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The European collective response
It turns out there won't be one. In fact we are seeing the opposite:
"We will work cooperatively and in a coordinated way within the European Union and with our international partners," it [the statement] added. "In the spirit of close cooperation within the European Union, we will ensure that potential cross-border effects of national decisions are taken into consideration."
This language was seen as a rebuke to Ireland, which last week decided to offer guarantees to all Irish depositors. The decision, taken unilaterally, irked Brown and his lieutenants in London, who feared it might lead Britons to pull their money out of British banks and put it in Irish banks instead to enjoy the guarantee.
British depositors were already crowding to get into the nationalized Northern Rock but they were turned away at the proverbial door. Other news is that the German government-led bank consortium to rescue Hypo Bank has fallen apart, not a good sign. The German government has today moved to guarantee all "private savings deposits" [private Sparanlagen], also not a good sign. Which other countries will now follow suit? All of them? Europe as a whole lacks a safe asset as focal, liquid, and available as T-Bills and now that is becoming a problem.
Posted by Tyler Cowen on October 5, 2008 at 01:54 PM in Economics | Permalink
Comments
What's wrong with deposit guarantees?
I'd suggest no limit, and later lower the limit, with deposits retaining the limit they were deposited under.
The no-limit gets big deposits (you want deposits, right?); the declining limit prevents a dysfunctional business model from working very long, ie the moral hazard.
Posted by: rhhardin at Oct 5, 2008 2:15:53 PM
The name of the bank is Hypo Real Estate, a spin-off of HypoVereinsbank (a merger of the real Hypobank and Vereinsbank), which was acquired by Unicredit of Italy a few years ago.
Europe has a safe asset: German debt. Right now, Germany is about as creditworthy as the USA. (The capacity is of course much lower, though.)
Posted by: IWantCookieNow at Oct 5, 2008 2:18:11 PM
Tyler, German deposit guarantee was a paltry EUR 20,000 (USD 28,000 these days) instead of for instance EUR 70,000 in France. This is mainly catching up.
Posted by: Henri Tournyol du Clos at Oct 5, 2008 2:26:44 PM
I don't understand why no one else seems as worried about the situation in Europe as I am. (I am selling all my European stocks tomorrow.) These countries don't borrow in their own currencuy. How can, say, Ireland possibly make good on bank debt equal to two years GDP? And what happens if it doesn't make good? The Irish government has no power to print more currency; it will have to default.
Posted by: y81 at Oct 5, 2008 2:35:38 PM
Here is more detail on Germany, note the second paragraph:
Der Staat schreibt vor, dass 90 Prozent der Beträge auf Tagesgeld-, Festgeld- oder Girokonten nicht antastbar sind. Allerdings gilt diese Regel nur bis zu einem Betrag von 20 000 Euro pro Kunde. Darüber hinaus haben sich die meisten privaten Banken verpflichtet, pro Kunde einen Betrag von 30 Prozent des haftenden Eigenkapitals zu garantieren. Das sind bei den großen Instituten mehrere Hundert Millionen Euro. Im Ernstfall springt dieser sogenannte Einlagensicherungsfonds ein, in den private Banken regelmäßig einzahlen.
Bei Sparkassen greift ein schärferer Mechanismus: Grundsätzlich sind 100 Prozent aller Kundeneinlagen gesichert. Die einzelnen Institute sind verpflichtet, sich gegenseitig zu stützen und so eine Insolvenz von vornherein abzuwenden. Nach Informationen des deutschen Sparkassen- und Giroverbandes hat seit Gründung des Verbands in den 70er-Jahren noch kein Kunde seine Einlagen bei einer Sparkasse verloren. Ein ähnlich enges Sicherheitsnetz haben auch die Volks- und Raiffeisenbanken: Die Einlagen sind zu 100 Prozent gesichert, die Institute stützen sich gegenseitig, um einer Pleite vorzubeugen.
