How Basel regulations fucked over both American real estate and Southern European governments

A blog dedicated to explaining the causes of the financial crisis has an excellent summary of the argument that Basel regulations doomed us all, both Americans and Europeans.

Basel regulations essentially tells large banks and institutions (and only them) precisely how much risk they can take with certain asset classes. Under Basel I, adopted in the West in 1992, banks were allowed to take huge risks in mortgage-backed securities and small risks in vanilla business loans. Basel I is in the process of being phased out in favor of Basel II, which went into effect in Europe in 2006-07. The second incarnation allows institutional investors to plow all of their clients' money in certain classes of sovereign debt (which at the time included Greek or Portuguese government bonds) without leaving a cent left over in case the bonds default. Obviously, it was precisely the asset classes that required little capital that have been taking down the global financial system, more slowly that us Americans realized.

As Jeffrey Friedman explains in the first piece, these rules only applied to large institutions such as banks and pension funds. While other investors were not as heavily invested in these risky products, they did fall victim to the mania to a lesser extent – though in the end, it's the banks who need the bailouts (and the public pension crisis in America is coming), not hedge funds and S&L's.

Those who call for more regulation of financial risk are frequently unaware of how minutely risk is regulated for large institutions. Proponents of regulation that are aware often argue that these are merely ceilings on risks and that an unregulated market would have been able to go even wilder on these risky loans, but the truth is that regulations are more than just ceilings. As they used to say in IT procurement, nobody ever got fired for buying IBM – a company whose big break was FDR's 1935 Social Security Act and the lucrative federal contracts it created. And when you lower ceilings on risk – presumably the Democrat's desired regulatory policy – you're only entrenching the idea of relying on the government to tell you what is a good investment and what is not.

Would Germany be better off now if it were on the pound rather than the euro?

I don't really feel very qualified to talk about European monetary and macroeconomics, which is why for the most part I've avoided writing about Greece and the Eurozone's crisis, but – and maybe it's just the benzos – I feel like I have something slightly relevant to say.

First of all, Tyler Cowen has a great round-up of recent events and indicators (although I hate his first point) here. Additionally, I hear that even Paul Krugman – someone who, sometime during his transition from serious economist to columnist, turned into a man who never met a bailout he didn't like – thinks Greece is going to be dropped from the euro. (Although later in the article he seems overjoyed at the fact that a Greece back on the drachma would be able to destroy the currency to its heart's content.)

As far as I can gather, the consensus among economists is that debt restructuring (in Krugman's words, "a polite term for partial default") is certain, a more serious default is likely, and Greece leaving the eurozone – an that was seen as very fringe a few weeks ago – is now a distinct possibility. In the end, I think that the quicker Greece leaves the euro, the better. Many in Europe worry about the resultant instability won't be worth the risk – after all, even Greek dogs like to riot. But in the end, Greeks have become too accustomed to capitalism and liberal democracy, and once its leftist protestors no longer have the euro and lack of monetary and fiscal sovereignty to blame, the rioting will stop and the hard reforms will begin. Greek voters are too sophisticated to give into geography and regress to the level of its Balkan neighbors, who despite Greece's problems, they still make it look like Switzerland in comparison.

The big European monetary debate has always been whether the UK and Scandinavia should give up their pounds and crowns in favor of the euro. But it now looks like it would have been better for Germany, the Benelux, and Scandinavia to give up their marks, francs, guilders, and crowns in favor of the pound sterling.

"Greece admits it is riddled with corruption"

The title of this article – "Greece admits it is riddled with corruption" – sounds like it's from the Onion, but alas, it's from the Financial Times.

Here are some choice quotes from inside the article:

At an EU summit on Thursday night, The bloc’s 26 other national leaders sat in silence as Mr Papandreou delivered a short, blunt speech on Thursday night that said everything the rest of Europe had long known, or suspected, about Greek bureaucracy. [...]

