The Pain in Spain. . . .Turns Violent

On 20 June 2012, I marched in a massive peaceful demonstration in Madrid. The vivid and clear gist of the demonstration: the megabanks were stealing from the public and no more cuts in social spending to feed the banks would be tolerated. The peaceful protesters marched along Paseo del Prado to Plaza de Cibeles to Puerta Del Sol. Those familiar with Madrid know that these landmarks constitute the heart of Madrid and the center of the tourist district.

I fully supported the main message of the demonstrations: that it is morally and economically reprehensible to allow the megabanks to consume all the resources of the state and to crowd out all other more productive spending such as education, health care and public welfare. We marched with teachers, nurses, firefighters, and union members in support of this message.

This was a middle class protest, with only a very small fringe of apparent extremists (anarchists, communists, etc.). While the demonstration attained only scanty media coverage worldwide, I advise governing political and economic elites to take note, and modify their relentless aggregation of massive wealth at the very tip top of the western economic order. These middle class peaceful protests will turn ugly as the economic reality worsens for the vast majority of world citizens. As I have emphasized in the recent past, and as more and more economists note, Europe is headed for a massive economic crash. Extremism will follow almost as certainly as night follows day.

This reality is readily apparent throughout European history. And, history also shows that extremism leads to mass death, bloodshed, pain and misery, and, almost by definition, the destruction of individual rights (property rights included).

Frankly, the worldwide credit crunch is rooted in North America and the US policy of massive financial deregulation. Further, the US was the primary architect of the reigning model of globalization, with its highly deflationary bias stemming from its goal of endless cheap labor as well as its structural compulsion for developing nations to hoard currency reserves and subsidize developed world debt. The global debt crisis results from globalization's pro-debt and anti-middle class construction.

Certainly, the Eurozone too has erred. Specifically, it too has favored its banks too much and neglected the need to foster growth through unified fiscal policy and middle class development.

But once one considers the prospects of political extremism in Europe, fault is irrelevant. All that matters is that governing elites realize that the cost-benefit calculus for allowing an economic collapse in Europe is deeply, almost infinitely, negative.

Spain, once again, foretells an historic storm. And, these images and reports of recent violence in Spain do not bode well for governing elites as the monster of their creation--a bank centric and cheap labor version of globalization--spins out of control.

Yesterday, Spanish debt yields soared to Euro era records. Despite the rhetoric of Eurozone leaders the storm churns on and gains more destructive power. Spain is sinking fast and may be beyond rescue, and that implies a  major Eurozone crack-up.

(All photos and videos courtesy of Professor Mary K. Ramirez)

Yahoo Tabs Marissa Mayer as CEO

The Corporate Justice Blog has long advocated for diversity amongst corporate leadership.  The recent naming of Marissa Mayer as CEO of Yahoo has sparked significant attention and debate.  Mayer's gender (female), relative youth (37 years old), current pregnancy (six months pregnant), and announced pay package (estimated at somewhere between $71 and $100 million over five years) have each separately garnered praise and criticism.  Still, after many years leading and innovating at Google, Mayer seems poised to bring exciting leadership and stability to struggling Yahoo.

Mayer's appointment as CEO of Yahoo makes her the 19th female CEO of a Fortune 500 company, and the first ever pregnant CEO of a Fortune 500. Mayer will have the unique opportunity to start a family and lead a Fortune 500 company at the same time. Although, one should ask why this is particularly newsworthy. Certainly there have been hundreds of male CEOs of Fortune 500 companies that have become fathers, some for the first time, while simultaneously leading a Fortune 500. That this is news personifies the double standard that attaches to females when they become important leaders in corporate America.

From ThinkProgress: "Board members at Yahoo were aware that Mayer was expecting during the hiring process, and treated her pregnancy with a respect and deference very few women get to enjoy in the workplace. According to Mashable, an anonymous source said, 'It was not part of the consideration. …Like every other professional woman, she has to weigh all the factors in doing her job and having a family':  Mayer also expressed that she was pleased the Yahoo board was not concerned, telling Fortune their actions 'showed their evolved thinking.'  And as far as maternity leave goes, don’t expect Mayer to be out of the office for long. The new CEO plans to return to the office after a few short weeks and will be working throughout her time off. Yahoo’s scheduled September board meeting will be in Sunnyvale, Calif., rather than New York, to accommodate for the expecting mother-to-be."

