“To talk about a bailout for Spain at the moment makes no sense. Spain is not going to be rescued. It’s not possible to rescue Spain. There’s no intention to, it’s not necessary and therefore it’s not going to be rescued.”
Spanish Prime Minister Marino Rajoy, April 12, 2012, according to Doug Noland of the PrudentBear
The respite from the European debt crisis has run its course, and with the return of market stress comes a ratcheting up of vitriol directed at the Germans. I find it all worrying. For a moment today I tried to take comfort from a UK Telegraph headline that scrolled by on the Bloomberg screen: “Worrying Is Good for You and Reflects Higher IQ.” I’m adding this to my list of notions that sound appealing and I only wish were true.
By this point in the ongoing global Credit crisis, it should be clear that the real villain is the anchorless global Credit “system” devoid of anything, any mechanism, or any sound money and Credit principles that might help to restrain excess. Self-adjustment and automatic self-correcting mechanisms would be invaluable. Instead, our central bank, steward of the world’s so-called “reserve currency,” indicates its willingness to become even more “activist” - and global finance spirals only further out of control. For decades now, global Credit has been allowed to expand unchecked – with no limit to either the quantity or quality of debt instruments. Perhaps the timing and sequencing of various crises was unknowable, though the end results were for the most part predictable.
Over the years I’ve been a fan of the euro. I’m saddened that my and others’ hopes for a sustainable sound currency failed to materialize. It is surely not going to be part of any solution to a rudderless global monetary system but instead appears poised to become its biggest casualty yet. But to blame Europe’s travails on the Bundesbank is really stretching the bounds of reasonableness – and sound analysis.
In hindsight, a common European currency was not a good idea. Yet European monetary integration is in jeopardy today because for too many years the dysfunctional global marketplace mispriced finance. Greece, Portugal, Ireland, Spain, Italy and others for too long had access to unlimited low-cost borrowings (along the lines of Fannie Mae and Freddie Mac, and the U.S. Treasury). This prolonged mispricing of Credit led to financial and economic imbalances and deep structural maladjustment, just as one would have expected analyzing the situation from an “Austrian” (or, even, German) economic perspective. I often recall the words of wisdom from the great economist, Dr. Kurt Richebacher: “The only cure for a Bubble is to not allow it to develop.”
The nineties saw Credit crises ravage Mexico, Thailand, South Korea, Malaysia, Indonesia, Russia, Brazil, and many others. The developing economies were the “periphery” for that Credit crisis period. Their problems were blamed on ill-advised policies, “currency pegs,” borrowing/spending excesses and other domestic shortcomings. Our and other developed world policymakers had complete understanding as to the causes of various crises, and the IMF delivered the harsh medicine. No one in power wanted to deal with the root of the problem – a dysfunctional global monetary apparatus. No one was willing to address the proliferation of leveraged speculation and derivatives that was integral to distorted market pricing, gross liquidity excesses and attendant systemic fragilities. Indeed, it appeared that officials from key developed countries were content to use the increasingly powerful leveraged players as political expedients and monetary transmission mechanisms.
In the U.S., the unprecedented expansion of (mispriced) mortgage debt and related leveraging was instrumental in fueling a New Paradigm economic expansion, complete with surging government revenues and budget surpluses (not to mention incredible wealth accumulations/redistributions). In Europe, leveraged speculation was critical to the historic yield convergence that permitted the introduction of a single currency. Policymakers on both sides of the pond were so enamored with their new tools and busy patting themselves on the back that they apparently did not have time to ponder long-term Bubble consequences.
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