Marshall Auerback
Articles by Marshall Auerback:
In Praise of American Political Dysfunction
March 7, 2013 by Marshall Auerback
President Barack Obama speaks with Speaker of the House John Boehner during a meeting with bipartisan group of congressional leaders in the Roosevelt Room of the White House in Washington, DC. Photo by Olivier Douliery/ABACAUSA
The lamentable state of American political parties has become common sport amongst the chattering classes in Washington and beyond, although one wonders whether this political dysfunction has really been such a bad thing when considering how united bipartisan “responsible” action always seems to result in yet more budget cuts. By virtue of the fact that Congress and the Obama Administration couldn’t agree on much for the past few years, America’s deficits got large enough to put a floor on demand. The transfer payments via the automatic stabilisers worked to stabilise private sector incomes and allowed a general, albeit tepid, recovery in the economy.
But since the beginning of the year, Democrats and Republicans have put aside a lot of their differences, and what has been the result? Well, first we got the deal to avert the so-called “fiscal cliff”, the upshot being tax increases (and not just on wealthy people, but via the regressive payroll tax hike) which took around .5% out of GDP. This despite the fact that the deficit as a percentage of GDP had already fallen from 10% to 7% – one of the fastest 3 year falls on record.
Mark Carney to head the Bank of England
November 27, 2012 by Marshall Auerback
Mark Carney in Davos, Switzerland. Jolanda Flubacher/swiss-image.ch
As a Canadian, perhaps I should feel a surge of patriotic pride now that Mark Carney has been designated the new head of the Bank of England – quite a step up for the current governor of the Bank of Canada. There is no question that Mr. Carney is a market-savvy guy (he did, after all, work for the vampire squid), and his experiences as Chairman on the Financial Stability Board (FSB) suggests that he is sensitive to the ongoing systemic risks present in our increasingly complex global banking system.
That said, his recent attack on the Bank of England’s Andy Haldane in a Euromoney interview last month, does give one some cause for concern, particularly as it evinces the usual complacency that most Canadians seem to feel about the basic soundness of their own banking system, which essentially upholds the universal banking model as a viable one. By contrast, in his famous “dog and frisbee speech” delivered last August at Jackson Hole, Wyoming, Haldane suggested that: “Regulation of modern finance is almost certainly too complex. That configuration spells trouble…Because complexity generates uncertainty, it requires a regulatory response grounded in simplicity, not complexity.”
The Fiscal Cliff and the American Economy
November 24, 2012 by Marshall Auerback
Looking at the latest US data, business sentiment and capital spending have been eroding, and given the lagged impact of capex, that trend looks set to continue for the next few months. Against that, a number of consumer sentiment indicators remain upbeat and housing looks like it is in a firmly established uptrend, after a 5 year bear market. In fact, the existing home inventory to sales ratio is as low as it ever gets, and that is with still very depressed sales. If sales pick up further, given low inventories and with new housing starts still below the replacement rate, home prices could lurch forward.
That said, the markets have been fairly upbeat given the rising perception of a deal to avert the US falling off the ‘fiscal cliff’. But even a deal that drains, say, 1-1.5% of GDP will have negative consequences for the US economy. Bear in mind that the U.S. still has a very high ratio of private debt to GDP. Therefore any such fiscal restriction as contemplated by the two parties may result in a significantly lower economic growth rate than the average 3% rate of the last five quarters (which is what the revised economic data of the past few quarters will eventually show).
Has Mario Draghi Saved the Euro?
September 13, 2012 by Marshall Auerback
European Central Bank President Mario Draghi. Monika Flueckiger/swiss-image.ch
Germany’s Constitutional Court gave a green light on Wednesday for the country to ratify Europe’s new bailout fund, boosting hopes that the single currency bloc is finally putting in place the tools to resolve its three-year old debt crisis.
In an eagerly anticipated ruling that has had investors on tenterhooks for months, the court in the southern city of Karlsruhe insisted the German parliament be given veto rights over any increase in Berlin’s contribution to the 700 billion euro European Stability Mechanism (ESM). There were strings attached to its endorsement of the ESM and a separate European pact on budget rules, and a relief rally has occurred as another apparent impediment to a euro “solution” appears to have been eliminated.
