Sunday, March 31, 2013

Provocative New Research About the Labor Market

This is new and different, but it kind of fits into perceptions of what’s wrong with the labor market:

… But in a paper released Monday by the National Bureau of Economic Research, a team of Canadian economists argues that the U.S. faces a longer-term problem.

They found that unlike the 1990s, when companies needed hundreds of thousands of skilled workers to develop, build and install high-tech systems—everything from corporate intranets to manufacturing robots—demand for such skills has fallen in recent years, even as young people continued to flock to programs that taught them.

"Once the robots are in place you still need some people, but you need a lot less than when you were putting in the robots," said Paul Beaudry, an economist at the University of British Columbia …

So, part of what we’re seeing is a mismatch between demand and supply:

But using Labor Department data, Mr. Beaudry and his coauthors found that demand for college-level occupations—primarily managers, professionals and technical workers—peaked as a share of the workforce in about 2000, just as the dot-com bubble was about to burst, and then began to decline. The supply of such workers, meanwhile, continued to grow through the 2000s.

Read the whole thing, entitled “College Grads May Be Stuck in Low-Skill Jobs” in the March 26 issue of The Wall Street Journal.

The Progressives’ Worst Nightmare

Progressives, the trendy word for (mostly Democratic) politicians in D.C. who want to create programs and policies to help people, are in big trouble.

The problem is that while interest in their policies has come back into vogue, any ability to fund them is disappearing quickly.

The budget action last week in Congress … establishes a pretty simple pattern: Squeeze money out of the military, but also squeeze money out of all varieties of domestic social programs the federal government runs …

Meanwhile, the even bigger entitlement programs that really drive the deficit—Medicare, Social Security and Medicaid—are left nearly untouched.

One way to think about this pattern is that it leaves wealthy retirees living in gated golf-course communities with benefits that are unscathed, while Head Start programs for kids, or research by scientists in university laboratories, for that matter, take a hit.

That notion ought to give shivers to those who like programs in which the government does something other than just write checks…

This has been coming for a long time:

According to data from the Congressional Budget Office, the money spent on nonmilitary discretionary programs … declined to 4% of the nation's gross domestic product last year from 5.2% in 1980. …

… Even in the longer-term budget resolution just passed by the Senate during the weekend—that would be the Democrats' master plan for spending—nonmilitary discretionary spending would fall as a share of GDP to 2.5% in 2023 from 3.7% this year.

This is a bit off-topic, but I wonder about the politics of Obama’s positions on this. He spends a huge amount of time and energy campaigning for a renaissance of the progressives palette of programs — and yet these can’t have much future. I find this odd: it’s kind of like a football coach putting in a run-centered game plan after you’ve fallen behind by 20 points at halftime. It’s in the realm of not only “won’t work” but also “won’t even be remembered”. Weird. 

Read “Liberals Find Themselves In a Spending Trap” by Gerald Seib in The Wall Street Journal.

Saturday, March 30, 2013

Political Chaos In Italy

Italy isn’t in great shape economically.

It’s politics may be worse. Italy had an election earlier this month, but they still don’t have a government.

Italy is a parliamentary system: the party with the most votes gets to rule. But if no one get a majority, the parties have to form a coalition.

Since the election, they’ve tried  — more than once — to form a coalition government. And failed.

Currently, the presumably more serious government, that came in last place in the election, is still in charge as a caretaker.

Keep your eye on the ball. Macroeconomic crises do not surprise people who are paying attention. But, the excuse “no one saw this coming” is often used after that fact.

Not to worry though: Belgium went without a new government for over a year, and in many ways the country was all the better for it.

Cypriot Haircut Larger Than Expected

The final number is in for the haircut received for accounts over 100K, and it’s a doozy:

  • 5 out of every 8 dollars are gone, and
  • The other 3 out of 8 bailed-in to the banks in exchange for equity, and
  • A promise that some of it might be returned if the banks stabilized.

Thursday, March 28, 2013

No Bank Run Yet

The capital controls are in place, and while there were lines, there were no runs when Cyprus opened its banks today.

Do note that it is 2013, and most people do their banking over the internet … so the real thing to look at is not 20th century style lines, but the data on internet withdrawals that will come out over the next several weeks.

How long will the capital controls be in place? No one knows. They Cypriot government says a week to a month. This does not seem historically informed: Iceland is now in year 5 of its controls, and the UK maintained wartime capital control from 1939 to 1979 (that’s not a typo). Note that both of those places had profitable industries other than financial services. Cyprus is left with serving daiquiris by the pool.

I didn't know this:

Still, the experience of other capital-controlled countries gives us some lessons about how these regimes work out over time. Capital controls turn into trade controls, as the locals attempt to find ways to turn hard assets or non-banking services into foreign exchange. At some price, for example, you can buy a boat in Cyprus with post-haircut, capital-controlled local deposits, sail it to Lebanon, and then sell it for real, usable money. The same with antiques, jewellery, or anything else you can think of. Even capital goods such as fork lifts can be motored off in the middle of the night.

Of course the authorities anticipate some of these problems, but there are always new ones. Particularly after the initial shock of control imposition wears off, the population turns from productive effort to finding ways to game the system. Some cultures are more resistant than others to this change in character, but in all cases social cohesion and respect for law are eroded over time.

There are winners, of course. As one of my sovereign restructuring friends says: “The financial institution that comes out ahead is the Banco de Mattress. After all, if you are a small depositor, you can’t turn up with your €25,000 in cash in Frankfurt and expect to be able to open a bank account. You can, though, just keep it at home or in your own safe.”

Fixers and intermediaries become sought after; having a cousin in the central bank will be a mark of social distinction.

What a Capital Control Looks Like

This is at the airport in Larnaca, Cyprus:


Of course … to enforce this they are probably searching luggage.

Note that there is a Russian version at the bottom.

BTW: There were 12 private jets, all Russian, parked on the runway at this single airport. Larnaca is the size of St. George.

A Picture Is Worth a Thousand Words


This is from a Cypriot newspaper: is it levity or realism?

Tuesday, March 26, 2013

Also Required for Exam 2

Blogger is not allowing me to update the widget that has the links for Exam 2, or to add a new one. Is it just me, or is Google starting to s**k at everything except search?

