the great recession
February 9, 2011 6:57 PM Subscribe
Why has the world economic crisis hit some countries - USA and UK, but especially Ireland, Iceland, Greece and Spain - so much harder than others?
Some countries have banking regulations.
posted by aeschenkarnos at 7:43 PM on February 9, 2011 [6 favorites]
posted by aeschenkarnos at 7:43 PM on February 9, 2011 [6 favorites]
Which countries are you thinking of as ones that were less affected by the current (or recent, depending on whom you read) recession? I don't understand your premise.
China and India are in the midst of huge booms, but even so the booms were affected by the recession.
posted by Sidhedevil at 7:54 PM on February 9, 2011
China and India are in the midst of huge booms, but even so the booms were affected by the recession.
posted by Sidhedevil at 7:54 PM on February 9, 2011
This interview with Brigitta Jonsdottir does a really good job of talking about how the events in Europe effected Iceland and how changes to laws in Iceland and some unpopular decisions there opened the door to their economic collapse.
Then this interview with Bob Chapman of The International Forecaster touches on further events in Europe and Egypt, highlighting how the manipulation of world economies is playing out. Helpfully, the interview touches upon economic theory and history with discussions about how similar techniques have played out in the past.
Bottom line: The economic collapses could be avoided, except there is an unwillingness to let the market correct itself. Instead, you have massive bailouts and loan agreements that are not in the best interests of the effected countries like Ireland, Greece, etc. etc. The likely result will concentrate wealth and power for the few while stripping victim nations of their economic and political sovereignty.
The interviews explain it better than I can and will certainly provide you with a jumping off point to start researching this a little deeper.
It's difficult to find in-depth nuanced discussions about these issues that don't include lots of empty jibber jabber, and I hope you'll find the interviews informative.
If I had to sum it all up, I'd say the lesson learned is that it is a very bad idea and totally unsustainable to prop up economies by artificially suppressing interest rates, printing money on demand (devaluing currency) and getting into bed with world-class loan sharks when you can't cover your country's action.
posted by jbenben at 8:08 PM on February 9, 2011 [4 favorites]
Then this interview with Bob Chapman of The International Forecaster touches on further events in Europe and Egypt, highlighting how the manipulation of world economies is playing out. Helpfully, the interview touches upon economic theory and history with discussions about how similar techniques have played out in the past.
Bottom line: The economic collapses could be avoided, except there is an unwillingness to let the market correct itself. Instead, you have massive bailouts and loan agreements that are not in the best interests of the effected countries like Ireland, Greece, etc. etc. The likely result will concentrate wealth and power for the few while stripping victim nations of their economic and political sovereignty.
The interviews explain it better than I can and will certainly provide you with a jumping off point to start researching this a little deeper.
It's difficult to find in-depth nuanced discussions about these issues that don't include lots of empty jibber jabber, and I hope you'll find the interviews informative.
If I had to sum it all up, I'd say the lesson learned is that it is a very bad idea and totally unsustainable to prop up economies by artificially suppressing interest rates, printing money on demand (devaluing currency) and getting into bed with world-class loan sharks when you can't cover your country's action.
posted by jbenben at 8:08 PM on February 9, 2011 [4 favorites]
Check out Michael Lewis's series of articles in Vanity Fair. So far he's covered Greece, Ireland, and Iceland. I love the way he writes.
posted by jourman2 at 8:33 PM on February 9, 2011 [3 favorites]
posted by jourman2 at 8:33 PM on February 9, 2011 [3 favorites]
Which countries are you thinking of as ones that were less affected by the current (or recent, depending on whom you read) recession? I don't understand your premise.
China and India are in the midst of huge booms, but even so the booms were affected by the recession.
Australia is an example of a developed country which came through relatively unscathed (and avoided a technical recession). I've had a few cracks at typing a good explanation but I'm not an economist, so hopefully someone else can explain exactly why (my Google-fu kept turning up jingoistic stuff from the Murdoch press). I think it's a combination of better banking regulations and exporting resources to China. The share market took a hit, but when you hear stories from the US about collapsing banks/mortgage defaults/mass layoffs, that's just totally foreign here. We say "GFC" - global financial crisis - the way Americans say "the economy" - eg, "I got a great deal buying x from the US because of the GFC" or "my friend moved to New York and can't get a job because of the GFC" etc.
