M.G. in Progress - The Unbearable Lightness of Being an economist

Launch Euro- bonds and then go a bit the Japan way...

2013-04-06T12:00:00.001+02:00

Update of April 6th, 2013

I think that launching the Euro-bonds immediately would allow and make it easier to go a bit the Japan and its central bank way.

Maybe we could give it a try...although there are risks of a kind of competitive easing madness.

Here below what I was writing a year ago and before...

The debate on Euro-bonds seems stuck somewhere...A Curious Bull-Bear Stalemate. The European Commission's report on the public consultation on the European Commission Green Paper on the feasibility of introducing Stability Bonds showed only 40 responses sic! Basically nobody cares...?

I still contend that Euro-bonds are bonds to be alive. Unless Euro-bonds are launched pretty soon there will be big problems ahead, particularly for the ECB. The latter is indeed likely to incur big losses if Greece were to exit the Euro. The ECB is already running on nominal and fictitious Euro-bonds buying all EU member states bonds, which have to be sterilised on all operations with repo operations. But the recent ECB longer-term refinancing operations cannot go forever. What if Greece exit the Euro?
Euros can still be printed but operations would be far easier if the Euros are backed by Euro-bonds. If investors are at present more concerned about solvency than liquidity, LTRO by the ECB will not help that much. Full scale quantitative easing will be needed and this is definitely more effective with Euro-bonds, that is monetising EU sovereign debt not national one.

If Euro-bonds were adopted borrowing costs for many countries will be lower (along the same lines of when the Euro was introduced) but net costs for Germany will not necessarily be higher. Even if borrowing costs for Germany will be a bit higher then at present (which can be initially compensated), costs of defaults, Euro exits and ECB losses are far higher for everybody, particularly Germany. The costs of not having Euro-bonds could be far higher than the cost of having them.

On the other hand ,the Euro-zone currency union saved Germany’s major banks from insolvency, and German taxpayers from the burden of a massive bailout. European bank exposure to the PIGS wasn’t altruistic economic development and cooperation funding; it was very often speculative and without due diligence investment. Moreover Germany relies on the EU for exports, so a stable and not in recession area is on its interest.

One variation on the Euro-bonds idea that has gained traction in recent weeks is something called "project bonds". It's not a big deal as it's exactly what was proposed in 1993 by the European Commission President's Delors. It will not help as the money involved is too little.

Euro-bonds may not resolve the current crisis but I think would avoid having a bigger one.
I also expect Euro-bonds “soon”.

2012-05-29T15:02:00.001+02:00

This post was written more than two years ago following L'Aquila earthquake in Italy. Here we are again in the Emilia Romagna region...

Is an earthquake in Italy really a Black Swan?

An earthquake could normally be characterized as Black Swan to the extent that "first, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable".

Yet in Italy earthquakes are not exactly unpredictable one offs for which there are no precedents and so nothing to learn from. There is a great deal of information in the occurrences of an earthquake.

It appears that geophysicists know they still cannot predict when an earthquake will occur, how much its magnitude will be and where it will strike. We say that economists suffer from the same problem in their predictions: if they say when they cannot tell you how much and vice-versa. If they tell you when and how much they will fail the prediction.

However in the prediction of earthquakes, some empirical laws (e.g. power law) are known to hold, which are remarkably simple. There exist also some interesting approaches based on peculiar properties of precursory phenomena observed within complex seismic time series.

The fact that earthquakes like financial markets could be affected by the Black Swan frequency problem does not impel us to do nothing! Not at all. We can focus more and more on prevention rather than prediction and establish some ground smart rules in order to avoid financial systems to collapse in turmoil and earthquakes to raise the death toll and damages.

The recent earthquake in Italy, along the same lines of the world financial crisis, shows that somebody, particularly in Italy, still have some difficulties in making prevention to work and abide by the rules of, for example, seismic construction. Thus the debate is easily shifted from prevention and regulation to failure of predictions so that nobody is accountable. The same is in fact happening in the financial crisis. Sad similarities and news.

Euro- bonds: what are we waiting for?

2012-05-26T10:56:00.000+02:00

The debate on Euro-bonds seems stuck somewhere...A Curious Bull-Bear Stalemate. The European Commission's report on the public consultation on the European Commission Green Paper on the feasibility of introducing Stability Bonds showed only 40 responses sic! Basically nobody cares...?

