Free Markets, Free People
Megan McArdle hits some points that pretty much doom Europe and, if it is not already too late, the US. They are contradictions and conditions that make recovery from all this fiscal irresponsibility almost impossible. It involves social welfare, democracies and why that combination simply can’t find the necessary ability heal itself.
When I was a young and naive economics writer, I used to write about developing countries a fair amount. Time and again they would make these bizarre and pointless moves, like suddenly and for no apparent reason defaulting on a bunch of debt. They would engage in obviously, stupidly unsustainable fiscal practices that caused recurring crises. They would divert critical investment funds into social spending which was going to become unsustainable when underinvestment reduced government revenue. And the other journalists and I would cluck our tongues and say "Why can’t they do the right thing when it’s so . . . bleeding . . . obvious?"
Then we had our own financial crisis and it became suddenly, vividly clear: democratic governments cannot do even obvious right things if the public will not tolerate it. Even dictators have interest groups whose support they must buy.
This has come home to me forcefully several times over the last few years, but never more than now. The leaders of the eurozone have a dual mandate to keep the euro intact, and to not do the things which could keep the euro intact. They cannot fiscally integrate to the extent necessary because, as I wrote for the Daily the other day, the Greeks do not want to act like Germans, and the Germans do not want to share their credit rating with anyone who won’t.
It is a bit like the Ohio vote on unions. In a heavily union state, those who benefit the most vote to continue the situation where they benefit. In democracies like Europe where people’s property are up for re-distribution, those who benefit from such redistribution are always going to vote to continue the status quo. And, of course, politicians who benefit from the vote of that constituency are going to try to find every way they can to accommodate that constituency.
So even when it is “so … bleeding … obvious”, to most economic observers as to what action must be taken, nothing happens or, in some cases, it gets worse.
At some point, though, the bill comes due. We’ve talked about the laws of economics and how unyielding they are. Oh you can screw around and play some games that allow you to defy them for a while, but like gravity, it all will finally come tumbling down.
We’re there. We’re at the falling down stage if things don’t change drastically.
But there is seemingly no stomach for drastic change.
And that leaves us to try to figure out what the world will look like after the collapse of the Western social welfare system is complete. Because it is seeming like its not a matter of “if”, but “when”.
Irony of ironies. The Chinese lecturing the supposed capitalist West on economics and the welfare state. Of course, as we’ve discussed many times, Crony Capitalism and/or Corporatism aren’t Capitalism. At best the West has a mixed economy with various levels of intrusion and market distortion caused by governments. In effect, what this gentleman is saying to Europe is the intrusion and distortion levels are such that they have caused a cultural malaise which is finally coming home to roost:
"If you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of the worn out welfare society. I think the labour laws are outdated. The labour laws induce sloth, indolence, rather than hardworking. The incentive system, is totally out of whack.
"Why should, for instance, within [the] eurozone some member’s people have to work to 65, even longer, whereas in some other countries they are happily retiring at 55, languishing on the beach? This is unfair. The welfare system is good for any society to reduce the gap, to help those who happen to have disadvantages, to enjoy a good life, but a welfare society should not induce people not to work hard."
Jin Liqun, the supervising chairman of China’s sovereign wealth fund
Of course that just touches the surface of the problems Europe faces, but essentially Jin is saying that the system in Europe, i.e. state welfare, is not only unsustainable, but discourages hard work – a vicious and self-defeating cycle.
Go figure. Most rational people understand that human beings respond to incentive. And that a good portion will always choose the easy way. Human nature 101. So when given the option of hard work or being a slacker and getting paid to be one, those who tend to slack will always choose the latter if an incentive to do so is provided.
His point about labor laws that require rules such as featherbedding for instance is true. And, by dictating wages, etc., government intrudes on market dynamics which properly price labor. Instead we see the distortion of labor’s worth, rules that cut into productivity and spiraling costs which kick up the price of goods and services beyond what a market would dictate.
