European Credit Crisis: Germans Throwing Stones

Paul Krugman has it right when he says this:

I hold no brief for weak financial regulation in America. But it’s a bad sign that Germans still think of this as a made-in-America crisis. The truth is that the European housing bubble was as big or bigger than the US bubble; not in Germany, true, but it was German capital exports that fed the bubbles in Spain and Ireland. This was a North Atlantic crisis, roughly equally severe on both sides of the ocean.

If you go to the bottom of this credit crisis timeline, you will see where German banks like IKB, Hypo Real Estate, HSH Nordbank and Dresdner Bank, chasing yield, lent recklessly all across Europe and North America. Apparently, European fund managers are now piling into a well advanced bubble in Australia too.

Of course the US banks were reckless. Of course they were. But the people in glass houses in Germany will soon find out that what comes around goes around.

Sources:

PS: you might want to take a look at this too and you’ll see what I’m talking about.

19 Comments
  1. de Graaf says

    You should also understand that Germany doesn’t set monetary policy like the FED. The FED created the moral hazard with artificial interest rates in the US.

    The effects on the financial industry were a massive chasing of yields accross the globe in an effort to avoid being overtaken by competitors. This was the main reasons why institutions vigorously searched for high yield returns.

    The culprit of all this is the FED and the ECB. Not Germany and its capital exports. That was just a rational behavior in pursuit of earnings growth that was common in the industry at that time.

    Besides, this Germany blaming was expected. The last man standing is always to blame right?

    Silly Keynesians and their moronic policy excuses…

    1. Edward Harrison says

      Who’s blaming whom though? I am not blaming the Germans any more than Krugman is in his piece (although he has elsewhere). Clearly, Wolfgang Franz was blaming the Americans in his editorial. In the US, more likely you’ll see people blaming the Chinese for their so-called savings glut. In my view, there is a lot of blame to go around.

      1. de Graaf says

        I was talking about Keynesian Krugman.

        Blame is easy, but looking for the real origin of this crisis is merely following the logic of reason following the Austrian School of Economics. Input, reason by logic, output. Forget marginal utility and computer models.

        And it doesn’t take long to see that monetary policy set by the FED is the cause of easy money and massive credit growth in the US, closely followed by the ECB to support their financial buddies from the threat of US ‘easy money’ institutions in pursuit of hostile take-over bids.

        Look, the financial industry was horribly deregulated in the ’90’s and the NASDAQ boom/bust in 2000 should have led to a decent recession to purge the malinvestments out from the system. That wasn’t allowed by those FED and banker friends.

        The easy money policy that followed led to the biggest credit binge in world history, where for the first time in the financial history of the world, ALL asset classes went up, and 1 asset class went down all the way through 2007, the US dollar…

        Sure there were different regulations that contributed or eased the crisis in the global economy, but the major driver in the pursuit for yield, was US monetary policy and capital exports to the rest of the world. Logic tells me I’m not going to save my money for 2 percent a year when inflation is at 4 percent. Financial institutions where looking to outpace inflation, and that required high yield assets. If that becomes common in the industry, who actually made that moral hazard so common…? Of course…the FED at the roots of monetary policy.

        Germany has nothing to do with that. However, Keynesian economic thinking does.

        1. Marshall Auerback says

          I don’t think Keynesian thinking has anything to do with the bubble. In
          fact, we’ve pretty well ignored Keynes and the lessons of fiscal policy over
          the past 30 years and instead relied on the Fed compensating for
          insufficient aggregate demand via the serial creation of bubbles through the monetary
          policy transmission. I would hardly classify Volcker, Greenspan or
          Bernanke as hard-core Keynesians. Quite the opposite. They are the embodiment
          of a neo-liberal philosophy fundamentally antithetical to Keynesianism. They
          represent what Minsky once called “money market capitalism”. It is clear
          that the policies the Fed, the ECB and the IMF have promoted over the last
          decades have not helped those in poorer nations solve poverty and have also
          maintained persistently high levels of labour underutilisation across most
          advanced economies. It is also clear that the economic policies these
          agencies have been promoting for years were instrumental in creating the
          conditions that ultimately led to the collapse in 2007. Now they are emerging,
          unashamed, and touting even more destructive policy frameworks. The
          establishment of the primacy of monetary policy over fiscal just means that the
          treasuries have become a passive partners and have allowed central banks to use
          unemployment as a policy tool to keep inflation stable. Central banks have
          thus been consistently working against the broader interests of the
          community. The on-going dead-weight losses arising from this strategy have been
          enormous and denied by the central bankers. They put out flawed and
          misleading research reports which try to hide the fact that the sacrifice ratios
          have broadly risen during the era of inflation targeting.

