Goldman Sachs Pressed for Derivatives Data
Jul 1, 2010
Goldman Sachs Group Inc. refused a request from the Financial Crisis Inquiry Commission to reveal how much it makes trading derivatives, saying the bank doesn’t separate the figure from other businesses.
“Some other firms have provided us with that data when we’ve asked for it and Goldman Sachs hasn’t,” Commissioner Brooksley Born said today in Washington on the second day of a hearing investigating the role of derivatives in the 2008 credit crisis, which sparked the worst recession since the 1930s. “It makes one wonder why Goldman has the incentive or impetus to not release this information.”
Banks including JPMorgan Chase & Co., the biggest derivatives dealer, have provided estimates to investors. The top five U.S. commercial banks, including Goldman Sachs, generated an estimated $28 billion in revenue from privately negotiated derivatives in 2009, according to company reports collected by the Federal Reserve and people familiar with banks’ income sources.
Goldman Sachs, the most profitable Wall Street firm in history, is being questioned about credit-default swap trades with American International Group Inc., the insurer bailed out by the U.S. government after AIG was unable to meet collateral demands from trading partners on the contracts. The swaps, used by Goldman Sachs and other banks to hedge against declines in the value of mortgage-linked debt, caused losses at AIG as housing prices collapsed.
Goldman Sachs Chief Financial Officer David Viniar testified today that the firm has no way of separating out its derivatives data from trading in cash securities.
“We don’t have a separate derivatives business,” Viniar told the panel. “It’s integrated into the rest of our business.”
Commissioner Byron Georgiou said he doubted Goldman Sachs was unable to provide the information.
“When you tell us that you don’t know how much you make in your derivatives business, nobody here really believes it,” Georgiou told Viniar. “Nobody here believes that you don’t know how much money you’re making on the various aspects of your business, it doesn’t make any sense.”
Goldman Sachs held a gross amount of $49.1 trillion of derivatives contracts as of March 31, according to an Office of the Comptroller of the Currency report last month. The bank reported total trading revenue of $7.65 billion during the first quarter. That follows total trading revenue of $23.2 billion in 2009, according to a filing with the Federal Reserve.
“It’s kind of dangerous, don’t you think, to claim to the FCIC that you don’t know the profitability of a major line of business,” said Craig Pirrong, a finance professor at the University of Houston. “How can you rationally allocate capital, for instance, if you don’t know the return to that capital?”
Under a March 2008 amendment to derivatives accounting standards, companies are exempt from breaking out gains or losses on derivatives used as part of a trading book that also includes cash securities, if other information on the trading activities is provided, according to the Financial Accounting Standards Board’s Statement No. 161.
Goldman Sachs is “definitely capable of providing the data that was asked for, but I can understand their fear of doing so,” said Brian Yelvington, head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut, and a former credit swaps trader.
“There is a potential for such a number to vastly overstate the amount of profit or loss captured by a particular business because much of that business may be symbiotic with another,” Yelvington said. “They may have made money on the derivatives leg of a trade, for example, and lost it on the cash leg.”
JPMorgan said in February 2009 that about 8 percent of its total revenue from 2006 to 2008 came from derivatives in its investment-banking unit, according to a presentation made to investors.
That breakdown and revenue figures from regulatory filings imply that half of JPMorgan’s $31.2 billion in trading revenue those years came from derivatives, according to Alexander Yavorsky, a senior analyst at Moody’s Investors Service in New York.
“Reporting a revenue number, just the profit on derivatives without looking at cash positions associated with hedging those, is going to be a highly imprecise exercise,” Yavorsky said in an interview today.
Goldman Sachs was subpoenaed by the commission last month after the New York-based firm sent more than a billion pages of documents to the panel, a shipment so sizable that panel members called it an attempt to hinder their probe.
“We did not ask them to pull up a dump truck to our offices and dump a bunch of rubbish,” Chairman Phil Angelides, who previously served as California’s treasurer, said June 7. “This has been a very deliberate effort over time to run out the clock.”
The commission, which will report its findings to Congress and President Barack Obama by December, said June 29 that the bank had been more responsive to information requests since being subpoenaed. Separately, Goldman Sachs faces a U.S. Securities and Exchange Commission fraud suit over sales of a mortgage-linked security. The bank has said the SEC suit is unfounded.
