Crisis Profits in Greece and Elsewhere

Pending approvals, Greece finally has the bridge loan it has been seeking since March. But instead of the €7 billion Greece needed then, for perhaps as little as one year, the new loan is €86 billion for three years. The €79 billion difference and two extra years reflect the damage done to the economy in Greece by the delay. The national economy went, in three short months, from an even-keel recovery to depression-level functioning in which it was briefly dependent on international food aid. For the eurozone, the delay not only means a higher funding level for Greece right now, but also means it will take three to five extra years of work before the eurozone can be considered stable again, including an increased risk that that task can never be accomplished.

This is not merely a lesson in taking action when the time comes, though. The core eurozone countries have privately profited from the problems in Greece. They have swept up much of the money flowing out of Greece. The German government alone is estimated to have saved €100 billion in interest payments already from the flight-to-safety effect, with private borrowers in Germany saving considerably more than that. Employers across the euro zone have been able to hire skilled workers away from Greece at salaries considerably lower than the free market would have allowed. It is a case of, if not actually manufacturing a crisis, at least prolonging it so that the rich can get richer while the poor get poorer. When naysayers claim that the eurozone is being managed like an empire, this is the kind of effect they are talking about.

Of course, we have seen the same principle in action elsewhere. The mostly manufactured sense of crisis since 2007 in the United States has been hugely beneficial to Wall Street banking, the Detroit automakers, and the fossil fuel sector. In the last case, now that the crisis is fading, coal and oil companies are showing that they may not survive without the chaos windfalls they’ve enjoyed in recent years. More broadly, wherever you see state capitalism, you will find crisis upon crisis as the most well-funded business interests rush to position themselves to profit from the confusion and suffering of everyone else.

This Week in Bank Failures

The theft of $1.5 billion from three banks in Moldova remains a mystery, but what has become clear is that the scheme, originally seen as a vast conspiracy of hundreds of shadowy companies, was substantially carried out by a single well-financed person who had detailed knowledge of banking regulation and ties to Russia, Ukraine, and Britain. The money was taken away over a two-year period through loans to nonexistent businesses, then in one weekend, most of the documents and records were destroyed. Today the central bank ordered the three banks involved, Savings Bank, Social Bank and Unibank, to close. They are immediately prohibited from opening new accounts, and they will be wound down and deposits transferred to other banks in October. The three banks hold 30 percent of the deposits in Moldova, and the scale of the losses has resulted in unpaid government salaries and the closing of public services including hospitals.

The largest U.S. banks are reducing their office space. JPMorgan Chase is vacating a building in New York, moving some jobs to New Jersey. Bank of America will not be renewing its lease on four floors of an office tower in Charlotte.

Promontory Financial Group LLC is effectively banned from advising banks in New York State after regulators looked over the group’s advisory documents, particularly those on money laundering transactions done by Standard Chartered Bank for businesses based in Iran. Regulators found that reports were routinely revised to cover up signs of misconduct at banks. Promontory says regulators don’t have any authority over its work and is preparing a legal challenge to the order.

Standard Chartered Bank reduced its dividend by half and said it would seek additional capital if needed.

U.S. banks had asked the Federal Communications Commission (FCC) to relax rules on telemarketing so that they could place robocalls to cell phones of customers and prospective customers without the customers’ permission. However, the FCC let the existing rules stand and adopted an interpretation that specifically prohibits such calls. Nothing in the telemarketing rules prevents banks from contacting customers by phone, but calls to cell phones cannot be placed by machine.

Guilty: Tom Hayes, a trader at UBS and Citigroup, was sentenced to 9 1/2 years in prison after being convicted of leading an international syndicate that rigged Libor rates. Hayes continued his rate-rigging scheme even after learning that he was facing a criminal investigation. Hayes had little to offer in his own defense, admitting that he routinely requested false rate reports, but claiming that this was a standard practice at both banks and that he never gave any thought to the consequences of his actions. Hayes was found guilty on all eight charges he faced in the first Libor case to go to trial.

The NCUA liquidated New Bethel Federal Credit Union in Virginia. It had been in conservatorship since April 30. It had 172 members.