(photo courtesy of wikimedia)

1931?

Sometimes events seemingly outstrip human influence leading to worldwide catastrophe. August 1914 led to 16 million deaths (and ultimately World War II) all triggered by the assassination of an obscure Archduke from the Austro-Hungarian Empire on June 28, 1914.

1931 was such a year, when the failure of Credit Anstalt in Vienna triggered a world wide bank run and flight to safety that transmogrified the Crash of 1929 into the Great Depression. As BusinessWeek recently stated:

"In May 1931, a Viennese bank named Credit-Anstalt failed. Founded by the famous Rothschild banking family in 1855, Credit-Anstalt was one of the most important financial institutions of the Austro-Hungarian Empire, and its failure came as a shock because it was considered impregnable. The bank not only made loans; it acquired ownership stakes in all kinds of companies throughout the sprawling empire, from sugar producers to the new automobile makers. Its headquarters city, Vienna, was a place of wealth and splendor, famous for its opera, balls, chocolate, psychoanalysis, and the extravagant architecture of the Ringstrasse. The fall of Credit-Anstalt—and the dominoes it helped topple across Continental Europe and the confidence it shredded as far away as the U.S.—wasn't just the failure of a bank: It was a failure of civilization."

The end result of this bank failure in far away Vienna was massive bank runs around the world, first, in Berlin (because banks there had deposits in Credit Anstalt), then in London (because banks there lent to German banks) and ultimately the US (because who knows what bank is safe if all the European banks go down the tubes). The Great Depression then took full hold around the world leading to 25% unemployment in the US and a 30% plunge in economic output. Soon thereafter political extremism in Europe led to the horrors of World War II.

Today, mainstream economists are raising the specter of a 1931 type of event, where an economic shock in Europe leads to a global panic resulting in a massive and sudden withdrawal of credit from the global economy. Paul Krugman:

"As in 1931, Western nations have the resources they need to avoid catastrophe, and indeed to restore prosperity — and we have the added advantage of knowing much more than our great-grandparents did about how depressions happen and how to end them. But knowledge and resources do no good if those who possess them refuse to use them. And that’s what seems to be happening. The fundamentals of the world economy aren’t, in themselves, all that scary; it’s the almost universal abdication of responsibility that fills me, and many other economists, with a growing sense of dread."

From the University of California, Brad De Long and Barry Eichengreen:

"The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening. We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right." As shown above, political extremism is on the march in places like Spain.


Nouriel Roubini and Niall Ferguson:

"Is it one minute to midnight in Europe? We fear that the German government’s policy of doing “too little too late” risks a repeat of precisely the crisis of the mid-20th century that European integration was designed to avoid. We find it extraordinary that it should be Germany, of all countries, that is failing to learn from history. Fixated on the non-threat of inflation, today’s Germans appear to attach more importance to 1923 (the year of hyperinflation) than to 1933 (the year democracy died). They would do well to remember how a European banking crisis two years before 1933 contributed directly to the breakdown of democracy not just in their own country but right across the European continent."

Obviously, we have reached a major danger point in economic history. I first wrote about the parallels of the Eurozone crisis to 1931 and Credit Anstalt in late 2011. Since then the European Central Bank flooded the system with liquidity--but liquidity never solves a crisis based upon insolvency. And, in Europe too many nations and banks are simply insolvent. So, the sugar high is about over and massive capital is fleeing Europe in favor of safe havens. That is why Treasury yields are so low. 

Economically, the pain of a financial crisis is a function of the volume and rapidity of the withdrawal of capital from an economy into safe havens. For a picture of economic pain projected for the Eurozone given its current path, see this graph from Der Spiegel out of Berlin. As I have repeatedly argued, these numbers, which must be added to already grim economic realities, portend a calamity worse than Lehman. Indeed, these numbers promise a global depression.

