After a week-end immersed on fiscal policy studies I woke up to an article from Bloomberg that starts with the following:
“The euro rose against the dollar and yen, Standard & Poor’s 500 Index futures gained and commodities climbed a fourth day after German and French leaders pledged to devise a plan to stem Europe’s debt crisis in three weeks and as the U.S. showed signs of sustaining its economic recovery.”
The article goes on to say: “German Chancellor Angela Merkel and French President Nicolas Sarkozy will deliver a plan to recapitalize European banks and address the Greek debt crisis by the Nov. 3 Group of 20 summit. Belgium will buy part of failing Dexia SA and provide security for depositors.”
Although not a surprise it saddens me. This is the sheer proof that 2008 came and went without any impact on policy makers. More importantly, I am getting more and more convinced that governments accuse markets of irrational behavior only to take more control of the markets and mask own irrationality.
Europe had a chance to strengthen the euro zone by adopting radical fiscal reforms. One such reform would have been adopting a common fiscal policy for the euro zone. Instead, EU policy makers chose the short term solution and much more expensive in the long run. In the same time it could be the solution that has sealed the fate of EURO few years down the road.
I expect markets to react very positive on the actual announcement of the bailout. We might see the same kind of rally as on the announcement of TARP. The effect of this decision should keep markets calm for few months.
Just remeber there is one more bailout to be done: heavily indebted European countries. Once this is taken care of markets should have few quarters of positive return.
All the world will have to deal with then will be higher taxes and low growth for years to come. But let’s wait to see the details of the bailout plans.
Here is The Economist on the same topic.
And ZERO HEDGE shows a list of the safest banks in Europe after the new round of stress tests. No comment here.
Source: THE ECONOMIST
From John Hussman on how bailouts affect growth:
The skewed distribution of wealth in the U.S. is worsened by policies that misallocate capital and divert public funds to bail out investments that have already gone bad.
Background: If you think about the “standard of living” in a country, you can roughly define it as the amount of goods and services that individuals are able to consume in return for their work. If you think about the “productivity” of a country, you can roughly define it as the amount of goods and services that individuals are able to produce for their work. Clearly, over the long-term, the productivity and the standard-of-living of a country go hand in hand. The best way to create both, over the long-term, is for an economy to build a stock of productive capital (inventions, new technologies, plants, equipment, public infrastructure, etc), and human capital (labor skills, education).
Still, even a generally productive economy can produce a skewed distribution in the standard of living enjoyed by its citizens. In a competitive and undistorted economy, the distribution of wealth is determined by the ability of each individual to a) provide a useful service, b) distribute the services they provide over a large number of “units”, and c) maintain the scarcity of what they provide.
So for example, professional football players earn more than teachers not because playing football has more virtue, but because professional football players are among a very small group, and distribute their “services” over millions and millions of spectators, each which implicitly pays a few cents to each player per game. Mark Zuckerberg at Facebook is able to distribute his services across hundreds of millions of users, each which implicitly pays him a tiny amount by viewing advertising. Bill Gates distributed his services over every computer that ran Windows, while the factory workers who built those computers were each able to distribute their skills over a smaller number of units. Teachers represent a large professional group, but are typically able to distribute their services over a limited number of students, each which implicitly pays a portion of their family’s income to the teacher. One-on-one aides tend to earn less, despite often being extremely skilled, because in order for them to earn a high income, their earnings would have to capture much of the income of their single student’s family.
The distribution of wealth has become increasingly skewed as trade has become more globalized and technology has allowed the innovations of a single person to be spread across millions of consuming “units.” At the same time, the economic emergence of China and India has brought forth literally billions of new workers who dilute the scarcity of the existing labor force. An economy where capital is scarce, protectable, and can easily be distributed over numerous units, while labor is plentiful, homogeneous and can only be applied to a smaller number of units, is an economy that is prone to an enormously skewed distrbution of wealth.
This process takes on a grotesque character when it becomes possible for a company to distribute its impact over a very large number of units, and government policy protects that ability even when the impact of the company reflects not skill but ineptitude. This is essentially what has happened with the “too big to fail” institutions. Despite inflicting massive damage on the economy, they are afforded a protected status that allows them to extract “rents” that don’t reflect the cost they have imposed. From that standpoint, the Occupy Wall Street protests are a welcome reflection of public frustration over Washington’s slavish coddling of reckless financial institutions.”