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Instead of despair, practical solutions to the Euro crisis

by Starvid Mon Sep 12th, 2011 at 05:45:57 AM EST

With the recent ruling of the German constitutional court, the eurobond idea is entirely out of the window. It seems to me we can either despair at the general idiocy of the crisis management of our elites, or we can try to see what can be salvaged.

Promoted by Colman


Given the ruling, nothing will be done on a political level unless the German parliament gives the green light, which it won't. Even if Frau Merkel would like to be helpful, she is hamstrung by both parliament and the courts.

What remains to us then, if we want to save the euro from collapse? We do have the options of further ECB initiatives, like a massive ECB monetization of periphery sovereign debt to keep rates reasonable, while austerity is pushed hard going forward. This is the solution of saving the euro through depression in the periphery. It's not a pretty picture. It does nothing to resolve the structural problems of our financial system, and carries a massive moral hazard as the casino capitalists who still hold periphery debt will be bailed out by Eurozone taxpayers. On the other hand, with the ECB secondary market purchases of periphery debt, that bail-out has already happened to a considerable degree.

Another option, almost never mentioned but very reasonable and practical in my mind, is the periphery default solution. This means that periphery nations will partially default on their debts and institute haircuts on their bonds. This will not really cause any losses to the banks and others who hold periphery debt, as soon as they cease their make-believe and start marking their bonds to market. The losses have already happened, and the sooner this is realized, the earlier healing and de-zombiefication can begin.

However, as mentioned this solution will realize massive paper losses in certain banks, and this means that they will require injections of fresh equity so as to maintain reasonable leverage and capital coverage ratios. Thankfully, the solution to this issue is very straightforward and requires nothing exotic. Finance 101 works perfectly here. During the 2008 phase of the crisis, three of the four major Swedish banks launched rights issues to strengthen their balance sheets. This is nothing stranger than having the current shareholders pay money into the bank, like a reverse dividend. If they refuse, their share of the banks total ownership is diluted.

But what if there is not enough capital on the private markets to plug what might be very considerable holes in the European banking system? No problem! In the early 90's Swedish banking crisis, this very thing happened. It was resolved by a method commonly used in IPO's, where a large actor (bank, fund or the like) guarantees to buy all the shares not wanted by the market and hold them for a certain amount of time before they can be sold. In the Swedish example, the actor which guaranteed the rights issue of Nordbanken (Nordea) was... the Kingdom of Sweden. Over time, through fusions and divestments, the ownership share has fallen to about 13%. In the event of a national government not being able to back such an investment, emergency credits could be extended either by the ECB, direct ownership stakes could be held by the ECB, or credit could be extended on a bilateral basis.

This means there is a simple national solution to this eurozone-wide problem, which aviods whatever blockages might be thrown up by Brussels or Berlin.

What are your opinions of these ideas? Do you have any other ideas which are not pie-in-the-sky (eurobonds etc), but which actually would have a reasonable chance of working, not only theoretically but politically and practically as well?

Display:
What's not to like? a) it works (both Sweden and Finland have demonstrated it), b) the bastards get a crewcut and c) direct ownership gives more leverage in controlling the bastards - until they shape up.

And a rights issue mean the bastards are buggered either way.

There's trillions of magic money still floating round the global system - it hasn't disappeared. Magic Money is still looking for easy pickings. But when the low hanging has been nabbed, the only choice is slim pickings (aka rights issues?).

You can't be me, I'm taken

by Sven Triloqvist on Sun Sep 11th, 2011 at 12:12:00 PM EST
Can't find the exact quote or who posted it, so apologies.  

The Big Boys aren't using their money, as NCE would claim, to invest.  They are "hiding" it.  A choice of word I find enlightening.

We're in a situation where TPTB are unwilling to give-up several thousand times the money the average person has for only several hundred times.  In my book, we're going down from sheer Greed and Power Trips.

YMM of course V.

Thus they are impervious to Reason.  


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Sep 11th, 2011 at 02:04:19 PM EST
[ Parent ]
A wealthy friend of mine, who started his financial empire in college playing penny poker, told me that the entire trick is to gamble with other people's money. Set up your company, pay yourself a salary, and then if the gamble fails your money is still intact.

So the bankers will not be personally "taking a haircut," it will be the owners of the bank shares.

by asdf on Mon Sep 12th, 2011 at 11:41:58 AM EST
[ Parent ]
"OPM -- other people's money. The only way to go!" was the advise given me by a sadder but wiser veteran of Silicon Valley while I was working at Burr Brown in Tuscon in the early '70s.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 11:50:44 AM EST
[ Parent ]
Bank management might lose their jobs.

And if the next bank they seek employment at has two brain cells to rub together, their career. Of course, it's not an altogether bad bet that this conditional won't be true.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 12:06:45 PM EST
[ Parent ]
"if the next bank they seek employment at has two brain cells to rub together"

ROTFLMAO

by asdf on Mon Sep 12th, 2011 at 12:22:10 PM EST
[ Parent ]
No expert, but i thought the Court ruled eurobonds can be used if the Bundestag votes for them, which is highly likely, as the opposition SPD and Greens support them as well as a majority of Merkel's allies.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Sun Sep 11th, 2011 at 01:52:44 PM EST
That was a German court and could be a problem for Germany.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Sep 11th, 2011 at 09:08:05 PM EST
[ Parent ]
I do live in Germany, and know which Court it was.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Mon Sep 12th, 2011 at 06:39:02 AM EST
[ Parent ]
Your knowledge of the situation was never in question. The question was how and why a decision by a German constitutional court could be binding on the ECB and all other member states. The answer appears to be - "it's complicated."

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 11:40:31 AM EST
[ Parent ]
We (along with everyone else) may have fallen for the punditocracy's tendentious reading of the court's ruling. However, if their interpretations are correct, no new institutions can be created which don't require the Bundestag to get involved in approving every action. This includes Eurobonds.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 02:06:30 AM EST
[ Parent ]
Just today: After Stark (Eurointelligence)
Wolfgang Münchau says Constitutional Court a disaster for the eurozone

In his column in the Financial Times, Wolfgang Munchau says there are only two solutions to the eurozone crisis - a debt monetisation, or a Eurobond. The first is illegal under European law, the second is now illegal under German constitutional law. The Constitutional Court's decision delineates what is legal and what is not. A temporary mechanism in which the Bundestag retains ultimate control, such as the EFSF, is legal. The permanent mechanism is clearly a borderline case, according to the judgement, as a result of which the ESM is likely to give rise to another, and possibly more serious challenge. A eurobond is clearly beyond what the constitution permits, because it involves a permanent transfer of fiscal sovereignty.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 02:38:25 AM EST
[ Parent ]
So Germany has to change its constitution?

Well, I have heard that changing constitutions in order to deal with the euro crisis is popular in German leadership so that should not be a problem right?

</snark>

But seriously, how fast could Germany change its constitution to allow permanent transfer of fiscal sovereignty?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Mon Sep 12th, 2011 at 04:32:30 AM EST
[ Parent ]
If they could somehow hire Zapatero, it should be pretty quick....
by gk (gk (gk quattro due due sette @gmail.com)) on Mon Sep 12th, 2011 at 04:34:13 AM EST
[ Parent ]
There is not much popular support in Germany for the eurobonds. If they'd also need to change the holy Grundgesetz (think US Constitution), the political and popular will should be about zero. In my opinion, the German Constitutional court just killed the Eurobond.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 04:48:27 AM EST
[ Parent ]
In 2009 they introduced a debt brake in the Grundgesetz, making it more holy.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 05:03:48 AM EST
[ Parent ]
And even less sinfull... :P

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 05:13:12 AM EST
[ Parent ]
Less sinnvoll I would say...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 05:25:20 AM EST
[ Parent ]
Could you please cite regarding popular support?

Both opposition parties support Eurobonds (SPD and Greens), as well as a majority of the CDU/CSU. Do you think the parties would take that position if there weren't some popular support? (this doesn't mean there is no opposition to Eurobonds, of course.)

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 06:37:34 AM EST
[ Parent ]
That is hopeful news from me. I was not aware of the particular opinions of the parties in the Bundestag, but were rather going on the noises coming from Merkel et consortes, which have repeatedly been negative on the issue of eurobonds.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 06:43:22 AM EST
[ Parent ]
See my original comment, which directly stated the support.

And please remember that many of the media commenters are flagging their own issues, or are representing bondholders.


"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 07:16:53 AM EST
[ Parent ]
Can you give a link, or copy Münchau in full? and your first comment (to mine) link doesn't work.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Mon Sep 12th, 2011 at 06:40:53 AM EST
[ Parent ]
It appears googling can no longer bypass Eurointelligence's firewall...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 06:47:27 AM EST
[ Parent ]
FT.com: Stop rejoicing. This was no victory for the eurozone (Wolfgang Münchau, September 11, 2011)
As an advocate of eurozone bonds, I have to admit their prospect looks grim after last week's ruling of the German constitutional court. The court upheld the European financial adjustment facility, the crisis mechanism. This was, undoutedly, good news. But after I read the whole ruling, which ran to 29 tightly written pages, I realised that this judgement was not a victory for the eurozone at all. On the contrary, it categorically rules out any policy option beyond what has been agreed so far. I cannot see how it can be consistent with the survival of the eurozone, given the policies of member states and the ECB.

Much of the language in this document is opaque constitutional jargon. But on the issues that matter, the ruling is surprisingly, and depressingly, clear. It says the German government must not accept permanent mechanisms - as opposed to the EFSF, which is temporary - with the following criteria: if they involve a permanent liability to other countries; if these liabilities are very large or incalculable; and if foreign governments, through their actions, can trigger the payment of the guarantees. If I were a plaintiff in this case, I would regard that statement as an open invitation by the court to bring a new case against the European stability mechanism.

...

Moreover, you cannot get around this unfortunate fact with an ingenious combination of eurocratic trickery and financial engineering. The court, quite cleverly, did not mention eurobonds. It talked about liabilities. The Bundestag is not precluded from giving money to Greece, but it cannot empower a third party, such as the EFSF or ESM, let alone a hypothetical European Debt Agency, from usurping sovereign power. Sovereignty can be delegated in small slices, but not permanently.

(Google link)

It would appear that only existing permanent institutions should be able to issue Eurobonds. That probable means either the ECB or the European Investment Bank. Or are those ruled out, too?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 08:50:50 AM EST
[ Parent ]
A couple of weeks ago Edward Harrison noted that the structure of all "bailout" agreements were collections of bilateral agreements between the country being rescued and the individual countries banding together to make the rescue. He maintained that this was due to insistence that all funds be traceable back to individual countries and suggested that this was so that the debts would survive even if the euro-zone did not. It would also be a mechanism to prevent the emergence of any super-national agency which could make commitments to which member states might individually object. This is clearly consistent with what we are seeing.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 09:41:07 AM EST
[ Parent ]
See Varoufakis on Perfectly Separable Debts.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 09:46:24 AM EST
[ Parent ]
Harrison may have been citing Varoufakis, but I remember To The Finland Station -- one of my favorite works of historical analysis and historiography.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 11:33:16 AM EST
[ Parent ]
correct link to punditocracy.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 07:12:13 AM EST
[ Parent ]
Danke. nothing there which shows Eurobonds as unconstitutional, unless the Bundestag is not involved on a case by case basis.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Mon Sep 12th, 2011 at 07:19:13 AM EST
[ Parent ]
But involving the Bundestag on a case-by-case basis would be akin to giving California veto powers over the US federal deficit (or Beyern veto power over the German ditto). While technically possible, it would be unacceptable in so many ways it's not even funny.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 07:42:12 AM EST
[ Parent ]
Also not all Eurobonds are created equal. The ECB issued ones could still be ok even if the jointly issued ones are out. And if it is legal for the ECB to act as market maker of last resort for state bonds in the secondary market...
by generic on Mon Sep 12th, 2011 at 08:21:23 AM EST
[ Parent ]
But is it legal for the ECB to issue bonds over the objections of the national parliaments? Let's not forget the ECB is owned by the 27 EU National Central Banks and each of these is "owned" by their respective Treasuries who capitalize their Central Banks and receive profits from them.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 08:36:47 AM EST
[ Parent ]
But is it legal for the ECB to issue bonds over the objections of the national parliaments?

Yes.

Central bank independence, remember.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 08:42:46 AM EST
[ Parent ]
Who issues Eurobonds, then? The Bundestag?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 08:12:41 AM EST
[ Parent ]
no new institutions can be created which don't require the Bundestag to get involved

I was of the impression that Starvid's proposal involved the existing ECB issuing bonds and/or creating euros, which, while against current policy, was not illegal under the terms of the EU agreements. The legality of such a change should be the purview of an EU or EMU, not a German, court -- if there is such an EU or EMU court with such purview. Or is the requirement that all policy changes by the ECB must be approved by the German parliament written into, as opposed to simply assumed by, the the treaties that created the EMU?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 08:21:21 AM EST
[ Parent ]
It is, of course, what should have been done for all bogus debts (not just bogus government debts) back in 2007/8.

And it won't happen, for the same reason: The ECBuBa will crash the defaulting country's banking system, because the banksters who currently hold the bonds have greater political clout than the defaulting countries and will wish to use the ECBuBa to make an example of defaulters pour encourage les autres.

Maybe if we promised the management at the exposed banks that they would not be fired for their gross stupidity, incompetence and outright criminality, we might be able to persuade them to toss their shareholders under the bus.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Sep 11th, 2011 at 01:58:08 PM EST
The essential problem is getting those who think they have "won" to acknowledge that they only "won" about 10% as much as they think. Perhaps if they thought that the money they have squirreled away was at risk they could be persuaded to trade their fake profits for the right to keep their stashed loot legally. But when they get to decide what is legal that is a hard sell. I am beginning to think that small pamphlets that clearly explain who has got what and how they got it written about the local society and in the local language might be a good idea. They could be handed out, and electronic versions could be sent via the web. But having lots of printed material in circulation would be insurance against someone throwing the master switch.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Sep 11th, 2011 at 09:14:29 PM EST
[ Parent ]
This
In the event of a national government not being able to back such an investment, emergency credits could be extended either by the ECB, direct ownership stakes could be held by the ECB, or credit could be extended on a bilateral basis.
would seem to contradict that
This means there is a simple national solution to this eurozone-wide problem, which aviods whatever blockages might be thrown up by Brussels or Berlin.
Because of the Austerity drive, most Eurozone governments don't have the fiscal capacity to do this, and the ECB can't do it.

However, the EFSF is quickly morphing into a bank recapitalization scheme. Eurointelligence writes:

there are reports over the weekend that Germany is now preparing for a Greek default. The strategy seems to be to pay the next tranche and wait until the EFSF receives its new powers before forcing Greece into a default. The EFSF would then be in a position to stabilise European banks.
(After Stark, 12 September 2011)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 02:44:34 AM EST
Modest proposal:

Policy 2 - Tackling the banking sector crisis
Institution: The European Financial Stability Fund.

Summary: The purpose of Policy 2 is to cleanse the banks of questionable public and private paper assets so as to allow them to turn liquidity that comes their way in the future into loans to enterprises and households. The problem, currently, is that if banks are submitted to rigorous stress tests, several may be found to be bankrupt. Thus, Europe needs simultaneously to lean on them to come clean but also to help them do so without insolvency.



Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Mon Sep 12th, 2011 at 04:38:06 AM EST
[ Parent ]
The Modest Proposal lacks about 200 billion euros to work out, as you need money to strengthen the asset side of the ECB unless the leverage should move up to about 1 to 600. Furthermore, it seems like the Modest Proposal with its debt tranche transfers, while very attractive on paper, should be blocked by the German ruling. Which is what prompted me to pen this diary.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 04:52:12 AM EST
[ Parent ]
There is no operational reason that a central bank should have to be solvent.

