ECB vs. the speculators

I’d get popcorn to watch ECB vs. the speculators, if the whole sorry story weren’t so sickening.

The European Central Bank is meeting today to figure out what the bleep to do about this mess in Europe (the press conference is happening as I write). In the lead-up to the ECB announcement, non-core bonds (like Spain’s) were doing well in expectation that the ECB will have to step in to buy “peripheral” bonds – otherwise known as circling the wagons to support the countries that are coming under attack.

Of course, all of this volatility presents fabulous speculative opportunities. It is really hard to imagine how authorities can sustain any reasonable policy course when battered by these kind of hot money flows.
For a while I have been musing about various crisis scenarios and contagion transmission avenues, and one such scenario appears on Rabble today. I must say that capital controls designed to target tsunamis of hot money inflows are looking pretty good to me right now. And it would raise some cash – which might be handy in the Eurozone at the moment. Seems like a better idea than just kicking Ireland in the teeth when it is down. Too bad the height of a speculative frenzy is the wrong time to realize that governments’ need policy levers on the books to handle a major crisis.


  • This comment (and her rabble piece) moves the debate in the right direction in my view. Hot money, speculation, all the features of “The Great Financialization” (to borrow the phrase of Kari Levitt from her John Kenneth G. lecture) are what are coming to the surface in the current phase of the long crisis of capitalism. Ellen has the best take I have seen on what needs to be done. Capital controls, and a Financial Transactions Tax (FTT) as called for by Make Poverty History, and Oxfam would be an improvement. Overall we need more thinking about banking policy. Monetary policy is no substitute for it. Fiscal policy is making things worse, or about to do so with austerity budgets in place, or waiting around the corner.
    Note: the CD Howe Institute thinks we need to re-start the Asset Backed securitization process all over again. Amongst their backers, sanity is in short supply, or so it would appear. How long can a few continue to profit big time, at the expense of everybody else? Until some people with courage step in and break up the crooked game I guess.

  • I have a suggestion . . . not out of any sense that it’s a remotely politically feasible option, just in the spirit that if it were on the table, things like financial transaction taxes would seem more moderate:

    As long as the banks want to make their primary business messing about with elaborate financial instruments, why not restrict them to that stuff. Have nonbusiness basic savings deposits and mortgages done strictly by depositor-owned credit unions. That way if banks’ high finance runs into a reef again, ordinary people’s assets would be relatively untouched.

  • The euro was always a disaster waiting to happen and at its first crisis it has been found seriously wanting. Individual countries in Europe borrowed money in a currency they cannot control by means of their own central bank and so are candidates for insolvency. Bond holders don’t know what to expect – default, break-up of the euro, indefinite European Central bank purchase of bonds, some other arrangement – so bond prices, hence interest rates, are gyrating all over the map.

    Lack of currency sovereignty also prevents these countries from undertaking the fiscal stimulus they need to correct high levels of unemployment. It also prevents revaluation of overvalued and undervalued currencies.

    Countries that have currency sovereignty are not experiencing currency and bond-related turmoil: the US, Canada, Japan, Switzerland, Australia, etc. Note this is not the same as saying these countries can’t experience problems caused by the value of their respective currencies.

  • The old national currencies had the “advantage” of not allowing the countries to borrow at a reasonable rate. Becoming sub-national currencies in a Bank of Canada environment with a conservative central bank has its disadvantages, and created what is the issue today. The issue today is bank solvency, not national solvency.
    The U.S. is fine ? How is California doing?

  • European countries are indeed comparable to Canadian provinces. What can be done in Canada is for the national government to spend enough to alleviate the fiscal problems of the sub-national governments.

    In Canada I would propose this be done by immediately implementing the following, largely paid for by the federal government:
    *a public pharmacare program (see the Canadian Health Coalition on this) to alleviate the burden of health costs on the provinces
    *a national non-profit daycare program much like the Quebec program. My two children benefited from this and I am amazed no other province does it.
    *a very large subsidy to public transit and intercity rail.
    *public job program targeting the most disadvantaged

    These would reduce health and social welfare costs and increase the tax take by the provinces as incomes rose. Such a program is perfectly feasible under current circumstances in Canada but requires political mobilisation.

    In Europe there is no national fiscal authority so this cannot be done.

  • I agree with Keith. A common currency in absence of a common bond, only further distorts things. Germany in particular has been the major beneficiary. The PIIGS ensure that the value of the Euro remains far lower than the DM would have been. Germany gains export competitiveness at someone else’s expense. Conversely the value of the Euro is to high for PIIGS in light of productivity. While not optimal, having control over the value of one’s currency is a very effective and quick way to absorb readjustment. ( See Krugman’s look at Poland on his blog. )

    Where I differ is that I believe that the wisest course of action the Federal Government could take would be to increase the Basic Personal Exemption to a minimum of $12K per year with COL indexing. While I like his recommendations regarding new social program spending, I would add some basic dental coverage. All paid for by estate taxes and increased duties on imported goods from countries that manipulate their currencies or benefit from differing labour or environmental rules and regs.

  • For Glen:

    In the face of insufficient aggregate demand I prefer the federal government spend to give work to the unemployed so they can provide the services we so obviously need.

    It is true a the decrease in taxes you suggest will also provide a boost to aggregate demand but the effect is much less since a good part is saved so I prefer government spending. It’s also fairer as it provides goods and services that advance the public interest. Take a look at the multipliers in Table A.1 at

    Imposing an inheritance tax, say, above 5 million dollars, is a good idea for reasons of fairness. I support fair trade so am in favour of import duties on cheap imported stuff due to suppression of workers.

    If we impose tariffs on countries engaging in very bad environmental practices we would have to impose import duties on ourselves given how appalling our own record has been. I’m not sure I’d go there.

    With respect to undervalued currencies: they allow us to get stuff we want very cheaply. If we impose duties that’ll increase prices here. I think we should take the cheap stuff and make up the lost jobs by employing people here to provide other goods and services we need such as the ones I noted above.

    I see no problem including basic dental coverage – an excellent idea. Do we have enough dentists and dental hygenists to do this? We might need to provide more education to increase their number.

  • Keith, I was careful to suggest only a decrease in taxation for those on the bottom end of the scale. The reason is that on the bottom end almost any increase in income translates into increased spending. Rarely do low wage earners have the luxury of saving. Increasing the PME also has the benefit of helping ensure that employment is more competitive with social assistance.

    I do not accept that we are dependant on cheap goods. We are to far from having full employment for that to be the case. It also begs the question, will these goods remain cheap? The evidence suggest no. Once the subsidised used to capture production have served their purpose (reduced competition), they will be removed and prices will rise. Take a look at what is happening with rare earth minerals.

    On the other issues I will refer to you to the following links…..

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