David Brooks writes about the economic crises here and in Europe. In Europe, Germans msut clean up the mess in Greece and Italy, even though they played by the rules: people paid taxes, government officials followed laws, and budgets were followed.
Over the past few decades, several European nations, like Germany and the Netherlands, have played by the rules and practiced good governance. They have lived within their means, undertaken painful reforms, enhanced their competitiveness and reinforced good values. Now they are being brutally browbeaten for not wanting to bail out nations like Greece, Italy and Spain, which did not do these things, which instead borrowed huge amounts of money that they are choosing not to repay.
Greece and Italy will have to get bailed out, but the long term survival of the Euro-zone is in question. Will Germans start acting like Greece or will Greece start acting like Germany?
Like any good University of Chicago grad, I've read a ton of Max Weber, so I like any discussion of a capitalistic work ethic. Also, a friend of Steve has returned from working in London for a year full of complaints about their lazy ways, so this topic has been dinner conversation.
In a strange turn, Brooks complains about anti-rich bashing in our country.
On the other hand, there are people who see the European crisis through the prism of some cosmic class war. What matters is not how people conduct themselves, but whether they are a have or a have-not. The burden of proof is against the haves. The benefit of the doubt is with the have-nots. Any resistance to redistribution is greeted with outrage.
I think it is possible to reward hard work and, at the same time, remove obstacles so that all people can be rewarded for hard work.
Apt. 11d 
Wait–isn’t half the European problem that the ant bankers have lent a lot of money to the grasshoppers, and the grasshoppers can’t pay it back?
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I also think Brooks’s class warfare turn is strange, at least for Greece and Italy (I don’t know about Spain). It isn’t like you have only wealthy Germans and only poor Greeks. You’ve got middle class Germans being asked to take steps that will lower their standard of living in order to do a bail out that will disproportionately go to wealthy Greeks (who probably don’t pay their taxes) and wealthy bond holders.
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Greece and Italy will have to get bailed out
Really? Is that possible? and Spain, Portugal too? How about France?
The European system took time to get to this impasse. http://www.aei.org/outlook/economics/international-economy/finance/how-did-europes-debt-crisis-get-so-bad/
In other words, the more France and Germany commit to loan weaker European countries like Greece, Italy, and Spain, the less creditworthy they become. Deterioration of France’s creditworthiness has already boosted its borrowing costs in recent weeks and has caused it to join those advocating more bond buying by the European Central Bank (ECB).
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Is Brooks turning to class warfare? Or is he accusing others of doing so, in a situation where it is inappropriate? Certainly, there is no shortage of blogosphere participants ready to interpret the European crisis in class warfare terms: the Greeks are poor, so all good leftists must support them, and the sort of austerity program that the Germans want is a plot by the rich, and must be resisted. Check out some left-leaning sites like Economist’s View or Crooked Timber for examples.
You might think that even die-hard lefties could agree on making rich Greeks pay their taxes, but that isn’t the prevailing ethos.
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Hmpf. I read this and I think, substitute “the Midwest” for Germany, and “Nevada” or “Florida” for Greece, and you’ve got much the same situation in the States.
I keep waiting for all this stuff to result in someone finally reining in the risk-happy bankers, which IMO is where it all started. Why is that not happening?
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Hmpf. I read this and I think, substitute “the Midwest” for Germany, and “Nevada” or “Florida” for Greece, and you’ve got much the same situation in the States.
All the Euro critics said you can’t have currency union with a common fiscal policy or a common national identity. It looks like they are being proved correct.
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“I keep waiting for all this stuff to result in someone finally reining in the risk-happy bankers, which IMO is where it all started. Why is that not happening?”
Well, somebody brought a class warfare perspective to the discussion. Greek bankers who bought Greek government bonds are risk-happy?
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David Brooks provides a kind of information entropy – after reading one of his columns, you will know less than you did before reading it. This particular column is wrong on the facts, wrong on the details, wrong on the lessons.
