Europe

Oh dear.

There is large amount of facile commentary on Europe. My favorite at the moment is the notion that if the euro area and/or the European Union are allowed to dissolve, Europe will go back to war.

Sorry, but forcing other Europeans to pay for Greece's (and perhaps Italy's) spending is a recipe for resentment and strife. Not forcing Germans to pay for Greek goodies is a recipe for people getting along.

The other view is moronic. Argument a la mode:

Forcing OakesSpalding and Makifat to live in the same house is a recipe for domestic tranquility. Letting them go their separate ways is a recipe for strife. WTF?

Well, there are a fair amount of Europeans who take pride in what they have accomplished. And given the fact that most countries there have been invaded at one time or another by most other countries, the idea that if they are somehow economically tied together they will remain harmonious is not totally out of bounds.

But I agree. Saying that letting Greece fail is a recipe for war is a bit far fetched.

Now Italy, on the other hand.....

In real life, if two people get married, a divorce is rarely a quick road to people getting along. In fact, in many cases, getting a divorce can ensure life-long acrimony between two people. I would say with any relationship, telling someone that you're going to help each other, and then dumping the other when they need help is a good way to ensure long term acrimony, not people getting along.

>4 prosfilaes:
The cause-effect relationship goes the other way. The reason that divorced people often have persistent acrimony is because the acrimony is what made them get divorced.

Regarding the "helping" thing, my forcing you to pay for my plasma-screen TV is not going to make you like me. Poll Germans these days to see how they feel about the Greek bailout.

Interestingly, the Greeks themselves are PO'd about it too. Seriously, Greece? The rest of Europe is forking over cash to pay for your excessive spending and you're pissed at them? WTF? The story is that the bailout has conditions the Greeks don't like, but then, you know... don't take the fuckin' bailout. Something about pipers and tunes, here.
Maybe the Greek population is PO'd at their own political class for going along with it. That I could sort of understand.

The other thing is, the analogy is backward. When the divorce process itself adds to the initial acrimony, it's because x is forced to fork money over to y (typically the ex-husband being forced to fork money over to the ex-wife). Here, it's staying together that means x is forced to fork money over to y, while divorcing would mean a cessation of that.

>3 Arctic-Stranger:
And given the fact that most countries there have been invaded at one time or another by most other countries...

I know what you're saying (might as well try something else), but if you see the Crips and Bloods were constantly shooting at each other in the past, you shouldn't conclude that forcing them all into a room is a recipe for peace!

the idea that if they are somehow economically tied together they will remain harmonious is not totally out of bounds.

This is actually something I've tried to find literature on, in an ad-hoc way from time to time, but haven't had any success: Does having significant trade with another country make you less likely to go to war with them? I don't know.

But the question takes me to another thing that drives me up the wall about much discussion of Europe: the assumption that the common currency and the free trade area are necessarily a "package deal." Silly. And there's no reason that inter-country bailouts have to go along with free trade.

This week: Italian gov't bond yields up.
Today: Spanish gov't bond yields up.

There are lots of reasons this could happen, but everyone knows the reason in this case: Increased perception of default risk.

Will the European Central Bank print euros to bail out sovereign debts?

What about the European Financial Stability Facility? From proposed 800 billion euros to 1.2 trillion, and heading northward. "If you spend an untenable amount, we'll bail you out!" Yeah, THAT provides incentive for fiscal restraint.

The best-case scenario is that this blows up now. If it blows up later, it will be because the perception of a pan-European bailout facility makes all governments even more reckless in their borrowing.

Longer wait ► bigger bubble ► bigger crash.

My God, MarketWatch is now offering advice on how to short European bank stocks.

The problem with the Euro should have been obvious from the start: you can't have a common currency without a common financial policy. Europeans have to make a choice: either they centralize financial planning- which would mean individual countries within the EU would lose sovereignty- or they abandon the Euro. Even if they resolve this crisis now, there will be other crises ahead. The problem runs much deeper than just Greek overspending.

Another obvious problem is that the Euro zone includes countries like Germany and France, which have large, advanced economies, coupled with Greece, Portugal and the countries of Central Europe. The latter are essentially developing countries. While Germany may want a higher-valued and more stable currency, Greece needs a lower currency to attract investment and be competitive. But they both use the Euro.

Copping a line from Glenn Reynolds:

Europe is now too socialist for the People's Republic of China:

(Earlier this month) the chairman of the supervisory board of China Investment Corporation, the country’s sovereign wealth fund, put further distance between China and the eurozone bail-out, saying that Europe’s bloated welfare state meant that people did not work hard enough.

“I think if you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of their worn out welfare societies,” Jin Liqun said in an interview with Al Jazeera television. “I think the labour laws are outdated – the labour laws induce sloth, indolence rather than hard working. The incentive system is totally out of whack.”

Eurozone leaders had been hoping that China would use some of its trade surplus to back the bail-out fund.

>10 madpoet: Agree with pretty much the entire post. For more on this, put "impossible trinity" into a search engine.

And "optimum currency area" for background.

Those making analogies with divorcese etc. Don't forget these countries are neighbours. They can't just move out of town. next week, next year next decade they still need to trade with each other!

if Greek leaves and goes back to the drachma t will be paying the its loans in buttons, all the European banks that gave them the money, will watch their investment evaporate and Europe will find themselves bailing those banks out.
if Greece stays in the Euro then It get bailed out directly, what we are watching is Europe reminding Greece that this is only marginally preferable, an that it should toe the line

I was kindly asked by Carnophile to join this discussion.

What are the causes of the crisis?

There are multiple direct causes for the crisis. The Lehman crisis in the US brought weaknesses to the surface in multiple European countries. Spain and Ireland had healthy public finances, but had a banking problem due to overinvestment in real estate. Portugal and Italy have high national debt combined with low growth. Greece had the same problems as Italy and Portugal for a long time, but had managed to hide it by forging its statistics.

The root causes are in weaknesses in the set-up of the euro and enforcement of the rules, combined with weaknesses in the banking systems. Overall, the euro block is in better shape than the US, with a much healthier balance of payments and a lower level of consolidated national debt.

In northern Europe the return on government bonds has been dismal for decades, which may have something to do with the generous money supply of the ECB and its overseas brothers in arms. Hence money found its way to government bonds in the Mediterranean, where traditionally interest rates were higher. Mediterranean countries traditionally ran larger deficits than in the north, which they solved by depreciating their currencies, just like Britain and the US. With the introduction of the euro, that currency risk disappeared, but it was replaced with counterparty risk. Banks ignored that risk, speculating that governments in the euro-zone were “risk-free”. The lower interest rates in the Club Med countries led to decade long borrowing bonanza. Unfortunately, that money was not invested a way that it strengthened their economies.

The euro union is not an equivalent of the United States. It is a union of independent states that have only delegated part of their sovereignty to common institutions. The states are largely free to follow their own economic, social and fiscal policies. I would say that this is a necessity given the level of cultural integration. If you follow Hofstede’s model of measuring cultures (as in Culture and Organizations, which I highly recommend to anyone of you who does not have a passport, as well as to all Republican candidates for the presidential elections), you will find that four out of five global cultural models are present on the old continent. Citizens of countries like Greece, Italy and France have a profoundly different relationship with their government than they have in Germany or Holland. In brief, the social contract between burgher and government down south is not as strong as up north, leading to tougher wage negotiations, earlier retirement (with low pay) and more tax evasion, combined with more government borrowing, and, before the euro, currency depreciations. This lack of cultural integration and shared history can be seen as a cause for the very limited amount of transfer payments between the regions. In the US, New York State supports Florida to a much larger extent than Finland supports Portugal. In the euro zone transfer payments are restricted to EU subsidies. The oversight on these transfer payments is largely left to the receiving country. Differences in social policies also make integration difficult. Germans, who retire at 67, feel reluctant to subsidise Greeks who sometimes can retire in their 50’s. This does not mean that Greeks are lazy. Greeks work more hours on average than Germans or Dutchmen. The problems are to a large extent institutional.

Related to this is another problem: besides structural changes to gain competitiveness, southern countries need growth to reduce their debts. But northern countries will not expand budgets to accommodate this. Rather, they are reducing their own debt, because it is excessive (Germany's at 80%) or to prepare for the aging of society (Holland at 63%).

The lack of fiscal integration was recognised from the beginning: each country issues its own government bonds. Euro bonds would be much cheaper, because of greater liquidity. They would however automatically lead to fiscal transfers based on spread differences based upon differences in government credit risk. The strong countries have refused this. Another proof of the understanding for the need for more fiscal integration was the requirement that European governments had to keep their national debt below 60% (which says nothing about combined government, banking, and private debt) and their government budget deficits below 3%. All countries have sinned against these rules, including Germany and France, the de facto leaders of the zone. Some had recognised that this was an uphill battle from the start. E.g. in the 1990’s the Dutch Finance Minister passionately opposed the inclusion of Italy in the first batch of euro countries. But the other countries considered it a loss of face if Italy as a founding member of the European Community would not be included.

Among the things European countries share is weak banking oversight. Unlike the FED, the ECB has no detailed overview of exposures of each bank. The national regulators keep these to themselves. The European Central Bank also cannot operate officially as a lender of last resort to governments, just like the FED and the Bank of England. There are good reasons for this. First of all, the European institutions cannot enforce countries to change fiscal and social policies if they mess things up. Such countries could hold the ECB hostage in such a case as we have seen in the last weeks of Berlusconi. In principle, the IMF should be the lender of last resort at the moment when countries get balance of payment issues, but that goes against the pride of (particularly Southern) European countries. Secondly, the Germans demand that the ECB largely follows the Bundesbank that did not have this right. But the Germans, Dutch, and Finns have tailored their economic policies in such a way that they can deal with that. Club Med has not adapted. Thirdly, there is the dispatched government bond market. In practice, the ECB is now operating as the lender of last resort, although it restricts itself to buying in the secondary market. So far the ECB has been reasonably successful in sterilising this extension of the money supply. Estimatedly, they can continue this policy to about EUR 300 Bn in purchases (at least EUR 120 Bn to go). However, if balance sheets in the banking sector have recovered and lending picks up again, it is questionable if the ECB can get rid of its stock of bonds quickly enough, due to the liquidity issues explained above. Consequently, this would lead to inflation and higher interest rates in the longer term.

