The best from ending week's posts.
EUROPE
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.
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.”
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.
On banking union, speak the
truth – Charles Wyplosz / voxeu.org
The European Commission presented their plan
for a single EZ bank supervisor this weekend. While it is a good start, this
column argues that it avoids the hard truth driving the process: the Eurozone
needs a lender of last resort and the ECB is the only one that can play the
role. Admitting this truth makes it clear that the Eurozone also needs an
arrangement with member governments on bank-bailouts cost sharing and
institutions to minimise the ultimate costs.
The Next Barroso… – Brussels blog
/ FT
a list of early contenders from each of the
major political families.
Discussion of 2011 Review of
Conditionality – IMF
2011 Review of Conditionality - Overview Paper – IMF
Why did I
include these? Conditionality will be the key to Spanish aid (of course it will
end up like Greece, with constant games of chicken,
but at least in the beginning this is the playbook).
We’ll settle this internal
devaluation question quicker than we thought – alphaville
/ FT
One of the criticisms of “internal devaluation”
is that it’s a slower method of improving competitiveness than an old fashioned
currency devaluation. There are also questions about whether it even works.
Missed Chances Stoke
Skepticism Over EU’s Crisis Fight – BB
Background
/ summary article
What really caused Eurozone
banks' balance sheets to grow? – Sober
Look
So what actually drove this increase in assets
discussed above? A large part of it was due to accelerated purchases of
sovereign debt… Italy and Spain clearly did not care if banks' balance sheets would increase as a
result. And it was done at the expense of lending to the "real
economy", pushing the Eurozone into its current recession.
The euro’s paradox – alphaville
/ FT
if the single currency gets stronger, then the
eurozone’s economic recovery gets harder — and thus the measures that are
taken, ostensibly, to shore the euro up run the risk of doing it damage by
undermining its longer-term existence.
EUROPE: PIIGS
Deposit Flight From Europe
Banks Eroding Common Currency – BB
Why Spain Will Seek Help—and Why the ECB Retains Its Leverage – PIIE
First, recall that the ECB was more than
willing in November 2011 to cut Prime Minister Silvio Berlusconi of Italy loose and deny him
securities market program (SMP) support because of insufficient progress on reforms. Its action set a
precedent for even large euro area member state governments. Second, unlike the
case of Lehman Brothers and other systemic banks, large industrial countries do
not go bankrupt overnight. Rather they run the risk of sliding into it over
time.
Mariano Rajoy waiting for
markets to force his hand – Sober
Look
Clearly a number of political reasons are
causing Rajoy to delay asking for ECB's assistance. Applying now however would
give Spain time to negotiate the bailout conditions versus having to do it under
duress. Sadly, critical decisions in the Eurozone seem to be made only under
duress. And given the economic and fiscal trajectory of Spain, it is just a matter
of time before market conditions will force Rajoy's hand.
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 OMT and ‘limits’ – alphaville
/ FT
“We will only buy the debt with the remaining
maturity of three years and part of the conditionality will be that the maturity
structure of the debt may not change so that they (governments) cannot put all
the new debt in the short end of the market,”
QE would be right for Europe,
too – Wolfgang
Münchau / FT
The biggest danger for the eurozone right now
is a rapidly deteriorating economy
USA: FISCAL CLIFF
Goldman On The Fiscal Cliff:
Worse Before It Gets Better – ZH
US Update: Fiscal cliff moves
into focus – Nordea
(pdf)
USA: FED
QE market reaction – Thomson
Reuters
table of
historical asset class price changes after QE
The One Chart To Explain The
Real Effect Of QE3
– ZH
Barclays: bad economic news may not seem so horrible,
if it is perceived to raise the probability of a market-friendly monetary
policy response…But now that the monetary policy responses to economic weakness
are in place, markets have had the good news.
QE3 and Inflation
Expectations – MacroMania
good charts
CENTRAL BANKING
When Money Dies – ZH
Bob Janjuah
/ RBS: The Fed and the ECB are directing
and attempting to orchestrate the grossest misallocation and mispricing of
capital in the history of mankind.
Charting central banks’
balance sheets – ASA
Monetary policy: A victory,
and a test – Free
exchange / The Economist
The notion that the central bank should focus
on raising NGDP and that inflation is largely a sideshow has taken a while to
catch on. But caught on it has.
