Seventy percent of the crisis

ay, October 05, 2008

Seventy percent of the crisis

Chief economist Brian S. Wesbury and his colleague Robert Stein at First Trust Portfolios of Chicago estimate the impact of the "mark-to-market" accounting rule on the current crisis as follows:

It is true that the root of this crisis is bad mortgage loans, but probably 70 percent of the real crisis that we face today is caused by mark-to-market accounting in an illiquid market. What's most fascinating is that the Treasury is selling its plan as a way to put a bottom in mortgage pool prices, tipping its hat to the problem of mark-to-market accounting without acknowledging it. It is a real shame that there is so little discussion of this reality.

That was posted today on the US Conservative Central blog … a political blog. The message is reinforced in a second post.

Wesbury and Stein complain about the lack of discussion on this issue, but they wrote originally on 25 September. Since then, on the US blogs, discussion on the issue has exploded. In Britain, however, there is still virtually no discussion.

We know it was on the agenda at yesterday's meeting in Paris but, bizarrely, the only reference we can find to any subsequent decision is in The New York Times. From that source, we learn that: "Leaders said they would try to rewrite European accounting rules by the end of the month to limit the losses banks have to write off, an effort to match changes in 'mark-to-market' accounting rules in the United States while keeping Europe's financial sector competitive."

When you seem to be totally out on your own, as seems to be the case with this blog on this subject, it is reassuring to see the Conservative Central blog take it so seriously. It confirms that we are not wrong in focusing so heavily on the issue.

But why, for news of our own government's decision do we have to read it on the NYT? Why is there not a single British newspaper, apart from The Sunday Telegraph carrying Booker's column, capable of discussing this. And how is it that the EU rewrite the rules by the end of the month, or have we missed something?

Meanwhile, bad news flows in so fast that it is a job keeping up with it. European banks are going down like ninepins, Germany appears to be joining Ireland and Greece (maybe) in guaranteeing all private savings accounts, putting, says AP Europe's biggest economy at odds with calls for a unified European response to the global financial meltdown. See this and this.

Do I sense this crisis is gathering pace, or what?

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Blood on the floor

We've said it before but it won't hurt to say it again. Very often, the story missed by the jornos is far more interesting than the one they are telling us. And leaping into that category is the latest development on the Irish bank guarantee saga, which hints at massive infighting within the EU commission, with blood flowing under the doors and into thecouloirs. 

As we left the story, the journos and sundry others were twittering away about the guarantee, entirely oblivious to the fact that the Irish government had clearly and unequivocally breached EU law, specifically Directive 97/9/EC.

What they are also missing is that Charlie McCreevy, the EU's financial services (and single market) commissioner is responsible for enforcing this directive, it being a single market measure.

However, given his former role as Irish finance minister and, currently, Ireland's EU commissioner, he was fully aware of the parlous state of the Irish banking system and the last thing he was going to do was pull the plug on his own country, especially as that would have meant the collapse of the Irish banking system – or a major part of it.

That left the commission in the untenable position of a member state having driven a cart and horse through EU law, potentially – and in fact – threatening the whole moral authority of the EU.

But, while McCreevy is prepared to stand idly by, and see the EU fall apart rather than his beloved Ireland, Dutch commissioner Neelie Kroes (pictured), with a cv to die for, is made of much sterner stuff.

The Rottweiler of Brussels, this is the lady who took on Microsoft and won and, although her directorate has no direct jurisdiction over single market issues, according to Reuters, she has nevertheless intervened.

In a statement today, she has declared that there was a "discriminatory element" to unlimited guarantees on bank deposits and that she "expected" Ireland to modify its guarantee plans.

The word "expected" from that lady is merely a long-winded way of saying "you will" and, to reinforce the message, she told Dutch TV, "We are now in close contact. My people were in Dublin Friday and Saturday and returned with reports that changes will be made." This lady just don't take prisoners.

How McCreevy will react remains to be seen but we will probably never know. Unlike Westminster, the "colleagues" tend to do their in-fighting behind closed doors, away from the prying hacks – who are anyway too dim to realise what is going on even when, as in this case, the blood is seeping under the doors.

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