Instead of despair, practical solutions to the Euro crisis | 300 comments (300 topical, editorial, 0 hidden)

Re: practical solutions to the Euro crisis (4.00 / 2)

Krugman blog: The Spanish Prisoner (September 11, 2011)

One of the good ideas in Paul De Grauwe's now-essential paper (pdf) was to do a head-to-head comparison of Spain and the UK to illustrate the problems the euro faces. Here's an update.
...
To some extent this may reflect the reality that British growth prospects are better because of the depreciated pound, and also the fact that Britain won't have to deflate the way Spain will thanks to being on the euro. But I believe that De Grauwe is right that the most important factor is that Britain, which can turn to the Bank of England for financing if necessary, doesn't face the risk of a run by creditors the way Spain does.
What's needed, clearly, is for Europe -- and ultimately that probably means the ECB -- to provide for Spain and Italy the kind of backstop countries with their own currencies can provide for themselves. Without that, the whole euro system is at risk of unraveling, not over the course of years, but over the course of a few weeks.

Economics is politics by other means

by Carrie (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 10:18:37 AM EST

Re: practical solutions to the Euro crisis (none / 1)

Krugman uses this as an argument for the Euro being a very bad idea for Spain and almost any other member country. But the reality is perhaps more that the ECB doesn't have the powers/flexibility/ideology to backstop their economy like the Bank of England does. If the ECB acted to stabilise rather than deflate periferal economies we wouldn't be having much of this conversation. The problem isn't necessarily the Euro, it is the ECB as presently managed/constructed.

Can we really expect an independent Bank of Spain/Greece/Ireland acting as the ECB has done, unless ideologically captured?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 11:35:03 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

Even with a far more aggresive ECB, we would have still gotten debt bubbles in the periphery, it would just have given us more time to deal with/deny it for longer. Sure, yields could have kept down, but even so.

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

by Starvid on Mon Sep 12th, 2011 at 11:57:51 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

In the de Grauwe paper [PDF] there's this on page 25:

The next question then becomes: can the European monetary authorities, in particular de ECB, help out national governments? We have been told that this is impossible because the ECB should only be concerned by system-wide aggregates. It cannot be made responsible for national economic conditions. The reason is that it has one objective which is the maintenance of price stability in the Eurozone as a whole, and because it has only one instrument to achieve this goal.
This I believe is too cheap an answer. The ECB is not only responsible for price stability but also for financial stability. The financial crisis that erupted in 2010 had its origin in a limited number of countries. It is therefore important that the ECB focuses not only on system-wide aggregates but also on what happens in individual countries. Excessive bank credit creation in a number of member countries should also appear on the radar screen of the ECB in Frankfurt upon which the ECB should act.

Economics is politics by other means

by Carrie (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 12:13:22 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

Surely structural centre/periphery imbalances are a systemic problem? When low ECB interest rates (require by slow German growth) created an asset price bubble in Ireland and Spain, surely the ECB had a responsibility, as regulator of last resort, to limit these by capital controls, bank regulation and other non interest rate mechanisms. A one size fits all interest rate policy by definition means the need for non interest rate measures where the interest rate (driven by the core) is inappropriate for a particular member state. Where does it say, in the Treaty,that the ECB need only concern itself with system wide aggregates? When property inflation in Ireland reached 10-15%, why was that none of the ECB's concern - particularly when it was largely fuelled by German/French/UK banksnot subject to Irish regulation?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 12:34:04 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 3)

Where does it say, in the Treaty,that the ECB need only concern itself with system wide aggregates?

Nowhere. That, and the claim that it has only one policy tool (the interest rate) are ideological drivel.

Economics is politics by other means

by Carrie (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 12:36:29 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

When low ECB interest rates (require by slow German growth) created an asset price bubble in Ireland and Spain

Low interest rates do not create bubbles. Inadequate regulation creates bubbles (or, as in Spain's case, structural current accounts deficits under a fixed exchange rate).

The problem with the ECB was not that it kept rates low. It was that it did nothing (and has since studiously obstructed any attempt to do something meaningful) about the current accounts imbalances.

particularly when it was largely fuelled by German/French/UK banksnot subject to Irish regulation?

It wasn't. It was enabled by German/French/UK banks, but the primary mortgage originators were Irish, and subject to Irish regulations.