For that matter, if the central bank performs market maker of first and last resort functions in sovereign bonds, sovereign bonds become definitionally risk-free, which means that the gearing of sovereign bonds becomes irrelevant, even for a private bank. Which is what the Basel rules, correctly, note when they set prudential capital requirements to zero for sovereign debt - their mistake is to not account for (sometimes implicit) currency risk.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 04:58:07 AM EST
[ Parent ]
It is a political problem that the Central Bank is leveraged 600 to 1. And this crisis is political, since we wouldn't be talking about any of this otherwise.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 05:01:27 AM EST
[ Parent ]
If the central bank cow-tows to Hayekian political pressure, we might as well abolish the whole "independent central bank" fiction and make it explicitly subservient to Parliament. That way the political pressure on the ECBuBa will become a lot less one-sided.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 05:04:04 AM EST
[ Parent ]
You're arguing that if the ECB takes losses making it insolvent, it should just print itself new equity?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 05:14:50 AM EST
[ Parent ]
Not quite.

If the ECB is conventionally insolvent because of Euro payments it must meet, it can always "print" itself the money to meet them. This is seigniorage and it may be inflationary.

The ECB is owned by the national central banks of all EU members, proportionally to their GDP, and the national central banks are owned by the national treasuries, in the sense that the central banks pay from their profits into their treasury's account, and the treasury capitalizes it if necessary. At the end of 2010, to compensate for the increase in balance sheet size from bond purchases, the ECB asked for its capital to be doubled from €5bn to €10bn, which was financed by the combined treasuries and thus "by the taxpayer".

If the ECB is conventionally insolvent because of non-Euro liabilities, then it all depends on the combined fiscal ability to obtain foreign currency. If the combined Central Bank/Treasury system is actually insolvent in a foreign currency you may have hyperinflation or sovereign default.

All of this is in Willem Buiter's Can Central Banks Go Broke? linked to here.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 05:24:51 AM EST
[ Parent ]
I'm just talking about euro liabilities here, arising from sovereign defaults or whatever. Then money printing is the way the ECB will recapitalise itself then. I wouldn't worry too much about inflation though, not as long as we're in a liquidity trap. I suppose the problem here though, as with all EMU problems, is that not all euro nations (you know who) might be equally liquidity trapped.

But what's the best thing to do then? Ask for more capital from national governments to bring the leverage down well in advance of a crisis, or print money/ask for money when the crisis actually hits?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Sep 12th, 2011 at 05:32:33 AM EST
[ Parent ]
The members that are not liquidity trapped obviously need to have higher inflation than the members that are for a while to rebalance internal trade flows.

I can see no problem with that. Well, no economic problem.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 05:41:05 AM EST
[ Parent ]
Yes, but the rest of it won't come to pass. And even that may fail if it is challenged in the German courts as "fiscal union by the back door".

On the sovereign debt crisis, the outcome is likely to be a "default union" as described by Buiter in Blundering towards a 'You Break it You Own it' Europe (August 1, 2011).

On the structural trade imbalances and secular dearth of investment in the periphery, nothing will be done as all reference to the "Marshall Plan" was dropped from the final July 21 summit.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 05:00:08 AM EST
[ Parent ]
final July 21 summit statement

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 05:06:42 AM EST
[ Parent ]
to emerge this weekend is that the inevitability of Greece defaulting on debts is acknowledged.

Pussyfooting around for three years hasn't changed that immutable certainty : debts that can't be paid, won't be paid.

The crashing stock of European's banks is the market's way of marking to market the unpayable debts.

(The rest of the stock market is crashing too. Is that a matter of the value of productive enterprises being pulled down arbitrarily by the banking crash, or recognition that, with headless chickens governing us, we are heading for a deep depression? I favour the former explanation. The market isn't that smart.)

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Sep 12th, 2011 at 05:13:50 AM EST
The asset value crash is part of the process by which the capitalists drive the economy to depression.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 05:26:38 AM EST
[ Parent ]
stock of productive companies is going down because people are selling. Why are they selling?

  1. because the indices (CAC40 etc) are down because the banks are sharply down (quite rightly), and the banks weigh heavily in the indices. Quick, panic, sell everything.

  2. some clever investors, seeing the sharp decline in banks, hasten to sell other stocks in order to buy the banks at "bargain" prices...

Why would the capitalists actually seek to drive the economy to depression? I can't see the upside.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Sep 12th, 2011 at 06:15:11 AM EST
[ Parent ]
The capitalists seek to preserve their individual net worth (or its purchasing power). Collectively, they drive the economy to depression.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 06:25:36 AM EST
[ Parent ]
And those capitalists who are liquid during a crash can buy up on the cheap the assets of those capitalists who are not liquid. But they would proclaim and, possibly, even believe that provoking a crash would be quite deplorable.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 09:00:59 AM EST
[ Parent ]
This issue of the interests of individual capitalists (and countries) being at variance with their collective interests seems, to me, to be central to this whole crisis.  We have seen how, in the US, a few key strategically placed and politically active firms - think Koch brothers, Oil majors, Goldman Sacks etc - can drive an entire economic agenda (Tea party economics) which can enrich them at the expense of other capitalists, the economy, and of course everyone else.

Remarkably they can (mis)represent themselves as being on the side of the common man, whilst those, like Obama, who want greater regulation/taxation in the interests of capitalism and the economy as a whole are presented as the stooges of Wall as opposed to Main street.

This has got to be one of the greatest marketing tricks of all time.  Teh Stoopid will always identify with the rugged individualist/"self-made" capitalist versus the "wealth destroying" bureaucratic economic regulators/taxers.  Individual need/greed is leveraged to promote identification with individual corporate interests and to mobilse support against the collective bests interests of the whole.

This is perhaps also why "dictatorial" China is managing a more strategically effective economic policy than "democratic" USA which eschews all infrastructural investment/regulation in favour of private get rich quick schemes legitimised by an appeal to individualistic "freedom".

The greater problem here, in both EU and USA, is not even legal or institutional.  It is the ingrained popular ideology which equates individual personal interests with individual corporate interests with the best interests of the collective as a whole.  There is no concept of common good any more, except as an emergent property of collective private greed.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 10:30:42 AM EST
[ Parent ]
To put it another way, democracy doesn't work when electors and especially economists and bankers have the emotional and collective sophistication of two year olds.

'More for me - less for you' is a spectacularly stupid political position. The fact that it's the default among the investors (i.e. those whose political influence actually counts for something in setting policy) doesn't alter its fundamental knuckle-dragging idiocy.

We don't need financial solutions - we need a fundamental overhaul of left-ish narratives which attack and destroy Hayekian nonsense, without legitimising it as a valid world view first.

Some things are not even wrong - and that includes almost everything the financial classes have been telling the rest of the world since at least the 1980s.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Sep 12th, 2011 at 11:38:20 AM EST
[ Parent ]
Here's the official ECB position:
The Frankfurt-based institution wants social welfare entitlements reviewed and is also calling for greater efforts to facilitate pay cuts in private employment contracts.

Interviewed by The Irish Times,  ECB executive board member Jürgen Stark said the Government should capitalise on improving market sentiment towards Ireland by "frontloading" cuts outlined in the EU- IMF bailout plan.

The government here is trying to persuade the ECB that it's a dumb idea for us to pay off billions of unsecured Anglo Irish Bank bonds that aren't covered by the guarantee:


He is dismissive of a renewed Government push to avoid repaying about €3.8 billion of the senior debt in Anglo Irish Bank and Irish Nationwide Building Society. That's the total amount we're meant to be cutting from the budget next year.

The ECB remains opposed to such an initiative and Mr Stark says Ireland is "not autonomous to take this decision". The question is a "non-issue" for the bank.

Which of your alternatives do you think they're going to go for?

by Colman (colman at eurotrib.com) on Mon Sep 12th, 2011 at 05:44:32 AM EST
Default and depression in the periphery, of course.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 05:49:01 AM EST
[ Parent ]
Because the other alternative, directly bailing out their own banks, is what they've been desperately trying to avoid for years now.
by Colman (colman at eurotrib.com) on Mon Sep 12th, 2011 at 05:51:48 AM EST
[ Parent ]
Well, somebody had to say it.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Sep 12th, 2011 at 06:26:20 AM EST
[ Parent ]


Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 07:44:21 AM EST
[ Parent ]
Government urged to cut welfare, public sector pay - The Irish Times - Mon, Sep 12, 2011
Although he insists it is not for him as a central banker to call for social welfare cuts, he says entitlements should be examined.

I fear he's being misquoted. Surely he said :

"Although he insists it is not for him as a central banker to call for entitlements to be examined, he says  social welfare should be cut."

There, that's better.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Sep 12th, 2011 at 06:32:02 AM EST
[ Parent ]
Stark is said to be resigning because (according to him), the ECB went beyond its remit in buying bonds on the secondary market. But no problem for him in openly admitting he's stepping outside his remit (It is not for me as a central banker...) before going right ahead and doing just that.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Sep 12th, 2011 at 06:42:43 AM EST
[ Parent ]
to panic the Irish government into turbo-austerity instead of selective default. He knows that within weeks, as Greek default takes shape, they will have a free hand to abandon the residual bank debt.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Sep 12th, 2011 at 06:36:21 AM EST
[ Parent ]
Lorenzo Consoli, Italian journalist, former president of the International Press Association in Brussels:

Lorenzo Consoli: « C'est à la Commission Européenne d'ouvrir le débat du coût du Non-Euro » | Sauvons l'Europe Lorenzo Consoli, "It's up to the European Commission to start up the debate on the cost of the Non-Euro» | Sauvons l'Europe
C'est à la Commission Européenne d'ouvrir le débat du coût du Non Euro. Pourquoi la Commission Européenne n'a-t-elle pas présenté dès le début de la crise un rapport sur le coût du Non-Euro, particulièrement pour l'industrie allemande ? Il existe un précédent avec le rapport Cecchini de la Commission Delors sur le coût de la non-Europe en 1986.It's up to the European Commission to open the debate on the cost of the Non-Euro. Why didn't the European Commission publish at the beginning of the crisis a report on the cost of the Non-Euro, especially for German industry? There is a precedent with the Cecchini Report of the Delors Commission on the Cost of Non-Europe in 1986.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Sep 12th, 2011 at 06:38:08 AM EST
Once again i believe the anti-German parade on this discussion is bit strong. Starvid believes the Eurobond is ruled unconstitutional, as does Migs, citing Münchau. But even he apparently doesn't know.

I don't know for certain, but my financial advisors tell me that the Court has ruled that Eurobonds are not in principle unconstitutional, but that the Bundestag must play a more direct role.

As i've been pointing out, there is much support for the Eurobonds in the Bundestag. How that plays out during financial explosion of course is anyone's guess.

But i'm tired of all the ranting against Germans and Germany, especially at a time when we need far more english speaking Germans on ET. It's right wing economists everywhere who are to blame, and the politicians of all stripes who suck up to them. Not Germans.

There are BILD people in every country. You can argue the Bundesbank is managed by poisonous dinosuars with too much influence on european finance, but you can't forget the majority of German industrialists who want the Euro to survive.

Münchau could even be wrong. /rant

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 07:05:16 AM EST
Barring some sort of putsch, a Socialist (capital-s socialist!) president and parliamentary majority will be in place in France within a year. That will change the picture somewhat.

Unfortunately, the next federal election in Schleu-land is two years away. Grand Coalition (SDP-CDU - preferably without CSU, preferably with Greens) would be an interim solution, it would break the stranglehold of the FDP/Bundesbank dictatorship.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Sep 12th, 2011 at 07:17:16 AM EST
[ Parent ]
At this point anything less than a FdG / Die Linke EU leadership won't be enough. A Jean-Luc Mélenchon (will he be running?) / Gesine Lötzsch summit just might be a game changer. Anyone want to help with the odds against that?

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Mon Sep 12th, 2011 at 08:07:27 PM EST
[ Parent ]
I commented:
We (along with everyone else) may have fallen for the punditocracy's tendentious reading of the court's ruling. However, if their interpretations are correct, no new institutions can be created which don't require the Bundestag to get involved in approving every action. This includes Eurobonds.
I linked to this
For Reinhard Müller the court prohibits the Bundestag to disempower itself

Frankfurter Allgemeine Zeitung's legal correspondent Reinhard Müller lauds the fact that the constitutional court's ruling makes it clear that a disempowerment of Bundestag is unconstitutional. "The German legislator must not accept durable mechanisms in international law that would end in guaranteeing the decisions of other states", Müller writes. Each help that generates costs within the EU and on an international level "must from now on be voted on by Bundestag in each individual case", he concludes.

For Heribert Prantl the limits of EU integration in the Grundgesetz have been reached

For Süddeutsche Zeitung's deputy editor Heribert Prantl the Karlsruhe ruling has defined the limits of European integration as long as the Grundgesetz is in place. "The power of the Grundgesetz ends when the European confederation becomes a federal state", he explains underlining that the European possibilities of the Grundgesetz have been exhausted.  "If more Europe becomes necessary, a European government shall be created - whether you call it an economic government or otherwise. It would then no longer be sufficient to involve the parliament, and a new constitutional basis would needed. This would supplant the Grundgesetz, and would have to be decided by the people".

For Nikolaus Blome Germany has drawn its red lines

After Angela Merkel's speech in Bundestag and the court ruling, Bild's deputy editor Nikolaus Blome explains the chancellor's design for tomorrow's eurozone. "At the moment the euro states are like car drivers who do not respect the traffic rules, who are not afraid of police tickets, who get into accidents and endanger each other", he writes. "That is bad enough. But it is no reason to take the steering wheels out of all cars, the accelerator and brakes. Instead we need more traffic lights, tougher penalties and quick penalties for all breaches, perhaps even taking away the driver's licence." In any way, Blome concludes, Merkel has drawn her "red line" and made it clear that there is "no need for a debt union with euro bonds where Brussels is dictating national budgets and where each individual state guarantees everybody else".  

Who do we believe? Can you find a single pundit, German or otherwise, (and we're not taking it just from Münchau, thankyou very much) who is on record saying that Eurobonds are a possibility now, based on their own reading of the Court ruling?

I haven't tried to read the actual ruling but I would not dare to interpret it myself either because I am not familiar with German constitutional convention...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 07:18:06 AM EST
[ Parent ]
My reading: It's not eurobonds which are unconstitutional, but the ESM or similar Euro mechanisms taken without specific Bundestag approval.

I can't cite anyone specific. I did ask my tax/financial advisors, who are part of the Mittelstand team, who advise many German companies. They specifically said eurobonds are not unconstitutional, unless they don't carry specific approval. I believe what's unclear is the nature of the mechanisms used to administer Eurobonds or equivalent. But that is something the Bundestag could fix.

(I'm very pressed for time today, tough to research further)

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 07:27:28 AM EST
[ Parent ]
I've read this morning that German bank exposure to Greece is 14.x billion euros, slightly larger than France's 13.x, but that Germany's exposure includes the KfW participation in the first bailout.

Isn't that peanuts? Shouldn't casino players be... oh, i give up.

PS. for comparison, KfW is committed to €5B in the first wave of offshore project support for ten projects.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 07:33:11 AM EST
[ Parent ]
The moral hazard involved in handouts to lazy economies makes the whole idea intolerable, even though it would be far cheaper than forcing them to default.

Yes, we realize we are cutting off our nose to spite our face, but it's important to punish the guilty, even if we have to ruin our economy in the process.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Sep 12th, 2011 at 07:57:31 AM EST
[ Parent ]
And if all else fails, we can always shame them by flying their flags at halfmast...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 08:13:58 AM EST
[ Parent ]
It's funny that this suggestion is viewed as one of the most objectionable, given that it would be one of the least painful to play along with. No way is having your flag at full mast worth five percentage points of unemployment. It's not even a close contest.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 08:39:40 AM EST
[ Parent ]
Narrative...