It was posted exactly two years ago

2011-11-26T23:49:00.001+01:00

It was posted exactly two years ago on

Friday, November 27, 2009

Just a REMINDER, republished exactly the same!

Few days ago, inquiring minds asked Nobel Prize Krugman about debt/GDP ratio comparisons. There is a bizarre school of thought who tend to think that sovereign public debt does not matter or debt can be accumulated for long time without sustainability and solvency problems.
The Dubai crisis is simply reminding us: a) the financial crisis is not over b) any debt needs to be paid back, no matter if it's private or sovereign (or a mix of the two).
In the case of Dubai, Buiter is stressing that the debt of the Dubai World Group and of Nakheel was not Dubai sovereign debt or sovereign-guaranteed debt. Yet financial markets are reacting as if either private or public (sovereign) debt levels are important. As a matter of fact the financial crisis has shown how private debts of banks and financial institutions become public debt and greatly contribute to its growth.
The volume of activity in sovereign credit default swaps – which measure the cost to insure against bond default has recently increased enormously. Some countries, like Greece, are showing clear sign of Sovereign Credit Deterioration. Bets on rich country bond defaults aim at guessing Which of the “Rich Four” Countries Will Default First?.

Italy is an interesting case as CDS volumes (USD gross notional) and contracts increased both about 48% in one year. Italy has one of the highest debt/GDP ratio of the developed economies and CDS volume is now the highest for an individual country.

So what are CDS and Interest Rates Telling Us? Simply that investors are increasingly worried about debt in the world, particularly industrialized countries and they are hedging long-tail risk.
Although debt as the percentage of GDP is not the only criteria to really assign a viable ranking to the default risk, it's a reminder that investors would like to be paid back sooner or later and all bills have to be paid.
That is why it is so important that you eat debt immediately, on Thanksgiving.
And do not tell people that Dubai is a Black Swan when it's just a roasted turkey as usual.

Euro bonds or Bonds to be alive!

2011-11-24T23:18:00.001+01:00

When I published this post about Euro bonds in March 2009 I actually imagined the present situation. Now even the European Commission proposes something along the same lines I sketched them out in my posts. They call it wrongly Stability Bonds just for cosmetics reasons, to try to be different.
It took the European Commission almost 3 years to understand the situation and table a proposal. It did it collating and collecting material on internet. Yet the first proposal was made in 1993 by Commission's President Jacques Delors.

The title of the James Bond movie on my post was Never say never again.

Today Spiegel on line International writes: German Resistance to Pooling Debt May Be Shrinking - "Never say never: The German government remains officially opposed to controversial euro bonds. Behind the scenes, however, press reports indicate that some within Chancellor Merkel's government have begun discussing the conditions under which they might accept a pooling of euro-zone debt".

After several years it's really time to say Never say never again.

Yet you have a Euro pessimist like Nobel Prize Paul Krugman writing that recent higher rates in Germany is to be seen as market "in effect pricing in a real possibility of eurozone collapse".
I think it's easier to think that actually the market is pricing and pushing the launch of Euro-bonds. Against this backdrop German rates will have to be a bit higher...

I still contend that EU bonds are necessary to further EU economic and financial integration as they are Bonds to be alive. Not just stability. I may technically also add they are now necessary to take European Central Bank out of impasse of buying bonds of doubtful value or incurring losses. De facto the ECB is already running on kind of notional EU bonds, at its expenses...

<p>&amp;amp;amp;lt;p&amp;amp;amp;gt;&amp;amp;amp;amp;amp;amp;amp;lt;p&amp;amp;amp;amp;amp;amp;amp;gt;&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;lt;p&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;gt;&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;lt;p&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;gt;&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;lt;br&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;gt;U&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;lt;/p&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;gt;&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;lt;/p&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;gt;&amp;amp;amp;amp;amp;amp;amp;lt;/p&amp;amp;amp;amp;amp;amp;amp;gt;&amp;amp;amp;lt;/p&amp;amp;amp;gt;</p> UPDATE: On issues like organisational set-up and conditions for entering the system of Euro-bonds, I think that it should be possible the transformation of EFSF/ESM into a full scale debt management agency where Member States could initially simply opt to transfer common issuance functions to the agency providing collateral (why not gold or revenues?) and guarantees (joint and several). Germany could even opt-out but it will realize immediately that actually competition within EU in issuing government bonds is not necessarily good and could result just in a beggar thy neighbour wrong policy. I do not see the need of treaties changes in such a transformation. Let's also avoid the proliferation of mechanisms, instruments and facilities as money is money and debt is debt.
UPDATE of 27/11/2011: Reading the press a new option to avoid treaties modifications appears and would also simplify the launch of Eurobonds: to sign a mini-stability pact (along the lines of Schengen for immigration and just among those countries willing to do it with opting-out of some) then to also launch euro-bonds with joint and several guarantees of the mini-stability pact signatories. That means that Eurobonds system can be set up on a voluntary basis among those willing to abide by the rules and conditions of the pact.

