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Official opposition to the eurozone austerity fetish becomes a bad joke

It’s been a sweet and sour couple of days for Angela Merkel and the Frankfurt Group (and The Enlightenment, which mostly has sour news these daysdecades).

First, yesterday’s good news (well, ‘good’ for Merkel & Friends): The results came in on Thursday’s historic vote in Ireland to ratify Berlin’s ‘fiscal compact‘ treaty and, as expected, the Irish voted 60-40 in favor of ratification. Yes, Ireland just outlawed Keynesian economics in exchange for the possibility of another bailout:

NYTimes
Ireland Approves Treaty to Set European Union Budget Controls
By DOUGLAS DALBY
Published: June 1, 2012

DUBLIN – Ireland voted overwhelmingly to ratify a treaty intended to bind European Union member states to tighter budgetary controls in an effort to address the sovereign debt crisis that is threatening the euro.

But turnout was low, 50.3 percent; 60.3 percent of those who voted approved the new measures.


The result was also welcomed by the president of the European Commission, José Manuel Barroso, who described the treaty as “a key component of the E.U.’s response to the current economic crisis.”

The Sinn Fein leader, Gerry Adams, who opposed the pact, said he was not disappointed by the result but accused the government of scaremongering, particularly in regard to access to future financing if the measure were rejected. Mr. Adams said he had met many people who had voted for the treaty “through gritted teeth.”

Much of the debate in the run-up to the vote had concentrated on whether Ireland would require another bailout on top of the current one, which is due to run out at the end of 2013, or whether it would regain access to the bond markets by then.

Although the government coalition of Fine Gael and the Labour Party remains adamant that Ireland will not require another bailout, financial experts say it is increasingly likely that it will, given the overall sluggishness of the domestic and European economies.

Yes, Ireland just outlawed Keynesian economics because of all those valuable lessons its learned about the dangers of Keynsianism. For instance, unless there’s a law banning ‘excessive’ deficit spending (even in a recession) and unless the a nation guts its public sector permanently, a country just might spend a decade embracing neo-liberal ‘reforms’, deregulate its economy and allow its unregulated banks to grow so large that the failure of a handful of financial institution could end up imploding the whole economy. Yes, at least at least one of the P.I.I.G.S. has clearly demonstrated that it learned its lessons about the profound dangers of ‘Big Government’.

But all of yesterday’s news wasn’t so positive for Merkel. The two biggest P.I.I.G.S., Italy and Spain, appear to be wavering in their commitments to an austere awesome future. And since Spain and Italy have been two of the more ‘well behaved‘ little piggies up to this point, this is a most distressing development. It’s not all bad, though…Spain’s prime minister Mario Rajoy – a paragon of honesty and virtue – is still calling for the formation of a eurozone ‘fiscal authority’ that would oversee national spending and would limit membership of that authority to only those nations that meet strict budget conditions. AND he wants to see this authority put in place SOON. Now that doesn’t sound so bad.

Rajoy also wants a banking union, as does the European Commission, but Rajoy wants it all put in place as soon as possible. And why the rush? Well, one reason might be that the ‘expansionary austerity’ Rajoy has been imposing on Spain appears to be mostly good at expanding bank bailouts. On top of all that, at the same time Rajoy was calling for a new banking union and strong fiscal authority to impose ‘strict’ budget conditions on ailing eurozone members, Rajoy was also asking for an extra year to meet Spain’s own budget requirements (of a deficit under 3%). An extra year?! ?! Patience Angela, patience:

Spain calls for new euro fiscal authority

By Julien Toyer

MADRID | Sat Jun 2, 2012 5:34pm EDT

(Reuters) – Spain, the latest combat zone in Europe’s long-running debt wars, urged the euro zone to set up a new fiscal authority to manage the bloc’s finances and send a clear signal to markets that the single currency project is irreversible.

Prime Minister Mariano Rajoy said the authority would also go a long way to alleviating Spain’s woes which, along with the prospect of a Greek euro exit, have threatened to derail the single currency project.

It is not the first time a European leader has proposed creating such an authority but the problems and the size of Spain – a country deemed too big to fail – have prompted EU policymakers to hurriedly consider measures such as creating a fiscal and banking union ahead of a EU summit on June 28-29.

Germany, the paymaster of the euro zone, and others insist such a move can only happen as part of a drive to much closer fiscal union and relinquishing of national sovereignty.

Overspending in the regions and troubles with a banking sector badly hit by a property crash four years ago have sent Spain’s borrowing costs to record highs and pushed the country closer to seeking an international bailout.

The risk premium investors demand to hold Spanish 10-year debt rather than German bonds rose to its highest since the launch of the euro – 548 basis points – on Friday.

The Spanish government, which has hiked taxes, slashed spending, cut social benefits and bailed out troubled banks, argues that there is little else it can do and the European Union should now act to ease the country’s liquidity concerns.

In private, senior Spanish officials have said this could be done by using European money to recapitalize directly ailing banks or through a direct intervention of the European Central Bank on the bond market.

They have also said the euro zone should quickly move towards a fiscal union to complete its 13-year monetary union but Rajoy went a step further by making a formal offer.

“The European Union needs to reinforce its architecture,” Rajoy said at an event in Sitges, in the north-eastern province of Catalonia. “This entails moving towards more integration, transferring more sovereignty, especially in the fiscal field.

“And this means a compromise to create a new European fiscal authority which would guide the fiscal policy in the euro zone, harmonies the fiscal policy of member states and enable a centralized control of (public) finances,” he added.

NO TABOOS

He also said the authority would be in charge of managing European debts and should be constituted by countries of the euro zone meeting strict conditions.

A spokesman for Olli Rehn, the EU commissioner in charge of economic and monetary affairs, said draft legislation designed to step up financial discipline in the euro zone, would create such a fiscal authority by granting new powers to the EU’s executive.

“This would grant enhanced powers to the European Commission on fiscal surveillance, including allowing the sanctioning of countries,” said Amadeu Altafaj.

“Even before a budget is drafted and reaches the national parliament, the Commission could ask for a revision of the budgetary plans if it considers this would not allow a country to meet its fiscal commitments, and thereby could endanger financial stability.”

A day after Berlin supported giving Spain an extra year to cut its deficit down to the 3 percent of GDP threshold, Chancellor Angela Merkel said it should be possible for countries that violate fiscal rules to be sued in the European Court of Justice.

Poor, poor Angela. At least her allies in the Frankfurt Group, like EU Commissioner Olli Rehn, is ahead of things. His new planned centralized authority gets to ‘revise’ national budgetary plans even before the budgets are drafted. Talk about being proactive! And Rajoy seems like his heart’s in the right place…he still wants to turn Spain into a privatized fiefdom. He’s just a little slow.

And then there’s Italy:

May 31, 2012, 8:47 a.m. ET
UPDATE: Italy’s Monti Urges Germany To Reconsider Austerity Push

(Updates throughout with more quotes, details. Adds in Rehn comments)

— Monti warns that sooner or later there will be austerity backlash

— Monti says there should be no change to ECB mandate

— EU Rehn says lowering borrowing costs is matter of survival for euro bloc

By Matina Stevis

Of DOW JONES NEWSWIRES

BRUSSELS (Dow Jones)–Italian premier Mario Monti on Thursday urged Germany to reconsider its push for austerity, warning that Berlin’s approach is generating a popular backlash that could undercut the region’s chances of overcoming the crisis.

Speaking at a conference in Brussels, Monti said that there will “sooner or later be a backlash against the fiscal discipline” that European governments are imposing.

“Europe should accelerate its efforts in order to limit contagion not simply because a huge financial…crisis will be a frightful event but even more because this would dismantle the support for sustainable fiscal discipline,” he said. “Most notably, Germany should reflect quickly but deeply and act on these matters,” Monti said.

Monti has been one of the main proponents of a growth agenda to help the region’s economy get back on its feet. Last week, he also joined new French President Francois Hollande in calling for some form of common debt issuance for the euro zone. However Berlin has insisted that fiscal consolidation must be the centerpiece of the anti-crisis response.

The Italian premier also weighed in on the debate over the European Central Bank’s inflation-only mandate, following calls from some member states to expand it to include growth-promoting monetary policy.

Monti said he was against such ideas.

“Maybe I’m too German but I believe that the ECB has been really extraordinary in acquiring in a few years a very excellent reputation,” he said. He added that the mandate has not prevented the ECB devising “new modalities of intervention.”

He added that urging the ECB to implement bolder expansionist methods to support growth would be a disincentive to euro-zone governments to press on with implementing reforms and pursuing pro-growth investments.

However he signalled he would like to see the central bank become slightly more activist.

He said the ECB should look at the functioning of monetary-policy transmission mechanisms as they have become “increasingly…disconnected from the real policymaking in the different countries.”

That pesky Monti…how dare he question the austerity-only approach. Italy, why can’t you be more like Spain. Granted, Monti also appear to oppose any actual pro-growth actions by the ECB, like raising it’s inflation target above the already astronomical 2%, so it’s not really clear what part of the austerity agenda Monti opposes. But still…bad EU-installed technocrat!

And what’s this? Et tu Silvio?

Bloomberg
ECB Must Print Euros Or Italy May Say ‘Ciao:’ Berlusconi
By Lorenzo Totaro and Jeffrey Donovan – Jun 1, 2012 8:12 AM CT

Former Premier Silvio Berlusconi said Italy should say “ciao, euro” if the European Central Bank doesn’t start printing money to tackle the debt crisis and Germany should quit the single currency if it won’t back a bolder role for ECB.
“The economic crisis can’t be solved” in Italy, Berlusconi said in comments posted on his party’s website today. He called on Prime Minister Mario Monti to “change his political line” and lobby European leaders to back a money- printing campaign by the Frankfurt-based ECB. If the central bank doesn’t become a “lender of last resort,” Italy should say “ciao, euro,” the former premier said.
The media tycoon-turned-politician became the latest European leaders to step up pressure on German Chancellor Angela Merkel and the ECB to permit a more aggressive response to the region’s debt crisis. Monti yesterday called on Merkel to drop her opposition to allowing the euro region’s rescue mechanism to lend directly to banks.

‘Our Currency’
Berlusconi, 75, who resigned as premier in November as Italian borrowing costs surged amid a worsening debt crisis, said Italy should remain in the European Union even if it exits the euro. He added that another of his proposals was that the “Bank of Italy prints euros or our own currency.”
“It’s a crazy idea of mine,” he said, without specifying if he meant reviving the lira.
On May 25 Berlusconi, who heads the party with the most seats in the Rome-based parliament and whose support is crucial for Monti’s government, called for an overhaul of the country’s constitution to strengthen the powers of the president. He also said he would seek the office if his party requested him to.

Oh wait, never mind!

Berlusconi says idea Italy should dump euro was “joke”

By Steve Scherer

ROME | Sat Jun 2, 2012 10:35am EDT

(Reuters) – Former Premier Silvio Berlusconi said on Saturday he was only joking when he suggested that Italy should dump the euro unless the European Central Bank agreed to inject more cash into the economy.

“We have to go to Europe and say forcefully that the ECB should start printing money. If it doesn’t, we should have the strength to say ‘ciao, ciao’ and leave the euro,” Berlusconi said on Friday in an entry on his Facebook page.

Less than 24 hours later, the former leader reversed his position, which clashed with that of Prime Minister Mario Monti and threatened to undermine the government almost a year ahead of the next national vote.

“That a joke … could be mistaken for a proposal is certainly a serious mistake for whoever claims to provide political news,” Berlusconi wrote on Saturday on his Facebook page.

He said the press had taken seriously what he had said “with a smile and irony”.

Ahhhh….HA HA HA. Ok, that was a good one Silvio. I bet you had Angela really scared there for a second.

What a joke.

