Yves here. While Frankel’s take on the ECB’s errors has some merit, his recommendation, of imposing much harder limits on eurozone members who run deficits in excess of permitted levels, is more debatable.
Any country running a large intra-eurozone trade deficit is going to show rising debt levels. If the increase in debt funds investments that increase economic productivity, that might work out fine in the long run, but that seldom proves to be the case. We’ve seen that big debtors either rack up rising government debt levels directly (Greece) or have rising private sector debts that eventually result in outsized financial sectors that produce financial crises that lead to collapses in tax revenues that then lead to rising government debt levels (or directly via bailouts, see Ireland). Note in most countries the explosion in debt to GDP is primarily the result of the impact of the global financial crisis on tax revenues). So fiscal deficits cannot be addressed independent of trade and cross border capital flows.
By Jeffrey Frankel, Professor of Economics at the Kennedy School of Government, Harvard. Cross posted from VoxEU
It is a year since Greece was bailed out by EU and IMF and there are many who label it a failure. This column says that while there is plenty of blame to go around, there were three big mistakes made by the European Central Bank. Number one: Letting Greece join the euro in the first place
By now just about everybody agrees that the European bailout of Greece has failed (see for example Darvas et al. 2011). The debt will have to be restructured. As has been evident for well over a year, it is not possible to think of a plausible combination of Greek budget balance, sovereign risk premium, and economic growth rates that imply anything other than an explosive path for the future ratio of debt to GDP.
There is plenty of blame to go around. But three big mistakes can be attributed to the European leadership. This includes the ECB – surprisingly, in that it has otherwise been the most competent and successful of Europe-wide institutions.
Mistake number 1: The decision in 2000 to admit Greece in the Eurozone.
Greece was an outlier, geographically and economically. It did not come close to meeting the Maastricht Criteria, particularly the 3% ceiling on the budget deficit as a share of GDP. No doubt most Greeks would agree with the judgment that they would be much better off today if they were outside the euro, free to devalue and restore their lost competitiveness.
Mistake number 2: Allowing the interest rate spreads on sovereign bonds issued by Greece (and other periphery countries) to fall almost to zero during the period 2002-2007.
Despite budget deficits and debt levels that far exceeded the limits of the Stability and Growth Pact, Greece was able to borrow almost as easily as Germany. Part of the blame belongs to international investors who grossly underestimated risk on all sorts of assets during this period (Frankel 2007). And part of the blame belongs to the rating agencies who, as usual, have been lagging indicators of European debt troubles, rather than leading indicators. But in this case, both groups might justify their attitudes by pointing out that the ECB accepted Greek debt as collateral, on a par with German debt.
The third mistake was the failure to send Greece to the IMF early in the crisis.
By January 2010 the need should have been clear. Rather than going into shock, leaders in Frankfurt and Brussels could have welcomed the Greek crisis as a useful opportunity to establish a precedent for the long-term life of the euro (see Frankel 2010).
The idea that such a problem would eventually arise somewhere in the Eurozone cannot have come as a surprise. After all, why had the architects written the Maastricht fiscal criteria and the No Bailout Clause (1991) and the Stability and Growth Pact (1997)? Sceptical German taxpayers believed that, before the project was done, they would be asked to bail out some profligate Mediterranean country. European elites adopted the fiscal rules precisely to combat these fears.
When the rules failed and the crisis came, the leaders should have thanked their lucky stars that the first test case had arisen in a country that met two characteristics admirably.
First, the Greek government had broken the rules so egregiously and so frequently that Europe’s leaders could, with a clear conscience, judge a firm stand to be merited.
The only alternative was to risk establishing the precedent that all governments are ultimately to be bailed out all the time, with all the moral hazard headaches that precedent implies.
Second, the Greek economy was small enough to make it feasible for Europe to come up with the funds necessary to insulate others, who were vulnerable to contagion but not as blameworthy, for example Ireland.
