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Is Europe Heading For A Meltdown?

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http://www.telegraph.co.uk/finance/comment/edmundconway/7770265/Is-Europe-heading-for-a-meltdown.html

This financial crisis is worse than the sub-prime crash of 2008 because the sums are so much bigger and it is governments that are in dire straits. Edmund Conway explains the dangers.

Mervyn King, the Bank of England Governor, summed it up best: "Dealing with a banking crisis was difficult enough," he said the other week, "but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there's no backstop."

In other words, were this a computer game, the politicians would be down to their last life. Any mistake now and it really is Game Over. Or to pick a slightly more traditional game, it is rather like a session of pass-the-parcel which is fast approaching the end of the line.

The European financial crisis may look and smell rather different to the American banking crisis of a couple of years ago, but strip away the details – the breakdown of the euro, the crumbling of the Spanish banking system to take just two – and what you are left with is the next leg of a global financial crisis. Politicians temporarily "solved" the sub-prime crisis of 2007 and 2008 by nationalising billions of pounds' worth of bank debt. While this helped reinject a little confidence into markets, the real upshot was merely to transfer that debt on to public-sector balance sheets.

This kind of card-shuffle trick has a long-established pedigree: after the dotcom bust, Alan Greenspan slashed US interest rates to (then) unprecedented lows, which helped dull the pain, but only at the cost of generating the housing bubble that fed sub-prime. It is not so different to the Ponzi scheme carried out by Bernard Madoff, except that unlike his hedge fund fraud, this one is being carried out in full public view.

The problem is that this has to stop somewhere, and that gasping noise over the past couple of weeks is the sound of millions of investors realising, all at once, that the music might have stopped. Having leapt back into the market in 2009 and fuelled the biggest stock-market leap since the recovery from the Wall Street Crash in the early 1930s, investors have suddenly deserted. London's FTSE 100 has lost 15 per cent of its value in little more than a month. The mayhem on European bourses is even worse, while on Wall Street the Dow Jones teeters on the brink of the talismanic 10,000 level.

Whatever yardstick you care to choose – share-price moves, the rates at which banks lend to each other, measures of volatility – we are now in a similar position to 2008.

Europe's problem is that the unfortunate game of pass-the-parcel came at just the wrong moment. It resulted in a hefty extra amount of debt being lumped on to its member states' balance sheets when they were least-equipped to deal with it.

Europe was always heading for a crunch. For years, the German and Dutch economies pulled in one direction (high saving, low spending) while the Club Med bloc – Greece, Portugal, Spain, Italy (and their Celtic outpost Ireland) – pulled in the other. At some point, there was always going to be a problem, given that these two economic blocs were yoked together in the same currency, controlled by the same central bank. By triggering the global recession and shovelling an unexpected load of debt on to Greece's balance sheet, the financial crisis has effectively smoked out the European folly.

The Club Med nations – and in many senses Britain – were not so different to sub-prime households: they borrowed cheap in order to raise their standards of living, ignoring the question of whether they could afford to take on so much debt. But, as King points out, sub-prime households – and the banks that lent to them – can usually be bailed out. The International Monetary Fund simply does not have enough cash to bail out a major economy like Spain, Italy or, heaven forfend, Britain. So, again, we find ourselves in unknown territory.

Priceless, absolutely priceless.

So our great central banker thought he could fix the problem by transferring the debt from the banks balance sheet onto the taxpayer!!

We truly are led by morons who will stop at nothing to steal from the public.

Merv you never fixed the problem you just delayed the correction, but this time we take out the govts and the banks.

Genius.

He's certainly value for money...

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http://www.telegraph.co.uk/finance/comment/edmundconway/7770265/Is-Europe-heading-for-a-meltdown.html

Priceless, absolutely priceless.

So our great central banker thought he could fix the problem by transferring the debt from the banks balance sheet onto the taxpayer!!

We truly are led by morons who will stop at nothing to steal from the public.

Merv you never fixed the problem you just delayed the correction, but this time we take out the govts and the banks.

Genius.

He's certainly value for money...

Greeks trying to get some protection from the morons

link

In the 1940s, as the only reliable currency available, much of it was hoarded in trunks, under floorboards and buried in gardens. Any respectable girl's dowry included a cache of sovereigns.

Now they are being used as a physical hedge against fears that Greece may leave the euro zone.

For weeks buyers have been queuing patiently in the central bank's main downtown Athens office, prepared to shell out nearly €273 ($409) per piece, up from €243 at the start of May and €180 last July.

Persistent worries that Greece could default at least partly on its debts are emptying the Bank of Greece's vaults of at least 700 gold coins a day, giving a whole new meaning to the term sovereign debt.

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"Dealing with a banking crisis was difficult enough," he said the other week, "but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there's no backstop."

