Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

Green Economics

by Crazy Horse Fri Nov 26th, 2010 at 05:33:24 AM EST

We are good at finding fault with the results of unbridled predatory capitalism, perhaps less good, or less evolved, at proposing solutions. In a front page diary yesterday about Daniel Cohn-Bendit's recent remarks, he said:


So, we are saving, not just banks, but a system that is in itself a system of bankruptcy, a political system... It's the failure of neoliberalism and of deregulation...

to which Miguel responded:

European Greens Party: Financial Crisis
In this context, the EGP puts forward the following propositions for consideration:

In the short term, Governments have no other choice than to take action in order to prevent the collapse of the banking system by providing state guarantees or injecting capital, using taxpayers' money. Because at the same time, Governments find billions to save banks that are responsible for their problem, while they can't find the funding needed to fight starvation, unemployment, environmental degradation, the loss of biodiversity and to fund development aid, this rescue is not legitimate if not counterbalanced by a number of measures
<sigh>
I replied:


The document is from October 2008; perhaps Green economic policy has matured in the intervening two years.
Further, as you didn't highlight, "this rescue is not legitimate if not counterbalanced by a number of measures," so we should first investigate the counterbalancing measures.

So let's look at the underlying measures, and see if the European Greens have something to offer, below the fold.


Here are the proposed measures in full, to discuss.

Measures aimed at ensuring the stability and the transparency of the financial system
  • First of all, the compensation of executives and financial traders must be drastically reined in. These were effectively one of the root causes of the current crisis as large banks tried at all costs to artificially inflate the performance of their funds in order to justify the outrageous salaries of their traders.  This encouraged executives to take ill-considered risks when trading credits. From now on, their salaries must be in line with real, sustainable performance.    
  • The long-standing Green proposal of implementing a financial transaction tax (Tobin/Spahn type tax) must urgently be implemented at European level.     
  • All financial instruments currently marketed and sold by financial institutions, especially those which enable securitization of loans, must be scrutinized by a Financial Services Testing Foundation, set up at European level. Those whose innocuousness and added value to the economy are questioned have to undergo an extra accreditation procedure.
  • Similarly, naked short-selling, that is, speculating on the loss of value of assets, must be permanently banned;    
  • The valuation of stocks by the fair value principle (mark to market) has proven to be feeding the crisis and should be reformed;    
  • Initiatives must be taken at European level to effectively tackle the accreditation, transparency and control of hedge funds;     
  • Similarly, increased action must be taken to prevent tax fraud and tax evasion, effectively closing the tax havens within the EU and putting pressure on those outside the EU    .
  • Consideration must be given to measures effectively preventing speculative shareholders to exert control on enterprises (e.g. by imposing delays before their voting rights become effective)    

Measure aimed at improvement of consumer protection   

  • Across the EU, deposits to financial institutions must be guaranteed to a minimum level of 100.000 €; to that effect, a reserve to which all financial institutions shall have to contribute must be established where it does not yet exist;

Measures aimed at improving the regulatory framework   

  • Accounting rules must ensure that the balance sheets and corporate accounts reflect the economic reality, e.g. by drastically restricting the ability of financial institutions to remove key risks from their balance sheets and by moving away from rules that are exclusively based on short-term market value;    
  • An initiative must be taken at EU level to institute an independent European rating agency;    
  • Last but not least, the regulatory package must be supported by the creation of an EU-wide financial markets watchdog which will overcome the national fragmentation of banking oversight and be strong enough to enforce regulation:

Measures aimed at diminishing the negative effects on the real economy

  • Coordination on the EU-level on measures to diminish the negative effects of the crisis of the finance sector on the other sectors of the economy.    
  • Anti-cyclical budgetary measures must be taken to master the crisis.    
  • In order to counter the effect of the credit crunch on the enterprises (especially the SMEs) sufficient liquidity must be provided by the European Central Bank.

Finally, it would also be unethical that those whose action made this collapse possible would escape all consequences of them. Investigations must be launched in order to determine whether the current regulatory framework, however limited, has been infringed upon (especially in terms of transparency) and prosecutions be initiated where applicable.

