The Crisis in the EU

November 4, 2011

by Jerry O’Driscoll

I addressed the Greek situation and the wider EU debt crisis in an op ed in The Wall Street Journal on Wednesday, November 2nd (“Why We Can’t Escape the Eurocrisis”). It is also posted today on the Cato homepage. I explain the linkages between the US and the EU, particularly among financial institutions.

Banks within the EU finance the deficits of their governments. It is not just that Greek banks buy Greek sovereign debt, but French banks lend to Greek banks. And French banks buy the bonds of the Italian government. US banks lend to EU banks. Less well known, US money market funds hold a good amount of debt issued by EU banks. And the Fed is backstopping dollar funding of EU banks.

Sovereign defaults over there will have a big impact over here. And, then, there is our own public debt problem. And it is not just public-sector debt that afflicts both economies, but, to varying degrees, excessive leverage in the household and nonfinancial corporate sectors.

Last night, Judge Napolitano interviewed me for a segment on “Freedom Watch.”

The Judge was interested in not only the economic issues, but also political issues.

The lead segment was with John Allison, former CEO of BB&T, who decried the crony capitalism that is at the root of the crisis here and there. It was enjoyable to hear a former banker denounce rent seeking by banks. He even used the word “rents.”

11 Responses to “The Crisis in the EU”

  1. Roger Koppl Says:

    Allison also used the term “national socialism” aptly and alluded to the 13 October 2008 meeting in which Paulson and Geithner strong-armed 9 major banks into selling them preferred stock.
    (See: http://readingeagle.com/article.aspx?id=138663)

  2. Roger Koppl Says:

    This is what corporatism looks like.

    If you go here
    http://www.judicialwatch.org/files/documents/2009/TreasuryDocsPart3.pdf
    and scroll down to about five pages from the bottom, you will find Paulson’s talking points for the meeting of 13 October 2008.

    Opting out “would leave you vulnerable and exposed” and “you should be aware that your regulator will require [a capital infusion] in any circumstance.” But, hey, it’s entirely voluntary and there’s no pressure here.

  3. successfulbuild Says:

    That is not national socialism and has nothing to do with national socialism. Find me a political science definition that says that national socialism is when banks are “strong armed.” Keep in mind that Roger Koppl also seems to think that “multiculturalism” is evil and a form of “collectivism,” which is certainly inline with the tenants of national socialism — as the national socialists wanted one Germany culture plus a system of Libertarian property rights. “We stand for the maintenance of private property.. We shall protect free-enterprise as the sole order.”

    So, one culture. Yes, that is close to Nazism. Strong arming banks — that isn’t Nazism. No definition in the world has that in there.

    I’ll check back tomorrow for Koppl’s sources.

    It should also be pointed out that Judge Napolitano is a 9/11 truther. He believes that building 7 was not hit hard enough to fall on its own and they found termite. Of course, quite a few at the Mises Institute believe the same thing.

  4. Roger Koppl Says:

    Heh. “succssfulbuild” has ordered me to provided sources and to do so today. She barks, “I’ll check back tomorrow for Koppl’s sources.” Ruh roh! Ever her obedient student, I will humbly comply. My dear successfulbuild, please go here:

    http://mises.org/books/plannedchaos.pdf

    and search for “zwangswirtschaft,” which means something like “forced economy” or “compelled economy.” There Mises says that the German system preserved the form of private property, but issued “entrepreneurs” their orders. The suggestion that the Nazis wanted or implemented “Libertarian property rights” is unambiguously false. This point is not a matter of competing interpretations.

    Now, if you check out the Allison tape, he was *not* just tossing around charges that this or that person is “a Nazi” or anything like that. Rather, he was pointing out that some of the corporatist measures being proposed or implemented today are not so much “socialist” (as many say) as “*national* socialist.” He is clearly referring to Zwangswirtschaft. We preserve the form of private property, but the state controls the economy. I have said something similar in this forum in the past:
    https://thinkmarkets.wordpress.com/2009/07/13/we-are-all-fascists-now/

    I’ll let readers judge whether my opinions on multiculturalism are similar to the anything found in Nazi ideology:
    https://thinkmarkets.wordpress.com/2011/07/25/oslo-and-multiculturalism/

    https://thinkmarkets.wordpress.com/2011/07/26/them-is-us-more-thoughts-on-oslo-and-multiculturalism/

    Oh, and then there is some sort of charge that Judge Napolitano is a truther. Um, okay, well, let’s say that the charge is not mistaken. Let’s go further and assume for the sake of argument that the Judge is as mad as a hatter and takes joy in frightening young children and kicking puppies. Would that somehow disprove statements made by O’Driscoll and Allison? Of course not.

  5. successfulbuild Says:

    LOl.

