Monday, November 28, 2011

Central bankers vs humanity

The big banksters are toying with an economic catastrophe.  There is really no other way to view the current crises in Europe.  And why do we know this is true?  Because the whole mess could be resolved by pushing a few buttons.  Unfortunately, the folks who could push those buttons are not inclined to do it.

To Save The Euro We Must Destroy Germany
Mike "Mish" ShedlockGlobal Economic Trend Analysis | Nov. 17, 2011

Yesterday German Chancellor Angela Merkel came flat out and said, "To save the Euro we must Destroy Germany". 
Well not exactly, but she may as well have because that is the implication. This is what she did say: Germany Is Ready to Cede Some Sovereignty to Save the Euro 
Chancellor Angela Merkel said that Germany is ready to cede some sovereignty to strengthen the euro area and restore confidence in the common currency. 
European Union treaty changes to strengthen EU institutions and patrol tighter budget rules are needed “to make the euro zone more crisis-proof,” Merkel told reporters in Berlin today at a joint briefing with Irish Prime Minister Enda Kenny. 
“Germany sees the need in this context to show the markets and the world public that the euro will remain together, that the euro must be defended, but also that we are prepared to give up a little bit of national sovereignty,” Merkel said. Germany wants a strong EU and a euro “of 17 member states that is just as strong and inspires confidence on international markets.” 
For starters Merkel is saying what she wants. It is debatable if that is what Germany wants at all. I rather doubt it. 
Moreover, even if it is what Germany wants, it is not Merkel's decision. Such decisions, as the German supreme court has ruled are up to voters of Germany, not politicians with an axe to grind about what they want. more
 Here is James Galbraith explaining how big the mess really is.
Joe Weisenthal over at Business Insider explains how available the push-the-reset-button option actually is.  (It actually makes me nervous to agree with such a Wall Street Type but there you have it.)
How A Flaw In The Human Brain Is What's Preventing A Solution In Europe
Joe Weisenthal | Nov. 10, 2011

People don't understand money. That's why the Eurozone crisis isn't getting solved.

Let's back up for a second: This morning we wrote about a radical note from Jefferies, which argued that if the ECB wasn't going to buy Italian debt, then at least the BoE should do it.

The argument: Well, if Italy goes down, then it will buffett the UK economy pretty hard (including its banks) so might as well get pre-emptive and go ahead and do it.

We can safely say this will never happen, but not because it's not a good idea. The idea is fine from an accounting economic standpoint, but everyone in the UK would go ballistic.

Same with the Fed if it tried to monetize Italian debt... Everyone would turn on Bernanke.

And the reason everyone would go ballistic, is because people don't understand money. Their minds still inhabit a gold-standard world, where central banks can somehow "run out" of money, and bailouts automatically "cost the taxpayer" billions.

This was a point that Paul Krugman recently made in a post about banking and fractional reserve lending...

Let me add that the fractional reserve thing exhibits a characteristic common to a lot of what I see in the Paulist camp: they have an oddly antiquated notion of what money and finance are about, one that misses the “virtualness” of the modern world. They still think of money as being pieces of green paper, rather than what it mostly is now, zeroes and ones in some server somewhere. They still think of banks as being those big marble buildings, in a world in which most banking is a lot more abstract than that.

The only problem here is that Paul Krugman aims too narrowly. It's not just the Ron Paulists who have such a hard view of money.

Alan Greenspan, who ran the Fed, said in testimony...

But as I've testified here before to a similar question, central bankers began to realize in the late 1970s how deleterious a factor the inflation was. And, indeed, since the late '70s, central bankers generally have behaved as though we were on the gold standard. And, indeed, the extent of liquidity contraction that has occurred as a consequence of the various different efforts on the part of monetary authorities is a clear indication that we recognize that excessive creation of liquidity creates inflation which, in turn, undermines economic growth.

The fact of the matter is that we're not on a gold standard. Period. A system of fiat money, where the only limits are on resources (labor, commodities, etc.) is nothing like a gold standard, where there is actually a hard limit on the amount of money there is.