But, that may not be the worst of it. Painful economic disruptions historically lead to painful political extremism, especially in Europe. And, unfortunately, signs abound that severe political disruptions loom once again in Europe, as I will highlight in my next post.

Conference and Book on Implicit Bias Elevate the Discourse on Race

I attended a conference last week at Harvard Law School launching a book entitled “Implicit Racial Bias Across The Law” edited by Justin Levinson and Robert Smith.  I moderated one of the concurrent sessions on implicit bias and organizations where the presenters discussed the racial climates and cultures of private corporations, law firms and academic institutions.  Typically, discussions about organizations and how they deal with issues of race are constrained and confined by the discourse itself.  Spokespersons for universities and private firms rarely speak of bias, discrimination, or racism.  Instead, they typically talk about diversity, affirmative action, inclusion, access and equal opportunity.  These relatively cheerful words obscure the reality of the abysmal prospects for workers, suppliers, consumers, and students of color in the business world and the university setting.  Justin and Robert’s book and the panel on organizational bias forced conference presenters to move beyond diversity doublespeak to explore the continuing and pervasive problem of racial bias.  I applaud Justin and Robert for elevating the discourse about twenty-first century racial bias.

Pain in Spain Falls on All but the Megabanks

 

So, the media is full of stories that the Eurozone is bailing out Spain--but it is not and will not work. My objection is this: in fact, Spain is not being bailed out. The Spanish people are bailing out the Eurozone megabanks by undertaking $125 billion of new indebtedness so that the Spanish banks can continue to pay Eurozone banks interest and principal and Spanish bankers can continue in power.

Let me explain, using the FDIC Resolutions Handbook for failed banks. According to the FDIC resolution manual, when the FDIC takes over a failed bank it only protects the depositors. Senior management gets sacked (p. 85) and unsecured creditors only get "receivership certificates." A receivership certificate "entitles its holder to a portion of the receiver’s collections on the failed institution’s assets." (p. 5). In other words, the unsecured creditors get any positive net worth remaining after resolution--which is usually nothing because healthy banks with positive net worth are generally not placed in receivership. Simply put, neither managers nor unsecured creditors get deposit insurance, backed by the full faith and credit of the United States Government (see official FDIC teller decal, above).

On the other hand, the Eurozone guidelines for EFSF bailouts, like that for Spain, are only available for systemically important financial institutions and do not preclude payments to unsecured creditors. Indeed, the whole point of the Eurozone bailout for systemically important institutions is to assure protection of the financial system--that is payment to other big banks in Europe. (As the EFSF guidelines state: "A candidate for recapitalisation will have to be a distressed financial institution systemically relevant or posing a threat to financial stability."). Thus, while shareholders do appropriately suffer losses under an EFSF bailout--general unsecured creditors do not necessarily face pain of loss, particularly if "contagion" could result. Finally, the Eurozone guidelines allow each nation-state to indulge its financial elites by failing to mandate their dismissal (much less investigation leading to possible indictment or civil liability). Derivatives counter-parties get protection as do megabanks more generally (under the rubric of "contagion").

This is nuts! Sovereign nations now effectively guarantee derivatives contracts involving megabanks. At a cost of hundreds of billions of Euros the Eurozone now stands behind every derivatives contract involving a Eurozone bank. Overstatement?

Well, the depth of the Eurozone commitment to saving the big banks is evident in the pain it tolerates for the people of Spain. Spain has Great Depression levels of unemployment approaching 25%. Over 50% of its youth is unemployed.  The government continues to push extreme austerity on its people with wage freezes and deep cutbacks for public sector employees. Health and education expenditures face high cuts. And, now Spain promises more austerity ahead. Yet, here in Spain, I see no evidence that the banking elites that caused this crisis face any loss of power, prestige, position or money. (Although the Socialist Party is stirring).

