On the paradox of sovereignty

There should be nothing surprising in the Hungarian governments reluctance to accept the terms of the EU and the IMF for a new agreement, at least for those following the developments in Hungary. The EU insists on repeal of some recently passed legislation, while the IMF made very clear that there is no way Hungary can hope for anything else than a stand-by-agreement with hard policy conditionality. A detailed action plan, quarterly reviews, and again reinstatement of the fiscal policy framework dismantled  in the last twenty months. At least for the time all of this is unpalatable fro the Hungarian government - despite signs that they are trying to conclude their separate pact with the IMF with or without the Eu's blessing. (The government announced the chief of the Hungarian delegation will visit Washington for informal talks next January in order to meet with IMF general director Christine Lagarde, other directors and the staff responsible for Hungary, but there was nothing about reestablishing contact with Brussels and the EC.)

The reason behind this reluctance is - besides underestimating the risks most probably because government politicians are eyeing the reserves of the Hungarian National Bank as a source of liquidity that can enable the country to weather the storm until growth resume - a deeply seated desire for sovereignty. The conflict - fashioned as an economic war of liberation or independence - is about Hungary's ability to conduct its self-styled policies. One can argue - rightly - how short-sighted this old-fashioned concept of sovereignty is today, discuss how impossible is it nowadays to dissociate one country from the world, or point out that even the giants of the world are steering towards forms of collective world governance, even if only out of necessity. But the Hungarian situation conceals far more than a simple arch-conservative or super-traditionalist understanding of sovereignty. It is deeply paradox.

The government struggles to establish a precautionary or flexible credit line with the IMF, something they phrased as safety net or insurance, an agreement providing IMF money almost unconditionally in case of necessity - in the name of economic sovereignty. They reject conditionality because it would grant supervision over Hungarian policy decisions for a foreign institution.  However, one and a half years ago, at the wake of the previous IMF program everyone expected the parties will to arrange for exactly the same type of agreement. Then the Hungarian government suddenly disrupted the negotiations, after some days of hesitation and confusion announced the war of economic liberation on the IMF and proceeded with her unorthodox measures designed to resolve the problems that the IMF program was intended to resolve. It seemed the IMF won't ever return and sovereignty is regained successfully. Only one year passed and the necessity of a new understanding with the IMF seemed inevitable in order to avoid the worst. But - directly because of the disruption the government inflicted upon the country - the government has a very slim chance to get the desired flexible credit line. The one they would have easily got before the war started. They would have now their beloved sovereignty without the war. But the harder they fought for it the farther it slipped away...

P.S. Actually, if one looks after a similar concept of sovereignty there is one handy parallel in the neighborhood, albeit from some decades earlier. The Romanian government - not independently from the very strong nationalism in the country - thought of and acted similarly in the international community since 1918 and until 1989. Surprisingly their fervor for sovereignty somehow abated in the last decade, or at least they have learnt how to manoeuvre.

On thin ice?

Hungary's prime minister is in full gear. With declining popularity and approval ratings he is convinced that it is due to his government's inability to make people understand how well they are treated. Instead they believe in the lies of the opposition. As a result Viktor Orbán appears everywhere, gives interviews (even to reporters earlier exiled to remote corners of the public media) and engages the opposition in the parliament. (Contrary to the British custom there is no informal obligation of the premier to participate on Prime Minister's Questions every week.) Additionally he visits friendly societies, in order to clarify his program for faithful followers. 

Aside from the obvious ominous signs - what to expect from people supposedly belonging to the country's business elite who are listening to Orbán's contradictio in adiecto statements without objection, moreover, taking it with applause - the prime minister made yesterday an interesting comment in one of these circles. He referred to that although it is almost impossible to introduce fixed exchange rate it is worth to contemplate the possibility. 

Given the self-proclaimed and proudly borne "unorthodox" nature of the economic policy of the government, such a hint is not necessarily as meaningless as one would be inclined to take it. There is at least one recent example that a country managed to regain competitiveness and growth with a set of measures including capital - and implicitly exchange rate - controls. Paul Krugman gladly compares the example of Iceland as a country that took a more traditional devaluation focused IMF approach in the aftermath of its crisis to the European countries taking the internal devaluation path. Iceland is an example for a country's potential to convince the IMF  that act of its own design can serve the common aim of returning to growth just as well as the IMF's proposals. According to the latest IMF report on Iceland the government insisted on capital controls in order to make devaluation (and implicitly inflating away debt) easier with pre-empting capital flight.

