It is now common knowledge that there is a potential domino effect of European sovereign debt contagion in roughly the following order:
Greece → Ireland → Portugal → Spain → Italy → UK
While some people have been writing about this for well over a year, many others have joined the party late (there are now over 600,000 hits from a Google search discussing this topic.)
It is also now common knowledge that while Greece and Ireland have relatively small economies, there will be real trouble if the Spanish domino falls.
Iceland has the world’s 112th biggest economy, Ireland the 38th, and Portugal the 36th. In contrast, Spain has the world’s 9th biggest economy, Italy the 7th and the UK the 6th. A failure by one of the latter 3 would be devastating for the world economy.
As Nouriel Roubini wrote in February:
But the real nightmare domino is Spain. Roubini refers to the Spanish debt problems as “the elephant in the room”.
“You can try to ring fence Spain. And you can essentially try to provide financing officially to Ireland, Portugal, and Greece for three years. Leave them out of the market. Maybe restructure their debt down the line.”
“But if Spain falls off the cliff, there is not enough official money in this envelope of European resources to bail out Spain. Spain is too big to fail on one side—and also too big to be bailed out.”
With Spain, the first problem is the size of its public debt: €1 trillion. (Greece, by contrast, has €300 of public debt.) Spain also has €1 trillion in private foreign liabilities.
And for problems of that magnitude, there simply are not enough resources—governmental or super-sovereign—to go around.
And as I’ve previously pointed out, Germany and France – the world’s 4th and 5th largest economies – have the greatest exposure to Portuguese and Spanish debt. For more on the interconnections between Euro economies adding to the risk of contagion, see this.
While it is tempting to assume that the Eurozone bailouts mean that creditor nations which have managed their economies well and saved huge amounts of excess reserves which they lend out, Sean Corrigon points out that the European bailouts are a Ponzi scheme:
Under the rules of this multi-trillion shell game, the sovereigns guarantee the ECB which funds the banks which buy the government debt which provides for everyone else’s guarantees.
(America is no different: Bill Gross, Nouriel Roubini, Laurence Kotlikoff, Steve Keen, Michel Chossudovsky and the Wall Street Journal all say that America is running a giant Ponzi scheme as well. And both America and Europe are trying to cover up the insolvency of their banks by running faux stress tests.)
It didn’t have to be like this. The European nations did not have to sacrifice themselves for the sake of their big banks.
As Roubini wrote in February:
“We have decided to socialize the private losses of the banking system.
***
Roubini believes that further attempts at intervention have only increased the magnitude of the problems with sovereign debt. He says, “Now you have a bunch of super sovereigns— the IMF, the EU, the eurozone—bailing out these sovereigns.”Essentially, the super-sovereigns underwrite sovereign debt—increasing the scale and concentrating the problems.
Roubini characterizes super-sovereign intervention as merely kicking the can down the road.
He says wryly: “There’s not going to be anyone coming from Mars or the moon to bail out the IMF or the Eurozone.”
But, despite the paper shuffling of debt at the national level—and at the level of supranational entities—reality ultimately intervenes: “So at some point you need restructuring. At some point you need the creditors of the banks to take a hit —otherwise you put all this debt on the balance sheet of government. And then you break the back of government—and then government is insolvent.”
And here’s my take from April:
As I pointed out in December 2008:
The Bank for International Settlements (BIS) is often called the “central banks’ central bank”, as it coordinates transactions between central banks.
BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:
The scope and magnitude of the bank rescue packages also meant that significant risks had been transferred onto government balance sheets. This was particularly apparent in the market for CDS referencing sovereigns involved either in large individual bank rescues or in broad-based support packages for the financial sector, including the United States. While such CDS were thinly traded prior to the announced rescue packages, spreads widened suddenly on increased demand for credit protection, while corresponding financial sector spreads tightened.
In other words, by assuming huge portions of the risk from banks trading in toxic derivatives, and by spending trillions that they don’t have, central banks have put their countries at risk from default.
***
But They Had No Choice … Did They?
But nations had no choice but to bail out their banks, did they?
Well, actually, they did.
The leading monetary economist told the Wall Street Journal that this was not a liquidity crisis, but an insolvency crisis. She said that Bernanke is fighting the last war, and is taking the wrong approach (as are other central bankers).
Nobel economist Paul Krugman and leading economist James Galbraith agree. They say that the government’s attempts to prop up the price of toxic assets no one wants is not helpful.
BIS slammed the easy credit policy of the Fed and other central banks, the failure to regulate the shadow banking system, “the use of gimmicks and palliatives”, and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”.
Remember, America wasn’t the only country with a housing bubble. The world’s central bankers let a global housing bubble development. As I noted in December 2008:
… The bubble was not confined to the U.S.
There was a worldwide bubble in real estate.
Indeed, the Economist magazine wrote in 2005 that the worldwide boom in residential real estate prices in this decade was “the biggest bubble in history“. The Economist noted that – at that time – the total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – an increase equal to the combined GDPs of those nations.Housing bubbles are now bursting in China, France, Spain, Ireland, the United Kingdom, Eastern Europe, and many other regions.
