Phisix Mania Phase: Been There, Done That

The Philippine Phisix suffered its second major weekly decline for the year, down 2.04%. 

Two consecutive weeks of hefty losses has brought the Phisix off 4.62% from the recently etched milestone highs. Such losses have shaved the year-to-date gains to only 12.15%.

Yet the local benchmark appears to have bounced off the 50-day moving averages supported largely by domestic participants.

Two weeks of the manic bullish reprieve has translated to net foreign selling.

Yet foreign selling does not necessarily translate to fund repatriation. Selling proceeds could be held in cash at the banking system or could have been shifted to other domestic assets (local bonds or properties). The paltry decline of the Peso over two weeks from 40.68 per USD to 40.84 per USD as of Friday’s close may have manifested on such dynamics.

But so far, domestic participants seem to have used technicals to provide support on the Phisix. This seems to manifest on the “refusal to retrench” and “this time is different” mentality.

We have seen this before.

I have been writing about how I think today’s deepening of the manic phase may partly resemble 1993[1].

Then the Phisix returned an eye-popping 154% in nominal currency gains. Following a sharp run up, there had been two sporadic corrections. Ironically, over the same period today, in March and in May where the index fell 6.1% and 5.8% respectively (see 2 red ellipses).

The gist or 63% of the astounding year-to-date 154% return came during the yearend rally that began in October.

While I am not a fan of searching for patterns, whether charts or statistics, to predict the markets, I believe that the psychological framework undergirding today’s boom represents a good approximation of what may happen during a manic phase.

When the prevailing bias has been to think that the current bullrun has been about “good governance” economics, “robust earnings” and that domestic markets “are financially resilient from stresses abroad” while at the same time blissfully ignorant of the baneful impact of expansionary credit from artificially induced interest rates and other credit easing measures, all these are symptoms of “Wow I am smart” (left window) and the “new paradigm” (right window) of the deepening mania phase.

Again mania, for me, signifies as the yield chasing phenomenon that have been rationalized by voguish themes or by popular but flawed perception of reality, enabled and facilitated by credit expansion.[2]

So if I correctly pinpoint the stage of our stock market cycle, then we should expect the Phisix to use the current corrections or consolidations as potential springboard to reach the bear “capitulation” phase where the Phisix may or could reach the 10,000 level. This may happen this year or the next (2014), and again, is strictly conditional.

And the manic phase will be accompanied by an intensive accumulation of systemic credit which will most likely be supplemented by last week’s easing of the 1.86 trillion peso Special Deposit Accounts (SDA) by the BSP[3].

Remember, the BSP explicitly desires that the banking system’s money deposited at the BSP be “withdrawn” and “circulated” in the economy, since according to them SDA money will hardly extrapolate to inflation risks.

In other words, the BSP’s recent SDA policies will account for as providing implicit support to the domestic asset markets, in addition to its current record low interest rates.

So unless domestic monetary officials make a reversal on these credit easing policies, there is a strong likelihood for the Phisix to playout on the final stage of the boom phase of the domestic bubble cycle.

Let me be clear, I am not suggesting that the Phisix will yield 154% this year. Instead I am saying that since social policies ultimately shapes bubble cycles, we are likely to see current policies sustain the domestic bubble process, unless the BSP reverses current policies—most possibly in response to the market signals, e.g. price inflation pressures—or if exogenous “shock” events will be substantial enough to undermine the current prevailing bias.

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[1] see Global Financial Markets Party on the Palm of Central Bankers January 21, 2013

[2] see Phisix Amidst the Global Pandemic of Bubbles February 18, 2013

[3] see Phisix and the BSP: This Time is Different? March, 17, 2013

Thailand’s Officials Flexes Muscles on Domestic Stock Market Bubbles

To deny that today’s asset market prices have been mainly driven by social policies is to see only a segment or an incomplete picture of reality.

I mentioned last week that Thailand’s SET has overtaken the Philippine Phisix as the latter saw the bulls hibernate. Yet in a snap of a finger, dramatic changes occurred.

Thailand’s SET nosedived 7.5% this week, with Friday’s huge 3.3% losses accounting for nearly half of the week’s quasi panic selling. This week’s “biggest slump since 2008” basically halved the SET’s year-to-date gains: yes, 7.5% losses in one week.

News reports say that the mini crash accounted for “forced sales on margin accounts”[1] in response to expectations over an increase on “margin requirements on trading”. 

The Thai bourse said that the level of collateral for account holders will be increased to 20% of the credit line from 15%[2] or an additional 5% of collateral will be required for every credit line used.

