I may be beginning to figure out what is going on.
I went to bed early last night knowing the world is not as I thought it to be.
I am still uncertain.
There are a few solid points of reference, conditions that must be included:
Germany is a power in Europe.
Russia is a power in Europe.
The world runs on fossil carbon.
Global warming provides a real limit to growth.
The banks are not insured.
The smaller depositors are insured in the US and Britain.
Sovereign bankruptcy does not exist.
Sovereign insolvency exists.
Sovereign default can exist.
This is about where I was heading.
The Euro is toast.http://ftalphaville.ft.com/blog/
Eurozone as a tragedy of the commons
Here’s an innovative way of looking at the Eurozone crisis. Not so much the periphery states being reckless, but some states taking advantage of what should have always been seen as a collective pool of wealth.We’re talking a tragedy of the commons.
Not our view, but that of of Aaron Tornell and Frank Westermann, professor of Economics at UCLA and Professor of International Economic Policy at the University Osnabrueck respectively writing on VoxEu this Friday.
As they put it:
Generally, a private bank can borrow from its national central bank as long as the bank (i) is financially sound and (ii) has eligible collateral. What opens the door to the tragedy-of-the-commons is the way in which these conditions are implemented: Supervisory powers reside with national authorities, not with the ECB in Frankfurt. Thus, the decision of whether a bank is financially sound or not is made by the country’s regulatory authority, not by the ECB. This is a small, but important distinction. Eligibility criteria for collateral have been relaxed significantly.It’s connected they say to the deteriorating quality of the collateral that National Central Banks accept:
Before the 2008 crisis there was a minimum rating of A-. In October 2008, it was reduced to BBB- and by July 2011 was completely abolished in Greece, Ireland, and Portugal. Finally, in November 2011 the ECB allowed seven national central banks to “accept as collateral performing credit claims that do not satisfy ordinary eligibility criteria.” In Italy, for instance, “leasing and factoring companies, including those without a banking license, will be considered as valid providers of pledge.” France will start to accept residential mortgages as well as dollar-denominated assets. Spain will accept some foreign loans not subject to Spanish law, “subject to individual legal assessment.” Ireland and Portugal will accept unsecured consumer loans and mortgages.And let’s not forget the role played by everyone’s favourite transfer system Target2:
By the Target mechanism, the domestic pool of money demand is extended to become the Eurozone-wide pool of money demand for each country, thereby generating a common-pool problem.In short, what the authors are arguing is that a single fiscal policy may not be enough to save the Eurozone. Until individual NCBs are dispanded, and a proper central authority (more akin to a Federal Reserve) takes their place, there is little to curtail the abuse of existing mechanics which allow for individual countries to take advantage of the collective monetary “commons”.
As the authors summed up in a recent New York Times editorial:
To save the euro, the 17 countries that use the shared currency will not only need a more unified fiscal policy. They will also need a single institution to tide over troubled financial institutions, and a single banking authority to supervise banks and, if necessary, close or merge them.Interesting because it suggests the solution doesn’t necessarily lie on the fiscal side.
The authors use the analogy of a shared tab amongst friends. Those who underdrink at the end of the night end up overpaying. However, it’s not really the fault of those who overdrink per se. It’s the arrangement that provides them with the incentive to do so.
Thus, to make sure that noone exploits the arrangement, it makes sense to employ a central authority to police and restrain overt overdrinking.
Tornell andWestermann conclude:
Only the European Central Bank, not national regulators, should have the power to decide if a bank is financially sound, and eligible for central-bank loans.Interesting thinking.
—
The national central banks — including Germany’s Bundesbank and the Bank of France — should become subsidiaries of the European Central Bank like the 12 Federal Reserve Banks (in New York and San Francisco, etc.). Voting rights at the European Central Bank should be reorganized so that they are proportional to the share of the loss that each country would bear in case of default. Those who bear the largest share of the cost should have greater say as to when the drinking should stop.
Related links:
The risks of dysfunctional money markets - FT Alphaville
Are western central banks having an existential crisis? – FT Alphaville
On the ECB’s attempts to ring-fence its balance sheet - FT Alphaville
Koo on German bubbles – FT Alphaville
Europe Needs a Federal Reserve – New York Times
This entry was posted by Izabella Kaminska on Friday, June 22nd, 2012 at 15:13 and is filed under Capital markets. Tagged with ecb, eurozone crisis, Greece, periphery, Target2."