The biggest impact any of my friends, family, co-workers experienced was being able to buy stuff online really cheaply because of the parity (-ish) with the US dollar.
posted by jaynewould at 9:07 PM on February 9, 2011 [1 favorite]
China and India are in the midst of huge booms, but even so the booms were affected by the recession.
Australia is an example of a developed country which came through relatively unscathed (and avoided a technical recession). I've had a few cracks at typing a good explanation but I'm not an economist, so hopefully someone else can explain exactly why (my Google-fu kept turning up jingoistic stuff from the Murdoch press). I think it's a combination of better banking regulations and exporting resources to China. The share market took a hit, but when you hear stories from the US about collapsing banks/mortgage defaults/mass layoffs, that's just totally foreign here. We say "GFC" - global financial crisis - the way Americans say "the economy" - eg, "I got a great deal buying x from the US because of the GFC" or "my friend moved to New York and can't get a job because of the GFC" etc.
The biggest impact any of my friends, family, co-workers experienced was being able to buy stuff online really cheaply because of the parity (-ish) with the US dollar.
posted by jaynewould at 9:07 PM on February 9, 2011 [1 favorite]
Ack. Should amend that to point out that some people surely did lose their jobs/default on mortgages here, just not anything like the scale in the US.
posted by jaynewould at 9:09 PM on February 9, 2011
posted by jaynewould at 9:09 PM on February 9, 2011
Well, Ireland and Iceland both had banking systems that were hugely disproportionate compared to their domestic economies. This happened because they aggressively marketed themselves in other European countries with high interest rates on deposits, deposits flooded in. The banks then loaned much of the money to property developers in their own country and others (Ireland) or just in others (Iceland).
In Iceland, when the banks failed the government had to assume responsibility for paying back the deposits - ordinarily not a huge problem, but the banks were so huge compared to the small Icelandic GDP (and thus, tax base) that it will take a long time for them to be able to pay it back. In Ireland, the government also assumed responsibility for paying back the bondholders so they have an even larger debt burden.
Also, much of the Irish economy has been based on construction over the last few years, so Ireland simultaneously saw a huge increase in government debt and a big decrease in taxes when the construction industry collapsed. Combine that with the several 100k (a large percentage of the population) Polish labourers who very suddenly left Ireland to go back home (taking their income with them) and the many Irish residents who are underwater on their mortgages (and so, reluctant to spend) and you have the makings of a real disaster.
The US and UK also had outsized banking sectors but they were (believe it or not) better regulated, and both of those countries have substantial non-banking economies.
posted by atrazine at 11:45 PM on February 9, 2011
In Iceland, when the banks failed the government had to assume responsibility for paying back the deposits - ordinarily not a huge problem, but the banks were so huge compared to the small Icelandic GDP (and thus, tax base) that it will take a long time for them to be able to pay it back. In Ireland, the government also assumed responsibility for paying back the bondholders so they have an even larger debt burden.
Also, much of the Irish economy has been based on construction over the last few years, so Ireland simultaneously saw a huge increase in government debt and a big decrease in taxes when the construction industry collapsed. Combine that with the several 100k (a large percentage of the population) Polish labourers who very suddenly left Ireland to go back home (taking their income with them) and the many Irish residents who are underwater on their mortgages (and so, reluctant to spend) and you have the makings of a real disaster.
The US and UK also had outsized banking sectors but they were (believe it or not) better regulated, and both of those countries have substantial non-banking economies.
posted by atrazine at 11:45 PM on February 9, 2011
It might be interesting for you to consider what have the nations that have managed to do incredibly well (relatively) done right or done differently that allowed them to dodge the bulk of the wrath of the recession.
The Economist has this piece on Germany's economy that talks about some of the strengths that fly in direct contrast to the nations with serious problems that contributed to the recession or collapsed under their own weight or fiscal policy problems: incredibly strong exports to the also-relatively-robust emerging economies, incredibly low unemployment, no housing bubble or banking crisis because of good monetary policy and, I suppose, a certain Deutschness that keeps people from getting wrapped up in things like that, and companies who held on to their employees and were able to spool back up when the demand returned, quickly.