WHEN THE GOING GETS TOUGH, THE LIES GET GOING

2011-05-09T07:22:00.001+02:00

"Market jitters bring difficult choice between truth and lies for politicians, spokespeople".

It's true that WHEN THE GOING GETS TOUGH, THE LIES GET GOING....

But how to interpret the words of Jean-Claude Juncker, prime minister of Luxembourg, for whom the threat of immediate market turbulence means the usual norms of transparency don't apply.

He is reported to have said that "When it becomes serious, you have to lie". This about markets reactions to Greece's situation bring us back to other lies I wrote about. Then there are lies and inconvenient truth...

Yet for politicians the usual liar paradox applies: "Everything I say is a lie".

Does it apply to some economists as well?

For the Italians future: "Ordem e Progresso" or stop voting Berlusconi...

2011-04-30T16:09:00.005+02:00

WHY ITALIANS ARE STILL VOTING AND/OR SUPPORTING SILVIO, OR JUST

LAUGHING AT HIS JOKES ?

New ways of farming: why not?

2011-04-01T10:27:00.000+02:00

What does FARMING mean nowadays?

Energy farming ensures that there is a consistent supply of energy by means of expanding, improving the various energies supplies aimed at maintaining a constant and local supply.
Energy farming can be done in any country. One cannot stay without energy.

YES, WE CAN: in developing countries as well....
From traditional agriculture farm to wind and solar farms.
From lands of oil and uranium to lands of renewables.

The "Domino theory" goes on: from Apocalypse Now to Odyssey Dawn

2011-03-20T23:52:00.003+01:00

"By early 1954, it was clear to many U.S. policymakers that the French were failing in their attempt to re-establish colonial control in Indochina (Vietnam), which they lost during World War II when the Japanese took control of the area. The Vietnamese nationalists, led by the communist Ho Chi Minh, were on the verge of winning a stunning victory against French forces at the battle of Dien Bien Phu. In just a few weeks, representatives from the world's powers were scheduled to meet in Geneva to discuss a political settlement of the Vietnamese conflict. U.S. officials were concerned that a victory by Ho's forces and/or an agreement in Geneva might leave a communist regime in control of all or part of Vietnam. In an attempt to rally congressional and public support for increased U.S. aid to the French, President Eisenhower gave an historic press conference on April 7, 1954.
He spent much of the speech explaining the significance of Vietnam to the United States. First was its economic importance, "the specific value of a locality in its production of materials that the world needs" (materials such as rubber, jute, and sulphur). There was also the "possibility that many human beings pass under a dictatorship that is inimical to the free world." Finally, the president noted, "You have broader considerations that might follow what you would call the 'falling domino' principle." Eisenhower expanded on this thought, explaining, "You have a row of dominoes set up, you knock over the first one, and what will happen to the last one is a certainty that it will go over very quickly." This would lead to disintegration in Southeast Asia, with the "loss of Indochina, of Burma, of Thailand, of the Peninsula, and Indonesia following." Eisenhower suggested that even Japan, which needed Southeast Asia for trade, would be in danger. A year later in 1955 the Vietnam War started...

Eisenhower's words are having big impacts in history as the domino theory and later its reverse with Iraq's invasion is still being applied and Apocalypse Now is in Lybia called Odyssey Dawn as somebody "loves the smell of napalm in the morning".

Is nuclear power an option worthing the risks and costs?

