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If Greece Was California...
For all its rhetoric, the current situation in the Eurozone should be very familiar to most Americans: after all it is merely a Federalist organization just missing one key feature: Federalism. At least for now. Whether Europe will succeed in reversing 20 centuries of nationalist pride, a multitude of languages, religions, cultures, histories, and superficial solidarity and friendliness covering generations of broad-based enmity, blood feuds and hatred, which is precisely what will be required (because the monetary union was merely half of the game) remains to be seen. It is likely that the stock market will force this resolution sooner than most expect. Then the question becomes: will Europe truly become the United States of Europe. And if so, what would the current Greek travails look like if they were transplanted to the state of California: another place which may soon be in dire need of a bailout. Luckily Jefferies' David Zervos has performed just the thought experiment: "let's assume the European monetary system structure was in place in the US. And then imagine that a US "member state" were to head towards a bankruptcy or a restructuring of its debts - for example California." The results are below.
Separation of Bank and State
The Euro monetary system is flawed. It is a system that was cobbled together for political purposes; and sadly it was set up in such a way that each member state retained significant sovereign powers - most importantly the ability to exit the system and default on debts in times of stress. There is virtually NO federal power in the Union, as witnessed by the complete breakdown of the Maastrict and Lisbon treaties. In fact, what we are seeing today is that the structure of the monetary system is so poorly designed, it actually creates perverse fiscal linkages across member states that incentivize strategic default and exit. Our new leader of the Greek revolt - Mr CHEpras - has figured this one out. And in turn he is holding Angie hostage as we head into June 17th!
To better understand these flaws in the Eurosystem let's assume the European monetary system structure was in place in the US. And then imagine that a US "member state" were to head towards a bankruptcy or a restructuring of its debts - for example California.
So let's suppose California promised its citizens huge pensions, free health care, all you can eat baklava at beachside state parks, subsidized education, retirement at age 45, all you can drink ouzo in town squares and paid 2 week vacations during retirement. And then assume the authorities never came after anyone who didn't pay property, sales or income taxes.
Now it's probably safe to further assume that the suckers who had bought California municipal debt in the past (because it had a zero risk weight), would quickly figure out that the state finances were unsustainable. In turn, these investors would dump the debt and crash the system into crisis.
So what would happen next in our US member state financial crisis? Well, the California governor would head to the US Congress to ask for money - a bailout. Although there is a "no bailout" clause in the US constitution, it would be over run by political forces as California would be deemed systemically important. The bailout would be granted and future reforms would be exhanged for current cash. The other states would not want to pay unless California reformed its profligate policies. But the prospect of no free baklava and ouzo then sends the Californians to the streets - rioting, looting and protesting ensue.
The agreed reforms by the Governor then fail to pass the state legislature. And as the bailout money slows to a trickle. The fed up Californians finally elect a militant left wing radical, Alexis (aka Alec) Baldwin, to lead them out of this mess!
When Alexis gets into office, the US officials in DC worry. They cut off all the Californian banks from funding at the Fed. But luckily, the "Central Bank of California" has an Emergency Liquidity Assistance program. This gives the member state central bank access to uncollaterized lending from the Fed - the dollars and the ouzo keep flowing. But the Central Bank of California starts to run a huge deficit with the other US regional central banks in the Fed's Target2 system. As the crisis deepens, retail depositors start to question the credit quality of the California banks; and everyone starts to worry that the Fed might turn off the ELA for the Central Bank of California. In turn they worry that California banks will not be able to access dollars. The depositors in California banks then start to pull their funds, and send them to internet banks based in "safe" shale gas towns up in North Dakota. Because in this imaginary world there is no FDIC insurance and resolution authority (just like in Europe), the California banks can only go to the Central Bank of California for dollars, who in turn continue to lend dollars to an insolvent banking system to pay out depositors. In order to reassure depositors, California might announce a deposit guarantee program - but with the state's credit rating is at CCC, the guarantee does nothing to stem the deposit outflow.
In this nightmare monetary structure, with regional central banks, ELA, Target2 and no FDIC, the prospect of a state default FORCES a bank default. The banks automatically fall when the state goes into financial turmoil because of the financial structure. A bank run is the only equilibrium in this system.
There is sadly no separation of member state financials state and bank financials in the European financial system. So what's the end game in our little US example above? Well, after the Californians take all the their dollars out of the California banks, Alexis realizes that if the central bank of California, along with the state and the banks default, the citizens will still have their dollar wealth preserved and the state could start all over again by issuing new dollars with Mr Baldwin's picture on them (or maybe Che's picture). This California competitive devaluation/default would then leave a multi-trillion dollar hole in the Fed balance sheet and the rest of the more responsible US states would have to pick up the tab. So Alexis goes back to Washington to threaten exit unless the ouzo and baklava keep coming. And here we sit in the current battle in Europe!
