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History Teaches Us that We Learn Nothing from History, Part 2: It’s 1931 all over again

Following last weekend’s epic fail announced $125 billion bank bailout in Spain, the ever present question of “what’s next” has been looming larger than usual this past week. Especially since the details of the bailout are yet to be determined. After all, if an amount of money that could cut Spain’s unemployment rate in half for a year could end up fizzling in under 5 hours, something doesn’t add up. Dramatic policy failures like this often lead to some sort of soul searching and grasping for historical lessons that might apply to the current conundrum. Let’s watch:

Ghost of Nazi Past Haunts Austerity-Gripped Europe: Euro Credit
By John Glover – Jun 22, 2012 2:21 AM CT

The specter of the 1930s financial crisis that culminated in the rise of Adolf Hitler’s Nazi party and the Second World War is stalking Europe.

In May 1931, Creditanstalt, founded in Vienna by the Rothschild banking dynasty and the biggest lender in what remained of the Habsburg Empire, suffered a run. Its collapse after a merger with an insolvent rival sparked a crisis that left Germany and central Europe strewn with failed banks, caused defaults in Europe and Latin America, knocked the pound off the gold standard, and forced the New York Federal Reserve by October to raise its discount rate by 2 percentage points.

“The biggest economic catastrophe of the last century has been, of course, the big crisis after 1929,” Ewald Nowotny, governor of the Austrian central bank, said at a conference this week in Vienna. “I truly can say that when we had the big crisis of 2007 and 2008, it was in the back of the mind of everybody, all of us, every central banker, that we must avoid the mistakes of the 1930s.”

What Harold James, professor of history and international affairs at Princeton University, calls the “vicious cycle” of contagion between banks and sovereigns is spinning today, just as it was 80 years ago. Spain’s 10-year borrowing cost has averaged 6.6 percent this month, more than a percentage point higher than a year ago, after it sought 100 billion euros ($127 billion) to bolster its banks.

Local Taxpayers

The European Union’s accord with Spain, triggered by the collapse of Bankia SA, the country’s third-biggest lender, will leave the nation with debt about equivalent to its annual gross domestic product. Ireland’s 63 billion-euro bailout of its banks pushed sovereign debt to 108 percent of GDP last year from 44 percent in 2008.

The critical thing now and in the 1930s is that you can’t distinguish between bank and sovereign debt,” said Brian Reading, an economist at Lombard Street Research in London. “As long as banking systems remain national, it doesn’t much matter how international the bank is, local taxpayers are on the hook for it if it collapses.

Under Germany’s austerity policies in the 1930s, taxes rose, benefits and wages were reduced and unemployment soared, stoking the popular ire that Hitler harnessed. Extremists are gaining ground now as unemployment in Greece passes the 20 percent mark after five years of recession. The far-right Golden Dawn won 6.9 percent of the vote and 18 seats in the country’s most recent elections. France’s anti-immigrant, anti-euro National Front won two seats in parliamentary elections June 17.

Weak Mergers

Creditanstalt in 1931, like Spain’s Bankia now, was created by mergers with lenders weakened by toxic loans and capital shortfalls. After Creditanstalt failed, the government stepped in to prop it up, fatally hurting its own credit. A run on Austria’s bonds and the schilling ensued, according to Michael Bordo, national fellow of the Hoover Institution on campus of Stanford University in Palo Alto, California.

Yes, the many lessons civilization learned from the economic catastrophes of the 1930’s that led to the rise of fascism – the same ones aggressively unlearned over the past half a century – are apparently getting relearned. For instance, if you’re going to conduct a major bailout of a systemically important bank, make sure it’s actually big enough to get the job done. And if you’re going to do an international big bank bailout for a country, don’t do it in such a manner that the bailout saves the bank but kills country’s credit. Learning from history never gets old

Spain’s borrowing costs hit 12-year high
Rates on 12 to 18-month bonds top 5% as PM fails to persuade eurozone leaders at G20 that bailout is not national debt

Giles Tremlett in Madrid
guardian.co.uk, Tuesday 19 June 2012 10.55 EDT

Spain’s economy continued to ride the bailout rollercoaster on Tuesday as borrowing costs remained at unsustainably high levels and the government paid its highest rate in a dozen years to raise money.

A €3bn (£2.4bn)bond issue proved, however, that Spain could still borrow on the markets – even if interest rates on 12 to 18-month bonds have now risen to more than 5%.

Prime minister Mariano Rajoy, meanwhile, reportedly failed to persuade eurozone colleagues that a bailout of up to €100bn for Spanish banks should not be counted as national debt – a move that would have eased growing pressure for a full bailout of Spain.

“Connecting banking risk and sovereign risk has become very damaging,” Rajoy told fellow world leaders at the G20 meeting in Mexico, according to Spanish reporters who accompanied him.

Although others in Europe would also like to reduce the link between banking risk and country risk, the eurozone finance ministers who decide on bailouts were reportedly against the idea. “The rules do not permit it,” one senior official told El País newspaper.

The €100bn, which is expected to be channelled through Spain’s bank restructuring fund, will increase Spain’s national debt by up to 15%.

Spain is expected on Thursday to state the global figure of how much it will take from the €100bn credit line offered to its banks by the European Union’s bailout fund. That decision would be made after a first – and rapid – round of independent audits of Spain’s banking system.

A decision by the Bank of Spain to postpone a second round of audits from late July until September did nothing to settle market nerves. Yields on Spain’s benchmark 10-year bonds dropped slightly, but still stayed over the crucial 7% rate that many economists consider unsustainable.

Finance minister Luis de Guindos insisted that Spain did not deserve to be paying such a high penalty, claiming that reforms would soon reduce the budget deficit and set growth going again. “The way markets are penalising Spain today does not reflect the efforts we have made or the growth potential of the economy,” he said. “Spain is a solvent country and a country which has a capacity to grow.”

Budget minister Cristóbal Montoro continued to call for the European Central Bank (ECB) to resume buying Spanish bonds in order to keep borrowing costs down – and some analysts saw ECB action as inevitable as fears over contagion in Italy grew.

But others thought it was too late to see off a full bailout of Spain’s entire economy. “It is inevitable,” said Harvinder Sian, of RBS. “The market has made its statement. There has to be a change in the way the Europeans are attacking the crisis.”

Many analysts now consider that the decisions which will shape the future of Spain are no longer in the hands of its own politicians. “The Spanish government is close to exhausting its domestic policy options, with the markets increasingly demanding a game-changing response from the EU/ECB to the latest phase of the crisis,” said Raj Badiani of IHS Global Insight.

Ok, well, not ALL the lessons have been learned. But at least it appears that Bankia’s bailout will be big enough. Perhaps that will help calm the markets:

Spain: Auditors determine bank bailout could cost as much as $78B in worst case scenario

By Associated Press, Published: June 21

MADRID – Spain’s troubled banks could need as much as €62 billion ($78.6 billion) in new capital to protect themselves from economic shocks, according to independent auditors hired by the government to assess the country’s struggling financial sector, officials said Thursday.

The Spanish government will use the auditors’ report as the basis for their application for a bank bailout loan from the 17 countries that use the euro. With tensions rising over the future of the eurozone, Spain is expected to submit its specific request for outside assistance no later than Monday, said Jean-Claude Juncker, who chairs meetings of zone’s finance ministers.

“We invited Spain to pursue this clear and ambitious strategy, which needs to be implemented swiftly and communicated early,” Juncker said after Spanish Economy Minister Luis de Guindos presented the audit results to the ministers who are members of the so-called Eurogroup.

Deputy Bank of Spain Governor Fernando Restoy noted that this worst-case scenario cited by the auditors was far below the €100 billion ($126.7 billion) loan offered by the eurozone’s finance ministers two weeks ago.