We are not even talking about market responses to a bubble bust or from interest rate spikes, but from an arbitrary edict by the Thai bourse aimed at allegedly reducing “risks to the clearing system” as well as to “help reduce volatility”.

The Stock Exchange of Thailand (SET) seem to be a government agency, since it is a “juristic entity set up under the Securities Exchange of Thailand Act, B.E. 2517 (1974)”, according to the wikipedia.org[3].

Yet if markets have all been about “fundamentals” and “earnings”, then why the aggregate brutal reaction to what appears as a tightening directed by political officials on stock market participants?

The vehemence of selling pressures incited by the “forced sales on margin accounts” only goes to demonstrate how leveraged Thai’s equity markets have been.

Importantly, this also reveals how policymakers can act unilaterally at the expense of the politically unconnected public.

Thai officials seem to sense of a bubble in progress, then precipitately decides tighten.

But their campaign appears to be hinged on a piecemeal approach targeted at a specific asset class.

The actions by the SET essentially reflect on the recent statements by Deputy Governor of the Bank of Thailand, Mr Pongpen Ruengvirayudh, who I recently cited[4].

The Thai official seems to have a good basic comprehension of the nature of bubbles and has recently acknowledged of the considerable growth of the nation’s systemic credit. But he ambivalently dismissed the prospects of the risks of a bubble in presupposing that their actions will successfully contain them.

So I would read the SET’s recent activities in the context of Mr Pongpen Ruengvirayudh’s declarations; where Thai officials will target specific asset markets for bubble containment measures.

Yet it is unclear if the SET’s latest policies will fundamentally impair the prevailing bias.

This will really depend AGAIN on the prospective actions of SET and other regulators, particularly the Bank of Thailand (BoT).

Interventions basically engender uncertainty. And markets disdain uncertainty. However this axiom would only be true if interventions don’t cover monetary easing or credit expansion. The global financial markets have thus far slobbered over central banking stimulus.

In corollary, the contemporary steroids addicted financial markets detests interventions that are based on “tightening” or “withdrawal”

For the meantime, the recent decree on margin trades will translate to an adjustment window from the policy induced uncertainty made by SET’s latest “tightening”. Thus Thai equities are likely to struggle.

Market participants will then assess if SET officials will continue to foist uncertainty through more ‘tightening’ interventions, or if the authorities will allow markets to function. If the former, then Thai’s equity markets would have more downside bias going forward. If the latter, then Thai’s mania may catch a second wind.

It would also be misguided to assume that assaulting stock markets will extrapolate to the suppression of bubbles. Such actions represent as dealing with the symptoms rather than the disease.

China’s stock market, as measured by the Shanghai Stock Exchange Composite[5], remains in consolidation at the bear market troughs.

But the object of manias via rampant speculation and credit expansion has only been diverted to the property markets.

Stock market bubbles seem as easier to control politically compared to property bubbles. That’s because the former operates on centrally organized regulated platforms as against the latter which represents a localized, diversified and fragmented market.

In servicing the financial needs of the highly dispersed property sector, banks frequently engage in off-balance sheet transactions combined with other nonbank entities or intermediaries. They are resorted to by many firms in order to circumvent or skirt regulations. These companies represent the shadow banking industry[6].

Such phenomenon hasn’t been limited to China[7] and the US[8] but has evolved to cover much of the major economies of the world[9]. 

The global pandemic of bubble policies has mainly fueled their rise. Also, shadow banking has been a function of regulatory responses by markets as well as political entities (like the local governments of China). Yet the more the regulations, the bigger the shadow banks.

It’s been an incessant cat mouse game between regulators and market forces.

As I recently pointed out, the feedback on the newly imposed property restrictions on China’s property markets has prompted people to exploit legal loopholes. Incidences of divorce have skyrocketed as married couples use the divorce route to bypass new regulations[10].

Another example, Malaysia’s string of legal restrains likewise has failed to prevent the recent surge in property prices[11] which the IMF admitted they failed to see beforehand.

So Thailand’s tepid approach in dealing with her bubbles will hardly meet the objectives of managing them. The bubble caused by easy money policies isn’t likely to stop; they will only shift, unless the authorities deal with the real cause.

Officials may deny that bubbles pose as public risk. But they are beginning to tinker with the markets in order to rein them. This means they are admitting indirectly to the menace which they publicly reject. We call this demonstrated preference or action speaks louder than words.

Nonetheless, Thailand’s experience shows how highly sensitive or fragile markets are to the prospects of tightening. 