In the light of Iceland's performance, much praised by the IMF, even the idea that Hungary's leaders are contemplating something similar cannot be written off easily. However, some caveats should be made here concerning the viability of a possible change of strategy. Firstly, Iceland started negotiations with the EU on its accession simultaneously with its IMF program. On the one hand it means a strong pledge that capital controls and exchange rate manipulation will remain temporary, on the other hand it was free from the EU rules, something not given for Hungary, part of a joined EU-IMF credit program. It is hard to see in Hungary’s case how EU law can be eliminated, even if it allows for reintroduction of capital controls in case of economic danger. Secondly, Hungary is still following the path of classic austerity – despite the government’s insistence on the opposite –, it is “on the Greek road”, as Orbán likes to formulate. Even if it is possible to change track, the austerity already has forced its citizens to deplete their reserves, it has not strengthened its banking system (as Iceland did), rather weakened it in the last year, and the typical neo-liberal reforms (for example on the labour market) proudly passed in Parliament yesterday do not suggest the government’s willingness to take an alternative route in order to share the burdens of the crisis more fairly. Thirdly, and this point is knit the former, Orbán has a distorted vision of Hungarian society, impeding him to realize policies strengthening equality. Yesterday he also announced that his policies are aimed at strengthening the middle class. However, the latest income statistic of the Statistical Office showed that people with a monthly per capita net income of 130000 HUF (400 EUR, equivalent of 200000 HUF gross wage) in 2010 belonged to the top income decile. Fidesz’s new flat-tax in 2011 meant a tax raise for everyone with a gross wage under 290000 HUF. One can safely guess that Orbán’s policy – however strongly he is convinced of the opposite – benefits only 4-5% of the population, and certainly not the middle class, only the elite. And last, but not least, a sudden change of track would not only need approval from Hungary’s creditors (something certainly not happening without clearly formulated and well founded strategy), but a bit more capacity to act than the government has shown until today.

Why not?

The crisis of Hungary and the drama of the EU – for a brief period separate from each other and the former even resolved at least in the imagery of the prime minister, Viktor Orbán – suddenly got bound to each other very firmly. Not only was the complete dependence of Hungary's economy on and from the European declared, but the unfolding crisis of the eurozone absorbed Hungary's fate last week, at the meeting of the European Council. The issue of whether the prime minister blundered diplomatically or not in Friday morning is significant only in a strictly Hungarian context as a possible demonstration of the governments rapidly diminishing capacity to handle politics and governance, not the first sign in this sense and hardly the last one. But the whole French-German plan bears utmost significance for the country as well and poses some questions concerning the governments confused reaction too.

The interpretations of the council's declaration pointed out at least four important aspects that should be considered from a Hungarian (and more broadly from an East Central European perspective). The proposed new fiscal stability rules can be seen as the end of (or even the outlawing of) Keynsianist economic policies. Furthermore, some argue that a fiscal union following the German blueprint of re-balancing through austerity can bring (or just aggravate) the present state of economics close to depression and bring about a serious challenge to democracy. The latter means that crisis stricken countries, among them Hungary, certainly have to reconsider their place and chances given the restrictive economic environment. But the plan is far from being unproblematic from a pro-European perspective too, it proposes an incomplete transfer union without proper governing bodies and democratic representation, reviving (or even enhancing) the never eliminated complaint of democratic deficit in the EU.

But with all of these issues that certainly should not be neglected or treated in an off hand manner, the Hungarian reaction was very curious. While the government portrays itself (and is selling this idea to its European partners at every occasion) as the champion of far reaching reforms, fiscal prudence and stability, hails itself as the only country that will achieve a budget deficit within the limits prescribed in the Maastricht Tretay, it still failed to sign to a new treaty that will only enshrine these self-proclaimed objects of national pried. Even if its boldly announced aim is to transform the country to the most (or most recently, from today one of the most) competitive countries in Europe , and one that can compete with China. Quite in line with what the Germans are blamed for, trying to make everyone German as a panacea for the crisis.

