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5.09.2010

Propping Up the Euro with an Emergency Fund: A First Step in the Right Direction

A first step, but a (very) small one.

I haven't seen the details of the proposed emergency fund (or mechanism) but rumours are that it would be around €70 billion.

If that is the right figure, it's peanuts! It's just about 10 percent of the TARP launched by the US Treasury to save the American banking system from collapse after Lehman Brothers had defaulted in September 2008. I know that the Greek crisis - around some €130 billion, give or take a dozen - is much, much smaller than Lehman Brothers which was "worth" some $600 billion. But €70 billion is puny if it's supposed to prop up the Euro, considering that Portugal and Spain are certain to be the next target of speculators. And then Ireland, Italy...

In short, a fund is a first step in the right direction...assuming that all Euro-zone finance ministers have understood that the said "direction" is setting up a European-wide Treasury or Ministry of Finances, like the US Treasury.

But has the European political class understood what is at stake? I doubt it. Consider what props up the American Dollar and has kept it going through the worst storms we've seen in History, including the latest one, the Big Recession. The American Dollar has two legs that keep it walking: one is the Federal reserve, the other is the US Treasury. What has the Euro got? One leg only: the European Central Bank. And not a very strong leg either, because it is limited by mandate to focus only on fighting inflation (unlike the Federal reserve which covers much broader questions of economic growth, unemployment etc) So far, we've been lucky with Mr. Trichet, the ECB head, who looks well beyond inflation (in these deflationary times, a singularly irrelevant question) and talks about a "systemic crisis".

Right he is. It is a systemic crisis, because the Euro is lacking a second leg to stand on: there's nothing like the US Treasury. As I've pointed out in my previous blog, the Euro has only got the Maastricht Treaty and a bunch of (now largely irrelevant) parameters. Will adding a small fund to this sorry cocktail make a difference? I seriously doubt it. It's not a question of money, but a question of mechanism. What is needed is a mechanism to tap as much money as is needed. If 70 billion will do the trick, fine. But if more is required, the decision process cannot take weeks the way it has happened for Greece.

It won't work.

What will work? Obviously, setting up a Euro-zone wide financial ministry. Because Europeans are hopelessly nationalistic, it can't be done politically. What can? I'm curious to see what Mr. Barroso and the EU Commission are coming up with. We should know by Monday morning what exactly they've been cooking in Brussels and whether it will work.

That's for the short term. Over the medium term, I still think that more is needed than an emergency fund. Maastricht has to change: a set of rules that are rigid and immediately disregarded cannot be a serious foundation for a currency. What is needed is a supranational Ministry of Finance responsible to the Finance Ministers of the Euro-member countries.

If that's too much to ask for, forget the Euro. And forget Europe too!

5.07.2010

How to Fix the Euro and Avoid a Double Dip Recession: Change the Maastricht Parameters!

It sounds like what the French call “l’oeuf de Colomb” – Columbus’ egg: the great man was asked how to stand an egg on its head and he simply cracked the bottom to keep it upright.

Here too we need to crack the bottom to keep the Euro upright and avoid sliding again in a deep recession – making it a double dip recession, the kind that is most frightening, because the second dip could be far worse than the first caused by the fall of Lehman Brothers. To those outside the Euro-zone who are gleefully watching the Euro collapse and congratulating themselves for not having joined in (and here I’m thinking of the British in particular), beware! If the Euro-zone area goes into an economic tailspin, it means European markets for British, Chinese, Japanese, American goods etc will dry up. International trade is a two-way street: if you block one end of the street, the traffic stops. So any excessive weakening of the Euro is highly contagious worldwide. I don’t need to go on, I think you get the picture.

What about this business of cracking the bottom of the egg? To paraphrase one of Bill Clinton’s famous slogan: to fix the Euro, fix the Maastricht parameters, stupid!

