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Physicist, Startup Founder, Blogger, Dad

Friday, September 30, 2011

Soros: nationalize European banks

Soros outlines his proposal for solving the eurozone crisis. It seems to me that the best informed people are the most alarmed by the current situation. I notice Pimco just went into "risk-off" mode.

Financial Times: Financial markets are driving the world towards another Great Depression. The authorities, particularly in Europe, have lost control of the situation. They need to regain control and they need to do so now.

Three bold steps are needed. First, the governments of the eurozone must agree in principle on a new treaty creating a common Treasury for the eurozone. In the meantime, the main banks must be put under European Central Bank direction in return for a temporary guarantee and permanent recapitalisation. The ECB would direct banks to maintain credit lines and outstanding loans, while closely monitoring risks taken for their own accounts. Third, the ECB would enable countries such as Italy and Spain to temporarily refinance themselves within limits at a very low cost. These steps would calm markets and give Europe time to develop a growth strategy, without which the debt problem cannot be solved.

[ More privatizing gains and socializing losses? ]

... This course of action does not require leveraging or increasing the size of the EFSF but it is more radical because it puts the banks under European control. That is liable to arouse the opposition of both the banks and the national authorities. Only public pressure can make it happen.

I'm not sure what the "growth strategy" would be. Despite what Keynes wrote, it's not easy for governments to simply order up (healthy, real) growth, even with checkbook in hand. I'm with Hayek that this kind of growth is something you might pay for dearly in the long run. In addition, governments are running out of ammunition.

*** I realize that what Soros proposes isn't exactly nationalization of at-risk banks. But ultimately the ECB and European taxpayers will assume responsibility for their prior investment decisions.

16 comments:

LondonYoung said...

Well, Britain's North American colonies formed a union to win independence in 1775 but had to rework their mutual agreement in 1789 to avoid defaulting on their debts.  All currency unions not involving treasury unions have always failed on a short time scale.  How old is the euro now?

Soros, I will add, has no credentials other than to foresee when govt policies will fail in the face of market forces - in Europe.  But this is his sweet spot, so listen up.

I agree with Steve that growth strategies are not easily ordered up by govts, but financial collapses sure can be.  

steve hsu said...

Portfolio mgmt advice, please? :-)

Risk-off, all cash, beared up?

Carson Chow said...

Can you explain to me why the Euro is still relatively high?

LondonYoung said...

If you are willing to assume that the tenure system won't change, then you are in the enviable position of being willing to take risk where others can't - your downside is floored as something still quite nice.  A spanish villa with panoramic med view can be picked off for a song right now if you wanna take a week's vacation to shop for one.  Alternatively, div yields are very high for european common equity - just stay away from anything financial, or anything taking advantage of a low tax regime.

I would beware of cash, which is probably the riskiest asset of all.  At the same time, I would avoid risk.  It is all a question of understanding your own wealth numeraire.

silkop said...

Well, in my own investment decisions, I try to imagine what the famed 0,1% would like to happen next. What are their assets allocated? I suppose the usual tactics will work: first drive valuable companies' stock prices into the ground, then buy up, finally laugh at the former owners who were forced to give them up and after the coup no longer can afford them.

Seth said...

" I notice Pimco just went into "risk-off" mode."

Any specific reference?   El-Erian's latest mumblings about policy makers' indecisiveness?  An actual trade?  I assume you don't mean Gross' dumping treasuries a few months ago?

steve hsu said...

http://online.wsj.com/article/SB10001424052970204138204576600603468901250.html

steve hsu said...

If they kick out Greece and a few other countries, the remaining core economies (and hence currency) will actually be stronger.

steve hsu said...

Spanish villa! Very tempting ... :-)

LondonYoung said...

errr, relative to what?  USD?  The US is engaging in QE, a.k.a. printing money - but the ECB is resisting that.  I will also point out the Timmy G has issued almost all his debt in the short tenor end of the curve, so the fed can't really raise interest rates in response to inflation anymore.  The northern europeans tend to run longer duration.  So, that's why the euro is holding up vs. usd.  But both are actually crumbling ...

LondonYoung said...

Too bad the french and german banking systems are chock-a-block with Greek debt being carried at par because it is "performing" ....

LondonYoung said...

Find a real estate lawyer in Malaga and tell him that if he finds you a "4 euro place", you are prepared to pay 2 euro in cash immediately and 200k to him for finding the deal ... you'll print.  Years from now your kids will sell it off if they haven't become too emotionally attached ...

In a lower price range, it is easy to find beautiful sterling silverware on ebay selling below melt ... I figure a professor ought to have a formal set to serve 24 ... just watch out when you put the silver teaspoons in boiling hot coffee!

Carson Chow said...

What about operation Twist?

LondonYoung said...

If you view the Fed and UST as a joint entity (probably the correct thing to do) then we are monetizing the long end and shorting the portfolio duration even more.  Note that normally the Fed is supposed to hold this stuff to maturity, so if the recession ever ends they're gonna have a real accounting problem ...

reservoir_dogs said...

Why is cash so risky? I understand the devaluation of currency bit, but in the short term, there is currently no inflation and if the Europeans collapse, there is even less of a chance for inflation. In the mean while you can wait out the crisis and get stock at fire sale price.

reservoir_dogs said...

Here is onething that I don't quite understand. I get it that the Europeans are screwed. What we have there is basically the same movie that we saw three years or so ago. The banks go down and everything seize up. I have significantly lesss confidence that the European collective are going to do the right thing to fix this(compared to even the U.S.). However, looking at this from the U.S. point of view, we have just gone through this. Our banks have exposure to European debt, but not nearly to the degree as the Europeans do. In addition, most of this is in countries which are not that bad off, the Germans, the Franch, the British, The Nordic countries. They should be able to repay their debts to us. The U.S. lending should improve as the bad loans are written off and foreclosures completed in the next two years or so. In the mean time, while we are not going to grow in a horid pace, we should not sink into a big recession either. I can see that the financial assets may take a beating while the European drama unfolds, but main street should just keep on ticking, no?

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