ECB Poised to Approve Italian Bailout of Monte dei Paschi Bank: An Instance of Federal-State Collusion?

Under the E.U.’s banking law enacted after the 2008 financial crisis, the state governments “are not supposed to inject fresh taxpayer money into a bank if it is deemed insolvent. When a bank gets into financial trouble, shareholders and bondholders, assumed to be sophisticated investors aware of the risks, are supposed to take the hit and bear the losses.” Much of the banking reforms were intended, moreover, “to prevent banks from becoming so big and so risky that they could hold the global economy hostage. Politicians and policy makers didn’t want taxpayers to be on the hook for the banks’ mistakes.” What about a mid-sized bank whose financial plight puts a state’s economy and reigning political elite in jeopardy? Should the E.U.’s central bankers look the other way and allow the state’s government to finance a bail-out so stockholders and bondholders need not feel the brunt?

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Breaking Up the Biggest Banks: The Impact on Moral Hazard

Citing the “slap on the wrist” culture at the U.S. Federal Reserve and the Securities and Exchange Commission (SEC), U.S. Senator Elizabeth Warren called on Congress in April 2015 to break up the big banks such as Bank of America, Citigroup, JPMorgan Chase, and Goldman Sachs.[1] She coupled the ‘break-up” approach to reducing the systemic risk with limiting the Fed’s ability to bailout individual banks. The synergy in Warren’s approach is worthy of further analysis.

The full essay is at "Breaking Up the Biggest Banks."

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[i] Reuters, “Elizabeth Warren Calls on Congress to Break Up the Big Banks, Change Tax Rules,” The Huffington Post, April 15, 2015.

Moral Hazard in Mortgages

“The cherished American ideal of self-reliance has a flip side”[1]  Before getting to the implications, or flip side, I want to fill out what informs this ideal. One could add to it the ideological stance that came into its own in 1980 with the election of Ronald Reagan, who declared that government is the problem. This implies that government should be minimized, and otherwise corrected as much as possible. Government is hardly to be viewed as the solution. This is the legacy of the Kennedy assassinations of the 1960s, the Vietnam War, and Watergate as well as Ford’s pathetic “WIN” buttons and Carter’s micromanagement and failure in regard to the hostages in Iran. I was not old enough for the Kennedys’ truncated optimism (and that of Martin Luther King) to resonate; I knew the political (and economic) pessimism of the 1970s and the energizing “fix it” mentality of the early 1980s. Of course, Reagan’s “new federalism” failed, as did his aim to balance the federal budget, and the jury is still out on whether “peace through strength” pushed the USSR off the cliff.

The full essay is at "Moral Hazard in Mortgages."

1. Shaila Dewan, “Moral Hazard: A Tempest-Tossed Idea,” The New York Times, February 26, 2012. 

Eurobonds: The Solution to the E.U.’s Debt Crisis?

One possible solution to the E.U.’s debt crisis may be debt issued by an E.U. government agency and vouched for by all 17 state governments that use the euro currency. According to The Wall Street Journal, “Such euro bonds would dispel concerns Italy or Spain might not be able to get the financing they need, as it would be provided centrally.”[1] Of course there is the downside of moral hazard: states facing crushing debt-loads could rely on the wealthier states to guarantee additional debt. Because the “fiscally imprudent” state governments “could borrow freely at low cost, there would be little incentive to stop.”[2] The wealthier states in turn would be in the position of guaranteeing debt that they do not control.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

1. Charles Forelle, “A Shaken Europe Looks for Bolder Fixes,” The Wall Street Journal, August 19, 2011. 

2. Ibid.