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Saturday, November 19, 2011

The Jack Welch “MBA” Program: Executive Training Videos

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.

Regarding the European Central Bank, which was established in 1998, its formal mission is to protect the value of the euro by maintaining price stability through monetary policy (i.e., the setting of interest rates). While being forbid being able to finance state governments (the Federal Reserve is also forbidden this function in the U.S.), the ECB could foreseeably print unlimited amounts of money to buy the government bonds of indebted states such as Greece, Italy, Portugal, Spain, Ireland and even France. It is possible that the default of one of those states could bring down the euro, and the ECB is tasked ultimately with doing what is necessary to protect that currency. That a central bank would not be able to save its own currency from collapse seems to contradict the raison d’etre of a central bank.

Like the fundamental flaw of monetary union without fiscal integration, the ECB could be tasked with an inherently self-contradictory mandate. In other words, be a central bank but don’t be one.
As Angela Merkel of Germany has pointed out, however, what good would a grossly inflated currency be? Using a “wall of money” to buy up Italian bonds, the ECB would no longer be able to take a commensurate amount out of the banking system to obviate an expansion in the money supply.

Furthermore, if the German Chancellorin is correct that in bailing out states, the central bank would be blending fiscal with monetary policy—government with central banking—the confluence could raise the specter of the dreaded “democracy deficit,” and perhaps even serve as tangible evidence of it. A “backdoor bailout” via the ECB would essentially be “a transfer of money from German taxpayers to cover the debts of other states without parliamentary approval,” according to the New York Times. “New Yorkers don’t mind transferring money year after year to Appalachia, but in Europe, people do mind,” according to Dennis Snower of the Keil Institute for the World Economy. He adds that “the European project would truly be in danger because the democratic deficit would explode.” The democratic legitimacy of the E.U. itself would render the union untenable in voters’ eyes.

Even so, if the E.U.’s legislative bodies continue to proceed only incrementally and one of the “problem states” (or “profligate” states, as Merkel characterizes them, and thus the need for austerity in lieu of a bailout from the ECB) needs something more to obviate default and so only the ECB is left to act, it would have to step in aggressively to protect the euro or that currency could collapse (and some think the E.U. would come down with it, though this seems exaggerated, perhaps even fear-mongering, rhetoric).  The democratic deficit would lay at the doorsteps of the politicians in the European Union. In other words, a combination of E.U. legislation and a transfer of more governmental sovereignty to the E.U. from the states would alleviate the centripetal force acting on the ECB, which is admittedly less democratic than either the European Council or the Parliament.

The fundamental flaw in there being a common currency and a central bank yet without fiscal integration (the Wall Street Journal incorrectly writes, “without political union,” as if the E.U. Parliament were not a legislature) should be corrected through either representative (i.e., legislatures) or direct (i.e., referendums) democracy, rather than by a bank stepping in to fill the power void. “With no one else to step into the breach [during Greece’s debt crisis in late 2009], the ECB tossed its rule book aside,” according to the Wall Street Journal. “[ECB] (o)fficials propped up banks by providing unlimited loans at low interest rates and by buying tens of billions of euros worth of collateralized bank bonds. As Greece, Ireland and Portugal careened toward default in 2010 and 2011, the ECB found itself as the only institution in Europe that could act quickly, by creating euros to buy bonds.” Yet relative to the crisis, that intervention was quite limited and temporary. The New York Times in November 2011 reported that the ECB bond purchases had only been $252 billion so far, compared with more than $2 trillion purchased by the U.S. central bank in recent years. “[The ECB] need(s) to go into the market and say we have a wall of money here and no matter how much speculation there is, we are going to keep buying Italian bonds and any other euro bonds that are threatened, Irish Finance Minister Michael Noonan said in 2011. Wolfgang Franz, chairman of the German Council of Economic Experts, which advises the state government, retorted in an interview published in Frankfurter Allgemeine, That path “belongs to the deadly sins of a central bank.”

