Megan McCardle talks about the difficulties facing people from poor backgrounds in moving up the ladder.
Another thing I would add to this list would be geographic mobility. One of the major differences between people in the lower, middle, and upper classes is how much they travel. Often, you'll find that middle and upper class families are spread across the country. They are willing and able to travel, and this means they can take advantage of opportunities that don't exist if you don't move. If you're only looking for jobs in only one area, you're hurting you're chances.
Also, It's kinda obvious to say, but poor people often come from poor places. If you're poor and never move you wake up each morning in Lone Pines SD, or Detroit, or rural Alabama.
Partly, I think that this lack of mobility is due to the fact that upper and middle class people are not as dependent on local support networks, whether that is relatives or friends or the church. Also, they have the resources to move, as well as to still stay in touch with family: they can afford a cross-country plane ticket to come home for the holidays. Middle and upper class people also have those connections in places outside their local community: schoolmates (say from college), relatives, co-workers who can tell them about job opportunities that they wouldn't be aware of otherwise, help them settle in, and can make moving less of an alienating experience.
When you grow up in W. Baltimore, or Appalachia, and you and every one you know has never been anywhere else, that anywhere else can seem foreign in a way that the middle class and the upper class just don't see.
Wednesday, December 14, 2011
Skyrim
An article on why Skyrim is singlehandedly keeping us in a recession. I haven't posted alot recently. The Mage's College needs my help retrieving the Staff of Magnus.
I saw someone down at the Occupy protests with a sign that said "We're for... Oh cool, MW3 is out". We'll at least he can rest assured knowing he's still doing his part to bring down the capitalist war machine.
I saw someone down at the Occupy protests with a sign that said "We're for... Oh cool, MW3 is out". We'll at least he can rest assured knowing he's still doing his part to bring down the capitalist war machine.
Sunday, December 11, 2011
This is Absurd
So Draghi, the president of the ECB, has decided not to support governments to reduce their debt. Instead, he's going to lend to banks. This basically means that he intends to deal with the effects of the sovereign debt crisis (the risk of triggering a bank run), rather than the underlying problem (their assets are bad). Apparently, this guy thinks the way to deal with a sovereign debt crisis does not in any way involve dealing with the sovereigns.
Draghi is completely correct when he calls plans that involve lending to the IMF or the EFSF "tricks". It's just that so are the things he's decided to do instead- which amount to providing the banks with free credit and allowing them to cut their cash reserves. This is not always the best way to help someone get out of debt. Both options present moral hazards- one for borrowers, one for lenders. Why not do the trick that actually works?
Even if you are trying to punish profligate national governments, it still amounts to an attempt to cut the yields on public debt. This amounts to still trying to fix the problem (thankfully), just without transparency and with a fair amount of extra-legal arm wrenching. As Nicolas Sarkozy helpfully pointed out...
"Italian banks will be able to borrow [from the ECB] at 1 per cent, while the Italian state is borrowing at 6–7 per cent. It doesn’t take a finance specialist to see that the Italian state will be able to ask Italian banks to finance part of the government debt at a much lower rate."
If that wasn't bad enough, the ECB couldn't even provide unanimity in cutting its rate to one percent. Demonstrating a commitment to prevent inflation can cut the yields on sovereign debt, but not in a situation where the markets think that tight monetary policy will result in a default. These debts are not payable with only two percent inflation. The ECB was never going to do an about face and suddenly decide to start targeting nominal GDP, but they could have at least demonstrated that they had a concern not only for the euro, but also the actual economy that backs it up.
There are two ways to deal with this crisis: either the ECB can provide aid through monetary policy (increasing inflation so that their euro denominated debt is worth less), or European heads of state can deal with it through fiscal policy by directly transferring funds to the at-risk countries (so that they owe fewer euros). The second is politically impossible.
Draghi is completely correct when he calls plans that involve lending to the IMF or the EFSF "tricks". It's just that so are the things he's decided to do instead- which amount to providing the banks with free credit and allowing them to cut their cash reserves. This is not always the best way to help someone get out of debt. Both options present moral hazards- one for borrowers, one for lenders. Why not do the trick that actually works?
Even if you are trying to punish profligate national governments, it still amounts to an attempt to cut the yields on public debt. This amounts to still trying to fix the problem (thankfully), just without transparency and with a fair amount of extra-legal arm wrenching. As Nicolas Sarkozy helpfully pointed out...
