43 thoughts on “Mody on “Europhoria””

  1. The fall in peripheral yields, the ‘europhoria’, appears to have been driven by buying from ‘real’ money, as opposed to hedge funds, and to some degree, domestic banks. As Mody notes, the fundamentals have not improved so what has changed?. Rightly or wrongly, investors presumably perceive that the re-denomination risk has fallen sharply in most of the periphery, whether due to OMT specifically or to a broader belief that the political will exists to keep the euro, as is evident by policies cobbled together over the past few years. The ban on naked CDS positions also makes it more difficult to take large short positions in euro bond markets. Whether the single currency survives is still likely to be determined by electorates, whether through austerity fatigue or creditor fatigue-‘europhobia’

  2. ‘ ban on naked CDS positions ..’

    Positive. The derivatives sector of the financial system is out of control – and a vast range of them serve no useful ‘human’ purpose. Free bazookas anyone?

  3. This paper has the right degree of truthiness.

    ‘Bondholders have come to expect that they will be bailed out and, as such, lending is virtually risk free.’

    As Michael Hudson points out, central banks are independent of politicians, but they are not independent of banks or creditor interests.

    http://www.amazon.com/THE-BUBBLE-BEYOND-Michael-Hudson/dp/3981484207.

    Plutocracy is an ancient form of tyranny. Capital gains is the way you takes your winnings these days, so asset inflation is the goal. The power to rig the economic game has reached new heights, with the MSM and the hired economist guns spinning away behind the veil of democracy and ‘open dialogue’.

  4. Draghi convinced the market that the fat tail risk of a Euro breakup was under control . Markets can’t price that sort of thing anyway. They are much better at algorithmic speed trading and assymetric info shafting. So when Draghi whistled everyone piled in. And never bet against the Central Bank.
    But the risk hasn’t gone away.
    There was a poignant cartoon in this week’s Canard enchainé. A man named PME (short for small and medium size enterprises) at a window trying to launch a paper plane called ‘confidence’ out the window. On the floor were all the previous planes that didn’t fly.

  5. A very interesting and informative paper. There are,however, two oddities that deserve comment as they illustrate that, while the author’s command of the technical detail is unquestioned, the same cannot be said for his political judgments.

    “Where the distressed sovereign is insolvent, the risks borne by the official lenders will be significant: the process of forgiveness-in-driblets of Greek official debt illustrates the pressures. If the distressed sovereign in the future is larger than Greece, the costs imposed on the official creditors would be correspondingly larger. Both the economic resources and the political willingness to deliver on this promise can thus come into question, not least because this policy has essentially arisen as a bureaucratic response without seeking a political mandate. Indeed, the reason for not seeking the political mandate was precisely that it would be rejected.”

    Is the author saying that the ministers for finance involved in the decision-making, no matter how one views it, lack a democratic mandate?

    “Moreover, unlike the ECB’s OMT, the IMF’s lending is still based on the presumption of preferred creditor status, to be repaid before all others—in the Greek case, the IMF has encouraged easing of terms charged by official European lenders while being itself repaid in full.”

    The EA cannot be treated as a political animal and the IMF as a black box. The decision-makers in the IMF, one of whom – the US – enjoys a veto, are also politically mandated.

    On the ban on naked default swaps, the position of the IMF is worth recalling.

    http://www.ft.com/intl/cms/s/0/dfda3d9e-a2b0-11e2-bd45-00144feabdc0.html?siteedition=intl#axzz2tD78nIc8

    A cynic might say that, having been taken to cleaners by Wall Street once, EU governments were not inclined to volunteer to repeat the experience.

    Some news from Eurostat.

    http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-14022014-AP/EN/2-14022014-AP-EN.PDF

  6. fyi Mick Clifford also on fine form – must be the day that is in it …

    ‘WHO would be a watchdog in a dysfunctional democracy? The events of the last five days demonstrate that in one vital area, this State resembles something plucked from the dark imagination of Franz Kafka, rather than amodern European country.

    http://www.irishexaminer.com/analysis/gsoc-controversy-highlights-the-joke-of-a-democratic-ireland-258710.html

    [n.b. the ‘title’ of one of Kafka’s best known work is embargoed for the duration]

  7. @ David O’Donnell

    ‘WHO would be a watchdog in a dysfunctional democracy?’