Posted by: Tyler Cowen at Oct 5, 2008 2:38:05 PM
By the way, here's the Town of Hypoluxo, "Home of the Barefoot Mailman"
http://www.hypoluxo.org/
Posted by: at Oct 5, 2008 2:47:46 PM
Local savings banks, the "Sparkassen" discussed in Tyler's second paragraph above, should be little affected by the freezing up of the money market. Their main and as far as I know pretty much only source of funding are demand deposits, and unless we start to see actual old-style bank runs in Germany, they will be fine. The new government guarantee of deposits should prevent any runs from occurring.
Posted by: Commenterlein at Oct 5, 2008 2:51:28 PM
Guys, the problem with deposit insurance is that the governments here do not guarantee even $100k per person per bank, and it has to go up to make sure there are no run on the banks.
y81 : interestingly,
1. printing more money is never a solution that simply dilutes your currency.
2. control of currency by ECB and euro has actually helped the weaker countries to borrow at lower rates and makes a lot of economic sense. The only big issue then is if the entire euro region is borrowing too much money. I do not have any stats on that but would be interesting if anyone has a link.
Any comments Tyler?
Posted by: SA at Oct 5, 2008 3:17:54 PM
The first country which is going to follow suit is - not unsurprisingly - Austria ...
This afternoon, the Austrian minister for finance W. Molterer declared that he will propose to
increase the guaranteed limit of private savings deposits due to fears
of an outflow of private savings from Austrian to German banks.
Until now the guaranteed limit in Austria is EUR 20.000 (as in Germany).
The proposal will be made on wednesday next week.
Posted by: Austron at Oct 5, 2008 3:53:54 PM
If we look at the guarantees the governments are making, one could ask the obvious question, "Why not nationalize the banks?"
Before everyone goes crazy, here are benefits:
1. Who's money is it anyway? Why should printing money be in the hands of anyone other than Congress, for lack of a better term? It does not make any kind of sense to have private institutions deriving a profit from 'creating' the national currency.
2. The interest paid could then be considered into total money supply making inflation zero.
I would love to hear economist views, on the concerns of such an arrangement. I believe there is a lot of evidence to believe that the Founders envisioned something like this, in fact at one time state governments DID print their own money.
Posted by: Jim L at Oct 5, 2008 4:51:49 PM
Here is the latest on the Hypo Real Estate matter in Germany. Evidently a new agreement has been
reached involving an increased contribution from German financial institutions.
http://de.news.yahoo.com/ap/20081005/tbs-lsung-in-letzter-minute-fr-hypo-real-f8250da.html
Posted by: joec at Oct 5, 2008 5:46:23 PM
With the three-month T-bill yielding a whole 0.51%, might I humbly suggest "the Euro" as a comparable safe asset?
Posted by: Jason Briggeman at Oct 5, 2008 5:58:56 PM
BTW, per this specific entry: I am posting now from Athens, Greece, where the crisis has not only not reached here, but is not even a topic of conversation! LOL.
I have a theory about the bailout crisis: it's routine--a routine credit contraction caused by overexpansion. I would welcome a comment from the readers of this blog.
Here's how to prove this yourself: Google "The Curve in the Road by John Mauldin". Look at the two graphs for LIBOR over the last year and for commercial paper outstanding since 1990. Two things stand out: LIBOR also spiked in Dec 07 and from Mar-May 08--to 2% from 0.5%. This past 30 days it spiked from 1% to 3.5%. To me, it doesn't seem unprecedented. I've heard that in the early 1970s a similar spike occurred (can anybody confirm this?). Second, and most damaging: the reduction in commercial paper is not historically abnormal now. From 2000 to 2003, commercial paper dropped 19% (look at the graph: 1600 to 1300). From 2006 to 2008 (today's crisis) commercial paper outstanding dropped 25% (2200 to 1650). Severe yes, but, again, not totally unprecedented.
Can we therefore say that this credit crisis is a 'routine' (albeit severe) response to the credit expansion we've had over the last five years or so? If so, then why did Bernanke and Paulson panic? Could it be that as middle-aged men who have never witnessed a severe credit contraction (such as happened in the early 1970s and early 1980s), they overreacted? Of course, more cynical and sinister theories are possible, but this is the benign theory: they were simply over their heads in responding to a relatively normal credit contraction. And we taxpayers have to pay, as well as setting an extremely damaging precedent for the USA.