Spain’s banking sector is struggling under toxic loans and assets from the collapse of the country’s property market in 2008. Concerns that Spain’s economy is so weak that it could not afford the cost of propping up its banks has sent its borrowing costs soaring to levels not seen since it joined the European single currency in 1999.

In the auditors’ stress test for the worst-case economic scenario – a fall in gross domestic product of 6.5 percent over the period 2012-2014 – most of the banks were deemed to be in a “comfortable” position, Restoy said.

“We’re not talking about the imperative capital necessities of the banks. We’re not talking about someone urgently needing such and such an amount of capital to deal with their obligations,” said Restoy. “We’re talking about the capital that would be needed if we were to see a situation of extreme tension which is very unlikely to come about.”

“We should keep in mind we are not talking about how much capital an entity needs to survive. We’re talking about how much capital an entity will need to confront a situation of extreme stress,” he added.

Eurozone finance ministers offered Spain a bailout loan of up to €100 billion on June 9. The terms of the loan – for which Spain, rather than banks, will ultimately be responsible for – still have to be negotiated.

The release of the audits probably won’t erase market nervousness about Spain, said Mark Miller, an analyst with Capital Economics in London.

“At face value it looks as if there is a reasonable safety margin given that up to €100 billion is potentially available,” he said. “Having said that, the extent of the economic situation in Spain could even deteriorate beyond what is being described as an adverse scenario.”

Well there’s some good news for a change. Sure, the $125 billion ‘bailout’ of Spain’s banks will be added to Spain’s national debt, potentially driving the country into insolvency. But at least that entire $125 billion probably won’t be necessary. After all, the auditors concluded that only $78 billion would be needed under a ‘worst case scenario’ of a 6.5% fall in GDP from 2012-2014. Spain’s economy shrank at an measly annualized rate of 1.2% in the fourth quarter of last year, so it will take some really bad policies or shocks if we’re going to see that ‘worst case scenario’ come to fruition. For instance, the immediate problem facing Spain is the record high interest rates it’s paying in the debt markets and the threat that it simply won’t be able to stay solvent. So anything that actively encourages ‘the market’ to expect Spain to default could potentially trigger the cataclysmic Spanish default scenario might trigger a ‘worst case scenario’. You know, something like Germany’s Chancellor sending signals that the eurozone’s ‘core’ (which is pretty much just Germany at this point) isn’t serious about addressing Spain’s immediate debt crisis and is ok with a default or even the unraveling of the eurozone. And we all know that could never happen:

Financial Times
June 22, 2012 7:07 pm
Eurozone rift deepens over debt crisis

By Guy Dinmore in Rome and Peter Spiegel in Luxembourg

Leaders of the eurozone’s four largest economies pledged on Friday to back a €130bn growth package and defend the common currency but remained divided over the credit crisis as Germany continued to resist proposals to issue common debt and use bailout funds to stabilise financial markets.

The meeting in Rome was intended to demonstrate a coming together ahead of next week’s EU summit, but ended in disagreement over the need for short-term intervention in the markets and how to achieve greater political and financial union.

At a joint press conference Angela Merkel, German chancellor, declined to endorse affirmations by all three of her co-heads of government – Italy’s Mario Monti, François Hollande of France and Spain’s Mariano Rajoy – of the need to use the eurozone’s bailout funds to “stabilise financial markets”.

“We need to use all existing mechanisms to stabilise markets, to give confidence, to fight speculation,” Mr Hollande said. “This would be an important step,” he added, endorsing a proposal by Mr Monti that the bailout fund should be used to buy the debt of “virtuous” countries on the open market.

Instead, Ms Merkel said Europe needed to respect existing rules and had to work towards common structures to regulate the euro rather than have policies emanating from “17 parliaments each with national sovereignty”.

“If I am giving money to Spanish banks … I am the German chancellor but I cannot say what these banks can do,” she said.

Yes, there’s no way we’re going to see a repeat of the 1930’s global financial panic. The historical lessons are just too compelling for a repeat of those mistakes:

April 20, 2011, 11:01PM EST
Bloomberg Businessweek
Lessons from the Credit-Anstalt Collapse
Europe is in far better shape than when the Austrian bank failed in 1931, but the risk of a domino effect remains

By Peter Coy

In May 1931, a Viennese bank named Credit-Anstalt failed. Founded by the famous Rothschild banking family in 1855, Credit-Anstalt was one of the most important financial institutions of the Austro-Hungarian Empire, and its failure came as a shock because it was considered impregnable. The bank not only made loans; it acquired ownership stakes in all kinds of companies throughout the sprawling empire, from sugar producers to the new automobile makers. Its headquarters city, Vienna, was a place of wealth and splendor, famous for its opera, balls, chocolate, psychoanalysis, and the extravagant architecture of the Ringstrasse. The fall of Credit-Anstalt-and the dominoes it helped topple across Continental Europe and the confidence it shredded as far away as the U.S.-wasn’t just the failure of a bank: It was a failure of civilization.

Once again, Europe’s banking system, and by extension its social fabric, is threatened by bad loans. What had been slow-moving fiscal disasters in Greece, Ireland, and Portugal have gathered speed in recent weeks despite rescue packages designed to calm markets and prevent spreading the contagion to Spain, Belgium, and beyond. Portugal’s 10-year borrowing costs hit a record 9.3 percent on Apr. 20, up from 7.4 percent just a month before, even as authorities met in Lisbon on an €80 billion ($116 billion) financing package. The higher that creditors drive up interest rates, the more unaffordable the debt becomes-creating the conditions for the very failure they fear. “All of the rescue packages don’t really ensure that we can escape this adverse feedback loop that these countries are being trapped in,” Christoph Rieger, head of fixed-income strategy at Frankfurt-based Commerzbank (CRZBY), told Bloomberg Television on Apr. 19.

The tipping point came early in 1931 when a bank director named Zoltan Hajdu refused to sign off on Credit-Anstalt’s books without a comprehensive reevaluation of the bank’s assets. The bank revealed losses that it kept revising upward as the weeks passed. Depositors withdrew funds. The Austrian government stepped in to guarantee all the bank’s deposits and other liabilities-but that only brought the government’s own creditworthiness into question. “In today’s language,” says Schubert, “Credit-Anstalt was too big to fail, but too big to save.”

Harold James, a British historian at Princeton University, described what happened next in his 2001 book The End of Globalization: Lessons from the Great Depression. “The Viennese panic brought down banks in Amsterdam and Warsaw. In June and July the scare spread to Germany, and from there immediately to Latvia, Turkey, and Egypt (and within a few months to England and the U.S.).” Austria got an undersized loan from the Bank for International Settlements and some help from the British branch of the Rothschild family. But French politicians rejected an international rescue without political concessions from Germany that weren’t forthcoming.

Thus the failure of Credit-Anstalt accelerated the financial panic that turned a recession into a global depression. Economic distress in Austria contributed to the outbreak of violent conflict between socialists and fascists in 1934. Jews became scapegoats. In 1938, Nazi Germany occupied Austria, and Adolf Hitler was received by adoring crowds in Vienna. Albeit indirectly, the failure of Credit-Anstalt helped clear the path for some of the darkest events of the 20th century.

The scariest thing about the Credit-Anstalt default is that it occurred in a small, peripheral country, just as today’s worst problems are concentrated so far in Greece, Ireland, and Portugal, which combined make up just 5 percent of the 27-nation European Union’s gross domestic product. “Austria is a tiny, tiny little place, and you wouldn’t imagine it could set off a chain of domino reactions. But it did. I do see exactly that potential now,” says James.