    Made me think of poor Patrick Neary.

  8. @ DOCM

    ‘A cynic might say that, having been taken to cleaners by Wall Street once, EU governments were not inclined to volunteer to repeat the experience’

    It is not the governments, which are being taken to the cleaners, it is the ordinary citizens. Top politicians and public officials can look forward to substantial pensions, private sector sinecures, and speaking opportunities as a reward for services rendered.

    While there has been some learning, the principle of divide and conquer is still operative among the nations. The general thrust of EU governments is to preserve and protect banking and creditor interests, and to promote financialisation aka looting at the expense of economic development. That policy can result only in stagnation and debt deflation, starting at the periphery and moving towards the core.

    The sort of ‘obscure’ developments described in this link get scarcely a mention, yet they affect the lives of millions. It’s amazing what you can do when you have an iron grip on the MSM. Keep the focus firmly on the personalities and the political circus, while the serious biz is done behind closed doors.

    http://www.nakedcapitalism.com/2014/02/focus-tbtf-banks-misses-even-powerful-private-equity-kingpins-moving-unregulated-parts-banking.html

  9. “It is not the governments, which are being taken to the cleaners, it is the ordinary citizens.”

    +1

    And the risk is building up again and it’s going to crash again and there won’t be any CB magic to make it better. Growth is gone ..

    I had to laugh yesterday . A UBS ad “More interest, more saving”
    1.5% interest

    Blow me over with a feather duster. 1.5%.
    Unbelievable, Jeff
    Why are interest rates still so low, Jeff ?

  10. @ Paul Quigley

    I was referring to the use of naked CDS to speculate on EA sovereign debt as far as the present and “going forward” is concerned. The reference to being “taken to the cleaners” was to the well-documented shenanigans in relation to sub-prime lending and the use of derivatives.

    Ultimately, the taxpayer is, of course, the loser.

    cf. the experience of Germany as analysed in this INSEAD paper.

    http://www.insead.edu/facultyresearch/research/doc.cfm?did=44430

    In short, the only thing possibly worse than having unregulated banks running the show is to have politicians doing it through state ownership of the national banking system.

  11. @DOCM
    “In short, the only thing possibly worse than having unregulated banks running the show is to have politicians doing it through state ownership of the national banking system.”

    Why?
    Banks are utilities. Governments run water utilities…
    AIB had to be bailed out by the Government twice in 30 years.
    What use was private sector management there?

  12. @seafóid

    Banks are utilities. Governments run water utilities…
    AIB had to be bailed out by the Government twice in 30 years.
    What use was private sector management there?

    +1

    It is a bit galling, is it not, to hear about the clear superiority of the private banking system (even totally unregulated apparently!) over control by the state after the financial sector caused a worldwide crisis and Josephine Citoyen had to spend hundreds of billions of Euro to rescue it from its own stunning incompetence and greed. I mean it is five years later and there is still no certainty that the banking bailouts are finished or that the financial sector is reformed and stable.

    I often wonder about the psychopathology of neoliberalism. Some of it is reactionary zealotry, some of it is obviously a lack of empathy coupled with intense affect, a substantial fraction seems to be avaricious sociopathy but there is more than that going on here – there is a very serious disconnect from reality.

    How can you look at five years of European economic policy failure and not think that the thinking behind it must be defective? How can you look at the failure of the financial sector and think that everything else has to change? What kind of thought processes are at work here? It can not all be dishonesty and class interest. This is a collective cognitive disorder of the policy making apparatus in Europe.

    I think Aidan Regan was closing in on it here:

    “The Fairytale of Europe’s Magic Improving Dust Formula”

    …But the point to be noted is that the empirical non-falsifiability of structural reform policies is the idea that underpins the consensus between the national and supranational. It enables all of the actors to sell a policy that no one understands or can even refute. It is a fairytale….

