Today (technically yesterday as of this writing) Denmark held parliamentary elections. I have been remiss in covering this election for ET. Partly because I have had other things on my mind for the past month (the election campaign was, by one measure, three weeks long. By another it's been six months); partly because European events have held my attention; and partly because I got the urge to break things every time I turned on the TV from all the cargo cult economics being peddled.

Then I remind myself that election campaigns that revolve around subjects I know less well are probably equally loaded with sanctimonious bullshit. And that thought is just depressing.

But you came here to get some results and perhaps a little coalition poker. So here goes:

Meet the new boss, same as the old boss

As of this writing, the latest results are:
A: 44 (-1); Social democrats; PES (Schröderites)
B: 17 (+8); Social liberals; ALDE (Lib-Dem-ish; compulsive centrist disorder sufferers)
C: 8 (-10); Conservatives; EPP (Tories)
F: 16 (-7); Socialists; Greens/EFA (Social democrats)
I: 9 (+4); Liberal Alliance; Unknown, presumed ALDE (Glibertarians)
K: 0 (-);Christian democrats; N/A (I don't know, and they don't seem to either)
O: 22 (-3);People's Party; EFD (Ugly party)
V: 47 (+1);Liberals; ALDE (Neoliberal)
Ø: 12 (+8); Red-Green; GUE/NGL (Socialists)

You need 90 seats for a majority, because our Atlantic territories fill four seats. Which will, barring direct divine intervention, break down 3:1 in favour of the good guys.

Now, there's a couple of binding constraints on possible coalitions that pretty much obviate the usual coalition poker:

• A and F will form a government, with Ø support.

• V, C and I form the opposition.

• O can't make policy with A, because then A will hug them to death (also, O and A leadership hate each others' guts).

• B can make economic policy with V and C, but can't work with O at all. And then they don't have 90 seats.

If the new government is smart, it will sell everything - and I do mean everything - else to B to keep them out of the economic policy. Giving B a veto on economic policy is a dead certain way to lose the next election. Also, get atrocious economic policy, but with a Schröderite PM I take that as the baseline from which improvements might be made, not a defeat snatched from the jaws of victory.

If the new government is dumb, it will either attempt to shortcharge B enough to break the coalition, and get massacred in the subsequent elections (this is what the wingnuts are already crowing about). Or they'll meet B halfway on economic policy, in which case we'll have 15 % unemployment in four years, and then we'll lose the election.

Promoted by DoDo

One of the major problems in discussing the financial sector is that we have at least three main narratives of what banking is.

The Conventional Wisdom:

1. Alice goes up to a bank and gives it one hundred gold coins, and the bank gives her a note saying she owns 100 gold coins in its vaults.
2. Bob goes up and asks the bank to borrow fifty gold coins. The bank looks at Bob's business plan and decides to give him fifty gold coins. In return, Bob gives the bank a note saying that he will pay it back, with interest.
3. Charles goes up to the bank and asks for thirty gold coins. The bank looks at Charles' business plan, decides that it wants nothing to do with it and tells him to sod off.

You can add various complications, such as fractional reserve banking, checking accounts where the gold never leaves the vault once deposited (except during bank runs), and such. But the basic narrative is that Alice deposits money, which the bank then uses to make loans.

Paper money, it is imagined, works the same basic way. Except that instead of digging it out of a mine you print it at a central bank, a notion which is slightly ominous and invokes images of wheelbarrows and invading Poland.

[editor's note, by Migeru] Originally posted as a comment

In the comment thread to my last diary, 'Bubbles' Greenspan came up. And while I despise Chairman Bubbles as much as the next guy, I think it's important to despise 'Bubbles' for the right reasons. To whit:

Greenspan took care of keeping interest rates low. This bred a series of asset bubbles, culminating in the real estate bubble which began deflating in 2007

Not quite.

Relaxation of lending standards and margin requirements make bubbles. Low interest rates have nothing to do with it. You get bubbles at 7 % rates. You get bubbles at 3 % rates. You get bubbles at 0 % rates. Hell, the broker's rate touched 12 % for a while during the spring of 1929. When you have that sort of short-term returns to speculative activity, fiddling with the rediscount rate barely amounts to a rounding error.

(That probably will not be learned)

Lesson 1: The state of readiness of our financial regulators at the start of the crisis was is contemptible.

