Can Someone Please Explain Germany’s Reputation for Fiscal Conservatism to Me?
Assume I believe in risk-adjusted return on capital. That is, I don’t buy a bond yielding 12% instead of one yielding 6% without first considering that the yield difference is affected by the likelihood of Principal return being lower. (But I will buy the 12% bond if I believe the risk premium is too high relative to the 6% bond.)
In short, I fit the second—not the more accurate “traditional” or the current even-more-bollixed “risk management” definition—of the Prudent Investor.
I can watch my neighbor buy more and more expensive gadgetry, while knowing that s/he makes no more than I do, has some old debts, and doesn’t not have dynastic wealth (i.e., the possibility of inheritance or some other deus ex machina) to save himmer. And I notice that hisser buying is growing greater over time.
My neighbor decides to borrow money from people to support hisser ever-more-extravagant lifestyle. S/he offers rates slightly higher than the rate at which I can borrow. (That is, I can borrow money, take the interest payments from himmer, and pocket the difference—if the Principal is paid back on schedule.)
Do I loan the money to—effectively, buy bonds from—my neighbor?
My instinctive answer is “No,” but I am a Prudent Investor. So perhaps I give my neighbor some money—monies I can afford, not something I need to borrow—as a token.
Under no condition do I become—by a margin of more than 2:1—the largest creditor of my neighbor’s lifestyle. Not, at least, if I want to maintain my reputation as a conservative (“prudent”) investor.
Remember, fiscal discipline is what we impose on other nations. The name of the game is not prudence, but power.
Not a good way to frame the issues at work here. Not to justify Germany’s current set of policies, but countries have a wide variety of interests and policy goals, and all of them have inertia, because domestic interests arrange their affairs to accommodate the chosen set of policies. That is to say, trying to shove Germany’s decision about Greece and Ireland into a “fiscally conserative or not” dichotomy will miss most of what is going on.
In normal policy parlance, fiscal conservatism has to do with the balance of income and outlays, not the risk of some part of the income and outlays. Germany is more fiscally conservative than Greece, so Germany is in a position to aid Greece, and Greece is in a position to need aid.
Ken,
“can someone explain Germany’s reputation for fiscal conservatism?”
well, “fiscal policy is the use of government expenditure and revenue collection to influence the economy”.
http://en.wikipedia.org/wiki/Fiscal_policy
Hypo Real Estate (HRE) was a spin off from HypoVereinsbank in Germany. It happened to buy Depfa, a German bank that moved to Ireland in 2002 to use the less strict bank regulation there. Ireland was the destination for many of the European SIV and shadow banks.
http://en.wikipedia.org/wiki/Hypo_Real_Estate
http://en.wikipedia.org/wiki/Depfa_Bank
Shortly after buying Depfa Lehman Brothers collapsed and with it Depfa’s financing scheme. It bought muni and sold covered bonds (long) and borrowed short. When bank credit dried up quickly in 2008, HRE was rescued by buying up the shares for cheap. It was pretty much the Swedish model and the only case where the bank owners (read: shareholders) were punished for hiring the wrong guys who made stupid decisions.
So, HRE is now owned by the German government. But it didn’t lend money like crazy although it was owned by the government. It is own by the government because of the irresponsible business structure.
Was it smart and/or fiscally responsible to rescue HRE? About as smart as rescuing AIG, Fanny, Freddie and all the others big players. But the damage was already done before the German taxpayer jumped in. And the loan portfolio grew when Depfa was under Irish supervision.
I think, it is OK to blame Depfa and Georg Funke for behaving irresponsibly. And HRE for not understanding what was in Depfa’s books. And the EU for allowing juridical arbitrage. Blaming Germany as a nation simply doesn’t fit into the picture. It was a fiscal decision to use government money to prevent layoffs in 2008 and 2009. It helped companies to keep their workforce and meet demand when business conditions improved. But what went wrong at HRE was not a fiscal decision.
What are you surprised at? There are two catagories on that list. One of government owned banks. The other private sector. The portion that is owned by the goverment(s) is not really a problem. That can be sat on for a very long time.
That which is owed to the private banks is not much to worry about either. Consider the last bank on the list
SocGen about $700mm of total exposure to Erie. This is the same bank that lost $6b from a rouge trader. They are still standing from that. Ireland is not a big deal.
This cheat shows more of the numbers. Forget ireland. That is managable. It is Spain that is going to be the problem.
Yes it is who controls the credit, why the Templar were destroyed. They got too big in the Crusader finance cabal for the French King.
Questions Kenny doesn’t ask:
How much does the German bank have in reserve?
What other exposure does the bank run? If they’re doing the same in Greece, Portugal, then there’s more reason to be concerned.
Typical, take a data point out of context and use it to prove or disprove a supposed conventional wisdom. Yawn.
#1. Hypo Bank is German
#2. Hypo Bank was Stupid
#1 and #2 do not imply #3: “Germans are Stupid”
If you are convinced it does then try this one
#4. WaMu was American
#5. WaMu was Stupid
#4 and #4 do not imply #6: “Americans are Stupid”
Minor style suggestion: singular “they” and “them” flows better than “hisser” and “himmer”.