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Europe Does Have a Safety Net, It's Called the European Central Bank Print
Tuesday, 15 May 2012 04:44

A Washington Post article on the crisis in Greece and its potential impact on Europe's economy told readers that:

"growth in China slowing and U.S. officials looking to tame record government deficits .....[is] leaving Europe, in a sense, operating without a safety net."

Actually, Europe has a perfectly good safety net. It is called the European Central Bank (ECB). The ECB, if it chose to act like a central bank, could guarantee the debt of Italy, Spain and other heavily indebted countries. This would quickly reduce the interest rate on their debt to near German levels, making their debt burden easily sustainable.

To date, the ECB has maintained its obsession with keeping inflation at less than 2.0 percent, which prevents the sort of adjustment that would allow Greece, Italy and Spain to become competitive within the euro zone. The article should have mentioned the ECB's obsession with maintaining this Maginot Line, which is at the center of the euro zone crisis.

David Brooks Is Disappointed that Politicians Are Not Philosophers Print
Tuesday, 15 May 2012 04:33

In a discussion of President Obama's re-election prospects David Brooks bemoans the fact that:

"this race, like almost all re-election races, is shaping up to be a referendum on the incumbent, not a choice between two visions."

When would an election ever be "a choice between two visions?" Why would anyone expect a politician to have a vision? Do accountants and truck drivers have visions?

Most probably do, but it is irrelevant to their jobs, just as a presidential candidate's vision is irrelevant to their jobs. Winning elections is about getting the support of the people with the money and power to deliver votes. It is not clear why anyone would be looking for vision in this story.

Too Little Trading on Wall Street? The NYT Should be Kidding Print
Tuesday, 15 May 2012 04:14

I had to check repeatedly to make sure that it is not April 1 when I read a NYT editorial complaining about too little trading on Wall Street. The editorial does raise a legitimate point. Many people are wary of Wall Street because they don't trust the financial sector to treat them honestly for some of the reasons mentioned in the piece.

However this has little to do with trading volume. Middle class people should be able to be comfortable putting money in the stock market, but they should also know that they will generally make more money with a portfolio that does not trade frequently. Trading does not on net increase returns, it just redistributes them. Frequent trading means that a larger share of the returns generated by the stock market will end up in the pockets of the financial industry, with less going to investors.

This piece also notes the poor returns from the stock market since 2000. This was not a surprise. It was a direct result of the high price to earnings ratio at the peak of the bubble. Price to earnings ratios in excess of 30 to 1, virtually guaranteed poor returns in the years ahead. People who took third grade arithmetic understood this fact. Unfortunately most of the people with top positions in the government and financial industry are not among this elite group.

The Economic Crisis is Just So Complicated: #54,311 Print
Monday, 14 May 2012 10:17

Andrew Gelman points us to a peculiar Bloomberg column by Reid Hastie that refers to some well-known research results from cognitive psychology with the seeming purpose of undermining efforts to hold anyone accountable for the economic crisis. The piece tells us:

"Just as we are wired to like a diet rich in fats and sugars, we have an appetite for simple, coherent narratives."

which we are urged to remember:

"the next time you hear a good story about why the financial recession, or any other economically significant event, was caused by a single collection of bad actors."

This is a truly bizarre juxtaposition. There is a great deal of evidence that many actors in the financial sector were at least unethical in their behavior (e.g. bond rating agencies giving investment grade ratings to issues they knew were junk), and may well have broken the law. In effect what Hastie is telling us is that we should not be concerned about this evidence and its implications for the markets and the economy because we are hard-wired to like a good story.

Sorry, but this one makes no sense. If the argument is that the bad actors in the financial sector should not be held responsible for the economic crisis, then the argument should be based on the facts and the economics. The assertion that the people who think the financial industry was responsible just have some cognition problem is pretty much just a crude ad hominem argument.

Outstanding Piece on German Labor Markets In Washington Times Print
Monday, 14 May 2012 10:04
The Washington Times showed that it can do serious reporting. This piece on the German labor market is solidly researched and carefully written. At last, the nation's capital has a real newspaper.
The Washington Post Has Not Heard of the Federal Reserve Board Print
Monday, 14 May 2012 06:48

That is what readers of a front page article on the impact of austerity in Spain must have concluded when the Post told readers:

"The tensions between tackling runaway deficits and stimulating the economy are in many ways akin to those facing the United States, where political leaders are struggling to agree on the right balance."

Actually, the problems facing Spain and the U.S. are not comparable, most importantly because the United States issues its own currency and Spain does not. This is the main reason that the interest rate on 10-Treasury bonds in the United States is less than 1.8 percent, while it's close to 6.0 percent in Spain.

