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 First Lady took to the stage at the Democratic National Convention, and united a divided hall.
Most convention speeches are forgotten almost before they’re finished. But tonight in Philadelphia, Michelle Obama delivered a speech that will be replayed, quoted, and anthologized for years. It was as pure a piece of political oratory as this campaign has offered, and instantly entered the pantheon of great convention speeches.
Obama stepped out onto a stage in front of a divided party, including delegates who had booed almost every mention of the presumptive nominee. And she delivered a speech that united the hall, bringing it to its feet.
She did it, moreover, her own way—forming a striking contrast with the night’s other speakers. She did it without shouting at the crowd. Without overtly slamming Republicans. Without turning explicitly negative. Her speech was laden with sharp barbs, but she delivered them calmly, sometimes wryly, biting her lower lip, hitting her cadence. It was a masterful performance.
A 30-step review of the mayhem in Philadelphia, and what Clinton’s convention says about the future of the American political system.
Hillary Clinton, her advisers, and their allies at the Democratic National Committee watched Donald Trump’s nominating convention in Cleveland with smug satisfaction.
Team Trump had insulted Ohio’s governor, approved a Melania Trump speech that plagiarized Michelle Obama, lied about the plagiarism, and allowed Ted Cruz to expose party divisions in a prime-time speech.
“Hey @Reince,” Democratic National Committee chairwoman Debbie Wasserman Schultz tweeted GOP chairman Reince Priebus. “I’m in Cleveland if you need another chair to keep your convention in order.”
Schultz reflected the Democratic establishment’s false sense of security. Headed to their convention in Philadelphia, Democrats felt more united than Republicans, better organized, and less vulnerable to the long-term disruption of a populist insurgency.
All hell broke loose.
WikiLeaks released 20,000 emails stolen from DNC computers, proof of the worst-kept secret in Democratic politics: The party worked against socialist-populist Bernie Sanders to ease Hillary Clinton’s path to the nomination. The FBI said it would investigate whether Russia hacked the DNC to influence the U.S. election.
All hell broke loose.
“Lock her up!” chanted Democratic activists in the streets of Philadelphia. These Sanders supporters carried signs and wore T-shirts that called for Clinton’s indictment, channeling those GOP delegates in Cleveland who drew rebukes for defying old rules of political decorum.
Schultz cut a deal with the Clinton team to resign, effective upon the conclusion of the convention. She planned to open and close the gathering with remarks lauding her leadership.
All hell broke loose.
Addressing delegates from her home state of Florida, Shultz chastised an unruly crowd carrying signs reading “Division!” and “EMAILS.” She said, “We know that the voices in this room that are standing up and being disruptive, we know that is not the Florida we know.”
“Shame! Shame! Shame!” crowd members chanted. Schultz scurried out of the room.
Sanders himself tried to prevent a show of disunity on the convention floor, pleading with his supporters to back Clinton. Having promised his followers “a revolution,” he now fed them bitter pragmatism. “Brothers and sisters,” Sanders said, “this is the real world that we live in.”
All hell broke loose.
While the streets filled with a sweaty mass of angry Sanders supporters—mostly young and white and disconnected from the political system—the Clinton team told Shultz she couldn’t address the convention.
Sanders sent his supporters a text message, urging them not to protest on the convention floor.
All hell broke loose.
As the convention came to order, hundreds of Democrats protested outside. “No, no, DNC—we won’t vote for Hillary!”
Inside, Cynthia Hale mentioned Clinton’s name during the opening prayer. Some delegates booed, others chanted for Sanders.
There would be more protests.
Eventually, Clinton likely will regain control of her convention. Like in Cleveland, the desire to defeat a hated enemy will overcome internal differences. The blues will line up against the reds, Wall Street will support both teams, Clinton will win in November, and the status quo will declare victory over change. Populist unrest will broaden and intensify.
Or Trump will win. He won’t keep his promises, because he never does. He won’t make America any greater than it already is. He might make it worse. The status quo will declare victory over change. Populist unrest will broaden and intensify.