And the bubble in commercial real estate is also bursting world-wide. See this.
***
BIS also cautioned that bailouts could harm the economy (as did the former head of the Fed’s open market operations). Indeed, the bailouts create a climate of moral hazard which encourages more risky behavior. Nobel prize winning economist George Akerlof predicted in 1993 that credit default swaps would lead to a major crash, and that future crashes were guaranteed unless the government stopped letting big financial players loot by placing bets they could never pay off when things started to go wrong, and by continuing to bail out the gamblers.
These truths are as applicable in Europe as in America. The central bankers have done the wrong things. They haven’t fixed anything, but simply transferred the cancerous toxic derivatives and other financial bombs from the giant banks to the nations themselves.
Caveat: Even though Italy’s debt/GDP ratio looks high, it has a high household savings rate and virtually all of its government debt is owned internally, by households. So it may not be vulnerable as one might think.
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Funny, BIS overnight changed their accounting method and halved the outstanding debt it tracked but debt continues to grow.
Nothing but more Quantitative Easing on a worldwide scale will come before defaults.
And I forget who but some talking head economic analyst said they can write CDS faster than they can print money. Scary.
“There’s not going to be anyone coming from Mars or the moon to bail out the IMF or the Eurozone.”
No, but they do not need external help – they can print more money …
So the real question is not whether some external player is willing to bail out these entities, but whether the biggest nations (the US, Germany, the UK) is willing to print enough money to keep things balanced.
So far the answer has been “yes” – because the winners of the bailouts are these bigger economies.
The page will turn not if some external entity refuses to show up, but if more countries decide to go Iceland: if they refuse to be blackmailed into accepting nonsense bailouts at ridiculous financing costs.
For example Ireland’s debt service will be 20% of GDP by 2014. Put in another way: in 2014 the population of
Ireland will pay a 20% tax to the UK,
Germany, France, the Netherlands and the USA.
And Ireland does not have the debtor’s classiv weapon available: it does not print its own money anymore, so it cannot weaken it to reduce the debt burden
and to boost exports.
Is that model sustainable? Will they
accept that in the long run? Highly unlikely.
It is absurd that sovereign nations ever borrow money. The usury class will soon find that it has over reached and will be bypassed, Lord willing.
“He says wryly: “There’s not going to be anyone coming from Mars or the moon to bail out the IMF or the Eurozone.””
We don’t need intervention from mars, to create enough money to recapitalise banks, the IMF and the eurozone.
While the crisis may be one of solvency, that is easily remedied by adding liquidity which sooner or later will result in a creeping recapitalisation of banks. In fact as soon as people stop believeing in world collapse, they’ll start buying bank shares with some of that liquidity.
“And then you break the back of government—and then government is insolvent.”
Absolute rubbish. A government is only insolvent if it chooses to be. How come people are still coming out with this rubbish after the Fed has created trillions of dollars of new money? And when the chinese have been printing money non stop for 15 years? And when the japan has near 300% debt to GDP and still 0% interest rates?
A rational government can easily choose to be insolvent instead of paying it’s debt by printing money. The FX loses can make necessary imports (like energy) so high the entire economy shuts off. The extreme case in point is Zimbabwe. There are actual limits on what Sovereign nations choose to do – because the costs are higher than the benefits.
Economic cleansing could be performed by not forgiving debt, but allowing all countries to pay down their debts, interest free. Of course, this would need to trickle all the way down to main street.
If everybody is in debt, than to whom are they in debt too?
The United Kingdom is monetarily sovereign so is not subject to the constraints and risks of the other nations mentioned in the opening paragraph. Of course, this does not rule out that it might foolishly act as if it is subject to the same constraints and risks.
you got to it first frolix22….the UK has no place in that progression
Neither the UK, nor the US, have any place in that progression. For the US and Japan, the door is open for taxes to be that much lower for a given size govt. They issue their own currency. Unfortunately, however, the politicians and mainstream economists believe otherwise, including the author of this piece.
They believe the federal deficits are too large, posing risks they can’t specifically articulate when pressed, though they are rarely pressed by the media who believe same.
The euro zone, however has that and much larger issues as well. Financially, the euro zone member nations have put themselves in the position of the US States. Their spending is revenue constrained. They must tax or borrow to fund their spending.
The problem is the deficits from the automatic stabilizers are at the member nation level, and therefore they do result in member nation insolvency, which is NOT the problem facing the US or the UK.
Furthermore, the demand leakages (pension fund contributions, etc.) require offsetting deficit spending that’s beyond the capabilities of the national govts. to deficit spend. The only possible answer for the euro zone is for the ECB to directly or indirectly ‘write the check’ as has been happening with the ECB buying of member nation debt in the secondary markets.
But this is done only kicking and screaming (especially on the part of the Germans) and not as a matter of understanding that this is a matter of sound fiscal policy. So while the ECB’s buying is ongoing, so are the noises to somehow ‘exit’ this policy. And that gives us more crises like Ireland.
There isn’t an exit from this policy without replacing it with some other avenue for the required ECB check writing, including an alternative proposals for ECB distributions, etc.
