Complacency and incrementalism are traps to avoid

Clear-eyed, bold action is what the world requires if the financial drama is to subside

by: Lawrence Summers

China’s stock market has been a rollercoaster despite — or perhaps because of — government involvement
China’s stock market has been a rollercoaster despite — or perhaps because of — government involvement

Against a backdrop of slow and diminishing growth forecasts, recent months and especially recent weeks have seen an extraordinary level of financial drama. While not rising to the level of the systemic global crisis of 2008, or the period of great uncertainty in the late 1990s around the Asia-Russia-Brazil-Long-Term Capital Management crises, markets everywhere seem to be thwarting political aspirations.

Greece’s relationship with the euro area has been a financial soap opera for months, and it is one that is unlikely to end anytime soon. Concerns about German dominance of Europe are now more salient than they have been at any time in the past 70 years.

China’s stock market has been a rollercoaster despite — or perhaps because of — a remarkable (even for China) level of government involvement. And the ability of the Chinese government to deliver the rapid growth on which its legitimacy increasingly depends is very much open to question.
In the US, while the fiscal picture at the federal level appears healthier than it has in a long time, thanks to a marked slowdown in healthcare costs, Puerto Rico is on the brink of the largest municipal bond default in American history.

Tolstoy observed that all happy families are alike but each unhappy family is miserable in its own way. In the same way, each of these situations is driven by its own dynamics. But their concatenation does warrant reflection on some common lessons for financial policymakers and their political masters. Two stand out.

First, there are economic laws like there are physical laws and, as with physical laws, economic laws do not yield to political will. The financial crisis, the great recession and sharp increases in inequality have all properly led to a negative reassessment of the functionality of unfettered free markets. It does not follow, however, that governments can bring about economic outcomes they prefer by fiat.

Greece’s problems, of course, relate to the failings of Greek economic policy. But it should come as no surprise that a fiscal contraction in excess of 20 per cent of gross domestic product in an economy that does not have the freedom to loosen monetary policy or to devalue its currency leads to depression, even if policymakers wish otherwise.

Famously, while you can fool all of the people some of the time and some of the people all of the time, you cannot fool all of the people all of the time. In the same way, markets may well be inefficient and diverge from fundamental value, and they may well be subject to government manipulation for significant intervals, but it is a foolish government that supposes it can indefinitely maintain speculative prices at politically convenient levels, as the Chinese authorities may soon discover.
Likewise, if a default cannot be managed, it is tempting to assume that it cannot occur. This is an obvious fallacy demonstrated most recently by European insistence in 2010 that Greek debt would never be restructured. It dangerously invites complacency on the part of creditors and leaves debtors with such large overhangs that they have little motivation to carry out constructive reform.

Financial problems are in some combination always about two things — arithmetic that does not add up and a loss of confidence. Incremental steps that provide some but not large sums of assistance, that postpone but do not reduce scheduled debt payments, and that defer decisions about the future to the future run the constant risk that they will not bring convincing arithmetic into view and will be insufficient to restore market confidence.
There are dozens of examples in financial history when an exchange-rate peg was maintained too long, or debt was restructured too late, or forbearance was carried out for too long. I can think of none where strong action came too soon. Clear-eyed, bold action is what the world requires if the financial drama is to subside. Let us hope against much of the experience of recent years that it will be forthcoming.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

