Modigliani-Miller and Yanis’ response No. 2

Yanis answers once more, directly to the first part of my response, before I had the chance to write my second part. He suggests that we should clearly mark our responses as this discussion is likely to continue – which I look forward to! So this post is KE3 in response to YV2.

I understand that Yanis does not want his Modest Proposal (MP) to be taken apart; he rightly says that it is a combined effort, where each part reinforces the other. However, he goes a little too far in my view and makes assumptions about how the combined beneficial effect of the MP will look like that somewhat mutes a necessary discussion about each bit separately.

I agree with Yanis that the unusually low interest rates of Germany are in part a sign of panic and disruption rather than a sign of German fiscal brilliance. And likewise for Spain or Italy, with opposite sign. But apart from that, a very famous theorem, Modigliani-Miller, tells us that the structure of how a company finances itself – under lots of idealizing conditions – is irrelevant for how much it is worth. For the MP and other suggestions of how to structure European sovereign debt, this means that when the “blue” part of the debt has higher seniority and thus, lower rates, the yields on the “red” debt will be so high that the interest rate cost will be the same in total. In theory, that is, without panic or disintegration or mutualization of debt.

Yanis knows all this, of course. And given the current situation, I expect (as he does) that the MP will lower the total interest rate costs of, say, Italian debt, so Modigliani-Miller doesn’t apply. However, will it be enough to bring the marginal rates on “red” debt to a sufficiently low level? As Yanis writes, correctly in my view, market discipline will be strengthened: the rates on “red” debt will probably go up, beyond the yields that Italy and Spain are paying now, not to mention Greece. After all, in a country like Italy with >100% of GDP in debt, the upper half (the “red” debt) would have to bear all the risk. Even in benign economic circumstances, this would lead to very high yields in my view.

Then what? If you put a lot of faith in the MP, you will argue that it doesn’t matter much as the MP will make “the crisis go away”. Unfortunately, this also ends the debate. So let us for the sake of argument put less faith in the full MP, for instance because wage and price differentials across Europe will not go away easily, leaving countries like Greece and Portugal in recession for a long time. Or because property busts like the ones in Spain and Ireland are hard to handle even outside of a currency union. As marginal yields set the incentive for how much to borrow, the pressure by markets will be very high. Will this lead countries to enact the exact austerity policies that are part of the problem right now? Fiscal waterboarding by markets, so to speak? I consider that quite likely. These countries may need a grace period, and how should we implement it?

This brings me to another misunderstanding about the MP: how is the transition period supposed to look like? Will each bond holder get two new bonds: one which is backed by the ECB, the other by the national government? Or will countries, as I assumed, just replace bonds that run out with ECB bonds? The latter will run into legal problems, as new debt will be senior to existing bonds which, as far as I know, would be a default event on existing bonds that often have a pari passu clause. On the other hand, it would give countries a grace period in which they don’t have to turn to the market, which could be helpful in current circumstances. It would be great if Yanis could clear that up.

Kommentare

  1. I agree and I wrote similar findings on the blue/red bonds of the Bruegel Institute, They are, in my opinion, a great instrument to avoid future excesses in state expenses once everybody has again modest debt. They would help a lot to avoid a future case a la Greece. However, they would not help in cases such as Irland and Spain that suffer more from a real estate and banking crisis than of too much state debt.

    That said, I’m not finding the blue/red bond proposal bad. On the contrary, I really like it. Just we shouldn’t fool ourselves in thinking this is going to solve all the problems. It solves only few, but in that it’s a better suggestion than any of the “solutions” implemented so far.

    • kantoos schreibt:

      @ lostgen

      I think Yanis would agree, which is why he points to the full MP and its beneficial effects.

  2. Very Serious Sam schreibt:

    As for the blue/red bonds, see what Tyler Cowen wrote here http://marginalrevolution.com/marginalrevolution/2012/05/the-blue-bondred-bond-proposal.html
    —-
    1. GDP figures will be manipulated, to allow for the issuance of more guaranteed debt.

    2. The key is guaranteeing the banks and their deposits, at reasonable cross-border cost. This doesn’t accomplish that.

    3. Presumably a country has to pay back its joint bonds first, otherwise it is too easy to pass the buck on those and just pay back the national bonds. That makes the purely national bonds subordinated debt and may raise rather than lower their risk. Real private sector lending is already becoming subordinate to an unworkable degree, given all the “first in line” public lenders involved.

