[OPE] The new German Ideology from a Krugmanist perspective

Germany needs more than an accounting trick
By Wolfgang Münchau

FT May 17 2009

(...) A spokesman for the federation of Germany's private banks made a good
analogy when he compared the scheme [to buy toxic securities] to a deep
freezer.

The banks are trying to buy time. When the crisis is over, they hope that
the structured securities can be sold at reasonable prices.

Until that happens nothing is resolved.

Why did the government opt for such an obviously daft plan?

The answer is because it costs next to nothing.

There is only a cost to the government if the SPV goes bankrupt,
which is not going to happen soon, if at all.

The SPV even pays a fee to the government to cover the expense of issuing
the guarantee.

So the scheme tries to be the equivalent of a free lunch. But it
it is only cost-free in a narrow accounting sense. The economic costs
are huge.

Last week the German government was told that the tax shortfall
would be 300bn over three years - two-thirds of that due to the crisis. If
you split the loss evenly over the three years, the pure tax effect of the
crisis makes up some 3 per cent of gross domestic product for three years
running. Not bailing out the banks will almost certainly end up being more
costly than bailing out the banks. But a bail-out would be unpopular, and
the government does not want to touch this issue until the federal elections
in September. Until then, we have an insufficient ring-fencing plan only.
(....)

The German political classes have yet to comprehend that recapitalisation is
necessary, and that it will end up costing the taxpayer a lot of money. The
plan as it stands now offers no resolution, only procrastination. While US
banks have already written off a fair proportion of the bad debts, the
Europeans are adopting schemes that allow the banks to postpone resolution.
http://www.ft.com/cms/s/0/606510ba-4310-11de-b793-00144feabdc0.html

SPV means "special purpose vehicle" but also "SPV GmbH", an independent
German record label founded in 1984 as a German distributor of Roadrunner
Records. Point is, the Germans are trying to establish rigorously who should
pay for the crisis, morally and otherwise, that is all.

Somebody has to pay, ain't that right? But why?

J.

I spit out like a sewer hole
Yet still receive your kiss
How can I measure up to anyone now
After such a love as this?

- The Who, Who are you?

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Received on Tue May 19 18:34:38 2009