Frankfurt or Jackson Hole

Frankfurt or Jackson Hole
David R. Kotok
August 30, 2012




Mario Draghi and most European Central Bank members will not come to Jackson Hole. The exception is the Bundesbank’s president Jens Weidmann, who will come for one day.

The issue in Europe is simply a negotiation attempt for an agreement to establish the ESM (European Stability Mechanism), assuming that the German constitutional court approves or requires modifications that are acceptable.

As soon as the agreement is complete, a new European financing mechanism will be implemented. The mechanism will be styled in part after the US system of primary dealers that directly deal with our Federal Reserve and implement policy by buying and selling American sovereign debt, US Treasury securities.

The difference in Europe is that Mario Draghi cannot implement this process if it conflicts with the Bundesbank. Germany and the German Central Bank represent the largest “capital key” weight in the ECB.

Unlike the US where Ben Bernanke can tolerate dissenting votes (he’s had as many as three) and still implement policy on the Federal Open Market Committee (FOMC), the ECB governing council system operates in a different format. Draghi must accomplish a consensus in order to avoid the problems. He knows that market turmoil will result if he faces dissenting Germany.

Markets will observe these negotiations closely. Watch the upcoming ECB meeting on September 6, 2012. Also look for the German constitutional court decision and the elections in the Netherlands, both on September 12, 2012. There is a lot at stake in Europe. No decisions are final. There is ample opportunity for success or failure and much volatility as Labor Day weekend progresses.

At Leen’s Lodge, our group will observe the events in Europe and in the US. Satellite connected TV and Wi-Fi take this Maine destination into the modern world in real time. Hopefully, there will be a minute or two for some pristine water, a fishing rod, and a friendly cooperative pescado.


David R. Kotok, Chairman and Chief Investment Officer

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