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 09:07:32 AM EST
[ Parent ]
Offer to fly your flag at half mast and upside down in return for sensible policies! The implications of what CH has posted is that the whole problem is a giant hissy fit by a small group of important German players. Hell! Bernake ought to GIVE them 14 billion euros worth of US$ if they will just use it to cover the losses of the German banks, shut up and get out of the way. In the end, that would be cheaper for all of his TBTF buddies.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 09:09:22 AM EST
[ Parent ]
and stand in the corner, in return for a lower interest rate?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Sep 12th, 2011 at 09:12:46 AM EST
[ Parent ]
Paparendou should go stand in the corner with a dunce cap for being too chicken or too stupid to just default already.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 11:59:57 AM EST
[ Parent ]

   

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 01:29:52 PM EST
[ Parent ]
It is interesting to note that J P Morgan's bonus pool for 2010 was $28 billion and Goldman, who had an off year, had a pool of $18 billion. But were anyone to suggest that the German banks's €14 billion losses be paid, even if part, out of the bonus pools, they would quickly find out what is truly sacred in our world.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 01:32:56 PM EST
[ Parent ]
ARGeezer:
It is interesting to note that J P Morgan's bonus pool for 2010 was $28 billion and Goldman, who had an off year, had a pool of $18 billion. But were anyone to suggest that the German banks's €14 billion losses be paid, even if part, out of the bonus pools, they would quickly find out what is truly sacred in our world.

top comment...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Sep 12th, 2011 at 02:27:51 PM EST
[ Parent ]
Not the most objectionable, the most transparently indicative of how insane the conversation has become.
by Colman (colman at eurotrib.com) on Mon Sep 12th, 2011 at 10:51:45 AM EST
[ Parent ]
If the Bundesbank must approve it then so should every other member state, right?

Which is akin to a new treaty. What the German Constitutional Court has ruled is that the currently existing European institutions cannot issue Eurobonds. A new institution has to be created. There is no time for that, so this here crisis will have to be handled by other methods.

Just take the July 21 agreement. How many member states have done what was required of them, with or without parliamentary intervention?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 08:25:18 AM EST
[ Parent ]
What the German Constitutional Court has ruled is that the currently existing European institutions cannot issue Eurobonds.

Probably not correct either...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 08:31:12 AM EST
[ Parent ]
"What the German Constitutional Court has ruled is that the currently existing European institutions cannot issue Eurobonds.

 Probably not correct either..."

That interpretation is indeed a bridge to far.

by IM on Wed Sep 14th, 2011 at 10:01:37 AM EST
[ Parent ]
Frankfurt does not have jurisdiction to tell existing EU institutions what they can or cannot do. That jurisdiction resides in Strassbourg. Frankfurt only has jurisdiction over what new institutions Germany can participate in without revising its constitution.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 08:34:56 AM EST
[ Parent ]
In theory, perhaps, were a group not including Germany to gain a preponderance of influence over the ECB, and, were that group agree to be bound mutually to a specific amount of obligation, it could take actions to which Germany might object and in which Germany might not participate. If that objection and non-participation does not, in and of itself vitiate the action, Germany would have been presented with a fait accomplis.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 12:28:04 PM EST
[ Parent ]
If a group not including Germany secured control of the ECB, Germany would implicitly be on the hook for their policies as long as they (and the European court in Strassbourg) were willing to accept that the ECB does not have to be solvent to operate. No formal fiscal transfer has to take place.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:02:56 PM EST
[ Parent ]
So? It is not only their money. Call it easing by other means. My only concern is if it could be done under the circumstances described - or others.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 01:37:10 PM EST
[ Parent ]
Actually, it would not be German money but it would be done with a currency they share.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 01:40:11 PM EST
[ Parent ]
If a group not including Germany secured control of the ECB, Germany would implicitly be on the hook for their policies...

As if the peripherals are not in just that situation now.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 01:38:50 PM EST
[ Parent ]
A freudian slip?

The german constitutional court is in Karlsruhe.

And the other court is in Luxemburg.

by IM on Wed Sep 14th, 2011 at 10:19:34 AM EST
[ Parent ]
No, just an ordinary cock-up in my German geography. And I did actually think that the European courts were all located Strassbourg (which probably tells you something about the sort of government we've had in Denmark for the last decade).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Sep 14th, 2011 at 01:59:21 PM EST
[ Parent ]
From three weeks ago.

Chancellor Angela Merkel of Germany on Sunday re-emphasized her opposition to issuing bonds backed by all the euro zone countries, a position that will be greeted enthusiastically by many of her fellow citizens but could unsettle investors at the beginning of what could be another difficult week in global financial markets.

Mrs. Merkel told ZDF television in an interview broadcast Sunday that the so-called euro bonds would be an option only in the distant future.

"It will not be possible to solve the current crisis with euro bonds," she said. She added that "politicians can't and won't simply run after the markets."

"The markets want to force us to do certain things," she added. "That we won't do. Politicians have to make sure that we're unassailable, that we can make policy for the people."

The German finance minister, Wolfgang Schäuble, echoed Mrs. Merkel's comments, saying that common debt would make it easier for governments to avoid pursuing responsible fiscal policies. In any case, he told the newspaper Welt am Sonntag, it would take too long for countries in the euro zone to amend the treaty on monetary union, which would probably be required to allow the issuance of such bonds.

"We have to solve the crisis within the existing treaty," Mr. Schäuble said.

The statements by the German leaders are in tune with public opinion in Germany as well as in other countries, like the Netherlands. The Dutch finance minister, Jan Kees de Jager, told the magazine Der Spiegel in an interview published Sunday that Mrs. Merkel should remain firm in her opposition to euro bonds.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Sep 12th, 2011 at 07:29:11 AM EST
[ Parent ]
3 weeks ago was before the Bundesverfassungsgericht ruling. Also before the Euro cratered from $1.44 to $1.36, and the markets were roiled again. Merkel also said in the article there were no signs of a German recession, which there now are. So, grain of salt in order. (The NY Times didn't interview a shit load of Small/Medium Enterprises.)

Remember, she's trying to stay in power, while her coalition is falling apart around her. Some things she says for the populace, some things she aims elsewhere. Clearly, she, like most, has no clue where this crisis is going.

Likely in Germany, popular support is not the issue. it's what the general industrial leaders, (think Mittelstand, not Siemens) want.

Further: every day there will be all manner of "new developments," so we shouldn't get caught up in dissecting every latest wrinkle. What's important is to realize that her opposition, also "reflects" popular support.

Also, we should read to the end of the article, where other views might be buried:


Opposition to euro bonds is strong within German political circles and among the country's conservative economics establishment because of the perception that the country would wind up subsidizing its neighbors.

But some economists argue that euro bonds would be cheaper even for Germany, because the volume of the bond market would rival that of United States Treasury securities and promote the euro as a reserve currency. That would increase demand for the bonds and lower interest rates.

There is some support for euro bonds in Germany. Leaders of the opposition Social Democrats and Green Party have spoken in favor of common European debt. In addition, the Frankfurter Allgemeine newspaper quoted several members of Mrs. Merkel's governing coalition in Parliament on Sunday as saying that Germany should not rule out euro bonds forever.

While rejecting the bonds, Mr. Schäuble said that Germany would defend the euro "under all circumstances" and that the government categorically rejected suggestions that Greece should leave the euro zone, as some economists have proposed.

So there we have it, nobody knows nothing.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 07:50:27 AM EST
[ Parent ]
These people who purport to "analyse" the bond markets of sovereign states or federations always amuse me, because it depends so heavily on what sort of term structure the central bank decides to create through its open market operations in defence of its overnight target.

It's noise, but these people treat it like signal.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 08:00:27 AM EST
[ Parent ]
it depends so heavily on what sort of term structure the central bank decides to create through its open market operations in defence of its overnight target.

Would Loki not object a diary might be in order.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 02:22:43 PM EST
[ Parent ]
The CB can fix the interest rate XOR the volume of securities outstanding at any given maturity (say, it can fix the yield of 30-year Treasuries IFF it is prepared to accept that it does not control the number of 30-year T-bonds in circulation).

The CB usually decides to fix the term structure of the outstanding sovereign bonds. But this is an atavistic holdover from the gold standard, where the term structure of sovereign bonds actually mattered. If the CB woke up one fine morning and decided to mess with the bond traders' heads a little, it could rearrange the term structure of the sovereign debt outstanding before lunchtime, without in any way impairing its ability to carry out its duties as a central bank. This would, obviously, cause the yield curve to change drastically - remember that the CB can fix the term structure XOR the yields.

Since the CB does not have to disclose its open market operations, and since the term structure of the sovereign bonds in private hands is not published in real time (if it is published at all), the pundits would interpret the new yield curve as being due to all sorts of things "liquidity preference," "short-term default risk," "inflationary pressure" or whatever bullshit just-so story could be made to fit the facts. When in fact it was just the CB adjusting its portfolio for no real operational reason. Or, in other words, noise that got taken for signal.

Conversely, if a bond trader wakes up one morning and decides to restructure his portfolio, there is no operational reason why the CB couldn't simply accommodate him and keep the yield curve where it is. That it chooses not to do so is just as much a policy decision as actively transacting in order to mess with people's heads was above. And so this, as above, is noise mistaken for signal.

Mind you, it's rather expensive noise. It costs the US taxpayers alone on the order of US$ 400 bn in totally unjustified subsidies. It's pretty much the only government-run lottery that has a payout above 100 %.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 02:54:50 PM EST
[ Parent ]
It's pretty much the only government-run lottery that has a payout above 100 %.

And the Fed gets to pick a fairly small population to which to distribute the winnings.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 03:44:00 PM EST
[ Parent ]
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 03:52:57 PM EST
[ Parent ]
Exclusive OR: Either one or the other.

As opposed to ordinary (inclusive) OR, which is one or the other or both.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 04:02:57 PM EST
[ Parent ]
Mark your calendars. Merkel says something that isn't an outright lie. "It will not be possible to solve the current crisis with euro bonds," is completely correct, because the solution to the current crisis is to default.

Eurobonds is the solution to the next crisis.

However, this

The statements by the German leaders are in tune with public opinion in Germany

is the NYT's tea-leaf reading. And I have, shall we say, less than complete confidence in the NYT's ability to (or interest in) ascertaining German public opinion...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 07:52:51 AM EST
[ Parent ]
For those of us out of touch with the mechanics of the Bundestag - how does support there translate into a legislative vote?

(In Britain, effectively only the government can put forward something to be voted on.)

by Metatone (metatone [a|t] gmail (dot) com) on Mon Sep 12th, 2011 at 09:39:08 AM EST
[ Parent ]
Technically, i don't know if a vote must come from the government, or if the opposition can propose.

But there is already a pending vote scheduled for 29 Sept., put forth by Merkel, (on the second tranche of EFSF?). Further, the Court says they  must vote if 'Schland is on the hook. It is this scheduled vote which (so far) has the support of both a majority of CDU and much opposition SPD/Greens as well.

But what happens in the next two weeks is anyone's guess.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 09:54:34 AM EST
[ Parent ]
if the government relies on the opposition to pass legislation, with the FDP voting against?

I mean, is it constitutionally tenable for the FDP to remain in government in this case? Perhaps they could be blackmailed into carrying on : they are the people with the least interest in an early election.

(Recall : FDP 15% at the elections two years ago, flirting with the 4% threshold today, and still calling the shots?)

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Sep 12th, 2011 at 10:38:46 AM EST
[ Parent ]
Sounds  like the PDs in the last government.
by Colman (colman at eurotrib.com) on Mon Sep 12th, 2011 at 10:54:12 AM EST
[ Parent ]
I don't know. I do suspect that the breakup of the government is one of the elephants in the room. The FDP was almost completely shut out of local elections in the section of Niedersachsen surrounding Bremen yesterday, in some cases with as low as 2%. and next Sunday are the elections in Berlin.

PS. The threshold is 5%, though the FDP is flirting with below 4%.
PPS. I met two leaders of the local FDP at a Fest last weekend. Should have seen their faces when i said their underlying economic theory has been totally discredited. They haven't called back as they said.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 10:57:31 AM EST
[ Parent ]
Local FDP leaders learn their lines from their national leaders.  They are not economic theorists. You just told them their religion wasn't true.  How dare you. You must be some hippy Green extremist or agent provocateur.  Vee must keep zat mensch under surveillance...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 11:14:03 AM EST
[ Parent ]
Crazy Horse:
The FDP was almost completely shut out of local elections in the section of Niedersachsen surrounding Bremen yesterday, in some cases with as low as 2%

Diary! Diary! Diary!

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Sep 12th, 2011 at 11:20:00 AM EST
[ Parent ]
the Greens are the (stealthy, secret, backdoor, ulterior; from heimlich) Winner

Regional Results Here (note: the white in the middle is Bremen, and only the region is shown, not all of Niedersachsen.

The CDU had the most with 37%, losing 4.3%. SPD had 34.9%, minus 1.7% Greens nearly doubled to 14.3% in this conservative part of the country. But key is the loss to the FDP, now at 3.4% down from 6.7%.

Remember, this is only for local governments, so in some cases the national party may not play the most important role.

Loved this quote: "FDP regional deputy leader Hans-Heinrich Sander, said his party was after their massive defeat in a deep crisis. The negative sentiment about the federal party had "broken through even in the flat lands"."

Participation was only 52.5%, a touch higher than five years ago.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 11:55:48 AM EST
[ Parent ]
One of the most interesting results is that the SPD took away the mayorship in VW city Wolfsburg from the CDU after 10 years.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Mon Sep 12th, 2011 at 12:07:04 PM EST
[ Parent ]
I can't find that news in any English-language source, not DW, not The Local, nowhere.

This is a change of majority, presumably : CDU/FDP replaced by SPD/Grunen?


It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Sep 12th, 2011 at 12:11:26 PM EST
[ Parent ]
Really? Are you saying that ET is not a news source. or that it isn't in English?
by gk (gk (gk quattro due due sette @gmail.com)) on Mon Sep 12th, 2011 at 12:28:42 PM EST
[ Parent ]
I had just spent ten minutes or so trawling the internets for the information, came back empty-handed and found the news here.

If I had waited a few more minutes, I suppose Google would have brought me here.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Sep 12th, 2011 at 12:35:53 PM EST
[ Parent ]
It did make it to the Washington Times with the title "Merkel surviving German voting despite setbacks". How long will in take until 3% for the FDP becomes "survival"?
by gk (gk (gk quattro due due sette @gmail.com)) on Mon Sep 12th, 2011 at 12:52:02 PM EST
[ Parent ]
Somewhat allied question, How long before Die Linke cannot be kept out of government?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Mon Sep 12th, 2011 at 12:54:11 PM EST
[ Parent ]
Though that article is referring to last week's Mecklenburg-Vorpommern disaster, which was a Landtag vote.

and to AT, Die Linke is in some disarray, and not looking able to capitalize on the current situation. With exceptions.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 01:12:38 PM EST
[ Parent ]
You're right. I assumed that the date of the newspaper was the date of the news...
by gk (gk (gk quattro due due sette @gmail.com)) on Mon Sep 12th, 2011 at 01:19:49 PM EST
[ Parent ]
No, if i read your question correctly. These are all local elections, with the totals i gave being the aggregate. So in some places the guard changed, but the CDU still had the most aggregate votes.

What's important is the aggregate ascendency of the Greens, the well-earned descent and despondence of the yellow FDP, and the ability of the Pirates to have 18 seats in various locals.

Then again, as a prediction of the future, Red-Green is looking exceptionally strong, nearing 50% together. (for the State elections in two years.)

So then, yes, to the other side of your question.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 12:33:58 PM EST
[ Parent ]
Thank you. I had understood that these were both local elections and Landtag elections. So it was a stupid question.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Sep 12th, 2011 at 12:40:21 PM EST
[ Parent ]
Crazy Horse:
and the ability of the Pirates to have 18 seats in various locals

I count more then 18 here:

Piratenpartei Niedersachsen | Klarmachen zum Ändern! : Kommunalwahl 2011

Ergebnisse der KWNDS11

Actually, Piraten had already summed it up in Piratenwiki

Mandate in Landtagen und Kommunalen Parlamenten
Niedersachsen   voraussichtlich ca. 59

Which more then doubles the total local seats of Piratenpartei Deutschland. Now Sunday's state election in Berlin will be very interesting, I've heard they've polled above the 5% limit there.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Mon Sep 12th, 2011 at 03:34:20 PM EST
[ Parent ]
Sorry, i must have only had our region up on the screen at the time. That was 18, in the Kommune surrounding Bremen from Oldenburg to Cuxhaven.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Mon Sep 12th, 2011 at 04:16:44 PM EST
[ Parent ]
Around 1% statewide. Quite astonishing, if you consider its a local election and that they didn#t put candidates in every county.
by IM on Wed Sep 14th, 2011 at 09:42:33 AM EST
[ Parent ]
I could write a lot about it, being involved and all. But since we are talking abuot local elections, it is not really that interesting.