Now, they might have moved North of the border if the Irish regulator had had its eyes on the ball, in which case your complaint would have been valid. But that's an exercise in counterfactual history.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:09:53 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 3)

Many of the Irish developers who lost Billions and whose debts have now been socialised by the Irish Government made their losses in massive losses on developments throughout Europe and particularly in England. They borrowed from European banks for European developments in full compliance with EU liberalisation laws and policies. They were Irish in origin only and yet the "Irish Taxpayer" has now picked up the tab - for losses on investments which never came near Ireland.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 01:16:20 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

As you know, I'm not among the most effusive cheerleaders for the ECBuBa, but even I am not quite prepared to blame it for the Irish government deciding to bail out Irish gamblers who gamble in other countries, with other countries money and supported by other countries' banks. That would seem to be a matter for the Irish electorate to - ah - discuss with Fianna Fail.

Now, if you can make a credible case that the ECBuBa blackmailed Ireland to bail out the developers, and not just the banks, that's a different sort of story. But still not about low interest rates.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:32:26 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 2)

The ECB blackmailed the Irish Government to bail out the banks who had made loans to the developers using funds originating from EU banks - by threatening to withdraw all liquidity support for the Irish banks and thus crashing the Irish banking system - if it did not do so. Even now it is threatening to withdraw support if the Irish Government does not pay unguaranteed senior bondholders in the long defunct Anglo-Irish bank in full c. 3.8 Billion in the next few months - see Colman quotes.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 01:38:11 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

link here

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 01:40:45 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 3)

And that is quite obviously absurd.

However, this is not the story you told in the previous post - where you contended that the Irish developers had borrowed directly from foreign banks. Since domestic banks were involved, an on-the-bounce financial regulator could have killed the bubble dead.

Yes, the ECBuBa could also have killed the bubble dead by adequately policing cross-border lending. But you do that case no favours by pretending that the Irish regulator was powerless to stop the gambling when Irish banks were involved in it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:49:38 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

I'm not contending that the Irish banking regulator wasn't Brain dead - he was. What I am arguing is that the "light touch" regulation philosophy dominant at the time was fully in line with ECB market liberalisation policies, and the Irish developers and banks were lauded by all and sundry within the EU and beyond for their entrepreneurialism. An effectively regulator would have been swimming against the tide at the time.

In any case, I am unclear why the "Nurse in Ennis" should have been made liable for the losses of private banks domiciled in Ireland for losses sustained in Ireland and abroad. The primary responsibility for that has to lie with the Irish Government and regulator. However even now they are acting under extreme pressure from the ECB to repay bondholders in defunct banks in full despite the fact that those bonds weren't covered by any guarantee.

It seems clear to me that the ECB still hasn't learned what at least the Irish Government and bank regulator have learned in the meantime.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 03:32:01 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

However even now they are acting under extreme pressure from the ECB to repay bondholders in defunct banks in full despite the fact that those bonds weren't covered by any guarantee.

You're ignoring the 2008 "blanket guarantee" of all bank liabilities?

Economics is politics by other means

by Carrie (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 03:33:24 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

Apparently the 3.8 Billion of Anglo Irish bonds currently at issue weren't covered by any Govt. Guarantee

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 03:55:40 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

We agree on all that.

Still doesn't mean the bubble was caused by low interest rates or ECBuBa chicanery. The ECBuBa does not have the authority to play banking regulator, so let's focus on pillorying it for the chicanery it's actually responsible for. Being overstated has never done anything good for an argument.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 03:46:11 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

I think you'd find it hard to find an Irish economist who doesn't believe that the exceptionally low ECB interest rates at a time of 8-10% "growth" in the Irish economy didn't contribute to the asset price bubble. "market forces" determined that cheap credit availability resulted in increasingly higher asset prices. Whether the primary blame is placed on the "cheap" or on the "availability" is a matter we can debate. But I would tend toward the former. There simply wasn't a culture, in Ireland or the EU, to go for some heavy handed bank regulation at the time.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 04:02:05 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

I think you'd find it hard to find an Irish economist who doesn't believe that the exceptionally low ECB interest rates at a time of 8-10% "growth" in the Irish economy didn't contribute to the asset price bubble.

There is no mechanism for low interest rates to create bubbles.

There is no mechanism for high interest rates to kill bubbles, except by flatlining the productive economy so hard that pessimism causes people to reexamine prospectuses that now seem too good to be true (actually they should have seemed like that all the time, but nothing focuses your mind on little things like the soundness of a business model like the imminent threat of bankruptcy). I file that under the heading of "cures that are worse than the disease."

