How to Make the Euro Project Work

The euro seems to be on its last legs, and the vision which inspired its genesis seems to have vanished from the politicians sponsoring it. The recent spat with England and Prime Minister Cameron has only served to highlight the vacuum in vision. Previously, whenever England was scapegoated, English politicians skulked like whipped curs, and Euro-politicians adopted that practiced condescending, look-askance stance toward the wayward one. This time around, the feeling among English politicians and electorate was more relief than abashedness, and the pose of superiority by the likes of Premier Sarkozy could hardly be attempted, let alone maintained. The media did its best to foster the impression, and the attempt failed.

So what now? What of the grand vision of a single currency binding fiscally responsible, growth-oriented economies into a viable, synergistic whole? What we now have is a ramshackle construction inviting the incurrence of debt and inhibiting its repayment, a growth-crippling currency combined with a debt overhang that makes the US dollar seem a safe haven.

But was this ever the end which was envisioned? Was the euro ever simply to have facilitated fiscal responsibility and economic growth? Was there perhaps another goal envisioned by its founders, a goal which perhaps now has been lost sight of by those who were to carry the torch?

In point of fact, the euro is simply one building block in an entire agenda. What is needed to save the euro is to understand that agenda. The euro needs to be set off against other, equally desired, institutions in order to take firm root.

There is a simple calculus that all politicians from Northern to Southern Europe have to make: the euro comes with a price, and that price is for the nothern nations to assume the fiscal burden of the southern nations. That burden consists of, on the one hand, debt, and, on the other, the continued flow of transfer payments. These transfer payments are the key to the entire project. Welfare payments, subsidies, pensions, they all need to be included in a blanket agreement without which a common currency cannot survive.

Of course, the southern countries would be only too happy to establish such an arrangement, and so the northern countries need to make specific that this takeover involves not only liabilities but assets — specifically, control of the political machinery by which the decisions are made over such transfer payments. The southern countries have to relinquish political control of their citizenries.

In turn, this cannot be done only for the southern countries. Such an arrangement will require the transfer of political responsibility over welfare-state decision-making to the level of the European Union, for the northern as well as the southern countries. Germany, the Netherlands, France, Belgium, will likewise have to yield democratic control to Brussels and Strasbourg.

Can such a system be called democratic? Strictly speaking, yes, because it will still be a one-man, one-vote system. But as it stands here described, the price would be too high for the northern countries to pay. They will not relinquish their national parliaments in favor of the European Parliament without, to use a common-law notion, “consideration.”

That consideration must be a form of control. Behind the democratic facade, there must be a predominance of control lodged in the northern countries. How can this best be achieved?

Through control of the central bank, and short-term interest rates. A tight monetary policy favors the more economically powerful areas — the “core” — of a currency region, and keeps the weaker areas — the “periphery” — more or less in thrall.

Would that be enough? Possibly. A monetary policy geared to the needs of the northern countries would ensure enough prosperity in those countries to shoulder a good deal of the welfare-state burden of the southern countries, without precipitating an inflationary spiral, which is what would take place if monetary policy were geared toward the southern countries. And the southern countries would console themselves with the awareness that their sky-high unemployment rates and exuberant levels of welfare payoffs were covered. The facade of a European Parliament would give the impression of democracy, and, for the rest, all residual conflicts could be worked out on the pitch — of what use is the UEFA Champions’ League if not this?

Cloverfield Government

Well it’s about time I woke up from hibernation to begin posting again. Not much to say for awhile there, not to mention being preoccupied with finishing the next volume of the Stahl translation, about the state and constitutional law. I hope to have it published within a month (that’s quite optimistic though). At any rate, I did have a thought to communicate! And that is this. I finally got around to watching the movie “Cloverfield.” It’s not one of those movies my wife likes to see, so it sat around gathering dust until she went out of town for a few days, at which point I blew the dust off of the said DVD and watched it. What a grotesque movie, yet very well done, because it seemed real enough to actually have happened. But, here comes the thought I wanted to communicate: the monster in Cloverfield, while highly believable, was not quite up to the times. If he really wanted to come over as a modern-day monster, he would have gotten on the national news, have blamed all the carnage in Manhattan on the army, and stated that he really was there to fix things, to restore order, to rebuild, he being the only entity large enough to be able to do that. After all, isn’t that what our government has done? Destroyed the economy through years of either parasitic or blatantly destructive action (e.g., subprime mortgage sponsorship), and then blame the entire mess on the victims, to wit, business and the market. We have a Cloverfield government; but there are those who are filming with their camcorders for posterity’s sake. This hopefully will allow future generations to learn from our mistake, not to listen to big ugly green monsters, replete with giant teeth, in politicians’ clothing.

What is a Crisis of Trust?

We hear a lot these days about the current financial crisis being one of trust. Banks don’t trust each other any more, lenders don’t trust borrowers, investors don’t trust who or what they are investing in. That is all true, but it does not get to the heart of the matter.

What is trust? It is confidence that commitments will be honored, that agreements will be kept. Which gives us an indication of the true nature of the capitalist economy.

Classical economics has many virtues, but it has also saddled capitalism with the concept of homo economicus, the egotistical, self-serving economic actor as the core of the capitalist system. This is a gross misconception. Capitalism is not built upon self-serving egotists but upon people willing to make commitments to each other, both short-term and long-term, regarding their economic resources. That is what credit and debt, borrowing and lending, are all about. The commitments are mutual. When these commitments are reneged on on the scale they have been in the current crisis, the system fails.

