One size fits nobody?

Pr Q said:

In particular (and by no means uniquely to Germany) policies that are primarily driven by the interests of banks have become the basis of a popular backlash against other scapegoats – in this case the citizens of the peripheral economies who are on the hook for failures of the financial sector.

Why does every major problem have to have a single head-line bad guy? I am second to none in my denunciation of bankers. But they are not the only culprits, especially in a stuff-up as big as the GFC.

My understanding of most deals is that they require a minimum of two parties. For a deal to go wrong at least one party must foul up. But its perfectly possible for both parties to be in the wrong, which makes the stuff-up go global.

Can’t the EU’s economic problems be a combination of bad business from both the top-down (swindling British bankers) and the bottom-up (skiving Greek tax-“payers”)? The evidence that the average Greek in the street is not pulling his weight in the tax department is pretty overwhelming. Or is it now politically incorrect to point out the bleeding obvious in economics as well?

Just as the US’s financial problems were a combination of bad business from both the top-down (Wall Street sharks) and bottom-up (Main Street suckers), plus morally hazardous government bank rollers wrapping the whole thing together.

Less hedgehog, more fox please.

Because the banks are not the main culprits. Rather the main culprits are mortgage holders but governments just don’t have the balls to tell them that their wanting everything on tick has messed us all up. It’ll really mean massive property devaluation.

“the actual policies being pursued and advocated by Germany don’t necessarily correspond to any reasonable conception of Germany’s national interest”

This – more than the ECB – is the fundamental here. If Germany wanted a different policy, e.g. 4% inflation target, apparently constraining ECB personalities and rules would vanish in a puff of smoke. And, what’s more, Germany’s policy attitude has very long-standing roots in Germany’s political economy, so it can’t be expected to change.

The whole argument would be more convincing if it didn’t implicitly hold that there is some sort of sens in speaking of ‘currencies’ fitting ‘areas’.

Adding on a few kicks to the bankers. The policies that the government of Germany is following might be considered to be far more in the ‘national interest’ if the ‘national interest’ was defined as ‘the short-term interests of the financial elites’.

I would sneer here, but I live in the USA, where that’s almost written into the Constitution.

The actions of the ECB contribute most to my opinion that policymakers in Europe do not even have a basic understanding of the interaction between government policy and macroeconomics as they attempt to grapple with this crisis. In the US there is plenty to complain about, but at least the head of the central bank understands what is minimally required to maintain the financial system, even if we haven’t taken actions to really address underlying causes or provide real relief for the middle class. Of course, the fed has a dual mandate which probably helps. The mistake with the ECB is not recognizing that even if you don’t have a dual mandate, if you fail to maintain economic growth badly enough, you will be out of a job eventually, one way or another.

Disinflation enables stable class structure and maintains status quo of winners. A dynamic economy, while nominally preferred, is practically discouraged because this involves new players with different priorities than the ancien regime.

This is also true. But I don’t think it in any way contradicts John Q.’s analysis. It just provides the political-economy background to it.

“This is also true. But I don’t think it in any way contradicts John Q.’s analysis. It just provides the political-economy background to it.”

It does contradict the point that the ECB is going to be ‘forced’ to do somesuch at some point in the future.

Cherchez L’Homme:

WSJ: What do you think the risk is that this wrenching process will cause the breakup of the euro or its membership?

TRICHET: Of course the euro is there and will be there in the future. I do not comment on what I consider absurd hypotheses. I am used to such questions from the very beginning of the euro. The paradox is that, years ago, the question was about Germany supposed to be at that time the “sick man of Europe”. I was responding that Germany was doing hard work that its economy was catching up on competitiveness. Now the same hard work has to be done by those that were growing rapidly over the past years but at the same time had lost their competitiveness. One has to accept that within a vast economy that has the size of the euro area, with 331 million people, there are economic differences. For instance when I look on both sides of the Atlantic I see that the differences between the fastest and slowest-growing U.S. states, it is more or less of the same order of magnitude as between countries in the euro area, for instance between Oklahoma and Nevada, 13 % differences in growth in 2009; between Slovakia and Ireland more than 9 % in growth in 2008.

