Krugman: German market signals “catastrophe for the Euro...hard to find reasons for optimism”

[FourScore]

Sun Sep 25, 2011 at 09:31 PM PDT
Krugman: German market signals “catastrophe for the Euro...hard to find reasons for optimism”
by bobswern

It is rare for Paul Krugman to preempt the publishing of one his NYT op-ed columns with a blog entry warning that his upcoming Times’ piece was going to be “depressing.” But, this evening, that’s exactly what he did when he posted this: “Prophylactic Du Jour.”

So…I’ve just finished reading his op-ed column, “Euro Zone Death Trip,” and I now understand what he was referencing, less than 90 minutes ago.

As he tells us towards the top of his NYT column…

Euro Zone Death Trip
Paul Krugman
NY Times
September 26, 2011

…On one side, Europe’s situation is really, really scary: with countries that account for a third of the euro area’s economy now under speculative attack, the single currency’s very existence is being threatened — and a euro collapse could inflict vast damage on the world.

On the other side, European policy makers seem set to deliver more of the same. They’ll probably find a way to provide more credit to countries in trouble, which may or may not stave off imminent disaster. But they don’t seem at all ready to acknowledge a crucial fact — namely, that without more expansionary fiscal and monetary policies in Europe’s stronger economies, all of their rescue attempts will fail.

The story so far: The introduction of the euro in 1999 led to a vast boom in lending to Europe’s peripheral economies, because investors believed (wrongly) that the shared currency made Greek or Spanish debt just as safe as German debt. Contrary to what you often hear, this lending boom wasn’t mostly financing profligate government spending — Spain and Ireland actually ran budget surpluses on the eve of the crisis, and had low levels of debt. Instead, the inflows of money mainly fueled huge booms in private spending, especially on housing…

MUCH MORE AT: http://www.dailykos.com/story/2011/09/26/1020201/-Krugman:-German-market-signals-%E2%80%9Ccatastrophe-for-the-Eurohard-to-find-reasons-for-optimism%E2%80%9D?via=siderec

[JCMach1]

1. Yikes, yeah it's very bad

The Eurozone is pooched and even China is also poised to fall into a banking trap if things go south too rapidly. Unless policy makers get it together, we are spiraling towards a depression.

[FirstLight]

2. yikes

all I can say is hold on, sparky....Mr Toad's Wild Ride....

[JCMach1]

3. This crisis is much more dangerous than 2008 because the Eurozone has no unified

ability to fight the problems it faces. At least the U.S. had direct, immediate and aggressive action which staunched the flow and prevented what would have been a run on the banks.

Fast forward... What can the Eurozone do? It doesn't have the political will, or power to do anything... that means the world is in for a dangerous time.

[tama]

5. Hmm

Eurozone can say, fuck the banks and let them fall and fuck the shareholders, cancell all national debt to private banks in all EU countries. Dunno if and when they are ready to do so, but you know what will happen in Wall Street and City if and when they do.

[FirstLight]

6. It's a scary kind of fatalism

we know it has to break down in order to be rebuilt to some degree...but how it looks on the ground is a whole 'nother ball game...

[OHdem10]

4. That Austerity has worked out real well for them has it not???

When are they going to stop and think--this just may
not be what we need right now.

How hard is it to understand. Countries were already
in recession. So they did deep cuts. This just meant
more people on unemployment lines and paying no taxes.
More people not working means they are not buying anything
more than bare necessities when their benefits are cut.
Buying only necessities means the economy stays in the
ditch.

And the GOP is working at feverish pace full steam ahead
trying to do the same for our country.

[Katashi_itto]

7. The status quo is protecting itself... the actual problem of the derivitives

will not be addressed. It simply means the system is willing to destroy itself sooner rather than declare derivatives illegal and apply a "Chinese" solution like rounding up bank execs and everyone involved and showing them the business end of a guillotine.

This is a good thing. It just means a system reset is coming sooner. I mean we arent really losing anything except trillions of dollars of "Air Money"

[JCMach1]

9. I don't specifically blame derivatives... just unsound banking practices

(and yeah derivatives were one component of that). Banks are now finding out that their lack of due diligence on all of those Euro real estate loans was non-existent.

This is the end-game to the European real estate bubble.

This will put pressure on sovereign debt, not just in Europe, but around the world.

I use the example of Dubai (which nearly defaulted in 2008). They have a 50Billion dollar loan payment this spring. Refinancing will most likely be impossible through normal means and they will be faced with the same issues as Greek debt. Now play that out country by country around the world.

Time to ask the question of truth. How much 'real' reserves do the European banks have?

1x100
1X1000
1x10000

?????????

