By Lynn Parramore. Cross posted from Alternet
Lately, European elites have been congratulating themselves for averting disaster in the eurozone. But who, exactly, is breaking out the champagne?
The Banks Got Bailed Out
If you read the mainstream media reporting, you will learn that the European Central Bank (ECB) has “eased pressure” and “given breathing room” to the banks and financial markets, including the markets for sovereign debt. Translation: the bankers in the eurozone were sitting around biting their fingernails as holders of eurozone bank debt headed for the hills at the prospect of default by Greece and other countries. So the ECB gave them a sweetheart deal that allowed them to borrow more than €1 trillion for three years at just 1 percent interest. The banks got bailed out and will continue their irresponsible and in some cases criminal activity unchecked. Hooray!
Meanwhile, you will hear that the Italian and Spanish 10-year government bond yields have fallen below 5 percent, which is supposed to be another positive development. What you will not hear: having been given money very cheaply, the banks went on a spending spree. They bought government bonds that they will eventually unload at a handsome profit. Great! For them.
In the long run, it is doubtful that the real crisis has been averted. The economies of the eurozone are still not growing, and the Greek default has probably not been averted. But the bankers and financiers, and the politicians that back them, are feeling good for the moment.
Meanwhile, the full brunt of the crisis falls on the ordinary citizens of vulnerable countries like Spain, which has now emerged as the most worrisome of the so-called PIIGS countries (Portugal, Ireland, Italy Greece, Spain). For them, the present is grim and the future is dark. For those already enduring hardships, life has become a nightmare. Austerity measures, also known a “fiscal discipline” may have saved the euro and the banks. But they have not solved the underlying economic problems, because European elites are acting from two misguided notions. They refuse to recognize that Spain’s fiscal difficulties are a consequence of the economic crisis, not the cause. There’s a big difference, but this false narrative works to the advantage of the 1%, who would like to see the population in dire straits so that the plundering of the commons and shredding of labor protections and the social safety net can proceed unimpeded.
European elites also fail to acknowledge what Marshall Auerback and Ed Harrison have pointed out repeatedly: the structure of the eurozone is deeply flawed and creates damaging and unsustainable relationships between member countries that share a currency. In the United States, member states like New York and Mississippi have very different economies, but because they are part of the same political structure, part of the riches of one state will be transferred to make up the shortfall caused by the less robust economies of the poorer neighbors. That’s accepted as the price of keeping a country together. In the eurozone, on the other hand, you’ve got a shared currency but little sense of shared political purpose, so a country with a stronger economy, like Germany, resents aiding its poorer neighbors and therefore focuses on imposing misguided “discipline” on the poorer country as if that will solve the problem. What if New York imposed “discipline” on Mississippi? Pretty soon, a poor state would be even poorer, and its population would experience unrest and possibly descend into chaos.
The Rest Got Sold Out
Which brings us to Spain. At the moment, unemployment is above 23 percent and one young person in two is out of work. The economic crisis has created widespread hardship, which means that the need for state assistance for people who can’t find work or have health problems or other emergencies is rising just at the moment when drastic budget cuts are being imposed. We’re talking about cuts to health care, cuts to education, and cuts to other services that are not frills, but vital to any kind of chance for people to have a stable, decent life. In some areas, hospitals have been shut down. School children have been left to attend class without heating or toilet paper. A banker is breaking out the champagne while a child nearby is shivering. This Dickensian scenario is what elites are currently crowing about.
And it goes on. In a recent article, “Spain’s safety net frays as care workers go unpaid,” Reuters reports that nurses, streetcleaners, and caregivers of the mentally ill and others in desperate need of help are being laid off. Sick people can’t get medication. The human costs of austerity measures are cruel and startling.
The eurozone structure and the austerity madness has exacerbated the gap between the more robust northern economies and shrinking southern ones, which is a recipe for growing social unrest. As regular people and workers get increasingly squeezed, protests are bound to follow. Social critics warn of a whole “lost generation” with no hope and nothing to lose.