It seems that so far in this Greek-induced crisis, no one has thought of it. Everybody’s attention has been taken in by proximate causes, first among them, Greek corruption and profligacy. In this respect, many statistics could be quoted but one stands out: 40% of the Greek working population is employed by the Greek State! That’s incredible. Greece has been swept over by a tsunami of clientelism: every politician that has ever been in office has created a string of jobs for his voters. Of course, that game is over now. The Germans have no sympathy for this sort of thing, and in this at least they’re right. On the rest they’re wrong. In particular, in insisting on austerity measures that are so severe that they will push the economy into a long-lasting depression, some say ten years, ultimately making it impossible for the Greek Government to ever pay back its debt. This is not a win-win situation, but a loss-loss situation – or if you prefer to use a more sophisticated term: deflation. The Germans naturally have to share much of the blame for the depth – and probable length – of the Euro crisis. If they had been more cooperative and moved sooner in unison with the French (as they used to do in the past), we wouldn’t have the problem we have now.

More recently – as I indicated in my previous post – the ratings agencies have been pointed out as the villains of the piece. When Standard and Poor’s reduced Greek bonds to junk status a few days ago, there was an outcry in Europe, and a call to create a European ratings agency. It is true that the major ratings agencies – Standard & Poor’s, Moody’s etc – are all American. But that, in itself, is not the problem. Many countries – China, Canada, Japan – have created their own national ratings agency but these have no effect beyond national borders. The only ratings that count are precisely those issued by S&P’s, Moody’s etcc and no other. You can’t change capitalism overnight.

Creating national (or European-wide) agencies is not the answer. What’s wrong with the likes of S&P’s and Moody’s is not their nationality but that they are not independent. They’re in the pay of international finance. The ratings they issue are necessarily biased.

The solution would be to force ratings agencies to come clean about how they do their analyses and why. More transparency is what is needed. More transparency and more control by international agencies such as the International Monetary Fund that are entities independent from private finance. And when a rating is issued on a Euro member country’ sovereign debt, a vetting by the European Central Bank should be required. If the Bank is convinced of the soundness of the rating, then it could be issued. If not, then it should be stopped. But that implies a deep institutional change and it is likely to take time before all the major players concerned (the G20 and others) can come to an agreement on how to control the ratings agencies.

In the meantime, the drama goes on. Now speculators (and I mean hedge funds and other big investors), having cleaned out on Wall Street, are looking for new opportunities for a fast buck. They have turned their attention to sovereign debt. This is only natural. They always search for chinks in the armour: in the case of Wall Street, the chink was sub-prime mortgages embedded in derivatives. In the case of sovereign debt, it was first Dubai and they had to test whether it would be saved by the United Arab Emirates (it was). Now it’s Greece, and they have to test whether it will be saved by the European Union (it will).

But at what cost! And yet much of the pain could be easily avoided with a single stroke of the (Euro-zone) pen: move the Maastrich parameters from the present 3 percent rule (the ratio of debt to GNP) to something more realistic, say 5 or 6. The exact percentage is something economists could work out, but it should be in line with the capacity of the Euro-zone economies to function and recover from a down turn in the economic cycle. The problem for Greece is that it is asked to function and apply fiscal policies that would be appropriate for the German economic situation. The Greeks have to reign in their debt and adopt austerity measures, no one is arguing they shouldn’t. But the measure shouldn’t be excessive, or else they will kill the productive machinery of the Greek economy. So the deficit/GNP goal set by the Maastrich agreement should not be 3 percent. It is in any case hypocritical to argue that 3 percent is the right figure. It may have been at the time the Euro was established (although that too is arguable) but it no longer is so under present circumstances.

I know I sound like I am arguing about abstract percentages rather than the real world. But there is nothing abstract about the so-called Maastricht parameters. Why? Consider what the Euro is based on. To make the currency work, Eurocrats were faced with a real difficulty. They were able to set up a Central Bank but had to replace with an agreement the fact that there is no overall Euro-zone financial ministry. That’s what the Maastricht parameters are all about: iron-clad guidelines for all Euro-zone members, dictating how far into debt they are allowed to go. Three percent and no more. Of course, since the beginning of the Euro that three percent rule has been repeatedly broken, first by the French and the Germans. Then everybody got into the act, though it was done discreetly. But it was done. In other words, the Greeks weren’t the first to break the rules, even if they did so with greater abandon than anybody else, and for years kept hidden from view how far they had sunk into the red.

