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Friday, September 21

21st Sep - Weekender: Best of The Week

 The best from ending week's posts.

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.

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.”

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.

On banking union, speak the truthCharles Wyplosz /
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 ConditionalityIMF
2011 Review of Conditionality - Overview PaperIMF
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 FightBB
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 paradoxalphaville / 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.

Deposit Flight From Europe Banks Eroding Common CurrencyBB

Why Spain Will Seek Help—and Why the ECB Retains Its LeveragePIIE
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.

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, tooWolfgang Münchau / FT
The biggest danger for the eurozone right now is a rapidly deteriorating economy

Goldman On The Fiscal Cliff: Worse Before It Gets Better ZH

US Update: Fiscal cliff moves into focus Nordea (pdf)

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

The One Chart To Explain The Real Effect Of QE3ZH
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 ExpectationsMacroMania
good charts

When Money DiesZH
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 sheetsASA

Monetary policy: A victory, and a testFree 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 policyASA

How central banks contributed to the financial
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 RulesEconomist’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

New financial forecasts: Central banks taking out the bigger gunsNordea
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 collapsedmpettis

This time is different – no quick rise in yields in sightNordea

Price earnings ratios on paradeAbnormal Returns

Things That Make You Go Hmmm: Zor and ZamThe 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 DalioPragCap
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 BalancePension Pulse
The euro zone crisis will likely create a “lost decade” in southern Europe, hedge-fund honcho Ray Dalio said Wednesday.

The Man Behing QE2The 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 equitiesDynamic Hedge
(video 25 minutes)

The End of China's Easy GrowthThe 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 CommitteeBIS
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 Designreading the markets
Schüll, an associate professor at MIT, argues that addiction to machine gambling stems from the interplay between the gambler and the machine.

EKP:n KuukausikatsausSuomen Pankki
suora pdf-linkki (283 sivua, 7.58MB)

Velkakriisissä käy kehnosti tai vielä kehnomminJan 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 euroaHS

EU:n ajolähtö – Kriisiunionista yhteisvastuun unioniin EVA
koko raportti pdf-muodossa