None of this makes economic sense. When I worked at the FDIC we worked to maintain rational economic incentives for bankers. Those committing bankicide were served subpoenas and it was my job to make criminal referrals or to sue to recover damages. I recall bankers breaking down in tears under questioning about how their bank had failed. It was on many levels unpleasant work. But rational banking incentives matter. Today, these bailouts send an inescapable message: bankers may speculate all they want because the governments will bankroll their folly to the tune of billions or even trillions. The only way to stop bank failures is to stop guaranteeing bank failures and to make the failure of a bank very painful for senior managers and unsecured creditors like bond holders or derivatives counter-parties. 

So, the Eurozone now provides hundreds of billions to protect the megabanks from their own speculative excess and pain and economic misery for people who foot the bill. It is difficult to imagine a more destructive economic reality or a more morally reprehensible policy. This new policy of giving megabanks an unlimited and first claim on public wealth will doom us all.

As in World War II, perhaps Spain is again a prelude for the challenges coming to the US. 

The Pain in Spain and the Scourge of the Megabanks

The chart above, which repeatedly has been in focus on this blog (most recently by dre cummings), shows that our banks continue to hoard vast wealth that could fund massive economic growth through new loans or through alternative government programs other than massive subsidies for the megabanks. Two factors basically drive the banks to accumulate reserves rather than lend: severe risk aversion and the ill-advised decision by the Fed to pay interest on reserves for the first time in October of 2008--thus, putting a decidedly contractionary influence upon monetary policy at the onset of a major downturn.

This new program also represents a massive transfer of money to the banks from the government. The Fed pays about .25 percent to encourage banks to hold reserves. During that same period the equivalent investment in Treasury obligations would have essentially zero yield. Basically, over four years we gave the banks about $100 billion for not investing the vast wealth that we pumped into the financial sector to keep it afloat after the financial crisis caused by the obscene recklessness of the banks. This constitutes the worst corporate welfare program in our history, for it is at once the most economically counterproductive and morally reprehensible use of social wealth imaginable. It is in short, a reflection of a banktatorship.

On May 31, I flew to Spain. Spain is today ground zero in the financial crisis and I wanted to see first hand how Spaniards are coping and what they think about the bank crisis. Just like the US, Spain is quickly shedding social programs and stunting its economic growth in order to turn the nation state into a giant bank welfare state. Thus, for example, Spain has dramatically cut coal subsidies resulting in thousands of lost jobs in the coal sector despite the fact the nation already has a 25 percent unemployment rate.  At the same time, Spain is poised to inject nearly $25 billion into one of its largest banks, and the IMF suggests a total of at least $50 billion will ultimately be needed.

The economic carnage in Spain and Greece is a warning to America. Austerity for everyone but the banks is a cruel and suicidal policy. No economy can function when the state becomes an appendage of big finance. The only winners are senior bank executives and their cronies in government. Who would invest in such a pseudo-capitalist society? If banks suck all of the oxygen out of an economy who will buy any good and services produced? The brewing Euro-depression stands as a stark reminder to America that giving all social wealth to a small handful of banking elites (a policy that originated in America with the repeal of Glass-Steagall) will destroy an economy and lead to mass impoverishment.

The megabanks must be broken up and this remains the biggest issue of the coming political campaign--which likely will not even be on the table given the bi-partisan nature of the American banktatorship.

A Shining Illustration of a Dangerous Truth: London 2012

Christopher Dekki, a 2012 St. John's Law School graduate, has written an excellent essay on corporate influence and the Olympic Games.  I've posted Chris' insightful observations below.

