Europe is falling apart---close to bringing the whole world down.

The bailouts are really only temporary measures. If there really are no major conditions, that IS a huge win for Spain. If there are austerity conditions, then Spain potentially goes down the rabbit hole with Greece, where austerity crushes the economy and creates a permanent dependence on bailouts. The good thing with Spain is that the bailout is more TARP-like, which is a much better method than what happened with Greece.

The real news that's starting to come up in Europe is the new focus on a political and economic union. If the early reports turn out to be remotely close to what happens - and this seems like a multi-year process at the very least - it could be a revolutionary change for Europe. The early reports suggests that every country would lose the right to issue their own bonds and would have to run balanced budgets. Only Europe as a whole could borrow, and funds would be given depending on agreement between the various nations.

I have no idea how it would play out. On one hand, it would be a definitive solution to pretend one crazy country from bringing down the system. On the other, it just makes the problems of each country having different economic situations that much more difficult to alleviate. And depending on who controls the money, it could just make a bunch of countries subservient to others. It will be really interesting to see how this plays out and whether 20 different countries can actually come to a single agreement. It would almost make Europe like the US with a bunch of individual states that have to balance their budget, but with a federal government that does nothing but decide which states really need and get extra money.

 

Absolutely - but a big part of the problem right now is that the people creating the debt don't control their monetary policies. If they did, this would never have gotten out of control - the Drachma would just have lost value relative to the Deutchmark and the problem would have sort of addressed itself over time. If everything is centralized to one big group, you get the people issuing the debt and printing the money to be the same people. So you have a situation more like the US, Japan, UK, etc - still issuing lots of debt, but the fear of default isn't there because they now can always print more. So you'll have other issues as the US and Japan do, but you won't get this bizarre problem that Europe has.

 

How so? Every country would still be responsible for its own taxes, budget, etc. If people don't pay taxes, like a lot of people in Greece, there would be no balanced budget in reality, the country would still be in trouble, and the other countries would still have to bail them out. How would that be a definitive solution?

 

The current problem with Greece is the interconnectedness with everything else. If Greece defaults, all the banks in Europe take huge losses and it starts a chain reaction. Then fear spreads to the next country that might be in that situation, raising their interest rates, and ensuring it does become a problem there even if it wasn't already. This is sort of similar to what happened with US banks in Lehman Brothers era, with bank after bank toppling as fear spread from one to the next - despite the fact that many were actually just fine and able to pay all their bills.

With a central Euro bond, you eliminate all the individual country bonds. So if Greece does what you say and needs help, Europe has two options. It can help fund Greece at far more reasonable interest rates since the bonds are backed by everyone. Or, it can say "tough luck" and let Greece deal with the problem - that could totally wreck Greece, but it won't really effect the other countries nearly as much because there is no Greek debt out there to drag down everyone else.

It doesn't solve the underlying economic problems that Europe has - there are still structural unemployment problems, deficit issues, etc. But it does help take the whole contagion / financial implosion scenario off the table. The big question is just how they would structure the power - who gets to decide if Greece gets to borrow or not? That seems like the trickiest and most contentious part - I'm sure the powerful countries will want all the say, but are all the other countries willing to put their fate in the hands of Germany and France?

 

Oh I'm in agreement here - I've always thought the Euro was a terrible idea all around, and each country needs the ability to fluctuate their own currency. But given that we're clearly not headed in that direction, I think the proposed idea is much more stabilizing than what we have now - which is basically the worst of all worlds. That doesn't mean it's necessarily good for the competitiveness of Europe - just that it helps prevent total disaster.

Agreed - but even the floating of this proposal will put downward pressure on interest rates for individual European countries, which helps buy them much-needed time. If there is potential for everyone's debt to get backed by Europe as a whole, then the chance of default drops, which should bring down the spreads between German debt and everyone else's. That helps puts the imminent-disaster scenarios off the table because those are all based on the inability of countries to borrow at reasonable rates. The one big exception is Greece because of the elections next week, and the difficulty of figuring out what to do if SYRIZA wins or is strong enough again to prevent the formation of a pro-bailout government.

 

http://www.zerohedge.com/news/spanish-bailout-explained-one-image

 

So now's the time to invest in Spanish banks?

 

Personally, my favorite member of the FOMC says what everyone else is thinking.

http://bostonglobe.com/1969/12/20/ye...f9N/story.html

Federal Reserve’s Janet Yellen says recovery still vulnerable.

Well, duh, trickle down and conservative economics just doesn't work.

Krugman was right from the beginning. Obama wimped out, trying to please the GOP he had a too small stimulus, with a lot of the money geared to the wealthy who don't tend to spend too much of it.

After all even Warren Buffet or the famous Koch brothers only wear one pair of a pants at a time. Though their income is 1000's of times that of an ordinary person they only tend to have several times, if that, number of cars. Even money bags Romney only has about 6 houses.

Just not enough demand to make up for laying off teachers, firemen, etc. in addition to the private sector layoffs due to lack of demand, now that folks can't treat their houses as ATM's.

 

<iframe width="560" height="315" src="http://www.youtube.com/embed/GVmeeYwEiQw?rel=0" frameborder="0" allowfullscreen></iframe>

 

I was being a bit sarcastic. That said I had $100 sitting around in my IRA yesterday and put it in BBVA. Probably going to lose it all but hey maybe they're too big to fail and I'll get rewarded somehow.

 

http://www.telegraph.co.uk/finance/...bcontract-their-destiny-to-the-Bundebank.html

Overblown?