Last but not least there are the villains of the decade: the bankers. Bankers (mainly in Europe and Britain) have lent too much to weak sovereigns. or sold CDS’s (Britain and the US, although some now pop up in European banks’ books as well). Balance sheet requirements in Europe remained lower after Lehman than in the US, making the European banking system shakier than in the US (which is of course a regulatory problem). This makes the risk of a banking crisis bigger than you would want in the current circumstances. Countries like France would have to invest massive amounts of money in their banks if PIIGS sovereigns ceased paying their debts. This is one of the reasons for the idea that euro countries should not default if they are insolvent. But insolvency cannot be solved without haircuts and transfer payments, particularly in the countries with high debt and low growth issues.

Will it lead to war?

That chance is still very remote. Europe has to cut budgets, and prefers cutting the defence budget to the retirement benefit budget. Equally, Europe’s societies are not exactly blessed with a youth bulge that often increased the chance of war in the past. But so far problems have been quite abstract for most Europeans. The people who feel the pain personally are mostly in Greece (lower salaries, increased taxes), Spain (increased unemployment), and Ireland (lower salaries, increased taxes and unemployment)

But you never know. Bosnians and Serbs used to live in one country. The main difference between them was that Serbs did not go to church and the Bosnians did not go to the mosque. Then they started killing each other. But that is the Balkan. It is only a small part of Europe, and only Slovenia and Greece could be considered Balkan countries.

Don't we in Canada and the US have similar issues developing with our states and provinces? What will happen if California, Illinois, Ontario debts worsen?

At the state-municipal level in Michigan, whole cities and school areas are losing autonomy as the state imposes emergency management of their finances.

I see some new posts above, but for now:

Germany wants to stop a possible UK referendum on the EU.

Friedman pushes the meme that no two countries with a McDonalds have to war against each other. I don't know whether that is true or not, but I think significant economic ties can keep people from invading one another. That is not a surefire recipe for peace, but not a bad one.

I don't buy the divorce analogy. People fall in love; countries make treaties based on self-interest.

And the Crips and Bloods never had the Treaty of Paris.

Bailout's unintended consequences: By effectively making credit derivatives inapplicable to sovereign bonds, it eliminated them as a way to hedge sovereign bond risk.

So prices on sovereign bonds fall.

>19 Arctic-Stranger: That was true, about the McDonald's, until the recent (and brief) Georgian-Russian war. Purely coincidental, anyways. It's not like opening a McDonald's in Iran or North Korea would make war there impossible.

I don't think the European countries will go to war, but economic ties have nothing to do with it. France and Germany were each other's biggest trading partners on the eve of WWI; it didn't stop them from killing each other by the millions. What's kept the peace so long in Europe (aside from the former Yugoslavia) is, first, the Cold War threat, and then the European public's disapproval of war. War is just not accepted in Western Europe anymore (in Iraq or Afghanistan, sure... but not here in Europe!)

If there is violence, it will be internal: riots we've already seen... maybe a coup or even a revolution, at the very worst- but that's only in central Europe. Western European democracies are too mature for that. Knock on wood.

21> nods any talk of war amongst European states would garner nothing but blank looks from Europeans, it would be like trying to give a talk about big game hunting at a Homemakers craft fare.

#21: That was true, about the McDonald's, until the recent (and brief) Georgian-Russian war. Purely coincidental, anyways. It's not like opening a McDonald's in Iran or North Korea would make war there impossible.

That's confusing cause and effect. McDonald's doesn't stop wars; it's an indicator of a stable enough economy and state of mind that wars don't happen.

>23 prosfilaes: "it's an indicator of a stable enough economy and state of mind that wars don't happen."

Well, Yugoslavia got it's first McDonald's in 1988. Civil war broke out in 1990, two years later.

http://en.wikipedia.org/wiki/List_of_countries_with_McDonald%27s_franchises

...But we're getting a bit off topic.

Per Thursday's Wall Street Journal: Increasing pressure on the ECB to print euros to bail out governments' debts. Actually, the ECB already has been printing money to buy Greek and Italian government bonds, but some folks are saying it's not enough.

From the same WSJ:

French gov't yields starting to rise.

European banks starting to run out of the collateral assets that the ECB will accept for loans.

(No links because I'm reading hard copy, but I'm sure links are out there.)

Its not about debt size its about confidence
http://www.bbc.co.uk/news/business-15748696

Some data on the European balance of payments, both externally (quite okay) and internally (a problem): http://www.economonitor.com/rebeccawilder/2011/11/21/ea-balance-of-payments-the-...

About the McDonald's thing. In no way did I see it as a cause, but a series of effects.

Anyone remember MAD--Mutually Assured Destruction? Maybe today we have our own version of MAD--MAD-E Mutually Assured Destruction-Economic. If one country's economy fails, it takes the others down with it.

I may be wrong on this, but going back to TARP, as much as we might have wished those guys got their due deserts for bad business practices, letting them fail could be catastrophic. Maybe Greece is the Lehman Brothers, which we can let go down, but not Italy.

Carnophile, what do you think of this:

Germany, Sweden and other European countries with strong public finances should be on standby to provide emergency fiscal stimulus if the continent falls into deep recession, Sweden’s finance minister has said.

(...)

Europe’s fiscal and trade “surplus” countries have faced criticism for not using tax and government spending policies to boost growth across the continent and provide demand for goods and services exported from the eurozone’s crisis-hit member states.

In a video interview, Mr Borg said Sweden and Germany had room for fiscal stimulus measures but should remain “cautious” if, as he expected, economic growth merely continued at a more modest pace, so as to avoid putting fresh pressure on bond markets.

"The economies of southern and northern Europe make strange bedfellows", the Economist shows in a few charts:

http://www.economist.com/blogs/dailychart/2011/11/euro-zone-economies

As you can see in this graph, Italian national debt has hardly risen since 2000. Italy has accomplished this by cutting spending equivalent to the increase in interest payment. Three months ago everybody was optimistic about Italy's solvency. After a verbal brawl between Berlusconi and his Finance Minister it is considered a huge problem.

http://www.mint.com/blog/trends/then-and-now-the-european-debt-crisis-112011/?di...

Reading, but busy. Should have time this Thanksgiving Break to get back into this.

A very fluid, fast-changing, interesting situation.

Maybe-- and this is just a thought-- there should be two Euros. "Euro A" and "Euro B" Euro A would be valued at 100% of the existing Euro, and used by the more advanced northern economies, while Euro B would be used by Greece, Portugal, Spain, etc., and initially valued at 80% of the Euro. As the latter economies develop and become more stable, they could switch to Euro A.

Of course, no country would want to be a Euro B country, but it might be better than going back to the drachma, krona, etc.

Should we do that in the U.S., too? Maybe an Alabama dollar and a Montana dollar?

Bear in mind, it's an idea that's been bandied about.

> 33

It is an idea I advocated in 1998. It is quite popular in Britain (with its own "Euro C" currency).

The Dutch government's Bureau for Policy Analysis, has recently calculated that the wealth effect (because of easier intra-European trade) of the euro is about one week's salary per Dutch worker (say 2%) per year. That calculation must have been been made before incorporation of the expected costs of subsidising the garlic zone. Trade with Sweden and Denmark, who do not have the euro, has grown almost as much as trade with countries that adopted the single currency. Holland earns 70% of its national income from exports. In large countries with a healthy balance of payments, the effect should be lower.

In the mean time we see Belgian national politicians completely screwing up, as if there is no euro crisis.

>34 Jesse_wiedinmyer: The difference between the U.S. and Europe is that there is a federal government in the U.S., and a federal reserve, that determines economic policy. The E.U. doesn't have that. For the Euro to survive (as I mentioned above), Europeans will have to give more power to politicians in Brussels. I'm not sure they're ready to do that, but the alternative is to give up the Euro, or at least divide the Eurozone. The status quo-- a common currency without a common economic policy-- is unsustainable, in the long term. It's been less than a decade since the Euro was adopted by many European countries, and the system is falling apart, at the very first crisis.

Dividing the Eurozone into two parts won't solve all the problems, but it might ease some of the economic stress between north and south Europe.

>35 Jesse_wiedinmyer:
Jesse, can you re-do the link?

Think it was this one...

Glancing mention to the end of the piece.

http://www.vanityfair.com/business/features/2011/09/europe-201109

Got link, thanks.

Should we do that in the U.S., too? Maybe an Alabama dollar and a Montana dollar?

Sounds collectible!

> 39

That is the worst Michael Lewis has written, and a reason for me not read his new book Boomerang: Travels in the New Third World. An insult to his readers' intelligence (or at least mine).

But here's a first design for the northern euro. With France still in it, surprisingly.

#1 Support, please. Lewis has written some tripe, and if that's the worst, I want support.

>39 Jesse_wiedinmyer:
Oh gross! I stopped reading after a few paragraphs on Germans' supposed obsession with feces. Eww!

Apparently Sarkozy is in favour of some sort of split within the EU, with a few nations serving as a "core" of Europe, and the rest left on the fringe. See link below, from the Economist:

http://www.economist.com/blogs/charlemagne/2011/11/future-eu

The good news is that the EU bureaucracy is focusing like a laser on the important stuff:

EU bans claim that water can prevent dehydration.

Yes, this is serious, apparently.

>16 mercure:
There are multiple direct causes for the crisis. The Lehman crisis in the US brought weaknesses to the surface in multiple European countries.

I doubt this. Not that financial institutions that invested in risky mortgage-backed securities weren’t hurt. But the problem in Europe - at least the headline problem over here in the US - is a government debt problem.

Overall, the euro block is in better shape than the US, with a much healthier balance of payments and a lower level of consolidated national debt.

mercure, really now! Surely you can’t be arguing that sovereign debt in Europe isn’t a problem?!

