Economy & Market week ended 12/25/2010

Here is a draft post from 2010 early 2011 which did not get published in which the dysfunctionality of  the eurozone was so obvious and yet so ignored today.

For a Holiday week, a tremendous amount of information flowed and we are going to cover the eurozone, Ireland, Germany, bonds, the euro, other countries like the UK, China, the new tax bill in the U.S., the mortgage mess, austerity in U.S. municipalities and States, unemployment, sectoral balances, the effect of home prices on small business, and the market and investing.  You should find this material pertinent and thought provoking.

Michael Hudson in discussing how financial interests determine sovereign policy argues that bankers are getting politicians to siphon off public money bail bankers out of their mistakes at the expense of capital formation and living standards.  Latvia is an example of how the economy has been subjected for the purposes of bankers just as if it has been militarily defeated and occupied.  Germany is serving its bankers and not the people; Germany needs to adopt more progressive tax and financial policies.  Hudson sees the current crisis as a sovereign crisis --- who is in charge and responsible for taking care of the citizens --- not a true debt crisis.  Banks should be forced to realistically value assets and debts on their books.  There is no need to wreak economies with financial asset stripping.  Debt needs to be restructured with the help of a progressive tax and a true central bank which can help finance governments.  He wants to see taxes shifted back on to land and resource rent as well as financial and capital gains.  He wants to de-privatize basic utilities and natural monopolies to take control from rentiers and prevent Europe from being turned into a tollbooth economy.

Edward Harrison acknowledges that eurozone internal devaluation and austerity is not a politically sustainable solution and there are only three possible outcomes in his opinion: monetization, default. or breakup.  Charles Wyplosz sees the problem as a lack of alternative options planning allowing decisive action, because the ECB has been consistently late to help.  Wyplosz remains concerned about debt and possible default.  He sees six questions which need to be addressed: can eurozone member nations face down the markets, is there a strategy for avoiding defaults, is there a plan to organize defaults if they occur, can a first defaulter be ringed to avoid contagion, if sovereign default is a possibility should banks also need to fail, and is ECB independence threatened by its need for more capital?  Daniel Gros finds the debate in the eurozone over the structure and financing of a stability mechanism self-defeating and likely to promote a festering situation which does not solve the lack of growth in the countries affected and the increasing costs to refinance with rising interest rates.  Geoffrey Underhill sees the problem as fully understood from the beginning of the euro as a lack of federalism.  The eurozone needs to act as a federal union consistent with the primacy of Germany as established by the structural formation of the euro and the ECB needs to proved guarantees to the "provinces" "... and adequate internal resource transfers to compensate for the fully predictable adjustment asymmetries in the absence of intra-Eurozone devaluations."

Is Germany, in demanding at the European Summit that "... there would be no fiscal transfers to troubled economies, and that the best way forward is further fiscal consolidation, along with plans for the private sector to share in any losses after a sovereign default", acting in its best interests?  Gavyn Davies believes Germany is not acting in its best interests.  There is a "damaging effect of a permanent increase in the interest rate spread of 1 per cent over Germany fully offsets the beneficial effects of reducing the budget deficit by 1 per cent of GDP for the troubled EU economies."  He believes the strategy emerging from the Summit will not work and the stronger EU economies could make a big difference by providing the weaker economies with liquidity in the form of lower interest rates.  Davies uses a recent paper by Lupton and Mackie to demonstrated the arithmetic to show Germany cannot continue to assert its creditor nation policies which will not reward these weaker nations and demands they suffer the sanctions befitting their debt and not place German banks on the precipice of shared suffering in sovereign default by any one of these weaker nations.

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