Born had warned in 1998, as chairman of the Commodity Futures Trading Commission, that the unregulated over-the- counter derivatives market posed a danger to the global financial system. She moved to address changes in how swaps based on interest rates, commodities or currencies were traded and was stopped by then-Federal Reserve Chairman Alan Greenspan, SEC Chairman Arthur Levitt and Treasury Secretary Robert Rubin, who all argued the market could regulate itself.
Born said last year that the banks that caused the crisis were trying to stop the congressional overhaul of the market.
“Special interests in the financial-services industry are beginning to advocate a return to business as usual,” Born said in May 2009 as she accepted a Profile in Courage award from the John F. Kennedy Library Foundation.---------------------------------------------------------------------------------------------------------------
28 Jun 2010
Both fiscal and monetary policy may have to be tightened at the same time and before recovery is entrenched, a chilling possibility for asset markets. "Macroeconomic support has its limits," said the bank's annual report.
The Swiss-based "bank for central bankers" said ultra-low rates and massive fiscal stimulus saved the world from an economic meltdown during the credit crisis, but the balance of advantage has since shifted.
"Such powerful measures have strong side-effects, and their dangers are becoming apparent. The time has come to ask how they can be phased out," it said.
"There are limits to how long monetary policy can remain expansionary. Keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risks for financial stability. We cannot wait for the resumption of strong growth to begin the process of policy correction."
The clarion call for higher rates and an end to quantitative easing is controversial and pits the BIS against the International Monetary Fund in an epochal policy battle. If wrong, the BIS strategy risks pushing the global economy into depression.
Dominique Strauss-Kahn, the IMF chief, warned against zealous self-flagellation at the G20 summit. "It could be a catastrophe if all the countries were tightening, it could totally destroy the recovery."
Gabriel Stein, of Lombard Street Research, said the BIS is playing with fire. "Fiscal and monetary tightening were tried in tandem in the early 1930s and it didn't work then. The BIS ought to know better," he said.
The bank said the US and Europe made the fatal error of holding rates too low after the dotcom bust, fearing a slide towards deflation. The effect was to fuel asset bubbles and depress credit yields, pressuring lenders to chase risk. "Our recent experience with exactly these consequences a mere five years ago should make us extremely wary this time around," it said.
The BIS warned that central banks are luring banks into a fresh trap by shoring up lenders with cheap access to short-term funding, which is then used to buy long-dated bonds at higher yield – the so-called sovereign "carry trade". Some have already been caught out badly in Greek debt.
"Financial institutions may underestimate the risk associated with this maturity exposure. They might face difficulty rolling over their short-term debt. An unexpected tightening of monetary policy might cause serious repercussions," it said.
The parallel with post dotcom errors is likely to rile critics. Housing markets and banks were robust at the time, whereas the damage now is deeply structural in the US, Britain and Europe. Yet the BIS has clearly concluded that it is better for indebted economies to take their punishment early rather than dragging out the ordeal as in Japan.
On the spending side, the bank called for "immediate front-loaded fiscal consolidation" in key industrial states. "Public debt-to-GDP ratios are on unsustainable trajectories," rising from 76pc of GDP in 2007 to 100pc in 2011. The picture is worse than it looks since the crisis has "permanently" reduced output, and aging costs are soaring.
Yet fiscal austerity may be less of a drag on recovery than presumed. Denmark slashed its primary deficit by 13.4pc of GDP from 1983-1986, yet eked out growth of 3.9pc a year. Sweden grew by 3.7pc during its hair-shirt episode in the 1990s, Canada by 2.8pc, and Belgium by 2.3pc.
These cases do not tell us what would happen if half the world tightens at the same time, feeding on each other. Even so, the BIS data challenges Keynesian claims about fiscal stimulus. State spending merely "crowds out" private activity.
Besides, governments have no choice. They must retrench to appease the bond vigilantes in the new era of sovereign frailty. "A sudden loss in market confidence would be far worse," said the BIS.
RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve
27 Jun 2010
Entitled "Deflation: Making Sure It Doesn’t Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.