The problem is, it's hard to conceptualize the non gold standard world, since for most of us money is actually finite, and it's this bias the prevents solutions in Europe. more
Just in case you were hoping the Germans were more sane about the subject of money, here is the depressing truth courtesy of Juergen Stark.  In his pinched worldview, the reason to not push the reset buttons on the European economy is that if that were done, the moneychangers would lose their ability to order around democratically elected governments.  Obviously, all the nasty authoritarian German creeps were NOT put out of business in 1945.
Outgoing ECB Economist Juergen Stark Explains The Real Reason He Opposes Monetisation
Edward Harrison, Credit Writedowns | Nov. 27, 2011 
As I have been saying at Credit Writedowns, the ECB’s opposition to monetising sovereign debt is not about immediate inflation concerns but rather its resistance to moving into a politicised quasi-fiscal role. Arguing in defense of the ECB last week, I wrote the following:

Conclusion: central bankers always prefer to force elected officials to make the tough political choices that are the essence of fiscal policy. The fiscal agent adds and subtracts net financial assets in the private sector by deficit spending, or cutting spending and raising taxes. Central bankers want the fiscal agent to use these tools as the driver of macroeconomic policy while the monetary agent is tasked with more narrow aims.

In the US, the monetary agent, the Federal Reserve, has a dual mandate for price stability and full employment, and therefore has some political legitimacy as a quasi-fiscal agent. Even in the US, you hear Fed Chair Ben Bernanke stating very clearly that he does not want to do more and that he wants the fiscal agent to take on the principal policy burdens for maintaining full employment. The European Central bank has one mandate, price stability. And that means it is much more reluctant to step into a quasi-fiscal role.

So when Mervyn King talks about the ECB “buying sovereign debt of national countries, which is used and seen as a mechanism for financing the current-account deficit of those countries”, he is talking about a policy choice that helps the national governments achieve their fiscal aims, a quasi-fiscal role.

The ECB has balked at doing this – rightly so, I might add (in a brief role as policy advocate). Their position is that the fiscal agent is elected by a democratic process and must solely take on the responsibility of achieving macroeconomic objectives outside of price stability. [emphasis in original]

In an interview with the Frankfurter Allgemeine Zeitung, a leading German broadsheet, the ECB chief economist explained his resignation and that of Bundesbank head Axel Weber in terms very similar to these. The argument is clear. Whether the ECB eventually is forced to take on this quasi-fiscal role by the escalating sovereign debt crisis is another matter. I have said the ECB will be forced into this role because of Italy, though I do have my doubts.

Below is my translation of the Stark interview. Note his commentary on commodity and asset-price inflation and the distortionary asset-based economic model based on cheap money that is practiced in the US. His is a framing of the problem with which I agree due to the altered private portfolio preferences this Greenspan/Bernanke put engenders. However, I do not agree with Stark’s framing of deficits as the “root causes” of the crisis. Spain and Ireland had no deficits pre-crisis. The problem was the incomplete institutional arrangement of the euro zone currency union. Any solution that does not address this will fail.

Also notice his framing of the Eurobond/fiscal union issue. He doesn’t rule out Eurobonds. Rather, he says it must be fiscal/political union first and only then Eurobonds. more
And an example of the sort of leverage the banksters hold by their unwillingness to allow a sane view of money to prevail.
NOVEMBER 27, 2011 · 12:54 PM

Ever so quietly, with the acquiescence of Berlin, Brussels is planning to let the bankers off. 
Scared by market attacks on northern Europe, and still lacking any bazooka money, the EU’s key players are secretly putting together a plan to ensure the electors pick up the debt-crisis tab. The plan – which first emanated from Paris – is being scoped out and sold to the major member States by Wolfgang Schauble. It will be discussed at the ESM summit this week. 
When I was first given this lead last Friday, my initial reaction was that it was unlikely to be true – because none of the majors had picked it up. But I’ve been fooled that way before. If you hunt hard enough, both Reuters and Bloomberg have reported it: but I don’t see any sign that they’ve grasped its full significance. 
The spin technique has been to smother it with what appears to be this morning’s ‘big’ story – that Merkel and Sarkozy have agreed to set up an ‘instant austerity pact’ between all eurozone members….including themselves. Bild Am Sonntag pre-released it onto the wires last night, billing the idea as, basically, bringing the ESM bailout mechanism forward from 2013 and applying it de facto right away. In fact it’s nothing of the sort: it’s just another “look we’re applying discipline” stunt. More disturbing than the ham-fisted cynicism of this is that yet again here, we have a clear sign here of how Merkel is completely misreading what the markets are trying to get through her dull Osti head: they want action now on guarantees, not more signs of the dominatrix wielding her leather whip. But others are addressing this with a cunning approach to getting the markets off their backs. 
Basically, the nugget that has gone largely undiscovered is this: although a number of sources know and have reported about tighter lending discipline being forced upon all the banks operating in the euro area, Brussels is secretly dangling a quid pro quo in front of investment bankers – who should be scoring loans properly as part of their commercial duty anyway. 
Staggeringly, the deal is this: agree to these new banking rules in full, and we’ll let you off taking any haircut when it comes to ClubMed debt.
I understand the ClubMeds are all for it. Imagine that. The northern Europeans are less keen, because they see this for what it is: looney lender forgiveness as well as sovereign debt forgiveness. The exception (and why are we not surprised?) is German Finance Minister Woflgang Schauble. 
The way this would span out, the fat guys in the tall buildings – who have not suffered at all in the past – will not suffer anything at all in the future either. Those who have wound up sleeping on the streets because of their foolhardy agreement to the cheap loans pushed their way will be let off….courtesy of the EU taxpayer. In a phrase, the banks would be off the hook. As always in Wonderland, however, there is the small matter of who picks up the tab. more 

