From the weekend Barron’s Mid-Year Roundtable, here is some trenchant and detoxifying Felix Zulauf:
If you ran the ECB, how would you deal with Greece?
There is no painless solution. We have to let entities, even governments, default. But we have to make sure first that the banking system can handle its clients’ defaults. That is the problem. In the European banking system, equity capital is only 3% of assets. In the U.S. it is 4.5%. Raising banks’ equity-capital ratios is the only way to solve the problem in the long run.
We missed the chance during the financial crisis. I would have handled the whole crisis differently. I would have nationalized the banks and not allowed them to pay any dividends or big bonuses. First they would have to improve their equity-capital positions. This would go hand in hand with extremely low growth.
You would have been very unpopular.
The fiscal authorities have to support the system. But instead of wasting money to boost consumption, they should be spending on investments that will bear fruit long term. By the middle of the decade at the latest, we will have a major crisis, bigger than 2008. Several countries will default, particularly in Europe. Quasi-fixed exchange rates between the U.S. and China will start to unravel, which will force the U.S. dollar down tremendously. It will push bond yields up and stocks down.