And that’s just a very small part of the problem. Europe decided decades ago that it could use a mixed economy to somehow pay for a large welfare state. It thought it had it all figured out and then this crisis hit. But it was clear to many that it isn’t this crisis that precipitated Europe’s current financial problems, it just hastened them. Much like the revenue shortfalls we see here for the trillions in unfunded obligations for Social Security, Medicare and Medicaid, Europe has seen those for years. Its day of reckoning is at hand.
Greece was the weakest member of the Eurozone. But Italy, Spain, Portugal and Ireland aren’t far behind. What critics of the welfare state have said for decades can no longer be hidden. And, unsurprisingly, the culture that sort of a state breeds is fighting tooth and nail to preserve it, even if they really know that’s not possible.
But the irony is unquestionable. Lectures by communists on the dangers of the welfare state. Snowballs in hell are obviously possible.
Well it looks like the much touted Euro economic package for Greece may be coming apart more quickly than expected, thanks to the bombshell announcement by Greek PM George Papandreou. Papandreou has decided, apparently without consulting anyone else, that the package should be put up for a vote. As the Wall Street Journal points out, a no vote could be disastrous:
A "yes" vote in the referendum could deflate the massive street protests and strikes that threaten to paralyze Greece as it tries to enact a brutal austerity program to earn rescue loans from the euro zone and the International Monetary Fund.
A "no" vote, however, could bring down the government and cut off international funding for Greece, leaving the country facing a financial meltdown.
Of course the country is already facing a financial meltdown, austerity measures have sparked violent protests for months and the purpose of the package agreed upon by European leaders was designed to help avert a meltdown and save both the Greek economy (as much of it as can be saved), while propping up the Euro.
As you might imagine, the surprise announcement was not favorably met by other European leaders. In fact, it wasn’t met favorably by a lot of Greek leaders who apparently had no idea that a referendum was in the offing.
Jean-Claude Juncker, who chairs meetings of euro zone finance ministers, refused to rule out a Greek debt default.
"The Greek prime minister has taken this decision without talking it through with his European colleagues," he said in Luxembourg.
Asked whether a Greeks "no" vote would mean bankruptcy for Greece, Juncker responded: "I cannot exclude that this would be the case, but it depends on how exactly the question is formulated and on what exactly the Greeks people will vote on."
I think most understand that no matter how the “question is formulated”, a vote against the plan would most likely send Greece spiraling down the drain and the fear is it would take the Euro with it
Markets, which had calmed down after the plan was announced, have had the expected reaction to the Papandreou referendum plan. They’ve headed down:
Greek Premier George Papandreou said he will put the nation’s bailout deal through a referendum, potentially undoing a long-awaited agreement struck last week and sending European stocks down 3.3 percent. The region’s bank shares fell 6.4 percent.
"European leaders feel as if they’ve been blindsided by Papandreou," said Chad Morganlander, portfolio manager at Stifel, Nicolaus & Co in Florham Park, New Jersey.
He said the move underscored the current risk in Europe and threw a wrench into the region’s stability plan.
The Dow dropped 2% on the news.
While our attention is on the Palinization of Herman Cain, we need to really keep an eye on this impending crisis. If Greece has a referendum and the vote is “no”, what Cain did or didn’t do in the 1990s isn’t really going to matter much. We’ll have another financial tsunami headed our way and we’d better begin to batten down the hatches.
James Pethokoukis reminds us that if we’re not watching the European debt crisis, we should. The one thing Tim Geithner apparently got right was how it could effect the US negatively. Geithner said:
Europe is so large and so closely integrated with the U.S. and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand.
And that’s the obvious truth. If you need to catch up, here’s an article in the Financial Times to bring you up to date (you may need to sign up or register to read it).
Pethokoukis then points to a report from Barclays Capital that details what Geithner was talking about:
Our baseline forecast assumes that policymakers will prevent the turmoil in Europe from leading to a full-blown financial crisis similar to 2008 and that US policymakers will not impose excessive fiscal tightening starting in 2012. If, by contrast, either of these risks is realized, the potential for another recession will increase substantially. We use the Fed’s stress scenario under the Comprehensive Capital Analysis and Review (CCAR) as an alternative scenario to our baseline, but ratchet up the intensity modestly and analyze its effect on the outlook for house prices.