    4. Germany still ends up with its finger on the “send you (and me) to doom” trigger, which already isn’t working out in the Greek situation. If Spain or Italy is approaching insolvency, can the Germans really withdraw credit? Didn’t the ECB just lend over a trillion euros, starting December 2012? How well is that going? Is Germany finding it easy to say “nichts mehr!”, or is the pressure for ever-greater bailouts integration? Why should the Germans let themselves be led further down that gangplank? Why not just call the plan “Germany commits to no more bailouts, not ever, ever again” and cross your fingers behind your back?
    —-

    Valid arguments, not easy to ignore, I think.

    As for the rest: Yanis was already asked several times by several blog contributors, about what the MP is not adressing, but what MUST be adressed in parallel and beyond all this finance alchemiae: what is the new, sustainable business model for Greece, one where she has more or less constantly a primary surplus and no current account deficit.

    Because no matter if she stays in the EMU or not: she must change a whole lot of things. If she doesn’t, she will mostly depend on what standard of living the taxpayers of other countries are willing to fund. Which is not a future I’d like to see for Greece.

    There was not any response whatsoever so far.

  3. Positroll schreibt:

    “Property busts like the ones in Spain and Ireland are hard to handle even outside of a currency union. As marginal yields set the incentive for how much to borrow, the pressure by markets will be very high. Will this lead countries to enact the exact austerity policies that are part of the problem right now? Fiscal waterboarding by markets, so to speak? I consider that quite likely. These countries may need a grace period, and how should we implement it?”

    I think this is the core problem. In order to solve the crisis, we need
    - a little higher inflation in the Euro-zone (3%)
    - a way to lower the overall debt, especially of the pigs, without destroying growth by austerity
    - a way to help the pigs service their debts
    - more demand in the north
    - a way to restart growth in the south, i.e.
    - – to prop up the housing market in the south
    - – to prop up tourism in the south.

    At the same time, German voters will likely resist anything that works as a direct transfer of wealth from north to south (“Aufbau Ost” was expensive enough and is still ongoing, and southern Italy demonstrates the dangers of making such structures permanent).

    Which brings me back to my own plan … http://kantooseconomics.com/2012/05/25/yanis-varoufakis-on-fiscal-water-boarding-and-ecb-bonds/#comment-7693
    Besides the points discussed there, it should especially calm the markets wrt the 3-5 year bonds of Spain and Italy. Since the markets know that these countries will receive 200+ billion Euros each from the ECB purpose-bound to service debt coming due in this timeframe, the risk perception for these bonds should go down a lot. And so we get a 2 year grace period for Spain, Italy and Portugal (2 years from now, they can still give out 3 year bonds that are covered by ECB funds), allowing them to get back on their feet and implement the needed reforms. Greece, otoh, is another can of worms …

    Also, once we (Europe) get back on our feet and slowly emerge from the liquidity trap, there will be room again for the ECB to very slowly (!!!) start raising interest rates to bring down inflation. If the ECB makes this clear enough from the outset, rumblings from Germany over the dangers of inflation should be muted..

    P.S. There is a typo in the linked comment; at the end it must read
    “The ECJ surely would NOT want to punish Germany for helping out the GIPS countries …”

    • To boost growth in the south without transfer payments, Germany just needs to significantly raise their salary adders (“Lohnnebenkosten”). This will increase the income of the state which can use that to pay down debt or invest in infrastructure or save for its aging population. At the same time the relative productivity in the south becomes more attractive to private investments.

    • kantoos schreibt:

      @ lost

      As much as I agree that there is a major competitiveness problem, I am losing my belief that this is an effective policy without major policy changes in how banks are handled. Investment in Spain will not happen with money from outside of Spain as long as there is a revaluation risk, it won’t happen from within unless there is some trust in banks again, and it won’t happen until wages are so low that they can compensate for the risk premium that has to be paid on Spanish investment.

    • Very Serious Sam schreibt:

      @lostgen

      To raise the salary adders was done several times. And the ‘Beitragsbemessungsgrenzen’ are even raised year per year. The reason: it doesn’t affect the income of public servants and the costs for their employers. The additional burden is only on the private sector employees and firms.

