First, there’s another Michael Lewis feature in which he takes his individual brand of comic-finance-travel journalism to Germany.
The only economically plausible scenario is that Germans, with a bit of help from a rapidly shrinking population of solvent European countries, suck it up, work harder, and pay for everyone else. But what is economically plausible appears to be politically unacceptable. The German people all know at least one fact about the euro: that before they agreed to trade in their deutsche marks their leaders promised them, explicitly, they would never be required to bail out other countries. That rule was created with the founding of the European Central Bank (E.C.B.)—and was violated a year ago. The German public is every day more upset by the violation—so upset that Chancellor Angela Merkel, who has a reputation for reading the public mood, hasn’t even bothered to try to go before the German people to persuade them that it might be in their interests to help the Greeks.
There’s also a Q & A with Lewis about his piece.
If that’s too long, I’ve been looking around the global financial press for a big picture overview of the current crisis and you really can’t do better that Brian Fallow’s column in the Herald yesterday:
Suppose that New Zealand, attracted by the prospect of Australian interest rates, adopted the aussie dollar.
Suppose further that the price of that was that before a Finance Minister could present a Budget to Parliament he had to run it past Canberra: “Nah, mate, come back with one with less spending and more tax. We won’t underwrite this.”
How would we feel?
In Europe’s case, however, something like that may come to be seen as the lesser evil.
If the alternative to fiscal integration is monetary disintegration – with countries leaving the euro system and defaulting on their debts – what would it cost taxpayers in the remainder of the euro area to bail out their banks, when they are left holding the bag?
The take-home message I get from all this is that we’re still in the midst of the Global Financial Crisis – we currently see it as being a couple of months in late 2008, subsequent to the collapse of Lehmans, but historically it will refer to a period from, say, 2008 to 2013 (or whenever).
And while the first stage of the GFC was a classic ‘crisis of capitalism’, straight outa’ Karl Marx (now accompanied with riots by his detested lumpen-proletariat) it now looks more like a crisis of regulated capitalism, as politicians and central banks try and fail to resolve the issues.
I’m currently reading Too big to Fail, am probably the last person in the world to do so, and started it before this hit the fan, again. Its the same names coming up again, the same irrational hysteria, the same self fulfilling prophecies of doom, the same bumbling lack of human leadership while computers trade the market down to oblivion- one thing that strikes is that how can these bankers who make tens of millions of dollars a year, be so stupid? Again?
But then again if you could retire on only one years salary of $40million to Telluride, you probably wouldnt give a toss either.
Comment by gn — August 12, 2011 @ 7:56 am
The 1997 Asian Financial Crisis ended a few short years later because the Asian governments concerned let Too Big Too Fail corporations go to the wall. (The South Korean Government is probably the finest government in the world.)
Asian Financial Crisis 1997 to 1998.
Comment by Simon — August 12, 2011 @ 8:15 am
Yeah, it’s easy to predict the building is going to burn down when there’s a deep fat fryer boiling in the kitchen. It takes someone who’s actually connected with the world – so we can exclude, say, most economists, but especially the ones working at Citi, RBS, BNP Paribas, Freddie Mac and Fannie Mae, the UK Treasury, the Federal Reserve, Goldman Sachs, BoA, WaMu… sigh… Barclays, HSBC, ANZ, Commonwealth Bank, Deutsche Bank, the European Central Bank, most universities, all the other central banks and merchant banks I haven’t mentioned, undiscovered economists foraging on the moon looking for whatever sustenance their species thrives on, the vast majority of accountants and commercial lawyers and every single politician, ever* – to know the actual risks of the house burning down when the obvious things that cause them aren’t already happening.
Too big to fail is a euphemism for “we’ll lose our jobs”. The British government took over Northern Rock during the first shaky moment in 2008, but for some reason when it came to keeping banks under control governments completely failed to do the same when it demonstrably worked. Instead we gave them money in the form of preference shares to keep them going and still let them pay out billions of dollars in bonuses while we cover their arses based on the idea that we couldn’t keep the great people who actually generate wealth if we didn’t make sure that the environment was palatable. Oh, no, they’d take all their dodgy assets over to Hong Kong! All these bankers who fucked up trading with fictional money would suddenly run away to China, and take their expertise with them!
