Coppola Comment

In a lecture presented at the 2011 IMF Annual Research Conference, Hyun Song Shin of Princeton University argued that the driver of the 2007-8 financial crisis was not a global saving glut so much as a global banking glut. He highlighted the role of the European banks in inflating the credit bubble that abruptly burst at the height of the crisis, causing a string of failures of banks and other financial institutions, and economic distress around the globe. European banks borrowed large amounts of US dollars through the money markets and invested them in US asset-backed securities via the US's shadow banking system. In effect, they acted as if they were US banks, but in Europe and therefore beyond the reach of US bank regulation. This diagram shows how it worked (the “border” is the residency border beyond which US bank regulation has no traction): But it is not the model itself so much as Shin's remarks about the role of European regulation after the introduction of the

Germany's Finance Minister Wolfgang Schaueble has long been critical of ECB monetary policy,. But now, as Reuters says,  the gloves are off . In a speech at a prizegiving for an ordoliberal economics foundation last Friday, Dr. Schaeuble effectively demanded that the ECB raise interest rates. The justification? Very low interest rates hurt Germany's savers, which are the bedrock of its economy. There is a political dimension to this. Dr. Schaueble's party, the CDU, is losing popularity and desperate for pensioner votes. Dr. Schauble even went so far as to blame ECB monetary policy for the rise of the right-wing eurosceptic AfD: "I said to Mario Draghi...be very proud: you can attribute 50% of the results of a party that seems to be new and successful in Germany to the design of this [monetary] policy," Mr. Schäuble said. This is outrageous. Dr. Schaueble is a politician, not a central banker. His attempt to influence the conduct of ECB monetary policy to ga

Guest post by Ari Andricopoulos It is difficult to read the history of inter-war Europe and the US without feeling a deep sense of foreboding about the future of the Eurozone. What is the Eurozone if not a new gold standard, lacking even the flexibility to readjust the peg? For the war reparations demanded at Versailles, or the war debts owed by France and the UK to the US, we see the huge debts owed by the South of Europe to the North, particularly Germany. The growth model of the Eurozone now appears to be based largely on running a current account surplus. Competitive devaluation is required to make exports relatively cheap. While this may have been a very successful policy for Germany during a period of high economic growth in the rest of the world, it cannot work in the beggar-thy-neighbour demand-starved world economy of today. As I've explained elsewhere , reasonably large government deficits are very important for sustainable economic growth. However,

From @MineforNothing on Twitter comes this chart: Now, we know Finland is in a bit of a mess. A series of nasty supply-side shocks has devastated the economy. When Nokia collapsed in the wake of the 2007-8 financial crisis, ripping a huge hole in the country's GDP, the government responded with substantial fiscal support. This wrecked its formerly virtuous fiscal position: it switched from a 6% budget surplus to a 4% deficit in one year, and although its deficit has improved slightly since, it is still outside Maastricht limits. Because of this, the current government - under pressure from the insane Eurocrats - is implementing fiscal austerity to bring the budget deficit back below 3% of GDP. For an economy which has suffered a serious reduction in its productive capacity, this is disastrous. The austerity measures will neither reduce the deficit nor restore the economy. On the contrary, they will cause the economy to shrink and consequently - through simple arithmetic - i

At the Bank of England's Open Forum in London's Guildhall on Wednesday 11th November, an increasingly desperate-sounding Mario Draghi said this : As the majority of money is issued by private banks - bank deposits - there can only be a single currency if there is a single banking system. For money to be truly one, it has to be truly fungible, independent of its form and independent of its function. This is far from being the first time that Signor Draghi has pushed the case for common supervision of banks, common deposit insurance and a common resolution mechanism. He has warned repeatedly that fragmentation of the monetary system along national lines undermines the fabric of the common currency and threatens its very existence. But in reality, Europe does not have a common currency. Indeed it has never had one. The price of money is different in the various nations of the Eurozone. The "Euro" in Greece does not have the same value that it does in Germany, a