Discussion

30 comments for “Official opposition to the eurozone austerity fetish becomes a bad joke”

  1. I find it remarkable that in the U.S., the following argument is not being made anywhere — not even by the astute Paul Krugman:

    • Ratio of debt to GDP during Great Depression: 40% of GDP.
    • Ratio of debt to GDP BEFORE the 2008 crash: 70% of GDP.
    • Ratio of debt to GDP DURING 2008 crash: 102% of GDP.
    • Ratio of debt to GDP in 1950s, paying-off WW2 Keynesian stimulus debt: 120% of GDP.

    Source for statistics: see link at bottom of comment.

    As you can see, debt was at its all-time-high in the 1950s.

    But there were NO spending cuts.

    IN FACT, taxes were RAISED to 91% on the top tax bracket.

    And spending INCREASED.

    The fact is: The United States SPENT its way out of WW2 debt.

    How? The U.S. went on a massive print-run and spending spree that built the U.S. Interstate Freeway System (100% socialist in nature), public schools, municipal water systems, hydroelectric dam projects, rural electrification (much of the rural U.S. still did not have electricity), hospitals (which used to be non-profit), ports, bridges, airports, fire departments, and the G.I. Bill, which paid for veterans to go to college and become Middle Class taxpayers.

    This spending-spree created a boom that created a new class of taxpayers that barely existed before the Great Depression: the Middle Class.

    By 1974, the debt-to-GDP ratio fell to 32 PERCENT. (Source: See link at bottom of comment).

    Because of deficit-spending on infrastructure, the U.S. “outgrew” and “absorbed” its own biggest-ever debt.

    Accusations of “spending money we don’t have” need to explain how the U.S. spent its way out of WW2 debt.

    Somebody please beg Paul Krugman to mention this.

    http://www.usgovernmentspending.com/federal_debt_chart.html

    Posted by R. Wilson | June 8, 2012, 5:51 pm
  2. I think we have a new record here: Spain’s financial crisis has gone from a bad joke to a $125 billion pathetic farce in 4:40. It’s good to see all the austerity “cred” that the eurozone has been building up with “the markets” finally pay off:

    Spain’s bailout bought just 4 hours and 40 minutes of calm
    Posted by Brad Plumer at 10:42 AM ET, 06/11/2012

    In the past, every time European leaders have huddled together and announced a plan to douse the latest fire in Europe, the financial markets have usually been placated for a brief while – say, a few weeks or months. Then another crisis flares up, and everyone starts panicking again.

    Now, though, it seems we only get a few hours of post-bailout euphoria before panic sets in again. On Saturday, euro zone leaders declared they were ready to loan the Spanish government up to $125 billion to prop up the country’s troubled banks. The hope was that this would instill confidence in Spain’s banking sector, stop Spainards from yanking their deposits out, and make everybody more confident in Spain’s overall future.

    That didn’t quite happen. As you can see from the chart below , the calm lasted about 4 hours and 40 minutes. As markets opened on Monday, Spain’s borrowing costs (in orange) dropped for a brief while before skyrocketing well above the worrisome 6 percent level. Italy’s borrowing costs (in gray) have also jolted upward. Investors are skittish about lending both countries money, because they’re worried about getting repaid:[see graphic]

    So why didn’t the Spanish bailout reassure anyone? The line from most analysts is that the deal didn’t, as Wolfgang Munchau puts it, “render Spain’s position in the eurozone sustainable.” Under the agreement, Europe will lend the Spanish government up to $125 billion. A Spanish government agency will use that money to buy partial stakes in Spanish banks, giving the banks more capital – similar to how the United States recapitalized its banks with TARP. (Spain’s version, by the way, is called “FROB,” the Fund for Orderly Recapitalization of Banks.)

    Trouble is, the Spanish government itself already has a high debt load – about 81 percent of GDP. That figure is expected to soar above 90 percent of GDP if Spain takes the full $125 billion loan. Given that Spain is now slogging through a recession that’s being exacerbated by large austerity measures, those debts are looking fairly unsustainable.

    Posted by Pterrafractyl | June 11, 2012, 8:11 am
  3. Spain right-wing president just “declared war” on the EU’s central bankers. Italy’s installed technocrat Preznit agrees, it’s time for battle. Them’s fightin’ words:

    Bloomberg
    Rajoy Battles ECB for Loans; Monti Appeals for EU Action
    By Ben Sills and Angeline Benoit – Jun 13, 2012 7:59 AM CT

    Spain and Italy appealed to European policy makers to step up their response to the financial crisis after a 100 billion-euro ($125 billion) lifeline for Spanish banks failed to calm markets.

    Spanish Prime Minister Mariano Rajoy said today he’ll “battle” central bankers refusing to buy debt from peripheral nations. Rajoy published a letter to European Union leaders calling for the European Central Bank to buy debt from the countries struggling to shore up their finances.

    “That is the battle we have to wage in Europe,” Rajoy told the Spanish parliament in Madrid today. “I am waging it.” His Italian counterpart, Mario Monti, told lawmakers in Rome Europe faces a “crucial” moment.

    The leaders of southern Europe’s biggest economies went on the offensive as bond yields jumped following the announcement of a bailout for Spanish banks that was intended to quell concern over the countries’ finances. The decline wiped out the effects of 1 trillion euros in ECB loans for euro-region banks that had held yields in check since December.

    Yes, the ECB must now expect the much feared “please take us over” roll-over-and-play-dead attack. Its effectiveness lies in its ability to confound:

    Europe’s ‘Worst Crisis’ Requires Fiscal Union: Spain
    Published: Wednesday, 13 Jun 2012 | 8:12 AM ET

    By: Katy Barnato
    Assistant Editor, CNBC

    Europe needs a fiscal and banking union if it is to survive “the worst crisis” since the European Union’s creation, Spanish Prime Minister Mariano Rajoy said in an open letter to leaders on Wednesday.

    In the letter, which was addressed to Jose Manuel Barroso, president of the European Commission and Herman Van Rompuy, president of the European Council, Rajoy said fiscal and banking union, as well as monetary union, will be necessary to counter financial volatility and restore confidence in the euro zone.

    “We must create a European fiscal authority that can direct fiscal policies in the euro zone, that can harmonize member states’ fiscal policies, and that can control central finances, as well as manage European debt,” Rajoy wrote.

    Rajoy added that the European Council’s next meeting on June 28-29 provides an “urgent” opportunity to outline these plans, and that leaders must sent a “clear and determined” message about the irrevocability of the euro and the common market.

    Mario’s possum-style kung fu is never to be underestimated.

    Posted by Pterrafractyl | June 13, 2012, 8:27 am
  4. One of the dangers of S&M play is the risk that the sadist forgets the “safe word”. So, umm, Mario, “the markets” might be trying to tell you something:

    Spain to unveil new austerity steps soon: sources

    Wed Jul 4, 2012 8:41am EDT

    (Reuters) – Spain’s government is putting finishing touches to an up to 30 billion euro ($38 billion) package of spending cuts and tax hikes to help it meet this year’s deficit targets, sources with knowledge of the matter said.

    Running over several years, the program could involve raising Spain’s main consumer tax, a new energy levy, reforms to the pension system, pay cuts for civil servants, new motorway tolls and another drastic reduction in ministry and regional spending, the sources said.

    Some measures may be announced next week, when the EU is likely to grant the government an extra year to cut its deficit below 3 percent of output, and others could be presented over the summer and included in a multi-year budget plan due to be prepared in August.

    Spain’s highly-indebted regions and banks badly hit by a property crash four years ago have put the country firmly in the sights of investors who fear that, given its size, it could derail the entire single currency project if its economy collapses.

    The new austerity drive aims to put Spain back on track to meet its deficit goals for 2012, though some questioned whether it would simply add to the country’s problems by entrenching its recession even more deeply.

    Data for the first five months of the year revealed spending and revenue slippage that makes the current objective unattainable without new cuts.

    The idea is to implement cuts worth three percent of gross domestic product. Everything is under review,” said one of the sources with knowledge of the government’s thinking.

    THE WRONG MEDICINE?

    Spain is negotiating an up to 100-billion-euro European rescue for its banks and pressing for an EU intervention on its bond market to cut soaring borrowing costs.

    But it is unclear if the new austerity plan will be well received by markets wary that too much belt-tightening would choke off any hope of economic recovery.

    “More austerity will only make things worse in the short-term,” said Nicholas Spiro, from Spiro Sovereign Strategy.

    “The market does not need to be convinced that (Prime Minister Mariano) Rajoy’s government is serious about fiscal retrenchment. While there are serious doubts about the government’s ability to enforce discipline in the regions, the real worry is the lack of growth,” he said.

    Both the European Commission and the International Monetary Fund have said Spain should not rush to cut its public deficit after the economy fell into its second recession in three years in the first quarter.

    The Commission has repeatedly called on Spain to shift the tax burden towards indirect consumer and energy taxes and to better control its devolved regions.

    In its latest economic assessment, the IMF also urged Spain to raise its VAT rate – one of the lowest in Europe – and implement pay cuts for civil servants.

    Rajoy said on Monday he would speed up his structural reform and spending cuts drive, especially in the regions, while Foreign Minister Jose Manuel Garcia-Margallo said the government would soon implement “severe” budget cuts.

    Posted by Pterrafractyl | July 4, 2012, 11:14 pm
  5. Greece newly formed government is about to make a push to get its austerity goals eased up a bit in order to give the country a little breathing room. The new government is also apparently taking a page from the “Mario Rajoy School of Austerity Negotiating”: The bold new measure being offered to the “troika” – in exchange for reducing the mandated tax hikes, layoffs, and wage cuts – is to speed up and expand the privatization of state assets:

    Greece presses case to change bailout terms

    ATHENS | Thu Jul 5, 2012 4:08am EDT

    (Reuters) – Greece’s new government took up the task on Thursday of persuading skeptical lenders visiting Athens to ease the punishing terms of the bailout saving the debt-laden country from bankruptcy.

    Just hours after being sworn in, Finance Minister Yannis Stournaras was due to meet senior officials from Greece’s trio of international lenders – the European Union, European Central Bank and International Monetary Fund.

    The so-called ‘troika’ is in Athens to review Greece’s faltering progress on fiscal adjustment and reforms under a 130 billion euro ($162.63 billion) bailout package.

    Trying to take advantage of a shift in Europe towards more growth-oriented economic policy measures, Greece’s coalition government wants to soften the conditions attached to the bailout – withering tax hikes, job losses and wage cuts that have deepened a recession now into its fifth year.

    It faces huge public pressure following a re-run election on June 17 that saw the radical leftist Syriza bloc surge into second place on a promise to tear up the bailout terms, raising the prospect of a catastrophic Greek exit from Europe’s single currency.

    But the three-party coalition government led by Conservative Antonis Samaras faces stiff resistance from European partners, notably paymaster Germany, who say that while they are open to adjusting the program, they will not change the targets.

    In Stockholm, Swedish Finance Minister Anders Borg said on Swedish Radio on Thursday there was a major risk would fail to fulfill its obligations to its lenders and end up in “some sort of default”.

    Greece will run out of cash within weeks if it fails to secure the next 31.5 billion-euro installment of bailout funds.

    The government says it wants tax cuts, a freeze on public sector layoffs, extra help for the poor and unemployed and an additional two years to cut its deficit.

    If implemented in full, that program would undo many austerity measures the country agreed to earlier this year to clinch its second bailout since 2010.

    It is offering in exchange to expand and speed up the privatization process.

    Stournaras, a liberal economist who helped negotiate Greece’s entry into the euro in 2001, took on the job after Samaras’s first choice, banker Vassilis Rapanos, withdrew citing ill health.

    Posted by Pterrafractyl | July 5, 2012, 12:56 am
  6. Posted by Pterrafractyl | July 7, 2012, 9:50 am
  7. @Rob. That site has a good cross-section of comments from people trying to make sense of the economic system and suggest repairs within the framework of that system. They seem to have some background and not be stuck in ideological mudholes ( except for the guy who thinks gold backed money will cure the common cold ).

