Here are the best picks from my past week's articles. Spain, euro's future and global debt were the main talk of the week. Regular weekend posts coming up later. You can follow me on Twitter, Facebook, email, paper.li.
EURO CRISIS
European policymakers, particularly on the continent, have long appeared to be in denial of the centrality of systemic banking fragility in the place’s problems…Put simply, Europe’s leaders are not ready to create a truly meaningful federal framework for banking policy because a critical mass of countries see banks as a core instrument of national policy...Ultimately, monetary union cannot be sustainable without fiscal union and banking union, and these will not themselves be sustainable without a form of political union…Contrary to many people’s intuitive perception, it is politically easier for a nation to renounce its own currency and even its fiscal sovereignty than its control on banks.
The fate of the euro will probably be determined by politics as much as economics. A debtor state may tire of internal devaluation. A creditor may want to stop supporting others. And any one of the euro’s 17 members may balk at the loss of sovereignty involved in saving the currency. But the worst outcome of a euro split would be a chaotic breakdown.
It wasn’t all that long ago that public intellectuals could make a coherent case that European union, both political and monetary, was and would be a great success story…But if by “the European experiment” we mean the euro, that’s been a disaster, and virtually everybody in Europe would have been better off had it never existed.
Eurozone Chutzpah and the IMF – Project Syndicate
Simon Tilford: Many European leaders believe that the rest of the world owes the eurozone a bailout because the currency union is just an innocent bystander…This rationale highlights the core of the problem: the eurozone is institutionally incomplete, and eurozone policymakers continue to blame investors for pointing this out.
George Soros: The Bundesbank will never accept these proposals, but the European authorities ought to take them seriously. The future of Europe is a political issue, and thus is beyond the Bundesbank’s competence to decide.
Sovereign debt: It isn't a debt crisis – Free exchange / The Economist
"euro-zone country with a large current-account deficit" is a vastly better predictor of crisis than "large debt load". An economy with its own currency can sustain very large debt loads without prompting a crisis. And an economy with its own currency and a persistent current-account surplus can flout every last bit of conventional debt wisdom and still avoid crisis. So long as it's called Japan, anyway.
What happened when Poland’s Fixed Exchange Rate Experiment Failed: Lessons for a Euro Divorce – EconoMonitor
Ed Dolan: first lesson is that fixed exchange rates aren’t for everyone… second lesson is that there is more than one way to leave a fixed exchange rate… third lesson is that if a country chooses any kind of managed exchange rate regime, even as a transitional measure, credibility matters
Hazards, moral and otherwise – Free exchange / The Economist
Euro-zone leaders—core-country politicians, ECB officials, and so on—want desperately to ensure that the periphery faces consequences for "bad" behaviour. So great is their determination to accomplish this, however, that they have severed any relationship between the actions of an individual euro-zone member and the reaction in debt markets.
The EZ breakup contest: Take ignorance seriously – voxeu.org
Richard Baldwin: The five finalists of the £250,000 EZ breakup contest were announced last week; only one has a graduate degree in economics. This column argues that three are amateurish efforts full of economic and factual errors. European economists should take such ignorance seriously. Failure to do so in the US allowed odious ideas to gain respectability.
EURO CRISIS: SPAIN
54-slide presentation on Spain
Spanish debt – a house of cards? – Oxford Economics (pdf)
5 page analysis from 5-Apr.
Spain Banks Boost Borrowing From ECB by 50 Percent in March – BB
Spanish banks’ borrowings from the ECB jumped by almost 50 percent in March, reaching the most on record, as lenders tap emergency loans and channel some of it into sovereign debt purchases.
Spanish banks’ borrowings from the ECB jumped by almost 50 percent in March, reaching the most on record, as lenders tap emergency loans and channel some of it into sovereign debt purchases.
Very nice seven-pager.
When a minister of finance and economics states that his country “does not need a rescue at this time” and the central bank governor cautions that banks will need more capital “if the economy worsens more than expected,” private bondholders are likely to take notice
EURO CRISIS: ECB
Disquiet at the ECB – MacroScope
A day for central bankers and maybe the hint of a row brewing within the ECB.
Monthly Bulletin, April 2012 – ECB (pdf)
The Big Easing – Project Syndicate
Daniel Gros: The real problem for the ECB is that it is not properly insured against the credit risk that it is taking on. The 0.75% spread between deposit and lending rates (yielding €7.5 billion per year) does not provide much of a cushion against the losses that are looming in Greece, where the ECB has €130 billion at stake.
The ECB’s Lethal Inhibition – Project Syndicate
Barry Eichengreen: The ECB is preoccupied by moral-hazard risk – the idea that supporting spending will relieve the pressure on governments to act. But it should also worry about meltdown risk – about the danger that its own failure to act, by leading to a deep recession, will undermine political leaders’ ability to take the steps needed to put their economies on a sound footing.
OTHER
Why QE is being mis-sold – alphaville / FT
At the macro level, deleveraging must be a managed process: for the private sector to deleverage without causing a depression, the public sector has to move in the opposite direction and re-lever by effectively viewing the balance sheets of the monetary and fiscal authorities as a consolidated whole.
At the macro level, deleveraging must be a managed process: for the private sector to deleverage without causing a depression, the public sector has to move in the opposite direction and re-lever by effectively viewing the balance sheets of the monetary and fiscal authorities as a consolidated whole.
Volatility At World's End: Deflation, Hyperinflation And The Alchemy Of Risk – Artemis / ZH
Artemis Capital Management’s 18-pager discussing the tail scenarios. Must-read, when you have time.
Equity Focus: Newtonian Profits – PIMCO
Stock prices today are anchored on strong profits, hence investors’ intense focus on the sustainability of those profits. If they fall, stock prices are likely to follow.
Quants: The Alchemists of Wall Street – Youtube
A story about greed, fear and randomness from the insides of Wall Street, director Marije Meerman, research Gerko Wessel, VPRO Backlight 2010 (48min)
Markets, Morality and Mathematics – Magic, Maths and Money
One of the key critics of Aquinas’ argument that a merchant could charge what heliked, providing the future was uncertain, was Pierre Jean Olivi, who was born near Béziers in Languedoc around 1248.
Debts that can’t be paid, won’t be – Credit Writedowns
But as economies have been financialized, creditors have gained political power – and also the power to disable realistic academic discussion of the debt problem. What they fear most of all are thoughts of how to avoid today’s arrangements that have given them a free lunch at the rest of the economy’s expense. (full pdf)
Chartocopia: OECD Snapshot of the World – The Daily Capitalist
The OECD just came out with its “Interim Assessment” of the major economies within the OECD (34 countries). (see the article for quickie or download the whole thing.)
Dealing with debt – Free exchange / The Economist
The IMF is now releasing chapters from the April edition of its World Economic Outlook and one of them—chapter 3—is quite a nice discussion of the impact of household debt on economic recovery. (see chapters 3 and 4 on IMF)
Should There Be an FDA to Approve Financial Products? – Minyanville
Aaron Brown: There are two reasons to dislike this proposal: theory and practice. In theory, the goal is a bad one. In practice, the proposed agency is designed to resemble the FDA, which is the poster child for regulatory capture. (okay, the topic isn't relevant, but there simply isn't a bad text from Aaron)
Exponential Economist Meets Finite Physicist – Do the Math