Going down the list, the primary issues are slightly different for the countries you listed. Sometimes more dramatically so. The US hit a double-whammy of housing bubble mixed with toxic, complex derivatives by large banks that played too close to the overleveraged sun and got burned horribly. (I wrote about the cause as speculated about while things were happening in this response on Ask Mefi a few years ago.)
The UK suffered from similar fiscal issues, starting especially with Nothern Rock's bank run and subsequent collapse into public ownership caused by subprime lending issues. Other commenters have more insight into Ireland and Iceland's issues, but Iceland was a nation of 300,000 with serious fiscal problems. A population that tiny can't absorb any sort of fluctuations like they encountered, and thus, they essentially through the entire economy into insolvency.
Greece had gotten themselves into a bit of a runaway train issue with their entitlement spending, much like the US has, but on a much shorter time scale. They were outspending their tax revenue without the ability to easily print more debt-backed money and when the crisis hit elsewhere, it exposed their fiscal problems.
Spain has rampant unemployment, an enormous housing bubble (the popping of which contributed to said unemployment), and generally slow economic growth. They're not particularly big on manufacturing or exports and they bring little else to the table in a lot of other ways so it was a bit of wrong place and wrong time for them and Greece. Their crises may have not been nearly as bad if not for the rest of the industrialized world's banking systems fucking each other rightly, but that has magnified their weaknesses and brought trouble upon them.
Then again, you can look at Japan, who has managed to completely squander two solid decades of serious global growth, both chalked up as "lost decades" due to a horrible asset price bubble collapse, kneed in the groin by the global crisis to keep them down again. Poor leadership, bad fiscal policy, and entrenched cultural biases that sometimes cloud judgement on corporate policy have basically given them almost no real growth in TWENTY YEARS. JAPAN! They should have taken over the world by now, but they stalled out something fierce, and it's fascinating to explore how a confluence of mismanagements and bad fiscal events can destroy a modern country's economy like that.
Likewise, it's impressive to see how the US government was able to contain the spiraling economic downturn with the "bailouts" and TARP funding and other general stimulus and propping. While we're not out of the woods yet, it's universally accepted that refusing to offer any bailouts or bank support would have been devastating in a way that would NOT yield such a "decent considering the circumstances" year as 2010 was. We were at the precipice of a great depression and it looks like we've taken a few steps back from the ledge.
We've still got a ways to go, and I'm furious at the greedy financial sector for just ignoring even the most basic tenants of risk and leverage management and destroying large swaths of our economy to do it. I think that regulations should limit their abilities in a manner that helps prevent such disasters, but you'll hear others argue that financial vehicles like derivatives help provide liquidity and financial flexibility, and that's what's required for growth, investment, and well, to build anything. That's true, but they got too smart for their own good, and we all paid the price. What's most frustrating is how few people were held accountable. People see the "bailouts" as absolution on the financial industry's crimes, but in reality, the government bailed us all out by keeping things from completely melting down.
Little solace for those of us now completely upside-down on our mortgages because we bought into a bubble we didn't think would pop... when you look back at a bubble, it's easy to say "that couldn't keep going forever" but when you're caught up inside it, you're terrified if you don't buy now, prices will be EVEN MORE tomorrow and the day after that, and you'll be kicking yourself. The banks can lend horrible credit risks cash because people don't default on their mortgages when their home's value keeps going up, so what's the worry?
Read my earlier (linked) comment for more on that bit, but I'll say this: Most of the "bailout" funds have been repaid, and most with quite a bit of interest. The companies they propped up are still serving large amounts of investment capital, or providing entire industries with jobs. (See: the entire US auto industry, minus Ford, who is amazing for other reasons outside of the purview of this response.) I think, considering the circumstances, they did as well as could be expected. It's just tragic that they ever had to.
Now to contain the deficit, decrease US unemployment further, get entitlements right with Jesus, and fix healthcare. And make sure the banks can never hurt us like that again. Boy oh boy.
posted by disillusioned at 12:51 AM on February 10, 2011 [5 favorites]
The Economist has this piece on Germany's economy that talks about some of the strengths that fly in direct contrast to the nations with serious problems that contributed to the recession or collapsed under their own weight or fiscal policy problems: incredibly strong exports to the also-relatively-robust emerging economies, incredibly low unemployment, no housing bubble or banking crisis because of good monetary policy and, I suppose, a certain Deutschness that keeps people from getting wrapped up in things like that, and companies who held on to their employees and were able to spool back up when the demand returned, quickly.
