How to Make the Euro Project Work

The euro seems to be on its last legs, and the vision which inspired its genesis seems to have vanished from the politicians sponsoring it. The recent spat with England and Prime Minister Cameron has only served to highlight the vacuum in vision. Previously, whenever England was scapegoated, English politicians skulked like whipped curs, and Euro-politicians adopted that practiced condescending, look-askance stance toward the wayward one. This time around, the feeling among English politicians and electorate was more relief than abashedness, and the pose of superiority by the likes of Premier Sarkozy could hardly be attempted, let alone maintained. The media did its best to foster the impression, and the attempt failed.

So what now? What of the grand vision of a single currency binding fiscally responsible, growth-oriented economies into a viable, synergistic whole? What we now have is a ramshackle construction inviting the incurrence of debt and inhibiting its repayment, a growth-crippling currency combined with a debt overhang that makes the US dollar seem a safe haven.

But was this ever the end which was envisioned? Was the euro ever simply to have facilitated fiscal responsibility and economic growth? Was there perhaps another goal envisioned by its founders, a goal which perhaps now has been lost sight of by those who were to carry the torch?

In point of fact, the euro is simply one building block in an entire agenda. What is needed to save the euro is to understand that agenda. The euro needs to be set off against other, equally desired, institutions in order to take firm root.

There is a simple calculus that all politicians from Northern to Southern Europe have to make: the euro comes with a price, and that price is for the nothern nations to assume the fiscal burden of the southern nations. That burden consists of, on the one hand, debt, and, on the other, the continued flow of transfer payments. These transfer payments are the key to the entire project. Welfare payments, subsidies, pensions, they all need to be included in a blanket agreement without which a common currency cannot survive.

Of course, the southern countries would be only too happy to establish such an arrangement, and so the northern countries need to make specific that this takeover involves not only liabilities but assets -- specifically, control of the political machinery by which the decisions are made over such transfer payments. The southern countries have to relinquish political control of their citizenries.

In turn, this cannot be done only for the southern countries. Such an arrangement will require the transfer of political responsibility over welfare-state decision-making to the level of the European Union, for the northern as well as the southern countries. Germany, the Netherlands, France, Belgium, will likewise have to yield democratic control to Brussels and Strasbourg.

Can such a system be called democratic? Strictly speaking, yes, because it will still be a one-man, one-vote system. But as it stands here described, the price would be too high for the northern countries to pay. They will not relinquish their national parliaments in favor of the European Parliament without, to use a common-law notion, "consideration."

That consideration must be a form of control. Behind the democratic facade, there must be a predominance of control lodged in the northern countries. How can this best be achieved?

Through control of the central bank, and short-term interest rates. A tight monetary policy favors the more economically powerful areas -- the "core" -- of a currency region, and keeps the weaker areas -- the "periphery" -- more or less in thrall.

Would that be enough? Possibly. A monetary policy geared to the needs of the northern countries would ensure enough prosperity in those countries to shoulder a good deal of the welfare-state burden of the southern countries, without precipitating an inflationary spiral, which is what would take place if monetary policy were geared toward the southern countries. And the southern countries would console themselves with the awareness that their sky-high unemployment rates and exuberant levels of welfare payoffs were covered. The facade of a European Parliament would give the impression of democracy, and, for the rest, all residual conflicts could be worked out on the pitch -- of what use is the UEFA Champions' League if not this?

Much Ado About Easing

"Quantitative Easing" is the latest thing to get in a tizzy about these days. Everyone seems to have an opinion on quantative easing, either in favor (deflation-countering inflation is a good thing) or opposed (depreciation is a bad thing).

An investment analyst whose work I recommend, Nicholas Vardy, the "Global Guru," recently jumped on the QE bandwagon. The sentiment among global growth prognosticators has recently turned bullish. The question for Vardy is, "So what really has changed since the end of the summer?" And his answer, "of course, is quantitative easing." What is the effect of quantitative easing? "An extra $600 billion sloshing around global financial markets has two effects. First, it devalues the dollar, sending dollar-denominated commodity prices higher. Second, with interest rates forced down, investors are sent on a desperate chase for yield, driving up the prices of all assets in emerging markets."

