The EU central bank has loosened up its low-interest lending to second-tier banks, charging them very low interest rates and accepting as collateral lower-grade assets like mortgage-backed securities. It’s those very same securities that caused the banks to fail when the housing bubble burst, failures from which they were bailed out by the EU central bank while home mortgage borrowers were allowed to drift in the wind — just like in the US.
The EU central bank is not extending additional low-interest loans directly to troubled governments like Greece and Italy. Instead the 2nd-tier banks will continue financing those governments’ budget shortfalls. Those banks will borrow euros at, say, 1% from the central bank and then lend those same euros back out at, say, 3 or 4% to Greece and Italy. Meanwhile, the EU will impose austerity on the member governments to ensure that the second-tier banks collect their profits.
If the governments can’t keep up with their loan payments — and there’s no reason to believe that their precarious situation will improve any time soon — will these second-tier banks fail? That doesn’t seem very likely given the precedents. What’s more likely is that the central bank would again bail out the banks with more cheap euros, using as collateral the already-existing government securities that the governments aren’t able to pay back. Meanwhile, the Greek and Italian citizens must continue to pay usurious rates to investment bankers while themselves being subjected to government austerity and high private-sector unemployment and decreasing wages.
Here in the US, the Democrats in Congress are purportedly fighting tooth and nail for a temporary extension of the payroll tax reduction. This isn’t a tax in the usual sense. Part of it is an insurance premium that finances Medicare: you pay in now so you can get low-cost healthcare after you’ve retired from working. The other part is a retirement investment program: pay into Social Security now so you can live off the principal plus return when you’ve retired. Both components of the payroll “tax” require that the employer match the worker’s contribution, making it a small but vital part of the employee’s total compensation package.
Reducing the payroll tax accomplishes three things: it undermines two self-sustaining government programs for older people; it reduces employee pay; it increases ready cash available for workers to spend now. Who benefits? Companies and their investors, who get increased consumer spending from their workers while actually decreasing their paychecks. Who loses? Workers, whose financial security at retirement is severely compromised.
Thanks, Democrats. And as part of the “compromise” to gain the necessary votes from Republicans, the Democrats dropped the tax increase on millionaires — this after Dem senate leader Harry Reid already scrapped the tax rise for those making between $350K and $1M because, Reid reminded us, that kind of pay isn’t really high income in today’s economy. Boehner will fold on the payroll tax cut, Democrats in Congress are braying about the Republican Speaker of the House. Of course he will: it’s in the best interest of his constituents. The only debate remaining is whether Congress and the President will make this windfall for employers and investors permanent rather following the usual Washington playbook of staging an ongoing series of brinksmanship throwdowns over short-term extensions.