WatchHere's the timeline as I understand it. I welcome anyone to make corrections or additions since this is a complicated subject. Greece is currently experiencing a Lehman Brothers style credit deterioration/meltdown. The cost of borrowing is going up faster than Greece can cut their deficit.
I also want to point out that by EU standards, the United States is insolvent. Our debt will exceed 100% of our GDP this year and our budget deficit is 12.4%. (EU limits deficits to 3% of GDP) The only thing protecting the United States dollar is momentum and faith. Anyway here is the time line:
- Greece allowed their budget deficit to exceed EU rules by 400% and their own estimates by more than double.
- The old government hid this fact in an apparent attempt to defraud the EU central bank and keep their bond rating high.
- In November, the new government announces desperate measures required to save nation from bankruptcy and default.
- On December 7th, S&P puts Greece on the downgrade watch list.
- On December 8th Fitch cuts Greece from A- to BBB+ with a negative forecast.
- On December 14th the Greek government slashes spending everywhere in a desperate attempt to eliminate the budget deficit. Wages are cut, people are laid off, social programs are slashed, taxes are raised on the rich.
- On December 16th S&P downgrades to BBB- saying even these radical steps aren't going to help much.
- On December 22nd Moody's cuts Greek debt from A2 to A1. Bond selling accelerates and Greek stocks get caught in the crossfire.
- In January the EU shows up and demands answers.
- In response, Greek government announces new even more drastic cuts in government spending.
- Unions have had enough and plan massive nationwide strikes.
- On February 2nd, the Greek government freezes all government wages for 2010 including people making under 2000 Euros per month. (low income)
- On February 10th Unions hold the first nationwide general strike shutting down nearly all transportation, government services, and hospitals.
- Also on February 10th Moody's threatens to cut bond rating to A3 or even Baa1 if budget cutting efforts are only partially successful.
- On February 11th the European Central bank starts to panic. They imply that the EU will not let Greece default on its debt without actually guaranteeing they will cover the debt. Greek bonds improve slightly.
- Prior and up to Friday February 12th there is widespread speculation that other EU nations may be in similar trouble, and passing the hat for a Greek bailout might send Spain and Portugal over the edge next. It is believed that both of these nations are in worse shape than Greece. Both have larger debt imbalances. The fear is a cascade failure on the scale of an entire continent.
- Stay tuned for Monday!
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Greece is insolvent because it lacks control over its own currency. If it were allowed to temporarily devalue its own money, it would be fine, but the Greeks made the mistake of believing that joining the Euro was all upside.
I'm very curious to see where this goes. If things go badly for the three highly troubled countries (not to mention the unmentioned massive debts of wealthy EU countries, particularly France), it could lead in two directions
1. Dissolve the Euro, go back to independent economies. If this happens, anyone with assets in dollars is going to make out like a bandit.
2. Convert into a true single economy, along the lines of the US. I'm skeptical that this would go through any time in the next century though -- for all the talk of European unity, most of these countries still hate each other.
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Kevin--
http://www.nytimes.com/2010/02/15/opinion/15krugman.html
says much of the same things as you...
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I happen to agree with Krugman on this issue, but by and large I don't care for his opinions because his track record is pretty average among economists. I'm particularly annoyed at him because he refuses to admit when he's wrong, and he acts like winning the "Nobel Prize in economics" makes everything he says the gospel.
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Kevin says
Krugman's track record is awful.
Here he is in 2001 urging for Greenspan to cut rates as fast as possible.
Here he is in 2001 urging for housing to be pump primed.
Again, in 2001, he wanted to stimulate housing even more.
Still, wanting to stimulate housing more.
btw...that export led recovery never came. We just continued to outsource.
Still wants to promote spending on housing in late 2001
Of course, he'll never admit he said any of this. He even claims that he saw the housing bubble coming before this. I can find a bunch of quotes from him 2003 screaming his head off about the deficit and how it is going to create a giant fiscal crisis. If you ask him today, the deficit doesn't matter at all. He's a liar, plain and simple.
