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  • Europe’s Answer to the Financial Crisis?: Bigger Government


    Right now, the world has too little capital, too few jobs, and too little growth. So what do Europe’s leaders want to do? Press for yet more job-killing regulation and more investment-stifling oversight, with a heaping helping of “global governance” on top. If this wasn’t so dangerous, it would be laughably irrelevant.

    The European plans, unveiled on Sunday in the run-up to the G20 summit in April, are breathtaking in their intrusiveness. All financial market activities around the world should be regulated to ensure that they foster “sustainable economic activity,” promote economic ‘balance,’ and do not upset market stability. All tax havens must be abolished, and the way must be cleared for the “establishment of a global governance structure” that will prevent the development of all market “excess.”

    This is, frankly, ridiculous. The idea that government can ensure the stability of markets is wrong, but it is hardly new. For years, we’ve been told that the U.S. showed the unacceptable, unregulated face of capitalism, while in Europe, governments ensured that markets worked responsibly. But that’s not how it’s worked out. In both the U.S. and Europe, governments have made things worse.

    In the U.S., it was the collapse of the mortgage market that triggered the landslide. That market was pushed to unsustainable heights by the Federal Reserve, the Federal Housing Administration, Fannie Mae, and Freddie Mac, government entities all. The money that poured into the housing sector was created by the state, and directed into that sector as an act of policy. And where the government led, U.S. banks happily followed.

    And if you think the U.S. is in trouble, you’ve not been paying attention to Europe. Most U.S. banks in Summer 2008 were leveraged at less than 20 to 1. By contrast, European banks were leveraged up to 50 to 1, which is why Royal Bank of Scotland and Lloyds have now been nationalized, and why the remainder are at the mercy of the ongoing collapse of Eastern Europe. The idea that the European system of regulation would work better if it was made even bigger is foolish.

    That goes double for the Euro, which, as Milton Friedman insisted it would be, has been a catastrophe. Far from preventing excess, the Euro has promoted it. It has imposed inappropriate interest rates and thereby distorted investment decisions across Europe. And, of course, the Euro was adopted for political reasons. Recessions, recoveries, and growth are a normal part of every capitalist economy, but the exaggerated bubble that is now bursting was fostered by governments. By setting a goal of maintaining market stability, governments only make the inevitable corrections worse.

    Conservatives obviously accept that markets cannot flourish without government to make and enforce law. But that is not what the European leaders are up to. What they want is what they always want: a more centralized and stasis-bound European Union in an economically ossified world. The problem Europe faces is that the rest of the world has more flexible labor markets. Over time, this means Europe increasingly finds it harder to compete and more difficult to pay the costs of the welfare state.

    The European campaign in favor of economic ‘balance’ and against ‘tax havens’ gives the game away: what really upsets them is that money they could be taxing is eluding their grasp. The financial crisis offers the perfect opportunity to close this loophole, and, if the rest of the world is dumb enough to go along, to impose more European-style burdens on everyone else. Slowing down the freer economies of the world would improve ‘balance’ by making Europe’s markets more attractive by comparison.

    German Chancellor Angela Merkel offered a perfect illustration of European hypocrisy with her comment that “When I look at the restructuring plans of some American [auto] companies, there are a lot of state funds flowing into them.” She’s right: the U.S. auto bailout is a protectionist disgrace. But that’s what governments do when they go beyond setting the rules of the game: they protect their own, try to pick winners, and make decisions for reasons of politics instead of economics.

    The European proposal would mean a massive expansion of political authority over the world’s markets, a corresponding decline in political and economic freedom, and even more opportunities for governments and the markets to get it catastrophically wrong. The U.S. must not allow itself to be led down this European path.

    Posted in International [slideshow_deploy]

    2 Responses to Europe’s Answer to the Financial Crisis?: Bigger Government

    1. Money As Wealth, Min says:

      The solution will not come from the same type of thinking that got us into this mess. It will not come from those who are wedded to old ways of economic understanding; in fact if you listen to the experts, sooner or later they all say some version of "I don't know". Many of the experts are following theories and models that were first posited by men born generations ago – before we traded securitized debt, at the speed of light, 24 hours a day, around the globe. It would have been impossible for them to render an accurate model of our economy.

      It's time for the next evolution in economic thinking and the State of Minnesota has an answer.

      There are bills before the Minnesota Legislature that can fix our broken economy. We have to upgrade the way we fund infrastructure. The key lies there.

      There is a Blog (moneyaswealth.blogspot.com) that goes over the basics. Read the blog from bottom to top. Email with questions. Get behind this effort. We can fix this.

      For some answers: Money As Wealth, Read Bottom to Top

      P.S., Minnesota is on the way. California needs this right now!

    2. guyz says:



      - Solve the loan problem.

      - Solve the derivative problem.

      - Reassemble whole loan mortgages

      The U.S. economy is shrinking fast, because businesses cannot get loans that they need to operate normally. Banks and lenders already own $ billions in bad loans, and they are afraid to make new loans. The government gave $ billions in bailout money for banks to start lending, but banks hoard the money to save themselves.

      Our financial system became untrustworthy, because it mixed $ billions in bad loans in with the good loans. Now, banks do not trust any of the loans, and the entire credit market stopped working.