The current ECB funding proposals could buy some time but ultimately don’t work because they force fiscal austerity on these countries as the price for their ongoing bond buying support, which ultimately exacerbates the very deficit problems which created the solvency issues in the first place. Bringing in the IMF is particularly curious, as the IMF’s euros come from the euro members themselves, as do the euro from the other funding schemes. All that the core member nations funding the periphery does is amplify the solvency issues of the core, which are just as much in ponzi (dependent on further borrowing to pay off debt) as all the rest.
The ESF is not going to do the trick. Clearly, the hope is that it will be able to issue triple A-rated debt guaranteed by all eurozone members except Greece (any nation seeking help is excluded). Ironically, as the number of eurozone nations receiving help from the EFSF grows, as it clearly will with Ireland, Portugal and later Spain on the ropes, the number backing that debt decreases—making it less likely that EFSF debt can retain the highest rating. Details are still being worked out but it appears that any nation that cannot float debt at an interest rate less than 5% would be able to borrow from the EFSF at a lower rate. Portugal recently found itself in that category, after auctioning debt, and while it has denied it would seek help, the better terms it could obtain at the EFSF must look attractive. In any case, only 40% of the nations that stand behind the EFSF’s debts are themselves rated AAA—so what we have is mostly lower-rated governments guaranteeing EFSF debt that hopes to get an AAA rating. At least on the surface, that arrangement seems fishy. If more countries get downgraded and if more need to seek assistance, it is possible that the guarantees will not be sufficient to allow the EFSF to issue the full €440bn precisely when the full amount is most needed
So what we are seeing in the euro zone is a continued muddling through with banks and govts. in trouble, deposit insurance and member govts. kept credible only by the ECB continuing to support funding of both banks and the national govts, and a highly deflationary policy of ECB imposed ‘fiscal responsibility’ that’s keeping a lid on real economic growth.
The only difference in these months between US and Spain is that the large investors are dollar denominated and clearly do not want their holdings to be devalued, so they are happily betting against Spain’s debt. But the fundamentals are the same. Broken banks, a huge private debt, a burgeoning public debt, big twin trade and accounts deficits.
But it’s Spain who’s under scrutiny…
Bah!
According to Banco de España, outstanding liabilities of the Spanish State is 476 billion euros in october, not 1 trillion Prof. Roubini, I hope the rest of your analysis had better support.
http://www.bde.es/webbde/es/estadis/infoest/e0603e.pdf
Last year public deficit was 99 billion euros and that hugh increase has been behind all the attention given to Spanish Economy, but this year deficit has been 30billion euros from january to october (half the figure for the same period last year).
http://www.bde.es/webbde/es/estadis/infoest/e0602e.pdf
This is a considerable reduction. It is true that this is nothing if investors say no to Spanish public debt, but it also apply to Germany, and the hugh amount of money their banks need for next year.
The 30 billion euros figure which you cite is for Spain’s central government. Total public debt includes the regions, as this article mentions:
http://news.ph.msn.com/business/article.aspx?cp-documentid=4478455
Borrowing 9.3 percent of GDP at high real rates of interest is worrisome. The last thing a weak economy needs is higher debt service charges piled on its back.
I hope Spain can escape restructuring (créeme — tengo uno depósito en un banco español!). But I’d put the odds about 50/50, frankly. :-(
Regional governments are non financed via Government bonds, in the same way that California deficit is not financed via Treasuries.
If you consider that government has to rescue everibody, regional, local governments, banks, companies, or turist that goes for a free surgery of course you need more money than the one in the public deficit, but this is also the case for any country.
Perverse incentives — such as the belief that badly-managed banks will be bailed out by government authorities — are predictably wreaking havoc.
Another perverse incentive is the current structure of deposit insurance. In the US, the FDIC provides a 100% guarantee on the first $250,000 in an account. In shopping for a CD, one can simply look for the highest insured yield, without regard to the bank’s solvency. This leads to destructive phenomena such as brokered deposits, and sick institutions sucking funds out of sound ones with high (but unsustainable) yields.
Many depositors probably think the purpose of FDIC insurance is to protect them. Actually, based on the experience of the early 1930s, deposit insurance is intended to prevent systemic meltdown.
I’d argue that this purpose would be better served by providing an unlimited guarantee on 90% of all deposits. Accepting 10% risk is not going to destroy anyone if their bank fails. But depositors would pay much more attention to solvency than yield under such a regime.
The other essential feature of a risk-based system is an explicit statutory policy that banks WOULD NOT be bailed out. Collapsed banks would be liquidated or reorganized in bankruptcy, with the FDIC as a senior creditor. Depositors would be assured of getting 90% of their funds. Haircuts or wipeouts of equity and bondholders would fund the FDIC’s recovery.
Remember: leveraged fractional reserve bankstering is a risky business — or it was supposed to be!
Such a system, I think, would tend to weed out weak and mismanaged banks on an ongoing basis, rather than allowing a systemic Bubble to grow so large that it can’t be deflated without threatening the entire economy.
