No Nouriel, I am no longer optimistic – it feels like 1932

Niall Ferguson and Nouriel Roubini have a comment in the Financial Times. I have great respect for both gentlemen – even though I often disagree with both of them – and their latest comment raises some very key issues concerning the future of the euro zone and Europe in general. And it is very timely given that this weekend the Spanish government has asked the EU for a massive new bail out.

I will not address all of the topic’s in Ferguson’s and Roubini’s article, but let me just bring this telling quote:

We 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. 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.

Hear! Hear! I have often been alarmed how European policy makers are bringing up the risk of higher inflation (1923) rather than the risk of deflation (1392-33) and I have earlier said that 2011 was shaping out to be like 1931. Unfortunately it more and more seems like 2012 is turning out to be like 1932 for Europe.

In the 1930s the crisis let to an attempt of a violent “unification” of Europe. This time around European policy makers are calling for more political integration to solve a monetary crisis despite the fact that European institutions like the ECB and the European Commission so far has failed utterly in solving the crisis. We all know that what is needed is not closer political integration in the EU, but monetary easing from the ECB. The ECB could end this crisis tomorrow, but the problem is that we apparently will only get monetary easing once further political integration is forced through. This is unfortunately what you get when political outcomes become part of the monetary policy reaction.

Last time I spoke face-to-face with Nouriel Roubini was in 2010 (I think just after Bernanke had announced QE2). Nouriel asked me “Lars, are you still so optimistic?” . I actually don’t remember my reply, but today my answer would certainly have been “NO! It all feels very much like 1932”

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UPDATE – some earlier posts in 1931-33:

1931:
The Tragic year: 1931
Germany 1931, Argentina 2001 – Greece 2011?
Brüning (1931) and Papandreou (2011)
Lorenzo on Tooze – and a bit on 1931
“Meantime people wrangle about fiscal remedies”
“Incredible Europeans” have learned nothing from history
The Hoover (Merkel/Sarkozy) Moratorium
80 years on – here we go again…
“Our Monetary ills Laid to Puritanism”
Monetary policy and banking crisis – lessons from the Great Depression

1932:
“The gold standard remains the best available monetary mechanism”
Hjalmar Schacht’s echo – it all feels a lot more like 1932 than 1923
Greek and French political news slipped into the financial section
Political news kept slipping into the financial section – European style
November 1932: Hitler, FDR and European central bankers
Please listen to Nicholas Craft!
Needed: Rooseveltian Resolve
Gold, France and book recommendations
“…political news kept slipping into the financial section”
Gideon Gono, a time machine and the liquidity trap
France caused the Great Depression – who caused the Great Recession?

1933:
Who did most for the US stock market? FDR or Bernanke?
“The Bacon Standard” (the PIG PEG) would have saved Denmark from the Great Depression
Remember the mistakes of 1937? A lesson for today’s policy makers
I am blaming Murray Rothbard for my writer’s block
Irving Fisher and the New Normal

The Tragic year: 1931

Benjamin Anderson termed 1931 the “the tragic year” – these are some of the events in that tragic year: 

  1. One of Europe’s largest banks with large exposure to Central and Eastern Europe gets into serious trouble (It is of course Austria’s largest bank Österiechishe Kredit Anstalt – and it of course collapsed)
  2. Europe’s Sovereign debt crisis is threatening financial stability and currency collapse (It’s the Germans that are to blame – they can’t pay their war debts)
  3. Major international banks push for a big country to save the sinners (The US banks ask US president Hoover to help ease the pain on Germany)
  4. Debt restructuring (The Hoover moratorium gives Germany a bit of relief – the US banks are happy to begin with)
  5. Monetary policy keeps deflationary pressures on (The French central bank keeps hoarding gold)
  6. An insane commitment to a failed monetary system (the gold standard mentality keeps the commitment to the gold standard despite the fact that it is killing Europe)
  7. Some countries have had enough and give up the monetary standard (The UK leaves the gold standard – the Scandinavian countries follows suit – and recover fast from the Great Depression)
  8. Technocracy is popular and it suggested that indebted nations should be run by technocrats (The so-called Technocracy Movement became increasingly popular in German)

And here we are 80 years on…do you see any similarities? I wonder what 2012 will bring – in 1932 10 countries (or so…) defaulted…

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