Perhaps Mr Brooks works hard, but it’s certainly not evident in his columns: full of ill-informed lazy opinionating with scarcely a fact in sight: yet he is richly rewarded for this. I’d like to see an austerity program at the NYT..
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Hmpf. I read this and I think, substitute “the Midwest” for Germany, and “Nevada” or “Florida” for Greece, and you’ve got much the same situation in the States.
No.
http://www.economist.com/blogs/dailychart/2011/08/americas-fiscal-union
The United States performs fiscal transfers between states as a matter of course. All US residents are subject to federal taxes, though, so we all contribute to the common treasury at the same rate, determined by income. Europeans pay far less to the EU than to their respective national governments.
Some have proposed a fiscal union to solve the current crisis, but there’s no mechanism in the Maastricht Treaty to enact such a union. A new Maastricht Treaty has been raised as a possibility to solve the crisis, but…would you like to enter a fiscal union with gravely indebted countries? http://rt.com/business/news/union-euro-treaty-crisis-885/
A number of the countries now in trouble misrepresented their national finances to qualify for the EU.
http://georgewashington2.blogspot.com/2011/07/goldman-bet-against-its-european.html
In the same way that homeowners take out a second mortgage to pay off their credit card debt, Goldman Sachs and JP Morgan Chase and other U.S. banks helped push government debt far into the future through the derivatives market. This was done in Greece, Italy, and likely several other euro-zone countries as well. In several dozen deals in Europe, “banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books.” Because the deals are not listed as loans, they are not listed as debt (liabilities), and so the true debt of Greece and other euro-zone countries was and likely to a large degree remains hidden. Greece effectively mortgaged its airports and highways to the major banks in order to get cash up-front and keep the loans off the books, classifying them as transactions.[New York Times]
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Friends don’t let friends read David Brooks.
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Anyone else remember an article (probably Wash Post or NYT or maybe Slate) that talked about how the Germans are just used to seeing the Greeks, Italians, and Spanish as grasshoppers (or maybe butterflies, to make it a bit more romantic) while they work busily away keeping all their trains running on time. It was tongue in cheek, but, with tongue in cheek, it was arguing that Germany has always been willing to subsidize the way of life in those other countries, to maintain a playground where they can play (on their vacations) with the “children” who trade a less productivity, a less rich lifestyle, cars that break down, and trains that don’t run on time for really good food, sunshine, and play.
It was a fun article.
Really, though, I do think that the Germans are talking about bail outs and austerity plans to save their banks, and not to support the Greeks.
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Doug,
The past few years, I’ve also heard of a Western European-financed housing bubble in Eastern Europe (Bulgaria, etc.). Have you seen any sign of that in your travels?
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Here’s Jon Stewart explaining how there was a secret $7.7 trillion bank bailout besides TARP, in which the feds loaned the banks the money for zero interest and then borrowed it back from the banks at interest. As Stewart explains it, the banks were essentially able to buy dollar bills for 97 cents each.
http://www.thedailyshow.com/watch/thu-december-1-2011/america-s-next-tarp-model
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Oh yes, those lazy and profligate Southern Europeans. When will they learn to emulate their
bettersNorthern neighbors? Let’s just leave aside that this problem was created global capitalism and their banks, not a que sera sera lifestyle, and let’s leave aside that for the past decade Germany and France have been profiting off of the integrated currency system and have been pushing through policies to benefit themselves at the expense of Southern Europe. Let’s also ignore that the problems with Greece, Italy, and Spain are fundamentally different. Finally, let’s ignore that the class aspect is that middle class people all over the world are getting screwed by the failures created by the very few, whom are apparently making out like bandits. In this sense, the German and Italian middle class actually have much more in common than they do different, but if we play up crass national stereotypes a bit more, maybe they won’t notice that.LikeLike
The Economist says there’s still a lot of bubble to pop.
“Britain’s venerable magazine The Economist says Canada is one of nine countries in the world where housing is overvalued by 25 per cent or more right now — and among four where prices are in line with those in the U.S. “at the peak of its bubble.”