"Italian banks will be able to borrow [from the ECB] at 1 per cent, while the Italian state is borrowing at 6–7 per cent. It doesn’t take a finance specialist to see that the Italian state will be able to ask Italian banks to finance part of the government debt at a much lower rate."
If that wasn't bad enough, the ECB couldn't even provide unanimity in cutting its rate to one percent. Demonstrating a commitment to prevent inflation can cut the yields on sovereign debt, but not in a situation where the markets think that tight monetary policy will result in a default. These debts are not payable with only two percent inflation. The ECB was never going to do an about face and suddenly decide to start targeting nominal GDP, but they could have at least demonstrated that they had a concern not only for the euro, but also the actual economy that backs it up.
There are two ways to deal with this crisis: either the ECB can provide aid through monetary policy (increasing inflation so that their euro denominated debt is worth less), or European heads of state can deal with it through fiscal policy by directly transferring funds to the at-risk countries (so that they owe fewer euros). The second is politically impossible.
Saturday, December 10, 2011
The Euro Game
The EU told David Cameron to get in line, and Cameron walked out. The problem is he may have accidentally walked out of the EU. There has been a lot of back and forth about this, as the Lib Dems have used this to attack their partners in the coalition. I want to be clear that I think Cameron lost this fight before it even began, but nonetheless we should talk about why.
Over the last couple days it has become increasingly clear that the conflicts between the Euro core and countries like Britain are not really about any particular euro-problem, but rather about the EU itself. The "reforms" that Cameron was asked to sign on to were neither necessary, nor very good ideas. Handing over control over such an important sector for Britain as the financial industry was never going happen. And that's exactly why it was brought up.
What's going on is not a debate about the balance of power between the EU and national governments, but rather the balance of political power within the EU As the membership of the EU has increased, and as France has suffered a prolonged period of relatively dismal growth, it has seen it's influence within the EU decrease. It's share of the GDP within the European Union is less than 16%, of population it is half that. This will only get worse as Europe continues to expand, and as Eastern European countries continue to close the gap between them and the more developed countries to the west. And yet, France still expects to wield a wildly disproportionate amount of power with the EU.
The membership of Britain doesn't help. Not only is the UK the largest economy in Europe after Germany and France (until recently it was larger than France, but it had a really nasty great recession), but it is the most important member of the liberal bloc that generally is in opposition to France. It is also the only country large enough to be a partner with Germany, who holds all the cards right now. Removing Britain from the equation improves the political math considerably.
And so, Sarkozy decided to get into a tiff on very favorable ground. He chose to bring up the financial industry not for any constructive reason, but because its just such damn good politics. There's no easier way to cast the other guy as the villain as putting them on the same side as the banks. Sarkozy also knows that the British would never be willing to compromise when it comes to the financial industry, it's just too important a part of their economy.
The trick here is to get Germany to take your side, because they hold the whole balance of power between the liberals and the integrationists. And that's exactly what's happened. Cameron has come away looking petulant and childish, even complaining that the other members shouldn't get to use EU facilities if they don't invite him. Sarkozy, meanwhile, has set himself up as the very embodiment of European unity and togetherness, when actually he's taking advantage of the financial crisis for crass political gain.
The consequences of Britain retreating from a position of influence would be dire. It would deprive Germany of any partner within the EU except France; it would mean that there would be no large player around which the smaller EU countries could gather; and it would not result in a EU that would sign up for a free trade pact with Britain, but rather would turn the EU into a protected market for French products.
Poland, on the other hand, has demonstrated it has an understanding of the politics of the crisis. Without actually conceding anything, Tusk cozied up with Germany to avoid being thrown out into the cold by France. This is the right time for Cameron to buy Angela Merkel some flowers and start soliloquizing her beauty. Just close your eyes.
Over the last couple days it has become increasingly clear that the conflicts between the Euro core and countries like Britain are not really about any particular euro-problem, but rather about the EU itself. The "reforms" that Cameron was asked to sign on to were neither necessary, nor very good ideas. Handing over control over such an important sector for Britain as the financial industry was never going happen. And that's exactly why it was brought up.
What's going on is not a debate about the balance of power between the EU and national governments, but rather the balance of political power within the EU As the membership of the EU has increased, and as France has suffered a prolonged period of relatively dismal growth, it has seen it's influence within the EU decrease. It's share of the GDP within the European Union is less than 16%, of population it is half that. This will only get worse as Europe continues to expand, and as Eastern European countries continue to close the gap between them and the more developed countries to the west. And yet, France still expects to wield a wildly disproportionate amount of power with the EU.
