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Josh Rosner: Eurozone Crisis – No More Safe Havens

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Josh Rosner of Graham Fisher published a report last week urging subscribers to short bunds, beating the Moody’s negative watch for Germany and the Netherlands by a full week.

The article provides a data-rich analysis of how a banking crisis has morphed into a sovereign debt crisis as the authorities have refused to impose losses on investors in banks in the so-called core Eurozone countries. And as Rosner argues, the current path of denial and delay has increased the eventual costs to Germany and the global economy, with the tab to Germany already €500 billion higher than it would otherwise have been. The executive summary:

As the global financial and economic crisis drags on European regulators and policy-makers are continuing in their attempts to find a path from crisis toward stability, while balancing the public interests of independent sovereign nations desirous of a deeper financial, economic, political and fiscal union. Concurrent with these attempts, the media and government officials in the core of Europe are characterizing the crisis as one stemming from profligate borrowing and reckless spending by peripheral Eurozone economies.

Past Eurozone growth, particularly in Germany, did not come from meaningful improvements in productivity, but rather on the back of household wage reductions and industry-friendly reforms to the labor market – the Hartz reforms – which transferred wealth from the people to the banking and export-driven sectors of the economy.

While German and French taxpayers are justifiably angry, their anger is largely misdirected. Rather than embracing the false narrative blaming only peripheral nations for requiring bailouts, the anger should more rightfully be directed at:

• Designers of the European Monetary Union who, at the creation of the EMU, ignored regular and repeated warnings, from noted academics, analysts and policy advisors, that structural weaknesses would lead us to the crisis we now face;

• Banks, in the core, with weak internal controls and excessive leverage, which were profligate lenders in search of yield, to weak private, corporate and sovereign creditors in the peripheral countries;

• Those officials and technocrats who failed to properly regulate the domestic banking industry and allowed bankers to treat all sovereign debt as equal regardless of the differing debt capacity of the issuer;

• Rating agencies that failed to offer meaningful analysis of sovereign credit capacities and also assumed that too-big-to-fail financial institutions ratings should reflect an implied or explicit guarantee by their home country;

• Political leaders who, since the beginning of the crisis, downplayed its ultimate costs and, thus, delayed its resolution and increased the ultimate costs to taxpayers;

With this as a backdrop, it logically follows that the German government and central bank are seeking to protect the markets for German exporters and the German banking sector. Accordingly, the German government will be forced to choose either a large share of the costs of supporting a further integration of the European Monetary Union or, alternately, the larger economic and social costs of its failure, including the massive costs of recapitalizing German banks and financial support for German industry Either approach will lead to German debts rising markedly while its economy contracts. The costs will be astounding.

The longer it takes for political leaders to offer their constituents full disclosure and transparency, the more costly any solution will be. For this reason, Eurozone political leaders must act decisively.

This paper will not suggest a particular path. Rather, this paper will show the constraints on choosing a path forward are the results of a lack of political will, not economic ability. The lack of will is a failure of politicians to lead and of technocrats reticent to deliver unwelcome, but necessary news to the German people.

In Germany, where real wage declines early last decade robbed households of consumption and represented a transfer of income to domestic exporters and banks, the news that taxpayers will now be responsible for bailing out these firms, while accepting reductions in national sovereignty will be a particularly bitter pill to swallow.

In several Eurozone countries rising nationalistic sentiment threatens to derail the Euro project. A disorderly collapse will result in an outcome far more costly to core countries than fully recognizing losses, recapitalizing financial institutions and integrating Eurozone economies. This paper will explore:

• Why, in the wake of unification of East and West Germany, Germany was uniquely poised to benefit from a monetary union;

• The role that Germany and its banking sector played in setting the stage for a crisis in the periphery;

• Germany’s current economic and fiscal condition and existing commitments to the periphery;

• The possible German debt to GDP implications of various crisis management approaches;

• The likelihood German bond yields will no longer remain detached from fundamentals; and

• A fair basis on which to consider German obligations to the periphery.