For that reason, German economist Holger Schmieding says Europe should do everything in its power to prevent or at least delay defaults by national governments. Schmieding, chief economist of the German private bank Joh. Berenberg Gossler, says keeping Greece and others from defaulting for as long as possible-if not forever-will give banks in Germany, France, and other nations that have lent to them the time they need to rebuild their capital so they can withstand the hit from loan losses. The Bank for International Settlements says that as of last September, German banks had over €220 billion worth of exposure to Greece, Ireland, and Portugal, and French banks had over €150 billion worth.

For all of Europe’s bickering over aid to Greece, Ireland, and Portugal, the Continent is more united and financially stable now than in the interwar period. “Unlike Austria in 1931, the euro zone has the resources to bail out the threatened banks without really triggering a full-blown debt crisis,” says Michael D. Bordo, a Rutgers University economic historian. The more Europe takes the lessons of Credit-Anstalt to heart, the less likely it is to make the same mistakes again. The introduction of Schubert’s book begins with the famous line of George Santayana, the Spanish philosopher, who said, “Those who cannot remember the past are condemned to repeat it.” J. Bradford DeLong, an economist at the University of California at Berkeley, thinks Europe has absorbed Santayana’s message-to an extent. “Because we remember the Credit-Anstalt, we will not make that mistake,” DeLong says. “We will make different ones.”

Lessons learned.


14 comments for “History Teaches Us that We Learn Nothing from History, Part 2: It’s 1931 all over again”

  1. Well this is kind of nice to see: The new ‘pro-bailout’ governing coalition in Greece appears to be familiarizing itself with now-taboo basic economic concepts. Concepts like, for instance, usury:

    Greece Seeks at Least Two-Year Extension to Bailout Goals
    By Maria Petrakis and Tom Stoukas – Jun 23, 2012 7:53 AM CT

    Greece will push its creditors to extend fiscal deadlines under the country’s bailout program by at least two years, according to a policy document drawn up by the three parties in the country’s governing coalition.

    New Democracy, Pasok and the Democratic Left agree that plans to cut 150,000 public-sector jobs should be scrapped, the document, received by e-mail from the Greek government today, showed. Proposals also include reducing sales tax for cafes, bars, restaurants and the agricultural industry, and increasing the threshold for paying income tax.

    The government affirmed its commitment for the need to reduce deficits, control debt and implement the structural reforms the country needs, the policy statement showed.

    Prime Minister Antonis Samaras held his first Cabinet meeting on June 21 after his New Democracy party won Greece’s general election on June 17 on pledges to renegotiate parts of the 130 billion-euro ($163 billion) second bailout from the European Union and International Monetary Fund while keeping Greece in the euro. Samaras joined forces with Pasok, which finished third on June 17, and sixth-placed Democratic Left.

    Greece has slipped behind budget-cutting targets that euro- area nations and the IMF imposed in exchange for 240 billion euros in aid pledges in the past two years.

    The partners support state-asset sales, a key plank of plans to reduce Greece’s debt, and will negotiate with creditors that some of them, like the national rail company OSE, be carried out through public-private partnerships, according to the document.

    The Greek state is seeking to raise 50 billion euros from state assets, half of which are real estate, by 2020 to meet conditions of its bailout agreement. The process was halted after the country’s first election on May 6 produced no government.

    So the state-asset sales are still on track, but at least there appears to be some sort of push back against punitive policies that are little more than ‘feel good’ measures designed to placate a sense that ‘those lazy Greeks need to be punished’!(amongst other things) Not that a moderate pullback in these austerity demands will make much of a difference at this point, but still. Baby-steps in the right direction are still better than long strides down the path to oblivion.

    And, of course, there’s always the possibility that these pleas won’t make a bit difference:

    Schaeuble says “no” to throwing money at euro crisis

    BERLIN | Sun Jun 24, 2012 1:53pm EDT

    (Reuters) – Throwing more money at the eurozone debt crisis will not solve the problem because the troubles have to be resolved at the cause, German Finance Minister Wolfgang Schaeuble said on Sunday.

    Schaeuble also said in an interview with German TV network ZDF that Greece has not done enough to fulfill promises it made in exchange for bailout funds. Schaeuble also criticized the recent interventions by U.S. President Barack Obama.

    “We have to fight the causes,” Schaeuble said. “Anyone who believes that money alone or bailouts or any other solutions, or monetary policy at the ECB — that will never resolve the problem. The causes have to be resolved.”

    Schaeuble added: “It’s not going to help to take money to it. The decisive thing is to credibly fight the causes of the crisis. It’s succeeding very well in Ireland and Portugal. It’s not succeeding very well in Greece. But it must succeed in Greece. There’s no other way to do this.”

    Schaeuble said Greece has clearly not done enough.

    “Greece hasn’t tried enough so far, that has to be said quite clearly,” Schaeuble said. “That has to be said with respect for the domestic political difficulties. But no one on earth who has followed this issue would think that Greece has fulfilled what it has promised.

    “Italy and Spain are different on this question,” he added. “They’re making great reform efforts.”

    Yes Greece, why can’t you simply address the core causes of your economic funk: inherent currency union structural flaws everyone was warned about and the dangers of an unproven ‘internal devaluation’ scheme Greek sloth. If you finally address this ’cause’, you’ll get a cookie, just like one Spain was given.

    Really Greece, why can’t you just be more like Ireland?

    Posted by Pterrafractyl | June 24, 2012, 4:17 pm
  2. As Krugman points out, the parallels between today and 1931 include trans-Atlantic policy failures:

    Op-Ed Columnist
    The Great Abdication
    Published: June 24, 2012

    Among economists who know their history, the mere mention of certain years evokes shivers. For example, three years ago Christina Romer, then the head of President Obama’s Council of Economic Advisers, warned politicians not to re-enact 1937 – the year F.D.R. shifted, far too soon, from fiscal stimulus to austerity, plunging the recovering economy back into recession. Unfortunately, this advice was ignored.

    But now I’m hearing more and more about an even more fateful year. Suddenly normally calm economists are talking about 1931, the year everything fell apart.

    And it’s happening again, both in Europe and in America.

    Yet let’s not ridicule the Europeans, since many of our own policy makers are acting just as irresponsibly. And I’m not just talking about Congressional Republicans, who often seem as if they are deliberately trying to sabotage the economy.

    Let’s talk instead about the Federal Reserve. The Fed has a so-called dual mandate: it’s supposed to seek both price stability and full employment. And last week the Fed released its latest set of economic projections, showing that it expects to fail on both parts of its mandate, with inflation below target and unemployment far above target for years to come.

    This is a terrible prospect, and the Fed knows it. Ben Bernanke, the Fed’s chairman, has warned in particular about the damage being done to America by the unprecedented level of long-term unemployment.

    So what does the Fed propose doing about the situation? Almost nothing. True, last week the Fed announced some actions that would supposedly boost the economy. But I think it’s fair to say that everyone at all familiar with the situation regards these actions as pathetically inadequate – the bare minimum the Fed could do to deflect accusations that it is doing nothing at all.

    Why won’t the Fed act? My guess is that it’s intimidated by those Congressional Republicans, that’s it’s afraid to do anything that might be seen as providing political aid to President Obama, that is, anything that might help the economy. Maybe there’s some other explanation, but the fact is that the Fed, like the European Central Bank, like the U.S. Congress, like the government of Germany, has decided that avoiding economic disaster is somebody else’s responsibility.

    None of this should be happening. As in 1931, Western nations have the resources they need to avoid catastrophe, and indeed to restore prosperity – and we have the added advantage of knowing much more than our great-grandparents did about how depressions happen and how to end them. But knowledge and resources do no good if those who possess them refuse to use them.

