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.
The passing of Antonin Scalia roils the presidential campaign and could leave the Supreme Court deadlocked until 2017. Will the Senate even consider a replacement nominated by President Obama?
The sudden death of Antonin Scalia, an associate justice of the United States Supreme Court, on Saturday morning will shake up American politics like few events in recent memory, reshaping the 2016 presidential campaign and potentially leaving the Supreme Court deadlocked for more than a year.
In the short term, President Obama will have to decide who to nominate to replace the voluble conservative jurist, and the Republican-led Senate will have to decide whether to even consider the president’s pick in the heat of the election campaign. Majority Leader Mitch McConnell immediately signaled that an Obama nominee would not get a vote this year. “The American people should have a voice in the selection of their next Supreme Court justice,” the Kentucky Republican said in a statement. “Therefore, this vacancy should not be filled until we have a new president.” CNN reported Saturday evening that Obama intends to nominate a new Supreme Court justice, setting up a potential confrontation with Republicans that would play out both on Capitol Hill and on the campaign trail.
The number of American teens who excel at advanced math has surged. Why?
On a sultry evening last July, a tall, soft-spoken 17-year-old named David Stoner and nearly 600 other math whizzes from all over the world sat huddled in small groups around wicker bistro tables, talking in low voices and obsessively refreshing the browsers on their laptops. The air in the cavernous lobby of the Lotus Hotel Pang Suan Kaew in Chiang Mai, Thailand, was humid, recalls Stoner, whose light South Carolina accent warms his carefully chosen words. The tension in the room made it seem especially heavy, like the atmosphere at a high-stakes poker tournament.
Stoner and five teammates were representing the United States in the 56th International Mathematical Olympiad. They figured they’d done pretty well over the two days of competition. God knows, they’d trained hard. Stoner, like his teammates, had endured a grueling regime for more than a year—practicing tricky problems over breakfast before school and taking on more problems late into the evening after he completed the homework for his college-level math classes. Sometimes, he sketched out proofs on the large dry-erase board his dad had installed in his bedroom. Most nights, he put himself to sleep reading books like New Problems in Euclidean Geometry and An Introduction to Diophantine Equations.
Does his faith influence his judicial decision making?
March was a hugely important month for religion and the Supreme Court, and a pivotal moment for Justice Antonin Scalia, the subject of a fat new biography. Too bad we couldn’t talk plainly about what was, and is, at stake. In a country historically averse to political debates about competing faiths, nowhere is frank discussion of religion more taboo than at the U.S. Supreme Court. “Religion is the third rail of Supreme Court politics. It’s not something that’s talked about in polite company,” as Jeff Shesol, the author of a book about the New Deal Court, put it. He was speaking with NPR’s Nina Totenberg in 2010, when John Paul Stevens was looking at retirement and, for the first time in American history, there was the prospect of six Catholics, three Jews, and no Protestants on the highest court in the land—a watershed almost too “radioactive,” Totenberg remarked, even to note. And beware of venturing any further than that, as the University of Chicago Law School’s Geoffrey Stone did in a controversial 2007 blog post suggesting that the Supreme Court’s five conservatives likely derived their abortion views from Catholic doctrine: Scalia—a devout Catholic, and the current Court’s longest-serving conservative—announced a boycott of the school until Stone leaves the faculty.
Today’s empires are born on the web, and exert tremendous power in the material world.
Mark Zuckerberg hasn’t had the best week.
First, Facebook’s Free Basics platform was effectively banned in India. Then, a high-profile member of Facebook’s board of directors, the venture capitalist Marc Andreessen, sounded off about the decision to his nearly half-a-million Twitter followers with a stunning comment.
“Anti-colonialism has been economically catastrophic for the Indian people for decades,” Andreessen wrote. “Why stop now?”
After that, the Internet went nuts.
Andreessen deleted his tweet, apologized, and underscored that he is “100 percent opposed to colonialism” and “100 percent in favor of independence and freedom.” Zuckerberg, Facebook’s CEO, followed up with his own Facebook post to say Andreessen’s comment was “deeply upsetting” to him, and not representative of the way he thinks “at all.”