The longer leaders wait and the less decisive their approach, the greater the risk that German bunds and German banks will lose their status as the “safe haven” assets of Europe. These risks are already on the rise as witnessed by recent the deterioration of global investor appetite for German government and bank securities.

This is the money paragraph:

I encourage you to read the article in full:

GF&Co- Euro Crisis- No More Safe Havens

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44 comments

  1. John Bennett

    I missed this when it was first published in the Economist but it says a lot. You might consider reproducing it in the future. Libor is busted. Claiming-it-isn’t is fraud. A major redo is essential.


    The Economist

    This is a printer friendly version of the page.

    Free exchange
    Hammer time
    How auction theory can help improve the system for setting LIBOR

    Jul 14th 2012 | from the print edition

    PITY the British Bankers’ Association (BBA): it lacks the tools it needs to do its job. It sets one of finance’s most important interest rates, but the prices it needs to do this do not exist. The London Inter-bank Offered Rate (LIBOR) aims to represent the prices banks charge when lending to one another. The rates are required every day, including in currencies and at maturities where actual transactions are rare. To find the right prices the BBA uses a system that works a bit like an auction. And auction theory might just help rectify the flaws in LIBOR.

    Auctions are commonly used to find prices where none exists. There are lots of variants. In “English” auctions, often used to sell rare paintings, bids are public and the highest bidder wins. In online auctions, bids are privately submitted and the auctioneer selects the winner and price. In financial-market auctions—to buy government bonds, say—there can be more than one winner since there are lots of similar assets for sale. Whatever the set-up, one of the aims is to elicit price information from the bidders.

    The LIBOR-setting process has a similar aim. The BBA plays a role akin to an auctioneer, asking banks to submit daily estimates of the rate they would pay to borrow in “reasonable market size”. These private submissions are collected by the BBA. After throwing aside outlier bids, the average gives the final LIBOR price.

    Some of LIBOR’s failures also have echoes in auctions. Traders at involved banks are accused of aligning their LIBOR estimates in an attempt to affect the final rate. They were able to cross-check what others had done, since the BBA makes individual estimates public. These traders had, in effect, formed a “bidding ring”, analogous to a sort of cartel that is familiar to observers of auctions.

    Bidding rings can be both sophisticated and long-lasting. In a 2009 paper John Asker of New York University’s Stern School of Business examined a bidding ring that specialised in valuable stamp collections. The members recognised that it was not in their interests to battle it out in proper auctions. So before each sale they submitted private bids to a central organiser (a taxi driver). The top bidder in this illegal “knockout” auction had the right to bid, unthreatened, at the auction house. The losers in the knockout auction received a payment to keep them sweet. The cartel ran over 1,700 of these knockout auctions in one year, and operated successfully for 15 years.

    Luckily for those trying to mend LIBOR, there are examples of how these types of cartel falter. In a 1992 paper on bidding rings, Preston McAfee, now at Google, and John McMillan, then of the University of California, San Diego, outlined four challenges that bidding rings face. First, they need an enforcement mechanism so that members stick to the rules. Second, the spoils need to be fairly shared. Third, new entrants must be kept out. Finally, the cartel needs to avoid action from outside that aims to topple it.

    A better LIBOR system would be based on actual data as far as possible: not using any market data just because some are missing was never a good idea. If the BBA needs estimates to fill the gaps, it should learn a simple lesson from auctions: you have to stick to your bid. False bidding in an auction is penalised: Sotheby’s, for example, is currently suing two buyers who failed to pay for Chinese works of art won at auction. It should be the same with LIBOR. Banks that claim one price but actually pay another when they borrow should face a hefty fine.

    Once banks’ LIBOR bids actually have some commitment value, the system should focus on the weaknesses that auction cartels are known to have. The cartel-enforcement problem would be more acute if the BBA increased the number of submitting banks and kept those bids private. The entry of outsiders should be actively encouraged, by allowing other lenders to banks (money-market funds, say) to submit estimates, too.

    You can’t touch this

    No two auctions are exactly alike but the BBA could also borrow from the ideas of others. In 2007 and 2008 the Bank of England (BoE) and America’s Treasury both wanted to push cash into illiquid markets by buying up dodgy collateral. But markets had dried up, so there were no prices for these assets. Both called in auction experts—Paul Klemperer of Oxford University for the BoE and Paul Milgrom of Stanford University for the Treasury.

