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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
November 23, 2011
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Financial Times: “Can you explain why the ECB cannot be lender of last resort?”
Bundesbank President Jens Weidmann: “The eurosystem is a lender of last resort – for solvent but illiquid banks. It must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty [prohibiting monetary financing – or central bank funding of governments]. I cannot see how you can ensure the stability of a monetary union by violating its legal provisions.  I think the prohibition of monetary financing is very important in ensuring the credibility and independence of the central bank, which allow us to deliver on our primary objective of price stability. This is a very fundamental issue. If we now overstep that mandate, we call into question our own independence.”

Financial Times: “The impression is that the Bundesbank will stick by principles until the whole house burns down…”

Weidmann: “Right now we’re talking about the EU treaty and I don’t see how you can build trust in a system that violates laws.”

Financial Times: “Are you a pragmatist?”

Weidmann: “I am president of an institution which is bound by a legal framework. We should respect the division of labour in a democracy. This has nothing to do with pragmatism or dogmatism.”
Financial Times: “What if there is a conflict between Article 123 and the risk of a refinancing crisis for Italian debt?
Weidmann: “That assumes that you can address the issues in Italy with liquidity and that’s not the case. This whole debate completely blurs responsibilities. Furthermore, monetary financing will set the wrong incentives, neglect the root causes of the problem, violate the legal foundations on which we work, and destroy the cedibility and trust in institutions. You won’t solve the crisis by reducing incentives for the Italian government to act.  It’s really an absurd debate in which we are telling institutions: don’t care about the law.”

Financial Times: “Why shouldn’t Germany, which has total credibility in financial markets, loosen its fiscal stance?”

Weidmann: “Germany has that credibility because it followed a specific fiscal path in the past, and it should not lose that track record and credibility by abandoning that path. It’s very important that Germany remains the stability anchor within the monetary union.”

And today from a speech given by Mr. Weidmann in Frankfurt:  “The lack of success in containing the crisis does not justify overstretching the mandate of the central bank and making it responsible for solving the crisis.  The economic costs of any form of monetary financing of public debts and deficits outweigh its benefits so clearly that it will not help to stabilize the current situation in any sustainable way.”

It would not appear that the Bundesbank is about to succumb to intense political and market pressures - and promote the ECB into the role as open-ended “buyer of last resort.”  For the Germans, it is a fundamental issue of core principles.  The costs of “monetary financing” – or monetization – outweigh the benefits “so clearly.”  And especially here in the U.S., there is a complete lack of appreciation for the myriad costs involved in central bank market interventions.  For too long, policymakers and pundits alike have tried to paint “inflation” as the only real cost of “loose money” (i.e. low rates, market interventions and ballooning Fed holdings), a price too easily dismissed in a crisis environment.  Yet Mr. Weidmann focuses not on inflation but on “credibility,” “independence,” “incentives,” “trust,” the rule of law and the critical importance of a “stability anchor.” It is my view that the control by contemporary central banking over inflation is overplayed, especially when contrasted to a central bank’s profound role in nurturing a monetary backdrop conducive to a level playing field in markets and economies, to fostering a sound financial and economic backdrop, and to ensuring systemic stability.

Truth be told, “Monetary financing will set the wrong incentives, neglect the root causes of the problem, violate the legal foundations on which we work, and destroy the credibility and trust in institutions. You won’t solve the crisis by reducing incentives…”  This applies to the eurozone and it certainly applies to the U.S.  I was struck by a comment Warren Buffett made earlier in the week on CNBC.  Mr. Buffett noted that “the U.S. had the ability to do what was necessary” back in 2008, and Europe must find the will to do the same today.  Many continue to miss the critical distinction between 2008's “private sector” debt crisis and today’s “sovereign” debt crisis.  After years (decades?) of accommodation, markets are now much belatedly disciplining governments throughout Europe - and it’s proving an incredibly more challenging dynamic than 2008.  That markets are not today disciplining Washington is no cause for overconfidence or hubris.

Part of my thesis has been that the more the Germans saw of the European and, increasingly, global financial crisis the more determined they would be to safeguard their institutions, economy and credibility.  The markets, of course, want the ECB to be more like the Fed, while I suspect the Bundesbank stares across the Atlantic and sees disaster in the making.  To anyone willing to see, our central bank’s credibility has been badly damaged, market incentives have been terribly damaged, and trust in institutions and the markets has been severely damaged.  When it comes to rules and legalities, the Federal Reserve is making things up on the fly, with monetary policy becoming an anchor of instability.   

All the same, as the markets see it, the U.S. is fine for now but something really has to give in Europe.  Systemic stress again this week reached the point where the markets began anticipating yet another dramatic policy prescription.  The ECB, or the IMF, or the ECB financing the IMF perhaps financing the EFSF that could finance Italy that could finance their banks that could finance the rapidly faltering European economy?  What a mess.  

It is the conventional view that European policy incompetence and lack of leadership have created a situation where policymaking simply cannot keep pace with a rapidly escalating crisis.  Most believe this crisis didn’t have to happen and that it can still be resolved with sufficient policy resolve.  

I tend to look at the situation much differently.  After disregarding the issue of monetary instability, associated price distortions, and Credit and speculative excess for many years - and kicking the can down the road for too long - policymakers have hit the proverbial wall.  They have suddenly lost the wherewithal to connect foot to can.  It’s not that sovereign yields are unreasonably high, only that they’ve surged to not unreasonable levels so abruptly.  A long-distorted market pricing structure has unraveled rather dramatically, leaving dangerously leveraged financial institutions and over-indebted governments (along with a bloated Credit structure) in a dire predicament.  It’s not so much that recent policies have caused the crisis as much as it is a case where an incredibly challenging political and policy backdrop created an opening for The Day of Reckoning to burst right on through.  

I’ll assume that European (and global) policymakers are prepared to approach this crisis with only greater resolve.  Markets are counting on it.  But it also makes sense to me that the Europeans must now be working diligently behind the scenes on backup plans in case the whole thing continues to unravel.  Quietly, do they focus on saving the sovereign “periphery,” the banks, or a group of “core” nations that might be able to salvage monetary union?  It is increasingly apparent that resources are insufficient to sustain everyone.  I’ll presume the sophisticated “money” is maneuvering for the exits.  There were times this week when I had a really bad feeling about how things were unfolding.