Yves here. This article gives one of the best high level summaries of the problems besetting the Eurozone I have seen. I’m not as keen about his remedy, which is not to say that it isn’t clever and wouldn’t in theory work. But from everything I can tell, the ECB is simply not prepared to expand its balance sheet anywhere near as much as would be needed.
By Daniel Gros, Director of the Centre for European Policy Studies, Brussels. Cross posted from VoxEU
Investors are anticipating the unravelling of the 21 July 2011 “solution” and a breakdown of the interbank-market that would throw the economy into an “immediate recession” like the one experienced after the Lehman bankruptcy. This column argues that this will happen without quick and bold action. The EFSF can’t work as designed but if it were registered as a bank – which would give it access to unlimited ECB re-financing – governments could stop the generalised breakdown of confidence while leaving the management of public debt in the hand of the finance ministers.
Canaries were kept in coal mines because they die faster than humans when exposed to dangerous gases. When the birds stopped singing, wise miners knew that it was time to gear up the emergency procedures.
Greece, as it turns out, was the Eurozone’s canary. The canary was resuscitated and a small rescue mechanism was set up to revive a further canary or two – but beyond this the warning was ignored. The miners kept on working. They convinced themselves that this was the canary’s problem.
Greece wasn’t a special case
The problems of Greece should not have been interpreted as a special case. They should have been viewed as the first manifestation of a general problem:
As a sign that the Global Crisis was spreading to public debt;
As a sign that capital markets would no longer refinance excessive levels of public debt, especially in the Eurozone members who could no longer rely on central bank support.
This has become particularly clear after the July 2011 European Council – the meeting that was supposed to end the crisis by settling the Greek case with a mixture of lower interest rates and some private sector rescheduling and restructuring.
The Greek public might not appreciate it, but it has received a preferential treatment from the EU. With the decisions taken at the July European Council, Greece will essentially have all its financing needs for the next decade arranged and is assured of paying less than 4 % on the new debt it is incurring. The two other countries with a programme, Ireland and Portugal, will have similarly low interest rates and long-term loans, but they are still expected to face the test of the markets in a few years.
The debt fears reach the core
But while Greece, Ireland, and Portugal got lower rates for their official long-term financing, Spain and Italy experienced a surge in their borrowing costs. They are paying close to 6% for ten-year money.
It is clear that these countries cannot be expected to provide billions of euros in credits to Greece at 3.5% when they are paying themselves so much more. Europe’s leaders wanted to be generous to Greece, but the supply of cheap funds is limited. Not everybody can be served this way.
The EFSF was designed for a peripheral crisis
This applies in particular to the Eurozone’s rescue fund, the European Financial Stability Fund (EFSF). This will simply not have enough funds to undertake the massive bond purchases now required to stabilize markets. It was sized to provide the financing promised to Greece, Ireland, and Portugal.
Moreover the structure of the EFSF makes it vulnerable to a domino chain.
The rules of the EFSF imply that countries that need financing themselves or face high borrowing costs ‘step out’, i.e. no longer provide guarantees for the EFSF.
If the borrowing costs of Italy and Spain stay at crisis levels, or if these two countries need to bail out themselves, only the core Eurozone members would remain to back the EFSF.
At this point, the debt burden on the core would become unbearable.
Dangers of applying the periphery solution to the core
Importantly, the larger is the EFSF, the faster the dominos fall. The position of the French government – that the EFSF should be increased – does not make sense even from a narrow French point of view.
Financial markets have realized this and are thus driving up borrowing costs for France – the core country most in danger of losing its AAA rating.
If France has to ‘step out’ of the EFSF, Germany (and some of its smaller neighbours) would have to carrying the whole burden.
This would be too much even for Germany – the Italian government debt alone is equivalent to the entire German GDP.
How this drives the markets
The situation is so critical because this domino effect has started to operate.
Financial markets do not wait for country after country to be downgraded.
Investors anticipate the endgame – the unravelling of the entire EFSF/ESM structure.
As EFSF was Eurozone leaders’ central response to the debt problem, its demise would leave the Eurozone with a big problem and no solution.
The bank-government-debt snare
As usual, banks are the weakest link and are subject to another domino effect.
Many banks hold large amounts of Eurozone government debt;
Their credit rating can never be above that of their own sovereign.
Anyone expecting a country’s downgrade should also sell the shares of its banks.
This, in turn, increases the cost of capital for the vulnerable banks making them more vulnerable.
Other banks – who see the falling bank share prices and widening credit-default spreads – react by refusing to provide the vulnerable banks with interbank liquidity.
This breakdown in the interbank market, in turn, leads to a breakdown of the credit circuit.
This is what lead to the “immediate recession” experienced after the Lehman bankruptcy showed.
These days it seems that the equity markets are anticipating a doomsday scenario with the economy going abruptly into recession as the interbank market breaks down under the anticipation of further public debt problems. Unfortunately this anticipation will be realized unless the breakdown of the interbank market is addressed very soon.
What needs to be done
At this point the Eurozone needs a massive infusion of liquidity. Given that the cascade structure of the EFSF is part of the problem, the solution cannot be a massive increase in its size. However, the EFSF could simply be registered as a bank and could then have access to unlimited re-financing by the ECB, which is the only institution which can provide the required liquidity quickly and in convincing quantity.
This solution would have the advantage that it leaves the management of public debt problems in the hand of the finance ministries, but it provides them with the liquidity backstop that is needed when there is a generalised breakdown of confidence and liquidity. This is exactly when a lender of last resort is most needed.
It would of course be much better if the ECB did not have to ‘bail out’ the European rescue mechanism, but in this case one has to choose between two evils. Even a massive increase in the ECB’s balance sheet (which if the US experience is any guide will not lead to inflation) constitutes a lesser evil compared to a breakdown of the Eurozone financial system.
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Good and balanced post, Yves.
The proposal makes a lot of sense and your comments even more so. A big “Thank you” Yves.
Fed up reading WS guys talking their books on this very subject. Thanks for the change.
Of course I not long the EUR on a 10-30 years scale but I do not buy into their bets – they will be crashed in due time IMHO. A Pyrrhic victor. At any cost for their European counter-parties.
The feeling here in Europe – and not only in France – is that New York is getting political on those subject, replacing Washington on bilateral policy issue.
