Nov. 3, 2011 - Freedomain Radio - Stefan Molyneux
21:23
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| Hi, everybody. It's Stefan Molyneux from Freedomain Radio. | |
| I have David Howden, Assistant Professor of Economics at St. | |
| Louis University in Madrid. | |
| Thank you so much for taking the time. | |
| Thanks, Stefan. So, Europe is quite the center of activity in the media and among people who are interested in economics these days. | |
| I was wondering, I mean, my understanding is that there's three general causes of the European euro crisis at the moment. | |
| I mean, the first is crazy social welfare and deficit finance spending, which is true of all over the world. | |
| And the second, of course, is the more recent and proximate financial crisis from 2008 onwards. | |
| And the third appears to be just the general decay of demographics. | |
| I was reading somewhere that Greece has a... | |
| Fertility rate of 1.2 or 1.3, which is just way below what is needed to replenish. | |
| And so you've got this big bulge of people heading into retirement. | |
| Are those the major factors that you see? | |
| Are there other factors that I'm not aware of? | |
| Well, I think that hits it pretty well on all the heads. | |
| I don't think the demographic factors I downplay a little bit. | |
| I don't think they're... They are important, but they're not important until sometime in the future. | |
| The one today I think more is just the... | |
| There's two questions I suppose to answer. | |
| The first is where the crisis came from, and the second is why it's prolonging. | |
| And that identifies fairly well where the crisis came from, so just too much deficit spending and unsustainable policies, social policies in the past. | |
| But I think when we look at why it's lasting or continuing, it's more of a problem of... | |
| Continued muddles in the economy and especially continued monetary muddling by the ECB. Now, the two aspects of, at least in America, I think the two aspects that are threatening to prolong the current recession into a Japanese-style multi-decade decay is the, | |
| I mean, artificially low interest rates, you have massive bailouts in the economic sector, and you have the overprinting of money through these quantitative easing measures. | |
| Have those been pursued? And they haven't really pursued – I live in Canada. | |
| We haven't really pursued – Well, in a lot of ways, the European approach is even, I think, more extreme than the American approach, although it might not seem like it on first appearance. | |
| So, in America, you saw much more Quick and immediate quantitative easing. | |
| The numbers were of course massive and in the European situation it becomes a little bit more complicated because it varies country to country and the numbers maybe don't add up to as large as they were immediately in the States but as it wears on we keep adding more and more billions and trillions are becoming the new billions apparently. | |
| So it's becoming quite a concerted effort in just sheer numbers or in sheer money terms. | |
| And it seems that every solution that is put forward, and I mocked this roundly in a recent show, but it seems that every solution that is put forward simply involves more deficit financing. | |
| And it seems to me, you know, this may be naive, ignorant, out of the, you know, inside the box economic thinking, but it seems to me somewhat ridiculous and naive to imagine that a debt crisis can be financed or solved by deficit financing, which of course is just another form of debt. | |
| Am I missing something obvious? | |
| No, I think that's pretty obvious. | |
| You can't solve it. If you think debt is the problem, then... | |
| Heaping on more debt isn't going to provide the solution, I don't think. | |
| The problem was it was a misidentified crisis from the start by most people. | |
| So the prevailing opinion was we're in a crisis of illiquidity, not insolvency. | |
| So if markets are illiquid, we'll just provide more liquidity to them, increase the money supply, for example, or increase credit. | |
| And that'll fix that problem. | |
| And slowly... Sorry, this is just a basic Keynesian prime the pump kind of thing, right? | |
| Yeah, exactly. That's what it would boil down to. | |
| And now I think where most people are on side at identifying that the crisis is more one of insolvency. | |
| So in Greece, this is especially apparent. | |
| And it's becoming more increasingly apparent in Portugal or Ireland or even countries that are closer to the core, although still peripheral, I suppose, like Belgium, Italy and Spain. | |
| Now, a lot of people are having trouble understanding why the old remedies didn't work prior to the unification of the currency under the euro. | |
| Countries had remedies with devaluing of currency. | |
| How would that help them in this situation? | |
