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COMMENTARY
October 29, 2011
Beyond rescue
Europe's latest summit rescue plan appeared to score with the markets, this week, on both sides of the Atlantic, and yet this appearance is deceptive. Many investors were covering short positions.They had bet the summiteers could agree on nothing at all; and they were wrong. This alone was probably enough to propel everything back upwards for a day or two. Now we watch for the hangover. The first telltale sign of reality sinking back in, was the bond pressure accumulating on Italy. The "theory" behind the European politicians' "final" and "groundbreaking" agreement (their third so far this year) seems to be, to create a rescue fund so large it never has to be used; for its mere existence assures everyone of stability. But in the present environment, one trillion euros is chump change. Any one of the several Mediterranean powers could swallow that, and be burping for more. There were minor accomplishments, such as getting the private banks to write down Greek debt by 50 per cent. This was as close to a no-brainer as financial overseers could get. The banks have themselves to blame, but not only themselves, for having taken in more sovereign debt than they could ever handle. Given experiences with Brazil and other countries in previous decades, everyone should have learned by now that sovereign debt itself requires as much security as private: if not more, given the worthlessness of politicians' promises. Taking Greece for our point of departure, more and more of its bottomless debt has anyway been assumed by international agencies such as the European Central Bank and the IMF. Even after writedowns that begin to seriously limit the ability of European banks to finance the European economy (which is where the wealth comes from), Greece is left owing more than 100 per cent of GDP. And then we turn not only to Italy but to Portugal, Spain, France, Britain, and finally even to Germany - that foolish country which surr end ered its Deutschmark for the sake of European comity, and now has rioters calling them "Nazis" by way of thanks. The private banks, for their pains - which include having to fill yawning pits with recapitalizations - have demanded and received new government guarantees to see them through a period of real danger. But again: such guarantees are smoke and mirrors. They in turn dep end ultimately on confidence in sovereign debt, which will not survive a little arithmetic. And once again, let me emphasize: no banks, no economy. No economy, no jobs; and incidentally, no tax revenue. The fatuous "Occupy Wall Street" movement is premised on the notion that this isn't true, that all bank l end ing should be taken for free money, if the borrowers aren't in a mood to repay. And while they represent the lunatic fringe, a substantial part of every western electorate nods approvingly towards them, without bothering to think through what they are approving. It was upon such electorates the Nanny States were built; and in turn, within such Nanny States that incredibly irresponsible public attitudes were cultivated. The very impulse to blame everything that has gone wrong on the greed of "bankers" and "capitalists" betrays a world view that is essentially insane, and now shifting, under pressure, towards malice. Which is hardly to say bankers and capitalists are without blame. They played along with fanciful regulatory regimes, from shortterm self-interest. They knowingly accepted a dream world in which paper is backed by paper in infinite recession, and applied all their wits to devising the clever instruments by which they themselves were fooled. We, and they, live "equally" in this economic dream world, concocted originally by central bankers, tasked by the politicians nearly half-a-century ago with conjuring pure-paper currencies to replace the direct and indirect gold standard the politicians had abandoned - because hard currencies limited the expansion of Nanny States. The idea, now coming even out of a much-publicized position paper from one of the Vatican bureaucracies, that the solution is to create a bigger central bank, is the latest extension of this nonsense. There will be a fourth European summit-to- end -all-summits, almost certainly, before the end of the year. Like the previous ones, it will try to save the short-term situation, at the cost of mounding the accumulated slag-pile higher. The solutions are, in every case so far as I can see, of a piece with the background causes of the problem. They are paper solutions, and worse, paper solutions the markets can now see through. Which is not to say that paper solutions aren't worth trying, as stopgaps while we try to conceive real solutions. But truly radical thinking is required, to imagine how genuinely hard currencies might be restored, and with them, the discipline of finite budgeting; while letting defaults happen. And to do this before nature supervenes, to impose her own remedies for human dreaming. Assuming she hasn't already made her move. David Warren
© Ottawa Citizen
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