The European debt crisis is inspiring public radio to literary analysis. Last week NPR’s Planet Money put the French-German relationship into a “threepenny opera”:

All

Everyone is counting on you
You’ve got the money
We’ve got the debt (Oh yes, we’ve got a lot of debt!)
And do we need a bailout—you bet

Germany

Zat’s it, I’ve had enough
Looks like it’s time now for me to leave…

France

Oh?

Germany

Vhy is ze door locked? You must let me out.

France

Dear when the times are tough
It’s better to give zan to receive

Then Monday Marketplace Radio turned to classics professor Emily Allen Hornblower and economist Bill Lastrapes to discuss Greek debt as classical tragedy—Oedipus? The ant and the grasshopper?

Loyal Cato readers will recognize Bill Lastrapes as the coauthor of the much-discussed Cato Working Paper “Has the Fed Been a Failure?”

And then, if you prefer prose and sober analysis to literary analogies, let me recommend Holman Jenkins’s perceptive column on why Europe hasn’t solved its crisis yet, which unfortunately appeared in the less-read Saturday edition of the Wall Street Journal. (OK, not less read than Cato-at-Liberty, but probably less read than the weekday Journal.)

Neither leader has an incentive to sacrifice what have become vital and divergent interests to produce a credible bailout plan for Europe. To simplify, German voters don’t want to bail out French banks, and the French government can’t afford to bail out French banks, when and if the long-awaited Greek default is allowed to happen….

There is another savior in the wings, of course, the European Central Bank. But the ECB has no incentive to betray in advance its willingness to get France and Germany off the hook by printing money to keep Europe’s heavily indebted governments afloat. Yet all know this is the outcome politicians are stalling for. This is the outcome markets are relying on, and why they haven’t crashed.

All are waiting for some market ruction hairy enough that the central bank will cast aside every political and legal restraint in order to save the euro….

And then the crisis will be over? Not by a long shot.

All these “solvent” countries and their banks will be dependent on the ECB to keep them “solvent,” a reality that can only lead to entrenched inflation across the European economy. That is, unless these governments undertake heroic reforms quickly to restore themselves to the good graces of the global bond market so they can stand up again without the ECB’s visible help.

It’s just conceivable that this might happen—that countries on the ECB life-support might put their nose to the grindstone to make good on their debts, held by ECB and others. Or they might just resume the game of chicken with German taxpayers, albeit in a new form, implicitly demanding that Germany bail out the ECB before the bank is forced thoroughly to debauch the continent’s common currency, the euro.

The Euro Crisis in Prose and Poetry is a post from Cato @ Liberty - Cato Institute Blog

Tattoo it on your forearm—or better, that of your favorite legislator—for easy reference in the next debate over wiretapping: government surveillance is a security breach—by definition and by design. The latest evidence of this comes from Germany, where there’s growing furor over a hacker group’s allegations that government-designed Trojan Horse spyware is not only insecure, but packed with functions that exceed the limits of German law:

On Saturday, the CCC (the hacker group) announced that it had been given hard drives containing “state spying software,” which had allegedly been used by German investigators to carry out surveillance of Internet communication. The organization had analyzed the software and found it to be full of defects. They also found that it transmitted information via a server located in the United States. As well as its surveillance functions, it could be used to plant files on an individual’s computer. It was also not sufficiently protected, so that third parties with the necessary technical skills could hijack the Trojan horse’s functions for their own ends. The software possibly violated German law, the organization said.

Back in 2004–2005, software designed to facilitate police wiretaps was exploited by unknown parties to intercept the communications of dozens of top political officials in Greece. And just last year, we saw an attack on Google’s e-mail system targeting Chinese dissidents, which some sources have claimed was carried out by compromising a backend interface designed for law enforcement.

Any communications architecture that is designed to facilitate outsider access to communications—for all the most noble reasons—is necessarily more vulnerable to malicious interception as a result. That’s why technologists have looked with justified skepticism on periodic calls from intelligence agencies to redesign data networks for their convenience. At least in this case, the vulnerability is limited to specific target computers on which the malware has been installed. Increasingly, governments want their spyware installed at the switches—making for a more attractive target, and more catastrophic harm in the event of a successful attack.

The Lives of Others 2.0 is a post from Cato @ Liberty - Cato Institute Blog

As Congress and the White House continue to debate the future of Fannie Mae and Freddie Mac, one of the oft heard concerns is that if we eliminate all the various mortgage subsidies in our system, then the cost of a mortgage will increase.  There certainly is a basic logic to that concern.  After all, why have subsidies if they don’t lower the price of the subsidized good.  Of course some, if not all, of said subsidy could be eaten up by the providers/producers of that good.

