THE CAUSES AND THE STRUCTURAL FAILINGS OF THE EUROPEAN MONETARY UNION
The Eurocurrency project was flawed from its inception both structurally, technically and fundamentally. The amalgamation of several nations’ currency into one defies not only geography but takes full account of the historical dimension of monetary policies and substances in which those currencies have been evolving.
Furthering a political end by an economic means is one thing, but sustaining this reality beyond a plausible rationale is altogether another thing. The Euro, in its conception, driven by the two leading and strongest nations namely Germany and France, was doomed for the fact that wrong tools and concepts were used to envisage monetary harmonisation without the right mechanisms to assess its intrinsic value, to jugulate its inflationary pressures and to equalise its devastating effects on the purchasing power of its disparate populations.
The euro was benchmarked against the US Dollar, which, in itself, is the most fundamental error any currency should envisage because, contrary to universal belief, there is simply no such a thing as a Dollar Standard. This fundamental error is the norm everywhere in the globe and as such the initiators of the Euro can be excused from this fatal mistake.
The international monetary system chief structural failing is the lack of a unified global standard for the world’s currencies. I will introduce such standard in the development of this paper and explain how it could be implemented without further delay for I trust this is what the world has been waiting for a very long period of time.
Prior to the creation of the Euro as a currency, a set of convergence criteria was defined and adhering countries were supposed to meet them. However, only few of them truly met these convergence criteria, which in itself did not take specific countries’ macroeconomic configurations into account, and consequently the lax approach to this compliance provided further ammunition for future disaster.
The world then witnessed a major financial crisis settling down following the demise of the US Housing Market deflation induced by the artificially appreciated subprime financial instruments. As a consequence of this situation, banks became reluctant both to lend to the market and to inter-lend among themselves, worried that they have insufficient funds available. This was a clear case of adverse market-confidence shortcomings.
In spite of these facts, the world needed to go on and economic activity had to be revived by a series of concerted quantitative easing exercises at major central banks to enable the markets to respond to man-made systemic failures.
Policy makers failed, virtually on a global basis, to define the conditions under which this could be done at both global and individual country levels.
Nobody look at the underlying causes of this situation by exploring in turn the intrinsic causes of the banking panics witnessed across the world, the recent stock markets concerted crashes, the prospective bursting of financial instruments which ought undoubtedly to lead to a major currency crisis and sovereign defaults. Hedge funds demise were on the making too.
Consequently, if this was going to happen, even at a prospective level, anticipation would have been the order of the day: strategic complementarities in financial markets needed to be addressed by a proactive and innovative Systemic Risk in Interactive Markets (SRIM) nomenclature embedded within the global financial risk spectrum.
A concerted policy on leverage ought to be determined and applied to such effect. Moreover, another concerted action towards jugulating the distortions observed within asset-liability mismatch must be addressed. Same thing goes for correcting regulatory failures which were so self-evident that no doubt about it could have been contemplated. Further down the line, institutionalised fraud mainly from the investment banking sector, contagion and recessionary effects were also to be isolated if we hoped and wanted to reach a harmonised toolkit to solve this massive irresponsibility.
Among the various reasons that led to this situation, we have identified twelve (12) causes at the core of our elusive financial system, intertwined on a multidimensional declination. These are:
- Poor lending decisions by banks and financial intermediaries
- Bias-induced poor judgement by both borrowers and/or lenders
- Speculation and overbuilding of artificial financial capital over the cyclical upturns
- Inadequate mortgage products
- Irresponsible corporate leveraging and high personal debts
- Cosmetic financial innovation poorly distributed and sometimes concealing unavoidable default risks
- Inadequate, erratic and heterogeneous central banks policies
- Ineffective and lack of global harmonisation in regulation
- Excessive housing speculation
- Artificially hyped housing valuation
- Inadequate securitization practices and,
- Inaccurate credit ratings
The host of these shortcomings led to 9.2% of either delinquent loan or in foreclosure at August 2008 within the US$ 12 Trillion US Mortgage Market. According to the US Government estimates, the value of the subprime mortgages was at the time in the vicinity of US$ 1.3 Trillion as of March 2007 with approximately 7.5 Million first-lien subprime mortgages outstanding. Yet, the delinquency rate was at 25% at May 2008. Our conservative estimates predicted up to 2 million properties were subject to foreclosures, up 79% versus 2006.
The capital question here begs to ask ourselves what were the pictures in the other industrialised nations? Probably no worse than the US situation, one can guess. However, these problems still existed in other markets and as a consequence a concerted global fine-tuning exercise was required to address them.
