Firing duds or life ammo?

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By Cees Bruggemans, Chief Economist of FNB.

Two totally different propositions, both full of pathos.

The ECB decides to do the bare minimum. Clearly not believing in shock-and-awe, wanting European governments to sort out their finances and their banks with some urgency, the ECB is still game enough to try and offer protective fire to Portugal (aggressively buying its bonds) with the aim of preventing markets from knocking it into a lifeboat, freeing the road for going after bigger game (Spain).

But will the bare minimum suffice?


Meanwhile, over in the US, the political offensive against the Fed and its ‘irresponsible’ bond buying policies has reached a new intensity, Congress forcing the Fed to publicly do a WiliLeaks on itself, divulging how many trillions it lend out and to whom in the crisis.

This is one sure way for the Fed to lose the publicity war. For it clearly saved Wall Street, including much assistance to foreign banks. And not everyone likes that.


It may be that European markets will calm down again. They did after Greece, after policy showed its teeth (the very size of the European lifeboat).

But it may also be that too many people have now figured there are going to be debt restructurings with haircuts. There are too many unresolved issues, also where the bigger countries are concerned.

It is the negatives that are hair-raising. Electorates don’t want to bail out what they consider undeserving foreigners. Market investors don’t want (big) haircut losses. The ECB doesn’t want to create too many sovereign and bank dependencies. Targeted countries find it difficult to convince their populations to accept sacrifice. Political opposition parties try to win office by rubbishing the right policies.

Where is this leading?


In the US, they shot their two growth engines (finance and construction). They hollowed out their goods sector (giving away export capacity). Household finances are impaired. The mood is defensive. Growth will not be going anywhere fast for years, leaving large residue of disconnected unemployment and despair.

Meanwhile, US politics has spiked fiscal policy, and is now focusing on the Fed to see whether it can be made to become less pro-active. Like tying a fireman’s one hand behind his back, amputating the other and thinking this is the right way to continue fighting an inferno.


What seems to be giving way most noticeably everywhere is the ability to judge what makes sense and what does not.

This applies to fiscal policy, which can still play a supportive role where state finances have not yet been completely overburdened. And the meaning of central bank bond buying in economies performing well below potential with slow growth and approaching deflation.

But it goes beyond appreciating the positive roles of activist fiscal and monetary policy in these crisis times.

Okay, so you were burned in Europe and barely got out. And now you are rushing into anything in Asia because it isn’t contaminated, it isn’t Europe, it looks good on paper (data can be sterile and hide the real picture) and you are rushing in.

Apparently, this is not the exception. People often don’t seem to understand the long-term weaknesses of the places they are going into. In other, more normal times there would not have been such cavalier attitudes. Due diligence would be a lot more thorough. But today, having escaped from Europe (just), anything Asian in comparison looks ‘good’ – how droll. But does that mean new mistakes are being made daily, enrolling in bubbles that will blow ere long in turn?


Everything being mentioned here is self-inflicted. One remembers with a certain nostalgia the adventuresome way in which US Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke stumbled through September/October 2008. But they arrested the financial implosion (as it was in the UK). They got the real sector to cancel their panic. And the world came back from the brink.

But earlier this year (Greece), and then in recent weeks and months (QE2 in the US, the US elections, the political US witch-hunts, European politics trumping markets, Ireland becoming victimized, a widening bond market contagion), one wonders where events are heading.

Do not think that things are under control, that normality has been restored, or that all senior political leaders necessarily know what they are doing (not only technically, but also politically).

This is a world blinded by events, disoriented by noise, smoke and mirrors, fearful about losing its bearings, and inclined to panicky overreactions.

This may sound like overstatement, especially from a peaceful vantage point in some forgotten corner of the world. But closer observation should drive home the increasing state of confusion, and the incoherent self-destructive responses (high and low) observable with growing regularity everywhere.

This isn’t a short global crisis (already 40 months old). Modern technology makes information and responses flow in record time, on a scale which makes the complexity mind-numbing. With mistakes a certainty. Restoring order may take years more.

Where is this actually leading?

Making the right decisions under such uncertainty and often waylaid by misleading impressions is a challenge never encountered before by so many people globally.

Source: Cees Bruggemans, FNB, December 3, 2010.

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