2011-03-19T11:31:00.001+01:00

Reading this article about The lessons of Fukushima, one should draw few conclusions without fallacies:
a) people tend not to learn from previous mistakes. Learning from lessons is a psychological human being, particularly politician, constraint and limit. Black Swans, in financial markets, earthquakes or nuclear accidents, do exist, but some prefer to ignore them.

b) Nuclear power is an option that never undergo proper cost-benefit analysis and impact and risk assessment. Its "true" cost is never revealed whereas the benefits are always overstated for political and ideological reasons.
c) Renewable energy alternatives, energy savings and energy efficiency are options which still find some difficulties to be understood and be widely accepted because of ideologies, political lobbies and special interests not really economic or strategic reasons.

Think about: to build a nuclear plant it takes 10-12 years and unknown costs and risks whereas renewables, energy saving and efficiency options take only few days to be built while costs and risks are known in advance. Which rational option one should choose? It's quite clear that the nuclear option is neither rational nor economically sound. Rather a risky option.

Bread and Freedom: or changing diet/dictator

2011-02-20T16:33:00.004+01:00

Inquiring minds are asking "So, what's going on in the Middle East?"
While it's true that some economists have been warning for quite some time about the effects of food/commodities prices, history should have taught that food and liberties are always claimed when a revolution starts. During the French Revolution people cried "pain et liberté", that means bread and freedom. It is apparent that a combination of high food prices and unemployment under a dictatorial regime create the condition of social unrest and revolutions. The domino effect is ongoing.

Lessons from the financial crisis and history should be that definitely we should not reply "If they have no bread, let them eat cake!"("S'ils n'ont plus de pain, qu’ils mangent de la brioche"). I am not sure that some governments, politicians, bankers or economists have fully understood that it's not the right answer to keep going in business as usual mode.

UPDATE: The BBC has an interesting map about the potential for social unrest following the fall of the presidents of Egypt and Tunisia.
While the map should be titled "Mediterranean and Middle East protests", I still contend that Berlusconi should be included in that survey with a pretty high unrest index based at least on age and corruption. Definitely the domino effect should sweep more leaders from power...

In Italian read here .

Furies by you: or Three women judges to hear Silvio Berlusconi hooker trial

2011-02-17T18:39:00.002+01:00

Three female judges will hear the case, which was "fast-tracked" by judge Cristina Di Censa to take place in Milan on April 6.

Odes of Giosue Carducci/Miramar: Darkly the Furies , by you, to the wind. Shake out the sails.

In Greek mythology the Erinnýes (Ἐρινύες, pl. of Ἐρινύς, Erinýs; literally "the angry ones") or Eumenídes (Εὐμενίδες, pl. of Εὐμενίς; literally "the gracious ones" but also translated as "Kind-hearted Ones" or "Kindly Ones") or Furies or Dirae in Roman mythology were female chthonic deities of vengeance or supernatural personifications of the anger of the dead. A formulaic oath in the Iliad invokes them as "those who beneath the earth punish whosoever has sworn a false oath". Burkert suggests they are "an embodiment of the act of self-cursing contained in the oath".

It's more than ironic for Berlusconi...

Bunga Bunga or The Fable of The Bees: or, Private Vices, Public Benefits

2011-02-08T13:02:00.014+01:00

What's happening to Italy? Berlusconi's escort scandal is self-explanatory of an history...of "fucking " dictatorships.

However some Italians are pretty much convinced that the Fable of the Bees is just the political economy recipe the country needs.

Remember that the author of The Fable of the Bess, poem published in 1705 by Bernard Mandeville, argued that "a libertine, for example, is a vicious character, and yet his spending will employ tailors, servants, perfumers, cooks, and opportunist female and/or male prostitutes. These persons, in turn, will employ bakers, carpenters, and the like. Therefore, the rapaciousness and violence of the base passions of the libertine benefit society in general." I wonder if that is the case in Italy or somebody should study more economics (Mr. Mandeville was a political economist...).

Had Mandeville already a Berlusconi in mind?

Yet some four centuries before Mandeville, Dante Alighieri’s Divina Commedia, Purgatory, Canto VI, lines 76-78 read:

Ahi serva Italia, di dolore ostello,                (Alas enslaved Italy,
                                                             abode of anguish,
nave sanza nocchiere in gran tempesta,    ship with no pilot
                                                            in a great storm,
non donna di province, ma bordello!           not ruler of provinces,
                                                                      but bordello!)