Killing bubbles is the financial regulator's job. Killing unsustainable growth rates is fiscal policy's job.

I think that there are compelling reasons to give the central bank the financial regulator's job. But that requires giving the CB the financial regulator's tools as well, and that's not the institutional setup we have right now. And it's especially not the sort of central banks we have right now. Major housecleaning would be necessary before they could fill those shoes.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 04:11:03 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

JakeS:

There is no mechanism for low interest rates to create bubbles.

I'm stunned by that statement. The Irish debt crisis is largely driven by Mortgage debt taken on my people who could afford the mortgage when both partners had jobs and when interest rates were low. There simply would not have been so much property development or a market for buying it in the absence of historically low interest rates. Are you forgetting that Ireland has one of the highest rates of home ownership (and mortgage debt) in the world? We are not talking business models here - simply affordability of mortgage repayments in the context of two income families and historically low ECB tracker rate mortgages that people thought would go in for ever - an an historic employment and wages boom which were well beyond the remit of any financial regulator to control.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 04:21:30 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

The Irish debt crisis is largely driven by Mortgage debt taken on my people who could afford the mortgage when both partners had jobs and when interest rates were low.

But this is not a problem with low interest rates. This is a problem with the financial regulator not making sure that banks don't lend to people who can only afford the loan because of interest rates that a blind deaf-mute could have told you that the ECB would eventually raise. Really. The ECB, and the BuBa before it, have been following a Taylor rule targeting German inflation since around 1980.

More fundamentally, variable-rate mortgages are an abomination unto God that should never have been decriminalised in the first place.

Even more fundamentally, an on-the-bounce financial regulator would have noticed - and killed - mortgages with a principal in excess of 5 times annual before-tax household income. With extreme prejudice, and no matter what the interest rate looks like.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 04:47:39 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 2)

There seem to me to be a lot of "oughts" in here. I think we agree that regulators ought do their job, even it that seems more the exception than the rule. It is, none the less, generally true that very low interest rates for a long time and with an expectation that they will be low for a long time is an invitation to carry trades and to bubbles. These conditions might not "cause" bubbles, but they certainly enable them. Perhaps human nature in a lightly regulated low interest rate environment with run amok finance doesn't "cause" bubbles either, but there will be a high correlation of the creation of bubbles with such conditions.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 05:59:20 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 3)

It is, none the less, generally true that very low interest rates for a long time and with an expectation that they will be low for a long time is an invitation to carry trades and to bubbles.

Carry trades, yes, but any CB/financial regulator with two brain cells to rub together can kill those. Bubbles, no. You get bubbles when you have high rates, you get bubbles when you have low rates. Because you get bubbles.

It so happens that the genesis of the bubbles of the last thirty years have coincided with low interest rates. This is because inflating a bigger bubble is the only solution neoliberal economics permits for dealing with the fall-out from a bursting bubble. So you will have low rates and incipient bubbles coinciding due to the common origin as remedies for an economic downturn.

You can destroy bubbles by raising interest rates, yes. Nobody disputes that. But the way raising interest rates kills bubbles is by keeping you at the bottom of the business cycle, whereas the way prudent financial regulation and unrestricted countercyclical fiscal policy prevents bubbles by keeping you on the top of the business cycle.

I know which of those I'd like to use.

Perhaps human nature in a lightly regulated low interest rate environment with run amok finance doesn't "cause" bubbles either, but there will be a high correlation of the creation of bubbles with such conditions.

Human nature in low regulation environments is to run amok with bubbles. Interest rates are neither here nor there. Interest rates were not low during the Florida land bubble. Interest rates were not low during the South Sea bubble. Interest rates were not low during the Tulip bubble.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 13th, 2011 at 06:22:44 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

Aside from the obvious ...

Bubbles are inherent to Human Behavior. People see other people doing something they want/like/need and start jumping up and down on the band wagon to get it. More people see people doing this and start doing the same thing.

Eventually the wagon breaks.

Reference: Extraordinary Popular Delusions & the Madness of Crowds, a book that everyone needs to read.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Sep 13th, 2011 at 12:54:28 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

I'm not arguing that financial regulation doesn't have a role, but that interest rates have an even greater role. The affordability of mortgages has been damaged more by people losing jobs and large parts of their income rather than the relatively minor interest rate increases to date. Interest rates also effect perceptions of value. If can get a mortgage for a house for the same price as I can rent one, why wouldn't I get the mortgage and end up owning the house in the end.