    Capitalism can be so many different things and be practiced with such a bewildering variety of outcomes that people lose themselves in second tier discussions of theoretical matters and avoid confronting first principles. What is the purpose of an economic system? While I don’t advocate any kind of propertyless society or ‘flat’ outcome, it’s just obvious that presently too much wealth has accumulated in too few hands for anything but a few slightly varying disaster scenarios to unfold, unless the direct solution of forcible redistribution of property is applied soon. By this, I don’t mean a few tax increases, conceded after much wrangling. or some meager expansion of the welfare state. I mean forcible appropriation of any corporate and individual net worth over some reasonable limits and the permanent institutionalizing of those limits into the social and economic fabric. This can’t be done by negotiating with the people whose power we are removing.

    The resulting gradient of production and wealth won’t be ‘equal’. but it could be livable, i.e., not requiring that a large portion of the populace live in misery and enslavement or simply die. That minimally good result is identical to what is promised by all the flavors of capitalism and socialist variants, so why not bypass theory and go directly there, especially since their own versions of the promised land recede further by the minute?

    The reason we don’t is twofold, involving both shared economic delusions and physical fear. The current kings on the hill have deluded the populace into the idea that property is so sacred that many of us must be continually sacrificed on its altar. We have accepted the notion that the current distribution of wealth and the mechanisms for gaining it are identical to justice, morality and order. They have confused us over the difference between having some or enough and having it all. If that meme ever fails, as it seems to be failing now, we will see simple raw violence revealed as the force that props up their cartel world. Fascism or Nature ( as they see nature ), red in tooth and claw, has always been there behind the corporate glass and we cooperate in not seeing it, holding to our comfortable illusions of civilization.

    So, is wishing to see less misery and death rather than more – and saying so – the new definition of terrorism? Yes.

    The broader things occupy me more than the passing details, so it’s hard to get too intensely interested in modern money theory or in what convoluted mechanism the ECB will use to write off unpayable debt while not seeming to do so.

    Posted by Dwight | July 7, 2012, 10:04 am
  8. @Dwight: I think the main reason we unfortunately have to delve into all this monetary theory stuff is because ill-advised monetary (and fiscal) policy is one of the primary fascist/corporatist tools of choice. It’s an unavoidable task to attempt to counter or at least highlight the pervasive foolishness peddled as serious economic policy. Persuasive bad ideas: the most potent weapon ever imagined.

    And regarding a wealth cap, I’ve often wondered why our income top tax rates kick in around $350,000 (at least in the US) when there are billions in annual income for the top earners. The top tax bracket hasn’t always been that low, especially during times of war. It’s like capping the tax rate at the %0.01 marker on the income scale.

    Something that would be interesting to see from a game-theory perspective would be an income tax rate that is literally pegged to whoever makes the most in a given year. So if the top earner makes $1 billion that year, some progressive scale is applied to everyone with $1 billion as the top “tax bracket”, but if there’s $2 billion made by the top earner the next year, that same tax bracket gradient is applied, but scaled from a $0 – $2 billion scale. And make it REALLY progressive, so you really don’t want to be #1 or anywhere near the top tier. And then add the stipulation that top earners are free to use charitable donations as write offs to reduce their incomes. Suddenly, there’s still a race to get rich but not TOO rich relative to everyone else. Don’t like your rising income tax rates? Talk to Uncle Money Bags that made AND KEPT the most. Granted, there would probably be unintended consequences like widespread public support of the richest person in the nation using income-shelters and tax havens (because it would bring EVERYONE’s taxes down), but it’s a fun thought experiment. Hopefully it’s also not one of those destructive bad ideas. A sort of unintended weapon of mass destruction. We have enough those already.

    Posted by Pterrafractyl | July 9, 2012, 8:17 am
  9. @ PTERRAFRACTYL .. your game-theory inspired proposal about empirically targeting top earners ( ‘earn’ being a questionable term ) opens up the moral and psychological issues involved in the pursuit of obscene levels of wealth.

    I involuntarily channel Ayn Rand. She would say that such a thing was a witchhunt by evil, jealous and mediocre people against the creative and innovative minority who are responsible for maintaining civilization in the face of demonic socialism.

    I am grateful that Rand existed and wrote because she presents her twisted Nordic economic cosmology without nuance or apology. It’s all very raw and primal. You can clearly imagine the Entrepreneur, sword in hand, atop a rocky crag with a fierce storm blowing all around, raging at the elements, at God himself, and at the vile sexually-inferior Lilliputans whose only goal in life is to stop him from making a buck.

    Such a tax structure as you suggest implies strongly that wealth is not proof of virtue. That’s downright UnAmerican.

    Posted by Dwight | July 9, 2012, 10:53 am
  10. @Rob: Well I was being somewhat facetious with my little tax proposal, but not entirely . It was a silly exercise in the kind of “thinking outside the box” re-imagining of our economic structure that we need. But you’re right that to really “think outside the box” we need better concepts of what constitutes “wealth”. Or better than “wealth”, what constitutes a “meaningful goal” for people doing what they do every day. Or “success”. People may not inherently all want to all be obscenely wealthy, but I do suspect nearly everyone wants to be “successful” by some definition. We just need to figure out a better way to channel that drive. Similarly, what about “power”? For some reason power is always “my power over something else”, but rarely “our power to get shit down we couldn’t do alone”. As mortal beings, the need for power/security probably is instilled in us pretty heavily…that need just seems to drive us sort of nuts. We’re a weird social species at this point in time. Public safety, pension/security, a viable future for our children, or world without suffering and, yes, even some personal possessions, should all fall into the category of “meaningful things I work for everyday because I really value that stuff”. As you point out, it’s simply all in the “personal possessions” category now and that’s really messed up.

    But even if we can conceive of a better definition of wealth, goals, success or whatever it is that defines our envisioned shining city on the hill, one of the values of my fun little tax proposal is that, at the end of the day, the Randoid system of life has a HUGE advantage over almost all other forms of self-government: It’s a surprisingly robust “system”. Whatever happens in a free-for-all free-market is what is supposed to happen. Let the chips fall where they may. If we spiral into an austerity-induced decades-long depression, well, that’s just what should have happened. And if you and up with a billion dollars or nothing, well, that’s just a reflection of who you were as a person. And if the whole economy collapses in an speculative clusterfuck, well, the “system” can still rebuild…just with a lot more endemic poverty. At its core, the rules of the Randian word are remarkably simple to create and self-perpetuate: as long as you have a basic legal system to enforce property-rights and a force available to physically enforce those law, it’ll keep going forever. Or at least until we pollute ourselves into oblivion (barring the ‘Avatar’ scenario, where we get to pollute other worlds). The “peg our tax rates to the richest guy around” proposal was more just an attempt at thinking about self-correcting mechanism that prevent an over-concentration of private wealth within the context of a system that still promotes the accumulation of these widgets we call money.

    So I think we have to rethink what it is that defines “wealth”, “success”, “power”, etc. But we also need to think “systemically” about how people can live their day to day lives “successfully” in as much of a self-automated way as possible. The world is too complicated for the Randian solution, but that doesn’t mean we can’t come up with some snazzy self-correcting/self-perpetuating systems too. And we don’t really have a choice. Building social cohesion is a tricky and getting everyone to voluntarily get done what needs to get done is a really tricky task. The best solutions tend to be elegantly, simple, but not necessarily obvious. It doesn’t have to be a strictly “economic” system…but we need something that we can pass down to our kids and they can pass down to their kids and it sort of works. And it has to work within the context of where we are now: a dying, overpopulated, over-polluted, psychologically disturbed world. That may seem like an exceptionally daunting task because it is. But it’s hard to imagine all the different ways in which a “democracy” and “self-governing” society can run itself. Humanity has barely scratched the surface of those possibilities. The more alternative systems we have, the easier it’s going to be in decriminalizing our societies and replacing our existing clusterfuck of a planetary system with something better. But those new systems have got to work.

    And yes, there are a huge number of flaws with my proposal, hence the WMD warning at the end. Hehe.

    Posted by Pterrafractyl | July 10, 2012, 9:45 am
  11. @Rob:
    No, I was being serious, but I probably should have clarified it better. There’s the pure “Randian” system with almost no government or anything. “Somalia”, as it’s often referred to. We haven’t really seen how “robust” that would be in too many other instances because few societies are yet crazy enough to completely “go there”. But there’s the Randian-lite system, sort of like what the US had for much of the 19th and early 20th century. As a “system”, that Randian-lite “free-market but not actually because we’ll bail out or protect the powerful” system is, to a large extent, accountability-free. There are no standards like providing adequate food, shelter, medicine, education, a better future, etc. That’s ALL up to the individual, family or maybe local community. And assuming people accept it as a just system or, more frequently, as the ONLY just system, it can keep chugging along regardless of how much it trashes the place. And yes, it’s shockingly fragile too, in that it, well, ends up trashing the place. But again, as long as people accept its outcomes as what should have happened or the ONLY viable option, the “system” can keep rebooting itself, rising from the ashes once again. There are no meaningful standards for performance.

    And yes, the masses do get pissed and make attempts at reform, but that’s part of the system too…each “reboot” might include some reforms here and there, but then it’s just back to union-busting time until the reforms have been reversed. That’s part of what this whole boom/bust/austerity cycle is all about right now. The system is rebooting.

    Whether it works or not remains to be seen, but the fact that it has such a simple solution for everything (impoverish almost everyone!) and that solution is being pretty successfully implemented across an entire continent right now (and is coming to a continent near you in the near future) strikes me as a form of systemic robustness. It can work in an “democracy”, a fascist state, a dictatorship, whatever. The form of government is irrelevant as long as it’s a form of government run by and for the powerful. That strikes me as a surprisingly robust “Randian-ish” system given what a train wreck it’s been.

    And yes, once it destroys the resources of the world our current Randian-lite global system will show itself to lack any meaningful long-term robustness. Medium-term robustness perhaps?

    Posted by Pterrafractyl | July 10, 2012, 11:21 am
  12. @Rob: lol. Yep, it’s a bust alright.

    @Dwight: Regarding our sense of what it is to be unamerican, is it just me, or have we become the Highlander society? THERE CAN BE ONLY ONE!

    Posted by Pterrafractyl | July 10, 2012, 12:55 pm
  13. Mario, this isn’t easy to bring up…but you have a problem and need help. This can’t continue:

    The Telegraph
    Spanish PM Mariano Rajoy raises VAT 3pc in shock U-turn
    Spanish Prime Minister Mariano Rajoy has performed an astonishing U-turn and raised VAT by 3pc.

    By Andrew Trotman

    10:12AM BST 11 Jul 2012

    The measure is part of a plan to cut €65bn from the struggling country’s budget over the next two-and-a-half years, and comes as hundreds of miners arrive in Madrid to protest against government cuts to subsidies.

    The increase in Value Added Tax to 21pc from 18pc directly contradicts Mr Rajoy’s previous promise that he would not raise taxes.

    “I said I would cut taxes and I’m raising them,” he said. “But the circumstances have changed and I have to adapt to them.”

    The prime minister’s fourth austerity package in seven months will scrap a tax rebate for home buyers, scale back unemployment benefits, consolidate local governments – helping to cut €3.5bn from local authority budgets – and eliminate the year-end bonus for some public workers.

    Airports, ports and railway assets will also be privatised, in an effort to minimise the impact of a eurozone debt crisis that has plunged Spain into a double-dip recession and pushed unemployment up to 24.4pc.

    Spain is also struggling to meet tough deficit cutting targets set with the EU, despite Europe agreeing to give the country more time.

    This week the EU allowed Spain until 2014 instead of 2013 to reach a public deficit of 3pc (down from 3.5pc), and to cut the country’s deficit for this year to 6.3pc of GDP.

    The Spanish government forecasts a contraction of 1.7pc this year and the recession probably intensified in the second quarter, the Bank of Spain estimated late last month.

    In June the IMF advised Spain that it should raise taxes and cut government workers’ pay to narrow its budget deficit.

    “I know that the measures I’ve announced aren’t agreeable,” Mr Rajoy said in his 70-minute speech to lawmakers. “They aren’t agreeable but they are essential. We are in an extraordinarily serious situation.