The membership of Britain doesn't help. Not only is the UK the largest economy in Europe after Germany and France (until recently it was larger than France, but it had a really nasty great recession), but it is the most important member of the liberal bloc that generally is in opposition to France. It is also the only country large enough to be a partner with Germany, who holds all the cards right now. Removing Britain from the equation improves the political math considerably.
And so, Sarkozy decided to get into a tiff on very favorable ground. He chose to bring up the financial industry not for any constructive reason, but because its just such damn good politics. There's no easier way to cast the other guy as the villain as putting them on the same side as the banks. Sarkozy also knows that the British would never be willing to compromise when it comes to the financial industry, it's just too important a part of their economy.
The trick here is to get Germany to take your side, because they hold the whole balance of power between the liberals and the integrationists. And that's exactly what's happened. Cameron has come away looking petulant and childish, even complaining that the other members shouldn't get to use EU facilities if they don't invite him. Sarkozy, meanwhile, has set himself up as the very embodiment of European unity and togetherness, when actually he's taking advantage of the financial crisis for crass political gain.
The consequences of Britain retreating from a position of influence would be dire. It would deprive Germany of any partner within the EU except France; it would mean that there would be no large player around which the smaller EU countries could gather; and it would not result in a EU that would sign up for a free trade pact with Britain, but rather would turn the EU into a protected market for French products.
Poland, on the other hand, has demonstrated it has an understanding of the politics of the crisis. Without actually conceding anything, Tusk cozied up with Germany to avoid being thrown out into the cold by France. This is the right time for Cameron to buy Angela Merkel some flowers and start soliloquizing her beauty. Just close your eyes.
Monday, December 5, 2011
The 50s
When using the 50s and 60s as an example of income equality, please be careful. Using household income fails to pick up on the fact that households were made up of two people, with very unequal incomes and opportunities.
Sunday, December 4, 2011
Immigrant/Emmigrant Advantages
I think it's interesting that America, and the emerging economies of India and China have some of the same advantages, just in reverse. America, an immigrant country, has a large population of people who have connections with others in other the country they came from. China, an country with a large emigrant population, there is this network of connections abroad, as well people who went abroad and came back with experience and ideas from the outside world.
Both immigrants and emigres provide their countries with clear advantages. As The Economist explains....
"This is because the diaspora networks have three lucrative virtues. First, they speed the flow of information across borders: a Chinese businessman in South Africa who sees a demand for plastic vuvuzelas will quickly inform his cousin who runs a factory in China.
Second, they foster trust. That Chinese factory-owner will believe what his cousin tells him, and act on it fast, perhaps sealing a deal worth millions with a single conversation on Skype.
Third, and most important, diasporas create connections that help people with good ideas collaborate with each other, both within and across ethnicities."
These connections help a country take advantage of the opportunities of international trade.
Aside from these international networks, the clear advantage to being a destination for the driven and upwardly mobile is that these people actually work and pay taxes here. And for the countries they come from, they can be a source of foreign direct investment and remittances.
And this is what both countries need. America has the tools to invest in people, such as capital and good higher education, but it needs more people who have the enterprise to take advantage of this.
And India and China and the rest of the developing world need capital. If immigrants know about some good investments abroad, it can help alleviate the depressing returns on capital we're getting right now, and allow us to counteract the effects of an aging population. And if India and China can get well-targeted capital, they'll see increasing productivity from labor.
In the section quoted above, the economist talks about a person living abroad who can quickly spot an opportunity to sell something in the country they live in. But it works the other way too. One thing you can say about Americans is that we are great at consuming. We have access to an incredible breadth of products that are not marketed abroad. A person who comes here might realize that the people back home might really enjoy some of the things we've got here. And know how to sell it to them.
Both immigrants and emigres provide their countries with clear advantages. As The Economist explains....
"This is because the diaspora networks have three lucrative virtues. First, they speed the flow of information across borders: a Chinese businessman in South Africa who sees a demand for plastic vuvuzelas will quickly inform his cousin who runs a factory in China.
Second, they foster trust. That Chinese factory-owner will believe what his cousin tells him, and act on it fast, perhaps sealing a deal worth millions with a single conversation on Skype.
