If anything has been learned from the past decade's ramping up and unwinding of the Collateralized Debt Obligations (and related matters), it's that today's politicians and technocrats have taken leave of the notion of moral hazard, as if they could repeal it. Until moral hazard comes back into vogue, I fear the sky is the limit for the bad things that can happen because the game will always be to act in your short term interest before the next guy does.
Very true. Reminds me of this email I got recently from my brokerage:
While the Fed is lending money at almost zero interest rates, why not take advantage of it through <brokerage name>? <Your broker> will lend up to $566,000 at 1.25% for every $100,000 in a Portfolio Margin4 Securities Trading account. As of 4/5/2010, more than 500 stocks had a dividend yield of 5% or more.
Your broker just buys a CDS on you, and then when you default, they get their money and whatever stock you bought. And since most people don't default, the bank that issued the CDS makes money too.
Playing numbers games helps everyone grow their capital. You just have to do it intelligently.
Anecdotal evidence (i.e. a friend who knows someone in Greece) is that Greeks are lining up at banks to withdraw all their funds, i.e. a classic bank run is now in progress.
Ultimately, the "euro" experiment is doomed to failure. You can't have a unified currency and monetary policy, while individual countries have massively different domestic spending policies.
Being unable to devalue the currency (print money to pay debt), is --I think-- a good thing. It is harder for politicians to postpone the pain, they have to cut spending and do what's needed for the country/state/province to recover fiscally.
If somebody weights 200kg: The right solution is to lose weight and eat your vegetables; not to "devalue" the Kilogram.
Another way to lose weight would be to starve to death, which is what happened to many people the last time the Fed refused to devalue the currency (1929-1933).
To be fair, a massive ecological crisis (the dustbowl) and price controls on food (making it uneconomical to ship food to cities) also contributed to food shortages.
> price controls on food (making it uneconomical to ship food to cities) also contributed to food shortages.
You got the boundary on the price controls wrong. They mandated minimum prices, not maximum. The minimum was more than enough to pay for shipping, but it was higher than the amount people could afford.
FDR believed that the depression was caused by excess production. The federal govt destroyed food and other things to reduce supply in an effort to drive up prices.
That didn't stop until WWII was imminent, when it became obvious that the US couldn't be an "arsenal of democracy" if it wasn't producing as much as it could.
This war on production is what made the great depression "great", that is, long an deep.
To be fair, these FDR policies were extensions of what Hoover had done. Interestingly enough, FDR campaigned against them.
While price controls of food cause problems, they sound really good to voters when there is a recession, and thus they sound really good to politicians.
The great depression has NOTHING to do with the Greek crisis. The crash of 1929 was caused by the financial sector, not by a crushing national debt. In 1929 the US federal debt was less than 20% of GDP [1].
It's not because a looser monetary policy could have helped during the great depression that it will help in every situation.
Actually the recently announced austerity plan has been the hardest ever for the people here, at least since democracy was restored in 1974. And the soon-to-be-announced revised austerity plan mandated by the IMF is rumored to be the hardest thing since WW II. It's not certain that the plan's goals will be met of course, but you can be sure that this time the politicians are not only caring about their re-election.
Go to Athens and you will see the problem very clearly. The habour is full of yachts, the streets are jammed with luxury cars and the people covered in designer labels and bling. This is a wealthy place, you might think, then look at little closer. The place looks like a building site and here's why: in Greece you pay no taxes on a building 'til it's completed, but since the weather is fine all year anyway, why not just leave the top floor unfinished? And they do, private individuals and corporations alike.
You see, the Greeks want a level of government spending like Germany or Sweden. They're even willing to vote in the taxes to fund it. But they're not willing to actually pay those taxes, and so they just don't. Greece is a poor country full of rich people. In that sense the austerity measures will be easy to implement: corruption is everywhere. As is a strong sense of entitlement... Compare that to Germany or Sweden where paying your tax is seen as a civic duty.
I did quite like the German idea that the Greeks ought to sell off their islands to other countries to raise cash.
You're right about the lack of forced labor camps, but "Stalinist" is how local economists describe the situation.