      It would be much better to impose the burden on a broader base, including the public servants. And generally to raise the net incomes of the majority of people. Along with a general revamping of the tax/transfer system.

  4. @Kantoos
    I fully agree. Again this is only one thing that will help, but not solve the problem entirely. My point was that it is easier to align the productivity on the German side via salary adders than by salary reduction in the South itself. Of course outright salary increases would also do the trick, but they are more difficult to achieve by the politics and will likely take much more time.

    @VSS
    Adding public servants to the burden might help to gain pubilc support, but it will not effect competiveness as much as private salaries do.

    • kantoos schreibt:

      @ lostgen

      I agree, although there is certainly one thing the ECB could do: keep inflation expectations well anchored at (not below!) 2%, which would have much, much more positive effects than raising German wages by force (which does not increase aggregate demand).

      Then again, a lot needs to be done simultaneously, and in that respect, Yanis was correct right from the beginning, when lots of people focused too much on debt, debt levels etc.

    • I agree, also aggregate demands increases if the extra income earned by the salary adders would be spent.

      We have many issues that need to be tackled. Not addressing one of them will likely prelong this crisis and/or create a new one in a few years.

      (1) The aggregate demand needs to increase in the Eurozone as a whole. Here the ECB holds the most powerful tools to achieve this.

      (2) The asymmetry in Eurzone productivity needs to be reduced as it is the prime cause for the payment crisis. For this I suggested to rather raise salaries/salary adders in Germany than lowering salaries in south. In the long run, there should be automatic stabilizers a.k.a. a transfer union. To reduce moral hazard in this, it would be best to harmonize the sozial systems on European level and not directly finance national governments.

      (3) The banking system needs to be fixed to make ECB policies more effective. Especially, the banks need much much lower leverage. And the bank needs a workable insolvency scheme that encourages the bond holders to do their duty and limit the risk the banks take on the balance sheet. Currently they don’t care because they are being bailed anyway.

  5. Rien Huizer schreibt:

    @ Kantoos,

    Bringinging in some robust micoeconomics of finance is laudable. Next step is to simply expect that (forget about the multiple equilibria, too hard) efficient markets will see right through all these little schemes to do something that should not work.

    Solve a supply side (development) problem using the proper tools and do the same with AD.

    And if the problem is only of the Greece type, it has little to do with economics anyway….

  6. Rien Huizer schreibt:

    @ Kantoos

    Politicians should be able to repeat the same lie accurately and convincingly. Maybe they can defeat the core of financial macroeconomics. I guess not costlessly, but the costs will be in the future.

  7. jopa schreibt:

    @ VerlGen:

    The asymmetry in Eurzone productivity needs to be reduced as it is the prime cause for the payment crisis. For this I suggested to rather raise salaries/salary adders in Germany than lowering salaries in south.

    This only works out if you focus on the EUR zone and ignore the rest of the world. Raising wages in “the core” would make the core less competitive, but wouldn’t help the industry in “the periphery”. Maybe the citizens of the “core” would by more goods, but these would not come from the “periphery” countries. Big gainers would instead be China, South Korea, parts of Eastern Europe, you name it. The problem in Europe today is not mainly the asymmetry with regard to competitiveness, but the lack of competitiveness in certain countries, which needs to be dealt with foremost locally.

    • @jopa

      I don’t follow this argument. To the external world the competiveness will remain unchanged as the Euro exchange rate will adjust accordingly.

    • jopa schreibt:

      @ VerlGen:

      …the Euro exchange rate will adjust accordingly.

      What would be the transmission mechanism, please? And if so, shouldn’t we assume that a change in the EUR exchange rate would have other effects as well?

  8. cangrande schreibt:

    Kantoos: “Will each bond holder get two new bonds: one which is backed by the ECB, the other by the national government? Or will countries, as I assumed, just replace bonds that run out with ECB bonds? The latter will run into legal problems, as new debt will be senior to existing bonds which, as far as I know, would be a default event on existing bonds that often have a pari passu clause.”

    No: The country will simply be dished out money from the ECB, and the ECB will issue a loan backed by nobody else than by the ECB itself.
    The credit for the country is supposed to statistically not count as such, it is not to be included in the country’s debt, and the country is not to guarantee this debt to the Holders of the ECB-Eurobonds. Cf. P. 7 MP:
    „Such a ‘tranche transfer’ to ECB Eurobonds should not count on the national debt or member states nor need be guaranteed by them“ and „Therefore EU Eurobonds need not and should not count on the debt of EU member states, nor be guaranteed by them“.
    (Note that this point is beeing hammered down twice in one paragraph!).

