• Теги
    • избранные теги
    • Компании111
      • Показать ещё
      Разное1
      Люди1
      Международные организации1
      Показатели1
General Growth Prop
22 января 2013, 20:07

Guest Post: Why Stimulus Has Failed

Authored by Raghuram Rajan, originally posted at Project Syndicate, Two fundamental beliefs have driven economic policy around the world in recent years. The first is that the world suffers from a shortage of aggregate demand relative to supply; the second is that monetary and fiscal stimulus will close the gap. Is it possible that the diagnosis is right, but that the remedy is wrong? That would explain why we have made little headway so far in restoring growth to pre-crisis levels. And it would also indicate that we must rethink our remedies. High levels of involuntary unemployment throughout the advanced economies suggest that demand lags behind potential supply. While unemployment is significantly higher in sectors that were booming before the crisis, such as construction in the United States, it is more widespread, underpinning the view that greater demand is necessary to restore full employment. Policymakers initially resorted to government spending and low interest rates to boost demand. As government debt has ballooned and policy interest rates have hit rock bottom, central banks have focused on increasingly innovative policy to boost demand. Yet growth continues to be painfully slow. Why? What if the problem is the assumption that all demand is created equal? We know that pre-crisis demand was boosted by massive amounts of borrowing. When borrowing becomes easier, it is not the well-to-do, whose spending is not constrained by their incomes, who increase their consumption; rather, the increase comes from poorer and younger families whose needs and dreams far outpace their incomes. Their needs can be different from those of the rich. Moreover, the goods that are easiest to buy are those that are easy to post as collateral – houses and cars, rather than perishables. And rising house prices in some regions make it easier to borrow even more to spend on other daily needs such as diapers and baby food. The point is that debt-fueled demand emanates from particular households in particular regions for particular goods. While it catalyzes a more generalized demand – the elderly plumber who works longer hours in the boom spends more on his stamp collection – it is not unreasonable to believe that much of debt-fueled demand is more focused. So, as lending dries up, borrowing households can no longer spend, and demand for certain goods changes disproportionately, especially in areas that boomed earlier. Of course, the effects spread through the economy – as demand for cars falls, demand for steel also falls, and steel workers are laid off. But unemployment is most pronounced in the construction and automobile sectors, or in regions where house prices rose particularly rapidly. It is easy to see why a general stimulus to demand, such as a cut in payroll taxes, may be ineffective in restoring the economy to full employment. The general stimulus goes to everyone, not just the former borrowers. And everyone’s spending patterns differ – the older, wealthier household buys jewelry from Tiffany, rather than a car from General Motors. And even the former borrowers are unlikely to use their stimulus money to pay for more housing – they have soured on the dreams that housing held out. Indeed, because the pattern of demand that is expressible has shifted with the change in access to borrowing, the pace at which the economy can grow without inflation may also fall. With too many construction workers and too few jewelers, greater demand may result in higher jewelry prices rather than more output. Put differently, the bust that follows years of a debt-fueled boom leaves behind an economy that supplies too much of the wrong kind of good relative to the changed demand. Unlike a normal cyclical recession, in which demand falls across the board and recovery requires merely rehiring laid-off workers to resume their old jobs, economic recovery following a lending bust typically requires workers to move across industries and to new locations. There is thus a subtle but important difference between my debt-driven demand view and the neo-Keynesian explanation that deleveraging (saving by chastened borrowers) or debt overhang (the inability of debt-laden borrowers to spend) is responsible for slow post-crisis growth. Both views accept that the central source of weak aggregate demand is the disappearance of demand from former borrowers. But they differ on solutions. The neo-Keynesian economist wants to boost demand generally. But if we believe that debt-driven demand is different, demand stimulus will at best be a palliative. Writing down former borrowers’ debt may be slightly more effective in producing the old pattern of demand, but it will probably not restore it to the pre-crisis level. In any case, do we really want the former borrowers to borrow themselves into trouble again? The only sustainable solution is to allow the supply side to adjust to more normal and sustainable sources of demand – to ease the way for construction workers and autoworkers to retrain for faster-growing industries. The worst thing that governments can do is to stand in the way by propping up unviable firms or by sustaining demand in unviable industries through easy credit. Supply-side adjustments take time, and, after five years of recession, economies have made some headway. But continued misdiagnosis will have lasting effects. The advanced countries will spend decades working off high public-debt loads, while their central banks will have to unwind bloated balance sheets and back off from promises of support that markets have come to rely on. Frighteningly, the new Japanese government is still trying to deal with the aftermath of the country’s two-decade-old property bust. One can only hope that it will not indulge in more of the kind of spending that already has proven so ineffective – and that has left Japan with the highest debt burden (around 230% of GDP) in the OECD. Unfortunately, history provides little cause for optimism.

