There's a simple enough way to resolve the mess in Cyprus. It doesn't even involve asking the Germans to pay more or the Cypriots to tax bank deposits. It's called printing money.
A quick recap. Cyprus needs to raise €5.8 billion ($7.4 billion) to rescue its insolvent banks or the European Central Bank (ECB) says it will cut off the "emergency liquidity assistance" (ELA) loans keeping those zombie banks afloat. It's not so easy to come up with €5.8 billion in just a €19 billion economy. So Germany has told Cyprus to tax bank deposits, including supposedly insured amounts below €100,000, to get what it needs. The Cypriot parliament hated that idea and voted in unison to reject the bank-deposit tax on Tuesday.
There are three players here -- Germany, Cyprus, and the ECB -- and each comes with a big hurdle. First, Germany insists it won't hand over any more than the €10 billion it's already committed. Angela Merkel doesn't want to fully bail out the less-than-reputable Russian oligarchs who use the island as a tax haven, particularly in an election year. Second, Cyprus doesn't want to cripple its future as an offshore financial center (although it's too late for that) with any kind of deposit tax. Third, the ECB has to sign off on any agreement.
This is what we call an impasse. Germany doesn't want to pay more, Cyprus doesn't to tax more, and the ECB doesn't want to print more. It's a game of chicken with the future of the euro potentially at stake (again). The question is who moves first. With Germany and Cyprus still quite far apart, it's up to the ECB. After all, the magic of the printing-press would make the Cyprus banking disaster much easier to solve.
Here's how Cyprus could save itself in three, easy steps -- with the ECB's tacit support.
1. Merge Cyprus' Big Banks and then Spin Off a Bad Bank
The best way to deal with the losses in Cypriot banks is to isolate them. This just means putting all the good assets from its biggest banks into a good bank pile. The rest goes into the "bad bank" pile. But how does this improve things? Well, for one, it gives the government an idea of the size of the black hole in bank balance sheets. For another, it replaces two zombie banks that won't lend with one dead bank that won't and one healthy one that will. In other words, it should, albeit slightly, increase the amount of credit in the economy.
2. Convert Uninsured Deposits to Bank CDs
Deposit tax or not, the Cypriot financial system is doomed. Its business model of giving rich Russians a place to park (perhaps ill-gotten) cash and avoid taxes is finished. Just the specter of the deposit tax will be enough to spur deposit flight from abroad.
This capital exodus will only hasten the next bailout. Cypriot banks can afford to lose a bit of their deposit base, but losing too much will turn their balance sheets even more upside down -- and make them even more dependent on ELA funding. It won't be long before the banks need more capital from the Germans.
What is to be done? As Felix Salmon points out, sovereign debt guru Lee Buchheit and Mitu Gulati of Duke University have come up with an elegantly simple solution: Convert uninsured deposit amounts above €100,000 into bank certificates of deposit, or CDs. Now, this wouldn't solve the banks' capital problems now, but it would reduce the banks' capital problems in the future. Banks would give uninsured depositors the choice of accepting either a five- or ten-year bank CD, with the latter offering either a higher interest rate or some kind of natural gas bond as a sweetener. The government would also extend the maturity on its sovereign debt by five years -- which Buchhet and Gulati estimate would save €6.6 billion.
3. Recapitalize the Bad Bank with Government-Guaranteed Natural Gas Bonds
This is where things get tricky. Even if the Cypriot government did all of the above, it would still need to recapitalize the bad bank. And that's still not easy for Cyprus to do. But with a little legerdemain, Cyprus can get the ECB to print what it needs. That is, after all, what Ireland recently did.
There's a wildcard in all of this. Cyprus might have huge natural gas reserves. Upper-end estimates value the hoped-for-reserves at €300 billion, but that's all they are for now: hoped for. Almost none of the reserves have been proved yet. And besides, even if they do exist, it would still be another decade before they came on line. But this could be enough to save Cyprus now. Here's how it would work.
First, securitize future natural gas revenue into long-term bonds. These bonds would have maturities between 25 and 40 years, and the senior-most tranche would go exclusively towards recapping the bad bank. Depositors who term out their accounts could get junior tranches if they prefer the upside risk to a lower interest rate on their CD.
Second, the government guarantees the senior-most tranche of these natural gas bonds. In other words, the government will cover the difference between what these bonds are supposed to pay, and what they do if it turns out there isn't much (or any) natural gas. Now, this looks like a pretty daunting contingent liability for a government with a €19 billion economy, but it's much more manageable over 25 to 40 years.
Third, backload the payments on the bonds.
Fourth, give these government-guaranteed bonds to the bad bank to use as collateral for ELA loans. Let's be clear what this means. These bonds would almost certainly trade far below par, but that's not what the Cypriot government cares about. It cares about giving the bad bank safe-ish assets it can use as collateral for ELA money from the Central Bank of Cyprus. The bad bank gets the capital it needs now, and the government doesn't have to pay much until much later. It's money-printing in disguise. Of course, the ECB Governing Council could overrule this extension of ELA by a two-thirds vote ... but would it would really push Cyprus out of the euro zone if crisis had been averted? Probably not.
