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"It takes two to tango" is a poor excuse for predatory lending, even if it is to be expected that a loan shark will use it.

Let's be clear, what has been going on over the life of the Euro has been German export subsidies in the (EU-allowed) form of private sector vendor finance as opposed to the (EU-disallowed) government export subsidies.

The government subsidy comes at the end, when loans are guaranteed, lenders made whole, and political pressure brough to bear internationally to ensure the debt is collected.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Mon Dec 12th, 2011 at 09:04:08 AM EST
[ Parent ]
I still think it makes sense, because this has not been the classical case of predatory lending, which includes a lender on one hand an ordinary (and relatively clueless) guy on the other hand. In these cases, the recipients of the funds have in many cases been people who could have been expected to know better: governments, corporations and so on. You don't have the required asymmetry of information then.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 06:23:02 AM EST
[ Parent ]
The required asymmetry for "predatory lending" is of power, not of information.

You just need to look at the way Greece has been forced to take billions of new loans over the past two years and the conditions attached to them (billed as designed to return Greece to debt sustainability whereas any realistic assessment was already predicting from the beginning what has already happened: not only is Greece's ability to pay deteriorating, but it is descending deeper and deeper into debt).

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 06:27:51 AM EST
[ Parent ]
That might be so now, but it certainly was not the case before the crisis as the imbalances were building up. No one forced the PIGS to buy all that stuff on their credit cards.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 08:43:36 AM EST
[ Parent ]
How interesting. If, after 1999, the periphery's private sectors hadn't borrowed heavily from the core private sectors in what amounts effectively to vendor finance, there would have been a Eurozone-wide recession on the order of the intra-Eurozone trade imbalances as a fraction of GDP.

Elsewhere you say

In any case, you continue to not address the issue of why the periphery should accept depression conditions rather than the core accepting some inflation.

I'm not arguing for any of those solutions, as I see both as unacceptable. I want to see widespread sovereign defaults, bank recapitalizations and the emergency funds of the ESFS spent on infrastructure spending in the periphery as a way of offsetting austerity.

So, how do you propose infrastructure spending in the periphery would have happened after 1999 in the absence of "credit card spending"? Let me remind you this happens in a putative free market environment where credit is intermediated by private banks and the public sector doesn't get (even prudentially) to tell the banking sector where it needs to direct credit other than by setting some crude ground rules or boundary conditions such as the Basel accords. Also see here.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 08:59:45 AM EST
[ Parent ]
How interesting. If, after 1999, the periphery's private sectors hadn't borrowed heavily from the core private sectors in what amounts effectively to vendor finance, there would have been a Eurozone-wide recession on the order of the intra-Eurozone trade imbalances as a fraction of GDP.

Which could have been met with lower interest rates, or that failing, financial stimulus.

So, how do you propose infrastructure spending in the periphery would have happened after 1999 in the absence of "credit card spending"?

The issuance of sovereign debt seems reasonable, as does private equity (not "private equity" as in LBO variety, but equity as in the opposite of debt) investment if the latter were not forthcoming at a great enough scale.

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

by Starvid on Wed Dec 14th, 2011 at 09:24:08 AM EST
[ Parent ]
Which could have been met with lower interest rates, or that failing, financial stimulus.

Low interest rates for all is what we got and it fed private debt bubbles in the periphery. As to financial stimulus... what continent have you spent the past 2 years in?

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:30:21 AM EST
[ Parent ]
I meant fiscal stimulus, not QE.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 09:32:54 AM EST
[ Parent ]
Precisely, what continent have you spent the past 2 years in that would have allowed fiscal stimulus to counter a looming recession? Can't be Europe.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:35:36 AM EST
[ Parent ]
It's not my fault European elites can't get their heads around Econ 101.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 09:42:16 AM EST
[ Parent ]
As Theo Weigel said, the Euro speaks German.

And everyman believes that the Germans are good at Econ 101.