Everyone who got it wrong and continues to advise on this has a vested interest in keeping this charade going. So fuck it, we can keep throwing billions of dollars into bad companies that don’t trade in anything except debt in the first place while they refuse the same credit to companies that actually produce tangible goods and let them go to the wall until we’re left with nothing but companies that are owned by banks and hedge funds. That’ll fix the problem.
*list not exhaustive
Comment by Dizzy — August 12, 2011 @ 8:43 am
Oh, but hey, it’s nice to see that that article explains Daniel Tosh nicely.
Comment by Dizzy — August 12, 2011 @ 8:54 am
The Euro crisis means that the Australians are never even going to think about a single currency with us now. Which is probably for the best, despite what John Key says.
Comment by bradluen — August 12, 2011 @ 9:01 am
I never thought the GFC was over first time round. There was no structural change, none of the problems were fixed.
I think your 2013 end date might be a bit optimistic.
A.
Comment by Antoine — August 12, 2011 @ 9:16 am
@ Antoine
+1
Also, we are going to have a Japanese style lost decade and a bit.
Comment by andy (the other one) — August 12, 2011 @ 9:18 am
“…while the first stage of the GFC was a classic ‘crisis of capitalism’, straight outa’ Karl Marx (now accompanied with riots by his detested lumpen-proletariat) it now looks more like a crisis of regulated capitalism, as politicians and central banks try and fail to resolve the issues…”
This has to be one of the dumbest observations I have ever read. We are in the same event, so it is impossible to divide it up in this trite way – the GFC was caused by the unrestrained parastism of global capitalist finance. If we are still in the GFC, then the cause remains the same. Trying to shift blame around simply because the calender has advanced is just peripatetic nonsense. Further, the politicians and the central banks are still operating in the same, failed unregulated neo-liberal paradigm that caused this whole damn disaster in the first place. Get back to me when a whole lot of bankers have been lined up and shot, David Cameron is strung up by his heels in Trafalgar square, a whole pile of debt has been repudiated and we’ve got a second Bretton Woods agreement in place. Otherwise, it is the same discredited people with the same tatty stall selling the same shitty failed solutions.
The whole Euro project is a deeply right wing one in its origins, institutions and macroeconomic policy settings that was sold to an unsuspecting European public as a further step along the road of European unity. The poison of right wing economic theory is now destroying the economies of Europe one weakest link at a time. The Germans and rest of the big European economies fed Greece with cheap credit like so much heroin to a junkie, and now as the deeply implicit dealers in the filthy business they are pretending it is all Greece’s fault. “The only economically plausible scenario..?” What planet is Lewis on? The only plausible scenario is for Greece to default, leave to Euro zone, and be allowed to deflate it’s currency. Otherwise the vision of the future for Greece is the jackboot of a German banker stamping on the countries face forever – or until the communists take over and repudiate all the debts.
In the longer run, the entire western world has to default on it’s massive debts and start again, otherwise – just as in the 1930′s – orthodox classical economics tied to massive debt will simply see the west crippled forever in austerity. Seventy years ago WWII in the end offered the the only solution to the massive debts and conservaitve economic policies and personally I don’t really feel that a global war between nuclear armed states is a reasonable price to pay just because a bunch of fat cat bankers are considered untouchable.
Comment by Sanctuary — August 12, 2011 @ 9:50 am
In the longer run, the entire western world has to default on it’s massive debts and start again, otherwise – just as in the 1930′s – orthodox classical economics tied to massive debt will simply see the west crippled forever in austerity.
I was confused at first but Santuary’s comment is so full of confidently predictive statements it must be correct. It was also useful as I now understand the opposition to the Euro and European integration by conservative parties throughout Europe was just to throw us off the scent of the VRWC.
Comment by Richard — August 12, 2011 @ 10:06 am
Sanctuary, as far as I’m concerned, if stupidity got us into this mess, it can damn well get us out of it.
Comment by Kahikatea — August 12, 2011 @ 10:11 am
@ Richard – The Euro is deeply right wing because it’s philosophical underpinning are neo-liberal orthodoxy all the way – as the PIIGS crisis is demonstrating. That this has led to a predictable disaster that is resented by Conservative parties in Europe is one life’s delicious little ironies.
