Conflation and non sequiturs, thy name is Mitt Romney
Here’s an exchange between Tim Worstall and me in the comments to my post below titled “Spain. Please,Mr. Obama, talk about Spain. Please.”:
WORSTALL: If you’re going to comment on the Spanish economy might help if you knew something about it.
The big three banks, the equivalent of the Wall Street ones? They’re just fine.
Know which part of he banking system screwed up? The Main Street one. The one that was run not for profit (the cajas were not for profits, usually owned by a charitable foundation). Run by the local politicians in fact. The community organisers you might say.
That’s the part of the Spanish banking system that is hopelessly bust. Not a single piece of deregulation in sight. No CDOs, no CDS, no nothing except too many loans out to people who cannot repay.
This may be many things but a rerun of Wall Street in the 90s and 00s it ain’t.
ME: Hmm, Tim. Did you say in your comment that the percentage of the Spanish economy that is spent on government has even the slightest thing at all to do with the economic situation in Spain? Was that in code language somewhere in what you said? If so, I didn’t pick it up.
And, if there was no a single piece of deregulation in sight—No CDOs, no CDS, no nothing except too many loans out to people who cannot repay—then maybe it’s that there wasn’t enough regulation of the banking system, to begin with? And I’m sorta wondering what the difference in outcome was between a bank controlled by pols who screwed up (in Spain) and pols controlled by a banking system (here)? And, y’know, what all it has to do with the percentage of the economy that is spent on government—which is what Romney claims.
Conflation and non sequiturs, thy name is Mitt Romney. Remove the incessant conflations and non sequiturs, and what do you have, Tim? Do tell.
Do tell.
Shorter TW: Since unregulated non-profits can lose billions why bother regulating banks?
Strategery!
Here’s what you said:
“Romney doesn’t want to go down the path to Spain? Oh? Well, sine, actually, the percent of Spain’s total economy that they spend on government has nothing at all to do with Spain’s situation now, and instead has everything to do with the fact that they had a huge, huge housing bubble, worse even than ours, and since their housing bubble, like ours, is—like ours—the main cause of their economic problems, and since Romney wants to repeal the Dodd-Frank Wall Street and Mortgage-lending regulations and replace them with regulations that favor Wall Street … then, yes, Romney does want to go down the path of Spain.
Or at least down the path we took during our deregulation juggernaut.”
Spain’s problem is to do with the housing bubble. Which you then go on to equate with the deregulation of Wall Street.
I point out to you that Spain does indeed have a problem with a housing bubble. But that the problem, is nothing at all to do with Wall Street like deregulation. Because Spain didn’t have that deregulation.
Indeed, Spain had some of the tightest bank regulation in the world. They were banned, entirely, from using off balance sheet SPVs. Not allowed to securitise mortgage debt. Forced to increase reserves throughout the boom. Precisely and exactly because it was a boom, until they had some of the highest capital margins in the world.
Which is what I pointed out: that Spain’s housing bubble problems are nothing to do with that deregulation that didn’t happen.
They are to do with Spain being in the euro and thus having negative real interest rates for a number of years. But that’s another story.
Thanks, Tim. The bottom, then, if in understand correctly, is that the economy collapsed in this country and in Spain for the same generic reason—a huge housing bubble—but that the reason for the housing bubble in this country was different than the reason for the housing bubble in Spain. In this country, the housing bubble was caused by such things as financial-industry “products” like mortgage-backed securities and security-ratings agencies that had huge conflicts of interest. In Spain, the housing bubble was caused largely by something irrelevant here: Spain’s membership in the Euro zone.
But in neither case—most relevantly, Spain’s, because Romney claimed otherwise last night—was the housing bubble and the resulting collapse of the economy the result of government spending. Which was the main point of my post. Or was supposed to be.
Anyway … thanks for your explanation.
Beverly, the public taking on debt relative to government spending has theories where if the government does not take enough debt putting money into the economy then the public will. Not saying this was Spain but the two may be related.
