Sept 29th’s FT contains two alarming articles. Martin Wolf calls for the EU to get the printing presses running because everything else has failed. We respect Mr. Wolf as one of the only three journalists in the world today who thinks for himself and does not have his head wedged up his ass. We respect his idea as well. He may be wrong but his idea is simple, to the point, and he admits it’s desperation (he calls it “the unthinkable”).
In the second article, George Soros explains how to prevent a “Second Great Depression.” Mr. Soros is an investing genius and a very smart man. Perhaps too smart. Because I have no f**king idea what he is talking about.
“This is how it would work. Since a eurozone treaty establishing a common treasury would take a long time to conclude, in the interim the member states have to appeal to the ECB to fill the vacuum….
It would require a newly created intergovernmental agency to enable the EFSF to cooperate with Europe’s central bank. This would have to be authorised by Germany’s Bundestag and perhaps by the legislatures of other states as well….
The EFSF would be used primarily to guarantee and recapitalise banks. The systemically important banks would have to sign an undertaking with the EFSF that they would abide by the instructions of the ECB as long as the guarantees were in force. Banks that refused to sign would not be guaranteed. Europe’s central bank would then instruct the banks to maintain their credit lines and loan portfolios while closely monitoring the risks they run for their own account…
To relieve the pressure on the government bonds of countries such as Italy, the ECB would lower its discount rate. It would then encourage the countries concerned to finance themselves entirely by issuing treasury bills and encourage the banks to buy the bills. The banks could rediscount the bills with the ECB but they would not do so as long as they earned more on the bills than on the cash.”
Ok, so I skipped a bunch of parts but WTF George? What are you talking about? I read this article excited to learn the solution to our woes but now I just need a stiff drink. I have literally no idea what he is talking about.
Neither do the regulators. Unfortunately, that will not stop them from implementing some inferior version of his plan. After all, they love complicated stop-gap measures that buy them a few more days/weeks/months and pass the buck to the next unlucky legislator.
As a society, we have outsmarted ourselves. Things are too complicated. No one — not George Soros, not The Bernank, not The Maestro — can understand how all the pieces fit together and where all the unintended consequences will pop up. And yet we add more towers to our castle built on sand.
Recommendation: Initiate a complication index spread trade. Get long short-term complication and confusion while shorting the out-year complication basket. Things are going to simplify, one way or the other.