All this begs the question, with all the subsidies we have for mortgage finance, are mortgages actually cheaper in the U.S.?  While not perfect, one way of answering that question is to look at mortgage rates in other countries.   Although every developed country has some sort of government intervention in their mortgage market, almost all have considerably less support then that provided by the U.S.  (For a useful comparison of international differences see Michael Lea’s paper).

The European Mortgage Federation regularly collects information on mortgage pricing by EU countries.   The latest complete annual data from the EMF’s Hypostat database is for 2009, with at least a decade of historical data.

A quick glance reveals that mortgage rates in most European countries are not all that different than rates in the U.S.  For instance in 2009, the U.S. 30 year mortgage rate was, on average, 5.04; whereas mortgages in France averaged 4.6 and those in Germany averaged 4.29.  In the UK, the average was 4.34.

Part of this difference is driven by product type.  For instance, in France, most mortgages tend to be 15 year, which one would expect to be cheaper than a 30 year.  But the French 15 year rate of 4.6 isn’t all that different from the current U.S. 15 year rate of 4.1.  As lending rates are usually bench-marked off the rate on government debt, part of the slightly higher rate in some European countries is due to their higher government borrowing rate.  If we instead measure mortgage costs as a spread over government funding costs (as reported by the OECD), then many European countries look more affordable than the U.S.  For instance, German mortgages price about 100 basis points over long-term German govt debt; whereas U.S. mortgages price about 140 basis points over long-term U.S. government debt.

I don’t expect these numbers to settle the debate.  A variety of other costs, such as points paid or required downpayments, differ dramatically across countries.  Unfortunately that data does not seem to be readily available.  What the preceding comparison does suggest, however, is that even without Fannie and Freddie, U.S. mortgage rates aren’t necessarily going to be a lot higher.

Are Mortgages Cheaper in the U.S.? is a post from Cato @ Liberty - Cato Institute Blog

Early in the Obama Administration, there was an amusing/embarrassing incident when Chinese students laughed at Treasury Secretary Geithner when he claimed the United States had a strong-dollar policy.

I suspect that even Geithner would be smart enough to avoid such a claim today, not after the Fed’s announcement (with the full support of the White House and Treasury) that it would flood the economy with $600 billion of hot money. Here’s what my colleague Alan Reynolds wrote in the Wall Street Journal about Bernanke’s policy.

Mr. Bernanke…believes (contrary to our past experience with stagflation) that inflation is no danger thanks to economic slack (high unemployment). He reasons that if people can nonetheless be persuaded to expect higher inflation, regardless of the slack, that means interest rates will appear even lower in real terms. If that worked as planned, lower real interest rates would supposedly fix our hangover from the last Fed-financed borrowing binge by encouraging more borrowing. This whole scheme raises nagging questions. Why would domestic investors accept a lower yield on bonds if they expect higher inflation? And why would foreign investors accept a lower yield on U.S. bonds if they expect exchange rate losses on dollar-denominated securities? Why wouldn’t intelligent people shift their investments toward commodities or related stocks (such as mining and related machinery) and either shun, or sell short, long-term Treasurys? And if they did that, how could it possibly help the economy?

The rest of the world seems to share these concerns. The Germans are not big fans of America’s binge of borrowing and easy money. Here’s what Finance Minister Wolfgang Schäuble had to say in a recent interview.

The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. …I seriously doubt that it makes sense to pump unlimited amounts of money into the markets. There is no lack of liquidity in the US economy, which is why I don’t recognize the economic argument behind this measure. …The Fed’s decisions bring more uncertainty to the global economy. …It’s inconsistent for the Americans to accuse the Chinese of manipulating exchange rates and then to artificially depress the dollar exchange rate by printing money.

The comment about borrowed money has a bit of hypocrisy since German government debt is not much lower than it is in the United States, but the Finance Minister surely is correct about monetary policy. And speaking of China, we now have the odd situation of a Chinese rating agency downgrading U.S. government debt.

The United States has lost its double-A credit rating with Dagong Global Credit Rating Co., Ltd., the first domestic rating agency in China, due to its new round of quantitative easing policy. Dagong Global on Tuesday downgraded the local and foreign currency long-term sovereign credit rating of the US by one level to A+ from previous AA with “negative” outlook.

This development shold be taken with a giant grain of salt, as explained by a Wall Street Journal blogger. Nonetheless, the fact that the China-based agency thought this was a smart tactic must say something about how the rest of the world is beginning to perceive America.

Simply stated, Obama is following Jimmy Carter-style economic policy, so nobody should be surprised if the result is 1970s-style stagflation.