The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost."
Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE).
Investors basking in Wall Street's V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing.
The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era.
The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month. This is a volatile index that can be distorted by the supply of new ships, but those who watch it as an early warning signal for China and commodities are nervous.
Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)".
"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors.
Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure said this is the option "which I personally prefer".
A recent paper by the San Francisco Fed argues that interest rates should now be minus 5pc under the bank's "rule of thumb" measure of capacity use and unemployment. The rate is currently minus 2pc when QE is factored in. You could conclude, very crudely, that the Fed must therefore buy another $2 trillion of bonds, and even more if Europe's EMU debacle goes from bad to worse. I suspect that this hints at the Bernanke view, but it is anathema to hardliners at the Kansas, Richmond, Philadephia, and Dallas Feds.
Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said.
Despite the apparent rift with Europe, the US is arguably tightening fiscal policy just as hard. Congress has cut off benefits for those unemployed beyond six months, leaving 1.3m without support. California has to slash $19bn in spending this year, as much as Greece, Portugal, Ireland, Hungary, and Romania combined. The states together must cut $112bn to comply with state laws.
The Congressional Budget Office said federal stimulus from the Obama package peaked in the first quarter. The effect will turn sharply negative by next year as tax rises automatically kick in, a net swing of 4pc of GDP. This is happening as the US housing market tips into a double-dip. New homes sales crashed 33pc to a record low of 300,000 in May after subsidies expired.
It is sobering that zero rates, QE a l'outrance, and an $800bn fiscal blitz should should have delivered so little. Just as it is sobering that Club Med bond purchases by the European Central Bank and the creation of the EU's €750bn rescue "shield" have failed to stabilize Europe's debt markets. Greek default contracts reached an all-time high of 1,125 on Friday even though the €110bn EU-IMF rescue is up and running. Are investors questioning EU solvency itself, or making a judgment on German willingness to back pledges with real money?
Clearly we are nearing the end of the "Phoney War", that phase of the global crisis when it seemed as if governments could conjure away the Great Debt. The trauma has merely been displaced from banks, auto makers, and homeowners onto the taxpayer, lifting public debt in the OECD bloc from 70pc of GDP to 100pc by next year. As the Bank for International Settlements warns, sovereign debt crises are nearing "boiling point" in half the world economy.
Fiscal largesse had its place last year. It arrested the downward spiral at a crucial moment, but that moment has passed. There is a time to love and a time to hate, a time for war and a time for peace. The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan. The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes.
Some say that the Fed's QE policies have failed. I profoundly disagree. The US property market - and therefore the banks - would have imploded if the Fed had not pulled down mortgage rates so aggressively, but you can never prove a counter-factual.
The case for fresh QE is not to inflate away the debt or default on Chinese creditors by stealth devaluation. It is to prevent deflation.
Bernanke warned in that speech eight years ago that "sustained deflation can be highly destructive to a modern economy" because it leads to slow death from a rising real burden of debt.
At the time, the broad money supply war growing at 6pc and the Dallas Fed's `trimmed mean' index of core inflation was 2.2pc.
We are much nearer the tipping today. The M3 money supply has contracted by 5.5pc over the last year, and the pace is accelerating: the 'trimmed mean' index is now 0.6pc on a six-month basis, the lowest ever. America is one twist shy of a debt-deflation trap.
There is no doubt that the Fed has the tools to stop this. "Sufficient injections of money will ultimately always reverse a deflation," said Bernanke. The question is whether he can muster support for such action in the face of massive popular disgust, a Republican Fronde in Congress, and resistance from the liquidationsists at the Kansas, Philadelphia, and Richmond Feds. If he cannot, we are in grave trouble.
The age of easy credit and its aftermath Is there life after debt?
Rich countries borrowed from the future.
Paying the bill will be difficult, and so will living in a thriftier world
Jun 24th 2010
DEBT is as powerful a drug as alcohol and nicotine. In boom times Western consumers used it to enhance their lifestyles, companies borrowed to expand their businesses and investors employed debt to enhance their returns. For as long as the boom lasted, Mr Micawber’s famous injunction appeared to be wrong: when annual expenditure exceeded income, the result was happiness, not misery.