European leaders also should have thanked their stars that the IMF exists. Instead of acting as if such a crisis had never been seen before, they should have realised that imposing policy conditionality in rescue loan packages is precisely the IMF’s job. International politics is less likely to prevent the IMF from enforcing painful fiscal retrenchment and other difficult conditions than it is among regional neighbours or other political allies. Europe is no different in this respect than Latin America or Asia. Even the need to include in the package substantial funds from regional powers on top of IMF money, subject to the same IMF conditionality, should have been recognised as familiar from big emerging-market crises such as those of the 1990s.
But the reaction of leaders in both Frankfurt and Brussels was that going to the IMF was unthinkable, that this was a problem to be settled within Europe. They chose to play for time instead, to treat insolvency as illiquidity (see Darvas et al. 2011). Against all evidence – and despite a decade of Stability and Growth Pact violations – they still wish to believe that they can impose fiscal discipline on member states. Despite two decades in which citizens of Germany and other European countries have expressed clearly that they do not share their leaders’ enthusiasm for Economic and Monetary Union (O’Rourke 2011), the latter apparently still wish to believe that further progress to political and fiscal union is possible. The Economic and Monetary Union has long since become an ostrich, burying its head in the sand.
It turned out that the German taxpayers were right all along. How, in light of that democratic deficit, can anyone think that Europe is ready for a transfer union?
Solutions looking forward
The three mistakes now lie in the past. How can Europe’s fiscal regime be reformed to avoid future repeats? The reforms in train are not credible. (“We are going to make the fiscal rules more explicit and make sure to monitor them more tightly next time” – see for example Thygesen 2011). But it is not too late to apply the lesson of mistake number two – the ECB policy of accepting the assets of all member states as collateral.
The Eurozone should adopt a rule that whenever a country violates the fiscal criterion of the Pact (say, a budget deficit in excess of 3% of GDP, structurally adjusted), the ECB must stop accepting that government’s debt as collateral
This system would achieve the elusive objective of true automaticity. If a country exceeded the threshold for justifiable reasons, such as natural disaster or war, the private markets could perceive that and impose little or no default-risk premium. No judgment of the merits by bureaucrats or politicians would be required. More likely, for periphery countries, the result of such a re-classification would be the re-emergence of sovereign spreads of moderate magnitudes, in between the extremes of the 2002-2007 lows and the 2009-2011 highs. The interest rate premium would send a message far more credibly, forcefully, and promptly than any warning that any Brussels bureaucracy will ever turn out.
This is how it works among the US states and municipalities (Bayoumi et al. 1995). Despite the absence of their own currencies, the recurrence of dysfunctional local politics and excessive deficits, and even a history of state defaults in the 19th century, federal bailouts are not delivered and not expected. Without some such device, the new European Stability Mechanism is in danger of becoming a mechanism for instability.
So why is mistake #1 simply to allow “Greece” in (in 2000)? If the problem really were limited to Greece, there wouldn’t be a problem. It would be somewhat embarrassing, but that’d be the end of it.
However, errors of this kind pervade his attempt at analysis:
1. He confuses political considerations for technocratic considerations (such as stability and growth potential)
2. He suggests this problem should be solved by the ECB, and that ECB negligence or unwillingness to be realistic is at the bottom of the issue.
3. (more problematically) he seems to have forgotten to look at the size of the problems in other economies (most notably Italy), and only talks about the one case that is most prominent in the media. Didn’t he have time to look up the relevant literature (admittedly probably rather poor) on ‘peripheral’ euro-countries, or is VoxEU akin to a daily newspaper in that it prefers timeliness over rigor?
4. Most problematic of all, he writes “Sceptical German taxpayers believed that, before the project was done, they would be asked to bail out some profligate Mediterranean country. European elites adopted the fiscal rules precisely to combat these fears.” And then, painfully, “When the rules failed and the crisis came, the leaders should have thanked their lucky stars that the first test case had arisen in a country that met two characteristics admirably.”
This, to my mind, shows first and foremost how one-sidedly political (or stupidly uninformed) the author is. To ignore, or to not mention that France and Germany were among the first to break the Stability Pact rules is either a farce or a joke.
