Friday, November 11, 2011

Not That It Matters

All Aboard The Failboat

"R.A." is a writer for The Economist, legendary pro-business and fairly conservative publication based in the UK. R.A. published an article, "Finito?" on Wednesday, which describes the trap the EU and the Eurozone finds itself in pretty succinctly (paragraphing added for clarity):
I have been examining and re-examining the situation, trying to find the potential happy ending. It isn't there. The euro zone is in a death spiral.

Markets are abandoning the periphery, including Italy, which is the world's eighth largest economy and third largest bond market. This is triggering margin calls and leading banks to pull credit from the European market. This, in turn, is damaging the European economy, which is already being squeezed by the austerity programmes adopted in every large euro-zone economy. A weakening economy will damage revenues, undermining efforts at fiscal consolidation, further driving away investors and potentially triggering more austerity. The cycle will continue until something breaks.

Eventually, one economy or another will face a true bank run and severe capital flight and will be forced to adopt capital controls. At that point, it will effectively be out of the euro area. What happens next isn't clear, but it's unlikely to be pretty...

I hate to get this pessimistic about the situation. It feels panicky and overwrought. I can't believe that Europe would allow so damaging an outcome as a financial collapse and break-up to occur. And I still don't understand why, if this is all as obvious as it seems to me, equities aren't down 20% now, rather than 2% or 3%.

But the window within which something could be done to prevent it is closing, and fast. I hope to be proven astoundingly wrong in my assessment, but I'm struggling to see alternative outcomes.
It seems obvious to so many professional economists and analysts that Austerity is not the medicine for the Made-In-USA financial crisis -- that reductions in the spending by governments will only continue to reduce growth, maintain high unemployment, and lead to who knows what potential political upheavals.

A commenter, "LexHumana", to R.A.'s post summed up the "centrist" and "reasonable" opinions of a large number of people:
Not to say that the Kubler-Ross model is applicable in all such cases, but I am continuingly amazed at how this Eurozone crisis (and the comparable U.S. financial crisis) nicely follows the five stages of grief. Europe began with denial ("there is no problem, everything is normal"), then moved to anger ("damn those profligate Greeks"), then to bargaining (which still has not been successfully concluded with Greece), and are now entering the stage of depression ("oh my god, we are doomed").

Eventually, Europe will reach "acceptance", and realize that there is no bloodless way of solving this problem -- the Greeks will accept that the days of wine and roses are officially over and go back to the way Greece was in the 1950s, the bondholders will accept the fact that you can't get blood from a turnip and write-off much of the debt as uncollectable, and the rest of the European citizenry will (via their central banks) accept that in order to avoid a financial collapse by the bondholders some degree of bailout will be required and they will be the ones to foot the bill.

An extraordinary amount of pain needs to be shared among the parties, and this is going to push Europe into a recession, but it is survivable.... as long as they get to "acceptance" sooner rather than later.
The problem is, this argument depends upon the premise that the European citizenry will... accept that in order to to avoid a financial collapse... some degree of bailout will be required and they will be the ones to foot the bill.

Why? the "European citizenry" are already asking why they should have to pay to bail out their own versions of TBTF banks. Unlike the Americans, they found their voices on this subject pretty quickly -- footage of Greeks facing off against riot police in Athens, or in Italy, Spain, and the U.K., proves that. Rather than agree to support a rotten system, they're refusing. They want changes made that benefit the majority.

(The way Europeans are saying "no" reminds me, in spirit, of a scene in James Cameron's Aliens: Ripley (Sigourney Weaver) says the Marines should simply nuke the nest of alien creatures; it's the only way to solve the problem and ensure the safety of everyone. The corporate Yuppie slimeball, Burke (Paul Reiser) says, "Whoa, whoa, whoa; You can't do that. This area has a significant dollar value, and represents a significant investment to the company" [Too Big To Fail, in other words?]. "Well, they can bill me," Ripley snorts.)

Why, Europeans ask, should they assist the same people who created this problem? Why should they do with less, see their children go hungry, to subsidize the lifestyles of the wealthy?

It could be argued that Europeans have a longer history of "knowing their place", and dealing with the whims and excesses of aristocrats and nouveau parvenus, and so can 'take it'. It could also be argued that Europe has a tradition of not taking it. And under the grinding, enforced poverty of The New Austerity (so obvious an arrangement to benefit bad banks, bad actors and bad governments), Europe's Communist political parties could become resurgent. Who knows; they might get it right the second time around.

But we don't have to go there. The current dilemma is all avoidable. But we're still going to be forced to go there anyway, to save the banks and the rich and the hurt fee-fees of The Masters Of The Universe.




MEHR: The Krug Man explains the entire crisis in one sentence.