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Staring at the abiss with Paul Krugman

by Luis de Sousa Fri Mar 16th, 2012 at 06:03:17 PM EST

Paul Krugman was in Lisbon last week to receive three honoris causa PhD and openly advise Greece to leave the Economic and Monetary Union, something taken as a smooth advice to Portugal in the same direction. This is something that can only be accomplished by using the Lisbon Treaty mechanism to leave the EU. One must simply acknowledge this reality: many people would like to see the shattering of the Eurozone and the EU. Some of them wish it for pure xenophobic reasons; others would take it as the ultimate proof that the social state doesn't work. Others simply do not want what they see as a direct concurrent to the US dollar ever to succeed. And others still, simply do not understand the EU, and particularly the Eurozone. I like to think that Krugman, someone who contributed so much to Complexity Science, one of the fields on which I do research, falls in the latter class.


This is a crosspost from AtTheEdgeOfTime.

Expresso
Paul Krugman: Grécia deve sair do euro e Portugal permanecer
17:29 Segunda feira, 27 de fevereiro de 2012

A probabilidade de a Grécia sair da zona euro é muito elevada, mas Portugal tem "75%" de possibilidades de se manter na moeda única, disse hoje em Lisboa o economista norte-americano Paul Krugman. The changes of Greece leaving the Eurozone are high, but Portugal has "75%" chances of remaining in the single currency, said today in Lisbon the north-american economist Paul Krugman.
"Ninguém sabe ao certo" como vai evoluir a crise financeira da zona euro, disse Krugman numa conferência de imprensa. "Acredito bastante que a Grécia vai abandonar o euro. Portugal deve ficar? depende do que se passar nos próximos dois ou três anos", disse o prémio Nobel da Economia de 2008. "No one knows for sure" how the Eurozone financial crisis will evolve, said Krugman in a press conference. "I strongly believe that Greece will abandon the euro. Should Portugal stay? it depends of what may happen in the next two or three years, said the 2008 Economic Nobel prise winner.

To the case, the motivations behind Paul Krugman's call to a break of the EU are largely irrelevant. What is important is to understand what a course of action like this would entail. This post is an anticipation exercise, or on more human wordings, a prediction, like those made by astrologers; take it as likely as you wish.

There have been many cases of countries defaulting on external creditors and/or experiencing hyperinflation; there are some folk swift in making comparisons with previous cases to defend particular views. The reality is that no country ever left a monetary union like the Eurozone, after an exceptional period of 25 years of economic transformation towards the tertiary sector and at a time when oil prices are at 90 €/b.

Following is a ran down of how things could develop in a smaller Eurozone state that decides to leave the EU. It is slightly inspired on a poem by Robert Calvert entitled "The ten seconds of forever", which by some reason always comes to my mind whenever I reflect on this subject it.

Day One - Run on the Banks

To this most economic analysts are arriving too. Facing the hypothesis of a devaluation of their savings, citizens try to get their money out of the bank or out of the country, into a currency insulated from the downward spiral, inevitably the Euro itself. Things like this happened in Argentina and Mexico, and notably last year in Iran. By the end of the day capital controls have have to be fully re-established, most banks are forced to close doors and whatever value the government fixed the new currency on is now irrelevant.

If this happened in Greece, for instance, it would spread the same day to Portugal, or vice-versa. Ireland would be the next in line, then Spain and after Italy; the EU institutions would face great difficulties to deal with the pace of events.

Day Two - Bankruptcy tsunami

The following consequence of the re-introduction of an old currency is a massive bankruptcy. Most banks and companies have now assets denominated in the new currency, which lost the largest part of its value, but are indebted to foreign banks in Euros; they all became insolvent overnight, even if not officially. This is something the mainstream economic pundits are also able to get to, though in lesser numbers than to the all out bank run.

Most folk have become unemployed, or otherwise have lost a real salary. Outside, most other Eurozone members have had to impose some sort of capital controls too; even if succeeded, they wont prevent every trade deficit and surplus in the Eurozone to close.

Day Three - Economic paralysis

Most economic activity is gone. Internally most companies are now insolvent, and from abroad no one is willing to negotiate while the new currency doesn't stabilise. Capital controls themselves impose a serious barrier on foreign trade that can't be overcome fast enough. The break away state understands that it is now an island, and an isolated one.

Fresh fruits and vegetables start to disappear from store shelves; they are just a pronounce of what's to come.

Day Four - The Panic

Its hyperinflation, but bread prices have gone up much faster than anything else. Some call it speculation, but on the internet some folk are pointing to the fact that the regular imports of flour from the larger states have stopped flowing; it is just a matter of time. Folk start rushing into stores to stock up, and soon there's nothing left to buy. Opportunistic speculation and long queues lead to the first serious break ups of civil order.

On their way back from the supermarket to home folk notice that long queues have also formed on every service station. But it is too late, in a few hours there's no road fuel left in and around large cities. Emergency and Security services are overwhelmed, both by the number of occurrences and the lack of fuel; civil order is just a memory now.

If you think something like isn't possible consider that late last year, in the wake of the creditor haircut and the aborted referendum, Greece was only being able to get petroleum from Iran, a country living similar foreign confidence issues.

Day Five - The last day of forever

Mass transit has completely stopped, but most folk are not venturing to go outside anyway. There are news of looting everywhere; security forces and medical urgency seem to be largely inoperative. All sorts of rumours spread and trust on the media wanes; the internet seems to have gone schizophrenic; religious temples are packed. In practice the government doesn't exist any more.

When the evening comes the electricity supply goes down; the bright lights of the city are all gone and moonshine is all that's left. TV and the internet are gone, a few radios survive but they cannot provide any relevant information. Hours later tap water stops running in some parts of the city. It will be a long night.

<hr>
This is a doom story. There are many other possible outcomes, dependent on prompt action by the government, like it was made in Iran. Capital controls introduced in advance, curfew, rationing, all can help avoid this worst case scenario. But none of it is good, more than that, none of it would leave the break away state better than in the EU.

Being part of the EU is not the problem for Portugal or Greece, but rather the lack of solidarity, vision, and courage of those that command it today.

Display:
If someone wants a real-time demonstration of the power of the EU myth in some parts of the EU: Just read this.

Myths are powerful things. Unmovable forces.

Unmovable until gravity kicks in, of course.

by cagatacos on Sat Mar 17th, 2012 at 07:05:28 AM EST
What happens when the unstoppable force of Fisher's debt deflation meets the unmovable object of the EU myth?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 09:00:34 AM EST
[ Parent ]
Collapse. The question is one of the time between successive collapses and the number before the entire system collapses.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Mar 17th, 2012 at 09:16:56 AM EST
[ Parent ]
We are between the rock of austerity and the hard place of balance-sheet recession.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 09:43:08 AM EST
[ Parent ]
And bound for debt-deflation death spiral.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Mar 17th, 2012 at 10:58:10 AM EST
[ Parent ]
Unless there's something special about the EU vs other currency crises that means history doesn't apply, I think it's highly unlikely Krugman lacks understanding of the EU.  Always nice to see that exceptionalism isn't solely an American thing though.

As to the doom scenario, I'd point out that Day One is already happening.  Day Two isn't far behind with unemployment rising at its current rate.

Day Three sounds like projection to me.  They have economic paralysis already, imposed by the Troika.  Your own link in the Day Four section notes economic paralysis resulting in the need to seek oil from Iran.

Day Five is going to be a lot more likely to happen if they continue on their current course.

There are no good options here.  Krugman's pointing out that Greece leaving the eurozone looks like it's ultimately going to be the least-bad option for Greeks.  At least with their own currency, they have some shot at getting out of the hole.  Right now, the EU is slowly bleeding them dry.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 17th, 2012 at 08:12:07 AM EST
I have to echo Drew here:

  • Day 1: Run on banks, has already happened. It started in 2008 and the whole "Target 2" kerfuffle is actually a result of it.
  • Day 2: Bankruptcy tsunami, is currently happening in the European Periphery, and has run its course in Greece. This has been exacerbated by austerity-motivated selective sovereign default as the public sector prefers to pay bondholders than providers, and stop payments to providers they do because, well, it doesn't trigger CDS...
  • Day 3: Economic paralysis, is on display in Greece.
  • Day 4: Hyperinflation, people are beginning to turn to barter in Greece and more and more proposals for local currencies are being made across the EU.
  • Day 5: the last [first?] day of forever, is also on display in Greece.

Therefore, how does EU membership make a difference? The process may be different, but the results are the same. Greece has, for the past 2 years, experienced the economic destruction that leaving the Euro would have caused, but it remains in the Euro. Had it left the Euro and suffered from it for two years, it would be on its way to recovery. As it is, it still hasn't touched bottom even by the Troika's own projections. And when they finally give up and kick Greece out, it will have to endure another two years of pain before things turn around.

Portugal is next, by the way, and I am sorry if this sounds personal but the only reason you can say being part of the EU is not the problem for Portugal or Greece is that you yourself recently took advantage of Portugal's EU membership to escape the sinking periphery boat into the core.

Your the problem [is] rather the lack of solidarity, vision, and courage of those that command [the EU] today sounds a lot like Gandhi's Western Civilisation would be a good idea or the typical quip about such and such place would be great were it not for its inhabitants.

The EU doesn't lack vision or courage, it lacks solidarity. Trichet and Schäuble have been awarded Charlemagne Prizes for their role in this crisis, Trichet has shown considerable vision by correctly predicting a European Commussioner without a budget to spend but with the power to prevent member states from spending. Mario Draghi has a vision for Europe: "the European Social Model is already dead", and the courage to "print" 1 trillion Euros over the Bundesbank's hissy fit, to give to the banks while continuing to strangle the public sector. Merkel has a vision: the era of living beyond our means is over and the necessary pain may last decades.

What the EU doesn't have any more is solidarity. So, fuck this for a lark.

In that sense, I also have to echo cagatacos on the strength of the EU myth. In the prophetic words of JC Juncker, the Euro will outlive us all, which could also be put as the Euro will bury us all.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 08:57:41 AM EST
How can we expect intra-EU solidarity when we are busily destroying intra-country solidarity in every single one of our countries.

Again, the euro is not the problem. Right wing policies are the problem. It is possible to do left wing policies and solidarity with a strong currency and limited public debt. It's not because Serious People tell us it's not done that it can't be done.

How would the 40-80% cut in wages that most workers and pensioners suffer in a disorderly devaluation be any better than the current ordeal?

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 11:08:01 AM EST
[ Parent ]
Again, the euro is not the problem.

Yes, it is.

Right wing policies are the problem.

The euro is governed by institutionalized right-wing policies.

It is possible to do left wing policies and solidarity with a strong currency and limited public debt.

"If we only had the right people in charge...."

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 17th, 2012 at 12:08:37 PM EST
[ Parent ]
I still think the policies and ideologies of the people in charge do matter.
by IM on Sat Mar 17th, 2012 at 12:11:43 PM EST
[ Parent ]
I do, too, but that doesn't mean the crisis would cease to exist if the EU were governed by socialists.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 17th, 2012 at 12:13:33 PM EST
[ Parent ]
why not? A different reaction to crisis will give different results?
by IM on Sat Mar 17th, 2012 at 12:14:28 PM EST
[ Parent ]
Because reactions the other way are hamstrung by the nature of the system.

There's also the obvious problem that all of the so-called socialists are with the austerians on this lunacy.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 17th, 2012 at 12:18:00 PM EST
[ Parent ]
I don't believe in unchangeable systems. Or in unchangeable directions of political parties, for what. The future is still unwritten etc.
by IM on Sat Mar 17th, 2012 at 12:20:06 PM EST
[ Parent ]
That's fine if you're talking about five or ten years from now (at best), but that's a bit late here.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 17th, 2012 at 12:23:18 PM EST
[ Parent ]
if the socialists win in France and trigger a new Europe-wide debate on the treaties. Hollande is saying a lot of good things today.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 12:42:07 PM EST
[ Parent ]
Clegg was saying a lot of good things before he was elected.

Now it's clear it was all lies and PR, and his real interest is in abetting the Tory agenda to the maximum possible extent.

This has been a consistent pattern by 'left' leaders since at least the mid 90s.

Hollande is already something of a Third Way-ist. So excuse my cynicism if I don't expect great things of him. (Although I'll be delighted if I'm proved wrong.)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Mar 19th, 2012 at 05:14:50 AM EST
[ Parent ]
Eurointelligence Daily Briefing: Complacency watch: Why raise the size of the ESM when the markets are calming? (19.03.2012)
Hollande does not manage to get an explicit support from the European left to renegotiate the fiscal pact

According to Les Echos, Francois Hollande on Saturday managed to overcome the impression of being isolated in Europe by bringing his European counterparts like SPD chairman Sigmar Gabriel and Italy's Democratic Party leader Pier Luigi Bersani others to a common electoral rally to Paris. According to Le Figaro he mocked the ,,holy alliance" that conservative Europeans leaders like Angela Merkel, David Cameron, Mario Monti and Donald Tusk had put in place by agreeing not to meet with him during the election campaign. But the announcements about a renegotiation of the fiscal pact stayed very vague and the idea of a common ,,Paris Declaration" that Hollande would have liked to publish was dropped because of a lack of agreement on what to say on the fiscal pact, the paper writes. According to Les Echos, Gabriel said he was in favour of ,,complementing the treaty with a real European initiative in favour of growth" but he said nothing that the SPD would use its influence on the vote to force Merkel's hands. According to Financial Times Deutschland, however, Gabriel wants to wait for the French presidential elections before ratifying the fiscal pact in order to be able to force her to agree to an EU growth initiative.



There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 05:28:01 AM EST
[ Parent ]
The Holy Alliance (also called the Grand Alliance) was a fourth coalition of Russia, Austria and Prussia created in 1815 at the behest of Czar Alexander I of Russia, signed by the three powers in Paris on September 26, 1815, in the Congress of Vienna after the defeat of Napoleon. Ostensibly it was to instill the Christian values of charity and peace in European political life, but _in practice Klemens Wenzel von Metternich made it a bastion against revolution. The monarchs of the three countries involved used this to band together in order to prevent revolutionary influence (especially from the French Revolution) from entering these nations. It was against democracy, revolution, and secularism. The Alliance is usually associated with the Quadruple and Quintuple Alliances, which included the United Kingdom and (from 1818) France with the aim of upholding the European peace settlement concluded at the Congress of Vienna. The Alliance was conventionally taken to have become defunct with Alexander's death in 1825.


