Sunday, December 04, 2011

Morality and debt...  

There has been a robust debate in the econoblogs regarding the Eurozone crisis and how the economic strength of Germany does or does not grant them the moral "high ground".  I have noticed this is often how debtor/creditor arguments devolve - the virtues of the lender versus the vices of the borrower. Tyler Cowen does an excellent job of listing the facets of this debate, and sums up this way:
I believe that the Germans have approached this crisis with some bad economic theories, a lack of understanding of how government spending cuts can be self-defeating in the short run, and a good deal of more or less deliberate self-deception about its partners in the union, not to mention Germany’s own ability and willingness to act “fully European.”  I’m also not sure that Germany has a path out of this which leaves their own financial system intact.  You can rack up the moral and practical minus points there in considerable number.  That said, I see a lot of intellectuals dismissing the perspective outlined above, rather than figuring out why it makes so much sense to so many people, not just in Germany.  I think the financial elites in the periphery countries themselves actually see it quite clearly.
The result is significant misunderstandings about what can happen and will happen in the eurozone.  Germany cannot and will not drop its moral perspective, even if there is some theory — and yes theory is the right word here, because no one knows these broad guarantees will work — of how a broader and far more costly commitment can set things right.

In reading American discussions of the eurozone, I am frequently reminded of earlier discussions of the Soviet Union.  Most outsiders simply didn’t realize how little social capital was left in the system, though some of the Soviet insiders did.  Might the same be true of the eurozone?  I’m not calling these countries corrupt, rather there may be remarkably little cross-national cultural capital, and remarkably little deep public support for a costly EU bargain, so little that many German (and other) insiders know that no grand bargain can be sustained or even seriously attempted.

I believe we need to be exposed to this moral perspective, and this intellectual Turing test, as a bracing slap in the face, as a wake-up call, and I see our unwillingness to do anything with this perspective, other than summarily dismiss it as a kind of tragic juvenile moralizing, as a sign of our own decline, right here in the USofA.

But it's the same transaction, people!  How can lending be an act of moral superiority and the borrowers' actions be cast as morally suspect? If nothing else, hasn't the lender then engineered the "fall" of the borrower?

To be sure, the economic and cultural character of Germany resonates with the "work ethic" moral training remains a powerful part of Western societies: hard work, thrift, gratification delay, self-determination, etc. But I think we may be outgrowing those values or at least failing to modify them to present economic realities.

One of the most powerful of these new realities is the abundance of wealth. In the face of that surplus the choices for investors are not always an array of solid, high return productive assets, but a sorry collection of higher-risk, low yield instruments. I do not disallow the German culture its moral high ground connected to thrift and good choices, but I do wonder why they should not bear responsibility for their investment choices - both private and public. Why were they pouring money into Greek, Spanish, Irish debt to such a degree they could not suffer bad consequences? Aren't they guilty of bad investment strategy at least? Should not they bear the consequences of buying junk?

This is the dilemma of capital surplus countries and individuals. You will seldom find another place to park your money as "virtuous" as your own business, since they would likely be in capital excess, too.

Meanwhile, Ezra Klein reports from the financial front lines.
Over the course of dozens of interviews conducted in Berlin over the last few days, I've spoken to members of Angela Merkel's government, members of the opposition Social Democrats, industrialists, and bankers. No one has evinced even the slightest willingness to see the euro zone crack apart. But nor have they quite said they're willing to save it. Rather, they remain serenely confident that they will save it. But they don't have a surefire strategy. They have a bet. A big one.
That's really the key to understanding the German psychology on the euro. In America, we keep asking why they don't join with the European Central Bank to end the run on the European periphery. The answer is simple: they don't want to end the run on the European periphery. To them, the run on Italy and Greece and Portugal and Spain is a feature, not a bug. It's leverage, and they want to use it.
Look how much it has already gotten them. Greece, Portugal, Italy and Ireland are working their way through stringent deficit-reduction plans. The widely disliked governments of Greece and Italy, which proved unequal to the task of fiscal reform, have been toppled. There is a good chance that the euro zone might become what Germany has always wanted it to be: a fiscal union, in which the members meet their deficit targets and reform their labor markets. And none of this would have happened without the markets making their run at the European periphery.
So to understand the German position, look at it from their perspective: Why in the world would Germany let up the pressure now? When they're so close to amending the very treaty underlying the euro zone? When France has joined with them on a set of reforms? When the market is doing what the Germans never could?
I worry this makes the Germans sound like puppetmasters. They're not. Many of their intended reforms are very sensible. The flaws they point to in the euro zone are, indeed, deep, structural flaws in the euro zone. They do envision a future that includes sacrifice on their part: eurobonds that raise Germany's cost of borrowing and a bailout fund -- excuse me, a fiscal stabilization fund -- that they contribute heavily to.
So my concern isn't that the Germans are selfish and calculating. It's that, without quite realizing it, they have become reckless. They are trying to time the market, betting that they can, in essence, manage the run -- that they can do just enough to keep the pressure on without letting matters get totally out of hand. They are like a doctor who, faced with an unhealthy patient presenting signs of a heart attack, demands to see the patient lose weight before they will administer the life-saving treatment.
In almost all of their arguments, the Germans are right. The euro does need to be fixed. But first it needs to be saved. The Germans are betting that this is their opportunity to do both. If they're right, it will have been a remarkable play. If they're wrong, it will have been a disastrous one. [More]
It will be some time featuring very low rates before this curious economic puzzle gets solved. The idea of excess money struggling to get a return despite being the trophy of economically prudence and self-discipline will take some time getting used to. My guess is we are nearing that time as the last of the ~5 year investment instruments roll over into sub 1% territory. I'm seeing it at my bank, and now in Europe.

[Update: Rats! As soon as I labored through this post, Kevin Drum explains it much better. And with punctuation, spelling and charts. It's a must-read for those newly interested in the euro.]

Savers need borrowers just as much as the reverse. Meanwhile, the ag markets have a huge stake in this political turmoil as we obviously miss the extra money in the pits.

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