    “Our public spending exceeds our income by tens of billions of euros.

    “We are living in a crucial moment that will determine the future of our families, our youth, our social welfare and all our hopes. That is the reality. We have to get out of this mess and we have to do it as soon as possible.”

    Income tax will be cut in a bid to placate a population already angry at continued austerity measures.

    Mario, this is a disease. It’s not your fault but you have an illness. Can’t you see what you’re doing to your family? Your little brother has already starting copying your behavior:

    Portugal Lurches Into Austerity Trap With Creditors: Euro Credit

    By Henrique Almeida – Jul 11, 2012 2:38 AM CT

    Portugal’s international creditors may soon have to ease terms of the country’s bailout to prevent the plan from derailing as the government faces setbacks in attaining its deficit goals.

    Prime Minister Pedro Passos Coelho’s struggle to meet deficit pledges were further hampered last week when about 2 billion euros ($2.5 billion) of planned cuts to pensions and civil servants’ holiday pay were ruled unconstitutional. With Portugal’s 10-year bond yield above 10 percent, returning to the markets next year may be untenable, requiring more international aid despite the premier’s insistence he won’t seek concessions.

    “Lisbon’s strategy is to continue to be the good student among bailed-out countries until it becomes clear that Brussels and Berlin must ease the rules of the game for it to succeed,” said Antonio Barroso, a London-based analyst at Eurasia group.

    Portugal completed the fourth review of its 78 billion-euro bailout plan on June 4 and progress helped bring down the benchmark yield from a euro-era record of 18.3 percent on Jan. 31. Now a deepening recession and the court ruling are putting pressure on government finances, and raising doubts about the chances of the nation reducing its deficit to within the European Union’s limit of 3 percent of gross domestic product next year.

    Bond Gains

    Portuguese bonds gained almost 30 percent this year as the government stuck to terms of the international rescue, the most among euro-area government debt, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. In the same period, German securities returned 3.6 percent and Spanish debt declined 5.3 percent.

    Finance Minister Vitor Gaspar signaled the government’s intentions not to seek concessions yesterday in Brussels even after euro-region finance ministers agreed to give Spain an extra year to meet its deficit goals and eased terms of its 100 billion-euro bank bailout. The Portuguese and Spanish cases are different and the government won’t be deterred by the court ruling, Gaspar said.

    “The Portuguese government is studying measures of equal impact on the budget” to compensate for the court’s ruling, he said.

    After seeking a bailout last year, Portugal has increased taxes, reduced spending to shrink the size of government and sold stakes in companies, including utility EDP-Energias de Portugal SA and power-grid operator REN-Redes Energeticas Nacionais (RENE) SA, to bolster public finances.

    Austerity Plans

    The austerity measures have deepened the recession with Portugal’s economy forecast to contract 3 percent this year and unemployment set to rise to a euro-era record 15.9 percent in 2013, according to government estimates. Economic growth has averaged less than 1 percent a year for the past decade, placing Portugal among Europe’s weakest performers.

    Portugal has pledged to have a budget deficit equal to 4.5 percent of GDP this year and to trim that to the EU limit of 3 percent in 2013. The central government’s shortfall widened to 7.9 percent in the first quarter from 7.5 percent a year earlier, leaving those goals looking optimistic. The budget gap probably will be on the agenda, when Portugal’s creditors carry out the fifth review of the bailout plan starting on Aug. 28.

    Portugal may end the year with a deficit of more than 5.5 percent of GDP, missing the rescue plan’s target by more than 1 percentage point and prompting an easing of bailout terms, said Ricardo Santos, a London-based economist at BNP Paribas SA. (BNP)
    Deficit Slippage

    “Because of the size of the slippage, however, the new targets will have to be combined with further fiscal tightening, putting at risk the domestic political consensus on the program,” Santos said in a June 28 research report.

    The good news for Portugal is the country’s austerity trap may prompt the EU and the International Monetary Fund to heed Seguro’s calls and grant the government more time to carry out its aid plan, even if Passos Coelho won’t ask for an extension.

    “It may be that, given the impact simultaneous austerity is having on economic activity within Europe, the EU might be open to reassess the targets set in the bailout program to Portugal,” said Goncalo Pascoal, chief economist at Banco Comercial Portugues (BCP) in Lisbon.

    Mario, your family needs you to pull it together.

    Posted by Pterrafractyl | July 11, 2012, 8:44 am
  14. @Dwight: You would have enjoyed the Thom Hartmann show today…the open question in the 3rd hour was “should we put a 100% tax on wealth over $1 billion?” It’s good to see these kinds of unspeakable ideas talked about on the airwaves. I’d just love to see a national dialogue that centered around justifying why we NEED to have multibillionaires (or else society would collapse, you see).

    Posted by Pterrafractyl | July 11, 2012, 2:31 pm
  15. I missed that but I assume they were talking about hard individual net worth caps and not yearly income. A billion? I’m thinking 20 or 50 million as a starting point. There’s some number where an individual has everything they could possibly use or want and money over that is just greed or personal political power. The idea that wealth directly equals political power and that such power should be widely distributed should be a simple given for modern man, but somehow it isn’t. If such a redistributive mechanism were in place, after a few years the average person would wonder why it wasn’t there all along.

    It’s a worthwhile concept, even if sophomoric and naive, but it’s hard to imagine it happening, whatever the amounts. For it to work it would have to happen simultaneously across several countries by UN treaty or bilateral agreements. Otherwise the capital and the people attached to it would just change residence to whatever country was most wealth friendly, further collapsing the home economies. Corporations would behave the same. And there is the familiar brick wall where even piecemeal workable solutions that threaten wealth don’t have a chance as long as wealth controls media, academia and legislatures.

    Taking stuff from the rich and handing it to the poor isn’t really the point either. The wealth of a society is mostly what we all do and produce on an ongoing basis. It’s more of removing an society-wide, institutionalized encouragement to moral and spiritual illness. The lure of personal wealth and power without limit manifests as personal glory seeking and causes evil behavior and evil results.

    Posted by Dwight | July 11, 2012, 6:44 pm
  16. @Dwight: I agree that proposing a $1 billion wealth cap (I think it was wealth and not annual income) it’s an unimplementable system. But it’s as great mental exercise in that it forces a number of questions that are rarely, if ever, asked. The $20 to $50 society would be fascinating to see. What’s fun about a $1 billion cap is that it’s such an obscenely high value that those in the “no cap”-camp have to come up with some pretty compelling arguments to justify that wealth accumulation. I’d love to hear what those arguments are because beyond systemic arguments (like what you brought up regarding the risk of flight capital and interwoven economies) I’m hard-pressed to think of strong moral arguments against such a cap. It’s just so much money. What exactly does one have to do to truly “earn” $1 billion over the course of their lifetime? Inquiring minds want to know. And if someone can come up with a strong moral case against a $1 billion cap, ok, let’s see how that stands up against a $10 billion, $100 billion, or $1 trillion cap, and so on. And the higher that theoretical cap, the more untenable the systemic arguments become. And both the moral or systemic arguments in the “no cap”-camp have to eventually scale all the way up to “all the money in the world”.

    Another assumption that gets raised is “what’s the regulatory context of that $1 billion+ fortune”. We don’t have to have our crazy wealth distribution and kleptocratic history. If you cure cancer…maybe not all of it but a whole bunch of it…have a billion if somehow in the market reward system you earn a billion. AND there would need to be strong regulations on how wealth could be translated into political power. Have fun job creating or going on cruises billionaires. Just don’t corrupt stuff. We’ll just tax the shit out of it if it gets too high. Who knows where that is in the future. It sort of depends on how much profit from speculative investing one can make. Money is just of social cred widget (or should be) and you may not want something like a cap acting as a constant “wall”. I’d be fine with really friggin’ high progressive taxes for the people above some cap like $1 billion or something…who knows, just somewhere.

    But after Citizens United, now it’s anything goes. Once again, nightmarish. Any ol’ billionaire (and mere multi-millionaires too) can hire the modern day Mighty Wurlitzer of mass media to swing a this or that election. And then they can all buy off the system with bribes, legal (political contributions, etc) and illegal (everything from whoops to OMGWTF?!). It’s a very different ballgame for the global billionaire class from where it should be. That’s the fun of fascist/far-right policies and a lot of looting for decades. We have a fucked up wealth distribution and corrupt system. But bur current “no caps” way might be just fine in under some other set of rules. Maybe caps would be awesome. Who knows. The critical thing is the “being just focused on getting money and not being focused on the planet careening off a cliff” part. Sigh.

    Our current general system could probably be fixed well enough to chug along pretty easily. We just have to pass better laws and then investigate a bunch of stuff. That’s at least the path of least resistance. Making decent laws only seems as hard as it has in the past because of gobs of corruption. Any new system (one not in fascist clutches like ours) involves moving past all the existing inertia of the systems running the world, and if we could ever figure out how to “reboot” that whole thing, we’d could start finding and implementing solutions without even having to change THAT much of the wealth distribution. The $50 million cap sounds personally fine to me. Or a billion. Or more if it just made the system work better. Just don’t have mobster-style billionaires. Batmen are OK.

    But here we are: money = political power like never before. This guy might become president. And he’s paying the bills. Sigh.

    Posted by Pterrafractyl | July 12, 2012, 12:08 am
  17. Ah, here we go…The American thing to do:


    “It’s really American to avoid paying taxes, legally,” said Senator Lindsey Graham, Republican of South Carolina, on Tuesday. He was defending Mitt Romney, who, as this morning’s editorial in The Times notes, appears to have the most elaborate history of tax avoidance – offshore tax havens, disputed sheltering mechanisms, complex trusts – of any major presidential candidate in history.

    Posted by Pterrafractyl | July 12, 2012, 6:26 am
  18. Mario’s microcosm in Merkel’s macrocosm: full spectrum awfulness:

    Bloomberg
    Spain Threatens Deficit-Troubled Regions, Offers Help
    By Angeline Benoit – Jul 13, 2012 5:35 AM CT

    Spain’s government threatened to take control of budgets in regions that fail to meet austerity targets, while offering financing to help them avoid default as the nation battles to restore investor confidence.

    Regions projected to miss deficit goals this year were given a week to take action or risk intervention, Budget Minister Cristobal Montoro said in Madrid late yesterday after meeting regional finance chiefs. Local officials, including some from the ruling People’s Party, resisted his demands.

    “This proposal has more show than go,” said Michael Derks, chief strategist at FxPro Group Ltd. in London. “Spain isn’t in any position to take on more obligations and this isn’t going to repair the credibility of regional governments that have been shut out of markets for a considerable time.”

    The Cabinet will examine today a mechanism to provide exceptional assistance with bond redemptions to regional governments that are shut out of markets, Montoro said. The aid will be conditional on additional budget cuts.

    Posted by Pterrafractyl | July 13, 2012, 7:14 am
  19. Building a better future, one fire sale at a time:

    Bloomberg
    Madrid Region to Sell 100 Office Buildings Amid Austerity
    By Sharon Smyth – Jul 16, 2012 7:43 AM CT

    Madrid’s regional government plans to sell 100 office buildings in the center of the Spanish capital over three years to cut its deficit and pay for services as the country makes its deepest budget cuts on record.

    “We’re not a real estate company,” said Jose Luis Moreno Casas, the government official who is overseeing the sales. “Our job is to ensure there is adequate health care, education and mobility for our people.”

    Spanish regional governments control more than a third of public spending and play a key role in cutting the national government deficit, part of Spain’s vow to meet the conditions of a 100 billion-euro ($122 billion) rescue package for the nation’s banks. Prime Minister Mariano Rajoy announced a third round of spending cuts this year on July 11 to shear 65 billion euros from the deficit and avoid a second bailout as rising borrowing costs threaten to shut Spain out of credit markets.

    “We have hundreds of buildings we can sell, but we want to start our real estate liquidation operation with the better assets,” Moreno said.