    Not surprisingly I don’t find any mention of super seniority in the MP itself. This idea is only proposed in Varoufakis “A reply to Kantoos Economics on the merits of the Modest Proposal” (http://yanisvaroufakis.eu/2012/05/28/a-reply-to-kantoos-economics-on-the-merits-of-the-modest-proposal/). Do I trust these two authors? Not in a lifetime!

    Lowering the coutries’ debt is a very important point, if not the central aim, repeated several times in the MP, The intent is, obviously, to lower the statistical figure of a countries debt. What are the authors hoping to achieve thereby? Obviously more leeway for the countries, to incur fresh (“red”) debt.
    Taken at face value, this would be economic kindergarden.
    The markets (if working properly) will not look at the BIP-rate of debt, but at debt sustainability, so if super-seniority of ECB-country-credit was agreed upon, the debt would weigh on the country’s balances.
    However, the idea does make sense if the Holland-Varoufakis-paper is not meant as a scientific proposal, but as a political paper. First, you lure those ignorant barbarians deeper and deeper into the common-debt-trap. And once you’ve got them kneedeep in the sh., you come up, peacemeal, with your real intentions: Subordination of ECB debt, plus guarantees for the red debt.
    Plus “credit” for uneconomical EIB-projects etc. (How, for instance, would the EIB recover any capital that it is supposed to invested in the fields of health, education, environmental improvements?)

    Two professors of economics unable to phrase a plan that at least SOUNDS watertight?
    Or rather:
    To lobbyists for highly indebted countries (Greece and Portugal), which would prefer to live at the expense of foreign taxpayers?
    Like I said: Il trucco c’é, ma non si vede. If you think the paper was designed as a scientific contribution, you’ll fail to see the trick.

  9. Ralf T schreibt:

    Hi Kantoos,

    I know this is slightly OT, but it does tie in nicely with the question of who will ultimately bear the burden: http://baselinescenario.com/2012/05/28/the-end-of-the-euro-a-survivors-guide/
    Simon Jonson seems to argue, that the game is up and as things currently stand there is no realistic(in economic and political terms) way for the Euro to survive. I found his line of argument quite convincing. What is he getting wrong?

    • kantoos schreibt:

      @ Ralf

      The necessity that Greece will be followed by other countries is often assumed more than argued. Where do you draw the line? Will Austria also leave? Why not?

      The Target-2 stuff is nonsense. Collateral is provided for almost all these transactions as they originate in money creation by the central banks. If Greece leaves, and wants to steal the collateral, the euros in German bank accounts of Greek citizens and companies will probably be converted by force into drachme, which makes the “losses” of the ECB go away. If Greece hands over the collateral, well, then we don’t know how much will be lost. But not vis-a-vis some ideal scenario of “no losses”, but compared to a proper counterfactual: what would have happend, had the ECB cut of Greece sooner? And should we bribe Greece into staying in the eurozone, which might be costly as well? There are a lot of essentially un-answerable questions that Simon and Peter just make easy assumptions on.

      I will have a post on exit options up shortly.

  10. Ralf T schreibt:

    @Kantoos

    thanks for the reply.
    If you´re planning on writing an article about exit options, you might find this presentation interesting:
    http://www.scribd.com/doc/96024196/Achtung-Baby-Germany-is-Riskier-Than-You-Think#fullscreen

    • Very Serious Sam schreibt:

      This presentation takes a lot of assumptions based on expectations as input and thus is not very convincing from the ‘science’ point of view. Parts might be worth considering, the total not. Plus, essentially it says Germany has to surrender to the blackmailers like the finance industry, Greece, Spain and others or else it would lose even more.

      I say: a nation may never surrender to such demands, or it will forever be the payer of last resort for other people’s parties. Rather we all go down together for some time and rebuild the whole architecture from scratch than put such limitless and endless burden to pay on our children and grandchildren.