Mcwop
Mcwop
not at all sure i understood what you are saying here, but those theories tend to leave out about fifty relevant variables for every one they “prove” will lead to the claimed result.
Coberly, read this piece as it explains it much better than I can in the comments. http://www.huffingtonpost.com/mobileweb/warren-mosler/the-certainty-of-debt-and_b_1656736.html
Mcwop
Coberly in more from Salon:
http://www.salon.com/2012/04/19/deficit_dogma_debunked/?mobile.html
Mcwop
thanks for the links. i’ll try to get to them.
Far as i can recall, the imf gently warned spain in 2004…somewhat less gently in its early 2005 report – [excerpt] –
The boom in house prices and the sharp increase in household indebtedness have continued unabated. With a sixth consecutive year of double-digit percentage increases in 2004, house prices have virtually doubled in real terms since 1997. Mortgage credit—almost exclusively at variable rates—has also continued to grow at a rapid pace (around 25 percent in 2004). Relatedly, household indebtedness has overtaken euro area levels, exceeding 70 percent of GDP in 2004.
9. The main domestic risk to the recovery is posed by the continued boom in house prices and the high level of household indebtedness.
February 2005
IMF Country Report No. 05/56
http://www.imf.org/external/pubs/ft/scr/2005/cr0556.pdf [PDF]
there was no surprise.
Juan
Bev:
Indeed there is linkage back to Wall Street and TBTF with the crisis in Spain and the Eurozone. The same as the US, Germany and the govs want the little guy to pay for it. Those CDO/MBS, CDS, and naked CDS didn’t just stay in the US. Where ever there was a place to use them, the GS of the world brought them to bear.
“The European sovereign debt crisis is little more than a huge ‘bait and switch’ perpetrated on the publics of Europe, by their governments, on behalf of their banks. We need to remember that what we refer to today as the ‘European Sovereign Debt Crisis’ began as a private sector financial crisis back in 2008, when ‘too big to fail banks,’ writing deep out of the money options on taxpayers, quite unexpectedly (to some) blew up. Fearing a financial Armageddon, governments transformed private bank debt into public debt via bailouts, lost revenues, lower growth, higher transfers, and yawning deficits. The unavoidable result across the European continent was a massive increase in government debt. While painting this as a story of fiscal irresponsibility has some plausibility in the Greek case, it simply isn’t true for anyone else. The Irish and the Spanish, I and S in the eponymous ‘PIGS’ were, for example, considered ‘best in neoliberal class’ in terms of debts and deficits until the crisis hit. Public debt is a consequence of the crisis, not its cause.” http://triplecrisis.com/how-to-turn-a-continent-into-a-subprime-cdo “How to Turn a Continent into A Subprime CDO” Tim is blowing smoke as usual.
This whole debacle started with Greenspan deregulating the commercial and investment banking. GS was never a bank until TARP in which case they and others were made banks in order to bask in the power of the FED and cheap loans.
Remember to, the influx of global money which found safe haven in mortgages after Greenspan told the global community he was not going to increase FED rates in and about 2003 (I can probably find a reference to it in my files).
In any case Germany can not afford to lose PIIGS from the EU.
Tim’s explanation–most especially the final paragraph–is spot on. But do not neglect the role of financial alchemy.
As he (correctly, of course) notes, Spanish banks were “not allowed to securitise mortgage debt.” But Spain’s housing bubble was based on capital inflows (primarily from Germany), and you can safely bet that the German banks were doing the Fin Svcs equivalent of “hedging”–finding correlations that hadn’t gone wrong before and assuming they would not go wrong in the future. (Incomplete markets are a bitch, though they have enabled Joe Stiglitz to have a Career.)
So I’m betting–my usual US$20, your favorite charity v. mine–that those same German banks that decided to Lend Big ($146B) for Spanish property took a lot of positions in the US MBS market as “hedges.” Though I would be happy to be proved wrong.
Thanks, all—Ken, Tim, run, Anon, Mcwop, coberly, am soc—for participating in this discussion. These facts are so important. And I’m proud of myself for actually following all of it. (Okay, most of it.)