Italy Is Next In Line For a Banking Crisis

The Wall Street Journal reports that Italy could be ground zero for the next European economic crisis:

In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.

....The U.K. vote to exit the European Union has compounded the strains on Europe’s banks in general and Italy’s in particular.... Brexit has many executives concerned that central banks will keep interest rates lower for longer than they might otherwise, in an attempt to counteract the slower growth—in the eurozone as well as Britain. European banks’ stocks slid after the vote, with those in Italy especially hurt.

....“Brexit could lead to a full-blown banking crisis in Italy,” said Lorenzo Codogno, former director general at the Italian Treasury. “The risk of a eurozone meltdown is clearly there if Brexit concerns are not immediately addressed.”

It's not clear to me just how bad things really are in Italy, since the Journal compares their level of nonperforming loans to the US, not to peer countries like Portugal or Spain. Even better would be to tell us how Italy's current NPL level compares to past levels. It it really way out of whack historically? Or just mildly worse than usual during this phase of an economic cycle?

That said, it's apparent that Europe's banking sector continues to have problems thanks to the endless can kicking done between 2010 and 2014. The hope that everything would just spontaneously get better if structural problems were ignored long enough was never a great plan, and it still isn't. However, a standard bank bailout isn't possible, thanks to new rules adopted by the EU two years ago. Philipp Hildebrand suggests instead something simpler:

As Angela Merkel, German chancellor, has pointed out, the rules as they stand...permit the temporary shoring-up of banks with public money to make up for a capital shortfall revealed by a regulatory stress test, if raising private capital is not feasible. It is a fortunate coincidence that the 2016 European Banking Authority’s stress test campaign is under way. And it is clear, with most European banks trading far below book value, that raising private capital at this juncture is not a practical option. At the same time, most European banks are perfectly viable, and so resolution is not the way to go.

The European Commission should therefore allow those governments that wish to do so to take temporary equity stakes in banks that need a capital boost. Importantly, state aid rules apply, so this should not be a free handout. Rather, it should be conditional on banks committing to significant steps to address the structural difficulties they face and diversifying income sources. This would be similar to the US Tarp process in 2008 that ended up returning money to taxpayers.

Perhaps so. "Temporary," of course, has a tendency to last a long time in some countries. Still, this might be the best and easiest solution. If Italy thinks it best to rescue its own banks with an equity infusion, they should probably be allowed to do so. Ditto for Portugal, Spain, and other countries with continuing bank sector weakness. I don't know if it would work as well as TARP did—and TARP did work, despite the bad rap it's gotten—since Italy's economy is fundamentally weaker than the US economy ever was. But it's worth a try.

Hillary Clinton Innocent

The FBI has concluded that Hillary Clinton was careless in her use of a personal email server, but that's all. No criminal charges will be brought:

With respect to the thousands of e-mails we found that were not among those produced to State…We found no evidence that any of the additional work-related e-mails were intentionally deleted in an effort to conceal them.

…Although we did not find clear evidence that Secretary Clinton or her colleagues intended to violate laws governing the handling of classified information, there is evidence that they were extremely careless in their handling of very sensitive, highly classified information.

…While not the focus of our investigation, we also developed evidence that the security culture of the State Department in general, and with respect to use of unclassified e-mail systems in particular, was generally lacking in the kind of care for classified information found elsewhere in the government.

…Although there is evidence of potential violations of the statutes regarding the handling of classified information, our judgment is that no reasonable prosecutor would bring such a case…In looking back at our investigations into mishandling or removal of classified information, we cannot find a case that would support bringing criminal charges on these facts. All the cases prosecuted involved some combination of: clearly intentional and willful mishandling of classified information; or vast quantities of materials exposed in such a way as to support an inference of intentional misconduct; or indications of disloyalty to the United States; or efforts to obstruct justice. We do not see those things here.

Even conservatives expected this and have been preparing the ground all weekend to insist that the whole thing was rigged and Hillary really is guilty regardless of what the FBI says. Good luck with that, folks.

Bottom line: Hillary Clinton screwed up. She's admitted this repeatedly. Other investigators have come to the same conclusion. If you want to criticize her for this, that's fine. She deserves it. But there was no criminal intent and essentially no chance that a jury would have convicted her. We've known this for months now. Now we know it officially.

Stephen Rose writes in the Washington Monthly that the middle class is indeed shrinking. But this is good news—if you use a specific measure that he created for no apparent reason. Basically, he took the definitions of rich, middle class, and poor from 1979 and adjusted them for inflation. Then he compared that to incomes in 2014. Voila! More people are in the higher income groups.

