Time to think urgently and creatively on the Greek issue

Comments on Wesley Widmaier "Eurozone’s shared identity the final tragedy of the Greek crisis", 1/07/2015

There is a need to balance the macro and micro economic policies for the troubled countries and the potential moral hazard issues. The argument for debt forgiveness, while may have some attractiveness, but if not handled with great care, may create a moral hazard issue on the debtor's side.

The Greek tragedy, if it is to become one, reflects a weakness of the single currency of the euro, at least the shortcomings in its design, that is, the lack of consideration of a mechanism for a country or a number of countries to exit from it when the circumstances have become so necessary that such exit actions would be better than for that country or countries to stay inside the euro zone.

That shortcoming in the design of the euro reflects the erroneous approach of those involved in the euro process, that is to say, the simple minded and linear approach to economic/currency integration.

That shortcoming may have also created a moral hazard problem for some countries. In good times, some countries within the euro zone may have spent too much beyond their means, caused by some imperfection in the integration process that have over valued their economies. On the other hand, those countries may experience economic problems so severe that it is difficult to deal with within the single currency framework, because they lack the means to adjust without the need to force severe cuts to their nominal income/wages, as compared to the case where the country had its own currency and can devalue as a means of adjustment to its reduced international competitiveness.

Given the current irreconcilable stance between the debtor, that is Greece, and its major creditors, the so called Troika, there is an urgent need for a rethink of the euro approach. The rethink needs to design an exit strategy for a member country. An orderly exit of a member should be good for both that member and the rest of the euro zone members. There is no point to blame each other on the failure of the negotiations to claim a higher moral ground, whether it is Greece or any other parties. What is needed is cool head, creative thinking and quick actions. Failing to do that may cause unnecessarily greater damages than it needs to be.

Moral hazard must be avoided in euro

Comments on Karen Maley "First shots in the battle for Spain?" 30/07/2012, http://www.businessspectator.com.au/bs.nsf/Article/European-crisis-ECB-Mario-Draghi-Spain-bailout-pd20120730-WNUMH?OpenDocument&src=sph&src=rot
It will not work as long as there are diverse interests and responsibilities that have been running so deep and wide between the Germans and the others.

It will be irresponsible to bail out some the troubled euro economies without them paying a real price for their troubles.

A middle way is to bail them out on the condition that they pay a higher than the ECB rate or possible potential euro bond rates to other more better shaped euro member economies.

But no one is saying that yet so far.

Until that is clear, then the euro is doomed to see some of its weak members to exit it.

Alternatively, a possible dual euro currency system may also work that would afford the flexibility of currency adjustment to their fallen international competitiveness.

Good intention but poor idea

Comments on Rahel Carter “Flood insurance must be accessible to all”, 13//01/2011, http://www.theaustralian.com.au/news/opinion/flood-insurance-must-be-accessible-to-all/story-e6frg6zo-1225986572360

This proposal might appear to be a good idea at a time of a floods crisis, it is highly likely that people will realise it would be wrong to do that when cool heads prevail after the heightened emotions during the current crisis.

Rachel Carter may ask why.

The simple reason is that doing what she proposed would make some people reduce their own responsibilities in considering the location of their homes and residences, that would in turn make the impacts of any natural disasters unnecessarily much more severe in terms of damages to properties and lives.
It is a typical issue of moral hazard.

It is not a good idea to take away insurance agencies the right to determine the costs of insurance according to the real circumstances and risks.

Government regulations may be necessary, but undue legality prescriptions can be very harmful.

There must be sufficient information available to the public for them to consider location matters in terms of potential natural disasters.

The recommendations from the inquiry into the Victoria black Saturday bushfires have implications for the issues here.

Too big to fail argument half correct and half wrong

Comments on Stephen Bartholomeusz “Lehman: A symptom, not a cause”, 14/09/2009, http://www.businessspectator.com.au/bs.nsf/Article/Lehman-A-symptom-not-a-cause-pd20090914-VV9ZV?OpenDocument&src=sph

If Lehman Brothers had been bailed out as opposed to let it collapse, there would have been no impact on any moral hazard issues.

You have to let some to fail to deter firms from being or becoming too reckless.

One question is that why should government have bailed out so many firms rather than letting them fail and nationalise them to let shareholders lose all their money/investments and to remove all those executives, so to avoid and prevent both systematic failures and moral hazard.

While the logic that some firms are too big to fail has some truth, one has to let those firms bear the consequences of their management.

Let those that would fail to do so and use temporary nationalisation to save the system. Rehabilitate any firms if necessary and then sell them so the taxpayers don't have to bear the costs.

This is a correct measure to deal with such difficult issues.