The Need for Eurostimulus
Lest you think my concerns about Jean Claude Tricet’s too-tight monetary policy are just more left-wing lack of thrift, check out Megan McArdle agreeing with me. Meanwhile, as Felix Salmon observes the Europeans aren’t just being laggard on the monetary policy front. Laggards on monetary policy are naturally going to be laggards on fiscal policy, too. The issue, as best one can tell, is primarily Germany where they’re paranoid about inflation. German sluggishness about this is triply damaging. First, Germany is one of the world’s largest economies. Second, Germany has a huge current account surplus, so they’re much better-positioned to do stimulus than is (say) the United States. And third, Germany’s central position in Europe makes it difficult for Europe’s small countries (who collectively add up to a pretty major economy) to engage in any meaningful stimulus absent Germany leadership.
Kevin Drum remarks:
I don’t have any brilliant suggestions for getting Europe to become a little more proactive on the let’s-avoid-another-great-depression front. Just one more job for the Obama economic team to work on, I suppose. Maybe someday Treasury will actually hire someone besides Tim Geithner and we can start pushing on this a little harder than we are now.
I think it’s important to move beyond dry wit and really ring the alarm bells on this. The economy is very global, and it’s extremely difficult to see it pulling short of a depression if the European Union and Japan are twiddling their thumbs. Beyond that, if there isn’t meaningful global coordination of stimulus efforts then protectionist pressures are going to become harder-and-harder to resist in China and the United States to prevent free riding. That, in turn, would buy some short-term assistance at the cost of really hobbling the prospects for recovery down the road. Under the circumstances, it really would be nice if we had an Undersecretary of Treasury for International Affairs. In the past, the job has been held by such figures as Lawrence Summers and Timothy Geithner, so they must know some people who work in this field. And it would also be nice to see the President and the White House team more focused on this. They seem primarily interested in doing domestic political battle with the GOP over their budget proposal, which is understandable but they need to recognize that their political prospects are closely tied to the fate of the global economy and for better or for worse Trichet, Angela Merkel, Taro Aso, Nicholas Sarkozy, and Hu Jintao are more relevant to this than is Rush Limbaugh.
On a related note, a hobbyhorse of mine over the past couple of years has been the relative neglect of Europe in foreign policy conversations. There’s not that much thrilling bloodshed in Europe, but the immense wealth and productive capacity of the E.U. nations means that, in practice, the everyday lives of Americans are more impacted by political events in Europe than by events in Baghdad or Teheran.
34 Responses to “The Need for Eurostimulus”
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March 4th, 2009 at 11:58 am
What those numbers seem to ignore is the additional spending in Europe automatically created by a more generous welfare system, during a recession (unemployment benefits…).
Last I checked, many European countries are already running large deficits.
March 4th, 2009 at 12:03 pm
While I don’t disagree with the economic need for stimulative spending, I’m deeply uncomfortable with the seemingly growing notion that it’s immoral for people to buy shit they don’t need and don’t want. In other words, I’m afraid that Keynesism is become a pretext for enforcement of consumerism and materialism. Hope you’ll write about that.
March 4th, 2009 at 12:04 pm
Also, could the lack of leadership in Europe be blamed in part on the Czech presidency? Not only is it a relatively small and poor (by EU standards) country, but their president is aggressively anti-European.
March 4th, 2009 at 12:05 pm
It seems to me a bit unfair to blame the Europeans for this. The fact is, the US has thus far unveiled nothing in the way of a credible strategy to fix its finance system.
Our entire financial system is insolvent, but everyone in American government seems to believe that if we pretend for long enough that it’s solvent, eventually the problem will go away. It won’t.
When the stimulus package was waiting for passage, I assumed, obviously foolishly, that right on its heels we would see a plan to take most or all of the US banking system into temporary receivership.
Had I known that we would be staying with a “feed the zombie banks money” policy on the finance side, I really wouldn’t have supported the stimulus.
In fact, in hindsight I feel I shouldn’t have supported ANY of the money that’s been spent to kick the can down the road on this crisis. I thought March 2009 was where we were kicking the can to.
Turns out “kick the can” IS the plan. I don’t support that and neither should European bankers.