The Euro is not (not yet) the currency of a United Europe. The American dollar has a huge advantage: it is protected by a central bank (the Federal Reserve) which has political clout (the US Treasury). The European Central Bank hasn’t got that kind of clout. Why ? Because every Euro-member has jealously guarded its sovereignty over fiscal and financial matters. There is no Euro-zone Treasury or federal financial ministry, like in the US. When an American State goes bankrupt, or nearly so like, say, California, nothing happens to the dollar. When Greece threatens to fail, so does the Euro. The European Central Bank can do nothing about it, except take Greek bonds as collateral even if rated junk, and perhaps buy up Greek bonds as needed. I write “perhaps” because so far it hasn’t said it would do so. Jean-Claude Trichet, the head of the European Central Bank, has recently told the press that so far the matter hadn’t even been considered. And this should come as no surprise. Mopping up Greek bonds from the market is a measure of last resort, something it is rumoured (probably rightly so) that the Germans are opposed to. And of course, somebody has to finance the purchase of bonds by the European Bank. In other words, Euro-zone financial ministers have to agree to it. Fat chance!

So what is the solution? Some have suggested Greece should drop out of the Euro, others that Germany should. Such suggestions make no sense whatsoever. Dropping out of the Euro for any Euro member would mean declaring bankruptcy. Should Greece do so, all the banks across Europe that hold Greek debt would be endangered – and many would fail. Remember, French and German banks hold between them well over €100 billion in Greek debt. Then there’s the rest of Europe (Italy, Spain etc) who also hold Greek bonds.

Such a scenario is obviously unthinkable.

I believe that so far the right policy decisions have been taken and the Euro-zone’s bailout plan for Greece makes sense. What does not make sense is the severity of the austerity measures imposed today on Greece, tomorrow on Portugal, and next Spain.

Austerity is required but not to the point of jeopardizing economic recovery. The way out of this dilemma is to fix the Maastricht parameters, introducing sufficient flexibility in them to safeguard recovery. It won’t be easy because it is a political decision. The Euro-zone finance ministers have to get together and agree on a new set of guidelines to govern the debt/GNP ratio (and several other related matters). But they must do something fast, or else speculation against the Euro will continue unabated. If nothing is done, we’ll be heading straight into a Big Recession – perhaps a bigger one than the one we are so painfully climbing out – a recession that will affect not only Europe but the rest of the world too. Remember, because of international trade, any imbalance in the system is instantly globalized. There is no escape.

Do you agree? If I have convinced you, please help me in spreading the word. We need to make our political class aware of the danger. Ms. Merkel has already lost enough time before accepting to bail out Greece, there is no more time to lose.

We MUST change the Maastricht parameters as soon as possible. It may not be easy – anything involving politics never is – but it IS FEASIBLE. It’s a matter of political will.

Send my blog around, make comments, add to it, do whatever you like but spread the word to your friends and everyone you know.It is our only chance to keep speculators at bay and stop them from wrecking havoc and causing untold poverty and suffering.

We’ve got to make the politicians listen to us.Please help out and spread the word! CHANGE MAASTRICHT!

4.30.2010

The real villains in the Euro debacle? The ratings agencies!

The crisis of the Euro is stalked by the ghost of Argentina - the only important industrialized  country that failed in recent memory. That was back in January 2002, when the government announced it would default on $141 billion in public sector debt.  But for the Euro debacle, the real villains are the big credit ratings agencies: Standard & Poor's, Moody's and (possibly) Dun & Bradstreet.