Einstein’s gravitational waves rest on a genuinely radical idea.
After decades of anticipation, we have directly detected gravitational waves—ripples in spacetime traveling at the speed of light through the universe. Scientists at LIGO (the Laser Interferometic Gravitational-wave Observatory) have announced that they have measured waves coming from the inspiral of two massive black holes, providing a spectacular confirmation of Albert Einstein’s general theory of relativity, whose hundredth anniversary was celebrated just last year.
Finding gravitational waves indicates that Einstein was (once again) right, and opens a new window onto energetic events occurring around the universe. But there’s a deeper lesson, as well: a reminder of the central importance of locality, an idea that underlies much of modern physics.
This isn’t a new problem for women. Our skinny jeans have pockets, but there is no way an object bigger than a standard issue ID card fits in the front, and everyone knows that slipping a phone in your back pocket is an invitation for a treacherous dive into a toilet, or a backflip resulting in heartbreaking shatters. Purses have enclosures that were once suitable for the flip phone generation but have since become too snug for newer models. Throwing it into the main compartment seems risky, at best.
This wasn’t terribly surprising. When Streep was asked, last year, in the course of promoting her extremely feminist film Suffragette, whether she is herself a feminist, the actor replied that, no, she isn’t. Instead: “I am a humanist,” she said. “I am for nice, easy balance.”
And why stopping it requires that governments get out of the way
As it stands, the international coalition is far from winning the information war against the Islamic State. Its air strikes may be squeezing the group in Iraq and Syria and killing many of its leaders, but that has not halted the self-proclaimed caliphate’s ideological momentum. Indeed, at the end of 2015, it was estimated that the number of foreigners travelling to join militant groups in Iraq and Syria—predominantly the Islamic State—had more than doubled in the course of just 18 months. What’s more, while these figures may be striking, sheer numbers are less important than intent when it comes to the organization’s actual threat to the world. As we have already seen, it takes a very small number of people to unleash great terror, whether in Iraq, Syria, or elsewhere.
Ben Stiller’s follow-up to his own comedy classic is a downright bummer, no matter how many celebrity cameos it tries to cram in.
You don’t need to go to the theater to get the full experience of Zoolander 2. Simply get your hands on a copy of the original, watch it, and then yell a bunch of unfunny topical lines every time somebody tells a joke. That’s how it feels to watch Ben Stiller’s sequel to his 2001 spoof of the fashion industry: Zoolander 2 takes pains to reference every successful gag you remember from the original, and then embellish them in painful—often offensive, almost always outdated—fashion. It’s a film that has no real reason to exist, and it spends its entire running time reaffirming that fact.
The original Zoolander, to be fair, had no business being as funny as it was—it made fun of an industry that already seems to exist in a constant state of self-parody, and much of its humor relied on simple malapropisms and sight gags. But it was hilarious anyway as a candid snapshot of the fizzling-out of ’90s culture. Like almost any zeitgeist comedy, it belonged to a particular moment—and boy, should it have stayed there. With Zoolander 2, Stiller (who directed, co-wrote, and stars) tries to recapture the magic of 2001 by referencing its past glories with increasing desperation, perhaps to avoid the fact that he has nothing new to say about the fashion industry or celebrity culture 15 years laters.
How those three little words sound around the world
I love saying “I love you.” I’ll say “love ya” to my parents when I’m about to get off the phone with them, and “love you!!” to my wife as she’s heading out the door for work (“love you???” on Gchat means I’ve gotten myself into trouble with her and I’m searching for a way out). I tell my son I love him, and he doesn’t even get it—he’s an infant. I’ve been known to proclaim that I love sushi and football and Benjamin Franklin (I mean, how could you not love Ben?).
Many people in this world would find my behavior rather strange. That’s because Americans are exceptionally promiscuous when it comes to professing their love. In the United States, “I love you” is at once exalted and devalued. It can mean everything ... or nothing at all. This is not universally the case.