Bernanke still uncertain as to economy.... US will not be the first wagon of economic recovery

Breaking news: Bernanke remains quite careful when talking about the US economy, de US Treasuries immediately slide en we'll have to see what equities will do and the dollar. I think it will be a hot summer, certainly now that the Obama legal package will ensure some further regulation for the banking sector (which cannot lend as much due to necessary buffers, leading to lower economic growth). The only upshot of his talk was that Bernanke found the risks in the banking system to be not as large as they used to be.

Meanwhile, the Dutch political parties are hesitating and discussing the best way to act after the elections. I may hope that with former Prime Minister Lubbers, things will start rolling, because the economic developments aren't waiting for us until we are done determining our new coalition here.

Stimulate the economy or choose for spending cuts...?

The big question of today in the Netherlands (and perhaps also the world) is whether we should try to further stimulate the economy, encouraging the consumer to spend or whether we should cut (government) spending to ensure that in the future, the Dutch government can still cary its own weight?

I think that the answer may be suprisingly simple, but I don't hear it coming up in the debate in the Netherlands. And the answer is that we know from research that, although there are only 1 million citizens that have some stock in the stock markets, all 16 million inhabitants of the Netherlands become nervous when the stock markets fall. And consumers quickly react by saving money and not spending it.

Now, if we look ahead, the chances are very considerable that there will be more turbulence on the financial markets, leading to a consumer that is unwilling to spend. In that situation, one might find an argument for the Keynesian approach in which governments should increase spending. But, one could also say that experience from other countries tells us that cutting deep and quickly is far more beneficial than waiting and muddling through. So, let's not be afraid to let the recession bite and choose for and anticipate subdued government and consumer spending.

An additional argument for cutting government spending is that in practice, not much of the initial cutting proposals are being effected properly. They often sound tough, but are then modified by later compromises, ideas and newer insight. So the best bet in my opinion would be to choose for spending cuts and letting the citizens take care of themselves and their savings for a while.

You're welcome.

Banks stow away more money than during Lehman-crisis and politicians appear to remain unaware

Financial Times reports that the European banks now deposited more than 320 billion euro at the ECB, afraid of lending it to one another. This amount is higher than during the Lehman episode. And as a surprise, weblog Geenstijl is alert and reports about this matter. The AEX has plunged a bit and the Dow fell through the 10.000.

Today we were also informed that the consumer spending in April in Europe dropped considerably as a result of the European crisis. Everyone immediately started saving again. Which means that spending will indeed fall this year, when the eurocrisis continues (quite likely as Greece is completely unable to pay back).

It is surprising to note that this market reality hasn't reached the Dutch politicians. The economic crisis is still here. Yet, we see Emile Roemer -leader of the leftwing Socialistische Partij- claiming that he is going the redistribute the profits of Dutch banks of last year as if Robin Hood himself.

Well, dream on Emile, have a look at the P&Ls of last year and you'll see no profits there...

Politicians shut down the markets...

I am wondering lately: could things become even worse than having Greek butter on the head? This week we got the answer, and it was the German government that gave it to us by unilaterally introducing a prohibition on short-selling (as a response to financial markets developments). Because the Germans find it clear that those crooks at banks and financial markets are messing with us politicans and we will get back to them. Even the Dutch parliament followed that same line of reasoning today. And the stock markets in the US continued their nose dive.

I remember well that two years ago, at the beginning of the crisis, we were all afraid that politcians would overreact on the crisis. Well, we finally experience it now. With Lehman, it was the distrust between banks that lead to a frozen/absent market. But now, the mechanism is more direct. Politicians themselves shut down the markets and thus create an atmosphere of distrust and unease. Because the real killer for a market is politicians stepping in en messing with the trades directly. So at first we had a liquidity-crisis, then a trust-crisis, followed by a euro-crisis which now results in a political-financial crisis.


Things aren't proceeding that well this way. And all of that because essentially Merkel comes from Eastern Europa and hasn't learnt that well how financal markets work. It would be quite remarkable if, in the end, the 'communist system and upbringing' turns out to be responsible -in this indirect way- for the euro failing and for the end of eurocapitalism.....

Greek butter on the heads of politicians...?

The past few days were all about Greece, the European Union and the financial system. All kinds of stuff happened that amazed me. Most remarkable was, IMHO, the reflex by politicians to blame the financial markets (and/or banks) that the trade in Greek governments bonds halted. Rating agancies were blamed for putting Greece on the hot seat. Politicians felt that speculants, banks and anyonemore were speculating Euroland to its downfall, which is why new regulation should be designed to counteract such speculative trades.

Let's look at this from a distance. The European politicians decide to introduce the euro and realize this requires fiscal discipline. Yet, the disciplining mechanism (stability pact: a well chosen name) is not being used, nor followed. The euro thus becomes a coin with some loose ends.

Meanwhile, financial markets have seriously realised that all sorts of loans may have counterparty risks (having learnt this the hard way by being too careless with the bus loads of cheap money since 2000). Whether it is a bank or a government that you lend out money too, there is always a counterparty risk. And particularly rating agencies are very eager to demonstrate that they did learn their lessons from the crisis. They won't be caught redhanded by giving out AAA-ratings. No, they now more seriously look at risks than before. And apply that lesson to Greece. Only to be heavily blamed by the politicians for doing so and upsetting the markets.

The conclusion seems clear to me. The current size and maturity of the financial markets does not leave a lot of room for immature politicians who think it is possible to build a European Union without respecting their own basic agreements on budgets. What happens in the financial markets is not so much caused by speculation. It is better to state that it is the direct but delayed result of political inabilities and inaction. The grudge that politicians hold towards speculaters thus returns as a boomerang to hit themselves.

The beginning, why did I start this blog?

This is a blog about amazement and wonder. I am often surprised about what happens in the Netherlands, how the public react and about the views of Dutch politicians. Aren't we just running around as headless chickens too often? Talking through our hats? Don't we, Dutch people, often find things too selfexplaining whilst they are actually not? I can really be surprised sometimes and this blog is just a place to vent my observations and to create a public archive of my personal surprise.

Perhaps it surprises you that, some 10 years after blogging evolved, I am now taking up this blog..? Well, that seems a pretty good start for me. You are surprised, I am surprised, We are surprised.