The euro union... is a union of independent states that have only delegated part of their sovereignty to common institutions.
Or so they thought. The crisis now is being used to found an argument that fiscal policy should be consolidated at the euro area level (!). This calls to mind the Austrian economists’ point that government expansion tends to cause messes that are used as arguments for yet more government expansion, etc. Although, interestingly, there is a lot of pushback against this idea now, both from voters in northern nations and from, e.g., Sarkozy, with the idea of a multi-tier EU and/or euro area.

The lack of fiscal integration was recognized from the beginning: each country issues its own government bonds. Euro bonds would be much cheaper, because of greater liquidity.

Truly astounding to me that this is even being discussed. It wouldn’t last ten years. The PIIGS are going to run up their debts while German taxpayers pay for it? Lol, as if. Germany simply wouldn’t do it for very long. (I don’t think they’d do it even once more than they already have. German politicians, I trust, like politicians elsewhere, like being re-elected.) What, exactly, is the rest of the euro area going to do? Invade Germany and make them do it at gun point? Ridiculous. As you mention, the area can’t even enforce its own rules about deficits as it is.

Balance sheet requirements in Europe remained lower after Lehman than in the US, making the European banking system shakier than in the US (which is of course a regulatory problem).

The US banking system has looked pretty shaky lately!

>17 margd: Don't we in Canada and the US have similar issues developing with our states and provinces? What will happen if California, Illinois, Ontario debts worsen?

Indeed, one wonders. Harrisburg, PA just tried to declare bankruptcy and a Federal judge struck down that attempt.

>29 mercure: I can't get behind the subscriber wall, but from your quoted snippets:

Attention Germany, etc: Open a vein and start bleeding yourselves directly into Greece!!!

Crazy. Never happen, not for long anyway.

>28 Arctic-Stranger:, 29
Even if this were politically feasible as a long-run proposition (there are serious doubts even about the short run), the northern countries aren't infinitely rich.

>30 mercure: Interesting link. Really sums up why kludging together all those nations was always ill-advised. I don't know if the differences were as large 20 years ago, but still, they were there and this was foreseeable.

>31 mercure:
As you can see in this graph, Italian national debt has hardly risen since 2000.
They have a large chunk of debt maturing mid-Next year, no? 307 billion euros, IIRC.

>37 madpoet: a common currency without a common economic policy-- is unsustainable, in the long term. It's been less than a decade since the Euro was adopted by many European countries, and the system is falling apart, at the very first crisis.

I always thought the single currency would die sooner or later because nations benefit from autonomous monetary policy. But I never thought it would happen this fast. I had in mind a time frame of 50 - 100 years.

>36 mercure: the wealth effect (because of easier intra-European trade) of the euro is about one week's salary per Dutch worker (say 2%) per year. That calculation must have been been made before incorporation of the expected costs of subsidising the garlic zone. Trade with Sweden and Denmark, who do not have the euro, has grown almost as much as trade with countries that adopted the single currency.

"The single currency was a solution in search of a problem."

Discuss.

The euro was a political project, the result of the end of the Cold War and the fall of the Berlin Wall. Most of its neighbours at first opposed German reunification. The German magazine Der Spiegel lately brought an article about Margaret Thatcher taking pre-war maps out of her handbag and discussing them with Francois Mitterrand. As a way to contain Germany and its economic power the French demanded the single currency. Keep in mind that the purpose of the whole European Union is to stop war on the continent. It is one of the first articles in most of the treaties related to the European Union and its predecessors, and the European Union has been remarkably successful at this. A war between France and Germany is currently unthinkable, and the dictatorships in Portugal, Spain and Greece were easily integrated. The United States are always promoting the integration of other countries in Eastern Europe and Turkey for that reason. The “no more war” argument is brought up again now, among others by chancellor Merkel. So the euro is not seen as a solution in search of a problem, but as an instrument of peace and prosperity.

The Lehman crisis caused a different appreciation of risk in the euro zone’s banking zone. You may remember the various funny stress tests, which never included a scenario of a sovereign default. They created transparency of banks’ holdings in the field, though. Equally, some countries had highly leveraged banks (particularly France, but also Germany, who probably gave more develop aid to the US home buyers than to the whole African continent), and were not that keen on raising capital requirements swiftly. The sovereign crisis as we see it now started with the new Greek prime minister admitting his country's fraudulent debt statistics. If that issue had been quickly resolved, all the markets would now be focusing on America’s debt problem. But the northern countries wanted the IMF to solve it, potentially with a haircut for bond holders. Each country looked at its bank exposure and (cultural) concept of honour, and some said “no”. French banks have a lot of subsidiaries in Greece that would have had to write off a lot of debt. So they promoted the idea of a bail out by tax payers, basically meaning that Finnish, Spanish, Italian, German, etc. tax payers would pay the Greek government, who would pay the French banks. The Germans were only somewhat against that, because the Germans are the number two party who would profit from this concept. This particular policy is also behind Cameron’s and Obama’s insistence that the Europeans should “get their house in order”. What they basically mean is: you pay for our banks’ outstanding loans. America is number three of credit holders of PIIGS countries, if I am not mistaken. And it is Goldman who helped the Greeks cooking their books with swap constructions.

Still, the consolidated situation for Europe is better than America’s. If you insist on it I can probably find some article that proofs it (from PIMCO, for example). At a consolidated level, the balance of payments of European countries is only slightly negative. Most of the imports from PIIGS countries come from other European countries, and the northern European countries are all extremely competitive and run very large trade surpluses. It is the same with the debt level. The average national debt is maybe 80% only. The problem is fragmentation within the euro block. The euro block is fragmented, as are its the banks (as could be regional US banks to their own state’s debt). Were it as unified as America, Europe could afford its problems quite easily.

Remember that in the 1990’s when the euro was negotiated, the German economy was in worse shape than it is today (this year the German government collects record taxes and will reduce tax rates for citizens in 2012). They have gone through over 10 years of zero salary increases to improve competitiveness, and to finance the biggest leveraged buy-out in world history (the take over of East Germany). So while Germany’s competitiveness improved, France’s was stagnant, and Italy’s deteriorated. To achieve this, the Germans were also “tax sinners”, by running deficits larger than what the treaties allowed. As the leaders of the pack, they thought the rules did not apply to them, and they got away with it.

What is currently on the table is a treaty change that would lead to automatic fines for countries not balancing their budget sufficiently. The European Union government is a strange beast. It is not elected, and highly technocratic (and excels at creating bad publicity for itself, although it is not more silly than US Congress deciding that pizza is a vegetable; at least the Europeans try to mitigate the nonsense of big business). So while it has no democratic legitimacy, it can develop and implement policies that are often beneficial. Many have to do with standardisation (that increases competition) or best practices. Countries that implement the rules from Brussels more swiftly, are mostly in northern Europe and do better economically. Like every organisation, Brussels has ideas to increase its production, which would require more (tax) income. But they are quite strictly curtailed by national governments. It is now the northern leaders who demand a `budget czar`for oversight of national fiscal policies through Brussels. I would say this “Austrian economists” idea does not apply here.

Last week Brussels proposed three flavours of Eurobonds, based upon various levels of fiscal integration and the required treaty changes. They were based upon different calculation mechanisms, and maximum levels of debt it could finance to mitigate moral hazard. I have not really looked into the details however. The northern countries are not infinitely rich, but Europe fights with tied hands. Unlike the FED, the Bank of England and the Bank of Japan, the ECB is not a lender of last resort to its sovereigns. Effectively, Europe is the only place still on an equivalent of the gold standard. My father recalls that one sterling was worth over eight guilders. Today, one sterling would have been just 2.50 guilders. The greenback has done only a little better (as the Nixon government taught foreign creditors: "the dollar is our currency and your problem")

One thing that puzzles me is the long term democratic legitimacy of fiscal integration. Right now you see different solutions for deficit reductions being implemented across Europe. Fearing next year's elections, the French president opted for taxes on corporations. The Belgians go for taxing their citizens. The Dutch increased some taxes somewhat, and slashed government spending. The Germans slowed down bringing their deficit in line with EU requirements by reducing taxes. How can you standardise models that have taken decades to develop and run on different ideas of the role of government, time horizons, etc.?

You, too, can be a Central Banker. Play "€CONOMIA", the monetary policy game from the European Central Bank: http://www.ecb.int/ecb/educational/economia/html/index.en.html.

I don't think there's a version for proponents of the Austrian School.

Edited to correct a misspelling.

>17 margd: Don't we in Canada and the US have similar issues developing with our states and provinces? What will happen if California, Illinois, Ontario debts worsen?

>48 Carnophile: Indeed, one wonders. Harrisburg, PA just tried to declare bankruptcy and a Federal judge struck down that attempt.

Michigan law allows the state to appoint an emergency manager if a city or school board is in financial difficulty: http://www.michigan.gov/documents/snyder/EMF_Fact_Sheet2_347889_7.pdf . Apparently, the intent is to prevent bankruptcy.

Could interstate commerce clause allow US to pass similar legislation for a state in financial difficulty?

My impression of the Canadian system is that most responsibilities are federal--the opposite of the US--so I assume it could step in more easily? For years, it's functioned to move monies from "have" to "have-not" provinces, more so I think than in US?

>53 steve.clason:
The policy simulator at the San Francisco Federal Reserve Bank:
http://www.frbsf.org/education/activities/chairman/index.html

According to this simulator, after 12 quarters of the Federal Funds interest rate = 0 - which is where we are now - inflation should be above 15% and unemployment should be 1.5%.
That's starting from infla = 2.1% and unemp = 4.75%, but still!


Could interstate commerce clause allow US to pass similar legislation for a state in financial difficulty?

God knows that clause has been pretty elastic.

>52 mercure:
The euro was a political project... the purpose of the whole European Union is to stop war on the continent... and the European Union has been remarkably successful at this.
Now really, mercure, this is post hoc ergo propter hoc. It’s not as though Germany was about to invade France in the early 1990s, but was forestalled at the last instant as the euro began to be phased in.

A war between France and Germany is currently unthinkable
Well, yeah, because France has nukes!

(particularly France, but also Germany, who probably gave more develop aid to the US home buyers than to the whole African continent)
You lost me here.

If that issue had been quickly resolved, all the markets would now be focusing on America’s debt problem.
The US has a very serious debt problem, no doubt about it. But Greek sovereign debt holders have already had to take a 50% writedown!

