Hayman Capital's Kyle Bass Provides CNBC Interview On Japan, Europe And Munis

Watch, listen, learn. Also, here's a link to Bass's/Hayman's most recent annual letter.

Intro and Japan:


Europe:


Munis and Meredith Whitney:

Vaclav Klaus On The Failure Of The Euro Experiment

TILB Political Hall of Famer Vaclav Klaus, president of the Czech Republic, makes the point that "the Euro Zone has failed" in today's WSJ OpEd section. I could not agree more. Oh, to have Klaus as our president here stateside...

Below is the OpEd in its entirety and here is a link to the WSJ online site itself. The OpEd is basically a reprinting of an essay that he recently published via the Cato Institute (link here).

ESSAY - The Wall Street Journal
JUNE 1, 2010
'The Euro Zone Has Failed'
By VáCLAV KLAUS

After the fall of communism in 1989, the Czech Republic wanted to be a normal European country again as soon as possible, after being excluded from participating in the post-World War II European integration process for 41 years. The only way to achieve this was to become a member country of the European Union. We had no other choice, but the communist experience was still too "fresh." We wanted to be free and didn't want to lose our freedom and our finally regained sovereignty. Many of us were therefore in favor of a looser form of European integration, against the so-called deepening of the EU and against the creation of political union in Europe. People like me understood very early that the idea of a European single currency is a dangerous project which will either bring big problems or lead to the undemocratic centralization of Europe. My position was clear: With all my reservations, we had to apply for EU membership, but at the same time we had to fight against projects such as the euro.

As a long-standing critic of the idea of a European single currency, I have not rejoiced at the current problems in the euro zone because their consequences could be serious for all of us in Europe—for members and non-members of the euro zone, for its supporters and opponents. Even the enthusiastic propagandists of the euro suddenly speak about the potential collapse of the whole project now, and it is us critics who say we have to look at it in a more structured way.

The term "collapse" has at least two meanings. The first is that the euro-zone project has not succeeded in delivering the positive effects that had been rightly or wrongly expected from it. It was mistakenly and irresponsibly presented as an indisputable economic benefit to all the countries willing to give up their own long-treasured currencies. Extensive studies published prior to the launch of the European single currency promised that the euro would help to accelerate economic growth and reduce inflation and stressed, in particular, that the member states of the euro zone would be protected against all kinds of external economic disruptions (the so-called exogenous shocks).

This has not happened. After the establishment of the euro zone, the economic growth of its member states has slowed down compared to previous decades, increasing the gap between the rate of growth in the euro-zone countries and that in other major economies—such as the United States and China, smaller economies in Southeast Asia and other parts of the developing world, as well as Central and Eastern European countries that are not members of the euro zone.

Economic growth in Europe has been slowing down since the 1960s, thanks to the increasingly damaging economic and social system which started dominating Europe at that time. The European "soziale Marktwirtschaft" is an unproductive variant of a welfare state, of state paternalism, of "leisure" society, of high taxes and low motivation to work. The existence of the euro has not reversed that trend. According to the European Central Bank, the average annual rate of growth in the euro-zone countries was 3.4% in the 1970s, 2.4% in the 1980s, 2.2% in the 1990s and only 1.1% from 2001 to 2009 (the decade of the euro). A similar slowdown has not occurred anywhere else in the world (speaking about "normal" countries, e.g. countries without wars or revolutions).

Not even the expected convergence of inflation rates has taken place. Two distinct groups have formed within the euro zone—one (including most of the countries of western and northern Europe) with a low inflation rate and one (including Greece, Spain, Portugal and Ireland) with a higher inflation rate. We have also seen an increase in long-term trade imbalances. There are countries where exports exceed imports and countries that lastingly import more than they export. It is no coincidence that the latter countries also have higher inflation. It has no connection with the world-wide crisis. This crisis "only" escalated and exposed longtime hidden economic problems; it did not cause them.

During its first 10 years, the euro zone has not led to any measurable homogenization of its member states' economies. The euro zone, which comprises 16 European countries, is not an "optimum currency area" as defined by the economic theory. Even Otmar Issing, the former member of the Executive Board and chief economist of the European Central Bank, has repeatedly pointed out (most recently in a speech in Prague in December 2009) that the establishment of the euro zone was primarily a political, not an economic, decision. In such a situation, it is inevitable that the costs of establishing and maintaining it exceed its benefits.

