Le Show; 2011-10-02

From deep inside your radio. This is Lesho and a few months ago I interviewed a blogger who might have been reading on the subject of the foreclosure mess by the name of Eve Smith. Her blog is called nakedcapitalism.com and I was, I've been struck by how much of what she said at that point has become near to conventional wisdom in the intervening months. So I've asked her back, we're both sitting in a studio in New York City today looking face to face as opposed to the phone line link that we had in the previous interview. So welcome back to Lesho, Eve Smith. Harry, glad to be here and glad to actually meet you in person. Same here. Just background for listeners who didn't hear the previous show, you've worked for sometimes as a management consultant. Is that correct? Right. I specialize to sort of work in reverse order. I've been a management consultant to the financial services industry, had my own business since 1989.

Before that I worked and this is now in forward order for Goldman Sachs in corporate finance then from McKinsey and ran the, started up and ran the mergers and acquisitions department for Sumi Tomo Bank, which then was the second biggest bank in the world. You worked for Goldman Sachs when the money wasn't quite as good as it is now, right? That's correct. Yes. And also, frankly, when Wall Street was only a criminal at the margins, so in the nine months since we first spoke, I get the sense that the eerie sense that the stuff that you said to me and that you've been writing about then, which was sort of poo-pooed by the banks and by a lot of people, supposedly, analogy about this, has sort of become close to conventional wisdom in terms of what the judges in foreclosure cases are now saying. Can you kind of say what the trend line is along that? Well, it's continuing along the same path. Basically, and this is the ironic thing about why it actually wasn't so difficult to call

was the fact that if you did look at what had already happened in the courts, by the time we spoke, it was very clear that there were serious problems with how the mortgages had been transferred into securitizations. Now, this all sounds very technical, and frankly, it is very technical. You know, we used to have an old-fashioned system where a person would deal directly with the bank. So, the documentation was straightforward, and it never moved, and if there were any problems, if somebody lost their job, that person would then go back to the bank and the bank would know the local community and the bank would make a decision whether the person could be saved or not. So it was first thing, a much simpler system, and second, a more fault tolerance system because the banks were prepared as they do in every other kind of loan to make a modification if the borrower looked viable. You see, it's in every other kind of lending. You know, if you read it all the papers, we have a process for big companies called Chapter 11, because it's much more difficult to do that kind of negotiation with the big

companies. You have a court process, but the point is the general premise is that when you've lent money, if you can get a half a loaf, you're better off than none. Now what happens with these securitizations is that the paper, the paper, meaning the mortgage, had to go through a very complicated path to actually get into the securitization, and there were very good reasons for that, in that they had a whole bunch of complicated legal requirements they had to satisfy. What happened over time was that the banks began violating their own procedures and yet did not change the contracts, and the consequence of that is they have a mess they can't fix. Normally, if people deviate from a contract, you can still go back and say, gee, I was supposed to use this kind of steel, but in fact, I use that kind of steel, and so we'll sort out some kind of number to make up for the fact that I didn't do what I was supposed to do. With this, the whole deal was designed in such a way that it's extremely rigid, so you can't go do those kind of waivers that you would do in pretty much any other walk

of life. There was a time deadline by which things had to be done, and they deliberately picked when they designed these securitizations, they deliberately picked that the trust would be, I guess it's very technical, but they deliberately picked New York law because New York law was so settled on the matter of the trust. The trust is kind of a legal box that the mortgages wind up in the end, and New York law is extremely unforgiving. If you don't do things exactly as stipulated in the contracts, it doesn't work, and the contracts do not allow for anything to be done at this late date to fix them. So the result is that these mortgages basically did not effectively get into the box they were supposed to get into. That means when you want to foreclose, you open the box, and legally, it's empty. Legally you can't, legally you can't go back and say, oh, the mortgage, we kind of partly left it back somewhere earlier and now we'll transfer it, and now that just doesn't work. And that's why we've had this big scandal with what's called robesigning, robesigning where

the banks were not merely having people sign on an automated basis, they were actually making representations. The banks want to make it sound like it's just, even the name robesigning makes it just not like it's mass signatures, which is part of what it was. But there's another whole pattern which hasn't gotten the attention it deserves that the banks were actually engaging in what amounts to fabrications and forgeries of various types of putting dates, you know, back dating documents of having things signed by banks that literally don't exist anymore to make things work or where they couldn't possibly have the proper approvals where the person signing it could not possibly have gotten the authorization from the right party to make the signature they're making. So basically, you have a whole huge pattern of fraud and forgeries to allow the servicers who are the people who act on behalf of the trust to do foreclosures. And that's such a large scale pattern now that it's become undeniable. So judges have become aware of this pattern of practice and are ruling in more and more

cases that the foreclosures are not valid as well. That is correct. And that's a huge problem for the banks also. Now still, there's still some judges that are very bank-friendly. So it's not as if this is happening universally, but the bank-friendly judges tend to be, to the extent they're around, are at the higher court level. The robust signing scandal led to a huge shift in the attitude of judges because before foreclosure defense attorneys had been coming in and been pointing out these problems and the judges' response had been basically what, in many cases, been well, the guy still had deadbeats, somehow the money's owed here, and when the judges take the integrity of the court very seriously. So in their framework, the fact that banks were submitting false avidavits to them, that's very close to submitting false testimony. And that's just such a sin that the presumption that the banks were right has gone away. And the judges have become very skeptical. They're now looking at the cases with a really jaundiced eye.