There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 05:30:05 AM EST
[ Parent ]
See also: Hundred Thousand Sons of Saint Louis
The Holy Alliance (Russia, Austria and Prussia) refused Ferdinand's request for help, but the Quadruple Alliance (Britain, France, the Netherlands and Austria) at the Congress of Vienna in October 1822 gave France a mandate to intervene and restore the Spanish monarchy. On 22 January 1823, a secret treaty was signed at the congress of Verona, allowing France to invade Spain to restore Ferdinand VII as an absolute monarch. With this agreement from the Holy Alliance, on 28 January 1823 Louis XVIII announced that "a hundred thousand Frenchmen are ready to march, invoking the name of Saint Louis, to safeguard the throne of Spain for a grandson of Henry IV of France". At the end of February, France's Chambres voted an extraordinary grant for the expedition. Châteaubriand and the ultra-royalists rejoiced - the royal army was going to prove its bravery and devotion in the face of Spanish liberals, fighting for the glory of the Bourbon monarchy.


There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 05:33:29 AM EST
[ Parent ]
Otto, Royal Prince of Bavaria, then Othon, King of Greece (Greek: Ὄθων, Βασιλεὺς τῆς Ἑλλάδος, Óthon, Vasiléfs tis Elládos; 1 June 1815 - 26 July 1867) was made the first modern King of Greece in 1832 under the Convention of London, whereby Greece became a new kingdom under the protection of the Great Powers (the United Kingdom, France and the Russian Empire).
The second son of the philhellene King Ludwig I of Bavaria, Otto ascended the newly created throne of Greece while still a minor. His government was initially run by a three-man regency council made up of Bavarian court officials. Upon reaching his majority, Otto removed the regents when they proved unpopular with the people and he ruled as an absolute monarch. Eventually his subjects' demands for a Constitution proved overwhelming and in the face of an armed but peaceful insurrection, Otto granted a Constitution in 1843.

by Katrin on Mon Mar 19th, 2012 at 05:49:38 AM EST
[ Parent ]
I didn't know we were that close to success in the project to reverse the French Revolution...

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 06:03:07 AM EST
[ Parent ]
Nobody says Fico will save us! But if a critical mass is reached - perhaps after the elections in France. So in half a year, a year things could change.
by IM on Sat Mar 17th, 2012 at 12:48:45 PM EST
[ Parent ]
Though he was for me the last Democrat left standing I still gave Obama six months before I despaired of his doing anything constructive about the problems with the banks and finance, so perhaps we should give Hollande at least until the summer solstice. In truth, from what I have seen of his positions on ET, I am not too optimistic of his being able to make the sort of fundamental challenges to the course and policies being followed to be able to succeed in effecting basic change.

Since the fall of 2008 I have believed and maintained that the problems with the existing system and the reasons why it must be reformed must be forcefully presented to the public  in order to prepare them to accept and then demand basic reforms. But the existing system remains a quasi-sacred order and candidates will only talk about changes at the margins. I find it hard to see that changing absent an even more fundamental collapse of that system - one that cannot be papered over with fiat currency created and given only to bankers.

At present all remain caught in the spell of the existing system. In Europe that takes the form of the myth of the EU and the Euro. It is as though the bankers have left us as wasps leave victim insects - paralyzed but alive as food for their larvae. Someone or some event must break the spell. The sooner the better.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Mar 17th, 2012 at 06:29:02 PM EST
[ Parent ]
Obama is finally beginning to make some noises about finance.

But it is an election year, so some cynicism is reasonable.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Mar 19th, 2012 at 05:17:56 AM EST
[ Parent ]
See here about Obama and the "Hedge Fund Democrats"
Actually, I've seen this in action at meetings where financial big wheels and professors mingle. You'd think that the people with the big bucks would be confident; on the contrary, they're insecure, because they want respect for their minds. And I know for a fact that some of Obama's big-money early backers were motivated in large part by the lure of being in the inner circle in a way that someone like Hillary, with her long record and connections, couldn't offer.
They supported Obama because as a relative Washington outsider they though he'd sell slots in his inner circle? And now after 4 years Obama has developed the Washington connections and doesn't need the Masters of the Universe any more? Is that it?
And now Obama says what anyone paying attention would: that these big-money people were, to some extent, making their money in socially destructive ways -- and they go insane, precisely because in their hearts they know that he's right.

And because money talks in politics, this pettiness, this display of ego and hurt vanity, may have disastrous consequences.

(Krugman)

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 05:25:21 AM EST
[ Parent ]
From my experience, the big wigs from different elites (financial and academical in this example) are as a rule insecure when they meet, because they need each other to confirm that they are indeed important and great men. And as a rule they get it.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Mon Mar 19th, 2012 at 07:50:43 AM EST
[ Parent ]
After all the purpose of power, according to psychologist David A. McCelelland, at an individual psychological level, is to feel powerful. Ain't life grand.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Mar 30th, 2012 at 02:31:56 PM EST
[ Parent ]
This is Rorschach. The concept of 'Power' in its broadest assertive sense is unknown to the vast majority living on this planet. The word the majority relates to, even if they are unable to express it directly or clearly, is 'dignity'.

Dignity is the perception that individual life is worthwhile, giving is rewarding, and that one is not powerless to effect change where injustice is witnessed.

You can't be me, I'm taken

by Sven Triloqvist on Fri Mar 30th, 2012 at 02:43:46 PM EST
[ Parent ]
I believe what McClelland was trying to assess was how 'power' was perceived by those who were perceived to have it - across three cultures, but it has been >35 years since I read the work. The title of his book was Power - The Inner Experience 1975. At the time he was head of the Dept. of Psychology at Harvard.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Mar 30th, 2012 at 05:19:20 PM EST
[ Parent ]
Those who have power demand dignity. Those with out power simply want dignity.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Mar 30th, 2012 at 05:20:52 PM EST
[ Parent ]
On this point, you might refer IM to Yes, Minister and Yes, Prime Minister.
by rifek on Thu Mar 22nd, 2012 at 05:15:02 PM EST
[ Parent ]
The euro is governed by institutionalized right-wing policies.

Precisely. The Euro makes neoliberal la-la-land the law of the land. Which means not only that sensible economic policies are subversive, but that the system is on a collision course with economic reality (Fisher's debt deflation).

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 01:27:38 PM EST
[ Parent ]
Again - lower taxes and balanced budgets are NOT THE SAME THING. German austerians are not against tax increases to balance budgets. It's the combination with neoliberal policies which is absolutely toxic.

And when your creditworthiness is decided in London, being prudent with debt is not geostrategically silly. We worry about our energy coming from Russia, but we should worry about our money being valued by the Anglos.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 06:54:30 PM EST
[ Parent ]
We should also worry about the ECB being the only sovereign in the Eurozone.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 06:56:07 PM EST
[ Parent ]
When will you drop the Anglo paranoia? There's enough idiocy on display in Brussels, Frankfurt and Basel without needing to blame the City.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 06:57:40 PM EST
[ Parent ]
I think I must agree with Migeru here. The rating agencies and Wall Street banks might carry huge culpability in creating the US crisis (as predicted by Jerome here on the ET), but the Euro crisis is entirely homegrown.

Remember; it's not like investors always even care about the rating agencies. Japan was downgraded years and years ago, and their sovereign rates have been falling ever since. When S&P downrated the US, US bonds soared, while it was the stock market which went into the toilet.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Mar 17th, 2012 at 07:01:38 PM EST
[ Parent ]
is a purely anglo thing, coming from reliance on capital markets (rather than debt lending) for finance. It has led to the quest for valuing everything in monetary terms (so that it can be traded), liquidity (or lack thereof) in everything, the concept of riskless assets, and a general lack of due diligence in your lending practices. You rely on the rating rather than on your own analysis (and I've seen this from the inside - using ratings are the absolutely easiest way to be lazy inside a bank).

The lack of due diligence should not be a problem if the stupid money is punished (and not bailed out - this is where financial capitalism will break), but the reliance on monetising and valuing everything through the prism of finance brings short-termism, the "there is no society" mindset and, in the absence of a strong State, runaway greed & al.

So "anglo" is a short cut for the Reagan/Thatcher ideology, but there are roots for it where it came from.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:17:44 PM EST
[ Parent ]
using ratings are the absolutely easiest way to be lazy inside a bank

Heh. Everytime the guys from the bank come and suggest we buy this or that corporate bond (I help manage some research stipend money) and say that it has this or that rating, I give them a look and mutter something about MBS's or CDO's or the S&P downrate of the US, and then they look rather sheepish. :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Mar 17th, 2012 at 07:23:44 PM EST
[ Parent ]
In a society where everything is market-based, everything has either a market value or no value.  And no fair factoring back in the externalities the market makers have so cleverly swept under the rug.

I've always found it amusing that the Royals were generally fans of Maggie when her markets-ueber-alles approach was directly contrary to every interest and tradition of the monarchy.

by rifek on Thu Mar 22nd, 2012 at 05:31:22 PM EST
[ Parent ]
Migeru:
There's enough idiocy on display in Brussels, Frankfurt and Basel without needing to blame the City.

If the City (and Wall St) impinge on the Eurozone situation, should that be ignored? When it's pointed out that either rating is a superfluous function, or should not be in the hands of private City/Wall Street corporations, the response is invariably, "the rating agencies didn't cause the euro crisis". No, but they have arguably exacerbated it at every turn by publishing (often correct) analyses and consequent rating changes with an acuity and rigour that were so strikingly absent concerning American financial bubble-and-fraud in the lead-up to the first leg of this crisis. Is it absurd to find logical that US interests (and those of Britain, the GBP having been sidekick to the dollar for decades) lie in avoiding the loss, in the financial crisis, of the world-reserve-currency status of the dollar, and therefore in seizing an opportunity to weaken the relative status of the main contender for replacement? Or that global financial capitalism (to a considerable extent offshore but pre-eminently centred on New York and London, currently at least) abhors the regulatory tendency the EU represents at world level?

Why place a theoretical ring-fence round continental Europe (where, I'm not denying, our "leaders" bear huge responsibility for driving us over the cliff) and ignore global power struggles? If, tomorrow, the euro fell apart and our countries were severally sovereign, would those power struggles have no relevance?

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Mar 18th, 2012 at 06:27:23 AM EST
[ Parent ]
There is a line beyond which pointing out malign foreign interests becomes an exercise in excuse-making for domestic collaborators and general idiocy, rather than analysis. And reasonable people can disagree on which side of that line Jerome's comment is on, given that it is made in response to the observation that the Euro elevates liberal (neo- or ordo-, doesn't matter - they agree on this particular delusion) fantasy world economics into the law of the land.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 18th, 2012 at 09:34:37 AM EST
[ Parent ]
There may also be a line beyond which continually imputing defensiveness and excuse-making to other participants here may be improductive of debate and analysis.

I was not writing to defend Jerome's comment, he can do that himself, but to support the view that excluding global power struggles from the field truncates the discussion, which then appears to conclude that Europe's problems are solely self-inflicted and that sovereign nation-states will be either the inevitable result of those self-inflicted problems, or the correct response to them. Well-adapted macroeconomic policies for those states may be suggested (with great confidence, even), but it's legitimate to have doubts about, not their theoretical effectiveness, but their chances of being applied in real conditions - will global finance go away, will laissez-faire neoliberalism go away, will economists change their spots, will right-minded governments emerge from the polities we have, will global imbalances and their attendant pressure to race to the bottom disappear, because the euro is no more and we have independent nation-states? Luis's (self-admittedly) doomer scenario above has the merit of putting the subject on the table. It's not enough to reply (hyperbole for hyperbole) that what's happening within the euro is just as bad, or that all a government needs to do is this or that. A serious (probably multi-scenario) description of what might and what is likely to happen to our several nation-states in the event of leaving the euro or of a general euro collapse, is called for. Alongside which (though great doubts may be legitimate on this score too), the chances of a return to the '80s to re-debate and identify an acceptable construction sans Maastricht for what has become the EU (including what the outlines of an acceptable construction would be), need to be assessed. Vast programme.

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Mar 18th, 2012 at 12:47:43 PM EST
[ Parent ]
I'm not sure I fully understood all of that and so my point may be similar:  There is a distinction between academic and policy analysis.  Academic analysis should be wholly  objective/fact driven - but rarely is. Policy analysis focuses on the policy leavers and factors over which you actually have some influence/control. So it makes sense for those of engaged primarily in the EU policy/politics space to focus on the shortcomings of the EU/Eurozone itself. That is not to say anglo neo-liberal influences haven't exerted a baleful influence on EU policy/decision makers and may indeed be the cause for a lot of our ills. But it is easier to address the known and obvious defects in the design of the Eurozone project itself rather than to be tilting at generalised neo-lib shibboleths and windmills all the time... If we could fix the structural defects and lack of solidarity in the Eurozone architecture, we wouldn't have to worry over-much about what the City/Wall street are up to.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 19th, 2012 at 11:11:46 AM EST
[ Parent ]
That is right. You could crowd out Migerus german paranoia.
by IM on Wed Mar 21st, 2012 at 06:47:13 AM EST
[ Parent ]
we should worry about our money being valued by the Anglos

Nothing secondary market purchases by the ECB with a stated cap on yields wouldn't solve faster than you can say 'Weimar'.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:02:43 PM EST
[ Parent ]
Were it not for the fact that the ECB has been busy undermining the credibility of its own sovereign debt purchases.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:03:51 PM EST
[ Parent ]
The EU is still trying to have a sovereign currency without a sovereign.  Not a good mix.
by rifek on Thu Mar 22nd, 2012 at 05:34:57 PM EST
[ Parent ]
The ECB is the only sovereign, it just pretends that it isn't.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Mar 22nd, 2012 at 06:03:42 PM EST
[ Parent ]
On the contrary, it seems to rather enjoy being the sovereign. It's just an old-fashioned sort of sovereign. Specifically, the sort of which went out of style around 1792. For reasons and in ways that the ECB may yet come to experience first-hand if they persist in the destruction of European society.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 22nd, 2012 at 08:47:15 PM EST
[ Parent ]
Again - lower taxes and balanced budgets are NOT THE SAME THING.

