Change the Rules When They Don’t Suit You

In my blogs of April 29th, I commented on The Volcker Rule and The Unraveling of the EU ?

I notice from recent news items that the German Government now wants to put limitations on hedge funds, naked short selling to limit so called speculators or speculative instruments.

It is ironical. In the 80’s and the 90’s when Asia went through their financial crises, the regulators and politicians from the European countries and the United States would visit and preach the free market gospel.Governments should not interfere in the free markets. Regulators should not control foreign exchange rates and the stock markets. They should allow the free flow of capital.

Hong Kong was berated when it closed down its stock market for a couple of days. Malaysia’s President Mahatir was cast as the villain who was taking Malaysia backwards when he imposed exchange controls. Also who can forgot the humiliating picture of IMF’s Michel Camdessus towering over President Suharto of Indonesia while signing the strict conditions imposed by IMF under the bail out. It brought to mind pictures of surrender documents being signed by the losing side during World War II. This when Indonesia’s currency had already devalued by over 500 percent. They insisted that countries should allow their banks to fail and that they had to swallow their bitter medicine if they wanted to seek the help of IMF (which the Koreans with their sense of humor, put signs as being short for “I am f****d “ ).

Now these very countries are doing exactly what they said should not be done. They are bailing out banks and corporates, placing restrictions on free flow of capital and controlling derivatives.

The Europeans are being optimistic if they think that by imposing such restrictions they will be able to able to control the behavior of sovereign nations, who while sharing a common currency will forgo their national interests.At the end of the day,the market players zero in on areas of weakness, like hyenas feeding on a wounded buck. If the politicians had managed their economies as they should have, there would be no opportunities for speculators. You might close one window, but in today's world other windows will be opened and fund managers will do what they are paid to do, if necessary by creating synthetic instruments aided by the banks.

Politicians in Greece and Spain are no different than politicians in Germany, France and the United States. They will do what they need to do to get elected. Look at the track record of countries in South America who have defaulted more than once . If two or three countries in the EU default simultaneously, do you see Chancellor Markel and President Sarkozy asking their voters to sacrifice their social benefits and health care programs to enable them to contribute a larger sum to the bail out fund ? That would be an end not just to their own political career but to their party’s chances of retaining power and perhaps the end of the Euro.

By contrast this time perhaps the Asians were smarter. The Asean market countries have not rushed to have a common currency and to open their borders. They are getting there step by step , initially by working out trade agreements and other confidence building measures. The Asian tortoise will eventually build its own structure which suits their political and economic needs and at its own pace.

The Greek crisis is just Act One,Scene One in the unfolding of the Great European Family drama which will unfold over many years. Will the German Bürgermeister, make the necessary sacrifices needed to keep Zorba dancing ? Keep watching this space....