Negative interest rates

Bankers v mattresses

Central banks are still testing the limits to how low interest rates can go

IN JUNE of last year the European Central Bank reduced its benchmark interest rate, at which it lends to commercial banks, to 0.15% and its deposit rate, which it pays to banks on their reserves, to -0.1%. For a central bank that was once cautious about unconventional measures, setting a negative interest rate was a bold move. The ECB was in effect charging commercial banks to hold their excess deposits at the central bank, in the hope that this would drive down borrowing costs more generally.

Three months later, the ECB cut the deposit rate again, to -0.2%. When the ECB’s rate-setting council next meets, on December 3rd, it is widely expected to trim the deposit rate even further, as well as to approve more “quantitative easing” or QE (the creation of money to buy bonds).

In a recent speech Mr Draghi claimed that the ECB’s unconventional policies over the past 18 months had been the “dominant force” in spurring the euro-zone economy and staving off deflation. Lending by banks is slowly reviving. Even so, he suggested, deficient inflation and lingering concerns about the strength of recovery justify further action.   

Not so long ago, the lowest possible interest rate was thought to be zero. There is a ready alternative to keeping money in banks: holding it as cash. Mattresses do not charge for storing notes. Depositors might tolerate small fees, to avoid the cost and hassle of making other arrangements—but most had assumed their tolerance would be limited. “We are now at the lower bound,” Mario Draghi, the ECB’s boss, said after the last cut. He now seems to be reconsidering—but how low can the ECB go?

The ECB is not alone in testing the lower bound to interest rates. Denmark’s central bank has set its main policy rate below zero for much of the past three years to repel capital inflows that had threatened its exchange-rate peg with the euro. In January the Swiss National Bank abandoned its attempts to stop the franc from appreciating against the euro by printing and selling francs in vast quantities; instead it resorted to negative interest rates to deter investors from buying francs.

Sweden’s central bank, the Riksbank, took its main policy rate negative in February, to weaken the krona, make imports more expensive and thus push inflation closer to its target of 2%.

For all these countries, it is the exchange rate against the euro that matters most. To suppress their currencies, their central banks must offer interest rates that are further below zero than the ECB’s. The deposit rate in Denmark and in Switzerland is -0.75%. In Sweden it is -1.1%.

This has not caused commercial banks to swap their reserves at the central bank for cash, as theory would suggest. That is because to do so would itself be costly. To settle payments, banks must move vast sums between themselves each day. The costs of counting, storing, moving and insuring lorry-loads of banknotes apparently trumps the smallish charge Europe’s central banks are levying to hold electronic deposits. The other possible use for banks’ reserves is to lend them to other banks, but they are already awash with the excess liquidity created by QE.

The deposit rate at central banks sets a floor for the cost of overnight loans more generally, which is why short-term money-market rates have also turned negative. Indeed, negative policy rates and money creation through central-bank purchases of bonds or foreign currencies have dragged the yields on sovereign bonds into the red all over Europe (see chart). That in turn has pulled down the interest rates charged by banks for new loans.

Banks have passed on some of the cost of negative rates to their corporate clients. For them, too, the cost of moving and storing large stocks of cash is prohibitive; the obvious alternative—buying safe and liquid bonds—also now comes at a cost, thanks to negative yields.

This week Alternative Bank Schweiz, a tiny Swiss outfit, said it would be forced to levy negative rates on personal accounts from January. Most banks, however, have shielded retail customers from such charges, on the assumption they would move their accounts elsewhere. As a consequence, overall bank deposits have been stable. The banks have simply absorbed the cost of deposits at the central bank, which has dented profits. A further cut in the ECB’s deposit rate of 0.2 percentage points could squeeze the net profits of European banks by 6%, according to Autonomous Research.

As interest rates creep further into the red, economists’ prescriptions have become bolder. In a speech in September Andy Haldane, the chief economist of the Bank of England, outlined a range of options to allow rates to go lower still. The most radical would be to get rid of the mattress option by abolishing cash altogether. Ken Rogoff of Harvard University calculates that there is $4,000 of currency in circulation for every person in America. Much of it is used to hide transactions from tax authorities or the police. Abolishing it would curb such activities, as well as helping central bankers.

Yet depositors might still find ways to safeguard their savings. Switching to foreign currency or precious metals would be an obvious option. As Kenneth Garbade and Jamie McAndrews of the Federal Reserve Bank of New York point out, taxpayers could make advance payments to the taxman and subsequently claim them back. Depositors could withdraw funds in the form of bankers’ drafts (certified cheques) to use as a store of value. Such drafts might even become a form of parallel currency, since they are transferable. Any form of pre-paid card, such as urban-transport passes, gift vouchers or mobile-phone SIMs could double up as zero-yielding assets. If interest rates became deeply negative, it would turn business conventions upside down. Companies would seek to make payments quickly and receive them slowly. Their inventories would grow fatter.

In practice, euro-zone banks are the ones on the front-line of negative rates. That is sparking worries that, if rates go too low, they might harm the economy. Banks that are nervous about the stability of their deposits are less likely to lend, says Huw van Steenis of Morgan Stanley, an investment bank. Yet pushing rates lower still is also likely further to weaken the euro against the dollar, especially as the Federal Reserve seems set to raise its main interest rate on December 16th. That may even be the ECB’s main motive—just as suppressing their currencies is the explicit aim of the other members of the negative-rate club.

Fourth Turning - Social and Cultural Distress Dividing The Nation

By: The Burning Platform

I wrote the first three parts of this article back in September and planned to finish it in early October, but life intervened and truthfully I don't think I was ready to confront how bad things will likely get as this Fourth Turning moves into the violent, chaotic war stage just over the horizon. The developments in the Middle East, Europe, U.S., China and across the globe in the last months have confirmed my belief war drums are beating louder, global war beckons, and much bloodshed will be the result. Fourth Turnings proceed at their own pace within the 20 to 25 year crisis framework, but there is one guarantee - they never de-intensify as they progress. Just as Winter gets colder, stormier and more bitter as you proceed from December through February, Fourth Turnings get nastier, grimmer, more perilous, with our way of life hanging in the balance.

In Part 1 of this article I discussed the catalyst spark which ignited this Fourth Turning and the seemingly delayed regeneracy. In Part 2 I pondered possible Grey Champion prophet generation leaders who could arise during the regeneracy. In Part 3 I focused on the economic channel of distress which is likely to be the primary driving force in the next phase of this Crisis. In Part 4 I will assess the social and cultural channels of distress dividing the nation, Part 5 the technological, ecological, political, military channels of distress likely to burst forth with the molten ingredients of this Fourth Turning, and finally in Part 6 our rendezvous with destiny, with potential climaxes to this Winter of our discontent.