    And that’s what seems to be happening. The fundamentals of the world economy aren’t, in themselves, all that scary; it’s the almost universal abdication of responsibility that fills me, and many other economists, with a growing sense of dread.

    Posted by Pterrafractyl | June 24, 2012, 7:25 pm
  3. Russia and China: You’re friendly neighborhood lenders you really hope approves your application for a loan because if they turn you down it’s loan shark time:

    NY Times
    Cyprus Becomes 5th E.U. Member to Seek Rescue
    Published: June 25, 201

    PARIS – Cyprus on Monday said it was formally requesting a bailout from the European Union in a bid to bolster its struggling banks, making it the fifth euro zone country to request a rescue.

    The announcement came after weeks of concern that the crisis in Greece and a potential Greek exit from the euro could bring down the economy in the small island nation, whose banks are heavily exposed to Greece.

    The slim victory of a pro-euro party in recent Greek elections helped to temporarily alleviate that concern, even as economists said Cyprus could need as much as €10 billion, or $12.5 billion, to shore up its ailing banks and cash-strapped public sector.

    Cyprus needs to find €1.8 billion, or about 10 percent of its gross domestic product, to recapitalize its second-largest bank, Cyprus Popular Bank, by a June 30 deadline, according to Cypriot officials. In total, Cypriot banks have outstanding loans or other money at risk totaling €152 billion, or eight times the size of the country’s gross domestic product, according to the International Monetary Fund. Such exposure has made the country vulnerable to financial upheaval.

    Cyprus has asked the European Union not to impose demands for harsh austerity and to focus the rescue package on the country’s banks, Cypriot officials say. The country has been so determined to avoid Draconian caveats – including calls from some countries that it suspend its 10 percent corporate tax rate – that it had recently sought aid from Russia and China.

    Michalis Sarris, a former World Bank economist and finance minister who is now chairman of Cyprus Popular Bank, said Monday that Cyprus was in talks with China over a possible loan. China was potentially interested in a stake in a Cypriot bank, in return for a toehold in the country’s burgeoning gas industry, officials said.

    But with time running out, officials said Cyprus, which has been shut out of international markets for more than a year, had little choice but to request aid from the European Financial Stability Facility.

    Mr. Sarris said that extensive exposure of Cypriot banks to Greece and the country’s exclusion from international financial markets had made asking for a bailout a matter of urgency.

    But he also said that Cyprus’s problems paled in comparison with Greece and that the country’s small size and its lack of relative profligacy compared with Greece made it better positioned to weather the crisis.

    “The situation here is different than in Greece,” he said. “What we are looking at is a relatively mild adjustment that won’t inflict too much pain.”

    While Cyprus’s problems threatened to add to the financial instability in Europe, more concerning for officials and investors is the fear that Italy, the third-largest economy in the euro zone, after Germany and France, will itself end up needing help.

    Cypriot officials said Monday that they would continue to seek loans from Russia and China to buttress potential E.U. financial support. Cyprus last year secured a €2.5 billion loan from Russia at a below-market rate of 4.5 percent to cover its refinancing needs for this year.

    Over the weekend, the Cypriot president, Demetris Christofias, the only communist leader in the European Union, railed against the 27-member bloc, noting in an interview with To Vima, a Greek newspaper, that the European Commission, the European Central Bank and the International Monetary Fund had operated like a “colonial force” by forcing austerity measures and unbridled free-market policies on bailed-out countries.

    But on Monday, as the ratings agency Fitch downgraded Cyprus debt to “junk” status, prompted by the amount of rescue money that would be needed to bail out its banks, economic necessity appeared to trump all other considerations.

    Posted by Pterrafractyl | June 25, 2012, 7:37 pm
  4. Alas, Krugman still holds himself within the mainstream of the last century of economic practice, even though he lobbies for a kinder, gentler Keynesianism. The concept that an ongoing, evergrowing and perpetual stream of public debt is a valid way to finance governments is a fraud and against common sense. It is almost equivalent to an individual who is forced to borrow ever-increasing amounts to supplement his income from real production, while his lender is free to change terms and interest rates on the fly. At some point the debt burden will cut into his subsistence needs and his real productivity will begin to fall. At this point a smart lender would ease the debt squeeze because he knows that the maximum appropriation of wealth involves the victim still functioning and producing.

    That upper limit on theft from an individual doesn’t apply as strictly to state debt because the victim ( the populace as a whole ) is virtually immortal and can be squeezed to the point of general social breakdown. Individual death and suffering is not relevant. This death camp style of economics only requires a never ending stream of laborers. ( If the Nazis had won WW2 and murdered the last Jew, the concentration camps would have kept going with a supply of Slavs, Africans, etc. )

    Easing the debt burden of these countries involves lenders voluntarily forgoing some portion of their income stream in order to preserve the system as a whole. It will not be an act of kindness. The ongoing negotiations are about
    who will not get paid and how much. The public can’t win, since any workable solution only means that the lending class is functioning as an aligned body, temporarily ‘sacrificing’ near-term individual profit for the sake of future profit.

    Within the logic of this insane system, currency inflation or quantitative easing could be used to effectively erase a portion of the debt of states, but that solution would unhappily affect other types of debt as well, lessening the flow of wealth from other sources and exposing the bizarre mechanics of the overall system.

    Unfortunately, the planet is entrapped in the machine because it is the current primary basis for real production and social order, as crippled as both those are. Krugman is advising the financial elites to temporarily cooperate to save the whole planetary structure of debt. If he went as far as to question the moral validity of that structure, he would be expelled from the mainstream of economists who can get space in the New York Times.

    Posted by Dwight | June 26, 2012, 6:12 am
  5. @Dwight: I just tuned into the Thom Hartmann show today and the topic at hand is “what is the purpose of an economy?” as a meta-question. It’s a vital question because we definitely have to rethink how we structure our economies, fast, now that humanity and the biosphere are facing the prospect of hitting hard physical walls. One of the reasons I find Keynesianism so important nowadays is simply because it injected a whole slew of new ideas into conversation that just weren’t there before in the days of “classical” economics. While I can’t speak for Krugman, I’d imagine that he takes the “we’ve learned a lot about how economies work but we’re still learning” approach, which is fundamentally different from the “there can be no other model, this is it folks” mentality ingrained in classical econ. At least that’s how classical econ seems to be applied…like a religion with unchallengeable dogma. Keynesianism represents a sort of economic Enlightenment…it’s not the end all and be all of economics but it’s an example of an attempt to rethink our assumptions. It’s not alone in that (e.g. Marx and Engles had some interesting insights). I just find Keynesianism to be an invaluable addition to the ideas that might guide the creation of market-based economies.

    I also don’t think government debt-based spending during economic downturns is necessarily a path to eventual debt-doom (although it could be, especially when it’s all blown on bank bailouts). The justification for deficit spending can be sort of summarized by “you got to spend money to make money”, “opportunity cost”, and “getting more from less using better technology/design/methods/idea/whatever”: Three concepts that the business community seems to understand when it comes to private enterprises but can’t quite accept when it comes to a society at large. If the economy is down and people are out of work, we can just let them lay idle and erode their skills OR we could hire them to do something the needs to be done, like educating the themselves and/or the next generation and just figure out how we can get more out of the dwindling resources we have, how we can craft better rules of play (regulations). That’s a REAL dynamic economy, unlike the “deregulate for dynamism and free-markets forever” garbage we’re fed. Under our current model, and in a collapsing world, getting “more for less” is now largely constrained to “more profit and less costs via more poverty for more people”.