The attack on Thailand’s stock market by their authorities to quash homegrown bubbles is a lesson that should be relevant for world markets or for the Phisix.

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[1] Reuters.com SE Asia Stocks-Down; Thailand underperforms on forced sales, March 22, 2013

[2] Bloomberg.com Thai Stocks Post Worst Week Since 2008 on Margin Rule Change March 22, 2013 SFGate.com

[3] Wikipedia.org Operations Stock Exchange of Thailand

[4] see Phisix’s Mania: We’re Still Dancing March 11, 2013

[5] tradingeconomics.com CHINA STOCK MARKET (SSE COMPOSITE)

[6] Wikipedia.org Shadow banking system

[7] see More Signs that China’s $2.4 Trillion Shadow Banking System is in Big Trouble September 14, 2012

[8] see 2008 US Mortgage Crisis: The US Federal Reserve and Crony Capitalism as Principal Causes May 31, 2011

[9] see Financial Bubble: Shadow Banking System Soar to US $67 Trillion or 100% of World GDP November 20, 2012

[10] Finance Asia Property tax exposes Chinese pragmatism March 20, 2013

[11] see More Signs of Manic Phase in The Phisix, ASEAN and the US, March 4, 2013

Cyprus: The Mouse that Roared

Unfolding events in Cyprus may or may not be a factor for the Phisix or for the region over the coming days. 

This will actually depend on how the bailout package will take shape, and importantly, if these will get accepted by the “troika” (IMF, EU and the ECB), whose initial bid to force upon a bank deposit tax indiscriminately on bank depositors had been aborted due to the widespread public opposition.

So far, the Cyprus parliament has reportedly voted on several key measures[1] as nationalization of pensions, capital controls, bad bank and good bank. Reports say that the Cyprus government has repackaged the bank deposit levy to cover accounts with over 100,000 euros with a one-time charge of 20%[2]!

The troika demands that the Cyprus government raise some € 5.8 billion to secure a € 10 billion or US $12.9 billion lifeline.

If there may be no deal reached by the deadline on Monday, then Cyprus may be forced out of the Eurozone. Then here we may see uncertainty unravel across the global financial markets as a Cyprus exit, which will likely be exacerbated by bank runs and or social turmoil, may ripple through the banking system of other nations.

However, if Cyprus gets to be rescued at the nick of time, then problems in the EU will be pushed for another day.

Nonetheless unfolding events in a 1 million populated Cyprus, but whose banking system has been eight times her economy[3] has so far had far reaching effects.

The Cyprus “bail in” has already ruffled geopolitical feathers.

Germans are said to been reluctant to provide backstop to Cyprus due to nation’s heavy exposure to the Russians, where the latter comprises about a third of deposits of the Cyprus banking system. Much of illegal money from Russia has allegedly sought safehaven in Cyprus.

The Cyprus-Russia link goes more than deposits. They are linked via cross-investments too.

Some say that the Germans had intended to “stick it to the Russians”[4].

On the other hand, Russians have felt provoked by what they perceive as discrimination.

Meanwhile events in Cyprus have also opened up fresh wounds between Greeks and the Turkish over territorial claims[5].

The other more important fresh development is of the bank deposit taxes.

Where a tax is defined[6] as “a fee levied by a government on income, a product or an activity”, deposit taxes are really not taxes, but confiscation.

Some argue that this should herald a positive development where private sector involvement takes over the taxpayers. Others say that filing for bankruptcy would also translate to the same loss of depositor’s money.

Confiscation is confiscation no matter how it is dressed. It is immoral. Private sector involvement is forced participation.

Bankruptcy proceedings will determine how losses will partitioned across secured and unsecured creditors and equity holders. Not all banks will need to undergo the same bankruptcy process. Yet confiscation will be applied unilaterally to all. For whose benefit? The banksters and the politicians.

And one reason bondholders have been eluded from such discussion has been because Cyprus banks have already been pledged them as collateral for target2 programs at the ECB[7].

The more important part is that events in Cyprus have essentially paved way for politicians of other nations, such as Spain and New Zealand[8], to consider or reckon deposits as optional funding sources for future bailouts.

With declining deposits in the Eurozone[9], the assault on savers and depositors can only exacerbate their financial conditions and incite systemic bankruns.

So confidence and security of keeping one’s money in the banking system will likely ebb once the Cyprus’ deposits grab policies will become a precedent.

This is why panic over bank deposits have led to resurgent interest on gold and strikingly even on the virtual currency the bitcoin[10]. The growing public interest in bitcoin comes despite the US treasury’s recently issued regulations in the name of money laundering[11].

