This dynamic helps to explain the severity of the housing bubble (built as it was on ARMs and subprime mortgages), and also... Spain. Spain is in some pretty tough shape lately, asking for bailouts from people who probably can't afford them and possibly won't even provide them anyway. A big part of Spain's problem lies beneath the surface in the regional governments, which can no longer afford to finance their debts. It's essentially a bigger and more dangerous version of the budding problems with local pensions here in the United States, and it's a situation that seems like it pretty clearly could have been avoided.
This week's QUOTE OF THE WEEK
Ciudad de la Luz [an extravagant, publicly financed, near-bankrupt movie studio] has become a prominent example of Valencia’s frenzy of modern-day pyramid building, which left a legacy of $25.5 billion in regional debt and bankrupt infrastructure projects as well as the backlash now building against it.
Valencia’s other investments included a harbor for superyachts, an opera house styled like the one in Sydney, Australia, a futuristic science museum, the biggest aquarium in Europe and a sail-shaped bridge, not to mention an airport that never had a single arrival or departure. It also attracted extravagant events like the America’s Cup and Formula One racing.
- Doreen Carvajal and Raphael Minder, New York Times
When governments of any kind begin to make "investments" in the economy to attract big events or simply more tourists—especially when such investment is geared toward attracting big international events like the America's Cup and Formula One (and the Olympics... more on that later)—it rarely ends well. At best, the local economy receives a short-term jolt, and then is left trying to figure out what to do with the infrastructure (and how to pay for its maintenance) after is it no longer in active use. At worst, we end up with a Valencia situation, with taxpayers on the hook for failed ventures, looking for bailouts from anywhere they can find them.
Yes, the taxpayers themselves are always to blame for allowing their governments to spend like this, but the central banks' "expansionary" monetary policies are aggressive enablers in the process. Appropriate, then, that they should find themselves under increasing scrutiny in the aftermath of these sorts of bubbles. But be aware, "doing more" is not the solution—on the contrary, it's at the very heart of the problem.
[NY Times]
(h/t Tyler Cowen)
This week's QUOTE OF THE WEEK
Ciudad de la Luz [an extravagant, publicly financed, near-bankrupt movie studio] has become a prominent example of Valencia’s frenzy of modern-day pyramid building, which left a legacy of $25.5 billion in regional debt and bankrupt infrastructure projects as well as the backlash now building against it.
Valencia’s other investments included a harbor for superyachts, an opera house styled like the one in Sydney, Australia, a futuristic science museum, the biggest aquarium in Europe and a sail-shaped bridge, not to mention an airport that never had a single arrival or departure. It also attracted extravagant events like the America’s Cup and Formula One racing.
- Doreen Carvajal and Raphael Minder, New York Times
When governments of any kind begin to make "investments" in the economy to attract big events or simply more tourists—especially when such investment is geared toward attracting big international events like the America's Cup and Formula One (and the Olympics... more on that later)—it rarely ends well. At best, the local economy receives a short-term jolt, and then is left trying to figure out what to do with the infrastructure (and how to pay for its maintenance) after is it no longer in active use. At worst, we end up with a Valencia situation, with taxpayers on the hook for failed ventures, looking for bailouts from anywhere they can find them.
Yes, the taxpayers themselves are always to blame for allowing their governments to spend like this, but the central banks' "expansionary" monetary policies are aggressive enablers in the process. Appropriate, then, that they should find themselves under increasing scrutiny in the aftermath of these sorts of bubbles. But be aware, "doing more" is not the solution—on the contrary, it's at the very heart of the problem.
[NY Times]
(h/t Tyler Cowen)
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