Comment by Sanctuary — August 12, 2011 @ 10:16 am
In 2003, James Howard Kunstler correctly anticipated that what he calls “The Long Emergency” was imminent and unavoidable. His perspective was based on the consequences of Peak Oil hitting the global economy and societies everywhere, initially producing a bumpy plateau of recession and recovery as energy prices fluctuate on the event horizon of growing scarcity.
We can add to this the gathering effects of climate change and the economic and fiscal consequences of a decade of outsourcing jobs to countries with cheaper labour which has destroyed literally millions of manufacturing jobs in the West and / or converted them into lower-paying service jobs….whose workers either pay less tax on lower incomes or have no income and rely on state assistance. At the same time, taxes were cut for those on the best incomes, making matters even worse.
So here we are…and this problem is only getting underway. Our world is on the cusp of huge change and our leaders (and most voters) haven’t got a clue….eyes riveted to the rear-vision mirror in their feeble attempts to chart a viable course into the future.
Comment by Steve (@nza1) — August 12, 2011 @ 11:05 am
Danyl, the only thing that I’m surprised about is that you’re surprised about this. The problem wasn’t fixed in 2008, it was only prolonged by band aids.Forget the left/right bullshit and do the maths.
Comment by Mark Harris — August 12, 2011 @ 11:46 am
Sanctuary, not your usual subtle understatement today.
These two charts from the Australian are interesting, especially the first one.
http://blogs.theaustralian.news.com.au/mumble/index.php/theaustralian/comments/net_debt/
It looks like Australia and NZ had a lucky combination of gdp growth, government revenue growth and a bi-partisan agreement on repaying government debt in the 90s and 2000s. This gives our governments a bit more leeway in responding to the current shower of shit
Comment by Tinakori — August 12, 2011 @ 12:15 pm
Even after 2+ years, no ‘authority’ has presented a compelling reason why letting bankers take a haircut as debtors default and positions unwind will somehow bring the world to an end.
Wouldn’t the simplest solution to be for nation states to guarantee retail deposits and up to a nominal amount and legislate the rest of the debt out of existence (or if thats too radical, buy up risky mortgages/loans at a few cents to the dollar and extend payment terms)?
Every investment class carries an element of risk, but that particular tenet of capitalism seems to have been conveniently forgotten.
Comment by Gregor W — August 12, 2011 @ 12:18 pm
In a sense, our previous Labour Govt was the most right wing in our history. Around most of the developed world Govts took on massive amounts of debt and expanded their reach enormously into their communities. Here we got zero net debt and our citizens close to the most personally indebted in the world. Mind you, we still got a massively increased Govt which went from Core Crown Expenture of $34 billion to $70 billion today.. but in a funny old way we lucked on to a better prospect than the countries that are in deep trouble.
Most of those troubled OECD countries have higher per capita incomes than we do, and less personal debt, so they’ll have to assume the nations debt and pay it off through increased tax and less benefits, but here its the other way round, we have so much personal debt and lowish incomes that we can’t afford more tax and less benefits. Its gonna be interesting.
JC
Comment by JC — August 12, 2011 @ 12:51 pm
Our current problems are obviously a hangover of the ’08 crisis, but the problem is not that nothing has changed. It’s that (ta-dah) everything has changed.
Before the crisis people were irrationally willing to take on debt. 2008 smacked that out of them, and now they’re irrationally afraid of debt. If you expect politicians and central bankers to show leadership and say, “Look, debt is OK if you can and will pay it back, we’ll prove it by borrowing a billion bucks and
stuffing it in S&P’s offices and setting the place on firespending it on infrastructure”, you might be disappointed, because politicians and central bankers are approximately as irrational as everyone else. We got lucky in the Great Depression because the policies of left-wing parties at the time happened to coincide with what was actually the right thing to do. Doesn’t seem to be the case this time around, so it’s going to be a rough decade.Comment by bradluen — August 12, 2011 @ 1:15 pm
I agree with Sanctuary – the free market capitalists are still in charge and nothing has changed – just band aids liberally slapped on anything that looks dodgy, and those band aids paid for handsomely by the public.