“The others are France, Australia and Belgium, it says under a headline that claims “the bursting of the global economic bubble is only halfway through.””
http://www.moneyville.ca/article/1094562–alarm-bells-sound-over-our-house-prices
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I can see it here in Vancouver where housing is more expensive than Manhattan. However, the price increases over the past 5-10 years have been created by cash purchases by investors from the PRC (China). Nothing at all to do with crazy lending practices.
It has had an adverse impact on the culture of the city. Formerly middle class neighborhoods are now mansion prices. Certain streets may have one or two owner occupiers while the rest of the houses remain empty. And finally, when a significant portion of a city’s residents are there solely for ESL education and investment purposes, there aren’t necessarily a lot of deep roots planted. When the education is done and the investment winds change, THAT will result in a market crash. Until then, you plug your nose and ignore the monopoly money prices.
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“I can see it here in Vancouver where housing is more expensive than Manhattan. However, the price increases over the past 5-10 years have been created by cash purchases by investors from the PRC (China). Nothing at all to do with crazy lending practices.”
I have in-laws in the Vancouver area, and it’s one of life’s mysteries what makes Vancouver tick.
One issue I see with the Rich Chinese theory of BC real estate is that BC residents are heavily in consumer debt. I was just reading that BC residents carry an average of $37k (Canadian) in non-mortgage debt (the Canadian average is $25k).
http://www.vancouversun.com/business/residents+have+highest+debt+paying+faster/5798811/story.html
I guess we’ll see in a few years.
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my Canadian in-laws have been buying up property in Toronto over the past few years like crazy. Every time we travel up to visit, there is another building going up and another and another. We mention, casually, that maybe things are going to crash there like here…too much building, prices going through the roof, wages not keeping pace, needing 20% downpayment and their standard line is “our banks didn’t/don’t lend like the US did”. We wouldn’t care much but it is all their money and our inheritance. We can’t imagine it continuing.
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Sandra-
My boyfriend is from Venice, and high real estate prices have pretty much killed that city. Since the superrich all want homes there, the city is a mix of empty houses owned by billionaires and really old people. Except for tourists, there’s nothing going on there. According to him, all the young people can fit in a single plaza, and everyone leaves to get a job. For the public good, I really think there should be some way to limit the process of the superrich buying multiple properties all over the world, since it really strangles metropolitan areas.
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“…their standard line is “our banks didn’t/don’t lend like the US did”.”
Typical. Almost nobody believes that their area is in a bubble until it’s over. It’s always “different here.” I think Canadians in particular are very invested in the idea of being more sensible and more financially conservative than Americans.
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Like that’s hard.
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Amy P – We do have a much more conservative banking system BUT have had our real estate crashes in the past too.
B.I. – That is such a foreshadowing of Vancouver. Yet for now people have drunk the kook-aid and talk about the great lifestyle. Not so great if you have three kids, are pushing forty and are living in a moldy 2 bedroom suite. :::cue Stadler and Waldorf::: Back in my single days when I first lived here you could own a place in your 20’s and afford to ski at Whistler. Now, not so much.
I have talked with friends about how Vancouver made two mistakes in the past twenty years that prevented it from becoming a Seattle. Through adverse tax policies it encouraged the corporate offices to move 1,000 miles east to Calgary. The second is allowing the influx of mega rich investment. Th combination resulted in fewer high paying jobs and a market where 90% cannot afford a home.
But the developers have made a killing…
Jenny – I think like anywhere, its risky to have too much invested in real estate. And within a city it depends upon the location too. Houses in Little Italy, High Park, the Annex – yes. Condos near the lake, not so great an idea.
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Would this be good time to mention that the median house in Pittsburgh goes for just over twice the median family income? That statistic probably isn’t exactly as meaningful as it might be elsewhere. The bottom end of the housing market just shut down completely. The nicer areas have seen a fair bit of increase.