The Entire Sovereign Debt Crisis Can Be Understood By Looking At Sweden Vs. Finland
Joe Weisenthal | Nov. 27, 2011,

These two charts basically explain everything.

The first chart shows the yield on the Swedish 5-year bond.

As you can see, it's absolutely plummeting right now.

Now here's a look at its neighbor, Finland, and the yields on its 5-year bond.

Basically they look identical all through the year up until November and then BAM. Finnish yields are exploding higher, right as Swedish yields are blasting lower.

The only obvious difference between the two: Finland is part of the Eurozone, meaning it can't print its own money. Sweden has no such risk.

This is a narrow version of something that much of the media picks up on earlier last week that UK gilts were trading with a lower yield that German bonds, a reflection of the same principle: In UK the government can print. In Germany, it can't.

Right now, this is what investors demand, and if you don't have your own central bank that can pay off your debts, you're in trouble.

There's one other point here, which is that the spike in Finnish yields stands on its own as being remarkable. Clearly November will go down as the month when sovereign debt fears in Europe stopped being a peripheral issues, but rather an issue for everyone, including Northern states that you'd figure are bastions of stability. more
You want to know how we get cement-head central bankers, note that the new Bundesbank president is only 43 years old and views the world in ways that would have qualified him for a cabinet post in the administration of Grover Cleveland in the 1890s.  They must clone these clowns in a vat somewhere.  Note how enthusiastically he parrots the party line (I've boldfaced it below).  If you want to know how a 43-year-old gets to run one of the more important economies in the world, a foaming, barking enthusiasm for 19th century conventional monetary "wisdom" will explain it every time.
Saving the Euro
Germany's Central Bank against the World
Jens Weidmann, the new president of Germany's Bundesbank, is strongly opposed to making the European Central Bank the lender of last resort in efforts to prop up the common currency. It's a lonely fight, however, and the pressure from Germany's European partners is intense. Some warn that Weidmann's course could end up destroying the euro. By SPIEGEL Staff. 
An unsuspecting observer witnessing last Wednesday's meeting in room E 400 of the Paul Löbe House, a parliamentary building in Berlin, could have been mistaken for thinking it was the defense of a PhD thesis. The candidate, wearing a dark suit, sat down politely at a separate table, his youthful-looking face revealing a mixture of shyness and confidence. He folded his hands and placed them on the table in front of him, waiting patiently until someone addressed him. Sitting across from him, the members of the Finance Committee of the German parliament, the Bundestag, could easily have been a board of university examiners.

But the man being questioned was none other than Jens Weidmann, the 43-year-old president of Germany's central bank, the Bundesbank, and it didn't take long for his audience to realize that he should not be underestimated. Speaking in a quiet but firm voice, Weidmann delivered his assessment of the bailout policy of the euro-zone countries and the European Central Bank (ECB). In the end, it was Weidmann who was handing out the grades -- and they weren't good ones.

Politicians still hadn't done their homework, the Bundesbank president said critically. He assigned the blame for the crisis of confidence in the euro zone to politicians and said that they were jeopardizing the central bank's independent position. And then came the statement without which no German monetary watchdog can complete an appearance. The ECB, Weidmann said, has only one purpose, namely "to keep prices stable." 
One man is bracing himself against the storm. In the battle to save the euro, Europe's monetary watchdogs are under growing pressure from around the world to buy up unlimited quantities of the sovereign bonds of ailing member states. But the head of the Bundesbank is saying no, and he is making his message loud and clear, not only in Berlin, but also in Brussels, Paris and Washington. If the ECB gave in to the pressure, Weidmann argues, it would not only be violating European treaties and the German constitution. Such a move would also be "synonymous with the issuance of euro bonds." more

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