22 января 2013, 18:27

Contra Raghu Rajan: Economic Stimulus Has Not Failed, It Has Not Been Tried (on a Large Enough Scale)

Perhaps the most fundamental truth of monetary economics that the government can always boost (or reduce) the flow of spending, and in a sticky-price world thus drive the flow of production and employment wherever it wants. As Ben Bernanke said, as a last resort to increase production and employment the government can simply throw money out of helicopters--less picturesquely, cut taxes and print cash to fill the resulting deficit, or to get a little more umph buy extra stuff and thus put some extra unemployed people to work in the process of getting the money out into the economy. Expansionary fiscal and expansionary monetary policy together trigger a rise in the circular flow of nominal spending, and unless price expectations are unanchored and prices flexible enough that 100% of that rise shows up as higher inflation, the greater circular flow puts more people to work making more stuff. Economists fight over what happens when you do one of the two--when you just do a monetary expansion buying government bonds for cash (because people might not spend their extra cash but hoard it as a savings vehicle), or when you just do a fiscal expansion buying stuff or cutting taxes and paying for it not by printing money but by selling bonds (because purchases of government bonds that crowd-out purchases of private bonds simply shift demand away from private investment). Economists fight over what share of the increase in the nominal circular flow will show up as higher prices as opposed to higher output--over what the natural rate of unemployment is, and how it was affected by the crisis. But back in 2007 I would have said that every macroeconomist who has done any homework at all believes that coordinated monetary and fiscal expansion together increase at least the flow of nominal GDP. Now comes the very smart Raghu Rajan to say, apparently, not so: Why Stimulus Has Failed: Two fundamental beliefs have driven economic policy around the world in recent years… the world suffers from a shortage of aggregate demand… [and] monetary and fiscal stimulus will close the gap. Is it possible that the diagnosis is right, but that the remedy is wrong?… High levels of involuntary unemployment throughout the advanced economies suggest that demand lags behind potential supply…. What if the problem is the assumption that all demand is created equal?… When borrowing becomes easier… the increase [in demand] comes from poorer and younger families whose needs and dreams far outpace their incomes…. Moreover, the goods that are easiest to buy are those that are easy to post as collateral – houses and cars, rather than perishables…. [D]ebt-fueled demand emanates from particular households in particular regions for particular goods…. [A]s lending dries up, borrowing households can no longer spend, and demand for certain goods changes disproportionately, especially in areas that boomed earlier…. It is [then] easy to see why a general stimulus… may be ineffective…. The general stimulus goes to everyone, not just the former borrowers… the older, wealthier household buys jewelry from Tiffany, rather than a car from General Motors…. Indeed, because the pattern of demand that is expressible has shifted with the change in access to borrowing, the pace at which the economy can grow without inflation may also fall…. Unlike a normal cyclical recession, in which demand falls across the board and recovery requires merely rehiring laid-off workers to resume their old jobs, economic recovery following a lending bust typically requires workers to move across industries and to new locations. There is thus a subtle but important difference between my debt-driven demand view and the neo-Keynesian explanation that deleveraging (saving by chastened borrowers) or debt overhang (the inability of debt-laden borrowers to spend) is responsible for slow post-crisis growth. Both views accept that the central source of weak aggregate demand is the disappearance of demand from former borrowers. But they differ on solutions. The neo-Keynesian economist wants to boost demand generally…. [I think] only sustainable solution is to allow the supply side to adjust to more normal and sustainable sources of demand – to ease the way for construction workers and autoworkers to retrain for faster-growing industries. The worst thing that governments can do is to stand in the way by propping up unviable firms or by sustaining demand in unviable industries