I saw that quote and thought it was something one of the more extreme HPC'rs would say. I'm a fan of Merv, he knows the score but it constrained by his position from saying "Looks, you feckwits, it's the debt innit, we're all dooooomed".

I get the feeling that Minsky is about to have another moment.

Maybe this time should be called a "Merv Moment", the point at which you say the same is up, we're broke.

VMR.

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I saw that quote and thought it was something one of the more extreme HPC'rs would say. I'm a fan of Merv, he knows the score but it constrained by his position from saying "Looks, you feckwits, it's the debt innit, we're all dooooomed".

So your saying being independent stops him from saying the truth? I think we have a differing view over what being independent actually means.

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So your saying being independent stops him from saying the truth? I think we have a differing view over what being independent actually means.

I'm saying being Governor of the BoE stops him from saying the truth.

VMR.

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http://www.telegraph.co.uk/finance/comment/edmundconway/7770265/Is-Europe-heading-for-a-meltdown.html

Priceless, absolutely priceless.

So our great central banker thought he could fix the problem by transferring the debt from the banks balance sheet onto the taxpayer!!

We truly are led by morons who will stop at nothing to steal from the public.

Merv you never fixed the problem you just delayed the correction, but this time we take out the govts and the banks.

Genius.

He's certainly value for money...

I have to disagree with the details of your analysis.

Firstly, the banking bailouts were organised by the Treasury, not the Bank of England. You have the wrong villain I'm afraid.

The Bank of England did go to the Treasury for permission to print £200 billion. A move I agree with.

What went wrong was this. First of all they should have let the bad banks go under. Northern Rock, Bradford and Bingley, RBS, HBOS (no forced takeovers). Of course there was a risk of contagion, so you do backstop the good banks.

But the bad banks, you close the doors, and let the shareholders get wiped out, and give bondholders AND depositors a haircut. Liquidation then follows. Reducing the number of banks improves the profitability of those remaining, meaning they are likely to be able to find their own funds.

In the UK we backstopped the lot.

I would have like to have seen directors and recent directors of these banks personally bankrupted as well. Just like they do with councillors. Running a UK bank has rewards, but there should be big risks too. And by bankrupt, that includes losing your pension. Personal liabilities of directors would certainly focus the minds of those on the board.

But if you do have banks going under, you get massive credit deflation. QE counters this. The UK has gone about this the right way, with purchases of Government Securities, that is all that the central bank should by buying. Those bonds should then be cancelled, monetising the debt, and indeed reducing the State's debt. You get that money to flood into the economy by running a temporary fiscal deficit, again countering the deflationary shock of part of the banking system going under.

Doing the above will get you out of this kind of mess. But to do it, you need to have government spending policies that can be reigned in quickly. Labour left the finances out of control.

As for Europe, they need to do the above. But with one central bank and many countries, I dont know how the Central Bank can go about buying up government bonds in a manner that is fair to all countries. What a mess.

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http://www.telegraph.co.uk/finance/comment/edmundconway/7770265/Is-Europe-heading-for-a-meltdown.html

Priceless, absolutely priceless.

So our great central banker thought he could fix the problem by transferring the debt from the banks balance sheet onto the taxpayer!!

We truly are led by morons who will stop at nothing to steal from the public.

Merv you never fixed the problem you just delayed the correction, but this time we take out the govts and the banks.

Genius.

He's certainly value for money...

Sounds like a pretty fair comment to me. He's not saying whether he supported the bank bailouts or not, he's just saying that at least that option was there, and that that option doesn't exist for sovereign debt. The comment is more interesting because many would say that the option of QE acts as a backstop for soveriegn debt, but I suspect he was referring to the problems specific to eurozone countries.

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Sounds like a pretty fair comment to me. He's not saying whether he supported the bank bailouts or not, he's just saying that at least that option was there, and that that option doesn't exist for sovereign debt.

One point I like to remind myself of about sovereign debt is that it is unsecured unless the other party has better armed forces than you.

VMR.

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All these crises are doing is giving sh1t journalists the opportunity to talk cr@p. They can say anything they want and make it all up, it doesn't really matter. People forget to correct them after the event.

Koletsky has made an entire career out of it!

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I have to disagree with the details of your analysis.

Firstly, the banking bailouts were organised by the Treasury, not the Bank of England. You have the wrong villain I'm afraid.

The Bank of England did go to the Treasury for permission to print £200 billion. A move I agree with.

What went wrong was this. First of all they should have let the bad banks go under. Northern Rock, Bradford and Bingley, RBS, HBOS (no forced takeovers). Of course there was a risk of contagion, so you do backstop the good banks.

http://www.independent.co.uk/news/business/news/exgovernor-george-says-bank-deliberately-fuelled-consumer-boom-441160.html

The Bank of England deliberately stoked the consumer boom that has led to record house prices and personal debt in order to avert a recession, the former Bank Governor Eddie George admitted yesterday.