Such confiscatory policies will also redefine or put to question the governments’ deposit insurance guarantees. Not that guarantees are dependable, they are not; as they tend increase the moral hazard in the banking system as even alleged by the IMF[12]. 

Deposit guarantees are merely symbolical, as they cannot guarantee all the depositors. Given the fractional reserve nature of the contemporary banking system, if the public awakens to simultaneously demand cash, there won’t be enough to handle them. And obliging them would mean hyperinflation. That’s the reason the dean of the Austrian economics, Murray Rothbard calls deposit insurance a “swindle”[13].

The banks would be instantly insolvent, since they could only muster 10 percent of the cash they owe their befuddled customers. Neither would the enormous tax increase needed to bail everyone out be at all palatable. No: the only thing the Fed could do — and this would be in their power — would be to print enough money to pay off all the bank depositors. Unfortunately, in the present state of the banking system, the result would be an immediate plunge into the horrors of hyperinflation.

So governments will not only resort to taxing people’s savings implicitly (by inflation), they seem now eager to consider a more direct route: confiscation of one’s savings or private property. Note there is a difference between the two: direct confiscation means outright loss. Inflation means you can buy less.

Finally, losses from deposit confiscation, and its sibling, capital controls will lead to deflation.

Confiscatory deflation, as defined by Austrian economist Joseph Salerno, is inflicted on the economy by the political authorities as a means of obstructing an ongoing bank credit deflation that threatens to liquidate an unsound financial system built on fractional reserve banking.  Its essence is an abrogation of bank depositors' property titles to their cash stored in immediately redeemable checking and savings deposits[14]. 

The result should be a contraction of money supply and bank credit deflation and its subsequent symptoms. This will be vented on the markets if other bigger nations deploy the same policies as Cyprus.

That’s why events in Cyprus bear watching.

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[1] See Cyprus President Warned Friends of Crisis March 23, 2013

[2] New York Times Cyprus Makes Plan to Seize Portion of High-Level Deposits, March 23, 2013

[3] Constantinos Stephanou The Banking System in Cyprus: Time to Rethink the Business Model? 2011 World Bank

[4] Investopedia.com The Cyprus Crisis 101 March 19, 2013

[5] See Will Events in Cyprus Trigger a War? March 22, 2013

[6] Investorwords.com Tax

[7] Mark J Grant Why Cyprus Matters (And The ECB Knows It) Zero Hedge March 23, 2013

[8] John Aziz Guest Post: Whose Insured Deposits Will Be Plundered Next? Zero Hedge March 21, 2013

[9] The Economist Infographics March 23, 2013

[10] See Bitcoins: Safehaven from Cyprus Debacle and Officially Recognized by the US Treasury March 21, 2013

[11] International Business Times, US Treasury Department: Virtual Currencies (Read: Bitcoins) Need Real Rules To Curb Money Laundering March 22, 2013

[12] Buttonwood What does a guarantee mean? The Economist March 19, 2013

[13] Murray N. Rothbard Taking Money Back January 14, 2008 Mises.org

[14] Joseph Salerno Confiscatory Deflation: The Case of Argentina, February 12, 2002 Mises.org

RBS: Asia Has a Credit Bubble!

Like Thailand, Philippine officials will likely continue to stubbornly contradict publicly on the risks of bubbles, yet as I recently pointed out, recent events in Cyprus only reinforces the perspective of how regulators can hardly see or anticipate bubbles until fait accompli or until the ex-post materialization of the advent of a crisis[1].

And it would seem that more from the mainstream are becoming aware of elevated risks of Asia’s credit expansion. (yes, I am not alone)

The Royal Bank of Scotland (RBS) practically notices all the symptoms I have been elaborating as effects or symptoms of bubbles.

They note that bank deposits have not kept the pace with rate of credit growth. They also noticed that the focus on domestic consumption coincides with rising credit levels and the loosening of credit conditions (left window). Savings have also been in a conspicuous decline.

Remember consumption is a function of income. Outside income, more consumption can only be attained by virtue of borrowing and by running down of savings. Borrowing represents the frontloading of consumption. Expanded consumption today eventually leads to lesser consumption tomorrow as the borrowers would have to pay back on the interest and principal of debts.

As I previously noted[2]

My explanation revolved around examining the 3 ways people to consume; productivity growth (which is the sound or sustainable way) and or by the running down of savings stock and or through acquiring debt (the latter two are unsustainable).

So the decline in deposits and savings as credit expands are signs of capital consumption.