To give you some idea: if you want to start a company, it will take you a minimum of 40 days to visit various bureaucrats and get permissions.
When you hire employees they will come with union strings and have a Soviet-era worker mindset (i.e., they can do whatever work they want, incompetently or not, and they still expect to get paid, etc.), which is probably where the phrase comes from.
Well then those quote "local economists" are idiots with no sense of history.
"Mildly socialist, corrupt and inefficient" is how any economist who has a brain, local or otherwise, would describe it.
"Stalinist" is for Sarah Palin, the Tea Party and other groups who are more concerned with "impact words" than actually understanding anything.
EDIT: Just to make it more clear how inaccurate and inflammatory that comparison is, Stalin by many estimates killed more people than Hitler. I'll repeat that. Stalin by many estimates killed more people than Hitler. Want to rethink the comparison maybe?
Their references to that term allude to red tape on a large scale, centralized economic planning, indifferent and unmotivated labor, etc., not the death camps and killing.
(And that last phrase reminded me of this: http://bit.ly/bh96ml apropos of nothing).
Yeah but even then, it's not "stalinist", it's "poorly executed social democracy". The government isn't running the farms or producing toilet paper, they just have more bureaucracy than in America, and less well executed than elsewhere in Europe.
> in Greece you pay no taxes on a building 'til it's completed, but since the weather is fine all year anyway, why not just leave the top floor unfinished? And they do, private individuals and corporations alike.
This. Athens reminded me a little bit of Cairo, with mile after mile of "unfinished" occupied buildings.
It seems also that good policy is a major problem. No taxes till complete? That's fine, now make it illegal to move into an incomplete building. No sane person can make a rational argument that people should be able to move into construction sites.
I would make that argument, especially if I'm personally involved in the building (not sure about the legalities here).
Maintaining a house no one lives in is pretty expensive, so there's every reason to have someone move in as soon as the house can manage weather protection, food storage, and ventilation. Further, if you're personally involved in advancing those concerns, you're already spending at least 10 hours a day in the building. Now, leasing the place out while there are holes in the floor is probably against a law, but there's no reason why buildings couldn't be continuously developed incrementally with user feedback. And occasionally, they are.
Hopefully the Germans will be smart enough to force the scheduling of the bailout payments to be done in such a way that it pushes the Greeks to cut their spending. Maybe something like make the first payment equal to about 95% of what seems to be needed in order to cover their interest payments and then decline from there.
"The place looks like a building site and here's why: in Greece you pay no taxes on a building 'til it's completed, but since the weather is fine all year anyway, why not just leave the top floor unfinished?"
Interesting. The exact same thing happens in south Italy.
Yep, Europe has set itself up in a situation where sooner or later, it'll have to get a unified economic policy. But it doesn't look like a bad thing to me:
* European countries are too small to be meaningful in worldwide economic (or military) matters: our markets would be too atomized, we wouldn't have any negotiation power unless we "harmonize" our positions: I'd rather have the decisions be taken together, rather than harmonized as an afterthought.
* Granted, today Brussels doesn't work democratically and lacks real power, especially when it comes to monetary policy. Giving real power to that shapeless bureaucracy seems stupid at first sight. For European elections, most parties are attached to a single country, have "national" (i.e. totally off-topic and inapplicable) programs, aren't kept accountable for anything once elected; the vast majority of voters either don't have a clue what a Euro-MP's purpose is, or would bet that they have none.
But all of this would change quite rapidly, if Brussels was to get some real, strategic, intelligible power: real programs would become defensible during elections, the purpose of real pan-European parties would become clear, and if elected people ran on a real program, they could be held accountable of it (well, at least as much as in normal democraties anyway).
I agree somewhat with the sentiment that a stronger EU can be good.
But I do not see why we should see harmonization as so important. Unilateral free trade is always possible. Also, Switzerland seems to be doing fine as a small and independent country.
Without harmonisation:
* We can't decide anything about inflation, interest rates, at monetary policies.
