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Saturday, November 19, 2011

On the Role of the European Central Bank in Ending the Debt Contagion

According to the Wall Street Journal, “That the [ECB] has been forced to step into the power vacuum left by a fractious political class underscores the increasing centrifugal forces unleashed by the debt crisis.” Yet that pressure was being applied to the central bank to issue Eurobonds and buy more state government bonds in spite of the objections of German officials suggests that there were also centripetal forces acting on the center at the expense of the state capitals, even Berlin. It is important to view the E.U.’s “management” of its debt crisis through the prism of the history of European integration since the Shuman Plan in 1951, which called for ever closer union so as to obviate war and give Europe a stronger economic and diplomatic power in the world. The history of the European project can be characterized as a series of fits and starts, punctuated by momentary crises—each proffering potential ruin to the union itself. For example, France’s veto of Britain’s accession as a state must surely have struck some people as portending the end of the EC—the forerunner to the E.U. Yet from the vantage point of 2011, the conduct of the accession seems a mere hiccup on a much longer road of hills and valleys. Regarding the extent of integration by 2011 (e.g., monetary union), the question is whether European efforts to come to grips with the contagion of over-burdened state debt signify merely another valley, or an inherent contradiction or fault-line in the E.U. itself. Whatever the answer, the outcome will no doubt come about incrementally, as one might expect from E.U. history.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Tuesday, November 15, 2011

The Market Mechanism: Complicit in E.U. Debt Crisis

According to the New York Times, “How European sovereign debt became the new subprime is a story with many culprits, including governments that borrowed beyond their means, regulators who permitted banks to treat the bonds as risk-free and investors who for too long did not make much of a distinction between the bonds of troubled economies like Greece and Italy and those issued by the rock-solid Germany.” In going through these culprits and how they interrelated, it should not be lost that the market mechanism itself can be held as suspect, for at the very least it enabled the furtive games to be played for far too long. Indeed, the market itself did not do a good job for years in providing accurate risk-return relationships.

The full essay is in, "Essays on the E.U. Political Economy," available at Amazon. 


Monday, November 14, 2011

Monti and Papadernos in the E.U.: Leadership in Technical Expertise or Democratic Deficit?

“The moment of truth has come.” This was said by the head of state of the E.U.’s third largest state, Italy, in a televised address just after Berlusconi had resigned as the prime minister. Although the statement could be interpreted as referring to the need to reign in the Italian profligate system of public-sector patronage (which includes private contractors), Giorgio Napolitano could also have been referring to the credibility of his state at the E.U. level. “We need to restore confidence with investors and European institutions,” he continued before turning to the more tangible point that the state would need to refinance nearly 200 billion euros in government bonds before May, 2012.



                             Monti and Barroso                                    John Thys/Agence France-Presse/Getty

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Sunday, November 13, 2011

Contagion Beyond the Headlines: Portugal and Eastern Europe

The E.U. states of Greece and Italy were grabbing headlines during the first two weeks of November 2011, given the dramatic resignations of Papandreou and Berlusconi. The only other state to get some attention was France. The Wall Street Journal noted on November 12th that concerns had been quietly building about France. According to the paper,“French bond yields rose to four-month highs, one day after Standard & Poor's Ratings Services erroneously issued a message saying it had cut France's triple-A credit rating. The yield on France's benchmark 10-year bond climbed 0.02 percentage point to 3.46%. That was 1.66 percentage points over yields on comparable German government bonds. France now has the highest government bond yields among its triple-A-rated peers in the region.” However, it seems overly dramatic to say that a .02 percent increase evinces a climb. Moreover, 3.46% is well under 7 percent, which is the level that was presumed at the time to signify the need for a bailout. Relative to the changes in the Italian yield, those of the French bonds could be viewed as relatively moderate, The French yield was still closer to that of Germany. Although not a red herring, the concern over France masked some real sleepers that were poised to take a hit in 2012. 



Eclipsed by the headlines, Portugal’s expected GDP for 2012 was revised downward by the E.U.’s executive branch in November from the May estimates of around -1.8% to -3% with an expected unemployment rate of nearly 14 percent. The 2011 numbers were also revised downward, from about -1.9% to around -2.1 percent. Meanwhile, Portugal’s semi-sovereign 10-year bond yield was at just over 12 percent, well over Italy’s “point of no return” rate of 7.5 percent, which was hit for a day during the second week of November. With an expected contraction of 3% in 2012 and a 12% yield in November of 2011, Portugal could be expected to face stronger head-winds in being able to make its interest payments in 2012. I suspect that the press had become so captivated with the circus of personalities in Greece and Italy that the iceberg lying in front of Portugal was simply not seen.

Besides Portugal, some of the states in Eastern Europe faced icebergs of their own—though not necessarily of their own making. These too were receiving too little press coverage in November of 2011. Specifically, the state leaders of the “euro zone” had decided in October to give the “zone’s” major banks until the following summer to raise their capital reserves. With that amount of time, the banks could avoid issuing new stock (which would dilute the holdings of their existing stockholders) and get the added reserves together by cutting back on lending to Eastern E.U. state governments instead. Morgan Stanley figures that Poland, Romania, and Hungary are most vulnerable to a loss of “euro zone” bank lending. Roughly 1 trillion euros of “euro zone” bank assets were in Eastern Europe at the time of the change in governments in Greece and Italy. Hungary’s exposure was the largest, with loans held by the banks amounting to about 37% of GDP. According to the Wall Street Journal, any hit to the E.U.’s eastern states, whose economic growth had been powered the global recovery, would only worsen the E.U.’s economic outlook and its ability to service its debts. That is to say, enabling the “euro zone” banks to raise additional reserve capital by reducing lending rather than raising equity may have been in the banks’ interest, but choking the eastern states could already in November be expected to make it more difficult for Greece, Italy, and Portugal to service their respective debts from reduced economic output in 2012. 

It would have been wiser on the journalists’ part to put France in perspective and take a look at Portugal and Eastern Europe than to have fixated so much on the plights of Papandreou and Berlusconi as they struggled to maintain power only to ultimately lose it.

Sources:
Matthew Dalton, “Europe Slashes Its Growth Forecast,” The Wall Street Journal, November 11, 2011. http://online.wsj.com/article/SB10001424052970204224604577029442286713940.html

Kelly Evans, “Eastern Europe Vulnerable in Debt Crisis,” The Wall Street Journal, November 11, 2011. http://online.wsj.com/article/SB10001424052970203537304577030422025545822.html

Neelabh Chaturvedi, Stelios Bouras, and Liam Moloney, “Europe Pulls Back From Brink,” The Wall Street Journal, November 12-13, 2011. http://online.wsj.com/article/SB10001424052970204358004577032401682551744.html?mod=googlenews_wsj


11/11/11

In Berlin at the Brandenburg Gate on 11/11/11 in 2011, costumes were the norm in the evening as revelers celebrated the numeric convergence. I suspect that unlike the Chinese, the Europeans were struck by the convergence itself, rather by any good luck attached to the numerology. I myself was struck by the convergence alone. Both at 11:11am and 11:11pm, I was surprised that other Americans around me seemed to be either ignorant of the alignment or utterly indifferent to it. It occurred to me that just as a given time-date system is artificial, so too are human cultures—which include political and economic values that are stitched together by leaders who peddle meaning to the masses. Both our systems and our ideologies are all too limiting, yet we can find meaning in them. Perhaps this is ultimately why we have them and the leaders that trumpet them or suggest new ones. I contend that 11/11/11 too plays into the human instinct for sense-making, especially in terms of visual and cognitive symmetries.