The political aspect of our problem is that a privately-owned bank cartel — the Federal Reserve — has been not only handed the self-regulatory reins, but also allowed to centrally plan interest rates in a forlorn attempt to day-trade the economy, and not incidentally to enrich its members via yield curve arbitrage.
Handing political power to unelected banksters leads to anti-populist obscenities such as Goldman Sachs and Morgan Stanley being allowed to join the Federal Reserve system in 2008, despite being investment banks rather than traditional deposit takers. These kleptocratic corporate parasites should be ejected forthwith.
Abolishing the Fed would fix both of these abuses in one fell swoop. Bernanke’s Folly — QE2 — is such a grand screw-up that he may well have lit the fuse on the Fed’s dissolution. Let’s hope so.
The last pope, the last Fed chairman — flush twice; it’s a long damned way to Hell!
I’m looking forward to seeing your methodology that we checking, savings and bank CD holders can use to determine the solvency of our international bank holding company. Especially since large pieces of the books seem hidden in Grand Cayman, Bermuda, and Ireland. Also US regulators allow banks to do mark-to-make believe accounting now. Don’t forget to include how we can figure out what CDS are worth.
Just because Warren Buffet and Bill Gross say they don’t know how to do it shouldn’t impede our desire to do it, but please make it simple enough for those of us that don’t do math real good. Remember how hard it is for some of us to balance our checkbooks.
Other than that, sounds like a fine task for us non-bankster little people. Of course if we don’t like the idea of our fractional banking checking accounts losing 10% or disappearing altogether, we can still put our money in a coffee can and bury it in the back yard. The banksters can’t force “progress” on us.
Of course if we don’t like the idea of our fractional banking checking accounts losing 10% or disappearing altogether, we can still put our money in a coffee can and bury it in the back yard. Cedric Regula
Cash is way up on the bankster hit list. It allows people way too much freedom and privacy in their opinion. They will use various excuses such as the drug war, the war on Muslims but what they really want is total control.
I wonder if this is actually part of the determiner. That is to say, if you can’t figure out whether a bank is solvent, you shouldn’t actually put your money in it.
That is to say, if you can’t figure out whether a bank is solvent, you shouldn’t actually put your money in it. Bill White
An outstanding and crucial point. Bravo!
Exactly. If banks don’t provide sufficient information of their assets and liabilities such that depositors an get a clear picture of their financial health, don’t loan them anything at all.
I like the 90% guarantee – great improvement.
Such services already exist. Here’s one of them:
http://www.bankrate.com/rates/safe-sound/bank-ratings-search.aspx
With risk-shared deposit insurance, there would be plenty more of them.
This isn’t some kind of antipopulist plot against ‘little people.’ It’s intended to short-circuit the Bubble engine of bankster bailouts, which has trapped so many in underwater real estate and long-term tax slavery.
Pay-as-you-go pinpricks versus systemic collapse — your choice!
I’ve tried to use the ratings services to determine institutional health but they don’t seem to provide the full picture.
For instance, BofA has a 3 out of 5 star rating when much of the reporting on the MERS mess, aggravated by it’s acquisition of Countrywide, indicates it is likely facing serious solvency issues or even nationalization.
The ratings seem to refer to superficial accounting, not what is going on at other levels for the larger institutions especially.
Remember: leveraged fractional reserve bankstering is a risky business — or it was supposed to be!
Such a system, I think, would tend to weed out weak and mismanaged banks on an ongoing basis, rather than allowing a systemic Bubble to grow so large that it can’t be deflated without threatening the entire economy. Jim Haygood
Your suggestions, though much better than the current system, don’t address the fundamental dishonesty of government backed fractional reserve banking. Can a system based on dishonesty (theft of purchasing power, in this case) ever be stable? Or to put it more simply, “Is God mocked?”
I don’t know, F. Beard. But fractional reserve banking has been entrenched for centuries, while deposit insurance is a 1930s innovation (in the US). As such, deposit insurance may be easier to tweak than the entire 500-year-old model of western banking.
As such, deposit insurance may be easier to tweak than the entire 500-year-old model of western banking. Jim Haygood
I wonder if it is too late for tweaks, at least in the US. I know I am discouraged about the prospects for real economic growth here. I could get excited about fundamental reform though. Instead we are likely to see some form of government backed gold standard (fascism) or more socialism. It would be nice if instead we figured out how to do capitalism correctly.
This what happens when you borrow from the rich instead of taxing them, or eating them.
Taxing and/or eating leaves less continuing guilt. The existing debt when you borrow has a nasty habit of reminding you of the past. I much prefer eating them, as the moral burden on my conscious is so much less.
As we watch the bail outs of the Eurozone create a larger and larger Ponzi scheme I am wondering why the debtor classes of ALL countries don’t form a type of Solidarity movement to force the collapse of the banksters. After all it was likely Solidarity’s example, repeated in various ways throughout the Eastern Bloc, that led to the Eastern Bloc’s effective dismantling, and contributed to the collapse of the Soviet Union.
