Mercury Rising 鳯女

Politics, life, and other things that matter

Magical money

Posted by Charles II on January 13, 2011

Barry Ritholtz has a bunch of good links today. The one I like best is Robert Lenzner at Forbes:

The giant US banks have been bailed out again from huge potential writeoffs by loosey-goosey accounting accepted by the accounting profession and the regulators.

They are allowed to accrue interest on non-performing mortgages ” until the actual foreclosure takes place, which on average takes about 16 months.

Presumably that income gets written off when foreclosure actually takes place, so you can figure there’s something like $50-$100B of funny money on the banks’ balance sheets based on collecting mortgages that aren’t being paid. That’s separate from the $1T in assets that will have to be written down on foreclosed mortgages.

And, by the way, this perfectly illustrates why keeping people in their homes, paying mortgages is so important. You can either pay $50-$100B per year to keep people in their homes or a $1T lump sum to kick them out. Assuming that people will either move or get permanent jobs within 10-20 years, it’s pretty obvious which the cheapest solution is.

Meanwhile, Caroline Salas of Bloomberg reports that the president of the Federal Reserve Bank of Dallas calls keeping the US out of complete collapse “fiscal pathology,” which gives you an idea of the mental state of the inflation hawks among the Fed governors. I would concede that tax breaks for billionaires was pathological legislation, not to mention our military budget, but most of the rest of the spending Congress has done for the last two years has been for unemployment insurance, Medicaid, and tax relief for the middle class and poor. Pathology.

Paul Krugman asks if Europe can be saved. As is often the case, I think Krugman gets the diagnosis wrong: he thinks that the basic problem is that the periphery (i.e., the poorer countries) can’t devalue their currency and therefore work cheaper; the alternative is cutting everyone’s wages/payments, which is hard to negotiate. (Unless, of course, countries decided that that’s what the real problem was and legislated it into being. Foreign bond holders would be p–sed, of course, but maybe better a smaller coupon than actual default?) In my opinion, though, the real problems are that (a) Germany (and to a degree France and even Britain) is rich enough to subsidize its industries so that the poorer nations can’t really compete, and (b) there’s widespread corruption and weak governance in the so-called periphery. Sure, you can force wages down… or Germany could accept that it needs to subsidize the weaker nations while they bring their operations up to speed. It may end up doing so through bailouts, but that’s a far inferior solution. But I really don’t understand why Krugman turns to currency devaluation when the US– which has just as a diverse and large economy as Europe– has enjoyed monetary union for hundreds of years. Would the Great Depression have been less awful if Kansas and Georgia been able to devalue their currencies? Somehow I doubt it.

And Simon Johnson, writing on The Baseline Scenario has your optimism for the day:

Let’s be honest. With the appointment of Bill Daley, the big banks have won completely this round of boom-bust-bailout. The risk inherent to our financial system is now higher than it was in the early/mid-2000s. We are set up for another illusory financial expansion and another debilitating crisis.

Bill Daley will get it done.

Ritholtz has more, but I lack the time to read everything I should.

6 Responses to “Magical money”

  1. David W. said

    Somewhere along the line you missed Krugman’s point about how people in the U.S. can move to find new jobs, and how the government can transfer money in the form of unemployment funding to aid economically stricken areas. That’s not the case in Europe where there still are higher barriers to both migration and economic aid.

    Regarding German subsidies, while there are some of their solar power and budding aerospace industries, and their old coal mines and steel plants, most of the German economy isn’t heavily subsidized. (Although I am assuming that the old west Germany still aids the old east Germany.)

    • Charles II said

      David, I’ve read Krugman’s arguments so many times I could probably recite them in my sleep. In this piece, the core of his argument doesn’t rely on migration. The issue of the costs of the social welfare state is addressed briefly, and not done quantitatively, where it might not look like such a big deal. This student disposes of the myth of the costs of the European welfare state in a very few words. Our society wastes much more money on health insurance, the military, and the drug war than the Europeans could dream of wasting on childcare and decent unemployment benefits.

      There are probably lower governmental barriers to migration within Europe than there are within the US. If you get offered a job somewhere else, you just go. Probably the most serious real barrier is language, but many Europeans speak multiple languages. (You can read a statistical analysis here. They do not make an effective case that the institutional barriers are higher than, e.g., getting a law/medical license in a new state, getting new driver’s licenses, getting screwed on vested benefits, etc.).