Part of this is, of course, due to political obstructionism, but I think a large part of it is simply that financial regulators lack routine when it comes to placing large financial institutions in receivership. I think we'd get pretty far if we could get the financial regulator to hold regular (say, monthly) in-house drills of how to resolve banks, plus yearly "war games" where they play out some disaster scenario (attack on the currency, collapse in the real estate market, etc.). Drills serve both to familiarise people with the unfamiliar and to provide regulators with a weight of authority to counter political obstruction.

Lesson 2: Federal currency, state-level fiscal policy, persistent interstate trade surplus: Pick any two.

Lesson 3: Low inflation, heterogenous currency union, state-level fiscal policy: Pick any two.

front-paged by afew

Somewhere deep in the comment thread of Mig's latest news roundup on the EPP's slow-motion murder of Southern Europe, I made a scorecard for the distributional consequences of various macroeconomic preferences. Since there proved to be considerable interest for seeing it in diary format, I've reproduced it below the fold.

Except where explicitly noted, one may expect that reversing policies will cause the advantages and disadvantages to be reversed. However, prolonged applications of policies systematically favouring some groups at the expense of others will typically also alter the underlying institutional structure. When you bend society out of shape, it doesn't quite go back to the original shape after you release it.

Mike Norman Economics: Foreign institutions were the biggest borrowers from the Fed during the financial crisis

New disclosures that come out of a recent Freedom of Information Act ruling shows that during the height of the financial crisis the Fed lent billions of dollars to foreign institutions.

The data shows that the Fed's discount window was accessed heavily during the Lehman crisis back in October 2008 and through the spring of last year. Two of the biggest borrowers were the European bank, Dexia SA, which took $26.5 billion in a single day and Depfa, a subsidiary of German Hypo Real Estate Group. They borrowed $24.6 billion.

So basically the US Fed rescued a couple of large European banks from their own stupidity by opening the discount window to them during QE1.

Let's unpack that statement a bit.

Apparently our suggestion that Ireland should stiff some bondholders are being considered. I got a mail from a lurker, asking for more concrete suggestions. I'm posting the exchange here (with permission, and only minor edits), so the regulars can supplement and poke holes in my recommendations.

Hi Jake,

I hope you don't mind getting an email on your eurotrib post.

I agree with you - we are sheep here in Ireland.

We are in the middle of an election for our next government, and all the main political parties are doing is tweaking the spending allowed by the IMF/EU loan, in order to take the same amount out of the economy this year. Nobody is addressing the terms of the loan - the fact that the amount of the 'bailout' (not for Ireland, for the banks who lent to us!) of €67.5bn (not counting €17.5bn we are contributing - decimating our pension reserve fund) is not going to allow us to proceed  an 'orderly restructuring' (aka default) in 2014. In fact we will need in the order of €152 bn to get to 2014.

Nor is any politician questioning the terms of the loan which will see the stripping of our national assets, which would give us a foundation for growth.

We are in dire straits. We cannot borrow money in the markets. The ECB gave the ok to our Central Bank in December to print €51bn euro. I am not sure if this relates to the amounts disclosed in a newspaper last week.

Our government continues to pay the bondholders of the banks on foot of the guarantee given in 2008 (after Trichet left a message on the Minister for Finance's phone that we had to save our banks, and Irishman Peter Sutherland of Goldman Sachs etc said don't burn the bondholders). Last Monday €750 million was paid out to unsecured bondholders who were not covered by the guarantee.  The December quarterly report of the Bank of International Settlements showed that foreign bank exposure to sovereign debt in three of the peripheral EU member states was reduced by 14% (some say by 18% in Ireland - I cannot extrapolate the figures)

Nobody is saying 'we repudiate this deal', because without it there is no money.

We have abundant , but undeveloped, energy resources. The EU needs our agreement to make the EFSF permanent (we require a referendum on that, something our government and the EU will try to avoid)

You say threaten to publish data on the solvency of the surplus countries private banks unless the ECB its doing its job. What do you expect the EB to do? It is already overexposed to Ireland, and no doubt, will expect us to borrow to buy back some of  our dodgy bonds.

[...] Our current trajectory would leave us with no resources but the people, no growth and nothing left to sell.

What would you do? What terms would you seek?

[signature, etc.]

My response is below the fold.

Economists, economic commentators and moral philosophers (immoral philosophers in the case of the Austrians) from both the left-wing and the right-wing critique of orthodox economic tradition have seemingly joined forces in attacking "easy money" and the illusion that it is possible to moderate the business cycle through interest rate policy. But go beyond the sloganeering, and you will find that there are substantial differences between the different critiques. In the effort to understand these differences, I find it helpful to distinguish between three sorts of "easy money:"

• Money can be "easy" in the sense that one can borrow on little or no margin.

