Cliff Diving
Oct. 27th, 2011 02:08 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
koganbotMy understanding — or, more accurately, since I don't actually understand the subject or know what I'm talking about, my understanding of Paul Krugman's and Paul De Grauwe's et al.'s understanding, since those are the people I'm choosing to believe, even when I don't understand them — is that the most dangerous problem right now isn't Greece, and isn't banks' exposure to Grecian debt (though this is dangerous), but Italy. Or, not really Italy itself, since its economy isn't actually doing so poorly compared to similar countries, but the perception that its debt will become unsustainable because people will refuse to continue sustaining the debt. (Repeat for emphasis: the debt will become unsustainable because creditors will refuse to sustain it.) In other words, we'll have the equivalent of a bank run, but on a country rather than a bank, the run being in the form of investors selling off their Italian bonds. As with a bank run, the bank doesn't have to have any fundamental problems, and investors don't have to believe that the bank does have fundamental problems, all they have to believe is that other investors are about to start withdrawing their funds (in this instance, selling bonds). So the first investor will sell his or her bonds so as not to get caught broke if other people sell theirs first. And the run is on. And Italy, which right now is able to pay its interest, will then have enormous interest to pay.
There's a sure-fire way to prevent the run from happening: the European Central Bank declares that it will unconditionally back Italian bonds by offering to buy them if the interest rates get out of hand. (Interest rates on bonds go up when investors sell, right? As I said, this is not my subject.) And the ECB can do so because in effect it can print its own money or do something equivalent, and in the current situation, owing toprinciples of quantum mechanics some detailed macroeconomic stuff I won't go into but it concerns the zero lower bound, there's little risk of inflation if it does so. And if the ECB declares its willingness to buy the bonds it most likely won't have to anyway, because investors will lose their fear of a run and their incentive to sell out.
But the European Central Bank won't do this, since to back the bonds would be the equivalent of eating the main meal with the dessert fork, and this is just not done. Well, other central banks do it, but not this one! So instead there's some sort of ad hoc or something-else fund that's undercapitalized and is supposed to be there backing the bonds but it can't really, and also Italy is admonished to get its house in order and cause its population to suffer because contracting an economy is what gives everyone the confidence to expand, and suffering is good for the soul.
Stock markets rallied today on the basis of yesterday's deal in Europe, but Italian bonds did not rally, their interest rates still being near the high. So — I'm told — the Euro vehicle is still heading towards the cliff.
Occupy update: Public perception is being pushed in the direction of "Oh, those park occupiers are costing taxpayer money, let's chase 'em out." And we play into that when we focus on our getting mistreated in parks rather than on the psychoses of European central banks and ilk.
There's a sure-fire way to prevent the run from happening: the European Central Bank declares that it will unconditionally back Italian bonds by offering to buy them if the interest rates get out of hand. (Interest rates on bonds go up when investors sell, right? As I said, this is not my subject.) And the ECB can do so because in effect it can print its own money or do something equivalent, and in the current situation, owing to
But the European Central Bank won't do this, since to back the bonds would be the equivalent of eating the main meal with the dessert fork, and this is just not done. Well, other central banks do it, but not this one! So instead there's some sort of ad hoc or something-else fund that's undercapitalized and is supposed to be there backing the bonds but it can't really, and also Italy is admonished to get its house in order and cause its population to suffer because contracting an economy is what gives everyone the confidence to expand, and suffering is good for the soul.
Stock markets rallied today on the basis of yesterday's deal in Europe, but Italian bonds did not rally, their interest rates still being near the high. So — I'm told — the Euro vehicle is still heading towards the cliff.
Occupy update: Public perception is being pushed in the direction of "Oh, those park occupiers are costing taxpayer money, let's chase 'em out." And we play into that when we focus on our getting mistreated in parks rather than on the psychoses of European central banks and ilk.
no subject
Date: 2011-10-29 04:19 am (UTC)Finally there is the little problem of the EU Treaty, whose Article 125 (TFEU), is quite explicit:
"The Union shall not be liable for or assume the commitments of central governments... of any Member State....
A Member State shall not be liable for or assume the commitments of central governments... of another Member State"
In short, it is illegal. The Treaty does not allow the EU or its members to guarantee each other's debt.
While one could argue that the EFSF is technically not the EU or a member state, it is clearly wholly dependent on members. It is thus difficult to argue that the granting of even partial guarantees by the EFSF for the debt of member countries does not contravene this so-called 'no bailout' clause of the Treaty.
Hmmmm. Would that apply to the ECB's potentially buying bonds as well (as I said it could/should above)? Or is making it clear that you will buy bonds fundamentally different in character from being liable for or assuming a commitment, i.e. is fundamentally different from offering to insure bonds that other entities have purchased or might purchase? The ECB has bought Italian bonds already, right? (Or am I totally wrong.) I'd guess that the effect of offering to insure bonds and offering to be the buyer of last resort on the bonds is supposed to be similar, but that legally the two are in a different category.
Btw, the EFSF is the "sort of ad hoc or something-else fund" I referred to above, though actually I have no idea if it's ad hoc or is long-standing but is just being pressed into service in this way in this instance. (In what way? Well, read the article I linked, then explain it to me.)
no subject
Date: 2011-10-29 06:20 pm (UTC)If that's unclear, how about "as I said above that the ECB could or should do: promise that if circumstances dictate it will buy bonds without limit."
Falling Short Again
Date: 2011-10-29 06:48 pm (UTC)Kash Mansori is unhappy with the state of the Italian bond market just days after the supposed big rescue. Indeed, the Panzerfaust has fallen far short; Italy is having to roll over its debt at levels that are unsustainable, and the unraveling of the euro is definitely still on.
no subject
Date: 2011-11-01 07:42 pm (UTC)http://krugman.blogs.nytimes.com/2011/11/01/repost-european-inflation-targets