Please note that the Italian word “bordello” has actually two different meanings: literally “a cheap whorehouse”, it also means metaphorically any place or situation of troublesome mess.

Now as a brothel it does not appear that the Bunga Bunga system is that cheap in all respects or making any good to the economy in the Mandeville's spirit.

As far as the modern colloquial Italian second meaning is concerned, the mess is such that Italy appears a dictatorship whose rulers spend their days in brothels. Definitely a situation of troublesome mess.

The Roman Salute: the case of Italian dictatorship

2011-02-04T14:12:00.001+01:00

I have received from a friend of mine the picture above.
For its interpretation I would suggest to read the book on the Roman salute or saluto Romano. "This book is the first systematic study of the saluto romano, the Roman or Fascist salute, in the various cultural contexts that were decisive for the origin of this gesture, its appropriation by totalitarian ideologies, and its dissemination. It also traces the survival of the raisedarm salute in the popular media until today, adducing and interpreting extensive textual and visual evidence since well before the birth of Fascism".
Italian history is complicate but at this stage one might reasonably say that it's a "fucking" history...of dictatorships...

PS: of course on Berlusconi's position there is a strong assumption that he can make it..

Bunga Bunga, the intruder!!

2011-02-01T15:57:00.006+01:00

Any similarity?

Tunisian President fleed country amid unrest;

Egypt's Mubarak is being pushed to flee country unless he grants civil liberties;

Silvio Berlusconi is kindly requested to flee Italy as soon as possible and bring Bunga Bunga system along with him...

UPDATE:

Behind every man

there's an exhausted woman!

The Future of Facebook is in the past...of a lonely crowd

2011-01-11T19:35:00.005+01:00

Goldman Sachs is investing $450 million of its own money in Facebook, at a valuation that implies the social networking company is now worth $50 billion. Goldman is also apparently launching a fund that will bring its own high net worth clients in as investors for Facebook.

Goldman Sachs’s $450 million investment in Facebook has raised many questions. Apart from the involvement of Goldman Sachs debated here and here, what's interesting for any investment to be made is the future of Facebook and the world as we know it.

I think that Facebook is just all about what Davied Riesman, sociologist, described in self-explanatory titles of two books of the "50: The Lonely Crowd. New York, 1950. (With N. Glazer and R. Denney.) and Faces in the Crowd. New Haven, Conn., 1952.

Facebook is actually the triumph of "the other-directed character" described by David Riesman. How to define one's self becomes a function of the way others live, thus "shared" in Facebook where a person wants to be loved and "liked" rather than esteemed. Those who are in Faceebook are other-directed and need assurance that they are emotionally in tune with others.

I would say, taking it from Riesman, "that isn't it possible that Facebook is as a whole a fantastic fraud, presenting an image of people, a crowd, taken seriously by no one, least of all the ones who sign up or invest in its shares? It's a lonely crowd, stupid! The face of the crowd...Facebook.

P.S.: I joined Facebook a few months ago because some people were keeping sending me e-mails from their Facebook accounts asking to be my friend. I've signed up but frankly speaking I am a bit at odds with the spirit of that social networking. For that and other reasons I would question the valuation of Goldman Sachs and I have, like others, some serious doubts about the return on investment in the long run....

UPDATE: This video is self-explanatory

More here

Rising bond yields: would EU bonds end the crisis?

2010-12-22T06:58:00.006+01:00

There is an enlightening Spotlight on European Government Bonds with Current State of the Sovereign Debt Crisis in Picture made by MISH'S Global Economic Trend Analysis.

I think his charts are showing clearly one thing: borrowing costs for EU countries are indeed rising. Actually also the US benchmark 10-year yield rose this week to the highest level in seven months as retail sales advanced in November more than economists forecast and the Federal Reserve said the recovery is continuing.

Inquiring minds may interpret the general rise in sovereign bonds yields in three ways: a) growth rates are expected to be higher (valid perhaps for US and possibly Germany where German bund yields have picked up by an almost commensurate amount as have Treasuries.); b) inflation is expected to be higher due to money supply increases and quantitative easing; c) the supply of sovereign bonds is getting above bond vigilantes absorption capacity and willingness to buy at certain levels of risk premia. In all circumstances it appears that debt and deficit to GDP ratios - c) to a) levels - matter to bond vigilantes.

