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Sunday, March 24, 2013

Bailing-In European Style

It's clear that people are tired of watching banks and others major institutions of getting themselves into trouble only for them to be 'bailed out' using taxpayer money (often because failure may result in a catastrophic cascade/succession of other failures). This has happened most prominently in the United States of late but obviously the situation has continuously popped up over the last few years in Europe as well.

Thus far, the reasons how they have found themselves in be such circumstances have often been related to compentency, taking high levels of risk that borders on negligence and malpractice, and engaging in (and being knowingly involved in) unethical and often illegal transactions.

I think most people are in the same boat though. As far as I'm concerned the people in charge can make an unlimited amount of money if they perform. However, if they have to be bailed out they should be penalised for their indiscretions. The option to take a haircut of salaries, stock options, and so on... of any people who are directly responsible should not and can not be ruled out (ironically, there are often local laws which cover corporate governance in relation to these issues though awareness of these particular laws is sometimes sub-par and not enforced often or harshly enough)(In an ideal world such people would either resign or be let go. However, keeping them on temporarily so that they can detail just exactly where they diverged may be necessary/required.). They have to learn that if they want to play with other people's money they will be held accountable. After all, it's clear that there is a far greater propensity for risk taking, if you have no 'skin in the game'.

- if funds can be determined to be be used for criminal (or other abnormal) activities (if you've ever read up on/about issues related to 'export controls' especially with regards to countries that are under sanction you'll realise that tracking such activities is easier said than done. There is also the problem of just exactly how big a role criminal activity plays in modern economies. One paper I read basically insinuated that it may actually be 'holding' up a good chunk of 'normal activity'. More research needs to go into this...)
- if they have resorted to unusual regulations to artifically boost their performance in an unsustainable fashion which could lead to collapse
- or if there is any other 'abnormalities' in the system
they should be among the first to be forced to shell out some of the burden not the average citizen who hasn't done anything wrong

Obviously, there are several key problems with 'bailing in' including:
- bank/currency runs
- loss of confidence which can lead to other cascading effects
- legal/jurisdictional issues
- political issues (though history indicates that if a levy is implemented fairly and under the correct circumstances it may actually be successful)
- implementation (they recently closed banks in Cyprus as a means of stopping a bank/currency run. This is only part of the solution though. If they do go directly after proceeds from criminal activity or other people 'of wealth' they need to think about back dating laws/dealing with jurisdiction issues so that if money is shifted or broken into multiple accounts (to deal with haircuts that are based on 'tiering'). Further discussion required at an international level.)

That's why I'm proposing something slightly different. Recently, the Australian Federal government implemented something called a 'super profits' tax on the mining sector (It's implementation was only partially successful due to loopholes in the way it was legislated.) as a way of basically funding future investment if/when the mining sector does undergo something of a downturn. I propose something similar. If banks are making substantial profits (the size of this is arbitrary but if you look at profits in the financial sector they seem quite healthy at the top end despite many of the problems that we are currently facing), a chunk of their profits will to go into a pool that is then used to help stablise, neutralise, and then hopefully fix crises situations such as this. It will ultimately act as a further firewall against instability and reduce the burden upon central banks (and ultimately taxpayers) in dealing with such circumstances (Obviously, the key problem is the size of it and how to implement it without impacting upon growth upon the finance/banking sector too much. Further thought/discussion required...).

Banks/opponents of this policy need to think about it in a different way. If one of their competitors collapses even though they may get a share of the clients confidence in the sector is also shaken which ultimately impacts on them as well. This is reflected in the style of assets which clients are willing to invest in and ultimately the returns that are realistically posisble. Moreover, it's clear that many banks have questionable assets on their books (everywhere not just Europe) and that removing them from their books isn't going to be an easy nor quick process. A pool of money from those who are able to provide further stability to the system is in everyone's best interest and ultimately backs up any stablity funds or any other liquidity options that are provided by the ECB.

Another option is to bail out/in based on citizenship (transfer all money back/responsibility back to the point of origin). At this point, we re-capitalise which reduces the burden on depositors. An option to basically reduce the size of the possible impact of a possible default, reduce the size of the finance sector in proportion in comparison to their economy while also allowing them room to breathe and basically set things right. Basically, roll up the bank or shift the responsibility back to others within the Eurozone (or elsewhere) to maintain confidence within the Eurozone whilst also allowing for the (hopefully) successful roll up of the bank in question. Clearly this is something that has been thought of (and implemented) in the past (Iceland/Greece) but it is also clear that there is some reluctance by those who basically have 'less skin to lose' than members of the Eurozone. If we do go down this path we may require more negotiations and therefore more time to have deal with the problem at large. Time that we may not have depending on those that are involved and how far they're willing to push their case forward.

Finally, equity in projects underway should always be considered (enough to make it worthwhile but also allows the country in question to maintain sovereignty).

For me, only after all of these other options have been considered should a broad levy be considered...

Been thinking about the logistics of having a second currency. Instead of a second currency if another country were willing to share their currency (temporarily or over the long term) that may be an option with regards to an exit and would save on a lot of production/implementation issues as well? The obvious question is just exactly who would be willing to put their hand up to do this.

The obvious question that has been asked before is whether or not they (Cyprus) are that important in the overall scheme of things. As stated elsewhere, they represent only a fraction of Eurozone output and most markets seem to be brushing off these issues. People may be factoring in confidence as too vital a factor in this circumstance. The key thing is just how strongly they are linked back into the Eurozone/EU.
From a personal perspective, I think it would be a really good test to see how the Eurozone/EU would hold up and the logistics of the process if they were to be let go.

One of the things I've found interesting throughout the the European crises is the dynamic/relationship between the desires/rights of the individual versus that of the state and ultimately the EU. On the one hand, you have those who are doing everything they possibly can to keep it from breaking up. On the other hand, there are those who are calling for reform and possibly even the breakup of the Eurozone/EU. Clearly, some of the policies that have been implemented may take time to bear fruit (such as in Germany when they reformed their labour laws about a decade ago) but the thing that continues to plague me is whether or not forcing countries into the mould/shape is necessarily the best policy at this particular moment in time. If we use a second currency we'll gain some additional flexibility, give some countries some more breathing room, and basically allow them to make their own progress in a multi-tier/speed EU which also allows them to change position at any point in time should they desire (depending on it's implementation). For me, progression should be natural and desired not forced. This shouldn't be a question of just not whether or not whether policies that are being pursued are the correct way forward. We should also question whether or not short/medium term pain is worth long term gain (or vice versa) and whether ultimately the citizens of EU/Eurozone buy into the vision that European leaders are currently proposing.

The other thing that needs to be thought about is whether the stronger economies can energise the weaker ones or whether they are just being slowed down them. This is not a simple question obviously especially in light of the role Asia (and China in particular) have played in global economic growth in recent history.


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Quick Beef Stew Recipe, Random Stuff, and More

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