Third, and most important, diasporas create connections that help people with good ideas collaborate with each other, both within and across ethnicities."
These connections help a country take advantage of the opportunities of international trade.
 |
| Chinese and Indian diaspora populations. From The Economist |
And this is what both countries need. America has the tools to invest in people, such as capital and good higher education, but it needs more people who have the enterprise to take advantage of this.
And India and China and the rest of the developing world need capital. If immigrants know about some good investments abroad, it can help alleviate the depressing returns on capital we're getting right now, and allow us to counteract the effects of an aging population. And if India and China can get well-targeted capital, they'll see increasing productivity from labor.
In the section quoted above, the economist talks about a person living abroad who can quickly spot an opportunity to sell something in the country they live in. But it works the other way too. One thing you can say about Americans is that we are great at consuming. We have access to an incredible breadth of products that are not marketed abroad. A person who comes here might realize that the people back home might really enjoy some of the things we've got here. And know how to sell it to them.
Saturday, December 3, 2011
Inequality and Innovation
Alex Tabarrok, and Tyler Cowen, over at Marginal Revolution believe that there has been a great stagnation in innovation in recent decades. Except in IT, we haven't had the same level of innovation as during decades that saw the invention of the automobile or flight, or antibiotics. We don't have new innovations, and that's what's hurting our economy.
Matt Yglesias has been consistently arguing that inequality is making it hard to get new products into people's hands. Essentially, too many Americans don't have the means to consume the hot new product. Too many new inventions (such as smartphones, which is one of his examples) aren't accessible for the majority of Americans. We have new innovations, but they are unaffordable.
I'm sure this argument has been made by one of these people somewhere, but I wonder if growing inequality in the United States is a threat to innovation. And particularly the development of the kinds of products that create lots of jobs and provide real benefits for lots of people. Traditionally, the middle class in America has been a great engine for driving the creation of innovative products. They have enough disposable income to be able to buy a new product, but not so much that there isn't pressure to make it cheap.
Henry Ford made his fortune creating a car that the average American could afford. Remember that the innovation here wasn't the automobile, it was how to make automobiles cheaply. Later, Toyota hit it big creating cheap, fuel efficient cars that average Americans wanted. But now Toyota is developing fuel efficient cars that most people really can't afford (the Prius). Wealthy Eco-conscious consumers are a niche market.
The upper class will reward you for creating cool new gadgets, but the middle class then force you to go back to basics and figure out how you can make it as efficiently as possible. There isn't the same incentive to do this if the middle class isn't spending the same share of income as it was before. Today, power windows come standard, but I wonder if rear-view parking cameras or hybrid drives will ever reach the point where they aren't considered luxuries. It is when inventions become accessible for the great majority of people that can really transform society, from the automobile, to affordable jet travel, to the computer.
This makes inequality all the more pernicious. When there are lots of new things you can buy with alot of money, but few new things you can buy with some money, inequality increases in some non-obvious ways. And in a way that doesn't really show up in statistics about inequality. Too many of our innovators are working to serve the top brackets rather than average Americans.
On the flip side, In other parts of the world, such as India, we're new innovations designed for their rising middle class, and for the poor - "frugal innovation". These include mobile banking in Africa, or mobile monitors for irrigation systems in India. And these innovations have the capacity to really improve the lives of ordinary people.
Matt Yglesias has been consistently arguing that inequality is making it hard to get new products into people's hands. Essentially, too many Americans don't have the means to consume the hot new product. Too many new inventions (such as smartphones, which is one of his examples) aren't accessible for the majority of Americans. We have new innovations, but they are unaffordable.
I'm sure this argument has been made by one of these people somewhere, but I wonder if growing inequality in the United States is a threat to innovation. And particularly the development of the kinds of products that create lots of jobs and provide real benefits for lots of people. Traditionally, the middle class in America has been a great engine for driving the creation of innovative products. They have enough disposable income to be able to buy a new product, but not so much that there isn't pressure to make it cheap.
Henry Ford made his fortune creating a car that the average American could afford. Remember that the innovation here wasn't the automobile, it was how to make automobiles cheaply. Later, Toyota hit it big creating cheap, fuel efficient cars that average Americans wanted. But now Toyota is developing fuel efficient cars that most people really can't afford (the Prius). Wealthy Eco-conscious consumers are a niche market.
