Notes From Underground

The breaking news during the weekend was the growing unrest in Middle Eastern nations as the contagion of TAHRIR SQUARE has created a desire for change in the autocracies dominating many Arab governments. Libya is the newest hotspot and protests against the Qaddafi regime has been met by state violence. Bahrain has also seen increased political unrest as the SHIITE majority is pushing for a greater say in how the small emirate is governed.

In Bahrain the reaction by the authorities is more subdued but the world awaits the Saudi response as the two kingdoms are structurally similar and geographically close–only a causeway  away, as they way. Saudi Arabia has a SHIITE minority that is always a potential problem that risks being instigated by Iranian provocateurs. U.S. policymakers have placed themselves in a very precarious position for if political unrest breaks out in Saudi Arabia, will it be maintenance of the status quo or a soft push to the agents of change? For me  I will not buy into the rising tide of Arab democracy until the streets of Damascus are full of protestors.

Further protests roiled the Wisconsin capitol as the public union employees have rallied their supporters to try to stop the “anti-union “efforts of Governor Scott Walker. It seems that the state’s public unions are willing to compromise on health care benefits and pension contributions but are opposed to having their collective bargaining rights abrogated. This issue is now about politics rather than policy and it is setting the stage for the 2012 presidential election. The economic data has shown that during the last decade  the pay of public sector employees has risen dramatically in relation to the private sector. State and municipal budgets are funded by taxes and if the growth in public expenses exceeds the revenue from taxes something has to give. If the states are not willing to curb the impact of rising public sector salaries, then the worst prognostications of Meredith Whitney are going to be realized.

Muni bond sales people can argue that the situation is not as dire as some predict but a defeat for Governor Walker in Wisconsin will be an ominous event for all budget negotiations. The folks in Washington are paying close attention to see how the citizens react for failure to rein in STATE DEFICITS because of political demonstrations will mean reluctance to curtail the U.S. deficit. Failure to kick the “cans” of the profligate will merely result in another game of kick-the-budget down the road. As Herb Stein would have said, “Something that can’t continue, won’t.”

A quick note: It seems that the Chinese technology company, HUAWEI, has reconsidered challenging the CFIUS decision and will not force President Obama to make an executive override of his Treasury Department. Is there a tradeoff here on some other sensitive issue? It is too early to tell but we should certainly be aware of a Chinese investment possibly being announced. It seems  that the Chinese were advised it was better not to back the President into a corner but as we know, nothing in Washington is done for free: Quid pro quos can be very rewarding.

Also on the world’s political stage, Angela Merkel got a beat down in the Hamburg municipal election. Merkel’s CDU were humiliated as it garnered 21 percent of the vote after receiving 42 percent in 2008. Merkel’s political handlers are trying to spin this as a totally local affair, but when a previously strong CDU constituency is delivered a devastating defeat–SPD HAD 49.6 percent–the Chancellor had better wake up to the fact that her supporters are disenchanted with her party and it can only be with the problems in the European Union.

The economy in Germany is relatively strong so what could be the cause of voter discontent? If Frau Merkel was running for President of Paris she would probably do well but how she will play in the conservative German states is becoming very questionable. If the story really becomes an anti-EU piece, the bailout of the PIIGS will be back in the headlines. The solutions to real problems have to be more than mere political spin.

The G-20 finance ministers and central bankers finished their two-day meeting in Paris and there was so much manure on the streets that it seems the clock was set back to 1911. The statement was crafted by French finance minister, Christine Lagarde, in what Tim Geithner called an act of “deft diplomacy.” Mr. Secretary, you may call it “deft diplomacy”, but I will call it unadulterated HORSE SHIT. It seems that the G-20 wants to create economic yardsticks based on the current accounts–foreign holdings, budget deficits and private savings–as key indicators that can produce large global imbalances. The Chinese objected as they rightly believed that all criticism and yardsticks were directed at them. Lagarde was able to get the Chinese to compromise by promising that the Chinese desire for a change in the role of the DOLLAR as the main reserve currency would be examined. The French are trying to play all sides against each other in their presidency of the G-20 and the outcome will not be positive.

Friday, FED CHAIRMAN BERNANKE delivered a speech to the G-20 group in which he laid out his view that much of the financial crisis was a result of the needs of large surplus nations to invest in highly rated securities. In a Financial Times article by Robin Harding, “The preference by so many investors for perceived safety created strong incentives for U.S. financial engineers to develop investment products that ‘transformed’ risky loans into highly rated securities.”

This is an appalling prognosis by the FED Chairman. It doesn’t lay the blame at the low interests of the Greenspan Fed fueling the need for more risk. I guess it hits too close to home. I will tell you, Mr. Bernanke, that the need for high-rated securities was a fallout from Orange County and most certainly not the result of global imbalances. The finger-pointing at the investment needs of the Chinese for highly rated securities will not play well in China, thus rendering the “deft diplomacy” to be panglossian nonsense.

Tags: Angela Merkel, Ben Bernanke, CDU, CFIUS, China, Dollar, Fed, G-20, Geithner, Hamburg, Horse Shit, Huawei, pension funds, Shiite, state deficits, Tahrir Square, Wisconsin

This entry was posted on February 20, 2011 at 9:03 pm and is filed under China, Federal Reserve, G-20, Germany, Middle East. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.