This is easily one of the best articles that I have read by anyone on the current financial crisis…
Why doesn’t Continental Europe get it?
Unfortunately, the authors’ conclusions make for grim reading.
Filed under: Economy | Tagged: EU, Financial Crisis
bit r-w, isn’t it?
I sadly don’t know enough about macroeconomics to follow the current situation as knowledgeably as I’d like to, but I’m thinking that this is just more than a ‘crisis of confidence’. I mean, is the money actually ‘there’?
apart from my inner socialist half-hoping that capitalism will actually collapse, I’m suspicious of a lot of things economists of certain political persuasions are saying.
in that article it basically says inflation won’t be a problem because there won’t be any money to give people pay rises. yes? but things will still cost more, and the absence of a wage spiral won’t prevent low- and middle-income people having their consumption spending eaten into.
as for his debunking the moral hazard argument in a “systemic crisis”, and the danger of solvent banks failing through liquidity crises (when both solvent and insolvent banks are being protected?) I’m reminded of Ray Kinsella’s article in the IT (http://www.irishtimes.com/newspaper/opinion/2008/1003/1222959303798.html) which had the ludicrous remark that:
“There is little point in talking about competition or distortions in competition in an environment in which the very survival of institutions can be undermined.”
replace ‘institution’, i.e. bank, ie. commercial enterprise, with ‘factory’ and ask yourself how many of those have had to close because of ‘competition’. I’m not wholly anti-free market by any means, but I’m against this sort of utter hypocrisy.
bit r-w, isn’t it?
Love that remark. Firstly, because you cannot bring yourself to type right-wing and, secondly, because you kind of presume to pigeon-hole my views!!
is the money actually ‘there’?
Yes it is. See this article from Monday’s Indo – http://www.independent.ie/business/european/banks-swamp-ecb-with-record-level-of-deposits-in-market-failure-1487089.html
The issue is genuinely one of confidence. I might write about market confidence shortly from a layman’s perspective, as I aready see one amusing analogy (at least to me) that can be made.
I’m suspicious of a lot of things economists of certain political persuasions are saying.
I am too – of all political hues though!
In truth, my own instinct has been saying that the ECB’s restricted mandate to simply managing inflation risk has become a massive hinderence, as inflation is no longer the biggest problem to solve.
The breaking news, though, is that the ECB, Fed, and BoE have all jointly cut their rates by 0.5%!! So, the game called for in the article is now afoot!
as for his debunking the moral hazard argument in a “systemic crisis”,
To be fair, I do not think that the author is debunking moral hazard. Rather, as with inflation, the question right now is what is the greater evil to be fighting?
Systemic risk is a major consideration for the safe management of financial markets. However, people do not necessarily understand why this is. After all, in most markets, if a company fails, this is usually good news for its competitors. However, in finance, the degree of interconnection between banks can be so significant, that the collapse of one can lead directly to the collapse of others and no modern economy can survive without a functionning financial system.
Now a lot of lessons have been learned in terms of managing systemic risk (SE Asia and Latin America have, unfortunately, provided many useful case studies). However, something this large, affecting nearly every top-name bank in the world has never been truly envisaged. That is why many people are increasingly rattled right now as the fall-out from the amazing bankruptcy of Lehman Brothers continues to gather momentum.
Unfortunately, your factory argument is actually an inappropriate comparison, but it does offer a possible other way to explain the jist of systemic risk. In other words, the closure of a major automobile company in a region can have devestating knock-on effects for the local economy. Essentially, the economy’s heart has been ripped out and the blood is no longer being pumped around the body.
Clearly systemic risk is different in terms of how it works. At the same time, I just wanted to illustrate how the loss of one company can cause the failure of several others.
good points. apologies if you felt pigeon-holed, we might all be in one very big hole yet!
as for ‘r-w’, actually, I mostly just wrote that for concision and a certain sort of knowing humour, but if you want I’ll come out and say “reactionary” and “counter-revolutionary” instead
as for economists and politics, during my brief experience of Economics in UCD Orts, I was lectured by Moore McDowell (Michael’s brother) and had a textbook half written by Ben Bernanke (with European additions by McDowell and another UCD lecturer). Anyway, what I took from that was a broad understanding of the logic of free-market economics but also a distrust of the way that logic was presented as somehow impervious to political (i.e., left-wing) re-interpretation or riposte.
will be interesting to see what effect the 0.5% has.
in the left-wing interpretation, the systemic crisis has been there for some time. and the factory is just as much a part of the system as the bank, but under the current prevailing ideology one is being held hostage to the other (in both actual economic terms and political ones)… of course, that is only an interpretation; and it’s only some of us that still believe ideology is relevant, too. six months ago, I wouldn’t have thought that it was, personally, but now the times have gotten interesting again…
No worries on the political remark. I have an a la carte approach that confuses me as much as anyone else.
The rate cut does help, but European banks desperately need to be recapitalised as well and the money markets have to start lending to banks again. I do not have a view on the actual numbers involved, but the British plan this morning had many commendable concepts in it to my mind, including Government money going in as capital (the lefty in me roars!).
On your last point, I think that if socialist ideology cannot profit (ha, ha) from the past 12 months, then it really is a bankrupt (he, he) way of thinking.