What's here of value, what's missing?

Display:
As a first step in October 2008, not bad for a party not known for financial sophistication (among the Serious Ones). I'm wondering why there hasn't been further evolutions of their proposals, (there probably are, but I haven't seen them).

I'm looking and waiting for some political entity to evince some of the revulsion I find in the current situation and propose attendant solutions possible so we don't experience this again.

(Must try to get some work done today, back later.)

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Fri Nov 26th, 2010 at 05:38:47 AM EST
Interestingly, the EGF document also says
Politically, at the EU commission level, Commissioner McCreevy has been one of the leading promoters of the deregulation of the financial markets, enjoying the wholehearted support of President Barroso. They bear a heavy responsibility in this collapse and we will do whatever we can to prevent the return of a Barroso/McCreevy commission in 2009.
and Cohn-Bendit did mention McCreevy in his EP remarks the other day.

Two observations:

  • The EGP did fail to "prevent the return of a Barroso/McCreevy commission in 2009", with visible consequences of ideology-induced political paralysis (and worse) in 2010
  • Daniel Cohn-Bendit was still this week consistent (down to the personalization on particular culprits, figureheads or targets of opportunity) with the message the EGP was putting out 2 years ago.


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Carrie (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 05:45:52 AM EST
[ Parent ]
I haven't followed the proposals of the Euro-Greens at all, and here in Schland not very deeply. Perhaps due to my lack of familiarity with their proposals, i've been disappointed that i haven't heard more in the way of concrete opposition. Hope it's my lack of attention. They could be following up their Stuttgart 21/nuclear plant extension success, 22% in recent polls, with a strong economic platform.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin
by Crazy Horse on Fri Nov 26th, 2010 at 06:02:40 AM EST
[ Parent ]
Migeru:
The EGP did fail to "prevent the return of a Barroso/McCreevy commission in 2009", with visible consequences of ideology-induced political paralysis (and worse) in 2010

Don't you think criticism should be a little more realistic? The EuroGreens are not responsible for the current "ideology-induced political paralysis (and worse)", unless we consider that it's the fault of one minority movement that it failed to convince majority opinion. The European parliamentary elections returned a conservative majority, while most European countries are currently run by conservatives or neolib-intoxicated socdems - all elected. Further, the Greens' attempt to build an anti-Barroso majority in Parliament was not supported by the socialists, who negotiated jobs for their people (Ashton, Schulz).

Migeru:

Daniel Cohn-Bendit was still this week consistent (down to the personalization on particular culprits, figureheads or targets of opportunity) with the message the EGP was putting out 2 years ago.

Except that he was particularly underlining the talking point "failure of economic liberalism and deregulation".

As for the "personalization on particular culprits, figureheads or targets of opportunity", he mentioned McCreevy in a recap on past Irish ultraliberalism.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 26th, 2010 at 09:41:29 AM EST
[ Parent ]
afew:
Migeru:
The EGP did fail to "prevent the return of a Barroso/McCreevy commission in 2009", with visible consequences of ideology-induced political paralysis (and worse) in 2010

Don't you think criticism should be a little more realistic?

Not their fault, of course, that Barroso got reappointed.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Carrie (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 09:42:36 AM EST
[ Parent ]
good on the greens for at least making the right noises, and cohn-bendit shows some moxie in naming the beast.

dare one hope he may be a model for future euro-pols?

of all the solutions, i cannot understand the resistance to the tobin tax. in one fell swoop so many problems could be solved, with such little pain for those who are already well-inured from want.

go daniel, go CH! let's keep the dialogue on point and moving forward from the stagnant thinking and addiction to hoary old paradigms. we need to be ready with well thought through solutions, as we watch the dinosaurs lurching around on their last legs, trying to take down as much of the fauna around them as they can.

the way forward seems clear, massive regulation for banksters/criminals to curb their enthusiasm, which the green policies do well, imo, and massive investment of (dwindling value) currency into hardcore alt energy projects, so we can maintain as much of what distinguishes us from 3rd world nations in terms of sanitation and steady food supply.

