I contend that crony capitalism, where the government picks winners and losers, is a big part of our dissatisfaction right now. Thanks to Glenn Reynolds at Instapundit for the reminder about this clip.

Private holders of Greek debt have not been able to reach an agreement with the EU finance ministers on restructuring the terms of their Greek debt holdings.  They hold 60% of the outstanding debt, and they don’t want to accept a new rate less than 4% on those holdings.  The EU wants the private debt holders to voluntarily take about a 50% haircut.  From the linked WSJ article:

Austrian Finance Minister Maria Fekter said she’s “not pleased” with progress
so far. “We’re sending a very direct message to Greece that the community
expects more, also in terms of structural reform,” she told reporters. “We’re
not pleased and only when there’s a written message on the table in front of us,
can further assistance be discussed.”

Ms. Fekter said she wanted a written pledge from Greece’s political party
leaders that they were all committed to implement austerity plans.

Swedish Finance Minister Anders Borg also had tough remarks for Greece,
saying that “when it comes to structural and fiscal reform they have not
delivered.”

Greek Finance Minister Evangelos Venizelos acknowledged there have been
slippages in the implementation of austerity measures that Greece has agreed
with its euro-zone peers and the IMF as part of its original bailout program.

I love the term “slippages” in the paragraph above.  Greek politicians talk just like American politicians!

The Atlantic Magazine has a very interesting article that contains the most important graphs of 2011 as selected by a group of economists.

I think that this graph from the article best explains the volatility of 2011.

The December 10th edition of Barrons included an article entitled “The Great American Refinancing”.  It put forth an idea that has been embraced by both liberals and conservatives.  The basic idea is that any homeowner who is current on their mortgage would have the ability to refinance their payments at the lowest rates available today.  That rate is currently around 4%.  Whether the homeowner has equity in the home or not would have no impact on the ability to refinance.

This plan could have several positive and lasting effects:  1. It could act as a permanent tax cut as long as people stay in their homes  2.  It would steady home prices by slowing new delinquencies  3.  It could strengthen credit quality by focusing on responsible buyers/homeowners, and in doing so, minimize the cost to taxpayers.

Though interest rates are low, many homeowners are reluctant to refinance because of  the high fees, appraisals, income, and credit checks.  In addition, banks are imposing high underwriting standards on performing loans, in order to keep the higher- yielding loans on their books.

Barrons states that this type of program could add $80 billion annually for years to come.  If this process could be enacted in a timely and streamlined fashion, we, along with many others, believe it could be our way up and out of the real estate led crisis that started more than four years ago.

From Rick Santelli’s morning bond report:

Yesterday’s rally faded when rumors started to surface that S&P was going to downgrade certain countries in the Eurozone.  The actual report came out after the close, and the rating agency put 15 out of the 17 Eurozone countries on negative creditwatch which means that they could be downgraded.  Greece and Switzerland were the two countries that were not included; Greece has already been downgraded, and Switzerland has always been good at isolating itself.

The longer this crisis drags on, the higher the probability that Europe will fall into recession.  European leaders are meeting again this Friday to try to hammer out an agreement to impose fiscal discipline on the weaker members of the EU.  Bond yields in Europe have been coming down from their recent highs, so confidence in Merkel’s and Sarkozy’s ability to negotiate this crisis seems to be improving

On Wednesday, The Fed and the ECB, along with other international banks bolstered swap lines, thereby increasing global liquidity and easing fears of a credit market shut down.

Today, we got employment numbers that were at least as good as expected. And, the September number was revised upward.

The Europeans have bought themselves some time, the same way we did in the U.S. during our financial crisis.  The key to a long term solution both here and abroad is to address the ballooning government spending, and the out of control entitlement program spending.  Perhaps having gone to the brink, we can implement a real plan to cut spending money that we don’t have.

As an aside, for anyone who has not taken the time to do so, read the text of the Simpson-Bowles Act

Italy had a bond auction today, and once again the yields went up.  The three year sold at 7.89%, and the ten year note sold at 7.56%.  I have embedded an interesting article below that talks about the difference in borrowing costs for countries that issue debt in their own currency versus those that don’t.

This Wall Street Journal article titled “Debt Panel Folds its Tent” is a good summary of the failure of Congress to come to any agreement on the best way to reduce the deficit.  Their title is probably a better metaphor than mine for this post given the tent cities coming down in the various Occupy protests. From the article:

“In failing to reach an agreement, members of the supercommittee seemed immune
to mounting public disapproval of Congress’s record, and they gambled that
fallout on Wall Street and world financial markets wouldn’t be significant or
enduring. Washington has now likely punted on addressing the nation’s festering
fiscal problems until after next year’s elections.

For financial markets, the outcome was further confirmation of policy makers’
unwillingness to tackle the deficit and contributed to a drop of 248.85 points,
or 2.1%, in the Dow Jones Industrial Average, which moved back into the red for
2011.”

I am very cynical about the leadership in Washington, but John Podoretz in this New York Post article out does me in cynicism when he states:

“The supercommittee triumphed in accomplishing what it was truly intended to  accomplish.

It was created to kick the can down the road. The only thing that mattered  was that it come into existence, and it did. Its invention made increases in the  debt ceiling possible through the end of President Obama’s term.”

Read more: http://www.nypost.com/p/news/local/they_didn_fail_they_succeeded_in_FnLojzFlEYd9CACM38CWDI#ixzz1eRmVhM7q

Do you remember that old Monty Python skit “Nobody expects the Spanish Inquisition”?  Today’s phrase for the turmoil in global markets is “Nobody expects the Greek referendum”.  European leaders are understandingly stunned by Papandreou’s announcement today of a referendum on the austerity measures that his government has agreed to in order to restructure their sovereign debt.  There will be parliamentary debate this week, but the vote may be put off until December or January.  Unless the Greek government reverses course on this decision, the markets will remain volatile for the foreseeable future.

We will be closely watching Italian and Spanish yield spreads for a tell on the outcome of this debate.