The Europeans try to Shake Down the World with their Emission Trading Scheme but China, Russia, India and the US fight Back

Posted by PITHOCRATES - March 18th, 2012

Week in Review

The European Union thought that they had struck gold.  Their little Emission Trading Scheme.  Which would force foreign governments to fund a large portion of their chronic budget deficits.  By forcing them to buy permits to emit carbon in their airspace.  As well as other nations ‘ airspace.  Even in airspace over the high seas.  A bold scheme their Emission Trading Scheme.  Though not strictly legal.  And requiring a submissive airline industry that has no problem saying “make me your bitch” to the Europeans.   Which doesn’t look to be the case (see U.S. sides with China against airlines emissions tax by Tim Devaney posted 3/15/2012 on The Washington Times).

The European Union’s plan to impose a tax on international airlines for their carbon emissions has run into fierce head winds, with the Obama administration joining China, India and other powers in a growing global drive to force the EU to back down…

“It’s a tricky one: Fight a trade war with the entire world, or back down,” said Richard Aboulafia, vice president of analysis at Virginia-based Teal Group. “I’m thinking they’re going to back down.”

China is one of the biggest opponents of the plan, which would tax airlines for their carbon outputs for flights to or from Europe. The controversial part of the tax, which has drawn complaints that the fee is illegal under international trade law, is that it is assessed based on the entirety of the flight distance, not just the part spent over European airspace.

Hitting back at Europe where it counts, China has canceled plans to purchase 55 jets worth $14 billion from Airbus.

On Thursday, it suspended a purchase of 10 Airbus A330s, a move made just days after Airbus complained to European politicians about China having put off buying 10 A380 superjumbos and 35 A330s.

China and Russia have said their airlines will not comply with the emissions charge, which could keep their carriers from traveling to Europe altogether. Congress has considered a similar measure.

At a meeting last month in Moscow, almost 30 countries adopted a resolution threatening Europe with eight forms of retaliation they would consider if the charge is not scrapped. Among those measures are bringing legal cases before international trade forums, not granting European carriers landing rights and routes, and new levies against EU national airlines…

Airlines aren’t necessarily opposed to paying for their emissions in European airspace, which is unquestionably under EU jurisdiction, but chafe at being charged for emissions over other parts of the world. For example, European airspace takes up only 9 percent of a flight from San Francisco to London, according to Airlines for America. The rest is over the U.S., Canada and the high seas, but airlines would be charged for the entire 5,371-mile trip.

Money talks and a silly Emission Trading Scheme walks.  Or soon will.  Unless the Europeans want to take on the whole world.  Plunging the international economy into a trade war.  Could they be so arrogant?  Well that’s a silly question.  Of course they can be.  But will they put their silly environmentalism where their economies are?  And do they think the world is so ignorant not to see that this is just a way to get others to pay for their chronic budget deficits?  The world is betting they’re not.  And will back down.  Which they’d be wise to do.  For if they thought they had deficit problems before an international trade war directed at them they ain’t seen nothing yet.

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Financial Crises: The Fed Giveth and the Fed Taketh Away

Posted by PITHOCRATES - December 3rd, 2010

Great Depression vs. Great Recession

Ben Bernanke is a genius.  I guess.  That’s what they keep saying at least. 

The chairman of the Federal Reserve is a student of the Great Depression, that great lesson of how NOT to implement monetary policy.  And because of his knowledge of this past great Federal Reserve boondoggle, who better to fix the present great Federal Reserve boondoggle?  What we affectionately call the Great Recession.

There are similarities between the two.  Government caused both.  But there are differences.  Bad fiscal policy brought on a recession in the 1920s.  Then bad monetary policy exasperated the problem into the Great Depression. 

Bad monetary policy played a more prominent role in the present crisis.  It was a combination of cheap money and aggressive government policy to put people into houses they couldn’t afford that set off an international debt bomb.  Thanks to Fannie Mae and Freddie Mac buying highly risky mortgages and selling them as ‘safe’ yet high-yield investments.  Those rascally things we call derivatives.

The Great Depression suffered massive bank failures because the lender of last resort (the Fed) didn’t lend.  In fact, they made it more difficult to borrow money when banks needed money most.  Why did they do this?  They thought rich people were using cheap money to invest in the stock market.  So they made money more expensive to borrow to prevent this ‘speculation’.

The Great Recession suffered massive bank failures because people took on great debt in ideal times (low interest rates and increasing home values).  When the ‘ideal’ became real (rising interest rates and falling home values), surprise surprise, these people couldn’t pay their mortgages anymore.  And all those derivatives became worthless. 

The Great Depression:  Lessons Learned.  And not Learned.

