Month in Review, December, 2012: Part 2, Globalized failures

February 8, 2013 | Bankruptcy, Boston, CalPERS, Disaster response, Economics, Euro, Global news, Month in review, New York City, Proposition 13, Real estate taxes, Relief, San Bernardino, Slums, Speculation

[Previous Months in Review available here: Nov 12, Oct 12, Sep 12, Aug 12, Jul 12, Jun 12, May 12]


By:David A. Smith


[Continued from yesterday’s Part 1.]


In yesterday’s Part 1 of our economically grim December, we followed localized failures in Boston and New York City to the ultimate in personal and parochial, the house-of-cards collapse of confidence in Alphonse Fletcher (who first came to AHI’s notice through his tribulations with the income-verification police of his local co-op) – and yet, that claim of liquidity pales into insignificance compared with the printing presses at the disposal of the unelected economic dictator of Europe, whose words shake or calm the market’s waters, as we discovered in Mario’s magic air fund:


You think Mario knows what he’s doing?

Me neither.


If insanity entails seeing visions no one else can perceive, then genius entails making other people believe your visions – and by this definition, ECB President Mario Draghi is clearly a very clever fellow with a long memory, for he’s recently reached back a quarter-century into Michael Milken’s old bag of tricks and revived the (in)famous Drexel Burnham Lambert ‘air fund’ with his conjuring of the Outright Monetary Transactions (OMT) commitment, a bit of political vaporware that has calmed markets for more than five months, despite the fact that it does not exist and there are no plans to create it.


So you’ve figured it out, have you?


Moreover, now that everyone believes the OMT will exist, and governments like Spain’s are flagellating themselves to purge their sins of profligacy in hopes of being received into the bosom of Mr. Draghi’s financial church, Mr. Draghi is making clear that, perhaps, no matter how much virtue a nation achieves, it may never be enough to win entry into heaven. As reported with delightful bone-dry U snark in Capital Economics ECB Watch (November 29, 2012):


Overall, then, the message will be that the ECB is standing ready to use its latest weapon, but is

unwilling to make any promises over how effective it will be and reluctant to allow governments to relax their own efforts.


A banker, goes the old joke, is someone who will lend you money only when you don’t need it. Mr. Draghi is acting like a quintessential banker.


I’ve got a secret


While Mr. Draghi declines to fund Spain or Greece – both of which may be sensible credit decisions, one must admit – and while the Eurozone refuses to countenance the possibility either nation might exit the single currency despite its auto-asphyxiation of their economies, the peripheral countries are moving eve closer to Societal bankruptcy: Part 1, the fall of order, and Part 2, the rise of disorder:


“Our society is on a razor’s edge,” Public Order Minister Nikos Dendias said recently, after striking shipyard workers broke into the grounds of the Defense Ministry.

Do I look like a spymaster? Don’t answer that.


he Ministry of Public Order and Citizen Protection runs the national police, fire departments, coast guard, and spy services.


“If we can’t contain ourselves, if we can’t maintain our social cohesion, if we can’t continue to act within the rules … I fear we will end up being a jungle.”


One endgame is the military coup, with which Greece is incredibly familiar:


You don’t vote for a junta!


It seems the ECB, having forgotten coups and wars of times past, has concluded that such unpleasantness is no longer impossible in Europe, having been declared illegal.  I lack their confidence.


Enjoy your stay


“Haven’t we learned anything from history? What we are seeing is a situation that is falling apart, the social fabric is falling apart,” Rizakos said. “I’m very concerned about the situation in Greece. There are many desperate people … All this creates an explosive cocktail.”


The other possible endgame is secession. Sooner or later, Greece will have to exit from the euro, if only to save the nation by saving its economy by regaining control over its currency.



I speak of national collapse out of the smaller-scale domestic experience.  Five years ago, Americans would have thought municipal bankruptcy impossible, even unthinkable, and yet by now, they occur so regularly the stories seldom make the national news – which is foolish, because more of them are coming, and Innumeracy precedes insolvency: Part 1, Those who can’t count, overspend, Part 2, those who overspend, obfuscate, and Part 3, those who obfuscate, obstruct.  By Part 4, those who obstruct, expire, we had uncovered the actual villain of the piece:


Um.., Snidely, what’s your business model?