    In Mr Klemperer’s “product mix” auction, bidders submit detailed bids, which include both the prices they would pay and quantities they would accept for a range of goods. Because bids are simultaneous and are never revealed, bidders cannot learn from one another, making collusion harder. Since the auctions are of the many-winner financial type, a knockout system, as in the stamp bidding ring, is unlikely.

    Having received a set of bids for different goods, at various prices and quantities, the auctioneer in Mr Klemperer’s set-up then conducts a proxy auction on bidders’ behalf to see who should get what, and what the price should be. Because nothing is revealed to the bidders and they know they cannot influence this process, their best bet is to tell the truth. What is more, since the auctioneer has price information for a range of quantities, it is possible to see how prices change as supply does.

    The BBA needs to rework LIBOR completely if it wants to save it. The kinds of ideas being used in auctions might help it do that. If it could elicit honest prices for various quantities of money-market lending it would be able to provide both an accurate LIBOR rate and information on how LIBOR might move as banks’ financing needs change. This price information would be valuable to regulators. At the moment LIBOR is just a made-up price for an ill-defined quantity of money. Time to call an auctioneer.

    Sources

    John Asker, “A Study of the Internal Organization of a Bidding Cartel”, American Economic Review, 100(3), 724-762, 2010

    John Asker, “Bidding Rings”, New Palgrave Dictionary of Economics Online, 2010

    Paul Klemperer, “The Product-Mix Auction: a New Auction Design for Differentiated Goods”, Journal of the European Economic Association, 2010

    P. McAfee and J. McMillan, “Bidding Rings”, American Economic Review, June 1992, 579-599

    Economist.com/blogs/freeexchange

  2. Lune

    Overall a great article, but I’d take issue with the statement “the public interests of independent sovereign nations desirous of a deeper financial, economic, political and fiscal union”.

    I’m not so sure there was any such public consensus. Most of the binding treaties underpinning the EU failed to be ratified in the first try, and ways had to be found around this democratic “failure” of the hoi polloi to buy into the technocrats’ dreams.

    Indeed, even now, I suspect if you ask most Europeans what they most wanted out of any EU, they’d probably pick the Schengen Agreement and… the Schengen Agreement. That’s about it. All the other stuff, including the Euro, have far less popular support than the Eurocrats believe and/or try to portray to the rest of the world.

    1. They didn't leave me a choice

      Public consensus never existed. What we had were a bunch of extremely manipulated votes (where they were even held) that would just have been repeated until the “correct” voting result was manipulated out of the public. In finland they never even mentioned that a currency union would be one of the results of the primary EU vote and that it would be “mandatory” (Notwithstanding that there’s EU members not in eurozone right now. Gotta hand it to the eurocrat scum, they do know how to spin lies.) and there would not be a vote on if we wanted the euro. The technocrats/pseudoautocrats just said that “it’s a parliamentary democracy, we don’t need to ask the public if they want a new currency”.

      Never mind that the matter was never brought up in national elections, meaning that no choice over this issue was ever made by the electorate, even within the retarded “hurr durr representation” paradigm. Eurocrats represent nobody but themselves and the superclass. A bunch of traitors is what they are.

  3. marty

    Thanks for posting this Yves. I’m still reading the full report, but it so far I’ve found many nuggets of wisdom. I appreciate that Rossner does not mince words.

  4. Hugh

    I like the phrase “profligate lenders” because it so effectively undercuts the virtue/profligacy meme that just never seems to die.

    For the rest, this is about kleptocracy. It is about looting. While we often speak of Germans and Germany, it is important to keep in mind that the German 99% are not exempt from looting but a primary target for it.

  5. Jim

    Josh Rosner first says, “This paper will not suggest a particular path”. Then he proceeds to argue that leaving the Eurozone will result in higher costs for Germany than staying in it. Where is his backup?

