The Gang of Six plan

Ezra Klein links to a founding document.  David Wessel summarizes some of it.  It’s complicated and a lot of it will be re-legislated.  We still have an OK path forward.  It seemed to me that gdp+1 for Medicare does lot of the medium-term work.  The entire tax discussion was unclear and I feared that some revenue losses were perhaps not acknowledged.  At this point the real questions are about public perceptions, not the principles of public finance as they might be debated by Musgrave and Buchanan.  The estimated level of social capital in the U.S. political system will very shortly be revalued, one way or the other.

Here is Dan Mitchell on the plan.  Here is a Hayekian argument on the debt ceiling.  Here is Peter Leeson on the history of “God Damn!”

On Europe, it’s as simple as that.  The Greek bond yield topped 39 percent.  As I said to a reporter today, France gave birth to it (the euro), faltered and left it on the doorstop of some distant, passive-aggressive German parents, and they are willing to feed the thing but not to pay the bill at Harvard.

Addendum: Ezra has a lengthy summary and analysis.  Blog-lengthy, that is.  Chait doesn’t think it can pass.

Comments

Why have people been buying Greek bonds at all for the past three months? No internet access and a broker secretly mocking you?

Is that why the stock market was up today? I've been wondering, if nothing passes how does the stock market crash AND interest rates rise? Where does all that money go? Not the euro. Should we go long on the yen or something?

The stock market was up today (and Treasury rates improved yet again, as they've been improving throughout this "crisis") because the House passed cap, cut, and balance.

The House passed the bill in the evening, quite a bit after markets closed.

The votes had long before been counted. It was a done deal.

The Eurobond would probably be a disaster even if it could be done politically imo.

I think the Germans (as well as Finland, Holland and Austria) are playing this wrong. They should use the fact that they actually do have options, for leverage. They could leave the euro and recreate the D-Mark if they wanted to. The way to play it would be to write a check for Greece, Ireland and Portugal to cover them the next X years. That's sunk cost anyway and something that will be done one way or another. Then have a small chat with Spain and Italy and tell them there will be absolutely no bailout for them. If they start massive austerity and structural reforms soon, the Germans will simply leave the euro and leave them on their own. Put pressure on the France to help enforce it as well.

The downside is that fuck knows what will happen to bond rates when it gets out that the Germans are considering leaving the Euro.

The Eurobond would probably be a disaster even if it could be done politically imo.

I think the Germans (as well as Finland, Holland and Austria) are playing this wrong. They should use the fact, that they actually do have options, for leverage. They could leave the euro and recreate the D-Mark if they wanted to. I think the way to play it would be to write a check for Greece, Ireland and Portugal to cover them the next X years. That's sunk cost anyway and something that will be done one way or another. Then have a small chat with Spain and Italy and tell them there will be absolutely no bailout for them. If they dont start massive austerity and structural reforms soon, the Germans will simply exit the euro and leave them on their own. Put some pressure on the France to help enforce it as well.

The downside is that who knows what will happen to bond rates when it gets out that the Germans are considering leaving the Euro.

The implication of the linked article is that either Europeans must create Eurobonds, do-intracountry transfers, or otherwise move toward fiscal union, or the Euro (perhaps even the EU) will end. The implication of Tyler's post is that he agrees. I disagree entirely.

What if core Europe refused to come to the rescue of peripheral Europe and peripheral Europe defaulted? Life would get even harder in peripherial Europe, certainly. Some in peripheral Europe (e.g. Greece) might choose to abandon the Euro. Others in peripherial Europe (e.g. the Baltics) might choose to show markets that they are willing to endure very harsh austerity to stay within the Euro. Having made it clear to bond markets that the Euro membership did not guarantee soverign bonds, there would be wider variability in the soverign bond rates for Euro members; this would be good, since countries would have to pay rates comeasurate with their fiscal policies. Many European banks, including many banks in core Europe, would be threatened, and then recapitalized by their home countries; why is that worse than the backdoor recapitalization that is occuring now? There would be tremendous fear and uncertainty as the consequences were sorted out; that also occured in 2007 and no currencies disappeared.

Countries have, in the past, defaulted on dollar-denominated debt. Those defaults were very bad for the countries and bondholders, and bad for the financial markets in general, and often resulted in the end of a dollar peg. But no one ever thought that those defaults would cause the end of the dollar.

Thank you for a very good analysis.

@Silas Barta
Greece isn't issuing new debt at these yields, these are the yields implied by the prices existing Greek debt is trading at. So these high yield debts are held by people who likely expect default, and hope to get their money's worth before they do.

@Martin
I'm not sure that the costs to the well run countries of exiting the Euro or a disorderly exit of the poor countries are low enough to make credible a threat for them to exit the Euro. At least for their sake, I'm pretty sure that Italy's leadership already knows there is a serious risk they are too big to save.

It gets rid of an entire tax - the AMT. That should count for something.

There are more than a few false notes in the "Hayekian" case for raising the debt ceiling. Here are two:

1. It's factually false to assert the that legal obligation to service the debt cannot be met without raising the debt limit. There is more than 10X more revenue coming every month than is required to service the debt.

2. Hayek dramatically and repeatedly embraced Germany's sudden and over night suspension of all price controls in the Western zone after WWII -- empirical experience which changed Hayek's views about what was both politically possible and advisable as a matter of policy. These events happened after Hayek published what he wrote earlier about price controls in Britain -- changing Hayek's views in retrospect on such matters, as can be clear in Hayek's advice to Thatcher in the 1970s. Hayek in the wake of the post war German experience always recommended dramatic and significant free market reforms when the chance came.

3.

In short, it was the same Beltway apoplectic screeching that we've seen so much of this week, but preposterously and promiscuously embedding the string "Hayek" in the silly hope of sounding libertarian.

Using the debt ceiling as leverage to reduce budget deficits without raising taxes, and to put a hard check on the growth of government bureaucracies which Hayek called "the road to serfdom", is just the kind of incremental and pro-free-market constitutional innovation that Hayek would have loved.

@ David Wright
None of the Baltic states are members of the eurozone.

Greece did sell $2.3bn of 13-week bills today attracting a healthy bid-to-cover ratio above 3. The 4.58 per cent yield was actually slightly lower than the June auction yield.

Estonia, Latvia, and Lithuania have all pegged their currencies to the Euro. They successfully preseved their pegs through the 2007-2009 downturn; bond markets are more convinced of their continued Euro link than they are of Greece's continued Euro link. For economic purposes, they are Euro members; they just don't have representation on the ECB's interest-rate-setting committee.

Estonia joined the eurozone in 2010: http://www.bbc.co.uk/news/world-europe-12098513

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