In point of fact, if I understand it correctly – and this point is not mentioned in the Reuters article – Calpers’ business model is more nefarious than mere pension management. For Calpers cities, Calpers undertakes to pay the city’s pension obligations when these come due, provided that the city makes annual payments to Calpers in amounts that Calpers determines annually will be sufficient to address the looming annuity requirements.


Unless you restructure them in bankruptcy, that is


Calpers, in other words, is an insurance agency, and pension obligations are the cities’ death benefits. So when Calpers pushes higher pension benefits, it is simply selling insurance that it claims cities are obligated to pay for, come hell, high water, legislation or litigation.


Led by a board of directors who are all themselves members of the pension plan


In short, a board of foxes guarding the henhouse.


– Calpers has for decades pushed to sweeten benefits for retirees.


That’s not all Calpers did over the decades.


A 1999 law championed by Calpers, known as SB 400, cut the retirement age five years and increased benefits for state workers, all on the premise that a rising stock market meant benefits could be juiced up at little or no cost.


You see the evil here?


I have a defined narcotics plan


Get ‘em hooked on retirement benefits, really build up the addiction, then hammer ‘em with inescapable premium hikes.


San Bernardino is in bankruptcy today because:


The city says it owes Calpers $143 million. Using a different calculation, Calpers says the city would have to pay $320 million if it left the plan immediately.


Once the cities are addicted to yield, they become easy victims for the next drug – toxic investments.


Calpers says it wasn’t responsible for the decisions made in San Bernardino.


I’m just the dealer, I’m not responsible for what you put in your arm.


I’m not responsible for how they use the products I sell


Though the villain in San Bernardino’s bankruptcy is easy to spot, the passage of time has made it harder to spot the villains in Jefferson County, Alabama – except those elected officials who’ve already gone to jail, of whom there are quite a few –


Former Jefferson County Commissioner gary White being escorted into prison


or what the equities should be, which is why Bankruptcy Court Judge Thomas Bennett is the most important slow country boy in America:



[The judge] is right; Jefferson County’s case may well define the respective rights and powers of different creditor classes in a municipal bankruptcy, and in particular the three-way relationship among:


It’s okay when it’s a three-way? With a gummint in the middle there’s some leeway?


1.     Bondholders, who put up money in good faith based on firm pledges from government bodies.

2.     Government bodies, which made promises they cannot keep based on public-choice calculations by people who are now out of office, in jail, or dead.

3.     Citizens, who incited the government bodies to give them these benefits, often failing to appreciate what their goodies might actually cost.


“There isn’t anyone east of Orange County who has any vast experience in a Chapter 9 case,” Judge Copenhaven said, referring to the California county that previously held the record for the country’s largest municipal bankruptcy.


While Judge Bennett will be forging legal precedent in Jefferson Coounty, New Orleans has been forging disaster-recovery precedent, nearly all of it cautionary tales, as shown in Relief precludes recovery:


Relief is a noble endeavor. Recovery is a slow and difficult process. So at any given moment, relief seems the kinder thing to do – and yet, by its well-intended support, relief precludes recovery and in that preclusion extends the economic depression. That’s my takeaway, anyhow, from this AP story reprinted in Yahoo News (July, 2012):


In this May 10, 2012 photo, a blighted home, which is managed by the Louisiana Land Trust, an agency set up to handle the wrecked properties using federal funds, is seen on Dumaine St. in New Orleans.


New Orleans (AP) — More than 3,000 lots flooded by Hurricane Katrina and bought with federal money in an emergency bailout sit idle across this city — a multimillion-dollar drain on federal, state and city coffers that lends itself to no easy solution.


Built and vacant property is a haven for rot, particularly in a hot humid climate like New Orleans’, and even more when economic gangrene has set in.


Perhaps fittingly for a year that had so little unequivocally good economic news, I rang out the old year 2012 with blackly humorous advice I expected to be read only by those who would not take it, in Suicide is tax-less:


Suicide is painless
It brings on many changes
And I can take or leave it if I please

–”Suicide is Painless,” Johnny Mandel and Michael Altman


As we count down to the undiscovered countryof the ‘fiscal cliff’, we approach one of the largest tax discontinuities in decades – where the tick of a clock can make a difference of over a million dollars, and when that happens, as analyzed in this story from CNBC (December 27, 2012), life or death decisions become more visibly economic:


Will this be your last supper, my lord?


Will ‘Fiscal Cliff’ Accelerate Millionaire Deaths?


By John Carney, Senior Editor,


Short answer: Yes. And why is anyone surprised?


And you can do the same thing if you please