    The other really valuable concept we need to remember from Keynes is the idea that we have find new ways to derive enjoyment in life while using less AND working less. The 15 hour workweek he predicted was possible might be one of the few ways we can come to a new social contract where people forgo some material wealth in return for more time…time we can spend trying to get more from less (just imagine the inventions that would arise if people had all that time on their hands). We need a new virtuous cycle fast. It won’t be Keynesianism itself. It will be something new. But there are a lot of ideas of his that we really need to remember right now.

    Posted by Pterrafractyl | June 26, 2012, 12:05 pm
  6. @pterrafractyl.. Most of that granted and all noted, yes, there is nothing inherently evil about governments borrowing – it’s a technology and it’s neutral. From whom and for what are pivotal questions. Valid debt is that which causes overall debt to be less, as a percentage of production. That’s it in a nutshell. Plus, we can borrow from ourselves as easily as borrow from private parties. The money comes from the debt in either case. A full employment model pays for itself in increased production if capital gain is sufficiently taxed and if the economic surplus is not wasted in war. And, horror of horrors for the Randites and contrary to their predictions, the government can actually shrink when people are prosperous enough to not need the poverty services it provides or the enforcement umbrella that grows up alongside poverty. That’s the virtuous cycle I think you mean.

    But none of that can happen without good intent. General prosperity has to be a conscious target with policy directed at that target, not at subsidies of financiers, hoping they’ll pass it down ( borrowing from them in the first place is a subsidy ). We have enough history and data to know that general prosperity is definitely not a natural outgrowth of the unregulated market. If that’s radical, call me Karl. We’re pretty much on the same page.

    Posted by Dwight | June 26, 2012, 4:13 pm
  7. @Dwight: Krugman’s latest post is a direct answer to the question of “how does more debt help in the context of a debt-driven deprepession”. It’s useful in that it provides an explanation from a purely technical framework that operates within the logic of the economic structure as it exists todays (as opposed to our “if only civilization wasn’t such a trainwreck” frameworks, heh). The gist of it being that, when debt bubbles burst and an economy falls into a depression, the “natural” interest rates on savings can become near zero or even negative (negative interest rates aren’t so bad in a deflationary or high risk environment….just ask the investors in German Bunds this year). And since getting negative real interest rates is such a difficult task for something like the Federal Reserve to achieve, the system ends up with inappropriately high real interest rates (even if the nominal rate is near zero) that encourage potential lenders to just keep piling their money into bonds or other “safe” assets instead of lending to the borrowers and allowing the economy to start turning around. So public spending becomes the primary tool that’s left because of this “zero boundary” quirk in interest rates and available policy tools.

    This whole situation also reminds us of what you just brought up: why do we relying on “private lenders” as the primary source of our money supply (which is what the Fed is) instead of, say, a National Bank that doesn’t charge society for the ‘luxury’ of credit? If money was a social tool, we could turn on the national money-spigot during deflationary times to get ourselves out of this mess. Instead, we have to wait for the private sector to create that money by issuing credit in the form of a loan (i.e. the fun of fractional reserve banking). And when they won’t (because of the zero-boundary effects that disincentivize lending), we’re left with option of issuing public debt or just letting the economy fall into a tailspin. Somehow issuing public credit from public institutions is bad and private credit creation is the only allowable path forward.

    And yeah, there are reasonable concerns about out of control public credit creation under such a system (while private mega credit bubbles like what we just experienced, compliments of the banks, are just fine and “natural” apparently). But also as you point out, any system we make will be subject to calamity if the people running it aren’t doing so with good intent. Rotten elites will ruin any nation in any system, public or private.

    Posted by Pterrafractyl | June 26, 2012, 8:18 pm
  8. @Pterfractyl… In the west we hold to an ideological bias that money means something and so we avoid negative interest, unlike the Asians, who know it’s all a shell game. I wish Krugman would differentiate between investment in the real economy and speculation. I believe his deleveraging scenario relates to a shift of capital from speculation to the real economy. Any investment could be viewed as an admixture of the two but they are really distinct processes, each with a different result. As speculative investment becomes a larger part of overall investment the real economy deteriorates. Here’s my amateur take on negative interest rates. Its a huge generalization and leaves out many elements, as I am wont to produce.

    Negative interest rates are largely a consequence of speculation, electronics and tax policy. In the past the global speculative market ( gambling with mostly borrowed money ) was held to some limits by simple time constraints, regulation. publicity and taxes. It took time to complete a transaction. The price rise caused by purchase ( not the primary reason to invest in a particular thing but still a factor ) could kick in and be seen by others who might sell, dropping the return of the speculator when he sold. Now a speculative buy and sell can be completed before its specific effect on the market is evident, the trade is untaxed and the leveling effects of the trade show up only later for others to deal with. Picture the probably apocryphal tale of Mayer Rothschild’s machinations with British bonds done a million times daily with high-speed computers.

    As speculative return rises and becomes more dependable, investment in real production suffers. In the abstract we’ve created a market where the mere act of buying something causes its price to rise and that price rise can be captured in the ‘sell’ if the transaction is fast enough and if taxation and transaction fees don’t cut into the margin. For all that to be possible there has to some control of information flow, even if only a strategic delay. and there also must be a large segment of investors not involved in high-speed speculation to absorb the losses from millions of low-margin trades. These ‘investors’ include the nominally non-investor public who are involuntary particpants. Consequently, there are recurrent bubbles everywhere in everything, lasting minutes or years. It is an insider market based on bubbles. Derivatives multiply the problem but aren’t the source.

    When the central bank to commercial bank rate goes very low or negative it means that the anticipated rate of return on speculation is falling ( because of its overall destructive effects on the real economy ) and closing in on the anticipated price inflation rate, making even speculation barely profitable. This is when everyone sits on their assets and things grind to a halt. Poverty spreads, the cost of labor approaches subsistence, causing rising return on investment in the real economy, which can then can catch up to falling speculative return. The machine lurches forward, reluctantly.

    Satan created both women and the business cycle to plague us endlessly.

    Posted by Dwight | June 28, 2012, 7:22 am
  9. @Dwight: Speaking of negative interest rates, the ECB has been actively considering taking the euro into the “twilight zone” over the last couple of days:

    Draghi May Enter Twilight Zone Where Fed Fears to Tread
    By Jana Randow – Jun 27, 2012 6:41 AM CT

    European Central Bank President Mario Draghi is contemplating taking interest rates into a twilight zone shunned by the Federal Reserve.

    While cutting ECB rates may boost confidence, stimulate lending and foster growth, it could also involve reducing the bank’s deposit rate to zero or even lower. Once an obstacle for policy makers because it risks hurting the money markets they’re trying to revive, cutting the deposit rate from 0.25 percent is no longer a taboo, two euro-area central bank officials said on June 15.

    “The European recession is worsening, the ECB has to do more,” said Julian Callow, chief European economist at Barclays Capital in London, who forecasts rates will be cut at the ECB’s next policy meeting on July 5. “A negative deposit rate is something they need to consider but taking it to zero as a first step is more likely.”

    Should Draghi elect to cut the deposit rate to zero or lower, he’ll be entering territory few policy makers have dared to venture. Sweden’s Riksbank in July 2009 became the world’s first central bank to charge financial institutions for the money they deposited with it overnight. The Fed rejected cutting its deposit rate from 0.25 percent last year. With Europe’s debt crisis damping inflation pressures and curbing growth, the ECB may feel the benefits outweigh the negatives.
    ‘Psychological Effect’

    “A rate cut could have an important psychological effect in the current environment,” said Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about $20 billion. “Negative interest rates aren’t an irrational concept. I’m not sure, though, whether in the case of the ECB it will have the desired effect.”

