To Save The Eurozone: $1 trillion, European Central Bank Reform, And A New Head for the IMF

By Peter Boone and Simon Johnson

When Mr. Trichet (head of the European Central Bank, ECB) and Mr.  Strauss-Kahn (head of the International Monetary Fund, IMF) rushed to Berlin this week to meet Prime Minister Angela Merkel and the German parliament, the moment was eerily reminiscent of September 2008 – when Hank Paulson stormed up to the US Congress, demanding for $700bn in relief for the largest US banks.  Remember the aftermath of that debacle: despite the Treasury argument that this would be enough, much more money was eventually needed, and Mr. Paulson left office a few months later under a cloud.

The problem this time is bigger.  It is not only about banks, it is about the essence of the eurozone, and the political survival of all the public figures responsible.  If Mr. Trichet and Mr. Strauss-Kahn were honest, they would admit to Ms. Merkel “we messed up – more than a decade ago, when we were governor of the Banque de France and French finance minister, respectively”.  These two founders of the European unity dream helped set rules for the eurozone which, by their nature, have caused small flaws to turn into great dangers. 

The underlying problem is the rule for printing money:  in the eurozone, any government can finance itself by issuing bonds directly (or indirectly) to commercial banks, and then having those banks “repo” them (i.e., borrow using these bonds as collateral) at the ECB in return for fresh euros.  The commercial banks make a profit because the ECB charges them very little for those loans, while the governments get the money – and can thus finance larger budget deficits.  The problem is that eventually that government has to pay back its debt or, more modestly, at least stabilize its public debt levels. 

This same structure directly distorts the incentives of commercial banks:  they have a backstop at the ECB, which is the “lender of last resort”; and the ECB and European Union (EU) put a great deal of pressure on each nation to bail out commercial banks in trouble.  When a country joins the eurozone, its banks win access to a large amount of cheap financing, along with the expectation they will be bailed out when they make mistakes.  This, in turn, enables the banks to greatly expand their balance sheets, ploughing into domestic real estate, overseas expansion, or crazy junk products issued by Goldman Sachs.  Just think of Ireland and Spain, where the banks took on massive loans that are now sinking the country. 

Given the eurozone provides easy access to cheap money, it is no wonder that many more nations want to join.  No wonder also that it blew up.  Nations with profligate governments or weak financial systems had a bonanza.  They essentially borrowed funds from the less profligate elsewhere in the eurozone, backed by the ECB.  The Germans were relatively austere; the periphery enjoyed the boom.   But now we have moved past the boom, and someone in Greece, Portugal, Spain, Ireland and perhaps Italy has to repay something – or at least stop borrowing without constraint.  So Mr. Trichet and Mr. Strauss-Kahn go, cap in hand, to ask Germany for further assistance.

There are three possible scenarios.  First, the ECB may be allowed to really let loose with “liquidity” – and somehow buy up all the bonds of troubled eurozone nations.  But this is exactly the process that always and everywhere brings about high inflation.  The Germans would fight hard against such a policy, although it would prevent default.

Second, officials still hope that bond yields for weaker governments widen but then stabilize.  This is bad news for troubled eurozone countries, but they manage to avoid default.  The rest of the world grows by enough to pull up even the European “Club Med + Ireland”.  Call this the trickle down scenario or just a miracle.

Most likely, the situation is about to turn much worse and a third scenario unfolds.  The nightmare for Europe is not at this point about Greece or Portugal – it is all about Italian and Spanish bond yields.  This week those yields are rising quickly from low levels, while German yields are falling – so this spread is widening sharply.  The yields for Spain – for example – are rising because hitherto inattentive investors, who always thought these bonds were nearly as safe as cash, suddenly realize there are reasonable scenarios where those bonds could fall sharply in value or even possibly default.  Given that Spain has 20% unemployment, an uncompetitive exchange rate, a great deal of public debt, and a reported government deficit of 11.2 percent (compared with headline numbers for Greece at 13.6 percent and Portugal at 9.4 percent), everyone now asks:  Does a 5% yield on Spain’s ten year bonds justify the risk?  The market is increasingly taking the view that the answer is no, at least for now.  So, we can anticipate Spanish (and Italian) yields will keep rising.  In turn, this causes other asset prices to fall in those nations, thus worsening their banking systems, and hence leading to credit contraction and capital flight.  It is a dismal prognosis.