For a long time debt in the rich world has grown faster than incomes. As our special report this week spells out, it is not just government deficits that have swelled. In America private-sector debt alone rose from around 50% of GDP in 1950 to nearly 300% at its recent peak. The origins of the boom go even further back, reflecting huge changes in social attitudes. In the 19th century defaulting borrowers were sent to prison. The generation that lived through the Great Depression learned to scrimp and save. But the wider take-up of credit cards in the 1960s created a “buy now, pay later” society. Default became just a lifestyle choice. The reckless lender, rather than the imprudent debtor, was likely to get the blame.
As consumers leveraged up, so did companies. The average bond rating fell from A in 1981 to BBB- today, just one notch above junk status. Firms that held cash on their balance-sheets were criticised for their timidity, while bankruptcy laws, such as America’s Chapter 11, prevented creditors from foreclosing on companies. That forgiving regime encouraged entrepreneurs (in Silicon Valley a bankruptcy is like a duelling scar in a Prussian officers’ mess) but also allowed too many zombie companies to survive (look at the airlines). And no industry was more addicted to leverage than finance. Banks ran balance-sheets with ever lower levels of equity capital; private equity and hedge funds, which use debt aggressively, churned out billionaires. The road to riches was simple: buy an asset with borrowed money, then sit back and watch its price rise.
All this was encouraged by the authorities. Any time a debt crisis threatened the economy, central banks slashed interest rates. The prospect of such rescues reduced the risk of taking on more debt. Bubbles were created, first in equities, then in housing. It was a monetary ratchet, in which each cycle ended with much higher debt and much lower interest rates. The end-game was reached in 2007-08 when investors realised a lot of this debt would not be repaid. As the credit crunch tightened, central banks had to cut short-term rates to 1% or below.
And now the reckoning
Rich-world countries now face two sets of problems. The most pressing is how to pay off their debts. Many people who have cut back their credit-card spending and firms which have seen their credit lines slashed would be horrified to see how little the rich world’s overall burden has fallen. Much of the debt has merely moved from the private to the public sector as governments have correctly stepped in to support banks and save the economy from falling into depression. And in the future, even more money will have to be raised, because of governments’ lavish promises of pensions and health care for the retiring baby-boom generation.
All this debt will have to be regularly refinanced and rolled over. Crises of confidence are likely, given that the rich world’s trend rate of growth (and thus the ability of debtors to service their loans) looks set to slow. Worse, much private debt is secured against assets; while the value of the debt is fixed, the value of the assets can fall. This can cause a vicious circle as debtors are forced to sell assets, driving prices down.
Piling up more debt does not seem an option. There is little appetite on behalf of borrowers or creditors. All governments face the tricky balance of appeasing the markets without damaging growth: Britain’s new government had a go this week (see article). But living with less debt will present a second set of longer-term challenges.
A rich world with less debt would look very different. Banks are already facing demands for higher capital ratios (and thus safer balance-sheets). Western consumers, facing higher taxes and lower benefits, will no longer have the freedom to spend; indeed, they will want to save more as they face long retirements. Sarah Jessica Parker and her Manolo Blahniks will be out; Grandma Walton and her sensible apron will be in. Houses will once again be somewhere to live, not vehicles for speculation. Some business models, notably private equity, will find it tougher to thrive. Life will be harder for entrepreneurs: more than half of all new firms rely on debt finance.
For policymakers, the priorities are clear. First, they need to focus on generating growth. America, with its relatively young, rising population, will find that comparatively easy. Continental Europe, by contrast, runs the risk of ending up like Japan, which has spent two decades struggling to grow in the face of its debt burden and ageing population. The best and the brightest young Europeans may emigrate to countries without such burdens; and if the economy stagnates, those that remain may eventually decide either to default on their debts, or to cut benefits to the elderly. Faced with those dangers, Europe needs to embrace the structural reforms necessary to make its economies as fast-growing and flexible as possible.
Second, policymakers need to begin the long task of rebalancing the world economy. It makes sense for Western countries, like workers in their 50s, to save for retirement rather than run up their credit-card bills. But if one lot of people saves, another must borrow. At the moment the developing world is unwilling to run current-account deficits; even getting China to save less is a huge task (see article). All the same, a shift is in everybody’s long-term interest—and the younger parts of the world should be the borrowers.