Anyway, here’s the rest of the links:

Continuing Weirdness In Europe

It’s all happening live:

  • Banks in Cyprus are still not open. Now they say Thursday.
  • The rumors are that withdrawals may be limited to 30 Euros. Leaked memos indicate that bank employees haven’t yet been told what the limits will be (probably so they don’t tell their friends and family).
  • A poll by Stern (the largest news magazine in Germany) shows that over half of the German population no longer believes their deposits within Germany are safe.
  • Cypriot government opposition to its largest private bank taking (Bank of Cyprus) over the emergency loans (ELA) issued by the European Central Bank (ECB) to the second largest bank (Laiki) was apparently over fears that the “better” bank will not be able to continue payments on that many loans for more than about 6 months.
  • Fitch (a rating company) has downgraded the ratings of Cypriot banks, and its government. Laiki Bank is now rated as “in default” even though it hasn’t been open for 2 weeks.
  • There were large protests of students on Tuesday in the Cypriot capital of Nicosia. Only 3K, but that is proportional to 1,200K in the U.S. How would our country behave if there were a million students marching in D.C.?
  • The U.K. sent a new shipment of cash to British citizens in Cyprus. It’s 13 times larger than the one last week.
  • The final percent for the “haircut” won’t be announced until Friday. They are talking up to 80%, with it taking up to 7 years to clear out claims on the other 20%.
  • British expatriates and retirees around the Mediterranean have been calling in to their financial advisors for advice about the safety of their money in the PIGS.
  • Sheesh: “Eurogroup president Jeroen Dijsselbloem is at it again. He has now reportedly said that a levy on wealth is defendable in principle. He adds that the majority of Cyprus deposits aren't savings.” [emphasis added]

Also Paul Krugman (a liberal) agrees with the view of Tim Worstall (a conservatives and/or libertarian) that I discussed on Monday — that Cyprus might as well declare bankruptcy, leave the Eurozone, and start fresh.

The Other Shoe Drops

Fresh from the unusual (whether it turns out well or not, it certainly was handled differently) crisis in Cyprus, there’s this from the current head of the Eurozone:

If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?' …

If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders. …

"We should aim at a situation where we will never need to even consider direct recapitalisation," …

"If we have even more instruments in terms of bail-in and how far we can go on bail-in, the need for direct recap will become smaller and smaller."

So, here we go again: uninsured depositors are on the hook for a Cyprus-style bail-in in other Eurozone countries too. Watch out if you live in Spain, Ireland or Italy.

Note that he doesn’t say they’ll take money from insured depositors. That’s a lark. Here’s what everyone’s going to do now. If you have 200K in an account, only 100K of which is covered by a deposit guarantee, then you’ll split it into 2 accounts of 100K which are both guaranteed. The only reason people haven’t done this before is inconvenience. So, it’s reasonable to conclude that by the time the next crisis hits, there will only be insured deposits to call on for a bail-in.

On one level, the Eurozone’s position isn’t a horrible policy. These banks that are in trouble get this way by offering high rates of return to depositors. They get those high rates of return by making risky investments with the depositors money. High risk means you lose sometimes, but deposit insurance means you don’t have to worry about that. It’s heads-I-win, tails-you-lose. Getting depositors on the hook is just changing the tails-you-lose part to tails-I-lose.

The problem that the Eurozone has is that it has invited countries into this single overarching monetary system, with lender-of-last-resort power. But it hasn’t integrated their regulatory systems quite as well. And it’s opened up borders to financial transactions. So the customer in, say, Austria, can deposit their money in Spain’s heads-I-win-tails-you-lose bank, or in Finland’s heads-I-win-tails-I-lose bank. We shouldn’t be surprised that they choose the Spanish bank.

Hold that thought. Back to the current head of the Eurozone, who also said this:

Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used …

This is really bad.

Kydland and Prescott were awarded a Nobel Prize for their work in the 1970’s that government’s get themselves into trouble when they use their own discretion rather than some fixed rule to determine policy responses. This problem is known as time inconsistency.

It goes like this. There’s a game between the public (like, say, a bank) and the government. The bank knows that if it screws up, the government will bail it out. This encourages it to incur more risk. No surprise there. But Kydland and Prescott noted that it can be optimal for a government to 1) say truthfully that it won’t bail out the bank before there is a need to, and then 2) change their mind when the bail out is needed. Now here’s the kicker: the optimal response of a bank is then to incur the risk and force the government to do exactly this.

Think about that for a minute: it’s saying that the outcome of optimal choices is for banks to take on too much risk and government to back them up. The world would be a better place if this didn’t happen; which makes this a form of prisoners’ dilemma.

The solution to this is some sort of binding rule on government behavior that makes # 2 impossible. Say, a rule that says the government can never bail out anyone.

Thirty-five years after Kydland and Prescott’s publication, and ten years after they were recognized for it with a Nobel Prize … the head of the Eurozone doesn’t get it yet.

But, more generally, the whole Eurozone doesn’t get it either. The inconsistency between having a unified monetary system and a non-unified regulatory system is also a rules vs. discretion problem. The Eurozone has some rules for admittance (it came out last year that Greece lied left and right to get in), but is still harboring the illusion that bank regulation and deposit guarantees can be handled at the state level. They haven’t admitted to themselves yet that this doesn’t work.

I am not claiming this is easy or fun for taxpayers and policymakers in the better regulated economies. We can and do have the potential for the same sort of problems in the U.S. But, we have recognized through trial and error the benefits of a more centralized regulatory system. Think about it: you might shop for a cheaper financial firm on the internet, and when you find one it’s more than likely because they have reduced brick-and-mortar costs … not because of the particular state they happen to be headquartered in. In the Eurozone, it’s the other way around.

Sunday, March 24, 2013

Just the Same, Only Worse

So, the troika and Cyprus came to an agreement Sunday night. The self-congratulatory press conferences went on until 2 AM.

The just the same part is essentially the same on that the troika presented to Cyprus 10 days ago (before the disastrous plan to tax everyone).

  • The second largest bank can’t be saved. It’s “good” assets will be transferred to the biggest bank (along with all of the liabilities for money it owes to the European Central Bank). The remaining positions will be wound down.
  • The Cypriots pony up 40% of uninsured deposits (those over 100K). Hopefully most of that is Russian money, and hopefully most of that is in turn illegal Russian money.
  • The Eurozone gives them back about 2-3 times that amount to stabilize their financial system. This isn’t even twice as much as they’ve already received, so I wonder if it’s enough.
  • The legislature in Cyprus still needs to pass this.