This is uninteresting. It's a mathematical consequence of the fact that incomes have grown in real terms since 1979. They haven't grown by a lot for those who aren't rich, but they've grown nonetheless, and that means everyone automatically moves up in 1979 terms. If we did this same exercise for the year 100 AD, we'd find that virtually everyone in the country is now part of the top 1 percent. Big deal. I honestly don't understand what the point of this is supposed to be. It's literally meaningless.

But I nonetheless want to point out what Rose does with his results:

The widening gulf between some middle-class Americans and their neighbors also helps to shed new light on the depth of populist anger. For most Americans, the plutocrats in the top 1% are remote figures whose standard of living is impossible to attain. But it’s another thing to be confronted by the success of those in one’s everyday experience.

As Dennis Gilbert notes in his The American Class Structure in an Age of Growing Inequality, many people without college degree feel disrespected by those with a college degree. Often when they think about the “rich,” it is anyone with $100,000 or more — not those in the true one percent earning $350,000 or more.

....The tensions and resentments of the bottom 70 percent are much more based on interactions of the middle class and lower middle class with the upper middle class than they are with interactions between the middle class and the rich. Couple this with rising uncertainties and anxieties about the future and you have the disappointment and anger that have benefited the populist campaigns of Republican Donald Trump and Democrat Bernie Sanders.

Rose presents no evidence that the gap between the upper middle class and the lower middle class is any greater than it's ever been. Nor does he present any evidence that working class resentment toward the upper middle class is any greater than it was in the past. In the 50s, Joseph McCarthy pretty clearly appealed to resentment against the egghead class. In the 60s, Richard Nixon appealed to hardhats who resented elite opposition to the Vietnam War. "Reagan Democrats" are the stuff of political lore. Newt Gingrich and George Bush made hay with the resentments of evangelicals against latte-sipping liberals who looked down their noses at them. This kind of class-based resentment is nothing new.

So: Is working-class resentment against the upper middle class any greater than it used to be? There's certainly no income-based argument that it is. Nor do I know of any poll-based evidence. Nor even any real anecdotal evidence. As near as I can tell, "real America" has been angry at coastal elites pretty much forever according to the campaign reporting we see every four years.

I wouldn't be surprised if members of the lower middle class are more resentful of elites today than they were in the past. But I'm awfully tired of hearing this asserted endlessly based on nothing much at all. Throw me a bone, folks. Give me some real evidence that the working class is angrier than it's ever been. Anything will do. Polls. Surveys. NSA wiretaps. Something—other than the fact that Donald Trump has a following among a group of Republican voters who have been mad at the eggheads forever and mad at Democrats ever since the Civil Rights Act was passed. What have you got?

Happy 4th of July!

And if you're looking for reasons to be proud of America today, here's a quickie top ten list. Every country makes plenty of mistakes, and we've certainly made our share. But even taking our shortcomings into account, we've done an awful lot right:

  1. We have the most dynamic culture of entrepreneurship in the world.
  2. In the postwar era we have consistently supported free trade, often at our own expense.
  3. We were on the right side of history in the fight against fascism.
  4. We were on the right side of history in the fight against communism.
  5. We are on the right side of history in the fight against terrorism.
  6. We have the strongest protections of speech and religious freedoms in the world.
  7. We protect the world's sea lanes all but single-handedly.
  8. We are the most benign hegemon in world history.
  9. Even today, we accept and incorporate immigrants better than nearly any country in history.
  10. American science is the most vigorous in the world, to the benefit of nearly every person on the globe.

Friday Cat Blogging - 1 July 2016

Whenever we leave the house via the front door—usually to take a walk—the cats wait patiently for us. I don't know how long they'd wait for us before falling asleep, but longer than 20 minutes, anyway. This is what we always come back to: a pair of cats keeping watch out the window, waiting for our return. The only variation comes from Hilbert, who sometimes waits next to the front-door window, hoping he can make an escape when we open the door. He never seems to realize that staring out the window gives the game away.

Here's How To Do Free Trade Right

Jared Bernstein says that Donald Trump has a legitimate point about the problems with American trade agreements:

The process by which they’re negotiated is undemocratic, they uplift investor rights over sovereign rights, they reverse the order in which certain challenges should be tackled, and they fail to deal with currency issues. But globalization cannot nor should not be stopped. Done right, it delivers great benefits to advanced countries through the increased supply of goods, and it helps improve the living standards of workers in developing countries through profits made from trade with wealthier nations. Trump’s tariffs would undermine all of that.

