Remember Hank Paulson’s bazooka?  Well, it turned out that the Paulson bazooka was more like the Bernanke/Paulson bazooka.  The combination of monetary policy and fiscal policy during the credit crisis was highly effective in ending the solvency concerns that were unfolding in 2008.  QE1 “worked” in that it shored up markets when it was needed.  Combining this with the stimulus act was a potent mix.  And though I believe they were not our best options at the time (I was in favor of a Swedish approach to the US banking system and a stimulus that was more focused on helping Main Street) they proved to stop the contagion.  Europe must stop the contagion.

Although not entirely analogous to the American credit crisis (which was really a household debt crisis), the Euro crisis is similar.  And I think it’s going to require an equally large bazooka.  The only problem is that Jean Claude Trichet doesn’t have his Hank Paulson (no central Treasury in Europe).  This recent piece in the FT laid out the problem superbly:

“Stopping Europe’s current crisis requires fundamental overhaul of the eurozone’s institutions. But the most important part of that overhaul is to ensure that the ECB takes on full responsibility as a lender of last resort in the government bond markets of the eurozone. Without this, the markets cannot be stabilised and crises will remain endemic.

At the same time, further steps towards political unification must be taken, without which control on national government deficits and debts cannot be implemented. Some steps in that direction were taken recently when the European Council strengthened control of national budgetary processes and on national macroeconomic policies. These decisions, however, are insufficient, and more fundamental changes in the governance of the eurozone are needed. These should be such that the ECB can trust that its lender of last resort responsibilities in the government bond markets will not lead to a never-ending dynamic of debt creation.”

I am still having trouble seeing a scenario in which Europe isn’t forced into greater unification, a Euro bond and a central treasury.  The only question is whether they will wait for the entire union to collapse before trying to put it back together again or if they will be proactive?


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Cullen Roche

    I should add that I am simply considering the potential outcomes here. Either Europe lets the market deal with this (which means massive insolvencies and defaults and defections, ie, the total nightmare scenario where global depression breaks out) or we get ahead of the issue….I know some of you would choose depression, but not me. I won’t have my std of living altered because some monetary union couldn’t be properly organized….just like it’s unacceptable for foolish American bankers and homeowners to crush the rest of us….

  • prescient11

    I could not agree more. Plus, Germany will benefit from a weaker euro. And the Chinese don’t want to see them fall off a cliff either.

    But some morons are running amuck over there. Makes me appreciate BB all the more to be honest.

  • Mountaineer

    We were discussing the inadequacy of the Euro bailout facility over a year ago; I’m so glad the EU banks and policymakers could join us.

    Unification or dismemberment, but until then Trichet has to fill the gap. The ECB can backstop the Euro banks while they restructure the debts, but Trichet is woefully behind. Euro banks are already being cut out of the MMs, the sharks are circling. Rumor becomes prophetic overnight in this kind of environment.

  • Dan Dell

    “Germany will benefit from a weaker euro.”

    That’s why they’d rather keep the PIIGS in the EU. If they let the PIIGS out, the Euro would strengthen.

  • Cullen Roche

    Yeah, and the fact that he’s raising rates should tell everyone where he stands on all of this. Bundes bankers whispering in his ears about inflation. This has to make one wonder if we’ll walk right up to the cliff edge again before they realize what they need to do….

  • pub

    “I am not concerned for the Eurosystem as a whole… if I take the Eurosystem as a whole we are in a much better situation… than the US and Japan or other big economies,” – Trichet

    with this kind of ignorance at the helm it’s hard to envision this ending well

  • baychev

    europe needs huge pension benefits and government spending cuts. it has an enormous demographic problem and it cannot be overcome. on top of that, the PIIGS have the lowest retirement ages in the union, the highest share of uneducated and unemployed populace in working age and highest tax evasion rates.
    you cannot fix such a parasite infested den with unification or common bonds, only common sense could possibly help put things on the right path.

  • Dan Dell

    and its nice that Trichet is responding by saying the US is in a worse position than the EU. seems like his head is in the wrong place.

    i have to believe that the Fed will signal strongly, although it may just be confirmation of everyones fear at this point.

  • Dan Dell

    posted the same thing. head in the sand

  • effem

    My personal belief is that global citizens want a change even if it brings a crisis. If you took a global survey i bet 70% of people would say the current monetary system hasn’t worked to their benefit for the last decade. Of course the other 30% are in charge and own all the wealth. Obvious problem is what comes next if the system blows?

    These are tricky issues. Do you move further down a path that most people don’t seem to like to preserve “wealth” as currently defined or do you roll the dice on a new framework?

  • Mountaineer

    Credit markets in America are screaming deflation, in the EMs they’re forecasting a slowdown, and in Europe they’re starting to question the longterm solvency of the core. And still this man is raising rates and supporting austerity. It’s an incredible thing to witness.