More to the point, it shows that national considerations have so far always outweighed Eurozone ones, and that the indecision associated by the author with the “Greek” problem is nothing new. And while it is perhaps valid to wonder whether it was wise to admit the PIIGS to the Eurozone (not so much wise for the ‘West’ as wise for those countries themselves), it is nothing less than an attempt to rewrite history to suggest, as the author does, that this was ever a technical problem in which more mature capitalist economies (like Fr/nl/Germany) are only to blame for sparing the rod when it came to the periphery. Because if anything, the problem was with Basel-II, and the fact that they decided to let loose the banks of war on these economies which were totally unaccustomed to having access to such cheap debt.
You make very good points, notably that the first to breach the common rules, setting a horrible example were France and Germany – and that they were not fined, setting an even more horrible example, in this case by the Commission.
I think that the World is divided into two kind of peoples: (1) boot-licking economists who write articles on how bad is Greece and how holy are “German taxpayers” (they mean German banksters but don’t dare to say) and (2) normal people who realize that this can’t be only the fault of Greece, much less of the Greek People.
“…..(2) normal people who realize that this can’t be only the fault of Greece, much less of the Greek People.”
The trouble with the second category is that look at the can’t be only the fault of Greece as a polite way of saying it is not at all the fault of Greece.
The bleeding hearts seem to favor a total renunciation of responsibility by the profligates weather in international (PIIGS mess)or the local (sub prime mess).
This seems akin to saying the reckless should stick the prudent with all of the bill with no reformation needed by the reckless.
I know that German workers have average salaries that are several times those of Greeks, not counting other benefits (welfare, public housing, etc. – that in Greece are just a distant dream). Hence I know that Greek workers are already “punished” (exploited) much more than Germans are (for no reason at all other than maybe their relative lack of blue eyes and having fought against fascism in WWII and later, something most Germans did not).
That is what I know.
Did the right wing Greek government borrow too much? Get them and their support banksters to pay for it, never, in no case, the Greek People must pay. And I dare say that they won’t pay: that they are not paying already (they are not as a matter of fact among strikes and active tax and tariff disobedience) and that if the blackmail persists it will only backfire. Because Greeks may be poor and sturdy but they do have a character and a long tradition of revolutionary struggle, hard to find anywhere else in Europe or even in the World.
I know also that unpaid loans by bankrupt customers are a problem of the lender, not the bankrupt borrower. That’s why banks get an interest for: for their risk.
Sometimes things go bad and the normal thing to do is to write the debt out. There’s not even discussion about that. No trap rescues that include further debts, no: write the debt out even if that means no more loans because debt service is a burden that cannot be assumed beyond certain limits.
Actually Greece should have declared bankruptcy months ago but is not doing it partly as not to hurt “friendly” interests from German, French and other foreign bankers.
Whatever the case, if I have to choose between the bread of families or the new limo of your random Strauss-Khan bankster-rapist of nations, I have no doubt: bread comes first, second and third.
German workers have a higher salary because they earned it through higher efficiency, better organization of societies etc.
Nobody is punishing the Greek worker save his ability to collectively advance. That is the primary difference between an advanced economy and one that is not as advanced. (the fact that the second economy/populace did not do what is needed and hence currently has not what it takes). Bayern München is likely to consistently outperforms say AEK Athens FC because they are a stronger team not quite because they are punishing anyone. This fact in itself does not give AEK or its supporters the right to be stupid without consequence.
Yes there can and will be defaults. The point is there will also be consequence thereof impacting negatively future borrowings, credibility etc.
The nonsense of weakening the currency is just that cockamamie nonsense. Otherwise do you mean to suggest you hold would up prefer life under the Zimbabwean dollar as stellar?
“Greek workers” is a very heterogeneous group. In the private sector, whatever little is left of it, Greek workers are quite productive, which in plain terms means that they work hard and are paid little.
In the government controlled sector productivity is very low. Not only are people working very inefficiently, and in many cases very little, but salaries are much higher than most people suspect. I suspect that the typical worker at a German oil refinery makes less than his equivalent in Greece.