Public Sector Jobs Are Real Jobs
September 4, 2012 by Marshall Auerback
In 1976 at a time when economists thought more about unemployment, the US economist Charles C. Killingsworth wrote a paper entitled “Should full employment be a major national goal”. He was a long-time advocate of public employment programs and understood how deficient the economics profession was when it came to caring about people.
I thought about this paper recently upon reading an article in the Daily Beast by the always insightful Michael Tomasky, “The Real Obama Needs to Fight Five GOP Myths About the Imaginary Obama” . Tomasky discusses the myths that Obama needs to dispel during his party’s upcoming convention. One in particular caught my attention: the idea that the President needed to confront the myth that he allegedly believes that jobs come from government.
Greece is being kept alive by the ECB’s Emergency Lending Authority
August 10, 2012 by Marshall Auerback
Mario Monti, Mario Draghi and Angela Merkel in Brussels. Image via European Council
Greece has moved off center stage, as Spain has become the preoccupation de jour for Europe’s increasingly embattled authorities. But one has to wonder how the Greek banking system has managed to sustain itself over the past several months, given widespread deposit flight and the country’s ongoing solvency challenges. Well, we now have a better idea, courtesy of a leak to the German weekly news magazine Der Spiegel, which has published information about ECB plans to keep Greece on its feet until the next tranche of European Union-International Monetary Fund aid is paid out.
How Far is the ECB Prepared to Go to Save the Euro?
July 29, 2012 by Marshall Auerback
ECB President Mario Draghi with Ramon Tremosa. Image via European Council
Re-reading Mr Draghi’s market-moving remarks last Thursday, one gains a sense that the European Central Bank chief recognizes that the ECB has a banking run on its hand. Most market participants have understandably focused on Mr. Draghi’s pledge that the ECB was “ready to do whatever it takes” to preserve the single currency. “Believe me, it will be enough,” he told a conference in London. We prefer to focus on other aspects of the speech.
It is particularly salient that Mr. Draghi highlights the fatal flaw of the euro zone noted by Professor Peter Garber some 14 years ago: As long as there was no perceived probability of euro exit by any euro nation, the established transfer system coupling private markets with European system of Central Bank support (Target 2, ELA, ECB repos) would function like any other monetary system in a single nation state.
Geithner: Europe Can’t be Left Hanging on the Edge of Abyss
July 18, 2012 by Marshall Auerback
Michael Kinsley once defined a gaffe as “when a politician tells the truth – some obvious truth he isn’t supposed to say.” On that basis, the recent headline that just popped up might well represent a major gaffe of the Kinsley variety by Treasury Secretary Tim Geithner.
Speaking on CNBC’s “Delivering Alpha” conference, the Treasury Secretary argued:
What is very important is that [Eurozone officials] not leave the Continent hanging on the edge of the abyss as a device for getting more leverage for reform, because that leaves the rest of the world much more exposed to financial pressure and slower growth from Europe.
In essence, Geithner is letting the cat out of the bag. He is implying that Europe is hanging on the edge of the abyss. Only Germany can prevent it from falling in, and at the same time it appears that Berlin has now moved into a position where they cannot or will not prevent that disasterous scenario, either for economic or legal reasons.
Spain’s Growing Pains
July 12, 2012 by Marshall Auerback
Prime Minister Mariano Rajoy in Valencia. Diego Crespo/La Moncloa
Just when you think that things can get no worse in Spain, they do. Take a look at the chart at the end of the article, courtesy of Credit Suisse via FT’s Alphaville. Yiagos Alexopoulos at Credit Suisse estimates that Spanish capital outflows are currently running at an annualised rate of 50 per cent of GDP. No question, the bank run is clearly accelerating, and one can easily understand why.
The country is turning into a Little House of Economic Horrors. The alleged “rescue” of Madrid’s banks is a non-starter. 100 billion euros won’t begin to cover the scale of the problem on any honest accounting or “stress test” (and that’s before we get to the next phase of announced austerity measures).