This will get nasty soon – before the end of the year – and will beget and nurture a new political climate between the two sides of the big pond.
Not for the better, I’m sorry to say.
The idea of turning the EFSF into a bank is on a par with the wooden Badger in Holy Grail.
Somehow Europe can solve it’s problems by having yet another bank?
Idiotic!
Bloomberg:
These countries are banning short selling of selected stocks.
Factivists might want to get out to various forums the Bloomberg URL (including Foppe’s quote), and other ones as discovered online. Since this afternoon I’ve already seen this referred to as a general ban on short selling, which is inaccurate.
http://www.bloomberg.com/news/2011-08-11/france-spain-italy-belgium-ban-short-sales-to-halt-rout-in-bank-shares.html
I think that the move shows a sense of unity of what we could call the Latin or French bloc. Greece outlawed short-selling the day before, btw. This bloc falls barely short of a majority in the Eurogroup, which can be easily fixed with the addition of Ireland, Portugal, Cyprus and Malta.
The implication of Italy and France in the crisis means that all the Eurozone is implicated now and that the intransigent position of Merkel (I would not dare say “Germany” when 50% of the public opinion holds a different position) will have to yield to a more realistic policy.
Most of Germany wants nothing to do with a fiscal union. Why do so many NC readers who would otherwise respect public opinion disregard it so callously when it comes to the EU?
Why can’t you acknowledge that the best scenario for all of Europe is for each country to adopt its own currency?
It’s not any “best scenario”. A shared currency is good but we need a more flexible currency, one that fits the average European economy and not only the top one (Germany).
Also while for Germany, exiting the euro and restoring the DM would be easy (at least right now, while they are still in a strong position), for the weaker economies it’d be suicidal, because there would be such speculative movements and undue inflation that it’d be totally crazy.
Economically weak states cannot abandon the euro but can rally together to force the Eurogroup and the ECB to adopt the policies that are best for their economies.
But in general the euro is good. We just need a realistic (weaker) euro and realistic ECB policies in general, including buying states’ debt when necessary.
In other words, if Spain would now move back to the peseta, I (and even much more investors and hoarders) would try to stay as much in the euro as possible, because it is not just stronger but also easy to use across those silly historical borders. Legal or not, it’d be accepted everywhere.
Short selling such as put options are exchange traded and thus are transparent and a way for a small trader to take a position. As Stiglitz has pointed out a healthy market should let you bet for or against a company depending on how you feel about it. This is yet another gift to the banks forcing you to only vote in their favor.
If regulators were serious they would tackle high frequency trading and the much much larger over the counter derivative market.
The issue is not the shorts on their own. It is the US players, and some turncoat EU players, developing large, predictable, short positions and then letting their friends at S&P pull the trigger. It is larceny, pure and simple. If I was feeling more effusive, I would refer to it as economic war.
Of course the US is everyone’s friend. It’s is nothing personal, just business!
Two questions.
First, what is the hidden value of the implied backstop that the ECB provides if the EFSF is turned into a bank? Maybe evaluating the CDS equivalent would provide the answer, I’m not sure. This would let us know how big the get-out-jail-free card is for the private bankers not taking their haircuts on their public bonds. This is a wealth transfer mechanism that is part of pillage-the-crash-also from EU taxpayers to both EU and US ruling class.
Second, what is the value of the naked long positions held in the US that are helping drive the whole game? This is the value of a wealth transfer from EU taxpayers to US ruling class.
I’m somewhat unsure about where the EFSF is in it’s life cycle. As far as I can tell it is still nearly a drawing board concept. We hear much about how it is backstopped by german and french taxpayers, because you have to be rated AAA otherwise you get a free pass. Obviously S&P wants France in the backstop class.
But this is all to backstop what I call EU Super Bonds, and I don’t think any have been sold yet to the proles of the world nor TBTF banks.
Now sure, if they get this transfer of loss/liability from existing loser-rich-misunderstood-investor-banks to a new class of deserving losers, then the new losers have their guarantee that the undertaxed french and germans will make good on the losses.
Course if something happens to the French AAA rating, the French can back out of the EFSF backstop. Then S&P or anyone else, irregardless of whether they were involved in the French downgrade, would probably feel obligated to downgrade EFSF bonds. But the upside is this would increase “brand recognition” for any rating agencies that feel they need to get their names in the public spotlight once again.
So put aside for the moment whether we care about brand recognition of rating agencies, I have serious doubts the EFSF will have any success selling EU Super Bonds.
So instead of the P_IG_ loans being covered for 10 years at 4%, we might find out they aren’t as soon as maybe start of next year.
Oh hell! and hours later I realise I wrote long where I meant short…
Thanks for that Cedric. We will all be very interested to see how they put it together and whether Euro bonds happen – if it all survives that long.
My questions were an attempt to flush out any knowledge anybody here has (Yves?) about how to guesstimate the costs, of these financial realities. In the currency of your choice!
It is no given that the Germans agree to finance the additioanal 1-2 trillion euros that the ESMF needs. If Merkel agrees to this it will end her political career.
The other alternative on the table is that the weak peripheral countries are asked to leave the euro.
France does not want this because they need the German funding to keep the sovereign debt prices up so they do not destroy their own French banking conglomerates.
This is a solvency problem that can only be solved by a restructuring. The restructuring is inevitably a default or partial default.
In the end the German voters will not go along with bailing out profligate countries to which they have no alliance.
The real unknown is what is the total amount of CDS and who wrote them. This sovereign default risk along with the counterparty default risk will see the LIBOR spike and liquidity dry up.
Hopefully, Ben Bernank does not provide American dollars to the bailout of euroland.
I agree that this problem can only be solved by default, one way or another, sooner or later. But I also think that credit default swaps are ethically criminal and should be outlawed. Markets should not trade in derivatives at all (only real goods) but betting against the normal success of governments and institutions is ethically criminal and should be legally criminal as well – not something dealt with normally in officially sanctioned stock markets.
Great comment, Frank.
Too bad too many others disregard German public opinion. It’s as if the EuroCrats know what’s better for Germany than Germans themselves.
So, how many vestal virgins will need to be sacrificed?
How much more hidden insidious global genocide will occur while the international puppets of the global inherited rich mumble about austerity.
