Sunday, June 17, 2012

A glimmer of hope?

Weekend Update.

On Monday the Greeks decide whether to vote for the Easter Bunny or Santa Claus to solve their fiscal problems. What is Europe planning to do next?

Sunday's New York Times had an unusually cogent article on European events over the weekend, reporting on events with thoughtful analysis:
The head of the European Central Bank and other euro zone leaders worked on Saturday on a grand vision... the plan will push for countries to remove the regulations and layers of bureaucracy that inhibit competition, keep young people out of the work force or make it difficult to start a new business....

Over the years, countries have repeatedly pledged to clear the rules that hinder competition and led to chronically anemic growth. If the euro zone grew faster, tax receipts would rise and the debts of countries like Spain or Italy would seem less daunting
Halelujah! Growth -- the classical, growth-theory, higher productivity, bend-up-the-trendline, long-run kind of growth, not the quick espresso stimulus kind of growth (if that even works) -- is the only hope for Europe to repay debt rather than face the awful choices of default or inflation. At least we understand this is the central answer and without it, all the rescue plans will fail.

For years the mantra has been, stimulus and crisis management today, and "structural reform program" to be implemented in the vague far off future. They've figured out it won't work. Decades of previous good times did not bring structural reform. 
“There is a long-standing agenda on growth,” Mr. Draghi told a gathering of economists on Friday in Frankfurt. “It is time to implement it.”
---

But..
But it is unclear whether yet more pledges of reform, which would face significant hurdles, will calm financial markets.

The euro zone has no shortage of plans and pacts intended to end years of sluggish growth and impose discipline on its 17 members.

The challenge for Mr. Draghi and the plan’s authors....will be to package their plan in a way that makes investors believe something will get done.

The most difficult task for Mr. Draghi and the other leaders may be to establish a binding timetable, to ensure that political leaders do not drag their feet.
Correct. Quite a challenge, I'd say. How do you establish a "binding timetable?"
The leaders are “only capable of acting at gunpoint” — when markets force them to, Willem H. Buiter, chief economist at Citigroup, said...
But once markets "force them to" act, by a huge bank run, refusing to buy government debt, running from the currency, it will be too late for a structural reform plan to have any chance.

---

What about the immediate problem, the bank run, no longer "imminent" but gaining steam every day?
Under the plan, euro zone leaders will seek to establish the central bank as supreme bank regulator with broad powers, in place of the relatively toothless European Banking Authority.

Countries would also create a deposit insurance program to augment national programs. The goal would be to reassure ordinary depositors and prevent bank runs, an imminent danger in Spain as well as Greece. But any sharing of financial burdens almost automatically encounters opposition in Germany.
Catch 22. We've got a bank run. How to stop it? Ah, deposit insurance! But who is going to pay for that? "Countries" are not credible. The whole problem is that "countries" used their banks as piggy banks, stuffing them with sovereign debt. So, if the countries default on their sovereign debt, the banks go under, and the same "countries" obviously don't have the money to guarantee deposits.

A cross-national deposit insurance scheme, while banks are already stuffed with sovereign debt, is back to Plan A, run for the exit and stiff Germany with the bill. Which "automatically encounters opposition in Germany."

A Supreme Bank Regulator  to stop banks from gorging on sovereign debt in the first place might have been  good idea, perhaps. (The concept "sovereign debt is risky" isn't necessarily beyond the ability of national regulators to comprehend, even with Basel rules denying it.) But it's way too late for that now.

Bottom line: Waffling again. No serious plan to stop the bank run already in place. You can't stop the crisis by saying you'll invent a totally new regulation regime to keep the banks from taking risks.

----

What about looming sovereign defaults?
For now, the most important new tool is a half-dozen rules known as the Six-Pack, which took effect in December. In coming months, the European Commission will be able to impose fines on euro zone countries of up to 0.2 percent of their gross domestic products if they flout rules on public debts and deficits.
Oh yeah, right. The same Spanish government you just lent 100 billion euros to pour down the rathole of its banks, that one. You're going to tell them to pay you a fine of 0.2 pct of GDP because they're borrowing too much money..from you?

The one big lesson to learn from this debacle is that deficit limit rules do not avoid sovereign defaults. A currency union without fiscal union needs to allow sovereign default.

As far as quelling the panic, good luck that "we really mean the deficit targets this time" will have any effect.

---

What are they going to do now, to stop the unraveling that is likely to happen in weeks?
Mario Draghi, the president of the central bank and one of the authors of the plan, said Friday that it would be unveiled within days, ahead of a meeting of European leaders at the end of June.
Well, that's good. I hope there still is a euro at the end of June.

