By Simon Johnson
Given recent maneuverings around European Central Bank (ECB) appointments and the obvious discomfort of Mario Draghi – he carries the Goldman Sachs connection now like other people carry albatrosses – the German financial-industrial complex seems to regard Axel Weber as a “done deal” to become the new ECB president.
Such an assumption is premature. Mr. Weber, as long standing head of the Bundesbank and general German economic maestro (including, quietly, on fiscal issues), is due to face his own round of questioning – if you listen carefully, you can hear southern Europeans sharpening their arguments, and with good reason.
There are six important and difficult subject areas for Mr. Weber.
- Who was asleep at which wheel when Deutsche Bank was allowed to become one of the most leveraged banks in the world, betting and losing heavily on subprime mortgages – among other things?
- What exactly was Mr. Weber’s involvement in the Hypo Bank debacle? Germany likes to claim that it can regulate large banks effectively – and there is no reason to limit their size. To the rest of us, it seems like Germany can’t even regulate and control relatively small banks.
- Why does Germany continue to resist sensible proposals to increase capital requirements on banks (both at the deputy minister level and through the relentless lobbying of Josef Ackermann)? The presumption among their closest allies is that this is to hide losses – and general government culpability – in the mismanagement of German public banks (Landesbanken). Why is it reasonable to hold up the entire G20 process (and the BIS, etc), at a technical level, for what is essentially a broad form of political cover-up?
- Why have the full results of European bank stress tests never been published? Is this because of large current and likely future losses on the balance sheets of financial institutions that fall within Mr. Weber’s remit?
- German officials are keen to criticize the southern periphery of the eurozone, but let’s face it – eurozone monetary policy was highly procyclical (exaggerating the boom and the bust, e.g., in Spain), and regulators looked the other way as northern/core banks extended credit to the Mediterranean and East European neighbors. The upside benefited German exporters; the downside is now being laid entirely at the door of “profligate” nations. Is this entirely fair and reasonable?
- As Mr. Weber aspires to European-level leadership, here is the big issue. Is it his intention to manage the currency zone to suit the preferences of the core nations (i.e., Germany), while letting those on the periphery be whipped around by policies that are not suited for them? Is there anything at all that he and others take as lessons from recent experience?
More broadly, Germany and Mr. Weber have been central in building a version of the Bretton Woods fixed exchange rate system within Europe. The entire burden of adjustment is placed on deficit countries (talk to Greece); it is considered beyond the pale to even suggest that German fiscal policy may be too tight, that Germany needs to expand domestic demand, or – heaven forbid – that Germany’s intention to export its way back to growth (with a current account surplus, in their view) is not exactly a model of enlightened economic leadership.
On top of this, and unlike Bretton Woods, there is no mechanism for adjusting exchange rates within the currency union. Given what we have learned in the past two years, is this still such a bright idea?
With Draghi damaged and the Weberian model so open to question, look (or hope) for dark horses to emerge in the race for the ECB.
And don’t make the mistake of thinking that you don’t care. The broader European economy accounts for around 1/3 of world GDP, depending on how you count it. The President of the European Central Bank is the preeminent policy maker in this space.
If the growth prospects for this area remain dismal while European banks stay loosely supervised (our Axel Weber baseline), expect even more destabilizing capital flows into emerging markets – and into the United States.
The Baseline Scenario 
“Who was asleep at which wheel when Deutsche Bank was allowed to become one of the most leveraged banks in the world, betting and losing heavily on subprime mortgages – among other things?” Extending that metaphor wasn’t most of them in bed with Goldman Sachs, thus making for strange but comfortable bedfellows. The list is long, many, if not most, having had their forward-looking statements implode on themselves (pleading guilty by association, here). They say the EU remains in the top economic position over U.S. and China, exceeding their GDPs by at least a factor of three.
“Germany likes to claim that it can regulate large banks effectively”
It depends on what you mean by effective.
Weber: “We can control our banks. We have them right where they want us.”
Considering how much Germans like to eat pork, I guess the PIIGS would prefer even a Brit to Herr Weber. A second life for M. Brown?
“Germany’s intention to export its way back to growth (with a current account surplus…)”
They want to export goods _and_ capital? Who do they think they are, China?
Right questioning Simon, as Germany stated they would
work on their own bank reforms ( there were two concurrent bills in the works coming out of the
Ministery of Economy and Finance Ministry )
When Frau Merkel started taking on the banks, the banking syndicate hit back, threatening to further cut credit.DB is a very big fish, hugely overleveraged
and hugely exposed to CRE losses. As you may know, the
last line of the banksters’s syndicate-it was voiced out also in Netherlands- following a hearing of the director of the Dutch Central Bank admitting being lax on oversight, evertyone seems to have been “sleeping at the wheels” when it comes to banks’s regulators ( maybe their pockets got greased instead ) this weeek is: if we have to comply with the new Basel requirements, we will not be able to lend, lol..and JP Morgan frontrunning on the American front while Mrs Masters readies new synthetics …Send over the handcuffs…
Enlightening piece. Thank you.
So, let’s see: Germany should bail out Greece et. al by inflating its domestic economy? My guess is the Germans are smarter than that, but we’ll see.
