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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Draghi leaves door open on PSI?

Posted by WARREN MOSLER on December 19th, 2011

Reads to me like PSI discussion might come back after a firewall and bank recap is in place?

FT: And the fifth answer is that the idea of introducing private sector involvement (PSI) in eurozone bail-outs was, in retrospect, a mistake?

Mario Draghi: The ideal sequencing would have been to first have a firewall in place, then do the recapitalization of the banks, and only afterwards decide whether you need to have PSI. This would have allowed managing stressed sovereign conditions in an orderly way. This was not done. Neither the EFSF was in place, nor were banks recapitalized, before people started suggesting PSI. It was like letting a bank fail without having a proper mechanism for managing this failure, as it had happened with Lehman.

7 Responses to “Draghi leaves door open on PSI?”

  1. Art Says:

    So he’s green lighting bank failures, as long as the “proper mechanisms” are in place, believing that EFSF/ESM and higher capital requirements are the necessary mechanisms to prevent contagion and a freezing up of the global payments system? Seriously? My head-scratching hand’s starting to cramp up…

    Reply

  2. Tom Hickey Says:

    Underlying the “plan” still seems to be that expansionary fiscal austerity is working and will eventually return the EZ to financial and economic health. Does anyone seriously think that this is going to work politically, even if it were feasible economically, which it is not.

    Meanwhile, the yield curve is collapsing in the US, and fx hedges indicate global risk off as the dollar rises against most currencies. Gary Shilling predicts deeper recession in the EZ and he opines that the euro could hit parity with the dollar in 2012, and that we could see a large EZ bank failure, too.

    Quote of the day on Twitter: “If failure of the euro is unthinkable, why is everyone talking about it?”

    Reply

    Adam (ak) Reply:

    @Tom Hickey,

    I think that the Germans still want to see Euro seriously weakened in order to stimulate their export and a massive “beggar-thy-neighbour” policy unleashed.

    What will the Americans do? I think that they will start doing the same. The Chinese have a peg against a basket and their foreign financial assets holdings are balanced so they really don’t care…

    Reply

    Hannah Reply:

    @Tom Hickey, Rumsfeld’s cohort has been looking for more than a decade for the euro and Old Europe to fail so the New World Order could triumph. After all, didn’t Saddam Hussein have to go because he was planning to sell Iraq’s oil for euros?

    Reply

    ESM Reply:

    @Hannah,

    “After all, didn’t Saddam Hussein have to go because he was planning to sell Iraq’s oil for euros?”

    Redenominating the price of oil in Euros would have no effect. Warren can tell you that Rummy understood MMT and therefore knew this as well as anyone.

    Reply

  3. Walter Says:

    PSI has never left, but always stayed. The way they did it with Greece they promised not to repeat. Germany however made very clear that PSI will stay and that they will hook on to IMF practices, so called Collective Action Clauses (CACs).
    The problem of course is that there is no currency issuer that is defaulting on normal debt in its own currency because cb and tsy can always agree. In the ez that will work different. As it looks now there is no way that Germany is going to pay for defaults of other members or let the ECB put up the money.
    Looks to me ez politicians strongly underestimate that this heavily reduces investors’ appetite for ez member states’ debt.

    Reply

  4. Bob Says:

    Reptilian dragon Draghi is draggin’ Europe to the pit of serfdom to the banksters.

    Reply

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