Time for Plan B. The Spanish bank bailout didn't even work for one day.
Apparently, $125 billion billion doesn't buy much these days. Not even six hours of relief.
Over the weekend, Europe announced a bailout of Spain's ailing banks. It wasn't quite financial shock-and-awe, but €100 billion ($125 billion) seemed like an impressive enough sum to buy at least a few weeks -- or at worst a few days, right? -- of calm in the markets. It wasn't. If anything, things are getting worse faster in Europe. What's going on?
First, a quick recap. As Paul Krugman put it, Spain was Europe's Florida. It had a prodigious housing bubble. And now its cajas saving banks have a prodigious amount of bad real estate loans on their books. But the Spanish government can't afford to bail its banks out. It can't print euros, and it can't borrow euros, except at punitive rates. We have a word for this. That word is "broke".
But Spain resisted going to Germany for a bailout. Spain feared the austere terms Germany would likely impose as part of any deal. So Spain played a game of chicken. First, it tried to get the European Central Bank (ECB) to bail out its banks instead. Germany balked. Then, it threatened eurogeddon -- memorably saying that they would not be bullied because "Spain is not Uganda" -- if it didn't at least get better terms on its bailout.
At first, it looked like Spain had won. Europe announced that the €100 billion aid package for Spain's banks would come without any further conditionality. Translation: Spain would get the money without having to do any more austerity than it had already promised to do. But then things unraveled. And fast.
The chart below from Bloomberg shows Spain's 10-year borrowing costs. Remember, the point of the Spanish bank bailout is, in large part, to reduce yields on Spanish bonds to break up the doom loop between weak sovereigns and weak banks. About that....
After briefly retreating, Spanish borrowing costs surged above 6.5 percent. That's the market giving a vote of no-confidence for the bank bailout. But the bad news hasn't stopped there. The Spanish IBEX stock index gave away a 5.9 percent increase, and finished down on the day. Italian bonds got hammered too. So did the Italian FTSE MIB stock index.
Why did markets turn so quickly from gloom to doom? The short answer: Investors are worried the Spanish bank bailout might make things worse -- and with good reason. The devil is in the details, and the Europeans have been embarrassingly short on those. Here are the four big questions that remain to be answered.
1) What's the interest rate on the €100 billion loan to Spain?
This being Europe, the term "bailout" is a bit misleading. Germany isn't cutting a check for Spain. It's a loan. European officials have promised that the interest rate on this loan is well below what Spain can borrow in the markets -- it'd better be, or what would be the point? -- but they haven't said what that rate is. It's hard to judge how good a deal Spain is getting without knowing this.
2) How much will the bailout add to Spain's debt?
This being Europe, Spain's bank bailout has a slightly Byzantine structure. The bailout funds will go to Spain's so-called Fund for Orderly Recapitalization of Banks (FROB) -- a government agency that will then inject the money into struggling banks. The Spanish government, however, backstops the FROB.
But this being Europe, this financial legerdemain doesn't really matter. The Spanish government is ultimately on the hook, full stop. So the bank "bailout" will add roughly 10 percentage points to Spain's public debt-to-GDP ratio, assuming growth doesn't collapse further. That's a big assumption.
3) Will the bailout loan be senior to other debt?
This being Europe, there are two bailout funds. There's the soon-to-be defunct European Financial Stability Facility (EFSF) and the soon-to-be online European Stability Mechanism (ESM). Spoiler alert: They're supposed to increase ... stability. They haven't exactly succeeded.
This being Europe, it actually matters a great deal whether the EFSF or the ESM loans the money to Spain. The ESM is senior to all other creditors, after the IMF. The EFSF isn't. In plain English, an ESM loan increases the odds that private bondholders will take a loss if Spain ever restructures its debt. An EFSF loan doesn't. So private investors will demand higher interest rates on Spanish bonds to compensate for the higher risk of losses if the money comes from the ESM. That's precisely what happened on Monday after European officials announced that it would indeed be the ESM making the loans.
But this being Europe, they subsequently reversed themselves. They said that the money might come from the EFSF instead -- at least at first. In the long run, it's unclear how much this would even matter. In the short run, Spain is still on the hook as a partial guarantor of EFSF loans. Um, what? The EFSF works by issuing bonds backstopped by Europe's healthy economies. But Spain can't get out of its commitment as a guarantor because its government technically isn't getting bailed out. Its banks are. So Spain would be guaranteeing a loan it's taking out. That makes even less sense than you think.
4) Will the bank bailout come with new strings attached?
This being Europe, it's not too surprising that the initial headlines that Spain was getting this money unconditionally might not be true. On Monday, German officials said that the so-called Troika of the EC, ECB, and IMF would "supervise" the bailout -- which is eurospeak for imposing more austere austerity. Still, it's unclear what this means. It's possible the Germans were talking about a previously announced agreement where European officials will reform Spain's sclerotic financial sector. But it's also possible that they were talking about further spending cuts and tax hikes.