Then it gets worse.  As rates rise, traditional investors in euro zone bonds, which are pension funds and commercial banks, will refuse to take more.  There will be no buyers in the market and governments will not be able to roll over debts.  We saw the first glimpse of this on Tuesday, when both Spanish and Irish short term debt auctions virtually failed.  Once this happens more broadly, the problem will be too big for even Mr. Trichet or Ms. Merkel to solve.  The euro zone will be at risk of massive collapse.

If this awful but unfortunately plausible scenario comes about, there is a clear solution – unfortunately, it is also anathema to Mr. Trichet and Ms. Merkel, and thus unlikely to be discussed seriously until it is too late.  This is the standard package that comes to all emerging markets in crisis: a very sharp fall in the euro, restructuring of euro zone fiscal/monetary rules to make them compatible with financial stability, and massive external liquidity support – not because Europe has an external payments problem, but because this is the only way to provide credible budget support that softens the blow of the needed austerity programs.

The liquidity support involved would be large:  if we assume that roughly three years of sovereign debt repayments should be fully backed – and it takes that kind of commitment to break such negative sentiment – then approximately $1 trillion would be needed to backstop Greece, Portugal, Spain and Italy.  It may be that more funds are eventually needed – but in any case, the amounts would be less than the total reserves of China.  These amounts would also be reduced as the euro falls; it could be heading back to well under $1 per euro, which is where it stood one decade ago.

External financial support would only make sense if combined with key structural reforms, including an end to the repo window at the ECB.  As former UBS banker Al Breach recently argued, the ECB could instead issue bonds to all nations which would then be used subsequently for monetary operations – every central needs a way to add or subtract liquidity from the financial system.  These bonds would need to be backed by a small “euro zone” tax, thus making the ECB more like other central banks around the world.  It would no longer accept bonds of “regional governments” in the union as collateral, and instead would buy and sell “eurozone” bonds.  These new eurozone bonds would also offer a way for governments to roll over some of their existing debts.     

If the eurozone does need this package, it cannot be managed under a “business as usual” model.  The funds would need to come from the G20, and extremely tough decisions over fiscal and monetary policy need to be handled in a fair and reasonable manner.  Someone needs to be in charge on behalf of Europe (would this be the European Commission, or Ms. Merkel and the German government?) and someone needs to represent the G20. 

By far the most natural G20 partner to manage this process is – despite all its baggage – the IMF, but there’s a serious problem.  Mr. Strauss-Kahn, the current head of the IMF today, very much wants to become the next President of France.  There is no way for the G20 to provide funding that he would guide – he has an obvious and unavoidable conflict of interest, and no incentive to make the tough decisions today that are required to sort out the euro zone. 

Mr. Strauss-Kahn should resign and a respected financial leader of a relatively independent country should take charge at the IMF.  One potential choice would be Mark Carney, the current Governor of the Bank of Canada.   Or, if the G20 agrees – finally – that it is time to phase out the leading role of the G7 (which has not done well of late), Montek Ahluwalia of India would be an outstanding candidate.

An edited version of this post appeared this morning on the NYT’s Economix; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

61 responses to “To Save The Eurozone: $1 trillion, European Central Bank Reform, And A New Head for the IMF

  1. Mohammed Shahid

    Suspect it should be ‘Chancellor’ Angela Merkel. NYT Economix seems to have reflected the designation right.

  2. For what it’s worth, shouldn’t the European banks also be broken up?

  3. ‘We need counterweights not just to Wall Street’s toxic products but to its malign influence.’

    Well you have just found your counterweights in European leaders who will not co-operate with the White House in relation to the wars in Irak and Afghanistan, the JSF project etc. etc. until the creative financial people who caused all this mess will be behind bars. And Fabulous Fab just won’t do.

  4. Why don’t they get on their knees to her like Paulson supposedly did with Pelosi? That way even the specific histrionics would fit the perfect parallel with the 2008 bailout scam.

    Ponzi scheme unravelling, check.

    Criminals who ran the con now want to go into disaster capitalist mode, demand to be bailed out, check.

    Shock-and-awe cries of “Stampede! – By Monday we won’t have an economy!”, check.

    Kleptocracy on the rampage, trying to prop up its terminal zombie self, check.

    It’s the same Tower of Babel, just taller, more top-heavy, with an even more pronounced totter, than two years ago.

  5. You are far too kind to Germany here – the Germans were well aware of that the ECB bonds-for-Euro swaps allowed periphery countries to borrow. Indeed, THAT WAS THE IDEA. This way, Germany could continue its export dominance.

    Germany is like a company that extends credit to unworthy consumers, and builds up a high net receivables and thus declares high nominal profits (but has lousy cash flow because it can’t collect on receivables). So who do we blame? The borrowers who took advantage, or the creditors who pretended to the world that credible demand for their goods was increasing?