I grudgingly agree with Frankel on the “three mistakes”. First, and foremost, Greece should have never been admitted into the euro zone! Greece balanced its budget practically never in the period from 1970 to 1999 and relied on hefty currency devaluations to keep its economy competitive. Admitting Greece was the European Commission’s and EU heads of state’s mistake. Second, it was unfortunate that spreads on Greek bonds got so low. The Hellenic Republic and the Bundesrepublik paying the same interest rate? So much about the wisdom of markets! Third, the Maastricht conditions should have been imposed MUCH more stringently and Greece should have been sent to the IMF MUCH earlier, perhaps spring 2008. These last mistakes were made by the EU politicians.
I have already said more than once that the real problem is not state debt but two anomalous facts which are errors of the ECB or the deals behind this institution:
1. The euro is highly overvalued, maybe as much as 40%. This may help German economy (???) but hardly so the overall economy of the Union. The euro must have been kept at least somewhat weaker by the ECB and the other EU institutions.
2. The ECB should loan to states instead of private banks, at least as an option. Allowing private banks to speculate with public debt is a brutal mistake and putting the public thing under the private interests of an oligarchy. It’s totally against the most basic principles of democracy and even sovereignty (regardless of popular representation in decision-making).
Besides all that, the Greek state certainly had and still has some problems, notably the lack of taxation income (because it is some sort of de facto tax heaven for the very rich and corporations in general). This lack of taxation because of excessive reliance on salary and consumption taxes, all of which tax mostly the working class and not the elites nor companies, is behind the budgetary issues of all the stumbling states.
The only alternative is to increase taxation on the very rich and the corporations but that would require, at least to some extent, a concerted pan-EU effort, including protectionist measures in order to fence off derived damages to competitiveness.
So the solution (other than outright socialism or a Somalia scenario) must be:
1. Devalue the euro to near parity with the US dollar.
2. Allow the ECB to loan to the states (with a coherent mechanism but skipping the private banksters in any case).
3. Concerted effort to increase the taxation pressure on the elites and corporate profits.
4. Maybe some careful industrial protectionism (too many companies in the EU periphery can’t compete with imports from China and other states lacking working rights and environmental regulations).
Thank you, Maju, for considering the lives of others. Nobody (almost nobody in politics and economics) does anymore.
I repeat -The nonsense of weakening the currency is just that cockamamie nonsense. Otherwise do you mean to suggest you hold would up prefer life under the Zimbabwean dollar as stellar?
Currency essentially represents purchasing power. One cannot weaken it and then complain of low wages (because by weakening it you are effectively lowering wages in real terms)
Ideally I for one would prefer much as I can get as a compensation of spending my time and would like the “wage” I get to buy much as it can ergo would like a strong currency.
What Comrade Maju talks about is wealth transfers don’t confuse it with concern for lives of others. (and that flick (The Lives of Others played in a red country by the way)
Sovereign debt itself IS a mistake. The ability to service debt is the ability to issue one’s own currency debt-free:
“If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.” Thomas Edison from http://quotes.liberty-tree.ca/quote_blog/Thomas.Edison.Quote.6991
Not to get especially personal, F. Beard, but while quotes can serve a purpose, it is helpful for the discussion if you could do a little bit more work in applying it to the article being discussed at hand, rather than letting us fill in the dots.. As it is, I’m having trouble figuring out how you think your quote is pertinent to this specific article..
As it is, I’m having trouble figuring out how you think your quote is pertinent to this specific article.. Foppe
Greece should never have borrowed in the first place is the way it is pertinent.
A nation doesn’t have to sell bonds to destroy itself. It can issue it’s own debt-free currency and hyperinflate itself to destruction too. Either way is possible, if the folks running the show surf the Pilot Wave and not the Gnostic Wave. The Pilot Wave is the composition of the Gnostic Waves — Fourier Style. When the Gnostic Waves fluctuate in jumps of disharmony, then it takes a surpreme effort to re-integrate a righteous and empathetic Pilot Wave. It’s like if you can’t draw and try to do a portrait. You get a big mess — an eye there, a nose here and then a splotch of hair. But not a man. Although you patch it as you can, you don’t come close almost to man. A tune beyond us, not ourselves. Not the serendade of a man who plays a blue guitar. Here’s the footnote. LOL.