Will the Federal Reserve’s Easy-Money Policy Turn the United States into a Global Laughingstock? is a post from Cato @ Liberty - Cato Institute Blog

There’s an old joke that if you owe a bank $10,000, you have a problem, but if you owe a bank $10,000,000, the bank has a problem. The Greek government certainly seems to have that attitude. Short-sighted and corrupt politicians in Athens have spent their nation into a fiscal ditch and they now want to mooch from both the IMF and other European nations (especially Germany). The German Prime Minister (if only for political reasons) is talking tough, saying that Greece should do more to reduce subsidies and handouts. Why should Germans work until age 67, after all, so Greeks can enjoy overpaid government jobs and retire at age 61? So what is the response from the Greeks? Amazingly, one of the politicians had the gall to say his nation “cannot accept” further wage cuts. Here’s an excerpt from the Daily Telegraph:

It is far from clear whether Athens will agree to further austerity as strikes hit the country day after day. Andreas Loverdos, Greece’s labour minister, said the EU-IMF team wants further wages cuts. “We cannot accept that.” Greece knows it can opt for default at any time, setting off an EMU-wide crisis and bringing down Europe’s banks. It also knows that key figures in the Bundestag favour debt restructuring. ‘Those who chased high yield by purchasing Greek debt must share the costs,’ said Volker Wissing, chair of Bundestag’s finance committee. Leo Dautzenberg from the Christian Democrats said banks should prepare for a `haircut’ of up to 50pc. The ECB, Brussels, and the IMF have been fighting feverishly to head off such a move, fearing a financial chain-reaction.

If the Germans have any brains and pride, they will tell the Greeks to go jump in a lake (other phrases come to mind, but this is a family-oriented blog). And if this means that German banks take a loss on their holdings of Greek government debt, there’s a silver lining to that dark cloud since it is time for financial institutions to realize that they should not be lending so much money to corrupt and wasteful governments.

Greek Chutzpah is a post from Cato @ Liberty - Cato Institute Blog

Three items in the news this week remind us why we should be glad we live in a more global economy. While American consumers remain cautious, American companies and workers are finding increasing opportunities in markets abroad:

• Sales of General Motors vehicles continue to slump in the United States, but they are surging in China. The company announced this week that sales in China of GM-branded cars and trucks were up 67 percent in 2009, to 1.8 million vehicles. If current trends continue, within a year or two GM will be selling more vehicles in China than in the United States.
• James Cameron’s 3-D movie spectacular “Avatar” just surpassed $1 billion in global box-office sales. Two-thirds of its revenue has come from abroad, with France, Germany, and Russia the leading markets. This has been a growing pattern for U.S. films. Hollywood—which loves to skewer business and capitalism—is thriving in a global market.
• Since 2003, the middle class in Brazil has grown by 32 million. As the Washington Post reports, “Once hobbled with high inflation and perennially susceptible to worldwide crises, Brazil now has a vibrant consumer market …” Brazil’s overall economy is bigger than either India or Russia, and its per-capita GDP is nearly double that of China.

As I note in my Cato book Mad about Trade, American companies and workers will find their best opportunities in the future by selling to the emerging global middle class in Brazil, China, India and elsewhere. Without access to more robust markets abroad, the Great Recession of 2008-09 would have been more like the Great Depression.

Global Markets Keep U.S. Economy Afloat is a post from Cato @ Liberty - Cato Institute Blog

German politicians apparently have been hot on the trail of evil evaders who did not pay tax on coffee ordered over the Internet. To address this terrible crisis, the government spent 800,000 euro and tracked down 4000 dangerous criminals. Shockingly, a few cynics, including the folks at Reuters, are trying to diminish this triumph by pointing out that the government spent 30 times more than it collected:

Germany spent more than 30 times as much collecting taxes on coffee beans ordered online from abroad than it received in the tax revenues, the accounting office said on Tuesday. Some 4,000 Germans who bought coffee over the Internet from other EU countries but failed to pay the coffee tax have been charged between a few cents to 10 euros ($14.81) in taxes and fees, said Dieter Engels, head of Germany’s Federal Accounting Office. Tax collectors ended up with just 25,000 euros, way below the 800,000 euros in the costs of staff charged with collecting the payments, Engels said.

Great Moments in Foreign Government is a post from Cato @ Liberty - Cato Institute Blog

On his personal blog, Bottom-Up, Cato adjunct scholar Timothy B. Lee compares the Berlin Wall to the wall along the southern border of the United States. There are differences, of course, but important similarities too.

[I]t’s jarring that less than 20 years after one Republican president gave a stirring speech about the barbarity of erecting a wall to trap millions of people in a country they wanted to leave, another Republican president signed legislation to do just that. Conservatives, of course, bristle at analogies between East Germany’s wall and our own, but they seem unable to explain how they actually differ.

Judging by its ‘wall’ policies, the United States appears to value the freedom of Europeans more than Americans.