1) Our modeling suggests that in a recession scenario, house prices, as measured by the CoreLogic headline index, could decline another 7% in 2012 . … The scenario posits declining real GDP for four consecutive quarters, with Q2 12 having the deepest decline at 6% (q/q saar).
2) Real disposable personal income also declines for four consecutive quarters, albeit with a one-quarter lag relative to the decline in GDP, and the unemployment rate moves persistently higher, peaking at 12.1% by the end of our forecast horizon. …
3) Furthermore, the rising unemployment rate suggests that delinquencies would push shadow inventory higher, putting downward pressure on distressed home prices. Together, the two effects send home prices significantly lower in 2012.
Or in simple terms, if Europe goes, so does the US. Housing down another 7% and unemployment up into the 12% area.
Obviously this is all based on modeling and plugging in various numbers. So just as obviously those numbers could be off a bit. However, the basic premise is correct. If Europe can’t solve its debt crisis, the US will also suffer and, as you can see, suffer mightily (check out the chart at the link).
I think the political implications are clear even for the most partisan among us.
As expected global market reaction to the US credit downgrade has been anything but positive.
Global stock markets sank again Monday as worries over the downgrade of U.S. debt outweighed relief at a European Central Bank pledge to buy up Italian and Spanish bonds to help the two countries avoid devastating defaults.
European markets shed their early momentum and losses were heavy in Asia. Most stocks were trading sharply lower amid mounting fears over the opening of U.S. markets, when traders will have their first chance to respond to Standard & Poor’s momentous decision to lower its triple A rating for the U.S.
"The reverberations from S&P’s downgrade are still being felt across the globe," said David Jones, chief market strategist at IG Index.
The European Central Bank’s buy of Italian and Spanish bonds – two Euro countries in deep financial trouble – at first seemed to allay the expected downturn. However that was later reversed and global markets saw a sharp downturn.
At this time one can only speculate what will happen in US markets, but the global sell off is not a good sign.
Monday’s trading came after one of the worst market weeks since the collapse of U.S. investment bank Lehman Brothers in 2008 – around $2.5 trillion was wiped off global stocks last week.
In Europe, Britain’s FTSE 100 index of leading British shares was down 1.7 percent at 5,157 while France’s CAC-40 fell 1.6 percent to 3,227. Germany’s DAX was 2.3 percent lower at 6,091.
Sentiment in Europe was hurt by an expected sell-off at the U.S. open – Dow futures were down 1.8 percent at 11,196 while the broader Standard & Poor’s 500 futures fell 2.1 percent to 1,173.
The one bright spot in an otherwise dismal picture is the US Treasuries market. And “bright spot” is a relative term considering the rest of the markets:
So far, the S&P downgrade doesn’t seem to be having too much of an impact on U.S. government bonds, known as Treasuries. The worry has been that the downgrade would prompt investors to demand more, but the yield on ten-year Treasuries has actually fallen.
"Early market reactions suggest that the treasury market will remain well supported," said Jane Foley, an analyst at Rabobank International. "Even though there may be no sharp sell-off in treasuries this week, S&P’s decision should at least provide a signal to the U.S. government that it may be foolhardy to continue to take its creditors for granted indefinitely."
Two points. One – yes, it should provide such a signal. However, if that signal isn’t acted upon and acted upon swiftly, then two – the treasury market will not remain well supported. Interest rates will rise on demand by investors and servicing our debt will cost more and more.
To add more fuel to the fire, there’s this:
"Investors are concerned about a rising risk of global recession, credit downgrades especially now in the eurozone, such as France, the threat of a major bank bust and a global liquidity trap as investors stay in cash," said Neil MacKinnon, global macro strategist at VTB Capital.