The Wall Street Journal refers to the “fractious political class” as the culprit behind both the conflict regarding the role of the ECB and the situation wherein that institution would itself as the only E.U. institution able, if only (maybe) in theory, to take on the contagion. I contend differently that the true culprits are ideological and structural. A structural or institutional conflict of interest exists in relying on state officials to push for a transfer of more governmental sovereignty to additional E.U. competencies. This conflict of interest comes out of imbalance of power in the federal system with respect to the states and the E.U. Government.

Furthermore, a “states’ rights” ideology permeates through virtually all of the state capitals in the E.U. (to be sure, some more than others). The content of this ideology reinforces the structural imbalance of power in the federal system. Also, the nature of ideology itself is problematic, and the sheer salience of ideology in terms of the E.U. magnifies the harm. An ideology of whatever stripe has the nasty habit of ignoring the need for practical exigencies, even in the midst of a crisis. Every ideology seems to come “prepackaged” with a blind spot. It is so dangerous because the ideology itself does not admit to the existence of any blind spot, not to mention that ideology itself innately gives rise to it. It is like telling a person who assumes that he cannot be wrong that he is in fact wrong. Add this dynamic to the structural conflict of interest above and you see the real nature of the bind facing the European project. This can be seen in the denial alone of the E.U. being a political union already by 2011 (or that E.U. competencies are something other than state sovereignty).

Besides handicapping the E.U. itself, the institutional (i.e., state-level) conflict of interest and ideology lie at the root of the near paralysis concerning stopping the spread of the debt-crisis contagion. Ironically, the conflict of interest and the “states’ rights” (formerly nationalism) ideology could force the ECB to buck Merkel in spite of her involvement at the E.U. level. Faced with a vital state defaulting on its debt, the ECB could be forced to take a more active role—a broader interpretation—in defending the value of the euro. This mission presumably includes protecting the euro as a currency. The effective transfer of governmental sovereignty that would be enjoined by the more expansive interpretation (which is legitimate under the bank’s mission at the time, but also admittedly dangerous, given the unlimitedness of the bank’s ability to “print” the currency) would only add to the perception of a democratic deficit at the E.U. level, and thus fuel the “state rights” ideology. According to the New York Times, the ECB has “the firepower to intervene aggressively in the markets with essentially unlimited resources.” Like greed, power aggrandizement can be characterized for its unlimitedness. It could be argued that democratic accountability is absolutely essential to the legitimacy of such a magnitude of power in a democratic federal system of republics.

Generally speaking, a downward cycle could have been underway even by 2011 wherein paralysis or insufficiency at the E.U. level grows relative to whatever level of integration is needed to stave off or redress impending or extant crises; the hypertrophy of the less-democratic avenue at the E.U. level, pressured into action by the more democratic means being stymied by “state rights,” could cause state officials and their respective electorates to cherish the states’ vetoes at the E.U. level even more—ironically as the integrative needs of the union require more competencies at the federal level. The states could be acting in a way with respect to the E.U. that results in exactly what they fear most—a technocratic, non-democratic super-state accountable to no one but itself. Welcome to the European Central Bank.

Click to add a question or comment on the role of the European Central Bank (ECB) in ending the debt crisis.

Sources:
Brian Blackstone and Matthew Karnitschnig, “Crisis Ensnares Central Bank in Desperate Bid to Save Euro,” The Wall Street Journal, November 18, 2011. http://online.wsj.com/article/SB10001424052970203611404577042302226590104.html

Jack Ewing and Nicholas Kulish, “European Rift on Bank’s Role in Debt Relief,” The New York Times, November 18, 2011. http://www.nytimes.com/2011/11/18/world/europe/european-central-bank-resists-calls-to-act-in-debt-crisis.html?pagewanted=all








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.

Comparable state bond yields in the E.U.’s “euro zone” until 2009 belied the risk differential between states like Germany and Greece. “For most of the last decade, bond yields among Germany, Greece, Portugal, Ireland, Italy and Spain traveled in a tight pack. That meant investors buying and selling those bonds acted as if the countries were almost equally safe simply because they were members of the euro zone, despite shaky finances in Greece, real estate bubbles in Ireland and Spain and high debt in Italy.” Then when the yields finally did diverge, banks ignored the significance in terms of differential risk, much like banks had discounted the risk on mortgage-backed derivative securities whose returns were much higher than treasuries.  According to the Times, “For years, Greek and Italian bonds did not pay much more than German ones, but banks were always hungry to chase even a fraction of additional profit. For much of the last decade, they bought the higher-yield bonds, ignoring the growing political and fiscal problems of those countries as well as other peripheral euro zone nations like Ireland, Spain and Portugal.” So even when the market “clicks in,” investors can make horrendous mistakes in reading it.

