Tuesday, August 30, 2011

When a plan fails, try the same thing—only harder

The various schemes to saddle the (mostly German) European taxpayers with the unpayable debts run up by the various countries and individuals since the introduction of the Euro would be hilarious if the implications were not so dire.  Of course, the current economic catastrophes were baked into the system when the hyper-conservative, neoliberal wet dream Maastricht Treaty was signed in 1992.

So now we have a system where the banks, who should be taking a haircut as the reward for some truly wretched lending decisions, literally cannot do so without going out of business.  If the world's big banks had to write down their bad loans, there would be none left standing—at least none that I can think of.  And so they are trying to get someone to conjure up the necessary rituals to make their garbage loans portfolios "perform" again.  Hence the plans to get the German and Finnish taxpayers to pay the bills because being a frugal lot, they still have some money left to steal.

And so now we have Euro bonds--and if that doesn't work, something else that will perform the same function.  The problem is that someone like Angela Merkel will commit political suicide if she backs a plan which was clearly prohibited by German law when Germany chose to abandon the Deutschmark for the Euro.  On the other hand, if she doesn't agree to try, she will be blamed for destroying the great Euro dream.  In fact, former Chancellor Kohl is already accusing her of just that.

Government Analysis
Euro Bonds Would Cost Germany Billions
Many prominent politicians are calling for the introduction of jointly issued euro bonds to help combat the European debt crisis. But research conducted by the German government suggests that the bonds would face tough legal challenges, and would cost Germany billions in additional borrowing costs.

When it comes to joint bonds for the euro-zone countries, German Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble, continue to contend that they steadfastly oppose the idea. Yet there are many indications that the two German politicians, both of the conservative Christian Democratic Union (CDU), do not reject the controversial idea of euro bonds quite as vehemently as they would like many people to believe. In principle, they are against them -- but only in principle, it would seem.

Merkel, for one, would have no qualms about riding roughshod over her coalition partner, the pro-business Free Democratic Party (FDP), and introducing the joint government bonds if the survival of the monetary union depended on it. Schäuble would also be willing to take the plunge if euro-zone member countries waived a considerable degree of sovereignty and subjected themselves to the rigors of a common economic and fiscal policy regime.

Euro bonds, which are backed by such prominent politicians as the president of the Euro Group, Luxembourg Prime Minister Jean-Claude Juncker, are a controversial scheme because they would have a dual impact: positive for some, negative for others. The main beneficiaries would be precisely those countries that currently have to pay high interest rates because of their precarious financial situation. The new bonds would have lower interest rates because countries with excellent credit ratings would take on part of the risk. 
Consequently, countries with solid economies, like Germany, would have to pay more. Schäuble's experts have already calculated just how much of an extra burden this would be on Germany's federal budget. During the first few years, the amounts involved would be relatively manageable. In the first year, they believe that the federal budget would face extra costs of €2.5 billion ($3.6 billion). During the second year, they say, the additional expenditure would be twice as high. After 10 years, they contend that the additional borrowing costs would amount to between €20 billion and €25 billion. more
The cheerleaders for the bank bailouts have already resorted to name-calling.  German politicians who have respect for the laws they passed prohibiting economic suicide by Euro bond are now deemed hysterical.
Euro bail-out in doubt as 'hysteria' sweeps Germany 
German Chancellor Angela Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe's revamped rescue machinery, threatening a consitutional crisis in Germany and a fresh eruption of the euro debt saga.

By Ambrose Evans-Pritchard
8:07PM BST 28 Aug 2011

Mrs Merkel has cancelled a high-profile trip to Russia on September 7, the crucial day when the package goes to the Bundestag and the country's constitutional court rules on the legality of the EU's bail-out machinery.

If the court rules that the €440bn rescue fund (EFSF) breaches Treaty law or undermines German fiscal sovereignty, it risks setting off an instant brushfire across monetary union.

The seething discontent in Germany over Europe's debt crisis has spread to all the key institutions of the state. "Hysteria is sweeping Germany " said Klaus Regling, the EFSF's director.

German media reported that the latest tally of votes in the Bundestag shows that 23 members from Mrs Merkel's own coalition plan to vote against the package, including twelve of the 44 members of Bavaria's Social Christians (CSU). This may force the Chancellor to rely on opposition votes, risking a government collapse.

Christian Wulff, Germany's president, stunned the country last week by accusing the European Central Bank of going "far beyond its mandate" with mass purchases of Spanish and Italian debt, and warning that the Europe's headlong rush towards fiscal union stikes at the "very core" of democracy. "Decisions have to be made in parliament in a liberal democracy. That is where legitimacy lies," he said.