The only worse part:

  • Cyprus now has capital controls.
  • We still don’t know if there will be bank runs this week.
  • The Cypriot business model, catering to Russians, and the prosperity that went along with that is probably dead. Russian money is now going to Latvia. That’s not necessarily a recipe for a problem, but it is possible that their financial system could be overwhelmed just like Cyprus’ was.
  • There are effectively two Euros: the one you use just about everywhere, and the one you have to use in Cyprus because of capital controls. So much for European monetary union.
  • There’s a precedent for suggesting that bank deposit guarantees can be readily overturned.
  • The troika looks like a bunch of amateurs. The pizzas getting delivered to the meetings late the night before an ultimatum came due didn’t help.
  • The Russians are surer than ever that no one in western Europe likes them.

And … here’s a chart from Eurostat that indicates where we might next see trouble:

File:Budget Deficit and Public Debt to GDP in 2012 (for selected EU Members).png

We’d better hope that the Cypriot financial problems (too much Russian money reinvested in too much Greek debt) were unique, because if not, there are a bunch of bigger name places in trouble.

BTW: If the U.S. were in this chart, it would be in the same block as Cyprus.

Sunday’s Cyprus News

They’re coming down to the wire today.

  • There’s a traditional bank holiday in Cyprus tomorrow.
  • The ECB (European Central Bank) has set tomorrow as its deadline for continuing to support Cypriot banks.
  • Cypriot leaders are meeting with officials of “the troika” — the Eurozone, the ECB and the IMF — in Brussels … starting around Noon (our time).
  • Cyprus still doesn’t have much of a plan to come up with the full 6-7B the troika wants to see.

The Telegraph may have shut down its live blogging for the weekend, but another newspaper, The Guardian, has stepped into the breach to do it today.

Understanding macroeconomics requires some recognition of the “we’ve always done it this way” factor. This article from The Daily Beast goes over the historical details that are motivating Europeans to act this way.

One thing to remember in all this, when you see pictures of protesters in the streets, dysfunctional behavior on the part of politicians, and inflexibility of potential creditors is that … Cyprus is already bankrupt, in fact if not in name. Everyone is in denial … but sometimes it’s best to just admit it, and start over — here’s my friend Tim Worstall voicing that opinion. The trendy phrase this week to describe that choice is to do a “full Iceland”, since this is what that country did 4-5 years ago.

Here’s a human interest story about what it’s like in Cyprus this weekend (not required). The daily ATM withdrawal limit at Laiki bank was cut by 60% today — other banks followed suit. But, then there’s this:

French Finance Minister Pierre Moscovici put it more bluntly: "To all those who say that we are strangling an entire people ... Cyprus is a casino economy that was on the brink of bankruptcy,"

Tweets from inside the pre-big-meeting in Brussels suggest that the troika is not impressed with the solidarity fund that Cyprus has put together. Also, intelligence officials reported inflows of 12B euros worth of dirty money from Russia within the past year. That is over twice what the troika is looking for as the Cypriot contribution.

Saturday, March 23, 2013

Cyprus’ Solidarity Plan/Fund

Cyprus’ alternative to the Eurozone’s demand for 10% of bank deposits is to put together something they’re calling their solidarity fund.

What this is has not been clear the last several days.

Now, Open Europe, an economic/political think tank has delineated, via tweet, what’s in this:


Frankly, this looks like the sort of plan that you put together towards the end of Monopoly game when you’ve just landed on Boardwalk with a hotel.

I’m not sure what they mean by the pension fund is “only solvent due to govt transfers”. Perhaps it is underfunded? Perhaps they are including the scheduled infusions of pension payments that haven’t been made yet? Anyway, it sounds dicey.

The gas reserves are the big item … but remember the Russians already passed on this. How great can it be if the people you’ve screwed over won’t make an offer on the only thing you’ve got?

The other thing about that gas item is the no money until 2018 part. This is where an economics student needs to think about opportunity costs. If the value of the stock of gas is 30B, and you figure it needs to kick off a minimum return of 10% per year, then the opportunity cost of this is $3B per year right now. So, they Cypriot dream of selling their mineral rights is like asking the people that you owe money to pony up $3B per year for 5 years until they might start getting some positive cash flow. To me … this sounds like asking for a loan to pay off a loan.

Via Marginal Revolution.

Cyprus’ Capital Controls

Cyprus has passed some capital controls.

When you say “capital controls” to people on the street, they usually have no idea what you mean.

When you say “capital controls” to economists, they usually have no idea what you mean either. I know I don’t until the specifics come out.

Typically though, these mean any sort of legal measures that politicians can dream up, that they have hopes of enforcing, with the intention of slowing down the movement of money out of a country. In this case:

The Prodigal Geek, has seen the full banking bill (in Greek) and gives a summary of what the wide-reaching capital controls would entail.

Restrictions in daily withdrawals

Ban on premature termination of time savings deposits

Compulsory renewal of all time savings deposits upon maturity

Conversion of current accounts to time deposits

Ban or restrictions on non cash transactions

Restrictions on use of debit, credit or prepaid debit cards

Ban or restriction on cashing in cheques

Restrictions on domestic interbank transfers or transfers within the same bank

Restrictions on the interactions/transactions of the public with credit institutions

Restrictions on movements of capital, payments, transfers

Any other measure which the Finance Minister or the Governor of Cyprus Central Bank see necessary for reasons of public order and safety

To summarize, starting in the middle: without checks or debit cards, your checking account is now a savings account from which you can make limited daily withdrawals, your savings accounts is now a CD, your existing short-term CDs will be automatically rolled over into long-term CDs, and you can’t cash them out early.

This is my opinion, but I don’t believe capital controls this aggressive have ever been used in a developed and/or European country in the last 50 years.

Also, make no mistake: this is like creating a second-class Euro just for Cyprus — basically it’s scrip. So much for a single currency. And check this out:

Cyprus is odds-on favourite with bookmakers William Hill to be the first country to leave the euro. Having been a 20/1 shot to do so a week ago, Cyprus is now 1/2 favourite, displacing former odds-on favourite Greece, whose odds have now gone out to 7/4.

Saturday’s Cyprus News

Cyprus is considering a plan to tax accounts over the guaranteed value of 100K euros at 25%, with no tax on smaller accounts.

This suggests that Russia told Cyprus that it doesn’t care what it does with the presumably ill-gotten deposits of Russians. But, there’s also the view that a lot of the (largely anti-Putin) Russian middle-class uses the Cypriot banking system to hide legitimate funds from the Russian government.

There are also rumors that ownership of the gas fields that Russia wanted is in dispute with Turkey, and the Russians don’t want to antagonize the Turks (old enemies who’ve been doing might well economically for the last few decades).

Banks are down to 2-3 days of cash to fill ATM machines.

