Posted by: Dirk | October 2, 2013

The parallel universe of Jens Weidmann, Bundesbank

Recently, CNBC reported on Mr Weidmann, who is the president of the Bundesbank, Germany’s central bank:

Current regulations made it “highly attractive” for banks to invest in government bonds, and especially those of their home countries, Weidmann argued. As a result, the debt now makes up 5.3 percent of total bank assets in the euro zone – an increase of a third from five years ago.

“The time is ripe to address the regulatory treatment of sovereign exposures. Without it, I see no reliable way of breaking the sovereign-banking nexus,” he wrote.

Even though he is talking about macroeconomics and monetary theory, I do not understand him at all. The euro zone is in trouble because of real estate bubbles in Ireland and Spain, where banks refinanced by borrowing from German banks. Spain and Ireland both had budget surpluses in the years leading up to the crisis, and government debt to GDP was lower in both countries than in Germany. Only because of the generous public bailout of private Irish banks did sovereign debt become a problem, and the expectation of the same happening in Spain has led to rising yields there as well. Greece, while a problem, is an outlier.

So, the sovereign-banking nexus can be broken by two policies. Mr Weidmann proposes to somehow reduce the amount of sovereign bonds held by banks. That begs the question who is holding those bonds instead, or, how governments will cut their spending since they cannot offload as many sovereign bonds at banks as before. The logical result of this policy solution is a reduction in government spending and with it a reduction of the welfare state.

The other policy solution would be to make sovereign debt risk free. There are many ways to do it, the easiest that is on the table is eurobonds. That solution was recommended by the German economic policy advisers board, but it was deemed to be politically unacceptable. With that solution, European governments would be able to spend money how they see fit. Since they are democratically elected that means that running deficit after deficit is legitimate. In Mr Weidmann’s solution, deficit talk and rising interest rates on public debt would drive the policy debate. Where it ends nobody knows – I haven’t seen a monetary system where debt is not risk-free apart from the euro zone, and the result of that experiment has actually been quite horrible. We are 0.1% below record unemployment in the euro zone at 12.0%, as the EU itself reports. So, the logical solution, I suppose, would be to clean up the banking sector and to remove default risk on sovereign bonds.

A third solution, by the way, is to tackle the problem by increasing taxes. But, apart from the macroeconomic problems of a fall in aggregate demand these would cause, this is completely off the table since the two weekly magazines seem to be really, really afraid that the marginal income tax rate on the top 3% of income earners could be raised from 45% to 48%. Here are their covers from this week:

spiegeltitel

focustitel(Geld her! = give money! / Was kostet mich Schwarz-Rot? = How much will take Black-Red from me?)

The correct answer to this kind of silliness comes from the satirical magazine Der Postillion, which titles that the top-hat and monocle-wearing German middle class would bear the brunt of the tax policy.

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Responses

  1. Inasmuch as the sovereignty of nation states is failing, on the collapse of fiat money, beginning with the Emerging Market Currencies, CEW, and Emerging Market Bonds, EMB, nannycrats will increasingly meet in summits and work groups, to renounce national sovereignty, and to establish regional sovereignty, where monetary, fiscal, and economic policies will be directed by statist public private partnerships of banks, businesses, labor organizations and governments, all for the goal of regional sustainability. The IMF is showing the way forward, as the centerpiece statement of its position paper More Fiscal Integration to Boost Euro Area Resilience, dated September 25, 2013, calls for better oversight of national policies and enforcement of rules: “Going forward, reinstating fiscal discipline and reviving market discipline may require stronger involvement of the center in national fiscal decisions.” A One Euro Government is coming soon, it will be a United States of Europe, with a great democratic deficit. The periphery nations, will exist as hollow moons revolving about planet Brussels and planet Berlin. While Greeks cannot be Germans, all will be living as one, in common debt servitude to centralized task masters, such as Jenz Weidmann, President of the Bundesbank, as they direct a Eurozone Fiscal Union.

    Liberalism featured trust in the world central bankers for investment gain. Now in authoritarianism, specifically out of waves of economic and political turmoil in the Mediterranean Sea nation states of Portugal, Italy, Greece, and Spain, people will come to trust in the word, will, and way of sovereign regional leaders, that is statist nannycrats, for regional security, stability, and sustainability, as communicated in bible prophecy of Revelation 13:3-4.

    Doug Noland penned that liberalism as the age of wildcat finance; an epoch where bankers of all types fiercely strived to outdo one another to generate the greatest investment results, and where Ben Bernanke fathered credit easing.

    But now with Jesus Christ, operating in dispensation, that is the administration of all things economic and political, as presented in Ephesians 1:10, the world has pivoted from liberalism to authoritarianism, where Angela Merkel fathered debt servitude with Greek Bailouts I, and II, and where she in calling for More Europe, laid the groundwork for a soon coming One Euro Government.

    Authoritarianism is the age of wildcat governance, where leaders bite, rip and tear one another apart, in their struggle to become top dog leader; these will increasingly rule regionally, in diktat.

    Peter Schwarz of WSWS reports on the emergence of wildcat goverance and its diktat in article Italian Government Survives Confidence Vote.


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