Roubini And Ferguson: Berlin Ignoring Lessons of 1930s

Monday, 11 Jun 2012 06:34 AM

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Economists Nouriel Roubini and Niall Ferguson fear that the German government’s policy of doing “too little too late” risks a repeat of precisely the crisis of the mid-20th century that European integration was designed to avoid.

"We find it extraordinary that it should be Germany, of all countries, that is failing to learn from history," Roubini and Ferguson write in the Financial Times. "Fixated on the non-threat of inflation, today’s Germans appear to attach more importance to 1923 (the year of hyperinflation) than to 1933 (the year democracy died)."

"They would do well to remember how a European banking crisis two years before 1933 contributed directly to the breakdown of democracy not just in their own country but right across the European continent."

Editor's Note: Sept. 18 Cover-Up Is a Final Turning for America

Roubini and Ferguson have warned for more than three years that continental Europe needs to clean up its banks’ woeful balance sheets, and say that next to nothing has been done.

“In the meantime, a silent run on the banks of the eurozone periphery has been under way for two years now: cross-border, interbank and wholesale funding has rolled off and been substituted with European Central Bank financing; and “smart money” – large uninsured deposits of wealthy individuals – has quietly departed Greek and other ‘Club Med’ banks,” they say.

Now, the public is finally losing faith and the silent run may spread to smaller insured deposits as well.

“The way out of this crisis seems clear,” Ferguson and Roubini say. “First, there needs to be a program of direct recapitalization — via preferred non-voting shares — of eurozone banks, in the periphery and the core, by the European Financial Stability Facility and its successor, the European Stability Mechanism.”

“Second, to avoid a run on eurozone banks — a certainty in the case of a Greek exit and likely in any case — an EU-wide system of deposit insurance needs to be created.”

To reduce moral hazard (and the equity and credit risk taken by eurozone taxpayers), several additional measures should also be implemented, the economists say.

The deposit insurance scheme has to be funded by appropriate bank levies: this could be a financial transaction tax or, better, a charge on all bank liabilities; there needs to be a bank resolution scheme in which unsecured creditors of banks — both junior and senior — would take a hit before taxpayer money is used; and measures to limit the size of banks to avoid the too-big-to-fail problem need to be taken.

“We also favor an EU-wide system of supervision and regulation,” say Roubini and Ferguson.

The Economic Times reports that European officials have taken a step toward surrendering a cherished national prerogative by proposing to shift banking regulation to a central authority.

Editor's Note: Sept. 18 Cover-Up Is a Final Turning for America


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