  • yhvd

    I believe one thing that will be needed in the eurozone is a similar institution as FDIC. Basically, what happens now is that cost of the local bank busts is put on the tabs for the local governments, but the policies governing the same banks with margin and lending rates is but centrally. That is not a good combination.

    Also, it would make the bigger countries start to construct bailouts that had other reasons than just to protect their own banks from fallout.

  • Dan Dell

    “My personal belief is that global citizens want a change even if it brings a crisis.”

    Sadly, I agree. Many do want to cut off their nose to spite their face, but once the bleeding starts, they’ll be screaming bloody murder. (now THAT is a hodgepodge of mixed metaphors.)

  • baychev

    JCT is not a man of principle, but he has a mandate and he is trying to fulfill it to some extent: inflation is above 2% and his target is just below 2%, what is so wrong about this part of his act? please explain.
    money does not solve a thing in europe. with so much gov’t transfers going on for decades, if you just print more to hand it out, it immediately shows up in the inflation rate and is taken back from the recipient, so there is no net benefit. with the exception of a few savage nations, the infrastructure is excellent, public transportation as well.
    i really do not see a lever besides the level of income redistribution that the old continent can touch with some success.

  • Sormiou

    Very, very good post TPC.
    Viewed from France, a country that is slowly but surely impacted by the bond market moves, I cannot agree more with the ECB bazooka concept.
    What strikes me is the lack of public support from german voters. True Weymar memories are often quoted as being very much present in germany’s mind, but all in all a big round of QE associated with serious fiscal controls at the european level would : 1/ weaken an overvalued euro thus boosting german exporters 2/ strenghten germany main trading partners who still are its fellow EC members.
    Germany has all to win in an ECB round of QE.

  • Dimm

    Unification or dismemberment.

    Probably both. Some will exit. The rest will get Common treasury.

  • Odysseus

    Obviously, this “big bazooka” that should do would be Euro-bonds. But the ideology that led to EU unification stipulated memberstates to be like households, “currency users”. Why should that change? There are absolutely no serious proposals of reform coming from EU politicians. Instead, they should have even been been confirmed in their stance by the the recent US “debt ceiling debate”.

  • Dimm


    The benefits in Greece and Germany are about the same. The rest of the countries are pretty close.

    The country with the lowest retirement age is Belgium I believe.

    Instead of focusing on how to advance our well being, you focus is on bringing down the developed world to Africa’s standards and hate of course.

    Take it easy on the Faux News propaganda.

  • boatman

    its so easy to let ‘unification is what they should do’ slide of our lips…..a whole lot easier than to get it done on a continent that has been warring w/one another since the first homo sapiens came out of africa and took out the neanderthals….and most speak different languages…..i know, the iphone translates….irrelevant.

    economic expediency never trumps nationalistic societal politics.

    eu comes apart.

  • Cullen Roche

    Right. What’s so fascinating here is that you all are EXACTLY like the American states (currency users). But the hurdle to becoming a full union is history. I grew up in the state of VA and lived much of my life in DC. I now live in CA. While I have familial allegiance to VA I don’t call myself a Virginian. I call myself an American. Europeans don’t have this. And it’s the single biggest hurdle. I am not sure that you all can overcome it. You have long proud histories within your countries and relinquishing that is not easy to do. But ultimately, it might be the only thing that saves Europe….You have to become Europeans rather than a union of Germans, Frenchman, Greeks, etc.

    I personally think we’ll look back at Europe 100 years from now as one of the great historical achievements of human unity. Much like people currently view the USA.

  • Different Chris


    This piece combined with your comment right here is probably the best sumation of the situation in EU I’ve seen anywhere.

    Anyone out there: I’d be very interested in links/books on the following-
    -Something describing the interactions/transactions between the ECB and the treasuries.
    -A detailed description of the contagion risk to the global economy based on the European situation.

  • prescient11

    The entire point of central banks is to shore up the banking system. Screw his so-called “mandate”.

    You don’t make sure the grass is watered when the house is burning.

    Inflation is not a problem in the Eurozone, at all…

  • prescient11

    Partial exit is interesting. I wonder if they could do that to make sure that another country or so separates Turkey from the rest of the Eurozone.