Can anyone in the US imagine ever designing a system so fundamentally flawed? Its insane! Without some form of FDIC insurance and national banking resolution authority, the European Monetary System will surely tear itself to shreds. In fact, as the Target2 imbalances rise, it is clear that Germany is already being placed on the hook for Greek deposits and other peripheral deposits. The system has de facto insurance and no one in the south is even paying a fee for it. Crazy!
In the last couple days I have spent a bit of time trying to find any legal construct which would allow the ELA to be turned off for a member country. I can't. It doesn't mean it won't be done (as the Irish were threatened with this 18 months ago), but we are entering the twilight zone of the ECB legal department. Who knows what happens next?
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Small localized government makes more sense. Only 25 years or so has passed since the power of the computer became available. Who says people still need Governments? There are lots of options that did not exist at any time in the history of civilization.
Instead we are stuck with sociopathic globalists that want to control the world with weapons. Just seems like and antiquated, primitive and obsolete system that has outlived its usefulness and is doomed to go the way of the dinosaur.
The author embarrasses himself in comparing California and Greece.
True, California spends too much, alot of that expense being excessive public welfare, state worker salaries and pensions. However where the two diverge is in tax collection and industry. Quite simply, California tax enforcement is relatively aggressive, robust & efficient as compared to Greece. Also, California (for all it's business hostile environment) still manages to have numerous industries and economic output.
As noted by some posters above, California gets less back from the U.S. Federal government than gets extracted in taxes. The state would probably be better off on its own (then it could form a trading block with Texas and other entities), cutting out the criminals in D.C. & N.Y. much like the BRICs are about to turn their backs on the USD (which itself got outsourced to a private, non-transparent, banking cabal 100 years ago).
The problem facing California is the "mana from heaven" attitude of many of its citizen and politicians who buy votes with unbacked promises.
In other words, the problem facing California is the same that's prevalent across the globe ...
TOO MUCH GOVERNMENT!
Are you an actual Californian saying too much government? California regulates farts! Come on! You can't be serious. The only thing in California NOT regulated are illegals.
What a FUBAR article.
Just a few points here:
So first the author states the European Union has too much federalism? And implies the US got it just right?
Maybe someone needs to read up on the idea of federalism a little bit. The idea is to give smaller entitieswithin the souvereign as much decision authority as possible, and that also includes funding, so no squeezing of the states from the federal level, either by turning off the spigot or by dumping costs on them without their representation, such as the feds deciding on benefits which the states have to pay out.
The main idea of federalism is to have competition between the states, within certain limits.
And FDIC insurance has only good aspects to it - what does that term "moral hazard" mean again?
It's not all the fault of the Greeks: if Germany lets them runs up the TARGET2 balances without limit, then that's mainly Germany's fault.
crap article
<<<<<Calif, where they pass a lottery with a fucking lie about how it is going to add to the schools budget.>>>>>
New York state pulled that same lie about 30 or so years ago.
Lotto ... it's for the children --- yeah right ---
Is the "United States of Europe" the Union of Soviet Socialist European Republics in disguise? I think the latter is a more apt discription. :) Just sayin,.....
If Alec Baldwin is a militant left wing radical, instead of the liberally motivated media star who is well intentioned but still invested in his 1% lifestyle comforts, then I'm a former member of the WeatherUnderground.
The inability of people to integrate facts into their political analysis these days makes political dialog between positions almost impossible.
I see a saturation of conservative comments about Obama and the indefinite detention of US citizens imbedded in the recent extensions of the Patriot Act. But when push came to shove in the house the other day and a recent court ruling forced the House to Vote on specific legislation affirming that the President had such rights guess what the result was. Nearly every REPUBLICAN voted FOR indefinite detention. Nearly every DEMOCRAT voted AGAINST indefinite detention. This is a matter of public record and easily found on the web.
In nearly every single case the prime movers behind the spate of laws restricting personal freedoms and expanding federal law enforement powers passed in the last 11 years have been REPUBLICANS. And, the votes in the Senate and House that have passed this legislation have come overwhelmingly from REPUBLICANS.
But clearly it is Obama and the communistic Democrats who threaten our freedom. Ha ha ha ha ha ha ha ha ha ha ha ha ha ha
Pardon me, you butt kissing liberal pos. Did you see what a negative vote would do to our returning and serving military? How's the Weather Underground?
Off topic but has anyone else noticed that Beck's Beer is no longer imported, it's "PRODUCT OF USA"? WTF?
