Why not 100 trillion, then?
4/10/11 17:10![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
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talkpoliticsThe stock exchanges didn't start this week with a plunge. Wow, that's such a rarity these days! But the crisis is far from over. Greece is far from saved and magic wands do not exist. Sorry, Ms Rowling. It's a thing some investors are very quick to forget.
The hopes that the Euro leaders would somehow miraculously fill the European Financial Stability Facility (EFSF) with 2 trillion Euro (as advised by this genius in finance, Tim Geithner and some other economists) are looking exactly like a prayer for Harry Potter's arrival. Or maybe Neo's. It also caused some short term optimism. Optimism is a nice thing. It makes you feel good. For a while.
The solution looks so temptingly simple! Since no one really believed that the hastily packed safety fund of 440 billion Euro would be sufficient, why not make it bigger? Maybe twice and thrice bigger. How didn't we come up with that earlier? Or maybe there was a reason we didn't. Let's see... Oh yes, I recalled! We didn't know where we'd get all that money from. Details, duh.
Actually, despite the mass delusion that EFSF constitutes a huge heap of cash that you can shovel into and sprinkle onto everyone who's in trouble, in fact these 440 billion Euro are just a potential ability of the fund to emit debt that then gets guaranteed by the European central banks. At the moment EFSF can be financed relatively easily because of its near perfect AAA rating. Oh, those ratings! It's this way exactly because of the guarantees by the Euro governments with an AAA rating. Germany, France, Netherlands, Austria.
But what happens if we somehow inflate this fund even more, aiming to calm down the markets? Let's say 2 or 3 trillion... How about 10 trillion. Hell, WHY NOT 100 TRILLION!? Practically: nothing. Except that Germany & Co. will have to guarantee a still bigger amount. Big deal, eh? They won't have to pull the money out of the taxpayer's pocket on the minute you need it. First there'll be some "negotiations", then some public statements by the politicians, then some more negotiations. But the risk, if they really get to pay, will increase. And the higher risk means that some of those countries will probably lose their precious triple A. And that's exactly what the rating agencies are warning about. This stuff can't go on forever. The leaders and bankers in the Eurozone are starting to realize that there's no more such a thing as cheap and riskless options for expanding EFSF.
The more European countries are losing their perfect rating, the more likely it'll become that the safety fund would lose its own triple A. And with this, its ability to finance debts cheaply. After all, apart from the economic powerhouse that is Germany, there are countries with much lower rating standing behind this fund. Including Greece, Portugal and Ireland, who are already sucking from the fund and they've practically halved its capacity by now. And also Spain and Italy, whose guarantee at the moment counts for nothing. So we have this paradox: in order to have faith in the EFSF's ability to stop the debt crisis, the investors will expect it to be inflated. But the bigger it gets, the more useless it'll become. No surprise that the German finance minister Wolfgang Schaeuble called it outright "a stupid idea".
Until now EFSF used to work like a Jedi mind trick. You take a useless debt from a failed economy (or one on life support), you pack it up, and with an artistic wave of your hand in front of the eyes of the investors you make them believe that it's now the safest thing in the world. Actually this resembles those infamous mortgage derivatives that even the experts didn't know how they worked, and which started the whole mess in 2007. But this time the scales are frighteningly bigger. Now we're not playing with houses, but with entire economies.
So when you eventually lose your Jedi skills, waving with your hand now only makes you look stupid. If the investors are doubting in the stability of this fund and the economies who guarantee for it, they simply won't give their money for it so cheaply. And a new buyer must be found. China maybe? You think the Chinese are stupid? Think again. They'll only invest as much as they deem advantageous for them. Not a dime more. And certainly not in areas where no return is expected. Capitalism at its best, see!
So what now? Well, here the ideas are diverging into infinite scenarios. One of the main plans of the European Central Bank is to finance the fund so it could serve as a buffer against losses. But many believe this dilution of the focus wouldn't achieve anything. The fund, which in practice is supported by the Euro taxpayers, will be guaranteed by that same central bank which also depends on those same taxpayers.