Low taxes is not the only form of fantasy economics practised on by the right wing.

Balanced budgets are fine, whatever, as long as they are regarded as an incidental circumstance rather than an actual policy objective.

And when your creditworthiness is decided in London,

... then your central bank is not doing its job.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 09:23:35 PM EST
[ Parent ]
Jerome a Paris:
German austerians are not against tax increases to balance budgets.

Taxes on the poor is ok, but a luxury tax on cars in Greece was not allowed.

ReporterNet.com | Tax on Luxury Cars to be Abolished

The government is expected to abolish the luxury tax on private cars with ex-factory prices of more than €20,000 for new and €16,000 for used, according to statements by Deputy Finance Minister Pantelis Oikonomou, who cited European legislation.

"In order to prevent the country from being referred to the European Court, a draft provision has been prepared for the abolition of the luxury tax on private cars," he said in Parliament.

Luxury tax rates vary between 10% and 40%, depending on the ex-factory price.

Oikonomou said the ministry is also preparing a more favorable tax regime for imported used cars. Greece has already lost a case at the European Court on this issue.



A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Sun Mar 18th, 2012 at 03:50:33 PM EST
[ Parent ]
Slashing the salaries of psychologists to less than what some would earn stocking shelves in a grocery store here, and then taxing them higher through their utilities, is Very Serious.

Just don't you dare tax BMWs.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Mar 19th, 2012 at 09:52:51 AM EST
[ Parent ]
How can we expect intra-EU solidarity when we are busily destroying intra-country solidarity in every single one of our countries.

We're busy destroying intra-country solidarity under orders from the EU institutions, not least the ECB and the Commission. And governments which might have been inclined to oppose EU policy don't because that's not being a good European.

We'll see how long Hollande's brave opposition holds up.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 01:29:45 PM EST
[ Parent ]
Aren't you forgetting a 30-year worldwide political trend.

But that gets to our disagreement on the EU Constitution - I'm saying that the EU Commission + Parliament, despite all their flaws, were the only institutions able - and willing - to take on big corporates and win - and not having the legitimacy of a people-backed vote to back them robbed them of their ability to do any meaningful regulation, as they could have done. Instead they just went with the ideological flow.

Deeply ironic that the French destroyed Europe's ability to do decent technocratic regulation of business.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:37:53 PM EST
[ Parent ]
Eventually ideology gets condensed into institutional structure. Then you're fucked.

The Maastricht treaty did it. When we joined the Euro, we were fucked.

And the reason why countries joined the euro had nothing to do with economics but with stupid political notions of national pride and personal political legacies.

Because, you know, humans are morons.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:41:39 PM EST
[ Parent ]
Maastricht embedded Germany's strong money ideology - one we had to live with already anyway - not the anti-tax anti-government one.

It's not because today's ideologically acceptable 'solution' to public deficits is to cut taxes and cut social services even more that this is what the Euro treaties say. Nothing in the euro treaties prevents you from increasing corporate tax, income tax or whatever else - only corporate lobbying and ideological trends.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:47:02 PM EST
[ Parent ]
Maastricht embedded Germany's strong money ideology - one we had to live with already anyway - not the anti-tax anti-government one.

What? This was in Maastricht already:

Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as `national central banks') in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
That is German anti-government ideology.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:48:38 PM EST
[ Parent ]
Nothing in the euro treaties prevents you from increasing corporate tax, income tax or whatever else - only corporate lobbying and ideological trends.

If debt is above 60% GDP and deficits would have to exceed 3%, then it is actually Maastricht that forces you to settle on increasing taxes in the middle of a recession. And increasing taxes in a deep balance-sheet recession is wrong. Therefore, the Maastricht Treaty forces us to take wrong macroeconomic policy decisions by outlawing certain options.

See Is Keynesianism now a thoughtcrime? and also Fiscal rules going mad ....

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:56:27 PM EST
[ Parent ]
Maastricht embedded Germany's strong money ideology - one we had to live with already anyway

"We" being limited to countries who are sentimentally attached to a particular D-Mark exchange rate.

Prior to entering the Euro, Greece, Spain and Italy did not share such silly superstitions.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 09:28:42 PM EST
[ Parent ]
Germany seems convinced hard-money policies will produce the same sort of soft landing it enjoyed (alone in the world) after the Panic of 1873 provided it can find someone to land on.  Listen up, Greece, no luxury taxes on those Beemers you import.  I wonder when Germany will remember that it got through that period so smoothly due to the huge stimulus program it implemented to build public infrastructure.
by rifek on Thu Mar 22nd, 2012 at 05:59:09 PM EST
[ Parent ]
Migeru:
that's not being a good European.

You say this often, but what evidence do you have that this in fact motivates governments?

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Mar 18th, 2012 at 06:32:09 AM EST
[ Parent ]
I don't know what motivates governments, but every time it's part of the story we're told about why decisions are made.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 05:00:16 AM EST
[ Parent ]
Your memory's much better than mine, but I don't recall reading/hearing it cited as a motivation.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Mar 19th, 2012 at 01:29:22 PM EST
[ Parent ]
How would the 40-80% cut in wages that most workers and pensioners suffer in a disorderly devaluation be any better than the current ordeal?

Easy: they would retain their jobs and the public sector would retain the ability to run social transfers and employ people.

The morons in charge are not only gutting intra-EU solidarity. They're destroying the concept of state action. And they're doing so because the EU treaties and the Euro rules mandate it.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 01:32:14 PM EST
[ Parent ]
Also, I'm not sure this is due only to the political figurehead morons are responsible for this. It's their expert advisors and the civil service itself that's infested with neoliberal ideologues.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 01:33:30 PM EST
[ Parent ]
Migeru:
It's their expert advisors and the civil service itself that's infested with neoliberal ideologues.

they only know that solution to problems, anything else endangers their status quo, and is as repellent to their worldview as theirs is to anyone not brainwashed by the propaganda.

their model made billions for the usual suspects, the last 60 years has seen western economies transform, especially in the PIIGS, from basically peasants-with-shoes (china just getting there...) into booming economies and they fully expected their model to scale up without glitches and if it was so magical as to transform our postwar societies then it seemed logical to go global and give everyone access to the unrestrained capitalism unicorn's magical blessings, what's not to love?

especially when communism embodied their terror of losing the right to private property, totalitarian state control, parrot media and food lines, no consumer goods.

without the nemesis to combat, capitalism looks like a collapsed souffle, its contradictions within a democracy ever more nakedly, basely inhuman, as we watch them taken to their logical outcomes, ie 1% of the most cunning and unscrupulous cornering the market on anything that moves and screwing the 99% too decent or dumb to figure out how to join the club.

it's just as disgusting as those monolithic iron curtain, just as heartless... it's heading for fascism, the cain to abel's communism.

as the 1% connive to raise the drawbridge now and enjoy their ill-gotten winnings behind the moat of their security systems, hoi polloi are out in the cold, and from inside the strains of merriment drown out for the moment the dull, thunderous grumble outside the stockades.

in the devil's workshop the tools are making ever more refined tools of their own, all the better to game the risks of life, to rig the wheel to better screw the johns, the muppets, useful idiots to the wall of social despair.

don't like it? tough... no one asked your parents to reproduce! not our problem, is it?

we don't owe you anything, not our fault you can't afford to live... go away and die, or throw yourselves at our stormtroopers and die that way, but just die anyway. you are surplus, we don't even need you for cannon fodder or to run the factories, you aren't worth investing in, period. don't want to give up and fade to black? then go figure out how to serve the borg in novel ways, learn to lie while smiling for the media, or to slice and dice odds and stats to help us trap any dummies still unfleeced and shear them more efficiently.

then you can join the club... otherwise you are just evolutionary compost, deal with it.

 

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Sat Mar 17th, 2012 at 03:13:47 PM EST
[ Parent ]
It is possible to do left wing policies and solidarity with a strong currency and limited public debt.

  1. How do you do that without a federal level redistribution mechanism (also known as Fiscal transfers)?

  2. Why do you want a strong currency?


There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 01:47:23 PM EST
[ Parent ]
1. You could either have a federal investment arm to create demand in times of need. This wouldn't be needed on a massive scale at all times, as liquidity traps are rare, and localized recessions caused by the "wrong" (ie Frankfurt-focused) interest rate, by their nature are localized.

Alternately or complementary, you could create a strong federal financial regulatory agency to fight debt buildups, including in the private sector. Current account imbalances will then have to be financed mainly by equity transfers while they are evened out, not debt issuance. This should create strong political and popular pressures to deal with current account balances. On top of this, remove the taboo of sovereign default.

2. A strong currency protects the purchasing power of consumers, making vital imports like gasoline, coffee, bananas (and foreign vacations!) cheaper, while imposing a powerful competitive pressure on the export industry, making it lean and constantly focused on improvement.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Mar 17th, 2012 at 04:09:34 PM EST
[ Parent ]
You could either have a federal investment arm to create demand in times of need.

Did you know that the European Investment Bank has a stack of projects ready to fund in Greece, but it cannot fund them because half of the funding needs to come from the member state concerned and austerity policies don't allow Greece to spend any money on such projects?

A strong currency protects the purchasing power of consumers, making vital imports like gasoline, coffee, bananas (and foreign vacations!) cheaper

The EU has balanced external trade. Do you think monetizing sovereign Eurozone debt would change that?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 05:53:21 PM EST
[ Parent ]
  1. Yes. And you can't blame me for those stupid rules. :)

  2. I don't see your point. The EU as a whole needs imports, and the stronger the currency, the cheaper they'll be. And trying to repair weak competitiveness with devaluations might work once, but it's hardly a long-term fix. See Sweden in the 70's and 80's.


Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Mar 17th, 2012 at 06:29:34 PM EST
[ Parent ]
My point re:2 is that we wouldn't be in a crisis without the wrong, irrational belief that monetizing sovereign debt weakens the currency and/or creates inflation.

After all, apparently, monetizing toilet paper created by the shadow banking system does nothing of the sort.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 06:50:47 PM EST
[ Parent ]
Look, I'm not saying monetizing debt would create inflation either - not as long as we're stuck in the liquidity trap.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Mar 17th, 2012 at 06:57:04 PM EST
[ Parent ]
What is a liquidity trap?
by kjr63 on Sun Mar 18th, 2012 at 01:05:25 PM EST
[ Parent ]
Its when everybody (people, corporations, banks) hoards cash, because they think there will be tough times ahead. Nobody invests, and presto, tough times it is.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Sun Mar 18th, 2012 at 01:16:09 PM EST
[ Parent ]
From Wikipedia: "A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels."

In short, as interest rates are already zero, they can't be cut any further. Hence something else is needed to stimulate the economy, like infrastructure spending or quantitative easing (and the efficacy of the latter is somewhat questionable in my opinion).

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sun Mar 18th, 2012 at 01:49:25 PM EST
[ Parent ]
Jake's explanation is interesting, but there's the Wikipedia:

From Wikipedia: "A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence to stimulate economic growth.

Private sector is loaned up. No more (credible) debt takers.


A liquidity trap is caused when people hoard cash because they expect..

The confidence fairy?


..an adverse event such as deflation,

Rotschilds were very handy creating deflation (according to the movie "Money Masters").

by kjr63 on Sun Mar 18th, 2012 at 02:18:11 PM EST
[ Parent ]

From Wikipedia: "A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence to stimulate economic growth.

This actually suggests that we don't have a liquidity trap. Central bank has lowered interest rates. Mortgages are cheaper than ever. They just can't go below zero.

Also this suggests that lower interest rate to private sector necessary stimulates economic growth. It does not, if the private sector is over-indebted already.

by kjr63 on Sun Mar 18th, 2012 at 02:44:41 PM EST
[ Parent ]
We're at the zero lower bound.

See Paradox of Thrift

Two caveats are added to this criticism. Firstly, if savings are held as cash, rather than being loaned out (directly by savers, or indirectly, as via bank deposits), then loanable funds do not increase, and thus a recession may be caused - but this is due to holding cash, not to saving per se. Secondly, banks themselves may hold cash, rather than loaning it out, which results in the growth of excess reserves - funds on deposit but not loaned out. This is argued to occur in liquidity trap situations, when interest rates are at a zero lower bound (or near it) and savings still exceed investment demand. Within Keynesian economics, the desire to hold currency rather than loan it out is discussed under liquidity preference.
This is a better explanation than the one at liquidity trap. Basically, what's going on is that extreme liquidity preference would require negative interest rates in order for "savings not to exceed investment". As the zero lower bound makes that impossible (Ahem... See Negative interest rates: when are they coming to a central bank near you? by WIllem Buiter on May 7, 2009) then you find yourself in a liquidity trap where injections of money into the economy fail to stimulate lending.

The problem with the Wikipedia articles about economics, unlike the ones about, say, physics, is that the causal chains are not very clear in the mind of the article writers (possibly because the theory itself is broken).

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 05:08:24 AM EST
[ Parent ]
The causal chain is unclear to the writers because they are not describing a causal theory, they are relating a just-so story.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 19th, 2012 at 06:35:57 PM EST
[ Parent ]
Or the banks could be getting cash from Central but are sitting on it because they know their paper is at least half garbage, and they need to make up the difference in case someone has the bad form to make a reserve audit.
by rifek on Thu Mar 22nd, 2012 at 06:11:53 PM EST
[ Parent ]
On the contrary, sitting on a time bomb would make them more inclined to gamble big rather than go home. After all, it is impossible to go double-bankrupt.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 22nd, 2012 at 08:49:05 PM EST
[ Parent ]
Oh, they aren't going home, they're playing Extend and Pretend: Phase II, in which they don't even have to cook their books to make the collateral look double what it is, they just use tax money to make it all look good.
by rifek on Fri Mar 23rd, 2012 at 07:22:29 PM EST
[ Parent ]
Yeah, but extending and pretending doesn't get you out of the insolvency, it just prevents you from being resolved immediately. Sitting on shit until it matures doesn't, barring direct divine intervention, make it not-shit, let alone give it a gilt edge. If you want to dig yourself out of a serious insolvency, you need to make something happen to your balance sheet.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Mar 23rd, 2012 at 11:04:14 PM EST
[ Parent ]
You're forgetting the first rule of investment bankers: When it hits the fan, IBG-YBG (I'll be gone, you'll be gone.).
by rifek on Sun Mar 25th, 2012 at 12:33:45 AM EST
[ Parent ]
It's what MIT school economists call it when you hit the zero bound of nominal interest rates. Since MIT school economists subscribe to the loanable funds fallacy, they believe that the central bank lowers interest rates by creating more liquidity, rather than creating more liquidity in consequence of its decision to lower interest rates.