Because we’re all too busy out “shopping” to even notice or care there’s a problem?
i dont get why its OK to gamble on whether a country will default.
pete rose gets such harsh criticism.
The real economies have been weakening for years in the countries mentioned in the title as production atrophied. The boom of the last few years was based on money lent, money borrowed, and money spent — so no surprise that something had to change.
But for the UK, the process is easier to reverse because they have devalued and can devalue as much as “needed”, which facilitates the transition. So, the UK economy can go through rough times but I do not see a collapse.
The other countries have a big problem because they are asked to reduce consumption and increase production. The first is easy but causes unemployment and business defaults. The second is simply very hard because their costs start at a high level and are practically impossible to bring down sufficiently in a short period and without the risk of major civil unrest. The strong euro is clearly not good for everyone. I can see that the PIGS can last in the euro for a few more years until all the people’s savings and patience are exhausted and then realize that it may be better to quit the euro and restructure their debts…
… Or the powers that be realize that the euro can be devalued making the transition much easier.
In the meantime something must be done about the antithesis of fiat and hence Bankster, Inc. – that being PMs. But what is that something? Is there something?
It’s very hard to tote around a drum of oil. Or a bushel of wheat. Or an acre of land. Or a pond of water. Gold and silver OTOH tote around quite handedly.
Damn. I think I just answered my question.
RH
In the meantime something must be done about the antithesis of fiat and hence Bankster, Inc. – that being PMs. But what is that something? Is there something? Rick Halsen
Funny you should ask:
Common stock as money has many advantages over gold as money such as:
1) Common stock requires no borrowing or lending hence there is no need for usury. This abides by Deuteronomy 23:19-20.
2) The amount of new common stock issued is not artificially constrained as is the case with precious metals.
3) All price inflation is born by the corporation’s owners who can vote to control it.
4) Since there is no need for borrowing or lending, deflation is not a potential problem.
5) The assets of a corporation can be performing assets unlike gold which is a non-performing one. However, a corporation could easily have gold as an asset too if desired.
Ach, mon, ‘artificial constraint’ is the whole point of the PMs.
Bernanke’s Folly — QE2 — is like handing a bottle of vodka, a bag of crystal meth, a box of condoms, a loaded machine gun and the car keys to a rowdy teenager and bidding him, ‘Have a good time! And don’t take no crap from nobody!’
It’s only a matter of time until you’ll notice the whoop of si-reens in the distance, if not the glow of licking flames on the horizon.
God save us from this madman! (Bernanke, not F. Beard.)
Ach, mon, ‘artificial constraint’ is the whole point of the PMs. Jim Haygood
Indeed but shall we have the Amazon despoiled with mercury by gold seekers? Shall economic growth be dependent on the mining rate of gold? (I am familiar with the convoluted arguments for gold since that is where I started my study of money).
I think a simpler, more elegant solution to the problem of government fiat is to simply make it legal tender for government debts only (taxes and fees) not private ones. Conversely, private monies (including gold of course) would only be good for private debts, not government ones.
Of course re-writing the tax laws for separate government and private money supplies might be as difficult as separating Siamese twins. However, it might well be worth the effort if we could abolish the nation-wide boom-bust cycle.
These long term charts are eye opening, keep in mind, most of these are on log scale, to give an example of the absurdity of the current market levels, please take 3 minutes to review.
I posted up a bunch of very long term charts in case anyone is interested
http://oahutrading.blogspot.com/
I hope that you mke very large contributions to Yves Smith for the use of her blog. You would demonstrate more integrity if you just paid for a banner ad on this site.
Why are these countries approaching the supposed meltdowns in such orderly fashion. It seems to me that the bond vigilantes are acting in unison to squeeze profits one country at a time and the EU is taking advantage of the action to gain control of each individual sovereign. Maybe the EU is really the money behind the run on the bonds. Possible?
More Probable than ‘possible’!
The ultimate conclusion of The Treaty of Lisbon.
Everybody needs a crash pad, but woe to those who bought during this time and are stuck between the street and their foreclosure eviction. It can’t be asked enough, why is anyone paying their mortgage. The bubble was entirely a shell game, with parasitical musical chairs and not one som’bitch is in jail:
“There was a worldwide bubble in real estate.
Indeed, the Economist magazine wrote in 2005 that the worldwide boom in residential real estate prices in this decade was “the biggest bubble in history“. The Economist noted that – at that time – the total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – an increase equal to the combined GDPs of those nations.”
“Why are these countries approaching the supposed meltdowns in such orderly fashion”
Yes it’s strange because if fact nothing is happening.
The supposed bankruotcy never happen.
Ever for Greece the weakest country has shown no sign of default on his debt.
The only real change is the strengthening of the Euro monetary system and especially the German control over other country.
There have been no Eurodefaults because Eurotaxpayers have thrown ever great amounts of Eurocash at the Europroblem.
This is not gloating. The US, UK, China, Germany and others will get their day of reckoning soon enough.
There’s a certain absurdity about the whole Irish situation. At the end of 2007, the government was still running a budget surplus (and had for 5 years in a row) and total national debt was only around 25% of GDP. The “fiscal crisis” is largely a result of their decision to backstop their banks (really the top 3 banks).