talos' diary describes the world the neolib would like to plunge the entire continent, a scene of desperate workers and few opportunities.

european students are seeing the ladders pulled up by the generations who have benefited from state sponsored education, and they are p-o'd, quite understandably, though most of them probably want to go through the higher ed-mill for all kinds of shallow reasons, no matter, education should be sacred, it seems obvious that in later life one would not want to be looked after by ignorant clods, but there you go...

same with watching the society you're too old to fashion intelligently any more, being run incompetently.

right now we have a euro public that is morose and apathetic, barely involved, but as the neolib screw tightens, and the familiar spectre of totalitarianism emerges from the smoke and rubble of whatever (series of) shock doctrine(s) we are submitted to, perhaps there will be enough public backlash to make governments stop in their tracks and listen more to the thinking public, which, as shown on this and other blogs, is way ahead of the policy makers.

great diary CH. this is the yin yang to focus on, bridling the neolibs' vikingisation of euro finance and rechanneling whatever public money we can conjure into projects that reflect real needs, like J's wind turbines.

it's not like they're lacking! or the knowledge to make them real is either! yet we still hear media babble how lefties want the gvt to finance people digging holes then filling them in again.

such demented discourse...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Nov 27th, 2010 at 09:05:47 AM EST
[ Parent ]
of all the solutions, i cannot understand the resistance to the tobin tax. in one fell swoop so many problems could be solved, with such little pain for those who are already well-inured from want.

I agree with the second part, but not the first.  Yes it would curb very short term speculation that requires high frequency trading with low profit margins for individual trades, but there's plenty of speculative trading that wouldn't be significantly affected by a Tobin tax and that sort would increase in the wake of the imposition of the tax.  Don't get me wrong, I'm all for it. Some problems would be alleviated, revenue would be raised in a way which doesn't impact most people at all, and I don't see any economic downside.

by MarekNYC on Sat Nov 27th, 2010 at 11:42:50 AM EST
[ Parent ]
tobin tax is easy, too easy, to evade. One cannot impose this tax on brokers or market makers, so they can front for customers - supposedly this happens in the UK.
by rootless2 on Sat Nov 27th, 2010 at 11:57:57 AM EST
[ Parent ]
Titles are bought and sold on regulated markets. Are you suggesting that brokers would act as  illicit bookmakers, buying and selling privately without reference to the regulated and taxed exchange, and that it would be impossible to prohibit or regulate this? or is there something else I've missed?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Sat Nov 27th, 2010 at 02:53:18 PM EST
[ Parent ]
brokers must buy and sell in large volume. So imposing a tobin tax on them would essentially break the functioning of the market - not necessarily a bad idea, but not one that has much support. So, from what I've been told by people who do this stuff, the UK transaction tax is a tax only on individual investors who are the usual suckers in this process anyways. Big traders get their brokers to trade for them or become brokers.
by rootless2 on Sat Nov 27th, 2010 at 03:43:17 PM EST
[ Parent ]
Why "must" they sell in large volume on low margins?

Sounds like there are too many bookies and not enough horses on that racetrack.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 27th, 2010 at 06:34:07 PM EST
[ Parent ]
the theory is that they are itermediaries, not traders.
by rootless2 on Sat Nov 27th, 2010 at 07:07:54 PM EST
[ Parent ]
But if they are simply intermediaries, what prevents them from passing on (part of) a Tobin tax to their customers?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 27th, 2010 at 07:16:27 PM EST
[ Parent ]
that's not how the UK tax works. I assume the idea is that much of how the market works depends on market makers and dealers being able to provide trade liquidity and making trades just to keep the market going.

i think, in practice, it's impossible to police for big traders because they use more and more dark pools and other mechanisms that evade the trading center.

by rootless2 on Sat Nov 27th, 2010 at 08:17:09 PM EST
[ Parent ]
I assume the idea is that much of how the market works depends on market makers and dealers being able to provide trade liquidity and making trades just to keep the market going.