The upper class will reward you for creating cool new gadgets, but the middle class then force you to go back to basics and figure out how you can make it as efficiently as possible. There isn't the same incentive to do this if the middle class isn't spending the same share of income as it was before. Today, power windows come standard, but I wonder if rear-view parking cameras or hybrid drives will ever reach the point where they aren't considered luxuries. It is when inventions become accessible for the great majority of people that can really transform society, from the automobile, to affordable jet travel, to the computer.
This makes inequality all the more pernicious. When there are lots of new things you can buy with alot of money, but few new things you can buy with some money, inequality increases in some non-obvious ways. And in a way that doesn't really show up in statistics about inequality. Too many of our innovators are working to serve the top brackets rather than average Americans.
On the flip side, In other parts of the world, such as India, we're new innovations designed for their rising middle class, and for the poor - "frugal innovation". These include mobile banking in Africa, or mobile monitors for irrigation systems in India. And these innovations have the capacity to really improve the lives of ordinary people.
Friday, December 2, 2011
Market Forces Are Not "Undemocratic"
Euro Crisis and the Transformation of European Democracy - from the Atlantic, by Heather Horn
And she quotes from this article in Le Monde by constitutional rights professor Dominique Rousseau.
"What are we seeing? That the markets delegate political management of society to politicians; that these men, because they are elected by the people, think themselves to be free in their decisions; that, as long as these decisions don't infringe upon their interests and remain compatible with their projects, the markets let them govern; that day when politicians take decisions which contradict [these interests], the markets dismiss them without care; and--which Marx didn't even dare to imagine--that the markets replace elected politicians by Lucas Papadémos, former vice president of the central European bank, and by Mario Monti, former European commissioner."
So, of course, "En clair, il s'agit de plouto-républiques!".
I keep hearing the argument, not just from writers but far more importantly from politicians such as Angela Merkel or Nicolas Sarkozy. They dislike the fact that their agendas are essentially dominated by movements in bond markets, and are finding that having any control over them involves doing a bunch of things which they dislike, and wouldn't make if they had a choice.
The thing is, governments have to operate in the real world, which requires difficult decisions and pragmatism. When the people run the government- a democracy- they are the ones who have to deal with these harsh choices. The reason democracy was such a revolutionary idea was because it involved trusting the difficult choices of running a state with the people.
The fact that their options are constrained by limited resources, and the willingness of people to lend them money, is not anti-democratic. A democracy has every right to ask individuals to lend it money- this is called issuing bonds. Or it can require people to give it money- this is called taxes. If it chooses to ask individuals, then they can give their money or not as they so choose. And if they don't trust the people to keep their word, and pay them back, then they won't.
Why don't they trust it? Because of the bad decisions made by the people before, and the fact that the people really aren't that trustworthy. They want generous benefits and low taxes, but you can't have both, and so you borrow money. Until you reach the point where it becomes evident that the debt is so high that it either can't or won't be repayed. If the people don't want to have to worry about the difficulties of financing their debt, they don't have to borrow money.
I think part of the problem here is that people really don't understand the market, and they assign it an agency it doesn't possess. The bond market is not some pundit who is debating the kind of society we should have with you. It is simply a reflection of the general assessment as to whether bond holders are going to be payed back. You can raise taxes, or reduce benefits, and, as long as it looks like it's going to stabilize the countries finances, interest rates will fall. This is not plutocracy, it is reality.
When these politicians and pundits decry the bond market as undemocratic they are simply saying, "wouldn't it be nice if we didn't live in a world where there's all these things we want but can't afford". That's not democracy, that's daydreaming.
And she quotes from this article in Le Monde by constitutional rights professor Dominique Rousseau.
"What are we seeing? That the markets delegate political management of society to politicians; that these men, because they are elected by the people, think themselves to be free in their decisions; that, as long as these decisions don't infringe upon their interests and remain compatible with their projects, the markets let them govern; that day when politicians take decisions which contradict [these interests], the markets dismiss them without care; and--which Marx didn't even dare to imagine--that the markets replace elected politicians by Lucas Papadémos, former vice president of the central European bank, and by Mario Monti, former European commissioner."
So, of course, "En clair, il s'agit de plouto-républiques!".
I keep hearing the argument, not just from writers but far more importantly from politicians such as Angela Merkel or Nicolas Sarkozy. They dislike the fact that their agendas are essentially dominated by movements in bond markets, and are finding that having any control over them involves doing a bunch of things which they dislike, and wouldn't make if they had a choice.
