Euro

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I Agree

Yes. I agree.

The negotiations concerning the Greek bail-out were absurd. They showed in vivid highlight just how foolish the entire Euro exercise is. Countries with economies as varied as those of Europe ought not bind themselves together without going the whole way into some sort of federal political and budgetary union. That would allow funds to move about internally so that regions falling into distress can get help ‘anonymously’ without the need for the tragic farce we have just witnessed.

This is what happens inside the United States. Funds routinely move about, Federal programs make sure that some basic services – such as Social Security – are paid from a central source so if a state like Florida gets into difficulty bills still get paid and services are still provided. Were this not so, and if Florida had been responsible for, say, those pensions back in 2009, it would have faced a crisis similar to that in Greece. Indeed the imbalances in the flow of funds into and from Washington are what allows many states in America to pretend that they are fiscally secure.

Of course this doesn’t mean that state budgets are immune to crisis. It is still quite possible for reckless fiscal policy to exist at the local level. What the Federal budget does allow, though, is that the adjustments that are made are not as severe as those just imposed on Greece. Florida has not, for instance, been thrown into a depression-without-end. By removing the cost of many basic services from the budgets of the states the central government mitigates the cost of adjustments when a locality errs in its own policies.

All this is, of course, in addition to the benefits of free inter-state commerce and having the same currency.

There is nothing like this in Europe. So the Euro is doomed. As it was from the start. Because local errors and plain happenstance are not going to go away.

There is no news in this. It was well discussed and documented at the time the Euro was launched. Back then the hubris of the pro-Euro technocrats was sufficient to drown out the naysayers. But history is having the last laugh.

So. Yes. I agree.

To what?

To the notion that it is not the Greeks who ought to leave the Euro. It is the Germans.

If the Germans are unwilling to set up a central Euro-federal budget such that internal imbalances can be taken care of automatically, and if they are also unwilling to write down debtor nation debt when it becomes obvious those debts are unsustainable, then they ought to leave the Euro. Because to stay in is simply to destroy it.

Persistent German trade imbalances threaten European economic stability just as much as the uncompetitive nature of historic Greek economic policies. The Germans seem very proud of their export surplus without noting that, in effect, they are also exporting unemployment. Perhaps their economists realize this. Perhaps it is this realization that presses them to impose on Greece what is a depression-without-end: it saves them from having to explain to German voters how unsustainable German policy is.

Were Germany to leave the Euro its new currency would no doubt appreciate rapidly against the now German-less Euro. The necessary adjustment would happen. The Greeks could get back on their feet, their trade would become more competitive, and the Germans would suffer export losses as their currency rose to reflect the true consequences of recent German policy. But the germans would also gain from the cheaper goods they could buy abroad.

This happy outcome seems so much more preferable to the current situation. The Greeks could modernize their economy without being forced to live in perpetual depression. And the Germans could afford to buy vast loads of stuff from their Euro neighbors at bargain basement prices. Heck Germany might even become an importer.

Nah.

I agree that won’t happen.

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Greece 2

Well so much for that.

Where do I begin?

The so-called deal announced yesterday achieves none of its objectives. The written objectives that is. The unwritten ones we will get to in a moment.

There is no doubt in my mind that the Greek economy suffers from a surfeit of inefficiencies. It cannot sustain the social edifice erected on top of it without ridding itself of the multitude of privileges that various groups have accumulated for themselves through time. Greek government has been, for many years, a source of patronage and protection of a slew of inside deals that wreak havoc on those – the majority – on the outside.

I am sure this systemic problem must irk everyone living further north.

But.

Clearing out those problems now is not the priority. Saving Greece is. Saving Greek democracy. Saving those who have no access to the myriad schemes and deals that enrich the minority.

That was what I understood the left wing governing party to stand for.

What I did not understand that the Greek government apparently had no viable plan ‘B’. It made no serious effort to put an plan for an exit form the Euro. It had no idea of how to execute the issuance of an alternative currency.

Or so it seems.

So the Greek government entered this fight without heavy weaponry. It was bound to fail. It had to capitulate.

And what a capitulation it was. Yanks Varoufakis is calling it a new Treaty of Versailles. From what I can see, he is right. The deal is a disaster for Greece. It assures the destruction of whatever is left of the Greek economy. It will prolong, for many years if not decades, the stagnation and steady decline that has set in since austerity was forced on it. It will stir up political and social unrest. It will push the Greeks into a marginal and subjugated existence at the whim of technocrats and politicians who, apparently, used last weeks referendum result as a reason to execute what amounts to a coup. They have seized control of the financial operation of a sovereign nation.