through easy credit. Supply-side adjustments take time…. But continued misdiagnosis will have lasting effects… From my perspective, what Raghu is doing is saying that if we were to undertake more aggressive coordinated monetary and fiscal expansion we would hit the inflation wall sooner than I think likely--that the difficulties of retraining and readjustment mean that the division of the increase in the flow of spending would soon shift to 100% inflation, 0% extra production. Perhaps it will. But we have not gotten there yet. We are still in a world where the flow of nominal GDP in the North Atlantic is some six percentage points below its pre-2008 trend. Fix that trend of nominal GDP first via coordinated monetary and fiscal expansion, and then we will examine the division at the margin of PY into P and Y, and talk…

13 января 2013, 18:23

"Oderint dum Metuant?" Weblogging: Responsibility of Journalists to Place Quotes in Context Edition

According to Gaius Suetonius Tranquillus, a favorite saying of first-century Roman emperor Gaius Julius Caesar Augustus Germanicus "Caligula"… Justin Wolfers tweets: Sympathetic to @davidmwessel's view that Krugman & @delong can be too quick to call him a fool for citing their ideological opponents.— Justin Wolfers (@justinwolfers) January 5, 2013 I protest. Go to Google, enter "site:delong.typepad.com 'david wessel'" into the search box, press "I'm feeling lucky", and what comes up is: Brad DeLong : David Wessel's You Are There: Ben Bernanke Five Years Ago Today: David Wessel alone is worth the price of the Wall Street Journal… In fact, going further down the list of results: Results (2) and (3) are simply (implicitly approving) quotes from Wessel's columns; Result (4) is an attempt by me to defend myself against Wessel's charge that I do not understand that Herbert Hoover is an unreliable narrator; Result (5)… (5) does implicitly take David to task for quoting without discussion Liaquat Ahmed's claim that in 2009 "no Keynesians or even monetarists ever realized that the numbers to make their policies work are so gigantic" (which I believe is not true) and assigning Robert Barro to the set of ""advocate[s] of the earlier fiscal and monetary stimulus" (which I think needs more nuance); Result (6)… (6) quotes Duncan Black saying "Shorter David Wessel: 'The hippies are like so totally wrong about everything, but here's my plan in the WSJ to implement the hippie agenda.' That's a bit of an unfair characterization, but I wish pundits could just say 'here's what should be done' without pretending to float above everyone else who is wrong"; Result (7) is another (implicitly approving) quote; Result (8) is an entirely approving explication of something Wessel had written in very compressed form; Result (9) is made up of my notes for a Barclays-sponsored conversation with Wessel; and Result (10) is another (implicitly approving) quote. I understand that it is probably good for the world to have David Wessel looking over his shoulder and wondering "am I giving appropriate context to these people I am quoting?" I do think that whenever he finds himself writing something like: How to Get the U.S. Recovery Back on Track: One set of physicians, the Keynesians, are sure their medicine worked, but the dosage was insufficient. They prescribe more stimulus, perhaps extending a payroll tax holiday that is to expire at year-end, as President Barack Obama proposes. Another set, influential among Republicans, is just as sure the medicine didn't work. They prescribe the opposite: Starve the fever—cut spending significantly and soon. A third set, influenced by professors Kenneth Rogoff and Carmen Reinhart's history of financial crises, says deleveraging is like detox: Painful, takes time and can't be rushed… he should at least pause and think whether that is not too close to "opinions of shape of earth differ" journalism. But I do have the most enormous respect for David. And I really do think he is much more likely to read "David Wessel alone is worth the price of the Wall Street Journal" than he is to read me calling him a fool for quoting my ideological opponents. Unless he gives me reason. As long as he quotes my ideological opponents in enough context for his uninformed readers to understand what fools they are. Top ten hits on Google for "site:delong.typepad.com 'david wessel'": (1) Brad DeLong : David Wessel's You Are There: Ben Bernanke Five Years Ago Today: David Wessel alone is worth the price of the Wall Street Journal: Oops: What Bernanke Said Five Years Ago Today: Five years