The thing is, governments have to operate in the real world, which requires difficult decisions and pragmatism. When the people run the government- a democracy- they are the ones who have to deal with these harsh choices. The reason democracy was such a revolutionary idea was because it involved trusting the difficult choices of running a state with the people.
The fact that their options are constrained by limited resources, and the willingness of people to lend them money, is not anti-democratic. A democracy has every right to ask individuals to lend it money- this is called issuing bonds. Or it can require people to give it money- this is called taxes. If it chooses to ask individuals, then they can give their money or not as they so choose. And if they don't trust the people to keep their word, and pay them back, then they won't.
Why don't they trust it? Because of the bad decisions made by the people before, and the fact that the people really aren't that trustworthy. They want generous benefits and low taxes, but you can't have both, and so you borrow money. Until you reach the point where it becomes evident that the debt is so high that it either can't or won't be repayed. If the people don't want to have to worry about the difficulties of financing their debt, they don't have to borrow money.
I think part of the problem here is that people really don't understand the market, and they assign it an agency it doesn't possess. The bond market is not some pundit who is debating the kind of society we should have with you. It is simply a reflection of the general assessment as to whether bond holders are going to be payed back. You can raise taxes, or reduce benefits, and, as long as it looks like it's going to stabilize the countries finances, interest rates will fall. This is not plutocracy, it is reality.
When these politicians and pundits decry the bond market as undemocratic they are simply saying, "wouldn't it be nice if we didn't live in a world where there's all these things we want but can't afford". That's not democracy, that's daydreaming.
Thursday, December 1, 2011
Moral Hazard
I just think it's interesting that the worries about "moral hazard" are so completely different on different sides of the Atlantic.
Over here, we worry that bailing out the creditors (who were owed tons of money that wasn't repayed) because they were too big to fail is a moral hazard. They don't have the proper incentive to minimize their risk knowing that they have free insurance courtesy of Uncle Sam.
Over there, they worry that bailing out the debtors (who owe tons of money that they can't repay) because they are too big to fail is a moral hazard. They don't have the proper incentive to not borrow so much money knowing that their tab is going to be picked up by Germany.
When governments make a bad loan go away it presents a moral hazard in both directions. When someone picks up the drunks tab for him, the bartender doesn't have to pay the price of his bad decisions (in letting this guy have a tab) as well. There doesn't seem to be enough talk about the moral hazard of bailing out Greece or Portugal or Spain or Italy as it concerns the creditors. The European banking system let not very creditworthy countries go deeper and deeper into debt they couldn't or wouldn't repay.
The Eurozone got into this crisis because spreads between debt in the strong core (Germany) and the weak periphery (Portugal, Italy, Greece, and Spain), were too low. Not only that, European sovereign debt was allowed to be used as "core capital", essentially risk free, when it wasn't. There was the assumption that if worse came to worse they would be bailed out. And whadya know.
Right now, we have a situation in which efforts to rescue the euro are being held up over concerns that not forcing these profligate governments to pay their debts themselves, there won't be the proper incentive to run a responsible budget. But at the same time, we're not going to let their banks, where their citizens keep all their money, take substantial losses and probably go bust. And face the proper incentive to not make such poor investments in the future.
So, the CDU/CSU coalition that runs Germany, has decided to play brinksmanship, and insist on harsh austerity measures partly to make these countries feel the pain of their bad decisions. But there is always the assumption that Germans who put their money in the hands of idiotic bankers are not at risk of loosing their money for their bad decisions.
They assumed that countries would be honor bound to pay of their tab, when that's not how the world works. Countries often default on their commitments. And so, Angela Merkel intends to force them to pony up. She has decided to allow bankers to claw their money back by essentially threatening to break the drunk's legs if he doesn't settle his tab. But private creditors shouldn't get to count on support from their government to avoid suffering losses, unless we want to make gunboat diplomacy a regular feature of international finance.
The way to avoid moral hazard is to let people go into bankruptcy and then sort it out there. But we're not going to do that right now because then the world would end. We can at least learn something, though.
It seems that everyone acknowledges that the Greek government behaved atrociously in going so deeply into debt. And after they get bailed out, we're going to make sure they don't do it again. But people still haven't acknowledged that German and French bankers behaved atrociously in assuming that they could money lending money to Greece but not accept any risk. And after Greece gets bailed out, we need to make sure they aren't going to do it again. And from now on we're going to remember that countries default, it happens. But lets just admit that large scale government intervention to save the euro will leave the integrity of the market deeply compromised in many different ways, and presents many different moral hazards.