Yes, at the margins there were problems with 100% mortgages and people getting mortgages 5 times their combined incomes - and this should have been regulated. But overall mortgage demand wouldn't have been anything like it was had interest rates been higher.

If interest rates are as irrelevant as you claim, why is it virtually the only policy tool the ECB actually uses on an ongoing basis?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 07:06:27 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 3)

If interest rates are as irrelevant as you claim, why is it virtually the only policy tool the ECB actually uses on an ongoing basis?

Because neoclassical monetarism says that the only thing the central bank should or could worry about is inflation, that inflation is due to the growth of the money supply, and that the size of the money supply is controlled by setting the interest rate.

Economics is politics by other means

by Carrie (migeru at eurotrib dot com) on Tue Sep 13th, 2011 at 02:35:43 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

But if (as you seem to suggest here) housing prices and mortgage loads were not unreasonable relative to incomes, given continued full employment, then there wasn't a housing bubble. Real estate prices appreciating to take into account improving incomes isn't a bubble - it's catch-up. It's only a bubble if it is unsustainable given full employment and prevailing nominal wages (e.g. because people take out mortgages that only make sense if they can sell the house for more than they bought it for).

Otherwise it's just a government failing to apply sufficient countercyclical fiscal policy when the catch-up period ends, and the private sector has to take some time to figure out what to do with all the people it previously employed to work in the catch-up.

The affordability of mortgages has been damaged more by people losing jobs and large parts of their income rather than the relatively minor interest rate increases to date.

If people are not being bankrupted by rising interest rates, then how would higher interest rates in the past have prevented them from going bankrupt today?

If interest rates are as irrelevant as you claim, why is it virtually the only policy tool the ECB actually uses on an ongoing basis?

Because the ECB believes that money supply drives inflation. (In the real world, it's the other way around.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 13th, 2011 at 06:33:05 AM EST
[ Parent ]

Your argument seems moralistic, (4.00 / 3)

rather than historical. Certainly, the U.S. experience - which essentially spawned the whole 'developed-world' housing bubble - was planned by Greenspan, Rubin, Gramm, and ilk. And Bubbles Greenspan was in charge of the interest rate component.

That component was essential in the arguments that I experienced. Hard-heads like myself said that 'what goes up, comes down'; the CW became 'with rates this low, it's free money'.

Seriously - I was there.

paul spencer

by paul spencer (paulgspencer@gmail.com) on Mon Sep 12th, 2011 at 07:23:31 PM EST
[ Parent ]

Re: Your argument seems moralistic, (4.00 / 3)

In the case of the US, Alan Greenspan actually encouraged people to get variable rate mortgages when interest rates were at their floor from his bully pulpit as Fed Chairman.

Federal Reserve Chairman Alan Greenspan said Monday that Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.
In a standing-room-only speech to the Credit Union National Association meeting here, Greenspan also said U.S. household finances appeared generally sound, despite rising debt levels and bankruptcy filings. Low interest rates and surging home prices have given consumers flexibility to manage debt, he said.
"Overall, the household sector seems to be in good shape," Greenspan said.

That was in 2004...

Economics is politics by other means

by Carrie (migeru at eurotrib dot com) on Tue Sep 13th, 2011 at 02:39:27 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 2)

But this is not a problem with low interest rates. This is a problem with the financial regulator not making sure that banks don't lend to people who can only afford the loan because of interest rates that a blind deaf-mute could have told you that the ECB would eventually raise.

This is not the issue. Low mortgage interest rate does not improve the ability to buy houses. And asset price inflation is not a "sub-prime" issue. Low interest rate just capitalises rental value into higher price (price = rent/interest). The absolute interest payment stays the same despite the interest rate in monopoly markets like housing. Just the amount of debt increases and along with that naturally higher amortisation costs. Then we have a economic disaster.

by kjr63 on Tue Sep 13th, 2011 at 06:14:00 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

Addition:

Housing market is a credit market, not "real economy." Credit is given to the one who promises banks the highest interest. The price rises until "investors" pay all rental value to the banks as interest. So again, lower interest just means higher prices.

by kjr63 on Tue Sep 13th, 2011 at 06:19:02 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 3)

That is why preventing unrealistic principals is an important regulatory function, even if people can afford the monthly payment.