The "liquidity trap," then, is the point where no amount of additional liquidity can reduce borrowing costs.

It's got nothing to do with liquidity, and it's not a trap. It's an operational constraint on the use of interest rate policy in macroeconomic planning. And it should not come as a surprise to anybody, but it repeatedly does, because neoclassical economists have an unhealthy infatuation with irrationally excluding discretionary fiscal and industrial policy from the realm of macroeconomic planning.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 18th, 2012 at 01:50:24 PM EST
[ Parent ]
...neoclassical economists have an unhealthy infatuation with irrationally excluding discretionary fiscal and industrial policy from the realm of macroeconomic planning.

It probably goes down better with most to just instinctually reject those policies they know in their guts will provoke the ire of TPTB, or, especially, of  those agents of TPTB who have influence over their careers. Gaffney showed rather clearly how this got started through the power of patronage over US private universities, it has been ongoing for over a century and Krugman's blindness to even the role of debt probably only seems willful.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 18th, 2012 at 07:27:46 PM EST
[ Parent ]
Bloomberg Op-Ed: The Sorrow and the Pity of Another Liquidity Trap: Brad DeLong Jul 5, 2011
A financial crisis initiates a sudden flight to safety among bondholders -- widening interest-rate spreads, diminishing the private sector's desire to sell bonds to raise capital and encouraging individuals to save more and consume less as they, too, hunker down. Thus bond prices rise, and interest rates drop. As rates fall, firms see that they can get capital on attractive terms and so issue more bonds; households see the low interest rate earned on their savings and lose some of their desire to save. The market heads toward equilibrium.

...

In responding to a small financial disruption, the Federal Reserve can inject more money into the economy by buying bonds for cash, increasing the amount of cash so that even at the lower velocity of money we retain the same volume of spending. This eases the decline in interest rates, spending, employment and production into a decline in interest rates alone.

But when rates become so low that there's little difference between cash and short-term government bonds, open-market operations cease having an effect; they simply swap one zero- yielding government asset for another, with their hunger to hold more safe, liquid assets unsatisfied.

This is the liquidity trap.



There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 20th, 2012 at 01:02:27 PM EST
[ Parent ]
Starvid:
And trying to repair weak competitiveness with devaluations might work once, but it's hardly a long-term fix. See Sweden in the 70's and 80's.

I know that it is a common opinion that the 70's and 80's devaluations were bad, but the same time there is no opinion for abandoning the floating currency today. And the strong currency policy of the early 90ies was just a huge failure.

I suspect the 70's and 80's devaluations were really a sympthom of RoW catching up to Sweden. Skipping the carnage and destruction of ww2 is not an advantage that was going to last forever.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sun Mar 18th, 2012 at 04:00:52 PM EST
[ Parent ]
There is a crucial difference between devaluing within a fixed-rate system and floating your currency.

If you devalue in a fixed rate system, you have to defend the new, lower exchange rate, a rate which is prima facie incredible (you just devalued - why should anybody trust you to not do it again). Which means that you have to jack up interest rates almost as high to defend the new exchange rate as you had to to defend the old.

If you float, on the other hand, you are not committing to defending any particular exchange rate. So if people dislike holding your new, lower valued, currency, you can go "too bad, so sad" and keep the interest rate low for the benefit of your domestic industry.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 19th, 2012 at 06:28:34 PM EST
[ Parent ]
1. You could either have a federal investment arm to create demand in times of need. This wouldn't be needed on a massive scale at all times,

Sure, it would only need to be maybe 2-5 % of total GDP when you average it over every year of operation.

as liquidity traps are rare,

Only if you run silly, growth-destroying interest rate policies like Taylor rules. Under a more sensible zero interest rate policy, you are always in a "liquidity trap." Because it's not actually a "liquidity trap." It the zero bound on nominal interest rates. Liquidity has nothing to do with it.

Alternately or complementary, you could create a strong federal financial regulatory agency to fight debt buildups, including in the private sector.

This requires a public sector able and willing to print and spend money as needed, in order to compensate for waxing and waning private demand.

2. A strong currency protects the purchasing power of consumers,

So what? Protecting the (purchasing) power of "consumers" is not an objective of left-wing policy. "Consumers" includes plenty of people whose interests are not ordinarily considered important in the formulation of left-wing policy.

making vital imports like gasoline, coffee, bananas (and foreign vacations!) cheaper,

At the cost of leaving a poorer country for the next generation. Foreign goods cost what they cost. You're not going to be able to change what they cost without fancy diplomatic footwork or old-fashioned gunboat diplomacy. When you use your "strong currency," so-called, to obtain cheap vacations, you are paying for those vacations with your children's wealth.

while imposing a powerful competitive pressure on the export industry, making it lean and constantly focused on improvement.

Because raising the average quality of your firms by destroying solvent and, on their merits, profitable going concerns because they are not profitable enough is obviously an awesome way to encourage industrial development.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 09:42:13 PM EST
[ Parent ]
Sure, it would only need to be maybe 2-5 % of total GDP when you average it over every year of operation.

Instead, what's being suggested as a bold "growth" policy is to recycle unspent structural funds into paying down debt. And let's not forget the structural funds are part of the 1% of GDP EU budget...

So, yeah, the EU Council and Commission are full of vision and courage.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 09:58:12 PM EST
[ Parent ]
It is possible to do left wing policies and solidarity with a strong currency and limited public debt.

If you start out from small amounts of private debt and let the private sector finance the imbalances, sure, and that's what happened in the first 10 years of the Euro. Until the private debt bubble pops and then it's impossible to have an economy if you insist on low headline inflation and low public debt.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 02:10:55 PM EST
[ Parent ]
The imbalance problem could have been solved with very simple 'right-wing' tools: applying the law - in that case bankruptcy laws and tax laws.

Private default is a very simple way to deal with intra-zone imbalances. But we 'saved' the banks (or rather, their senior unsecured lenders). Again, the scale of the transfers caused by that decisions are so huge as to overwhelm the materiality of any other policy discussion.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 06:49:36 PM EST
[ Parent ]
Bankruptcies are the emergency rooms of the financial system. A financial system which relies on regularly having large cascades of bankruptcies to cope with elementary design flaws like the Grief and Stupidity Pact is going to be expensive and messy and will produce greatly inferior results compared to fixing the actual problem. Which is that members have no sustainable way to defend against inadequate inflation other member states.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 09:16:38 PM EST
[ Parent ]
The way we "fixed" this messiness here in the US was to slam the bankruptcy court door (on little people, not on players) and make the trial courts an arm of the collection industry.
by rifek on Thu Mar 22nd, 2012 at 06:19:23 PM EST
[ Parent ]
Ah, yes, closing the emergency room will allow you to avoid dealing with the mess and expense of running an emergency room.

In other recent news, breaking the thermometer will make the patient better. True fact.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 22nd, 2012 at 08:50:25 PM EST
[ Parent ]
Again, the euro is not the problem.

And what, precisely, makes the Euro differ in this respect from every other currency union in the history of currency unions?

It is possible to do left wing policies and solidarity with a strong currency

It is possible to do left-wing policies and solidarity if you view the "strength" or "weakness" of the currency as an incidental and largely unimportant byproduct of one's overall industrial policy. It is not, however, possible to do left-wing policies when one is bound to defend a strong currency, so-called, for no reason other than to defend a strong currency, so-called.

and limited public debt.

Again, only as an incidental circumstance, not when you elevate it to the status of coequal (nevermind primary) policy objective.

How would the 40-80% cut in wages that most workers and pensioners suffer in a disorderly devaluation be any better than the current ordeal?

Because
(a) they won't. 40 % is the upper bound on the amount of depreciation required to restore unit cost parity.
(b) a depreciation of the currency is shared between workers and savers alike, even under the ceteris paribus assumption. And the point of floating the currency is to gain the ability to implement aggressive full-employment policies, so you are looking at a case that is more worker-friendly than the ceteris paribus case.
And (c) the current policy regimen being imposed on countries who fail to take adequate measures to protect their sovereignty from the Bundesbank will keep destroying until there is nothing more to destroy or sovereignty is reasserted. The latter carries a considerable risk of substantial violence. The former carries a guarantee of even more substantial violence.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 09:06:27 PM EST
[ Parent ]
The dilemma of Portugal and Greece is reminiscent of the dilemma faced by the officers and men serving under a naval captain who seems to have gone mad. The problem is not just what their actions would lead to on the ship, but what the consequences would be once they attempted to rejoin society. Regardless of the facts, naval and civil authorities are highly reluctant to admit that there is ever justification for such action. Admission would constitute opening the biggest can of worms in existence. Yet every function on the ship is deteriorating towards collapse, led by morale and there is a deep fear that the captain may scuttle the ship, taking all hands down with it - Jim Jones fashion.

The fear of authorities of the undermining of authority is mirrored by the current crisis of legitimacy. Officially, accountability is to democratically elected officials, but we know that the accountability being protected currently is to the fraudulent wealth controlled by a tiny minority whose actions and folly has already set in motion the sinking of the ship. Yet, for governmental authority, fear of the wrath of the wealthy and the perils of the downfall of the existing, century old financial system overbalances concern for the lives of the population which that system is supposed to serve. So they will refuse to acknowledge the problem until they cannot.

The lessons from history seem to be that all revolutions turn into self devouring monsters that senselessly kill a horrifying number of citizens in the process of replacing an old system with a newer system that ends up being a new set of scoundrels operating a new system that still bears many of the faults of the old. Regardless of the rhetoric, the powerful always use power to their personal benefit.

The 'end of history' was just the ultimate conservative dream of eternal stasis. Stay tuned.  

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Mar 17th, 2012 at 09:02:11 AM EST
Yup. if there was any hope that, once JC Juncker, the last active politician involved in the Maastricht treaty, left office, the Euro rules would be reformed to make them more sane, the Euro crisis has dashed those hopes. The serious people have doubled down, dug their heels, and come up with an even more insane "Fiscal Compact". The responsibility for the mess is so extensive that nobody is going to accuse anyone else of being responsible. Only those who fall by the Darwinian wayside can be safely blamed.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 09:05:12 AM EST
[ Parent ]
The dilemma of Portugal and Greece

Because France is not Italy is not Spain is not Portugal is not Ireland is not Greece.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 09:06:13 AM EST
[ Parent ]
:-)  But Greece and Portugal are the first who are forced to confront the crises. Denial is still possible in Spain, Italy, Belguim, France, ....

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Mar 17th, 2012 at 09:14:53 AM EST
[ Parent ]
I wonder if France going down would finally change the discussion.  I used to think it undoubtedly would, but these people are exceptionally stupid.

To the point that I only half-jokingly said to Mig yesterday that the Troika won't get it until the car bombs start going off in Berlin and Frankfurt.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 17th, 2012 at 09:24:35 AM EST
[ Parent ]
If Hollande wins the French presidential election things get interesting agains... for about three months until he surrenders to the Austerians.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 09:35:42 AM EST
[ Parent ]
those that were most directly seen as the "centrist realists" in the socialist party - people like Attali or Peyrelevade - have now openly moved to support Sarkozy or Bayrou because they find the PS too dinosaury for their tastes.

So there is hope yet, I'd say.


Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:07:20 PM EST
[ Parent ]
At least part of the Troika get it: The IMF's preemptive smokescreen for covering up another foretold program failure (by Yanis Varoufakis). The question is why policy has such inertia that civil servants can continue pushing it forward when they can see it doesn't work. Something ARGeezer addresses upthread but doesn't really answer.

What is it, the fact that people in positions of responsibility prefer to ruin the institutions they are running than lose face by admitting a mistake and changing course?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 09:46:28 AM EST
[ Parent ]
To the ancient, traditional mindset, bravely holding your post while the world collapses around you is seen as noble while using your position to transform the system is seen as subversive. To subvert the system they serve is 'treasonous' and undercuts their own authority. The emergence of a new consensus, if it happens, is the only thing that could vindicate their actions.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Mar 17th, 2012 at 11:05:30 AM EST
[ Parent ]
The short answer is most people don't handle change very well and will not change their conclusions or actions based on new evidence.  The process is:

  1.  Ignore the New Evidence
  2.  Deny the New Evidence
  3.  Reject that the New Evidence will affect them in any way
  4.  Reject that the New Evidence will affect them to the same degree

Now add the fact political and other Decision Makers are highly addicted, physically and mentally 'attached,' to the status quo and it's easy to see why the EU is in a Real Mess©.


Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Sat Mar 17th, 2012 at 01:00:09 PM EST
[ Parent ]
Not just the EU, either.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Mar 17th, 2012 at 06:39:49 PM EST
[ Parent ]
Migeru:
What is it, the fact that people in positions of responsibility prefer to ruin the institutions they are running than lose face by admitting a mistake and changing course?

they've starved any other neural pathways than the canon they have espoused, they were selected for their capacity to be single minded 'true believers' and now that's all they know how to be, especially as that attitude is reinforced every time they open a E1000 bottle of wine and feel like they're getting away with the heist.

any critical thinkers (not team players) were thrown under the bus long ago, the filtering so efficient, now their bubble of delusional denial is as hermetic as is possible, and only the most gamechanging of events can irrupt it.

since the universe abhors stasis, that's exactly what they'll get, unless enough wise heads unite in a message that could be strong enough to capture mass attention and steer the ship away from the shoals.

heavily armed, extremely paranoid psychos have taken over the asylum, now it will take a correspondingly high level of survival intelligence to wrest back the control from them.

it is a very tricky, difficult situation.