Greece for Grownups

Adair Turner

JUL 13, 2015

Greek Prime Minister Alexis Tsipras

LONDON – Greece and its European partners may have agreed on a new bailout provision, but how the Greek economic tragedy will actually end remains a mystery. One thing, however, is certain: eurozone governments will end up writing off a large proportion of their loans to Greece. Their refusal to recognize that reality has increased the losses they will suffer.
To be sure, the Greek government has, at times, been provocative and unrealistic, failing to accept, for example, the need for serious pension reform. But the eurozone authorities’ refusal to accept the need for debt relief has been equally divorced from reality. Three weeks ago, International Monetary Fund Managing Director Christine Lagarde’s called for talks to resume “with adults in the room.” That means facing facts.
In this sense, the IMF’s latest Debt Sustainability Analysis, published on June 26, is a grown-up document. It makes clear that Greece’s debts will not be sustainable without further concessional loans and an extension of existing debt maturities; perhaps, it suggests, a write-off of some €50 billion ($55 billion) will also be needed. But even these calculations are based on unrealistic assumptions.
Previous bailout agreements presumed that Greece would run a primary budget surplus (before interest payments) of 4.5% of GDP pretty much permanently. The IMF has revised that assumption downward, to 3.5%. But this still ignores the reality that Greeks can walk away from their debts – not only metaphorically, by defaulting, but also literally, by migrating to Germany, for instance.
As long as Greece remains a member of the European Union, its taxpayers can walk away, just as Detroit’s did in the decades before its bankruptcy. If remaining in Greece means living in a country where taxes are always 10% higher than public expenditures, many – especially the young and talented – will do just that.
It has been clear for five years that Greece’s debts are unsustainable. It was also obvious that the private-sector debt write-down of 2012 would have to be followed by an official one. But the eurozone authorities refused to offer debt relief to the previous Greek government, and instead imposed more severe austerity than was necessary.
As a consequence, Greece’s recession deepened; its already-unsustainable debt swelled further; and the anti-austerity Syriza party rose to power. The prolonged uncertainty drove Greeks to withdraw their bank deposits, the cash for which came from the €90 billion of emergency liquidity assistance provided by the European Central Bank. That money will be re-denominated in devalued new drachmas if Greece leaves the eurozone.
In promising that Germany would suffer no debt write-off, Chancellor Angela Merkel made a promise she couldn’t keep. Worse, by maintaining that stubborn position, eurozone negotiators have ensured that the eventual write-offs will be even larger.
That negotiating position might still be rational if bigger eventual Greek write-offs would be offset by reduced write-offs elsewhere or at another time. After all, if Greece receives debt relief Ireland or Spain might demand the same, and all eurozone governments would have a weaker incentive to adhere to fiscal discipline in the future. A rational banker might deliberately provoke bankruptcy and suffer larger write-offs than necessary, in order to teach lessons and create better future incentives.
But Greece is not just another debtor. It is a potentially fragile state on the edge of a Europe that is facing a massive migration crisis and a dangerously nationalistic Russian leadership looking for opportunities to cause trouble. The eurozone must find a way to ensure future debt discipline, without provoking an even deeper crisis in Greece.
Even in the United States, imposing fiscal discipline on sub-federal entities is often difficult. However clear their non-guaranteed status, financially distressed cities or states – whether New York in the 1970s or Puerto Rico today – can put serious pressure on national political leaders to offer assistance. In the eurozone, the links between governments and national banking systems make market discipline even more difficult to achieve.
Imagine if one were to suggest that banks operating in Illinois should be required to hold large portfolios of Illinois state bonds, with their deposits insured by an Illinois state insurance scheme, and the Illinois state government responsible for recapitalization, if needed. The proposal would be dismissed as economic lunacy. In such a system, a recession would create a self-reinforcing spiral of deteriorating public finances, rising fears of bank insolvency, and declining credit extension. And yet, if you replace “Illinois” with Ireland, Spain, or Greece, that is how things work in the eurozone.
This system has made a market-based approach to addressing unsustainable debts impossible.
Rather than risking write-offs of government or bank debt, eurozone governments and the ECB absorbed the debts that were initially extended by the private sector onto the public balance sheets of the eurozone’s member states. In Ireland and Spain, the private sector escaped scot-free. In Greece, there was some “private-sector involvement”; but many irresponsible lenders still managed to pass on their exposures to eurozone governments.
To ensure future fiscal discipline, the eurozone must disentangle its banks from national governments and create a true banking union. High equity requirements or tight quantitative limits should be used to restrict banks’ holdings of national government bonds; banks should instead hold liquid assets in the form of eurozone-level bonds, bills, or cash reserves at the ECB.
And national public debt should be held by the non-bank private sector, which should suffer large write-downs if debt rises to unsustainable levels. The desirable effect would be that governments would find it harder to accumulate debts they could not afford.
But appropriate future reforms cannot change the fact that, today, Greece’s debts are unsustainable. Adult negotiators have to face two realities: large debt write-offs are inevitable, and punishing Greece further will not put the eurozone on the path to financial discipline. For that, systemic reform is essential.

Greece’s brutal creditors have demolished the eurozone project

Stripped of ambitions for a political and economic union, the bloc changes into a utilitarian project

by: Wolfgang Münchau 

The shadow of a protestor waving the Greek national flag is seen through a European Union (EU) flag, during a pro European Union (EU) demonstration in Thessaloniki, Greece, on Monday, June 22, 2015. After a day of talks on Monday, leaders from Greece’s 18 fellow euro-zone countries agreed that Greek Prime Minister Alexis Tsipras’s government was finally getting serious after it submitted a set of reform measures that began to converge with the terms demanded by creditors. Photographer: Konstantinos Tsakalidis/Bloomberg

A few things that many of us took for granted, and that some of us believed in, ended in a single weekend. By forcing Alexis Tsipras into a humiliating defeat, Greece’s creditors have done a lot more than bring about regime change in Greece or endanger its relations with the eurozone.

They have destroyed the eurozone as we know it and demolished the idea of a monetary union as a step towards a democratic political union.

In doing so they reverted to the nationalist European power struggles of the 19th and early 20th century. They demoted the eurozone into a toxic fixed exchange-rate system, with a shared single currency, run in the interests of Germany, held together by the threat of absolute destitution for those who challenge the prevailing order. The best thing that can be said of the weekend is the brutal honesty of those perpetrating this regime change.

But it was not just the brutality that stood out, nor even the total capitulation of Greece. The material shift is that Germany has formally proposed an exit mechanism. On Saturday, Wolfgang Schäuble, finance minister, insisted on a time-limited exit — a “timeout” as he called it. I have heard quite a few crazy proposals in my time, and this one is right up there. A member state pushed for the expulsion of another. This was the real coup over the weekend: regime change in the eurozone.

The fact that a formal Grexit may have been avoided for the moment is immaterial. Grexit will be back on the table when you have the slightest political accident — and there are still many things that could go wrong, both in Greece and in other eurozone parliaments. Any other country that in future might challenge German economic orthodoxy will face similar problems.

This brings us back to a more toxic version of the old exchange-rate mechanism of the 1990s that left countries trapped in a system run primarily for the benefit of Germany, which led to the exit of the British pound and the temporary departure of the Italian lira. What was left was a coalition of countries willing to adjust their economies to Germany’s. Britain had to leave because it was not.

What should the Greeks do now? Forget for a moment the economic debate of the last few months, over issues such as the impact of austerity or economic reforms on growth, and ask yourself this simple question: do you really think that an economic reform programme, for which a government has no political mandate, which has been explicitly rejected in a referendum, that has been forced through by sheer political blackmail, can conceivably work?