| And what's happening now that they don't have that option? | |
| Well, use Greece as a really good example. | |
| Greece is in a situation where it has way too much debt. | |
| It's insolvent in the sense that there is no way that Greece could ever pay off the amount of debt that it has right now. | |
| It's non-competitive in the sense that its costs are too high relative to any other European country or most other countries, at least in the Western world, based on the fact that it's locked into this currency union with one exchange rate provided via the Euro that it has to share with every other Eurozone country. | |
| So in Greece's case in the past, the solution Would have been painful still, although it would have been a solution. | |
| They could have inflated their way away, inflated their problems away. | |
| That would have taken care of the debt problem. | |
| And it also would have devalued the currency so that they could have become a little bit more competitive. | |
| Right now the problem for them, or one problem I suppose, is their hands are tied because they don't have this policy option available to them. | |
| I'd probably point out, I think this is a double-edged sword. | |
| It's almost, it's a cost and it's a blessing to them as well. | |
| So it's beneficial in the, well, I'll start with the cost. | |
| It's of course negative in the sense, like I just pointed out, that there's no real solution for Greece to get out of this crisis short of exiting the euro. | |
| It's a blessing in disguise at the same time for most Greek people that the government isn't just able to inflate their problems out of this and we don't have an inflation crisis in Greece right now like we could have in the past. | |
| Well, and of course, inflating the currency is particularly tragic for people who are on fixed incomes because, of course, the value of their purchasing drachma, I guess it would be sort of evaporate slowly, whereas if there's more of a hard – I mean, that's really a soft default. | |
| You're basically saying you can't pay bills except with monopoly money, just the same as saying you can't pay your bills. | |
| But with the heart default, the pain tends to be much more specific and not generalized to the whole population. | |
| It tends to hit, of course, the creditors and the financial institutions, which I think people would feel is more fair. | |
| I mean, I know that they're talking about with this bailout that they're getting a 50% haircut on Greek bonds. | |
| What is the perception about who should pay for Greece? | |
| Is it the general population? | |
| Is it the financial institutions? | |
| Well, I think there's a general agreement right now that the financial institutions are the ones who should pay. | |
| And then we don't really see this happening with most of the policies that are coming forward. | |
| So in Greece's case, all of the bailout options, even taking a 50% haircut on Greek debt, is still a bailout to the financial institutions in the sense that that's probably not that much compared to what they would take if the whole country went bust. | |
| The problem is right now, if Greece is locked in a situation where they can't inflate their problems away and they face bankruptcy, The natural response should be to evade bankruptcy which in Greece's case would be curtailing the expenditure side of things or limiting your public expenditures and that's the problem that we don't see happening in the country. | |
| Everybody talks about how do we raise revenues and right now they're doing it through bailouts and nobody wants to focus on the other side which is really drastically cutting expenditures so that you can actually get out of this bankrupt situation. | |
| Well, I mean, I'm sure that the politicians would be interested in that approach, but of course there tends to be a lot of reactionary aggression from the population who has grown up in this sort of cocoon of status propaganda about how they can get lunch for free, right? | |
| Yeah, well, that's now become a social problem in Greece where you have an entitled society. | |
| More than 50% of the population works either directly or vaguely, indirectly for the government sector. | |
| So now, if you think about that as a tipping point for a democracy, when over half of your voters have a vested interest in keeping these types of policies going, they're incredibly hard to change. | |
| So where do you think this is going to go? | |
| I mean we've – out here on the North American continent, we've heard whispers and rumors and murmurs of a supranational government that may be imposed because it's sort of weird. | |
| I mean the euro was a messed up institution to begin with. | |
| But when you have domestic control of policies that affect your competitiveness but you don't have domestic control of your exchange rates – Yeah, well I think there's a slow awakening I suppose within Europe. | |
| That maybe this integration project was for starters not as well thought out as people thought it was, and maybe its scope is much wider than people think is feasible. | |
| And I hope the solution is going to be, and I would tend to think that we'll get there eventually, That the scope of the Eurozone will be scaled back. | |
| Some countries on the periphery, Greece would be the first example, will have to be let go, if only for the reason that they're in a situation they should never have been in in the first place, because they should never have been part of the Eurozone in the first place. | |
| And this is sort of amazing to me. | |
| They say that small crime lands you in jail, big crime gets you a crown. | |
| It is amazing to me that I think it was in the 90s that I think it was Goldman Sachs that helped Greek cook the books to even get into the euro. | |
| And there doesn't seem to be any particular desire to go after any of the people to do with that or any of the organizations. | |
| Is there any sense of outrage or is that just like, you know, it's water under the bridge, let's just focus ahead? | |
| Yeah. Yeah, well, I think probably what happened, and that's a good point, that nobody, right now in this crisis, nobody's really looking at who got them into the Eurozone in the first place or who brought on this situation in the first place, and we're just dealing with the effects now. | |
| But one significant factor you would think is having some kind of going after the people maybe who brought on these types of conditions. | |
| So Greece getting acceptance into the Eurozone It bewilders me that nobody wants to answer the question or hold anybody accountable for how it is that they actually got into this union based on faulty statistics and outright lies in some places. | |
| And instead, everybody just wants to deal with the more proximal effects that we see today. | |
| I suppose it more has to do with the urgency of today rather than dealing with the bygones that are now bygones. | |
| There's not a lot of political capital creating historical enemies. | |
| You need much more contemporary enemies like the Germans. | |
| That's right. Now, another question that I have, it seems that a lot of the bigger economies, the yields on the government bonds are crossing over into very dangerous territory. | |
| I'm sort of looking at Italy crossing over 6%, which makes their debt, I think, virtually impossible to service. | |
| I mean, Portugal's over 10%. | |
| Where is this going? | |
| I mean, there's not going to be enough money to bail these countries out. | |
| Do you think there's going to be any kind of banking crisis? | |
| Well, I'll deal with the questions. | |
| There's two questions there. | |
| So the first one is, where is this going on in a public sector? | |
| At this point, the European Stability Fund is not large enough to handle every country possible. | |
| And if they spend money bailing out smaller countries like Greece, there's definitely not going to be enough able to be committed to the larger countries. | |
| And I think in light of this, and there is a realization that this crisis is brewing in the fairly immediate future, people should start considering whether throwing more and more tens of billions of dollars after Greece, which after all in the grand scheme of things is fairly small relative to any other Western European economy, is worthwhile. The second question is the banking crisis, which is probably more important even in a lot of these countries that we look at. | |
| In Spain, I think this is the more important question to look at because Spain doesn't really have a A public sector budget or deficit crisis in the strict sense of the word, the government debt levels really aren't that high by European standards. | |
| Their debt to GDP in Spain might be 60-65% somewhere in that neighborhood. | |
| The banking sector on the other hand is highly indebted. | |
| It's absolutely massive. | |
| It's highly unstable because the assets are backed up by basically Really worthless mortgages, for the most part, provided by the Spanish property bubble. | |
| So at some point in time in the future, we're going to have to deal with a real banking crisis, which is really separate from the sovereign debt crisis in the sense that banks are going to realize losses on their assets and won't be able to fund their liabilities. | |
| And this is really a problem in the sense that if this coincides with the public sector problem, there's not going to be a public sector there to backstop the banking industry. | |
| And I think a lot of people really rely on this, including banks. | |
| Sorry, can you just break that last part down a little bit? | |
| Do you mean that there won't be a cushion for employment or there won't be the bailout money? | |