Essay by Chris Dekki

The imagery is powerful. The symbolism is deeply imbedded in countless minds. The victories are an unmatched source of pride for millions of people. There are few things in the world more alluring than a grand competition where athletes (although no longer vying for dominance in the nude and to the exclusion of women) come together from every region of the world under the banner of the colorful Olympic rings. Undoubtedly, the Olympic games are important events both throughout history and in the present. Their existential purpose is to remind governments about the unshakeable unity of the single human family. Even the most cynical person cannot deny being moved by the sight a young athlete beaming with pride as he or she holds up a gold medal for the entire world to see. Yes, whether played out in the warmth of the summer or the cold of a snowy winter, the Olympic games are truly a spectacle to be experienced. Now, keeping all of this excitement and pride in mind, there is one reality that logically follows from the abundant Olympic hoopla: audience. The Olympics attract a massive, truly global audience that is ready to be mesmerized by feats of strength, skill, and courage. Thus, wherever there are willing consumers ready to submit to the pleasures of entertainment, there is businesspeople lying in wait, prepared to pounce on the lucrative whims of the masses. To many people, the Olympics are much more than simply an opportunity for humanity to come together in peace and harmony for some innocent athletic amusement. To the business-minded, the Olympics are an unmatched golden opportunity upon which only a fool would elect not to capitalize.


This year’s summer Olympics in London are no exception to previous tried and true business models. A quick glance at the list of “partners” of the 2012 Olympics demonstrates the critical function of corporations in the development of the games. These corporations have served as promoters, supporters, and goods and services suppliers to the organizers in London. Without their assistance, the games would most likely not be as cost-effective, profitable, or ostentatious. Nevertheless, entrenched in this major corporate position in the London games, is a reflection of the role corporations play in the everyday lives of human beings throughout the globe. As the recent revolts of the Occupy Wall Street movement have revealed, corporations wield outsized influence over the decisions of lawmakers in parliaments and legislatures from North America to Asia. Thanks to the corrupting nature of money, leaders in government, desperate to retain their tenuous elected positions, have transformed into pawns in which wealthy corporate players can buy and sell their political loyalties. In this modern era of complex local, national, regional, and international governance, it is the wealthy who have the capacity to play the biggest part in the world’s intricate political game. Undoubtedly, because of this global reality, it is the international corporate elites who surely exert the greatest authority over the international system.


Certain areas of the law have been especially affected by the financial might of corporations. In terms of public health law, corporations have been particularly successful in swaying the development of legislation. As the latest nutritional policy debacle in the United States Congress has shown, not even school children are safe from the power of lobbyists and corporate interest groups. Due to the efforts of organizations like the American Frozen Food Institute (AFFI), federal dietary regulations now promote the consumption of pizza as part of a child’s healthy daily school meal plan. Truly, this logic-defying state of affairs can best be understood by this horrifying statement: “‘This agreement [in Congress] ensures that nutrient-rich vegetables such as potatoes, corn and peas will remain part of a balanced, healthy diet in federally funded school meals and recognizes the significant amounts of potassium, fiber and vitamins A and C provided by tomato paste, ensuring that students may continue to enjoy healthy meals such as pizza and pasta,’ said Kraig Naasz, president of the American Frozen Food Institute.” Yes, thanks to the noble efforts of men like Kraig Naasz and his colleagues at the AFFI, children can now enjoy healthy servings of pizza and pasta at school. Truly, there is no better brain food for developing minds than a greasy helping of frozen cheese pizza topped with a mere smudge of antioxidant packed tomato paste. Notwithstanding the negligent health benefits of a spoonful of canned tomato paste, there is a serious connection between government frozen food regulations in the United States and the numerous corporate sponsorships of the 2012 Summer Olympics in London. At the very pinnacle of health and fitness stands the greatest athletic competition in the history of mankind: the Olympics. In promoting the value of sport and physical vigor, the Olympics should theoretically transcend the mighty vice grip of corporations over the direction of national and international public health policy. Nevertheless, some of the very corporations that have greatly affected public health have managed to secure a position of influence over the London Olympics. Some of the guiltiest of these corporate offenders are Coca Cola, McDonalds, Dow Chemical, BP, and several others. Yet these corporations are featured partners in what is supposed to be the greenest, most environmentally friendly, most sustainable games in history. Some of these corporate entities are not only swaying public health policy for the worst, they are also guilty of highly destructive environmental disasters that have had long-lasting effects on human health and environmental sustainability.