Why?

To avoid a hair cut on the outstanding debt. A haircut that still seems inevitable.

Now for those unwritten objectives.

Sometime this weekend this became an exercise in punishment, in the extraction of reparations, and in the public humiliation of a democratically elected leader. This deal cannot have been about anything economic: it is manifestly a grossly foolish and viciously constructed error if it is. The Greek economy will not thrive under the boot of the Troika. This deal is not intended to resuscitate the Greek economy, it is intended to make an example of it.

The deal is, in effect, a demonstration of raw power. A kind of scorched earth, burn-down-the-villages, and round-up-the-citizens exercise designed to teach a lesson. It is a return to the pre-European Union realpolitik that so ruptured and ruined the continent in the early twentieth century.

It is an embarrassment and a humiliation for the Greeks, but more so for Germany and it enablers. The Germans have cast themselves backwards morally, they have stripped away all pretense and revealed an ugly truth about themselves: they see no “union” in the Eurozone, they see no equality, and they brook no democracy.

For months now Merkel and her aides have talked about their lack of “trust” in the efforts being made by the Greeks. Now the worm has turned. It is Germany whose intentions, motives, and words engender no trust. From the deliberate leak of German documents to the vicious behind the scenes campaign to eject Greece entirely from the Euro, no one can doubt that this was an exercise in old fashioned power politics.

Someone needs to write a new version of “The economic Consequences of the Peace”.

Europe is no longer a stable union, it is fractured and exposed as undemocratic. Greece is a virtual dominion living under constant threat with its assets pawned so as to save foreign banks.

This is a very bad day indeed.

 

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Greece

So we reach the end. Good. Let democracy and popular government prevail. The entire Euro project was conceived by a small group of elitist technocrats, then foisted on national peoples often without any ability on the part of the people to veto it.

The crisis in Europe is an echo of the crisis here in the US. America’s banks went on an unsustainable binge of greedy excess. They generated, accumulated, mixed, and then sold mortgages in an ever increasing frenzy driven by the knowledge that as long as they moved the pile fast enough they could reward themselves handsomely and not suffer the consequences of their descent into the depths of outright fraud.

And it was a fraud.

Maybe not in the narrow and legally provable sense, but in the broader and more applicable ethical sense. The banks sought to rip us off to enrich themselves. They knew how compliant our governments all were. They knew that, in the end, they would be bailed out. So there was never a brake on their acceleration over the edge.

This we all know. All except, apparently, for those few who cling to the delusion that it was the US government’s fault for “forcing” the banks to lend to marginally creditworthy borrowers in the name of some equality program. This trope still pops up now and again. It is utter rubbish, but serves to fog up the post-crisis debate just enough that we have never sought proper compensation from the banks. They still exist, absent one or two of the real fringe players, and are bigger and more dangerous than ever.

So the sudden realization that all that highly rated paper spewing from the Wall Street spigot, was just toxic junk, overturned the world’s finances. The Euro zone immediately fell into disarray. Its banks had gathered debts with reckless abandon and needed help. That help took the form, by and large, of moving the debts from private balance sheets onto public balance sheets. Meaning the taxpayers and not shareholders were now responsible for piles of useless assets that they had no responsibility for creating.

Add in the burden of providing support to those thrown into unemployment by the inevitable recession the bank crisis gave life to and government budgets everywhere were thrown into disarray. Debt piled up.

So governments suddenly faced their own debt management crises. And true to the immutable laws of capitalism, the bankers began to decry the increasing piles of debt accumulated from their own vice. Those bankers and their friends in orthodox economics began to talk ominously of impending confidence crises wherein nations would be unable to access the credit markets and so continue to fund the recovery from the bank induced horror.

The ratio of debt to GDP, we were told, had risen to crisis levels and needed to be reduced. Instead of increasing GDP the advocated approach was to reduce debt.

Now any fool with even a modest education could have understood that reducing debt ratios by cutting spending would also cut GDP meaning that the risk was high that the ratio might never fall even with substantial cuts. Worse: the risk was higher that cuts would actually reduce GDP faster than it would allow debt to be reduced, thus the ratio would deteriorate.

But that doesn’t happen in orthodox textbooks. And it doesn’t fit the banker’s narrative.

So austerity was invented and doomed to fail from the beginning.