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theoakman says
And that was the correct thing to do. 2001 wasn't the problem. And low interest rates weren't the problem either--it was poor underwriting standards.
theoakman says
You really don't get it at all. Different things matter at different times. Deficits, for example--during boom times like 2003, you should be running a surplus. So the fact that we were running huge deficits during a strong economy is a very bad thing. But during recessions/depressions, deficits are a necessary evil. You have to run a deficit in order to make up for the lost demand of the private sector...
So if he said the budget deficit was bad in 2003 but OK now, he's be entirely correct.
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I concur with tatupu. There is no such thing as a permanent position in economics; it is primarily the science of analyzing, inducing or responding to changes. Krugman got carried away with his response to the 2001 tech bust, but also remember, most of those articles were written before 9/11, the ensuing wars and the surge of outsourcing to China.
Note that I am not a big Krugman fan. Paul occasionally highlights important issues, but he also enjoys the limelight too much for my tastes. He'll oversimplify complex issues just to make a splash in his own column, even though he often dismisses dissenters as oversimplifying things. His Nobel Prize gets waved around too much---I'd like to hear what other laureates of the Nobel Prize in Economics have been saying for the past few years.
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tatupu70 says
Actually, if you look at the bubble, real estate was already at its inflation adjusted all time high. The last thing we needed is to pump prime the housing market in 2001. And FYI, poor underwriting standards occurred in the latter stages of the bubble beyond 2003, not the early stages. If you don't think low interest rates fueled the housing bubble, you are nuts. In fact, every real estate pundit told people to "buy now while rates are low".
As per deficits, spoken like a true Keynesian. If you read Krugman's writings via 2003 on the deficit, he claimed that the government possesses no ability to pay off the debt without printing lots of money and causing lots of inflation. Now, both you and Krugman seem to think that a deficit 4 times larger doesn't affect that cold hard fact simply because we are in a recession. The US still can't pay it's bills and stands no chance.
Btw...it's hilarious that you think the economy was strong in 2003.
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Brand says
Every "Nobel" in economics in the past 20 years has had a god awful track record of economic forecasting and some of them have gone on to bankrupt giant funds multiple times. Krugman's forecasting record is god awful, yet somehow he manages to avoid criticism because he's got followers that blindly believe everything he says today while forgetting everything he said beyond 1 year ago.
The shifting of positions is a "non sequitor". If bankrupting yourself as a nation, you're bankrupting yourself. It's ludicrous to assume you aren't bankrupting yourself because you are in recession. In fact, it makes the fact that your pursuing the same policies even more ludicrous. Besides, they already tried the Keynesian remedy in 2001. We ended up with more unemployment, more inflation, and bigger deficits a mere 7 years later.
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theoakman says
Really? How do you measure strength? GDP growth is what I use and it was pretty robust in 2003.
theoakman says
I guess I'm nuts then because I think it had a very small effect. The data doesn't support your view, btw.
theoakman says
That's not at all what I'm saying. Please read it again. I'm saying that in 2003 we should have had a surplus that would cover the deficit spending that we have to pursue during the next recession. But even if we don't have that surplus, we still have to fix the economy.
theoakman says
Nice try. You can assume cause and effect there, but it's still not true. I'd say--we tried deregulation in the financial industry in the early 2000s and ended up with more unemployment and bigger deficits a few years later.
And more inflation?? Are you kidding? Um, try more deflation.
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The bubble was inflation. It was massive credit expansion that allowed the housing bubble to inflate (people borrowed money that didn't even exist, it was created out of thin air and put on a balance sheet only to be lent out again and again. It is called Fractional Reserve Banking). How many of the homes purchased in the past 10 years were bought with savings rather than credit? Just because we now have a temporary contraction of they credit supply doesn't mean we are not still going to feel the effects of both credit inflation of the housing bubble, and the inflation of the printing press over the past 18 months.
Look at energy and food prices. Look at health care. Sorry, just because you can buy a big screen tv or a house for less $ than last year or the new Ipod has more memory and features for less money doesn't mean the value of your dollar is going longer when it comes to the necessities of life. If anything we have to work more hours to buy the same amount of food, fuel and electricity as last year.