So, why the restraint? There is an obvious explanation, sovereignty. It means power and as the new fiscla riles and most notably the way they would be enforced would curtail the sovereignty of the parties to the new treaty, the government is not quite willing to hand its power to a European body or accept trusteeship of Germans and French. Especially if it still believes in its vision of a West in decline and an East on the rise. However, even if such considerations certainly played a role in the decision not to accept the new treaty (a position later softened to consulting the parliament on this issue) there is one valid point hidden in all of the verbal camouflage: is it possible to create a fiscal union on the proposed line without hampering or tacitly eliminating democracy? It is not only about the way the Greek and Italian premiers were replaced – seen by many as a plot of mysterious capitalists and foreign politicians –, but about the German plan's content: constitutional fiscal rules that could – in case of a suitable interpretation – ban fiscal stimulus and enforce the further dissolution of welfare institutions. Not that it would be too far from the Hungarian government's aim. It is frequently declaring the end of the welfare state, a new era of work-based society instead of one based on social benefits. But according to its interpretation this process is the result of the rise of the East, an industrious, demographically growing world, whose success can be followed only with its own measures, hence the insistence of gaining competitiveness vis-a-vis China.

But if one considers the process of how the welfare systems were rolled back, it is hard not to see other factors, intra-EU developments behind it. Most notably the insistence on market based investments in ECE after 1989 as opposed to institutional based ones. It meant a competition for investment even into social systems and as in every case investment could be attracted with the fastest and safest return on capital and with the fattest profit. The subsequent necessity to cut welfare systems as there was no need and way to finance them resulted not from the competition from the East but from the competition among new member (and accession) states.

From the above diagnosis one can conclude that some EU-wide measures would be beneficial for the members states in the sense of reducing the pressure on their present welfare systems and societies. Such as a harmonized tax base (part of the German proposal), that would reduce (or probably eliminate) tax competition in order to attract investment. With envisioning more significant reforms of the EU's architecture – in the longer term – there is the possibility to harmonize and connect – and later merge – certain welfare systems, such as health care,, unemployment benefits or pensions. It would alleviate a huge burden from some crisis stricken countries, like in Hungary's case 1-2 billion EUR would certainly reduce the dissipation of medical personnel. And as such changes would require a larger and more flexible EU budget it would make it possible to enact fiscal stimuli even if the member states adhere to the strict fiscal rules proposed. But it needs new political structure, with real political representation and responsibility, an enhanced role of EU instiutions in governing, not (only) intergovernmental action.

But as if such a situation wouldn't be complex enough, internal developments in Hungary makes the country's position even more complicated. Authoritarian tendencies transforming a functioning democracy into an illiberal one at best; a „visionary” economic policy, a mixture of classic nineteenth century capitalism, catholic social thinking from the thirties, neo-liberal dogmas like tax competition and flat-tax, and nationalist protectionism results in an unpredictable and growth restraining voluntarism; an overestimated potential of the country coupled with the belief in national peculiarity, all of these manifested in utterly misguided action and failure to recognize real constraints for the country, ultimately leading to a return to the earlier decried IMF as the only potential source of financing for the next years.

Manoeuvreing between political constraints abroad and a sense of omnipotency at home (given the governments 2/3 majority and its ability to change the constitution according to its will in days) was channeled into an attempt to completely rebuild the state. As a result next year Hungarians have to face not only the expected economic hardships (declining real wages, stagnating, probably even growing unemployment etc.), but the possible chaos brought about radical changes in the structure of the state. (Reducing local self-governments to a minimal role, building a centralized public instruction system, drastic reduction of higher education, centralization of pub,ic administration hitherto enacted by local self-governments etc.) The government during its eighteen months long tenure showed rather incapacity to carry out such sweeping changes, resulting in frequents delays compared to the previously announced deadlines, window dressing without real changes, frequent reversals of earlier measures (the most telling is the example of minor taxes, the government in an attempt to reduce red tape eliminated 10 of them, but in a year introduced another twelve). Nothing happened according to the plans outlined, everything was in a permanent delay and confusion and the deepest changes are still only in the phase of legislation. Not to speak of illusory ideas, like a restructuring of the disability pensions and benefits system, with a failed plan to reconsider the status of almost 400 000 people in six month. Meanwhile the lowest levels of state administration became highly politicized, party commissaries installed, essential systems are underfinanced (health care, education, administration) while the budget renounces significant potential revenues (progressive taxation, a progressive property tax etc.) But there is no EU-wide resolution of the problems on offer from Hungary, neither an attempt to fight for preserving what was left from social equality and cohesion. This fight is not for the greater good of the community – or only in a weird sense, for the greater good of a non-existing, imaginary organic nation –, but for the power of a government sliding into authoritarianism.