      People don’t move in Europe because the society understands that shunting people hither and yon makes little sense, and very definitely has negative effects on childhood education and sense of participation in society. Aside from the costs, moving breaks up family networks of support. The social structure reinforces demographic stability. So, the costs of adjustment in the US are forced onto workers, while in Europe society bears the cost of adjustment

      As for subsidies, phew. German subsidies were 7.5% of GDP as of 2001.

      But that just begins to touch the surface of the corporate state in Europe. Funding of industrial development relies much more heavily on banks vs equities than in the US. That does encourage entrepreneurship in the US– print some shares of stock, find a sucker with some money he doesn’t need, and the next high tech business is off to the races. But it also means that the costs of business failures are borne off of institutional balance sheets. In Europe, bank failure is much more damaging than in the US. So the state is bearing the cost of propping up the banks. This is a hidden subsidy.

      And so on.

      As for the issue of transferring payments to mitigate the costs of the crisis, Krugman uses rhetorical smoke and mirrors. He says, “retirees who moved to Nevada for the sunshine don’t have to worry that the state’s reduced tax take will endanger their Social Security checks or their Medicare coverage.” Nevada might not cut those, true. But it’s very likely that the Congress will–or will try to. And how about Medicaid, which the most helpless of the elderly are dependent on? That’s a state program, even if it uses some federal dollars, and some states are slashing those benefits. And state pensions? New Jersey is already determined to show that it can break contracts at will.

      Same for the problem of bank bailouts; they are, too, Nevada’s problem, because Nevada pays into the system that guarantees the banks.

      When it comes to unemployment benefits, yeah, American workers won’t get them cut state by state, at least in the near term. They also start off with benefits that are pathetic compared to European benefits. With regard to national borders and unemployment benefits, they are a problem, because Europe is more provincial than we are. But if the ECB, i.e., the Germans prop up the Irish banks, they are doing exactly what Krugman says they aren’t able to do because of national borders. It’s only helping human beings that is impossible in this mad era.

  2. David W. said

    There are probably lower governmental barriers to migration within Europe than there are within the US.

    I can’t even think of *one* governmental barrier to migration within the U.S. Yes, there are professional license requirements that the states have, but there’s nothing preventing any U.S. citizen from simply moving from one U.S. state to another.

    • Charles II said

      I’ll take that as an admission that you weren’t aware that the European welfare state was within a few points of GDP of the US, and that German direct subsidies are (at least as of 2001) so large. Also that I have pretty well disposed of the mobility argument and weakened the transfer of payments argument.

      There are governmental barriers to re-locating within the US, ranging from:
      – Professional license requirements (doctors, nurses, lawyers, etc.)
      – Driver’s license requirements
      – Business license requirements (small businessmen)
      – Tax reporting issues (probably similar to Europe)

      There are others, but I’m not making the argument that barriers for moving within the US are high, simply that barriers within Europe are also not particularly high. Which are lower? Given that they’re similar, I’ll happily say, “I don’t know.”

      • David W. said

        Charles, you’re welcome to assume anything you want, but please allow me to make my own actual admissions! About GDP now, it’s actually GDPs and they do vary by state in Europe considerably. I think Krugman’s point about how a single currency puts considerable stress on those countries like Latvia and Greece is an important one given how it puts tremendous downward pressure on wages that leads to social unrest.

        As to barriers to migration, perhaps a better term would be friction when it comes to the effort required to re-license, acquire necessary permits, etc. I used to be a semi-truck driver and had to get a new CDL once, but it was no more burdensome than getting it in my former state of residence. I’ve certainly never worried about getting a new driver’s license after a move either.

        As to taxes, shrug. I currently work in a different state than I live in and while it’s a bother I do manage to deal with it without much hassle.

      • Charles II said

        David, when you make assertions, are confronted with contrary evidence and refuse to even acknowledge the evidence, it becomes pretty clear to the person you’re talking to that you’re out of your depth.

        I understand Krugman’s point. I just think he’s wrong. I think it’s strikingly similar to the argument that we should do away with the minimum wage, because that would allow unemployed people to work cheaper. He’s saying, in effect, let countries work cheaper so they can be employed. It’s the kind of argument that works in theory, and not so well in practice. The first country to lower its standard of living will get some jobs. But when everyone tries to do it, it’s a race to the bottom.

        The core economic problem is one of maldistribution. Highly unequal distribution of wealth encourages corruption and bad decision making in general. The most conspicuous example of this in Europe is subsidies that industry benefits from (ranging from direct subsidies to infrastructure to the educational system). Because the Europeans aren’t quite as hypocritical as we are, they also subsidize people in the form of some social benefits. But the system is wasteful. It wastes human talent and it misdirects resources. It’s not as wasteful as the American system, but devaluation will not solve the basic problem.

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