I want to expand the definition of Mikhail Kropotkin’s wealth transfer question/assertion above to say the the US ruling class is the same thing as the global inherited rich that the world’s citizens need to laugh out of control of our society that I keep insinuating into our dialog.
Laugh these bastards into the Hague and lets get on with the complexities of stopping the class genocide we have now.
Where are the fucking grown-ups in our world?….I mean, beside Yves and a few other American dream patriots, or whatever the hell they want to call themselves , out there.
You state my feelings very well. The Western Society is based on the RULE OF LAW. During these past few years the spirit of this rule has been violated repeatedly to favour the few at the top at the expense of the masses. It is disgusting but I believe that revenge will come via the ballot boxes over the next few years.
It just takes so darn a long period of time until the populace realizes this grandest theft of all times being perpetrated in broad daylight. By listening to people, I realize that many are still confused and do not really know what caused all of this, namely overindebtness promoted by the financial institutions prior to 2007 and over many years and the bank lobby’s skill to manipulate political decisions in their favor, meaning in favour of allowing a larger and larger credit bubble.
Thelarge unknown, at least in the US, is whether or not we are ven operating under the constitution at this point. Aside from the National Emergency concerning 9/11 there are several others existing. It may escape some that the rules have changed, and while the government plays “I don’t know” about spying on Americans, torture, and extending by executive order the right of banks to cook their books(Bush Jr in 2006) US citizens are deers in the headlights. It is not a mistake that none of the criminals responsibile for the financial crisis and the $13 trillion bail-out have gone to jail—under what law(or legal entity), exactly–did they commit a crime?
maybe something like ‘free creative energy’ would work. No. Not poetic or catchy -any old meme can come along and kill it in the crib. We’ll have to come up with something. The American ‘dream’ I’m afraid has put everyone to sleep.
I don’t see Obama relying on the ballot box for edicts and wars or austerity for that matter -everything and anything but.
He has the dictatorial powers ceded to him by our Congress.
rather, the office of the presidency, has been ceded dictatorial powers. Who the next president is does not matter. They’s why there are so many buffoons on stage.
For sure, Europe’s free creative energy is already bubbling, with this Fisher-Price ‘blue bond-red bond’ game (suited for ages 4-8):
http://www.bloomberg.com/news/2011-08-11/eu-heads-for-eurobond-clash-amid-german-dread-over-looming-fiscal-union.html
There’s something for every child here.
What’s YOUR favorite color? ;-)
Actually, I think this sounds like an interesting idea. I generally favor sovereigns issuing their own currency (without central bank intermediaries) that they can use for their own national interests and take their own responsibility for. If countries have similar interests there may be benefits from a common currency. If the euro is to stay intact as a multicountry currency this seems to give it some common ground while still allowing for some individuality.
my head is spinning.
My favorite color, and rare, is an ochre sunset over the Rockies.
“By turning the euro market into the world’s second largest after U.S. Treasuries, the liquidity boost would quash the Germans’ cost concerns by saving each country 30 basis points per bond, the authors wrote.”
Who needs colors when “liqidity boost” can do this?
I think S&P would have to give liquidy boosted CREDIT ratings a “plus sign”. Prolly AAA+ if they can tweak their model right. Outlook would be pretty positive too, methinks. Even “Rosy”, maybe. Especially if we can look forward to the ECB printing Euros to pay it off!
PH, I differentiated between the value of the implied guarantee by the ECB and the cost of paying out the shorts when the US ratings agencies deliver the downgrades very deliberately. I am trying to get two things out in the open. Which way the money goes and how much of it.
The ECB piece will come out of the EU taxpayers to the holders of EU sovereign debt in the form of both not needing to pay for the, otherwise necessary, CDS (or similar risk covering instrument) and covering any recapitalisation to avoid anybody taking a haircut.
The shorts will mostly go to players in the US, but I would be interested to hear if anyone has any real intel on the amount. I expect that some EU players will have some cannibalistic EU short positions. I expect the large majority will be US players feeding off EU tax payers.
Does anybody have any actual numbers. Once they are out in the open, I suspect the real anger will come out. It is one thing to know you are being stolen from. It is another to know how much they got away with! Is there anyway to work out how much the implied and directly stated, but uncharged for, guarantees are worth in EUs or USDs or RMB?
Economics, finance, capitalism, construct and analyze reality as if it were quantitative but history, that is the evolution of the human spirit, is qualitative. Europe can’t solve a banking problem or a financial problem along economists’ lines of thinking. Europe is in the process of constructing itself, of creating a new concept of unity in which I is a WE and WE is an I. this sentence is a progressive one . We go from the I to the WE and from the WE to an I but that I is not the same personal I that began the sentence it is an I that encompasses the consciousness of the WE.
Europe notices now that Financial capitalism is a danger to itself and to the nation states and steps are being taken, groping, feeling the walls in a darkened room in the path to a new way of social relations.
This sounds prophetic, I hope it is.
This sounds as if the cause of the problem cannot be located and as if it is just like a natural catastroph. It definitely is NOT. It is man made and the culprits sit still in their fancy offices instead of rotting in jail. Sometimes justice takes a long time to arrive but I feel confident, it will with a vegeance once people realize the crime perpetrated against them.
The only thing that has been bailed out are actually the banks again. Greece will never be able to pay back this debt nor will many other countries. Instead of letting them default a year ago already, the extend and pretend strategy had been employed with the result that the problem becomes larger and larger and ways are found to transfer the losses again to the public either in form of “money printing” which means reduced purchasing power of the currency or in form of having governments issuing guarantees that will be enforced at one stage in the future and lead to reduced services of the government and higher taxes.
All disasters are natural. To infer otherwise is to suggest that somehow Man is above Nature and HER laws. At best we are the biological equivalent of those nasty algos in the Financial markets that mindlessly slosh around in positive feedback loops tilting the ship ever closer to capsizing. Even if they became self-aware, these programs would likely be extremely frustrated by their inability to transcend their programming and thus save themselves from crashing the system.
Your prophecy: Under capitalism, where the only “we’s” are the antisocial “we’s” of class and nation!? Or are you prophesying that “we” Europeans are going to get rid of capitalism? Don’t you feel any obligation to provide a factual grounding for the trend that you foresee?