The irony of the situation is that the government – while deluding itself that so-called unorthodox measures (windfall taxes etc.) do not mean austerity – creates exactly the same self-generating and self-intensifying cycle of austerity that can be expected from the German plan too. Its followers – and its politicians – still think that it is just temporary, a kind of transition, with the rebuilding of the state finished amelioration of the situation is in sight from 2013. However, given its impact on economic growth and the proven inability of the government to provide effective governance the fight for sovereignty can easily end in a catastrophe. German style austerity carried out while the state simply dissolves. In the face of this prospect – and it is the irony – even a strict, closely monitored IMF-EU program can be favorable.  

Disorderly devaluation?

The saga of the conversion of fx-loans in Hungary goes on. According to a report at the Hungarian website origo.hu the government's main aim is to regain freedom of exchange rate determination and practically carry out a devaluation of the forint, without hurting households with fx-loans. As I'm no friend of this government I'm sceptical a bit, no government politician or supporter used this argumentation until today. However, if it is true it is just an even stronger proof of the incompetence of the government.

I know that I was arguing – not that it would matter the slightest – on behalf of external devaluation, therefore to declare a seemingly identical argumentation could seem paradox. Nonetheless, it is hard to treat the government's proposal as fulfilling the three necessary preconditions of a successful devaluation through the conversion of fx-loans. Any attempt should be comprehensive in its extent, prompt in its execution and orderly regarding the covering of losses and managing the inevitable risks. In this case none of the above preconditions exists.

The volume of fx-loans is around 1 million households. The ration of non-performing loans is around 10%. The proposal of the government intends to cover only 300 000 at best, so, the remaining 700 000 would still make a very significant electoral base not to let the forint devalue. And this is the maximal number the government claims will have an opportunity to make the conversion. The Minister of National Economy allegedly argued that only 50 or 100 billion HUF loss will be incurred to the banks, a sum that gives only about 75 000 existing loans converted. Hardly a reduction enabling the government to devalue.

Neither is the proposal prompt enough to make a sufficient reduction for a quick devaluation. Although the prime minister told yesterday that only a limited time frame would be allowed to the debtors to make the conversion (a solution with many – albeit very different – risks), this evening the reports states that the possibility will be open indefinitely. So, even with the compulsory lending of forint based loans prescribed for the banks the process would be slow (given the practical and procedural necessities, finding the suitable new loan, preparing the documentation etc.) and without it it will only be a cherry picking of the better debtors. Meanwhile everyone will avoid the not so promising clients, effectively reducing the number of conversions and therefore postponing the restoration of freedom of exchange rate manipulation. With the process underway for months or probably even for years the economy can not have the boost hoped from the devaluation.

It is again hardly an orderly solution. Although the distribution of the losses is clearly settled at least for the time being* nothing else seems to be in place to impede the dangerous process induced by the conversion. First of all there could be a long period of risen demand for forint that will inevitably lead to higher interest rates, while the exchange rate will be depressed (but probably not depressed enough to lift the exports significantly) to compel the National Bank to raise its policy rate and simultaneously inflating the country's foreign currency denominated sovereign debt. Even at the present rate of 286-287 forint for one euro the debt grew with 800 billion forint, 26+ of the amount the government reduced it back in summer. It would effectively mean the end of the debt reduction course, up to this moment the main objective of government policy.**