Had they said, “we’re nationalizing these 3 banks immediately, all depositors will be made whole, and as for the bondholders, well, if there’s anything left after the depositors are taken care of and assets are sold off, well they can have that” they would be in an entirely different situation right now. There’d still be a big problem, don’t get me wrong, but we wouldn’t be talking about sovereign defaults on blogs. Ireland would be in an entirely negotiating situation with the EU and IMF, and any “bailout” would EXPLICITLY be a bailout of German/British/French banks as opposed to the Irish government.
It certainly would have been better for Ireland to protect depositors without indemnifying investors in bank equity and bonds.
But if you take the conclusion of Reinhart and Rogoff’s book on financial crises seriously, a burst bubble (a real estate bubble, in Ireland’s case) practically guarantees a couple of decades of pain afterward, whether it is concealed behind a misty veil of inflation, or sweated out as hair-shirt deflationary austerity. In real terms, the results are essentially the same.
This is what was so purblind about the Greenspan/Bernanke doctrine that bubbles cannot be identified in real time, even as those monstrous carbuncles were deforming the world economy. Today’s distress is the direct, predictable result of their ham-handed central planning, which always leaned toward excessively low rates and excessive monetary expansion.
But if you take the conclusion of Reinhart and Rogoff’s book on financial crises seriously, a burst bubble (a real estate bubble, in Ireland’s case) practically guarantees a couple of decades of pain afterward, whether it is concealed behind a misty veil of inflation, or sweated out as hair-shirt deflationary austerity. In real terms, the results are essentially the same. Jim Haygood
Wow! An unnecessary 20 year sentence of suffering. Dare we guess what monsters ala Hitler that might create?
Just as a big fat check from the US Treasury could solve any individual’s money problems, so could it solve the entire nation’s money problems as long as the banks were put out of or limited in their counterfeiting business with the new money.
Of course it is a given that the victims never be bailed out only the villains.
This is what was so purblind about the Greenspan/Bernanke doctrine that bubbles cannot be identified in real time, even as those monstrous carbuncles were deforming the world economy. Jim Haygood
Worse, Greenspan said bubbles were NECESSARY for economic growth. What a sad but probably true conclusion given our money system of competitive counterfeiting and musical chairs.
Yes, yes and yes. If the public at large in all developed nations (EU and US, UK) will wake up and start forcing the politicians to back up the public, and not the investors per se’ (the public being the retirement accts, RE foreclosures, etc and the investors being the GS and alike), then maybe there is a chance the public could survive the current upheaval. But in order for this to happen, EDUCATION AND REAL DATA TO SUPPORT THE FACTS (for the public), need to take precedent, believing as I do, that the majority of people are intelligent and can make good decisions if given the real facts (this is where the MSM show their bias’s towards the wealthy).
Pen letter to the Naked Capitalism forum… the meat is at the bottom
In spite of our differences, we have and mankind has, an aversion to serious disruption and change. We all suppose that the larger systemic changes will have negative effects on some aspects of our lives. We all point to external entities as the causes of our troubles and discontent. Few are willing to give up their present station in the name and fact of progress.
Take the various reactions to F Beard’s monotonous reposting of ‘Cancel all debt and give everyone $10,000. The two most common responses to this (other than ignore this nut bag) are: Why should I not get more money than my neighbor? (for whatever reason we can contrive), and even more importantly where is there any incentive if everyone has the same amount?
Personally, the only flaw I see in FB’s solution is that society has disintegrated to make it unworkable. The system of laws and entitlements would need to be rewritten and there would need to be huge exceptions for the elderly and the incapacitated. For the young and the healthy the $10,000 reset would be a God sent leveling of the social stratum. The wealthy captains of industry would gleefully roll up their sleeves and get to work. The charlatans and the shysters would of course do well. The lazy, the incompetent, and the unlucky would loose or waste all their share. In other words, within very few years we would be back where we are now.
Here is another “revolutionary” proposal.
How about making debt enforcement illegal. The responsibility for the assumption of debt is shared between the borrower and the lender. The borrower is actually pledging only his/her integrity as security for the debt. The lender is not required to lend and any lending is based on faith in the borrowers ability and willingness to repay. This has a huge implication in that the lender is then a shareholder in the enterprise, and is motivated to promote it’s success.
This could be extended to a ‘voluntary’ flat rate Tax structure which could also be coupled with the voter registration….When a citizen filed and paid taxes for the year, they would be registered to vote for whatever jurisdiction they paid the tax to. Many wealthy people already do this in a way. They just go around the parasites and fund programs of their choice through philanthropy. Some will howl that voting is their right, I don’t think so. I think citizenship is an obligatory contract between a person and their government. This contract has broken down in both directions.
Just to clarify. I see F Beard as a moral intelligent person. I just don’t think that program would work or be allowed to work.
I think the most important thing is the destruction of the ‘Debt as a weapon’ structure of our world.