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Sat Mar 17th, 2012 at 04:37:05 PM EST
[ Parent ]
The reason why they don't change course is because there are multiple actors involved and a few of them go along with the powerful who they believe have the wrong proscription out of hope that eventually they will come to their senses.

But this is a fool's game.

Even Varoufakis believes (with his constant beating of the drum for Eurobonds) that eventually Germany will change course. But it will never happen, not until it is way too late.

by Upstate NY on Sun Mar 18th, 2012 at 02:12:00 PM EST
[ Parent ]
Germany will change course only to preserve the Franco-German axis and it may be too late then.

My concern throughout has not been that some workable policy mix won't be find after all the wrong ones have been tried first, but the collateral damage inflicted before getting there.

The destruction of Greece is too much collateral damage for me, but of course one could argue that it's about 1% of the EU so it's not a serious loss if it stops at that. What I can't fathom is the callousness required for the Troika to formulate and execute the policy. You don't drive "one of us" to IMF riots, which indicates that Greece is not perceived as one of us in Brussels and Frankfurt and that is the real problem.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 05:13:10 AM EST
[ Parent ]
You don't drive "one of us" to IMF riots, which indicates that Greece is not perceived as one of us in Brussels and Frankfurt and that is the real problem.

Of course. Wasn't that clear from the beginning?

There is a tiny economic area (no, with a currency union that expression doesn't make sense). Start new: there is a tiny area that managed to break away from the old arch-enemy and chose us. It hasn't much of a business idea, but who cares? It's one territory and without question the centre has to transfer funds to the parts of the periphery that are at a disadvantage. Perhaps one day it will even be the other way round, who knows? You noticed that I am talking of the Saarland, I hope.

It just depends on the  definition of us, and that means the definition of the European idea.

by Katrin on Mon Mar 19th, 2012 at 05:43:20 AM EST
[ Parent ]
"Germany will change course only to preserve the Franco-German axis and it may be too late then."

Or will it?


Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Mar 19th, 2012 at 08:19:34 AM EST
[ Parent ]
That German-Russian scenario should make your mouth water with [Starvid's Rysskräck™ Technology] .

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 08:22:03 AM EST
[ Parent ]
Closer security relations with Poland certainly seems very reasonable from a Swedish point of view.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Mar 19th, 2012 at 08:25:16 AM EST
[ Parent ]
I thought after the email-leak everybody agreed that stratfor are a bunch of jokers?

German-polish relations haven't been as good as now since the siege of vienna.

by IM on Wed Mar 21st, 2012 at 07:16:53 AM EST
[ Parent ]
And thank god for that! :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Mar 21st, 2012 at 01:20:24 PM EST
[ Parent ]
Jobs for everyone at the Heimatschutzministerium!

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Sat Mar 17th, 2012 at 11:56:05 AM EST
[ Parent ]
Paul Krugman was in Lisbon last week to receive three honoris causa PhD and openly advise Greece to leave the Economic and Monetary Union, something taken as a smooth advice to Portugal in the same direction. This is something that can only be accomplished by using the Lisbon Treaty mechanism to leave the EU.

False. One can simply print scrip, accept it in payment for taxes, and pass laws obviating all debts in the former legal tender.

To the case, the motivations behind Paul Krugman's call to a break of the EU

He is not. He is calling for breaking the Eurozone, which is not the same as breaking the EU.

There have been many cases of countries defaulting on external creditors and/or experiencing hyperinflation; there are some folk swift in making comparisons with previous cases to defend particular views. The reality is that no country ever left a monetary union like the Eurozone, after an exceptional period of 25 years of economic transformation towards the tertiary sector and at a time when oil prices are at 90 €/b.

Translation: No historical circumstance precisely matches current circumstance, so I'll invent an arbitrary set of criteria based on personal hobby horses more than underlying economic analysis to justify disregarding the overwhelming historical experience.

Following is a ran down of how things could develop in a smaller Eurozone state that decides to leave the EU.

Day One - Run on the Banks

Already happening. Stopping it is actually more feasible when one abandons silly notions like money mobility and intra-EU interbank obligations, and moves to explicit hard currency rationing.

Further, a Eurozone exit means that the sovereign can back domestic depository functions with its unlimited ability to print its own currency. So actually, leaving the common currency enhances, not diminishes, the tool available to deal with the domestic banks.

To this most economic analysts are arriving too. Facing the hypothesis of a devaluation of their savings, citizens try to get their money out of the bank or out of the country, into a currency insulated from the downward spiral, inevitably the Euro itself.

So what? The government has no obligation to guarantee risk-free real return on people's savings.

Things like this happened in Argentina and Mexico, and notably last year in Iran. By the end of the day capital controls have have to be fully re-established, most banks are forced to close doors and whatever value the government fixed the new currency on is now irrelevant.

The government does not fix the value of the new currency. That's the whole point of leaving a currency union. There is no reason to leave the union and then re-establish a peg. That's just silly.

If this happened in Greece, for instance, it would spread the same day to Portugal, or vice-versa. Ireland would be the next in line, then Spain and after Italy;

Again, so what?

the EU institutions would face great difficulties to deal with the pace of events.

The EU institutions "faced great difficulty in dealing with the pace of events" two years ago. Today they are not facing any great difficulty, because they are not dealing with the events that actually unfold, preferring to retreat to more comfortable fantasies.

Day Two - Bankruptcy tsunami

The following consequence of the re-introduction of an old currency is a massive bankruptcy. Most banks and companies have now assets denominated in the new currency, which lost the largest part of its value, but are indebted to foreign banks in Euros;


No. Part of converting to a new currency is to convert all debts resolved under domestic law or owed by debtors living under domestic jurisdiction to the new currency. Unilaterally, and at some fictitious exchange rate.

Most folk have become unemployed, or otherwise have lost a real salary.

Yes, that happened two years ago.

Outside, most other Eurozone members have had to impose some sort of capital controls too;

Yes. When Germany employs protectionist wage dumping, other countries must employ protectionist capital controls. This is a consequence of German protectionism, not of a Greek defense against that protectionism.

Day Three - Economic paralysis

Most economic activity is gone.


That happened six months ago.

Internally most companies are now insolvent,

No, internally all companies are solvent, because their debt is inflated and devalued away overnight.

and from abroad no one is willing to negotiate while the new currency doesn't stabilise. Capital controls themselves impose a serious barrier on foreign trade that can't be overcome fast enough. The break away state understands that it is now an island, and an isolated one.

False. Foreign trade remains perfectly possible, but only on a balanced budget basis. Hard currency must be rationed, of course, and so must certain essential imports such as fuel. But this is already the case, and has been the case for some months now.

Fresh fruits and vegetables start to disappear from store shelves;

Yes, you'll have 18-24 months of rationing and quasi-wartime economy.

Greece has been living under a quasi-wartime economy for 24 months already. If they had gone full Argentina the second it became clear that Germany would not print all the money the Eurozone needed to inflate away the unsustainable debts, they would be through the crisis already, and they would have suffered less in the process than they already have, nevermind what is to come.

If you think something like isn't possible consider that late last year, in the wake of the creditor haircut and the aborted referendum, Greece was only being able to get petroleum from Iran, a country living similar foreign confidence issues.

You assume that the exit happens on someone else's time table. Which it only does if Greece does not make it happen on their own time table. If it happens on Greece's time table, they will be able to institute wartime rationing of essentials.

Capital controls introduced in advance, curfew, rationing, all can help avoid this worst case scenario. But none of it is good, more than that, none of it would leave the break away state better than in the EU.

This is simply false, unless the EU embarks on a massive policy of inflation and public spending, which the EU will not do.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 09:31:22 AM EST
Or you could just read what Drew and Mig wrote, which I clearly hadn't before I fisked it.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 09:37:05 AM EST
[ Parent ]
Third time's a charm.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 09:39:48 AM EST
[ Parent ]
other redistribution policies are possible.

That's also true within the euro. It is possible to have policies causing both public and private sector surpluses in intra-deficit countries, they're just not very bank-friendly or business-friendly.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 11:17:31 AM EST
[ Parent ]
You're ignoring the intra-EU cross-border redistribution problem, the infamous fiscal transfers that are the only way of sustaining persistent intra-EU trade balances. The issue which all the serious people keep running away from.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 01:25:00 PM EST
[ Parent ]
I'm not ignoring it, I'm saying it should have been solved, as it could have been, through private default.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 06:56:08 PM EST
[ Parent ]
Given that it wasn't solved and it continues to not be solved and it continues to grow and now, with the breakdown of the interbank lending system, it shows up in internal Eurosystem central bank balances... I think we have a problem.

But never mind, if you think the way to solve a balance of trade imbalance is serial private default once every 10 years or so...

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:00:37 PM EST
[ Parent ]
It just needs to happen once to make the problem much smaller for a much longer time the next time round - i.e. vendor finance because harder to find, and German exports become less attractive.

But basically we still get to the point that growth in some parts of the eurozone was based on unsustainable debt-funded consumption.

We know how to do debt-funded investment (EINB without the need for national co-financing, or not as much), and we know how to make debt funding of consumption painful for the lenders.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:09:47 PM EST
[ Parent ]
But basically we still get to the point that growth in some parts of the eurozone was based on unsustainable debt-funded consumption.
You conveniently gloss over the fact that the Eurozone's institutional makeup restricts public sector debt but leaves private sector debt unrestricted on the premise that the market will provide. Evidently, not only is that legal framework nothing but condensed neoliberal ideology, but unrestricted risks will give rise to profit opportunities that will be exploited by economic agents. So private vendor finance of German exports fuelling a bubble of elephantine proportions was a plausibly predictable outcome of the Eurozone's own institutional construction. And nothing is being made to address that. They're doubling down on the dismantling of the public sector which was a predictable consequence of the Maastricht Treaty.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:23:28 PM EST
[ Parent ]
There is a simple solution to stupid private lending: bankrupcty (ie debt cancellation). Nothing in the European treaties prevented that solution.

And nothing prevented countries from regulating lending more stringently inside their borders. It's "anti-growth" so it usually doesn't happen, but that's the point, isn't it? We can't seem to do the right thing if it costs us anything in the short term.

The grip of our financial world on our politicians (and minds) is what prevented that solution from happening.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:32:52 PM EST
[ Parent ]
It's "anti-growth" so it usually doesn't happen, but that's the point, isn't it?

You seem to forget that there are real people whose livelihoods, why, whose lives, are being ground to a bloody pulp because of "anti-growth" policies currently being imposed by the EU.

If what it takes for people to be able to not starve is nominal GDP growth and some inflation, fuck, why isn't it happening? Why do we have pro-growth policies only when it benefits the oligarchy?

Because sure as hell being "anti-growth" doesn't appear to be a political negative these days.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:37:02 PM EST
[ Parent ]
other redistribution policies are possible.

That's also true within the euro.


Within the Euro you need a qualified majority. Outside the Euro, you can impose such redistribution unilaterally.

The question comes down to whether the state or federal level in Europe is the more effective economic planning unit. And since the federal level has taken a twenty-five-year ride on the "hard money" crazy train, well...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 08:17:14 PM EST
[ Parent ]
Yes, you'll have 18-24 months of rationing and quasi-wartime economy.


Hi Jake, your detailed rebate echoes most of the concerns expressed so far in the fountain of comments this post has spawn. This particular assertion is the most problematic to me, if a state like Greece leaves the EU there wont be any short-term recovery. Moreover, things like a long term shortage of fuels can perform social transformations that may not even be possible to reverse.

The lack of internal production on the primary and secondary sectors, and the cut off from external markets would impose problems that couldn't be solved either easily or fast. True, a lot can be done at the community level, but the impoverishment would still be huge. The best parallel I can draw is with what happened to Cuba and North Korea once the USSR collapsed. Cuba managed to reform itself but it took about a decade; North Korea never really came back.

Vencit omnia veritas.
by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Sat Mar 17th, 2012 at 02:18:00 PM EST
[ Parent ]
if a state like Greece leaves the EU there wont be any short-term recovery

Whereas there will be one if it stays?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 02:19:37 PM EST
[ Parent ]
Cuba managed to reform itself but it took about a decade; North Korea never really came back.

I must strenously insist this is wrong. Greece and Portugal are, all their weak sides granted, still modern capitalist economies full of hard-working entrepenurial innovative people (as long as they have jobs), who have created excellent business before and will do so again, as soon as the EU allows them too.

Cuba and North Korea on the other hand, are worhless commie dictatorships, shackling their own people and preventing them from initiating any kind of enterprise. These countries would not be able to export anything even if they devalued their currencies to Hell and back. I mean, useless Cuba, famous for sugarcane, dirt poor labourers and oil shortages, even managed to entirely miss out on the sugarecane ethanol boom!

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Mar 17th, 2012 at 04:21:44 PM EST
[ Parent ]
Greece and Portugal are, all their weak sides granted, still modern capitalist economies full of hard-working entrepenurial innovative people (as long as they have jobs), who have created excellent business before and will do so again, as soon as the EU allows them to[].

That is rather the point, isn't it? The EU is part of the solution only insofar as it can stop being the problem.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 05:55:21 PM EST
[ Parent ]
It sure is. We've seen the enemy, and he is us.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Mar 17th, 2012 at 06:30:54 PM EST
[ Parent ]
Not everyone appears to agree, yet.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 06:49:26 PM EST
[ Parent ]
if a state like Greece leaves the EU there wont be any short-term recovery.

If Greece fails to leave the Euro, there will be no state of Greece that can experience a recovery. Long or short term.

We're two years late and twenty percentage points of unemployment short for the "keep the Euro" side of this discussion to have any rational basis in observable reality.

Moreover, things like a long term shortage of fuels can perform social transformations that may not even be possible to reverse.

Yeah, being a structural trade deficit country with a strategic import dependency on food or fuel sucks.

Now please tell me how allowing the ECB to destroy your society, government and economy will make that better?

The lack of internal production on the primary and secondary sectors, and the cut off from external markets would impose problems that couldn't be solved either easily or fast.

You keep talking about this mythical state of being "cut off from external markets" as if it had been actually observed anywhere in history as a result of a sovereign default and de-pegging.