You and I told them so, but you and I don’t count. The voice of democracy has been stifled. Popular government has been subverted and re-tooled as government for the benefit of a few.

And they want to be repaid. Despite having started the crisis. Despite having made bad decision after bad decision. Despite being so-called “experts” at risk assessment. Despite the 25% unemployment. Despite the 25% decline in GDP. And despite the humanitarian catastrophe that their greed unleashed on perfectly innocent people.

That a whole slew of north European politicians have cast their lot with the bankers is testimony to the grip that plutocracy and economic orthodoxy have combined to exert. It is an insanity. It is a delirium from which Europe, or rather the Euro project, probably will not recover.

Deservedly so.

When you ask an orthodox economist what a market is comprised of they rarely mention people. When you ask a banker what constitutes a debtor nation they will not talk about human beings. They do not care about real lives. Or real consequences. Reality in all its manifest aspects is expunged from their respective analyses. Instead they speak in a language specifically constructed to dehumanize their thoughts. This is to protect them from the ethical responsibility for their ideas and actions.

Well no more. Maybe.

Democracy has spoken up.

Let us not rejoice just yet though. There is work to do.

The Greeks have resisted more plunder. But can they rebuild?

I hope so.

 

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Oh, Those Crazy Mega-Banks

Oh dear. I managed to avoid talking about banks for quite a while. It seems time to revisit our favorite villains. They’re up to no good again.

The problem with banking, as someone far wiser than I once said, is that banks are more dangerous than standing armies. I guess he must have said that back before the contemporary American infatuation with all things military. But the point remains the same.

Banks are dangerous. Really and truly dangerous. And the bigger they get the more dangerous they get. Comparing a mega-bank like Citibank with our local three branch small bank is ludicrous. They may look and sound similar, but they are in different universes. It’s like comparing a bee-bee gun to a nuclear bomb. They both can go pop. But one can do an awful lot more harm.

So much so that our regulators are scared stiff of regulating them.

You probably missed it, but one of our regulators recently admitted that his agency was afraid of enforcing the law against a big bank because of the mess it could make of the economy were it even rumored to fail, let alone actually fail. This attitude effectively moves the mega-banks outside the law. They used to be too big to fail. Now they are too big to prosecute. Don’t you wish you could be outside the law? You could trash entire economies and then bitch about being inconvenienced by those bad economies. Heck you could even get yourself bailed out whilst you foreclose on the poor people you sold rotten loans to. You would become truly blameless. For everything. You could even brag publicly, as Jamie Dimon CEO of JP Morgan Chase did, that your bank does really well in recessions.

No wonder banks cause so many recessions. They profit from them.

Not that Dimon is very good. He managed to lose a pot load of money for his shareholders in a great scam scheme risk avoidance strategy known affectionately as the ‘London Whale’. The ‘Whale’ bit being a reference to the extent of the losses the brilliant yahoos involved managed to accumulate. Not that, mind you, any of the senior executives knew about those losses. Heavens forfend! Not once were the people who earn gazillion dollar bonuses for being the epicenter of all things good involved in such plans. Oh dear heaven no. The poor dears were just as surprised as you or I when the losses started oozing from every pore of the beast they purportedly manage. Never mind. Their bonuses and stellar reputations remain intact. Safe too are the yahoos.

No. The only idiots in the episode of the ‘Whale’ are you and I who steadfastly underwrite JP Morgan Chase and its peers, tolerate it excesses, allow it to roll over its regulators, and generally muck around with our economy.

And: Yes we do underwrite the mega-banks.

They benefit from being too big to fail, prosecute, and stop. Because of this their creditors, who are the devil incarnate when they deal with your or me, become cream puffs and hand over money at ever cheaper rates to the mega-banks. You see, because bank stupidity goes unpunished – we bail them out and set them on their way every time – their creditors could care less about silly schemes like the ‘Whale’. Those losses just don’t matter. The taxpayers will step in and pay up.

Why?

Because if a mega-bank goes down, the economy goes down with it. In another context it would be called hostage taking. In banking it’s called being regulated. With the definition of regulated being that you can get away with anything.

It was not always thus. And for small banks it still isn’t thus. Small banks get closed down all the time. When they fail, the regulators think nothing of stepping in, taking over, and selling off the profit making bits to other, usually larger, banks. It goes on all the time. I know. I helped buy a few. So small bank creditors are a lot more careful and charge a lot more for their money.

So the big banks – the really dangerous ones – get all the breaks. The little ones get none.