This being Europe, it's almost impossible to say. But it's another reason for markets to worry. Troika reforms in Greece, Portugal and Ireland have knee-capped growth. And a country that can't print its own money can't pay back its debts when it's not growing. It creates self-fulfilling doubts about its solvency. It's just another reason for investors to push up the yields on Spanish debt.
There's a simple way to tell if the Spanish bank bailout is working. Look at Spanish borrowing costs. If they're falling, it's working. If they're not, it's not. By that metric, the 48-hour old bailout is already a clear failure.
It's easy to understand why. The bailout will increase Spain's debt. It will make Spanish debt riskier for private investors. And it might make it harder for Spain to pay back its debts. It kicks the can at the expense of zombifying Spain's economy.
Here's the worst part. It's not even clear that the Eurocrats understand the mistakes they're making. If they did, they wouldn't keep repeating them, from Greece to Ireland to Portugal, and now Spain. They're running out of time. So are we.
It happened gradually—and until the U.S. figures out how to treat the problem, it will only get worse.
It’s 2020, four years from now. The campaign is under way to succeed the president, who is retiring after a single wretched term. Voters are angrier than ever—at politicians, at compromisers, at the establishment. Congress and the White House seem incapable of working together on anything, even when their interests align. With lawmaking at a standstill, the president’s use of executive orders and regulatory discretion has reached a level that Congress views as dictatorial—not that Congress can do anything about it, except file lawsuits that the divided Supreme Court, its three vacancies unfilled, has been unable to resolve.
On Capitol Hill, Speaker Paul Ryan resigned after proving unable to pass a budget, or much else. The House burned through two more speakers and one “acting” speaker, a job invented following four speakerless months. The Senate, meanwhile, is tied in knots by wannabe presidents and aspiring talk-show hosts, who use the chamber as a social-media platform to build their brands by obstructing—well, everything. The Defense Department is among hundreds of agencies that have not been reauthorized, the government has shut down three times, and, yes, it finally happened: The United States briefly defaulted on the national debt, precipitating a market collapse and an economic downturn. No one wanted that outcome, but no one was able to prevent it.
Their degrees may help them secure entry-level jobs, but to advance in their careers, they’ll need much more than technical skills.
American undergraduates are flocking to business programs, and finding plenty of entry-level opportunities. But when businesses go hunting for CEOs or managers, “they will say, a couple of decades out, that I’m looking for a liberal arts grad,” said Judy Samuelson, executive director of the Aspen Institute’s Business and Society Program.
That presents a growing challenge to colleges and universities. Students are clamoring for degrees that will help them secure jobs in a shifting economy, but to succeed in the long term, they’ll require an education that allows them to grow, adapt, and contribute as citizens—and to build successful careers. And it’s why many schools are shaking up their curricula to ensure that undergraduate business majors receive something they may not even know they need—a rigorous liberal-arts education.
The impenetrable Supreme Court justice’s leftward shift and his latest blockbuster of a term.
Some years ago, Dahlia Lithwick and I christened Justice Anthony Kennedy “the Sphinx of Sacramento.” Throughout his nearly 30 years on the Supreme Court, Kennedy’s mind has often seemed like a distant and mysterious country, with its own language and folkways beyond the ken of normal Americans.
Seldom has it seemed more puzzling than at the end of the Court’s 2015 to 2016 term. Kennedy’s votes in two crucial cases—one dealing with affirmative action and the other with abortion—procured important, and surprisingly sweeping, liberal victories on high-profile issues that conservatives care desperately about.
What is the Sphinx up to?
I often violently disagree with Kennedy’s legal judgment, but I cannot help but admire his personal qualities. In public, and from what I can tell in private, he is a man of deep kindness, courtesy, and benevolence, embodying the sort of small-town civic virtue one would expect from a man who left the snake pit of a big San Francisco firm to go into solo practice in Sacramento, California. His opinions seldom display the petty meanness that sometimes disfigures his colleagues’ work.
The Freddie Gray trials illustrate the inability of criminal prosecutions to halt police brutality.
When Baltimore police officer Caesar Goodson Jr., was acquitted Thursday of all charges related to the death of Freddie Gray, the one emotion absent from the courtroom, social media, and the crowds of protesters in the city was surprise. The cases of all six officers alleged to be involved in Gray’s April 2015 death have been tossed about in a sea of strange legal wrangling and reshuffling, but without much real suspense. The trial of Officer Edward Nero ended in a judge’s acquittal, and that of Officer William Porter in a hung jury. All six officers charged in the case remain on administrative, drawing full salaries, pending the outcome of an internal investigation. But it’s likely that these officers will share the fate of most officers accused of killing black people in the line of duty: a return to police work.
At least 41 people were killed and scores injured in bombings Tuesday night at Ataturk airport, one of the busiest in Europe.