• Money can be "easy" in the sense that lenders are less than duly diligent in reassuring themselves that the collateral or business plan against which the money is borrowed is sound and worth the full amount of the loan.

• Money can be "easy" in the sense that one can borrow at a low interest rate.

Now, in the orthodox tradition, these three come to the same thing. Lenders, in the orthodox tradition, optimise the present value of their portfolio, given their individual desired risk profile. Whether risk in this picture comes from absence of sound collateral or absence of sound margins is a matter of the most supreme indifference. When the orthodox tradition speaks of "easy money" or "hawkish monetary policy" (not to be confused with "hard currency," which is something else entirely), they therefore speak exclusively of the interest rate floor set by the central bank.

The financial system encompasses, roughly speaking, seven different kinds of activities, in declining order of importance:

1. Retail banking - letters of credit, payment clearing, overdrafts, debit cards, checking accounts, etc.

2. Maintaining orderly exchanges.

3. Pensions.

4. Insurance (not including "insurance" against losses of financial assets - insurance schemes require losses to be mostly uncorrelated, and financial losses are almost always highly correlated).

5. Investment banking - long-term credits to finance development of capital-intensive industrial plant.

6. Long-term lending against existing capital - real estate being the prime example, but successful investment banking turns into this once the plant it funds is up and running.

7. The rest - venture capital, corporate raiders, hedge funds, brokers' loans, etc.

We'll look at #1, 5 and 6: A lot of (but by no means all) crises originate in investment banking and mortgaging of existing assets, and retail banking usually gets taken along for the ride because of the joint ownership of retail and investment banking houses.

front-paged by afew

This started out as a response to a post by Bill Mitchell in which he paints a picture of the € as a project so full of FAIL that everybody would be better served by simply abandoning it outright. I felt it worthwhile to repost it here, because such sentiments, while not expressed in quite that many words, have been echoed here on ET.

I take issue with that conclusion not so much because it is economically unsound. There is an economic case to be made against the common currency (although it is not quite as strong as Mitchell would have you believe). But in my view it misses the point. So without further ado:

There's both more and less going on here than meets the eye.

There's less going on here in three ways: In the first place, the Irish crisis is not a € crisis. The Irish crisis is a crisis of Irish domestic governance. Ireland has a trade surplus, and has had one throughout, so nothing prevents Ireland from simply telling the international money markets to go take a hike. Nothing, that is, except the fact that Ireland is run by corrupt halfwits.

In the second place, the crisis is not inherent to the fact that the EU has a common currency. There are plenty of ways to structure a common currency that do not cause this sort of balance of payments crises. The problem is that the € contains two pernicious elements: The German Stupidity Pact (known in more polite company as the Growth and Stability Pact), and the fact that the ECB is mandated to pursue an inflation-first policy. Neither is an intrinsic requirement for having an EU-wide currency. It would be perfectly possible, for instance, to abolish the GSP, and stabilise current accounts by having the ECB issue a Eurobancor to those countries that have intra-€-zone balance of payment deficits.

front-paged by afew

In the recent comment thread on the French protests, Mig reminded me that there is an EU consultation on the subject of pension reform, and suggested that I draw up a draft response that ET could polish for shipment.

So here goes.

Part One: The Premises

The justification for the consultation is itself worth responding to, as it attempts to enforce a number of framings that are simply objectively false.

Ageing populations in all Member States have put existing retirement systems under massive strain

This is not generally true. The European member states are in varying stages of their demographic transition - some have it before them, others behind them. The demographic picture is a lot more nuanced than it is painted in this call for papers.

and the financial and economic crisis has only increased this pressure.

This, again, is not generally true. It is only true for those member states who have (foolishly) structured their retirement schemes as if they were hedge funds. For those states who fund retirement benefits from direct sovereign outlays, the financial crisis poses no problem for the retirement schemes - indeed, during a demand-side economic crisis generous retirement schemes are a feature, not a bug, of macroeconomic policy.

the pension challenge - one of the biggest facing Europe and most parts of the world today

It is a little hard not to wax sarcastic about this. Fossil fuel depletion? Financial regulation? Mainstream European right-wing leaders acting all nostalgic for fascism? The de-industrialisation of every part of Europe outside Poland and the Ruhrgebiet? Apparently those are chopped liver next to the all-important need for reform.

