Opinion

Felix Salmon

The Europe debate

By Felix Salmon
April 10, 2012

Remember the Krugman vs Summers debate last year? That was fun, in its own way. But this year’s Munk Debate looks set to be simply depressing. The invitation has the details: the motion is “be it resolved that the European experiment has failed”. And I’m reasonably confident that the “pro” side — Niall Ferguson and Josef Joffe — is going to win.

That’s partly because Ferguson has the public-speaking chops to dismantle his meeker opponents, Peter Mandelson and Daniel Cohn-Bendit. Ferguson is likely to go strongly for the jugular, while Mandelson and Cohn-Bendit will noodle around ineffectually, hedging their conclusions and sacrificing rhetorical dominance for the sake of intellectual honesty.

You can see this, already, in the invite. Each speaker is introduced with a one-liner; Ferguson says that Europe is conducting “an experiment in the impossible”, while Mandelson says that Europe is, um, “getting there” and that the world is “very impatient”. Cohn-Bendit is weaker still: his quote, “We need a true democratic process for the renewal of Europe, in which the European Parliament has to play a central role,” seems to imply that Europe really is doomed, since there’s no way that the European Parliament is going to play a central role in anything, except perhaps an expenses scandal.

It wasn’t all that long ago that public intellectuals could make a coherent case that European union, both political and monetary, was and would be a great success story. In the wake of Greece’s default, however, and credible beliefs that Portugal is likely to follow suit, disillusionment and pessimism is the order of the day. The era of great European statesmen is over; in their place, we have David Cameron.

I was a believer in the European experiment; indeed, I thought it had a kind of grand historical inevitability to it, and that a strong whole could be made up of vibrant and disparate parts. And from a big-picture historical perspective, Europe is indeed a success: a bloody and war-torn continent has transformed itself into a political union where it’s unthinkable and impossible for one member state to invade another. But if by “the European experiment” we mean the euro, that’s been a disaster, and virtually everybody in Europe would have been better off had it never existed.

In this, curiously, the broad European population was much more prescient than the educated and political elites, who in large part imposed the euro on their unthankful and unwilling countries. Mandelson is a key member of that elite, and he was wrong about the euro and about the advisability of the UK joining it. It’s going to be very hard indeed for him to persuade an audience of Canadians that this time he’s right. Or, for that matter, that they should in any way welcome the prospect of a monetary union with Iceland.

Comments
69 comments so far | RSS Comments RSS

Hmm, you underestimate Mandelson at your peril. His eyes are always on the bigger political picture, so if he loses you can bet it’s because he wants to for some greater political gain elsewhere…

Posted by FifthDecade | Report as abusive
 

“…virtually everybody in Europe would have been better off had it (the euro) never existed.”

I don’t see how anybody can see that with any certainty. The problem may not be the union that created the euro, but the rules governing it.

I think Germany is better off with the euro. If they still had their own currency and maintained their fiscal discipline, it would be so expensive their export machine would be crippled. Sure, they have to subsidize nations that are fiscally challenged, but I’m not convinced that the cost of those subsidies is greater than the benefit they receive from artificially underpriced exports.

If Greece and Italy were not part of the euro, they would still be in financial trouble, except no other country would feel obligated or worried enough to bail them out.

Everything and everyone in the world is dependent on everybody else to some extent, and the formal union that is the EU reminds everybody there of that each day. I know a lot of people think they are self-sufficient, but that’s only because they have customers. Which they are dependent on.

Posted by KenG_CA | Report as abusive
 

What I’ve seen of Mandelson over the years from Ireland (not a whole lot, but occasionally, and always as a fairly disinterested observer), he is quite impressive when he wants to be – particularly when faced with a frothing opponent, he has a way of appearing far more reasonable. I particularly remember how he showed up Paxman on the BBC on a few occasions.

Re the Euro: most people in Ireland that I know were in favour at the time – it was exciting – and aside from the rounding “errors” in the local shops, the benefits from easier trade and travel were felt fairly quickly and, frankly, continue to be felt. I don’t think it’s self-evident at all that we’d have been better off without the Euro; it’s particularly noticeable how it’s held its value. My cash savings, had they been in Irish punts, would have been all but worthless by now.

For example, these days I frequently purchase motorbike-related goods online from Germany, Italy and Spain, and comparison shopping is made far easier by not having to switch between a half-dozen currencies. Even though I now live in the UK, I have a Euro-denominated pre-paid debit card, so I have a measure of control my foreign-exchange rate and I don’t need to worry about individual currency movements.

Anglosphere perception of the Euro is biased for a handful of reasons; no large English-speaking economy uses the thing, so people speaking in favour of its practical uses tend to be few and far between, while there’s self-interest on the part of the US (fearing a competitor to the dollar) and the UK (lots of Little Englanders living in the 19th century, you really need to hear them singing “Rule, Britannia!” during Last Night of the Proms).

Posted by BarryKelly | Report as abusive
 

“I think Germany is better off with the euro.” (Ken G)

Indeed they are, Ken – the same way China is better off with an artificially undervalued currency. Each of them is the ethical equivalent of the other, and both of them deserve to be treated the same way by the rest of the world – harshly.

@BarryKelly – without adoption of the Euro the Irish might still have a future to look forward to; now they have none.

Posted by MrRFox | Report as abusive
 

Do you think the US under Republican / Conservative ideology would resemble that of the current state of the EU?

Austerity;
Wage and job cuts of public sector;
The fixed Euro as a Gold Standard of sorts;
Fixed debt to GDP ratio;
Dismantling of public welfare programs.

I think the EU is a preview of the US under Republican control.

Posted by GRRR | Report as abusive
 

MrRFox, we are treating them harshly: we’re printing dollars as fast as we can, and the dollar is not losing any value.

Posted by KenG_CA | Report as abusive
 

“I think the EU is a preview of the US under Republican control.” (GRRR, above)

We should be so lucky – last time they were in power they blew the lid off of deficit spending. No justification I can see to think it will be any different if they get another chance.

May a pox, a plague and three IEDs be visited on all politicians and all Wall Streeters of all stripes.

Posted by MrRFox | Report as abusive
 

>> “a bloody and war-torn continent has transformed itself into a political union where it’s unthinkable and impossible for one member state to invade another”

I could easily argue that this has much less to do with the union and much more to do with the fall of the Berlin Wall and the subsequent end of the cold war.

And the Euro is indeed overrated. In the first months of this year I’ve traveled to Vienna, Zurich, and London, and have had to carry three currencies. Euro? Bah!

Posted by Curmudgeon | Report as abusive
 

@ curmudgeon – cast your eyes back a little bit further into the history of europe and you can easily see a bloody war-torn continent dating back to romans.

switzerland isn’t even in the eu, and the uk isn’t in the eurozone. a bit like complaining about needing pesos in mexico and loonies in canada.