Ok, Greece started the ball rolling with its profligacy and corruption, and Portugal may well pick it up next, to be followed by Spain, Ireland etc. No, not Italy - people who have punned the famous PIIGS, with two II, have got it wrong, they're just the usual bunch of haughty, rain-drenched Northern Europeans who can't stand South Europeans basking in the sun. The correct term is PIGS, with the I for Italy excised. And the on-going wave of speculation attacks on the PIGS is not through yet, and it certainly isn't where Greece is concerned. Because the austerity measures required to solve the problem are bound to be politically unpalatable. As usual, the rich have taken their money out and placed it safely abroad and the poor are left to pick up the pieces. Greek banks have been depleted and their weakness was recently duly noted in the press.

The next act in the Greek drama is highly predictable: the unions will organize mass protests and general strikes, making the whole situation much, much worse. At least one major source of external revenues for Greece will be compromised. Good-bye to income from summer tourists! This is no doubt going to be a very sour and sad summer for Greece.

Ok, Germany is also a culprit. It has procrastinated because of a politically weak Chancellor, Angela Merkel, concerned with a key state election in North Rhine-Westphalia on 9 May that threatens to upset her government coalition. She stopped listening to the popular anti-Greek sentiment in Germany only when it became clear that it was not a matter of bailing out Greece but of saving the Euro. How could she take so long to realize what the stakes were? Perhaps she is instinctively anti-European - and by that I mean not commmitted to the ideal of a United Europe - because she comes from the East (she was born an East German). Most Eastern Europeans are not committed to Europe: for them joining the EU was a business opportunity, a way to finance their agriculture with EU funds and to free themselves from the shackles of Russian (ex-Soviet) influence. They did not join because they believed in Europe. If you have any doubts about that, just look at Poland and how the (now that he's dead, revered) Polish President did everything in his power to delay the signing of the Lisbon treaty and the strengthening of the EU.

But the real villains in the Euro debacle? As I said in my opening, we now know who they are: the ratings agencies! Standard and Poor's two days ago, on April 28, cut its rating of Greek government debt by a full three notches to BB-plus, the first level of speculative status. The outlook is negative, meaning the agency could downgrade Greece again. To justify this rating, S&P's cited the "political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory." In short, they believe it is impossible for Greece to dig itself out of the hole it's in. Under present conditions, the austerity measures (a) are not enough and (b) if they were enough, they wouldn't  allow the Greek economy to recover so the debts can be paid back. The Greeks are dammed if they do and damned if they don't.

How credible is this piece of reasoning? Not very. It is, as often the case in this type of economic prediction, a perfect example of failure in DYNAMIC thinking. What do I mean by that?

Two things.

First, remember that predictions are always based on a reasoning of the following type: if you've got this, then you're going to get that. But you've got to make sure you don't overlook something in the situation you're looking at. Economists with their nice mathematical models make that sort of mistake all too often, because the models are only as good as their premises - never better. Miss out on one element? Then what you've got is nothing more than a classic case of TITO: Thrash In/Thrash Out. And all the complex and intellectually satisfying econometrics and mathematical modelling that has gone into it cannot change the result.

Second, a prediction is necessarily forward-looking. Time is of the essence, you have to factor it in. To be successful and credible, a prediction has to take correctly into account all the dynamics of the situation: things are a certain way today, they're going to be different tomorrow. Everything moves, nothing stays the same.This movement is sometimes imperceptible, but it's there. And this movement, more likely than not, is highly complex: it depends on a series of other moves in other related (and not so related) areas. You have to throw your mental net very wide to understand how a situation might evolve. You also need to have a lot of imagination. A mathematical model can't give you that, it's a mental straitjacket. That's why so few predictions made by economists are right - in fact, most of them are systematically wrong. It's a peculiar failure in dynamic thinking, and a very common one.

Why should credit ratings agencies who are filled with people trained in economic analysis be exempt of this failure? Of course, they're not. Ratings agencies are just as fallible as the whole economic profession. In this particular case, what is wrong with S&P's reasoning?

Simple. They've overlooked two fundamental facts, one economic and the other political.

The economic: once the Euro goes down, exports are helped. Not only German exports, but Greek exports too - including vacations in Greece that become more attractive for $$$holders. So that's your first dynamic factor that is overlooked.