WSJ: The U.S. copes with these differences through labor mobility and a federal budget. Does the euro zone ultimately need a big federal budget?

TRICHET: The quantum leap we are asking for in surveillance of fiscal policy has to be the equivalent, in our own institutional framework, of what a federation could do. And we should not overestimate labor mobility in the U.S. and underestimate it in Europe. If I take the U.S. state with the highest unemployment and the state with the lowest, I am not that far from what we observe in the euro area, for instance in 2009 between 18% and Spain, 3,7 % in Netherlands, and between 13,6 % in Michigan, and 4,3 % in North Dakota, 4.3%.

agree with Oliver On labor mobility. skillful labor help to boost up your economy. I think Europe needs to concentrate on it?

Just as the US’s financial problems were a combination of bad business from both the top-down (Wall Street sharks) and bottom-up (Main Street suckers), plus morally hazardous government bank rollers wrapping the whole thing together.

(Completely off-topic…) As the commentators on a recent B&T thread noted, the worst suckers are the people who thought they are the evil geniuses. Case in point: AIG Financial Products….

Of course, this accords with your general point..

That is true, but it is a transient issue, which means that the US is closer to an optimal currency area than the Eurozone.
In addition, the problem exists in the US only as long as your are not foreclosed. After that lower rents increase mobility.

I certainly thought all that stuff was crazy before the bubble popped, but I’m paranoid about these things.

I’d suspect that the impact of labor mobility in the US might be overestimated, but I doubt the impact of less labor mobility in Europe is not underestimated. Adding language (and maybe even a sense of nationalism) to the mix isn’t likely to do anything other than make the problems of labor mobility worse.

Oliver in #18: “the US has labor mobility. The Eurozone doesn’t. All legal equality doesn’t remove language barriers.”
Er, am I imagining the long history of South-North and now East-West Europeam migration? Italians and Spaniards went to Germany in the 1960s, lon gbefore there was an intra-EU right of settlement. Somehow, tens of millions of pretty uneducated Turks, Pakistanis, Poles, Algerians etc have managed to overcome language barriers and find jobs abroad. The same is true of Mexican immigrants to the USA today.

“True, but that isn’t full mobility.”

??

Re Lemuel @32: the folk belief that lots of Americans are frequently on the move is, I think, a product of the fact that the media are based in large coastal cities in which many inhabitants (including the mediots) have in fact moved from elsewhere. When I moved to Ohio some years ago, I was indeed struck by the very high proportion of people who are living near where they were born. I guess I shouldn’t have been surprised but then I’m originally from the East Coast myself (and a former academic, a profession in which long-distance moves are usually a career necessity), so I too was prone to this misconception.

Lemuel : “a large majority of American adults live in the same state they were born in”

Steve: “the folk belief that lots of Americans are frequently on the move”
“When I moved to Ohio some years ago, I was indeed struck by the very high proportion of people who are living near where they were born.”

And there’s nothing wrong with that! Why shouldn’t they stay in their community?

I am uncomfortable with a certain view – which may not be yours but which comes up a lot in these discussions – that (mass) migration is a good thing per se that should be encouraged. Keep in mind that (mass) migration is an incredibly inefficient process that destroys a lot of capital – material and social – and strains the communities at both ends of the trajectory. Sure, it also enriches communities and promotes cultural diversity. Nevertheless, economic mass migration is not something to be welcomed and should not be seen as an easy way to solve economic troubles. It isn’t easy, even when the cultural barriers are low, and it doesn’t solve the economic problems that are pushing people to leave. And it undermines the health and stability of communities. To expect the economic imbalance in either Europe or the US to be “solved” by masses of people being shuffled around on the map – millions of Spaniards moved to the Netherlands, Michiganders to the Dakotas – seems foolish to me. This isn’t molecules in a chemical diffusion experiment.

