Although the loss of sovereignty is only perceived when IMF representatives or other international creditors show up at the airport, the reality is that the erosion of self-determination begins when a bond auction attracts bids from foreign lenders. The key to regaining this sovereignty is obvious. The government could limit itself to borrowing principally from its own citizens, as is the case in Japan.  Alternatively, if foreigners already own the debt, counties could snatch back sovereignty by renegotiating or reneging on the deal. This could occur as a result of a default in the traditional sense or, if the nation has control over its currency, by printing money. None of these are particularly flattering options for the debtor nation, but if self-determination is the goal, this is how it can be achieved.

Losing sovereignty is not a dirty word in every case, though. Many nations have willingly ceded sovereignty for the greater good. For example, in the case of confederation, trade regulations, nuclear proliferation agreements, CO² emissions caps, or other areas of international law, governments willingly limit their room for manoeuvre in the wider interest of their citizens. Even in the case of public debt, the loss of sovereignty through borrowing may also be in the public interest if the money is invested in a way that, at least, yields a long-run return that is greater than the cost. If that condition is not met, the sovereignty is lost for nothing and the citizens are fully justified in petitioning their parliament.

“Let’s see what this guy has to hide”

“This time they should look more carefully at what he has been up to”

“Isn’t it dreadful that people are only interested in digging up dirt from his past?”

The office of Germany President has undoubtedly suffered from the Wulff affair, and there is an obvious political urgency to resurrect it, but what is the best way to proceed? Should one crown the nominee Gauck, who up to now has had a squeaky clean background, and simply hope that nothing that smells of scandal comes to the surface during his term, or should one dig into his past as deeply as possible to make sure that there are no embarrassing skeletons in his closet?

One of the factors that lead to Wulff’s downfall was his tactic of revealing only snippets from his questionable past and not coming clean in one go. The affair started with the revelation that he had received a home loan from a friend while he was State Premier of Lower Saxony. Later, it became known that he had accepted paid vacations; the state had subsidised filmmakers, one of which was Wulff’s close personal friend; there were also revelations about parties and book deals. The list was too long for the public to digest. With each new story, or part thereof, observers had to open a new ‘mental account’ with a small loss. Psychologically, it would almost have been better to come clean with all the indiscretions in one go. This is one thing the due diligence team could remember should Herr Gauck have less than a pristine past.

A problem still remains: if someone manages to dig up a scandal severe enough to disqualify the 72-year old Gauck (the older one is the more time one has to accumulate indiscretions), who should then take the role of president? When one considers what politicians, the press, and the public currently expect of the new president, no-one less than super-human could possibly fit the job description.

If Twitter is anything to go by, the dirt-digging is unavoidable. If anything is found, though, bringing everything into the open would be preferable for the President’s Office than a revelation that comes to light at a later date. As US politicians have demonstrated, a little dope while at university is no impediment to attaining high office; the only pre-requisite is that it is known in advance.

The reason Bob Diamond wrongly concluded that the banks would be able to “put the blame game behind us” was because this is how things used to work in the past.  The public frequently gets upset by scandals, tales of wrongdoing, or evidence of excess, but then after a few days or weeks people simply get used to it, they adapt, they forget about it. This doesn’t seem to be happening anymore; people are noticeably less forgiving than they were in the past, and tenacious with it.

Philipp Hildebrand, the former president of the Swiss National Bank, tried for weeks to duck the flying fruit when news emerged of the uncanny timing of his wife’s personal currency trades. The public furore simply refused to go away and he eventually stepped down. The same applied to the German President Christian Wulff, who resigned on Friday as a result of a story that broke two months earlier. Both characters were admittedly hounded out of office by an unashamedly hostile media, but the media only pursues a story as long as it interests the public.

Still Occupying the City of London

It is tempting to see a link between the Occupy movement and this new public mood. Many thought it was a hollow crusade that would fizzle out after a few weeks or months – or at the latest with the onset of wintry weather – yet the tents are still there. The question is: which way does the relationship work? Could it be that the message of Occupy has entered the popular psyche? Or was it a pre-existing, but unspoken public sentiment that erupted into the Occupy movement?  At least, the targets of public fury all seem to be figures in the one-percent income group.

It would be unwise for people like Diamond to believe there will be a return to business-as- usual any time soon. Ultimately, if bankers, politicians and business leaders want to avoid public opprobrium, they might actually have to start addressing the grievances expressed by the Occupy crowd. Trying to keep a low profile until the storm blows over is a tactic that has had its day.

“Ooww, I felt that one” fans can be heard to say when one of their own is badly injured on the field. They are not exaggerating.  Brain research has revealed that the same region is activated in the brain of the observer as in the brain of person who is actually experiencing the pain. The brain region is called the anterior Insula and the sensation is commonly known as empathy. However, this same fan, in the very next moment, can feel totally indifferent to, or even gloat at the misadventures of a member of the opposing team. In this case, neurons in a different brain region – the Nucleus Accumbens – are stimulated. This region is part of the reward centre, which means that observers feel little empathy with others’ misfortune; they might even experience some small pleasure.

Important for feelings of empathy is the perception of group membership. When it comes to family members, friends or even to supporters of the same football team, it is the anterior Insula that will be activated. As observers ‘feel’ the pain of in-group members, they are more willing to lend a helping hand. In behavioural finance, we would say that a friend’s loss is my loss. Things are different when it comes to members of the out-group, however.  Here indifference will prevail, if not outright schadenfreude. A competitor’s loss is my gain. With the help of a brain scanner it is even possible to predict whether a subject will run to the aid of person in need or not: the greater the level of activity in the Nucleus Accumbens, the lower will be the willingness to help.