The implications for the rest of the eurozone are at least as troubling. We will soon be asking ourselves whether this new eurozone, in which the strong push around the weak, can be sustainable. Previously, the strongest argument against any forecasts of break-up has been the strong political commitment of all its members. If you ask Italians why they are in the eurozone, few have ever pointed to the economic benefits. They wanted to be part of the most ambitious project of European integration undertaken so far.

But if you take away the political aspiration, you may end up with a different judgment. From a pure economic point of view, we know that the euro has worked well for Germany. It worked moderately well for The Netherlands and Austria, although it produced quite a degree of financial instability in both.
But for Italy, it has been an unmitigated economic disaster. The country has seen virtually no productivity growth since the start of the euro in 1999. If you want to blame the lack of structural reforms, then you have to explain how Italy managed decent growth rates before 1999. Can we be sure that a majority of Italians will support the single currency in three years’ time?

The euro has not worked out for Finland either. While the country is considered the world champion of structural reforms, its economy has slumped ever since Nokia lost the plot as the world’s erstwhile premier mobile phone maker. France has performed relatively well during the euro’s early years But it, too, is now running persistent current account deficits. It is not only Greece where the euro is not optimal.

Once you strip the eurozone of any ambitions for a political and economic union, it changes into a utilitarian project in which member states will coldly weigh the benefits and costs, just as Britain is currently assessing the relative advantages or disadvantages of EU membership. In such a system, someone, somewhere, will want to leave sometime. And the strong political commitment to save it will no longer be there either.

Deal on Greek Debt Crisis Exposes Europe’s Deepening Fissures


JULY 13, 2015

President François Hollande of France, left, played an important role in mediating between Germany and Greece during the meetings that culminated in a deal early Monday. Credit Philippe Wojazer/Reuters       
LONDON — Chancellor Angela Merkel of Germany said about Greece on Sunday that “the most important currency has been lost: that is trust and reliability.” But many Germans think the most important currency that has been lost is the deutsche mark, the symbol of rectitude and confidence that embodied West Germany’s ascent from the ashes of World War II.
That same sense of solidity is badly lacking in the European Union as it confronts the limits of its ambitions, and Monday morning’s painful deal on Greece seems unlikely to restore it.
The latest effort to preserve Greek membership in the eurozone has only deepened the fissures within the European Union between north and south, between advanced economies and developing ones, between large countries and smaller ones, between lenders and debtors, and, just as important, between those 19 countries within the eurozone and the nine European Union nations outside it.
In the name of preserving the “European project” and European “solidarity,” the ultimatum put to Greece required something close to the surrender of the nation’s sovereignty. For all of Greece’s past sins, and for all of the gamesmanship and harsh talk of the governing Syriza party, this outcome arguably had elements of punishment as well as fiscal responsibility.
Whether this is good or bad for Greece, in the end, the Greeks will decide. But it averted an outcome that could have left Europe even more badly fractured. And it highlighted the willingness of some leaders to make a compelling case for unity over narrow national interest, especially President François Hollande of France, who played an important role in mediating between Germany and Greece.
Unpopular and yet contemplating another run for the presidency in 2017, Mr. Hollande displayed leadership and distanced himself from Ms. Merkel and German demands, which many in Europe, especially in France, saw as selfishness and even vindictiveness.
On Monday, Mr. Hollande said that “even if it was long, I think for Europe this was a good night and a good day.” That is true, given the alternatives.
But it will be even better if the European Union can now, after so many years, lift its head from its euro crisis and begin to concentrate on other critical issues: providing economic growth and jobs for its young people, a rational and unified policy on migration, a response to Russian ambitions in Ukraine and elsewhere, and a British vote on whether to leave the European Union.
A so-called Brexit — an exit by Britain, which is expected to overtake France as Europe’s second-largest economy and is one of Europe’s main military and diplomatic actors, with a permanent seat on the United Nations Security Council — would be far more damaging to the European Union than the departure of small, difficult Greece.

 Chancellor Angela Merkel of Germany, center-left, conferred with Prime Minister Alexis Tsipras of Greece, center-right, and President Francois Hollande of France in Brussels on Sunday. Credit John Macdougall/Agence France-Presse — Getty Images                    