  11. The point is that it’s likely that at present the countries in trouble will default on the red part, this because the crisis went on for too long WITHOUT red/blue already in place. This of course is bad, but not as bad as a total default or a total break-up. And this is also one reason why you cannot separate at least three of the two points of the proposal, i.e. because the shock produced by the default (or hair-cut) on the red part to be absorbed you need first to insure the banking system in some way, but you cannot do it at national level only, otherwise you go back to the ping-pong dynamic between banks and states.

    But I think the real point in favour of Yanis proposal is that there isn’t any other one on the table, except for the two extreme ones: “let’s go on with austerity” or “let’s break-up and go back to national currencies”. About austerity we’re touching the effects concretely, so it’s easy to understand that it doesn’t work (ok, in Germany is a bit difficult to experience those effects, that’s a problem…). About the euro-breaking option it’s a different case, there’s this great hope fed by economists like Krugman and Roubini and based on what happened in Argentina. But there are many problems also with that: first we don’t really know what’s going to happen, Argentina had very different premises and circumstances and the risk is quite high. Second leaving the euro will be a shock for any country (even Germany of course!), I think it’s quite unreasonable to think this can be a “smooth” passage. so adding an other shock to the already shocked situation can’t do anything than worsening the situation. Third there’s a political cost too. We often hear that eurozone, or even EU, were just political ideas, or ideologies, or “fantastic objects” and so on, and sometimes (but not in the case of Soros’s last speech) this is used as an argument for saying “given it was just out of a political will, it was and it will always be bad economics”. But this is based on the assumption that there can be an economic system insulated by the political and cultural ones. It’s not like this of course. It would be nice to have a way to “measure” the “political” costs of breaking the eurozone, but this is not (and won’t be) the case. At least it’s not possible to measure them with a monetary measure unit. So I don’t have any ready answer on this point, but, probably irrationally from your point of view, I don’t know, I would prefer our leaders to try any practicable solution within the eurozone before getting to the break-up option. So I would prefer a process of trial and error checking with austerity as the first (not working) step, and the break-up as the actual last resort. Of course, this is very difficult given we’re talking about the lives of millions of people, it’s not like managing just our own. That’s why, in my opinion would be good to start from the banking union. Because with that at least we would start to break the link between national governments policy shaping and national banking systems, and the debt ping-ponging between sovereigns and banks. Of course, there is the risk that it won’t work. Ok, that’s true, we don’t know until we try. But in my opinion it seems a more reasonable reform than just breaking up the euro, which seems to me nearer to a revolution then to an “evolutionary” road map.

  12. cangrande schreibt:

    Kanntoos: Could it be that you – and so far, also I – have overlooked the elephant in the room?

    The Hypothesis Holland-Varoufakis of an underinvestiment crisis poses two questions: one obvious, the other one ‘the elephant’:

    1) How did they come to the conclusion (or how could you possibly determine) that the crisis is (apart from the other factors state debt and banking crisis) underinvestment, as opposed to underconsumption?

    2) Assuming that H-V are right, and there actually IS an underinvestiment crisis:
    Why should massive public investments (EIB) be the (only, or even a workable) solution? The narrative of the Troika (also, I guess, yours, and certainly mine) is, basically: Investment would come, if conditions where right. (Which applies, of course, not only for Greece, but also for Portugal, Spain and Italy – and France?!) Holland/Varoufakis simply do not adress this is fundamental question. Did they overlook it? Are they ideologically biased toward state intervention?
    Whichever it may be: This basic contrast should come to the open.

    From all of what I’ve read in your blog I infer that you don’t think the state thing will work in producing blossoming landscapes. Neither do I. But when it comes to the present debate I don’t think you’ll get anywhere unless you are aware of this tacit assumption of H.-V., and unless they themselves are forced to openly confess to it and discuss IT.
    It would probably then turn out that all the technical details (or objections) somehow or another are only mirror reflections of the “ideological” split between command economy and private economy.

  13. cangrande schreibt:

    Basically, what Holland-Varoufakis (or, in Germany, people like Horn, Fricke, Flassbeck) are saying, is: Dig holes to create jobs, and let the ECB print the money to pay for it!

    However, much as I perceive the H.-V. “modest propsal” to be (and loathe it as) an intellectual cover-up job for Greek (southern) inefficiencies (which doesn’t mean to imply that we don’t have our own, like “Energiewende”), they may still be right in their assumption that there is something like “the” crisis.

