Why Germany Should Lead or Leave

George Soros

08 September 2012


NEW YORKEurope has been in a financial crisis since 2007. When the bankruptcy of Lehman Brothers endangered the credit of financial institutions, private credit was replaced by the credit of the state, revealing an unrecognized flaw in the euro. By transferring their right to print money to the European Central Bank (ECB), member countries exposed themselves to the risk of default, like Third World countries heavily indebted in a foreign currency. Commercial banks loaded with weaker countries’ government bonds became potentially insolvent.
There is a parallel between the ongoing euro crisis and the international banking crisis of 1982. Back then, the International Monetary Fund saved the global banking system by lending just enough money to heavily indebted countries; default was avoided, but at the cost of a lasting depression. Latin America suffered a lost decade.

Germany is playing the same role today as the IMF did then. The setting differs, but the effect is the same. Creditors are shifting the entire burden of adjustment on to the debtor countries and avoiding their own responsibility.

The euro crisis is a complex mixture of banking and sovereign-debt problems, as well as divergences in economic performance that have given rise to balance-of-payments imbalances within the eurozone.
The authorities did not understand the complexity of the crisis, let alone see a solution. So they tried to buy time.
Usually, that works. Financial panics subside, and the authorities realize a profit on their intervention. But not this time, because the financial problems were combined with a process of political disintegration.

When the European Union was created, it was the embodiment of an open society – a voluntary association of equal states that surrendered part of their sovereignty for the common good. The euro crisis is now turning the EU into something fundamentally different, dividing member countries into two classescreditors and debtors – with the creditors in charge.
As the strongest creditor country, Germany has emerged as the hegemon. Debtor countries pay substantial risk premiums for financing their government debt. This is reflected in their cost of financing in general. To make matters worse, the Bundesbank remains committed to an outmoded monetary doctrine rooted in Germany’s traumatic experience with inflation. As a result, it recognizes only inflation as a threat to stability, and ignores deflation, which is the real threat today. Moreover, Germany’s insistence on austerity for debtor countries can easily become counterproductive by increasing the debt ratio as GDP falls.
There is a real danger that a two-tier Europe will become permanent. Both human and financial resources will be attracted to the center, leaving the periphery permanently depressed. But the periphery is seething with discontent.
Europe’s tragedy is not the result of an evil plot, but stems, rather, from a lack of coherent policies. As in ancient Greek tragedies, misconceptions and a sheer lack of understanding have had unintended but fateful consequences.
Germany, as the largest creditor country, is in charge, but refuses to take on additional liabilities; as a result, every opportunity to resolve the crisis has been missed. The crisis spread from Greece to other deficit countries, eventually calling into question the euro’s very survival. Since a breakup of the euro would cause immense damage, Germany always does the minimum necessary to hold it together.
Most recently, German Chancellor Angela Merkel has backed ECB President Mario Draghi, leaving Bundesbank President Jens Weidmann isolated. This will enable the ECB to put a lid on the borrowing costs of countries that submit to an austerity program under the supervision of the Troika (the IMF, the ECB, and the European Commission). That will save the euro, but it is also a step toward the permanent division of Europe into debtors and creditors.
The debtors are bound to reject a two-tier Europe sooner or later. If the euro breaks up in disarray, the common market and the EU will be destroyed, leaving Europe worse off than it was when the effort to unite it began, owing to a legacy of mutual mistrust and hostility.

The later the breakup, the worse the ultimate outcome. So it is time to consider alternatives that until recently would have been inconceivable.
In my judgment, the best course of action is to persuade Germany to choose between either leading the creation of a political union with genuine burden-sharing, or leaving the euro.
Since all of the accumulated debt is denominated in euros, it makes all the difference who remains in charge of the monetary union. If Germany left, the euro would depreciate. Debtor countries would regain their competitiveness; their debt would diminish in real terms; and, with the ECB under their control, the threat of default would disappear and their borrowing costs would fall to levels comparable to that in the United Kingdom.
The creditor countries, by contrast, would incur losses on their claims and investments denominated in euros and encounter stiffer competition at home from other eurozone members. The extent of creditor countries’ losses would depend on the extent of the depreciation, giving them an interest in keeping the depreciation within bounds.
After initial dislocations, the eventual outcome would fulfill John Maynard Keynes’ dream of an international currency system in which both creditors and debtors share responsibility for maintaining stability. And Europe would avert the looming depression.
The same result could be achieved, with less cost to Germany, if Germany chose to behave as a benevolent hegemon. That would mean implementing the proposed European banking union; establishing a more or less level playing field between debtor and creditor countries by establishing a Debt Reduction Fund, and eventually converting all debt into Eurobonds; and aiming at nominal GDP growth of up to 5%, so that Europe could grow its way out of excessive indebtedness.
Whether Germany decides to lead or leave, either alternative would be better than creating an unsustainable two-tier Europe.