Which is why we're in deep doo-doo.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:47:26 AM EST
[ Parent ]
As Martin Wolf advised accession states: joining the euro is not about getting Germany-cheap sovereign debt. That's just the beginning. When you join the euro, you join Germany, with all that entails.

As someone said: would you like to be in a monetary union where Greeks run the fiscal policy and Germans run the monetary policy? Currently, only 8 % of Swedes do. And I'm not one of them. The only person I know who still wants to join the euro does so because he thinks it's a step closer to the United States of Europe, and damn the consequences. Which is after all also what the architects of the euro felt.

Or in the words of Romano Prodi back in 2001: "I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created"

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

by Starvid on Wed Dec 14th, 2011 at 09:57:29 AM EST
[ Parent ]
As someone said: would you like to be in a monetary union where Greeks run the fiscal policy and Germans run the monetary policy?

Beats the current arrangement where the Germans run both.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:59:42 AM EST
[ Parent ]
When you join the euro, you join Germany, with all that entails.

If only. Apparently Germany doesn't agree that the rest of us are part of them.

Or maybe they do. They don't seem to have much "solidarity" for the Ossies either.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 10:01:32 AM EST
[ Parent ]
So, how do you propose infrastructure spending in the periphery would have happened after 1999 in the absence of "credit card spending"?

The issuance of sovereign debt seems reasonable, as does private equity (not "private equity" as in LBO variety, but equity as in the opposite of debt) investment if the latter were not forthcoming at a great enough scale.

So, the Growth and Stability pact and the Illegal State Aid rules are unreasonable since you propose that during the Euro era peripheral Europe should have issued sovereign debt to fund equity investments in new productive assets...

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:32:28 AM EST
[ Parent ]
The Growth and Stability pact makes no sense. When you introduce a common currency in an area which hardly can be described as an optimal currency area, it's economics 101 that the interest rate weapon will become blunter, and that fiscal policy will have to play a greater role. Both to stimulate the economy during downturns and to cool it at the top of the business cycle. This requires much weaker restrictions on deficit spending, but it also requires a much lower level of sovereign indebtedness over the business cycle, so as to not make the burden of debt overbearing and make stimulus impossible for that reason. The EZ required a 60 % government indebtedness to join. Clearly as events has shown, this level was much too high.

Also, I said the private sector should have supplied the equity, not direct-state investment in productive assets, even if such do make sense in certain industries. Power and infrastructure comes to mind.

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

by Starvid on Wed Dec 14th, 2011 at 09:40:31 AM EST
[ Parent ]
Which is why the Stability and Growth Pact is to be replaced with a Stability and Growth Union with constitutional debt brakes for all, in the middle of a depression.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:44:59 AM EST
[ Parent ]
Our great leaders are oh so wise. :p

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 09:58:16 AM EST
[ Parent ]
The total consolidated government debt (municipal, state, federal, cash, central bank reserves, insured deposits in excess of bank reserves and what have you) is to a considerable (but not complete) extent endogenous.

That is to say, if you want state-level (and below) consolidated government debt to be less than 60 % of GDP, you will have to let federal consolidated government debt (in the Eurozone that means central bank reserves and cash, but not ensured deposits in excess of the bank's reserves and cash position) to be in excess of 40 % of GDP (the consolidated government liabilities to GDP ratio is on the order of 100 % for most advanced industrial societies).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 10:33:15 AM EST
[ Parent ]
I don't see why. Every debt is to another person a claim. As debt is reduced the claimant receives his cash back, and he certainly need not lend it to someone else. It can just as well be invested as equity, and the result is a society with less gearing.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 10:41:53 AM EST
[ Parent ]
Cash is a part of the consolidated government debt.

Or, to put it in another way: Government bonds are a part of the money supply.

With a properly run central bank, cash and government bonds held by own residents contribute precisely equally to society's gearing: Not at all. (Foreign government bonds are different.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 11:26:17 AM EST
[ Parent ]
But in the Eurozone things don't work that way, at least legally...

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 11:45:57 AM EST
[ Parent ]

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