Lord George said he and his colleagues on the Monetary Policy Committee "did not have much of a choice" as they battled to prevent the UK being dragged into a worldwide economic slump by slashing interest rates. And he said his legacy to the current MPC was to "sort out" the problems he had caused.

Could you explain which section of the economy you need to encourage a consumer boom with debt?

Would it be the banking sector perhaps?

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I'm saying being Governor of the BoE stops him from saying the truth.

VMR.

I disagree he's independent and he should have been voicing his concerns from the start, that's what being independent means.

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I disagree he's independent and he should have been voicing his concerns from the start, that's what being independent means.

BoE is independent of Government (supposedly)

Merv is employed by BoE and needs to act according to his position. Any governor of the BoE should not go around saying we're all doomed. I think he has gone more than far enough for that position in warning about debt and the fact that we are at last chance saloon.

Merv is not independent of the BoE.

VMR.

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I like your analysis and see a similar outcome myself.however,to say Merv has no responsibility is somewhat naieve.

http://www.bankofengland.co.uk/financialstability/index.htm

'The Bank has a statutory objective to “contribute to protecting and enhancing the stability of the financial systems of the United Kingdom”. The Bank does this through its risk assessment and risk reduction work, market intelligence functions, payments systems oversight, banking and market operations, including, in exceptional circumstances by acting as lender of last resort, and resolution work to deal with distressed banks'

I agree he can worm out of a lot of things by pointing at the FSA and saying that whilst he worked for the company that built the Titanic,it was the FSA that drove it into the iceberg.

He should be out on his @rse and replaced by someone who actually saw this coming.Same the world over.

Pedro,

I am sure that the Bank of England is still smarting at Golden Brown's ill thought out decision to give banking oversight to the FSA. This was of course a disaster, as it was loaded with crooks that let crooked bankers do what they want.

The Bank of England would have known a lot about what was going on, but in theory were powerless to stop it. Their objective is to get that control back with the Bank of England. And the best way to do this, is let the poor regulation run its course, and allow bad banks to collapse. In a way, Merv would have wanted to see some banks go under, so that in the longer term, the fundamental task of banking oversight was returned to the Bank of England. If he did nothing, then maybe its because he wanted to do nothing.

You will note though, that Merv the Swerve gave a very big warning about banking stability before everything went up in smoke. I seem to recall that he said something about the 'age of nice' being over, and for banks to 'stress test their models'. Wise words indeed, though he knew no one would listen. It has really left the Bank of England with a lot of credibility as a result of all of this. Blaming Merv for everything is just plain silly.

As for the maintenance of the stability of the financial system, the Bank of England can only go so far. If a bunch of bankers and the Treasury get together to move toxic debt onto the backs of Taxpayers, there isnt a lot that the Bank of England can do about that.

As you can tell, I am quite a fan of Mervyn King, I dont think that much of the criticism voiced at him has any substance behind it.

I was also quite impressed with Darling. Whilst he made some mistakes in not letting the banks fail with depositors and bondholders taking a haircut, he did listen to much sage advice.

I was not at all impressed with Brown, who sold our Gold, forced HBOS to merge with Lloyds, and gave banking oversight to the now discredited FSA.

The jury is still out on this new liberal government. So far I dont like very much of what I have seen. It should be pay cuts rather than job cuts in the public sector, along with an axe to pensions, both state and civil service. Plus an end to the fraud that is housing benefit. A crisis gives you the chance to end it now, why dont they take that chance?

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One point I like to remind myself of about sovereign debt is that it is unsecured unless the other party has better armed forces than you.

10 years ago, that would have been good for us.

now, not so much.

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But if you do have banks going under, you get massive credit deflation. QE counters this. The UK has gone about this the right way, with purchases of Government Securities, that is all that the central bank should by buying. Those bonds should then be cancelled, monetising the debt, and indeed reducing the State's debt.

Fiat money is debt. All of it. Even the folding and jingling stuff. Surely you've been on here long enough to know that much?

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As you can tell, I am quite a fan of Mervyn King, I dont think that much of the criticism voiced at him has any substance behind it.

I was also quite impressed with Darling. Whilst he made some mistakes in not letting the banks fail with depositors and bondholders taking a haircut, he did listen to much sage advice.

I was not at all impressed with Brown, who sold our Gold, forced HBOS to merge with Lloyds, and gave banking oversight to the now discredited FSA.

The jury is still out on this new liberal government. So far I dont like very much of what I have seen. It should be pay cuts rather than job cuts in the public sector, along with an axe to pensions, both state and civil service. Plus an end to the fraud that is housing benefit. A crisis gives you the chance to end it now, why dont they take that chance?

I agree with everything you have written.

As for the coalition, I'm reserving judgement until the emergency budget. We'll find out then whether they have any teeth and how sharp they are. So far, though, I'm liking the sound of their bark and the LibDem side are proving to be particularly impressive.

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  • 259 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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