There may be trouble ahead

The road ahead will be distressful for everyone living in the U.S., as we experience the horrors of war, economic collapse, civil chaos, political upheaval, and the tearing of society's social fabric. The pain and suffering being experienced across the globe today will not bypass the people of the United States. Winter has arrived and lethal storms are gathering in the distance.

Don't think you can escape. You can prepare, but this Crisis will reshape our society for better or worse, and you cannot sidestep the consequences or cruel environment we must survive.
"Reflect on what happens when a terrible winter blizzard strikes. You hear the weather warning but probably fail to act on it. The sky darkens. Then the storm hits with full fury, and the air is a howling whiteness. One by one, your links to the machine age break down. Electricity flickers out, cutting off the TV. Batteries fade, cutting off the radio. Phones go dead. Roads become impossible, and cars get stuck. Food supplies dwindle. Day to day vestiges of modern civilization - bank machines, mutual funds, mass retailers, computers, satellites, airplanes, governments - all recede into irrelevance. Picture yourself and your loved ones in the midst of a howling blizzard that lasts several years. Think about what you would need, who could help you, and why your fate might matter to anybody other than yourself. That is how to plan for a saecular winter. Don't think you can escape the Fourth Turning. History warns that a Crisis will reshape the basic social and economic environment that you now take for granted." - Strauss & Howe - The Fourth Turning
 Social Distress

The vast and growing Grand Canyon sized gap between the haves and have nots, and the societal implications of an elitist uber-wealthy minority capturing the levers of our economic, financial, and political systems, using that control to further enrich themselves at the expense of the isolated working class, can be clearly understood by following the dialogue between three billionaires chatting on stage at a conference thrown by a convicted Wall Street criminal.
Sheryl Sandberg: "Yeah, so let's follow up on a bunch of the things we were talking about. Let's start with income inequality." 
Hank Paulson: "Ok, well.. income inequality. I think this is something we've all thought about. You know I was working on that topic when I was still at Goldman Sachs.."
Robert Rubin: "In which direction? You were working on increasing it." 
Hank Paulson then bursts out laughing: "Yeah! We were making it wider!"
Hank Paulson Laughing

Paulson and Rubin spent vast portions of their lives working for the vampire squid on the face of America - Goldman Sachs. This firm represents everything wrong with our social order, as they use all means (legal or illegal) to enrich themselves, whether it be back stabbing clients, double crossing partners, eviscerating vulnerable competitors, robbing the poor, rigging markets, buying influence, placing executives in the highest levels of government, or screwing the taxpayer when their risky gambles blow up the world. Paulson and Rubin are the perfect representatives of the .1% ruling class who protect their interests and the interests of their crony capitalist colleagues at all costs. They truly believe they are shrewder, more astute, cleverer, deserving of the billions they have absconded through rigging the markets, should be running the country behind the scenes, and merit the worship of the lowly peasantry.

The gap between the richest 1% and the bottom 90% has never been wider in history. The previous largest gap occurred in 1929, at the start of the last Fourth Turning. When the real median household income hasn't advanced in the last 26 years and men's real wages are where they were in 1971, while CEOs of S&P 500 companies make 331 times their workers and Wall Street hedge fund managers make billions while paying no taxes, you have building anger, disillusionment and calls for retribution.

Some people are waking up to the fact the Ben Bernanke led Federal Reserve and the Hank Paulson/Tim Geithner led Treasury saved their buddies on Wall Street while throwing the people on Main Street under the bus. When Wall Street's leveraged risk bets pay off, they reap all the riches - as is happening today. When their colossal wagers go bad, the propaganda about systematic failure is rolled out and the American people are stuck with the losses. The goal has always been to revive the stock market and make sure the Wall Street banks continue to generate billions in profits, while leaving the taxpayer on the hook for their failed bets.

Share of Income by Bracket

The OWS and Tea Party were both grass roots initiated movements as a societal response to the distress created by Wall Street and their government crony cohorts. The Wall Street banks colluded with DHS and captured politicians of both parties to crush OWS and subvert the Tea Party. The Deep State's success in squashing dissent from what they considered the lowly peasants has only been temporarily papered over by the $10 trillion of debt issued to keep the masses sedated, deluded and ignorant about the true nature of the ongoing crisis. The storyline about the 1% is misleading, as many people in the 1% are small business owners, doctors, and professional workers. The true story is the exponential wealth increase of the .1% over the last 35 years as the financialization of the economy has enriched psychopathic, highly educated men who produce nothing but misery, debt, and ultimately social unrest.

Top Wealth Shares

Decomposing the 1% reveals the top .1% increasing their share of the national wealth from less than 9% in 1980 to over 21% today. These are the corporate CEO's buying back their company stock at all-time highs in order to boost their stock based compensation, Wall Street executives who committed the largest control fraud in world history while unabashedly flaunting laws & regulations, hedge fund managers who manipulate and rig the markets while paying no taxes on their billion dollar profits, and billionaire cronies who profit from the military industrial complex and sick care complex by paying off politicians to write laws in their favor and funnel government contracts to them. The sacking and pillaging of the nation's wealth by psychopaths who are never satisfied with their current vast level of riches, power and control, exposes itself in the tremendous recovery on Wall Street and the ongoing depression on Main Street.

A simmering rage is bubbling below the surface as 20% of American households rely on food stamps to survive, the percentage of Americans in the labor force stands at a four decade low, real household income remains stagnant at 1988 levels, corporate profits have reached record levels while corporations continue to fire Americans - shipping their jobs overseas, and the six mega-corporations representing the mainstream media cover up the truth, mislead the public with propaganda, while celebrating the .1% as saviors of our economy. There is nothing more volatile to societal stability than millions of unemployed men, growing angry and resentful towards the ruling class for their lot in life.

Americans on Food Stamps

The vast gulf between the haves and have nots will fuel further violence between the classes, as our fraying society is already seething with anger between races, religions, political parties, and genders. The increasingly brutal police state, militarization of local police forces, shaking down of citizens through fines, and unlawful surveillance of our electronic communications, will lead to a backlash against police.

The Black Lives Matter movement, begun after a number of police brutality incidents against black men, has been hijacked by politically motived race baiters and is exacerbating tensions between blacks and whites. The false storyline perpetuated by the media disregards the fact blacks, who represent 13% of the population, commit 22% of all violent crimes and 93% of black shooting victims are shot by other blacks. The white population, abiding by laws, is getting sick of being blamed for the gun violence and lawlessness in liberal ghetto bastions like Chicago, Detroit, Baltimore, St. Louis and Philadelphia.