The political: Greek bonds cannot be treated as vulgar corporate bonds. What does it mean, downgrading Greek government bonds to junk status? How can sovereign debt - a government's promise to redeem its debt - be equated with business debt? This is political nonsense. No global business - not even the biggest American corporation or bank - can save itself when its paper is rated junk. We've all seen what happened to Lehman Brothers. And if more big banks did not fail in the current crisis, it's because they were lucky enough to be bailed out by governments. Is the Greek government going to be left out in the cold? Obviously not. The whole of Europe is behind it - actually  the whole world, since the International Monetary Fund has joined the European Central Bank and the Commission  in the bailout of Greece.

But do governments always band together to save a brother in trouble? Here we return to the ghost of Argentina I mentioned in the beginning. It's all very simple. Argentina - politically - is not Greece. Argentina never had the kind of instant, institutionalized political support that Greece has, and I mean EU backing. It is in the interest of every Euro-zone member to shore up the Euro - actually it's in the interest of the whole world. Otherwise international trade will go to the dogs. Should the Euro crash, you could buy a spanking new BMW for $10,000! Unthinkable.

So what was Standard and Poor's thinking of when it downgraded Greece - and next moved to downgrade Portugal? Rumours are that the other agencies are about to follow. Are they serious?

It is beginning to look like the credit ratings agencies are either very stupid (i.e. unable to engage into dynamic thinking), or very corrupt. I know, I wrote corrupt. That's a  strong word and  I can't prove it. But it is a fact that the ratings agencies are paid for their analyses. A ratings agency has to make a living like everybody else! And where is the butter on their bread coming from? The corporate world. Wall Street. Anybody who's issuing bonds needs to be rated, or else the bonds won't sell. There'll be no market for them. Hence the basic role of the ratings agencies. So if you follow the quid prodest rule, you can easily see who's behind the ratings agencies and their apparently thoughtless degrading of sovereign debt...

Who?

The speculators, of course!

There's much talk about regulating the banks and hedge funds. All fine and good. But what about the ratings agencies? That's where the trouble starts and something needs to be done about it.

Regulate the ratings agencies! Now!

Any ideas how to do that? I've got some, but I'd love to hear yours...

4.21.2010

The Curious Case of Volcanic Ash and why nobody is doing anything about it

Now we've all learned something airlines have known for a long time: that volcanic ash is catastrophic, it sandblasts planes and shuts down jet engines. And you can't see it in the sky. That's the incredible thing. Looking up, the sky remains blue - with pretty white wisps of what seems innocuous vapour but could be deadly ash.

And so it was when, on a fine spring day, huge ash clouds billowed out of an Icelandic volcano whose name is unpronounceable and impossible to remember and were blown across Europe. We all read about the havoc caused in air traffic all over Europe and beyond, and I won't go over it here. To keep you updated on air traffic is the job of the media.

All I want to do here is make some comments about this - the Curious Case of Volcanic Ash.

First, the consequences of a stop in air travel like this one - 5 or 6 days so far, and who knows for how  long - were far worse than expected. It didn't merely ground some passengers. It grounded an incredible number of them: over 50,000 Americans were stranded in Europe and four times as many British citizens spread out around the globe couldn't get home. Similarly dismal statistics apply to the citizens of a dozen other countries.

Then there were the surprising - but if you stop to think about it - perfectly natural disruptions in European markets for tropical fruit and out-of-season vegetables. Europeans, with a rising standard of living, have started to behave just like Americans: they want asparagus, green beans, grapes and strawberries all year round - which means flying them in from Latin America and Africa where they are produced.   Kenya alone is losing an estimated US$ 2 million a day. And that means hardship for everyone in developing countries, including the rural poor who provide the manual labour to pick the produce and pack it.

However, politically, fruit and vegetable producers and distributors don't constitute a very strong lobby. Neither do passengers. The heavy weights who really got annoyed on the fifth day of stoppage imposed by Eurocontrol were (predictably) the airlines. Lufthansa sent up test flights, and I gather so did British Airways, with their planes coming back unscathed. Such tests didn't convince the authorities: after all, nobody knows where those clouds are. They can easily be confused with normal vapour. The test planes could have simply by-passed them.

