The weekend's huge reading package, heavy on Europe and Fed's latest QE-dance
Previously on MoreLiver’s:
EUROPE
The Great Stagnation
and the Future of the Euro (36min) – youtube
Economist Tyler Cowen (George Mason University) held the annual
lecture organized by Istituto Bruno Leoni in Milan.
The Evolving Euro – EconoMonitor
The Eurozone has been in a state of change
already for several years. Democratic decision making takes time and it is
clear that Eurozone 2.0 will not be launched for several more years. The
president of the European Commission in his recent State of the Union address
admitted that completion of the new design would require changes in the EU
treaties. Nevertheless, Eurozone 2.0 should be designed in such a way as to
make it stronger and more flexible, not more exclusive. Mundell’s question of
what countries and what characteristics constitute an optimum currency area
remains as relevant in 2012 as it did in 1961.
In the debates raging over the future of the EU
and the eurozone, Germany always takes center stage. But, in terms of influencing outcomes in Europe, France remains as important
as Germany, for three reasons.
What Remains: On the European Union – The
Nation
In the ongoing atomization of society, citizens
and classes have vanished as forces for change and given way to a world of
individuals who come together as consumers of goods or information, and who
trust the Internet more than they do their political representatives or the
experts they watch on television. Governing institutions today have lost sight
of the principle of politics rooted in the collective values of a res publica,
even as they continue to defend the “civilization of capital.”
Don't buy assets; sell insurance – Free
exchange / The Economist
The current market failure in Europe is obvious enough: long-term
investors can hedge themselves against government bankruptcies (through the CDS
market) but cannot hedge themselves against possible currency devaluations. It
is this market failure that the ECB needs to address. (wrong: CDS products are priced and
settled in non-domestic currencies – ML)
One lesson is that your best chance to prevent
deep crises is forcefully addressing booms before they get out of hand. Another
is that even crises that look abysmal can be contained and overcome— policies
to adjust the economy and international financial support do work.
One of the key global diplomatic meetings
shaping the early 21st century world, our equivalent of the Congress of Vienna in 1815. In the era of 4GW State-to-State wars are
replaced by global conferences setting policy about currencies, trade — and
climate change.
Thursday’s announcement that Spain’s central government
has arranged a €8bn “credit”, ‘with several banks’… It is not on the market. It
follows another off-the-market financing last week, for a€6bn injection into
the official bank recap fund, Frob, to cover the Bankia rescue. The sums here
add up to 10 per cent of Spain’s €86bn issuance
plans for this year.
How to buy EU citizenship – euobserver
EUROPE: ECB
Has ‘Super Mario’ Really Saved the Euro? – New
Economic Perspectives
So yes, the Eurozone could go on for a long
time in a kind of underemployment “equilibrium” as long as the ECB continues to
buy national government securities. The problem is that, while this is
possible, politically the optics of this are such that the ECB cannot go on
forever doing this in such an ad hoc fashion, with the ECB putting out the
fires wherever there is need for increased liquidity, unless these countries
trade balances reverse themselves.
Has Mario Draghi done what it takes to save
the euro? – The Economist
Mario Draghi seems more sorcerer than central
banker. Since the boss of the European Central Bank (ECB) said in late July
that he would do “whatever it takes” to save the euro, Spanish two-year bond
yields have fallen from 7% to 3%.
The ongoing euro-area crisis is seen by many as
vindication of skeptics who said that a monetary union encompassing a disparate
group of countries is doomed to fail because the countries do not constitute
what economists call an optimum currency area. Thus, they argued, a
one-size-fits-all monetary policy that goes with participation in an alliance
such as the European Economic and Monetary Union (EMU) creates strains that ultimately
prove insurmountable.
The bond market consequences of Mr Draghi – bruegel
Draghi’s announcement of new OMT has impacted
the pattern of yield curves substantially, with a downward shift for both
short-term and long-term maturities, particularly marked for Spain.
Introducing the Latin Euro – Simon
Johnson / Economix / NYT
The Germans will be increasingly drawn toward
one plausible conclusion: perhaps the euro area is simply the wrong system. If
tough austerity programs do not wrest nations free from high unemployment and
overindebtedness, then how are they to get back on the path to growth? If a
one-time devaluation could help release nations from their troubles rather more
quickly, perhaps Germany should instead acknowledge – or insist – that the single currency is a
failed exchange-rate regime.
EUROPE: BANKING UNION
Plans for common supervision could easily turn
messy – The Economist
Tougher and more consistent bank supervision in
Europe might have prevented some of the worst bank failures of recent years.
One bank supervisor, many paymasters – Brussels
blog / FT
Is it possible to have one supervisor for
eurozone banks, while keeping 17 different paymasters for when things go wrong?
USA: FED & QE
QE market reaction – Thomson
Reuters
table of
historical asset class price changes after QE
Fed's selling volatility into the market will
force mispricing of risk – Sober
Look
Buying mortgages results in a direct sale of
volatility (prepayment risk) to the public. Extending the rate guidance to “mid
2015” represents an implicit sale of volatility – the Fed is giving up the
option to hike
On Bernanke's Voyage To The End Of The Monetary
Policy World – ZH
Morgan
Stanley: If the Fed has not acted
consistently over the past few meetings, how will market participants infer
future action? Has it adapted a hierarchal mandate in which it will work first
to reduce unemployment until it reaches some barrier of distaste on inflation? Or
was the phrase “in the context of price stability” snuck in to trump policy
activism?
BofA Sees Fed Assets Surpassing $5 Trillion By
End Of 2014... Leading To $3350 Gold And $190 Crude – ZH
QE3: How long before the Fed’s stimulus helps
the real economy? About six months. – Wonkblog
/ WP
More Fedding – Krugman / NYT
The Fed asserts its independence – Free
exchange / The Economist
A Psychological Profile of Ben Bernanke – EconoMonitor