Cultural Distress

Cultural Distress

Even though the vast majority of gun related crimes happen in urban ghettos and the much publicized mass shootings are committed by mentally deranged young men on psychotropic drugs, liberal control freak politicians use scare tactics and misinformation in their effort to grab the guns of law abiding Americans living in rural regions. It is the elitist hypocrite politicians living on the coasts, protected by armed guards, who want to eviscerate the 2nd Amendment, and think it is fine for the 4th Amendment to be disregarded by police thugs across the land. Disarming the citizenry is essential to implementing a dictatorial regime. The race wars have intensified, as the Black Lives Matter meme has spread to college campuses in Missouri and in the hallowed Ivy League at Yale and Princeton.

The bullying tactics of the pampered participation trophy generation of entitled millennials, being misled by social justice warrior ideologues, is fueling a backlash by older generations who studied, worked hard, obtained useful college degrees, repaid their student loans, and didn't use race, gender, or micro-aggressions as excuses when they failed. College campuses, which once championed free speech and free thought, have now become bastions of censorship, left wing ideology, suppression of opinion, shouting down of dissent, thought control, and subduing the rights of the majority for the benefit of an outraged minority who resort to violent rhetoric to achieve their outcomes.

Institutions of higher education have become nothing more than glorified daycare centers for kids who never grew up, learned personal responsibility, or developed critical thinking skills. The feckless college faculty and administrators have allowed financial considerations to override learning, as the curriculum has been dumbed down to meet the degraded capabilities of their high self-esteem/low intelligence students. The reality of an increasingly brutal economic environment and high likelihood of war is about to crash headlong into the coddled, pampered, parent protected, iGadget, facebook worlds of millions of millennials.

They will be nothing but cannon fodder for the Deep State unless they develop a backbone, start thinking critically about what is happening in this world, start dealing with reality, stop trusting the government to save them, and make a stand against the corporate fascist tyranny consuming our nation. The Peter Pan Syndrome, where people with the body of an adult but the mind of a child, increasingly dominate the landscape, as a larger number of supposed adults exhibit emotionally immature behaviors. The self-neutering of young men is the result of twelve years of feminist social engineering in government controlled public schools. The wussificiation is complete.

The combination of social justice warriors, pushing agendas completely out of step with mainstream Americans, and a dying legacy media providing infotainment disguised as news, fuels further cultural distress from coast to coast. With liberalism rampant and dominant on the coasts and conservatism governing the heartland, the cultural divide in the country is a gaping chasm. Average Americans trying to live their lives, pay their bills, and raise families have no strong opinions about gay marriage, men dressing like women, or other deviant behavior performed by consenting adults in the privacy of their own households. But when the liberal media, social justice warriors, and Hollywood elites shove the "right" to gay marriage, the crucifying of people for their religious beliefs, the "courage" of a man pretending to be a woman, and the glorification of abhorrent behavior, down the throats of Americans trying to mind their own business, an unforeseen backlash is inevitable.

The war on the traditional family unit, white males, societal norms, common decency, and community standards has gone too far and the pushback from common decent middle class folks has begun. It is a proven fact that households with married parents are on average wealthier, raise kids who do better in school, can withstand economic setbacks better, and have been the backbone of this country since its inception. The feminist belief that women can raise children without men has proven to be a disaster.

With the percentage of married households plunging from over 70% in 1970 to under 50% today, an ominous tipping point has been reached. Rather than address this truly disastrous problem, the radical feminists and race baiters carry on their culture wars. The social justice warriors, prodded by the liberal media and agenda driven ideologues, are offended by free speech, white people, men, married couples, religious freedom, having to repay loans, gun owners, capitalism, carbon dioxide, meat, yoga and anyone who dares to disagree with their antagonistic, bombastic, vacuous nonsense.

Shockingly, they aren't offended by the tattooed, pierced freaks roaming the streets, angry because no one will hire them. They aren't offended by the millions of willfully ignorant, low class army of lazy Obama voters who feel entitled to free housing, free medical care, free food, free phones, and free education at the expense of the working middle class. They aren't offended by the 70% of black babies born out of wedlock and black men shirking their responsibilities as fathers. They aren't offended by the rampant criminality and murder rates in the Democrat controlled urban ghettos, created by the welfare policies implemented over the last 50 years.

They aren't offended by 93% of black murders being committed by blacks. They aren't offended by a president droning wedding parties and bombing hospitals, while fighting undeclared wars in foreign lands. They aren't offended by the widespread Medicare, SSDI, and food stamp fraud, costing taxpayers billions per year. Normal people living normal lives are sick and tired of the hypocritical, hollow horseshit rubbed in their faces by a dying legacy media and agenda driven social networks on a daily basis. The foolishness and lunacy of these feckless feeble minded warriors against normalcy will be exposed when confronted by the harsh reality of a Fourth Turning.

The rise of Donald Trump and Ben Carson in the early polls for Republican presidential candidate is being fueled by a rising anger and discontent with the corporate media promoting offensive social agendas, the flaunting of the Constitution by a president ruling by executive order, a GOP establishment corrupted by power and unanswerable to their constituents, the disinterest of politicians in both parties in securing our porous southern borders from foreign invasion by illegal hordes. Now the repercussions of Obama ignoring the threats of Islamic extremism and allowing tens of thousands of undocumented Syrian refugees to flood into the country immediately overwhelming our insolvent welfare system and refusing to assimilate into our culture as they worship at mosques where they are taught to hate everything about American culture, is further fueling a political backlash.

As Aldous Huxley realized six decades ago, the truth is unimportant to those controlling the "free" press and shallow distractions will keep the masses occupied while the controllers achieve their goals.
"In regard to propaganda the early advocates of universal literacy and a free press envisaged only two possibilities: the propaganda might be true, or it might be false. They did not foresee what in fact has happened, above all in our Western capitalist democracies - the development of a vast mass communications industry, concerned in the main neither with the true nor the false, but with the unreal, the more or less totally irrelevant. In a word, they failed to take into account man's almost infinite appetite for distractions." - Aldous Huxley, 1958, in the article The Capitalist Free Press
The media will use their standard propaganda techniques of showing crying women and children to tug at the heartstrings of a naive, unaware populace to allow refugees from a conflict created by the U.S. in Syria to come into our country. You know the tired rhetoric - give us your tired, your poor, your huddled masses yearning to breathe free. But this is a Fourth Turning where the harsh reality crashes headlong into rhetoric, memes, and storylines.

Whether the U.S. government is responsible or not for creating the wave of Islamic radicals practicing their warped religious beliefs across the globe by committing murder against innocent people, the fact remains that only Muslims are waging this war against non-believers. There are no Catholics, Baptists, Lutherans, Jews, Buddhists, or atheists spreading their religious beliefs by committing acts of terror or waging war. A religious war is brewing and the consequences will be far reaching and bloody for those practicing Islam. There may be only a small minority of radical jihadists, but the silence of the majority speaks volumes to non-Muslims around the world.