Beyond the practical issues the new strategy (external devaluation) is the third one in 16 months. Initially there was an attempt for a stimulus through tax cuts that almost immediately failed due to policy constraints. The EU forbade any deviation form the agreed deficit target of 3,8% of GDP. During the autumn the government made an experiment with classic austerity and tax cuts, but the budget collapsed already in January, leading to the very typical austerity program (internal devaluation), the Széll Kálmán plan and the primary objective of forced and fast debt reduction. And now the government turned around again, this time opting for external devaluation. Albeit not in a very sensitive way. (It is worth to take a look at what happened in Iceland, where – with the assistance of the IMF – a consolidation program based on external devaluation was carried out successfully. It needed far more and far stronger cooperation and effort than the Hungarian government envisages.) And not only the sudden and unexpected turns and twists speak fro themselves, there are a lot of contradiction between these strategies. Austerity is the opposite of the stimulus, while external and internal devaluations are hardly reconcilable and the former will initially raise the debt to GDP ratio. A sensitive mixture of these approaches would still be possible (especially of the first and the third), but it would need a more complex and sensible approach, one that calculates with every possible effect and takes into account every potential risk. Unfortunately the only economic quality the government seems to possesses is a very high marginal propensity for gambling.

* However, the prime minister admitted yesterday that the EU Court would most probably declare the move illegal, order compensation and fine Hungary, but he was eager to assure the people that they do not need to fear, the state will take this burden.

** There are a numerous other risks. For example the conversion means the liquidation of Hungarian assets and payment of huge sums to foreign creditors. Reducing national wealth and handing it over to foreigners, a reduction of the capital and with it the possible base of investment, and obviously will have a negative impact on the current account.

Self comment on the previous post

Maybe soemone who has read this blog carefully will obstruct my previous post that earlier I was no friend of banks and suddenly taking an issue on behalf of them can only be the expression of political bias. In order to clarify this (but not denying some political bias, anyway, why should a blogger be unbiased, it is supposedly a very personal genre) let me present my opinion. Firstly, banks are not persons, therefore they could not have virtues and vices and banks as such can hardly commit sins and deserve punishment. Any reference in texts claiming that banks has acted one way or the other is a simplification and a pars pro toto. Banks are instiutions managed by humans, and these humans obviously can be judged even for the morality of their handling of business. However, at the moment, In Hungary these humans should not fear any punishment, it is pardoxically reserved for non-person without the free will that is the basis of any moral judgement. Furthermore, these humans are defended, their income taxes (note I'm speaking of those who run these banks and not those who work at the local bank subsidiary in the cashier's desk) were cut and - implicitely, but logically - they are always included in that virtuous group of hard-working people who were obstructed in their work by the previous, progressive tax system - at least in the fantasy world of these politicians. So, if there is at all someone who deserves punishment it is not the instiution, but the humans.

Secondly, and it is in a way a logical consequence of the above outlined problem, banks as institution can hardly be substituted for anything else than banks, whatever name they will carry. If they were driven to excesses - as they surely were -, if their payment schemes encouraged reckless behavior and ever growing taking of risk through the innovation of new finacial means to distribute these risk around the world then they need regulation, better control. But this is not the same as recklessly punish them with enforcing on them huge losses. Someone malicious could even say that anyone, even the dumbest, can punish the banks but only a few clever can regulate them properly in order to avoid the recurrence of such excesses. Because the banks, be them the good, old family banks or the new investment empires are essential for the economy. The immediate effects of the credit crunch in 2008 (when the flow of capital was frozen in a moment and the economy stalled) and the visible effects of the present reluctance of banks to lend (slow growth, even in Hungary, 0% q-o-q, 1,5% y-o-y in the second quarter of this year after two quarters with y-o-y growth above 2%) prove this very basic truth. It was obvious from the start of the crisis that there will be losses and the main issue will be the distribution of these losses. Not only according to abstract ideas of justice and fairness but according to the very practical necessities of the economy. I was always in favor - not that my opinion would carry any weight in this issue - of strict regulation, limiting the bonus schemes of banks and brokerage houses, dividing banks into retail and investment ones etc. But - however painful it is for my moral and political convictions - I tried to be always aware of the fact that the banking system has to be put in order with the help of the public. Unfortunately not too much was done in this regard and even these meagre achievements were - at least in Hungary - undone by the new government.