  13. @Shay Begorrah

    On ‘the psychopathology of neoliberalim’ and its backers:

    Some empirial if illustrative evidence [great graphic]

    A rare look inside the Koch brothers political empire

    The labyrinthian design of the political network backed by the Koch brothers and their fellow conservative donors serves several purposes, but one of the biggest is to ensure the privacy of its financial backers. As we detailed last month, the money flows through a complex maze of tax-exempt groups and limited liability corporations, creating multiple barriers that shield the identities of the donors. Such anonymous contributions should be allowed, Charles Koch has argued, to protect people from the attacks that he and his brother David and their company have fielded. Critics say the Kochs and their allies seek to influence elections without accountability.

    http://www.washingtonpost.com/blogs/the-fix/wp/2014/02/05/a-rare-look-inside-the-koch-brothers-political-empire/

    p.s. Elements within the Blind Biddy Hedge School are presently mapping the Hibernian equivalents; no point in waiting for the Unis!

  14. @David O’Donnell

    The Koch brothers are fascinating. They are a coincidence of the worst kind of reactionary impulses, utter disdain for anyone who is not wealthy and staggering resources (perhaps 26 billion dollars each). What puts the evil cherry on top of the sociopathic pie is that they are determined to be reverse robin hoods, ceaselessly campaigning to take from the poor and give to the rich.

    @paul quigley

    They Yves Smith piece is good (as usual), keeping investment banking small and comprehensible enough to manage is at odds with the required scale and complexity needed to maintain a competitive edge. There is an evolutionary pressure to become unmanageably complex and dangerously large.

  15. @ Paul Quigley

    Thanks for the link.

    This comment by John McManus IMHO is closer to the reality of (i) what may be achievable and (ii) what is coming down the tracks.

    http://www.irishtimes.com/business/economy/germany-s-legal-nit-picking-put-stability-in-second-place-1.1693835

    I also found this comment by Adair Turner to be very informative and, again, anchored in what seems to be happening at the levels that matter i.e. the decision-makers and the voting public (where this right exists).

    http://tinyurl.com/odp2u3b

    This side of the European elections, one can expect little in the way of constructive debate. If both the far left and the far right make gains, having in common (i) an unbridled dogmatism and belief in the validity of their positions and (ii) disregard for the institutions that countries have signed up to, the pressure on the centre-left and centre-right to achieve a new equilibrium in the EU will be immense. The outcome will, in practice, be a rather modest affair as there is no general appetite for the many “pie in the sky” proposals emanating from different quarters.

  16. The Koch Bros are odious.

    @ DOCM

    “If both the far left and the far right make gains, having in common (i) an unbridled dogmatism and belief in the validity of their positions and (ii) disregard for the institutions that countries have signed up to, the pressure on the centre-left and centre-right to achieve a new equilibrium in the EU will be immense. ”

    If the Far left and far right make any headway it”ll be the fault of the elites who didn’t bother acting in time. You always support Olli and co but they have made a horse’s #### of the EZ.
    Big fallout this week and last week in CH from the vote on Feb 9. a lot of fingers are being pointed at out of touch elites. The NZZ yesterday was particularly scathing.

  17. @ seafóid

    Hence my dismissal of the many “pie in the sky” proposals flying around which demonstrate a great deal of hubris on the part of their originators and zero political nous.

  18. @DOCM

    If both the far left and the far right make gains, having in common (i) an unbridled dogmatism and belief in the validity of their positions and (ii) disregard for the institutions that countries have signed up to, the pressure on the centre-left and centre-right to achieve a new equilibrium in the EU will be immense.

    <Sighs>. You see this a lot in American politics, where the right claims to represent the centre or be willing to come to a centrist accommodation. In fact the modern centre left already (mistakenly) accommodated and is centrist while the centre right has moved in a more reactionary direction since the 1980s (that is you by the way). The left has already compromised as much as is possible without losing all relevance.

    It is also insulting to the intelligence of every reader to suggest that right and left are somehow co-responsible for the failure of Eurozone economic and monetary policy in a period when the European Commission and ECB are unapologetically neoliberal and the right has enjoyed almost total political power in the EU (not coincidentally I might add). What role exactly has the left had in this?