Well, if that's how the British regulators define a "working" market, then yes, a Tobin tax would prevent the market from working. A Tobin tax is there to make sure that the capital allocation of a country does not become the byproduct of the activities of a casino; the "market making" you describe sounds like it is intended to make sure that the capital allocation of a country does become the byproduct of the activities of a casino.

i think, in practice, it's impossible to police for big traders because they use more and more dark pools and other mechanisms that evade the trading center.

If you want to Tobin tax stock trades, and want to enforce it, just make all trades for which the tax has not been paid legally non-enforceable. Traders are allowed to trade their IOUs in smoky back rooms all day long for all I care, but if they want the police to force the losing side of a bet to cough up the securities he sold, then they have to have the deal properly stamped and notarised.

If that means that it will take a day or two to conduct an equity transaction, and therefore take most of the fun out of daytrading, well, I'll consider that a feature, not a bug.

On a more positive note, it would provide all the "gub'mint BAD!" knuckle-draggers a real-time view of what a world without government is like, in an isolated environment where it only harms people who have more money than sense. After all, those shady, unregulated, unenforced backroom deals are precisely the sort of informal system that glibertarians claim can be used to govern all economic activity.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 27th, 2010 at 08:47:24 PM EST
[ Parent ]
to me, that's a battle not worth fighting, but ... i think it's more interesting and important to create methods of finance that don't depend on the banks and destinations for deposits that evade banker fees and stock markets entirely.
by rootless2 on Sat Nov 27th, 2010 at 09:01:15 PM EST
[ Parent ]
You are talking about inventing an entirely new way of organising industrial production. Industrial civilisation has always used banks and, to some extent, stock markets.

That is not to say that making another sort of industrial civilisation is not possible. But may I suggest that simply putting engineers rather than banksters in charge of the version we have will be a worthwhile intermediate solution? Or at least one that will keep things from blowing up with too great a frequency while we look for a different way of organising industrial production. Downsizing the stock exchange and associated bankster sprawl will be a part of that, so it's a battle we'll have to fight anyway.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 27th, 2010 at 09:09:59 PM EST
[ Parent ]
Well, industrial civilisation was created by banks and stock markets.

But continuing to do something blatantly stupid just because it's always been done that way isn't a winning strategy.

Whether we like it or not, we're currently working towards a financial revolution equivalent to the scientific revolution of the 17th and 18th century, the industrial revolution of the 18th and 19th, and the IT revolution of the 20th and 21st.

It may take the rest of the century to complete, but it's now become obvious that banks and stock markets in their current form are the most regressive institutions on the planet - without exception. (And I'm including the Vatican.)

In the same way the Catholic Counter-Reformation was overtaken by events (eventually, after many horrors) the sheer criminal idiocy of the current financial system is becoming so obvious that it can only be sustained by force and violence temporarily.

There's been a consistent cycle of panics, depressions, and failures since the 19th century. Socialism and the New Deal were the first breaks in that cycle.

Since the 80s the cycle has started up again. But even with minimal historical memory of specifics, there's going to be obvious intellectual and popular push-back over the next few years.

And there are going to be new ideas and new political game plans coming out of that, which are going to make the old system so obviously unsustainable that it can't possibly survive past the medium term.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Nov 27th, 2010 at 09:27:21 PM EST
[ Parent ]
Perhaps. Or perhaps not.

I'm not seeing any bold new proposals for how to organise production that will accommodate the basic physical and organisational requirements for sustaining the standard of living that is possible in a properly managed industrial society. They may appear in due course - we may even be part of the intellectual current that brings them about. But I think it would be prudent to prepare for the possibility that it may not happen, by making sure that our activism is at least compatible with an engineer-run monetary industrial society.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 27th, 2010 at 09:49:28 PM EST
[ Parent ]
not really. Just a government owned or non-profit postbank, and/or having the Reserve bank purchase infrastructure bonds directly from government agencies instead of floating bonds, and or pension bonds that could be guaranteed by the government and that would drain employee pension money out of the PE sector. our entire system is based on letting the financial sector direct and impose commissions on all investment, but they do it badly and take too much.
by rootless2 on Sat Nov 27th, 2010 at 10:11:49 PM EST
[ Parent ]
You can't impose a tax on traders and brokers for the same reason you can't regulate traders and brokers - they're children who have no adult morality, and they'll do anything to keep their sense of self-importance, entitlement and privilege intact.