As this Fourth Turning continues to intensify, the bowing down to political correctness and agendas of social justice warrior bigots by traditional minded Americans is going to stop. The pushback may be violent, as the aggressive tactics of these free speech hating fascists is met with armed confrontation they aren't anticipating. These "warriors" aren't exactly the Hero generation who did the heavy lifting during the last Fourth Turning. Privileged, entitled, ignorant millennials bullying weak kneed college professors and milk toast administrators on the campuses of liberal arts colleges isn't exactly storming the beaches of Normandy or battling through the jungles on Guadalcanal.

When confronted with Americans who have seen their standard of living falling for the last twenty five years and are sick and tired of hearing drivel about white privilege, black lives matter, safe spaces, gay and transgender "rights", micro-aggressions, rape culture, misogyny, $15 minimum wage, and a myriad of other offenses against feminism, these easily offended "warriors" will piss their pants. These trivialities will seem so quaint when they are confronted with an angry guy with a gun on the streets or when they are told to report for duty as we wage war with Russia and China. The foolishness of the culture wars will become strikingly apparent when economic collapse and life or death choices confront our special snowflake generation.


The Fed Is Stressed Out

What if a bank had the same problem the regulators have?

      Photo: karen bleier/Agence France-Presse/Getty Images

Almost nobody in Washington cares, and most of the financial media haven’t noticed. But the inspector general’s office at the Federal Reserve recently reported the disturbing results of an internal investigation. Last December the central bank internally identified “fundamental weaknesses in key areas” related to the Fed’s own governance of the stress testing it conducts of financial firms.

The Fed’s stress tests theoretically judge whether the country’s largest banks can withstand economic downturns. So the Fed identifying a problem with its own management of the stress tests is akin to an energy company noticing that something is not right at one of its nuclear reactors.

According to the inspector general, “The governance review findings include, among other items, a shortcoming in policies and procedures, insufficient model testing” and “incomplete structures and information flows to ensure proper oversight of model risk management.” These Fed models are essentially a black box to the public, so there’s no way to tell from the outside how large a problem this is. 
The Fed’s ability to construct and maintain financial and economic models is much more than a subject of intellectual curiosity. Given that Fed-approved models at the heart of the so-called Basel capital standards proved to be spectacularly wrong in the run-up to the last financial crisis, the new report is more reason to wonder why anyone should expect them to be more accurate the next time.

The Fed’s IG adds that last year’s internal review “notes that similar findings identified at institutions supervised by the Federal Reserve have typically been characterized as matters requiring immediate attention or as matters requiring attention.”

That’s for sure. Receiving a “matters requiring immediate attention” letter from the Fed is a big deal at a bank. The Journal reported last year that after the Fed used this language in a letter to Credit Suisse castigating the bank’s work in the market for leveraged loans, the bank chose not to participate in the financing of several buy-out deals.

But it’s hard to tell if anything will come from this report that seems to have fallen deep in a Beltway forest. The IG office’s report says that the Fed is taking a number of steps to correct its shortcomings, and that the Fed’s reform plans “appear to be responsive to our recommendations.”

The Fed wields enormous power with little democratic accountability and transparency. This was tolerable when the Fed’s main job was monetary, but its vast new regulatory authority requires more scrutiny. Congress should add the Fed’s stressed-out standards for stress tests to its oversight list.

Terrorism in the Age of Trump

By Jonathan Chait

Dried blood can be seen on the window of  the Carillon cafe  in Paris Saturday Nov. 14, 2015, a day after over 120 people were killed  in a series of shooting and explosions.
Dried blood on the window of Paris’s Carillon cafe. Photo: Jerome Delay/AP
In the aftermath of mass murder in Paris, Establishment Republicans posited hopefully that now, finally, their voters would get serious and support a presidential candidate who had professional experience in the field of politics.

A few days after the attacks, Politico reported the firm convictions of party stalwarts, who confidently asserted, "The reemergence of foreign policy atop the Republican agenda will force voters to reevaluate the outsider candidates, particularly as both [Donald] Trump and [Ben] Carson display a lack of knowledge about national security and the terrorist threat."
But that, it turned out, was wishful thinking. Far from sobering up the Republican electorate, the attacks served instead to ­intensify its state of frothing rage. A poll showed that the candidate Republicans trusted most to handle terrorism, and the candidate who found his overall lead in the polls rising again after an autumn sag, was none other than Donald J. Trump. And, indeed, this development may have been predictable. From the standpoint of a Trump skeptic, it makes no sense to entrust the task of addressing large policy problems to a buffoonish demagogue; post-Paris, it makes even less sense to entrust one with solving problems now revealed to be even larger.
From the standpoint of a Trump fan, however, things look quite different: The country desperately needs a strong leader who can assure it of victory and who will look after its people without being held back by diplomatic niceties or moral decency, goes the thinking. Gazing upon the bloody streets of Paris and the hordes of suspicious-looking foreigners desperate to take refuge in the United States, his supporters see the allure of a Trump ­presidency now more than ever.