          ne of the most important elements of public purpose that the state has to
          maximise is employment. It is not the only thing the government should be
          pursuing but employment is a basic connection that people have with the
          economy and it is usually the difference between living in poverty or not.
          Once the private sector has made its spending (and saving decisions) based
          on its expectations of the future, the government has to render those
          private decisions consistent with the objective of full employment. Given the
          non-government sector will typically desire to net save (accumulate financial
          assets in the currency of issue) over the course of a business cycle this
          means that there will be, on average, a spending gap over the course of the
          same cycle that can only be filled by the national government. There is no
          escaping that.
          The national government then has a choice – maintain full employment by
          ensuring there is no spending gap which means that the necessary structural
          deficit is defined by this political goal. It will be whatever is required to
          close the spending gap.
          However, it is also possible that the political goals may be to maintain
          some slack in the economy (persistent unemployment and underemployment) which
          means that the government structural deficit will be somewhat smaller and
          perhaps even, for a time, a budget surplus will be possible.
          But the second option would introduce fiscal drag (deflationary forces)
          into the economy which will ultimately cause firms to reduce production and
          income and drive the budget outcome towards increasing deficits.
          Ultimately, the spending gap is closed by the automatic stabilisers because
          falling national income ensures that that the leakages (saving, taxation
          and imports) equal the injections (investment, government spending and
          exports) so that the sectoral balances hold (being accounting constructs). But
          at that point, the economy will support lower employment levels and rising
          unemployment.
          The budget will also be in deficit – but in this situation, the deficits
          will be what I call “bad” deficits. Deficits driven by a declining economy
          and rising unemployment.
          So fiscal sustainability requires that the government fills the spending
          gap with “good” deficits at levels of economic activity consistent with full
          employment – which I define as 2 per cent unemployment and zero
          underemployment.
          Fiscal sustainability cannot be defined independently of full employment.
          Once the link between full employment and the conduct of fiscal policy is
          abandoned, we are effectively admitting that we do not want government to
          take responsibility of full employment (and the equity advantages that
          accompany that end).

          In a message dated 6/23/2010 2:31:52 P.M. Mountain Daylight Time,
          writes:

          de Graaf (unregistered) wrote, in response to Edward Harrison:

          I was talking about Keynesian Krugman.

          Blame is easy, but looking for the real origin of this crisis is merely
          following the logic of reason following the Austrian School of Economics.
          Input, reason by logic, output. Forget marginal utility and computer models.

          And it doesn’t take long to see that monetary policy set by the FED is the
          cause of easy money and massive credit growth in the US, closely followed
          by the ECB to support their financial buddies from the threat of US ‘easy
          money’ institutions in pursuit of hostile take-over bids.

          Look, the financial industry was horribly deregulated in the ’90’s and the
          NASDAQ boom/bust in 2000 should have led to a decent recession to purge
          the malinvestments out from the system. That wasn’t allowed by those FED and
          banker friends.

          The easy money policy that followed led to the biggest credit binge in
          world history, where for the first time in the financial history of the world,
          ALL asset classes went up, and 1 asset class went down all the way through
          2007, the US dollar…

          Sure there were different regulations that contributed or eased the crisis
          in the global economy, but the major driver in the pursuit for yield, was
          US monetary policy and capital exports to the rest of the world. Logic
          tells me I’m not going to save my money for 2 percent a year when inflation is
          at 4 percent. Financial institutions where looking to outpace inflation,
          and that required high yield assets. If that becomes common in the industry,
          who actually made that moral hazard so common…? Of course…the FED at
          the roots of monetary policy.

          Germany has nothing to do with that. However, Keynesian economic thinking
          does.

          Link to comment: http://disq.us/eydtk

        2. Edward Harrison says

          I wouldn’t put Keynesian thinking at the root of the Fed’s problems at all.

          I see it this way. Greenspan, the world’s most powerful central planner was all about cleaning up after the mess which created a moral hazard and kept rates easy both on the way up and down (see “Greenspan: Hate Him, Hate Him”)
          https://pro.creditwritedowns.com/2010/04/greenspan-hate-him-hate-him.html

          However, this lax policy was not consistent with his easy money manipulation of rates. The result was a credit bubble. Was it any different in the UK? Not much. The problem actually had a lot more to do with the incompatibility of laissez-faire regulatory oversight and easy money. Laissez-faire doesn’t work when you have someone pumping up the money supply. You’re just asking for trouble.

          None of this has anything to do with Keynes, of course because Greenspan was not a Keynesian.

          1. Marshall Auerback says

            Agree Ed. Calling Greenspan a Keynesian is as absurd as thinking that he
            was a true Ayn Rand disciple. The man was an intellectual charlatan who
            embraced prevailing economic and political views to get ahead
            opportunistically. Not a principled bone in the man’s body.

            In a message dated 6/23/2010 2:41:22 P.M. Mountain Daylight Time,
            writes:

            Edward Harrison wrote, in response to de Graaf (unregistered):

            I wouldn’t put Keynesian thinking at the root of the Fed’s problems at
            all.

            I see it this way. Greenspan, the world’s most powerful central planner
            was all about cleaning up after the mess which created a moral hazard and
            kept rates easy both on the way up and down (see “Greenspan: Hate Him, Hate
            Him”)
            https://pro.creditwritedowns.com/2010/04/greenspan-hate-him-hate-him.html

            However, this lax policy was not consistent with his easy money
            manipulation of rates. The result was a credit bubble. Was it any different in the
            UK? Not much. The problem actually had a lot more to do with the
            incompatibility of laissez-faire regulatory oversight and easy money. Laissez-faire
            doesn’t work when you have someone pumping up the money supply. You’re just
            asking for trouble.

            None of this has anything to do with Keynes, of course because Greenspan
            was not a Keynesian.

            Link to comment: http://disq.us/eyeq5

        3. de Graaf says

          I should correct myself if I implied that Greenspan was a Keynesian economist. Alot of economists at the FED do made their careers at the Ivey league institutions that all have curriculums based on the works of the good ol’ John Maynard Keynes and his ‘General Theory of Employment, Interest and Money’. Proof me wrong.

          So when your buddy needs a bailout during his first term watch and fiscal austerity is a bit hard to sell, why not make it happen by monetary policy and artificial low interest rates? Greenspan loved laissez faire, but laissez faire and Ayn Rand would never allow government manipulation of interest rates, in my opinion. His ‘model’ had a flaw, but I think his ethics lost a tad too, don’t you think?

          Now Keynesianism is back, but we (Dutch, Germans) have found out that debt isn’t the solution. When debt saturation occurs on your balance sheet, there is no (nominal) growth left on offer without a printing press. Austerity is the only solution left for Europe other than outright default where the US is headed for, where it not for the weapon of hyperdestruction…a fiat money printing press.

          I wish you Americans good luck with the fiscal house. I’m glad we have change coming in my own home country, the Netherlands. A good cut in government will do us all good. After all, deflation is a good thing. You just have to embrace it with conviction.

          Two cheers for the fiscally prudent in Europe! I’m glad some people still have the ability to think dynamically, instead of 4 percent linear on an annual basis… ;)

        4. Edward Harrison says

          de Graaf,

          I’ll have to write up my view on this. But, for the time being, call me an Austerian because it seems pretty clear that stimulus of the Krugman variety will be wasted on propping up the banking and real estate sectors and promoting a further misallocation of resources while insiders enrich themselves with bonuses from phantom profits. I find the whole spectacle absolutely pathetic. So, you and I agree on a few things here – namely that those calling for yet more stimulus to be wasted on the banking and real estate sector is pure insanity.

          On the other hand, full tilt austerity is equally insane. Most of the people promoting it don’t have a very good grasp of the how the public and private sectors balances interact. The potential for a debt deflationary outcome is high.