      The U.S. economy will continue to shrink until we untangle the loans. Once the bad loans are isolated, they can be fixed one at a time. Then trust will be restored. Credit will flow, and the economy will grow.

      So far, our government is spending $ trillions on bailouts and pork projects, out of ignorance and political ideology. The real solution is much less expensive than that.

      The USA has fixed this problem before, and it is not hard to fix again. This is how:

      A) Start with the Resolution Trust Corporation (RTC), which the federal government setup to solve a Savings and Loan problem in the 1980s.

      B) RTC buys up securitized mortgages and derivatives to reassemble whole mortgage loans.

      1. “Securitized mortgages” are home loans that have been bundled into large groups and sold to investors. A group of about 4,000 mortgages can be “securitized” and sold just like a stock or bond. Investors like to buy groups of mortgages because they receive all the monthly house payments.

      2. Some groups of securitized mortgages were subdivided into smaller pieces, called “derivatives.” However, both of the fancy names refer to mortgage loans.

      3. The problem is that many bad loans (with no payments) got mixed in with good loans. That turned the all the securitized mortgages into bad investments, which are ruining our banks. It is a huge problem, and the government has to fix it, before our economy will recover.

      4. Total securitized mortgage and derivative market is estimated at $1.3 Trillion by a Professor of Economics at Ohio State University. (Also see the graph from Deutsche Bank at “The Death of Securitized Mortgages” http://www.nakedcapitalism.com/2008/06/death-of-s… )

      5. Government should buy up securitized mortgages and derivatives at the lowest market price, which is set via a reverse auction. (Google on “reverse auction”.)

      6. Squatters, who sit on their mortgage derivatives, in order to extort big $ from the rest of the system, can be forced to sell. (Law is analogous to eminent domain, or sales forced on cybersquatters that registered the domain names of well-established companies.)

      7. Government pays mortgage derivative squatters at market price set by previous reverse auctions, perhaps with a penalty to the squatters.

      8. Sellers give up all rights. No new law there.

      9. Banks, investors, and insurers now have cash instead of questionable mortgage loans and derivatives. So, the banking system is healthy with cash to lend.

      10. Credit will flow, and the economy will grow.

      C) Government reassembles whole loans from securitized mortgage components and derivatives.

      D) Government sorts the newly reassembled whole loans (mortgages) into groups according to risk/quality.

      1. Government uses traditional mortgage experts and guidelines to sort the home loans into quality groups, for example, a high quality group would include homeowners with 20% (or more) equity in their house at today’s market price; and house payments that are 25% (or less) of homeowners monthly income.

      E) Government (RTC) sells the reassembled whole loans to traditional mortgage banks.

      1. This solves the problem of renegotiating home loans with homeowners. Read on.

      2. Law must be changed so that reassembled whole loan mortgages cannot be securitized into derivatives, again.

      3. An important purpose is to reconnect each homeowner with his lender, and vice versa.

      4. It eliminates incentive for mortgage lenders to make predatory and junk loans. If the loan fails, the lender is stuck with a bad loan.

      5. Government recovers much of the $1.3 Trillion purchase cost, because government auctions off the reassembled mortgages.

      6. The lower quality, more risky mortgages would fetch a lower price at auction.

      7. Mortgage companies, that buy the risky loans, will have more room to negotiate with the homeowners.

      8. Some homeowner negotiations will not succeed. Those homeowners will move into affordable rentals. (The government does not owe everyone a free house.)

      9. Other renters would like to buy those empty homes at reduced market prices.

      10. If the government gets stuck with some homes, the government could profit by selling the homes when the housing market recovers.

      F) Insurers like AIG may be reorganized through bankruptcy.

      1. Securitized mortgage pools never made business sense, unless they were protected by various insurance schemes.

      2. Those insurance schemes always were a scam.

      3. Insurance only works when most of the insured assets are never hit with a disaster. That is why flood insurance does not work very well. A major flood ruins all the buildings in a large area, all at the same time. So, the insurance company goes broke, and people that bought the insurance are not protected. That is the problem with securitized mortgage insurance. In an economic downturn, the “disaster” hits all the houses at the same time. Securitized mortgage insurance was doomed to fail, and the insurance companies went broke in 2009.

      4. Companies that ran the insurance scam may have to go through bankruptcy.

      5. Never ending government bailouts for insurers like AIG are just throwing good money after bad. So, stop the bailouts.

      This plan is inexpensive, tried and true. It leaves the banks healthy, with cash to lend. It restores trust in the credit markets, so loans will be made. It reassembles mortgage derivatives into whole loans, and restarts traditional mortgage lending. People can get loans to buy homes. Credit will flow, and the economy will grow.*


      *The economy will grow if President Obama’s massive tax, borrow, and spending plans can be stopped, before he creates another Great Depression. Presidents Hoover and Roosevelt already tried to tax, borrow and spend their way out of a recession in the 1930s. Instead, they created the Great Depression, which lasted 12 years. Straight as he goes, President Obama is doing it, again. Nevertheless, cleaning up the securitized mortgage mess is a necessary first step.

      If President Obama announced Steps 1 and 2, today, the stock market would go up within hours. Investors love a real business plan, instead of a political pork plan. Millions of people will be wealthier, feel wealthier, and have more money to spend. That will jump start the economic recovery within days.

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