French banks have a lot of subsidiaries in Greece that would have had to write off a lot of debt. So they promoted the idea of a bail out by tax payers... tax payers would pay the Greek government, who would pay the French banks.
If a gov’t thinks that bailouts are appropriate, why not just bail out their own banks? Why use the indirect method of bailing out an entire government whose debt the banks are holding?

Obama’s insistence that the Europeans should “get their house in order”.
Even I found Obama’s finger-wagging lecture to Europe grating. I can hardly imagine how irritating it must be to you Europeans.

Still, the consolidated situation for Europe is better than America’s... At a consolidated level, the balance of payments of European countries is only slightly negative. Most of the imports from PIIGS countries come from other European countries.
Major traders are already ramping up for a return to the drachma, and there’s a fear that such could lead to a self-fulfilling prophecy or domino effect. What’s going on in the EU or the euro area as a whole masks the real issues here. If Greece and Italy default there are huge stresses on the EU and the euro area. If they leave the euro area...
Regarding the consolidated perspective: The balance of trade for planet earth is identically zero. Every debt is someone else’s asset, so when real assets are taken into account, the net balance sheet position of planet earth is positive. This doesn’t make, e.g., the US federal government’s terrible debt problem vanish, though. Such aggregation can paper over an awful lot of problems.

What is currently on the table is a treaty change that would lead to automatic fines for countries not balancing their budget sufficiently.
Enforced by whom? How? Why would that be enforced more than the extant deficit-can’t-go-above-3%-of-GDP rule?

The European Union government... is not more silly than US Congress deciding that pizza is a vegetable
Yes, the US federal government is also a bunch of clowns. They’re birds of a feather.

Effectively, Europe is the only place still on an equivalent of the gold standard.
Huh?

>54 margd:

I don't think there's a version for proponents of the Austrian School.

Isn't the Austrian school more of an American hobby?

Just like saving the world is an American hobby, right? The eminent British journalist Ambrose Evans-Prichard thinks Uncle Ben could do just that with a little Blitzkrieg to smoke out the Krauts:

"The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations," he said.

(...)

The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world’s paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent.

One presumes that the Fed would purchase both the triple AAA core and Club Med in a symmetric blast of monetary stimulus across the board, avoiding the (fiscal) error of targeting semi-solvent states. In sense, the Fed would do quantitative easing for the Europeans, whether they liked it or not.

(...)

“We in the US need to snuff out these sado-fiscalists and fast, they are a danger to the world. The US can force monetisation at the ECB. We should back up the forklift and buy Euro area bonds. Lots of them,” he said.

This is neither Clausewitz nor Keynes, but honourable old monetarism:

The school is not Keynesian. They are inspired by interwar economists Ralph Hawtrey and Sweden’s Gustav Cassel, as well as monetarist guru Milton Friedman. “Anybody who has studied the Great Depression should find recent European events surreal. Day-by-day history repeats itself. It is tragic,” said Lars Christensen from Danske Bank, author of a book on Friedman.

“It is possible that a dramatic shift toward monetary stimulus could rescue the euro,” said Scott Sumner, a professor at Bentley University and the group’s eminence grise. Instead, EU authorities are repeating the errors of the Slump by obsessing over inflation when (forward-looking) deflation is already the greater threat.

Helicopter Ben would probably devalue the USD in the process also, which would be good for US employment, right?

> 56

It’s not as though Germany was about to invade France in the early 1990s

No, that is not the point. Have you read Henry Kissinger’s Diplomacy? In Europe there had long been an equilibrium between the larger states Britain, France, Prussia, the Habsburgs, and Russia. The re-unification of Germany messed up this equilibrium again. Germany is bigger than all its neighbours except Russia (but a much stronger economic power). Re-unified Germany has 80 million citizens; Britain and France have about 60 million. So careful integration of Germany into the common interests of the continent was considered important. Even without the military, German financial power would tower over France, and the French did not like that. Now that Germany is showing its swagger, you see the Dutch prime minister meeting up with his British counterpart. The old reflexes are still there.

Well, yeah, because France has nukes!

Absolutely. And Germany has a large chemicals industry. I would rate myself no expert in the field, but I’d seriously doubt that any European power could start a war against its neighbour(s) within 4-5 years. During the Cold War, all NATO-countries (with France partially exempted) were organised under American leadership to fight the Soviet Union. Right now, the armed forces are reorganised to fight in Afghanistan or realise regime change in Libya (some European countries were less enthusiastic about looking for weapons of mass destruction in Iraq, as you may recall). As an example, Holland is in the process of selling all its tanks. They used to have over 1,000. So what are Europeans going to fight with?

(particularly France, but also Germany, who probably gave more develop aid to the US home buyers than to the whole African continent)

German (state owned) savings banks have lost massive amounts of money from “structured securities, derivatives and diverse loan portfolios” mostly from the US. E.g. WestLB transferred 85 Billion to a bad bank guaranteed by the German government. US construction workers were paid, the houses still stand, but the money is lost. Belgian Fortis had to be rescued the Dutch, Belgian and Luxembourg governments, at least partly due to losses on US asset backed securities. As a Dutch taxpayer, I still guarantee a portfolio of American MBS’s for INGDirect. INGDirect would have preferred to repatriate the US savings to its holding in the Netherlands, but US law forced it to invest in the US. And the only competitive interest was from (conservative) mortgage backed securities (so far there are no losses on the state guarantee). European banking oversight was awful, while many European banks operate on a more international scale than US banks.

If a gov’t thinks that bailouts are appropriate, why not just bail out their own banks? Why use the indirect method of bailing out an entire government whose debt the banks are holding?

That is clear and simple: Greece cannot print its own money. The money supply is determined by the ECB in Frankfurt. If Greece needs money to bail out its banks, it needs to borrow that money. Would you lend it? Hence, the ECB now keeps Greek banks on a lifeline in return for collateral. To remain within its mandate the ECB will only do so as long as there is no haircut on any sovereign debt.

Even I found Obama’s finger-wagging lecture to Europe grating. I can hardly imagine how irritating it must be to you Europeans

The Europeans would do the same if they got the chance. The silly thing is the concept that governments should bail out all banks. That is nonsense. Banks should be able to go bankrupt. Systemic banks could then be saved by buying new stock in the bank at the most terrible discount imaginable. Likely, this will teach old shareholders a lesson, and might gain tax payers a profit in the long run. This is what Sweden did in the 1990’s.

Such aggregation can paper over an awful lot of problems.

I cannot agree more. However, the problem is bigger in Europe than in the US, because there is no central government, and the ECB is limited in its supervision of national banks. If Europeans would show solidarity the way people from New York subsidise Arizona, Europe’s problems would pale compared to America’s.

Enforced by whom? How? Why would that be enforced more than the extant deficit-can’t-go-above-3%-of-GDP rule?

By repression from the European Commission in Brussels. Already it can fine countries if they do not deliver budgets for approval to Brussels. That is why Belgium all of a sudden is going to get a government. Belgium had had a caretaker government since the last elections for over 500 days. Parties were still negotiating a coalition. The budget cuts or tax increases they were quarrelling about were less than the fine expected from failing to create a budget meeting EU-guidelines (I don’t think you have that in the US; this is an advantage of decentralised system). Europe will now get a “budget czar” that will have much more authority to force countries to meet the targets of the Maastricht Treaty.

Effectively, Europe is the only place still on an equivalent of the gold standard.
Huh?

Europe is not really on the gold standard, that is true. But the ECB is more independent from the government, does not have full employment in its mandate, still takes its inflation target serious, and has no mandate to become a lender of last resort to sovereigns (in the primary market at least, and it restricts its lending in the secondary market). So its behaviour is much more as if it were on the gold standard than all the other central banks. It is one of the reasons people like Nouriel Roubini are chastising the ECB. See for example Paul Krugman here:

By itself, that rate hike — although it was obviously, obviously a big mistake — should not have mattered that much. But maybe it acted as a signal of the ECB’s bloody-mindedness, and that’s what set off the panic.

If that’s what happened, then the ECB’s hard-money madness may have destroyed the euro.

>58 mercure: That reminds me of a quote by a French diplomat who was asked, in the 1950s, what NATO was for. He said, "It is to keep the Russians out, the Americans in, and the Germans down."

I've heard the argument that a re-united Germany was a threat to European peace, but I just don't buy it. Militarily, Germany was not a threat, as NATO would not allow any German aggression. And then the cost of reunification with East Germany was so burdensome that Germany wasn't a threat, economically, to anyone, for quite some time.

Otmar Issing, German former member of the Executive Board of the European Central Bank, explains the position of the ECB (for now) in the Financial Times:

Should a central bank act as the ultimate buyer of public debt? (One should not disguise it under the term of lender of last resort). Solvency of a sovereign debtor is traditionally defined as the state being able to service its debt by collecting taxes. Bringing this issue into the domain of the central bank means transferring an obligation of public finance into a monetary phenomenon. Nota bene: Not of monetary policy!

All the arguments in favour of such a “solution” of the public debt problem imply that the central bank will be taken hostage by politics (history provides us with a number of bad examples). How would investors react to such a new regime? Would they expect higher inflation in the future? If so, what would be the effect on long term interest rates? If those rates rose substantially this would lead to new problems for the sustainability of public finance. It is futile to speculate on a possible spiral of dangerous developments, but ignoring this risk is irresponsible. Stressing the role of the central bank as the ultimate buyer of public debt should be seen as an indication of the pathological state of public finances not as a sign of strength.

Secondly, the situation in the euro area is fundamentally different from the US or the UK. No one would argue that the Fed should guarantee the debt of individual states. No need because there are strict limits for debt financing by US states. This is also a fundamental principle of European Monetary Union (EMU) as it was designed by the Maastricht Treaty and presented to the people in countries getting the euro as the currency.

This is not a flaw in the institutional arrangement of EMU, but the prohibition of monetary financing is an indispensable element for a stable currency. Pressing the ECB into the role of ultimate buyer of public debt of individual member states would create the biggest conceivable moral hazard.

