Wednesday, November 30, 2011

The Virtues Of Prussian Morality

Financial markets were granted a respite today from the ongoing Euro crisis by concerted central bank activity that made dollars more cheaply and readily available to borrowers in return for foreign currencies, including Euros.  The Federal Reserve's participation means that the US is assuming Euro risk in return for pushing the crisis out of the danger zone.  With this move, central banks are kicking the can down the road in order to give Euro-spendthrifts another last chance to put their fiscal houses in order.  Noman suggests that you don't hold your breath waiting for it.

The Fed's international action is kin to the President's various stimuli and jobs plans, which serve primarily to channel red state resources into over-bloated, blue state public sectors until the federal government is politically able to assume permanent responsibility for state shortfalls.  The alternative is for voters to force public sector unions and other beneficiaries of taxpayer largesse to surrender their privileges.  People with sinecures to lose, however, generally fight harder, dirtier, more passionately and longer in order to preserve their prerogatives than does a diffused population bearing only portion of a widely distributed cost in order to end them.

In the case of the Euro, the central banks' actions funnel the money of more responsible nations--which laughably includes the US--into the economies of nations that cannot support the level of public commitments they have assumed.  It alleviates the symptoms without addressing the illness; It is a pain-killer, not a cure.

The conundrum was well summarized a couple of weeks back in a WSJ editorial concerning a different but related palliative, European Central Bank purchases of toxic sovereign debt.
And what if even [bond purchases don't] work? The ECB would have squandered its monetary credibility, and shattered its charter, to buy the worst debt in the euro zone at the expense of the countries with the best fiscal policies and the lowest interest rates. It will have abandoned any semblance of market discipline in favor of a panicky rush to defend the ability of spendthrift governments to borrow. Price stability will move from the ECB's sole mandate to its third or fourth priority. 
Europe's real problem now, as at the euro's founding, is that the currency zone lacks a mechanism for enforcing fiscal discipline. The Stability and Growth Pact was an attempt, but it lacked teeth and was violated early. All of the fixes in the current crisis lack credibility with markets because they too lack any discipline that would show creditors that Europe's problems of overspending, cradle-to-grave middle-class entitlements and slow growth are being fixed. 
The voices now pleading for greater "fiscal union" are really pleading for the Germans and the ECB to write their governments blank checks.
The relevant question regarding the Fed's cheap currency swaps is whether given European nations' inability to get their financial houses in order, the Fed's intervention constitutes a responsible action, or even one likely to avert the rightly feared consequences.  In short, is it a good bet?  The Germans think not, which is why they are impeding ECB bond purchases.  While central banks dollar swaps are a less dramatic ameliorative than bond purchases, Noman is inclined to agree with the German assessment of the European predicament.
Berlin's alleged sin is its reluctance to write a blank check to save the euro—either by underwriting a new euro-zone fiscal union, or granting permission for the European Central Bank to buy trillions in sovereign debt. The chant comes in unison from the debtor nations themselves, the bailout caucus in Brussels, an Obama White House concerned about its re-election, and liberal pundits worried that their welfare-state economic model is under assault. Like the "rich" in America who must pay their "fair share," the Germans are supposed to pay up to save a united Europe.

Passing the cost of big government profligacy onto the fiscally responsible is the political drama of 2011 in a nutshell.  Dollar swaps and debt purchases are just means of putting off fixing, and redistributing the costs of, deeper unaddressed problems.  European nations, and American states, that serve as hosts for the socialistically inclined are being forced by capital markets to reckon with economic reality.  They have spent and promised too much more than they can afford.  Lenders who are fronting the money for utopia want to be compensated for assuming higher risk, if indeed they are willing to assume it at all.  When the bill is presented to reckless debtors in the form of higher rates or insufficient demand for new debt, old lenders clamor for retroactive guarantees while deadbeat borrowers riot for bailouts on easy terms.  If granted, borrowers and lenders alike continue along their merry courses until the menace reasserts itself in more virulent form because of higher levels of debt, at which time the troubled entity is presumed too big to fail.  If denied money to compensate for past errors and perpetuate future ones, lenders pull back while borrowers burn cars, occupy Wall Street, demonize the rich, demagog the opposition, threaten social instability and mug for sympathetic cameras.