  • baychev

    there are things about you are very, very ignorant. don’t look at official retirement age, look at effective retirement age. in the club med where most people are working for the gov’t they are enjoying early retirement ‘benefits’. and you don’t seem capable of doing math either: do you advance your well being by printing money and stuffing bonds with which you are paying pensions now in the retirement accounts of working people. this is called ponzi scheme and is criminal, quite the opposite of ‘advancing the well being’ that you pretend ;)

  • Dan Dell

    there isn’t a mechanism in place for an exit, which makes any possible exit very messy

  • baychev

    inflation IS a problem. so many people live off gov’t transfers, the money has to be taken from someone to be given to another. when inflation eats 3% of an earner’s income it cripples the gov’t ability to tax even more and it cripples its ability to borrow cheaply in the market.
    you can’t shore up this overly leveraged banking system without taking it over. indeed debt is awfully difficult to get rid of in europe besides at the gov’t level, but that is no excuse to take it for granted that it will be repaid without a problem and on schedule.
    better to recapitalize the banks and cut the losses rather than pretend that all is well and the PIIGS will ever pay off their debts while they cannot even roll them over given their never ending deficit spending ‘predisposition’.

  • Dimm

    Blinded by hate, ignorant and obnoxious. No point to attempt a conversation with you.

  • Dan Dell

    “I don’t call myself a Virginian. I call myself an American. Europeans don’t have this. And it’s the single biggest hurdle. I am not sure that you all can overcome it. You have long proud histories within your countries and relinquishing that is not easy to do.”


  • baychev

    i am not blinded by hate. it is a fact that 30% of portuguese never graduate high school!
    when do you expect them to repay the 90 billion ‘package’ that was put for them when they have only skills to peel cork off trees? what is their standard of living and who owes them a better one?
    i guess you will say i owe it to them, and not you. are you a gov’t worker?

  • baychev

    i am sorry, only 30% actually graduate from high school, even less pursue a higher degree.

  • Leverage

    Yeah, crazy inflation… NOT! Outright deflation in the periphery, more if you count real estate huge deflationary forces.

    Anyway inflation is just a byproduct of the Bernank QE’s effort to prop up stocks (and commodities):

    We need tax cuts and investment programs to decrease the necessity of oil (this is what is killing Spain balance of trade btw) or the central banks can start to pray because the system will fall apart at some point.

  • james

    paulson’s bazooka = a giant handout for financial institutions, at the expense of savers.

  • Leverage

    Do it indeed, this is bullshit, and data supports it. Effective retirement dates are not lower in Greece than in Germany.

    And the ‘public employment’ myths, please cut it. Greece is a single country and even there it’s not the usual thing.

  • Leverage

    It won’t happen, want to know why? look at baychev comments and replies.

    Let this currency union die and rest in peace as a demonstration on what you shouldn’t for the rest of the history.

  • SuperC

    first of all, yes. Could they not stabilize this by simply having the ECB buy 10% of the par-value of each countries debt on the market and destroying it.

    This won’t cause inflation because the inflationary pressures of debt are incurred as the debt is taken and the money is spent, and that debt is subsequently deflationary. Thats my idea, or if its someone elses, I am not trying to rip them off I just haven’t read it.

    Imagine that we had a society of 100 peole that each made a thousand bucks a year. One day someone invents a bank and loans everybody 500 bucks. Some of them go to the casino, some of them get drunk, some use it to build a hut to live in. But to pay back that 500 they wind up having not 1000 dollars to spend each year going forward but perhaps 900.

    Borrowing by currency users probably pays inflation forward, and the effects of that inflation are already here. Europes governments are sort of “private sector” in a way, as they are currency users.

    This is, in Japan, in the US, and in Europe, endable. It may be that the ECB itself has the ability to simply end it.

  • jasmit

    If the Euro collapses, there is no putting the monetary union back together again let alone further monetary integration. There is no popular support for the monetary union even now. This is a project of the EU elites which never had the support of Eu citizens who ultimately pay the bills.

  • Dimm

    Here is some data in perspective from WSJ:
    country Dropout rate
    Portugal 37%
    US: 23.3%
    Greece: 8.6%
    EU average 16.6%

    So the conclusion is … It proves nothing of what you are trying to say.

  • baychev

    you are right that the effective age is identical but… 40% of greece’s workforce is employed… by the state.
    the income of these people is tax on the other 60%, or the part of them that actually are paying taxes which might be something like 30%. how much more can you tax some to pay a larger group and pensions on top of that? if you take more than 50% of someone’s income you disincentivise that person to work and he’s looking to join the privilleged.
    do you have any other explanation of the PIIGS situation than spending beyond their means to repay? i will be glad to hear it. just don’t pull off that a wolfpack has routed them, they have been running crazy deficits for quite some time and they do not want to bring their expenditures in line with their revenues. eager to hear your position.

  • jt26

    The solution is the Milky Way Monetary Fund, we just need to pool the resources of the galaxy with the some super special drawing rights, and come save the day. Earth is just Thailand in 1997, things aren’t so bad.

  • Leverage

    I wonder what sort of crapp economic thought is taught in Germany to make comparable current situation to Weimar (I guess not better than the rest of failed mainstream economics),

    Instead the european central bankers by trying to avoid it are creating the preconditions in the periphery for an exit of the euro and a possible hyperinflation.

