The crisis and Spain: an answer to a comment

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This is a response to a comment in my post “The crisis and the Spanish revolution”. I think kim misunderstood a part of the story. I am afraid i didnt make myself clear so I am trying one more time and doing it through a post because this is too large to be put as a comment.

I will refer to one of your sentences first: “...and albeit you hate the Germans with all your heart...”. I want to believe you were either kidding me or too tired and you didnt know what you were writing. I just wanted to make this clear as there may be many people reading this. Come on...i dont know where you got this from but...no comments, i think it is clear it is simply false and nonsense.

Now let's go for another sentence: “However, what really puzzles me is that you claim that low Spanish interest rates made the Germans interested in putting money in Spanish coffers.” It looked like you were quoting me but...i haven't said that at all. What seems to me is that you kind of took two sentences and mixed them up to create that. You didnt understand what i meant. There was a policy of low interest rates in the whole Europe. The German banks had accumulated a lot of money and so what they did was to invest money in other countries such as Spain. The low interest rate allowed Spain to borrow money man. If to borrow money you need to pay back 5 times the amount in two years, well, you think about it twice (wise people at least). If you can borrow money at a very low interest rate, then you start to think well, i take the risk, i borrow. I dont know where you understood this thing of the low Spanish interest rate making Germany invest...I haven't said that at all. I am not an economist but i suppose the interest rate concerns primarily to the one who is going to borrow the money. Perhaps you are having a misunderstanding here between the verbs to borrow and to lend because in the end you say something that kind of tells me we both agree: “A low interest rate indicates that it is CHEAP to borrow money from a given country”. Well, exactly man, that is what i mean. It was very cheap for Spain to borrow money from German banks. That is what they did until the point of extreme indebtedness.

Kim, revise the use of the verbs to lend and to borrow. I quote you again: “...people would be willing to borrow money to the country....You do not gain much right now if you borrow German money.” Didnt you mean “to lend”?

Let's go with the next thing. Yes, the low interest rate should indicate a positive perception of the debtor, in this case, Spain. I agree. I did not say there is something conspiratory in those interest rate changes. What i say is that any single person with a decent IQ could foresee what was going to happen with the housing bubble. No one can predict when a bubble will burst man, but people are aware of the fact that a bubble is being created. They story of the housing bubble did not begin with the crisis. We heard about it over the years, since i was a child. If you talk about a bubble that means you are aware of it and as you said: “at a certain time, the speculation ends with a broken bubble”. If you know that, they know that too, and they did nothing against it. In fact, they foster it. It is not about conspiracy. It is about the fact that speculation has driven our country into serious troubles, and those responsible for it must pay and not benefit. I am shocked when i read that you say that they Spanish government should have incresed the taxes such as the VAT. This is what you call “text book manoeuvres for political science students”. OK, let's look at the story again:

So the very low interest rate fosters the housing market (it is cheap for them to borrow money). This anyway can only discourage the banking market. However, in Spain they are very smart and decide to do the following: give mortgages to every one. They give mortgages to people whom you would never ever lend 5 euros. The bargain begins. I don't have to explain everything again. The speculation was clearly visible. For a bubble to burst, it first needs to be created. This bubble was created due to the incredible explosion in building, way above the demand and with astronomical prices which did not correspond to the real costs and the wages. I give you an example: a flat which was about 132 000 euros in 1998 (it was in pesetas and not in euros at the time but it doesnt matter) had a value of 400 000 euros in 2005. That is 3 times more expensive in 7 years (and believe me, this is a bad example). Of course i have to accept that many regular people participated in this. Some people saw bussiness in this and they were buying houses to then almost immediately sell them at a much higher value.

Banking-savings banks-housing market. They destroyed it all. They couldn't predict when it would happen, but they knew it would happen just as you wrote: “...the speculation ends with a broken bubble”). You kind of contradict yourself in the same paragraph. Do not do that Kim. By the way when i say Germany, i do not mean the Germans as a whole or a country. I mean those who are responsible for it. It is fair to acknowledge that the housing bubble could not have happened without the money influx coming from Germany. It is simple, without the German money the Spanish banks could not have financed the housing bubble.

