So they bail out their own greedy German bankers instead of the whole eurozone’s… Fix germany’s problem, not Spain, Greece, Portugal, Ireland, etc. Works for them.
This is the problem of a central currency without much central committment. Does someone in Texas or Kansas want to pay more taxes to fix the problems of California and its towns? The sentiment is 10 times worse in Europe, I imagine.
They “swap” items out to keep the final inflation figures low. Whether that practice is ethical, practical, desirable, etc is another conversation. It’s certainly not accurate. You can do all sorts of math manipulation to offset all the real price increases people are seeing all around them.
Think of it in reverse: What incentive does the Fed/govt have to manipulate the numbers so that inflation publicized is higher?
So they fix their own banks and leave major export markets like Spain having to endure the mess that the banks made, slowly and painfully. Doesn’t exactly sound like the formula for economic growth.
They probably feel the same as the rest of America felt when we had to spend all that money to fix the Texas S&L mess.
:dubious:
Here, you can compare the CPI to MIT’s Billion Price Index…
In the US, they scan the web and get the prices of over a half million goods daily, which is 5 times the number of prices the government looks at. If the government is really monkeying around with the data, you should see a major difference between the indices.
Because Germany is more to blame for the current crisis than Spain is. Spain had much lower debts and a lower deficit than Germany going into the financial crisis; its banks were better run and required fewer bailouts than German banks (which were up there with the worst of them internationally); and Spain has implemented more austerity than Germany has in response to the crisis.
The problem is that the structure of the Eurozone massively benefitted Germany - turning its “sick man of Europe” stagnation in the late 90s into an export-driven boom - came at the expense of Spain, causing a brutal boom and bust in Spanish housing and high inflation there. However Germany and the ECB have also refused to take any major measures to mitigate Spain’s current uncompetitive situation.
If anyone deserves to be suffering to turn around the current crisis, it’s Germany.
No it doesn’t. If they bail out their own banks and walk away, half of Europe defaults and collapses out of the Euro, plunging Germany into deep recession and possibly causing the collapse of the European banking system altogether in the chaos.
They do though. States like New York transfer 5-10% of their GDP to bail out states like Florida and Alabama each year. That’s a level of bailout inconceivable in Europe, but in the US it’s not even considered a bailout.
This gets into a larger systemic problem with the EU. The way it’s set up, it’s basically the Union of Germany & France and a bunch of Satellite States.
RE: The Price Index - so what? I doubt they are seriously distorting the truth. The question is, for example - if you bought a house, have a mortgage, and now house prices are way down - how does this lower YOUR cost of living? OTOH, if you already bought a big TV and the price is now down, or up, it does not impact you personally either. Averged over 300 million people, it does matter.
I don’t say the Germans fixing only the German problem is a good idea - just easier to sell to the German taxpayer, less disruptive than letting the whole system go down the tubes. The ideal situation is to wave a magic wand, eliminate all the debt, call the whole thing even, and start from scratch; have a “Euro-Bankruptcy Trustee” who decides what debts should be covered and by how much, based on hardship situations…
All pie in the sky. The europeans have blown their wad and now they have to pay the piper, and they will have no money. It will not necessarily hurt the worst offenders the hardest. Life is not always fair.
If the European Central Bank bought bonds and inflation occurred, they could always move the policy into reverse. Besides, a little inflation would arguably be superior to deflation or inflation that’s under 2%.
Printing money would be a good thing. There is a moral hazard problem though if the central bank buys Spanish or Greek bonds. The analogy would be if the Fed bought the obligations of Louisiana or the state of California. Such actions would blunt incentives for the individual countries to run sound fiscal policies. I think such fears are overblown in the European context, but at least that’s a real argument, in contrast with fears about hyperinflation that are not grounded in empirical observation.
The underlying problem is that Greece, Spain, Ireland, France and Germany don’t really share a sensible common currency area. In the US, if the oil patch goes south, automatic stabilizers kick in the form of higher out-migration and lower in-migration to the weaker states. Furthermore, the US is incredibly fiscally integrated: Florida is currency paying less money to the center in the form of taxes, is receiving higher welfare payments and enjoys massive support by the FDIC relative to most other states. And there are few regional complaints: we are all one country after all. The Maastricht treaty was a grand mistake and working out an appropriate kludge is challenging.
With respect, easy moralism is no substitute for careful analysis and observation. Spain and Ireland had more responsible fiscal policies in the years running up to 2007 than Germany did. The problem was in their under-regulated banking system and near-universal naivete about financial markets in general and the housing bubble in particular.
It essentially does. The federal government essentially buys most of the obligations of Louisiana and California to provide unemployment benefits, pensions, healthcare and national defence to its citizens, along with a bunch of other obligations. If Spain and Greece had those obligations taken off their hands their situation would be very different. I agree there is a moral hazard issue, but the analogy with the US is slightly misleading.
The Spanish banking system was arguably better regulated than the German one. While Deutsche Bank was being bailed out in 2008, Santander was making acquisitions. And the Spanish and Irish were no more naive about financial markets and housing bubbles than the US or the UK. The fundamental problem is the structure of the Eurozone and the way it has been governed, which first caused huge capital inflows from Germany into the Spainish housing market (causing inflation without increasing productivity, rendering it uncompetitive) and then stripped Spain of the conventional tools for dealing with the kind of crisis it has encountered since 2008 (currency devaluation and monetary easing).
It’s hard to put much of the blame on Spain but the Spanish people will be suffering a nightmare for years to come. Their unemployment is already above Great Depression levels in the US.