    If Germany were to stay in the Eurozone, it would inevitably become just one state of the 17 that would comprise the United States of Europe. This is a fact. So, once the German state and its 81 million citizens go up against Italy’s 61 million and Spain’s 47 million, guess who’s going to ask the residents of the German state to transfer 8% of their GPD, permanently, to the South?

    1. Yves Smith Post author

      Looks like you didn’t read his analysis in full, or if you did, you have problems with reading comprehension.

      He has tons of support, including a chart from Der Spiegel that shows the costs of a Eurobreakup. And his basic point is a continuation of a kick the can strategy will be far worse for GERMAN citizens, since it will lead to much higher bailout costs of GERMAN banks as well as big time unemployment in Germany. Better choices are costly too, as he stresses, but not coming to grips with the situation is the worst option.

      My German reading experts say the Germans have days to take decisive action. If not, we are on a path to another 1931, a Creditanstalt type crisis.

      1. Hubert

        What if there is no “Solution”? What if it is only about can-kicking and who is about to pay for this spectacle ?
        I would not trust any cost calculation for either scenario. Scenario A is the end of the System as we know it. Scenario B is a can-kick with an open-ended bill for Germany. The system will go for B relying on Treaties and Promises signed and to be signed to reassure Germany. Except if something goes “wrong” in the meantime. There we could talk about days, weeks or months – we do not know ….

  6. Adam K.

    Well into the full article and although not an economist these are just few of my understandings:

    1. In this story there is no growth per se but simply transferable wealth from one group to another and the rest is air

    2. Unlike in capitalistic theory, risk and investment are no longer coupled together and when people invest they no longer tolerate negative yields.

    3. Pyramid scheme and the house of cards is falling apart.

  7. Eric

    What’s this obsession with Germany?
    There are 17 eurozone countries and many of them are exposed to the problems some of them have. The Netherlands, Austria, Finland, France, to name a few.
    And many non eurozone countries too.
    Only banks in France and the UK have together double the exposure to debt in the GIIPS compared to Germany. But there is an obsession with Germany on this site and in these reports.

    1. Yves Smith Post author

      I guess you have not been paying attention.

      1. Germany is far and away the biggest economy of the surplus nations and also has the biggest surpluses, hence is far and away the biggest capital exporter

      2. The Bundesbank has enormous sway with the ECB

      3. Germany is calling the shots on whether Greece is getting more bailouts.

      1. Eric

        Germany may be the biggest economy, but if Germany stood alone against 16 other eurozone nations, it would have no political power. Germany gets lots of support of other Northern nations and I dislike the image being painted in the media Germany alone is calling the shots. Or that Germany has benefited so much of the euro while the periphery are victims. Please remember Germany never wanted the euro, it was the Southern nations, and France, that wanted the euro.
        The periphery that is in trouble is not among the main trading partners of Germany, they are not important for the economic success of Germany. The recent economic success of Germany can largely be tributed to exports outside the eurozone, like Asia.
        If you think Germany is going to suffer from a eurozone breakup, please take a look at France (biggest creditor of the eurozone!) and the UK (third largest creditor with large exposure to Ireland and Spain). Strangely enough it’s repeated over and over how Germany supposedly did finance the booms in the periphery (suggesting they are to blame), why are France and UK never mentioned?

    2. Bobito

      To add to Yves’s reply – the political structure of the European Union is such that Germany wields disproportionate political power, and if Germany and France cooperate they can make the Union do what they want. No other country, except perhaps for France, can by itself block or change EU wide policy. This situation exists because Germany is the most populous and the richest country in the EU and because the EU was set up that way. If Spain doesn’t like some EU policy, it can complain, it can suggest modifications, but it can’t really do much else – and now of course it has to do what it is told (this is the price of the banking bailout – raising the VAT and the like).

      1. Eric

        you clearly don’t understand how the EU works, on most, in particular policy areas that are seen as vital, all EU countries have a veto. Even the smallest. Example: tiny Cyprus blocking access negotiations with Turkey.
        If Spain would regard something as of vital political or economic interest, they surely will use their veto if needed.
        This is exactly the reason why so little is accomplished at EU summits: all countries use veto’s.