It can issue it’s own debt-free currency and hyperinflate itself to destruction too craazyman
There is an elegant solution to that – allow genuine private currencies. That way, if the government overspent relative to taxation then ONLY the government and its payees would suffer. Government itself would therefore have a very strong incentive to spend wisely.
“A nation doesn’t have to sell bonds to destroy itself. It can issue it’s own debt-free currency and hyperinflate itself to destruction too.”
A currency note is also just that a note akin to a zero maturity bond (i.e. debt)
A currency note is also just that a note akin to a zero maturity bond (i.e. debt) illusionist
Then what is currency redeemed for?
Hence currency can be debt-free.
Any “debt” is from taxpayers to the government and government issued currency is the means to pay that debt.
Government borrowing is thus completely unnecessary.
“Then what is currency redeemed for?”
There is an implicit redemption value. (“the full faith and trust of the govt” and similar mambo jumbo.)
That is why if you print (& weaken ) you are flirting with danger that the perception of trust turns to distrust.
This is why you cannot “excel model” your way out of a recession. Creative destruction is always a absolute unavoidable consequence of a debt binge. Sure you can work at the margins to less some pain but unless the markets (the vast majority of the folks) can see that there is genuine prudence that has been incorporated into policy there will no exit from the turbulence.
So by implication currency has implicit covenants of debt and therefore in effect there is no debt free currency.
The problem is with the euro itself, or rather with the philosophy that makes all euro nations monetarily non-sovereign. They all are in a straight jacket, not being able to create their sovereign currency.
The euro was a bad idea to begin with and remains a bad idea. In exchange for a slight trade convenience, they all gave up their Monetary Sovereignty. Over time, more euro nations will suffer Greece’s fate, until the only ones standing will be the large net exporters.
The UK was wise to keep its sovereign currency.
Rodger Malcolm Mitchell
The Euro also approximates a gold standard so we can see how well that would work out.
The solution to the money problem is liberty in money creation – liberty for governments to create as much money as they desire and liberty of the private sector to use private money alternatives to escape the “stealth inflation tax” should governments print too much.
“The problem is with the euro itself, or rather with the philosophy that makes all euro nations monetarily non-sovereign. They all are in a straight jacket, not being able to create their sovereign currency.”
While not being able to monetize debt does lead to some interim difficulty – the cause of the issue is gluttony when offered debt.
Remember without the Euro a good many of the peripherals many not be offered debt at all – and the cost to roll over may be even larger if offered.
Any solution needs to fix the fundamental issue – i.e. tendency to debt binge.
Any solution needs to fix the fundamental issue – i.e. tendency to debt binge. illusionist
1) Governments should never borrow in the first place so there should be no debt.
2) Government issued money should only be legal tender for debts to governments, taxes and fees, not private ones. That way, ONLY government and its payees would suffer if government overspent relative to taxation.
“1) Governments should never borrow in the first place so there should be no debt.”
__ I AGREE
“2) Government issued money should only be legal tender for debts to governments, taxes and fees, not private ones. That way, ONLY government and its payees would suffer if government overspent relative to taxation.”
SOUNDS NICE – not sure if it can be pulled off. Somebody (if not the Govt) will still do this task for private debt and the inherent dangers of not having clear prudent means of keeping the quantity reasonable within bounds (adequate to keep commerce flow and yet not excessive to make it a ponzi) will still need to be devised and overseen.
Somebody (if not the Govt) will still do this task for private debt illusionist
Not necessarily. If the government managed its money supply well then most would choose to use it for private debts too for convenience.
and the inherent dangers of not having clear prudent means of keeping the quantity reasonable within bounds (adequate to keep commerce flow and yet not excessive to make it a ponzi) will still need to be devised and overseen. illusionist
Without government privilege such as a lender of last resort, government deposit insurance, etc. and the usual laws against fraud and insolvency then free market competition should keep private currencies in check.
“The UK was wise to keep its sovereign currency.”
If profligacy continues it is true the queens mug shot will still look better than Robert Mugabe’s by a hair.
One aspect touched on is the dysfunctional relationship between the IMF and the ECB re the reparations packages.
What is the logic behind the IMF part of the loans demanding a different interest rate to the EU loans?