The problem with this argument is, so-called quantitative easing does not cause $600 billion to begin sloshing around financial markets. It doesn't slosh around anywhere but the Fed's primary dealers' balance sheets. Now these primary dealers are commercial banks, and the money they have credited to them by the Fed, in exchange for the Treasuries they sell, is money which is added to their balance sheets. Hence, there is $600 billion more sloshing about there, not on the financial markets. For that money to enter financial markets, these banks have to lend. That is the way our two-tier banking system works. Now, the question is, are there market players out there willing to borrow, and put up the necessary collateral, in order to come by that additional $600 billion, in order to drive up securities prices on financial markets? That is the missing link that must be shown to exist in order for fears of depreciation to be grounded.

Vardy's second point, regarding lower interest rates and the "desperate chase for yield," is more to the point. Indeed, this is the primary effect of "quantitative easing," which is to flatten the yield curve from the long end. By doing this, the Fed may well be trying to force banks to lend more because the alternative, profits gained from borrowing at zero interest to buy interest-yielding treasuries, will narrow. I think that is the Fed's end game, not fomenting inflation/depreciation, which depends on a lot more than simple quantitative easing. But the Fed could achieve such a goal more quickly and surely by simply raising interest rates at the short end, thus flattening the yield curve from that side, which would do much to encourage lending. After all, the October 2010 Senior Loan Officer Opinion Survey doesn't show any increased lending activity at all. When such lending activity does increase, that is when we need to start worrying about inflation, depreciation, and cutting back on the Fed balance sheet.

Why the Fed Should Boost Interest Rates

If the Fed wants to boost economic activity, it should think about raising the federal funds target rate. Why? Wouldn't that restrict lending? Paradoxically, it would likely increase lending.

This would force banks to engage in more lending in order to make a profit. Currently, banks can make money doing virtually nothing, as they borrow money from the Fed at zero percent interest and use that money to buy government bonds yielding 2-3%. This blog makes the same point. If banks can make a profit without risk -- because government bonds carry no risk -- then why lend at risk? But if the Fed raises its rates, then this margin will shrink and banks will be forced to engage in riskier activity, such as lending to business and consumers. Perhaps then, as the big banks move away from risk aversion, interbank rates would drop, facilitating borrowing across the board.

The argument is that raising rates will plunge the economy into a depression. With bonds trading at yields of less than 2%, bond markets, it is said, are signalling that inflation is dead. But is this not to reverse the actual situation? Are bonds not trading at this low a level because the baseline rate is zero? Raise the rate, and these short-term rates will also rise. This will simply have the effect of flattening the yield curve -- 30-year rates remain stubbornly above 3 1/2%. As long as the yield curve does not invert, is there a problem with that?

St. Louis Fed chairman Thomas Hoenig has been arguing for some time that the federal funds rate needs to be moved out of the zero percent range. His argument makes sense. The Fed can do more to boost economic activity than lower rates.

What is Common Law?

Common Law is a term I use as an umbrella concept, shorthand for a comprehensive world-view of limited sovereignty, restricted government, private law (property and contract), the self-reliant citizen, the market order not only of goods and services but of credit and debt and goodwill, of coordination of equals rather than command by superiors of inferiors. Another term for this is the rule of law. But because that latter term is fuzzy and not often filled in with concrete content, I resort to common law, which is the better term for that reality anyway.

But the term common law does generate some confusion. Usually when one hears it, one thinks of the historically determined Anglo-Saxon and cognate legal systems, with all of their peculiarities and practices, which only the practicing lawyer has occasion to master.

Indeed, this is a valid viewpoint. For one salient characteristic of true common law is that it develops practically through the process of adjudication, in the courtroom, through the dialectic of adversarial thesis and antithesis. Here, of course, lawyers rule the roost. But that does not mean that common law is not also something more than mere practitioners' fodder.