And even if there's some way to get out of this vicious circle and make the magic work once again, there's just no way that the trick would pass politically. The change has to be approved by the parliaments of all 17 members of the Euro zone. They'll all have to fight for "improving" on the previous debt. They'll have to delegate authority to this fund to buy off state bonds and re-finance banks. So far 10 of the member states have approved the changes that their leaders are proposing. Slovakia rejected them and at the moment there's some heavy bargaining and persuading going on behind the scenes. In Germany itself, Merkel's majority threw most of its support behind the plan after all, but there were question marks until the very last moment if her own party would support her at all.
All that said, pushing more changes about the EFSF looks difficult, to put it mildly. Europe is simply too heterogeneous and clumsy when it comes to acting resolutely on urgent issues. It can't take even the simplest and clearest decisions quickly enough (much like the US, by the way). And the increasing dissatisfaction in some of the countries increases the risks for whatever safety measures have been taken until now. They could easily be scrapped. Greece is looking more and more like a ticking bomb, and more and more people are refusing to pay for its mistakes and throw their money into a black hole. Especially since the Greeks themselves don't look very willing to gather themselves and start working this time.
Now the main question is what happens when the euphoria about the fund's expansion fades away and fear takes over the markets once again, and pushes them further to the Dark Side. Probably before we've even reached the point where Greece's default becomes a 100% inevitability, we'll witness a couple more Jedi tricks from the Euro leaders. Whether ECB would create artificial inflation (which will suddenly and miraculously stop being inflation with the categorical wave of a hand), or the governments would decide to re-capitalize the banks (who, of course, do NOT need that help at all, I'm tellin' ya, cuz, you know, they're SO stable, right?) - there are still many possible mind tricks up their sleeve.
So may the Force be with you, Europe.
The hopes that the Euro leaders would somehow miraculously fill the European Financial Stability Facility (EFSF) with 2 trillion Euro (as advised by this genius in finance, Tim Geithner and some other economists) are looking exactly like a prayer for Harry Potter's arrival. Or maybe Neo's. It also caused some short term optimism. Optimism is a nice thing. It makes you feel good. For a while.
The solution looks so temptingly simple! Since no one really believed that the hastily packed safety fund of 440 billion Euro would be sufficient, why not make it bigger? Maybe twice and thrice bigger. How didn't we come up with that earlier? Or maybe there was a reason we didn't. Let's see... Oh yes, I recalled! We didn't know where we'd get all that money from. Details, duh.
Actually, despite the mass delusion that EFSF constitutes a huge heap of cash that you can shovel into and sprinkle onto everyone who's in trouble, in fact these 440 billion Euro are just a potential ability of the fund to emit debt that then gets guaranteed by the European central banks. At the moment EFSF can be financed relatively easily because of its near perfect AAA rating. Oh, those ratings! It's this way exactly because of the guarantees by the Euro governments with an AAA rating. Germany, France, Netherlands, Austria.
But what happens if we somehow inflate this fund even more, aiming to calm down the markets? Let's say 2 or 3 trillion... How about 10 trillion. Hell, WHY NOT 100 TRILLION!? Practically: nothing. Except that Germany & Co. will have to guarantee a still bigger amount. Big deal, eh? They won't have to pull the money out of the taxpayer's pocket on the minute you need it. First there'll be some "negotiations", then some public statements by the politicians, then some more negotiations. But the risk, if they really get to pay, will increase. And the higher risk means that some of those countries will probably lose their precious triple A. And that's exactly what the rating agencies are warning about. This stuff can't go on forever. The leaders and bankers in the Eurozone are starting to realize that there's no more such a thing as cheap and riskless options for expanding EFSF.
The more European countries are losing their perfect rating, the more likely it'll become that the safety fund would lose its own triple A. And with this, its ability to finance debts cheaply. After all, apart from the economic powerhouse that is Germany, there are countries with much lower rating standing behind this fund. Including Greece, Portugal and Ireland, who are already sucking from the fund and they've practically halved its capacity by now. And also Spain and Italy, whose guarantee at the moment counts for nothing. So we have this paradox: in order to have faith in the EFSF's ability to stop the debt crisis, the investors will expect it to be inflated. But the bigger it gets, the more useless it'll become. No surprise that the German finance minister Wolfgang Schaeuble called it outright "a stupid idea".
