The Germany problem

By Felix Salmon
June 15, 2009

Will Hutton interviews Paul Krugman:

PK: How is it possible that Germany, which did not have a house price bubble, is having a steeper GDP fall than anyone else in the major economies?

The answer is that they depended upon exporting to the bubble regions of Europe, so they actually got side-swiped by the loss of those exports worse than the bubble regions themselves got hit.

It’s Germany on a global scale that is the concern. We worry about the drag on world demand from the global savings coming out of east Asia and the Middle East, but within Europe there’s a European savings glut which is coming out of Germany. And it’s much bigger relative to the size of the economy.

WH: And on top there is an unique and unaddressed huge potential banking crisis. The Germans pride themselves on their three-legged banking system, but it is incredibly interlinked. The IMF warns that Germany could have to take at least $500bn of writedowns, which its banks have not begun to recognise. German banks hold a trillion dollars – maybe more – of maturing collateralised debt obligations that can only be refinanced by crystallising the losses. We’ve had RBS and you’ve had Citigroup. Germany’s GDP will fall 6% this year – before the banking crisis has hit it.

And that’s just the CDOs — it doesn’t include probably another trillion dollars of loans to central and eastern European corporates and sovereigns, which are nowadays looking extremely toxic. Meanwhile, the political leadership in Germany is in denial, acting for all the world as though the loss of central bank independence is the biggest problem facing the global economy.

The base-case scenario, then, is that Germany goes Japan — and drags the rest of the Eurozone, if not the entire world, into a Japan-style Lost Decade. How do we stop that from happening, especially absent political will in Berlin? I have no idea.


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The problem with central regulated stimulus driven “green spots”

The problem with central regulated stimulus driven “green spots” is that they only last as long as the stimulus is being given. Stopping the stimulus is like stopping water to your fresh green sprouts. The green dries and dies off and this is exactly the same as whit keeping your long interest rates low.

However the FED already had planned to buy as much as $1.25 trillion in mortgage-backed securities by the end of this year and $300 billion of Treasuries before September which still is less than 5% of the total of $6.6 trillion in the outstanding market. Source: (Reuters) The Great Debate – The Fed needs to get its wallet out

But the U.S. banks are insolvent cause that’s the main reason why the stress test definitely wasn’t and couldn’t be “a solvency test.” The U.S. now is the big melting pot calling the kettle black in urging Europe for a “stress test” which in fact in the American version was merely a biding time, jurist mind, word gimmick. Geithner cunningly was able to avoid this “bad bank” ditch in which the Germans have digged themselves now by taking this “stress test” far to seriously and actually trying to expose themselves by the “bad bank”- slush fund idea which was immediately rejected in the U.S. after they discovered it could cost them up to $4 trillion. Remember that if you are at a Poker table and you don’t know who the chump is, you’re the chump!

Inflation is not the problem now in a still declining economy and oil prices fairly low. Devaluating currencies, including the dollar, toxic assets, huge country deficits world wide, extreme volatility in the market, under capitalized insolvent banks still deleveraging, are. Long term investment already have been devastated by this global crises causing massive amounts of long term investment capital being destroyed. Much harm has been done by the banksters using and still using their toxics against the people and ordinary businesses. The answer could have been the Tulp Mania answer but who would listen to me back than and now it’s to late.

Bernanke has been caught between a hard and a rock place! Not spending will end the “green spot” dream immediately, long term interest go up and give more deflationary threats but on the other side of the evil coin can cause (hyper) inflation of the dollar if gross spending. But gross spending is needed according to their own Greenspan and clone Bernanke philosophy? A Faustian bargain but not to the Chinese who can easily absorb their foreign dollars into their massive solid savings rock bubble and just laugh to Geithner about it. Of cause everybody is praising the dollar now, we all want a soft landing but if it’s a hard one, the Chinese said, we just can take it.

Posted by Youri Carma | Report as abusive

So Germany is blowing up the world and there’s nothing other countries can do?

Now you know how non-Americans feel about your “it’s our Presidency, Congress, Treasury, Fed, dollar, IMF, army, CO2 emissions…, but your problem”-attitude. Welcome to the two-way street called Globalisation. It’s mostly good, but sometimes it can be a bitch, especially if you are new to it.

I would not be surprised if this recession will teach Americans important lessons of a lifetime, not just about frugality but also about living in a highly connected world where the US no longer calls all the shots.

Posted by Michael M | Report as abusive

mmh, I might be mistaken there, but I thought the different german banks weren’t all that interlinked … sure they all (or at least Landesbanken and big commercial banks) could face more/bigger problems in the future, but I don’t see how this is because of inter-linked-ness. It is just because they played with stakes too high and hold too much collateral that might come down on them, like many other banks, and in case of Deutsche Bank the belief of their CEO that about 25 % capitalization or so (I think) is good enough. Local Banks won’t have much issues I think, but they also normally don’t do risky stuff.

Posted by flo | Report as abusive

Perhaps the strategy is that the EU will simply continue to repeatedly investigate and fine American companies such as Microsoft and Intel until the Eurozone recovers all these losses.

Posted by Glenn | Report as abusive

That’s a good idea, Glenn.

Posted by Alister | Report as abusive

“Perhaps the strategy is that the EU will simply continue to repeatedly investigate and fine American companies such as Microsoft and Intel until the Eurozone recovers all these losses.”

The EU is nothing compared to a Texan jury. Expect DBK and CS to be held accountable for billions in the Huntsman trial.

Posted by a | Report as abusive

German Problem?

The problem is that the German Banks bought too much from the unregulated US system.

American bankers or politicans have not and still not care if their financial products ruin the world.

Its time to replace the US Dollar and that Industrial Empire.

Sometimes, I dont even wonder why the americans wont recognize the International Court in the Hague, not
respecting rules in the financial system or even
basic human rights.

Hey, what did you expect?

Vietnam Part 2 coming to a News Show near you soon …

Posted by Ben | Report as abusive