One Size Fits All?

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Lorenzo Bini Smaghi lays out the case for why membership of the euro area has been a stabilising force during the crisis in this speech.

69 Responses to “One Size Fits All?”

  1. The Dork of Cork Says:

    A enigma wrapped up in Gibberish – infact it was almost Greenspan like.

    Lets cut to the chase – who benefits ? who pays ?

    “While central banks can, should and do provide liquidity support to financial markets, they cannot provide solvency support. That would represent an encroachment upon the domain of the fiscal authorities and blur the distinction between monetary and fiscal policy. It would threaten the independence of the central bank, on which the credible pursuit of price stability relies. In the face of a financial crisis, the fiscal authorities may be called upon to shore up capital in the banking system. The monetary authorities cannot and should not play any role in this area.”

    Wow – “encroachment on the domain of the fiscal authorties”
    ” blur the distinction between monetory and fiscal policey ”

    MY EYES MY EYES………. their purer then the driven snow meme seems their most favoured tale in a crisis

    He then predictably goes on and declares who should pay – but if a poor serf shall pay who will get the surplus……. yes the bankers again.

    They are merely trying to save their own ass – nothing more.
    No elegance is on display here , just evasion and deception.

    Central bankers have no executive function and indeed to my mind have no altruistic function.
    They only have power over us because we accept that they have power.

    The poltical and economic situation is very similar to pre reformation Europe where the princes accept the power of Rome as they seem to have a monopoly of knowledge at least over the populace.

    Nothing less then a gigantic new religious war is needed to purge their financial poison.

    Morgan Kelly is right – we must leave this den of vipers , whatever the cost – but a default on our part must transfer losses onto their most precious.
    They must learn that austerity cuts both ways.
    Let them eat punts.

  2. backwardsevolution Says:

    “Does anyone really think there is no chance that the citizens of one of the nations lined up to be stripmined by the E.U. will openly rebel against the stripmining, throwing out their government until they find some politicians who are not spineless lackeys and factotums of the financial Status Quo?

    Does anyone really think the banks are really that precious to the people they are stripmining? Just how awful would it be if all the big banks with exposure to sovereign debt in the E.U. went belly up and were declared insolvent? A handful of very wealthy managers would lose their jobs, a handful of very wealthy owners would lose their stake, and all the pension funds and mutual funds which bet on the infinite passivity of the citizenry and the infinite checkbook of the E.U. would lose, too.

    It’s called Capitalistic risk and return, baby, and return can be negative. All the big players assumed the citizenry would quietly line up to have the clothing ripped from their backs and their flesh flayed to extract the pound of flesh “owed” the banks. But as the citizenry of Europe wake up to costs of the stripmining, which extends now to the taxpayers of Germany, Finland and beyond, they are withdrawing their support of the financial Status Quo.”

    http://www.oftwominds.com/blogmay11/out-of-control5-11.html

  3. David O'Donnell Says:

    @LBS

    The 7 Habits of Highly Ineffective Managers

    http://www.bnet.com/photos/the-7-habits-of-highly-ineffective-managers/6239073?promo=713&tag=nl.e713

    @all

    Italian for P45 anyone?

  4. zhou_enlai Says:

    Nouriel Roubini has some choice words for Mr. Bini Smaghi:

    http://www.economonitor.com/nouriel/2011/05/25/much-ado-about-relatively-little-contagion-risks-from-an-orderly-greek-debt-restructuring-are-modest-contained-and-manageable/

    [i]Those who are vehemently opposed to any orderly restructuring of Greece’s public debt—even a modest re-profiling of it—start with the ECB, especially president Jean-Claude Trichet and executive board member Lorenzo Bini Smaghi. They—and others within the ECB and outside of it—have been presenting the view that a debt restructuring in Greece—they incorrectly keep on referring to it as a default, which is a very different event from an orderly debt restructuring—would lead to financial Armageddon, with massive contagion to banks and sovereigns all over the EZ, destroying the capital of Greek and creditor banks in the bloc’s core, triggering widespread bank and sovereign debt runs and leading to a Lehman-style EZ and global financial meltdown. The ECB—or the vocal part of its executive board—is so upset at the thought of even a modest re-profiling—or “soft restructuring”—that Trichet stormed out of the May 6 “secret” meeting of EU finance ministers when the option of an orderly debt restructuring was discussed.

    The reality is that these comments about massive contagion and financial disaster, akin to fear-mongering, have little conceptual or empirical basis. Indeed a rational—as opposed to an unsubstantiated—analysis of the risks of contagion deriving from an orderly restructuring of Greece’s debt suggests that those risks are modest, contained and manageable. The ECB’s ideological blindfolds—that have led to it not being able to seriously consider the possibility of an orderly restructuring and the ways of avoiding contagion—have left the institution in an awkward spot. Its asset ledger is now piled high with hundreds of billions of euros of claims against PIIGS banks that are relatively poor collateral—mostly public debt or bank debt guaranteed by governments—for its lending to PIIGS banks. And, on top of that, there is another pile of PIIGS public debt that is the result of its outright limited purchases of PIIGS government debt.[/i]

  5. Rory O'Farrell Says:

    “In principle, national monetary policies have the advantage of being able to counter the negative pressure on inflation produced by the fiscal tightening. In practice, however, countries in urgent need of fiscal retrenchment do not necessarily experience lower inflation. At present, inflation is higher than the euro area average in Portugal, Ireland, Spain and, in particular, Greece.”

    This certainly isn’t true for Ireland.

  6. Gavin Kostick Says:

    From Mr Lorenzo Bini Smaghi speech:

    “The Eurosystem has provided – and is still providing – support to those national banking systems which face liquidity needs. I would like to underline that the key precondition for such a support is that the country concerned sticks to the EU/IMF adjustment programme and are on track. In other words, the responsibility for ensuring the conditions for the Eurosystem to support the banking system of the countries under stress is with the authorities of the countries themselves. There should be no doubt about it.”

    This is nice and clear. I would like to see a government response to this.

    Some thoughts/questions.

    (1) Is this in the ECB’s remit?

    (2) Is this written down anywhere in agreements between Ireland and the EU/IMF/EFSF?

    (3) Does this mean that it is worthwhile to pick up on Colm McCarthy’s argument from a couple of Sunday’s ago?

    “The budget cannot be balanced overnight, although it should certainly be addressed far more rapidly than the Government intends. This should start with an emergency Budget before the Dail adjourns in July. Nor can we walk away from the sole available lender, but it is surely time to cut out payments to unguaranteed and subordinated bank bondholders. ”

    It’s the last sentence I think is most relevant here, but I’ve put the longer quote in to keep DOCM happy by not partially representing.

    Overall, the whole tone of this speech, and a number of contributions now, reminds me of Bertrand Russell’s splendid put down of the philosophy of St Thomas Aquinas

    “There is little of the true philosophic spirit in Aquinas [BS], he does not, …, set out to follow wherever the argument may lead. He is not engaged in an inquiry, the result of which it is impossible to know in advance. Before he begins to philosophize, he already knows the truth … If he can find apparently rational arguments for some parts of the faith, so much the better; if he cannot, he need only fall back on revelation. The finding of arguments for a conclusion given in advance is not philosophy, but special pleading. I cannot, therefore, feel that he deserves to be put on a level with the best philosophers either of Greece or of modern times.”

    http://www.independent.ie/opinion/analysis/forget-forecasts-only-the-markets-view-matters-2647447.html

  7. remnant Says:

    Quick Quick Bini Smaghi – we need to get you in touch with your colleagues who are “encroaching on the domain of the fiscal authorities” by coercing Ireland into paying off private bank bondholders. Likewise, some of your other colleagues have been threatening the Greek banking system with withdrawal of liquidity if the fiscal authorities attempt a restructuring of their sovereign debt. Ditto for Portugal – where the big stick of withdrawal of liquidity was used to help beat their sovereign into the a “rescue” package. Arbitrary uses of power that are only employed against smaller countries and are directed to achieve ends and purposes that are not part of any Treaty, Contract or Statute.