---

Bottom line. Mr. Draghi is saying the right words on growth. But these plans to address bank runs and sovereign defaults are not realistic. And the pace of events is quickening. The time to actually implement a pro-growth policy, and stop financial panic by convincing markets it will really happen, is getting shorter and shorter.

2 comments:

  1. Professor, I agree with your agreement with Draghi's comments, but in my opinion the opportunity to meaningfully incorporate default on pre-08 gov't debt is gone and has not been a realistic option since summer '11.

    Additionally, even though the chances of an accident in Greece are lower, should an accident happen its consequences will be much more severe, as the Greek stock market shows signs of excessive optimism. Banking stocks are up almost 100% in a week (even for Greece this is unprecedented), but considering that C and M1 in Greece is highly cyclical (that's what you get when 2 months a year you've got a influx of tourists that is double the size of the country's population) so even assuming that the eurozone fully underwrites Greek deposits, solely by virtue of cyclicality in the influx of currency the greek banking sector will in a couple of months be unable to finance short term borrowing that the Greek government needs to finance emergencies such as insulin and chemo drugs imports. At that time, Greece will likely be running an increasing CA surplus as imports collapse and the temptation to miss a few bond payments to buy insulin will be very hard to resist, even at the risk of € exit...

    ReplyDelete
  2. PROF. COCHRANE,

    i HEVE NOT BEEN STUDYING ECONOMICS REALY HARD FOR QUITE SOME TIME NOW, BUT I HAVE BECAME A READER OF ECONOMIC BLOGS. IT IS THE PLACE WHERE I AM LEARNING AND BECAUSE OF THIS IS THE PLACE I SHOULD PUT MY DOUBTS. PERHAPS I AM COMPLETELY MISTAKEN AND MUST BE IGNORED, PERHAPS I AM ASKING A GOOD QUESTION AND PERHAPS THERE IS A VALID INSIGHT IN MY QUESTION.

    MY PROBLEM IS THAT "LONG RUN GROUTH POLICIES" DOES NOT SEEM TO MEAN DEVELOPMENT BECAUSE THE LOCAL BUSINESS CULTURE COULD ASSEMBLE THAT CHANGE IN A WAY THAT IT DOES NOT MEAN A CHANGE AT ALL.

    I MEAN, SUPPOSE A UNDERDEVELOPED ECONOMY WHERE THERE IS A HUGE AMOUNT OF REGULATION AND ALL THE PROBLEMS THAT COMES WITH IT. SUPOSE NOW THAT IN ORDER TO DEVELOP THIS ECONOMY POLITICIANS DECIDE THAT OPENING A COMPANY MUST BE FAST AN EASY AND THAT THIS DECISION GENERATES OBJECTIVE CHANGE.
    THE WHOLE IDEA OF THE INDICATOR IS THAT IT REFLECTS THE CURRENT STATE OF THE BUSINESS WORLD IN SOME SOCIETY. THE PROBLEM IS THAT WHENEVER IT BECOMES THE OBJECT OF POLICIES, THIS INDICATOR LOOSES ITS REPRESENTATIVITY AS AN UNBIASED SIGNAL AND BECAMES SOMETHING MANUFACTIRED AND INNOCUOUS.

    WE CAN TAKE AS AN EXAMPLE INDUSTRIAL POLICY IN BRAZIL. I MEAN, IN THE 50'S INDUSTRIALIZATION IN THE COUNTRY WAS GIVING ITS FIRST STEPS AND SOME OF THE WORLD'S BETTER HEADS WERE STUDYING HOW TO INDUSTRIALIZE THE COUNTRY. THOSE GUYS WERE SUPERQUALIFIED AND THERE WAS A VERY INTENSE EFFORT IN THE TASK. TODAY ONE CAN HARDLY FIGURE OUT A PRODUCT BRAZIL CANNOT PRODUCE. THE QUESTION IS: DID IT REALY MEANT A CHANGE? NO, BRAZIL CHANGED, BUT STILL IS A BASIC PRODUCTS EXPORTER!


    I MEAN, FOR ME, IT FEELS LIKE A SYLOGISM.

    (1) SOCIETIES AND ITS INSTITUTIONS ARE A PRODUCT OF ITS HISTORY.
    (2) ANY CONCIEVABLE CHANGE OR REVOLUTION WILL ALWAYS HAVE THE INSTITUTIONS AND CULTURAL HABITS THAT PRECEEDED THEM AS THEIR MAJOR REFERENCE.
    => ANY INITIATIVE IN THE DIRECTION OF IMPLEMENTING "GROUTH POLICIES" MEANS TO PUT MAKE UP OVER A VERY UGLY FACE BECAUSE. COSMETIC EFFECTS BUT NOT REALY A CHANGE ....


    YOUR SAYING?

    ReplyDelete

Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.