But I disagree with the ‘mass default on debts’ option, as (same as for waiving student loans) this rewards the profligate spenders who borrowed and spent on ‘lifestyle’ merrily, while punishing the frugal. The alternative is to raise taxes on companies, trusts and PAYE to pay off government debt, and…..
…to tackle the elephant in the room – trade liberalisation. This pillar of free market capitalism says we should have no tariffs or quotas on imports, which has led to the private debt mountain. Slap tariffs and quotas on imports from nations that have bad human rights, workers rights and environmental records to balance up the ‘level playing field’. Treat it like ACC assessments – start with crude UN measurements of those 3 factors, then refine with time. Any foreign company that feels overtariffed can apply for a re-assessment (at full cost).
NZ manufacturing then becomes viable again, and stimulates PAYE and company tax revenue to the state, while giving bigger wages to workers to pay off their personal debt. Sorted.
Until trade liberalisation is addressed, NZ will keep losing productive jobs that are not tied to the land, forests and fisheries. Raw logs felled, fish caught, and milk/meat/wool grown will not prop up 4.5m people.
Comment by bob — August 12, 2011 @ 1:24 pm
“……to tackle the elephant in the room – trade liberalisation…”
I think Adidas have just recently given us the clearest possible demonstration of what “trade liberalisation” actually means in the real world. Trade liberalisation is one way bet for corporations to liberally overcharge us, liberally underpay them, and liberally make out like bandits with the profits. No wonder they love it so much.
Comment by Sanctuary — August 12, 2011 @ 1:36 pm
“…Sanctuary, not your usual subtle understatement today…”
Hah! it is Friday morning and the weekend beckons, what better time for bracing polemics
?
Comment by Sanctuary — August 12, 2011 @ 1:38 pm
Slap tariffs and quotas on imports from nations that have bad human rights, workers rights and environmental records to balance up the ‘level playing field’… NZ manufacturing then becomes viable again
Hypothetical question:
Does an innefficent manufacturing sector, using outdated technology and poor governance structures (i’m personally thinking of a sterotypical French agri-business) deserve trade protection from an efficent asian (or australasian, even) competitor, simply because France doesn’t torture terrorists?
I agree with the sentiment that we should be pushing nations to improve there social/environmental record, but this seems like a really round-about-backwards way to do it.
Comment by Phil — August 12, 2011 @ 1:49 pm
This pillar of free market capitalism says we should have no tariffs or quotas on imports, which has led to the private debt mountain.
Oh, if you’ve got some proof of this, I’d love to see it. The numerous and various defaults and debt-crisis of Russia, Mexico, Central America, Eastern Europe, and so on, over the last 40-odd years would tend to suggest that, with all due respect, you’re talking out your arse.
Comment by Phil — August 12, 2011 @ 1:56 pm
“Even after 2+ years, no ‘authority’ has presented a compelling reason why letting bankers take a haircut as debtors default and positions unwind will somehow bring the world to an end.”
I suspect a key one for countries like Ireland, Greece, Spain, Portugal et al is that after the said haircut they still have to go back to the bankers and borrow more money to cover their deficits. Post haircut, that would be a challenging discussion.
Comment by Tinakori — August 12, 2011 @ 2:15 pm
Further, the politicians and the central banks are still operating in the same, failed unregulated neo-liberal paradigm that caused this whole damn disaster in the first place.
Unregulated really you believe that? No regulation at all? I wonder what the literally hundreds of financial regulatory agencies at the state and federal level in the US do fit he market is “unregulated”.
And while the first stage of the GFC was a classic ‘crisis of capitalism’, straight outa’ Karl Marx
Should we ignore the change to the Community Reinvestment Act (CRA) (the first private securitization of loans were of CRA loans), to make banks prove they were making efforts at lending to the ‘underprivileged”, which led to the creation of the subprime mortgage market in the US? Should we ignore the role of the government sponsored enterprises Fannie Mae and Freddie Mac (the federal guarantee of which gave risky securtizations of their mortgages an implied triple A rating) or the role of the Federal housing Authority in directing mortgage lending to low income borrowers? Should we ignore the the labyrinthine mess of regulations that conferred upon the rating agencies government protection and privilege and effectively barred anyone from competing with them? Should we ignore the Federal Reserve keeping interest rates low for five years after the dot com crash and the credit expansion it fostered? Should we ignore the role of the Basel accords?