    Heck, maybe we can get them to withhold liquidity from the French banking system if they don’t stop objecting to our interest rate cut. Or to the Germans if they continue insist that our 2M taxpayers pick up the cost of re-capitalising their banking system.

    We all know what needs to happen here – the top 3 levels of the ECB need to lose their jobs for either gross incompetence (e.g., lending euro 160M to bankrupt banks on the basis of dodgy collateral, punting on the bonds of GR/PO/et al) or abuse of power. The ECB then needs to be recapitalised and hedged in with real due process and accountability (e.g. haul Trichet in front of the European Parliament to answer questions under Oath, etc).

    Revolutions in Greece, Portugal + Spain(?) vs loss of senior bureaucrat jobs.

  8. remnant Says:

    @ Dork

    Cool use of that Andrew Jackson quote re. the ECB. (His was based on the 2nd Bank of the United States – a situation that is in some ways an interesting analogue of where we are today).

    http://inertia.posterous.com/den-of-vipers

  9. Gary O'Callaghan Says:

    Smaghi’s intellectual dishonesty seems to know no bounds.

    Now he tells us that, under the old EMS, interest rate divergence would have been very small and Ireland, for example, might have had even lower interest rates as dictated by a sluggish Germany under that regime. (And that these low rates would have aggravated the boom even further). So, why did we join monetary union?

    No, Mr. B-S, the argument for monetary union was that it would eliminate interest rate divergence to the benefit of all. And it succeeded in doing so until the ECB differentiated between creditors–by insisting that losses be localized–after the crisis. Thus, interest rates are now higher in Ireland because all of the banking losses stayed in Ireland–and there was no haircut for foreign-held bonds.

    And, by the way, the shocks that aggravated the system occurred before 2007 and were asymmetric. The “common” financial crisis just exposed them.

    This guy is a clown and could perform any trick required of him.

  10. Joseph Ryan Says:

    Trying to dissect the turgid text of the article we can glean the following:

    1. The ECB did very well in managing its own objective of price stability.
    2. The peripherals would have been just as flaky, irresponsible and badly off, if the euro had never been introduced.

    In sum, I would maintain that there are no clear reasons for believing that cross-country variation in economic performance within the euro area has proved larger than would have been the case if national monetary policies had been retained and the euro not introduced.

    3. The inflation rate of the peripherals are still lousy despite negative growth. Translated, you are incompetent buch of sods. There is a grain of thruth in his inference here.

    At present, inflation is higher than the euro area average in Portugal, Ireland, Spain and, in particular, Greece.

    Personally, I doubt the truth of the above, certainly in relation to Ireland.

    4. The ECB non-standard measures went out of its way to help prevent bank ‘asset fire sales’ which would otherwise have happened.

    This has avoided a disorderly deleveraging of bank balance sheets and the associated potential for a fire sale-driven, vicious downward spiral in asset prices and bank capital.

    Ireland would certainly be better off if banks had been folded.

    5. The ECB will help with liquidity in the banks provided that countries keeps to the EU/IMF programs.

    I would like to underline that the key precondition for such a support is that the country concerned sticks to the EU/IMF adjustment programme and are on track. In other words, the responsibility for ensuring the conditions for the Eurosystem to support the banking system of the countries under stress is with the authorities of the countries themselves. There should be no doubt about it.

    6. Translated the above means, if countries don’t keep to the EU/IMF agreements we will drive you back to the economic stone age.

    7. But why no mention of the ECB insistence to keep insolvent banks open. This inconvenient truth would disturb Mr Bini Smaghi’s train of thought.

    8. And a new definition of ‘convergence’:

    And, in all cases, convergence has to be with the best performer in the euro area. We cannot accept any weakening that would be implied by the averaging-out of the performance of all Member States. Indeed, all countries have homework to do: there is much scope for improvement even in the strongest countries if the benefits of price stability are to be fully reaped by the people of Europe.

    A reasonable person could conclude the following:

    Powerful institutions rarely admit failure, no matter how obvious the failure is to other people. The ECB is laying down its laws for members which include a ‘convergence’ to German norms. While reluctantly supporting liquidity in banks, the banks are a national problem (for peripherals) but must be kept open at national expense. And don’t burn the bondholders.

    If countries don’t keep to the EU/IMF agreements we will drive you back to the economic stone age.

    Even General Paulus finally had his doubts at Stalingrad, Mr Bini Smaghi of the ECB board member is still in the process of berating the troops of the peripherals for lack of discipline and courage. And pointing to the success of real soldiers in other theatres.

    Mr Bini Smaghi, it is time to get off the stage.

  11. wow Says:

    Saw that Lorenzo is being lined up as a possible for a big job. Wonder does his comments reflect what he believes or what he thinks others want him to believe.

    Cynical maybe

  12. David O'Donnell Says:

    @all

    from ECB to IMF … worth a read …

    The Problem With Christine Lagarde
    By Simon Johnson [Baseline Scenario]

    ‘The contest to run the IMF seems over before it has even really begun. But Ms. Lagarde has a serious problem that may still derail her candidacy, if there is ever any substantive, open, or transparent discussion of her merits. There is major design flaw in the eurozone and Ms. Lagarde is the last person that non-European governments should want to put in charge of helping sort that out. […] .. French, German and other “core” banks facilitated this divergence with a surge in lending to both consumers and governments in the periphery – convincing themselves, shareholders, and regulators that this was low risk. […] Ms. Lagarde has led the “no restructuring” school of thought in recent months with regard to Greece – and presumably other eurozone countries also. Debt restructuring is no kind of panacea. But to take the option completely off the table is also not smart – unless you really think there is no deeper issue that must be addressed. […] Ms. Lagarde personifies the strategy of gambling for eurozone resurrection with other people’s money. Why would taxpayers in US and elsewhere want to support her on this basis?

    http://baselinescenario.com/2011/05/26/the-problem-with-christine-lagarde/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29

  13. grumpy Says:

    How do you square

    “As I said, the issue is not new, but it is certainly topical. I am sometimes tempted to answer that this is not the right question, or at least that the question comes too late, given that we now have had a monetary union for more than 11 years”

    with

    “Although the economic literature prior to the introduction of the euro emphasised the importance of asymmetric shocks, the cross-country variation in growth and inflation in recent years has been driven by differences in the impact and diffusion of a common shock, namely the financial crisis. ”

    …..”cross-country variation in growth and inflation in recent years ” has in fact also been driven by the unwinding of such variations that took place prior to 2007 and were facilitated by the existence of the Eurozone.

    As for the Euro …..

    “Has the single monetary policy exacerbated these cross-country differences? The answer depends greatly on the counterfactual scenario you choose.

    It is certainly possible to construct a theoretical counterfactual within which credible and independent national monetary policies would have ensured price stability in every country now in the euro area”

    For some reason he puts “theoretical” in italics as if to give the impression it could not happen in reality, then continues…

    “However, a more realistic counterfactual would envisage euro area countries being connected by some version of the old Exchange Rate Mechanism (ERM)”

    …why? Is the UK in the ERM?