    Finally anyone who suggests the that the current European Institutions are deserving of our respect for what are essentially legal reasons should be ashamed of themselves. It is these very institutions that are dogmatic and are indifferent to the well being of the people. They need to be purged, dismantled or escaped from.

  19. @DOCM

    Hence my dismissal of the many “pie in the sky” proposals flying around which demonstrate a great deal of hubris on the part of their originators and zero political nous.

    Paul Krugman’s Eurovenn remains the last word (or diagram) on what “political nous” means in a European context.

    http://krugman.blogs.nytimes.com/2011/09/28/the-eurovenn/?_php=true&_type=blogs&_r=0

    The sad fact is that what is currently acceptable in European politics is just not compatible with solving the real world problems we face, the “political realities” and “physical reality” are in opposition.

    The problems will not change so the politics will have to and that does not require accommodation, it requires confrontation.

  20. @ seafóid

    By the way, on your remark in relation to the fact that I am generally supportive of the Commission, this is largely true but not because I hold the performance of individual commissioners, and notably the President of the Commission, in high regard but because the Commission is institutionally required to promote the “general interest” of the EU. It usually makes a reasonable job of it (especially in the context of its strongest institutional role; that of being the competition authority of the EU).

    The debate among elites, especially among those that do not stoop to participating and competing in the political arena, seems to me to be divorced from any need to observe what is actually going on on the European pitch. It is obvious, for example, that there is no mood in the European electorate to scrap the entire game and its existing rules and to start from scratch.

    An interesting exercise is to draw up mental shopping lists of the stated public demands of the main players. They overlap to a surprising but highly predictable extent, enough to achieve an agreement using the simplified revision procedure in the Lisbon Treaty i.e. without the need to refer any agreement to a referendum in France. (No doubt, Ireland will hold one; don’t we always?).

  21. @DOCM
    Elite complacency is a massive EZ operational risk , not to mention UK risk. Tull says the Tories are preferable to Farage and they are but if they push failed policies too far they are liable to lose control of the dynamic. Same goes for Olli pactus.

  22. @DOCM on the European Commission

    …the Commission is institutionally required to promote the “general interest” of the EU. It usually makes a reasonable job of it (especially in the context of its strongest institutional role; that of being the competition authority of the EU).

    I know you are the only supporter of the European Union status quo here, that it is a very lonely and thankless job and that you are obliged to do it but it still amazes me you come out with this, ahem, stuff.

    How much worse a job could the European Commission have done on economic and monetary affairs? How much lower could the caliber of its commissioners be? Rehn is a ignorant right wing clown while Buti is a figure of derision and contempt. Draghi is doing a good job with a bad brief but he has little real power but everyone knows Germany sets the limit of his options.

    I suppose if the general interest of the EU and the well being of its citizens are not tightly coupled it is a slightly less absurd thing to say but still the general interest of the EU can not involve being an international laughing stock for its failed economic management and institutional ineptitude. Can it?

  23. @ seafóid

    I do not think that it is complacency but more than a slight air of panic. On the mental exercise that I suggested, and looking at the possible categories, these occur to me; (i) developments in real economy (ii) calendar (iii) policies and (iv) events (a la MacMillan).

    The last mentioned can, of course, also occur under (i) and (ii) and, if Ashoka Mody is right, the most serious would be a renewed collapse in confidence in the euro (which I consider to be highly unlikely). In the calendar, a vote by Scotland to leave the UK would really set the cat among the pigeons but I would consider this also to be unlikely. A breakthrough by both the extreme left and the extreme right in the EP elections seems a real possibility (refer back to “panic” above).

    The other calendar events that suggest themselves offhand for consideration are the decision of the GCC on the ESM (which is unlikely to further rock the boat too much) on 18 March, concluding the banking union negotiations with the EP before the elections in May and the “musical chairs”, as Dijsselbloem described it in a weekend interview, with regard to the allocation of the major portfolios in the new Commission (taking up office in November); not to mention the appointment of a permanent chair to the Eurogroup (which Dijsselbloem conceded was a possibility).