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AdHominem says
No, the bubble was a bubble.
AdHominem says
Maybe we will, maybe we won't. The jury's not in on that one yet.
AdHominem says
Energy and food are two components of inflation, as are electronics. The total of the entire basket gives inflation. And the total has been negative for ~ 1-1.5 years.
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My health care insurance bill is up 18% AGAIN this year. I've gotten double-digit increases from Kaiser every year since 1998.
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AdHominem says
that's not exactly how money creation actually works but in the present case close enough not to quibble I guess.
The expansion drove the bubble and the bubble drove the expansion. Land values are a magical dimension of the economy. Land is free -- like the air! -- but unlike the air is fixed in location and thus location value attaches to it.
Location value becomes a treadmill -- the more productive a community becomes the higher its land values -- visible as purchase prices and rents -- becomes.
And not only rising productivity will push up land values -- ANYTHING that increases J6P's disposable income or otherwise increases his buying power will push up land values. This is basic economics.
Banks qualifying borrowers on total household income, not just the man's income? Higher home prices!
Mortgage interest rates generally falling over the past 20 years? Higher home prices!
More aggressive lending underwriting, pay-option, negative-am, outright suicide lending? Higher home prices!
The late 90s productivity boom, much lower oil prices, wage inflation, dotcom lotteries? Higher home prices!
Tax cuts and credits for all, especially families with multiple children? Higher home prices!
Higher home prices? Higher home prices! (the boom feeds itself)
By 2003-2004 all these factors were operative, PLUS the innovation of CDOs on the back-end to indirectly connect yield-seekers with home debtors, allowing not just savings money to fund loans but actual investment money -- there IS a difference.
Anyway, these higher home prices was a multi-TRILLION dollar stimulus to the economy 2003-2007. Ramping trade with China's magical factories filled the nation with cheap goods and the new big box retailers to move it. Home improvement and durable goods became a major engine of activity, all funded by borrowed money against rising land values. The Gov't of China wrapped some of this trade around by buying large amounts of GSE bonds. Virtuous cycle!
The real estate sector itself was chiseling off its 5% or so of the total transaction volume as its vig -- immense money flows into completely useless social parasites' pockets.
I’ve gotten double-digit increases from Kaiser every year since 1998.
Higher health insurance costs? LOWER HOME PRICES, ceteris paribus.
During the boom years, net mortgage lending was around ONE TRILLION per year (2004-2006), 2.5X what it was in the late 90s. 2009 should be coming in at NEGATIVE $300B. This is astounding.
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tatupu70 says
Exactamundo. Greenspan in 2001-2004 was really pushing on a string with the interest rate cuts. 30 year mortgage rates never got below 6% even when there was free money at shorter terms (everyone was guarding against inflation, even as late as 2007).
illustrates the diff clear enough.
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^ that's also why he started jaw-boning for more ARMs in 2004, too:
http://www.usatoday.com/money/economy/fed/2004-02-23-greenspan-debt_x.htm
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iwog says
Isn't the customer pool shrinking? The unemployed, and healthy underemployed, are dropping insurance, and thus the pool remaining has more sickos right? Pay up buttercup, or join the rest of the USA which is increasingly without coverage. if you are among the segment that just does without, then it's very personally deflationary as far as your overhead costs. Just don't get sick!
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Troy says
Man I just love it when people dig up Greenspan gems. I particularly love this expert cheerleading:
"Joseph McKenzie, deputy chief economist at the Federal Housing Finance Board, says buyers like the stability of fixed-rate mortgages, but there is increasing flexibility in products. "There are lots of innovative programs, especially targeting low-income and first-time buyers," he says."
FIRST HIT'S FREE!
I looked up Joseph McKenzie on LinkedIn, and it shows he's been there for 21 years.
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Vicente says
It's the baby boomer effect. They are charging me $1000 a month so they don't have to charge grandpa $5000 a month. I understand the economics of it. Perhaps 5 years from now when health care is 100% higher there might be political willpower to actually fix the system.