For those committed to living beyond their means, anything, is preferable to losing the good thing they've got.  Nothing could be worse than surrendering their privileges.   Better to have one's desires at others expense, like the United Auto Workers Union were able to arrange with Democrat's help.  The trick is political: How to make others pay for big government profligacy against their wills?

The alternative is to repent, relent, and change course for the sake of the common good.
The reality is that the Germans—along with the Dutch and the Finns—are the rare Europeans who understand that saving the euro requires more than a blank check. It requires a new political commitment to better economic policy. Chancellor Angela Merkel and her cabinet are as euro-centric as the French, but they realize that money alone won't solve Europe's more fundamental debt and growth problem. 
It's certainly true that the Germans have benefited from the euro, which is one reason they want to preserve it. Their exports have flourished, often to other European countries, thanks to a stable currency and free-trade zone. But one reason for their relative economic success is that Germany is a rare European country that used the early years of the euro to reform its labor markets and improve fiscal policies. While the Greeks and Italians used their years of near-German borrowing rates to live beyond their means, the Bavarians became more competitive.
It all comes back to the same choice between (1) reducing the size and scope of government, (2) playing political chicken until the economic order runs off a cliff, or (3) affectuating a revolutionary redistribution of wealth, which, as we know from history, works only once: when people have something to take; thereafter they cease to produce. Why should they bother?  The second choice is merely the fast, opportunistic track to the third.

Noman understands the desirability, and perhaps even preferability, of averting imminent catastrophe by resorting to palliatives. The galling aspect of todays social welfare crises, however, is that by deferring judgment day and preserving the status quo, the illness is granted more time to posture as the cure; the cause as the antedote.  Needless to say, the problem doesn't get fixed; it festers.  People get lulled by orchestrated manifestations like Occupy Wall Street.  During the respite, Leftist politicians like President Obama at home and his socialist counterparts in Europe, just make matters worse, and the eventual reckoning more severe, by expanding entitlements, increasing public employment and larding troughs for cronies.  They never change, and it is folly to expect them to.

Leftists know that at the next reassertion of crisis, they will win more concessions via violence, demagoguery, cunning, treachery and political chicanery--all with the benefit of media manipulation.  Perhaps they might even achieve political victory by imposing confiscatory taxes on people who vociferously object to progressive policies.  Given the opportunity of crisis, they might even lay claim to private wealth for "public" purposes--meaning the preferred purposes of politicians, bureaucrats and hangers-on who presume to speak for the public.  They have only to continue lying, clamoring, accusing, scapegoating, escalating and confronting.  That's the Leftist playbook, and it's always worked before.

With respect to the European theater of this war:
The tragedy is that the euro-zone countries failed to abide by their original fiscal rules, a failure that has brought them to this unhappy pass. The Brussels-Washington bailout caucus now wants to extend the damage to monetary policy by printing more euros [to purchase toxic debt] and worrying about the consequences later.
In opposing that option, the Germans are said to be imposing their Prussian morality on everyone else. But without reforms, the countries of southern Europe will never pull out of their downward debt spiral. The Germans are at least telling the truth.
It becomes increasingly clear that we are kicking the can down the road to serfdom, or to more heinous forms of servitude.  Heaven give us the strength, the Germanic virtue, to resist going back.

1 comment:

  1. The Germans telling the truth? When are they going to be candid about how the ECB has been adjusting interest rates solely in Germany's favour, eh? When are they going to recant their open racism against the so-called "Anglo-Saxon" free-market capitalism and disown their own social market? If what the Germans are displaying is "virtue", then how much worse their vice?