In a reply to a comment on my recent post about Target2 and ELA, I said this: There are no "Greek euros" or "German euros". There are only European euros. So the ECB is not exchanging Greek and German euros at par. Both countries are using the same currency, which is produced by the Eurosystem. The NCBs are not autonomous entities, they are part of the Eurosystem. They do not create their own currencies : collectively, they create the single currency. This is how a single currency works. If there are multiple "central banks" within a single currency area - as there are in the United States, for example - they do not produce their own currencies. St. Louis Federal Reserve does not produce St. Louis Dollars. It produces United States dollars. As does the Minneapolis Fed, and the New York Fed, and the Atlanta Fed, and so on. The twelve Federal Reserve banks collectively produce one currency, the US dollar. So the person who argued that Greek and Ge

My latest post at Pieria considers the sizeable role of the Eurodollar market in the unsustainable growth of credit that led to the 2007-8 financial crisis.  In a lecture presented at the 2011 IMF Annual Research Conference, Hyun Song Shin of Princeton University argued that the driver of the 2007-8 financial crisis was not a global saving glut so much as a global banking glut. He highlighted the role of the European banks in inflating the credit bubble that abruptly burst at the height of the crisis, causing a string of failures of banks and other financial institutions, and economic distress around the globe. European banks borrowed large amounts of US dollars through the money markets and invested them in US asset-backed securities via the US's shadow banking system. In effect, they acted as if they were US banks, but in Europe and therefore beyond the reach of US bank regulation...... What was it that drove the expansion of the Eurodollar market and encouraged European

My latest post at Forbes considers what the ECB's alternatives are for easing in the Eurozone: The ECB is not going to do QE, or indeed any other form of monetary easing at the moment. But they are  talking about it . And for the moment, it seems, talk is enough. The Euro is up and bond yields are down, even for Greece (which is bravely attempting  to return to the capital markets this week). European stock markets are  worrying about the Ukraine crisis.  It’s back to business as usual. But as Andrew Clare of Cass Business School  caustically remarks , “markets won’t be satisfied forever with hot air”. Unless Euro area inflation somehow reverses its current downward trend – which seems unlikely, since the world is on a  general disinflationary trend  at the moment and the Euro area is hardly a stellar performer  – the ECB will eventually be forced to do more than talk. Read on here . UPDATE: The ratings agency Fitch is rather more positive about the ECB buying SME loan se

My post at Pieria looking at the ECB's alternatives for monetary easing.  The latest money supply figures from the Euro area  are awful : But there's very little the ECB can - or will - do about it. The problem is the combination of a common currency with national politics..... Read the full article here .

A few days ago the German constitutional court  referred the question  of the legality of the ECB’s Outright Monetary Transactions (OMT) to the European Court of Justice (ECJ), claiming that the ECB was straying into fiscal policy that was beyond its mandate and that OMT breached EU treaty directives outlawing monetary financing of governments. The question of the legality of OMT has been a running sore ever since it was first mooted  in August 2012. The ECB has clearly stated that it regards OMT, or rather the threat of OMT, to be part of its monetary policy toolkit. It has nothing whatsoever to do with bailing out Eurozone sovereigns, although that may be an incidental effect. It’s all about the Euro..... Read on here .

We all know that Euro membership has been of doubtful benefit to periphery countries such as Greece and Portugal. But Germany has been a net beneficiary of the Euro, hasn't it? Not according to these charts from Albert Edwards (h/t Edward Harrison). (larger image here ) Note the point on both charts where the trend changed sharply. Yes, it's 2000 - when the Euro was introduced. Admittedly, Germany's gross fixed investment was already declining, but after 2000 it fell off a cliff. And the current account decomposition chart shows us why. Note the collapse in borrowing by non-financial corporations from 2000 onwards. That is disappearing domestic private sector investment. In fact in 2009-10 NFCs were net saving. This is distinctly unhelpful in an economy which has seen gross fixed investment falling for the last twenty years. To start with, it appears that government borrowing replaced private sector net borrowing. But even that declined from 2004 onwards, replaced