My choice of the words "establishing" and "maintaining" is not accidental. Most economic commentators were satisfied by the ease and apparent inexpensiveness of the first step (the establishment of the common monetary area). This helped to form the impression that everything was fine with this project.

The exchange rates of the countries joining the euro zone probably more or less reflected the economic reality at the time when the euro was born. However, over the last decade, the economic performance of euro-zone countries diverged and the negative effects of the "straight-jacket" of a single currency have become more and more visible. When "good weather" (in the economic sense of the word) prevailed, no visible problems arose. Once the crisis (or "bad weather") arrived, the lack of homogeneity manifested itself very clearly. In that sense, I dare say that—as a project that promised to be of considerable economic benefit to its members—the euro zone has failed.

The second meaning of the term collapse is the possible collapse of the euro zone as an institution, the demise of the euro. To that question, my answer is no, it will not collapse. So much political capital had been invested in its existence and in its role as a "cement" that binds the EU on its way to supra-nationality that in the foreseeable future the euro will surely not be abandoned.

It will continue, but at a very high price—low economic growth. It will bring economic losses even to non-members of the euro zone, like the Czech Republic.

The huge amount of money that Greece will receive can be divided by the number of the euro-zone inhabitants, and each person can calculate his or her own "contribution." However, the "opportunity" costs arising from the loss of a potentially higher growth rate, which is much more difficult for a non-economist to imagine, will be far more painful. I do not doubt that for political reasons this price will be paid and that the euro-zone inhabitants will never find out just how much the euro truly cost them.

The mechanism that will save the European monetary union is the increasing volume of financial transfers that will have to be sent to euro-zone countries suffering from the biggest economic and financial problems. Yet everyone knows that sending massive financial transfers is possible only in a state, and the EU, or the euro zone, is not a state. Only in a state there is a sufficient feeling of solidarity among its citizens. Only in a state—and unified Germany in the 1990s is an excellent example—can massive financial transfers be justified and made politically viable. (By the way, the inter-German financial transfers in that era annually equaled the whole sum potentially needed for Greece to survive). Twenty years ago, I happened to be the minister of finance in a dissolving political—and monetary—union called Czechoslovakia. I have to confess that the country broke up because of the lack of mutual solidarity.

That is why Europe will have to decide whether to centralize itself politically as well. Europeans don't want that because they know (or at least feel) that it would be to the detriment of liberty and prosperity. There is, however, a real danger that the politicians will do it anyway—behind the backs of those who elected them. And this is what bothers me most. The recent dealings in EU headquarters in Brussels—literally behind closed doors—about the aid package for Greece demonstrated that there is no democracy there. The German-French tandem made the decision on behalf of the rest of the euro-zone countries, and I am afraid this will continue.

It is evident that the euro—the European single currency—and the currently proposed measures to save the euro do not represent any "salvation" for the European economy. In the long run, it can be saved only by a radical restructuring of the European economic and social system. My country had a velvet revolution and made a radical transformation of its political, economic and social structures. Fifteen years ago, I sometimes joked that after entering the EU we should start a velvet revolution there as well. Unfortunately, this ceases to be a joke now.

The Czech Republic has not made a mistake by avoiding the membership in the euro zone. I am glad we are not the only country taking that view. In April, the Financial Times published an article by the late governor of the Polish central bank, Slawomir Skrzypek. He wrote it shortly before his tragic death in an airplane crash near Smolensk, Russia. In that article, Mr. Skrzypek wrote, "As a non-member of the euro, Poland has been able to profit from flexibility of the zloty exchange rate in a way that has helped growth and lowered the current account deficit without importing inflation." He added that "the decade-long story of peripheral euro members drastically losing competitiveness has been a salutary lesson." There is no need to add anything to that.

Václav Klaus has served as president of the Czech Republic since 2003

[click here for video of an excellent interview with Klaus by Peter Robinson from 2009]

Liberty Quote Of The Day: Ludwig von Mises

As TILB followers know, Mises is an unrivaled genius in understanding economic consequences and human behavior. We proudly display at the top of our website his "tu ne cede malis" quote as an ironclad motto of standing against the Wormwoods that populate our government.

As we collectively celebrate the wonders of money printing and the socialism of losses, TILB can't help but reflect back on this quote from Mises's great work Human Action. If it doesn't give you a warm fuzzy about Helicopter Ben, nothing will.

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."

- Ludwig von Mises

From somewhere, far in the distance, beyond the rising fog and across the seas, the wind carried on its back a faintly whispered word, audible only to the ears of the awake: "gold".