The enveloping climate of fear extends far beyond Trumpian knuckle-draggers, however. A CNN reporter at a press conference asked President Obama, “Why can’t we take out these bastards?” Polls conducted days after the Parisian atrocities showed substantial majorities in favor of sending ground troops to fight ISIS and against allowing more ISIS-fleeing refugees into the U.S. America is relying on its lizard brain.
The atmosphere after Paris provided the nearest approximation to the mix of dread, rage, and suspicion that pervaded American politics after 9/11. And once again, a Bush responded by instinctively proposing to send ground troops to occupy a Middle Eastern country. This time it was Jeb, characteristically blind to the prospect that American ground troops would allow ISIS to refashion itself as the authentic local resistance to a Western invasion. At a recent campaign event, one voter asked if the ­Middle East was safer with or without Saddam Hussein ruling Iraq. Bush replied, “We can have a history lesson or we can talk about the fact that I’m running for president.” (This is the closest Bush has come to openly acknowledging that his election would require voters to forget everything that happened in the recent past.)
France, the target of the attacks, responded somewhat like our country did after 9/11: striking back at the enemy militarily. (President François Hollande vowed to wage a “pitiless” war.) But the United States has changed since the last time it had a Bush in office—in large part because it had a Bush in office. The current president, elected in no small part owing to widespread disgust with the Iraq War, has no ready-made policy response to sate the public’s anger. The Obama administration had an anti-ISIS strategy in place before Paris: air strikes, limited use of special forces, aid to proxies on the ground, and the use of intelligence and law enforcement to ward off threats. The attacks in Paris were a horror but not a revelation; the administration already knew ISIS wanted to murder enemy civilians, including Westerners, indiscriminately.
Because Obama — unlike Bush in 2001 and Hollande today — had no change of action in response, the nationalistic impulses unleashed by the attacks have flowed into different channels from the ones 14 years ago. The American backlash has taken on a wildly xenophobic character this time around. Despite the fact that the Paris attacks were not carried out by Syrian refugees, that France itself vowed to continue its refugee program following the attacks, and that the United States was taking a fraction of the exiles that its (much smaller) European allies were, American fears settled on the possibility that refugees might replicate the horrors of Paris on American soil.
In theory, ISIS could certainly plant terrorists among refugees. In practice, refugees undergo a screening process that lasts an average of two years, and officials dismiss the risk as minimal. Anne C. Richard, the assistant secretary of State for population, refugees, and migration, told a House committee, “The odds of a refugee becoming a terrorist are very, very small.” No risk can be eliminated, of course. Alcohol, pizza, automobiles, not to mention millions and millions of guns, all pose risks. One might even wonder why the risk that deranged men loyal to ISIS might gun down civilians should terrify a country already inured to these sorts of slaughters carried out by men afflicted by different derangements. A rational or even semi-rational approach to the situation might balance the danger of terrorists’ hiding among the refugee population against the humanitarian benefits of saving innocent people from the horrors of civil war and ISIS’s medieval barbarism.
No such reasoning has cooled the feverish response, however. Obviously, every country gives the interests of its own ­people more weight than the interests of others. The essence of nationalism is to disregard the interests of other countries completely. “We are a compassionate nation,” announced House Speaker Paul Ryan, employing the usual lead-in for endorsing uncompassionate policies, “but we also must remember that our priority is to protect the American people.” And by “priority,” Ryan made clear, he really meant “only consideration.” Specifically he said, “We should not bring Syrian refugees into this country unless we can be 100 percent confident that they are not here to do us harm.” A 100 percent certainty is an extremely high threshold. This is the immigration-policy analogue of Dick Cheney’s One Percent Doctrine, which held, in the wake of 9/11, that even a one percent chance of terrorists’ obtaining weapons of mass destruction must be treated as a certainty.
Republican leaders have struggled, with mixed results, to suppress the xenophobic undertones on the right for fear that their party will alienate the growing share of Latino voters. The Muslim voting bloc — being smaller, harder to measure, and not as politically useful — has no such leverage. Thus this new iteration of the immigration debate has subjected its targets to unrestrained savagery. Rand Paul vowed to “end housing assistance to refugees.” Ted Cruz and Jeb Bush both proposed to let in only Christian refugees, untroubled by the legal and practical obstacles to attaching a formal religious test to government policy.
The terms conservatives used to explain their reasoning served only to confirm their cruelty. “If there’s a rabid dog running around in your neighborhood, you’re probably not going to assume something good about that dog, and you’re probably going to put your children out of the way,” said Ben Carson about Syrian refugees. “It doesn’t mean that you hate all dogs, by any stretch of the imagination, but you’re putting your intellect into motion.” Marco Rubio, meanwhile, objected to Hillary Clinton’s denial that the United States is at war with Islam like so: “That would be like saying we weren’t at war with the Nazis, because we were afraid to offend some Germans who may have been members of the Nazi Party but weren’t violent themselves.” In Carson’s analogy, terrorists are like rabid dogs, and Muslims like all dogs. In Rubio’s analogy, terrorists are like violent Nazis, and regular Muslims are like nonviolent Nazis.
Trump insisted, falsely, that he had seen thousands of American Muslims cheering the 9/11 attacks. (Confronted with the fact that there’s no evidence of such a thing: “I have the world’s best memory.”) This time around, the right-wing mind has come to fixate on the imagined enemy at home rather than the real one abroad.

It is Trump who has set the pace. His talent for manipulating the darkest emotions of the conservative id, while minimizing specific policy commitments, has been on full display. In every public appearance, he emitted new, authoritarian-sounding warnings. “We’re going to have to do things that we never did before. And some people are going to be upset about it, but I think that now everybody is feeling that security is going to rule,” he vowed. “We’re going to have to look at the mosques. We’re going to have to look very, very carefully.” Every new sound bite set off a profitable fervor of media speculation, forcing other candidates to raise the bidding or be left behind. “It’s not about closing down mosques,” insisted Rubio, placing himself rhetorically to Trump’s right, “it’s about closing down anyplace — whether it’s a café, a diner, an internet site — anyplace where radicals are being inspired.”
The tea-party movement had initially fashioned itself as wildly anti-statist. Now its advocates have veered into wild authoritarianism. None of this requires intellectual justification in lizard-brain America, and Trump, for now, is the Lizard King.

Mauricio Macri will make a difference beyond Argentina

His victory shows change is possible through the ballot box, writes Daniel Lansberg-Rodriguez
This is how socialism ends, not with a bang but with a squeaker. After a commanding lead during the run-up to Sunday’s presidential run-off election, in the end conservative challenger Mauricio Macri’s victory came down to only 200,000 votes in a nation of more than 40m. The defeat of Cristina Fernández’s political machine has prompted euphoria in much of Buenos Aires. Once it dies down, the president-elect will have his work cut out.
In democratic Argentina, non-Peronist presidents are the rarest of birds; none has finished a term in office. Mr Macri does not command a majority of Senate seats (although he can block hostile legislation). He has relatively little support among Argentina’s powerful provincial governors.

Meanwhile, much like Juan Domingo Perón, whose style shifted from militant nationalism to populist socialism, Peronism is amorphous, more patronage than ideology. It will recover.

Mr Macri may need time to transform the economic wasteland he inherits from predecessors who were happy to default on their country’s debt and shield inefficient industries from competition. But the effects of his victory may be sooner felt outside Argentina.
As the socialist tide in Latin America has receded, dragged back by the death or retirement of its charismatic leaders and the turning of the commodity cycle, it has left many a bloated government high and dry — in Brazil, Venezuela and Chile as well as Argentina. Still, Kirchnerism is the first to expire.
As the largest Hispanic country in South America, Argentina casts a sizeable shadow, and Mr Macri has promised to re-engage with the US and strengthen ties with the EU. Just as the rise of Hugo Chávez in Venezuela helped bring populist movements to power across the continent, Argentina’s choice of a market-friendly pragmatism may galvanise opposition movements elsewhere.
In Venezuela’s legislative elections next month, Mr Macri’s victory has shown a nervous electorate that real change is possible through the ballot box. There is even a remote chance it might strengthen the resolve of Brazilians seeking to impeach Dilma Rousseff, or persuade Bolivians that there can be workable alternatives, ahead of February’s referendum on scrapping term limits for Evo Morales.
Beyond what he represents, the importance of Mr Macri lies in what he can do. The past two decades has seen the proliferation of supranational organisations in South America, which has weakened US influence over the sovereign affairs of their members. This, though, has led to an erosion of values. A code of silence has prevailed as like-minded nations refused to call out one another on the chipping away of democratic protections, free media and human rights.

