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Posted by on Dec 10, 2011 in Economy, International | 3 comments

Saving The Plutocrats

Here is some economic history from Barry Ritholtz:

We’ve known for literally thousands of years that debts need to be periodically written down, or the entire economy will collapse. And see this.

We’ve known for 1,900 years that that rampant inequality destroys societies.

We’ve known for thousands of years that debasing currencies leads to economic collapse.

We’ve known for hundreds of years that the failure to punish financial fraud destroys economies.

We’ve known for hundreds of years that monopolies and the political influence which accompanies too much power in too few hands is dangerous for free markets.

We’ve known for hundreds of years that trust is vital for a healthy economy.

We’ve known since the 1930s Great Depression that separating depository banking from speculative investment banking is key to economic stability. See this, this, this and this.

We’ve known since 1988 that quantitative easing doesn’t work to rescue an ailing economy.

We’ve known since 1993 that derivatives such as credit default swaps – if not reined in – could take down the economy. And see this.

We’ve known since 1998 that crony capitalism destroys even the strongest economies, and that economies that are capitalist in name only need major reforms to create accountability and competitive markets.

We’ve known since 2007 or earlier that lax oversight of hedge funds could blow up the economy.

Of course the technocrats and politicians in the US and Europe have either learned none of these lessons or are ignoring them.  The latest example is Europe’s disastrous summit.

I thought disasters were all meant to happen over the weekend? Somehow, in Brussels, EU leaders have contrived to pull defeat out of the jaws of victory on Thursday night, leaving Friday for finger-pointing and recriminations and wondering whether anybody who signed on to this deal has any chance at all of even getting re-elected, let alone being remembered as one of the leaders who saved the euro.

Here’s how the FT put it on Wednesday:

It borders on hysterical to say there are but hours to save the euro, but there is a risk that if the crisis is not now tamed the price of a rescue might start to spiral out of politicians’ grasp. The stakes are therefore very high at Friday’s summit. The world cannot afford another half-baked solution.

And yet, inevitably, another half-baked solution is exactly what we got. Which means, I fear, that it is now, officially, too late to save the Eurozone: the collapse of the entire edifice is now not a matter of if but rather of when.

So why is this happening? We will return to Ritholz’s first point for the answer:

We’ve known for literally thousands of years that debts need to be periodically written down, or the entire economy will collapse.

The technocrats and politicians are simply ignoring the fact that there is trillions of dollars of debt that is never going to be repaid. Of course the primary goal is not to save the international financial system or the Euro but to protect the TBF banks and the wealth and power of the plutocrats.  Of course their policy will fail on all counts.

As Kevin O’Rourke points out the forced austerity makes it even less likely that any of the debt will ever be repaid.

One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and is predicting declines in eurozone GDP for late 2011 and early 2012.

A contracting economy will be even less likely that debt will be repaid.  It should be obvious that the Eurozone is going to eventually breakup.  O’Rourke thinks the sooner the better.

An immediate breakup of the eurozone would be a catastrophe, which is why the European Council agreed to a “fiscal stability union” in exchange for some movement by the ECB. This may indeed prevent collapse in the short run – though that is far from certain. Treaty negotiations outside the EU framework, and the ratification procedures that will follow, are a recipe for even more uncertainty when Europe needs it least.

In the slightly longer run, such a deal, assuming that it goes ahead, will mean continued austerity on the eurozone periphery, without the offsetting impact of devaluation or stimulus at the core. Unemployment will continue to rise, placing pressure on households, governments, and banks. We will hear much more about the relative merits of technocracy and democracy. Anti-European sentiment will continue to grow, and populist parties will prosper. Violence is not out of the question.

This summit should have proposed institutional changes to avert such a scenario. But if such changes are politically impossible, and the euro is doomed, then a speedy death is preferable to a prolonged and painful demise. A eurozone collapse in the immediate future would be widely perceived as a catastrophe, which should at least serve as a source of hope for the future. But if it collapses after several years of perverse macroeconomic policies required by countries’ treaty obligations, the end, when it comes, will be regarded not as a calamity, but as a liberation.

And that really would be worse.

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  • RP

    “debts need to be periodically written down, or the entire economy will collapse”. When repudiation of debts occurred in the 1800’s as stated in this article, who owned that debt? The debt owned today is much different since much of it is owned by foreign nations as well as middle class citizens here as part of personal or employers pension funds. The outcome would be much different today.

    “trust is vital for a healthy economy”. Sure don’t have that today and no one in sight of the Presidency that appears to be bringing this as a major issue for the election.

    “failure to punish financial fraud destroys economies.” Today, we have failure to punish those who fraudulently certified their financial statements, resulting in huge losses. Political cronyism still prevails due to the large number of Wall Streeters either in or just out of the current administration insider network.

    “We’ve known since the 1930s……” Can anyone find anything listed after this point that our leaders in Washington are not guilty of?

    All we get is class warfare, pandering to political supporters and more spending and debt.

    Guess the Eurozone can break up, but how does the USA handle the problems in the future. Could be that we repudiate our debt, but what kind of country would be left after the middle class loses most of its assets due to the extreme depression that will follow that act?

  • @RP
    “Today, we have failure to punish those who fraudulently certified their financial statements, resulting in huge losses.”
    If you are talking about mortgage fraud it was the lenders that certified the financial statements and created the false W2’s long after the borrowers had signed off. It is indeed a crime that none of these lenders have been brought to justice. I suggest you read The Monster: How a gang of predatory lenders and Wall Street bankers fleeced America – and spawned a global crisis by Michael W. Hudson

  • Rcoutme

    One solution to this mess is to create a “Bank of the United States” or have individual states create their own banks (like in North Dakota). The reason is that then, when a loan is created, the Bank of the United States would be the ‘beneficiary’ of the money. It would, subsequently, be Americans paying themselves. In addition, the power of other banks (including the Federal Reserve) to create money would be eliminated.

    Thus: when a project, such as a dam or a road, needs to be created, the government would create the money to pay the workers and such (materials, whatever). The repayment of the ‘loan’ would generate interest that would go directly to the taxpayers instead of to the bankers. In North Dakota this has been a huge benefit as they can lend to their own communities (towns, schools, etc) and the interest on the loans goes to the state taxpayers.

    I begged my state congressmen (Massachusetts) to create a similar bank. They said that they didn’t trust the government to run such an institution. They don’t trust THEMSELVES? Ouch…

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