Until now EFSF used to work like a Jedi mind trick. You take a useless debt from a failed economy (or one on life support), you pack it up, and with an artistic wave of your hand in front of the eyes of the investors you make them believe that it's now the safest thing in the world. Actually this resembles those infamous mortgage derivatives that even the experts didn't know how they worked, and which started the whole mess in 2007. But this time the scales are frighteningly bigger. Now we're not playing with houses, but with entire economies.
So when you eventually lose your Jedi skills, waving with your hand now only makes you look stupid. If the investors are doubting in the stability of this fund and the economies who guarantee for it, they simply won't give their money for it so cheaply. And a new buyer must be found. China maybe? You think the Chinese are stupid? Think again. They'll only invest as much as they deem advantageous for them. Not a dime more. And certainly not in areas where no return is expected. Capitalism at its best, see!
So what now? Well, here the ideas are diverging into infinite scenarios. One of the main plans of the European Central Bank is to finance the fund so it could serve as a buffer against losses. But many believe this dilution of the focus wouldn't achieve anything. The fund, which in practice is supported by the Euro taxpayers, will be guaranteed by that same central bank which also depends on those same taxpayers.
And even if there's some way to get out of this vicious circle and make the magic work once again, there's just no way that the trick would pass politically. The change has to be approved by the parliaments of all 17 members of the Euro zone. They'll all have to fight for "improving" on the previous debt. They'll have to delegate authority to this fund to buy off state bonds and re-finance banks. So far 10 of the member states have approved the changes that their leaders are proposing. Slovakia rejected them and at the moment there's some heavy bargaining and persuading going on behind the scenes. In Germany itself, Merkel's majority threw most of its support behind the plan after all, but there were question marks until the very last moment if her own party would support her at all.
All that said, pushing more changes about the EFSF looks difficult, to put it mildly. Europe is simply too heterogeneous and clumsy when it comes to acting resolutely on urgent issues. It can't take even the simplest and clearest decisions quickly enough (much like the US, by the way). And the increasing dissatisfaction in some of the countries increases the risks for whatever safety measures have been taken until now. They could easily be scrapped. Greece is looking more and more like a ticking bomb, and more and more people are refusing to pay for its mistakes and throw their money into a black hole. Especially since the Greeks themselves don't look very willing to gather themselves and start working this time.
Now the main question is what happens when the euphoria about the fund's expansion fades away and fear takes over the markets once again, and pushes them further to the Dark Side. Probably before we've even reached the point where Greece's default becomes a 100% inevitability, we'll witness a couple more Jedi tricks from the Euro leaders. Whether ECB would create artificial inflation (which will suddenly and miraculously stop being inflation with the categorical wave of a hand), or the governments would decide to re-capitalize the banks (who, of course, do NOT need that help at all, I'm tellin' ya, cuz, you know, they're SO stable, right?) - there are still many possible mind tricks up their sleeve.
So may the Force be with you, Europe.
(no subject)
Date: 4/10/11 15:15 (UTC)(no subject)
Date: 4/10/11 15:21 (UTC)(no subject)
Date: 4/10/11 18:56 (UTC)The only difference between individual investors' spending with the hopes of a net positive return and the government doing the same is that there are countless experiments going on simultaneously under the banner of private investment where trial and error can have at least a chance at discovering where real long term potential exists, whereas the government acts as a single investor large enough to carry its own gravitational pull, but without the benefit of having a matching ability to increase the odds of getting a return on investment.
When the government spends, it does not spend as a body of millions of independent actors with divergent and diverse priorities, but as a single actor with inordinate pull. It can't improve its odds of successful investment more than you or I can.
(no subject)
Date: 4/10/11 19:01 (UTC)That's your speculation, yes. And I'd say you have all rights to speculate on anything. The only way to know for sure is to try.
Governments change the rules all the time so they're never the losing side. And since they're already owned by banks, there's no way the banks would be the losing side. That leaves us with what, the people being the only ones who could possibly be a losing side. And that's what happens in reality, with or without the help of government.
No extreme is ever good. Balance is hard to achieve but that doesn't mean it shouldn't be constantly tried. There's a certain point of balance between government regulation and a free-for-all wild-wild-west survival-of-the-fittest market.