* There's an incentive for fiscal dumping: you set your tax rates for mobile capital so low that you drain wealth from the 26 other countries; knowing that common market and currency makes more things mobile and therefore drainable
Besides, free trade is a fairy tale: we practice free trade according the WTO rules, but the real business is the negotiation where WTO rules are decided. As Europe, you've got enough weight to have your word, as most businesses can't afford to forgo the whole European market. Most of them can forgo France, or Germany, or Spain.
That's because politicians/diplomats are negotiating free-trade as if it was a prisoner's dilemma. But you can lower tariffs unilateral.
And there are people who regard fiscal competition (or other regulatory competition) as a good thing.
Could you please explain your argument about inflation? Couldn't each country decide on its own inflation, without harmonization nor a common currency?
Let's say we have 10 countries, with an identical GDP of 100 billion, and 10% flat tax rate. Let's say they agree on what's the minimum decent level of public services (health care, education, roads, wars abroad, prisons, car makers and bank bailouts...), and it cost just these 10% GDP raised by taxes.
On day 1, everything goes smooth: everyone needs 10 billions, has 10 billions, spends them. Now, a country decide to lower its tax rate to 5%. Taxable activities move massively to this country, their GDP soars to 300 billions: they've now 15 billions of income tax, that's great for them; but other countries have only got 9.4 billion left, they're below their bare minimum income. They'll have to choose between suppressing some public services, and protect themselves against the dumping countries (i.e. make it artificially impractical for companies of the dumping country to do business in the rest of the union).
Now, if the dumping country is much smaller than the others, it can do some dumping without hurting other, bigger countries too much with the drain. That's why dumping countries are usually small ones: the smaller the country, the more we let it get away with.
The dumping mechanisms encourage to lower taxes, at the expense of reduced public services. In some countries, limiting public services is ideologically considered a Good Thing (and for some reason, people don't realize that wars and prisons are public services). But limited public services are correlated with higher stress, and higher crime rates. That's not the lifestyle most Europeans want: so we have to protect our taxes. Don't forget that there is already a strong control feedback on taxes: voters don't enjoy paying them, so most taxes that can be suppressed or lowered under acceptable conditions are cut ASAP.
> Could you please explain your argument about inflation?
> Couldn't each country decide on its own inflation, without harmonization nor a common currency?
Without a common currency you can handle your own inflation.
But if there are many different moneys in a market, and they fluctuate relative to each other, it's much more difficult to make business. Moreover, when countries have independent monetary policies, they eventually indulge into protectionism (although they try to disguise it into something else). Therefore there's no more common market, with the corresponding economies of scale.
Before the Euro, european countries already had a "monetary snake" system which limited money fluctuation and ability to indulge into protectionism, to favor business inside Europe.
Finally, being known as unable to raise inflation has a positive effect: since lenders are confident that Euro can't be significantly devalued, they consider the loan as less risky, and therefore accept lower interest rates. Look at Greece: people are afraid that the country might go bankrupt, so they only lend at high interest rates, putting Greece into further trouble. Know, imagine that Greece was able to devalue its currency through inflation: lenders would anticipate massive inflation, and protect themselves with outrageous interest rates. The alternative for Greece would be to borrow into a stronger, foreign money, but then if their economy tanks, the debt would explode with soaring exchange rates, and the whole country would default. Given this high risk of default, interest rates would soar even if labelled in a strong currency.
Being tied to a strong currency, with some rules which keep it strong, forces you to drive your economy responsibly. Unfortunately for Greece, the Euro rules weren't strong and enforceable enough to prevent their politicians from acting irresponsibly. Know they're going to pay...
Switerland is doing fine because it takes the attitude that it's fine to accept Nazi gold, loot from third world despots, corrupt politicians and business people etc.
> You can't have a unified currency and monetary policy, while individual countries have massively different domestic spending policies.
This is factually incorrect, because for over 1000 years European currencies were backed by silver or gold and were thus the same, despite the fact that European polities had vastly different spending priorities and indeed levels of development.
You may need to brush up on the history of currency. So called "gold and silver" standards did not eliminate fluctuating exchange rates and valuation/devaluation cycles.