| I don't think there's going to be bailout money. | |
| Even more severe, I think you could look at it on something like deposit insurance. | |
| In Europe, deposit insurance is provided nationally by the public by each country. | |
| Is Spain in the middle of a, well, we'll use Italy, in the middle of a government budget crisis, do you think the Spanish government actually has billions of euros lying around to honor the deposit insurance for its bankrupt banking industry as well? | |
| And that's severe, and that's something that people don't think about, but they They fully expect it to happen, right? | |
| Nobody questions that you have deposit insurance on your banks, and yet I don't think that most of these European governments actually have the funds set aside, not sufficient funds anyway, to honor the liabilities of the banking sectors. | |
| Yeah, I mean, it's a great tragedy. | |
| Deposit insurance is like the morphine that lets your toothache turn fatal because people don't monitor these things because they assume, oh, it's taken care of. | |
| That's right, exactly. And you get it in extremis, or I think we have examples in extremis where not only do you not monitor the prudence of your bank to make sure it's not doing anything risky, you actually reward banks by putting your money in the ones that give you either the lowest service charges or the highest rates of interest. | |
| And those two factors coincide with risky lending on the whole. | |
| It's the exact opposite, of course. | |
| Risk should go up with speculation, but if you argue, risk is actually going down relative to the value of speculation, which creates a very distorted incentive. | |
| Exactly. So, of course, if there is a European banking crisis, then, I mean, there will perhaps – I mean, it's almost hard to imagine that there will be a run on banks because that's been generations since that's really been an issue. | |
| But people may panic, of course, and the Internet allows this information to spread quickly. | |
| International trade, of course, will virtually shut down from Europe because you need those notes of exchange to swap between banks. | |
| What are the other effects that you think will come out of a potential banking crisis in Europe? | |
| I'm not sure, actually, that we're not in the midst of an electronic banking run right now in Europe. | |
| I read the other day, I can't remember the source and I don't know how credible it is, to be perfectly honest, but it said... | |
| All right, we'll put this in the rumor category, but fair enough. | |
| We'll put this in the rumor category that demand deposits in Spanish banks are down 30% year on year. | |
| Now, even if we say that that's only a third true, 10% decline is still massive, especially given that I think a lot of people are liquidating riskier investments and holding on cash as they become more and more uncertain during the crisis. | |
| Well, and sorry, if we assume that the Spanish banks are only leveraged 10 to 1, 10% still wipes them out, right? | |
| Exactly. Exactly. | |
| And I mean, in the US crisis, banks were like 30 to 1, so it would not be unusual to expect them to at least be 10 to 1. | |
| So they may be effectively insolvent. | |
| Exactly. On the whole, I would say that banks are even more levered than they were in the US. So 30 to 1, I don't think is unusual for your average European bank. | |
| In Greece, I know it's a fact that electronic transfers have been causing this e-bank run, if you want to call it that, where deposit holders definitely are shipping their euros out of Greece. | |
| One problem, one significant problem is you have this situation where a euro note deposited in Deutsche Bank in Frankfurt is worth the exact same as a euro note which is deposited in, I don't know, Athens Bank in Athens. | |
| And the fact of the matter is, there's at least some expectation that sometime in the future, if Greece has to exit the eurozone, that euro which is held in Athens is going to have to be re-denominated into, let's say, a new drachma. | |
| And it's not going to be at a favourable exchange rate. | |
| And if you have your money still in the country, you're going to lose. | |
| So I know we do have a capital run going on right now from these peripheral countries, people shipping their accounts and their deposits as much as they can up into more stable core countries. | |
| Is there a concern? I don't know if this would even be possible in the sort of electronic banking world, but there's sort of an old-style South African approach to limiting the amount of credit or capital that can exit the country. | |
| Do you think there's any capacity for governments to put restrictions on the flight of capital? | |
| It's a difficult one within the Eurozone because one of the primary tenants of the zone One of its building blocks was freedom of movement of labor and capital. | |
