A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Thursday, June 14, 2012

News from Europe

Spanish banks get some sort of bridge loan to nowhere through their government.


from Prime Minister Mariano Rajoy, whose party won with 44.6 % of the vote in November. Polls now say he would capture 37%., with 63% unhappy with his performance. Quote
"Europe is offering Spanish banks a credit line that they will have to pay back.... There is no macroeconomic conditionality for the country, but for the banks that receive it."
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Sounds kind of good. At least it sounds like Spain has declined the hemlock Ireland imposed on itself – the wholesale guarantee of bank assets by the taxpayer.

Not so fast.

The page one headline in the Wall Street Journal is followed by the lead, "Spain's acquiescence to a bailout of as much as 100 billion euros ($125) for its banks is a prelude to a much bigger question: Will Spain need a bailout for itself?"

Prime minister Rajoy's quote is on page A7.

On page A6, in the column just to the left of a quarter page ad for art deco diamond cufflinks, you get an analyst with this quote: "What you have to say now is that Spain is likely to lose access to the bond markets completely at some point. It has demonstrated to everybody that market access is limited by requesting aid."

And in truth, the banks and the political apparatus in Spain are interlinked, partly through the cajas, the regional savings banks, seven of which were merged to form Bankia, whose chairman Rodrigo de Rato resigned under pressure last month. The shares of Bankia did not find eager buyers on international markets, so they were peddled to the domestic population. Those shares have lost 75% since they were issued in July of last year.

Sudeep Reddy reports that the U.S. had quote pressed behind the scenes in recent monts for Eurozone rescue money to be injected directly into Spanish banks, instead of going through a loan to the government as now planned. That goal was pushed publicly by the IMF and many nations in Eurpoe – apart from the most powerful, Germany – to avoid adding to Madrid's already bloated government debt load and risking even higher Spanish borrowing costs in the coming months."


The banks are buying the government's bonds and the government is getting loans for the banks,  and there is no real separation. So the prime minister's position, though better as a negotiating strategy than Ireland's pointing the gun at itself, is likely no more credible than this quote from a Saturday news conference.
"It will allow the restarting of credit to families, entrepreneurs, small and medium-sized businesses so that they can all carry out their projects...  The European project, the future of the euro and our banking system all won new credibility yesterday."
 The aid comes from the European Union. We suggest the credibility of Saturday had vanished by the next Thursday.

Late news from Europe Online via Steve Keen

The jog on Greek banks is turning into a sprint, it seems, ahead of Sunday's elections.
Athens (dpa) - Greeks faced with uncertainty over their country‘s future have been withdrawing hundreds of millions of euros a day, officials said Tuesday, as the country heads to the polls for an election that could decide whether it stays in the single currency.

Greek account holders had withdrawn between 100 to 500 million euros a day, bank officials said, according to local media.

Reports said approximately 5 to 6 billion euros had vanished from accounts during the month of May and the situation had not improved since the start of June.

Bank officials said since the start of the economic crisis at the end of 2009 some 80 billion euros had left local bank accounts.
 One imagines the ECB now asked for continuing loans from Greek banks to deal with the bank run.  We've said it is the day that the ECB refuses to provide that backing that is the day the Greeks leave the euro.  It is not a matter of a choice by government.

We'll see.

I guess I would be moving money from Athens to Berlin right now.  If I had any money.

Meanwhile an old book with a new preface is out.  The book is Charles Kindleberger's The World in Depression, 1929-1939.

The preface is from Barry Eichengreen and Brad DeLong, which says in part:
The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening. We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right.
 Mark Blyth and Matthias Matthijs at Foreign Affairs: The World Waits For Germany.:
So Germany has shifted, but not enough to make any real difference to the outcome. Germany is both devoutly anti-reflationary and leadership averse, which is the worst possible combination at the worst possible moment. It would be nice, to use an American expression, for Germany to step up to the plate and put its full economic weight behind a fiscal and a banking union, including euro-denominated sovereign debt. But for reasons of history and ideology, as well as political and economic context, Europe may well be about to re-run Kindleberger's 1930s ...
 Another call for a banking union from the ECB, read from the Wall Street Journal
The European Central Bank repeated its call for a common banking union to shore up the euro zone's financial system, even as Germany's central bank warned such proposals are "premature" and risky.

The ECB's No. 2 official, Vitor Constancio of Portugal, also said the central bank should have the power to supervise large European banks, saying it has the institutional resources and knowledge to perform such a task.