Mr. Obama, Tear Down This Wall is a post from Cato @ Liberty - Cato Institute Blog

A handful of guilt-ridden wealthy Germans are asking to pay more tax according to a BBC report. They could just give their money to the state, of course, but they want to impose their self-loathing policies on all successful Germans. The amusing part of the story is that these dilettantes were puzzled that so few people showed up to their protest. Maybe next time they could do some real redistribution and announce that they will be tossing real banknotes in the air:

A group of rich Germans has launched a petition calling for the government to make wealthy people pay higher taxes. The group say they have more money than they need, and the extra revenue could fund economic and social programmes…

Simply donating money to deal with the problems is not enough, they want a change in the whole approach.

…The man behind the petition, Dieter Lehmkuhl, told Berlin’s Tagesspiegel that there were 2.2 million people in Germany with a fortune of more than 500,000 euros. If they all paid the tax for two years, Germany could raise 100bn euros to fund ecological programmes, education and social projects, said the retired doctor and heir to a brewery. Signatory Peter Vollmer told AFP news agency he was supporting the proposal because he had inherited “a lot of money I do not need”. He said the tax would be “a viable and socially acceptable way out of the flagrant budget crisis”. The group held a demonstration in Berlin on Wednesday to draw attention to their plans, throwing fake banknotes into the air. Mr Vollmer said it was “really strange that so few people came”.

But not all tormented rich people live in Germany. A few months ago, I had a chance to debate an American version of this strange subspecies.

German Masochists is a post from Cato @ Liberty - Cato Institute Blog

The United States is going to cut back on airstrikes in Afghanistan, according to the new commander there, Gen. Stanley McChrystal. This decision comes on the heels of Central Command’s release (late on a Friday afternoon) of the executive summary of a report on the killing of dozens — at least — of civilians in Farah Province in Western Afghanistan. On May 4, a B-1B providing air support to US and Afghan forces there bombed some buildings, thinking that they contained insurgents. The buildings were apparently full of civilians.

Everyone seems to think this is a wise policy shift. The center of gravity in an insurgency, we’re often told, is the population. You need their support to find and defeat insurgents. Killing people undermines their support for the occupier and the government. You often hear the same thing about airstrikes in Pakistan.

This is a sensible argument, but it has some problems.  For one, empirics to support it are hard to come by. Second, it isn’t obvious that people cooperate with occupiers or governments because they like them. Support may come instead from the mix of incentives — coercive and economic — that the population faces.  The power to reward and punish behavior probably matters more in generating cooperation than feelings of loyalty, although they are not mutually exclusive.

You might respond that it is simply immoral to kill innocent people, whatever the strategic effects. That takes us to the real trouble with the critique of airstrikes, which is the idea that you can fight clean wars.

The accidental killing of Afghan civilians is a tragedy we should limit (one way to do so might be to simply stop using bombers for close air support).  It is also an inevitable consequence of fighting a war in Afghanistan. Troops are going to use plentiful and occasionally indiscriminate firepower to defend themselves. This problem can be mitigated but not solved. You should not support the war in Afghanistan if you cannot support killing innocent people in prosecuting it. As Harvey Sapolsky (my professor at MIT) points out on his new blog, the allies killed 50,000 French civilians in the course of liberating France in World War II. Today precision munitions save many civilians, but, along with euphemistic words like state-building, they threaten to delude us into thinking that we can fight antiseptic wars that adhere to liberal norms. (The situation is even worse in Germany, where they are arguing about whether to call what they are doing in Afghanistan a war).

As Sapolsky puts it:

Air power is our advantage, especially in a country where our forces are spread thin and the distances are large. Precautions have limited greatly the number of weapons dropped and how air power is employed. But only a little deception apparently is needed to put this advantage in jeopardy. Soldiers are still dying in Afghanistan. If there is no will to inflict casualties then there should be no will in absorbing them. Try as we may to avoid it, war kills the innocent.

For the source of this post’s title see the first article (pdf) here.

War without Killing? is a post from Cato @ Liberty - Cato Institute Blog

The Daily Mail reports that a Romanian student who sold her virginity to the highest bidder as part of an online auction may wind up keeping less than half of her earnings thanks to Germany’s oppressive tax system:

Tax authorities in Germany are poised to claim 50 per cent of the money that a teenage student earned for ‘auctioning’ her virginity… Romanian-born Alina Percea, who is a student in Germany, was paid £8,800 in cash for a weekend of sex with the Italian businessman after she auctioned her virginity online. But tax officials in Berlin regard the 18-year-old’s act as ‘nothing more than prostitution’. Prostitution is legal in Germany — but it is heavily taxed. …It also emerged that, because Alina earned so much in such a short time, she may even be liable for a hefty VAT bill too. VAT in Germany works out to 19 per cent, meaning the sale of her virginity could land her with just over £3,000 in the end.

Tax Bureaucrats Take the Fun out of Everything is a post from Cato @ Liberty - Cato Institute Blog