  8. Jim Haygood

    ‘Josh Rosner of Graham Fisher published a report last week urging subscribers to short bunds, beating the Moody’s negative watch for Germany and the Netherlands by a full week.’/i>

    Errr, is that the same scribd document reproduced above? I might have missed it, but ‘shorting bunds’ does not seem to be the main emphasis of this article.

    Shorting bunds now would be a lot like shorting Microsoft, Cisco and Intel in, say, November 1999. In a few years, you would have made a ton of money. But the next few months would have been exceedingly painful.

    Loved the passage on p. 25 which mentions ‘€90 billion dollars’ — obviously a reco to short the euro to parity with the dollar!

  9. p78

    Thank you for this piece. One of the articles in the links, “Europe losing battle against debt crisis” by one Komal Sri-Kumar, was trully upseting. It “recommended” the destruction of fair wages (like Germany did), annihilation of workplace guarantees (like Monti tries to do), and for countries, selling national assets in exchange of debt reduction (they still want those Greek islands).
    I hope Komal reads Rosner.

  10. Generalfeldmarschall Von Hindenburg

    Germany and France are the only European countries aside from Russia that can decline to support the neoliberal Washington consensus. Given Angela Merkel’s personal story, it’s very unlikely the current government in Berlin will break from the TINA orthodoxy. But the fact Germany doesn’t have to squueze Europe dry in order to keep corrupt swindlers like and Goldman and the rest from choking on the results of this disaster is why the focus on Germany. Germany could choose to save Europe from a train wreck, but don’t hold your breath.

    1. Jim

      Why should Germany have to save any other country but Germany? Don’t nations exist? Isn’t the loyalty of a nation’s leader to the nation which elected him?

      Did US taxpayers rally to the Argentine cause one decade ago and commit to a permanent fiscal transfers to save the dollar in Buenos Aires? So why are so many of you asking Germany to do this?

      The end game, any very few of you are courageous enough to say it, is a United States of Europe, with permanent fiscal transfers of 7% of GDP, from the North to the South. It would also mean that the residents of the state of Germany would play alongside the residents of the state of Spain in the World Cup, as team members of the US of Europe soccer team, competing against the teams from the UK and the US.

      1. Yves Smith Post author

        Repeating myself, but you OBVIOUSLY have not read the full piece. I suggest you stop embarrassing yourself.

        1. Ottawan

          Jimmy Boy’s merely addicted to a vulgar-”realist” line. ‘Tis not his fault. In a pseudo-academic, half-witted-thought-experiment world, he’s right: why would Germans want to be part of a proper euro union? They’d be constantly shifting money off to those “less fortunate”. Naked self-interest says “no dice!”
          It hardly needs saying that this line of thinking started losing relevance…circa 1994 (I know. Its an arbitrary year no matter where you put it. You could say it became a moot point as far back as late 80s or as late as Nice?).

        2. Jim

          Yves, I read the money paragraph and leafed throught the rest. Let’s say that the total cost to German taxpayers of pulling out of the Eurozone is 800B. What certainty do you have that the continued necessary fiscal transfers over the next 10 years won’t dwarf that figure?

          More importantly, don’t we care about German democracy? Weren’t German voters promised that fiscal transfers would never be necessary.

          1. Lune

            Jim-

            Look at it this way: the ongoing fiscal transfers is the price Germany must pay if it wants to keep the southern states from devaluing their currency and becoming export-competitive vis-a-vis Germany.

            You say a 7-8% yearly fiscal transfer is too much. Fair enough. Germany’s GDP is over 1/3rd exports. What portion of those exports (not just intra-EU but to the rest of the world) will be lost to southern european competitors if they leave the Euro and devalue their currency? I imagine it will be much more than the 7-8% fiscal transfers you decry.

            Similarly, despite German moralizing, the bailouts occurring are not bailouts of the southern countries. They are of northern banks who lent to the southern countries and are now facing bankruptcy. In the case of Greeks, their “bailout” packages don’t even reach the shores of Greece: they’re paid directly to Greece’s creditors (i.e. the northern banks) out of an account in the ECB, with only the bill ever reaching Greece’s treasury.