If the German government is going to monitor Greece's budget, lets have Greek banks monitor German banks. Or we could just stop worrying about whose fault this all is and just fix it, instead of trying to decide whose fault this all is right now.
Over here, we worry that bailing out the creditors (who were owed tons of money that wasn't repayed) because they were too big to fail is a moral hazard. They don't have the proper incentive to minimize their risk knowing that they have free insurance courtesy of Uncle Sam.
Over there, they worry that bailing out the debtors (who owe tons of money that they can't repay) because they are too big to fail is a moral hazard. They don't have the proper incentive to not borrow so much money knowing that their tab is going to be picked up by Germany.
When governments make a bad loan go away it presents a moral hazard in both directions. When someone picks up the drunks tab for him, the bartender doesn't have to pay the price of his bad decisions (in letting this guy have a tab) as well. There doesn't seem to be enough talk about the moral hazard of bailing out Greece or Portugal or Spain or Italy as it concerns the creditors. The European banking system let not very creditworthy countries go deeper and deeper into debt they couldn't or wouldn't repay.
The Eurozone got into this crisis because spreads between debt in the strong core (Germany) and the weak periphery (Portugal, Italy, Greece, and Spain), were too low. Not only that, European sovereign debt was allowed to be used as "core capital", essentially risk free, when it wasn't. There was the assumption that if worse came to worse they would be bailed out. And whadya know.
Right now, we have a situation in which efforts to rescue the euro are being held up over concerns that not forcing these profligate governments to pay their debts themselves, there won't be the proper incentive to run a responsible budget. But at the same time, we're not going to let their banks, where their citizens keep all their money, take substantial losses and probably go bust. And face the proper incentive to not make such poor investments in the future.
So, the CDU/CSU coalition that runs Germany, has decided to play brinksmanship, and insist on harsh austerity measures partly to make these countries feel the pain of their bad decisions. But there is always the assumption that Germans who put their money in the hands of idiotic bankers are not at risk of loosing their money for their bad decisions.
They assumed that countries would be honor bound to pay of their tab, when that's not how the world works. Countries often default on their commitments. And so, Angela Merkel intends to force them to pony up. She has decided to allow bankers to claw their money back by essentially threatening to break the drunk's legs if he doesn't settle his tab. But private creditors shouldn't get to count on support from their government to avoid suffering losses, unless we want to make gunboat diplomacy a regular feature of international finance.
The way to avoid moral hazard is to let people go into bankruptcy and then sort it out there. But we're not going to do that right now because then the world would end. We can at least learn something, though.
It seems that everyone acknowledges that the Greek government behaved atrociously in going so deeply into debt. And after they get bailed out, we're going to make sure they don't do it again. But people still haven't acknowledged that German and French bankers behaved atrociously in assuming that they could money lending money to Greece but not accept any risk. And after Greece gets bailed out, we need to make sure they aren't going to do it again. And from now on we're going to remember that countries default, it happens. But lets just admit that large scale government intervention to save the euro will leave the integrity of the market deeply compromised in many different ways, and presents many different moral hazards.
If the German government is going to monitor Greece's budget, lets have Greek banks monitor German banks. Or we could just stop worrying about whose fault this all is and just fix it, instead of trying to decide whose fault this all is right now.
How to Save Europe
There are two things that I think need to be part of any realistic attempt to stabilize Europe
1. The ECB needs to print more money, some of the debt has to be inflated away
2. The risks of sovereign default for private bond holders needs to be reduced
And any solution cannot rely on
1. The continued cooperation of European Countries, because they can't get along
2. Amending the treaties, because that would take too long and would be impossible anyway
3. Asking governments for money, because they don't have it or won't give it
You need to find a way to raise funds without individually asking European countries for money. If you do, you're going to have the same problem that you always have when trying to raise money for public goods. Each would benefit if everyone chipped in, but there is an incredible incentive to defect and not chip in yourself. Contributors to the EFSF bear all the costs, but only gain some of the benefit of a stable Euro. Also, the EU doesn't have the power to tax or a treasury, like the Federal Government in the United States does. So it can't get money that way.
The ECB may not be able to ask or force European countries to give it euros, but what it can do is just print them. European countries need Euros to pay their creditors, and the ECB can make as many euros as it wants. The only tax it can do is an inflation tax.