And the trend was the usual: SPD crumbling, CDU crumbling more, Greens surging, FDP vanishing, Linke inconclusive.

State elections in Berlin will this weekend will tell us a bit more.

by IM on Wed Sep 14th, 2011 at 09:48:39 AM EST
[ Parent ]
I could write a lot about it, being involved and all. But since we are talking abuot local elections, it is not really that interesting.

How involved and "why not really that interesting"? "All politics is local."

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Sep 14th, 2011 at 10:26:51 AM EST
[ Parent ]
A minor election campaign (mayor) and a nominal candidate (council).

Yes, all politics are local. But in say, Goslar they imported a mayor from Bavaria, member of the CSU, who defaeted a SDP/Grüne/FDP candidate handily. That is nice story, but it don't really tells us much about the general political mood in Germany.

by IM on Wed Sep 14th, 2011 at 10:34:59 AM EST
[ Parent ]
Cities are the Research and Development laboratories of the future.  Only cities have the population, infra-structure, and wealth - as well as the tolerance - to support the Creative Class (here and here) from which new solutions will arise.

Which puts DoDo's post a couple of days ago Berlin's Gentrification Row: Locals Rage Against Rising Rents:

Berlin's Kreuzberg and Neukölln districts were once known for cheap rents and diversity. But their edgy urban charm has attracted both affluent residents and international investors, jacking up rents in the process. Now long-time locals are fighting to keep their flats.

Above the gritty caverns and stale air of the Hermannplatz subway station, thousands of Berliners came together last Saturday in the city's Neukölln district in a gesture of solidarity. Middle-aged parents pushed baby strollers alongside leather-clad adolescents with colorful hair, protesting what they all see as the systematic displacement of the city's lower (and even middle) class residents.

critically (IMO) important.  It is these neighborhoods that are the attractors of and for the Creative Class meaning they are the potential incubators of 'What's Next.'  Destroying these neighborhoods eliminates the  social wealth of networks, contacts, meeting places, small businesses, etc. where, eventually, the CC, over time, creates the vibrancy underpinning for economic development.  

Regional and State authorities are spending millions to artificially create a Silicon Valley¹ while the city government of Berlin is busily destroying one!  

This doesn't make a whole lot of sense, putting it mildly.  

The only way to stop this nonsense is for people to get active in local politics and change things around.

Thus, the upcoming Berlin city election is important.

¹  Which emerged spontaneously by the exact process I described in the above paragraph

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Sep 14th, 2011 at 11:43:53 AM EST
[ Parent ]
Well, yes, But I am living in a depopulating town. And in the whole of Lower Saxony there are about two cities,Hanover and Brunswick. I don't really think Salzgitter or Goslar or Oldenburg or even Wolfsburg is a laboratory of the future.
by IM on Wed Sep 14th, 2011 at 12:03:24 PM EST
[ Parent ]
Well ... they could be.  

A quick look at the list of towns you gave allows me to suggest Oldenburg looks like a possibility.  The Carl von Ossietzky University, according to Wikipedia "specializes in cross-disciplinary studies" with a 18,000, or so, student body both of which are Good Things.  The town has a population of ~160,000 meaning there is enough people to support "off-beat, odd ball" ventures.  Close to Bremen so ventures based in Oldenburg can use some of its infrastructure, e.g., the airport, as well as having the potential to attract customers from Bremen, or expand into the city 'on the cheap,' and could also be a source of financing for business expansion.  (?) The plaza in front of the Oldenburg castle could be used as an inexpensive venue for a town market - if it isn't already used as such - for local businesses, offering a wide range of products (and services?) to bring-in people from Bremen.  The port can be leveraged in a couple of different ways as well.

The necessary condition for this is an Oldenburg city government that doesn't have its head up its bum.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Sep 14th, 2011 at 12:43:43 PM EST
[ Parent ]
Financialization eats creative classes for breakfast. I suspect that is what is driving the destruction of the Kreuzberg and Neukölln districts. But the process is either facilitated or impeded by city governments. The cities like development fees, building fees, etc., but it might be nice if they gave some consideration to the long term impact of what they are permitting. But that flies in the fact of dogma that says "markets know best" and that economics is an autonomous sphere upon which evil government must not encroach.  The Kreuzberg and Neukölln districts of Berlin need candidates that will point all of this out, oppose the development and expose the real agendas (I suppose to be) at work.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Sep 14th, 2011 at 01:45:00 PM EST
[ Parent ]
Financialization eats creative classes for breakfast.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Sep 14th, 2011 at 02:38:08 PM EST
[ Parent ]
5% threshold

Ah. 4% is the Austrian threshold. That means they are closer to oblivion then I thought.

by generic on Mon Sep 12th, 2011 at 11:24:23 AM EST
[ Parent ]
Merkel lacks majority for euro bailout fund - The Local

German Chancellor Angela Merkel's centre-right coalition failed to find a majority for the eurozone rescue fund in a test vote on Monday evening.

(12 Sep 11) Twelve members of Merkel's conservatives and two from their junior partners the Free Democrats (FDP) voted against the European Financial Stability Facility (EFSF), which is meant to prop up eurozone countries in distress. A further 11 MPs from the coalition abstained.

Christian Democratic parliamentarian Peter Altmaier said it was "completely natural" that there would be opposition to the euro bailout at this point in the legislative process and expressed confidence the government would eventually cobble together a majority.

The vote in parliament is planned for September 29.

What happens next...?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Sep 12th, 2011 at 12:22:37 PM EST
[ Parent ]
Much easier to vote no when there's nothing at stake but a test, but with much to gain from some quid-pro-quo.

If the opposition within her coalition remains, however, wheeee.

Meanwhile, FDP chair Rösler's party got hammered in his home state.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 12:38:50 PM EST
[ Parent ]
She wants a majority from only within her coalition. The opposition is actually willing to support her on that (the EFSF vote and the like) but relying on opposition votes is seen as a sign of major weakness and the end of the coalition with the FDP.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Tue Sep 13th, 2011 at 05:08:03 AM EST
[ Parent ]
and dramatically slam the door.

There's no other way out, since Merkel seems endlessly willing to endure the millstone around her neck as she tries to keep her head above water.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Tue Sep 13th, 2011 at 05:14:03 AM EST
[ Parent ]
Only if the FDP would be willing to rescue its share of the vote by around 10%.  I don't think they are that desperate yet.

Perhaps one state election later.

by IM on Wed Sep 14th, 2011 at 09:40:13 AM EST
[ Parent ]
Generally, junior coalition partners in unpopular governments are severely punished at the next election. Electorally, the FDP would be smart to quit now : they might get back above 5% in two years, if voters reward them for taking a stand on principle.

If, on the other hand, they are determined to stay in government out of principle, in order to wreck all attempts at effective crisis management, then I suppose that's ... um... admirable. Suicidal, but admirable.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Sep 14th, 2011 at 11:25:01 AM EST
[ Parent ]
Ah, yes. I assumed that the fall of the government would lead to new elections now. And that would be even more suicidal then hanging on for two years and hoping something will turn up. You assume a new government and elections in two years. But leaving the government would look bad anyway and two years in opposition may not be enough.
by IM on Wed Sep 14th, 2011 at 11:34:09 AM EST
[ Parent ]
"But there is already a pending vote scheduled for 29 Sept., put forth by Merkel, (on the second tranche of EFSF?). Further, the Court says they  must vote if 'Schland is on the hook. It is this scheduled vote which (so far) has the support of both a majority of CDU and much opposition SPD/Greens as well."

The majority of CDU/CSU/FDP is not that big. There are enough dissenters so that the proposal wouldn't get a majority from them alone. It will still pass on SPD and green support, but of course the government would be quite damaged.

And al this will happen after the government will lose another state election this weekend, putting further pressure especially on the FDP.

by IM on Wed Sep 14th, 2011 at 09:54:49 AM EST
[ Parent ]
I would certainly enjoy that.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Wed Sep 14th, 2011 at 11:26:19 AM EST
[ Parent ]
IM, i wasn't implying that the government parties are already a majority, but that the majority of the Bundestag delegates support the vote.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Wed Sep 14th, 2011 at 02:04:36 PM EST
[ Parent ]
Ah, Bundestag CDU/CSU delegates.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Wed Sep 14th, 2011 at 02:10:29 PM EST
[ Parent ]
Yes, that is what I said. But they want a majority of their own.
by IM on Thu Sep 15th, 2011 at 06:07:32 AM EST
[ Parent ]
There are  couple of issues here.

Firstly, Merkel is on record as saying a new EU Treaty is required to address the issues raised by this crisis.  International Treaties, once ratified, by definition, override national constitutions, courts and Parliaments.  German Sovereignty has already been significantly eroded/pooled by the development of the EU.  

The question is, therefore, whether Eurobonds exceed the powers currently transferred to EU institutions under current treaties. That question is ultimately a matter for the European Court, should some EU institution break the current political consensus and issue them.  It is not for the German Constitutional Court to tell the EU what it can or cannot do under existing devolved sovereign powers.

If, as conventional wisdom seems to suggest, Eurobonds are beyond the scope of existing Treaties, then we are down to pragmatic temporary solutions, (as approved by the National constitutional Courts) or a new EU Treaty.  So far, only Merkel seems to be serious about proposing a new EU Treaty, so we cannot blame her for not recognising the limitations of existing Euro institutions.

It all depends on the content of any new Treaty, of course, but right now the political climate for a new Treaty couldn't be worse in many countries, particularly in countries like Ireland where a popular referendum is required.  Unless any such new Treaty explicitly prohibited ordinary people from becoming liable for the losses of TBTF banks, I couldn't see any such Treaty having a chance of being passed.

Basically we need a new Treaty to explicitly provide for the re-structuring of insolvent banks and sovereigns within the Eurozone according to some agreed rules.  Cue Austrian Apoplexy.  We need an ECB with a wider remit (full employment) and broader powers to act as market maker of last resort. Cue exit of all Stark raving mad central bankers.

But the debate on what any new Treaty should contain hasn't even begun because CW doesn't have a clue as to how this crisis can be resolved and new crises prevented. We can blame the entire conservative establishment for that, but at least Merkel has had the foresight to point out that existing EU institutions and legal powers are inadequate.

Indeed I wouldn't be surprised if a new German leader from the Centre-Left will ultimately take the lead on all this.  But first we need a Greek default, and probably a partial Italian one as well before the CW is fully exposed for the bankrupt ideology that it is.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 10:59:35 AM EST
[ Parent ]
Merkel is on record as saying a new EU Treaty is required to address the issues raised by this crisis.

As JakeS has said elsewhere in this thread, that's how you prevent the crisis from repeating itself, not how you resolve the current crisis.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 11:22:44 AM EST
[ Parent ]
Agreed, but unless you regard recurring and unpredictable crises and defaults as a solution, the only way for European elites to even come to grips with the notion that the Euro has systemic problems which require systemic solutions is to start the debate on what is required to prevent them.

If I get the time, I might write a diary on what any new Treaty should look like including elements such as:

  1. A euro wide legal framework for bank restructuring in the event of failure to abide by Basel III capitalisation requirements - specifically ruling out taxpayers as guarantors of last resort - and providing for a harmonised hierarchy of risk sharing amongst investors..

  2. Fiscal harmonisation between member states

  3. Policies and institutions specifically designed to combat structural/regional - e.g. trade - imbalances

  4. Eurobonds

  5. Bank regulation

  6. full employment and productivity/income equalisation

  7. Asset and consumer price inflation control

  8. Tobin tax to disincentivise speculators and other incentives to volatility/gaming the system

  9. Dismemberment of TBTF banks

  10. Social harmonisation (health/education/social welfare) between member states

And no, I don't expect the above to be passed or even proposed any time soon... but that is no reason why we shouldn't start the debate...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 01:04:49 PM EST
[ Parent ]
Even the Basel III gearing limits are grossly inadequate, particularly vis-a-vis currency risk.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:12:30 PM EST
[ Parent ]
a) The ESM will pass the parliament

b) The opposition is pro eurobonds

c) I don't know how to interpret the ruling of the constitutional court yet. I think it does prohibits a fiscal union. We have to remember though that on matters of european integration the court has habit of giving sanction to the integration step of the moment but also to draw a line in the sand. And then a few years alter the line is crossed and they draw a new line.

by IM on Wed Sep 14th, 2011 at 10:08:35 AM EST
[ Parent ]

Fifty-three percent of Germans oppose further aid for Greece and wouldn't save the country from default unless it fulfills terms of the rescue agreement, Bild am Sonntag reported, citing an Emnid poll of 503 respondents conducted Sept. 8.

From today's Bloomberg. Once again we see confirmation polls used as propaganda. Can you imagine if 15.09 of those vastly representative 503 people were told that bailout funds go to German banks, they would change their views and we would be 50-50. Heck, i'll bet i could find 15.23 people just here in the neighborhood, with a margin of error at +- 4.6 kmh€.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 08:58:18 AM EST
Only 53%? That's good. And I don't think more people would support a bank bail-out.
by IM on Wed Sep 14th, 2011 at 09:37:18 AM EST
[ Parent ]
Another option, almost never mentioned but very reasonable and practical in my mind, is the periphery default solution.

This is very widely mentioned. And this is what EU actually originally suggested in Ireland.

Geithner said no. American banks had insured all these loans. The same applies to Greece, i believe. European tax payers are on the hook for american casinos.

by kjr63 on Mon Sep 12th, 2011 at 09:03:15 AM EST
The plot thickens. How will Geithner prevent a Greek default, exceedingly costly for US banks who will be obliged to pay out to all those Euro banks who bought insurance?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Sep 12th, 2011 at 09:16:20 AM EST
[ Parent ]
It's not that complicated. Every party has a counterparty. Every counterparty has a counterparty. and all them parties and count-'em parties has hedges, too, and they have some counterparties and various hedges. AND some FX stakes and aluminum and corn.

This is how you make trillions of business about billions of investment. Or did i misunderencapsulate something falsely, at half-mast?

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 09:38:17 AM EST
[ Parent ]
There are two already existing, non-temporary European institutions that could issue bonds without needing Bundestag involvement: the European Central Bank and the European Investment Bank.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 09:17:12 AM EST
Possibly not if Germany were jointly or severally liable, though in the end the Bundestag would likely vote to approve. Or possibly so.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Mon Sep 12th, 2011 at 09:43:31 AM EST
[ Parent ]
Since the institutions in question already exist, they do not need permission from the German constitutional court to bypass the Bundestag. They need permission from Strassbourg.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 13th, 2011 at 07:32:57 PM EST
[ Parent ]
Sorry for citing the Telegraph here, but this is better than what they've been putting out lately:

http://www.telegraph.co.uk/finance/financialcrisis/8755881/Germany-and-Greece-flirt-with-mutual-assu red-destruction.html

My solution - like that of Hans-Olaf Henkel, the ex-head of Germany's industry federation (BDI) - is to split EMU into two blocs, with France leading a Latin Union that keeps the euro. This bloc would devalue but not by 60pc, yet uphold its euro debts intact. The risk of default and banking crises would decrease, not increase.

The German bloc could launch their Thaler, recapitalizing banks to cover losses from rump euro debt. Disruptions could be contained by capital controls at first. None of this is beyond the wit of man. My bet is that aggregate losses would be lower than the status quo, and the long term outcome much healthier. The EU might even carry on, unruffled.

The status quo, however, is not acceptable. EMU's debt-deflation strategy has trapped half of Europe in depression, with youth unemployment reaching 46pc in Spain and no way out for years.