As for the regulators, they bear much of the responsibility too. “Before 1999, when Europe forged its monetary union, regulators permitted banks to treat as risk-free the debt of any country that belonged to the Organization for Economic Cooperation and Development.” In fact, “amid the subprime mortgage crisis, Europe’s regulators added to the problem by demanding that banks hold more safe assets, much of it [state bonds]. . . . When the subprime crisis started to buffet Wall Street in 2007, banks sought shelter by turning even more to European sovereign debt, especially [states] with the best returns. The B.I.S. data show that bank lending to the governments of Portugal, Ireland, Italy, Greece and Spain, largely through bond purchases, rose faster than usual, by 24.2 percent, to $827 billion, between the second quarter of 2007 and the third quarter of 2009,” when Greece became an issue. Chasing the higher yields, banks were blind to the higher risk. As a result, European banks had a net exposure of about $120 billion to Greek government borrowings and private debt at the end of June 2011, according to the Bank for International Settlements. The banks’ exposure of $643 billion to Spain and $837 billion to Italy is even more astonishing, given the “PIGS” problem had been well known before that time.

Adding to the problem was an inter-institutional conflict of interest. Namely, the banks’ “special relationship with governments” sometimes also presented  what the New York Times calls “a unique dilemma.” Banks had “little incentive to publicize red flags even if they were suspicious about [the state] debt.” The banks had a financial incentive to encourage “euro zone” states to issue more debt because those banks made so much underwriting the new issues. “As the subprime crisis peaked on Wall Street, banks sharply increased their underwriting of European sovereign debt. Since 2005, “several dozen banks in [the European Union] and the United States have earned $1.1 billion in fees from selling bonds for European governments, according to Thomson Reuters and Freeman Consulting Services.” In 2007 alone, the world’s big banks made $113.9 million in underwriting fees. In 2009, that number had more than doubled to $273 million.

Should any banker have grown a conscience or developed a long term interest, he or she could count on hearing from a government official. For example, “Benoît Coeuré, an official at France’s debt-issuing agency at the time, insisted that the policy was not to discourage the banks from analysis. But ‘if it had a negative tone on French policies,’ he said bluntly, ‘my role was to object to it.’” The incentives of the banks and the state governments were typically in sync, however, given the state interest in raising more debt while minimizing interest costs and the banks’ interest in having the governments issue more debt. So the banks and governments tended to tacitly agree to ignore any accruing risk. As toxic as the collusion was, we ought not lose sight of the fact that the market mechanism could not serve as a corrective.

State debt in the euro zone “has lost its apparent risk-free status,” Hervé Hannoun, deputy director general of the Bank for International Settlements, said in a speech in the fall of 2011 in which he called for an end to “the fiction.” To restore confidence, he concluded, the world needs to move “from denial to recognition.” The problem is that both “the fiction” and “recognition” are compatible with the debt market, and indeed with the market mechanism itself.

As stated above, the state bond market in the E.U. did not adequately reflect the risk differential for about a decade, and “when the signals were evident they were ignored.” Even though the markets became “brutally efficient in telegraphing the differing debt risks among European [states], they failed in that function for a long time, just as they failed to reflect the risks of subprime mortgage loans as a real estate bubble formed in the United States,” the Times observes. The market mechanism itself is not always efficient or effective in calibrating the risk-return equation. When the mechanism is accurate and transparent, the information can be discounted or dismissed if doing so is in the financial interests of the banks and governments. The free market, it would seem, is not self-regulatory unless a big jolt of sudden recognition hits it—and then the market can over-react in a fit of irrational exuberance possibly even ending in a bank run and collapse of the financial system.