    “Another theoretical argument can be made suggesting that independent national monetary policies could be more expansionary when national fiscal policies turn restrictive ”

    …..”theoretical”, again in italics!…..plus no mention of the non-theoretical fact that independent national central banks can raise interest rates during booms to dampen them and the associated asset price inflation. Wonder why, is he stupid or disingenuous?

    ” the depreciation of sterling against the euro has not cushioned growth but rather led to a higher rate of domestic inflation in Britain than in the euro area.”

    It is revelatory to me that the UK’s higher interest rates had no dampening effect during the property booms, that the swift devaluation after the financial crisis swamped Europe had no effect in terms of preventing deflation, and that the easier terms for exporters plus the ability to print money – have all been of no import to the UK. In light of this I really don’t understand why it was so obvious to me that the UK was not going to the IMF and that Ireland was. How did I ever manage to get that right, and seemingly so easily?

    “While central banks can, should and do provide liquidity support to financial markets, they cannot provide solvency support.”

    This is a bit like his logic that by him and the ECB saying there is no possibility of default in the EZ – a default cannot therefore happen. It is rather late for him to become aware of the fact the ECB is forbidden from offering solvency support. Maybe they were genuinely deluding themselves the banks were not insolvent – maybe they actually believed everything Honohan and Lenihan said in public. The fact is that they HAVE provided solvency support.

    “That would represent an encroachment upon the domain of the fiscal authorities and blur the distinction between monetary and fiscal policy. It would threaten the independence of the central bank, on which the credible pursuit of price stability relies.”

    Lozza BS doth protest too much here. Those “would”s are actually “has”s.

    “The monetary authorities cannot and should not play any role in this area.”

    This is the crux if the problem. They have – as bureaucrats – realised they have overstepped their mandate and potentially could be blamed for failure to manage risk at their own institution. They are only interested in making sure they don’t get the blame for a required re-cap of their bank – hence haircuts or restructuring would be a disaster, run for the hills.

    “And, in all cases, convergence has to be with the best performer in the euro area. We cannot accept any weakening that would be implied by the averaging-out of the performance of all Member States. Indeed, all countries have homework to do: there is much scope for improvement even in the strongest countries if the benefits of price stability are to be fully reaped by the people of Europe.”

    ….Greece is out of the Euro then.

  14. grumpy Says:

    BTW Philip, is there a problem with spamming or something, I mean apart from Lorenzo?

  15. The Dork of Cork Says:

    @Remnant
    Jackson made a grave mistake – he took the goverment money deposits out of The Bank but did not incorporate the existing bank debts withen the treasuary – this created a speculative frenzy amongst the state banks which ended in a spectacular crash.
    Much like the deliberate policey of the ECB whose goal was to break the sovereigns through a low goverment debt / high private debt ratio.
    The ECB have essentially copied Jackson’s mistake to achieve a poltical goal.
    Lesson number one – money has a time function.
    Even Milton Friedman stated that a CB need only one desk inside a Treasury to function.
    I am surprised the ECB have not bought Gold on a dramatic scale yet – they may want to hold a bit longer and wait for a even bigger crisis.
    Cementing their power over sovergin money using private money.

  16. Ceteris paribus Says:

    @ Gavin
    Our future, as Colm said, will be assessed on the bond market…and it is not looking good with 10 yr at 11.06%.

  17. DOCM Says:

    @ All

    Meanwhile, back at the ranch!

    http://online.wsj.com/article/BT-CO-20110526-710792.html

    If Ireland wishes to avoid the same situation in the not too distant future, the fundamental issues raised by Pat McArdle in today’s IT will have to be addressed.

    http://www.irishtimes.com/newspaper/finance/2011/0527/1224297852128.html

    When elephants fight, the grass gets trampled, according to that well-known African saying. The arena happens to be the international bond market which is showing every sign of blowing up in the same way as the sub-prime bubble did. The recent musings if LBS have no real significance other than to confirm the legal division of responsibility between the ECB and the “elephants”: the governments of the larger members of the EZ (size being measured in terms of the strength of their economic and financial portfolios rather than geography).

    The EZ is supposed to sign off on a treaty establishing the ESM between now and 24/25 June, the major bone of contention remaining being the problem at the very centre of the discussion on this blog for months past: how is “burden-sharing” to be organised? All very well in theory, but rather difficult in practice. A legal obligation to put CAC clauses in ALL new government bond issues, for example, might be a pill on which countries mindful of their shakyy AAA status might choke on. And the idea of obliging private investors to participate in a sovereign rescue when their lack of participation is the main reason why a sovereign rescue is necessary in the first place seems, to put it mildly, to lack a certain logic.

    At least the IMF, even if it is dominated by the same European elephants, with an additional – rogue – elephant from the US, has rules in place.

  18. DOCM Says:

    @ All

    Entering a Google search for ‘EU Juncker: IMF may not pay next Greek loan tranche’ will get around WSJ subscription barrier.

    Incidentally, Juncker seems to be losing whatever touch he ever had with regard to his public announcements.

  19. seafóid Says:

    That superb ESRI paper on confidence bias was made for LBS

    “The original demonstrations of confirmation bias are due to Wason (1960, 1968), who designed experimental tasks in which people were asked to test abstract rules. Subjects tended to seek positive instances of rules and failed to employ tests that could refute them. There is a large body of subsequent work on this bias (see Nickerson, 1998, for review).

    Experimental and survey evidence shows that confirmation bias applies also to the consideration of ambiguous evidence, which tends to be interpreted in line with prior beliefs; that the bias is exhibited by experts as well as lay-people; and that confirmation bias applies across many reasoning domains, including economic contexts with real rewards and costly acquisition of information (Jones and Sugden, 2001).

    Overconfidence Bias

    This bias manifests itself in two ways. First, we tend to be too optimistic regarding assessments of our own ability or personal outcomes. Second, we are inclined to believe that our assessments of likely outcomes are more accurate than they in fact are. These phenomena apply to many types of judgement. For instance, one classic psychological study found that 93% of drivers thought their driving skills were above the median (Svenson, 1981).

    Our feelings of competence can themselves be biased, especially when dealing with complex systems. ”

    and then there is this

    In his book “Down to the wire” David Orr describes “a system haphazardly created in the dim light of an incomplete understanding of reality”.

  20. zhou_enlai Says:

    Will Draghi’s appointment mean Bini smaghi will be out of the ECB?

    If so, where might he end up?? The IMF?? The Commission??

    The man is clearly a disciple of EU mission creep. He sees the crisis as an opportunity to remake the EU as he imagines it should be.

  21. hoganmahew Says:

    There are three methods of computing HICP inflation (m/m, yoy and yearly average) in Eurostat:
    http://epp.eurostat.ec.europa.eu/tgm/refreshTableAction.do?tab=table&plugin=1&pcode=teicp000&language=en

    On all of these Ireland is below the average. On a yearly average, inflation is still negative here…

  22. hoganmahew Says:

    @zhou_enlai
    A soft restructuring is only not a default if the creditors agree to it. Given that the ECB is the largest single creditor of both the Greek state and the Greek banks and is vehemently opposed to soft restructurings, there can be no agreement. Therefore, any change in terms and conditions must be a default.

    That the ECB is precipitating the crisis is to be regretted. Normally what happens is that the large creditors get together and work out a mechanism for a soft restructuring that allows for them to account for the damage and minimise the effects. For countries and their national banking systems, the IMF often leads and facilitates this process. The smaller creditors get to eat the lumps the larger ones hand out.