This is all summarised in this paper A crisis of politics not economics, complexity ignorance and policy failure which is the best explanation of the financial crisis I’ve come across and explains why it was a systematic failure of systematic rules not a ‘crisis of capitalism’.
Here is good article explaining why Financial Regulation is Doomed to Fail why they can’t remove systematic risk from banking and finance and why the Basel rules actually set the stage for systematic failure.
Comment by Quoth the Raven — August 12, 2011 @ 2:58 pm
Dizzy @ 3 says “Everyone who got it wrong and continues to advise on this has a vested interest in keeping this charade going.”
Couldn’t agree more, we should all listen to Peter Schiff. He predicted it and was laughed at. Look for the bit where laffer says “monetary policy is spectacular”. Also “Peter what artificial lending standards are you talking about”. Also Schiff saying “I think gold will go over a thousand”:
Sanct @ 8 says “The whole Euro project is a deeply right wing one in its origins”
Good, let’s work together to shut it down.
“The Germans and rest of the big European economies fed Greece with cheap credit like so much heroin to a junkie” actually, if anyone had asked the Germans (i.e. the people, i.e. held a referendum like the French & Irish did) I suspect there would have been a resounding “nein’!
bob @ 18 “18.I agree with Sanctuary – the free market capitalists are still in charge”
Hmm, reconcile “free-market” and “state guarantee of profitability for bank shareholders”.
Comment by Clunking Fist — August 12, 2011 @ 3:09 pm
Clunking Fist – On the opposite side is Democrat Barney Frank in 05′ saying there wasn’t a housing bubble and there couldn’t be one.
and from that enlightened soul we have the Dodd–Frank Wall Street Reform and Consumer Protection Act. Another mess of regulation.
Comment by Quoth the Raven — August 12, 2011 @ 3:23 pm
“…and explains why it was a systematic failure of systematic rules not a ‘crisis of capitalism’…”
It is comments like this that marks the acolytes of neo-liberalism as more or less just followers of a cult. Evidence of failure is simply interpreted as evidence of insufficent belief and orthodoxy – economics reduced to the level of 14th century supplicants looking for reasons why God has so far failed to protect their village from the black death.
You are welcome to keep on frantically worshiping your tin God of the market – the problem is you insist on trying to drag the rest of us over into the economic abyss with you.
Comment by Sanctuary — August 12, 2011 @ 3:33 pm
“The take-home message I get from all this is that we’re still in the midst of the Global Financial Crisis”
Deep down I’d still say there were two separate crises:
1) The Global Credit Crunch – when a failure in the general banking system caused a sharp, but relatively short, collapse in real economic activity. This started in mid-2007, and finally eased back during early-mid 2009
2) A sovereign debt crisis – effectively a Euro zone crisis, that really started to get underway in May 2010. And has flared up again every few months in more and more concerning ways.
The first crisis occurred because of information and trust – no-one knew who was exposed to what. And it lead to a panic. The second crisis doesn’t have this attribute – the issue is just that a currency union with a fiscal union has led to hell of an imbalance in the region.
I believe the second crisis would have happened even if the first one had not – although the fact that the initial credit crisis had happened has made things more difficult.
Comment by Matt Nolan — August 12, 2011 @ 3:35 pm
Sanctuary – You know that before the financial crisis I was on the side of the social democrats I voted Labour, but confronted by the evidence and the arguments from the other side my ideas changed. It was quite the opposite of your narrative.
You ignore the evidence of all the innumerable ways in which government intervened in the market that led to this systematic failure. You provide no argument to contrary just hyperbole, but of course I’m the unthinking acolyte. So you believe that (from the above paper)
1. HUD directives to Fannie and Freddie, beginning in 1994, which produced a gigantic spate of government-insured subprime and nonprime lending and securitization.
2. The innumerable regulations that had, since 1936, “canonized by decree” the judgments of the rating firms.
3. The 1975 S.E.C. decision to confer legally protected status on the three extant rating agencies.
4. The loose-money policies of the central banks (not just in the United States, as Taylor shows), which, in sparking the overall housing boom,
also created a large but fragile subprime bubble.
