Mitt Romney’s Ridiculous Comparison of US to Greece
By John Carney
Dec 21 (CNBC) — I realize that Republicans want the United States to accumulate less debt. That’s a fine policy position to take. I’m somewhat sympathetic to the idea that debt can drag down the economy.
But there’s no need to start saying crazy things like the U.S. is about to become Italy or Greece if Obama is elected for another term. This simply isn’t in the cards.
The problems faced by Greece and Italy are nowhere near comparable to those faced by the United States. We have far more dynamic economies — and far lower tax rates — than those countries. More important, our government can indirectly self-finance by having the Federal Reserve buy Treasurys on the secondary market.
As we’ve seen, the Fed has an unlimited balance sheet, something that Greece and Italy do not enjoy.
Our government will never run out of money. Greece and Italy can definitely run out of money.
So it’s a shame to see Mitt Romney, the Republican frontrunner for president, spouting this nonsense.From The Hill:
Mitt Romney said that the United States would experience a financial crisis similar to that of Greece or Italy if President Obama were elected to a second term, and hit rival Newt Gingrich’s plan for the federal judiciary as unconstitutional during an interview Monday night with Fox News’s Bill O’Reilly.
“I think we hit a Greece-like wall. I think before the end of his second term, if he were re-elected, there’s a very high risk that we would hit a financial crisis that Greece or Italy have faced,” Romney said.This is worse than ignorant. It is actually malfeasant. Having one of the leading politicians in the country talk like this can only induce further economic panic.
(Hat tip: Warren Mosler)
Category Archives: Italy
Romney: US could face ‘financial crisis’ like Greece, Italy if Obama is reelected
In case you had any respect whatsoever for Romney’s understanding of monetary operations and fiscal policy.
In fact, no one has been invoking Greece since the S&P downgrade when interest rates went down, and pundits from both sides pointed out the difference is we ‘print our own money.’
Romney: US could face ‘financial crisis’ like Greece, Italy if Obama is reelected
By Justin Sink
Dec 20 — Mitt Romney said that the United States would experience a financial crisis similar to that of Greece or Italy if President Obama were elected to a second term, and hit rival Newt Gingrich’s plan for the federal judiciary as unconstitutional during an interview Monday night with Fox News’s Bill O’Reilly.
“I think we hit a Greece-like wall. I think before the end of his second term, if he were reelected, there’s a very high risk that we would hit a financial crisis that Greece or Italy have faced,” Romney said.
“I think it’s also very possible that we would continue to see very high levels of unemployment. I think you would see industry in this country, entrepreneurs, big and small, decide to go elsewhere, to take their investment dollars to other nations. This president has put together the most anti-investment, anti-growth and anti-job series of policies that I’ve seen since Jimmy Carter,” he added.
comments on the new long term ECB funding policy for member banks
The talk is that the new ECB longer term euro funding policy will mean euro member banks will suddenly start buying member nation euro debt and thereby ease the funding issue.
That doesn’t make sense to me. I see the 20 billion euro/wk bond purchases as possibly being enough to stabilize things, but not this.
Here’s my take:
So even if a bank officer now wants to buy, say, Italian debt out to 3 years because he can get ECB funding for that term, he probably has to go to an investment committee, so it is unlikely to happen overnight.
And the investment committees go something like this.
Investment officer:
‘now that we can get 3 year term funding from the ECB, i recommend we add to our italian debt position and make a 3% spread, which is a 30% return on equity’
committee responses:
‘why does the availability of term funding alter our current policy of reducing holdings to reduce credit risk?
what are the regulatory limits?
will the regulators allow us to own more?
what about the risk of downgrade which could force a sale?
what about repo haircuts if prices fall?
what if it’s decided Italy is unsustainable and the euro ministers vote on private sector haircuts?
how will taking on this risk affect our ability to raise capital?’
etc.
While banks may indeed buy more euro member nation debt due to the availability of the new term funding, I don’t think that new funding is enough to cause them to make that decision.
I do think the term funding will be used by banks with problems obtaining term funding to lock in the term cost of funds.
ECB Wants New Capital Rules Amid Credit Crunch Fears
It’s supports the notion that they understand that for govt debt to go down with the current institutional structure they need private sector debt (and/or exports) to increase.