Weaning rich countries off their debt addiction will cause withdrawal symptoms. Austerity does not appeal to voters, who may work off their frustrations on politicians and (worse) foreigners. Mr Micawber’s phrase may be turned on its head again. When annual income is forced to exceed annual expenditure, the result may well be misery.
An interactive chart allows you to compare how the debt burden varies across 14 countries and to examine different types of borrowing
Germany and France examine 'two-tier' euro
Germany and France are examining ways of creating a "two-tier" euro system to separate stronger northern European countries from weaker southern states.
Alex Spillius in Washington and Bruno Waterfield in Brussels
19 Jun 2010
A European official has told The Daily Telegraph the dramatic option was being examined at cabinet level.
Senior politicians believe their economies need to be better protected as they could not cope with another crisis on a par the one in Greece.
The creation of a "super-euro" zone would initially include France, Germany, Holland, Austria and Finland.
The likes of Greece, Spain, Italy, Portugal and even Ireland would be left in a larger rump mostly Mediterranean grouping.
The official said French and German officials had first spent months examining how to exclude poor-performing states from the euro but decided it was not feasible.
A two-tier monetary system in the 16-member euro zone is being examined as a "plan B".
"The philosophy is the stronger countries might need to move away from countries they can't afford to bail-out," said the official. "As a way of containing the damage, they may have to do something dramatic, though obviously in the short term implementation is difficult.
"It's an act of desperation. They are not talking about ideal solutions but the lesser of evils. Helping Greece could be done relatively cheaply but Spain they can't afford to let fail or bail-out.
"And putting more pressure on the people of France and Germany to save other countries is politically unfeasible."
One option, to protect the wealthier northern European countries and to help indebted southern Europeans, would be for Germany to lead a group of countries out of the existing euro into a new single currency alongside the old.
The old euro would decline sharply against the new German and French dominated currency but both north and southern Europeans would be protected.
Northern economies would be protected from debt contagion and southern countries would be spared the horrors of being thrown out and forced to go it alone.
Angela Merkel, the German Chancellor, has already paid a political price for forcing the rescue plan on a reluctant public, losing her majority in the upper house of parliament in a recent election.
The official pointed out that France held lent £500 billion to Spain and the Germans had lent £335 billion.
Nicolas Sarkozy, the French president, is understood to have been initially cool on the idea but has grown so frustrated with Greece and now Spain that he has allowed officials to explore proposals.
"He would prefer to keep the euro in place but if Spain, Italy and Greece are dragging him down he accepts he may have to cut them loose," said the official. "They are trying to contain the contagious effect but they don't have a solution yet."
The crunch time will come in September, when Spain has to refinance £67 billion of its foreign debt.
"If the markets don't buy that will trigger a response by Germany and France," said the official.
Expelling a country from the euro could push the whole region into a slump because European banks are so exposed to debt in southern Europe. The consequences for the exiting country would be even more catastrophic.
"The euro zone debt crisis has a long way to run," said one senior EU negotiator. "No one knows where it is going to end up. Only one thing is sure, the euro zone will change."
Italian economists slam austerity measures
17 Jun 2010
"The `politics of sacrifice' in Italy and in Europe run the risk of accentuating the crisis in the end, causing a faster rise in unemployment and company failures, and could at a certain point compel some countries to leave monetary union. We must have an immediate debate on the extremely grave errors in economic policies now being committed," the economists said.
"The fundamental point is that the current instability of monetary union is not just the result of accounting fraud and over-spending. In reality, it stems from a profound interweaving of the global economic crisis and imbalances within the eurozone."
The letter, which has echoes of a famous letter to The Times by 360 economists denouncing the Thatcher cuts in the early 1980s, was drafted by a network of Left-leaning Keynesian economists and published by Il Sole.
The letter accused the EU authorities and leading governments of being out of step with modern economic thinking, marking the first clear revolt by parts of the eurozone's intellectual elite against EMU orthodoxies and especially against the "deflationary economic policies" being imposed by Germany.
The group said states might choose to leave EMU in order to end job destruction.