(no subject)
Date: 4/10/11 19:28 (UTC)To be successful, one has to be willing to fail on a survivable scale, but the scale the government is operating on is by its very nature beyond that measure, at best because the expectations we place on government prevent it from being any less than the largest spender of consequence, and at worst because as the spender of greatest consequence it can 'create its own weather patterns', and just like the weather, it can't control the effects after they've been triggered.
It has nothing to do with the rules governments make to put themselves on the 'winning' side (or what the banks do to achieve the same ends) because whether you're the government or a megabank, there are too many aspects unseen to do anything but gain the appearance of success or failure based on the facade of control.
(no subject)
Date: 4/10/11 20:10 (UTC)(no subject)
Date: 4/10/11 21:09 (UTC)And I wouldn't classify them as being shining examples of sustainable behavior either in many cases. I don't think either you or I would suggest that the reason they've been able to maintain position has to do with their ability to make superior decisions, which is what my point revolved around. I'm not saying that multinationals maintain themselves via their superior decisions, and if I'm not going to say that about them, I'm also not going to say that about government when it engages in stimulus spending.
Leaving aside for the moment the question of legislative regulation as opposed to the efficacy of stimulus (because we were talking about the latter as I recall), my point was directed at the odds of finding success on the part of any individual actor, be it a multinational or a government. Certainly those institutions have shown a certain level of resiliency but I suspect that neither of us will attribute that resiliency to their superior judgement and wisdom to that of the regular individual investor. The wisdom to command economies does not exist in the multinational corporation or the government.
This is where I part ways with several conservative commentators who argue that the individual investor is somehow inherently smarter and more wise, but they're missing the point. The wisdom necessary to solve problems of mathematical complexity does not rest in any one individual or group, but is diffuse over society as a whole. The only question that remains after one recognizes this is: how does one tap into it?
And I don't know why I keep having to say this, but I and most other libertarians do not advocate removing barriers to fraud and violence. That's an an-cap argument, and I'm not an an-cap. In fact I've seen only one person here who I know from his comments to even have flirted with it.
(no subject)
Date: 4/10/11 21:13 (UTC)(no subject)
Date: 4/10/11 21:16 (UTC)Somewhat related, and also interesting...
Date: 4/10/11 22:26 (UTC)Re: Somewhat related, and also interesting...
Date: 5/10/11 07:25 (UTC)Re: Somewhat related, and also interesting...
Date: 5/10/11 08:27 (UTC)Altogether, I wish more people were aware of the prospects and implications of crowdsourcing. The potential for a business model essentially upon what is to my mind, a very humbling realization, and yet still have every chance to be successful seems to be a possible fulfillment on the strengths of market infrastructure.
(no subject)
Date: 5/10/11 09:09 (UTC)Correct, multinationals don't necessarily maintain their position thanks to superior decisions, but through the accumulation of power. Undaunted, unmatched, uncontrollable power. It turns out regulations only work for those who can't afford to bypass them. the too big to fail are too powerful to be regulated. And if you try to really do it, all hell breaks loose.
As for the individual investor's irrational urges, I'd recommend The Century of the Self. A rather long(ish) documentary, but worth watching.
(no subject)
Date: 5/10/11 17:18 (UTC)I'm also not arguing that the individual investor is without the temptation to behave irrationally. But that is another factor that divides out, as both government and the private individual have spotty records on rationality, because both have at their core the same human traits for better or worse. We have a very popular war on drugs in this country despite all reason suggesting we should not. If the government is just as susceptible to the same kind of failure (one that drains billions from the system to maintain) then we're not really distinguishing one from the other any longer.
Since we're talking about characteristics, though, it would be in line with this thread to mention at this point the ones that coincide with crowd wisdom, or the kind of wisdom that has better than a snowball's chance of finding solutions to complex economic problems are: Diversity of opinion, independent thought, decentralization, and a means of aggregation. (http://en.wikipedia.org/wiki/The_Wisdom_of_Crowds) If the options we are always presented with are the market and the government, which one shares the greater part of those characteristics?
That doesn't mean, as mentioned, that the characteristics the market has in common with that list which enable it to arrive at these solutions, can't be circumvented or short circuited by human fallibility. Of course it can. But the capacity for finding solutions cannot be supplemented or replaced by an institution which possesses few to none of them in the first place. Governments (and even several large multinationals) are more hierarchical, centralized, and resistant to independent thought. Decisions are often unilateral in these types of organizations and difficult to challenge once they are made.