| So this is a politically difficult measure to put in place. | |
| That's not to say that it couldn't potentially be in the cards as the crisis prolongs. | |
| I think anything's possible. | |
| But right now, I don't think that's possible. | |
| Before they do something like that, I would expect almost, to be perfectly honest, I would expect a country to do a wholesale exit from the Eurozone before we saw a capital control on a country. | |
| I've got to imagine, I mean, this is complete wild ass guess, but I've got to imagine that would be an immediate 20% decline in the standard of living. | |
| I mean, it's hard to imagine how that wouldn't just be catastrophic to the country as a whole. | |
| In the short run, I have no doubt in my mind it would be extremely painful. | |
| In the long run, I think it's absolutely necessary to get rid of the imbalances and get rid of the situation that really caused the problem today. | |
| There's one problem. When I read most analyses of the present crisis, they say countries aren't going to leave the Eurozone because the short-term cost is so high. | |
| And the hit that you're going to have to immediately take just far outweighs whatever cost it would be to just continue bailing out these countries. | |
| Even for developed countries like Germany, if Greece were to leave the Eurozone, Germans are going to take a hit, right? | |
| The stock market is going to go down. | |
| The euro is going to take a hit on value, etc., etc. | |
| But this ignores the whole cost that we have over the whole, if you bail out Greece and keep them in the eurozone, this isn't a one-time expense. | |
| This is an expense that we could be incurring every single year from now until forever to keep this country a part of this currency union. | |
| Well, and of course, if you want people to accept suffering, all you have to do is stoke the fires of nationalism and say, we will not cede control of our system too far. | |
| I mean, you can get people to accept this if you make it a kind of economic war metaphor and retention of suffering. | |
| You can get people to do lots of silly things if you appeal to their nationalism. | |
| That would be my guess. Oh, absolutely. | |
| So let me ask you – I know we're a little pressed for time and I want to make sure that I get you out the door if you need to go. | |
| But of course nobody is admitting that libertarians have been right all along. | |
| Nobody is saying, gosh, let's go talk to those Austrians because they've been predicting this for decades. | |
| There's nobody who wants to talk about the causes. | |
| If you were – let me imagine so you were propelled to a – we give you fluent Greek and we propel you to the Acropolis where you announce your – what you want to say to the Greeks or to all of the people in Europe who are struggling from this crisis. | |
| What is it that you would say to them? | |
| I know it's a tough question, but in a nutshell, what is it you would say to them in an attempt to sort of wake them up to the causes and remedies that you feel would be rational? | |
| I would say look back at the past decade that you've had and ask yourself whether you thought that this was sustainable, that you would keep living off an unsustainable lifestyle brought on by funds coming in from other European countries, sharing a currency with other countries that didn't match fundamentally the fundaments of your economy. | |
| And then I would say if you're going to wake up, you better recognize that if you want some kind of long-term stable situation that's not going to be prone to booms or busts. | |
| The booms aren't really a blessing either because they seem in this case to give rise to the bust. | |
| You better be questioning whether joining this political union and getting the transfer funds that came with it was the right decision. | |
| And more importantly joining the currency union and sharing a currency with stronger economies such as France or Germany was such a wise decision either. | |
| I see swelling music. | |
| I see a topless Laurence Fishburne delivering that speech from the top of a craggy rock, lightning in the background, and I see people cheering. | |
| And hopefully we can get that message across. | |
| I would start with, I'm afraid we've lied to you your whole lives. | |
| Start to unpack it from there. | |
| Well, listen, David, I really, really do appreciate your time. | |
| I know that you blog for Mises.org. | |
| Are there any other places on the web that people can go to get your wit and wisdom? | |
| Yeah, Mises.org and also for a wonderful British think tank promoting monetary stability called the Cobden Center. | |
| It's available at cobdencenter.org. | |
| Well, thank you so much, David. | |
| I really appreciate your time. Thanks a lot, Stefan. |
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