László Andor, EU Commissioner for Employment, Social Affairs and Inclusion said:

"The number of retired people in Europe compared to those financing their pensions is forecast to double by 2060 - the current situation is simply not sustainable. In addressing this challenge the balance between time spent in work and in retirement needs to be looked at carefully."

This is a shockingly deceptive framing.

The number of retired people relative to the number of working-age people is completely irrelevant. The relevant figure is the number of working-age people relative to the total population - including those who are too young to be in the working-age population. Properly accounting for those who are below working age offsets the increase in those above working age to a considerable extent in those countries member states that have a declining population (and those member states that have a growing population are not scheduled to have a demographic crisis at all over the period covered by Eurostat projections).

In particular, [the consultation] aims to address the following issues:

• Ensuring adequate incomes in retirement and making sure pension systems are sustainable in the long term

• Achieving the right balance between work and retirement and facilitating a longer active life

• Removing obstacles to people who work in different EU countries and to the internal market for retirement products

• Making pensions safer in the wake of the recent economic crisis, both now and in the longer term

• Making sure pensions are more transparent so that people can take informed decisions about their own retirement income

The consultation period will run for four months (ending 15 November 2010) during which anyone with an interest in the subject can submit their views via a dedicated website. The European Commission will then analyse all responses and consider the best course for future actions to address these issues at EU level.

One of the things the conventional wisdom on ET frequently lambastes orthodox economic theory for is an inattention to the question of land and (other) raw materials. These are usually rolled into the capital apparatus, despite the important difference that one can be replenished by human labour and ingenuity while the other cannot.

front-paged by afew

Back when the Americans had their panic(s) a couple of years ago, European Tribune was very quick to disassemble the "Savings Glut" theory promoted by Helicopter Ben and the salmon-coloured press.

The Savings Glut theory goes something like this:

China saves more than it invests. China's excess savings must be recycled. The US is the default place to recycle excess savings. This creates a US current accounts deficit and lowers US interest rates, causing a bubble, which causes a panic.

The ET critique is that (1) China's saving is the consequence, not the cause, of American CA deficit. China pegs its currency to the US$, and in order to maintain this peg it must use open market operations to counteract any American CA deficit against it. Otherwise, the US$ would fall against the Yuan. (2) It was always in the US' power to raise interest rates and/or use the low interest rates to finance investment in real physical assets, instead of consumption. And (3) bubbles don't happen just because of low interest rates - bubbles happen in the presence of particular circumstances of collective psychology, which it is within the power of economic policymakers to abet or suppress.

front-paged by afew

Paul Krugman: Core Logic

Now, the measurement issue: we'd like to keep track of this sort of inflation inertia, both on the upside and on the downside -- because just as embedded inflation is hard to get rid of, so is embedded deflation (ask the Japanese). But in the real world, while some (many) goods behave like this, some don't: their prices rise quickly with supply and demand changes, and don't display inertia. So we need a measure that extracts the signal from the noise, getting at the inertial part of the story.

The standard measure tries to do this by excluding the obviously non-inertial prices: food and energy. But are they the whole story? Of course not -- and standard core measures have been behaving a bit erratically lately. Hence the growing preference among many economists for measures like medians and trimmed means, which exclude prices that move by a lot in any given month, presumably therefore isolating the prices that move sluggishly, which is what we want.

So let me get this right: The concept of "core inflation" is justified by the need to keep track of "embedded," or systemic inflation caused by oligopolistic price-setting.

Now, the best way to do that would be to study the actual economics of the issue and try to figure out which parts of the economy are dominated by oligopolies and monopolies, and which parts of the economy are dominated by competitive firms. Of course, that may or may not be practical. So the second best way to do it would be to develop some kind of heuristic for detecting oligopolistic pricing in the raw price data.¹

But that's not what our dear econometricians are doing.

[editor's note, by Migeru] Part of the Reasons for Despair occasional series.

_{(C) European Tribune, 2010, all rights reserved, etc.}

Setup

1. Take one set of ordinary playing cards (preferably the Denialists' Deck or the Iraqi Bad Guy deck the Americans put out in 2003, but any deck will do). Aces count as ones (unless the players bribe each other to count them as something else).


2. Hand each player twenty (20) Greenback tokens and give each player a pile of Debt tokens. Finally, place a pile of Greenbacks, a pile of Debt tokens and a pile of Credit Rating tokens in an easy-to-reach place (the players represent banks, so let's call this the Central Bank). Functionally, Greenbacks can be used as Central Bank Debt tokens (the two kinds will never end up in the same pile unless you're engaging in some seriously shady accounting), but if you have enough different kinds of tokens, it is recommended that you keep them distinct for psychological reasons.