George Soros is Chairman of Soros Fund Management and Chairman of the Open Society Institute. A pioneer of the hedge-fund industry, he is the author of many books, including The Alchemy of Finance and The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means.


September 7, 2012, 7:38 p.m. ET

Mortimer Zuckerman: Those Jobless Numbers Are Even Worse Than They Look

Still above 8%—and closer to 19% in a truer accounting. Here's a plan for improvement.


Don't be fooled by the headline unemployment number of 8.1% announced on Friday. The reason the number dropped to 8.1% from 8.3% in July was not because more jobs were created, but because more people quit looking for work.

The number for August reflects only people who have actively applied for a job in the past four weeks, either by interview or by filling an application form. But when the average period of unemployment is nearly 40 weeks, it is unrealistic to expect everyone who needs a job to keep seeking work consistently for months on end. You don't have to be lazy to recoil from the heartbreaking futility of knocking, week after week, on closed doors.

How many people are out of work but not counted as unemployed because they hadn't sought work in the past four weeks? Eight million. This is the sort of distressing number that turns up when you look beyond the headline number.

Here's another one: 96,000that's how many new jobs were added last month, well short of the anemic 125,000 predicted by analysts, and dramatically less than the (still paltry) 139,000 the economy had been averaging in 2012.

The alarming numbers proliferate the deeper you look: 40.7% of the people counted as unemployed have been out of work for 27 weeks or more—that's 5.2 million "long-term" unemployed. Fewer Americans are at work today than in April 2000, even though the population since then has grown by 31 million.

We are still almost five million payrolls shy of where we were at the end of 2007, when the recession began. Think about that when you hear the Obama administration's talk of an economic recovery.

The key indicator of our employment health, in all the statistics, is what the government calls U-6.

This is the number who have applied for work in the past six months and includes people who are involuntary part-time workersgovernment-speak for those individuals whose jobs have been cut back to two or three days a week.
They are working part-time only because they've been unable to find full-time work. This involuntary army of what's called "underutilized labor" has been hovering for months at about 15% of the workforce. Include the eight million who have simply given up looking, and the real unemployment rate is closer to 19%.

In short, the president's ill-designed stimulus program was a failure. For all our other national concerns, and the red herrings that typically swim in electoral waters, American voters refuse to be distracted from the No. 1 issue: the economy. And even many of those who have jobs are hurting, because annual wage increases have dropped to an average of 1.6%, the lowest in the past 30 years. Adjusting for inflation, wages are contracting.

The best single indicator of how confident workers are about their jobs is reflected in how they cling to them. The so-called quit rate has sagged to the lowest in years.

Older Americans can't afford to quit. Ironically, since the recession began, employment in the age group of 55 and older is up 3.9 million, even as total employment is down by five million. These citizens hope to retire with dignity, but they feel the need to bolster savings as a salve for the stomach-churning decline in their net worth, 75% of which has come from the fall in the value of their home equity.

The baby-boomer population postponing its exit from the workforce in a recession creates a huge bottleneck that blocks youth employment. Displaced young workers now face double-digit unemployment and more life at home with their parents.

Many young couples decide that they can't afford to start a family, and as a consequence the birthrate has just hit a 25-year low of 1.87%. Nor are young workers' prospects very good.

Layoff announcements have risen from year-ago levels and hiring plans have dropped sharply. People are not going to swallow talk of recovery until hiring is occurring at a pace to bring at least 300,000 more hires per month than the economy has been averaging for the past two years.

Furthermore, the jobs that are available are mostly not good ones. More than 40% of the new private-sector jobs are in low-paying categories such as health care, leisure activities, bars and restaurants.

We are experiencing, in effect, a modern-day depression. Consider two indicators: First, food stamps: More than 45 million Americans are in the program! An almost incredible record. It's 15% of the population compared with the 7.9% participation from 1970-2000. Food-stamp enrollment has been rising at a rate of 400,000 per month over the past four years.

Second, Social Security disability—another record. More than 11 million Americans are collecting federal disability checks. Half of these beneficiaries have signed on since President Obama took office more than three years ago.

These dependent millions are the invisible counterparts of the soup kitchens and bread lines of the 1930s, invisible because they get their checks in the mail. But it doesn't take away from the fact that millions of people who had good private-sector jobs now have to rely on welfare for life support.

This shameful situation, intolerable for a nation as wealthy as the United States, is not going to go away on Nov. 7. No matter who wins, the next president will betray the country if he doesn't swiftly fashion policies to address the specific needs of the unemployed, especially the long-term unemployed.