But i was saying that i feel shocked when you say the Spanish government should have increased the taxes, which according to you it is “text book manoeuvres for political science students”. I am astounded with some other comments: “Firstly, if Spanish banks are not bailed out and thus supporting the German banks, the crisis might spread to Germany...We simply need Germany to guise Europe as a somewhat credible place. Whatever you think is fair, the market does not care about. They need to feel that Deutsche Bank is strong and sound and so forth. As long as Germany stands, Europe survives.”

You also say: “This is by the way something you completely misses out on. What happens in Spain, gravely affects the rest of Europe....“The hole of Europe is afraid of Spain" meaning that Europe is afraid that Spain defaults as that would drag Europe closer if not into the abyss. Thus, the German government has no interst in seeing a default of the Spanish government. Let's put a comment in all this:

I dont know why you think I miss out on that point. I am very well aware of the fact that, if Spain leaves the Euro, the German banks collapse and with it the whole European financial system. I am very well aware of that and that is why they will not let it happen. But this is not going to happen man, they are jus taking the measurements they always wanted to take.

I say i am astounded, i say i cannot believe what you write. It seems then that we do not have to look for the right and fair thing to do? Let's look at it again please:

When Spain joined the European Union most of the industrial and agrarian sectors were dismantled and our economy was based on building-housing. This has been fostered by banks and politicians. They found a bargain, they thought: Yes! We are going to make a lot of money. So the construction companies went into debt over the years. Many families, usually with a lot of money also participated in the speculation, going into debt and buying several houses to then make money out of it...the banks were pushing and pushing and pushing this...and the politicians just put the cherry on the cake. That is, we can clearly point at those who hold responsibility for what happened, yet we do not punish them and do something about it?

The bubble bursts and banks start taking all the houses back, leaving people on the street. But of course these banks are also in debt and owe a lot of money to foreign countries such as the German ones. The houses they take back now worth nothing so of course they go bankrupt. The answer is that the banks must be rescued and how do we do that? With public money, with our money. The truth Kim is that the German banks invested in Spain thinking they could get profit from the Spanish housing bubble. The crisis began, they got scared and stopped investing in it. Everything went wrong and now the German banks demand their money bank. There will be no crisis for them unless Spain leaves the euro. The truth is that right now, there is an incredible flow of money from Spain to Germany, enriching the Germank banks and keeping the German bonds very safely. It is a fact. There is no crisis for Germany unless Spain and other countries of the periphery leave the Euro and they would do anything in their power to avoid it. Of course Europe is afraid of Spain, but for the moment they make profit.

I dont know if there is any need in saying all this. You seem to know it very well as judged by your comments: “ if Spanish banks are not bailed out and thus supporting the German banks, the crisis might spread to Germany...Whatever you think is fair, the market does not care about.”

The Spanish banks, holding a big part of the responsibility for the crisis, went bankrupt. Spain is having serious troubles, people are suffering but...nobody wants to save Spain, they just want to save the creditors, that is, the foreign countries such as the German ones which gave money to the Spanish ones.

Example: 100 000 millions of euros (can your mind really grab the idea of such an amount of money?) were approved by the German parliament. Money to save their own banks as it was clearly stated by Peter Boefinger, German government economic adviser. I quote him: “This assistance is not to these countries in trouble (like Spain) but rather to our own banks who own a lot of private debt in those countries.”

And what about the ECB? Well, it is more of the same and this is even more dramatic. You think of a central bank such as the U.S. Federal Rserve, which is supposed to exist to estimulate economy. What does this mean? To push the “on button” and create money out of nothing. They make up money and use it to buy U.S. Government bonds and mortgage-backed securities. As far as I know, as stated in “Modern Money Mechanics”, they do this in order to keep reasonable interest rates in those bonds, that is, it protects the State from speculation. This is the theory and i think it is better to leave it here.

However, the ECB has not bought any debt in a very long time. And what is what they are doing now? They lend money to private banks at a very low interest rate! These banks, owing most of the Spanish debt then buy public debt with very high interests. The amount of money lent by the ECB to private banks in the past year is above a trillion Euros! What the hell is going on here? So they send over a trillion Euros of public money to the private finantial sector? And all this with the claim that this would in turn imply the renewed flow of credit into all those families and small-sized enterprises which were in debt. They have seen absolutely nothing. Only from time to time they buy some few government bonds in a way which solves nothing.