5. “No-recourse” laws, entitling mortgagors to suffer little consequence if they defaulted.
and
6. The Basel accords, as promulgated in 1988 and enacted in the United States, with modifications, in 1991-92.
had absolutely no role in financial crisis?
Economic freedom correlates positively with the income level of the poorest 10 percent with women’s income per capita income and it leads to poverty reduction. The abyss I want to take you over is one with greater prosperity for all, the elimination of poverty, and greater human happiness, well-being and freedom. That abyss.
Comment by Quoth the Raven — August 12, 2011 @ 3:56 pm
The first crisis occurred because of information and trust – no-one knew who was exposed to what. And it lead to a panic. The second crisis doesn’t have this attribute – the issue is just that a currency union with a fiscal union has led to hell of an imbalance in the region.
I believe the second crisis would have happened even if the first one had not – although the fact that the initial credit crisis had happened has made things more difficult.
Comment by Matt Nolan
Of course, it might help somewhat if the countries that were running to save the banks with over a trillion dollars of fictional aid, and who ran to QE to balance the fact that they’d lost the monopoly on currency generation would actually stand up for each other instead of saying that THIS is where we draw the line. We can save banks, but screw it if we’re even going to think about saving our partners in an actual currency where actual people feel the effects of things. There’s nothing like a Deutsche Bank lobbyist with an IMF twat hanging off his pointed tail to suddenly make sense of everything and point out that yes, saving the banks was necessary, we were too big to fail, but no, whole countries can go down the pan. After all, they’re just fleeting.
No, what we can do now is force the countries that are in trouble to bear the brunt of the pain – and possibly get the same banks that screwed up and we bailed out to help them, because those other countries that narrowly avoided sovereign debt crises now operate on the self interested principle. Because, let’s face it, merchant banks and hedge funds are playing the same tricks with sovereign bonds in the PIIGS countries now, and people like Goldman Sachs have been deeply involved in these shenanigans, playing around with hiding debt.
The imbalance isn’t caused by the Euro as such – it’s caused by countries within it trying to go their own way. They’ve drawn a line – and the line is that they’ll throw billions into banks in their own countries, but because the electorates refuse to take responsibility for their own actions, they won’t take any action to save the economies failing. These failing economies countries they had so much hinged on foreign debt from private and government sources it’s unbelievable – and now we have to swallow a whole other bunch of horeshit from, surprise surprise, bailed-out banks’ economists, who love to claim that it’s mismanagement, but can we have our money back now?
Tell me, if your mechanic serviced your car’s brakes, and then they failed and you ended up paralysed from the waist down, and then that mechanic then told you he was the only person who could fix your car, would you still be taking your car to him? The answer is, obviously, yes, if you’re the leader of a world economy. Or an economist.
Comment by Dizzy — August 12, 2011 @ 6:07 pm
Matt Nolan:
I think you are underestimating the effects of the first crisis. In some countries (eg Canada, and NZ to an extent) the exposure wasn’t too extreme, and a slow turn around was managed with conventional monetary policy and a cycling track. But in the US the effect was much larger, and monetary policy has struggled to turn the economy around. Unfortunately the political landscape prevented supplementing this with the necessary fiscal policy. This US recession has, in turn, had wider, international affects.
Comment by Nick — August 12, 2011 @ 6:47 pm
“Of course, it might help somewhat if the countries that were running to save the banks with over a trillion dollars of fictional aid, and who ran to QE to balance the fact that they’d lost the monopoly on currency generation would actually stand up for each other instead of saying that THIS is where we draw the line.”
None of the Euro countries had any sort of QE – until Greece failed and started getting bailed out. I agree Europe has been dysfunctional – but that is a result of the lack of co-ordination between separate governments and a shared monetary authority.
The justification for QE is the same justification as cutting interest rates – it is too ease monetary policy to make up for the fact people really don’t want to borrow right now, and are running into their shells.
With Bank bailouts, a lot of that was in Ireland and the UK – and was premised on the fact that the banks were beileved to be solvent, but just facing illiquidity. In that case, the government can prevent a bank run and sell at a profit (like the US has been able to do with much of its spending in the banking sector). However, its turned out that Ireland was wrong – but they only discovered that once they had gone too far.