I have no facts other than the trends. Today’s article by Smith on the Icelandic response to economic catastrophe may be a pointer.
What happens happens. The massive attack of capitalistic gamblers on the State is perhaps being addressed by the State. If the State is to be swallowed by Capital I feel the the State will put up a big fight and abolish the present form of Capital. If Capital should win this present fight then Capital will become ipso facto the State and have its substance , that is, to keep the ethical character of human relations. Augustine said a long time a ago that even bandits must keep peace among themselves. That is the task of the State.
I do think we Europeans can only move on if we do get rid of Capitalism. It won’t happen yet because conscience and organization is weak and inertia strong but will eventually happen: there is no other way out.
And I think it will also happen in the USA, even if conscience is even weaker and organization as well. Because they cannot move on without breaking the rules. And the first thing for any society is nothing else but collective survival – and then stability: social peace. And Capitalism is more and more threatening them both.
GREAT ANALYSIS — down to the subhead What needs to be done. Then the author goes apeshit haywire with this non sequitur:
“At this point the Eurozone needs a massive infusion of liquidity.”
Repeat after me, Gros: “Liquidity is not a remedy for insolvency.”
Restructuring — and nothing but — is the remedy for insolvency.
Who knew that waffle-eating so compromises the ratiocinative process?
For sure. Similar to all the ’emergency’ liquidity help to US and other western banks what is really needed is debt re-structuring rather than increased liquidity on the backs of taxpayers.
‘Crisis’ politics like the US debt ceiling fiasco mostly seem to punish the middle classes.
If by “middle class” you mean “sorely mistaken working class”, I fully concur.
If not you have misplaced who the real taxpayers are – the average working stiff!
Yes a ‘comfortable and viable’ middle class is getting harder to find. To the detriment of everyone..
http://www.youtube.com/watch?v=akVL7QY0S8A#t=06m20s “The Coming Collapse of the Middle Class.” presentation by Elizabeth Warren
Look, I get it, Americans have been fooling themselves with variations of Weberian class structure for a long time. What gets my goat is, even with the rubbish that Weber went on about, Americans can’t even apply that with any rigour.
Having a job that allows you to own a house that is large enough for everybody that lives there, according to anglo standards, and a current-ish car and your kids going to the local government provided school does not make you middle class. Jobs in factories, office blocks or on the land can’t make you middle class. The New-Deal-got-a-job-and-it-seems-alright crew were never middle class. Advertising works and the American population bought it. Now the jobs aren’t there, they know what middle class is, not them.
I think what the author means is that the ECB can provide liquidity to the euro system for ever and ever. It is unconstrained in this task because the ECB is the issuer of the currency.
In his analysis, Permanent liquidity = remedy for insolvency.
IMHO, he is right.
Inflation has to be considered especially if the underlying problem is persistent fraud. Further income inequality is another undesired outcome. Creative destruction needs to build a more sustainable system.
“Even a massive increase in the ECB’s balance sheet (which if the US experience is any guide will not lead to inflation) constitutes a lesser evil compared to a breakdown of the Eurozone financial system.”
No inflation? And it wouldn’t cost taxpayers any money directly? It must be some sort of magic. Hmmm…
Seriously though, Yves is probably right that the ECB is not willing to do this… YET. We’ll see how far they’re willing to go when things get a bit more choppy.
And before the ‘debasement of the currency’ types start getting all uppity, we’ve seen this movie before… we know how it ends:
http://pragcap.com/the-dollar-debasement-myth-the-feds-balance-sheet
“I put together this chart [see link for chart] showing the dollar index versus the Fed’s balance sheet over the last three years. As you can clearly see – there is no real correlation between the size of the balance sheet and the USD. None at all. This has all been proven correct despite my repeated ramblings, yet the inflationists and fear mongerers still garner all of the attention. Clearly, people prefer to be scared as opposed to being told the truth.”
Three years of data is a joke, when 97 years are available. Here’s where you can find it:
http://fraser.stlouisfed.org/publications/bms/
The multifold expansion of the Fed’s balance sheet over decades absolutely correlates with the dollar’s manyfold loss of purchasing power.
Using cherry-picked correlations for brief, abnormal periods is — to adopt your adjective of choice — disingenuous.
More specific link required — you know I’m not going to look through all that. If you’ve looked through the relevant data before, direct me to it.
Anyway, we’re talking about policy measures here. So what you call the ‘abnormal’ situation is exactly what we’re interested in here.
Okay, let’s look into this properly. Because I have a feeling you haven’t.
First, how would you like to measure the dollar’s purchasing power? Exchange rate or inflation rate?
Actually, why am I even getting into this?
Let’s stop for a moment.
The example above given by Roche is the effects of extending the Fed’s balance sheet to absorb other assets.
If the ECB were to undertake a similar action we are interested in understanding what the effects might be.
So, this isn’t ‘disingenuous’ at all. We’re comparing like with like.
disingenuous=BS
There will be no inflation risk because the euro economy is way below potential and can thus afford financing by the ECB to guarantee aggregate demand in the peripheral economies does not collapse.
Interesting how intelligent and open minded mainstream economists like Daniel Gross end up conjuring potential solutions that are 100% compatible with an MMT approach -without perhaps even being aware that such an approach exists.
Which of course provides us with further evidence that the MMT approach is a sound a realistic one.
Facts are hard to avoid these days. Yesterday Krugman ran a blog saying that the US could borrow indefinitely and always create money to pay down the debt (which shows that he’s apparently been taking lessons from Alan Greenspan… ew! he should have listened to the MMTers, much nicer company):
http://krugman.blogs.nytimes.com/2011/08/11/franc-thoughts-on-long-run-fiscal-issues/
Krugman has done a 180-degree turn here so graceful that almost no one noticed it:
http://www.nytimes.com/2011/03/25/opinion/25krugman.html?_r=1&hp
“But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt.”
Dur-hur? Mr. Krugman, you disingenuous toad!
But, yeah, as I was saying: facts are heavy things and they’re often hard to avoid.
The US and Greece are not so different. Structural payments issues, political parties supported by both individuals and companies that do not pay taxes and declining levels of education.
True. But Krugman was talking about default risk.
There is also a finer point here. There is outright default and there is the number of basis points the taxpayer has to fund because of S&P’s political / economic position.