And the result is that increasingly, banks are finding it very difficult to get foreclosure through. I mean, in New York, which has gotten tough on two levels, New York, the skepticism of the judges has become very high, and on top of that, they've now have a standard in the courts that the turning on the foreclosing side has to submit, basically, it's a certification that all the paperwork is correct. And really, this is just a belt and suspenders. I mean, they should be submitting everything correct anyhow, but that certification makes it easier for the borrower's counsel to challenge a foreclosure. So procedurally, it's important, because normally, it's very bad form for the defense attorney to say, I think he's pulling one here. As a consequence, foreclosures in New York, the banks basically are still finding people delinquent, obviously, somebody's in default, they're in default, but the foreclosures are now so backed up that it would take literally 62 years to clear the backlog at current rates, and that critics are liking to say, oh, that's the courts fault, no, it's actually

the banks are holding them back too, the banks are holding them back, because they know they won't, the New York judges won't stand for it. And as I read to you, your blog, one of the attempts to solve this problem is in Florida where the governor is now proposing that they do away with courts as a way station for foreclosures and have so-called nonjudicial foreclosures, right? Right. And I frankly, I think that would be, I mean, that doesn't mean there won't be any attempt to get that through. There's been a very big backlash in Florida among the, some of it's among more conservative judges, because they have had some success in stacking the court system in Florida. But the flip side is that, for example, the state attorney general, Pam Bondy's under a lot of pressure because she tried to do some house cleaning in her office and cleaned out some tried getting rid of some staffers that found improprieties and how foreclosures were being done, and that's going down very badly in the press. So the fact that Bondy's attempts to cover for the banks are not being well received suggests that there would be a big pushback if the state government were trying to go

that route. Hmm. Then on the other side, I think also via your blog, I just read in the last few days about the experience of a fraud investigator inside countrywide. Yes. In the countrywide case, basically, they had an internal investigator who was looking at trying to find out what was happening with some offices that looked like they were problematic. And the very high concept of the story is that she found that there were really severe abuses that in certain offices, they were literally taking and cutting and pasting information from one application to another. They would use appraisals to enable the deal to go through. They would use appraisal from one deal, from one mortgage on another. I mean, it was really grossly improper stuff. And when she started finding it, she began being frozen out of certain investigations. She began being frozen out of certain offices. It was clearly being blocked at extremely high levels of countrywide. I mean, and although they don't have proof, the sense of the report is that this was blocked

basically at the executive level, that it went to, if not Mozilla, all the guys right under him. Mozilla, the former founder, one of the two founders, one of the two founders and the CEO at the time of countrywide. This goes to, I guess, another guest on this program and somebody that I started reading through your blog, Bill Black's theory that fraud is not a side effect of all this. Fraud is the cause of much of the mess we've been seeing that fraud is a feature, not a flaw. I would agree with that. And that's, it's become, I mean, where we're seeing it now is in the foreclosure arena. But if you back up, there was a lot of activity that took place by the employees of the banks themselves that, to call it gaming, the system is being charitable. You had, for example, traders who would book trades that they knew were not going to work out, but they worked according to their bonus system.

Now, when they're caught individually, they're called road traggers, but we hadn't been done on a systematic basis, approved at higher levels. And it really hasn't come out to a proper degree even now because there haven't been serious investigations. I mean, the senior management of these banks are much more culpable for the blowups of the banks than has really been widely discussed or proven. And when you say these banks, you want to name names? Oh, for example, the one place where it did come out, for example, was UBS, the bank that's now in the spotlight with its rogue traders, sort of, you know, round two. They were one of the few banks that was subject to any kind of real disclosure. Because Switzerland still has, Switzerland is a little country with big banks. Therefore, it can't afford to really have its banks blow up because it would blow up the entire country. Oh, you got left to school with a lot of things. And good chocolate. And so what happened is that when UBS needed a bailout, they made UBS, the entire external, really truly independent, because sometimes we have external investigations

that are really not truly independent. They made them hire truly independent external investigators and write a report on what happened. And basically, there was, there was a unit which, because it looked to be profitable, everybody gave it a free pass. And it was booking collateralized debt obligation trades, which were just clearly not going to work out, but short term looked profitable. I mean, I can explain the mechanics of why it worked because it was also regulatory gaming. But effectively, they were abusing the system. Some of it was incompetent. And some of it was the executives had every reason to sign off on it, because they would get bonuses based on these dubious profits also. So there was some degree of disclosure in the UBS case. And there's good reason to think that the similar things were happening at the other, at the other euro banks. That the traders were basically engaged in a strategy that amounted to looting. If you had thought about it or had real independent risk management systems, you would have been able to tell that.

But the way the bankers set up is at risk management is actually a fig leaf for the senior executives. They have plausible deniability when they go for the short term strategies that are almost certain to blow up. So that's where we're at in the America situation, except for one thing that I wanted to pursue with you. So consistent on this, since I started reading you, that the problem with the American financial system is that there is this enormous amount of second mortgages held by banks, which they're claiming are worth what they thought they were worth in 2008, and are refusing to acknowledge that in the intervening time, those houses that the second mortgages are written on have dropped in value, which means the second mortgages have dropped in value, and those would be enormous losses for the banks if I got that right. That's correct. I mean, the one with the biggest second mortgage book, and in most cases, they're all overwhelmingly home equity lines of credit, and I'll get to why that matters in a second.

