Global Crisis/Innovation Blog
The New Democracy: Bond Traders Rule!
By Shlomo Maital
A new form of democracy has just been born – yesterday in fact.
Greece appointed Lucas Papademos as Prime Minister designate. He ran Greece’s Central Bank, at the time Greece bluffed its way into the European Single Market and euro, with false data, and was vice governor of the European Central Bank. He has consistently opposed any ‘haircut’ (reduction) of Greece’s debt.
Italy is apparently appointing Mario Monti, former European Commission competition commissioner, as its new Prime Minister, to replace Silvio Berlusconi and lead Italy toward new austerity measures.
Why were these new leaders chosen? In the sole desperate hope that the bond markets will like the moves sufficiently, to raise the price of Italy’s and Greece’s sovereign bonds, enough to keep those two countries solvent, able to continue to borrow in capital markets so they can avoid default and bankruptcy.
Will it work? Will the bond traders agree? Will they give a Facebook “thumbs up”? (Like!). Or will they give a Facebook thumbs down? Everything depends on these bond traders – the future of Europe, the future of the Euro, and perhaps the future of global markets.
This is the new democracy. A key political decision is being made, NOT by the people of Greece, and not by the people of Italy, but by the faceless millions who buy and sell bonds in global markets. And they, of course, are driven not by considerations of the wellbeing of Italians and Greeks – but by the wellbeing of their bonuses and bottom lines.
Not a very good system, is it! It is not, in fact, democracy any longer. It is the oligarchy of money. We thought the power of financial markets had been curtailed and regulated after the global crisis of 2007-9 – but in fact, it has if anything grown.
TIMnovate 
5 comments
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November 11, 2011 at 11:09 am
Mike Eftimakis
Great analysis, but what can Europe do to fix this ??
November 12, 2011 at 9:42 am
timnovate
I’m afraid it’s almost military — you have to outgun the bond traders. Assemble a massive stabilization fund, ten times larger than is now being discussed. The bond traders will back away instantly from such firepower — because it can wipe out the bears. the irony is, the bigger such fund is, the less likely it is you will have to use it. Why don’t the Germans understand this — the more you put into the fund, the less you have to use it for bailouts. The bond traders themselves can verify this.
November 12, 2011 at 1:17 pm
Mike Eftimakis
Why can’t the ECB just print more money to pour into the fund?
This would be a kind of devaluation, right? If I have correctly understood my macro-economy courses (forgive me, Shlomo!)…, this would benefit all borrowers in Euro (including European states).
Am I missing something?
November 13, 2011 at 7:18 am
timnovate
Gili, thanks for your email. I’ve been travelling and return home tonight. Can you please tell me if there is anything specific I have to write or to change? where? with thanks, Shlomo
November 13, 2011 at 7:15 am
timnovate
faithful reader Mike, of COURSE the ECB can pour money into the fund, which is what the American Fed would do, and has done, under Bernanke. Problem is, the Germans would never agree. What is needed now is simply an aggressive ‘lender of last resort’, which is a key role of any Central Bank, especially the ECB. But what can one do, if the ECB just won’t do its duty?