  • Revaluer

    It s not only different cultures that are an obstacle to more unification. The Commission of the European Union is not very popular in Europe, it s associated with big government and red tape. No European politician would dare to propose such a thing.
    Most Europeans are proud and glad to be Europeans, but the United States of Europe? – well, maybe an invasion of the Red Army of China will bring us to that point. Not the simple threat of an economic depression.

  • Leverage

    I’ve a better solution: we need some aliens so we can all become proud & competitive export champions and exchange goods for alien currency and paper (so we can continue with this crazy economic systems) and run a trade surplus!

  • baychev

    pardon me, but are you economics illiterate? is cheap credit a right to everyone?

    if you have some common sense, you would not lend to a bunch of high school dropouts money at 4% for 10 years. if you have observed their ‘routine’ you would know they would immediately spend it on food, drinks and flashy cars, once it is spent it is gone, their ability to earn has not been improved one yota, but their debt burden has grown. guess what, they have nothing to lose by not repaying you and the easiest thing for them to do is show you the finger.
    if you have common sense, you would call your pension plan administrator right away and demand that your pension savings does not go into supporting an ‘enhanced’ lifestyle for these dropouts because you will have to be working like a dog till you drop, with 20% youth unemployment across the board in the EU, the youth won’t pay for your retirement, just forget it.

    and you are not doing greece favor either by demanding them to give you 25% of their tax collections as interest on the bailout ‘package’, because this is pure debt slavery package that is even unheard of in Africa that you dread so much.

  • SuperC

    so if we have 100 people * 1000 dollars of income per year and no savings, we have 100k spent into the economy every year. If all of a sudden everybody borrows an extra 500 bucks and spends it, that year we will have 150k spent into the economy, which is likely very inflationary unless we had a large amount of slack capacity. Going forward, as 100 dollasr per year from each person is spent on debt repayment, we would have just 90,000 dollars spent into the economy.

    I’ve only thought about this a bit, but i think its very likely to be true (and it may well be something everybody already knows). Debt of currency users is inflationary/stimulative as it is increasing and deflationary/depressive as it decreases.

    Now the “debt” of a currency issuer, which isn’t actually debt at all, should be permanently stimulative/inflationary, because it represents an increase in the money supply.

    We have not had nearly large enough creations of currency over the last 30 years (i.e., not nearly large enough budget deficits), which led to an ongoing private sector/currency user debt boom, which led to a situation where the best answer is raising the money supply, just as everybody is decided the best cure to a debt crisis is less money supply (i.e., less debt, less deficits).

    I feel like I am watching worldwide suicide on an economic level (which, regrettably will probably lead to a few of the real thing).

  • baychev

    inflation or deflation? the unit of account increases, so we cannot measure accurately, you probably know the saying: when you suck at the game, you change the rules.

    what is going on is relative repricing: the things we buy on credit and feed our hubris with go down because we have suddenly realized we are not such a good credit and we don’t have the income to pay the installments. but the things that feed our bellies and take us to the work drudgery go up in price because we need them for our own survival.

    what is easier from a practical standing point: eliminate debt and start consuming again and borrowing at more adequate rates or engage in elaborate socail and economic engineering where we are attempting to create growth while we are deluding ourselves everything costs way more than we can service with our income and keeping credit social(ist)?

  • SuperC

    Also, its just semantics, but a country like the us isn’t running a trade “deficit”, its exporting currency. This is important, because as someone noted in one of these threads recently, calling the supply of US Dollars “debt” has negative connotations and rallies the masses against it, calling it “the money supply” is positive (and more accurate) and that process of re-branding is going to be key to better policy decisions from politicians.

    “Currency exporter” is more accurate than “trade deficit” and also less negative.

    And while it remains true that those dollars we are exporting represent some future claim on property, production, and so forth of the US, it nonetheless remains, in my humble view, more accurate and also more helpful to call us currency exporters.

    thanks to anybody who considers these thoughts.

  • Leverage

    You’re pretty clueless about “PIIGS” if you just pull them all on the same group because their problems are very different, or at least were until useless ECB & European elites manufactured this crisis (it all started with the euro).

    Spain had an huge bubble and needs a lot of private deleverage, Italy wasn’t a problem but because of the European elites incompetency has become one (neither was Spanish finance btw until the depression made deficits raise). Ireland had an other bubble and the financialization of the economy. I guess until even France is in danger this sort of propaganda will work, you will run out of acronyms eventually. Public debt fired because of automatic stabilizers, this wouldn’t be a problem with monetary sovereignty and wouldn’t be inflationary because net financial assets are decreasing in the periphery (it’s the problem of non-optimal monetary unions, like the EMU).

    The whole lot of problems in Europe are one in the end: euro and current institutional frame; so finish it (in either way, consolidation or disintegration). This gold standard redux won’t work because the same reasons the first one failed eventually and lead to wars. Let nations ‘solve’ or not their problems with their own sovereignty.

