Mike Shedlock

True to form, Paul Krugman does not understand the difference between problems and solutions in Europe any more than he does in the US.

In Deck Chairs, Titanic Krugman states ...

OK, yes, European banks do need more capital. But their problems are a symptom of the underlying sovereign debt problem, which can only be resolved, if at all, with ECB lending AND a commitment to reflate. Without that, the losses on sovereign debt will blow right through any amount of newly raised bank capital.
The housing bubble came from the Fed's unwillingness to let the recession of 2001 play out to its normal end. Europe is in a bigger mess today because of foolish attempts to prevent Greece from defaulting.

In both cases, the proper solution is to let banks fail. Bondholders will take a hit, but so what? The world will not end when it isn't.

Printing Money Will Not Solve the Crisis

Bundesbank president Jens Weidmann disagrees with Krugman in an interview with the Bild stating Rescue Packages Will Not Solve the Crisis
Weidmann: Increased leverage increases the risk.

Bild: French President Sarkozy wants the EFSF to furnish a bank license, so as to have unlimited resources.

Weidmann: That would be a state financing by printing money and thus in my view a fatal way. It is forbidden for good reasons by the EU treaties. I am pleased that the federal government sees it the same way.

Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.

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