ago, July 18, 2007, Federal Reserve Chairman Ben Bernanke testified before the House Financial Services Committee as he is today. The housing bubble was bursting, cracks in the global financial system were just beginning to appear, but Bernanke didn’t sound terribly worried or prescient… (2) Brad DeLong : David Wessel Writes About CEO Pay (no comment on Wessel article, just long quotes that violate "fair use" principles due to my laziness at excerpting) (3) David Wessel: Fed Paying Interest on Reserves: A Primer (no comment on Wessel article, just long quotes that violate "fair use" principles due to my laziness at excerpting) (4) Brad DeLong : DeLong Smackdown Watch (David Wessel/Marx-Schumpeter-Hoover-Mellon Axis Edition): On page 46 of David Wessel (2009), In Fed We Trust: Ben Bernanke's War on the Great Panic (New York: Crown: 9780307459688), I read: This notion of the government's [macroeconomic stabilization] role was not universal in the 1930s. In his memoirs, Herbert Hoover described tension within his own administration, putting words into Treasury Secretary Andrew Mellon's mouth that are routinely reported as something Mellon actually said: In one camp were the "leave it alone liquidationts" headed by Secretary Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." He held that even panic was not altogether a bad thing. He said: "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people"... Who is it "routinely reports" something like this? Moi! This is actually a difficult question, which I hope to write up properly someday: Hoover in his memoirs is definitely an unreliable narrator. He sets himself up as opposing Mellon within the administration, when actually when push came to shove he (reluctantly) supported Mellon. As Wessel notes on page 47, he gave himself in the early 1930s excessive vision as to the size of the problem. And he claimed that he had nothing to do with the MacArthur-Eisenhower-Patton military police action against the Bonus Marchers on the Mall. Hoover's unreliability centers around two issues: (a) Hoover insists--no matter what the evidence--that everything was going fine and the depression was licked until the election of THAT COMMUNIST ROOSEVELT; (b) any mistakes made during his administration were the fault of unworthy subordinates--MacArthur, Mellon--who misled Hoover…. Hoover is an unreliable narrator. But odds are that his claims that, internally, Mellon was a liquidationist are sound. (5) Brad DeLong : David Wessel Says: It Is 1931 Again: David Wessel: The Perils of Ignoring History: There is an optimistic scenario for the U.S. economy: Europe gets its act together. The pace of world growth quickens, igniting demand for U.S. exports. American politicians agree to a credible compromise that gives the economy a fiscal boost now and restrains deficits later. The housing market turns up. Relieved businesses hire. Relieved consumers spend. But there are at least two unpleasant scenarios: One is that Europe becomes the epicenter of a financial earthquake on the scale of the crash of 1929 or Lehman Brothers 2008. The other is that Europe muddles through, but the U.S. stagnates for another five years, mired in slow growth, high unemployment and ugly politics…. No one would intentionally choose the second or third, yet policy makers look more likely to stumble into one of those holes than find a path to the happier ending. Why? Liaquat Ahamed has been pondering that question…. "Is it because people don't know what to do (or there's disagreement about what to do)," he wonders, "or is it the politics, particularly the reluctance to ask some people to pay for the mistakes of others?"… Mr. Ahamed sees another, largely unappreciated lesson from the '20s. The few moves in the right direction then were too small for the scale of the economic disaster…. In our time, says Mr. Ahamed, "I don't think Keynesians or even monetarists ever realized that the numbers to make their policies work are so gigantic. Everyone had sticker shock."