I have been silent for quite some time. This was not planned per se and I was suppose to have gone back to writing quite some time ago. However that wasn’t possible. I’ll attempt to correct this.
At first, this was because I was busy with more urgent matters. It was also easy to keep myself from the computer because nothing new was happening. In the roller coaster of EU economics and politics all that was expectable happened. Greece continues to drag its feet, which probably makes sense both economically and politically, as it means the shock is more progressive, both for economic variables as for social stability. Portugal and Ireland proceed eagerly and masochistically with the implementation of their austerity programmes. Portugal has now all but temporarily eliminated the 13th salary month. This makes difference for earners who don’t receive it but it makes no difference to employers who still pay it. It’s extremely bad for the private sector, where consumption dissipates but where labour costs remain the same. In the meantime Italy continues (rather interestingly, I have to admit) test the markets, while Spain is in full electoral mode. Banks are again at the centre of people’s concerns as increasingly looming restructuring of Greek debt leads to a fall in market access to banks exposed to it, such as Dexia. Finally after going on holidays, politicians have come back and have ratified the July 21 EFSF reforms. This came at great cost to Slovakia, whose Prime Minister showed (in my opinion) great political leadership, or at least selfless sense of state, by putting Europe ahead of national party politics. It is the 3rd government to fall due to the Eurozone crisis, and in my humble view, not the last. It’s not rocket science and none of this should have come as a surprise. The last reason why I have not been writing is that I’ve actually been writing several posts at the same time, which has meant I wasn’t able to finish any single one. Because I am now done, I can actually start posting them, which I shall do asap, once I’ve made sure everything sounds good.
Until then, I’ll just say that the next 5 posts will be about banking. They are not particularly relevant for this blog. Nonetheless, their general relevance is interesting to understand one of the most important sectors of the economy. Truthfully I decided to write them in part so that if I ever forgot their insights I’d have somewhere to go back to and remember them. The first post will introduce and summarise the conclusions I came to by researching this topic (very superficially). The first post is about the transmission of monetary policy, and focuses on the mechanism through which the central bank’s interest rate tools influence the interbanking lending rates. The second one is about Fractional reserve lending and bank runs. The third post discusses the role of asymmetries of information in the banking sector and how they seem to lead to overinvestment. Then I’ll return to the role of the central bank, with a specific focus on how it goes about intervening in the market from a balance sheet point of view. I spend some time distinguishing between Debt Monetisation, Quantitative and Qualitative Easing. Finally I’ll ramble on a little bit about the tools available to the ECB.
Having recorded these facts about monetary policy and banking, I then move on to consider fiscal policy in the Eurozone, and update what I perceive to be the benefits of federalism. This was the reason I decided to read about monetary policy because one of the arguments is debt monetisation.
Later on I’ll consider the exchange rate effects of country size and liquidity and how these affect the independence of monetary and fiscal policy. If I’m right this should be relevant for Sweden, Norway, UK and Switzerland.
Finally, if and when I have the time, I’ve been putting down some ideas about the rise and fall of the Roman empire. This is purely indulgent but I think an interestingly obvious conclusion can be reached which is relevant (although not immediately) for Europe today.
So stay tuned! 😉