Diminishing market reactions
to unconventional monetary policy – ASA
How central banks contributed
to the financial crisis – voxeu.org
Even before the crisis, there were some who stressed
that monetary policy should keep an eye on asset bubbles and the growth of
credit. This column argues that the policy of inflation targeting, used widely
in the 1990s and 2000s, did indeed lead to excessive credit growth that
eventually bred financial instability.
Woodford on Optimal Monetary
Policy Rules – Economist’s
View
NGDP has desirable properties, and sometimes it
is the optimal policy, but not always. What's important, as anyone familiar
with Woodford's book and work realizes, is the inclusion of both growth and
level variables in the policy rule
MARKETS
New financial forecasts:
Central banks taking out the bigger guns – Nordea
or instead
of the summary, the full pdf
To be Europe this
autumn... – Humble
Student
Despite all the hoopla about the actions of the
Fed, it has been European equities that have begun to bottom and started to
become the leadership. US equities have begun
to weaken against global equities and started to lag.
By 2015 hard commodity prices
will have collapsed
– mpettis
This time is different – no
quick rise in yields in sight – Nordea
Price earnings ratios on
parade – Abnormal
Returns
Things That Make You Go Hmmm:
Zor and Zam – The
Big Picture
Grant
Williams’ newsletter, very good – better than The Economist!
It's Just Getting Stupid! – ZH
Barclays: Investors seem to misremember history;
monetary policy was not the only driver of the rallies following QE2 and
Operation Twist. (good charts)
What does liquidity mean to
YOU? – alphaville
/ FT
The analysts at Citi piled five factors into
their model to measure liquidity, employing a 60-day horizon
A Book That Will Change the
Way You Think About Trading – Minyanville
Aaron
Brown: Eric G. Falkenstein’s 'The Missing
Risk Premium' argues that there is no risk premium and there never was, so
conventional investing advice is deeply misguided.
Deep Thoughts by Ray Dalio – PragCap
Ray Dalio, the founder of Bridgewater, the
world’s largest hedge fund, was at the Council on Foreign Relations discussing
his macro approach and his general view of the world. It’s a rare look at his thinking
Ray Dalio on Striking the Right
Balance – Pension
Pulse
The euro
zone crisis will likely create a “lost decade” in southern Europe, hedge-fund honcho Ray Dalio said
Wednesday.
The Man Behing QE2 – The Big Picture
(video 54
minutes) Scott Sumner: Market Efficiency and
the Crash of 2008
Gundlach: I doubt you’re
going to have lost decade in equities – Dynamic
Hedge
(video 25
minutes)
OTHER
The End of China's Easy Growth – The
Telegraph
The more we learn about China’s vast stimulus
plans, the more far-fetched they seem.
Quantitative impact study
results published by the Basel Committee – BIS
the average common equity Tier 1 capital ratio
(CET1) of Group 1 banks was 7.7%, as compared with the Basel III minimum requirement of 4.5%. In
order for all Group 1 banks to reach the 4.5% minimum, an increase of €11.9
billion CET1 would be required. The overall shortfall increases to €374.1 billion
to achieve a CET1 target level of 7.0%
Schüll, Addiction by Design – reading
the markets
Schüll, an associate professor at MIT, argues
that addiction to machine gambling stems from the interplay between the gambler
and the machine.
IN FINNISH
EKP:n Kuukausikatsaus – Suomen Pankki
suora pdf-linkki
(283 sivua, 7.58MB)
Velkakriisissä käy
kehnosti tai vielä kehnommin – Jan
Hurri / TalSa
Eurooppa uppoaa yhä syvemmälle
velkasuohon ja rämpii siinä vielä vuosia – varsinkin, kun väärät kriisitoimet
pahentavat kriisiä. Näin arvioivat maailman eturivin taloustietäjät, joiden
mukaan Euroopan käy kehnosti tai vielä kehnommin. Siitä asiantuntijat ovat
jyrkästi erimielisiä, olisiko euron hajoaminen helpotus vai alkaisiko siitä
kaaos.
Suomen pankkikriisi: missä päähenkilöt ovat nyt?
(2001) – TalSa
Eva: Suomen suora
riski euron hajoamisesta 89 miljardia euroa – HS
EU:n ajolähtö – Kriisiunionista yhteisvastuun unioniin
– EVA
koko raportti pdf-muodossa