“He recognised that there was a huge problem of corruption throughout the administration, including in public procurement,” Mr Barroso said. [...]

“Our basic problem is systemic corruption,” Mr Papandreou said in Brussels on Friday. [...]

The underlying problem is, however, one of Greek credibility...

...I'll say!

Italian underemployment

Tyler Cowen the other day remarked about the perhaps increasing irrelevance of unemployment figures, given the apparently rising phenomenon of "underemployment," where workers are counted as employed despite the fact that they work much fewer hours and earn much less money than they have in the past.

Perry Anderson, in a fascinating recap in the London Review of Books of Italy's history since the beginning of the Second Republic in 1992, gives a good example of underemployment-in-action:

Redeeming this desolation has, to all intents and purposes, been just one improvement, in job creation. Unemployment, which stood at 12 per cent in the mid-1990s has dropped to 6 per cent today. But most of this work – half of all the new posts in 2006 – involves short-term contracts, and much of it is precarious employment in the informal economy. No counteracting dynamism has resulted. In the formula of the Neapolitan sociologist Enrico Pugliese, Italy has gone from growth without jobs in the last years of the First Republic to jobs without growth under the Second, blocking productivity gains.

In case you're curious about Anderson's verdict on the so-called "reforms" of the Second Republic, here's the last paragraph:

Growth was not liberated, but asphyxiated. Export shares have fallen, and the public debt, the third largest in the world, has remained stubbornly above 100 per cent of GDP, mocking the provisions of Maastricht. When the Second Republic started, Italy still enjoyed the second highest GDP per capita of the big EU states, measured in purchasing power parity, after Germany – a standard of living in real terms above that of France or Britain. Today it has fallen below an EU average now weighed down by the relative poverty of the East European states, and is close to being overtaken by Greece.

Overtaken by Greece?! That's saying something...

Athenians have second thoughts about Olympics

According to a story in the Christian Science Monitor, some in the city of Athens are reconsidering whether hosting the 2004 Olympic Games was really worth the $15 billion cost. The stadiums lie either empty or underutilized. Athens got some infrastructure out of the deal – the metro was revamped, the ancient city center was beautified, and the airport was enlarged – but all of those investments could have been made without hosting the Olympics. Beijing is spending an estimated $40 billion on their coming out party, but authoritarian regimes are insulated from the oversight and criticism that other Olympic hosts face from their citizens. The article also implies that Tokyoites are a lot less receptive to the idea of hosting the Olympics in 2016 than they were in 1964. The trend seems to be that citizens in booming, upcoming cities (Tokyo 1964, Beijing 2008) are more likely to welcome the Olympics than citizens of dynamic market-oriented cities who don't need to prove themselves to the world.

All my writings on Olympics-related topics here, with more examples of Olympics-gone-wrong in Sochi and Baku.

NATO madness

In case you were under the mistaken impression that international political decisions about military alliances were made with care, a dispatch from Bucharest ought to clear things up:

NATO Secretary General Jaap de Hoop Scheffer announced that Macedonia was not invited to join the Alliance, due to its name related controversy with Greece. [...] Greek officials argued that Macedonia need to choose another name for their nation or at least add another adjective to it.

Macedonia has long been maligned by its neighboring countries of Bulgaria, Serbia, and Greece, all of whom have argued at one point or another that Macedonia rightfully belongs to them. Greece's claims are based on a) the fact that there's a province in Greece called Macedonia, and b) a long-standing resentment over the lost empire of Alexander the Great of Macedon. Of course, there are plenty of cases like this that haven't caused such petty tensions (New Mexico in the US vs. Mexico the country, Moldova the region of Romania vs. Republica Moldova) and outright rejection from a treaty over naming concerns. Bulgaria and Serbia have better claims on the territory, anyway – the Macedonians are Slavs like the Bulgarians and Serbs (unlike the Greeks), and Macedonian is little more than a dialect of Bulgarian (or vice-versa, depending on how you want to look at it).