Saturday, November 15, 2008


Germany's Chancellor, Angela Merkel, has declared Germany officially in recession. The German economy, the largest in Europe, has shrunk for two successive quarters. Its chief financial officer warns that this recession will be "serious." Merkel has advocated drawing up a "risk map" of institutions likely to go under so they can be helped before they bleed too much -- a sort of economic triage.

It's difficult for an outsider to know how to evaluate all this. The ubiquitous construction cranes have not stopped working in Leipzig. Buildings are going up, not into foreclosure. Watching CNN Europe and the BBC each night, I hear interviews with financial experts all across the Eurozone, who seem to say that this global recession is a result of the crisis on the American stock market. If the United States doesn't pull out of this mess, neither will Europe or Asia.

Germany does not have a large national debt. In addition, it has a positive trade balance, being a huge exporter of all kinds of goods. Perhaps that is insulating the country somewhat. But not according to TV reports. One thing, however, does seem clear to me -- here there aren't the foreclosures common in the U.S., with people evicted from their homes, or the factory closings in China, with people milling around outside the gates demanding back pay. At least, not yet.


Mike Flynn said...

here there aren't the foreclosures common in the U.S., with people evicted from their homes

Perhaps there were no programs to push people into mortgages that they couldn't afford.

(Suppose it were discovered that married people lived longer, happier, and healthier lives. Would anyone suppose that a government program to inveigle people into marriage would increase our store of happiness?)

All bubbles burst; but how they burst depends on the individual circumstances. The bubble did not have the same impact as the mortgage bubble, let alone the stock bubble of 1929, because fewer people were involved.

I think the tendency when things are going well is to do more of the thing that seems to be going well. When railroads were the big thing, it was logical to build another railroad and get in on it. But because of the time lag in the system between actions and consequences, this meant that people continued to build railroads well after the marginal rate of return had peaked. Is there really economic niche space for a fifth railroad between Chicago and Detroit? It is the rhythm of this build-prosper-overbuild-bust cycle that accounts for these things happening every 18-20 years.

In the current case, there was a concerted government effort to get more and more people into home ownership. That this was a confusion of effect with cause went unnoticed save by Jane Jacobs, Nicholas Taleb, the Wall Street Journal, and a few others.

Mark said...

"Cause & Effect, Chain of Events,
All of this Chaos makes perfect sense...."

I can't remember the title, but I read a book a year or two ago describing how Back In The Day people would not necessarily believe that they had to do exactly one task for their entire careers. When more valuable work needed doing, workers who were willing to do it stepped up to the plate. This did require a kind of mental flexibility that maybe got ground down after the industrial revolution. The trade unions didn't help either; why would they encourage people to learn skills outside their one specialization when that meant a possible drop in dues and clout?

I recently spoke with a few plumbers and electricians. There is one camp that complains and moans about "the economy" and "this right-to-work state" after having expected tomorrow's tomorrows to be the same as yesterday's yesterdays. The other grouping realized that a changing environment requires changes in business tactics. They don't complain about the lack of new construction to drive their businesses, rather they go repair older homes and buildings and enjoy the security that comes with flexibility.