  6. It should definitely be “Chancellor” Merkel.

    Also the Italian 10-year bond auction today was oversubscribed with an average yield of 4.09%. So there are still buyers.

    As with the call to “wake the president” this blog seems to move more into a “cable news style” of sensational analysis. Too bad.

  7. A couple more points –

    – It’s not obvious the US really wants to rescue the ECB, particularly after the stunts the ECB pulled in 2008 where it aggressively moved to displace the dollar as the world’s reserve currency (by holding to a tight money policy and disparaging the dollar), thus contributing to instability and encouraging a run/carry trade on the dollar. Now that their strong Euro policy has backfired as US companies have seen their share of world trade rise, they want the US to play nice? Hmmm…

    – OTOH, I’ve long argued the overvalued dollar has been an albatross around our necks, contributing to our rising debt burdens and overconsumption of imports as demand for the dollar itself has made our exports less competitive. Then again, since when have central bankers cared more about real exports than the short term value of their precious currency?

    – I have to ask, where exactly does the $1 trillion dollar fund come from? From money printed by the ECB? From the IMF (aka, the US)? And if from the US, is that not money which is printed that displaces money that could be printed domestically? In essence, that money comes indirectly from the US taxpayer?

    And who are we bailing out? As you’ve noted, the bondholders in the EU are largely pension funds.

    So why praytell do the pension funds deserve to be protected when their obligations are primarily to the same individuals (at the national level) who are responsible for these catastrophes, and for decades of relative overconsumption and underinvestment? And if we must bail them out at full _nominal_ value, WHY must the funding for that bailout come from more debt obligations rather than by seignorage/inflation (aka, printed money)? Again, more kicking the can down the road.

  8. One of the things I find refreshing about Prof Johnson (and Peter Boone) is there is some valuable education in macroeconomic policy for people like myself who don’t have that background. Yet inevitably it raises for me some questions that might be obvious to an expert. Prof Johnson has argued aggressively for the U.S. Congress to set size and leverage limits on large banks. When I read that, the underlying concerns seemed quite reasonable, but my question was shouldn’t that kind of policy be coordinated among G20 states, since most megabanks are outside the U.S. and the risks they pose extend internationally. I think the very largest of all are based in the U.K., Germany, and France, with cumulatively 10s of trillions in financial assets. So my question is do the Eurozone investment banks present relevant risks if the Club Med contagion spreads? It seems disturbing enough if Greece or other EU member states cannot be stabilized, but is there any credible risk of a TBTF scenario with any Eurozone banks, and does that scenario present significantly wider risks akin to 2008? I take the point about closing the repo window at the ECB as one means to stop encouraging excessive sovereign debt and to shift towards austerity, but do size/leverage limits on Eurozone banks have any place in G20 negotiations and, if not, why not?

  9. The same Mark Carney who worked at Goldman Sachs. No thanks. How about someone puts him under oath and asks him while he worked at the Vampire Squid did he do any dirty derivative deals with Greece to cook its books?

  10. Nice proposal. Expanding the IMF issomething that definitely should be explored. On the other hand, I think it might be more effective if the ECB did the heavy lifting in this crisis, in particular by providing liquidity.

    Oh, and as a Canadian, I’m happy to support an expanded IMF is necessary, but keep your hands off our BoC govenor :)

  11. Young Economist

    Bailout is not solution but it will cause bigger problem because the default will be EU systemic problem. If PIIGS status is really severe, Germany will have no ability to bail them out.

    The bailout is also not the appropriate policy because the real bailout is private investors of Greece who get the high return without caring the default risk; therefore, Germany and other EU decide to use public money to bail out the private investors. In the case of Greece default, the private investors lose and public gains but in the case of EU bailout, the public loses and the private investors gain from the higher return but no default risk that is transferred to public. At the end, Greece will default but the Germany government already transfers money from private investor to public people. That is too bad for German people to pay tax for the benefit of Greece and private investors.

    The best solution is no bailout and let the private investor lose. Noone gets hurt and the public people including Greece and EU gain from 1. Greece public gain from lower debt burden, meaning lower tax 2. EU people gain from no bailout, meaning lower tax.

    All bailout policy is to protect speculator under the loss of public people and at the end all EU including Germany and France will default. Goodbye real EU collapse from bailout.

