November 10, 2011Posted by on
Marshall Auerback writing on the blogspot New economic Perspectives says that the markets are again in free-fall and, once again, a lazy Mediterranean profligate is to blame. This time, it’s an Italian, rather than a Greek’. His ire is aimed at the new head of the European Central Bank Mario Draghi saying that it was extraordinary to observe the euphoric reaction to the formation of the European Financial Stability Forum a few weeks ago, along with the “voluntary” 50% haircut on Greek debt. That to anybody with a modicum of understanding of modern money, it was obvious that the EFSF would never end well and that the absence of a substantive role for the European Central Bank would prove to be its undoing. As far as the haircuts went, the façade of voluntarism had to be maintained in order to avoid triggering a series of credit default swaps (CDS) written on Greek debt, which again highlights the feckless quality of our global regulators being hoisted on their own petard, given their reluctance to eliminate these Frankenstein-like financial innovations in the aftermath of the 2008 disaster.
Auerback claims that it goes back to the need for creditworthiness to precede credit. Policies designed to promote job growth, higher incomes and a corresponding ability to service debt are a prerequesite to a borrower taking on a loan or a banker to extend one. Banking should be an optimistic activity, where the success of the lender is tied up with the success of the borrower; in other words, not the spectacle of vampire-like squids betting against the success of their clients via instruments such as credit default swaps. He continues that at least one decent by-product of the eurocrats’ incompetent handling of this national solvency disaster has been the likely discrediting of CDSs as a hedging instrument in the future.
Note that 5 year CDSs on Italian debt have not blown out to new highs today in spite of bond yields rising over 7%, because the markets are slowly but surely coming to the recognition that they are ineffective hedging instruments – although they have been very useful in terms of lining the pockets of the likes of JP Morgan and Goldman Sachs.
Auerback says that Silvio Berlusconi was right to oppose the crude political ploy being foisted on him by the ECB, and the Franco-German irrational and economically counterproductive fiscal austerity program in exchange for “support” from the likes of the IMF. All Berlusconi had to do was cast his eyes to the other side of the Adriatic to see the likely effect of that. The overriding imperative in Euroland (indeed, in the entire global economy) should be to stimulate economic growth to ensure that there are enough jobs for all who want them. Private spending is very flat and so they need to replace it with public spending or GDP will decline further. The eurocrats seem incapable of understanding that even if the budget deficit rises in the short-run, it will always come down again as GDP grows because more people pay taxes and less people warrant government welfare support.
As for Italy itself, this is a sordid case of the Europe’s mandarins subverting yet another democracy, through crude economic blackmail. Already one government has been destroyed this way: In the words of Fintan O’Toole of the Irish Times:
Firstly, it was made explicit that the most reckless, irresponsible and ultimately impermissible thing a government could do was to seek the consent of its own people to decisions that would shape their lives. And, indeed, even if it had gone ahead, the Greek referendum would have been largely meaningless. As one Greek MP put it, the question would have been: do you want to take your own life or to be killed?
Secondly, there was open and shameless intervention by European leaders (Angela Merkel and Nicolas Sarkozy) in the internal affairs of another state. Sarkozy hailed the “courageous and responsible” stance of the main Greek opposition party – in effect a call for the replacement of the elected Greek government.
The third part of this moment of clarity was what happened in Ireland: the payment of a billion dollars to unsecured Anglo Irish Bank bondholders. Apart from its obvious obscenity, the most striking aspect of this was that, for the first time, we had a government performing an action it openly declared to be wrong. Michael Noonan wasn’t handing over these vast sums of cash from a bankrupt nation to vulture capitalist gamblers because he thought it was a good idea. He was doing it because there was a gun to his head. The threat came from the European Central Bank and it was as crude as it was brutal: give the spivs your taxpayers’ money or we’ll bring down your banking system.
Of course, this is nothing new for the EU, as any Irishman or Portuguese citizen can attest. Vote the “wrong” way in a national referendum and the result is ignored by the eurocrats until the silly peasants realize the egregious errors of their ways and re-vote the right way. If it takes two, or even three, referenda, so be it. Politically, the interpretation of any aspect of the Treaties relating to European governance have always been largely left in the hands of unelected bureaucrats, operating out of institutions which are devoid of any kind of democratic legitimacy. This, in turn, has led to an increasing sense of political alienation and a corresponding move toward extremist parties hostile to any kind of political and monetary union in other parts of Europe. Under politically charged circumstances, these extremist parties might become the mainstream.