Lose Liberty and You Will Lose Your Civilization – Big Brother is Here
We recently quoted H.L. Mencken's famous saying on 'practical politics' in the context of the euro area's crisis and what we think the plans of the political elite were all along (namely to use a future crisis to drive the political centralization of Europe forward against the will of the citizenry):
The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.”
As we noted, although it should be well known that politics works this way, 'the rubes fall for it every time'. Indeed, how else could legal monstrosities like the PATRIOT Act, the Military Commissions Act and the National Defense Authorization Act – all of which are little more than variations on the theme of Hitler's 'Enabling Act' of 1933 – ever have seen the light of day?
A bunch of bearded reactionary medieval throwbacks in a cave in the Hindu Kush managed to get the most powerful nation on earth to shred the very legal foundations that made it great in the first place? How nutty is that?
Today this trend has taken over the entire West. Governments are now snooping on their citizens without court orders in both the US and Europe to an extent previously unimaginable. The NSA is building the biggest snooping and data collection facility in all of history in the desert of Utah. As Wired magazine reported, its purpose is:
“To intercept, decipher, analyze, and store vast swaths of the world’s communications as they zap down from satellites and zip through the underground and undersea cables of international, foreign, and domestic networks. The heavily fortified $2 billion center should be up and running in September 2013. Flowing through its servers and routers and stored in near-bottomless databases will be all forms of communication, including the complete contents of private emails, cell phone calls, and Google searches, as well as all sorts of personal data trails—parking receipts, travel itineraries, bookstore purchases, and other digital “pocket litter.” It is, in some measure, the realization of the “total information awareness” program created during the first term of the Bush administration—an effort that was killed by Congress in 2003 after it caused an outcry over its potential for invading Americans’ privacy.
It is noteworthy that the title of the Wired article contains the following admonishment in parentheses : “Watch What You Say”.
This snooping by faceless bureaucrats, worthy of the GDR's infamous STASI, stifles individual initiative and the free spread and exchange of ideas. It will eventually sap Western civilization of what remains of its strength. Apparently governments are oblivious to the fact that the sources of our prosperity and progress are individual liberty and property rights. Suppress one or both and you can eventually wave your civilization good-bye.
Financial Repression In Italy
Nowadays the snooping and repression is increasingly shifting from the 'security' sphere to the financial sphere. 'Financial repression' – a term originally coined be Ken Rogoff and Carmen Reinhardt to describe the tendency of governments to try and 'inflate away' their debts – is taking on ever more sinister shapes.
In Italy, the Monti government has begun to control the spending habits of its citizens to a never before seen extent (hat tip to 'Das Gelbe Forum' in Germany). Its crackdown on alleged tax evaders has so far produced 23 suicides by people who were either utterly ruined by the State's demands for back taxes owed or otherwise fell victim to the economic crisis.
Now there is the so-called 'spesometro', whereby the government creates a map of all consumer spending in Italy, correlating it in seconds with tax payer information. If anyone buys more than he should be able to buy according to his tax return, the 'agenzia delle entrate' soon shows up and asks him to explain how he was able to indulge in such spending. Savers must be able to provide a time-line of several years detailing how and and how much they saved when and why. Anyone who has not been overly fastidious with keeping records of every detail of his financial life is thus in danger of being fined if he buys 'too much'. Given that Italy has a very high private savings rate, a great many perfectly innocent citizens will probably be ensnared by the 'spesometro'.
The crack troops of the finance ministry in Rome meanwhile are raiding entire villages, meticulously controlling small businesses and farms for violations of rules and regulations and possible tax evasion. A few weeks ago eight mechanics businesses that repaired bicycles and agricultural machinery in a small town were closed down and their assets confiscated due to 'their papers not being in order' (whatever that means). Fines between €6,000 to €35,000 were handed out according to the businessmen concerned. One business owner was fined because his son was in the repair shop helping out. His crime: 'exploitation of a minor'. To this one must point out that it has been a tradition since practically forever in Italy that children occasionally help out in the businesses of their parents that will one day be their own. Since there is no apprenticeship for artisan jobs, this is how young people learn the trade. Note by the way that in Southern Italy youth unemployment stands above 50%.