  12. Johnson and Kwak have mentioned numerous times that the G20 has to address the banking issue. Generally, they do so within the context of “resolution authority,” which is meaningless for a large cross-border institution absent a G20-endorsed process. They also say (basically) “Don’t hold your breath.”

    The idea is, if other countries want to host banks with assets 200% of their GDP (Iceland, for example), then let them take that risk and put their economies on the line. If we keep our banks small, they won’t be able to hold our economy hostage or collect exorbitant rents. If the Europeans like that sort of treatment (say SJ & JK), they are welcome to it.

    For my part, I would agree with you that even if we manage to shrink our banking sector, we will still suffer collateral damage if other nations’ too big to fail banks get to the brink (and are either bailed out OR allowed to fail), so we can’t really just ignore them.

  13. Canucklehead

    The third scenario is the likely one. That said, the liquidity option would not be successful. Basically, with the liquidity opition you are trying to herd cats (fat ones and skinny ones).

    As a test of the liquidity option on a smaller scale, Greece should be encumbered with the present EU/IMF deal so they cannot act out in their own self-interest. That encumbrance will not happen. They are considered a sovereign nation and retain the right to default and leave the euro. That “right to leave” extinguishes any value in the liquidity option.

    The liquidity option is simply a bigger hole.

  14. Has this site become the Bailout Scenario–especially after the endorsement of toothless financial reform?

    Credibility is waning.

  15. People complain about fiscally mismanaged Greece when it is Germany that gets the free ride.

    If this awful but unfortunately plausible scenario comes about, there is a clear solution – unfortunately, it is also anathema to Mr. Trichet and Ms. Merkel, and thus unlikely to be discussed seriously until it is too late.

    That’s another problem, too little too late. Greece could have been quietly bailed out last year for a few hundred millions in rate subsidies buying some time. The time would have been used to extend Greek maturities and draw up a budget plan. A bailout – cash not talk – a few months ago would have accomplished much the same thing and heightened the stature of the bailer in the process.

    A bailout would have bought the time to force eurobanks to clean up their balance sheets.

    Instead, it’s been denial and waiting for some other entity to do the heavy lifting. The trillion- euro price tag is the consequence.

    Sorry kids, a trillion is much to low, how about 10- 12 trillion! Not that it matters, the euro is kaput, anyway. Devalue it and how will Europe afford to buy crude oil?

  16. “there is a clear solution…. massive external liquidity support”

    et tu Johnson?

  17. Who knew that the EU would beat the US to the debt saturation event horizon?

  18. If Merkel has just 2 marbles rattling around in her head, she’ll tell Greece to go suck on the exhaust pipe of a Mercedes Benz. Because at the end of it Germany will have a worse fiscal situation and Greece will still fail like lazy liars deserve to fail. I’ve posted this 3 times already, and as long as this topic carries on, I’ll post it again. Because every week that passes it becomes more true.

  19. Re: @ stevefromvirginia___Yes, they could have used the classic “band-aid fix” ,but they realized (the powers that be)a year,or so ago that the problemm was festering,and metastasizing exponentially. The best case for action was to let it come out,and let the reality set in,or better said,the severe gravity of past fiscal laise’sez’faire that all had participated (not sure Germany likes being lumped in the mix,but?)in? The patient (PIIGS’s) needs triage immediately,period! Finally, the numbers aren’t all that bad when you take the EU’s “GNP’into consideration. There’s alot of wiggle room, and the alternate proposals are realistically doable.

  20. If there is to be a bailout, part of the whole deal has to include regulation (and accountability) for those who caused the mess. As stated above, “External financial support would only make sense if combined with key structural reforms.”

    As “Double L” said, “Fool me once, shame on — shame on you. Fool me — you can’t get fooled again.” NOT!
    Fool us once shame on you (Paulson), fool us twice shame on us.

    We’ve bailed out all the US TBTF banks through AIG and the Fed policy the past year – trillions of $, no strings, so far no new regulation to speak of…
    That whole deal should only have been done with massive reform and accountability.

    The whole world financial system will come down if we do it again with no reform or accountability.

    Watch and see, if the PIIGS are bailed out (and the global banks that back them) with no strings attached, no reform to prevent this fraud from continuing elsewhere, the next time this happens you can forget the global economy (if not sooner than the “next time”). Confidence will go through the floor.

  21. Thanks. As you can tell, I’ve started reading relatively recently, so I appreciate the background. Collateral damage seems like a plausible negative outcome if a TBTF scenario develops outside the U.S. Another more immediate concern is the prospect of capital flight en masse if just one G20 state acting in isolation imposes size and leverage limits on its own banks. It seems plausible that this could deeply damage the enacting state’s economy and even magnify wider TBTF risks by concentrating a larger share of global assets in a smaller number of megabanks. Without clear answers to those concerns, my sense is it’s best to grapple toward broader consensus among the G20 rather than for one state to attempt a “break up” by itself.