Cyprus did pass 9 laws to 1) split banks into good and bad parts, 2) impose capital controls, and 3) raise some money by nationalizing government pension funds. These actually have nothing to do with satisfying the demands of the Eurozone directly … they’re the easy stuff. There are rumors that the Eurozone has completely discounted the pension fund idea: they want cold, hard cash as proof of seriousness on the part of Cyprus, and they don’t see pledging pension funds as talk without the walk.

The Telegraph is still live blogging tweets about the crisis … they just seem to be doing this on a day-by-day basis. Here’s Friday (the reporters are taking the weekend off). Timestamps are GMT, so subtract 6 hours (usually it’s 7, but we do daylight savings time earlier than they do in London). There are dozens of tweets and over 3K comments, if you’re interested.

There are 4 branches of Laiki (the 2nd largest and most troubled Cypriot bank) in England. Because of their organizational structure, depositors there are not covered under English law, and will be subject to any legislated actions in Cyprus. So, there’s going to be some chance of contagion there.

The Cypriot plan right now includes completely shutting down Laiki. They figure they can save $2-3B (by not trying heroic measures to turn a dead bank into a zombie bank) out of the $5-6B they need to come up with that way.

BTW: The Eurozone has increased the amount they want Cyprus to contribute by almost a billion. No reason given, but it probably reflects evolving estimates of the scope of losses that will need to be covered.

Summing up: so far the Eurozone is coming out well, with no contagion apparent, and no bad politics at home. If they thought they were punishing Russia, they instead seem to be punishing Russians. And Cypriots are still screwed:

Take a moment to realise the scale of what’s been done here. No human agency has achieved [sic] so much economic destruction in such a short time without the use of weapons. The combination of laying waste to the financial sector and tearing up the savings of thousands of residents means that Cyprus won’t return to current levels of output for a decade, a funeral pyre which bears comparison only with Greece. There are four shocks happening at once; the bog-standard austerity shock; the trauma of bank withdrawal controls; the wealth shock; and the structural shock of wiping out the financial sector. The bailout bill is certainly going to get a lot higher too, as a larger amount of debt is piled onto a smaller economy.

That said, a future as “Iceland without the fish” does have some comforts for Cyprus. Its economy actually looks a lot more like that of Iceland than that of its cousin, Greece. It’s a relatively wealthy, open economy with much stronger institutions – ranked #36 in the World Bank’s Ease of Doing Business survey – closer to Iceland’s 14, than Greece’s 79.

The debt clean-out will help growth as it always has. But cold comfort for the people sacrificed by a toxic blend of European idealism and grotesque local incompetence

Friday, March 22, 2013

Revisiting the Argentinian Nationalization of YPF

About a year ago, I posted about how the government of Argentina nationalized the assets of the oil company, YPF, a division of the Spanish company Repsol.

This week I received a paper which surveyed finance professors about the value of YPF at the time of the nationalization. The consensus was about $10B.

Argentina has still offered no compensation to the owners of Repsol.

There are two broad similarities to this semester’s crisis in Cyprus. First, it isn’t impossible for governments to steal billions of dollars. Second, Argentina defaulted on its debts about 10 years ago, and implicitly stole from many retirees (mostly in Italy and Spain) who had bought Argentinian bonds.

So, we’ve seen stuff like the Cyprus situation before. It doesn’t end well. The difference this time around is that Cyprus is inside the EU.

Friday Morning’s Cyprus News

The Russian government has declined to infuse more cash, and sent negotiators on flights home.

I can’t document this, but the coverage in the news now makes pointedly clear that the initial proposal to tax both large and small bank accounts was driven by fear in the Cypriot government that the inflow of funds from Russia would dry up if large depositors were singled out.

Central bankers are coordinating measures in which overseas branches are being cut loose from their home banks back on the island.

Cypriot banks are still putting cash in some ATMs, although the maximum daily withdrawal has been cut by 2/3 (to about $300), and the maximum withdrawal in each ATM session is being held to about $50. Clearly there isn’t any more coming in from anywhere; so this is a bank run in slow motion.

Thursday, March 21, 2013

Thursday’s Cyprus News

  • The Telegraph (an English newspaper) is reporting tweets about the crisis in real time.
  • Market Monetarist reports that Bitcoin prices are up 50% since the tax on deposits was announced.*
  • The banks are going to be shut down in Cyprus until at least Tuesday (Monday is a regularly scheduled holiday). Marginal Revolution has dug out that there have been instances of a complete shutdown of a country’s banking system once before: four times in 20th century, bankers in Ireland went on (labor) strike. Clearly, Ireland survived. On the other hand, at the time of those strikes, Ireland was generally regarded as a 3rd world country, so it’s not clear there was as much development to be lost as in the Cyprus of today.
  • Cyprus still needs to come up with its part of the contribution: the Eurozone has indicated it will cut off lender-of-last-resort funding to Cypriot banks if their government doesn’t pony up some cash. The latest is that the government is considering nationalizing public and semi-public pensions instead of bank deposits (I don’t know what they mean by semi-public either).
  • Most shocking, at least to the bureaucrats who tend to think they’re masters of the universe, the Eurogroup held a conference call with the government of Cyprus Wednesday night — and the government of Cyprus refused to participate:

    The call was among members of the Eurogroup Working Group, which consists of deputy finance ministers or senior treasury officials from the 17 euro zone countries as well as representatives from the European Central Bank and the European Commission. The group is chaired by Austria's Thomas Wieser.

    Cyprus decided not to take part in the call, a decision that several participants described as troubling and reflecting the wider confusion surrounding the island's predicament.

    "The (Cypriot) parliament is obviously too emotional and will not decide on anything, if Cyprus does not even feel that they can attend the call it is a big problem for us," the French representative said, according to the notes seen by Reuters.

    "We have never seen this."

* Bitcoins are a completely virtual currency, unattached to any government. They are frequently used for internet transactions where … hmmm … someone’s not sure everything is on the level.

Tuesday, March 19, 2013

What Now?

Tuesday, the legislature of Cyprus unanimously voted down the aid package agreed to on Friday.

This could be a good thing: the whole explicit taking of government guaranteed deposits is a Pandora’s box no one should have peeked into.

But, we’re not back to the situation of last Friday either.

  • Last Friday, there was a credible threat that a bank or banks would go bankrupt and close its doors. That would mean that some depositors would lose a big chunk of their wealth permanently, and a bit more temporarily as the bankruptcy was worked out.
  • Over the weekend, the plan was for everyone to lose some of their money permanently.
  • Now, the lack of plan, means that everyone will lose all of their wealth temporarily. Is that better? It now appears that the banks will not open before next Tuesday.

