Tuesday, 28 December 2010

Euro Crisis: German Experts miss the point

Leading German economic 'experts' urge Chancellor Merkel to take the lead in rescuing the Euro. But while their suggestions may all have some merit they miss the key aspect: All the mentioned remedies are at best a sticking plaster. The critical aspect has been overlooked: the banking system must be isolated from the impact that a bankruptcy in any member state - or a leaving of the Eurozone - can have. Only that would guarantee that no fiscal transfers or bailouts are necessary.

Sunday, 19 December 2010

QE: Miracle Cure or Con Job?

Just finished re-reading Mackay's classic on the Madness of Crowds. So this topic is of timely interest to me. The academic - and to a lesser extent political and media - debate for and against quantitative easing rages: but while I am not able to devote as much time and intellectual firepower (?) to this subject as the deep thinkers who offer their wisdom on the subject as I have to pursue a day-job as well , I would just like to observe that until this recent attack of collective madness anyone suggesting the use of helicopter money as a means to combat economic problems would have been considered to be NUTS! If this social experiment is successful it surely opens the door to end the 'economic problem' for good. Alternatively it will go into the history books as the greatest Ponzi scheme and con trick ever, on a par with the South Sea Bubble, with Ben Shalom Bernanke in the role of John Law.

Monday, 13 December 2010

German Banks fear for Euro 400 Billion

Update: the more representatives of financial firms argue that a 'fiscal union' in the EU is unavoidable in order to 'save the Euro', the more we are convinced that faulty (or wishful) thinking is behind their arguments. See recent interviews from Pimco and Commerzbank.
Horror headlines such as these do nothing to further a rational discussion about debt problems in Europe. There really are three simultaneous crises happening in Europe at the moment: Most national states have run up their debts to a level that has become unsustainable. This would have also been the case if the Euro would never have been introduced. Buying votes by inventing more and more handouts can not go on forever as the state can not increase its share of GNP beyond a certain level - and definitely not beyond 100 per cent! The crisis of the Euro is the next crisis - and this one is aggravated by the banking crisis. No one has made any provision in banking practices or regulations for the possibility that a member state may wish - or be forced - to leave the Eurozone. If any of the zillions of 'experts' in the EU and its member states would have been farsighted enough, the banking system would not have been allowed to build an enormous web of assets and liabilities throughout the EU while pretending that the Eurozone would exist forever. A German bank for example should have been obligated to make ample risk provisions for the eventuality of a break-up. Maybe funding for international exposure should have been on a matched-funding basis so that all assets in, say, Spain are funded by a separated Spanish subsidiary that gets its funding in Spain. In that case the problem faced by 'peripheral' EU member states would have been reduced to a pure problem of economic and fiscal policy in the respective country and would not have endangered the Eurozone as a whole. When 'experts' now say that the only solution to the problems of the Eurozone is the introduction of a fiscal union one can explain this wrong prescription in two ways: either these experts are just plain wrong or they are motivated - as were the fathers of the Euro - by the hidden agenda that was intended to create a European (Socialist) Superstate all along, where money gets freely directed to the pet projects of unaccountable lobbies or the politically well-connected. To return to the problem mentioned in the headline above: one should never confuse overall exposure with the level of the final loss that has to be expected. As the Latin American debt crisis of the 1980's demonstrated, recovery levels may be well below 100 per cent but they will be substantial if an intelligent debt workout plan is adhered to.