For example:
"In 1663, a new gold coinage was introduced based on the 22 carat fine guinea. Fixed in weight at 44½ to the troy pound from 1670, this coin's value varied considerably until 1717, when it was fixed at 21 shillings (21/-, 1.05 pounds). However, despite the efforts of Sir Isaac Newton, Master of the Mint, to reduce the guinea's value, this valuation overvalued gold relative to silver when compared to the valuations in other European countries"
So even in physical coin form, this only worsened with introduction of paper notes, individual currencies fluctuated in valuation from country to country.
Thus, European currencies historically were not "the same".
You a projecting modern commodity trading exchange concepts onto history - until the advent of "virtual" trading of gold - there DEFINITELY was fluctuations of the value of gold and silver between countries.
But at the time, not all gold coins were the same. A florin from northern italy was not necessarily worth the same as a ducat of identical weight. Different mints formulated their metal differently and counterfeiting was a real and serious problem. The rumour that a king had ordered the adulteration of the currency could cause prices to swing wildly. Asset backed currencies were not some edenic pre-lapsarian device of peace and plenty. As an economic mechanism they have serious problems; in some respects more so than a fiat currency.
You've just criticized bimetalism, not the concept of a backed currency. Gold will be the same value relative to gold; it's just impossible to peg gold to silver.
You could also reasonably argue that the US is a perfect example of what the OP thinks is impossible. The primary differences are that we have a far more mobile workforce than does Europe, we have effective caps on state debt levels, and we have a (much hated) unified tax system that allows federal tax money to be spent in states that are lagging economically. Despite conservative hatred of these latter two items, they have done a lot to keep us from going through Greek debt crises of our own.
What odds would you offer on common monetary policy in the EU falling apart first vs common monetary policy in the US and China falling apart first? (China and other countries are copying US policy, by pegging the exchange rate. They should fail soon, too, by the same logic.)
The real economics at work here are the economies of scale that comes with being the reserve currency of the world. Whoever owns the reserve currency holds the keys to the global economy - they're not backing anytime soon. Some say it could be 2022 when the Euro > Dollar.
The US has probably greater fiscal transfers between states and the federal budget is bigger than the EU budget compared to the member states' budgets.
Euro countries are supposed to do that too, it's part of the deal. Not everyone cares too much about that, though. It's easier to be yelled at by the ECB than your voters when the latter will vote you out of office.
The big difference is that flow of capital, goods, and (most importantly) labor between states is virtually unrestricted. In Europe, this isn't the case, which is a big reason Europe isn't an "optimal currency zone" (http://en.wikipedia.org/wiki/Optimum_currency_area).
What restrictions are there on labor moving between states in the EU? I'm not aware of any at all - witness the large numbers of Poles who now work in the UK (which I admit I rather like).
I don't know about legal restrictions, but I frequently see the claim that people empirically don't move within the EU as much as they move within the US. I'd guess that variability of language/culture probably plays a role...
There are no legal restrictions for most countries; recent entrants to the EU don't get full access to labor markets of most other EU countries immediately. But generally people can move or invest where they like, and EU-wide standards have been established most products and services (so your widget/widgeteria doesn't have to be approved by 22 different regulatory agencies).
There are no internal customs controls in the continental EU; the UK and Ireland reserve an exception, partly due to historical problems with terrorism.
Most states run balanced budgets most years, and some have been in surplus quite recently. Of course, they do that partly by shifting funding of state government functions to the federal budget, which is not constitutionally required to be balanced as most state budgets are.
More of a temporary setback and more centralized decisions and restrictions in the future. I really can't see anything not normal happening for a new currency/"government in the making" on the block.
You may see this as a "normal" transition period but that doesn't mean EMU will survive intact. Sovereign debt crises (plural) and bank solvency are huge problems for several EMU states.
If one EMU state defaults on sovereign debt, there will be a chain reaction in the banking system and the debt markets. Several states are at risk of defaulting.
Meanwhile, in reality, it was about time for the euro to come down against the dollar. Macroeconomically too, of course, but on a personal level a ~10% effective gross wage increase (or reversal of decrease to be precise) is quite alright with me.