… As best as I can see, Liaquat Ahamed's claim that "no Keynesians or even monetarists ever realized that the numbers to make their policies work are so gigantic. Everyone had sticker shock…" is simply wrong. I know that I was talking in April 2008 about how we wanted to be ready to nationalize Fannie and Freddie and use them to refinance every single mortgage in the country if it should become necessary. Christina Romer and Jared Bernstein could do the math on the demand gap in late 2008 and early 2009, and did so. The monetarists are harder. Some--Lars Svensson, Michael Woodford, and Scott Sumner come immediately to mind--seem to have known well how much less effective open-market operations are once you hit the zero nominal bound, how large the scale of operations have to become, and how it is (we think) much better not to announce volumes of bond purchases but instead to try to engage stabilizing speculation on your side by announcing that you are targeting the forecast. Others did not seem to get it, and still do not seem to get it. And I gotta protest David Wessel's claim that Robert Barro was an "advocate of the earlier fiscal and monetary stimulus". I remember Robert Barro in January 2009: Robert J. Barro: Government Spending Is No Free Lunch: A much more plausible starting point is a multiplier of zero…. I can understand various attempts to prop up the financial system. These efforts, akin to avoiding bank runs in prior periods, recognize that the social consequences of credit-market decisions extend well beyond the individuals and businesses making the decisions. But, in terms of fiscal-stimulus proposals, it would be unfortunate if the best Team Obama can offer is an unvarnished version of Keynes's 1936 "General Theory of Employment, Interest and Money."… [W]e should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis… (6) Brad DeLong : David Wessel Joins the Hippies Who Have Been Calling for More Aggressive Economic Stimulus for... 2 3/4 Years Now: David Wessel: How to Get the U.S. Recovery Back on Track: The U.S. economy resembles a patient who survived a heart attack, and tells his doctor: "I took your advice, swallowed the pills and I still don't feel well." We were warned the post-recession recovery, now marking its second anniversary, would be painfully slow. It's worse…. One set of physicians, the Keynesians, are sure their medicine worked, but the dosage was insufficient. They prescribe more stimulus.... Another set, influential among Republicans, is just as sure the medicine didn't work. They prescribe the opposite: Starve the fever—cut spending significantly and soon. A third set, influenced by professors Kenneth Rogoff and Carmen Reinhart's history of financial crises, says deleveraging is like detox: Painful, takes time and can't be rushed…. If the president and Congress want to slip some growth-inducing remedies into the pending deficit deal, what should they examine with an unjaundiced eye?… Duncan Black wishes for some recognition that some of us have been on this case--although howling at the dead, uncaring stars, for all the good we have done--for 31 months now: Eschaton: Shorter David Wessel: "The hippies are like so totally wrong about everything, but here's my plan in the WSJ to implement the hippie agenda." That's a bit of an unfair characterization, but I wish pundits could just say "here's what should be done" without pretending to float above everyone else who is wrong. (7) David Wessel: Geithner Made Simple (no comment on Wessel article, just a quote that for once does not violate "fair use" principles) (8) Brad DeLong : "Show Me the Collateral" Blogging: One of the Three Major Market Failures Underlying Our Current Difficulties…: …is the extraordinary demand on the part of investors for "safe" assets--and the concomitant failure of financial markets to mobilize the risk-bearing capacity of the global economy to bear risk/provide safety. David Wessel on demand and supply for "safe" assets: World's Supply of 'Safe' Assets Runs Short: The world economy faces a shortage of super-safe financial assets, bonds for which there is almost no risk of default and for which the market is so big that investors can buy and sell them readily. When anything is in short supply, its price rises. The bond market is no exception. It has been pushing up the price of U.S. Treasurys, still seen as safer than nearly all alternatives…. This is the point that Cardiff Garcia illustrates with the unwanted mutant offspring of the most important chart in the world… In a way, it is a product of trust--or, rather, of the absence of same. Markets in which people do not trust each other are subject to adverse selection problems: they collapse, or function badly. It is the purpose of institutions, especially financial institutions, to substitute for the trust that does not exist. And when the financial underpinnings needed to substitute for trust are not present, the macroeconomy can go badly awry as well. Consider something as simple as market exchange. My wife's and my earning power right now is not quite enough to exclude us from the 99%…. Yet somehow we can't just go to the store, pick things out, and tell the cashier: "We'll owe it to ya. We're good for it." (Indeed, the only person in this Fallen Sublunary Sphere willing right now to lend us unsecured money for a more-than-30-day term is Tom Goldstein, and he is probably getting antsy about his $40 right now…). However, it is not just cash money that an economy needs to possess in sufficient quantities to substitute for the absence of trust in spenders. Spenders give you money in order to substitute for trust. But consider businesses seeking to borrow and invest…. What they need to give you, instead of the cash that you are giving them, is savings vehicles--bonds--of sufficient expected value. Economies can have a shortage of savings vehicles as well as of cash, and can suffer Wicksellian as well as monetarist recessions. Last, there are a whole set of transactions in which what the counterparty wants is not your cash or your bond to substitute for nonexistent trust, but rather some safe and liquid collateral: a particular, peculiar bond that they are confident will maintain its (nominal, at least) value at maturity and that they are confident everybody else will be confident will maintain its (nominal, at least) value at maturity so that it will be useful as a means of raising cash in a hurry now. That's what AAA assets are good for. And when an economy is short of AAA assets, it can fall into a recession--but not a monetarist or a Wicksellian recession, rather an Minskyite recession… (9) Brad DeLong: Barclays Debate with Robert Barro, Moderated by David Wessel: My Draft Opening Statement: WESSEL: 'If President Obama invited you into the Oval Office, told you that he recognized that the economic policies he has pursued to date haven't had the desired outcome, and gave you five minutes to tell him what in your opinion he should do now (setting aside whether Congress would go along)?" DELONG: "I would say: Mr. President: When you took office, you quickly became convinced for some reason that we were going to see a rapid, V-shaped recovery. Hence you took your task to be (a) stopping the panic, (b) recapitalizing the banking system, and (c) filling in a good chunk of the demand gap with the Recovery Act. Then, you thought, the task of macroeconomic stabilization would be finished. And so you turned your attention to (i) health care reform, (ii) financial regulation, (iii) long-run budget balance, and other issues. "This was wrong. We do not have a V but rather an L. Our expectations that the market was strong enough to return the economy to its long-run full-employment configuration within a couple of years--perhaps with assistance from the Federal Reserve--was wrong. The short run of slack aggregate demand, high unemployment, and low capacity utilization looks as though it will last not two to three years after the downturn begin but five to ten years--or more." (10) (10) Brad DeLong : David Wessel Says: The "Somebody Must Suffer" Caucus Should Chill (no comment on Wessel article, just a quote that for once does not violate "fair use" principles)

03 января 2013, 05:34

Happy New Year Germany: Greece Needs A New Bailout

When it comes to the main sovereign story of 2011 and 2012, namely the endless bailout of Greece, now in its third iteration, the conventional wisdom is that courtesy of the near elimination of the country's private sovereign debt and the fact that its official foreign debt held by benevolent taxpayer funded globalist powers (IMF, ECB, EFSF) has been mostly converted into a zero-coupon, perpetual piece of paper, the country is fine. After all it has no debt interest expense to finance, and the only shortfall it has to plug is that created by its primary budget deficit (which as we showed earlier is "improving" on a year over year basis not because the economy is improving, but because the Greek government is simply refusing to pay its bills). So there is nothing more to do but sit back and wait while the economy slowly recovers, the unprecedented internal imbalance with Germany is gradually aligned, are the unemployment rate drops, (while hoping that the population does not die out first) right? Wrong. What everyone is forgetting is that the heart of the Greek problem is not the Greek sovereign debt, and certainly not the rate of interest, but the fact that Greece's financial system, i.e. its banks, are utterly insolvent: and with the private banking system no longer creating money by handing out loans to a just as insolvent broader population (and the ECB certainly no longer