    If you only have a hammer (policy: cut spending) everything looks like a nail to you (public deficits are the problem).

  • Dimm

    Another rant completely unrelated to YOUR chosen narrative. I give up.

  • John

    Mish has an interesting post on the ECB’s comments this week and The German central Banks comments. Seems world’s apart right now

  • Leverage

    Yes, the mythical “you’re living above your means!”. You’re presenting us a false dichotomy were you can only do one of both things.

    Credit writedowns are necessary, this means deleveraging households and corporations, and banks failing. But pretending that’s the only non-solution, creating a deflationary zero-sum depression environment where social darwinists can play their games and tell the rest of the people how much they are “living beyond their means” while they keep their material consumption at the same level? No thanks, keep that for yourself.

    While the deleverage goes aggregate demand has to be increased until society as its full capacity utilization and there is no involuntary unemployment. And prices (flows, not stocks) will send signals of where you need to invest to overcome problems.

  • Leverage

    * meant Spanish public finance

  • Oroboros

    “The only question is whether they will wait for the entire union to collapse before trying to put it back together again or if they will be proactive?”

    90% towards collapse, then – as all eurocrats, Germans included, together realize their own jobs and careers are on the line (if they’re in office during the collapse they’ll be voted out en masse) – a new treaty will be rushed through. The people will have little say.

    My best guess, given my experiences.

  • baychev

    I agree with you that although the PIIGS are in one group, they barely have any similarities.
    Ireland has had strong and still very competitive economy, the RE sector really got out of control and cronyism let to socialisation of bank losses.
    Portugal has never had economic growth in the past 10 years, they were simply borrowing and spending.
    Greece and Italy are cheats, they would do anything to exploit a situation to their own advantage collectively as a society. When France and Germany relaxed the 3% deficit rule in 2008 to their own benefit, Greece took that exception to the extreme with a 12% deficit. They have been in default 1 out of every 2 years for the past 130 years, this track records speaks for itself and has no single cause. Italy has as well deeply rooted dishonesty problems like tax evasion and clear divide between the north and the south.
    Spain had a huge RE bubble (many homes are being repaid with incomes from UK/Netherlands though), but it has another big problem as well: too many people milking the unemployment benefits system while working on the black market.

    If each country has taken the knife and cut out its own rot, it would have helped alot and they would not be in their respective and strikingly similar situations: out of credit and out of money. default is like vomiting, it helps clean the system and regain conscience quickly, I don’t see why we have to be attempting drunk intellectual stunts as some suggest here, this is an oxymoron.

  • baychev

    My thinking goes along these lines, I know it is heresy for MMTers and Keynesians, but here it is: if we admit that we indeed had a bubble, we cannot possibly keep aggregate demand where it is without blowing at least equally sized bubble somewhere else in the economy. Is it exactly another bubble what we want to end up with? If not, we have to let the economy shrink and enforce market discipline by having imprudent investors take their losses. If we bail them, they simply rush for the next bubble we are about to blow and policymaking becomes hostage of moral hazard.
    I can tell you now that neither MMTers nor Keynes are intellectually bankrupt people whose only goal was to create a theory about a trap that leads serfdom and usory. Just like in AA team, we have to admit that we are debt addicts and we have to break that habit in order to recover because we have passed the inflection point where every shot if stimulus brings any additional lasting benefits.

  • Leverage

    I will just ignore policy prescription based on stereotypes and outright generalization and propaganda. But I will go to the root of it: “If we bail them, they simply rush for the next bubble we are about to blow and policymaking becomes hostage of moral hazard.

    I can tell you now that neither MMTers nor Keynes are intellectually bankrupt people whose only goal was to create a theory about a trap that leads serfdom and usory. Just like in AA team, we have to admit that we are debt addicts and we have to break that habit in order to recover because we have passed the inflection point where every shot if stimulus brings any additional lasting benefits.”

    You can’t really believe this, there isn’t a single MMT’er (that I know of at least) or postkeynesian (which are the true heirs of Keynes) which said banks should be bailed out. Indeed one of the good things of our monetary system is that banks can be liquidated without problem (except some chaos). But once deleverage starts is not necessary to destroy the whole economy with it.

    The only constraints are real (this is what MMT is about). Pretending financial capital availability should slack aggregate demand or employment is nonsensical. That’s a job of prices (and this is not even true, it only means consumption would have to be reduced and employment and production be focused elsewhere or try to mitigate that inflation by investment and development).

  • Cullen Roche

    Super C,

    That’s a good thought. And what’s interesting about these “claims” on our future wealth is that foreign nations can’t really do much with those dollars aside from buy our bonds. As we saw with China a few years ago, they can’t buy our companies or our ports. So, the real question people need to ask themselves, is what wealth are they gaining a claim on? More bonds? So be it. If they want to send their goods and services overseas then fine by me….