(no subject)
Date: 4/10/11 19:08 (UTC)In what cases has stimulus not been just that?
(no subject)
Date: 4/10/11 19:17 (UTC)(no subject)
Date: 4/10/11 19:19 (UTC)(no subject)
Date: 4/10/11 20:06 (UTC)(no subject)
Date: 5/10/11 02:38 (UTC)We've rebuilt nearly every school in the country, and despite the Murdoch noise machine doing its best to say this has been an epic waste of money, two separate reviews have found that there was waste on about 0.5% of all projects; I'd like to see a private company with such efficiency! This kept the building industry going.
We gave nearly everyone in the country between $900-$3000 the minute the financial crash happened. This meant, rather than tightening the purse strings, people went and bought stuff. Independent analysis shows this saved around 30 000 retail jobs in the immediate aftermath of the GFC.
We've also done a range of infrastructure projects, including much needed upgrades to a few significant coal ports, increasing our export capacity, and a big push towards renewable energy, meaning Kyoto targets may actually be attainable.
Our debt sits at about 20% GDP, unemployment 5%, inflation around 3%.
It *works* when you're a Keynesian on the way up as well as the way down; we spent the good times paying off debt, and our reserve bank interest rates averaged around 5% for the last decade. This meant when the crash came we could enact countercyclical monetary and fiscal policies without the debt crippling the country and ruining our credit rating. The problem the US and Europe are seeing now is that they had their cake and ate it too during the last two decades of boom time, meaning now there's no cake left.
(no subject)
Date: 5/10/11 09:16 (UTC)It's so easy to indulge in spending and living beyond one's means. In many countries in the West, whenever some voice came up warning that people should also think about their future and the lifestyle of living beyond their means was dangerous, they'd be talked down by a mob of mocking giggles.
Fortunately, there were other places where the majority of people, and hence their governments, realized early enough that this behavior was unsustainable in the long run. So, kudos Australia.
(no subject)
Date: 6/10/11 00:05 (UTC)(no subject)
Date: 4/10/11 15:23 (UTC)(no subject)
Date: 4/10/11 17:31 (UTC)(no subject)
Date: 4/10/11 16:02 (UTC)Whoever came up with this scheme is probably spending hours kissing their own reflection in the mirror.
(no subject)
Date: 4/10/11 21:11 (UTC)(no subject)
Date: 5/10/11 09:21 (UTC)(no subject)
Date: 4/10/11 17:29 (UTC)(no subject)
Date: 4/10/11 19:11 (UTC)(no subject)
Date: 4/10/11 18:43 (UTC)I'd say the only way for them to take the lesson is to be stung, and very hard. Let them go through what Bulgaria, Estonia, Argentina and others went through after the state default and the introduction of a currency board. It won't kill them as it didn't kill us, but they might learn a thing or two in the process. And maybe they'll be more humble next time.
(no subject)
Date: 4/10/11 18:44 (UTC)(no subject)
Date: 4/10/11 18:52 (UTC)(no subject)
Date: 4/10/11 18:54 (UTC)(no subject)
Date: 4/10/11 18:55 (UTC)(no subject)
Date: 4/10/11 18:56 (UTC)(no subject)
Date: 4/10/11 18:57 (UTC)(no subject)
Date: 4/10/11 18:57 (UTC)(no subject)
Date: 4/10/11 19:13 (UTC)Perhaps because it's not the fault of Greece's citizens this has happened, and they're the ones who will suffer if Greece goes under, plus it'll also damage the economies of other groups.
The problem is the global market is such that if one part fails, it hurts other parts severely.
(no subject)
Date: 4/10/11 19:16 (UTC)(no subject)
Date: 6/10/11 04:10 (UTC)(no subject)
Date: 6/10/11 05:22 (UTC)yes, it almost as if, for a country such as this one, communism should be naturally adopted & faithfully practiced. and it must be a moderate communism at that! none of this 'everybody gets $65,000 a year' crap.
(no subject)
Date: 6/10/11 05:02 (UTC)(no subject)
Date: 7/10/11 08:31 (UTC)(no subject)
Date: 9/10/11 03:37 (UTC)