    As I have previously stated here, for me the fundamental problem (which Keynes foresaw, and therefore today surely wouldn’t opt for any “Keynesian” “solution”!) is the accumulation of money with the “capitalists” (cf. my blogposting “Die Ökonomie der Artos-Phagen: Warum eine eigentumsbasierte Geldwirtschaft (im Basismodell) nicht dauerhaft funktionieren kann” – http://beltwild.blogspot.de/2010/01/die-okonomie-der-artos-phagen-warum.html). Not the accumulation as such, but the the fact that the “rich” simply can’t consume as much as they amass, and, on the other hand, there aren’t sufficient opportunities for (productive!) investments.
    This would also be the root cause for the imbalances between surplus- and debt-economies.

    You (the readers) may not agree with it, but aren’t the ‘inflationists’ (Blanchard etc.) and the ‘deleveragers’ basically telling us that very same story (possibly without being aware of it themselves; they may well have a mental blockade and this may well be induced by some capital-biased innate structure within the “narrative” of economic science!)

    Plus, if you disagree: How do you explain the world-crisis (as opposed to the specific crisis in Greece)?

    Another question (or a solution?) is how come that our economy has managed to establish a financial system, which seems to have the ability to create “yields” while not producing anything?
    Are those “yields” coming from ever fresh money diverted (by “the rich”) from the real economy?
    Or has the financial system created a mechanism which somehow forces the central banks to always funnel more fresh money into it, and thereby creating an illusion of yields?

    You will, of course, think that I’m a crackpot (even though the theory of uncerconsumption is already centuries old). But that won’t change my opinion that the economic “science”, in its present state does not ask the right questions to get anywhere near the root causes of the crisis. And while I agree with Soros, that for the reason of reflexivity economics will never be an exact science, I still hold that it should be able to uncover the roots of the crisis.

  14. cangrande schreibt:

    Correction of my commentary June 5. My statement
    “Not surprisingly I don’t find any mention of super seniority in the MP itself”
    is mistaken – s. p. 8 of the MP.
    However, it does remain unexplicable for me how anybody could want to accord super seniority to some debt that on the other hand he doesn’t want to be counted among the countries “official” debt.

  15. Ralf T schreibt:

    Hi Kantoos,
    have you read this comment by “cangrande” on Yanis´s blog : http://yanisvaroufakis.eu/2012/06/03/why-europe-should-fear-fina-gail-like-reasonableness-much-much-more-than-it-fears-syriza/#comment-11429
    I personally find it vile, arrogant and quite frankly revolting to my stomach. He seems to have taken it upon himself to be your personal representative on Yanis´s blog.
    I very much hope that that is not the case, because his comments have little to do with the general standard of civility and mutual respect, you and Yanis agreed upon for the purpose of discussing the question at hand.

    • kantoos schreibt:

      @ Ralf

      Cangrande is a regular commentator, and was repeatedly warned to keep his comments short, and non-insulting (not on Greece, but on many other topics as well). Whenever he failed to do that, I refused to publish his comments. At one point he was so angry at me that he declared never to comment on my blog again. You can be sure that he is not, by any means, my representative anywhere.

      @ can

      Please don’t give other the impression that you are acting on my behalf.

  16. cangrande schreibt:

    Dear Ralf T,
    if you assume that I’m acting on behalf of Kantoos you are logically implying that I’m voicing his opinion. Now if I were Kantoos, I’d certainly find that idea revolting – if I were him and would read my commentary ;-)

    And what exact statements of mine bother your stomach?
    Certainly not this one:
    “The Fourth Reich (and I don’t care if this offends German-born commentators; after all, they have plastered on me and on my compatriots pretty much the same labels they once plastered on the Jews) deems Eurobonds “unconstitutional”.
    Oh really?
    And what about all those destructional austerity measures that the Fourth Reich, in collusion with the Troika, has imposed on the “PIIGS” in clear violation of their Constitutions?”
    Because that’s not from me. (http://yanisvaroufakis.eu/2012/06/03/why-europe-should-fear-fina-gail-like-reasonableness-much-much-more-than-it-fears-syriza/#comment-11329)

    And since it may have escaped your attention: the posting “Why Europe should fear Fine Gael-like ‘reasonableness’ much, much more than it fears Syriza” is not part of the discussion between Kantoos and Varoufakis.
    This doesn’t mean I didn’t also post within the discussion: http://yanisvaroufakis.eu/2012/06/06/on-the-transition-to-a-viable-eurozone-and-the-modigliani-miller-theorem-continuing-the-dialogue-with-kantoos-economics-on-the-modest-proposal-response-yv3-to-ke3/#comment-11451
    Of course Kantoos for sure has noticed himself that Varoufakis dodged the pari-passu-question and certainly Kantoos can and will speak for himself and doesn’t dependend on me to be his loudspeaker.
    But that doesn’t mean that I’m forbidden to comment on the fact (and a few others), does it, Ralf T?

