Eurozone crisis: We're all dooomed! Here's why
Imagine someone on £10K with a £50K credit card bill
Surely there's something we can do?
So, what can we do about it? We could try what is being tried. A rescue fund: let us go and buy lots of Italian debt, drive the price up, the yields down and we're dandy. Great, OK, let's do that. So, now we've got this money pot called the EFSF (don't worry, boring acronym) which is to do just that. Except, in some fit of absentmindedness, no one actually put any money into the EFSF. There's a few billion in there but that's just the spare change of the beggar priming the collection cup. The EFSF is to go and borrow the trillion to buy the Italian debt. Everyone promises, cross my heart, to guarantee the EFSF but no one has been willing to cough up the cash.
This causes the occasional problem: it didn't take long to work out that the guarantees France has made would, if they ever had to make good on them, drive France into being Greece. The other problem is that having primed the collection plate they went off to ask people to lend the EFSF money. Err, no, said China, Brazil, the US and Russia. They did manage to borrow 3 billion this week: but the interest rate on the EFSF bonds is now rising just like it is on the bonds of France, Italy, Spain and so on. In part because it is France, Italy and Spain, among others, actually guaranteeing the EFSF and in part because the Japanese, who bought 20 per cent of the last EFSF bond issue, have already lost money on it.
This whole process has been called “The Mother of all CDOs”: yup, CDOs being those things that tanked the American financial system as they went down with the housing market. That system worked for a decade but the attempt to recreate it in Europe seems to be failing after a few weeks.
We're mad as hell and we're not taking any more
So, we could do what is being done but it's not going to work. Could we actually do something that would work? Sure we could.
We could just make new money. The European Central Bank (ECB) can do that, just like the Fed in the US and the BoE in the UK. This is very much what quantitative easing (QE) is. Print new money, buy government debt with it, prices of govt debt rise, yields on govt debt fall. Exactly what we want to happen. ECB prints up a trillion euro (creates it on a computer actually but...) buys Italian bonds and we're done.
Sure, we get a bit of inflation out of this: but that's actually good at this point. It makes all the other adjustments much easier, like grease on an axle. We're not in fact doing this though: this simple and obvious thing that could and should be done. The reason we're not is because it's illegal. This would be the ECB acting as a “lender of last resort” and the ECB isn't allowed to act as a lender of last resort. This is, believe me, from an economic point of view, really a quite remarkable fuck up.
It isn't just that cramming 17 wildly disparate countries into one currency for entirely political reasons was a bad idea (the “optimal currency area” argument) it's that when they did it, they set it up so that the central bank couldn't perform the most important task of a central bank: be the lender of last resort. The ECB just isn't allowed to print money and bail Italy (or whoever) out.
Sadly, this means that there isn't actually any solution to what is going on. Waffling about on the subject of austerity, of working back into competitiveness, this doesn't work because it won't work quickly enough. Faffing around about treaty changes and more Europe and joint economic monitoring won't work because it won't work fast enough. The EFSF won't work because no one will lend it the money to make it work. And finally, the one thing that would work and would work fast (within a week if it was actually done), the ECB printing money and buying bonds, is illegal.
I'm afraid we're all stuffed. ®
As a UKIP supporter, I've been saying it will all end in tears for at least a decade. I can find a Usenet post of that vintage saying exactly that. Being right is quite wonderful, but I think given the human pain about to come I'd rather have been wrong.