But interest rates affect other things than the mortgage market. They also raise the risk-free rate of return, which means that they subsidise lazy money and reduce investment in real capital (if you can invest in a machine that gives 1 % or in a sovereign bond that gives 1 %, you're going to pick the bond. But the bond generates 0 % added value to society, while the machine generates 1 % added value to society - so that's a net loss).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 13th, 2011 at 06:44:12 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

But interest rates affect other things than the mortgage market.

Yes. The problem is not the ECB rate, it's the bank mortgage rate.

by kjr63 on Tue Sep 13th, 2011 at 07:04:04 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

..or to be more precise, the problem is privatised land, that allows the financialisation of land values.

by kjr63 on Tue Sep 13th, 2011 at 07:06:48 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

Hypothetically, imagine Germany pulled out of the euro and wanted to set up a new currency union among like-minded countries. You're Finland: what do you do?

by Upstate NY on Mon Sep 12th, 2011 at 01:54:30 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 3)

If you wish to act in your national interest, you say "thanks, but no thanks."

If you wish to join the Neuro... well, that depends on how the €-Mark is dissolved in the first place. In the legally most straightforward scenario, it is dissolved by members issuing scrip. But you can only exit via scrip if you wish your scrip to depreciate (Gresham's law, Wörgl experiment), and Germany does not want that. So if Germany pulls out, it will be at the end point of some political negotiation which would likely include setting up the Neuro framework.

If it didn't, I'd suggest an Enhanced Cooperation group.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 02:08:26 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 2)

Finland is not really like-minded with Gernamy. Finland is like-minded with anglo-american world. There is a firm belief here in the power of debt and real estate. Not much else.

by kjr63 on Tue Sep 13th, 2011 at 08:04:54 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

Can I get you to expand that thought?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Sep 13th, 2011 at 12:58:42 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

Housing bubble and household mortgage expansion for a start. Both at historical record levels in Finland.

by kjr63 on Tue Sep 13th, 2011 at 05:08:51 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

Ah, OK.

Thanks

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Sep 13th, 2011 at 05:14:37 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

Look at this silly article:

http://yle.fi/uutiset/kotimaa/2011/09/poliisi_tutkii_harvinaista_petossarjaa_asuntokaupoissa_2869033 .html?origin=rss

According to the police the price is so low that there must be a crime. It should cost half a million, construction costs are so expensive (three times that of Germany). So ridiculous.

by kjr63 on Tue Sep 13th, 2011 at 05:43:51 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

Been looking at Finnish housing prices since early in the year. And gagging.

I don't understand why housing is so expensive, across the board, the Nordic countries. I understand winter is an issue ....

but ...

still.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Sep 14th, 2011 at 11:49:36 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 3)

I understand winter is an issue ....

It's not. The issue is the same as in Ireland and Spain.

The Serious People claim that the value of an apartment in a "middle of nowhere" town in Finland is 2400e/m2.

Of course it is nothing like this.

by kjr63 on Thu Sep 15th, 2011 at 04:35:11 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 2)

No, no, that can't be. Only swarthy Mediterraneans engage in unsustainable debt-fuelled property speculation.

Economics is politics by other means

by Carrie (migeru at eurotrib dot com) on Thu Sep 15th, 2011 at 04:55:32 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

I understand there are old warehouses in Helsinki one can pick-up for (relative) cheap. Wonder about purchasing one of those and turning it into a residence.

It's not like I haven't done that stuff before.

(sigh)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Sep 16th, 2011 at 01:09:05 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

Brick storage buildings are no longer in demand due to the pan-Fenno JIT production methodology. But their use permits have to be legally changed to residential. I know one photographer who managed to add a 'janitor' apartment to his studio. Overall though, I am surprised that more of these buildings haven't been converted to residential.

You can't be me, I'm taken

by Sven Triloqvist on Fri Sep 16th, 2011 at 02:16:38 AM EST
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Re: practical solutions to the Euro crisis (none / 1)

If the Helsinki city government is looking for a place to incubate a Creative Class, there it is. Old warehouses are marvelously adaptable and wonderful spaces for doing all kinds of things.

Have to dig into it to discover why people haven't snapped them up. Answers could range from Helsinki government unwillingness to change the zoning and/or issuing permits allowing conversion up to the people who have thought of it don't have and can't borrow the money to buy and convert them.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Sep 16th, 2011 at 10:28:19 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

ATinNM:

I don't understand why housing is so expensive, across the board, the Nordic countries. I understand winter is an issue ....