    And besides, Ralf: If you feel revolted at my commentary: why not say so in the Varoufakis-blog? Apologize for your ill-mannered fellow-German, and tell the readers that of course you and a lot of other Germans just love to see their tax money go south (and to the banks)!

  17. cangrande schreibt:

    Aus einem Interview des Tagesspiegel (übernommen von der ZEIT) mit Commerzbank-Vorstand Martin Zielke (http://www.zeit.de/wirtschaft/2012-05/commerzbank-interview-zielke/seite-3):

    Frage (des Interviewers Moritz Döbler): Für mich ist es seit Jahren ein und dieselbe Krise, die sich unterschiedlich zeigt.

    Zielke: Die Auffassung teile ich nicht. Ich sehe sehr unterschiedliche Phänomene. Eine Immobilienblase wie in den USA hatten wir zum Beispiel in Deutschland nicht. Die Staatsschuldenkrise dagegen ist ein Problem fast aller traditionellen Industriestaaten. Viele sind massiv überschuldet. Und der Grund dafür liegt nicht allein in der Finanzkrise. Wir haben nicht erst seit 2008 über unsere Verhältnisse gelebt. Zudem haben eine Reihe dieser Staaten das Problem, dass ihre Wirtschaft nicht wettbewerbsfähig ist. Und wir haben Länder, die bis heute nicht gewillt sind, die dafür notwendigen Strukturveränderungen vorzunehmen. Und falls das nicht endlich passiert, hilft auch kein neues Geld. Wir brauchen wettbewerbsfähige Strukturen und wir müssen die Staatsverschuldung senken. Daran führt kein Weg vorbei. Deshalb habe ich großen Respekt vor der Leistung der Politik in unserem Land. Hier wurden in der Vergangenheit wichtige Entscheidungen auch gegen vorhandene Widerstände getroffen.

  18. cangrande schreibt:

    As for my commentary 6. Juni 2012 um 16:48 (http://kantooseconomics.com/2012/06/04/modigliani-miller-and-yanis-response-no-2/#comment-7923) I’ve now discovered that Holland-Varoufakis have completely reworked their MP (at the end of May 2012?).
    It is only now that the super seniority has been introduced.
    Now also the intended mechanism of tranche transfer to the ECB has been clarified:
    “ E.g. for a member state whose debt to GDP ratio is 90% of GDP, the ratio of its debt that qualifies as MCD is 2/3. Thus, when a bond matures with face value, say, €1 billion, two thirds of this (€666 million) will be paid (redeemed) by the ECB.” (p. 7, annotation # 5)

    Continuous repayment, however, seems to be optional now, not obligatory:
    “Member-states undertake to redeem bonds in full when redemption is due if the holders opt for this rather than to extend them at lower more secure rates offered by the ECB.” (p. 8, second part of the sentence is hard to understand for me.)

    As for investments, it is logical that the authors should demand them to be directed
    “… into the deficit regions that are currently buckling under the unbearable weight of fiscal consolidation.” (p. 12)
    Question is, of course, whether you can identify a sufficient amount of “productive investments” (p. 10). Reading on p.14:
    “Shifting social investments to Europe also would release a major share of national
    fiscal revenues to achieve the as yet unrealised commitment of the Essen European
    Council to ‘more labour intensive employment in the social sphere’
    and therefore enabling more teachers and smaller class sizes more health workers for
    an ageing population”
    makes me wary as to what sort of “investments” the authors have in mind.
    The ECB co-financing is now on page 15:
    ” Our proposal is that this 50% co-financing, which now acts as a mighty break on growth (courtesy of the indebtedness of member-states), comes from additional, net, ECB-bond issues.”