Britain, which never joined the euro currency bloc, plans to hold a referendum by the end of 2017 on whether to remain a member of the European Union, and Prime Minister David Cameron is negotiating now to change Britain’s terms of membership. The mess over Greece has hardly helped the reputation of the European Union inside Britain, but it may also help Mr. Cameron secure a better deal.
Together with the migration crisis and Greece, these represent “the four horsemen” circling around Europe’s future, said Rem Korteweg of the Center for European Reform, a research institution based in London.
“The four horsemen threaten the E.U. precisely because they raise issues that can only be solved if governments prioritize a European solution over narrow national agendas,” he said. “If a European answer cannot be found, the horsemen will continue to promote chaos, instability and mutual recrimination” within the European Union.
As for Ms. Merkel, her reputation hangs in the balance, at home and in her role as Europe’s de facto leader. Having rejected a Greek exit from the eurozone three years ago in the name of European solidarity, she has again avoided that outcome. This time, she risked considerable cost to her political standing at home. But what would really damage her legacy is another expensive bailout for Greece that fails.
The crisis that played out over the weekend was just the latest in a series that traces back to the origins and nature of the currency union.
When Germany under Chancellor Helmut Kohl gave in more than two decades ago to the entreaties of President François Mitterrand of France and agreed to give up the deutsche mark for the new common currency, the euro, he did so for the same reason Mr. Kohl had agreed earlier to trade one East German mark for one West German mark: politics.
Economics was never the most important issue, and Mr. Kohl and Mr. Mitterrand ignored the voices that warned against a common currency without common financial institutions or fiscal policies in a set of widely varying economies.
Greece was allowed into the eurozone for largely the same reasons, wishful politics, that put ancient Greece, the core of European culture, at the heart of a European ideal built on civilization and peace. The fact that today’s Greece bears little relationship to the country of Socrates or Pericles was simply ignored. And so was clear evidence, well-known at the time in Brussels, that the Greeks were regularly faking their budgetary figures to qualify for the euro.
The magical thinking involved was that the euro, somehow shorn of politics, would bring all these different economies into closer balance. The last decade has proved that to be illusory.
And Monday’s deal — if it is ratified by an angry Greek Parliament, and by an unhappy German Parliament, and not derailed by smaller countries like Finland with coalition governments that depend on the support of euroskeptic parties — will avert the debacle of a country leaving the common currency for the first time. But by itself, it will do little to strengthen the future of the euro, and it might simply prolong the agony and deepen the divisions.
For many in Europe, the euro’s economic benefits have been offset by the constraints it imposes. For the weaker economies in particular, it has become a sort of prison, limiting the ability of elected governments to use budgetary policy to smooth out the ups and downs of the economic cycle and eliminating their use of currency fluctuations to help manage national economies.
For Greece, the crisis five years ago was a chance to create a modern democratic capitalist state, which was one of the reasons to join the European Union in the first place. Many Greeks suffered, the debt mountain grew, and finally, as long predicted, the economic squeeze produced a political revolt — and just as Greece finally seemed to have turned an important corner and was running a primary surplus, in other words, financing its current budget and having something left over to pay its debts.
The victory in January of Prime Minister Alexis Tsipras and his Syriza party led to the reversal of some critical economic overhauls demanded by creditors, threw the Greek economy backward and raised even higher the requirement for further loans. Mr. Tsipras bet big but lost. But so have the Greeks.
It is one thing to undergo changes when a government and a people have bought into them as necessary and hopeful — this is how the Baltic nations took the pill of economic austerity and overhaul, and this is largely how Ireland, Portugal and Spain saw matters, too, when faced with implosion.
But it is a far different thing to have further social changes and austerity shoved down one’s throat in an exercise of political power and domination, as many Greeks are no doubt interpreting this deal. Carrying out these changes will feel like enforced labor to many Greeks, and especially to the Syriza government, if it survives at all.
As Samuel Johnson said about second marriages, this prospective third bailout of Greece is a triumph of hope over experience. Even more so with Mr. Tsipras and Syriza, their protestations of mandates and sovereignty thrown back into their faces by European colleagues offended by Syriza’s moralizing, and even more, by its gamesmanship.

