Sovereign debt bubble thread

[Admiral Yi]

The bad macro outcome was rational on a micro level though. And that's something you can blame on our politicians and central bankers, but can't really blame on the indvidual. Individuals are expected to act according to their rational individual benefit.

How's that?  It's not rationale to conclude that easy money will continue indefinitely.  It's not rationale to conclude that bubble prices will rise indefinitely.

Or rational, even.

[Iormlund]

You don't need to believe prices will keep rising forever. Just long enough.

Also, we are looking at it with tremendous amount of hindsight. The collapse was triggered and greatly amplified by the sub-prime crisis first and the Greek fiasco later. How many "normal" people could predict that?

And what Joan said is right, Spanish banks did have fairly decent regulation (a result of the Banesto affair in the 90s I guess). That's why they could hold so long (which it turned out to be a bad idea). And also why the ones that were professionally managed are quite healthy (Santander, BBVA, Caixa, Ibercaja to name both banks and cajas).

[Admiral Yi]

I don't see how it's relevant what triggered it and when.  The collapse of the subprime bubble and the Tulip mania weren't triggered by anything but they burst none the less.

[Iormlund]

It's all about perception. It's relevant first because everyone took for granted they would be able to see the slowdown (or even affect it in the case of politicians). But instead it exploded on their faces.
And second because Spain is not isolated. In an otherwise healthy European and world economy the rest of Spain wouldn't have had this much trouble recovering from the mess. But when everyone around is deleveraging and competing for the same reduced export markets it gets much harder.

So people thought at most it would be rough for some time and then life would go on as usual. Except as it turned out it's not just a little rough. It's no-longer-noticing-people-scavenging-for-food rough.

[The Minsky Moment]

It's not rationale to conclude that bubble prices will rise indefinitely.

It's rational to think the prices accurately reflect all available market information.
In fact, the very economic model you rely upon assumes the truth of that statement.

So from the POV of an rational economic agent, if the price of capital (measured by interest rate) is at a level that "purchasing" it (by borrowing) and then investing in RE, given the price that such assets command in the market, will make money compared to other outlets, then that is what rational economic agents will do.  Rising prices are a part of the feedback loop that accompanies that process.  The rational agent can recognize that at some point prices will cease to rise, but the transaction still works from their individual perspective. 

[Admiral Yi]

Which economic model am I relying on Joan?

[The Minsky Moment]

Which economic model am I relying on Joan?

One in which prices adjust so that markets clear on a macro level.

[Admiral Yi]

One in which prices adjust so that markets clear on a macro level.

In my model markets clear with a lag in some cases. 

[Sheilbh]

Also I think the currency union does prevent countries from being able to take appropriate steps after a banking failure (though Spain should've acted earlier). They need to be able to write down bad debts, recapitalise the banks that can survive and wind down the others. Without a national central bank and currency, or a Eurozone procedure, then it destroys state finances as happened in Ireland and Spain and is currently happening in Slovenia (had the UK joined the Euro we'd have blown it apart by now). The other effect of this is that to avoid needing a bailout states let banking crises linger - again, Spain and Slovenia with Ireland's cautionary tale.

Also the union did make it easier for surpluses in Germany to fund bubbles in Spain - the other aspect of moral hazard. The global debt crisis was in large part caused by unprecedented savings in the developing world funding debt in the US and the rest. The Euro was an extreme and local version of that.

Apparently Germany's willing to back the ECB (with Asmussen's support) against the Bundesbank, which is a big deal. Even Telegraph Euro doomsayers think it could survive if this turns out.

[The Minsky Moment]

In my model markets clear with a lag in some cases.

In that case Greece should be compelled to reach fiscal stability.




With a lag.   

[Admiral Yi]

In that case Greece should be compelled to reach fiscal stability.




With a lag.   

I don't follow.

[Zanza]

Meanwhile Germany's general government budget (federal, state, local, social security) was in the black the first time since 2007 in the first half of 2012. Let's see if the second half gets as gloomy as predicted.

[Iormlund]

Low unemployment and windfall from capital flight from the periphery might help explain that one.

Speaking of Germany, I was looking at info on lack of qualified labor and stumbled on an interesting article on Der Spiegel last week about booming German towns trying to recruit youngsters over here. The last paragraph in particular was enlightening:

This was precisely the problem in Düren, a town near Aachen in the western state of North Rhine-Westphalia. Local companies had invited Spanish trainees, including a group from Seville, to complete training programs in the area. The employers were enthusiastic about the trainees, including Javier Saintmartin, 26.

But when he completed the training program, Saintmartin, like his fellow Spaniards, turned down the job he was offered as an automobile mechanic. "The coworkers are all very nice," he wrote in his farewell note. But, he added, in Düren people ate dinner at 6 p.m., and there was almost nothing going on after 8 o'clock.

Under those circumstances, he preferred to stay in Seville. He is now working as a garbage collector there.

This is something I witnessed in Switzerland as well. How big does a city have to get over there to have nightlife?

[MadImmortalMan]

You consider that a dealbreaker? Sheesh.

[Syt]

You consider that a dealbreaker? Sheesh.

Yeah, seriously.

Also, Düren is not a big city, it has barely 100k inhabitants. You would find a few bars and dance clubs, but certainly not a vibrant nightlife like in, say, Berlin or Hamburg.