If these loans are supposed to aid countries rescue themselves then one can conclude the higher interest rate charged by the EU has a punitive element attached to it.
And this is how the EU is now viewed by the peripheral countries ;as the jackbooted partner to the IMG good cop.
Well, okay, the US federal government does not bail out state governments, but it sure does pour cash into suffering states. The EU federal government would have to do the same if the solution is to be comparable.
Now the reason the US federal government helps the people of hurting states is that they have a vote in the federal government. In the absence of similar democracy-with-teeth in the EU, central states like Germany may think they can carry on bringing the pain, and so gaining the benefits of single currency while saving themselves money, without consequence. But if the people can’t vote to hurt the federation that’s hurting them, they’ll eventually vote to make the EU state they’re in leave the EU.
Creative destruction is always a absolute unavoidable consequence of a debt binge. illusionist
1) The debt was created by what in essence is a government enforced counterfeiting cartel; it is thus morally invalid.
2) Since the debt is morally invalid it follows that debt-forgiveness or equivalent such as a bailout of the entire population is called for along with abolition of counterfeiting cartel.
“Since the debt is morally invalid it follows that debt-forgiveness or equivalent such as a bailout of the entire population is called for along with abolition of counterfeiting cartel.”
In effect this would also be stealing from anyone who was prudent. I find that thought despicable and therefore feel whatever new paradigm emerges will not be sustainable without in effect first rewarding the prudent.
I find that thought despicable and therefore feel whatever new paradigm emerges will not be sustainable without in effect first rewarding the prudent.
That’s why the entire population, including savers, should receive an equal bailout check of new, debt-free full legal tender fiat. The banking cartel cheats both borrowers and savers so both should be bailed out.
Of course we need fundamental reform too, to prevent the problem from reoccurring.
Savers should get more
– or else if effect they are being punished. Where is the “recompense”for delaying gratification & not endangering the system yada yada. If you now hit the rest button they get neither the pleasure of consumption nor the reward for forbearance.
Where is the “recompense”for delaying gratification & not endangering the system yada yada. illusionist
The borrowers would merely be out of debt. The savers would be out of debt PLUS have a big wad of cash.
Plus, with fundamental reform, the savers would likely receive much higher real interest rates.
OK – Under the right numbers I can buy that.
If – This could be engineered to be more or less similar in effect to a depression/ deep recession (creative destruction). The good consequence is it may without the negative emotional baggage of a depression – but only if “Of course we need fundamental reform too, to prevent the problem from reoccurring.”
Otherwise you open a Pandora’s box and next time around o boy the the debt binge will be a monster.
Under the right numbers I can buy that. illusionist
The minimum bailout total should be the total “underwaterness” of the US housing market times TWO since that is the minimum Biblical penalty for deliberate theft.
I would err on the side of generosity though since we should not wish to repeat the bailout.
“The minimum bailout total should be the total “underwaterness” of the US housing market times TWO since that is the minimum Biblical penalty for deliberate theft.”
Two issues – 1). “underwaterness”is a moving target and could change (even going over water) depending on circumstances. 2). Let us keep this out of the realm of religiosity ( including and not restricted to Harry Potter books)
Also under the mechanics you describe –
Where is this going to be financed/ how does the transfer from the old to new paradigm facilitated.
That is why the easier and practical solution is a depression or alternately currency event hyperinflation that will in effect reset the game. Unfortunately while it will achieve your results it will be accompanied by a lot of painful destruction. Your original scenario has promise but falls short on mechanics to create the paradigm shifts needed. Still the concept has promise.
Considering this description of how dysfunctional the Greek society is, the surprising thing is that its candidacy as a European Union member was even considered to begin with.
I’m not sure what you’re trying to say with your post (it’s a tad open-ended ;)), but as I tried to point out in my own post, technocratic considerations played little to no part in the choice to admit Greece, Spain and Portugal into the EU. They were admitted because the EU felt a desire to strengthen the then-fledgling democracies, and did not want those countries to “fall back” into autocratic rule. So while it is probably correct to state that they would not have been let in, had economic considerations played a role, it is also beside the point, because ideological reasons trump those. (Something readers of NC should be quite familiar with.)