"There is a need to…conceive a banking union as an integral counterpart of monetary union," the ECB said in its semiannual financial stability review. Such a union would include euro-zone-wide bank supervision, deposit guarantees and a funding mechanism from banks."
 We are  reminded of the end game in chess.  The end game is the period after the outcome has been decided, but the checkmate has not yet occurred, or the draw has not been agreed to.  The tactics and grand strategies have been played.  The end game is NOT the climactic final mating maneuver.  It is an often tedious pushing of a pawn to the last rank or cornering the king or even just a perpetual play on when neither side has the material to force a win.  Good players will often resign rather than waste time where there is nothing to learn, resigning even if the outcome is sure to be a draw or even if they could force a win.

This is the situation in Europe.  Nouriel Roubini predicted these events in 2006 at Davos.  The strategies to avoid them were to deal directly with the trade deficits, the debt and what are termed competitiveness issues.  The political players in the game, however, were not willing to give up their queen or bishops, as the strategy required, preferring to save the banks and lenders and euro rather than win the game.  But sacrificing the king is a gambit that never wins.  The king is the broad real economy, which must be fully employed in productive enterprise.

A friend of mine returned yesterday from France.
"... intensely interesting", he wrote. "No question in my mind but that the European experiment is the most radical in recent history.  I got a whole new appreciation for the political power of the euro -- despite its economic  failings, it is a political statement of incredible importance. "
 I'll leave out his comments on the experience of coming back to the U.S.  But he did conclude, "Ugh, we ought to be ashamed."

So.  I accept that the euro is a matter of extreme political power and importance.  But it becomes like a chess player who doesn't realize the game is over and forces his opponent to play on and on, contemplating every possibility that his king might block the connected pawns, dragging the game on into the night.  The motivation not to lose is intense.  The game has ultimate importance.  In the end, the worry is that the ultimate realization of loss will spur anger and frustration and it will cease to be a game of chess.  The board will be upended and engagement on economics will become engagement in political fisticuffs.

The question, of course, becomes, "Is the game really over?" For those of us who see it as a game, a combination of finance and currencies and employment policies and bubbles, and ultimately of political players, yes, the game is over.  The next game should begin as soon as possible.  For those invested in the euro project, who see the money as a symbol of unity and social advance, there IS the possibility that an overarching and unprecedented control of the financial sector and the financing mechanism could be instituted.  Dani Rodrik's view.  In theory, the sovereignty of nations could be upheld, trade rebalanced, the exchange rate difficulties finessed, even now—or perhaps especially now in the appreciation of the desperate times.

But the game is in the hands of those who must save the queen, not the king.  The bankers led by the ECB are making the moves.  It doesn't matter that everyone else sees the futility.  Even IF everyone else saw the futility.  The common currency can survive, but not the banks, not the bond vigilantes, not the arcane economics that excuses such behavior.

Because in the last analysis there is NO economics that supports what the policy elite in Europe and the US are doing.
All that said, let's look at the end game.

Europe's bailout, the transition of bank debts to the public, the fact of Ponzi debt and consumer debt that must be paid out of income without having produced any income-generating value.  The situation remains and worsens that nations with excess total debt are finding higher interest rates in the context of negative net incomes.

Why not balance trade?

First – the book – not rumor, since you can see the Review and Comment edition at DemandSideBooks.com, but not real either – in the book we argue that the great virtue of Germany and China is their willingness to take money instead of goods when they trade.  it is not the trade of wool for wine through the medium of money.  It is the trade of wool for money.  When the money is turned into bonds, so as to collect a little interest, it becomes debt. Voila, the choice by me is turned into an obligation by you.

Of course, you COULD  adjust the exchange rate.  Country A's goods are more expensive now.  China and Germany don't export so much.  Trade is balanced, some inflation, some deterioration in Country B's standards of living.  No net negative income.

And we lose the absurdity of the policy prescription from the righteous market fundamentalist, "Everybody needs to follow Germany and Japan into net exporter status."

But what about the US?  You see a chart in the book, final out soon, which shows that the US has a net deficit five times that of the next country.  Yet the same folks as hold up Germany are most wont to congratulate the corporate oligarchy in the US for its weathering the economic storms.

Massive trade deficit
Massive government deficits
Dysfunctional political process, bought by that corporate oligarchy

But the so-called underlying economy is doing well, because I guess we bailed out the banks and allowed them to run the government.

In any event, we're glad we didn't do too much meltdown in Europe talk last week.  The situation is not much different today, except in the eyes of the beholders.  But those beholders often behold the second coming.  The solution that has yet to be approached – restructure the debt, remake the banking system, allow an exchange rate mechanism or capital controls is not beheld. 

It will be the madness of austerity until it becomes entirely too onerous.  The madness of austerity is rule by the banks, under the leadership of the ECB, more austerity for each new loan.  More debt, more austerity.  Great plan.

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