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GDP entirely based on fictitious bubble wealth. Yes, it's still hilarious you think the economy was strong in 2003.
I'll agree the government should have cut spending. But they should always be cutting spending. All they do is waste money.
This wasn't a laissez-fair approach. Wall St and the entire housing industry were subsidized through the roof.
Gas, food, housing, energy, insurance, rent, tuition, health care, transportation. All of these things are way above their 2001 levels despite us being in the worst downturn of our lifetimes. That's called inflation. Yeah yeah yeah I know. You bought a plasma TV for 20% of what it cost 8 years ago.
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theoakman says
OK--but I asked you a question. How do you measure strength of an economy.
theoakman says
What exactly are you refering to? Please post some data showing your point.
theoakman says
Yes, of course. I didn't say we've had deflation for the last 9 years!! Only the last 1-1.5 years... But, I don't think most things are "way" above what you paid in 2001. Rent, transportation, housing, food--in most of the US are not "way" above 2001 levels.
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tatupu70 says
food has gone up a lot. What was the normal price in 2001 at Safeway is now the club-sale price now. Gas is up 50% but that's largely due to the weaker dollar, limited production, and increased buying from India and China, not monetary inflation per se.
theoakman says
One man's waste is another man's paycheck!
If you /really/ want to see wasted money check out what Paris Hilton spends her inheritance on.
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theoakman says
That didn't push people to spend more on a house than they could afford. The price rises of 2003-2006 was partially a speculative bubble and the rather total abandonment of sensible lending underwriting.
Prices were set at what the Greatest Fool was willing to borrow. That wasn't the problem, though, the core problem was that the financial system was re-geared (by industry insiders embedded in government) to actually LEND the money to these fools.
Countrywide, WaMu, and several hundred more lending outfits left a vast trail of destruction in their wake.
The problem wasn't too much government, but too little.
You either already know this or are really obtuse.
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Troy says: The problem wasn’t too much government, but too little.
I would frame it a different way. There was too little governance. The Fed and Treasury had largely the same powers as now, but they chose not to probe deeply into underwriting standards. They opted not to increase reserve requirements when lending was getting overheated. I don't think that we need a whole bunch of new laws or agencies (unless it's to limit naked shorts and exotic derivatives). Greenspan and Bernanke both had the available tools to apply the brakes at any time in the past 10 years. Along with Paulson & Co., they deliberately chose not to exercise their powers, for a variety of theoretical and ideological reasons.
Like Charlie Munger said recently on Slate: These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive.
In other words, your agencies and laws are useless if you have poor bureaucrats running the show. There is no way to pass a law that says, "Don't appoint poor bureaucrats to critical government positions.", hence a large component of this problem cannot be resolved via legislation.
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More people should listen to Warren Buffett and Charlie Munger.
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Hi thanks for your information. I think its very accurate. I would like to ad that Greece has a real problem with basic distrust of government because of their history. As a result greeks do whatever they can do to avoid paying taxes. Greek society has so many wonderful qualities they support strong families, encourage education, and work very hard but this basic distrust of government makes it
so difficult for them as a country to move forward. People do not think its their patriotic duty to pay taxes they think of it as naive. I think before the government is trusted they will have to restructure the way it works. The local government is full of nepotism and corruption. The government must become more transparent and be regulated by other institutions. yaisou!
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Greeks have an unsustainable system which enables them to retire at age 58 with 14 "monthly" pension payments each year for the retirees. With the lowest fertility rate in Europe, Greeks don't have enough young workers to pay for these relatively generous pension benefits. Kind of like the CA pension disaster here in the US. When it was pointed out that Germans retire at age 67 were being asked to bailout irresponsible Greeks who retire at 58, Greek Prime Minister Theodoros Pangalos denounced the conditions of the EU deal on the grounds that the Germans stole from the Bank of Greece during World War II. http://www.time.com/time/world/article/0,8599,1968381,00.html .
How dare you tell us how to manage our finances! Just give us your money and STFU!