Hence, it cannot be that the practicing lawyer "owns" this system, and views any incursion by "laymen" to be illegitimate. But alas it is more often so than not. Yes, the guild mentality reigns here as everywhere else, despite the fact that in a democracy, the law ought to be a domain open to the citizen, accessible to his inquiry, amenable to his uses. Ah, for a return to the days of a truly liberal conception of citizenship, where the professional saw his task as aiding the gentleman citizen rather than lording it over the unclean and untutored! But that is a subject for another day.

We need the historically grown positive law, even for legal and political philosopy, even for economics, because without it we are all at sea. Which means that the practitioners of that law cannot withhold it as their own private domain. The law is of and for us all. And, to properly understand common law, one must understand the philosophy behind the very notion of a common law.

Very simply, common law is law which applies across the board in a given jurisdiction, applies to all equally. It is the uniform law of a sovereign polity. And, beyond this, it is the general equity behind all positive law. So it is both basic principles, and practical application thereof in a universal way. Opposed to this regime is the regime of privilege, where the rulers exercise their wills to impose commands or orders or distributions, rather than allowing matters to be arranged by free and equal individuals in the give-and-take of bargaining owners. The regime of privilege ruled the roost in pre-modern Europe, and has since taken up its positions in modern government, with its war against the rule of law in favor of favoritism, privilege, and interest-group-based politics.

To combat privilege we need to recover the concept of the common law. I hope to set up a web site soon dedicated specifically to exploring the common law paradigm. This will integrate the various books I've written, and will write, on the subject, as well as other work in the fields of law, politics, and economics, so as to see them in the light of this same paradigm.

Stay tuned.

The New Normal

Rush Limbaugh discussed the concept of the "New Normal" on his radio show yesterday. He was pretty much on target: the "New Normal" is considered by many to be some inevitability, for which the Obama government is not responsible. I discuss the concept at length in my upcoming book Common-Law Investing. What I try to make clear is that the "New Normal" is not anything inevitable but simply the result of overspending government, entitlement-mentality citizenry, and the dysfunctional dependency fostered between these two. And I make clear that there is an alternative, in terms of investment, to this "New Normal," and that is emerging-markets countries where this kind of dysfunctional politics has been abandoned in favor of market discipline. The "New Normal" is not inevitable but it certainly is a good possibility given the state of mind of First World citizenries these days. That's bad news, but the good news is that emerging markets offer an alternative to those who do not buy into it.

New Book: Common Law & Natural Rights

I haven't been posting much lately, and there's a reason. I've been busy writing a new book. And it's ready for the reading public. The title is Common Law & Natural Rights: The Question of Conservative Foundations, and it is an examination of natural rights as the foundation for conservatism, as opposed to the common law. It is the contention of the book that natural rights has served neither conservatism nor contemporary polities well. The reliance on natural rights and its daughter, the separation of powers, has led to overweening government, based on absolute democracy. The common law as a self-contained, independent bulwark of liberty is proposed as the alternative. For more information, follow this link.

Regarding the Stahl book on constitutional law, it is nearly finished. I hope to have it ready for publication within a month or two. Stay tuned.

Responses to the Geithner Plan...

are lukewarm at best. Today's Wall Street Journal op-ed ("The Geithner Asset Play") raises the appropriate objections. The goal of the plan, which is to rid banks' balance sheets of unmarketable assets, really is something that has to be done if credit relations are to be restored. But it seems that Geithner wishes to accomplish this, once again, on the backs of the taxpayer. Why not try something such as was suggested by Larry Kudlow (see my blog here), whereby mark-to-market accounting rules are eased -- something which will cost the taxpayer nothing. John Berlau notes that Geithner's plan mentions nothing about mark-to-market.

Furthermore, Paul Krugman's running commentary on the plan ("The Conscience of a Liberal") is well worth perusing, even if sprinkled -- liberally -- with really funky liberalism.