Posted by Worsel | Report as abusive
 

“MrRFox, we are treating them harshly: we’re printing dollars as fast as we can, and the dollar is not losing any value.” (Ken G, above)

Well, we’re not actually printing as fast as Zimbabwe was, but still too fast IMO. Seems that EZ is likewise printing fast enough to keep the exchange rate stable. And of course, China’s currency is chained to the US$. Trade-barrier-punishment might be the only way to deal effectively with each of them.

@Worsel – IMO Europe will survive the disintegration of the EZ, but will be worse off for a time than it was before the EZ came into being. That’s the price that is due for letting political fantasy trump financial reality.

Posted by MrRFox | Report as abusive
 

MrRFox, in a normal (whatever that is) global economy, when one nation becomes less competitive, and they import more than they export, their currency loses value, so if their decreased competitiveness was caused by high prices, the resulting devaluation will reduce the cost of their exports, and their trade deficit. This hasn’t happened to the U.S., because no other nation will allow the dollar to be devalued.

As a result, we lose jobs. The government chooses to respond by spending on programs to help create replacement jobs, and finances these programs by printing, or borrowing money. This should lead to inflation but doesn’t, because the nations with trade surpluses keep lending us money. Deficit spending is the perfect response to currency manipulation, as those nations who finance our debt will ultimately pay the price by being repaid in inflated dollars. And until that happens, we get to buy all of their stuff at subsidized prices.

Posted by KenG_CA | Report as abusive
 

@KenG – Deficit spending generates debt, which you propose to dispose of by means of subsequent inflation, to erase much of the burden of the debt. That works, but in the process it also crushes people who have been prudent and saved money, rather than imprudent by borrowing too much of it.

Rewarding the imprudent at the expense of the prudent isn’t a course of action I care to be associated with – or be a victim of. IMO the burden of the losses should fall on the borrowers and their creditors.

Posted by MrRFox | Report as abusive
 

@MrRFox, any time the economy grows faster than the population, there will be inflation. If debt is ever used to finance investment, by the government or private parties, there will be inflation. It is inevitable. Obviously, it should be managed prudently (if possible), but the answer to what is prudent is arbitrary, and usually depends on whether you have or don’t have assets subject to inflation, or a job that is threatened by imports.

I wouldn’t characterize deficit spending in response to currency manipulation as rewarding the imprudent, but rather as protecting everyone under your umbrella. There will obviously be casualties with this defense, but they are recoverable, and not fatalities, which happens when we don’t offset decreases in private investment with increases in public investment.

Posted by KenG_CA | Report as abusive
 

@KenG – Inflation is a monetary phenomenon – if we’ve learned nothing else in that last 50 years, we’ve at least learned that. Population and other things don’t actually enter into it, except possibly as motivators for inflationary monetary policies.

As you say, there have to be casualties – somebody has to eat the losses that have happened. You choose to put them the only group that was not complicit in the treachery that produced the disaster – the prudent. Cool.

Posted by MrRFox | Report as abusive
 

“I think the EU is a preview of the US under Republican control.”

Except Europe started from a greater degree of socialism than we embrace. They are farther out of equilibrium than the US is. (The formal debt is only one measure, hardly the most important.)

Posted by TFF | Report as abusive
 

Comparing the Euro Zone and America is really dumb. Other than the size of their economies, the differences are stark and plentiful. I think that the idea that the EZ lacked a strong central govt was because the UK wouldn’t join. That undermined a lot of support and strength in the union, and gave old Europe a constant detractor looking to make its fears reality. If the UK had joined, the power would have been shared between France, Germany and the UK and it very well could’ve succeeded very well indeed. As it is now, the odds are still better than average that the EZ and EEC carries on though with perhaps a couple fewer nations in the currency pact.

Finally I would add that the EU actually is a model for how a formal world govt would look like, only hopefully compliance with the rules would be mandatory and strictly enforced in a world body instead of letting willy-nilly enforcement lead to a TBTSolve problem.

Posted by CDN_Rebel | Report as abusive
 

RFox, if inflation is just a monetary phenomenon, then we don’t need to worry about it – who keeps all of their assets in cash (other than when we are in a deflationary spiral, like in 2008)?

I think you use a very broad brush to highlight who is complicit in the treachery. There are lots of people who have nothing to do with deficits and overconsumption, but get punished anyway. And would be penalized by your approach, of using trade barriers. I’m all for putting the burden of losses on borrowers and creditors, but that requires a political will that is non-existent.

TFF, come on, you can’t let that MrRFox’s position on inflation go unchallenged. :-)

Posted by KenG_CA | Report as abusive
 

@KenG, inflation *is* strictly a monetary phenomenon. Unfortunately, many of our assets and liabilities are also monetary instruments. Inflation distorts all of them indiscriminately.

You’ve been calling for moderate inflation (or at least a threat of inflation), as you believe that the status quo needs a certain distortion. People need to get off their duffs and invest in REAL assets as opposed to putting so much into MONETARY assets that exist only in some imaginary electronic universe. I happen to agree with you on that.

But inflation won’t solve our deficits, it won’t pay for our expensive social insurance promises, and it won’t directly put people to work.

As for putting the burden of losses on borrowers, you can’t squeeze blood from a stone. If they had any assets to begin with, they wouldn’t have needed to borrow so much! (Most cases, not all cases.)

Posted by TFF | Report as abusive
 

The number one problem in Europe is demographic. Bill Gross went into this back in August 2010.

“Demographics

Posted by DanHess | Report as abusive
 

The number one problem in Europe is demographic. Bill Gross went into this back in August 2010.

“Demographics – or in this case population growth – is so long term in its influence that economists and observers are inclined to explain the functioning of economic society without ever factoring in the essential part that it plays in growth. Production depends upon people, not only in the actual process, but because of the final demand that justifies its existence. The more and more consumers, the more and more need for things to be produced. I will go so far as to say that not only growth but capitalism itself may be in part dependent on a growing population. Our modern era of capitalism over the past several centuries has never known a period of time in which population declined or grew less than 1% a year.”

http://www.pimco.com/EN/Insights/Pages/P rivatesEyeBillGrossAugust2010.aspx

The demographic events in Europe and elsewhere are just massive. The solution has always been to hold the line on costs and growth will catch up. But what if there is *no more growth. ever.*

Consider: if population and new household formation stops and goes in reverse, new home building does NOT continue at 0% growth; instead it may see a near 100% decline. New roads, schools, buildings, and the durable goods inside, maybe 75% decline. We have all we need, thank you very much; our population is no longer growing. There may be slow replacement of that which is old but a house can last a hundred years or more. If investment is predicated on 5% demand growth and demand instead declines 30% as people have what they need and we aren’t creating new people, prices will just collapse due to massive glut. Producers would be taking a huge loss on everything they make. China stands to lose massively as they are investing heavily in plant that may never earn a dollar or yuan.

Third world countries emphatically seem to be too poor to able to step into the breach, at least at prices needed to make present investments profitable.

Japan is leading the way in this demographic new world and the results are not promising. Even as they are exporters extraordinaire, their economy languishes. Without export, their economy would have have just collapsed. What about the huge numbers of nations that haven’t distinguished themselves as exporters?

When a nation undergoes a demographic transition to become a nation of elderly, the economy *should* probably shrink dramatically and proportionally. Remember, a nation of elderly needs a lot less. And a workforce that is much smaller is capable of a lot less.

But there is nothing in the plan of any government or any major company to allow for the possibility that the natural Adam-Smithian hand of the economy is just pushing toward shrinkage at times.

***Trying to hold up developed economies at sizes larger than their natural size is making these economies very sick because much deficit spending is directed to things that do not earn an economic return.***

Posted by DanHess | Report as abusive
 

Good to see you around, DanHess! Terrific post!

Posted by TFF | Report as abusive
 

TFF, I don’t believe inflation will pay off the deficits, but that when we do get around to paying off the debt, it will be with dollars that are worth less than they are today.

I view deficit spending (and the accompanying printing of dollars) as defense against currency manipulation. If there was a free currency market, the dollar would have declined in recent years, allowing US exports to be more competitive, and imports more expensive. There is no free currency market, as every nation attempts to game the system. They are all effectively preventing the U.S. from competing, and whether it is intentional or not is irrelevant, it keeps us from being able to create jobs here. So we have to do what ever it takes to ensure that the trading of assets and labor continues here in the U.S. – and that has meant that the government spends money that drives domestic trade.

If the government hadn’t been printing money the last four years at the rate it has, the dollar (if it didn’t crash and burn) would be so expensive that our exports would have disappeared, and we would be even more of a nation of retailers of imported goods than we are now. Except for those who would be unemployed, the numbers of which would be much larger.

“But inflation won’t solve our deficits, it won’t pay for our expensive social insurance promises, and it won’t directly put people to work.”

you’re right, inflation won’t pay for those things, but the government’s printing press can. And if there are no consequences for the deficits, and the rest of the world refuses to let the dollar decline so we can participate as an equal partner in the global economy, then we have no other choice. It’s as if the exporting nations are telling us they won’t buy our stuff, we have to buy theirs, and they will lend us the money, almost for free.

Posted by KenG_CA | Report as abusive
 

@KenG, according to the last projections I saw, the US doesn’t intend to begin paying down the debt for at least another decade… And by the time we near the end of the decade, I’m sure that date will have been pushed another ten years into the future.

One problem with threatening inflation is that investors will presumably start demanding higher yields from the Treasury. We can barely afford what we already are paying.

There are always consequences, I’m just not smart enough to know what they will be…

Posted by TFF | Report as abusive
 

TFF, I don’t know if the US will ever pay down its debt, it’s more like a permanent balloon loan. I don’t think it matters, either, at least not as long as the dollar is the reserve currency of the world (which it will be at least until China floats it’s renminbi).

The government had better get its budget in order before inflation appears. I won’t bet that this will happen, though.

Yes, there are always consequences, and we don’t know what they will be in the future. But I think we can make good guesses about what would happen today if we accepted currency gaming without any adjustment in our fiscal or monetary policy – more unemployment. We shouldn’t accept that.

Posted by KenG_CA | Report as abusive
 

Looking only at population growth is missing the crucial factor – it’s the growth of the size of the working, spending, consuming population that is important; the retired consume less, spend less, and yet in most Western economies they are the only part of the population that is growing. In many ways, it can be argued the aged don’t just suffer from hardening of the arteries, but actually cause a hardening of the arteries of economies. They sit on assets and don’t consume, yet become a larger and larger part of society.

Thatcher’s monetarists in the 1980s used unemployment as a tool to kill inflation, and it was the later recovery in the economy and the rise in employment that created the Lawson boom of 1987. Japan has a very large retired population, and has for years been stuck in a deflationary cycle as the number of working age citizens reduced.

Sub-economies in the third world, eg the developed part of China and the Westernised areas of India that between them have as many rich consumers as the West will continue to grow while they can import workers from their rural hinterlands. The US has benefitted from Mexican immigrants, legal or otherwise, and so has the UK gained from the influx of illegal immigrants. Pushing them away, or making it more difficult for them to come when your working population is falling is not sensible if you are looking for long term growth.

Part of Europe’s problems comes from countries like Italy were the population isn’t just not growing, it’s falling. Part of Germany’s growth comes from the culmination of the unification process of importing 14 million “immigrants” from the old East Germany. Part of the recent growth of the UK comes from the hundreds of thousands of East Europeans who flooded to the country, and their return back to Poland and other lands must bear some responsibility for the later slump in the UK (albeit less so as many stayed).

Simple soundbites just don’t go deep enough to approach an understanding or explanation of the complexity of the problem. You always have to go deeper but think on a wide canvas.

Posted by FifthDecade | Report as abusive
 

This is one of the best comment threads of the year!

@ KennyG_CA “I know a lot of people think they are self-sufficient, but that’s only because they have customers. Which they are dependent on.” See Canada… they export food, energy of every possible type, they make cars, planes, drugs… you name it. If you cut Canada off from the rest of the world the only thing they would have a hard time with would be fresh fruits and veggies.

@ DanHess… every word of your post is true but what is to be done? A very wise man once said the greatest shortcoming of the human mind is the failure to comprehend the exponental function. Open an excel spreadsheet and enter 1 into cell 1A. In cell 2A enter the following formula =(1A*1.02) Next click and drag that formula down through 1000 cells. The result is something close to 390billion. If human kind needed to increase the supply of oil, wheat, potable water, whatever by 2% per year than in 1000 years we would need 390billion times as much as we currently use.

I’m not a doomer I think global GDP will continue to rise for at least another 100 years… just know that eventually we will be heading for a near zero growth economy. Look at the quality of life in Japan… you can argue it’s fallen some since 1985 but it’s still top 5% globally.

Posted by y2kurtus | Report as abusive
 

y2k, fruits and veggies are kind of important to life, and not very available in Canada in the winter. Much of their trade surplus (if they have one) is due to stuff they take out of the ground – oil, gas, minerals, paper – and as we move away from a fossil fuel-powered world and newspapers give way to the internet, they might not be as self-sufficient as they appear to be now. But in any case, you’re making my point – if their customers for stuff they take out of the ground go broke, they won’t be buying things from Canada. Canada has a vested interest in the health of the U.S. economy.

Posted by KenG_CA | Report as abusive
 

@KenG, @TFF, et.al. – Who gets to decide if inflation or austerity is the way to go? Economists? People like “us”?

I submit that it is the general population that gets to make this fundamental value judgment. And they seem pretty firmly of the opinion that inflation, deficit spending and currency depreciation isn’t the way they want to see things play-out. I don’t want to see that either.

“Finally I would add that the EU actually is a model for how a formal world govt would look like, only hopefully compliance with the rules would be mandatory and strictly enforced in a world body instead of letting willy-nilly enforcement lead to a TBTSolve problem.” (CDN_Rebel, 2:27pm)

Sure, Reb … and I wish I was 6′-6″ and could slam-dunk a basketball. We’re both thinking Fantasy Land stuff.

Posted by MrRFox | Report as abusive
 

MrRFox, good question. I don’t agree with your take on the general population’s solution, but that’s not to say I think they favor the opposite, either. I live in California, and the people here seem to favor low taxes and high spending, and blame somebody else’s politicians for the deficits. I think they want low unemployment and would like that accomplished without deficits, but they also want to maintain the lifestyle they have been led to believe is their birthright, and they want the best health care, and to feel secure. So you have to take their vote with a grain of salt.

If we choose to reduce deficit spending in response to a problem (i.e., a weak economy) largely influenced by currency manipulation, there will be negative consequences for millions of people. They will lose jobs, homes, and some, their lives. Is that something a great nation should accept, just to avoid inflation? Yes, inflation will penalize many who have done no wrong, but it won’t kill them or throw them on the streets. Austerity will accomplish that, and then what will be the plan for dealing with it? Who would pay for scraping dead bodies off the streets? Should we invest more in prisons? What is the worse of the two outcomes?

Posted by KenG_CA | Report as abusive
 

I’m from CA too, Ken, but have been in SEA for like 20 years. You diagnose the mind-set perfectly – people want it all and want to pay for none of it. I agree – inflationary deficits and easy monetary policy comes the closest to delivering that – or at least appearing to do so in the short/medium term. Of course it leads to long-term disaster, but who cares about that? Perhaps just only those who are foolish enough to place trust in the value of a fiat currency – muppets.

Guess it’s time to plan to get out of US$ and into PMs.

Bubble without end – Amen!

Posted by MrRFox | Report as abusive
 

The Euro currency was simply a nasty way of spreading socialism very quickly, like HIV, without having to call it by name. Now they are all lumped together in the same bed, banging the same old broads, eating the same slop, drinking out of the toilet like my hound does some days.
Europe has been in decline for decades – it is now in its muslim death throws, waiting for allah and hell

Posted by jackdanielsesq | Report as abusive
 

@FifthDecade, great comment here: “In many ways, it can be argued the aged don’t just suffer from hardening of the arteries, but actually cause a hardening of the arteries of economies. They sit on assets and don’t consume, yet become a larger and larger part of society.”

Note that even their investing habits become ossified. In retirement, people are far more likely to invest in monetary instruments (bonds, CDs, cash savings) than in real production (small businesses and equities). Filtering capital through the banking system is a poor way to fund growth.

@MrRFox, “Who gets to decide if inflation or austerity is the way to go? Economists? People like “us”? I submit that it is the general population that gets to make this fundamental value judgment.”

My initial answer was “politicians”. Which I immediately qualified to, “politicians hoping to get reelected”. Austerity is grossly unpopular — witness the European riots — which is why I expect inflation to take the lead. But if the population embraces austerity, understanding that as the *middle class* pays more and gets less , then who am I to object? I simply don’t expect we will ever see that. Easy enough to try to make the “wealthy” pay for it all, but you and I both know that the wealthy don’t swing enough money to make that equation work. At the very least, you need to drill down to the median household income to find an answer.

Posted by TFF | Report as abusive
 

@TFF – you wrote, “Filtering capital through the banking system is a poor way to fund growth.” Why is that, TFF – any particular reason other than a desire to butt…. the prudent, like FS and Danny B and so many others advocate? Or is it that you recognize that Wall Street bankers are a criminal-class unto themselves?

Yes, we all take your point – people were led to believe by those seeking their votes that they could have it all and pay for none of it. The prudent never swallowed that bull…. Is that why you want to stick the consequences of the irresponsible on them?

@jackdanielsesq – you wrote, “Europe has been in decline for decades – it is now in its muslim death throws, waiting for allah and hell.” Too true JDesq – a joy to watch it play-out, isn’t it? Of course, a similar tide is sweeping over the US in the form of Hispanics, right? The Europeans will surrender their society to the Moslems; we will surrender ours to the Spanish-speakers, won’t we? Both outcomes are baked-in-the-cake, aren’t they?

OBTW: JackD – make mine a double, please.

Posted by MrRFox | Report as abusive
 

@MrRFox, my brother has been squeezed for financing for a while now. He has a healthy, growing business, based on a (relatively) easily scalable model, but the banks are VERY cautious about extending credit. By the time they are willing to give him a sizable loan, he won’t need it any more.

Equity investors take risk in the search of returns and growth. Banks are only interested in sure things (since they don’t directly participate in the hoped-for growth). Which form of financing offers greater hope for the economy?

Besides which, banks demand a profit on their money. More efficient to fund your capital needs directly. I would be interested in seeing some reporting on cross-generational funding? It makes little sense (other than diversification of credit risk) for Grandpa to be buying bonds and CDs while Junior takes out costly loans to fund his education and home purchase. In the past, Grandpa had most of his assets tied up in pension plans — but with the advent of the 401k you are seeing greater possibilities for the older generation to finance the younger.

“The prudent never swallowed that bull…. Is that why you want to stick the consequences of the irresponsible on them?”

MrRFox, let me know when you figure out what YOU believe, and I’ll continue this discussion. First you declared that this decision ought to be left to popular vote. Now you are suggesting that *I* am supposed to make this decision on their behalf?!?

If I were the one making the decision, I would vote for austerity. Higher taxes, skimpier benefits. But it is a democracy, and I doubt my personal preferences will garner any significant public support.

Posted by TFF | Report as abusive
 

@TFF – Individuals should be free to do as they choose within the law with their savings. If they don’t want equity-type risk, I don’t believe it’s governments job to try to manipulate them into doing so, or punish them if they don’t. I came from small business, and understand how difficult getting financing is – and how the ability to cope with that challenge separates the worthy from the rest.

We’re both right on the other thing – the prudent are out-numbered by the irresponsible, but the prudent have the assets and the others have only debts. I’ll never support treating the prudent as prey animals.

Posted by MrRFox | Report as abusive
 

@TFF – Individuals should be free to do as they choose within the law with their savings. If they don’t want equity-type risk, I don’t believe it’s governments job to try to manipulate them into doing so, or punish them if they don’t. I came from small business, and understand how difficult getting financing is – and how the ability to cope with that challenge separates the worthy from the rest.

We’re both right on the other thing – the prudent are out-numbered by the irresponsible, but the prudent have the assets and the others have only debts. I’ll never support treating the prudent as prey animals.

Posted by MrRFox | Report as abusive
 

@MrRFox, I support the right of individuals to do as they choose with their money. Yet what I said still stands — funneling that money through the banks is not healthy for the economy.

My brother made it through the worst of the financing squeeze essentially by self-financing — living off a fraction of his formal income and plowing the rest back into the business. I would guess that most entrepreneurs do quite a bit of this.

“I’ll never support treating the prudent as prey animals.”

Yes, but we will lose. People tend to vote their pocket books, not their ethics.

Posted by TFF | Report as abusive
 

MrRFox, prudent sellers need buyers, whether they are prudent or not. You can play the tough love card on the irresponsible masses, but when you do that, the sellers lose customers, and their business either shrinks or falls apart, as their model fails.

I appreciate your feelings on this, and also on the other thread on the mortgage mess, but being right or fair may not be the best solution. All the money in the world will be of little value if the economy crashes enough to take the monetary system down with it. Letting home values collapse because of the underwater/over-leveraged home mortgage crisis spirals out of control will not serve the interests of the prudent.

Posted by KenG_CA | Report as abusive
 

Again there’s an over-simplification here, and an assumption that poor people are not prudent, and that rich people always are. I’d remind you that it was risk taking, rich bankers who wrecked the world economy while the prudent middle class now pay for their largesse. In addition, the expensive US political system predicates against prudent politicians, and it is the politicians that define the laws.

I agree with TFF on the point about banks being a poor way to stimulate the economy: first of all, they suck in money to rebuild their reserves and this money contributes to nothing in the way of growth today (although it might tomorrow, if it ever comes). Secondly, a lot of what a bank makes goes into high salaries and bonuses which are then squirreled away into long term savings, again not being used for growth in today’s economy. In that way, young bankers are as sclerotic as the retired – in fact, it could be said that anyone with savings above the National Savings Rate causes an increase in economic entropy.

I look at this from an ecological viewpoint: money is the energy and nutrients within the ecosystem that is the economy. The most productive ecosystems are the tropical rain forests, but they store very few nutrients in their soils; less productive ecosystems include the temperate regions where resources are locked up in the soil and so produce fewer thriving organisms. (For organism, read company.)

Posted by FifthDecade | Report as abusive
 

@KenG – you wrote, “I appreciate your feelings on this, and also on the other thread on the mortgage mess, but being right or fair may not be the best solution.”

The burden of too many years of experience compels one to face a certain reality – the “right or fair” thing to do is almost never the easiest thing to do – but it is the only thing to do that works out well in the long pull.

IMO the correct way to approach any policy problem is to first determine the ethical outcome/s – and then figure out how to attain that and make a proper financial return as well. This process requires much more skill, insight and creativity than taking “the path of least resistance”. That’s why it’s the right thing to do – and is rarely, if ever, done.

Posted by MrRFox | Report as abusive
 

MrFox, reset switches are great for computers, but not societies. Change needs to be incremental, as injecting a step function into a complex system is asking for instability.

I thought you were kidding on the post about mortgage modifications (“This policy just (God willing) might unite Tea Party and OWS and inspire open rebellion and bloodshed. About time, isn’t it?”), but maybe not – in any case, I’m not willing to give up just yet.

While a lot of people want to assign blame to individual behavior, I feel people are doing what they have been trained to do, whether they are Wall Street paper traders or middle class wage earners living way beyond their means, and it’s the design of the system that provides individuals with options that are collectively bad. But It’s easier to change rules and policy than to alter human nature and behavior. People may be called greedy or irresponsible, but a well-designed system won’t let individual choices bring the system down. The challenge is changing that system when the people responsible for changes like it the way that it is.

Fifth Decade, I don’t know if you were addressing my comments, but in no way do I think that all poor people acted imprudently, nor all wealthy people behaved responsibly. I was only saying that if you want to put all of the bad actors on the sidelines, you won’t have a big enough cast for your free market story. I’m with you on your comment, I drone on endlessly about the evils of hoarding capital.

Posted by KenG_CA | Report as abusive
 

@KenG – we’re moving from economics into politics now. So be it. Sometimes self-serving, entrenched interests can only be dealt with by extreme measures. Things like The French Revolution and The Cultural Revolution can be therapeutic – not to mention entertaining – not to mention a means of obtaining “justice”. When all else has proven ineffectual, ….

Posted by MrRFox | Report as abusive
 

@KenG_CA No Ken, I wasn’t aiming at you. I was looking at those others making sweeping statements based on monochromatic views of the world where everything is simple and black and white. People with the idea that we don’t need to think or plan carefully, but just need to do something that hurts, and that one homogenous group is right, and the other wrong. I believe that the homogeneity that such sweeping pronouncements assume exists is more a reflection of the inability of those espousing such nonsense to grasp the full complexities of the issues. We have such people in the UK, while in the US they sound like Fox.

Posted by FifthDecade | Report as abusive
 

@5thDecade – We look at policy-making differently, 5th. You seek the way that you (erroneously, in my view) think is the easiest way out – and without regard to who gets stuck with the losses. I seek the just solution – the one that is least costly to those not complicit in the wrongdoing, and without regard to how much damage is inflicted on the culpable.

Sorry, but justice is my “thing”. As you suggest, what a dangerous fool that makes me.

Posted by MrRFox | Report as abusive
 

@MrRFox, “justice” is not always simple to decipher.

Penniless peasant steals loaf of bread to feed his children. Penniless peasant is brought to justice, has his hand chopped off. (That was, of course, the system under which he chose to steal.)

@KenG, you make an excellent point about people needing GOOD choices. It is trickiest when your choices range from bad to worse — especially when those choices that are least bad in the short term have very poor long-term results. (Isn’t that the definition of a credit card?)

Posted by TFF | Report as abusive
 

I think Fox you’re disputing the central tenet of why people live together in societies. Anthropologically that makes you a Neanderthal…

Posted by FifthDecade | Report as abusive
 

“@MrRFox, “justice” is not always simple to decipher.” (TFF)

Are you suggesting the difficulty of the concept frees us from the moral duty to seek justice? I don’t think you are, TFF – but others might misunderstand your intent.

“I think Fox you’re disputing the central tenet of why people live together in societies. Anthropologically that makes you a Neanderthal…” (5thDecade)

Down to name-calling, are we now, 5th? I must have cut Sociology class the day it was explained that societies developed for the purpose of promoting injustice. Thanks for enlightening me, Master.

Posted by MrRFox | Report as abusive
 

@MrRFox, I’m suggesting that “justice” can be more than simply “that’s what the contract says”.

That said, there is plenty of anecdotal evidence that simple speculative greed drove much of the real estate bubble — both on the part of lenders (approving deals that never should have gotten off the ground) and buyers (people picking up multiple properties to take advantage of the expected price appreciation). I have little sympathy for THOSE cases.

Unfortunately some honest (if unsophisticated) people got caught up in the mess. I wouldn’t object to helping them out if we could find a way to do so without spending 90% of the money on bailing out banks and speculators.

Posted by TFF | Report as abusive
 

@TFF – for sure there are some number of borrowers who didn’t behave unethically (no Liar Loan or excessive LTV). I have a lot harder time extending that open-mindedness to any lenders. So, when they whine about having their Seconds erased on underwater 80:20 deals, they get no sympathy. Anyway, we’re all kind of talking around the issue – not straight at it.

Any kind of program to actually solve the problem DEMANDS that all underwater loans be written down on bank balance sheets to no more than the current LTV of the securing property. And that pretty much wipes out all the banks.

The banks maybe could sell equity to raise capital, but they don’t want to dilute their existing shareholders. The Feds could “gift” banks enough $ to fill the hole, but taxpayers might start killing pols and bankers on sight if they were to try that.

Best compromise IMO is the Northern Rock Solution – Feds recap the banks, existing shareholders and junior creditors get nothing or close to it, and depositors and senior creditors come away clean. The Feds own the banks for a time, while they dump all the existing execs, bring salaries back to sanity, eliminate crazy trading and lending, and then sell the bank shares back into the public market over time. Least-bad idea I’ve heard, so far.

Posted by MrRFox | Report as abusive
 

That’s not a bad compromise, MrRFox… The other answer (the path they are currently on) involves turning a blind eye to the balance sheet problems while feeding the banks cheap cash and waiting until they recapitalize themselves through their profits.

And that isn’t a terrible solution either. The banks aren’t coming out of this clean, and the worst actors will be stuck as zombies for far longer than those which practiced greater restraint. The overextended borrowers have a choice between fulfilling their commitments and giving the house back to the bank. Dragging the foreclosures out over the course of a decade allows the real estate market time to adjust.

Typically, if a mortgage hasn’t defaulted within five years, then it will probably be repaid. We aren’t in a typical situation, but anybody who is still current on their 2005-era mortgage is probably pretty committed to making it good. There will be continuing defaults, but if we do nothing we can avoid a flood.

Do we risk doing something and potentially making a bad situation even worse? The moral hazard involved with blanket principal writedowns is HUGE, even if the banks could afford it and/or be recapitalized.

Posted by TFF | Report as abusive
 

Fox, not name calling, just pointing out that if we aren’t in it together, we stand alone; Neanderthals were supposedly just as intelligent (if not more so) than Homo sapiens and were certainly stronger but lived alone. The strongest dominated their territory, the weak died out. Yet where are they now? Homo sapiens’ love of the group over that of the individual ensured they survived and the individually stronger Neanderthals died out.

As I keep saying, it isn’t a matter of things just being black and white; when multiple factors are involved, multiple players are both strong and weak at the same time, and the other players may need them for their own survival at a later time so just letting them fall is not always a good solution. Plus a lot depends on whether we are talking about corporates or individuals.

The US has a history of favouring the corporation, in Europe we favour the individual. This is clear when you look at the different responses to the housing bubble (which didn’t really exist for most of Europe, mostly the UK and Spain). In the UK, nobody ended up homeless, in the US thousands did.

Posted by FifthDecade | Report as abusive
 

@TFF – you wrote – “The other answer (the path they are currently on) involves … feeding the banks cheap cash and waiting until they recapitalize themselves through their profits.* And that isn’t a terrible solution either.”

It’s a terribly unjust solution, TFF. Taxpayers are “gifting” those profits that dribble-in over time to banks, and getting zip in return; while the same crew of criminals keeps lining their pockets from the booty, like Blanstein’s $12Mil last year. That doesn’t happen under Northern Rock. The current process serves to drag-out the resolution of the housing matter for possibly decades – that’s not really a good thing, even if it’s paper-over by fictitious accounting on bank balance sheet. It does, however, have one irresistible virtue compared to Northern Rock – the criminals on the Street love it. What else matters?

OBTW: Just because banks write-down underwater loans to FMV doesn’t necessarily mean the borrowers get a principal write-down too. The two matters are completely separate.

@5thDecade – You see it as a matter of the strong helping the weak – sorry, but IMO you miss the point. It’s actually a matter of the innocent having their pockets picked (again) for the benefit of the guilty. I don’t like that – neither do substantially all of the “innocent” Neanderthals.

Posted by MrRFox | Report as abusive
 

@FifthDecade, “In the UK, nobody ended up homeless, in the US thousands did.”

Really? Not impossible, but I haven’t seen that reported. How long did they remain homeless? Why were they not helped by the social safety net? Being foreclosed on is very different from “ending up homeless”.

@MrRFox, you make a good point about the ridiculous Wall Street bonuses (other executive-level corporate compensation is also through the roof). Otherwise, I’m not certain that dragging out the resolution is worse than a sudden shock.

“Just because banks write-down underwater loans to FMV doesn’t necessarily mean the borrowers get a principal write-down too.”

Ah. Wasn’t sure what you meant by that. In essence, the present policy allows the banks to continue operating with reduced equity levels rather than forcing a recapitalization. It dampens lending activity, encouraging the banks to shrink their books while they rebuild equity through profits, but is that really a bad thing?

The low interest rates, which are at the heart of the banking subsidy, have a variety of other effects:
* They are propping up housing values at some 20% (or more) above normal levels.
* They permit massive deficit spending for fiscal stimulus, without the crushing interest payments that would normally accompany such a policy (for now).
* The 75% of the mortgages which AREN’T underwater can be refinanced at interest rates under 4%.

Could argue that the “economy recovery” we saw last year was largely due to the low interest rates. It isn’t a complete recovery (several key aspects are missing) and there is a good chance it will fall flat in the next few months, but it isn’t quite as lopsided as what you describe.

Moreover, this solution promises to whallop the banks TWICE. Once the economic picture recovers, rates will rise and the loan margins will be squeezed. There is always a price to pay — and banking is not likely to be a healthy investment for at least another decade. (Think I owned shares in a bank for just one month out of the last two years.)

Posted by TFF | Report as abusive
 

@TFF – you wrote -”…the present policy allows the banks to continue operating with reduced equity levels rather than forcing a recapitalization.” Yes, they are allowed to carry performing loans (even in non-recourse jurisdictions) at historical cost even though the value of the securing property is far lower. This polite fiction all comes to an end if there are strategic defaults or any other acts that require reality to be recognized by auditors. Until then, it’s Fantasy Time.

TFF, you also wrote – “… encouraging the banks to shrink their books while they rebuild equity through profits, but is that really a bad thing?” Yes, because those bank profits are actually gifts from taxpayers. Under Northern Rock, the taxpayers also pay, but they own the banks when they do. That’s more fair, isn’t it?

Dragging-out the resolution is how the Japs did it – and are still doing it. Want to follow in their economic footsteps?

Bottom Line – banks must be recaped – by taxpayers, one way or the other. Shall we make them gifts, or declare them insolvent and take them over and own them when we recap them?

Posted by MrRFox | Report as abusive
 

@MrRFox, I’m not convinced all of the banks are (at this point) in QUITE as bad shape as you suggest. WFC and JPM in particular seem to be solvent, if not as profitable as they were before the crash. Then again, I’m not convinced of that assessment either. “Opaque”, to put it mildly. Or “Fantasy”, if I’m overestimating them.

Is Northern Rock the ONLY bank in the UK? The US already rescued/recapitalized AIG (which you objected to as a bailout?!?), Citigroup, and Fannie/Freddie. They forced Wachovia and WaMu into receivership. How many other banks did you want the Feds to take over? All of them?

There are some significant differences between the US and Japan — both political and demographic. The demographic differences are perhaps the most significant. “Dragging things out” simply gives you a chance to grow out of the problem. Japan’s demographics made growth impossible, thus extending the process.

Posted by TFF | Report as abusive
 

@EverybodyWhoMisses-”ASliceofLimeInTheSo da” –

Everything becomes easy once you arrive at a straight answer to this -

“Bottom Line – banks must be recaped – by taxpayers, one way or the other. Shall we make them gifts, or declare them insolvent and take them over and own them when we recap them?”

It requires only a one-word answer – gifts or takeover?

What’s it to be?

Posted by MrRFox | Report as abusive
 

@MrRFox, the answer to your question is “that is a false dichotomy”.

Banking, like most businesses, is inherently profitable. Instead of spending taxpayer money on gifts, or spending taxpayer money on takeovers, why not force the banks to recapitalize themselves from future profits? Make them plow 5-10 years of earnings into repairing their balance sheets.

The other half of this approach is flooding the markets with cash to stabilize housing values (at perhaps a 20% higher level than they would naturally sink to) and to keep other businesses working while the banks slowly fix themselves.

I truly don’t understand how you can on the one hand complain about AIG being “bailed out” and on the other hand suggest that the Feds take over every single major bank in the country. If you aren’t happy with X, then why do you think you would be happy with 10X?

Finally, I suspect that most of the banks have successfully repaired their capitalization already. You worry that the mortgages are being carried on the books for more than the present value of the property, but as long as the mortgages are being repaid they ARE worth more than the present value of the property. Moreover, I suspect the overhang is less than the capital on hand. Most of the banks were probably insolvent in 2009, but I doubt that is true today. And those that are still in trouble will lose business and shrink into semi-oblivion over the next decade.

Posted by TFF | Report as abusive
 

@TFF – Cool, then there’s no need to do anything at all, is there?

Posted by MrRFox | Report as abusive
 

@MrRFox, the problem was created ten years ago and the decisions on the resolution were made four years ago. The implications of those decisions will continue for another 5-7 years. But no, further action is not called for at this point. We are not on the brink of financial collapse, we are simply in the middle of a long and agonizing recession/recovery.

The best and bravest action at this point is to take no action at all. Stop interfering with the natural course of events and let the markets work to restore equilibrium. Even if that is painful.

Posted by TFF | Report as abusive
 

@TFF – you wrote – “we are simply in the middle of a long and agonizing recession/recovery.* The best and bravest action at this point is to take no action at all.

Look at LadyG’s example, above. Thousands, maybe millions, are locked-in to underwater situations – they can’t sell, can’t re-fi, can’t stop paying on a mortgage that makes no financial sense and can’t afford to keep throwing money away by continuing to pay. Eventually, they all need to make the “pro move” and do what LadyG did – dump the losing trade. The longer we drag that out the worse the damage will be for everyone involved.

You say banks are so flush they could write-down all underwater loans and still survive. Hope you’re right – pretty sure you’re not. Damn sure the GSEs couldn’t do that.

Posted by MrRFox | Report as abusive
 

@MrRFox, not every household with an underwater mortgage is in a bad situation. They are merely paying what they agreed to pay seven years ago. As long as they don’t lose their job and don’t need to move, they are fine. Remember that whether a mortgage is underwater or not, if you make the payments for 30 consecutive years then you own your home free and clear. This is how our parents/grandparents lived.

That isn’t to say their situation might not be improved — and I’m open to ideas like LadyG’s — but I would strongly favor proposals that limit the hit to the public purse.

I didn’t say that ALL the banks are financially healthy, I said that MOST of the banks (the major ones at least) have repaired their balance sheets. Consider Wells Fargo, for example, the leading residential lender. Their combined residential first mortgage and home equity portfolios total around $330B. Their Tier 1 equity is around $100B. Do you truly believe they would need to write off a third of their residential book just to get down to market value on the properties?!? (And they have segregated roughly $100B of assets that are higher risk, with the intention of running off that portfolio. Doing so quite successfully thus far.) Please don’t exaggerate the problem!

The GSEs are not banks. Nor are they private companies. In fact they are an example of what you are (foolishly) recommending for the entire system! The Treasury recapitalized the GSEs, and took on the (ongoing) losses at great taxpayer expense. Are you holding the GSEs up as a shining light for what our financial system should look like?

Posted by TFF | Report as abusive
 

@TFF – you wrote -

“…not every household with an underwater mortgage is in a bad situation.”

Suggest you ask LadyG about that – she’s been there. They are locked-in – they cannot sell the home, probably cannot relocate to take a new and better job, cannot refinance, must make payments for the life of the loan that exceed those based on the current FMV of the home lest they see their credit ratings destroyed.

Seems like “a bad situation” to me. Bet big money LadyG wasn’t happy being in it – perhaps she’ll tell us how allegedly “not bad” it was. She eventually threw in the towel – bet she wishes she’d done it sooner. Eventually, most all upside-down borrowers will reach the same conclusion, and more foreclosures will drive prices down further, and deeper bank balance sheet hits will result.

When disaster has struck, there’s nothing to be gained by pretending that it hasn’t. Dragging things out and hoping for a miracle to make all the pain go away isn’t a responsible policy approach IMO. Nor is it fair to drag things out and recap the banks by gifts of taxpayer funds that dribble-in over time, as is happening now; while entrenched managements that caused the whole mess continue to milk the system – and continue to finance both political parties.

