New legislation responding to old EU crisis

From BBC Business News on the status of Spain and a potential bail-out:

On Wednesday, the European Commission unveiled proposals designed to stop taxpayers' money being used to bail out failed banks.
The aim is to ensure losses are borne by bank shareholders and creditors and minimise costs for taxpayers.
However, new legislation is unlikely to come into force before 2014 at the earliest, too late to protect taxpayers from any further immediate bank failures.
"The proposal we have today may be only useful for the future but it does not solve the current problems we face," said Sharon Bowles, chair of the European Parliament's economic and finance committee.
There would be new requirements for countries to prepare for a bank collapse, collecting money through an annual levy on banks that would be used to provide emergency loans or guarantees.

Brilliant. The European Commission will have new laws on the books to prevent a redux of the EU crisis occurring again in the future... if the EU even still exists in the future.

It seems European politicians are acting as if their policies could apply retroactively, but even if these sort of reforms could have stopped the current crisis, that's no guarantee that future crises will look anything like the current one.

There's also the chance that this new legislation - "an annual levy on banks that would be used to provide emergency loans or guarantees" - will just add to the moral hazard problem and make excessive risk-taking by banks even more likely.

Responding to the last crisis is of great temptation to politicians, who must be "doing something" in order to satisfy their constituents, but this foolhardy rush to action may do more damage than good. Post-Enron accounting reforms have been blamed for making the U.S. financial crisis worse, and Europe could be reading a parallel story five years from now if these proposals go through.

The printing presses have broken down; how will we inflate the currency now?

This just in. A recent printing run, in hundred dollar bills, has substantial defects that make many of the notes unusable. How big of a printing run? Just $110 billion worth. From CNBC:

At the time, officials announced the new bills would incorporate sophisticated high-tech security features, including a 3-D security strip and a color-shifting image of a bell designed to foil counterfeiters.
But the production process is so complex, it has instead foiled the government printers tasked with producing billions of the new notes.
An official familiar with the situation told CNBC that 1.1 billion of the new bills have been printed, but they are unusable because of a creasing problem in which paper folds over during production, revealing a blank unlinked portion of the bill face.
A second person familiar with the situation said that at the height of the problem, as many as 30 percent of the bills rolling off the printing press included the flaw, leading to the production shut down.
The total face value of the unusable bills, $110 billion, represents more than ten percent of the entire supply of US currency on the planet, which a government source said is $930 billion in banknotes. For now, the unusable bills are stored in the vaults in "cash packs" of four bundles of 4,000 each, with each pack containing 16,000 bills.
Officials don’t know exactly what caused the problem. "There is something drastically wrong here," a person familiar with the situation said. "The frustration level is off the charts."
Because officials don’t know how many of the 1.1 billion bills include the flaw, they have to hold them in the massive vaults until they are able to develop a mechanized system that can sort out the usable bills from the defects.
Sorting such a huge quantity of bills by hand, the officials estimate, could take between 20 and 30 years. Using a mechanized system, they think they could sort the massive pile of bills, each of which features the familiar image of Benjamin Franklin on the face, in about one year. [Emphasis added.]

The total cost of producing the bad bills was $120 million, excluding whatever it will take to sort the good from the bad. The unusable bills will have to be burned; frankly, it might be cheaper to just burn the entire print run, compared with sorting over 1.1 billion items of currency.

Apparently, during this print run of 1.1 billion, no one checked at the beginning/middle for quality control. A private firm that operated like this would be out of business. With almost a third of the prints unusable, I can't imagine many repeat customers... other than the federal government.

Kidding aside, this poses some tangible problems for the Federal Reserve, whose strategy has depended on getting currency flowing in the economy. With at least a year's delay before this money will actually be reaching consumers' hands, it complicates monetary policy. Facing an already Herculean task of managing market perceptions and signals, having this additional lag between action and effect could make the results of Fed decisions even more difficult to anticipate.