However with the private sector necessarily pro cyclical (which is what Minsky boils down to),
at best this policy will keep mainly keep things from getting worse than otherwise.
ECB Wants New Capital Rules Amid Credit Crunch Fears
December 15 (MNI) — The European Central Bank, fearful of a looming credit crunch, is pushing regulators to alter new recapitalization rules in a way that will dissuade banks from shrinking their balance sheets to reach the 9% core tier 1 ratio required by the middle of next year, well-placed Eurosystem sources told Market News International.
In late October, the European Banking Authority (EBA) said it was requiring the region’s biggest banks to establish an exceptional and temporary buffer: the ratio of their highest quality capital to the assets on their balance sheet, weighted for risk, must reach 9% by the end of June 2012.
Eurosystem central bank officials as well as some EU governments are concerned that this new capital requirement could lead to a massive deleveraging by banks in Europe, which would entail selling off assets and significantly tightening conditions for lending.
There is widespread fear that such a development would depress loans to households and businesses. Some say it is already partly to blame for the big selloff in sovereign government bonds last month that led to sharply higher borrowing costs for Italy and Spain.
The original idea behind the EBA directive was that banks would need to maintain a constant 9% ratio over the entire period during which the requirement was in force. They could do so either by raising new capital — a big challenge in current market conditions — or by dumping assets and not acquiring new ones, which turned out to be the easier route.
“If you combine [asset] disposals with an aggressive fiscal tightening, you are creating the conditions for a sharp contraction,” a Eurozone central banker warned. He projected that the combined hit on GDP from fiscal tightening and bank retrenchment could be as much as two full percentage points. “That means a recession next year,” he said.
In recent public comments, ECB President Mario Draghi expressed concern about the potentially pernicious impact of bank deleveraging to meet the new capital targets. “We want to make absolutely sure that this process does not aggravate the credit tightening that is going on now,” the ECB president said. “It is important that banks raise capital, but not in a way that affects lending.”
Sources said that under a new proposal intended to address this problem, banks would be required not to reach a 9% ratio but to raise a specified, fixed amount of capital by the mid-2012 deadline.
Based on figures banks provided to the EBA as of end-September, the regulators would calculate the amount of capital a bank would have needed to hit the 9% capital ratio at that time. Banks would then be required to raise that level of capital regardless of what they had done with their assets since then or what they might do with them in the future.
Because banks would be required to raise the same amount of core tier one capital regardless of subsequent balance sheet moves, they would no longer have the same incentive to dump assets as a means of meeting the capital requirement.
A senior EU source said that a recent letter from the chairman of the EBA and the Polish EU presidency had noted that bank deleveraging was hurting the recovery, and it laid out a plan by which the 9% ratio would be calculated on the basis of risk-weighted assets on banks’ books as of September 30.
If the plan is approved, “you won’t see a change to the actual ratios or the sums [to be raised], but there will be a clarification that this should not be achieved through asset disposal,” this source said. “It should slow the aggressive [asset] disposal, which many people think is killing any chance of an upswing.”
After releasing new figures last Thursday on the total capital shortfall of European banks, totaling E114.7 billion, the EBA told banks to raise the money from investors, retained earnings and lower bonuses. Banks may only sell assets if the disposals do not limit overall lending to the economy, the EBA said.
However, it is not clear how bank regulators and supervisors would enforce this and whether there would be a level playing field, a well-placed Eurosystem source said. A new EBA requirement of the type now being discussed could address this issue, he said.
The decision on whether to switch from a capital ratio to a fixed amount of capital that each bank must raise lies in the hands of supervisors and regulators. It is too early to tell whether regulators will adopt the recommendation, since deliberations are still going on, another Eurosystem source said.
In its own effort to ensure the Eurozone’s economy won’t be starved for credit, the ECB last week announced a radical set of new liquidity measures, including a looser collateral framework and refinancing operations with a maturity of three years.
Why the IMF thing works for the euro
As a matter of chance, the euro’s lucky stars fall in line with the latest IMF musings.