“These failing economies countries they had so much hinged on foreign debt from private and government sources it’s unbelievable”
As their real exchange rate was too high, given their entry into the Euro zone – so it made borrowing seem danged attractive. Furthermore, people around the world were incredibly willing to lend to them at low low rates of interest. Undeniably people were irresponsible, and as far as you can make both the lenders and borrowers pay for their choice that is fine – the issue is when the cost to reputation influences the willingness of people to lend to each other when it is in their mutual interest.
The true costs of the crisis came from the loss of trust given some pretty bad lending and borrowing practices – and given international “imbalances” from developing Asia loading up on capital and devaluing their currencies. These are the issues that need to be worked through now – and they are the same issues that were being talked about YEARS before the crisis.
“I think you are underestimating the effects of the first crisis. In some countries (eg Canada, and NZ to an extent) the exposure wasn’t too extreme, and a slow turn around was managed with conventional monetary policy and a cycling track. But in the US the effect was much larger, and monetary policy has struggled to turn the economy around. Unfortunately the political landscape prevented supplementing this with the necessary fiscal policy. This US recession has, in turn, had wider, international affects.”
Ahhh I didn’t mean it to come across that way – I’m sorry that my comment did.
What I meant was that they are very different beasts – the initial crisis had a huge, sharp, impact which will be felt in the level of activity for some time yet … especially as people try to rebuild relationships with lenders. All I was meaning to say was that the European crisis is actually fairly separate – and would have occurred even if the US had never had its housing bubble, and there had been no massive credit contraction. What we see today is a continuation of the European crisis rather than the complete breakdown in US credit markets (although the recent lawsuit by AIG against BOA isn’t really helping matters).
Comment by Matt Nolan — August 12, 2011 @ 9:36 pm
@ Dizzy-and your solution is big boy???
Comment by will — August 12, 2011 @ 9:37 pm
@ will
It’s something involving your sinus cavity and a blowfly maggot.
@ Matt Nolan
“None of the Euro countries had any sort of QE – until Greece failed and started getting bailed out. I agree Europe has been dysfunctional – but that is a result of the lack of co-ordination between separate governments and a shared monetary authority.
The justification for QE is the same justification as cutting interest rates – it is too ease monetary policy to make up for the fact people really don’t want to borrow right now, and are running into their shells.
With Bank bailouts, a lot of that was in Ireland and the UK – and was premised on the fact that the banks were beileved to be solvent, but just facing illiquidity. In that case, the government can prevent a bank run and sell at a profit (like the US has been able to do with much of its spending in the banking sector). However, its turned out that Ireland was wrong – but they only discovered that once they had gone too far.”
This might be a matter of disagreement – but the buy-ups of covered bonds by the ECB back in 2009 was definitely QE. It’s exactly what the Federal Reserve did before it embarked on fully fledged quantitative easing, and it’s effectively just the same as QE – it’s putting central bank guarantee security into dangerous assets to fill the hole and provide a form of risk management.
The reasoning for QE is to fill the hole that’s been left by overvalued assets – those that appeared on the markets in the form of debt securities that ended up worthless. It’s pointless asking where the money went, or whether or not it was even safe to exist at all, very much like the market value of any given stock – all the government can effectively do is create more and pass it over to the banks. Which is what the covered bond buyup was. Cutting interest rates is a different matter. QE has no real effect on lending, except to recreate liquidity in individual institutions with worthless assets, rather than giving them gold – interest rates being held at very low figures for several years is designed to encourage borrowing, but has no real effect on those trying to make money out of lending. Why would low interest rates appeal to usurers? They don’t – the only reason banks refused to lend at the retail level is because the interest rates don’t offset their newly increased risk margin enough, and because government has given them the bailout on a silver platter with very few terms.
My honest answer is a the threat of a government takeover contingent on very strict terms. Lehman’s collapse was a failure of government to act not by bailing them out, but by their failure to step in and take over at that point. Failure is not good, but failure and death of a bank is not the only option. If governments are prepared to offer other banks security in the form of QE, then they can take over banks and offer security by reaping ALL the rewards from others’ failures – exactly like Barclays buying up failed banks on the open market.