    The ECB is its own worst enemy. Somebody needs to do a Canute on them and show them that they can’t order back the tide. If default is perceived to be inevitable, it will happen. If creditors don’t take action in advance, it will be a disorderly default and the outcome will be worse for the creditors (and for Greece itself).

    I suspect the IMF is playing hardball with its insistence that Greece do the impossible and return to the markets as planned before releasing the next payment. It has had enough of the ECB’s childishness and the EU’s ineffective parenting of its spoilt brat. The ECB need (as a group of Central Bankers) to shut up and get back to the business of monetarism. The EU needs to pull its finger out and agree on a plan that is both realistic and flexible and then implement it.

  23. ObsessiveMathsFreak Says:

    This man is a banker.

    He has no credibility.

  24. grumpy Says:

    @ docm
    That article should be considered in tandem with Enda’s seeming willingness to cut the ground from under Bruton over his unpopular proposals. It looks as if he doesn’t get that, sooner or later, the government will have to become unpopular – and it might be better to sell the fact that it is inevitable rather than just long fingering it.

    This thread touches on the idea of inflexibility as a problem or not in the EZ. Inflexibility in exchange rates requires flexibility in labour markets if economies are not “convergent” (remember the days when convergence was said to be important for the project to work). The article you link to illustrates just how far away Ireland is from addressing its economy’s outlying characteristics. I was going to paste a bit in, as many readers don’t click on links, but you really have to read it all since it so effectively demonstrates the fact that even when it has effectively gone bust, Ireland just will not change.

    http://www.irishtimes.com/newspaper/finance/2011/0527/1224297852128.html

  25. Peter Stapleton Says:

    He is destined to head the Banca d’Italia – the Italian Central Bank – which, as the Economist likes to point out, will make him probably the highest paid central banker in the world.

  26. Overseas commentator Says:

    Many of the comments on this blog seem to imply that their author wish a Greek default. I think that the first victims after Greece would be Ireland and Portugal .They will not be able to reenter the market for years to come and be at the mercy of periodic negotiations with their partners to refinance their deficits ,or they will default. History shows that any default is followed by a disastrous dip in the standard of living of the country in default .I do not know if a Greek default can be avoided ,but I do not understand those who wish that it will happen.

  27. Garo Says:

    @OMF: I think you made a mistake in your spelling.
    :s/b/w/

  28. David O'Donnell Says:

    @zhou_enlai

    Yes. LBS is out. As noted previously, he is all set to become Abbot of the Trappist Monastery in Bobbio, and his expenses are to be covered by the Saintly_Columbanus Bank AG in perpetuity as a modest reward for facilitating the €100 billion in capital flows from Hibernian vichy_banks to the Cantons of Zuge; he is also rumoured to be in negotiation with the Dinny_O’Brien Press on contributing a weekly opinion piece on the Florentine approach to skinning the serfs and the irrelevance of tribunals in the age of the Medicci.

    @seafóid

    “… a system haphazardly created in the dim light of an incomplete understanding of reality” (Orr).

    The ontologically challenged neo-classicals will love this one!

    @all

    I hear rumours of a strike at the IMF …

  29. David O'Donnell Says:

    @all

    Consequences of Debt Restructuring – What Would a Greek Haircut Mean for Germany?

    [good facts and figs here …. Der Spiegel Online - Conclusion: Germans could handle a 50% haircut on Greek Debt ... at a canter]

    http://www.spiegel.de/international/europe/0,1518,765318,00.html#ref=nlint

  30. DOCM Says:

    @ Grumpy

    The utterances by our esteemed Taoiseach over the past 24 hours are not such as to inspire confidence. Like Overseas Commentator, I am at a loss to understand the insouciance with which the idea of default by Ireland is contemplated – even by serious commentators – on this blog.

    As to whether the country will change, unless the economy awakes from its torpor of its own accord, it will have to.

  31. Brian Woods Snr Says:

    @ Overseas Commentator:

    Some of us on this blog have totted up the sums. We (Ireland) do not, and will not have, the necessary economic growth to pay back the money owed. It just cannot happen – that’s the math! QED.

    We are not ‘wishing’ default – we know its inevitable, but our politicians (and european ones as well) are frantically attempting to delay this event for as long as possible – that’s politics! QED.

    Anyway, bad and all as we are the US is in worse shape. The Maya calendar stopped in 2012. Now I wonder why? Global defaults? The Fourth Oil Shock? Perhaps they had a Peak Stone shock! We’ve had a credit shock.

    Check out Hudson over on iTulip.com. This global financial and economic crisis is about to get a whole lot worse – in SloMo.

    Brian Snr.

  32. The Dork of Cork Says:

    @Overseas Commentator
    You want us to bend our knee to the priesthood again ?
    There comes a time when you have had enough.

    Besides although the periphery is only a minor player in the Euro GDP – it holds vast amounts of private debt which is now unproductive but yet the priesthood wishes we pay interest on this crap – therefore it seems the core depends on interest income and subsequent consumption/investment that we service with exports and tourism.
    We clearly are in no postion to increase exports any further and tourists are becoming austere so therefore we cannot service our debts.
    This trade relationship is obsolete at a sustained $100 barrel oil.
    Something got to give – so therefore if the ECB won’t Tango then we have to dance alone.

  33. Toxic Avenger Says:

    Grumpy’s comment ” This is the crux if the problem. They have – as bureaucrats – realised they have overstepped their mandate and potentially could be blamed for failure to manage risk at their own institution. They are only interested in making sure they don’t get the blame for a required re-cap of their bank – hence haircuts or restructuring would be a disaster, run for the hills.” has more than a grain of truth in it IMO.

    @Overseas commentator: it seems to me that our own government are hoping that the Greek crisis will ultimately result in things being made easier for them.

  34. Ordinary man Says:

    @ seafoid & ObsessiveMathsFreak

    +1

    @DO’D

    ‘The ontologically challenged neo-classicals will love this one!’

    Beautiful :)

  35. Tomc Says:

    I understand that a one rate policy was a recipe for disaster in the middle part of this decade but why did the democratically elected Irish government compound this issue by overlaying it with a wasteful pro cyclical structural budget deficit? Whose fault in the European continent was that?

    In 2008 when the Irish government unilaterally g’teed the non demand debts of the Irish banking system without consulting anybody except a couple of crank Irish economists, who in europe can we blame for that?

    We live in a country which imports 95% of it’s energy needs but we take a naive approach to the real politics of global energy security and a disdain for anything that plays off the necessary risk/reward of building domestic or regional energy infrastructure.

    We have a website of professional and amateur economists who can’t agree on a national net debt number.meanwhile we spend no time debating how to cut the 7bn of non debt service budgetary deficit in a an economically rational way.

    Bini may be a clown but he wouldn’t stick out in this circus.

  36. Michael Hennigan - Finfacts Says:

    In 1987, Ireland’s debt to GDP ratio was 125% and the spread on Irish 10 year bonds with the German bund was 700 basis points (bps) or 7%. On joining the European Exchange Rate Mechanism (ERM) the spread began to fall, and was down to 100 bps in 1992. Before joining the euro in Jan 1999, the spread was 10-20 bps. There was a similar pattern for other countries and in the third week of July 2007 the yield on the 10-year maturity Irish sovereign bond was lower than the yield on a comparable German bund.

    It’s a fairytale scenario that outside of the euro against a backdrop of an international credit boom and a search for yield, that an impotent central bank on Dame Street would have operated a prudent monetary policy.