And, keep in mind that, like all legislators, voting against an unpopular proposal in public doesn’t mean that they aren’t still working towards the same or a similar plan in private.

What are the new developments? Well …

  • The UK stations a lot of troops in Cyprus, and they are already flying in cash. BTW: there are UN peacekeepers in Cyprus too — no doubt cash will be flown in for them as well.
  • Russia’s largest natural gas company, Gazprom, is offering to bail out the government in exchange for drilling concessions. The Russians are known for driving hard bargains.
  • More broadly, Russia is willing to offer more aid, but only if Cyprus starts divulging the names of Russian nationals with big deposits in Cyprus. That sounds like thugs angling to hit other thugs.
  • International markets in Cypriot assets have not crashed (much). This suggests that investors already anticipated, and had marked down prices, in anticipation of nonsense (like that which has taken place). This is bad news for Cyprus and good news for you and me.
  • International risk managers are starting to decline counterparty offers with Cypriot connections.
  • There is talk of capital controls.

Ah … capital controls. What exactly does that mean? The capital here is financial capital: basically, accounting entries in Euros on bank statements (remember, the banks are closed, so the only money now is the cash in people’s hands). Capital controls means that, first, no one will be allowed to transfer those Euros to a financial institution outside the country — those transactions won’t be hard, they’ll be considered a criminal activity. Second, you do permit some capital movement by forcing (or allowing) people to buy brand new bonds with their Euros. But those bonds will only be available within Cyprus, so to get your money out of Cyprus you’ll need to sell your bond to someone who … probably already has one. Good luck with that, but it is possible.

In the end, capital controls will mean that everyone loses a chunk of their wealth. It probably also means that Cyprus eventually leaves the Eurozone, and goes back to issuing its own currency. This will probably make the Mexican experience of 1994-5 look easy.

Lastly, you may have some fun with the “game” at Crooked Timber.

Monday, March 18, 2013

Today’s News On Cyprus

1) Headlines in mid-morning showed that the bank holiday in Cyprus has been unofficially extended for 2 more days.

2) ekathimerini, a Greek magazine reports on its site that the original demand, from the IMF and the German government on Friday, was for forfeiture of 40% of deposits. The 10% figure is the compromise.

3) Remember my post about Italy (and the goofy election results that followed their government’s attempt to get back on track)? Well, the chief economist at Commerzbank (a private German bank) has recommended to the German magazine Handelsblatt a 15% haircut for depositors in Italian banks.

4) About half of the deposits in Cyprus are Russian. And Cyprus is the largest source of foreign direct investment (buying and building physical stuff) into Russia. Clearly, this is laundering of dirty money by taking it out of Russia before putting it right back in again. Not surprisingly, Putin is ticked off about what amounts to a tax on reinvestment of ill-gotten gains.

5) Megan McArdle makes a good point at The Daily Beast:

Hopefully, savers will view Cyprus as an extreme one-off: a tiny nation whose banking system was unsustainably oversized for its economy, and whose substantial depositor base of kleptocratic foreigners made it uniquely difficult to deliver government support.  

The problem is, Europe seems to be chock full of unique, one time problems with its banking system.  There's a real risk that investors will decide that they'd rather not stick around to see what one-of-a-kind, custom-crafted solution the European ministers come up with next.

6) It appears that deposit insurance was a requirement imposed on Cyprus by the EU when they agreed to let Cyprus join. Of course, it was the EU that just abrogated the deposit insurance they made Cyprus offer.

7) The vote on the plan has been pushed back until Tuesday. It is not clear that it has the votes to pass the legislature in Cyprus. If it is voted down, speculation is that the banking system there will collapse, and the country is then likely to default.

8) Here’s another good quote from FT Alphaville:

A “one-off” often isn’t. Calling something after “stability” isn’t very stable. Saying that something is not a precedent usually makes it one.

9) FT Alphaville also has the balance sheet of Laiki bank:

Note that there is almost no debt or equity. It’s all deposits. So this is less like a bank, and more like the wad of cash that people chip in and redistribute when there is a local tragedy. Also note that the “Central/other banks” entry is money already loaned by the European Central Bank under a program known as ELA. The EU refused to support Laiki on Friday because they already are supporting 1/3 of it.

10) Also, in the vein of “no one saw this coming”, FT Alphaville has a list at the bottom of the post with 10 previous articles about the decline of Cyprus.

Sunday, March 17, 2013

More Light than Heat About Cyprus

The Financial Times is getting closer to the heart of the matter.

The European Central Bank determined last week that the second largest bank in Cyprus, Laiki, was in such bad shape that they could not justify giving it any service as lender-of-last-resort.

So, the proposition given by the Eurozone to the government of Cyprus was either 1) do nothing, Laiki fails this week, and you are on the hook for 30B euros of insured deposits, or 2) agree to the haircut which covers a third of the bailout package we’re willing to give you.

BTW: There are discussions in the Cypriot government about convincing the Eurozone to accept a bigger haircut on large accounts, in exchange for a reduced haircut on smaller accounts.

FWIW: It’s hard to get perspective on this, because Cyprus isn’t that well known. It makes up just 0.2% of the Eurozone economy. That’s comparable to Vermont relative to the U.S. economy. But, with an out-sized banking system: something like all of New England’s financial system crammed into Vermont.

N.B. # 1: You could and should view this as a tax on wealth, and many people are describing it this way. Keep that in mind when you hear 99 percenters talking about taxes on wealth, financial transactions,and so on.

N.B. # 2: The word “bail-in” is being tossed around. A bail-out is when outside money is brought in to make your operation solvent. A “bail-in” is when money you’ve already put into an operation is permanently committed without you being able to get it out again: sort of like having your bonds converted to (worthless) stock, with the chance that you might get lucky.

Even More On Cyprus

A Fistful of Euros notes that the Cypriot bank holiday set for Monday was declared in a one-line press release just 9 days ago (not required if you can’t read Greek).

They also note that this is the first day of Lent (a religious period in which the faithful are asked to give up something for their sins) in the Greek Orthodox religious calendar, and that Cypriots are being asked to give up some of their wealth on that very day.

You don’t have to be very cynical to recognize that as political a**-covering on a grand scale.

More On Cyprus

Tim Worstall notes that Cyprus has a form of deposit insurance, guaranteed by its government. And that the Eurozone is forcing the government to renege on that promise.

This is a big deal: deposit insurance is what stops bank runs.

