Notes From Underground: A STARK Reminder of Merkel’s bad decision

Many times NOTES FROM UNDERGROUND warned that Chancellor Merkel had made a grave error by failing to push for Axel Weber to assume the Presidency of the ECB after Jean-Claude Trichet. I argued that the German populace would be a more willing participant in an enhanced bailout facility if a strong anti-inflationist from Germany was at the helm of the mechanism of financial bailouts for the PIIGS. It seemed that President Sarkozy had “bested” Merkel and the German Chancellor was forced to abandon Weber and agree to a compromise, ECB President Mario Draghi. Friday’s announcement by Juergen Stark that he was resigning his position on the ECB Executive Board and Governing Council gave the markets a scare and led to a large selloff in the EURO and global equity markets.

It seems that Herr Stark grew frustrated by the lack of direction of ECB policy and was angered by the increasing use of the ECB as a fiscal bailout mechanism. As the BTP/BUND spread continues to show, Italy is in the markets crosshairs and with an Italian becoming the ECB president, markets are beginning to wonder where Mario Draghi’s loyalties will lie. The mood of Germany’s electorate is foul as last week’s election loss by Merkel’s Party in her home state certainly reflects. It is now time to monitor the Spanish and Italian two-year notes as an indicator of increased stress in the PIIGS. This is this instrument that will be the most attacked as it was in Greece, Ireland and Portugal.

Quick Hitter #1: The communique of the G-7 meeting this weekend in Marseilles was so empty that I am left to wonder if the colonial finance ministers really understand that there is a genuine credit crisis confronting the global economy. If the G-7 doesn’t have the necessary clout and financial fortitude, then put an end to this ridiculous remnant of a colonial mindset and just move on to a new inclusive G-20 that has the real financial clout to make decisions. The G-20 and IMF are set to meet in two weeks in Washington. The financial crisis should be at full boil by then and maybe the world’s leading economies will be able to put forward some real steps at global financial coordination.

Again, nothing of substance was accomplished in Marseilles. Not even a decision on Japan’s need to unilaterally curb YEN appreciation. The SWISS have thrown the global currency markets into disarray as the YEN and DOLLAR have become the recipients of haven status. The last thing the U.S. and Japanese economies need right now is an appreciating currency. A strengthening DOLLAR may give Bernanke the impetus to push harder for a QE3 program, which will cause renewed havoc in the global currency markets.

Quick Hitter#2: President Obama’s speech was deemed by many analysts to be a forceful and powerful call for a job creation program, thus leading to a needed boost in consumer demand. I don’t sense that and believe that the program fell short of what is so badly needed. I have argued for almost two years in this blog that the housing problem needs resolution and the first step ought to be A MASSIVE REFI PROGRAM. Obama presented a brief nod to this:


This is admitting to the significance of refis to consumer demand and yet it seems that the President did not go far enough. It is time to use the borrowing power of the U.S. Treasury to lock in very low mortgage rates for ALL HOMEOWNERS WISHING TO REFI and utilize the nationalized GSEs (Freddie and Fannie) to alleviate the uncertainty and stress that so many homeowners are suffering. The banks are not allowing REFIs as they like collecting the very high rates from the teaser ARM RESETS that is the basis for the recent increase in foreclosures. Mortgage forbearance pushed by the U.S. government will alleviate a great deal of stress that is overhanging the real estate sector of the economy.

Yes, it will cause some banks to suffer but so be it. The banks and holders of RMBS have been granted enough time. If every concern is about consumer demand creation then stop nibbling at the fringes and get to the heart of the issue. The president used the $2000 figure in his speech. I think he is low and its effect will be immediate. The equity markets reacted negatively to President Obama’s speech–Europe certainly was a major drag–but if the REFI ISSUE WAS ADDRESSED IT MAY BE A REAL BOOST TO THE ECONOMY.

The FED has provided DYNAMIC MONETARY POLICY while FISCAL POLICY APPEARS TEPID AT BEST. As the president said, the REFI program doesn’t even require Congressional approval as the White House can do it on its own.


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13 Responses to “Notes From Underground: A STARK Reminder of Merkel’s bad decision”

  1. arthur Says:

    Great post and reminder… G7 is useless and G20 “it’s about herding cats together with other animals that don’t really like cats. And that’s not really herding.” (Ian Bremmer). Lack of global leadership.

    The euro is breaking down by Andres Drobny, DGA.

  2. kevinwaspi Says:

    We have the world we deserve with mis-placed academics in charge. The best you can say about their management style is that like academia, they imagine a perfect world, then build their models like one actually exists. No wonder they lurch from crisis to crisis.

  3. USIKPA Says:


    USD 2,000 – 3,000 a year in a family’s pocket does not even work out to a 10 billion a year stimulus for the final demand. What is all the fuss about?

  4. USIKPA Says:

    …Unless, of course, you assume that ALL 45 to 50 million mortgages mentioned at will be refinanced ?

  5. yra Says:

    USIKPA–as many as possible –but the uncertainty it would relieve to those with the exploding arms and teaser rates would be helpful.This is not what I philosophically believe but the basis of belief left the barn long ago.There are those who would liquidate all things at all costs but I believe that horse departed long ago –probably back during LTCM when greenspan blinked before knowing what he was afraid of

  6. asherz Says:


    All the suggestions you are proposing is continuing to kick the can down the road and doesn’t address the problem that has brought us to the present parlous state; TOO MUCH DEBT!!! The only long term solutions are write-downs and restructurings. That will cause great pain to many institutions but we no longer can preserve bondholders and shareholders’ interests. Refis and bailouts just buy a little time and corporate heads and consumers understand this and will not help stimulate the economy.

    You must be watching the MSM if you think Obama’s speech was more than forceful rhetoric. Some of us saw behind his 17 iterations of “pass this NOW” chorus and understand these ideas will add to our debt without doing what has to be done and to pick up the can.

    You have not suggested debt reduction which is the ultimate solution. It doesn’t have to be done immediately but spread over ten years. And Citibank and GE shareholders and bondholders will absorb the write-downs. FNM and FRE situation has to be addressed as well. Refis are NOT the answer. The debt principal remains. And when the government refis institute the 3% interest rate reduction, it is paid by someone; in that case the taxpayers, which increases the federal deficit and debt. FNM and FRE are costing us $400B now. This will continue to grow. Your suggestions perpetuate the problem. We must begin to find the real solutions, painful as they may be.

  7. arthur Says:

    very interesting. Debt reduction is a must. Growth policies too.

  8. arthur Says:

    Your opinion about France losing triple A?

  9. yra Says:

    Asherz: the topic of a very good discussion and several points worth consideration.Readers of this BLOG know that my views are a mix of Austrian and the sound basis of Keynes with some marx thrown in to keep the criticism of capitalism appropriate.The study of Austrian credit cycles allowed many analysts to be prepared for what has been superficially called the SUBPRIME credit debacle.Many times I have cited Richard Koo’s fine work on the “balance sheet recession”–yes debt reduction and its effects are certainly what is needed to prevent the zombie outcome that has haunted Japan,but a mass liquidation of assets at this juncture would bring results thatwould not benefit a capitalist economy.The Greenspan Put has been antithetical to capitalism as it has prevented the cleansing that the liquididationists have called for–but I believe that the social and political outcomes are too deep a price at this juncture.Again,it ought to have been done but the Wall Street/Tarp crowd prevailed and we have been on muddle through–In my mind REFI’s will at least alleviate some of the burden on main street and slow the foreclosure process while causing a hit to bondholders,shareholders,GSE’s and the originators—is this the best solution,absolutely not but it does create some breathing room for the heavily indebted on Main Street-it may not be debt reduction but some sense of debt relief—and as far as Obama’s speech I was not praising it for its power or foresight but critical of those who did.But I did find it of interest that President Obama raised the refi issue

  10. Peter Says:


    I like your blog, but like the comments to your missive better. I do not know where you are based – but, it might be best to stick to the subject you know best – Europe.

    BO spoke and the US markets answered with the DOW down 300 – too little too late from a leaderless President. Refis will be opposed by the banks. They can not refi loans priced in excess of collateral. Refis may force banks to mark loan portfolios and derivatives to market – that would expose their insolvency.

    Hopefully, Europe will take care of its own banks and not look for new TARP money from the USA. No IMF money for the European banks either – I do not want to pay 40% of that bill as a US Taxpayer.

    It is now time for Europe to take the lead:

    Nationalize all insolvent banks and repudiate all derivatives underwritten by them. That would start the process of healing the world banking system, which will probably take a good 10 years to complete.


  11. yra Says:

    Peter–many good points.I am based in Chicago and the REFI is a theoretical proposal and needs to be sorted out.But the relief to stressed homeowners is being borne by the system as of now and nothing has been done in 4 years.The banks insolvency is a problem but if the refis are the game breaker then the system is far more fragile then we have even thought.Europe cannot take the lead until it figures out whether it is better to bail out the banks or the sovereigns—the true existential dilemma.As far as refiing loans in excess of collateral the bigger problem is the HECLOS—the home equity loans that is causing jamie dimon to lose sleep

  12. Peter Says:


    HELOCS – I did not realize the problem was so dire. Thank you.

    From a September 2010 article:

    “What this tells me is that most of the $321 billion in HELOCs loans owned by the “too big to fail” banks are probably worth no more than a few thousand dollars each if the borrower defaults. A growing number of HELOCs where the property has already been foreclosed and repossessed by the banks are worth perhaps $500 each.”

  13. yra Says:

    Thanks Peter–and of course I meant Helocs.Jamie Dimon did a great job of getting JPM out of a great deal of their derivatives before the shit hit the fan–but he pushed JPM into the HELOC game as an alternative and it has created big problems for Morgan-Chase.But that will take a while to play out but it is causing havoc in the foreclosure arena

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