Megan McArdle
"The current plan on the table, as I understand it, is for the PIIGS to get bailouts in exchange for letting the more solvent countries step in and run their budgets if they violate budget rules. I can see how this could work, but I can also see how that might be the last straw, and that if the central countries actually tried to execute on this authority, they might find that it doesn't actually exist . . . while their guarantees of that debt very much do. The EU, in fact, has a rather long history of creating toothless institutions that everyone ends up ignoring."
Yeah, Germany can't really force sovereign countries to do anything. It's only lever is its willingness to give them money, and they aren't really very willing anyway. Also, countries don't like surrendering fiscal sovereignty. It can have really bad effects, just ask Suharto.
Karl Smith
"The Eurozone is now a single currency area in name only. Worse, the national central banks do not have the power to control monetary policy. Which means by American or British standards there is no monetary policy in Europe right now. There is regimented chaos."
Karl Smith argues that the ECB can no longer control monetary policy. And that there is no Eurozone-wide monetary policy. The price of Euros in different Euro countries is diverging, and that this is a prelude to the formal break up of the single currency.
From the previous post, Karl Smith
"By that I mean the ECB is no longer controlling the marginal cost of funding and that indeed the cost of such funding is rising much higher than the official 1.25% rate, at least up to 2.25% and perhaps as high as 6 – 7%."
"At the crux of the problem seems to be the inability to arbitrage away differences in funding costs between institutions and countries because of malfunctioning in the European Repo market."
Essentially, if I understand him, and I don't, Europe is so fractured along national lines that households and firms in different European countries are facing radically different interest rates. Also, that the ECB just can't get the liquidity out, let alone out into the real economy, because of a break down in the actual mechanics of trading because you can't find good collateral. People trade sovereign debt mostly as a fairly safe asset to post as collateral for other trades. But sovereign debt in the Eurozone is not the same, and it's not that safe, and there's deep uncertainty as to how unsafe it actually is.
From an IMF working paper by M. Singh, link from MR.
"Post-Lehman, there has been a significant decline in the source collateral for the large
dealers that specialize in intermediating pledgeable collateral. Since collateral can be
reused, the overall effect (i.e., reduced ‘source’ of collateral times the velocity of collateral)
may have been a $4-5 trillion reduction in collateral. This decline in financial lubrication
likely has impact on the conduct of global monetary policy."
There has been a decline in the velocity of collateral which has a similar effect to a decline in the velocity of money. After Lehman, people want to have as few intermediaries that they might be exposed to as possible. If you post some collateral when I lend you money, I can then pledge your collateral as collateral for someone to lend me money, and so on. And money is created. But this chain has gotten shorter because after Lehman people are less sure about whether everyone in the chain is going to be here tomorrow to repay.
Or it's clear at this point that I don't know what I'm talking about.
