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Euro Zone monetary policy can only buy more time

"Central banks in recent years have been pulled into the role of a crisis manager. Some think that central

banks are the only able ones. I consider this thinking wrong and dangerous," Mr Weidmann told Finnish

newspaper Helsingin Sanomat in an recent interview. The Bundesbank President also repeated his

warning that central bank financing could become addictive like a drug.

"The program can bring considerable risks to the monetary policy. Those risks now have to be limited

and prevented," he was quoted as saying, Mr Weidmann said that the greatest risk was that cheaper

financing took away the incentive for fiscal reform.

"Monetary policy can only buy more time. It is like a painkiller which will not erase the reasons but can

cause risks and side effects," he also stated. By the same taken, he warned against Europe depending

on the ECB to supervise banks in the banking union. "That would mask the conflict of interest between

the supervision task and monetary policy. I hope that the ECB would only serve as a helper," he said. It is

wrong an disastrous to rely on the EU to solve anything also. Its anti democratic attitude has created a

built in ignorance which will eventually make it implode under the weight of bad decisions. This is one

major reason why the great democracies won WW2 along with the massive spilling of blood from the

Soviet Union. We gathered and used information better than the opposition. The EU does not want to

listen because its rulers think they know all that is needed from some transcendental wisdom and they

don't need to listen or consider mere reality.

The EZ / the EU are both doomed I say, because the political system is built on a deliberate ignorance

assuming super wisdom and knowledge in its unaccountable rulers where, in fact, they are mortals just

like the hundreds of millions of subjects they so much despise.

HEGEL once wrote, “What experience and history teaches us is that people and governments have never

learned anything from history.” Actually, I think people do learn. The problem is that they forget — sometimes amazingly quickly. That seems to be happening today, even though recovery from the

economic debacle of 2008-9 is far from complete. Evidence of this forgetting is everywhere. The public

has lost interest in the causes of the crisis; many, of course, are just struggling to get by. Unrepentant

financiers whine about “excessive” regulation and pay lobbyists to battle every step toward reform.

Conservatives bemoan “big government” and yearn to return to laissez-faire deregulation. Higher

international standards for bank capital and liquidity have been delayed. I could go on. Instead, let me

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try to encapsulate what we must remember about the financial crisis into 10 financial commandments,

all of which were brazenly violated in the years leading up to the crisis.

1. People Forget that should be “remembered”  

Treasury Secretary Timothy F. Geithner lamented last year that before the crisis, “There was no memory

of extreme crisis, no memory of what can happen when a nation allows huge amounts of risk to build

up.” He was right. As the renegade economist Hyman Minsky knew, it is normal for speculative markets

to go to extremes. A key reason, Minsky believed, is that, unlike elephants, people forget. When the

good times roll, investors expect them to roll indefinitely. When bubbles burst, they are always

surprised.

2. Self-Regulation, a non reliable concept 

Self-regulation of financial markets is a cruel oxymoron. We need zookeepers to watch over the animals.

The government must not outsource this function to “market discipline” (another oxymoron) or to for-

profit companies like credit-rating agencies. The Dodd-Frank Act of 2010 isn’t perfect, but it has thepotential to change regulation for the better. But most of its reforms are still being phased in, and as the

rules are being drafted, the industry (here and abroad) is fighting them tooth and nail and often

prevailing.

3. Listen to thy Shareholders and honor their requests

Boards of public corporations are supposed to protect the interests of shareholders, partly by

monitoring the behavior of top executives, who are employees, not emperors. In the years before the

crisis, too many directors forgot those responsibilities, and both their companies and the broader public

suffered from the malign neglect. Will they now remember? Some will — for a while. But sanctions on

directors for poor performance are minimal.

4. Institute a Risk Management policy  

One bitter lesson of the crisis is that, when it comes to risk taking, what you don’t know can hurt you.

Too many C.E.O.’s let their subordinates ride roughshod over risk managers, tipping the balance toward

greed and away from fear. The primary responsibility for keeping risk-management systems up to snuff 

rests with top executives and boards of directors. But the Federal Reserve and other regulators are now

watching and mustn’t let up.

5. Less Leverage equals better control 

Excessive leverage — otherwise known as over-borrowing — was one of the chief foundations of the

house of cards that collapsed so violently in 2008. Overpaid investment “geniuses” used leverage to

manufacture extraordinary returns out of ordinary investments. Bankers and investors (not to mention

home buyers) deluded themselves into thinking they could earn high returns without assuming big risks.

But leverage is like alcohol: a little bit has health benefits, but too much can kill you. The banks’ near-

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death experiences, plus preparation for higher capital requirements to come, are temporarily keeping

them sober. But watch for the binge drinking to return.

6. Keep It Simple

Modern finance profits from complexity, because befuddled customers are more profitable ones. But do

all those fancy financial instruments actually do the economy any good? Paul A. Volcker, the former Fed

chairman, once said the A.T.M. was the only beneficial financial innovation in the recent past. He may

have exaggerated, but he had a point. Who needs credit default swaps on collateralized debt

obligations, and other such concoctions?

7. Standardize Derivatives

Derivatives acquired a bad name in the crisis. But if they are straightforward, transparent, well

collateralized, traded in liquid markets by well-capitalized counterparties and sensibly regulated,

derivatives can help investors hedge risks. It is the customized, opaque, “over the counter” derivatives

that are the most dangerous — and the ones more likely to serve the interests of the dealers than theircustomers. Dodd-Frank pushed some derivatives toward greater standardization and transparent

trading on exchanges, but not enough. The industry is pushing to keep more derivatives trading out of 

the sunshine.

8. Keep an eye the Balance Sheet 

Before the crisis, some banks took important financial activities off their balance sheets to hide how

much leverage they had. But the joke was on them. The crisis revealed that some chief executives were

only dimly aware of the off-balance-sheet entities their banks held. These “masters of the universe”

hadn’t mastered their own books. Dodd-Frank specifies that “capital requirements shall take into

account any off-balance-sheet activities of the company.” That’s a welcome step toward making off -

balance-sheet entities safe and rare. Now regulators must make the rule work.

9. Negotiate the compensation packages

Offering traders monumental rewards for success, but a mere slap on the wrist for failure, encourages

them to take excessive risks. Chief executives and corporate directors should “claw back” pay when

putative gains turn into losses. If they don’t, we may need the heavy hand of government to do it.

10. Our Boss, the consumer 

The meek won’t inherit their fair share of the earth if they are constantly being fleeced. What welearned in the crisis is that failure to protect unsophisticated consumers from financial predators can

undermine the whole economy. That surprising lesson mustn’t be forgotten. The Consumer Financial

Protection Bureau should institutionalize it. Mark Twain is said to have quipped that while history

doesn’t repeat itself, it does rhyme. There will be financial crises in the future, and the next one won’t

be a carbon copy of the last. Neither, however, will it be so different that these commandments won’t

apply. Financial history does rhyme, but we’re already forgetting the meter. 

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Date: jan. 22. 2013

Mircea Halaciuga, Esq.

004.072.458.1078

www.SIPG.ro