Worldwise: German Sentiment (Karl Smith & Arash Molavi Vassei)
 

A technical problem caused only the first part of this diavlog to be recorded. We apologize.

"Heavy Haircuts"
 

This diavlog is important, overdue, too brief, and wicked scary.

Re: "Heavy Haircuts"
 

Yes indeed.

Re: "Heavy Haircuts"
 

All the more reason to regret the technical error that cut it short.

Maybe Karl and Arash would be willing to re-record the full length conversation -- and maybe BhTV would be willing to post it.

Re: Worldwise: German Sentiment (Karl Smith & Arash Molavi Vassei)
 

The Germans would be insane to allow the ECB to expand its authority. If anyone has learned anything in this crisis, it is that the political class of Brussels considers any single European national interest to be expendable.

Re: Worldwise: German Sentiment (Karl Smith & Arash Molavi Vassei)
 

Looks like the diavlog took a a haircut.

Economic government = trade barriers imposed from above
 

It's a shame that most of the diavlog was lost.

I think I share Arash's train of thought. The question arises what exactly the proposed "european economic government" is supposed to do, in order correct for the problems that come with a common currency.

In addition to a transfer union, there would have to be the equivalent of tariffs, and capital controls, just imposed from above. This would completely contradict the legitimizing ideology of free trade, but institutions are quite flexible to ditch their ideology in favor of a new one, if it preserves or increases their power.

So I wouldn't be surprised, if the EU commission would dictate import or export quotas (between EU nations), prices and wages in the future. There is even precedent in the form of the EU's bizzare common agricultural policy.

This is, how it might turn out, even though the elites seem currently to be unaware of the implications of the political direction they are pushing for.

Re: Worldwise: German Sentiment (Karl Smith & Arash Molavi Vassei)
 

Impossible to glean very much from this, due to the technical problems.

Here is an interview with a Greek economist who has been talking to Doug Henwood periodically about the financial crisis. This is actually the best discussion I have heard so far about the euro crisis (it is the episode of November 12, 2011).

http://www.leftbusinessobserver.com/Radio.html#S111112

The problem, as I understand it, is that given current institutional structures, i.e. currency union without political/fiscal union, the markets will always attack the bonds of the weaker and/or weakest links in the union. But then this creates a problem for the entire union, especially when the weak link is a major country, let's say Italy.

Just as was the case in the US financial crisis, I would like to hear someone spell out how derivatives may be contributing to the euro crisis, which would mean getting an estimate of who holds them, in what amounts, and what the net position of major banks with lots of sovereign debt exposure is. That is, one line of argument is that the crisis is less one of sovereign European governments than of private European banks who are their creditors. But I have heard Matt Miller say on "Left, Right, and Center" that an aggravating problem is the domino effect that might ensue in the derivative market for the sovereign debt instruments. He is getting that from sources, he's not making it up or thinking it up on his own, and he did work at OMB under Clinton.

Re: Worldwise: German Sentiment (Karl Smith & Arash Molavi Vassei)
 

Thanks for the link. I would like to have a better understanding of the role of derivatives in this crisis too.

Speaking of Italy and weak links.... Did you know that Mario Draghi, the new head of the European Central Bank, and Mario Monti, the new head of the Italian government, both worked for Goldman Sachs in the past? Given the role of Goldman Sachs in helping the Greek government conceal the extent of its debt so that Greece could join the euro, perhaps the two Marios can use some of their Italian subtlety and trickery to fool the markets. (No ethnic slur intended, Italian Americans).

Re: Worldwise: German Sentiment (Karl Smith & Arash Molavi Vassei)
 

Too bad it was cut short. Hope we have more diavlogs about what's going on in Europe.

Re: "Heavy Haircuts"
 

True. Is there any way we can get these two guys to redo and/or expand on the DV? We need to hear more about this topic.

Re: Worldwise: German Sentiment (Karl Smith & Arash Molavi Vassei)
 

Tell my why a controlled, relatively modest rate of inflation, of say 6 or 7 percent a year for 6 or 7 years, would not "solve" the problems of European indebtedness? (Or of U.S. and Chinese indebtedness too for that matter). Assuming central bankers have the tools and knowledge to produce such a rate -- a big if I will grant -- why isn't this the best possible solution? Defaults are avoided with all their complications via credit default swaps; public and private debts are gradually monetized; lenders are suitably punished for their foolish irresponsibility in extending these loans in the first place; real wages, government pensions, etc., are automatically reduced in those areas where they need to be reduced; while countries like Germany, which are already living within their means, would be free to make cost-of-living adjustments in wages, pension plans, etc. Sure, inflation has a lot of unintended downsides, but take them all in all, aren't they outweighed by the alternatives?

Of course if Vassei's alternative makes sense, I take it all back.

Re: Worldwise: German Sentiment (Karl Smith & Arash Molavi Vassei)
 

I can think of one reason right off of the bat. The current debt scheme requires low interest rates in order to be manageable to service the debt. A scheme of devaluation would cause panic in the bond markets, especially on long term debt. So the yields that nations would be paying for debt service in order to get the numbers they would be putting on the market would result in a spiraling problem. The Italians are horrified at 8%: imagine how they would react to 13% with a deliberate European inflationary scheme.

Re: Worldwise: German Sentiment (Karl Smith & Arash Molavi Vassei)
 

Not to say there wouldn't be all kinds of problems, but we had that situation here in the U.S. back in the late 1970's. It was unpleasant ("stagflation") but we lived through it and came out the other side. Inflation transfers wealth from creditors to debtors: households in debt get relief, sovereign governments in debt get relief. It also lowers real wages and increases the volume of employment. The only alternative I know is austerity, but austerity is (or appears to be) a political impossibility. So inflation is the only alternative as far as I can see.

Anyway expect no agreement about matters economic. It's what policy makers think in their secret heart of hearts that decides. That would be Ben Bernanke in this country, not sure who in Europe or China.

Re: Worldwise: German Sentiment (Karl Smith & Arash Molavi Vassei)
 

We came out the other side because paying higher yields on a hundred, or a couple hundred billion dollars is easier than paying higher yields on $15 trillion dollars. If we had to pay 8% yields on US debt, debt service would soon exceed Medicaid. In the medium term, it would surpass even Medicare. That is catastrophic; and we're in better shape than the Europeans.

Well, why is that a superior order? Debtors to me aren't any more moral, necessarily, than creditors. Sovereign governments certainly aren't, when they've used borrowed money to bribe sections of the electorate for power.

I suspect the economic annihilation radiating out of Europe in the wake of the Eurozone collapse will create a new paradigm on this. Austerity will become the default posture of politics.