Perhaps most important,
operationally,
the ECB lending to the IMF,
which then lends to euro member nations,
doesn’t count as ‘printing money’ in the Teutonic monetary bible.
To recap:
When the ECB buys bonds,
it credits member bank accounts on the ECB’s spreadsheet.
Those accounts count as ‘money’ while the bonds did not count as ‘money’
So this is said to be ‘printing money’
The ECB then offers different euro accounts,
also data on the same ECB spreadsheet,
that pay interest with relatively short maturities.
This is called ‘sterilization’ because those deposits don’t count as ‘money’
However, when the ECB buys SDR from the IMF loans to the IMF,
and it credits the IMF account at the ECB with euro,
that doesn’t count as ‘printing money.’
Nor does the IMF lending those euro to the likes of Italy count as ‘printing money’
And, while a bit of a stretch,
the IMF was, after all, set up to address balance of payments issues.
And while overall the euro zone doesn’t have a balance of payments issue of any consequence,
it’s not wrong to say the euro nations in question
do have balance of payments issues.
So here’s one place in the world of floating exchange rates between nations
where IMF involvement can be said to actually fit its original mandate.
Furthermore, if there’s one force that can be trusted to impose austerity,
it’s the IMF, of course.
Also interesting is that the IMF takes the credit risk for the loans it makes,
while the ECB takes IMF credit risk on its balance sheet.
This means the rest of world is assuming the risk for the loans to the national govts.
Lastly, while it triggers a massive relief rally,
it’s just Bigfoot kicking the can way down the road,
as the austerity continues to weaken the euro economy,
now to the point of driving up deficits as GDP growth goes negative.
So bringing in the IMF helps Germany preserve it’s ‘max austerity’ image,
kicks the solvency issue down the road,
and all without the ECB ‘printing money’!
So now let’s see if it actually happens.
Merry Christmas!
Spanish Voters Set to Throw Out Socialists in Election
As previously discussed, there is virtually no political support to leave the euro,
as it’s not intuitively obvious the euro is the problem.
It is intuitively obvious, however, that the problem was irresponsible govt
and so the move towards responsible govt- aka austerity- continues.
The euro economy can be easily ‘fixed’ and in short order.
The ECB can, one way or another, facilitate all funding needs and end the solvency issue.
And the Stability and Growth Pact (SGP) can be modified to allow deficits sufficient to sustain aggregate demand.
Currently Germany continues to be obstructing the elimination of the solvency issue,
even as market forces are now begining to weaken German bonds.
And there are no member nations yet supporting readjusting the SGP to allow higher deficits.
So my best guess is Germany will soon recognize what most of the financial community has recently been voicing- ECB bond buying combined with austerity is not inflationary- opening the door to the ECB bond buying being an EU sanctioned policy of the institutional structure to ensure solvency.
That will trigger a massive ‘relief rally’ that will fade as the reality of the depressing nature of the
austerity takes over.
It could also sideline the discussion of Greek haircuts and default discussion in general.
Spanish Voters Set to Throw Out Socialists in Election
November 20 (Reuters) — Spaniards are expected to throw out the Socialists they blame for a disastrous economic situation in an election on Sunday and to vote in a center-right party likely to dole out more bitter medicine in the form of public spending cuts.
Opinion polls show the People’s Party (PP), led by Mariano Rajoy, has an unassailable lead over the ruling Socialists, who have led the country from boom to bust in seven years in power.
Voters are angry with the Socialists for failing to act swiftly to prevent the economic slide and then for bringing in austerity measures that have cut wages, benefits and jobs.
Yet people are now resigned to further slashes in spending on health and education in the midst of a European debt crisis that has toppled the governments of Ireland, Portugal, Greece and Italy and pushed Spain’s borrowing costs ever higher.
Goldman- worries about the inflationary impact of debt monetisation are exaggerated
Good to see Dirk at Goldman is pretty much spot on:
German Economic Commentary : Chancellor Merkel not keen on more a proactive ECB stance
Published November 18, 2011
Chancellor Merkel gave a speech in Berlin yesterday where her main message with respect to stabilisation measures was essentially: No! Merkel rejected the introduction of Eurobonds but also any commitment from the ECB’s side to be the lender of last resort for Euro-zone governments.