    On the policies front, tightening the rules with regard to free movement is a definte runner
    The known unknown is whether there will also be agreement to open the Pandora’s box of a treaty re-negotiation (an essential lifebuoy – in more senses than one – for Cameron).

  24. @ seafóid

    I was intending to add the TTIP in the policies section cf.

    http://www.ft.com/intl/cms/s/0/1f0fe13e-9582-11e3-8371-00144feab7de.html#axzz2tD78nIc8

    The two big signatories missing are, of course, France and Germany, the first because no French trade minister could afford politically to sign it (and the current one would not want to in any case) and the second because, one assumes, it would have been impolitic to do so in the context of maintaining the bilateral alliance assumed to be at the heart of the EU. That does not change the fact that Germany is largely ad idem with the UK in matters relating to trade.

    Incidentally, the role of the Commission in conducting trade negotiations has been much clarified and strengthened by the Lisbon Treaty.

  25. @ DOCM

    Many thanks for the Adair Turner link. Chimes nicely with Hudson’s Bubble and Beyond.

    If one accepts Turner’s analysis, then Draghi is clearly impotent in macroeconomic and economic development terms. Any monetary easing which he introduces will serve only to inflate property and asset prices, but will not feed through to ‘productive investment’, or employment.

    Absent radical tax reform, targeting the capital gains by which the 1% take their rewards, (to be loaned out again for even further tax-free rewards), there is no escaping the treadmill of chronic indebtedness and economic regression. It is a race to the bottom for those not protected by various types of employment and social guarantees. There are going to be a lot of sad parents and grandparents.

    I quote from Aidan Regan, as Shay kindly linked above:

    ‘Structural reforms are, ultimately, a short-hand to say more markets and less politics’

    Asset markets behave very differently from commodity markets, and that is the nub of it. DSGE is yesterday, Minsky is the model for today.

    Meanwhile the economics profession has abandoned and betrayed its classic and historical origins. Where is their 21st c. analysis of rent and unearned income ? It is no wonder the pols are disoriented.

    As you say, radical parties are in the offing, but most lack sound economic analysis. As a result, they will be easy enough for the 1% to fund, mislead and subvert. A good dose of bloody xenophobia, a la Ukraine, will serve to buttress a rotten status quo. Plus ca change.

    As Turner puts it:

    ‘These developments are consistent with the conclusions I have reached in this lecture. But they suggest that the forces driving macro-‐economic phenomena may be even deeper than I have suggested, and may require even more fundamental rethinking of some economic theory.’

    MMT is a good place to start, IMHO.

    http://www.levyinstitute.org/

  26. @ Paul Quigley

    One does not have to accept the analysis of Turner as he is neither prescriptive nor dogmatic in his approach. He gets my vote as he does not believe in the counsel of despair currently doing the rounds under the title – incomprehensible outside certain circles – of “secular stagnation” (if I have it right). The fact is that general, competing and contradictory economic and social theories on what has gone wrong, and how to put it right, appear to have lost almost all credibility and, to a certain extent, caused a loss of reputation for the disciplines associated with them.

    With any luck, the developed economies involved will right themselves despite the action of politicians; irrespective of the academic advice it happens to be based upon.

    P.S. One must also recall that the FSA in the UK, no more than in Ireland, was not exactly a howling success.

  27. @ DOCM

    With respect, that is a philosophy of ‘hit and hope’, which sits uneasily with your lapidary political and institutional analysis. Ask Joe Schmidt. It’s not enough to have a good lineout, total football is required.

    There are economic academics, but economics is a social science, with profound applications in the real world. The FSA was a prisoner of the prevailing ‘free markets’ ie free asset prices and free private credit creation, orthodoxy. We need to re-socialise, or if you like civilise, finance, IMHO. The alternative is barbarism and social fracture.

    ‘Secular stagnation’ is not a counsel of despair. It is a diagnosis, and a very serious one.

