From today’s Open Europe news summary:
1. Brussels proposes revamped €11bn aid package for Ukraine
2. The European Commission yesterday released its in-depth review into macroeconomic imbalances, in which it called for “policy action” on the German current account surplus, but accepted that steps were being taken.
3. Greece seeking debt guarantees to aid return to market
4. The ECB will hold its monthly meeting today with expectations split over whether the bank will take further action to fight low inflation. Recent stronger data, on inflation and economic activity, may potentially allow the ECB to avoid taking drastic action, according to the WSJ.
5. Discussions between member states and MEPs are at a deadlock over the plans for a banking union and in particular the single bank resolution fund. Negotiations were called off last week but MEPs will present a compromise proposal to member states next week.
Europe is bankrupt, yet it will give eleven billion euros to a country that is not a member of the EU. Germany is criticized for producing goods that people want to buy and is willing to accept ever depreciating pieces of paper (actually ever depreciating TARGET2 credits at the ECB) in return. Greece wants to borrow even more from the credit markets using the rest of Europe as guarantors. The ECB is determined to debase the euro and not allow prices to fall, which would be a blessing to the average European citizen. And, finally, the EU is determined to socialize bank risk continent-wide, which will elevate moral hazard in order to further deplete Europe’s capital base.
The world is turned upside down.
Re: Fed’s Aid in 2008 Crisis Stretched Worldwide
Your article about the Fed’s actions in 2008 to lend $580 billion in so-called “swap lines” to central banks internationally sounds a note of triumphalism that is completely unwarranted. The Fed had no authority to lend to these entities, despite its attempts to justify its action as lending against collateral. In any regard, if the collateral against which the Fed lent dollars was so strong and, as your article states, the American taxpayers actually made money on the deal, why did the Fed need to get involved at all? The obvious answer is that the Fed took an illegal risk that fortunately worked out. New York Fed President Timothy Geithner’s chest puffing statement that “the privilege of being the reserve currency comes with some burdens” is especially troubling in that we may assume that in the future the Fed will engage in similar risky adventures. One final note…what caused the 2008 crisis in the first place? Your article identifies it perfectly: “The root cause of the problem was this: Global banks did lots of business in dollars–buying up United States mortgaged-backed securities,…” And what initiated the massive issuance of these soon-to-be-worthless mortgaged-backed securities? Fed money printing. So, please, let’s not call the Fed a hero, when it really caused the crisis that led to its illegal actions.
In your February 24th edition under “The Week” recap of significant news events you make the astounding statement that Ben Bernanke should be applauded for his massive money printing, interest rate pegging, socialist monetary planning maneuvers during and after the 2008 crisis. Now, I do not expect National Review to spout the Mises Institute’s Austrian critique, but all Bernanke did was short stop the necessary and inevitable recession of which he himself was greatly responsible only to re-inflate the bubble in order to guarantee us an even greater crash after he leaves his watch. Please, please tell your readers that money is not the play thing of governments. It is part and parcel of the free market economy. Without sound money economic calculation is impossible.
Re: Abe grapples with mystery of missing J-curve
Perhaps I can shed some light on Japanese Prime Minister Abe’s missing J-curve; i.e., why Japan’s trade deficit seems to be increasing rather than decreasing after massive monetary intervention to reduce the purchasing power of the yen. Monetary debasement does NOT result in an economic recovery, because no nation can force another to pay for its recovery. Monetary debasement transfers wealth within an economy by subsidizing exports at the expense of the entire economy, but this effect is delayed as the new money works it way from first receivers of the new money to later receivers. The BOJ gives more yen to buyers using dollars, euros, and other currencies, as the article states, but this is nothing more than a gift to foreigners that is funneled through exporters. Because exporters are the first receivers of the new money, they buy resources at existing prices and make large profits. As you state, exporters have seen a surge in their share prices, but this is exactly what one should expect when government taxes all to give to the few. Eventually the monetary debasement raises all costs and this initial benefit to exporters vanishes. Then the country is left with a depleted capital base and a higher price level. What a great policy!