Spain's problems can be viewed as being more in line with the fiscal problems that a particular state, like California or Ohio, might face. The existance of single currency under the control of the European Central Bank, means that individual countries cannot count on the central bank to support their debt, which makes it far more risky than the debt of countries like the U.S., U.K., or Japan, even if the latter might carry much heavier debt burdens.

The term "runaway" was strange editorializing that does not belong in a news story. It is strange because Spain's deficit is entirely due to the economic crisis created by the collapse of its housing bubble.

How Did AP Determine that the Scheduled Cuts to the Military Budget Would be "Crippling?" Print
Monday, 14 May 2012 04:57

That is what readers of an AP article on the impact of budget cuts stemming from last year's agreement must be wondering. The first sentence of the piece told readers that:

"Moving to protect the military from a crippling wave of budget cuts next year, a key House committee voted Monday to cut instead food aid, health care and social services like Meals on Wheels."

The piece would have been more informative if it had avoided editorializing by including the word "crippling." That assessment is obviously a judgement call on which there is considerable disagreement. Even with the cuts put in place, the government would still be spending well above 4.0 percent of GDP on the military. By contrast, it was spending just 3.0 percent of GDP in 2000, so current spending is more than one-third higher relative to the size of our economy.

It also would be useful if the budget numbers in this piece were expressed as a share of GDP and/or the total budget over the relevant horizon. The vast majority of readers have no ability to assess the importance of items like $80 billion in savings on federal employee pensions over the course of a decade. (This is approximately 0.2 percent of projected spending.)

[Thanks to Randy Schutt for passing this one along.]

Spanish Debt, the European Central Bank, and the Maginot Line Print
Thursday, 10 May 2012 04:54

The NYT had an article that reports on the high level of corporate debt and indebtedness in general in Spain. The article gives a measure of the total debt to GDP in Spain and then compares it to the ratios in other countries.

This is a confused way to assess the issue. Debt by itself will reveal nothing about the state of an economy. Debt is also an asset.

Suppose every household in the United States lent $300,000 to the household on its left. (We are going to make the United States a circle for purposes of this analysis.) With roughly 130 million households, the United States now has $39 trillion (@ 2.6 times GDP) more debt than it did previously.

However, as a country it is no poorer than it had been previously. In fact, every household is just as well off as it had been previously. It owes $300,000 more than it had previously, but it has $300,000 more in assets than it had previously.

Problems arise due to the distribution of the debt. If every third household borrowed $600,000, which was lent by the other two households, then this third household is getting deep in debt, with the other two are appearing to build up large amounts of assets.

This is what happened to Spain, the United States and other countries with serious housing bubbles. The other two households were willing to lend money to the third household because they thought it held an asset (a house) of great value. When this turned out not to be true, the third household found itself with an unsustainable debt burden and the other two households found themselves with assets of questionable value. If the third household can't repay its debt, then the loans are no longer worth their face value.

Central banks should be paying attention to the buildup of such unsustainable debt burdens. Unfortunately, the European Central Bank (ECB) was focused on building up its Maginot Line, being vigilant in its fight against inflation.

The problem now is to try to correct the imbalances created by growth of the housing bubble. Spain and the rest of Europe is getting little help from ECB which is still focused on reinforcing the Maginot Line rather than promoting growth in the euro zone.

France's 35-Hour Workweek is "Much Criticized" In the Washington Post Print
Wednesday, 09 May 2012 05:00

A Washington Post article on the likely composition of France's new socialist government mentioned Martine Aubrey, a former minister, who it identified as the main proponent of "the much-criticized 35-hour workweek in the 1990s." There is probably no major policy change that could not be described as "much criticized," however they generally do not appear with this characterization in the Washington Post and other major news outlets.

In fact, the 35-hour workweek has proven to be hugely popular in France. Nicolas Sarkozy, the current president, had attempted to roll back the law, but he was forced to back down in the face of overwhelming public opposition. The result was that he only made relatively minor changes in the law.

Germans Hold Incoherent Views On Greece and Southern Europe Print
Wednesday, 09 May 2012 04:43

It would have been useful to include this fact in an article on how Germans are losing patience with Greece. Germany has been anxious to build up and preserve its export market in southern Europe. However if Germany wants to have an export surplus with these countries, as it does, then it must lend them money. There is no logical way around this.

For this reason, it is absurd that Germans are both upset about the borrowing by Greece and other peripheral countries, but yet refuse to take the steps (most importantly higher domestic inflation) that would allow these countries to regain competitiveness. The Germans are acting like little children who both want to have their cake and eat it too, and then get mad at everyone else because they won't make it possible. 

If Germany wants to keep the euro zone intact, with its current low inflation obsession, then Germans will have to give money to the peripheral countries to buy their stuff. There is no way around this. The Germans' complaints are against logic, not their southern neighbors. 

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.