Growth fantasies provide bait for the Debt Trap. The IMF dance party rearranges Titanic deck chairs, but only until the music stops. Old habits must be hard to break, particularly at the Peterson Institute.
Yes, exactly !
I would even find Homer Simpson als chief of ECB likeable and capable.
There are rumors, among European financial circles, that Goldman Sachs tricks were used by Britain and Germany, not just PIIGS. How interesting that would be…
In any case, some of the screaming in Germany about the conversion of the Drachma into the Euro at the wrong rate is disingenuous, because it was known all along… Also the Euro without a Federal economic structure to back it up was crazy.
Failure of Greece would make Lehman failure look like a joke (many countries would then fail). Thus, the only solution is to realize that the mandate of the financial-industrial complex has been violated. It was a relation of trust, it turned into the financial-piratical complex. Hesitations of some in Germany about supporting Greece ought to be viewed as a reason not to support them for ECB leadership.
PA
The drachma did not enter the Euro at the wrong rate, but greek wages and price levels rose very fast which raised the real effective ‘exchange rate’ — leaving Greece ‘overvalued’ and with large imbalances. They do need to devalue, but not because of the wrong fx rate in 2001.
charles, when exactly did merkel start taking on the banks?
Greeks pay themselves too much. They need to reduce their wages. In the old days, this was done by inflating. Now they have to cut their nominal pay. Same difference. Why is this so difficult?
Simon writes “sensible proposals to increase capital requirements on banks”
Sorry, what is sensible about that, in the midst of a crisis? How come you so gladly want to empower bureaucrats to spend tax dollars and not empower bankers to help out when really needed?
Again, allowing the private banks to help out the economy, by lowering their capital requirements now, even at the risk of more bailouts tomorrow, is much better than having government bureaucrats do the lending or decide on fiscal spending.
A dollar spent by a bureaucrat is a tax dollar spent but a dollar lent by a banker does not necessarily mean a future tax dollar spent and this is what anyone concerned with a fiscal deficit should know by now.
Well put Simon; did you sent the questions to Mr Weber? Not that I expect him to give any decent answer. At least, he could start thinking.
lol
Springfield Rebels
Maybe the crew at The Simpsons will take a cue and create a character based on Simon Johnson who leads the charge as the folks at Springfield, who are plain fed up, storm and takeover the local branch of Zombie Bank, with James Kwak and Homer Simpson bringing up the rear.
http://tippygolden.wordpress.com/springfield-rebels/
Would not Axel Weber be able to ask Simon Johnson a couple a questions down this line too?
I mean Bundesbank is important but the IMF is not completely irrelevant either.
Per K,
You have repeatedly made this argument here without addressing the low propensity to lend exhibited by the banks so far with all the “encouragements” provided to them by the fed and treasury. The low fed funds rate, the rinsing of the trash in their balance sheets with and numerous other inducements have not led to increased lending. The Banks are in a balance sheet repairing and De-levaraging mode, and will be so for a while more.
Secondly, the next component of the “banking stimulus plan” as suggested by you, is the question of whether there are plenty of private sector borrowers willing and able to take on loans to boost GDP, or stave of further deflation. I would venture just the opposite. Private sector and personal borrowers are also in the early stages of a great De-leveraging process of their own, and will be repairing their own balance sheets, not taking on more debt.
That implies that only the bureaucrats can be entrusted with a borrowed dollar today, precisely because they will enact their expertise…SPEND IT!!! which at this moment is exactly recipe.
The “Frankfurter Allgemeine Zeitung” has an (German only) article today (http://www.faz.net/s/RubEC1ACFE1EE274C81BCD3621EF555C83C/Doc~E98DE1E4A40BF40ACA2AB5C7E6C0B53C3~ATpl~Ecommon~Scontent.html) providing some background information and assuming that the decision Mr. Weber and Mr. Draghi is a mere diplomatic haggle. So, objective decision making – and an honest answer to the six questions – can already today be consigned to the realms of fantasy.
Examples of diplomatic bagaining (from the article):
– Guenther Oettinger (former Minister President of Baden-Wuertemberg) has only become the new European Commissioner for Energy in 2010 (i.e. Germany deserves something better next time)
– Last week, Germany successfully promoted the Portuguese president to become the new ECB vice president (maybe someone from northern Europe should then be president?)
Edit: the Portuguese central bank(!) president will be ECB vice president
The Greek and Spanish governments should open German language classes for their unemployed. If Germany wants to export its goods, its partners can export their unemployment. Isn’t this one of the pillars of the European project?
I have not said that Governments should not spend. I have not said that the banks and the private sector are not all in a deleveraging mood… though in the case of the banks it has less to do with mood and more to do with sheer regulatory realities… when their AAAs lendings and investments are downgraded they need to put up a lot of new capital.
What I do say though is that there are small businesses and entrepreneurs out there that are not getting the finance they want because there is a lack of “regulatory” capital in the banks and that this could be temporarily solved by reducing the capital requirements for banks on this type of operation.
But of course, what I do not say, is “that only the bureaucrats can be entrusted with a borrowed dollar today, precisely because they will enact their expert”. On the contrary I believe that one of the most urgent needs of this and most countries is to improve the capacity of their bureaucrats; who, at least in my humble opinion, have clearly been lacking lately.
Right on!