And one of the big positive (and negative) features of joining the Eurozone is that people can bank with banks in other countries.

It will be interesting to see if the Cypriots make runs on foreign banks, and if that transmits the problem.

Worstall notes at the bottom that when Iceland’s banking system collapsed in 2008-9, its government did honor its deposit insurance. So this policy will make the Cypriot situation different from others.

P.S. Forgot to mention in earlier posts that depositors funds are being replaced with equity claims on the banks. So this is a bit like the Obama bailout of GM, where the unions were given equity in the bankrupt company in the hopes that it might perk up in the future.

A Little More On Cyprus

Some of It Was True … has been following the situation more closely.

… those who noted that the Cyprus bailout took place ahead of a local bank holiday on Monday were onto something.

Cyprus was a British colony, and its financial system is modeled after the British system. In Britain, bank holidays are regular holidays that can be used to give regulators extra time to make sure that the books of the banks are in order. So doing this move in Cyprus when they have a bank holiday may be a sign that banks will be shuttered or reorganized too.

Four choices have been faced ahead of every [Eurozone] bailout; screw the local taxpayer; screw the creditors; the Germans pay for everything; or fiddle the numbers in the hope the crisis just goes away. The Irish programme rested heavily on option 1, the Portuguese and Greek (especially) on options 1 & 4. Hopes for option 3 (ESM [kind of an EU version of our TARP] buys shares in the banks) are dead in the water. This programme indicates option 2 gaining in strength, 3 & 4 sinking.

It actually may be a good thing if option 2 is gaining steam, since there are many deep pockets moving presumably ill-gotten money through the European backwaters.

… senior bank bondholders are being protected to save other banks. But this means that Cypriot depositors are being sacrificed that depositors in the rest of Europe can be protected.

This is definitely a move to spread the pain to prevent a contagious spread of the Cypriot crisis to banks in other countries. This then is similar to the U.S. bailout of AIG in 2008; too many foreign financial systems were dependent on the cash flows coming out of that operation, making it risky for it to just be near the borderline of bankruptcy.

And the Russians? … I would guess the thinking is that 10% is seen as a cost of doing business when it comes to money laundering … If the infliction of losses on small depositors has a purpose, it’s probably to reassure the Russians that they are not being discriminated against. Yes, I may have thrown up a little in my mouth typing that.


My own judgement is that inflicting costs on depositors in principle is an extremely important one, but that not sparing the small depositor is worse …

Perhaps so. The long-term problem is that if you don’t do something like this, you end up with zombie banks, that face no risk from taking extravagant gambles: heads they win, tails … well … the rest of us pay.

The bottom line for us here in the U.S. is that you need to hope that this sort of move does preclude contagion, because that can reach back to our financial system too.

Via Marginal Revolution.


Big news out of Cyprus this weekend. Depositors at Cypriot banks had 10% of their deposits taken away from them overnight.

Backstory: Cyprus is a large island in the eastern Mediterranean. Over half of it is a Greek-speaking independent country called Cyprus. Cyprus is the third smallest country in the European Union, and the third smallest in the Eurozone. During the hottest part of the Eurozone crisis of the last few years, Cyprus was quiet. But, it’s moved to the top of the problem list over the last year.

The issue with Cyprus is an unstable financial sector. Many Russian oligarchs (who can get their wealth out of Russia) park it in banks in sunny Cyprus. A tax haven with a lot of cash inflows is not a recipe for good financial decisions. And where did Greek-speaking Cypriot bankers prefer to invest their deposits? Nearby, in economic basket-case Greece!*

One of the things macroeconomists worry about with financial crises is that they are contagious. In the case of Greece and Cyprus, last spring, holders of Greek government bonds were forced to accept a write-down of the maturity value of their outstanding bonds in exchange for new loans to the government. Basically, the story for those investors was: the government you invested in put its own economy in the toilet, so your bonds aren’t worth much now, and if the new loans help raise the economy out of the toilet, you shouldn’t be able to benefit from that. This is called a “haircut”. The thing is, one of the big losers in this particular haircut was Cypriot banks.

So, for a year, Cyprus has been teetering, with the government supporting its banks with emergency loans — often financed by loans from the Russian government. It’s been clear for a while that Cyprus needs a more formal bailout from the EU.

Except the EU is dominated by financially sound Germany, which is getting tired of this. It doesn’t help that bailing out Cyprus amounts to bailing out rich Russian individuals who probably got their money from graft in Russia, supported in part by cash flows from high natural gas prices paid by  … the Germans!

This time they’ve come up with a new haircut. All Cypriot bank depositors learned, after the close of business on Friday evening, that they will lose 10% of their deposits on large accounts, and 7% of small accounts. The Eurozone imposed this measure to fund about 1/3 of a $17B rescue plan that will help keep Cyprus in the Eurozone.

Of course, there were runs on ATMs on Friday. It isn’t clear if the banks will be able reopen successfully on Monday. And the legislature of Cyprus has yet to approve the move. But, how can they turn it down when the bailout package is conditional on it? Since they’re the ones who have to enforce it, you’ve got to think that they implicitly agreed to go along with this before it became official, and that they just have to make that approval explicit.

Here’s a negative view of this policy move. Here is a more positive one. Both agree we are in uncharted waters.

Do note that it is good when policymakers try new things, especially if the old way didn’t work. On the other hand, surprises like this are a big deal: remember how the American economy responded in 2008 to the government’s decision not to bail out Lehmann Brothers, as they had other failing financial institutions.

* Cyprus has not been helped by the destruction from one of the largest accidental explosions in history.

Wednesday, March 13, 2013

If the Labor Market Is So Poor, Why Are Overtime Hours So Strong?


The last time U.S. factory workers put in longer weeks than they averaged in February, Rosie the Riveter was on the assembly line and American GIs were fighting Nazis in Europe. …

“The workweeks are very, very, very long right now, on a historical basis,” said Michael Montgomery, U.S. economist at IHS Global Insight in Lexington, Massachusetts. …

Production workers averaged 41.9 hours a week in February, Labor Department data showed last week. That tied December 1997 and January 1998 as the most since May 1944, when full wartime production was pulling more women into factories …

This is yet more evidence that we have a labor market that has split between those who are employed and employable at current labor costs, and those who are not. We don’t seem to be having any trouble at all with the first group. Therefore, high and lingering unemployment appears to be a problem with either the benefits that a person brings to their potential employer, or the costs that they impose upon them.