    While Madrid is right to market the properties in digestible packages, the assets still may not be attractive to investors because of Spain’s perceived risks, according to Simon Martin, head of research and investment strategy at Tristan Capital Partners, a real estate investment company in London with 4 billion euros of assets under management.

    “There is no credit available right now for Spain, given the risk perception of the country,” said Martin, who isn’t looking to invest in the assets being sold. “Assets will need to be high quality and very cheap relative to price levels elsewhere before international investors will take part in a sale process.”
    Valuable Properties

    Madrid is considering selling hospital buildings, schools, universities and retirement homes in the later phases of the three-year plan, according to Moreno. The city government owns 36 hospitals, 1,700 schools and 40 retirement homes, he said.

    Posted by Pterrafractyl | July 17, 2012, 6:49 am
  20. Uh oh, interest rates on Spanish bonds just hit record highs again. I wonder why:

    Bloomberg
    Euro Weakens as Germany Says Spain Liable for Bailout Funding
    By Joseph Ciolli and Allison Bennett – Jul 19, 2012 8:58 AM CT

    The euro fell for a second day versus the dollar as German Finance Minister Wolfgang Schaeuble said Spain must take over guarantees for bailout funding, adding to concern European leaders will struggle to stem their sovereign-debt crisis.

    “The market started moving off Schaeuble because he basically said, ‘We’re going to make the Spanish pay,’” Boris Schlossberg, managing director of foreign exchange at BK Asset Management, an investment advisory firm in New York, said in a phone interview. “This is something that the market really doesn’t like because it essentially makes bank debt, sovereign debt on a liability basis.”

    German lawmakers were poised to back their government’s participation in the euro-area bailout of Spanish banks after Schaeuble said Spain would remain liable for as much as 100 billion euros ($123 billion) of aid.

    Posted by Pterrafractyl | July 19, 2012, 6:36 am
  21. Spain’s most prominent banker was dodging taxes for years? Uh oh? Uh, no. It’s all good:

    NY TImes
    Case Against Chairman of Banco Santander Is Dropped
    By RAPHAEL MINDER
    Published: May 22, 2012

    MADRID – Spain’s national court on Tuesday closed a tax fraud investigation focusing on Emilio Botín, the chairman of Banco Santander, and 11 of his relatives.

    The court said the case was abandoned, without any charges being brought, because the Botín family had straightened out its tax problems before June 2011, when the investigation was announced. At the time, people close to the family said the Botíns had already paid about 200 million euros (about $288 million based on the exchange rate at that time) in back taxes.

    Lawyers from Uría Menéndez, a Madrid law firm representing the Botín family, said they welcomed the court decision.

    “The full dismissal of this case by the national high court judge, at the request of the public prosecutor and the state attorney, confirm what we said when the case was opened in June 2011: that the family had voluntarily and completely regularized its tax obligations, which were and are all up to date,” the lawyers said in a statement.

    Still, the announcement in June that Mr. Botín was the subject of a tax evasion investigation was a shock to Spain’s already fragile banking sector. The national tax agency’s inquiry was based on a list of undeclared Swiss bank accounts sent to the Spanish authorities by their French counterparts. The list was handed over to France by a former information technology expert at HSBC.

    The Botín family’s dealings with HSBC dated to 1937, when Mr. Botín’s father, who was also named Emilio, left Spain after the start of the Spanish Civil War and opened an account in Switzerland. He died in 1993, but the Botíns’ lawyers said his son and other heirs found out about the secret bank account only two years ago, when the list of HSBC account holders came to light.

    Mr. Botín took the helm of Banco Santander in 1986, making him one of the country’s longest-serving banking chairmen. His stature in Spain is such that his rare pronouncements on the economy often eclipse those of politicians.

    Well that’s fascinating that the Botin family’s tax-sheltering bank of choice was HSBC, the latest bank to admit to money-laundering for drug cartels. Especially since the both HSBC and Banco Santander were BOTH panned by the US Senate for lax controls on drug and terror money-laundering back in 2004. And then there was the drug plane that crashed on the private landing strip at Emilio Botin’s mansion in 2008. Oh well, I guess we’ll never know now that the investigation into the Botins’ finances was closed. We’ll just have to be content with how well all of Spain’s “structural reforms” – like tax reformare working.

    Posted by Pterrafractyl | July 19, 2012, 8:36 pm
  22. And Spain’s government continues its “dead cat bounce” strategy to economic recovery:

    Bloomberg
    Spanish Home Prices Fall Most on Record as Economy Shrinks
    By Sharon Smyth – Sep 14, 2012 6:09 AM CT

    Spanish home prices fell the most on record in the second quarter as the euro area’s fourth- largest economy shrank and a reduction in mortgage lending crimped demand for property.

    The average price of houses and apartments declined 14.4 percent from a year earlier, the most since the measurement began in 2008, the National Statistics Institute in Madrid said today in an e-mailed statement. Prices fell 3.3 percent from the previous quarter.

    “The data reflects a significant drop and confirms that prices haven’t bottomed out yet,” said Fernando Encinar, co- founder of Idealista.com, Spain’s largest property website. “Only homes that are heavily discounted will sell as access to credit has completely dried up for potential buyers.”

    Spain, which forecasts an economic contraction of 1.7 percent this year, is in its second recession in three years. The country’s 25 percent unemployment rate is Europe’s highest and has diminished lending for residential real estate.

    House prices more than doubled in the decade through 2007, before turning negative in the first quarter of 2008 and have since fallen by about 23 percent, data from the Ministry of Public Works show. Home prices have fallen 32.4 percent since a December 2007 peak, according to separate data from Tasaciones Inmobiliarias, Spain’s largest home appraiser.

    The property bonanza that ended in 2008 has left around 2 million unsold homes in Spain, representing supply that will take a decade to absorb, according to Madrid-based property research firm R.R. de Acuna & Asociados.

    “Stock isn’t being reduced and some of it will never be sold because of its quality and location,” said Fernando Rodriguez de Acuna Martinez, a partner at Acuna & Asociados. “Some of it may have to be demolished in the future to stop the slide in prices.”

    Well, at least the demolition of all those empty houses should create a few jobs once the market finally bottoms some time in the next decade…expansionary austerity forever! It just takes patience.

    Posted by Pterrafractyl | September 14, 2012, 2:56 pm
  23. This “pain is gain in Spain” austerity fetish just keeps getting better and better. Stagflation forever!

    Bloomberg
    Spanish Contraction Continues, Austerity Spurs Inflation
    By Emma Ross-Thomas – Oct 30, 2012 4:09 AM CT

    Spain’s economy contracted for a fifth quarter, undermining efforts to plug the budget deficit that’s pushing the nation closer to a bailout, while austerity measures kept inflation at a 17-month high.

    Gross domestic product declined 0.3 percent in the three months through September, compared with 0.4 percent the prior quarter, the National Statistics Institute said today. That compared with the Bank of Spain’s estimate on Oct. 23 of a 0.4 percent contraction. Consumer prices, rose 3.5 percent from a year earlier, Madrid-based INE said.

    The prolongation of Spain’s five-year slump, which is prompting record loan defaults at the nation’s banks and job cuts at companies including Gamesa SA (GAM), adds to pressure on Prime Minister Mariano Rajoy as he resists requesting international aid. While the tax hikes he’s implementing as part of his austerity program are depressing consumption, they are also spurring inflation, which threatens to add 3 billion euros ($3.9 billion) to the country’s pension bill.

    “The real discussion should be about how protracted the recession will be and if you look at the fiscal tightening you really have to be conservative about next year,” said Martin Van Vliet, an economist at ING Bank in Amsterdam. “I’m very concerned about the size of the fiscal tightening, the fact they’re going to miss their deficit targets and the fact Rajoy is delaying the request for aid.”

    Not Indispensable

    Spain’s 10-year benchmark bond yield fell to 5.638 percent at 10:08 a.m. in Madrid from 5.656 percent yesterday. Even after a 176 basis point narrowing since European Central Bank President Mario Draghi first proposed buying cash-strapped nations’ debt on Aug. 2, Spain pays 417 basis points more than Germany to borrow for 10 years.

    Rajoy, whose popularity has slumped as budget cuts deepen the recession while failing to tame borrowing costs, said yesterday he would trigger the bailout mechanism when it was in Spaniards’ best interests, and such a move isn’t “indispensable” at the moment.

    The government is battling a 25 percent unemployment rate, Europe’s joint-highest with Greece, and a slump in consumption that prompted a record 11 percent annual decline in retail sales in September. Value-added tax rose in September as part of the government’s 100 billion-euro austerity program, pushing up prices.
    VAT Impact

    The VAT hike on Sept. 1 encouraged consumers to bring forward spending, the Bank of Spain said last week, as it forecast domestic demand would fall faster in the last three months of the year. GDP will decline more deeply in the fourth quarter than in the previous three months, Van Vliet forecast.

    Recall that Spain’s 3.6% inflation would not be a problem at all if it wasn’t for a certain meddling inflation-monster that perpetually assaults common sense.

    Posted by Pterrafractyl | October 30, 2012, 10:59 pm
  24. Huh, so it turns out the post-housing bubble strategy of shoveling money into bust banks while simultaneously imposing austerity and further imploding the economy is a bad idea:

    Rising bad loans signal more pain for Spanish banks

    Thu Jan 24, 2013 10:31am EST

    (Reuters) – Rising bad loans at Bankinter (BKT.MC) and Sabadell (SABE.MC) point to more pain for Spanish banks as they near the end of a deep clean of rotten property assets that hammered profits last year.

    Though Sabadell and Bankinter are among Spain’s healthier lenders which did not need rescue funds from Europe, both have been hit by big writedowns on soured real estate assets in the wake of the country’s property market crash.

    The drive to mark down toxic assets pushed Spain to take around 40 billion euros ($53 billion) in aid from Europe in 2012 for banks in need of capital and unable to cope.

    Most banks in Spain will take the last hit from property-related writedowns in fourth-quarter 2012 results. But a deep recession is still hurting their loan books.

    Mid-sized Bankinter warned on Thursday its bad loans could hit 5 percent of total loans this year, up from 4.28 percent at the end of 2012, given Spain’s weak economy and rising unemployment, even though January had been a good month.

    Spain’s unemployment rate hit a record high of 26 percent in the fourth quarter, figures showed on Thursday.

    “If the employment data continues to be like what we saw (on Thursday), we cannot be optimistic,” said Maria Dolores Dancausa, chief executive of Bankinter.

    Spanish banks’ bad loan rate reached a new high in November of 11.4 percent of the outstanding portfolio, and the country is predicting its economy will only really improve in 2014. Still, banks are now hoping their earnings will get better.

    “The writedowns were very harsh last year and it’s possible they were not the last, but they were enough to situate us at the beginning of the end of the crisis that began in 2007,” said Sabadell chairman Josep Oliu.

    Fortunately, policy makers have a bold new solution to shore up the still-ailing Spanish banking sector: Public bailouts of the bad banks’ bondholders:

    Bloomberg
    Bankia Customers May Get Spanish Cash to Cover Bonds Losses
    By Esteban Duarte, Ben Sills & Charles Penty – Jan 22, 2013 9:14 AM CT

    Spain is considering using public money to help Bankia group compensate private investors in about 5 billion euros ($6.7 billion) of bonds amid claims the notes were mis-sold, according to two people familiar with the matter.

    The plan is one option Spain is assessing to help buyers of securities issued by the savings banks that now form part of nationalized Bankia, said the people, who asked not to be named because the talks are private. The International Monetary Fund, European Central Bank and European Union will discuss the proposal in Madrid next week, one of the people said.

    The conditions of the European bailout for Spanish banks in July meant subordinated debt holders, including depositors who bought preferred shares sold as safe investments, lost almost half their money. Spain is creating an arbitration mechanism to decide on cases where bad practice in the selling of the notes can be shown, Economy Minister Luis de Guindos said Dec. 18.