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Update: Greece will default on its debt and both Portugal and probably Spain will follow. That seems to be the consensus now, and is the reason the stock market took a dive earlier in the week. The potential consequences depend on who you're listening to:
1. Nothing. Investors will understand that Greece (and Spain and Portugal) are small nations relative to the world economy and will absorb the losses.
2. Chain reaction systemic collapse of European credit. Losses in G.S.P. will result in defaults elsewhere and the result will be Icelandic-style bank failures for poor nations and USA-style bank bailouts for rich nations. Money will flood into the Untied States as the mythical last safe haven and cause a much bigger recovery than anyone expects. (alternate: Money will flood into China)
3. Chain reaction systemic collapse of world Credit. Investors will realize that United States and UK books are actually much worse off than Greece, and on a scale hundreds of times larger. Money will flood into gold and the bond bubble will collapse in every nation. Both the Euro and the dollar will begin terminal devaluation.
Place your bets folks, place your bets............
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iwog says
I'm thinking they just kick Greece out and postpone the break up in the Eurozone.
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Postpone is right. I remember thinking back in the 1990s when all this was coming together that a group of nations full of prejudice and hatred and bloodshed going back 3000 years was not likely resist the temptation to cheat on the currency.
I'm not sure what's going to happen.
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What happened in Greece... stays in Greece.
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iwog's posts on this thread are outstanding. He definitely has an an ability to think out of the box. Regarding his 11:40am 4/29 post/question, I think it will start like #2, then US credit rating will deteriorate, although not to the same extent as the PIGS (Portugal, Italy, Greece, Spain)
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Grecian formula? http://ur.lc/j2a
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iwog says
Has there ever been a time in history where countries didn't cheat on their paper currencies with international trade?
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theoakman says
Why restrict your thinking to paper currency? There hasn't been a time in history when countries didn't cheat on their currencies of any type.
The cat is out of the bag on Greece. The IMF will be picking up over 30% of the bill as junior debt. Why does this matter? Because the IMF is 40% funded by US taxpayers. So our tax dollars will be subordinate to the money owed to European banks. IMF has been almost always senior debt in the past. The US taxpayer will be on the hook subsidizing Greek style wages and benefits, including almost unbelievable retirement benefits for Greeks who can retire at age 53. Of course the possibility exists that the Greeks will put their fiscal house in order for the first time since Plato, repay all the debt, and everything will be fine.
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Huge flight to the dollar today due to predictions that the Greece bailout is too little too late.
The dollar is up over 1% across nearly every currency.
It's also causing a dip in interest rates. If you need to lock in a mortgage, today is probably the day to do it.
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What's going to happen if Spain and others have a similar issue? Or are they not in as much trouble?
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mthom says
Depends on who you ask. Some people say that Spain and Portugal are in more trouble than Greece. It's generally accepted that all three will eventually default without a bailout of some kind.
I'm waiting for a plan to consolidate the Euro back to the original 7 nations and allow weaker nations to opt out. I think that's the best plan to fix this. Then the default might only be a default back to a depreciated currency, and not something that threatens the entire Eurozone.
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robertoaribas's website
Spain is a MUCH bigger economy than Greece, so Spain's problems matter a whole lot more.
Maybe we should let California out of the union, give it its own currency and let it default. After all, any country stupid enough to give home buyers money as it goes under a tsunami of red ink would not get an IMF bailout.
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iwog says
I think that such a blow would weaken the Euro to the point where the monetary union would dissolve. I wouldn't be surprised to see the Euro drop to the $0.75 range in such an event.
Beyond that, it's not clear that the other Eurozone countries are all that sound. France has an enormous debt problem. Germany is OK (relatively speaking), but the union as a whole isn't all that sound.
I'm guessing that the ECB will start an inflation inducing policy, though they'll try to time it to coincide with similar actions from the federal reserve.
I'm guessing that the Swiss are feeling pretty smug about now.
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robertoaribas says
California pays more money to the federal government than it receives. Cutting California off from the rest of the country would actually FIX the entire problem since we could use the money to balance the books.
Gotta be careful when considering states that provide the largest share of wealth production in the country. You need us, we don't need you. =)