Weekending 25 September 2011

Thy hand, great Anarch! lets the curtain fall;

And universal Darkness buries All.

Alexander Pope

The Dunciad

No posting last weekend – internet problems and also simply the chaos, even through the weekend itself as everyone hosed the Greeks and eurozone finance ministers, led by the Austrian minister, got uppity with US Treasury Secretary Tim Geithner for suggesting they better get their act together. Briefly to recap though: the working week was bookended by the UK’s Independent Commission on Banking (ICB) or Vickers commission recommending separation of utility and investment banking in Britain and ended with a stunning example of the point of the Vickers proposals. As ICB member (and FT economics editor) Martin Wolf wrote in the FT Friday, 16 September, ‘Thank you UBS’.

As a member of the UK’s Independent Commission on Banking under Sir John Vickers I could not have asked for a better illustration of the unregulatable risks to which investment banks are exposed than Thursday’s announcement of a loss of $2bn in “unauthorised trading”. No sane country can allow taxpayers to stand behind such risks.

British bankers and their lobbyists had spent months following the publication of the Vickers group’s interim report – which presented the ring-fencing proposal in draft – pushing that hoary line that it would signal the death of the City, the end of all life inside the Square Mile – and prime minister Cameron and chancellor George Osborne seemed to be buying the argument. And then! Step forward Kweku Adoboli – and ring up $2bn plus on the UBS till.

But before that unveiling Thursday (15th) by UBS management of their little loss (clients’ funds were not affected) JPM’s Jamie Dimon stuck in his five cents-worth Monday (in  an FT interview) on the evils of bank regulation: Basel III was ‘anti-American’?!  And he was ‘almost’ inclined to the view that the US should fold up the tent and …

“I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” he said. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.”

Actually it is all getting very (worryingly) xenophobic – including again this week. Everyone has their own version of the ‘Polish’ joke. The English have their ‘Paddy’ stories, the Irish have their ‘Kerry man’ tales. Kiwis and Wallabies sledge each other on and off the cricket (and rugby) field of play and so on and on. All very fine and in the nature of things but … It can get out of hand. Yes, the Greeks have problems and have brought things on their own heads but the idea that they are all beach bums, slackers and layabouts is sailing pretty close to outright racism, and no small touch of sectarianism as well, when mouthed by northern European politicians who themselves can have questions to answer. Don’t mention the Anschluss!

Weekending 25 September – or the story of Geithner’s Clouds

This week ended with the annual IMF/World Bank jamboree-cum-wafflefest in Washington while at the end of next week there is that crucial German parliamentary vote on enlarging the EFSF – and that could turn into in effect a confidence vote for Merkel.

The working week simply exposed further eurozone (EZ) finance ministers putting beyond doubt their stupidity – and their irresponsibility – as well as a United States run out of ammunition with Operation Twist getting the thumbs down from the markets. Tim Geithner (again), pre-IMF gabfest,

“The two other clouds still over us [in addition to oil prices and Japan] are the European crisis and the deep concern that you can see across the world and around the country about whether the political system in the United States is up to the challenges we face”

To be sure. Among the few other voices of sanity was as ever Felix Salmon with his advice Thursday to market watchers,

… let’s not kid ourselves that there’s any particular reason why global stocks are falling. And especially, let’s not try to invent some spurious reason for the fall, be it broad and inchoate (“global economy fears”) or weirdly specific (“Federal Reserve pessimism”).


As a general rule, if you see “fears” or “pessimism” in a market-report headline, that’s code for “the market fell and we don’t know why”, or alternatively “the market is volatile and yet we feel the need to impose some spurious causality onto it”.

This kind of thing matters — because when news organizations run enormous headlines about intraday movements in the stock market, that’s likely to panic the population as a whole. They think that they should care about such things because if it wasn’t important, the media wouldn’t be shouting about it so loudly. And they internalize other fallacious bits of journalistic laziness as well: like the idea that the direction of the stock market is a good proxy for the future health of the economy, or the idea that rising stocks are always a good thing and falling stocks are always a bad thing.

This is so true but also while there was no reason why stocks were down by any particular amount on any day last week – or up, down and all over the place for weeks now – there is also the Geithner point. Salmon makes a hugely valid point about journalism while Geithner’s concern is with a more pressing issue in fact, systemic political failure. That failure in turn is actually an old problem of philosophy and economics, the pursuit of individual self-interest in place of collective action or as it is called sometimes, the free rider problem or the logic of collective action. Here is one way of looking at it (not terribly useful one might say) and here is another (one might say equally useless given Geithner’s Clouds), Mark Dow’s posting on Felix Salmon’s blog,

As I write, financial leaders from around the world have assembled in Washington DC for a long weekend of hard thought. The initial signs are not encouraging. Many top European policymakers, especially in Germany, still appear to be in denial about the gravity of the situation and the need for a holistic solution. There seems to be too much attention paid to Greece and Italy, too much adherence to hidebound rules and compacts, too great a desire to punish the misbehavers and combat market forces.

Germany is the lynchpin. Germany, understandably, objects to two things: committing more fiscal resources and further compromising the integrity of the ECB.

As we put this filing to bed the news out of Washington is not good. Wolfgang Munchau has filed his FT column and as ever it doesn’t come any straighter,

The world’s inability to shake off the economic downturn and contagion in Italy has changed the nature of the eurozone crisis. What was once a debt problem of small peripheral countries is now threatening the euro’s existence. Europe’s leaders did not see this coming. They failed to recapitalise their banking system sufficiently. And when they designed the European financial stability facility, they created a mechanism suitable only for small countries. Their strategy has come unstuck.  

And for Mark Dow here is the problem, Munchau again, in relation to the kind of imaginative and necessary programme he advocates:

Rescuing the eurozone requires an action plan of a scale hard to fathom. In the coming weeks, Europe’s political leaders will have to decide what to do about Greece, recapitalise the banking sector, fix the EFSF, all in a way that ties in with a clearly laid-out strategy for the future of the eurozone. A short-term fix may impress the markets for a few days. It is not going to end the crisis.

Based on previous performance, it is hard to imagine that the European Council will rise to the occasion. If it does, it is even harder to believe that they can get the support back home.

I have never seen Europe’s policymakers as scared as I saw them in Washington last week.

And here’s a question. How scared will they be Thursday as the clock counts down to the Bundestag vote on the EFSF and Greece2? Happy Days.

Thy hand, great Anarch! lets the curtain fall;

And universal Darkness buries All.


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