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WHAT'S NEW
May 12, 2010
Who's On First?
To be able to quote both Churchill and Marx in the same Ecomentary must seem quixotic at best...but what could be more quixotic then the reversal by the leaders of the ECB who swore not so long ago that they would "never" use the ECB to buy out the failing sovereign debt of some States who refused to abide by the 'fiscal rules' of the EMU. That was, of course, when the house wasn't burning down. By last Sunday, it was either put out the fire or let the House that the Treaty of Rome built burn down. They lowered their colors and made a quick turnabout. At the end of the day, the Europeans became Lincolnesque and decided to save their Union, for better or for worse.
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May 08, 2010
Disequilibrium and Disorder
The frantic behavior over this week of virtually all markets including currencies, fixed income and equities betrays awkward similarities with the events of 2008. There is a difference, however, this time. The relevant policy authorities in Europe seem unable to marshal sufficient resolve to contend with these unruly markets. That inability resides in the flawed structure of the EU and the EMU, its monetary counterpart. As the European interbank market fragments and spreads blow out, even a flawed policy authority will be forced to confront the current meltdown. The key issues are timing and force. Surely, something significant is now in the cards…but whether it will be sufficient will depend upon markets regaining their trust in policy authorities. For that to happen a substantial show of resolve will be needed.
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April 20, 2010
The Central Issue: Wall Street versus Main Street
There is an interminable wrangle going on in Washington as to the proper content of a financial reform bill. Sadly, but predictably, both the Executive and Legislative branches define their tasks in terms of "outcomes." That is they think they can prescribe and proscribe the activities of financial institutions based on the "outcomes" they wish to have. With this orientation, it is virtually guaranteed that we will get a bill no one really likes; that the bill will not do what we hope; and that our financial environment will be suffused with unintended and unpleasant consequences. Legislation that ignores economic incentives and substitutes a carrot and stick list of do's and don’ts is the wrong methodology. Into this darkness, a bright light appeared today when the President of the Philadelphia Fed, Charlie Plosser, published a letter to various Congressional leaders that outlines in a clear, well thought manner how to go about financial reform. It is proposal that is modest in its demands and easy to understand. Modest and understandable limits to legislative activities are probably disqualifications for a serious consideration of the Plosser proposal. Still, this is a thoughtful piece that should be the foundation for a sensible approach to financial reform. It starts with incentives and harnesses the power of markets along socially desirable lines. It is heartwarming to know that not every Fed Reserve official marches in lockstep with political correctness. It is well worth reading.
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