Why Gold Is The Best Defense Against A Global Financial Crisis

° BIS and IMF have issued warnings that America's economy is not equipped to handle another financial crisis.                
  • In spite of June's higher jobs numbers and lower unemployment, the U.S. economy is not fully recovered.
  • To prepare for the financial crises ahead, buy gold--an insurance for your lifestyle.
    I live in hurricane country, South Louisiana. You learn down here that the first sign of blue skies after a 'cane passes through isn't the relief it first seems. It's a head fake - the quiet, clear eye of the storm.
    The horrible truth is that it's a beautiful lie. For on its way is the backside of the hurricane, and the destruction it brings is often worse than what you've already survived.
    Economies have their own analog. The financial storm passes; the regulators, politicians and populace exhale their relief … and then the backside slams with an unanticipated ferocity - just what happened after the 1929 financial crash.
    Here we are today, seven years after blue skies re-emerged over America, and all is worryingly unwell. Is the backside of the global financial crisis, a crisis born of imprudent fiscal and monetary policies in America, bearing down on our shores?
    In separate reports over the last week or so, the two global finance agencies cautioned that Western economies, led by the Pied Piper of America, are ill-equipped to handle the storms that will arrive on the backside of a global financial crisis that has not yet blown itself out.
    Hidden in plain sight in their reports is a clear message: Lighten up on paper assets and load up on real assets that will weather the storms, namely gold and silver.
    The Global Financial Crisis
    The global financial crisis is not done. Not yet.
    The blue skies we're told to look at - the supposedly improving jobs market, the supposedly improving GDP, Wall Street near record highs, the strong dollar, the rebound in housing - all beautiful lies that paper over a horrible truth: Nothing much has been repaired.
    We've not allowed it.
    We - and I mean politicians and monetary bureaucrats - have not allowed capitalism to expunge the detritus built up during years of bubble blowing by letting companies to simply fail. We administered CPR in a crunch to keep the patient alive, but the root cause of the illness - excessive debts and government's efforts to fend off the painful yet necessary correction - here at home and across much of the Western world has not been addressed.
    Sure, we have Dodd-Frank(enstein), but it's a bloated grab-bag of reactionary codswallop that makes politicians - and Big Government cheerleaders - think they've built a bulwark that will stand in ending in the next crisis. That's what government always does - react to the last problem by applying Band-Aids.
    But what has really changed?
    Too-big-to-fail banks are bigger today than they were before they helped bring down the economy.
    As a Harvard business school study found, Too Big to Fail has itself been a failure because its onerous regulations have crushed smaller banks and allowed the problematic big banks to get bigger.
    American debt hasn't decreased; it has risen by 83% since the end of 2008!!!
    The U.S. economy isn't the model of health the media and politicians tell us it is. We're generating low-pay jobs in the service while losing high-paying jobs in manufacturing and, yes, technology. The stock market is in another paper-asset bubble and has reached valuations not seen since just before 1929 and during the salad days of Alan Greenspan's delusional reign.
    Perhaps worst of all, the Federal Reserve has limited ammunition with which to fight a new war - be it inflation, a currency or debt crisis, an uncontrolled sell-off on Wall Street (à la China), an imploding mother of all bond bubbles, or even a simplistic recession.
    Which is why the BIS, central banker to the world's central banks, announced that the world is out of options when another global financial crisis hits. Interest rates have been so low for so long that they are now the very reason for economic anemia rather than the solution they're supposed to be.
    Meanwhile, debt burdens in the West and the inherent financial risks remain much too high.
    "The unthinkable" the BIS concludes, "risks becoming routine and being perceived as the new normal."
    The BIS takeaway: Central banks have mismanaged the global financial crisis to a large extent because they don't understand the crisis very well. They're effectively trying to cure a drug addict by pumping his system full of speed, and failing to realize the new drug is doing just as much damage, if not more.
    As for the IMF … executives there are doing everything but falling to their knees and begging the Federal Reserve not raise interest rates any time soon. The IMF sees "key fault lines" across all manner of the U.S. financial landscape and that "new pockets of vulnerabilities have emerged."
    Reflecting my earlier comment, large and interconnected banks, the IMF concludes, "dominate the system even more than before." Leverage has ramped up in the non-banking financial sector, and insurers have taken on more risk "and could be faced with negative equity in a downside scenario."
    When the blue skies yield once again to storm clouds and the winds roar ashore again, the second time around will be worse - if only because the Fed has little left in its quiver.
    A Safe Haven in the Storm
    Your solution is simple: Take some money off the table. I am.
    I've seen my personal portfolio increase nicely in recent years and I don't want to see it retreat if the backside of the global financial crisis roars through the economy.
    You don't have to sell everything, but sell enough to keep your heart rate calm in a crisis.
    I'm using the cash to add more real assets to my portfolio. I'm buying gold bullion and adding investment-grade ancient and rare European coins to my collection. I like bargains and collectible European coins as an asset class have not kept pace with U.S. coins. They're cheap.
    I have written many times that gold is not an investment but, rather, an insurance policy protecting you from political and monetary stupidity.
    Now is not the time to believe the sugary hype of Wall Street and spin-doctoring of Pennsylvania Avenue. The risks to your personal wealth are too high.
    Until next time, stay Sovereign…


    By Jon Hilsenrath


    Financial regulators are putting out a report Monday about unusual behavior in the $13 trillion U.S. Treasury bond market. As my colleague Katy Burne explains in a WSJ story today, trading in the market has grown thin and prone to unpredictable lurches in bond yields. It has regulators worried, because it could lead to volatility that hurts the economy and markets when the Fed starts raising interest rates. 

    Treasury market gyrations on October 15 have gotten a great deal of attention and will be the focus of the report. But as Fed Governor Lael Brainard noted in a recent speech, it wasn’t an isolated event. Late on March 18, the day of a Fed policy meeting, the U.S. dollar depreciated against the euro by 1.75% in less than three minutes, a large drop in a short interval. A few weeks later, German bunds yields swung wildly at a time of little market news. And before all that there was the “taper tantrum” of 2013 when U.S. Treasury yields shot up as the Fed considered ending its bond-buying program.
    The regulators themselves might be a cause of the problem. New rules on capital and liquidity for banks have made them reluctant to hold much bond inventory and play aggressively as middlemen in the market, making it less liquid and harder to clear very big trades by investors.
    So will the report shoulder the blame for this new market risk? Don’t count on it.
    “Reductions in broker-dealer inventories occurred prior to the passage of the Dodd-Frank Act, suggesting that factors other than regulation may also be contributing,” Ms. Brainard said.
    Instead, they seem likely to file this under the category of what former Defense Secretary Donald Rumsfeld once called “known unknowns,” problems they know are lurking, but don’t know how to explain, fix or predict.

    Dollar Weaker Ahead of Yellen Testimony, Greek Vote

    Few investors made large bets ahead of Fed Chairwoman’s testimony to congress

    By James Ramage

    Updated July 14, 2015 4:25 p.m. ET
    Federal Reserve Chairwoman Janet Yellen is set to give her semi-annual monetary-policy testimony on Capitol Hill on Wednesday and Thursday.Federal Reserve Chairwoman Janet Yellen is set to give her semi-annual monetary-policy testimony on Capitol Hill on Wednesday and Thursday. Photo: Manuel Balce Ceneta/Associated

    The dollar edged lower against the euro and the yen on Tuesday, as few investors made large bets a day before Federal Reserve Chairwoman Janet Yellen begins her semiannual monetary-policy testimony on Capitol Hill.

    In addition, investors held back on currency trades during the session on growing concerns over whether Greek Prime Minister Alexis Tsipras can pass punishing austerity measures through parliament on Wednesday. Failure to do so would likely reignite fears that Greece could exit the euro area and upend markets over the near term.

    The dollar slipped 0.1% against the common currency from the previous day, with one euro buying $1.1005 in late-afternoon trade. The U.S. currency also inched down 0.1% to 123.38 Japanese yen.