    “The government is trying to redress the harm done to thousands of families by the alleged mis-selling,” said Luis Arenzana, an investment adviser at Shelter Island Total Return Fund in Madrid.

    Spain may have to stump up its own money to compensate junior note holders because the terms of the banking-industry bailout prevent it from using EU cash.

    Debt Swap

    Under the EU rescue, Bankia’s parent Banco Financiero y de Ahorros SA is swapping its junior debt for shares at valuations of 54 percent to 86 percent of face value, the lender said Nov. 28. If the shares rise, Spain will have to spend less to make good the private investors.

    “One of the essential elements of the program is restructuring certain parts of the banking industry and also if necessary winding down of banks, mergers of banks and then subsequent recapitalization, which is being done in line with the memorandum,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in Brussels when asked about the Spanish plans.

    Officials at Bankia, the Economy Ministry and Bank of Spain declined to comment.

    Institutional investors are “unlikely to take kindly to compensation” if they’re excluded from a deal, said Olly Burrows, a London-based credit analyst at Rabobank International.

    “The Spanish government should be careful not to signal to the capital markets that some bondholders are more equal than others,” Burrows said.

    Posted by Pterrafractyl | January 24, 2013, 8:50 am
  25. Pardon me, once again, for stating the obvious.

    “…nec­es­sary wind­ing down of banks, merg­ers of banks and then sub­se­quent recap­i­tal­iza­tion…”, meaning, of course, that any and all means will be taken to preserve, as far as possible, the income stream arising from citizen to state to transnational bank debt. We are watching limited and negotiated tradeoffs, where some holders of debt foreswear a portion of repayment to insure the eventual repayment of the greater part. Euro-capitalism’s ongoing crises are inevitable and mechanical and are, despite a seeming conscious guidance by various avatars, beyond any nation’s control, except as that nation simply abandons all participation in the system. We can only watch as the European economy repeatedly approaches some precipice, is barely saved by patchwork solutions, only to flow towards a subsequent, different and worse disaster. Far from foreshadowing any collapse of free-market capitalism, this event stream has become, instead, its operating norm. Extant roving capital, operating as a natural force akin to gravity, insures the occurrence of whatever tragedies are needed to produce maximum return on investment.

    Greece should leave the euro, if that’s still politically possible, suffer through the subsequent collapse and inflation, and then, while preserving the lives of her citizens, rebuild an economy much more independent of foreign loan capital. This is, in essence (but not appearance), what Germany embarked on in pre-Nazi years. Drastically devaluing her own currency was seen as a national disaster at the time but was, in retrospect, a very successful maneuver, which Germany does not want Greece to repeat and so escape Germany’s EU prison. In Germany the Nazis commandeered the final stages of the process of creating an autonomous currency disconnected from its foreign debt. The pain of this stratagem was assigned to the Weimar period and, from the beginning, was designed to reduce her burden of foreign debt and reestablish a sound internal investment climate. It was eventually successful and
    the Nazis arrived in time to take credit for the German economic “miracle”. History mistakenly records that they reversed previous policies instead of simply completing the last stages of a project begun a decade earlier.

    Posted by Dwight | January 24, 2013, 10:23 pm
  26. @Dwight: I’d agree with most of that but I don’t see the eurozone’s crises as being beyond any nation’s control, except to the extent that the Bundesbank is truly an “independent” entity. It’s the alpha dog in terms of what the policy options and the alpha dog is putting the minimization of the size of any ECB interventions and “internal devaluation” at the top of the priority list. A crisis of some sort was inevitable following the financial bubble that started bursting in 2008, but it didn’t have to be this bad. Concerns over the scale of “credit expansion” didn’t have to be elevated to a top concern. That was a choice made by avators like Jens Weidmann. And in the face of growing evidence that it was a bad choice we’re seeing no real indications that those avatars have changed their minds. And various avators for powerful interests *cough* *Merkel & Friends* *cough* ensured that we’re going to see a lot more crises like this in the future by demanding the EU sign on to the new “fiscal treaty” that limits budget deficits and guarantees that the counter-cyclical forces of government deficit spending during times of recession won’t happen. And if Merkel hadn’t decided to employ the political strategy of selling the German public on the notion that “lazy Southern European nations want to take your money but I will protect you and your euros” she and the CDU wouldn’t be the political bind that eliminates any possibility of real solution to the ongoing crises. Lot’s of bad choices that are making bad situations worse are being consistently made by very influential people in very influential nations. For example:

    Bloomberg
    Merkel Rebuffs Rajoy’s Call to Do More to Boost Euro Stimulus
    By Patrick Donahue – Jan 26, 2013 12:07 PM CT

    German Chancellor Angela Merkel rebuffed calls by Spanish Prime Minister Mariano Rajoy that euro nations in better financial health should help the bloc out of its economic slump by spurring growth.

    Merkel, in the Chilean capital Santiago today for a meeting of European and Latin American leaders, said euro member states need to focus on both fiscal consolidation and growth. Rajoy said yesterday countries that have the funds should use them.

    “There is no either/or,” Merkel said today after meeting with Chilean President Sebastian Pinera. “Confidence can only increase if you have solid finances on the one hand, and on the other hand have the structures of reform in such a way that the economy can grow. We are trying to make a contribution.”

    European leaders declaring an end to the worst of their three-year-old debt crisis are still grappling with recession and soaring unemployment. Joblessness in Spain climbed to a record of more than 26 percent in the last quarter, putting almost 6 million people out of work, as Rajoy imposed the deepest budget cuts in the country’s democratic history.

    The German leader was unmoved by calls for wealthier countries such as hers to loosen tight spending, saying that the 17-member currency union must focus on boosting competitiveness with respect to the rest of the world. Germany is leading the way in implementing that agenda, Merkel said.

    “We in Germany believe we’re contributing to a robust euro area,” the chancellor said in Santiago’s presidential palace after signing an agreement on mining and economic growth with Chilean leader Pinera.

    Posted by Pterrafractyl | January 26, 2013, 7:27 pm
  27. Congrats to Spain: with hints of an economic recovery underway and only 25% unemployment it’s become a shining example of austerity-onomics:

    The New York Times
    The Conscience of a Liberal

    The Structural Fetish

    Paul Krugman
    September 9, 2014 11:20 am

    The FT has a pretty decent article on the emerging doctrine of “Draghinomics”, which looks a lot like Blanchardnomics, which looks a lot like Krugmanomics — hey, we all studied macro at MIT in the mid 1970s. But I was struck by this bit:

    One other senior eurozone official attending the Italian forum which gathers together policy makers, business people and academics said: “Structural reforms are key. Those countries that have made these efforts are performing better: Ireland, Spain and Portugal. Italy and France should think a little bit about this.

    Yep, Spain offers a useful lesson for France:
    [see image showing Spain’s horrifically persistent +20% unemployment]
    For those of us not part of the structural reform cult, the story of Spain is this: the country experienced a full-scale depression when its housing bubble burst; this depression has led to a gradual, painful “internal devaluation” as labor costs come down, making Spain more competitive within Europe; and as a result, Spain is finally starting a slight recovery, with its growth rate in recent quarters (but only in recent quarters) higher than France. To see this as a triumph of structural reform requires preconceptions so strong it’s hard to see why you would even bother looking at data.

    Yeah, comparing Spain, with nearly 25% unemployment, with France’s ~10% unemployment rate may not be the optimal comparison for the austerians. Then again, when it comes to the austerians and good news, beggars can’t be choosers:

    Spanish economy grows at fastest pace since 2007

    By Laure Fillon August 28, 2014 11:42 AM

    Madrid (AFP) – Spain’s economy posted its strongest quarterly expansion since 2007 between April and June due to stronger domestic demand, official data showed Thursday, in a further sign of recovery from recession.

    The Spanish economy, the eurozone’s fourth-biggest, grew by 0.6 percent in the second quarter compared with the previous three months, the National Statistics Institute (NSI) said, confirming its preliminary estimate.

    The promising data came on the same day the NSI said inflation fell by 0.5 percent in August — the biggest dip in consumer prices since 2009 — prompting fears that Spain may struggle to head off deflation.

    Year on year the economy grew by 1.2 percent, following four consecutive quarters of expansion, the NSI said.

    The quarterly growth figures marked an acceleration from growth of 0.4 percent in the first quarter.

    It was Spain’s best quarterly growth figure since the final three-month period of 2007, when the economy grew by 0.7 percent.

    The institute added that the level of employment grew by 0.8 percent compared to a year earlier, with 127,000 jobs created.

    The government said that represented the first annual net job creation since 2008, the year the financial crisis started.

    Spain’s overall unemployment rate is still extremely high, however, at nearly 24.5 percent according to the latest official figure.

    Prime Minister Mariano Rajoy said earlier this month that the economy was recovering “better than expected” and was now among Europe’s best performers.

    “We are registering healthy and diversified growth which is here to stay,” he said.

    “In less than two years we have gone from being an economy on the brink of a bailout to being one of the economies that is growing the most in Europe.”

    – Job creation –

    The government has said it will likely raise its growth forecast for this year to 1.5 percent, up from a previous estimate of 1.2 percent, and possibly to 2.0 percent next year, up from 1.9 percent.

    Growth in the second quarter was fuelled by a rise in household spending, which expanded by 0.7 percent from the previous quarter, when it grew 0.5 percent, the statistics office said.

    External demand, which had helped prop up the economy, fell by 0.7 percent however, due to a fall in exports as growth cooled in many of Spain’s main European trading partners.

    Spain emerged in the second half of 2013 from its second recession since 2008 when a labour-intensive property bubble burst, crippling the economy and throwing millions of people out of work.

    The country faced pressure to seek a full financial bailout from the eurozone in 2012. In the end it received 41 billion euros ($55 billion) to rescue its banks.

    The latest unemployment data showed the jobless rate edged below 25.0 percent in April-June for the first time since the third quarter of 2012.

    But at 24.47 percent, it remains the second-highest jobless rate in the eurozone after Greece and one of the highest in the industrialised world.

    Yes, as Mariano Rajoy says, “In less than two years we have gone from being an economy on the brink of a bailout to being one of the economies that is growing the most in Europe.” All that was required for that year of growth was sending the economy into a multi-year tailspin that created the second-highest jobless rate in the eurozone. Good job austerians!

    And it’s also great to hear that rising domestic spending and the first quarter of rising property prices since 2008 are fueling the growth, although since much of the real estate boom is driven by foreign real estate investors (meet Goldman, your new landlord) it’s sort of like Spain is exporting itself at this point. Still, it’s progress.

    But with exports falling 0.7%, you have to wonder if a recovery that’s been fueled by growth in domestically consumer spending will be able to gain any traction if the rest of the eurozone is still mired in deflation and those exports can’t keep growing (or worse, start falling). After all, it was Spain’s booming exports over the last couple of years that helped to compensate for the 25% unemployment rates and collapse in domestic demand and those exports are clearly going to have to continue booming for Spain’s real economy to recover. Even though every nation can’t simultaneously export its way to prosperity, export-driven growth is still widely viewed as the only “credible” growth in the new EU. And now, just as Spain’s domestic spending is rising the exports are falling and the trade deficit is spiking (albeit from last year’s record low trade deficit).

    So can Spain’s economy create a domestically driven recovery when most of the rest of Europe is still falling into the doldrums? Let’s hope so, but either way, it’s all a reminder that there isn’t just a need to end the EU-wide austerity. There’s an urgent need to end the austerity. As Spain is demonstrating, the synchronized austerity isn’t just continuing to drag economies into the doldrums. It’s also threatening to stomp out the economic green shoots that inevitably take place even in depressed economies (stuff needs replacement at some point). And that ongoing austerity is one of the big questions going forward is what other growth drivers will be available to Spain if the exports market continue to lag? Hmmmm….

    The Guardian
    Spain prepares for an autumn of discontent by buying €1bn of riot gear
    Amid concerns about heavy handed policing, protesters will face a newly equipped force and truck-mounted water cannon

    Ashifa Kassam in Madrid
    Monday 8 September 2014 12.43 EDT

    The Spanish government is readying itself for an autumn of discontent, spending nearly €1bn on riot gear for police units as disparate protest groups prepare a string of demonstrations.