Where is this going to be financed/ how does the transfer from the old to new paradigm facilitated. illusionist
1) Set reserve requirements to 100% (pending full reform) to put banks out of the counterfeiting business and to preclude serious price inflation from 2)
2) Send every US citizen a big and equal check of new debt-free full legal tender fiat.
3) After allowing a period of time for the debt to clear then implement fundamental reform including separate government and private money supplies. The Fed would be abolished and banks would be on their own. Legal tender laws for private debt would be repealed and also the capital gains tax. Genuine alternative private currencies would be allowed which would only be acceptable for private debts, not government ones.
It is a little more complex than that;
“1) Set reserve requirements to 100% (pending full reform) to put banks out of the counterfeiting business and to preclude serious price inflation from 2)”
There will be an instant dislocation in that banks would need to call back all loans made thus far if the limit is to be applied to existing loans causing tremendous chaos. If applied only prospectively it would still be extreme chaos and further banks, companies and constituents would game the system by retro activating the loans leading automatically to hyperinflation.
At any rate I this the loans per se are not the issue – it is off balance sheet debts and counter party risks of derivatives ( out of the money option if you will) that pose the risks and Margins by themselves do not address this.
“2) Send every US citizen a big and equal check of new debt-free full legal tender fiat.”
In effect you are suggesting tearing a new A hole on every foreign investor and counter parties in a very inter connected world. Really think it will pass with out retaliation or that anyone will want to do business again here?
It is a little more complex than that; illusionist
I never said I had all the answers; feedback is appreciated. :)
“1) Set reserve requirements to 100% (pending full reform) to put banks out of the counterfeiting business and to preclude serious price inflation from 2)” FB
There will be an instant dislocation in that banks would need to call back all loans made thus far if the limit is to be applied to existing loans causing tremendous chaos. illusionist
The 100% reserve requirement would only apply to new loans not existing ones.
If applied only prospectively it would still be extreme chaos and further banks, companies and constituents would game the system by retro activating the loans leading automatically to hyperinflation. illusionist
Let them try. The Fed discount window would be permanently closed and no more open market purchases (or sales) would be allowed either. Leverage would be a lot more risky.
At any rate I this the loans per se are not the issue – it is off balance sheet debts and counter party risks of derivatives ( out of the money option if you will) that pose the risks and Margins by themselves do not address this. illusionist
I would think a huge injection of real legal tender via new deposits for savers and paid off debt for savers would be good for the banks.
“2) Send every US citizen a big and equal check of new debt-free full legal tender fiat.” FB
In effect you are suggesting tearing a new A hole on every foreign investor and counter parties in a very inter connected world. illusionist
Not really. Since US banks would find it difficult to leverage that new cash safely (without the Fed) then price inflation should not be serious.
Really think it will pass with out retaliation or that anyone will want to do business again here? illusionist
Why not? A bailout from under fascism and genuine reform should be good for business.
F. Beard – I enjoyed the conversation.
I do think your idea is interesting. I see the potentialities as an intellectual exercise just need to think a little further on the mechanics.
At any rate good talking. Will look for your posts.
I see the potentialities as an intellectual exercise just need to think a little further on the mechanics. illusionist
Ideas have to start somewhere.
Thanks for the feedback!
I think these two opinion articles recently published at New Europe are of interest regarding the “Greek crisis” and the general bankster debt fraud:
– Ralph T. Niemeyer, Deutsche Bank’s trick- German SPIEGEL Magazine’s “Greek Oracle” undermines democracy. A strong criticism on how the German and other media is playing in the hands of the banksters in this speculative “crisis” (setup).
– Eurozone banks v Nations: Are banking firms more endurable than major European countries? (not signed) – A criticism of the fallacy of private companies and banks being “more solvent” than sovereign states.
NE is a Brussels-based media, however it has a more balanced approach to European affairs than other NW European ones. It is extremely important to see this pseudo-crisis from the viewpoint of someone else than NW European and US banksters (and their political and media lackeys), who are so obviously manipulating the whole matter to cause defaults in Greece and elsewhere…