Take the various reactions to F Beard’s monotonous reposting of ‘Cancel all debt and give everyone $10,000. Paul Repstock
I never said such a thing. I simply advocate that all US adult citizens be sent a huge and equal check of new, debt and interest free United States Notes combined with leverage restrictions on the banks to preclude price inflation from the new high powered money. Borrowers could pay down their debts if they wished but I would not require it (none of my business).
Some libertarians like to remind us of the undue burdens of the elite, and how they alone pay far more taxes, hire people, make the world go ’round and therefore demand “fairness” as they crush lives, destroy environments and start wars.
Following this comforting vision of royalty the propaganda, (notably blown out of the asshole of Forbes in the 90s)- we’re supposed to believe something simple like a flat tax will set things right. Or a return to the gold standard. It’s a fact that the games in a Casino that are even more favorable to the house are those that are easiest to understand. What other explanation exists for the sweet soothing comfort of ignorance? Perhaps we should have gun fights on the way to work, those that live will earn their pay. Free, unfettered competition.
It’s only moral to help the weak or those of poor breeding to their rightful end of failure. We in fact, will hold a gun to people’s heads, only we’ll call it a contract.
Hudson:
“The danger the United States faces today is that the government debt crisis scheduled to hit Congress next spring (when Republicans are threatening to vote against raising the federal debt limit as the government deficit soars) will provide an opportunity for the wealthy to give a coup de grace on what is left of progressive taxation in this country. A flat tax on wage income and consumer sales would “free” the rentiers from taxes on their property.”
What is your point? Is this a reply to my post?
The IMF is too F’ing BIG to fall on its face and FAIL! Sometimes we forget where the IMF gets its loot….
Meanwhile, back inside the black hole, music continues playing out: http://www.youtube.com/watch?v=1q7d0MSsUDs
When governments make promises in their own currency they cannot go bust!
The point has been made before in these replies but it needs to be reiterated in a different way. Macroeconomics is a different beast to microeconomics – we must not fall for the Fallacy of Composition. The whole economy does not operate in the same way as a household or a company.
Governments can always buy what they want, when they want, or fulfil any of their monetary promises in their own currency by crediting the recipient’s commercial bank’s reserve account at the central bank, which would then be transferred as a ledger entry to the recipient’s account. (When push comes to shove this even applies to the Eurozone – if Merkel and Sarkozy told the ECB to credit various accounts then the ECB would do so if the alternative was the dismantling of the Euro. Or alternatively, the Bundesbank would credit an individual’s account and the ECB would credit the Bundesbank account.)
For this reason the UK, US, China, and even the Eurozone, etc cannot “go bust”, no matter how large their debt is. This is in line with Modern Monetary Theory. Here’s a kindergarten guide:
http://mq.academia.edu/FrankAshe/Papers/168923/A_Kindergarten_Guide_to_Modern_Monetary_Theory_Days_1-3_
The question becomes, what will happen to the economy if the promised payments are made. While the economy is mired in recession then additional government payments will most probably boost aggregate demand and help to mitigate the recession. When and if inflation becomes a problem the governments can reduce their spending and/or increase taxes.
The major societal problem is one of fairness: those institutions that are implicated in the origins of the crisis need to been seen to bear a substantial part of the burden in order to rebuild the social capital that has been destroyed. This means almost all commercial banks, as they lent to an out-of-control property bubble with inadequate controls, to other banks that were patently not following reasonable policies, or engaged in outright fraud will need to be wiped out – including senior bond holders. Easiest way may be to convert them to equity holders – but as the recent IMF paper notes, there is a lot we don’t understand about financial interconnectedness.
While it may be politically and legally difficult to claw back egregious payments to banking executives, an increase in tax on wealth may be necessary to rebuild a sense of fairness in society (Unfortunately I don’t think such a tax hike will happen).
It may take some novel thinking to solve the problem of a housing glut in certain regions. Here’s one out-there idea to stimulate debate. For nationalised banks, how about a lottery to dispose of foreclosed assets? Owners or renters of property in a city with bank owned developments could buy a lottery ticket, with prizes of an unsold property to those numbers drawn at random.
I love the part in the Kindergarter Guide that says
Quote:
Moneypenny: “People have a habit of acquiring and disposing of things. These trades are called the economy.”
Neo: “What about making things? Isn’t that important
Moneypenny: We’ll only look at what people swap between themselves. If you make something for yourself then it’s your own business. The economy is what everybody does for other people.
So the idea that you making stuff for yourself is what causes other people to want the stuff once they see you using what you made doesn’t ever occur to the moronic mind of the MMT “economist.”
It is the creative act in the individual mind produces all economic activity such acts allow the creation of new job categories upon with all new kinds of exchanges are made.
Adam Smith’s idea that about man being only different from dogs because he has ” propensity for trucking and barter” is completely wrong.
The economy isn’t about exchanges it’s about human civilization transforming matter for material provision.
The reason we exchange stuff is because it give more control over nature and therefore it is the process of work through manufactured capital that determines exchanges not money in the form of “stocks and flows.”
Once against economists are trying to violate the laws of physics and it’s resulting principles in the science of ecology. MMT is just another monetarist scam trying to keep people from the reality economy are organized politically by ideas based on our understand of physical principles.