Therefore it is a much better characterization of capitalism to label it the “commitment economy” rather than the “greed economy,” which is what the Left paints it as, thanks to classical economics.

Capitalism is commitments, not greed. The trust one hears so much about is trust in keeping commitments. Capitalism, friends, is the commitment economy.

What’s Behind the Meltdown

The stock markets continue to plummet in unnerving fashion. The blame for it is centering on the “bailout” package — was it too little too late, was it too much, was the passage of it a dispiriting display of bad leadership. I think it goes deeper than that. The bailout was never meant to solve the problem, only to stave off something worse. But what it most of all did was spark the fear of ever-more government takeover of the private sector, which combined with polls indicating Democratic victory in both Congress and the Presidency in November, has spooked the investor class to get out while the getting’s good. Let’s face it: if the Democrats win in November, this bailout package is going to look like libertarianism compared to the stuff they’re going to pull to “solve the crisis.”

The Bottom Line: False Weights and Measures

At bottom, the issue involved in this financial crisis is false weights and measures. That is, a standard of valuation that is manipulated, making people believe they are receiving something other (of lesser value) than they actually are.

The Bible has this to say about such false weights and measures:

Le 19:36 Just balances, just weights, a just ephah, and a just hin, shall ye have: I am the LORD your God, which brought you out of the land of Egypt.
De 25:13 ¶ Thou shalt not have in thy bag divers weights, a great and a small.
De 25:14 Thou shalt not have in thine house divers measures, a great and a small.
De 25:15 But thou shalt have a perfect and just weight, a perfect and just measure shalt thou have: that thy days may be lengthened in the land which the LORD thy God giveth thee.
De 25:16 For all that do such things, and all that do unrighteously, are an abomination unto the LORD thy God.
Pr 11:1 ¶ A false balance is abomination to the LORD: but a just weight is his delight.
Pr 16:11 ¶ A just weight and balance are the LORD’S: all the weights of the bag are his work.
Pr 20:23 ¶ Divers weights are an abomination unto the LORD; and a false balance is not good.
Eze 45:10 Ye shall have just balances, and a just ephah, and a just bath.
Eze 45:11 The ephah and the bath shall be of one measure, that the bath may contain the tenth part of an homer, and the ephah the tenth part of an homer: the measure thereof shall be after the homer.
Eze 45:12 And the shekel shall be twenty gerahs: twenty shekels, five and twenty shekels, fifteen shekels, shall be your maneh.
Mic 6:10 Are there yet the treasures of wickedness in the house of the wicked, and the scant measure that is abominable?
Mic 6:11 Shall I count them pure with the wicked balances, and with the bag of deceitful weights?
Ho 12:7 ¶ He is a merchant, the balances of deceit are in his hand: he loveth to oppress.

In the current financial muckup, this falsification of the standard of value occurred thanks to a complete failure of functioning by the leading credit rating agencies. Subprime mortgages were packaged into bonds that were passed off as AAA — the highest rating possible. Given the great demand for such safe-haven assets in a global economy awash in liquidity, these bonds were purchased like hotcakes, making for ever-increasing demand for subprime mortgages to be packaged into these bonds (CDOs, MBSs). They thus spread throughout the world. The questions which now arise are:

  1. How many banks and other lending agencies have these assets on their balance sheets, and to what degree?
  2. What is the degree that each of these assets is contaminated with subprime mortgages which either have already failed or will fail?

The recent “bailout” package passed by the Congress is intended to get this auditing process under way in the US. The question is, will it accomplish what it is supposed to, without subverting the system even further? Be that as it may: who is going to take care of this process in the rest of the world? And what is the best way to take care of it? It is the mother of all tangled messes.

The bottom line is, this was a catastrophe from start to finish egged on and smiled upon by the government, in pursuit of social justice, of Joe Biden’s “fairness.” It is the government that is supposed to supervise the functioning of such services as credit rating, simply as a matter of averting fraud. Instead of doing that, it turned a blind eye on the whole procedure, the better to achieve the stated goal of affordable housing.

Capitalism was set to work under the constraints set by the government. Now that government has nearly destroyed capitalism, it is going to fix it. How: with more of the same?

The Book of Amos speaks of a judgement upon a nation addicted to false weights and measures:

ch 8, verse 4: Hear this, O ye that swallow up the needy, even to make the poor of the land to fail,
5 Saying, When will the new moon be gone, that we may sell corn? and the sabbath, that we may set forth wheat, making the ephah small, and the shekel great, and falsifying the balances by deceit?
6 That we may buy the poor for silver, and the needy for a pair of shoes; yea, and sell the refuse of the wheat?

Amos’s Israel was judged and found wanting; it was given over to conquest by the Assyrians.

What judgement awaits us? For we keep voting in people who, this time around in the name of the poor, love the false balance, the small ephah and the great shekel, who have hung this catastrophe around our necks and then blame the faithful servant (Wall Street) who in fact carried out their bidding; who want us to return them to office for more of the same.

That in itself is judgement I cringe to think about.

More than an Analogy?

One of the themes running through my head regarding a description of the current financial crisis is that of the similarity of subprime mortgages to HIV. Just as HIV gets in the bloodstream and destroys immune capacity, subprime mortgages were packaged together in MSOs and CDOs which, circulating through the banking system, in turn have destroyed the banking system’s capacity to deal with bad risk.

But the analogy is even more appropriate given the latest news that Barney Frank’s boyfriend was the one in charge of coming up with the affordable housing schemes at Fannie Mae that precipitated this HIV infection of the capitalist bloodstream.

Makes one shudder just to think about it.