It would be perfectly possible to factor in an instant Tobin tax into every speculative transaction. Supermarkets manage to calculate the VAT on millions of daily transactions, eBay and the credit card companies have to technology to take a percentage of every sale, so it's hardly a technical challenge equivalent to the Moon Landings to enforce a transaction tax on all City institutions.

And while you're at it, you might as well make the record of all trades and transactions to public.

There would howls of outrage, but this would - naturally - increase market confidence, and enable everyone to perform due diligence more effectively.

But the real aim of the markets isn't honesty or transparency, and it isn't even shareholder profit - it's the creation and maintenance of political and personal privilege, with a certain gladiatorial entertainment value for participants.

Which is why government oversight can't be allowed. It's purely a political problem.

Now, in the UK we have Milliband, who frankly seems rather dull and stupid so far. He's certainly not hitting any new notes in the UK's political imagination.

But it might not be a bad idea to find out who his economic advisors are - not counting that idiot shadow-chancellor of his - and see what can be done about pushing a transaction tax more aggressively.

The UK's daily forex trade volume is in the billions. And that's just fx on its own.

Tapping into every trade is an economic no-brainer - but it isn't going to happen without some serious political strong-arming.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Nov 27th, 2010 at 09:12:19 PM EST
[ Parent ]
ThatBritGuy:
The UK's daily forex trade volume is in the billions. And that's just fx on its own.

the chief beauty to it i find is its simplicity and as you say, the no brainer part of it, anyone can see its benefits, (except the usual suspects), and it would be therefore easy to rally around, not needing any wonky explanations.

it would leave the tax havens high and dry in full global public view, i think, too. they'd be next...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Dec 1st, 2010 at 07:58:19 PM EST
[ Parent ]
That's not correct. for example: http://en.wikipedia.org/wiki/Dark_pools_of_liquidity but of course brokers act for traders - this is exactly what happens in the UK to evade the tax.
Because the UK tax code provides exemptions from the Stamp Duty Reserve Tax for all financial intermediaries, including market makers, investment banks and other members of the LSE,[75] and due to the strong growth of the contracts for difference (CFD) industry, which provides UK investors with untaxed substitutes for LSE stocks, according to the Oxera (2007) report,[71] more than 70% percent of the total UK stock market volume, including the entire institutional volume remained (in 2005) exempt from the Stamp Duty,
http://en.wikipedia.org/wiki/Tobin_tax#United_Kingdom_experience_with_stock_transaction_tax_.28Stamp _Duty.29 I only know this because I asked some quants about tobin tax and got laughed at.
by rootless2 on Sat Nov 27th, 2010 at 08:21:27 PM EST
[ Parent ]
Exchanges allow "off-exchange" transactions as long as they take place within the bid-offer spread at the time they took place. They are then retroactively inserted into the record of transactions .

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Carrie (migeru at eurotrib dot com) on Sun Nov 28th, 2010 at 03:09:03 AM EST
[ Parent ]
[ET Moderation Technology™]

Added links, TribExt formatting...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Carrie (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 05:41:54 AM EST
Vielen Dank.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin
by Crazy Horse on Fri Nov 26th, 2010 at 05:58:20 AM EST
[ Parent ]
Bitte sehr.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Carrie (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 06:12:41 AM EST
[ Parent ]
I think these are weak, unimaginative solutions that depend on the regulatory vigilance of a system that has shown itself to be set up to be un-vigilant and captive.
by rootless2 on Sat Nov 27th, 2010 at 11:59:03 AM EST
What's missing is an understanding of broken the global financial system actually is.

All numbers are estimates:

Global GNP:  $72 trillion

Total global equity market: $36.6 trillion

Total global debt: $38.2 trillion

Total global derivatives market: $791 trillion

Speaking roughly, and badly, the global GNP is based on global equity and debt ($74.8 trillion) produces global GNP leveraged 10.6 times supporting global derivatives.  