Many people regard the following as a description of what’s wrong with the economy:

Another potential nudge to raise hiring is that wages as a percentage of GDP are near a record low, Labor Department data show. From the early 1950s until 1975, wages were at least 50 percent of GDP. They hit a record low of 43.6 percent in last year’s third quarter and ended the year at 43.9 percent.

I regard that as less of an issue. Compensation of employees is near historical norms. If compensation is normal, and wages are down, then the difference — benefits — must have gone up.

“We’ve reached a point where they can’t really reduce wages anymore,” Howard Ward, chief investment officer at Gamco Investors Inc., said in a March 11 interview on Bloomberg Television’s “Surveillance.” …

Don’t bet on it. Most employee benefits are still healthcare costs, and no matter what the White House says, we do not and will not have those under control any time soon. Mark my word, the share of wages will continue to drop.

Via Marginal Revolution.

Sunday, March 10, 2013

Unserious Obama

This is from an editorial entitled “Obama's Not So Grand Offer” from the March 7 issue of The Wall Street Journal — so you know it won’t be pro-Obama.

It’s about the lack of seriousness with which Obama approaches government budget problems (having said that, we’re in the position we’re in because just about no one has approached them seriously for decades … so why should Obama be any different),

Here’s an idea we’re going to come back to later in the semester:

Mr. Obama says he's prepared to make tough choices on Medicare and other entitlements … with his plan to save $400 billion. …

To put $400 billion in perspective, Medicare's long-term "unfunded liability"—the gap between promised benefits and the program's ability to fund them—is roughly $42.7 trillion. …

You think the government has a spending problem now? What about the far larger amount of spending they’ve already signed off on, without figuring how to pay for it (or even if they can)?

Earlier in the semester I explained how the CPI is constructed with the Laspeyres’ method, which is biased on the high side. This means that every time social security payments are adjusted for inflation they are adjusted upward by too much: in short, a free lunch for seniors:

Outside of the left-right fringes, there is broad bipartisan agreement about changing the consumer price index slightly to more accurately measure real inflation in the economy. … But Mr. Obama can't bring himself to support it, while pretending that he does.

Known as "chain weighted" CPI, this index reflects how consumers change their purchasing habits when prices change. The Congressional Budget Office says Social Security and other benefits would fall by about $216 billion over a decade.

So Obama is against making sure that seniors aren’t compensated less for the costs of inflation than the taxpayers who usually aren’t compensated at all. That should tell you who’s side he’s on.

These last two points are just trivia compared to the rest:

… Some $120 billion, or 30% of the package [devoted to reducing healthcare spending], comes from a catch-all category called "other health savings" filled with initiatives that are so micro the White House doesn't itemize them. [emphasis added]

Yep … $120B they can’t even be bothered to itemize. You know … when I catch my kids in a fib the first thing I ask them is to start itemizing the details. It works every time.

Then there’s this part of the plan:

He can save $45 billion in part by reducing "improper payments," the Washington euphemism for cutting checks in the wrong amount, to the wrong person, for the wrong reason or all three.

It's good to know the President is in favor of the bureaucracies not accidentally sending money to people who didn't earn it …

That one’s a real sign they’re thinking outside the box.

Oh Boy

The more we study the labor market in the wake of the Great Recession, the weirder and more disturbing it gets.

First, we had a good employment and unemployment report last week: 236K more jobs (that’s a pretty good number), and the unemployment rate dropping to 7.7% as it continues a typically-paced downward crawl.

But, here’s the problem:

The number of multiple jobholders rose by 340,000 this month, to 7.26 million — a rise larger than the headline rise in payrolls. Which means that one way of looking at this report is to say that all of the new jobs created were second or third jobs, going to people who were already employed elsewhere. Meanwhile, the number of people unemployed for six months or longer went up by 89,000 people this month, to 4.8 million, and the average duration of unemployment also rose, to 36.9 weeks from 35.3 weeks.

This is really damning evidence that what we’re seeing is a breakdown in the labor market for certain people only.

Leave aside for a moment claims that some people have to work more than one job: that’s a diversion that you shouldn’t pay much attention to.

From the perspective of the employer, the marginal cost of employing a new person is the same whether they have zero, one, or more, jobs. And yet they are choosing the people who already have a job.

So what employers are telling us is that the marginal opportunity cost of hiring someone who already has a job is lower than the marginal opportunity cost of someone who does not have a job. This isn’t about money — it’s about all the pain in the a** characteristics that employees bring with them, and that employers agree to put up with when they hire someone.

Now return to the incentives to the applicant. Think about it: if they need a second job, is it possible for the marginal benefit of the second job to exceed that of the first job? Probably not. And what if they don’t have a job at all? You’d like to think there is a marginal benefit in moving from unemployed to employed (and I think that there is), but it clearly can’t be that large.

Via Marginal Revolution.

Monday, March 4, 2013

Sequester Graphic

I like the image at the top left, because it gives a good sense of the relative size of what’s cut and what’s not:


Note that there is some debate about whether the smallest black square should fall within the large brown square as shown here, or whether it should be lumped with the middle-sized black square. If you do the latter, the two black squares would be the same size (that’s the breakdown that I used in last week’s Powerpoint presentation).

The is from a piece entitled “”Cuts Roll In as Time Runs Out” which appeared in the March 1 issue of The Wall Street Journal.

Sunday, March 3, 2013

Get Used to the EMU as a Source of Problems

Macroeconomic problems in the EMU are quiescent now; don’t get used to that — this is going to be in the news for your adult life (kind of like racism in the U.S. or violence in the Middle East).

A good primer on this is the interview entitled “Why the Euro Crisis Isn't Over” in the February 23 issue of The Wall Street Journal.

In macropolitics, there’s always a lot of fingerpointing about why people didn’t forecast this or that. The thing is, they usually did:

… Bernard Connolly foretold the misery that awaited the European Union. Given that he was an instrumental figure in the EU bureaucracy and publicly expressed his doubts in a book called "The Rotten Heart of Europe," he was promptly fired. Mr. Connolly takes no pleasure now in having seen his prediction come true. And he takes no comfort in the view, prevalent in many quarters, that the EU has passed through the worst of its crisis …

The first solution is the one used in the U.S., the second one is what Italy is leaning towards:

Two immediate solutions present themselves, Mr. Connolly says, neither appetizing. Either Germany pays "something like 10% of German GDP a year, every year, forever" to the crisis-hit countries to keep them in the euro. Or the economy gets so bad in Greece or Spain or elsewhere that voters finally say, " 'Well, we'll chuck the whole lot of you out.'

