Arnold Kling  

Daily Kipper- und Wipperzeit Update

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Tyler Cowen writes,


Arguably it's now a question of who stares down whom. If you do not doubt German resolve, bet on the ECB and lend money to Italy fairly cheaply. If you fear that Italy suffers from its own version of the great stagnation, and doesn't have good enough political institutions to make decent reforms (and now the hammer of the private capital markets is partially removed), maybe the ECB will cry uncle at some point and give up. Knowing that, confidence will not return and the speculators will continue to pounce. We'll see soon enough what the markets think.

Read the whole thing. Peter Oborne is even more distressed.

I am in the skeptical camp. My line is that as long as you have bad debt that is priced at par, you have an active crisis. To the extent that the ECB is trying to keep the price of weak-country debt close to par, it is not offering a credible solution. Uncertainty will prevail in the markets.

On the other hand, if it were to set prices that were far below par but which it is willing and able to pay, then it can remove the uncertainty. The resolution to the original Kipper- und Wipperzeit did that, where the new bank would weigh the debased coins issued under the previous regime and set prices based on those weights. The Brady Bonds did that for the Latin American debt crisis. If you ask me, somebody needs to produce a Brady Bond sort of resolution to the European debt crisis. It will be ugly, and some European banks will be insolvent, which in turn will require re-pricing some of their liabilities (presumably not their deposits) and shutting some of them down. But keeping the crisis fires burning will be even uglier.



COMMENTS (4 to date)
Philo writes:

". . . if it were to set prices that were far below par but which it is willing and able to pay, then it can remove the uncertainty." The prices it offers to pay need not be "far below par": *with sufficient inflation*, they can be at par, after all. The ECB can inflate its way out of this crisis. It is obviously very reluctant to do so, but it may finally be on the brink of accepting that this is the best course.

Hugh writes:

All this pain just to save the Euro - and it may be too late anyway.

I would like to think that our finest minds are looking for the best (least painful) way of freeing European countries from this gruesome experiment.

Alas, they almost certainly aren't.

Joe Cushing writes:

I think this whole economic slump would be behind us if we hadn't spent the last 4 years trying to prevent market clearing prices. Sure, the economy could suffer severely for a short while but ultimately these lower prices would jump start the economy and it would probably happen faster than 4 years. Prices need to reflect economic reality in order for an economy to flourish. I wish they'd just get it over with--it's like taking 4 yeas to peel off a band aid.

Yancey Ward writes:

Arnold wrote:

If you ask me, somebody needs to produce a Brady Bond sort of resolution to the European debt crisis.

Bruce Krasting suggested the same thing several months ago.

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