Simple thoughts on Europe

1. The fundamental cause of the financial crisis has been people and institutions thinking they are more wealthy than they are; this spread to Europe as well and now we are seeing the comeuppance.

2. Although accounting conventions differ, and numbers should not be shifted out of context, many major European banks are highly leveraged.  The mechanics of the so-called "shadow banking system" — namely the ability of short-term creditors to flee on a moment's notice – remain in place.

3. The major European powers would not have come up with a nearly $1 trillion bailout, also involving de facto loss of ECB independence, unless they were scared ****less.

4. They are trying to do a version of TARP-in-advance-of-the-panic and in my view that panic would have come today.

5. Here is one view, consistent with my own: "My quick thoughts on markets are as follows: great for risk assets, terrible news for bonds, great news for southern European bonds, bad news for the flight to quality UST trade, and ultimately terrible news for the EUR. Maybe the EUR tries to rally on this, but it the end this bailout has done nothing positive for the EUR. The market will inevitably look at the ECB as being forced by the EU to monetize the debts of EU rogue nations…"

6. Basically the ECB is monetizing bad government debt claims.

7. The Fed has reactivated its dollar swap lines to Europe.

8. "Greece’s 10-year borrowing costs plunged by almost half – an astonishing 5.9 percentage points – to 6.5 percent."  And Deutsche Bank is up ten percent. 

9. This doesn't solve any of the basic fiscal problems, so ultimately it raises the stakes and creates a chance of even greater financial failure.  Simon Johnson comments.

10. Question: does this sentence sounds scary or non-scary?: "”We shall defend the euro whatever it takes,” Mr. Rehn said."

11. Felix Salmon writes: "They’re not all partners together anymore: now they’re bifurcating into the rich lenders, on the one hand, and the formerly-profligate debtors, on the other. The mind-boggling sums involved are only going to increase resentments both of the south in the north and of the north in the south."

12. How much time has the EU bought itself?

Addendum: Paul Krugman comments.  And Arnold Kling comments.  Ezra Klein comments.  Matt Yglesias comments.