The RBS also observed that the ballooning of credit have come amidst the backdrop of falling labor productivity while the region’s balance of payments had rapidly been deteriorating.

Declining savings and the diversion of household expenditure towards debt financed consumption goods leads to capital consumption, thus the decline in productivity.

Artificially suppressed interest rates, which penalizes savers and encourage speculation in the financial markets and other unproductive uses of capital, mainly through the concentration of speculative investments or gambles on capital intensive projects, e.g. property, shopping mall, casinos, are symptoms of malinvestments. So instead of promoting productive investments, low interest rates serve as another source of productivity losses.

The RBS equally notes that India, Indonesia and Thailand have become balance of payment ‘deficit’ countries whereas Malaysia’s surplus has been sharply declining. The regions banks’ loan-deposit ratios have likewise substantially increased to uncomfortable levels (right window).

When nations spend more than they produce, then such deficits occur. And deficits would then need to be financed by foreigners or as I previously noted “would need to be offset by capital accounts or increasing foreign claims on local assets”[3]. 

And with more countries posting deficits, then the increased competition for savings of other nations will translate to increased pressure for higher domestic interest rates. Yet greater dependence on foreigners increases the risks of a sudden stop or of a slowdown or reversal of capital flows.

On the same plane, when domestic spending is financed by domestic debt then deficits grow along with rising local debt levels.

The deterioration of real savings or wealth generating activities and the expansion of bubble activities only increases the risks of a disorderly adjustment (bubble bust) which may be triggered by high interest rates or by interventions to reverse the untenable policies or by sudden stops or by plain unsustainable arrangements or even a combination of these.

The RBS also comments that household debt ratios particularly in Hong Kong Malaysia and Singapore have increasingly transformed into a fragile state, accounting for over 65% of GDP. Worst is that household wealth has nearly been concentrated in property, which makes the region’s wealth highly vulnerable to higher interest rates and a decline in property prices.

Overreliance on debt which has been used for unproductive and consumption activities only increases people’s sensitivity and susceptibility towards upward changes in interest rates that are likely to affect asset prices and economic performance.

This is known as the bubble cycle.

The RBS as quoted by the Reuter’s Sujata Rao[4],

What is however worrying is the pace of credit growth. …The combination of rapid credit disbursals and more importantly, the on-going divergence between credit disbursals and GDP growth implies that the system is becoming more vulnerable to income and interest rate shocks.

Again while such imbalances may not have reached a tipping point or the critical mass yet and which may not likely impact the region over the interim, everything will depend on the “pace of credit growth”.

And a manic phase will likely goad more debt acquisition in order to chase yields.

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[1] see The Anatomy of the Cyprus’ Bubble Cycle March 24, 2013

[2] see Shopping Mall Bubble: The Quibble Over Statistics January 29, 2013

[3] See E-Vat 15%: Possible Consequence from Current Quasi Boom Policies December 10, 2012

[4] Sujata Rao Asia’s credit explosion, Global Investing Reuters.com March 22, 2013

The Anatomy of the Cyprus’ Bubble Cycle

The following article from the Reuters has a concise chronicle of the boom bust cycle which today has been plaguing Cyprus via a banking crisis and which I dissect.

(all bold highlights mine, occasional side comments of mine in italics)

1. The Pre-EU setting.

Before joining the euro, the Central Bank of Cyprus only allowed banks to use up to 30 percent of their foreign deposits to support local lending, a measure designed to prevent sizeable deposits from Greeks and Russians fuelling a bubble.

2. The Moral Hazard from EU’s economic convergence policies

When Cyprus joined the single European currency, Greek and other euro area deposits were reclassified as domestic, leading to billions more local lending, Pambos Papageorgiou, a member of Cyprus's parliament and a former central bank board member said.

"In terms of regulation we were not prepared for such a credit bubble," he told Reuters.

Banks' loan books expanded almost 32 percent in 2008 as its newly gained euro zone status made Cyprus a more attractive destination for banking and business generally, but Cypriot banks maintained the unusual position of funding almost all their lending from deposits.

3. How bubble policies reshaped the public’s behavior.

"The banks were considered super conservative," said Alexander Apostolides an economic historian at Cyprus' European University, a private university on the outskirts of Nicosia.

When Lehman Brothers collapsed in the summer of 2008, most of the world's banks suffered in the fallout, but not Cyprus's.

"Everyone here was sitting pretty," said Fiona Mullen, a Nicosia-based economist, reflecting on the fact Cypriot banks did not depend on capital markets for funding and did not invest in complex financial products that felled other institutions.