Mauricio Macri has overturned 12 years of Peronist rule in Argentina as the candidate for change. Jonathan Wheatley asks JP Rathbone, FT Latin America editor, how hard it will be for the new president to turn the economy around without causing too much pain to the electorate.

Nowhere is this as visible as in Venezuela, now governed by Nicolás Maduro, a gaffe-prone Pierrot who succeeded Mr Chávez and displays a penchant for collecting political prisoners. Mr Maduro is the most visible symptom of the region’s troubling slide towards authoritarianism.
Mr Macri invited Lilian Tintori, the wife of jailed Venezuelan opposition leader Leopoldo López, to his victory speech. He has promised to invoke a “democracy clause” and suspend Venezuela from the Mercosur trade bloc during a summit in Paraguay, days after he takes office. The odds are stacked against success. All but one of Mercosur’s other voting members are allied with Mr Maduro, and Brazil has already made its opposition to suspension clear.
Still, standing up to Mr Maduro would be worth it. It is the one promise that Mr Macri can deliver unilaterally. Forcing the conversation would signal to the US and the EU that Mr Macri is the future, and that the future is bright.
The writer teaches Latin American business at the Kellogg School of Management

miércoles, diciembre 02, 2015



The Import of Exports

Ricardo Hausmann

Shipping containers.

CAMBRIDGE – Should a country’s development strategy pay special attention to exports? After all, exports have nothing to do with satisfying their people’s basic needs, such as education, health care, housing, power, water, telecoms, security, the rule of law, and recreation. So why give precedence to satisfying the needs of distant foreign consumers?

That, in a nutshell, is what many opponents of free trade and economic globalization – as well as many on the right who believe that all industries should be treated equally – want to know.

But there are no right answers to wrong questions. It is precisely because governments care about their own people that they should focus on exports.

To see this, consider what a market economy is all about. Some, including Pope Francis, would say that it is about greed – a system in which everybody cares only about herself.

But a market economy should be understood as a system in which we are supposed to earn our keep by doing things for other people; how much we earn depends on how others value what we do for them. The market economy forces us to be concerned about the needs of others, because it is their need that constitutes the source of our livelihood. In some sense, a market economy is a gift-exchange system; money merely tracks the value of the gifts we give one another.

As a result, a market economy encourages specialization: We become very good in a narrow set of skills or products, and exchange them for millions of other things we have no clue how to do or make. As a consequence, we end up doing remarkably few things and buying everything else from others.

This observation is as true about an individual as it is about a place, whether the place is a neighborhood, a town, a state or province, or a country. Every town has grocery stores, beauty parlors, gas stations, and movie theaters that serve the local community. Economists call these “non-tradable activities,” because they are not undertaken with distant customers in mind.

But the town’s people would also want access to things that nobody in the city even knows how to make. For example, most towns and cities do not produce food, cars, gasoline, medicines, TVs, or films. So they need to “import” these goods from elsewhere. To pay for what they want from out-of-towners, they must sell them some of the things that they do know how to make.

Of course, the out-of-towners have the option of buying from somewhere else. This is why the goods and services that a place can sell to non-residents have a disproportionate impact on its quality of life – and even its viability. A mining town becomes a ghost town when the mine closes, because the grocery store, the pharmacy, and the movie theater no longer have the capacity to buy the “imported” food, medicine, and films they need.

In contrast to non-tradable activities, a place’s export activities need to be pretty good to convince out-of-town customers – who have ample other options – to buy from local producers.

That means that exports must have an attractive quality/cost ratio.

One way to increase this ratio is to improve quality and productivity. Another is to lower wages. The higher the productivity and the quality of export activities, the higher the wages they can pay and still remain competitive. If employment in the export industry is significant, as is true in most places that do not rely on oil revenues, the wages that the export sector can afford will affect the wages of everybody in town. Everyone thus has an interest in improving their export sector.

Because they are subject to greater competition, export activities tend to undergo faster technological and productivity improvements than other parts of the economy. They are constantly under threat from innovation and new competitors that could disrupt their business. Consider the iPhone’s devastating impact on Finland’s once-dominant national champion Nokia, or the effect of the shale-oil revolution on OPEC.

Successful places tend to move from a few technologically simple industries that are competitive enough to export their products to a greater number of industries that are increasingly complex. For example, in 1963, 97% of Thailand’s export basket was composed of agricultural and mineral products such as rice, rubber, tin, and jute. By 2013, these represented less than 20% of the total, while machinery and chemicals accounted for 56%.

A similar transformation can be seen in every successful non-OPEC developing country. The success of a place is very much related to its people’s ability to accomplish this transformation, as exemplified by places such as Singapore, Turkey, and Israel.

So what should countries, provinces, and cities do? Skeptics might say that they should just focus on fixing the things that locals care about, such as education or infrastructure, or improve everybody’s “business environment.” Exports will take care of themselves.

But life is more complicated than this. The needs of export activities are often quite distinct.

The specific rules, infrastructure, skills, and technological mastery that export activities require tend to be different from those needed for the non-tradable activities that usually generate the bulk of a place’s employment. While diversification into new areas is always challenging, it is particularly difficult for tradable activities, which have to face foreign competition from the start. By contrast, pioneers in non-tradable activities start with a captive market. Moreover, exporters need particularly strong connections to knowhow found elsewhere on the planet, thus making them more sensitive to foreign investment, migration, and international professional links.

To survive and thrive, societies need to pay special attention to those activities that produce goods and services they can sell to non-residents. Indeed, the need to act on new export opportunities and remove obstacles to success is probably the central lesson from the East Asian and Irish growth miracles.

Non-tradable activities are akin to a country’s sports leagues: different people like different teams. Those engaged in tradable activities are like the national team: we should all root for them – and organize ourselves to make sure they succeed.


miércoles, diciembre 02, 2015




Not so smart

Why two big banks failed

IN 2008, as the financial system was collapsing, Alan Greenspan, the former chairman of the Federal Reserve and champion of free markets, admitted he had been wrong. “I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms,” he said. In other words: why would bankers destroy their own livelihoods?

Some clues to Mr Greenspan’s conundrum can be found in a new book* on Lehman Brothers, the American investment bank whose failure precipitated the worst of the crisis, and a recent report** on the collapse of HBOS, a British retail bank, that imploded soon after. Although the two banks had different histories, they made similar mistakes.

For a start, both strayed from their core expertise. HBOS was created through the combination of Halifax, a retail mortgage lender, and Bank of Scotland, one of Scotland’s two biggest banks.

The merged entity wanted to gain market share in England and compete with the likes of HSBC and Barclays. The easiest way to increase business was to focus on smaller, riskier borrowers. The new lending book grew by 50% in 2007, just as the market was beginning to turn.

