Fed Uncertainty Principle as Applied to ECB: Trichet's Power Grab

My personal favorite post is the Fed Uncertainty Principle written April 03, 2008. I called for a huge power grab by the Fed well before it happened and well before the Lehman crisis and bank bailouts.

Interestingly, the Fed Uncertainty Principle, especially corollary number 2, clearly applies to the ECB as well.

Uncertainty Principle Corollary Number Two:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

What brought the Uncertainty Principle to mind is a Google translation on FAZ.NET.

"The progressive shift of power to Brussels"

Please consider "The progressive shift of power to Brussels"

In a "five-point memorandum of [Christian Democratic Union party] CSU General Secretary Alexander Dobrindt, responds to the recent proposals of the President of the European Central Bank (ECB), Jean-Claude Trichet.

"The power of the EU has become larger after each crisis, not less. We must, therefore, the automatism that leads to a progressive shift in power towards Brussels, to the test. "It would have to determine criteria, is the point at which the European integration process to end. Then no other powers should be shifted more to Brussels. "If the analysis shows that the ultimate purpose has already been exceeded, skills are transferred back."

Dobrindt criticized the ECB's role in the € crisis. "There needs to be examined in particular whether the purchase of government bonds, debt-EU countries with the legal foundations of the ECB is compatible."

The above translation is choppy. However, choppy translation or not, the point is crystal clear: Power increasingly concentrates in the hands of those who caused the crisis. In the US that it the Fed. In Europe, it applies to the ECB.

Here is the original link in German: "Fortschreitende Machtverschiebung in Richtung Brüssel"

Although it is perfectly obvious, I did not think of Trichet's role in terms of the Fed Uncertainty Principle until reading that translation.

ECB president Jean-Claude Trichet was one of the original architects of the Maastricht Treaty, and he has violated that treaty at will ever since.

For further discussion, please see Trichet Calls for Creation of European "Nanny-State" and Fiscal "Nanny-Zone".

German Finance Ministers Wants Haircuts

As long as we are in the German to English translation mode, inquiring minds should consider Schäuble wants to take private creditors in the duty

Federal Finance Minister Schäuble (CDU) said at the weekend, including the private creditor would have to contribute. In the euro zone, he finds it, but so far little backing.

The Finance Ministry on Sunday denied a report by the newspaper "Wall Street Journal, after which the 17 euro zone countries had already agreed that private creditors about 30 billion euro should contribute to a new rescue pact. It had still not been decided, said a ministry spokesman, the Frankfurter Allgemeine Zeitung in Berlin. The federal government set but it is extremely committed to let the private creditors not left out and formalize their financial participation.

The Federal Ministry of Finance has meanwhile prepared a paper on the involvement of private creditors in the Greece-rescue. In essence it provides that private investors to abandon some of their claims against Greece. It is not enough that they voluntarily leave their money for longer in the country, as proposed by the European Central Bank (ECB).

"Public participation should include a new three-year program from 2012 to 2014," says the paper, according to the Welt am Sonntag ". The program should be accompanied by a voluntary exchange of existing bonds into new bonds with a longer term of seven years. Those investors who are switching into could be addressed in future, preferably when further debt restructuring should be required. "Bonds that are not exchanged, would not enjoy this advantage," says the paper. In addition, should the European Central Bank to agree to release only the new bonds as collateral for refinancing banks in Greece. This would imply that exchange, the European central banks almost 50 billion euros in Greece bonds.

The original article in German is Schäuble will private Gläubiger in die Pflicht nehmen.

The ECB certainly does not want to discuss haircuts. Moreover, US media has recently portrayed the German finance minister as giving in to that concept as well. Thus things are not as portrayed.

Note that a duration change, voluntary or not, constitutes a default according to Moody's, Fitch, and the S&P rating agencies.

Addendum:

Reader EM offers a smoother translation of the FAZ article as follows:

The CSU fundamentally opposes a further transfer of power in the EU in the direction of Brussels. A "five-point memorandum" from CSU General secretary Alexander Dobrindt, a copy of which has been obtained by the Frankfurter Allgemeinen Zeitung, moreover argues for a taking back of authority from Brussels.

Dobrindt is reacting especially to the most recent proposals of the President of the European Central Bank (ECB) president Jean-Claude Trichet. A European financial authority and a European finance ministry are in contravention of the EU accords. Such demands represent "A de-democratization and de-sovereignization of the EU states", writes Dobrindt. This must be "defended against".

If more power were devolved toward Brussels, this would restrict the range of options "in Berlin and Munich", writes Dobrindt. "The power of the EU has become larger after each crisis, but the magnitude of the following crisis has not been reduced. We must therefore put the automatism that leads to a progressive shift in power towards Brussels, to the test." Criteria must be established as to at which point the European integration process is considered to be complete. At that point no further powers should be transferred to Brussels. "If the analysis shows that the finality has already been exceeded, powers are transferred back."

Dobrindt criticized the ECB's role in the EU crisis. "It must especially be examined, whether the purchase of government bonds of indebted EU countries is compatible with the legal foundations of the ECB."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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