    The ECB uses three interest rates to steer borrowing costs in financial markets. The main refinancing rate determines how much banks pay for ECB loans, while the deposit and marginal rates provide a floor and ceiling for the interest banks charge each other overnight.

    If the deposit rate was cut to zero or lower, it would discourage banks from parking excess liquidity with the ECB overnight, potentially prompting them to lend the cash instead. Almost 800 billion euros ($1 trillion) is being deposited with the ECB each day.

    On the other hand, a deposit rate cut could hurt banks’ profitability by lowering money-market rates, potentially hampering credit supply to companies and households and reducing banks’ incentive to lend to other financial institutions.
    Money Markets

    “It won’t help the prospect of a functioning money market because banks won’t be compensated for the risk they’re taking,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. It would make more sense to lower the benchmark rate, thus reducing the interest banks pay on ECB loans, and keep the deposit rate where it is, Green said.

    Twin Benefits

    The ECB has been examining the possible impact on markets of a deposit rate cut, helping to ease policy makers’ concerns, according to a euro-area official who asked not to be named because the deliberations are not public.

    Callow said lowering the deposit rate would encourage banks in fiscally-sound countries like Germany, which are flush with excess cash, to lend to troubled banks on the euro-area periphery, which are dependent on ECB funding.

    That would have the twin benefits of reducing banks’ addiction to ECB funding and shrinking excess liquidity in the system.

    “A deposit rate at zero will be of particular support to banks in southern Europe because it could help encourage some flow of credit,” said Callow. “A negative deposit rate can be damaging for money markets.”

    Negative rates would destroy the business model for money- market funds, which would face the prospect of paying to invest, said Societe Generale economist Klaus Baader.

    ‘Twilight Zone’

    European money-market funds totaled 1.1 trillion euros at the end of March, according data from Fitch Ratings Co.

    “But the ECB doesn’t set policy to keep alive certain parts of the financial sector,” he said. “Policy makers want to show that they haven’t exhausted their options yet.”

    Another consequence of an ECB deposit rate cut may be that some banks take advantage of a clause in the three-year loans allowing them to pay the money back after a year, which would reduce excess liquidity in the system.

    That could be the basis for a compromise between the ECB and the Bundesbank, whose President Jens Weidmann has repeatedly warned of the risks related to too-generous liquidity provision, said Carsten Brzeski, senior economist at ING Group in Brussels.

    “Reducing excess liquidity with a rate cut should sound rather interesting for the Bundesbank,” he said. “Maybe that’s the twilight zone where Draghi and Weidmann will meet.”

    Great, so going negative on the ECB’s overight rate will either encourage the wealthier banks to lend to the troubled institutions (raise their lending risk to make cash) OR turn the banks’ emergency ECB three-year loans back to the ECB two year’s early (pulling the out of the system). And the Bundesbank is said to be interested “pay back early”-option. I wonder how this is going to go.

    It will be interesting to see what happens if they go down this route. As the article indicates, the money-markets are a key source of credit for businesses. But it’s also a key source of funds for making speculative financial bets and credit creation. Borrowing at the lowest rate possible and then investing in some sort of riskier debt is credit creation distilled and a basic part of bubblenomic 101 and our economy. And money markets are key to that…they set the floor on short term rates available to investors So if the money markets gets disrupted/starved there’s a lot of deleveraging coming. Things could get tense in the world of leveraged finance if the ECB does, indeed, enter the Twilight Zone and the money-markets contract. Parking assets at the ECB is generally limited to highly liquid assets (like treasuries) and it’s using that asset as collateral for cash for a day. For a small fee. In reverse, banks can lend cash to the central bank, taking liquidity out of the system to get the smallest interest possible. It’s how big banks stash cash under the matress.

    And when banks first turn their assets over to borrow cash, then borrow against that cash for more cash, and then lend that cash back the ECB, you get something like what’s apparently been going on since the ECB’s big trillion+ euro three-year lending program got underway. In March, the ECB lent out 530 billion euros and saw its overnight deposits jump from 475.2 billion euros on the to 776.9 billion overnight. It’s still around there. So that’s quite a bit of cashthat could be pushed off of the sidelines if the overnight deposit rate goes negatives.

    Plus there’s last week’s temporary “loosening of collateral restrictions” ruling by the ECB. They’re acceptng junk. Now banks can hand over home and auto loans with junk ratings (-BBB S&P). So if the ECB takes the deposit rate negative, it sounds like assets (including junk) could still be swapped for cash but the incentive to take that cash and reinvest in the ECB overnight funds would be mitigated. With a flood o subprime securities heading towards the ECB another overnight deposit surge could be in the cards. If that happens the Twilight-Zone of negative rates could end up sending A LOT of cash scattering out of the ECB.

    You have to wonder how long it took after the adoption of a early forms of market economies before ancient cultures developed a word analogous to “a giant speculative clusterfuck”. Just imagine what barter-bubble dynamics look like. Or even wierder, barter-market bubble dynamics. Fascinatingly, we might actually get to see that last scenario, assuming things get out of whack in Volos. Let’s hope that doesn’t happen:

    Greek Town Adopting System of ‘Bartering on Steroids’
    By Clark Boyd · June 14, 2012

    Buyers and sellers gather in a sweltering, previously abandoned building in the Greek city of Volos, some 200 miles north of Athens. There’s a bit of everything available here – books, eggs, clothes, kids’ toys, and even an old fax machine.

    But there isn’t a euro in sight. On the eve of a vote which may determine whether Greece stays in the euro zone, these Greeks have moved beyond the euro, at least here. This market is the brainchild of a network of people who have chucked the euro in favor of the TEM – the Greek shorthand for “Alternative Local Currency.”

    “In the network, people can trade their goods and services. They don’t need money for that. They just need time and the desire to do it,” said Christos Papaioannou, one of the network’s founders. It’s kind of like bartering on steroids, he added.

    “We can see it as exchanging favors, if I do a service for you, then you owe me a favour, and I can use that favour to get some service from someone else. So, we don’t have to exchange directly, I can get it from some third person.”

    Let’s say someone offers a haircut. The network determines that’s worth 10 credits. (To make it easier to set prices, one TEM is valued at one euro.) The haircutter can then spend those credits on products at the market, or on services offered by someone else.

    To be clear, there is no real “currency” that changes hands – no scrip. Instead, credits are tracked, goods and services are listed, offered and accepted, through an open-source computer program designed for this kind of “community banking.”

    The original idea for the network predates the economic crisis, said Papaioannou, adding it’s about coming up with different ways for people to interact economically, so “that people do things together, and take things in their own hands, basically.”

    It’s an idea that appeals to Euripides Siouras, who joined the TEM network in December 2010. “I thought that the existing economic system was something like a war. It wasn’t made for the citizens,” Siouras said.

    Please don’t introduce us to barter-market bubble dynamics, Valos. Something like this could be an invaluable social tool in so many situations across the world when the financial economy falls apart/blows up and the real economy can’t function. This is one of the coolest stories I’ve ever read. They took the plunge, tried it out and it sounds that this hyprid barter-market thing really works in a pinch. How awesome. Very very nice Valos.