    Since June, the interior ministry has tendered four contracts to purchase riot equipment ranging from shields to stab vests. The ministry also finalised its purchase of a new truck-mounted water cannon, an anti-riot measure used during Spain’s dictatorship and the transition to democracy but little seen in recent years. Despite attempts by opposition Socialist politician Antonio Trevín to paint the purchase as “a return to times that we would rather forget”, the ministry said in its tender that the water cannon was necessary, “given the current social dynamic”.

    The government’s spending spree comes as groups across Spain are predicting a season of protests. “We’re calling it the autumn of confronting power and institutions,” said the activist group Coordinadora 25-S which has its roots in the indignados movement.

    Rallies are being planned to counter draft laws by the governing People’s party that would curtail access to abortion in Spain or see unauthorised protests levied fines of up to €600,000. Months after former King Juan Carlos abdicated the throne in favour of his son King Felipe VI, protests are also being planned to demand a referendum on the monarchy. In Catalonia, the push continues for a vote on independence, while the Canary Islands has said it wants to put the idea of oil exploration in the waters around the region to a referendum.

    Amnesty International in Spain said the purchase of riot gear was a worrying development. “They say they buy this material to control disturbances, but how exactly will it be used?” said Amnesty’s Ángel Gonzalo. “In Greece we have documented how these water cannons, when used a short distance, can provoke severe injuries and commotions.”

    In April, the organisation warned in a report that the Spanish government was using harassment and excessive police force to limit the right to protest. Through first-person accounts from several protests in Madrid and Barcelona, they noted that while the vast majority of protesters were peaceful, police treated them similarly to those who incited violence.

    The Amnesty International report was made public just one week before a ban on the use of rubber bullets by police came into effect in Catalonia, after a long-fought campaign by seven people who had each lost an eye in Barcelona.

    Well there we go: anti-austerity protests can now be channeled into a stimulus program, although it’s unclear how much of that riot gear was domestically produced. Still, it’s a start!

    Might Spanish voters will reward the conservative Rajoy government in 2015 for this creatively bold ‘riot-gear stimulus’ plan? We’ll see!

    Posted by Pterrafractyl | September 10, 2014, 6:12 pm
  28. From the department of corrections: the reports of Spain’s 1 billion euro purchase of riot gear in preparation for austerity protests was off be three orders of magnitude. It’s just 1 million euros in riot gear:

    Spain prepares for an autumn of discontent by buying €1m of riot gear
    Amid concerns about heavy handed policing, protesters will face a newly equipped force and truck-mounted water cannon

    Ashifa Kassam in Madrid
    The Guardian, Monday 8 September 2014 12.43 EDT

    The Spanish government is readying itself for an autumn of discontent, spending nearly €1m on riot gear for police units as disparate protest groups prepare a string of demonstrations.

    Since June, the interior ministry has tendered four contracts to purchase riot equipment ranging from shields to stab vests. The ministry also finalised its purchase of a new truck-mounted water cannon, an anti-riot measure used during Spain’s dictatorship and the transition to democracy but little seen in recent years. Despite attempts by opposition Socialist politician Antonio Trevín to paint the purchase as “a return to times that we would rather forget”, the ministry said in its tender that the water cannon was necessary, “given the current social dynamic”.

    This article was amended on 9 September 2014 to correct the amount spent on riot gear from €1bn to €1m.

    Well, there goes the billion euro riot gear stimulus package. Although don’t give up hope yet. Now that Spanish officials are jumping on board the “hey, deflation isn’t bad, that’s just a myth! No worries!”-crazy train, the kind of “social dynamic” that would justify a much bigger riot gear purchases are just a matter of time:

    The Wall Street Journal
    Spain’s Spiraling Price Decline No Reason to Worry, Say Some Economists
    European Policy Makers Concerned Spanish Trend Could Upend Continent’s Fragile Recovery

    By David Román
    Updated Sept. 12, 2014 10:28 a.m. ET

    MADRID–Spain’s economy sank deeper into a spiral of consumer price declines in August, but Spanish officials and some economists say that’s no reason to worry.

    Deflation refers to persistent falls in prices that lead to a vicious cycle of weak profits and reduced levels of business investment. It is often viewed with alarm in heavily indebted economies such as Spain’s, because debts don’t shrink along with salaries and sales, making it harder for individuals and companies to pay back loans. If consumers put off buying things in the belief prices will drop further, the economy suffers more.

    In the latest sign that deflation is taking hold across southern Europe, Spain’s National Institute of Statistics said Friday that the consumer price index had dropped 0.5% during the 12-month period to August. That was second straight monthly decline and the steepest in 10 months.

    European policymakers worry openly that the downward spiral in Spain, Portugal, Greece and Italy could spread and upend the continent’s fragile economic recovery. Last week, the European Central Bank responded with a cut in interest rates and new stimulus plans.

    Yet some economists say lower consumer prices aren’t always bad news and in some cases may spur consumption in the way tax cuts do.

    “In countries like Spain and Italy, I would say that deflation is necessary. That’s the way for the economy to adjust and make itself more competitive,” said Michele Boldrin, an Italian-born economics professor at the Washington University in St. Louis.

    Mr. Boldrin noted that several academic studies have failed to find a sustained historical link between deflation and economic depression, the only exception being the Great Depression of the 1930s.

    Citing the work of Andrew Atkeson of the University of California, Los Angeles, and Patrick J. Kehoe of the University of Minnesota, Mr. Boldrin said continued price deflation throughout the 19th century had helped improve the competitiveness of industrialized nations.

    “If goods and services are falling in price, you don’t need higher wages,” Mr. Boldrin said.

    Spain recorded its first drop in prices last October, just as the economy was bouncing back from its second recession in five years. Prices fell again in March.

    Yet Spain’s economy grew 2.4% on an annualized basis in the second quarter of this year, one of the highest rates in the euro zone, driven by a spike in internal consumption that surpassed earlier estimates. Over the last year of positive economic growth, Spain’s annual CPI has never been higher than 0.3%.

    Spanish officials say that the country’s deflation is largely the result of decreases in volatile global energy prices, while prices of other items in Spain’s consumer basket have remained steady or declined less.

    Fernando Jiménez Latorre, a former deputy finance minister, said Spain can expect negative prices for another three months. But signs of resilient demand indicate that prices should return to positive levels by the end of the year, he added.

    “At a time when internal demand is strong, falling prices aren’t such a worry,” Mr. Jiménez Latorre said month before he left the government to work for the International Monetary Fund.

    John H. Cochrane, a professor of finance at the University of Chicago, said deflation isn’t a risk for Spain’s economic growth as long as internal demand holds strong.

    Another reason not to worry, he said, is that the euro zone as a whole is still seeing year-on-year price increases. The currency union’s consumer price index was up 0.3% in August. In a currency union it simply is impossible for prices in a country to diverge from all the others for long, Mr. Cochrane said.

    “I don’t see how Europe, with current very large outstanding sovereign debts, and a central bank committed to ‘do what it takes’ can possibly have a sustained serious deflation spiral,” he said. “A bit of mild 1 to 2 percent deflation is within the errors of measuring inflation, which are much bigger than most people realize. Some prices go up, some prices go down, new goods are introduced. It’s a rough guess.”

    This is one of those “where does one begin” articles. For instance, that study by Andrew Atkeson of the University of California, Los Angeles, and Patrick J. Kehoe of the University of Minnesota basically concluded that the boom-bust Gilded Age was great so don’t worry about it:

    MarketWatch
    What’s so bad about falling prices? Nothing
    By
    RichDanker

    Published: Jan 24, 2014 10:14 a.m. ET

    As Ben Bernanke hands over the Federal Reserve chairmanship to Janet Yellen at the end of January, leadership of the central bank will be passed from one strident deflation foe to another.

    All the way back in 2002, Bernanke in his speech “Deflation: Making Sure ‘It’ Doesn’t Happen Here,”, proposed what would become his program to fight deflation in response to the 2008 financial crisis: a zero fed funds rate and large-scale Treasury debt purchases aimed at bringing down interest rates to encourage economic activity. We came to know it as quantitative easing.

    Yet five years in, those policies are still entrenched (despite last month’s “taper”) with Yellen set on maintaining them.

    What’s happened in the American economy since then? Not deflation, defined as a decrease in the broad price level. You can conclude that Bernanke’s experiment worked in achieving its purpose of making sure “it” didn’t happen here, but you can also conclude from the data that his purpose was misguided from the start and it backfired.

    Bernanke’s seminal academic experience is the Great Depression, an era he interprets (influenced by Milton Friedman) as caused by deflation from the Fed.

    But does deflation cause depression? That’s a question two economists, Andrew Atkeson and Patrick Kehoe, examined in a 2004 paper for the Federal Reserve Bank of Minneapolis.. No, they say. Their data set of 17 countries across 100 years found that nearly 90% of periods of deflation did not have depression. They acknowledge an exception in the surprise deflation of the Great Depression, but say that it is “not an overwhelmingly tight link.”

    But their point is not to try and refight the cause of the Great Depression, as Bernanke is wont to do, but defend the concept of deflation from the catastrophe ascribed to it. After all, what is so bad about falling prices? As the publisher and financial historian James Grant likes to point out, this is exactly what draws carloads of people to Walmart every weekend.

    The Walmart era of American economic history isn’t actually the contemporary one, but the 1879-1914 period when a surge in innovation and output made commodities cheaper and even food prices stable.

    This was natural “good” deflation driven by the increase in the supply of goods — as opposed to a Fed-driven decrease in the money supply that Bernanke and Friedman blame for the Great Depression. People got the dual benefit of a robust economy and flat-to-falling prices.

    Our modern economy not only has Walmart, but Target, Costco, and iPhones whose prices seem to be cut in half every time a next generation is released. It’s extremely price competitive, yet prices overall won’t stop rising.

    Yes, from 1879-1914, technology and innovation led to “good” deflation, and therefore deflation caused by a collapse in Spain’s economy resulting in surging debt (which is made worse by deflation) is “good” too. And let’s also ignore the episodes of high deflation and inflation and banking panics that led to the creation of the Federal Reserve system). Isn’t defending deflation fun?

    And then there are the statements by John H. Cochrane, professor of finance at the University of Chicago, that there’s no real need to be concerned about a period of extended deflation because, hey, the ECB said it would do “whatever it takes” to avoid it. That means we can apparently ignore all of the indicators that the ECB won’t actually be allowed to do “whatever it takes” since “whatever it takes” goes beyond monetary policy and requires that eurozone members actually engage in some stimulus spending which is why Draghi is telling governments to start spending. And then there’s the fact that John Cochrane doesn’t appear to believe monetary policy is useful when stuck in a “zero lower bound” liquidity trap anyways. Interestingly, that’s the same argument Paul Krugman has been making for years for why stimulative fiscal policies are required in addition to sane monetary policies:

    The New York Times
    The Conscience of a Liberal
    Stupidity in Economic Discourse 2
    Paul Krugman
    April 1, 2014 2:39 pm

    I’ve written before about the myth of the stupid progressive economist.Many conservative economists have a fixed idea in their heads — it’s more than just a presumption, because it seems completely impervious to evidence — that progressive economists are dumb guys who don’t understand basic economics. And because of this fixed idea, conservatives appear literally unable to read what my side writes; they criticize the dumb things they’re sure we must have said, without checking to see if that’s what we actually said.

    In the linked post I wrote about health reform issues, but you also see this in macro: five years and more into this discussion, freshwater economists still can’t wrap their brains around the notion that modern Keynesians (both New and eclectic) have actually done a lot of hard thinking over the past few decades. I’ve called this a failure of reading comprehension, but it’s actually an unwillingness to read at all, to so much as glance at what the actual argument might be.

