UK News

from Felix Salmon:

Europe’s insoluble problems

Mohamed El-Erian is calling for massive recapitalization of the banking system:

The global financial system is being refined "day in and day out," El-Erian said, and as a result the balance between public and private is shifting and regulation is altering. "This is not being done according to some master plan," but in reaction to a series of crisis management interventions.

None of these piecemeal policy moves restored confidence in the markets, he said. What is needed is a coordinated and simultaneous set of policy actions globally in four areas: restoration of credit markets, elimination of deteriorating assets from balance sheets, injecting capital quickly into the banking system, and regulatory forbearance.

Oh, wait, that was El-Erian back in October 2008. But he's saying something very similar now:

In addition to specifying higher prudential capital ratios, governments must now bully banks to act immediately. Where private funding is not forthcoming, which should now be the presumption for a growing number of banks, recapitalization must be imposed, in return for fundamental changes in the way financial institutions operate and burdens are shared.

The main difference, here, is the move from "regulatory forbearance" the first time around, to governments forcing "fundamental changes in the way financial institutions operate" today. But either way, this is basically, the bank-nationalization debate all over again.

In the U.S., we didn't nationalize in 2009. We ended up taking only modest stakes in banks, and getting through the crisis through the massive application of liquidity by the Fed. If the central bank, as lender of last resort, ensures that banks will always be funded, then you don't need nationalization. It's a bailout by monetary rather than fiscal means, and it's a lot friendlier to bank shareholders than nationalization is.

But the problem in Europe is that the ECB is displaying neither the willingness nor the ability to act as a lender of last resort -- and in that situation, the only policy action left is for governments to step in and try to backstop the banking system directly. This is a very dangerous road to travel down: it's basically what Ireland did when it guaranteed the liabilities of the entire Irish banking system, thereby consigning itself to a national fiscal nightmare for the foreseeable future.

from Felix Salmon:

Europe’s doomed fate

This is beginning to feel like 2008, complete with all the rumor and chaos and volatility we saw back then. MF Global is a bit like those Bear Stearns hedge funds which went bust -- an isolated datapoint in one respect, but ominous in many others. And right now the best case scenario is that Greece ends up being Bear Stearns, rescued by an international community petrified of what might happen in the event of a chaotic collapse.

But Greece being Greece, of course, a chaotic collapse has to be pretty much an inevitability at some point.

Of the many ways in which the euro project was fundamentally misguided, this might be the proximate cause of its demise: it was never robust to the messy world of political reality. And in the real world, people -- including heads of state -- make stupid decisions all the time.

So it's a bit silly, frankly, second-guessing George Papandreou's fateful decision to call a referendum on the latest Greece bailout. It might not have been the most statesmanlike thing to do, but the fact is that, judged by the standard of most Greek prime ministers, Papandreou's pretty much the best that Europe could reasonably hope for. (Just think: Greece could be run right now by someone more like Silvio Berlusconi. Or, for that matter, Jon Corzine.)

In Greek tragedy, humans don't rise above events to triumph; rather, they are crushed by forces greater than themselves. (It's one reason why The Wire was such an innovative piece of television: it reached back past that great humanist, Shakespeare, to his Greek antecedents.) The architects of the eurozone displayed classic hubris: they saw the increasing economic ties between the various countries and locked themselves in to a momentum trade where such ties could only ever strengthen and never weaken.

And in the event it took much less time than even the skeptics had anticipated before that hubris resulted in the inexorable nemesis.

There is a decent chance that the G20 summit will somehow muddle through in Cannes. There's even a possibility that Greece will manage to extract itself from its current political mess, implement the reforms that Merkel and Sarkozy are insisting on, and live to collapse some other day.

Mandelson slip-up confirms eurosceptics’ fears

Business minister Peter Mandelson built his reputation as a sure-footed communicator for the Labour Party, but the former EU trade commissioner suffered a rare slip-up on Friday when he confirmed many eurosceptics’ fears that the European Commission relished its lack of democratic accountability.

“The best principle of the European Commission ever invented was that it should not be elected — that it was remote, unaccountable, a major bureaucracy that could do good for Europe and can take the risks of saying things and doing things that are not as easy to do in the member states,” said Mandelson.

The remarks to French students in Paris were at least partly in jest, and prompted laughter.

Talking more about the benefits of working for the Commission, Mandelson went on: “We’re not elected, we don’t have to think: ‘Oh my God, what are we going to say and do because the public are going to turn us out of office?’”

Not, of course, that Mandelson was suggesting this is the position Labour finds itself in now, with an election due by June and the Conservatives ahead in the polls.

But he did remind his audience that he expected Britain to join the euro some day — something the Conservatives have firmly ruled out for as long as they are in office.

Is powerful Mandy talking up the euro?

When Prime Minister Gordon Brown reshuffled his cabinet last week, fending off a challenge to his authority, a significant outcome was the creation of one of the most powerful ministerial jobs Britain has seen in years.

Peter Mandelson, a former European commissioner who has twice served in British governments in the past and twice been forced to resign, was reconfirmed as secretary of state for business, but also given greatly expanded authorities that make him a powerful if unofficial number two to Brown.

Much fun has been made of Mandelson’s new title, which because he has been elevated to the House of Lords in order to serve in the cabinet now officially reads as: