The ECB and the Test of Moral Hazard

It just occurred to me to think about the European Debt Crisis in this way: the European Central Bank is acting very differently from the way the US Federal Reserve acted in somewhat similar circumstances.

In 2008 the Fed, like everyone else, was terrified that the entire US banking system was going to come crashing down in the wake of the mortgage crisis.  So they did really extraordinary stuff to make sure that the banks could not fail.  Along with the Stimulus, this managed to keep the US out of a Depression, even if it wasn't really enough to get us booming again.

Europe now faces a different kind of debt problem: sovereign debt of the European Union member states. We're in a slow-motion run on the debt of the European countries with weaker economies.  This could be stopped by the ECB, but much to the chagrin of the liberal economists I read, they just won't do it.  German people, who control the ECB, just can't stomach the thought of bailing out lazy southern Europe.  Germans are terrified not of default by bond-issuing countries, but of inflation in Germany.

The ECB argument stresses a familiar topic in the US- Moral Hazard.  Some conservatives say that the US system should not have been bailed out in 2008, and that the investment banks should have been allowed to fail.  Yes, the argument goes, this would have created a much worse economic situation, maybe even a second Great Depression, but the alternative is to teach the banking sector that government will bail them out if they get in trouble.  Knowing that they have this safety net means they don't have to fear risk, and will continue to gamble recklessly.  Many of us would respond by noting that the Moral Hazard problem is real, but the harm in this area was worth it to avoid such a huge economic catastrophy, which would affect millions of people who hadn't done anything wrong.

But in Europe, the ECB is fixated on the Moral Hazard of allowing Greece, Spain, Italy, etc to escape their debt woes through bailout, write-downs, or even through deliberate inflationary policy.  They have to Feel the Pain so they learn their lesson!

So here we go: the ECB seems bent on demanding severe austerity for the debtor nations, which looks fated to fail since countries that slash and tax to balance budgets in a recession tend not to grow, which is what is ultimately needed to increase tax revenue and cover their debts.  This seems to be heading for another severe recession in Europe, which ought to teach Greece a lesson or two.  That must feel good to the Germans!

Except..... it's affecting lots of countries, even those which have been more responsible in their budgeting over the years.  And the recession will probably be worldwide.  And German bankers will probably lose their shirts too, since the loans aren't repayable and there will eventually be a default.  Lessons in Moral Hazard all around!

False Equivalency Watch

It's always good to wake up in the morning with some politics to really get the blood boiling.  Today I was watching Up With Chris Hayes on MSNBC, and there was a woman on the show from one of these "budget responsibility" centers (I didn't catch the name of the woman or the organization, and it's not up on the web yet).  They were talking about the Affordable Care Act, often referred to as ObamaCare.

The "responsible" woman made the point that when Republicans took over Congress they passed their tax cuts first and did nothing about the deficit, so Democrats were understandably uninterested in tackling the deficit under their watch.  And she said that the Democrats went ahead and passed health care without concern about the deficit, so Republicans understandably "didn't want to play".

At this point I was screaming at the television.  Fortunately, MSNBC has liberals on its panels to guard against these mushy centrist arguments that become Common Wisdom.  So a man named Starr, who had worked in the Clinton administration, pointed out that the ACA is fully paid for and does not increase the deficit.  He even called the previous statement "false equivalence".

So at least this morning justice was served.  But in how many other forums do these mealy-mouthed and lazy "centrists" do this?

Look, if you want to be honest and still argue from a centrist perspective, I guess you can say that the Republican party has been a terrible steward of responsible budgeting in the past, but that there is real indication that things have changed with the advent of the Tea Party.  I'm not sure I buy it, but it's really the only way to be honest and still give conservatives the benefit of the doubt.  Then, when we look at the 2008 Democratic congress and administration, one can certainly criticize the Keynesian deficit spending they initiated in the form of the Stimulus package.  But when we look at the signature big accomplishment, the ACA, it should be acknowledged that it is paid for.  Criticize the taxes that pay for it, that's fair game, but to call it "fiscally irresponsible" is dishonest.

This is the area in which the Mainstream Media fails us so badly.  And it's where "centrists" fail us too. 

The ECB Destroys the World

Here's something from Matt Yglesias I read this morning:

UK Can Now Borrow Cheaper Than Germany

By Matthew Yglesias

| Posted Thursday, Nov. 24, 2011, at 11:00 AM ET

If you want proof that the Eurozone's sovereign debt woes are fundamentally about the governance of the single currency and the odd behavior of the European Central Bank, then look no further than the fact that Germany's 10-year borrowing costs are now higher than the UK's. It's very difficult to explain this in terms of the kind of scolding moralism that the Germans have been deploying this fall to explain borrowing problems in the Mediterannean countries. The British aren't out-exporting the Germans. The Germans don't have a bad work ethic or a corrupt political system. The German government hasn't been more profligate than the British government in running up debt over the past 10-15 years. The Bank of England has been much less focused on fighting unemployment than has the Bundesbank/ECB. And over the past year the growth performance of the UK has been terrible as austerity budgeting crushes domestic demand and the economy continues to lack appropriate structure for export-led growth.

And yet financial markets would rather lend to the UK. Because the UK's not in the Eurozone, and because everyone knows the UK's central bank isn't going to let anything crazy happen or get into any wild games of chicken.

I didn't know anything about the European Central Bank a few months ago, and my critics would argue that I still don't know anything about it, but reading Yglesias and Krugman lately has me really depressed about what's going on there.

We keep getting forecasts of doom about European budget problems from the Right, warning that the US is going to be like Greece, just as Spain/Italy/Portugal are following Greece into debt crisis.  They keep saying that this is all because those countries spend too much, because, well, I guess because if they have a debt problem then spending too much is the only reason that can be considered.

But now that Germany is starting to have borrowing problems, even though they're the ultimate savers, running responsible budget surpluses since forever, how can we fit that into the Right's morality play?

Answer: it doesn't fit. Because the problem isn't spending- in other words, spending isn't the reason that European debt problems are spreading all over. The problem is that the European Central Bank is refusing to solve the problem because they're locked into their own morality play and want to scold the southern countries and don't want to bail them out. So now a problem that should be just in Greece (which is the one country that deserves the morality play) is leaking out everywhere, even to Germany.

The good news for American conservatives, though, is that their like-minded European friends are going to drive that whole continent into the ditch, which is going to lead to a huge recession here too, which will get blamed on Obama since he's president, which will get us President Romney. Good times!

Good links on Republican Radicalization

Some of my web-surfing this morning is relevant to my last post about the radicalization of the Republican party.  Rather than rehash yesterday's post, here are some links that bolster the point:

Here's one from David Frum about how the Republican party has changed since 2000, written by a conservative former speechwriter for George W. Bush.

Here are a couple of posts from Jon Chait making the point that Republicans aren't really interested in deficit reduction, only tax cuts, and defending President Obama's leadership around budget issues (basically making the point that he has tried being very involved, tried staying out entirely, and tried negotiating behind the scenes all at different times, and found that none of those approaches work.  In order to lead, the other party has to be willing to follow).

Radicalization of the Parties

I am so sick of the Common Wisdom that both parties in the US have become radicalized.  It's basically an article of faith among the "Third Way" crowd.  But it's a classic example of false equivalence.

Sarah Pailin, Michelle Bachman, and  Herman Cain are extremely radical- much more so than anyone I can think of in the Democratic party mainstream.  The equivalent to those politicians on the Left would be Noam Chomsky and Michael Moore- but those guys have no pull at all in the Democratic party. The list of crazy stuff said by Bachman, for example, could fill a book, and she won the Iowa Straw Poll!

Let me put it this way: think about both parties and their mainstream platforms in, say, 2000. I can name a half dozen major issues on which the Republican party has moved way Right (torture, religious diversity for Muslims, cap & trade/ environment, health care, progressive taxation, etc). Now think about areas in which the Democrats have moved Left- I can come up with one- Gay Rights/marriage/civil unions. That's it.  (Some people jump in with Health Care, in which Democrats passed a bill much less liberal than that proposed by the Clintons, with ideas drawn originally from Right Wing think tanks in response to ClintonCare. The only thing that makes it seem more liberal is that it succeeded in passing).

Obama has tried mightily to work from the Center, but every time he turns that direction the Republicans have responded by running 10 steps toward the Right.

Hey, maybe the radicals are right: maybe we need to ditch the entire modern welfare state and return to 1929 America. I'm not buying it, but that's what a huge chunk of the GOP is selling.

By the way, I recommend browsing through the Third Way website.  It's staggering- the position papers criticize the stale thinking of Left and Right, contrasting the Michael Moore position with the mainstream Republican position on every issue. In the economics paper, the authors quote Brad DeLong and Paul Krugman from the Left- two voices totally marginalized by actual policy-makers in Washington.  Then they go on to propose.... basically the exact position of the Obama administration.  Unbelievable- they want so badly to believe in their narrative that they miss what's right in front of them.

Defenseless!

I was talking with a family member about the SuperCommittee and the looming automatic cuts to the Defense budget.  Am I worried about America's security? 

No.  Why not?  The Pentagon budget will be cut 10% starting in 2013!  How can the US remain a superpower?

OK, here's my answer:

I think the US can survive a 10% cut in spending on the military, considering we currently spend six times as much as our next closest competitor.

The SuperCommittee Fails- The Sky is Not Falling

The SuperCommittee has failed to come to an agreement.  It's been pretty obvious the last few days that this would be the case.  For me it comes as a relief, since I was concerned that Senator Kerry and other Democrats were going to give away the store in the face of Republican intransigence. 

As I look at Politico's front page, I can't even bear to read the stories about who is to blame.  I expect the "pox on both your houses" view to be the overriding narrative in the Mainstream Media.  The Dow dropped 250 points today, which is apparently due to the lack of a deal.  Let me make a few points:

• This isn't really a big deal.  The law that created the SuperCommittee also mandated automatic cuts to go into effect in the case of failure to agree.  These cuts hit the Defense budget worst of all, which is OK with me, although they hit domestic discretionary spending too, which is not so great.  But they don't touch Social Security or Medicare, which is very important.
• The Bush tax cuts are still set to expire at the end of 2012.  When that happens, the medium-term budget problems will be nearly solved, if the Democrats can just hold firm- which is a big if.
• If you want to blame someone, it's really not hard to parse the whole thing out.  Democrats insisted on a mixture of spending cuts and revenue increases to solve the budget gap.  Republicans insisted that there could not be one dime of tax hikes.  They pretended to offer some revenue increases, but said that they would only do so if the Bush tax cuts were also extended permanently, which would be a huge tax cut compared to the status quo law.  Now again, this is all OK with me- I think the Democrats would have taken a deal with token tax hikes in exchange for wholesale slashing of Social Security and Medicare, which would have been a policy and political disaster for them.  Thank God the Republicans can't take yes for an answer. 
• The MainStream Media's portrayal of the blame pie was summed up nicely by Paul Krugman a few days ago.  I can't find the passage, but it was something like: Media: The parties can't get together because Republicans won't raise taxes and Democrats won't touch entitlements. Obama: I am willing to reform entitlements in exchange for tax increases. Media:  Democrats are not willing to touch entitlements and Republicans won't accept tax increases. It's just that simple; Democrats are willing to cut spending, and seem willing even to slash social programs to get a deal, but they aren't going to do those things because they want to, they do them in exchange for something else.  Since Republicans have nothing they're willing to offer, there's not going to be a deal.