March 4th, 2009 at 12:15 pm
Obviously if you think stimulus is a good idea, then you want everyone to stimulate. But if you are very skeptical that stimulus will have any appreciable effect, but has significant inflationary consequences, then you probably think that Germany is doing the brilliant thing: soaking up whatever benefits might accrue from the U.S.’s stupid policies, while at the same time avoiding the fiscal and monetary problems with carrying huge debt burdens.
So I say to Germany: don’t stimulate!
March 4th, 2009 at 12:16 pm
Ape Man,
Our financial system is actually in better shape than Europe’s. According to John Mauldin:
March 4th, 2009 at 12:20 pm
Our entire financial system is insolvent, but everyone in American government seems to believe that if we pretend for long enough that it’s solvent, eventually the problem will go away. It won’t.
This is right. The U.S. has two options with regard to the banking system. To let BofA and Citigroup fail. This will have very terrible short-term effects, but since financial services are, when done properly, profit-making, other companies would step into the breach in fairly short order.
Or to take BofA and Citigroup into receivership, clean house, and re-privatize them as “new” improved banks. This is much more costly, but infinitely more preferential to what we’re doing now which is just giving money to BofA and Citigroup so they can continue along their merry ways until they need the next infusion of money in 3-6 months, and on and on and on.
These banks are insolvent. Insolvency isn’t the end of the world. And banking isn’t any more “unique” or sui generis than car making. Depositers are insured, so just let these things go bankrupt and let’s reboot.
March 4th, 2009 at 12:27 pm
As merely an observer of politics (what nations do), it looks to me that the Euros are waiting to see (as usual) what actions we take, and consequently how successful we are in propping up our massive economy. If our remaining banks come into position to spend again, there is an argument that they will swoop in like vultures and buy much of the Euro banks’ heretofore “toxic” assets at bargain prices. But at least that would save their banks from taking responsibility for their mismanagement. Plus, why should their states borrow a horrible amount of money to bail themselves out when the Americans are busy putting themselves into debt and will do it for them?
March 4th, 2009 at 12:28 pm
I don’t think it is accurate to say we have adopted a policy of indefinitely kicking the can down the road. The asset-pricing mechanisms are just getting started, and the stress tests aren’t due to be completed until the end of April. At that point, supposedly the banks will have up to six months to come up with private capital before a final resolution, although obviously things may be moving so fast for some of the worst banks that action will be needed sooner.
Blah blah blah. Look, the price of an asset that can’t be sold is 0. You can pretend that it’s worth some fictional number, but that’s just make believe in the same way that if I put a home I bought in 2006 for $350,000 on the market today for $350,000, I am merely wasting my own time. I might get a buyer at $250,000, depending on the market.
In the real world, if you have enough money to stay afloat while some of your assets return to a more acceptable price, then that’s your business. But that’s not the case for these banks, whose liabilities exceed assets that they acquired at bubble-era prices.
But here we have bullshit “stress testing” and “asset pricing” that’s entirely fictional. Stress testing and realistic asset pricing in 2006 might’ve done some good, when the banks could’ve offloaded some of these questionable assets before the price went to near 0. But “stress testing” once the assets are worthless in the current market MISSES THE POINT OF STRESS TESTING.
It’s political hooey, designed precisely as Ape said to kick the can down the road in the HOPE that the economy will automagically reboot itself by April or May or the summer. That’s nonsense.
The value of something isn’t an objective number that needs to be devined through spreadsheet analysis. The value of something is subjective: it’s what a buyer will pay for it.
March 4th, 2009 at 12:29 pm
Dave:
That’s the point. Europe can’t save its banks. Can’t. They don’t have the institutional structure to take the coordinated action they would need to fix their banks – their banks are international but their finance policy is national. They need the US to stop the bleeding. If we don’t, Europe is dead no matter what they do, unless some magical consensus emerges among the five or six biggest countries about what to do.
DTM:
I hope you’re right. That’s what I WANT to think. But I’m getting worried.
I agree that TARP and its children did what they were supposed to do and stabilized the credit markets. But I’m getting cold feet on assuming that Obama and Geithner are going to nationalize the banks when they keep saying – over and over – that they aren’t going to.