Note of the "this time is different" mentality and the attitudes of "invincibility".

4. Overconfidence and Mania

Marios Mavrides, a finance lecturer and government politician, says his warnings about the detrimental impact on the economy of so much extra lending fell on deaf ears.

"I was talking about the (property) bubble but nobody wanted to listen, because everyone was making money," he said. (sounds strikingly familiar today—Prudent Investor)

The fact that the main Cyprus property taxes are payable on sale made people hold onto property, further fuelling prices, Papageorgiou added…

Michael Olympios, chairman of the Cyprus Investor Association that represents 27,000 individual stock market investors, said he too criticized the central bank for "lax" regulation that facilitated excessive risk taking.

Ex-post, people always look for someone to pass the blame on. They forget the responsibility comes from within.

The Cyprus General Index from Tradingeconomics.com

Notice: The losses from the bust had been more brutal than the gains from the boom

5. The yield chasing dynamic fueled by monetary-credit expansion

A depositor would have earned 31,000 euros on a 100,000 euros deposit held for the last five year in Cyprus, compared to the 15,000 to 18,000 euros the same deposit would have made in Italy and Spain, and the 8,000 interest it would have earned in Germany, according to figures from UniCredit.

Bulging deposit books not only fuelled lending expansion at home, it also drove Cypriot banks overseas. Greece, where many Cypriots claim heritage, was the destination of choice for the island's two biggest lenders, Cyprus Popular Bank -- formerly called Laiki -- and Bank of Cyprus.

6. The Knowledge problem: Regulators didn’t see the crisis coming. Also the transmission mechanism: From the periphery (Greek crisis) to the core (Cyprus crisis)

The extent of this exposure was laid bare in the European Banking Authority's 2011 "stress tests", which were published that July, as the European Union and International Monetary Fund (IMF) were battling to come up with a fresh rescue deal to save Greece. (reveals how bank stress tests can’t be relied on—Prudent Investor)

The EBA figures showed 30 percent (11 billion euros) of Bank of Cyprus' total loan book was wrapped up in Greece by December 2010, as was 43 percent (or 19 billion euros) of Laiki's, which was then known as Marfin Popular.

More striking was the bank's exposure to Greek debt.

At the time, Bank of Cyprus's 2.4 billion euros of Greek debt was enough to wipe out 75 percent of the bank's total capital, while Laiki's 3.4 billion euros exposure outstripped its 3.2 billion euros of total capital.

The close ties between Greece and Cyprus meant the Cypriot banks did not listen to warnings about this exposure…

Artificial booms are often interpreted as validating the policies of the incumbent political authorities. It's only during fait accompli where people recognize of the failures of politics. This is an example of time inconsistency dilemma

Yet the blame will always be pinned on the victims (private sector, e.g. depositors, the speculators) rather than the promoters of the bubble.

 

7. More regulatory failure.

Whatever the motive, the Greek exposure defied country risk standards typically applied by central banks; a clause in Cyprus' EU/IMF December memorandum of understanding explicitly requires the banks to have more diversified portfolios of higher credit quality.

"That (the way the exposures were allowed to build) was a problem of supervision," said Papageorgiou, who was a member of the six-man board of directors of the central bank at the time.

The board, which met less than once a month, never knew how much Greek debt the banks were holding, both Papageorgiou and another person with direct knowledge of the situation told Reuters.

Note that imbalances accrued swiftly and where hardly anyone saw the imminence of today's crisis.  What used to be "Conservative" banks suddenly transformed into aggressive banks.

Yet another interesting point is that the events in Cyprus proves my thesis that crisis are essentially "unique". There is no definitive line in the sand for credit events. Cyprus had its own distinctive thumbprint or identity, particularly her "unusual position" of reliance on deposits, compared to their peers.

 

Wonderful learning experience

Video: Murray Rothbard on the Six Stages of the Libertarian Movement

(hat tip Lew Rockwell Blog)

Cyprus President Warned Friends of Crisis

Events in Cyprus have been demonstrative of the wide distinction between how the pubic perceives governments are supposed to operate (the romantic view where government looks after the interest of the general welfare) with how governments truly operate (self interests).

In reality governments operates around the cabal of insiders, again take it from the events in Cyprus.

From the Daily Mail, (hat tip lewrockwell.com)

Cypriot president Nikos Anastasiades 'warned' close friends of the financial crisis about to engulf his country so they could move their money abroad, it was claimed on Friday.