Is it? Compared to percentage of income or what?

At least in Sweden, there is (still) a large public owned housing sector which sets the standard for rents, which should keep them at fairly decent level.

Is it perhaps that construction workers are (still) unionised well-paid workers?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Sep 17th, 2011 at 08:56:31 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

Compared to the risk I'm prepared assume:

In the last 10 years, the price of tenant-owner apartments nationwide has risen by 153 percent [Me: eek!,] while small houses have grown in value by a comparatively modest 72 percent. [Me: "modest" 72%????]
In 2000, buyers had to pay 8,314 kronor per square metre ($115 per square foot) for a flat in Sweden. But by the end of 2010, Swedish apartment prices had risen to 21,057 kronor per square metre ($293 per square foot).

(cite)

Looking at the price rise and comparing to the average Swedish salary I conclude Sweden (and Finland) is experiencing a real estate bubble.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Sep 17th, 2011 at 10:56:28 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

Oh, you mean the bubble. Yes, it is still there. I thought you meant something more structural.

Note that average price is skewed towards units that are hold for a short time and also more costly units. From what I have seen the price rise has been moderate outside the mayor cities. Outside the mayor cities is also where the renting market with the controlled rents works best as there is no housing shortage and the town council acts as landlord of last resort.

To pick from the adds:
Alvägen 4 - 5 room house in Vännäs kommun/Vännäs | Hemnet

695 000 kr

Vännäs is a nice little town outside Umeå.

Södra Vägen 8 - 5 room house in Stockholm | Hemnet

4 600 000 kr

Ok, it is also bigger, but there is also a lot of bubble going on.

European Tribune - Housing bubble in Sweden going pop?

After some debate an interesting line-up formed. On one hand the central bank and the real estate salesmen denied that a bubble could be predicted at all. The central bank because bubbles can be known in their limited world and the salesmen because everybody knows that prices go up-up-up. On the other side was Bostadskreditnämnden, the treasury and the largest banks.

Still has not popped.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Sep 17th, 2011 at 02:14:05 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

In what sense have the developers been bailed out?

by Colman (colman at eurotrib.com) on Mon Sep 12th, 2011 at 01:44:00 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

No idea. That was Frank's contention. Unless I misread him, in which case this subthread may be disregarded without loss of generality.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:51:21 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

As a parenthesis, I again reiterate my position that the regional imbalances are not as such the problem (at least not in the short and medium run) - the problem is that the imbalances are papered over with debt instead of equity. IE, if Germany wants to finance Spanish purchases of German luxury cars, they should not do it by lending money to Spanish real estate developers, but rather by buying Iberdrola.

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

by Starvid on Mon Sep 12th, 2011 at 01:51:00 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 5)

The problem, if you want to talk root causes, is insufficient €-zone aggregate demand, caused by the wage suppression of the neo-mercantilist countries. The imbalances are the symptom.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 02:00:40 PM EST
[ Parent ]

Now we're talking essentials - (4.00 / 4)

or real politics (as opposed to realpolitik). These kinds of diaries are wonderful displays of expository prose, but to what effect? IMO, none until we get to a basic issue with a basic solution - preferably one that can be converted to a fairly concise slogan. Who's good at marketing here?

Actually, we need two types of slogans: 1) a slogan that speaks to Frank's national viewpoint without blaming the German people at-large, and 2) one for the Germans that blames the Austrians (economics school, that is). Maybe the German Greens and Pirates are handling that already.

paul spencer

by paul spencer (paulgspencer@gmail.com) on Mon Sep 12th, 2011 at 07:36:01 PM EST
[ Parent ]

Re: Now we're talking essentials - (4.00 / 6)

Well, it's simple. Germans should be pissed off (i) at their politicians for squeezing their wages to create profits for multinationals and their owners, (ii) at their banks for blowing off that money in stupid casino bets in US subprime and Spanish real estate, (iii) at their politicians for bailing out the banks at no political or practical cost to bank managers and bondholders, (iv) at their elites for blaming Greek laziness for the stagnant wages.

German elites have managed to make the Germans appear proud to have been ripped off by their banks and elites, because it somehow makes them more virtuous than the Greek.