Perhaps a global coalition of the G20, IMF, China, and the oil powers will combine to rescue Euroland, as some now hope. But how would that bridge the gap between EMU's North and South? It solves nothing.

by Upstate NY on Mon Sep 12th, 2011 at 09:49:54 AM EST
Germany and Greece flirt with mutual assured destruction by Ambrose Evans-Pritchard.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 09:54:59 AM EST
[ Parent ]
henkel i believe was one of the parties to the Constitutional Court suit. Representing the moralizer pirates. Bah.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Mon Sep 12th, 2011 at 09:58:05 AM EST
[ Parent ]
A different selection of paragraphs...
Let us be clear, the chief reason why Greece cannot meet its deficit targets is because the EU has imposed the most violent fiscal deflation ever inflicted on a modern developed economy - 16pc of GDP of net tightening in three years - without offsetting monetary stimulus, debt relief, or devaluation.

...

"The euro should not exist," said Stephane Deo from UBS. It creates more costs than benefits for the weak. Its "dysfunctional nature" was disguised by a credit bubble. The error is now "painfully obvious".

...

Perhaps a global coalition of the G20, IMF, China, and the oil powers will combine to rescue Euroland, as some now hope. But how would that bridge the gap between EMU's North and South? It solves nothing.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 10:02:28 AM EST
[ Parent ]
teach me for the eleventieth time to comment without reading the article.

I still think, one Euro, with both Euro "Treasuries" AND forced haircuts will do less damage than what i really think most thinkers really think. (Couldn't Greece defaulting be spun as Euro policy "forced haircuts?")

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 10:15:20 AM EST
[ Parent ]
remarkably close to one mention by Starvid in the diary text:


Another option, almost never mentioned but very reasonable and practical in my mind, is the periphery default solution. This means that periphery nations will partially default on their debts and institute haircuts on their bonds. This will not really cause any losses to the banks and others who hold periphery debt, as soon as they cease their make-believe and start marking their bonds to market. The losses have already happened, and the sooner this is realized, the earlier healing and de-zombiefication can begin.

And probably suggested by Jake S and Migs and others going back to the mezozoic, or at least a few years ago.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Mon Sep 12th, 2011 at 10:36:35 AM EST
[ Parent ]
That was probably Jerome's solution (he's repeatedly asked why would a Greek default be so terrible for the Eurozone?).

I was more in favour of something along the lines of this

Nothing will scare those betting against Europe more than unleashing the unlimited balance sheet. Only the ECB fits this bill. The ECB needs to turn the fire hose in support of the sovereigns on the firing line. They have already been pinning Spanish and Italian debt at around a 5% yield. They may soon need to support France. But rather than being stealthy about it, they need to commit to it up front. Worrying about undermining reform resolve in Italy and Spain, while understandable, is, at this point, a second order issue. There are other ways to scare the passenger without threatening to drive your own car over the cliff. The ECB should either state or heavily imply that until further notice they are willing to subjugate their single mandate to this objective. Those worried about inflation should take comfort from the experiences of Japan and the US. And, lastly, of course there must be continued liquidity support for the banking sector even after the recapitalization. This will be a hard, but necessary sell.
If they had done this with Greece in February 2010 (no, the bond purchases since then don't count because the ECB has been shy and apologetic about them, very much un-marketmaker-like) none of this crisis would have happened.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 10:45:31 AM EST
[ Parent ]
Don't they get jealous of the Swiss bankers?

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Mon Sep 12th, 2011 at 11:03:12 AM EST
[ Parent ]
What is the objection to the ECB acting as market maker on secondary markets.

Is it:

  1. The ECB is acting outside its legal remit
  2. The ECB will be exposed to unsustainable losses
  3. It doesn't solve the fundamental problem
  4. Moral hazard - it rewards poor national economic managhement


Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 11:27:19 AM EST
[ Parent ]
All of the above.

For reference, 1) and 2) are untrue as a matter of fact, 3) is excuse-making and 4) is an ideological rather than operational objection.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 12:17:29 PM EST
[ Parent ]
  1. is false, but it has been the primary argument. Recently the German President argued it was outside the spirit but not the letter of the law.

  2. is false too, but it is used. The ECB cannot become insolvent by buying Euro-denominated sovereign debt. At most it would have to use seigniorage or (as has already happened) ask the member states to recapitalize it.

  3. True, but hasn't been used as an argument against bond purchases and is neither here nor there as it confuses the resolution of the current crisis with the prevention of a recurrence in the future. It is not for the ECB to change the institutional architecture of the Eurozone and even less to dictate fiscal/employment/welfare policy to member states. But the ECB has a responsibility for financial stability today. And the unique ability to do certain things.

  4. That has been used as an argument, but we know this crisis has a moral dimension for many of the people involved.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 12:20:02 PM EST
[ Parent ]
but we know this crisis has a moral dimension for many of the people involved.

And an immoral dimension for others.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 02:48:40 PM EST
[ Parent ]
It's a very strange morality that considers riots and mass unemployment and/or wage slavery superior to equitable wealth redistribution and responsible behaviour by the financial classes.

In psychology, this is usually called projection - where one's personal failings are palmed off on others, who are then painted black and punished for them.

Once again it's obvious that the financial classes have some very serious psychological and emotional problems.

Unfortunately our 'moral' politics selects for and rewards those same problems.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Sep 12th, 2011 at 03:16:41 PM EST
[ Parent ]
Yeah, it is too bad that the initials for the debt afflicted peripheral countries could not have been arranged so as to spell "GOATs". That would have been much more appropriate than PIIGs. But this does reveal where are the bases of our present religious institutions. The Holy of Holies is clearly the Banker's Bonus. And the bigger the bank the holier it is.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 03:39:22 PM EST
[ Parent ]
I recommend: One Market Under God

One Market Under God: Extreme Capitalism, Market Populism, and the End of Economic Democracy is a 2000 book by historian and author Thomas Frank. It was published by Anchor Books. The book traces the development of what Frank calls "market populism: the idea that markets are a far more democratic form of organization than democratically elected governments." He also discusses many facets of the New Economy, "culture studs," and internet brokerages. An excerpt of the book was the cover story of the October 12, 2000 issue of The Nation [1]. It was reviewed in The American Prospect on December 18, 2000 [2], in The New York Times on December 21, 2000 [3]
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Sep 12th, 2011 at 04:18:10 PM EST
[ Parent ]
A short, sweet column by Paul de Grauwe: Why contagion cannot be stopped in the Eurozone (Eurointelligence 28.07.2011)
Why has the ECB refused to take up its responsibility of lender of last resort in the government bond markets (while it has dutifully taken up this responsibility during the banking crisis)? A popular answer is that the ECB should not do this because it risks losing money. This is certainly the wrong answer. When there is confidence that the central bank will operate as a lender of last resort in the sovereign bond markets, the central bank does not have to act as a lender of last resort most of the time. And when it has to do so, we should not really worry about the fact that it loses money. What matters is financial stability, not the profit and loss account of the central bank. A central bank can always fill the holes by printing money.

A more serious concern is moral hazard, i.e. the risk that if the ECB guarantees that cash will always be available to pay out sovereign bond holders, this will lead governments to issue too much debt. But this risk of moral hazard is no different from the risk of moral hazard in the banking system. The way to deal with this risk is not to abolish the role of lender of last resort but to create rules that will constrain governments in issuing debt.

The ECB has been influenced too much by the one-dimensional theory of inflation targeting. According to that theory, all a central bank should do is to stabilize the price level. All the rest will then also be stable. Historically, however, central banks have been invested with another equally important task, i.e. to ensure financial stability, which includes stabilizing the government bond market.  By refusing this role in the Eurozone, the ECB has become the single most important reason why the Eurozone crisis cannot be stopped.




Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Sep 13th, 2011 at 08:49:54 AM EST
[ Parent ]
Well, but I meant, rarely mentioned by Serious People.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 11:54:33 AM EST
[ Parent ]
Sadly, all that pessimism counts as realism now.
by Upstate NY on Mon Sep 12th, 2011 at 10:21:37 AM EST
[ Parent ]
Krugman blog: The Spanish Prisoner (September 11, 2011)
One of the good ideas in Paul De Grauwe's now-essential paper (pdf) was to do a head-to-head comparison of Spain and the UK to illustrate the problems the euro faces. Here's an update.

...

To some extent this may reflect the reality that British growth prospects are better because of the depreciated pound, and also the fact that Britain won't have to deflate the way Spain will thanks to being on the euro. But I believe that De Grauwe is right that the most important factor is that Britain, which can turn to the Bank of England for financing if necessary, doesn't face the risk of a run by creditors the way Spain does.

What's needed, clearly, is for Europe -- and ultimately that probably means the ECB -- to provide for Spain and Italy the kind of backstop countries with their own currencies can provide for themselves. Without that, the whole euro system is at risk of unraveling, not over the course of years, but over the course of a few weeks.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 10:18:37 AM EST
Krugman uses this as an argument for the Euro being a very bad idea for Spain and almost any other member country.  But the reality is perhaps more that the ECB doesn't have the powers/flexibility/ideology to backstop their economy like the Bank of England does. If the ECB acted to stabilise rather than deflate periferal economies we wouldn't be having much of this conversation. The problem isn't necessarily the Euro, it is the ECB as presently managed/constructed.

Can we really expect an independent Bank of Spain/Greece/Ireland acting as the ECB has done, unless ideologically captured?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 11:35:03 AM EST
[ Parent ]
Even with a far more aggresive ECB, we would have still gotten debt bubbles in the periphery, it would just have given us more time to deal with/deny it for longer. Sure, yields could have kept down, but even so.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 11:57:51 AM EST
[ Parent ]
In the de Grauwe paper [PDF] there's this on page 25:
The next question then becomes: can the European monetary authorities, in particular de ECB, help out national governments? We have been told that this is impossible because the ECB should only be concerned by system-wide aggregates. It cannot be made responsible for national economic conditions. The reason is that it has one objective which is the maintenance of price stability in the Eurozone as a whole, and because it has only one instrument to achieve this goal.

This I believe is too cheap an answer. The ECB is not only responsible for price stability but also for financial stability. The financial crisis that erupted in 2010 had its origin in a limited number of countries. It is therefore important that the ECB focuses not only on system-wide aggregates but also on what happens in individual countries. Excessive bank credit creation in a number of member countries should also appear on the radar screen of the ECB in Frankfurt upon which the ECB should act.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 12:13:22 PM EST
[ Parent ]
Surely structural centre/periphery imbalances are a systemic problem? When low ECB interest rates (require by slow German growth) created an asset price bubble in Ireland and Spain, surely the ECB had a responsibility, as regulator of last resort, to limit these by capital controls, bank regulation and other non interest rate mechanisms.  A one size fits all interest rate policy by definition means the need for non interest rate measures where the interest rate (driven by the core) is inappropriate for a particular member state.  Where does it say, in the Treaty,that the ECB need only concern itself with system wide aggregates? When property inflation in Ireland reached 10-15%, why was that none of the ECB's concern - particularly when it was largely fuelled by German/French/UK banksnot subject to Irish regulation?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 12:34:04 PM EST
[ Parent ]
Where does it say, in the Treaty,that the ECB need only concern itself with system wide aggregates?

Nowhere. That, and the claim that it has only one policy tool (the interest rate) are ideological drivel.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 12:36:29 PM EST
[ Parent ]
When low ECB interest rates (require by slow German growth) created an asset price bubble in Ireland and Spain

Low interest rates do not create bubbles. Inadequate regulation creates bubbles (or, as in Spain's case, structural current accounts deficits under a fixed exchange rate).

The problem with the ECB was not that it kept rates low. It was that it did nothing (and has since studiously obstructed any attempt to do something meaningful) about the current accounts imbalances.

particularly when it was largely fuelled by German/French/UK banksnot subject to Irish regulation?

It wasn't. It was enabled by German/French/UK banks, but the primary mortgage originators were Irish, and subject to Irish regulations.

Now, they might have moved North of the border if the Irish regulator had had its eyes on the ball, in which case your complaint would have been valid. But that's an exercise in counterfactual history.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:09:53 PM EST
[ Parent ]
Many of the Irish developers who lost Billions and whose debts have now been socialised by the Irish Government made their losses in massive losses on developments throughout Europe and particularly in England. They borrowed from European banks for European developments in full compliance with EU liberalisation laws and policies.  They were Irish in origin only and yet the "Irish Taxpayer" has now picked up the tab - for losses on investments which never came near Ireland.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 01:16:20 PM EST
[ Parent ]
As you know, I'm not among the most effusive cheerleaders for the ECBuBa, but even I am not quite prepared to blame it for the Irish government deciding to bail out Irish gamblers who gamble in other countries, with other countries money and supported by other countries' banks. That would seem to be a matter for the Irish electorate to - ah - discuss with Fianna Fail.

Now, if you can make a credible case that the ECBuBa blackmailed Ireland to bail out the developers, and not just the banks, that's a different sort of story. But still not about low interest rates.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:32:26 PM EST
[ Parent ]
The ECB blackmailed the Irish Government to bail out the banks who had made loans to the developers using funds originating from EU banks - by threatening to withdraw all liquidity support for the Irish banks and thus crashing the Irish banking system - if it did not do so.  Even now it is threatening to withdraw support if the Irish Government does not pay unguaranteed senior bondholders in the long defunct Anglo-Irish bank in full c. 3.8 Billion in the next few months - see Colman quotes.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 01:38:11 PM EST
[ Parent ]
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 01:40:45 PM EST
[ Parent ]
And that is quite obviously absurd.

However, this is not the story you told in the previous post - where you contended that the Irish developers had borrowed directly from foreign banks. Since domestic banks were involved, an on-the-bounce financial regulator could have killed the bubble dead.

Yes, the ECBuBa could also have killed the bubble dead by adequately policing cross-border lending. But you do that case no favours by pretending that the Irish regulator was powerless to stop the gambling when Irish banks were involved in it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:49:38 PM EST
[ Parent ]
I'm not contending that the Irish banking regulator wasn't Brain dead - he was.  What I am arguing is that the "light touch" regulation philosophy dominant at the time was fully in line with ECB market liberalisation policies, and the Irish developers and banks were lauded by all and sundry within the EU and beyond for their entrepreneurialism.  An effectively regulator would have been swimming against the tide at the time.

In any case, I am unclear why the "Nurse in Ennis" should have been made liable for the losses of private banks domiciled in Ireland for losses sustained in Ireland and abroad.  The primary responsibility for that has to lie with the Irish Government and regulator.  However even now they are acting under extreme pressure from the ECB to repay bondholders in defunct banks in full despite the fact that those bonds weren't covered by any guarantee.

It seems clear to me that the ECB still hasn't learned what at least the Irish Government and bank regulator have learned in the meantime.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 03:32:01 PM EST
[ Parent ]
However even now they are acting under extreme pressure from the ECB to repay bondholders in defunct banks in full despite the fact that those bonds weren't covered by any guarantee.

You're ignoring the 2008 "blanket guarantee" of all bank liabilities?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 03:33:24 PM EST
[ Parent ]
Apparently the 3.8 Billion of Anglo Irish bonds currently at issue weren't covered by any Govt. Guarantee

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 03:55:40 PM EST
[ Parent ]
We agree on all that.

Still doesn't mean the bubble was caused by low interest rates or ECBuBa chicanery. The ECBuBa does not have the authority to play banking regulator, so let's focus on pillorying it for the chicanery it's actually responsible for. Being overstated has never done anything good for an argument.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 03:46:11 PM EST
[ Parent ]
I think you'd find it hard to find an Irish economist who doesn't believe that the exceptionally low ECB interest rates at a time of 8-10% "growth" in the Irish economy didn't contribute to the asset price bubble.  "market forces" determined that cheap credit availability resulted in increasingly higher asset prices.  Whether the primary blame is placed on the "cheap" or on the "availability" is a matter we can debate. But I would tend toward the former. There simply wasn't a culture, in Ireland or the EU, to go for some heavy handed bank regulation at the time.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 04:02:05 PM EST
[ Parent ]
I think you'd find it hard to find an Irish economist who doesn't believe that the exceptionally low ECB interest rates at a time of 8-10% "growth" in the Irish economy didn't contribute to the asset price bubble.

There is no mechanism for low interest rates to create bubbles.

There is no mechanism for high interest rates to kill bubbles, except by flatlining the productive economy so hard that pessimism causes people to reexamine prospectuses that now seem too good to be true (actually they should have seemed like that all the time, but nothing focuses your mind on little things like the soundness of a business model like the imminent threat of bankruptcy). I file that under the heading of "cures that are worse than the disease."