The 2012 London Olympics are a lens through which the pervasiveness of corporate influence over national and international public health law and policy can be analyzed. The London games are a microcosm of a larger international problem that has reared its ugly head on every continent. As the world struggles with the harmful effects of oil spills, chemical catastrophes, and decadent fast food, the corporations at the helm of selfish political activism have now successfully conquered London. They have shamelessly inserted themselves into an event that is meant to showcase some of humanity’s greatest attributes. Now, the Olympics are nothing more than free advertising for a group of corporations that have done little in the recent past besides earn exorbitant profits at the expense of human welfare. So as the world sits back, bites into a Big Mac, sips on a coke, and remains fixated on the Olympics, hopefully more people will recognize the sheer hypocrisy of it all.

(photo of London Olympic Clock by Chitrapa courtesy of Wikimedia Commons)

Eurozone Crack-up Will be Worse than Lehman

Athens is burning and the whole world fiddles. In fact, the crisis seems to have confirmed rumors of the decline of the west.  The Euro hit a 2 year low today, reflecting real economic dislocation afoot in the Eurozone. S&P downgraded five Spanish banks last week. And, late today, the ECB turned down a request from Madrid to assist in bailing out its financial sector. The Eurozone crisis may well be the worst managed financial crisis in history. After all, Europe has the resources to grow out of this crisis.

In any event, a split has emerged: some commentators think a Grexit will lead to financial chaos; but, some think it can be managed.

The problem is that a Greek exit from the Eurozone would disrupt trade, impede investment, and cause massive cash hoarding as depositors, businesses and financial institutions all would try to move rapidly out of Greek denominated assets and into safe havens like Germany, Great Britain and the US.  Soon Spain and Italy would be suspect and they would follow Greece down the tubes into debt-deflation. The volume and speed of risk aversion and capital flows would make Lehman Brothers look like a walk in the park.

Progress for Female CEOs?

2012 represents a highwater mark for female CEOs among the Fortune 500.  For the first time in history, 18 of the Fortune 500 corporations are headed by women.  This however, only relates to 3.6% of all CEO jobs at the world's largest firms.  This blog has consistently highlighted the lack of diversity amongst corporate leadership maintaining that effective corporate governance increases when diversity is present amongst corporate leaders.

Female CEOs are weighing in on why the paucity of female leadership continues and how a woman can target and achieve leadership goals in corporate America.  Heather Bresch, the CEO of Mylan Pharmaceuticals believes that a strong work ethic remains the most critical element. "'I had a very strong work ethic,' adds Heather Bresch, CEO of Mylan 'and was willing to do whatever it takes to get the job done. There is simply no substitute for hard work when it comes to achieving success.'"  Further, when detailing how best to deal with obstacles including gender bias, Bresch continues:  "'My experiences with gender bias are probably the norm,' says Ms. Bresch of Mylan. 'What I found was that expectations of women were simply lower, and this resulted in being overlooked for certain opportunities. Now as a leader, I strive to create an environment different than the one I faced, an environment where good ideas can come from anyone—young, old, men, women, assistant, executive—and opportunities are open to everyone.'"

Additionally, Maggie Wilderotter, CEO of Frontier Communications also observes in the Wall Street Journal, that "[u]nless you're delivering value, there is no right to move forward. I do disagree that all is fair in the workplace. . . . Men selectively listen,' Ms. Wilderotter says. She recalls making points in boardrooms, then watching the group take note of a male later saying the same thing. 'When that happened, I'd stop the conversation and say, 'Do you realize I said that 10 minutes ago?' Women have to take responsibility for the dynamic around them; you can't just say 'Woe is me.'"

While obstacles remain, including gender bias, the good old boys network, and stereotyping, amongst others women are making progress in the boardroom, albeit slowly.  With 18 female CEOs showing the way, perhaps a sea change is under way.

How to Fix the US Debt Problem--In Two Simple Pictures

The current debt problem, while serious, and certainly requiring broad-based sacrifice in both spending and higher taxes, is hardly a new challenge. After World War II, US debt levels were much higher than today--topping out at 120 percent of GDP. But over the next thirty years bi-partisan efforts led to a debt level that was only 25 percent of the peak, as shown on the chart above (from here). How did 6 Republican and Democratic presidents successfully and dramatically reduce the national debt?