But the, of course, in a foreclosure with so many houses in America under water, these seconds are worth nothing, and with a very high unemployment rate, you know, sort of rationally you'd expect consumers to favor their first mortgage over their second mortgage, since the second mortgage would be wiped out if they got in real trouble, that they should be able to go in and negotiate and bargain to get the second redone, and it would have more trouble getting the first redone. We had this all working backwards because the banks have kept the second mortgages on their books, and it was the first mortgages that they securitized. So what happens is the banks who, who both own the second mortgage book and will own a servicing operation, will have very aggressive debt collection on the second. They'll harass the borrower and have them terrified on the second. And the other thing that happens on the second mortgages is that because they're home equity lines of credit, if a borrower makes any kind of minimal payment, they can pretend that it's current.

So let's say on your second mortgage, you owe $250 a month and you've missed two payments. If you miss a third payment, they will have to report that as severely delinquent. And so, and that's something in the bank analyst monitor. What they'll do is sometime between the second payment and third payment is called and basically and the bank will basically say, send us anything. And they'll treat it as current and they'll argue in the press, oh, these are really current. You know, really, there's no problem with these seconds and all the people in the press who are saying that there's a problem, they just, they're just alarmists and wrong. And what of course happens in those cases is that when they cut the payments that much, that means they add that the part that the borrower hasn't paid and should have paid, they add that to the principal balance. It's not like there's been any forgiveness here. It's just another, it's just a way of stringing things along. And if a borrower is in that much trouble that they can't make their second mortgage payment, this thing is probably a goner. I mean, who are we kidding? It just might be on a longer path than it would be otherwise. So the import of all that is that the banks have yet to acknowledge, the American banks have yet to acknowledge enormous losses.

But what would you estimate the value that we're talking about here is? Well, it's for the five biggest banks. It's about three hundred and eighty billion in aggregate. And to give you an idea of, and the one that's got the heaviest amount outstanding is Bank of America at about now, I've seen older numbers at more like 96 billion. I'm told it's currently more like eighty billion. So they made it to this last round. I think they increased their reserves quite a bit on them. But in any event, Bank of America, it's eighty billion versus book equity of around two hundred, a bit over two hundred billion book equity, meaning the, what they report to have publicly as, as their common shareholders equity, the value of the company is reflected by the stock market. Well, not as we're talking about the stock market is much less these days, the stock market is considered a little discount. So if you, and I should have looked at Bank of America stock before I came in, but their market value is, is, has been as low as just about 50% of their book value. So it's probably, and I have, I should say so.

Let's just pick a number and say it's in the hundred and two hundred and twenty billion range right now. Because I suggest that people who are trading in Bank of America stock are taking cognizance of this overhang of second. Yes. Yes. And I think that it was as low as eighty nine billion, and I think it's down to that kind of level. So basically, their reported value of the second mortgage book is about as big as their market capitalization. That gives you an idea. Well, if investors in bank stocks are acknowledging these losses, what's in it for the banks to keep pretending that these losses don't exist? They believe they can't afford to go down the alternative path. The alternative path is admitting how greatly undercapitalized they are. They would have to do huge sales of stock at very low prices that would dilute the current owners. That would almost certainly, even though that's sort of doable from a financial standpoint. I mean, the theory is doable and practice what happens is remember early 2009, when city bank and Bank of America look very rocky, what typically happens is these banks don't raise enough money when times are good.

They think of these max of equity raises only when their backs are against the wall. And doing something like that would almost certainly result in senior management being fired because it would be so dilutive that the board and such an emergency step that the board would have to get rid of incumbent management. So this is basically, you know, into a significant degree protecting current management in the board. The next part of that is that the other thing that the bank should be doing and to some extent Bank of America has started doing that is to try to shrink and simplify their business. And again, the problem is now that the banks are all looking wobbly and are on the ropes. Nobody wants to buy the good businesses that these banks have. So for example Bank of America sold its stake in the Chinese part of its stake in the Chinese construction bank. Even that was a difficult sale because not that that's a bad business and they had a gain in that company. But because it happens to be at this time, lots of similar banks in China are also looking to raise money, so there was quite a lot of competition to be raising money at that time.

But the point is that what happens when something, you know, think of what happens if somebody, some individual gets in trouble and they suddenly need, you know, they suddenly just have a medical emergency, let's say, and they don't have, they don't have enough cash. They start, you know, what are you going to sell? You're going to sell your best stuff. You're going to sell your China, you're going to sell, you know, if you've got any investments that are any good, you're going to sell the stuff that's easiest to sell and has the best gain in it, unfortunately, as a business, that's going to be your best businesses. So the effort to make their, to fill their hole is actually making the business weaker. We'll continue our conversation with Eve Smith, author of the book, Econned Moments From Now Here on The Show. And now news from outside the bubble. In case you're wondering who's winning, Iran quietly hosted a delegation of Taliban members in Tehran.