    We would have put capital controls in place to slow down the inflow of ‘hot’ money as a counter to a high interest rate?

    There would also have been pressure from exporters e.g. similar to Brazil’s dilemma today.

    A central bank that didn’t even bother gathering data, never mind taking action, on for example 10-year interest only loans that were the fuel for the buy-to-let investment boom or preferred pleading letters to the banks urging restraint in contrast with the Bank of Spain which forced the big banks under its control to increase ‘rainy day’ provisions, was hardly likely to show vision.

    Even before the ECB benchmark rate fell to 2% in mid 2003, a baby step to rein in the investment bubble was reversed by Ahern/McCreevy after the Galway tent elite cried foul.

    There is blame to go around but the breastbeaters should keep in mind that Ireland was the only member of the EMU during the financial crisis to legislate for the socialisation of private bank debt.

  37. Brian Woods Snr Says:

    @ Tomc: Interesting comments.

    Politicians make the decisions in this country – well actually they make the decisions they are ‘told’ to make. Get my drift? You saw what happened when the pols tried to take the Med cards from the Gray Tigers! Raid on IFA offices? Mick O’L beating up on the air safety guys? That twit from IBEC who asserted Sunday was just an ‘ordinary working day’ Now where were the Mitred on that one?

    Voters have no function after the counts are in and the bums have taken their seats. That, believe it or not, is Democracy Irish Style. There are are least 16 versions off ‘democracy’ in the text books! The mind boggles. Why do you think the FoI Act was ‘diluted’? Keep the Mushheads in the dark?

    Ah! The energy bit! This is where the devil be. Nothing in mainstream econ undergrad texts about critical relationship between energy and economic activity – like that they are Siamese twins! You trip up one, the other also falls! That’s where we are now. Falling! Well, we are actually in an economic Regression, which will make the 1930s look like a picnic.

    Why do people think we need social welfare in the first place anyway? A food riot can be an awfully ugly thing indeed. You are correct about the circus bit, its the bread bit I am concerned about.

    Brian Snr.

  38. Kevin Walsh Says:

    I’m not sure why people feel that the incompetence of Irish politicians and regulators in some way excuses the incompetence of European politicians and regulators.

  39. David O'Donnell Says:

    @all

    Sharon Bowles MEP, who chairs the powerful economic and monetary committee at the European Parliament (which has been visiting Ireland on a fact-finding mission) has said Ireland should be paying lower, not higher, interest rates than the other bailout countries. She is not too impressed with Dear Lorenzo either ….

    http://www.independent.ie/business/irish/british-mep-condemns-punitive-bailout-interest-rate-2660209.html

  40. DOCM Says:

    @ Brian Woods Snr.

    Others not on this blog have also totted up the sums and have come to the conclusion that, until the fundamental issues raised by Tomc are recognised and addressed, there will be no free lunch for Ireland.

    All democracies could be described as the organised civilised resolution of conflicts between different interest groups. The most glaring example of conflict in Ireland is between the rest of society and the unholy alliance that exists between all those paid from the public purse and elected representatives.

    I think that there is an increased recognition that this alliance has to be broken, even among those benefiting from it. A start could have been made, for example, by abolishing at least half the posts of Minister of State (no such luck!). The most important step, however, is to break the link between the salaries of elected representatives and those of public servants.

    But the key issue is the cost of unfunded pensions (and allowances) as demonstrated by Pat McArdle. The unforced error in introducing the pension levy simply highlights the obvious anomalies. The economy can no longer afford them (not to mention the system of allowances applicable to the police as revealed in a recent Dáil reply).

    In the past, this type of crisis has been overcome in Ireland by a slow spiral into economic stagnation, hidden to some extent by mass emigration. The only bright spot that I see is that the bust on this occasion is so spectacular that we are not being left to our own devices to resolve it.

    As to professional and amateur economists, what the global economic crisis has revealed is that the profession of economist does not really exist. It is closer to alchemy than to science. To that extent, we are all amateurs cf. extract from article by Justin O’Brien some months ago.

    QUOTE Economics requires the injection of new thinking from disciplines as varied as political science, law and ethics. The elevation of behavioural economics, a rag-tag of concepts drawn from these disciplines but not integrated within a coherent and cohesive program, demonstrates the enormity of the challenge.

    There is a pressing need for new economic thinking. It cannot take place in a vacuum. For economics to save itself it must accept reintegration with the other social sciences and the humanities. It necessitates not only a return to the political economy of JM Keynes. It necessitates a return to the agenda advanced by Adam Smith, himself a professor of jurisprudence at Glasgow, which measures progress not only on efficiency but on the strength of moral communities. Contemporary economics has much to relearn. UNQUOTE.

    A return to the science of ‘political economy’ is what is required. The debate could then take place in the real rather than virtual world.

    http://www.irishtimes.com/newspaper/opinion/2011/0411/1224294394466.html

  41. Brian Woods Snr Says:

    @DOCM: “A return to the science of ‘political economy’ is what is required. The debate could then take place in the real rather than virtual world.”

    BINGO!

    Brian Snr.

  42. Darren Says:

    @Tomc

    I’m not sure anyone has tried to blame the EU for the poor judgement and disastrous policies of the FF era. But the above speech is about whether “monetary policy implemented by the ECB fit different underlying economic performances in the Member States of the euro area” so perhaps that’s why the comments are mostly about this.

    I would however blame the ECB for compounding the broader European sovereign debt crisis through consistent attempts to protect what they perceive to be the interests of the German economy and its satellites. In the speech LBS states “in all cases, convergence has to be with the best performer in the euro area” and restates the “importance of the German economy in Europe” suggesting nothing has been learnt from this.

    That the he has moved into such clearly political domain outlining the ECB’s power to pull liquidity if the IMF/EU deal is not adhered yet still protests
    “Current challenges therefore do not call into question the primacy of the ECB’s objective of price stability.” is rich.

  43. Ordinary man Says:

    @DOCM

    ‘Economics requires the injection of new thinking from disciplines as varied as political science, law and ethics.’

    Banking and politics could do with significant doses of the same along with a bit of experience outside the ‘bubble’ most of them appear to inhabit.

    The problem I have with most of the above is that there are no, or little, direct personal consequences for them, as individuals, from the decisions they make which can impact on so many.

  44. grumpy Says:

    @tomc

    “We have a website of professional and amateur economists who can’t agree on a national net debt number.meanwhile we spend no time debating how to cut the 7bn of non debt service budgetary deficit in a an economically rational way.

    Bini may be a clown but he wouldn’t stick out in this circus.”

    I think it has been established that there are a number of experienced public sector economists that understand the requirement for action on this front, but they feel they would be letting down colleagues and or family by doing other than keeping their heads down. It would be both distasteful and irrational (from a personal perspective) to take a lead on this, where is the incentive?

    Probably they are waiting for the politicians to drive that agenda, then when nobody can reasonably hold them responsible – who would choose to put themselves in that position , other than misfits. The politicians probably look at it the same way – and will do as little as possible until obviously forced to do otherwise by the IMF.

    The misfits seem to number about three.

  45. The Dork of Cork Says:

    @DOCM
    Larry Summers , Gordon Brown ,George Soros ? – no thanks.

    When last has this elite won a war , do they even hold the Gold ?

    Who gave them power over our lives , in many ways they did not even take it – we gave it to them !!
    NO MORE SWAMP CREATURES.