If I were in Europe I would be even less inclined to read tea leaves on this, especially if no one is coming through back-channels and telling me “Look, don’t worry, we just have to let this play out.”
If I were a Euro finance minister or central banker I would be sitting on my hands waiting to see what the US is going to do.
March 4th, 2009 at 12:29 pm
I think this is the first time I’ve seen “Megan McArdle agrees with me” as supporting one’s claim.
March 4th, 2009 at 12:40 pm
Does anyone know how to log into Michelle Malkins comments sections?
I want to taunt the “Galters” who are deciding to work less so they can avoid the 4% tax increase on income over $250,000, but I can’t get in.
March 4th, 2009 at 12:44 pm
Joe Strummer:
What you’re saying is true in a sense. But in this case the picture actually is a bit more complex – it’s not all “blah blah blah.”
The securities that the banks are holding have a “hold-to-maturity” value and an open market value. Right now we’re in a situation where accounting rules allow banks to assume hold-to-maturity values haven’t fallen even though everyone knows they have. Those rules are creating a giant disconnect between the banks’ paper balance sheets and their actual objective solvency.
The problem is, you can’t simply take the open market value and assign it to the hold-to-maturity value. The hold-to-maturity value probably IS considerably higher than the market value – as you note the current market value is close to zero, and as bad as these assets are they are yielding more than nothing even today, when things are VERY bad.
What scares me about the stress testing is that I haven’t heard a solid answer to the question “what happens when a big bank is revealed by stress testing to be balance-sheet insolvent?”
If the answer to that question is “temporary nationalization” then I’m happy, and I agree with DTM that waiting 6 months isn’t the end of the world (probably).
If the answer is “buy their assets at massively inflated prices and then wait for the assets to magically become worth what was paid for them” then I’m skeptical.
March 4th, 2009 at 12:47 pm
I think that John Hulsman and Will Schirano said it best four years ago in the National Interest. “The European Union is Dead.”
And this is simply more evidence of why it is dead. On the crucial question underlying political integration — whether or not one is prepared to ‘die for the EU,’ the largest and most pro-EU member has said no.
And for good reason, because Germany knows that there is a shitstorm coming from the East and they’re going to need cash to survive it.
Damned if they do and damned if they don’t. There’s no way they have (or the rest of the West) has the money to prop up the East…and if they let them collapse, it’s going to be brutal.
Trust me, I don’t want Europe to fail…To be honest, they’ve been a net benefit for the United States since the dawn of the ECM. But for many years now, Europhiles have been telling us to ignore the facts and pretend that there was nothing that could stop the EU. I recall many a meeting where we were told of the bike that always continued forward. Well, that bike is continuing forward, off of a cliff.
We were right, they were wrong.
Now it’s time to figure out what to do about it.
March 4th, 2009 at 12:47 pm
I meant that it seems like people think it’s immoral to not buy worthless shit in a recession.
March 4th, 2009 at 12:53 pm
Also, on coordination…You might also want to check out this piece that Schirano wrote for the Center for European Policy Analysis:
http://www.cepa.org/digest/the_financial_crisis_hits_europes_regulatory_environment.php
March 4th, 2009 at 12:53 pm
Ape:
With that caveat, then I agree that the value of the asset is at least whatever it’s yielding (taking into account the risk of further defaults that might lower the yield) and not, strictly speaking, the open market price.
Banks that can weather the storm while the market recovers are being stress tested, and surviving. Banks that can’t weather the storm because they can’t raise money on the open market, are also being stress tested and failing. I don’t see what the added element of “stress testing” by government regulators accomplishes in this environment.
March 4th, 2009 at 12:55 pm
I think that John Hulsman and Will Schirano said it best four years ago in the National Interest. “The European Union is Dead.”
Huh, usually this decades-old claim is made for the future: “The European Union is almost dead!!!”. Now you want to take credit for thinking the EU was dead four years ago? It still seems rather alive to me today.
March 4th, 2009 at 12:55 pm
“I meant that it seems like people think it’s immoral to not buy worthless shit in a recession.”
I don’t think anyone thinks that. But I have a secure, well-paying job, and I’ve been making more big purchases and eating out at locally-owned restaurants more often recently, at least partially out of a sense that if I don’t, who will? So, while maybe not a moral obligation, it’s nice to do your part to keep things afloat during tough times if you can afford to. Not that many people can.