injecting direct liquidity into the Greek economy) there is little that supports any form of economic growth (the Austrians out there will immediately recognize the problem: if money is not being created, the economy is not "growing", period). After all there is a reason why of the countless billions in Greek bailouts, of which the majority was used primarily to fund interest and maturity payments to other banks such as Deutsche Bank, the biggest portion that remained on the ground in Greece never made it to the actual people, but served to prop up the Greek banks, some €50 billion. What was this money used for? Simply said, to plug capitalization shortfalls arising from one of two things: i) a gigantic outflow of deposits from the local banking system, as Greek lost all confidence their money was safe in the local banks, which meant Greek banks had to promptly find the money to pay their depositors lest a countrywide bank run developed which would then result in a Europe-wide financial panic, and ii) the soaring notional amount of non-performing "bad" loans, which remained as placeholders on the bank balance sheets, market at whatever mythical number the local accounts let the banks mark them at, but which generated zero inbound cash flows. Which, incidentally, would mean that deposits were undercollaterialized, and the realization that NPL levels are stratospheric and going higher, would lead to i) and the appropriate dire consequences. Which brings us to the topic of today's post. Moments ago Kathimerini reported that in 2012, the amount of non-performing loans has exploded by a laughable amount, rising some 50% from December 2011, when it was "only" 16% and stood at a gargantuan 24% last month (indicatively, in the US this would mean that some $1.7 trillion in loans was nonperforming). And therein lies the rub, because as Kathiermini prudently notes, the "bad loans come to a considerable 55 billion euros. This means that the sum of NPLs already exceeds the total funds set aside for the recapitalization of the local credit system, which amounts to €50 billion." Oops. This means that not only every single euro allotted for the bailout of the Greek banking sector has been used up to plug a gaping NPL shortfall, but already Greece is €5 billion short. Sure enough, the last thing Kathimerini would want to do is give people the impression that, once again, their deposits are effectively impaired with the soothing proclamation that "there has been a notable improvement in economic conditions that is reflected in the significant slowdown in the rate of creation of new bad loans." So 16% to 24% is a slow down? Maybe the fact that Greek unemployment is rising at "just" 1% of total each month is also a "notable improvement." No, we doubt Kathimerini would be so audacious to proclaim the above chart of Greek unemployment as "notably improving". But that's a problem, because the level of NPL, the level of unemployment, and the general state of the economy (whose Q3 GDP imploded by 7.2%, the worst quarterly drop following a 6.7% GDP decline in Q1, and 6.3% in Q2) are closely linked, and one can't improve without the other. And usually the catalyst the drives an overall bounce in the economy is some endo- or exogenous source of money demand and creation (usually for nations in depression it involves war). Absent that, there can be no improvement. Which, following the preceding optimism, is precisely what the Kathimerini author admits: "However, unless the growth of new NPLs is contained, banks may need yet another recapitalization process at the end of 2013, the same sources say." In other words, dear Germans, the country that you, and everyone else, though is now saved and needs no more bailouts, at least according to the current Finance Minister, not the previous one who now it appears was avoiding paying his taxes like the plague (ah yes, the Greek tax collections "issue" - a fun topic for another day), is already down €5 billion and in need of bailout Number 4. Expect this news to be sprung on a witless Germany in the coming months, but most likely not before the Merkel reelection. After all the last thing Germany needs to understand is that the hundreds of billions "invested" to preserve the Eurozone have achieved precisely nothing, and the gaping black hole is bigger and blacker than ever before. But at least the hedge funds who bought worthless Greek bonds at 15 cents on the euro and made three times their money in three month, are happy. Everyone else, i.e. the Greek people, good luck. For the fourth time.