Cheaper to make it here. Plus most European "imported" beers are made differently to appeal to American "tastes", which revolve around absolute shit beer like Budweiser, Coors, and Miller.
In the globalized New World Order it matters not which geographic locality (we used to call them "countries") corporate profits go to. All are equally ensalved by the New World Order.
Where did the Valley Girls go? Drove through the valley a couple of weeks ago for a conference, and didn't see a single Valley Girl. Lots and lots of Spanish and Armenian (?) signs.
All moved to Colorado in the 1990's. The late-to-exit ones are flooding Idaho as we speak, trying to turn it into little Cali. They're fleeing the crime and social decay brought by the 3rd world immigrants that they will still, to this day, claim to love and cherish. They'll claw your eyes out if you speak ill of the illegals.
California is an awesome place to live. That's why it's so expensive. High demand and limited supply. If you're an average schmuck, life is tough here. You'll live like a rat in cramped quarters and never get laid. If you're a man of means, you'll live in a beautiful seaside home with nearly perfect year-around weather. Not only that but you'll get your choice of the most beautiful women in the country. Drop dead gorgeous bodies and great sex from greedy women who will do anything you want.
Losers lament California. They are jealous of those of us who drive Porsche's and live in awesome gated communities. A land of opportunity where lots of moolah is available for those who are talented and resourceful.
Sounds like Mumbai, a shithole.
I wouldnt live in California if somebody gave me 19.5 billion dollars and 100 virgins. Now go get me some physical gold.
don't forget all that lovely fall out from Fukushima that California is getting.. its going to be a great season for 2011/2012 wines.
Your state has worked to deny the people who actually PRODUCE a product, but cater to the ones who cannot produce clean sheets! When it's all said and done, California is a vast farm, and nobody knows how to work the land. The people who knew how to farm are either in jail or forced out through political correctness. Grow stuff, you ignorant people. Feed the masses. Your learning curve will decimate millions. California used to provide 75% of our country's produce. Do you even provide 25% TODAY? Ask yourselves why?
I'm very curious. Where does your meat, cheese, dairy, produce and grain come from? It should be your own state. Tell me.
California isn't even an awesome place to visit! If you want to pay twice as much for anything, come to California.
I just want to say that I am glad to see the discussion on Zero Hedge moving towards my theory regarding the Euro crisis, its origins, and its most likely outcome. It was boring having to spam the same post into the myriad "Greece Sure to Exit the Euro" posts on Zero Hedge as the only contrarian voice amongst a sea of "IT'S OVER, GREECE EXITING THE E.U. AND EURO CURRENCY" meme that was taking hold.
But, as I have said before, there is a wild card here - the Anglo military empire that currently enjoys global hegemony. Do they want a United Europe? Or do they see it as a threat? That is the only factor that could prevent the European aristocracy from realizing its dream of a "United States of Europe" supranational government for Europe.
But even if the Anglo empire is working to undermine the European Union the Euro technocrats will pull out all the stops trying to make the United States of Europe a reality. Eurobonds are happening, soon, get used to it.
Not sure what the article is talking about with deposit insurance programs. It was established in the Euro formation that there'd be a EUR20,000 coverage, which has been increased repeatedly over the past four years or so. Though on the other side of that, Ireland was stupid for guaranteeing unlimited deposit values...
http://en.wikipedia.org/wiki/Deposit_insurance#European_Union
FDIC is the key? Are you kidding? Who's the "Insurer"? Insurance isn't the problem. It's the ability to create debt without being checked by the market forces of savers. Debt should always be about a voluntary contract between savers and borrowers. Modern banking has destroyed that balance. "Federal" Insurance does not solve that problem but only exacerbates irresponsible deposits (i.e. lending).
Funny thing... kinda off your track, but recall sometime last year when FDIC started getting worried about its cash buffers and was fighting against... some entity from using their funds?
I think I saw it on ZH back then, but no longer do I recall.
Further to this - if EU decided to make its own FDIC... would there be enough funds available, aside from IOU slips.
You're all a bunch of tools. Go get some physical gold or something.
http://www.youtube.com/watch?v=PRA_9_djcPo
This idea of a united Europe is simply ridiculous and comparing it to the US doesn't make sense. (I am not blaming this story though)
The US states were never independant countries with different cultures and languages and rules and regulations and fighting wars for thousand of years.
Do you really think that merging the Czech Republic and Slovakia into one country (again) is a great idea?? And how about Great Britain and Ireland? The French really want that many Kings and Queens?
The American states were sovereign. And they lost it to the central government once it had grown strong enough to take it from them.
Surely there is no parallel to be drawn between that historical anecdote and Europe...
