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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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  • U.S.E. IT OR LOSE IT: US OF EUROPE OR BUST 2 comments
    Jun 5, 2011 4:05 AM | about stocks: UUP, UDN, FXE, ERO, URR, ULE, EUO, DRR, FXA, FXB, FXC, FXD, FXF, FXEN, FXY, JYF, AUNZ, CYB, GLD, CNY, USO, DUG, USL, NBO, DBV, ICI, CEW, SLV, OIL, SPY, SDS, RSW, BXDC, SPXU, SH, DIA, EWC, EWA, TLT, XHB, ITM, IGOV, VGK, TBT, GSG, DBC, CORN, ICN, SZR, BZF, GRU, DAX-OLD, FRC, DB, SAN, BNO, ENI
     There’s no responsible choice but bailout Greece, other GIIPS to avoid spreading financial collapse. No way to prevent another crisis, more bailouts, and collapse of political will without some kind of centralized budget supervision. Ultimately, the same goes for ANY institution public or private whose failure can threaten economic chaos. Such institutions must be view like semi-governmental bodies or utilities, heavily regulated in exchange for government guaranteed survival.

     

    In honor of Greek Bailout Week (II), here’s a proposal that should by now be obvious to all, whether they admit it or not. I’ve said it before, so have many others, most recently ECB Chief JC Trichet himself in a rare moment of candor. It bears repeating.

    It’s time to decide. EZ member nations must choose between:

    • The continued existence of the EZ in its current form in exchange for vastly limited sovereignty. In particular, with limited financial autonomy, with some kind of centralized budget approval and or spending veto power over individual states.
    • Continued full sovereignty in exchange for a dissolved or radically altered EZ, probably one contracted down to member states with similar needs and reliable fiscal management.

    The United States of Europe

    The EZ’s existence in its current form but with some form of centralized budgeting or at least veto over national spending of member nations to prevent another EU crisis. Now that we know just one small nation can risk dragging down the entire EU banking system and economy (and likely risk a global contagion too), the EU cannot afford to allow individual member nations the freedom to hold the EU’s economy for ransom.

    While some form of centralized budgeting or spending veto over member states definitely has its own difficulties, it would likely eliminate much of the root causes of the current crisis. In theory,

    • Better chance at avoiding mismanagement/corruption/tax cheating: outsider tax collection supervisors should make it harder for connected locals to reach and corrupt those enforcing the tax laws.

    A theoretically more corruption/mismanagement free mechanism might yet be able to salvage enough popular support to survive. Currently, citizens of both creditor and debtor nations can justifiably feel they’re being asked to pay for the bad decision and corruption of others.

    • Better chance of political support: Pro-bailout governments are being steadily rejected by voters, and for good reason. Taxpayers are bearing the risks, while private investors keep the profits. Debtor and creditor nation citizens are being asked to bear hardship for the mistakes of others, for the sake of banks, bankers, and connected fat cat locals who benefitted from lax tax enforcement, easy credit, or bankers who sought bigger bonuses and profits from risky PIIGS bonds and now want others to pay for their mistakes. Sooner or later voters will rightfully reject those supporting this arrangement. That’s already at least been attempted in Ireland and Portugal, and on a local level in other nations like Germany.

    Understood this is not a comprehensive solution.

    Taken only slightly further, and this line of thinking leads us to an idea I first read about ~30 years ago in The New Republicperhaps written by then Editor In Chief Martin Peretz, in the wake of the 1980s Latin American Debt Crisis (remember that one?) Simply put, that banks, like utilities or any institution whose failure can wreak social or economic havoc, cannot be allowed the autonomy to fail.

    The Lehman Brothers collapse was what started the first contagion and ongoing Great Financial Crisis, and no amount of centralized sovereign budgeting would have prevented that.

    Hence the need for greater regulation in exchange for government support against insolvency. Not easy, but also clearly unavoidable if future financial crisis are to be prevented and ultimately the value of fiat currencies maintained. (They get undermined by money printing/stimulus of big bailouts).

    Hey, I’ve always thought of myself as highly in favor of free enterprise, limited government, etc, but first and foremost I’m a pragmatist. I see no way out of the above.

    Do you dear reader? Input welcome.

    This is one of those posts in which I’m looking at an economic policy dilemma and asking for solutions rather than advocating a specific answer.

    Thanks in advance for your thoughts.

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?

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  • basehitz
    , contributor
    Comments (1551) | Send Message
     
    While the theoretical argument of a centrally planned EZ might have credibility if it were run by individuals who served the citizenry at large, it is painfully clear that the current regime serves the bankers at the expense of the real economy. So the theoretically plausible is subordinated to the demonstrated self-serving policies of the moneyed interests.

     

    That is, these bastards can’t be trusted to do the right thing.

     

    So rather than continuing to overburden the citizens with public and banking debt by whatever concocted scheme they create, IMO they’d be better off to flush the corrupt banking cartel and it’s enablers in public office. That would cause a very severe recession, but they would emerge with a clean balance sheet and have the opportunity to rebuild. Analogous would be choosing Iceland over Ireland.

     

    Institutionalizing TBTF has promoted moral hazard. I would advocate returning to the basic premise Paul Volcker advocated. Namely, the public sector protects traditional banking functions but precludes risky engagements. And if a bank still becomes insolvent, it is shut down, assets sold, and management fired.

     

    And if they really want to get the message across, criminally prosecute those who broke the law. If they put just one WS or banking executive in jail doing hard time in a federal prison, that would be a game changer.

     

    Otherwise moral hazard will continue as the banking industry has overwhelmingly demonstrated that they cannot manage themselves.
    5 Jun 2011, 07:24 AM Reply Like
  • Cliff Wachtel
    , contributor
    Comments (1813) | Send Message
     
    Author’s reply » ooh, nice, well thought out. Need to think about this one. Here it, for sure hate idea of full central planning. Was thinking more about a limited oversight to keep them honest but for sure the devil will be in the details. Corrupt people will corrupt any system no matter how well designed.

     

    Yes, should be some kind of mechanism for those running TBTF banks to be held to higher standard to keep them honest. Need to think more on this
    5 Jun 2011, 12:29 PM Reply Like
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