Monti's troopers are now also controlling the fields and forests to catch 'illegal tree pruners', work which mostly retired farmers engage in to slightly improve their meager incomes. Note that the social security pension of a farmer amounts to only about €400/month. By helping to prune olive trees, these people can occasionally earn €100 in a day. Now they are working by night, using flood lights to escape the controls. This is understandable, as the €400 pension is simply not enough for them to survive on. A new saying is now making the rounds in rural Italy: 'Se lavori sei un ladro!' – 'If you work, you are a thief'.
Apparently Monti's bureaucrats will only be satisfied when the youth turn to a life of crime and the old people starve.
Monti is a kind of modern-day Diocletian, especially with regards to how excessive the punishments for even small indiscretions have become. For example, as gasoline has become extremely expensive in Italy on account of the egregious taxes levied on it, many Italians have taken to getting gasoline from across the border. Anyone caught with a spare canister containing more than 10 liters of gas upon entering Italy will be fined a minimum of €7,750 , their vehicle will be impounded and auctioned off and on top of all this they will face a jail term of between six to 36 months (source: ).
As the Italian tax payer's association noted in a recent press release: 'Monti's reform has consisted of introducing new taxes and nothing else'.
This is precisely the criticism we leveled at the Italian 'austerity budget' when it was revealed: 'austerity' means only austerity for citizens, who are going to be plundered like never before. There is no 'austerity' for the State itself. Its share of the economic pie will not shrink, it will actually grow.
The whole climate in Italy has become poisoned by the government's money grab. On TV there are now spots like for instance one where a bureaucrat in the finance ministry receives a phone call from a 'concerned citizen' who says: “The baker right below my flat almost never hands over a sales slip. I've lived above him for 24 year, we know each other since school, so I know for sure….”, or he says “the hairdresser I have gone to for the past ten years has never issued a receipt to me”, and so forth.
In various villages people have spotted posters that show a man with an attache case wearing a black suit and black shades and sporting the bloodied teeth of a vampire. The poster explains that he depicts the “tax evader who is sucking the blood from honest people” and who “must be ostracized and hunted down”. The guilty parties are soon identified: it is for instance the owner of a small repair shop who doesn't hand over a sales slip for three euros he charged for a bicycle repair and others like him. Denunciation of alleged offenders has become a popular sport. The opportunity for abuse is obviosuly vast.
Not surprisingly, Italy's economy is now in free-fall. You can not pressure small businesses with Gestapo tactics and hope for a revival of business at the same time.
Via Scott Barber of Reuters: Italy's industrial production and real GDP growth – click chart for better resolution.
Meanwhile in Greece, the government can now snoop into all banking and credit card activities of its citizens without a court order. The latest development on this front is that the government can actually simply confiscate funds it deems to be the fruits of tax evasion, with the trials to happen afterward. So the citizens concerned can challenge the confiscation of their savings if they still have enough money left to pay for a lawyer. Mish has just posted an update on this that has all the details. As he rightly concludes, this should accelerate capital flight from Greece substantially. Here is also a link to the original story at Ekathimerini.
Greece's economy remains pretty much in free-fall as well.
Industrial production and GDP in Greece, via Scott Barber of Reuters – click chart for better resolution.
We could go on, but you probably get the drift by now. Many governments in Europe are putting pressure on their citizens like never before in order to get hold of more money. Liberty is dying in the process. One feels reminded of the emperors in the final stages of the Roman Empire, who also attempted to 'rescue' a failed welfare/warfare state by means of inflation, price controls and financial repression. This only hastened the Empire's demise and it won't be any different with the modern-day version of this policy.
And how has it come to this?
It can ultimately be traced back to the decision of a handful of morons in power to replace a burst bubble with an even bigger bubble. When the new bubble inevitably burst as well, their successors predictably decided that bailing out a bunch of banks that had made bad investments was the way to go forward. The idea of hewing to the principles of free market capitalism and letting the market handle the problem was not considered feasible.