What happens then is that value of Euros declines (inflation), and anyone who has anything denominated in Euros looses money. But this, at least, falls mostly on people and countries who have things. And reduces the actual debts of European countries because their debts are denominated in euros. This is how sovereign countries usually weasel out of their commitments, it should work here too.
Although this is kinda similar to defaulting, this should be preferred by bond holders. Inflation can usually be limited, so the bond holders only loose some of their value, rather than defaults where there is every incentive for the defaulting country to go big. Also, a weaker euro should make Europe more competitive, giving a boost to exports and reducing imports. The southern countries have needed a weaker currency for a long time now, but instead have been stuck with a strong currency that is more of a benefit for northern countries like Germany with a positive trade balance.
The problem is that the ECB is legally prohibited from giving money to governments to pay down their debts. What it can do, however, is give the euros to the IMF which can then give the euros to governments. The ECB has printed euros before to place in certain IMF vehicles, although nothing on this scale. As far as I know, the ECB doesn't actually have to ask anyone's permission to do this. And this solution doesn't involve the EU or it's member nations deciding anything or working together.
The IMF has a great deal of experience rescuing (successfully and unsuccessfully) troubled countries. It can give countries like Spain or Italy or Portugal euros in exchange for the kinds of long-term reforms that will help them pay back their debts. The IMF is also not another European country, and I think a little distance would be good for whoever is trying to figure out a solution to this whole mess. When the people in these rescued countries, who have to put up with austerity and labor market reforms and all sorts of other unpopular dictats from unelected technocrats, start protesting at least it won't be against each other. Because goodwill among Europeans is already in dangerously short supply right now. And everyone hates the IMF anyway.
1. The ECB needs to print more money, some of the debt has to be inflated away
2. The risks of sovereign default for private bond holders needs to be reduced
And any solution cannot rely on
1. The continued cooperation of European Countries, because they can't get along
2. Amending the treaties, because that would take too long and would be impossible anyway
3. Asking governments for money, because they don't have it or won't give it
You need to find a way to raise funds without individually asking European countries for money. If you do, you're going to have the same problem that you always have when trying to raise money for public goods. Each would benefit if everyone chipped in, but there is an incredible incentive to defect and not chip in yourself. Contributors to the EFSF bear all the costs, but only gain some of the benefit of a stable Euro. Also, the EU doesn't have the power to tax or a treasury, like the Federal Government in the United States does. So it can't get money that way.
The ECB may not be able to ask or force European countries to give it euros, but what it can do is just print them. European countries need Euros to pay their creditors, and the ECB can make as many euros as it wants. The only tax it can do is an inflation tax.
What happens then is that value of Euros declines (inflation), and anyone who has anything denominated in Euros looses money. But this, at least, falls mostly on people and countries who have things. And reduces the actual debts of European countries because their debts are denominated in euros. This is how sovereign countries usually weasel out of their commitments, it should work here too.
Although this is kinda similar to defaulting, this should be preferred by bond holders. Inflation can usually be limited, so the bond holders only loose some of their value, rather than defaults where there is every incentive for the defaulting country to go big. Also, a weaker euro should make Europe more competitive, giving a boost to exports and reducing imports. The southern countries have needed a weaker currency for a long time now, but instead have been stuck with a strong currency that is more of a benefit for northern countries like Germany with a positive trade balance.
The problem is that the ECB is legally prohibited from giving money to governments to pay down their debts. What it can do, however, is give the euros to the IMF which can then give the euros to governments. The ECB has printed euros before to place in certain IMF vehicles, although nothing on this scale. As far as I know, the ECB doesn't actually have to ask anyone's permission to do this. And this solution doesn't involve the EU or it's member nations deciding anything or working together.
The IMF has a great deal of experience rescuing (successfully and unsuccessfully) troubled countries. It can give countries like Spain or Italy or Portugal euros in exchange for the kinds of long-term reforms that will help them pay back their debts. The IMF is also not another European country, and I think a little distance would be good for whoever is trying to figure out a solution to this whole mess. When the people in these rescued countries, who have to put up with austerity and labor market reforms and all sorts of other unpopular dictats from unelected technocrats, start protesting at least it won't be against each other. Because goodwill among Europeans is already in dangerously short supply right now. And everyone hates the IMF anyway.
Subscribe to:
Comments (Atom)