Going down the list, the primary issues are slightly different for the countries you listed. Sometimes more dramatically so. The US hit a double-whammy of housing bubble mixed with toxic, complex derivatives by large banks that played too close to the overleveraged sun and got burned horribly. (I wrote about the cause as speculated about while things were happening in this response on Ask Mefi a few years ago.)
The UK suffered from similar fiscal issues, starting especially with Nothern Rock's bank run and subsequent collapse into public ownership caused by subprime lending issues. Other commenters have more insight into Ireland and Iceland's issues, but Iceland was a nation of 300,000 with serious fiscal problems. A population that tiny can't absorb any sort of fluctuations like they encountered, and thus, they essentially through the entire economy into insolvency.
Greece had gotten themselves into a bit of a runaway train issue with their entitlement spending, much like the US has, but on a much shorter time scale. They were outspending their tax revenue without the ability to easily print more debt-backed money and when the crisis hit elsewhere, it exposed their fiscal problems.
Spain has rampant unemployment, an enormous housing bubble (the popping of which contributed to said unemployment), and generally slow economic growth. They're not particularly big on manufacturing or exports and they bring little else to the table in a lot of other ways so it was a bit of wrong place and wrong time for them and Greece. Their crises may have not been nearly as bad if not for the rest of the industrialized world's banking systems fucking each other rightly, but that has magnified their weaknesses and brought trouble upon them.
Then again, you can look at Japan, who has managed to completely squander two solid decades of serious global growth, both chalked up as "lost decades" due to a horrible asset price bubble collapse, kneed in the groin by the global crisis to keep them down again. Poor leadership, bad fiscal policy, and entrenched cultural biases that sometimes cloud judgement on corporate policy have basically given them almost no real growth in TWENTY YEARS. JAPAN! They should have taken over the world by now, but they stalled out something fierce, and it's fascinating to explore how a confluence of mismanagements and bad fiscal events can destroy a modern country's economy like that.
Likewise, it's impressive to see how the US government was able to contain the spiraling economic downturn with the "bailouts" and TARP funding and other general stimulus and propping. While we're not out of the woods yet, it's universally accepted that refusing to offer any bailouts or bank support would have been devastating in a way that would NOT yield such a "decent considering the circumstances" year as 2010 was. We were at the precipice of a great depression and it looks like we've taken a few steps back from the ledge.
We've still got a ways to go, and I'm furious at the greedy financial sector for just ignoring even the most basic tenants of risk and leverage management and destroying large swaths of our economy to do it. I think that regulations should limit their abilities in a manner that helps prevent such disasters, but you'll hear others argue that financial vehicles like derivatives help provide liquidity and financial flexibility, and that's what's required for growth, investment, and well, to build anything. That's true, but they got too smart for their own good, and we all paid the price. What's most frustrating is how few people were held accountable. People see the "bailouts" as absolution on the financial industry's crimes, but in reality, the government bailed us all out by keeping things from completely melting down.
Little solace for those of us now completely upside-down on our mortgages because we bought into a bubble we didn't think would pop... when you look back at a bubble, it's easy to say "that couldn't keep going forever" but when you're caught up inside it, you're terrified if you don't buy now, prices will be EVEN MORE tomorrow and the day after that, and you'll be kicking yourself. The banks can lend horrible credit risks cash because people don't default on their mortgages when their home's value keeps going up, so what's the worry?
Read my earlier (linked) comment for more on that bit, but I'll say this: Most of the "bailout" funds have been repaid, and most with quite a bit of interest. The companies they propped up are still serving large amounts of investment capital, or providing entire industries with jobs. (See: the entire US auto industry, minus Ford, who is amazing for other reasons outside of the purview of this response.) I think, considering the circumstances, they did as well as could be expected. It's just tragic that they ever had to.
