A central lesson of financial crises is that success requires the commitment of financial force greater than the foreseeable magnitude of financial pressures....
[The European Union has] come to recognise that if you underdo it, it can be more expensive.Following up on this theme, in his Telegraph column, Ambrose Evans-Pritchard observes
Top officials from the US Treasury and the International Monetary Fund are privately worried that Europe’s `Grand Plan’ to overcome the debt crisis is fundamentally deficient and may fail to restore market confidence.
The lesson from the Great Recession is that governments cannot buy market confidence. They can spend vast sums of money and purchase a Great Reprieve, but they cannot buy long-term market confidence.
This finding is not surprising given that the lesson from the Great Depression is that success in restoring market confidence comes from disclosure which ensures that market participants have assess to all the useful, relevant information in an appropriate, timely manner.
Let me make a few factual observations in support of the need for disclosure ins restoring market confidence.
- Without detailed disclosure of each bank's current asset, liability and off-balance sheet exposures, how does anyone know if the European Union does not already have the needed capital with the European Financial Stability Fund or, alternatively, that 4 trillion euros (2 trillion that BlackRock's Larry Fink said the banks need and 2 trillion for sovereign debt under Mr. Geithner's initial recommendation) is enough?
- Now that Mr. Geithner and the IMF officials have offered their opinion that 2 trillion euros is required, what happens if the EU's proposal is for less? I realize that Mr. Geithner and the IMF officials are entitled to their opinion, but in theory the EU has much better information as the national financial regulators report to them and not to Mr. Geithner and the IMF officials.
- Who would buy Greece's debt if the EFSF is only guaranteeing the loss on the first 30% and Greece's debt is trading suggesting write-offs of 50% or more?
- Without detailed disclosure of each bank's current asset, liability and off-balance sheet exposures, market participants cannot verify for themselves if the Grand Plan restores solvency to the banking system let alone cures the sovereign debt problem. If market participants cannot verify solvency for themselves, why should market confidence be restored by a Grand Plan based on recapitalization figures generated by regulators who managed to run stress tests that passed banks which had to be nationalized within 90 days of the announcement of the results?
- Without detailed disclosure of each bank's current asset, liability and off-balance sheet exposures, how do market participants know which banks are solvent and which are insolvent? If they do not know who is solvent or who is insolvent, why would they want to keep their money in these banks?