It hasn't. Stop scaring people with monsters under the bed. It's fundamentally dishonest.

True, a lot can be done at the community level, but the impoverishment would still be huge.

The improverishment is already huge.

The best parallel I can draw is with what happened to Cuba and North Korea once the USSR collapsed.

You need to make an actual positive case for that before I'll even bother pointing out all the obvious reasons that comparison is horseshit. With plenty of historical counterexamples.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 08:28:10 PM EST
[ Parent ]
Opportunistic speculation and long queues lead to the first serious break ups of civil order.

On their way back from the supermarket to home folk notice that long queues have also formed on every service station. But it is too late, in a few hours there's no road fuel left in and around large cities. Emergency and Security services are overwhelmed, both by the number of occurrences and the lack of fuel; civil order is just a memory now.


This passage, in particular, is farcical. Have you been paying attention to the news from Greece lately? At all? The actual news, as reported by people who actually have feet on the ground there, as opposed to regurgitated Troika press releases?

The Greek government is barely the government of the parliament building and immediate environs. "Civil order" has been a memory for so long the memory itself is fading.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 09:47:36 AM EST
Have any of you people who blithely say that bank runs "are already happening" have any idea what bank runs are? Especially nation-wide ones?

Seepage is what's been happening to date. Bank runs? Not so far.

Russia in the early 90s is the closest example I can think of, and it's not pretty - and it goes rather beyond what's happened to date, even in Greece.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 11:13:31 AM EST
[ Parent ]
Seepage is what's been happening to date.

Did Alan Greenspan hack J's account?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 17th, 2012 at 12:10:14 PM EST
[ Parent ]
Have you been in a nationwide bank run?

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 12:40:00 PM EST
[ Parent ]
Maybe we should send you on a fact-finding mission to Greece...

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 01:50:02 PM EST
[ Parent ]
If by that you mean people standing outside banks looking to pull their deposits, no, I haven't.  (There were a couple cases of it at regional banks, but not on a nationwide scale.)  I don't accept the premise that this is what a modern bank run looks like.  It's 2012 in Europe, not 1992 in Russia.

I do remember the run on the money markets in 2008.

If you're looking for people rushing to the banks to pull out their cash, you're not going to find it.  We kind of put a whole new section of the federal government together to prevent such things, which worked as it was supposed to even as some of our largest banks were failing.

Do you not think a traditional (as you have in mind) run on the banks occurs as WaMu, Wachovia, et al, fail without the FDIC and others there to back regular people's deposits, and without constant assurances (and demonstrations) from all the relevant players that deposits were secure?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 18th, 2012 at 09:20:28 AM EST
[ Parent ]
Only because of the ECB's liquidity policies.

Bank runs in this day and age don't involve queues and riots in front of bank branches. Unless you're England.

But the banking system remains completely broken in the 5th year of the crisis. We have had "quiet deposit flight" both at the individual bank and at the country-wide level throughout, in fits and starts.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 01:23:05 PM EST
[ Parent ]
Well Jerome is right. There have been considerable currency transfers out of Greek banks, but there have been no bank runs. Which is a great mystery actually, as a bank run would be the rational thing at this stage.  If I had euros in a Greek bank account, I'd transfer them out of the country ASAP. There was actually an interesting recent interview with Bengt Dennis, head of the bank of Sweden during the early 90's, where he said that very thing.
   
   
   
-Det som förvånar mig mest är att grekerna inte har stormat bankerna. Det är märkligt. Uttagen har hittills skett i slowmotion. Frågan är vad som händer om det inträffar.

Den euro man tar ut måste väl vara säker?

-Nej, det behöver den inte vara. Regeringen kan bestämma att från klockan 00:00 ett visst datum ska alla eurosedlar och pengar på grekiska bankkonton växlas in till den nya valutan, till en fastställd kurs.

Kan de verkligen göra det?

-En regering kan göra vad som helst. Se på Östtyskland, där fick varje medborgare växla in en viss summa mot D-mark. Men det kommer inte att hända något med Grekland förrän Italien och Spanien står trygga. De är för stora ekonomier för att de ska tillåtas falla. Men ju säkrare de länderna står, desto lättare blir det att släppa Grekland. Det finns en risk för att även Portugal dras med.

- What has surprised me the most is that the Greeks haven't staged a run on their banks. It is strange. The withdrawals have this far happened in slowmotion. The question is what will happen when it [a run on the banks] happens.

But the euro you withdraw [in Greece] must be secure?

- No, it doesn't have to be. The government can decide that from 00:00 a clock at a certain date, all euro notes and money on Greek bank accounts will be exchanged for the new currency, at a certain exchange rate.

Can they really do that?

- A government can do anything. Look as East Germany, where every citizen was allowed to exchange a certain amount for D-marks. But nothing will happen with Greece until Italy and Spain are safe. They are too big economies to be allowed to fail. But the safer those countries become, the easier it will be to drop Greece. There is a risk Portugal as well be dragged down with it.

I really should translate the entire interview as it is really interesting.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Mar 17th, 2012 at 04:40:08 PM EST
[ Parent ]
There have been considerable currency transfers out of Greek banks, but there have been no bank runs. Which is a great mystery actually, as a bank run would be the rational thing at this stage.  If I had euros in a Greek bank account, I'd transfer them out of the country ASAP.

I think you're interestingly wrong.

First, the circumstantial evidence:

German banks target worried Greeks in Germany

Greeks worried about a debt restructuring or a euro exit increasingly transfer their money to banks abroad, Bild-Zeitung reports. According to the mass circulation tabloid German banks such a savings bank in Munich have posted signs in their windows advertising in Greek and German that Greek costumers will be advised in Greek. According to the paper €30bn have already been transferred from Greece abroad since the crisis started.

(May 2011)

So that's 30 billion in a year, easily 15% of GDP.

Now let's look at Target2 balances:

... The first point to clarify is that there appears to be absolutely no correlation between the current account data of Greece and the TARGET2 balances.  In fact, Greece has been running a constant CAD since it joined the Euro, yet TARGET2 balance discrepancies didn't start showing up until 2008 which is the time Greece's CAD actually began to improve.

(Professor Sinn strays off target, 14 March 2012)

It does look like a run on the country to me. And in fact it started in 2008 because of the generalised flight to safety that started then.

It's only because of the existence of the European System of Central Banks that we haven't actually seen an Albania-style (forget Russia, that's for wimps) banking crisis in Greece.  Of course the German economic establishment is making noises about how they would like to actually use the Target2 balances to cause just such a crisis in the European periphery.

So, I'm sorry to say, both you and Jerome are wrong on this one. I said interestingly wrong because you'd be right before about 1970 when electronic banking started (I'm taking the emergence of ATM technology as a watershed).

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 06:08:08 PM EST
[ Parent ]
That's not a run, that's a walk.

A bank run does mean people hysterically fighting to enter into banks to gain physical access to cash or to their accounts. On a national scale. I saw that happen in Moscow (in that case they changed banknotes over night and people were only allowed to change a small number of the larger banknotes - those that everybody used for non-dollar savings - per person, it's not pretty. That where you see exchange rates move on an hourly basis or more frequently, and people get desperate and do desperate things.

That happened at least twice in 92-93. Then in 98 you had another kind of run - the internal kind, with banks closing overnight and savers losing it all (but well-informed insiders allowed to withdraw money before doors closed. Several of my Russian friends who were supposed to come to my wedding in September 1998 did not make it because they were ruined or too busy trying to salvage some of their assets.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:01:58 PM EST
[ Parent ]
What do you call the loss of access of French banks to Eurodollar liquidity last August? Also a walk?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:04:32 PM EST
[ Parent ]
Nothing which could not be resolved by timely central bank intervention to maintain financial stability, which after all is the job of central banks.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Mar 17th, 2012 at 07:06:43 PM EST
[ Parent ]
You know as well as I do that's not the job of the Bundesbank, or of the ECB as understood by the Bundesbank.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:08:22 PM EST
[ Parent ]
Still, they did intervene and they did resolve the issue.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Mar 17th, 2012 at 07:14:55 PM EST
[ Parent ]
Well, yes, as long as it's banks and not sovereigns that are being liquidity-squeezed, it's all right.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:16:34 PM EST
[ Parent ]
That's a US problem, not a eurozone problem, in that they don't have a banking system that does infrastructure funding and have to rely on outsiders, whom they can on a whim decide are not trustworthy, thereby shooting themselves (and them alone) in the foot in the process. Why should we care whether European banks get access to dollars or not?

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:12:05 PM EST
[ Parent ]
I beg to differ. The French banks would have keeled over were it not for emergency operations such as this because the ECB itself didn't have enough dollars to backstop the dollar liquidity needs of the French banks once the Eurodollar deposits evaporated.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:15:40 PM EST
[ Parent ]
And the intervention happened. Even a broken clock shows the right time twice a day.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Mar 17th, 2012 at 07:18:12 PM EST
[ Parent ]
Yes, intervention by the Fed (not by the ECB, but through the ECB, for practical reasons) to save their part of the system.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:22:57 PM EST
[ Parent ]
The ECB was not doing their job. What American institutions were being saved, when it was the French banks that had the liquidity problems? Who was rescued from the impending doom of missing payments on USD interest rate swaps?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:26:44 PM EST
[ Parent ]
The US money markets were rescued.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:29:40 PM EST
[ Parent ]
So, no wrong was going to befall any French institutions after defaulting on their dollar obligations?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:33:41 PM EST
[ Parent ]
why the fuck do you keep on putting in my mouth things I haven't said?

Of course they'd be in deep shit, as in officially bankrupt, but then there's nothing preventing their regulator from taking them over and letting creditors live with that - especially foreign creditors in a foreign currency (they'd probably get access to the USD portfolio, which are probably decently sound, and that would actually be settled relatively easily). The  euro-side bankruptcy would be a good thing, by forcing the dezombiefication of the bank, but that would make the wrong people unhappy - again, less of a problem for France, which could nationalize the local bits and just let the international stuff become a bad bank, à la Dexia (where Belgium took back the retail/local bank), but without the state guarantees.


Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:44:07 PM EST
[ Parent ]
Because you keep pretending it was just the US that had a problem here. It was the Europeans who were rescued from default.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:46:55 PM EST
[ Parent ]
Why should we care whether European banks get access to dollars or not?

Hello? <facepalm>

Because they have large asset portfolios denominated in US Dollars which require access to dollar funding?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:18:02 PM EST
[ Parent ]
Again, why should we care. The only people that would suffer if the European banks could not rollover their dollar funding were the US money markets who lent them these dollars.

Sure, that could turn systemic, but you keep on explaining that central banks have ways to solves systemic problems. and in that case, that would have been the job of the Fed, which is supposedly sane.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:25:49 PM EST
[ Parent ]
I submit the situation would have been French (not American) banks defaulting on their US Dollar obligations, which is a problem for the Banque de France and by Extension the ECB which had to be rescued by the Fed.

You'll remember Dean Baker's Time for the Fed to Take Over the European Central Bank's Job

In this case the Fed would be intervening in the European economy for the same reason as China - to sustain our domestic economy. If the eurozone collapses, there are no easy tools in the Fed's bag of tricks that will allow it to quickly offset the negative impact on the U.S. economy. It would make far more sense to act preemptively to prevent this disaster from happening. This can be seen as an essential part of its legal mandate to maintain full employment.

Of course this sort of intervention will look horrible from the standpoint of the eurozone countries. It will appear as though they cannot be trusted to manage their own central bank and deal with their own economic affairs.

Unfortunately, this is the case. They have entrusted the continent's most important economic institution to a group of ideological zealots who are infatuated by the sight of low inflation rates even as whole economies collapse in ruins and tens of millions of people needlessly go unemployed.

Perhaps the Europeans will respond to this affront by putting some serious people in charge of the ECB who are committed to maintaining a functioning economy in the eurozone.  If that is the outcome, it will be a win-win for all involved. But if they can't rise to the task, we should not allow the ECB ideologues to wreak havoc on the lives of tens of millions of innocent people in Europe, the developing world and here in the United States.



There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:29:36 PM EST
[ Parent ]
I guess we're not in a crisis, then, just a hiccup.

See you at the other side of the Depression, maybe in 2025...

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:05:13 PM EST
[ Parent ]
saying there  are no "bank runs" as such is not saying that it's not a crisis, just being a bit less hyperbolic. Your point below that the financial system is broken is correct.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:22:07 PM EST
[ Parent ]
Still, there are bank runs. The fact that there isn't an interbank market means there are runs on most banks, being papered over by the ECB.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:25:09 PM EST
[ Parent ]
well yes, back to the core problem, which is bankrupt banks whose bankruptcies have not yet been acknowledged. Zombie banks, and we are sacrificing our economies to save their creditors.

This is not a euro problem, this is a massive scale redistribution problem. The only euro problem I see is that we proved that we can't have euro-zone convergence the easy way, i.e. via private-debt fueled consumption. It needs t be public transfers for investment.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 17th, 2012 at 07:28:10 PM EST
[ Parent ]
It needs to be public transfers for investment.

I submit this is, in practice, forbidden by the Eurozone's constituent regulations.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:30:34 PM EST
[ Parent ]
Even if you'd cancel out all the debt by having the banks write down their loans, you'd still have a number of periphery nations who just aren't competitive, and who won't bounce back until the EU lets them, or we wait out the grinding internal devaluation, which eventually will result in full employment. In the long run.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Mar 17th, 2012 at 07:31:06 PM EST
[ Parent ]
who won't bounce back until the EU lets them

I'm not holding my breath.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:31:41 PM EST
[ Parent ]
grinding internal devaluation, which eventually will result in full employment. In the long run.
Sorry, no.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:32:16 PM EST
[ Parent ]
Sooner or later the resistance to nominal wage cuts will fade (when the pain gets intense enough), salaries will fall, and you'll see an export-led resurgence. But if this will require 3 years of recession or 10, is an open question.

But I think it far more likely that before the levels of pain needed to achieve that are reached, countries will choose to leave the Eurozone.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Mar 17th, 2012 at 07:36:44 PM EST
[ Parent ]
People will die f lack of health care before "competitiveness" is restored.