Even Martin Wolf of the Financial Times (not exactly the paper of record for the 99%) calls this situation “insanity”:
One definition of insanity is to do the same thing over and over again and expect different results. Germany’s determination to impose a fiscal hair shirt on its eurozone partners did not work in the “stability and growth pact”. Is it going to work in the “treaty on stability, co-ordination and governance” agreed last week? I doubt it. The treaty reflects the view that the crisis was due to fiscal indiscipline and that the solution is more discipline. This is far from the whole truth. Rigorous application of such a misleading idea is dangerous.
There is a madness stalking Europe. And it’s not the “fiscal irresponsibility” of ordinary citizens. It’s the greed and short-sightedness of elites who don’t seem to mind that innocent children are made to pay for their excesses. That is surely another definition of insanity.
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“Meanwhile, you will hear that the Italian and Spanish 10-year government bond yields have fallen below 5 percent, which is supposed to be another positive development. What you will not hear: having been given money very cheaply, the banks went on a spending spree. They bought government bonds that they will eventually unload at a handsome profit. Great! For them.”
Mosler and I were talking about this. I wrote something similar a while back, but now I’m not so sure. There’s no ‘transition mechanism’ between the LTRO and bond yields. You don’t borrow money and then instantly shove it into bonds arbitrarily. Yes there is cheap cash there, but there’s no compulsion to buy Greek debt or whatever.
The angle I took on it was ‘confidence’. The banks were given cash and so they felt confident enough to buy more peripheral debt. But I was never convinced. To think so is to conceive of investors as really stupid robots who don’t bother thinking things through.
Anyway, Warren finally pointed out to something very interesting. It seems that the Japanese were devaluing the Yen at the very same time as all this stuff was going on. And so there’s every likelihood that they gave the nod to buy up eurodebt in a show of solidarity with the eurofools…
http://moslereconomics.com/2012/02/27/ltro-birdie-telling-me-maybe-the-boj-gave-the-nod-to-its-banks/
Well, either that or the markets are dim to no end…
(b) The markets are dim to no end…
I wouldn’t bet on it… or ‘trade’ on it… or whatever they call it these days…
Agreed. Loose fed money seems to mostly inflate stock prices and oil prices, rather than its intended purpose: to stimulate business investment. Such is the nature of inflationary policy during debt deflation.
Is there any evidence (not speculation, evidence) that the LTRO gave rise to a “carry trade” with massive purchases of sovereign debt that in turn lowered their yields?
An alternative explanation for the fall in the yields of Italian and Spanish debt is the following: what the LTRO did was to halt the previous, uncontrolled, fire sale like deleveraging process. Once banks were able to secure unlimited funding from the ECB they simply stopped selling sovereign bonds. Banks are not necessarily taking on additional credit exposure; but at least they are not selling. Plus, many investors decided to purchase sovereign bonds again once they understood that banks would not be selling.
This would be enough to explain the recent drop in bond yields, wouldn’t it?
Still don’t understand how Ms. Parramore can conclude the banks will unload them “at a handsome profit.”
… was just kidding. Punk Economics II had it right (again):
ECB Cash For Trash = The Next Asset Bubble In Waiting.
They’re getting free money by locking in the spread between the yield on short-dated peripherial paper and the 1% the ECB is charging. By taking the peripheral debt as LTRO collateral, and beating the drum that Greece is a one-off event, the ECB isn’t helping “confidence”, it’s offering risk-free returns.
That is not free money. Consider the example of buying Greek debt with your 1% ECB loan.
On one side the “markets” (bankster mafias) approved that way the new governments of Monti and Rajoy. They are not “naive”, they are ideological.
On the other side, while I understand your perplexity re. Italy, Spain has a very limited public debt problem so far (private debt is another issue, but it’s not public debt unless you nationalize the debt, as Cowen did in Ireland). What I am surprised is that the “markets” were not buying Spanish bonds with such a low public debt in comparison with, say, Germany (never mind Italy or Greece). That’s because the “markets” are ideological and some elitist clique decreed that Spain should be treated as a heavy debt state even when it is a low debt one for EU standards.
It’s not for us to know, apparently, who exactly decreed that but I’m quite sure that if you can track the earliest use of the insulting acronym “PIIGS” you will find one of the ringleaders in the field of journalism, possibly a paid writer (pretending to be a true journalist, or even several) like my own cousin.