There are several arguments the German government/Bundesbank are putting forward against a more pro-active stance of the ECB. First, a more pro-active role would not be in accordance with the treaties. Second, it would create moral hazard as it would reduce the incentive for governments to consolidate and reform. Third, debt monetisation, sovereign debt purchases by the ECB, leads to inflation. The latter argument was echoed by the chairman of the council of economic experts Franz, who said in an interview with FAZ newspaper that debt monetisation is a “deadly sin” for a central bank.
These are valid arguments, but only up to a point. In particular the worries about the inflationary impact of debt monetisation are exaggerated. Sovereign debt purchases of a central bank do not necessarily lead to inflation (see the example of Japan, although it can, see the example of Zimbabwe). It can lead to inflation if these purchases are used to finance an expansionary fiscal policy that will lead to strong growth and demand outpacing supply such that price setters will increase their prices. Fiscal policy, however, will be quite restrictive in the Euro-zone in the coming years. Italy, for example, aims at tightening fiscal policy by almost 3% next year on our estimate (we calculate this as the change in the structural primary fiscal balance). And while it remains to be seen whether the fiscal targets will be met, it is a safe bet that fiscal policy will not be expansionary in the Euro-zone for quite some time.
It can also lead to inflation if there is an excessive debt overhang, i.e. the fiscal position of a country is clearly unsustainable. Put differently the expansion of the monetary side is, even in the long run, not backed by a similar expansion of the real side of the economy. As we have argued in the past we see this only as a remote risk.
What the ECB is currently doing under its SMP is essentially swapping one savings instrument (peripheral sovereign debt) for another (cash) as private sector investors, for various reasons, no longer want to hold peripheral debt. But this has no inflationary implications unless one assumes that investors are spending the cash thereby stimulating demand which then leads to inflation. But these investors are not holding cash because they want to increase their spending, but because they think, rightly or wrongly, that cash is more rewarding from an investment point of view.
There are no easy choices and it would have been, no doubt, better if the ECB had never got in the position it is in now. But the current situation demands a careful weighing of the risk involved with any decision taken. The inflationary risk thereby seems to be getting an unduly high weight in the consideration of German policy makers.
Dirk Schumacher
Republicans, fearing Greece, agreeing to tax hikes
Shows the Republicans truly do fear the US becoming the next Greece,
as they begin to lean towards tax hikes.
Meanwhile, they continue keeping us on the road to Japan.
Or worse.
A lot worse.
Republicans Consider Breaking No-Tax Vow as Deadline Looms
By Brian Faler
November 15 (Bloomberg) — For Senator John Cornyn, it was the situation in Greece.
The Texas Republican said he is willing to back tax increases as part of a major deficit-reduction deal because he fears the European debt crisis could spread to the U.S.
“We’ve never been in this spot before,” said Cornyn, who also leads his party’s effort to elect more Republicans to the Senate. “We’re looking over at Europe and what’s happening in Greece and Italy — we risk having another huge financial crisis in this country, and we’ve got to try to solve the problem.”
He is one of a growing number of Republicans, many with otherwise impeccable anti-tax credentials, who say they are willing to raise taxes to reach a big deficit-reduction deal with Democrats.
That may help insulate them from charges of stubbornness if Congress’s bipartisan supercommittee doesn’t meet its Nov. 23 deadline to find a way to cut $1.5 trillion. For now, it’s helped shift Washington’s debate to how much, rather than whether, to raise taxes.
Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said he is encouraged by the shift even as Democrats scoff at a specific Republican proposal.
“It’s a step in the right direction for them to just rhetorically cross that line,” said Conrad.
‘Real Trouble’
Asked if Republicans were trying to set up a blame game should the supercommittee fail, Conrad said, “I hope not” because “if we aren’t beyond that, we are in real trouble.”
Democrats say the Republican deficit plan relies too heavily on spending cuts and would give the wealthy too much of a tax break. Some question whether its numbers add up.
At issue is a proposal by the supercommittee’s Republicans to trade permanent cuts in income tax rates, with the top rate dropping to as little as 28 percent, for new limits on deductions, exclusions and other tax breaks. They estimate that it would produce $300 billion to reduce the deficit.
