Who Fixes the Euro?

[Renew Deal]

Talking to an Irish friend recently, I got a splendid take on the euro-crisis. As he pointed out, there are two sides to the growing European sovereign debt crisis. Yes, the feckless peripheral countries on the fringe engaged in an ill-judged splurge on property and their governments borrowed and spent with abandon.

But the banks holding the savings of the core members — including most of Germany's supposedly stodgy but actually reckless state banks — were happy to fuel the binge. They may also have counted on an implicit guarantee from their governments. Although bailing out the improvident Greeks might strike voters as a bad idea, letting Germany's state banks go to the wall would be far worse.
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Even if Europe gets through the current crisis, politicians need to face up to what it tells us about the euro-venture. The crisis is a result of predictable behaviors. The peripheral countries are populated by optimistic younger citizens. The richer countries are populated by older people concerned who want to put the memory of a poorer, hard-working past behind them and enjoy an affluent old age.
<snip>

But remove the currency markets and you take away the constant credit rating service the currency markets provided. You also took away the explicit need to provide for the currency risk. To replace all that the banks ought to have undertaken keener credit analyses, probably resulting in higher margins on loans to the peripheral countries. Why didn't they?
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http://blogs.hbr.org/hbr/hbreditors/2011/06/who_fixes_the_euro.html

[bemildred]

1. "letting Germany's state banks go to the wall would be far worse"

See, this is what is called "begging the question" or "assuming that which you wish to prove". Saving the banks is a good idea ONLY if they are thoroughly reformed, recast, and regulated so as not to fuck up in the same way again soon. Otherwise, one is better off to let them crash and die so as to 1.) be able to start over fresh and 2.) save the future costs of the future disasters that the unreformed banks will facilitate and participate in.

[orangeapple]

2. in this case

"regulated so as not to fuck up in the same way again soon"

'fucking up' means 'loan the government money'.

I asked my European (online) acquaintances when this whole experiment started what would stop one government from spending money it couldn't repay, essentially inflating on the back of other EU States. With France and Germany blowing off the deficit limits in the stability pact, what hope would there be that other nations would abide by them?

[bemildred]

3. Money comes from governments, not from banks.

Banks can do only what governments allow them to do. The notion that banks creating money out of nothing and "loaning" it to the government is somehow better than governments creating money out of nothing is ridiculous. The banks have shown themselves to be - at best - no better than governments in being disciplined about the creation of money from nothing, and on occasion they have stooped to outright fraud. At minimum they (banks) ought to be severly regulated if we are to allow them to create money from nothing. Investment bankers have the principles of minks in heat and the instincts of riverboat gamblers, and ought not be allowed anywhere near the public money supply.

[orangeapple]

4. money came from the market

"Banks can do only what governments allow them to do."

And governments let banks loan governments money. This is because in general governments like to spend more than they dare to tax.


"The notion that banks creating money out of nothing and "loaning" it to the government is somehow better than governments creating money out of nothing is ridiculous."

before governments ever got in on the act.

One of the existing banking regulation is that governments allow banks to create money out of nothing.
I'm not a fan of central bank cartels and fractional reserve lending of fiat money (see my sig), but the tenets of fractional reserve banking does put a limit on monetary expansion that a Treasurer with a printing press wouldn't have, and for that reason alone is superior. Would you really take the Zimbabwe fiscal situation over the EU's?


"The banks have shown themselves to be - at best - no better than governments in being disciplined about the creation of money from nothing, and on occasion they have stooped to outright fraud."

Fiat money is the real fraud. The sooner we take steps to eliminate it the sooner our economy can return to a sound footing, establishing prices on supply and demand instead of hunches about how many billions the Fed or Congress will create in debt tomorrow.


"At minimum they (banks) ought to be severly regulated if we are to allow them to create money from nothing. Investment bankers have the principles of minks in heat and the instincts of riverboat gamblers, and ought not be allowed anywhere near the public money supply."

Congressional inclinations can hardly be demonstrated superior. I suggest we eliminate the legal tender laws and return to sound money. Those institutions that overleverage can reap the consequences without The Bernank and his printing press rushing to their rescue, or Congressman with the taxpayer's checkbook for that matter.

[bemildred]

5. We could probably find some common ground.

I think it is not correct to assume that any country that uses fiat currency will become Zimbabwe, and all currency nowadays is in fact fiat currency, if one omits the small amount of coinage that has actual precious metal in it, and therefore it appears to be at least feasible - if not guaranteed to happen - to manage fiat currency well, since some nations do manage it. One is done in by corruption in government rather than any intrinsic property of fiat currency, which is after all just pieces of paper, and I doubt that if one has a corrupt government somehow having a hard currency will save you.

I am not one to defend the probity or good sense of Congress or politicians, but I do not consider that the financial community is any better. I have worked for a broker/trading firm, so I do have some experience.

The one thing I will say about politicians is that the thing that annoys me most about them is not that they sell out, but that they sell out so cheap.

Nonetheless, I stand by the assertion that mediating a fiat currency regime by inserting private banks into it does not in fact result in a better situation, it just makes it easier to obfuscate what is going on.