Frustration, failure, voluntarism

Hungary is still only a secondary front-line of the renascent crisis, not among the headlines and for a superficial observer (i. e. for most of them) it could seem justified. Although the slippage in this years budget (and the obvious: the flat tax was not capable to stimulate growth) could warrant some worry, the government is imitating action at every negative sign, this time announcing 100 billion HUF correction measures. Hardly credible (enhancing tax collection makes 40% of this amount, and a freeze on government purcheses another 40%) and hardly structural, but it didn't really disturb analysts. Not even the news that the execution of the Széll Kálmán-plan (the bouquet of austerity and supposed reform measures planned to bring 550 billion HUF savings next year and about 900 billion until 2013) suffers from serious slippages, and exactly at those fields from where the government expects the highest savings could shake the belief in these guys. They can at last claim that the government is devoted to the deficit figure and ready to apply new measures if necessary. (I would really like to know how long would they bosses at their banks tolerate if they would announce that they had managed to failed to achieve the planned profit in the first eight months of the year, but they are very committed to the planned number and are ready to make corrective measures.) Anyway, it was hardly the sensation of the week, especially in the light of the government's even harder commitment to the flat tax.

But the end of the week brought back the memories of last year, when hardly a week passed without events and announcement testing everyone's heart and patience. It turned out that something was cooking (besides the books) in the witch's kitchen run by the government, a new plan to save the fx-loan holders.

Well, the malicious will certainly point out that as a complete program with this aim was already implemented and started two weeks ago it was even more short-lived than this year's budget, another object of pride of the government. But as one of the reasons the government came up with this new idea was the not qiite spectacular success of the original program (there was no opportunity to show long queues, praising the government in the TV) it is worth to be mentioned. The other reason behind the new plan – at least in my opinion – is the complete failure of the flat tax and the resulting frustration with the economic policy. I'm sure they attribute the lack of internal demand not to the fact that the new tax system was a tax hike for most of the population and it favored the segment with the least marginal propensity to consume, but to the spiking mortgage rates due to the CHF based loans. I fear it is telling regarding the mind-set of the government that facing the obvious collapse of the whole of their economic governance they decided to stimulate their original stimulus, instead of changing the pattern of redistribution. (Furthermore, they will cement in this tax system with a two-thirds majority law.)

What is the problem with the proposal? Firstly, it is its aim: to „release” the income of households in order to make them spend more on consumption. Secondly, the set-up of the plan and the parameters applied. Not only is there a few evidence that the weakness of the forint was the main reason of the weakness of domestic demand* but it fails to address the major problem caused by the fx-loans: the effective fixed excahnge rate of the HUF. As long as hundreds of thousands has fx-loans the country can not devalue because it will immediately harm, cause pain to millions. But external devaluation would improve export competitiveness faster and with less pain (mainly thorugh import generated inflation) than the internal devaluation (austerity) executed by Fidesz. However, the government only hopes to bring redemption to a quarter of the 1,2 million households with fx-loans with their plan to enforce a conversion of the loans at an exchange rate of 180 Huf (50 forints weaker than last Friday's close), signaling that they do not really want to get rid of the effective peg in order to curve out more room for manoeuvre for the economic policy, but to fend of the popular pressure.

As for the second problem the plan lays the whole of the burden and the losses on the banks. However, the balance sheet of these banks is already full of hidden losses due to the non performing loans and the loss of value of the real estates serving as collateral fro these fx-loans. As long as they can keep their debtors afloat they not necessarily can declare these losses and they can manage „only” with setting up appropriate reserves. So, they can hope – and in this sense their interest is common with their debtors' interests – that at the end these loans will be payed back according to schedule and they can release the reserves set up to cover projected but at the end avoided losses. However, as soon as they are forced to accept the conversion of these loans (or the repayment in one sum) at 180 HUF exchange rate they will realize huge losses on these loans that has to be covered. According to preliminary estimates it can be as high as 1100 billion HUF. It will effectively force them to recapitalize. Even if their owners (Western Banks mainly) will provide them with the necessary capital – that is far from being certain – they will certainly try to find as much foreign capital as they can for this purpose. One option is to freeze lending and use the capital to cover losses. And on the long run they will certainly pay close to zero rates on deposits, as they won't need to accumulate capital this was because they won't lend. (There is of course the secondary effect of losing confidence in Hungary. As this move would be most probably illegal, violation of existing contract by a third party without interest in these contract, violation of property right and that way unconstitutional and against EU law if the government implement it it will be equal with the declaration that no investment and no property – remember the private pension funds! - is safe here.) Anyway, it could bring the banks to the decision to withdraw – gradually or even abruptly – from Hungary. It will certainly cause further reduction in lending and tighten already very tight financial conditions. And such events are rarely beneficial to economic growth, something the government desperately wants to deliver.