In the last couple of weeks in a powerful and unusual signal of attempt to shape the trajectory of the Afghan conflict as U.S. troops begin to withdraw. That's from the Washington Post. The presence of the Taliban members suggests Iran has cultivated deeper ties with the Taliban than was previously known and is stepping up efforts to influence its eastern neighbor as the U.S. pulls out. Iran has supported the Northern Alliance as it fought the extreme Sunni Taliban around of course Shiite during the 1990s and came close to open war with the group. In 1998, when eight Iranian diplomats were killed in Afghanistan. But you know, bygones. U.S. officials have for years accused Iran of fueling the Afghan war by providing training and sophisticated weapons to individual insurgent commanders. Quote Iran considers itself a regional player with legitimate stake in Afghanistan and doesn't want to see progress that runs contrary to its political interests. Says a Michael simple, a Afghanistan scholar and diplomat at the price of Iran having a role in the next step as dealing with the Taliban, they're prepared to do it.

Pragmatic. See, you can be fundamentalist and pragmatic simultaneously. This from France, 24 superweeds are plaguing high-tech Monsanto crops in southern United States, driving farmers to use more herbicides, returned to conventional crops or even abandon their farms. Farmers over relied on Monsanto's revolutionary and controversial combination of a single herbicide roundup and a high-tech seed with built-in resistance to roundup, which contains glyphosate. According to scientists, today, 100,000 acres in Georgia are severely infested with pigweed. Get this pigweed out of here in 29 counties and now confirmed resistance to glyphosate. It is to say, roundup. According to a weed specialist from the University of Georgia, Stanley Cole Pappa, farmers are taking this threat very seriously. It took us two years to make them understand how serious it was, but once they understood,

they started taking a very aggressive approach to the weed. Just to illustrate how aggressive we are, he says, last year we hand weeded 45% of our severely infested fields that fight involved spending a lot of money. And Monsanto decided to design a deadlier weed. They probably could not have done better. Resistant pigweed is the most feared superweed. Man, I remember when the word superweed was not scary, you know, it was a come on alongside horseweed, ragweed, and good old fashioned water hemp. Water hemp, when did they legalize that? Pigweed is the one pest you don't want. It is so dominating, says Cole Pepper can produce 10,000 seeds at a time, much like Will Chamberlain, is drought resistant and has very diverse genetics. It can go three meters high and easily smother young cotton plants. Today farmers are struggling to find an effective herbicide they can safely use in cotton fields. But you know, it was, oh sorry, it was worth it to have those hip genetically modified

seeds for a little while, wasn't it? It was a good ride. And from the Guardian of London, a US soldier has been sentenced to seven years in prison for his role in the murders of Afghan civilians last year, private first class Andrew Holmes. 21 was among five soldiers charged over the thrill killings of three civilians during patrols in Kandahar. The murders have been described as among the most serious war crimes charges to emerge from the Afghanistan war. Hearts and minds, babe. Holmes from Boise, Idaho confessed in court to firing a heavy machine gun at a boy from 15 feet away after his coat offended through a grenade at him. It was a mop-up operation. He was accused of directly participating in the first killing and initially charged with premeditated murder, but an deal with prosecutors homes pleaded guilty to murder by an inherently dangerous act, as well as possessing a finger bone from his victim and smoking hushies. Hushies, hushies.

Lieutenant Colonel Kwasi Hawks sentenced him to seven years in jail, saying there was no excuse for the murder. Hawks also told the defendant, quote, I hope, and I believe you'll have a long and productive life and I believe a happy life. Well, that's what you deserve after machine gunning a kid who's been granaded. Wouldn't you say I would news from outside the bubble. This year's broad cast, fish living in the Gulf of Mexico, marshes exposed to last year's BP oil, I've undergone cellular changes, it doesn't mean they switched to a demobile that could lead to developmental and reproductive problems, according to researchers reporting in the proceedings of the National Academy of Sciences. The study funded by the National Science Foundation and the Gulf of Mexico Research Initiative suggests scientists are just beginning to capture these spills, ecological impact. The team of researchers focused on the Killy fish, a minnow-like creature that's abundant

and a good indicator of the health of wetlands. Killy fish residing in areas affected by the spill, the BP oil spill we're talking about. I know the sponsor in the Olympics now. This is the last year showed cell abnormalities, including impaired gills, two months after the oil had disappeared, Killy fish, embryos exposed in the lab to water from the same site which had only trace amounts of chemicals in it, still developed sub-normalities, according to Tom Broca. Their biology is telling us they've been exposed to these chemicals and be affected by them in negative ways, said the papers lead author Andrew Whitehead of LSU, very low level exposures can cause these toxic effects. And hey, they're sponsoring the Olympics, everything's, it's all good, see what I'm saying? And now, let me rate the trays for you. In fact, a follow-up to a story we had on this broadcast last week, but you have to go

to insurance journal to find it, thanks to a listener who had tipped us to insurance journal. Lloyd Syndicate withdraws its 9-11 lawsuit against Saudi Arabia. What? I'll read it for you. Lloyd's of London's Syndicate 3500 filed a notice mid September to voluntarily dismiss its federal lawsuit against Saudi Arabia over 9-11 claims. The lawsuit first filed just about a week and a half earlier had asserted that Saudi Arabia as well as several Saudi charity and financial organizations were instrumental in helping al-Qaeda carry out the 9-11 attacks. Attorney Stephen Cosen told insurance journal he cannot comment on why Lloyd's decided to drop the case. He said the suit could be refiled and there could be other similar lawsuits filed by other insurers sometime in the future. He said he cannot talk about the lawsuit other than to say, quote, that we were instructed to voluntarily dismiss without prejudice.