    “Aggregate investment in the Eurozone thus funded (50% by EIB-bonds and 50%
    by ECB-bonds) could be calibrated to a level equal to some proportion of total
    Eurozone GDP while the distribution of funding within the various Eurozone
    regions (and not just countries) should be designed to counteract the internal
    imbalances of competitiveness and intra-Eurozone (im)balance of payments.” (p. 15)
    This distribution of European investmens is consistent with the idea of convergence, but might be inconsistent with economic success. Looks to me like those “investments” are bound to become a highly politicised affair, which may not be the healthiest climate to yield a decent ROI.

  19. Erich schreibt:

    Debt was allways connected with default. So those who give credit to someone have to have a look at their risk. This was allways the case throughout the history. So when those who give credit make a wrong speculation about their risk they loose their money. It is really very bad to let the tax payers who didn’t have any control about that risk take over such damage.

    Some people say this is necessary, but then the system making this necessary is bad. There must be a way to change such a system and those who studied economics should be able to design such a change. It’s really an immoral suggestion to let the poor people take this damage by loading huge credits on their back or by taking their money by inflation.

    I think we have to accept that some countries go through a default. Of course this would also cost some tax money, but at least it gives a perspective. The banks and their owners who did the wrong speculation will be punished by using up their capital. Then they have to be recapitalized up to a certain extend by the government. Then the government can decide if those banks have a real business money and can make them smaller or split them up accordingly. We should have done this from the beginning. Of course this is no easy going, but to follow the path we have gone up to now, can make it only worse.

  20. cangrande schreibt:

    Lektüreempfehlung (betr. Lettland) zur Griechenland-Krise (und gegen die Rezepte von Varoufakis et al.):
    http://axelreetz.blogspot.de/2009/03/die-krise-in-lettland-ihre-ursachen-und_12.html
    (aktueller z. B. http://www.deutsche-mittelstands-nachrichten.de/2012/06/43378/ und brandaktuell: http://www.welt.de/newsticker/news2/article106419878/Lagarde-lobt-Lettland-fuer-strikten-Sparkurs.html).

    Soros’ Behauptung (http://www.georgesoros.com/interviews-speeches/entry/remarks_at_the_festival_of_economics_trento_italy/): “you cannot reduce the debt burden by shrinking the economy, only by growing your way out of it” dürfte damit widerlegt sein.

    Aber selbst wenn diese Aussage zutreffen würde beruht seine Meinung, wie die aller anderen (Geld-)’Injektionisten’, auf dem impliziten logischen Fehlschluss, dass man den quasi umkehren kann: ‘Wenn man nur genügend Geld injiziert, erhält man eine blühende Wirtschaft’.
    Das kann aber natürlich bei “Mondwirtschaften” (http://beltwild.blogspot.de/2011/07/traktat-uber-mond-und.html), deren (Schein)blüte nur daran besteht, sich von “Sonnenwirtschaften” bestrahlen zu lassen, nicht dauerhaft funktionieren funktionieren.
    Letztlich sind solche Meinungen (wie sie ja auch bei uns, auch unter Fachökonomen, vertreten werden, und erkennbar auch von Varoufakis mit seiner Ablehnung einer Austeritätspolitik) eine “fallacy of consumption” (http://www.europac.net/commentaries/fallacy_consumption).
    Und die kann uns Steuerzahler bzw. ECB-Geld-Benutzer noch teuer zu stehen kommen.

  21. cangrande schreibt:

    @Kantoos
    “At one point he was so angry at me that he declared never to comment on my blog again. You can be sure that he is not, by any means, my representative anywhere.
    @ can Please don’t give other the impression that you are acting on my behalf.”

    Fact is, that I did stop commenting on your blog for quite a while.
    However, not because I was aggravated at you. I simply had the impression that my arguments were repeating themselves and I could not contribute anything novel to the debates.

    As for RalfT’s impression: His problem, if he got an idea like that; let him explain how come.
    I’ve never said anything to that effect, and certainly didn’t try to give anybody such a preposterous idea.
    I am proud to be able to think for myself, and of course I speak for myself.

    • kantoos schreibt:

      @ can

      I know you did, but you were quite angry as well… Anyway. I am sure you can and do speak for yourself. I just meant to ask you to check whether others (like Ralf) could be led to believe that you are speaking on my behalf.

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