The respected Cypriot newspaper Filelftheros made the allegation which was picked up eagerly by German media.

Germans are angry at the way their country has been linked to the Nazis and Hitler by Cypriots angry at the defunct rescue deal which called for a levy on all savings.

The Cyprus newspaper did not say how much money was moved abroad but quoted sources saying the president 'knew about the possible closure of the banks' and tipped off close friends who were able to move vast sums abroad. 

Italian media said the 4.5 billion euros left the island in the week before the crisis.

As an update on the swiftly unfolding events in Cyprus, Russia has rejected a deal with Cyprus.  Also the Cyprus parliament approved of instituting capital controls aside from other measures passed.

From Reuters:

As hundreds of demonstrators faced off with riot police outside parliament late into Friday night, lawmakers inside voted to nationalize pension funds, pool state assets for a bond issue and peel good assets from bad in stricken banks.

We live in very interesting times.

Tom Woods: Why the Greenbackers Are Wrong

One of the strident critics of the US Federal Reserve have been the Greenbackers. 

Greenbackers represent a left wing American political party backed by the ideology which embraces inflationism (hence “greenbacks” in reference to non-gold backed paper money) and who are opposed to the gold standard due to its deflationary outcome. Greenbackers desire the engagement of more money printing as a solution to social ills.

One of the Greenback movement’s most vocal spokesperson Atty. Ellen Brown has been repeatedly critiqued by Austrian economist Gary North.

At the 2013 Austrian Economic Research Conference, Austrian economist Thomas Woods points out of the basic economic errors of the Greenback’s ideology by dealing with money basics, which is why I posted his paper.

Here is a snip of Tom Woods’ paper:

One of Ron Paul’s great accomplishments is that the Federal Reserve faces more opposition today than ever before. Readers of this site will be familiar with the arguments: the Fed enjoys special government privileges; its interference with market interest rates gives rise to the boom-bust business cycle; it has undermined the value of the dollar; it creates moral hazard, since market participants know the money producer can bail them out; and it is unnecessary to and at odds with a free-market economy.

Unfortunately, not all Fed critics, even among Ron Paul supporters, approach the problem in this way. A subset of the end-the-Fed crowd opposes the Fed for peripheral or entirely wrongheaded reasons. For this group, the Fed is not inflating enough. (I have been told by one critic that our problem cannot be that too much money is being created, since he doesn’t know anyone who has too many Federal Reserve Notes.) Their other main complaints are (1) that the Fed is “privately owned” (the Fed’s problem evidently being that it isn’t socialistic enough), (2) that fiat money is just fine as long as it is issued by the people’s trusty representatives instead of by the Fed, and (3) that under the present system we are burdened with what they call “debt-based money”; their key monetary reform, in turn, involves moving to “debt-free money.” These critics have been called Greenbackers, a reference to fiat money used during the Civil War. (A fourth claim is that the Austrian School of economics, which Ron Paul promotes, is composed of shills for the banking system and the status quo; I have exploded this claim already – here, here, and here.)

With so much to cover I don’t intend to get into (1) right now, but it should suffice to note that being created by an act of Congress, having your board’s personnel appointed by the U.S. president, and enjoying government-granted monopoly privileges without which you would be of no significance, are not the typical features of a “private” institution. I’ll address (2) and (3) throughout what follows.

The point of this discussion is to refute the principal falsehoods that circulate among Greenbackers: (a) that a gold standard (either 100 percent reserve or fractional reserve) or the Federal Reserve’s fiat money system yields an outcome in which outstanding loans cannot all be paid because there is “not enough money” to pay both the principal and the interest; (b) that if the banks are allowed to issue loans at interest they will eventually wind up with all the money; and that the only alternative is “debt-free” fiat paper money issued by government.

My answers will be as follows: (1) the claim that there is “not enough money” to pay both principal and interest is false, regardless of which of these monetary systems we are considering; and (2) even if “debt-free” money were the solution, the best producer of such money is the free market, not Nancy Pelosi or John McCain.

Read the rest here

This portion where Mr. Woods deals with the how the banking system would be regulated by economic forces in a free market environment is particularly worth quoting:

as with every other industry, profit regulates production. The production of money, like the production of all other goods, settles on a normal rate of return, and is not uniquely poised to shower participants in that industry with premium profits. As more firms enter the industry, the rising demand for the factors of production necessary to produce the money puts upward pressure on the prices of those factors. Meanwhile, the increase in money production itself puts downward pressure on the purchasing power of the money produced.