So much to watch and consider. While this may not be the most interesting news to read about, none is more vital. The problems in both Europe and the US have a far reaching effect on global markets. And they will have an effect, at some point, on everyone’s wallet. We’re in uncharted territory here, and unfortunately, there are no easy and painless ways to solve these problems.
So, where’s the UN, NATO and R2P? I mean, this should be bad enough to get them involved given the Libya scenario:
Syrian tanks took up positions outside the city of Hama on Saturday, where tens of thousands of people took to the streets to mourn the deaths of at least 65 protesters gunned down by security forces there the day before.
But wait, there’s more:
The government’s violent crackdown against a three-month-old popular uprising continued, with helicopter gunships killing 10 people in a neighboring province and residents of Hama bracing for a military assault that would be the first on the city since the government bombed it in 1982, killing at least 10,000 people.
Wow, that was enough to get Gadhafi the full might of the UN, NATO and the US to come down on him.
What is that? Is that the sound of hypocrisy I hear in DC, Europe and the UN? Inconsistency? Or just cluelessness?
So many were treated for gunshot wounds at local hospitals that blood supplies ran low, residents said. Throughout the night, loudspeakers on mosques normally used for calls to prayer urged people to donate blood.
Yeah, this isn’t anything like our illegal war in Libya, is it?
Allahpundit provides a roundup of quotes out of Europe concerning the celebration here of the death of Osama bin Laden. As you might expect, the latent anti-Americanism isn’t so latent anymore and the incident of bin Laden’s death provides the superior Euros a chance to do a little self-serving moral preening. For instance:
“At a press conference at Lambeth Palace, The Daily Telegraph asked [the Archbishop of Canterbury Rowan] Williams whether he thought the US had been right to kill bin Laden.
“After declining to respond initially, he later replied: ‘I think the killing of an unarmed man is always going to leave a very uncomfortable feeling, because it doesn’t look as if justice is seen to be done in those circumstances.’”
Really? It doesn’t? How does one define “justice” then? Certainly Europe doesn’t think “death” is justice regardless of how monstrous the deed is. Kill 3,000 people in NY plus Khobar Towers, two African Embassies and the USS Cole? Oh, and those subway deaths in London? Those deeds obviously don’t justify what just happened.
Nope - we should have caught him, tried him (and given him an international platform to spew his hate) and then locked him up? How’s that anymore justice than what happened? We have a mad dog on tape bragging about being the man responsible for all those deaths. We have intel that says he was going to kill more (attacking trains in the US on the 10th anniversary of 9/11). If ever justice was served anywhere, it was served on the night of May 1st in a compound in Pakistan. And no, I’m not uncomfortable in the least about that. Someone needs to remind the Archbishop that “justice” isn’t a process, it’s a result.
Next come those who would like to ignore the elephant in the room and those celebrations simply won’t let them do it:
“Nicolas Demorand, editor of the left-leaning French daily Libération, on Tuesday bemoaned the ‘toxic rhetoric’ of the campaign against terrorism. From that rhetoric, he wrote, stems ‘this base, uncomfortable joy, unprecedented in a democracy, that blew yesterday over the streets of New York.’
“Even the editor of the centrist weekly L’Express, Christophe Barbier, cautioned, ‘To victory one must not add provocation.’ He added: ‘To desecrate the cadaver or the memory of Bin Laden is to revive him. To cry one’s joy in the streets of our cities is to ape the turbaned barbarians who danced the night of Sept. 11. It is to tell them the ghastly competition continues between them and us.’”
Someone get a clue bat for Barbier will you? The “ghastly competition” does continue. Because they initiated it and haven’t said “uncle” yet. And it will continue until the murderous organization that has killed thousands over the years – primarily Muslims, btw – is destroyed, root and branch. Sniffing at the celebrations and calling them an “aping” of the barbarians is to use an equivalence that indicates moral cowardice that would welcome submission before resistance.