Killing bubbles is the financial regulator's job. Killing unsustainable growth rates is fiscal policy's job.

I think that there are compelling reasons to give the central bank the financial regulator's job. But that requires giving the CB the financial regulator's tools as well, and that's not the institutional setup we have right now. And it's especially not the sort of central banks we have right now. Major housecleaning would be necessary before they could fill those shoes.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 04:11:03 PM EST
[ Parent ]
JakeS:
There is no mechanism for low interest rates to create bubbles.

I'm stunned by that statement.  The Irish debt crisis is largely driven by Mortgage debt taken on my people who could afford the mortgage when both partners had jobs and when interest rates were low. There simply would not have been so much property development or a market for buying it in the absence of historically low interest rates. Are you forgetting that Ireland has one of the highest rates of home ownership (and mortgage debt) in the world?  We are not talking business models here - simply affordability of mortgage repayments in the context of two income families and historically low ECB tracker rate mortgages that people thought would go in for ever - an an historic employment and wages boom which were well beyond the remit of any financial regulator to control.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 04:21:30 PM EST
[ Parent ]
The Irish debt crisis is largely driven by Mortgage debt taken on my people who could afford the mortgage when both partners had jobs and when interest rates were low.

But this is not a problem with low interest rates. This is a problem with the financial regulator not making sure that banks don't lend to people who can only afford the loan because of interest rates that a blind deaf-mute could have told you that the ECB would eventually raise. Really. The ECB, and the BuBa before it, have been following a Taylor rule targeting German inflation since around 1980.

More fundamentally, variable-rate mortgages are an abomination unto God that should never have been decriminalised in the first place.

Even more fundamentally, an on-the-bounce financial regulator would have noticed - and killed - mortgages with a principal in excess of 5 times annual before-tax household income. With extreme prejudice, and no matter what the interest rate looks like.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 04:47:39 PM EST
[ Parent ]
There seem to me to be a lot of "oughts" in here. I think we agree that regulators ought do their job, even it that seems more the exception than the rule. It is, none the less, generally true that very low interest rates for a long time and with an expectation that they will be low for a long time is an invitation to carry trades and to bubbles. These conditions might not "cause" bubbles, but they certainly enable them. Perhaps human nature in a lightly regulated low interest rate environment with run amok finance doesn't "cause" bubbles either, but there will be a high correlation of the creation of bubbles with such conditions.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 05:59:20 PM EST
[ Parent ]
It is, none the less, generally true that very low interest rates for a long time and with an expectation that they will be low for a long time is an invitation to carry trades and to bubbles.

Carry trades, yes, but any CB/financial regulator with two brain cells to rub together can kill those. Bubbles, no. You get bubbles when you have high rates, you get bubbles when you have low rates. Because you get bubbles.

It so happens that the genesis of the bubbles of the last thirty years have coincided with low interest rates. This is because inflating a bigger bubble is the only solution neoliberal economics permits for dealing with the fall-out from a bursting bubble. So you will have low rates and incipient bubbles coinciding due to the common origin as remedies for an economic downturn.

You can destroy bubbles by raising interest rates, yes. Nobody disputes that. But the way raising interest rates kills bubbles is by keeping you at the bottom of the business cycle, whereas the way prudent financial regulation and unrestricted countercyclical fiscal policy prevents bubbles by keeping you on the top of the business cycle.

I know which of those I'd like to use.

Perhaps human nature in a lightly regulated low interest rate environment with run amok finance doesn't "cause" bubbles either, but there will be a high correlation of the creation of bubbles with such conditions.

Human nature in low regulation environments is to run amok with bubbles. Interest rates are neither here nor there. Interest rates were not low during the Florida land bubble. Interest rates were not low during the South Sea bubble. Interest rates were not low during the Tulip bubble.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 13th, 2011 at 06:22:44 AM EST
[ Parent ]
Aside from the obvious ...

Bubbles are inherent to Human Behavior.  People see other people doing something they want/like/need and start jumping up and down on the band wagon to get it.  More people see people doing this and start doing the same thing.

Eventually the wagon breaks.

Reference: Extraordinary Popular Delusions & the Madness of Crowds, a book that everyone needs to read.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Sep 13th, 2011 at 12:54:28 PM EST
[ Parent ]
I'm not arguing that financial regulation doesn't have a role, but that interest rates have an even greater role.  The affordability of mortgages has been damaged more by people losing jobs and large parts of their income rather than the relatively minor interest rate increases to date.  Interest rates also effect perceptions of value.  If can get a mortgage for a house for the same price as I can rent one, why wouldn't I get the mortgage and end up owning the house in the end.

Yes, at the margins there were problems with 100% mortgages and people getting mortgages 5 times their combined incomes - and this should have been regulated. But overall mortgage demand wouldn't have been anything like it was had interest rates been higher.

If interest rates are as irrelevant as you claim, why is it virtually the only policy tool the ECB actually uses on an ongoing basis?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 07:06:27 PM EST
[ Parent ]
If interest rates are as irrelevant as you claim, why is it virtually the only policy tool the ECB actually uses on an ongoing basis?

Because neoclassical monetarism says that the only thing the central bank should or could worry about is inflation, that inflation is due to the growth of the money supply, and that the size of the money supply is controlled by setting the interest rate.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Sep 13th, 2011 at 02:35:43 AM EST
[ Parent ]
But if (as you seem to suggest here) housing prices and mortgage loads were not unreasonable relative to incomes, given continued full employment, then there wasn't a housing bubble. Real estate prices appreciating to take into account improving incomes isn't a bubble - it's catch-up. It's only a bubble if it is unsustainable given full employment and prevailing nominal wages (e.g. because people take out mortgages that only make sense if they can sell the house for more than they bought it for).

Otherwise it's just a government failing to apply sufficient countercyclical fiscal policy when the catch-up period ends, and the private sector has to take some time to figure out what to do with all the people it previously employed to work in the catch-up.

The affordability of mortgages has been damaged more by people losing jobs and large parts of their income rather than the relatively minor interest rate increases to date.

If people are not being bankrupted by rising interest rates, then how would higher interest rates in the past have prevented them from going bankrupt today?

If interest rates are as irrelevant as you claim, why is it virtually the only policy tool the ECB actually uses on an ongoing basis?

Because the ECB believes that money supply drives inflation. (In the real world, it's the other way around.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 13th, 2011 at 06:33:05 AM EST
[ Parent ]
rather than historical. Certainly, the U.S. experience - which essentially spawned the whole 'developed-world' housing bubble - was planned by Greenspan, Rubin, Gramm, and ilk. And Bubbles Greenspan was in charge of the interest rate component.

That component was essential in the arguments that I experienced. Hard-heads like myself said that 'what goes up, comes down'; the CW became 'with rates this low, it's free money'.

Seriously - I was there.


paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Mon Sep 12th, 2011 at 07:23:31 PM EST
[ Parent ]
In the case of the US, Alan Greenspan actually encouraged people to get variable rate mortgages when interest rates were at their floor from his bully pulpit as Fed Chairman.
Federal Reserve Chairman Alan Greenspan said Monday that Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.

In a standing-room-only speech to the Credit Union National Association meeting here, Greenspan also said U.S. household finances appeared generally sound, despite rising debt levels and bankruptcy filings. Low interest rates and surging home prices have given consumers flexibility to manage debt, he said.

"Overall, the household sector seems to be in good shape," Greenspan said.

That was in 2004...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Sep 13th, 2011 at 02:39:27 AM EST
[ Parent ]
But this is not a problem with low interest rates. This is a problem with the financial regulator not making sure that banks don't lend to people who can only afford the loan because of interest rates that a blind deaf-mute could have told you that the ECB would eventually raise.

This is not the issue. Low mortgage interest rate does not improve the ability to buy houses. And asset price inflation is not a "sub-prime" issue. Low interest rate just capitalises rental value into higher price (price = rent/interest). The absolute interest payment stays the same despite the interest rate in monopoly markets like housing. Just the amount of debt increases and along with that naturally higher amortisation costs. Then we have a economic disaster.

by kjr63 on Tue Sep 13th, 2011 at 06:14:00 AM EST
[ Parent ]
Addition:

Housing market is a credit market, not "real economy." Credit is given to the one who promises banks the highest interest. The price rises until "investors" pay all rental value to the banks as interest. So again, lower interest just means higher prices.

by kjr63 on Tue Sep 13th, 2011 at 06:19:02 AM EST
[ Parent ]
That is why preventing unrealistic principals is an important regulatory function, even if people can afford the monthly payment.

But interest rates affect other things than the mortgage market. They also raise the risk-free rate of return, which means that they subsidise lazy money and reduce investment in real capital (if you can invest in a machine that gives 1 % or in a sovereign bond that gives 1 %, you're going to pick the bond. But the bond generates 0 % added value to society, while the machine generates 1 % added value to society - so that's a net loss).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 13th, 2011 at 06:44:12 AM EST
[ Parent ]
But interest rates affect other things than the mortgage market.

Yes. The problem is not the ECB rate, it's the bank mortgage rate.

by kjr63 on Tue Sep 13th, 2011 at 07:04:04 AM EST
[ Parent ]
..or to be more precise, the problem is privatised land, that allows the financialisation of land values.
by kjr63 on Tue Sep 13th, 2011 at 07:06:48 AM EST
[ Parent ]
Hypothetically, imagine Germany pulled out of the euro and wanted to set up a new currency union among like-minded countries. You're Finland: what do you do?
by Upstate NY on Mon Sep 12th, 2011 at 01:54:30 PM EST
[ Parent ]
If you wish to act in your national interest, you say "thanks, but no thanks."

If you wish to join the Neuro... well, that depends on how the €-Mark is dissolved in the first place. In the legally most straightforward scenario, it is dissolved by members issuing scrip. But you can only exit via scrip if you wish your scrip to depreciate (Gresham's law, Wörgl experiment), and Germany does not want that. So if Germany pulls out, it will be at the end point of some political negotiation which would likely include setting up the Neuro framework.

If it didn't, I'd suggest an Enhanced Cooperation group.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 02:08:26 PM EST
[ Parent ]
Finland is not really like-minded with Gernamy. Finland is like-minded with anglo-american world. There is a firm belief here in the power of debt and real estate. Not much else.
by kjr63 on Tue Sep 13th, 2011 at 08:04:54 AM EST
[ Parent ]
Can I get you to expand that thought?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 13th, 2011 at 12:58:42 PM EST
[ Parent ]
Housing bubble and household mortgage expansion for a start. Both at historical record levels in Finland.
by kjr63 on Tue Sep 13th, 2011 at 05:08:51 PM EST
[ Parent ]
Ah, OK.

Thanks

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Sep 13th, 2011 at 05:14:37 PM EST
[ Parent ]
Look at this silly article:

http://yle.fi/uutiset/kotimaa/2011/09/poliisi_tutkii_harvinaista_petossarjaa_asuntokaupoissa_2869033 .html?origin=rss

According to the police the price is so low that there must be a crime. It should cost half a million, construction costs are so expensive (three times that of Germany). So ridiculous.

by kjr63 on Tue Sep 13th, 2011 at 05:43:51 PM EST
[ Parent ]
Been looking at Finnish housing prices since early in the year.  And gagging.  

I don't understand why housing is so expensive, across the board, the Nordic countries.  I understand winter is an issue ....

but ...

still.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Sep 14th, 2011 at 11:49:36 AM EST
[ Parent ]
I understand winter is an issue ....

It's not. The issue is the same as in Ireland and Spain.

The Serious People claim that the value of an apartment in a "middle of nowhere" town in Finland is 2400e/m2.

Of course it is nothing like this.

by kjr63 on Thu Sep 15th, 2011 at 04:35:11 AM EST
[ Parent ]
No, no, that can't be. Only swarthy Mediterraneans engage in unsustainable debt-fuelled property speculation.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Sep 15th, 2011 at 04:55:32 AM EST
[ Parent ]
I understand there are old warehouses in Helsinki one can pick-up for (relative) cheap.  Wonder about purchasing one of those and turning it into a residence.

It's not like I haven't done that stuff before.

(sigh)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Sep 16th, 2011 at 01:09:05 AM EST
[ Parent ]
Brick storage buildings are no longer in demand due to the pan-Fenno  JIT production methodology. But their use permits have to be legally changed to residential. I know one photographer who managed to add a 'janitor' apartment to his studio.  Overall though, I am surprised that more of these buildings haven't been converted to residential.

You can't be me, I'm taken
by Sven Triloqvist on Fri Sep 16th, 2011 at 02:16:38 AM EST
[ Parent ]
If the Helsinki city government is looking for a place to incubate a Creative Class, there it is.  Old warehouses are marvelously adaptable and wonderful spaces for doing all kinds of things.  

Have to dig into it to discover why people haven't snapped them up.  Answers could range from Helsinki government unwillingness to change the zoning and/or issuing permits allowing conversion up to the people who have thought of it don't have and can't borrow the money to buy and convert them.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Sep 16th, 2011 at 10:28:19 AM EST
[ Parent ]
ATinNM:
I don't understand why housing is so expensive, across the board, the Nordic countries.  I understand winter is an issue ....

Is it? Compared to percentage of income or what?

At least in Sweden, there is (still) a large public owned housing sector which sets the standard for rents, which should keep them at fairly decent level.

Is it perhaps that construction workers are (still) unionised well-paid workers?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Sep 17th, 2011 at 08:56:31 AM EST
[ Parent ]
Compared to the risk I'm prepared assume:

In the last 10 years, the price of tenant-owner apartments nationwide has risen by 153 percent [Me: eek!,] while small houses have grown in value by a comparatively modest 72 percent.  [Me: "modest" 72%????]

In 2000, buyers had to pay 8,314 kronor per square metre ($115 per square foot) for a flat in Sweden. But by the end of 2010, Swedish apartment prices had risen to 21,057 kronor per square metre ($293 per square foot).

(cite)

Looking at the price rise and comparing to the average Swedish salary I conclude Sweden (and Finland) is experiencing a real estate bubble.  


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Sep 17th, 2011 at 10:56:28 AM EST
[ Parent ]
Oh, you mean the bubble. Yes, it is still there. I thought you meant something more structural.

Note that average price is skewed towards units that are hold for a short time and also more costly units. From what I have seen the price rise has been moderate outside the mayor cities. Outside the mayor cities is also where the renting market with the controlled rents works best as there is no housing shortage and the town council acts as landlord of last resort.

To pick from the adds:
Alvägen 4 - 5 room house in Vännäs kommun/Vännäs | Hemnet

695 000 kr

Vännäs is a nice little town outside Umeå.

Södra Vägen 8 - 5 room house in Stockholm | Hemnet

4 600 000 kr

Ok, it is also bigger, but there is also a lot of bubble going on.

European Tribune - Housing bubble in Sweden going pop?

After some debate an interesting line-up formed. On one hand the central bank and the real estate salesmen denied that a bubble could be predicted at all. The central bank because bubbles can be known in their limited world and the salesmen because everybody knows that prices go up-up-up. On the other side was Bostadskreditnämnden, the treasury and the largest banks.

Still has not popped.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Sep 17th, 2011 at 02:14:05 PM EST
[ Parent ]
In what sense have the developers been bailed out?
by Colman (colman at eurotrib.com) on Mon Sep 12th, 2011 at 01:44:00 PM EST
[ Parent ]
No idea. That was Frank's contention. Unless I misread him, in which case this subthread may be disregarded without loss of generality.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:51:21 PM EST
[ Parent ]
As a parenthesis, I again reiterate my position that the regional imbalances are not as such the problem (at least not in the short and medium run) - the problem is that the imbalances are papered over with debt instead of equity. IE, if Germany wants to finance Spanish purchases of German luxury cars, they should not do it by lending money to Spanish real estate developers, but rather by buying Iberdrola.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 01:51:00 PM EST
[ Parent ]
The problem, if you want to talk root causes, is insufficient €-zone aggregate demand, caused by the wage suppression of the neo-mercantilist countries. The imbalances are the symptom.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 02:00:40 PM EST
[ Parent ]
or real politics (as opposed to realpolitik). These kinds of diaries are wonderful displays of expository prose, but to what effect? IMO, none until we get to a basic issue with a basic solution - preferably one that can be converted to a fairly concise slogan. Who's good at marketing here?

