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Sunday, September 16

16th Sep - Weekender: Europe & USA

The weekend's huge reading package, heavy on Europe and Fed's latest QE-dance

Previously on MoreLiver’s:

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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 EuroEconoMonitor
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.

Europe’s Vital French ConnectionKemal DerviĊŸ / Project Syndicate
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 UnionThe 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 insuranceFree 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)

Taking Away the Punch Bowl: Lessons from The Booms and Busts in Emerging EuropeiMFdirect
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.

Hidden history about Madrid 1995: a look at the conference that changed the worldFabius Maximus
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.

Placements privadas, in Spainalphaville / FT
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 citizenshipeuobserver

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%.

One-Size-Fits-All Monetary Policy: Europe and the U.S.FED
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 Draghibruegel
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 EuroSimon 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.

Plans for common supervision could easily turn messyThe Economist
Tougher and more consistent bank supervision in Europe might have prevented some of the worst bank failures of recent years.

EU turf war on banking union may pose risks to Spaineuobserver

One bank supervisor, many paymastersBrussels blog / FT
Is it possible to have one supervisor for eurozone banks, while keeping 17 different paymasters for when things go wrong?

QE market reactionThomson Reuters
table of historical asset class price changes after QE

Fed's selling volatility into the market will force mispricing of riskSober 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 WorldZH
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 CrudeZH

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 independenceFree exchange / The Economist

Rosenberg: "If The US Is Truly Japan, The Fed Will End Up Owning The Entire Market"ZH

A Psychological Profile of Ben BernankeEconoMonitor

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