Maybe he knows what he’s talking about:

In 2003 … Mr. Connolly described the U.S. economy as a debt-driven Ponzi scheme and predicted that interest rates would have to fall even further in the next cycle to keep the scheme going.

As per usual, politicians and the media focus too much on the symptoms:

… "both the sovereign-debt crisis and the banking crisis are symptoms, not causes. And the underlying problem has been that there was a massive bubble generated in the world as a whole by monetary policy—but particularly in the euro zone" by European Central Bank policy.

"And what kept the stuff flowing in," Mr. Connolly says, "was essentially the belief, 'Well, yes, there is a high rate of return in construction.' " That in turn depended on "ongoing expectations" about house appreciation "that were in some ways not dissimilar to what was happening to the United States in the middle of the last decade. But it was much bigger."

How much bigger? "If you scale housing starts by population, then the housing boom in Spain and Ireland was something like three or four times as intense as the peak of the boom in the U.S. That's mind boggling."

And here’s what I want you to think about. Several times this semester I’ve pointed to the problem with long-term unemployment in the U.S. In Europe, the problem is countries that aren’t competitive, in the U.S. the problem is groups within the labor force that aren’t competitive. So, consider this quote, and draw an analogy between how it talks about countries within Europe, and how we should talk about some workers in the U.S.

That torrent of money drove up wages far faster than productivity improved, while cheap borrowing led to major deficit spending. After the 2008 financial panic, the bubble inevitably burst.

So what's needed now is not simply a fiscal retrenchment, or even a retrenchment along with banking reform. Wages and prices have to adjust to something like their pre-bubble trends, Mr. Connolly says, to make these economies competitive again.

If it’s correct to draw this analogy, then the U.S. is doing fiscal retrenchment (and it won’t be enough) with banking reform (which won’t be enough) because the bubble was in the real wages of people tied to the construction, housing, and real estate finance sectors.

Saturday, March 2, 2013

More On Sequestration

Peter pointed out a front page piece in the February 27 issue of The New York Times entitled “Austerity Kills Government Jobs as Cuts to Budgets Loom” that made just about the same points I’d made in Monday’s lecture.

… Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years.

The above point is not making any claims about the multiplier, just pointing out that from an accounting perspective, government spending on the stuff that counts (in a Keynesian sense) is down about 7%. In turn, that is about 20% of the U.S. economy, so spending is contributing to about a 2% drop in real GDP (see Section1, Table 1.1.6).

13-02-27 New York Times Capture of Government Purchases of Goods and Services

As always, they have an informative chart (copy shown above). Note that the last time the Republicans went through with something like this is shown in 1995 … in large measure, that increase Clinton’s popularity prior to his reelection.

Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II.

13-02-27 New York Times Capture of Government Employment

Here’s a chart of government employment relative to the previous peak of the business cycle (copy shown above).

That amount corresponds to adding about 0.4% to the unemployment rate. Here they make the same point I’ve made a few times in class (they just don’t have the guts to call it the Obama bait-and-switch like I do ;)

Total government spending continues to increase, but those broader figures include benefit programs like Social Security. Government purchases and investments expand the nation’s economy, just as private sector transactions do, while benefit programs move money from one group of people to another without directly expanding economic activity.

… sequestration mostly spares Medicare and Medicaid, the health care programs that are the primary reason federal spending is projected to increase.

Then they quote Tyler Cowen (a professor from George Mason University, who blogs at Marginal Revolution, and writes a column for The New York Times):

“People focus on the upfront cost and they don’t think through the whole timeline,” said Tyler Cowen, an economist at George Mason University and an occasional contributor to the Sunday Business section of The New York Times. “You have to cut spending within the next 10 years anyway. It may be time to take some lumps.”

I find nothing wrong with that view. I think sequestration is dumb along many dimensions and useless along others … but I have no trouble with beginning to end the charade that government does much other than write checks.

Italy and Its Election

The Eurozone crisis (see here, here, here, here, or here) has settled down a bit over the past year, but none of the fundamental problems have been solved.

Italy is the 3rd largest economy (of the big three) in the Eurozone, and the biggest of the PIIGS that are in difficulty. In short, if Italy gets worse, it will be a much bigger problem than Greece has been … and Greece’s problems have been big news for a couple of years now.

Italy’s general problem is similar to other developed economies, they’re just further along: an aging population has voted itself too much entitlement spending, and the government is having trouble financing that. Italy’s specific problem is that it is far more difficult to fire workers there than in other countries.

Fourteen months ago, Italy formed a new government with an economist, Mario Monti, at the top (yeah). But this probably will just give economists a bad name, since the economic problems are a symptom with political causes: Monti replaced Berlusconi, a sleaze who retired to face his many corruption charges.

More importantly, Monti is more a creature of the European Union government in Brussels, since he has held positions with them since the early 90’s.

Anyway, Italy has a parliamentary system: imagine if America had no presidential elections, but the majority party in Congress was allowed to choose the president (usually called a prime minister in a parliamentary system) and cabinet. Italy also has more than 2 political parties, and they come and go more frequently, so coalitions of larger minority parties usually end up hammering out a new government.

Italy just had an election. It was widely seen as a referendum on the reforms instituted by Monti to improve Italy’s ability to be a stabilizing rather than destabilizing part of the Eurozone. These included higher taxes (particularly taxes on the not-very-liquid wealth held in the form of family homes), efforts to make the labor market more flexible, and an increase in the retirement age.

Monti’s party lost. In fact, he came in fourth out of four. Worse, he came behind Berlusconi (reappearing like a bad penny) and an instigator named Beppe Grillo.

Grillo is widely reported in America to be a comedian. This isn’t quite right. He is an older sitcom actor, who got political and was banned from Italian TV (no doubt the politicians got him censored): think a combination of Tim Allen and Jon Stewart. His blog is widely read (English version). His politics are primarily “throw them all out, they’re all crooks and bums.” So, he’s a combo of Tim Allen, Jon Stewart, and Ross Perot.

It isn’t clear how this is all going to turn out. What is clear is the analogy: the Eurozone is like a dysfunctional family in a reality TV show, Italy tried to clean up its act, and it just checked itself out of rehab. Stay tuned for trouble.


Italians born in 1970, who are about 43 now, will pay 50% more in taxes as a percentage of their lifetime income than those born in 1952, according to research from the Bank of Italy and the University of Verona. The research also found they will receive half the pension benefits that Italy’s 60-somethings are getting or are poised to get.

No wonder they want to throw the bums out.

Via Marginal Revolution quoting an article entitled “'Lost Generation' Feels Italy's Fiscal Squeeze” from The Wall Street Journal.