I have made the point repeatedly that the same worker is very much more productive with better physical plant. Therefore, there are two ways to "improve" accounting measures of worker productivity. To punish the worker for having to work with crap equipment, or to invest in improving their equipment.

The capitalists who decided to not invest in proper equipment in the first place are not punished, only the workers who had no say in the matter.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:39:41 PM EST
[ Parent ]
there are two ways to "improve" accounting measures of worker productivity

Which are not mutually exclusive.

The capitalists who decided to not invest in proper equipment in the first place are not punished, only the workers who had no say in the matter.

The capitalist which does not run a successful plant will go broke and lose the thing that makes him a capitalist: his capital.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Mar 17th, 2012 at 07:42:26 PM EST
[ Parent ]
The capitalist which does not run a successful plant will go broke and lose the thing that makes him a capitalist: his capital.

Hmm, limited liability and political connections.

We're talking oligarchy here.

And when their country goes to hell the government borrows from the IMF in order to prop the exchange rate long enough for them to get their savings out at a favourable rate. Or, in the case of the Eurozone, the government refuses to institute capital controls and accepts "rescue" after "rescue" while the oligarchs decamp to Luxembourg with their money.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:45:52 PM EST
[ Parent ]
Also, after 3 to 5 years of depression the physical plant itself is degraded beyond repair (like a tissue starved of blood gets gangrenous or necrotic). Then there's no wage level that will restore competitiveness because the job is lost.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:43:49 PM EST
[ Parent ]
Low salaries beget new investment, and if the domestic capitalist are bled dry, it will come in the form of foreign direct investment.

Anyway, much plant (except in heavy industry) becomes outdated and is written off pretty quickly, even if not in 3 years.


Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Mar 17th, 2012 at 07:48:22 PM EST
[ Parent ]
Low salaries beget new investment, and if the domestic capitalist are bled dry, it will come in the form of foreign direct investment.

Want to bet on how long it takes for FDI into Greece to pick up? Do you think it makes a difference how many people die of the effects of economic depression in the interim?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:51:01 PM EST
[ Parent ]
This is a perfect instance of in the long run, we're all dead. For rather short values of long run.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:51:50 PM EST
[ Parent ]
If you can't fund basic services to the degree that it results in mass casualties, you'd better start raising taxes.

But this doesn't change what I say. Even if you get an increased mortality, you will eventually return to full employment via salary cuts. It won't be fun and it won't be pretty and most importantly it will be a really stupid way to do things, but eventually you will reach full employment.

I'm not arguing this is the good way to do things, I'm just saying that eventually that's what will happen, even if I also think the devaluation road is far more politically likely (and a lot smarter).

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Mar 17th, 2012 at 07:55:20 PM EST
[ Parent ]
If you can't fund basic services to the degree that it results in mass casualties, you'd better start raising taxes.

You know the reason basic services in Greece are failing is not the taxes have not been raised. But, of course, the middle of a recession is the wrong time to fire your doctors and nurses and raise taxes on everyone else.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:57:44 PM EST
[ Parent ]
You know I don't disagree with you here. I am after all a Keynesian.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Mar 17th, 2012 at 08:02:02 PM EST
[ Parent ]
You sound a lot like a Samuelsonian.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 08:02:33 PM EST
[ Parent ]
Who just happened to be one of the most influential Keynesian economists ever.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Mar 17th, 2012 at 08:06:07 PM EST
[ Parent ]


Austerity can only be implemented in the shadow of a concentration camp.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 08:49:50 PM EST
[ Parent ]
Then, neither is Paul Krugman. But I suppose you prefer Joan "North Korea" Robinson?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sun Mar 18th, 2012 at 09:39:11 AM EST
[ Parent ]
Krugman is indeed a neoclassical rather than a Keynesian.

I don't know Robinson, but from a cursory perusal of Google, her contributions to economic theory look respectable enough.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 18th, 2012 at 11:29:34 AM EST
[ Parent ]
Sigh... It is not really helpful to the clarity of the debate to invent new definitions whom no one use, but yourself.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sun Mar 18th, 2012 at 01:51:00 PM EST
[ Parent ]
It's not conducive to debate to accept and repeat neoclassical newspeak.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 19th, 2012 at 05:58:42 PM EST
[ Parent ]
What kind of an argument is that?

What if we call him Paul "Mahathir" Krugman?

Milton "Pinochet" Friedman was correct that monetary contraction made the Great Depression worse.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 04:56:27 AM EST
[ Parent ]
And still, people complain over Friedman advising Pinochet on economic issues, all the time.

While I haven't read any of Robinsons texts (and I should), I kinda find it hard to believe that someone who thought the Cultural Revolution was an excellent idea from a social and economic point of view, really has any reality-based advice to offer us,

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Mar 19th, 2012 at 08:22:38 AM EST
[ Parent ]
Wikipedia: Joan Robinson
Initially a supporter of neoclassical economics, she changed her mind after getting acquainted with John Maynard Keynes. As a member of "the Cambridge School" of economics, Robinson assisted with the support and exposition of Keynes' General Theory, writing especially on its employment implications in 1936 and 1937 (it attempted to explain employment dynamics in the midst of the Great Depression).

In 1933, in her book, The Economics of Imperfect Competition, Robinson coined the term "monopsony," which is used to describe the buyer converse of a seller monopoly.

In 1942 Robinson's An Essay on Marxian Economics famously concentrated on Karl Marx as an economist, helping revive the debate on this aspect of his legacy.

During the Second World War, Joan Robinson worked on a few different Committees for the wartime national government. During this time, she visited the Soviet Union as well as China. She developed an interest in underdeveloped and developing nations and contributed a lot that is now understood in this section of economics.

In 1949, she was invited by Ragnar Frisch to become the vice president of the Econometric Society but declined, saying she couldn't be part of the editorial committee of a journal she couldn't read.

In 1956, Joan Robinson published her magnum opus, The Accumulation of Capital, which extended Keynesianism into the long-run. Six years later, she published another book about growth theory, which talked about concepts of "Golden Age" growth paths. Afterwards, she developed the Cambridge growth theory with Nicholas Kaldor. During the 1960s, she was a major participant in the Cambridge capital controversy alongside Piero Sraffa.

Close to the end of her life she studied and concentrated on methodological problems in economics and tried to recover the original message of Keynes' General Theory. Between 1962 and 1980 she wrote many economics books for the general public. Robinson suggested developing an alternative to the revival of classical economics.

At least two students who studied under her have won the Nobel Prize in Economic Sciences: Amartya Sen and Joseph Stiglitz.

Also, Robinson made several trips to China, reporting her observations and analyses in China: An Economic Perspective (1958), The Cultural Revolution in China (1969), and Economic Management in China (1975; 3rd ed, 1976), in which she praised the Cultural Revolution. She also stated in reference to divided Korea that "[o]bviously, sooner or later the country must be reunited by absorbing the South into socialism." These statements caused significant damage to her reputation, and possibly cost her the Nobel Prize for Economics. During her last decade, she became more and more pessimistic about the possibilities of reforming economic theory, as expressed, for example, in her essay "Spring Cleaning".

Quite an intellectual trip, I must say.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 08:32:17 AM EST
[ Parent ]
...is a dangerous thing:

All PDF. Harcourt appears to be the author of a major book on Post-Keynesian economics: The Structure of Post-Keynesian Economics: The Core Contributions of the Pioneers in which Joan Robinson features majorly.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 19th, 2012 at 08:46:11 AM EST
[ Parent ]
And still, people complain over Friedman advising Pinochet on economic issues, all the time.

Friedman was on the record as saying that he preferred a "free market"(sic) dictatorship over democratic socialism.

This bears pointing out, repeatedly, because there is this persistent mythology that right-wingers are pro-democracy.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 19th, 2012 at 06:18:43 PM EST
[ Parent ]
Right-wingers are pro-Democracy™ - which has the same relationship to real democracy that Rupert Murdoch has to quality journalism.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Mar 19th, 2012 at 07:33:42 PM EST
[ Parent ]
How ducky wonderful the compares:

United States GDP per capita:  $48,147

Nasty socialist scumbags from the Frozen North:

Nordic countries GDP per capita: $62,959

My case.

It rests.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Mon Mar 19th, 2012 at 07:46:30 PM EST
[ Parent ]
Think that's household GDP, not per capita.

Unless both regions are doing a helluva lot better than I thought. :)

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 20th, 2012 at 05:50:54 AM EST
[ Parent ]
Are you implying the economic systems of the Nordic countries have more in common with North Korea than with the US?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 20th, 2012 at 08:11:03 AM EST
[ Parent ]
That would be the Republican view.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 20th, 2012 at 08:12:45 AM EST
[ Parent ]
As your signature mentions, the Republican story is not always the same as the truth.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 20th, 2012 at 08:37:33 AM EST
[ Parent ]
The Stockholm Syndrome Pt. 1 - The Daily Show with Jon Stewart - 04/21/09 - Video Clip | Comedy Central
The Stockholm Syndrome Pt. 1 Wyatt Cenac travels to Sweden to wake up their hauntingly thin citizens from their socialist nightmare.


A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Tue Mar 20th, 2012 at 08:37:39 AM EST
[ Parent ]
Sweden is often compared to Germany (high CA surplus, hi-tech manufacturing and so on), but one interesting difference is that while German real wages have stagnated for the last decade, Swedish real wages have increased by 20% during the same period.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 20th, 2012 at 10:09:27 AM EST
[ Parent ]
According to CIA facts 2011, GDP average per cap, USA = 48.000 bucks, Scandinavia + Finland = 42.000.

You can't be me, I'm taken
by Sven Triloqvist on Tue Mar 20th, 2012 at 08:33:56 AM EST
[ Parent ]
But of course by the time you throw in free education, free healthcare and affordable, practical public transportation, we Nordics are way ahead.

As usual, GDP doesn't tell us that much.

You can't be me, I'm taken

by Sven Triloqvist on Tue Mar 20th, 2012 at 08:36:59 AM EST
[ Parent ]
eventually you will reach full employment.
If you kill enough people, eventually the remainder will be employed
I'm not arguing this is the good way to do things, I'm just saying that eventually that's what will happen
Well, I am arguing the EU is acting as a force of evil, and in large part it is because the institutions are designed to act this way. It would take courageous civil servants and politicians to not do what they-re doing, since they could plausibly be accused of breaking the letter of the EU treaties and regulations.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 08:00:10 PM EST
[ Parent ]
I'm not arguing from a moral point of view here. If I did, well, sure, I agree that the ECB is acting very badly. And stupidly.

But that does not change the argument about what would eventually happen, as it is not a normative argument. And furthermore, you know just as well as I do that equilibrium would not be achieved by the unemployed starving to death.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Mar 17th, 2012 at 08:04:39 PM EST
[ Parent ]
equilibrium would not be achieved by the unemployed starving to death

You're right: they are, and it isn't.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 08:06:02 PM EST
[ Parent ]
Sooner or later the resistance to nominal wage cuts will fade (when the pain gets intense enough), salaries will fall, and you'll see an export-led resurgence.

No, you will see another wave of plant closures as the deflationary impact of protectionist wage dumping hits the balance sheets of firms that in any properly managed macroeconomy would be fundamentally sound.

And then you will see a trade war, not totally unlike the good, old-fashioned sort with import duties and customs barriers. Except instead of competing to see who can raise import duties higher before their domestic economy starts breaking for lack of raw materials, we'll be seeing who can raise unemployment higher before their democracy breaks from paramilitary organisations being the only viable career prospect for anybody born after 1990.

And unlike the counterfactual presented of the in the diary body, this is a repeatedly observed and well described phenomenon.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 08:48:29 PM EST
[ Parent ]
VoxEU: The Central Bank as the Market Maker of last Resort: From lender of last resort to market maker of last resort (13 August 2007)
When banks were the main providers of credit, the financial stability mandate of central banks could be summarised as their lender of last resort function: in times of crisis, lend freely, at a penalty rate and against collateral that would be good in normal times but may be impaired in times of crisis.1 The counterparties of the central bank in these lender of last resort operations were commercial banks (shorthand for deposit-taking institutions whose main liabilities were deposits withdrawable on demand and subject to a sequential service (first-come, first served) constraint. Their main assets were illiquid loans. This financial structure invited bank runs when confidence in the banks was undermined, for whatever reason. In the days when banks were the dominant intermediaries, a credit crunch or liquidity squeeze manifested itself in the inability of banks to borrow; a lender of last resort that targeted banks was the right vehicle for dealing with liquidity crises and credit squeezes in that set-up.

These days are gone in the globally integrated modern financial systems characterising all advanced industrial countries and an increasing number of emerging markets.

Today, external finance to non-financial corporations and to financial institutions is increasingly provided not through banks but through the issuance of tradable financial instruments directly to the financial markets or indirectly to the financial markets through banks and other financial institutions whose assets are, thanks to securitisation and similar techniques, liquid in normal times.  Now that financial markets (and non-bank financial institutions) have increasingly taken over the function of providing credit and all forms of finance to deficit spending units, a credit crunch or liquidity crunch manifests itself in a different way from the world described by Walter Bagehot's lender of last resort (see Walter Bagehot (1873), Lombard Street: A Description of the Money Market).

Today, a credit crunch or liquidity squeeze manifests itself as disorderly financial markets. Because of pervasive Knightian uncertainty (risk that is perceived as immeasurable and not possible to calculate or quantify), fear and in the limit, panic, little or no trade occurs in certain classes of financial instruments (say subprime mortgage-backed `collateralised debt obligations' CDOs) because there is no market maker with both the knowledge to price these financial instruments and the deep pockets to credibly post buying and selling prices. The precise way in which such micro-market failure (the failure to match willing buyers and sellers at prices acceptable to both) occurs differs for exchange-traded instruments and over-the-counter financial instruments (instruments for which bilateral bargaining over a deal is the normal exchange mechanism), but the solution is the same: the central bank has to become the market maker of last resort.

This was like 3 weeks into the subprime crisis. 5 years into it, the ECB remains at war with central banking.

