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THAT ARMAGEDDON SUMMER OF 2010 Lessons for LTRO2 in 2012

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Think of the table below as a sequence diagram, a model of a European Policy process, a framework into which you can insert your favorite events or events which asymptotix may have missed.

But as it is in software engineering, the sequence diagram is a model a heuristic, on the basis of the EU policy response to the crisis of 2010 (sequenced here from asymptotix), what chance of efficacy has the ECB LTRO policy of 2011/2012 ?

What becomes apparent is that political bumbling hand-shaked with ‘extend and pretend’ entails that when the politicians do reach for a text book macroeconomic policy, the policy becomes ineffective because the transmission mechanism is a big bowl of jellied eels, covered over with fudged stress tests and incomprehensible accounting standards.

The above is true when picking a Rational Expectations type Rule based Policy off the shelf as a consequence of a) the politicians being secretly in cahoots with the transmission mechanism players, (particularly the Hedge Funds); & b) the politicians facilitating ‘extend & pretend’ by not enforcing transparency rules such as Basel and IFRS fully. You cannot run a rule based Monetarist style Rational Expectations Policy without transparency; it just doesn’t work! Basel II Pillar 2 is the interlock between macroprudential governance and the transmission mechanism. Sure the Financial Market Supervisory process (dirty washing) does not need to be hung out on the line on a Sunday morning but at the very least the underlying arithmetic Pillar One numbers and IFRS reconciliation MUST bear some semblance of reference to reality, otherwise you are pumping liquidity into a pipe full of holes!

What becomes even more apparent though in looking at the summer of 2010 is that the fantasy of Keynesian multipliers and the denial of Crowding Out was still alive in the heads of policy makers, after all, the Con-Dem government had only just taken power in May in the UK. Labour-style Golden Rule, expand at will nonsense policies were still running their course in the UK at that time & in Brussels they were running around like headless chickens willing to believe in the next fantasy that dropped off the Schuman Metro! That much is obvious. They were flying by the seat of their pants (notice all of the announcements are late on Friday, us ‘watchers’ got awfully used to that); CEBS had been dismissed but the Lamfalussy re-engineering had not occurred so the Commission was in total ‘control’ (or not) with Herman the Splendid at the wheel, noone lets face it had a clue in Brussels, Ollie the Jester hadn’t ridden into sight at the Justus Lipsius by then, it was a mess; I may jest myself but should not the EU Commission instigate an investigation into the events and activities of that summer which caused the end of the European project? And censure those responsible for this patent debacle!

Lessons for LTRO2 on the leap day of 2012? – draw your own; you politicians and officials (or pay me to advise you)!

I should have thought at this stage my point is clear! Be Rational! Be Honest! Be Transparent; you are letting the Financial Markets away with (literally) MURDER! But governance is key and policy expedition in line with Rational Expectations is also key; clear and most of all CREDIBLE rules!

One other lesson of governance and process is all too apparent from this review, Stress Testing is crucial. Stress Tests are fundamental (at both the MACRO and MICRO level). Given that Basel-Pillar 2 is the macro prudential interlock point between the authorities and the transmission mechanism; Stress Tests have to be conducted properly since their results are fundamental to the efficacy of any style of monetary policy and thus the welfare of citizens. In my view, then, there is in fact a categorical moral imperative to get them right.








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Monday, 10 May 2010

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 Tuesday, 7 September 2010

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Friday, 10 September 2010

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Friday, 8 October 2010

Germany to set out crisis resolution plan



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