The plan’s principal author is Senator Pat Toomey, a Pennsylvania Republican who previously led the Club for Growth, a Washington anti-tax group. House Speaker John Boehner, an Ohio Republican, today endorsed the proposal, calling it a “fair offer.”
Some conservative organizations are accusing Republicans of trying to hide tax increases through the Toomey plan.
Norquist Reaction
“Closing tax loopholes is all well and good,” said Americans for Tax Reform president Grover Norquist in an opinion article in Politico. “But doing so to raise revenues is just as much a tax hike as raising tax rates.” He added, “Any congressman who wants to keep his promise to voters to oppose tax increases” must oppose the plan.
Many Republican lawmakers are also unhappy with the proposal. “We don’t have a tax problem — we have a spending problem,” said Senator Jim DeMint, a South Carolina Republican. “For us to get lulled into ‘how much to raise taxes’ in this thing is foolish.”
Senator Orrin Hatch, the top Republican on the tax-writing Finance Committee, said, “Some of these loopholes really aren’t loopholes.” He called them “important policy provisions, like the home interest mortgage deduction.”
Republican supporters of the plan say they are trying to lock in lower income-tax rates that will otherwise jump if, as is currently scheduled, the tax cuts enacted in President George W. Bush’s administration expire at the end of next year. President Barack Obama opposes extending the Bush-era cuts for those earning more than $250,000, and Republicans are unlikely in the 2012 elections to win the Senate votes they would need to keep the tax cuts in effect.
‘Biggest Tax Increase’
“What we’re trying to do is avoid the biggest tax increase in the history of the country,” Senator Charles Grassley, an Iowa Republican, said of Toomey’s plan.
Toomey declined to comment other than to point to a Nov. 10 Wall Street Journal editorial quoting him as calling his proposal a “bitter pill” that is “justified to prevent the tax increase that’s coming.”
A number of Republicans are playing down anti-tax pledges they signed with Norquist’s group. “We take an oath to uphold the Constitution” and “that trumps any and every consideration,” said Cornyn.
“I didn’t know I was signing a marriage vow,” said Representative Mike Simpson of Idaho, one of 40 House Republicans who recently signed a letter signaling willingness to raise taxes as part of a major deficit-cutting deal.
Shifting Opinion
Senator Lamar Alexander of Tennessee, the chamber’s third- ranking Republican, said he saw a sign of shifting opinion when three of the supercommittee Republican members — Toomey, Rob Portman of Ohio and Arizona’s Jon Kyl — briefed Senate colleagues on their plan and no one complained.
“For Pat Toomey and Portman and Kyl to come in and tell a whole roomful of Republicans that ‘we’ve put $250 billion of tax increases on the table’ and not get a murmur of dissent is remarkable,” said Alexander.
Senator Saxby Chambliss, a Georgia Republican, said his party’s lawmakers should consider bigger tax increases if it would lead to a larger debt-reduction deal, because the political price they would pay will essentially be the same.
“You’re going to be criticized by the same people irrespective of what the number is,” said Chambliss.
CNBC’s John Carney on Krugman and MMT
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> (email exchange)
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> On Sat, Nov 12, 2011 at 2:19 PM, Stephanie wrote:
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> John Carney loving on us again
Yes!
Paul Krugman Goes MMT on Italy
By John Carney
November 11 (CNBC) — It seems pretty clear that the school of thought known as Modern Monetary Theory has made a big impact on Paul Krugman’s thinking.
As Cullen Roche at Pragmatic Capitalism points out, just a few months ago the spread between bonds issued by Japan and Italy, which have similar debt and demographic issues, was perplexing Krugman.
“A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.
…I actually don’t have a firm view. But it seems to be an important puzzle to resolve.”
But today’s column is basically right out of MMT.
“What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of Third World countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.”
Merkel comments
*DJ Merkel: “Euro Zone Solidarity Must Be Combined With Sound Budget Measures”
To make sure unemployment never comes down and unit labor costs stay down.
*DJ Merkel: Italy Will Put Through Planned Austerity Measures Soon
Also to make sure unemployment never comes down and unit labor costs stay down.