President Bush at the time told CNN . It didn't seem to occur to him that this was the functional equivalent of a famous quote by an unnamed US officer during the Vietnam war after the leveling of Ben Tre: „It became necessary to destroy the town in order to save it.“.
As a result of these decisions, the worst stewards of capital remained in charge and governments all over the West are now strapped for funds. Naturally, the only 'solutions' they could think of were to inflate the money supply and increase financial repression.
Misery in Europe, via Scott Barber. The Green line below adds unemployment and inflation to obtain the so-called 'misery index' – which has just hit a new high in euro-land – click chart for better resolution.
Spain: Santander's CEO Thinks We're All Stupid
Everybody has been wondering about the still very low level of mortgage defaults in Spain. As the CEO of Santander Alfredo Saenz revealed to Bloomberg, worrying about the state of mortgage credit in Spain is 'stupid':
“JPMorgan Chase & Co. (JPM), the world’s largest bond underwriter, predicts that Spanish mortgage arrears will surge as unemployment rises. That’s also the view from the international debt market, which has driven up yields on Spain’s bonds in a bet the country will have to bail out banks.
In Spain, Banco Santander SA (SAN) Chief Executive Officer Alfredo Saenz said yesterday that’s nonsense. “Mortgages get paid in good times and in bad,” he said in a news conference at the bank’s headquarters outside . “Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.”
Yeah, sure. It's totally stupid to suspect that the bursting of one of the biggest housing and mortgage credit bubbles in all of history could lead to major trouble for the mortgage lenders. As one observer remarked:
“There does seem to be a strange contrast between the high level of unemployment and the surprisingly low level of delinquencies on mortgages,” said Georg Grodzki, who helps oversee $515 billion as head of credit research at Legal & General Plc in London. “This raises the issue of whether loans have been amended to make them look current when in fact they are distressed.”
You bet that this is the issue raised by the 'strange contrast'. The newly unemployed in Spain are all current on their second home mortgages incurred at bubble prices? It's totally credible! We think Saenz is putting a massive amount of lipstick on a pig here. As we have frequently pointed out, everybody knows by now that Spain's banks are past masters at hiding their problems with a plethora of accounting tricks.
This is further buttressed by the revelation that yet another sub rosa bank bailout has apparently been initiated by the ECB via . As a reminder: if a bank uses the ELA, it means it no longer has any eligible securities it can pledge with the central bank. Instead it simply issues an 'IOU' and the national central bank then prints up the money to give to the bank after getting the nod from the ECB's governing council. In Ireland's banking system there are still some €50 billion or so in ELA funding floating about. In Greece the ELA has also been used quite liberally (€70 billion at the peak).
According to the FT:
“[…] in its weekly financial report, just released, the ECB reveals a €121bn increase in claims on eurozone banks which is says was the result of putting all ELA use under one heading.
By definition, this must be the minimum amount of ELA being provided by the “eurosystem,” the network of eurozone national central banks. As such, it is much higher — maybe €10bn or more — than would be accounted for by use in Ireland and Greece alone. So somewhere else in the eurozone, ELA is also being provided in significant quantities.”
You have one guess as to where this 'somewhere else' probably is. Very likely it's the country which only 'stupid people' would suspect of facing a growing risk of mortgage delinquencies.
Here by the way is a long term chart of Santander, which the stupid people trading in the stock market are apparently selling with both hands – although it is obviously still doing a lot better than many of the smaller and more domestically focused banks in Spain:
Santander's share price is busy probing the lows of the 2002 bear market. This is what is known as 'going nowhere in interesting ways'. In real terms, its shareholders are sitting on a vast loss now. – click chart for better resolution.
Meanwhile, deposit flight has lately accelerated in Spain, as the chart below shows:
Via CLSA: growth in Spain's private sector bank deposits has turned negative – click chart for better resolution.
Saenz explains the extraordinarily good performance of Spanish mortgages as follows:
“Saenz said Spanish culture is part of the reason why default rates remain low.
Spaniards tend to keep up their mortgage loans because borrowers respond with all their assets and not just their property if they default, Lorena Mullor, manager of the Spanish mortgage association, said in an interview. Many treat the purchase of their home as a valuable asset that will help fund their retirement and can rely on the support of their families to help them keep up payments if they lose their jobs, she said.
