John – you may well be right 0ver the l0nger run, and your arguments are obviously the sensible ones, but so far we have seen rather less coordination among national authorities in the EU than one might have liked to have, and no consensus emerging on a shared supranational regulatory system (this has been floated, but as best as I can tell, has been shot down for the moment at least).

Also, Bank of England /= regulator of UK banks. Similarly for Ireland, Germany, Belgium, Sweden, Luxembourg…

But accidents offend my mechanistic sensibility.

Perhaps the glut is symptomatic of a collective action problem among nation states. Observing the volatility of international capital flows, each state aims to save enough to guard against disastrous capital flight. (The savings policy might take a variety of concrete forms: rents collected by state controlled banks, for instance, or regressive tax cuts. ) In short, the combination of multiple sovereign states and a single capital market always will produce a savings glut. The glut will cause investment volatility, which will strengthen each state’s propensity to save. You can see where I am going with this. Widening gyre and all that.

And if economic competition among states is unstable, because of a glut or for any other reason, will the international system revert to military competition? Is that what happened in 1913?

So far as I know, the professional economists in my country (USA) have not written about this problem. It is not the sort of problem closeted anarchists like to write about.

There is still a distinction – and it is an important one. The ECB lacks certain tools that its US equivalent has – and these tools are important and helpful in general crises as well as in ‘normal’ times. That’s the issue. And the regulator issue is very, very important (as someone who writes on delegated powers and the Commission, this may be a particular hobby horse of mine, but I think it is objectively a very important distinction). As I said in my original post, there is no actor at the EU level – neither the European Commission, nor the ECB, nor anybody else, which regulates what national banks do on a day-to-day basis. This aspect of central bank functioning is still reserved to the national level central banks, who are jealous of their powers and independence. This means that there are important loopholes in supervision, esp. wrt the activities of banks which cross national borders, and consequent questions about who deals with the wreckage when things go wrong (see e.g. Fortis disaster). This is a real problem with obvious and substantial consequences. Nor is the European Commission the happy dispenser of regulations from on high that you suggest. It had been trying to expand its authority vis-a-vis national regulators in areas such as competition policy (Charlie McCreevy’s various initiatives), but had been facing some very stiff headwinds indeed. You are really underestimating the power of existing national institutional arrangements here, and as a result not understanding the underlying politics very well, as best as I can see.

Your definition of a lender of last resort – “It refers to a central bank’s willingness to lend money to specific institutions whom nobody else will lend to, in order to keep the system propped up” – is correct – and this is what, for example, the BOE did with Northern Rock. Normally, bank liquidity operations are intended to affect the money market as part of general monetary policy, not to keep the entire system from collapsing. So your definition – and your argument that the ECB isn’t a lender of last resort – would be correct, in normal times.

But these are not normal times. The problem, at present, isn’t that there is one specific bank which can’t raise money for idiosyncratic reasons – there is a systematic lack of interbank liquidity and therefore a need for a system-wide lender of last resort, and I would argue that, by expanding its liquidity programmes and relaxing its capital criteria, this is exactly what the ECB has turned into.

I’m afraid I don’t see the distinction that you are trying to draw w.r.t. regulation. “The EC issues regulations on how banks should behave, but it doesn’t actually regulate how banks behave?” I suppose in a very narrow sense that’s true – it’s up to the national regulators. But in the same sense, the UK Parliament doesn’t regulate, say, British drivers. It produces laws on how drivers ought to behave, but those laws are actually put into effect by the police and the courts, both of whom have quite a bit of latitude on how they enforce the law – just as national parliaments and regulators have a bit of latitude about how they deal with, say, the Capital Requirements Directive.

Ajay, that is quite true. While you may not follow it as intended, it is quite very parse-able. If only you get used to comprehension of content. As opposed to form. Insofar as punctuation is concerned, much of my experience is with condensation of academic gobbledygook . Policy makers prefer, and in my opinion are competent (and only to that extent) to comprehend, precis. It is unfortunate that I carry that experience along with me. Wherever I go. Plus, I have this really confused apprehension of the distinctions among the usage of colon, semi-colons, hyphens. As the Americans are wont to shrug, my bad. Too bad.

With regards to the content, my point in #16 was a response to your Q. regarding a frustrated statement of that fact that many keep insisting on the imminent failure of the EU. I agreed with the professed fact and informed you of a possible end to such insistence, viz., when there is unified foreign policy for the whole union.

The references to Germany was a response to the OP, which is, characteristic of many posts on CT, mum about the undeniable fact that politics beats economics. Always. It is a heavy burden on society at large to indulge in such fancies (the keeping mum part. Not the fact. May I wink? Or must I be Sarah Palin to warrant such indulgence?)

As with most of my comments, perhaps all, I make no arguments. I state facts as I see them. You are most welcome to dispute my observations or dismiss them with total disregard or whole-heartedly agree with them. Your choice. No compulsion. And if I may make a comment as to potential impact, no matter whatsoever.

I think we are talking at cross-purposes here. The “lender of last resort” function, as best as I understand it (open to correction from Real Economists if I am wrong), doesn’t refer to generic liquidity operations. It refers to a central bank’s willingness to lend money to specific institutions whom nobody else will lend to, in order to keep the system propped up. The operations that you are referring to are quite different. What the ECB has done, ex post, is to issue opinions on the circumstances under which central banks/national governments can offer deposit guarantees etc. And the distinction between regulator/issuer of regulations is a really important one. The European Commission can issue broad rules governing how actors ought to behave in the marketplace. It can’t regulate the specific behaviour of financial institutions in national markets (it has neither the authority nor the capacity).

Well, only if it’s a quibble to distinguish between, say, the Fed and Congress.

Tee-hee. That’s actually really funny if you know anything about the debates on the US Constitution…

How long? Until there is a unified EU foreign policy.

Carts and horses. Globalisation of finance and its consequent regulations, without a public, albeit purported, globalised political establishment is not going happen. At least not without collapses now and then. The current Letters of Credit crisis is already taking its toll on many exporters. But only to nations that aren’t that very pally with the exporting nation. Govts. and their functionaries making phone calls to their counterparts in other countries has fortunately not gone out of fashion. Bankers talking overseas to each other has, unfortunately, gone. A poltical establishment is a pre-requisite to a financial establishment. Unification of Germany happened because of a express will to unite. The modality of that unification happened with economy, finance, travel arrangements taking precedence over flag hoisting. But flag hoisting was the purpose.

A one-world polity is preferrable to some. Most here on CT. But anathema to a very very large number of people across the world.