March 4th, 2009 at 1:02 pm
Why oh why,
The point of their piece was that there was no ethos to bind the populace of Europe together. Germany telling the East demonstrates this.
On the crucial question of whether or not the Germans will take one for the team…or ‘die for Europe’ if you will…The answer is no. The reality is that the answer has never changed. Had this happened 4 years ago, or 10 years ago, or 100 years ago…the answer has always been no. That’s not a union.
Up to that point, no one had looked at it from that angle…Everyone was/and still is process driven. As they wrote…Process without foundation is not dissimilar to building a house from the top down.
What the left doesn’t seem to grasp is that this had to be a bottom-up process to succeed. It wasn’t…it was elite driven. Hence it was always dead.
March 4th, 2009 at 1:10 pm
There will probably never be a European president sending EU troops to die at the other side of the globe, but I’m not sure that is a bad thing. But an organization that keeps getting bigger and more powerful can hardly be described as “dead”. Some American and English writers regularly predict the end of the EU, mostly because they hate it.
March 4th, 2009 at 1:14 pm
Matt — one thing I really want to understand is *why* they’re not getting anyone besides Geithner in at Treasury. It’s fricking *insane* to let that situation continue.
March 4th, 2009 at 1:28 pm
Why oh why,
I’m not talking about literally sending EU troops to go and die. I’m talking about the man on the street that buys into the EU because he or she is ready to cede his country’s sovereignty to it. That’s what you absolutely must have as a foundation for the Union. They don’t have it…what they have is process which is viewed as illegitimate in the eyes of Europeans.
Think of Iraq…Remember how people like you and I would agree that it was a political problem and not a military problem. This is the same thing. Without the politics, there is not union…in the same way that if you don’t have buy-in in Iraq, there is no real government.
used to be disgusted,
They’re not going to replace Geithner as Treasury because he’s the one taking all of the hits for the folks that write the policy. That’s why Summers isn’t your SECTREAS, because he’s smart enough to not put himself in front of a train.
Geithner is a figurehead…In fact, had they followed his advice, we’d be far better off than we are now having followed the policy decisions of Summers, Emmanuel, and Axelrod/Rove.
Those three are your problem. Geithner has little, if any, influence.
March 4th, 2009 at 2:14 pm
March 4th, 2009 at 2:18 pm
MY doesn’t know what he’s talking about:
German stimulus plan clears final hurdle
March 4th, 2009 at 2:31 pm
novakant,
MY was speaking about the whole of Europe…not solely Germany.
But your post is just more proof that the Germans…who spent the better part of last year criticizing the US and telling us that it was the end of our system…are in worse shape than we ever were/are.
Funny, I do seem to remember many a poster talking about how Europe was better off and that we would be lucky to have a system like Europe’s. I guess reality isn’t as palatable as dreaming.
March 4th, 2009 at 3:10 pm
I guess reality isn’t as palatable as dreaming.
The reality is that Bush/Blair/Brown’s neo-liberal nonsense got us into this mess in the first place – IT HAS FAILED. and now we’re picking up the pieces.
March 4th, 2009 at 4:23 pm
What is entirely absent from this whole conversation is the fact that the Germans actually DID introduce a program to stabilize and restore confidence in the financial market.
It’s called SoFFin (Sonderfonds Finanzmarktstabilisierung – Financial Market Stabilization Fund) and was introduced on October 17, 2008 with a volume of around 568 (!) billion dollars. That’s neither a lagged response nor is it chump change.
They are also right now trying to figure out how to save or at least help stabilize Opel, which is owned by GM and therefore pretty screwed due to no fault of its own.
March 4th, 2009 at 4:34 pm
“The reality is that Bush/Blair/Brown’s neo-liberal nonsense got us into this mess in the first place – IT HAS FAILED.”
Spain is run by socialists and has an even worse housing bust and 14%+ unemployment. Does that mean SOCIALISM HAS FAILED?
March 4th, 2009 at 6:25 pm
Yes, socialism has failed – in 1989. Spain is about as socialist as the UK, which has been run by so-called socialists since 1997. Get a grip.