It could be called perception risk.
The two things are entirely different. And anyway, Krugman was talking about the US. When S&P released their silly statements people rushed to buy t-bills. So, ‘perception risk’ doesn’t exist.
Perception risk will exist for French taxpayers as soon as S&P puts France at AA+.
And the roll on will be ugly.
But that’s when the shorts kick in. You know, perception risk part 2.
BTW who is “people” that buy t-bills? They aren’t war bonds. This is institutional larceny and warfare. “People” are the only real source of pillage and are also collateral damage. Last time I looked the suicide rate in the American working class male population was not easing off. Economics matter. Thatcher was wrong, there is a society, just not for MMT-ers or neo-liberals (left or right).
Krugman was talking about the US.
And eh… the people that buy t-bills are, well, people that work in hedge funds and central banks and all that. As far as the ‘no society’ thing and the suicide rate. That’s just weird.
Krugman may have been talking about the US. This thread is about the EU and what is going on there.
You got my point, the action in the EU and the US is institutional. Central banks and governments propping up private losses. The people that put the orders through are irrelevant, the people that make the decisions to do so and the people that profit from those decisions are the ones that matter.
The suicide rate and the ‘no society’ comments were too brief. The actions of those that are protecting private profits and stores of wealth have effects in the real world. People lose jobs, then they lose houses, if they owned them, and some give up then. For some it takes longer. That creates a significant component of the suicide rate. It is not just charts, not just theories and arguments. It is real outcomes in real peoples’ lives with real consequences. So no Phil, it is not weird, it is real and truly tragic. Try to get out more (see I can play the man too).
The theories and arguments that have been supporting the last 30 odd years of pillage of the working classes come from the same place as Thatcher’s ‘no society’ attitude. Neo-liberalism and MMT don’t fix the problem.
No, what was weird is that you just blamed MMTers (and by extension: me) for the suicide rate. You’ve now done that twice. And no matter what way you look at it that’s pretty damn weird.
No I am associating the theories to their outcomes. That’s the problem. If you feel responsible – that’s your problem.
BTW Phil, do you have any way of estimating the two values I asked about at the top of the thread?
They are real numbers, but I just don’t know how to put them together. There must be tables and indices that could be used… That would help. It won’t fix the problem, but it will help people to get their heads around how big it is. Could be a first step.
MMT has no ‘outcomes’, it’s never been practiced. So unless you have a crystal ball…
As for the measures, I presume you’re referring to these:
“Structural payments issues, political parties supported by both individuals and companies that do not pay taxes and declining levels of education.”
(1) Structural payment issues: I don’t know what you’re referring to here. Bond yields, maybe?
(2) Political parties supported by individuals and companies that evade tax: Tough nut. Do research on what sort of people and which companies are evading tax and then compare this to who is funding political parties. It would be a new measure as far as I know (and not a very useful one, if I’m to be wholly honest).
(3) Education levels: Personally, I’d look at levels of education (how many reached high school etc.); educational spending as % of GDP (or per capita spending) and teachers salaries. Doug Henwood put all these (and more) together in a recent LBO newsletter (No. 132). Maybe if you emailed him and agreed to subscribe for a year or whatever he might send you a copy of this.
Here’s the issue (not in full):
http://www.leftbusinessobserver.com/LBO_current.html
And subscription details:
http://www.leftbusinessobserver.com/LBO_subonline.html
Contact details are on the site.
Just noticed, the full article for the education article is here:
http://www.leftbusinessobserver.com/InAndOutOfSchool.html
Also relevant:
http://www.leftbusinessobserver.com/BeastlyNumbers.html
Whoops, the questions I raised initially are in post #7. That is:
“First, what is the hidden value of the implied backstop that the ECB provides if the EFSF is turned into a bank? Maybe evaluating the CDS equivalent would provide the answer, I’m not sure. This would let us know how big the get-out-jail-free card is for the private bankers not taking their haircuts on their public bonds. This is a wealth transfer mechanism that is part of pillage-the-crash-also from EU taxpayers to both EU and US ruling class.
Second, what is the value of the naked short positions held in the US that are helping drive the whole game? This is the value of a wealth transfer from EU taxpayers to US ruling class.”
I included my own correction from post 9.
Neither are easy, but getting a handle on them somehow would be useful in lifting the argument from pure theory to some kind of discussion about actual burden for actual people.
Thanks for a shot at the others. The structural payments issue with the US is more balance of payments, with the long term issue of no longer being the producer of a lot of the higher value component of your consumption. Like the relationship between Greece and Germany. That is now more interesting as financialisation has turned what was more trackable into something much more difficult to nail down. For example, my question about the short selling that some EU members are trying to stop, now that it is too late.
At least the US has the finance industry, Greece doesn’t.
The second one you looked at would be interesting only in terms of who exactly had who in their pocket. There is the register of contributions to politicians and parties etc. Very tangled and, no, not that useful. We know the system is broken because of vested interests already.
The info on education you pointed to looks great. Thanks for that. Useful resource I had not run across.
“First, what is the hidden value of the implied backstop that the ECB provides if the EFSF is turned into a bank?”
Impossible to say. I just ran it by Mosler (which is straight from the bond trader’s mouth). He said he’d start at €5trn to let the markets know they’re serious and work from there.
“This is a wealth transfer mechanism that is part of pillage-the-crash-also from EU taxpayers to both EU and US ruling class.”
It is quite clearly not. Taxpayers are not charged when the ECB expands it’s balance-sheets. As the author indicated, no inflation would take place either. There MIGHT be some currency depreciation, but I think this would be a good thing because (a) many goods are traded within Europe, so it shouldn’t affect standards of living too badly and (b) depreciation would help those economies in recession get exports online in a big way.
“Second, what is the value of the naked short positions held in the US that are helping drive the whole game? This is the value of a wealth transfer from EU taxpayers to US ruling class.”
That’s a very polemical way of looking at it. People who take a short position on the market are making money from those who lose out by taking a long position. The EU taxpayer is not involved in any direct way. There’s no point in measuring any of this, it’s not relevant.
Thanks for asking around.
Just to check, that EU5trn is that the par value on the CDS? So what about the quarterly fees that CDS to cover this would amount to? Are there reference rates on CDS that might be used to work that number up?