          By the way, I should point out that the household savings in Germany is offset by the large debt burdens so it’s really not as simple as saying these people here save but these people do not. For instance, the debt burdens of the German and Dutch public sectors are larger than the Spanish.
          https://pro.creditwritedowns.com/2010/05/spain-is-the-perfect-example-of-a-country-that-never-should-have-joined-the-euro-zone.html

          Expect me to post on this. But suffice it to say that I want a glide path scenario that avoids debt deflation. But if I had to choose between the hairshirt now or a worse one later, I would choose one now.

    2. Edward Harrison says

      One last problem in Germany that the politicians need to address is household debt levels. German households are more indebted than Greek households. It’s Greece and Italy where household debt levels are lowest.

      http://www.nakedcapitalism.com/2010/05/german-households-owe-more-than-greeces-do.html

      German policy needs to take this into account – namely by allowing households to relieve their debt stress as austerity takes hold.

      1. Marshall Auerback says

        Another point here (since I’m trying to deal in facts, not silly
        name-calling).
        Reading the press, one gets the impression that the Greeks must enjoy one
        of the highest standards of living in Europe while making the frugal
        Germans pick up the tab. In reality, the Greeks have one of the lowest per capita
        incomes in Europe (€21,100), much lower than the Eurozone 12 (€27,600)
        or the German level (€29,400). Further, the Greek social safety nets might
        seem very generous by US standards but are truly modest compared to the
        rest of the Europe. On average, for 1998-2007 Greece spent only €3530.47 per
        capita on social protection benefits–slightly less than Spain’s spending
        and about €700 more than Portugal’s, which has one of the lowest levels in
        all of the Eurozone. By contrast, Germany and France spent more than
        double the Greek level, while the original Eurozone 12 level averaged €6251.78.
        Even Ireland, which has one of the most neoliberal economies in the euro
        area, spent more on social protection than the supposedly profligate Greeks.
        Greece has one of the most unequal distributions of income in Europe, and
        a very high level of poverty. Again, the evidence is not consistent with
        the picture presented in the media of an overly generous welfare state—unless
        the comparison is made against the situation in the US.

        In a message dated 6/23/2010 2:23:32 P.M. Mountain Daylight Time,
        writes:

        Edward Harrison wrote, in response to de Graaf (unregistered):

        One last problem in Germany that the politicians need to address is
        household debt levels. German households are more indebted than Greek households.
        It’s Greece and Italy where household debt levels are lowest.

        http://www.nakedcapitalism.com/2010/05/german-households-owe-more-than-greec
        es-do.html

        German policy needs to take this into account – namely by allowing
        households to relieve their debt stress as austerity takes hold.

        Link to comment: http://disq.us/eycwa

  2. Jo says

    I have to take issue with you here Ed; for no other reason than I have a default position of always believing Krugman to be wrong.

    1. Edward Harrison says

      It’s the message; not the messenger though :) What the Germans need to realize is that their banking system is undercapitalized. Blaming the US for the credit crisis won’t solve anyone’s problems any more than blaming the Germans for wanting fiscal prudence in a fixed currency system.

      1. Marshall Auerback says

        Ed, you are 100% right on this. Until the German policy makers surrounding
        Merkel figure out they will not just be collapsing the euro, but also
        their own banking system, starting with the banks with the largest exposures on
        their books to the private sectors of the GIPSIs, and their export
        markets, 70% of which go to Europe (30-40% of that the eurozone only), we will
        have a big problem.

        As my friend Rob Parenteau always says, “Austeria, uber alles!”

        In a message dated 6/23/2010 2:07:24 P.M. Mountain Daylight Time,
        writes:

        Edward Harrison wrote, in response to Jo (unregistered):

        It’s the message; not the messenger though :) What the Germans need to
        realize is that their banking system is undercapitalized. Blaming the US for
        the credit crisis won’t solve anyone’s problems any more than blaming the
        Germans for wanting fiscal prudence in a fixed currency system.

        Link to comment: http://disq.us/eyaz8

    2. Edward Harrison says

      Also Jo, read this history for a more nuanced perspective:

      The Soft Depression in Germany and the Rise of Euro Populism
      https://pro.creditwritedowns.com/2010/05/the-soft-depression-in-germany-and-the-rise-of-euro-populism.html

      If you told me I had to blame one actor only I would choose Alan Greenspan’s Fed. But, as always, ideologues want to simplify things and point fingers when in fact there were a lot of factors to this whole mess.

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