Five actions are critical:

1. Find the money to spur an expansion of public and private training programs with proven track records.

2. Increase access to financing for small businesses and thus expand entrepreneurial opportunities.

3. Lower government hurdles to the formation of new businesses.

4. Explore special subsidies for private employers who hire the long-term unemployed.

5. Get serious about the long decay in public works and infrastructure, which poses a dramatic national threat. Infrastructure projects should be tolled so that the users ultimately pay for them.

It's zero hour. Policy makers need to understand that the most important family program, the most important social program and the most important economic program in America all go by the same name: jobs.

Mr. Zuckerman is chairman and editor in chief of U.S. News & World Report.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

domingo, septiembre 09, 2012


Barron's Cover


Happy at Last

After an ugly six-year decline, home prices are starting to look up. Why the rebound is for real. Plus: What's next for the top 50 U.S. housing markets.

                                            Scott Pollack for Barron's

Nothing's wreaked quite the havoc on the U.S. economy, and indeed the national psyche, as the six-year slide in home prices. It wiped out some $7 trillion in household wealth, savaged bank balance sheets, and induced the Great Recession and the tepid recovery.

Yet there are unimpeachable signs that this national nightmare is now over. Home prices are starting to rise, if somewhat haltingly, in most areas of the country. And a number of forecasters predict home-price increases around 10% or so nationally over the next three years, with some metropolitan statistical areas, such as Midland, Texas, and Bismarck, N.D., likely riding the energy-exploration boom to better than 20% jumps in residential-real-estate prices. The turnaround, in fact, appears to be arriving exactly on the schedule that Barron's laid out this year in a March 19 cover story entitled "Ready to Rebound."

Of greatest moment, perhaps, was the release two weeks ago of the S&P/Case Shiller Composite 20-City Index that showed a jump in home prices of 2.3% in June over May. Likewise the Case-Shiller National Index in the second quarter rose 6.9% over the first-quarter level, before any seasonal adjustment. And for the first time since the summer of 2010, the National Index actually nosed ahead of the year-earlier quarter's reading, if only by 1.2%.

"This increase in home prices, unlike the one that occurred in 2009-2010 as a result of the temporary tax credit for first-time home buyers, looks to be for real," says David Blitzer, chairman of the index committee at S&P Dow Jones Indices. "We probably won't see a V-shaped recovery in housing, with prices overall going up 20% in the next year. But this rally has legs, and prices will definitely be higher next year."

The recent strength seems to have continued in July and August, according to home-price indexes compiled by CoreLogic. Like Case-Shiller, the consumer, mortgage and property research firm tabulates prices based on repeat sales of the same properties, but it releases the data more quickly. CoreLogic said last week that, year over year, home prices nationally had jumped 3.8% in July and an even stronger 4.6% in August. The latter number was based on its pending, rather than completed, home-sale price index.

"It has been six years since the housing market last experienced the gains we saw in the July numbers, with indications that the summer will finish up on a strong note," says CoreLogic CEO Anand Nallathambi. "Although we expect some slowing in price gains over the balance of 2012, we are clearly seeing the light at the end of a very long tunnel."

TO BE SURE, any sustained recovery in prices faces some formidable obstacles. The "shadow inventory" of residences that are in some stage of foreclosure or whose owners are at least 90 days delinquent on their mortgages stands at 3.1 million6% of the 50 million home loans in the U.S. In a normally functioning market, the total of distressed properties would be more like 2%.

Likewise, some 13 million homeowners are under water -- meaning that their mortgages are larger than the value of their houses or condos. Although the vast majority of these people are current on their mortgage payments, many may be tempted to resort to a "strategic default." This is particularly true in the event of a job loss or some other economic vicissitude.

And finally, the collapse in housing prices was so severe -- nationally, residential real estate fell by over one third in value, peak-to-trough -- that it would take at least a 50% jump just to restore prices to the nutty levels they achieved in 2006. Unfortunately, those were the prices at which many homes were purchased. So, for many, hope will be difficult to maintain in the years ahead.

Just look at Phoenix (see table below). Through June, it had enjoyed a 14.4% price recovery, but that rise only reduced the 55.9% decline from its peak to a 49.6% loss. Some areas like the Central Valley of California may take decades to return to the heady levels of peak valuation, when even folks who couldn't walk and chew gum at the same time could get home loans.

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Yet some keen observers of the real-estate market, such as Moody's Analytics' Mark Zandi, are optimistic that home prices will rise as much as 10% from current levels by the end of 2014, once the shadow inventory is worked down over the next year or so. He points to such factors as the continued rise in effective rent rates (the main competition to home ownership), low mortgage rates, steady though slow improvement in job growth and improving availability of bank credit.