I’m not sure which world you’ve been living in, but all the major European economies provided liquidity to their banks – bailouts – and the largest bailouts were in the US because they had the highest levels of exposure. Germany pumped 480bn Euro into their banks, France threw 360bn Euro into theirs – take your pick of any country in or out of Europe or the Eurozone.
But we don’t disagree on the second point.
Comment by Dizzy — August 13, 2011 @ 4:09 pm
Words strung together do not make a coherent argument I’m afraid old bean
Comment by abel the amish — August 13, 2011 @ 6:04 pm
Actually, that depends on the words and their order abel me old amish.
Comment by Guy Smiley — August 13, 2011 @ 7:39 pm
Sanctuary said The Euro is deeply right wing because it’s philosophical underpinning are neo-liberal orthodoxy all the way.
The fatuous left-right dichotomy aside I think most would label Milton Friedman as “neo-liberal” So here is Milton Friedman on the Euro in 1999:
Your views and mine are currently very much the same on the euro. . . . What most troubles me as it does you is that members of the euro have thrown away the key. Once the euro physically replaces the separate currencies, how in the world do you get out? It’s a major crisis. As a result, I would strongly agree with your view that the euro should be abandoned before January 1, 2002.
At the same time, the odds are very great that it will not be abandoned. The defects of the euro will take some time to show up; nothing happens very rapidly in this area. There are fewer than three years to go. Even if difficulties deriving from the euro occur in those three years, the political system is unlikely to react quickly enough to end the euro. As a result, I think it would be very desirable for some systematic thought to be given to devising some way to get out of the straitjacket of the euro after 2002. The least Italy should do is to keep intact the plates which are used to produce lira.
Your piece is very persuasive but I am afraid it will not persuade.
Here is another article Was Milton Friedman right about the euro? Quote:
Before the launch of the euro in 1999, Milton Friedman predicted that the Eurozone would not survive its first economic crisis.
He noted that in a world of floating exchange rates, if one country faces a shock, it could simply respond by letting the exchange rate change. But with the arrival of the euro, that option is no longer available.
Mr. Friedman also highlighted the case of Ireland. In 2001, he said the country should have been tightening its monetary policy but couldn’t because it was tied into the new European currency. “The European Central Bank makes monetary policy for the whole of euroland.”
Comment by Quoth the Raven — August 13, 2011 @ 9:48 pm
I must say I was always surprised by the enthusiasm for the Euro among people who were otherwise in favour of floating exchange rates – I always thought it dodgy because it prevented the adjustments we normally get from currency revaluation, whether in a floating exchange rate or through management of a fixed exchange-rate.
Comment by Kahikatea — August 13, 2011 @ 9:58 pm
The European Central Bank makes monetary policy for the whole of euroland
Well, Duh.
The Fed makes monetary policy for the whole of the USA (as well, implicitly, dollarised nations like Ecuador and Panama) but I very much doubt Milton Friedman would have supported California introducing its own currency, and lowering interest rates relative to the USD, in response to the dot-com bubble of silicon valley.
Comment by Phil — August 13, 2011 @ 11:29 pm
Phil – The point is that a one size fits all policy was always going to face problems. The imbalances were there from the very beginning of the Euro experiment which is what Milton Friedman understood. With an expanding banking sector and booming housing market already, Ireland joining the monetary union with low interest rates was only going to pour fuel on the fire, whilst in Greece the government could pursue profligate spending while paying low interest rates on government bonds.
Friedman’s predictions of a Euro collapse and his desire for it to be abolished hardly jibe with Sanctuary assertions that the Euro is “neo-liberal orthodoxy all the way”.
Friedman’s policies on central banking were based on what he believed could be done to best improve them given that they already exist. However, he wanted the Federal Reserve abolished and according to David Friedman, Milton did not object to free banking. Quoting Friedman:
“Any system which gives so much power and so much discretion to a few men, that mistakes ‑‑ excusable or not ‑‑ can have such far reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic ‑‑ this is the key political argument against an independent central bank. . .To paraphrase Clemenceau: money is much too serious a matter to be left to the Central Bankers.”
Comment by Quoth the Raven — August 14, 2011 @ 12:22 am