>57 mercure: Until Wed I would have said there's no possibility of the US using monetary policy to bail out Europe. But given the Fed-led coordinated central bank intervention to make dollars more available to European financial institutions, I'm not so sure.

Devaluing the $ good for US employment. By the textbook, sure. But the textbook stories have looked ever more wobbly over the last few years.

>58 mercure:
It’s not as though Germany was about to invade France in the early 1990s

No, that is not the point.

I was responding to what you wrote in 52:

The euro was a political project... As a way to contain Germany and its economic power the French demanded the single currency. Keep in mind that the purpose of the whole European Union is to stop war on the continent. It is one of the first articles in most of the treaties related to the European Union and its predecessors, and the European Union has been remarkably successful at this.

(particularly France, but also Germany, who probably gave more develop aid to the US home buyers than to the whole African continent)

German (state owned) savings banks have lost massive amounts of money from “structured securities, derivatives and diverse loan portfolios” mostly from the US. E.g. WestLB transferred 85 Billion to a bad bank guaranteed by the German government. US construction workers were paid, the houses still stand, but the money is lost. Belgian Fortis had to be rescued the Dutch, Belgian and Luxembourg governments, at least partly due to losses on US asset backed securities.

Oh, I see, this is another European anti-American rant. Right. Consider all that “development aid” an extremely small remuneration for all the treasure and blood we’ve been forced to expend bailing your abbattior of a continent out every time you start yet another fratricidal war of extermination. And let’s not even mention the Marshall Plan.

Don’t turn this into a pissing match about who owes whom more, mercure. You’ll lose. All I have to say “twentieth century.”

I thought you were different, but you’re just another US-hating European, it seems. Pity. For a few weeks there I was almost convinced I finally had a sparring partner in this group mostly interested in facts and logic.

In fact, I was mentally composing a post to lefties in this group using you as an example of how reasoned argument is more convincing than hate-fuilled cries of "racism," and the like.

But hey, you saved me the trouble, so that's cool. Thanks!

Your story about the spread of MBS risk is - how can I put this? - conveniently incomplete. European institutions are not at all innocent of MBS shenanigans.

(1) UK banks like Bradford and Bingley adopted lowered lending standards. E.g., increased mortgage loans to amateur landlords and loans in which the borrower "self-certified" their income (no verification required). Bradford and Bingley's mortgage unit was nationalized in September 2008 and the remnants were bought by a Spanish bank.

(2) UK Bank Nothern Rock originated sub-prime loans and then farmed out the risk to Lehman Brothers in the US. Sold MBSs that were based on UK mortgages to Lehman. Notice this is the opposite of the usual story about risk going from the US to other countries.

Oh, I’m sorry, are these facts getting in the way of your anti-US bleating? Too bad, suck it up.

As a Dutch taxpayer, I still guarantee a portfolio of American MBS’s for INGDirect. INGDirect would have preferred to repatriate the US savings to its holding in the Netherlands, but US law forced it to invest in the US.

I call pure, unadultered bullshit. The US has no repatriation controls on outbound funds as far as I know. Provide a credible citation for this, and I’ll say “I stand corrected,” but I rather strongly suspect this is a European urban legend.

As a Dutch taxpayer, I still guarantee a portfolio of American MBS’s...
As a US taxpayer, I pay for European defense. Wanna see who pays more?

Oh, hey, and now my home currency gets to be depreciated because the US central bank is bailing out European finaicial institutions: US $ down 1.1% Wed due to the enhanced swap lines policy action. Jesus, is there any trouble your shithole of a continent can get into that doesn’t require us to solve?

I was just thinking how all the threads on 'Pro and Con' turn nasty and personal, so I thought I'd check in on the 'Europe' thread, as it seemed to be the exception. We had a really interesting discussion going here.

Oh well.

it was inevitable I am afraid this is Pro and Con after all.

>67 madpoet: Agree. I've just been a lurker on this one, and am sorry to see it take this turn.

Carnophile, you're more convincing when you stick to economics. Quite interesting.

But when you refer to mercure's post as a "rant"--well, it's not. Refute an argument, if you will, but why mischaracterize it, and risk obscuring facts with rhetoric?

Or, your reference to "hate-filled"--err, where does that come in? That's a huge escalation in tone. Is it warranted?

As for turning this into a historical pissing match--well, until you blew your stack, wasn't the conversation mostly about a more focussed period, and issue, and it wasn't a pissing match...till now...

What happened to your sense of humour, Carnophile? I would be the last to talk down America’s contribution to safeguarding European democracy. And although there was certainly an element of American self interest, the contribution during two World Wars of individual Americans (and Tommies, Poles, Aussies, Limes, Indians, Moroccans, etc., who were directly involved in the liberation of our little kingdom) is still very much appreciated in Old Europe. But you see, combining facts and logics is still partly a creative process, and occasionally we try to joke in this country. There may however be a cultural factor at work. Always be careful with condemning people if you deal with foreigners, old chap!

Let me first congratulate you that between the ranting you were sometimes right. I doubt if MBS’s were an American invention, but I would say they are in their modern form. The idea that you can measure risk and calculate your free lunch from diversification precisely on the basis of 10 years of data was “Made in America”. America is still the thought leader in investment, although, just like with so many inventions, quite a few products do not work in practice. And certainly Europeans have tried them too, although I don’t think there is a place in Europe that legally supports the moral hazard that you just return the key to the bank if the value of your real estate is lower than your outstanding mortgage.

And for your information, Europeans did other risky things. Sometimes they even got away with it. E.g. some pension funds here invested eight digit figures in bonds of Fanny May and Freddie Mac. Such bonds offered a somewhat better yield than US Treasuries and were implicitly guaranteed by the federal government. Which is a good thing, given that both institutions are basically bankrupt now. So Dutch middle class retirees are very grateful that Barack and Tim transfer the tax paid by America’s middle class workers to Fanny and Freddie who pay it to them.

Regarding the case of INGDirect, I am afraid you are as wrong as your qualification is un-gentlemanly. Don’t ask me about the details of all the laws you have on the other side of the great pond, but it has to do with the legal structure of INGDirect USA (which was recently divested by ING). It was an internet savings bank, so it was probalby legally a “thrift”, or whatever you call it. As such it was restricted in what it did with its money. It had to invest 65% of savings into assets related to real estate, according to this report of the Dutch Central Bank. The money could not be transferred in whole to ING Group. Anyway, as a tax payer I guarantee the princely sum of 28 billion dollars of American ALT-A mortgages. And so far the Dutch Treasury makes a profit on it. I used it as an argument to show how connected the world is, and how difficult it is to understand the risks you are exposed to.

And really, something was terribly wrong with your sense of judgment if you worry about a one percent depreciation of your currency. You see, many European countries are net creditors to America, just like Japan and China. If you depreciate your currency, we get less of our money back. If our conservative monetary policy is sustainable is very doubtful, but most Dutch institutional investors (that are sometimes as big as their US counterparts) hedge the currency risk on their American assets, because in the past the greenback has lost significant value versus the guilder and now the euro. These hedges are concluded mostly with American investment banks, that obtain fees for the privilege. That way you get some of the money back that you invest in our defence.

And if I may digress a bit also, did you know that your president George W. Bush signed a law that allows America to attack the Dutch seat of government, a fellow NATO-member and an ally in probably 6 wars and a country that financed your War of Independence and supplied you with arms at great costs to itself? Without us you would still be taxed for your tea, and there seems nothing you hate more than taxes!

>67 madpoet:,68,69

A good rant can be quite jolly. E.g. you do not need to agree with Nigel Farage MEP to admire his great oratory skills. I would have admired Carnophile if he could have done something equivalent.

We may hear Mr. Farage again somewhere the week after next when Barroso and Van Rompuy have proudly presented another "comprehensive solution" to the euro zone's problems. I have lost count, but it is probably going to be the fourth time. And quite a few people are afraid that this is going to be the real make-or-break moment.

Last night I watched the weekly interview with the Dutch prime minister, who kept all options carefully open. He had visited President Obama earlier this week, who had asked him why Europe did not print more money. But the prime minister, a trained historian, explained to the president that increasing the money supply would be a risky thing to do and it would reduce the need for reform. When asked about the summit next weekend, he said he will carefully weight Dutch interests and that progress in Europe is necessary.

Just this week the parliamentary investigation into the 2008 crisis brought to light that the Dutch government had a law ready for signing to stealthily nationalise ING if that were necessary. Only 6 people knew about it.

There is an excellent paper by Barry Eichengreen about Europe's problems and the mayhem you may expect if the euro would break up. Incidentally, the paper is from 2008.

Mr. Eichengreen's paper is a 60 pages document that will take you at least an hour to read. So let us first listen to Mr. Farage:

And we are now living in a German-dominated Europe - something that the European project was actually supposed to stop. Something that those who went before us actually paid a heavy price in blood to prevent. I don’t want to live in a German-dominated Europe and nor do the citizens of Europe.

But you guys have played a role, because when Mr Papandreou got up and used the word ‘referendum’. Or Mr Rehn, you described it as ‘a breach of confidence’, and your friends here got together like a pack of hyenas, rounded on Papandreou, had him removed and replaced by a puppet Government. That was an absolutely disgusting spectacle that was.

And not satisfied with that, you decided that Berlusconi had to go. So he was removed and replaced by Mr Monti, a former European Commissioner, a fellow architect of this Euro disaster and a man who wasn’t even a member of parliament.

He touches upon a long term concern: the democratic legitimacy of standardised fiscal policies across the euro zone.

70> Don’t ask me about the details of all the laws you have on the other side of the great pond, but it has to do with the legal structure of INGDirect USA (which was recently divested by ING). It was an internet savings bank, so it was probalby legally a “thrift”, or whatever you call it.

They were called Savings and Loans but that kind of bank were all converted to regular ordinary banks after the Savings and Loan crisis of 20 or so years ago. More recently the depression era law that maintained a distinction between investment banks and banks was reversed so I believe that we only have one kind of bank now in the US.

We have at least two different regulatory agencies. Banks may opt to be under one or the other, as I understand it, and I had thought the distinction was roughly along the lines of commercial (in its latest incarnation) versus savings banks. I'd like someone who knows the details to clarify that.