  • baychev

    Indeed, you never said explicitly banks shall be bailed out, but you implied it. What is ‘aggregate demand’, is it something tangiable? When we had the internet bubble, how could we possibly sustain that ‘demand’ for companies that never turned a dollar of profit? How could we sustain the demand for homes given everyone with a heartbeat got a 0% down 250,000 loan? These are bubbles and they are UNSUSTAINABLE. There is no way to keep that demand unless you give the moral hazard players leverage to blow another bubble, they are anyways to the eyeballs in bad debt and need bailouts. Trying to sustain a bubble inflated means we have to move it from one asset class to another, because this is NOT a genuine demand for commodities like steel, oil that you can use for many different purposes. In fact we are trying to sustain credit at uncerviceable levels, isn’t this a dignlosable lunacy?
    Pardon my writing, this blog platform is not smartphone friendly.

  • baychev

    Not sure about Spain, but the U.S. has a genuine need for skilled labor: engineers, programmers and unskilled agri workers. How could we possibly replace them with house flipping agents and builders? This is not the 30-ties where you put screws either on a car, a machine of some sort or you look after your own garden. ‘All things equal’ does not seem to be equal anymore :)

  • Leverage

    Demand for goods and services can rise without bubbles as long as there is unemployment and capacity underutilization. This means that there are machines without workers and workers without jobs. Remind the era of 50-60’s, and there were not big bubbles then.

    Bubbles created financial assets by credit expansion,. that credit expansion fuelled growth (income), but also created an asset-bubble. But you have to look beyond that: how was the distribution of these financial assets and the debt counterpart, were incomes decoupled from productivity raises, etc. The problem with credit expansion and asset bubbles is that the net financial assets end up mostly in the hands of financial system (and some corporations) while households (and other corporations) end up with a lot of debt. But this does not mean that there wasn’t real output and that now there is an huge output gap in the economy.

    This is the whole point of MMT, if governments create financial assets it can offset private leverage in the first place. Obviously we would have to place harder control on credit expansion and lending practice, but it wouldn’t be a problem if the demand for money so the economy can run at full capacity comes from elsewhere.

  • baychev

    I fully understand how MMT and Keynesianism work on paper, I do not understand how it could possibly work in reality. We have a shortage of skilled software engineers, why not place the liberal arts grads that no longer have jobs as RE agents on the PCs to program? Or the builders? Or send them to pick tomatoes? Even probationers do not want to do agri work!
    Labor is not unskilled commodity as you are trying to present it, idle capacity for homebuilding equipment is not software for programming, etc. This is the great folly of’aggregate demand’, it does not appreciate the difference between available supply and needed demand.
    This clown Dimm never understood why cost cutting is necessary: much of gov’t spending was funded(or not ) by receipts from UNSUSTAINABLE bubble activity and if it does not shrink, the debt slowly drags the economy down like the private sector you are describing.
    You just cant fake ‘aggregate demand’ forever and pay interest on this fake, uneconomic activity.

  • Leverage

    Yes, the crisis is the fault of labour, how they dare to be underskilled or study these useless liberal arts!

    Remove unemployment benefits and implement a job guarantee program instead. Then you can blame labour for being unemployed if you wish. Until then I think you don’t know what you’re talking about or are making outright generalizations again.

    Usually people is not in the business of not earning an income and not eating. Most people seeking a job after X weeks will get any available job it can apply to. People can learn new skills and actually there is place for unskilled labour, when private sector has deleveraged it can pick up and be more efficient about job creation, meanwhile the government has to help however it can (cutting employment costs, taxes or by job programs). Is not ideal but is better than the other thing.

    P.S: BTW if you want to pick on bad spending pick on agricultural subsidies in the first world, the only need of job demand on these sectors are created by governments. And food is not one of the sectors really lacking output, there is an huge waste of food and enough to feed everyone in this planet if it weren’t because of these terrible policies in the first world!

  • Leverage

    Ah btw, with lower debts, falling real estate prices and a low deflation in a lot of sectors , coupled with labour share of productivity and increase of shared part of income from corporations etc. probably we would need to work less for better standards of living and sharing jobs (what has been done in part in some countries like Germany), while even reducing consumption.

    It’s a social and policy (political) problem, is not a financial (financial problems at macro scale are always “manufactured” or artificial IMO) and economic problem (lack of output capacity or too high cost push inflation; both can be managed).

  • Mike Irl


    I’m not sure the differences between EU & US citizens as regards how they see their nationality is as great as you suggest, especially in the eurozone. I believe things have been changing a lot in the last decade or so. There is also much common anger at the elites for making such a mess of currency union. Just as in the US, the media BS creates artificial division. Were people to realise the benefits that an MMT approach could bring & who (& what) really is the enemy of our collective wellbeing, I think there would be great enthusiasm for further integration.