    And I mean that quite literally. Brad DeLong quotes from a John Cochrane paper (no link) which declares that those stupid Keynesians don’t understand why monetary policy is ineffective. It’s not because of the zero lower bound, it’s because bonds and monetary base are perfect substitutes:

    In this analysis, monetary policy is impotent, but not for the usual reason that interest rates are nearly zero. The Fed can arbitrarily exchange Treasury debt for money, and increase the money supply as much as we like. But nobody cares if it does so, since the “flight to liquidity” is equally towards all forms of Government debt. If we want more fruit and less cheese, putting more apples and less oranges in the fruit basket won’t help.

    So, I think I can say without boasting that the modern revival of liquidity-trap economics began with my 1998 Brookings Paper (pdf). Here’s the first sentence of that paper:

    THE LIQUIDITY TRAP – that awkward condition in which monetary policy loses its grip because the nominal interest rate is essentially zero, in which the quantity of money becomes irrelevant because money and bonds are essentially perfect substitutes – played a central role in the early years of macroeconomics as a discipline.

    That was 16 years ago. Just saying.

    So when Cochrane says “I don’t see how Europe, with current very large outstanding sovereign debts, and a central bank committed to ‘do what it takes’ can possibly have a sustained serious deflation spiral,” he’s basically saying, “don’t worry, deflation won’t be allowed to get all that bad because the ECB promised to step in and do something”, and yet in the above piece Paul Krugman highlights Cochrane arguing that monetary policy is of limited value alone when rates are neary zero, which is exactly the kind of situation Spain finds itself in right now.

    So anyways, don’t worry, the billion euro riot gear stimulus package is just a matter of time.

    Posted by Pterrafractyl | September 12, 2014, 8:41 am
  29. “Spain continues to look quite healthy compared to other euro zone countries,” according to a banker quoted in the article below. The article also goes on to mention that Spain’s prices are falling, its unemployment is over 23% and expected to remain over 20% for years, lending remains subdued, and the “quite healthy” economic growth of 0.5% last quarter appears to be losing steam as a result of the rest of the Spain’s eurozone trading partners showing even worse growth. Good job Spain?

    UPDATE 1-Euro zone haunts Spanish economy as growth slows, prices fall

    Thu Oct 30, 2014 5:38am EDT

    * Spain’s economy grows 0.5 percent in Q3 versus Q2

    * Growth rate difficult to sustain, says economist

    * Spanish national prices fall 0.1 pct, fourth fall in a row (Adds context, quotes)

    MADRID, Oct 30 (Reuters) – Spain’s economy expanded for the fifth quarter running between July and September, but a slowing rate of growth along with falling consumer prices suggested the recovery may be losing momentum.

    Gross domestic product (GDP) rose by 0.5 percent in the third quarter from the second, preliminary National Statistics Institute (INE) data showed on Thursday, in line with expectations but down from 0.6 percent between April and June.

    Consumer prices shrank for the fourth straight month in October, separate INE figures showed, with national prices dropping 0.1 percent from a year earlier.

    Lifted by strong exports and improving domestic demand, Spain’s economy has bounced back after dipping in and out of recession for almost six years following a property crash in 2008.

    But it is coming under pressure from deteriorating economic conditions among its main trade partners in the euro zone.r

    STRUCTURAL WEAKNESS

    “Spain continues to look quite healthy compared to other euro zone countries,” said Nomura economist Silvio Peruzzo.

    Spanish consumer prices also dipped when measured according to European-Union harmonised data, falling 0.2 percent year on year in October, INE said.

    “Despite the sizeable acceleration in growth, inflation dynamics remain extremely subdued. We haven’t got significant economic strength at the structural level to boost prices, which reflects weakness in the labour market,” said Peruzzo.

    Spanish unemployment is the second highest in the European Union, registering 23.7 percent in the third quarter, and is not expected to drop below 20 percent for years.

    Concerns that the pace of Spain’s recovery could stutter over the next year have also been reflected in earnings from its banks, which show they are keeping a tight rein on credit flows despite stimulus efforts from the European Central Bank.

    While Spanish banks are trying to harness the recovery and boost income from core loan businesses, leading banks Caixabank , Bankia and BBVA have all reported in third quarter results that levels of lending in the country are still falling.

    As we can see, the “soft bigotry of low expectations” doesn’t just apply to kids. An entire continent can apparently be the victim of it simultaneously (including the kids).

    Posted by Pterrafractyl | October 30, 2014, 10:15 am
  30. The Spanish government Necromonger conversion is complete:

    Bloomberg Business
    Spain Said to Lead EU Push to Force Terms on Greece

    by Nikolaos Chrysoloras and Karl Stagno Navarra

    3:35 PM CST
    February 22, 2015

    (Bloomberg) — As euro-region finance ministers turned the screw on Greece in Friday’s talks, the group’s usual enforcer, Wolfgang Schaeuble of Germany, was eclipsed by Spain’s Luis de Guindos, according to two people with direct knowledge of the talks.

    De Guindos took the toughest line with Greek Finance Minister Yanis Varoufakis as the bloc forced forced him to adhere to the terms of the country’s existing bailout to retain access to official financing, the people said, asking not to be named because the conversations were private. When the group rejected Schaeuble’s call for a Tuesday meeting to scrutinize Greece’s plans to meet those conditions, De Guindos insisted, winning agreement for a teleconference, they said.

    The Spanish government is particularly sensitive to the fortunes of the Syriza government in Greece because the party’s Spanish ally, Podemos, has surged to the top of some recent polls. A victory for Varoufakis would have strengthened Podemos’s argument that De Guindos’s boss, Prime Minister Mariano Rajoy, was wrong to impose austerity on Spain.

    The Spanish government “has always been constructive but it has to defend its interests,” Guindos said on Friday. “A climate is developing in which the new Greek government is adapting to the rules that affect us all.”

    A spokeswoman for De Guindos said Spain is in favor of dialogue and flexibility within the existing rules and has shown its solidarity with Greece by contributing 26 billion euros ($30 billion) to its bailout at a time when its own financing conditions were not good.

    Guindos Shouting

    De Guindos, at times raising his voice, railed against Varoufakis in Friday’s meeting, telling him he has to win the trust of his euro-region counterparts and learn how politics is conducted at the European level, one of the people said. De Guindos has been in the running to replace Jeroen Dijsselbloem of the Netherlands as head of the euro-region finance ministers’ group when the Dutchman’s term expires this year.

    Spain’s general election is due around the end of the year and Iglesias has pledged to restructure the country’s 1 trillion euros ($1.1 trillion) of public debt if he wins.

    “De Guindos, at times raising his voice, railed against Varoufakis in Friday’s meeting, telling him he has to win the trust of his euro-region counterparts and learn how politics is conducted at the European level.” Yes, when will Varoufakis learn that resistance is futile? Probably sooner or later. Folks like Luis de Guindos are extremely qualified to teach riff raff like the Greek Finance Minister “how politics is conducted at the European level”:

    The Wall Street Journal
    Banker Will Lead Spanish Crisis Fight

    By Jonathan House and David Román
    December 22, 2011

    MADRID—Mariano Rajoy, Spain’s newly elected prime minister, selected a well-known former deputy finance minister and investment banker to spearhead his government’s efforts to pull the euro zone’s fourth-largest economy out of its worst crisis in decades.

    Spain’s new finance minister will be the 51-year-old Luis de Guindos, an economist who held various positions, including deputy finance minister, in the governments of conservative Prime Minister José María Aznar during the 1996-2004 period. Later, he headed investment bank Lehman Brothers in Spain, a financial-sector think tank and has been a frequent commentator in the local press.

    A good communicator and English speaker, Mr. de Guindos will assume the dual challenge of pushing through tough overhauls at home while shoring up international confidence in Spain, a key task at a time of soaring borrowing costs. As he isn’t a member of Mr. Rajoy’s Popular Party, he is viewed as independent in Spanish political circles.

    Mr. Rajoy’s cabinet formation comes just over a month after his conservative Popular Party won a landslide victory in general elections, making Spain the third ailing euro-zone economy to see a change of government in recent months after administrations in Italy and Greece collapsed over their inability to push through economic overhauls demanded by the European Union and financial markets.

    Mr. Rajoy has promised to make reducing the country’s unemployment rate—now above 21%—and meeting its deficit-reduction commitments with the EU his top priorities.

    In a break with usual practice, the veteran politician waited until taking his oath of office earlier Wednesday before announcing the ministries that will make up his government and the people that will head them.

    Overall, Mr. Rajoy has cut the number of ministries to 13 from 15, though he created a new budget ministry that will assume responsibility for budget and tax issues. It will be headed up by Cristóbal Montoro, 61, previously the Popular Party’s chief economic spokesman. Mr. de Guindos’s finance ministry will have responsibility for overall economic policy.

    Mr. Montoro also held various positions in the Aznar governments of 1996-2004, including that of budget minister. The economic overhauls made during those years are largely credited with helping to ensure that Spain entered the euro in 1999 and to transform the country into one of the currency area’s chief growth engines until the global financial crisis struck in 2007. Some critics, however, have charged that those same policies encouraged the formation of Spain’s massive housing bubble, the fallout of which continues to weigh heavily.

    “The combination of de Guindos and Montoro is great news,” said Angel de la Fuente, head of Kepler Capital Markets in North America. “They both have experience from the Aznar government and de Guindos knows financial markets well.”

    Yes, Spain’s currently finance minister, Luis de Guindos, is an ex-Lehman banker who held various positions in the governments of conservative Prime Minister José María Aznar during the 1996-2004 period when the foundations of the Spanish Housing bubble was established, including the position of deputy finance minister. And he’s now demanding that the EU turn the austerity screws on Greece.

    So, with that in mind, here’s a quick look back at some of the news that was coming out of Spain back in 2004 when the new Socialist government was coming into power following the departure of the Aznar government that de Guindos worked for:

    Financial Times
    Property bubble baffles Spanish

    August 20, 2004 5:00 am

    By Paul Betts

    Recent interest rate rises in Britain have shown how a single country’s central bank can retain a margin of manoeuvre to control a property boom. In eurozone countries it is infinitely more difficult – and no more so than in Spain.

    Favourable borrowing costs coupled with despondency over stock and bond markets have had similar effects in Italy and France – but nothing like in Spain, where borrowing costs have fallen to 3.25 per cent, below Spain’s above-average eurozone inflation rate of 3.5 per cent.

    The new Socialist government is so worried it has appointed a housing minister – the first since 1977 – to tackle what is rapidly turning into an unsustainable property and construction frenzy. Last year alone, more than 600,000 new homes were built. There are more than 3m empty homes.

    Jaime Caruana, the Spanish central bank governor, is urging the government to take steps to orchestrate a soft landing, since his own hands are tied by the European Central Bank.

    Without a measured response, Spain risks paying a heavy price for the former Aznar government’s over-reliance on the property boom to underpin growth.

    Just take a moment to soak that in:


    The new Socialist government is so worried it has appointed a housing minister – the first since 1977 – to tackle what is rapidly turning into an unsustainable property and construction frenzy. Last year alone, more than 600,000 new homes were built. There are more than 3m empty homes.

    Jaime Caruana, the Spanish central bank governor, is urging the government to take steps to orchestrate a soft landing, since his own hands are tied by the European Central Bank.

    Without a measured response, Spain risks paying a heavy price for the former Aznar government’s over-reliance on the property boom to underpin growth.

    That’s right, by the time Spain’s socialist government came into power in 2004, a housing bubble was already in place that was leading to 600,000 new homes being built in 2003 when there were already more than 3 million empty homes (close to the number of empty homes in 2013). At the same, it was also clear, even back in 2004, that the loss of control of its own central banking policies was leading to a Spanish housing bubble that Spain really couldn’t control and the European Central Bank had no interest in controlling. It’s a reminder of how the whole “profligate government spending caused the financial crisis” meme is largely nonsense. It’s also a reminder of why one of the most important paths to seeing an end to the eurozone crisis is seeing an end to how “politics is conducted at the European level“.

    Posted by Pterrafractyl | February 23, 2015, 12:40 am

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