One final note: you can argue that "but for" the government intervention, the contraction in commercial paper would have been much more severe, which therefore justifies the intervention. But this is complete speculation. In fact, you can argue that $700 B is not enough to prevent further contraction, and therefore this argument is circular.
PS--A professional economist has independently made a similar argument to the above: Google "What Crisis" by professor John Seater.
Posted by: Ray Lopez at Oct 5, 2008 6:54:57 PM
The Swedish, Icelandic, Dutch, And British Plan
The Swedish Plan, via the NY Times:
"That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.
“If I go into a bank,” said Bo Lundgren, who was Sweden’s deputy minister of finance at the time, “I’d rather get equity so that there is some upside for the taxpayer.”
The Iclelandic Plan, via Paul Krugman:
"Iceland has just bailed out Glitnir Bank, with the government putting in 600 million euros — $859 million — in return for a 75% stake.
Iceland has only a bit more than 300,000 people, about 1/1000th the population of the United States. So this was, per capita, the equivalent of an $850 billion bailout here.
Notice, by the way, that it was an equity injection rather than a purchase of bad debt; I approve."
The Dutch Plan, via Calculated Risk:
"The Dutch government on Friday re-negotiated last weekend’s bail-out of Fortis in order to buy all of Fortis’s Dutch operations for €16.8bn, including its Dutch insurance operations and the Dutch operations of ABN Amro..."
The Dutch government will privatise the Fortis and ABN Amro operations after calm returns to the markets, it said. Nationalize. Then privatize. That is a proven approach. It will be interesting to see if the Dutch approach works better or worse than the Paulson plan. "
The British Plan, via Calculated Risk:
"Alistair Darling, the Chancellor, could give the banks billions of pounds in return for shares in an emergency bailout plan to be enacted if the financial crisis worsens, The Daily Telegraph has learnt..."
This is more like the Swedish solution, or the RFC in the U.S. during the Depression, as opposed to the TARP. "
It will be interesting to compare these results with TARP.
Posted by: Don the libertarian Democrat at Oct 5, 2008 9:12:30 PM
Whatever criticisms you can make about the U.S. response (and there are many), the Europeans have not even been able to come up with a coordinated response. (This could turn out to be an argument for the traditional old nation-state, but that's another matter.) The next major sign could be the meeting of the G7 later this week. Simon Johnson, my co-author, has an article on the stakes of that meeting at http://baselinescenario.com/2008/10/04/g7-at-the-bat/.
Posted by: James Kwak at Oct 5, 2008 10:08:56 PM
If we look at the guarantees the governments are making, one could ask the obvious question, "Why not nationalize the banks?"
In normal times, one strong reason not to is the bankers wouldn't like it. How many people owe favors to bankers? Who can afford the very best assassins? The idea would have no chance.
And then there's ideology. People say that nationalized businesses are inevitably run badly. Private banks are always more efficient and better-run. If you have a thousand private banks then the worst-run of them can go out of business. If the government runs the banking system as one unit, when it goes bad what can you do?
And apart from the efficiency issue, banks owned by the government will be manipulated by politicians.
In short, the arguments against public banks are the same as the convincing arguments why public police must lead to disaster, plus we already have rich and dangerous private bankers.
These arguments are somewhat less convincing at a time when the private banking system appears to have self-destructed.
It would be better not to nationalize the financial institutions that can prove they're solvent. We don't want to take people's property away from them. But banks whose debts are greater than their assets -- who needs them?
Posted by: J Thomas at Oct 6, 2008 12:17:01 AM
I know this is a European comment section, but does anybody have any data on how Australia is doing? I hardly ever see any news about them since they are usually grouped in discussion boards with China and Asian countries, but they hardly ever come up. Does anybody know how their currency is fairing and how they are dealing with the European and American crisis?
Posted by: Torris187 at Oct 6, 2008 2:01:56 AM
Europe as a whole lacks a safe asset as focal, liquid, and available as T-Bills and now that is becoming a problem.