    So, Mrs. Koppl’s “scholarship” on Nazi Germany comes not from historians of Germany, but, wait for it… Ludwig von Mises…..!?!?!? Somebody who advocated an even BIGGER control of the economy with his gold standard (see theory of money and credit). Who’s he going to cite next? Peter Schiff? Or even worse George Reisman? Or how about Ralph Raico at the Mises Institute, who said that Mises defense of fascism was justified given that Winston Churchill supported fascism over communism — which is why he sided with the alliance, and said he would have made “at least a favorable reference to the Devil in the House of Commons” if Hitler invaded Hell. (Winston Churchill, July 22, 1941, to his private secretary Sir John Colville, Churchill speaks: Winston Churchill in Peace and War: Collected Speeches 1897-1963 (New York: Chelsea, 1980)).

    Mrs. Koppl has no knowledge of history and is ignorant of German history. I suggest she may want to broaden her readings beyond the daily articles at the Mises Institute!

    There is no political science definition in the world that says that it would be appropriate to call Geithner’s actions a form of Nazism. Doing so an insult to all the people that suffered in that system because of a lack of democratic rights — which Libertarians insist should be implemented in the US. In fact, had the Nazis had democratic-rights, the holocaust would not have happened and likely World War II wouldn’t have happened since it is far more difficult for democratic nations to go to war.

    The state did not control the economy in Nazi Germany and they had less social spending than even the United States. Furthermore, the Nazi Charter of Labor gave corporations complete control over their property. Workers were the subjects of the corporations, and the only rights they had were severely limited, such as a week’s notice before being fired and so on.

    Finally, as for Judge’s 9/11 truther comments they are easy to reference presuming you know how to work the Internet. The comments above (citing Mises as some kind of scholar) and the fact that the good Judge is a 9/11 truther shows what we’re dealing with: a bunch of ignorant kooks who don’t know what they’re talking about.

    (Mrs. Koppl herself is a bit of a conspiracy theorists, calling the well-established field of Forensic science, which has helped to solve thousands of cases, including many that otherwise wouldn’t have been solved, as some kind of crank science. We can see why this person shouldn’t be taken seriously. )

    P.S. Several of the males at the Mises Institute are convinced that they’re women.

    That’s right, at the Mises Institute, their followers don’t even know if they’re male or female. I rest my case about the Mises Institute and their idiotic followers.

  6. successfulbuild Says:

    I think what Austrian economics is is like the Westboro Baptist Church. All the other denominations of economics are “corrupt” and not true to the pseudo-scientific and anti-logical method of Ludwig Mises. Koppl’s revisionist history is a good example, although Pete/Major Freedom running around the Internet about “poo poo” creating its own demand is another. The only difference is the WBC don’t go out and try and kill people like the followers of the Mises Institute.

    And btw… did we ever find an explanation for Hayek and Linguistics?

  7. Roger Koppl Says:

    Hm. It seems successfulbuild has issues with the Mises Institute and, by extension I guess, with Mises himself. I’ll just state dogmatically that several of the things being said here are simply false, including a rather silly characterization of my work on forensic science as some sort of conspiracy theory. I don’t see any point in engaging further, so I do not expect to respond to successfulbuild again.


  8. I address the word “we” in Jerry O’Driscoll’s title, “Why We Can’t Escape the Eurocrisis”. This is the language of one speaking on behalf of a state, if I am not mistaken.

    But the world does not come to an end when a state corrupts and dies. Humanity goes on. New states will emerge and in their time will also probably corrupt and die, as history suggests to me.

    For a blog titled Think Markets I would suggest a different meaning for “we”, such as: We who prefer to trust markets more than states.

    We have different needs. The collapse of an empire may bring on a dark age, with the collapse of institutions which have taken their order and law from the surrounding empire. But if “we” can see this we can start building institutions which will survive, as well as possible, the weakening and corruption of surrounding states.


  9. I updated my views with a post on Cato’s homepage to reflect the markets’ reaction to events in Italy.

    http://www.cato-at-liberty.org/the-end-of-the-euro/

  10. Pietro M. Says:

    I think that pessimism is unwarranted, both for some government finances and for the financial sector.

    Greek finances are beyond salvation. Italy is different. Public expenditures are 52% of GDP, so that there are margins for a 5% cut. The primary deficit is small.

    Economic growth is projected to be between 0 and 0.5% in the years to come. A few structural reforms may easily add half a percentage point to growth.

    The government has real estate property and equity in many firms, and it could probably reduce the debt by 20% without even reducing the deficit.

    No bankrupt is needed, only relatively small reforms.

    Going to the financial sector, inside assets are the problem, because they have overleveraged. Balance-sheet problems would be nominal in an ideal world. Because there are financial frictions, of course, there are costs, but nothing that a debt restructuring wouldn’t solve.

    Zingales has proposed a plan to turn financial debt into equity. I consider more equitable to wipe out equity holders first, as Dowd has proposed. Both would solve the balance sheet problems.

    I don’t fear the fundamentals. I fear policy reactions. There is no reason to fear about the euro on economic grounds. The risk is all political.


  11. I certainly hope Pietro’s optimism is warranted. He ends his comment: “There is no reason to fear about the euro on economic grounds. The risk is all political.”

    Well, surely the risk has always been political. Greeks are hardworking, entrepreneurial people when they live outside of Greece.


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