High Costs and Coal Bankruptcies

The U.S. coal industry is in long-term decline according to an analysis by Keith Goldberg at Law360. Four major U.S. coal mining companies have filed for bankruptcy protection this year, but bankruptcy does not provide an easy way for coal companies to avoid the high costs of operating a coal mine. The costs continue after a mine is closed, with the cost of cleaning up the mining site and the ongoing costs of health care for miners. These are costs that coal companies pay only about half of, but that still may be more than some of them can afford.

The market price of coal has never covered all the costs of coal mining. For a recent example, see a coal mining project in Australia that was approved only because regulators illegally disregarded some of the costs. The only solution when production costs are too high is to start to phase out the less favorable mines. That will be a difficult transition for an industry that sees itself as expanding, but it is hard to see where new markets for coal will be found. As it is, coal is too expensive as an energy source to use for much beyond generating electricity and making steel. In electricity, coal is squeezed by falling prices for natural gas and solar. We have already seen aging coal power plants shut down in cost-cutting moves, and this will affect more and more of the electricity supply as solar installation prices fall. Official policies in the two largest coal-consuming countries, China and the United States, point toward a phase-out of coal within the next 80 years. This combination of market forces and official policy have already created a glut of coal in the international market. Facing high costs and declining demand, some of the coal mines that fall into bankruptcy this year and next will ultimately have to shut down.

Spicy Food Linked to Longevity

A longitudinal study found that people who ate spicy food more often were less likely to die over a seven-year period. At The Washington Post:

Hot topic: Could regularly eating spicy foods help you live longer?

This is a highly credible study because of its size, with half a million participants, and its duration, with some participants recorded for as long as ten years. However, the mechanisms by which spices are associated with better health are not known.

The researchers speculated about a link to capsaicin, the primary cause of the hot effect of peppers and several other spices. One possible mechanism could be that capsaicin and other components of spices might kill fungi, bacteria, and other parasitic organisms inside the human body, but even this obvious theory has not been well studied. Capsaicin and curcumin, another common spice component, have antioxidant effects that have been measured, and peppers contain other known antioxidants, including vitamin C. The antioxidant effect might provide part of the explanation. Another possibility is that the nutrients in peppers and other spicy vegetables, which include vitamins, minerals, and enzymes, are an important factor. But the answer could also be as simple as hydration, if spicy foods prompt eaters to drink more water.

The Durability Trend

There is a trend toward more durable products, and one way this is seen is in a downward trend in manufacturing volume. Recent statistics point to actual declines in manufacturing in only a few places, but one of those places is China, the world’s biggest manufacturing country and a place where we came to expect rapid growth every year.

The durability trend can be seen everywhere you turn. These are a few examples:

• The no-new-clothing fashion trend of 2009-2011, made possible by the large amount of not-worn-out clothing in the closet
• LED light bulbs, which may last nearly as long as the sockets they attach to
• Today’s sustainable-energy announcement from the White House, which emphasizes electrical generation technology that last longer than traditional fuel-burning power plants
• The 20-year-old cars on the road, as common as 10-year-old cars were a generation ago
• Laptop computers that last 5 years instead of 18 months
• The widespread replacement of tape with disk for information storage a decade ago, and the current move from disk to flash memory
• The prominence of manufacturers that design for durability, such as Apple, Toyota, and Ikea
• Batteries that promise longer life
• Advancements in glass for greater impact and scratch resistance
• A resurgence in hardcover books compared to paperbacks

In general, durability leads to a decrease in manufacturing, as products are not replaced as often. The higher prices of the more durable designs may partly make up for this but can never fully cover the decline in manufacturing volume. A greater reliance on durable goods tends to lead to geopolitical stability, as the timing of product deliveries is no longer so sensitive. On the other hand, as goods become more durable, purchases are more easily postponed, and this might to a more pronounced business cycle as people facing financial pressure may cut back sharply on spending.

Consumers will insist on improved durability in categories such as tools as they own more and more manufactured products. In the last century, consumers have gone from owning around 100 items to owning around 10,000. Replacing 10,000 items every couple of years would be too much to ask, so products will have to last longer.