    Posted by Pterrafractyl | June 30, 2012, 3:19 am
  10. The Greek experience with credit bubbles and money lenders goes way back. From ‘A History of Greece to the Death of Alexander’ – Bury, speaking of events circa 600 B.C.:

    Dracon’s code was something, but it did not touch the root of the evil. Every year the oppressiveness of the rich few and the impoverishment of the small farmer were increasing. Without capital, and obliged to borrow money, the small proprietors mortgaged their lands, which fell into the hands of capitalists, who lent money at ruinous interest. It must be remembered that money was still very scarce and that the peasants had now to purchase all their needs in coin. Even in Attica the small peasant could not cope with the larger proprietor. Thus the little farms of Attica were covered with stones, on which the mortgage bonds were written ; the large estates grew apace ; the black earth, as Solon said, was enslaved. The condition of the free labourers was even more deplorable. The hek – the sixth part of the produce, which was their wage, no longer, sufficed, under the new economical conditions, to support life, and they were forced into borrowing from their masters. The interest was high, the laws of debt were ruthless, and the person of the borrower was the pledge of repayment and forfeited to the lender in reduced to case of inability to pay. The result was that the class of free labourers was being gradually transformed into a class of slaves, whom their lords could sell when they chose. 

    Thus while the wealthy few were becoming wealthier and greedier, the small proprietors were becoming landless, and the landless freemen were becoming slaves. And the evil was aggravated by unjust judgments, and the perversion of law in favour of the rich and powerful. The social disease seemed likely to culminate in a political revolution. The people were bitter against their remorseless oppressors, and only wanted a leader to rebel. To any student of contemporary politics, observing the development in other states, a tyranny would have seemed the most probable solution.

    This instance of crisis was averted by a distinctly non-free-market device. Large swaths of unpayable debt were simply canceled by decree.

    This solution is unlikely in the present. The Greek elites understood that their power rested on a boundaried local productive economy that was being strangled and which obviously had been drained of all its speculative value. In a global economy in which production suffers some here and some there and where the predictable results of impoverishment are diffuse, the point of breakdown is not so apparent and so the creditors are each individually reluctant to release their grip.

    Posted by Dwight | July 1, 2012, 9:08 am
  11. Paul Krugman reminds us of another historical lesson not learned:

    The New York Times
    The Conscience of a Liberal
    Moveable Feast Macroeconomics
    Paul Krugman
    February 1, 2013, 6:58 pm

    Ah, Paris in the 1920s. It was the era of Hemingway and F. Scott Fitzgerald, Gertrude Stein and Alice B. Toklas, sovereign debt and stabilization. Wait, what?

    OK, I’ve written before about the notion that France in the 20s offers the closest thing I can find in the historical record to a crisis of the kind the deficit scolds keep warning us about. We’re not at all like Greece; we have our own currency, and our debts are in that currency. So we can’t run out of cash, even if the bond vigilantes turn out to be real and lose faith in America. At worst, we’re something like France in the 1920s, with its floating exchange rate and large wartime debt — except that our debt isn’t nearly as bad as a share of GDP, and we don’t have the lingering gold standard mentality that prevailed across the Western world back then.

    So, what actually happened to 1920s France?

    Krugman goes on to show how France in 1921 had over twice as much debt as Greece had in 2009 and how France’s currency did indeed suffer a large collapse in value. Prices roughly doubled from 1919 – 1926 and briefly spiking another 20% before tapering off. And in spite of the large currency depreciations and steeply rising prices, the French economy grew strongly. If France hadn’t had the option of depreciating its debt and currency at the end of WWI it would have been economicaly screwed. This happened in parallel to post WWI Germany, which was egregriously indebted, and forced to induce hyperinflation by circumstance. The French experience is much more applicable to the contemporary global state of affairs regarding levels of national debts, deficits, and the “dangers” of government stimulus spending vs austerity. It’s a reminder of the historical lesson that history might provide many lessons but some are more applicable than others. It depends on circumstance:

    The New York Times
    The Conscience of a Liberal
    Partying Like It’s 1923: Or, The Weimar Temptation

    Paul Krugman
    December 27, 2010, 3:11 pm

    There’s an observation I’ve tried to make in a number of columns and blog posts, but maybe haven’t gotten across as clearly as I should: namely, the extent to which current economic discourse is being warped by what we might call the Weimar Temptation, the desire to see everything in terms of the evils of deficits and the money printed to cover them.

    The hyperinflation story is, after all, satisfying both intellectually and morally. A weak, spendthrift government can’t limit its spending to match its revenues; it loses the confidence of investors, so it has to print money to make up the difference; and too much money chasing too few goods leads to ever-higher inflation.

    Economics teachers love this story; hey, I love it. It’s clear, it’s simple, you can walk through it on the blackboard, and yes, it really does happen. It’s a great set-piece, both for the textbook and for intro macro classes.

    But there’s always the temptation to apply the story too widely. Partly this is the drunk-and-the-streetlight effect: you look for dropped keys where the light is brightest, even though that’s not actually where you dropped them. Partly it’s ideology: the hyperinflation story is a comfortable one for people who want to make government always the problem, never the solution.

    And the remarkable thing is how many people are determined to Weimarize recent events, even though the actual experience of the past three years has been an object lesson in the fact that sometimes that framework just doesn’t fit. In late 2008 there was, maybe, an excuse for looking at the big rise in the monetary base and thinking that inflation was coming — although not if you had actually looked at Japanese experience. At this point, however, it’s just bizarre to use that obviously failed framework rather than the well-developed theory of the liquidity trap, which has sailed through recent events with flying colors.

    But it keeps happening anyway. A few months back, in a dialogue in Korea with Niall Ferguson, I suggested a macroeconomic version of Godwin’s Law: the first person to bring up the Weimar hyperinflation is considered to have lost the debate. He was, um, not happy. And despite all the evidence, a lot of people are obviously determined to keep on partying like it’s 1923.

    Note that Krugman wrote that blog post regarding the perpetual hyperinflation hysteria a little more than two years ago. Its still applicable. No joke. Societies that worry about the volume of their monetary bases too seriously might overlook the sane and fair solutions that fit the society’s current situation and instead risk serious calamity.

    This has been a Krugman Moment.

    Posted by Pterrafractyl | February 2, 2013, 5:38 pm
  12. That was then:

    The New York Times
    Treasury’s Got Bill Gross on Speed Dial

    Published: June 20, 2009

    Newport Beach, Calif.

    Every day, Bill Gross, the world’s most successful bond fund manager, withdraws into a conference room at lunchtime with his lieutenants to discuss his firm’s investments. The blinds are drawn to keep out the sunshine, and he forbids any fiddling with BlackBerrys or cellphones. He wants everyone disconnected from the outside world and focused on what matters most to him: mining riches for his clients at Pimco, the swiftly growing money management firm.

    And with the collapse of Wall Street, Mr. Gross has emerged as one of the nation’s most influential financiers. His frequent appearances on CNBC draw buzz, as do his wickedly humorous monthly investing columns on the Pimco Web site. Treasury secretaries call him for advice. Warren E. Buffett, the Berkshire Hathaway chairman, and Alan Greenspan, the former Federal Reserve chairman, sing his praises.

    “He’s a very individualistic person. He doesn’t come at analysis or investment judgment in the words, terminology or ambience that I have been used to over the decades,” Mr. Greenspan says. “That may be the secret of his success. There is no doubt there is an extraordinary intellect there.” Mr. Greenspan, it should be noted, now works for Pimco as a consultant.

    That’s one of the reasons the government has courted him closely.Last fall, the Federal Reserve Bank of New York, run at the time by Mr. Geithner, hired Pimco — along with BlackRock, Goldman Sachs and Wellington Management — to buy up to $1.25 trillion in mortgage bonds in an effort to keep interest rates from skyrocketing.

    Last December, when it was pressing Bank of America to complete its ill-fated acquisition of Merrill Lynch, the Federal Reserve also looked to Pimco for advice. According to recently released messages that Fed staff members sent one another that month, Pimco evaluated the two banks and concluded that Merrill wouldn’t survive without a capital infusion or additional government aid.