    It does sound like your ‘don’t hold the breath’ point is realistic and sensible. Query though if the Eurozone crisis presents the severe risks suggested in the posting, whether a TBTF scenario could unfold in the Eurozone. Maybe the answer is no way, the Eurozone banks are so broadly diversified that a sovereign debt crisis with the Mediterranean states at its epicenter won’t affect the banks too much, so it’s not even a second thought on any credible person’s mind. If the answer is maybe or no one really knows, then the daily events may support a deeper and more urgent examination of whether size and leverage limits on large banks should form part of any reform proposals under consideration among the G20 / IMF / etc. No one should want to see a replay of 2008 but this time starting with a bank holding a trillion-plus dollars in financial assets.

  22. The problem being,if the ECB raises rates gradually, the money will stay in Europe,thusly giving the US Fed the green (excuse) light too raise rates (only hurting the american consumer mind you) creating more problems. Remember,a strong Euro was in america’s interest,as was on the other side of the equation,a weak dollar when it came too our exports. The Chinese were way ahead of the game keeping their currency pegged to the dollar,and beating the worlds so called hegemony dieties at their own game. Once again the industialized world countries have their autonomous fate dictated to them by the, “Central Bank, God”!

  23. Merkel will show she deserves the title “Chancellor” when she ACTS like she cares more for the fiscal health of her native country than pacifying lazy babies sucking on milk bottles in lounge chairs in Greece.

  24. I’m sorry, I portrayed that picture unfairly. I should have said patio chairs, not lounge chairs.

  25. The alternative scenario is this is another creditor shakedown of a public. The US caved in to creditor demands and bailed them out of their securities in the financials. The obvious big-money opportunity is to now find other State patsies.

    Here, a typical US state would be a large Greece. I doubt we would demand the USA cover for a State default. I doubt Simon would suggest US States solicit the IMF. Investors need to take their lumps.

  26. There is no hard evidence that Strauss Kahn wants to run for President of France in 2012. True, he is the only possible candidate that the polls give a good chance of beating Sarkozy. But the French Socialists are talking about internal primaries well in advance of the elections, making it necessary for DSK to quit his IMF job early, which begins to look like an awkward, risky, and even – given the current crisis – cowardly thing to do. Methinks he is condemned to stay at the IMF, which is probably a good thing in the European crisis, since he is relatively activist, known and respected in Europe, a true European, and a smart pol.

    Of course, Simon knows a lot better than we do what might br good for the IMF.

  27. Ditto. Why would you want to put a former Goldman Sachs executive in charge of the IMF?

    Especially when these same EU banks, having ploughed money into “crazy junk products” issued by Goldman Sachs, are now in financial crisis.

  28. Bill Gilwood

    “Another more immediate concern is the prospect of capital flight en masse if just one G20 state acting in isolation imposes size and leverage limits on its own banks.”

    Why?

  29. Carney, Harper worried by Greek debt crisis

    Thu Apr 29 2010 – Toronto Star – excerpt

    OTTAWA — ” The Bank of Canada and Prime Minister Stephen Harper are warning that national debt problems like those battering Greece are a threat to economic rebound in Canada and around the globe.

    “The debt situation is one of the largest, arguably the largest, risk to securing the global recovery,” Mark Carney, the central bank governor, told a Senate committee.

    “The net result of this would be negative for growth in Canada.”

    The risk that Greece’s debt emergency could spread has raised the possibility of a renewed economic crisis dominating the G20 and G8 leaders’ summits that Harper is hosting in Ontario in June.

    “The Greek crisis reminds us that government borrowing and government debts cannot go on without limit,” Harper said at a pre-G20/G8 business conference in Gatineau, Que.

    Assessing economic conditions, Harper said “there is still an overall fragility, particularly as we know in big markets of the United States and Europe, and still systemic risks out there in terms of banking systems and government debt.”

    Whether leaders of the world’s 20 largest economies can work together in Toronto to promote sustained post-recession growth will test the value of the G20, which includes both rich countries and such developing nations as China and India, he added.

    As Harper spoke, officials of the European Union and the International Monetary Fund were rushing to complete an agreement with Greece to keep the debt-burdened country from defaulting on its loans.

    The latest reports say the Greek bailout may require $160 billion over three years.”