While the quarterly fees and the payout do not appear as costs immediately to taxpayers, as the costs are implicit, they are two other things, the way I see it.
The quarterly fees and the payouts are avoided cost to the institutions (banks etc) that would otherwise need to purchase CDSs. So someone there is not covering their costs.
Also, as I understand it, the ECB would not meet a default payout by just turning the presses on. They expect them to be funded by national treasuries. They have rules about who is in or out on covering the payouts. I would expect the markets to account for the implied risk in national bond rates if your treasury is part of the ECB funding group. After all, there is some risk of default there due to the payout potential. Those costs then transfer into individual national treasuries with the taxpayer at the end of the money trail.
I agree with what you are saying, if they just print more Euros. But they are not doing just that, if I understand it.
Yes, I am polemic, goes with my intellectual territory.
“Just to check, that EU5trn is that the par value on the CDS?”
I don’t really get where CDS’s come into this. The bailout would work by ponying up a certain amount of money (€5trn) to try to convince the markets that you are serious. This would calm everyone down and begin to take over the assets that are causing problems. The EFSF would then be a ‘lender of last resort’ that others could go to for funding. We wouldn’t know the end price until the mess had been cleared up. I don’t see what CDS would have to do with this…
“Also, as I understand it, the ECB would not meet a default payout by just turning the presses on.”
I think the point is that, in essence, they would. They’d open up the ECB balance sheet to the EFSF. It would work just like any ‘lender of last resort’ program. And this wouldn’t be a default payout either. This would be a payout that would aim to prevent default.
“I agree with what you are saying, if they just print more Euros. But they are not doing just that, if I understand it.”
Well, that’s not what’s going on now (currently these payments are being backed by government bonds). But I think that is what the above author is proposing… it’s certainly what I’m proposing. And in this circumstance taxpayers would not lose out.
(Actually taxpayers aren’t ‘losing out’ even in the current setup, but let’s not start that argument again — if I do I fear a rabid commentator might turn up to my house with a Molotov cocktail!)
OK. The EU5trn would be ponied up, as the system works now, by issuing government bonds.
The CDS come in where the private bond holders do not get *free* insurance in the form of a EU (EFSF / ECB) guarantee backed up by the promise of government bonds. If they were to be responsible for their own situation, they could obtain CDSs to cover. That would involve taking on the costs, of course. That is the number I am chasing. How much would it cost those being protected to protect themselves.
We will “know the end price until the mess had been cleared up” by the private bondholders taking the haircut they must to end this. I don’t think that will happen. While they hold a collective gun to the heads of all of the EUs tax base and can milk it, they will keep it up.
Any solution needs to take into account where the bonds came from and what they were used for. The current crisis is manufactured, in that private bondholders are being shielded from the consequences of their risky and often illegal behaviours. The ruling class, and a chunk of the middle classes, are being protected from handing back the cash they siphoned out of those bond deals, as either banksters or through other traditional ways of extracting private wealth from public resources. Any other solution does not deal with the problem, no matter what theory it originates from.
If anyone needs to throw a Molotov, and I hope it does not come down to it, it’s not at theoreticians.
A main problem seems to be getting the money spent in the right way.. Massive corporate subsidies on the one hand while they outsource jobs and pay exorbitant executive salaries or things like medicare and social security and education that provide jobs and income to be spent into the real economy..
Well, many people seem to think that by pointing to this solution certain people are letting banks off the hook etc. That’s not the case. But the banking issue is basically a separate one.
What course of action the ECB takes will not alter banking behavior. That requires regulators. It’s a separate issue — to repeat myself for a moment.
And of course there are questions about spending the money in the right way. But first the debate needs to be moved to the point where people understand that we’re not short of money.
Nobody thinks we’re running out of teh moneys. They all know they can “just print more.” The issue is what is the impact of printing teh moneys, whether it’s more near term (ie., inflation) or long term (ie., the generational argument).
If you assume the public is really that stupid, they immediately figure they don’t need to take you seriously. And, as far as what the future holds long term, you don’t know any better than they do, but you only have half of that down.
Inter-generational argument is dumb tabloid nonsense.
As for the public thinking they have enough money. In regards Europe, no they don’t:
http://www.davidmcwilliams.ie/2010/07/22/ireland-is-staring-down-the-barrel-of-bankruptcy
I can testify from living here that people do in fact think we are ‘bankrupt’.
In the US people thought they were running out of money before Greenspan said otherwise. (Yeah, I know, everyone is going to pull a Krugman and pretend they ‘knew all along’ but I got youz guyses numbers on this one…). As for the ‘printing money’, no one is actually printing any money, so I don’t see where you get that from.
In the above the ECB would not ‘print money’. It would back backstop the EFSF to purchase bonds. This is not printing money. You can argue that it is, but that only shows that you don’t know what you’re talking about.
At this point the Eurozone needs a massive infusion of liquidity. Given that the cascade structure of the EFSF is part of the problem, the solution cannot be a massive increase in its size. However, the EFSF could simply be registered as a bank and could then have access to unlimited re-financing by the ECB, which is the only institution which can provide the required liquidity quickly and in convincing quantity.
This is all fancy econ speak for printing money. There is not enough money to bailout all of Europe. Therefore more money needs to be created in order to SAVE the EU. An iroinc twist on the idea that spending = saving! How will this be accomplished?
The EFSF can’t work as designed but if it were registered as a bank – which would give it access to unlimited ECB re-financing – governments could stop the generalised breakdown of confidence while leaving the management of public debt in the hand of the finance ministers.
They wish to endow the EFSF with magical powers!
Creating Money http://en.wikipedia.org/wiki/Printing_money
I wonder what the optimal money supply for the world is… not too much, not too little, just right. Kinda like the story of Goldilocks and the 3 Bears.
btw, towards the end of the wiki article on creating money, in the section called Alternative Theories is a link to Chartalism (aka MMT).
“I wonder what the optimal money supply for the world is…”
All of it in the hands of a few, no matter how much we print. They can control inflation that way by only spending a small percentage of it…it’s brilliant!