In other words, these twin pressures of (1) the increasing costliness of money production and (2) the decreasing value of the money thus produced (since the more money that exists, ceteris paribus, the lower its purchasing power) serve to regulate money production in the same way they regulate the production of all other goods in the economy.

Once the gold is mined, it needs to be converted into coins for general use, and subsequently stamped with some form of reliable certification indicating the weight and fineness of those coins. Private firms perform such certification for a wide variety of goods on the free market. This service is provided for newly coined money by mints.

Banking services would exist on the free market to the extent that people valued financial intermediation, as well as the various services, such as check-writing and the safekeeping of money, that banks provided.

Quote of the Day: Distinguishing Property from Wealth

Property is a legal concept, whereas wealth is an economic concept. The two are often confused, but they should be kept quite clearly distinct. The one refers to a set of rights, the other to how people value such rights. The same legal claim to property may yield great wealth today and none tomorrow. Market exchanges change the values of property claims continuously, as Ludwig Lachmann explained clearly in his important essay on “The Market Economy and the Distribution of Wealth.”

This is from Cato Institute’s Tom G. Palmer, in the continuing debate over negative and positive rights at the Cato Unbound

Cyprus: From Deposit Taxes to Capital Controls; Russian Intervention Next?

After the botched attempt by scheming unelected Eurocrats to impose bank deposit levies in order to bail out the banking system, which had been foiled by the Cyprus Parliament, the EU now threatens to kick Cyprus out of the Union, followed by proposed measures to impose capital controls.

From Reuters

The European Union gave Cyprus till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.

In a sign it was at least preparing for the worst, the Cypriot government sought powers on Thursday to impose capital controls to stem a flood of funds leaving the island if there is no deal before banks reopen following this week's shutdown.

So same dog but with a different collar.

Principally, capital controls would represent the same assault on property rights.

Notes the Zero Hedge: (bold and italics original)

As Europe wakes up to what could be a tumultuous day, Handelsblatt reports that the ECB has decided that, due to the "great danger" of a bank run once they reopen next week, it will enforce capital controls independently of Cypriot (elected) officials. With perhaps a nod towards negotiating some ELA funding for Cypriot banks next week (if the government accepts this ECB-enforced 'program'), the rather stunning restrictions on people's private property include:

-Freezing Savings - no time-frame (it's not your money anymore)

-Make bank transfers dependent on Central Bank approval (a money tzar?)

-Lower ATM withdrawal limits (spend it how we say?)

The capital controls will be designed "so that citizens have access to sufficient cash to go about their lives." So, there it is, a European Union imposed decision on just how much money each Cypriot can spend per day. Wasn't it just last week, we were told Europe is fixed?

Another interesting aspect the geopolitical consequence from the unfolding events in Cyprus.

While I have earlier noted that unresolved ethnic rivalries, conflicting territorial claims that covers energy resources with neighbors, and the realignment of alliances and rivalries within east Mediterranean region may trigger a regional military conflict, Russia’s heavy stake in Cyprus could also spark a military conflagration.

Nearly a third or $19 billion of the 70 billion euros in deposits in Cyprus banks are reportedly held by Russians (supposedly from oligarchs to alleged mafias to political money). 

According to CNBC

One Russian bank, Alfa Bank, estimates that $70 billion of illegal capital flight from Russia in the past two decades may have found its way to Cyprus.

Moody's rating agency said last week Russian banks had about $12 billion placed with Cypriot banks at the end of 2012 and has estimated that Russian corporate deposits at Cypriot banks could be around $19 billion.

"We think that the $19 billion exposure is mostly wholesale - ie corporate," Eugene Tarzimanov, Senior Credit Officer at Moody's in Russia, told Reuters.

Some of Russia's largest banks have some credit exposure to Cyprus. VTB, Russia's second-largest bank by assets, had $13.8 billion in assets and $374 million through its Cypriot subsidiary, Russian Commercial Bank, at the end of 2011.

Political pressure has allegedly been building up for the Russian government to intervene

From Investmentwatch.com

From latest reports, the Cypriot banks might open on March 26th at the earliest. That’s two weeks after being shut down. That’s two weeks of unmet financial obligations, ie government employee salaries, public works financing, unpaid pensions etc etc…Expect unrest on the streets of Moscow

The EU/Germany are certainly aware that 95% of all Russian money goes through the Cypriot banks. Certainly they were well aware of the consequences this would lead to. Is this the first salvo in the new world war??

Dennis Gartman of the eponymous The Gartman Letters made a recent germane comment at the CNBC “Don’t Mess with the Russian Mafia”.

Next week will be very interesting.