Because that's another incredible fact that came out in this crisis: the shutdown of European air space was decreed not on the basis of scientific, verifiable facts, but on computer models. In other words: theoretical probabilities not hard facts. It's amazing how our Society is committed to mathematics and statistics rather than direct observation. The theory said there were risks - how risky nobody really knew - but there were some risks and so the decision was taken.

Nobody felt like taking any risks.

The "principle of precaution" is sancro-sanct in Europe. No politician nor any government or inter-governmental institution such as Eurocontrol would have dared to contravene the principle. Indeed, it is the same principle that has led to the overproduction of swine flu vaccine last winter. And the same principle that stops most European countries from allowing in genetically-modified cereals, vegetables or meat.

The precaution principle is Big Stuff - a real tyrant.

So should we ditch it? Of course not. One should not - not ever - put any life in danger, no matter how small the risk. It's not just a question of being politically correct, but morally correct.

Great. Are you impressed? I am not. I can't help but notice that when a stop in air traffic causes losses reportedly amounting to some 200 million Euros a day, the situation tends to change. Imperceptibly - but it does change. Airports across Europe were progressively re-opened.

Why? Remember, the airline lobby is powerful. They've even got national parliaments discussing the possibility of helping them with "emergency funding", claiming that this crisis is worse than what happened after 9/11 and American air space was closed...

Ok, that's a lot of political blah-blah but the threat of volcanic ash remains. There are over one hundred active volcanoes on this planet. Fortunately most do not threaten European air space, one of the most trafficked in the world.
But watching the gradual re-opening of air traffic, another disturbing fact emerged. European air space did not open smoothly, no, it hesitated, sputtered, and took time. Too much time. Because it's not easy, when there is no such thing as a Single European Sky and over two dozen countries are involved. Obviously a lot of consultation is required: it is much easier to close down the skies than re-open them. The EU Commission has been grumbling that's because no one has paid any attention to its Single European Sky proposal (made back in 2004). The Commission is probably right. Indeed, no one has paid any attention. Every country wants to hold on to every bit of national sovereignty it can, especially if it's up in the sky.

I bet that soon the whole crisis will be forgotten and the Single European Sky proposal will once more fall into oblivion. Until the next crisis...

But do we really have to live in this way, with an institutional mess and a lack of scientific data? Perhaps not. I came across an interesting story in the Italian press (the Stampa of 21 April). A few years ago, when Etna, Sicily's monster volcano and the biggest in Europe, spewed ashes for a whole month, the airport of Catania, Fontanarossa, had to be closed. That's not such a small airport (it averages 6 million passengers a year) but the problem passed largely unnoticed. Why? Sicilians themselves used the Palermo airport, two hours away from Catania, and most of the ashes was blown south, over Africa where there are practically no airports. Of course, if Etna wakes up again (as it is bound to), and blows its ashes up north, then another Icelandic-like disaster would hit Europe.

The Italians are well aware of this, and their "Protezione Civile", a government outfit tasked with disaster prevention and management, set up four months ago in Catania airport a special radar. It is reportedly a modified version of those used for meterological purposes and it is designed to monitor volcanic ashes in the atmosphere. I am no scientist, but I can easily imagine how the system would work. With the help of the radar, the idea is simple enough: identify ash-free corridors in the sky above the airport, allowing planes to land and take-off safely. In other words: direct observation as opposed to theory and computer models. It would mean monitoring volcanic ashes in real time - something that cannot be done now.

So why isn't the system in use everywhere in Europe? Because, according to the Protezione Civile, the radar in Catania is still experimental. It has to be tested and Etna, a notoriously fickle volcano, is not collaborating. For the moment it is fast asleep and not spewing any ash at all.

Do we really have to wait for Etna to wake up and send ashes all over Europe so we can test the system? Wouldn't it be better to set up this experimental radar somewhere in Northern Europe and test is out as soon as possible on the Icelandic ash clouds?