And, yes, we have 'a run' in the sense that financial intermediation remains broken which, were it not for the globally integrated modern financial systems. 'A run' is a liquidity squeeze, and such things have been known (and continue) to afflict everything from nonfinancial firms to entire national economies during this crisis.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 07:13:02 PM EST
[ Parent ]
If generalised hysteria is an essential component of bank runs, then de-pegging - or the threat of de-pegging - does not necessarily cause bank runs.

If you want to use that definition of "bank run" (which we can do, sure), then my response to Louis' scaremongering is not to say "bank run already happening" - it is to say "Greece has already proven that it can manage a total collapse of its depository banking system without bank runs and other hysterics."

The operative point is the same: It is perfectly possible, with a minimum of planning, to wipe out savers and creditors wholesale without hysterics on the part of anybody outside the salmon-coloured press, and without a breakdown of the social order.

It is not similarly possible to wipe 20-30 per cent of the employable workforce off the face of the economy without a breakdown of the social order. At least inasmuch as one's definition of "social order" includes some semblance of parliamentary democracy and responsible government.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 17th, 2012 at 08:37:59 PM EST
[ Parent ]
Well who are we to doubt the German economic establishment? They clearly know what they are tliking about as evidenced by Germany's success. Like in 2005 when they told us that Germany would enter a long period of stagnation:

Kolumne: Thomas Fricke - Huch, wir sind Wirtschaftswunder | FTD.de Column: Thomas Fricke - Oops, we are economic miracle | FTD.de
Die Beschäftigung werde "in den kommenden Jahren bestenfalls stagnieren", orakelte im November 2005 Jörg Krämer, damals Chefökonom der HVB, heute bei der Commerzbank - weil Angela Merkels Große Koalition, die damals gerade angetreten war, "durchgreifende Arbeitsmarktreformen nicht einmal erwogen" habe. Jetzt werde der "Fluch der unterlassenen Reformen" über uns kommen, versprach Krämer. Ähnlich klang's bei Rürups Sachverständigen: Die Haushaltslage sei "desolat", das geringe Wachstumspotenzial behindere "eine durchgreifende Erholung".The employment level would "stagnate in the coming years, at best," Jörg Krämer, then chief economist of the HVB , now at Commerzbank prophetised in November 2005 - because Angela Merkel's grand coalition government, which then had just assumed office, had "not even considered far-reaching labor market reforms." Now the "curse of of the forsaken reforms" will come upon us, promised Krämers. Similar Rürups Sachverständigenrat: The budget situation was "desperate" low growth potential prevents a "sustained recovery".


Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Sat Mar 17th, 2012 at 07:16:19 PM EST
[ Parent ]
Another tiny detail from Switzerland  H/T Jesse

Back in June of last year (2011) I wrote about how there was such a demand for safe deposit boxes in Switzerland that,

    ...if you want a bank box in Zurich today, they will require that you have a minum of half a million swiss francs on deposit in the bank, before they will even consider you. That is how short of space they are.

The same person,who told me that contacted me today to tell me that the demand for Safe deposit boxes has grown so hugely that in the area bordering Italy, hotels are now renting out their own safety deposit boxes.

First the Greeks now the Italians. Capital Flight in full effect. But don't worry I am sure Mr Monti has it all under control.

Of course it is only the money of those who have enough liquid cash to make it worthwhile to go to Switzerland and open an account or rent a safe deposit box that flies away in this manner. I moved most of my remaining savings from TD Ameritrade FDIC insured money market like accounts to the only local bank that has a 3 Star rating. The rest remains in accounts at a regional bank we use for everyday banking. So I diversified my institutional risk, at a minimum. I still have my safe deposit box, but I also have a storage solution that is not under the control of the FDIC.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Mar 17th, 2012 at 07:24:08 PM EST
[ Parent ]
"The Greek government is barely the government of the parliament building and immediate environs. "Civil order" has been a memory for so long the memory itself is fading."

Isn't that just a tad hyperbolic?

by IM on Sat Mar 17th, 2012 at 11:20:35 AM EST
[ Parent ]
Give it another Friedman.  The hyperbole tends to become the reality.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 17th, 2012 at 12:14:37 PM EST
[ Parent ]
Oh yes, a friedman. Now that is instilling confidence.

According to the conventional wisdom of this blog, the euro would have ceased to exist around January first of this year.

by IM on Sat Mar 17th, 2012 at 12:22:45 PM EST
[ Parent ]
Where's that conventional wisdom come from?  I must have missed the vote.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 17th, 2012 at 12:24:19 PM EST
[ Parent ]
Oh like conventional wisdom in the greater world, cv is not subject to a vote. That wouldn't be seriuos.
by IM on Sat Mar 17th, 2012 at 12:26:30 PM EST
[ Parent ]
Or perhaps it's not conventional wisdom, rather just made-up.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 17th, 2012 at 12:28:56 PM EST
[ Parent ]
Get a grip. Do you really want do deny hyperbolic predictions of the end of the euro on this blog prior to christmas?
by IM on Sat Mar 17th, 2012 at 12:34:06 PM EST
[ Parent ]
I don't know if anybody has made such predictions or not.  I'm questioning your assertion that it's conventional wisdom.  You could at least cite a few examples.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 17th, 2012 at 12:40:10 PM EST
[ Parent ]
Why? Waste of time. Didn't you read the blog in december or did all of this get down the memory hole?
by IM on Sat Mar 17th, 2012 at 12:46:27 PM EST
[ Parent ]
Jake, your language is bordering the impolite, which is leaving me wondering what exactly you don't like about this post. If every state would leave the EU simply because they don't like where the Council is leading there would be no EU at all.

I'd note two points:

. The vast majority of Greeks want to remain in the Eurozone, let alone the EU.

. There is no comparison between the news we have been scantly getting from Iran and those we are getting from Greece.

Do you understand the EU Jake?

Vencit omnia veritas.
by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Sat Mar 17th, 2012 at 02:25:25 PM EST
[ Parent ]
There is no comparison between the news we have been scantly getting from Iran and those we are getting from Greece.

Um, in Iran health care provision is not collapsing as we speak. Parents are not giving their children up to social services because they cannot pay the bills. People are not being taxed through the electricity bill in order to pay interest on money that never actually makes it to the country.

Did you see this?

Have you been keeping track of what Jean-Claude Juncker has been saying? Such as

"We are highly concerned by the high unemployment and increasing poverty, but we agreed Spain will stick to the 3 percent target in 2013, which is more important than the avenues chosen in 2012," Juncker explained.
also
I don't agree that Spain should go through excessive and stupid consolidation that puts it in a more difficult situation than it already is, but on the other hand Spain is the fourth- largest economy of the euro zone and as such it cannot take total leave from the promises it has made," Juncker said.
"There is poverty, there is unemployment, the policy is stupid, but damn us if we're going to deviate from the policy even if it's stupid."

Do you understand the EU, Luis?

Is it still the EU you knew and loved?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 02:35:29 PM EST
[ Parent ]
Juncker is very candid these days:

http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_14647_18/03/2012_433448

We have heard that at first you pushed for a longer-term program, five or six years of adjustment and lower interest rates, but that the Germans opposed this. Is this the case?

Exactly.

Just to insist on this point: Are the Germans taking a punishing attitude toward Greece?

I don't know if the Germans were taking a punishing attitude toward Greece, I don't like that expression, but whenever I tried to be more accommodating, whenever I tried to be, let's say, less severe, I had to face strong reactions from several countries.

He's stepping down from his post soon.

by Upstate NY on Sun Mar 18th, 2012 at 02:01:39 PM EST
[ Parent ]
Luis de Sousa:
. The vast majority of Greeks want to remain in the Eurozone, let alone the EU.

If there are opinion pols on the eurozone in Greece, I would very much like to see them.

On the leaving the EU part, I don't see it. Sure, there is no legal basis to leave the EMU, but then again there is no legal basis for ECB to bleed the perifiery dry. In the short term, executive power rules.

Say that Greece or Portugal defaults, issue their own currency and does not leave the EU. Then the Commission could take Greece or Portugal to court, the country could be fined, loose EU-funds and eventually voting priviligies. Then again taking a country to court is a political decision, and if you are right that the rest of the eurozone promptly collapses when the first leaves, maybe the rest of the EU is not all that interested in trying to push the first country that left to re-join the collapsed EMU.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sat Mar 17th, 2012 at 03:38:20 PM EST
[ Parent ]
Jake, your language is bordering the impolite, which is leaving me wondering what exactly you don't like about this post.

That you are scaremongering in the service of an austerity policy that is going to kill on the order of 60 thousand Greeks over the next decade or so.

If every state would leave the EU simply because they don't like where the Council is leading there would be no EU at all.

In the first place, EU membership has never been a question. The notion that it is impossible to leave the Euro without leaving the EU is pro-austerity propaganda. There is no mechanism for forcing a country to exit the European Union in response to their refusal to honour the Euro as the sole legal tender in their jurisdiction.

In the second place, no EU institution has any legal authority to impose line-item vetoes on the Greek budget. But the Troika is doing it anyway. In this context, your appeals to be good Europeans and follow the rules (as dictated by an insane central bank and a chancellor who is unfit to manage a kindergarden, let alone a mid-sized European country) is simply laughable.

And in the third place, to describe the situation as "simply not liking where the Council is leading" is such a mendacious lie that I wonder what the fuck you were thinking when you wrote it. To reiterate: The austerity policy being imposed on Greece will murder on the order of one per cent of the Greek population over the next decade.

This is not "simply not liking" a policy. It is self-defense against an enemy occupation.

There is no comparison between the news we have been scantly getting from Iran and those we are getting from Greece.

What news are you getting from Greece?

Do you understand the EU Jake?

Yes. Certainly better than you do.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 19th, 2012 at 06:59:09 PM EST
[ Parent ]
Krugman's mistake, and the point that you don't address in your projection, is failing to realise that a Euro exit cannot be ringfenced. Once Germany kicks Greece out, France is sure to follow within a few years.

Yanis Varoufakis: CAUTERISE AND PRINT: GERMANY'S NEWEST PLAN A

Will it work? Three reasons it won't

... The idea that exiting the eurozone is a simple matter of devaluing is dead wrong. It confuses the correct view that Greece and Portugal and Ireland would have been better off outside the euro with the quite different, and catastrophically erroneous, view that exiting is the optimal strategy. ...

... Germany's new Plan A is doomed. Here are three reasons:

The first reason is that, in the short, run, just like in the case of Lehman's, the Frankfurt optimists are assuming that they know the unknowable (just like, prior to 2008, they assumed they had created riskless risk). The interconnections between the Portuguese banks with those of Spain, and of the Greek banks with those of France and Germany, are of the sort that will only see the light of day when disaster strikes. And when they do appear in full Technicolor their sight will be terrifying.

The second reason is that the massive liquidity injection into the Italian and Spanish banks, not to mention the French and German ones, will operate like large cortisone doses injected into a cancer patient. They will cause temporary relief but, at the same time, they will give the underlying malignancies time to grow nastier, bigger and deadlier. In short, the remaining eurozone's banking sector will turn into a monster version of Japan's zombie banks of the 1990s, brewing en masse the next banking crisis and embedding the virus of recession everywhere, from Spain to Germany, from France to Italy.

The third reason is structural. The eurozone's troubles stem from the lack of a pan-European system of supervising the banks, of managing public debt and of planning for aggregate investment. None of these three constituents of the Crisis will be dealt with if Greece, Portugal and possibly Ireland are amputated - even if the stumps are effectively cauterised. This means that on the Morning After, Italy will be the next Greece and Spain will be the new Portugal. The internal imbalances of the eurozone, after a brief lull, will start rearing their hideous heads again, and, in conjunction with the zombie banks and the recessionary environment, it will not be long before another round of amputations will become `inevitable'.

There is, in other words, no way to ringfence the crisis unless all deficit countries all the way to France are ejected and all that remains is a Neuro consisting of Germany, Netherlands, Finland, Luxembourg and maybe a couple of others, which could only remain a surplus country by engaging in massively mercantilistic currency policy in competition with China.

In other words, finally the Bundesbank would accept responsibility for countering upwards pressures on its currency's exchange rate, or else there would be massive internal deflation and/or one of the Virtuous Four Euro countries would find itself a net importer once the Neuro(tic)zone achieves balanced external trade at a stable exchange rate.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 09:54:49 AM EST
In a sick system there will always be at least one sick man. The system requires it.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Mar 17th, 2012 at 11:52:22 AM EST
[ Parent ]
Migeru, maybe I wasn't clear enough, but that's exactly what I meant when I wrote this:

Outside, most other Eurozone members have had to impose some sort of capital controls too; even if succeeded, they wont prevent every trade deficit and surplus in the Eurozone to close.

You just need one euro state to leave the EU and a regression process takes place that can all other states in hours.

Vencit omnia veritas.
by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Sat Mar 17th, 2012 at 02:29:51 PM EST
[ Parent ]
So the euro will bury us all.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 02:36:16 PM EST
[ Parent ]
Kicking out every single country but Germany one at a time, will take a long time, years and years. Meanwhile, the internal imbalances might go away.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Mar 17th, 2012 at 04:44:37 PM EST
[ Parent ]
Hmm, the rumours are that Greece will be out this year, followed shortly after by Portugal (give it 6 months?). Then Ireland will fail to pass the Fiscal Compact in referendum. And Spain is going to follow on Greece's heels with 2 year lag. So, give it 3 years until either France is out or the Bundesbank folds (like they did in 1992/3 - apparently even they were not willing to see the Franc ejected from the ERM, unlike the Pound and the Lira).

That's, of course, in the gradualist view. If Varoufakis is right, the whole thing unravels within 6 months of Greece being shown the door. So, next year?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 17th, 2012 at 06:11:11 PM EST
[ Parent ]
Depends on how observant the Portuguese, Spanish and Italian governments are (I have given up hope that France will realise that it has a greater commonality of circumstance with the rest of the deficit countries than with Germany). It is possible that they will see the handwriting on the wall if Greece is sufficiently rudely ejected, and skip the 6-24 months of unnecessary pain.

But this is EPP-PES governments we're talking about. I would not bet money that they have the clarity of vision to find a lit fire on a moonless night.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 18th, 2012 at 08:05:41 AM EST
[ Parent ]


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