Here’s what we know:
—Three suicide bombers opened fire and blew themselves up at Istanbul’s Ataturk International Airport Tuesday night, killing at least 41 people and wounding more than 200. Officials suspect the Islamic State was behind the attack.
—Ataturk is the third-busiest airport in Europe, after London Heathrow and Paris Charles de Gaulle.
—We’re live-blogging the aftermath of the attack, and you can read how it unfolded below. All updates are in Eastern Standard Time (GMT -5).
The Istanbul Governor's Office said the dead included 10 foreign nationals, including three who had dual nationality. The office also said that of the 239 people wounded in the attack, 109 had been discharged from hospital.
Footnotes. Numbers. Detailed proposals. The Donald’s economic address at an aluminum factory in Pennsylvania had it all.
Donald Trump must have hired some researchers.
The famously off-the-cuff orator delivered a surprisingly specific speech on trade, making seven detailed policy pledges while predicting that Hillary Clinton, if elected, would tweak and then sign the enormous Pacific trade pact she now opposes as a candidate for president.
Trump’s address to workers at a Pennsylvania aluminum factory continued his recent effort to lift both the tone and substance of his speeches. But it marked an even bigger departure in its sheer wonkiness.First, his campaign sent out the prepared remarks with 128 footnotes. And in delivering the speech from a teleprompter, Trump delved into such granular policy detail that he referenced specific sections of decades-old trade laws and vowed to invoke “Article 2205” of the North American Free Trade Agreement. Doing so, he said, would withdraw the U.S. from NAFTA if its trading partners don’t agree to renegotiate the Clinton-era accord.
Whether Trump later claims to be born again or passes over the question is irrelevant. Dobson’s statement of hearsay says nothing about Trump’s faith, but it reveals a lot about how some evangelicals are trying to steel themselves to vote for Trump in the fall.
The Supreme Court declined to hear a major religious-freedom case on Tuesday, showing how much things have changed since Hobby Lobby.
Two years ago, the U.S. Supreme Court handed down a controversial 5-4 ruling about birth control and religion, Burwell v. Hobby Lobby Stores, Inc. Because of the ruling, private companies owned by religious people, including the craft-supply chain Hobby Lobby, can now refuse to cover certain kinds of birth control in their employee insurance plans, a requirement that was put in place by the 2010 Affordable Care Act. Supporters of the ruling claimed it as a triumph for religious freedom and an important precedent for cases about conscience-based objections to contraception.
Two years later, a pharmacy chain in Washington state, Stormans Inc., which operates a store in Olympia called Ralph’s Thriftway, has been denied a hearing before the Supreme Court. The pharmacy’s owners, along with two other pharmacists who are also plaintiffs in the case, Stormans, Inc. v. Wiesman, refused to stock emergency contraception, including Plan B and ella, for religious reasons—they believe the pills are effectively abortifacients. Long-standing state regulations require Washington pharmacies to stock a “representative assortment of drugs in order to meet the pharmaceutical needs of ... patients.” The requirements were updated in 2007, specifying that pharmacies must deliver all FDA-approved drugs to customers; they can’t refer people to get medication at a different location for any kind of religious or moral reasons.
There’s more to life than can be measured in monetary returns.
What’s a good use of money?
For investors, that question comes down to a relatively straightforward calculation: Which of the available options has the greatest expected return on the investment?
But investors are far from the only people who are using the “return on investment” framework to weigh different options. “This has become a very, very powerful tool for decision making, not only in business, but in our culture as a whole,” said Moses Pava, an ethicist and a dean of the Sy Syms School of Business at Yeshiva University, at the Aspen Ideas Festival, co-hosted by the Aspen Institute and The Atlantic. In particular, Pava sees this kind of thinking dominating the world of education, both on the part of students in choosing schools and majors, and on the part of school in how they market themselves to potential enrollees. This, he says, will not end well for liberal arts schools.
Fears of civilization-wide idleness are based too much on the downsides of being unemployed in a society premised on the concept of employment.
People have speculated for centuries about a future without work, and today is no different, with academics, writers, and activists once again warning that technology is replacing human workers. Some imagine that the coming work-free world will be defined by inequality: A few wealthy people will own all the capital, and the masses will struggle in an impoverished wasteland.
A different, less paranoid, and not mutually exclusive prediction holds that the future will be a wasteland of a different sort, one characterized by purposelessness: Without jobs to give their lives meaning, people will simply become lazy and depressed. Indeed, today’s unemployed don’t seem to be having a great time. One Gallup poll found that 20 percent of Americans who have been unemployed for at least a year report having depression, double the rate for working Americans. Also, some research suggests that the explanation for rising rates of mortality, mental-health problems, and addiction among poorly-educated, middle-aged people is a shortage of well-paid jobs. Another study shows that people are often happier at work than in their free time. Perhaps this is why many worry about the agonizing dullness of a jobless future.