Where is European cooperation on this most important matter?

What do you think? Do join me in asking that something be done without wasting time any further!

4.17.2010

Finances of Mass Destruction: is the End in Sight?

At first glance, it would seem speculators are having a field day. Their Glory Age started two years ago. After betting against the American real estate market and successfully shooting mortgages down in flames, sovereign debt is now under attack. First in Dubai, next in Greece, then Portugal, Spain and why not Italy? When it happened in Dubai, we all felt rather removed from it (after all, it was the Middle East and in any case the Arabs are flooded in ill-earned petro-dollars, right?). Now that the problem has reached the shores of Europe, it's a little too close to home for comfort.

Well, what are the speculators really up to this time?

It would appear that the national rate of savings (rather than ratios like debt to GDP) is the key indicator speculators look at. The reasoning is very simple. If a country saves too little, it means it can't keep up with payments on its national debt - because the only way to pay back creditors is through taxation. And when a country is poor and getting poorer because of the Great Recession, there's little income to tax. It's a downward spiral. Hence the attack on so-called "sovereign debt".

That's the latest and most worrying effect of the Great Recession. If you read the newspapers, as usual the news are dire and dismal. One wonders why Greece and Portugal would ever want to stay in the Euro. Pundits predict that the austerity measures imposed on them by Brussels and its Euro partners (and among them Germany is unpleasantly vocal) are likely to prolong the recession. Countries caught in this particular trap are going to find it nearly impossible to climb out and get back into a healthy growth cycle.

Are speculators going to enjoy full impunity as they shoot down one country after another? It certainly looks like the odds are on their side. They have never had to pay for their misdeeds - indeed, the big bank bailouts using taxpayers' money look dangerously close to a sophisticated form of insurance against failure, opening the way to yet more misdeeds in future. After successfully wreaking havoc in international private finance,  it would appear that it is the turn of public finance.

Now is that really true? Is there no hope, nothing that is going to shield us from the financial sharks?

First, their reasoning may be wrong and in the end, turn against them. Take those attacks on the Greek sovereign debt (and, eventually, other European countries with low savings rates). Ok, a first result is the weakening of the Euro. But, remember, that's just what Germany wants to help its exporters -  it is a country whose growth depends on exports far more than any other in the Euro area. So renewed attacks on Greece are going to play in the hands of the Germans, insofar as it weakens the Euro. But we're in a dynamic situation. A weaker Euro also helps exporters throughout the Euro area, Greece and Portugal included. So, after all and in spite of what is said in the media, there's a silver lining in the cloud hanging over Europe: if the Euro goes down, up go exports across the board...

Second, the days of gleeful impunity for speculators may actually be reaching an end. Yesterday, 16 April 2010 - a date we should put a red circle around on our calendar- the SEC announced it was going to pursue Goldman Sachs for fraud. It charged that investors were duped into losing $US1 billion on a rigged deal pegged to dubious home loans. There's actually a great deal of public sympathy for this kind of move. The term Warren Buffett coined for derivatives was instantly a popular success. He famously described them as "financial weapons of mass destruction". Likewise, Michel Barnier, the European Commissioner for the Internal Market, is also considering tough regulations and has been repeatedly threatening to impose rules on hedge funds and curbs on bankers' pay. In Europe - probably unlike America - people are becoming increasingly irritated with the capitalist market ideology which is viewed as nothing more than an amoral money jungle.

Let's hope that the road to greater regulation of the financial world is not stopped by the likes of Sarah Palin and her irresponsible Tea Party cronies...We can't let bankers turn their banks into gambling houses. They're supposed to support economic growth, ensuring that savings are turned into constructive investments. Savings are not something to play roulette with, betting against the real estate market and sovereign debt.

In all this, what really worries me is the obvious collapse of morality across our modern society. In the rush to make money - ever more money $$$ - bankers seem to have forgotten what their banking role was all about. Artists seem to have forgotten what Art was all about. I hope that doctors still remember what medecine is about and that engineers still know how to build bridges that hold up...
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