Now to contain the deficit, decrease US unemployment further, get entitlements right with Jesus, and fix healthcare. And make sure the banks can never hurt us like that again. Boy oh boy.
posted by disillusioned at 12:51 AM on February 10, 2011 [5 favorites]
I second the Michael Lewis articles, they're great.
I would say that a major determinant of whether a country got hosed in the crisis or not was the presence of a sufficiently "creative" banking sector that was able to fan the flames of a bubble by shoveling huge amounts of (possibly foreign) money onto the fire. Bubbles will die without speculative investment, and the only way to direct money to an obviously insane cause is to have an out of control banking sector.
In Spain, it was tiny ancient community banks, some run by the church(!), that ran off the tracks and possibly took the country with them.
posted by tempythethird at 1:46 AM on February 10, 2011 [1 favorite]
I would say that a major determinant of whether a country got hosed in the crisis or not was the presence of a sufficiently "creative" banking sector that was able to fan the flames of a bubble by shoveling huge amounts of (possibly foreign) money onto the fire. Bubbles will die without speculative investment, and the only way to direct money to an obviously insane cause is to have an out of control banking sector.
In Spain, it was tiny ancient community banks, some run by the church(!), that ran off the tracks and possibly took the country with them.
posted by tempythethird at 1:46 AM on February 10, 2011 [1 favorite]
The short answer: leverage. The countries that get hit the hardest were the ones that were over leveraged.
posted by gjc at 5:15 AM on February 10, 2011
posted by gjc at 5:15 AM on February 10, 2011
You absolutely want to check out the Planet Money podcasts on NPR as they have covered each of those countries in depth.
posted by jenlovesponies at 5:45 AM on February 10, 2011
posted by jenlovesponies at 5:45 AM on February 10, 2011
OP, lots of good info above. And I will caution you as you delve deeper and start investigating this issue...
Many of the global financial interests and multi-national corporations that lobbied ($$) tirelessly to have business and banking rules relaxed world-wide own the very media outlets you might be turning to for information. The real story is usually still there between the lines, but, many facts and angles will be left out because journalists are not permitted to cover certain information. I worked for some of these outfits, so I know first hand.
Often, it's not overt censorship that's the problem. The simple fact is, most folks in news organizations want to keep their jobs. From the top down inside these organizations, they stick to talking about what is "safe" to discuss openly.
It's a multi-layered catastrophe.
posted by jbenben at 11:08 AM on February 10, 2011
Many of the global financial interests and multi-national corporations that lobbied ($$) tirelessly to have business and banking rules relaxed world-wide own the very media outlets you might be turning to for information. The real story is usually still there between the lines, but, many facts and angles will be left out because journalists are not permitted to cover certain information. I worked for some of these outfits, so I know first hand.
Often, it's not overt censorship that's the problem. The simple fact is, most folks in news organizations want to keep their jobs. From the top down inside these organizations, they stick to talking about what is "safe" to discuss openly.
It's a multi-layered catastrophe.
posted by jbenben at 11:08 AM on February 10, 2011
jayneworld, Australia avoided the GFC for a couple of well-founded reasons. Firstly, our well-regulated, well-financed banking cartel. Our big four are too big to fail, and they got government guarantees right from the get go. As well as not being nearly as risky in teh first place. Secondly, the stimulus package. Ken henry said go hard, go early, go households. We all got $1000 free cash, and the BER kept the construction industry afloat. Thirdly, china keeps swallowing our resources.
posted by wilful at 3:53 PM on February 10, 2011
posted by wilful at 3:53 PM on February 10, 2011
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That said: Ireland's government assumed the debt of its banks, which heretofore had been privately held. Now its taxpayers are on the hook for all that debt and no one wants to invest in the country as a result. The European Central Bank is said to be contemplating some sort of intervention.
Iceland got hooked on liquidity and cheap capital and leveraged itself to the hilt; it is too small an economy for this to be easily dealt with.
Greece spent too much money on social services, and had very little tax compliance, so it was spending much more than it took in in revenue.
Spain faces an aging population and a declining birthrate as well as persistently high unemployment and slow economic growth relative to France, the UK, and Germany.
This is all a very high level overview, of course.
posted by dfriedman at 7:02 PM on February 9, 2011 [3 favorites]