And the bigger you get, the more breaks you get. Eventually you can even rise to lawless status. The only thing you have to fear – apart from not having enough space to accommodate your bonus – is those pesky anti-trust laws. But in post-Reagan America we don’t use those laws. Indeed we encourage bigness.

So it is both refreshing and curious to see a small, but determined, band in Congress beginning to beat the ‘break up the banks drum’.

Yes. Please. Break up the banks.

And if you think this is academic think, if you will, for a moment about poor Cyprus.

Cyprus is one of those unfortunate small places that allowed its banks to outgrow its economy. Cypriot bank assets are about 800% of the island’s GDP. Its banks had become a favorite offshore location for Russian ‘hot’ money. The Cypriot economy has been destabilized in recent years, it is shrinking and needs Euro Zone help.

This is another one of those paradoxes. Euro Zone help is the same as applying the leeches. If the first leech doesn’t work – it never does – then they apply more. In this case the leech takes the form of a one time tax on savings accounts. Your savings account, were you a Cypriot bank customer, is about to get zapped by as much as 10%. So whereas your retirement nest egg was $10,000, it could now be as little as $9,000. All because of hot money and unregulated international capital flows.

So Cyprus is going the way of Iceland and Ireland before it. All because its banks swam in the shark infested waters of global capital flows. I am sure it won’t be long before we read stern messages about how the sudden rise in poverty and unemployment within the island’s citizenry is a small and necessary price to pay for stabilizing the banking system.  Oh. And you may hear homilies from sundry German bankers about then need for fiscal discipline as if Cyprus had lax budgets. It didn’t. It was a model of fiscal rectitude.

Nope. It was just bad at regulating its banks.

Like us.

The danger of us following in Greek or Spanish footsteps comes not from our debt or our deficit. It comes from our unwillingness to confront the mega-banks.

Our biggest banks are a clear and present danger. They represent a threat to national security.

That ought to get everyone’s attention.

Let’s stomp on the mega-banks. Let’s break them up.

 

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Historic Grumpiness

I am not sure how to react to the drift of events. It seems as if our leaders, both here and in Europe, are determined to re-create the Great Depression. I guess it must have been fun the first time through. While else would they be so steadfast in their lunacy?

We live in absurd times. We are lead by fools. Our commentariat is stupid, ignorant, badly educated, or simply to darned lazy to pick up a history book. It surely isn’t difficult. Even I can do it.

Boy, am I grumpy.

I crossed the line today when I came across a piece in the Washington Post by the now less than notable – in my mind – Robert Samuelson. His article attempts to provide a critique of Keynes. The conclusion being that Keynes would repudiate Keynesian policies in the supposedly debt ridden world of today. You can read the article yourselves, I am too annoyed to provide a prÌ©cis here. Suffice to say Samuelson succeeds only in displaying his ignorance both of Keynes and of recent history.

His argument is, as my father would say: utter tosh. Twaddle. Of course it doesn’t help my distemper to have spent the prior weekend re-reading Minsky, but let that pass.

We are living through an epic repudiation of classical economics in all its varied guises. In my more aggressive moments I wish that the Swedes, or whoever it is that doles out the faux Nobel prize for economics, had a recall button. The embarrassment of an entire generation of economists is on display before us, but instead of a scientific reaction – a healthy change of mind in view of their failure – we are being subjected to a petulant, nay petty, rearguard action wherein the orthodox true believers throw hissy fits of hate against the one theoretical construct that has, with flying colors no less, stood up against that facts.

Keynes has been vindicated. Not repudiated. Knowing as we do that Keynes was hardly a shrinking violet and was certainly not too shy to claim righteous victory for his ideas, it would shock me to the core to hear or read him walk away from his theories in their time of victory.

Have I made myself clear?

Whatever flavor of Keynes you adhere to, and this is not a moment to parse them apart, the basic constructs have supplied us with both analytical power to explain events, and policies to improve our lot or to solve our problems. That our leadership cannot or will not embrace those policies is a source of frustration for all those advocating them. Ideological blocks are preventing us applying the cure. But that we know the cure is clear.