I think the Economist was one of the first papers to popularize the use of the term PIGS to designate the countries of the southern European periphery – and this started well before the 2008 crisis.
So, yes, maybe the massive sell off of those countries’ public debt was pre-orchestrated. The inevitable end result of this campaign will be a further weakening of the European – especially southern European – welfare states. An important victory from the point of view of the neoliberal ideologues that pontificate in all Economist-like publications.
Banks and Republicans, the wholly owned Wall Street subsidiary, are all about deregulation. What they’re too dumb to realize is deregulation in the finance sector leads to increased risk.
Some of the kids without toilet paper have Republican or banker parents, so all is well.
I think it’s more that capitalism encourages making things somebody else’s problem.
What “externalities”? The world is round!
Remember the first theorem of free markets from Econ 101: in a fully competitive market with fully internalized costs and full information, *nobody makes any profits*.
Of course, businessmen want to make profits, so under capitalism, their three goals are:
(1) to create monopolies;
(2) to externalize costs (make someone else pay)
(3) to hide information from everyone else
Under other systems, there may be other ways to make profits, perhaps by being given grants from the king or something, in which case the businessmen will petition to get the ‘free money’. And, since our system is a ‘mixed’ system, we see businessmen doing that too.
Why so partisan? Democrats raised more money from Wall St in the last election cycle, and it was Clinton, Schumer, and other dems that championed the deregulation of banks and swaps.
Democrats have a majority of minorities with non-voting shares — not a wholly owned subsidiary. They’ll take your money, they’ll nod their head in agreement with everything you say, but they won’t do what you want.
Here’s my experience in another austerity zone: Chile in the 1980s under the guidance of Pinochet.
Upon entering the train station bathroom in Valparaiso I notice there was a table with rolls of toilet paper at the entrance. An unmanned table.
“How strange” I thought.
Upon entering the stall to do my business I found — no toilet paper…”that’s odd”, so I went out and grabbed a roll from the table, did what comes naturally using an American portion of paper.
Upon exiting, a large women stood glaring at me took the roll from my hand, looked at it and demanded One Hundred Dollars, U.S!
“You’r crazy, toilet paper is free!!!!”…skipping the ugly details with the cop that appeared and backed her up…the woman receives the toilet paper from a boss that measures each roll’s diameter with a micrometer and then charges her accordingly. This was the woman’s job, so sit outside the toilets and sell squares of toilet paper to customers and give a profit to her boss. The Chilean Economic Miracle with not a taint of Socialism. Wonder how soon toilet paper will disappear from our stalls?
Went to a Chevron station in L.A. bought gas and then used the restroom and found no paper in the bathroom. Exited, grabbed a roll being sold in the minimart and restocked the dispenser in the bathroom. The Hispanic clerk wanted me to pay for the roll. “Call the cops Chiquita, this is America — toilet paper is free…”
There’s no toilet paper in the Chicago School!
lol — _everybody_ knows you’re supposed to carry around your own roll of toilet paper in your pocketbook or briefcase. That’s what they are for!
China was once a divided mess too and Eourope is beyound a great leap forward moment but here is a very interesting documentary that is a must see for everyone. Trust me its worth a watch
Part 1 http://www.youtube.com/watch?v=yjvvVgD44Z0
part 2 http://www.youtube.com/watch?v=-ksPm2l-NUM&feature=fvwrel
part 3 http://www.youtube.com/watch?v=fdpGIqr_HRQ&feature=related
part 4 http://www.youtube.com/watch?v=Y5Bgc_6q54Q&feature=related
part 5 http://www.youtube.com/watch?v=0UdAjXd9Mxc&feature=related
@American slave,
Thanks for the link to the series of videos which depict the pre-smog era in China. To a large extent, I suppose that one might thank the Western- (administration of Richard Nixon, that very administration which facilitated the, as yet, unappreciated development of MMT by formally taking the USA off of the gold standard) -inspired modernization of China for the current world-wide race to deplete the earth’s natural resources.
“There is a madness stalking Europe.” And not only Europe. When the 99% rise, the 1% will back down. But it will take the 99% rising to make it happen. Occupy Together.
