STOCK MARKET WATCH -- Thursday, 12 January 2012

[Demeter]

17. Marshall Auerback: The Road to Serfdom

http://www.nakedcapitalism.com/2011/11/marshall-auerback-the-road-to-serfdom.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29


...Creditworthiness precedes credit. You need policies designed to promote job growth, higher incomes and a corresponding ability to service debt before you can expect a borrower take on a loan or a banker to extend one. And, as Minsky used to point out, in the old days, banking was a fundamentally optimistic activity, because the success of the lender was tied up with the success of the borrower; in other words, we didn’t have the spectacle of vampire-like squids betting against the success of their clients via instruments such as credit default swaps.

Credit default swaps themselves are to “hedging” credit exposure what nuclear weapons are to “hedging” national defence requirements. In theory, they both sound like reasonable deterrents to mitigate disaster, but use them and everything blows up. At least one decent by-product of the eurocrats’ incompetent handling of this national solvency disaster has been the likely discrediting of CDSs as a hedging instrument in the future. Note that 5 year CDSs on Italian debt have not blown out to new highs today in spite of bond yields rising over 7%, because the markets are slowly but surely coming to the recognition that they are ineffective hedging instruments – although they have been very useful in terms of lining the pockets of the likes of JP Morgan and Goldman Sachs.

Say what you will about Silvio Berlusconi (and there’s LOTS one can say about the man as any reader of the NY Post can attest). But he was right to oppose to a crude political ploy being foisted on him by the ECB, the French and Germans to accept an irrational and economically counterproductive program fiscal austerity program in exchange for “support” from the likes of the IMF. All Berlusconi had to do was cast his eyes to the other side of the Adriatic to see the likely effect of that. The markets’ reaction to his resignation was surreal: akin to turkeys voting for Thanksgiving. The overriding imperative in Euroland (indeed, in the entire global economy) should be to stimulate economic growth to ensure that there are enough jobs for all who want them...