Whether it’s Clinton or Trump, historians will note how a billionaire celebrity took over the GOP with an anti-trade, anti-immigration nativism, setting fire to the political playbook that guided campaigns for the last half of the 20th century and the first decade of the 21st.
Today will be long remembered, too. Sanders couldn’t calm the churning of his supporters and, as in a mutiny aboard a pirate ship, the deckhands have seized control from the captain.
This could be the start of something big inside the Democratic Party. What if, for instance, Sanders’s coalition banded together with Black Lives Matters to create Tea Party-like takeover of the Democratic Party?
People have witnessed disruption in the retail, entertainment, and financial industries—in virtually every institution except for government and politics. In an era of choice and technological efficiency, the American voter is given a binary choice and gridlocked government.
Most Americans want something better than what the Democratic-Republican duopoly crams down their throats.
They’re mad as hell and, as evidenced in Cleveland and Philadelphia, they’re just starting to realize how powerful they are. They don’t need to take it anymore.
The Vermont senator closed the first night of the Democratic National Convention in Philadelphia with a show of unity, but his supporters weren’t necessarily with him.
After a contentious start to the Democratic convention, Bernie Sanders took the stage at the end of the night on Monday, to an adoring crowd. By the time he left, he did not seem to have succeeded in convincing his most ardent supporters to stand with Hillary Clinton.
Sanders framed the election as a clear choice between the threat of Donald Trump in the White House, and the far better outcome of a President Hillary Clinton. “We need leadership, which brings our people together and makes us stronger—not leadership which insults Latinos, Muslims, women, African Americans, and veterans and divides us up,” Sanders warned. “By these measures, any objective observer will conclude that—based on her ideas and her leadership—Hillary Clinton must become the next president of the United States. The choice is not even close.” The line met with loud cheers and applause.
As the Democratic National Convention prepares to kick off, a massive leak of hacked emails renews old questions about how the Clintons and their associates operate.
PHILADELPHIA—What’s with Hillary Clinton and email? The Democratic presidential nominee who shattered her credibility over a rogue email system while serving as secretary of state now must deal with an electronic snafu at the Democratic National Committee.
Among 20,000 DNC emails posted by WikiLeaks on the eve of Clinton’s nominating convention, there are scores in which party employees criticized and mocked Bernie Sanders during his primary campaign against Clinton. (Caveat: We don’t formally know the emails are authentic).
The email dump jeopardizes Clinton’s ability to unify the party in Philadelphia and avoid the public fratricide that spoiled Donald Trump’s convention in Cleveland. While some of the DNC emails criticized Clinton, the overwhelming number of anti-Sanders correspondences create an indelible impression that the DNC violated its oath of neutrality.
The pressures of national academic standards have pushed character education out of the classroom.
A few months ago, I presented the following scenario to my junior English students: Your boyfriend or girlfriend has committed a felony, during which other people were badly harmed. Should you or should you not turn him or her into the police?
The class immediately erupted with commentary. It was obvious, they said, that loyalty was paramount—not a single student said they’d “snitch.” They were unequivocally unconcerned about who was harmed in this hypothetical scenario. This troubled me.
This discussion was part of an introduction to an essay assignment about whether Americans should pay more for ethically produced food. We continued discussing other dilemmas, and the kids were more engaged that they’d been in weeks, grappling with big questions about values, character, and right versus wrong as I attempted to expand their thinking about who and what is affected—and why it matters—by their caloric choices.
Ask yourself, is all that wasted time really rewarding? And other tips from Charles Duhigg, who wrote the book on productivity.
Why is it that the more work I have to do, the more the Internet beckons me into its endless maw of distraction? Oh Lord, I will say, appealing both to myself and to whatever blog-God might be listening, I have an hour to finish this article.
But first, isn’t this Tasty video fascinating? I’ve never thought about making buffalo-fried cheese nuggets before, but now that I’ve watched a pair of disembodied hands prepare them so expertly, I should definitely head over to Amazon and Prime me some buffalo sauce.