    ‘Hansen, who argued in the late nineteen-thirties that “secular stagnation” had befallen the U.S. economy, turned out to be wrong. But that had a lot to do with a big Keynesian stimulus program otherwise known as the Second World War, which served as the precursor to three decades of widely shared prosperity. Absent another military conflict, it is hard to see where a comparable burst of capital investment and innovation is going to come from. The online revolution, after a promising start, has so far proved disappointing. The green-energy revolution hasn’t really got going. There doesn’t appear to be the political will to seize upon a rebirth of America’s old cities and invest in the “new urbanism.” Unless something else comes along, it looks like we will be left with the old formula of cheap money and rising asset prices. And, as Summers points out, we all know where that leads.’

    http://www.newyorker.com/online/blogs/johncassidy/2014/01/is-larry-summers-right-about-secular-stagnation.html

  28. imho imho !!! Little slips on the Humility Index – we even accept nano-equivalents …. (ever since the McDowells were tested ….)

  29. @DOCM

    We are dealing with an imperfect world and have to make do with what is available. The US is not a useful model, least of all for the EU.

    It is the Eurovenn again and again and again. Sad.

    Perhaps, given that the policies chosen so far have failed miserably and the politically possible ones will not work in the real world (actual reality), we should be focused on making the world a less imperfect so that successful policies are possible? Why continuously opt for failure over change?

    The other option is slavishly supporting the Eurozone establishment line, which seems a little craven, or encouraging us to sit back and wait on developments which is getting a little tired five years in to a unresolved crisis.

    Remember that the Eurozone is the one of the worst performing developed economies since the crisis. Why reward failure with faith? It has got to sink in at some point.

  30. @ DOCM

    Eurointelligence doesn’t see much to cheer about

    If that is the compromise, then one wonders why the European Parliament kicked up such a fuss. The ability by national compartments to seek external funding through host-state guarantees is not a big deal at all. All the essential criticisms of this agreement remain in place. It is unwieldy. It is not relevant for this year’s stress tests for which it would matter the most. And it does not cover macro risks. The latter point is possibly the most important. Even with a programme like this, the EU could never stem a TARP programme if confronted with another macro-scale banking crisis. We believe this resolution and the compromise are not a step in the right direction, but might possibly reduce the solidity of the system, as ultimate responsibility is not clearly assigned, which was the case before.

  31. @ DOCM

    I agree that solutions have to be worked through the complex political, institutional and cultural landscape of Europe, but the problems of the financial system are not uniquely European and have been mainly been driven by US practices, or should I say malpractices. The City of London, for example, owes its modern day strategic position to the Eurodollar marker, which was designed to evade US capital controls.

    These days, the strategy of ‘global finance’ is simply to capture the various national executives. The beast has grown.

  32. @ Paul Quigley

    Eurointelligence, because it is asking for more than the present political and institutional situation allows, is missing the essential point viz. Germany has accepted the principle of eventual mutualisation of responsibility for the conduct of banking in the Euro Area; in the form of a transitional timetable – still under discussion – where the quid pro quo is essentially for participating governments to first get their banking sectors into shape with some possible limited financial assistance.

    It might be argued that it is the banks that are eventually taking on the responsibility, and only against limited risks, but this is ultimately simply a convenient political fiction as the experience both in the US and Europe post-Lehmans has demonstrated.

    As to the European Parliament, it marches to the tune of the major political groupings over which national governments have considerable influence. This situation may not prevail in the new parliament. The pressure to strike a deal is immense. Given the stated position of the ECB, one wonders if Schaeuble did not have up his sleeve the concession on the time-frame in the deal he struck with the other ministers. There is also so the fact that there is a new government in Berlin with the SPD more favourable to an agreement than the junior party, the FDP, in the previous government.

  33. @DOCM

    Eurointelligence, because it is asking for more than the present political and institutional situation allows…

    The Eurovenn again? Already?

    If you are not willing to challenge the present political and institutional arrangement in the Eurozone then you will not be a part of any solution.

    Alternately if you think that Ireland has no choice but to accept (and even simperingly support) the present political and institutional arrangement in the EU then you are making a terrific argument for leaving the Eurozone, or at least trying to sink it.

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