    * Speaking as a Canadian and long time political observer, Harper is an idiot. :-)

  30. Mark Carney, the central bank governor (Canada)

    Thu Apr 29 2010 – Toronto Star – excerpt

    “Before joining the (Canadian) public service, Carney had a thirteen-year career with Goldman Sachs in its London, Tokyo, New York and Toronto offices. His progressively senior positions included co-head of sovereign risk; executive director, emerging debt capital markets; and managing director, investment banking. He worked on South Africa’s post-apartheid venture into international bond markets, and was heavily involved in Goldman Sachs’s work with the 1998 Russian financial crisis.[5]”

    http://tinyurl.com/in-goldman

  31. “Sympathy For The Devil”

    “I stuck around St. Petersburg
    When I saw it was a time for a change…

    Pleased to meet you
    Hope you guess my name, oh yeah
    Ah, what’s puzzling you
    Is the nature of my game, oh yeah”

    (M. Jagger/K. Richards)

  32. I think that every day that passes shows to Strauss-Kahn that becoming President of France is not a good idea :
    1) the ideological set-up of his supposed electoral base is absolutely dreadful. 99% of people in the French Socialist Party has no sense of the fiscal challenges ahead, and I am not even talking about the leftist junior coalition partners…
    2) It is only “good to be the king” if one can give favors. This is how politicians operate. The problem is that in 2012, there will be no money left in France for favors. 100% of executive time will be managing austerity and riots (as Papandreou is doing righ now). Not a fun place to be, except if one has a strong sense of duty and sacrifice. Last time I checked, DSK was more on the hedonist camp…

    On the other hand, and especially if Mr Johnson’s plan is adopted, the Head of IMF will be the effective head of Europe for the next ten years, so why quit now ? IMF is really where the action is !

  33. How can people believe they are not surrendering their political-social soverienty when they surrender their economic soverienty, be it the U.S. citizen to the Fed or Greece to the Euro?

  34. Another contributing factor imo is the rapid rise of the Euro vs the USD. There was hardly any economic justification for this as crisis hit all. The high value of the Euro has dampened tourism to those that need it most (Greece, Spain, Portugal and to a lesser extent Italy and France). It has also adversely affected exports where manufacturing still exists.
    A realistic 1 Euro = $1 would benefit all Europeans, although may hinder US debt…

  35. Well, well Simon,
    What an utter disappointment. With your recent whistleblowing disclosures of the predatory lending practices of the private monopolists of the credit creation mechanism I thought you might profer as a solution something outside the current orthodox. I even began to promote you to the NZ Labour Party as being part of a possible new age collective advisory unit alongside Joseph Stiglitz and Michael Hudson, to be approached as an alternative to the “Chicago Way” structural adjustment advice that has permiated out of No1 on The Terrace, Wellington, NZ since we suffered the first of our receiverships at the hands of the private international incorporated investment banks in 1961, second 1984, third at present.
    I now feel completely gutted to hear you appear to still have allegiances to the private banking elite with the outrageous suggestion to crisis that was caused by the predatory issuance of excess created credit being solved by the further excess issuance of created credit to the benefit of the very same slaveminded elitist’s who have repeatedly prospered from their predatory excess lending(boom) and foreclosure(bust) business cycles.
    Public Credit is the only viable solution that has been historically tried and tested in nations such as US, Canada, Australia, NZ.
    Have a read of the link below detailing the how Public Credit was used in NZ and how the private incorporated investment banks and their locally recruited commissioned co-operatives shut it down and are now on the verge of complete economic domination of a nation that is falsely portrayed as the most equitable transparant democracy on earth:

    http://publiccreditorbust.blog.com/2010/04/16/perhaps-the-greatest-three-pages-from-the-greatest-new-zealand-political-book-ever-written-by-one-of-the-labour-movements-greatest-forgotten-and-much-wrongly-besmirched-heros/

  36. Excellent post. Jim Rogers is a true “free-market” capitalist. He also said that GM and Wall Street should fail and not be bailed out. Many times over.

    Jim Rogers – Predicts the future part 1 VPRO Blacklight

  37. Jim Rogers predicting the future in january 2008.

  38. Rectification: Jim Rogers predicting the future in january 2009!

  39. I believe it is time to get rid of the current system of international finance. the BIS appears to be OK, but then the central bankers screw it up. I’ve concluded the whole system is a kind of financial mafia desigend to allow elites to steal and cheat. then when the pigeons come home to roost, we do it over again. time to end the farce that benefits the worlds bankers.