Greece is a distraction. German wages are the real political issue.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Tue Sep 13th, 2011 at 06:35:26 AM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

If the ECB can buy sovereign bonds which might default any second (even if only in the secondary market), why couldn't it guarantee rights issues? And in the event of lack of a private or sovereign capital heading for those issues, take an equity stake itself? The shares would only be held for a short time, maybe 5-15 years, depending on how soon the economy and stock market rebounds.

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

by Starvid on Mon Sep 12th, 2011 at 01:38:07 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

Because sovereign bonds, once they have been laundered by the bid-ask spread of a major investment bank, are monetary instruments, and may therefore be bought as part of ordinary interest rate targeting. The common stock of banks is not.

Also, the banksters don't forcible injection of new equity. That sort of thing tends to precipitously increase the risk of having to look for a new job.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:41:46 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

So basically, the only problem is the one inside people's heads. Then comes the question: how come we managed to do this in Sweden, Finland, France, Belgium, even in the US and UK (though very badly)? Or how can German Landesbanken be government-owned (the horror!)?

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

by Starvid on Mon Sep 12th, 2011 at 01:48:55 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 3)

No, there is an actual constitutional problem, in that recapitalisation of banks is a fiscal operation, not an interest rate policy operation. The central bank is not allowed to do that. For a variety of reasons, some of which are actually unimpeachable.

What we could (and should) do is have the states recapitalise banks by issuing bonds to them and taking an equity stake in payment rather than a demand deposit. The ECB should then rediscount those bonds, and Bob's your uncle.

It's slightly more convoluted, but it preserves the principle that only parliaments can make fiscal policy. Which is an important sort of principle to adhere to, in my view.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:58:40 PM EST
[ Parent ]

Fiscal policy (none / 1)

I agree than it is important that fiscal policies should remain under the control of Parliament. However the ECB seems to be doing little else but make fiscal policy "recommendations" to member states like Ireland, and backing up their recommendations with threats of crashing our banking system if we don't comply.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 03:49:42 PM EST
[ Parent ]

Re: Fiscal policy (none / 1)

Which is totally and completely beyond its mandate and arguably downright unconstitutional.

So let's pillory it for usurping the function of democratically elected parliaments, not for failing to usurp the function of national financial regulators. By attacking the ECB for something that wasn't actually its fault, you're framing the conversation in a way that's far too easy for its cheerleaders to derail.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 04:14:09 PM EST
[ Parent ]

Re: Fiscal policy (none / 0)

A Central bank not responsible for banking regulation - another anomaly a new EU Treaty would need to address.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 04:29:43 PM EST
[ Parent ]

Re: Fiscal policy (4.00 / 3)

That is actually not an anomaly. Most jurisdictions have separated the functions of central bank and financial regulator. What is an anomaly is that there is no financial regulator at the same administrative level as the central bank.

There is a strong case for combining the two functions, and an even stronger for having a federal financial regulator, but neither is an absolute operational necessity in the way an employer of last resort is an absolute operational necessity.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 04:52:40 PM EST
[ Parent ]

Re: Fiscal policy (none / 1)

neither ()functions of central bank and financial regulator is an absolute operational necessity in the way an employer of last resort is an absolute operational necessity.

An absolute necessity that is, in fact, a modern rarity.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 12th, 2011 at 06:04:32 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

The problem isn't necessarily the Euro, it is the ECB as presently managed/constructed.

Aren't they one and the same thing? They are both defined by the EU Treaties. If the ECB is wrongly constructed at present, the Euro is badly constructed at present.

Economics is politics by other means

by Carrie (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 12:03:46 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

The Euro also has a lot of upsides whereas it is difficult to imagine a more stupid ECB policy/charter. The solution is a reform of the ECB rather than an abolition of the Euro. I am still unclear - see my question above - whether ECB policy is entirely due to Treaty limitation or more due to ideological idiocy.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 12:25:38 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

The Euro has political upsides, but I am not convinced that fixed exchange rate regimes do anything good on the economic side.

The political upsides can be gained at smaller economic cost if the will is there. If the political will isn't there, then what's the point?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 12:29:57 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

For Ireland (a small economy) the move from the Punt to the Euro was critical in preventing:

Ruinous interest rates (15%) largely driven by unreal perceptions of the Irish economy by important foreign actors
Extreme fluctuations in exchange rates - largely driven by large financial speculators gaming the system for personal gain
A decline in business investment - driven by the twin uncertainties above - individual businesses crave interest and currency stability as it improves predictability, planning and budgeting and reduces uncertainty over external factors over which businesses have no control - exchange and interest rates.