Anyway, we’re both repeating ourselves now, so I’ll sign-out here.

OBTW: You’re not Japanese, are you?

Posted by MrRFox | Report as abusive
 

@MrRFox, please try to read a little more precisely… Twice in two posts you’ve modified a qualifier. Either you are doing so intentionally (which makes you a dishonest liar) or you are doing so carelessly (which makes you a fool). Your pick.

When I said “most of the banks have successfully repaired their capitalization already”, I meant precisely that. I didn’t mean “all of the banks and the GSEs to boot”.

When I said “not every household with an underwater mortgage is in a bad situation”, I meant precisely that. If I had meant, “no underwater mortgage is ever a problem” then I would have said so.

It is **VERY** annoying to hold discussions with liars/idiots who continually twist your words. If you persist in that behavior, I’ll leave you to “discuss” yourself off in a corner.

To answer your point, the degree to which being underwater is bad depends on three factors.
(1) How affordable was your original deal?
(2) How badly do you need to move?
(3) How far are you underwater?

If the original deal was affordable, then continuing an underwater mortgage isn’t substantially worse than renting. If you don’t need to relocate, then that isn’t an issue FOR YOU. And if you are $30k underwater then you have less to gain from shedding the obligation than if you are $500k underwater.

Most of the underwater mortgages are not seriously troubled and will eventually be repaid (unless the market takes another jag downwards which might or might not happen). Those which are most seriously underwater will (or should) eventually default, but I’ve never denied that.

It isn’t as bad (not yet at least) as some would have you believe. Obama’s recent plan for refinancing might have helped 3M to 4M households. That is a big number (and LadyG might have been among them), but it is still a small fraction of the total households in the country.

You still haven’t told me whether or not you approve of the (taxpayer funded) Fannie/Freddie takeover, or the (taxpayer funded) AIG takeover. I’ve seen you criticize each on occasion, but then you are proposing that the taxpayers fund a similar recapitalization of the ENTIRE financial system. Seems expensive to me, not to mention presently unnecessary. (If you were going to do that, it should have been done in 2008-2009, not 2012.)

Posted by TFF | Report as abusive
 

“You still haven’t told me whether or not you approve of the (taxpayer funded) Fannie/Freddie takeover,” (TFF)

It had to be done, but should only have been done in conjunction with applying the Northern Rock Solution to all other insolvent banks. That would have been the least unfair way to have handled it.

“or the (taxpayer funded) AIG takeover…”

Paying AIG’s counterparties 100% was criminal – an AIG default on CDSs in conjunction with the general MBS crisis meant substantially all of them were insolvent. They all should have been Northern Rocked.

” you are proposing that the taxpayers fund a similar recapitalization of the ENTIRE financial system. Seems expensive to me, not to mention presently unnecessary…”

Taxpayers are doing that right now – gifting money to banks to repair their balance sheets – IMO that’s improper. The money very likely must come from taxpayers or the Fed; that being the case, the taxpayers should own the institutions when the taxpayers recap them – that’s what Northern Rock accomplishes. The money works out the same either way, but your way – the wait-it-out method – amounts to taxpayers making gifts to private institutions. I don’t like that – you seem to. Cool – that’s also why they make chocolate and vanilla both. GFYS

Posted by MrRFox | Report as abusive
 

Thanks for the answers, MrRFox. I wouldn’t have objected to that solution back in 2008 — just seems a little late at this point. The price tag would have been HUGE, but not necessarily any worse than a decade of deficit spending.

But I disagree that the present solution represents a gift from taxpayers to the banks. Most of the funding for the losses is coming from the banks’ earnings, and most of what you see as a gift will be clawed back when interest rates rise in a few years.

QE isn’t strictly fair (as you have pointed out). It is hard on those who hold monetary assets, good for those with monetary liabilities. The banks are in both games, so I would guess it does more to shift profits than create them? Overall, QE is good for borrowers (and with an $11T federal debt we are all borrowers) and bad for lenders (such as China).

In conclusion, I think I’m with you on the solution — nationalize banks and boot the bums — but not on the timing. We’ve already committed to the present course of action, and barring another 20%+ drop in real estate prices there is simply no excuse for nationalizing most of the banks at this point.

Posted by TFF | Report as abusive
 

There are three sources of new capital for banks – profits and government money have been mentioned already (although if the second is a loan it isn’t really a capital injection). UBS, the biggest of the Swiss banks diluted shareholder holdings by taking in new capital from new shareholders.

Fox, I’m not sure your constant chatter about “the Northern Rock Solution” conveys much understanding of what this actually is… perhaps you could explain what you think it means? In any case, Northern Rock was not a big bank, that would be LloydsTSB and RBS.

@TFF I don’t call people living in gymnasiums and halls in dormitory style conditions as being ‘homed’. I could also add that those people in the UK who lost their houses do not suffer any difference in medical care compared to their previous position, neither timewise nor qualitywise.

Posted by FifthDecade | Report as abusive
 

@FifthDecade, like I said, I haven’t seen this supposed epidemic reported. Can you offer a link? I’m puzzled why foreclosure would leave them in such dire straits. Perhaps the people you are describing also lost their jobs?

For the most part, foreclosure is a middle class disease. The poor were never able to buy in the first place.

Posted by TFF | Report as abusive
 

Part of the sub-prime problem was that the poor WERE in fact sold houses, financial ‘experts’ walked into their homes and told them they COULD afford to buy that dream house, even though some of them were on benefits and had no deposits. Just look at Cleveland. Innocent people were sold loans that should never have been given to them, but the lenders didn’t care as they passed the loans on up through the repackaging ladder.

Here’s a link to the web version of the News Report Paul Mason did for BBC’s Newsnight program:
http://www.bbc.co.uk/news/world-us-canad a-14296682

This link illustrates my point of how the US thinks less of the individual than does Europe, although the US system does allow companies to push totally unsuitable products by those who think of themselves more highly than they think of their victims. This might only be a small number of the total cases, but the fact remains it is allowed, it happened, and in Europe there are regulations and safety nets that respect the individual, and control companies more tightly.

Posted by FifthDecade | Report as abusive
 

Agreed, Fifth, that was PART of the subprime problem. Only the tip of the iceberg, though.

That Paul Mason report cites legitimate suffering, but consider the cause? Unemployment, divorce, unemployment. You can add medical bills to that list if you like. This story, at least, didn’t blame any of it on foreclosure. Rather, it is part and parcel of the greater recession/depression.

Europe definitely embraces a greater degree of socialism than the US — that is both your strength and your weakness.

Posted by TFF | Report as abusive
 

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