I don't think that's necessarily a bad thing. The big problem with the credit crunch is that real economy businesses and borrowers are being starved of credit. The lack of a T-Bill equivalent may create a useful incentive to put money into the real economy instead.
Also, for economists this should be a very useful natural experiment indeed. Will the free-market European response or the socialist US response be most effective at dealing with the crisis?
Posted by: TheophileEscargot at Oct 6, 2008 5:41:12 AM
The European collective response: It turns out there won't be one
Thank goodness we didn't treat the EU like say, the United States, and take away all their country-specific UN seats for a single EU seat....
Posted by: at Oct 6, 2008 7:13:35 AM
Before everyone goes crazy, here are benefits:
1. Who's money is it anyway? Why should printing money be in the hands of anyone other than Congress, for lack of a better term? It does not make any kind of sense to have private institutions deriving a profit from 'creating' the national currency.
2. The interest paid could then be considered into total money supply making inflation zero.
Jim L: ever hear about Executive Order 11110 was issued by President John F. Kennedy on June 4, 1963.
Ya, it seems that guys like andrew jackson and the boys all had hits out on them after pissing off teh backers of the Central Bank. RON PAUL COULD get himself killed. Why? Because Ron Paul wants to abolish the privately-owned Federal Reserve Bank. Five US Presidents who sought to abolish the private-owned Federal Reserve Bank were assassinated:
1) Andrew Jackson (Survived); 2) Abraham Lincoln; 3) James Garfield; 4) William McKinley; 5) John Kennedy.
research each of them.
Posted by: gabe at Oct 6, 2008 3:41:10 PM
welcome to oliver stone's next movie....
Jim L: ever hear about Executive Order 11110 was issued by President John F. Kennedy on June 4, 1963.
"Ya, it seems that guys like andrew jackson and the boys all had hits out on them after pissing off teh backers of the Central Bank. RON PAUL COULD get himself killed. Why? Because Ron Paul wants to abolish the privately-owned Federal Reserve Bank. Five US Presidents who sought to abolish the private-owned Federal Reserve Bank were assassinated:
1) Andrew Jackson (Survived); 2) Abraham Lincoln; 3) James Garfield; 4) William McKinley; 5) John Kennedy.
research each of them. "
Posted by: jc at Oct 6, 2008 6:45:38 PM
welcome to oliver stone's next movie....
Jim L: ever hear about Executive Order 11110 was issued by President John F. Kennedy on June 4, 1963.
"Ya, it seems that guys like andrew jackson and the boys all had hits out on them after pissing off teh backers of the Central Bank. RON PAUL COULD get himself killed. Why? Because Ron Paul wants to abolish the privately-owned Federal Reserve Bank. Five US Presidents who sought to abolish the private-owned Federal Reserve Bank were assassinated:
1) Andrew Jackson (Survived); 2) Abraham Lincoln; 3) James Garfield; 4) William McKinley; 5) John Kennedy.
research each of them. "
Posted by: jc at Oct 6, 2008 6:46:08 PM
welcome to oliver stone's next movie....
Jim L: ever hear about Executive Order 11110 was issued by President John F. Kennedy on June 4, 1963.
"Ya, it seems that guys like andrew jackson and the boys all had hits out on them after pissing off teh backers of the Central Bank. RON PAUL COULD get himself killed. Why? Because Ron Paul wants to abolish the privately-owned Federal Reserve Bank. Five US Presidents who sought to abolish the private-owned Federal Reserve Bank were assassinated:
1) Andrew Jackson (Survived); 2) Abraham Lincoln; 3) James Garfield; 4) William McKinley; 5) John Kennedy.
research each of them. "
Posted by: jc at Oct 6, 2008 6:46:21 PM
But wait - what does Europe have to do with anything? I thought this was all a problem of lax US federal regulation by the Bush Administration specifically?
Posted by: Eric H at Oct 7, 2008 2:38:56 AM
Eric H, we sold europeans tons and tons of worthless paper that looked like it wasn't risky.
Now they have to deal with that. We have offered to buy a little bit of it back.
Posted by: J Thomas at Oct 7, 2008 12:09:58 PM