I'm not sure FDIC-type insurance helps Europe. This type of insurance was surely designed for use where the odd bank failed once in a while - like medical or legal malpractice insurance. We are likely to see runs on hundreds of banks at the same time as everybody scrambles to get their cash out. The system would be overwhelmed - there just isn't the money.
Eh, probably okay to use California for Greece, but you have the wrong picture.
One of the state's main problems is taxation that has been growing into a feudal system, wherein the multi-generational & very rich pay a pittance on property taxes compared to everyone else.
In the 1970's a law was passed capping property taxes at around 1% per property, with the value set based upon its sale price.
For many rich families, property taxes on sometimes massive coastal estates is far less than a new college grad getting a 1 bedroom condo in the same city!
How does this work? Say a rich family purchased a big parcel in 1977 for $500,000 (a big sum back then). Their taxes would have been around $5000 per year. Today that same property may be worth $5,000,000, but they still only pay around $6000 (small annual adjustments can be made, but they are capped).
A new college grad today purchasing a condo for $500,000 in San Francisco, would in fact be paying about the same in property taxes as a legacy aristocratic estate.
A fair taxation system should tax everyone fairly. California does not, and the lack of revenue on the tax side (since the deficits must be made up elsewhere) is killing the state.
So tax avoidance and unfair taxation of aristocratic families...
Yes, California does in fact have a lot in common with Greece.
Lol. A new college grad with $100,000 in student loan debt will be "buying" a $500,000 condo?
This country is fucked into the ground. Open the doors, party's over. Get the fuck out.
the author merely parrots the same old lines about greece - does he have any clue at all how things are there? tax collectors don't collect taxes in greece? my ass. they are more rapacious and extractive than tax collectors up in europe any day of the week. the tax authorities in greece operate like gangsters. they size you up, make a guess (and with experience comes a very good sense of accurate guessing) as to just how much you have, and then make up any bullshit they feel like to squeeze that much out of you. If they figure then can get a hundred grand out of you, they will invent ellegations of fantasy income or procedural violations or whatever else they dreamup, to demand half a million from you. Then they will 'allow' you to eventually settle for the hundred grand. They might pocket some of the hundred grand , but the citizen is being raped for the hundred grand and hardly knows or cares exactly how the rapists split up the spoils.
In greece there is no appeal in the courts. There are special tax courts which are of course tied to the same system. They will make you pay the whole disputed amount up front and then if ten years later your case finally comes up they will pressurize you for bribes and of course lawyers fees to again do you the favor of only bleeding out the hundred grand from you they planned to take in the first place. Then of course the judges and agents and politicians haverigged that appeal system to squeeze more bribes and money, but the original concept still stands - they will get out of you as much as they want, which tends to be everything they can get their hands on.
Maybe if the official papers say that half a million was owed and nly 100 grand paid, then they might be able ot claim to be so poor at collecting taxes, but the reality is that they take whatever they can get their hands on.
I had to laugh at the guy wondering about the hatred for California. Dude, EVERY American who doesn't live in California HATES it.
"Without some form of FDIC insurance and national banking resolution authority, the European Monetary System will surely tear itself to shreds.". Now there's a great idea if ever there was one. Let me understand you. I put my money in the bank to be warehoused for me, and I need to pay (through my taxes) for insurance on my deposit?
Hmmm. Someone who wasn't an idiot would maybe put there money in a bank that had a good reputation for not pretending that your money is there money!?! I thought that existed at one point in the US? It was called free banking!!! The real problem is that an individual's money is not being warehoused and the government has given both the ECB and the banks free reign in creating money out of thin air!!! If we ACTUALLY HAVE REAL FREE BANKING with no central authority, many if not all these problems would go away. It wouldn't be long after the baklava and ouzo parties for everyone to realise they should pull their money out of the institution printing money and let it go bankrupt. Easy wasn't it, and it didn't cost taxpayers a dime in either insurance or regulation!
THE whole premise here is missing the whole point of the TRUE WEAKNESS OF THE EURO SYSTEM.
it isn't 'sad' that the euro-system isn't based on taking away soverignty of member states. it is BECAUSE of this freedom from fiscal constraint and monetary contraint that
THAT PREDATORY LENDING AND IRRESPONSIBLE BORROWING WERE GUARANTEED BY THE STRUCTURE.----IT WAS BY DESIGN THAT THIS SYSTEM WAS GOING TO CREATE A HUGE UNSUSTAINABLE CREDIT BUBBLE TO BENEFIT LARGE BANKS AT THE EXPENSE OF NATIONAL TREASURIES.
and paradoxically many of the large banks benefiting from the euro system were not only german or french, but american. namely, the too big to faills that participated heavily in helping issue and move debt around the euro ponzi table.
IDIOTS MISS THE WHOLE POINT.