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The European Irony

Jun 14, 2012
Negative Market fundamentals continue to pour in all over the world. Pick your crisis: Greece, Spain, Italy, Portugal, the slowdown in Asia, the United States – whatever the case – they’re all getting worse. 

The problems overseas, as we know, are both monetary and fiscal. Key elections are to take place in Greece this weekend, and like France’s recent campaign, there is little difference among the candidates and prior governance. All candidates are pro ECB (European Central Bank) yet some are "anti-bailout." I don’t know how such a position can be legitimate.  

To call a spade a shovel: too many countries in Europe lack the discipline to live within the boundaries of their own means. So in order to sustain their lifestyle, countries like Greece must rely on a redistribution of wealth from better managed countries like Germany. In Europe the wealth transfer largely runs through the ECB. To be pro-ECB and anti-bailout seems somewhat of a political oxymoron. 

And it doesn’t come without a cost.

Increasingly, European countries are agreeing to give up long-term sovereign rights in exchange for another short-term monetary bailout. To drive this point home: understand that Greek central governance is agreeing to a long-term subservient role in determining the social security of its citizens for a short-term monetary benefit. These are conditions that incubate revolutions. And why not?  

Europe is too big and diverse to be managed effectively by one body – just like American banks. In both markets, bailouts act like deodorant, covering up only the foul smell – not the foul itself. They fix nothing. They solve nothing. They’re too easy: print more money, spend it, and then worry about it later. Any benefit is temporary at best, political in the least. Solutions, on the other hand, are never easy. They require hard choices, sacrifices, and extreme effort. 

The solution to fixing the American banking system is to start with a broad based de-institutionalization (a break up of the financial industry) – and that includes making some hard decisions about Fannie and Freddie, who continue to artificially depress housing values. They do so to limit consumer debt and lending – to limit catastrophe – and to limit the need for bailouts.  

But this isn’t the way to solve the "too big to fail" problem. It stifles growth and inserts politics into home ownership. There’s no reason for that. But because Fannie and Freddie are government owned and guarantee the vast majority of all mortgages, they corrupt the mortgage market by politicizing it. That’s why hundreds of thousands of middle-class Americans can’t refinance their home mortgages while cash-buying foreign ownership is spiking (see: Foreigners Snap Up Properties in the U.S., Wall Street Journal on-line.) 
The government needs to get out of the housing market. It can’t begin to recover until then. Fannie and Freddie must be disbanded and/or entirely privatized. Again, the industry needs to get smaller, and freer.  

And like the U.S. banking system, Europe’s solution is independence (a break up of the monetary union) – a move to smaller, more competitive and responsible fiscal entities. Sadly, many countries in Europe prefer dependence, bailouts, and controlled markets, over freedom and independence – just like the American banking system.

That’s the European irony.  

None of it is good for stocks, money, or land values.

Stay tuned…

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