I know this sounds incredibly fanciful. Gimmicky, even. A government driven into bankruptcy by its banks can save them, and itself, by issuing some new long-term debt to give them? Really? Well, yes. This kind of alchemy is precisely what Ireland has done.
Like Cyprus, Ireland has an outsized financial sector that made some outsized bets that went bad. Financial bankruptcy turned to national bankruptcy and then bailout after the Irish government guaranteed losses it couldn't possibly guarantee. So far, so bad. But here's where things get interesting. The Irish government nationalized its biggest problem bank, and recapitalized it with promissory notes -- basically, front-loaded government debt instruments. The now-nationalized bank then used these promissory notes as collateral for ELA funding, which allowed it to slowly wind itself down. (Irish economist Karl Whelan has the best explanation of all this, if you want the full wonk).
Then they had a revelation. Wouldn't it be great if they could exchange these promissory notes with their upfront repayments for back-loaded, longer-term bonds? Yes, yes it would. The Irish government ripped up the promissory notes and issued 25-to-40-year bonds to use as collateral instead. (For legal reasons, they also closed down the nationalized bank, and transferred its remaining assets to a bad bank). The ECB could have vetoed this, but it chose not to.
Again, the benefit of all this financial sleight-of-hand was the central bank printed money for Ireland today, and Ireland didn't have to pay it back for many years. As Wolfgang Münchau of the Financial Times explains, it was a deliberately convoluted way of printing money for the government to hide that they were printing money for the government.
Cyprus should pull an Ireland, and force the ECB to make a decision. Either the ECB refuses to accept guaranteed natural gas bonds as collateral, and Cyprus gets booted from the euro, or the ECB relents, and the panic subsides.
In other words, make the ECB decide whether the euro is worth printing 5.8 billion euros.
As it’s moved beyond the George R.R. Martin novels, the series has evolved both for better and for worse.
Well, that was more like it. Sunday night’s Game of Thrones finale, “The Winds of Winter,” was the best episode of the season—the best, perhaps, in a few seasons. It was packed full of major developments—bye, bye, Baelor; hello, Dany’s fleet—but still found the time for some quieter moments, such as Tyrion’s touching acceptance of the role of Hand of the Queen. I was out of town last week and thus unable to take my usual seat at our Game of Thrones roundtable. But I did have some closing thoughts about what the episode—and season six in general—told us about how the show has evolved.
Last season, viewers got a limited taste—principally in the storylines in the North—of how the show would be different once showrunners Benioff and Weiss ran out of material from George R.R. Martin’s novels and had to set out on their own. But it was this season in which that exception truly became the norm. Though Martin long ago supplied Benioff and Weiss with a general narrative blueprint of the major arcs of the story, they can no longer rely on the books scene by scene. Game of Thrones is truly their show now. And thanks to changes in pacing, character development, and plot streamlining, it’s also a markedly different show from the one we watched in seasons one through four—for the worse and, to some degree, for the better.
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.
Readers share their own experiences in an ongoing series.
Prompted by Emma Green’s note on the Supreme Court case Whole Women’s Health v. Hellerstedt, for which a group of lawyers filed a document openly describing their abortions, readers share their own stories in an ongoing collection edited by Chris Bodenner. We are posting a wide range of experiences—from pro-choice and pro-life readers, women and men alike—so if you have an experience not represented so far, please send us a note: firstname.lastname@example.org.
How much do you really need to say to put a sentence together?
Just as fish presumably don’t know they’re wet, many English speakers don’t know that the way their language works is just one of endless ways it could have come out. It’s easy to think that what one’s native language puts words to, and how, reflects the fundamentals of reality.
But languages are strikingly different in the level of detail they require a speaker to provide in order to put a sentence together. In English, for example, here’s a simple sentence that comes to my mind for rather specific reasons related to having small children: “The father said ‘Come here!’” This statement specifies that there is a father, that he conducted the action of speaking in the past, and that he indicated the child should approach him at the location “here.” What else would a language need to do?
The star Daily Show correspondent is moving on to make her own scripted comedy, and her gain is the show’s huge loss.
When Jon Stewart announced he was leaving The Daily Show last year, many fans lobbied for Jessica Williams to replace him, pushing one of the show’s standout performers into a limelight she deemed herself not quite ready for. “Thank you, but I am extremely under-qualified for the job!” Williams tweeted. Comedy Central eventually picked Trevor Noah for the gig, and in the following months, Williams’s star has only risen higher. It’s no huge surprise, then, that on Wednesday she told Entertainment Weekly she was moving on from The Daily Show to develop her own scripted series for Comedy Central. It’s great news for Williams, but a huge loss for the show she’s leaving behind.