At least two implications follow. First, calls for less government regulation (i.e., for a “return” to the free market) are woefully misguided to the point of reflecting a condition of utter denial (more likely greed). Such calls suggest that we as human beings are utterly incapable of learning from our mistakes. Second, the E.U. (and U.S.) states rely too much on leverage, given the ability of the market mechanism to accurately reflect the debt instruments’ respective amounts of risk and the ability of participants to pay attention to what the market indicators are saying. In short, we are too human, all too human, to be playing with the debt-loads that our institutions have been acquiring and holding.

Click to add a question or comment on the role of the market mechanism in the E.U. debt crisis.

Source:

Liz Alderman and Susanne Craig, “Europe’s Banks Found Safety of Bonds a Costly Illusion,” The New York Times, November 11, 2011. http://www.nytimes.com/2011/11/11/business/global/sovereign-debt-turns-sour-in-euro-zone.html


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.

While the need for refinancing and making structural reforms to the state’s culture of public finance were pressing concerns, the figurehead’s point on credibility should not be dismissed as if it were mere rhetoric. I have written on the vital role that integrity can play in reinforcing the reputational capital of a leader. Even without positing any number of specific ethical principles, such as fairness and equality, as being necessary for integrity, the mere congruence between word and deed can be taken as the essence of integrity. Simply standing by what one has said can do wonders for the credibility of a leader as well as his or her organization or polity. Loading “extras” onto integrity itself can actually backfire in terms of one’s credibility as forthright rather than a subterranean ideologue.

The sort of credibility that comes from integrity is vital to the sustainability of a federal system, given its vulnerability toward intestine power struggles between governments. In a federal system like the E.U. in which the states hold the preponderance of the public authority, it is absolutely vital that the each state’s leaders are seen as credible in the other state capitals as well as in the E.U. institutions. The officials of those institutions must also be viewed as credible, given their relatively weak basis of power. In fact, given the tenuous basis of the E.U. Government as something more than a gathering of state officials, the E.U. institutions have developed their own basis of credibility, with technical expertise serving as the currency. This currency, I contend, was very much in play in the selection of replacements for Papandreou in Greece and Berlusconi in Italy.

Greece’s Papandreou may have been tacitly pushed out by E.U. leaders, which include state officials such as Merkel and Sarkozy, for having lost credibility by announcing a referendum in Greece on the latest debt-deal reached at the E.U. without having bothered to clear it at the E.U. leaders first. The plummet in the prime minister’s stock in reputational capital at the E.U. level (including Merkel and Sarkozy) did him in. It is perhaps no accident that the prime minister was summarily fired and replaced by a technocrat who was a known commodity to the officials running the E.U. Beyond connections, it is significant that technical expertise itself is no stranger in terms of earning credibility, and thus legitimacy at the E.U. level. It should come as no surprise that pressure across the E.U. and from the leaders of E.U. institutions would advantage technocrats over career politicians, especially in “problem states” such as Greece and Italy in 2011.  Even Merkel and Sarkozy, two politicians themselves, acquiesced with the E.U.-level norm in the selection process.

In fact, it could be said that proficiency at a technical expertise is the criterion for integrity, and thus of credibility as well, in at the E.U. level. That is, expertise may be reckoned as the sine qua non for integrity and thus credibility in having public authority at the empire-level in Europe. It might be that the Europe-wide ambitions of politicians such as Hitler in the twentieth century spurred on the alternative basis from the Shuman Plan onward. Indeed, the first effort at European integration after World War II centered on a rather technocratic effort to coordinate coal and steel production.

While the technocratic basis may indeed keep potential E.U. dictators at bay, it should be noted that expertise and integrity are in fact two different things. Furthermore, because proficiency at a skill or expertise in a technical knowledge does not necessarily connote or involve integrity (e.g., Madoff), the conflation represents, in effect, a hypertrophy or exaggeration of the value of technical expertise—perhaps even a taking of it as an end in itself. One might recall Kant’s theory that rational nature is properly to be taken as an end in itself because it has absolute value in assigning value. Technical expertise could be informed by that nature, and thus taken in a rationalist sense as an end in itself. Even so, this would not turn expertise into integrity. In fact, regarding expertise as being behind the credibility of a public official can actually interfere with the practice of leadership. This can be seen in the case of the transfer of power in Italy.