Lehman was best known for bond-trading, but moved heavily into property lending. Through a subsidiary called BNC Mortgage it was the 11th-biggest subprime lender in America; it underwrote more mortgage-backed securities than any other Wall Street firm and it made direct investments in property companies.

Managers of both firms thought they were taking advantage of profitable opportunities. By taking even more risk, even as others were retreating, they were gaining market share. They believed this would bring success in the long term. HBOS thought that retreating from lending in 2007 would damage its franchise. In essence, the pair thought they could survive only by moving forward, like sharks.

Risk-control systems should have saved managers from their mistakes, but didn’t. Lehman had a risk department that employed nearly 400 people, including former regulators; its approach to risk management had been praised by the Securities and Exchange Commission (SEC), an American regulator, in 2005. But the chief risk officer was overruled and risk limits were ignored; some investments in commercial property and private equity were excluded from internal stress tests.

HBOS conducted its own stress tests on its property portfolio, but used a hypothetical downturn milder than the recession of the early 1990s. A stress test conducted by external consultants in 2005 calculated that the bank would lose the equivalent of three years’ profits only once every 5,000 years; three years later, the bank needed a government rescue.

Both banks became heavily dependent on short-term funding in the wholesale markets, and thus vulnerable to any loss of investor confidence. That may explain why both banks were slow to write down the value of their assets: any admission of weakness could damage their reputation. And while both banks raised equity in their dying months, neither raised enough.

In neither case did the board control the managers. More than two-thirds of Lehman’s board had no significant recent experience of banking. The report on HBOS said its board lacked “knowledge and experience of banking”. To be fair, recruitment of experienced non-executives might have been difficult; anyone capable of overseeing a modern bank was presumably working for a competitor.

That points to a broader problem. Lehman had over 7,000 legal entities, of which 209 were registered subsidiaries; it had assets of $700 billion. Such a complex organisation was very hard to monitor, let alone control.

A long period of benign economic conditions and rising property values lulled executives at both HBOS and Lehman into a false sense of security. They thought they were brilliant and could handle the cycle; in fact, they had just been lucky. To go back to Mr Greenspan’s error, bankers did focus on their self-interest: they believed that if they didn’t expand their balance-sheets and keep pushing up profits, they would be replaced. They didn’t see the truck coming until it hit them.

*“Lehman Brothers: A Crisis of Value” by Oonagh McDonald, Manchester University Press
**“The failure of HBOS plc”

Balky Bavarians

US Congress Demands Action on Nazi Looted Art

By Ulrike Knöfel

Twenty-nine members of the US House of Representatives have thrown their support behind the anscestors of art collector Albert Flechtheim as they seek restitution.
DPA Twenty-nine members of the US House of Representatives have thrown their support behind the anscestors of art collector Albert Flechtheim as they seek restitution.
Are artworks looted by the Nazis from Jewish collectors still hanging in Bavarian museums?

Twenty-nine members of the US Congress think so, and have written a letter to the German state demanding that officials stop dragging their feet on restitution.

The letter, postmarked two Thursdays ago in Washington, wasn't likely to be welcomed by its recipient in Munich's state chancellery. The document bore the grand blue letterhead of the US House of Representatives and was signed by 29 members of Congress -- and demanded that Bavarian Governor Horst Seehofer facilitate a dialogue between his state's museums and Jewish families who still suspect the institutions of harboring Nazi-looted art.

These people, the letter read, were still waiting for restitution for that which had been stolen from their ancestors during the Holocaust. Germany had pledged as much when it agreed to adhere to the Washington Conference Principles of Nazi-Confiscated Art. Bavaria, for its part, had made its own commitments and was expected to make good on them. But that would require "greater dialogue and cooperation."

"The importance of these issues to Holocaust survivors and their families worldwide cannot be overstated," the letter reads.

In recent years, much has been said -- and promised -- regarding Nazi-looted art in Germany. This was particularly the case two years ago when the world learned of the secret collection held by Cornelius Gurlitt, the son of a former Nazi-era art dealer, who lived in Munich. The federal government and authorities in Bavaria consented to a "relentless investigation into Nazi art theft."

But in the US, home to the relatives of many Nazi victims, many no longer believe that Germany is being sincere, be it in terms of the Gurlitt estate or the many other cases that remain open. Of the hundreds of potentially looted artworks in Gurlitt's collection, only two have been returned to their rightful owners. When asked what the Americans think of Germany's handling of the looted art, Michael Hulton replies: "They find it disgusting." His story, or that of his great-uncle, is seen by many as symptomatic and was the likely catalyst for the Congressional letter to Seehofer.

Hulton, 69, is a British-born physician whose German parents went by the name Hulisch until their emigration. For years, Hulton has lived in San Francisco, while his stepmother lives in England. The two of them are the only descendants of Hulton's great-uncle, the Jewish collector and art dealer Alfred Flechtheim.

Like a Silent Witness

The great Flechtheim, a World War I officer, true Bohemian and a man with a passion for art. He was an authority of Modernity -- and was destroyed by the Nazis early on. The anti-Semitic insults had been growing in number since 1930, and in late 1932, Flechtheim's portrait was splashed across the front page of the Illustrierter Beobachter, a Nazi propaganda magazine. It carried the headline, "The Race Question Is the Key to World History." It was this picture that Hulton showed the politicians on Capitol Hill, and it remained on display during the discussion, watching over the participants like a silent witness.

In March 1933, after the Nazis ascended to power, the SA, Hitler's paramilitary hooligans, stormed an auction that had been organized by Flechtheim. The Nazi press called him the "art Jew" and accused him of defiling the "German people's soul" in an impudent and "Jewish, negro-like" manner. Flechtheim and his gallery were declared "finished." Even the word "extermination" was used.

In the US, there is an impression that Germany, as soon as the question of restitution is raised, tends to trivialize the first few years of National Socialism. To be sure, German institutions have in some cases admitted that Jewish art owners were exposed to duress. But they nevertheless insist that individual art purchases made early on must be viewed independently from the broader persecution that occurred during the Third Reich.

Is such an argument acceptable? It leaves out a lot -- such as the fact that Jews were not allowed to pursue certain professions, that people were forced into bankruptcy, that people were terrorized. It leaves out the fact that people feared for their families and that everyday sadism crept into their lives as early as 1933, 1934 or 1935. Flechtheim's case is even more complicated. It is claimed that he sold many of the artworks in question prior to 1933, making them exempt from any suspicions of undue expropriation.

A Source of Pride

Today, Munich's Pinakothek der Moderne museum owns nine paintings that Hulton suspects were given up by his great-uncle amid his persecution and flight that followed the Nazis' seizure of power.