    Ps check out William K Blacks piece on Matt Cooper – great minds think alike I guess or maybe Dorks rarely differ.
    He advocates going back to the punt but for that to be effective the financial slugs must eat punt pellets.
    http://downwiththatsortot.blogspot.com/2011/05/matt-cooper-interviews-prof-william.html
    Morgan Kelly must clarify his postion on fiscal austerity – does he mean to do this withen the Eurozone ?
    That would clearly be a disaster.

  46. Darth Vader Says:

    This is all a load of complete crap that is fed to the irish people.

    Ireland is going to default in 2014 because the entire political class is hell bent on distruction of the Irish Nation and putting Ireland back into the stone age.

    When the new crowd you would have at least expected a few “resignations” from the the Department of Finance. No none

    We would have expceted that we don’t continue to pay guards for not turning up to work. Any movement none

    We would have expected a constitutinal admentment so that our judges get paid a fair wage instead of 3 times the european average. Any movement none.

    We would expected some adjustment in hospital wages so that despite having the most expensive medical system in the world bar the USA we could expect to get treated rather than the money going on management consultants who manage the department of health who mange the regional HSEs who manage nothing because the consulatants says what goes in the hospitals.

    Ireland has been set up to keep the clique going, the clique who did nothing and sucks off the PAYE worker. No we are get into debt in vast sums to continue to pay these patsys. Argentian style default is the only path for ireland.

  47. DOCM Says:

    @ David O’Donnell

    Herewith details of the bilateral loan granted by the UK government of which Sharon Bowles’ party is a member.

    http://www.telegraph.co.uk/finance/financialcrisis/8203912/Key-points-terms-of-UK-loan-to-Ireland.html

    Not exactly a bargain!

    Two other points worth noting. First, as JTO never fails to inform us, anybody holding UK government bonds purchased with euros is nursing a big capital loss at this point, a useful reminder that, almost alone among member states, the UK has taken a decision not to adopt the single currency of the EU. Second, on UK insistence, there will be no further loans from the EFSM which raises cash on the back of the EU budget – in respect of which the UK has negotiated a hefty permanent rebate on its contribution – although an exception appears to have been made in respect of Portugal.

    I make these points simply to underline the fact there is no market in the EZ for lectures of any kind emanated from UK representatives. That is not to say that the point Sharon Bowles makes is not a correct one. Countries sharing a single currency owe a “duty of care”, to take a current buzz word, which they are singularly failing to fulfil.

  48. Joseph Ryan Says:

    @Grumpy

    It would be both distasteful and irrational (from a personal perspective) to take a lead on this, where is the incentive?

    A little like the attitude in the Dept of Finance, Central Bank, regulators office and several of the banks in the pre crisis era.

    In my time going to school, Sergeant Custume was one of the heroes we learned about:
    ‘Does any man dream that a Gael can fear, of a thousand deeds let him learn but one….’
    We are over three hundred years down the road from that episode in history. And it looks like about three hundred years downhill to boot.

  49. zhou_enlai Says:

    @tomc

    One would need to look through the archives to see what has or has not been discussed. Some issues get more air-time because there is more international and press comment on such matters.

    1. Cuts v Taxes

    The issues of cuts -v- tax increases has been discussed numerous times.

    2. Job Creation

    Similarly, the issue of the effectiveness of various job-creation strategies has also been discussed.

    3. Transfer Payments

    The effect of reducing transfer payments could receive more discussion. The Swedish model which the world has fallen in love with like a new Washinton Consensus, and which we have signed up to follow, could be discussed more.

    4. Specific Cuts

    The emphasis on wage cuts so far reflects the consensus that removing services is damaging and should be avoided if possible.

    The different effects of cuts in different parts of the Govt spending (e.g. health screening v roads repair) has not been discussed. At the moment the focus seems to be on reducing wage costs and eliminating waste. (Making general cuts (e.g. 5% of entire budget) seems to be one tool to help effect waste cutting when all else fails rather than an opposing methodology.)

    It would be interesting to learn if there is informative research in this are (rather than research which simply tells you a good health service is good for the economy which we all know and which is no help). However, the fact of the matter is that such questions are probably best addressed by civil servants and politicians on a case by case basis.

    On this score, there has been debate on the Dept of Finances capacity to do anything properly, including co-ordinating and balancing the competing claims of different departments on the public purse. However, more direction on the overall framework for an economically effective method of balancing such claims would be instructive.

    5. Legal Environment

    The effect of changes in the regulatory and legal environment and in property rights has not been discussed much (although I think there was a focus on regulation some time ago). This is a critical area where we have benefited in the past, e.g. with the IFSC. It is a pity there is not more focus on this area.

  50. Gavin Kostick Says:

    David McWilliams picks up on this speech in today’s “Sunday Business Post”. He talks about the option of the ECB creating money ex nihilo.

    On the whole nature of the euro thing I’ve been trying to come up with scenarios to help me think it through a bit, so I’d be happy for observations on the following.

    An eccentric Irish artist makes a sculpture out of junk she finds for free. She puts it up for auction, where, after fierce bidding, it is sold for e100,000. The artist is eccentric and will only accept cash, euro notes. The buyer takes out the e100,000 from an ordinary deposit account in a commercial bank (3% interest pa) and pays up and now owns the sculpture. The artist, takes the cash and simply locks all of it away. Inflation also running at 3% pa.

    After one year:

    (a) What, if anything, is the net effect on the total amount of euro in circulation of this transaction?

    (b) What, if anything, is the net effect on the value of euro in circulation as a result of this transaction.

    (c) Is there any change in the overall wealth of the country as a result of this?

  51. David O'Donnell Says:

    FULL IRISH in Jeopardy: TD raises stink over feed rations on NAMA’s pig farms

    … the case of a Cork pig farmer whose €25m loans were transferred from AIB to NAMA. [TD] claimed that NAMA wanted to slaughter 20,000 pigs on the farm, as it was not prepared to pay for their feeding.

    http://www.independent.ie/national-news/td-raises-stink-over-feed-rations-on-namas-pig-farms-2660683.html

    Cork and Tip pigs flying to Dublin to protest; exFF TD, Ned_een Orwell O’Kief demands that the government guarantee liquidity to all Irish pigs in the national interest.

    [Annals of NAMA, III(IX), 2011 Special Issue: Daft as Lorenzo]

  52. Kevin Donoghue Says:

    @Gavin Kostick

    Your question reminds me of wrestling with first-year macroeconomics in the B. Comm. many long years ago. I’m not sure if my answers are up to standard. As the old examiner’s joke has it, the questions stay the same, but the answers change. And for all I know there may be lots of better answers waiting in the moderation queue. At time of writing yours is the latest comment in the thread.

    (a) Assuming the ECB sees no reason to change its interest-rate policy, the money supply has increased. The bank will have to find an extra 100k to replace the lost deposit, which would tend to put upward pressure (infinitesimal, obviously) on the interest rate. But by assumption the ECB ensures that this tiny increase in the demand for money is met. Things would be different if the ECB targeted the money supply, as the Bundesbank was wont to do at one time.

    (b) No price-index is affected, unless the supply of free junk runs out. I presume that’s what you mean by the value of the euro. Anyway your example provides no reason to suppose the exchange rate is affected either. Given these non-effects, the assumption that the ECB leaves interest rates unchanged is reasonable. But again, if the price of junk takes off, that’s a different story. In economist’s jargon, I’m assuming that the ECB follows a Taylor Rule of some sort. (Google for details if desired.)