One more reality check:
http://www.truth-out.org/news-thom-hartmann-new-study-shows-extreme-poverty-america-has-doubled-last-15-years-and-more/1331-0
I have a suggestion.
This is about the mortgage settlement which is not yet finalized and signed off. I notice that the topic is falling off the radar of the MSM as well as the blogs that have covered it so far.
Perhaps you could add a clock to your web page that shows the number of days that have passed since the initial announcement as we wait for the final details. It will be a reminder to other bloggers as well as regular readers that there is unfinished work. Just so it does not get forgotten.
“you’ve got a shared currency but little sense of shared political purpose, so a country with a stronger economy, like Germany, resents aiding its poorer neighbors and therefore focuses on imposing misguided “discipline” on the poorer country as if that will solve the problem. What if New York imposed “discipline” on Mississippi? Pretty soon, a poor state would be even poorer, and its population would experience unrest and possibly descend into chaos.”
Wrong choice of examples IMHO.
New York is NOT certainly “aiding” (is that your word) Mississipi more than Germany currently. The very existence of WS mortgage pumps – that Yves has so nicely documented – and the federal reserve are making the situation of Mississipi even worse than what Germany is imposing on Southern Europe.
“Offering” mortgages to Mississipi households and perverting the course of money and capitalism on such an wide basis ain’t worse than what Germany is imposing on the so-called Club Med IMHO.
The taxes transfers from Manhattan household to their poorer counterparts in poorer states ain’t worse than the cars Germany sells in those sunny countries.
In the end this “toilet paper” post is essentially supported by “toilet paper” argumentation. This is not financial in any sense and makes the case supported by this site weaker.
This site is certainly leaning into the social area more than economics. Why not! That the reason we read. Because it is documented as well. It is not a sheer political blog. But this post does not belong that league.
We need strong and factual argumentation on all issues including social and political ones:
“What is the exact level of contribution – money-wise – by each of the participants to this chaos?”
The level of North-to-South money transfer is and has been substantial for a large period. Not exactly 3 or 5 years. Significantly betting the common currency, the way the ECB currently, is by the way already a massive step.
Other issue:
“What is current level of revenues, taxations and social contributions in the countries mentioned above?”
You cannot expect tax transfers without an initial equalization of the tax structures.
“What is the current price level for home in Southern Europe?”
You cannot expect massive transfers of money with market prices still significantly over the top.
I’d be propose you contact Edward Hughes.
His writings on those subjects are balanced. They are documented as well. Argumentation and factual reports are needed even more the “paper toilet” is the Spanish schools.
By saying that places like NY have been “aiding” Mississippi we of course do not mean the PEOPLE of Mississippi, we mean the 0.1% elite of Mississippi. That state has a long record of having a tiny elite control everything, dating to before the Civil War….
Ok, but you’re painting in very broad strokes, forgetting that for several decades there have been transfers between EU members, in fact relatively large tranfers, for example from GErmany and other rich member states to Spain and fringe members, that are part of the overall cohesion goals of the EU. See:
en.wikipedia.org/wiki/Structural_Funds_and_Cohesion_Funds
So the German will to punish, and I do not doubt that among certain German politicians there is a righteousness that firmly believes in punishment as an educational tool, though unlike in the USA such characters are not in the majority in Germany, is not a sudden thing.
And I don’t claim that Germany always gives more than it gets. I think in agriculture German farmers may sometimes get more than their brothers in Spain. But regarding infrastructure I believe that Spain has been a net benefactor for quite some time.
woops – not benefactor but someone who enjoys benefits. What’s the right term?
You’re thinking of “beneficiary”, from Latin “beneficium” (good deed, a favor) and “beneficiarius” (enjoying a favor).
Thanks!
“you’re painting in very broad strokes, forgetting that for several decades there have been transfers between EU members, in fact relatively large transfers, for example from Germany and other rich member states to Spain and fringe members”
+1
Yes DECADES DO MATTER. The question and the money divides, are not only an issue of “elite” against “non-elite”, South-against-North. It’s more complex on all grounds.
It looks like the site need a couple of Eurozone-based contributors… When talking Eurozone matters. Sure, I have not doubt that this Naked Capitalism blog has some useful perspective to offer on Euro issues. But paper-toilet argumentation is NOT a good thing.