  40. Thank you for posting Carney’s bio, which clearly shows that he was involved in sovereign risk/debt capital markets while at Goldman. Again, under oath, he should be deposed about his knowledge and role in cooking the books of Greece with dirty derivatives deals.

    Simon, I have absolutely no confidence in Mark Carney, how can you support him when you want to break up these institutions? His worldview clearly will side with those of the TBTFs.

  41. I don’t expect you to understand, because you’re obviously stupid, but let’s try:

    Merkel doesn’t give a sh*t about Greece. She’s protecting

    a) The German banks, which have a lot to lose
    b) The value of the euro, which essentially means the people who have a lot of euros and will lose a lot of money if the euro loses it’s value.

    When an investor says that “Greece will default” or “Greece should default” there’s a good chance he’s short-selling greek government bonds. Don’t be naive (besides stupid that is).

  42. It seems the main possibilities following a “break up” would be reabsorbtion of assets into smaller U.S. banks, transfer of assets outside the U.S., and holding some assets in the scaled down U.S. banks subject to the hypothetical size and leverage limits. That is, vast financial assets will have to be shed from the U.S. megabanks. I question the realism of thinking that large third-party institutions involved in sophisticated financial transactions involving significant financial assets will trust an inexperienced smaller U.S. bank (like a community bank) to manage the transaction correctly. The more plausible scenario is such assets ending up under the management of a non-U.S. megabank that has the institutional experience, scale and sophistication to manage similar transactions. So while some assets might be reabsorbed into smaller U.S. banks, it seems more plausible that a large percentage of them will get transferred to non-U.S. megabanks. Thus the term, ‘capital flight.’ I have not heard a credible answer to this concern. Pending that, it seems preferable for the G20 (or at least G20 member states with megabanks) to seek consensus on size and leverage targets. If that could happen, hopefully it would mitigate the serious risk highlighted above, of simply concentrating more financial assets in a small number of megabanks. But such a consensus might end up looking almost like targeted limits on green house gas emissions, where states might agree to specified targets for reduction of megabank size and leverage over time (perhaps with differences for developed versus developing states like China), rather than setting a single hard limit at the outset.

    Under any analysis, it does not look like a simple problem.

  43. Another possible side effect of one state acting alone is brain drain. Query whether a hypothetical wunderkind financial advisor, or Ph.D. mathematician working on the latest financial models, will take her skills and talent to a midwestern or southern community bank post-break up, or will move to London or Beijing.

  44. This is due to German inflation paranoia

  45. What is propping up the Euro? It should be sliding down to well under a dollar by year end considering the extent of sovereign debt. Is the ECB quietly intervening to ensure that the Euro remains the prime contender to become a reserve currency? Are there political machinations at work here?

  46. Re: @ Anonymous____Nice,and Nicer ;^)

  47. `Curiouser and curiouser!’ cried Alice

  48. Europe will have a tough time when the Chinese commercial real estate bubble pops.

  49. Well … problems there may be in EUROPE … I agree ..
    But excuse me … im a bit confused
    1 Trillion was quoted as necesary for a financial recue package for Europe … RIGHT ?

    Lets see :

    Europe holds approx 3800 Billion in USA SECURITIES
    … correct me if Im wrong …

    Furthermore European Central Banks hold more than 1000 Billion in US DOLLARS as RESERVES … right ?

    Furthermore European Central banks hold the biggest Chunk of GOLD in this world.. approx 12500 Tonnes ..equal to roughly
    additional 500 Billion US dollar ..Right ?

    Equally …Europe … has apart from the last 2 years where current accounts combines shoved a smaller minus of approx 150 ( 2008 ) and 55 Billion ( 2009 )
    deficit … Europe has for the last 15 years had COMFORTABLE CURRENT ACCOUNT SURPLUSSES …. Right ?

    So THE NET CAPITAL POSITION OF THE COMBINED EUROPE VERSUS THE WORLD AUGHT TO BE COMFORTABLY ON THE POSITIVE SIDE …. Correct me if I may be wrong ?

    What could be a logical and necesary EUROPEAN solution ?

    Allow me to mention one of the possibilities :

    Europe starts SELLING some of their US TREASURIES as well as DOLLAR HOLDINGS …. That should be enough in order to carry EUROPE through this current MESS …

    ( this may be a bit harmful for the Dollar ..of course
    … and the S & P Rating Agencies Share-value may
    decrease … may be even considerably …
    but who cares about this …in EUROPE ? )

    Besides of that of course theres a lot to do in EUROPE rectifying our fiscal , internal as well as geopolitical situations .