  • Cullen Roche

    I agree that there is greater unity, but there are still large factions of Europe who cannot overcome a great national pride. Which is understandable.

  • Peter D

    LEt me second what Leverage is saying. I’ve been thinking about this more and more in the last week or so. The reason we had credit bubbles in the first place is the lack of NFAs in the private sector. The need to leverage comes from the lack of money. People wouldn’t have had to mortgage their homes had they had enough income to begin with. This is simplistic and probably unachievable without the correct regulatory and tax structure. Tax structure might be especially important. Seems to me more and more that we don’t need income taxes at all – we should not discourage labor, instead we should only have taxes on property and rentiers. We’ve been doing it all wrong all this time!
    Mosler just came out with this:

    Or have they? Looking back at past cycles it seems the support from private sector credit expansions that ’shouldn’t have happened’ has been overlooked, raising the question of whether what we have now is the norm in the absence of an ‘unsustainable bubble.’ For example, would output and employment have recovered in the last cycle without the expansion phase of sub prime fiasco? What would the late 1990’s have looked like without the funding of the impossible business plans of the .com and y2k credit expansion? And I credit much of the magic of the Reagan years to the expansion phase of what became the S and L debacle, and it was the emerging market lending boom that drove the prior decade. And note that Japan has not repeated the mistake of allowing the type of credit boom they had in the 1980’s, accounting for the last two decades of no growth, and, conversely, China’s boom has been almost entirely driven by loans from state owned banks with no concern about repayment.
    So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom? And with today’s politics, the odds of pursuing a higher deficit are about as remote as a meaningful private sector credit boom.

    I think Mosler is one of those one in a million self-made geniuses who just manage to see what the rest of us somehow miss.

  • Andrew P

    I kind of understand why Trichet is raising rates. He really is between a rock and a hard place. The Eurozone is a totally credit based currency system, as it has no central government treasury. This means that ALL Euro instruments (other than printed Euro notes and minted coins) have inherent credit risk. Nothing is truly safe. Trichet can’t afford to have the Euro fall too much in value. He needs EU depositors to keep their money in Eurozone banks. If there is a massive run to withdraw Euros and buy Dollars, Pounds, Yen, or Gold, the Euro could collapse suddenly, and most of the Eurozone banks could go down with it.

  • Andrew P

    2000 years ago the Europeans had a common identity. They were all Citizens of the Roman Empire. They can be so again. All they need is a new Caesar to be appointed during a crisis, and for Caesar to be given absolute power over all the things that really matter (military, police, finance, banking, justice, etc..)

  • baychev

    I am finding your irony baffling: both it is not the labour’s fault and labour is a commodity of the quality of… water: it can fit anywhere with no training or prior education at all.
    do you believe yourself?

  • baychev

    read this article from yesterday, it has come out just in time and summarizes the follies of your thought process:
    – excessive generalization and aggregation;
    – total disregard of the fact that capital goods in the slacking part of the economy (homebuilding) cannot be used in consumer electronics production or corn harvesting where there is indeed a real shortage for 3 years and counting;
    – apparent misfit between unemployed labour’s available skill set and the needed skill set;
    – the fact that skills just as capital goods require time to be acquired;

  • Kostas Kalevras

    Debt creation is money creation, debt repayment is money destruction. A stimulus packet will involve new money, it WON’T be taken out of anyone’s pocket. The PIIGS are in a desperate need of a buyer of last resort on their bonds (ECB/EFSF) and a large enough marshall project along with economic restructuring to get their economies back straight. You really cannot restructure an economy while making sure it has 20% unemployment in the same time. Massive deleveraging (which is already happening) will guarantee deflation and the recession will guarantee that the debt-to-gdp ratio will become even higher (as is happening in the whole of the periphery). Inflation is imported, mainly due to fuel and food prices, no interest rate increase will change anything in Saudi Arabia’s oil production, only in the demand (and economic strength) in the Eurozone countries.

  • Leverage

    Ok let me talk about Spain (the market I know better). Off course I know micro matters, structure of the labour market is important and sectoral demand too:
    – First, population grew by 5 millions or more in 8 years. Which is quite a lot for a country with a population fo around 42 mill. for the expansion.
    – Of these 5 mill. the majority where men of work age and underskilled (mostly poor latino-american, North Africa or sub-Saharan population). Native population was stagnant (or even decreasing, because of emigration).
    – The artificial ‘wealth’ effect created by the bubble, channelled most of the working force to construction or construction derivative employments. (As you say.)