Shouldn't the ECB not allow the interest rate of the government bonds to go over a certain limit and thus nullify speculation by the finantial market? The problem is that i always thought the ECB was different from the U.S. Federal Reserve, in a sense that it was created to control inflation. Of course, when it pushes the “on button” and creates money out of nowhere it goes against its goal, against the reason why it was created. The ECB function should be redefined and establish clearly what it is for. Now it is pushin the “on button” and thus going against its function and it is injecting this money into private institutions...this is a very bad joke. This lead to a very funny situation in which Spain was trying to reduce the public deficit but the interest rate on its bonds continued growing. The risk premium has only been alleviated when they ECB said it would finally buy public debt, proving that the ECB, and not the financial markets, determine the interest rate.

So they buy public debt and in exchange for it we have all these wonderful measurements: increase in taxes, retirement at the age of 67, privatization and more indebtedness (after all, when the ECB buys public debt, that debt was to be paid). These things seem to be to you typical text book manoeuvres. Let me try to understand this.

We have banks responsible for what happened. They claim Spanish society has to go through sacrificies to solve the problem. They pay nothing for what they did. We have politicians which also hold part of the responsibility. The pay nothing for what they did and implement those measurements which suffocate the Spanish people. What the government is doing is simply what a normal person who is a parasite and useless would do when in debt. If a parasite is in debt because it is spending too much, way above what that person earns, and suddenly finds it has to pay all that debt, what does it do? Think of a person who is renting a house on the beach to some German family. This person thinks, OK, i rise their rent. The government is simply doing that, OK, i have no idea how to make money and i do not change the economic engine of the country, i do not make a more progressive and fair fiscal policy...i just rise the taxes and get more money out of everyone, even though people are struggling to survive. Correct me if i am wrong but, how on Earth is this going to estimulate the economy? Another thing the person does is to start selling stuff. OK, that is what the government can and will do and it is called to privatize. Think of Greece, where most of the debt is owned by Germank banks. If Greece leaves the Euro...OK so i am hearing all the time that Greece should sell monuments, islands...what the hell man? If a person has no money, that person stoppes delaying payments. Well that is all what this delayed retirement age is about. The government says I have no money so continue working until you are 67, you will be paying taxes and i will not have to pay you. And finally indebtness, which i dont even want to explain because i think it is clear and this is becoming painful.

You say this has to happen? Otherwise Germany will collapse and with it the whole Europe. We do all this and people do not pay for what they did? I thought when you have a problem, you need to attack the roots of that problem so that it doesnt happen again. If we dont tear those roots, how do you know it will not happen again? That the market is not fair? If you say so, why do we have to play the rules? If they are so afraid i think they can do much better. If they are willing to tell the Spaniards what they should do i think they could also attack those who created the problem. There is no problem solving if you do not attack the problem, it is that simple. But it seems that text book manoeuvres say that if somebody commited speculation and drove a whole country to hell, regular people should pay for it and those who created the problem can continue making profit. How on Earth is this going to solve the problem? I do not claim we should leave the Euro, or let Germany go bankrupt or anything like that. I claim the problem must be solved, and will never be solved if those responsible for it do not pay. The problem is that those who hold power in all countries are very comfortable with this situation and continue making profit while implementing all those measurement they have been longing for.

I think the difference between your opinion and mine is deeper. It is the fact that i do not accept all this whole system as i think it is unfair. I do not want to play these rules. You seem to acknolwedge it is unfair but in your words: “...the market does not care”. It seems that you well adapted to all these rules after studying them for many years. I always find aberrant, although not surprising, that people who supposedly have socialist ideas and seem to despise capitalism, get very well adapted to all this monetary system and its rules. In the end this whole money thing seems to always win. Whether capitalism, or fascism, or communism or any other “ism”, in the end it is all about power and money and we all seem to have to adapt to “the markets”, whether fair or not. The monetary system dictates this. It is like a bible. It is text book manoeuvres.