The Euro had a hugely positive impact on economic growth and investment by reducing those uncertainties and the ability of third parties to game them. The major downside of the Euro has been inappropriate interest rates and a Eurowide failure of bank regulation.

For a small economy like Ireland to go back to its own currency would be an invitation to global capital to basically take over the country as no Government/Central bank would be in a position to control the speculators...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 12:43:54 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 2)

The aggregate amount of money floating around in the world is more than enough to buy Ireland in the morning, short Italy in the afternoon, and hedge Spain in over night trading.

Any attempt to solve the euro crisis has to keep that in mind.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Sep 12th, 2011 at 12:53:05 PM EST
[ Parent ]

And its worser its getting! n/t (none / 0)

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 01:12:22 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 4)

And that would be wrong. Any government and central bank that so desires can control the speculators. As the Swiss are proving as you read this.

To your specific points:

The risk-free interest rate of domestic currency is determined by the central bank. Full stop. If "the markets" disagree, then "the markets" are perfectly free to attempt to stage a run on an entity that is solvent by fiat. Pulling off a short squeeze on some speculator who doesn't understand the monetary system is loads of fun.
The central bank can always prevent the currency from appreciating. The central bank cannot prevent the currency from depreciating, but the central bank can procure sufficient hard currency in the open market (during those times when the currency is not under attack) to permit it to discharge the country's hard currency obligations and offer currency swaps to finance strategically important imports for 12-18 months.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:19:59 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

That all implies a level of confidence and competence and an appetite for risk which we have never had in this country at official level. I would venture to suggest that Switzerland/Singapore etc. are exceptions to the rule that relatively small entities cannot control their own destiny within global capitalism - and they do it by sucking up to global capitalists big time. Remember that a global speculator only has to be right once to make a killing. If a local central bank administrator gets it wrong once he is out iof a job probably permanently. Their is an asymmetry of risk aversion between speculators and regulators...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 04:12:52 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 2)

That all implies a level of confidence and competence and an appetite for risk which we have never had in this country at official level.

Confidence, yes. Competence, I hope. Risk? No, the whole point of this operation is to make sure you run no risk of getting into a fight with the markets that you can't win decisively. If Soros and his friends even have a sporting chance then You're Doing It Wrong.

The very problem with pledging to unilaterally defend a fixed exchange rate (which is effectively what you're doing when you're entering a fixed-rate regime with the D-Mark, since the BuBa is completely unwilling to live up to its end of the deal) is that you commit yourself to fights where the other guy has a fair chance of winning. Fights with speculators should be totally unfair in your favour. You print the money, and you decide how much of your money they get to borrow. If you can't win with that sort of home-field advantage, you really deserve to lose.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 04:30:59 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

So you are advocating that Ireland and all other "peripheral" states leave the Euro?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 12th, 2011 at 04:33:35 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (4.00 / 3)

Yes and no.

Most of the peripherals have no business, economically speaking, being in a currency union (or any other sort of fixed-rate regime) with Germany, Austria and the Netherlands. Ireland is different, because it has a structural internal current accounts surplus. But for various reasons of historical accident, Ireland is getting shafted. And there comes a point when one must weigh the cost of leaving the Eurozone against the cost of getting shafted for the benefit of Societé Generel and Joseph Ackerman's Christmas bonus.

My gut feeling is that Ireland is approaching the point where it might make sense to just say "fuck it" and issue scrip. But where you fall on that trade-off depends on how you value the future relative to the present, and that is fundamentally a political decision that I, as a foreigner, have no business making for Ireland.

And of course that's only the economics. It is possible to attach political value to the continued existence of the Euro, and be willing to pay an economic price for keeping this political value. Again, that's a political decision that I can't make for the Irish electorate. Though I do note in passing that aforementioned economic price is, under current institutional arrangements, borne disproportionally by the less well off.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 05:02:30 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 1)

There is no time for treaty reform before the crisis runs its full course.

Economics is politics by other means

by Carrie (migeru at eurotrib dot com) on Mon Sep 12th, 2011 at 12:31:12 PM EST
[ Parent ]

Re: practical solutions to the Euro crisis (none / 0)

Indeed. We're not talking years here, rather weeks or days.

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

by Starvid on Mon Sep 12th, 2011 at 01:43:37 PM EST
[ Parent ]

Instead of despair, practical solutions to the Euro crisis | 300 comments (300 topical, 0 editorial, 0 hidden)

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