The discussion over Williams becoming The Daily Show host in 2015 turned into a minor political maelstrom. Williams publicly pushed back against the idea that she had “impostor syndrome,” as suggested by one writer, for calling herself “under-qualified” and pointing to her young age (25 at the time) as a reason for her disinterest in the position. Indeed, there are a thousand reasons to not want the daily grind of a TV hosting gig, and the heightened scrutiny and criticism Noah has received in his year on the job is among them. But as Williams’s popularity and talents have grown, and as The Daily Show has struggled to retain its critical cachet after Stewart’s departure, it’s been hard not to mourn a different outcome in which Williams took the host job and steered the series in a fresher, more relevant direction.
People in Great Britain felt their leaders weren’t treating them fairly. Politicians in the U.S. should take note.
Britain’s Brexit vote has shocked the political elites of both the U.S. and Europe. The vote wasn’t just about the EU; in fact, polls before the referendum consistently showed that Europe wasn’t top on voters’ lists of concerns. But on both sides of the Atlantic Ocean, large numbers of people feel that the fundamental contracts of capitalism and democracy have been broken. In a capitalist economy, citizens tolerate rich people if they share in the wealth, and in a democracy, they give their consent to be governed if those governing do so in their interest. The Brexit vote was an opportunity for people to tell elites that both promises have been broken. The most effective line of the Leave campaign was “take back control.” It is also Donald Trump’s line.
Questions about the presumptive Republican nominee dominated a press conference of North America’s top leaders, culminating in a rant by President Obama.
NEWS BRIEF Wednesday’s energy summit in Ottawa began awkwardly enough when Canadian Prime Minister Justin Trudeau rather clumsily tried to finagle a three-way handshake with United States President Barack Obama and President Enrique Peña Nieto of Mexico. It only got more awkward when reporters began peppering the North American leaders with questions about Donald Trump.
All three men have harshly criticized the presumptive Republican nominee over the last several months in their home countries. Peña Nieto has compared him to Hitler and Mussolini, Trudeau has said he practices the politics of fear and division, and Obama has denounced his rhetoric on immigration, national security, and just about everything else over the course of the presidential campaign.
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.
As explained back in item #18 of this series, I’m using “the Resistance” and “Vichy Republicans” as useful shorthands for, respectively, the GOP figures who are fighting the hostile takeover of their territory, versus those who have acquiesced to a conquering force — which no doubt they’ll criticize once someone else has dealt with it. (And to make this clear every time, of course the analogy does not extend to likening this era’s conqueror, Donald Trump, to the historically unique Hitler.)
A psychology professor sketches a debate that captivates many in his field.
Asked what propositions are worthy of wider debate, Dan McAdams, a professor of psychology at Northwestern University, wondered how humans arrive at their personalities.
I am a personality and life-span developmental psychologist. Thus, my main activities are teaching, writing, and research. In my field, there are many ideas that are widely and vigorously debated. But it is not clear to me that the public at large is aware of these debates. Actually, “debate” is not quite the right word, because it suggests two diametrically opposed sides who take each other on. A better way to characterize it would be “conversations” among psychological scientists of different persuasions and inclinations, all of whom study the phenomenon of human personality. We may think of personality as the distinctive set of psychological characteristics that distinguish one person from the next. The back-and-forth among psychologists regarding the nature of human personality draws mainly from scientific research and theory, but it is also informed by ideology, culture, and personal experience.
A central question in the field of personality psychology today is this: To what extent is our personality given to us, and to what extent do we make it ourselves?
This is not the same thing as the old “nature versus nurture” debate. It is not so much about genes and environments as it is about the role of human will in the formation of personality. It seems pretty clear that certain foundational features of human personality – such as our basic dispositional traits – feel as if they are given to us. For example, as people move through life, from one situation to the next, they do not typically choose to be, say, “extraverted” or “anxious” or “especially kind and considerate.” “This is just how I am,” an especially extraverted person might say, regarding her tendency to be outgoing and socially dominant. “I can’t help it, I am just a very nervous person,” an individual with high levels of the trait neuroticism might conclude.
People tend to feel that their dispositional traits are given to them – by genes, past experiences, luck, whatever. (And research supports the claim.)
At the same time, there are other features of human personality that feel chosen or made, such as one’s life goals and values and, especially, the story that a person has constructed about life. Life stories – or what psychologists call narrative identities – are a very hot topic today in the psychological sciences.
A person’s life story is an internalized and evolving narrative of the self that reconstructs the past and imagines the future in such a way as to provide life with some sense of meaning and purpose. The story provides a subjective account, told to others and to the self, of how I came to be the person I am becoming. With respect to human personality, people’s stories about their lives (their narrative identities) layer over their dispositional traits. To understand a person well, even if that person is the self, one must understand the basic traits that inform everyday social behavior and the inner story that gives meaning to the person’s life.
The traits are given, it seems; but the stories seem to be made. Human beings, therefore, are simultaneously social actors whose behavior is shaped by given traits and autobiographical authors who make meaning out of their lives through narratives.