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2011-11-07

International institutions should avoid moral hazards

Comments on Wolfgang M√ľnchau “A G20 comedy of irrelevance”, 7/11/2011, http://www.businessspectator.com.au/bs.nsf/Article/G20-summit-eurozone-debt-crisis-Italy-bonds-ECB-EF-pd20111107-NCR2E?OpenDocument&src=mp

No matter what new world and regional institutions are set up, a key principle should be to avoid moral hazard problems.

People or countries with irresponsibility or mistakes must pay a price.

The IMF or ECB cannot be simply bail out countries without those countries required to pay a reasonable price for that bail out.

On the other hand, whoever contribute to bail out should be explicitly rewarded.

Without this kind of quasi market mechanism being introduced and effectively implemented, future failures cannot be minimised.

Italy woes raises the stakes of the euro crisis

Comments on Alan Kohler “Revenge of the golden days”, 7/11/2011, http://www.businessspectator.com.au/bs.nsf/Article/ECB-gold-G20-Cannes-IMF-debt-crisis-inflation-Berl-pd20111107-NCRPR?OpenDocument&src=sph&src=rot
As I have pointed out somewhere else, an orderly exit from the euro of some troubled members and allow them to have their own currencies and set fixed exchange rates to the euro, so they can have effective depreciations instead of deflation and so much painful adjustments.

Fixed exchange rates with the euro are to prevent what the Asia financial crisis from happening in the euro zone.

European leaders should realise that to keep the vanity of existing euro is costly, and more creative thinking is required to minimise the costs of adjustments.

The sooner they let this happen the better off they and the world will.

Any delay just simply exacerbate the problems.

2011-11-06

Eurozone sovereign debt crisis: creative thinking badly needed

Comments on Christopher Findlay "European debt crisis: European fragmentation?" 6/11/2011, http://www.eastasiaforum.org/2011/11/06/european-debt-crisis-european-fragmentation/
Most mainstream economists and politicians tend to think in a flexible exchange rate regime as the best and that can sometimes become a barrier to creative thinking.
In the current situation, for example, Greece could exit the euro and start using a new national currency withou destined to dwonward currency spiral if it pegs to the euro with a certain and appropriate own currency real depreciation.
I don’t see it would be inevitable for what occurred in the Asian financial crisis in 1997 to repeat if Greece, or any small number of existing eurozone countries exit the euro.
A dual and pegged currency in the current eurozone would present a sensible adjustment from the current effectively fixed exchange rate equivalent from 1 to 1 to a x to 1. Essentially it would create a much more flexible adjustment mechanism without necessarily introducing increased risks.
Even from the mainstream economics point of view, it is not a retreat from its current state of euro to a worse regime!
Why don’t economists think in this way?