At 11:11am on 11/11/11, I limited my “celebration” to sending out some emails to some friends and a general tweet to mark the moment for posterity; curiously, the people around me did not seem aware of the convergence. At 11:11pm, I was at a bar/restaurant listening to a band of old geezers play classic rock (and, sadly, a few Jimmy Buffett songs) from the 1970s. The only convergence in the 1970s was inflation and unemployment in the double-digits. In spite of my protestations, even the people I sitting with seemed utterly indifferent to the coming convergence—even as I took off my watch for emphasis! Still nothing—like watching a train go by on its own momentum. A few people across the room were checking their cellphones and blackberries, but, alas, for more pedestrian purposes than to keep an eye on the coming cosmic convergence. As I rather blatantly went to the lighted doorway to better see my watch at “the moment,” I felt utterly alienated from my own people. It was a case of the one and the many.
When the moment came, as I watched the five numbers on my digital watch all briefly display “11,” I felt like I was on Mars enjoying the thrill of my own private “Earth” moment while the Martians continued to sip their red brew. No, I was not drinking so I did not really think I saw aliens (they are all in Arizona, after all). Rather, I was struck by the divergence in values even amid the convergence in numbers. There wasn’t even a clock in the room! Had I been the manager there, I would have tried to arrange a date-time digital “clock” on a screen. Would the people have counted down the seconds? Would they have paid any attention to it? Walking back to my seat, I wondered whether I wasn’t some reincarnated European reborn in the Midwest as some bizarre joke from Descartes’ divine deceiver, or perhaps I was over-estimating the Europeans’ interest in the convergence. Perhaps it’s simply that I’m too innately unique—a man destined to forever be without a country.
About thirty minutes after 11:11pm, I was chatting with a middle-aged man who had been fired as a band teacher at a local high school. Our conversation came around to political economy. “Greed is good,” he stated in perfect seriousness with his eyes as though bullets aimed directly at me. I reacted as if I had been stunned by a taser gun. No wonder the guy’s students obeyed him. As for the gaping inequality in wealth in the U.S., he insisted that people should be allowed to accumulate without limit—even when they already have tens of billions of dollars. “That’s what America is all about,” he nearly shouted above the din of the band. How dare this even be questioned! The man was indeed voicing values held by enough Americans that he was expressing a major strand of American culture that I could not dismiss as an aberration or quirk. When I claimed that representative democracy itself could be at risk if private wealth gets even more concentrated in a few hands, he replied that the rich would never let America be ruined because they have a vested interest in the system. “The rich created this system,” he reminded me. Sure enough, the delegates at the U.S. constitutional convention in 1787 were creditors deeply concerned over Shays’ Rebellion over debt that had just occurred in Massachusetts a year earlier. That the debtors had fought in the war without being paid yet they still had to make payments on their farm debt made no nevermind to the “Founders.” Was American founded by selfishness and greed? The former band teacher replied, “Yes, of course” as if there were no a thing wrong with that. I was absolutely stunned. I felt like I had been transported to Mars. I countered that even if a bunch of rich guys founded the United States, greed can result in people acting against their own self-interest, paradoxically as they are narrowly obsessed with it. “America can collapse from its own weight on top,” I added as though it were a fact. As I said this, I had already concluded that I was horribly at odds with a major plank in the American lexicon—namely, that economic liberty should not be limited, even at hundreds of billions of dollars being held by one person. In fact, the lack of limit, even when a constraint would be for the good of the system itself, is held by many as a virtue—something to be proud of. That a signature of greed is its lack of limitation is no problem because greed itself is a virtue. I found myself as though I were visiting another planet, though this time without even my own private amusement in watching 11’s match up on my watch. Beyond the cultural ideology, I saw in the leader of the band a sordid selfishness that could only be utterly unapologetic given its nature. All I could say was, “Well, we just disagree. Have a good night. Nice to have met you.” I wondered if the rest of the world had come to say the same thing to the American “tourist” (i.e., ideology) even while admiring our political stability and wealth.