The world is simply unable to pay the global debt, see Global Debt and Parallel Universe by Jean Baudrillard, meaning CDO derivatives (est. $400 trillion) are, to all extents and purposes, bust.

The good news is the financial markets are, by and large, completely divorced from the Real Economy.  The entire derivative market could vanish tomorrow and have minimal effect on the Real Economy if policy and Decision Makers said it didn't by changing the rules of the game.  Global economic meltdown - "realizing" the bust - will come only from their attempting to continue to support the financial interests at the expensive of the Real Economy.

Here's some ideas I want to throw-out for public ridicule comment:

First, a distinction be made between "paper" and "real¹" investments and the former written down to zero.  

Second, no private institution should be allowed to borrow money from a Central Bank.  

Third, no public institution should be allowed to borrow on or from the public market.  

Fourth, a Tobin Tax be imposed.

Fifth, all non-"vanilla" financial instruments must have a end date, not more than 10 years from the issue date.

Sixth, any entity selling a non-"vanilla" financial instrument must deposit 100%, at zero interest, of the selling price(s) of the financial instrument with the Central Bank that can be redeemed, at par, by the purchaser of the instrument at any time.  Any money not redeemed by the end of the instrument will be returned to the issuing entity.  

¹ a company or group actually producing goods and/or services

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Nov 27th, 2010 at 04:09:07 PM EST
While we're about it, why not regulate that stocks have to held through 2 annual dividends to qualify as an 'investment'.

You can't be me, I'm taken
by Sven Triloqvist on Sat Nov 27th, 2010 at 04:20:39 PM EST
[ Parent ]
I don't know what the period is now but in the US a stock, say, had to be held for 2 years to qualify as a "long term investment" and, thus, get a lower tax rate on selling.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sat Nov 27th, 2010 at 04:36:45 PM EST
[ Parent ]
1 year.
by rootless2 on Sat Nov 27th, 2010 at 08:22:11 PM EST
[ Parent ]
Thanks!

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sat Nov 27th, 2010 at 09:54:33 PM EST
[ Parent ]
Second, no private institution should be allowed to borrow money from a Central Bank.

No, you want all deposit-taking institutions to borrow from the CB. In fact, you'd prefer for them to depend on borrowing from the CB - because then you have a solid grip on their balls.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 27th, 2010 at 06:38:21 PM EST
[ Parent ]
Indeed. One of the ideas I got from reading Minsky's Stabilizing an Unstable Economy was that monetarist central banking, which focuses mostly on setting the base interest rate and uses open-market operations for liquidity, misuses its tools.

Minksy argues that liquidity should be provided through the discount window - essentially through repos. Accessing liquidity through the discount window requires the banks to post collateral, which allows the central bank, at a discount, to get a peek into the bank's balance sheet. The discount can be as punitive as the central bank sees fit, depending on the asset.

Open market operations, on the other hand, should properly be used for market-making of last resort.

In my opinion, it was a mistake on the part of the European Central Bank to have set a lower bound on the credit rating of assets they would accept as collateral at the discount window. When you say a certain credit rating will not be accepted as collateral at any discount however steep, you're setting up a trigger for massive sell-offs in the event of a credit downgrade, as well as causing increased volatility as the asset approaches the limit from above. That is a recipe for financial instability, and financial stability is one of the key responsibilities of any modern Central Bank.

In particular, the ECB should always have been willing to take Greek debt as collateral, albeit at a sliding discount which could have been set as steep as deemed fit. In fact this discount would have acted as a soft floor on secondary market prices without the need to intervene in the market directly through open market operations, contributing to market-making of last resort. This would have been especially useful given that open market operations in the sovereign debt markets were (tendentiously, wrongly, ideologically) constitutionally controversial. Instead, the Central Bank had set a hard threshold below which Euro sovereign debt would not be accepted as repo collateral at any discount and it was forced by the market to make a specific exception for Greek debt.