Now let’s get a bit more specific about the US. There is clearly a difference in attitude compared to Europe. The idea that you can always vote with your feet, move away if you don’t like where you are is clearly more prevalent. Again I don’t necessarily see this as a good thing. This attitude has contributed greatly to increasing economic segregation, urban flight and the neglect of the cities, and it has significantly contributed to the housing bubble. Economists who interpret mobility as an equalizer of economic conditions are having it backwards: To a large extent, internal mobility in the US is motivated by the desire to escape diversity (e. g. Bill Bishop, The Big Sort). A lot of that mobility doesn’t cross state boundaries. Even when it does, is there evidence that “voting with the feet” promotes economic stability and resilience? Consider how Americans in past decades have voted with their feet for places like Nevada and Florida, which now find themselves among the states worst hit by the crisis. I hope Nevadans like it in North Dakota.

Particularly in GDP terms, Germany’s recovery has not been that strong”
That’s a joke, surely?

1) 3,6% is the biggest gain for Germany since 1992 … Please take into account that the German population + workforce is currently stable, while the US grows at 1%. So German growth of 3,6% (2011: 2,5 predicted by Ifo; might be even higher) produces the same growth / capita as a growth of 4,6% (2011: 3,5%) in the US.

2) In Germany, the number of workers on “short-work” peaked at 1,5 mio in mid 2009. They are now down to 300.000. Unemployed numbered 5 mio in 2004. They are now at 3 mio, with further reductions forecasted. As the continuation of the recovery of the world economy isn’t a sure thing yet, many manufacturers only hire back those (few) people they had to let go during the crisis. For the moment, they prefer paying overtime to hiring people from the service sector or foreigners that need to be expensively trained (as happened with the “Gastarbeiter” in the 50s / 60s).

3) Also, the service sector itself is expanding and hiring. But there aren’t that many “service jobs” in Germany compared to the US, that could be filled by southerners. Many restaurants are run by families. Paid parental leave means way less nannys. People do their own lawnmowing + laundry as they need to work less hours on their day job. After heavy losses, Walmart fled the Germany market when they found out that in supermarkets Germans prefer lower prices to better service (and surely don’t want other people packing their stuff into bags) …

That doesn’t mean I disagree on the main point. A somewhat higher inflation for a short time (e.g. 2 years) could do a lot to improve the situation of the GIPS-countries while not endangering long term stability. Personally, I’d prefer a one-time money drop by the ECB to all member states (according to population) that would have to be used to pay back debts of the memberstates.

And there’s nothing wrong with that! Why shouldn’t they stay in their community?

I didn’t intend any implication that it’s a problem, only that the reality about mobility in the US is at odds with elite / media perceptions.

Phil Armstrong @ #8 said:

I’m not sure skiving Greek tax-payers are entirely to blame: they haven’t changed their behaviour at all, it’s just that a bunch of European banks decided that the advent of the Euro clearly meant that the Greek attitudes would change overnight & it was obviously now safe to lend them huge amounts of money at a far smaller premium over German bunds than was sane.

Okay your explanation of the EU financial crisis makes more sense to me because it still allows for both elite top-down and populus bottom-up factors in the deals that went wrong. In both the US and EU, the Masters of the Universe dealt with the Greater Fools which ended in tears before bedtime for the taxpayer.

Interesting that in both cases it was mostly “Northern” bankers making bad business with “Southern” borrowers. Thus in the EU GFC, greedy Big Three (UK, FRA & FRG) bankers recklessly lent money to impecunious and dead-beat borrowers in the PIGS nations. This is analogous to the US GFC situation where greedy Wall Street bankers recklessly lent (or guaranteed and derived securities) to impecunious and dead-beat borrowers in the Sand States (CA, FL & NV).

And in both cases the “federal” government (FRB & ECB) had to step in to bail out the banks that were too big to fail. Although in the EU’s case the administration of the bail-outs was out-sourced to debtor nations who had to cut their spending in order to help with the financing.

Also in both cases, the federal governments responsibility for bailing out financial institutions meant that less funds were available for spending on the more general fiscal stimulus. Which was particularly bad timing because the credit crisis and construction bust had put both economies in a hole.

The conservative moral of the story is that society needs to impose more authoritarian controls on both greedy lenders and lazy borrowers or else society’s agencies wind up paying the cost. This fact punches another hole in the post-modern liberal fairy tale of freedom.