Financial Meltdown & Its Discontents

[demagogue]

Sotha asked for a thread to talk about the public financial woes of the US & EU, so here it is.

 

Here's a NYTimes Editorial today on the Euro zone to get the ball rolling --

http://www.nytimes.com/2012/06/09/opinion/the-euros-11th-hour.html?nl=todaysheadlines&emc=edit_th_20120609

 

Feel free to clench fists and bemoan our sick & broken systems.

[jay pettitt]

I'm going to send the Euro a get-well-soon card in the morning. Hopefully that'll cheer it up.

 

If nothing else, it's a useful diversion from having to notice the double-dip depression of Great British Pounds and ounces.

[jaxa]

Spanish banks to get up to 100bn euros in rescue loans

 

Spain is to get up to 100bn euros ($125bn; £80bn) in loans from eurozone funds to try to help shore up its struggling banks.

 

The move was agreed during emergency talks with eurozone finance ministers.

 

Spain's Economy Minister Luis de Guindos said his country would shortly make a formal request for assistance.

 

He emphasised that the help would be for the financial system, not the economy as a whole. "This is not a rescue," he said.

 

"This is a loan which is given in very favourable conditions, which will be determined in the next few days. But they are very favourable - much more favourable than the market ones," Mr de Guindos told a news conference.

 

The Spanish government had been reluctant to ask for a bailout like the one given to Greece, Ireland and Portugal, as these rescue packages came with demands for spending cuts and stringent spending cuts.

 

Mr de Guindos said there would be conditions attached for the banks receiving the loans, but there would not be "micro-economic conditions" for Spain.

 

"We hope that as a result of these injections [of capital] families and companies will have more solvent banks which are able to offer them credit, which they are not able to do at the moment," he said.

 

'Unprecedented'

 

The exact amount that Spain will receive will be decided after the completion of two audits of its banks, due to be completed by the end of the month.

 

A team comprising staff from the European Commission, the European Central Bank and the International Monetary Fund will head to Madrid to assess the needs of the Spanish banking sector, a Eurogroup spokesman confirmed to the BBC.

 

The money will bolster the finances of Spain's weakest banks, which have been left with billions of euros worth of bad loans because of the collapse of the country's property boom and the recession that followed.

 

Some of them borrowed large amounts on the international markets to lend to developers and homebuyers, a riskier strategy than funding it with deposits from savings.

 

When the credit crunch hit, Spain's financial sector was plunged into what the IMF has described as an "unprecedented" crisis.

 

Banks need to offload some 200,000 repossessed properties at a time when house prices have fallen by 25% on average.

 

The government has already put 34bn euros into the banking system to try to strengthen it, according to the IMF. In addition, it has recently nationalised Bankia, its fourth largest bank, which last month requested 19bn euros.

 

Spain was keen to ensure that any external assistance went directly to its banks, rather than to the central government.

 

As a result, the loans will go to its bank restructuring agency, called Frob. But this would still considered state debt, Mr de Guindos said.

 

The Eurogroup said "the Fund for Orderly Bank Restructuring, Frob, acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned. The Spanish government will retain the full responsibility of the financial assistance".

 

The money will come from two funds created to help eurozone members in financial distress. They are the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), which enters into force next month.

 

The European Commission welcomed the move.

 

"With this thorough restructuring of the banking sector, together with the on-going determined implementation of structural reforms and fiscal consolidation, we are certain that Spain can gradually regain the confidence of investors and market participants," Commission President Jose Manuel Barroso and Vice President Oli Rehn said in a statement.

 

Meanwhile, US Treasury Secretary Timothy Geithner described the developments as "important for the health of Spain's economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area".

[jay pettitt]

That's a lot of money right there.

 

Obviously the EU has a lot of money, so perhaps it's not so bad relatively, but it's a lot of money. Do you think it'll be the banks paying back the loan, or will it be paid back by everybody else losing their jobs and services through contraction of the private and public sectors? Only that's what seems to count as 'growth' policies here in the UK.

 

Talking of the UK, Mr Osborne (who I note is looking increasingly tubby these days) has come out blaming all the UKs woes entirely on the Euro (perish the thought his policies might just be a bit shit). Which is a bit rich. Rich probably not being the most appropriate word (at least for most of us). Mayhaps we should sort our own house out first Mr Osbourne...

 

So, something I do notice with the tiny bit a economics that I think I know, it seems pretty clear that most people you hear talk publicly haven't got a clue. What you end up with is a situation a bit like where the BBC got it's knuckles rapped recently for the way it presents scientific issues like climate change - it presents a false balance. You get an economist (or a climate scientist), and plonk them on screen 1 to 1 against an idiot (or worse, just put two idiots up against each other) and expect that the audience will somehow become informed individuals on the important technical issues of the day, instead of just becoming confused. The other thing, is that quite often the people who are leading the public discourse on economics are people who maybe know a bit about finance instead, which really isn't the same thing. It's a bit like the difference between English Literature and English Language.

 

Anyways, let the bastards get on with it. I'm off down the allotment. As someone pre-convinced (with some justification perhaps) that Mr Osbourne is ideologically bent on breaking at least the publicly owned parts of the UK economy, and that he lacks the sense to realise that he doesn't know what to do with the other bits either I'm rather tempted to like Mr Krugman (who can be seen below being pitted against two idiots by the BBC)

 

http://www.youtube.com/watch?v=_r-AKruzmkk&feature=player_embedded

Edited June 10, 2012 by jay pettitt

[Sotha]

The problem with this financial meltdown is exactly that it is difficult for a non-specialist to wrap their brains around the issue. Too many facets.

 

Can even the experts be believed as -like said- lots of money is involved and everyone are pursuing the actions that would bring benefits for themselves or their interest groups? Add politics to the obscurity of the problem and you have populistic parties suddenly achieving huge successes in elections, which in turn affects the power structures making the chaos even worse. Investors are a fish school that scrambles around in panic, but they have the money and somehow everyone else should pay the price but them. And the credit raters are rocking the boat just for fun to see if someone falls to the sharks. Eventually, if someone falls and have to pay the price it certainly is the common man who doesn't have much to do with the events that lead to this disaster. Those who brought this upon us are probably gonna enjoy a sip of expensive wine while they, slightly amused, monitor the social unrest, uncertainty, controversy, unemployment and chaos. They might have had to sell the ferrari but they still have the porsche, penthouses and the boats.

 

Sometimes I question whether money is a tool for the humans or we humans are simply a tool for the money.

[jay pettitt]

I kind of wonder if it isn't all that complicated, and that many of the facets are unnecessary, unhelpful facets that don't have much to do with the price of fish, but are added by people who want the air time, but aren't quite decent enough to realise that they've got nothing of merit to contribute.

 

Obviously it's going to be quite a bit complicated, but I think some of the bewilderment that the likes of you and I feel are down to the BBC and the newspapers etc etc doing a piss poor job at sticking facts and actual useful knowledge and thoughtfulness under our noses instead of the old red corner Vs blue corner one two.

 

Frankly, the silly man/woman combo in the vid I linked to have about as much business talking about economics on a flagship news programme as I do. Which is to say not much. I'd much rather listen to two economists who even if they disagree, aren't actually out to get each other, debate the relative merits of looking at the situation this way or that.

Edited June 10, 2012 by jay pettitt

[demagogue]

Now Italy is being led to the chopping block.

[pusianka]

I'm wondering what you guys think of Lala land... I mean Poland... or other smaller countries in terms of crisis. Could it be our chance or wil we just fall? Or maybe it isn't affecting us at all? Please I allow the ppl with knowledge to speak.

[Sotha]

Why is Poland called 'Lala land?'

 

I'm no specialist, but my guess (based on the news I read) is that all countries will be somewhat affected by this. How much they are affected depends on how many dominoes are gonna fall. The smaller the economy affected, the stronger will the outside influence be. Spain is a large economy so higher level EU control will not be exerted in its economy: they are talking about supporting the banks, not the goverment. A smaller economy would probably taken 'into custody' so that they can be sure the saving discipline is maintained, like Greece.

[demagogue]

In the article I linked, the term they use is contagion, how loss of confidence with one state's economy rattles other states and people start pulling money out of their banks, etc.

 

BTW, Lala Land is a very interesting and surreal little indie game series (download link in this): http://www.auntiepixelante.com/?p=264

[jysk]

US economist or US news paper articles in the last months were noticable for the fact that they were talking past the real problems. The point is, its not a _Euro_ crisis, its a crisis of various countries who have a large government debt _and_ deficit and also have the Euro als currency. The point is, its not fact that if one or more countries goes bancrupt that the Euro must be effected at all. Its just a currency. Currently it looks like Greece will go soon bancrupt (when the greece population will elect a government which rejects further EU help in turn for austerity in mid june) and maybe the weaker countries like Spain or Italy will fall too, but in no way that means that this will affect the curreny those countries have. Its a state debt crisis, not a currency crisis. Especially when looking on the fact the the Dollar isnt in a good position too, as the US has its own budget problems.

 

How this will end just depends on how Germany act, whether they will bail out the larger countries (currently Spain and Italy) too, or whether they just decide to drop them all and let them face their fate (which means state bankruptcy in a long term if no miracle happens or those countries enact some really serious and painful reforms). If Poland keeps a healthy and balanced government budget, they will be not be effected at all (like e.g. the northern countries). If they spend more than they have and get in the crosshair of speculators, they will face the same crisis as Greece, Spain etc. (i dont know what the current situation in Poland is) as the market will loose trust on the polish economy and will not rebuy their government bonds.

 

EDIT: I btw dont think Germany will bail out completly the large countries like Spain/Italy etc. They will certainly go bankrupt (if no miracle happens etc what i said before). What matters is just the point of time when Germany will stop to support those countries and what happen to market then. The German leftist (basically the whole opposition with about 60%+ of a voter share) opposition certainly want to support those countries as long as possible wilth billions of Euros, but thats not what the average German want. So what happened in the past ~2 years is just a process of a preparation of the process of bankrupty of lots of countries. The Merkel government certainly made it right to prepare everybody for this possible sencario. Its very hard to predict what will happen in the future. However if the Eurozone goes down economically this will have lots of effects on the US economy too, as the Eurozone is the largest economy zone in the world.

Edited June 13, 2012 by jysk

[jaxa]

^ Euro crisis = Eurozone crisis

[Melan]

Now Italy is being led to the chopping block.

That's pretty logical. It is all linked together. If someone falls, the weight is distributed among the rest. With each single economy falling, demand declines (everyone is cutting costs) and everyone's costs of financing their debt burden goes up by a few notches, courtesy of the rating agencies. Then the financial predators turn on the next weakest target, since by being downgraded, they are pushed into interest payments they cannot bear. The markets know they are unable to do it, so as risky investments, they are forced into even harsher and harsher terms on repaying their debts. It is a very self-fulfilling prophecy. Then, they cut employment and social services and consumption to climb out of the pit, and kill demand, putting entrepreneurs in the red and forcing them to fire more people, pushing the economy closer and closer to recession, and ultimately, as the new, horrific system stabilises at a lower level of balance, a full-blown depression. This is the way, instead of standing together and fending off the wolves through solidarity, the distribution of inancing risks (through Eurobonds) and massive job creation, Europe is allowing itself to be decimated.

 

And that doesn't even address the massive breach of trust that has developed between the core and the periphery. Badmouthing the Greeks etc. as lazy good-for-nothings will be remembered for a generation... by people pushed into poverty and resentment, humiliated by massive forces beyond their control.

 

I'm wondering what you guys think of Lala land... I mean Poland... or other smaller countries in terms of crisis. Could it be our chance or wil we just fall? Or maybe it isn't affecting us at all? Please I allow the ppl with knowledge to speak.

Poland is pretty large and has a strong internal market, which is good in times like this for domestic producers. It has its own currency which means it can inflate its way out of its debt if it has to. It is currently in a favourable phase of development after climbing out of the crisis of the early 2000s (when there was massive emigration, a lack of growth prospects etc.). It is rated relatively well by credit rating agencies, which means lower costs to finance itself. It has not yet been forced into a destructive austerity-based economic death spiral like, ah, Hungary. Really, Poland seems to be in a rather good place when all things are concerned. Of course, sometimes no place is good enough.

Edited June 13, 2012 by Melan

[jay pettitt]

US economist or US news paper articles in the last months were noticable for the fact that they were talking past the real problems...

 

The UK too. We're loving it in fact. It means we can look at you and your woes rather than notice that our own economies are shot - in the UK for example, you can't get a job if you're on the young side and/or on the old side.

 

Obviously being old and/or young is your own bloody fault and you people should try and squeeze a bit of "business reality" into your dizzy heads next to the kitten videos and why the hell should an economy think the people in it are worthwhile anyway. Especially when we've got a ready supply of people who are neither a bit too young or a bit too old growing on trees out the back. By the way, would you like to buy a novelty item - for some reason they're not selling well (I blame the old/young people for not buying enough, bunch of state scroungers the lot of 'em) - so, err, 10% off to you.

 

The point is, its not a _Euro_ crisis, its a crisis of various countries who have a large government debt _and_ deficit and also have the Euro as currency.

 

The UK had a relatively tiny Govt debt before the 2008 crisis (though we don't have the Euro, obviously - but I doubt it makes much difference). We still got hit very, very hard indeed. We now have quite a big debt (I think it's actually about average now as these things go - but there's political mileage in saying it's really huge - by the way, we need to take your pension off you), but that's because we stepped up and took out one hell of a mighty big loan so we could help our friends the banks out.

Edited June 13, 2012 by jay pettitt