    Today, Mr. Gross is eager to buy the same subprime loans he once refused to touch, as part of the Treasury’s distressed-asset initiative. After all, the thinking goes, if anybody can figure out how much all this debt is worth, it’s Pimco. But Pimco’s involvement in so many aspects of the bailout has made many other financiers and analysts uncomfortable. They say its proximity to the Treasury Department and the Fed may allow it to reap billions of easy dollars through federal contracts and preferential investment opportunities.

    A frequent complaint is this: Why is the Federal Reserve paying Pimco to buy mortgage securities on its behalf, when the firm is already a huge buyer and seller of the same bonds? “That’s the equivalent of a no-bid contract in Iraq,” fumes Barry Ritholtz, who runs an equity research firm in New York and writes The Big Picture, a popular and well-regarded economics blog. “It’s a license to steal.”

    This is now:

    The Wall Street Journal
    September 13, 2012, 5:40 p.m. ET

    Pimco’s Gross Reaps Benefits from Bets on Fed MBS Program


    Bill Gross, the manager of the world’s biggest bond fund, stands out as one of the fixed-income investors best positioned to benefit from the Federal Reserve’s latest monetary stimulus.

    Half of the $272.5 billion Total Return Fund that Mr. Gross manages at Pacific Investment Management Co. is dedicated to mortgage-backed securities after an extensive portfolio shuffle in recent months that saw him simultaneously offload longer-dated Treasury bonds. After the Fed announced it would buy more MBS as part of its new stimulus program Thursday afternoon, these securities enjoyed a strong rally while the longest maturing Treasurys sold off.

    The fund “is well positioned for this announcement,” said Mr. Gross in an emailed response to questions Thursday afternoon.

    Mr. Gross said Fed Chairman Ben Bernanke “is expressing an intent to be ‘all in’ until” unemployment falls and job growth rises to a sufficiently high level. “To me that point seems at least several years away so that mortgage or other purchases will continue beyond 2012,” he said.

    Mr. Gross has systematically concentrated his fund on MBS for months as he placed bets that the elevated unemployment rate and still tepid pace of economic recovery would push the Fed to provide additional support for the economy.

    This is a reminder that the biggest beneficiaries of government financial bailouts tend to be the biggest critics:

    MSN Money
    Bill Gross fears our borrowing could doom us
    The bond king is worried that massive credit expansion — not just deficit spending — is a threat to the global economy. His advice includes buying hard assets like gold.

    By Charley Blaine Fri 3:31 PM

    Even as the stock market is at five-year highs and the economy is looking stronger, Bill Gross is gloomy about the future. Very gloomy.

    The problem the managing director of PIMCO sees is that the domestic economy is going to be suffocated by debt. Not just government debt. But by consumer debt and corporate debt as well.

    The result will be that everyone will be working just to service their debts, and the economy won’t grow. Everything will just stall out.

    That’s what he told readers of his popular Investment Outlook essay, released this week.

    Moreover, in Gross’ view, the modern banking system is set up to produce inflation and generate real threats to the economy. Hence the title “Credit Supernova!”

    If you deposit money in a bank, the bank keeps some of the money as a reserve and lends the rest out. The borrower, in turn, deposits the money he’s been loaned, and the money gets loaned out again. The process repeats itself again and again. That’s how money gets created and an economy expands.

    Until the system gets out of control with way too much borrowing. Which is where Gross thinks it’s headed.

    The modern banking system in the United States and elsewhere moved through a period of self-sustaining credit to speculative credit expansion and now is into what the late economist Hyman Minsky called Ponzi finance. That’s where everyone needs additional credit just to cover increasingly burdensome interest payments, with accelerating inflation the end result.

    Ah, gold buggery and hyperinflationary fears. Sounds familiar.

    Posted by Pterrafractyl | February 2, 2013, 6:57 pm
  13. http://www.israelnationalnews.com/News/News.aspx/186521#.VEk51MmwRXA

    Israel Condemns Latvia’s ‘Butcher of Riga’ Musical

    Herberts Cukurs took part in Nazi atrocities against Latvia’s Jews – now the country is turning a ‘heinous criminal to cultural hero.’
    By Ari Yashar
    First Publish: 10/23/2014, 6:44 PM

    The Foreign Ministry on Thursday “strongly condemned” the Lavian musical production honoring the memory of Latvian Nazi war criminal Herberts Cukurs, infamously known as the “Butcher of Riga” for his atrocities against Jews in the Riga ghetto.

    “There must be no tolerance for any attempt to turn a heinous criminal into a cultural hero. This is a cynical attempt to deny history and constitutes an insult to all victims of the Nazis and their collaborators,” said the statement.

    The ministry added “Israel both welcomes and shares in the criticism issued by the Latvian authorities and the international community against the presentation of the musical.”

    On October 11 the musical launched a nationwide tour in Latvia, featuring singer Juris Miller, in part of a recent push to whitewash the record of the Nazi collaborator.

    Cukurs was a Latvian aviator and deputy commander of the Arajs Kommando, a notorious Nazi killing unit in Latvia similar to the SS that reportedly killed tens of thousands of Jews, itself responsible for killing half of Latvia’s Jewish population.

    Despite the overwhelming amount of witness testimony to Cukurs’s brutal atrocities, he never stood trial thanks to having fled to Brazil. However, the Mossad caught up with him, assassinating the Nazi member in Montevideo in 1965.

    Latvia has been seeing a resurgence of anti-Semitism, with Nazi collaborators in March holding their annual march in Riga.

    The musical whitewashing of Cukurs brings to mind another similar musical, “The Death of Klinghoffer,” which opened on Monday at New York’s Metropolitan Opera.

    The play has been widely condemned for glorifying and justifying the Popular Front for the Liberation of Palestine (PFLP) terrorists who murdered 69-year-old wheelchair-bound Leon Klinghoffer and tossed his body off of a cruise ship 29 years ago.

    Posted by Vanfield | October 23, 2014, 9:30 am
  14. Here’s a fun historical edition of everyone’s favorite game “Is it a zombie or a cockroach?“. Keep in mind this isn’t normally a game you can win, at least not when you’re dealing with with contemporary zombie/cockroach ideas undermining your society (everyone still loses in that case even if you answer correctly given the circumstances). But you can potentially win the game when dealing with historical zombie/cockroach ideas…assuming the zombie/cockroach has somehow been slain by now. Of course, that means, in this case, you’ve already lost. Oh well. Enjoy the game!

    The New York Times
    The Conscience of a Liberal

    Open Letters of 1933
    Paul Krugman
    Oct 27 7:34 am

    My friend and old classmate Irwin Collier, of the Free University of Berlin, sends me to an open letter to monetary officials warning of the dangers of printing money and debasing the dollar, claiming that these policies will undermine confidence and threaten to create a renewed financial crisis. But it’s not the famous 2010 letter to Ben Bernanke, whose signatories refuse to admit that they were wrong; it’s a letter sent by Columbia economists in 1933 (pdf):

    In our opinion, one of the most serious forces retarding the movement of recovery is the ever-increasing public distrust of the dollar. Unless confidence is speedily restorred by appropriate administrative action and by Congressional resistance to the demands of the inflationists, the country is likely to witness a major financial crisis in the next few months.

    It’s all there: decrying inflation amid deflation, invocation of “confidence”, a chin-stroking pose of being responsible while urging policies that would perpetuate depression. Those who refuse to learn from the past are condemned to repeat it.

    Bonus question! What creature best symbolizes the kind of economists and policy makers that willingly peddle zombie/cockroach ideas to the masses that have been discredited decades ago. Hint: It’s not a zombie or a cockroach although it’s tangentially related to both.

    Posted by Pterrafractyl | October 29, 2014, 1:23 pm

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