            If Germans don’t want even that pseudo-bailout to occur, then that’s fine. Democracy rules. But if Germany refuses to bailout its bankrupt banks via a “bailout” of Greece / Spain / crisis country du jour, then they can leave the EU and bail out the banks directly (for about the same price), only now additionally destroying their single largest export market and facing a resulting massive economic contraction as well. All in the name of not bailing out other countries.

            I’m not a Greece supporter or a German hater or whatever. As an American, I believe they all suck equally ;-) But Rosner’s point (which I agree with) is that Germany’s chosen path is bad *for Germany*. Forget about Greece. Do you wish to throw Germany’s economy into a Great Depression at the conclusion of your morality play? Because that’s what the 1st and 2nd act so far are pointing to.

          2. Jim

            Lune, thank you for your considered response.

            You ask, what percentage of German exports would be lost if the South left the Euro and devalued? I don’t know. Germany exports goods that are significantly different from those in Spain and Greece. Perhaps Greeks working in Germany will return to their homeland and setup competitors. Then Germany would have to adapt and compete. As it should.

            I don’t doubt that Germany would be negatively impacted by the dissolution of the Eurozone. Perhaps to tune of 1.5T Euros. And it would necessitate a bailout of German banks. But it would be a German bailout for German banks. And it wouldn’t be an open-ended commitment.

            I don’t see this as a morality play. I see it as an attempt by certain Germans to retain German sovereignty.

            Any other scenario, and Germany ceases to be Germany. It then becomes a state within the United States of Europe.

          3. Lune

            Jim-

            You’re right. Germany (like the rest of Europe) must decide whether it will revert to old nation-states, or move toward tighter integration. The current in-between position is untenable.

            So which to choose? I thought the whole purpose of the EU was to move away from nation-states and create a stable pan-European integration that would prevent the numerous wars / conflicts that ravaged the continent with disturbing regularity for hundreds of years, all by creating a notion of being “European” that trumped one’s nationality. To an American’s ear, that sounds awefully like a United States of Europe.

            Besides, I find it ironic that you wish to preserve German sovereignty while the Troika has run roughshod over Greek and Spanish sovereignty while implementing the wishes of the northern creditors. What’s good for the goose is good for the gander. If Germany wishes to revert to full sovereignty, what will it do when Greece and Spain (and possibly Portugal and Italy…) do the same and default on all their debt and leave the Euro? Will the German economy really do better on its own with full sovereignty intact than it would within a rebuilt EU that moves closer to a United States of Europe?

      2. Calgacus

        Why should Germany have to save any other country but Germany? Don’t nations exist? Isn’t the loyalty of a nation’s leader to the nation which elected him?

        Did US taxpayers rally to the Argentine cause one decade ago and commit to a permanent fiscal transfers to save the dollar in Buenos Aires? So why are so many of you asking Germany to do this?

        Yes, but Germany made the idiotic decision to join the Euro. It has arranged things so it is the hindmost lemming to jump off the cliff, but if it sticks to its idiotic TINA, idiotic “mainstream” neoclassical, neoliberal “economics”, idiotic “sound finance”, idiotic, criminal policies it is behind the ECB inflicting elsewhere, its economy WILL die too.

        The US did not sign a crazy treaty with Argentina that prevented either from using normal, sane, tried & true economic policies. If we had, we would have had the same decision presented to us.

        Nobody is asking for “fiscal transfers” when the Eurozone is at full employment, because they would not be necessary then.

        Germany & Germans have every right to determine its own destiny. But they have neither the right nor the ability to rewrite accounting & arithmetic according to insane, innumerate mainstream “economics”, insane “sound finance”. As the paper says “This paper will not suggest a particular path. Rather, this paper will show the constraints on choosing a path forward …” Your question presupposes ignoring the ironclad constraints and consequences Germany & the rest of the Eurozone imposed on itself. Staying in the Euro constrains it to “fiscal transfers” – or self-destruction.