Unquote. The motion seeks to close the case that is without precluding the possibility of renewal at a later date. Defendants who had been named in the complaint were the Kingdom of Saudi Arabia, the Saudi High Commission for Relief of Bosnia and Herzegovina, Saudi Joint Relief Committee for Kosovo and Chechnya, Saudi Red Crescent Society, National Commercial Bank, Al-Rajee Banking and Investment Company, and three Saudi citizens connected to these organizations, one of them a prince. No explanation, just ain't going to be doing that. More I cannot say, more I cannot read from the insurance journal.

Who's to know what's really going on? When I read the trades for you, copyrighted feature of this broadcast. We're resuming our conversation with Eve Smith, who's a blogger, management consultant and author of the recent book on all of this stuff called Econ. This is a week in which we're recording this conversation on Monday, hopefully it doesn't get all compromised by intervening events, but this is a week in which already those, I think among whom I count you, who've been saying the world economic situation looks bad have been joined by Christine Lagarde of the International Monetary Fund, I think over the weekend, the head of the Brazilian Central Bank. Lot of people coming out, a lot of supposedly authoritative people coming out with very

dire predictions for the state of the global economy, partly based on what's going on in Europe. Let me ask you, I as a reader, it looks to me as if what you described with the American banks and they're holding on to the second mortgages and continuing to deny their plummeting in value is analogous to what the European banks have been doing with Greek debt. Is that close to the mark? That's almost exactly accurate. In fact, there are some direct parallels because we in the U.S. had a series of stress tests, which were really not legitimate stress tests at all, but were an effort to persuade the markets that the banks weren't in such bad shape and the notion the U.S. was a G. Once they got to be in a little bit better shape, they would sell stock at higher prices and strengthen their balance sheets. Well, then we did the first part of the equation. They did the treasury led this big confidence building exercise with enough kabuki with bank pushback that, hopefully, the children would be fooled.

Then the banks didn't go raise enough equity. The banks had the opportunity to straighten themselves out a bit and instead, what did they do? They continued to pay themselves very large bonuses, which also prevented more money from being retained to strengthen their balance sheets and they didn't sell more stock. In Europe, it's even more dramatic because the banks, at least the U.S. banks, have taken some steps to improve their balance sheets even though they were inadequate. In Europe, the banks went into the crisis and experienced the crisis with even weaker equity levels in the U.S. banks and have done less to clean themselves up. It's universally agreed that European banks are in weaker shape than the U.S. bank. Such a thing is conceivable. What happened in the crisis, and this happened in the U.S. too, but even to an even greater degree in Europe, was that the cost of the crisis actually showed up as increases in government debt levels.

Most people, when they look at that impact, they tend to focus only on the bailouts. They think, oh, we had 750 billion for the tarp. No, the impact here was much greater because you had a collapse in tax revenues as a result of the crisis. At the same time, you had an increase in payments, different, what we call countercyclical payments. Automatic stabilizers. Automatic stabilizers. For example, food stamps went up and we now have food stamps have been at record levels for, I don't know how long, unemployment insurance goes up. There are sorts of things that they're all sort of out goes that happen when the economy is really bad. And to your applied point of what you said is normally that's considered to be a very good thing because then it helps, then the politicians don't have to run around and make up emergency spending programs, which are usually influenced by, you know, porky type influences. Instead, we have well-designed programs that just kick it automatically and it's not politically controversial. Well, we had an even worse version of that in Europe because you had some governments that already were running fairly high debt levels.

I mean, for example, the post-of-child of this is Greece, which even though the Eurozone has rules for how big deficits governments can run, Greece had consistently broken those rules and nobody said anything. So it's... Well, it wasn't part of it. The Greece lied about a lie. Some of it was a Greece lied, but it was, Greece was known to be lying. So that really doesn't count. And it's also partly that people don't talk about the fact that Germany broke the rules to at some point. So the fact that Germany had been given a free pass probably meant they couldn't really beat up on Greece. So there's all, you know, there's parts of the story that don't get the press necessarily if they deserve, but the point is that the blowout in debt levels and the government at the U.S. and the European nations is really direct consequence of the crisis. So this is a cost of the bank's malfeasance that is too often not attributed to the banks. It's made into the story of, oh, those bad people in Greece who live too high and now they're paying for it.

And that's really not the correct frame for the story. I mean, if Greece would have had a problem, you know, at some point, ex the crisis, but the problems in Europe are significantly a function of the financial crisis that interacted with a problematic structure for the eurozone and the fact that the banks were very highly levered. I mean, this is a much more complicated story than just, oh, you know, people in Greece lived too high and people in Spain bought too many houses. Although the thing that sticks out to me about the Greece story is that everybody who writes about it eventually gets to the point where they say, well, they have a really, really bad problem with tax collection in Greece, like they don't do it. Well, that is, that's true, but that's a little more complicated story too, in that there's basically something like, and I've seen the numbers, something like some of you 25 to 35% of the population is actually subject to actually pretty good tax collection. So it's the rest of the economy that is and the rest of the economy consists of a really large black market, like doctors are paid pretty much only in cash and grossly under the report.

And wealthy people from all over Europe who settle in Greece because they know it's very permissive there. So some of the people, some of the rich people who were in Greece wouldn't be in Greece if it weren't for the tax, they're tax migrants. They're tax migrants, exactly. So, but in any event, it is true that they have a very corrupt, lousy tax apparatus and they have a second problem that they have a very bloated civil service. They have a lot of civil service jobs that are basically fake jobs. There are some things that are said about Greece that are firmly untrue. You know, one of the urban legends is that, is it, you know, Greeks don't work very hard and they retire early. That's a firmly untrue. They work longer hours and retire much later than people in Germany. But nevertheless, they have a huge tax problem and they have this sort of bloated civil service problem, both of which are quite severe. Let's get back to the banks in the European context, because Europe now suddenly people are becoming aware that this next dip, if there's going to be one, and you were one of the earlier people to say there's going to be one, I think, is related to the banks situation with regard to the debt.