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“I have talked with friends about how Vancouver made two mistakes in the past twenty years that prevented it from becoming a Seattle.”
That’s very interesting. What gets me is that the Vancouver area has San Francisco/Bay Area type prices without having a SF/BA job market. The median household income in Vancouver is around $70k (Canadian), which does not get you into a million dollar home.
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MH,
In related news, I was listening to a radio show a while back where an Australian guy said that they were being swarmed by shady Americans trying to get Australians to invest in low-rent American real estate (sight-unseen, presumably).
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MH,
That wasn’t you, was it?
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Amy P – When I was in NYC last weekend I amused myself by seeing what I could afford if I sold our place here in Vancouver. And I’d be in NYC.
That sounds like I’d sell our place out from under my husband and daughter – I’d take them along too!
Vancouver does have a resource industry. There is also speculation that some of the real estate price increases can be attributed to money laundering from the drug trade in local brands of “ahem”. Apparently there are some fancy shcmancy homes that continue to be renovated and re-renovated…
MH – I have had numerous conversations with people about how there are many lovely places to live with affordable housing where you wouldn’t have to be house poor. West coasters ain’t buying it yet…And you can only imagine how wacky the rents are if the real estate is so out of reach.
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I like Australians. Or at least, the one I know is the only one who can make the Austrians get to the point.
There have been Pittsburgh houses sold to novice investors from out of town. You can make a good return if you know how to game Section 8 and don’t have too many ethics but the novices are losing money and then dumping the house on the city.
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@Sandra, 4 Condos in a high rise near the lake but they say, as 10 buildings go up around them: “at least we will always overlook the CN tower/lake”. And they keep buying more and more. The first one was bought 5 years ago and doubled in value and that started the buying spree. It won’t last. It can’t with the inventory.
And the funny thing is my In-Laws are from Ireland where many of their friends/family have lost their retirements in realestate. They just don’t believe it can happen in Toronto.
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“And the funny thing is my In-Laws are from Ireland where many of their friends/family have lost their retirements in realestate. They just don’t believe it can happen in Toronto.”
Exactly. People have a terrible time generalizing from a housing crash in one location to the possibility of another crash where they are now. “It’s different here.” And condos are especially bad, because they’re virtually identical boxes and you can put up a hundred of them on a tiny sliver of land.
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More from The Economist:
“…home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden…”
“Indeed, in the first four of those countries housing looks more overvalued than it was in America at the peak of its bubble.”
“In contrast, homes in America, Japan and Germany are all significantly undervalued.”
http://www.economist.com/node/21540231
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I wonder how they do these analyses because within Canada (cannot speak for the other countries but assume the same), there is a wide range in regional differences in economies plus differences in what is driving housing prices.
In other words, any crash in real estate markets in the past have been regional rather than the entire country.
I am not saying that housing is not overvalued, but that the drivers of those high values differ depending upon where you live even within the same city.
I recall an Economist article recently that lowered Vancouver’s livability rating because of heavy traffic in a neighbouring city four hours away by car and ocean ferry! The city ain’t so livable but that’s like saying Boston’s traffic is affecting NYC’s livability.
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“I recall an Economist article recently that lowered Vancouver’s livability rating because of heavy traffic in a neighbouring city four hours away by car and ocean ferry!”
Hee hee. Here they are, backpedaling. Trust The Economist to be unclear on the distinction between “Vancouver” and “Vancouver Island.”
http://www.economist.com/blogs/gulliver/2011/09/liveability-ranking
I was personally wondering about The Economist’s description of US real estate as undervalued. Our property values still average out at about 3X household income, which is not exactly dirt cheap, and there’s supposed to be a lot of bottled-up foreclosure inventory.
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Like any good University of Chicago grad, I’ve read a ton of Max Weber, so I like any discussion of a capitalistic work ethic. Also, a friend of Steve has returned from working in London for a year full of complaints about their lazy ways, so this topic has been dinner conversation.
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