[HT: TD]

T Minus 2 Days Until California Issues IOUs - Wells Fargo And Bank Of America Will Not Commit To Accepting Schwarzies

Get ready, Schwarzies are coming!

We are only two days from California issuing its own currency in the form of IOUs (dubbed Schwarzies by TILB) and we could hardly be more excited!

Schwarzenegger Scrip: we can almost taste it.

Yet, shockingly, until California gets the ratings agency granted credibility to pay off old Schwarzies with new Schwarzies (something akin to the crime Bernie Madoff received 150 years for... and the famous helicopter drop Dr. Ben Bernanke is regularly lauded for), some folks actually seem a bit timid about accepting Schwarzies.

"Who are these Schwarzie hating traitors," you might reasonably ask.

Well, your friendly neighborhood bankers at Wells Fargo and B of A - California's two largest banks - seem a tad bit hesitant to embrace the idea. As if California's mortgage default rate needed another reason to tick up...

B of A had this to say on the matter:

“Any action pursued by the state, such as issuing registered warrants, will require much greater specificity about rates, timelines, terms and many other variables for banks to determine ability to support such actions,” said BofA spokeswoman Colleen Haggerty in Los Angeles. “Speculating on a plan before the Legislature and governor have completed budget negotiations is premature.”

Ha! Is B of A pretending like it actually does credit work on borrowers and underwrites loans? Where was that discipline when it counted?

In any case, I think if we learned anything from the Hartmarx and Chrysler debacles, it is that if our president deems you strategically important (for instance, you either employ 40,000 unionized democrats or you make his suits), resistance is futile; it is not up to the lending bank to make decisions about who gets loans or how defaulting borrowers are treated.

What's that you say? The Obama Administration has refused California's requests for the federal government to help it with loan guarantees or otherwise bailout the state's finances? Now, that just seems mean. Unless, of course, you believe in conspiracies...

You may have noted that so far we have only quoted one of our two friendly neighborhood bankers on the matter of Schwarzies. Have no fear, Wells Fargo issued an equally banal statement on the matter.

However, a little more digging will show Wells Fargo's true opinion on the matter. In a recent speech at Stanford, Wells CEO John Stumpf said the following:

"The state of California is in financial ruin,” Stumpf told those attending a statewide microfinance lenders’ conference at Stanford University. “The budget deficit in California is staggering.”

Not exactly the words you want to hear from one of the largest potential cogs in the Schwarzie circulation system...

Stumpf went on to talk about the economic situation for California's citizens and corporations.

Stumpf said the recession is taking a toll on some of the loans made to creditworthy borrowers who lost their jobs and fell behind on payments.

“Today we’re charging off loans to people we should have made loans to,” said Stumpf, reiterating that the bank avoided many of the exotic mortgages offered by rivals.

...

On the national economy, Stumpf said this is his “third rodeo” or downturn. He pointed to the deep recession of the early 1980s when the prime rate hit 21 percent and the struggling economy of the late 1980s that counted most the nation’s largest thrifts and major banks in Texas among its casualties. He says the economic fallout from the dot-com bust and Sept. 11 terrorist attacks was significant but not as harsh as the earlier recessions.

“This one feels different,” Stumpf said. “It feels different in the respect that the whole world is in recession.”

Welcome to a world where economic realities, put off for decades by politicians and citizens that believed in Tooth Fairy Economics*, come forth in a burst of killjoy that makes everyone play the hand they were actually dealt.


[Hat Tip: JC-FL]



*Okay, TILB is officially copywriting the term Tooth Fairy Economics

...or, perhaps not. We had never heard the term before writing it just a moment ago and were so pleased with its goodness that we were fully prepared to laud self congratulatory genius heapings upon ourselves. However, we subsequently Bing'd it and found out some dude named Tom Woods at Campaign For Liberty used the phrase last February. Two comments: 1) as much as we want to assume he's some lucky deuchebag and keep the phrase for ourself, we love the ideals of Campaign For Liberty; and 2) we still are claiming it for our own. This is like when two scientists make an advancement at the same time and both claim credit for it...oh, dammit.

Nix our cliam. It is his even if it should be ours. He bettered us by four months.

Damn you Tom Woods and your enviable creativity and pursuit of liberty (this guy atually wrote a book that has a forward by Ron Paul; TILB considers that a major portion of a complete life).

Credit where credit is due. We bow to you, Tom Woods.

Dammit.