Warren G. Harding appointed Andrew Mellon as his Secretary of the Treasury.  A brilliant appointment.  The Harding administration cut taxes.  The economy surged.  Lesson learned?  Lower taxes stimulate the economy.  And brings more money into the treasury.

The Progressives in Washington, though, needed to buy votes.  So they tinkered.  They tried to protect American farmers from their own productivity.  And American manufacturers.  Also from their own productivity.  Their protectionist policies led to tariffs and an international trade war.  Lesson not learned?  When government tinkers bad things happen to the economy.

Then the Fed stepped in.  They saw economic activity.  And a weakening dollar (low interest rates were feeding the economic expansion).  So they strengthened the dollar.  To keep people from ‘speculating’ in the stock money with borrowed money.  And to meet international exchange rate requirements.  This led to bank failures and the Great Depression.  Lesson not learned?   When government tinkers bad things happen to the economy.

Easy Money Begets Bad Debt which Begets Financial Crisis

It would appear that Ben Bernanke et al learned only some of the lessons of the Great Depression.  In particular, the one about the Fed’s huge mistake in tightening the money supply.  No.  They would never do that again.  Next time, they would open the flood gates (see Fed aid in financial crisis went beyond U.S. banks to industry, foreign firms by Jia Lynn Yang, Neil Irwin and David S. Hilzenrath posted 12/2/2010 on The Washington Post).

The financial crisis stretched even farther across the economy than many had realized, as new disclosures show the Federal Reserve rushed trillions of dollars in emergency aid not just to Wall Street but also to motorcycle makers, telecom firms and foreign-owned banks in 2008 and 2009.

The Fed’s efforts to prop up the financial sector reached across a broad spectrum of the economy, benefiting stalwarts of American industry including General Electric and Caterpillar and household-name companies such as Verizon, Harley-Davidson and Toyota. The central bank’s aid programs also supported U.S. subsidiaries of banks based in East Asia, Europe and Canada while rescuing money-market mutual funds held by millions of Americans.

The Fed learned its lesson.  Their easy money gave us all that bad debt.  And we all learned just how bad ‘bad debt’ can be.  They wouldn’t make that mistake again.

The data also demonstrate how the Fed, in its scramble to keep the financial system afloat, eventually lowered its standards for the kind of collateral it allowed participating banks to post. From Citigroup, for instance, it accepted $156 million in triple-C collateral or lower – grades that indicate that the assets carried the greatest risk of default.

Well, maybe next time.

You Don’t Stop a Run by Starting a Run

With the cat out of the bag, people want to know who got these loans.  And how much each got.  But the Fed is not telling (see Fed ID’s companies that used crisis aid programs by Jeannine Aversa, AP Economics Writer, posted 12/1/2010 on Yahoo! News).

The Fed didn’t take part in that appeal. What the court case could require — but the Fed isn’t providing Wednesday — are the names of commercial banks that got low-cost emergency loans from the Fed’s “discount window” during the crisis.

The Fed has long acted as a lender of last resort, offering commercial banks loans through its discount window when they couldn’t obtain financing elsewhere. The Fed has kept secret the identities of such borrowers. It’s expressed fear that naming such a bank could cause a run on it, defeating the purpose of the program.

I can’t argue with that.  For this was an important lesson of the Great Depression.  When you’re trying to stop bank runs, you don’t advertise which banks are having financial problems.  A bank can survive a run.  If everyone doesn’t try to withdraw their money at the same time.  Which they may if the Fed advertises that a bank is going through difficult times.

When Fiscal Responsibility Fails, Try Extortion

Why does government always tinker and get themselves into trouble?  Because they like to spend money.  And control things.  No matter what the lessons of history have taught us.

Cutting taxes stimulate the economy.  But it doesn’t buy votes.  You need people to be dependent on government for that.  So no matter what mess government makes, they NEVER fix their mess by shrinking government or cutting taxes.  Even at the city level. 

When over budget what does a city do?  Why, they go to a favored tactic.  Threaten our personal safety (see Camden City Council Approves Massive Police And Fire Layoffs Reported by David Madden, KYW Newsradio 1060, posted 12/2/2010 on philadelphia.cbslocal.com).

Camden City Council, as expected, voted Thursday to lay off almost 400 workers, half of them police officers and firefighters, to bridge a $26.5 million deficit.

There’s a word for this.  And it’s not fiscal responsibility.  Some would call it extortion.

It’s never the pay and benefits of the other city workers.  It’s always the cops and firefighters.  Why?  Because cutting the pay and benefits of a bloated bureaucracy doesn’t put the fear of God into anyone.

Here we go Again

We never learn.  And you know what George Santayana said.  “Those who cannot remember the past are condemned to repeat it.”  And here we are.  Living in the past.  Again.

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