"We've clearly reached a key psychological shift in home buyers' psychology, where folks are now starting to worry about missing the boat, rather than fearing whatever house they buy, no matter how attractive the price, can only go down in value," Zandi explains.

Even more upbeat is Lawrence Yun, chief economist at the National Association of Realtors, who, unlike some of his predecessors, is more a sober analyst than a cheerleader for the real-estate brokerage industry. Yun is heartened by several factors that have been showing up in NAR monthly sales figures and median home-price trends.

For one thing, existing home sales in July ran at an annual pace of 4.47 million, up 10.4% from the 4.05 million pace in July 2011. Median sales prices, too, have been ticking up for five straight months. They hit $187,300 in July, 9.4% above the year-earlier level. Part of that rise reflects a changing mix of sales, with higher-priced homes accounting for a bigger share of volume. But, Yun points out, this factor alone should help boost overall economic growth.


AS A CONSEQUENCE, he thinks that home prices could rise as much as 5% in both 2012 and next year. One reason is that the inventory of unsold dwellings has remained surprisingly tight with just 2.4 million, or 6.4 months' worth of inventory, on the market in July, based on the current sales pace. Back in the darkest days of the home-price collapse in late 2008 and early 2009, inventories regularly clocked in at around a 10-month supply and even briefly surged to more than 12 months in the summer of 2010.

This current market tightness has confounded many residential real-estate bears in light of the fact that so many American homes remain in the foreclosure pipeline and so many homeowners are under water on their mortgages.

Even so, Yun expects the supply tightness to linger for some time to come. Many of the troubled properties in places like Phoenix and Miami are being absorbed by local investors attracted by the bargains available and the ability to earn a handsome yield on the properties by renting them out. Many of these opportunistic buyers are putting up all cash.

As a result, the shadow inventory has been dropping precipitously, declining from more than 4.5 million homes at the peak of the bust to just over 3 million homes currently.

Two years ago, distressed sales accounted for about a third of all sales of previously occupied homes. This year, the figure will be 25% and next year just 15%, predicts the economist.

This is important because foreclosure and "short" sales (sales by homeowners with the approval of lenders at less than the amount of the mortgage debt) are typically done at significant discounts to the price of comparable properties, destroying neighborhood home values in the process. But now, Yun notes, not only are distressed sales declining as a percentage of total existing-home sales, but so are the price discounts at which they occur.

Also potentially bolstering existing housing prices has been the precipitous drop in new-home construction, Yun contends. Given population growth and new household formations, the U.S. is producing only about half the 1.2 million new dwellings needed each year. In fact, he fears that a housing shortage could even develop.

FEW OBSERVERS HAVE FOLLOWED home-price trends with the assiduity of Ingo Winzer, president of Local Market Monitor. He started tracking them two decades ago, when he worked in the finance department of a now-defunct mortgage insurer.

But he does more than merely pontificate on market behavior. Indeed, he has the audacity to make three-year price forecasts for all 317 U.S. metropolitan statistical areas, from the populous New York area (11.7 million residents) to tiny Cheyenne, Wyo. (population 88,852). His clientele consists of local and regional banks, mortgage companies, home builders, and private real-state investors all over the country.

Winzer readily concedes that his is a somewhat inexact science, but he claims to be able to get most trends right. "Home prices tend to move in distinct long-term waves, particularly in major metro markets," he says. And, he maintains, the magnitude of the price moves is generally within the range of his three-year forecasts, even if each yearly prediction doesn't precisely come to pass.

His methodology involves establishing an equilibrium home price for each market, or a price for housing that each metro area's per-capita income comfortably can support. Other factors entering into his calculations include unemployment rates, job growth, and single- and multi-family building-permit activity. He also takes into account the past relationship in each area between income and home prices. Homes in desirable areas like San Francisco, for example, historically trade at prices above those that per capita income levels would dictate in most other parts of the country.

Winzer admits that forecasting prices these days is tougher because there is less history to use to judge price behavior in the current market. Nonetheless, he sees prices nationally rising a cumulative 7% over the next three years (beginning July 1, 2012).

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He expects some of the biggest jumps in oil-and-gas boom towns like Midland, Texas, where he sees prices jumping 49%; Houston, 26%; and Bismarck, N.D., 20%. At the same time, he expects prices in overbuilt Florida climes that rely on the second-home market to continue suffering, with Port St. Lucie falling 14%, Panama City dropping 7%, and Pensacola sliding 6%.

What's next for your home? The table above shows Winzer's forecasts for the top 50 U.S. markets.