        Nobody is asking Germany to eternally send a fixed 8% of its GDP south. What is being asked is allowing “fiscal transfers” that will increase the employment, real wealth & GDP of the South & then increase the GDP & financial wealth of Germany. The problem is German surpluses leaking demand from the periphery. The very easy solution is to replace the demand by printing Euros, spending them in Greece say, watch employment soar there & watch the newly printed Euros go North. It’s a win-win for everyone, Germany included.

        There are only two long-term, sane alternatives – Germany leaves the Euro, or Germany stays in and allows “fiscal transfers” – which will come right back to it, but will allow the Eurozone economies to recover and grow.

        To paraphrase Kalecki, Germany will get what they allow the ECB to spend, because Greece will spend what they get. If Germany “gives” 8%, casts its bread on the waters, after not very many days at all, it will find it again.

        1. Markar

          Greece will spend what they get

          Excuse me, but over 80% of the Greek bailout money never made it into the Greek economy. It went to the creditors.

        2. Jim

          Calgacus, thanks for your reply.

          You have the ECB monetize debt, inflation in Germany will increase. 40% of German households own their home, while 82% of Italians do. Who will be more negatively impacted by inflation?

          1. Calgacus

            Excuse me, but over 80% of the Greek bailout money never made it into the Greek economy. It went to the creditors. Yes. That is my point. The Eurozone is set up to be a “fiscal transfer” mechanism from the periphery to the center (Germany). Sane Keynesian MMT policy would pour Euros into Greece, to counter the existing structure.

            Greece would get full employment, real wealth, real consumption. The Euros would leak back to Germany, the creditors. The problem is that the ECB bailouts are given only under the condition that Greece adopt suicidal & destructive policies that harm everyone. If an ECB bailout were given under the condition that Greece expand its public sector & have a JG program, everyone in Europe would benefit.

            Jim: You have the ECB monetize debt, inflation in Germany will increase.

            NO, no, no. In a normal country like the USA or the UK, government debt is already money. So “monetizing debt” is gibberish. So in no case will “monetizing debt” ever seriously cause inflation in a normal country. Much/most of the time in a normal country, probably now, “monetizing debt” / QE etc in the USA, UK is disinflationary.

            Europe’s problem is that the treaties & the ECB demonetize government debt. The policy is to demonetize debt especially when governments act sanely & in a beneficial way, while universally destructive hoarding behavior is rewarded.

            The ECB “monetizing Greek debt” up to the point of full employment WILL NOT CAUSE INFLATION in Greece or Germany or anywhere else. It would be a free lunch. It would work like magic. Win-win for everyone. More real wealth, employment & consumption in Greece, more financial wealth in Germany. Of course these are tendencies – The reality in each country will be a mixture weighted toward each end of the spectrum as stated.

      3. Bobito

        “Why should Germany have to save any other country but Germany? Don’t nations exist? Isn’t the loyalty of a nation’s leader to the nation which elected him?”

        Implicit here is the moralistic argument – why should Germany have to save other countries from themselves – the problem is, that if one takes seriously such a moralistic discourse, then one has to ask how much responsibility Germany has for the current situation.

        A sample question: Whose capital was it that enabled the Spanish real estate mania?

        The bank that lends to crooked politicians building airports that will never, ever be used (e.g. the new airport in Castellon, Spain, or that in Ciudad Real, Spain) is at least as much at fault as those to whom it lends. Without its loans, these projects would never get off the ground. Such irresponsibility in lending occurred because of greed, and because governments – e.g. those of the EU and Germany, and also Spain, Italy, etc. – failed to adequately control the practices of the banks and other financial institutions operating under their authority.

        Spain entered the euro as a poorer partner. Where did it suddenly find capital to finance a real estate bubble? Surely some of that money came from elswhere?

        1. Eric

          that bank is called Bankia and if you want to blame people, or you want prosecutions, let’s start with the bankers directly responsible for these malinvestments.
          But the reason why the people who did mismanage Bankia are not in prison is because they are politicians from Spain’s large political parties.