The credit de-crunch exercise would have been a combination of actions, reforms and policy-driven initiatives. It ought to be durable and sustainable over time so as to provide a solid grounding that would have prevented this situation from happening again in the future.
On the 2nd of August 2008, I wrote to the Prime Minister Gordon Brown and the Chancellor of the Exchequer Alistair Darling proposing what I called: “Solving the Financial Crisis: A Study of Lyscale Riskgrade Distressed Assets Relief Scheme” .
I devised a scheme by which distressed assets could be relieved and the market confidence restored in a comprehensive fashion both in terms of restoring the market connectivity-gap and providing vital stimulus to the wider economy.
We start by outlining seven (7) clusters of repository vehicles namely under the function of:
- Government Revenues Collection (National Treasury)
- Government Central Monetary Authority (Central Bank)
- Lyscale Riskgrade as the administrative vehicle of the relief scheme
- Investors community
- Financial Institutions (Banks & intermediaries)
- Mortgage-backed Securities Portfolio (distressed assets)
Each of these stakeholders possesses specific functions that are interdependent and indispensible to the other parties in order to provide a smooth working of the scheme. It is worth mentioning that the scheme could not be operated as a standalone outfit if a single party is absent to the process. The coordination stance is a key to its entire success for a concerted fine-tuning of the whole operation cannot be substituted with an approximate gathering.
LYSCALE RISKGRADE’S DISTRESSED ASSETS RELIEF SCHEME
Under the repository cluster 1, the government taxation authority plays the central role of collecting taxes arising out of the scheme as regalia function, thus, guaranteeing the redistribution of wealth within the wider economy and fulfilling its role as the guarantor of the equitable social and economic justice for all.
Cluster 2 is fulfilled by the government central monetary authority, the Central Bank, which interacts upstream with the investors community and the financial institutions, and downstream, with Lyscale Riskgrade acting as an appointed vehicle for regulating and administering the scheme. Both interactions obey to stringent conditions. Classical relations between the Central Bank and the financial institutions follow the same traditional principles as established in modern days.
The Interaction [2 to 4] not only entitles tax regeneration by funds allocated by Central Bank to the Government Revenues via the Investors hub, but also dictates the Central Banking Authority to provide a Market & Financial Stability Guarantee to the Investment Community, a necessary stamp for boosting confidence in the whole economy.
The same parallel mechanism also dictates that a Financial Risk Instrument Guarantee be provided to the Financial Institutions within the framework of the Interaction [2 to 5]. In return, the Financial Institutions provide its MBS Portfolio at a discount to the Central Banking Authority which endorses it and passes on to the Appointed Administrator of the Scheme within the framework of the Interaction [2 to 3].
Lyscale Riskgrade, then, issues Global Currency Hedge and Financial Risk Instruments that it entrust the Central Bank with in order to guarantee the currency and financial value of the entire portfolio of the Mortgage-backed Securities.
Lyscale Riskgrade provides the Financial Risk Value Guarantee to the MBS Portfolio, which in turn, gives back its Premium on Return. These are interactions [3 to 6] and [6 to3]. While at the same time Homeowners provide their Premium on Consolidation at a future date when market stability is maintained, Lyscale Riskgrade, within its mandate, provides Foreclosure Relief for ARM Holders up to 75% of cash equivalents so that negative equity and mass repossession is avoided within the wider economy.
This study provided a simplified version of the Lyscale Riskgrade Distressed Asset Relief Scheme as a viable proposition to address the current global financial crisis in its entirety. It had been designed in a United Kingdom’s context but could have been applied to any other country with more or less similar economic configuration resemblance.
The running costs associated to the administration of the scheme would have been minimal in terms of the resources mobilisation as well as in terms of personnel. However, one must stress that its viability was highly contingent to government approval and full backing including a proper canalization of concerted efforts bringing together the Treasury, the Central Banking Authority, the financial markets and institutions as well as the homeowners.
Simplified procedures were possible to implement so as to avoid unnecessary bureaucratic delays for all the parties involved. Setting up the scheme could have been made within weeks if not days and the effective running of the whole operation should have not been too time-consuming both upstream and downstream.
BSc Hons Economics, Accounting & Finance, EMBS (Oxford), ACCA P/Q, GIFEM Group
Chairman & CEO, Lybrosis Capital Group
Chief Executive Officer, Lyscale Riskgrade
Managing Partner of The Black Swan Partnership
Chief Originator of the Global Monetary Hedge Portfolio Fund
Chief Conceptor & Inventor of LR Megasystem, LCG Global Architectures,
Capval, Globecross, EMH, Vestis & Delta High Engines