Empathy, or lack thereof, is pre-determined in the brain. As much as I might like to believe that I would take a sportsman-like interest in the well-being of the shins of players on the opposing team, the brain scanner might tell a different tale.

The prospect of a Greek default has been poison to the sentiment of German domestic institutional equity investors. Since the rating agency S&P downgraded nine eurozone sovereigns in mid-January, they have been tenacious in their bearish beliefs even though the DAX has risen steadily over that time. Although in last week’s poll it appeared as if the more than 12 percent trough-to-peak equity rally had started to bite – perhaps the implications of the Greek debacle are not so crucial to the performance of German blue-chips after all – but this week the bears are back again. Read more

My Plan B was to trawl the internet and the search brought me to a few Superman outfits that I found rather cute. What am I saying, ‘cute’? They were downright cool! However, it was priced quite richly for just a couple of hours of pre-school partying. How about just borrowing one? I checked with friends, but the only thing that fit was a Dalmatian puppy costume. No thanks. My mind was basically made up: my son needed a hero’s garb.

eBay listed a few children’s’ Superman suits. I bid on two items and ‘won’ one romper for a very reasonable price. Not bad, except that it didn’t have a cape. Where would the caped crusader be without his red cape? So, over my lunch break, I went browsing through the fabric stores. A lustrous scarlet fabric fit the bill perfectly, but it was sold only by the full metre and I would only need a fraction of that for my mini-hero. So I shelled out for far more red cloth than I needed, and I wasn’t even sure I would be able to stitch it into a cape. Needlework is not one of my strengths.

I could already see what was happening. One investment of time and of money seemed to be leading to another in an endless chain – the sunk-cost trap. I could almost feel my rising commitment and I knew that I was more caught up in this thing than I really wanted to be. Even before starting to cut and stitch, my monetary costs were nearing that of the off-the-peg outfit. I did find some small comfort in a message from eBay, where the second suit that I had bid on finally changed hands for a much higher price. Relatively speaking, I got off rather lightly. As I set to work, I consoled myself with the thought that at least one other person had had to pay more.

“Three years?” she gasped. “Facebook probably won’t even exist in three years.”

I thought about what she had said for a few moments and then smiled adoringly. Aahhh – my little girl might just have given me her first piece of investment advice.

However, when Draghi signaled that the ECB would be willing to forgo the profits from its Greek portfolio worth about €40 billion, I could hardly believe my ears – and not because the bonds would be worth €55 billion if held to maturity.  Rather, I was stunned to hear that, just like my aged mother-in-law, Draghi was treating the notional and the interest as being somehow different. My retired in-law would never dream of selling any of her fixed income investments to finance her consumption, but helps herself generously to the coupon payments. In other words, the capital and the fruits thereof are recorded in different mental accounts although she knows that the interest is compensation for the depreciation of the capital through inflation and, strictly speaking, should be consumed with the same moderation.

Mario Draghi is obviously doing the same thing by recording the Bank’s Greek bond portfolio and its respective profits into two different mental accounts. This psychological point of view enables him to view the capital and its fruits differently, when in fact the profits should be perceived as compensation for the possible devaluation of the capital stock. This means that he would indeed accept a loss in value of the portfolio, even if these profits are distributed lawfully among the eurozone’s central banks.

Granted, not all the inhabitants received the same share of the €100 million, 400,000 euros each. But, except for a Greek who wound up there for the love of a woman and apparently was overlooked by the ticket-sellers from a local homemakers' association, every villager received at least €100,000. Others, however, were paid a multiple of that figure. If we may believe the journalists who journeyed immediately to Sodeto after this windfall and blessing was announced, envy, resentment, and senseless debauchery haven't yet sullied the community. Although a bunch of fortune seekers and car salesmen, attracted by money like moths to a flame, have already visited this far-flung village, the villagers plainly aren't interested.

It may be because many of the villagers are old people who have already made it through life without making any really ostentatious purchases, perhaps even avoiding senseless consumption altogether. However, there is also a fear that the sudden wealth could curse the community, and so the money has come to be viewed with caution and reservation. The villagers consider themselves to be all in the same boat, sticking together and maintaining a fairness that goes so far that one ticket-seller disbursed the winnings to a girlfriend who had not yet paid for her ticket when the grand prize drawing was announced.

I sincerely hope for the citizens of Sodeto that the atmosphere in the village remains so congenial, but I'm a little pessimistic. First of all because most of the poorer members could afford only a quarter ticket, and of course therefore only got a relatively small portion of the profit. For many the money will quickly be spent on loan repayments or a long-awaited house renovation. But if one of the big winners shows up with a brand new Jaguar or a Porsche or a Maserati after waiting out a limited cooling-off period, the other newly rich won't hesitate long to pile in[1]. In other words, a conspicuous commodities 'arms race' is likely beginning at this moment, coupling envy and resentment to those who cannot keep up. A neighbor's new status symbol will quickly be perceived as a personal loss for the lesser endowed[2], so it is very likely that the sense of happiness and harmony in the village, despite the blessed windfall, may fall off dramatically.

The curious journalists will be long gone by then, but it might be worth a psychologist’s time to do a study on the residents' feelings of well-being. Research on happiness is currently in vogue, and in Sodeto one can find nearly perfect lab conditions.

The medium-term investors polled every week by Börse Frankfurt have apparently rethought their strategies. Perhaps it was the fact that the DAX rose by another 3.5 percent last week, for a total gain of 12 percent since Standard & Poor's lowered the creditworthiness of nine European countries on January 13th. We now see a significant drop in the number of pessimists on our panel, nearly three quarters of which proceeded directly into the bullish camp. As a result, the level of optimism measured by the Bull/Bear Index reaches slightly above this year's average...

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