                             Monti and Barroso                                    John Thys/Agence France-Presse/Getty
     
In Italy like Greece, integrity manifesting in credibility due to technical expertise was salient in the choice of Mario Monti as prime minister following the resignation of Berlusconi. Significantly, both Merkel and Sarkozy privately urged Giorgio Napolitano to appoint Monti. Like Lucas Papadernos of Greece, Monti had been a technocrat with good connections at the E.U. level. Most notably, he was competition commissioner at the E.U. Commission. So it should be no surprise at all that after lunching with Monti in mid-November, 2011, Jose Barroso, chief executive of the E.U. Government’s executive branch, had the following to say: “He has my full confidence and high personal esteem. . . . Mario Monti has the authority to guide Italy through this difficult moment.” According to the New York Times, beyond the “personality politics,” the “depth of European support for Italy” had a lot to do with that fact “that a technocrat they trust” had taken charge in Italy. Reinforcing the point that the basis of Monti’s legitimacy was technocratic in nature, “Berlusconi [had] said that he and his party would support Monti as long as his government remained an interim one made up of experts and not an administration with political ambitions,” according to the Wall Street Journal. Expert knowledge of public finance, rather than skills in the art of political compromise, would serve as the legitimation of the interim government that would take on the Italian culture of political patronage as if by financial skill alone.

Given the edge by pressure from within and atop the E.U. as well as by the dire fiscal conditions of the Italian and Greek states, technique would trump political wrangling for Monti and Papadernos. Yet how can a prime minister not be political?  Evincing political leadership (as distinct from technocratic skill), Monti said at the time of his assumption of power, “There is an emergency, but we can overcome it by pulling together.” The prime-minister-designate was expressing a social reality where in the meaning of the context was “emergency” and the operative value that of cooperation or harmony. Leadership vision is inherently political, rather than being of a technical expertise. Therefore, even under pressure from E.U. leaders, the expertise basis of integrity for Monti and Papadernos cannot exclude politics. Any serious political missteps would quickly trigger questions regarding the “expert” basis of either prime minister’s legitimacy, as Berlusconi was hinting rather explicitly in referring to Monti.  Both he and Papadernos took office having to contend with the incongruity of political integrity being based on technical expertise.

Moreover, both prime ministers must have known that in becoming a prime minister based on fiscal expertise, they risked charges of furthering the democracy deficit, especially given the recent retraction by Papandreou of a popular referendum on the October 2011 E.U.-brokered debt-deal enhancement. However, Fabrizio Saccomanni, the director general of the Bank of Italy, said on November 22, 2011 that he “dismissed the idea that Italy’s technocratic government led by Mr. Monti lacked democratic legitimacy, a point some commentators [had] made as they questioned the new government’s ability to push through austerity measures,” according to the New York Times. The ability questioned could be in terms of political as distinct from fiscal skill or of democratic as distinct from technocratic legitimacy. Even though democratic legitimacy does not rest on technical skill, the fact that both Monti and Papadernos were appointed by democratically-legitimate means (e.g., nominated by a head of state and supported by enough political parties in parliament) gave both men democratic legitimacy as they assumed their respective offices. Even so, the salience of the technocratic basis of credibility is ironic in so far as it comes from a European historical experience in which democracy fell short. It is thus no wonder that the question of a democracy deficit in the E.U. has not been very far from the political thoughts of many E.U. citizens, and that the rise to power of two technocrats would stir that pot even if their legitimacy to rule is sufficient, albeit indirectly via the value placed on technique and the involvement of democratically-elected representatives through their respective parties.


Sources:
Alessandra Galloni and Christopher Emsden, “Italy’s Monti Takes Up Mandate to Govern,” The Wall Street Journal, November 14, 2011. http://online.wsj.com/article/SB10001424052970204323904577035793185821920.html

Stephen Castle and Liz Alderman, “Under a New Prime Minister, Italy’s Star May Rise at the European Union,” The New York Times, November 23, 2011. http://www.nytimes.com/2011/11/23/business/global/rome-gets-new-respect-at-european-union.html

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 12ththat 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.
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