Of course, people can get carried away not only with power and money, but also with convergences such as 11:11 on 11/11/11 in terms of luck, causality and metaphysics. In this respect, American culture is more solid than, say, that of the Chinese. As David Hume argues, we do not understand causality as much as we think. Hence, superstition is as though a perennial temptation—especially in religion, where the lapse is almost always invisible to the beholder. In numerology, the number one represents a beginning or gateway. Having several number ones presumably reinforces the validity of the “beginningness” quality. In other words, the “vibrational frequency of the prime number” increases its power such that its attributes are multiplied.  In the case of the number one, the attributes of “new beginnings” and “purity” are significantly magnified in power in 11/11/11, presumably reaching its zenith at 11:11 (a.m. and p.m., or just once on the 24 hour clock). The fallacy, which I suspect took hold in China, is to say that the increase in power means that there is more apt to be a beginning empirically and even metaphysically. We can resist this temptation to get carried away with even rare line-ups in our own systems, which, after all, are artificial because they are invented and instituted by people. In other words, even though it is a human instinct, sense-making need not over-flow and eventuate into metaphysical significance. We cannot say that acknowledging 11/11/11/ opens up a gateway in one’s life. Rather, a person can actively start something irrespective of the numbers, even if only by spotting and seizing an opportunity.
A numeric alignment can hold its own significance within its own system for the human mind. That is, the significance can be felt even as it is known to be contrived and thus arbitrary from outside the system. As I stood in the lighted doorway waiting for my watch to briefly line up its various numbers to 11:11:11 on 11/11/11 as the rest of the room was fixated on the band (or the walls, or themselves), I presumed no metaphysical significance at all in terms of some beginning about to occur in my life; rather, it was the convergence itself—the fleeting and rare alignment—that galvanized my interest. The sudden turn from 1999 to 2000 was a similar sort of significance in terms of numbers in a particular dating system. People did not need to presume the issuance of a new era or good luck to get excited at 11:59pm on December 31, 1999 about the next minute being so different. Yet was it? Something can be felt as significant even as it is known to be arbitrary, yet such significance can be easily relegated.
Admittedly, it was more difficult to get excited about New Years’ Eve in 2005 or even 2010, given the significance of 2000. Similarly, on 11/11/11, a sense of complacency could have set in regarding convergences of ones. The year 2011 alone contained an extraordinary number of them:
1:11:11 on 1/1/11     
11:11:11 on 1/1/11      
 1:11:11 on 1/11/11     
11:11:11 on 1/11/11     
 1:11:11 on 11/1/11       
11:11:11 on 11/1/11
1:11:11  on 11/11/11      
11:11:11 on 11/11/11 
However, how many of these did the average person observe? I myself completely missed 1:11pm on 11/11/11 even though I was fixated on 11:11am and 11:11pm. I must have been “out to lunch” at 1:11pm. Although it would be 100 years before 11/11/11 would happen again, it would be “only” 10 years and a few months before 2:22pm (forget 2:22am!) on 2/22/22. Technically speaking, missing a “2” (2/ rather than 22/) means that the multiplied power of the “2” will be somewhat less. Trinitarians will have reason to get excited over 3/3/33 at 3:33pm, which will be the day after Ash Wednesday in 2033. However, the number of 3’s is one less than the number of 2’s in 2/22/22. Barring significant life-extending advances in medical science, 11:11 on 11/11/11 in 2011 was the best it could get in terms of the number of numbers in a numeric date-time convergence for those adults who happened to witness that convergence.
That this topic holds any significance whatsoever is I suspect due to the propensity of the human mind to seek and admire order. In terms of symmetry alone, the eye naturally gravitates to 1111111111 rather than 1645564336. The gambling machine that has three windows with a variety of pictures spinning around, we are naturally astonished when the same picture is shown in all three windows. Even so, three lemons does not mean bad luck any more than three apples means good health in the coming year. 11/11/11 is not an alignment by chance, even if the Gregorian calendar itself need not have been adopted when it was. Even so, the planned or arranged alignment, being both of, is inherently pleasing to the eyes and holding significance to the mind, especially if the convergence is rare and fleeting. It is as though everything makes sense, but only for a moment and then it is past. In fact, it is this basic feature of the mind—that which I call the sense-making instinct—that is the basis and appeal of a leader’s vision to followers and an organization or society as a whole. The social reality that is formulated and preached is like a series of ones in a chaotic world of fractal order and disorder.