However Mish concludes that any "plan for EU bonds has long been dead as France nixed the idea as well, and the charts show why: Germany and France do not want their borrowing costs to rise". Here I should clearly states that if German taxpayers hate bailing out their own banks they are already also bailing out profligate foreign governments (or indirectly national banks like in the case of Ireland) to bail out their own banks which made bad investments in PIGS sovereign bonds. Those who claim that EU bonds require some EU fiscal policy do not actually see that taxpayers are already being united by those strange mechanisms put in place to save banks...

To me the charts just show that borrowing costs are rising for everybody anyway, and that, together with other reasons, make the case for EU bonds issuances ever stronger. Should be evidence that Germany and France pay higher rates on their borrowing, I believe that a mechanism of compensation could be envisaged for the interest payments on respective countries EU bonds. It would instead be a pity if we discover that actually what makes EU yields to rise is exactly the unclear set up of the European Stability Mechanism and the perpetuation of the European Financial Stability Facility (EFSF), which might have moral hazard and an vicious circle intrinsic defects.

Where are the "good banks"?

2010-12-16T09:19:00.003+01:00

Followers of this blog may remember the debate about "bad banks" and "good banks" and lemon banking system. Looking at the table below from BIS Quarterly Review you may realize that there are now quite a number of bad banks in the Euro zone as sovereign bonds start to become "toxic assets". A similar picture was published here sometimes ago. What is adding insult to injuries (particularly for taxpayers) is that we are now bailing out countries to bailout banks...

The following table shows yesterday's close 10-year sovereign spreads (against 10 year German bunds). I wrote before that it does not make sense to have austerity plans whose savings are immediately spent on sovereign bonds interest payments and increasing spreads.

			Yesterday’s Close
France			0.347
Italy			1.653
Spain			2.473
Portugal			3.435
Greece			8.86
Ireland			5.371
Belgium			1.036

Prof. Buiter defines it "European sovereign debt kerfuffle’. Shall we ask Buiter to revamp the idea of "good banks"? It appears quit clear now that the problems is that European banks are too much exposed to sovereigns of different PIIGS countries. There are too many PIIGS to bail (and to make them fly).

Ireland should have been a case study for the creation of "good banks" instead of bailing it out to support the lemon banking system...We should break the vicious circle (I call it cross-countries Ponzi scheme) banks-sovereign-banks. Expand the EFSF to €1.7trn to cover potential demands from Ireland, Greece, Portugal, Spain, Italy and Belgium is adding insult to injuries...Where EFSF money is coming from? Out of thin air I suppose...
I did not expect that proposal from Buiter...Does he want now to continue to support "bad banks" either in Ireland or Spain? I would say 1) Initiate sovereign and bank restructuring "Taking A Bite Out Of Bondholders", either through haircuts or financial transaction tax. In this way "good banks" will be promoted particularly in Ireland or where most needed. I hoped the stress tests were made to rightly and really discover lemon banks instead of perpetuating the status quo ante. Where needed, transform banks' bondholders in shareholders instead of getting taxpayers money via governments to support the banks and continue to issue sovereign bonds for that purpose; 2) Start immediately EU bonds common issuances 3) Introduce a EU financial transaction tax to cover initially EU issuances and budget.

We read that Eurobonds idea is gaining in momentum as pressure on Merkel increases ahead of European Council. It's nice to read that Eurobond proposal is now politically promoted by the daughter (Mme Aubry) of Commission President Jacques Delors, who proposed it some 17 years ago...It's true that somebody have been sleeping at the wheel for several years...

UPDATE: Prof. Buiter suggests to get out ‘big bazooka’: Expand the EFSF to €1,700bn to cover potential demands from Ireland, Greece, Portugal, Spain, Italy and Belgium?
It's not a bazooka it's another naked gun on the table, it's just smell of fear...
It creates a vicious circle and moral hazard problem if a number of countries get under EFSF "protection". Debt service will in average increase for several countries as bondholders will sell longer-term bonds of few countries, thus making more likely for a country to ask for EFSF "protection" programme or get a higher risk premium on its sovereign . What if it does not work? Bondholders will get a haircut anyway so the sooner the restructuring the better....