    Earlier in the day, the dollar fell against rivals, as weak U.S. retail sales data for June signaled uneven consumer demand and dimmed expectations for economic growth over the second three months of the year.

    U.S. retail sales in June decreased 0.3% from the previous month to a seasonally adjusted $442 billion, the Commerce Department said. That compares with economists’ expectations of a 0.2% rise. Numbers for May and April were also revised lower.

    Though the data raise doubts about the U.S. economy’s robust recovery from a soft first quarter of 2015, investors are more likely to wait for Ms. Yellen’s comments to legislators and developments in Greece on Wednesday before making larger moves, said Richard Cochinos, head of Americas developed-market currency strategy at Citigroup Inc. C 0.67 % 
    “Investors want to see how those turn out before betting on the euro and the yen right now,” Mr. Cochinos said. “It was only one bad retail sales number, and not sufficient to cause people to change their views or back out of positions.”

    General uncertainty about the U.S. economy combined with global worries over the Greek debt crisis, falling commodity prices and China’s stock markets to push back expectations for the first Fed rate increase since 2006 toward the end of the year, or even into early 2016. Higher interest rates would draw yield-hungry investors to the dollar.

    Tsipras' Choice: Total Capitulation or Grexit; Text of 4-Page Eurozone Demands

    By: Mike Shedlock

    Sunday, July 12, 2015

    We now have "THE Final Offer Before Grexit" (I think). Of course, more offers will come after Grexit.

    The document is not in a form that can easily be copied. There is a line break of some sort after every character, that even my line break removal tool does not fix.
    I retyped most of the document, sometimes shortening sentences or paragraphs, the essential ideas below.

    Greece has Three Days to "Rebuild Trust" and Do the Following
    • Streamline VAT and broaden tax base to increase revenue.
    • Upfront comprehensive pension reform
    • Adopt Civil Procedure Code with major overhaul of civil justice system
    • Safeguard full legal independence of ELSTAT
    • Fully implement Treaty on Stability, make Fiscal Council operational before finalizing Memorandum of Understanding (MoU)
    • Introduce quasi-automatic spending cuts in case of deviation from targets after seeking advice from Fiscal Council and subject to the approval of the institutions
    • Transpose the BRRD within a week with support from European Commission

      MoU Highlights
    • Carry out ambitious reforms to fully compensate for the fiscal impact of the Constitutional Court ruling on 2012 pension clause
    • Implement a zero deficit clause or mutually agreeable measures by October 2015
    • Adopt more ambitious market reforms with a clear timetable for implementation of all OECD toolkit recommendations including Sunday trade, sales periods, pharmacy ownership, milk, bakeries, ferries, etc., etc.
    • Privatize electricity network
    • Undertake rigorous reviews of collective bargaining, industrial action, and collective dismissals
    • Modernize framework for collective dismissals
    • Strengthen financial sector including decisive action on non-performing loans
    • Eliminate political interference in appointment process and governance of HFSF

      On Top of That (Mish note: those were the exact words)
    • Develop a significantly scaled up privatization program with improve governance
    • Invite an independent body to assess price of assets sold with involvement of the Commission OR transfer 50 billion to an existing external and independent fund like the Institution for Growth in Luxembourg to be privatized over time to reduce debt.
    • Modernize and significantly strengthen Greek administration and put in place a program under the auspices of the European Commission, a capacity-building and de-politicization of the Greek administration. The first proposal needs to be provided by July 20.
    • To fully normalize working methods with the institutions, the government needs to consult and agree with the institutions on all draft legislation before submitting to parliament or the public. The Eurogroup stresses implementation is the key and welcomes Greek authorities to request by July 20 support for technical assistance.
    • Amend or compensate for "roll-back" legislation adopted during 2015 that is counter to the framework of the February 20, 2015 Eurogroup statement.

     Minimum Requirements

    The above-listed commitments are minimum requirements to start the negotiations with the Greek authorities. However, the Eurogroup made it clear that the start of negotiations does not preclude any final possible agreement on a new ESM programme, which will have to be based on a decision on the whole package (including financing needs, debt sustainability and possible bridge financing).

    Mish comment: the above sentence was retyped exactly as written.

    Additional Financing Needs

    The Eurogroup takes note of the possible financing needs of between €82 billion and €86 billion. The Eurogroup notes the urgent financing needs of Greece and the need for very swift progress in reaching a decision on a new MoU: Estimated amounts are €7 billion by July 20, and an additional €5 billion by mid-August.

    Additional Bank Recapitalization Buffer

    Given the accute challenges of the Greek financial sector, a new ESM would have to include a buffer of €10 billion to €25 billion for bank recapitalization, of which €10 billion would immediately be available in a segregated account at the ESM.

    No Haircuts
    • The Eurogroup stresses that nominal haircuts on debt cannot be undertaken.
    • The Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely.
    • Provided all the necessary conditions contained in this document are fulfilled, the Eurogroup and ESM board of directors may mandate the institutions to negotiate a new ESM programme. 
    Capitulation or Grexit

    In case no agreement could be reached, Greece should be offered swift negotiations on a time-out from the euro area, with possible debt restructuring.

    End of Document

    Bloomberg sums it up this way: EU Demand Complete Capitulation From Tsipras.

    German chancellor Angela Merkel had her choice, and she made it.

    Merkel's Choice
    1. Pony up another €80+ billion to Greece and offer debt relief on top of it, even though a majority of German voters would rather see Greece out of the eurozone.
    2. Push Greece out of the eurozone.
    Merkel selected option number 2. This pushed the ball in Tsipras' court.