Six of these works are from the German avant-gardist Max Beckmann, one is from Paul Klee and two are from the Spaniard Juan Gris. The Beckmann collection especially, which includes a comely portrait of the painter's second wife, is a source of pride in Múnich.

Hulton says he feels deceived by the museum. In fact, he says, they are now refusing to speak with him. Keeping lines of communication open, he complains, is a matter of fairness at the very least.

When contacted, the museum merely said that it had nothing to add to the current "state of affairs."

Hulton's lawyers say even Flechtheim's persecution is being "dangerously relativized." In May 1933, Flechtheim, then in his mid-50s, fled first to Switzerland, then to England via France.

Uprooted, he never was able to start anew. As he once wrote to the painter George Grosz, he felt as poor as a church mouse -- and as nervous as one too. A close friend reported early on that Flechtheim's wife Betti, who was also Jewish, was succumbing more and more every day to the despair of their situation. "She has uncertainty in front of her, and piles of rubble behind her." She stayed in Germany to be near her relatives, but she was probably also afraid of ending up completely dispossessed.

Flechtheim even dared to return on Germany on occasion. But every move he made compounded his feeling of helplessness.

In 1936 he divorced Betti, a move he naively thought would make her safer. He was sickly and suffered from both diabetes and an old injury he acquired in World War I. Then he fell, ended up with blood poisoning and had to have a leg amputated. In March 1937, at the age of 58, he died in London. The Nazis, who did not shy away from mocking the dead, published a caricature of him in an ad for their "Degenerate Art" exhibition. Betti Flechtheim committed suicide in 1941, shortly before she was scheduled for deportation.

Art historians were late to research the fate of Jewish collectors and gallery owners. Today, it's all anyone talks about. In 2013, the Pinakothek der Moderne and 14 other Munich museums coordinated parallel exhibitions about Flechtheim, making it seem as though they were serious about coming to terms with history. But even in the 2015 publication, "Alfred Flechtheim: Raubkunst und Restitution," ("Looted Art and Restitution"), there are indications that the urge (among the Bavarians as well) to address historical injustices is perhaps not deeply felt.

There were vexing references to "clearly audible accusations" of an "aggressive commercialization" of potential claimants' interests, "however one may choose to weigh such arguments." The authors even said: "It's about money, often a lot of money." Essentially, those fighting for the rightful inheritance of their ancestors are portrayed as money-grubbing opportunists.

Focus on Bavaria

In recent years, Hulton has filed many requests for information at German museums. They have often been able to provide evidence that works in their possession are not looted art. Other times they returned the pieces in question to the descendants of their former owners, or they came to some other mutual agreement. For more than a year, a Juan Gris painting has been the subject of deliberation by the so-called Limbach Commission, which can be tapped in cases of questionable provenance. That course of action, however, only works if both parties -- claimants and current owners alike -- cooperate.

Hulton has identified potentially looted art in places other than Bavaria, including works from Pablo Picasso and Max Ernst. But the members of Congress who are supporting the claims of Flechtheim's heirs are focusing exclusively on the southern German state. That is where they see the biggest need for dialogue -- and where they encounter the most recalcitrance.

The six Beckmann paintings were the subject of previous correspondence between Hulton's lawyers and their counterparts in Munich. The Bavarians asserted that Flechtheim sold the paintings in 1932 to the New York gallery owner J. B. Neumann. Only through him could they have found their way into the hands of the Munich dealer Günther Franke. Franke was Neumann's partner until 1932, after which he became self-employed. In 1974, he bequeathed his Beckmann works to the Bayerische Staatsgemäldesammlungen, the state painting collections.

The Bavarians claim the pieces are not looted art and cite two letters written by Flechtheim in March and May 1932. The first did, in fact, make it seem as if the sale of the Beckmann paintings was watertight. But then, the other dealer said he only wanted to pay a fraction of the agreed sum. To this, Flechtheim answered in May: "Tant pis! Many thanks for your letter. If you were afraid that I would have dumped Beckmanns for 2,300 marks, then you were mistaken. However, I do consider it in Beckmann's best interest that the paintings remain over there and with you."

"Tant pis" means "a pity," an expression of disappointment. But everybody interprets the passage differently. Was Flechtheim's Beckmann collection already in New York, and if so, would that necessarily mean that the sale had gone through? Or does the paragraph rather suggest -- "tant pis!" -- that the sale had not been closed? Hulton believes Flechtheim had only shipped paintings to New York that he held on consignment -- works that he did not own himself.

More Complicated That It Seemed

In 2014, the Bavarian Culture Ministry insisted that its museums had "drawn the right conclusions."

It didn't mention a letter from December 2013, in which a (now deceased) collector confirmed that he, soon after the end of World War II, had wanted to buy one of the Beckmann paintings in question, namely the portrait of the artist's wife. Hulton's German lawyer, Markus Stötzel, has a copy of the letter. But the dealer and eventual benefactor Günther Franke made it clear that the piece didn't belong to him and that the rightful owner was unreachable.

For another reason as well, it has long been clear that the matter was more complicated than it seemed. Stötzel, the lawyer, came across a photo of Beckmann's painting "The Lion Tamer," which used to belong to Flechtheim, in an auction catalogue in 2011. The auctioneer helped establish contact to the consignor, a largely unknown man named Cornelius Gurlitt. He believed that his father had bought the painting from Flechtheim in 1934. Hultons' lawyers assume the senior Gurlitt acquired it from Flechtheim's gallery in Berlin, which at the time was being liquidated by an auditor.

If that is true, it would mean that Flechtheim didn't sell his entire Beckmann collection in 1932.

An expert task force was assembled in 2013 by the German federal and Bavarian state governments to investigate Gurlitt's collection. Stötzel received a tip from one of the researchers that the name Flechtheim had popped up numerous times in the old documents. A majority of the documents were only provided to the task force with great delay because many had been in the possession of a filmmaker -- a rather odd detail that makes the Americans' skepticism more understandable. Stötzel has still not been granted access to the documents to this day.

Currently, nothing is being ruled out, not even a complaint filed by Stötzel against the Prussian Cultural Heritage Foundation in the case of the "Welfenschatz," or "Guelph Treasure." Mel Urbach, Hulton's New York attorney, says that if the situation isn't resolved, it means the Nazis got their way after all.

Brendan Boyle, a Democratic Congressman from Pennsylvania and one of the signatories of the letter, says the restitution of looted art is "the just and right thing to do."

Shortly before his death in 1937, Flechtheim left one of the paintings he took into exile with him to the government in Paris. He had wanted to become a French citizen. Today, the cubist work "Wedding" by Fernand Léger belongs to the Centre Pompidou. In the end, these seemingly complicated stories are, in fact, quite simple. Many museums owe their best artworks to the terror of the Nazis.

Bavaria's State Chancellery confirmed it had received the Americans' letter.