Actually, we need two types of slogans: 1) a slogan that speaks to Frank's national viewpoint without blaming the German people at-large, and 2) one for the Germans that blames the Austrians (economics school, that is). Maybe the German Greens and Pirates are handling that already.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Mon Sep 12th, 2011 at 07:36:01 PM EST
[ Parent ]
Well, it's simple. Germans should be pissed off (i) at their politicians for squeezing their wages to create profits for multinationals and their owners, (ii) at their banks for blowing off that money in stupid casino bets in US subprime and Spanish real estate, (iii) at their politicians for bailing out the banks at no political or practical cost to bank managers and bondholders, (iv) at their elites for blaming Greek laziness for the stagnant wages.

German elites have managed to make the Germans appear proud to have been ripped off by their banks and elites, because it somehow makes them more virtuous than the Greek.

Greece is a distraction. German wages are the real political issue.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Tue Sep 13th, 2011 at 06:35:26 AM EST
[ Parent ]
If the ECB can buy sovereign bonds which might default any second (even if only in the secondary market), why couldn't it guarantee rights issues? And in the event of lack of a private or sovereign capital heading for those issues, take an equity stake itself? The shares would only be held for a short time, maybe 5-15 years, depending on how soon the economy and stock market rebounds.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 01:38:07 PM EST
[ Parent ]
Because sovereign bonds, once they have been laundered by the bid-ask spread of a major investment bank, are monetary instruments, and may therefore be bought as part of ordinary interest rate targeting. The common stock of banks is not.

Also, the banksters don't forcible injection of new equity. That sort of thing tends to precipitously increase the risk of having to look for a new job.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:41:46 PM EST
[ Parent ]
So basically, the only problem is the one inside people's heads. Then comes the question: how come we managed to do this in Sweden, Finland, France, Belgium, even in the US and UK (though very badly)? Or how can German Landesbanken be government-owned (the horror!)?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 01:48:55 PM EST
[ Parent ]
No, there is an actual constitutional problem, in that recapitalisation of banks is a fiscal operation, not an interest rate policy operation. The central bank is not allowed to do that. For a variety of reasons, some of which are actually unimpeachable.

What we could (and should) do is have the states recapitalise banks by issuing bonds to them and taking an equity stake in payment rather than a demand deposit. The ECB should then rediscount those bonds, and Bob's your uncle.

It's slightly more convoluted, but it preserves the principle that only parliaments can make fiscal policy. Which is an important sort of principle to adhere to, in my view.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:58:40 PM EST
[ Parent ]
I agree than it is important that fiscal policies should remain under the control of Parliament.  However the ECB seems to be doing little else but make fiscal policy "recommendations" to member states like Ireland, and backing up their recommendations with threats of crashing our banking system if we don't comply.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 03:49:42 PM EST
[ Parent ]
Which is totally and completely beyond its mandate and arguably downright unconstitutional.

So let's pillory it for usurping the function of democratically elected parliaments, not for failing to usurp the function of national financial regulators. By attacking the ECB for something that wasn't actually its fault, you're framing the conversation in a way that's far too easy for its cheerleaders to derail.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 04:14:09 PM EST
[ Parent ]
A Central bank not responsible for banking regulation - another anomaly a new EU Treaty would need to address.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 04:29:43 PM EST
[ Parent ]
That is actually not an anomaly. Most jurisdictions have separated the functions of central bank and financial regulator. What is an anomaly is that there is no financial regulator at the same administrative level as the central bank.

There is a strong case for combining the two functions, and an even stronger for having a federal financial regulator, but neither is an absolute operational necessity in the way an employer of last resort is an absolute operational necessity.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 04:52:40 PM EST
[ Parent ]
 
neither ()functions of central bank and financial regulator is an absolute operational necessity in the way an employer of last resort is an absolute operational necessity.

An absolute necessity that is, in fact, a modern rarity.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 06:04:32 PM EST
[ Parent ]
The problem isn't necessarily the Euro, it is the ECB as presently managed/constructed.

Aren't they one and the same thing? They are both defined by the EU Treaties. If the ECB is wrongly constructed at present, the Euro is badly constructed at present.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 12:03:46 PM EST
[ Parent ]
The Euro also has a lot of upsides whereas it is difficult to imagine a more stupid ECB policy/charter.  The solution is a reform of the ECB rather than an abolition of the Euro.  I am still unclear - see my question above - whether ECB policy is entirely due to Treaty limitation or more due to ideological idiocy.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 12:25:38 PM EST
[ Parent ]
The Euro has political upsides, but I am not convinced that fixed exchange rate regimes do anything good on the economic side.

The political upsides can be gained at smaller economic cost if the will is there. If the political will isn't there, then what's the point?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 12:29:57 PM EST
[ Parent ]
For Ireland (a small economy) the move from the Punt to the Euro was critical in preventing:

  1. Ruinous interest rates (15%) largely driven by unreal perceptions of the Irish economy by important foreign actors

  2. Extreme fluctuations in exchange rates - largely driven by large financial speculators gaming the system for personal gain

  3. A decline in business investment - driven by the twin uncertainties above - individual businesses crave interest and currency stability as it improves predictability, planning and budgeting and reduces uncertainty over external factors over which businesses have no control - exchange and interest rates.

The Euro had a hugely positive impact on economic growth and investment by reducing those uncertainties and the ability of third parties to game them.  The major downside of the Euro has been inappropriate interest rates and a Eurowide failure of bank regulation.

For a small economy like Ireland to go back to its own currency would be an invitation to global capital to basically take over the country as no Government/Central bank would be in a position to control the speculators...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 12:43:54 PM EST
[ Parent ]
The aggregate amount of money floating around in the world is more than enough to buy Ireland in the morning, short Italy in the afternoon, and hedge Spain in over night trading.

Any attempt to solve the euro crisis has to keep that in mind.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Sep 12th, 2011 at 12:53:05 PM EST
[ Parent ]
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 01:12:22 PM EST
[ Parent ]
And that would be wrong. Any government and central bank that so desires can control the speculators. As the Swiss are proving as you read this.

To your specific points:

  1. The risk-free interest rate of domestic currency is determined by the central bank. Full stop. If "the markets" disagree, then "the markets" are perfectly free to attempt to stage a run on an entity that is solvent by fiat. Pulling off a short squeeze on some speculator who doesn't understand the monetary system is loads of fun.

  2. The central bank can always prevent the currency from appreciating. The central bank cannot prevent the currency from depreciating, but the central bank can procure sufficient hard currency in the open market (during those times when the currency is not under attack) to permit it to discharge the country's hard currency obligations and offer currency swaps to finance strategically important imports for 12-18 months.

- Jake

Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:19:59 PM EST
[ Parent ]
That all implies a level of confidence and competence and an appetite for risk which we have never had in this country at official level.  I would venture to suggest that Switzerland/Singapore etc. are exceptions to the rule that relatively small entities cannot control their own destiny within global capitalism -  and they do it by sucking up to global capitalists big time. Remember that a global speculator only has to be right once to make a killing.  If a local central bank administrator gets it wrong once he is out iof a job probably permanently. Their is an asymmetry of risk aversion between speculators and regulators...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 04:12:52 PM EST
[ Parent ]
That all implies a level of confidence and competence and an appetite for risk which we have never had in this country at official level.

Confidence, yes. Competence, I hope. Risk? No, the whole point of this operation is to make sure you run no risk of getting into a fight with the markets that you can't win decisively. If Soros and his friends even have a sporting chance then You're Doing It Wrong.

The very problem with pledging to unilaterally defend a fixed exchange rate (which is effectively what you're doing when you're entering a fixed-rate regime with the D-Mark, since the BuBa is completely unwilling to live up to its end of the deal) is that you commit yourself to fights where the other guy has a fair chance of winning. Fights with speculators should be totally unfair in your favour. You print the money, and you decide how much of your money they get to borrow. If you can't win with that sort of home-field advantage, you really deserve to lose.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 04:30:59 PM EST
[ Parent ]
So you are advocating that Ireland and all other "peripheral" states leave the Euro?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 04:33:35 PM EST
[ Parent ]
Yes and no.

Most of the peripherals have no business, economically speaking, being in a currency union (or any other sort of fixed-rate regime) with Germany, Austria and the Netherlands. Ireland is different, because it has a structural internal current accounts surplus. But for various reasons of historical accident, Ireland is getting shafted. And there comes a point when one must weigh the cost of leaving the Eurozone against the cost of getting shafted for the benefit of Societé Generel and Joseph Ackerman's Christmas bonus.

My gut feeling is that Ireland is approaching the point where it might make sense to just say "fuck it" and issue scrip. But where you fall on that trade-off depends on how you value the future relative to the present, and that is fundamentally a political decision that I, as a foreigner, have no business making for Ireland.

And of course that's only the economics. It is possible to attach political value to the continued existence of the Euro, and be willing to pay an economic price for keeping this political value. Again, that's a political decision that I can't make for the Irish electorate. Though I do note in passing that aforementioned economic price is, under current institutional arrangements, borne disproportionally by the less well off.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 05:02:30 PM EST
[ Parent ]
There is no time for treaty reform before the crisis runs its full course.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 12:31:12 PM EST
[ Parent ]
Indeed. We're not talking years here, rather weeks or days.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 01:43:37 PM EST
[ Parent ]
Reuters: EU leaders to discuss euro zone fiscal integration in Oct
"The first chapter will be on improving the efficiency of the working methods in the euro zone today -- how to get better coordination, better crisis management and more streamlined communication," Van Rompuy told a news briefing.

"The second chapter is on what we need in terms of strengthened institutions in the euro zone -- there were some interesting ideas published a few weeks ago," he said.

"Three -- what can we have as more fiscal discipline in the euro zone, even considering strengthening the Stability and Growth Pact and the macroeconomic surveillance," he said.

"And the fourth chapter will be on fiscal intergation."



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 10:56:32 AM EST
Unless these people base their decisions on Reality instead of NCE-based Fantasy Land none of this is going to do shit to affect the Positive Feedback Loop in a Negative Direction.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Mon Sep 12th, 2011 at 12:02:02 PM EST
[ Parent ]
Question regarding countries who may be potentially cowed out of the eurozone.

Has any European country ever formalized its economy by recognizing two currencies? I know Agrentina pegged to the dollar and had another currency floating. Prior to the eurozone, one could find dollars and marks floating around Europe in an unrecognized black market.

But can a country run two currencies? I realize that in terms of exports there are hard currencies already in use (conversion from national currencies), but I was wondering if any country formally allowed payment in alternate currencies. It's allowed in the USA and in Canada (you can use either US or Canadian currency at retail outlets) and this is left up to the retailer.

The benefits to my mind: Tourism seems largely unaffected by currency valuations in tourist-heavy countries. Greece for instance has had huge increases in prices since adopting the euro but tourism has risen concomitantly. It's also much easier for a visitor to use their own currency locally. Second, a quick conversion of payment for today's labor into a stable currency encourages investment and savings. It also gives users of nationally issued currency a kind of rung that allows them a foothold in the economy.

But, as I've said on ET many times before, I have no economics background. There may be a good reason why it's not done more regularly. In terms of leaving the eurozone, a country might allow two currencies to be of use instead of converting everything instantly to the new currency. That might forestall devaluation to a degree but I'm not one who has been convinced that devaluation of currency is necessarily the answer.

by Upstate NY on Mon Sep 12th, 2011 at 11:28:53 AM EST
You might be able to get able to get away with using Loonies up there in Upstate NY, but here in the flyover zone, even soft drink machines reject their coins, and their bills are as useful as Monopoly money. I think that informal acceptance of currency of bordering countries might be acceptable within the geographical range where there is a lot of travel. Mexican Pesos are usable in Los Angeles, for example.

http://en.wikipedia.org/wiki/Mexican_peso#Use_outside_Mexico suggests that at least still in the 19th century there was formal acceptance of some foreign currency in the U.S.

by asdf on Mon Sep 12th, 2011 at 11:56:09 AM EST
[ Parent ]
in fact cash register tickets give you dual prices.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Sep 12th, 2011 at 12:13:18 PM EST
[ Parent ]
Most of the problems encountered by a country running multiple currencies stemmed from a lack of information of the on-going fluctuation 'twixt and 'tween 'em.

Not a problem, any more.

 

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Sep 12th, 2011 at 12:16:45 PM EST
[ Parent ]
I just realized that you might be thinking the use of Canadian and American dollars up here are interchangeable. They are not. I'm not talking about swapping like coins. There are retailers with different cash registers, one taking Canadian cash and the other American.

I was at an amusement park this summer whose ticket line split into two registers at the last minute, one for Canadian cash and one for American cash. The conversion rates are implicit since I might pay $20 for admission whereas the Canadians might pay $22.

by Upstate NY on Mon Sep 12th, 2011 at 12:20:13 PM EST
[ Parent ]
Out here in Real America, you use Real American Money. Coins are sometimes interchangeable, but bills are not, unless you are at a bank and make an official trade.

Also note that the Canadian dollar is worth more than the USD these days...  :-)

by asdf on Mon Sep 12th, 2011 at 12:25:35 PM EST
[ Parent ]
IOW, Colorado is a stick-in-the-mud, backwater.  

:-p

(lol)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Sep 12th, 2011 at 12:46:45 PM EST
[ Parent ]
We are the pinnacle of civilization compared to New Mexico. As you know.
by asdf on Mon Sep 12th, 2011 at 01:06:55 PM EST
[ Parent ]
keep those pies a'flying.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Mon Sep 12th, 2011 at 03:53:50 PM EST
[ Parent ]
But can a country run two currencies?

Sure.  

There are problems of so doing, most notably expressed in Gresham's Law:

when government compulsorily overvalues one money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation

Universally mis-quoted and mis-understood by Neo-Classical, Austrian, and other economic ignorati as "bad money drives out good money."  

[Note the moralizing in the latter, wrong, formulation!]

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Sep 12th, 2011 at 12:09:07 PM EST
[ Parent ]
What if the undervalued money is kept in a local bank account relatively unencumbered by regulations. You have your euro savings account and your drachma savings account.
by Upstate NY on Mon Sep 12th, 2011 at 12:16:23 PM EST
[ Parent ]
What about it?

As long as the money is accepted as a means-of-exchange or as a store-of-value you can spend/invest the euros, drachmas ... or anything else within a national border.  Some of our local businesses are perfectly happy to accept euros and Mexican pesos; Canadian dollars are accepted along the northern tier of states.

Usually a national government will privilege their own currency by making it the legal tender for, e.g., tax payments.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Sep 12th, 2011 at 12:26:53 PM EST
[ Parent ]
And I screwed-up.

"money" s/b "currency"

The distinction has to be kept crystal clear.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Sep 12th, 2011 at 12:43:10 PM EST
[ Parent ]
Has any European country ever formalized its economy by recognizing two currencies?

Yes. This was quite common in the 19th century. It was... not always a good idea.

I was wondering if any country formally allowed payment in alternate currencies.

It is very difficult to prohibit tradesmen from voluntarily accepting hard currency in lieu of domestic currency. And even if it were possible, it would be stupid.

Most countries have rules stating that tradesmen are permitted (or sometimes even required) to provide change in the local currency, and nearly all countries demand that their tradesmen quote prices in the local currency.

What is pernicious is issuing credit or collecting taxes in hard currency, or promising to exchange hard currency for domestic currency on demand and at a fixed rate.

Limiting lending to and collecting taxes in domestic currency encourages residents to exchange the hard currency they earn from export businesses into soft currency, to meet tax obligations and settle debts.

The benefits to my mind: Tourism seems largely unaffected by currency valuations in tourist-heavy countries. Greece for instance has had huge increases in prices since adopting the euro but tourism has risen concomitantly. It's also much easier for a visitor to use their own currency locally.

Allowing the tourist industry to use foreign currency should not be a problem. You would probably want to encourage the tourist businesses to exchange the hard currency for domestic currency after it has passed through one or two local businesses, to avoid developing a parallel economy. There is no particular economic reason to do that (as long as taxes and credit is all in domestic currency you should be good), but there are political reasons to be wary of parallel economies.