Simple, they raised sufficient revenue through high taxes to cover all government expenditures and pay-off the Word War II debt. As the chart below (from here) demonstrates governing elites imposed marginal tax rates that reached as high as 92 percent to accomplish this.

What a difference responsible and farsighted governing elites that are willing to sacrifice for the betterment of their nation can make.

Eurozone Meltdown (Redux) and the Failure of Austerity

Things in Europe recently deteriorated dramatically. Austerity failed miserably to resolve the Eurozone crisis. The chart at right, from Bloomberg, shows the added risk premium of Spanish government debt relative to safe haven German Bunds has reached a new high--the highest since the crisis over there started and the highest in Eurozone history. Thus, the prior peak, on November 22, 2011, reached 4.69 percent--meaning that Spain paid nearly five percent more to compensate bond investors for the additional risk of holding Spanish bonds for 10 years. Today, as shown above, the spread now stands at 4.88 percent. Given that German Bunds yield a near record low of under 1.5 percent, Spain bears more than four times the interest expense of Germany to borrow funds.

This record high risk premium arose from political chaos in Greece, which this blog first reported on in May of 2010. Essentially, the recent May 6 elections in Greece ushered in fringe groups that make an exit from the Eurozone more likely. The austerity imposed as a cost of EU bailouts drove unemployment to 21%--thus the European "rescue" of Greece failed economically as well as politically. New elections for mid-June appear necessary to form a new government and this vote will determine if Greece will abide by the outrageous austerity imposed by Berlin and others or throws in the towel on the Euro. This is why more and more mainstream voices recently shifted their focus to the rather grim reality of the economic consequences of a Greek exit from the Eurozone monetary union--or the consequences of a Grexit.

The bottom line here is "cascading defaults, banks runs and catastrophic risk," as this blog reported last fall. No firm or individual would want to hold any asset or deposit that is subject to being re-denominated in new Drachmas rather than Euros. So all Greeks would desperately pull all Euros out of the Greek banking system rather than wait for bank deposits to be shifted into Drachmas which would rapidly fall in value. Meanwhile no firm would want Drachma assets and would retain many Euro denominated obligations--threatening massive and unknown risks of insolvency. There already are reports from Greece that bank runs are brewing.

Soon Spanish, Irish, Italian and Portugese investors would fear that those countries too may exit the Euro and capital would flow to safe havens such as Germany, the UK, and the US. The chart above illustrates that very dynamic. Money is rushing toward Germany lowering the yields on German debt as investors bid up the price of Bunds. Germany would lose access to its major export markets as the soaring cost of capital throughout the Eurozone crushes buying power and investment. Unemployment, already at a record high, in the Eurozone would soar.

So, how does all this add up for the USA? Initially, expect the cost of debt for the US to plunge. But, ultimately our economy would suffer great harm and deep distress from at least four channels:

First, if Europe suffers a depression from this financial meltdown, demand for US exports will decline as will export-related jobs.

Second, who knows what derivatives exposure our megabanks have to Greek, Spanish, Italian, Irish and Italian sovereign debt. After all, MF Global went belly-up on Greek debt and JP Morgan recently showed how inept the megabanks are at managing derivatives exposure.  

Third, beyond sovereign debt, our megabanks no doubt have huge exposure to Eurozone megabanks, through derivatives and otherwise, and if the Eurozone descends into full-blown depression it is hard to fathom their grossly undercapitalized banks surviving in the absence of government support which is not likely in a sovereign debt crisis for most Eurozone nations.

Fourth, a crisis over there means massive asset fire sales over here. US equities, commodities, real estate, and anything that can be sold for quick cash would invariably be called back into Europe to meet massive liquidity needs over there.

All in all, if Greece exits the Eurozone, in my view it will have more negative consequences for ordinary Americans than the failure of Lehman Brothers in September of 2008.