  11. David Petraitis

    The Rosner piece is brilliant. It brings out the salient points that show the extent of the corruption of the political class in Germany and the mendaciousness of the moral arguments used to beat the profligate Southerners. The German banks are way over extended. The German government wants the debts the banksters created by predatory lending hand in hand with German exporters paid in full – just think of those Grecian submarines. All while the German workers have had wages and benefits crammed down for years. Any solution will come home to roost.
    We are now only waiting for the tolling bell that will spell the lockdown of European credit in what has become named a “Lehman” moment, but which was previously known as the Creditanstalt moment. A big European bank will lose the ability to find daily liquidity real soon now… wait for it.

  12. Ruben

    “Accordingly, the German government will be forced to choose either a large share of the costs of supporting a further integration of the European Monetary Union or, alternately, the larger economic and social costs of its failure, including the massive costs of recapitalizing German banks and financial support for German industry”

    The second doomsday option. Even internally in Germany, Bavaria is threatening to challenge the transfer of resources from the four rich surplus German states to the 12 poor deficit German States in the constitutional court. Even if it is done just for electoral reasons, it is a clear signal that Germany will not pay the bill of further European integration and debt mutualization.

    http://www.spiegel.de/international/germany/press-review-on-bavaria-s-decision-to-sue-against-solidarity-payments-a-845088.html

    1. Hubert

      Tactics. Seehofer flogging a dead horse to deflect from his party (CSU) unpopular votes on the ESM. Elections upcoming.

      1. Ruben

        I know, Seehofer is just posturing, but why he thinks this posturing will yield electoral gain? Because he sees a Bavarian electorate that would buy the anti-solidarity posturing. So the point is that even internally, an important part of the rich-German-State electorate feels like not helping the poorer German States; therefore much less there would be any scope for Rosner second option, which involves German solidarity to people’s outside Germany.

  13. AustinF

    Remember that scene in ‘The Deerhunter’ where the prisoners are forced to play Russian Roulette by their brutal guards? Euro-banksters must have taken their inspiration from this movie, because they’re doing precisely the same thing with Europe’s population. Of course, they’re hoping working people will discover the live chamber first, and that organised labour will blow its brains out with structural reforms, leaving the corporate sector to mop up. However, banksters might not get lucky and will no doubt evince more than a slight degree of shock when they blow up the entire poltico-financial edifice. Will this grim possibilty stop the gamble? No. The prospect of rolling back every social gain made in the last century is just too delicious to resist. Pass me the pistol, and let the games begin has been their refrain from day one.

  14. Jesper

    The world of today…

    The author is probably intelligent and educated. His contribution to society is to provide financial advise and this particular report is an attempt to justify people gambling/speculating on that a particular asset is overvalued.

    The reading of his report:
    His description of events regarding Ireland is factually incorrect.
    He blames what regulators allowed to happen in Spain, Ireland and the US on regulators in Germany.

    & competitive devaluations…
    Greece, Spain, Italy, Portugal are competing among themselves to get sunseeking tourists from the north. Who among them would get a competitive advantage by devaluing if all of them do devalue?
    Exports to countries that devalue are expected to fall and exports to countries that default are expected to fall. The difference to the exporter is what?

  15. LAS

    Managerial elite tend to hug their positions, spewing delay and evasion like an octopus squirts black ink.

  16. steve from virginia

    Hmmm …

    At some point there will be losses imposed upon those who lent to banks, losses imposed on banks, upon bank managers, bank customers, people walking down the street in front of the banks … It won’t make any difference.

    Credit! We love ya! Please come home!

    Problem is at the end of your driveway, everything else is a diversion/denial.

    Nothing gets better until the toys are gone, all of them, all the luxuries, all the nonsense, all of it gone. What remains must pay for itself by its use as intended: if ‘it’ cannot pay as it goes without credit (like a claw hammer can pay for itself) ‘it’ is useless garbage fit for entertaining children and nothing else.

    Pay for itself … as it goes … no exceptions.

    1. F. Beard

      U B dumb. Credit is not real but the things it financed ARE. So the solution is not to destroy the real so it matches the phony but to replace the phony so it matches the real.

  17. Hmmmm

    Hmmmm, if that is the case for Germany just think how that applies to other mercantilists around the world for the past two or three decades, and what that implies for the rest of the world……

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