But I remember you writing that when people were blaming Ireland earlier on in the European situation that you found German banks, I guess Dutch and German banks to be fair, had almost kind of coaxed Ireland into the situation or eased Ireland or enabled Ireland into the situation that found itself in. Well, the Ireland is a really sad case because that was not a government debt problem. In fact, the Ireland had actually been running a budgetary surplus. What happened was that literally Ireland blew up because of, I've heard it said that literally the actions of a dozen people. They're basically very large banks, and you don't have to be that big to be a big bank in Ireland. But nevertheless, they're basically a amount of two bank entrepreneurs who got very aggressively into the home lending business. We had the same situation. We had the US only more so that you had a huge housing bubble. You had these banks making very low interest rate home loans.

When the bubble collapsed, the banks were bust. And what happened is that there was one Irish bank that was sold at a late stage and had bled to basically an implosion of one of the European banks. But through a whole bunch of mechanisms, the European banks were exposed to the problems with the Irish banks. Now, Ireland as a country should have stared down the European banks and said basically too bad, you restructured this debt because the Irish had not extended a guarantee to these banks. They didn't do what we did here. They didn't throw a big safety net under the banks the way the US did. The Irish government would have been very much within its rise to stare down the Europeans and say basically, stuff it, we're going to negotiate a solution to these banks. We're not going to take the banks onto the national balance sheet because the banking sector was massive and really not quite as bad as Iceland, which did let their banks fail and let their central banks fail. But it was, I think that the GDP ratio in Iceland was about 900%, and in Ireland was

about 750%, so it's grossly disproportionate to the size of the economy. However, the head of the Irish central bank, even though he was Irish, he was basically and career ECB, not a career ECB, but he had strong connections and reason to favor Curry favor with the ECB and the Euros on time, so they effectively had a trader in the form of the head of the Irish central bank. And if you don't have your central bank supporting you, you can't do anything. So he effectively, literally, he effectively sold out Ireland and I don't know why he hasn't been around in the town as a quisling. I mean, that was just a singularly destructive action. Or as an old quisling, at least, ECB meaning you're a central bank. So after months and months of people on the financial side saying the politicians are moving too slowly, there's this flurry of activity among the politicians and the officials all of a sudden to try to appear that they're speeding up to solve the European problem

less. It clung the world into a second great recession. Is that really what that is? Well, that's what's happening. In fact, one of the commentators who've been following this quisling Wolfgang Munchaw of the Financial Times said he's never seen European leaders so panicked. And the problem is that they have a disconnect between political timetables and market timetables. You can see how quickly things can go blow up, like, you know, Bear Stearns. It was literally 10 days before run on Bear Stearns happened and the bank was sold to JP Morgan. I mean, these things can just come apart very, very quickly. And the political process, unfortunately, involves multiple countries with oftentimes with multiple approvals required. And you just can't move things that quickly. I mean, for example, you know, you've been alluding to the votes this week. This is those votes are pursuant to a package that was approved July 2nd out of 17 Eurozone countries that have to approve it.

Only six have approved it so far and their whole series of approvals that are due this week. So, and if any of those don't happen, that could lead to a big market panic and meltdown because this, the package of July 2 was actually kind of a minor set of tweaks, you know, on a scale of things to an existing program, which was to bail out Greece, which was to bail out Greece, or to keep Greece afloat. To keep Greece afloat. Yeah, because they really haven't fixed Greece. They just keep extending a teeny little bits of more money to tide it over to the next time it needs more money. But in any event, and what they've really, you know, what they have finally realized, well, they've only realized one part of the problem, which is even more severe. They've realized that to merely paper things over, they're talking the wrong order of magnitude of money. That this old facility was $440 billion. It's what they call the EFSF, where there's so many acronyms, you can lose keeping track which attaches to which. And now they're realizing that they're going to need some kind of program more like in the trillions of euros.

They're not finally using the T word. And they're trying to come up with schemes, you know, so the one had they're trying to look like they understand there's a problem and they're going to act quickly enough. Even then they are pushing to have and some kind of announcement by the next G20 meeting, which is November 2nd. I mean, November 2nd is an eternity as far as Mr. Market is concerned. And then that's just going to be an announcement of what the plan is. You know, how long has it been going to take to implement the plan? I mean, this is just, you know, so just on a political time frame, this looks not very doable. The one other way that could go around this would be to have the European Central Bank, just interview, do what we call an America print. The European Central Bank would just keep monetizing debt. That's something the Germans are very reluctant to have happened. They have a very, they're very, very afraid of inflation with good historical reason, with good historical reason, except they also sort of look at the wrong part of the frame, which is it was that their reaction, their overreaction to their hyperinflation in the

early 1930s, between 30 and 32, their efforts to go back on the gold standard actually deep in their depression and were well led to Hitler. So they're like, right now they're looking at the wrong part of the historical frame. We are not anywhere as near in a hyperinflationary situation. We should be much more worried about the 30 to 32 situation, which they created and led to a global disaster. So they've got that problem, you know, this huge political timescale problem, but the even bigger problem is an economic problem. Even if they somehow managed to pull this all off, they're not solving the real problem. The real problem, they still have not solved the economic problem. So this is just basically another bigger better kick the can down the road strategy, which they somehow think is a solution. It's not a solution. The solution is there are some countries that are never going to be able to pay this debt back. They need to write that debt down. They need to, that will cause a big hit to the banks. They need to recapitalize those banks.