European debt crisis - Part II

2010-12-02T16:19:00.003+01:00

I keep writing that the only way out to the European debt crisis and the much feared domino or contagion effects is to a) stop the Ponzi scheme of public debt and its market for lemons of sovereign debt along with its EU money creation, b) restructure the debt and c) issue new one at EU level. Moreover a tax on financial transactions could start to help funding the EU budget and some EU governments. A financial transaction tax giving revenues for some 200 billions Euro per year could replace several austerity measures and aid packages to single countries.
When EU foreign currencies were attacked by speculation we got the Euro to replace them. If now we get sovereign bonds to be attacked we need the EU bond to replace them.
If we still are believers in the EU project we need now more Europe and European economic measures not less to sustain the project. The bailouts are national and economic nonsense. Let’s see when it comes to bigger countries like Italy, considered so far a Black Swan (which is not)…PIGS will not fly any more...

European debt crisis: back to the future?

2010-11-16T14:54:00.005+01:00

Over the last year, several posts of mine addressed European debt crisis issues. The problem is the link between Euro-zone sovereign borrowers and lenders. The risk has always been systemic within the Euro-zone to the extent that banks lent too much to governments which borrowed money also to save banks. We cannot see where this Ponzi-type scheme ends, but we can see that some countries are heading to a crisis similar to the sovereign default of Latin America in the 1970’s. On the other hand for some countries the sovereign debt is indeed external debt (held by banks in other EU countries), which makes the domino-effect likelier. It's true that it's not about Ireland or Greece anymore. Actually it has never been..
I still contend that it's not only a matter of the Europeans completing their monetary cordon sanitaire but it's a matter of restructuring the Euro-zone debts via common issuance of EU bonds. Any ECB's decision to put more money in circulation by buying government bonds is just the Ponzi's never ending story. Actually what should be done is to start writing-off all those loans/bonds which the banks count as assets because they were expecting to be paid back, and the money in the Euro-zone would be counted simply as destroyed.

The Fable of The Bees: or, Private Vices, Public Benefits. Berlusconi docet

2010-11-04T12:10:00.001+01:00

Just one year ago I published the following post about The Fable of The Bees: or, Private Vices, Public Benefits.

I am pretty much convinced that the Fable of the Bees is not just a tale but an Italian reality show and Berlusconi's way to reform the country.

Remember that the author of The Fable of the Bess, Bernard Mandeville, argued that "a libertine, for example, is a vicious character, and yet his spending will employ tailors, servants, perfumers, cooks, and opportunist female and/or male prostitutes. These persons, in turn, will employ bakers, carpenters, and the like. Therefore, the rapaciousness and violence of the base passions of the libertine benefit society in general."

I wonder if that is the case in Italy or somebody should study more economics (Mr. Mandeville was a political economist...).

Liquidity and consumption trap or crap? The myths of efficiency and capitalism

2010-10-07T07:39:00.003+02:00

Old fashion economists still debate how much of the world is currently in a liquidity trap, which is in classical Keynesian economics a situation where monetary policy is unable to stimulate an economy, either through lowering interest rates or increasing the money supply.

More realistic economists think that we are simply in a debt trap where, due actually to past excess of liquidity and indebtedness, consumers, businesses and governments deleveraging is now compulsory. People and governments have to come to the not so shocking realization that you can’t get wealthy or retire by borrowing and spending or to have rising inequality letting future generations to pay your bills.

There is also another old fashion theory that we are in a crisis of overproduction, Marxist style. On the other hand because of the fetishistic character of capital production, the capitalist system in all its phases and in all its details may in a way be considered to be in a “permanent” condition of crisis. Yet, the key proposition of the Say's Law is that no matter how much people save, production is still a possibility as it is the prerequisite for the attainment of any additional goods of consumption.

I have not figured out myself exactly how this economy works, but I can tell you that it is not working well.
There is a lot written about the liquidity and consumption traps, both creating similar limits on the ability of fiscal policies to push up employment and production.

However I think it's not a matter of "consumption trap", perhaps technology-driven, but a model of society based on "consumption crap" and myths of efficiency. For years we have been buying things we do not need (that's the real consumption crap) with money we do not have. And yes, the people producing and selling us the things we do not need depend on the money we do not have.

To give you an example of "consumption crap" take smart phones and similar gadgets: do people really need them or supply is creating its own demand? Apart from few exceptions, most people just waste time or play games with them particularly during working hours...(pretending to communicate urgent or useful things...).

