Political Animal


June 11, 2012 10:52 AM Spanish Bailout Roundup

By Ryan Cooper

The big news today is the €100 billion bailout that the European Central Bank sent the way of tottering Spanish banks. Matt Yglesias says this is a big step forward:

The key point is that though Spain will still have to abide by its existing austerity-oriented fiscal commitments, there are no new strings attached in terms of supervision of Spanish fiscal policy by Brussels, Frankfurt, or Berlin. That’s contrary to the precedent set in the earlier bailouts of Ireland, Greece, and Portugal and contrary to commitments made previously by Angela Merkel and the leaders of some of the smaller European countries when they created the bailout funds that are being used…

On the other hand, Paul Krugman is a bit more skeptical:

So there’s nothing necessarily wrong with this latest bailout (although a lot depends on the details). What’s striking, however, is that even as European leaders were putting together this rescue, they were signaling strongly that they have no intention of changing the policies that have left almost a quarter of Spain’s workers — and more than half its young people — jobless.

He notes also that the market for Spanish bonds is still moving the wrong direction. Similarly, Duncan Black points out that this bailout will be added to Spain’s national debt (about 10% of GDP), and that for $100 billion you could give hire half of Spain’s unemployed for a year at 34,000 euros. Wolfgang Münchau agrees, saying “The eurozone must recognise that some form of debt relief, or default, will be inevitable.”

Whenever something like this happens, I’m always reminded of this terrifying Steve Randy Waldman post. I can’t quite believe it in full but the world is doing its best to convince me otherwise:

…the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational.

If that is indeed their preference in the Eurozone, it might be the end of them. Brad Plumer observes today that the bailout calmed the markets…for precisely four hours and 40 minutes.

Ryan Cooper is a National Correspondent at The Week, and a former web editor of the Washington Monthly. Find him on Twitter: @ryanlcooper


  • c u n d gulag on June 11, 2012 11:43 AM:

    These are "Economic Neutron Bombs."

    They leave the banks and corporations standing, as they slowly kill-off most of the people.

  • Rick B on June 11, 2012 12:11 PM:

    This is the universal preference of the financially powerful oligarchs everywhere. We see it here currently with the devastation brought about by the mortgage crisis which continues unabated and we will see it again within a decade or so as the loans making up the financial aid bubble here in the U.S. start defaulting at an even higher rate and it becomes obvious that the consumers who should be powering our economy cannot afford to marry or start households because of the debts.

    Remember, the banks got the bankruptcy laws rewritten so that student loans cannot be discharged in bankruptcy. Good for bank accountants - very bad for the American economy.

  • Ron Byers on June 11, 2012 12:29 PM:

    Rick is right in general, but wrong as to the discharge of student loans. In the right circumstances it is still possible to discharge a student loan in bankruptcy, but it is exraordinarily difficult.

  • jjm on June 11, 2012 12:44 PM:

    Wow. Waldman is clearly right, unfortunately.

  • Josef K on June 11, 2012 12:46 PM:

    I've had a terrible thought: if there's another 'bubble' popping (student financial aid is a good contender), what if there are just enough tea party idiots in Congress now that no bailout or relief is passed? I doubt they'd be terribly receptive to either Bohner or McConnell's entreaties, and forget them listening to the White House.

    Worth thinking about, agreed?

  • boatboy_srq on June 11, 2012 12:59 PM:

    @Josef K: I doubt the Teahadists would bat an eyelash at this one - unless one or two of them still has student debt. I'd suggest that (as a strategy, NOT as a principle) the Dems go whole wingnut in that case and state that they wouldn't bail out a single indebted student - just to see how far past that the Teahadists would go (indenture all students with loans to the financial institutions that loaned them the money, perhaps?). The process wouldn't be healthy if the statement were actually implemented, but it would be informative.

  • gdb on June 11, 2012 3:58 PM:

    Ryan.. Your posts are good--- but this time you gotta read Krugman to the end of his post
    "Whatever the deep roots of this paralysis, itís becoming increasingly clear that it will take utter catastrophe to get any real policy action that goes beyond bank bailouts. But donít despair: at the rate things are going, especially in Europe, utter catastrophe may be just around the corner."

    Thats not "a bit more skeptical"... nor is that the tone of Krugman's blogs.

  • Jimo on June 11, 2012 9:48 PM:

    Indeed. At $200k per person, the U.S. bank bailout could instead have sent this sum out in checks to everyone and let the banks collapse.

    I don't know about you but with $200k in my pocket, I suspect I could survive economically for quite a while until the financial system recapitalized itself.