Finally, perhaps the most ironic condemnation comes from the country that was on the wrong side of two world wars, one of which required the civilized world rid itself of a monster that country put into power:
“The fashionable critique of Obama and the U.S. achieved its purest form on ARD Television, Germany’s equivalent of the BBC, where commentator Jörg Schoenenborn pompously observed that nothing good could come from Obama’s Bush-like breach of international law. ‘Al Qaeda will seek revenge,’ he asserts, ‘so, is the world any safer? No.’ Yet Americans dance in the streets, which Scheonenborn attributed to something essential, and essentially primitive, in the American character. The USA is, after all, ‘quite a foreign land to me. What kind of country celebrates an execution in such a way?’
I’ll take “primitive” over “barbaric”, “anti-Semitic”, and “murderous” any day. And no, Germany, you haven’t lived down your reputation yet. Not enough to take this sort of a position.
Of course AQ will seek revenge. But as mentioned above, they planned to attack anyway. So should we just sit back and let it happen? Would a few thousand more deaths have soothed your conscience enough to have you condone aggressive and justified action against the murderer? Or would it still have been considered a “primitive” action driven by blood lust? Instead, obviously, we should just roll over and allow these murderers to have their way. Apparently, that’s the European way.
There’s even more irony in this reaction though:
“[N]ow many of Obama’s erstwhile Euro-fans are feeling a twinge of buyer’s remorse. By ordering a covert raid on Pakistan that resulted in Osama bin Laden’s death at the hands of Navy SEALs, Obama has earned the kind of condemnation [from] Europe’s cognoscenti once reserved for his predecessor, George W. Bush…
I’m waiting for the first mention of “cowboy” to come floating across the Atlantic. It does make the point though that as long as you’re submissive and not aggressive in pursuing the best interests of the US, Euro’s will sort of, kind of pretend to like you. And we’ve all seen what that will buy. I wonder when the first calls for Obama’s Nobel Peace Prize to be withdrawn will begin?
I think Jonathan Tobin at Commentary best summarizes the reasons for Europe’s false and snobby self-righteousness:
It’s true that European snobbery is silly. But the factors underlying the Euro unwillingness to treat the battle with Islamist terrorism as a fight to the death are anything but a laughing matter. As Erlanger notes, the Europeans are genuinely afraid of the Islamic world, something that may have a great deal to do with the growing and increasingly assertive Muslim populations in Western European countries.
But the disdain for American joy about bin Laden’s death goes deeper than mere snobbery or concerns about local Muslims. It’s not just that Western European intellectuals don’t like the United States—they never have—but their unwillingness to countenance aggressive Western self-defense against Islamist terror is a function of their loss of belief in Western civilization itself. Many on the continent seem to have lost any sense that their countries and way of life as well as their faith is something worth defending. When it comes down to it that, and not the faux sophistication of Euro elites, is the difference between America and Europe these days.
For all of our problems and divisions, most Americans still believe in their country. All too many of our friends across the pond have lost faith in theirs. And that crisis in confidence, not good taste, is why Americans and not Europeans are celebrating the death of bin Laden.
It is a form of capitulation. If they can successfully continue to delude themselves into inaction by condemning our methods while draping themselves in false moral outrage, they can safely ignore the threat, even as it continues to build and subvert their own cultures. They don’t want to fight. They’ve already given up. All they want now is a way to justify their craven surrender. And that damn America keeps doing things that make that more and more difficult to do.
Following yesterday’s announcement that Greek debt was downgraded to junk status, today Spain’s debt was downgraded as well. Spain is, in many ways the bellwether for Europe’s debt crisis. Spain has a much larger economy than Greece. So large, in fact, that it may be too big to bail out.
Fortunately, Spain’s debt is still less than 60% of GDP; however, the country is on a reckless fiscal path and the government shows no signs of doing anything about it.
As a result of the growing crisis, the Euro is getting hammered in the FOREX market, while the dollar is soaring. This is, in effect, an interest rate hike for US businesses that export to the Euro zone.
Naturally, this places downward pressure on US export sales at a time where the overall business climate is still weak. So, none of this is good news for the American economy, either.