And then they also need more aggressive stimulative governmental policies, which will need running a somewhat higher level of inflation. And they need internal adjustment because another big one of the big problems in the Eurozone is that you've got Germany, Germany used to export a lot to the rest of the world and a little bit to the rest of the Eurozone in the last seven or eight years that's flipped. Germany now is not that much of an exporter to the rest of the world and is a massive net exporter to Europe. That's a big part of the reason why these countries got in so much debt because Germany has basically been lending them finance. I mean, lending them money to buy German products. To buy German products. That's part of that. That's one of the big reasons these countries went on a debt party, it was to accommodate the German export driven strategy. So you can't really fix the Eurozone's problem longer term without having Germany stop having such an export driven strategy. And what's coming out of the German's mouths is in coherent, you know, Merkel over the

weekend, who is sort of not acting like she's got religion, has said, well, we can't like Greece leaves the Eurozone, but then her reasons say that Germany is not willing to give up the strategy. Oh, well, you know, Greece left the Eurozone and somebody else would leave the Eurozone. And then what was left of the Euro would go up, the price of the Euro would go up, which would really hurt Germany, which means we Germany wouldn't be able to export some more. And yet that's what they have to give up. So she's basically saying we're not willing to give up our export driven strategy when that is one of the most important things that needs to change. Just from my, you know, uneducated civilians standpoint, the specter of lending people money so they can buy more of your products, sounds so much like what happened in this country, lending people money so they can keep buying, you know, in whether it's homes or home equity loans so they can buy other stuff. This is like almost eerily a rerun, isn't it?

No, it's exactly the same thing. And again, nobody's talking about the real underlying problem is that we have had rising stagnant worker wages and rising income inequality. And this was identified as a problem back in the Great Depression. I mean, it's ironic after the 20s, gilded age that certain members of the Roosevelt administration, particularly Marinor, Marinor Eccles, recognized that the rich, as he put it, the rich needed to be saved from themselves, that if the rich kept accumulating more and more wealth, they would just wind up with empty factories, empty office buildings that you need to have enough of the goods, the output that the economy go to workers so that they would spend because workers will spend more of their income than rich people will. Rich people, rich people are in a position that they accumulate more savings. I mean, how, how is a guy like Warren Buffett ever going to spend all the money he makes I mean, he's not. I have a few ideas of what he could do that if he calls me, you know, exactly. But the point is that to keep a high enough level of demand in the economy, you really

have to have a fairly high proportion of GDP of growth actually go to workers not to capital. So that's why there's actually a good economic reason for things that are now depicted as quasi-socialistic, like progressive income taxes. Too much favoring capital just results in too much capital chasing too few investments and not enough demand in the real economy, which is an asset bubble by definition. Yes. Yes. Which we've just lived through. Yes. So, if you look ahead six months, which I'm sure you do, where is the world? I would like to be, it would be better if I were wrong, this is my favorite things, but I don't see how we don't have some version of a financial crisis. I don't see how, and I've thought this for the last two years, but now it's like the plate's going to fall off the sticks.

I've thought that what the officials have been doing for the longest time is like the guy in the circus. Those guys in circus who have maybe six or seven sticks with the spinning plates on top and they have to keep running from stick to stick to keep enough energy to keep the plate spinning at a high enough velocity that they don't fall off the stick. Well, the plates have been looking wobbly for a really long time, and there have been so many plates wobbling that the officials running around trying to keep the plates from falling have been having to run awfully fast and awfully hard, and I don't see how these plates don't start falling. I mean, I just don't. We have political gridlock in terms of getting to the point where we have debt write-downs and debt restructuring. The banks have become so powerful that nobody wants to deal with them frontally and take them down, restructure them, treat them like utilities. When you say restructures, in civilian talk, that means that a debt that's being carried at $100 on your books is now worth $50.

Right. And what that means is that the people who have invested in the bank either by being bond holders or stockholders are going to take losses, and the normal way that you do that is that you wipe out the equity holders, depending how bad the losses are, you might have to also make the people who had bonds take some losses too, and then you take some of those, the value of the debt that's left, and you convert that to equity. So then the bank has this cleaned up balance sheet, but the investors in the bank have taken losses. And what normally happens when things are that bad with a bank is that you throw out management. I mean, that's sort of a no-brainer, if people presided over something that was that biggest group, you throw them out. And everybody is terrified. Everybody, when I say everybody, I'm talking about the regulatory officialdom, has become terrified of, oh my God, we can't possibly touch these banks. They're so complicated and they're so scary. It's just baloney. I mean, I'm really sorry. There's lots of talent out there in the industry. There's even some talent at the middle level of these banks that could move into, that

we're not part of the problem that could move into senior level roles. There are lots of people who were thrown out at various points, pre the crisis, because they saw the handwriting on the wall and tried to do the right thing. I mean, the problem is you'd have to work and find them. And if the officials had wanted to be on top of this, they could have had search firms looking out to find who the unemployed good guys were, and have them in the wings. This was a solvable problem. It's not when the officials have wanted to solve, because God forbid in America, you'd be called a socialist by intervening with the banks. I mean, a lot of it is about ideology here. And the second part, which I alluded to in the discussion with Europe, is that everybody in too many people, not everybody, because there are a whole bunch of economists that are of the contrary view, but too many people in positions of authority believe this austerity nonsense, that austerity will work. And it's unfortunately been promoted to lay people so that it would be politically unpopular to go against this bad austerity concept. The problem is everybody draws an analogy from a household. If you as a household have overspent, you know, you cut your spending, that all seems

very logical. And everybody thinks do the government has to do that too? Well, the problem is that as a household, that assumption is based on the idea that your income stays the same. When you cut spending, it doesn't affect your income. That is not true at any government level. The reverse is true. Government spending is part of the economy. You cut spending, you actually cut the size of the economy because you reduce demand. And the worst is that government spending is particularly powerful. It has what's called a multiplier effect. So if you cut government spending by 100 bucks, you actually reduce the size of the economy by a number bigger than that. And the result is that you make the debt to GDP ratio worse. That has been... And that's the thing everybody's trying to solve. And that has been demonstrated every time it's been tried. It's happening in Ireland that the debt to GDP ratio has gotten worse. Greece, since austerity has started, it's even undershooting its forecast and its forecast or grim. It was projected with austerity, it was projecting its economy to shrink over 3% this year.

It's now... And they revise our forecast within the last two months and it's not going to shrink more than 5%. I mean, you know, this does not work. And yet everybody seems addicted to this prescription, it doesn't work. So that's a good prognosis for the six months ahead then, right? Economically, the outcome looks quite grim. Well, I can't say it's been a pleasant picture you paint, but you do it with utmost clarity and I appreciate you coming in and I appreciate very much your daily. You spend a lot of time thinking and researching this stuff and yet you have a day job. So... Well, thank you so much, I really appreciate your praise and your readership. And it's the clarity with which you take arcane or at least to us arcane economic and financial concepts and without dumbing them down, I don't think clarifying them is really remarkable.

So thank you again for being with me. Well, thanks so much. And now... We're in London today and Addy is outside sunning himself because it's very hard for Adams to get a tan. But this is news of our friend, the Adam Radioactive Soil Inventitation that must be removed in Fukushima and for adjacent prefectures could reach up to 28.79 million cubic meters equal to filling the Tokyo dome 23 times, according to new estimate. The Japanese environment ministry finding a disposal of temporary storage site will be a tall order. The estimate covers soil and dead leaves mainly from areas with radiation levels of more than 5 million seaverts per year. About 17.5.5% of Fouke prefecture is contaminated to that level.

Yes, the estimate was submitted this week to a 12-member expert panel working on decontamination plans, finding a location to temporarily store such a huge amount of radioactive materials will be an extremely sensitive and politically difficult task for the Japanese government. But I'm sure they'll do it because don't they got it? No, maybe they don't. Now that's news of our friend, the Adam and ladies and gentlemen, it's not just Al Gore, even though he probably never did quite say he invented the internet, something like that. But here on a Sunday morning act show in London today is British Prime Minister David Cameron. We are brilliant inventors in this country. You can run through, we invented the jet engine, DNA, the World Wide Web, we invented these things. We don't always exploit them.

They invented DNA. Before Britain there was no DNA, what did the ancient Egyptians do for genetic code you wonder, and then you stop wondering. Nice people doing nice things, news corp, former news of the world editor Andy Coltson is now suing, news corp, his former employer, over the decision to stop paying his legal fees. He was hired by the foreign nation David Cameron before everything would blew.

And former news of the world executive employed by the British police, Metropolitan Police in London was secretly paid, about $40,000 by news group, news international news corp during his time at Scotland Yard, according to the Daily Telegraph. It was worrying for the police, but he was on the news corp payroll, they got money. I don't know, that's what I hear. Well ladies, they are nice people doing nice things, ladies and gentlemen, that's going to conclude this week's edition of the show, the program returns next week at the same time, over the same stations over NPR worldwide throughout Europe, USN 440 cable system, Japan. Around the world, the facilities of the American forces network up and down the east coast of the North America via the short wave giant WBCQ, the planet on the mighty 104 in Berlin around the world via the internet at different locations, live and archive whenever you

want at harryshare.com and kcrw.com, available for your smartphone through stitcher.com and available as a free podcast from kcrw.com. And it'd be just like restructuring the banks, if you'd have enjoyed it then, would you? Already. Thank you very much. Thanks to everybody who helped the big uneasy march across America beginning last March, concluded last Sunday night with a wonderful conversation with Jonathan Demian, Pleasant Phil New York, big uneasy is viewable, still in video on demand for a couple of weeks more and then at iTunes and well, still at iTunes and DVD available from amazon.com, information at thebeganeasy.com and if you're in London, I'll be falling on by maybe a slap in a bass or two with Miss Judith Owen at the fessentree in King's Road tomorrow Monday night. London where it's higher than New Orleans, imagine that, something's wrong.

The show comes to you from century, oh, thanks to Adrian Bodden at today at Global Radio for helping out with today's program. The show comes to you from century progress productions and originates through the facilities of KCRW Santa Monica, community recognized around the world as the home of the homeless. Thanks to the gang at Argo Studio in New York, too.