03 января 2013, 05:34

Happy New Year Germany: Greece Needs A New Bailout

When it comes to the main sovereign story of 2011 and 2012, namely the endless bailout of Greece, now in its third iteration, the conventional wisdom is that courtesy of the near elimination of the country's private sovereign debt and the fact that its official foreign debt held by benevolent taxpayer funded globalist powers (IMF, ECB, EFSF) has been mostly converted into a zero-coupon, perpetual piece of paper, the country is fine. After all it has no debt interest expense to finance, and the only shortfall it has to plug is that created by its primary budget deficit (which as we showed earlier is "improving" on a year over year basis not because the economy is improving, but because the Greek government has simply refused to pay its bills). So there is nothing more to do but sit back and wait while the economy slowly recovers, the unprecedented internal imbalance with Germany is gradually aligned, are the unemployment rate drops, (while hoping that the population does not die out first) right? Wrong. What everyone is forgetting is that the heart of the Greek problem is not the Greek sovereign debt, and certainly not the rate of interest, but the fact that Greece's financial system, i.e. its banks, are utterly insolvent: and with the private banking system no longer creating money by handing out loans to a just as insolvent broader population (and the ECB certainly no longer injecting direct liquidity into the Greek economy) there is little that supports any form of economic growth (the Austrians out there will immediately recognize the problem: if money is not being created, the economy is not "growing", period). After all there is a reason why of the countless billions in Greek bailouts, of which the majority was used primarily to fund interest and maturity payments to other banks such as Deutsche Bank, the biggest portion that remained on the ground in Greece never made it to the actual people, but served to prop up the Greek banks, some €50 billion. What was this money used for? Simply said, to plug capitalization shortfalls arising from one of two things: i) a gigantic outflow of deposits from the local banking system, as Greek lost all confidence their money was safe in the local banks, which meant Greek banks had to promptly find the money to pay their depositors lest a countrywide bank run developed which would then result in a Europe-wide financial panic, and ii) the soaring notional amount of non-performing "bad" loans, which remained as placeholders on the bank balance sheets, market at whatever mythical number the local accounts let the banks mark them at, but which generated zero inbound cash flows. Which, incidentally, would mean that deposits were undercollaterialized, and the realization that NPL levels are stratospheric and going higher, would lead to i) and the appropriate dire consequences. Which brings us to the topic of today's post. Moments ago, Greek Kathimerini reported that in 2012, the amount of non-performing loans has exploded by a laughable amount, rising some 50% from December 2011, when it was "only" 16% and stood at 24% last month. And therein lies the rub, because as Kathiermini prudently notes, the "bad loans come to a considerable 55 billion euros. This means that the sum of NPLs already exceeds the total funds set aside for the recapitalization of the local credit system, which amounts to €50 billion." Oops. This means that not only every single euro allotted for the bailout of the Greek banking sector has been used up to plug a gaping NPL shortfall, but already Greece is €5 billion short. Sure enough, the last thing Kathimerini would want to do is give people the impression that, once again, their deposits are effectively impaired with the soothing proclamation that "there has been a notable improvement in economic conditions that is reflected in the significant slowdown in the rate of creation of new bad loans." So 16% to 24% is a slow down? Maybe the fact that Greek unemployment is rising at "just" 1% of total each month is also a "notable improvement." No, we doubt Kathimerini would be so audacious to proclaim the above chart of Greek unemployment as "notably improving". But that's a problem, because the level of NPL, the level of unemployment, and the general state of the economy (whose Q3 GDP imploded by 7.2%, the worst quarterly drop following a 6.7% GDP decline in Q1, and 6.3% in Q2) are closely linked, and one can't improve without the other. And usually the catalyst the drives an overall bounce in the economy is some endo- or exogenous source of money demand and creation (usually for nations in depression it involves war). Absent that, there can be no improvement. Which, following the preceding optimism, is precisely what the Kathimerini author admits: "However, unless the growth of new NPLs is contained, banks may need yet another recapitalization process at the end of 2013, the same sources say." In other words, dear Germans, the country that you, and everyone else, though is now saved and needs no more bailouts, at least according to the current Finance Minister, not the previous one who now it appears was avoiding paying his taxes like the plague (ah yes, the Greek tax collections "issue" - a fun topic for another day), is already down €5 billion and in need of bailout Number 4. Expect this news to be sprung on a witless Germany in the coming months, but most likely not before the Merkel reelection. After all the last thing Germany needs to understand is that the hundreds of billions "invested" to preserve the Eurozone have achieved precisely nothing, and the gaping black hole is bigger and blacker than ever before. But at least the hedge funds who bought worthless Greek bonds at 15 cents on the euro and made three times their money in three month, are happy. Everyone else, i.e. the Greek people, good luck. For the fourth time.