Inflation fantasies…
http://www.donbrash.com/assets/Article-Images/Reserve-Bank/Inflation-targeting-14-years-on/0114682-1.jpg
http://investmentpostcards.files.wordpress.com/2007/10/17-oct-4.jpg?w=510
http://3.bp.blogspot.com/_r-PrKrLt5dM/Snl2b9MsxoI/AAAAAAAABxg/B_t495WZ-4U/s400/hyperinflation.jpg
“Greece wasn’t a special case.”
Greece isn’t a special case. All euro nations share the same problem: They are monetarily non-sovereign. They cannot control their money supply. They cannot pay their bills. They can go bankrupt.
In contrast, the U.S. is Monetarily Sovereign ( http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/ ). It can control its money supply. It can pay any bills of any size, any time. It cannot go bankrupt.
Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Rodger Malcolm Mitchell
Thanks. We never realized.
However, upon reflection it strikes me that you’re mostly just troll-posting here in order to generate links to your own blog.
Yves: I’ve never seen this guy say anything useful ever. Just posts of the type we see before us now. Anyone?
I find it fascinating that almost all of the posters and authorities linked to this article think that capitalism’s current financial problems can be solved by “easy money,” a.k.a “printing money.” Does even one of the luminaries have a cogent explanation of the origin of capitalism’s lifeblood, viz., profit? Has it occurred to anybody that profit is based upon real-world exploitation of human beings and the degradation of their biosphere? If these items provide the baseline limits to “our” precious Rat Race, how is printing money ad infinitum going to provide to the rats of capitalism the unlimited profits “fix” that they require? Even so veneered a hack as Alan Greenspan admitted that the great windfall afforded by the failure of socialism–bringing a third or so of the world back into capital’s maw–will be of limited effect. And you can’t turn the two-earner household (formerly the one-earner) into a three-earner unless you reintroduce child labor. Exercise: Ask your favorite economic guru–try Krugman–how much “productivity” (euphemism for profit) is enough under capitalism. Then consult your Econ 101 text, where you will learn that human (read: capitalist) wants are unlimited, while resources are limited; ergo, profits (“marginal utility,” “marginal efficiency of capital,” etc.) are eternal. –An obvious non sequitur, and insanely so, but this is part of the ideological furniture that the luminaries take for granted.
Sorry, but I don’t quite understand your question. Strictly speaking, printing money might well work at this point in time.
As for the other issue: I am not sure you can derive that conclusion from reading the responses in this thread. I am sure some are unaware of this, but I doubt the majority are, so yours is an unfair reading.
@Foppe: Your first criticism is a point well taken; I do tend to ramble on. I quite agree that printing money can alleviate (or forestall)a “credit crunch” in the short term, as in the case of the 2008 crisis; but such does nothing to fix the underlying problem, namely, the profitability of capital as the pole star of society–as we have seen in the aftermath of the 2008 crisis (stagnation and austerity for the Many–a case of asset-stripping by big capital, as opposed to profitably employing same). I remain in disagreement with your second criticism: I do not think that I am being “unfair,” inasmuch as most posters (and luminaries cited) are concerned with saving capitalism as a system (yes, as opposed to saving a handful of giant corporations). (Under oligopolistic capitalism this last distinction wears thin; but I shall not press this point.) “Saving capitalism from itself,” as the Keynesians put it, is not a priority for an old geezer like me, who is literally sick of a life in the Rat Race. So many of you folks are straightening the pictures in hell. (“We cradle the snake that devours us,” as Voltaire put it.) In a word: If the posters/luminaries were aware of the antisocial character of capitalism as a system, they wouldn’t be fretting over the best means to rescue it from its own depredations.
“Has it occurred to anybody that profit is based upon real-world exploitation of human beings and the degradation of their biosphere?”
Yes. I am fully aware of this.
“… how is printing money ad infinitum going to provide to the rats of capitalism the unlimited profits “fix” that they require?”
I do posit weakening the euro (i.e. effectively printing more euros, causing inflation) as a help for Eurozone’s businessmen (and hence their slaves… I mean, free workers) who have to compete in the international markets. This makes sense because it is a matter of leveraging.
In the case of the USA, it is different: they should just declare a bankruptcy like any self-respecting empire facing the inevitability of its own decadence.
However, because of the specifics of being the global hegemon and having their own fiat money as gold-standard of sorts, printing more money does gain time to the USA, deflecting some of its own problems outside (to the EU making it to lose competitiveness, to China causing inflation there, etc.)
It won’t last forever but it’s relatively effective while it does, helping to pay for the ever-growing costs of the imperial military, which is the main expenditure.
“… human (read: capitalist) wants are unlimited, while resources are limited; ergo, profits (“marginal utility,” “marginal efficiency of capital,” etc.) are eternal”.
That’s not correct. Profits are resources (or produce made out of those resources): money does not exist as such but only as mirror of actual finite resources. That’s why inflation happens so easily.
You cannot detach money from goods (resources): money is only a means, a symbol of those goods you can ‘retrieve’ in exchange in markets. Just as in the past you could retrieve gold in banks with it, at least in theory – but even gold’s value is just derived from the goods it can purchase and it’s just another, primitive and fetishist, form of fiat money.
So profit tends to fail, what brings capitalists to cut costs (fire workers), what reduces demand, what makes profits fall even more… and so on until a revolution happens and the socio-economic system is changed.
@Maju: Your 2d and 3d paragraphs tell me that you are unaware of what is known as the Cambridge Capital Controversy (I suggest you google this). This controversy arose when Joan Robinson, Piero Sraffa and the Cambridge, U.K., contingent pointed out, contrary to the Cambridge, Mass., U.S.A, contingent of neoclassicals (Samuelson and his “engineering production function,” Solow, et al.), that their (and your) attempt to reduce “capital” to a mere shorthand name for physical use-values turns out to be both incoherent and question-begging. In the synopsis of one disciple of Sraffa: “. . . whereas the wage rate and the rent per unit of land refer to physical units of labor and land respectively, the rate of profit is a percentage rate referred to the value of capital goods. And the value of total capital is a magnitude the determination of which requires a prior knowledge of the rate of profit, which is precisely a variable that one seeks to determine. In other words, the rate of profit is defined with respect to the value of capital goods, while the production function is a technical relation which can only include physical quantities.” (L. Pasinetti, “Lectures on the Theory of Production,” 1977, p. 29.) (Your googling–try “Jesus Felipe,” an excellent summary–will show you that the neoclassical mainstream simply shrugged off this entirely devastating criticism; relying verbally upon Samuelson’s “surrogate production function,” which requires a world economy with one and only one commodity.) Of course, K. Marx said as much, better and earlier, with his concept of capital as “self-expanding value.” Much earlier the Buddha staked out the conceptual ground in his critique of idolatry; while running an entire society based upon what “the economy” (read: capital) does is the most grievous form of idolatry ever devised by humanity. So much for progress. (If capital were merely your physical use-values, there’d be no need to turn on the TV to see what “we,” i.e., “the economy,” did today; nor do I think that even you are prepared to say–apropos your last para–that profit diminishes because . . . physical laborers and capital goods–your “resources” diminish in volume, mass, etc.)