Robert

>70 mercure:
Regarding the case of INGDirect, I am afraid you are as wrong as your qualification is un-gentlemanly... it has to do with the legal structure of INGDirect USA (which was recently divested by ING). It was an internet savings bank, so it was probalby legally a “thrift”, or whatever you call it. As such it was restricted in what it did with its money. It had to invest 65% of savings into assets related to real estate...

Nonsense. I am aware of the qualified thrift lender test.

1. Lower limits on relevant assets - which include various kinds on non-real-estate assets as well as residential mortgages, by the way - are not repatriation controls. If ING was chartered as a thift it would be just as verboten to sell off all its QTL assets and keep the proceeds in the US, as it would be to sell off all those assets and send the proceeds abroad. Though this is almost beside the point since...

2. ING can sell off its investments; it just has to maintain the 65% ratio. It could sell off half its asset portfolio and repatriate the proceeds, as long as the remaining asset portfolio had a 65% QTL component. It could also do this with 99% of its assets, or indeed just liquidate the institution.

3. Nothing is stopping ING from repatriating its investment income, its profit or interest income, from QTL assets. The 65% QTL test applies to assets; it doesn’t have anything whatsoever to do with the income streams generated from those assets. ING could repatriate 100% of the income streams they generate. Or if not, cite the law.

>72 jjwilson61:
The US has four kinds of depository institutions, financial institutions that obtain a significant chunk of their funds from saving and checking deposits: commercial banks, savings associations (formerly Savings and Loans, formerly Building and Loans), credit unions, and mutual savings banks.

(Technically credit union deposits aren't deposits, but "shares" in the institution, but as a practical matter this is a distinction without a difference).

The Glass-Steagal Act, the law that put up the barrier between commercial and investment banks - which are different kinds of animals - was partially removed in the 1990s. My impression is that Dodd-Frank as interpreted may re-build the wall to an extent.

>73 Mr.Durick:
There are several regulators of depository institutions. Depending on how you were chartered and what kind of business model you use, you could be subject to regulations of at least one of:

• The Federal Reserve System
• The Federal Deposit Insurance Corporation
• The Comptroller of the Currency (this is most relevant as a regulator if you have a significant amount of international activities)
• The Office of Thrift Supervision (which was recently shuttered by the Dodd-Frank Act and its functions handed off to the Comptroller of the Currency)
• The state government of the state you're located in
• The National Credit Union Administration
• The Securities and Exchange Commission to the extent that you engage in investment banking activities and participate in securities markets.

Earlier UBS produced a report on the consequences of breaking up of the euro. Here's a new one by ING. Scenarios start on page 9.

It gets chilly on page 11. The break-up could depress euro zone GDP by between 7% and 13%, double to triple the one of the Lehman crisis. The large drop in output, averaging 9% for the Eurozone as a whole, leads to sharp rises in unemployment, up to 13.2% of the labour force on average. America seems to get away with it quite well. I understand that American banks have greatly reduced their exposure to European sovereigns lately. And those of you who do not have mortgages but drive Hummers may even have a party:

A soaring US dollar would also impart a deflationary shock to the US economy. The sharp drop in global activity, coupled with a stronger US dollar would also prompt a sharp drop in commodity prices. In our break-up scenario, we assume that crude oil prices would fall to USD 55/bbl. This would serve to depress headline inflation worldwide.

It will also be your chance of a lifetime to invest in stocks!

While Germany is contemplating the nationalisation of Commerzbank (which is big), it is interesting to look at the causes for the rise of German national debt since 2009. Most was for support of their financial sector (think the 85 billion euro mentioned in message 58). German tax payers were more affected by the Lehman crisis than British tax payers.

Still, that is nothing compared to what German's elite is now demanding of its population, according to Ambrose Evans-Pritchard:

The Germans too are victims of this ruinous project, the greatest victims of all. Their elites have led them into a diplomatic and economic Stalingrad.

On the other hand, German employers cheer minister Rösler for his initiatives to make hiring workers from the weaker EU-countries easier.

>76 mercure:
grumpy old man

Devastating counter-argument.

>78 mercure:
While Germany is contemplating the nationalisation of Commerzbank (which is big), it is interesting to look at the causes for the rise of German national debt since 2009. Most was for support of their financial sector (think the 85 billion euro mentioned in message 58). German tax payers were more affected by the Lehman crisis than British tax payers.

German debt has been steadily going up since at least 1991 (as far back as the ECB data goes). But never mind, we must pick our time frames to tell an anti-American story! Here's the European Central Bank data on German government debt. By the way, this is the consolidated debt measure of which certain persons here are so very fond, which means it doesn't count the government debt held by government entities.

1908: Meteor strikes Tunguska, Siberia.
2011: A certain European blames it on the US.

It's all the U.S.'s fault!!! Blllllleeeeeeeeeaaaaarrrrrrrrrrrrrghhhhhhhhh!!!!!

Pathetic.

Oh, this is priceless. The alleged effect of monstrous Lehman on the German nat'l debt is somewhere between 10 and 15 percentage points of GDP (the magnitude of the yellow bar). However, the "accommodated revenue loss" is negative five percentage points. If you follow the link provided by wassisface and then proceed to the original IMF document, you get this footnote explaining the "accommodated revenue loss":

"Revenue loss associated with output losses from the financial crisis. This is computed as a residual. If the sum of identified drivers of debt is larger than the overall increase in debt, revenue losses from lower output were minimal and/or compensated for by fiscal measures."

Er, yes, it would seem to matter for the reliability of the graph if the estimated drivers of the increase in debt exceeded the actual increase in debt by a magnitude equal to 5% of GDP! LOL.

Another day, another anti-American European douchebag. Yawn.

Anti-American? So far the idea here is that Europeans have been lousy bankers and that the regulators have been sleeping. And nobody will claim that all losses were due to Lehman. A substantial sum was, but in the aftermath of the Lehman crash the banking sector made mind boggling losses for other reasons also. These were likely more substantial. As an example, on Tuesday night there was a documentary on the Beeb about RBS. The British taxpayer bailed them out for GBP 20 Billion. "Only" 11 Bn was attributed to its MBS-repacking unit in the United States. The total loss of RBS was GBP 24 Billion. The Germans had invested much more in MBS's, however.

If you’re going to be an asshole, at least try to be original.

I don't like your qualification, Carnophile. You have absolutely no manners. Rest assured, I shall cease my contribution. I do not like dealing with you.

Please don't stop Mercure. your posts are very interesting, well informed and informative. Just ignore Carnophile.

84> nods agreement

Here's another wish, Mercure, that you continue to post.

Robert

I know nothing about economics, but one debate with Carnophile on a political question was enough for me to establish his lack of interest in historical facts or even simple reasoning when they got in the way of his stereotypical right-wing paranoia. I've tuned him out since. What bothers me much more than his precious ADD-stricken instant-analyses is the potential extent to which patriots like him dominate the boardrooms of financial institutions and policy think-tanks. Or the even larger number of people who are easily swayed by such 'charismatic' evangelism, fed on myths about innate righteousness and the will to believe in oneself and one's circle and in success. Carnophile has touted his doctorate or doctoral candidacy in Economics more than once. I wonder how many similar experts, armed with a shiny list of credentials, roam across the glass and steel landscape of banking skyscrapers when they are not selling themselves on television. I might be mistaken, but I imagine them being rewarded for preaching what people want to hear, even as peers are throwing themselves out of neighbouring windows.

I see Existanai is back. I hope that post wasn't responding to any of my posts because I made use of the Ignore feature more than a year ago.

The Basel Agreement encouraged the holding of EU sovereign debt because it counted as “zero-risk” capital.

http://www.nationalreview.com/corner/284851/regulation-lemmings-andrew-stuttafor...

(1) Marketwatch on Europe-US links: American banks’ direct and indirect exposure to Greece, Ireland, Italy, Portugal, and Spain estimated at $641 billion.

(2) Prepare for riots in euro collapse, foreign office warns.

(3) Today's Wall Street Journal: Irish Central Bank studying printing options for return to Irish pound.

>82 Carnophile: It is interesting that the graph linked covers 2007 - 2011. I wonder how much "financial sector support" in 2011 has anything to do with Lehman, and how much involves propping up German banks that had purchased Greek sovereign debt.

boring. bring back mercure, I say.

>I hope that post wasn't responding to any of my posts

As promised above - the fervent patriot chooses hope over verification.

>boring.

Anti-boredomist!

EU minus Britain agrees to proceed on a "fiscal compact." The idea is not to issue to euro area bonds, but to limit government deficits and debt.

The question remains, though, what the enforcement mechanism will be. The rules already in place about deficits and debts have been flagrantly disregarded by major players. If the new rules are flagrantly disregarded, what happens? "We'll fine you!" And if we don't pay the fine? "We'll fine you even more!" And if we ignore that as well? I mean, at some point the rules either will be forced, literally, by, er, force, or they won't be.

The only alternative I see is exclusion from the free trade area. But that wouldn't seem to be a credible threat since the whole project is premised on the notion that free trade is in all EU nations' interest, so the "punisher" nations wouldn't want to do this any more than the "punished" would.

And the costs of making the legal and institutional changes required to punish a nation in this way, reinstituting trade barriers on particular nations, checking rules of origin, etc., would seem to be not worth it for the punisher. This is especially true given that a nation out of compliance this year might be back in compliance next year. Seriously, Germany is going to exclude France from free trade this year, gonig through all the trouble of re-writing tariff and quota laws, establishing enforcement mechanisms, etc., only to possibly dismantle all that next year? I don't really see that happening.

The other possible threat would be the withholding of some sort of pan-European aid funds. "Play by the rules or you don't get your disbursement this year." The problem with that is that not every nation can be a net beneficiary of such a transfer mechanism. Ones that are net contributors would be better off, not worse off, if they were excluded.

Also, there’s an escape clause embodied in the preliminary proposals - you’ll be allowed to violate the rules provided enough of the other members of the compact vote to let you. This could lead to sub rosa pressure from some nations to others. France to Croatia: “Vote to let us violate the rules or France shuts out Croatian imports.” (This is plausible if the costs of establishing trade barriers is small. If the cost is large, per above, the entire enforcement mechanism wouldn't work anyway.)