3. Shuffle the cards and deal each player a hand of three cards


4. The player most recently convicted of accounting malfeasance goes first. If tied, the player with the highest personal equity goes first.


5. The turn passes counter-clockwise.

When a European government's policies are dictated from Beijing or Moscow, we call them "collaborators" and other, less savoury, things.

When a European government's policies are dictated from Washington, we don't call it anything, because we don't aren't supposed to hear about it until we are presented with a fail accomplis.

Why has this country's voting rights in the European Union not been revoked? For that matter, if you raided their computers, there is little doubt that you'd find evidence that they have been selling internal EU negotiation strategy papers to foreign powers. I don't think they even got a good price.

So why are these Quislings, Petains and Benedict Arnolds not being indicted for espionage?

- Jake

Jerome recently flagged a bit of concern-trolling by Time Magazine that's quite heavy on the newspeak. And it really is a masterpiece of the art. The use of "Related Articles" is particularly elegant, and may signify a new development in the net-savvy of professional astroturfers.

Needless to say, I found myself tempted to make a translation into English...

Kapow! bazooka'd to front page by afew

One of the subthreads in this story turned towards a meta-discussion about gender culture on ET. This discussion has cropped up several times in the past, and I have usually avoided partaking in it, for a variety of reasons. One of those reasons is that it usually turns into a flame war, and my insurance stopped covering asbestos suit replacements after I began frequenting YouTube comment threads. Something about wilfully subjecting myself to avoidable risks, or somesuch insurance-speak.

However, to quote myself,

When you have a (set of) topic(s) that are overwhelmingly discussed by either gender, it does not seem irrelevant to ask why this is, and whether the reasons should prompt a change in site policy or culture.

[...]

If the entire community is composed mostly of one gender/skin colour/socioeconomic group, a little introspection might be in order.

It's not that homogeneity is necessarily evidence that something is wrong - there may be a variety of entirely acceptable reasons (or at least reasons that are beyond the power of the editors to change). But it should be cause for some introspection on a not too irregular basis.

It was correctly pointed out that a meta diary would be a suitable venue to have such a discussion. It was also pointed out that if I objected to the tone of the currently available example of said meta-diary, ET comes with a perfectly functional diary submission form.

This seems like a reasonable request, so here we go.

Ricardo is one of those classical economists who is usually turned into a pagan idol - to be the subject either of worship or of purification rites, depending on one's political affiliation.

It will, I hope, be evident that this text is written with no such desire. Richardo was not a stupid man, nor, I believe, a uniquely wicked one. Those of his models that have passed into the modern (neo)classical synthesis were not stupid models, and they were not based on stupid assumptions. They have, however, suffered the unfortunate fate that most economic theory will eventually fall prey to: Events have overtaken several of the key assumptions underpinning them.

Theory

The best way to illustrate this will be with a little graph:

The image on the right illustrates the production possibility frontiers (PPF) of two countries, A and B, with equal population (for a thorough introduction to PPFs, see this diary by Migeru). Both countries produce microchips and ball bearings, but Country A is an industrial state, while Country B is a third-world country, as seen from the disparity in their production levels (recall that they have similar population).

Now imagine that we open up Ricardian free trade between these two countries. What happens?

The answer is "nothing at all." The PPFs of these countries have precisely the same shape, so there is no expansion in the aggregated PPF from Ricardian free trade.¹

Practise

Suppose now that a well-meaning economist manages to convince Country A to enter into a bilateral trade agreement with Country B, modelled on the pattern of existing GATT/WTO treaties.

Promoted by afew

In this diary I introduced a frame of discussion about economics that I labelled the full world (by contrast with current economic thought which I claim is largely developed in and adapted to the empty world). In that diary, I looked at the different kinds of resources and the kinds of price shocks that could be expected when our non-negotiable way of life runs head first into the even less negotiable laws of physics.

This time, I'll look at a slightly different issue:

If economic activity is the process of converting raw materials to consumer goods and services, what happens when the capacity of one's industrial plant to convert raw materials into goods and services outstrips one's capacity to acquire raw materials?

To explore this, I'm going to go back to a fairly basic analytical tool: The production possibility frontier (PPF). The production possibility frontier represents the possible configurations of an economy when its labour and capital are fully deployed in the conversion of raw materials into consumer goods. The points that fall inside the PPF represent configurations that do not fully employ the capital and/or labour of the economy. The points that fall outside the PPF are unachievable given the available plant and labour force.