"Some countries will be pushed out of the eurozone, others will break away to free themselves from a deflationary spiral."
The euro mutiny begins
Ambrose Evans-Pritchard June 16th, 2010
The rebellion against the 1930s fiscal and monetary policies of the Euro-complex is gathering pace.
Il Sole has published a letter by 100 Italian economists warning that the austerity strategy imposed by Brussels/Frankfurt risks tipping Europe into a self-feeding downward spiral. Far from holding the eurozone together, it will cause weaker countries to be catapulted out of EMU. Others will leave in order to restore sovereign control over their central banks and unemployment policies.
At worst it will blow the EU apart, leading to the very acrimony that the European Project was supposed to prevent.
For readers of Italian, it’s here.
While I don’t share the big-state Left-Keynesian perspective of these professors — nor their implicit hostility to the free market — I do agree with much of their overall analysis.
My rough translation:
“The grave economic global crisis, and its links to the eurozone crisis, will not be resolved by cutting salaries, pensions, the welfare state, education, research …….. More likely, the `politics of sacrifice’ in Italy and in Europe runs the risk of accentuating the crisis in the end, causing a faster rise in unemployment, of insolvencies and company failures, and could at a certain point compel some countries to leave monetary union.
“The fundamental point to understand is that the current instability of monetary union is not just the result of accounting fraud and over-spending. In reality, it stems from a profound interweaving of the global economic crisis and imbalances within the eurozone …..
It blames the crisis on the “deflationary economic policies” of the richer states. “Especially Germany, geared for a long time to holding down salaries in relation to productivity, and to the penetration of foreign markets, gaining European market share for German companies…
They say the policy has led to growing surpluses in Germany, offset by growing debts in Southern Europe. The adjustment mechanism has not only failed. Matters have got worse, and worse.
“This is the deeper reason why market traders are betting on a collapse of the eurozone. They can see that as the crisis drags on this will cause tax revenues to fall, making it ever harder to repay debts, whether public or private. Some countries will progressively be pushed out of the eurozone, others will decide to break away to free themselves from a deflationary spiral… It is the risk of widespread defaults and the reconversion of debts into national currencies that is really motivating bets by speculators.
The economists denounced the “obstinacy” with which the EU authorities and governments are pursuing “depressionary policies”, and called on the European Central Bank to abandon its policy of “sterilizing” purchases of Greek, Portuguese, and Spanish bonds, and move to fully-fledged quantitative easing to boost the money supply.
“We must have an immediate debate on the extremely grave errors in economic policies now being committed..
Si, Signori .. Bravissimi.
Just to be clear, I do not share their Krugmanite view that huge fiscal deficits are benign. In my view, it is imperative that the whole western world reduces debt in a orderly fashion over 10 to 15 years. Pacing is crucial. Too fast can be self-defeating. Too slow is not an option.
My objection with the EU’s mix of policies is that extreme fiscal austerity is being imposed on a string of countries without offsetting monetary stimulus. (Yes, I know, some will say that I am mixing apples and oranges).
Ireland, Spain, and Portugal have already tipped into outright deflation. Ireland’s nominal GDP has contracted 18.6pc since the peak. They are falling deeper into an Irving Fisher debt-deflation trap.
This is reactionary folly. The College of European Commission should be taken out and horse-whipped outside the Breydel Building for demanding yet further cuts from Spain — which is already cutting wages 5pc this year, in an economy where total public /private debt is 280pc of GDP or more. Can nobody think of a more coherent way out of this?
As for Germany, frankly it is hard to know what to say. It is astonishing that Chancellor Merkel should unveil an €80bn package of fiscal retrenchment without consulting with the rest of Europe. This has raised the bar for everybody else, forcing them into yet further contractionary policies to keep up. Mrs Merkel does not begin to understand the nature of commitment made by Germany when it launched monetary union.
EMU has become an infernal machine. This will not be the last letter by angry economists.---------------------------------------------------------------------------------------------------------------
Io, economista finalmente felice vi racconto la mia vita a impatto zero
05 giugno 2010
pagina 39 sezione: CULTURA
SocGen rogue trader Jerome Kerviel 'hit the jackpot' on 7/7
January 23, 2009