Notice this means the Central Banks should be willing to take on local government debt, agency debt, corporate debt, even shares, as collateral for repos. They can set whatever discount they deem fit to ensure that the loan is properly collateralised. The point is to provide temporary emergency liquidity while getting a peek into a bank's balance sheet. Also, if the discount window is used as a matter of course rather than using open market operations, the stigma of using the discount window is removed Currently, any bank using the discount window opens itself to rumours of insolvency because it is such an exceptional practice.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Carrie (migeru at eurotrib dot com) on Sun Nov 28th, 2010 at 03:02:42 AM EST
[ Parent ]
We've got the beginnings of a good discussion here. However, a major reform of modern economic/fiscal policy and the attendant institutions is not only a discussion about Tobin tax mechanisms, or other similarly focused points.

On one side we've got existing reality, with its massively underestimated failure. On the other we've got a center of progressive thought here at ET. And in the middle we've got the program from the Greens, suffering as it is from the political necessity of spending the past twenty years being forced to frame most of their policy in the same neo-liberal morass which is now bringing us all to ruin.

Pointed criticism of the current reality is important, perhaps more important is the building of the basis of a new financial model which brings us step by step from the current reality towards a new reality which reflects the necessary reformation of global economic activity.

I don't know that the Greens have yet grasped this opportunity, which from my view is a powerful opening. At least aspects of their current program, though not well developed, point in the right direction.

Is there any other political entity which shows as much promise of pointing in the right direction, and taking back the word "reform" to mean something healthy for a change? Doesn't it make sense to try and uplevel their program, so it becomes more coherent, and can begin to make the necessary overhaul?

I can state conclusively that i don't know.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Sun Nov 28th, 2010 at 07:06:29 AM EST
As a special treat (not to detract from this discussion), Juergen Trittin guests on Das Erste's Ina's Nacht.  For german speakers about 40:00 he's joking about modern politics. about 47:30 he begins to DJ, Ina calls him DJ Can Return Fee, Burning Down the House, and ending w/ a funky Jan Delay.

Watch Here.

As an extra special treat, Trittin is followed by a live performance of a band who he says he watched in the rehearsal, and thinks is great.  From Norway.

YES! Katzenjammer!!!!  (53:00)

(You would never see a show like this in the US, especially with a high level politician playing DJ.  and my darlings no less. yes.)

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Sun Nov 28th, 2010 at 07:22:42 AM EST
[ Parent ]
PS. even if you don't Deutsch sprichtst, this video is good to watch just to see politicians on the fringe of television. for me it's actually amazing.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin
by Crazy Horse on Sun Nov 28th, 2010 at 05:51:42 PM EST
[ Parent ]
Not directly related to the european Greens economic policy, and definitely subsumed by focus on Wikileaks...

The Hamburg Greens today announced they are leaving the coalition government with the CDU.

Wheeeee!

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Sun Nov 28th, 2010 at 05:49:47 PM EST
[ Parent ]
Don't know how far this will get but...

Naked Credit-Default Swap Traders Face Tougher European Rules

Naked credit-default swaps on corporate and sovereign debt may be restricted under measures proposed by a European Parliament member.

Sovereign credit-default swaps should only be used to insure bonds owned by the investor, Pascal Canfin, a French Green party member of parliament sponsoring the bill said in a report today. Canfin also said positions in corporate swaps should be disclosed to regulators.

The European Commission, the European Union's executive arm, proposed rules in September to restrict so-called short selling by requiring traders to submit proof they can access the underlying shares or sovereign bonds to settle a trade designed to profit from falling prices. The rules would bring the EU closer to the stance taken by Germany, where Chancellor Angela Merkel banned some naked short selling in May.

Sovereign swap markets have "a major impact on the interest rates and therefore on the allocation of assets within the real economy," Canfin said in his report. "The inefficiency of these markets can lead to distortions in the allocation of capital for the real economy."

Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy and sell insurance on bonds they don't own.

The EU parliament will discuss Canfin's report before agreeing on a final position. The proposals need approval from the 27 finance ministers of the EU bloc, the parliament and commission before they can become law.



It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Nov 29th, 2010 at 03:35:26 PM EST


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