The ECB can start printing more money and will likely have to. Other than shoring up the banks though I’m not sure what else it will do. We can look to the US and the UK where quantative easing has not led to inflation but equally it has not stirred growth and development.
The problem with QE is the money is mostly getting squirreled away in bank accounts, not spent on anything. It’s kind of a stupid idea if you think about it: if you give people money, and they’re worried that their job is going to disappear, their first thought isn’t “Hey, I’m going to buy a new tv!” It’s “Shit, I’d better save this in case I get laid off in a few months!”
It did, however, buttress the banks which was necessary but as you note, it has not driven growth.
The German hyperinflation of the 1920’s is far in the past-yet the Germans are still scared of it. Suppose the ECB were to embark on a policy of inflation-wold this just encourage the Germans to save more?
Injected more money into a deflationary economy should (in theory) spark some economic activity-will this ever happen?
GM and Chrysler are still making cars and employing thousands.
the banks on Wall Street still are up and running, they haven’t closed their doors and turned off the lights.
Hundreds of banks across the USA - ditto.
People who otherwise would be buying macaroni dinners or frequenting food banks have rent and decent meals thanks to public works like paving roads.
AIG has not closed its doors, which would mean millions of policy holders either uninsured or scrambling to find replacement insurance.
I would suggest that the injection of cash in the economy has had a positive effect compared to what could have happened. There’s a limit to the quality of micracles it can produce.
However, some of this money, just like the issues under discussion for Europe, appears to reward bad behaviour on the part of those who got us into these messes. Unfortunately, this can’t be helped.
Easy moralism may not substitute for careful analysis - but the question is not what happened or who’s to blame… The question is what to do about it now.
Allowing the Greeks to carry on as they have is not a solution, it’s just a continuation of the problem. It seems even when faced with the stark reality, they at first tried to duck the issue by electing denialists. No matter who behaved well or badly, the pain in Spain is the banks they must sustain.
At this point, unlike the USA, banks still seem to be a local (national) problem rather than a central one, so it’s up to SPain to figure out how to fix their banks and whether to ask for outside help. From what I’ve read, Spain seems deserving but if Europe (Germany) gives them money, then the other PIIGS (Portugal, Italy, Ireland, Greece) will want their share.
manipulating economics is like nailing down jello. You can’t make an economy do exactly what you want, and you will likely get unintended spillover. I assume this is another reason why the europeans are proceeding cautiously.
That’s not was QE was about. QE was aimed at improving the balance sheets of banks, not consumers.
In normal times, the banks hold assets such as bonds and other securities that, along with its other assets, give the bank a return above what they pay out to depositors. If those assets turn out to be worth less than the banks thought they were worth, the banks willingness to extend credit declines because they perceive that their balance sheet situation isn’t as healthy as they presumed. QE is meant to replace the “bad” assets with “safe” assets, with the hope that it will repair the balance sheet of the bank, ease credit, and make it cheaper for the banks to raise capital. It didn’t do much for the overall economy for a variety of reasons, but a major reason is that the banks would rather use the money to continue engaging in the various financial shenanigans that we should have stopped after the last crisis than lending it out to businesses and consumers.
In Europe’s case, they keep putting together stop-gap financing to banks in the periphery so that they may continue their flow of payments to other banks in Europe, such as Germany’s banks. But they’ve coupled that with demanding austerity for the nations receiving the bailouts. That’s crippling the ability of those economies to recover, which means they have no realistic hope of paying back those stop-gap loans, which means Europe has just been kicking the can down the road a few months at a time. When Greece got bailed out in 2010, the Troika actually expected that GDP growth would be 2.1% this year; in reality, the expected decline in Greek GDP for 2012 is 6.7%.
I think the greater moral hazard is in always standing by to bail out the banks and not insisting on haircuts.
Not true. Europe’s banks are all connected by the investments they’ve made throughout Europe. They were willing to make those investments because the euro gave them a false sense of security about the creditworthiness of the nations they invested in. If the PIIGS’ banks don’t get help, that means the “good” banks have to take losses.
Now Greece seems likely to get the boot from the eurozone. I don’t see how they can continue to be a part of it. But Greece and Spain share the same problem: they don’t control their currency. If they did, they could devalue, reducing their cost of labor and make their exports more attractive. But they don’t have this option.
I see that I wasn’t clear. As I said, the US is highly fiscally integrated. But what the federal government doesn’t do is buy state bonds: the federal reserve buys treasury securities and during the financial crisis it bought mortgage securities. But not state bonds. So state governments are subject to a sort of financial discipline that the center is not.
I agree that Germany could send Spain et al financial aid. But doing that wouldn’t be as open ended. I also agree that these moral hazard problems are generally overblown.
Heh. It is said that one should never waste a crisis. Well we certainly dropped the ball on financial reform. I agree yet again.
It’s not really a stupid idea. If someone is worried about his job, and you give him money, he’ll save it. But there’s a limit to how much he’s willing to save. At some point hell stop saving and start spending. Put another way, there’s a demand for savings like there’s a demand for anything else, and it’s finite.
What’s interesting though is what happens when the Fed buys bonds. It swaps a bond somebody owned for an amount of money that’s equal to the value of the bond. His savings haven’t changed - at least not if you consider Treasuries a form of savings. Which the guy who sold them probably did. It’s an asset swap, in other words, and it’s not likely to change anyone’s behavior because from the point of view of whoever’s selling Treasuries not much has changed.
What’s needed is either more money or more Treasuries, not just swapping one for the other.