Is the country going the 30s à la Hemingway or Steinbeck way? Not heard of it at this stage. But I’d welcome documented evidence on these subjects. This post is not.
I have not doubt than life is Spain has got tougher. Anyone with family or friends over there will concur. It is pretty rough. A lot of people HAVE TO rely on their families.
Can this be averted? Is it a good point to avoid it? I do not know. But it looks like the Spanish economy has to change direction anyway.
Can it be done with mild and limited behavioural changes? Of course not. Have these changes started? We’d like to hear. But sure the crazy and unsustainable level of imports financed by external debts has reduced significantly.
I think Yves has a pretty good Euro team backing her up: Philip Pilkington will probably bite his tongue in two when he reads your comment. And Richter has hit a little rough weather but I think Yves will give him another chance. And Auerbach! And among comments Swedish Lex is brilliant and Kiste has shown some very sharp teeth.
In the general aspects, I like the article and agree with most it says.
Still, I’d like to add that while education, pensions, unemployment, labor rights, social protection, healthcare, are being cut wildly, many areas are untouched: military, police, monarchy expenditures, politicians’ salaries (with the very odd honorable exception), etc. are untouched.
While public schools are suffering, the public subsidies paid to private schools (mostly owned by the Catholic Church) remain untouched, as does the long-established subsidy to the Church as such. This should be quite shocking considering that most Spaniards are nowadays non-religious and that it’s an ideological and dispensable expenditure.
Overall: the State of Spain is cutting in the wrong areas. This is ideological and not pragmatical at all.
Time to dissolve the monasteries, old chum.
“Overall: the State of Spain is cutting in the wrong areas. This is ideological and not pragmatical at all.”
Is this not always and everywhere the case?
It seems to quite pragmatic from the view of the organized crime syndicate that is the international banking cartel.
As soon as one surrenders the idea that the ruling elite has any notion whatever of “public purpose,” it’s a lot easier to see what’s going on.
The fact that the ruling elites have no idea whatsoever of “public purpose” is what is going to be their downfall.
An elite which understands public purpose (Caesar Augustus?) can keep power and vast wealth with little trouble for long periods and be *loved* by the proles. One which doesn’t…. doesn’t last long unless it has an *extremely* loyal military backing it. (Which means that elite must understand public purpose enough to keep the military loyal!)
“Is this not always and everywhere the case?”
Possibly but it is still important to declare and denounce it, not everybody is so clear sighted.
They are saying in all the mainstream media once and again (and even in this blog): “cuts are necessary, urgent”, we must say: why cuts in such vital areas for the people and not in the accessory ones of military spending, monarchy, religious subsidies and such?
Sadly enough we are bound to state the obvious once and again because otherwise the ghost of Goebbels (who, if I’m correct, proclaimed that “a lie repeated a thousand times becomes a truth”) will win the hearts and minds of the public.
Well said and writen Lynn!. The problem is that we do not have a goebblesian advertisement apparatus to repeat these truths ad nauseam to make them popular. On the contrary, the existing advertising apparatus goes in the opposite direction.
good point. when I was young, in my twenties (long time ago) I wondered what the world would be like if we replaced ALL advertising with real info that humans could actually use to improve their lives. I could visualize the world transform…
“In the long run, it is doubtful that the real crisis has been averted. The economies of the eurozone are still not growing…” They cannot grow any longer due to peak oil; that’s the geological reality. On the socioeconomic side, elites are preserving their wealth, status and power by imposing “austerity” on others while -ostensibly- bailing out banks. They rationalize this conduct -to the extent they even care- by expecting growth to resume.
School children in Spain attend schools that aren’t stocked with toilet paper? My SIL is a teacher here in Los Angeles. She has provided toilet paper, soap and paper towels for her classroom for the past ten years because of budget cut backs. She also buys books, pencils, crayons and other classroom supplies out of her own meager paycheck for her students. And despite what libertarian’s falsely claim her pay as a teacher is not high. This situation is horrible both here in America and in Spain.
“Catch-22 says they have a right to do anything we can’t stop them from doing.” Well…..