http://www.reuters.com/article/2012/06/22/us-eurozone-meeting-idUSBRE85L0SD20120622
Euro's big four agree growth boost, split on bonds
No decisions. Austerity and growth are mutually exclusive.http://www.guardian.co.uk/business/debt-crisis
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23 Jun 2012: Angela Merkel's celebration of quarter-final goals angers Greeks, while her drummer impersonation amuses Germans - 22 Jun 2012: But leaders of France, Germany Italy and Spain fail to endorse full plan to protect countries under attack by markets
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22 Jun 2012: Sahra Wagenknecht: Because no elected government would stand a chance of revoking this policy, I will vote against the ratification 75 comments - 22 Jun 2012: Spain's government will this weekend finally make a formal request for the bailout money it needs to prop up ailing banks 5 comments
- 22 Jun 2012: Jason Farago: The GOP refrain has Obama turning the US into debt-wracked Greece – and never mind that their Irish poster-child bombed
46 comments -
22 Jun 2012: Calls for Germany to refuse to hand over more bailout funds – or even leave the euro – are gaining traction - 22 Jun 2012: German chancellor and fans urged to show restraint towards Greeks attending politically loaded football match
- 22 Jun 2012: Mario Monti, Italy's prime minister, sees next week's EU meeting as last chance to save the union
http://www.telegraph.co.uk/finance/financialcrisis/
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| 2 Comments Euro crisis 'domino effect' fears hit German confidence
German companies are becoming more worried about the eurozone debt crisis, Ifo economist Klaus Wohlrabe said on Friday after data showed business sentiment declined in June for a second month running to its lowest level in over two years.22 Jun 2012
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As the Euro 2012 quarter final nears, we focus on the economic score.22 Jun 2012
| 27 Comments Christine Lagarde: how IMF plan to save euro
Christine Lagarde, the head of the International Monetary Fund, calls for more centralised economic control in the 17 countries that use the euro and says rescue funds should be given direct to banks rather than via governments.22 Jun 2012
| 12 Comments FTSE falls on slowdown fears, but shrugs off Moody's downgrade
The FTSE 100 fell in early trading as investors largely shrugged off a major bank downgrade to focus on the continuing eurozone crisis and signs of a sharper slowdown in the global economy.http://krugman.blogs.nytimes.com/2012/06/22/the-euro-is-flat/
The Euro is toast.
The Euro Is Flat
Still limited blogging. But I thought I’d post about something that sort of surprised me.
As we contemplate the euro mess, there’s a strong tendency to think of it as having a lot to do with the fundamental inequalities in overall productivity and economic development between euro members — backward, semi-developed countries like Greece or Portugal (not my view, but what you often hear) awkwardly tied to powerhouses like Germany.
So it comes as something of a shock to look at Eurostat data (pdf) on real GDP per capita (or productivity, which look similar). Sure, Greece and Portugal are relatively poor, with GDP per capita of 82 and 77 percent, respectively, of the EU average; this means roughly 76 and 71 percent of the eurozone average, since the euro countries are a bit richer than the EU as a whole. Meanwhile, Germany is at 120 percent of the EU, or 112 percent of the EZ.
But it’s no different, really, than the US situation (look under per capita GDP). Alabama is at 74 percent of the US average, Mississippi at 67, with New England and the Middle Atlantic states at 118 and 116.
In other words, as far as underlying economic inequalities are concerned, the EZ is no worse than the US.
The difference, mainly, is that we think of ourselves as a nation, and blithely accept fiscal measures that routinely transfer large sums to the poorer states without even thinking of it as a regional issue — in fact, the states that are effectively on the dole tend to vote Republican and imagine themselves deeply self-reliant.
The thing is, we didn’t always think of ourselves as a nation, either. Before the Civil War, people talked about “these United States”; it was only after the war that “these” became “the”.
So the key to the success of the dollar zone may be summed up in three words: William Tecumseh Sherman."
As we contemplate the euro mess, there’s a strong tendency to think of it as having a lot to do with the fundamental inequalities in overall productivity and economic development between euro members — backward, semi-developed countries like Greece or Portugal (not my view, but what you often hear) awkwardly tied to powerhouses like Germany.
So it comes as something of a shock to look at Eurostat data (pdf) on real GDP per capita (or productivity, which look similar). Sure, Greece and Portugal are relatively poor, with GDP per capita of 82 and 77 percent, respectively, of the EU average; this means roughly 76 and 71 percent of the eurozone average, since the euro countries are a bit richer than the EU as a whole. Meanwhile, Germany is at 120 percent of the EU, or 112 percent of the EZ.
But it’s no different, really, than the US situation (look under per capita GDP). Alabama is at 74 percent of the US average, Mississippi at 67, with New England and the Middle Atlantic states at 118 and 116.
In other words, as far as underlying economic inequalities are concerned, the EZ is no worse than the US.
The difference, mainly, is that we think of ourselves as a nation, and blithely accept fiscal measures that routinely transfer large sums to the poorer states without even thinking of it as a regional issue — in fact, the states that are effectively on the dole tend to vote Republican and imagine themselves deeply self-reliant.
The thing is, we didn’t always think of ourselves as a nation, either. Before the Civil War, people talked about “these United States”; it was only after the war that “these” became “the”.
So the key to the success of the dollar zone may be summed up in three words: William Tecumseh Sherman."
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