    (c) There’s a once-off jump in the artist’s income and hence in that year’s GDP, assuming the CSO picks up this transaction. The artist’s wealth is increased by 100k and that of the buyer is unaffected (unless the poor sap has regrets about the purchase.) So aggregate wealth is up by 100k. Of course the ECB’s liabilities are also up by 100k, being the increase in the money supply. But that’s “outside money” which is a net asset for the private sector. Again, if you want to know more about that concept I’d suggest you take a stiff drink and then enter the term in Google Scholar.

  53. zhou_enlai Says:

    @tomc

    There has also been discussion of the effectiveness of a Fiscal Council to provide independent analysis of the effect of Govt fiscal spending. Presumably any such council would take into account the negative effects of cuts on the economy if not on political and social stability. Publications on proposals of this sort (primarily by Philip Lane in the Irish context) have been linked to from here. Those proposals go into detail.

  54. colm brazel Says:

    I enjoyed the Smaghi piece even though I disagree fundamentally with the Smaghi perspective he’s selling.

    I’ve particular objection to the following disastrous policy framework he encapsulates quoted below the following points:

    1. If a car is heading down a one way street and gets hit by another car, its not good policy to fix the car and send it on its way again down the same one way street, once again in the wrong direction. This is the policy behind NAMA and the european policy to support banks of the level of brokenness of Anglo.

    2. Smaghi seems indifferently blind to the glaring problem shown up by Central Banks such as our own CB fueling a crisis as in our own property bubble in a matter uncoordinated with the ECB and other central banks in a totally unregulated way.

    3. Rather than [6] below “avoiding disorderly deleveraging of bank balance sheets and the associated potential for a fire sale-driven, vicious downward spiral in asset prices and bank capital” ECB has through the support of NAMA in Ireland built upon the principle of cushioning and asset price manipulation, kicked the can down the road and compounded the problem instead of dealing with it. This has led to market uncertainty and has been a policy rejected and trounced by the markets in particular, who do not buy it.

    4. Rather like a heroin addict, the Irish patient has been put on methadone. The underlying addiction and fiscal instability created by unregulated lending is buffered and held in place by the ECB. Ireland becomes a vassal, zombie state with a broken economy. But, according to Smaghi the problem is fixed!

    5. We should be vexed by the short sighted indifference in the article to the real faultlines in the EMU and the ECB. In that regard, the article is full of problems for Ireland and the EU, rather than solutions.

    “Since the start of the financial crisis, the ECB has implemented a set of non-standard measures, taking advantage of the range of instruments available within the Eurosystem’s framework for the implementation of monetary policy. Foremost among these measures has been the adoption of a fixed rate tender procedure with full allotment in the ECB’s monetary policy operations. In conjunction with the flexible nature of the Eurosystem’s collateral framework, these measures allow banks to obtain funding even in the face of market dislocation. [6] This has avoided a disorderly deleveraging of bank balance sheets and the associated potential for a fire sale-driven, vicious downward spiral in asset prices and bank capital.

  55. seafóid Says:

    Meanwhile back in the boiler room the bust gets bustier

    http://www.ft.com/cms/s/0/eb91ba84-8a27-11e0-beff-00144feab49a.html#ixzz1NpAauvVp

    “European leaders are negotiating a deal that would lead to unprecedented outside intervention in the Greek economy, including international involvement in tax collection and privatisation of state assets, in exchange for new bail-out loans for Athens. People involved in the talks said the package would also include incentives for private holders of Greek debt voluntarily to extend Athens’ repayment schedule, as well as another round of austerity measures.”

    “Despite the hurdles, pressure is building to have a deal done within three weeks because of an IMF threat to withhold its portion of June’s €12bn bail-out payment unless Athens can show it can meet all its financing requirements for the next 12 months.”

    Wolfgang Munchau is having a great crisis

    http://www.ft.com/cms/s/0/cf7b10b8-8a25-11e0-beff-00144feab49a.html#ixzz1Np34PLrp

    “The policy alternatives are becoming increasingly clear. Either the EU/IMF continues to bankroll Greece for as long as it takes, or Greece will be forced into a hard default. There is no middle way”

    ” My hunch is that the European Council would prevent a break-up of the eurozone at this stage, and accept a follow-up programme. Once that programme ended, the same situation would present itself again. Northern European politicians will hyperventilate. They will talk about debt restructuring but in the end, they will roll over again for as long as Greece meets the conditions.
    If Greek politics interferes, all bets are off. Material noncompliance with the EU/IMF programme will always trigger a default. The price for continued support from the EU and the IMF is a quasi loss of economic sovereignty on the part of Greece. ”

    J. K. Galbraith:“The conventional wisdom” gives way not so much to new ideas as to “the massive onslaught of circumstances with which it cannot contend”.

    And what about this?

    In his 1926 book Wealth, Virtual Wealth and Debt: The Solution of the Economic Paradox (a book that presaged the market crash of 1929) Soddy pointed out the fundamental difference between real wealth – buildings, machinery, oil, pigs – and virtual wealth, in the form of money and debt. Soddy wrote that real wealth was subject to the inescapable entropy law of thermodynamics and would rot, rust, or wear out with age, while money and debt – as accounting devices invented by humans – were subject only to the laws of mathematics. Rather than decaying, virtual wealth, in the form of debt, compounding at the rate of interest, actually grows without bounds.

  56. Tomc Says:

    @zou

    Not sure who would be sitting on this fiscal council. We already have some of the most expensive senior civil servants in the world. What exactly is the function of the department of finance? These guys are super world class if their pay is meant to be any reflection of performance or competence.
    We also have the private sector pay scaled staff in the crack NTMA and the full technical staff resources of the IMF and the ECB on call.

    Who exactly would sit on this fiscal council? Social partners, academics, chartered accountants?

  57. Gavin Kostick Says:

    @ Kevin Donoghue

    Thanks very much for the reply, I now have to try to understand the answer! Also, the issue of ‘hanging posts’ is making me uncertain about the timing of posts – but still.

    The ‘Taylor Rule’ (and the fact that he’s around to talk about it) is new to me, and very interesting.

    I read a very simple thing on ‘outside money’, but it will have to wait until a stiff drink is handy.

    Yes, I meant ‘price index’. I was wondering if there was less money about in the system would the price index would change A bit more like when the KLF burnt one million pounds (I suppose until point where the BoE noticed it was gone).

    Also, I was wondering, say if the bank could not get e100,000 on deposit back in (even with an attractive rate), would the fractional reserve system mean even less money about as the bank has to reduce its loan book?

    ‘Of course the ECB’s liabilities are also up by 100k’, is also something I find odd about the euro. The money the ECB puts out is actually a liability against them, is that right? Who on earth is going to cash in on that? I wonder could all the Central Banks of the EZ region bizzarely hold the ECB to ransome?

    Finally I was rather hoping to provoke the Dork of Cork to denounce the whole monetary system all over again, and use the example given as a way to clarify his views.

    Cheers again.

    http://www.youtube.com/watch?v=2_GjZ7i4A6M

  58. The Dork of Cork Says:

    @Gavin
    Well I will give a amateur stab at things

    So (a) – the buyers deposit seems to be a term deposit if it pays a interest of 3% – this is not really a deposit in a bank but rather a loan to the bank (cash & checking accounts should at least in theory be the same thing)

    Lets imagine a simplified idealised CB with Gold on its asset side of the balance sheet and cash as its liability and your asset.
    Given that this buyers deposit was created by a loan in a commercial bank somewhere and now becomes cash, it is the CBs liability now

    (B) If the quanity of Gold remains the same withen the CB then the extra cash becomes devalued relative to the shiny asset.