    Tsipras' Choice
    1. Go back against everything he vowed to do and completely give in to Germany, accepting a far worse offer than he had weeks ago
    2. Grexit

    Mish Analysis

    This proposal is in ways a step in the right direction. Indeed France would benefit greatly if it had to adopt the best of the ideas: loosen work rules, make it easier for businesses to fire employees, reduce state spending, increase retirement age, undertake rigorous reviews of collective bargaining, and fully implement the treaty on stability.
    Ironically, not even Germany fully implements the treaty on stability. Instead, the previous two bailout agreements relied on massive VAT hikes with no real reforms.
    Greece imploded.
    Note that even if Greece does everything asked, the agreement above does not lead to a guaranteed ESM restructuring.
    Here is the exact sentence (emphasis in italics mine): "Provided all the necessary conditions contained in this document are fulfilled, the Eurogroup and ESM board of directors may in accordance with article 13.2 of the ESM Treaty, mandate the institutions to negotiate a new ESM programme, if the preconditions of Aricle 13 of the ESM treaty are met on the basis of the assessment referred to in Article 13.1"
    If Greece meets the all Eurogroup demands (and the document allows more to come), then if the preconditions in article 13 are met, then the ESM committee may (or may not), tap the ESM.

    Meanwhile, Greece is told that no nominal haircuts are coming.

    Tsipras' Clear Choice

    The wording of this document makes it clear Germany wants to push Greece out of the eurozone.

    Please review the final sentence of the proposal. Here it is again: "In case no agreement could be reached, Greece should be offered swift negotiations on a time-out from the euro area, with possible debt restructuring."

    If Greece turns down the offer, it gets "swift" negotiations on a "temporary time out", including the possibility of restructuring.

    In contrast Greece has no chance of restructuring if it accepts all of the above demands.

    Tsipras would be a fool to accept this proposal.

    As I have said all along, Greece's best chance is to default, not pay back a cent, and initiate the reforms it needs to grow over the long haul.

    Greece does not need the euro. No country does.

    Banks Endure Fed Waiting Game

    As second-quarter earnings season gets under way, bank stocks look to the Fed to start raising rates

    By David Reilly

    Updated July 12, 2015 7:57 p.m. ET 

    Federal Reserve Chairwoman Janet Yellen last month. On Friday, she reiterated that the Fed could raise rates later this year.Federal Reserve Chairwoman Janet Yellen last month. On Friday, she reiterated that the Fed could raise rates later this year. Photo: MANUEL BALCE CENETA/ASSOCIATED PRESS

    Bank stocks have their engines revving. If only the Federal Reserve would flash the green light.
    Investors got an idea in the second quarter of what lies in store for bank stocks when interest rates start rising. The KBW Nasdaq Bank Index outpaced the S&P 500 by about seven percentage points in the quarter. That happened as long-term yields marched upward on the increasing probability of the Fed finally beginning to raise rates in September.

    Since the end of June, though, global forces—Greece and China, chiefly—have buffeted yields and bank shares. Although that pressure abated at the end of last week, it still has bred doubt about the Fed’s timing. Chairwoman Janet Yellen reiterated Friday that the Fed could raise rates later this year. But Fed-funds futures imply a far greater chance of a first increase in December rather than September.
    The Fed’s timing is vital for banks: A rising-rate environment would allow for increasing profits on the back of expanding net interest margins, or the difference between what banks make borrowing and lending money. Banks have for some time watched those margins get ground down even as steady loan growth hasn’t been robust enough to make up for it.

    With J.P. Morgan Chase JPM 1.42 % & Co. and Wells Fargo WFC 1.05 % & Co. kicking off bank-earnings season this week, investors can expect the same sort of push and pull on second-quarter results. There may have been some stabilization of margins given rising yields. Yet revenue growth likely remained tepid. So banks may be forced to squeeze expenses even harder. 

    That leaves investors waiting on the Fed, with the added worry the potential benefit from a rate rise is already priced into bank stocks.

    On that score, there is reason for optimism. The banking sector is now better positioned for rising rates based on its mix of assets than it has ever been, Goldman Sachs analyst Richard Ramsden noted recently. He estimated the amount of bank assets minus liabilities that reprice within one year is more than twice what is was on the cusp of the rate-tightening cycle in 2003 and 2004.

    So even if the wait proves longer than investors were expecting, there may still be reason to cheer the race eventually getting under way.


    The Mystery of Vanishing Hotel Reservations

    Booking on travel sites like Expedia should guarantee a room, but guests sometimes end up bumped

    By Scott McCartney

    July 8, 2015 1:21 p.m. ET

    Michael Kotula and his wife booked a hotel room through Expedia EXPE 3.27 % eight months in advance of their daughter’s University of Delaware graduation in late May. They reconfirmed directly with the hotel two months before the big event.

    Two days before check-in, Expedia told them in an email the hotel was canceling. And when they called the Hilton Wilmington/Christiana in Newark, Del., to complain, Mr. Kotula was told reservations made through travel agencies like Expedia weren’t as secure as booking directly with the hotel.

    “I wish I had known before that my reservations with Expedia were built on quicksand,” Mr. Kotula says.

    Reservations made by authorized agencies are legally just as secure as bookings made directly with airlines, car-rental firms or hotels, according to hotel executives and industry analysts. But since hotels have to pay commissions for agency bookings, they try to push customers to book directly.