This is how I found myself, exhausted after leaving work at 8 p.m. one day recently, flopping onto my bed, still in my pencil skirt, and clicking open a horrific, traffic-mongering slideshow linked from the bottom of an article I was reading. It was about Stars Without Makeup or What Child Stars Look Like Now or some other rancid meat for my hungry lizard brain.
Hillary Clinton is running as the candidate of continuity—but Bernie Sanders, Elizabeth Warren, and most white Democrats think America is headed in the wrong direction.
Many commentators, watching the two party’s conventions, have noted that Democrats and Republicans seemed to describing different countries. But if you listened carefully last night, you heard two groups of Democrats describing different countries too.
The night began with Michelle Obama, who said, “I wake up every morning in a house that was built by slaves. And I watch my daughters—two beautiful intelligent black young women—play with the dog on the White House lawn. And because of Hillary Clinton, my daughters and all of our sons and daughters now take for granted that a woman can be president of the United States. Don't let anyone ever tell you that this country is not great. That somehow we need to make it great again. Because this right now is the greatest country on Earth.”
The president’s belief in policies that can benefit all Americans is being repudiated by voters, in favor of a vision of politics as a zero-sum game.
The 2016 presidential race represents a vivid rejection of the Obama style. This is easy to miss: His approval ratings are climbing, and Hillary Clinton won the Democratic primary by running as his successor. But the two most dramatic and portentous campaigns of the year, Donald Trump’s vertiginous win and Bernie Sanders’s astonishing insurgency, both flew in the face of the Obama era’s premises.
The Obama style had two pillars. He brought to apotheosis the American political tradition of redemptive constitutionalism. This is the creed of Abraham Lincoln’s Gettysburg Address and Second Inaugural, Martin Luther King Jr.’s “I Have a Dream” speech, and Lyndon Baines Johnson’s nationally televised speech on the Voting Rights Acts of 1965, in which he promised, “we shall overcome.” Redemptive constitutionalism holds that democracy and equal freedom really are the nation’s foundations, that slavery and Jim Crow were terrible deviations from these principles, and that, if we manage to take them seriously, to live by them, Americans will finally be free together.
Physicists can’t agree on whether the flow of future to past is real or a mental construct.
Einstein once described his friend Michele Besso as “the best sounding board in Europe” for scientific ideas. They attended university together in Zurich; later they were colleagues at the patent office in Bern. When Besso died in the spring of 1955, Einstein—knowing that his own time was also running out—wrote a now-famous letter to Besso’s family. “Now he has departed this strange world a little ahead of me,” Einstein wrote of his friend’s passing. “That signifies nothing. For us believing physicists, the distinction between past, present, and future is only a stubbornly persistent illusion.”
Einstein’s statement was not merely an attempt at consolation. Many physicists argue that Einstein’s position is implied by the two pillars of modern physics: Einstein’s masterpiece, the general theory of relativity, and the Standard Model of particle physics. The laws that underlie these theories are time-symmetric—that is, the physics they describe is the same, regardless of whether the variable called “time” increases or decreases. Moreover, they say nothing at all about the point we call “now”—a special moment (or so it appears) for us, but seemingly undefined when we talk about the universe at large. The resulting timeless cosmos is sometimes called a “block universe”—a static block of space-time in which any flow of time, or passage through it, must presumably be a mental construct or other illusion.
Close your eyes and imagine that ahacking group backed by Russian President Vladimir Putin broke into the email system of a major U.S. political party. The group stole thousands of sensitive messages and then published them through an obliging third party in a way that was strategically timed to influence the United States presidential election. Now open your eyes, because it looks like that’s what just happened.
On Friday, Wikileaks published 20,000 emails stolen from the Democratic National Committee. They reveal, among other things, thuggish infighting, a push by a top DNC official to use Bernie Sanders’s religious convictions against him in the South, and attempts to strong-arm media outlets. In other words, they reveal the Washington campaign monster for what it is.