Not to mention: "Vote for leniency for us, because we'll be keeping track of your votes. And if you don't vote in our favor, guess how we'll vote if you ever need an exception?"

EDIT: Although if the voting were by secret ballot it would reduce the above two problems and in theory even eliminate them.

Result: Some paper has ink applied to it. Speeches are made. Things continue on as before.

~87

Same old pattern. Carnophile launches a personal attack. His post is quickly overwhelmed with flags. Existanai personally attacks Carnophile on the basis that he or she "knows nothing about Economics" and he dares to have opinions based on his Ph.D. in that subject and numerous facts. No flags. Tells one: (1) Something about the mentality of the posters that dominate these forums and (2) the way that the purported monitors of these forums enforce TOS - doesn't it?

>95 lawecon:
I'm not convinced that it tells us that much about your examples (1) and (2) but, in any case, do (1) and (2) really matter that much? Life is short, lawecon. Flags are, well, little red icons. (Wowser. ) Personally I don't flag anybody and when I see people getting het up about them, it always sort of mystifies me.

I prefer to scan these threads in search of content and, occasionally, laughs. Doesn't always work but sometimes it does and hey, the price is right.

95: Given that Carnophile's post in question violates the TOS and Existanai's does not, the system is working just fine.

The situation in Europe is of grave concern to the U.S. for at least two reasons:

1) The cross-Atlantic links, both financial and in trade flows, are very real, notwithstanding how some strain to exaggerate and distort them to justify beating their favorite hobby horses. When we suffer Europe suffers; when Europe suffers we suffer.

2) The U.S. is on the same dark path of unsustainable government finances that at least some European nations are on. As Mises said, the U.S. didn't start on it as soon or travel it with quite the degree of speed and elan, but we're heading in the same direction. Already inbound chickens are looming on the radar.

David Hume a few centuries ago:
"Not only as a man, but as British subject, I pray for the flourishing commerce of Germany, Spain, Italy, and even France itself."

More on this:
Three layers of the European debt crisis

~97

I'd respond, "but one debate with StormRaven on a political question was enough for me to establish his lack of interest in historical facts or even simple reasoning when they got in the way of his stereotypical right-wing paranoia." Like you, I don't see any violation of TOS in that statement.

The Euro and the Tragedy of the Commons

A point that many have made before regarding the US, in which federal tax dollars are a commons from the point of view of congress and the president. Libecap applies it to the euro area as well.

Actually, the common currency by itself is not necessarily connected to fiscal policy, in theory. There's no reason in principle that Greece couldn't default with the main consequence being that Greece's sovereign debt takes a big beating on its credit rating.

As a practical matter, though, the debt situation and the fate of the euro seem to be bound together. A bad debt situation might tempt a nation to abandon the common currency so it can inflate its way out of the problem with independent monetary policy. Or the European Central Bank might simply blink and expand the supply of euros to buy the debt of sovereigns in trouble. In the latter case the value of the euro will fall eventually.

---------------------------------------------------

By the way, Thomas Sargent, who recently co-won the Nobel, did some work on fiscal-monetary linkages, though not in the context of a transnational currency.

Regarding the "divorce" issue from farther up: I was just over at David Friedman's blog. He makes the point that in the US's case, having a union didn't prevent a war. In fact Lincoln's major goal during the Civil War - his only goal? - was to preserve the Union.

(I am not saying I think Europe is going to have a war any time soon, "ever-closer union" or no.)

62% of French citizens think the euro lowers the French standard of living.

The French have growing reservations about the euro: 36% want to withdraw from the eurozone and go back to the franc, the old national currency; 4% have no opinion, which means that they don’t warmly support the single European currency; 44% say it is a handicap in the present context of a world economic crisis; 45% say it doesn’t serve the national interests of France; and a staggering 62% say it is damaging the average French family’s standards of living and purchasing power.

#103: 4% have no opinion, which means that they don’t warmly support the single European currency

Talk about biasing the data. 4% have no opinion; which quite possibly means they have no opinion on the matter or don't comment on economic issues.

If they say they have no opinion I'd take them at their word. They don't particularly support or oppose it.

The notion that every single person has a firm opinion one way or the other, defies belief.

He's not disagreeing with the statement. He's disagreeing with the presentation of the information, which accentuates a particular read to the disregard of another.

And he's correct, it's dirty spin.

: 4% have no opinion, which means that they make no objection to the single European currency

>106 Jesse_wiedinmyer:
It's definitely spin. It's not dirty spin because he presents the fact - 4% have no opinion - as well as spinning it.

>107 SimonW11:
Absolutely.

From Dave Barry's roundup of 2011:

In Europe, the economic crisis continues to worsen, especially in Greece, which has been operating under a financial model in which the government spends approximately $150 billion a year while taking in revenue totaling $336.50 from the lone Greek taxpayer, an Athens businessman who plans to retire in April. Greece has been making up the shortfall by charging everything to a MasterCard account that the Greek government applied for — in what some critics consider a questionable financial practice — using the name “Germany.”

Standard & Poor's cuts credit ratings of nine euro zone nations.

Portugal gov't bonds are now junk bonds.

Some pushback on the meme, e.g., of Krugman, that European policy has broadly been characterized by "austerity":

http://newsbusters.org/blogs/tom-blumer/2012/05/08/ibd-calls-out-establishment-p...

http://blogs.telegraph.co.uk/news/nilegardiner/100153583/why-the-new-york-timess...

E.g., from the second url:

"In London, Institute for Fiscal Studies research has shown that just 6 percent of planned cuts in current public service spending in Britain have actually been implemented..."

Greece exits the euro: The conventional wisdom now seems to be "when" and not "if."

Even Krugman gets the magnitude of the issues, thinks Greece could exit the euro as early as next month.

The commentariat has even coined a cute little term for a Greek exit: Grexit.

Wargaming a Greek walkout on the euro:

The European Commission and the European Central Bank are drawing up plans should Greece abandon the euro, Trade Commissioner Karel De Gucht said in an interview published Friday, the first time a senior European Union official has acknowledged such preparations.

The ECB and the commission are "working on emergency scenarios in case Greece doesn't make it," Mr. De Gucht said in an interview with the Flemish newspaper De Standaard.
...
European Economics Commissioner Olli Rehn quickly countered Mr. De Gucht's comments about the contingency plans, saying: "We are not working on the scenario of a Greek exit. We are working on the basis of a scenario of Greece staying in."

The Economist had a good point in last week's issue that had this been done some months earlier, the fallout from it happening would have been much easier. That is, a voluntary exit from the eurozone would have been better for Greece and the rest of the eurozone countries than the forced exit that is going to happen. Not only that, but the exit is going to occur during one of two other events: either a Franco-German split over the fiscal pact or a major Socialist revolt against Hollande in France for breaking his pledges on renegotiating or tearing up the Merkozy agreement.

Per The Economist blog, some folks in Europe are talking about forcing Greece off the euro, which doesn't seem to make sense. You can't really force another country not to use a particular currency. Panama (and other places) have adopted the US dollar. I don't recall Panama asking the US's permission first. Strange discussion.

The euro area could make some changes, like forbidding the European Central Bank from ever buying Greek government debt, even in an emergency. But that's not "forcing Greece off the euro."

Meanwhile, I think Greece's best response to such "threats" is probably "Please don't throw me in that briar patch, Br'er Fox!" They're probably going to want to deal with their problems partly by means of an independent monetary policy, for which they'd need their own money, natch. But according to a poll mentioned in the foregoing link, "three-quarters of Greeks want to remain in the euro." (?)

The whole debate seems backwards and upside-down.

I presume Panama and other countries that use the US dollar don't have the right to print their own US dollars, whereas Greece can today, although in a controlled fashion. If you set that number at zero wouldn't this be the same as forcing it off the Euro. There would be nothing to stop them keeping it as a legal tender but they'd have to get all the Euros they need by selling things that others need or getting other transfers or borrowing money in Euros on the open market which would probably be quite tricky at the mo. I guess in the end they can't force them off but they can make life sufficiently uncomfortable that the Greeks would end up saying we'd be better off ourselves with our own currency that we could devalue if it helps

^ Right. The rest of the euro area couldn't literally force Greece off the euro, though they certainly could take steps that would make it more costly for Greece to remain with the euro.

One Eurobond to Rule Them All

European Council: “If you ask it of me, I will give you the right to issue the One Bond.”

Merkel: “You offer it to me freely? I do not deny that my heart has greatly desired this. In the place of a Council you would have a Queen! Not dark but beautiful and terrible as the Morn! Treacherous as the Seas! Stronger than the foundations of the Earth! All shall love me and despair! … I have passed the test. I will diminish, and go into the West, and remain Merkel.”

Brussels = Mordor is just such a funny concept

Euro Breakup Precedent Seen When 15 State-Ruble Zone Fell Apart
By Catherine Hickley - Jun 7, 2012

"It was a currency union of 15 states in 1992. Two years later, as budget deficits spiraled out of control, hyperinflation reigned and economies shriveled, just two members of the Soviet Union’s ruble zone were left."

"As Greek politicians threaten to break terms of the country’s bailout with international lenders, Spain calls for financial help, and northern European nations balk at funding the south, historians are asking whether the euro region is about to face a similar exodus. They take a longer view of the European Union’s crisis than economists, and it’s much bleaker."

"The Soviet experience tells us “an exit like this is messy and leads to loss of income and inflation, and people are right to be scared of it,” said Harold James, a professor of history at Princeton University whose books include “The End of Globalization: Lessons From the Great Depression.” “It isn’t an attractive analogy at all because the Soviet Union states all had serious troubles for the whole of the 1990s.” ..."

http://www.bloomberg.com/news/2012-06-07/euro-breakup-precedent-seen-when-15-sta...

Sometimes I feel tempted by libertarianism. Then I read the posts that appear here, and come back to my senses.

>120 margd: "The Soviet experience tells us “an exit like this is messy and leads to loss of income and inflation, and people are right to be scared of it," said Harold James

For God's sake, they were exiting a totalitarian superstate! And he blames their economic disruptions on leaving a currency union?! Idiot.