    Off course to fix this there needs to be done a lot of stuff, specially removing the double legislation of the labour market which is creating all sort of generational problems, fixing the compensation system, reducing costs, etc. Some of this stuff has been done (even if not with all the decisiveness that should have been done) or will gradually (I hope). A lot of the unemployment will have to be fixed with migration (on process too). There must be some wage deflation (which is not that bad if housing costs drop a lot too, which they are doing). In some respects, formative prospects have to be fixed (but I don’t think this is a big problem in Spain, there is excess qualification; and I tend to think the same is true in USA, maybe you will have problems in some sectors, but it’s not the biggest problem).

    All this does not mean that: if demand drops (because deleverage), corporations won’t create employment or will end firing up even more people; if liquidity is drained someone has to steep to provide it and finance projects and investment that create long-term growth; that government ends as an employer of last resort (even if incomes are only minimal wage) for these willing to or that need to work. I don’t know of a single depression that wasn’t fixed with eventual government intervention some way or an other; even if it took a war (pretty stupid to get to that point, but was not unusual) to implement the right policies.

    I prefer the market to do it, but sometimes the market fails, and “self-regulation” is just an euphemism of “social darwinism”, and hence is not (and never has been) an option, because that will mean social and political revulsion (I’m sorry for “autrians”, get over it and learn from the past). I rest the discussion here because I know we won’t get anywhere and is a waste of time, had this discussion a bazillion times and I doubt anyone is gonna change their mind).

  • SuperC

    Its actually fairly akin to exporting oil, a position that everyone feels is advantageous. Some key differences exist, such as there is no finite supply of our currency, but as we export more and more currency we will inevitably approach a situation where the rest of the world thinks they have “enough” dollars, I mean there is some limit to how long a country can export its currency. Hyperinflation is not likely to be the result, just a weak enough dollar that power shifts away from us and we become an exporter again. Whereas with oil as supplies run out prices go up and perhaps the exporting countries enjoy their best days just before the game is up, a currency exporter should just gradually lose its ability to benefit this way.

    Just pondering. But really, if we have a trade “deficit” that implies that we are running a tab at the neighborhood bar, to be paid later. We aren’t, a deal is a deal and other parties have accepted dollars for their goods.

    We have imported goods and services and exported currency. An advantageous outcome with some downsides of exporting jobs and so forth. The shift to a “service economy” is a result of external demand for our currency, and at some point in the future it is likely that a shift back will be necessary, when demand for our currency subsides.

    Those thoughts seem reasonable, hope they are interesting to someone.

  • baychev

    i like the austrian approach: rather than trying to sustain the crashing unsustainable, they offer quick liquidation of malinvestments and reallocation of resources to other neglected areas.
    where they differ with keynesians and MMTers is the perception of reality: austrians admit there was a bubble and the economy needs to shrink in order to start growing balanced again until it forms a bubble elsewhere. keynesians and MMTers on their side suggest that we have to keep the bubble in place and simply inflate everything else in the economy through deficit spending until we reach equilibrium again. excuse me, but is it possible to inflate an entire economy through central planning? the soviet block has been trying it and they failed miserably.
    if it were possible to quickly inflate a whole economy but a single asset class, it must be possible to orchestrate even 5-6% GDP growth all the time. why don’t these clowns suggest we deficit spend all the time and simply have that supperior level of growth? am i missing something?

  • baychev

    please define for me (and possibly all others) what a balance sheet recession is. i know what balance sheet is, what recession is, both certainly refer to completely uncorrelated things, i just want to confirm my view that you are referring to nothing else but deleveraging.

  • baychev

    I am not sure what is messed up with your blog platform, but not all posts have Reply button. On top of that on Android phones this blog behaves awfully, is sluggish and typing is a nightmare. I cannot see what I am typing, where the cursor goes when I try to fix a typo, etc. Bear in mind that half of all internet connected devices being sold these days are not PCs and your blog does not provide the pleasant and engaging experience that it deserves given its quality.

    Now to your comment: I am fully with you that we need gov’t to do something, we just need not expect from it to support aggregate demand of a balanced economy plus a bubble and then another one, and another one…
    I hope you see where I am coming from. Tax breaks for IT companies building assembly lines in the U.S. should have been much better than letting them keep their profits offshore lest they pay any taxes. The negatives are again here, but nothing positive along with them.
    Corn is another inflection point. With mandated ethanol use in fuel, corn is skyrocketing. There is plenty of demand for harvesters and tractors, John Deere is full of back orders for something like 18 months, there are alot of smaller producers that are overwhelmed by demand. Why did no one suggest that these rotten auto companies be transformed into agri equipment producers given the huge demand rather than bankrupting them and giving Fiat(!!!) subsidies to produce cars all the while they are a major agri equipment producer in Europe as well?

    To me the answer is simple: change is not welcome, it is in fact dreaded and anything has to be done to avoid it. This type of mentality simply leads to ruin and is so un-American in spirit, yet so U.S. Congress. I’m laughing out loud every time I remember that ‘A change you can believe in’.