Let’s get this straight:

  1. Printing a wad of money right now will not have an impact on inflation. Evidence: it hasn’t yet, despite the torrent of money flooding into the economy. Last Friday’s inflation numbers showed core inflation of 0.2% – the upward spike in commodity prices from earlier in the year are still rumbling through the system. Headline inflation was flat. Flat. Narry a surge in sight. Not one whit of hyperinflation. So, why I wonder, are we still warned that inflation is “just around the corner”and that all that money will absolutely throw us into a Weimar style disaster? We have been thus warned by the hardliners for three years straight. They have been utterly wrong. Also for three years straight. After all that error one would have thought a little introspection is called for along with a modicum of contrition. But no. We get the same argument trundled out one more time. At some point inflation will certainly rise, and, like the proverbial broken clock, I assume they will claim victory for their falsified idea.
  2. More evidence: throughout this crisis we have been told that the markets, vaguely defined as creditors holding sovereign debt, will run for the hills as the debt issued to fund deficit spending piles up. Just you wait, argue the hawks, interest rates are about to rocket skyward and we will not be able to fund ourselves any longer. What happened? US rates have fallen. They are low. Very low. Creditors are falling over themselves to buy US debt. Somehow they don’t seem to worried. They are running towards, not away, from the US Treasury. OK, say the hawks, how about those Europeans? They seem to be having funding difficulties. Yes they are. But not because of poor fiscal management. The markets are not scared of the debt. They are scared of the the pickle that a poorly integrated fiscal union is having. Countries with balance of payment problems – Spain for example – cannot adjust their economies when they remain locked with others with the exact opposite imbalance. So they have to throw themselves into austerity measures far more draconian than the original problem required. And, let the record show, the Spanish were paragons of fiscal rectitude before the crisis, they were not spendthrift. Not at all. Instead, the Euro is acting in the same manner that the old gold standard did. Anyone tethered to it is suffering. External adjustment is not possible, so all the adjustment has to be made within. That means lower wages, deflation, and recession. In turn this means paying off debt will be more, not less difficult. Austerity leads to contraction no matter how you spin it. And, anyone with even a smidgeon of historical awareness knows that, back in the 1930’s, the countries that abandoned the gold standard early were also those who recovered early. They were unshackled and could adjust. Thus the UK recovered well before the US or France, despite its similar problems. Heroic austerity is simply another description of stubborn self defeating folly.
  3. This latter point deserves to stand by itself: austerity is just that. Austerity. Slashing away at government spending reduces the economy in the absence of any offsetting private sector expansion. And the very reason that debt-to-GDP ratios have spiraled upward is because GDP has slumped while safety net spending has kicked into prevent a free fall. Economies can get stuck in a vicious squeeze when this happens. The response should not to be to dig the hole deeper, but to keep the cash flowing in order to buy time for the private sector to work out its kinks. If those kinks are debt related then the time needed – and the cost – will be accordingly high. In other words we need to induce growth, not suffer some latter day purgative episode of indeterminable length. This not a moment to savor a self inflicted bout of moral scourge and cleansing, but to find ways to re-build. That can take debt. Lots of it. Meanwhile countries that implement austerity are all, without exception, suffering unnecessarily. Unemployment has erupted wherever austerity has been applied. Imbalances are moving in the right direction, but only modestly and at great human cost. Apparently the people of Ireland are more aware of the truth than the hawks, they are voting with their feet. Irish emigration has shot up during the years of austerity. Meanwhile the Irish economy is shrinking, unemployment has reached about 15%, and all the indication is that the pressure is building not easing. The voters suffering at the sharp end of economic policy know better than those developing the policy. Austerity doesn’t work.

Thus, when we come across an article such as Samuelson’s we have to shudder at the enormity of its ignorance. Or it’s author’s willingness to avoid evidence. In polite company we don’t refer to it with the language it deserves. Elsewhere is another matter.

History will not treat kindly those who refuse to learn from this crisis. Millions of lives are being ruined because of a stubborn adherence by poorly educated experts and leaders to a set of ideas that have been totally falsified by events.

And those defunct ideas are not those of Keynes. Far from it. His ideas are still standing.

Capitalism, oh horror, turns out to be riddled through with internal weaknesses. Markets are not always self correcting. And, in honor of Minsky, the financial world is endemically unstable. Indeed the very strengths – don’t laugh, there must be some somewhere – of our banking system condemn it to periodic failure. Disruptions in one market can, indeed, leak over into others. Wages are sticky. Heck stuff happens – uncertainty really, really matters. The list goes on.

The list reflects reality. The list reflects Keynes. Or, rather, Keynes understood the list. Which means, for all his obscure writing and occasionally vague explanation, Keynes understood reality.

Which is why his ideas work. Which is way more than we can say for the other folks.

History. Facts. They can make you grumpy.

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