Paul De Grauwe is Right: All Roads Lead Back to the ECB
July 5, 2012 by Marshall Auerback
Italy’s Mario Monti with Prime Minister Enda Kenny. Image via European Council
I have always been a fan of Professor Paul De Grauwe from the University of Leuven, who has consistently pointed out the structural flaws inherent in the original structures of the EU. Recently, Professor de Grauwe wrote an excellent analysis explaining why the latest “rescue plan” cobbled together by the Eurozone authorities is destined to fail.
European Debt Crisis: George Soros Exudes Optimism
June 28, 2012 by Marshall Auerback
George Soros in Davos. Sebastian Derungs/swiss-image.ch
George Soros probably understands the nature of the immediate problem facing the Eurozone. Namely, the accelerating bank run which, amongst other things, potentially exposes Germany to trillions of contingent euro liabilities. But even Soros reflects the prevailing – and mistaken – view that Greece might need to become the sacrificial lamb required to save the euro. He said as much in a recent interview in Der Spiegel.
Questioned about his proposal to rescue the European Monetary Union via a Debt Reduction Fund, Soros was asked whether this measure could also save Greece.
The Eurozone Still Faces Several Challenges
June 25, 2012 by Marshall Auerback
European financial officials are preparing their policy package to deal with the current crisis for the meeting scheduled next week. It is not clear whether any of the proposals will be able to stop the ongoing bank run. Here are some of the rumored proposals:
* Euro members jointly issue short term bills – in effect, short term euro bonds.
* A debt redemption fund as proposed by economic advisors to Merkel.
* New procedures for euro area banking supervision.
* Using the ESM to purchase peripheral nations’ bonds in order to reduce their sovereign interest rates.
French President Hollande is advocating the ESM purchase program. He is also advocating that the ESM be given a banking licence linked to the European Central Bank’s balance sheet. This makes sense as it addresses the solvency issue.
Future of Greece and the Eurozone Remains Uncertain
June 19, 2012 by Marshall Auerback
Prime Minister Antonis Samaras. alex@faraway/Flickr
So for the short term, it appears we won’t have a “Grexit”, which has led many commentators to suggest (laughably) that a crisis has been averted. Typical of this sentiment is a headline in Bloomberg today “Greece avoids chaos; Big Hurdles Loom”. To paraphrase Pete Townsend, meet the new chaos, same as the old chaos.
It is worth pondering how acceptance of the Troika’s program (even if cosmetic adjustments are made) will help hospitals get access to essential medical supplies (see here), whilst the government persists in enforcing a program which is killing its private sector by cutting spending and not paying legitimate bills, and an unemployment rate creeps towards 25 per cent and 50 per cent for youth.
Germany’s Constitutional Conundrum
June 13, 2012 by Marshall Auerback
Germany’s Angela Merkel with Nicolas Sarkozy. F. de la Mure/MAEE
Hans-Werner Sinn, President of Germany’s Ifo Institute and the Director of the Center for Economic Studies at the University of Munich, has taken to the pages of the New York Times to explain why Berlin is balking on a further bailout for Europe.
Amongst the points that Sinn makes against German sharing in the debt of the euro zone’s southern nations is a legal one: “For one thing, such a bailout is illegal under the Maastricht Treaty, which governs the euro zone. Because the treaty is law in each member state, a bailout would be rejected by Germany’s Constitutional Court.”
Another One Bites the Dust: The ECB Pours Cold Water on Bankia Bailout Solution
May 30, 2012 by Marshall Auerback
Bankia ATM in Madrid, Spain. Image via Global Post
It might seem strange to invoke Freddie Mercury and Queen in the context of the eurozone, but it’s the first thought that springs to mind, as Brussels and the increasingly hapless ECB, continue to mismanage their way to financial and economic catastrophe. Yesterday, there were signs that the Spanish plan to recapitalise Bankia (which came with the implied backing of the ECB’s balance sheet) introduced a potential way out of the eurozone’s metastisizing banking crisis.
Sadly, it’s another idea which will never get off the bulletin board, as the ECB bluntly rejected any proposal to use its balance sheet to indirectly fund Bankia, the troubled Spanish lender
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