So should fiscal policies redistribute income just to let "poor" people to buy them? I am not sure about that. The same happened with cars in the past. We wanted to sell a car to every single inhabitant of the earth to discover afterward that we have traffic jams and polluted cities...
As long as we are convinced of, and by, a society that basically eats, sleeps, works and then veges out in front of a display either of PC, TV or smart phones, there is no future or alternative to the consumption and liquidity traps we are in. Most people do not seem to care. It's the economy, stupid.

From currency war to Tobin tax: are currency traders polluting?

2010-09-30T13:11:00.001+02:00

During these days we read a lot about currency wars. However, what is actually happening in currency markets is not just that some countries are trying to export their crisis via competitive devaluations or other beggar-thy-neighbour policies.

I definitely agree with Joe Costello who writes:

it is a growing war amongst finance as to what debt is good or bad, with people continuing to position themselves to keep hold of the good money, while forcing the bad money onto others. This also begins to come straight into politics as policy recommendations try and make sure "good" debt stays good for those who own it and the losses of "bad" debt are forced on everyone else. Right now, our financial aristocracy is the only one in this fight, it's time for us to join and make them take losses, look now folks, the currency wars are raging in your backyard.

In fact the logic of short-term currency fluctuations frequently defies economic analysts’ understanding.
Under the circumstances described by Mr. Costello, I believe that it really would make sense if those countries assisting to their currency revaluation would introduce the classical Tobin tax or similar ones at least as a measure of currency control. In this context Brazil Central Bank Chief saying that "More Tax On Inflows A Possibility" is most welcome (as Brazil already has a tax on inflows and other financial transactions).

On the other hand if a country suffers from excessive portfolio or investment inflows why not to tax them to trim the currency appreciation? By taxing currency trades, particularly speculative and manipulative ones, two objectives can be achieved: raise important revenues to be spent or saved elsewhere and control the appreciation of local currency. In general a financial transaction tax of such a kind will have only positive externalities making the finance industry to pay for their pollution in the forex markets...

EU stress Tests: an inconvenient truth or back to the future

2010-09-12T09:14:00.004+02:00

I think that the recent EU stress tests on banks are not just Hiding Europe’s Unpleasant Details but they are concealing an inconvenient truth of EU web (within Europe) and loop (banks-governments-banks) debt exposures. The EU-wide stress test seems not to have included haircuts for sovereign debt held in the banking books of banks.

(H/t for the picture Barry Ritholtz.)

Now considering that EU banking book sovereign exposures are very large and interconnected, what happens if liquidity dries up again and governments start having problems at bonds issuances? Has this scenario a zero probability that the EU stress tests have not considered? I would not be sanguine, like others at OEC D, on the assumptions of no banks failure and no sovereign default as I still think that money is being created out of thin air.

Too interconnected and too indebted to fail?

2010-05-11T16:02:00.014+02:00

Looking at the picture below, inquiring minds should wonder if it makes sense and what and who are being bailed out.

I still contend that in the EU there is some creation of money out of thin air made by banks allowed to have 40-60 leverage ratios investing in assets (sovereign debt) considered "too safe to fail". We are not bailing out any of the PIGS countries, we are just and again bailing out those banks which lent to governments. The latter are just allowing them to manage their assets and liabilities with such high ratios and make bigger profits. In this way the Ponzi scheme goes on.

Since banks and governments owe each other many billions of euros I believe that it would really make more economic sense: a) the issuance of EU bonds. In fact, the so-called "no-bailout clause" of the Maastricht Treaty specifically stated that the community would not assume the debt of individual EU member states. However the debt interconnectedness and the recent bailout package alter that clause in practice as well as any other EU balancing budget rule (it's to be noted that actually the Pact's rules have so far been weakly enforced) b) The taxation of financial transactions and banks, including the systemic risk created by the "Europe's Web of Debt". Can you imagine the amount of revenues from this kind of taxation during these days?

Under the above circumstances, it is regrettable the ECB's decision to put more money in circulation by buying government bonds. Actually what should be done is to write-off all those loans, which the banks count as assets because they were expecting to be paid back and the money in the Euro-zone would be counted simply as destroyed. That's deleveraging the economy.