Most liberals agree with this criticism. Until Trump, in fact, opposition to trade deals was mostly limited to liberals—and still is, judging by the number of Republicans who oppose Trump's trade agenda. But as Bernstein says, international trade is basically a good thing. So what should we do to make it fairer? Tariffs and trade wars aren't the answer. Here are Bernstein's five recommendations:

Take action against those who suppress the value of their currencies relative to the dollar.

Change the sequencing of labor and environmental rights. Any benefits to partners in terms of market access must be preceded by confirmation that labor and environmental rights are enforced. That means that countries we enter trade agreements with must offer sustained evidence that conditions on the ground have improved, and that we withdraw trade benefits when there’s evidence of backsliding.

Relocate risk in investor disputes. The current Investor-State Dispute Settlement (ISDS) process is set up in such a way that investors in countries that are signatories to trade deals can, through non-elected tribunals, override the sovereign laws of developing countries....The answer to this problem is to shift this risk away from the broader public and back to the investors themselves. The way to accomplish this is by taking ISDS out of future trade agreements and insisting that investors privately insure themselves against investment losses.

Take a public welfare stance toward patent and copyright protections. Trade agreements should not increase protectionism. They should not extend patents or limit the competition that reduces prices and increases access to needed medicines.

Sunlight disinfects trade agreements. The trade agreement process is uniquely secretive and exclusive — and as a result non-representative of the views of millions of people affected by the deal....This level of secrecy must end. We’re not talking about nuclear codes but about the formulation of policies that will affect the everyday economic lives of every American. US-proposed text and then the texts of agreements after each negotiating round ought to be made publicly available.

Personally, I think the second point is the most important. We talk endlessly about protecting labor in these agreements, but nothing much ever really happens. The only way it will is to insist that labor rights come first, before markets are opened up.

Conversely, I've never been convinced that ISDS is quite the villain it's made out to be. I'm open to argument on this score, but trade agreements always need some kind of enforcement authority outside the nation states themselves, and ISDS is one of them. It's been around for a long time, and really doesn't seem to have done any harm to US interests.

The latest weirdness from the Donald Trump campaign is its June fundraising efforts. Trump is apparently having trouble raising money from the usual Republican suspects, but wants to avoid the embarrassment of yet another FEC report showing that he has no money. So he's turning to small-dollar fundraising via email. This shouldn't have been a problem. Conservatives mastered this approach to raising money a long time ago, so all Trump had to do was hire one of the many firms who have accumulated gigantic email lists and specialize in wringing donations out of ordinary citizens.

But apparently he didn't do that. For the past few days, reports have come in of people overseas being spammed with Trump fundraising emails. And not just any foreigners: members of foreign parliaments. This is peculiar, to say the least. First, it's illegal. Foreigners aren't allowed to contribute to presidential campaigns. Second, it's easy to avoid. Just purge your email list of addresses ending in .uk, .dk, etc. Any experienced email shop would already have done this. So where did Trump's email list come from?

Josh Marshall has been following this for several days, and he has a theory:

So Tim Watts is my new best friend in the Australian federal parliament. MP Tim Watts. Needless to say, we're pals now because he's getting bombarded by the Trump campaign asking for money to fight 'Crooked Hillary'....When I chatted with Tim last night (US Time) he said he'd gotten two more Trump emails in the last 7 hours hours. But when he showed me the emails, something pretty weird was immediately apparent.

They weren't actually just from Trump. One was from the Trump campaign. The other was from a pro-Trump Super Pac called Crippled America PAC.

Now, normally (i.e., completely separate from anything to do with Trump) it would be entirely unremarkable that someone was getting fundraising emails both from a campaign and also Super PACs supporting the campaign. They're likely both buying lists from the same vendor or even different vendors of likely Trump voters.

But remember, Tim is a foreign citizen and part of the government in another country. We've already speculated about the various ways all these foreign legislators could have ended up on Trump's list. The more we've looked into it, it seems increasingly implausible that he got this list from a list vendor. Not impossible just not likely at all. It now seems more probable that the Trump Organization simply had these emails in some business related database and decided to dump them into the email hopper for the fundraising blitz or just found some site that had a zip file of foreign government officials and used that.

....Given what I've said above, the existence of this list almost has to originate in Trump Derpland. A virtual certainty. So how did the same list end up in the hands of a Trump SuperPac? I looked up Crippled America PAC and as of their last filing just a couple weeks ago, they're total budget was $40. No m or b after that $ sign, forty bucks, the price of a fancy dinner. So obviously CAP was just stood up and actually started operating just now. And now they're showing up in Tim's inbox.

