Goodmongo asked me
Its all a big game! I was reading an article in the New York Times about the European crisis. Here is the paragraph that gets me:
Last month, in perhaps the boldest move of the crisis, the European Central Bank lent $620 billion to banks for up to three years at a rate of 1 percent. Some officials had hoped that these cheap loans would spur demand for government debt. The idea is that financial institutions would be able to make a tidy profit by borrowing from the central bank at 1 percent and using the money to buy government bonds that have a higher yield, like Spain's 10-year bond at 5.5 percent.
Am I crazy or wouldn't it have been easier and cheaper to just laon those governments the money directly at the 1%? Why try to sanitize it by going through commercial banks?
My answer is:
Because that's the law. The basic idea behind it is that profit-maximizing banks would not finance a government that is not credit-worthy. It's a free-market argument. The hope is to prevent governments from printing money and thus using the inflation tax to finance expensive programs (like social welfare ! :).The problem now is that profit-maximizing banks aren't actually all that good at determining credit risks and are part of very short-sighted financial markets. And, of course, they are often run by managers who try to maximize their own profit instead of the bank's.Which way you do it is really a question of the lesser evil.
But I'd like to make a larger point here. For decades now there is the narrative in the US that Europe is living in some kind of socialism-light. And while there are some reasons to think so, there are also quite some reasons to not think so.
For example the fact that many countries here have a flat tax. Here's a map. Or the fact that a country like Ireland has extremely low corporate taxes. Or the fact that rich people in some countries like Greece, but also like Italy don't actually pay taxes. Well, they should, but they don't.
So, the financing of government with the printing press, which enables politicians to spend as much as they like, is just one example where Europe is to the economic right of the US!
But here's the funny thing: The countries which perform best in Europe tend to be the ones with a strong government (~45% public expenditure quota), like Denmark, Sweden, Finland, Norway.
The European experience right now is that what is most important for a society is the fight against corruption. If corruption is low (rent-seeking minorities and interest groups are weak), a large and expensive government financed in a way that wealth differences are kept low*, seems to be pretty good for the economy and the society as a whole.
* progressive taxes that create a factor 30 instead of a factor 300 between a CEO's and an employee's income.