“It’s a sociological thing and that’s how it is,” said Saenz.
Santander had 59.4 billion euros of loans made to Spanish households to buy homes at the end of 2011 out of a total loan book in Spain of about 200 billion euros. The default ratio was 2.6 percent in March, down from 2.7 percent at the end of 2011, the bank said.
“The data is good so let’s not start debating the quality of the information,” said Saenz. “Mortgage arrears are not a problem and are not going to be a problem”
Yes, let's not under any circumstances debate the quality of the information. After all, it's a 'sociological thing' and that's that.
To this we would note that mortgages are usually not paid back with culture, but with money.
Here is a little case study from a recent NYT article (which inter alia quotes Edward Hugh who notes that the real mortgage delinquency rate is probably in double digits, far from the officially reported 2.6%):
“But lenders are now depending on people like Marta Afuera Pons, who is juggling two mortgages — one on her house, another on an investment property that went sour — and is about 350,000 euros in debt.
In late 2010, Ms. Afuera Pons, who had just lost her job as a social security administrator, stopped making payments on the mortgage of 132,000 euros that she and the man she lived with had taken out for their home in Tordera, near Barcelona.
Separately, they still owe 185,000 euros to the same bank after receiving further financing in 2007 to buy a house that was never built, because the developer went bankrupt a year later.
Like many Spaniards, Ms. Afuera Pons is hitting the two-year limit for receiving unemployment benefits. This month, she will receive her last 1,100-euro unemployment check.
Finding no buyers for her Tordera house, Ms. Afuera Pons says she is trying to persuade her lender, the savings banks BMN, to take back the mortgage and the property.”
Almost needless to say, Spain is probably littered with similar cases. We think Mr. Saenz will eventually have to eat crow. And yes, we should most definitely 'debate the quality of the information'. After all, every time there's a bank merger in Spain, the write-offs suddenly balloon to multiples of what was previously admitted to as constituting dubious assets.
Addendum: US Bank Earnings
Speaking of banks, we would like to briefly quote from John Hussman's most recent weekly update on US bank earnings (we have mentioned all these things in the past, but it is worth repeating them , especially as a new wrinkle has entered the proceedings):
“Banks continue to report seemingly pleasant earnings, as long as one doesn't look under the hood at the drivers of those reports. Two drivers have been particularly important this quarter. One is the further reduction of reserves against future loan losses, which shows up as a positive contribution to bank earnings. For example, a decline in loan loss reserves was the source of about one-third of the earnings reported by Citigroup. The other driver is something called a "debt valuation adjustment" or DVA. You might recall that as a result of European credit strains last year, investors sold off the bonds of major banks. In the world of bank accounting, the debt was therefore cheaper to retire, so – I am not making this up – the decline in the value of the bonds was booked as earnings. Of course, the value of bank debt has recovered somewhat since then, as investors have set aside concerns about Europe (which we doubt is a good idea). One might expect that since banks booked DVA as a contribution to earnings last year, we would see the opposite effect this quarter. But one would be wrong.
As Peter Tchir noted last week, "Morgan Stanley no longer includes DVA in its 'continuing operations' headline number. It was a loss of $2 billion this quarter. With 2 billion shares outstanding, that would have wiped out the gain. What bothers me, is that in Q3, when it was a gain of $3 billion, it was part of continuing ops." It was the same story at Bank of America, prompting one analyst to observe "one-time items are to be ignored when negative, and praised when providing a 'one-time benefit.'"
We have often mentioned the lowering of loan loss reserves and the above discussed 'DVA' as sources of a great deal of the reported bank earnings. To this it should be noted that the loan loss reserves issue is not the fault of the banks. There is actually an SEC rule to the effect that such reserves must be lowered when loan delinquencies improve. However, the selective use of 'DVA' – include it when it is advantageous and exclude it when it's not – that is an entirely new trick as far as we're aware.
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12 Responses to “Financial Repression in Italy and Spain’s Curiously Low Mortgage Delinquency Rates”
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