Marshall believes that this is a pretty obvious sign of coordination between the Trump campaign and a Trump Super PAC, which is a big non-no. What's more, they didn't even bother trying to hide it. There are undoubtedly ways they could have coordinated while still passing legal muster, but either they didn't have time for that or didn't know they weren't allowed to coordinate or just didn't care.

Wherever the list came from, I guess it's a pretty lousy one: I've gotten several Trump fundraising emails too, and I'm pretty sure there's nothing in my background that suggests I'd be soft touch for a Trump donation. Conversely, I never received a Ben Carson email while he was busy with his campaign grift. Apparently he at least cared enough to hire a decent vendor.

A sample from Monday is on the right. It comes from contact@victoryemails.com, whatever that is. I got another one from rnc@gopvictory.com, which I suppose originates from the Republican National Committee? All very strange.

A few months ago the FCC—or its three Democratic commissioners, anyway—proposed doing away with set-top boxes. They're basically a rip-off, doing next to nothing in return for a monthly rental that lasts forever. The FCC's proposal was for cable companies to make all programming information available in a standard format, so anyone could use it. You could replace your cable company's box with Roku or Apple TV or an app or just buy a box from someone else.

The cable companies all went ballistic, of course, and now the FCC is backing down in the face of an alternative proposal from the cable industry. The proposal itself isn't too bad—it relies on "Consumer Apps" downloaded from the cable companies—but the question is whether the industry is serious about it. The Register's Kieren McCarthy is pretty skeptical:

The cable industry's first target will be to ensure nothing is agreed for six months until after the presidential elections in November. Tom Wheeler's term as FCC chair doesn't officially end until 2018 but traditionally, the FCC chair steps down when a new president comes into office.

Adding to that, and helping to explain her sudden dislike of the cable box plan she voted in favor of, Jessica Rosenworcel's term officially ends this week — 30 June 2016. Even though she has been approved for a second term by President Obama, Congress is dragging out her confirmation in an effort to force Wheeler to resign early. If he resigns, Senate Republicans have said, they will confirm her. Wheeler so far is refusing to blink.

If the Senate doesn't approve Rosenworcel by the end of the year — December 31, 2016 — she has to leave the FCC: a casualty in partisan warfare fed by cable company dollars.

With the FCC taking on the cable industry in so many other ways — net neutrality rules and data privacy rules being just two — it looks as though the regulator has bitten off more than it can chew with its cable box plan.

It was a good idea while it lasted. Unfortunately, Republicans, as usual, are inexplicably opposed to any regulation that increases competition in the TV world. It's unclear why they so consistently take the side of a monopolistic industry hated by consumers, but there you have it.

Good news from Emmanuel Saez:

The latest IRS data show that incomes for the bottom 99 percent of families grew by 3.9 percent over 2014 levels, the best annual growth rate since 1998....

But you knew there had to be a but, right?

....but incomes for those families in the top 1 percent of earners grew even faster, by 7.7 percent, over the same period.

So income inequality continues to increase. Still, over the past two years, the non-super-rich have finally made some gains after seeing their incomes crater during the Great Recession. That's good news as far as it goes. The remaining question is whether this increase is mostly confined to the top 10-20 percent, or if workers in the bottom half of the income distribution also made gains. The chart below, which shows that hourly earnings of production and nonsupervisory workers have increased about 3.2 percent over the past two years, suggests that the working class has done about as well as the overall bottom 99 percent. The gains of the past two years appear to be fairly widely spread.

Donald Trump's Beautiful Chinese Ties

Greg Sargent on Donald Trump's continuing appeal:

One core assumption driving Donald Trump’s presidential candidacy is this: Voters will see even the seamier details of Trump’s business past as a positive, because even if he got rich by milking the corrupt system, Trump is now here to put his inside knowledge of the corrupt system to work on behalf of America — on your behalf. Trump has repeatedly said this himself in various forms.

In other words, he may be a bastard, but he's our bastard. But Sargent wonders if he can survive stuff like the video excerpt on the right. "Where are the ties made?" David Letterman asks. From offstage comes the answer: "The ties are made in China." Trump doesn't even respond. He just smirks. Sargent: "This suggests once again that there is no reason to assume that the big debate over globalization and trade will necessarily play to Trump’s advantage. Democrats will be able to point out that Trump repeatedly profited off of foreign labor in ways that he himself now claims sell out American workers."

Could be! It's not clear at this point that Trump can do anything that his fans won't forgive, but maybe this will do it. For more details, the New York Times has you covered.