A day earlier the Bundesbank had fired its own volley, condemning the ECB's bond purchases and warning the EU is drifting towards debt union without "democratic legitimacy" or treaty backing. 
Joahannes Singhammer, leader of the CSU's Bundestag group, accused the ECB of acting "dangerously" by jumping the gun before parliaments had voted. The ECB is implicitly acting on behalf of the rescue fund until it is ratified. 
A CSU document to be released on Monday flatly rebuts the latest accord between Chancellor Merkel and French president Nicholas Sarkozy, saying plans for an "economic government for eurozone states" are unacceptable. It demands treaty changes to let EMU states go bankrupt, and to eject them from the euro altogether for serial abuses. 
"An unlimited transfer union and pooling of debts for any length of time would imply a shared financial government and decisively change the character of a European confederation of states," said the draft, obtained by Der Spiegel. more
Mr Stephen King (the REAL horror writer) wants us to know that all these economic catastrophes really are not the fault of greedy banksters and that any deviation from the sacred ideals of Milton Friedman would amount to bad magic.  Of course, believing in Friedman is the problem.  So King is right when he suggests that the Friedmanesque heretics probably won't solve much by merely tinkering with the monetarist commandments.
The magicians of monetarism have very few tricks left up their sleeves

Developed economies are ending up with economic permafrost, where attempts to kick-start growth bump into economic reality

Stephen King  Monday, 29 August 2011

Somehow, investors have got it into their heads that the world is run by magicians always capable of pulling rabbits out of hats. Last week was a case in point. Ben Bernanke, the chairman of the US Federal Reserve, gave a speech at Jackson Hole, Wyoming, at the annual shindig of central bankers, academics and assorted policy wonks. Would he wave his magic wand? Did he have a few tricks up his sleeve? Would the world's economic problems come to an abrupt end?

As it turned out, Mr Bernanke promised little, announcing only that there would be an extra day set aside at the next scheduled meeting of the Federal Open Market Committee (FOMC) in September to discuss further policy options. Big deal. Still, it was enough to get investors excited again. A two-day meeting? What could be going on in the Federal Reserve monetary laboratory? Was there financial alchemy at work? Had the FOMC hired Harry Potter to help conjure up some new economic spells? 
We already have a pretty good idea of what is left in the monetary locker. The Federal Reserve could decide to buy bonds at longer-dated maturities that tend to have a more direct influence on the cost of borrowing for households and companies, thus widening the Fed's direct influence over the broader economy. It could buy up a range of less liquid assets such as property or equities (subject to a change in the law). It could choose to buy not just domestic IOUs but also foreign IOUs in a bid to steer the dollar down to a lower level (although what Congress would make of a Federal Reserve hell-bent on building up holdings of Greek or Portuguese government debt is anybody's guess). 
It could even decide to print more money and give the newly-created notes to the government to allow a "monetised" tax cut, turning the Fed chairman into "Helicopter Ben" (a policy which sounds great in theory but, as the experiences of Weimar, post-war Hungary and, more recently, Zimbabwe suggest, may not be quite so clever in practice). 
And ... well, that's about it. In the world of monetary economics, we're getting to the end of the line. Investors hope and pray for a bit of central-bank alchemy because they know that, otherwise, life could become jolly uncomfortable. Yet this view is remarkably myopic. It's true that, following the Fed's decision to adopt a further round of quantitative easing last year – so-called QE2 – markets rallied and, for a while, investors made hay. But, aside from a short-run shift in the ownership of assets (if yields on risk-free assets are pushed down to artificially low levels, riskier assets become relatively more attractive), it's a lot more difficult to argue that there has been any kind of follow-through in terms of economic recovery. Indeed, consensus growth forecasts have tumbled this year, reflecting both disappointing outcomes and mounting recessionary fears. Markets have, as a result, sold off. 
Even worse, unconventional policies have led to unexpected effects which may simply mean that central bankers are nothing like as powerful or influential as they'd sometimes like to think. In his Jackson Hole speech, Mr Bernanke talked about the "temporary" effect of the run-up in commodity prices earlier in the year as if this was something completely unrelated to the monetary policies pursued by the Federal Reserve and other developed-world central banks. Yet, arguably, rising commodity prices were both a result of excessive monetary stimulus and a cause of the more recent slowdown in economic activity. 
The effects of the Fed's monetary decisions spread far and wide. Other nations loosely tie their currencies to the US dollar reflecting both its role as the world's reserve currency and the Fed's reputation – mostly earned following the tough monetary medicine dispensed by Paul Volcker in the 1980s – as a guardian of price stability. Many of those nations, however, are not going through the financial traumas which have beset the US. American households may be frantically deleveraging and Washington may have got itself tied up in fiscal knots, but other countries have responded to low US interest rates and unconventional monetary policies with considerably more vigour. Most of these nations are to be found in the emerging world. Emerging nations are, by definition, at a different stage of economic development compared with the US and much of Europe. Their growth tends to be a lot more commodity-intensive. Any monetary action which puts a bit of rocket fuel into emerging-market growth engines is likely to lead to higher demand for commodities. Raw materials prices then rise and the rest of us find our fuel and food bills heading higher. more

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