Christopher Peterson to Join the Consumer Financial Protection Bureau

Professor Christopher Peterson has agreed to join the enforcement unit of the Consumer Financial Protection Bureau (CFPB).  The CFPB was formed as part of the Dodd-Frank Act of 2010 and stands to play a significant future role in protecting American consumers. 

According to the Salt Lake Tribune:  "Chris Peterson will take a leave from the U[niversity of Utah] law school to join the enforcement unit of the new bureau, charged with regulating everything from credit cards to mortgages.  He has called for a warning label on payday loans that would mark them as "predatory," and he has been critical of the Mortgage Electronic Registration System, or MERS, a mega-company created by mortgage bankers that owns more than half of all residential mortgages and has been actively foreclosing on thousands of Americans.  'This appointment manifests the bureau’s willingness to appoint senior staff members who have staked out strong positions on the merits of highly contentious issues the bureau will be facing,' wrote Alan Kaplinsky, who writes the CFPB Monitor blog and represents companies involved in consumer lending."

Too Big to Jail?

My spouse, Mary Kreiner Ramirez, recently posted an important law review article that every lawyer, law student and citizen should read, about a new lawlessness taking hold in our society that is yet another symptom of life in a crony capitalism state or our corporatocracy. Entitled Criminal Affirmance: Going Beyond the Deterrence Paradigm to Examine the Social Meaning of Declining Prosecution of Elite Crime, here is the abstract:

Recent financial scandals and the relative paucity of criminal prosecutions against elite actors that benefited from the crisis in response suggest a new reality in the criminal law system: some wrongful actors appear to be above the law and immune from criminal prosecution. As such, the criminal prosecutorial system affirms much of the wrongdoing giving rise to the crisis. This leaves the same elites undisturbed at the apex of the financial sector, and creates perverse incentives for any successors. Their incumbency in power results in massive deadweight losses due to the distorted incentives they now face. Further, this undermines the legitimacy of the rule of law and encourages even more lawlessness among the entire population, as the declination of prosecution advertises the profitability of crime. These considerations transcend deterrence as well as retribution as a traditional basis for criminal punishment. Affirmance is far more costly and dangerous with respect to the crimes of powerful elites that control large organizations than can be accounted for under traditional notions of deterrence. Few limits are placed on a prosecutor’s discretionary decision about whom to prosecute, and many factors against prosecution take hold, especially in resource-intensive white collar crime prosecutions. This article asserts that prosecutors should not decline prosecution in these circumstances without considering its potential affirmance of crime. Otherwise, the profitability of crime promises massive future losses. 

Prof. Ramirez persuasively argues that pursuing elite crime vindicates far more weighty interests than mere street crime entails. Elite crime simply garners more attention than a typical grand theft auto or possession of marijuana. By definition elites hold more power than street criminals, meaning their continued incumbency at the apex of our financial system promises more harm than the continued freedom of, say, a shop lifter. As such, traditional notions of deterrence fail to account for the unique compulsion in favor of punishing elite crime.

The party line here from the administration is: "We’ve found that much of the conduct that led to the financial crisis was unethical and irresponsible, but we also have discovered that some of this behavior, while morally reprehensible, may not necessarily have been criminal." Yet, Goldman Sachs settled securities fraud claims with the SEC for $550 million--the largest securities fraud settlement in the SEC's history. Other banks also paid hundreds of millions to settle securities fraud charges brought by the SEC. Angelo Mozilo paid a settlement of $67 million (the most ever by an officer of a pubic firm) to the SEC for his role in securities fraud at Countrywide. The DOJ could have pressed criminal charges of securities fraud in any of these cases, and allowed a jury to determine if criminal securities fraud had occurred.

Instead, the message of the Obama Department of Justice is that crime does pay. Further, these firms my have paid large fines, but they otherwise retain the profits of their crimes and their positions of power in our economy. For example, Angelo Mozilo paid $67. 5 million; but, his firm paid $45 million and he made over $500 million from 2003 to 2008 while at the helm of Countrywide. Yet, the DOJ declined to prosecute.

This historic run of lawlessness at the heart of our economy means that for first time ever in our history a class of individuals stands immune to criminal sanctions.