We don’t think that much has happened this week in the ongoing eurozone train wreck, whatever you may have read in the mainstream press. Supposedly, the world has put together a fund big enough to support the new bailout twins, Spain and Italy – wasn’t it only last week that Italy was helping to bail out Spain? Considering in turn the drawbacks that spring to mind
i) The money is mostly not new, but has been recycled from existing sources where it was already earmarked for something important
ii) There is talk of leverage, whatever that means. If anyone can explain how lenders of last resort can leverage, we would welcome some education.
iii) Crucially, the Germans, who end up footing most of the bill under these schemes, look increasingly unlikely to do so. We still believe that Angela Merkel will ultimately be willing to give up every last pfennig of her people’s wealth, on the condition that she becomes some combination of Queen Victoria and Catherine the Great, but they will not go along quietly. This has of course never stopped her before, but the German Constitutional Court is showing its teeth, and is harder to ignore.
We shall see. Meanwhile, and away from such short term issues, we have been drawn to a fascinating paper produced by researchers at the Bank of International Settlements. Even though it comes with the usual disclaimers that the opinions expressed do not necessarily reflect those of the organisation itself, etc, etc, we’re fairly sure that it does.
What is the BIS , you may ask. For those who are not well versed in arcane transnational financial institutions, it may best be described as the central banks’ central bank. Not the be confused with the World Bank, which is a division of Wall Street, or the IMF, overtly dedicated to the political needs of its government sponsors and the ambitions of its politically appointed boss, the BIS stands for propriety in global finance. To their credit, they do not seem at all embarrassed that their approach is quite out of tune with all modern banking principles.
The work is entitled “Characterising the Financial Cycle – Don’t Lose Sight of the Medium Term” – a provocative start in a world which is obsessed with staggering from one weekend to the next. But it gets worse, how about this?
They draw our attention to the “unfinished recession” phenomenon: policy responses that fail to take into account the length of the financial cycle may help contain recessions in the short run but at the expense of larger recessions down the road.” Their dry language cannot conceal the suggestion that politically driven measures to give an economy an artificial boost required by the exigencies of the electoral cycle will inevitably come back to bite us, as the national finances do whatever was needed to combat the excess which caused the recession in the first place. This is not a pleasant message for those who would tell us that they have the skills to eliminate the cycles in prosperity which have existed throughout recorded history.
You might think that the authors, by expressing such heterodox thoughts, have already put themselves at risk of rendition to a jurisdiction where the concept of habeus corpus is unknown, and never being heard of again. Perhaps they have accepted this, for they move on to even greater outrages against convention. How about this?
“Arguably, this is what happened both in the mid-1980s/early 1990s
and in the period 2001-2007. In both cases, policymakers reacted strongly to collapses in
equity prices – the global stock market crashes of 1987 and 2001, which ushered in
slowdowns in economic growth and/or actual recessions”
Can you say that? We all knew that the central banks were moving to save the investment banks from the bursting of the bubbles which they had inflated, and from which they had profitably massively, but where is the cover story that they acted with the best interests of the broader economy in their hearts?
For now, the BIS will probably remain on the fringes of international finance, but the time is coming when their better known colleagues will have taken themselves and their sponsors into bankruptcy. It is comforting to be reminded that there will be people in positions of influence who have understood the basic truth that our leaders’ efforts to improve matters by defying natural processes have a habit of only making things worse.
Category: Market Commentary