Economic development happens when the political leadership such the current leadership in Chinese (mostly engineers and scientists) have physically defined goals of what the nation could look like and then they set up economy digistically to meet those physical goals. It has nothing to with “accounts,” “trade”, or “markets” or anything else.
Economy lies in the polity organized by the dreams of the physically imagined.
The problem with America today is that money has become a ends unto its self and not means to any physical end at all. The elite has no imagination outside of “more money.”
Welcome to America: Mammon is God here and all humanity be damned. “Lasciate ogne speranza, voi ch’intrate”
The economy is about both exchanges among people and also making things.
Two words I’ve been harping on for years: Ponzi Scam
I have been trying to decide whether Charles Ponzi should be honored as the Prophet of the Age or merely as a man ahead of his time.
@Septeus7
“So the idea that you making stuff for yourself is what causes other people to want the stuff once they see you using what you made doesn’t ever occur to the moronic mind of the MMT “economist.””
Where did you get this idea from? Not from me or any other proponent of MMT that I know. What you’ve described is basic marketing and has occurred to lots of people over the years. It didn’t occur to me because the idea is so ubiquitous that I saw it in use before I had any time to think about it.
You have a few other things wrong too. MMT considers the financial flows and as such it doesn’t even pretend to cover the productive side of the economy. Septeus7, you’ve imagined MMT wants to say more about the economy than it does, and then call it deficient because it doesn’t answer questions that it didn’t ask.
Also you have confused manufacturing and economics. You say: “The economy isn’t about exchanges it’s about human civilization transforming matter for material provision.” and “The reason we exchange stuff is because it give more control over nature and therefore it is the process of work through manufactured capital that determines exchanges not money in the form of “stocks and flows.” ”
Three confusions here. 1. Creating material provision is a manufacturing exercise – like flaking a rock to get a sharp edge or making a silicon chip. Economics is about how we exchange things so as to move from flaking stones to making chips. 2. Money doesn’t “determine” exchanges, it acts as the medium of exchange. MMT doesn’t look at exchanges in general – trucking, bartering etc – it examines what happens to the medium. Septeus7, when you read MMT on these terms what do you disagree with? 3. Is exchange only about having more control over nature? That’s a very limited world you live in. I live in a world where I’ll wash your windows if you iron my clothes. Then we’ll both go lie on the beach.
“Economy lies in the polity organized by the dreams of the physically imagined.” Ha ha ha ha ! Ooops! Sorry that just slipped out. I meant to ask what did you mean?
:-)
Entered “European contagion” into Google, and it offered 1.13million hits. Increased 90% since your story perhaps.
Google now gives 1.26 million hits, an increase of
about 130,000 hits since your post of about 2.5 hours ago.
Wonder what the figure will be in another day.
Merkel is already hinting that defaults will be made possible, probably by 2013. Obviously there is a lot going on behind the scenes but the Germans are trying to push private investors to take haircuts, even at senior debt level.
Nice of her to consider that fools might actually take responsibility for their own actions. Since Ireland is so small, all of us should pay to erect billboards in Dublin encouraging them to default on the debt their corrupt government has saddled them with. Money well spent.
Interesting to see that from Mr.Repstock’s perspective captains of industry ( not sure exactly to which USA industry he refers) are clearly seperated from “the charlatans and the shysters”. Would we not be in the present situation if this were not so ?
correction to the above: Would we not be in the present situation if this were so ?
I’m not sure what is happening but posts on the newer threads are being delete wholesale??
BREAKING NEWS: As the EU debt crisis hits a new alarming high, members of the EU are in dicussion to change their name to a more secure, stronger one. Talks are ongoing with Germany (with a hesitant Ms Merkel) to change the initials EU to EGU (European German Union). One unnamed source ranked high in th EU said “This will instill great confidence in our union, because everyone knows that Germany can save us all!”
Following the tangent of th elst poster: why was the title “union” not retained after the American Civil War ?
If I’m onto the right line of thinking, most successful American wars are fought by bonus armies. In the case of the Civil War, the bonus army was called “The Union Army” because it was a bonus army tasked with putting down the traitors. The World War I Army was the American Expeditionary Force, and World War II Army was the “Army of the United States.” The institution of the “United States Army” itself proudly defended Alaska. Yes, they provided a great deal of the officer corp, but I would suggest there are major incentives to having an army with the aim of going home instead of doing a daily job. Of course, this is off topic.
At the end of the day, the Union was just a temporary term. The United States never ceased being the United States even in the areas of uprising. The “Confederate States” were always sovereign territory of the United States of America. Using “the Union” would suggest the region was conquered instead of merely restored to order of Constitutional law. I don’t know this for certain, but this is why I think the term “Union” was dropped. We don’t talk about the “Army of the United States” anymore even though most World War II vets were actually in that organization instead of the “United States Army.” Its the same thing for the AEF and whatever we called the Spanish and Mexican War armies.
Germany have and had no real estate bubble.
Maybe on of the reasons why it is in a little better shape than others.