    And many travelers harbor doubts about the security of using a middleman, and use online travel agencies like Expedia and Orbitz for comparison shopping and then book directly.

    Expedia says the hotel was wrong to tell Mr. Kotula there was a difference. “They’re looking for someone to blame,” says Adam Anderson, Expedia’s managing director of industry relations. But Hilton says in a statement that direct booking reservations may be favored when guests are relocated because “it is easier for the hotel to communicate directly to the guest if they had booked directly through Hilton.”

    Brad Wenger, general manager of the Hilton Wilmington, referred questions about the handling of the reservation to Hilton. Andrew Flack, Hilton’s vice president of global marketing, referred questions about Mr. Kotula’s reservation to the hotel.

    The bottom line: Airlines, resorts, cruises, hotels and car-rental firms can dump you for a better offer, regardless of how your booking was made.

    In the airline business, overbooking is regulated by the Transportation Department, which requires airlines to pay cash compensation to passengers involuntarily bumped from flights.

    The penalties were doubled in 2011 to lessen the incentive for airlines to bump a low-fare customer when a high-fare passenger shows up at the last minute. But hotels don’t face that kind of regulation.

    “Hotels do their best to meet their guests’ needs, and unlike other industries, hotels are very lenient when guests fail to honor their reservations, leaving them with empty rooms,” the American Hotel & Lodging Association said in a statement.

    While there are no data on hotel bumping rates, hotel occupancy has been climbing, meaning more nights when hotels sell out. Since many still allow cancellation of reservations up to 6 p.m. on the day of arrival, hotels overbook, knowing some guests won’t show. As the economy improves, there’s concern the practice of double-booking may be increasing, says Paul Ruden, executive vice president at the American Society of Travel Agents.

    Mr. Kotula, a Uniondale, N.Y., lawyer, and his wife, Stephanie Johnson, knew they needed to book a graduation-weekend hotel room far in advance. They had previously stayed at the Hilton near campus and liked it.

    Ms. Johnson booked a room on Sept. 26 for the graduation at about $250, a premium rate for that hotel. She called the hotel directly in March to reconfirm and was told the reservation was in order. Then two days before check-in, Expedia sent an email saying, “unfortunately the hotel is unable to accept your reservation” and that they should call to arrange new accommodations.

    Calling took several hours. Mr. Kotula, a gold-level member of Expedia’s loyalty program who previously booked trips through the agency with no problems, says he waited an hour to talk to a representative. He got no explanation of what had happened. He asked to speak to a supervisor, was put on hold, then disconnected.

    They called the hotel but were offered no explanation and told the manager would call them back, which never happened. “In a moment of candor, the hotel told us that our reservation is less secure when we book a reservation through a third-party payer like Expedia,” Mr. Kotula says of a conversation with a hotel Clerk.

    Hilton’s Mr. Flack says the company’s policy is to relocate overbooked guests to a comparable hotel and pay for the first night of the stay plus transportation to and from the alternate hotel.

    “All relocation decisions are made at the discretion of the hotel,” he says. Expedia rebooked the couple to a lesser-quality hotel farther from campus.

    Expedia says it received a “relocation request” from the Hilton two days before May 29 check-in and immediately notified the family. Expedia’s Mr. Anderson says the hotel told Expedia it chose to cancel some reservations because it wanted to lengthen the stay of a group. Mr. Wenger, the hotel’s general manager, confirmed there “was a large group staying that period that grew in size.”

    When overbooked, hotels make the decision on which customers get “walked,” the industry term for moving clients to other hotels. Industry experts say guests get selected for bumping based on how long they plan to stay, which rate they pay, whether they are important clients or part of a group, and what time they arrive to check in.

    “We are reinforcing our policies around overbooking with the hotel,” Hilton’s Mr. Flack says.

              Photo: Michael Sloan               

    Robert Rippee of Las Vegas also had problems calling Expedia customer service. On a New York business trip, he opted to book an apartment through Expedia. It looked good in online photos and the $400-a-night price seemed a relative bargain in pricey Manhattan.

    The address turned out to belong to a dry-cleaning shop. He called the contact number on his reservation and the landlord gave him another address. That was an apartment with tape over the door locks with no resemblance to the photos on Expedia. Mr. Rippee left a note saying the apartment wasn't what he booked and was unacceptable. He booked a room at the Lexington Hotel and then tried to call Expedia.

    Mr. Rippee says he spent an hour on hold, and then selected an option to have Expedia call him back. An hour later, Expedia called but the agent told him there was nothing Expedia could do—it was only the agent and he had to go to the landlord for a refund. He asked to speak to a supervisor, was placed on hold, then disconnected. “This cycle repeated three times during the night,” he says. Another go-round with the company the next day proved similarly fruitless.

    Mr. Rippee, a consultant in business development and technology and former hotel marketing executive, filed complaints with the Better Business Bureau and Federal Trade Commission. He then received an email from Expedia refunding the $1,100 he paid for two nights at the Lexington Hotel. Expedia confirmed this sequence of events.

    Expedia says its call centers are operating at maximum capacity with the peak summer travel season.

    As a result, “you will certainly find vocal customers who are frustrated with the experience,” a spokesman says regarding Mr. Rippee’s experience. The company is investigating reports of dropped calls and long wait times.

    And the phantom apartment? Expedia says it investigated and found “discrepancies” between its listing and the apartment. “Expedia has removed the apartment and other properties associated with this owner from its sites,” the company says.