NPR's Planet Money has analogized the breakup of the Austro-Hungarian empire, when governments started stamping Austro-Hungarian kone to make them into Hungarian krone, Czechoslovak koruna, etc. Chaos ensued as people tried to get their bills stamped here and there. See http://www.npr.org/blogs/money/2012/06/01/154153186/how-to-kill-a-currency

What's the deal with the Soviet break-up? How did they handle the change-over in money? I would imagine the problems would have been less, as the Soviet economy wasn't a free-market state to begin with.

>123 timspalding:

Fewer problems?!! This be a weird world if the Cold War liberal that I am needs to remind the young-uns of the other-worldly Soviet experiment.

Hell it's all BS. Spain got a bail out today and still the big money managers pulled the rug out from under the stock market and shorted stocks/companies doing great down to the dumps again. Unreal the way they make money shorting down and then buying at rock bottom prices. I think they have not given up on the "credit default" insurance for the sovereign country's bonds they have bought. If they can bust a country to default on bond payments they make another killing - without ever owning the bonds themselves!!!

I am not exonerating Greece or others who racked up to huge of debt but they are sure getting help going down.

Greek PM says the possibility of a Greek exit from the euro "cannot be excluded."

But never fear! Greece just got another 18 billion euros for its banks. At the current rate of deposit withdrawals, this will stabilize bank deposits for another... 20 days.

>125 DugsBooks:
Owners of Greek government bonds have not made a killing on them. As I recall, they've already had to take a 50% writedown.

As to shorting, remember every bet has two sides. For every shorter who's effectively betting that the price of an asset (Greek bonds or whatever) will fall, the person or institution on the other side of the bet is betting that the price will rise.

In my previous post you can click to an article about nervous Greek depositors taking their money out of Greek banks. They're not doing this to destabilize the banks or whatever, but simply because they're nervous. Presumably the finance guys are thinking the same way.

Malefactors of finance make a pat narrative. But sometimes a cigar is just a cigar, and sometimes fiscal profligacy is just fiscal profligacy.

Fewer problems?!! This be a weird world if the Cold War liberal that I am needs to remind the young-uns of the other-worldly Soviet experiment.

No I just mean that there wasn't that much monetized in the first place. Salaries were bad. (When they pretend to pay you and you pretend to work, it doesn't matter than much what they pay you in.) People didn't have big savings. Banking was rudimentary. (If you had real money, you probably kept it in dollars anyway.) Most industries were owned by the state, so it wasn't like price signals would get screwed up or a lot of corporate bank accounts were changing currency. And so forth. I can imagine that changing currencies on the Soviet Union wasn't as hard to do because the currency wasn't really driving things anyway.

#127: For every shorter who's effectively betting that the price of an asset (Greek bonds or whatever) will fall, the person or institution on the other side of the bet is betting that the price will rise.

Yes, but see, I live in Vegas; I know this game. Invariably, the house makes its money, and that money comes from the little guy.

Astoundingly stupid essay. Title: "Switzerland Should Join the Euro."

You wonder if it's one of those things you hear about, where people say something deliberately moronic, in order to get people to visit their site, thinking "Can they be serious?", thus driving up their web traffic.

Yes, but see, I live in Vegas; I know this game. Invariably, the house makes its money

No; see 127.

#127, I was referring to people betting on the Greek & other sovereign bonds failing- not being able to pay up when the time comes. They have financial instruments for that.

As I understand it, they are like the instruments used by the guy in California with Aspergers syndrome who took apart and read the home loan packages that were bundled and then bet against them by buying insurance if they failed. He made tens of millions while banks crumbled.

There are levels of interest rates that are unsustainable for countries who use the bond sales to float their {usually deficit } spending. These rates go up with the increase in risk is the way they work I believe..

>130 Carnophile:

I don't think it has the right solution, but the problem—flight to the Swiss Franc as a safety currency—is distorting their tiny economy in crazy ways. When foreigners buy up your currency in order to hold it, their demand raises the value against other currencies. Switzerland's economy is heavily dependent on exports. The result is that Swatch Watches and chocolate cost far too much and can't compete because lots of money managers with no interest in participating in the Swiss economy want to hold something, anything other than the Euro. Sure imports are cheap, but perfectly sound industries are whacked repeatedly against the wall for years for reasons having nothing to do with their performance. Switzerland's solution, to buy foreign currency in "unlimited" quantities to depress the franc and keep to a 1.2 peg is also rather strange and desperate as things go.

#131: I did see 127. If there's a zero-sum game, and one side has full-time employees and control over the terms of the agreement, they win. However it breaks down, the banks will take their cut, and it will turn out somehow that most of the big guys were on the right side of the deal. Sure, if the little guy has the time, the knowledge and sources, he can build himself into the big guy, but most of the little guys got sold the wrong side of the bet by market managers who may well have bought the right side of the bet for themselves. That's why booksmakers are highly controlled, unless they can call it high finance and then they don't have to worry about the gaming commission.

If the little guy was winning, the big guy would stop playing and stop offering shortage as an option.

The discussion seems to be revolving around the theory that any fiat currency will hold its value in the current situation, worldwide. To believe that any of the currencies will survive what is coming from the Chinese is misguided, at best. Gold and silver are the best hedges in this situation, as they are not an investment for profit as much as insurance for the inevitable failure of fiat currencies - all of which are not backed by any asset, and all of which are in the toilet waiting to be flushed. The Chinese are buying and hording gold at an amazing rate and it is the scuttlebutt in knowledgeable financial circles that they are aiming to provide the only gold-backed currency in the market, in the very near future. This will remove the dollar from the strong position it has held as the world's reserve currency. Nothing else will matter, when that occurs and all of us should be in a position of holding some gold and/or silver when that occurs.

>132 DugsBooks:, 134

However it breaks down, the banks will take their cut

Banks have lost many billions of euros on all this.

The players who lost lots of money are largely financial institutions - commercial banks, hedge funds, investment banks, other FIs that were holding Greek sovereign bonds.

Regarding the guy who won big in credit derivatives, his counterparties all would have been large FIs - see the foregoing list and add insurance companies. Most of life is not a zero-sum game, but these kinds of contracts are. Someone wins, someone loses. Large FIs don't always win - see the current nattering over the JP Morgan losses - and when they do, often their counterparties who lose are other large FIs.

>133 timspalding:
I understand the problem - I'm an economist, for God's sake - but joining the euro? Seriously?

>135 K.J.:
The discussion seems to be revolving around the theory that any fiat currency will hold its value in the current situation, worldwide

Actually, the main object of chatter in all this is the prospect of the euro being abandoned by several countries and its value tanking severely.

>137 Carnophile:

:)

Interesting factoid:

"Which European country works the hardest?
Asked to name the hardest-working country in Europe in a recent Pew poll, people in the U.K., France, Germany, Spain, Italy, Poland, and the Czech Republic all named Germany. Only Greeks, who work the longest hours in Europe, named Greece."

Economist.com, quoted in http://theweek.com/article/index/228965/the-bottom-line

Don't they retire at like 55, though? Or is that just gossip?

Anyway, the conventional wisdom about yesterday's election is that it makes it more likely that the euro area will hold together at least a little longer.

"EU figures show the average retirement age is 61 in Greece, 62 in Germany and 59.4 in France."

http://www.thisismoney.co.uk/money/pensions/article-1696682/Rising-retirement-ag...

My understanding is that Europeans have more vacation time than Americans--and I say good on them! I remember projections that working hours would be reduced in America, but reverse seems to have happened(?)

I suspect that in Greece etc. as well as America, the system, rather than the workers are to blame for workers' predicaments?

137> "Actually, the main object of chatter in all this is the prospect of the euro being abandoned by several countries and its value tanking severely."

Which seems to play into what I suggested rather well, from my perspective.

If you took a vote from the people of Germany I think you would find the majority don't want to bail out anyone, anymore. Neither do the French. If it went to a popular vote, the Eurozone would likely end tomorrow. If Spain, Greece and Portugal pull out of the Euro, it may even strengthen the Euro for the remaining countries, although I have a sense that most Europeans would rather go back to their own currencies - and not have the EU hierarchy calling the shots.

>141 margd: EU figures show the average retirement age is 61 in Greece

Okay, so the 55 retirement thing was just an urban legend. I thought that seemed a bit crazy.

>142 K.J.: Now I can't tell if we agree or disagree. I think there are two distinct (but nevertheless entangled) issues. One is the growth of government debt, which is a problem for many European govts as well as the US govt. The other is whether the common currency is sustainable. I don't think it is. 50 years from now, significantly fewer countries will be using it, I predict. Possibly 18 months from now. If I were a betting man, I wouldn't take any long positions in the euro, which seems to be consistent with your outlook.

>143 Carnophile:

See "CBS News: Europe Balks at Greece's Retire-at-50 Rules" http://www.cbsnews.com/2100-202_162-6491799.html

"Like many EU countries, the general retirement age in Greece is 65, although the actual average is about 61. However, the deeply fragmented system also provides for early retirement - as early as 55 for men and 50 for women - in many professions classified as "arduous and unhealthy."

The vast majority seem reasonable, like coal mining, but others, like the bakers and wind-instrument musicians, might strike some as a tad silly."

Wind-instrument musicians?!

Reedy-lung.

Many pensions here in US allow for early retirement at 55, e.g., government, car companies at least until recently. Employers have made use of early retirement option to pare payrolls or to switch to younger (cheaper) workers, forcing 55YO into early retirement (though forcing is illegal) and encouraging them to retire early through buyouts and sweeteners. I think it's yet another example of "kicking the can down the road". (Particularly pernicious when employers such as Illinois put aside only ~45% of monies needed to pay promised pensions.)

(On the other hand, boomers forced to work into 70s by fallout of Great Recession are not clearing positions for younger workers.)

I recall musicians have a a markedly reduced life span according to actuaries.

It's Cracked, but they do have an article on orchestra playing, including series and even life-threatening dangers: http://www.cracked.com/article_19411_5-bizarre-dark-sides-to-modern-orchestras.h...

> 148 I heard somewhere that conductors, at least, live longer--apparently wand-waving is aerobic activity! :)