The good news is that Japan does know how to rebuild its economy. It did it the old-fashioned way seventy years ago–hard work and savings. Patrick Barron
From today’s Open Europe news summary:
The WSJ reports that the ECB earned €1.4bn in net profit last year, well below that of the US Fed and the Bank of England. Open Europe’s Raoul Ruparel is quoted noting that the actions of central banks can give a “double benefit” by delivering a profit and keeping rates low for governments. However, he warned that this “shouldn’t be a key metric by which central bank action should be judged,” as it could create perverse incentives. WSJ Capital.gr Economica
The ECB’s supposed profit is phony. The same with that of the Fed. A central bank prints money when it monetizes a government bond. The government pays off the bond with more printed money, and the central bank books the interest as profit. This is just an accounting fiction between a counterfeiter of money and his beneficiary. Patrick Barron
From today’s Open Europe news summary:
The European Parliament’s economic affairs committee yesterday voted in favour of a proposal to limit credit card payment fees charged to retailers by banks at 0.3% of the transaction value, reports EUobserver. Negotiations with the Council on the final shape of the rules are not expected before the European Parliament elections in May. EUobserver
The certain consequences of this new proposal will be to reduce the number of businesses that take credit cards, because the credit card companies will not be able to make a profit serving small businesses with low average individual transaction amounts. The big retailers will benefit from this new law and may even have had a hand in drafting it.
Re: Obama Orders New Efficiency for Big Trucks
President Obama needs a lesson in Econ 101. Requiring that business meet a new fuel economy standard in order to achieve some environmental goal, no matter how discredited the theory, is one thing, but justifying it by claiming that business and consumers will benefit from lower prices is another. If this were the case, there would be no need for the new fuel economy standard either for big trucks or personal automobiles. Business pursuit of profits and consumer pursuit of better deals is all that is necessary. Let the public be warned: higher fuel economy standards for both big trucks and automobiles will cause our cost of living to rise and our standard of living to fall.
Re: Fed Closes a Loophole for Banks Overseas
Re: Lending Where Banks Can’t: Blackstone Thrives in Ireland
These two articles appeared on the front page of your Business Day section on Wednesday, February 19, 2014. Nothing could more completely refute the claims of the Federal Reserve Bank that its new tougher capital rules and regulatory oversight for foreign banks operating in the US and US banks operating overseas will “help ensure that capital keeps flowing during times of stress” than these two articles. The first article reports that the Fed brushes aside the banks’ protests that their operating costs will rise, leading to loss of market share, while the companion article tells of the success of the Blackstone Group to fund those very businesses that the banks can no longer afford to serve. The Fed and its sister regulators in Europe will find that in the future they will be regulating smaller and more irrelevant businesses. Patrick Barron
Re: A Picture of Detroit in Ruin
Detroit does not need another worthless plan in order to deal with its problems. To what end will a “blight plan” be put? This is the question that should have been asked before spending time and money documenting what all can see. Detroit’s blight is a symptom of a larger problem; it is not the problem itself. Detroit needs economic freedom. Declare Detroit a free city–free from federal and state taxes and regulations. End zoning. Sell off government owned property at whatever price it commands. Allow the people to make whatever use they may put their property, and then get out of the way. What will happen? Expect the first flowers of true economic freedom to blossom–unlicensed schools, beauty and barber shops, day care centers, restaurants, home and appliance repair centers, storage facilities, bodegas, computer repair, etc.. Then watch for light manufacturing to return–all unlicensed, of course–perhaps supplying parts to what remains of the automobile industry. Allow people to arm themselves without getting a government approved license, so that the average citizen can protect himself and his property. If you say this is impossible and that it will not work, then you obviously haven’t read American history.
Re: China Digs Itself Deeper into Dollar Trap
This short Bloomberg article is written from a Chinese point of view; i.e., that China finds itself in a trap having sold over a trillion dollars in goods in exchange for what may become worthless pieces of US debt. If it tries to shed itself of this debt too openly and too rapidly, it could suffer a collapse in the value of its holdings and set off a worldwide financial crisis.
The larger picture is that the collapse will be worse the longer China dithers and does nothing. It is clear that the US Federal Reserve Bank has no intention of restoring sound money any time soon. How can it when federal spending is so out of control that the US Congress last week completely suspended the budget ceiling? The Fed will monetize whatever US Treasury bonds the open market will not buy at a very high price.
The US Fed is the culprit, but China was always the willing stooge.
This crisis will end when a major player like China decides that enough is enough. As horrific as the cleansing may be, it is simply reality revealing itself. There never was an unlimited international appetite for US Treasury debt. The world bought the debt only because it assumed that America would honor the debt in money of equal purchasing power. For a long time now, no one has believed this fairy tale. But everyone is afraid of the necessary and inevitable recession/depression to come. The longer we wait the worse it will be.