Second, a quick conversion of payment for today's labor into a stable currency encourages investment and savings.

It would actually tend to reduce investments, by increasing the required return to equity. However, it would level the playing field between the little guy, who cannot easily arbitrage between foreign and domestic equity markets, and the big guy, who can. Which is probably worth the (small) decrease in aggregate investments.

However, hard-currency deposits would have to be very heavily regulated. If you allow your banks to accumulate hard-currency liabilities without keeping hard currency at hand to meet them, you're setting yourself up for a run on your currency. So while I would not personally prohibit hard currency deposits, I would require the central bank to purchase enough hard currency in the open market to match the total hard currency liabilities of the domestic economy, so it may act as lender of last resort in hard currency during a run on the currency.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:00:39 PM EST
[ Parent ]
But tradesmen accepting non-standard forms of money is different from the government officially having multiple currencies. In the first case it's just a matter of whether the locals accept a given medium of exchange, but in the second it involves banks and official exchange rates and whatever.

Could the issuing country count its debts in one currency and its assets in another? That would seem to put some heavy political pressure on the central bank regarding the relative exchange rates...

by asdf on Mon Sep 12th, 2011 at 01:10:24 PM EST
[ Parent ]
Latin American countries have multiple units of account, usually the currency and an inflation-indexed unit.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 01:15:06 PM EST
[ Parent ]
Inflation-indexed bonds are an abomination unto God and must be purged with fire.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:26:16 PM EST
[ Parent ]
It could, if it really wanted to. But if it doesn't issue both the currencies, it would lose a number of macroeconomic policy instruments. And if it does issue both, it's just playing silly-bugger.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:25:25 PM EST
[ Parent ]
There used to be bimetallic (gold/silver) standards. Those ended up failing because the silver coinage would devalue.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 01:18:28 PM EST
[ Parent ]
Is the Euro itself mentioned by name in the various Constitutions? If not, perhaps one could invent a new currency, the "new Euro," with a new set of rules and agreements, including an appropriate mapping of Euros to NEUs. The various special cases could be handled one at a time under the new rules, allowing any degree of tuning of various country considerations. The various haircuts and inflation and peripheral depressions could be distributed as agreed, including any special considerations needed to get around Constitutional rules...
by asdf on Mon Sep 12th, 2011 at 11:49:30 AM EST
There are several advantages to despair (or pessimism). I know we live in a world where optimism is glorified, but...

  1. If you are a pessimist, you are only bound to have good surprises ;)

  2. Hedging for disaster sometimes is a good idea. Disaster happens. If we accept cyclical views of history (I do), winter happens.

  3. While I do not want to discourage anyone to think and put forward solutions, the truth is that most of the time they are completely ignored. Especially in our case where our "power base" is out of power. For instance, think of the 2007/2008 crisis: Policy decisions have varied between bad and worse.

  4. Some energy should be put on worse case scenarios: Unemployment, social disruption, supply chain disruption (no food on the shelves). Some of these problems are happening RIGHT NOW.

  5. If the political process is broken, then there are other avenues: individual preparations, family, local community.

I actually believe that any nice solution to the future is being incepted now, in the borders of standard political practice. In my case I suggest that the transition movement is a good example, but it might come from other places. I doubt it will be from standard institutional arrangements and standard political practice.
by cagatacos on Tue Sep 13th, 2011 at 05:24:47 AM EST
f you are a pessimist, you are only bound to have good surprises ;)

I doubt even pessimists expected Zapatero to change the constitution so quickly....

by gk (gk (gk quattro due due sette @gmail.com)) on Tue Sep 13th, 2011 at 05:29:13 AM EST
[ Parent ]
Interestingly the issue of constitutional change seems to be slightly more contentious in Portugal. Something I find unexpected.

First, the president (a old fashion conservative, professor in economics, very different from the hard-neolib prime minister) complained that he found the debt provision "technically strange".

Second, the new leader of the labour party is selling himself as more to the left. He just might (though I am not holding my breath) not go along with it.

The interesting part of this is that some of our conservatives (connected to the president) are starting to get jittery to some lebensraum provisions. Interesting dynamics.

Nationalism is now more a lefty thing (i.e. sovereignty), so it seems. But we might getting some conservatives on board soon. Talk about upside down politics.

by cagatacos on Tue Sep 13th, 2011 at 06:10:49 AM EST
[ Parent ]
Spain is going to end up being the only country to reform its constitution to Merkozy's specification.

Because we're idiots with European inadequacy complex. If the European Union says "jump", we'll be the first lemming off the cliff...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Sep 13th, 2011 at 06:13:26 AM EST
[ Parent ]

Because we're idiots with European inadequacy complex. If the European Union says "jump", we'll be the first lemming off the cliff...

It is exactly the same in Portugal.

There are 2 differences between Spanish and Portuguese:

  1. Spaniards are a cheery bunch. We are blue, blue, blue (not blue enough for the times, though).

  2. Portuguese do understand that Spain and Portugal are very similar. Spaniards fail to see the bloody obvious.

The only reasonable union (in cultural terms) that I can think of is not the European Union. It is Confoederatio Iberia.
by cagatacos on Thu Sep 15th, 2011 at 04:06:51 AM EST
[ Parent ]
Of course Spaniards have a superiority complex over the Portuguese...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Sep 15th, 2011 at 04:26:15 AM EST
[ Parent ]
If the European Union says "jump", we'll be the first lemming off the cliff...

It is exactly the same in Portugal.

No, no, you'll be the second off the cliff.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Sep 15th, 2011 at 04:28:46 AM EST
[ Parent ]
After Greece, not after Spain

;)

by cagatacos on Thu Sep 15th, 2011 at 04:31:46 AM EST
[ Parent ]
Spain? My dear sir, you are talking about Sweden!

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Sep 15th, 2011 at 09:20:45 PM EST
[ Parent ]
Actually, that's precisely what pessimists did expect - he had to change it so fast, because otherwise he would have had to submit it to a referendum. Which would, to put it mildly, not have passed.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 13th, 2011 at 06:39:53 AM EST
[ Parent ]
Actually... Sin rechazo a la reforma constitucional, pero sí al trámite urgente que se utilizó (El País)
El 62% de los encuestados por Metroscopia asegura que si se hubiera sometido a consulta popular su voto hubiera sido un sí. ...

La reforma constitucional, la segunda desde 1978, debería haber sido consensuada con el resto de partidos, según el 73% de los españoles, de tal forma que quedara preservado el consenso con que fue aprobada en su momento. ...

Y el 64% (dos de cada tres encuestados) estaba a favor de que se sometiera a consulta popular, a pesar de que legalmente basta con la mayoría cualificada de las dos cámaras, al no estar dentro de los artículos especialmente protegidos de la Constitución...

No rejection of the constitutional reform, but of the urgent procedure used
62% of those polled by Metroscopia claimed that had there been a popular consultation their vote would have been yes. ...

The constitutional reform, the second since 1978, should have been by consensus with the rest of the political parties, according to 73% of Spaniards, so that the consensus with which the constitution was originally approves was preserved. ...

And 64% (two out of three of those polled) was in favour of a popular consultation, despite a qualified majority of both chambers being legally sufficient, since it wasn't within the specially protected articles of the Constitution. ...



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Sep 13th, 2011 at 06:59:00 AM EST
[ Parent ]
It appears that even I was insufficiently pessimistic.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 13th, 2011 at 07:31:43 PM EST
[ Parent ]
Of course a referendum would have forced a public debate and might have changed something...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Sep 14th, 2011 at 02:51:20 AM EST
[ Parent ]
These kind of amendments are popular. For whatever reasons.
by IM on Wed Sep 14th, 2011 at 09:16:12 AM EST
[ Parent ]
I think it basically boils down to the fact that "the government is like a household" is a very powerful metaphor.

Another powerful metaphor is that "the recession is the hangover from the binge of good times"

The hangover theory, then, turns out to be intellectually incoherent; nobody has managed to explain why bad investments in the past require the unemployment of good workers in the present. Yet the theory has powerful emotional appeal. Usually that appeal is strongest for conservatives, who can't stand the thought that positive action by governments (let alone--horrors!--printing money) can ever be a good idea. Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism. And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors. But moderates and liberals are not immune to the theory's seductive charms--especially when it gives them a chance to lecture others on their failings.

See also Common sense conservative:

an advocate of conservative politics who adopts the rhetoric of "common sense" to frame his or her arguments. The term is almost always used to apply to domestic and fiscal policy.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Sep 14th, 2011 at 09:22:00 AM EST
[ Parent ]
I thought I was a pessimist. Thanks for correcting me.
by gk (gk (gk quattro due due sette @gmail.com)) on Tue Sep 13th, 2011 at 01:05:09 PM EST
[ Parent ]
Yes, it's true "winter happens." But why does it have to happen in summer?

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Tue Sep 13th, 2011 at 05:33:04 AM EST
[ Parent ]
There's a reason it's called Climate Change.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Sep 13th, 2011 at 06:20:01 AM EST
[ Parent ]
Gotta be careful. The law of unintended consequences lurks.

http://www.ekathimerini.com/4dcgi/_w_articles_wsite3_1_11/09/2011_405789

So often left out of this discussion is the political dimension, which has explained all along the need for a part of the Greek leadership to do anything to please the core.

When Greece is cut loose, it will become the American vassal state it always really was. As the USA-Israel-Turkey trio breaks apart, they are trying to shoehorn Greece into a strategic agreement. Greece is now buying weaponry from Israel--no longer showering European arms manufacturers with borrowed dough. But Greece better be careful not to get too entangled because the money that the USA and Israel might throw its way will hurt its relations with Turkey. Economics says form a tight strategic relationship with Israel and the USA. But neighborliness says otherwise.

Turkey is pressing Greece (and Cyprus which wants to explore natural gas deposits south of Cyprus) precisely because of this burgeoning relationship.

by Upstate NY on Tue Sep 13th, 2011 at 09:01:44 AM EST
[ Parent ]
So, do we have any suggestions on what should be done, that are both reasonably good and also politically possible? Or is the entire euro project doomed?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Sep 13th, 2011 at 04:10:34 PM EST
Paul Mason: Could there be a German 'Marshall Plan' for Europe? (BBC)
With Juergen Stark taking his bat and ball home, the way is clear for the ECB to become a pro-active, crisis managing central bank (albeit on a wing and a prayer and with a lot of guidance, frankly, from the Fed and IMF), so does Germany continue exerting pressure against this or not?

...

Here is the psychological problem: some German policy makers - the ones with exposure to the wider world of Anglo-Saxon and Asian capitalism - are now discussing, in the background, a German 'Marshall Plan' for Greece and southern Europe.

...

It would need the German political class to put itself ahead of the people. If it happened it would signal Germany stepping onto the stage as a world power, eclipsing France - whose banks are in need of recapitalisation.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Sep 13th, 2011 at 05:02:11 PM EST
[ Parent ]
Eurointelligence: The banking crisis and its complacent response (14.09.2011)
Weidmann launches a debate on the eurozone's future evolution

In a remarkable speech Jens Weidmann yesterday launched a debate in Germany on the eurozone's future evolution, Financial Times Deutschland reports. The Bundesbank president urged the government to quickly decide on whether it wanted to continue on the basis of the existing arrangements or whether it intended to go down the road of a "big leap" towards a fiscal union. "From my point of view a decision has to be taken within a short time", he insisted. Half baked compromises as the euro summit decisions of July 21st threatened to undermine "a stability oriented currency union", he warned. Weidmann's preference clearly is to continue on the present basis by reinforcing the SGP and by increasing the pressure the markets exercise on countries to keep their finances in order. But he said a fiscal union where national parliaments no longer have the last word on the budgets and European authority intervenes is a possibility. The latter however would require a change of the German constitution and would be the result of a "long and difficult path". But Weidmann insisted that both options can be "in principle economically sustainable".



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Sep 14th, 2011 at 04:15:19 AM EST
[ Parent ]
Question:  under the existing EU "constitution" is greater fiscal union a Good Thing?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Sep 14th, 2011 at 11:58:43 AM EST
[ Parent ]
Greater Fiscal Union requires a new Constitution...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Sep 14th, 2011 at 12:10:17 PM EST
[ Parent ]
Martin Wolf: Time for Germany to make its fateful choice
Today, raging fire must be put out. Only then can attempts at building a more fireproof eurozone begin. The least bad option would be for the ECB to ensure liquidity for solvent governments and financial institutions, without limit. It should not, in fact, be intellectually difficult to argue that buying bonds is compatible with continued monetary stability, since broad money has been growing at a mere 2 per cent a year. It is sure to be politically hard, however, particularly for Mario Draghi, the incoming Italian ECB president. Yet it is what has to be done given the inadequate size of the European financial stability facility if called on to help larger beleaguered euro-member countries. Politicians must then dare to support such action.

What should happen if the German government decided that it could not support such a bold step? The ECB should go ahead anyway rather than let a cascading collapse unfold. It would then be up to Germany to decide whether to leave, perhaps with Austria, the Netherlands and Finland. The German people should be made aware that the results would include a soaring exchange rate, a massive decline in the profitability of Germany's exports, a huge financial shock and a sharp fall in gross domestic product. All this would be apart from the failure of two generations of efforts to build a strong European framework around Germany itself.

Germany possesses a binding veto over efforts to expand official fiscal support. But it is losing control over its central bank. In a crisis so menacing to Europe and the world, the one European institution with the capacity to act on the requisite scale should dare to do so, since the costs of not doing so are bound to prove devastating. That will surely create a political crisis, but this would be better than the financial crisis unleashed by a failure to try.

(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Sep 13th, 2011 at 06:31:13 PM EST
[ Parent ]
Eurozone default is not synonymous with breakup | Edward Harrison | 13 September 2011

Implicit in my post explaining that Germany is preparing for Greek bankruptcy is the view amongst European policy makers that default does not equal euro zone exit. I think I should reiterate this because a lot of people are acting like an imminent Greece exit from the euro zone is likely. This is not the case. Witness these remarks from the German Chancellor Angela Merkel (CDU) and her Economy Minister Philipp Roesler (FDP):

   Mrs Merkel told the RBB radio station: "The top priority is to avoid an uncontrolled insolvency, because that would not just affect Greece, and the danger that it hits everyone - or at least several countries - is very big.

    "I have made my position very clear that everything must be done to keep the eurozone together politically. Because we would soon have a domino effect," said the chancellor.

    At the weekend from German Economy Minister Philipp Roesler suggested that Greece would need an "orderly default" on its debts, a comment that sent global share prices tumbling on Monday.

Here's what they are saying: The German economy is doing reasonably well. But markets are tumbling and business and consumer confidence with it. Our recent election losses are due in large part to this. And indeed, all of this is due to the bailout policy we have taken since the European sovereign debt crisis began. We intend to put a line under that policy.

This extend and pretend strategy at first refused to concede what was plain to all, that Greece could not repay its debts. In July, we decided to move to the soft restructuring approach of maturity extension and interest rate reduction in order to allow our own banks more time to deal with their exposure to Greece.

This plan has not worked. Spain and Italy, large and relatively core members of the single currency, are now in the spotlight. I have made my position very clear that everything must be done to keep the eurozone together politically because we would soon have a domino effect. The increasing interest rates there risks everything and the whole thing could come unstuck. We do not want this because Germany will be blamed for all of this. And as `anti-European' as our government may sound, this is just rhetoric for the masses which are angry that Germany is again being made to take the lion's share of burden-sharing. The reality is that we in the German government are still very much behind the European project - not at any cost, mind you; but still we are willing to bear our fair share of the burdens to see this through.

In light of Greece's inability to meet its austerity targets, we now believe that we must move to a hard restructuring of Greek debt, an orderly default that will also involve recapitalisation of banks in Greece, and some in Germany and elsewhere. Finance Minister Schaeuble is already making preparations for this eventuality. The top priority is to avoid an uncontrolled insolvency, because that would not just affect Greece, and the danger that it hits everyone - or at least several countries - is very big.



"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 13th, 2011 at 10:45:33 PM EST
[ Parent ]


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