    Re-orientation to the EAST …. where the FUTURE lies
    appears LOGICAL another of THE NECESARY MEASURES …. RIGHT ?

    Think a bit about THAT …. over there !

    Mr Olesen

  50. Re: @ Anonymous____The clock is ticking for the Industrial World,….however not for the “Fortunate Chinese”, time is accelerating exponentially leaving any shortfalls years, perhaps decades away. Unfortunately the negative influenced time-clock that has Europe’s,and America’s hegemony encapsulated, has transformed itself into a teetering metronome being influenced by the “Gravitation Pull” of its malfeasance,and doom!

  51. Re: @ Ole Olesen____Sorry,but it works on both sides of the trades. America just doesn’t gobble up credit,but givith too.

  52. Hello,

    Would very much appreciate a clarification/ source on the statement in the main piece above to the effect that an auction of short term Irish government debt ‘virtually failed’ last Tuesday (along with that of Spain). I’m certainly not a bond market expert, so perhaps I’m simply missing something very basic, but my understanding from the web site of Ireland’s National Treasury Management Agency (NTMA) was that no such auction took place. The last auction of short term debt was on April 8th (covered 1.6 times) and of longer term debt (covered 3 times).

    Perhaps I simply missed a the results of such an auction, or the NTMA hasn’t update/announced something.

    For a bit of background…

    My understanding, from public statements of the NTMA CEO is that Ireland’s funding position is relatively good at the moment, with NTMA have completed 60% of its bond issuance this year (of €20bn), with cash balances from treasury bills of something like €23 bn in hand, and no immediate ‘pinch points’ a la Greece in rolling over longer term debt. I fully appreciate that these are much narrower issues than questions of medium/long term solvency, especially given the impact of domestic banking crises, and more contagion to come perhaps, but I was puzzled by the statement above.

  53. I meant in the comment above that the last auction of Irish govt bonds was held on April 20th, for bonds maturing in 2016 and 2020. See for example

    http://www.ntma.ie/GovernmentBonds/auctionDetails.php

  54. This post, stands out in that in addition to looking at economic components of the crisis, it uses that analysis to arrive at political recommendations as well as economic ones.

    It is not enough to identify lack of political will in the EU. Many observers have already made the point, as Spain just reconfirmed by calling for a summit a day after German elections, and at a time when bond spreads around the EU are soaring.

    I agree that Europeans in non-EU institutions—namely the IMF—are likely unable to make dispassionate decisions. This would be especially true if such an official was looking to hold office in his home country, as Strauss-Kahn seems to be. Yet, it is precisely this reason why he won’t step down. When was the last time you saw a politician simply give up his or her post for the greater good? It would be an admission of inability to deal with the crisis; the truth of such an admission would be beside the point.

    While debt restructuring and liquidity support to Greece are unavoidable, the $1 trillion the authors predict to be needed to support Greece, Portugal, Spain and Italy is simply eye popping. If the international community can’t get a couple hundred billion together for Greece, $1 trillion is a long shot. It also seems to me that devaluation of the Euro is a non-starter. With the inevitable shake down of Germany as part of any liquidity support program, I doubt the German public will want to put anything else on the line, let alone risk inflation. Although when it is all over I expect the EU to curtail unfettered access to cheap money, until then European management of the crisis will be what it has been so far—world-class muddling—and the crisis will end when world GDP growth picks up again.

  55. “…a respected financial leader of a relatively independent country should take charge…”

    How about Hank Paulson?

  56. nom deplume

    Why do people equate the IMF with the USA? We represent only 17% of the total quota and we get under 17% of the vote. The president is a European. *shrug* I’ve always thought the IMF was closer to what the UN is supposed to be in terms of ‘democratic’.

  57. nom deplume

    Yeah, I’m for the guy from India having done the research myself. He seems like an excellent choice. I actually think the solution is ‘simple’, in the same sense ‘in war everything is simple and the simplest things are difficult’, in that we need a Global Central Bank. Basically, an arm of the IMF (or rather vice versa) which could handle the ‘massively complex’ transactions. After all it would be much easier to force a single institution to be ‘transparent’ and follow the rules than to try and tracks thousands upon thousands of ‘regional/ hub banks’.

  58. Why the hell is Europe’s value as an entity in the world be measured in terms of what we can do for the US?
    Why the hell should we co-operate on any war or a US plane like JSF? As if Europe only exists to subsidise costs of US planes. Why is the US not co-operating with Brussels?

  59. Why should they ? The US one are still there; do they desserve it ?