Spain is beyond repair. This is also true of the
United States. Following is a bottom-up view of the insatiable parasites
clinging to the rump of the Spanish economy and how such gruesome imagery
applies elsewhere.
A Bloomberg story on September 27, 2012, resembled many others since the
mid-'oughts: "Spain's Boom-Era Building Gear Sold as Developers Cut
Off." This does not need much explanation but a connection is offered:
though QE3 is designed, and will (in cases) lift asset prices, gravity rather
than levitation is the natural direction of assets.
Construction equipment manufactured during the Spanish
housing boom now lounges and pouts, or jets to countries where housing bubbles
still offer a thrill. For the connoisseur of booms-and-busts, Berlin, Oslo, and
Hong Kong may be peaking. None are likely to match the sheer weight the defunct
construction industry loads on the Spanish economy. Bloomberg described its proportions:
"The property bonanza that ended in 2008 has left around 2 million unsold
homes in Spain, representing supply that will take a decade to absorb....
Spain's construction and real estate industry, which represented 18 percent of
gross domestic product before the financial crisis, now accounts for 11 percent
and building permits plummeted 87 percent last year from the 2004 peak."
[That it has only shrunk from 18% to 11% means the state is spending madly to
keep it, and the banks, operating. - FJS] "Work started on fewer than
4,500 houses in February this year, a 94 percent decline from the October 2006
peak."
Towards the bottom of the article, a modern financing
mechanism was advanced: "Almost half of Spain's 67,000 developers are insolvent but
not bankrupt after getting additional financing from banks, according to
R.R. de Acuna & Asociados, a property consulting firm. Extending the lives
of companies is becoming harder for banks after Prime Minister Mariano Rajoy's government demanded they set
more money aside to cover losses on real estate loans." [My italics. -
FJS] That the fantastically over-occupied development sector "is insolvent
but not bankrupt" should not be a surprise, at least to Americans, where
the same has been true of money-center banks, General Electric and General
Motors.
The question arises how the encumbered
Spanish banks are extending the lives of the developers. Rifling the archives,
Bloomberg also met with Fernando
Rodriguez de Acuna, president of R.R. de Acuna & Asociados on July 22,
2009. At that earlier meeting, Sharon Smythe (the author of both articles)
learned: "The nation's banks lent about
318 billion euros to domestic real estate companies and also were forced to
accept billions of euros of real estate assets in exchange for canceling debt
with insolvent developers." The banks accepted
the property back from the developers in lieu of payment for the loans.
Fernando Rodriguez de Acuna went on to say (in 2009):
"Those assets are sterile, or constantly falling in value, so the banks
have to get them off of their books or else they will damage their balance
sheets in coming years." One could sigh at Mr. Rodriquez' innocence, but
he was not alone in thinking the banks could not indefinitely pretend they held
real assets.
The banks are
slowly admitting losses, but Bloomberg's summary is of a slow recognition. Even
so, write-downs have left the banks stranded: unable to make loans. Up until
now, it appears, the banks and the government were able to carry the building
gear manufacturers.
We know bank write-downs in Europe have been limited
to window dressing. We may presume the assets that were "sterile, or
constantly falling in value," are worth a nominal amount today. Referring
to the September 27, 2012, Bloomberg brief in which "Prime Minister Mariano Rajoy's government demanded [banks] set
more money aside to cover losses on real estate loans": Money from where?
Who would invest in an insolvent bank that is pretending its capital is not
impaired? An unaccountable international organization is the best bet.
Let's suppose, first, the ECB is allowed
to capitalize banks. We will skip over (second) the Spanish government's
"bad bank" plan, and assume it takes wing. Even so, in this most
optimistic of scenarios, the revived lending capacity will fund, not strong and
growing businesses, but: the Spanish government.
The government's deficit gap is growing fast. On
September 25, 2012, Spain reported the January through August deficit rose from
3.81% of GDP in 2011 to 4.77% GDP in 2012. The Spanish government - in the
second or third year of "austerity" - has spent 8.9% more euros in
2012 than in 2011. Tax revenues have fallen by 4.6% in 2012.
The ECB needs to distribute euros at an
extraordinary pace to retain the façade of a continent that is not bankrupt.
Of the many reasons the deficit is getting worse,
coddling the insolvent but not bankrupt building industry is one. A total of
4,500 houses were built in February. Not all the developers build houses but,
when it takes five or ten companies to build one house each month, tax revenues
will fall. Living as if this is 2006 will push Spain back to 1492. It is
interesting that economists, who sold the world on "GDP" and
"productivity," have trapped workers of the world in the most
unproductive jail cell imaginable.
Across the ocean, Washington runs business in the
United States. This is why employment gains have been in government jobs. This
is why the favored financial industry is still far too large for a functioning
economy. This is why the capital-equipment industries that invest after
projecting demand over the next 10 years are not investing at all. These
companies have historically produced most of the high-paying jobs; their
absence is the reason new jobs are in the worst paying fields (except for
government, which pays a solid, middle-class wage: None of that
hedonically-adjusted, ex-food, ex-gas, pay-plan at the BLS.)
Federal Reserve policy props up dead and malignant
businesses. Its no-interest-rate gambit is manna for bad companies that
contaminate good companies. Good businesses do not hire. They do not invest. In
past times, they only had a vague notion of the Federal Reserve chairman since
they had business to conduct. Now, they are no less dependent on the
ministrations of Bernanke than the Soviet steel industry was to KGB requests.
They sit around wondering what Bernanke will do to them next and what this all
means. Introspective CEOs are un-American (if not un-Spanish.) The economies
run by Rajoy and Bernanke are headed down the same path as the failed
enterprises that hopped to the orders of Beria and Malenkov.
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