I am ultra-materialist. There are no “values”, only objects. Some objects have subjective value (of individual or collective nature) but objects are the real thing.
Profit is objectively irrelevant, just a psy-op or ‘magic summoning’ of a mesmerizing carrot before the noses of capitalists, their motivation to organize the collective production. And it only works because capitalists have the kind of personality (by nature or education or a mix of both) that would persecute such a virtual carrot.
Similarly, following the same twisted logic, capitalists try to put the carrot before the noses of (less motivated) workers and try to make the carrot indispensable for actual life by restricting all economic options outside their game involving the carrot (i.e. money, markets, working for them under their conditions).
As everybody knows, children (and maybe some fools) tell the truth. And young children understand perfectly that the $100 note is worthless in comparison with the cookie pack. It takes them time to understand the game of the carrot and how many cookie boxes can they get from those stupid adults with a $100 pack. Only as they are truly brainwashed and assimilated into the adult standard madness (a totally antinatural reality but the one that has been imposed on us) they start valuing more the $100 note… but only because it can be exchanged for many cookie packs (or equivalent).
As for Sraffians, I’ll refer you to Argentinean economist and blogger Rolando Astarita, who recently dedicated three successive articles to this matter. Sadly they are in Spanish but guess that is no problem for someone as educated as you apparently are:
‘Ultra-sraffianos y la teoría de Marx’: part 1, part 2, part 3.
He is certainly more qualified than I am to illustrate the point (mind you that we do not agree all the time).
“If capital were merely your physical use-values, there’d be no need to turn on the TV to see what “we,” i.e., “the economy,” did today”.
Not sure if I understand what you mean but as member of the working class I have no need nor use to know what “the economy did today”. My carrot is simpler: they do not pay me to think (not to think too much in any case). I either have a job and get paid a salary, or I do not have a job and do not get paid (could try welfare if there’s anything left yet).
It is very difficult in my experience, almost impossible, to get to produce your own goods and exchange them directly (or indirectly) with other producers. There was a very nice Argentinean experience in this sense not so long ago and it did work very well, but in any case this is exceptional and rather marginal, not what the economic system and society imposes on us since we are born (or a bit later maybe).
“nor do I think that even you are prepared to say–apropos your last para–that profit diminishes because . . . physical laborers and capital goods–your “resources” diminish in volume, mass, etc.”
Not my point in fact. My point is that profit is irrelevant in the real economy, except as motivator. Money is always profit (or loss if in red) and money is only there to (a) simplify markets and (b) serve as motivator (carrot) for the greedy ones. For those among us who lack greed, it’s more like whip: either you do as the rest or you get punished. We make up the working class, we mostly lack greed and we are not really interested in money… but because we are required to have some to buy/rent basic goods: food, housing, clothing, some caprices maybe…
@Maju: I thank you for your lengthy reply. (1) Your fourth-from-last para–the bit about not thinking because you are not paid to think–is the saddest passage I’ve seen in a long time. (2) Apropos your referring me to economist Astarita: Yo hablo la lengua castellana, pero mejor que usted diga el punto. Su papel en este lugar publico requiere no menos. (Other folks reading the exchange might like to know your point.) (3) I realize that you probably have not have had the time to read/absorb the references that I cited, but I urge you to do so. You might learn something about what are called “universals” in philosophy/logic. For example, as an “ultra-materialist” you deny all but “objects”–by which I presume you mean physical objects. But the very first word of your post–and, incidentally, this post of mine–is “I.” This word does not, obviously, exhaust its denotation in physical objectivity. I am not your “I,” and vice-versa; nor are you the same “I” (as a physical referent) that you were a nanosecond ago; but, alas, you are indeed the very same “I” that ponders this transition. (You are still Maju, are you not?) –The Cambridge Capital Controversy is all about this topic, although the economists on either side knew little or nothing about universals. Joan Robinson (later backed up by Sraffa et al.) simply had the insight to point out that the “engineering production function” of Samuelson (and neoclassical economics), which purported to limit its referents to technical, physical artifacts, could not claim coherence when dealing with capital in general and self-expanding value (for profit) in particular. For example, the capitalist invests a sum of money–value, a universal equivalent–in so much raw material, technology, technique, labor power, and so on–all radically distinct physical artifacts, but equated to a single universal sum of money. Then, if the capitalist is lucky, after production and after exchange, he finds that his product (which looks nothing like its physical ingredients) has not only transmuted into money, an homogeneous referent, but even more money–hence his profit rate. (So it goes–I have long thought that Robert Heilbroner’s locution for economists–“worldly philosophers”–was quite apt, even to the point that his appellation leaves out; namely, that most economists, like most philosophers, are ideologists of the confusion du jour.) Buena suerte!
Dynamics being set into motion in Europe bolster the curious matter of timing of S&P’s downgrade of U.S. sovereign debt. It’s rather plain these dynamics are targeting “full faith and credit” capacities of sovereign governments, likely with the aim of their destruction. One should also consider the dynamic involving leveraged speculators in this take down — theirs being an avenue of monetary transmission aggressively cultivated in the Age of Greenspan even to today’s extreme. (Check out Doug Noland’s commentary last week and this week for a more complete elaboration.)
It seems unlikely there will be more massive infusions of liquidity. The days of pretending the trans-Atlantic banking system suffers from a “liquidity crisis” rather than a solvency crisis appear to be coming to an end. There are enough people who understand the hyperinflationary dynamic this policy imposes — accelerated shutdown of physical economic activity — that its continuance seems most improbable.