    (C) wealth is neither created or destroyed withen the monetory juristiction – just transfered , however the external buying potential of the currency becomes compromised (such as for the buying of oil) – hence the reluctance of certain imperiums that do not have a petro currency peg to devalue their currency.

    The balance sheets of CBs are of course far more complicated then the above with probally certain pieces of midland bog somewhere withen Frankfurt balance sheet.
    As for seigniorage and other such concepts well then asking pros such as Lorcan K would be best but I will leave you with this chap who is gaming the CBs seigniorage extraction business.

    http://www.youtube.com/user/wepfinance
    – the above is pure seigniorage gaming since the goverment price is below the current cost price of the nickel , unlike buying gold where you pay a premium over spot for such metal indulgences

    Its the reason why Gold and silver and other base metals with fixed goverment prices at least equal to the extraction cost was taken out of circulation – to enable the CBs to pay their clients over and above the rest of us serfs

  59. Georg Baumann Says:

    How is that saying… walk a mile in another man’s shoes…. Mr. Smaghi is the continuations of double talk supporting austerity based on accounting fraud.

    You know, there are other people as well. such as this man here, Diarmuid O’Flynn – Full-time sports journalist with the Irish Examiner since 1998 – he is walking > 150 miles to Dublin. in protest of the bankster fraud, to deliver a petition against it, and he deserves a mentioning and perhaps a signature if you support it, you find the petition and info on his site here:

    http://thechatteringmagpie14.blogspot.com/2011/05/run-to-dail.html

  60. zhou_enlai Says:

    @tomc

    Part of the idea is to have a body independent of the Minister (which the DoF is not) providing analysis which can be used by the opposition and the media to hold the Govt to account. This has been done in the UK by the Conservative party.

    There is plenty of debate on the fiscal council stuff elsewhere on this site. I just wanted to point that out. There may be some gaps in the debate, but they are not as big as you suggested: “…we spend no time debating how to cut the 7bn of non debt service budgetary deficit in a an economically rational way…”

    There have also been discussions on the McCarthy reports. It is worth looking through the archives if you are interested.

  61. Brian Woods Snr Says:

    @ seafoid:

    Thanks for giving Soddy some further limelight. Much neglected source. Maybe its due to the fact that he was awarded a full Nobel Laureat for chemistry, not the bank prize economics! I notice the current price of the book is $114! I obtained mine for $15! :-)

    Brian Snr.

  62. The Dork of Cork Says:

    ?

  63. The Dork of Cork Says:

    @Gavin

    Well I will give a amateur stab at things

    So (a) – the buyers deposit seems to be a term deposit if it pays a interest of 3% – this is not really a deposit in a bank but rather a loan to the bank (cash & checking accounts should at least in theory be the same thing)

    Lets imagine a simplified idealised CB with Gold on its asset side of the balance sheet and cash as its liability and your asset.
    Given that this buyers deposit was created by a loan in a commercial bank somewhere and now becomes cash, it is the CBs liability now

    (B) If the quanity of Gold remains the same withen the CB then the extra cash becomes devalued relative to the shiny asset.

    (C) wealth is neither created or destroyed withen the monetory juristiction – just transfered , however the external buying potential of the currency becomes compromised (such as for the buying of oil) – hence the reluctance of certain imperiums that do not have a petro currency peg to devalue their currency.

    The balance sheets of CBs are of course far more complicated then the above with probally certain pieces of midland bog somewhere withen Frankfurt balance sheet.
    As for seigniorage and other such concepts well then asking pros such as Lorcan K would be best but I will leave you with this chap who is gaming the CBs seigniorage extraction business.

    http://www.youtube.com/user/wepfinance
    – the above is pure seigniorage gaming since the goverment price is below the current cost price of the nickel , unlike buying gold where you pay a premium over spot for such metal indulgences

    Its the reason why Gold and silver and other base metals with fixed goverment prices at least equal to the extraction cost was taken out of circulation – to enable the CBs to pay their clients over and above the rest of us serfs

    PS – to Irish economy blog – posted on zero hedge that I was denied access for some reason , subsequently apologized.
    I suppose it was some technical glitch.

  64. The Dork of Cork Says:

    If you are watching Zero hedge – it seems I have been blocked from posting on the Irish economy blog again – such is life

    Here is the response to your final question on “the one size fits all thread”

    Well I will give a amateur stab at things

    So (a) – the buyers deposit seems to be a term deposit if it pays a interest of 3% – this is not really a deposit in a bank but rather a loan to the bank (cash & checking accounts should at least in theory be the same thing)

    Lets imagine a simplified idealised CB with Gold on its asset side of the balance sheet and cash as its liability and your asset.
    Given that this buyers deposit was created by a loan in a commercial bank somewhere and now becomes cash, it is the CBs liability now

    (B) If the quanity of Gold remains the same withen the CB then the extra cash becomes devalued relative to the shiny asset.

    (C) wealth is neither created or destroyed withen the monetory juristiction – just transfered , however the external buying potential of the currency becomes compromised (such as for the buying of oil) – hence the reluctance of certain imperiums that do not have a petro currency peg to devalue their currency.

    The balance sheets of CBs are of course far more complicated then the above with probally certain pieces of midland bog somewhere withen Frankfurt balance sheet.
    As for seigniorage and other such concepts well then asking pros such as Lorcan K would be best but I will leave you with this chap who is gaming the CBs seigniorage extraction business.

    http://www.youtube.com/user/wepfinance
    – the above is pure seigniorage gaming since the goverment price is below the current cost price of the nickel , unlike buying gold where you pay a premium over spot for such metal indulgences

    Its the reason why Gold and silver and other base metals with fixed goverment prices at least equal to the extraction cost was taken out of circulation – to enable the CBs to pay their clients over and above the rest of us serfs

  65. The Dork of Cork Says:

    Is their some technical glitch ?
    tried to post a longish piece in response to Gavin – cannot see it ?

  66. Gavin Kostick Says:

    Thanks Dork, it came through.

  67. Gavin Kostick Says:

    @ The Dork

    A bit late in the day.

    I remember the legendary Blue Peter episode where they brought a pound note to the Bank of England and tried to cash it in for its value in gold.

    So I can see in your system that paper money is a liability against a central bank.

    I gather from Kevin Donoghue’s answer above, that the euro note is also a liability, ulimately against the ECB.

    I am wondering what I would get (as there is no gold there), other than kicked out, if I went to the ECB with a 20 euro notes and asked for its ‘value’? Is there still any ‘promise to pay the bearer’?

  68. Kevin Donoghue Says:

    @Gavin Kostick

    At best, you’d be asked if you’d like two tens or four fivers. It’s a bit like the Harry Worth sketch where his bank manager is hassling him about his overdraft and he finally says okay, I’ll give you a cheque! The notion that fiat money is a liability of the central bank is really just a logical consequence of double-entry book-keeping.

    Incidentally, I was being a bit facetious when I said you might need a drink before tackling the notion of “outside money”. Really, all that term means is that the asset is issued by an entity “outside” the private sector — the central bank. So it can fairly be considered part of the private sector’s net wealth, in contrast to ordinary debt which washes out in aggregate. What could really drive you to drink is the literature spawned by Robert Barro’s famous question: are government bonds net wealth?

  69. The Dork of Cork Says:

    @Gavin
    I think the ECB wants you to exchange your credit deposits for Gold – however I think it would prefer euro dollar reserves to move towards their balance sheet and therefore recapitalise their blushes. (Euro dollars are not Euros and are not necessarily based in Europe !)

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