As the plan is clearly not part of a coherent one on how to free the Hungarian economy from constraints from which it can be disentangled it is hard to see how it could lead to positive result. It is not aiming to the solution of the most important problem, just for short term political gains. (And it is the expression of frustration as the information on the discussion in Fidesz's caucus suggest. The most important supportive argument against the objections of the more restrained members was that the banks caused this whole mess they should bear the whole of the burden.) Not that there wouldn't be place for an orderly and well balanced solution to the problem. There were even plans proposed by bankers. And even if those were rejected with the cooperation and advice of the IMF and the EU (and with their loan) a kind of bad bank or special financial vehicle could be set up in order to clear the bank's balance sheets, convert the loans and that way achieve simultaneously the re-ignition of bank lending to the economy (that was already constrained by the huge implied losses and the subsequent frenzy to collect enough capital to cover these probable losses) and the lifting of the burden of households. But it would obviously end the economic war of liberation so proudly waged by the government.

*According to the data of the Office of Statistics retail sales grew in this year m-o-m and y-o-y as follows:

               m-o-m        y-o-y

January     0,9% and   0,9%

February -0,3% and   0,1%

March     -0,5% and -0,9%

April       -0,3% and -1,2%

May         0,5% and   0,7%

June        -0,5% and -0,5%

Meanwhile the CHF-HUF exchange rate fluctuated between 220 and 205 HUF in January, between 203 and 214 HUF in February, between 201 and 214 HUF in March, between 200 and 210 HUF in April, between 204 and 221 HUF in May and between 214 and 228 in June. Funnily, retail sales declined in the month when the CHF was weakest.

Scholars of humanties will save the world?

Yesterday - at least as I see, without any qualification and only intuitively - was a fine example how the psychology of the markets work. At the start almost every stock exchange plunged, almost a free fall, but they soon began to recover, most probably on the back of expectations that the FED will announce new measure to boost the sluggish US economy. The expectations ranged as far as the immediate announcement of quantitative easing adn what happened? Well, nothing. The FED reiterated that they are aware of the problems, just as they were earlier, they will keep interest rates practically at zero, just as it was for a while, they will pump back their profit into the financial system, again as it is happening even now, and of course they will consider anything that can help the economy. None of these measures helped to stop the deterioration so far, and to expect a different outcome for now would not be too logical. An none of these measures is new in any sense, not to speak of being surprising. Or did anyone honestly expected the FED to raise its rate in the face of the slump? (Just because today's hedalines speak of markets rebounding due to FED's announcement of keeping rates zero.)

Thus, the FED did not change course, while the markets were expecting something new, that could steer the world economy in another direction. The initial reaction were as one would expect: sell-off at the stock exchange. But, curiously, after some time euphoria settled and the markets rallied. Given what happened it is counterintuitive at best.. Market participants were waiting for the announcemtn of radical changes and what they receieved was the announcement of no change at all. Initially they reacted asthey should, but somehwo reconsidered their position and began to trade like the FED would have given them what they had expected. Instead of the usual market-bashing probabyl it is better to draw some conclusions.

It is not words that matter - sometimes instead of deed - but only how they are interpreted by actors on the market. Even if what they have heard was the opposite what they longed for they could still reinterpret it as if it would be the much desired news. But there is still a delicate case here: it seems words of financial institutions are more or less unintelligible for their audience and it confuses them, This time for the better - leading to positive evolution of the market -, but it can easily turn out to be the opposite. And this is the point where scholars of humanities could have a significant role in ameliorating of the workings of the economy. Who else are in a position to make a thorough textual and discoursive analysis of the words of financial institutions. Probably with a wide scale reserach project every statement and every interview of the respective central banks and their leaders should be collected and alaysed in order to determine the real meaning of words and phrases. And as personalities in the financial world change it would be a never ending story. But with the help of these scholars the markets would have a dictinoary or theasurus of the central banks enbaling them to undertsand their statements immediately. Funny, it seems the markets needs translators and they will collapse without the help of those useless humanity scholars.