I doubt if anyone actually knows the truth.

They have been skirting around the reserve regulations for a generation.

[Katashi_itto]

16. Derivitives have us leveraged (Just the U.S) at 18 times our GDP

If you take the entire planet we owe 172 trillion dollars.

The whole planet makes 6 trillion a year.

[FourScore]

18. Wow! That's staggering!

Welcome to DU, Katashi_itto!

:hi:

[Bluenorthwest]

17. Wow. There is no death penalty in Europe. So the blood lust

thing is not going to happen for you. The Chinese execute thousands a year, that sort of thing is anathema to Europeans, pretty much across the board.
Hard to take a suggestion seriously that is so far outside the acceptable actions of the culture in question and the legal system we are talking about.

[JCMach1]

8. And the US entered the tea party recession this Summer

caused by the same thing. Cut-backs at the state and local level have produced more joblessness and much lower economic activity.

[xchrom]

10. What does current economic thinking have to offer besides austerity & selling off the commons?

It's the only thing those in charge know.

& when that fails they only know to be 'surprised'.

[OHdem10]

11. Ex P.M. Gordon Browne wrote a book in which he laid out a plan.

which made much sense to me.

Believing the European Economies were so fragile
reeking from the recession, he took a Keynesian
approach and would have provided stimulus simultaneous
with the US. He believed there would have to
be reforms --cuts in benefits etc but he provided
for a more gradual move to Deficit Reduction.

Our problem was the stimulus was too small to have
lasting effect.

The Europeans chose Austerity. It will have to get
horrible before it gets better.

It is predicted it could 2016 or 17 before we begin
to show real growth.

[Lionessa]

12. I keep wondering how things would be different today if Greece had chosen

the Icelandic route to recovery, which seems now inevitable after, what, two years of fussing around and extreme austerity measures? But hey the banks managed to get a few more interest payments in the mean time. They should've just accepted default back. But from the start with the bank bail outs, the entire global economy has been being handled entirely incorrectly except apparently, Iceland.

[JCMach1]

14. Or, if the previous conservative government had not bailed out the banks

adding billions to an already high debt.

[Selatius]

19. The thing is Iceland's gov't didn't default. Their major banks did.

Rather than spend money they couldn't afford to bail out banks that were responsible for the economic crash, they let their banks fail and nationalized some of the pieces that were left and went after bankers for fraudulent practices. To be sure, there was a lot of pain in the short-term because their regulatory actions scared away foreign investors for a time, but Iceland is now in better shape than it was prior, and they didn't have to break the bank unlike the US that spent 900 billion to save its corrupt banks.

Greece is in worse shape. Their banks and their government are facing default. The Greek government needs to reform its tax collection system for its own sake. Their tax system is horribly abused by tax dodgers, and their enforcement mechanism has never been able to keep up. As far as Greek banks go, let them go down just like Iceland did.

[Owlet]

13. Plan "C"

"The end result of plan “A” – “defend the euro at all cost” – will be detrimental to all. Rescue deals have led the eurozone on the slippery path to the irresponsibility of a transfer union. If everybody is responsible for everybody’s debts, no one is. Competition between politicians in the eurozone will focus on who gets most at the expense of the others. The result is clear: more debts, higher inflation and a lower standard of living. The eurozone’s competitiveness is bound to fall behind other regions of the world.

As a plan “B” George Soros suggests that a Greek default “need not be disorderly”, or result in its departure from the eurozone. But a Greek default or departure from the eurozone implies risks too high to take. First in Athens, then Lisbon, Madrid and perhaps Rome, people would storm the banks as soon as word got out. A “haircut” would not improve Greece’s competitiveness either. Soon, the Greeks will have to go to the barber again. Anyway, we now talk also about Portugal, Spain, Italy and, I am afraid, soon France.

That is why we need a plan “C”: Austria, Finland, Germany and the Netherlands to leave the eurozone and create a new currency leaving the euro where it is. If planned and executed carefully, it could do the trick: a lower valued euro would improve the competitiveness of the remaining countries and stimulate their growth. In contrast, exports out of the “northern” countries would be affected but they would have lower inflation. Some non-euro countries would probably join this monetary union. Depending on performance, a flexible membership between the two unions should be possible."

Hans-Olaf Henkel, the former head of the Federation of German Industries

Full Story

[JCMach1]

15. Or everyone take a haircut by pegging the euro at 1.1 to the $

The German bankers, however, would rather slit their wrists.

So, what we are left with is them gaming the eventual default.

[Romulox]

20. I just can't fathom what the people of Europe thought a "monetary union" was supposed to mean...

Hint: it's like co-signing a loan. :silly: