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Krugmenistan vs Austeria

Note: see update below

Paul Krug­man has a recent post about how the coun­try of Esto­nia is appar­ent­ly pissed at him over his objec­tions to the asser­tion that Esto­ni­a’s aus­ter­i­ty-pol­i­cy has been a stun­ning suc­cess. It’s a fas­ci­nat­ing sto­ry that holds a num­ber of rel­e­vant lessons for the conun­drum the globe finds itself in at the moment.

The gist of Krug­man’s argu­ment is that the Esto­nia recov­ery has­n’t actu­al­ly been all that great: A 20% drop in GDP from 2007–2009 fol­lowed by rebound that’s brought Esto­nia back up to around 92% of its peak 2007 GDP. While this may be true, the aus­ter­i­ty-defend­ers make the case that this is real­ly all a mat­ter of selec­tive data-manip­u­la­tion and the gov­ern­men­t’s aus­ter­i­ty poli­cies. Plus, Krug­man real­ly pissed off Toomas Hen­drik Ilves, the pres­i­dent of Esto­nia. And, appar­ent­ly, a lot of the rest of Esto­nia:

Busi­ness Week
Krug­menistan vs. Esto­nia
By Bren­dan Gree­ley on July 20, 2012

In May 2009, months after the pas­sage of a $787 bil­lion stim­u­lus pack­age in the U.S., Estonia’s gov­ern­ment took the oppo­site tack: the hard line. It did not dip into the country’s reserves or bor­row mon­ey. Min­is­ters say they nev­er even con­sid­ered devalu­ing what was then Estonia’s cur­ren­cy, the kroon, which would have derailed a 10-year plan to adopt the euro. To main­tain the country’s bal­anced bud­get, a tra­di­tion it had hon­ored since the end of the Sovi­et occu­pa­tion, Estonia’s gov­ern­ment froze pen­sions, low­ered state salaries by about 10 per­cent, and raised the val­ue-added tax by 2 per­cent. The gross domes­tic prod­uct dropped more than 14 per­cent that year.


On June 6, in a blog post titled “Eston­ian Rhap­sody,” Krug­man took on what he called “the poster child for aus­ter­i­ty defend­ers.” In his post, he graphed real GDP from the height of the boom to the first quar­ter of this year to show that, even after a recov­ery, Estonia’s econ­o­my is still almost 10 per­cent below its peak in 2007. “This,” he wrote, “is what pass­es for eco­nom­ic tri­umph?”

“It was like an attack on Eston­ian peo­ple,” says Palmik, in an office above his plant, sur­round­ed by blue­prints for his new pro­duc­tion line. “These times have been very dif­fi­cult. Peo­ple have kept togeth­er. And this Krug­man took all these facts that he want­ed.”

Over the course of a week’s vis­it to three cities in Esto­nia, I met only two peo­ple who didn’t know what Krug­man wrote about their recov­ery. This is not because Esto­nia is a coun­try of blog-obsessed ama­teur econ­o­mists. It’s because Toomas Hen­drik Ilves picked a fight.

Ilves is the pres­i­dent of Esto­nia. The night Krug­man wrote his post, Ilves was in Riga, on a state vis­it to Latvia. He gave a talk to the city’s busi­ness com­mu­ni­ty, offer­ing what he calls “moral sup­port” for Latvia’s own aus­ter­i­ty pol­i­cy. He went to a recep­tion on a boat, then returned to his hotel and pulled out his iPhone. “I read some­where ‘Krug­man attacks Esto­nia,’ and I thought, well, let’s look at his blog,” says Ilves. “I said ‘What the f …’” Ilves does not com­plete the word.

Estonia’s pres­i­dent has lit­tle for­mal pow­er. As in the U.K., the prime min­is­ter runs the gov­ern­ment. Like the Queen of Eng­land, Ilves has only a bul­ly pul­pit. On June 6, stand­ing in front of the Riga Radis­son, he linked to Krugman’s post and wrote five tweets in 73 min­utes.

8:57 p.m. Let’s write about some­thing we know noth­ing about & be smug, over­bear­ing & patron­iz­ing: after all, they’re just wogs
9:06 p.m. Guess a Nobel in trade means you can pon­tif­i­cate on fis­cal mat­ters & declare my coun­try a “waste­land.” Must be a Prince­ton vs Colum­bia thing
9:15 p.m. But yes, what do we know? We’re just dumb & sil­ly East Euro­peans. Unen­light­ened. Some­day we too will under­stand. Nos­tra cul­pa.
9:32 p.m. Let’s sh*t on East Euro­peans: their Eng­lish is bad, won’t respond & actu­al­ly do what they’ve agreed to & reelect govts that are respon­si­ble.
10:10 p.m. Chill. Just because my country’s pol­i­cy runs against the Received Wis­dom & I object doesn’t mean y’all got­ta fol­low me.

The tweets made the Eston­ian papers and the inter­na­tion­al press. The next morn­ing Jür­gen Ligi, the country’s finance min­is­ter since 2009, had to com­ment on them at a press con­fer­ence. “Maybe the style can be argued,” he tells me. “For exam­ple, the reac­tion was real­ly sen­si­tive, blam­ing Krug­man, but the gen­er­al idea was right. Krug­man was clear­ly wrong. He clear­ly doesn’t under­stand dif­fer­ences of choic­es between Amer­i­ca and in a small econ­o­my. By a Nobelist, it was a shame.”


Since inde­pen­dence, Esto­nia has focused on becom­ing part of the West. It joined NATO, the Coali­tion of the Will­ing, and the Euro­pean Union. Mart Laar, Estonia’s first post-Sovi­et prime min­is­ter, likes to say that when he was elect­ed, he had read only one book on eco­nom­ics, Mil­ton Friedman’s Free to Choose. The coun­try is open, effi­cient, and wired. On the World Bank’s Ease of Doing Busi­ness Index, it ranks 24th out of 183. Esto­nia speaks a lan­guage close to Finnish, and its strongest trade ties are with Fin­land and Swe­den. At the Kadri­org, Ilves pro­duces a col­ored map rank­ing the most com­pet­i­tive economies in the Euro­pean Union. Esto­nia sits in the sec­ond tier, behind the Nordic coun­tries, grouped with Ger­many and the Unit­ed King­dom.


Note that Esto­nia isn’t the the only for­mer East­ern-Bloc coun­try to embrace lais­sez-faire eco­nom­ics with a fer­vor in the last two decades. Accord­ing to this piece by George Mason Uni­ver­si­ty pro­fes­sor Peter Boet­tke, the writ­ings of econ­o­mist Mil­ton Fried­man played a role in the col­lapse of the Sovi­et Union. Now, since Boet­tke is Boet­tke is an Aus­tri­an-school econ­o­mist and direc­tor of the Koch-found­ed/­fund­ed Mer­ca­tus Cen­ter, we should­n’t be sur­prised by the Fried­man-ori­ent­ed enthu­si­asm. Ok, we should be kind of sur­prised. But gen­er­al­ly speak­ing, think of Fried­man as the leader of right-wing “Chica­go School” counter-attack against Key­ne­sian­ism in the lat­ter half of the 20th cen­tu­ry (and you can think of the Aus­tri­an School as the crazy aunt liv­ing in the attic that went mad from her gold obses­sion).

Skip­ping down in the arti­cle...


Ilves divides Europe into coun­tries that fol­low the rules and coun­tries that don’t. And he has start­ed wor­ry­ing about a new kind of pop­ulism in Europe: peo­ple who play by the rules and are unwill­ing to help those who didn’t. Ilves points to Fin­land, where the True Finns par­ty has won votes by reject­ing bailouts, and to Slo­va­kia, where the prime min­is­ter lost a con­fi­dence vote last year for her sup­port of Europe’s bailout fund.

Esto­ni­ans, in their own eyes, have always fol­lowed the rules, and in 2009 took their lumps to do so. Ilves says Estonia’s aver­age salary is 10 per­cent below the min­i­mum salary in Greece. He says pen­sions are also much low­er, and civ­il ser­vants retire 15 years lat­er. “You can imag­ine why there might be some frus­tra­tion,” Ilves says.


The point made by Esto­ni­a’s pres­i­dent about the frus­tra­tions Esto­ni­ans feel over the per­ceived unfair­ness of the euro­zone bailouts is a crit­i­cal aspect the entire euro­zone cri­sis, and the Esto­ni­ans aren’t the only ones that share this sense of resent­ment. They did indeed “take their lumps”, vol­un­tar­i­ly. All three Baltic nations were still issu­ing their own cur­ren­cies when the cri­sis hit (Esto­nia joined the euro in 2011), and so all three had the option of devalu­ing their cur­ren­cies instead of embrac­ing the “inter­nal devaluation”/austerity approach. All three of the “Baltic Tigers” choose aus­ter­i­ty and it hurt. A lot. In addi­tion Latvia and Lithua­nia both had nation­al debts under 20% of their GDP debt and Esto­nia has had a bal­anced bud­get for two decades and almost no pub­lic debt at all. Humans are wired to per­ceive and dis­like inequal­i­ty. Researchers were appar­ent­ly able to insti­gate a strike in a capuchin mon­key com­mu­ni­ty sim­ply by shift­ing from a fair to unfair rewards sys­tem. We’re wired to per­ceived unfair­ness. It makes us tricky crit­ters to rule: we can sense injus­tice.

The sen­ti­ment that “we took our lumps for our suc­cess and now you’re ask­ing us to bailout a bunch of layabouts!?” is a very real sen­ti­ment across much of EU right now and it’s under­stand­able. And since the Baltic tigers have seen their economies rebound in the last cou­ple of years after swal­low­ing the bit­ter pill of wage cuts, there’s also the under­stand­able sen­ti­ment that the euro­zone’s ail­ing economies (the PIIGS) should sim­ply learn the lessons of the suc­cess of the Baltic states’ exper­i­ment with crash course aus­ter­i­ty. Unfor­tu­nate­ly, even when a pop­u­lace pays dear­ly in terms of aus­ter­i­ty the lessons drawn from their col­lec­tive expe­ri­ences may not be entire­ly applic­a­ble to a neigh­bor­ing nation also under­go­ing an eco­nom­ic cri­sis. Many of the same lessons that apply in the Baltics may also apply in the dis­tressed eco­nom­ics of Spain and Italy too. But a lot lessons don’t apply across dif­fer­ent economies. So the “we’ve paid, so should they”, sen­ti­ment is both an under­stand­able state­ment, but also a mis­guid­ed sen­ti­ment. Under­stand­ably mis­guid­ed sen­ti­ments are a big part of con­tem­po­rary pol­i­tics and pol­i­cy-mak­ing:

Finan­cial Times
Myths and truths of the Baltic aus­ter­i­ty mod­el
June 28, 2012 12:16 pm by Neil Buck­ley


Latvia and its Baltic neigh­bours Esto­nia and Lithua­nia suf­fered the world’s steep­est eco­nom­ic con­trac­tions in 2009 amid swinge­ing aus­ter­i­ty mea­sures. But now they find them­selves in the front­line of the debate over aus­ter­i­ty ver­sus growth as the best way to tack­le the eurozone’s debt prob­lems.

Even before Ms Lagarde’s com­ments, the Baltics were the talk of the eco­nom­ic blo­gos­phere after a spat between Paul Krug­man, the Nobel eco­nom­ics lau­re­ate and aus­ter­i­ty crit­ic, and Eston­ian pres­i­dent Toomas Ilves.

Ilves called Krug­man “smug, over­bear­ing and patro­n­is­ing” on twit­ter after a Krug­man blog ques­tioned whether Estonia’s “incom­plete” bounce­back from a Depres­sion-lev­el slump should be con­sid­ered an “eco­nom­ic tri­umph”.

So are the Baltics real­ly a mod­el for, say, Greece or Spain? The answer is prob­a­bly not – though they may pro­vide lessons. And that makes the Baltic states’ achieve­ments no less extra­or­di­nary.

The three for­mer Sovi­et states binged on cheap cap­i­tal in the 2000s, hop­ing to nar­row the eco­nom­ic gap with west­ern Europe in dou­ble-quick time. They became heav­i­ly reliant on short-term exter­nal financ­ing. When Lehman Broth­ers’ col­lapse cut off inter­na­tion­al liq­uid­i­ty, their economies – and tax rev­enues – hit the wall.

Com­pet­i­tive­ness, mean­while, had been sharply erod­ed by hefty pre-cri­sis wage increas­es. All three had also pegged their cur­ren­cies to the euro. They were des­per­ate to avoid a mon­e­tary deval­u­a­tion, tor­pe­do­ing their chances of join­ing the sin­gle cur­ren­cy.

So they pio­neered the “inter­nal” deval­u­a­tion – low­er­ing real wages and costs – that Ger­many, in par­tic­u­lar, is pre­scrib­ing for way­ward euro­zone economies. They slashed pub­lic sec­tor spend­ing, wages and jobs, while car­ry­ing out struc­tur­al reforms.

Con­sump­tion col­lapsed. Latvia, the most extreme case – and the only Baltic coun­try to receive an IMF bailout – saw its econ­o­my con­tract, peak to trough, by a quar­ter, and by 18 per cent in 2009 alone. Unem­ploy­ment tripled in three years to 21 per cent. Lithuania’s econ­o­my shrank near­ly 15 per cent in 2009, Estonia’s 14 per cent.

But all three returned to growth dur­ing 2010, and last year Estonia’s 7.6 per cent, Lithuania’s 5.8 per cent and Latvia’s 5.5 were the fastest growth rates among EU economies.

This recov­ery appears more than a “dead cat bounce”, instead reflect­ing a gen­uine recov­ery in com­pet­i­tive­ness. From spring 2010 to autumn 2011, the three saw year-on-year growth in total exports run­ning at above 20 per cent. Esto­nia and Lithua­nia expe­ri­enced peak export growth of a stun­ning 45 per cent in the first quar­ter of 2011, notes Anders Aslund of the Peter­son Insti­tute for Inter­na­tion­al Eco­nom­ics.

But the Baltics’ expe­ri­ence may not be trans­fer­able, or entire­ly rel­e­vant, to euro­zone periph­ery coun­tries.

First, the Baltics were not, like Greece, strug­gling under a moun­tain of debt – which their big falls in GDP would have made, pro­por­tion­al­ly, an even big­ger bur­den. Each had gov­ern­ment debt below 20 per cent of GDP in 2008 – Estonia’s was in low sin­gle dig­its.

The Baltic states also expe­ri­enced far more explo­sive pre-cri­sis growth than, say, Greece. In 2005–2007, Latvia’s econ­o­my grew by a third; salaries dou­bled. The eco­nom­ic crash took it back only to 2005.


Unions, too, are much weak­er than in, say, Greece. That made street protests against spend­ing cuts, thought not entire­ly absent, much more mut­ed.

And final­ly, emi­gra­tion has played a huge role as a safe­ty valve. Latvia’s pop­u­la­tion has shrunk about 10 per cent since 2000, to 2m. True, peo­ple were seek­ing bet­ter-paid jobs abroad even dur­ing the pre-2008 boom. But Mihails Haz­ans, Latvia’s biggest expert on the sub­ject, says emi­gra­tion rose sharply after aus­ter­i­ty was launched, and increas­ing­ly involved entire fam­i­lies. Some esti­mates sug­gest Lithuania’s pop­u­la­tion has declined by at least as much.


As the above excerpt indi­cates, there are a num­ber of dif­fer­ences between the eco­nom­ic sit­u­a­tion fac­ing the Baltic states and the PIIGS but it’s impor­tant to keep in mind that near­ly ALL the of the EU’s ail­ing economies had num­ber of big things in com­mon. For starters, they near­ly all had a major hous­ing boom (Por­tu­gal being an excep­tion). And it was a hous­ing boom that fueled a pri­vate — not pub­lic — debt binge in the years lead­ing up to the finan­cial melt­down:

Busi­ness Week
Krug­menistan vs. Esto­nia
By Bren­dan Gree­ley on July 20, 2012


In the 1990s, Estonia’s labor costs were low, and the work­force was skilled and edu­cat­ed, so the Finns moved south and start­ed busi­ness­es. In a way, Esto­nia was Finland’s East Germany—close, cheap, and cul­tur­al­ly famil­iar. Around 2004, Swedish and Finnish banks began to com­pete aggres­sive­ly to sell mort­gages in Esto­nia, and Esto­ni­ans began to build new hous­es. Var­blane lists what he calls the “dread­ful devel­op­ments” of the boom years. Pri­vate debt increased from 10 per­cent to 100 per­cent of GDP. As debt flowed into the coun­try, work­ers left man­u­fac­tur­ing for more lucra­tive jobs in con­struc­tion. Wages grew rapid­ly, and pro­duc­tiv­i­ty growth flat­tened out. Man­u­fac­tur­ing became more expen­sive. Domes­tic debt began to crowd out for­eign invest­ment.

The crash was nec­es­sary, says Finance Min­is­ter Ligi, “to cor­rect our under­stand­ing about growth poten­tial.”


It’s inter­est­ing to note that the coun­tries with the high­est rates of home own­er­ship in Europe tend to be amongst the poor­est nations and vice ver­sa. Keep in mind that the hous­ing bust did­n’t just wipe out the pri­vate wealth of Europe’s poor­est nations. It was also the cat­a­lyst for the sub­se­quent spike in pub­lic debt. It was clas­sic hous­ing bub­ble in action: as the con­struc­tion of new hous­es freezes and exist­ing home val­ues fall a nation won’t find itself only with col­laps­ing tax base. But there’s also the bailouts. Bub­bles pret­ty much always involve exces­sive lend­ing by the banks. So when that bub­ble bursts, home­own­ers and spec­u­la­tive investors default on their loans. And when enough bor­row­ers default, the banks default...at least if it’s a small­er bank. If the bank is BIG enough (i.e. too-big-to-fail BIG), it’s gets bailed out. And THAT’S REALLY EXPENSIVE.

So have the Baltics fol­lowed this strange dynam­ic of a pri­vate-sec­tor/debt-fueled boom and bust? In addi­tion to the self-imposed aus­ter­i­ty mea­sures, did the Baltic nations also have bank­ing crises fol­low­ing their hous­ing crash­es that lead to a pub­lic bailout of their banks? Was an expe­ri­ence like that part of what’s led to resent­ment in the Baltic nations over the ongo­ing bailouts in the PIIGS? Well...sort of:

Esto­nia avoid­ed a cri­sis with its bank­ing sys­tem in large part because its bank­ing sys­tem “is most­ly dom­i­nat­ed by Nordic banks”, and the Nordic banks are doing just fine. Most­ly. So while pri­vate debt lev­els are still high rel­a­tive to the low per-capi­ta incomes, the Eston­ian bank­ing sys­tem isn’t fac­ing a risk of insol­ven­cy because that sys­tem is, in effect, a sub­sidiary of the Nordic banks.

Lithua­nia and Latvia also have bank­ing sys­tems dom­i­nat­ed by their Nordic neigh­bors, but they haven’t been quite as for­tu­nate as Esto­nia. In Decem­ber 2008, Latvia received a 7.5 bil­lion euro “bailout” in the form of an emer­gency loan with lots of aus­tere-strings attached. This was fol­low­ing a run on the nation’s sec­ond largest bank, Parex, the pri­or month. The run was only quelled after the Lat­vian gov­ern­ment stepped in and pur­chased a 51% share in the bank and assumed it(and did some oth­er stuff). In 2009, Parex got a sec­ond round of “state cap­i­tal injec­tions”.

In Decem­ber last year both Lithua­nia and Lati­va got to expe­ri­ence a new bank run. Or, more pre­cise­ly, an ATM-run. This was fol­low­ing the col­lapse and state takeover of Lithua­ni­a’s 5th largest bank, Sno­ras, and its Lat­vian sub­sidiary. The cost of this bailout, 1 bil­lion euros, is enough to raise Lithu­ni­a’s pub­lic debt from 33% to 40% of GDP. And the cause of this col­lapse? Good ol’ bad ol’ greed and fraud per­pe­trat­ed by a con­stel­la­tion of for­eign and domes­tic oli­garchs.

So the Baltic states are very much in a posi­tion to under­stand how much it sucks to have to bail out a bunch of banks that made for­tunes in the build up of the bub­ble and/or fraud. Its under­stand­able that there might be an expec­ta­tion that oth­er coun­tries ALSO bail out their banks using pub­lic debt. Any­thing else would be unfair.

Now, if the Baltic Tigers had to endure years of aus­ter­i­ty while also foot­ing the bill for the bailout of pri­vate banks, why should­n’t the same be asked of the PIIGS? It’s a rea­son­able ques­tion for aus­ter­i­ty-weary mem­bers of the pub­lic to ask, even if its cou­pled to an unrea­son­able demand. So why should­n’t the PIIGS also just shrink their economies through “inter­nal devaluation”(austerity) and export their way back to eco­nom­ic health? Well, this gets us back to some of the main sim­i­lar­i­ties and dif­fer­ences between the sit­u­a­tions fac­ing a nation like Esto­nia and, say, Spain and Italy.

First, the sim­i­lar­i­ties: The Baltic nations may have still had their own cur­ren­cies when the cri­sis hit (recall that Esto­nia did­n’t join the euro until last year), but their cur­ren­cies were/are being pegged to the euro as a pre­req­ui­site for even­tu­al­ly join­ing the euro. Sim­i­lar­ly, the PIIGS are all euro­zone mem­bers. So Baltic Tigers and the PIIGS all shared the same under­ly­ing cur­ren­cy and the same conun­drum of being unable to deval­ue their cur­ren­cies in the face of a cri­sis. And cur­ren­cy deval­u­a­tion is one of the basic tools in the finan­cial-cri­sis tool­box. All of the coun­tries we’re talk­ing about lack that basic tool. Sim­i­lar­ly, all of the coun­tries in ques­tion lack a sec­ond pri­ma­ry tool that nor­mal­ly exists for coun­tries with a cen­tral bank: the abil­i­ty to sim­ply print more mon­ey. New­ly cre­at­ed print­ed mon­ey can be invalu­able in the midst of an eco­nom­ic cri­sis. It can finance emer­gency stim­u­lus spend­ing via the ind, it can buy up gov­ern­ment debt...generically speak­ing, the abil­i­ty of a cen­tral bank to print cre­ate more mon­ey sim­ply allows a gov­ern­ment to do some­thing in an emer­gency. But this isn’t an option for the euro­zone mem­bers or those aspir­ing to join the euro­zone. Sim­i­lar­ly, instead of print­ing more mon­ey a gov­ern­ment could just bor­row more and spend it on a stim­u­lus. But if you’re a mem­ber of the the euro­zone (or an aspir­ing mem­ber like the Baltics), that option is sim­ply no longer there. This is why the “inter­nal devaluation”/austerity pro­to­col that the Baltic Tigers com­mit­ted them­selves to in the wake of their hous­ing bub­bles sort of seemed like the default option for the entire euro­zone: once you take the option of print­ing new mon­ey, bor­row­ing more, stim­u­lus spend­ing, and cur­ren­cy deval­u­a­tion off the table, aus­ter­i­ty real­ly is one of the only options left.

Now, obvi­ous­ly, an econ­o­my can’t just print its way to pros­per­i­ty. Part of the rea­son the euro­zone’s top pol­i­cy-mak­ers are so adamant­ly opposed to the non-aus­ter­i­ty path out cri­sis for the PIIGS is because the only cen­tral bank that could print that new mon­ey is the Euro­pean Cen­tral Bank (ECB). All of the indi­vid­ual euro­zone nations still have their own cen­tral banks, but they can’t just print new euros. Only the ECB can do that. And the ECB was set up with strict con­trols on how much it could expand the mon­ey sup­ply. Now why would the euro­zone mem­bers have done such a strange thing? Well, in large part its because the euro­zone’s most influ­en­tial mem­ber, Ger­many, has a pow­er­ful nation­al mem­o­ry of how out of con­trol gov­ern­ment mon­ey cre­ation led to hyper­in­fla­tion in the 1920’s and the sub­se­quent hor­rors of the 1930’s. Grant­ed, his­to­ri­ans actu­al­ly point towards the defla­tion­ary poli­cies of the 30’s as the real cat­a­lyst of the eco­nom­ic calami­ty of the ear­ly 30’s that led to the rise of Hitler, but mem­o­ry can be a weird thing. As is the case with the Baltics, this hyper­fear of hyper­in­fla­tion may be a mis­un­der­stand­ing, but it’s an under­stand­able mis­un­der­stand­ing.

Of course, oth­er than print­ing more mon­ey or “inter­nal deval­u­a­tion”, there’s also the option an exter­nal bailout. It’s a famil­iar sce­nario at this point: call the IMF, ask for a bailout, get bailed out but with a bunch of aus­ter­i­ty mea­sures and pri­va­ti­za­tions of state assets as part of the agree­ment (e.g. “struc­tur­al reform”), and declare suc­cess. It’s pret­ty much the tem­plate for the euro­zone bailouts and that should­n’t be a sur­prise since the IMF is one third of the “troikas” we now find run­ning run­ning Greece, Ire­land, and Por­tu­gal. And, of course, a coun­ty can find itself in a sit­u­a­tion where it can print more mon­ey, deval­ue the cur­ren­cy, get an IMF bailout, and still end up default­ing. It’s a sit­u­a­tion Rus­sia found itself in back in 1998, with a num­ber of rel­e­vant lessons for today:

NY Times
The Euro in 2010 Feels Like the Ruble in 1998
Pub­lished: May 12, 2010

MOSCOW — As the finan­cial mar­kets try to absorb news of a res­cue pack­age for Greece and oth­er tee­ter­ing euro-zone economies, some bankers and econ­o­mists see par­al­lels to Russia’s default in 1998.

A decade ago Rus­sia was walk­ing in the same shoes as Greece is today, striv­ing to restore con­fi­dence in gov­ern­ment bonds by seek­ing a huge loan from the Inter­na­tion­al Mon­e­tary Fund and oth­er lenders. Then, as now, the debt cri­sis was roil­ing glob­al finan­cial mar­kets. And hopes were pinned on a bailout — one that in Russia’s case did not work.

“Greece cre­ates a remark­able sense of déjà vu,” Roland Nash, the head of research for Renais­sance Cap­i­tal invest­ment bank in Moscow, wrote in a recent note to investors. The 1998 bailout designed for Rus­sia, in the form of a res­cue pack­age offered by the Inter­na­tion­al Mon­e­tary Fund, had the effect of fore­stalling but not pre­vent­ing Russia’s default­ing on its for­eign debt.

Dur­ing the month between the announced res­cue and that default, Russ­ian and West­ern banks fran­ti­cal­ly cashed out of short-term debt as it matured, changed the rubles into dol­lars and spir­it­ed the mon­ey out of Rus­sia.

The bailout propped up the exchange rate through this process, enrich­ing those bond­hold­ers who got out ear­ly and leav­ing the embit­tered Russ­ian pub­lic hold­ing the debt and hav­ing to pay back cred­i­tors, includ­ing the I.M.F. By Aug. 17, 1998, when the gov­ern­ment announced a de fac­to default on Russia’s for­eign debt and said it would allow the ruble to float more freely against the dol­lar, the World Bank and mon­e­tary fund had dis­bursed about $5.1 bil­lion of the bailout mon­ey.

Some ana­lysts say that if a sim­i­lar pat­tern takes hold in the euro-zone res­cue, it could be Euro­pean tax­pay­ers pay­ing for the bailout while investors in Greek debt are large­ly made whole.

In Russia’s case, the mon­e­tary fund, spurred to action by the Clin­ton administration’s wor­ries about the polit­i­cal con­se­quences in Rus­sia of a finan­cial col­lapse, cob­bled togeth­er an aid pack­age that was enor­mous by the stan­dards of the day.

The mon­e­tary fund and oth­er lenders first pro­posed $5.6 bil­lion, but then raised it to $22.5 bil­lion, includ­ing pre­vi­ous com­mit­ments — the equiv­a­lent of $29.5 bil­lion in today’s dol­lars.

In Greece, the fund and Euro­pean Union ini­tial­ly pro­posed a bailout of 110 bil­lion euros, or $139 bil­lion, last week. After mar­kets react­ed skep­ti­cal­ly, Euro­pean finance min­is­ters met over the week­end and pro­posed a near­ly $1 tril­lion finan­cial sup­port pack­age for Greece and oth­er weak euro zone economies. They pro­posed form­ing an invest­ment fund guar­an­teed by the gov­ern­ments of rich­er Euro­pean Union coun­tries like Ger­many and France that would also draw on mon­e­tary fund mon­ey.

With Rus­sia, the suc­ces­sive bailout pro­pos­als were quick­ly judged by the mar­kets as too lit­tle, too late — as hap­pened with the Greek cri­sis before the lat­est announce­ment.

“You need speed to put out a for­est fire,” Ana­toly B. Chubais, who was the lead Russ­ian nego­tia­tor with the Inter­na­tion­al Mon­e­tary Fund in the 1998 cri­sis, said in writ­ten respons­es to ques­tions about the Greek bailout.

Edmond S. Phelps, a Nobel lau­re­ate and Colum­bia Uni­ver­si­ty econ­o­mist, in a tele­phone inter­view cit­ed a les­son from the 1998 bailout: lenders should announce their high­est num­ber as quick­ly as pos­si­ble, to keep inter­est rates down and low­er the cost of a bailout. Inter­na­tion­al lenders, he said, need to go in “with all their guns blaz­ing.”

Mr. Nash, in his investor note, wrote that bond investors ana­lyz­ing the sit­u­a­tion in Greece and the oth­er weak south­ern Euro­pean economies may be doing what bond investors did dur­ing the Rus­sia cri­sis — siz­ing up under­ly­ing neg­a­tive finan­cial forces so potent that many investors bet against even the big­ger bailout pack­age.

Back then, as now, a glob­al eco­nom­ic cri­sis had ren­dered local economies uncom­pet­i­tive at the exist­ing exchange rates. Rus­sia at the time had pegged the ruble to the dol­lar, Greece today is locked into the euro zone.

In Russia’s case, the prices for the country’s main­stay petro­le­um exports had plum­met­ed the pre­vi­ous year because the eco­nom­ic con­trac­tion in Asia in 1997 had dimin­ished demand. The ruble was under pres­sure to fol­low this trend down­ward. For many months, though, the Russ­ian cen­tral bank kept the ruble pegged to the dol­lar — a dol­lar that was gain­ing strength as glob­al investors sought a safe har­bor.

Only after the Russ­ian cen­tral bank final­ly did deval­ue the ruble in August 1998, which plunged by 70 per­cent with­in a month, did the Russ­ian econ­o­my begin to recov­er. The turn­around was faster than any­body imag­ined. With­in a year, Russia’s econ­o­my had recov­ered to pre­cri­sis lev­els and a decade of rapid growth fol­lowed. Banks rushed back to do busi­ness in Rus­sia.

Russia’s oil woes back then may be anal­o­gous to the gap today between Greece’s and South­ern Europe’s low pro­duc­tiv­i­ty and the high salaries its work­ers receive in euros. But the fix may be hard­er to achieve.

“Greece, fun­da­men­tal­ly, does not have a debt prob­lem,” Mr. Nash wrote. “It has an econ­o­my which is not com­pet­i­tive at the pre­vail­ing exchange rate and which lacks the struc­tur­al flex­i­bil­i­ty to become com­pet­i­tive.”


Yes, Rus­sia, in the end, faced a sit­u­a­tion with a num­ber of par­al­lels to what coun­tries like Greece or the Baltics face: a cur­ren­cy pegged to a stronger inter­na­tion­al stan­dard (the dol­lar in Rus­si­a’s case, the euro EU case) was sup­posed to give for­eign­er investors the kind of con­fi­dence in the coun­try that would spur long-term invest­ments and a dynam­ic econ­o­my. But when a cri­sis hits — a hous­ing crash in the EU and the Asian finan­cial cri­sis of 1997 for Rus­sia — that com­mit­ment to an arti­fi­cial­ly strong cur­ren­cy can become a lia­bil­i­ty. And those efforts to main­tain that arti­fi­cial strength can end up sim­ply pro­vid­ing the for­eign investors a “get out of jail free” card, so to speak. The bailout props up the cur­ren­cy dur­ing a time when for­eign lenders are all tempt­ed to head for the exits.

As the com­men­ta­tors in the above arti­cle point­ed out, the man­age­ment of a finan­cial cri­sis isn’t sim­ply a mat­ter of tech­no­crat­ic manip­u­la­tion of this or that inter­est rate. It’s clos­er to psy­cho­log­i­cal war­fare: the cen­tral bank and gov­ern­ment in cri­sis has to con­vince for­eign investors that the whole house of cards isn’t going to burn down. THAT’s why the abil­i­ty abil­i­ty of a cen­tral bank to print its own mon­ey at will and in unlim­it­ed amounts is such a sharp dou­ble-edge sword: When used appro­pri­ate­ly, a cen­tral bank can assure mar­kets that there won’t be a “liq­uid­i­ty event”. That’s what hap­pens when the mar­ket for some­thing freezes up when, for instance, you have tons of sell­ers and no buy­ers. When that hap­pens for a com­mod­i­ty or stock the price tends to plunge in a pan­ic. But when it hap­pens to a gov­ern­men­t’s sov­er­eign debt mar­ket the entire econ­o­my freezes. Liq­uid­i­ty events in any of the key mar­kets, like short-term gov­ern­ment debt, is how economies die, so the ability/threat of a cen­tral bank to print unlim­it­ed amounts of cash and use it to buy a crit­i­cal secu­ri­ty (usu­al­ly gov­ern­ment debt) is a very pow­er­ful tool to use ward of a liq­uid­i­ty event. But once that spig­ot real­ly is turned on, it’s not espe­cial­ly easy to turn off and it real­ly can poten­tial­ly over­whelm a coun­try’s mon­ey sup­ply. In oth­er words, you don’t real­ly want to turn on the unlim­it­ed-mon­ey fire hose unless there’s real­ly a fire. But if you’re going to use that fire hose, use it ear­ly and use it over­whelm­ing­ly. Rus­sia and the IMF had that fire hose in 1998 but did­n’t use it in time and end­ed up default­ing any­ways (a 70% deval­u­a­tion in their cur­ren­cy with­in an month was basi­cal­ly a default).

So, if cur­ren­cy deval­u­a­tion — like Rus­sia drop­ping the ruble’s cur­ren­cy peg to the dol­lar — is effec­tive­ly a default, and defaults are to be avoid­ed at all cost, how does cur­ren­cy deval­u­a­tion avoid spook­ing for­eign investors? Well, once again, one of the pri­ma­ry jobs (and tools) of a cen­tral bank is the man­age­ment of the psy­chol­o­gy of the mar­ket­place. When investors or spooked, cen­tral banks are sup­posed to step in and pre­vent a pan­ic. When investors get over­ly exu­ber­ant and move into “bub­ble” ter­ri­toriy, cen­tral banks are sup­posed to step in and “remove the punch bowl”. And when investors are REALLY spooked over about the long-term via­bil­i­ty of a nation’s econ­o­my, a cen­tral bank’s job is con­vince investors that there real­ly is a future for this coun­try. Cur­ren­cy deval­u­a­tion is one of the main tools that can give the world a sense that a coun­try real­ly does have a future. When a coun­try can export again, that light at the end of a tun­nel might not look so much like an oncom­ing train, and noth­ing helps a coun­try export more than a cur­ren­cy deval­u­a­tion. Think of the abil­i­ty of a cen­tral bank to print unlim­it­ed mon­ey as one of the pri­ma­ry tools avail­able for deal­ing with imme­di­ate liq­uid­i­ty crises, where­as the abil­i­ty to deval­ue a cur­ren­cy is sort of a long-term solu­tion. In a finan­cial pan­ic, you need both short term AND long term solu­tions and you need them simul­ta­ne­ous­ly.

Now, if the Baltics were able to rebound suc­cess­ful­ly (well, ok, that depends on you who ask to define “suc­cess­ful­ly”), why can’t nations like Spain, and Italy just fol­low that same mod­el? Well, now we return to the sim­i­lar­i­ties and dif­fer­ences between and economies like Spain and Italy, and one like Esto­nia. One obvi­ous dif­fer­ence between the two nations is that Spain and Italy are sim­ply much much larg­er than any of the Baltics. If they’re going to export their way back to health some­one else has to buy all those exports. That’s a lot eas­i­er to do in tiny economies like the Baltics where much of the eco­nom­ic growth of the past decade involved for­eign man­u­fac­tur­ers mov­ing in and set­ting up fac­to­ries for export. In oth­er words, if you’re already an export-ori­ent­ed econ­o­my, export­ing your way back to health is just a lot eas­i­er to do. And if you’re a tiny export-ori­ent­ed econ­o­my with wealthy neigh­bors, it’s that much eas­i­er.

Near­ly every­one agrees that Spain and Italy need more exports, but can they just “inter­nal­ly deval­ue” and export to the rest of the world in place of the nor­mal cur­ren­cy-deval­u­a­tion? Well, in the­o­ry, and over a long peri­od of time. Aus­ter­i­ty mea­sures could remain, unem­ploy­ment could lan­guish at high rates and wages could con­tin­ue to fall. But here’s the prob­lem: unlike a cur­ren­cy deval­u­a­tion, which sort of has the effect of uni­form­ly bring­ing down every­one’s wages in a nation (at least with respect to the out­side world), “inter­nal deval­u­a­tion” does­n’t rely a nice smooth mech­a­nism like cur­ren­cy deval­u­a­tion. Instead, it relies on folks just tak­ing a big pay cut. As many folks as pos­si­ble. And here’s the prob­lem: wages are “sticky”. Unem­ploy­ment may rise, but that does­n’t smooth­ly trans­late into low­er wages. Instead, what we’ve seen in Spain and Italy is sim­ply high unem­ploy­ment, but with lit­tle improve­ment in over­all “com­pet­i­tive­ness” because wages haven’t fall­en. And nei­ther should we expect them to unless a coun­try sub­mits to some sort of cen­tral­ized wage author­i­ty. That’s just the messi­ness of real life inter­fer­ing with eco­nom­ic the­o­ry. Even Esto­nia, a coun­try that con­scious­ly embrace “inter­nal deval­u­a­tion”, wages did even­tu­al­ly fall, but they were still pret­ty “sticky”:

Busi­ness Week
Krug­menistan vs. Esto­nia
By Bren­dan Gree­ley on July 20, 2012

Krug­man was right about one thing: Wages were sticky. But they weren’t glued. They declined slight­ly in 2009 and 2010. They have grown since, but the larg­er wage trend since 2007 is flat. Anec­do­tal­ly, some indus­tries report­ed wage cuts of as much as 30 per­cent. Pro­duc­tiv­i­ty, in the mean­time, recov­ered. And both look rough­ly where they’d be now had there been no hous­ing boom. As hoped, Estonia’s growth in 2010 and 2011 came from exports. The gov­ern­ment points proud­ly to Ericsson’s (ERIC) recent deci­sion to build a plant near Tallinn. Estonia’s politi­cians seem relieved that the coun­try has resumed its right­ful place in the world: man­u­fac­tur­ing, exports, and sobri­ety.


So why can’t this work for Spain and Italy? Well, it could work...in the long run. Once a coun­try’s spir­it and econ­o­my is suf­fi­cient­ly bro­ken, those wages will even­tu­al­ly fall. But why can’t this work in the short run? Well, once again, it could...in a dif­fer­ent world. More specif­i­cal­ly, it could poten­tial­ly work in a world that had the glob­al demand to buy all those new­ly com­pet­i­tive Span­ish and Italy exports. That’s a very dif­fer­ent world from the one we live in today and that brings us to one of the cen­tral prob­lems with the entire austerity/“internal deval­u­a­tion” approach to solv­ing these kinds of sov­er­eign debt crises: “inter­nal deval­u­a­tion” might increase exports and reduce imports, but it comes at an enor­mous cost that isn’t near­ly as cost­ly when cur­ren­cy deval­u­a­tion is used instead: “inter­nal deval­u­a­tion” breaks the inter­nal econ­o­my:

Spain is More Com­pet­i­tive than You Think
Jun 18, 2012 1:00 AM EDT
Fiona Bra­vo

You know Spaniards are depressed when Coca-Cola broad­casts a tele­vi­sion com­mer­cial encour­ag­ing cit­i­zens to “go get ’em.” The spot cuts away from for­eign com­men­ta­tors pre­dict­ing Spain’s immi­nent col­lapse to show­case the country’s strengths: engi­neers, high-speed trains, and, of course, soc­cer. In the midst of a cur­ren­cy cri­sis, steep cred­it down­grades, and a 100 bil­lion euro bailout of its bank­ing sys­tem, it’s easy to be pes­simistic about Spain. But there are some grounds for opti­mism.

Start with exports. While Span­ish wages rose much faster than the euro zone aver­age dur­ing the pre-cri­sis years, large exporters kept costs under con­trol, allow­ing them to stay rel­a­tive­ly com­pet­i­tive. Mean­while Span­ish employ­ers with more than 250 work­ers stayed just as pro­duc­tive as their Ger­man, Ital­ian, and French coun­ter­parts, accord­ing to BBVA, Spain’s No. 2 bank.

Con­se­quent­ly, despite Asia’s rise, Spain has man­aged to hang on to its glob­al mar­ket share of exports. That puts it in a league with Ger­many and well ahead of most of the euro zone. Indi­tex, the appar­el group best known for its Zara retail chain, is a poster child of Span­ish com­pet­i­tive­ness. It shrugged off the Euro­pean finan­cial cri­sis and even deliv­ered a sharp rise in first-quar­ter prof­its.

The catch is that exports, which account for about 30 per­cent of Spain’s GDP, can’t com­pen­sate for the steep drop in demand at home. Yet some com­pa­nies are doing well inside Spain. Mer­cadona, the largest pure­ly domes­tic gro­cer, boost­ed sales by 8 per­cent last year, to 17.8 bil­lion euros. Its unique busi­ness mod­el is stud­ied in the class­rooms of top Amer­i­can busi­ness schools.


Spain’s emblem­at­ic com­pa­nies show that this can be done. But their suc­cess has been despite, not because of, the country’s politi­cians and rigid employ­ment laws. Spain has already imple­ment­ed painful reforms, par­tic­u­lar­ly in the labor mar­ket, but they will take time to feed into the econ­o­my. The bank bailout may even­tu­al­ly ease the ongo­ing cred­it crunch, but in the short term the country’s spi­ral­ing bor­row­ing costs will make it hard­er for Span­ish entre­pre­neurs to finance their busi­ness­es. In the mean­time, the hope in Madrid is that the country’s nation­al soc­cer team, win­ner of the last World Cup, will pro­vide some respite from the doom and gloom.

As the above arti­cle high­lights, one of the fun­da­men­tal prob­lems with the “inter­nal deval­u­a­tion” approach is that any boost to exports comes at a pret­ty sig­nif­i­cant cost to the inter­nal econ­o­my: If the Key­ne­sian solu­tion to a fis­cal cri­sis involves more infla­tion (in the form of cur­ren­cy deval­u­a­tion and more pub­lic debt), the “aus­te­ri­on” solu­tion is more unem­ploy­ment. And in the infla­tion vs unem­ploy­ment debate, the unem­ploy­ment approach rarely seems to work. One of the main rea­sons the eco­nom­ic rebound of the Baltic nations has been point­ed out as an excep­tion­al exam­ple of the pow­er of aus­ter­i­ty is because suc­cess with aus­ter­i­ty alone is excep­tion­al­ly rare. It just does­n’t help a coun­try to break its non-export-ori­ent­ed econ­o­my. This is part­ly do to fact that sov­er­eign debt cri­sis are vir­tu­al­ly nev­er only about long-term con­cerns over the eco­nom­ic via­bil­i­ty of a nation. There is always a short-term com­po­nent to the cri­sis, and the clos­er a nation gets to default the greater those short-term con­cerns become in the minds of inter­na­tion­al investors. And if there’s one thing those inter­na­tion­al investors don’t want to see in a coun­try fac­ing a debt cri­sis it’s a surge in debt cou­pled with a col­lapse in con­fi­dence. Remem­ber, cen­tral bank­ing is as much about wag­ing psy­cho­log­i­cal war­fare as it is a task of man­ag­ing the econ­o­my. If a surge in debt is used in a large pro-stim­u­lus man­ner that cre­ates real con­fi­dence that the gov­ern­ment is seri­ous about address­ing the eco­nom­ic prob­lems both in the short, medi­um, and long-run, the mar­kets will be will­ing to accept that surge in debt and a cri­sis can be avert­ed. But if a surge in debt is tak­ing place amidst aus­ter­i­ty mea­sures due to a col­laps­ing inter­nal econ­o­my AND this is all tak­ing place in a col­laps­ing inter­na­tion­al economy...well, that’s just a recipe for dis­as­ter. Exact­ly the kind of dis­as­ter we’ve been see­ing across the euro­zone. Aus­ter­i­ty is, at best, a long-run solu­tion. Finan­cial pan­ics are short-term traps that may or may not involve long-term con­cerns. But regard­less of whether or not long-term “com­pet­i­tive­ness” con­cerns are part of what’s dri­ving the pan­ic, any solu­tion that requires long-term patience on the part of inter­na­tion­al investors is pret­ty much doomed to fail.

So why is Ger­many, leader of the euro­zone, so adamant about aus­ter­i­ty as the only mod­el? Well, part­ly because Ger­many tried aus­ter­i­ty less than a decade ago and it worked...sort of. Ger­many may have imple­ment­ed its own ver­sion of austerity/“internal deval­u­a­tion” in 2005, but that’s also not a great exam­ple of the val­ue of aus­ter­i­ty in the midst of a sov­er­eign debt cri­sis. Ger­many was­n’t in the midst of finan­cial pan­ic and the glob­al econ­o­my was still growing...it was a very dif­fer­ent sit­u­a­tion from what Spain and Italy find them­selves in today (Plus, the Ger­mans had some “help” that cush­ioned the blow). But it’s also impor­tant to keep in mind that the wage cuts expe­ri­enced Ger­man work­ers in the mid 2000’s were real and painful. One again, the desires of the Ger­man pub­lic to see the PIIGS pay for their bailout might be mis­guid­ed, but it’s under­stand­ably mis­guid­ed. But that just explains the mass psy­chol­o­gy of the gen­er­al pub­lic. The behav­ior of Ger­many’s politi­cians, on the oth­er hand, is less under­stand­able. It’s actu­al­ly pret­ty per­plex­ing:

The Irish Times — Fri­day, July 20, 2012
Bun­destag gives back­ing for bailout of Span­ish banks


GERMAN FINANCE min­is­ter Wolf­gang Schäu­ble will add Berlin’s sup­port for bail­ing out Span­ish banks today after receiv­ing the back­ing of a large Bun­destag major­i­ty yes­ter­day evening.

Some 473 MPs vot­ed in favour of con­tribut­ing almost €30 bil­lion in Ger­man loans and guar­an­tees to the Span­ish pack­age of up to €100 bil­lion, run­ning over 18 months.

But oppo­si­tion was more marked than in pre­vi­ous bailout votes: some 97 of a total of 620 MPs opposed the move, includ­ing 22 from the coali­tion ranks, with a total of 13 absten­tions.

The gov­ern­ment failed to get an absolute, so-called “chan­cel­lor” major­i­ty, though six coali­tion politi­cians were miss­ing from the mid­sum­mer par­lia­men­tary recall.

Before the vote, Mr Schäu­ble said finan­cial mar­kets had “doubts” about Spain’s eco­nom­ic health and the bailout would help Madrid buy time to com­plete cut­backs and reforms already under way.

“Spain is on the right path to sol­id state finances but this progress is endan­gered by inse­cu­ri­ty over its finan­cial sec­tor,” he said.

“We have a strong inter­est in allow­ing Spain to con­tin­ue to reform.”

He assured MPs that full lia­bil­i­ty for all loans lay with the Span­ish state, dis­miss­ing spec­u­la­tion in some quar­ters that recap­i­tal­is­ing euro zone banks would let states off the hook for lia­bil­i­ty.

Mr Schäu­ble denied this was the case with the Spain bailout, insist­ing Euro­pean lead­ers would dis­cuss this issue only after a Euro­pean bank­ing reg­u­la­tor was in place and oper­at­ing to everyone’s sat­is­fac­tion.

“Any­one who talks about imme­di­ate, direct refi­nanc­ing of banks through the ESM (bailout fund) or of col­lec­tive lia­bil­i­ty for banks in the euro sys­tem is shoot­ing his mouth off,” he said, a dig at euro zone bailout chief Klaus Regling.

Oppo­si­tion leader Frank Wal­ter Stein­meier, par­lia­men­tary head of the Social Democ­rats (SPD), said his par­ty would sup­port the bailout for euro zone sta­bil­i­ty – but as a show of sup­port for the euro zone and not for the gov­ern­ment.

He accused Angela Merkel’s coali­tion of unset­tling vot­ers by spin­ning a “fairy tale” of fis­cal­ly pru­dent Ger­mans sur­round­ed by fis­cal­ly reck­less neigh­bours.

“Ger­many is no blessed isle. The cri­sis will hit even export-dri­ven coun­tries [such as Ger­many] and, as one export mar­ket after anoth­er hits the skids, we can­not rule out that we will be dragged down,” he said.

Mr Stein­meier put the gov­ern­ment on notice that the SPD would not con­tin­ue to sup­port euro zone bailouts for banks unless cred­i­tor involve­ment was agreed.


OK, first off, kudos to SPD leader Frank Stein­meier. By call­ing out Merkel for sell­ing Ger­man vot­ers on a fairy tale of “lazy South­ern­ers” we might be see­ing a sign that the pow­er of the pol­i­tics of per­ceived inequal­i­ty is fad­ing in Ger­many. Now let’s hope the same hap­pens in Fin­land. Soon. Far-right polit­i­cal gains aren’t just being seen in the cri­sis-hit euro­zone mem­bers. Fin­land, with one of the strongest economies in europe, saw the far-right True Finns par­ty surge to 19% of the vote in last year’s elec­tions based on anti-bailout sen­ti­ment. And that sen­ti­ment has­n’t sub­sided since then as the south­ern economies con­tin­ue to erode. In fact, Fin­land man­aged to extract a spe­cial con­ces­sion in exchange for its sup­port of the lat­est Span­ish bank bailout: col­lat­er­al val­ues at ~40% of its share of the loans to Spains banks. The syn­er­gis­tic rela­tion­ship between the euro­zone cri­sis and the rise of rad­i­cal polit­i­cal groups is a grow­ing and most trou­bling phe­nom­e­na.

So what are we see­ing here with the Ger­man par­lia­ment demand­ing that Spain’s pub­lic accept the full lia­bil­i­ty for a 100 bil­lion euro bailout of Spain’s banks? Isn’t that just going to exac­er­bate the under­ly­ing sov­er­eign debt cri­sis? Well yes, but we’re not just see­ing the pol­i­tics of bailout-resent­ment on dis­play here. One way to look at it is we’re see­ing an attempt to do the unprece­dent­ed: cen­tral bank­ing does­n’t real­ly have prece­dent for deal­ing with finan­cial pan­ics using the aus­ter­i­ty-only approach. The accept­ed par­a­digm for quelling a pan­ic is for the cen­tral bank to act as a “lender of last resort”. In oth­er words, the cen­tral bank needs to threat­en to do what­ev­er it can to stop the pan­ic. Stim­u­lus spend­ing, buy­ing debt, print­ing mon­ey, any­thing. It may not be a per­fect approach but it does have a track record of work­ing. But in our brave new world of the euro­zone, the only cen­tral bank in the euro­zone with the pow­er to buy bonds and issue euros is the ECB. And not only does the ECB not want to use its pow­er of lender of last resort. It’s man­dat­ed to do one thing only: main­tain “price-sta­bil­i­ty”. That’s a fan­cy way of say­ing “avoid infla­tion at all costs”. Defla­tion is fine, though...you can’t have “inter­nal deval­u­a­tion” with­out defla­tion. And the spe­cial funds set up to help “bailout” the PIIGS (the EFSF and the ESM) can’t actu­al­ly buy sov­er­eign debt them­selves. At least not unlim­it­ed amounts. Only the ECB could tech­ni­cal­ly engage in these activ­i­ties and be a “lender of last resort” but it’s man­dat­ed not to do so:

Thurs­day, July 5, 2012
Mar­shall Auer­back: All Roads Lead to the ECB

By Mar­shall Auer­back, a hedge fund man­ag­er and port­fo­lio strate­gist. Cross post­ed from New Eco­nom­ic Per­spec­tives

We’ve always been a fan of Pro­fes­sor Paul De Grauwe from Uni­ver­si­ty of Leu­ven, who has con­sis­tent­ly point­ed out the struc­tur­al flaws inher­ent in the orig­i­nal struc­tures of the EU. Recent­ly, Pro­fes­sor de Grauwe wrote an excel­lent analy­sis explain­ing why the lat­est “res­cue plan” cob­bled togeth­er by the Euro­zone author­i­ties is des­tined to fail.

The key points:

1) ECB is not cur­rent­ly a ‘lender of last resort’. The ECB was set up with fun­da­men­tal flaws, where “… one of the ECB’s main con­cerns is the defense of its bal­ance sheet qual­i­ty. That is, a con­cern about avoid­ing loss­es and show­ing pos­i­tive equi­ty- even if that leads to finan­cial insta­bil­i­ty.” This is a pro­found­ly mis­con­ceived idea. As we have not­ed many times, a pri­vate bank needs cap­i­tal – clear­ly because there are pru­den­tial reg­u­la­tions requir­ing that – but because it can become insol­vent. It has not cur­ren­cy-issu­ing capac­i­ty in its own right. While the ECB has an elab­o­rate for­mu­la for deter­min­ing how cap­i­tal is from the nation­al mem­ber banks at an intrin­sic lev­el, it has no need for cap­i­tal. It could oper­ate for­ev­er with a bal­ance sheet that if held by a pri­vate bank would sig­nal insol­ven­cy. There are no com­pa­ra­ble con­cepts for a cur­ren­cy issuer and a cur­ren­cy user in terms of sol­ven­cy. The lat­ter is always at risk of insol­ven­cy the for­mer nev­er, so the ECB’s focus on prof­itabil­i­ty is not only mis­guid­ed, but lead­ing to inad­e­quate pol­i­cy respons­es.

2) The cre­ation of the Euro­pean Finan­cial Sta­bil­i­ty Facil­i­ty (EFSF) and the ESM has been moti­vat­ed by the over­rid­ing con­cern of the ECB to pro­tect its bal­ance sheet and to avoid engag­ing in “fis­cal pol­i­cy”. The prob­lem again goes back to the cre­ation of the euro: no supra­na­tion­al fis­cal author­i­ty to go with a supra­na­tion­al cen­tral bank, which means that the only enti­ty that can con­ceiv­ably car­ry out “fis­cal trans­fers” of the sort exem­pli­fied by a bond buy­ing oper­a­tion is the ECB. Sure, the actu­al fis­cal trans­fers can be ’sub­con­tract­ed” to the EFSF and ulti­mate­ly the ESM, but it can only work if the latter’s bal­ance sheet is linked to the ECB’s, giv­ing it the same unlim­it­ed capac­i­ty to buy up the bonds and there­by deal with the insol­ven­cy issue. As things stand now, per de Grauwe: “The enlarged respon­si­bil­i­ties that are now giv­en to the ESM are to be seen as a cov­er-up of the fail­ure of the ECB to take up its respon­si­bil­i­ty of the guardian of finan­cial sta­bil­i­ty in the Euro­zone; a respon­si­bil­i­ty that only the ECB can ful­fill”.

3) Relat­ed to this prob­lem is the fact that the ESM has been giv­en only finite resources as per Germany’s stip­u­la­tion the minute it begins. It is cap­i­talised at 500bn euros. And it’s unclear that Ger­many can go much fur­ther, giv­en that there are cur­rent­ly 3 con­sti­tu­tion­al chal­lenges which the ESM is now fac­ing with­in Germany’s courts. This will delay rat­i­fi­ca­tion of the vote tak­en last week by Germany’s par­lia­ment to rat­i­fy the ESM’s exis­tence, as well as lim­it­ing its fire­pow­er going for­ward. The ESM’s “bazooka” is in effect a pop-gun. Con­se­quent­ly, as de Grauwe argues, “Investors will start fore­cast­ing the moment when the ESM will run out of cash. They will then do what one expects from clever peo­ple. They will sell bonds now rather than lat­er.”

As is clear from every FX cri­sis in the past, “A cen­tral bank that pegs the exchange rate and has a finite stock of inter­na­tion­al reserves to defend its cur­ren­cy against spec­u­la­tive attacks faces the same prob­lem. At some point, the stock of reserves is deplet­ed and the cen­tral bank has to stop defend­ing the cur­ren­cy. Spec­u­la­tors do not wait for that moment to hap­pen. They set in motion their spec­u­la­tive sales of the cur­ren­cy much before the moment of deple­tion, trig­ger­ing a self-ful­fill­ing cri­sis. “

Until Europe’s author­i­ties have this fig­ured out, the cri­sis will con­tin­ue. All roads lead back to the ECB.

Once again, the ECB sim­ply isn’t allowed do what the Fed­er­al Reserve of Bank of Japan can do because the ECB’s man­date is lim­it­ed to one thing: “price sta­bil­i­ty”. Fight­ing infla­tion is pret­ty much it’s one and only pri­or­i­ty. And not sur­pris­ing­ly, that’s also the only man­date of the Bun­des­bank. As the Bun­des­bank goes, so goes the ECB. The night­mare of the Weimar Repub­lic lives on, but in reverse and in neigh­bor­ing coun­tries.

So what is this new par­a­digm that we’re see­ing here? What is the les­son for the world that the ECB (Bun­des­bank) has in store for the rest of us? Well, in some ways this an unprece­dent­ed approach to cen­tral bank­ing and eco­nom­ic man­age­ment. In oth­er ways it’s old school. Aus­tri­an old school:

The Hang­over The­o­ry
Are reces­sions the inevitable pay­back for good times?

By Paul Krugman|Posted Fri­day, Dec. 4, 1998, at 3:30 AM ET

A few weeks ago, a jour­nal­ist devot­ed a sub­stan­tial part of a pro­file of yours tru­ly to my fail­ure to pay due atten­tion to the “Aus­tri­an the­o­ry” of the busi­ness cycle—a the­o­ry that I regard as being about as wor­thy of seri­ous study as the phlo­gis­ton the­o­ry of fire. Oh well. But the inci­dent set me thinking—not so much about that par­tic­u­lar the­o­ry as about the gen­er­al world­view behind it. Call it the over­in­vest­ment the­o­ry of reces­sions, or “liq­ui­da­tion­ism,” or just call it the “hang­over the­o­ry.” It is the idea that slumps are the price we pay for booms, that the suf­fer­ing the econ­o­my expe­ri­ences dur­ing a reces­sion is a nec­es­sary pun­ish­ment for the excess­es of the pre­vi­ous expan­sion.

The hang­over the­o­ry is per­verse­ly seductive—not because it offers an easy way out, but because it does­n’t. It turns the wig­gles on our charts into a moral­i­ty play, a tale of hubris and down­fall. And it offers adher­ents the spe­cial plea­sure of dis­pens­ing painful advice with a clear con­science, secure in the belief that they are not heart­less but mere­ly prac­tic­ing tough love.

Pow­er­ful as these seduc­tions may be, they must be resisted—for the hang­over the­o­ry is dis­as­trous­ly wrong­head­ed. Reces­sions are not nec­es­sary con­se­quences of booms. They can and should be fought, not with aus­ter­i­ty but with liberality—with poli­cies that encour­age peo­ple to spend more, not less. Nor is this mere­ly an aca­d­e­m­ic argu­ment: The hang­over the­o­ry can do real harm. Liq­ui­da­tion­ist views played an impor­tant role in the spread of the Great Depression—with Aus­tri­an the­o­rists such as Friedrich von Hayek and Joseph Schum­peter stren­u­ous­ly argu­ing, in the very depths of that depres­sion, against any attempt to restore “sham” pros­per­i­ty by expand­ing cred­it and the mon­ey sup­ply. And these same views are doing their bit to inhib­it recov­ery in the world’s depressed economies at this very moment.

The many vari­ants of the hang­over the­o­ry all go some­thing like this: In the begin­ning, an invest­ment boom gets out of hand. Maybe exces­sive mon­ey cre­ation or reck­less bank lend­ing dri­ves it, maybe it is sim­ply a mat­ter of irra­tional exu­ber­ance on the part of entre­pre­neurs. What­ev­er the rea­son, all that invest­ment leads to the cre­ation of too much capacity—of fac­to­ries that can­not find mar­kets, of office build­ings that can­not find ten­ants. Since con­struc­tion projects take time to com­plete, how­ev­er, the boom can pro­ceed for a while before its unsound­ness becomes appar­ent. Even­tu­al­ly, how­ev­er, real­i­ty strikes—investors go bust and invest­ment spend­ing col­laps­es. The result is a slump whose depth is in pro­por­tion to the pre­vi­ous excess­es. More­over, that slump is part of the nec­es­sary heal­ing process: The excess capac­i­ty gets worked off, prices and wages fall from their exces­sive boom lev­els, and only then is the econ­o­my ready to recov­er.

Except for that last bit about the virtues of reces­sions, this is not a bad sto­ry about invest­ment cycles. Any­one who has watched the ups and downs of, say, Boston’s real estate mar­ket over the past 20 years can tell you that episodes in which overop­ti­mism and over­build­ing are fol­lowed by a bleary-eyed morn­ing after are very much a part of real life. But let’s ask a seem­ing­ly sil­ly ques­tion: Why should the ups and downs of invest­ment demand lead to ups and downs in the econ­o­my as a whole? Don’t say that it’s obvious—although invest­ment cycles clear­ly are asso­ci­at­ed with econ­o­my­wide reces­sions and recov­er­ies in prac­tice, a the­o­ry is sup­posed to explain observed cor­re­la­tions, not just assume them. And in fact the key to the Key­ne­sian rev­o­lu­tion in eco­nom­ic thought—a rev­o­lu­tion that made hang­over the­o­ry in gen­er­al and Aus­tri­an the­o­ry in par­tic­u­lar as obso­lete as epicycles—was John May­nard Keynes’ real­iza­tion that the cru­cial ques­tion was not why invest­ment demand some­times declines, but why such declines cause the whole econ­o­my to slump.

Here’s the prob­lem: As a mat­ter of sim­ple arith­metic, total spend­ing in the econ­o­my is nec­es­sar­i­ly equal to total income (every sale is also a pur­chase, and vice ver­sa). So if peo­ple decide to spend less on invest­ment goods, does­n’t that mean that they must be decid­ing to spend more on con­sump­tion goods—implying that an invest­ment slump should always be accom­pa­nied by a cor­re­spond­ing con­sump­tion boom? And if so why should there be a rise in unem­ploy­ment?

Most mod­ern hang­over the­o­rists prob­a­bly don’t even real­ize this is a prob­lem for their sto­ry. Nor did those sup­pos­ed­ly deep Aus­tri­an the­o­rists answer the rid­dle. The best that von Hayek or Schum­peter could come up with was the vague sug­ges­tion that unem­ploy­ment was a fric­tion­al prob­lem cre­at­ed as the econ­o­my trans­ferred work­ers from a bloat­ed invest­ment goods sec­tor back to the pro­duc­tion of con­sumer goods. (Hence their oppo­si­tion to any attempt to increase demand: This would leave “part of the work of depres­sion undone,” since mass unem­ploy­ment was part of the process of “adapt­ing the struc­ture of pro­duc­tion.”) But in that case, why does­n’t the invest­ment boom—which pre­sum­ably requires a trans­fer of work­ers in the oppo­site direction—also gen­er­ate mass unem­ploy­ment? And any­way, this sto­ry bears lit­tle resem­blance to what actu­al­ly hap­pens in a reces­sion, when every industry—not just the invest­ment sector—normally con­tracts.

As is so often the case in eco­nom­ics (or for that mat­ter in any intel­lec­tu­al endeav­or), the expla­na­tion of how reces­sions can hap­pen, though arrived at only after an epic intel­lec­tu­al jour­ney, turns out to be extreme­ly sim­ple. A reces­sion hap­pens when, for what­ev­er rea­son, a large part of the pri­vate sec­tor tries to increase its cash reserves at the same time. Yet, for all its sim­plic­i­ty, the insight that a slump is about an excess demand for mon­ey makes non­sense of the whole hang­over the­o­ry. For if the prob­lem is that col­lec­tive­ly peo­ple want to hold more mon­ey than there is in cir­cu­la­tion, why not sim­ply increase the sup­ply of mon­ey? You may tell me that it’s not that sim­ple, that dur­ing the pre­vi­ous boom busi­ness­men made bad invest­ments and banks made bad loans. Well, fine. Junk the bad invest­ments and write off the bad loans. Why should this require that per­fect­ly good pro­duc­tive capac­i­ty be left idle?

The hang­over the­o­ry, then, turns out to be intel­lec­tu­al­ly inco­her­ent; nobody has man­aged to explain why bad invest­ments in the past require the unem­ploy­ment of good work­ers in the present. Yet the the­o­ry has pow­er­ful emo­tion­al appeal. Usu­al­ly that appeal is strongest for con­ser­v­a­tives, who can’t stand the thought that pos­i­tive action by gov­ern­ments (let alone—horrors!—printing mon­ey) can ever be a good idea. Some lib­er­tar­i­ans extol the Aus­tri­an the­o­ry, not because they have real­ly thought that the­o­ry through, but because they feel the need for some pres­ti­gious alter­na­tive to the per­ceived sta­tist impli­ca­tions of Key­ne­sian­ism. And some peo­ple prob­a­bly are attract­ed to Aus­tri­an­ism because they imag­ine that it deval­ues the intel­lec­tu­al pre­ten­sions of eco­nom­ics pro­fes­sors. But mod­er­ates and lib­er­als are not immune to the the­o­ry’s seduc­tive charms—especially when it gives them a chance to lec­ture oth­ers on their fail­ings.


Keep in mind that Paul Krug­man wrote the above cri­tique of the Aus­tri­an School of eco­nom­ics in 1998, a decade before the cur­rent cri­sis. It’s also an amaz­ing­ly pre­dic­tive cri­tique. What Krug­man wrote about the Aus­tri­an approach to eco­nom­ics is pret­ty much what has hap­pened: a finan­cial cri­sis was turned into a moral­i­ty play and the ensu­ing aus­ter­i­ty-poli­cies end­ed up tak­ing down entire nation­al economies. And with Krug­man now the biggest oppo­nent of this neo-Aus­tri­an School of eco­nom­ics, it’s no sur­prised that we end up see­ing lots of fan­fare over the “Krug­menistan vs Esto­nia” sto­ry. After all, if the ECB was to suc­cess­ful­ly save the euro­zone with aus­ter­i­ty alone, that would send a pow­er­ful mes­sage to all future economies around the globe that aus­ter­i­ty works. What’s we’re see­ing here isn’t Krug­menistan vs Esto­nia. It’s Krug­menistan vs Aus­te­ria. It’s the ulti­mate moral­i­ty play where the final moral of the sto­ry is that gov­ern­ment social spend­ing does­n’t work and only leads to dis­as­ter. We are being taught that cen­tral banks should­n’t step in to act as the lender of last resort. That will only put off the nec­es­sary pain required for prop­er reform. One can see how this is an emo­tion­al­ly com­pelling approach to macro­eco­nom­ics. And if you’re look­ing at the con­se­quences of this approach, one can see how it’s also a giant blun­der. An under­stand­able giant blun­der, sure, but still a giant blun­der. The Aus­tri­an School of eco­nom­ics isn’t just a piece of our past: it’s intend­ed to be our future too. Our blun­der­ous future.

So how is the euro­zone sup­posed to pro­ceed for­ward and not con­tin­ue on as a giant fis­cal trap for its denizens? Well, one approach would be for the ECB to drop the moral­i­ty play and act like a real cen­tral bank. We just got a sign today that the ECB may do just that when ECB head Mario Draghi announced that the ECB is ready to start buy­ing sov­er­eign bonds again. As he put it, “these are not emp­ty words now”. Then again, he also said that the ECB must still act with­in it’s mandate...the sin­gle man­date of fight­ing infla­tion. So these may, once again, be emp­ty words. Still, it’s progress.

But ECB bond buy­ing is still only a short-term solu­tion. The euro­zone needs a long-term solu­tion and tit-for-tat aus­ter­i­ty real­ly isn’t going to cut it. If the euro­zone mem­ber nations end up view­ing each oth­er as either moochers or cru­el aus­ter­i­ty freaks it’s just not going to work. So here’s a free tip bor­rowed from a bil­lion­aire: the euro­zone needs to remem­ber the birth lot­tery. It’s a sim­ple con­cept pop­u­lar­ized by bil­lion­aire War­ren Buf­fett and it’s one most use­ful best ideas the guy has ever had. Think of it like this: We don’t con­trol where we’re born, who our par­ents are, what our nat­ur­al traits might be (phys­i­cal­ly, IQ, etc), and real­ly much else. At least not until we get old­er and begin to make our own way in the world. And even once we become adults there is still an immense amount of our world that is well beyond our indi­vid­ual con­trol. So with that in mind, if you were a hypo­thet­i­cal future cit­i­zen of the euro­zone but you could­n’t con­trol any­thing about which coun­try you were born in and any of your oth­er nat­ur­al traits, how would you want that euro­zone to be struc­tured?

Here’s a sec­ond tip: Part of the Aus­tri­an School involves a fix­a­tion on the going back to the gold stan­dard. There are a lot of prob­lems with the gold stan­dard, but as is the case with aus­ter­i­ty-pol­i­tics there’s just an immense amount of emo­tion­al pull to the idea of a “hard” cur­ren­cy. Now, since human­i­ty is fac­ing an immi­nent nat­ur­al resource cri­sis, per­haps the aspir­ing Aus­tri­an School econ­o­mists could start focus­ing their men­tal efforts on some­thing much more use­ful: an vital nat­ur­al resources stan­dard. As they say, you can’t eat gold. Fresh water and top soil, on the oth­er hand, real­ly help with eat­ing. A mean­ing­ful nat­ur­al resources stan­dard would no doubt have a num­ber of prob­lems, but at least it’s not a dead end like gold. We’re all dead in the long run, but human­i­ty is dead if we don’t get this resource crunch under con­trol. That’s real aus­ter­i­ty.

Here’s a final tip, although it’s not real­ly for the euro­zone. It’s for Mitt Rom­ney. And it’s not real­ly a tip. It’s more of a dec­la­ra­tion: Mit­tens, you have some messed up friends.

Well, I guess we know whether of not the ECB’s recent change of heart is real or not. It’s not:

Bun­des­bank pours cold water on ECB bond buy hopes

FRANKFURT | Fri Jul 27, 2012 6:38am EDT

(Reuters) — Ger­many’s Bun­des­bank damp­ened expec­ta­tions for fur­ther action by the Euro­pean Cen­tral Bank on Fri­day by uphold­ing its resis­tance to the ECB buy­ing bonds, a day after ECB Pres­i­dent Mario Draghi raised expec­ta­tions such a move could be on the cards.

Draghi sent a strong sig­nal to mar­kets on Thurs­day that the ECB was prepar­ing fur­ther pol­i­cy action, say­ing that the ECB was ready, with­in its man­date, to do what­ev­er it takes to pre­serve the euro, refer­ring also to inflat­ed bor­row­ing costs, which some saw as a hint the bank could revive its bond pur­chase pro­gram.

The Bun­des­bank, which oppos­es the ECB’s Secu­ri­ties Mar­kets Pro­gram (SMP) because it treads too close to the cen­tral bank’s ulti­mate taboo of state financ­ing, said on Fri­day it was still not in favor of such a step.

“The Bun­des­bank con­tin­ues to view the SMP in a crit­i­cal fash­ion,” a Bun­des­bank spokesman said “The mech­a­nism of bond pur­chas­es is prob­lem­at­ic because it sets the wrong incen­tives.”

The ECB has spent more than 210 bil­lion euros on gov­ern­ment bonds, hav­ing bought them in the sec­ondary mar­ket.



52 comments for “Krugmenistan vs Austeria”

  1. Thank you so much for this syn­the­sis and pre­sen­ta­tion. I feel like I’m actu­al­ly begin­ning to under­stand the EU sit­u­a­tion.

    Keep it up.

    Posted by GrumpusRex | July 31, 2012, 9:10 am
  2. @Grumpus: I think this arti­cle’s head­line real­ly high­lights one of the main rea­sons this new form of cen­tral bank­ing by the ECB (the “just bare­ly enough”-bailout tech­nique) will doom the con­ti­nent to end­less aus­ter­i­ty. The head­line refers to the ECB doing the “unthink­able”, yet those unthink­able actions — bond buy­ing bt the cen­tral bank, etc — are the kinds of things that should be con­sid­ered stan­dard tools in the cen­tral bank­ing tool­box. They may not be rou­tine because they’re intend­ed for emer­gen­cies, but they real­ly should be stan­dard prac­tice for those tools to be “on the table” so the mar­ket par­tic­i­pants know that the 800-pound gor­ril­la is able to act. Espe­cial­ly, as the arti­cle points out, when the ECB already did these actions. It was appar­ent­ly “unthink­able” that the ECB would do some­thing it’s already done?! This is the kind of pos­tur­ing that basi­cal­ly tells the bond mar­kets “here’s the keys, you’re in the dri­ver’s seat” and that is exact­ly the oppo­site of what a cen­tral bank is sup­posed to be doing when it’s try­ing to ward off a pan­ic:

    Insight: ECB thinks the unthink­able, action like­ly weeks away
    By Paul Car­rel and Paul Tay­lor
    FRANKFURT/PARIS | Mon Jul 30, 2012 10:31am EDT
    (Reuters) — The Euro­pean Cen­tral Bank is think­ing the unthink­able to save the euro, includ­ing resum­ing its con­tro­ver­sial bond-buy­ing pro­gram and pos­si­bly even pur­su­ing quan­ti­ta­tive eas­ing — in effect print­ing mon­ey.

    Bold action is prob­a­bly at least five weeks away, insid­ers say, though some more clues may come when the ECB reveals its lat­est inter­est rate deci­sion on Thurs­day.

    Sev­er­al oth­er pieces have to fall into place before the ECB will act deci­sive­ly, insid­ers say. These include a request for assis­tance from Spain, which Madrid is still resist­ing, a deci­sion by euro zone lead­ers to let their bailout fund buy bonds at auc­tion, and a Ger­man court rul­ing on the legal­i­ty of the euro zone’s per­ma­nent res­cue fund, due on Sep­tem­ber 12.

    Above all, ECB Pres­i­dent Mario Draghi must over­come the resis­tance of Ger­many’s pow­er­ful cen­tral bank, the guardian of mon­e­tary ortho­doxy, glow­er­ing from the oth­er side of Frank­furt.

    Draghi raised expec­ta­tions last Thurs­day that the ECB would resume buy­ing sov­er­eign bonds as Span­ish and Ital­ian bor­row­ing costs vault­ed towards lev­els that could force the euro zone’s third and fourth largest economies out of the cred­it mar­kets.



    Bold options such as accept­ing loss­es on ECB hold­ings of Greek gov­ern­ment bonds, and the ulti­mate “Big Bazooka” of buy­ing up mass­es of bonds from all euro zone coun­tries, are also on the cen­tral bankers’ radar screen, the sources said.

    The lat­ter would emu­late the U.S. Fed­er­al Reserve and the Bank of Eng­land pol­i­cy known in cen­tral bank jar­gon as quan­ti­ta­tive eas­ing, and to ordi­nary cit­i­zens as print­ing mon­ey.

    Since the onset of the glob­al finan­cial cri­sis in 2008, the Fed has tripled the size of its bal­ance sheet and the Bank of Eng­land’s has more than quadru­pled; but the ECB’s has expand­ed less than three­fold, most­ly through long-term lend­ing to banks.

    When the ECB did buy Greek, Por­tuguese, Irish, Span­ish and Ital­ian bonds, a pro­gram sus­pend­ed since March, it insist­ed that for each extra euro cre­at­ed, a euro was with­drawn from cir­cu­la­tion by tak­ing in inter­est-bear­ing deposits from banks. This is called ster­il­iza­tion, intend­ed to pre­vent infla­tion.

    The most rad­i­cal option for the ECB would be to cre­ate mon­ey to buy debt across the euro zone with­out ster­il­iz­ing the pur­chas­es. Insid­ers say that if such an oper­a­tion bought debt from all euro zone coun­tries, the ECB could avoid accu­sa­tions of financ­ing indi­vid­ual gov­ern­ments.

    A risk of defla­tion could give the ECB cov­er to embark on QE, and some pol­i­cy­mak­ers think that in extrem­is the Bun­des­bank could go along with such a pol­i­cy, so long as it did not involve buy­ing gov­ern­ment bonds.

    With infla­tion falling fast towards the ECB’s tar­get of below but close to 2 per­cent, growth slow­ing sharply in north­ern Europe and reces­sion deep­en­ing in the south, the cen­tral bank has unusu­al scope to move.

    By buy­ing assets oth­er than sov­er­eign debt, such as bank and cor­po­rate bonds, the ECB could still pump mon­ey into the sys­tem while cir­cum­vent­ing the “mon­e­tary financ­ing” taboo. One option would be for the ECB to allow the euro zone’s nation­al cen­tral banks to do the bond-buy­ing and car­ry the risk.



    With­in the Eurosys­tem, offi­cials are puz­zling over what will work. Mere­ly reac­ti­vat­ing the ECB’s bond buy­ing pro­gram, even in tan­dem with bond-buy­ing by the euro zone’s res­cue funds, may be too small a bazooka to deter spec­u­la­tors from bet­ting against Spain or Italy, two cen­tral bankers said.

    “Hedge funds aren’t stu­pid. They can count. They know how much is real­ly avail­able from the res­cue funds, how much the cen­tral bank has bought so far, and what the polit­i­cal con­straints are on doing more,” one euro zone source said.

    Even when ECB bond-buy­ing was in full flow last year, the ECB’s Gov­ern­ing Coun­cil lim­it­ed pur­chas­es to rough­ly 20 bil­lion euros a week, part­ly at the Bun­des­bank’s behest, insid­ers say.

    The expe­ri­ence remains seared into cen­tral bankers’ mem­o­ry after a deba­cle with Italy. With­in days of mak­ing com­mit­ments to deficit cuts and eco­nom­ic reforms to con­vince the ECB to step in, then Ital­ian Prime Min­is­ter Sil­vio Berlus­coni went back on his promis­es and treat­ed them as a joke.

    “They felt cheat­ed and they don’t want to have that hap­pen a sec­ond time,” a senior finan­cial source in the euro zone sys­tem said.

    So bar­ring a dra­mat­ic dete­ri­o­ra­tion, ECB action may have to wait until con­di­tions in the mar­kets get still worse, Greece gets clos­er to the brink, and the euro zone, in the words of one Brus­sels cri­sis man­ag­er, “explores the edge of the abyss”.

    (Writ­ing by Paul Tay­lor; edit­ing by Richard Woods)

    So even now, when the ECB is pub­licly think­ing about the unthink­able, there’s still a clear attempt to avoid nor­mal cen­tral bank­ing emer­gency actions at all costs in order to pla­cate to pla­cate the glow­er­ing Bun­des­bank. And as thearti­cle point­ed out, even when the ECB used the “Big Bazooka” of bond buy­ing in the past to shore up the ail­ing bond mar­kets, it would “ster­il­ize” each bond pur­chase with the removal of a euro from the mon­ey sup­ply in order to avoid infla­tion. Non-ster­il­ized use of the “Big Bazooka” is called “rad­i­cal” in our strange new world.

    One way to look at it is that the Bun­des­bank is mak­ing a big push to makee “mon­e­tary sta­bil­i­ty” the new gold-stan­dard. It cer­tain­ly makes a great ana­log to the gold-stan­dard: an intel­lec­tu­al­ly and emo­tion­al­ly appeal­ing eco­nom­ic par­a­digm that does­n’t actu­al­ly make much sense once you sit down and ana­lyze the real-world impli­ca­tions of such a par­a­digm. Why is infla­tion con­sid­ered the one and only great destroy­er of economies that must be fought at every oppor­tu­ni­ty for­ev­er? I’m not sure, but the Bun­des­bank wants to assure us that if we all just stick to this “sound mon­ey” path the future will be awe­some. That’s the mag­ic of low infa­tion-only eco­nom­ic pol­i­cy-mak­ing: It just works! Trust us! We’ll get to the promised land of a low-debt/high “pro­duc­tiv­i­ty” econ­o­my even­tu­al­ly. Even if we have to destroy the real econ­o­my along the way:

    De Guin­dos Said to Push Spain Cuts as Ger­many Sig­nals Aid
    By Ben Sills — Aug 1, 2012 7:42 AM CT

    Span­ish Econ­o­my Min­is­ter Luis de Guin­dos is push­ing for addi­tion­al bud­get cuts after Ger­many sig­naled to him that such a move would be reward­ed by bond mar­ket assis­tance, accord­ing to two peo­ple in Madrid famil­iar with his think­ing.

    De Guin­dos wants fur­ther cuts in health and edu­ca­tion spend­ing after his Ger­man coun­ter­part, Wolf­gang Schaeu­ble, told him that such a move would enable Ger­many to sup­port any steps by the Euro­pean Cen­tral Bank to push down Span­ish bor­row­ing costs, said the peo­ple, who dis­cussed the pro­pos­al with the econ­o­my min­is­ter. They asked not to be named as the dis­cus­sions were con­fi­den­tial. ECB Pres­i­dent Mario Draghi also backs de Guindos’s push, said one of the peo­ple.

    A spokes­woman for the ECB declined to com­ment. A spokes­woman for de Guin­dos said Spain is plan­ning no more cuts and hasn’t been asked to make any. The Ger­man Finance Min­istry referred to a joint state­ment pub­lished after Schaeu­ble host­ed de Guin­dos in Berlin on July 24 in which he said bond yields don’t “cor­re­spond to the fun­da­men­tals of the Span­ish econ­o­my.”


    Posted by Pterrafractyl | August 1, 2012, 3:32 pm
  3. One of the things the “expan­sion­ary aus­ter­i­ty” proponents(i.e. Aus­tri­an School eco­nom­ic the­o­ries) rarely point out to the pub­lic is that the expan­sion phase does­n’t hap­pen in the econ­o­my until after you’ve crushed it:

    Spain Bad Loans Ratio Surges to 11.23% as Defaults Climb
    By Charles Pen­ty & Sharon Smyth — Dec 18, 2012 4:09 AM CT

    Bad loans as a pro­por­tion of total lend­ing at Span­ish banks climbed to a record 11.23 per­cent in Octo­ber as the country’s eco­nom­ic slump led more com­pa­nies and home­own­ers to miss cred­it pay­ments.

    The pro­por­tion rose from 10.71 per­cent in Sep­tem­ber as 7.4 bil­lion euros ($9.8 bil­lion) of loans soured in the month to take the total of doubt­ful cred­it in the bank­ing sys­tem to 189.6 bil­lion euros, the Bank of Spain said on its web­site today. The mort­gage default rate jumped to 3.49 per­cent in the third quar­ter from 3.16 per­cent in the sec­ond quar­ter, the Bank of Spain said.

    Spain’s eco­nom­ic slump, now in its fifth year, con­tin­ues to dri­ve defaults to record highs as lenders report ris­ing impair­ments of cor­po­rate, home and con­sumer loans as well as those linked to real estate. Doubts about the abil­i­ty of Spain’s weak­er lenders to with­stand mount­ing impair­ments of loans linked to real estate helped push the coun­try to seek a Euro­pean bailout for its bank­ing sys­tem in June.

    “It’s clear that these lev­els of bad loans are going to keep ris­ing,” said Juan Pablo Lopez, an ana­lyst at Espir­i­to San­to Invest­ment Bank. “The flows of entries into default are still very high.”

    The default rate on loans to com­pa­nies jumped to 16.56 per­cent in the third quar­ter from 14.9 per­cent in the sec­ond quar­ter, the Bank of Spain said. Defaults on loans for real estate-linked activ­i­ties surged to 30.33 per­cent from 27.39 per­cent.

    Record loan defaults with high­er default lev­els still to come...it may not be much but it’s progress!

    Posted by Pterrafractyl | December 18, 2012, 12:39 pm
  4. Spain had bet­ter hope Paul Krug­man was right about that whole “Rein­hart-Rogoff ’90% nation­al debt-to-GDP red­line’ ” ker­fuf­fle. Because if Rei­hart and Rogoff were cor­rect, and 90% of debt-to-GDP real­ly does rep­re­sent a seri­ous thresh­old that will cre­ate a sig­nif­i­cant slow­down in eco­nom­ic growth, aus­ter­ian log­ic demands that Spain and much of the rest of the euro­zone needs more aus­ter­i­ty:

    Spain Pub­lic Debt Ris­es Above 2013 Tar­get Amid Reces­sion (1)
    By Ange­line Benoit and Este­ban Duarte Sep­tem­ber 13, 2013

    Spain’s pub­lic debt rose above Prime Min­is­ter Mar­i­ano Rajoy’s year-end goal last quar­ter as the nation strug­gled to emerge from its sec­ond reces­sion since 2008.

    Bor­row­ings by the euro area’s fourth-largest econ­o­my at the end of June rose to 92.2 per­cent of gross domes­tic prod­uct, or 943 bil­lion euros ($1.3 tril­lion), the Madrid-based Bank of Spain said on its web­site today. That com­pares with 923 bil­lion euros, or 90.1 per­cent of GDP, at the end of March, and the government’s goal of 91.4 per­cent by the end of the year.

    Spain’s debt load has more than dou­bled since 2008, when the end of a real-estate boom trig­gered an eco­nom­ic slump that is now in its its sixth year. The Inter­na­tion­al Mon­e­tary Fund pre­dicts the debt-to-GDP ratio will top 100 per­cent in 2015. The Euro­pean Com­mis­sion says it’ll be high­er than the euro-area aver­age, fore­cast to be 96 per­cent, for the first time in the sin­gle currency’s his­to­ry.


    The ECB yes­ter­day said in its month­ly bul­letin that Spain’s com­pli­ance with its gen­er­al gov­ern­ment deficit tar­get is “dif­fi­cult to gauge” and that it will depend on a stronger recov­ery of tax bases in the sec­ond half of the year.

    Reform Focus

    EU Eco­nom­ic and Mon­e­tary Affairs Com­mis­sion­er Olli Rehn today said Spain must stay the course of reform even as there are signs of an eco­nom­ic turn­around. Mean­while the gen­er­al sec­re­tary of Spain’s largest busi­ness lob­by, CEOE, Jose Maria Lacasa, told reporters in Madrid that the gov­ern­ment must stim­u­late growth and focus bud­get cuts on cur­rent spend­ing.

    Rajoy said Sept. 7 that Group of 20 lead­ers didn’t dis­cuss risk pre­mi­ums and pos­si­ble sov­er­eign bailouts when they met in St. Peters­burg. They talked about signs of a recov­ery and prospects that Spain’s reces­sion will end soon, he said. The econ­o­my con­tract­ed 0.1 per­cent in the three months through June.

    The gov­ern­ment pre­dicts growth will return in the sec­ond half after eight straight quar­ters of con­trac­tion. Bud­get Min­is­ter Cristo­bal Mon­toro said this week Spain is also on track to meet its bud­get-deficit tar­get of 6.5 per­cent of GDP in 2013, after the short­fall widened to 10.6 per­cent last year from 9.4 per­cent in 2011.

    Posted by Pterrafractyl | September 13, 2013, 12:56 pm
  5. Bad news for folks liv­ing in the euro­zone: Jens Wei­d­mann might be gain­ing a pro-aus­ter­i­ty ally at the ECB:

    Bun­des­bank May Gain ECB Ally as Lat­vian Joins Pol­i­cy Team
    By Aaron Egli­tis and Jana Randow Jan 8, 2014 3:02 AM CT

    The euro area’s newest entrant may give Bun­des­bank Pres­i­dent Jens Wei­d­mann an ally in his bat­tle against mon­e­tary pol­i­cy that he con­sid­ers too risky.

    Latvia’s Ilmars Rim­se­vics, 48, has joined the Euro­pean Cen­tral Bank’s Gov­ern­ing Coun­cil after his coun­try adopt­ed the sin­gle cur­ren­cy on Jan. 1. His his­to­ry of call­ing for bud­get cuts and struc­tur­al reforms as the Baltic nation nav­i­gat­ed a finan­cial cri­sis echoes the views of Germany’s Wei­d­mann, who has warned that easy mon­ey can derail fis­cal efforts.

    With rates in the euro area at a record low, unem­ploy­ment near an all-time high and bank lend­ing shrink­ing, ECB offi­cials are debat­ing how far to push mon­e­tary pol­i­cy. A quar­ter of the 23-mem­ber coun­cil opposed the last rate cut in Novem­ber and the addi­tion of Rim­se­vics, who backed bud­get cuts and tax increas­es equiv­a­lent to 16 per­cent of the Lat­vian econ­o­my in 2008 and 2009, may make fur­ther eas­ing hard­er to agree on.

    “I can imag­ine Gov­er­nor Rim­se­vics will empha­size that there are lim­its to what mon­e­tary pol­i­cy can deliv­er,” said Andrew Bosom­worth, man­ag­ing direc­tor at Pacif­ic Invest­ment Man­age­ment Co. in Munich who has met the cen­tral bank head. “I would expect him to sup­port ongo­ing fis­cal dis­ci­pline in the euro zone.”

    Fastest Growth

    ECB pol­i­cy mak­ers will keep the bench­mark inter­est rate unchanged at 0.25 per­cent when they meet in Frank­furt tomor­row, accord­ing to all 51 econ­o­mists sur­veyed by Bloomberg.

    Rim­se­vics, who declined to com­ment for this arti­cle, has worked at the Lat­vian cen­tral bank since 1992 and was re-elect­ed for a third six-year term as gov­er­nor last year. The coun­try is the 18th euro mem­ber and the fourth from the for­mer com­mu­nist bloc after Slo­va­kia, Slove­nia and neigh­bor­ing Esto­nia. Its econ­o­my is fore­cast to grow 4.1 per­cent this year, the fastest pace in the Euro­pean Union.

    That’s a turn­around from 2009, when gross domes­tic prod­uct shrank by 18 per­cent and led to one in five peo­ple being out of work. Since then, the nation of 2 mil­lion peo­ple has paid off the Inter­na­tion­al Mon­e­tary Fund’s share of a 7.5 bil­lion euro ($10.2 bil­lion) bailout loan and returned to the bond mar­kets. It expects a bud­get deficit of 0.9 per­cent this year, com­pared with 9.8 per­cent in 2009.

    Rimsevics’s own com­pen­sa­tion slid almost 40 per­cent to 77,000 lati ($150,000) in 2012 from 2008, accord­ing to his income dec­la­ra­tion.

    Rates Risk

    Lat­vian pol­i­cy mak­ers “have not only the Bundesbank’s prin­ci­ples, but they’ve also expe­ri­enced the hard med­i­cine first hand,” said Chris­t­ian Keller, an ana­lyst at Bar­clays Plc in Lon­don. “Rim­se­vics is prob­a­bly least like­ly to show a lot of sym­pa­thy for coun­tries in the euro-area periph­ery that may try to get by with easy mon­e­tary pol­i­cy and debt relief.”

    Wei­d­mann told Germany’s Bild news­pa­per last month that euro-area coun­tries must per­sist with their struc­tur­al adjust­ments. He said a pro­longed peri­od of low inter­est rates may delay reforms and reject­ed a debt cut for Greece.

    Euro-area bond yields have fall­en, reduc­ing the urgency to trim deficits, since ECB Pres­i­dent Mario Draghi promised in July 2012 to defend the sin­gle cur­ren­cy. That pledge led to a bond-pur­chase pro­gram, still untapped, that was opposed by Wei­d­mann and is being exam­ined by Germany’s Con­sti­tu­tion­al Court.

    “Lat­vians real­ize that once you get in trou­ble the most impor­tant thing is to cor­rect imbal­ances,” Rim­se­vics said at an invest­ment con­fer­ence at Bloomberg’s office in Lon­don in Octo­ber. “If you do it imme­di­ate­ly and cor­rect these imbal­ances, I think you’re def­i­nite­ly going to suc­ceed.”


    With a large num­ber of pro-aus­ter­i­ty gov­ern­ments set to join the euro­zone in com­ing years, it’s worth keep­ing in mind that we could end up see­ing the Wei­d­mann view — aus­ter­i­ty good, infla­tion bad — become a much more influ­en­tial phi­los­o­phy at the Euro­pean Cen­tral Bank by the end of the decade:

    The New York Times
    As Latvia Adopts Euro, Future Growth Is Slow­ing

    By LIZ ALDERMANJAN. 1, 2014

    PARIS — Dace Uti­nane, a doc­tor at a pri­vate health cen­ter, frowned dur­ing a stroll this week through Riga, the cap­i­tal of Latvia, as she con­tem­plat­ed her country’s move to become the newest mem­ber of Europe’s cur­ren­cy union.

    “I don’t like it — the euro is not my mon­ey,” said Dr. Uti­nane, arch­ing an eye­brow. “This has been dic­tat­ed by peo­ple from above. But we’re too small to do some­thing about it and protest against it.”

    In the halls of pow­er, Euro­pean lead­ers are tak­ing a stark­ly dif­fer­ent view. On Wednes­day, as Latvia became the 18th coun­try to join the euro, they pro­mot­ed it as a sign that the cur­ren­cy union — even with wrench­ing grow­ing pains that includ­ed threats of a breakup — is on a long-term path to achiev­ing its founders’ vision of con­tin­ued expan­sion.

    “Despite the neg­a­tive head­line of the cri­sis, the basic promise of peace, pros­per­i­ty and free­dom to trav­el and work still have their appeal,” said Hol­ger Schmied­ing, chief econ­o­mist at Beren­berg Bank in Lon­don. “So the process of euro enlarge­ment has not come to an end.”

    How quick­ly it will grow is anoth­er ques­tion. While most of the Euro­pean Union’s 28 mem­ber coun­tries are oblig­ed even­tu­al­ly to ditch their nation­al mon­ey for Europe’s sin­gle cur­ren­cy, skep­ti­cism among Euro­pean cit­i­zens about the euro union is still alive in many cor­ners.

    Lithua­nia is on track to be next in adopt­ing the cur­ren­cy, in 2015. Like Latvia, its neigh­bor and fel­low for­mer Sovi­et repub­lic, it is eager to link itself to the West, an imper­a­tive that has grown stark­er as Rus­sia seeks to keep a grasp on Ukraine despite recent pro-West­ern protests there.

    After 2015, how­ev­er, euro zone enlarge­ment is set to slow. In East­ern Europe, sev­er­al coun­tries have not even tak­en the first step required for euro mem­ber­ship by enter­ing the exchange rate mech­a­nism, a sort of wait­ing room. The Czech Repub­lic, Hun­gary and Poland have all pushed back their tar­get dates for euro zone mem­ber­ship until near the end of the decade in the face of low pub­lic sup­port.

    Small­er nations, includ­ing Roma­nia and Croa­t­ia, which joined the Euro­pean Union last year, have said they are unlike­ly to adopt the euro until around 2020, part­ly because their economies can­not quick­ly meet the cri­te­ria. Those include achiev­ing a deficit of 3 per­cent of gross domes­tic prod­uct and keep­ing debt to 60 per­cent of the annu­al gross domes­tic prod­uct.

    Den­mark may be one of the next to join. Although the idea was defeat­ed in a nation­al ref­er­en­dum in 2000, a new pub­lic vote will be held dur­ing par­lia­men­tary elec­tions in Decem­ber 2015. Pub­lic sup­port, which improved slight­ly after euro bills and coins start­ed cir­cu­lat­ing, plunged again dur­ing the euro cri­sis. Swe­den has also not tak­en the steps required to join, and has shown no signs of doing so.

    While Euro­pean Union mem­ber states are required to adopt the euro, cit­i­zens can still shoot down mem­ber­ship if a gov­ern­ment decides to hold a ref­er­en­dum. In Latvia, the gov­ern­ment chose not to hold one, giv­en the neg­a­tive sen­ti­ment revealed in pub­lic opin­ion sur­veys, and to push the issue through instead.

    Around half of Lat­vians opposed join­ing the euro, although sup­port rose toward the end of the year. The reluc­tance was pal­pa­ble on New Year’s Eve in Riga, where the fire­works and cel­e­bra­tions that illu­mi­nat­ed oth­er coun­tries at the moment of euro mem­ber­ship were stark­ly absent. The only sign that a new cur­ren­cy was com­ing was in stores, which had begun to post prices in euros along­side lats, the old mon­ey.

    Part of the reluc­tance among euro-skep­tics, econ­o­mists say, is the fear of los­ing a degree of sov­er­eign­ty and of being liable for sup­port­ing oth­er coun­tries should any new cri­sis break out. Few have for­got­ten how Esto­nia, which joined the euro in 2011, was soon called upon to help bail out Cyprus when a bank­ing cri­sis hit.

    The euro’s eco­nom­ic trou­bles have also dam­aged the cur­ren­cy bloc’s image and high­light­ed struc­tur­al flaws in its foun­da­tion that have still not been ful­ly addressed.


    Nope. Not good news at all.

    Posted by Pterrafractyl | January 8, 2014, 12:40 pm
  6. Get ready for Krug­menistan vs Swede­fla­tion:

    Krug­man Tar­get of Indig­na­tion as Swedes Reject Japan Com­ment
    By Johan Carl­strom and Niklas Mag­nus­son Apr 24, 2014 5:45 AM CT

    Swedes may be wish­ing they nev­er gave the Nobel Prize to Paul Krug­man.

    Pol­i­cy mak­ers are unit­ing against Krug­man after the Nobel Lau­re­ate likened price devel­op­ments in Scandinavia’s biggest econ­o­my to Japan’s bat­tle with defla­tion.

    “I’m sur­prised that he’s draw­ing par­al­lels to Japan,” Riks­bank Deputy Gov­er­nor Cecil­ia Skings­ley said yes­ter­day in Halm­stad in south­ern Swe­den. “The dif­fer­ences between Swe­den and Japan are sig­nif­i­cant­ly big­ger than the sim­i­lar­i­ties.”

    At least three pol­i­cy mak­ers have spo­ken out pub­licly against Krugman’s analy­sis of Swe­den, which one cen­tral banker even dubbed “crude.” The rebut­tal fol­lows an opin­ion piece by the Nobel Lau­re­ate, pub­lished April 21 in the New York Times, which char­ac­ter­izes the Riksbank’s steps dur­ing the finan­cial cri­sis as an exam­ple of “sadomon­e­tarism.” Krug­man con­tends that inter­est rate increas­es in 2010 and 2011 fueled a defla­tion­ary spi­ral like the one that par­a­lyzed Japan’s econ­o­my.

    Sweden’s con­sumer prices fell 0.6 per­cent in March from a year ear­li­er, twice as much as the cen­tral bank had pre­dict­ed. Head­line prices haven’t reached the Riksbank’s 2 per­cent tar­get since Decem­ber 2011. Adjust­ing for the effect of mort­gage rates, prices have lagged behind the tar­get since Decem­ber 2010. The Riks­bank esti­mates prices will stay below its 2 per­cent goal until mid-2015.

    Bank­ing Cri­sis

    Gov­er­nor Ste­fan Ingves, who is also chair­man of the Basel Com­mit­tee on Bank­ing Super­vi­sion that Krug­man describes as a “sadomon­e­tarist strong­hold,” said in an April 9 inter­view he expects infla­tion to return. He kept the repo rate at 0.75 per­cent this month, after agree­ing to a cut in Decem­ber.

    As one of the main archi­tects of Sweden’s recov­ery from its 1990s bank­ing cri­sis, Ingves has repeat­ed­ly warned against exces­sive­ly lax mon­e­tary pol­i­cy he says risks bloat­ing con­sumer debt bur­dens that are already at record high lev­els. Swedes owe their cred­i­tors more than 170 per­cent of dis­pos­able incomes, more than at any oth­er time in the nation’s his­to­ry.

    Debt is “a key issue for us and will remain so for the fore­see­able future,” Ingves said this month.

    His con­cerns are echoed by Finance Min­is­ter Anders Borg, who also dis­missed Krugman’s crit­i­cism of Swe­den.

    “I don’t find the com­par­i­son with a stag­nat­ing Japan accu­rate,” Borg told reporters yes­ter­day in Stock­holm.

    Instead of a defla­tion­ary trap, Borg sees risks linked to the hous­ing mar­ket and says Swe­den needs to cre­ate “safe­ty bar­ri­ers” before the next peri­od of eco­nom­ic decline, he said.

    ‘Fatal’ Devel­op­ment

    Yet some econ­o­mists argue Ingves’s focus on indebt­ed­ness may back­fire if defla­tion sets in. Per­sis­tent price declines could become “fatal” because infla­tion is the “only thing that can hol­low out the debt and help house­holds pay off their loans,” accord­ing to Par Mag­nus­son, head of Scan­di­na­vian rates strat­e­gy at Roy­al Bank of Scot­land Group Plc in Stock­holm.

    “What­ev­er their motives, sadomon­e­tarists have already done a lot of dam­age,” Krug­man said. “In Swe­den they have extract­ed defeat from the jaws of vic­to­ry, turn­ing an eco­nom­ic suc­cess sto­ry into a tale of stag­na­tion and defla­tion as far as the eye can see.”

    Though con­sumer prices have fall­en, Swe­den isn’t in a defla­tion­ary spi­ral, accord­ing to Riks­bank Deputy Gov­er­nor Per Jans­son. He called Krugman’s analy­sis “rather crude,” argu­ing it failed to take into account Sweden’s labor mar­ket growth or eco­nom­ic expan­sion rate.

    The Facts

    “When he for­mu­lates him­self in this way and some­times doesn’t have his facts in order, then it is impor­tant for us to address that,” Jans­son said in an inter­view with local news­pa­per Dagens Indus­tri. “It’s of course unfor­tu­nate when such a per­son writes in this over-sim­pli­fied and part­ly incor­rect way.”


    Yikes, Riks­bank Deputy Gov­er­nor Per Jans­son just engaged in some “rather crude” smack talk­ing which means this could become a hot­ter top­ic going for­ward. Although it’ll be inter­est­ing to see if any intra-Riks­bank smack talk­ing takes place in com­ing weeks because the deputy gov­er­nors at the Riks­bank have been pret­ty divid­ed all along. Krug­menistan has allies at the Riks­bank:

    Swe­den lam­basts Krug­man over Japan-style defla­tion warn­ing

    By Simon John­son and Johan Sen­nero

    STOCKHOLM/HALMSTAD, Swe­den Wed Apr 23, 2014 12:34pm EDT

    (Reuters) — Swedish pol­i­cy­mak­ers hit out on Wednes­day at sug­ges­tions by Nobel lau­re­ate Paul Krug­man that the Nordics’ biggest econ­o­my was in a Japan­ese-style defla­tion­ary trap.

    Finance Min­is­ter Anders Borg and two cen­tral bankers said Krug­man’s analy­sis — set out in a com­men­tary in Mon­day’s New York Times in which he called the Riks­bank “sadomon­e­tarist” — had mis­rep­re­sent­ed the coun­try’s sit­u­a­tion.

    In his op-ed titled “Swe­den Turns Japan­ese”, Krug­man said the Riks­bank, the cen­tral bank, had killed off a promis­ing post-cri­sis recov­ery in around 2010 and dragged the coun­try into defla­tion.

    “I don’t think that the com­par­i­son with a stag­nat­ing Japan is all that accu­rate,” Borg, one of Europe’s most respect­ed and long-serv­ing finance min­is­ters, told reporters on Wednes­day.

    Swe­den’s triple‑A rat­ed econ­o­my has been the envy of much of Europe, with pub­lic debt at around 40 per­cent of GDP — about half of Ger­many’s - and with one of the best growth rates in the Euro­pean Union.



    Swe­den’s cen­tral bank is now edg­ing clos­er to cut­ting inter­est rates in July because of per­sis­tent­ly low infla­tion.

    How­ev­er, it is also wor­ried that loos­er mon­e­tary pol­i­cy will fur­ther fuel a hous­ing boom and raise already high lev­els of house­hold debt — cur­rent­ly at around 170 per­cent of GDP — that have raised fears of a cred­it bub­ble.

    Those fac­tors have dri­ven a pol­i­cy debate that has divid­ed the bank’s six-mem­ber rate-set­ting coun­cil, with pol­i­cy­mak­ers Karoli­na Ekholm and Mar­tin Flo­den con­sis­tent­ly vot­ing for ear­li­er rates cuts than their four col­leagues.

    Cen­tral bank Deputy Gov­er­nor Cecil­ia Skings­ley, who has pre­vi­ous­ly vot­ed with the more hawk­ish major­i­ty of the Riks­bank on rates, said she saw there could be a need for fur­ther pol­i­cy stim­u­lus fol­low­ing the March infla­tion data.

    “All things being equal, at least for me, it opens up for an addi­tion­al need for stim­u­lus,” Skings­ley told reporters at a con­fer­ence in the south­ern town of Halm­stad. “But we have more data to take into account before I can take my deci­sion.”

    So we had two out of the six duputy gov­er­nors con­sis­tent­ly vot­ing for loos­er mon­ey/an­ti-defla­tion­ary poli­cies all along and now one of the infla­tion hawk is start­ing to waiv­er. That’s pret­ty close to a 3–3 split! Is the House of Swede­fla­tion a house divid­ed? It sure looks that way.

    Skip­ping down...


    Borg said pro­duc­tiv­i­ty growth, a strength­en­ing cur­ren­cy and mod­er­ate wage increas­es were fac­tors behind low infla­tion, but that the econ­o­my was grow­ing faster than oth­er nations.

    “Swe­den’s econ­o­my has fared best in Europe through­out the cri­sis,” Borg said.


    Ah, so accord­ing to Finance Min­is­ter Borg, since there’s been a rel­a­tive­ly strong econ­o­my (com­pared to most of the rest of Europe) under­pinned by high pro­duc­tiv­i­ty growth and only mod­er­ate wage increas­es AND a ris­ing hous­ing mar­ket and grow­ing con­sumer debt (which one might expect with a ris­ing hous­ing mar­ket doing well in a low-inter­est rate glob­al envi­ron­ment with sup­pressed wages) it is there­fore ok to flirt with out­right defla­tion...even though defla­tion would only make ser­vic­ing the con­sumer debt that the Riks­bank is so wor­ried about even more dif­fi­cult to ser­vice, espe­cial­ly if it derails the econ­o­my. If this seems baf­fling, keep in mind that, back in 2010, the Riks­bank was rais­ing inter­est rates due to sup­posed fears of infla­tion and just kept rais­ing rates while infla­tion fell below the tar­get rate of 2%, so Swe­den is in one of those “the faulty rea­sons change but the flawed poli­cies stay the same” kind of sit­u­a­tions and one rea­son or anoth­er is appar­ent­ly going to be found to keep the pro-defla­tion­ary poli­cies in place. This is why even the OECD had a few words with Swe­den’s pol­i­cy-mak­ers back in Decem­ber. The Swede­fla­tion sit­u­a­tion is just that baf­fling­ly bad:

    OECD Warns Riks­bank Against Obsess­ing Over Record Debt
    By Johan Carl­strom Dec 4, 2013 6:09 AM CT

    The Riks­bank should stop wor­ry­ing about Sweden’s record pri­vate debt load and could do more to sup­port eco­nom­ic growth, said Pier Car­lo Padoan, chief econ­o­mist at the Orga­ni­za­tion for Eco­nom­ic Coop­er­a­tion and Devel­op­ment.

    “We’re not tremen­dous­ly con­cerned about house­hold debt,” Padoan, who’s also deputy sec­re­tary-gen­er­al of the Paris-based group com­pris­ing the world’s devel­oped economies, said in a Dec. 2 inter­view in Stock­holm. “There’s not real­ly a risk of a bub­ble. I don’t think that cut­ting rates by itself would send debt high­er, would sig­nal that there are eas­i­er mon­e­tary and financ­ing con­di­tions.”

    The Riks­bank has come under pres­sure to low­er rates as the $540 bil­lion econ­o­my grap­ples with slack export demand and after con­sumer prices unex­pect­ed­ly declined in Octo­ber. Pol­i­cy mak­ers are strug­gling to bring infla­tion clos­er to the bank’s 2 per­cent tar­get with­out stok­ing an over­heat­ed hous­ing mar­ket. Infla­tion, exclud­ing mort­gage costs, has been below tar­get for almost three years.

    Con­sumer prices will rise 0.1 per­cent this year and 1 per­cent in 2014, the OECD fore­cast last month. Eco­nom­ic growth will slow to 0.7 per­cent this year from 1.3 per­cent in 2012, before pick­ing up to 2.3 per­cent in 2014, the OECD said. Gross domes­tic prod­uct in the Nordic region’s largest econ­o­my grew 0.1 per­cent in the three months through Sep­tem­ber, Sta­tis­tics Swe­den said last week. That missed the 0.5 per­cent esti­mate in a Bloomberg sur­vey.
    Ben­e­fit Econ­o­my

    “You could have a more expan­sion­ary, or an expan­sion­ary, mon­e­tary pol­i­cy stance which ben­e­fits the whole econ­o­my” cou­pled with “spe­cif­ic macro pru­den­tial mea­sures tar­get­ing the hous­ing mar­ket and mort­gages in a way that there is no exces­sive lend­ing there,” Padoan said.


    Yep, even the OECD...

    Posted by Pterrafractyl | April 27, 2014, 7:39 pm
  7. Part of what makes the EU’s aus­ter­i­ty expe­ri­ence so painful is that you don’t just have the poli­cies imposed that are specif­i­cal­ly designed to per­ma­nent­ly dis­em­pow­er work­ers and the mid­dle-class. You also get the fun of hav­ing the peo­ple push­ing these poli­cies tell you how proud they are about how it all worked out and how, for the sake of your future, it must con­tin­ue:

    The New York Times
    Bailout Is Over for Por­tu­gal, but Side Effects Will Linger


    LISBON — Europe’s climb out of its debt cri­sis has been nar­rat­ed by a long debate on whether the aus­ter­i­ty imposed on coun­tries that need­ed inter­na­tion­al bailouts would bring more pain than relief.

    Portugal’s move to exit its bailout gives new ammu­ni­tion to the aus­ter­i­ty advo­cates who have called for shred­ding Euro­pean-style social safe­ty nets that in many coun­tries no longer seem afford­able.

    As prac­ticed by Por­tu­gal, aus­ter­i­ty meant deep cuts in pub­lic employ­ee wages, low­er pen­sion pay­ments and unem­ploy­ment ben­e­fits and bud­get roll­backs in pre­vi­ous sacro­sanct areas like edu­ca­tion. Adding to the pain were high­er per­son­al income tax­es, steep­er val­ue-added tax­es and reduced reim­burse­ments for drugs and doc­tor bills.

    The Lis­bon gov­ern­ment and its cred­i­tors have now con­clud­ed that the coun­try has done enough cut­ting that it can exit its three-year, 78 bil­lion euro bailout pro­gram on sched­ule this month, with­out requir­ing a just-in-case cred­it line. But Por­tu­gal is also demon­strat­ing that there are harsh trade-offs in try­ing to end entrenched ways of life and restore growth — trade-offs that leave the econ­o­my in a frag­ile posi­tion.

    Such themes are com­mon across Europe. While growth is slow­ly return­ing and the mar­kets are sta­bi­liz­ing, the recov­ery is punc­tu­at­ed by seri­ous prob­lems that threat­en to derail the weak econ­o­my. Unem­ploy­ment remains stub­born­ly high in some coun­tries. Defla­tion fears are mount­ing. And the geopo­lit­i­cal sit­u­a­tion remains unsta­ble as Europe faces poten­tial fall­out from the esca­lat­ing cri­sis between Ukraine and Rus­sia.

    The Euro­pean Com­mis­sion said on Mon­day that growth in the Euro­pean Union would gain sig­nif­i­cant momen­tum through 2015. But it also warned of sig­nif­i­cant chal­lenges to the nascent recov­ery, includ­ing ten­sions with Rus­sia and an unwill­ing­ness by mem­ber gov­ern­ments to con­tin­ue reforms. “The recov­ery has now tak­en hold,” said Siim Kallas, an Eston­ian politi­cian who is a vice pres­i­dent of the com­mis­sion. But it is “impor­tant to embrace struc­tur­al reforms ear­ly on and to stay the course, what­ev­er chal­lenges may be faced along the way,” he said.

    Just in case you for­got the kind of men­tal­i­ty being dealt with here, note that Euro­pean Com­mis­sion vice pres­i­dent Siim Kallas also added that it is “impor­tant to embrace struc­tur­al reforms ear­ly on and to stay the course, what­ev­er chal­lenges may be faced along the way”. Appar­ent­ly pol­i­cy fail­ure and the need to cor­rect that pol­i­cy fail­ure are just some of the “chal­lenges” that must be over­come while “stay­ing the course”.


    In Por­tu­gal, unem­ploy­ment, while start­ing to decline, is still above 15 per­cent, high­er than the euro zone aver­age. Tens of thou­sands of work­ers have moved to Britain or Ger­many, as well as more dis­tant but Por­tuguese-speak­ing coun­tries like Brazil and Ango­la, in search of bet­ter futures. And despite for­mal­ly leav­ing its bailout pro­gram, Por­tu­gal will still need decades to pay down the total of €738 bil­lion ($1 tril­lion) in pub­lic and pri­vate debt the coun­try has amassed.


    But the bailout — secured by a Social­ist admin­is­tra­tion in 2011 although car­ried out by a cen­ter-right gov­ern­ment that came to pow­er only a month lat­er in a vot­er revolt — has come at a high social cost. And pol­i­tics could deter­mine whether even Por­tu­gal can and will stay on this new, hard-won course.

    Pedro Pas­sos Coel­ho, Portugal’s cen­ter-right prime min­is­ter, wast­ed lit­tle time on Sun­day in try­ing to take the cred­it for drag­ging Por­tu­gal out of a “peri­od of nation­al emer­gency,” dur­ing which his government’s tax increas­es and spend­ing cuts pro­voked many street protests but gained plau­dits from lenders. With anoth­er gen­er­al elec­tion in 2015, there is a risk that the gov­ern­ment might start laps­ing on the most unpop­u­lar reforms, said Anto­nio Roldán, an ana­lyst at the Eura­sia Group in Lon­don.

    Some busi­ness exec­u­tives are more opti­mistic, even if that requires tak­ing a long view.

    Por­tu­gal, like oth­er suf­fer­ing euro zone economies, has expe­ri­enced a sig­nif­i­cant exo­dus of work­ers. About 120,000 left the coun­try in 2012 alone, out of a labor force of 5.5 mil­lion.

    Those who left includ­ed many young and qual­i­fied work­ers, even from com­pa­nies that remained prof­itable through­out the cri­sis, like Tekev­er, a Por­tuguese tech­nol­o­gy com­pa­ny. Ricar­do Mendes, Tekever’s chief oper­at­ing offi­cer, said that about 20 of its 150 engi­neers left Por­tu­gal dur­ing the cri­sis, some ask­ing to relo­cate to Tekever’s for­eign sub­sidiaries and oth­ers find­ing jobs with rivals over­seas.

    We lost great peo­ple here not because there was some­thing wrong with the work itself but just because of the bad envi­ron­ment in Por­tu­gal, and that is a real pain,” Mr. Mendes said. “When peo­ple see a bet­ter future for their kids by liv­ing in Lon­don, what can you say to them?”

    Still, Mr. Mendes expressed con­fi­dence that “when the econ­o­my real­ly goes up and invest­ments are made, peo­ple will come back.”

    Por­tu­gal became the third euro econ­o­my to nego­ti­ate a bailout, after Greece and Ire­land, when its debt financ­ing costs spi­raled out of con­trol. But the coun­try was not hit by the burst­ing of a con­struc­tion bub­ble, as hap­pened to Ire­land and Spain. Nor was the reli­a­bil­i­ty of its gov­ern­ment accounts ever called into ques­tion, as in Greece, which is still labor­ing under its bailout pro­gram and the tough over­sight of its inter­na­tion­al cred­i­tors. Instead, Por­tu­gal suf­fered what its for­mer finance min­is­ter, Vítor Gas­par, called “a bust with­out a boom.”

    Portugal’s biggest chal­lenge may be rein­ing in pub­lic debt. Gov­ern­ment debt has soared dur­ing the bailout pro­gram by almost a third, to €276 bil­lion, or 129 per­cent of gross domes­tic prod­uct, com­pared with 94 per­cent at the end of 2010.

    In case you missed it: Gov­ern­ment debt has soared dur­ing the bailout pro­gram by almost a third, to €276 bil­lion, or 129 per­cent of gross domes­tic prod­uct, com­pared with 94 per­cent at the end of 2010.


    Cristi­na Casal­in­ho, a board mem­ber of I.G.C.P., the state debt man­age­ment office, acknowl­edged that Por­tu­gal still faced “a sig­nif­i­cant delever­ag­ing process.” But over all, she said, “the econ­o­my is now on a stronger foot­ing, evolv­ing out of a mod­el led by domes­tic demand into a growth mod­el pow­ered most­ly by exter­nal demand, and that is a real asset going for­ward.”

    Portugal’s over­haul has gone far beyond fis­cal tight­en­ing. Changes to labor rules have sig­nif­i­cant­ly low­ered the cost of hir­ing and fir­ing employ­ees.

    That has helped attract for­eign invest­ment. Last week, Volk­swa­gen said it would spend €677 mil­lion to expand pro­duc­tion at a fac­to­ry near Lis­bon.

    And jobs are being cre­at­ed in some new sec­tors. Teleper­for­mance, an out­sourc­ing com­pa­ny based in Paris, is help­ing turn Por­tu­gal into a Euro­pean call cen­ter hub. Teleperformance’s call cen­ters, able to han­dle more than two dozen lan­guages, employ 4,600 peo­ple here, com­pared with a staff of 1,800 in Por­tu­gal at the end of 2010, before the bailout.

    Notice the bright spot in Por­tu­gal’s econ­o­my: call cen­ters.


    Por­tuguese exports now rep­re­sent about 40 per­cent of G.D.P., up from 28 per­cent in 2009. While the cri­sis pushed many man­u­fac­tur­ers into bank­rupt­cy, the sur­vivors have used spare pro­duc­tion capac­i­ty to aim far more aggres­sive­ly at over­seas mar­kets.

    “Changes had to be made very quick­ly, and that has been very painful for most peo­ple, but the end result is that the econ­o­my is much stronger and bet­ter able to com­pete on the world mar­ket than three years ago,” said António Jorge, chief exec­u­tive of Soge­poc, a Por­tuguese food group that is Europe’s largest pro­duc­ers of toma­to paste.

    Still, the aus­ter­i­ty debate — along with street protests — is unlike­ly to end with the bailout pro­gram. Spend­ing cuts in sec­tors like edu­ca­tion have caused irrepara­ble social and eco­nom­ic dam­age to Por­tu­gal, accord­ing to some politi­cians and ana­lysts.

    “We would have required under any cir­cum­stances a strong effort to con­trol pub­lic finances and an amount of aus­ter­i­ty, but this was a com­plete overkill and a dis­as­ter,” said João Crav­in­ho, a for­mer Social­ist min­is­ter.

    Like many oth­er crit­ics of aus­ter­i­ty, Mr. Crav­in­ho equates that tough dis­ci­pline with the Ger­man gov­ern­ment that has been its most vocal preach­er.

    “Mak­ing Por­tu­gal appear like a very suc­cess­ful case and prov­ing that aus­ter­i­ty works in the short term is an impor­tant polit­i­cal mes­sage,” he said, “Not so much for us, but more for Ger­many.”

    Let’s review the mess that was Por­tu­gal’s “bailout”:
    By ear­ly 2011, Por­tu­gal was look­ing like the next ‘eurodomi­no’ to fall, pri­mar­i­ly due to exces­sive pri­vate debt and not pub­lic debt. So Merkel and the rest of the EU’s far right wreck­ing crew of course deter­mine that the prob­lem fac­ing Por­tu­gal is a bloat­ed gov­ern­ment and too much social spend­ing. So then Por­tu­gal spends the next three years impos­ing mas­sive pub­lic sec­tor aus­ter­i­ty in an attempt to impose ‘inter­nal deval­u­a­tion’ on Por­tugese econ­o­my and what are the results? Pub­lic debt spiked by a third, unem­ploy­ment is still above 15%, and the main fac­tor that appears to be keep­ing the unem­ploy­ment rate from going even high­er is the fact that the most skilled young work­ers aban­doned their lives in Por­tu­gal for a future else­where.

    And what lessons have pol­i­cy mak­ers tak­en from this expe­ri­ence? Oh yeah, that it is “impor­tant to embrace struc­tur­al reforms ear­ly on and to stay the course, what­ev­er chal­lenges may be faced along the way. Because, as we’re remind­ed at the end of the arti­cle, “mak­ing Por­tu­gal appear like a very suc­cess­ful case and prov­ing that aus­ter­i­ty works in the short term is an impor­tant polit­i­cal mes­sage,” he said, “Not so much for us, but more for Ger­many.” Yep!

    And it’s not just impor­tant for Ger­many’s right wing but, with the EU elec­tions loom­ing, any EU politi­cian that wants to pro­mote aus­ter­i­ty — like Jean-Claude Junck­er in his dri­ve to become Euro­pean Com­mis­sion Pres­i­dent — wants to cast Por­tu­gal as a won­der­ful mod­el to fol­low.

    But it was­n’t all bad news. Exports were up as a per­cent­age of GDP, which is what hap­pens when you tank your domes­tic econ­o­my, but at least they weren’t down! And best yet, the call cen­ter indus­try is thriv­ing. *ring* *ring* Your future is call­ing...:

    Call Cen­ters Call On Mul­ti­lin­gual Por­tuguese

    by Lau­ren Fray­er
    July 08, 2013 3:41 AM ET

    Fil­i­pa Neves speaks five lan­guages but still could­n’t find steady work in her native Por­tu­gal. So she was about to move to Ango­la, a for­mer Por­tuguese colony in Africa, where the econ­o­my is boom­ing.

    But she sent off one last resumé — to a call cen­ter. It was sort of a last resort. She’d heard the stereo­type.

    “You know, a con­tact cen­ter is like this dark hole they put you in. You’re sit­ting all day with a head­set, and it’s like a scary movie and they don’t pay you,” she recalled think­ing. “But then I saw this ad for French [lan­guage skills] and I said, ‘You know, why not?’ ”


    A His­to­ry Of Migrat­ing For Work

    Sure enough, work­ers on their cig­a­rette break out­side Neves’ new office are speak­ing per­haps a dozen lan­guages. Many are half-Por­tuguese and half-French, or half-Ger­man, or half-Eng­lish — the off­spring of gen­er­a­tions of Por­tuguese forced to go abroad to find work.

    Many Por­tuguese went to France in the 1960s and ’70s. Paris is cur­rent­ly the sec­ond-largest Por­tuguese city in the world, behind Lis­bon.

    Now Europe’s debt cri­sis has sparked a new wave of Por­tuguese migra­tion, as edu­cat­ed youth flee for jobs abroad. While Por­tu­gal’s over­all job­less rate is near­ing a record 18 per­cent, youth unem­ploy­ment tops 42 per­cent.

    Flu­en­cy in Por­tuguese, Span­ish, French, Eng­lish and Ger­man vir­tu­al­ly guar­an­tees Neves a job else­where in Europe. But by land­ing a job at a call cen­ter at home, she won’t have to leave her fam­i­ly.

    As Por­tu­gal’s econ­o­my tanks, there’s one glim­mer of hope and eco­nom­ic growth: the out­sourc­ing indus­try. Multi­na­tion­al com­pa­nies are increas­ing­ly turn­ing to Por­tu­gal as a cheap base for their call cen­ters and cus­tomer ser­vice hot­lines.

    They’re tak­ing advan­tage of Por­tu­gal’s low wages, high unem­ploy­ment and tal­ent for lan­guages. The aver­age salary for new col­lege grad­u­ates in Por­tu­gal is about $775 a month.

    “This spe­cif­ic mar­ket is absolute­ly boom­ing. We are almost dou­bling the size of our busi­ness, year on year,” said Neves’ boss, João Car­doso, the CEO of Teleper­for­mance Por­tu­gal. The firm man­ages local call cen­ters for multi­na­tion­al com­pa­nies. “So this mar­ket is total­ly unre­lat­ed with the Por­tuguese eco­nom­ic sit­u­a­tion.”

    A Rare Eco­nom­ic Bright Spot

    Por­tu­gal’s econ­o­my shrank by more than 3 per­cent last year. But call cen­ters are adding thou­sands of jobs while oth­er indus­tries shed them. And Por­tu­gal is join­ing coun­tries like Bul­gar­ia, Ire­land and Poland as out­sourc­ing lead­ers in Europe.

    Por­tu­gal is also ben­e­fit­ing from an out­sourc­ing trend dubbed “near-shoring,” in which West­ern com­pa­nies base their call cen­ters clos­er to home, rather than far­ther afield in coun­tries like India, the Philip­pines and Chi­na.

    “A lot of strong West­ern com­pa­nies are com­ing back home, in terms of the oper­a­tions that in the past they had placed in off­shore loca­tions,” said Guil­herme Ramos Pereira, exec­u­tive direc­tor of the Por­tu­gal Out­sourc­ing Asso­ci­a­tion, which lob­bies glob­al firms to come to Por­tu­gal.

    “They went [to India] because they need­ed large num­bers of resources and low cost of oper­a­tions. But stuff like inno­va­tion, qual­i­ty of the ser­vice pro­vid­ed, qual­i­ty and matu­ri­ty of pro­fes­sion­als — that’s what we have. As we lob­by, we use those argu­ments,” he says.

    For Euro­pean com­pa­nies, bas­ing call cen­ters in Por­tu­gal means there’s no cur­ren­cy con­ver­sion, nor sig­nif­i­cant time dif­fer­ence. It’s a bar­gain for com­pa­nies, Ramos Pereira said — and also for the few for­eign­ers recruit­ed as call cen­ter agents in lan­guages most Por­tuguese might not speak.

    “It’s a lot cheap­er than liv­ing and breath­ing in Scan­di­navia,” said Tom­my Nielsen, a Dan­ish cit­i­zen who grew up in Swe­den and speaks sev­er­al Scan­di­na­vian lan­guages. He was recruit­ed by a call cen­ter in Lis­bon for his lan­guage abil­i­ties and made the move in part because his pay­check goes fur­ther there.

    Econ­o­mists say the growth of Por­tu­gal’s out­sourc­ing indus­try is promis­ing and reveals how edu­cat­ed the pop­u­la­tion is, in terms of lan­guages. But they cau­tion against think­ing of out­sourc­ing at a cure-all for Por­tu­gal’s econ­o­my, which had long relied on man­u­fac­tur­ing.

    Por­tu­gal won’t be the ‘India of Europe’ — that’s just not real­is­tic,” said Pedro Lains, an eco­nom­ics pro­fes­sor at the Uni­ver­si­ty of Lis­bon. “We should­n’t be think­ing of a doomed, low-paid econ­o­my. We should be think­ing of an econ­o­my that will remain poor but with some growth, and where wages will have to increase in the near future.

    Until that hap­pens though, Por­tuguese call cen­ter oper­a­tors like Neves are hap­py to have a steady job. She wants to start a fam­i­ly.

    “And that means that I need a sta­ble job and a sta­ble income,” she said. “So that’s one of my plans, to get preg­nant and have a child. I think it’s time now.”

    “We should­n’t be think­ing of a doomed, low-paid econ­o­my. We should be think­ing of an econ­o­my that will remain poor but with some growth, and where wages will have to increase in the near future.”
    *ring* *ring*
    Your future is call­ing...

    Please hold...

    Thank you for hold­ing...You’re fired.

    Have a nice day.

    Posted by Pterrafractyl | May 10, 2014, 6:24 pm
  8. Pol­i­cy mak­ers in Berlin have anoth­er rea­son to oppose any attempts by the ECB to calm the euro­zone bond mar­kets: The mar­kets are so calm it might lead to a Ger­many hous­ing bub­ble:

    Draghi’s Calm Mar­kets Spark­ing Con­cern of Ger­man Risks
    By Eshe Nel­son and Neal Arm­strong Jun 20, 2014 1:24 AM CT

    The Euro­pean Cen­tral Bank’s unprece­dent­ed effort to fend off the threat of defla­tion has brought volatil­i­ty in finan­cial mar­kets to a stand­still. Pol­i­cy mak­ers aren’t so serene.

    Price swings in euro-area bonds and equi­ties have col­lapsed, bor­row­ing costs for the riski­est issuers reached record lows and Cyprus accessed fund­ing mar­kets just a year after receiv­ing a bailout. Rather than con­grat­u­late ECB Pres­i­dent Mario Draghi, offi­cials from Britain to the Bun­des­bank say per­sist­ing with the eas­ing pol­i­cy for too long may store up trou­ble.

    “There’s a gen­er­al dis­cus­sion of whether investors are get­ting too com­pla­cent about risks,” said Allan von Mehren, chief ana­lyst at Danske Bank A/S in Copen­hagen. “At some point we are like­ly to reach lev­els that could not give prop­er com­pen­sa­tion for the risk peo­ple are tak­ing. This is sim­i­lar to what hap­pened ahead of the finan­cial cri­sis.”

    The unease under­scores the chal­lenge for Draghi as he and fel­low pol­i­cy mak­ers attempt to revive lend­ing in the econ­o­my with­out undu­ly inflat­ing asset prices or enabling gov­ern­ments to ease up on plans to cut their deficits. A mon­e­tary pol­i­cy just for Ger­many would set inter­est rates at 4.65 per­cent, accord­ing to a Tay­lor Rule mod­el com­piled by Bloomberg, ver­sus minus 10.75 per­cent for Spain or minus 19.25 per­cent for Greece.

    Neg­a­tive Rates

    The ECB cut its bench­mark inter­est rate to a record 0.15 per­cent at this month’s meet­ing and became the first major cen­tral bank to charge for overnight deposits. That sent the one-week Eonia swap rate to a record-low 0.003 per­cent on June 16, accord­ing to ICAP Plc data, sig­nal­ing banks were will­ing to make loans at almost no cost for the bor­row­er, rather than pay the ECB’s penal­ty charge. The overnight index fell to a record-low 0.01 per­cent yes­ter­day.

    Instead, cash is pour­ing into fixed-income mar­kets. The aver­age yield on euro-area gov­ern­ment bonds fell to an all-time low of 1.3392 per­cent on June 9, from as high as 4.28 per­cent in Novem­ber 2011, accord­ing to Bank of Amer­i­ca Mer­rill Lynch’s Euro Gov­ern­ment Index. Yields on bonds from Europe’s riski­est bor­row­ers matched a record-low 3.46 per­cent on June 10, accord­ing to its Euro High Yield Con­strained Index.

    ‘Wor­ri­some’ Envi­ron­ment

    “This low-inter­est-rate envi­ron­ment, as much as it’s appro­pri­ate at this point in time, over a medi­um and longer peri­od of time is kind of wor­ri­some, espe­cial­ly in a Ger­man envi­ron­ment,” Bun­des­bank board mem­ber Andreas Dom­bret said in a Bloomberg Tele­vi­sion inter­view with Haslin­da Amin in Sin­ga­pore yes­ter­day. “We’ve seen in oth­er coun­tries this has led to hous­ing bub­bles so this is some­thing we have to watch close­ly.”


    “A mon­e­tary pol­i­cy just for Ger­many would set inter­est rates at 4.65 per­cent, accord­ing to a Tay­lor Rule mod­el com­piled by Bloomberg, ver­sus minus 10.75 per­cent for Spain or minus 19.25 per­cent for Greece”.

    So if Ger­many has a right to com­plain about a 0.15 inter­est rate pos­si­bly trig­ger­ing a hous­ing bub­ble because a “mon­e­tary pol­i­cy just for Ger­many would set inter­est rates at 4.65 per­cent”, don’t Greece and Spain have a sub­stan­tial­ly stronger case that their being sys­tem­at­i­cal­ly abused if their inter­est rates should be set at ‑19.25 and ‑10.75 per­cent?

    In relat­ed news, Paul Krug­man has a post about some new research on the long-term impact of aus­ter­i­ty. The con­clu­sion? The insane aus­ter­i­ty poli­cies of recent years has­n’t just reduced the short-term poten­tial for the impact­ed economies. Aus­ter­i­ty is also doing long-term dam­age

    The New York Times
    The Con­cien­sce of a Lib­er­al
    Aus­ter­i­ty and Hys­tere­sis

    Paul Krug­man
    JUNE 20, 2014 9:34 AM

    Lar­ry Ball has an impor­tant paper doc­u­ment­ing, on a con­sis­tent basis, a very dis­turb­ing point: if you believe offi­cial esti­mates of poten­tial out­put, the Great Reces­sion and its after­math have done incred­i­ble dam­age, not just to short-run out­put and employ­ment, but to long-run prospects.

    Here’s my back of the enve­lope ver­sion. If you look at the IMF’s “advanced coun­try” real GDP aggre­gate, it grew 18 per­cent from 2000 to 2007 — and back in 2007 it was gen­er­al­ly expect­ed to keep ris­ing at more or less the same rate. In fact, advanced-coun­try GDP is like­ly to be only around 6 per­cent high­er in 2014 than it was in 2007, or 10 per­cent below trend. Yet offi­cial esti­mates of eco­nom­ic slack are much low­er than 10 per­cent — the IMF’s esti­mate for 2014 is only 2.2 per­cent. So the num­bers seem to imply that the eco­nom­ic cri­sis caused some­thing like an 8 per­cent hit to eco­nom­ic poten­tial all across the advanced world, which is huge.

    One pos­si­bil­i­ty is that the out­put gap num­bers are wrong; we’re actu­al­ly hav­ing a very hard time fig­ur­ing out how much slack there is. Anoth­er pos­si­bil­i­ty is that it’s just a coin­ci­dence that under­ly­ing growth slowed at the same time as the cri­sis. But if you take the num­bers seri­ous­ly, they do seem to indi­cate that hys­tere­sis — short-term shocks qua­si-per­ma­nent­ly hurt the economy’s poten­tial — is a very big issue.

    Sup­pose, in par­tic­u­lar, that we look at the cor­re­la­tion between aus­ter­i­ty poli­cies and the decline in poten­tial out­put. In the fig­ure below I plot the IMF’s esti­mates of the change in struc­tur­al deficits as a per­cent­age of poten­tial GDP, 2009–2013, against Ball’s esti­mates of the decline in poten­tial out­put in 2013 rel­a­tive to pre-cri­sis expec­ta­tions:

    [see chart]

    This sug­gests that aus­ter­i­ty equal to one per­cent of GDP reduces poten­tial out­put by around 1 per­cent. That’s huge — easy enough to make aus­ter­i­ty a huge­ly self-defeat­ing pol­i­cy even in pure­ly fis­cal terms.

    There are var­i­ous ways you can try to ratio­nal­ize away this cor­re­la­tion. But it nonethe­less looks as if eco­nom­ic pol­i­cy has been even more destruc­tive than we thought

    Keep in mind that the pri­ma­ry jus­ti­fi­ca­tion we keep hear­ing from the aus­ter­i­ty advo­cates is that the euro­zone needs aus­ter­i­ty to har­mo­nize their economies to make them appro­pri­ate for a cur­ren­cy union. And now we’re in a sit­u­a­tion where there’s a 15% opti­mal inter­est rate spread between Ger­many and Spain and a 25% spread between Ger­many and Greece. How is per­ma­nent­ly dam­ag­ing some euro­zone economies going to “har­mo­nize” them going for­ward?

    Posted by Pterrafractyl | June 20, 2014, 7:27 am
  9. Italy’s new Prime Min­is­ter has a big new plan for turn­ing Italy’s econ­o­my around: More aus­ter­i­ty although he’s also ask­ing Angela Merkel for a lit­tle eas­ing up on the exist­ing rules. LOL. He’s new:

    Ren­zi Plans Ger­man-Style Revamp for Italy Eas­ing Bud­get
    By Andrew Frye Jun 24, 2014 7:27 AM CT

    Prime Min­is­ter Mat­teo Ren­zi said he is plan­ning three years of leg­is­la­tion to end Italy’s eco­nom­ic stag­na­tion and cit­ed Ger­many in 2003 as his inspi­ra­tion.

    Italy will present a pro­pos­al for broad changes to the pub­lic admin­is­tra­tion, the wel­fare sys­tem and the tax regime by Sept. 1, Ren­zi said today in a speech to Par­lia­ment in Rome. By repeat­ed­ly ref­er­enc­ing Germany’s leg­isla­tive over­haul a decade ago, Ren­zi simul­ta­ne­ous­ly set the bar for suc­cess and sig­naled he expects the Euro­pean Union to ease bud­get tar­gets in return.

    “Reforms car­ry a cost, as Ger­many knows,” Ren­zi said, cit­ing the fail­ure of Europe’s most-pop­u­lous coun­try to meet EU deficit lim­its while it fixed up its econ­o­my. He called for “a light eas­ing of the euro zone’s restric­tive eco­nom­ic poli­cies.”

    Italy’s eco­nom­ic stag­na­tion has defeat­ed four prime min­is­ters since 2001 and exposed a per­for­mance gap vis-a-vis EU allies like Ger­many and the U.K. that have done more to free up activ­i­ty. Ren­zi, strength­ened by a land­slide vic­to­ry in Italy’s elec­tion for the Euro­pean Par­lia­ment last month, has quelled inter­nal oppo­si­tion to broad changes and put him­self in a posi­tion to win con­ces­sions from the EU.

    In the speech, which also set out Italy’s strat­e­gy for a June 26–27 sum­mit in Brus­sels, Ren­zi ridiculed the Euro­pean Com­mis­sion, the EU’s exec­u­tive arm, for its focus on bud­get minu­tia and the assump­tion that mem­ber states need its peri­od­ic pol­i­cy rec­om­men­da­tions. He once again cit­ed Ger­many in 2003, under then-Chan­cel­lor Ger­hard Schroed­er, for its will­ing­ness to break the rules.

    ‘Shop­ping List’

    “Like Ger­many back then, we want to stop receiv­ing the rec­om­men­da­tions like a shop­ping list,” Ren­zi said. “It’s almost like this trans­forms Europe into an old, bor­ing aunt who tells us what to do.”

    Schroeder’s Agen­da 2010 pack­age unveiled in 2003 cut tax­es, made it eas­i­er to fire staff, forced those out of work for more than a year to accept any rea­son­able job offer and reduced long-term ben­e­fits. The efforts helped Ger­man busi­ness­es turn around. Italy has had four reces­sions since 2001, and its GDP is 9 per­cent low­er than it was at the begin­ning of the Euro­pean debt cri­sis.

    Note that the argu­ment that the “Agen­da 2010” aus­ter­i­ty pack­age “helped Ger­man busi­ness­es turn around” com­plete­ly ignores the fact that the rest of the con­ti­nent was in the midst of a euro-inspired bor­row­ing spree dur­ing those years with a few Ger­man exports sold to Ger­many’s EU part­ners. Also note that the aus­ter­i­ty pack­age involved repeat­ed vio­la­tions of the same kinds of EU bud­get caps that Ren­zi is com­mit­ting to for Italy adhere to for the com­ing years (which is what Ren­zi was refer­ring to when he cit­ed Schroed­er’s will­ing­ness to break the rules). And then there’s the fact that Ger­many’s export suc­cess does­n’t real­ly seem to have much to do with low­er wages but more to do with the niche for it fills in the glob­al man­u­fac­tur­ing mar­ket­place and the fact that the euro­zone arti­fi­cial­ly deflates the val­ue of Ger­many’s cur­ren­cy (while simul­ta­ne­ous­ly arti­fi­cial­ly inflat­ing the val­ue of the cur­ren­cy of the weak­er euro­zone mem­bers). And then there’s the fact that the export advan­tage for Ger­many from a sup­pressed euro has only got­ten bet­ter as the cri­sis con­tin­ues (despite that fact that the Bun­des­bank has been large­ly demand­ing strong-euro poli­cies).



    Ren­zi is cap­ping off a month­long effort to shift the focus of this week’s sum­mit from horse-trad­ing over Com­mis­sion appoint­ments to a broad­er debate about bud­get pol­i­cy. His push for a more expan­sive approach, bol­stered by his show­ing in EU elec­tions last month, is start­ing to bear fruit.


    Ger­man Chan­cel­lor Angela Merkel’s pro-bud­get-dis­ci­pline stance was under­mined in part by state­ments in sup­port of greater flex­i­bil­i­ty deliv­ered last week by her vice chan­cel­lor, Sig­mar Gabriel. Out­go­ing EU Pres­i­dent Her­man Van Rompuy trav­eled to Rome last week to medi­ate with Ren­zi about his pro­pos­als.

    Ren­zi has said Italy will respect the deficit lim­it and expressed his esteem for Merkel. Still, in today’s speech, he made it clear the Ger­many that inspires him is in the past and that he is pre­pared to chal­lenge Merkel on the country’s cur­rent approach.

    “There are prophets and cler­gy of rig­or who tell us there are no ways to move a sin­gle dec­i­mal point of the rules,” Ren­zi said. The EU must “quick­ly change the Ger­man-cen­tric poli­cies of aus­ter­i­ty and blind rig­or and set off down the road of recov­ery and devel­op­ment.”

    Yes, the EU must “quick­ly change the Ger­man-cen­tric poli­cies of aus­ter­i­ty and blind rig­or and set off down the road of recov­ery and devel­op­ment”, although it’s very unclear why “a light eas­ing of the euro zone’s restric­tive eco­nom­ic poli­cies” would real­ly be any­thing more than just a “light eas­ing” of those very same poli­cies. Either way, good luck Ren­zi! Those deaf ears your words are falling on hap­pen to be blind and dumb too:

    Europe Should Fol­low Ger­many’s Bud­get Exam­ple, Says Finance Min­is­ter
    By Dow Jones Busi­ness News, June 24, 2014, 07:09:00 AM EDT

    BERLIN–Europe should fol­low Ger­many’s exam­ple which proves that eco­nom­ic strength and a bal­anced bud­get are the result of stick­ing to Euro­pean bud­get rules, Finance Min­is­ter Wolf­gang Schaeu­ble said Tues­day, rebut­ting calls from debt-rid­den Euro­pean coun­tries to ease aus­ter­i­ty require­ments and focus more on growth.

    “We aren’t only an anchor of sta­bil­i­ty in Europe but also a growth engine,” he told the low­er house of par­lia­ment dur­ing the final read­ing of the 2014 bud­get. “We need exact­ly the same path in Europe: Regain­ing trust by stick­ing to the Sta­bil­i­ty and Growth Pact and boost­ing invest­ment through a more effi­cient use of Euro­pean Union funds.”

    Since the “Aus­ter­i­ty 2010” aus­ter­i­ty agen­da is appar­ent­ly going to be cit­ed now as ‘proof’ that ’ eco­nom­ic strength and a bal­anced bud­get are the result of stick­ing to Euro­pean bud­get rules’, it real­ly can’t be point­ed out enough that Ger­many and France both flout­ed those rules for years and it was exports pur­chased by Ger­many’s EU neigh­bors that helped Ger­many even­tu­al­ly get its bud­get deficit under 3%.



    The debate of loos­en­ing Euro­pean Union bud­get rules, which are known as the Sta­bil­i­ty and Growth Pact, has gained momen­tum over the past days after Ger­man Vice-chan­cel­lor Sig­mar Gabriel sup­port­ed Italy’s and France’s calls to give them more lee­way for boost­ing eco­nom­ic growth and reduc­ing unem­ploy­ment.

    Mr. Schaeu­ble and Chan­cel­lor Angela Merkel insist, how­ev­er, that exist­ing rules, which require coun­tries to keep their bud­get deficit below 3% of gross domes­tic prod­uct, are flex­i­ble enough to allow coun­tries to imple­ment reforms and boost the econ­o­my. They oppose amend­ments to the pact.

    In his speech to the Bun­destag low­er house, Mr. Schaeu­ble said that the new Euro­pean par­lia­ment and the next Euro­pean Com­mis­sion should focus on a bet­ter use of Euro­pean funds.

    “There is a lot of need for action and we should focus at this instead of lead­ing a dis­cus­sion that rais­es sus­pi­cions we might want to repeat past mis­takes,” Mr. Schaeu­ble said. “We have made seri­ous mis­takes by not stick­ing to the rules. We must­n’t repeat these mis­takes. We can see that the oth­er path is the right one. We must con­tin­ue this con­se­quent­ly.”


    “We have made seri­ous mis­takes by not stick­ing to the rules. We must­n’t repeat these mis­takes. We can see that the oth­er path is the right one. We must con­tin­ue this con­se­quent­ly.” Again, the “mis­take” of not stick­ing to the rules was ini­tial­ly made by Ger­many while it was imple­ment­ing the very same aus­ter­i­ty regime that is now being cit­ed as a mod­el for the rest of Europe. Again, good luck Ren­zi!

    And, of course, we can’t have an episode of aus­ter­i­ty-fever with­out some encour­ag­ing words from the Bun­des­bank. What Italy needs, accord­ing to Bun­des­bank chief Jens Wei­d­mann, is not less aus­ter­i­ty but more aus­ter­i­ty. Who could have seen that com­ing:

    Tues­day, June 24, 2014 — 03:14
    ECB Wei­d­mann: Fis­cal Rules Must Be Strength­ened Not Weak­ened

    By Johan­na Treeck

    FRANKFURT (MNI) — Euro­pean Cen­tral Bank Gov­ern­ing Coun­cil mem­ber Jens Wei­d­mann warned Tues­day in an opin­ion piece in Ger­man Sued­deutsche Zeitung that weak­en­ing fis­cal rules could spark fresh shock waves in the euro area.

    The com­ments came after France and Italy had pushed for lax­er inter­pre­ta­tion of fis­cal rule that would not could invest­ment in future growth as debt.

    “The decep­tive calm on finan­cial mar­kets bears the risk that lessons from the cri­sis for pub­lic bud­gets are already for­got­ten again,” Wei­d­mann said. “This would be fatal.”

    “Doubts over the sus­tain­abil­i­ty of pub­lic finances can cause grave reper­cus­sions for the cur­ren­cy union,” Wei­d­mann warned. Rather than weak­ened, fis­cal rules must be strength­ened and their imple­men­ta­tion made more bind­ing, the Bun­des­bank Pres­i­dent stressed.


    You have to won­der what the long game is for folks like Wei­d­mann because it’s becom­ing extreme­ly obvi­ous when they talk about “reform­ing” EU mem­ber states that this is the same kind of “reform” that might be lay­ing in wait for some­one that blew through all their cred­it cards and is now in mas­sive debt (and liv­ing in a coun­try with legal usury). In oth­er words, it’s becom­ing increas­ing­ly clear that the EU elites, espe­cial­ly those in Berlin and Frank­furt, hold the view that these EU mem­ber states are sup­posed to become sig­nif­i­cant­ly poor­er based on the argu­ments that they’re pub­lic spend­ing is too high while ignor­ing the fact that the euro­zone finan­cial crises were pri­mar­i­ly caused be pri­vate sec­tor get­ting trans­ferred onto the pub­lic bal­ance sheets (with Greece being a notable excep­tion). And yet it’s not at all clear that the EU pub­lic even remote­ly real­izes that per­ma­nent­ly reduced liv­ing stan­dards is the “reform” the Bun­des­bank has in mind. And that makes the entire aus­ter­i­ty regime just a shock­ing betray­al of an entire con­ti­nent that could dri­ve the mass­es into a rage if it’s ever wide­ly rec­og­nized. And the longer aus­ter­i­ty poli­cies rule the day and the more and more absurd the Bun­des­bank’s argu­ments get, the greater the prob­a­bil­i­ty that we’re going to see a mass real­iza­tion of a major betray­al.

    It’s very sim­i­lar to the prob­lem the GOP faces in the US: it’s sim­ply becom­ing hard­er and hard­er for aver­age vot­ers to buy into the notion that the GOP’s poli­cies aren’t entire­ly geared towards enrich­ing the bil­lion­aires and the “divide and con­quer” tech­niques that have worked so well in the past are start­ing to lose their effec­tive­ness as the long-term dam­age from the GOP’s poli­cies become hard­er and hard­er to ignore. This kind of “fraud fatigue” has cre­at­ed an exis­ten­tial cri­sis for the GOP but it’s tak­en decades to get there. How long is it going to take for the EU’s GOP analogs to blow through their cred­i­bil­i­ty? Will it take decades there too? What hap­pens when all these coun­tries real­ize that they were basi­cal­ly forced to destroy their futures and it was entire­ly avoid­able and based on lies and inde­fen­si­ble ide­olo­gies?

    Posted by Pterrafractyl | June 24, 2014, 12:30 pm
  10. How is a ‘bond vig­i­lante’ like the Sword of Damo­cles? Well, they’re both con­stant­ly threat­en­ing to destroy you at a momen­t’s notice. Also, they’re both myths. And how is a ‘bond vig­i­lante’ dif­fer­ent than the Sword of Damo­cles? No one actu­al­ly believes in the Sword of Damo­cles:

    The New York Times
    The Con­science of a Lib­er­al

    How Prophets Get Lone­ly
    Paul Krug­man
    July 5, 3:05 pm

    At Bloomberg View, Leonid Bershinksy weeps over the cru­el world that for some rea­son isn’t lis­ten­ing to Jaime Caru­a­na of the BIS, who warns that we must raise inter­est rates now now now. Why is this prophet so lone­ly?

    Well, it might have some­thing to do with the fact that three years ago Caru­a­na and the BIS warned that inter­est rates must rise to avert a surge of infla­tion. That didn’t hap­pen — in fact, low infla­tion and the threat of defla­tion came instead.

    Now, every­one gets things wrong some­times. But when that hap­pens, you’re sup­posed to think about why you were wrong, and recon­sid­er your pol­i­cy views. If the BIS did any soul-search­ing, nobody else noticed — and it’s still call­ing for high­er rates, with a new jus­ti­fi­ca­tion (and where it used to warn about infla­tion, now it’s argu­ing that defla­tion isn’t so bad.) Why, exact­ly, should any­one take its views seri­ous­ly at this point?

    But being a hard-mon­ey guy seems to mean nev­er hav­ing to recon­sid­er. I missed my chance to mark the anniver­sary, but it’s now five years plus since the WSJ warned that wild­ly infla­tion­ary mon­e­tary and fis­cal poli­cies were bring­ing on the bond vig­i­lantes. And to read their opin­ion pages, you’d think they were right all along.

    Yes, the bond vig­i­lantes are always out to get you and destroy your econ­o­my when­ev­er your nation steps out of line and devi­ates from super low infla­tion and strict bud­get aus­ter­i­ty, even for a moment and even if the super low infla­tion and bud­get aus­ter­i­ty are already destroy­ing your econ­o­my. This is why peo­ple like France’s Cen­tral Banker Chris­t­ian Noy­er needs to con­stant­ly cau­tion against out­landish ideas like the one Fran­cois Hol­land is float­ing of using France’s record low bor­row­ing rates to make pub­lic infest­ments in France’s infra­stuc­ture (what a stun­ning idea). As Noy­er points out below, this plan sim­ply isn’t an option because the bond vig­i­lantes are watch­ing, wait­ing to pounce at any moment and restrict France’s access to record cheap cred­it, and there’s noth­ing France can do about it because “No coun­try today has suf­fi­cient cred­i­bil­i­ty to put in place a strat­e­gy” of financ­ing pub­lic infra­struc­ture with a major debt increase”. The high priests of high finance of spo­ken. The bond vig­i­lantes will win, but only if you try. So don’t:

    ECB’s Noy­er Warns Euro Area Against Giv­ing Up on Deficit Cut­ting
    By Mark Deen Jul 5, 2014 9:54 AM CT

    Euro­pean Cen­tral Bank Gov­ern­ing Coun­cil mem­ber Chris­t­ian Noy­er warned euro-area gov­ern­ments against giv­ing up on deficit reduc­tion or look­ing to use a debt build-up to bol­ster growth.

    “No coun­try today has suf­fi­cient cred­i­bil­i­ty to put in place a strat­e­gy” of financ­ing pub­lic infra­struc­ture with a major debt increase, Noy­er said today at the Cer­cle des Econ­o­mistes con­fer­ence in Aix-en-Provence, France. “Decades of of deficits have cre­at­ed pro­found skep­ti­cism. The cur­rent bal­ance is frag­ile and any sig­nif­i­cant devi­a­tion from the cur­rent bud­get tra­jec­to­ry would prob­a­bly be paid for, in a volatile envi­ron­ment, with high­er bor­row­ing costs.”

    The remarks from Noy­er, who is also gov­er­nor of the Bank of France, comes as French Pres­i­dent Fran­cois Hol­lande has sug­gest­ed that gov­ern­ment invest­ment spend­ing be exempt from Euro­pean deficit mea­sures. France’s Euro­pean part­ners have twice allowed the coun­try to delay the dead­line for reduc­ing its bud­get deficit to 3 per­cent of gross domes­tic prod­uct. France is now com­mit­ted to reach­ing that lev­el in 2015.

    Noy­er also said that uncer­tain­ty about gov­ern­ment pol­i­cy is a “major obsta­cle” to long-term invest­ment. Cor­po­rate invest­ment spend­ing has so far failed to rebound in France, lim­it­ing the nation’s eco­nom­ic recov­ery.

    “It is impor­tant that pol­i­cy be clear, sta­ble and free of con­tin­gen­cies, as well as unam­bigu­ous­ly ori­ent­ed to the long term,” he said.

    The rate of price increas­es across the euro area remains “too low” right now, though out­right defla­tion has been avoid­ed, Noy­er said.

    Yes, “decades of deficits have cre­at­ed pro­found skep­ti­cism,” accord­ing to Noy­er. The bizarre cir­cum­stances asso­ci­at­ed with a cur­ren­cy union and self-imposed aus­ter­i­ty have noth­ing with the cur­rent cri­sis, it’s “decades of deficits”. As Krug­man points out, one of the bonus­es of being a “hard-mon­ey guy” is nev­er hav­ing to recon­sid­er. Any­thing. Ever.

    Well, almost nev­er. Some­times the pain of sadomon­e­tarist poli­cies get a lit­tle too painful, as we recent­ly saw in Swe­den. No, it was the pain asso­ci­at­ed with high unem­ploy­ment (that’s pain for the pro­les and there­fore good). It was the worst kind of pain that even a staunch admir­er of the bond vig­i­lantes (who are all very John Galt-like) can’t ignore: mon­e­tary pain:

    The New York Times
    The Con­science of a Lib­er­al

    Swedish Sadomon­e­tarist Set­back
    July 5, 2014 11:36 am

    Paul Krug­man

    OK, this is fair­ly amaz­ing. I’ve writ­ten often about sadomon­e­tarism among cen­tral bankers — the evi­dent urge to find some rea­son, any rea­son, to raise inter­est rates despite high unem­ploy­ment and low infla­tion. The most influ­en­tial hive of this kind of think­ing is the Bank for Inter­na­tion­al Set­tle­ments, which for some rea­son com­mands great respect even though it offers an ever-chang­ing ratio­nale — infla­tion! Any day now! Or maybe not! Finan­cial sta­bil­i­ty! — for its nev­er-chang­ing advo­ca­cy of tight mon­ey. But the place where pol­i­cy mak­ers most dra­mat­i­cal­ly gave in to this urge is Swe­den, where the major­i­ty at the Riks­bank decid­ed to indulge its rate-hike vice while freez­ing out one of the world’s lead­ing experts on defla­tion risks, my friend and for­mer col­league Lars Svens­son.

    Well, guess what: Lars has been proved so dra­mat­i­cal­ly right by events — rais­ing rates didn’t curb ris­ing debt, but it did push Swe­den into defla­tion — that the Riks­bank has done an abrupt U‑turn, slash­ing rates (and over­rul­ing the gov­er­nor and first deputy gov­er­nor).

    Actu­al­ly, the dra­ma of this U‑turn may be a very good thing, since it might con­vince investors that this is a real regime change.

    As we can see, defla­tion, one of the only known phe­nom­e­na that can over­rules a hard mon­ey cen­tral banker’s fear of the bond vig­i­lantes (bond mar­ket melt­downs can also do the trick), is already forc­ing a seri­ous rethink amongst some of the the hard mon­ey faith heal­ers. At least those in Swe­den. Still, it’s a strong faith in the threat­en­ing omnipo­tence of the bond vig­i­lantes (dur­ing a peri­od of record low inter­est rates) and the cor­rec­tive nature of eco­nom­ic shock ther­a­py and it’s pret­ty clear from the com­ments by France’s Noy­er that the faith in eco­nom­ic faith heal­ing is still going strong.

    At the same time, the over­rul­ing in a 4–2 vote of Swe­den’s hard mon­ey faith heal­er in chief, Ste­fan Ingves, might be a sign of the kind of back­lash we can expect against the faith heal­ers at the cen­tral banks across the EU and espe­cial­ly at the ECB if the ultra low infla­tion gets even worse.

    So defla­tion just might over­ride belief in the myth­i­cal pow­eres of the ever-vig­i­lant bond vig­i­lantes and force a seri­ous pol­i­cy response, although any­hing involve a pub­lic stim­u­lus pack­age will no doubt be over­ruled since it would prob­a­bly work and be extreme­ly embarass­ing for almost all par­ties run­ning in pow­er across the EU. So it’s real­ly unclear what sort of effec­tive pol­i­cy response can even be con­sid­er­ing in the EU nowa­days should the threat of defla­tion linger.

    This could be increas­ing­ly impor­tant to keep in mind because France’s Finance Min­is­ter, Michel Sapin, was recent­ly pro­mot­ing an idea that just might be enough to trig­ger the kind of sus­tained defla­tion­ary force that could force quite a rethink in the san­er seg­ments of the ECB or, more like­ly, just send the EU econom­nies fur­ther into a depres­sion: The euro­zone should pro­mote the replace­ment of the dol­lar with the euro for more inter­na­tion trans­ac­tions. In oth­er words, accord­ing to Sapin, pol­i­cy mak­ers have plans for the euro. It needs to go glob­al:

    The Wall Street Jour­nal
    French Banks Not Endan­gered by U.S. Jus­tice: French Finance Min­is­ter
    Michel Sapin Says He Isn’t Wor­ried

    By William Horobin
    July 6, 2014 6:51 a.m. ET

    AIX-EN-PROVENCE, France—French finance min­is­ter Michel Sapin said Sun­day French banks are not in dan­ger as a result of U.S. jus­tice deci­sions and the risks are now more cen­tral­ized on oth­er Euro­pean banks.

    Mr. Sap­in’s com­ments come after French bank BNP Paribas SA agreed to a $9 bil­lion fine for breach­ing U.S. sanc­tions against Sudan, Iran and oth­er coun­tries. The French bank was caught in legal pro­ceed­ings in the U.S. because the trans­ac­tions were in dol­lars.

    Asked if he was wor­ried about the impact of U.S. legal pro­ceed­ings on oth­er French banks, Mr. Sapin respond­ed “no.”


    Mr. Sapin repeat­ed that pol­i­cy mak­ers in Europe should look at ways of encour­ag­ing the use of the euro instead of the dol­lar in inter­na­tion­al trade. Euro­pean finance min­is­ters will dis­cuss the issue at a meet­ing in Brus­sels Mon­day.

    “It was­n’t us who asked for it to be on the agen­da, but I’ve talked about it with a lot of oth­er col­leagues and every­one agreed it’s a good sub­ject to get into to,” Mr. Sapin said.

    France’s Finance Min­is­ter pre­sum­ably does­n’t envi­sion the euro sud­den­ly replac­ing the dol­lar’s role in inter­a­tional trans­ac­tions. That can’t be eas­i­ly done but a larg­er role for the euro is cer­tain­ly pos­si­ble and there’s a lot room for growth so this could be a defla­tion­ary force for many years to come. All it would require is the appro­pri­ate polices, as Mr Sapin is advo­cat­ing, and, oh yeah, prob­a­bly defla­tion.

    Still, there are a num­ber of dif­fer­ent fac­tors that go into determing the move­ment of some­thing with as huge a mar­ket as the euro, so it’s pos­si­ble that a “use euros” cam­paign would have no appre­cia­ble effect on the val­ue of the cur­ren­cy, at least not for a while. But let’s keep in mind the ECB, and espe­cial­ly the Bun­des­bank, have been strange­ly deaf to all the calls for low­er­ing ECB poli­cies that can low­er the val­ue of the euro and that the ECB’s offi­cial pol­i­cy is that the exchange rate does not mat­ter. Only ‘price sta­bil­i­ty’ mat­ters.

    So now that France’s cen­tral banker has elud­ed to a grow­ing con­cen­sus that the euro should be pro­mot­ing as a dol­lar alter­na­tive for inter­na­tion­al trans­ac­tions, the prospect for an indi­rect ‘strong euro’ pol­i­cy is now on the table. It also rais­es the chill­ing pos­si­bil­i­ty that we could be look­ing at the cre­ation a new reserve cur­ren­cy par­a­digm that aims to replace the US’s par­a­digm of “we have the biggest econ­o­my and mil­i­tary” (which is what gives the US dol­lar “cred­i­bil­i­ty” inter­na­tion­al­ly) with a new euro­zone “we’re will­ing to eat our young for price sta­bil­i­ty” regime. An “Aus­ter­i­ty Stan­dard” that’s sup­posed to be as good as gold.

    There’s always been a lot to be desired with the US’s “we have the biggest econ­o­my and mil­i­tary” par­a­digm but if there’s to be a sin­gle reserve cur­ren­cy it’s not sur­pris­ing that it ends up being the cur­ren­cy of the coun­try with the biggest econ­o­my and mil­i­tary. Now that we seem to be tran­si­tion­ing to a mul­ti-polar/­mul­ti-reserve cur­ren­cy world, how­ev­er, the pos­si­bil­i­ty for dif­fer­ent reserve sta­tus par­a­digms is only going to keep grow­ing so it’ll be inter­est­ing to see what emerges.

    What won’t be inter­est­ing to watch, but instead grim and dis­tress­ing, will be the roll­out of a “we’re will­ing to eat our young for price sta­bil­i­ty so have con­fi­dence in our cur­ren­cy” par­a­digm that we can prob­a­bly expect from the euro­zone in its play for greater glob­al sta­tus. Faith heal­ing and snake han­dling is all fun and games until some­one gets bit­ten by the snake. But a school of faith heal­ing that views get­ting bit­ten by the snake as a nec­es­sary step for purifi­ca­tion and heal­ing is the kind of old time reli­gion more deserv­ing of a Dar­win Award than reserve cur­ren­cy sta­tus. And yet, as we can see, the high priests of the Cult of the For­ev­er Fear­ful of the Bond Vig­i­lantes are con­tin­u­ing to read the entrails and the mes­sage is clear: more socioe­co­nom­ic dis­em­bow­el­ings are need­ed before con­fi­dence can final­ly return. Any­thing else will bring about the wrath of the bond vig­i­lantes.

    And when con­fi­dence does return, the whole world will want to buy a piece of the mag­ic (for inter­na­tion­al trans­ac­tions ) and the ECB’s myth­i­cal bond vig­i­lantes will final­ly mate­ri­al­ize on our plane of exis­tence and achieve their right­ful reserve sta­tus over our mor­tal world as a glob­al force with immense influ­ence over the glob­al mon­ey sup­ply. At that point, it most­ly involves doing the same thing (aus­ter­i­ty for the mass­es using junk eco­nom­ics as an excuse) in dif­fer­ent ways (the excus­es might change) over and over and over.

    Posted by Pterrafractyl | July 6, 2014, 9:51 pm
  11. Krug­man calls “that’s BS!” on the BIS:

    The New York Times
    The Con­science of a Lib­er­al

    Not Knut
    Paul Krug­man
    Jul 7 10:13 am

    Gavyn Davies takes on the de fac­to debate between the hard-mon­ey men at the BIS and the mon­e­tary doves, and frames it as a con­flict between Keynes and Wick­sell. But I don’t think that’s right. The BIS posi­tion is in fact just as incon­sis­tent with Wick­sell as it is with Keynes. That doesn’t mean that the BIS is wrong (although I believe that it is); it does mean that its view is much stranger and hard­er to defend than Davies sug­gests.

    So, for those won­der­ing what this is all about: The Key­ne­sian view of mon­e­tary pol­i­cy is that the cen­tral bank should, if it can, set inter­est rates at a lev­el that pro­duces full employ­ment. Some­times it can’t: even at a zero rate the econ­o­my remains depressed, so you need fis­cal pol­i­cy. But in nor­mal times the Fed and its coun­ter­parts should be aim­ing at the full-employ­ment inter­est rate.

    Wick­sel­lian analy­sis is an old­er tra­di­tion; it argues that there is at any giv­en time a “nat­ur­al” rate of inter­est in the sense that keep­ing rates below that lev­el leads to infla­tion, keep­ing them above it leads to defla­tion.

    I have always con­sid­ered these approach­es essen­tial­ly equiv­a­lent: the Wick­sel­lian nat­ur­al rate is the rate that would lead to full employ­ment in a Key­ne­sian mod­el. I have, in fact, treat­ed them as equiv­a­lent on a num­ber of occa­sions, e.g. here.

    Now, what about the BIS? It is argu­ing that cen­tral banks have con­sis­tent­ly kept rates too low for the past cou­ple of decades. But this is not a state­ment about the Wick­sel­lian nat­ur­al rate. After all, infla­tion is low­er now than it was 20 years ago.

    No, what the BIS is argu­ing is that there is some oth­er appro­pri­ate rate, defined as a rate suf­fi­cient­ly high to dis­cour­age bub­bles, and that cen­tral banks should tar­get this rate even though it is above the Wick­sel­lian nat­ur­al rate – or, equiv­a­lent­ly, that the econ­o­my should be kept per­ma­nent­ly depressed in order to curb the irra­tional exu­ber­ance of investors.

    It’s true that they don’t put it that way – prob­a­bly because the pol­i­cy rec­om­men­da­tion sounds out­ra­geous when you do. We can’t reg­u­late finance effec­tive­ly, so we have to accept a per­ma­nent slump instead? Real­ly? But that’s what it amounts to.

    Yes, “the econ­o­my should be kept per­ma­nent­ly depressed in order to curb the irra­tional exu­ber­ance of investors” by jack­ing up the inter­est rates glob­al­ly. That’s not what the BIS said, but that’s basi­cal­ly what the BIS said. And echoed by the BIS’s fel­low trav­el­ers:

    Bub­ble fears mean split opin­ions at ECB
    Matt Clinch | @mattclinch81
    Fri­day, 4 Jul 2014 | 2:53 AM ET

    The lat­est gov­ern­ing coun­cil meet­ing of the Euro­pean Cen­tral Bank (ECB) may have lacked the fire­works of the pre­vi­ous mon­th’s, but fol­low­ing Thurs­day’s rate deci­sion cen­tral bank watch­ers received an insight into the con­cerns that still per­sist for some of its mem­bers.

    ECB pol­i­cy­mak­er and Pres­i­dent of the Ger­man Bun­des­bank Jens Wei­d­mann warned on Thurs­day that the stim­u­lus poli­cies being deliv­ered by the ECB could — over time — lead to finan­cial risks such as exor­bi­tant gains on real estate mar­kets.

    The ECB left mon­e­tary pol­i­cy unchanged at Thurs­day’s meet­ing after it announced a raft of mea­sures in June to com­bat the euro zone’s growth-sap­ping dis­in­fla­tion and spur its recov­ery. ECB Pres­i­dent Mario Draghi sound­ed a dovish note, giv­ing fur­ther details on the bank’s new long-term lend­ing pro­gram for banks and also announced that the fre­quen­cy of the bank’s meet­ings would change to a six-week cycle from Jan­u­ary 2015.

    Ger­many has typ­i­cal­ly shown the most resis­tance to low inter­est rates and ultra-easy pol­i­cy as the eco­nom­ic pow­er­house has out­per­formed its neigh­bors and has con­stant con­cerns that infla­tion could hurt its exports. Wei­d­man­n’s tone seemed to change dur­ing the run-up to June’s ECB meet­ing, with even Ger­many’s infla­tion fig­ures fail­ing to gain any real trac­tion, but his lat­est com­ments seem to tal­ly with his long term view on the region’s recov­ery.

    Mean­while, anoth­er ECB board mem­ber Benoit Coeure remained adamant that gov­ern­ments should not view low inter­est rates as “an invi­ta­tion to aban­don the path of fis­cal pru­dence,” accord­ing to Reuters. Thus, Coeure was try­ing to direct­ly alle­vi­ate the con­cerns com­ing from Ger­man offi­cials.

    “Gov­ern­ments have to con­tin­ue on their path towards resilient pub­lic finances,” said Coeure, who was quot­ed by the news agency. “They should stick to the rules they have agreed under the new EU fis­cal frame­work and not stretch them to the point where the cred­i­bil­i­ty of this frame­work would be harmed.”


    Yes, it’s always time to raise rates and enforce a lit­tle dis­ci­pline on the pro­les who have had it too easy. And if “the econ­o­my should be kept per­ma­nent­ly depressed in order to curb the irra­tional exu­ber­ance of investors” for years and years to come, oh well, that’s just the price that has to be paid for finan­cial sta­bil­i­ty.

    And there’s a new twist to the rate hike fever that’s emerg­ing: The argu­ment that the loose mon­ey poli­cies of the post-cri­sis years were part of a good faith “sup­ply-side” effort to stim­u­late the econ­o­my, but it just was­n’t enough. And now there’s fear of bub­bles. So we had bet­ter give up on this “sup­ply-side” stim­u­lus idea and try some­thing else...involving a rate hike:

    Cen­tral Banks Seek­ing to Spur Sup­ply Side Mir­a­cle Come Up Short
    By Simon Kennedy Jul 8, 2014 5:05 AM CT

    Cen­tral bankers’ exper­i­ment with zero inter­est rates is falling short on the sup­ply side of their economies.

    Pro­duc­tiv­i­ty and labor-force growth are fail­ing to accel­er­ate despite poli­cies Bank of Eng­land Gov­er­nor­Mark Car­ney said should deliv­er the eco­nom­ic growth need­ed to gen­er­ate “sup­ply-side improve­ment.”

    “Weak­er sup­ply-side per­for­mance may damp­en the enthu­si­asm of devel­oped-mar­ket cen­tral banks to exper­i­ment with their growth/inflation trade-off to elic­it strong sup­ply,” JPMor­gan Chase & Co. econ­o­mists led by Bruce Kas­man said in a July 4 report.

    The argu­ment of pol­i­cy mak­ers was that a by-prod­uct of pro­mot­ing demand would be an expan­sion in their economies’ capac­i­ty. The the­o­ry went that if low inter­est rates boost­ed growth then that would encour­age the cor­po­rate invest­ment need­ed to lift pro­duc­tiv­i­ty or the hir­ing nec­es­sary to draw dis­grun­tled job­less back into labor mar­kets or turn part-time posi­tions into full-time ones.

    “Cen­tral banks can affect people’s deci­sions about how much to work and firms’ deci­sions about how much to invest,” Car­ney said in Decem­ber.

    Doing so should help damp infla­tion, hand­ing the mon­e­tary author­i­ties even more time to focus on aid­ing growth. The prob­lem is that if the sup­ply-side doesn’t improve, then prices risk accel­er­at­ing at a weak­er lev­el of expan­sion, requir­ing ear­li­er inter­est-rate increas­es.

    ‘Depressed Activ­i­ty’

    The plan doesn’t seem to be work­ing and a slide in sup­ply has “depressed activ­i­ty enor­mous­ly rel­a­tive to its pre-finan­cial cri­sis tra­jec­to­ry,” say the JPMor­gan econ­o­mists.


    Did you catch that trick? In the new meme, low inter­est rates and unortho­dox cen­tral bank mea­sures (the “sup­ply-side” tools) con­sti­tute a stim­u­lus! And, sure, these types of cen­tral bank­ing mea­sures are an impor­tant com­po­nent of any com­pre­hen­sive stim­u­lus pol­i­cy, but they’re just the mon­e­tary com­po­nent of a real stim­u­lus pol­i­cy required dur­ing a sig­nif­i­cant eco­nom­ic down­turn. The fis­cal com­po­nent (gov­ern­ment spend­ing) is just com­plete­ly left out of the analy­sis. A sim­ple rate cut might get the job done under more nor­mal cir­cum­stances, but not when the econ­o­my is try­ing to dodge a depres­sion. So the insane fis­cal aus­ter­i­ty of the Cameron gov­ern­ment in the UK, the mad­ness of the rest of the EU, and the years of GOP-forced aus­ter­i­ty in the US just does­n’t even fac­tor into this new “low rates = sup­ply-side stim­u­lus = bub­bles” meme.

    And while the arti­cle does­n’t say that con­cerned observers are active­ly call­ing for a rate hike, it does note that “Weak­er sup­ply-side per­for­mance may damp­en the enthu­si­asm of devel­oped-mar­ket cen­tral banks to exper­i­ment with their growth/inflation trade-off to elic­it strong sup­ply,” and “the prob­lem is that if the sup­ply-side doesn’t improve, then prices risk accel­er­at­ing at a weak­er lev­el of expan­sion, requir­ing ear­li­er inter­est-rate increas­es”.

    So we can be pret­ty sure that a rate hike is prob­a­bly the rec­om­mend­ed solu­tion to the fail­ure of sup­ply-side stim­u­lus and what a clever rhetor­i­cal trick: Accord­ing to the meme, rais­ing inter­est rates will stop that unfair and inef­fec­tive “sup­ply-side” stim­u­lus. The need for a real fis­cal stim­u­lus nev­er gets men­tioned. It’s a reminder that the tac­tic of choice for rolling back the New Deal isn’t an actu­al pub­lic debate. The pri­ma­ry tac­tic is ‘unper­son­ing’ good ideas.

    Posted by Pterrafractyl | July 8, 2014, 11:07 am
  12. Paul Krug­man has writ­ten a num­ber of recent posts about how the wealth­i­er you are, the greater an income hit you will take from low inter­est rates and quan­ti­ta­tive eas­ing poli­cies, and vice ver­sa:

    The New York Times
    The Con­science of a Lib­er­al

    Class and Mon­e­tary Pol­i­cy
    Paul Kru­man
    Jul 8 12:37 pm

    I’ve been writ­ing a lot late­ly about the con­tin­u­ing influ­ence of infla­tion hys­ter­ics despite their awe­some wrong­ness over the past five-plus years. One ques­tion that nat­u­ral­ly aris­es is whose inter­ests are served by this unjus­ti­fied influ­ence.

    You don’t want to be too crude about it. I don’t think there are a lot of clear-head­ed hard-mon­ey types who secret­ly admit to them­selves that their mod­els have failed and that the poli­cies they advo­cate could mire the econ­o­my in a per­ma­nent slump, but nonethe­less say what will sup­port their class inter­ests. Instead, inter­ests feed ide­ol­o­gy, and the ide­o­logues may then be sor­ta-kin­da sin­cere in their beliefs.

    Still, it is worth ask­ing who ben­e­fits from low infla­tion or defla­tion, and from high­er inter­est rates. And the answer, basi­cal­ly, is rich old men.

    On the rich part: Using SIPP data, we can look at the com­par­i­son between finan­cial assets and debt by house­hold net worth:
    [see chart]
    Only the top end have more finan­cial assets (as opposed to real assets like hous­ing) than they have nom­i­nal debt; so they’re much more like­ly to be hurt by mild infla­tion and be helped by defla­tion than the rest.

    Now, it’s true that some of these finan­cial assets are stocks, which are claims on real assets. If we only look at inter­est-bear­ing assets, even the top group has more lia­bil­i­ties than assets:
    [see chart]
    But the SIPP top isn’t very high; in 2007 you need­ed a net worth of more than $8 mil­lion just to be in the top 1 per­cent. And since the ratio of inter­est-bear­ing assets to debt is clear­ly ris­ing with wealth, we can be sure that the tru­ly wealthy are indeed in the cat­e­go­ry where they have more to lose than to gain by a rise in the price lev­el.

    I won’t give a chart by age, but it’s also clear­ly true that the elder­ly rich are espe­cial­ly like­ly to own lots of bonds and not have much debt.

    But what about the peo­ple I keep hear­ing about — strug­gling mid­dle-class retirees liv­ing on the inter­est on their CDs? Well, they exist, but there aren’t many of them and they’re less mid­dle-class than you think.

    Basi­cal­ly, infla­tion redis­trib­utes wealth down the scale of both wealth and age, while defla­tion does the reverse.

    And there­in lies the deep expla­na­tion for infla­tion hys­te­ria. The Fed’s efforts to boost the econ­o­my haven’t had the dis­as­trous effects the usu­al sus­pects pre­dict­ed, but it’s nonethe­less true that this is no pol­i­cy for rich old men (ROMs?). And play­ing to the para­noia of the ROMs is basi­cal­ly what the WSJ edi­to­r­i­al page, Fox News, etc. is all about.

    “Basi­cal­ly, infla­tion redis­trib­utes wealth down the scale of both wealth and age, while defla­tion does the reverse”. Yep. It’s an idea worth repeat­ing:

    The New York Times
    The Con­science of a Lib­er­al

    More on Class and Mon­e­tary Pol­i­cy
    Jul 9 12:43 pm

    A bit more on the ques­tion of whose inter­ests are served by hard-mon­ey ide­ol­o­gy: One way to iden­ti­fy what you might call the cred­i­tor class is to look at who derives a lot of income from inter­est. The Piket­ty-Saez tables cal­cu­late inter­est income as a share of total income for var­i­ous per­centiles of the income dis­tri­b­u­tion; I looked at the num­bers from 2007, when the cri­sis had not yet struck and returns were “nor­mal”. It looks like this:
    [see chart]
    So inter­est is a sig­nif­i­cant source of income only for peo­ple high in the dis­tri­b­u­tion; it gets real­ly big for peo­ple with very high incomes. These are the peo­ple who have a lot to lose if infla­tion erodes the val­ues of their assets, and a lot to gain if infla­tion comes in below expec­ta­tions or there is actu­al defla­tion.

    So hard-mon­ey ide­ol­o­gy is, to an impor­tant extent, a reflec­tion of class inter­ests — not so much the one per­cent as the 0.01 per­cent.

    This is one of those lessons that can­not be repeat­ed enough these days: infla­tion hys­te­ria just hap­pens to coin­cide with the eco­nom­ic inter­ests of the of the top 0.01%. Imag­ine that.

    But it’s also a key insight that might give us an idea of “what’s next?” for the GOP. Specif­i­cal­ly, what’s the next strat­e­gy by the oli­garchs to grab an even big­ger share of the pie now that we’ve had sev­er­al decades of Reaganomics and tax-cut fever. You can’t keep cut­ting tax­es for­ev­er, and that means that the GOP’s sig­na­ture “San­ta Claus” can’t keep return­ing year after year with­out peo­ple even­tu­al­ly grow­ing up and los­ing their belief in San­ta.

    So what’s new mantra going to be going for­ward now that “tax cuts, tax cuts, tax cuts!” can no longer real­ly be relied upon for elec­toral mag­ic? Well, if we look back at what the GOP stood for before it learned to believe in the tax cut San­ta, the par­ty was basi­cal­ly an infla­tion-pho­bic pro-aus­ter­i­ty Grinch:

    The New York Times
    The Ori­gin of Mod­ern Repub­li­can Fis­cal Pol­i­cy
    March 20, 2012 6:00 am

    Bruce Bartlett held senior pol­i­cy roles in the Rea­gan and George H.W. Bush admin­is­tra­tions and served on the staffs of Rep­re­sen­ta­tives Jack Kemp and Ron Paul. He is the author of “The Ben­e­fit and the Bur­den: Tax Reform — Why We Need It and What It Will Take.” He also talks with Cather­ine Ram­pell about this post on today’s Busi­ness Day Live video.

    In 1976, the jour­nal­ist Jude Wan­nis­ki wrote an essay, “Tax­es and a Two-San­ta The­o­ry,” lit­tle noticed at the time and vir­tu­al­ly unknown today, that put for­ward a the­o­ry that has had extra­or­di­nary influ­ence on the Repub­li­can Par­ty. Indeed, vir­tu­al­ly every­thing Repub­li­cans say about tax­es and spend­ing today echoes that the­o­ry.

    In 1974, Mr. Wan­nis­ki attend­ed a con­fer­ence spon­sored by the Amer­i­can Enter­prise Insti­tute in Wash­ing­ton. One speak­er was Robert Mundell, who had worked with the con­fer­ence orga­niz­er, Arthur Laf­fer.

    In his con­fer­ence paper, Pro­fes­sor Mundell first artic­u­lat­ed what came to be called “sup­ply-side eco­nom­ics.” He said the main­stream eco­nom­ic view, based on the the­o­ries of John May­nard Keynes, was all wrong. Key­ne­sians advo­cat­ed easy mon­ey to stim­u­late growth and a tight fis­cal pol­i­cy to fight infla­tion.

    This was the exact oppo­site of what was nec­es­sary, Pro­fes­sor Mundell said. He advo­cat­ed a tight mon­ey pol­i­cy to fight infla­tion and tax-rate reduc­tions to stim­u­late growth.

    Mr. Wan­nis­ki wrote a com­men­tary, ““It’s Time to Cut Tax­es,” about Pro­fes­sor Mundell’s view that was pub­lished in The Wall Street Jour­nal on Dec. 11, 1974. He wrote a much longer descrip­tion of sup­ply-side eco­nom­ics, “The Mundell-Laf­fer Hypoth­e­sis — A New View of the World,” that was pub­lished in the spring 1975 issue of The Pub­lic Inter­est, an aca­d­e­m­ic jour­nal edit­ed by Irv­ing Kris­tol.

    Mr. Wanniski’s most impor­tant con­tri­bu­tion to the emerg­ing sup­ply-side phi­los­o­phy, how­ev­er, was his “Two-San­tas” arti­cle, pub­lished in The Nation­al Observ­er on March 6, 1976. The Observ­er was a week­ly pub­lished by Dow Jones that fold­ed in 1977; con­se­quent­ly, it has been pret­ty much for­got­ten. (The arti­cle doesn’t even appear among the archives of Mr. Wanniski’s work at the Poly­co­nom­ics Web site; I retyped it myself from a reprint Jack Kemp used to hand out when I worked for him, and I post­ed it here.)

    The essence of the Wan­nis­ki argu­ment was that each polit­i­cal par­ty need­ed to be a dif­fer­ent sort of San­ta Claus. The Democ­rats were the spend­ing San­ta Claus, promis­ing more gov­ern­ment ben­e­fits. The Repub­li­cans should be the tax-cut San­ta Claus, he said.

    Many of the nation’s prob­lems in 1976 stemmed from the unwill­ing­ness of Repub­li­cans to play that prop­er role. Instead of being the tax-cut San­ta, they had become the par­ty of fis­cal aus­ter­i­ty. The bal­anced bud­get was the sine qua non of Repub­li­can eco­nom­ic pol­i­cy. This was both bad eco­nom­ics and bad pol­i­tics, Mr. Wan­nis­ki said.

    Instead of wor­ry­ing about the deficit, he said, Repub­li­cans should just cut tax­es and push for faster growth, which would make the debt more bear­able.

    Mr. Kris­tol, who was very well con­nect­ed to Repub­li­can lead­ers, quick­ly saw the polit­i­cal virtue in Mr. Wanniski’s the­o­ry. In the intro­duc­tion to his 1995 book, “Neo­con­ser­vatism: The Auto­bi­og­ra­phy of an Idea,” Mr. Kris­tol explained how it affect­ed his think­ing:

    I was not cer­tain of its eco­nom­ic mer­its but quick­ly saw its polit­i­cal pos­si­bil­i­ties. To refo­cus Repub­li­can con­ser­v­a­tive thought on the eco­nom­ics of growth rather than sim­ply on the eco­nom­ics of sta­bil­i­ty seemed to me very promis­ing. Repub­li­can eco­nom­ics was then in truth a dis­mal sci­ence, explain­ing to the pop­u­lace, par­ent-like, why the good things in life that they want­ed were all too expen­sive.

    Repub­li­cans didn’t imme­di­ate­ly embrace the two-San­ta the­o­ry, but began to after Ronald Reagan’s vic­to­ry in 1980, when he ran main­ly in favor of a big tax cut, with far less empha­sis on deficit reduc­tion. In office, Rea­gan pushed for domes­tic spend­ing cuts but also sharply raised spend­ing for favored pro­grams such as the mil­i­tary.

    Although the bud­get deficit rose to 6 per­cent of gross domes­tic prod­uct in 1983 from 2.7 per­cent in 1980, Rea­gan eas­i­ly won re-elec­tion in 1984. This fur­ther con­vinced Repub­li­cans that the deficit was a los­ing issue and only tax cuts mat­tered for polit­i­cal suc­cess.

    The final straw was George H.W. Bush’s sup­port for a tax increase in 1990 to reduce the deficit, which many Repub­li­cans say sealed his defeat in 1992 by Bill Clin­ton.

    Since then, feal­ty to tax cuts and lip ser­vice to deficits has become Repub­li­can dog­ma.

    Among its enforcers is Grover Norquist of Amer­i­cans for Tax Reform, which makes sup­port for tax cuts and oppo­si­tion to tax increas­es a lit­mus test for all Repub­li­cans.

    In The Boston Globe’s Sun­day mag­a­zine this week, Mr. Norquist explains that his famous tax pledge owes much to Mr. Wanniski’s two-San­ta the­o­ry. Indeed, Mr. Norquist said he thought of the same idea him­self when he was in the sev­enth grade.


    So if the tax cut San­ta crash­es his sleigh, what’s left? The infla­tion-pho­bic aus­ter­i­ty Grinch, of course. Sure, the Grinch may not have San­ta’s elec­toral appeal, but as Krug­man has shown, after three decades of tax cuts and “sup­ply-side” poli­cies, there is A LOT of mon­ey in a shrink­ing num­ber of hands, and that means A LOT of mon­ey can be made by the most pow­er­ful peo­ple on the plan­et sim­ply by hik­ing inter­est rates. That may not have elec­toral appeal, but it’s going to have quite a bit of per­son­al appeal to the kinds of peo­ple that suf­fer from a finan­cial mass hoard­ing syn­drome. So there’s a huge incen­tive out there to ensure that as, the rich get rich­er, inter­est rates go high­er too, whether it’s good for the larg­er econ­o­my or not. There’s just not enough room left for end­less tax cuts so the pub­lic loot­ing is going have to come from anoth­er source. That’s not a San­ta-friend­ly agen­da. But it is what it is. So with inter­est rates set to be below his­tor­i­cal aver­ages for the fore­see­able future and the ultra­wealthy con­tin­u­ing to increase cash hoards, the temp­ta­tion for the GOP to roll out a Grinch agen­da, regard­less of the eco­nom­ic or polit­i­cal costs, is only going to grow and grow and grow.

    Posted by Pterrafractyl | July 10, 2014, 2:06 pm
  13. Krug­man is con­tin­u­ing to explore the unspo­ken assump­tions that go into the think­ing at insti­tu­tions like the BIS. Well, not so much ‘think­ing’. The unspo­ken atti­tudes at insti­tu­tions like the BIS:

    The New York Time
    The Con­science of a Lib­er­al

    Liq­ui­da­tion­ism in the 21st Cen­tu­ry
    July 12, 2014 3:20 pm

    Brad DeLong pro­fess­es him­self con­fused:

    I con­fess that I do not under­stand the recent BIS Annu­al Report. I have tried–I have tried very hard–to wrap my mind around just what the BIS posi­tion is. But I have failed.

    Actu­al­ly, I don’t think it’s that hard. But you need to see this in terms of an atti­tude, not a coher­ent mod­el.

    At least since 2010 the BIS posi­tion has basi­cal­ly been the same as that of 1930s liq­ui­da­tion­ists like Schum­peter, who warned against any “arti­fi­cial stim­u­lus” that might leave the “work of depres­sions undone.” And in 2010–2011 it had an intel­lec­tu­al­ly coher­ent — fac­tu­al­ly wrong, but coher­ent — sto­ry under­ly­ing that posi­tion. The BIS basi­cal­ly claimed that mass unem­ploy­ment was the result of struc­tur­al mis­match — work­ers had the wrong skills, and/or were in the wrong sec­tors. And it there­fore claimed that easy mon­ey would lead to a rapid rise in infla­tion, despite the high lev­el of unem­ploy­ment.

    But it didn’t hap­pen. So you might have expect­ed the BIS to revise its pol­i­cy pre­scrip­tions. What it did, instead, how­ev­er, was to look for new jus­ti­fi­ca­tions for the same pre­scrip­tions. Part­ly this involved play­ing up the sup­posed dam­age low rates do to finan­cial sta­bil­i­ty. But the BIS has also gone in heav­i­ly for the notion that we’re suf­fer­ing from a bal­ance-sheet reces­sion, that is, that over-indebt­ed­ness on the part of part of the pri­vate sec­tor is exert­ing a per­sis­tent drag on the econ­o­my.

    That’s a rea­son­able sto­ry — it’s a mod­el I like myself. But the BIS either doesn’t under­stand that model’s impli­ca­tions, or doesn’t care.

    Through­out the annu­al report, bal­ance-sheet prob­lems are treat­ed as if they were equiv­a­lent to the kind of real struc­tur­al prob­lems the bank used to claim were at the root of our trou­bles. That is, they’re treat­ed as a good rea­son to accept a pro­tract­ed peri­od of high unem­ploy­ment as some­how nat­ur­al, and to reject arti­fi­cial stim­u­lus that might alle­vi­ate the pain.

    That, how­ev­er –as Irv­ing Fish­er could have told them! — is not at all the cor­rect impli­ca­tion to draw from a bal­ance-sheet view. On the con­trary, what bal­ance-sheet mod­els tell us is that left to itself, the process of delever­ag­ing pro­duces huge, unnec­es­sary costs: debtors are forced to cut back, but cred­i­tors have no com­pa­ra­ble incen­tive to spend more, so there is a per­sis­tent short­fall of demand that leads to great pain and waste. More­over, the depressed state of the econ­o­my can crip­ple the process of delever­ag­ing itself, both because debtors don’t have the income to pay down their debts and because falling infla­tion or defla­tion increas­es the real val­ue of debt rel­a­tive to expec­ta­tions.

    So the bal­ance-sheet view actu­al­ly makes a com­pelling case for activism — for fis­cal deficits to sup­port demand while the pri­vate sec­tor gets its bal­ance sheets in order, for mon­e­tary pol­i­cy to sup­port the fis­cal pol­i­cy, for a rise in infla­tion tar­gets both to encour­age who­ev­er isn’t debt-con­strained to spend more and to erode the real val­ue of the debt.

    The BIS, how­ev­er, wants gov­ern­ments as well as house­holds to retrench — I’m kind of sur­prised that it doesn’t also call for every­one to run a trade sur­plus; it wants inter­est rates raised right away; and — in a clear sign that it isn’t being coher­ent — it includes a box declar­ing that defla­tion isn’t so bad, after all. Irv­ing Fish­er wept.


    Part of what makes the liq­ui­da­tion­ist atti­tude of these major enti­ties like the BIS (but also the ECB and Bun­des­bank), so per­plex­ing is that the expressed pur­pose of the liq­ui­da­tion phase is sup­posed to be that it will induce the “struc­tur­al reforms” in lives of those that either wracked up too much debt or those employed in unprof­itable sec­tors of the econ­o­my. That’s the gen­er­al moral­i­ty play at work: those in debt need to pay it back by work­ing more for less and those that are employed in unprof­itable indus­tries need­ed to shift into prof­itable ones. That strat­e­gy rests entire­ly on the pri­vate sav­ings still left in the econ­o­my get­ting with the econ­o­my mov­ing again while simul­ta­ne­ous­ly destroy­ing the abil­i­ty to save by caus­ing the entire econ­o­my to go into a self-rein­forc­ing defla­tion­ary tail­spin. Because even the pre­vi­ous­ly prof­itable areas get ham­mered when the whole econ­o­my is forced to con­tract. And that means that the only sec­tor of the soci­ety with the real abil­i­ty to pull the econ­o­my out of the dol­drums are those that had enough in sav­ings before the cri­sis to with­stand the dam­age inflict­ed by the eco­nom­ic retrac­tion and can afford to risk some por­tion of their sav­ings on buy­ing invest­ments in an ail­ing econ­o­my at fire sale prices. In oth­er words, the BIS’s atti­tude is that only the rich get­ting rich­er can save us, but only after the poor get poor­er. And the rich­er the rich are (and the poor­er the rest of us are will­ing to be in exchange for employ­ment) the more they can save us by fur­ther enrich­ing them­selves. It’s a real­ly strange and unpleas­ant atti­tude.

    Posted by Pterrafractyl | July 12, 2014, 4:34 pm
  14. Here’s a few arti­cles relat­ing to the theme of Paul Krug­man’s recent series of posts on the propen­si­ty for the ‘The Aus­te­ri­ons’ of the world to come with with new rea­sons, any rea­son, to jus­ti­fy the same junk far right poli­cies, over and over, with a hike in inter­est rates being near the top of the list these days.

    First, here’s the lat­est from Angela Merkel about how the ongo­ing weak­ness in the aus­ter­i­ty-rav­aged euro­zone and new trou­bles brew­ing one of Por­tu­gal’s biggest banks(that appears to most­ly be due to man­age­ment issues). Guess what: the only jus­ti­fi­able response is a renewed com­mitt­ment to aus­ter­i­ty poli­cies:

    Merkel Warns of Euro Fragili­ty, Cit­ing Por­tu­gal Tur­moil
    By Bri­an Parkin Jul 12, 2014 6:56 AM CT

    Ger­man Chan­cel­lor Angela Merkel said tur­moil in glob­al mar­kets caused by a Por­tuguese bank under­scores the euro region’s fragili­ty and shows the need for gov­ern­ments to respect debt and deficit lim­its.

    Merkel’s warn­ing at a cam­paign ral­ly of her Chris­t­ian Demo­c­ra­t­ic Union today was a renewed mes­sage to France and Italy to refrain from soft­en­ing euro-area rules as she revived rhetoric rem­i­nis­cent of the peak of Europe’s debt cri­sis.

    While pol­i­cy mak­ers put “many rules” in place to pre­vent a repeat of the cri­sis, “if we now move away from those rules, for instance on the Sta­bil­i­ty and Growth Pact, on every­thing we’ve done to sta­bi­lize the euro, we could very quick­ly get into a sit­u­a­tion where we start founder­ing,” Merkel said in a speech in the east­ern Ger­man city of Jena.

    Ban­co Espir­i­to San­to SA, Portugal’s sec­ond-biggest bank by mar­ket val­ue, roiled mar­kets on July 10 after a par­ent com­pa­ny missed pay­ments on com­mer­cial paper. Euro­pean stocks and Por­tuguese bonds rebound­ed yes­ter­day after a sell­off, while the bank’s long-term cred­it rat­ing was low­ered to B+ from BB- by Stan­dard & Poor’s.

    “The exam­ple of a Por­tuguese bank showed us in the last few days how quick­ly the so-called mar­kets are roiled, how quick­ly uncer­tain­ty returns and how frag­ile the whole euro con­struc­tion still is,” Merkel said. She didn’t men­tion Espir­i­to San­to by name.


    And here’s an arti­cle about Bun­des­bank chief Jens Wei­d­mann talk­ing about upset he is that inter­est rates are too low for Ger­many and that “this phase of low inter­est rates, this phase of expan­sive mon­e­tary pol­i­cy, should not last longer than is absolute­ly nec­es­sary”:

    ECB inter­est rates too low for Ger­many, says Bun­des­bank chief

    FRANKFURT, July 12 Sat Jul 12, 2014 7:58am EDT

    (Reuters) — The Euro­pean Cen­tral Bank’s inter­est rates are too low for Ger­many, Bun­des­bank chief Jens Wei­d­mann said on Sat­ur­day, adding that ECB mon­e­tary pol­i­cy should remain expan­sive for no longer than absolute­ly nec­es­sary.

    Speak­ing at a Bun­des­bank open day for the pub­lic, Wei­d­mann not­ed that many savers in Ger­many were irri­tat­ed by low inter­est rates but said these were aimed at sup­port­ing invest­ment and con­sump­tion.

    The ECB cut inter­est rates to record lows last month as part of a pack­age of mea­sures to breathe life into a slug­gish euro zone econ­o­my, where infla­tion is run­ning far below the cen­tral bank’s tar­get and there is a dearth of cred­it to small­er firms.

    The Ger­man econ­o­my, Europe’s largest, has been out­per­form­ing oth­er coun­tries in the bloc, how­ev­er.

    “It is clear that mon­e­tary pol­i­cy, when seen from a Ger­man view­point, is too expan­sive for Ger­many, too loose,” Wei­d­mann told a crowd at the start of the open day. “If we pur­sued our own mon­e­tary pol­i­cy, which we don’t, it would look dif­fer­ent.”

    “But we are in a cur­ren­cy union,” he said. “That means that in our mon­e­tary pol­i­cy deci­sions, we must ori­en­tate our­selves to the whole cur­ren­cy union.”

    Repeat­ing a warn­ing he has made pre­vi­ous­ly about the risks of leav­ing pol­i­cy loose for too long, Wei­d­mann added: “This phase of low inter­est rates, this phase of expan­sive mon­e­tary pol­i­cy, should not last longer than is absolute­ly nec­es­sary.”


    And here’s an arti­cle that takes a look at the out­ra­geous, rag­ing Ger­man infla­tion that Wei­d­mann was fret­ting about:

    The Wall Street Jour­nal
    Ger­man Infla­tion Picks Up but Remains Low
    June Saw Annu­al Rate of 1%

    By Todd Buell
    July 11, 2014 2:38 a.m. ET

    FRANKFURT—The rate of infla­tion in Ger­many picked up in June, data from the coun­try’s sta­tis­tics office Desta­tis showed Fri­day, con­firm­ing the pre­lim­i­nary esti­mate pub­lished two weeks ago.

    In har­mo­nized Euro­pean terms, prices increased by 0.4% on the month in June and were up 1.0% on the year. This fol­lowed a rise of only 0.6% on the year in May.

    In nation­al terms, the sta­tis­tics office said that prices increased by 0.3% on the month in June and grew by 1.0% on the year. Ener­gy prices were down by 0.3% on an annu­al basis, while the index exclud­ing ener­gy prices grew by 1.2% on the year.

    The low infla­tion rate in one of Europe’s strongest economies high­lights the chal­lenge that the Euro­pean Cen­tral Bank faces in try­ing to revive infla­tion­ary pres­sure in the euro zone and sup­port eco­nom­ic growth.

    Infla­tion in the euro zone was only 0.5% in June, well below the ECB’s medi­um-term tar­get of just below 2%. Low infla­tion in Ger­many also makes it more dif­fi­cult for strug­gling coun­tries to bring prices and wages down to more com­pet­i­tive lev­els.

    This is a prob­lem that ECB Exec­u­tive Board mem­ber Sabine Laut­en­schläger high­light­ed in a recent speech. Ger­many’s “very low” infla­tion means that “prices and wages in the cri­sis coun­tries there­fore need to fall even more sharply in order to make up com­pet­i­tive dis­ad­van­tages. This in turn makes eco­nom­ic recov­ery in these coun­tries more dif­fi­cult and may there­fore exert fur­ther down­ward pres­sure on prices,” she said.


    1% infla­tion. That’s 1% high­er than it should be. Appar­ent­ly.

    Posted by Pterrafractyl | July 14, 2014, 7:16 pm
  15. This is just too per­fect: Krug­man found this expla­na­tion from Lar­ry Kud­low for why low inter­est rates did­n’t cause hyper­in­fla­tion and the col­lapse of the US econ­o­my. It’s a mir­a­cle! That’s expla­na­tion:

    The New York Times
    The Con­science of a Lib­er­al
    Ya Got­ta Have Faith
    Jul 16 10:41 am

    Jared Bern­stein sends me to Con­gres­sion­al tes­ti­mo­ny on the state of the econ­o­my – his and Lar­ry Kudlow’s (pdf). Jared’s remarks are, of course, sen­si­ble. Kudlow’s are … well, kind of amaz­ing.

    Kudlow’s side of the aisle has, of course, been pre­dict­ing run­away infla­tion and a debased dol­lar for around five and a half years. Kud­low, to his cred­it, has actu­al­ly admit­ted that his pre­dic­tion didn’t pan out, which is rare. But what has he learned from the expe­ri­ence?

    The zero Fed­er­al Reserve tar­get rate, at five-years-plus after the finan­cial melt­down, is too low and is con­tribut­ing to a dis­tor­tion of risk assess­ment in the finan­cial mar­kets. More­over, the Fed has relapsed into the nonex­is­tent Phillips-curve trade­off between infla­tion and unem­ploy­ment. Ms. Yellen’s dash­board of labor-mar­ket indi­ca­tors makes your head spin. That’s no way to con­duct pol­i­cy. More peo­ple work­ing does not cause infla­tion. Excess mon­ey and a deval­ued dol­lar do.

    Mirac­u­lous­ly, both actu­al and expect­ed infla­tion indi­ca­tors have stayed low.

    Hey, noth­ing wrong with my mod­el – it’s just that mir­a­cles hap­pen.

    Well, now we know the hand of God is prop­ping up the US econ­o­my and sav­ing us from our­selves while, pre­sum­ably, God waits for us to come to our sens­es and fol­low the advice of the peo­ple that have con­sis­tent­ly wrong every step of the way. So it’s sort of like a real­ly dif­fi­cult test of faith: imag­ine if Indi­ana Jones had to walk across the invis­i­ble bridge to retrieve the Holy Grail, but at the insis­tence of some­one that’s been com­plete­ly wrong about every­thing up until that point. It’s quite a leap of faith at that point, but, hey, God works in mys­te­ri­ous ways. Of course, this also means we now have to be on the look out for the influ­ence of the Dev­il in the econ­o­my now that we’ve received this divine rev­e­la­tion, although that should­n’t be as hard to spot.

    Posted by Pterrafractyl | July 16, 2014, 12:20 pm
  16. Just in case it was­n’t clear that Berlin is intent on destroy our under­stand­ing of how economies work, Jens Wei­d­mann and Wolf­gang Schauble just reit­er­at­ed the “you’re on your own!” mes­sage to the rest of the euro­zone along with the help­ful advice that the high­ly indebt­ed coun­tries that need to export their way out of the dol­drums (because inter­nal stim­u­lus is effec­tive­ly vetoed by Berlin) should­n’t wor­ry about the high val­ue of the euro. They just need more “struc­tur­al refors” (aus­ter­i­ty) and “greater com­pet­i­tive­ness” (more aus­ter­i­ty). For the aus­te­ri­ans, what does­n’t kill you can only make you stronger even if it nev­er stops try­ing to kill you:

    Ger­many urges euro zone to reform, not rely on ECB help
    Bun­des­bank chief Jens Wei­d­mann says its not up to ECB to solve euro zone cri­sis

    Fri, Jul 18, 2014, 14:33


    Germany’s finance min­is­ter and cen­tral bank chief on Fri­day pressed euro zone gov­ern­ments to pass reforms to shape up their economies rather than rely on the Euro­pean Cen­tral Bank for help.

    In Madrid, Bun­des­bank chief Jens Wei­d­mann said loose mon­e­tary pol­i­cy had “done its bit” to main­tain price sta­bil­i­ty in the euro zone and urged gov­ern­ments to “keep the ped­al to the met­al” on reforms and respect Europe’s fis­cal rules.

    In Paris, Ger­man finance min­is­ter Wolf­gang Schaeu­ble said mon­e­tary pol­i­cy could give gov­ern­ments time to reform but could not achieve every­thing, urg­ing them to focus on improv­ing eco­nom­ic com­pet­i­tive­ness rather than on the euro exchange rate.

    The Ger­mans’ dou­ble-bar­reled warn­ing shot for euro zone gov­ern­ments came against the back­drop of a debate among the bloc’s pol­i­cy­mak­ers about the flex­i­bil­i­ty of their fis­cal rules, and calls from French offi­cials for the ECB to weak­en the euro.

    “We should not over­es­ti­mate the capac­i­ty of cen­tral banks to solve the cri­sis. It is not up to us to solve the cri­sis,” said Mr Wei­d­mann, whose role as Germany’s cen­tral bank chief gives him a seat on the ECB’s pol­i­cy­mak­ing Gov­ern­ing Coun­cil.

    “The cri­sis is a struc­tur­al cri­sis and has to do with a loss of com­pet­i­tive­ness and has to do with indebt­ed­ness that is con­sid­ered unsus­tain­able in some coun­tries,” he added after giv­ing a speech at the Madrid stock exchange.

    Mr Wei­d­mann, the lead­ing hawk on the ECB Coun­cil, said an exces­sive­ly gen­er­ous inter­pre­ta­tion of lee­way in fis­cal rules enshrined in Europe’s Sta­bil­i­ty and Growth Pact would under­mine its cred­i­bil­i­ty.

    Ital­ian prime min­is­ter Mat­teo Ren­zi, who has led calls to move from aus­ter­i­ty to expan­sion, said ear­li­er this month the Bun­des­bank should not com­ment on Ital­ian gov­ern­ment poli­cies.

    Mr Wei­d­mann defend­ed his right to call for struc­tur­al reforms and bud­get con­sol­i­da­tion, say­ing the ECB had bought gov­ern­ments time to act and that sus­tain­able pub­lic finances play a key role in but­tress­ing mon­e­tary pol­i­cy aimed at keep­ing prices sta­ble.

    Mr Schaeu­ble echoed the Bun­des­bank chief’s call for coun­tries to reform their economies to make them more com­pet­i­tive.

    “Mon­e­tary pol­i­cy can give time to put reforms in place but can­not do every­thing,” he told a con­fer­ence in Paris.

    Mr Schaeu­ble also pushed back at French pol­i­cy­mak­ers and busi­ness­es who have com­plained about the strength of the euro and asked for the EU and the ECB to do more to weak­en it. Ger­many has insist­ed on the inde­pen­dence of the ECB.

    A strong euro has its advan­tages, Mr Schaeu­ble said, adding: “We have to con­cen­trate on whether the Euro­pean econ­o­my is com­pet­i­tive and then we will have an appro­pri­ate exchange rate.”

    Mr Wei­d­mann cit­ed a litany of long-term dan­gers from easy mon­ey after the ECB cut inter­est rates to record lows last month as part of a pack­age of mea­sures to breathe life into a slug­gish euro zone econ­o­my.


    The Bun­des­bank chief said the Eurosys­tem of euro zone cen­tral banks — the ECB and its stake­hold­ers — must not give gov­ern­ments an easy ride by leav­ing inter­est rates low­er than need­ed to deliv­er sta­ble prices.

    “So it is par­tic­u­lar­ly impor­tant to make it quite clear now that the Eurosys­tem will not put off a nec­es­sary increase in cen­tral bank inter­est rates out of con­sid­er­a­tion for pub­lic finances,” Mr Wei­d­mann said.


    Yes, accord­ing to Jens Wei­d­mann, “the cri­sis is a struc­tur­al cri­sis and has to do with a loss of com­pet­i­tive­ness and has to do with indebt­ed­ness that is con­sid­ered unsus­tain­able in some coun­tries,” and yet the high val­ue of the euro, some­thing that exac­er­bates both export com­pet­i­tive­ness AND the debt load, is just this triv­i­al­i­ty that the ECB can­not and should not address. And just to top it off, Wei­d­mann also points out that the ECB can­not fac­tor in pub­lic finances when mak­ing it’s deci­sions to hike inter­est rates. If the road to hell is paved with good inten­tions, where does the road paved with bad inten­tions go? We’ll find out!

    Posted by Pterrafractyl | July 18, 2014, 11:08 am
  17. One of the recent trends in macro­eco­nom­ic pol­i­cy are­nas is to use the risk of asset bub­bles result­ing from loose mon­e­tary poli­cies as an argu­ment for tight­en­ing those poli­cies (via hik­ing inter­est rates, etc). With the ECB con­sid­er­ing a quan­ti­ta­tive eas­ing (QE) pol­i­cy cen­tered around buy­ing pri­vate debt-based asset-backed secu­ri­ties (ABS), this anti-bub­ble argu­ment has been used with greater fre­quen­cy in the euro­zone area of late. And it’s under­stand­able giv­en the role bub­bles of played in his­toric finan­cial calami­ties. But it’s an argu­ment that’s also used as an excuse to imple­ment poli­cies (like hik­ing inter­est rates and con­tin­u­ing aus­ter­i­ty) that will just make things worse imme­di­ate­ly with no real short or long-term ben­e­fits.

    Moody’s just released an opin­ion com­par­ing the ECB’s ABS QE plan vs a pol­i­cy that tar­gets low­er­ing the val­ue of the euro as the pri­ma­ry simu­lus (which would increase exports and ease the debt load for the whole euro­zone). Not sur­pris­ing­ly, Moody’s found that a pol­i­cy of low­er­ing the euro would prob­a­bly be prefer­able to asset-based QE that the ECB could take to help the euro­zone econ­o­my and ward off the defla­tion drag­ons. And Moody’s is quite pos­si­bly cor­rect about that, although there’s no sug­ges­tion of what types of poli­cies would actu­al­ly result in a low­er euro that don’t involve QE or some sort of ECB open mar­ket oper­a­tions. Poli­cies like a good old fash­ioned gov­ern­ment spend­ing spree stim­u­lus that dri­ves down the val­ue of a cur­ren­cy while simul­ta­ne­ous­ly mak­ing much need­ed invest­ments in pub­lic infra­struc­ture and gen­er­al qual­i­ty of life improve­ments and jump start­ing the econ­o­my out of a deep, defla­tion­ary reces­sion are nev­er to be men­tioned.

    Sig­nif­i­cant gov­ern­ment stim­u­lus isn’t always the opti­mal pol­i­cy solu­tion, but in the case of the cur­rent eur­zone sit­u­a­tion you almost could­n’t come up with a bet­ter solu­tion to the sit­u­a­tion than a big gov­ern­ment spend­ing spree across the board. The “periph­ery” nations and the “core”. They all need more infla­tion. And yet it’s either QE (which can have an infla­tion­ary impact on the kinds of assets that real­ly rish peo­ple buy) or noth­ing or austery are the only options real­ly dis­cussed. A mean­ing­ful gov­ern­ment stim­u­lus is nev­er ever to be dis­cussed with­in the con­text of the EU and espe­cial­ly the euro­zone. Not in this new nor­mal. You jump start the econ­o­my, the cur­ren­cy drops, and the over­all debt load eas­es. It is nev­er to be dis­cussed:

    Irish Inde­pen­dent
    Weak euro will do more to lift econ­o­my than ‘QE’ — Moody’s
    Don­al O’Dono­van

    Pub­lished 19/07/2014|00:00

    Quan­ti­ta­tive Eas­ing, or loose mon­ey poli­cies, would have only a mild­ly pos­i­tive effect on Ire­land because asset prices and bonds are not under­val­ued, accord­ing to Moody’s.

    The Euro­pean Cen­tral Bank (ECB) is active­ly con­sid­er­ing loos­en­ing mon­e­tary pol­i­cy which usu­al­ly dri­ves up asset prices, to help lift the euro area out of a slump, but the end effect could be mild and comes with risk, Moody’s said.

    A weak­er euro and greater com­mu­ni­ca­tion from the ECB are like­ly to be more effec­tive tools in efforts to boost the econ­o­my across the euro area, the report says.

    Irish shares are among the most expen­sive in the euro area, based on a price to earn­ings mea­sure, and not under­val­ued, while high bond prices for investors mean the cost of Gov­ern­ment bor­row­ing is down below pre-crash lev­els, the report said.

    ECB Pres­i­dent Mario Draghi is con­sid­er­ing mak­ing large-scale asset pur­chas­es, a pol­i­cy that pumps cash into the econ­o­my, to fight the ultra-low infla­tion that is now seen as a sig­nif­i­cant eco­nom­ic threat.

    “The impact of a QE pro­gramme by the ECB would be slight­ly cred­it pos­i­tive for euro area sov­er­eigns, with favourable, albeit lim­it­ed, effects on two of the four rat­ing fac­tors that we use to assess sov­er­eign cred­it­wor­thi­ness,” Moody’s said.

    But, pump­ing cred­it into the econ­o­my could dis­tort mar­kets and cre­ate a “moral haz­ard” if coun­tries, banks and cor­po­ra­tions used the pol­i­cy to avoid restruc­tur­ing over indebt­ed bal­ance sheets. It would be dif­fi­cult for the ECB to tai­lor QE to achieve spe­cif­ic tar­gets.

    As you can see, the mod­ern macro­eco­nom­ic debate around the ECB and the euro­zone mem­bers’ eco­nom­ic poli­cies resem­bles a zom­bie-unper­son hybrid that looks some­thing like Mil­ton Fried­man and Rand Paul.

    Posted by Pterrafractyl | July 19, 2014, 8:33 pm
  18. Here’s an arti­cle explor­ing to the rea­sons for the euro’s rel­a­tive­ly high val­ue despite its ongo­ing eco­nom­ic malaise. The rea­son hint­ed at in the arti­cle? Draghi’s 2012 com­mit­ment to “do what­ev­er it takes” to save the euro­zone must be at fault:

    How the ‘Teflon euro’ has stayed resilient
    Sara Eisen | @saraeisen

    You’ve heard the euro’s nick­names: “Teflon euro,” “safe haven euro,” and “Draghi’s euro.”

    They’re refer­ring to the per­sis­tent strength of the cur­ren­cy in the face of a slew of obsta­cles.

    First, the euro zone faces stag­nant or near-zero growth and an 11.6 per­cent unem­ploy­ment rate—still close to the 12 per­cent post-cri­sis peak.

    Con­sumer prices are bare­ly ris­ing: They’re up only 0.5 per­cent, the low­est lev­el in more than four years, and it’s the ninth month where infla­tion has been run­ning below 1 per­cent.

    Then there’s the bank­ing sys­tem, with poten­tial shocks lurk­ing, such as a finan­cial­ly trou­bled par­ent com­pa­ny of one of Por­tu­gal’s biggest banks.

    Even with the Euro­pean Cen­tral Bank’s extra­or­di­nary easy policy—including the recent­ly unveiled unprece­dent­ed neg­a­tive deposit rates, near-zero inter­est rates and a fresh round of low-cost loans to pump up lending—the bank­ing sys­tem is frag­ile.

    While the euro has fall­en recent­ly from its May highs of 1.39 to 1.35, a drop of near­ly 3 per­cent, it’s still trad­ing above its his­tor­i­cal aver­age. Mar­ket par­tic­i­pants, econ­o­mists and pol­i­cy­mak­ers still find them­selves scratch­ing their heads about the remark­able resilience of the cur­ren­cy in the face of so many fac­tors build­ing against it.

    Fur­ther­more, when one of the world’s most pow­er­ful cen­tral bankers wants a weak­er cur­ren­cy, it’s usu­al­ly a sure bet that the cur­ren­cy will weak­en.

    And ECB Pres­i­dent Mario Draghi has made it clear that’s part of what he has in mind.

    “In the present con­tact, an appre­ci­at­ed exchange rate is a risk to the sus­tain­abil­i­ty of the recov­ery,” Draghi told the Euro­pean Par­lia­men­t’s Com­mit­tee on Eco­nom­ic and Mon­e­tary Affairs in Stras­bourg ear­li­er this month.

    So why does the cur­ren­cy remain stub­born­ly stronger?

    Ask a Euro­pean politi­cian and you’ll hear that it’s the unwa­ver­ing com­mit­ment to Euro­pean inte­gra­tion and the stead­fast polit­i­cal sup­port and devo­tion to the Euro­pean mon­e­tary union.

    Mar­ket pros, how­ev­er, point to the ECB.

    A stronger euro start­ed with the mag­ic words uttered by Draghi in July 2012, when he vowed to do “what­ev­er it takes” to save the cur­ren­cy.

    It bot­tomed on that day at 1.20, has risen to near­ly 1.40 by March 2014.


    That marked the begin­ning of the para­dox of the ECB.

    That is, when Draghi promised to do what­ev­er it takes—and then fol­lowed it up with eas­ing mea­sures to pump up Europe’s econ­o­my (think LTRO, rate cuts)—not only did the euro bot­tom, but so did Euro­pean stocks and bonds. In fact, with the promise of easy pol­i­cy and cheap mon­ey, those assets became very attrac­tive.

    Mon­ey flowed in.

    Euro­pean stocks marched almost 50 per­cent high­er from the day of the Draghi speech, hit­ting mul­ti­year highs by the end of last month. Greek stocks leapt 100 per­cent, and Span­ish stocks jumped 87 per­cent.

    Euro­pean periph­er­al bonds staged an even more remark­able come­back.

    In Spain, the 10-year bond yield fell from 7.6 per­cent to below 2.6 per­cent now. Sim­i­lar ral­lies pushed rates low­er across Italy, Por­tu­gal, Greece, and Ire­land as investors pounced on periph­er­al debt.

    Here­in lies the ECB para­dox.

    Accord­ing to Black­Rock chief invest­ment strate­gist Jef­frey Rosen­berg, “when they take actions to sta­bi­lize the euro zone (do what­ev­er it takes), and that entails zero inter­est rates and flood­ing mar­kets with liq­uid­i­ty and nar­row­ing the periph­er­al to core coun­try inter­est rate differentials…that might sug­gest a low­er val­ue of the euro.” How­ev­er, Rosen­berg con­tin­ues “that brings more demand for euro-denom­i­nat­ed assets and hence more demand for the euro.”

    That idea turns the tra­di­tion­al think­ing of what dri­ves cur­ren­cies on its head.

    “The net impact of the ECB’s actions are ambigu­ous on the val­ue of the euro,” said Rosen­berg.

    In oth­er words, inter­est rate dif­fer­en­tials typ­i­cal­ly serve as a pri­ma­ry dri­ver of cur­ren­cy val­ues. That explains why the con­sen­sus view going into 2014 was for the euro to weak­en against the dol­lar because the Fed is in tight­en­ing mode while the ECB is firm­ly in eas­ing mode. And his­tor­i­cal­ly, cur­ren­cies do tend to fol­low rel­a­tive paths of inter­est rates.

    So how do you explain the stronger euro ver­sus dol­lar ear­li­er in the year (from 1.35 to 1.39) when the ECB was rais­ing hopes of easy pol­i­cy to fight infla­tion and boost growth?

    Strate­gists say you can part­ly point to those ris­ing Euro­pean stocks and bonds, dri­ven by easy poli­cies of the ECB. But there was an added fac­tor behind the cur­ren­cy’s move: U.S. Trea­sury yields were falling as frigid win­ter weath­er took a bite out of U.S. eco­nom­ic growth and pushed back expec­ta­tions of Fed tight­en­ing, boost­ing the dol­lar and fur­ther weak­en­ing the euro.

    So while yields in the U.S. slumped to mul­ti­month lows and pulled down the dol­lar, dovish easy ECB pol­i­cy at the same time was boost­ing Euro­pean assets and there­fore the euro.

    Accord­ing to David Woo, head of glob­al rates and cur­ren­cies strat­e­gy at Bank of Amer­i­ca Mer­rill Lynch, “with the euro area run­ning a cur­rent account sur­plus, a pre­con­di­tion for a low­er euro is increased pur­chas­es of for­eign secu­ri­ties by Euro­pean investors. So far this year, Euro­pean investors have been hap­py to stay close to home—European fixed income assets have done very well this year, espe­cial­ly on a volatil­i­ty-adjust­ed basis.”

    At the same time, “the con­sen­sus remains that a sig­nif­i­cant sell­off in U.S. Trea­surys has yet to come.”

    Bot­tom line:

    “By doing what­ev­er it takes to sup­port the euro zone, the ECB takes the tail risk out of the equa­tion,” said Rosen­berg, refer­ring to a poten­tial euro zone col­lapse and breakup.

    “That strength­ens the euro. And that impact off­sets the inter­est rate poli­cies that may lead to a weak­er euro. … In this line of think­ing, cur­ren­cies are not an asset class by them­selves. Rather they are a means to own­ing an asset class, whether it be stocks, bonds, real assets, etc.”

    The next path for the euro could be deter­mined by whether the vora­cious demand holds up for Euro­pean stocks and bonds.

    And watch whether U.S. Trea­sury yields stay his­tor­i­cal­ly low or start to creep high­er on ris­ing infla­tion expec­ta­tions, high­er inter­est rates or a bet­ter econ­o­my.

    There’s also the third fac­tor to keep in mind—big mon­ey loves the euro.


    Huh. So accord­ing to the mar­ket experts in this report, the euro’s strange­ly per­sis­tent strength is pri­mar­i­ly due to the psy­cho­log­i­cal impact from the ECB declar­ing that it would­n’t sim­ply allow the sov­er­eign bond mar­kets to melt­down while the euro­zone implodes even though Draghi has also talked about want­i­ng to see the euro go low­er. Also, “big mon­ey” just loves the euro (imag­ine that). So, as long as the ECB isn’t casu­al about the prospect of a euro­zone melt­down and big mon­ey still loves the euro (despite weak­ness­es in the mem­ber economies), the euro will stay strong? That’s not exact­ly a hope­ful sce­nario. Let’s hope it’s not accu­rate either.

    And in oth­er news, Wolf­gang Schauble reit­er­at­ed his views on the mer­its of the ECB doing any­thing to low­er the val­ue of the euro:

    Ger­many’s Schaeu­ble warns ECB on asset bub­bles

    July 20, 2014 1:36 PM

    Berlin (AFP) — Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble warned the Euro­pean Cen­tral Bank on Sun­day that a loose mon­e­tary pol­i­cy runs the risk of caus­ing asset bub­bles.

    “We can’t just leave the avoid­ance of bub­bles to gov­ern­ment super­vi­sion,” he told the Han­dels­blatt busi­ness dai­ly. “Cen­tral banks also need to keep an eye on that in their deci­sions about the mon­ey sup­ply.”

    Schaeu­ble, speak­ing in a joint inter­view with his French coun­ter­part Michel Sapin, said that “in parts of the prop­er­ty mar­ket there are signs that bub­bles are form­ing”, reit­er­at­ing ear­li­er warn­ings.

    But he reject­ed a French pro­pos­al for a tar­get­ed depre­ci­a­tion of the euro in pre-release extracts of the inter­view, which is due to be pub­lished in full on Mon­day.

    “I do not believe in polit­i­cal dis­cus­sions about the exchange rate, which is set by the mar­ket,” he said, adding that gov­ern­ment inter­ven­tion had “nev­er led to a good result”.

    Schaeu­ble backed the Euro­pean bank­ing union as a big step in the right direc­tion and said he did not fore­see major prob­lems in the “stress tests” of the bloc’s bank­ing sec­tor.


    If, accord­ing to observers, Draghi’s mere promise to “do what­ev­er it takes” back in 2012 has propped up the euro for the past two years, you have to won­der about the impact of end­less state­ments from Berlin like “I do not believe in polit­i­cal dis­cus­sions about the exchange rate, which is set by the market...[government inter­ven­tion has] nev­er led to a good result”.

    Posted by Pterrafractyl | July 22, 2014, 10:41 am
  19. See no labels, hear no labels, speak no labels...endorse GOP pro-aus­ter­i­ty lunatics. It’s the ‘No Labels’ way:

    No Labels? No results? No prob­lem.
    How a bipar­ti­san group that hoped to make Wash­ing­ton more func­tion­al became yet anoth­er cog in the D.C. mon­ey­mak­ing machine — and infu­ri­at­ed Democ­rats
    By Mered­ith Shin­er, Yahoo News 7/28/2014

    In 2010, a group of polit­i­cal vet­er­ans who said they were tired of the extreme par­ti­san­ship par­a­lyz­ing Wash­ing­ton cre­at­ed an orga­ni­za­tion to advance their new cause. The found­ing mis­sion of No Labels was “to move Amer­i­ca from the old pol­i­tics of point scor­ing toward a new pol­i­tics of prob­lem-solv­ing.” Through a com­bi­na­tion of con­gres­sion­al engage­ment in Wash­ing­ton and grass roots orga­niz­ing around the coun­try, No Labels’ lofty aspi­ra­tion was to pro­mote bipar­ti­san­ship by pro­vid­ing polit­i­cal cov­er for law­mak­ers to work across the aisle and cre­at­ing incen­tives to slow­ly erode the cul­ture of polar­iza­tion and intran­si­gence in Con­gress. But four years lat­er, it appears the group designed to com­bat the insid­i­ous habits of the Wash­ing­ton estab­lish­ment has been engulfed by it.

    Like many oth­er out­side polit­i­cal groups, No Labels spends a dis­pro­por­tion­ate part of its bud­get main­tain­ing and pro­mot­ing its own orga­ni­za­tion, try­ing to keep its pro­file high while ensur­ing a steady flow of fundrais­ing dol­lars, whose donors they keep secret, in a clut­tered non­prof­it envi­ron­ment. As part of its efforts to gain legit­i­ma­cy and grow its mem­ber­ship, No Labels has also occa­sion­al­ly wad­ed into con­gres­sion­al con­tests in ways that have raised sus­pi­cions among Democ­rats about the group’s own com­mit­ment to bipar­ti­san­ship.

    And though No Labels has posi­tioned itself as a war­rior against grid­lock, an inter­nal doc­u­ment obtained by Yahoo News sug­gests the group is bank­ing on more polit­i­cal dys­func­tion in an attempt to find “oppor­tu­ni­ty” and rel­e­vance for itself.

    The con­fi­den­tial doc­u­ment, dis­trib­uted at No Labels’ May exec­u­tive board meet­ing, out­lines a “break through strat­e­gy” for the group, which despite rais­ing mil­lions and a buzzy-for-cable-news-talk launch, has strug­gled to find a foothold on the cam­paign trail or in the halls of Con­gress. The first point in that strat­e­gy is a “bal­ance of pow­er shift in the U.S. Sen­ate,” an awk­ward posi­tion to out­line, if not advo­cate, giv­en No Labels’ aim of bipar­ti­san­ship and that one of the group’s co-chairs, Demo­c­ra­t­ic Sen­a­tor Joe Manchin of West Vir­ginia, cur­rent­ly sits in the major­i­ty cau­cus.

    “Should the bal­ance of pow­er in the U.S. Sen­ate flip fol­low­ing the 2014 midterm elec­tions and Repub­li­cans gain con­trol, No Labels sees an oppor­tu­ni­ty to bridge the gap between Con­gress and the White House,” the doc­u­ment reads in its “Break Through Strat­e­gy” sec­tion. “With Repub­li­cans hold­ing con­trol of both cham­bers in Con­gress and a Demo­c­rat in the White House, the like­li­hood of grid­lock will be high­er than ever before.

    “We have already begun back door con­ver­sa­tions with Sen­ate lead­ers to dis­cuss this increas­ing­ly like­ly sce­nario,” the doc­u­ment con­tin­ues.

    This pri­vate­ly stat­ed posi­tion exac­er­bates an already pub­licly spoiled rela­tion­ship with Sen­ate Democ­rats, who are still fum­ing from an April inci­dent in which the group sup­port­ed con­ser­v­a­tive Repub­li­can Cory Gard­ner in Col­orado over Manchin’s col­league, incum­bent Demo­c­rat Mark Udall. The endorse­ment, which No Labels lat­er tried to clar­i­fy by say­ing that any can­di­date could be backed by the group if they just agreed to be a mem­ber, was tout­ed by Gard­ner in press releas­es and caused the few Sen­ate Democ­rats involved with the group to threat­en to pull their mem­ber­ship, accord­ing to Demo­c­ra­t­ic sources.

    “It’s wrong to read the memo sug­gest­ing there is a greater oppor­tu­ni­ty com­ing out of Repub­li­can [vs.] Demo­c­ra­t­ic lead­er­ship in the Sen­ate. We are a bipar­ti­san group — whose prob­lem-solv­ing seal is car­ried by both Democ­rats and Repub­li­cans,” No Labels co-founder and chief oper­at­ing offi­cer Nan­cy Jacob­son said. “We are hap­py to work with who­ev­er the vot­ers choose. The memo was just a ‘what if’ doc­u­ment prepar­ing if there was a change.”

    But to open­ly dis­cuss its role in a future, hypo­thet­i­cal Repub­li­can-led Con­gress is espe­cial­ly unusu­al, giv­en that of the 10 sen­a­tors who belong to No Labels, three — Mark Begich of Alas­ka, Mark Pry­or of Arkansas and Mark Warn­er of Vir­ginia — are embroiled in dif­fi­cult re-elec­tion races and might have to lose in order for the GOP to take back the Sen­ate. Asked about “back door con­ver­sa­tions” with Sen­ate lead­er­ship cit­ed in the memo by the group, aides to the five Sen­ate GOP lead­ers told Yahoo News that their boss­es have not dis­cussed a Repub­li­can major­i­ty with No Labels, though No. 2 Repub­li­can John Cornyn of Texas did attend a May cam­paign event with the group in New York City and No. 3 Repub­li­can John Thune talked tax­es and Oba­macare in a meet­ing last month.

    Though a flip of the Sen­ate major­i­ty is a key expec­ta­tion in the group’s strat­e­gy, offi­cials at No Labels told Yahoo News they are more focused on the 2016 pres­i­den­tial race than the 2014 midterm elec­tions. The group’s mem­o­ran­dum briefly addressed its “role” in the midterms in a bul­let point that indi­cat­ed No Labels pro­vid­ed $300,000 “in finan­cial sup­port through direct can­di­date con­tri­bu­tions” at a May forum.

    The group failed to carve out much of a niche for itself in the 2012 pres­i­den­tial con­test. Its back­ing of a 12-point “Make Con­gress Work!” action plan and pro­mo­tion of a bill that would “with­hold con­gres­sion­al pay if mem­bers of Con­gress fail to pass spend­ing bills and the bud­get on time” went nowhere. Since then, its focus on fos­ter­ing bipar­ti­san­ship in Con­gress has not gone far, except to the extent that there is now bipar­ti­san stag­na­tion and grid­lock so severe some mem­bers report becom­ing depressed and hat­ing their jobs. Mem­bers of Con­gress seem all too eager to accept the man­tle of civic respon­si­bil­i­ty offered by No Labels, only to return to par­ti­san war­fare.

    In July 2013, No Labels held a ral­ly where law­mak­ers of both par­ties crowd­ed a park out­side the Capi­tol, stood on a grand­stand and one by one declared them­selves “prob­lem solvers.” The gov­ern­ment shut down a few months lat­er as Repub­li­cans, includ­ing some who appeared on that stage, refused to allow a bud­get to pass unless it defund­ed the president’s health care law.

    Even in its own May doc­u­ment, No Labels claimed only one leg­isla­tive vic­to­ry: a bill that passed out of the House Ener­gy and Com­merce Com­mit­tee by voice vote, but which nev­er came up for a vote in the House or became law.

    It turns out that for a group that con­sis­tent­ly bills itself as above the par­ti­san pol­i­tics and the cor­ro­sive cul­ture of Wash­ing­ton, No Labels has come to exem­pli­fy some of the most loathed qual­i­ties of the town’s many inter­est groups.

    Much of the group’s bud­get goes toward sus­tain­ing or pro­mot­ing itself. Accord­ing to No Labels’ con­fi­den­tial doc­u­ment, the group employed 22 paid staffers and eight con­sul­tants as of May. Of its pro­ject­ed $4.5 mil­lion bud­get for 2014, only 4 per­cent — or $180,000 — of spend­ing was slot­ted for “Con­gres­sion­al Rela­tions.” By con­trast, admin­is­tra­tive and oper­a­tional expens­es got $1.035 mil­lion over the same time peri­od. Anoth­er 5 per­cent was set for trav­el. A fur­ther 30 per­cent ($1.35 mil­lion) was ear­marked for dig­i­tal growth and press, and 14 per­cent for fundrais­ing.

    It’s unclear how the group’s bud­get broke down in pre­vi­ous years, as No Labels is not oblig­at­ed to ful­ly dis­close its finances or donors because of its 501(c)(4) tax-exempt sta­tus. But many of the organization’s biggest detrac­tors ques­tion why a group advo­cat­ing for a bet­ter Wash­ing­ton would embrace the same prac­tices as the groups prof­it­ing from divid­ing it.

    Out­side groups have become a cot­tage indus­try inside the Belt­way, where they pay lush salaries to staffers and con­sul­tants while talk­ing loud­ly and doing lit­tle to achieve their mis­sions in this age of leg­isla­tive sta­sis.

    “The real­i­ty is that No Labels is a front group to raise mon­ey and pay con­sul­tants,” said a senior Sen­ate Demo­c­ra­t­ic aide, who spoke on the con­di­tion of anonymi­ty. “They should release a full dis­clo­sure of not only how they’re rais­ing their mon­ey but also how they’re spend­ing it.”

    When asked whether No Labels should dis­close its donors when fight­ing for a less divi­sive polit­i­cal sys­tem, Jacob­son said, “No — In our hyper­par­ti­san world, the con­cern might well be the oppo­site,” sug­gest­ing that in a polit­i­cal atmos­phere where most big donors spend mon­ey to boost one side over anoth­er, donors who choose to pro­mote bipar­ti­san­ship need greater pro­tec­tion.

    No Labels has raised approx­i­mate­ly $12 mil­lion since 2010, with anoth­er $4 mil­lion pledged for 2014, accord­ing to its pri­vate finan­cial sum­ma­ry.

    And though it’s impos­si­ble to tell the exact break­down of high-dol­lar ver­sus grass-roots donors to the group, a sep­a­rate series of mem­o­ran­dums obtained by Yahoo News list­ed near­ly a dozen con­trib­u­tors who have cut six-fig­ure checks. In addi­tion to the few big donors the group already had dis­cussed pub­licly, this pre­vi­ous­ly unknown list of donors paints a pic­ture of a group that receives a sub­stan­tial chunk of its finan­cial back­ing from a small num­ber of peo­ple.

    In a memo to poten­tial inter­est­ed par­ties, dat­ed April 29, 2014, No Labels dis­closed five $500,000 donors, three $100,000 “donors who are con­sid­er­ing mov­ing to the $500K spon­sor­ship lev­el” and three donors whose con­tri­bu­tions were not spec­i­fied between the two lev­els. Among those donors are a for­mer top Enron employ­ee, John Arnold, and his wife; Alfred Taub­man, a real estate mag­nate who spent 10 months in prison for antitrust vio­la­tions, and his wife; and No Labels’ own legal coun­sel. Top GOP donor John Can­ning Jr., a pri­vate-equi­ty chair­man, host­ed a June lun­cheon for the group in Chica­go to famil­iar­ize oth­er prospec­tive sup­port­ers and is him­self a donor, though nei­ther he nor No Labels would dis­close how much he has donat­ed.

    “No Labels is sup­port­ed by both [estab­lished] Repub­li­can and Demo­c­ra­t­ic donors, as well as small donors that give on the web­site. The dona­tions are rough­ly equal,” Jacob­son, who is also a well-known Demo­c­ra­t­ic fundrais­er, said. “In a world of orga­ni­za­tions spend­ing tens and even hun­dreds of mil­lions of dol­lars, the work of No Labels (because it has not involved polit­i­cal adver­tis­ing) is done on a rel­a­tive­ly mod­est bud­get.”

    No Labels’ judg­ment, how­ev­er, of which politi­cians are best suit­ed to reduce con­gres­sion­al grid­lock is per­haps what makes the group the most vul­ner­a­ble to attack from its detrac­tors. And it has dimin­ished its cred­i­bil­i­ty with those it needs the most: the peo­ple who actu­al­ly influ­ence and make deci­sions on pol­i­cy. Mul­ti­ple Sen­ate Demo­c­ra­t­ic aides char­ac­ter­ized the rela­tion­ship between No Labels and Sen­ate Demo­c­ra­t­ic lead­ers as “hos­tile,” and said that the cur­rent dis­tance stems from the con­tro­ver­sy sur­round­ing Gard­ner and the Col­orado Sen­ate race.

    In April, No Labels gave its “Prob­lem Solver Seal” to Gard­ner, the GOP chal­lenger to the Sen­ate Demo­c­ra­t­ic incum­bent Udall. Gard­ner tout­ed the seal as an endorse­ment from No Labels, a sit­u­a­tion that incensed mem­bers of the Sen­ate Demo­c­ra­t­ic cau­cus.

    Gard­ner and No Labels then were forced to clar­i­fy the mean­ing of the seal after Demo­c­ra­t­ic mem­bers threat­ened to leave the group and mul­ti­ple No Labels board calls were held to dis­cuss the mat­ter. While a group spokesper­son told a local Den­ver Fox affil­i­ate that the seal is an “implied endorse­ment,” No Labels co-founder Mark McK­in­non, a for­mer George W. Bush and John McCain strate­gist, said that any­one — even Udall — would be eli­gi­ble for such a seal were they join the group.

    The Prob­lem Solver Seal grant­ed by No Labels to law­mak­ers requires noth­ing of those mem­bers from a pol­i­cy per­spec­tive, aside from agree­ing to be part of No Labels, and to attend meet­ings with oth­er No Labels mem­bers to dis­cuss broad prin­ci­ples of bipar­ti­san­ship. To be a mem­ber of No Labels, a politi­cian needs to pledge to not take any pledge but the oath of office and the Pledge of Alle­giance.


    Clear­ly peo­ple still are writ­ing big checks to keep the oper­a­tion mov­ing.

    But the more they do, and the more entrenched a play­er No Labels becomes, the more risk there is that the accu­mu­lat­ed weight of the group’s actions will come to define them per­ma­nent­ly. In today’s high­ly par­ti­san Wash­ing­ton, it’s hard to stay unla­beled for long.

    So the only thing you need to do to get the No Labels ‘Prob­lem Solver Seal’ is a pledge to not take any oth­er pledges oth­er than the oath of office and Pledge of Alle­giance. And Repub­li­can Cory Gard­ner was grant­ed that Prob­lem Solver Seal. Huh. Speak no pledge, see no pledge, hear no pledge. It’s the ‘No Labels’ way!

    Posted by Pterrafractyl | July 29, 2014, 10:52 am
  20. Giv­en the inter­twined nature of finan­cial prof­it and real-world aus­ter­i­ty, here’s a tale of two prof­it-dri­ven dis­as­ters: First, a tale of a polit­i­cal par­ty ded­i­cat­ed to cre­at­ing a soci­ety ruled by the prof­it motive and how the prof­it motive is destroy­ing the par­ty and its coun­try:

    Wednes­day, Jul 30, 2014 06:45 AM CST
    GOP’s moron­ic infer­no: The real rea­son cranks and shills rule the par­ty
    Why do only angry Repub­li­cans have any pow­er in their own par­ty? The answer lies in its piv­ot to the South
    Kim Mes­sick

    A few months back, a day after the Repub­li­can Lead­er­ship Con­fer­ence kicked off in New Orleans, Jamelle Bouie won­dered in Slate “Why the Repub­li­can Par­ty attracts provo­ca­teurs, faux mar­tyrs, and grifters in droves?” It’s a great ques­tion. Bouie not­ed the speak­ers whose pres­ence would raise doubts about any polit­i­cal body that invit­ed them to appear — from the ver­mic­u­late gas­bag Don­ald Trump to the huck­sters Her­man Cain and Sarah Palin. And he pro­vid­ed exam­ples of how the inflamed rhetoric of these fig­ures has become the ver­nac­u­lar of the Repub­li­can Par­ty as a whole. But in the end, his answer to his own ques­tion seemed dis­ap­point­ing­ly wan:

    “[I]n our world, the ener­gy of the con­ser­v­a­tive move­ment — and thus the Repub­li­can Par­ty — is geared toward these peo­ple. If you want mon­ey and atten­tion, you could do worse than become a con­ser­v­a­tive provo­ca­teur.”

    In oth­er words, where there is lots of resent­ment there will be lots of suck­ers. And — this being Amer­i­ca — where there are suck­ers, there will always be con men (and women) ready to relieve them of their hard-earned cash. The Repub­li­can obses­sion with repeal­ing the Afford­able Care Act, Bouie writes, is not ground­ed in any real­is­tic polit­i­cal cal­cu­lus; it endures because it’s “lucra­tive.” He quotes Robert Costa’s claim in Nation­al Review that “Busi­ness has boomed since the push to defund Oba­macare caught on. Con­ser­v­a­tive activists are light­ing up social media, dona­tions are pour­ing in, and e‑mail lists are grow­ing.”

    It’s not that any of this is wrong; quite the oppo­site. Bouie describes very clear­ly the nexus of right-wing out­rage, abun­dant cash, new forms of media, and self-involved shills that dri­ves Repub­li­can pol­i­tics. But as a lib­er­al who suf­fered through the Nixon, Rea­gan and Bush II pres­i­den­cies, I can attest that there has been no short­age of out­rage on the left. The salient fact is that this anger, and the sus­pi­cion and para­noia to which it some­times gave rise, nev­er had the author­i­ty for Democ­rats that right-wing angst now has for Repub­li­cans.

    After the 2006 midterm elec­tions, when gen­er­al revul­sion at Bush and his poli­cies gave Democ­rats com­plete con­trol of Con­gress, Nan­cy Pelosi, new­ly elect­ed speak­er of the House, quick­ly brushed aside any talk of impeach­ing the pres­i­dent. Such ideas, she said, were “off the table” — and that was the end of that. But nowa­days even “estab­lish­ment” Repub­li­cans such as South Car­oli­na Sen. Lind­sey Gra­ham glibly opine that Pres­i­dent Oba­ma may mer­it impeach­ment. What we need to explain, then, isn’t why pissed-off Repub­li­cans are eas­i­ly part­ed from their mon­ey; it’s why only pissed-off Repub­li­cans have any pow­er in their own par­ty. Bouie gives us the “how” of this sit­u­a­tion, but — his own excel­lent ques­tion notwith­stand­ing — he doesn’t give us the “why.”

    To get to why, we need to add one addi­tion­al ele­ment to the nexus of forces men­tioned above: the trans­for­ma­tion of Repub­li­can pol­i­tics pro­duced by the GOP’s piv­ot to the South after the Demo­c­ra­t­ic Party’s embrace of racial equal­i­ty alien­at­ed South­ern whites.

    The Repub­li­can Par­ty has long been the nat­ur­al home of monied inter­ests. In itself, there’s noth­ing objec­tion­able about this; cap­i­tal has dis­tinc­tive con­cerns, after all, and it can be argued that Repub­li­can advo­ca­cy of these inter­ests with­in our polit­i­cal sys­tem has in the long run been a source of sta­bil­i­ty. In the decades that stretched from the end of the Civ­il War until the 1960s, the par­ty drew its most reli­able sup­port from suc­cess­ful cap­i­tal­ists and those who want­ed to be — the Cap­tains of Indus­try on Wall Street and else­where, and the Rugged Indi­vid­u­al­ists of the rur­al Mid­west and small-town North. This Repub­li­can Par­ty was not averse to gov­ern­ment action when it fur­thered some press­ing social need; Abra­ham Lin­coln signed leg­is­la­tion cre­at­ing the Nation­al Acad­e­my of Sci­ences, for exam­ple, and Theodore Roo­sevelt was an ear­ly cham­pi­on of Pro­gres­sive-era eco­nom­ic reforms. The party’s sus­pi­cion of fed­er­al pow­er was root­ed in a prag­mat­ic sense of costs-and-ben­e­fits and a moral com­mit­ment to the ideals of self-suf­fi­cien­cy and per­son­al advance­ment.

    This sit­u­a­tion began to change in the ear­ly 1960s, when it became clear that the Demo­c­ra­t­ic Par­ty had tak­en up the cause of equal rights for African-Amer­i­cans. White South­ern­ers, repulsed, shrugged off their gen­er­a­tional anger at the par­ty of Lin­coln and increas­ing­ly sup­port­ed Repub­li­can pres­i­den­tial can­di­dates. Over the next 50 years, this shift in loy­al­ties grad­u­al­ly extend­ed into state Hous­es as well. After the Tea Par­ty wave in the 2010 midterms, Democ­rats con­trolled both hous­es in only two out of 14 South­ern leg­is­la­tures.

    This enor­mous elec­toral wind­fall — the fruits of the GOP’s noto­ri­ous “South­ern Strat­e­gy” — cre­at­ed a tec­ton­ic shift in the party’s inter­nal bal­ance of pow­er. With their for­tunes increas­ing­ly tied to this new South­ern elec­torate, Repub­li­can lead­ers and strate­gists did their best to pla­cate it and to lever­age its inten­si­ty. To bor­row a phrase from the days of the Cold War, it is “no acci­dent” that this same peri­od charts the party’s adop­tion of ever more rad­i­cal ver­sions of con­ser­v­a­tive pol­i­cy. The GOP’s relent­less march to the right, its embrace of a dra­mat­i­cal­ly dark­er, harsh­er ethos, are direct results of its shift to the South. For many of these new Repub­li­cans, fed­er­al pow­er was not sus­pect on prag­mat­ic or aspi­ra­tional grounds; it was sus­pect because it favored the shift­less and the infe­ri­or, because it took from the deserv­ing to reward the unde­serv­ing. It was noth­ing more (or less) than the agent of an ancient racial and class ene­my.

    This is the con­text in which we must place the oth­er struc­tur­al changes Bouie describes. New forms of media — and adap­ta­tions of old­er forms, such as talk radio — arose to express and exploit the dis­af­fec­tions of this elec­torate. Rush Lim­baugh and Ann Coul­ter, Glenn Beck and Lau­ra Ingra­ham, may well believe every word they say, but they are pri­mar­i­ly per­form­ers with a vest­ed inter­est in the well-tend­ed out­rage of their audi­ences. Thus fresh out­rages, every day, must be sewn, fer­til­ized and reaped.

    The rise of right-wing “news” plat­forms (Drudge, Fox, Bre­it­bart) has cre­at­ed an almost seam­less web of white rage, a wall of (con­ser­v­a­tive) sound even Phil Spec­tor would envy. It allows enter­tain­ers like Lim­baugh to dis­cuss some­thing as “fact” because it was men­tioned by “jour­nal­ists” on, say, Fox News, while the lat­ter can report (and there­by sanc­tion) the wildest, rank­est rou­tines of Lim­baugh & Co. because their prove­nance makes them “news­wor­thy.” The pathet­ic (if hilar­i­ous) spec­ta­cle of Repub­li­can wor­thies rush­ing to delete tweets cel­e­brat­ing the release of Bowe Bergdahl — the enter­tain­ment-jour­nal­ism com­plex hav­ing ruled against him — is only the lat­est demon­stra­tion of its immense pow­er over the GOP.


    And here’s the rub. Because the Repub­li­can Par­ty as a whole, of course, still wants to gov­ern. The Cap­tains of Indus­try — many of them, any­way — live in the real world and want to shape it to their advan­tage. (Even the Kochs demurred when it looked like House Repub­li­cans might push the coun­try into default last year.) So do mil­lions of sen­si­ble, ratio­nal Repub­li­can vot­ers. But they are now reap­ing the fruits of their party’s attempt to exploit the pas­sion of its most atavis­tic ele­ments — a strat­e­gy they are com­plic­it in, if only through their silence. To win elec­tions, they mort­gaged them­selves to a sect that, it turns out, has oth­er pri­or­i­ties. Now they find them­selves inex­tri­ca­bly asso­ci­at­ed in the pub­lic mind with its addled obses­sions. Most Repub­li­cans do not believe that the Afford­able Care Act is a total­i­tar­i­an scheme, or that Oba­ma is a jihadist, or that the vagi­na is a weapon of mass destruc­tion. But in the minds of many Amer­i­cans, a vote for a Repub­li­can pres­i­den­tial can­di­date is a vote for some­one behold­en to peo­ple who believe all these things and more.

    The rel­e­vant text for under­stand­ing the Repub­li­can “civ­il war,” then, isn’t so much “Uncle Tom’s Cab­in” as “Franken­stein.” The par­ty is now riv­en into three parts: a donor class that, like the rank-and-file, main­ly wants to win elec­tions and to gov­ern the coun­try in a (rel­a­tive­ly) respon­si­bly con­ser­v­a­tive way; a fero­cious cell of right-wing fab­u­lists that prefers defeat to the slight­est mod­u­la­tion in its hatred of the mod­ern world; and a net­work of enter­tain­ers and “jour­nal­ists” with an entre­pre­neur­ial invest­ment in pro­mot­ing the sec­ond group at the expense of the first. This leaves the lat­ter in an increas­ing­ly exposed posi­tion. As Bouie per­cep­tive­ly writes, “[M]ainstream Repub­li­cans … have to affirm extreme ideas (i.e., ‘self-depor­ta­tion’) to pass muster with the con­ser­v­a­tive base, and in the process, hurt them­selves with ordi­nary vot­ers.”

    It isn’t easy to see how these ten­sions resolve them­selves except through a con­clu­sive elec­toral repu­di­a­tion of one side or the oth­er. It’s as if a film stu­dio start­ed work on a project, but the exec­u­tives and crew thought they were mak­ing “Cos­mos” while the cast and pub­li­cists thought they were mak­ing “Alien.” Care to guess which of these would prove more pop­u­lar in red state Amer­i­ca? In Repub­li­can pol­i­tics these days, no one can hear you think.

    Next, here’s a tale of how a lack of prof­it is destroy­ing a chance to cure Ebo­la. Yes, Ebo­la. And since cur­ing Ebo­la is unprof­itable, it is there­fore near­ly unachiev­able in our prof­it-dri­ven sys­tem, result­ing in a dis­tinct lack of aus­ter­i­ty for Ebo­la:

    NBC News
    ‘No Mar­ket’: Sci­en­tists Strug­gle to Make Ebo­la Vac­cines, Treat­ments
    By Mag­gie Fox
    First pub­lished July 29th 2014, 4:08 pm

    At least four vac­cines are being devel­oped to pro­tect peo­ple against Ebo­la, includ­ing one that pro­tects mon­keys com­plete­ly against the dead­ly virus. Sev­er­al groups are also work­ing on treat­ments, but one of the most promis­ing is stuck in safe­ty test­ing.

    They might be far­ther along if not for one prob­lem: mon­ey.

    Even though Ebo­la is burn­ing out of con­trol in West Africa, it’s not a huge poten­tial mar­ket for a large phar­ma­ceu­ti­cal com­pa­ny to sink its teeth — and its assets — into devel­op­ing. That leaves the U.S. gov­ern­ment and small, niche bio­phar­ma­ceu­ti­cal com­pa­nies.

    “I don’t see why any­body except the U.S. gov­ern­ment would get involved in devel­op­ing these kinds of coun­ter­mea­sures,” said Dr. Sina Bavari of the U.S. Army Med­ical Research Insti­tute of Infec­tious Dis­eases (USAMRIID) in Fred­er­ick, Mary­land. “There is no mar­ket in it.”

    Ebo­la has infect­ed more than 1,200 peo­ple and killed close to 700 of them. Among the vic­tims are two U.S. char­i­ty work­ers — a doc­tor and a hygien­ist who were help­ing patients in Liberia. And the doc­tor lead­ing the fight in Sier­ra Leone died from the virus this week.

    An Amer­i­can work­ing for the Liber­ian gov­ern­ment col­lapsed after he got off a flight in Lagos, Nige­ria and died in iso­la­tion; Niger­ian offi­cials are work­ing to track down at least 59 peo­ple who were in con­tact with him to make sure they were not infect­ed.

    Yet the dozens of patients cur­rent­ly being treat­ed for Ebo­la are get­ting a bare min­i­mum of care. No spe­cif­ic drug has been shown to help peo­ple infect­ed with Ebo­la, so patients are giv­en saline to replace flu­ids lost to vom­it­ing and diar­rhea; painkillers to reduce fever and to help fight the gen­er­al mis­ery the virus caus­es; and antibi­otics to pre­vent what doc­tors call sec­ondary infec­tions.

    “There are at least four vac­cines that can pro­tect against Ebo­la (in mon­keys),” says Dr. Thomas Geis­bert, whose lab at the Uni­ver­si­ty of Texas Med­ical Branch is work­ing on some of them. “But how do you take this to the next lev­el?”


    As we can see, the prof­it motive is a dou­ble-edge sword: Sure, the prof­it motive might be lead­ing to the implo­sion of a polit­i­cal par­ty that sure­ly should be implod­ing for every­one’s sake, but it’s also lead­ing to more Ebo­la. So, giv­en our prof­it-dri­ven real­i­ty, we prob­a­bly expect the GOP to con­tin­ue its high­ly prof­itable descent into mad­ness but we should­n’t expect a cure for Ebo­la any­time soon. And that means the age of the fist bump may to nigh. Uh oh. Also, uh oh.

    Posted by Pterrafractyl | July 30, 2014, 9:19 am
  21. The aus­ter­i­ty dis­ease con­tin­ues to fes­ter in Por­tu­gal:

    Doc­tors strike in Por­tu­gal over aus­ter­i­ty cut­backs
    08 Jul 2014 21:51

    Doc­tors in Por­tu­gal walked out of hos­pi­tals and med­ical cen­tres on Tues­day at the start of a two-day strike over the impact of gov­ern­ment aus­ter­i­ty mea­sures on the health ser­vice.

    LISBON: Doc­tors in Por­tu­gal walked out of hos­pi­tals and med­ical cen­tres on Tues­day at the start of a two-day strike over the impact of gov­ern­ment aus­ter­i­ty mea­sures on the health ser­vice.

    The sec­tor — which has been hit by cut­backs since the coun­try entered an inter­na­tion­al bailout in 2011 — is being ordered to make a fur­ther 300 mil­lion euros ($408 mil­lion) of sav­ings this year.

    One union said it expects half of all pub­lic sec­tor med­ical staff could take part in the strike, with a protest called by the Nation­al Fed­er­a­tion of Doc­tors (FNAM) planned in Lis­bon on Tues­day after­noon.

    Med­ical staff are crit­i­cal of dete­ri­o­rat­ing work­ing con­di­tions in pub­lic hos­pi­tals, job loss­es, pay cuts, and the longer work­ing hours that have come as the sec­tor has had to make sav­ings.

    “Doc­tors in the field are very angry, so we think that the turnout will be good,” said Mario Jorge Neves, the FNAM vice-pres­i­dent.

    A min­i­mum lev­el of ser­vice has been guar­an­teed in emer­gency rooms, inten­sive care units and radio­ther­a­py units, but the action is expect­ed to lead to the can­cel­la­tion of thou­sands of med­ical appoint­ments and surgery ses­sions.

    The 1974 Car­na­tion Rev­o­lu­tion, which led to the end of decades of dic­ta­tor­ship, helped enshrine the right to free uni­ver­sal health care in the con­sti­tu­tion.

    But since 2011, the charges for vis­it­ing an emer­gency depart­ment have dou­bled to 20 euros ($27), while going to a local doc­tor now costs five euros. The wait­ing list for surgery is cur­rent­ly months long.

    “The nation­al health ser­vice was one of the great achieve­ments of the 1974 April rev­o­lu­tion, we must defend it,” said Maria Mer­linde Madureira, the FNAM pres­i­dent.

    Por­tu­gal exit­ed a three-year inter­na­tion­al bailout pro­gramme in May, after receiv­ing 78 bil­lion euros ($106 bil­lion) from the Euro­pean Union and the Inter­na­tion­al Mon­e­tary Fund in exchange for a series of strin­gent reforms in the coun­try.

    The strike is being sup­port­ed by the Col­lege of Physi­cians but anoth­er med­ical union, the Inde­pen­dent Union for Doc­tors, said its mem­bers will not be tak­ing part to give “dia­logue with the gov­ern­ment a chance”.


    On the plus side, Moody’s recent­ly raised Por­tu­gal’s gov­ern­ment bond rat­ings. Why? Because, despite the rul­ing of Por­tu­gal’s Supreme Court back in May that the aus­ter­i­ty poli­cies vio­lat­ed Por­tu­gal’s con­sti­tu­tion, The gov­ern­ment is still com­mit­ted to aus­ter­i­ty:

    UPDATE 1‑Moody’s rais­es rat­ing on Por­tu­gal’s gov­ern­ment bond

    Fri Jul 25, 2014 5:59pm EDT

    (Reuters) — Moody’s Investor Ser­vice raised Por­tu­gal’s gov­ern­ment bond rat­ing on Fri­day to “Ba1” from “Ba2”, on expec­ta­tions that the coun­try’s fis­cal con­sol­i­da­tion will remain on track.

    Por­tu­gal’s high­est court in May struck down sev­er­al bud­get mea­sures, includ­ing some pub­lic sec­tor salary cuts, cre­at­ing a fis­cal gap of about 700 mil­lion euros this year.

    “The first dri­ver behind the upgrade is Moody’s view of the gov­ern­men­t’s strong com­mit­ment to fis­cal con­sol­i­da­tion, despite repeat­ed set-backs stem­ming from the adverse rul­ings of the coun­try’s Con­sti­tu­tion­al Court,” Moody’s said on Fri­day. (bit.ly/1phcEXF)


    Por­tu­gal said in June it decid­ed to forego the last pay­ment from its inter­na­tion­al bailout pro­gram after the coun­try’s con­sti­tu­tion­al court reject­ed a series of aus­ter­i­ty mea­sures.

    The coun­try’s econ­o­my start­ed to recov­er last year, and bond yields have fall­en this year.

    Por­tu­gal has under­tak­en sev­er­al aus­ter­i­ty and reform mea­sures since the Euro­pean debt cri­sis that rocked glob­al mar­kets.

    The rat­ings agency assigned a sta­ble out­look to the gov­ern­ment bonds but said that the coun­try’s high exter­nal debt was a key cred­it weak­ness.

    Yes, Por­tu­gal got a bond rat­ing upgrad­ing by Moody due to the gov­ern­men­t’s com­mit­ment to aus­ter­i­ty even though Por­tu­gal’s top court explic­it­ly reject­ed the lat­est round of pub­lic sec­tor wage cuts. So why was Moody’s so con­fi­dent in Por­tu­gal’s ongo­ing com­mit­ment to aus­ter­i­ty? Here’s an exam­ple:

    Por­tuguese par­lia­ment pass­es pub­lic sec­tor wage cut

    July 25, 2014 2:21 PM

    Lis­bon (AFP) — The Por­tuguese par­lia­ment on Fri­day passed new pub­lic sec­tor wage cuts in a bid to meet its tar­get of reduc­ing the deficit.

    The law allows for a tem­po­rary reduc­tion of between 3.5 and 10 per­cent on salaries of more than €1,500 ($2000) a month.


    The law was vot­ed through by the gov­ern­ing cen­tre-right coali­tion, which has a com­fort­able major­i­ty in par­lia­ment. The entire left­ist oppo­si­tion vot­ed against it.

    The wage cuts would be reduced by 20 per­cent by 2015 and phased out over the next five years.

    In May, Por­tu­gal’s con­sti­tu­tion­al court reject­ed aus­ter­i­ty mea­sures includ­ed in Lis­bon’s 2014 bud­get as part of the cen­tre-right gov­ern­men­t’s ongo­ing cut­backs, as it hopes to reduce its deficit to four per­cent of gross domes­tic prod­uct (GDP).

    Por­tu­gal exit­ed a three-year inter­na­tion­al bailout pro­gramme in May, after receiv­ing 78 bil­lion euros ($106 bil­lion) from the Euro­pean Union and the Inter­na­tion­al Mon­e­tary Fund in exchange for a series of strin­gent reforms in the coun­try.

    Well, that sure helps explain Moody’s enthu­si­asm: On the same day that Moody’s upgrad­ed Por­tu­gal’s bond rat­ing, Por­tu­gal’s par­lia­ment passed a bill con­tain­ing the kinds of cuts that the Supreme Court threw out a cou­ple months ago.

    It’s not over yet, since the Supreme Court still has to rule on the con­sti­tu­tion­al­i­ty of the new wage cuts. But con­sid­er­ing that the court reject­ed these poli­cies two months ago and they just got rein­tro­duced any­ways and the cred­it rat­ing agen­cies will pun­ish coun­tries that don’t embrace aus­ter­i­ty, it’s unclear what’s going to make these kinds of poli­cies final­ly go away. Well, ok, elec­tions that result in a dif­fer­ent gov­ern­ment might make these kinds of poli­cies final­ly go away. Or not.

    In oth­er news, euro­zone offi­cials are real­ly vexed by the falling wages across south­ern Europe. Uh huh...

    Posted by Pterrafractyl | July 31, 2014, 8:24 pm
  22. This is kind of amus­ing: Paul Krug­man recent­ly wrote a col­umn about how offi­cial eco­nom­ic pol­i­cy-mak­ing was increas­ing­ly non-reliant on exper­tise with a demon­strat­ed track record of suc­cess. Instead, what we find is that the poli­cies that get adopt­ed are based on the myths and whims of polit­i­cal con men like Paul Ryan mas­querad­ing as pol­i­cy wonks and behav­ing as “a stu­pid person’s idea of what a thought­ful per­son sounds like”.

    In response, econ­o­mist Lawrence Kot­likoff, an econ­o­mist fond of declar­ing the US bank­rupt based on dubi­ous chains of log­ic tak­en to the extreme (as a jus­ti­fi­ca­tion for gut­ting the safe­ty net), wrote a col­umn in Forbes implor­ing Paul Krug­man to stop call­ing peo­ple like Paul Ryan names like “stu­pid” and be more civ­il instead.

    And this, of course, prompt­ed Paul Krug­man to respond that, no, he was­n’t call­ing Paul Ryan stu­pid. He was say­ing that Paul Ryan is a decep­tive con man that behaves as a stu­pid person’s idea of what a thought­ful per­son sounds like:

    The New York Times
    The Con­science of a Lib­er­al

    Con Men Aren’t Stu­pid
    Paul Krug­man
    Aug 3 4:24 pm

    Brad DeLong finds Lar­ry Kot­likoff ful­mi­nat­ing about how mean I am — so mean that he appar­ent­ly could’t bring him­self to read what I wrote. No, I didn’t say that Paul Ryan is stu­pid. I did imply — and have said explic­it­ly on many oth­er occa­sions — that he is a con man. Why did I do that?

    Not as a way to avoid hav­ing a sub­stan­tive dis­cus­sion. I’ve doc­u­ment­ed Ryan’s many cons very exten­sive­ly, show­ing in par­tic­u­lar that his bud­gets were sold on false pre­tens­es — all the alleged fis­cal respon­si­bil­i­ty lay not in the much-hyped changes to Medicare, but in mag­ic aster­isks claim­ing huge but unspec­i­fied sav­ings from dis­cre­tionary spend­ing and huge but unspec­i­fied rev­enue gains from clos­ing loop­holes he refused to name.

    Still, why not pre­tend that we’re hav­ing a nice, hon­est dis­cus­sion? Because I’m try­ing to inform read­ers about what’s going on — and the attempt to sell right-wing goals under false pre­tens­es is an impor­tant part of the sto­ry. If you fell for the care­ful­ly craft­ed image of Ryan as an hon­est wonk, you were being tak­en in — and it’s my job to ensure that you’re prop­er­ly informed.

    I wish we lived in a world in which you could pre­sume that major fig­ures are argu­ing in good faith, in which what they claim to be doing in their pol­i­cy pro­pos­als was what they were actu­al­ly doing. But wish­ing doesn’t make it so, and I would be act­ing in bad faith myself if I pre­tend­ed that the world was like that.

    Yes, liv­ing in a world where you could pre­sume that major fig­ures are argu­ing in good faith would be pret­ty great.

    Also, Paul Ryan total­ly does­n’t see how the GOP’s deci­sion to sue Oba­ma over his use of exec­u­tive orders should lead one to con­clude that impeach­ment is com­ing next. Real­ly.

    And Paul Ryan’s new life-coach­es-for-the-poor ‘anti-pover­ty’ plan is total­ly deficit neu­tral. Real­ly. You can trust Paul Ryan. Real­ly.

    Posted by Pterrafractyl | August 3, 2014, 9:22 pm
  23. It’s grow­ing increas­ing­ly fas­ci­nat­ing how the per­sis­tent­ly poor eco­nom­ic per­for­mance across the euro­zone fol­low­ing aus­ter­i­ty is almost always ‘unex­pect­ed’. The response out of Berlin and the EU Com­mis­sion to that unex­pect­ed­ly poor econ­o­my, how­ev­er, should prob­a­bly be expect­ed by now: More aus­ter­i­ty:

    France Risks EU Deficit Clash After Scrap­ping Tar­gets
    By Mark Deen Aug 14, 2014 7:56 AM CT

    The French gov­ern­ment aban­doned its 2014 deficit tar­gets after the econ­o­my unex­pect­ed­ly failed to grow for a sec­ond straight quar­ter, risk­ing a clash with Euro­pean part­ners striv­ing to meet their own fis­cal goals.

    Finance Min­is­ter Michel Sapin said that Euro­pean pol­i­cy is part­ly to blame for the lack of expan­sion in the region’s sec­ond-biggest econ­o­my. French gross domes­tic prod­uct stag­nat­ed in the three months through June, nation­al sta­tis­tics office Insee said today in Paris. Econ­o­mists fore­cast a 0.1 per­cent gain, a Bloomberg sur­vey showed.

    Sapin’s com­ments will fan a debate about France’s repeat­ed inabil­i­ty to meet Euro­pean Union fis­cal rules it helped write, with Ger­many advo­cat­ing reforms and pru­dent spend­ing to help meet deficit tar­gets and oth­er EU mem­bers led by Italy seek­ing more bud­getary lee­way. The Euro­pean Com­mis­sion has already allowed France to delay deficit tar­gets twice in the wake of the region’s sov­er­eign debt cri­sis.

    “There are Euro­pean caus­es and there are French caus­es for the lack of growth,” Sapin said on Europe 1 radio. “The rules allow flex­i­bil­i­ty for the sit­u­a­tion we are fac­ing.”

    The French gov­ern­ment now pre­dicts full-year growth of 0.5 per­cent instead of 1 per­cent announced pre­vi­ous­ly. This year’s deficit will exceed the lim­it of 4 per­cent of eco­nom­ic out­put agreed less than four months ago with the com­mis­sion, the EU’s exec­u­tive body.

    French Under­per­form

    Though Ger­many under­per­formed France in the sec­ond-quar­ter with a 0.2 per­cent GDP con­trac­tion, the three-month snap­shot hides a much stronger econ­o­my. The Bun­des­bank said this week that it still expects a full-year expan­sion of 1.9 per­cent and the com­mis­sion sees the Ger­man bud­get in bal­ance.

    “While the sec­ond-quar­ter weak­ness should remain tem­po­rary for Ger­many, France remains mired in stag­na­tion due to lack of reform,” said Chris­t­ian Schulz, an econ­o­mist at Beren­berg bank in Lon­don. “We expect France to con­tin­ue to under­per­form the cur­ren­cy area as a whole.”

    Sapin also said that France’s bud­get short­fall should be reduced at an “appro­pri­ate pace,” sug­gest­ing the deficit will exceed the 3 per­cent goal set for 2015. He declined to pro­vide a cur­rent esti­mate for next year’s deficit when asked.

    Ger­mans Chafe

    The finance minister’s remarks chafe with those of Ger­man pol­i­cy mak­ers. Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble, who has over­seen a bal­anced bud­get and plans no new gov­ern­ment debt from next year, said on July 18 that he expect­ed France to hold to its 2015 com­mit­ment, not­ing that it had already ben­e­fit­ed from deficit-reduc­tion delays.

    France should stop plead­ing for more sup­port from Ger­many and accel­er­ate mea­sures to over­haul its econ­o­my, Bun­des­bank Pres­i­dent Jens Wei­d­mann said yes­ter­day.

    “France needs to set an exam­ple with its bud­get,” Wei­d­mann said in an inter­view pub­lished in Le Monde news­pa­per. “Paris needs to stop ask­ing for growth-enhanc­ing efforts from Berlin and con­cen­trate on its own struc­tur­al reforms.”

    The Euro­pean Com­mis­sion echoed those com­ments today.

    “As we have con­sis­tent­ly stressed, it is through struc­tur­al reforms, adopt­ed and effec­tive­ly imple­ment­ed, that the con­di­tions will be put in place for a sus­tain­able recov­ery in growth and job cre­ation in France,” Michael Jen­nings, a spokesman for the EU exec­u­tive arm, told reporters in Brus­sels.


    Oh well, at least the euro­zone cit­i­zens can find com­fort in the knowl­edge that this too shall pass, although it would be more com­fort­ing if it was at all clear about the approx­i­mate num­ber of decades we should expect it to take for that to hap­pen. Does two or three sound about right?

    Posted by Pterrafractyl | August 14, 2014, 2:13 pm
  24. There have been a num­ber of head­lines in the news today fol­low­ing Mario Draghi’s talk at Jack­son Hole sug­gest­ing that the ECB’s chief is push­ing tax cuts and gov­ern­ment spend­ing as a rem­e­dy for the euro­zone’s death rat­tle. So keep in mind that when Draghi talked about more gov­ern­ment spend­ing he was specif­i­cal­ly talk­ing about Ger­many spend­ing more and not the coun­tries that most need more gov­ern­ment spend­ing:

    The New York Times
    E.C.B. Chief Seeks Tax Cuts and State Spend­ing


    JACKSON HOLE, Wyo. — Mario Draghi, pres­i­dent of the Euro­pean Cen­tral Bank, said Fri­day that Euro­pean gov­ern­ments need­ed to move from a focus on aus­ter­i­ty to a “more growth-friend­ly com­po­si­tion of fis­cal poli­cies.”

    Mr. Draghi’s com­ments were a change in tone for him, reflect­ing mount­ing con­cern that eco­nom­ic growth is sput­ter­ing in many Euro­pean coun­tries and that exist­ing efforts have proved insuf­fi­cient to spur faster growth.

    Speak­ing before an annu­al gath­er­ing of cen­tral bankers and econ­o­mists at a resort in the Rocky Moun­tains, Mr. Draghi said that the cen­tral bank was mov­ing to increase its own stim­u­lus cam­paign but that gov­ern­ments in the euro­zone also need­ed to help bol­ster demand for goods and ser­vices.

    “Since 2010, the euro area has suf­fered from fis­cal pol­i­cy being less avail­able and effec­tive,” he said. “It would be help­ful for the over­all stance of pol­i­cy if fis­cal pol­i­cy could play a greater role along­side mon­e­tary pol­i­cy, and I believe there is scope for this.”

    Mr. Draghi’s com­ments under­scored a grow­ing divide between the Unit­ed States, where the econ­o­my appears to be gain­ing strength, and Europe, where an endur­ing malaise has kept unem­ploy­ment painful­ly high while the rate of infla­tion, gen­er­al­ly con­sid­ered most ben­e­fi­cial when it is run­ning around 2 per­cent annu­al­ly, has near­ly come to a halt.

    The aggre­gate econ­o­my of the 18 euro area coun­tries did not grow in the sec­ond quar­ter, accord­ing to an ini­tial esti­mate pub­lished this week. The data pro­vid­ed ammu­ni­tion for crit­ics who say Euro­pean coun­tries have under­mined growth by cur­tail­ing gov­ern­ment spend­ing.


    Mr. Draghi sug­gest­ed that Euro­pean coun­tries should con­sid­er pub­lic invest­ments and tax cuts to com­ple­ment the cen­tral bank’s stim­u­lus cam­paign. Coun­tries like Ger­many, which are rel­a­tive­ly healthy, have the most room to adopt such poli­cies with­out break­ing the rules of the euro area.

    Mr. Draghi appeared to refer to the need for such coun­tries to recon­sid­er their com­mit­ment to aus­ter­i­ty in call­ing for the euro area to move to “a more growth-friend­ly” fis­cal stance. Some Ger­man offi­cials, how­ev­er, have already sig­naled a reluc­tance to move in this direc­tion. They argue that the onus is on strug­gling Euro­pean coun­tries like Spain, Italy and Greece to make painful eco­nom­ic adjust­ments intend­ed to increase long-term growth, like reduc­ing legal pro­tec­tions for work­ers, cut­ting back on social wel­fare pro­grams and reduc­ing pub­lic spend­ing.

    Mr. Draghi was care­ful to say that those coun­tries could not avoid such adjust­ments. The argu­ment he made on Fri­day, how­ev­er, was that such poli­cies are by them­selves insuf­fi­cient.

    “With­out high­er aggre­gate demand, we risk high­er struc­tur­al unem­ploy­ment, and gov­ern­ments that intro­duce struc­tur­al reforms could end up run­ning just to stand still,” he said. “With­out deter­mined struc­tur­al reforms, aggre­gate demand mea­sures will quick­ly run out of steam and may ulti­mate­ly become less effec­tive.”

    Yes, accord­ing to Draghi, the euro­zone coun­tries with the rel­a­tive­ly strong economies like Ger­many (with an econ­o­my that con­tract­ed 0.2% last quar­ter) need to impose less aus­ter­i­ty on them­selves in order to increase the aggre­gate demand for the euro­zone as a whole, while Draghi also empha­sized that that the coun­tries most ail­ing from aus­ter­i­ty ‘could not avoid such adjust­ment’. So Ger­many, which does­n’t real­ly import all that much from its periph­ery neigh­bors any­ways, needs to spend more in the hope of bal­anc­ing things out. Oh well, it could be worse. Draghi could have asked for tax cuts that includ­ed addi­tion­al spend­ing cuts to make them “bud­get-neu­tral”. Oh well:

    Unem­ploy­ment in the euro area
    Speech by Mario Draghi, Pres­i­dent of the ECB,
    Annu­al cen­tral bank sym­po­sium in Jack­son Hole,
    22 August 2014

    No one in soci­ety remains untouched by a sit­u­a­tion of high unem­ploy­ment. For the unem­ployed them­selves, it is often a tragedy which has last­ing effects on their life­time income. For those in work, it rais­es job inse­cu­ri­ty and under­mines social cohe­sion. For gov­ern­ments, it weighs on pub­lic finances and harms elec­tion prospects. And unem­ploy­ment is at the heart of the macro dynam­ics that shape short- and medi­um-term infla­tion, mean­ing it also affects cen­tral banks. Indeed, even when there are no risks to price sta­bil­i­ty, but unem­ploy­ment is high and social cohe­sion at threat, pres­sure on the cen­tral bank to respond invari­ably increas­es.
    1. The caus­es of unem­ploy­ment in the euro area

    The key issue, how­ev­er, is how much we can real­ly sus­tain­ably affect unem­ploy­ment, which in turn is a ques­tion – as has been much dis­cussed at this con­fer­ence – of whether the dri­vers are pre­dom­i­nant­ly cycli­cal or struc­tur­al. As we are an 18 coun­try mon­e­tary union this is nec­es­sar­i­ly a com­plex ques­tion in the euro area, but let me nonethe­less give a brief overview of how the ECB cur­rent­ly assess­es the sit­u­a­tion.


    Thus, it would be help­ful for the over­all stance of pol­i­cy if fis­cal pol­i­cy could play a greater role along­side mon­e­tary pol­i­cy, and I believe there is scope for this, while tak­ing into account our spe­cif­ic ini­tial con­di­tions and legal con­straints. These ini­tial con­di­tions include lev­els of gov­ern­ment expen­di­ture and tax­a­tion in the euro area that are, in rela­tion to GDP, already among the high­est in the world. And we are oper­at­ing with­in a set of fis­cal rules – the Sta­bil­i­ty and Growth Pact – which acts as an anchor for con­fi­dence and that would be self-defeat­ing to break.

    Let me in this con­text empha­sise four ele­ments.

    First, the exist­ing flex­i­bil­i­ty with­in the rules could be used to bet­ter address the weak recov­ery and to make room for the cost of need­ed struc­tur­al reforms.

    Sec­ond, there is lee­way to achieve a more growth-friend­ly com­po­si­tion of fis­cal poli­cies. As a start, it should be pos­si­ble to low­er the tax bur­den in a bud­get-neu­tral way. [15] This strat­e­gy could have pos­i­tive effects even in the short-term if tax­es are low­ered in those areas where the short-term fis­cal mul­ti­pli­er is high­er, and expen­di­tures cut in unpro­duc­tive areas where the mul­ti­pli­er is low­er. Research sug­gests pos­i­tive sec­ond-round effects on busi­ness con­fi­dence and pri­vate invest­ment could also be achieved in the short-term. [16]

    Third, in par­al­lel it may be use­ful to have a dis­cus­sion on the over­all fis­cal stance of the euro area. Unlike in oth­er major advanced economies, our fis­cal stance is not based on a sin­gle bud­get vot­ed for by a sin­gle par­lia­ment, but on the aggre­ga­tion of eigh­teen nation­al bud­gets and the EU bud­get. Stronger coor­di­na­tion among the dif­fer­ent nation­al fis­cal stances should in prin­ci­ple allow us to achieve a more growth-friend­ly over­all fis­cal stance for the euro area.

    Fourth, com­ple­men­tary action at the EU lev­el would also seem to be nec­es­sary to ensure both an appro­pri­ate aggre­gate posi­tion and a large pub­lic invest­ment pro­gramme – which is con­sis­tent with pro­pos­als by the incom­ing Pres­i­dent of the Euro­pean Com­mis­sion. [17]

    Reform­ing struc­tur­al poli­cies

    No amount of fis­cal or mon­e­tary accom­mo­da­tion, how­ev­er, can com­pen­sate for the nec­es­sary struc­tur­al reforms in the euro area. As I said, struc­tur­al unem­ploy­ment was already esti­mat­ed to be very high com­ing into the cri­sis (around 9%). Indeed, some research sug­gests it has been high since the 1970s. [18] And giv­en the inter­ac­tions I described, there are impor­tant rea­sons why nation­al struc­tur­al reforms that tack­le this prob­lem can no longer be delayed.


    As a start, it should be pos­si­ble to low­er the tax bur­den in a bud­get-neu­tral way. This strat­e­gy could have pos­i­tive effects even in the short-term if tax­es are low­ered in those areas where the short-term fis­cal mul­ti­pli­er is high­er, and expen­di­tures cut in unpro­duc­tive areas where the mul­ti­pli­er is low­er”. While it would be nice to believe that Draghi was tru­ly envi­sion­ing a plan where the “unpro­duc­tive” cuts need­ed to make the tax-cuts bud­get neu­tral, some­how it’s hard not to imag­ine Grover Norquist whis­per­ing in his ear. Draghi’s insis­tence of unre­lent­ing aus­ter­i­ty for the periph­ery helps with the imagery.

    Also note that the pro­pos­als for EU lev­el “large pub­lic invest­ment pro­gramme – which is con­sis­tent with pro­pos­als by the incom­ing Pres­i­dent of the Euro­pean Com­mis­sion”, were actu­al­ly a 300 bil­lion euro pub­lic-pri­vate part­ner­ship pro­gram that appears to be bud­get neu­tral with­out any increase in gov­ern­ment bud­gets:

    EU’s Junck­er calls for 300 bn euro invest­ment pro­gramme

    STRASBOURG, France, July 15 Tue Jul 15, 2014 4:40am EDT

    (Reuters) — Des­ig­nat­ed Euro­pean Com­mis­sion Pres­i­dent Jean-Claude Junck­er called on Tues­day for a 300 bil­lion euro ($409 bil­lion) pub­lic-pri­vate invest­ment pro­gramme to revive the Euro­pean econ­o­my, cre­ate jobs for the young and stim­u­late growth over the next three years.

    The mon­ey should be mobilised from exist­ing bud­get resources, the Euro­pean Invest­ment Bank and the pri­vate sec­tor, with­out chang­ing the bloc’s strict rules on bud­get deficits and debt reduc­tion, he told the Euro­pean Par­lia­ment dur­ing a debate on his con­fir­ma­tion to head the EU’s exec­u­tive.

    “We need a rein­dus­tri­al­i­sa­tion of Europe,” the for­mer Lux­em­bourg prime min­is­ter said, promis­ing a work pro­gramme in Feb­ru­ary 2015 for invest­ments in ener­gy, trans­port and broad­band net­works and indus­try clus­ters.

    300 bil­lion euros in pub­lic-pri­vate part­ner­ships in a bud­get-neu­tral envi­ron­ment where gov­ern­ments have noth­ing to spare prob­a­bly means a lit­tle less than 300 bil­lion euros in pri­vate invest­ments are slat­ed to be financ­ing the “large pub­lic invest­ment pro­gramme” Draghi have talk­ing about. But at least there are tax cuts (with fur­ther bud­get cuts) com­ing. Have fun with that.

    Posted by Pterrafractyl | August 22, 2014, 9:30 pm
  25. “The time has come for us to take on an alter­na­tive lead­er­ship, to set up an alter­na­tive motor and pro­mote ideas and prac­tices alter­na­tive to this destruc­tive ide­ol­o­gy”. That time actu­al­ly arrive a while ago, but since it’s still time to “take on an alter­na­tive lead­er­ship, to set up an alter­na­tive motor and pro­mote ideas and prac­tices alter­na­tive to this destruc­tive ide­ol­o­gy” this is good to hear:

    French econ­o­my min­is­ter urges alter­na­tive to Ger­man aus­ter­i­ty

    PARIS Sun Aug 24, 2014 4:07pm EDT

    (Reuters) — The time has come for France to resist Ger­many’s “obses­sion” with aus­ter­i­ty and pro­mote alter­na­tive poli­cies across the euro zone that sup­port house­hold con­sump­tion, fire­brand French Econ­o­my Min­is­ter Arnaud Mon­te­bourg said on Sun­day.

    Deficit-reduc­tion mea­sures car­ried out since the 2008 finan­cial cri­sis have crip­pled Europe’s economies and gov­ern­ments need to change course swift­ly or they will lose their vot­ers to pop­ulist and extrem­ist par­ties, Mon­te­bourg told a social­ists’ meet­ing in east­ern France.

    “France is the euro zone’s sec­ond-biggest econ­o­my, the world’s fifth-great­est pow­er, and it does not intend to align itself, ladies and gen­tle­men, with the exces­sive obses­sions of Ger­many’s con­ser­v­a­tives,” Mon­te­bourg said.

    “That is why the time has come for France and its gov­ern­ment, in the name of the Euro­pean Union’s sur­vival, to put up a just and sane resis­tance [to these poli­cies].”

    Mon­te­bourg said con­sen­sus was grow­ing among econ­o­mists and politi­cians world­wide on the need for growth-ori­ent­ed poli­cies and men­tioned his Ger­man social­ist coun­ter­part Sig­mar Gabriel and Italy’s pre­mier Mat­teo Ren­zi as poten­tial allies.


    Mon­te­bourg said he had per­son­al­ly asked Pres­i­dent Fran­cois Hol­lande for “a major re-direc­tion of our eco­nom­ic pol­i­cy”. The gov­ern­ment should now focus less on cut­ting debt than on sup­port­ing house­holds to revive con­sump­tion, a tra­di­tion­al eco­nom­ic dri­ver, he said.

    Mon­te­bourg, who makes no secret of his own pres­i­den­tial ambi­tions, is known for his fre­quent attacks on aus­ter­i­ty, but his lat­est com­ments are like­ly to embar­rass Hol­lande, who despite mount­ing pres­sure said just days ear­li­er he would not back away from his pol­i­cy based on spend­ing cuts and cor­po­rate tax breaks.

    Hol­lan­de’s busi­ness-mind­ed poli­cies have alien­at­ed many left-wing law­mak­ers and vot­ers already frus­trat­ed with his failed pledge to curb unem­ploy­ment. He is now the most unpop­u­lar pres­i­dent in over half a cen­tu­ry, with an approval score of 17 per­cent in the lat­est Ifop poll.


    In an inter­view pub­lished on Sat­ur­day, Mon­te­bourg had already warned the aus­ter­i­ty mea­sures pur­sued by France and its Euro­pean peers were stran­gling growth.

    Six years after the col­lapse of bank­ing group Lehman Broth­ers and the start of the glob­al eco­nom­ic cri­sis, the Unit­ed States and Britain have returned to growth while euro zone economies are still shrink­ing or stag­nat­ing, he not­ed on Sun­day.

    “There is a dis­ease spe­cif­ic to the euro zone, a seri­ous dis­ease, per­sis­tent and dan­ger­ous,” Mon­te­bourg said, argu­ing that fis­cal and mon­e­tary aus­ter­i­ty would not help end the cri­sis but had only wors­ened and extend­ed it.

    “The time has come for us to take on an alter­na­tive lead­er­ship, to set up an alter­na­tive motor and pro­mote ideas and prac­tices alter­na­tive to this destruc­tive ide­ol­o­gy,” he said.

    In oth­er, far less pos­i­tive news...

    Posted by Pterrafractyl | August 24, 2014, 6:47 pm
  26. You know how the GOP had to be sure to ensure that Oba­macare nev­er ever get prop­er­ly imple­ment­ed because then the pub­lic would sud­den­ly dis­cov­er that the pro­gram might actu­al­ly help their lives and was­n’t the night­mare plot to destroy the coun­try that the GOP was hyper­ven­ti­lat­ing about for so long. Here’s a sto­ry about the sim­i­lar dynam­ic tak­ing place in Europe that gets applied to any new help­ful gov­ern­ment at all. And as the sto­ry high­lights, sad­ly, it’s not just the euro-con­ser­v­a­tives that are ter­ri­fied of remind­ing the pub­lic that the gov­ern­ment can actu­al­ly help:

    France’s Hol­lande demands new gov­ern­ment after left­ist dis­sent

    By John Irish and Alexan­dria Sage

    PARIS Mon Aug 25, 2014 11:02am EDT

    (Reuters) — French Pres­i­dent Fran­cois Hol­lande asked his prime min­is­ter on Mon­day to form a new gov­ern­ment, look­ing to impose his will on the cab­i­net after rebel left­ist min­is­ters had called for an eco­nom­ic pol­i­cy U‑turn.

    The sur­prise move came the day after out­spo­ken Econ­o­my Min­is­ter Arnaud Mon­te­bourg had con­demned what he called fis­cal “aus­ter­i­ty” and attacked euro zone pow­er­house Ger­many’s “obses­sion” with bud­getary rigour.

    In a terse state­ment, Hol­lan­de’s office said Prime Min­is­ter Manuel Valls had hand­ed in his gov­ern­men­t’s res­ig­na­tion, open­ing the way for a reshuf­fle just four months after tak­ing office.

    “The head of state asked him to form a team that sup­ports the objec­tives he has set out for the coun­try,” the state­ment said, sug­gest­ing Valls would con­tin­ue try­ing to revive the euro zone’s sec­ond largest econ­o­my with tax cuts for busi­ness­es while slow­ly rein­ing in its pub­lic deficit by trim­ming spend­ing.

    France has lagged oth­er euro zone economies in emerg­ing from a recent slow­down, fuelling frus­tra­tion over Hol­lan­de’s lead­er­ship, both with­in his Social­ist par­ty and fur­ther afield.

    The new cab­i­net will be announced on Tues­day and there was no imme­di­ate word on who would stay and who would go. Local media report­ed that left-wing Cul­ture Min­is­ter Aure­lie Fil­ipet­ti had sig­nalled she did not want a post in the new gov­ern­ment.

    If Hol­lande decid­ed to sack Mon­te­bourg, who is viewed as a poten­tial pres­i­den­tial rival, he would risk see­ing the oust­ed min­is­ter take with him a band of rebel law­mak­ers and deprive him of the par­lia­men­tary major­i­ty he needs to push through reforms.

    Oppo­si­tion con­ser­v­a­tives, who for weeks have been embroiled in their own lead­er­ship rows, called for an out­right dis­so­lu­tion of par­lia­ment, as did the far-right Nation­al Front.

    “With half of the pres­i­den­tial man­date already gone, it does­n’t bode well for the abil­i­ty of the pres­i­dent, or what­ev­er gov­ern­ment he choos­es, to take key deci­sions,” said for­mer Prime Min­is­ter Fran­cois Fil­lon, one of hand­ful of hope­fuls for the con­ser­v­a­tive tick­et in the 2017 pres­i­den­tial elec­tion.

    “The big ques­tion with this reshuf­fle is whether Fran­cois Hol­lande will still have a par­lia­men­tary major­i­ty,” Fred­er­ic Dabi of poll­ster Ifop told i>Tele.

    In a con­fi­dence vote in April, Valls’ gov­ern­ment scored 306 votes — above the 289 votes need­ed for an absolute major­i­ty — with the help of small­er allied par­ties.


    A new sur­vey released at the week­end showed Hol­lan­de’s poll rat­ings stuck at 17 per­cent, the low­est for any leader of France since its Fifth Repub­lic was formed in 1958. Valls, a once-pop­u­lar inte­ri­or min­is­ter, saw his own pop­u­lar­i­ty erod­ed by his fail­ure to tack­le unem­ploy­ment, which is stuck above 10 per­cent.

    Despite being pro­mot­ed with­in the cab­i­net to econ­o­my min­is­ter, Mon­te­bourg has emerged as the most vis­i­ble leader of the left since Hol­lande in Jan­u­ary adopt­ed a more pro-busi­ness line to try and boost the econ­o­my with cor­po­rate tax breaks.

    Hol­lande has also sought to repair ties with Ger­man Chan­cel­lor Angela Merkel’s con­ser­v­a­tives that have been strained by France’s repeat­ed fail­ures to meet bud­getary tar­gets agreed with the Brus­sels-based Euro­pean Com­mis­sion.

    Speak­ing at a meet­ing of Social­ists in east­ern France on Sun­day, Mon­te­bourg said deficit-reduc­tion mea­sures car­ried out since the 2008 finan­cial cri­sis had crip­pled euro zone economies and urged gov­ern­ments to change course swift­ly or lose their vot­ers to pop­ulist and extrem­ist par­ties.

    “The time has come for us to take on an alter­na­tive lead­er­ship, to set up an alter­na­tive motor,” he told the gath­er­ing, where Edu­ca­tion Min­is­ter Benoit Hamon also took Hol­lan­de’s poli­cies to task.

    The irony of the tim­ing of Mon­te­bourg’s com­ments is that EU pol­i­cy­mak­ers have in recent weeks acknowl­edged the bloc’s rules on bud­get con­sol­i­da­tion should be fol­lowed with flex­i­bil­i­ty, while France this month con­ced­ed that stag­nant growth meant it would miss its 2014 bud­get tar­get.

    ECB chief Mario Draghi last week eased the focus of his euro zone pol­i­cy away from aus­ter­i­ty towards reviv­ing growth, urg­ing gov­ern­ments in a speech to do more to boost demand and hint­ing at Euro­pean Cen­tral Bank action.

    Ger­many, France, Italy, Spain, Por­tu­gal, Ire­land and oth­ers saw their bond yields hit all-time lows on Mon­day in response to his remarks, as spec­u­la­tion grew the ECB was prepar­ing new asset pur­chas­es to counter wilt­ing infla­tion.


    Yes, bond yields are at record lows (large­ly due to the ECB’s inter­ven­tion and mar­ket bets that the ECB will be forced to buy sov­er­eign bonds in the future due to its mas­sive pol­i­cy fail­ures so far), but gov­ern­ments can’t pos­si­ble engage in fis­cal stim­u­lus pro­grams. The rea­sons why fis­cal stim­u­lus can nev­er be con­sid­ered are nev­er made clear but also nev­er to be asked and now you know why: Dan­ger­ous ideas, like the idea that gov­ern­ment can be a force for good, can col­lapse the gov­ern­ment.

    Or maybe Paul Krug­man did it.

    Posted by Pterrafractyl | August 25, 2014, 7:59 am
  27. Euro­pean stocks and bonds are once again ral­ly­ing on the notion that euro­zone aus­ter­i­ty poli­cies are going to con­tin­ue to fail so mis­er­ably that the ECB will even­tu­al­ly be forced to engage in quan­ti­ta­tive eas­ing and pur­chase bonds. If that sounds like a crazy sit­u­a­tion, it’s because it is a crazy sit­u­a­tion. A crazy sit­u­a­tion cre­at­ed and fos­tered by men and women held in high regard in the halls of pow­er that appear to be total­ly insane:

    The Irish Times
    Aus­ter­i­ty will hold sway until deep­en­ing cri­sis changes ECB’s mind
    Ide­ol­o­gy brooks no argu­ment, despite what the facts say

    Chris Johns
    Tue, Aug 26, 2014, 12:12

    John May­nard Keynes famous­ly argued that politi­cians and pol­i­cy mak­ers are often “slaves to some defunct econ­o­mist”.

    I think he was only par­tial­ly cor­rect, par­tic­u­lar­ly if he meant that impor­tant deci­sions are based on a body of log­i­cal, coher­ent think­ing, albeit one of a mis­guid­ed kind. He went on to argue that “mad­men in author­i­ty, who hear voic­es in the air, are dis­till­ing their fren­zy from some aca­d­e­m­ic scrib­bler of a few years back”.

    He was right about the mad­ness but, like many a con­tem­po­rary econ­o­mist, wrong to infer that actu­al poli­cies always have their roots in ideas once thought of as sound. Keynes failed to recog­nise the full sig­nif­i­cance of the role played by ide­ol­o­gy; he didn’t make enough of his own point about mad­ness.

    Simon Wren-Lewis, a pro­fes­sor at Oxford Uni­ver­si­ty, has tried man­ful­ly to res­ur­rect this Key­ne­sian way of think­ing: in sev­er­al arti­cles he has tried to dis­till the log­ic behind Euro­pean aus­ter­i­ty. And then he pro­ceeds to dis­man­tle the intel­lec­tu­al edi­fice that he sees as under­pin­ning cur­rent eco­nom­ic poli­cies in the euro area (and the UK).

    For the most part I think he fails – not because he fails to iden­ti­fy the log­ic dri­ving aus­ter­i­ty but more because his task is doomed from the start. There is no such the­o­ret­i­cal ratio­nale, the log­ic sim­ply isn’t there, hid­den or oth­er­wise.

    Pro­fes­sor Wren Lewis has him­self come to a sim­i­lar con­clu­sion: he now likens cur­rent beliefs in bud­getary aus­ter­i­ty as akin to cre­ation­ism and cli­mate-change denial. The (accu­mu­lat­ing) evi­dence emphat­i­cal­ly points one way but con­trary beliefs remain as rock sol­id as ever.

    Despite much evi­dence to the con­trary, econ­o­mists do reach broad agree­ment on some things. The effects of fis­cal aus­ter­i­ty when inter­est rates are zero is one such notion, about which there is almost uni­ver­sal con­sen­sus: it’s a very bad idea.

    Anoth­er emi­nent pro­fes­sor, Paul De Grauwe of the Lon­don School of Eco­nom­ics, made the same point when he recent­ly said that Euro­pean pol­i­cy mak­ers “are doing every­thing they can to stop recov­ery tak­ing off, so they should not be sur­prised if there is in fact no take-off. It is bal­anced-bud­get fun­da­men­tal­ism, and it has become reli­gious”.


    Whether or not iner­tia is hard wired into Euro­pean pol­i­cy mak­ing, there is a sim­ple prac­ti­cal ques­tion: if Draghi is giv­ing the green light to less aus­ter­i­ty, who does he have in mind? It is cer­tain­ly not the Irish Finance Min­is­ter. The one coun­try that could seri­ous­ly do with less aus­ter­i­ty with no impli­ca­tions for debt sus­tain­abil­i­ty is Ger­many. The spelling and gram­mar check­ing soft­ware on this com­put­er does its utmost to pre­vent me putting ‘Angela Merkel’ and ‘fis­cal expan­sion’ into the same sen­tence.

    The polit­i­cal con­se­quences of Euro­pean eco­nom­ic stag­na­tion are easy to describe but dif­fi­cult to time. The French gov­ern­ment is in total dis­ar­ray, pre­cise­ly because of eco­nom­ics. There will be much more of this. And, as always, pol­i­tics will dri­ve the eco­nom­ics: more polit­i­cal chaos will, even­tu­al­ly, force the ECB to act in a mean­ing­ful way. That’s why bond mar­kets are mov­ing today. That same polit­i­cal chaos will pro­duce pan-Euro­pean fis­cal ini­tia­tives. Bal­anced bud­get fun­da­men­tal­ism has one, not ter­ri­bly demo­c­ra­t­ic, core belief: Europe’s local politi­cians can­not be trust­ed with spend­ing and tax­a­tion poli­cies. So, like mon­e­tary pol­i­cy, fis­cal pol­i­cy will be cen­tralised in the hands of tech­nocrats. Then we will get some extra spend­ing, some prop­er relief from aus­ter­i­ty. But not before.

    The trou­ble with chaos, of course, is that it is chaot­ic. And very dif­fi­cult to pre­dict and man­age.

    Posted by Pterrafractyl | August 26, 2014, 11:50 am
  28. Paul Krug­man has a the­o­ry about why the response from the Euro­pean left wing estab­lis­men­t’s response to the sud­den onslaught of far right eco­nom­ic the­o­ries has been so weak in recent years when com­pared to the push back against sim­i­lar the­o­ries in the US: The George W. Bush admin­is­tra­tion was so dis­as­ter­ous (and recent) that it sort of inoc­u­lat­ed US econ­o­mists and com­men­ta­tors to the idea that the talk­ing heads and elites in fan­cy suits must know what they are talk­ing about (or might be cyn­i­cal­ly lying). In oth­er words, after eight years of the Bush admin­is­tra­tion’s end­less attempts at “cre­at­ing our own real­i­ty”, the “real­i­ty-based com­mu­ni­ty” in the US basi­cal­ly devel­oped an aller­gy to ram­pant, in-your-face lying about top­ics that might destroy the nation, but in the EU they did­n’t have the same kind of expo­sure to the Bush-itis Big Lie virus with their own lead­ers and so nev­er devel­op that kind of aller­gic response to their own big elite lies. So....thanks for only expos­ing us and not killing us George?

    The New York Times
    The Con­science of a Lib­er­al
    Aus­ter­i­ty and the Hap­less Left
    Paul Krug­man
    Aug 29 9:00 am

    In today’s col­umn I am not nice to Fran­cois Hol­lande, who has shown about as much strength in stand­ing up to aus­te­ri­ans as a wet Kleenex. But one does have to admit that he’s not alone in his hap­less­ness; where, indeed, are the major polit­i­cal fig­ures on the Euro­pean left tak­ing a stand against dis­as­trous poli­cies? Britain’s Labour Par­ty has been almost sur­re­al­ly unwill­ing to chal­lenge Cameron/Osborne’s core premis­es; is any­one doing bet­ter?

    You can com­plain — and I have, often — about Pres­i­dent Obama’s will­ing­ness to go along with belt-tight­en­ing rhetoric, the years he wast­ed in pur­suit of a Grand Bar­gain, and so on; still, the Oba­ma admin­is­tra­tion, while it won’t use the word “stim­u­lus”, favors the thing itself, and in gen­er­al Amer­i­can lib­er­als have tak­en a much more forth­right stand against hard-mon­ey, bal­anced-bud­get ortho­doxy than their coun­ter­parts in Europe. Econ­o­mists, in par­tic­u­lar, have tak­en a much stronger stand. In Britain there are, to be sure, some promi­nent anti-aus­ter­i­ty voic­es — Mar­tin Wolf, Jonathan Portes, Simon Wren-Lewis, and I’m sure there are oth­ers I’m miss­ing. But they don’t seem to have any­thing like the weight in the debate that Lar­ry Sum­mers, Alan Blind­er, and many oth­ers have here.

    Why the dif­fer­ence? I don’t real­ly know. I have a cou­ple of hypothe­ses. One is that the US intel­lec­tu­al ecol­o­gy seems much more flex­i­ble: here, seri­ous econ­o­mists with cel­e­brat­ed research can also be pub­lic intel­lec­tu­als with large fol­low­ings, and even serve as pub­lic offi­cials; and they can pro­vide at least some coun­ter­weight to the Very Seri­ous Peo­ple. Think Lar­ry Sum­mers, but also Janet Yellen (and before her Ben Bernanke), and in a some­what dif­fer­ent way yours tru­ly. Such peo­ple aren’t total­ly absent in Europe — Mervyn King was an aca­d­e­m­ic cen­tral banker, and so in a way is Mario Draghi. But there’s much more of that in the US.

    Anoth­er hypoth­e­sis is that Amer­i­can lib­er­als have been tough­ened up by the crazi­ness of our right, and in par­tic­u­lar by the expe­ri­ence of the Bush years. After see­ing the Very Seri­ous Peo­ple lion­ize W, a fun­da­men­tal­ly ludi­crous fig­ure, and cheer on a war that was obvi­ous­ly cooked up on false pre­tens­es, US lib­er­als are more ready than Euro­pean Social Democ­rats to believe that the men in good suits have no idea what they’re talk­ing about. Oh, and Amer­i­ca does have a net­work of pro­gres­sive think tanks that is vast­ly big­ger and more effec­tive than any­thing in Europe.

    But I’m just mak­ing sug­ges­tions here. The hap­less­ness of the Euro­pean left is still some­thing I don’t ful­ly under­stand.

    As Krug­man notes at the end, it’s just a the­o­ry. But let’s hope there’s some real­i­ty to the the­o­ry, because oth­er­wise it sug­gests that soci­eties are sim­ply inca­pable of learn­ing and, in the case of the EU, it would also mean that the aus­ter­i­ty nev­er ends:

    Schaeu­ble Sees Draghi’s Instru­ments for Growth Exhaust­ed
    By Car­o­line Con­nan, Bri­an Parkin and Mark Deen Aug 29, 2014 4:24 AM CT

    The Euro­pean Cen­tral Bank has run out of ways to help the euro area, putting the bur­den on gov­ern­ments to spur growth with­out run­ning exces­sive deficits, Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble said.

    In an inter­view with Bloomberg Tele­vi­sion at the Medef busi­ness lead­ers’ con­fer­ence near Paris, Schaeu­ble said he agrees “100 per­cent” with ECB Pres­i­dent Mario Draghi’s appeals for gov­ern­ments in the 18-coun­try cur­ren­cy union to com­ple­ment mon­e­tary pol­i­cy with “struc­tur­al reforms” to boost com­pet­i­tive­ness and over­come the lega­cy of Europe’s debt cri­sis.

    ‘‘Mon­e­tary pol­i­cy can only buy time,’’ Schaeu­ble said in the inter­view yes­ter­day. “Liq­uid­i­ty in mar­kets is not too low, it’s even too high. There­fore I think mon­e­tary pol­i­cy has come to the end of its instru­ments and there­fore what we urgent­ly need is invest­ments, regain­ing con­fi­dence by investors, by mar­kets, by con­sumers.”

    Schaeuble’s com­ments reflect the main­stream view in Chan­cel­lor Angela Merkel’s coali­tion and Europe’s biggest econ­o­my as pol­i­cy mak­ers debate how to boost growth and Draghi sig­nals the euro area may need more mon­e­tary stim­u­lus. French Prime Min­is­ter Manuel Valls urged the ECB on Aug. 27 to use all means at its dis­pos­al to lift infla­tion to its tar­get lev­el.

    Euro-area infla­tion slowed in August and the job­less rate remained close to a record, accord­ing to EU data pub­lished today. Con­sumer prices rose 0.3 per­cent in August from a year ear­li­er, the low­est rate since Octo­ber 2009, adding to pos­si­ble argu­ments for Draghi to deliv­er quan­ti­ta­tive eas­ing. The euro was lit­tle changed at $1.3181 at 11:15 a.m. Frank­furt time, trad­ing near an 11-month low.


    “It’s very impor­tant that we all know in Europe — every mem­ber state — that we have to stick to struc­tur­al reforms and enhance com­pet­i­tive­ness, even in Ger­many,” he said. “We are fine actu­al­ly, but if we were not to con­tin­ue to enhance our com­pet­i­tive­ness in com­ing years we would lose our posi­tion.”

    Did you catch that?

    “I don’t think ECB mon­e­tary pol­i­cy has the instru­ments to fight defla­tion, to be quite frank,” Schaeu­ble said. Domes­tic demand is dri­ving Ger­man growth “because we have high con­fi­dence of con­sumers, investors.”

    “And the main rea­son why we have such a high con­fi­dence is they think our pub­lic bud­gets are sus­tain­able, we will stick to what we have promised and we stick with invest­ment,” he said.

    Yes, “domes­tic demand is dri­ving growth in Ger­many”, at least accord­ing to Ger­many’s finance min­is­ter while he’s argu­ing that the rest of the EU should slash their domes­tic economies via “inter­nal deval­u­a­tion” so they can emu­late Ger­many’s high-tech export ori­ent­ed eco­nom­ic mod­el with a mas­sive trade sur­plus. And appar­ent­ly the drop off in domes­tic demand in all the aus­ter­i­ty-stick­en nations was due to the con­sumers sud­den­ly wor­ry­ing about deficit and not, you know, due to the aus­ter­i­ty.

    Also note that when Schauble says:

    “It’s very impor­tant that we all know in Europe — every mem­ber state — that we have to stick to struc­tur­al reforms and enhance com­pet­i­tive­ness, even in Germany,...We are fine actu­al­ly, but if we were not to con­tin­ue to enhance our com­pet­i­tive­ness in com­ing years we would lose our posi­tion.”,

    He’s basi­cal­ly say­ing that the aus­ter­i­ty SHOULD NEVER END, even for the coun­tries with the strongest economies. And don’t for­get that since Berlin is demand­ing that the rest of the EU emu­late Ger­many’s high-tech export-ori­ent­ed econ­o­my, and if the rest of the EU actu­al­ly does that, all those nations will be in very direct com­pe­ti­tion with each oth­er and there­fore the aus­ter­i­ty and the dri­ve towards greater “com­pet­i­tive­ness” real­ly can con­tin­ue indef­i­nite­ly just from inter­nal­ly-dri­ven EU-com­pe­ti­tion (and that’s ignor­ing com­ing robotics/AI rev­o­lu­tion).

    So, in a way, Berlin real­ly is capa­ble of “cre­at­ing its own real­i­ty” just as the Bush admin­is­tra­tion was also capa­ble of “cre­at­ing its own real­i­ty”, but only as long as the real­i­ty it’s cre­at­ing is a crap­py, bro­ken real­i­ty. But cre­at­ing a real­i­ty where “expan­sion­ary aus­ter­i­ty”, applied across an entire con­ti­nent (or across the globe, as Schauble called for last year), will some­how lead to greater pros­per­i­ty for all would require the abil­i­ty to cre­ate a real­i­ty where 1 — 1 = 2. And yet some­how econ­o­mists and pol­i­cy-mak­ers through­out EU have ful­ly embraced the idea that 1 — 1 = 2. Why? Let’s hope Krug­man is right and the EU elites sim­ply did­n’t get an intense enough expo­sure to the lethal Bush-itis Big Lie virus to devel­op their immune sys­tems, because some of the alter­na­tive expla­na­tions are far less benign.

    Posted by Pterrafractyl | August 29, 2014, 3:16 pm
  29. Paul Krug­man is con­tin­u­ing his spir­it jour­ney into the minds of “hard-mon­ey” fetishist that remain ded­i­cat­ed to the notion that run away hyper­in­fla­tion is always just around the cor­ner, ready to destroy lives and the entire econ­o­my, unless eter­nal vig­i­lance is main­tained by pri­or­i­tiz­ing low infla­tion over the health and well being of lives and the entire econ­o­my even though his­to­ry teach­es and sound eco­nom­ic the­o­ry strong­ly sug­gest sug­gests that such a strat­e­gy for mere­ly ends up destroy­ing lives and the entire econ­o­my:

    The New York Times
    The Con­science of a Lib­er­al
    Three Roads to Hard Mon­ey
    Paul Krug­man
    Sep 2 4:49 pm

    So, a hedge fund man­ag­er, a right-wing politi­cian, and a fresh­wa­ter econ­o­mist walk into a restau­rant and order wine. No, this isn’t the set­up for a joke — it’s a real sto­ry. We don’t actu­al­ly know what they talked about, but all three have been promi­nent in warn­ing that the Fed is embarked on a dan­ger­ous­ly infla­tion­ary path. And as I have writ­ten many many times, this infla­tion para­noia has proved remark­ably resilient, endur­ing despite five-plus years of utter empir­i­cal fail­ure. Why?

    What strikes me here is that we have three seem­ing­ly dif­fer­ent sto­ries about the roots of hard-mon­ey mania, which hap­pen to be embod­ied in the per­sons of the three din­ers. One is that the wealthy hate mon­e­tary expan­sion because they fear that it will reduce their returns and erode their wealth, and mon­ey buys influ­ence. One is that move­ment con­ser­vatism has become a closed intel­lec­tu­al space, with­in which lead­ing polit­i­cal fig­ures can and do imag­ine that the truth about eco­nom­ics can be found in Atlas Shrugged. And one stress­es the inter­nal evo­lu­tion (or devo­lu­tion) of the eco­nom­ics pro­fes­sion, in which the rise of ratio­nal expec­ta­tions led to a great for­get­ting of even the most basic macro­eco­nom­ic con­cepts.

    On the face of it, these seem like dis­joint sto­ries, with their con­ver­gence at pre­cise­ly the moment they could do the most harm a coin­ci­dence. But there has to be more.

    I’m think­ing, I’m think­ing. Maybe some wine will help.

    Maybe some wine will help elu­ci­date the mys­ter­ies of elite eco­nom­ic Mun­chausen Syn­drome. Or per­haps the whine of bil­lion­aires com­plain­ing about about how a min­i­mum wage leads direct­ly to fas­cism will also get the cre­ative juices flow­ing. Why not poor a glass, take a lis­ten, and let the insights flow:

    The Huff­in­g­ton Post
    Top Koch Strate­gist Argues The Min­i­mum Wage Leads Direct­ly To Fas­cism

    Lau­ren Wind­sor
    Post­ed: 09/03/2014 9:04 am EDT

    At a polit­i­cal strat­e­gy sum­mit host­ed on June 16 by the con­ser­v­a­tive bil­lion­aires Charles and David Koch, Richard Fink, their top polit­i­cal strate­gist, told the pri­vate audi­ence that when he sees some­one “on the street” he says, “Get off your ass, and work hard like we did.” Fink’s anec­dote came dur­ing his pre­sen­ta­tion titled “The Long-Term Strat­e­gy: Engag­ing the Mid­dle Third,” which capped off a ses­sion of four speech­es detail­ing the intel­lec­tu­al foun­da­tion of Charles Koch’s polit­i­cal ide­ol­o­gy. Audio of the event was obtained by The Under­cur­rent and shared exclu­sive­ly with The Huff­in­g­ton Post.

    Charles Koch opened the ses­sion by lay­ing out his grand vision for the con­fer­ence; Dr. Vic­tor Han­son, a mil­i­tary his­to­ri­an, described the nature of the threat of col­lec­tivism; and Dr. Will Ruger, vice pres­i­dent of research and pol­i­cy at the Charles Koch Insti­tute, dis­cussed the fea­tures of a free soci­ety. Fink round­ed out the set, out­lin­ing the path to achieve the goals of dereg­u­la­tion and lim­it­ed gov­ern­ment. The mes­sage, he said, should focus on intent, mean­ing, and well-being.

    Of the four speech­es, Fink’s was the longest and the most can­did, offer­ing obser­va­tions on fas­cism, envi­ron­men­tal­ism, and the appli­ca­tion of busi­ness mar­ket­ing prin­ci­ples to the Koch broth­ers’ polit­i­cal mes­sag­ing. His state­ments were not off­hand remarks, but rather should be seen as rep­re­sen­ta­tive of the Kochs, as he was hailed as their “grand strate­gist” by emcee Kevin Gen­try in the pro­ceed­ings and sits on the boards of sev­er­al of their orga­ni­za­tions. Full tran­scripts are avail­able here.

    Mes­sages left for Koch, Fink and Ruger with Koch Indus­tries and the Charles Koch Insti­tute were not returned.

    Col­lec­tivism: Fram­ing Lib­er­als as Fas­cists

    In his speech titled “Amer­i­can Courage: Our Com­mit­ment to a Free Soci­ety,” Charles Koch echoed an op-ed he wrote ear­li­er this year in the Wall Street Jour­nal in both his para­noia and self-pity. The bil­lion­aire oil indus­tri­al­ist, host­ing some of the most pow­er­ful men in Wash­ing­ton, with­out irony claimed in his speech that he and his broth­er were “put square­ly in front of the fir­ing squad.” He lat­er framed the path ahead for Amer­i­ca as a bina­ry choice between free­dom and col­lec­tivism, a catchall term he used to describe lib­er­al­ism, social­ism, and fas­cism.

    Koch refrained from draw­ing explic­it par­al­lels to fas­cists, but his lieu­tenants did not. (Per­haps he learned from a past audio leak where­in he seemed to liken Pres­i­dent Barack Oba­ma to Sad­dam Hus­sein.) Ruger warned that lib­er­al­ism sets soci­ety on a march toward the fate of total­i­tar­i­an North Korea. “We clear­ly see the dif­fer­ence between free soci­eties and col­lec­tivist regimes in this night­time satel­lite image of the Kore­an penin­su­la, where the col­lec­tivist north is lit­er­al­ly in the dark due to its pover­ty,” said Ruger. “This is what col­lec­tivism gives you.”

    This con­fla­tion was a run­ning theme through­out the ses­sion, artic­u­lat­ed in large part by grand strate­gist Fink. An econ­o­mist by train­ing, he point­ed to psy­chol­o­gy to explain the dan­gers of rais­ing the min­i­mum wage vis á vis total­i­tar­i­an­ism.

    “Psy­chol­o­gy shows that is the main recruit­ing ground for total­i­tar­i­an­ism, for fas­cism, for con­formism, when peo­ple feel like they’re vic­tims,” said Fink. “So the big dan­ger of min­i­mum wage isn’t the fact that some peo­ple are being paid more than their val­ue-added — that’s not great. It’s not that it’s hard to stay in busi­ness — that’s not great, either. But it’s the 500,000 peo­ple that will not have a job because of min­i­mum wage.”

    He con­tin­ued, “We’re tak­ing these 500,000 peo­ple that would’ve had a job, and putting them unem­ployed, mak­ing depen­dence part of gov­ern­ment pro­grams, and destroy­ing their oppor­tu­ni­ty for earned suc­cess. And so we see this is a very big part of recruit­ment in Ger­many in the ’20s.”

    “If you look at the Third — the rise and fall of the Third Reich, you can see that,” Fink said. “And what hap­pens is a fas­cist comes in and offers them an oppor­tu­ni­ty, finds the vic­tim — Jews or the West — and offers them mean­ing for their life, OK?”

    Fink cit­ed the his­tor­i­cal exam­ples of Nazi Ger­many and com­mu­nist Rus­sia and Chi­na to segue to ter­ror­ism. “This is not just in Ger­many. It’s in Rus­sia, in Lenin, and Stal­in Rus­sia, and then Mao,” said Fink. “This is the recruit­ment ground for fas­cism, and it’s not just his­tor­i­cal. It’s what goes on today in the — in the sui­cide bomber recruit­ment.”

    Lack of Mean­ing in Life Leads to Envi­ron­men­tal­ism

    Fink’s com­men­tary on col­lec­tivism led to obser­va­tions on the psy­cho­log­i­cal under­pin­nings of the envi­ron­men­tal move­ment. Accord­ing to Fink, in the same way that lack of mean­ing in life leads to ter­ror­ism, it leads to envi­ron­men­tal­ism.

    “The envi­ron­men­tal move­ment. Occu­py Wall Street. These kids are search­ing for mean­ing. They’re protest­ing the 1 per­cent. They are the 1 per­cent, but they’re protest­ing the 1 per­cent. The envi­ron­men­tal move­ment and cli­mate change. It’s not about cli­mate change.

    I stud­ied cli­mate change for six years. I can’t fig­ure it out, quite frankly. Charles is ahead of me on this. I’m not a cli­ma­tol­o­gist, but I’m not com­plete­ly stu­pid. I can tell you I meet with peo­ple, par­tic­u­lar­ly in Cal­i­for­nia, that are con­vinced the world is going to burn up in you know, a year or two. They don’t know the answer — they don’t even know the ques­tion, because it’s not about cli­mate change. It’s about a cause. It gives their life mean­ing.”

    Fink’s state­ment that he’s not a cli­ma­tol­o­gist is notable con­sid­er­ing both his edu­ca­tion and employ­ment. Koch Indus­tries is a lead­ing pro­po­nent of cli­mate change skep­ti­cism. David Koch has posit­ed that cli­mate change may turn out to be good for humankind in that longer grow­ing sea­sons would sup­port greater food pro­duc­tion. And Charles Koch per­son­al­ly helped found the Insti­tute for Ener­gy Research, a group that defends oil indus­try tax sub­si­dies. Despite his actions, Charles Koch railed against this type of behav­ior dur­ing the sem­i­nar. “So to tru­ly help the poor and the econ­o­my, we have to elim­i­nate crony­ism,” he said. “We have to elim­i­nate wel­fare for the rich.”


    Apply­ing Busi­ness Mar­ket­ing to Polit­i­cal Mes­sag­ing

    Fink described the dif­fer­ences between the three thirds of the elec­torate — the “free­dom” third, the “col­lec­tivist” third, and the non-ide­o­log­i­cal mid­dle third of vot­ers, whose recruit­ment he said is cru­cial for the Koch network’s suc­cess. “Mitt Rom­ney won on lead­er­ship. He won on the econ­o­my. He won on expe­ri­ence,” Fink said. “What did he lose on? He lost on care and intent. Intent is extreme­ly impor­tant.”

    Fink spoke at length about the appear­ance of the Koch network’s motives to the mid­dle third, and the busi­ness-ori­ent­ed solu­tions for improv­ing its polit­i­cal brand.

    “Yeah, we want to decrease reg­u­la­tions. Why? It’s because we can make more prof­it, OK? Yeah, cut gov­ern­ment spend­ing so we don’t have to pay so much tax­es,” said Fink. “There’s truth in that, you all know, because we’re in the 30 per­cent of the free­dom fight­ers. But the mid­dle part of the coun­try doesn’t see it that way.”

    “When we focus on decreas­ing gov­ern­ment spend­ing, over-crim­i­nal­iza­tion, decreas­ing tax­es, it doesn’t do it, OK? We’ve been reach­ing the third by telling them what’s impor­tant — what we think is impor­tant should be impor­tant to them. And they’re not respond­ing and don’t like it, OK? Well, we get busi­ness — what do we do? We want to find out what the cus­tomer wants, right, not what we want them to buy,” he said.

    Fink con­clud­ed that if the broth­ers’ net­work could solve its mes­sag­ing prob­lem, it would “earn the respect and good feel­ing through the mid­dle third.” He also held up the Koch part­ner­ship with the Unit­ed Negro Col­lege Fund as emblem­at­ic of their strat­e­gy.

    Well, since the Koch broth­ers are clear­ly run­ning a fas­cist net­work intent on using an up-is-down “busi­ness mar­ket­ing” strat­e­gy to fool the rab­ble into join­ing their “Free­dom Fight­ing” cru­sade to fight the fas­cist threats of a min­i­mum wage and envi­ron­men­tal pro­tec­tions, could it also be the case that the “hard-mon­ey” fetishist are also fas­cists intent on using an up-is-down “busi­ness mar­ket­ing” strat­e­gy to fool the rab­ble into join­ing their “Free­dom Fight­ing” cru­sade to fight the fas­cist threats like a min­i­mum wage and envi­ron­men­tal pro­tec­tion? Maybe at least some of them?

    Posted by Pterrafractyl | September 3, 2014, 12:48 pm
  30. Here’s the lat­est round of “these deficit rules suck, we want to change them” vs “No, you need to stick to the rules just like we did”. Round and round we go:

    UPDATE 2‑France breaks 2015 deficit-cut­ting promise

    Wed Sep 10, 2014 6:17am EDT

    * Sapin says France will need more time to rein in pub­lic finances

    * Announce­ment comes as his pre­de­ces­sor gets EU bud­get job

    * Merkel says euro zone coun­tries must stick to com­mit­ments

    * Ger­many’s Schaeu­ble has resist­ed fur­ther fis­cal loos­en­ing (Releads with more quotes and details)

    By Leigh Thomas

    PARIS, Sept 10 (Reuters) — France announced on Wednes­day it was break­ing the lat­est in a long line of promis­es to Euro­pean Union part­ners to cut its pub­lic deficit, con­ced­ing it now would take until 2017 to bring its finances in line with EU rules.

    The state­ment by Finance Min­is­ter Michel Sapin fol­lows weeks of hints by Paris that weak­ness in the euro zone’s sec­ond largest econ­o­my would pre­vent it bring­ing the deficit below the EU ceil­ing of three per­cent of out­put next year as promised.

    Sapin insist­ed France was not seek­ing to change or sus­pend the rules but want­ed the dete­ri­o­rat­ing out­look for growth and infla­tion this year and next to be tak­en into account.

    Paris has led calls for a more flex­i­ble inter­pre­ta­tion of EU bud­get reg­u­la­tions along with Italy, but Ger­man Chan­cel­lor Angela Merkel has reject­ed any bend­ing of the rules and said on Wednes­day euro zone coun­tries should stick to their com­mit­ments.

    “The (Euro­pean) Com­mis­sion is right to keep up pres­sure for sol­id bud­gets and reforms,” she told par­lia­ment in Berlin. “What applies for Ger­many also applies unchanged for Europe.”

    Uphold­ing those rules will now fall to Sap­in’s Social­ist pre­de­ces­sor, Pierre Moscovi­ci who was appoint­ed Euro­pean Com­mis­sion­er for eco­nom­ic and mon­e­tary affairs in the new EU exec­u­tive team unveiled on Wednes­day.

    Moscovi­ci, an advo­cate of Keyn­sian demand-led eco­nom­ics, will be under the super­vi­sion of two Com­mis­sion vice-pres­i­dents, Jyr­ki Katainen and Vald­is Dom­brovskis, the for­mer prime min­is­ter of Fin­land and Latvia, both of whom back strict fis­cal dis­ci­pline.

    It was not imme­di­ate­ly clear whether that com­bi­na­tion of roles will improve France’s chance of avoid­ing dis­ci­pli­nary action by Brus­sels for miss­ing its tar­gets yet again.

    Sapin told a hasti­ly con­vened news con­fer­ence: “Let France’s posi­tion be clear: in the Euro­pean debate now open, we are not seek­ing a change of Euro­pean rules, we are not seek­ing their sus­pen­sion, nor any excep­tion for France or oth­er coun­tries.

    “We are ask­ing that every­one takes into account the eco­nom­ic real­i­ty we are all fac­ing — that growth that is too weak, infla­tion that is too low.”

    Sapin slashed his growth fore­casts for the French econ­o­my to 0.4 per­cent this year and 1.0 per­cent next, from pre­vi­ous tar­gets of one per­cent and 1.7 per­cent respec­tive­ly.

    He said the gov­ern­ment would stick to its plans to intro­duce no new tax­es next year and make some 21 bil­lion euros ($27.2 bil­lion) of spend­ing sav­ings.

    That means the deficit will now rise slight­ly to 4.4 per­cent this year, before eas­ing to 4.3 per­cent in 2015 and only approach­ing the 3 per­cent ceil­ing in 2017, at the end of Pres­i­dent Fran­cois Hol­lan­de’s five-year term.

    France won a two-year reprieve from the Com­mis­sion just last year to get its pub­lic finances into shape in return for a promise to push ahead with reforms to make its econ­o­my more com­pet­i­tive.


    That was the lat­est in over a decade of bro­ken promis­es by France and oth­er coun­tries that have under­mined con­fi­dence in the EU’s Sta­bil­i­ty and Growth Pact on deficits.

    But the yield on the French 10-year bond was large­ly unchanged at 1.39 per­cent after the announce­ment — an indi­ca­tion that mar­kets retain con­fi­dence in France’s high­ly liq­uid debt for now.

    Hol­lande has won sup­port from some EU part­ners for its cam­paign for flex­i­bil­i­ty in inter­pret­ing of EU bud­get rules, and Euro­pean Cen­tral Bank Mario Draghi has eased the focus of his pol­i­cy away from aus­ter­i­ty towards struc­tur­al reforms and pro­mot­ing growth.

    Yet Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble on Tues­day rebuffed calls for Berlin to spend more to boost the euro zone econ­o­my, insist­ing on the need for painful struc­tur­al reforms.

    Hol­lande, who has the low­est approval rat­ing of any mod­ern-day French pres­i­dent over his inabil­i­ty to fix the econ­o­my, last month eject­ed a trio of left­ist min­is­ters who had chal­lenged bud­getary rigour.

    One of those left­ists, for­mer Econ­o­my Min­is­ter Arnaud Mon­te­bourg, said in an inter­view pub­lished on Wednes­day that the French peo­ple had vot­ed for the left but end­ed up with the poli­cies of the Ger­man right.

    The offi­cial line for months has been that France accepts the need to reduce its deficit — but at a dif­fer­ent rhythm to that cur­rent­ly agreed with its EU part­ners.

    It will be for the incom­ing team of Euro­pean Com­mis­sion Pres­i­dent-elect Jean-Claude Junck­er to deter­mine how to han­dle France’s lat­est breach of its bud­get tar­gets.


    When you read things like:

    Uphold­ing those rules will now fall to Sap­in’s Social­ist pre­de­ces­sor, Pierre Moscovi­ci who was appoint­ed Euro­pean Com­mis­sion­er for eco­nom­ic and mon­e­tary affairs in the new EU exec­u­tive team unveiled on Wednes­day.

    Moscovi­ci, an advo­cate of Keyn­sian demand-led eco­nom­ics, will be under the super­vi­sion of two Com­mis­sion vice-pres­i­dents, Jyr­ki Katainen and Vald­is Dom­brovskis, the for­mer prime min­is­ter of Fin­land and Latvia, both of whom back strict fis­cal dis­ci­pline.


    One of those left­ists, for­mer Econ­o­my Min­is­ter Arnaud Mon­te­bourg, said in an inter­view pub­lished on Wednes­day that the French peo­ple had vot­ed for the left but end­ed up with the poli­cies of the Ger­man right.

    you have to won­der how many more pol­i­cy tus­sles it’s going to take for the real­i­ty to sink in that rules like The Fis­cal Com­pact and the ECB’s sin­gle man­date to focus on infla­tion alone (and com­plete­ly ignore things like unem­ploy­ment) con­sti­tu­tion­al­ly guar­an­tees that the poli­cies of the Ger­man right are now the offi­cial default poli­cies for the whole euro­zone under vir­tu­al­ly all cir­cum­stances. There was nev­er a good rea­son to agree to those rules in the first place but those are the rules nowa­days.

    Posted by Pterrafractyl | September 10, 2014, 10:28 am
  31. WTF?

    Wall Street on Parade
    The Fed Just Imposed Finan­cial Aus­ter­i­ty on the States

    By Pam Martens and Russ Martens: Sep­tem­ber 4, 2014

    The Fed­er­al Reserve Board of Gov­er­nors, togeth­er with the Fed­er­al Deposit Insur­ance Cor­po­ra­tion and Office of the Comp­trol­ler of the Cur­ren­cy – the top reg­u­la­tors of Wall Street’s largest banks – final­ized liq­uid­i­ty rules yes­ter­day that make absolute­ly no sense to any­one with a his­tor­i­cal per­spec­tive on how Wall Street oper­ates in a cri­sis.

    The Fed­er­al reg­u­la­tors adopt­ed a new rule that requires the country’s largest banks – those with $250 bil­lion or more in total assets – to hold an increased lev­el of new­ly defined “high qual­i­ty liq­uid assets” (HQLA) in order to meet a poten­tial run on the bank dur­ing a cred­it cri­sis. In addi­tion to U.S. Trea­sury secu­ri­ties and oth­er instru­ments backed by the full faith and cred­it of the U.S. gov­ern­ment (agency debt), the reg­u­la­tors have includ­ed some dubi­ous instru­ments while shun­ning oth­ers with a high­er safe­ty pro­file.

    Bizarrely, the Fed and its reg­u­la­to­ry sib­lings includ­ed invest­ment grade cor­po­rate bonds, the major­i­ty of which do not trade on an exchange, and more stun­ning­ly, stocks in the Rus­sell 1000, as meet­ing the def­i­n­i­tion of high qual­i­ty liq­uid assets, while exclud­ing all munic­i­pal bonds – even gen­er­al oblig­a­tion munic­i­pal bonds from states with a far high­er cred­it stand­ing and safe­ty pro­file than BBB-rat­ed cor­po­rate bonds.

    This, right­ful­ly, has state trea­sur­ers in an uproar. The five largest Wall Street banks con­trol the major­i­ty of deposits in the coun­try. By dis­qual­i­fy­ing munic­i­pal bonds from the cat­e­go­ry of liq­uid assets, the biggest banks are like­ly to trim back their hold­ings in munis which could raise the cost or lim­it the abil­i­ty for states, coun­ties, cities and school dis­tricts to issue muni bonds to build schools, roads, bridges and oth­er infra­struc­ture needs. This is a par­tic­u­lar­ly strange posi­tion for a Fed that is wor­ried about sub­par eco­nom­ic growth.

    In the Fed’s rule state­ment for the Fed­er­al Reg­is­ter, it acknowl­edged pub­lic com­menters’ chal­lenges to its inex­plic­a­ble bias against munic­i­pal bonds while embrac­ing all things cor­po­rate, writ­ing:

    “…com­menters assert­ed that the risk and liq­uid­i­ty pro­files of munic­i­pal secu­ri­ties were com­pa­ra­ble, if not supe­ri­or, to the pro­files of oth­er types of assets the agen­cies pro­posed for inclu­sion as HQLA, such as cor­po­rate bonds, equi­ties, cer­tain for­eign sov­er­eign oblig­a­tions, and cer­tain secu­ri­ties of GSEs.

    “A num­ber of com­menters expressed con­cerns that the pro­posed rule would have includ­ed cer­tain sov­er­eign secu­ri­ties for coun­tries that have small­er GDPs than some U.S. states as HQLA while exclud­ing oblig­a­tions of U.S. states and local gov­ern­ments. Some of these com­menters argued that the cred­it rat­ings of cer­tain states com­pare favor­ably with those of coun­tries whose oblig­a­tions could be includ­ed as lev­el 1 or lev­el 2A liq­uid assets. Com­menters also con­tend­ed that munic­i­pal secu­ri­ties per­form well and expe­ri­ence increased demand dur­ing times of stress. Sev­er­al com­menters assert­ed that bank­ing orga­ni­za­tions could liq­ui­date large hold­ings of munic­i­pal secu­ri­ties with min­i­mal mar­ket or price dis­rup­tion dur­ing a cri­sis sce­nario.”

    Mak­ing the Fed’s posi­tion even more unten­able is the fact that the Basel III Revised Liq­uid­i­ty Frame­work, the glob­al stan­dard that the new rule seeks to address, does not envi­sion gut­ting munic­i­pal bonds from the mix of suit­able liq­uid assets.

    The biggest hur­dle for the Fed’s posi­tion is that munic­i­pal bonds are read­i­ly eli­gi­ble for loans at the Fed’s dis­count win­dow – trump­ing any argu­ment that they could not com­mand liq­uid­i­ty in a cri­sis.

    The Fed’s ratio­nale for includ­ing cor­po­rate bonds and stocks but not munis in the high qual­i­ty liq­uid assets cat­e­go­ry rests on this premise:

    “The agen­cies believe that defin­ing an asset as liq­uid and read­i­ly-mar­ketable if it is trad­ed in an active sec­ondary mar­ket with more than two com­mit­ted mar­ket mak­ers, a large num­ber of com­mit­ted non-mar­ket mak­er par­tic­i­pants on both the buy­ing and sell­ing sides of trans­ac­tions, time­ly and observ­able mar­ket prices, and high trad­ing vol­umes pro­vides an appro­pri­ate stan­dard for deter­min­ing whether an asset can be read­i­ly sold in times of stress.”

    That premise lacks an his­tor­i­cal foun­da­tion. In times of cri­sis, Wall Street vet­er­ans know full well that mar­ket mak­ers have a nasty habit of back­ing away.


    That the Fed and its reg­u­la­to­ry cohorts have to resort to this implau­si­ble plan – which crimps the abil­i­ty of states and local­i­ties to raise essen­tial funds to oper­ate – in a strained effort to pre­tend that they’ve found a means of avoid­ing anoth­er mas­sive bailout of Wall Street in a cri­sis, is just fur­ther proof that the only way to seri­ous­ly deal with too-big-to-fail banks is to restore the Glass-Stea­gall Act and break up these com­plex crea­tures before they strike again.

    Well, that was hor­ri­ble to read. For­tu­nate­ly, the three reg­u­la­tors that agreed to this rule are also open to chang­ing it. And even more for­tu­nate­ly, that change only requires the Fed­er­al Reserve to act. So this may have just been a tem­po­rary awful mis­take. We’ll see:

    The Wall Street Jour­nal
    Reg­u­la­tors Open to Count­ing Muni Bonds in Bank Assets
    State, Local Offi­cials Say Exclu­sion Could Prompt Banks to Retreat From Muni Debt
    By Andrew Ack­er­man
    Sept. 9, 2014 1:43 p.m. ET

    WASHINGTON—Federal bank­ing reg­u­la­tors said they plan to revis­it a deci­sion to exclude munic­i­pal secu­ri­ties from a post­cri­sis rule aimed at ensur­ing banks have enough cash on hand to sur­vive a cri­sis, say­ing they are open to allow­ing some debt issued by states and local­i­ties to count as a “safe” asset.

    Top offi­cials from three bank regulators—the Fed­er­al Reserve, Office of the Comp­trol­ler of the Cur­ren­cy and the Fed­er­al Deposit Insur­ance Corp.—told Sen­ate law­mak­ers Tues­day they would con­sid­er alter­ing a rule com­plet­ed last week that requires banks to hold enough cash or cash-like assets to fund their oper­a­tions for 30 days. Pre­vi­ous­ly, only the Fed had expressed a will­ing­ness to alter the rule.

    Munic­i­pal secu­ri­ties cur­rent­ly don’t count as a “high-qual­i­ty liq­uid asset” under the rule, which means they won’t qual­i­fy under the new fund­ing require­ments. State and local offi­cials have said the exclu­sion could prompt banks to retreat from the munic­i­pal debt mar­kets, forc­ing gov­ern­ments to scale back spend­ing on roads, schools and oth­er infra­struc­ture projects financed with munic­i­pal bonds. Banks play an increas­ing­ly impor­tant role in the mar­ket, hav­ing near­ly dou­bled their own­er­ship of munic­i­pal secu­ri­ties over the past decade to more than 11%, accord­ing to Fed data.


    At Tues­day’s hear­ing, Fed Gov. Daniel Tarul­lo said he has asked his staff to ana­lyze the trad­ing of munic­i­pal secu­ri­ties to deter­mine which bonds would meet the def­i­n­i­tion of a “high-qual­i­ty liq­uid asset.” The com­ments are sim­i­lar to those he made last week when final­iz­ing the rule, say­ing there is evi­dence some state and local debt is fre­quent­ly trad­ed and may be “com­pa­ra­ble to that of the very liq­uid cor­po­rate bonds” that qual­i­fy as high-qual­i­ty and liq­uid.

    Mar­tin Gru­en­berg, chair­man of the FDIC, said his agency would sup­port revis­ing the rule “if there’s rea­son to make adjust­ments.”

    Thomas Cur­ry, the Comp­trol­ler of the Cur­ren­cy, said any deci­sion to alter to the rule would rest on the Fed’s analy­sis.

    “We’re open but we need to talk with our col­leagues,” he said.

    The Fed’s deci­sion to recon­sid­er whether to ful­ly exclude munic­i­pal secu­ri­ties was first report­ed by The Wall Street Jour­nal last week. By law, the Fed could amend the def­i­n­i­tion of safe assets uni­lat­er­al­ly, though bank­ing experts said it is unlike­ly they would act with­out the sup­port of the two oth­er reg­u­la­tors.

    Part of what makes the move to strip munic­i­pal bonds of their “high­ly liq­uid” sta­tus is that, as crit­ics have point­ed out, munic­i­pal bonds have a his­to­ry of very low rates of default so its unclear why you would have to lim­it banks’ hold­ing of these assets unless there’s rea­son to believe that munic­i­pal defaults will be much high­er in the future. Now why might reg­u­la­tors expect high­er munic­i­pal default rates? It’s a mys­tery.

    Posted by Pterrafractyl | September 14, 2014, 7:34 pm
  32. “French and Ger­man visions for Europe to clash in Berlin”. Guess which vision is going to win:

    French and Ger­man visions for Europe to clash in Berlin

    By Noah Barkin and Mark John

    BERLIN/PARIS Sun Sep 21, 2014 6:29am EDT

    (Reuters) — Ger­many and France will try to rec­on­cile diver­gent visions of how to fix Europe’s econ­o­my on Mon­day when Manuel Valls makes his first vis­it to Berlin as French prime min­is­ter and holds talks with Angela Merkel.

    The trip comes at a water­shed moment, with the region strug­gling to shake off the after­math of a pro­longed finan­cial cri­sis that has left its cit­i­zens poor­er, increas­ing­ly job­less and turn­ing to extrem­ist politi­cians for answers.

    But the risk is that Valls and Merkel talk past each oth­er: the French­man urg­ing a dash for growth and under­stand­ing from Berlin on France’s bro­ken fis­cal promis­es, and the Ger­man leader ask­ing the polit­i­cal­ly impos­si­ble of Paris on bud­getary rig­or and reform.

    The out­come of their one-hour lunch in Merkel’s chan­cellery will be scru­ti­nized in oth­er euro zone cap­i­tals – not least in Athens, Dublin, Por­tu­gal and Madrid, where lead­ers have played by the EU rule book and sub­ject­ed their coun­tries to gen­uine aus­ter­i­ty.

    “We have no inter­est in humil­i­at­ing the French,” said one Ger­man offi­cial who request­ed anonymi­ty.

    “But we would like to extract some­thing out of them – includ­ing real, ver­i­fi­able action on struc­tur­al reform – in exchange for let­ting them off the hook,” he said. “The prob­lem will be to find a com­pro­mise that is accept­able polit­i­cal­ly to both the French and the Ger­mans.”

    A decade ago, past lead­ers of Europe’s two largest economies reneged on promis­es to rein in their pub­lic deficits — a trans­gres­sion some say under­mined the bloc’s rules on bud­get dis­ci­pline and helped set the stage for its sov­er­eign debt cri­sis five years lat­er.

    The dif­fer­ence is that Berlin grad­u­al­ly went about bring­ing its fis­cal house into order, impos­ing wage mod­er­a­tion and enact­ing con­tro­ver­sial labor reforms. France large­ly stood still — and missed at least three more deficit tar­gets.

    When you read things like “A decade ago, past lead­ers of Europe’s two largest economies reneged on promis­es to rein in their pub­lic deficits — a trans­gres­sion some say under­mined the bloc’s rules on bud­get dis­ci­pline and helped set the stage for its sov­er­eign debt cri­sis five years lat­er.

    The dif­fer­ence is that Berlin grad­u­al­ly went about bring­ing its fis­cal house into order, impos­ing wage mod­er­a­tion and enact­ing con­tro­ver­sial labor reforms. France large­ly stood still — and missed at least three more deficit tar­gets”, keep in mind that those aus­ter­i­ty mea­sures imple­ment­ed by Ger­mayn were being under­tak­ing when the rest of the world was boom­ing, which is an extra­or­di­nar­i­ly dif­fer­ent sit­u­a­tion from today. Mass aus­ter­i­ty makes the imple­men­ta­tion of “expan­sion­ary aus­ter­i­ty” poli­cies inap­plic­a­ble even if one finds the “moral­i­ty play” aspect of aus­ter­i­ty poli­cies appeal­ing.

    Also keep in mind that the “wage mod­er­a­tion” and “con­tro­ver­sial labor reforms” that Schoed­er’s “Agen­da 2010” poli­ices led to the vast growth of under­paid work­ers that are only able to sur­vive due to gov­ern­ment sub­si­dies and that mod­el may not be the kind of thing we want to see the rest of Europe repli­cate.


    Ear­li­er this month it acknowl­edged that it would not bring its deficit down with­in EU lim­its until 2017. Ini­tial­ly, it had pledged to do so by 2013, before win­ning a reprieve until 2015.

    “Grant­i­ng France yet anoth­er two years on the deficit will cre­ate prob­lems in oth­er euro zone mem­bers,” said Daniela Schwarz­er of the Ger­man Mar­shall Fund in Berlin.

    “Coun­tries like Por­tu­gal, which were forced to take tough mea­sures, will see a dou­ble-stan­dard. Oth­ers will try to free-ride on the flex­i­bil­i­ty grant­ed to France. The Ger­mans are very aware of this.”


    Valls is a cen­trist with­in the Social­ist par­ty who ahead of his Berlin vis­it has repeat­ed­ly name-checked Ger­hard Schroed­er the Social Demo­c­rat ex-chan­cel­lor cred­it­ed with Ger­many’s reform push of the 2000s. He will aim to con­vince Merkel he can do the same job for France.

    His agen­da in Ger­many sends an econ­o­my-friend­ly sig­nal.

    After a red car­pet wel­come with mil­i­tary hon­ors on Mon­day, Valls will give a speech to Ger­man busi­ness­men on Tues­day. He then trav­els to the Ham­burg site of Fran­co-Ger­man plane­mak­er Air­bus and to Stuttgart, the heart of Ger­man indus­tri­al might.

    The snag is that what Valls can achieve dur­ing the remain­ing two years of Pres­i­dent Fran­cois Hol­lan­de’s term may fall well short of Merkel’s expec­ta­tions.

    Two main reform projects are cur­rent­ly in the works: a “law on growth” aimed at free­ing up trad­ing hours and tight­ly reg­u­lat­ed sec­tors in the French econ­o­my from phar­ma­cists to legal pro­fes­sion­als; and an eas­ing of restric­tions on com­pa­nies to pro­vide work­er rep­re­sen­ta­tion and oth­er ben­e­fits.

    Both are con­tro­ver­sial with unions and the French left and have already sparked street protests and threats of strikes. Yet few in Berlin believe that reforms being under­tak­en in France cur­rent­ly match those done in Ger­many.

    “Very lit­tle has been done. They need to do much more,” said an aide to the chan­cel­lor.

    Valls sur­vived a con­fi­dence vote on his new­ly reshuf­fled gov­ern­ment last week but did not obtain an absolute major­i­ty — mean­ing that any future attempts to rein in pub­lic spend­ing or enact reforms risk being held hostage by rebel left­ists.

    More­over his once healthy poll rat­ings have been hit by his asso­ci­a­tion with Hol­lande, whose pub­lic stand­ing has been ripped to shreds by his fail­ure to improve the lot of ordi­nary French, his inde­ci­sive lead­er­ship and messy pri­vate life.

    The con­trast with Merkel, who has emerged as Europe’s dom­i­nant leader with pop­u­lar­i­ty rat­ings at home of over 70 per­cent, could not be greater.


    Any signs from Valls of weak­ness in Berlin would be seized upon by his polit­i­cal oppo­nents at home, above all Marine Le Pen and her France-first Nation­al Front.

    “The cen­tral argu­ment of Valls will be: we haven’t changed our goals but there is less growth in Europe, less growth in France and less infla­tion. The con­text has changed, not the will to reform,” said Claire Demes­may of the Ger­man Coun­cil on For­eign Rela­tions (DGAP).

    Whether Merkel accepts this argu­ment is doubt­ful. She also has polit­i­cal con­straints in the form of the Alter­na­tive for Ger­many (AfD), a ris­ing new Ger­man euroskep­tic par­ty that is unset­tling her Chris­t­ian Democ­rats (CDU).

    If she goes too easy on France — for exam­ple grant­i­ng Paris more time on the deficit with­out new reform com­mit­ments — the AfD and many with­in her own par­ty would cry foul.

    Nor is Merkel like­ly to accede to French wish­es for more Ger­man stim­u­lus. Her gov­ern­men­t’s top goal is to deliv­er on its own promise to bal­ance the fed­er­al bud­get next year for the first time since 1969. Any spend­ing that might endan­ger this tar­get is seen as taboo.

    “The chan­cel­lor is adamant about this,” the Merkel aide said.

    And if Berlin allows lee­way on the deficit, France must be seen to do some­thing in return.

    “Behind closed doors, while Ger­many will cer­tain­ly push France on reform and (bud­get) con­sol­i­da­tion, France will be giv­en more time and flex­i­bil­i­ty,” said Chris­t­ian Oden­dahl, chief econ­o­mist at the Lon­don-based Cen­tre for Euro­pean Reform (CER).

    “But it just must not appear that way to the Ger­man pub­lic.”

    While much of the con­tent of that arti­cle was a ter­ri­fy­ing con­fir­ma­tion that Merkel and her domes­tic polit­i­cal con­cerns get to deter­mine EU pol­i­cy-mak­ing, at least it’s nice to see that this real­i­ty is not even remote­ly being hid­den any­more. Or maybe that’s also scary.

    Posted by Pterrafractyl | September 21, 2014, 10:41 pm
  33. One of the stranger quirks about human­i­ty is the deeply felt instinct that life must be hard and painful, at least for some­one, oth­er­wise civ­i­liza­tion will col­lapse. For instance, if sim­ply giv­ing the mass­es free mon­ey in the mid­dle of a depres­sion was, con­trary to our Calvin­ist instincts, exact­ly the pol­i­cy Europe needs to jump start its econ­o­my and avoid the defla­tion­ary block hole, would the gods of socioe­co­nom­ic Calvin­ism approve? Do we need to ask?:

    TLTRO effect is the ECB’s Wait­ing for Godot
    By Ross Fin­ley
    Sep­tem­ber 23, 2014

    When banks are offered hun­dreds of bil­lions of euros worth of what is essen­tial­ly free mon­ey and they don’t take every­thing they can get, some­thing has gone seri­ous­ly wrong.

    The Euro­pean Cen­tral Bank’s lat­est offer of cheap cash to banks — only this time tied to loans they pro­vide to pri­vate sec­tor busi­ness­es rather than with no strings attached — has got­ten off to a weak start.

    That sug­gests not only that tem­po­rary liq­uid­i­ty for lend­ing may be the wrong approach to boost a flat-lin­ing euro zone econ­o­my that is bare­ly gen­er­at­ing any infla­tion, but it also under­scores the much more seri­ous lack of demand in the econ­o­my.

    With only 82.6 bil­lion euros tak­en up in the first of two tranch­es it is now clear that the ECB will not be able to find enough tak­ers for the 400 bil­lion euros it has put on offer.

    The lat­est Reuters poll of euro zone mon­ey mar­ket traders pre­dicts that banks will take up 175 bil­lion in the Decem­ber auc­tion, leav­ing one-third of the cash untapped.

    To put that num­ber in per­spec­tive, when the ECB last offered mon­ey like this in the depths of the euro zone debt cri­sis a few years ago banks swal­lowed up more than one tril­lion euros. That made for explo­sive results on asset prices but also did very lit­tle to spur lend­ing.


    Part of the prob­lem is he’s spin­ning a lot of pol­i­cy plates at the same time.

    The lat­est round of cheap cash — dubbed Tar­get­ed Long-Term Refi­nanc­ing Oper­a­tions (TLTROs) — comes along with record low inter­est rates and an even more-neg­a­tive deposit rate, which in the­o­ry should dri­ve banks to take the cash and lend.

    The ECB also plans to build up the Asset-Backed Secu­ri­ties (ABS) mar­ket in Europe in order for the cen­tral bank to swoop in and pur­chase vast swathes of it.

    That will be lucra­tive for those who want to sell on those secu­ri­ties, and some traders have sug­gest­ed that wait­ing for details on ABS pur­chas­es has inter­fered with the TLTRO.

    Either way, banks will need to expand cred­it in order to ush­er in a cli­mate where secu­ri­ti­sa­tion — which involves parcel­ing togeth­er new secu­ri­ties backed by loans against assets — takes place. The idea is to con­nect small and mid-size busi­ness­es with the broad­er cap­i­tal mar­kets, where large com­pa­nies tend to go first to bor­row.

    But that under­ly­ing lend­ing does not appear to be hap­pen­ing.

    Lena Komil­e­va, chief econ­o­mist at G+ Eco­nom­ics, wrote:

    In mar­ket psy­chol­o­gy terms, it cre­ates a dan­ger­ous mar­ket co-ordi­na­tion loop between ‘buy­ing’ the ECB announce­ment and ‘sell­ing’ pol­i­cy action, which threat­ens to dis­rupt the core chan­nel of pol­i­cy trans­mis­sion into real economies – con­fi­dence.

    In oth­er words, so long as mar­kets are just trad­ing the effect from pol­i­cy announce­ments but not actu­al­ly respond­ing to the pol­i­cy, noth­ing will ever hap­pen to real lend­ing.

    The ECB also is close to wrap­ping up a lengthy assess­ment of euro zone bank bal­ance sheets and will have to walk a fine line report­ing the results in order not to cre­ate hav­oc if they con­tain any ugly sur­pris­es.

    So why won’t banks take free mon­ey in the mean­time?

    Komil­e­va explains it this way:

    The big dif­fer­ence between bank activ­i­ties in finan­cial mar­kets and in real economies is the finan­cial incen­tives and risk aver­sion. Lenders man­age their cost of cred­it and cap­i­tal more effi­cient­ly by sell­ing secu­ri­ties to oth­er investors and by bor­row­ing from the ECB, where­as when a loan is made in the real econ­o­my it stays on the bank’s books until it matures. This is an expen­sive diet for cap­i­tal-con­strained banks.

    Lend­ing to the pri­vate sec­tor has been in decline for the bet­ter part of two years and shows no signs of abat­ing since the TLTROs were launched in June.

    The lat­est data from the ECB due on Thurs­day are expect­ed to show a 1.5 per­cent annu­al decline in lend­ing, accord­ing to the lat­est Reuters poll, bare­ly changed from the month before.

    Econ­o­mists appear to be pay­ing very lit­tle atten­tion to this data series, mak­ing no vis­i­ble attempts to estab­lish the link between whether a revival in pri­vate sec­tor lend­ing might gen­er­ate any sig­nif­i­cant amount of infla­tion.

    Either way, one thing is clear.

    If a cen­tral bank offered hun­dreds of bil­lions of euros worth of cheap cash direct­ly to indi­vid­u­als, there wouldn’t be much hum­ming and haw­ing over whether or not they’d take it.

    And the sud­den explo­sive demand for goods and ser­vices that would most cer­tain­ly fol­low from such a mas­sive infu­sion of cash in a cli­mate where sav­ing it pays you less than noth­ing would almost cer­tain­ly spawn a pow­er­ful rush of infla­tion.

    For now, we wait for the lend­ing to pick up.

    At least the jour­nal­ist gets it:
    “Either way, one thing is clear.

    If a cen­tral bank offered hun­dreds of bil­lions of euros worth of cheap cash direct­ly to indi­vid­u­als, there wouldn’t be much hum­ming and haw­ing over whether or not they’d take it.

    And the sud­den explo­sive demand for goods and ser­vices that would most cer­tain­ly fol­low from such a mas­sive infu­sion of cash in a cli­mate where sav­ing it pays you less than noth­ing would almost cer­tain­ly spawn a pow­er­ful rush of infla­tion.”
    Yes, if a cen­tral bank offered hun­dreds of bil­lions of euros worth of cheap cash direct­ly to indi­vid­u­als, instead of oth­er banks, that just might scratch that itch (for con­sumer demand) that’s been plagu­ing the euro­zone for years. But, of course, that would vio­late the cos­mic rule that says only banks or the ultra-wealthy are moral­ly wor­thy of free mon­ey. The rab­ble would just be cor­rupt­ed and grow weak and deca­dent. Instead, maybe the euro­zone can keep beat­ing itself up while wait­ing for Godot. He’s sup­posed to arrive any year now.

    Posted by Pterrafractyl | September 23, 2014, 11:02 am
  34. Paul Krug­man has a blog post in response to a hilar­i­ous­ly erro­neous col­umn writ­ten by the Her­itage Foun­da­tion’s Stephen Moore that got him banned from the Kansas City Star by claim­ing that the states with Repub­li­can gov­er­nors were out­per­form­ing the Demo­c­ra­t­i­cal­ly run states that did­n’t pur­sue a trick­le-down approach to job growth (using incom­plete data sets). One of points Krug­man make is that both the top and bot­tom per­form­ing states (from a job growth per­spect) were run by Repub­li­can gov­er­nors. And if you look at the map in the post, it’s Texas and North Dako­ta that are lead­ing the way (with 8.5% and 21% job growth since the Decem­ber 2007, respec­tive­ly), which is to be expect­ed giv­en the ener­gy boom con­cen­trat­ed in those states.

    But as we learned ear­li­er this year, it’s not just ener­gy that’s been fuel­ing Tex­as­’s job growth. Immi­gra­tion and a pop­u­la­tion boom have also a major fac­tor too, specif­i­cal­ly immi­gra­tion from Mex­i­co and the state’s high birth rates (which are asso­ci­at­ed with immi­gra­tion from Mex­i­co). Yes, Mex­i­can immi­grants are part of the secret to Tex­as­’s suc­cess. Imag­ine that.

    But what about all the tax refugees from oth­er states flee­ing their high­er Blue state tax­es? Isn’t that dri­ving part of that growth? Well, it turns out that tax­es tend to be high­er in Texas vs oth­er states...unless you’re rich. It’s a Red State thing:

    The “Texas Mir­a­cle” fraud: Turns out it involves tax­ing the poor to help the rich get rich­er
    Yes, Texas has seen a lot of growth — but should con­ser­v­a­tives real­ly be brag­ging about it?
    Fri­day, Mar 7, 2014 12:56 PM CDT

    Alex Pareene

    Remem­ber “The Texas Mir­a­cle”? It was the sto­ry of how Rick Per­ry was going to be pres­i­dent because his state, Texas, was doing so much bet­ter than all the oth­er states. Texas was doing so well, we were told, because it was very con­ser­v­a­tive: Low tax­es, light reg­u­la­tion, and few pesky unions. We were sup­posed to com­pare Texas to Cal­i­for­nia, which, we were told, was an apoc­a­lyp­tic mess because it was run by lib­er­als.

    Then we sort of stopped hear­ing about The Texas Mir­a­cle for a while, because Rick Per­ry for­got how to count and it no longer seemed like he was per­son­al­ly respon­si­ble for man­ag­ing the econ­o­my of his vast state, but con­ser­v­a­tives still enjoy telling them­selves that Texas proves that their eco­nom­ic pol­i­cy pref­er­ences are objec­tive­ly supe­ri­or to those of lib­er­als. Except, well, maybe Texas isn’t that mirac­u­lous.

    At Wash­ing­ton Month­ly, Phillip Long­man argues that Texas’ growth is fueled pri­mar­i­ly by the ener­gy boom and by pop­u­la­tion growth. And that pop­u­la­tion growth is not hap­pen­ing because peo­ple from oth­er states are flee­ing to Texas to avoid high tax­es and oner­ous reg­u­la­tions, but because of immi­gra­tion from Mex­i­co and a high birthrate. More impor­tant­ly (and prob­a­bly obvi­ous­ly, to peo­ple who care about such things), the spoils of the Texas mir­a­cle have not been shared equal­ly: Eco­nom­ic mobil­i­ty is high­er in California’s major urban areas than in those of Texas. Plus: “Texas has more min­i­mum-wage jobs than any oth­er state, and only Mis­sis­sip­pi exceeds it with the most min­i­mum-wage work­ers per capi­ta.” Texas is falling behind var­i­ous states in terms of per capi­ta income.

    As Long­man con­cludes:

    But regard­less of its sources, pop­u­la­tion growth fuels eco­nom­ic growth. It swells the sup­ply and low­ers the cost of labor, while at the same time adding to the demand for new prod­ucts and ser­vices. As the pop­u­la­tion of Texas swelled by more than 24 per­cent from 2000 to 2013, so did the demand for just about every­thing, from hous­es to high­ways to strip malls. And this, com­bined with huge new flows of oil and gas dol­lars, plus increased trade with Mex­i­co, favored Texas with strong job cre­ation num­bers.

    But for some, the good news on Texas con­tin­ues apace. J.D. Tuc­cille, at the lib­er­tar­i­an mag­a­zine Reason’s Hit & Run blog, points to a paper from the Fed­er­al Reserve Bank of Dal­las show­ing that Texas cre­at­ed more high-wage jobs than low-wage ones between 2000 and 2013. Tuc­cille also points out that “in 2012, ’63,000 peo­ple moved from Cal­i­for­nia to Texas, while 43,000 in Texas moved to Cal­i­for­nia.’” (That… actu­al­ly seems pret­ty sta­tis­ti­cal­ly insignif­i­cant when we’re talk­ing about the two most pop­u­lous states in the union, each with more than 25 mil­lion res­i­dents, but ok, sure.)


    But here’s one impor­tant fact that Texas’ con­ser­v­a­tive and lib­er­tar­i­an boost­ers reli­ably fail to men­tion (per­haps because they don’t know it): If you’re not rich, Texas is not actu­al­ly a low-tax state. In fact, most Tex­ans pay more tax­es than most Cal­i­for­ni­ans. That seems strange and incor­rect at first — Texas doesn’t even have an income tax! — but it’s true. Thanks to sales and prop­er­ty tax­es, Texas is among the states with the ten most regres­sive tax sys­tems. Tex­ans in the bot­tom 60 per­cent of income dis­tri­b­u­tion all pay high­er effec­tive tax rates than their Cal­i­forn­ian coun­ter­parts. Texas’ top one-per­cent are the ones enjoy­ing the sup­posed low-tax utopia, pay­ing an effec­tive rate of 3.2 per­cent. The rate for the low­est 20 per­cent is 12.6 per­cent. Kevin Drum has a help­ful chart..

    This is not unusu­al for a con­ser­v­a­tive state. As the Insti­tute on Tax­a­tion and Eco­nom­ic Pol­i­cy sayss: “States praised as ‘low tax’ are often high tax states for low and mid­dle income fam­i­lies.” So… is this part of the con­ser­v­a­tive pol­i­cy pack­age that we are sup­posed to intro­duce every­where to spur growth? Slash tax­es for the rich and raise tax­es on… the poor and mid­dle class? It seems like it might be dif­fi­cult to cam­paign on that.

    When “growth” is its own self-jus­ti­fy­ing goal, cre­at­ing an econ­o­my that only deliv­ers for a priv­i­leged few doesn’t real­ly seem like a prob­lem. Still, don’t move to Texas expect­ing a bet­ter life, unless you own a petro­chem­i­cal refin­ery.

    So, yes, while Texas has done well from a job growth pere­spec­tive, it’s rather dif­fi­cult to asso­ciate that growth with the trick­le-down poli­cies cham­pi­oned by the far right.

    Still, here’s some good news for non-rich Tex­ans: After all that job growth wages are final­ly start­ing to rise too:

    Dal­las News
    Dal­las-Fort Worth leads in pay rais­es, too

    Mitchell Schnur­man


    Pub­lished: 11 August 2014 10:18 PM

    Updat­ed: 11 August 2014 10:21 PM

    Feel­ing rich­er yet?

    For many work­ers in Dal­las-Fort Worth, Texas’ growth is final­ly pay­ing off per­son­al­ly. Wages and salaries rose 4.4 per­cent in the past 12 months, accord­ing to a fed­er­al index of employ­ment costs.

    The increase is twice as high as the nation­al fig­ure and the high­est among large metro areas.

    It’s also the biggest gain for D‑FW since at least 2006, when the gov­ern­ment began report­ing sep­a­rate index­es for the met­ros.

    If this sounds too good to be true, con­sid­er a local anec­dote: This week, the Fort Worth City Coun­cil is sched­uled to approve a 4 per­cent across-the-board pay raise for city work­ers. It’s sup­posed to make up for years of lit­tle or no increas­es.

    Anoth­er broad mea­sure for D‑FW, hourly wages for pri­vate work­ers, rose 5.1 per­cent in June, echo­ing the trend.

    “We’ve been wait­ing for this,” said Cheryl Abbot, a region­al econ­o­mist for the Bureau of Labor Sta­tis­tics in Dal­las.

    In clas­sic eco­nom­ics, a steady increase in hir­ing is sup­posed to lead to high­er pay, she said. Texas has been a leader in job cre­ation, and the Dal­las area led all large met­ros in the past year. But that hasn’t paid off con­sis­tent­ly with high­er salaries.

    The link­age slipped every­where, espe­cial­ly after the reces­sion ham­mered medi­an incomes.

    “We’re final­ly start­ing to see that rela­tion­ship again,” Abbot said.

    D‑FW’s wage growth sur­passed the nation’s in ear­ly 2013 and has widened its lead. The San Fran­cis­co-San Jose area, in the midst of anoth­er tech­nol­o­gy boom, almost matched D‑FW on the wage increase. (It was slight­ly ahead on growth in total com­pen­sa­tion, which includes ben­e­fits). Thir­teen oth­er large met­ros, includ­ing Hous­ton, weren’t close to the top pair.

    In last month’s Beige Book, the Fed­er­al Reserve said wage pres­sures in the Dal­las and San Fran­cis­co dis­tricts were mod­er­ate­ly high­er than in oth­er parts of the coun­try. Here, the strongest pres­sures were in ener­gy and con­struc­tion, with both fac­ing labor short­ages, the Fed said.

    Oth­er indus­tries with pay pres­sure includ­ed air­lines, high tech, met­als and trans­porta­tion equip­ment man­u­fac­tur­ing, accord­ing to the report.

    Local recruiters cit­ed strong demand for work­ers in tech­nol­o­gy, engi­neer­ing, finance and account­ing. They also point­ed to announce­ments of some large high-pro­file relo­ca­tions, includ­ing Toy­ota and State Farm Insur­ance.

    While employ­ers still have the lever­age in most work­places, the bal­ance is shift­ing.


    Well there we go! “While employ­ers still have the lever­age in most work­places, the bal­ance is shift­ing”. That shift­ing bal­ance is good, right? No?

    Fish­er Says Fed Must Weigh Wage Pres­sures in Set­ting Rate Pol­i­cy
    By Alis­ter Bull Sep 28, 2014 11:41 AM CT

    The Fed­er­al Reserve mustn’t “fall behind the curve” as it weighs when to start rais­ing inter­est rates, Dal­las Fed Pres­i­dent Richard Fish­er said, cit­ing strength­en­ing U.S. growth and build­ing wage-price pres­sures.

    Fish­er, a vocal advo­cate for tighter mon­e­tary pol­i­cy to pro­tect against infla­tion, also said today that two soon-to-be-released eco­nom­ic reports from his Fed dis­trict would “knock your socks off.”

    “I don’t want to fall behind the curve here,” Fish­er said in a Fox News inter­view. “I think we could sud­den­ly get a patch of high growth, see some wage-price infla­tion, and that is when you start to wor­ry.”

    Fish­er dis­sent­ed on Sept. 17 at the last meet­ing of the Fed­er­al Open Mar­ket Com­mit­tee, when the Fed retained a pledge to keep rates near zero for a “con­sid­er­able time” after its asset pur­chas­es halt at the end of next month.

    He called U.S. sec­ond-quar­ter growth “uber strong,” refer­ring to the upward revi­sion last week to an annu­al­ized rate of 4.6 per­cent from 4.2 per­cent pre­vi­ous­ly esti­mat­ed, and said his­to­ry had shown that wage pres­sures could accel­er­ate when unem­ploy­ment got below cur­rent lev­els of 6.1 per­cent.

    In addi­tion, Fish­er said sur­veys of wage-price pres­sures in the Dal­las Fed’s dis­trict, which includes Texas, north­ern Louisiana and south­ern New Mex­i­co, were the high­est since before the reces­sion, and oth­er indic­tors were also buoy­ant.

    “We’re going to be releas­ing some data on Mon­day and Tues­day, our new sur­veys, that I think will just knock your socks off,” he said.


    Uh oh! As the Dal­las Fed pres­i­dent Richard Fish­er warns us, if the Fed­er­al Reserve does­n’t pare back its mon­e­tary stim­u­lus poli­cies soon wages might rise! Noooooooooo! And why is it bad for wages to rise in the mid­dle of a new cryp­to-Gild­ed Age? Well, as Fish­er also warns us, there’s a new study com­ing out (by Fish­er him­self) that shows that once the unem­ploye­ment rate falls below 6.1%, ris­ing wages start kill off job growth. So, you see, we need high enough unem­ploy­ment to keep wages down to keep infla­tion down so we don’t ruin the jobs mir­a­cle:

    Fed’s Fish­er: wages rise when job­less­ness drops below 6.1 per­cent

    Fri Sep 19, 2014 2:27pm EDT

    (Reuters) — The Unit­ed States could be on the verge of a wor­ri­some surge in wages if unem­ploy­ment con­tin­ues its down­ward trend, based on research Dal­las Fed­er­al Reserve Bank Pres­i­dent Richard Fish­er pre­sent­ed to his col­leagues at the Fed’s pol­i­cy-set­ting meet­ing this week.

    An unpub­lished paper pre­pared by his staff showed “declines in the unem­ploy­ment rate below 6.1 per­cent exert sig­nif­i­cant­ly high­er wage pres­sures than if the rate is above 6.1 per­cent,” Fish­er told Reuters in an inter­view Fri­day.

    Fish­er said he had his staff ana­lyze state-by-state unem­ploy­ment and wage data from 1982 to 2013 to try to fig­ure out why wage infla­tion is emerg­ing in Texas but not else­where in the nation.

    The results, he said he told his col­leagues, are “note­wor­thy and need to be thought through.”

    The U.S. unem­ploy­ment rate in August was 6.1 per­cent, exact­ly the point below which his staff’s research showed wages could start to take off.

    “The num­ber just hap­pened to be 6.1 per­cent — it is what shook out of the data,” Fish­er said.

    The Fed­er­al Reserve, which has kept short-term inter­est rates near zero since Decem­ber 2008, is expect­ed to begin to tight­en pol­i­cy next year. The pre­cise tim­ing will depend heav­i­ly on its assess­ment of the labor mar­ket, which the Fed this week said con­tin­ues to fall short.


    Strong job growth in Texas has brought the unem­ploy­ment rate there down to 5.1 per­cent. The Dal­las Fed esti­mates cur­rent Texas wage infla­tion at about 3.5 per­cent, high­er than the esti­mat­ed state-wide infla­tion rate of 2.5 per­cent, he said.

    The Fed tar­gets a U.S. infla­tion rate of 2.0 per­cent.

    Fish­er said on Fri­day he wor­ries that fur­ther declines in unem­ploy­ment nation­al­ly could lead to broad­er wage infla­tion. To head that off, and also to address what he called ris­ing excess­es in finan­cial mar­kets, Fish­er said he prefers to raise rates by spring­time, soon­er than many investors cur­rent­ly antic­i­pate.

    “I’d like to do it in a slow and grad­ual way, rather than rapid and sharp,” he said. “His­tor­i­cal­ly with­in the Fed, when­ev­er we’ve wait­ed til we believe we are at some mea­sure of full capac­i­ty uti­liza­tion and then we’ve raised rates, every time we’ve done it we’ve brought about a reces­sion.”

    Yes, accord­ing to Fish­er’s unpub­lished study, once unem­ploy­ment drops below 6.1% wages start grow­ing faster than infla­tion which is appar­ent­ly awful under all con­di­tions. There­fore the Fed needs to slow down the econ­o­my to pre­vent that awful wage growth or else hyper­in­fla­tion will kill us all!

    So meet your new mag­ic num­ber: 6.1%. Here we go again.

    Posted by Pterrafractyl | September 30, 2014, 9:30 am
  35. Voodoo Eco­nom­ics: The ulti­mate zom­bie idea:

    The New York Times
    Voodoo Eco­nom­ics, the Next Gen­er­a­tion
    Paul Krug­man
    OCT. 5, 2014

    Even if Repub­li­cans take the Sen­ate this year, gain­ing con­trol of both hous­es of Con­gress, they won’t gain much in con­ven­tion­al terms: They’re already able to block leg­is­la­tion, and they still won’t be able to pass any­thing over the president’s veto. One thing they will be able to do, how­ev­er, is impose their will on the Con­gres­sion­al Bud­get Office, hereto­fore a non­par­ti­san ref­er­ee on pol­i­cy pro­pos­als.

    As a result, we may soon find our­selves in deep voodoo.

    Dur­ing his failed bid for the 1980 Repub­li­can pres­i­den­tial nom­i­na­tion George H. W. Bush famous­ly described Ronald Reagan’s “sup­ply side” doc­trine — the claim that cut­ting tax­es on high incomes would lead to spec­tac­u­lar eco­nom­ic growth, so that tax cuts would pay for them­selves — as “voodoo eco­nom­ic pol­i­cy.” Bush was right. Even the rapid recov­ery from the 1981–82 reces­sion was dri­ven by inter­est-rate cuts, not tax cuts. Still, for a time the voodoo faith­ful claimed vin­di­ca­tion.

    The 1990s, how­ev­er, were bad news for voodoo. Con­ser­v­a­tives con­fi­dent­ly pre­dict­ed eco­nom­ic dis­as­ter after Bill Clinton’s 1993 tax hike. What hap­pened instead was a boom that sur­passed the Rea­gan expan­sion in every dimen­sion: G.D.P., jobs, wages and fam­i­ly incomes.


    But now it looks as if voodoo is mak­ing a come­back. At the state lev­el, Repub­li­can gov­er­nors — and Gov. Sam Brown­back of Kansas, in par­tic­u­lar — have been going all in on tax cuts despite trou­bled bud­gets, with con­fi­dent asser­tions that growth will solve all prob­lems. It’s not hap­pen­ing, and in Kansas a rebel­lion by mod­er­ates may deliv­er the state to Democ­rats. But the true believ­ers show no sign of waver­ing.

    Mean­while, in Con­gress Paul Ryan, the chair­man of the House Bud­get Com­mit­tee, is drop­ping broad hints that after the elec­tion he and his col­leagues will do what the Bushies nev­er did, try to push the bud­get office into adopt­ing “dynam­ic scor­ing,” that is, assum­ing a big eco­nom­ic pay­off from tax cuts.

    So why is this hap­pen­ing now? It’s not because voodoo eco­nom­ics has become any more cred­i­ble. True, recov­ery from the 2007–9 reces­sion has been slug­gish, but it has actu­al­ly been a bit faster than the typ­i­cal recov­ery from finan­cial cri­sis, despite unprece­dent­ed cuts in gov­ern­ment spend­ing. In fact, the recov­ery in pri­vate-sec­tor employ­ment has been faster than it was dur­ing the “Bush boom” last decade. At the same time, researchers at the Inter­na­tion­al Mon­e­tary Fund, sur­vey­ing cross-coun­try evi­dence, have found that redis­tri­b­u­tion of income from the afflu­ent to the poor, which con­ser­v­a­tives insist kills growth, actu­al­ly seems to boost economies.

    But facts won’t stop the voodoo come­back, for two main rea­sons.

    First, voodoo eco­nom­ics has dom­i­nat­ed the con­ser­v­a­tive move­ment for so long that it has become an inward-look­ing cult, whose mem­bers know what they know and are imper­vi­ous to con­trary evi­dence. Fif­teen years ago lead­ing Repub­li­cans may have been aware that the Clin­ton boom posed a prob­lem for their ide­ol­o­gy. Today some­one like Sen­a­tor Rand Paul can say: “When is the last time in our coun­try we cre­at­ed mil­lions of jobs? It was under Ronald Rea­gan.” Clin­ton who?

    Sec­ond, the nature of the bud­get debate means that Repub­li­can lead­ers need to believe in the ways of mag­ic. For years peo­ple like Mr. Ryan have posed as cham­pi­ons of fis­cal dis­ci­pline even while advo­cat­ing huge tax cuts for wealthy indi­vid­u­als and cor­po­ra­tions. They have also called for sav­age cuts in aid to the poor, but these have nev­er been big enough to off­set the rev­enue loss. So how can they make things add up?

    Well, for years they have relied on mag­ic aster­isks — claims that they will make up for lost rev­enue by clos­ing loop­holes and slash­ing spend­ing, details to fol­low. But this dodge has been los­ing effec­tive­ness as the years go by and the specifics keep not com­ing. Inevitably, then, they’re feel­ing the pull of that old black mag­ic — and if they take the Sen­ate, they’ll be able to infuse voodoo into sup­pos­ed­ly neu­tral analy­sis.

    Would they actu­al­ly do it? It would destroy the cred­i­bil­i­ty of a very impor­tant insti­tu­tion, one that has served the coun­try well. But have you seen any evi­dence that the mod­ern con­ser­v­a­tive move­ment cares about such things?

    The voodoo mag­ic is back for the US! Woohoo! At least, the mag­ic will be if the GOP takes the Sen­ate this year. And that means good times for all...until the inevitable spend­ing cuts are required to pay for the tax cuts that did­n’t quite end up pay­ing for them­selves. And then it’s just good times for the peo­ple that want­ed tax cuts and social spend­ing cuts. And, sad­ly it’s a group that includes much more than the GOP. For instance, France has embraced the voodoo mag­ic too:

    The Bugle
    Octo­ber 2014 — Issue #60

    Income tax changes to ben­e­fit 9 mil­lion

    Prime Min­is­ter Manuel Valls has unveiled changes to France’s income tax rules, due to come into effect next year, that could see a fur­ther 3 mil­lion house­holds pay no income tax, and anoth­er 6 mil­lion pay­ing sig­nif­i­cant­ly less than they did this year.

    As many a 9 mil­lion house­hold in France could soon find them­selves pay­ing less tax in 2015 of Prime Min­is­ter Manuel Valls foll­ws through with pro­pos­als to “remove” the low­est band of income tax. Speakin on iTelel, Valls insist­ed that remov­ing the low­er band would not, con­trary to some spec­u­la­tion, mean a great bur­den on high­er tax­pay­ers.

    When news of the changes first came to light, there was a degree of con­fu­sion as to the numer of house­holds that would ben­e­fit. Valls was quat­ed as say­ing that six mil­lion would be bet­ter off, but as more details were made pub­lic, bud­get min­is­ter Chris­t­ian Eck­ert lat­er referred to nine mil­lion. In France, apporx­i­mate­ly half of all house­hold pay income tax, which rep­re­sents 19 mil­ion foy­ers.

    Income tax is cal­cu­lat­ed on a house­hold basis and not on indi­vid­ual incomes. A cou­ple liv­ing togeth­er com­bine their incomes and will receive twice the tax allowance; an extra half ‘part’ is then added for each depen­dant child. Under cur­rent rules, no tax is paid on the first €6010 earned or €12,020 for a cou­ple — €18,030 if they have 2 childen). Income between €6011 — €11,991 is then taxed at 5.5% and it is this band that may soon be removed.

    It is believed that under the new rules due to come into force next year, the 5.5% band will be removed alto­geth­er, but that the thresh­old for the 14% band will be low­ered to €9,690.

    The result is that for high­er-rate tax pay­ers, there will be lit­tle or no change in their total tax bill, but low­er income fam­i­lies will ben­e­fit.

    Many had ques­tioned whether high­er earn­ers would ulti­mate­ly have to foot the bill for tax breaks for teh less well off, but this was stren­u­ous­ly denied by the bud­get min­is­ter who insist­ed: “There will be no losers. Hear us when we say that these mea­sures will not be paid for by oth­er con­trib­u­tors.”

    If the changes go through as cur­rent­ly out­lined, then 3 mil­lion house­holds that paid tax this year will pay noth­ing in 2015 and a fur­ther 5million will see their tax bill reduced. The total cost to the state is an esti­mat­ed €3.3 bil­lion when com­bined with ear­li­er tax pledges already made for the next finan­cial year.

    Yes, France is unveil­ing a plan for 3.3 bil­lion euros in tax cuts tar­get­ing the poor which is prob­a­bly a lot more use­ful than tax cuts for the rich in this sit­u­a­tion (although the peo­ple mak­ing between 9,690 — 11,991 euro should be kind of miffed). But are these cuts real­ly use­ful enough to off­set, for instance, 21 bil­lion euros in cuts to things like health­care and social spend­ing? Yes. At least “Yes” if you lis­ten to France’s finance min­is­ter Michel Sapin. Those 3.3 bil­lion euro tax cuts for the poor, along with addi­tion­al tax cuts for busi­ness­es, mean the 21 bil­lion euro spend­ing cuts on things like health­care don’t count as aus­ter­i­ty. Michel Sapin and Paul Ryan both snort the same tax-cut pix­ie dust and Sapin is a French Social­ist. Sup­ply-side pix­ie-dust abuse is clear­ly out of con­trol:

    France’s Social­ists detail hefty spend­ing cuts

    Post­ed: Wednes­day, Octo­ber 1, 2014 6:51 am | Updat­ed: 2:49 am, Fri Oct 3, 2014.

    Asso­ci­at­ed Press

    PARIS (AP) — France’s Social­ist gov­ern­ment has detailed a 21 bil­lion-euro ($26.5 bil­lion) cost-cut­ting plan, the biggest in the coun­try’s mod­ern his­to­ry, say­ing it will focus on trim­ming wel­fare ben­e­fits.

    Pre­sent­ing the 2015 bud­get on Wednes­day, Finance Min­is­ter Michel Sapin said the mea­sures show the gov­ern­ment is seri­ous about rein­ing in its bud­get deficit, which is above Euro­pean Union lim­its.

    “These spend­ing cuts are cru­cial to our cred­i­bil­i­ty in the eyes of the French and Euro­peans. They’ll be ful­ly applied,” he said.

    Sapin insist­ed, how­ev­er, that they are not aus­ter­i­ty mea­sures as they will be accom­pa­nied by tax cuts as well.

    The gov­ern­ment hopes the reforms will assuage EU author­i­ties irked by France’s deci­sion to let its bud­get deficit reach 4.4 per­cent of gross domes­tic prod­uct this year —far above the 3 per­cent demand­ed by the EU.

    A sig­nif­i­cant part of the sav­ings is to be made in France’s gen­er­ous wel­fare sys­tem. The gov­ern­ment will cut social secu­ri­ty spend­ing by 9.5 bil­lion euros,>includ­ing 3.2 bil­lion euros from health spend­ing, and 700 mil­lion euros from fam­i­ly ben­e­fits.

    These mea­sures prompt­ed harsh crit­i­cism — espe­cial­ly among left­ist vot­ers — in a coun­try that prizes its pub­lic ser­vices.

    The gov­ern­ment says it will reduce income tax­es for 6 mil­lion fam­i­lies next year, for a total amount of 3.2 bil­lion euros.

    The 2015 bud­get also plans to dimin­ish the num­ber of state employ­ees next year and lim­it wage increas­es.

    At the same time, the gov­ern­ment vows to reduce tax bur­den on employ­ers in hopes of encour­ag­ing hir­ing.

    “In the con­text of low growth and low infla­tion... the gov­ern­ment is now forced to make spend­ing cuts mea­sures, instead of sim­ply freeze the spend­ing as it used to do,” said Antoine Bozio, econ­o­mist and direc­tor of the Insti­tute of pub­lic poli­cies.


    Behold the mag­ic of tax cuts! 3.2 bil­lion in tax cuts should be more than enough to off­set the 21 bil­lion in spend­ing cuts. Giv­en the pow­er of “less is more” think­ing, just imag­ine how use­ful the bil­lions in cuts to France’s pub­lic health spend­ing will be in the com­ing year to France’s over­all pub­lic health. Just imag­ine.

    Posted by Pterrafractyl | October 5, 2014, 11:03 pm
  36. One of the big ques­tions of the day is why there has­n’t been more of a glob­al response to deal with the West African Ebo­la out­break. As a con­se­quence, we should prob­a­bly expect a lot more fol­lowup ques­tions like this:

    EU demands expla­na­tion from Spain on Ebo­la case
    The EU said Tues­day it has asked Spain to explain how a nurse treat­ing Ebo­la patients in Madrid con­tract­ed the dead­ly dis­ease, the first known case of trans­mis­sion out­side Africa.
    Octo­ber 7, 2014

    The Euro­pean Com­mis­sion “sent a let­ter Mon­day to the Span­ish health min­is­ter to obtain some clar­i­fi­ca­tion” of how this had hap­pened, despite all the pre­cau­tions tak­en, a spokesman said.

    “There is obvi­ous­ly a prob­lem some­where,” Com­mis­sion spokesman Fred­er­ic Vin­cent said, at a time when all Euro­pean Union mem­ber states are sup­posed to have tak­en mea­sures to pre­vent an Ebo­la out­break.

    Tests con­firmed that the nurse had been infect­ed with the dead­ly virus that has killed more than 3,400 peo­ple in west Africa.

    Span­ish health offi­cials are now try­ing to find out whom she may have come into con­tact with and are mon­i­tor­ing 30 people—including her co-work­ers and husband—closely for symp­toms of the dead­ly dis­ease.

    The woman was part of a med­ical team at Madrid’s La Paz-Car­los III hos­pi­tal that treat­ed two elder­ly Span­ish mis­sion­ar­ies who died of Ebo­la short­ly after they were repa­tri­at­ed from Africa.

    Vin­cent said that despite the case, the Com­mis­sion was not undu­ly con­cerned and believed that the spread of the virus in Europe “remains high­ly unlike­ly.”

    The Com­mis­sion, how­ev­er, hopes that Spain will pro­vide details by Wednes­day so that they can be dis­cussed by Euro­pean Union offi­cials.


    Hmmm...what could have con­tributed to the Span­ish nurse to con­tract Ebo­la? Human error is cer­tain­ly a pos­si­bil­i­ty, but let’s not for­get: this is Spain we’re talk­ing about here and the ‘human error’ virus infect­ed the coun­try’s lead­er­ship a while ago and just kept trick­ling down from there:

    Bud­get cuts impact­ed Span­ish hos­pi­tal where nurse caught Ebo­la
    10/08/14 07:04 AM—Updated 10/08/14 11:10 AM
    By Ned Resnikoff

    More than just bad luck may have caused a Span­ish nurse to con­tract Ebo­la from an infect­ed patient ear­li­er this week. In recent years, Madrid’s Car­los III hos­pi­tal has been plagued by bud­get cuts and under-staffing brought on by Euro­pean aus­ter­i­ty, accord­ing to local press.

    “It’s not the hos­pi­tal it used to be,” Amelia Batanero, a spokesper­son for the Inde­pen­dent Health Work­ers Union, told Eng­lish-lan­guage news site The Local in ear­ly August. Thanks to cuts, the hos­pi­tal has report­ed­ly had entire floors shut­tered for the past cou­ple of years.

    Span­ish health author­i­ties have deter­mined that “sub­stan­dard equip­ment and a fail­ure to fol­low pro­to­col” were to blame for the breach of quar­an­tine, accord­ing to The Guardian.

    While coun­tries across the Euro­pean Union have spent the past few years imple­ment­ing aus­ter­i­ty cuts, Spain has had to impose harsh­er cuts than most. In exchange for stim­u­lus from the Euro­pean Cen­tral Bank, the Euro­pean Com­mis­sion and the Inter­na­tion­al Mon­e­tary Fund, the Span­ish gov­ern­ment has had to make steep cuts to pub­lic employ­ment and the social safe­ty net.

    The country’s pub­licly fund­ed health ser­vice was just one of the major pro­grams to get put on the chop­ping block. Last year, researchers at the Lon­don School of Hygiene and Trop­i­cal Med­i­cine warned that the cuts could seri­ous­ly erode Spain’s qual­i­ty of med­ical cov­er­age and “put lives at risk.”

    Although the Unit­ed States has not expe­ri­enced any­thing close to Europe’s orches­trat­ed pro­gram of aus­ter­i­ty, its emer­gency response infra­struc­ture has also been affect­ed by cuts. Over the past four years, the Cen­ter for Dis­ease Con­trol — the prin­ci­pal agency in charge of coor­di­nat­ing America’s response to the Ebo­la threat — has been sub­ject to near­ly $600 mil­lion in bud­get cuts. Last week, Nation­al Insti­tutes of Health offi­cial Antho­ny Fau­ci tes­ti­fied at a joint Sen­ate hear­ing on how seques­tra­tion and oth­er recent bud­get cuts have affect­ed the government’s abil­i­ty to respond to the threat of Ebo­la.


    Well, the EU’s Ebo­la sit­u­a­tion could be worse! Much worse. Still, you have to won­der what’s going to win in the end: EU aus­ter­i­ty or Ebo­la. It’s unclear:

    The Wall Street Jour­nal
    Ger­many Steps Up Ebo­la Aid Amid Crit­i­cism of Slow Response
    Ger­many Increas­es Fund­ing Six­fold to €102 Mil­lion

    By Andrea Thomas

    Oct. 16, 2014 1:42 p.m. ET

    BERLIN—Germany on Thurs­day announced a six­fold increase in fund­ing to fight the Ebo­la epi­dem­ic in West Africa after fac­ing crit­i­cism it had been slow in deliv­er­ing on its pledge to help the region at the cen­ter of the out­break.

    The announce­ment that Berlin would raise spend­ing on fight­ing the Ebo­la out­break to €102 mil­lion ($130.9 mil­lion) from €17 mil­lion came one day after Pres­i­dent Barack Oba­ma held a video con­fer­ence with the lead­ers of France, Ger­many, Italy and the U.K. to dis­cuss a more aggres­sive response to Ebo­la.

    Ger­man lead­ers said this year their coun­try should play a larg­er role in tack­ling inter­na­tion­al crises. But, as the short­com­ings in Berlin’s Ebo­la strat­e­gy show, this pledge has run into prac­ti­cal obsta­cles, includ­ing anti­quat­ed mil­i­tary hard­ware that makes it dif­fi­cult to fer­ry aid quick­ly to the region.

    Relief orga­ni­za­tions and health experts said Berlin mis­judged the speed at which the epi­dem­ic was spread­ing, was late in deliv­er­ing on its pledge to build two hos­pi­tals in the region, had too few peo­ple on the ground, and didn’t suf­fi­cient­ly coor­di­nate with local health work­ers.

    Berlin’s ini­tial €17 mil­lion pledge paled next to the $750 mil­lion promised by the U.S. and the the $40 mil­lion float­ed by Japan. U.S. has sent the first of near­ly 4,000 troops it plans to deploy to West Africa while Cuba has sent 165 health work­ers to hard-hit Sier­ra Leone. The Ger­man defense min­istry said on Oct. 8 it won’t be able to send sig­nif­i­cant num­bers of per­son­nel into the hard-hit region before mid-Novem­ber.

    “The aid for West Africa should have start­ed in June. It’s a bit late now,” said Jonas Schmidt-Chan­a­sit, an expert on Ebo­la at the Bern­hard-Nocht-Insti­tute for Trop­i­cal Med­i­cine in Ham­burg. “What coun­tries such as Cuba have done is much more than Ger­many, which hasn’t yet set up any of the hos­pi­tals that it has promised. It would have been impor­tant to sup­port the part­ners on the ground. There is no need to rein­vent the wheel.”

    The for­eign min­istry gave the insti­tute, one of Germany’s lead­ing cen­ters for trop­i­cal dis­eases, €200,000 for set­ting up mobile lab­o­ra­to­ries in West Africa—too lit­tle giv­en the sever­i­ty of the epi­dem­ic, Mr. Schmidt-Chan­a­sit said.

    Flo­ri­an West­phal, man­ag­ing direc­tor of the Ger­man oper­a­tion of Doc­tors With­out Bor­ders, wrote to Chan­cel­lor Angela Merkel last month to com­plain about the lack of response to the Ebo­la cri­sis.

    “We have heard a lot of announce­ments since and some spe­cif­ic projects have been launched. But so far, we haven’t seen any of it on the ground,” said Mr. West­phal. “Fund­ing is cur­rent­ly not the main prob­lem. The main prob­lem is bring­ing per­son­nel and mate­r­i­al need­ed on-site right now.”

    The Ger­man Red Cross said Berlin would need 170 staff to oper­ate the two 200-bed hos­pi­tals it has promised to set up in Liberia and Sier­ra Leone. “This num­ber of beds can only be pro­vid­ed if we can pro­vide enough per­son­nel,” said Alexan­dra Bur­ck, spokes­woman for the Red Cross in Ger­many.

    Ger­many promised to par­tic­i­pate in an inter­na­tion­al air­lift to fer­ry per­son­nel and 100 tons of goods a week to the affect­ed region. But since the begin­ning of Octo­ber, the Air Force has flown only 5 tons of med­ical aid to Liberia and anoth­er 5 tons to Sier­ra Leone. One trans­port was delayed due to tech­ni­cal prob­lems with mil­i­tary car­go air­craft.


    “We all have under­es­ti­mat­ed the dis­as­trous con­se­quences of Ebo­la,” For­eign Min­is­ter Frank-Wal­ter Stein­meier said in a recent inter­view with Bild am Son­ntag Sun­day paper. “The race to catch up is start­ing now.”

    Well, it could be worse! Ger­many could have been run­ning a sur­plus while hold­ing back on this vital aid as opposed to almost run­ning a sur­plus. Oh well, at least France has pledged to increase its assis­tance fol­low­ing Pres­i­dent Oba­ma’s urgent call for the world to do more although it will be inter­est­ing to see the extent to which France will even be allowed to fol­low through on that pledge. After all, stop­ping Ebo­la isn’t free and the ‘human error’ virus is by no means extin­guished.

    Posted by Pterrafractyl | October 16, 2014, 10:23 pm
  37. Here’s a grim reminder that it would be intel­lec­tu­al­ly dis­hon­est to act as if there’s an intel­lec­tu­al­ly hon­est nation­al dis­cus­sion tak­ing place about impor­tant eco­nom­ic issues. That’s because stub­born stu­pid­i­ty wins dur­ing the Age of Derp :

    The New York Times
    The Con­science of a Lib­er­al
    This Age of Derp
    Octo­ber 19, 2014 3:29 pm
    Paul Krug­man

    I gath­er that some read­ers were puz­zled by my use of the term “derp” with regard to ped­dlers of infla­tion para­noia, even though I’ve used it quite a lot. So maybe it’s time to revis­it the con­cept; among oth­er things, once you under­stand the prob­lem of der­pi­tude, you under­stand why I write the way I do (and why the Asness­es of this world whine so much.)

    Josh Bar­ro brought derp into eco­nom­ic dis­cus­sion, and many of us imme­di­ate­ly real­ized that this was a term we’d been need­ing all along. As Noah Smith explained, what it means — at least in this con­text — is a deter­mined belief in some eco­nom­ic doc­trine that is com­plete­ly unmov­able by evi­dence. And there’s a lot of that going around.

    The infla­tion con­tro­ver­sy is a prime exam­ple. If you came into the glob­al finan­cial cri­sis believ­ing that a large expan­sion of the Fed­er­al Reserve’s bal­ance sheet must lead to ter­ri­ble infla­tion, what you have in fact encoun­tered is this:
    [see pic]

    I’ve indi­cat­ed the date of the debase­ment let­ter for ref­er­ence.

    So how do you respond? We all get things wrong, and if we’re not engaged in derp, we learn from the expe­ri­ence. But if you’re doing derp, you insist that you were right, and con­tin­ue to ful­mi­nate against mon­ey-print­ing exact­ly as you did before.

    The same thing hap­pens when we try to dis­cuss the effects of tax cuts — belief in their mag­i­cal effi­ca­cy is utter­ly insen­si­tive to evi­dence and expe­ri­ence.

    Now, not every wrong idea — or claim that I dis­agree with — is derp. I was pret­ty unhap­py with the claim that doom looms when­ev­er debt cross­es 90 per­cent of GDP, and not too hap­py with the lat­er claims that the rel­e­vant econ­o­mists nev­er said such a thing; that’s what every­one from Paul Ryan to Olli Rehn heard, and they were not warned off. But there has not, thank­ful­ly, been a move­ment insist­ing that growth does too fall off a cliff at 90 per­cent, so this is not a derp thing.

    But there is, as I said, a lot of derp out there. And what that means, in turn, is that you shouldn’t pre­tend that we’re hav­ing a real dis­cus­sion when we aren’t. In fact, it’s intel­lec­tu­al­ly dis­hon­est and a pub­lic dis­ser­vice to pre­tend that such a dis­cus­sion is tak­ing place. We can and indeed are hav­ing a seri­ous dis­cus­sion about the effects of quan­ti­ta­tive eas­ing, but peo­ple like Paul Ryan and Cliff Asness are not part of that dis­cus­sion, because no evi­dence could ever change their view. It’s not eco­nom­ics, it’s just derp.


    Yes, derp is the rule of the day. And with the GOP with­in strik­ing dis­tance of tak­ing the Sen­ate, the ques­tion aris­es of just how intense the derp is going to get over the next two years. But since derp is the rule of the day, the ques­tion sort of answers itself. For instance, we know that what­ev­er form the yet to come derp takes will include tax cuts for bil­lion­aires and Wall Street dereg­u­la­tions. That’s just how GOP derp works. Bil­lion­aires and Wall Street don’t buy off politi­cians for noth­ing:

    The Wall Street Jour­nal
    The Sat­ur­day Inter­view
    What If Repub­li­cans Win?
    We’ll nev­er ‘have the moral author­i­ty to deal with social wel­fare if we can’t deal with cor­po­rate wel­fare.’

    James Free­man
    Oct. 17, 2014 6:33 p.m. ET

    Jeb Hen­sar­ling may be the most impor­tant Repub­li­can elect­ed offi­cial you’ve nev­er heard of. He will become even more impor­tant if his par­ty wins con­trol of the U.S. Sen­ate in November’s elec­tions, two weeks from this Tues­day. He’s also a lead­ing can­di­date to even­tu­al­ly suc­ceed John Boehn­er as House speak­er.

    So it’s a good moment to sit down with the Tex­an, who rep­re­sents a dis­trict near Dal­las and is now chair­man of the House Finan­cial Ser­vices Com­mit­tee, to talk about the polit­i­cal pos­si­bil­i­ties and strat­e­gy. He believes the GOP is “poised for a good elec­tion” but not a great one. Good because Pres­i­dent Oba­ma is inef­fec­tu­al and unpop­u­lar. Not great because Repub­li­cans haven’t talked enough about their plans to encour­age job cre­ation and ris­ing incomes.

    But if Repub­li­cans do win a major­i­ty, count Mr. Hen­sar­ling among those who think they will have to do more than stymie Mr. Oba­ma for his final two years. They’ll have to pro­duce leg­is­la­tion, he says, putting bills on the president’s desk that he will have to sign or veto. The polit­i­cal trick will be cal­cu­lat­ing what to pass that Mr. Oba­ma might con­ceiv­ably sign, and what to pass any­way to edu­cate the coun­try and pre­pare for the 2016 elec­tion.

    Togeth­er with Rep. Paul Ryan (R., Wis.), who is expect­ed to become chair­man of the tax-writ­ing Ways and Means Com­mit­tee, Mr. Hen­sar­ling will dri­ve eco­nom­ic pol­i­cy in the House. A cere­bral vet­er­an law­mak­er who opposed the bank bailouts, he car­ries the respect of both tea par­ty con­ser­v­a­tives and estab­lish­ment mod­er­ates with­in the GOP.

    He’ll need that cred­i­bil­i­ty because he is aggres­sive in sketch­ing out a 2015 leg­isla­tive agen­da for faster eco­nom­ic growth. The com­mon theme he stress­es with Jour­nal edi­tors is lib­er­at­ing peo­ple from bureau­cra­cy, whether they are seek­ing a mort­gage, buy­ing health insur­ance, cross­ing America’s south­ern bor­der to make an hon­est liv­ing in the U.S. or sim­ply fill­ing out their tax returns.

    This last one pro­vides an oppor­tu­ni­ty to lib­er­ate Amer­i­cans from bil­lions of hours of unpro­duc­tive labor. “Noth­ing says eco­nom­ic growth like fun­da­men­tal tax reform,” says Mr. Hen­sar­ling. The idea is to slash tax rates, along with loop­holes, to enact a sim­pler, more user-friend­ly tax sys­tem.

    Con­trary to much Wash­ing­ton wis­dom, includ­ing among con­ser­v­a­tive pun­dits, he says tax reform is pos­si­ble in 2015 not only because the IRS is in such ill repute, but also because Repub­li­cans will have no excuse for inac­tion if they con­trol both hous­es of Con­gress. “It’s a put-up or shut-up moment for us,” he says.

    An ear­ly gut check for Repub­li­can reform­ers will come next year when Con­gress will decide whether to once again reau­tho­rize the Export-Import Bank, a mon­u­ment to crony cap­i­tal­ism that pro­vides cheap financ­ing for select­ed inter­na­tion­al trade deals.

    Mr. Hen­sar­ling views the Ex-Im bat­tle “some­what as a pre­cur­sor to the tax reform fight because there are so many vest­ed cor­po­rate inter­ests” served by the cur­rent tax code: “If we can’t get rid of this agency and the cor­po­rate wel­fare it rep­re­sents, how will House Repub­li­cans ever muster the intesti­nal for­ti­tude to be able to do fun­da­men­tal tax reform?” He adds, with some polit­i­cal poignan­cy, “I don’t know how we will ever have the moral author­i­ty to deal with social wel­fare if we can’t deal with cor­po­rate wel­fare.”

    On the Finan­cial Ser­vices Com­mit­tee, Mr. Hen­sar­ling has been qui­et­ly craft­ing bipar­ti­san reform bills that now lie buried in Major­i­ty Leader Har­ry Reid ’s Demo­c­ra­t­ic Sen­ate. But if Repub­li­cans con­trol the upper cham­ber after Novem­ber, Mr. Hen­sar­ling sud­den­ly will have some­one to work with, prob­a­bly Alabama’s Richard Shel­by, who is expect­ed to become chair­man of the Bank­ing Com­mit­tee in a GOP Sen­ate.

    Mr. Hen­sar­ling sees an oppor­tu­ni­ty to revis­it the 2010 Dodd-Frank law, which was draft­ed in haste after the finan­cial cri­sis and was false­ly pro­mot­ed as an end to too-big-to-fail banks. Mr. Hen­sar­ling says that “giv­en the state of the econ­o­my, peo­ple are tak­ing a sec­ond look” at both the law and the sto­ry they were sold by its authors. “We’ve all heard about Wall Street greed. I think peo­ple are now start­ing to be a lit­tle bit more sen­si­tized to Wash­ing­ton greed—the greed for pow­er and con­trol over our lives and our econ­o­my.”

    He notes that con­sumers aren’t pleased with the results: Free check­ing and cred­it-card perks are dis­ap­pear­ing, and more gen­er­al­ly the econ­o­my is lag­ging. Mr. Obama’s approval rat­ings on eco­nom­ic pol­i­cy are down, and Mr. Hen­sar­ling thinks one rea­son is the bur­den on lend­ing and small com­mu­ni­ty banks by Dodd-Frank’s “sheer weight, vol­ume, com­plex­i­ty and num­ber of reg­u­la­tions.”

    He is par­tic­u­lar­ly focused on the law’s Finan­cial Sta­bil­i­ty Over­sight Council—which can vote to res­cue cer­tain huge cor­po­ra­tions it deems “sys­tem­i­cal­ly important”—and on the Con­sumer Finan­cial Pro­tec­tion Bureau (CFPB), which he calls “the sin­gle most unac­count­able agency in the his­to­ry of Amer­i­ca.” Housed with­in the Fed­er­al Reserve, it draws fund­ing from the Fed but doesn’t answer to any Fed offi­cials, or to con­gres­sion­al appro­pri­a­tors, or to a bipar­ti­san com­mis­sion, as most inde­pen­dent agen­cies do. The bureau is run by a sin­gle direc­tor who can­not be removed unless the pres­i­dent can show cause.

    Mr. Hen­sar­ling also notes that the Bureau doesn’t even have true over­sight by the courts because of the Supreme Court’s Chevron legal doc­trine that com­pels judges to show def­er­ence to the bureau’s deci­sions. This lack of account­abil­i­ty may be why the bureau has been con­struct­ing what Mr. Hen­sar­ling calls “the Taj Mahal” to serve as its Belt­way head­quar­ters.

    Mr. Hen­sar­ling believes the CFPB’s lack of account­abil­i­ty is also lead­ing to “con­sumer pro­tec­tions” that Amer­i­cans don’t want or need. Once the bureau’s rules are ful­ly imple­ment­ed, he says, “one third of all blacks and His­pan­ics” will “no longer be able to buy the homes that they have tra­di­tion­al­ly been able to buy. We are pro­tect­ing them out of their homes! The qual­i­fied-mort­gage rule should have been called ‘quit­ting mort­gages’ because that’s what it’s all about. So I think I’ve got the argu­ment that is very com­pelling and peo­ple feel it,” says Mr. Hen­sar­ling. “They’re less free and less pros­per­ous.”

    Does this put him in the com­pa­ny of afford­able-hous­ing advo­cates who favor degrad­ed under­writ­ing stan­dards for polit­i­cal­ly favored demo­graph­ic groups?

    “Pos­si­bly, yes,” he says. “I don’t want degrad­ed stan­dards. I want mar­ket stan­dards. I don’t want gov­ern­ment fiat stan­dards. I don’t want one view com­ing out of Wash­ing­ton on what accept­able mort­gage risk is.” Because, he adds, that view is guar­an­teed to be wrong.

    Will he try to put a repeal of the CFPB on Mr. Obama’s desk next year? “It would be a very dif­fer­ent CFPB,” he replies. “I want gov­ern­ment to vig­or­ous­ly police our mar­kets” and it’s not nec­es­sar­i­ly a bad idea to have this func­tion cen­tral­ized in one depart­ment. “What is bad is giv­ing an unelect­ed, unac­count­able bureau­crat the uni­lat­er­al pow­er to essen­tial­ly decide what cred­it cards go in our wal­lets, what mort­gages we can have on our homes, which is exact­ly what CFPB is doing.”

    What about the sta­bil­i­ty coun­cil in Dodd-Frank? Would a GOP Con­gress vote to repeal it?

    “I would hope so,” Mr. Hen­sar­ling says, and he expects such a plan would enjoy “a lit­tle more bipar­ti­san buy-in.” He’s will­ing to seek what­ev­er reforms to the law can attract 60 votes in the Sen­ate. “Absolute­ly, what­ev­er the mar­ket will bear. I came here to make a dif­fer­ence, not to make a speech,” he says. He’d like to com­bine a repeal of this big-bank res­cuer with a new bank­rupt­cy plan for large finan­cial firms craft­ed by the House Judi­cia­ry Com­mit­tee, along with require­ments that banks hold more cap­i­tal.


    Giv­en the GOP’s will­ing­ness to threat­en a US default in 2012 dur­ing the fis­cal cliff show­down in order make the Bush tax-cuts for the bil­lion­aires per­ma­nent, it’s pret­ty clear that the par­ty is going to demand far more dur­ing any upcom­ing bud­get nego­ti­a­tions, espe­cial­ly if the GOP takes the Sen­ate. So it looks like gut­ting both the Con­sumer Finan­cial Pro­tec­tion Board and repeal­ing the Finan­cial Sta­bil­i­ty Over­sight Coun­cil are also going to be on the agen­da. Krug­man crit­i­cized Dodd-Frank in 2010 for giv­ing the Finan­cial Sta­bil­i­ty Over­sight Coun­cil dis­cre­tion over areas like cap­i­tal, liq­uid­i­ty, mak­ing the imple­men­ta­tion of rig­or­ous over­sight option­al. Henser­ling, on the oth­er hand, wants to see the coun­cil repealed entire­ly (He also said he opposed down­siz­ing banks last year).

    So the GOP’s big 2015 gov­ern­ment shut­down sales pitch just might include giv­ing peo­ple the free­dom to use bad finan­cial prod­ucts and repeal­ing the agency that deals with too big to fail banks on top of the tax cuts for the oli­garchs. It will be inter­est­ing to see what Hen­sar­ling has in mind for the sta­bil­i­ty coun­cil’s replace­ment. It will also we inter­est­ing to see how impressed the pub­lic is when anoth­er round of sup­ply-side tax-cuts and dereg­u­la­to­ry fever. Since full-throat­ed derp is part of the GOP’s pub­lic brand­ing at this point we can’t expect the GOP to change its long win­ning derp tac­tic. But we should­n’t expect the pub­lic to con­sume the same brand of derp for­ev­er. Stale derp leaves an after­taste that’s hard to for­get.

    Posted by Pterrafractyl | October 19, 2014, 11:13 pm
  38. As many have not­ed dur­ing this year’s mid-terms — even Alan West can attest — the GOP has no nation­al agen­da in its con­gres­sion­al cam­paigns this year oth­er than oppo­si­tion to all things Oba­ma. That does­n’t mean the par­ty does­n’t have a nation­al pol­i­cy agen­da that it’s going to try to imple­ment should the GOP take the Sen­ate. It just means the GOP’s pol­i­cy agen­da isn’t being talked about:

    The Econ­o­mist
    If the Repub­li­cans win the Sen­ate...
    Two sce­nar­ios for the next two years
    Oct 18th 2014 | WASHINGTON, DC

    MOST polls sug­gest that Repub­li­cans will cap­ture a nar­row major­i­ty in the Sen­ate in November’s mid-term elec­tions, while hold­ing on to the House of Rep­re­sen­ta­tives. So Amer­i­ca faces two more years of divid­ed gov­ern­ment, but with a shift in the bal­ance of pow­er.

    Until now, Barack Oba­ma has always had a Demo­c­ra­t­ic Sen­ate to block pro­pos­als passed by the House. If that buffer dis­ap­pears, he will have to sign or veto every bill that a Repub­li­can Con­gress sends him. The result may be polit­i­cal paral­y­sis, accel­er­at­ing the grey­ing of the president’s hair and alarm­ing allies world­wide. Or it may be that the two sides find com­mon ground and pass some sen­si­ble mea­sures.

    Pes­simists sigh that the par­ties are too polarised to agree on any­thing. Plen­ty of Repub­li­cans think Mr Oba­ma is a men­ace whom patri­ots must thwart and resist. Many Democ­rats believe there is no point in try­ing to cut deals with Repub­li­cans. Instead, they want Mr Oba­ma to spend his last two years in office ignor­ing Con­gress and using exec­u­tive orders and fed­er­al reg­u­la­tions to pur­sue pro­gres­sive goals, such as curb­ing green­house-gas emis­sions, shield­ing ille­gal migrants from depor­ta­tion (and even clos­ing the Guan­tá­namo Bay prison for ter­ror­ist sus­pects, if press reports are true: see Lex­ing­ton). Under this sce­nario, no sig­nif­i­cant laws will be passed until after the pres­i­den­tial elec­tion in 2016.

    Opti­mists retort that once Repub­li­cans con­trol both arms of Con­gress, they can­not just snarl from the side­lines. Unless they show they have a pos­i­tive agen­da, they risk a drub­bing in 2016. And if Mr Oba­ma wants a lega­cy, he will have to work with them. Some of the big­wigs inter­viewed for this arti­cle believe that sev­er­al con­struc­tive, growth-friend­ly poli­cies already enjoy enough bipar­ti­san sup­port to pass in the Sen­ate.

    The cur­rent road­block to such ideas, Repub­li­cans say, is Har­ry Reid, the Demo­c­ra­t­ic leader of the Sen­ate. In their telling, he stops many Repub­li­can amend­ments from com­ing to the floor for a vote pre­cise­ly because he fears they would pass. Prag­mat­ic, pro-busi­ness Repub­li­cans make a sim­i­lar point about the House of Rep­re­sen­ta­tives, not­ing that mod­er­ate Repub­li­can ideas need Demo­c­ra­t­ic votes to pass, since the GOP’s “Hell No” wing reflex­ive­ly oppos­es almost any­thing Mr Oba­ma might sign.

    Sen­a­tor Bob Cork­er, a Repub­li­can from Ten­nessee, makes a strik­ing claim. In pri­vate meet­ings with the pres­i­dent, he has told Mr Oba­ma that he will find it eas­i­er to address America’s long-term fis­cal woes if Democ­rats lose in Novem­ber. “I have told the pres­i­dent that he is bet­ter off if the Repub­li­cans are in the major­i­ty,” Mr Cork­er reports, explain­ing that both sides would then be under pres­sure to act respon­si­bly.

    If Repub­li­cans win the Sen­ate, Mr Cork­er hopes to see progress on long-stalled areas of pol­i­cy such as free trade, cor­po­rate-tax reform, deficit reduc­tion, fed­er­al high­way fund­ing, and revis­ing the legal basis for the war in Iraq and Syr­ia.

    Oth­er mod­er­ate Repub­li­cans agree. The most durable reforms are those that enjoy bipar­ti­san back­ing, from the Civ­il Rights Act to the Clin­ton-era wel­fare reforms. Laws rammed through by one par­ty enjoy less legit­i­ma­cy (Repub­li­cans cite Oba­macare; Democ­rats cite the George W. Bush tax cuts). The short­est-lived reforms rest on exec­u­tive orders, of the sort being urged on Mr Oba­ma by the Left.

    Repub­li­cans have what ought to be com­pelling rea­sons to seek com­pro­mise. Next year Con­gress must fund the gov­ern­ment by extend­ing exist­ing spend­ing plans and, ide­al­ly, by draw­ing up a for­mal bud­get. It must also raise the debt ceil­ing (a lim­it on fed­er­al bor­row­ing) or force a cat­a­stroph­ic nation­al default. Prag­mat­ic Repub­li­cans believe that the last time their par­ty played chick­en with the bud­get, it dis­graced itself in the eyes not just of econ­o­mists but also of vot­ers. (In Octo­ber 2013 House Repub­li­cans forced a gov­ern­ment shut­down by insist­ing that any new spend­ing bill must include pro­vi­sions to delay or defund bits of Oba­macare.)

    Some promi­nent Repub­li­cans, such as Paul Ryan of Wis­con­sin, chair­man of the House Bud­get Com­mit­tee and Mitt Romney’s run­ning-mate in 2012, sug­gest a two-pronged strat­e­gy that com­bines gov­ern­ing with point-scor­ing. A Repub­li­can Con­gress could pass a few mod­est, incre­men­tal bills which Mr Oba­ma might actu­al­ly sign, but also send him sev­er­al pop­u­lar ones which he might veto. For exam­ple, they would sure­ly ask him to approve the long-delayed Key­stone XL pipeline to car­ry oil from Canada’s tar sands to Amer­i­can refiner­ies. Envi­ron­men­tal­ists hate the idea, but if Mr Oba­ma vetoes it, Repub­li­cans will accuse him of killing jobs.

    Not all con­ser­v­a­tives share the opti­mists’ vision. Hard­lin­ers have essen­tial­ly giv­en up on work­ing with Mr Obama—unless he sur­ren­ders com­plete­ly and lets them dis­man­tle Oba­macare. Some urge their par­ty to ignore its own prag­mat­ic wing and chan­nel the vot­ers’ rage instead. Michael Need­ham, the chief exec­u­tive of Her­itage Action, a con­ser­v­a­tive cam­paign out­fit, denies that the 2013 shut­down hurt Repub­li­cans, insist­ing that it sparked a valu­able debate about Oba­macare. Her­itage Action would like to see Repub­li­cans pro­vide a “bold con­trast” to Mr Oba­ma, and show they care about ordi­nary Amer­i­cans and their stag­nat­ing incomes, rather than “the lob­by­ing class in Wash­ing­ton, and the Cham­ber of Com­merce”.

    The “no com­pro­mise” camp will grow loud­er as the next pres­i­den­tial race nears. Puta­tive White House con­tenders such as Sen­a­tor Ted Cruz of Texas will vie to come up with fresh attacks on Mr Oba­ma. Some will assume that the best chance of a Repub­li­can vic­to­ry in 2016 lies in prov­ing that divid­ed gov­ern­ment does not work and in see­ing Mr Oba­ma hoot­ed from office.

    Many Democ­rats think com­pro­mise is unlike­ly, too. If Repub­li­can prag­ma­tists in the Sen­ate think a new era of bipar­ti­san­ship is nigh, they “real­ly need to talk to some of their House col­leagues, because I see no evi­dence that they have changed,” says Chris Van Hollen of Mary­land, a senior House Demo­c­rat. He does not accept that the Repub­li­cans will win the Sen­ate, but if they do, he pre­dicts that they will over-reach and cre­ate a “huge pub­lic back­lash”. The Ryan bud­get plan “absolute­ly dev­as­tates” spend­ing on edu­ca­tion, sci­en­tif­ic research and infra­struc­ture, while cut­ting the top rate of per­son­al income tax, Mr Van Hollen charges. If Repub­li­cans want to pass Mr Ryan’s plan, “Go for it,” he urges.

    What­ev­er hap­pens in Novem­ber, Mr Oba­ma will remain in over­all con­trol of for­eign pol­i­cy and defence, and enjoy con­sid­er­able dis­cre­tion over how gov­ern­ment agen­cies imple­ment reg­u­la­tions. But a Repub­li­can Con­gress would hold the purse strings, and new fed­er­al appointees such as judges and cen­tral bankers would have to be approved by a Repub­li­can Sen­ate.

    If Repub­li­cans hold a nar­row major­i­ty in the Sen­ate, their ambi­tions will be lim­it­ed by the need to reach a super-major­i­ty of 60 sen­a­tors (to avoid a “fil­i­buster”, where a minor­i­ty of 41 or more can block a bill). How­ev­er, some poli­cies attached to bud­get bills can be passed by a sim­ple major­i­ty of 51, using a par­lia­men­tary wheeze known as rec­on­cil­i­a­tion. This may sound arcane (and is), but could have hefty real-world con­se­quences after Novem­ber.

    Strife via rec­on­cil­i­a­tion

    Mitch McConnell, the Repub­li­can leader in the Sen­ate, has set out how a new major­i­ty might be used. In a speech to donors that was leaked, he said: “We own the bud­get.” Repub­li­cans would use rid­ers on spend­ing bills to restrict the fed­er­al bureau­cra­cy, he explained. “No mon­ey can be spent to do this or that. We’re going to go after them on health care, on finan­cial ser­vices, on the Envi­ron­men­tal Pro­tec­tion Agency, across the board,” he said.

    Yet mak­ing such con­straints bite will be com­pli­cat­ed. It would take 60 votes to attach rid­ers to run-of-the-mill spend­ing bills, mean­ing that Demo­c­ra­t­ic sup­port would be need­ed. The game is to attach so many pop­u­lar spend­ing plans to a bill that some Democ­rats will back it, explains Judd Gregg, a for­mer Repub­li­can sen­a­tor.

    How­ev­er, rec­on­cil­i­a­tion must fol­low strict rules (to sim­pli­fy, it must be agreed that a policy’s main impact is on the fed­er­al bud­get, and it must not increase the long-term deficit). “Rec­on­cil­i­a­tion is a very dif­fi­cult vehi­cle to work with,” says Mr Gregg. It could per­haps be used to rein in envi­ron­men­tal reg­u­la­tions. But it is a poor way to pur­sue tax reform, since tax cuts are usu­al­ly assumed to increase the deficit.

    Note that Paul Ryan has a dynam­ic fuzzy math trick up his sleeve that just might take care of any of the math prob­lems that would pre­vent the GOP from “pur­su­ing tax reform” via the rec­on­cil­i­a­tion process giv­en the need to not increase the long-term deficit. So when Mitch McConnell talks about how the GOP is “going to go after them on health care, on finan­cial ser­vices, on the Envi­ron­men­tal Pro­tec­tion Agency, across the board,” that board can most def­i­nite­ly include bud­get bust­ing tax cuts too when the GOP con­trols the math.


    Oba­macare itself was part­ly passed via rec­on­cil­i­a­tion, and in 2012 the team plan­ning a Rom­ney pres­i­den­cy researched how much of the health law could be unpicked in the same way, recalls Lan­hee Chen of Stan­ford Uni­ver­si­ty, Mr Romney’s chief pol­i­cy advis­er. Quite a lot, was the answer, but rec­on­cil­i­a­tion is a lengthy process, and would prob­a­bly end in a veto by Mr Oba­ma, Mr Chen says.

    Democ­rats in the Sen­ate recent­ly tweaked their rules to make it eas­i­er to con­firm pres­i­den­tial appoint­ments with just 51 votes, and Repub­li­cans will have to decide whether to pre­serve that rule change, which they denounced at the time. Either way, if Repub­li­cans win in Novem­ber, Mr Oba­ma will have to nom­i­nate judges, ambas­sadors and senior offi­cials with bipar­ti­san appeal if he wants them con­firmed.

    In most oth­er areas, the goal for Repub­li­cans will be to find poli­cies that might attract mod­er­ate Democ­rats, and thus 60 votes. That could include mea­sures to boost ener­gy pro­duc­tion, pro­mote trade and tweak the tax sys­tem.

    On ener­gy, Con­gress could press fed­er­al reg­u­la­tors to grant export licences for nat­ur­al gas, and make it eas­i­er to drill for oil on fed­er­al lands or off­shore. On trade, Con­gress could grant the pres­i­dent “fast-track” author­i­ty to nego­ti­ate with for­eign gov­ern­ments, so that law­mak­ers can­not unpick deals after they have been agreed on. Mr Cork­er thinks this is pos­si­ble; Mr Van Hollen sus­pects that some in Con­gress may insist on see­ing details of pro­posed trade pacts before agree­ing to fast-track.

    On tax­es, Repub­li­can lead­ers think a bipar­ti­san deal could address the prob­lem of Amer­i­can firms hoard­ing prof­its over­seas. Recent head­lines about firms quit­ting the coun­try for tax rea­sons mean that both sides under­stand the harm caused by Uncle Sam’s insis­tence on tax­ing Amer­i­can firms’ prof­its even if they are earned abroad, says Mr Cork­er. Some on the right could live with a “repa­tri­a­tion hol­i­day” for prof­its. Con­gres­sion­al Democ­rats retort that an ear­li­er amnesty, in 2004, just led to more hoard­ing of prof­its abroad.

    Deal or no deal?

    A broad­er tax reform may be pos­si­ble, but House Repub­li­cans have always resist­ed con­sid­er­ing cor­po­rate tax­es in iso­la­tion, says Mr Van Hollen. Democ­rats close to the White House sound a bit more opti­mistic. In a recent arti­cle, Gene Sper­ling, a for­mer eco­nom­ic advis­er to Mr Oba­ma, insist­ed that the two par­ties’ lead­ers are not far apart on cor­po­rate-tax reform, sug­gest­ing both sides could agree to cut head­line rates while impos­ing a min­i­mum tax on for­eign earn­ings. Alas, the prospects for a grand bar­gain on tax­es and spend­ing do not look good. Democ­rats sug­gest that Repub­li­can sen­a­tors under­es­ti­mate how aller­gic House Repub­li­cans are to any­thing that sounds like a tax increase.

    Many Repub­li­cans will demand a show vote to repeal Oba­macare, which Mr Oba­ma would obvi­ous­ly veto. Small­er tweaks to the health law may pass, how­ev­er. Some Democ­rats sup­port Repub­li­can calls to repeal a tax on med­ical devices; oth­ers may agree to loosen the rules for when a firm is deemed large enough to be oblig­ed to offer its staff health insur­ance.

    Opti­mists hope that the near-insol­ven­cy of the High­way Trust Fund, which depends on fed­er­al fuel tax­es, will force Con­gress and the White House to do a deal when the next stop­gap fund­ing plan expires in 2015. But flintier con­ser­v­a­tives instead want the states to decide how to tax fuel and pay for roads, cut­ting out the fed­er­al gov­ern­ment entire­ly.

    Some Repub­li­cans think tweaks to immi­gra­tion pol­i­cy are pos­si­ble, as long as the ques­tion of what to do with the esti­mat­ed 11m ille­gal migrants now in Amer­i­ca is shelved. Sen­a­tor John Cornyn of Texas warns Democ­rats not to start by demand­ing an amnesty. He grum­bled to a Texas news­pa­per that Democ­rats “want to eat dessert before they eat their veg­eta­bles on immi­gra­tion”. Yet what Repub­li­cans want is for Democ­rats to swal­low con­ser­v­a­tive red meat—such as yet more bor­der secu­ri­ty, new sys­tems to catch visa-over­stay­ers and unlaw­ful job appli­cants and employ­er-friend­ly visa schemes. Only lat­er might Repub­li­cans con­tem­plate legal­i­sa­tion.

    As it hap­pens, a broad debate on immi­gra­tion looms after November’s elec­tions, because Mr Oba­ma is expect­ed to announce an exec­u­tive order to shield more migrants from depor­ta­tion, build­ing on an order of 2012 to stop deport­ing many young­sters brought to Amer­i­ca as chil­dren (a group known as Dream­ers). His­pan­ic activists want mil­lions more to be cov­ered. Mr Oba­ma may com­pro­mise, per­haps with a rule pro­tect­ing Dream­ers’ par­ents.

    Mr Chen, the for­mer Rom­ney advis­er, hopes that Repub­li­cans in Con­gress will put togeth­er a “rea­son­able” alter­na­tive to that pres­i­den­tial order and send it to Mr Oba­ma, forc­ing him to choose between a mod­est immi­gra­tion reform now, or pro­gres­sive per­fec­tion some day. Mr Chen fears, how­ev­er, that after the announce­ment of an Oba­ma amnesty some on the right will sim­ply “go nuts”, drown­ing out seri­ous debate with histri­on­ics.

    Many in Con­gress would like to draft a new autho­ri­sa­tion for the use of force against Islam­ic State. The cur­rent autho­ri­sa­tion dates back to 2001, is nar­row­ly tied to the Sep­tem­ber 11th attacks and gives the pres­i­dent sweep­ing pow­ers. Mr Oba­ma used to say that that autho­ri­sa­tion need­ed replac­ing; now he cites it as his author­i­ty for bomb­ing Iraq and Syr­ia. A Repub­li­can Con­gress would also demand that Amer­i­ca main­tain pres­sure on Iran’s nuclear pro­gramme, pre­dicts Mr Cork­er. How­ev­er, Mr Oba­ma would prob­a­bly veto any bill that tight­ened sanc­tions against his wish­es.

    The bat­tle between prag­ma­tists and par­ti­sans in both par­ties is far from resolved. If Repub­li­cans con­trol both halves of Con­gress, “They have to show they can gov­ern or they will suf­fer huge loss­es in 2016,” says Mr Gregg. But oth­er Repub­li­cans would rather deny Mr Oba­ma any suc­cess­es in his final two years. For one thing, they sin­cere­ly dis­trust him. For anoth­er, they want to ham­mer home the idea that Democ­rats are incom­pe­tent and big gov­ern­ment always fails. For their part, lefty ide­o­logues want to stir Repub­li­cans into such a fury that they repel vot­ers in 2016. That is why some hope for the largest pos­si­ble immi­gra­tion amnesty (pre­cise­ly to pro­voke the Right), and for a flur­ry of exec­u­tive pow­er-grabs.


    Well that was a nice lay­out of the GOP’s pol­i­cy option land­scape and wow that was bleak. Not just bleak for the Amer­i­can pub­lic but the GOP too. What were their options again? Tax cuts that will obvi­ous­ly be tar­get­ing large cor­po­ra­tions and the super-rich. Grant­i­ng Oba­ma free-trade fast track author­i­ty, because that’s just what the US elec­torate wants these days: more trade agree­ments. Then there’s simul­ta­ne­ous­ly pass­ing the Key­stone pipeline, allow­ing more off­shore drilling, and gut­ting the EPA. Plus the intra-par­ty show­downs between pick­ing apart Oba­macare via rec­on­cil­i­a­tion or try­ing to repeal it entire­ly. And the loom­ing pos­si­bil­i­ty of some sort of nativist freak out over immi­gra­tion that’s only going to make the GOP even less pop­u­lar than it already is with Lati­no vot­ers . The ongo­ing aus­ter­i­ty for pub­lic ser­vices and social pro­grams only get worse as will the unhelp­ful hys­ter­ics over ISIS and Ebo­la (with prob­a­ble calls for ground troops in Iraq and Syr­ia and addi­tion­al sabre rat­ting towards Iran too). And, final­ly, throw in all the ran­dom red meat crazy bills that they’re inevitably going to pass to appease the Tea Par­ty base because most of the options above are design to please the par­ty’s real base and some­thing is going to be need for the par­ty’s rab­ble.

    So it’s not look­ing like the GOP lacks options that does­n’t force the par­ty to seem like either the tool of greed, gov­ern­men­tal decay, or gen­er­al luna­cy. Pass­ing the Key­stone pipeline is prob­a­bly the most pop­u­lar option avail­able but only if the GOP does­n’t simul­ta­ne­ous­ly gut the EPA too much and is that real­ly pos­si­ble?

    Con­gress’s approval rat­ing is hov­er­ing 14% Will tax cuts for the rich, more pol­lu­tion, more aus­ter­i­ty, poi­son-pilling Oba­macare, off­shoring jobs, more war and ground troops, and more GOP insan­i­ty in gen­er­al real­ly lead to a Con­gres­sion­al approval rat­ings above 14%? Yes, at first there will part a par­ti­san bump that might get Con­gres­sion­al approval in the 30’s or some­thing but you have to won­der how like­ly it is that this con­tem­po­rary incar­na­tion of the GOP, which has yet to reach peak crazy, will be able to hold at least a 14% approval rat­ing at the end of two years.

    Sure, parts of the true believ­er Tea Par­ty base is going to be pissed for them not going far enough. But most the rest of the coun­try is almost cer­tain­ly going to be shocked by the real­i­ties of GOP aus­ter­i­ty once they’re active­ly increas­ing the aus­ter­i­ty above seques­tra­tion lev­els (which they will almost cer­tain­ly do). And peo­ple just might notice aus­ter­i­ty is sug­ar-coat­ed with tax cuts tar­get­ing the super-rich that don’t do any good for the gen­er­al econ­o­my. That’s what always seems to hap­pen: sup­port for the GOP’s poli­cies drops as the ser­vice cuts become real­i­ty and the tax cuts just result in more mon­ey tucked away in off­shore tax shel­ters. Even the “opti­mistic” agen­da described in the arti­cle above would be pret­ty unpop­u­lar and that sce­nario is just not real­is­tic. The Ted Cruzes of the par­ty can’t not go nuts. Thatts their thing.

    And yet, as the arti­cle lays out, there real­ly aren’t a lot of oth­er options. Real­ly, what else can the GOP do than the crap­tac­u­lar and dam­ag­ing agen­da laid out above? The agen­da laid out above is already “GOP-lite” poli­cies. That’s the least extreme agen­da we can real­is­ti­cal­ly expect at this point. The real­ly scary stuff, like dis­man­tling the New Deal, comes out when there’s a “Grand Bargain“on the table. And it’s unclear how like­ly it is that such a sce­nario takes place. Although, as in the arti­cle above, Sen­a­tor Cork­er does give us a hint of what to expect from the GOP dur­ing a such a Grand Bar­gain in the arti­cle from June below. And he also hints that a Grand Bar­gain show­down could hap­pen soon:

    Defense News
    Sen. Cork­er Sees Chance for Sequester-Killing ‘Grand Bar­gain’ Next Year
    Jun. 12, 2014 — 03:45AM |

    WASHINGTON — Should the GOP win con­trol of the US Sen­ate, a win­dow will open for law­mak­ers and the Oba­ma White House to take one more shot at a sequester-killing fis­cal deal, a key Sen­ate Repub­li­can tells Con­gress­Watch.

    Sen. Bob Cork­er, R‑Tenn., was involved in every effort to strike a “grand bar­gain” over the last few years. And despite a frus­trat­ing end to talks last Sep­tem­ber, Cork­er sees an oppor­tu­ni­ty ear­ly next year, when a new Con­gress is seat­ed.

    The key, in his eyes: A poten­tial­ly divid­ed gov­ern­ment, with Repub­li­cans con­trol­ling the leg­isla­tive branch and Democ­rats the exec­u­tive.

    “If we were for­tu­nate to … be in the major­i­ty, I think that’s when big things hap­pen for our coun­try because both sides own the solu­tion,” Cork­er said. “We’ve seen big things hap­pen in the past when we’ve had divid­ed gov­ern­ment, where you saw prob­lems that lin­gered and one side didn’t want to take the blame.

    “I real­ly hold out hope that if we win the major­i­ty … we’ll have the oppor­tu­ni­ty and the envi­ron­ment will be right for a big solu­tion to occur,” Cork­er said.

    Cork­er and oth­er Repub­li­cans said if Repub­li­cans con­trol both cham­bers next year, it should force Democ­rats and Pres­i­dent Barack Oba­ma to adhere to more GOP demands in nego­ti­a­tions over such a deal.

    A big­ger major­i­ty in the House and a small major­i­ty in the Sen­ate would be an ear­ly test for GOP lead­ers over whether they would accept some lev­el of defense cuts — like­ly small­er than sequestration’s sched­uled cuts — to get more of the domes­tic enti­tle­ment cuts they so crave.

    Repub­li­cans like Cork­er believe they can get more domes­tic enti­tle­ment pro­gram cuts and guard against Demo­c­ra­t­ic-sup­port­ed tax hikes if they con­trol both cham­bers. But, even with a small Sen­ate major­i­ty, they would still need to secure 60 votes to pass a deficit-par­ing bill.

    Cork­er said the admin­is­tra­tion, dur­ing pre­vi­ous tries at a fis­cal deal, has been “unwill­ing to upset their base.” But, he says, if Repub­li­cans con­trol both cham­bers, “I think that kind of changes that dynam­ic.”

    Shaun Dono­van, Hous­ing and Urban Devel­op­ment sec­re­tary and the White House’s nom­i­nee to run the Office of Man­age­ment and Bud­get, said Wednes­day that he wants to, if con­firmed, work with law­mak­ers on address­ing seques­tra­tion.


    Dono­van said the “pri­ma­ry dri­vers” of US debt and deficits are “health care cost growth and inad­e­quate rev­enues to meet the needs of our aging pop­u­la­tion.”

    That showed the White House remains far away on a solu­tion with Repub­li­cans, who con­tin­ue to reject the notion of a fis­cal deal that rais­es tax­es and cuts defense again rather than deep domes­tic enti­tle­ment pro­gram cuts.

    Con­gres­sion­al Democ­rats and the White House remain opposed to the kind of deep fed­er­al spend­ing cuts — most­ly to domes­tic enti­tle­ment pro­grams — the GOP wants.

    Oh my! A “Grand Bar­gain” “opp­por­tu­ni­ty” might spring up ear­ly next year as a con­se­quence of this:

    Cork­er and oth­er Repub­li­cans said if Repub­li­cans con­trol both cham­bers next year, it should force Democ­rats and Pres­i­dent Barack Oba­ma to adhere to more GOP demands in nego­ti­a­tions over such a deal.

    And those demands are like­ly to include this:

    Cork­er and oth­er Repub­li­cans said if Repub­li­cans con­trol both cham­bers next year, it should force Democ­rats and Pres­i­dent Barack Oba­ma to adhere to more GOP demands in nego­ti­a­tions over such a deal.


    Cork­er and oth­er Repub­li­cans said if Repub­li­cans con­trol both cham­bers next year, it should force Democ­rats and Pres­i­dent Barack Oba­ma to adhere to more GOP demands in nego­ti­a­tions over such a deal.

    And this might be part of the GOP’s debut per­for­mance ear­ly next year. At least that’s what Sen­a­tor Cork­er was pre­dict­ing back in June. Deep enti­tle­ment cuts via Grand Bar­gain black­mail right out of the gate. Bra­vo.

    Still, since the GOP has to know this is going to be a deeply unpop­u­lar the obvi­ous tools are going to be need­ed: Dis­trac­tions. Lots of dis­trac­tions. Just relent­less dis­trac­tions while it push­es through its core agen­da of tax cuts for the rich and gen­er­al plun­der­ing. Espe­cial­ly if a black­mail show­down is how they’re going to push it through. And if there’s one thing the GOP knows how to do bet­ter than just about any oth­er orga­ni­za­tion in the world that’s cre­ate lots and lots of arti­fi­cial dis­trac­tions while attempt­ing to push through a plun­der­ing agen­da. Espe­cial­ly if it requires brinks­man­ship black­mail and obfus­ca­tion. It does­n’t always work, but they sure seem to enjoy try­ing and if Sen­a­tor Cork­er’s pre­dic­tions from June are still applic­a­ble (and why would­n’t the be?) we just might be look­ing at anoth­er round of play­ing chick­en over short-term spend­ing and long-term enti­tle­ment cuts ear­ly next year.

    And since the GOP real­ly has lim­it­ed pol­i­cy flex­i­bil­i­ty (scorched earth cam­paigns are like that) the only ques­tion now, should the GOP take the Sen­ate, is and what kind of dis­trac­tions are going to be employed to allow the GOP to suc­cess­ful­ly push that black­mail agen­da ear­ly next year. Try to enjoy the show.

    Posted by Pterrafractyl | October 26, 2014, 1:13 am
  39. Here’s some news that would be sur­pris­ing if it was­n’t so pre­dictably lame: Ger­many’s Finance Min­is­ter, Wolf­gang Schaeu­ble, has announced a Ger­man fis­cal stim­u­lus plan despite all the pri­or oppo­si­tion to any spend­ing that isn’t deficit neu­tral. That’s the sur­pris­ing news. Of course, since this is the Merkel gov­ern­ment we’re talk­ing about, there’s a catch: the plan does­n’t break the Merkel gov­ern­men­t’s pledge to elim­i­nate Ger­many’s deficit in 2015 and be deficit neu­tral. How? By not start­ing until 2016. And there’s anoth­er catch: the fis­cal stim­u­lus is to be stretched out from 2016–2018 and only go up to 10 bil­lion euros, or 0.1% of Ger­many’s GDP. So the fis­cal stim­u­lus plan is to give far too lit­tle in stim­u­lus far too late for it to do any good. Also, the extra 10 bil­lion euros in spend­ing will be off­set by high­er tax­es. Sur­prise:

    EU Observ­er
    Ger­many plans extra €10 bil­lion invest­ment to head off EU crit­ics

    07.11.14 @ 09:29

    By Ben­jamin Fox

    BRUSSELS — Ger­many has giv­en the first hint that it is pre­pared to increase pub­lic invest­ment to steer a return to eco­nom­ic growth after Angela Merkel’s gov­ern­ment pledged to invest an extra €10 bil­lion by 2018.

    “I will pro­pose to the cab­i­net that in the course of plan­ning the 2016 bud­get we allo­cate addi­tion­al means for pub­lic invest­ment of the order of €10 bil­lion”, finance min­is­ter Wolf­gang Schaeu­ble told a press con­fer­ence on Thurs­day (6 Novem­ber).

    Schaeu­ble added that the extra funds would be matched by high­er tax rev­enues in the com­ing years and would not break his gov­ern­men­t’s promise to run a bal­anced bud­get for the first time in over 40 years in 2015. Most of the mon­ey is expect­ed to be ear­marked for road­build­ing and oth­er infra­struc­ture projects.

    Despite its rep­u­ta­tion as Europe’s eco­nom­ic pow­er­house, and its con­sis­tent­ly high trade sur­plus, the Ger­man econ­o­my has strug­gled so far this year and is one of the EU coun­tries to be most affect­ed by the bloc’s trade sanc­tions bat­tle with Rus­sia. It is fore­cast to grow by 1.2 per­cent this year fol­lowed by 1.3 per­cent in 2015.


    And now you know why a dif­fer­ent Wolf­gang feels the need to write pieces like this:

    Finan­cial Times
    The euro is in greater per­il today than at the height of the cri­sis

    The euro­zone has no mech­a­nism to defend itself against a drawn-out depres­sion

    Wolf­gang Mün­chau
    Novem­ber 9, 2014 2:11 pm

    If there is one thing Euro­pean pol­i­cy mak­ers agree on, it is that the sur­vival of the euro is no longer in doubt. The econ­o­my is not doing great, but at least the cri­sis is over.

    I would chal­lenge that con­sen­sus. Euro­pean pol­i­cy mak­ers tend to judge dan­ger in terms of the num­ber of late-night meet­ings in the Jus­tus Lip­sius build­ing in Brus­sels. There are def­i­nite­ly few­er of those. But that is a bad met­ric.

    I do not have the fog­gi­est idea what the prob­a­bil­i­ty of a break-up of the euro was dur­ing the cri­sis. But I am cer­tain that the prob­a­bil­i­ty is high­er today. Two years ago fore­cast­ers were hop­ing for strong eco­nom­ic recov­ery. Now we know it did not hap­pen, nor is it about to hap­pen. Two years ago, the euro­zone was unpre­pared for a finan­cial cri­sis, but at least pol­i­cy mak­ers respond­ed by cre­at­ing mech­a­nisms to deal with the acute threat.

    Today the euro­zone has no mech­a­nism to defend itself against a drawn-out depres­sion. And, unlike two years ago, pol­i­cy mak­ers have no appetite to cre­ate such a mech­a­nism.

    As so often in life, the true threat may not come from where you expect – the bond mar­kets. The main pro­tag­o­nists today are not inter­na­tion­al investors, but insur­rec­tion­al elec­torates more like­ly to vote for a new gen­er­a­tion of lead­ers and more will­ing to sup­port region­al inde­pen­dence move­ments.

    In France Marine Le Pen, the leader of the Nation­al Front, could expect to win a straight run-off with Pres­i­dent François Hol­lande. Beppe Gril­lo, the leader of the Five Star Move­ment in Italy, is the only cred­i­ble alter­na­tive to Mat­teo Ren­zi, the incum­bent prime min­is­ter. Both Ms Le Pen and Mr Gril­lo want their coun­tries to leave the euro­zone. In Greece, Alex­is Tsipras and his Syriza par­ty lead the polls. So does Podemos in Spain, with its for­mi­da­ble young leader Pablo Igle­sias.

    The ques­tion for vot­ers in the cri­sis-hit coun­tries is at which point does it become ratio­nal to leave the euro­zone? They might con­clude that it is not the case now; they might oppose a break-up for polit­i­cal rea­sons. Their judg­ment is prone to shift over time. I doubt it is becom­ing more favourable as the econ­o­my sinks deep­er into depres­sion.

    Unlike two years ago, we now have a clear­er idea about the long-term pol­i­cy response. Aus­ter­i­ty is here to stay. Fis­cal pol­i­cy will con­tin­ue to con­tract as mem­ber states ful­fil their oblig­a­tions under new Euro­pean fis­cal rules. Germany’s “stim­u­lus pro­gramme”, announced last week, is as good as it gets: 0.1 per cent of gross domes­tic prod­uct in extra spend­ing, not start­ing until 2016. Enjoy!

    What about mon­e­tary pol­i­cy? Mario Draghi said he expect­ed the bal­ance sheet of the Euro­pean Cen­tral Bank to increase by about €1tn. The pres­i­dent of the ECB did not set this num­ber as a
    for­mal tar­get, but as an expec­ta­tion
    – what­ev­er that means. The most opti­mistic inter­pre­ta­tion is that this implies a small pro­gramme of quan­ti­ta­tive eas­ing (pur­chas­es of gov­ern­ment debt). A more pes­simistic view is that noth­ing will hap­pen and that the ECB will miss the €1tn just as it keeps on miss­ing its infla­tion tar­get. My expec­ta­tion is that the ECB will meet the num­ber – and that it will not make much dif­fer­ence.

    And what about struc­tur­al reforms? We should not over­es­ti­mate their effect. Germany’s much-praised wel­fare and labour reforms made it more com­pet­i­tive against oth­er euro­zone coun­tries. But they did not increase domes­tic demand. Applied to the euro­zone as a whole, their effect would be even small­er as not every­body can become simul­ta­ne­ous­ly more com­pet­i­tive against one anoth­er.


    As Wolf­gang points out:

    Unlike two years ago, we now have a clear­er idea about the long-term pol­i­cy response. Aus­ter­i­ty is here to stay. Fis­cal pol­i­cy will con­tin­ue to con­tract as mem­ber states ful­fil their oblig­a­tions under new Euro­pean fis­cal rules. Germany’s “stim­u­lus pro­gramme”, announced last week, is as good as it gets: 0.1 per cent of gross domes­tic prod­uct in extra spend­ing, not start­ing until 2016. Enjoy!

    This is part of how the New Hope­less Nor­mal set­tles into place: with increas­ing­ly grim choic­es involv­ing either end­less aus­ter­i­ty or break­ing up the euro­zone. Every option sucks so noth­ing hap­pens beyond the iner­tial sit­u­a­tion­al decay.

    But don’t assume that things won’t change soon­er rather than lat­er. the cult of aus­ter­i­ty and defla­tion isn’t lim­it­ed to the Euro­pean pol­i­cy-mak­ing scene and the more it spreads, the more potent the aus­ter­i­ty dam­age becomes because even more nations are join­ing the race the bot­tom. When it’s not just Berlin, but also the cen­tral banks of France and even India (where aus­ter­i­ty poli­cies should real­ly not be tak­ing place) are jump­ing on board the aus­ter­i­ty band­wag­on, it’s very unclear how much longer the glob­al econ­o­my is going to be resist the lure of the socioe­co­nom­ic defla­tion­ary death spi­ral. But we should­n’t kid our­selves: The aus­te­ri­ans have a glob­al fan base in high places:

    The Eco­nom­ic Times
    While Janet Yellen favours QE, RBI gov­er­nor Raghu­ram Rajan advis­es cau­tion

    By Agen­cies | 8 Nov, 2014, 06.58AM IST

    PARIS: Cen­tral bankers and investors warned of mount­ing costs from six years of easy mon­e­tary pol­i­cy even as most acknowl­edged the world still needs low inter­est rates. The down­sides of cheap cash pro­vid­ed the dom­i­nant theme at a Bank of France con­fer­ence in Paris on Fri­day attend­ed by the likes of US Fed­er­al Reserve chair Janet Yellen and Bank of Japan Gov­er­nor Haruhiko Kuro­da as well as Lau­rence D Fink of Black­Rock and Allianz SE’s Mohamed El-Erian.

    Among the gripes: Cen­tral­bank stim­u­lus has relieved pres­sure on gov­ern­ments to revamp their economies, pun­ished savers, inflat­ed asset bub­bles and left finan­cial mar­kets over­ly reliant on liq­uid­i­ty and prone to volatil­i­ty when it revers­es. “This is a world which places too much of a bur­den on cen­tral banks,” said El-Erian, the for­mer chief exec­u­tive offi­cer of Pacif­ic Invest­ment Man­age­ment Co. and now an advis­er to Allianz.

    “This is a jour­ney, not a des­ti­na­tion. If the jour­ney lasts too long, cen­tral banks go from being part of the solu­tion to per­haps being part of the prob­lem.” Loose mon­e­tary pol­i­cy is still jus­ti­fied, said Yellen as she urged her col­leagues to “employ all avail­able tools, includ­ing uncon­ven­tion­al poli­cies, to sup­port eco­nom­ic growth and reach their infla­tion tar­gets.” Call­ing the world econ­o­my “frag­ile, brit­tle and frag­ment­ed”, IMF man­ag­ing direc­tor Chris­t­ian Lagarde told a con­fer­ence of cen­tral ..

    Bank of France gov­er­nor Chris­t­ian Noy­er said a “para­mount risk of very low inter­est rates is to enter­tain the illu­sion that gov­ern­ments can con­tin­ue to bor­row rather than make dif­fi­cult and yet nec­es­sary choic­es and indef­i­nite­ly put off the imple­men­ta­tion of struc­tur­al reforms.” RBI gov­er­nor Raghu­ram Rajan expressed doubts about whether addi­tion­al stim­u­lus is need­ed to boost glob­al eco­nom­ic growth, say­ing it is unre­al­is­tic to assume that growth can return to pre-cri­sis rates.

    “The bot­tom line is there is a very good ques­tion about whether more stim­u­lus is the answer,” said Rajan. “More stim­u­lus may ease the pain of reform” yet can’t sub­sti­tute for it, he said cit­ing actors such as demo­graph­ics and slow­er pro­duc­tiv­i­ty. He urged cen­tral bankers to resist pres­sure from politi­cians to get eco­nom­ic growth back to rates seen below the glob­al cri­sis in 2008.

    Not­ing that cen­tral banks have large­ly been eas­ing pol­i­cy for the past five to six years, Mr. Rajan said: “If you real­ly say we did­n’t do enough, you’re real­ly in the check-is-in-the-mail school of eco­nom­ics.”

    The sen­ti­ment expressed by for­mer PIMCO CEO Mohammed El-Erian that “This is a world which places too much of a bur­den on cen­tral banks...This is a jour­ney, not a des­ti­na­tion. If the jour­ney lasts too long, cen­tral banks go from being part of the solu­tion to per­haps being part of the prob­lem,” is an exam­ple of what’s on the mind of top pol­i­cy-mak­ers and it’s clear­ly more aus­ter­i­ty for the mass­es. That was all pro-aus­ter­i­ty lan­guage from El-Erian. He was talk­ing about too much of a finan­cial “bur­den” from the mon­e­tary stim­u­lus pro­grams falling on the cen­tral banks, the one insti­tu­tion designed to be able to han­dle seem­ing­ly insur­mount­able finan­cial bur­dens.

    And El-Eri­an’s view was appar­ent­ly rep­re­sen­ta­tive the gen­er­al of theme of the Bank of France con­fer­ence in Paris on Fri­day. The pres­i­dent of the Bank of France and Reserve Bank of India cer­tain­ly seem to agree. So instead of the hor­ri­ble bur­den on cen­tral banks of buy­ing finan­cial instru­ments (which they can do with rel­a­tive ease), folks like El-Erian and the cen­tral bankers of France and India want to see more of that “bur­den” felt by aver­age peo­ple and the poor (where “struc­tur­al reforms” can nev­er include “pros­per­i­ty for every­one” as a goal because that would make the sys­tem break).

    It’s also worth point­ing out that with the GOP’s vic­to­ry last week, that same kind of aus­ter­i­ty luna­cy is going to start infect­ing the Fed:

    The Wall Street Jour­nal
    GOP Sen­ate Takeover Puts Fed on Hot Seat
    Cen­tral Bank Faces Increased Scruti­ny of Pol­i­cy, Reg­u­la­to­ry Author­i­ty With Repub­li­cans in Con­trol of Con­gress
    By Vic­to­ria McGrane
    Updat­ed Nov. 5, 2014 12:11 a.m. ET

    Repub­li­cans’ takeover of the U.S. Sen­ate promis­es increased polit­i­cal tur­bu­lence for the Fed­er­al Reserve, which has already been under pres­sure from a GOP-con­trolled House.

    Finan­cial exec­u­tives say a GOP-led Sen­ate would ratch­et up con­gres­sion­al scruti­ny of the cen­tral bank’s inter­est-rate poli­cies, as well as its reg­u­la­to­ry duties as over­seer of the nation’s largest finan­cial firms. Repub­li­cans haven’t con­trolled the Sen­ate since before the 2008 finan­cial cri­sis and reces­sion, which put a spot­light on the Fed and its pow­ers.

    “If the Repub­li­cans take con­trol of the Sen­ate and thus have con­trol of both the House and the Senate—two words for the Fed­er­al Reserve: Watch out,” Cam­den Fine, pres­i­dent of the Inde­pen­dent Com­mu­ni­ty Bankers of Amer­i­ca, said before the Elec­tion Day results were final. His group rep­re­sents the com­mu­ni­ty-bank­ing indus­try.

    Lead­ing the GOP wish list in deal­ing with the Fed would be leg­is­la­tion to open the cen­tral bank to more scruti­ny of its inter­est-rate deci­sions, using con­gres­sion­al audits of mon­e­tary-pol­i­cy mat­ters that Fed offi­cials strong­ly oppose. Many Repub­li­can law­mak­ers also want to require the Fed to use a math­e­mat­i­cal rule to guide inter­est-rate deci­sions or shift its focus more direct­ly to infla­tion rather than infla­tion togeth­er with unem­ploy­ment. All of that would come on top of height­ened bipar­ti­san scruti­ny of the Fed’s reg­u­la­to­ry moves.

    Note that what’s being described above is a strong GOP desire to get rid of the Fed’s dual man­date and fol­low the Bundesbank/ECB mod­el of pri­or­i­tiz­ing low infla­tion over high unem­ploy­ment as a sys­tem­at­ic bias. It would be com­i­cal­ly bad pol­i­cy if it was­n’t grow­ing glob­al­ly.



    Many Repub­li­cans oppose the uncon­ven­tion­al efforts the cen­tral bank has tak­en to bol­ster the U.S. econ­o­my over the past sev­er­al years. The Fed last week announced the end of its long-run­ning bond-buy­ing stim­u­lus pro­gram, known as quan­ti­ta­tive eas­ing. But that won’t quell GOP crit­i­cism, since many Repub­li­cans want Fed offi­cials to move quick­ly now to raise inter­est rates from near zero and shrink the cen­tral bank’s bal­ance sheet, which has climbed to near $4.5 tril­lion.

    Under the Repub­li­can-led Sen­ate, Alaba­ma Sen. Richard Shel­by would like­ly become the next chair­man of the Sen­ate Bank­ing Com­mit­tee, which over­sees the Fed.

    Mr. Shel­by no fan of the Fed. He has been sharply crit­i­cal of its reg­u­la­to­ry per­for­mance in the run-up to the cri­sis. As the top Repub­li­can on the bank­ing pan­el after the cri­sis, he sup­port­ed strip­ping the cen­tral bank of its bank-super­vi­sion author­i­ty when Con­gress was writ­ing the 2010 Dodd-Frank finan­cial-reg­u­la­to­ry over­haul law. He vot­ed against Janet Yellen to be Fed chief, cit­ing her sup­port for the Fed’s bond-buy­ing pro­grams and his con­cerns that they could spark run­away infla­tion and oth­er eco­nom­ic prob­lems.


    A desire to curb the pow­er of the Fed is one of the few top­ics on which Mr. Shel­by sees eye to eye with Rep. Jeb Hen­sar­ling (R., Texas), the chair­man of the House Finan­cial Ser­vices Com­mit­tee, say indus­try lob­by­ists and ana­lysts. That means the two might be able to find com­mon ground on leg­is­la­tion.

    Mr. Hensarling’s com­mit­tee, which has juris­dic­tion over the Fed in the House, held 11 hear­ings in the past year exam­in­ing var­i­ous aspects of the Fed’s author­i­ty. The effort cul­mi­nat­ed in leg­is­la­tion propos­ing a mul­ti­fac­eted over­haul of the Fed that would, among oth­er things, require the Fed to adopt a for­mal math­e­mat­i­cal rule to guide its inter­est-rate deci­sions. Ms. Yellen oppos­es such a move.

    And note that when House Finan­cial Ser­vices Com­mit­tee chair­man Jeb Hen­sar­ling is attempt­ing to pass “egis­la­tion propos­ing a mul­ti­fac­eted over­haul of the Fed that would, among oth­er things, require the Fed to adopt a for­mal math­e­mat­i­cal rule to guide its inter­est-rate deci­sions. Ms. Yellen oppos­es such a move”, that means the GOP is seri­ous­ly about to try to destry the Fed and turn it into the Bun­des­bank.


    While Democ­rats oppose med­dling with the Fed’s mon­e­tary-pol­i­cy pow­ers, efforts to probe the Fed’s sub­stan­tial reg­u­la­to­ry pow­ers might find more sym­pa­thy on the left. Democ­rats and Repub­li­cans alike reg­u­lar­ly ques­tion whether the Fed has done enough to rein in the nation’s largest finan­cial firms since the 2008 cri­sis.

    Sen. Sher­rod Brown (D., Ohio) recent­ly said the Sen­ate Bank­ing Sub­com­mit­tee on Finan­cial Insti­tu­tions and Con­sumer Pro­tec­tion will hold a hear­ing to inves­ti­gate alle­ga­tions that Fed super­vi­sors are too cozy with the banks they over­see, fol­low­ing a report by non­prof­it news orga­ni­za­tion ProP­ub­li­ca and the pub­lic-radio pro­gram “This Amer­i­can Life.” Sen. Eliz­a­beth War­ren (D., Mass.) was among those who had called for such a hear­ing.

    Anoth­er mea­sure that could get more trac­tion with Repub­li­cans in charge is Sen. Rand Paul ’s “Audit the Fed” leg­is­la­tion. The bill by the Ken­tucky Repub­li­can would open up the Fed’s core mon­e­tary-pol­i­cy delib­er­a­tions to con­gres­sion­al scruti­ny.

    Sen. Ted Cruz of Texas, a poten­tial GOP pres­i­den­tial con­tender in 2016, recent­ly iden­ti­fied pass­ing Mr. Paul’s bill as one of 10 top pri­or­i­ties should his par­ty take con­trol of both cham­bers. Six out of 10 Repub­li­can mem­bers of the Sen­ate Bank­ing com­mit­tee are among the bill’s 31 co-spon­sors as is Sen­ate Repub­li­can Leader Mitch McConnell, who is set to become major­i­ty leader with Repub­li­cans in the Sen­ate major­i­ty.

    Mr. Paul’s leg­is­la­tion would direct the Gov­ern­ment Account­abil­i­ty Office, a non­par­ti­san arm of Con­gress, to con­duct a “full audit” of the Fed’s activ­i­ties, includ­ing its delib­er­a­tions on inter­est-rate pol­i­cy, and report back to Con­gress.

    Cur­rent­ly, the GAO reviews the cen­tral bank’s finan­cial oper­a­tions, but not its pol­i­cy deci­sions or agree­ments with for­eign gov­ern­ments and cen­tral banks. An out­side firm audits the Fed’s finan­cial oper­a­tions and its find­ings are pub­lished in the cen­tral bank’s annu­al report.

    A com­pan­ion mea­sure passed the House in Sep­tem­ber, but Sen­ate Major­i­ty Leader Har­ry Reid (D., Nev.) has kept it off the Sen­ate floor. That could now change with Repub­li­cans in charge.

    Fed offi­cials, led by Ms. Yellen, oppose Mr. Paul’s bill because they believe it could com­pro­mise the cen­tral bank’s polit­i­cal inde­pen­dence.

    “I would be very con­cerned about leg­is­la­tion that would sub­ject the Fed­er­al Reserve to short-term polit­i­cal pres­sures that could inter­fere with that inde­pen­dence,” Ms. Yellen said dur­ing her Novem­ber 2013 con­fir­ma­tion hear­ing. She also argued that the Fed is “one of the most trans­par­ent cen­tral banks in the world.”

    Is the Fed’s dual man­date in dan­ger? Well, in the short-run that’s unclear since Pres­i­dent Oba­ma can prob­a­bly veto any­thing that tru­ly guts the dual man­date. But now that the GOP is offi­cial­ly out to repeal the dual man­date and legal­ly enforce Bun­des­bank/ECB-style mon­e­tary poli­cies it’s pret­ty clear that not only is the dual man­date in seri­ous jeop­ardy but the entire glob­al econ­o­my is pos­si­bly at risk if Ted Cruz and Rand Paul break the Fed. Some degree of GOP-induced per­il is to be expect­ed since the GOP stopped being a respon­si­ble par­ty years ago, and this is by no means the first time top Repub­li­can offi­cials have called for over­turn­ing the dual man­date. But now that Europe has offi­cial­ly gone insane, as Wolf­gang Mun­chau dis­cussed above, and now that the GOP clown car is offi­cial­ly back in con­trol of Con­gress, the fate of the Fed’s dual man­date and, con­se­quent­ly, the Fed’s abil­i­ty to play its unique­ly impor­tant role in the glob­al finan­cial mar­kets and not derail the US recov­ery is going to sud­den­ly be in per­il if the GOP wins the White House in 2016 or man­ages to some­how ruin Fed pol­i­cy over the next two years.

    So, in 2016 we might also see a GOP pres­i­dent and Con­gress and the end of the dual man­date for the Fed­er­al reserve, with mon­e­tary aus­ter­i­ty a new per­ma­nent Fed pol­i­cy no mat­ter what. Along with all of the oth­er GOP pol­i­cy hor­rors. And oth­er gov­ern­ments around the world are embrac­ing sim­i­lar pol­i­cy atti­tudes.

    Leave it to the GOP to make that hor­ri­bly inad­e­quate 10 bil­lion euros in delayed stim­u­lus spend­ing start sound­ing pret­ty sweet. The West is expe­ri­enc­ing a bit of a rough patch.

    Posted by Pterrafractyl | November 10, 2014, 12:40 am
  40. Paul Krug­man has a post today that made a point that can­not be made enough in this era of glob­al aus­ter­i­ty and end­less calls for “struc­tur­al reforms”: If you think about it, the term “struc­tur­al reform” is sort of a Rorschach test. It does­n’t mean any­thing spe­cif­ic except that some­thing needs to be struc­tural­ly changed. And yet when politi­cians and busi­ness lead­ers call for “struc­tur­al reform” as an eco­nom­ic cure-all, you don’t hear a wide vari­ety of dif­fer­ent types of “struc­tur­al reforms” like increas­ing the social safe­ty-net or min­i­mum wages. Instead, the term “struc­tur­al reform”, which is tra­di­tion­al­ly asso­ci­at­ed with poli­cies used to deal­ing with stagfla­tion, almost always involves the same poli­cies that have been tra­di­tion­al­ly called for when deal­ing with stagfla­tion too. Poli­cies that cen­ter around that idea that “to allow bet­ter per­for­mance you need­ed to make the labor mar­ket more flex­i­ble, i.e., more bru­tal”. Sound famil­iar?

    And as Krug­man also points out, these anti-stagfla­tion poli­cies are some­what dubi­ous approach­es to deal­ing with defla­tion but at least there’s a kind of under­ly­ing log­ic to it. But when you’re apply­ing those same poli­cies that are designed to reduce infla­tion to economies that are already fac­ing out­right defla­tion due to col­laps­ing demand, employ­ing stagfla­tion is just insane. And yet, in an era of glob­al defla­tion­ary risk, not only has the anti-stagfla­tion term “struc­tur­al reform” become a vague vogue glob­al catch-phrase for politi­cians every­where, but those same anti-stagfla­tion poli­cies of yes­ter­year are today’s default pol­i­cy solu­tions too. Regard­less of the eco­nom­ic cir­cum­stances.

    So the next time you hear a politi­cian mut­ter some­thing about the need for more “struc­tur­al reforms” in an econ­o­my fac­ing noth­ing close to stagfla­tion, keep in mind that the “struc­tur­al reform” ver­bal Rorschach inkblot does­n’t actu­al­ly rep­re­sent what­ev­er you imag­ine it does. It should but it does­n’t. The “struc­tur­al reform” ver­bal inkblot actu­al­ly depicts some­thing very spe­cif­ic: a rich and pow­er­ful man mur­der­ing both his­to­ry and rea­son simul­ta­ne­ous­ly and then pro­ceed­ing to kneecap the poor while lec­tur­ing them about the need to be bet­ter peo­ple. It’s kind of a scary inkblot

    The New York Times
    The Con­science of a Lib­er­al

    Struc­tur­al Defor­mi­ty
    Paul Krug­man
    Nov 20 9:03 am

    Shin­zo Abe is doing the right thing, seek­ing to delay the next rise in con­sump­tion tax­es; this is good eco­nom­ic pol­i­cy, and also a fair­ly new expe­ri­ence for me — I met with a nation­al leader, made a case for the right pol­i­cy, and he’s actu­al­ly doing it! (Of course, there were many oth­er peo­ple mak­ing the same case.)

    But there’s a lot of skep­ti­cism, which on the whole is jus­ti­fied: Abe is try­ing to accom­plish some­thing very dif­fi­cult, and it’s by no means clear whether the instru­ments he’s deploy­ing are suf­fi­cient.

    Still, there’s one type of crit­i­cism that I real­ly, real­ly hate, for Japan and else­where — and I hate it espe­cial­ly because it’s one of those things that is so com­plete­ly accept­ed by Very Seri­ous Peo­ple that they don’t even real­ize that they’re spout­ing a dubi­ous hypoth­e­sis rather than speak­ing The Truth. I refer to the claim that Japan doesn’t need a demand boost, it needs struc­tur­al reform ™.

    What are we talk­ing about here? Tra­di­tion­al­ly, struc­tur­al reform was offered as an answer to the prob­lem of stagfla­tion. If your econ­o­my starts to over­heat, with accel­er­at­ing infla­tion, despite quite high unem­ploy­ment, then the argu­ment was that this was due to labor mar­ket rigidi­ties — basi­cal­ly a euphemism for a sys­tem in which it’s hard to fire peo­ple or slash their wages — and that to allow bet­ter per­for­mance you need­ed to make the labor mar­ket more flex­i­ble, i.e., more bru­tal.

    OK, this argu­ment makes a fair bit of sense, although even when the prob­lem is stagfla­tion it’s less iron­clad than con­ven­tion­al wis­dom would have you believe; there’s always been rea­son to believe that much “struc­tur­al” unem­ploy­ment is actu­al­ly the result of hys­tere­sis, of the last­ing dam­age done by pro­longed reces­sions. Still, at least this was a coher­ent argu­ment.

    But Japan isn’t suf­fer­ing from stagfla­tion; nei­ther is Europe. They are, instead, suf­fer­ing from low infla­tion or defla­tion, and per­sis­tent short­falls in demand despite zero inter­est rates. Why, exact­ly, is struc­tur­al reform sup­posed to help cure this prob­lem?

    .Indeed, the kind of struc­tur­al reform peo­ple have most­ly talked about in the past — mak­ing labor mar­kets more flex­i­ble, so that it’s eas­i­er to cut wages — would, if any­thing, deep­en the slumps. Why? The para­dox of flex­i­bil­i­ty: falling wages and prices increase the real bur­den of debt, depress­ing demand fur­ther.

    In fact, if you think about it, there’s a def­i­nite snake-oil feel to calls for struc­tur­al reform, which is tout­ed as a uni­ver­sal elixir — it cures infla­tion, but it cures defla­tion too! Also back pain and bad breath.

    Now, there might be some kinds of struc­tur­al reform that would do Japan some good. For exam­ple, changes in land use or build­ing height reg­u­la­tions that made more infill pos­si­ble in Japan­ese cities could spur invest­ment, and help increase demand. But the point is that the blan­ket call for “struc­tur­al reform” as the answer is intel­lec­tu­al­ly lazy, and destruc­tive. Not only would much of what we call struc­tur­al reform hurt rather than help; declar­ing that the prob­lem is struc­tur­al caus­es pol­i­cy­mak­ers to take their eye off the ball, since what Japan needs right now, more than any­thing else, is to escape from defla­tion any way it can.

    Stagfla­tion, like Dis­co, could always make a come­back. So we can’t rule out the pos­si­bil­i­ty that, in the future, a sit­u­a­tion could indeed arise where the tra­di­tion­al anti-stagfla­tion poli­cies are just what the doc­tored ordered. But since the Great Depres­sion could also make a come­back per­haps we should be exam­in­ing non-1970’s forms of “struc­tur­al reforms” that might actu­al­ly lead a a more robust socioe­co­nom­ic struc­ture dur­ing an era of stag­nant wages, grow­ing defla­tion­ary risks, boom­ing cor­po­rate prof­its, lost gen­er­a­tions, and an obscene, dam­ag­ing, and grow­ing wealth gap. The “struc­tur­al reform” ver­bal inkblot does­n’t have to be per­pet­u­al­ly scary. It’s all in our heads.

    Posted by Pterrafractyl | November 20, 2014, 11:27 pm
  41. Oh no: The GOP’s two top Repub­li­cans on the House and Sen­ate Finance Com­mit­tees, Jeb Hen­sar­ling and Richard Shel­by, are both get­ting big ideas about some major Fed over­hauls:

    A com­ing crack­down on Fed­er­al Reserve pow­er?

    Crit­ics want to water down the pow­er of the New York Fed pres­i­dent.

    By Jen­nifer Lib­er­to

    3/21/15 8:58 AM EDT

    A move to shift pow­er away from the New York Fed­er­al Reserve Bank is find­ing some pow­er­ful friends in Con­gress amid lin­ger­ing wor­ries that a key part of the cen­tral bank is too cozy with Wall Street.

    Two Repub­li­cans run­ning the bank­ing com­mit­tees have both said they plan to explore pro­pos­als from the out­spo­ken, for­mer Dal­las Fed­er­al Reserve Bank Pres­i­dent Richard Fish­er that would roll back a long-stand­ing pro­vi­sion that gives the pres­i­dent of the New York Fed­er­al Reserve Bank an auto­mat­ic posi­tion as vice chair­man of a pow­er­ful com­mit­tee and weak­en New York’s over­sight of Wall Street banks.

    The pol­i­tics may be ripe for chip­ping away at the pow­er of the Fed­er­al Reserve, unit­ing lib­er­als who want to crack down on Wall Street, Repub­li­cans who don’t like the Fed’s easy mon­ey poli­cies and lib­er­tar­i­ans who are sus­pi­cious of the Fed alto­geth­er.

    The move also reflects some region­al rival­ries with­in the Fed — the New York Fed­er­al Reserve Bank often over­shad­ows oth­er region­al banks, and Fish­er, known as a rab­ble rouser in Fed­er­al Reserve pol­i­tics, has been lob­by­ing for a change to the pow­er struc­ture.

    Bank­ing Chair­man Richard Shel­by (R‑Ala.) and House Finan­cial Ser­vices Jeb Hen­sar­ling (R‑Texas) say they’re open to reduc­ing the pow­er of the New York Fed, and the move has the poten­tial to appeal to Democ­rats who have been crit­i­cal of the Fed, like Sen. Eliz­a­beth War­ren (D‑Mass).

    “Mr. Fisher’s pro­pos­al deal­ing with the Fed and the Fed­er­al Open Mar­ket Com­mit­tee — we’re going to pur­sue all that and that would include the role of the New York Fed,” Shel­by said last week.

    And some Democ­rats have also said they’re open to poli­cies that shift pow­er away from the New York Fed.

    “The New York Fed plays an extra­or­di­nary role, and maybe it’s extra­or­di­nar­i­ly cap­tured, but it also rep­re­sents only 6 per­cent of the pop­u­la­tion,” said Rep. Brad Sher­man, (D‑Calif.) who wants to give a per­ma­nent vote on mon­e­tary pol­i­cy deci­sions to the San Fran­cis­co Fed, which serves nine west­ern states and 20 per­cent of the pop­u­la­tion.

    Sen. Mark Warn­er (D‑Va.), a mod­er­ate who said he hasn’t tak­en a posi­tion on the pro­pos­als yet, said, “I do think there’s been some legit­i­mate ques­tions of the role of the New York Fed.”

    Fish­er, who retired Thurs­day after 10 years at the Dal­las Fed, wants to yank the New York Fed’s per­ma­nent posi­tion as vice chair of the all-pow­er­ful Fed­er­al Open Mar­ket Com­mit­tee, the pan­el charged with mak­ing mon­e­tary pol­i­cy deci­sions, which met Wednes­day.

    While the New York Fed pres­i­dent could still par­tic­i­pate in mon­e­tary pol­i­cy dis­cus­sions, he or she would no longer always get a vote. Fish­er sug­gest­ed the job should rotate among the region­al Fed­er­al Reserve Banks every two years.

    The move would upend the cur­rent struc­ture, as the New York Fed has had a lock on that spot since 1936, thanks large­ly to its role as the infra­struc­ture, which sup­plies the trad­ing desk that car­ries out the Fed’s mon­e­tary pol­i­cy deci­sions.

    Fish­er is also propos­ing that oth­er region­al Fed banks over­see some of the Wall Street giants in a move aimed at address­ing crit­i­cism the New York Fed missed warn­ing signs of the finan­cial cri­sis, is too soft on Wall Street and holds too much pow­er and influ­ence at the Fed.

    “The great­est con­cern appears to be the prob­lem of reg­u­la­to­ry cap­ture by the largest and most pow­er­ful insti­tu­tions,” Fish­er said in a Feb­ru­ary speech in New York lay­ing out his plan.

    Wall Street crit­ics have been sus­pi­cious of the New York Fed since it and its then leader, Tim­o­thy Gei­th­n­er, played a key role in respond­ing to the 2008 finan­cial cri­sis and the bailouts that entailed.

    Late last year its cur­rent pres­i­dent, William Dud­ley, was hauled before the Sen­ate Bank­ing Com­mit­tee after reports from ProP­ub­li­ca and NPR’s This Amer­i­can Life that focused on a New York Fed exam­in­er who said her warn­ings about cer­tain busi­ness prac­tices and deals at Gold­man Sachs were ignored or brushed aside by her supe­ri­ors. She pro­vid­ed record­ings of her deal­ings with Fed offi­cials to back up her case.

    “We’ve got on tape high­er-ups at the New York Fed call­ing off the reg­u­la­tors,” War­ren told Dud­ley at the Novem­ber hear­ing. “And I’m just ask­ing the same kind of ques­tion — is there a cul­tur­al prob­lem at the New York Fed? I think the evi­dence sug­gests that there is.”

    The two most pow­er­ful law­mak­ers on finan­cial pol­i­cy say they are close­ly look­ing at Fisher’s pro­pos­al.

    “I’m going to take a very seri­ous look at that pro­pos­al,” said Hen­sar­ling. Hen­sar­ling said his pan­el will soon be work­ing on anoth­er pack­age of changes to reshape the Fed­er­al Reserve and “ensure we have a pre­dictable rules-based mon­e­tary pol­i­cy that works for work­ing Amer­i­cans. But any­thing that Richard Fish­er pro­pos­es is going to get a very seri­ous review from our com­mit­tee.”

    Sim­i­lar­ly, Shel­by told reporters last week he plans to pur­sue the pro­pos­al.

    “This is 2015 and things have changed,” said Shel­by, who is qui­et­ly work­ing on a Sen­ate leg­isla­tive pack­age. “We have a shift in pop­u­la­tion. Every­thing used to be in New York and a lot of it’s not.”

    Part of the idea’s pop­u­lar­i­ty may also be that it’s com­ing from Fish­er, who is a strange polit­i­cal ani­mal.

    He ran for U.S. Sen­ate as a con­ser­v­a­tive Demo­c­rat back in 1993 — which he now calls his “midlife cri­sis” moment, los­ing to for­mer Sen. Kay Bai­ley Hutchi­son (R‑Texas). He worked in the Carter and Clin­ton Admin­is­tra­tions and lat­er worked for Hen­ry Kissinger’s con­sult­ing firm, before join­ing the Dal­las Fed. He also spent much of the 1990s run­ning his own invest­ment firm.

    Some Repub­li­cans like Fish­er, because he often bucked the major­i­ty on the Fed, oppos­ing the con­tin­ued expan­sion of eco­nom­ic stim­u­lus mea­sures, which he called “mon­e­tary Rital­in” for the mar­kets. Fish­er is con­sid­ered a “hawk,” a mon­e­tary con­ser­v­a­tive who wor­ries most about infla­tion, which jives with the think­ing of Repub­li­cans and their poli­cies.

    “I have the high­est regard for Richard Fish­er, he’ll cer­tain­ly be missed, his voice on mon­e­tary pol­i­cy,” said Hen­sar­ling, who rep­re­sents part of Dal­las, although not Fish­er.

    Fish­er is also known for being one of the loud­er voic­es call­ing for reg­u­la­tors to chop up the giant mega­banks into small­er banks. And two years ago, he took an unprece­dent­ed step for a Fed pres­i­dent of attend­ing the an annu­al gath­er­ing of con­ser­v­a­tives, Con­ser­v­a­tive Polit­i­cal Action Con­fer­ence, to make the case for break­ing up Wall Street giants.

    The big ques­tion now is whether his pro­pos­als can make it into leg­isla­tive text.

    While Shel­by likes the idea, oth­er sen­a­tors on his com­mit­tee, includ­ing Repub­li­can Bob Cork­er and Democ­rats Jack Reed and Hei­di Heitkamp said they’re not ready to weigh in. For his part, Reed has a dif­fer­ent bill to require the pres­i­dent of the New York Fed to be pres­i­den­tial­ly appoint­ed and con­firmed by Con­gress rather than select­ed by its board.

    How­ev­er, the rank­ing Demo­c­rat on the pan­el, Sen. Sher­rod Brown, is cool to the pro­pos­al and said he doesn’t think Fisher’s pro­pos­al “changes much.” And Sen. Bob. Menen­dez (D‑N.J.) said he has con­cerns about shift­ing pow­er away from the New York Fed.

    “I think the New York Fed plays an impor­tant role in the Fed sys­tem. And I don’t take light­ly to some of the changes being dis­cussed,” Menen­dez said. “Some of what I’ve seen is too far reach­ing.”


    And Fish­er is report­ed­ly thrilled that there’s inter­est in this idea, said Cam­den Fine, pres­i­dent and CEO of the Inde­pen­dent Com­mu­ni­ty Bankers of Amer­i­ca, which is also push­ing for Fisher’s pro­pos­al. Fine said he spoke with Fish­er just last week about the idea, which “would bal­ance the Fed­er­al Reserve,” and reflect that “eco­nom­ic cen­ters are no longer con­cen­trat­ed on Man­hat­tan island,” Fine said.

    Fish­er also assured Fine that his retire­ment from the Dal­las Fed won’t damp­en his enthu­si­as­tic voice for push­ing his pro­pos­als. “He’s not going any­where,” Fine said.

    While par­ing back the New York Fed­er­al Reserve’s auto­mat­ic vot­ing rights is an inter­est­ing pro­pos­al (it would prob­a­bly empow­er the tight-mon­ey/dereg­u­la­tion hawks, which sucks, but it’s unde­ni­ably fair­er from a pop­u­la­tion stand­point), note this rather sig­nif­i­cant oth­er pro­pos­al:


    Fish­er is also propos­ing that oth­er region­al Fed banks over­see some of the Wall Street giants in a move aimed at address­ing crit­i­cism the New York Fed missed warn­ing signs of the finan­cial cri­sis, is too soft on Wall Street and holds too much pow­er and influ­ence at the Fed.

    “The great­est con­cern appears to be the prob­lem of reg­u­la­to­ry cap­ture by the largest and most pow­er­ful insti­tu­tions,” Fish­er said in a Feb­ru­ary speech in New York lay­ing out his plan.


    And Fish­er is report­ed­ly thrilled that there’s inter­est in this idea, said Cam­den Fine, pres­i­dent and CEO of the Inde­pen­dent Com­mu­ni­ty Bankers of Amer­i­ca, which is also push­ing for Fisher’s pro­pos­al. Fine said he spoke with Fish­er just last week about the idea, which “would bal­ance the Fed­er­al Reserve,” and reflect that “eco­nom­ic cen­ters are no longer con­cen­trat­ed on Man­hat­tan island,” Fine said.


    Yeah, that sounds rather omi­nous since you don’t want a race to the reg­u­la­to­ry sit­u­a­tion and it’s not real­ly clear if that’s what Fish­er had in mind. So let’s take a clos­er look at what exact­ly he said dur­ing his speech when he float­ed the idea:

    Fed­er­al Reserve Bank of Dal­las
    Speech­es by Pres­i­dent Richard W. Fish­er
    Sug­ges­tions After a Decade at the Fed

    Remarks before the Eco­nom­ic Club of New York
    New York City · Feb­ru­ary 11, 2015

    I am grate­ful to be invit­ed to speak to the Eco­nom­ic Club of New York on the eve of my retire­ment from 10 years of ser­vice as pres­i­dent of the Fed­er­al Reserve Bank of Dal­las. I have sat through 78 reg­u­lar meet­ings and an addi­tion­al 18 spe­cial meet­ings of the Fed­er­al Open Mar­ket Com­mit­tee (FOMC) for a total of 96 meet­ings under three Fed Chairs over the past decade. Giv­en what we went through dur­ing the cri­sis and the heal­ing we have tried to engi­neer in its after­math, I would argue you ought to mea­sure the life of a Fed pol­i­cy­mak­er in dog years. This morn­ing, I thought I might offer some sug­ges­tions based upon those 70 years of expe­ri­ence.


    2) With regard to reg­u­la­tion, the great­est con­cern appears to be the prob­lem of reg­u­la­to­ry cap­ture by the largest and most pow­er­ful insti­tu­tions, the so-called Sys­tem­i­cal­ly Impor­tant Finan­cial Insti­tu­tions, or SIFIs. We have insti­tut­ed at the Board of Gov­er­nors a pow­er­ful and, to my mind, extreme­ly able and dis­ci­plined leader on reg­u­la­to­ry mat­ters, Gov­er­nor Dan Tarul­lo. But if that alone proves unsat­is­fac­to­ry to the Con­gress, a sim­ple solu­tion would be to have each of the SIFIs super­vised and reg­u­lat­ed by Fed­er­al Reserve Bank staff from a dis­trict oth­er than the one in which the SIFI is head­quar­tered. Each of the Fed Banks has an able body of exam­in­ers. With a tough cen­tral dis­ci­pli­nary author­i­ty in Wash­ing­ton dis­patch­ing those troops to dis­tricts where SIFIs are con­cen­trat­ed, we might elim­i­nate any per­cep­tion of con­flict­ed inter­est and, again, assure that reg­u­la­tors from all 12 Fed­er­al Reserve dis­tricts, rather than from just two cities, are deployed in main­tain­ing the safe­ty and sound­ness of our bank­ing sys­tem.


    So it sounds like a “tough cen­tral dis­ci­pli­nary author­i­ty in Wash­ing­ton” is going to be “dis­patch­ing the troops” from the 12 region­al Fed banks to the Wall Street giants. Who runs the “tough cen­tral dis­ci­pli­nary author­i­ty in Wash­ing­ton”? That remains to be seen. It’s an inter­est­ing idea, in part because it might reduce the degree of sys­temic risk to the sys­tem if Wall Street banks are oper­at­ing under some­what dif­fer­ent over­sight regimes, but if that’s the case it’s also going to be a sit­u­a­tion where the Wall Street giants can shop for reg­u­la­tors (which might intro­duce ever worse sys­temic risks). Unless the “tough cen­tral dis­ci­pli­nary author­i­ty in Wash­ing­ton” is tough enough to resist Wall Street’s allure, it’s hard to see how that can be avoid­ed.

    So, yeah, it’s still look­ing omi­nous! And the omi­nous­ness does­n’t end there. For instance, back in Octo­ber Jeb Hen­sar­ling, the House Finance Com­mit­tee Chair­man who was so excit­ed about for­mer Dal­las Fed Gov­er­nor Richard Fish­er’s vision of a mul­ti-reg­u­la­tor mod­el of finance in the US, was talk­ing about a sce­nario that sound­ed eeri­ly sim­i­lar to Fish­er’s “mul­ti-reg­u­la­tor” scheme. The sim­i­lar­i­ties includ­ed the pro­pos­al’s vague­ness, although he was­n’t entire­ly vague. He also want­ed to revis­it Frank-Dodd and get rid of the Con­sumer Finan­cial Pro­tec­tion Bureau (CFPB). And gen­er­al­ly dereg­u­late stuff:

    The Wall Street Jour­nal
    What If Repub­li­cans Win?
    We’ll nev­er ‘have the moral author­i­ty to deal with social wel­fare if we can’t deal with cor­po­rate wel­fare.’

    By James Free­man
    Oct. 17, 2014 7:33 p.m. ET

    Jeb Hen­sar­ling may be the most impor­tant Repub­li­can elect­ed offi­cial you’ve nev­er heard of. He will become even more impor­tant if his par­ty wins con­trol of the U.S. Sen­ate in November’s elec­tions, two weeks from this Tues­day. He’s also a lead­ing can­di­date to even­tu­al­ly suc­ceed John Boehn­er as House speak­er.

    So it’s a good moment to sit down with the Tex­an, who rep­re­sents a dis­trict near Dal­las and is now chair­man of the House Finan­cial Ser­vices Com­mit­tee, to talk about the polit­i­cal pos­si­bil­i­ties and strat­e­gy. He believes the GOP is “poised for a good elec­tion” but not a great one. Good because Pres­i­dent Oba­ma is inef­fec­tu­al and unpop­u­lar. Not great because Repub­li­cans haven’t talked enough about their plans to encour­age job cre­ation and ris­ing incomes.

    But if Repub­li­cans do win a major­i­ty, count Mr. Hen­sar­ling among those who think they will have to do more than stymie Mr. Oba­ma for his final two years. They’ll have to pro­duce leg­is­la­tion, he says, putting bills on the president’s desk that he will have to sign or veto. The polit­i­cal trick will be cal­cu­lat­ing what to pass that Mr. Oba­ma might con­ceiv­ably sign, and what to pass any­way to edu­cate the coun­try and pre­pare for the 2016 elec­tion.

    Togeth­er with Rep. Paul Ryan (R., Wis.), who is expect­ed to become chair­man of the tax-writ­ing Ways and Means Com­mit­tee, Mr. Hen­sar­ling will dri­ve eco­nom­ic pol­i­cy in the House. A cere­bral vet­er­an law­mak­er who opposed the bank bailouts, he car­ries the respect of both tea par­ty con­ser­v­a­tives and estab­lish­ment mod­er­ates with­in the GOP.

    He’ll need that cred­i­bil­i­ty because he is aggres­sive in sketch­ing out a 2015 leg­isla­tive agen­da for faster eco­nom­ic growth. The com­mon theme he stress­es with Jour­nal edi­tors is lib­er­at­ing peo­ple from bureau­cra­cy, whether they are seek­ing a mort­gage, buy­ing health insur­ance, cross­ing America’s south­ern bor­der to make an hon­est liv­ing in the U.S. or sim­ply fill­ing out their tax returns.

    This last one pro­vides an oppor­tu­ni­ty to lib­er­ate Amer­i­cans from bil­lions of hours of unpro­duc­tive labor. “Noth­ing says eco­nom­ic growth like fun­da­men­tal tax reform,” says Mr. Hen­sar­ling. The idea is to slash tax rates, along with loop­holes, to enact a sim­pler, more user-friend­ly tax sys­tem.


    On the Finan­cial Ser­vices Com­mit­tee, Mr. Hen­sar­ling has been qui­et­ly craft­ing bipar­ti­san reform bills that now lie buried in Major­i­ty Leader Har­ry Reid’s Demo­c­ra­t­ic Sen­ate. But if Repub­li­cans con­trol the upper cham­ber after Novem­ber, Mr. Hen­sar­ling sud­den­ly will have some­one to work with, prob­a­bly Alabama’s Richard Shel­by, who is expect­ed to become chair­man of the Bank­ing Com­mit­tee in a GOP Sen­ate.

    Mr. Hen­sar­ling sees an oppor­tu­ni­ty to revis­it the 2010 Dodd-Frank law, which was draft­ed in haste after the finan­cial cri­sis and was false­ly pro­mot­ed as an end to too-big-to-fail banks. Mr. Hen­sar­ling says that “giv­en the state of the econ­o­my, peo­ple are tak­ing a sec­ond look” at both the law and the sto­ry they were sold by its authors. “We’ve all heard about Wall Street greed. I think peo­ple are now start­ing to be a lit­tle bit more sen­si­tized to Wash­ing­ton greed—the greed for pow­er and con­trol over our lives and our econ­o­my.”

    He notes that con­sumers aren’t pleased with the results: Free check­ing and cred­it-card perks are dis­ap­pear­ing, and more gen­er­al­ly the econ­o­my is lag­ging. Mr. Obama’s approval rat­ings on eco­nom­ic pol­i­cy are down, and Mr. Hen­sar­ling thinks one rea­son is the bur­den on lend­ing and small com­mu­ni­ty banks by Dodd-Frank’s “sheer weight, vol­ume, com­plex­i­ty and num­ber of reg­u­la­tions.”

    He is par­tic­u­lar­ly focused on the law’s Finan­cial Sta­bil­i­ty Over­sight Council—which can vote to res­cue cer­tain huge cor­po­ra­tions it deems “sys­tem­i­cal­ly important”—and on the Con­sumer Finan­cial Pro­tec­tion Bureau (CFPB), which he calls “the sin­gle most unac­count­able agency in the his­to­ry of Amer­i­ca.” Housed with­in the Fed­er­al Reserve, it draws fund­ing from the Fed but doesn’t answer to any Fed offi­cials, or to con­gres­sion­al appro­pri­a­tors, or to a bipar­ti­san com­mis­sion, as most inde­pen­dent agen­cies do. The bureau is run by a sin­gle direc­tor who can­not be removed unless the pres­i­dent can show cause.

    Mr. Hen­sar­ling also notes that the Bureau doesn’t even have true over­sight by the courts because of the Supreme Court’s Chevron legal doc­trine that com­pels judges to show def­er­ence to the bureau’s deci­sions. This lack of account­abil­i­ty may be why the bureau has been con­struct­ing what Mr. Hen­sar­ling calls “the Taj Mahal” to serve as its Belt­way head­quar­ters.

    Mr. Hen­sar­ling believes the CFPB’s lack of account­abil­i­ty is also lead­ing to “con­sumer pro­tec­tions” that Amer­i­cans don’t want or need. Once the bureau’s rules are ful­ly imple­ment­ed, he says, “one third of all blacks and His­pan­ics” will “no longer be able to buy the homes that they have tra­di­tion­al­ly been able to buy. We are pro­tect­ing them out of their homes! The qual­i­fied-mort­gage rule should have been called ‘quit­ting mort­gages’ because that’s what it’s all about. So I think I’ve got the argu­ment that is very com­pelling and peo­ple feel it,” says Mr. Hen­sar­ling. “They’re less free and less pros­per­ous.”

    Does this put him in the com­pa­ny of afford­able-hous­ing advo­cates who favor degrad­ed under­writ­ing stan­dards for polit­i­cal­ly favored demo­graph­ic groups?

    “Pos­si­bly, yes,” he says. “I don’t want degrad­ed stan­dards. I want mar­ket stan­dards. I don’t want gov­ern­ment fiat stan­dards. don’t want one view com­ing out of Wash­ing­ton on what accept­able mort­gage risk is.” Because, he adds, that view is guar­an­teed to be wrong.

    Will he try to put a repeal of the CFPB on Mr. Obama’s desk next year? “It would be a very dif­fer­ent CFPB,” he replies. “I want gov­ern­ment to vig­or­ous­ly police our mar­kets” and it’s not nec­es­sar­i­ly a bad idea to have this func­tion cen­tral­ized in one depart­ment. “What is bad is giv­ing an unelect­ed, unac­count­able bureau­crat the uni­lat­er­al pow­er to essen­tial­ly decide what cred­it cards go in our wal­lets, what mort­gages we can have on our homes, which is exact­ly what CFPB is doing.”

    What about the sta­bil­i­ty coun­cil in Dodd-Frank? Would a GOP Con­gress vote to repeal it?

    “I would hope so,” Mr. Hen­sar­ling says, and he expects such a plan would enjoy “a lit­tle more bipar­ti­san buy-in.” He’s will­ing to seek what­ev­er reforms to the law can attract 60 votes in the Sen­ate. “Absolute­ly, what­ev­er the mar­ket will bear. I came here to make a dif­fer­ence, not to make a speech,” he says. He’d like to com­bine a repeal of this big-bank res­cuer with a new bank­rupt­cy plan for large finan­cial firms craft­ed by the House Judi­cia­ry Com­mit­tee, along with require­ments that banks hold more cap­i­tal.


    You read that right at the end: Jep Hen­sar­ling, Chair­man of the House Finance Com­mit­tee and fan of Richard Fish­er’s plans for spread­ing bank reg­u­la­tions around to the regions Fed­er­al Reserve region­al banks, wants to have lax lend­ing stan­dards because he’s super con­cerned about minor­i­ty home buy­ers try­ing to qual­i­fy for loans!

    That might sound sur­pris­ing giv­en the GOP’s long-stand­ing insis­tence that Fan­nie and Fred­die and the Com­mu­ni­ty Rein­vest­ment Act caused the hous­ing cri­sis. But it’s not. Back in 2005, Hen­sar­ling was say­ing things like, “with the advent of sub­prime lend­ing, count­less fam­i­lies have now had their first oppor­tu­ni­ty to buy a home or per­haps be giv­en a sec­ond chance”. Dereg­u­lat­ing the banks is just what Hen­sar­ling is about. And The growth of the sub­prime sec­tor was just one part of that larg­er phe­nom­e­na of lax over­sight by both the pub­lic and pri­vate sec­tors. That’s one of the rea­sons the GOP focus­es so much on the Com­mu­ni­ty Rein­vest­ment Act: it deflects from the fact that a wide­spread col­lapse in lend­ing stan­dards by non-gov­ern­ment spon­sored enti­ties (i.e. non-Fan­nie and Fred­die lend­ing) was the real cause of the hous­ing bub­ble and that was heav­i­ly fueled by a lack of reg­u­la­tion in the “shad­ow bank­ing” sec­tor that was play­ing a grow­ing role in financ­ing the bub­ble (it’s one of many rea­sons for the focus on the Com­mu­ni­ty Rein­vest­ment Act).

    Still, what exact­ly does Hen­sar­ling mean when he says:

    ...“I don’t want degrad­ed stan­dards. I want mar­ket stan­dards. I don’t want gov­ern­ment fiat stan­dards. don’t want one view com­ing out of Wash­ing­ton on what accept­able mort­gage risk is.” Because, he adds, that view is guar­an­teed to be wrong.

    It sounds like he either envi­sions mul­ti­ple views on mort­gage lend­ing stan­dards com­ing out of Wash­ing­ton (which does­n’t real­ly make sense) or tran­si­tion­ing to a region­al or state-based sys­tem. Or maybe it’s some­thing like what Richard Fish­er pro­pos­es for the Wall Street banks although it’s not obvi­ous how that would work when applied every­where.

    So we know can expect Hen­sar­ling’s com­mit­tee in the House is going to dereg­u­late Wall Street one way or anoth­er and seems to like the idea of com­pet­ing reg­u­la­tors is part of the plan. Plus he wants to over­haul the new Finan­cial Sta­bil­i­ty Coun­cil. It’s all a bit omi­nous.

    And then there’s the fact that over in the Sen­ate Richard Shel­by is lit­er­al­ly try­ing to raise the lim­it on how big a bank can get before it’s “too big to fail”. Plus, he wants to impose the “Tay­lor Rule” on the Fed that will ensure that the Fed is forced to raise inter­est rates even the kind of sit­u­a­tion it’s faced in recent years where rais­ing the raise would be dis­as­trous.

    Yeah, it’s all cer­tain­ly feel­ing a lit­tle omi­nous-ish.

    And then there’s the fact that Richard Fish­er has gen­er­al­ly been wrong about every­thing dur­ing his term as the Dal­las Fed­er­al Reserve Gov­er­nor. For instance, last Sep­tem­ber he called for rais­ing rates by spring­time (so now). Why? To ward off “wage infla­tion”:

    FED’S FISHER: When The Unem­ploy­ment Rate Falls Below 6.1%, Wage Growth Picks Up Quick

    Ann Saphir, Reuters

    Sep. 19, 2014, 4:24 PM

    (Reuters) — The Unit­ed States could be on the verge of a wor­ri­some surge in wages if unem­ploy­ment con­tin­ues its down­ward trend, based on research Dal­las Fed­er­al Reserve Bank Pres­i­dent Richard Fish­er pre­sent­ed to his col­leagues at the Fed’s pol­i­cy-set­ting meet­ing this week.

    An unpub­lished paper pre­pared by his staff showed “declines in the unem­ploy­ment rate below 6.1 per­cent exert sig­nif­i­cant­ly high­er wage pres­sures than if the rate is above 6.1 per­cent,” Fish­er told Reuters in an inter­view Fri­day.

    Fish­er said he had his staff ana­lyze state-by-state unem­ploy­ment and wage data from 1982 to 2013 to try to fig­ure out why wage infla­tion is emerg­ing in Texas but not else­where in the nation.

    The results, he said he told his col­leagues, are “note­wor­thy and need to be thought through.”

    The U.S. unem­ploy­ment rate in August was 6.1 per­cent, exact­ly the point below which his staff’s research showed wages could start to take off.

    “The num­ber just hap­pened to be 6.1 per­cent — it is what shook out of the data,” Fish­er said.

    The Fed­er­al Reserve, which has kept short-term inter­est rates near zero since Decem­ber 2008, is expect­ed to begin to tight­en pol­i­cy next year. The pre­cise tim­ing will depend heav­i­ly on its assess­ment of the labor mar­ket, which the Fed this week said con­tin­ues to fall short.

    “There are still too many peo­ple who want jobs but can­not find them, too many who are work­ing part time but would pre­fer full-time work, and too many who are not search­ing for a job but would be if the labor mar­ket were stronger,” Fed Chair Janet Yellen said.


    The Fed tar­gets a U.S. infla­tion rate of 2.0 per­cent.

    Fish­er said on Fri­day he wor­ries that fur­ther declines in unem­ploy­ment nation­al­ly could lead to broad­er wage infla­tion. To head that off, and also to address what he called ris­ing excess­es in finan­cial mar­kets, Fish­er said he prefers to raise rates by spring­time, soon­er than many investors cur­rent­ly antic­i­pate.


    Yep, the for­mer Fed gov­er­nor that’s wor­ried about unem­ploy­ment drop­ping so low you acci­den­tal­ly get a raise above the rate of infla­tion is the same guy call­ing for this rather rad­i­cal over­haul of how the Fed­er­al Reserve func­tions. And the two top Repub­li­cans on the House and Sen­ate Finance Com­mit­tees think he’s got some great ideas. That sounds omi­nous.

    So it will be omi­nous­ly fas­ci­nat­ing to see how much trac­tion the Fed hawks, the same hawks that want to turn the Fed into more a Bun­des­bank-style cen­tral bank that pri­or­i­tizes low infla­tion over every­thing else (includ­ing employ­ment and an occa­sion­al raise), get in this quest to break the New York Fed’s tra­di­tion­al vot­ing priv­i­leges. Because while the his­tor­i­cal­ly cozy rela­tion­ship between Wall Street and the New York Fed is cer­tain­ly alarm­ing, the idea of a yet-to-be-cre­at­ed author­i­ty dol­ing out reg­u­la­to­ry over­sight for the Wall Street giants to teams under the super­vi­sion of the the 12 dif­fer­ent Fed region­al gov­er­nors?! Oooomi­nooou­ussss!

    Ominousness...it’s what the right-wing does best. Espe­cial­ly when it involves mon­ey and pow­er and the abil­i­ty of the Fed­er­al gov­ern­ment to do any­thing help­ful for the rab­ble. So with the pos­si­bil­i­ty of a GOP win in 2016, not only should you be very wary of any­thing pro­posed by Richard Fish­er and embrace by Jeb Hen­sar­ling and Richard Shel­by, but also keep in mind that this is all a pre­view.

    Posted by Pterrafractyl | March 22, 2015, 6:54 am
  42. Since it’s East­er today (you’ve won this round, East­er), and since Jesus would have been a pinko com­mie hip­pie in today’s con­text, here’s a spe­cial East­er Day cri­tique of neolib­er­al­ism and how the com­mod­i­fi­ca­tion of human­i­ty is fun­da­men­tal­ly harm­ing democ­ra­cy and our ideas of what it means to be human:

    Dis­sent Mag­a­zine
    Booked #3: What Exact­ly is Neolib­er­al­ism?
    Tim­o­thy Shenk — April 2, 2015

    Booked is a month­ly series of Q&As with authors by Dis­sent con­tribut­ing edi­tor Tim­o­thy Shenk. For this inter­view, he spoke with Wendy Brown about her new book Undo­ing the Demos: Neoliberalism’s Stealth Rev­o­lu­tion (Zone Books, 2015).

    Cli­mate change, a crip­pled wel­fare state, the 2008 finan­cial cri­sis, sky­rock­et­ing income inequal­i­ty, polit­i­cal dis­ap­point­ments reach­ing back decades, ter­ri­ble super­hero movies gross­ing bil­lions of dol­lars, and Tinder—these are just a few of the sins attrib­uted to neolib­er­al­ism. But what exact­ly is neolib­er­al­ism? An eco­nom­ic doc­trine? The revenge of capitalism’s rul­ing class? Or some­thing even more insid­i­ous?

    Wendy Brown takes up these ques­tions, and more, in her lat­est work, Undo­ing the Demos: Neoliberalism’s Stealth Rev­o­lu­tion. A search­ing inquiry, the book is part his­tor­i­cal study, part philo­soph­i­cal trea­tise, and part engaged polemic. Schol­ar­ship on neolib­er­al­ism is boom­ing, but Undo­ing the Demos high­lights a sub­ject too often neglect­ed: the polit­i­cal con­se­quences of view­ing the world as an enor­mous mar­ket­place. Her con­clu­sions are grim, but that makes grap­pling with them all the more urgent.

    —Tim­o­thy Shenk

    Tim­o­thy Shenk: You note ear­ly in Undo­ing the Demos that while ref­er­ences to “neolib­er­al­ism” have become rou­tine, espe­cial­ly on the left, the word itself “is a loose and shift­ing sig­ni­fi­er.” What is your def­i­n­i­tion of neolib­er­al­ism?

    Wendy Brown: In this book, I treat neolib­er­al­ism as a gov­ern­ing ratio­nal­i­ty through which every­thing is “econ­o­mized” and in a very spe­cif­ic way: human beings become mar­ket actors and noth­ing but, every field of activ­i­ty is seen as a mar­ket, and every enti­ty (whether pub­lic or pri­vate, whether per­son, busi­ness, or state) is gov­erned as a firm. Impor­tant­ly, this is not sim­ply a mat­ter of extend­ing com­mod­i­fi­ca­tion and mon­e­ti­za­tion everywhere—that’s the old Marx­ist depic­tion of capital’s trans­for­ma­tion of every­day life. Neolib­er­al­ism con­strues even non-wealth gen­er­at­ing spheres—such as learn­ing, dat­ing, or exercising—in mar­ket terms, sub­mits them to mar­ket met­rics, and gov­erns them with mar­ket tech­niques and prac­tices. Above all, it casts peo­ple as human cap­i­tal who must con­stant­ly tend to their own present and future val­ue.

    More­over, because neolib­er­al­ism came of age with (and abet­ted) finan­cial­iza­tion, the form of mar­ke­ti­za­tion at stake does not always con­cern prod­ucts or com­modi­ties, let alone their exchange. Today, mar­ket actors—from indi­vid­u­als to firms, uni­ver­si­ties to states, restau­rants to magazines—are more often con­cerned with their spec­u­la­tive­ly deter­mined val­ue, their rat­ings and rank­ings that shape future val­ue, than with imme­di­ate prof­it. All are tasked with enhanc­ing present and future val­ue through self-invest­ments that in turn attract investors. Finan­cial­ized mar­ket con­duct entails increas­ing or main­tain­ing one’s rat­ings, whether through blog hits, retweets, Yelp stars, col­lege rank­ings, or Moody’s bond rat­ings.

    Shenk: Dis­cus­sions about neolib­er­al­ism often treat it as an eco­nom­ic doc­trine, which also means that they con­cen­trate on its eco­nom­ic ram­i­fi­ca­tions. You shift the focus to pol­i­tics, where, you argue, neolib­er­al­ism has “inaugurate[d] democracy’s con­cep­tu­al unmoor­ing and sub­stan­tive dis­em­bow­el­ment.” Why does neolib­er­al­ism pose such a threat to democ­ra­cy?

    Brown: The most com­mon crit­i­cisms of neolib­er­al­ism, regard­ed sole­ly as eco­nom­ic pol­i­cy rather than as the broad­er phe­nom­e­non of a gov­ern­ing ratio­nal­i­ty, are that it gen­er­ates and legit­i­mates extreme inequal­i­ties of wealth and life con­di­tions; that it leads to increas­ing­ly pre­car­i­ous and dis­pos­able pop­u­la­tions; that it pro­duces an unprece­dent­ed inti­ma­cy between cap­i­tal (espe­cial­ly finance cap­i­tal) and states, and thus per­mits dom­i­na­tion of polit­i­cal life by cap­i­tal; that it gen­er­ates crass and even uneth­i­cal com­mer­cial­iza­tion of things right­ly pro­tect­ed from mar­kets, for exam­ple, babies, human organs, or endan­gered species or wilder­ness; that it pri­va­tizes pub­lic goods and thus elim­i­nates shared and egal­i­tar­i­an access to them; and that it sub­jects states, soci­eties, and indi­vid­u­als to the volatil­i­ty and hav­oc of unreg­u­lat­ed finan­cial mar­kets.

    Each of these is an impor­tant and objec­tion­able effect of neolib­er­al eco­nom­ic pol­i­cy. But neolib­er­al­ism also does pro­found dam­age to demo­c­ra­t­ic prac­tices, cul­tures, insti­tu­tions, and imag­i­nar­ies. Here’s where think­ing about neolib­er­al­ism as a gov­ern­ing ratio­nal­i­ty is impor­tant: this ratio­nal­i­ty switch­es the mean­ing of demo­c­ra­t­ic val­ues from a polit­i­cal to an eco­nom­ic reg­is­ter. Lib­er­ty is dis­con­nect­ed from either polit­i­cal par­tic­i­pa­tion or exis­ten­tial free­dom, and is reduced to mar­ket free­dom unim­ped­ed by reg­u­la­tion or any oth­er form of gov­ern­ment restric­tion. Equal­i­ty as a mat­ter of legal stand­ing and of par­tic­i­pa­tion in shared rule is replaced with the idea of an equal right to com­pete in a world where there are always win­ners and losers.

    The promise of democ­ra­cy depends upon con­crete insti­tu­tions and prac­tices, but also on an under­stand­ing of democ­ra­cy as the specif­i­cal­ly polit­i­cal reach by the peo­ple to hold and direct pow­ers that oth­er­wise dom­i­nate us. Once the econ­o­miza­tion of democracy’s terms and ele­ments is enact­ed in law, cul­ture, and soci­ety, pop­u­lar sov­er­eign­ty becomes flat­ly inco­her­ent. In mar­kets, the good is gen­er­at­ed by indi­vid­ual activ­i­ty, not by shared polit­i­cal delib­er­a­tion and rule. And, where there are only indi­vid­ual cap­i­tals and mar­ket­places, the demos, the peo­ple, do not exist.

    Shenk: It’s easy to depict neolib­er­al­ism as a nat­ur­al exten­sion of lib­er­al­ism, but you insist that the rela­tion­ship is much more com­pli­cat­ed than that. You illus­trate the broad trans­for­ma­tion by exam­in­ing the intel­lec­tu­al his­to­ry of homo oeco­nom­i­cus, a term whose mean­ing you claim has shift­ed rad­i­cal­ly since the time of Adam Smith. How has “eco­nom­ic man” changed in the last cen­tu­ry?

    Brown: You’re right, the rela­tion­ship is quite com­pli­cat­ed, espe­cial­ly if one accepts Foucault’s notion that neolib­er­al­ism is a “repro­gram­ming of lib­er­al­ism” rather than only a trans­for­ma­tion of cap­i­tal­ism. Here are the sim­plest things we might say about the mor­ph­ing of homo oeco­nom­i­cus. Two hun­dred years ago, this crea­ture pur­sued its inter­est through what Adam Smith termed “truck, barter, and exchange.” A gen­er­a­tion lat­er, Jere­my Ben­tham gives us the util­i­ty max­i­miz­er, cal­cu­lat­ing every­thing accord­ing to max­i­miz­ing plea­sure, min­i­miz­ing pain—cost/benefit. Thir­ty years ago, at the dawn of the neolib­er­al era, we get human cap­i­tal that entre­pre­neuri­al­izes itself at every turn. Today, homo oeco­nom­i­cus has been sig­nif­i­cant­ly reshaped as finan­cial­ized human cap­i­tal, seek­ing to enhance its val­ue in every domain of life.

    In con­trast with clas­si­cal eco­nom­ic lib­er­al­ism, then, the con­tem­po­rary fig­ure of homo oeco­nom­i­cus is dis­tinc­tive in at least two ways. First, for neolib­er­als, humans are only and every­where homo oeco­nom­i­cus. This was not so for clas­si­cal econ­o­mists, where we were mar­ket crea­tures in the econ­o­my, but not in civic, famil­ial, polit­i­cal, reli­gious, or eth­i­cal life. Sec­ond, neolib­er­al homo oeco­nom­i­cus today takes shape as val­ue-enhanc­ing human cap­i­tal, not as a crea­ture of exchange, pro­duc­tion, or even inter­est. This is marked­ly dif­fer­ent from the sub­ject drawn by Smith, Ben­tham, Marx, Polanyi, or even Gary Beck­er.


    Shenk: Homo oeco­nom­i­cus is a fair­ly com­mon term; less com­mon is the notion you oppose it to, homo politi­cus. What’s the geneal­o­gy of homo politi­cus, and how is it relat­ed to its more famous coun­ter­part?

    Brown: To under­stand what neolib­er­al­ism is doing to democ­ra­cy, we have to return to the point that, until recent­ly, human beings in the West have always been fig­ured as more than homo oeco­nom­i­cus. There have always been oth­er dimen­sions of us imag­ined and cul­ti­vat­ed in polit­i­cal, cul­tur­al, reli­gious, or famil­ial life. One of these fig­u­ra­tions, which we might call homo politi­cus, fea­tured promi­nent­ly in ancient Athens, Roman repub­li­can­ism, and even ear­ly lib­er­al­ism. But it has also appeared in mod­ern demo­c­ra­t­ic upheavals rang­ing from the French Rev­o­lu­tion to the civ­il rights move­ment. Homo politi­cus is incon­stant in form and con­tent, just as homo oeco­nom­i­cus is, and cer­tain­ly lib­er­al democ­ra­cy fea­tures an ane­mic ver­sion com­pared to, say, Aristotle’s account of humans as real­iz­ing our dis­tinc­tive­ly human capac­i­ties through shar­ing rule in the polis. But it is only with the neolib­er­al rev­o­lu­tion that homo politi­cus is final­ly van­quished as a fun­da­men­tal fea­ture of being human and of democ­ra­cy. Democ­ra­cy requires that cit­i­zens be mod­est­ly ori­ent­ed toward self-rule, not sim­ply val­ue enhance­ment, and that we under­stand our free­dom as rest­ing in such self-rule, not sim­ply in mar­ket con­duct. When this dimen­sion of being human is extin­guished, it takes with it the nec­es­sary ener­gies, prac­tices, and cul­ture of democ­ra­cy, as well as its very intel­li­gi­bil­i­ty.

    Shenk: Some of the major inter­preters of neolib­er­al­ism, espe­cial­ly those who approach it from a Marx­ist per­spec­tive, depict it as a straight­for­ward byprod­uct of 1970s eco­nom­ic tur­moil and back­lash against wel­fare states led by a revan­chist cap­i­tal­ist elite. It seems like you’re not sat­is­fied with that inter­pre­ta­tion. This is a big ques­tion, but do you have an alter­na­tive expla­na­tion for how we got here?

    Brown: That’s too long and com­pli­cat­ed a sto­ry to rehearse here but I can say this. For most Marx­ists, neolib­er­al­ism emerges in the 1970s in response to capitalism’s falling rate of prof­it; the shift of glob­al eco­nom­ic grav­i­ty to OPEC, Asia, and oth­er sites out­side the West; and the dilu­tion of class pow­er gen­er­at­ed by unions, redis­trib­u­tive wel­fare states, large and lazy cor­po­ra­tions, and the expec­ta­tions gen­er­at­ed by edu­cat­ed democ­ra­cies. From this per­spec­tive, neolib­er­al­ism is sim­ply cap­i­tal­ism on steroids: a state and IMF-backed con­sol­i­da­tion of class pow­er aimed at releas­ing cap­i­tal from reg­u­la­to­ry and nation­al con­straints, and defang­ing all forms of pop­u­lar sol­i­dar­i­ties, espe­cial­ly labor.

    The grains of truth in this analy­sis don’t get at the fun­da­men­tal trans­for­ma­tion of social, cul­tur­al, and indi­vid­ual life brought about by neolib­er­al rea­son. They don’t get at the ways that pub­lic insti­tu­tions and ser­vices have not mere­ly been out­sourced but thor­ough­ly recast as pri­vate goods for indi­vid­ual invest­ment or con­sump­tion. And they don’t get at the whole­sale remak­ing of work­places, schools, social life, and indi­vid­u­als. For that sto­ry, one has to track the dis­sem­i­na­tion of neolib­er­al econ­o­miza­tion through neolib­er­al­ism as a gov­ern­ing form of rea­son, not just a pow­er grab by cap­i­tal. There are many vehi­cles of this dissemination—law, cul­ture, and above all, the nov­el polit­i­cal-admin­is­tra­tive form we have come to call gov­er­nance. It is through gov­er­nance prac­tices that busi­ness mod­els and met­rics come to irri­gate every crevice of soci­ety, cir­cu­lat­ing from invest­ment banks to schools, from cor­po­ra­tions to uni­ver­si­ties, from pub­lic agen­cies to the indi­vid­ual. It is through the replace­ment of demo­c­ra­t­ic terms of law, par­tic­i­pa­tion, and jus­tice with idioms of bench­marks, objec­tives, and buy-ins that gov­er­nance dis­man­tles demo­c­ra­t­ic life while appear­ing only to instill it with “best prac­tices.”

    Shenk: Undo­ing the Demos cov­ers a siz­able amount of ground in just over 200 pages, but, as your dis­cus­sion of gov­er­nance just now indi­cates, you also spend a lot of time with spe­cif­ic instances of neolib­er­al­ism in action. My favorite of these more focused stud­ies is your extend­ed analy­sis of Cit­i­zens Unit­ed. What does that case tell us about neolib­er­al­ism more gen­er­al­ly?

    Brown: Pro­gres­sives gen­er­al­ly dis­par­age Cit­i­zens Unit­ed for hav­ing flood­ed the Amer­i­can elec­toral process with cor­po­rate mon­ey on the basis of tor­tured First Amend­ment rea­son­ing that treats cor­po­ra­tions as per­sons. How­ev­er, a care­ful read­ing of the major­i­ty deci­sion also reveals pre­cise­ly the thor­ough­go­ing econ­o­miza­tion of the terms and prac­tices of democ­ra­cy we have been talk­ing about. In the major­i­ty opin­ion, elec­toral cam­paigns are cast as “polit­i­cal mar­ket­places,” just as ideas are cast as freely cir­cu­lat­ing in a mar­ket where the only poten­tial inter­fer­ence aris­es from restric­tions on pro­duc­ers and con­sumers of ideas—who may speak and who may lis­ten or judge. Thus, Jus­tice Kennedy’s insis­tence on the fun­da­men­tal neolib­er­al prin­ci­ple that these mar­ket­places should be unreg­u­lat­ed paves the way for over­turn­ing a cen­tu­ry of cam­paign finance law aimed at mod­est­ly restrict­ing the pow­er of mon­ey in pol­i­tics. More­over, in the deci­sion, polit­i­cal speech itself is ren­dered as a kind of cap­i­tal right, func­tion­ing large­ly to advance the posi­tion of its bear­er, whether that bear­er is human cap­i­tal, cor­po­rate cap­i­tal, or finance cap­i­tal. This under­stand­ing of polit­i­cal speech replaces the idea of demo­c­ra­t­ic polit­i­cal speech as a vital (if poten­tial­ly monop­o­liz­able and cor­rupt­ible) medi­um for pub­lic delib­er­a­tion and per­sua­sion.

    Per­haps what is most sig­nif­i­cant about the Cit­i­zens Unit­ed deci­sion, then, is not that cor­po­ra­tions are ren­dered as per­sons, but that per­sons, let alone a peo­ple, do not appear as the foun­da­tion of democ­ra­cy, and a dis­tinct­ly pub­lic sphere of debate and dis­cus­sion do not appear as democracy’s vital venue. Instead, the deci­sion presents speech as a cap­i­tal right and polit­i­cal life and elec­tions as mar­ket­places.

    Shenk: You’re clear that democ­ra­cy is an ide­al that deserves defend­ing, but you’re skep­ti­cal about actu­al­ly exist­ing democ­ra­cy, which you describe as a sys­tem where “the com­mon rage of the com­mon cit­i­zen has been glo­ri­fied and exploit­ed.” And you wor­ry that mat­ters could get much worse, with democ­ra­cy as we know it giv­ing way to “a poli­ty in which the peo­ple are pawns of every kind of mod­ern pow­er.” Do you see a ten­sion between your trib­utes to demo­c­ra­t­ic ideals and your grim assess­ment of its cur­rent state?

    Brown: Democ­ra­cy is always incom­plete, always short of its promise, but the con­di­tions for cul­ti­vat­ing it can be bet­ter or worse. My point was that democ­ra­cy is real­ly reduced to a whis­per in the Euro-Atlantic nations today. Even Alan Greenspan says that elec­tions don’t much mat­ter much because, “thanks to glob­al­iza­tion . . . the world is gov­erned by mar­ket forces,” not elect­ed rep­re­sen­ta­tives. Vot­ing has been declin­ing for decades every­where in the West­ern world; politi­cians are gen­er­al­ly mis­trust­ed if not reviled (except for Varo­ufakis, of course!); and every­thing to do with polit­i­cal life or gov­ern­ment is wide­ly con­sid­ered either cap­tured by cap­i­tal, cor­rupt or burdensome—this hos­til­i­ty to the polit­i­cal itself is gen­er­at­ed by neolib­er­al rea­son. Thus, today, the mean­ing of democ­ra­cy is pret­ty much reduced to per­son­al lib­er­ty. Such lib­er­ty is not noth­ing, but could not be fur­ther from the idea of rule by and for the peo­ple.

    Hap­py East­er every­one!

    Posted by Pterrafractyl | April 5, 2015, 7:59 pm
  43. Paul Krug­man has a new post that address­es not just the self-defeat­ing nature of the aus­ter­i­ty fetish but also the self-deceiv­ing, but also self-sus­tain­ing, nature of aus­te­ri­ans’ behav­ior and log­ic.

    But first, let’s review the ‘Three Stooges’ nature of the whole sit­u­a­tion:

    The New York Times
    The Con­science of a Lib­er­al
    The Three Stooges The­o­ry of Fis­cal Pol­i­cy

    Paul Krug­man
    Decem­ber 6, 2013 9:38 am

    There’s a scene in one of the Three Stooges movies — if any read­ers know which one, please let me know — in which we see Curly bang­ing his head repeat­ed­ly against a wall. Moe asks why he’s doing that, and Curly says, “Because it feels so good when I stop.”

    Big joke, right? Except that this is now the reign­ing the­o­ry of fis­cal pol­i­cy.

    As Anto­nio Fatas points out, aus­te­ri­ans are now claim­ing vin­di­ca­tion because some of the coun­tries that imposed aus­ter­i­ty are — after years of eco­nom­ic con­trac­tion — final­ly start­ing to show a bit of growth. This is, as he says, hap­pen­ing because soon­er or lat­er economies do tend to grow, unless bad pol­i­cy not only con­tin­ues but gets steadi­ly worse; with aus­ter­i­ty still severe but arguably not get­ting much more severe, some growth isn’t a big sur­prise. And these coun­tries are still far below where they would have been with less aus­ter­i­ty.

    But hey, it feels good, at least rel­a­tive­ly, when the coun­tries stop bang­ing their heads against the wall. Aus­ter­i­ty rules!

    So here’s where we are: wish­ing that pol­i­cy offi­cials in Europe would rise to the same lev­el of ana­lyt­i­cal rig­or and intel­lec­tu­al clar­i­ty exhib­it­ed by Moe, Lar­ry, and Curly.

    Keep in mind that the actu­al pro-aus­ter­i­ty argu­ments are that aus­ter­i­ty is expan­sion­ary because the ‘con­fi­dence fairies’ promis­ing low­er debts and cheap­er labor would fill investors with so much con­fi­dence in the post-aus­ter­i­ty world that they would start invest­ing today! The IMF issued a report argu­ing exact­ly that in 2011 (before it issued the ‘oops!’ report in 2014). That was also the argu­ment Mitt Rom­ney’s chief eco­nom­ics advis­er was giv­ing him in 2012 (sor­ta).

    So that’s where we were about a year and a half ago: wish­ing that pol­i­cy offi­cials in Europe would rise to the same lev­el of ana­lyt­i­cal rig­or and intel­lec­tu­al clar­i­ty exhib­it­ed by Moe, Lar­ry, and Curly.

    Flash for­ward to today, and it becomes increas­ing­ly appar­ent that the pri­ma­ry ‘struc­tur­al reform’ imple­ment­ed across Europe over the last five years after all those blows to the head is that Europe is now posi­tion to embrace the ‘Three Stooges’ par­a­digm per­ma­nent­ly:

    The New York Times
    The Con­science of a Lib­er­al
    Stop-Go Aus­ter­i­ty and Self-Defeat­ing Recov­er­ies

    Paul Krug­man
    May 8 12:07 pm

    Some­times good things hap­pen to bad ideas. Actu­al­ly, it hap­pens all the time. Britain’s elec­tion results came as a sur­prise, but they were con­sis­tent with the gen­er­al propo­si­tion that elec­tions hinge not on an incumbent’s over­all record but on whether things are improv­ing in the six months or so before the vote. Cameron and com­pa­ny imposed aus­ter­i­ty for a cou­ple of years, then paused, and the econ­o­my picked up enough dur­ing the lull to give them a chance to make the same mis­takes all over again.

    They’ll prob­a­bly seize that chance. And giv­en the con­tin­u­ing weak­ness of British fun­da­men­tals – high house­hold debt, a soar­ing trade deficit, etc. – there’s a good chance that the resump­tion of aus­ter­i­ty will ush­er in anoth­er era of stag­na­tion. In oth­er words, the recov­ery of 2013–5, which is false­ly viewed as a vin­di­ca­tion of aus­ter­i­ty, is like­ly to prove self-defeat­ing.

    There’s a some­what sim­i­lar prob­lem in the euro area, as Bar­ry Eichen­green not­ed recent­ly. There, too, growth has picked up, thanks to a pause in aus­ter­i­ty, quan­ti­ta­tive eas­ing and a weak­er euro. The poli­cies that pulled Europe back from the brink were made polit­i­cal­ly pos­si­ble by fear, first of col­lapse, then of defla­tion. But as the fear abates, so does pres­sure to change Europe’s ways; aus­te­ri­ans are already claim­ing the pick­up as vin­di­ca­tion, not of Draghi’s activism, but of the poli­cies that made that activism nec­es­sary.

    Obvi­ous­ly my pes­simism here could be all wrong; if the pri­vate sec­tor in Britain or Europe has more oomph that I think, growth can con­tin­ue even with pol­i­cy back­slid­ing. But my guess is that we’re look­ing at an era of stop-go aus­ter­i­ty, in which politi­cians who refuse to learn the right lessons from his­to­ry doom their cit­i­zens to repeat it.

    Yep! After eas­ing up aus­ter­i­ty and watch­ing their economies recov­er, Europe’s aus­te­ri­ans are claim­ing vin­di­ca­tion. Putting aside the pathet­ic nature of a sit­u­a­tion where ‘Three Stooges’ log­ic rules the day, notice the incred­i­ble polit­i­cal con­trol the aus­te­ri­ans have by virtue of the fact that the aus­ter­i­ty-regime can always make the econ­o­my rel­a­tive­ly bet­ter than it used to be in the lead up to the elec­tions. We always hear about the risks that politi­cians might engage in a polit­i­cal­ly-inspired spend­ing spree in a lead up to elec­tions, but in the age of end­less aus­ter­i­ty it’s look­ing increas­ing­ly like eas­ing up on aus­ter­i­ty is new polit­i­cal trick that right-wing gov­ern­ment can use every­where: Step 1. Use junk eco­nom­ic the­o­ries to jus­ti­fy aus­ter­i­ty.
    Step 2. Send the econ­o­my into a reces­sion, or worse, argu­ing that we sim­ply have no choice.
    Step 3. Mid way through your term in office, ease up on the aus­ter­i­ty and/or use some oth­er stim­u­la­tive mea­sure.
    Step 4. Watch the econ­o­my improve and attribute it all to your aus­ter­i­ty poli­cies.
    Step 5. Get reelect­ed.
    Step 6. Rinse and repeat!
    Part of what makes the sit­u­a­tion so per­verse is that one of the pri­ma­ry argu­ments we’ve heard from the most extreme fac­tions of the pro-aus­ter­i­ty camp (e.g. the Bun­des­bank) for why there should­n’t have even been any eas­ing up on aus­ter­i­ty, or QE, or any oth­er help­ful mea­sures is that reduc­ing the aus­ter­i­ty or adding stim­u­lus would reduce the incen­tives for to engage in ‘struc­tur­al reform’. And yet, after QE is intro­duced and aus­ter­i­ty mea­sures eased in some euro­zone nations and those economies start improv­ing a bit, the aus­te­ri­ans use this improve­ment as vin­di­ca­tion of their aus­ter­i­ty poli­cies.

    So, in a sad way, the aus­te­ri­ans were par­tial­ly cor­rect: In the places they eased up on the aus­ter­i­ty and saw economies improve, that crit­i­cal ‘struc­tur­al reform’ of reeval­u­at­ing the junk macro­eco­nom­ic the­o­ries that led to this entire deba­cle has been com­plete­ly avoid­ed! And now the spir­it of Curly runs the con­ti­nent. Sure, you might think that it would occur to peo­ple that hav­ing their economies improve after they impose the aus­ter­i­ty might actu­al­ly indi­cate that the aus­ter­i­ty was­n’t actu­al­ly expan­sion­ary, but hey, did­n’t it feel real­ly good when that aus­ter­i­ty was eased and don’t you want those good feel­ings again? No pain, no gain, pro­les!

    Lots of good times ahead for Europe. Clas­si­cal­ly good.

    Posted by Pterrafractyl | May 8, 2015, 12:14 pm
  44. Back in March, Paul Krug­man had to devote an entire col­umn remind­ing Britain that, no, the aus­ter­i­ty poli­cies of George Osborne haven’t actu­al­ly done so well, and the UK econ­o­my only start­ed pick­ing up after the gov­ern­ment pulled back on the aus­ter­i­ty, despite the Tories’ pre-elec­tion efforts to con­vince the pub­lic of the suc­cess­es of aus­ter­i­ty-onom­ics. Unfor­tu­nate­ly (for every­one), the need for more such pub­lic appeals to col­lec­tive san­i­ty are becom­ing increas­ing­ly urgent going for­ward because, as David Cameron and George Osborne warned us last month in the lead up to their his­toric elec­toral suc­cess­es, the aus­ter­i­ty inflict­ed on the UK by Cameron and Osborne so far was just a warm up:

    The New York Times
    Cameron Promis­es Anoth­er Dose of Aus­ter­i­ty as British Elec­tions Near

    MARCH 16, 2015

    LONDON — The British elec­tion cam­paign now under­way here revolves in large part around a sin­gle issue: the econ­o­my, and whether its rebound is the result of an aus­ter­i­ty pol­i­cy cham­pi­oned by the Con­ser­v­a­tive-led gov­ern­ment, or in spite of it.

    Sim­i­lar ques­tions are being debat­ed through­out Europe, but in the wake of the glob­al reces­sion after the 2008–9 finan­cial cri­sis, few nations veered more sharply than Britain toward the the­o­ry that get­ting deficits and debt under con­trol was a pre­con­di­tion to a sus­tained recov­ery.

    As the May elec­tion approach­es, Prime Min­is­ter David Cameron is mak­ing the case that aus­ter­i­ty worked — the econ­o­my is grow­ing strong­ly and unem­ploy­ment is down sharply — and promis­ing an even tougher fis­cal stance that would slice deeply into many gov­ern­ment pro­grams.

    His plat­form is being chal­lenged by a broad spec­trum of crit­ics. The Church of Eng­land, for one, is urg­ing more “moral author­i­ty” and crit­i­ciz­ing inequal­i­ty and low-pay­ing jobs.

    But the cam­paign is also focus­ing atten­tion on key ele­ments of the eco­nom­ic debate: How much aus­ter­i­ty did the gov­ern­ment actu­al­ly impose? Is Britain’s recov­ery a vic­to­ry for bud­get cut­ting, or evi­dence that the coun­try pulled out of its slump through con­tin­ued if some­what low­er deficit spend­ing com­bined with an aggres­sive effort to keep inter­est rates low?

    Despite tough talk from Mr. Cameron and George Osborne, the chan­cel­lor of the Exche­quer, the gov­ern­ment con­tin­ues to spend much more than it takes in. Its bud­get deficit of 5.5 per­cent of gross domes­tic prod­uct is con­sid­er­ably high­er than that of the sup­pos­ed­ly spend­thrift Social­ist gov­ern­ment of France.

    Mr. Osborne has failed to deliv­er on two key promis­es made when he and Mr. Cameron took office five years ago at the head of a coali­tion with the Lib­er­al Democ­rats — to run a cycli­cal­ly adjust­ed bal­anced bud­get by this year and to begin to shrink Britain’s cumu­la­tive gov­ern­ment debt.

    “By his­tor­i­cal stan­dards this has been sig­nif­i­cant aus­ter­i­ty,” said Paul John­son, direc­tor of the Insti­tute for Fis­cal Stud­ies, a non­par­ti­san research insti­tu­tion that cal­cu­lates the costs of polit­i­cal promis­es. “But despite the rhetoric, it’s not a mas­sive aus­ter­i­ty, not com­pared to Ire­land, Spain or Greece.”

    Mr. Osborne, he said, has “not been quite such an aus­tere chan­cel­lor as either his own rhetoric or that of his crit­ics might sug­gest.”

    Still, real spend­ing by gov­ern­ment depart­ments is down 8 per­cent from 2010, when the bud­get deficit was more than 11 per­cent of G.D.P., a func­tion of the Labour government’s response to the glob­al crash of 2008.

    Yet because the econ­o­my did not grow as much as fore­cast, lim­it­ing tax rev­enue, the deficit did not fall as much as planned. The gov­ern­ment made impor­tant reduc­tions, deliv­er­ing most of the cuts it promised. But those cuts most­ly took place in the first two years, until 2012. As econ­o­mists on both sides point out, the gov­ern­ment eased off sharply after that. Aus­ter­i­ty was essen­tial­ly put off — to a poten­tial sec­ond term.

    “They were faced with a choice — to stick to the aus­ter­i­ty plan, or to do some­thing eco­nom­i­cal­ly more sen­si­ble — and they chose the lat­ter,” said Jonathan Portes, direc­tor of the Nation­al Insti­tute of Eco­nom­ic and Social Research. “Though I’m not a great fan of this gov­ern­ment, they made the right choice, and by com­par­i­son to what hap­pened in the euro­zone, every­one looks good.”

    In that sense, Mr. Cameron and Mr. Osborne have thread­ed the nee­dle, cut­ting enough at the start to keep bond hold­ers and core con­stituents hap­py, but at the same time, ben­e­fit­ing from a Key­ne­sian recov­ery, fueled by deficit spend­ing, while mak­ing the moral and ide­o­log­i­cal case that they are reduc­ing the deficit over time.

    What­ev­er the cuts so far, Mr. Osborne has vowed to swing a much broad­er ax to chop back the size of the state, renew­ing the Thatch­er-era belief that a large state sec­tor is waste­ful and sti­fles cre­ativ­i­ty.

    Mr. Osborne vows that his last bud­get before the elec­tion, to be deliv­ered Wednes­day, will con­tain “no give­aways, no gim­micks.” He has promised an absolute bud­get bal­ance by 2019, includ­ing invest­ment spend­ing, and a 1 per­cent sur­plus by 2020, which will mean a spend­ing cut by gov­ern­ment depart­ments of 14 per­cent in real terms, some 38 bil­lion pounds, over the next five years, a reduc­tion on a scale nev­er before seen.

    Accord­ing to Mr. John­son, Mr. Osborne, by 2019, would bring the state’s share of the econ­o­my to its low­est since World War II.

    The impact, if the bud­get is adopt­ed, would be sub­stan­tial. While promis­ing to cut some tax­es and pro­tect polit­i­cal­ly sen­si­tive things like pen­sions and the Nation­al Health Ser­vice as well as for­eign aid, Mr. Osborne will have to make dis­pro­por­tion­ate cuts in defense, polic­ing and local gov­ern­ment, hard choic­es in a time of renewed anx­i­ety about secu­ri­ty.

    “Much low-hang­ing fruit has already been plucked,” said Ryan Bourne, head of pub­lic pol­i­cy at the right-lean­ing Insti­tute of Eco­nom­ic Affairs. In his com­ing bud­get, Mr. Osborne may use the extra eco­nom­ic growth and the tax rev­enue it has pro­duced to soft­en his tar­gets slight­ly, espe­cial­ly with key Tories push­ing to pre­serve mil­i­tary spend­ing at 2 per­cent of G.D.P., the NATO guide­line.

    But he will not have much room to maneu­ver, since he has insist­ed that he will reach his goals through spend­ing cuts, not tax increas­es.

    “If you real­ly do that,” Mr. John­son said, “then the rhetoric begins to match the real­i­ty, because you real­ly are begin­ning to shrink the state.”

    He added that he has his doubts: “The size of the cuts in the non­pro­tect­ed parts of the bud­get would be so high I’d be aston­ished if this hap­pens.” Polling sug­gests it is unlike­ly that the Con­ser­v­a­tives will win an over­all major­i­ty in Par­lia­ment, even if Mr. Cameron returns as prime min­is­ter, lim­it­ing their abil­i­ty to enact their agen­da.


    The Con­ser­v­a­tives are play­ing on vot­ers’ mis­trust of Labour’s eco­nom­ic man­age­ment. They argue that with low­er oil prices, stronger demand, low­er infla­tion, more jobs, sev­en con­sec­u­tive quar­ters of growth, and growth of about 3 per­cent last year, the econ­o­my looks pret­ty good, so why let Labour mess it up again?

    In fact, the econ­o­my has sig­nif­i­cant prob­lems, with G.D.P. per capi­ta and real wages still low­er than they were before the 2008 eco­nom­ic cri­sis, though house­hold incomes have final­ly reached the 2008 lev­el. Liv­ing stan­dards are down, espe­cial­ly for young peo­ple who are get­ting low­er pay and a small­er share of social ben­e­fits than their par­ents. Labor pro­duc­tiv­i­ty is poor, and Britain is still run­ning a large struc­tur­al deficit, anoth­er indi­ca­tion that aus­ter­i­ty has been much milder than in Ire­land or Greece.

    What took every­one by sur­prise, giv­en the slow turn­around in the econ­o­my, has been the rebound in job cre­ation, with unem­ploy­ment now at 5.8 per­cent, down from 7.9 per­cent when the gov­ern­ment took office. Yet because most of the new jobs are either part-time or not high­ly paid, they have pro­duced less tax rev­enue.

    With inter­est rates so low, many econ­o­mists say it is wrong to wor­ry about adding mod­est amounts of new debt and to insist on fis­cal tight­en­ing that imper­ils the frag­ile recov­ery. Yet those who want to push down the debt now argue that if inter­est rates go up to tra­di­tion­al lev­els, ser­vic­ing an increas­ing amount of debt will be extreme­ly painful.


    That was what Cameron and Osborne were promis­ing before they got elect­ed: super-harsh aus­ter­i­ty!

    So is that what we should expect for the UK for Cameron’s next term now that vot­ers basi­cal­ly endorsed his super-aus­ter­i­ty pro­gram? Well, yes, of course that’s what we should expect. But don’t nec­es­sar­i­ly expect the aus­ter­i­ty to end when Cameron is gone. They have much big­ger, grander cuts in mind: throw­ing gov­ern­ment into the wood­chip­per and nev­er let­ting it out:

    The Guardian
    Aca­d­e­mics attack George Osborne bud­get sur­plus pro­pos­al

    Thomas Piket­ty, David Blanch­flower and oth­er experts say chancellor’s law would risk crash by shift­ing debt from gov­ern­ment on to house­holds

    Phillip Inman eco­nom­ics cor­re­spon­dent

    Fri­day 12 June 2015 14.18 EDT

    George Osborne’s plan to enshrine per­ma­nent bud­get sur­plus­es in law is a polit­i­cal gim­mick that ignores “basic eco­nom­ics”, a group of aca­d­e­m­ic econ­o­mists has warned.

    Respond­ing to the chancellor’s Man­sion House speech ear­li­er this week, they said a law forc­ing the gov­ern­ment to cut spend­ing or raise tax­es every year to gen­er­ate a bud­get sur­plus, char­ac­terised as Micaw­ber eco­nom­ics, would suck the econ­o­my dry and with­in a few years could trig­ger anoth­er cred­it crunch.

    In a let­ter to the Guardian, coor­di­nat­ed by the Cen­tre for Labour and Social Stud­ies, 77 of the best-known aca­d­e­m­ic econ­o­mists, includ­ing French econ­o­mist Thomas Piket­ty and Cam­bridge pro­fes­sor Ha-Joon Chang, said the chan­cel­lor was turn­ing a blind eye to the com­plex­i­ties of a 21st-cen­tu­ry econ­o­my that demand­ed gov­ern­ments remain flex­i­ble and respon­sive to chang­ing glob­al events.

    Piket­ty, who rose to promi­nence last year after his book Cap­i­tal became a best­seller, signed the let­ter along­side emi­nent eco­nom­ics pro­fes­sors from many of Britain’s top uni­ver­si­ties.

    Oth­er sig­na­to­ries of the let­ter include for­mer Bank of Eng­land mon­e­tary pol­i­cy com­mit­tee mem­ber David Blanch­flower, Diane Elson, emer­i­tus pro­fes­sor of eco­nom­ics at the Uni­ver­si­ty of Essex and chair of UK Women’s Bud­get Group along­side pro­fes­sors of eco­nom­ics from Oxford, Leeds and Lon­don uni­ver­si­ties.

    In a swipe at what they said was a “risky exper­i­ment with the econ­o­my in order to score polit­i­cal points”, they argued Osborne was guilty of adopt­ing a gim­mick designed to out­ma­noeu­vre his oppo­nents.

    The tough mes­sage fol­lows the chancellor’s annu­al Man­sion House speech in the City, dur­ing which he said the gov­ern­ment should be forced by law to bring down the UK’s debt moun­tain to pro­tect the econ­o­my against future shocks.

    Out­lin­ing plans for a law that forces the Trea­sury to run a sur­plus in “nor­mal times”, he said: “With our nation­al debt unsus­tain­ably high, and with the uncer­tain­ty about what the world econ­o­my will throw at us in the com­ing years, we must now fix the roof while the sun is shin­ing.”

    The chan­cel­lor argued that the dis­ci­pline imposed by a new law would sup­port future gen­er­a­tions who faced being sad­dled with sky-high debts.

    Osborne said he planned to hand the job of deter­min­ing when the UK was enjoy­ing “nor­mal times” to the Office for Bud­get Respon­si­bil­i­ty.

    But, in a first blow to his plan, the OBR said it would be for par­lia­ment to devise a def­i­n­i­tion, while its boss Robert Chote described the plan as “ambi­tious”.

    The aca­d­e­mics said Osborne was shift­ing the bur­den of debt from the gov­ern­ment to ordi­nary house­holds because “sur­plus­es and debts must arith­meti­cal­ly bal­ance out in mon­e­tary terms”.

    “The government’s bud­get posi­tion is not inde­pen­dent of the rest of the econ­o­my and if it choos­es to try to inflex­i­bly run sur­plus­es, and there­fore no longer bor­row, the knock-on effect to the rest of the econ­o­my will be sig­nif­i­cant,” they said.

    “House­holds, con­sumers and busi­ness­es may have to bor­row more over­all, and the risk of a per­son­al debt cri­sis to rival 2008 could be very real indeed.”

    The OBR also dent­ed Osborne’s scheme when it pre­dict­ed that the UK’s age­ing pop­u­la­tion would place an increas­ing bur­den on the pub­lic finances. It fore­cast that by 2023, only three years after the first expect­ed bud­get sur­plus, the Trea­sury would be forced to bor­row again to finance its White­hall spend­ing and wel­fare pay­ments.

    The let­ter effec­tive­ly sup­ports Labour’s pre-elec­tion pol­i­cy of bor­row­ing to invest in the econ­o­my.

    For­mer shad­ow chan­cel­lor Ed Balls argued that the gov­ern­ment should play a role in sup­port­ing appren­tice­ships and the devel­op­ment of a high­er skilled work­force to over­come a flatlin­ing of the UK’s pro­duc­tiv­i­ty.

    With­out state sup­port, he said busi­ness­es and house­holds must rely on their own resources or extra bor­row­ing, mak­ing the econ­o­my more unsta­ble. The UK economy’s reliance on con­sumer spend­ing to dri­ve growth has wor­ried many of the country’s most emi­nent econ­o­mists in acad­e­mia and the City.

    For the past four years, busi­ness­es have proved reluc­tant to invest, leav­ing con­sumers to shoul­der the bur­den with high­er spend­ing on mobile phones, cars and week­end breaks.

    The OBR has pre­dict­ed a dra­mat­ic increase in house­hold debt over the next five years to lev­els last seen before the finan­cial cri­sis. In the wake of the Lehman’s crash, bor­row­ing declined from 169% of GDP to about 135% of GDP before ris­ing again. The OBR says it will breach the ceil­ing set in 2008, ris­ing to more than 173%, by 2019.


    So, as is, the Office of Bud­get Respon­si­bil­i­ty (OBR) pre­dicts a dra­mat­ic increase house­hold debt over the next five year to lev­els last seen before the cri­sis. And the 77 econ­o­mists who wrote him that open let­ter basi­cal­ly see George Osborne’s “sur­plus­es for­ev­er!” plan as trans­fer­ring large amounts of the pub­lic debt bur­den onto pri­vate house­holds.

    At least there pre­sum­ably would­n’t be end­less aus­ter­i­ty since Osborne’s plan appears to put the sur­plus man­date on hold dur­ing non-“normal” years which is actu­al­ly an improve­ment over the aus­ter­i­ty-in-the-face-of-reces­sion poli­cies Cameron and Osborne embrace ear­li­er on. Plus, the semi-per­ma-sur­plus poli­cies will just end up desta­bi­liz­ing the econ­o­my by increas­ing­ly push­ing the debt bur­den onto house­holds so the UK will just have to wait for what will be increas­ing­ly fre­quent pri­vate debt-dri­ven finan­cial crises when­ev­er there’s some addi­tion­al gov­ern­ment pro­grams required. Malaise for­ev­er!

    As we can see, aus­ter­i­ty hurts. But, oooooh, it hurts so good. And that’s why it’s so irre­sistible...assum­ing you can afford the nec­es­sary painkillers.

    Posted by Pterrafractyl | June 15, 2015, 6:34 pm
  45. Here’s one of those arti­cles that almost seems designed to give Paul Krug­man a stroke:
    Bloomberg View con­trib­u­tor, Leonid Bershid­sky, recent­ly penned a piece that made a rather bold call to glob­al action. Why not unite the world under a sin­gle Bit­coin-like mon­e­tary sys­tem for the world because if all nations gave up con­trol of the mon­e­tary sys­tem every­thing would go much more smooth­ly. His rea­son­ing for this call? The lessons from the euro­zone expe­ri­ence. The arti­cle is also filled with exact­ly the kind of up is down, black is white type of analy­sis that, again, going to some­day give Paul Krug­man a stroke.

    And to top if all off, Bershid­sky makes clear in the final para­graph that he was­n’t mak­ing a seri­ous call for a one-world cur­ren­cy but instead a thought-exper­i­ment to give us a sense of just how com­pli­cat­ed and ambi­tious the euro­zone project real­ly is, which is cer­tain­ly true. At the same time, he refer to the glob­al Bit­coin-scheme as a “pipe-dream” and and feels the world does­n’t give the euro­zone ambi­tions (of get­ting coun­tries to relin­quish mon­e­tary sov­er­eign­ty) enough cred­it for help­ing teach us all valu­able lessons in how to cre­ate a clos­er world. And, in the sense that the euro­zone expe­ri­ence is teach­ing us what not to do, that’s cer­tain­ly true. But also keep in mind that Bershid­sky is a staunch sup­port­er of exact­ly the kinds of poli­cies that fueled the euro­zone cri­sis all these years, argu­ing last year that Europe had­n’t actu­al­ly imple­ment­ed real aus­ter­i­ty and recent­ly sug­gest­ing that Apple and oth­er multi­na­tion­als should bail out Greece in exchange for turn­ing Greece into a per­ma­nent tax-shel­ter.

    It’s all a reminder that, for the staunchest aus­te­ri­ans, the lessons from the euro­zone cri­sis are that it’s been so great so far why not share it with the world:

    Leonid Bershid­sky: What the world needs now is a sin­gle cur­ren­cy

    Post­ed: Fri­day, July 10, 2015 12:00 am | Updat­ed: 12:43 am, Fri Jul 10, 2015.

    It’s almost a tru­ism to say that mem­ber­ship in the euro exac­er­bat­ed the Greek cri­sis. The think­ing goes like this: Because Greece doesn’t have its own cur­ren­cy, it couldn’t increase its com­pet­i­tive­ness and boost growth through deval­u­a­tion. Although deval­u­a­tion is a valu­able instru­ment, I think most coun­tries and com­pa­nies would ben­e­fit if the world, not just Europe, used a sin­gle cur­ren­cy.

    Today’s frag­ment­ed finan­cial world is unfair. On the one hand, there’s Den­mark with such a glut of cur­ren­cy, local and for­eign, that its cen­tral bank’s key deposit rate is minus 0.75 per­cent and com­pa­nies are con­sid­er­ing over­pay­ing their tax­es because the Tax Min­istry pays 1 per­cent inter­est on the excess. Then there’s Greece, which has had to lim­it with­drawals from auto­mat­ed teller machines to 60 euros a day because of a severe cash crunch.

    Con­sid­er the case of Apple, with an enor­mous cash pile that earns next to noth­ing. The com­pa­ny had about $160 bil­lion in March 2014 and made $1.795 bil­lion in inter­est and div­i­dend income that year — which is less than 1 per­cent, con­sid­er­ing that the com­pa­ny kept increas­ing the cash hold­ing.

    And there are com­pa­nies, even entire coun­tries, that would kill to be financed at that rate — but are forced to accept much high­er ones, and not nec­es­sar­i­ly because they are unsafe bor­row­ers, but because they are often dragged down by risk per­cep­tions that have lit­tle to do with real­i­ty.

    Before the 2008 finan­cial cri­sis, finan­cial glob­al­iza­tion — defined as inter­na­tion­al cap­i­tal inflows — was on the rise, part­ly because investors under­es­ti­mat­ed risk. After the mort­gage crash, it became clear that rat­ing agen­cies weren’t much help to investors in mak­ing such esti­mates and that local and spe­cial­ized knowl­edge was need­ed to make intel­li­gent deci­sions. The Euro­pean debt cri­sis only con­firmed this. Cross-bor­der invest­ment fell off sharply:

    Despite all the talk of glob­al­iza­tion and its harm­ful effects, mon­ey doesn’t wan­der the world look­ing for oppor­tu­ni­ties. Main­ly, it stays at home. Even some of the record­ed inter­na­tion­al flows are in fact domes­tic invest­ment made through off­shore havens for tax pur­pos­es. No won­der direct invest­ment is the most sta­ble com­po­nent of cross-bor­der cap­i­tal move­ments: Com­pa­nies and indi­vid­u­als invest­ing in spe­cif­ic projects do their home­work on a micro lev­el, so they prob­a­bly have the best infor­ma­tion.


    To ensure that finan­cial resources are dis­trib­uted more even­ly through­out the world, it would make sense to cut down coun­try-spe­cif­ic risk. Tak­ing mon­e­tary pol­i­cy out of indi­vid­ual coun­tries’ hands would go a long way toward that goal. Cur­ren­cy risk would be elim­i­nat­ed — the same mon­e­tary unit would be in use every­where — and there would be a uni­form inter­est rate envi­ron­ment.

    The cred­it­wor­thi­ness of spe­cif­ic bor­row­ers would be investors’ biggest area of con­cern. That’s still a big unknown, and there would always be enough coups, rev­o­lu­tions, cor­rup­tion, fraud and mis­man­age­ment to throw the best mod­els off kil­ter. Yet there would be much less to wor­ry about.

    Now, the world’s 140 or so cur­ren­cies some­times make cross- bor­der flows dan­ger­ous. Switzer­land and Den­mark have both suf­fered from their com­mit­ment to their own cur­ren­cies this year. The abil­i­ty to deval­ue is nice, but it’s illu­so­ry, to a large extent: It helps bal­ance a bud­get, bring down debt lev­els and make exports more com­pet­i­tive, but it hits ordi­nary peo­ple with high infla­tion. Besides, accord­ing to a 2010 paper by Stephen Kamin, direc­tor of inter­na­tion­al finance at the Fed­er­al Reserve Sys­tem,

    The cri­sis has also iden­ti­fied an area in which the stan­dard array of cen­tral bank tools may have become inad­e­quate in many coun­tries: liq­uid­i­ty pro­vi­sion and the lender-of-last resort func­tion. With the rise in the share of finan­cial trans­ac­tions under­tak­en in vehi­cle cur­ren­cies such as dol­lars and euros, the abil­i­ty to print domes­tic cur­ren­cy may no longer suf­fice to address a liq­uid­i­ty cri­sis. Accord­ing­ly, inter­na­tion­al arrange­ments for liq­uid­i­ty pro­vi­sion may become increas­ing­ly impor­tant in the future.

    In short, by giv­ing up the right to print their own mon­ey, gov­ern­ments stand to lose less and less. And they might even need the dis­ci­pline imposed by an out­side mon­e­tary pol­i­cy author­i­ty. A coun­try depen­dent on a sin­gle nat­ur­al resource — say, oil — is tempt­ed to spend when the price of that resource is high; know­ing that deval­u­a­tion will be unavail­able when it falls will make such a coun­try accu­mu­late wind­fall rev­enues in a rainy-day fund instead.

    If the world used the same cur­ren­cy, the prob­lems inad­ver­tent­ly caused by the euro wouldn’t be repli­cat­ed. Ger­man banks were too will­ing to lend to projects in the Euro­pean periph­ery because they felt they could trust mem­bers of the same exclu­sive cur­ren­cy club and because the euro made invest­ing in Europe almost fric­tion­less, an advan­tage the rest of the world didn’t have. The one world, one cur­ren­cy club would make fric­tion dis­ap­pear.

    Of course, there would be the ques­tion of who should admin­is­ter the glob­al cen­tral bank. The U.S. would want to — the dol­lar is as close to a glob­al cur­ren­cy as we have — but resis­tance from oth­er glob­al play­ers would sink the project. This is where some­thing like Bit­coin could come in handy: a decen­tral­ized sys­tem that works with lit­tle human inter­ven­tion. “Min­ing” rules could be estab­lished to pre­vent any­one from cor­ner­ing the mar­ket, but the sys­tem would self-reg­u­late.

    This is naive Utopi­anism, of course. The obsta­cles to such a project are beyond esti­ma­tion, as so is the tech­ni­cal com­plex­i­ty. But this pipe-dream is a reminder of how tough and com­plex the euro project is. Those who has­ten to write it off as a fail­ure don’t show it enough respect. Sure, there have been set­backs, and some coun­tries might prove unable to keep tak­ing part, but its par­tic­i­pants are accu­mu­lat­ing data that might one day allow us to fig­ure out how to bring the whole world clos­er togeth­er.

    “This is where some­thing like Bit­coin could come in handy: a decen­tral­ized sys­tem that works with lit­tle human inter­ven­tion. “Min­ing” rules could be estab­lished to pre­vent any­one from cor­ner­ing the mar­ket, but the sys­tem would self-reg­u­late.” LOL.

    While there was no short­age of stroke-induc­ing con­tent, this one just might be the most lethal

    To ensure that finan­cial resources are dis­trib­uted more even­ly through­out the world, it would make sense to cut down coun­try-spe­cif­ic risk. Tak­ing mon­e­tary pol­i­cy out of indi­vid­ual coun­tries’ hands would go a long way toward that goal. Cur­ren­cy risk would be elim­i­nat­ed — the same mon­e­tary unit would be in use every­where — and there would be a uni­form inter­est rate envi­ron­ment.

    Yes, appar­ent­ly the les­son from the euro­zone cri­sis is that coun­tries that con­trol their own cur­ren­cy have ele­vat­ed finan­cial risks!? Hence, Bit­coin for all!

    So will fur­ther calls for a glob­al Bit­coin cur­ren­cy as a safe­guard for euro­zone-style crises be the straw that breaks the arter­ies in Paul Krug­man’s brain? Maybe. There’s a lot of com­pe­ti­tion in that depart­ment.

    A lot.

    Posted by Pterrafractyl | July 17, 2015, 9:40 pm
  46. When Paul Krug­man was back in school at MIT in the 70’s, there were prob­a­bly a lot of zany ideas float­ing around about what the world about be like four decades lat­er, but he prob­a­bly did­n’t expect to one day write columns about how we’re all basi­cal­ly liv­ing in an espe­cial­ly dystopi­an episode of The Twi­light Zone involv­ing the col­lec­tive mad­ness of his pro­fes­sion:

    The New York Times
    The Con­science of a Lib­er­al
    Sec­ond-best Macro­eco­nom­ics

    Paul Krug­man
    JULY 28, 2015 2:51 PM

    There’s a para­dox about eco­nom­ic pol­i­cy since the Great Reces­sion, one that is often acknowl­edged implic­it­ly but rarely stat­ed direct­ly. On one side, the eco­nom­ic prob­lems fac­ing both the Unit­ed States and Europe have been quite straight­for­ward and com­pre­hen­si­ble. On the oth­er side, the debate over actu­al pol­i­cy has been tor­tured and con­fused, with a gen­er­al sense even among afi­ciona­dos that the tools being deployed are inad­e­quate and come with trou­bling side effects.

    Specif­i­cal­ly, the whole west­ern world has spent years suf­fer­ing from a severe short­fall of aggre­gate demand; in Europe a severe mis­align­ment of nation­al costs and prices has been over­laid on this aggre­gate prob­lem. These aren’t hard prob­lems to diag­nose, and sim­ple macro­eco­nom­ic mod­els — which have worked very well, although nobody believes it — tell us how to solve them. Con­ven­tion­al mon­e­tary pol­i­cy is unavail­able thanks to the zero low­er bound, but fis­cal pol­i­cy is still on tap, as is the pos­si­bil­i­ty of rais­ing the infla­tion tar­get. As for mis­aligned costs, that’s where exchange rate adjust­ments come in. So no wor­ries: just hit the big macro­eco­nom­ic That Was Easy but­ton, and soon the trou­bles will be over.

    Except that all the nat­ur­al answers to our prob­lems have been ruled out polit­i­cal­ly. Aus­te­ri­ans not only block the use of fis­cal pol­i­cy, they dri­ve it in the wrong direc­tion; a rise in the infla­tion tar­get is impos­si­ble giv­en both cen­tral-banker prej­u­dices and the pow­er of the gold­bug right. Exchange rate adjust­ment is blocked by the dis­ap­pear­ance of Euro­pean nation­al cur­ren­cies, plus extreme fear over tech­ni­cal dif­fi­cul­ties in rein­tro­duc­ing them.

    As a result, we’re stuck with high­ly prob­lem­at­ic sec­ond-best poli­cies like quan­ti­ta­tive eas­ing and inter­nal deval­u­a­tion.

    In case you don’t know, “sec­ond best” is an eco­nom­ic term of art. It comes from a clas­sic 1956 paper by Lipsey and Lan­cast­er, which showed that poli­cies which might seem to dis­tort mar­kets may nonethe­less help the econ­o­my if mar­kets are already dis­tort­ed by oth­er fac­tors. For exam­ple, sup­pose that a devel­op­ing country’s poor­ly func­tion­ing cap­i­tal mar­kets are fail­ing to chan­nel sav­ings into man­u­fac­tur­ing, even though it’s a high­ly prof­itable sec­tor. Then tar­iffs that pro­tect man­u­fac­tur­ing from for­eign com­pe­ti­tion, raise prof­its, and there­fore make more invest­ment pos­si­ble can improve eco­nom­ic wel­fare.

    The prob­lems with sec­ond best as a pol­i­cy ratio­nale are famil­iar. For one thing, it’s always bet­ter to address exist­ing dis­tor­tions direct­ly, if you can — sec­ond best poli­cies gen­er­al­ly have unde­sir­able side effects (e.g., pro­tect­ing man­u­fac­tur­ing from for­eign com­pe­ti­tion dis­cour­ages con­sump­tion of indus­tri­al goods, may reduce effec­tive domes­tic com­pe­ti­tion, and so on). There’s also a polit­i­cal econ­o­my con­cern, which is that in a com­pli­cat­ed world you can come up with a sec­ond best ratio­nale for prac­ti­cal­ly any­thing. Some­where the Chica­go econ­o­mist Har­ry John­son wrote (this is from mem­o­ry) that in prac­tice “sec­ond best poli­cies are always devised by third-best econ­o­mists work­ing for fourth-best politi­cians” — harsh, but you can see his point.

    But here we are, with any­thing resem­bling first-best macro­eco­nom­ic pol­i­cy ruled out by polit­i­cal prej­u­dice, and the dis­tor­tions we’re try­ing to cor­rect are huge — one glob­al depres­sion can ruin your whole day. So we have quan­ti­ta­tive eas­ing, which is of uncer­tain effec­tive­ness, prob­a­bly dis­torts finan­cial mar­kets at least a bit, and gets trashed all the time by peo­ple stress­ing its real or pre­sumed faults; some­one like me is then put in the posi­tion of hav­ing to defend a pol­i­cy I would nev­er have cho­sen if there seemed to be a viable alter­na­tive.

    In a deep sense, I think the same thing is involved in try­ing to come up with less ter­ri­ble poli­cies in the euro area. The deal that Greece and its cred­i­tors should have reached — large-scale debt relief, pri­ma­ry sur­plus­es kept small and not ramped up over time — is a far cry from what Greece should and prob­a­bly would have done if it still had the drach­ma: big deval­u­a­tion now. The only way to defend the kind of thing that was actu­al­ly on the table was as the least-worst option giv­en that the right response was ruled out.

    Which makes me ask myself the ques­tion: Do peo­ple like me spend too much time being lim­it­ed by what is pre­sumed to be polit­i­cal­ly prac­ti­cal? Should we devote more time to try­ing to widen the range of options, to point­ing out that we real­ly would be much bet­ter off if we threw off the fet­ters of con­ven­tion­al deficit fears, the 2 per­cent infla­tion tar­get, and the extreme­ly ill-advised euro project?

    As we can see, when the realm of the polit­i­cal pos­si­bil­i­ties is lim­it­ed to crap­tac­u­lar sec­ond-best options(like QE, which is bet­ter than more aus­ter­i­ty but still sucky), the best use of Paul Krug­man’s time is actu­al­ly a rather dif­fi­cult con­sid­er­a­tion: the pol­i­cy-mak­ing world has gone mad in mul­ti­ple major coun­tries around the globe simul­ta­ne­ous­ly, so how much should Paul Krug­man spend his advo­cat­ing for the most opti­mal of the sub­op­ti­mal “polit­i­cal­ly prac­ti­cal” pol­i­cy solu­tions that the mad pol­i­cy-mak­ers will eve con­sid­er (where QE is a fre­quent best sec­ond-vest option) vs how much should Krug­man spend his time try­ing to get the world to wake itself up from its Aus­ter­ian trance and maybe recall the many impor­tant eco­nom­ic lessons human­i­ty learned over the last cen­tu­ry that we seem to have for­got­ten after Rea­gan gave us Alzheimer’s.

    As pol­i­cy-mak­ing san­i­ty is increas­ing­ly ver­boten, it’s not at all obvi­ous what Krug­man should be invest­ing his time in: Herd the high­ly ide­o­log­i­cal econo-cats towards the best sec­ond-best solu­tions cho­sen from the stunt­ed econo-tool­box of mad­ness? Or point out how the econo-cats have no clothes (except for the econo-rats in econo-cat’s cloth­ing)? Or how about describ­ing what the world could be like if it was­n’t run by high­ly ide­o­log­i­cal felines?

    What is Paul to do? That’s not clear. But let’s hope he finds plen­ty of time to artic­u­late a vision for how eco­nom­ic pol­i­cy-mak­ing could work if the econo-cats of today weren’t per­pet­u­al­ly hopped up on right-wing cat­nip. Even if pol­i­cy does­n’t change today, there’s a whole gen­er­a­tion of eco­nom­ics grad school stu­dents that are going be the pol­i­cy-mak­ers of tomor­row and the more san­i­ty they can hear now from their elders dur­ing an era of unre­al­i­ty like this the bet­ter.

    Posted by Pterrafractyl | July 28, 2015, 11:24 pm
  47. Bri­an Black­stone over as the Wall Street Jour­nal has an col­umn about the Fed­er­al Reserve’s deci­sion next week over whether or not to raise inter­est rates and he thinks the ECB’s deci­sion in 2011 to raise rates holds a num­ber of lessons for the Fed today. Keep in mind that folks like Paul Krug­man view a Fed rate rise as at this point as a major mis­take. Also keep in mind that this is an ECB-relat­ed his­tor­i­cal les­son so, of course, it’s a cau­tion­ary tale:

    The Wall Street Jour­nal
    Blackstone’s Take: ECB’s 2011 Rate Increas­es Could Hold Lessons for Fed
    It’s worth revis­it­ing anoth­er major cen­tral bank that raised inter­est rates for the first time in almost a decade.
    By Bri­an Black­stone
    Sept. 10, 2015 8:40 a.m. ET

    As the Fed­er­al Reserve gears up for a key deci­sion next week on whether to raise inter­est rates for the first time in almost a decade, it’s worth revis­it­ing anoth­er major cen­tral bank that went down this path a few years ago: the Euro­pean Cen­tral Bank.

    It’s easy to for­get that despite a severe reces­sion in 2009, fol­lowed by the erup­tion of Greece’s debt cri­sis in 2010, the ECB ini­ti­at­ed the briefest of tight­en­ing cam­paigns in April and July 2011 with a pair of quar­ter-per­cent­age-point rate increas­es.

    At the time it made sense, if you strict­ly applied the ECB’s infla­tion tar­get. Annu­al con­sumer price growth at the time was in the 2.5% to 3% range, well above the bank’s tar­get near 2%. The euro­zone econ­o­my was recov­er­ing, albeit uneven­ly with Ger­many lead­ing the way.

    “The pos­i­tive under­ly­ing momen­tum of eco­nom­ic activ­i­ty in the euro area remains in place,” then-pres­i­dent Jean Claude Trichet said after the July 2011 increase.

    So while oth­er major cen­tral banks were crank­ing up the stim­u­lus, the ECB was tight­en­ing.

    The short cycle was quick­ly reversed. The euro­zone slid back into a dou­ble-dip reces­sion in late 2011. In Mario Draghi’s first meet­ing as ECB pres­i­dent in Novem­ber 2011, the ECB cut rates, did so again the next month and even­tu­al­ly flood­ed mar­kets with tril­lions of euros of stim­u­lus via cheap bank loans and asset pur­chas­es that show no sign of end­ing soon.

    Of course, the Fed is far from being in this posi­tion. The U.S. econ­o­my has sev­er­al years of recov­ery under its belt and unem­ploy­ment is about half of Europe’s rate.

    But it also faces cross­cur­rents, as the ECB did four years ago when infla­tion and the econ­o­my were send­ing con­flict­ing sig­nals. The U.S. case is flipped: its growth and employ­ment that look stur­dy while infla­tion is ultra-low.


    The sec­ond les­son from the ECB is that there’s no such thing as a pain-free rate increase, even when pol­i­cy rates are near zero.

    Yes, as the ECB amply demon­strat­ed in 2011, you real­ly don’t want cen­tral banks to sud­den­ly raise rates ‘just because’. But also note that when you read...

    It’s easy to for­get that despite a severe reces­sion in 2009, fol­lowed by the erup­tion of Greece’s debt cri­sis in 2010, the ECB ini­ti­at­ed the briefest of tight­en­ing cam­paigns in April and July 2011 with a pair of quar­ter-per­cent­age-point rate increas­es.

    At the time it made sense, if you strict­ly applied the ECB’s infla­tion tar­get. Annu­al con­sumer price growth at the time was in the 2.5% to 3% range, well above the bank’s tar­get near 2%. The euro­zone econ­o­my was recov­er­ing, albeit uneven­ly with Ger­many lead­ing the way.

    “The pos­i­tive under­ly­ing momen­tum of eco­nom­ic activ­i­ty in the euro area remains in place,” then-pres­i­dent Jean Claude Trichet said after the July 2011 increase.

    ...that the ECB’s deci­sion to raise inter­est rates twice in short order did­n’t actu­al­ly make sense:

    The New York Times
    The Con­science of Lib­er­al

    The ECB’s Reverse FDR

    Paul Krug­man

    NOVEMBER 29, 2011 8:37 AM

    Ryan Avent joins the cho­rus of those sug­gest­ing that the Euro­pean Cen­tral Bank’s deci­sion last spring to start rais­ing rates — .a deci­sion that seemed crazy then, and looks even cra­zier now — was the point at which every­thing start­ed to fall apart.

    But how could what were, in the end, rel­a­tive­ly small rate hikes have done large dam­age? As Avent says, here is where the expec­ta­tions chan­nel may have been cru­cial.

    One way to look at it is as a reverse FDR. A few years ago Gau­ti Eggerts­son pub­lished a per­sua­sive analy­sis (pdf) of the big eco­nom­ic recov­ery of 1933–37; he argued that it had a lot to do with changed expec­ta­tions of future mon­e­tary pol­i­cy. Specif­i­cal­ly, by tak­ing Amer­i­ca off the gold stan­dard — a shock­ing move at the time — and explic­it­ly call­ing for a return to pre-Depres­sion price lev­els, FDR cre­at­ed an expec­ta­tion of ris­ing prices that had a salu­tary effect on demand.

    So what hap­pened in spring 2011? The ECB raised rates even though there was no sign of under­ly­ing infla­tion­ary pres­sure beyond a com­mod­i­ty blip, and even though the need­ed price adjust­ment in the periph­ery clear­ly need­ed a rea­son­ably high infla­tion tar­get.

    Trichet might as well have gone on TV and announced, “My col­leagues and I are deter­mined to make the debt prob­lems of south­ern Europe insol­u­ble.”

    And they’ve suc­ceed­ed.

    “Trichet might as well have gone on TV and announced, “My col­leagues and I are deter­mined to make the debt prob­lems of south­ern Europe insol­u­ble.””
    That’s how much sense the ECB’s deci­sion made back in 2011. So is Fed about to “pull an ‘ECB’ ” with its upcom­ing rate hike deci­sions? We’ll see. We’ll see...

    Posted by Pterrafractyl | September 10, 2015, 8:14 am
  48. To raise (Fed­er­al Reserve inter­est rates), or not to raise (Fed­er­al Reserve inter­est rates , that is the ques­tion. At least that was the ques­tion dur­ing a recent meet­ing of inter­na­tion­al cen­tral bankers and oth­er finan­cial big wigs in Lima, Peru, with­out a con­sen­sus answer. On the one hand, you have the IMF con­tin­u­ing to warn that rais­ing rates now could be dan­ger­ous for both the US econ­o­my but also lead to a flood of mon­ey flow­ing out of emer­gency mar­kets and back to the US. On the oth­er hand, you have the “Group of 30”, a body of cur­rent and for­mer cen­tral bankers, lead­ing financiers, and aca­d­e­mics which is argu­ing that the Fed just needs to start rais­ing inter­est rates now because the uncer­tain­ty over when the Fed will raise rates is caus­ing investors to take their mon­ey out of emerg­ing mar­kets at a faster rate than they oth­er­wise would be.

    So, to sum­ma­rize, one of the big con­cerns about what will hap­pen when the Fed starts rais­ing rates is that it will lead to a rush to the exits for emerg­ing mar­kets, but there’s still a siz­able con­tin­gent of cen­tral bankers and financiers that want to see those rates rise because not rais­ing the rates is actu­al­ly lead­ing to larg­er out­flows due to uncer­tain­ty:

    The New York Times
    Bankers Grap­ple With How to Help Emerg­ing Mar­kets

    OCT. 11, 2015

    LIMA, Peru — After a week of dis­cus­sions here, bankers and pol­i­cy mak­ers agreed that stem­ming the rush of invest­ments from emerg­ing mar­kets was one of the most impor­tant chal­lenges fac­ing the glob­al econ­o­my. But there was lit­tle agree­ment on how to actu­al­ly do that.

    On offi­cial pan­els, in closed-room ses­sions and over drinks in Lima restau­rants, mar­ket par­tic­i­pants strug­gled to come to grips with the per­sis­tent flows of mon­ey escap­ing emerg­ing-mar­ket stocks and bonds in search of safer invest­ment shores.

    “We have nev­er seen some­thing like this,” said Hung Tran, a senior exec­u­tive at the Insti­tute of Inter­na­tion­al Finance, a trade group for glob­al banks. Mr. Tran said that he was expect­ing net out­flows from emerg­ing mar­kets to be around $800 bil­lion for this year and next — by far the largest amount since insti­tu­tions began invest­ing in these mar­kets in the late 1980s.

    The fear is that these num­bers could increase sub­stan­tial­ly, espe­cial­ly if China’s cur­ren­cy weak­ens fur­ther. That could result in a rolling series of emerg­ing-mar­ket crises.

    At the root of the debate has been whether the Fed­er­al Reserve’s deci­sion last month to hold inter­est rates near zero has increased investor con­fi­dence in emerg­ing mar­kets or hurt it.

    The Inter­na­tion­al Mon­e­tary Fund, the host of the week’s meet­ings and the first line of defense in bail­ing out emerg­ing-mar­ket nations that run short of cash, has said that the Fed­er­al Reserve should refrain from an inter­est rate increase in light of the weak glob­al econ­o­my.

    And Gary D. Cohn, the pres­i­dent of Gold­man Sachs, said at a pan­el dis­cus­sion on Sat­ur­day that if you had just awak­ened from a years­long slum­ber and had to make a deci­sion about rais­ing rates, you would most like­ly choose not to do so.

    “We have a glob­al eco­nom­ic growth prob­lem,” Mr. Cohn said.

    But those on the front lines of the out­flows of funds from the emerg­ing mar­kets — cen­tral bankers in coun­tries like Brazil, Turkey, Malaysia and Mex­i­co — are begin­ning to say that the Fed’s deci­sion to hold back has actu­al­ly made their job more dif­fi­cult. That is because instead of stay­ing put, or mak­ing new invest­ments, investors are rush­ing out all the faster, spooked that the Fed has larg­er fears about Chi­na and oth­er emerg­ing mar­kets.

    “I heard time and again this week from gov­er­nors of emerg­ing-mar­ket cen­tral banks that it’s not the hike itself that wor­ries them,” said Jacob A. Frenkel, the chair­man of J.P. Mor­gan Chase Inter­na­tion­al and the for­mer head of Israel’s cen­tral bank. “It’s how much and when it occurs.”

    Mr. Frenkel is a mem­ber of a coali­tion of bankers, econ­o­mists and pol­i­cy mak­ers called the Group of Thir­ty that released a paper on Sun­day crit­i­ciz­ing the con­tin­u­a­tion of loose cen­tral bank poli­cies. He and his col­leagues who wrote the report urged the cen­tral banks — not least the Fed — to return to a more con­ven­tion­al approach to mar­kets by grad­u­al­ly increas­ing inter­est rates.


    So it’s the IMF vs the Group of 30:

    At the root of the debate has been whether the Fed­er­al Reserve’s deci­sion last month to hold inter­est rates near zero has increased investor con­fi­dence in emerg­ing mar­kets or hurt it.

    The Inter­na­tion­al Mon­e­tary Fund, the host of the week’s meet­ings and the first line of defense in bail­ing out emerg­ing-mar­ket nations that run short of cash, has said that the Fed­er­al Reserve should refrain from an inter­est rate increase in light of the weak glob­al econ­o­my.

    Mr. Frenkel is a mem­ber of a coali­tion of bankers, econ­o­mists and pol­i­cy mak­ers called the Group of Thir­ty that released a paper on Sun­day crit­i­ciz­ing the con­tin­u­a­tion of loose cen­tral bank poli­cies. He and his col­leagues who wrote the report urged the cen­tral banks — not least the Fed — to return to a more con­ven­tion­al approach to mar­kets by grad­u­al­ly increas­ing inter­est rates.”

    Now, keep in mind that the Group of 30 is basi­cal­ly a talk shop and even Paul Krug­man is a mem­ber. But also keep in mind that the cur­rent head of the Group of 30 is for­mer ECB chair­man Jean-Claude Trichet, and this is what Krug­man had to say about Trichet’s pro­pos­al to raise the ECB’s rates back in 2011:

    The New York Times
    The Con­science of a Lib­er­al
    The ECB’s Reverse FDR

    Paul Krug­man
    Novem­ber 29, 2011 8:37 am

    Ryan Avent joins the cho­rus of those sug­gest­ing that the Euro­pean Cen­tral Bank’s deci­sion last spring to start rais­ing rates — a deci­sion that seemed crazy then, and looks even cra­zier now — was the point at which every­thing start­ed to fall apat.

    But how could what were, in the end, rel­a­tive­ly small rate hikes have done large dam­age? As Avent says, here is where the expec­ta­tions chan­nel may have been cru­cial.

    One way to look at it is as a reverse FDR. A few years ago Gau­ti Eggerts­son pub­lished a per­sua­sive analy­sis (pdf) of the big eco­nom­ic recov­ery of 1933–37; he argued that it had a lot to do with changed expec­ta­tions of future mon­e­tary pol­i­cy. Specif­i­cal­ly, by tak­ing Amer­i­ca off the gold stan­dard — a shock­ing move at the time — and explic­it­ly call­ing for a return to pre-Depres­sion price lev­els, FDR cre­at­ed an expec­ta­tion of ris­ing prices that had a salu­tary effect on demand.

    So what hap­pened in spring 2011? The ECB raised rates even though there was no sign of under­ly­ing infla­tion­ary pres­sure beyond a com­mod­i­ty blip, and even though the need­ed price adjust­ment in the periph­ery clear­ly need­ed a rea­son­ably high infla­tion tar­get.

    Trichet might as well have gone on TV and announced, “My col­leagues and I are deter­mined to make the debt prob­lems of south­ern Europe insol­u­ble.”

    And they’ve suc­ceed­ed.

    Yes, when Jean-Claude Trichet was head of the ECB, he start­ed raised rates in the spring of 2011 despite the debt cri­sis because the euro­zone infla­tion rate was at 2.6% instead of 2%, when there was no real indi­ca­tion that the euro­zone economies was even remote­ly on sol­id foot­ing, and by Novem­ber of that year it was already look­ing like that deci­sion was the point at which every­thing start­ed to fall apart. And now the Group of 30, led by Trichet, just issued a report about how impor­tant it is that the Fed start rais­ing rates despite ongo­ing con­cerns about a weak­en­ing US econ­o­my and glob­al econ­o­my.

    Oh, and about those con­cerns over the pos­si­bil­i­ty that a Fed rate rise will lead to a surge in mon­ey flow­ing out of emerg­ing mar­kets...guess who does­n’t real­ly care about that:

    The Wall Street Jour­nal
    Cen­tral Bankers Urge Fed to Get On With Inter­est-Rate Increase
    Many offi­cials at IMF meet­ing in Lima, Peru, say they would pre­fer cer­tain­ty over agony of wait­ing

    By David Har­ri­son
    Oct. 11, 2015 2:00 p.m. ET

    LIMA, Peru—Talk of the Fed­er­al Reserve’s first rate increase in almost a decade tends to send many investors into a fren­zy. For the world’s cen­tral bankers, it is increas­ing­ly like­ly to elic­it sighs of res­ig­na­tion.

    Fed fatigue has enveloped emerg­ing-mar­ket offi­cials fac­ing repeat­ed bouts of volatil­i­ty in their cur­ren­cies and cap­i­tal flows along­side mount­ing wor­ries about debt. Some pol­i­cy mak­ers, gripped by the uncer­tain­ty, deliv­ered a mes­sage to their Amer­i­can coun­ter­parts as offi­cials gath­ered in the Peru­vian cap­i­tal for the Inter­na­tion­al Mon­e­tary Fund’s annu­al meet­ing: Please stop dither­ing.

    “Delay­ing the increase would not solve the sit­u­a­tion,” said Sukh­dave Singh, deputy gov­er­nor of Bank Negara Malaysia. “If it is a case that the emerg­ing mar­kets have tak­en on too much debt, there will be a day of reck­on­ing. Delay­ing an inter­est-rate hike does not nec­es­sar­i­ly address that issue.”

    Once the Fed moves, investors will move mon­ey back into the U.S., depriv­ing emerg­ing mar­kets of cap­i­tal, which will weak­en their cur­ren­cies and send infla­tion high­er.

    Fed fears have con­sumed emerg­ing economies for the past two years after an unprece­dent­ed stretch of U.S. mon­e­tary stim­u­lus. But many offi­cials at the IMF meet­ing, which end­ed Sun­day, said they would pre­fer cer­tain­ty now over the pro­longed agony of wait­ing.

    “This year, com­pared to a year ago, many emerg­ing-mar­ket cen­tral bank gov­er­nors and some oth­ers were keen­er that the Fed just get on with it, not because they were keen to see inter­est rates rise, but because they want­ed to reduce uncer­tain­ty,” said Thar­man Shan­mu­garat­nam, Singapore’s deputy prime min­is­ter and for­mer head of the IMF’s gov­ern­ing com­mit­tee.

    Emerg­ing-mar­ket offi­cials aren’t the only ones look­ing for the Fed to get on with it.

    Jens Wei­d­mann, pres­i­dent of Germany’s cen­tral bank, said the prospect of emerg­ing mar­kets get­ting hurt by a Fed-induced cap­i­tal out­flow is “no rea­son” to delay a rate increase that is jus­ti­fied by data. A U.S. rate increase “would be a reac­tion to a bet­ter econ­o­my and that would ulti­mate­ly be good news for the world econ­o­my,” he added.


    Many emerg­ing-mar­ket cen­tral bankers say they have done every­thing they can to pre­pare for a U.S. rate increase. They let their cur­ren­cies float, indi­cat­ing a will­ing­ness to absorb high­er infla­tion in exchange for cheap­er exports. They accu­mu­lat­ed for­eign cur­ren­cy reserves to absorb the shock of flee­ing cap­i­tal. And many set infla­tion tar­gets to reas­sure investors.

    But those prepa­ra­tions won’t pro­tect them from cur­ren­cy swings as mon­ey slosh­es around the world at the mer­est hint of Fed action, dri­ving up the val­ue of the dol­lar and infla­tion in emerg­ing mar­kets. For those cen­tral bankers tar­get­ing an infla­tion rate, the swings can force dif­fi­cult choic­es, such as rais­ing their own inter­est rates despite slow­ing economies.

    Not every­one is itch­ing for Fed action.

    Back­ers of fur­ther delay from the U.S. cen­tral bank have an impor­tant ally in the IMF, which says the world econ­o­my is still too weak to with­stand a rate increase this year. Fed tight­en­ing could spur a wave of cor­po­rate defaults as com­pa­nies bor­row­ing mon­ey in dol­lars face high­er debt costs, the IMF says.

    Many econ­o­mists were con­fi­dent the Fed would move in Sep­tem­ber based on the strength of the U.S. econ­o­my. But the deval­u­a­tion of the Chi­nese yuan and the tur­moil in the Chi­nese stock mar­ket raised the specter of a deep­er-than-antic­i­pat­ed slow­down. That stayed the Fed’s hand, though offi­cials were quick to say they still intend­ed to raise rates this year.

    Since then, weak eco­nom­ic data in the U.S. and slow­er expect­ed growth world-wide have shak­en up expec­ta­tions and par­a­lyzed emerg­ing mar­kets.

    One mit­i­gat­ing fac­tor for emerg­ing mar­kets is that U.S. offi­cials have been clear about their inten­tions to raise rates. That has giv­en investors time to move their mon­ey and cen­tral bankers in the devel­op­ing world to pre­pare. But not even the clear­est com­mu­ni­ca­tion can ful­ly pro­tect emerg­ing mar­kets.

    Nobody can say they were caught by sur­prise,” said Ilan Gold­fa­jn, chief econ­o­mist at Itaú Uni­ban­co. “That said, mar­kets are crazy.”

    Any­body look­ing for cer­tain­ty once the Fed moves is bound to be dis­ap­point­ed, said Leset­ja Kganya­go, head of the South African cen­tral bank. The first Fed rate increase will only lead to uncer­tain­ty about sub­se­quent moves, he said.

    “It’s the uncer­tain­ty that seems to be a per­ma­nent fea­ture now,” he said. “Volatil­i­ty becomes the order of the day.”

    Offi­cials say they are watch­ing every word from cen­tral bankers in the world’s largest econ­o­my. They face at least a few more months of wait­ing. “Every­one talked about Sep­tem­ber, then they were talk­ing about Decem­ber,” said the Paraguay cen­tral bank chief, Car­los Fer­nán­dez Val­dovi­nos. “Right now, here, after this meet­ing, every­one is talk­ing about Jan­u­ary.”

    How do you pre­pare for such a hazy out­look? “I think the word for me is be smart, be wise, know your lim­its,” he said.

    What a sur­prise, Uber-hawk Jens Wei­d­mann does­n’t actu­al­ly see the Fed-induced out­flow of mon­ey from emerg­ing mar­kets, the thing every­one else seems to be con­cerned about at the Lima con­fer­ence, as an actu­al raise not to raise rates? Why? Who knows, but it appears to involve some sort of cir­cu­lar rea­son­ing:

    Emerg­ing-mar­ket offi­cials aren’t the only ones look­ing for the Fed to get on with it.

    Jens Wei­d­mann, pres­i­dent of Germany’s cen­tral bank, said the prospect of emerg­ing mar­kets get­ting hurt by a Fed-induced cap­i­tal out­flow is “no rea­son” to delay a rate increase that is jus­ti­fied by data. A U.S. rate increase “would be a reac­tion to a bet­ter econ­o­my and that would ulti­mate­ly be good news for the world econ­o­my,” he added.

    So a U.S. rate increase, which “would be a reac­tion to a bet­ter econ­o­my” would “ulti­mate­ly be good news for the world econ­o­my” even if it caused the Fed-induced cap­i­tal out­flow that every­one else wants to avoid. Wow, that’s almost as com­pelling as the rea­son­ing by Sin­ga­pore’s cen­tral banker:

    “This year, com­pared to a year ago, many emerg­ing-mar­ket cen­tral bank gov­er­nors and some oth­ers were keen­er that the Fed just get on with it, not because they were keen to see inter­est rates rise, but because they want­ed to reduce uncer­tain­ty,” said Thar­man Shan­mu­garat­nam, Singapore’s deputy prime min­is­ter and for­mer head of the IMF’s gov­ern­ing com­mit­tee.

    Yes, like kids in a car ask­ing “are we there yet?” on the way to a des­ti­na­tion they don’t even want to get to just so they can get to the next phase of a trip they know they won’t enjoy, many emerg­ing-mar­ket cen­tral bank gov­er­nors push­ing for a rate rise “were keen­er that the Fed just get on with it, not because they were keen to see inter­est rates rise, but because they want­ed to reduce uncer­tain­ty”.

    So, basi­cal­ly, the IMF and the Doves at the Fed are one of the only things pre­vent­ing the rate hawks from jack­ing up rates — first at the Fed, but even­tu­al­ly every­where — and doing to the world econ­o­my what folks like Jean-Claude Trichet did to the euro­zone back in 2011. Gen­er­al feel­ings of uncer­tain­ty are prob­a­bly appro­pri­ate.

    Posted by Pterrafractyl | October 15, 2015, 9:40 am
  49. Remem­ber when the IMF did a big mea cul­pa over its advo­ca­cy of aus­ter­i­ty and sup­ply-side poli­cies that helped dev­as­tate Europe? Well, check out their new pro­pos­al for stim­u­lat­ing growth: fis­cal stim­u­lus for nations with the with “fis­cal space” to do so (which basi­cal­ly means no fis­cal stim­u­lus for most coun­tries because they won’t have the “space”) plus a bunch of sup­ply-side poli­cies:


    IMF says sup­ply-side reforms can help beat slug­gish growth

    WASHINGTON | By David Lawder
    Wed Apr 6, 2016 9:11pm IST

    The Inter­na­tion­al Mon­e­tary Fund offered a solu­tion to per­sis­tent­ly slug­gish eco­nom­ic growth on Wednes­day that includ­ed pro­pos­als to dereg­u­late prod­uct mar­kets and adopt poli­cies to boost labor mar­ket par­tic­i­pa­tion.

    But the analy­sis in the IMF’s annu­al World Eco­nom­ic Out­look acknowl­edged argu­ments from skep­tics of such “sup­ply side” reforms that dereg­u­la­tion can cause near-term falls in wages and price defla­tion and so need to be accom­pa­nied by fis­cal stim­u­lus aimed at boost­ing near-term.

    The IMF said new research shows that struc­tur­al changes to labor makets and some more heav­i­ly reg­u­lat­ed busi­ness sec­tors could help lift poten­tial out­put over the medi­um term while also help­ing to strength­en con­sumer con­fi­dence in the near term.

    It rec­om­mend­ed dereg­u­la­tion of the retail and pro­fes­sion­al ser­vices sec­tors and net­work-based sec­tors such as air, rail and road trans­porta­tion, elec­tric­i­ty and gas dis­tri­b­u­tion, tele­coms and postal ser­vices, par­tic­u­lar­ly in the euro zone and Japan.

    But the Fund said it is impor­tant to pair sup­ply side reforms with fis­cal stim­u­lus mea­sures to boost near term demand and cush­ion neg­a­tive shocks. For exam­ple, reduc­tions in unem­ploy­ment ben­e­fits and work­er pro­tec­tion laws should be paired with reduc­tions in labor tax­es to help boost take-home pay and draw peo­ple back into the labor force.

    “There is a role for com­ple­ment­ing struc­tur­al reform with macro­eco­nom­ic pol­i­cy sup­port. That includes fis­cal stim­u­lus wher­ev­er space is avail­able,” said IMF researcher Romain Duval, a lead author of the report.

    Duval and co-author Davide Furceri said that prod­uct mar­ket dereg­u­la­tion can start to pay growth div­i­dends imme­di­ate­ly regard­less of the eco­nom­ic envi­ron­ment so they should be force­ful­ly imple­ment­ed. Eco­nom­ic growth can increase by one per­cent­age point by the third year of the reforms, their research showed.


    “But the analy­sis in the IMF’s annu­al World Eco­nom­ic Out­look acknowl­edged argu­ments from skep­tics of such “sup­ply side” reforms that dereg­u­la­tion can cause near-term falls in wages and price defla­tion and so need to be accom­pa­nied by fis­cal stim­u­lus aimed at boost­ing near-term.”
    Sur­prise! Your wages and ben­e­fits are gut­ted and work­ers have less pro­tec­tions, but don’t wor­ry because there’s a fis­cal stim­u­lus, like reduced labor tax­es (which pre­sum­ably aren’t need­ed as much any­more to fund the things like unem­ploy­ment ben­e­fits which are going to be cut):


    It rec­om­mend­ed dereg­u­la­tion of the retail and pro­fes­sion­al ser­vices sec­tors and net­work-based sec­tors such as air, rail and road trans­porta­tion, elec­tric­i­ty and gas dis­tri­b­u­tion, tele­coms and postal ser­vices, par­tic­u­lar­ly in the euro zone and Japan.

    But the Fund said it is impor­tant to pair sup­ply side reforms with fis­cal stim­u­lus mea­sures to boost near term demand and cush­ion neg­a­tive shocks. For exam­ple, reduc­tions in unem­ploy­ment ben­e­fits and work­er pro­tec­tion laws should be paired with reduc­tions in labor tax­es to help boost take-home pay and draw peo­ple back into the labor force.

    “There is a role for com­ple­ment­ing struc­tur­al reform with macro­eco­nom­ic pol­i­cy sup­port. That includes fis­cal stim­u­lus wher­ev­er space is avail­able,” said IMF researcher Romain Duval, a lead author of the report.

    “There is a role for com­ple­ment­ing struc­tur­al reform with macro­eco­nom­ic pol­i­cy sup­port. That includes fis­cal stim­u­lus wher­ev­er space is avail­able.”
    It sure would be nice if the IMF pro­vid­ed a list of coun­tries it deems to have ‘avail­able fis­cal space’. After all, part of the whole premise behind the IMF’s pre­vi­ous calls for aus­ter­i­ty was that nations just HAVE to slash spend­ing in the face of a reces­sion because...[insert stu­pid rea­son here]. But it’s hard to see what the dif­fer­ence is between that pre­vi­ous stance and what the IMF is cur­rent­ly propos­ing if coun­tries can only engage in fis­cal stim­u­lus if they already have low debt and deficits. Isn’t this basi­cal­ly the same aus­ter­i­ty ide­ol­o­gy repack­aged in non-aus­ter­ian lan­guage? Well, not quite, since you have Berlin recent­ly argu­ing that G20 nations should employ no fis­cal stim­u­lus under any cir­cum­stances, but it’s close.

    So while the IMF is offer­ing the same stale sup­ply-side garbage that’s been dis­man­tling soci­eties for decades now, it could be worse sup­ply-side garbage. Bare­ly. It’s the kind of update from a major inter­na­tion­al insti­tu­tion that rais­es the ques­tion of what kinds of struc­tur­al reforms are required for the world to final­ly flee the cult of sup­ply-side struc­tur­al reforms. What could those reforms be that tru­ly unleash a soci­ety’s poten­tial? Hmmm...

    Posted by Pterrafractyl | April 6, 2016, 12:58 pm
  50. Paul Krug­man has a take on the big Brex­it vote that makes a point that’s going to be real­ly impor­tant for pro­gres­sives to keep in mind: whether or not poi­so­nous xeno­pho­bia real­ly was the pri­ma­ry fac­tor dri­ving sup­port for a Brex­it vote, there real­ly are major flaws with the struc­ture of the EU and espe­cial­ly the euro­zone that basi­cal­ly turned the EU into a aus­ter­i­ty/­so­cial-cat­a­stophe machine. So if the Brex­it turns out to be a dis­as­ter for the UK and Europe, it’s a dis­as­ter with­in the con­text of a much larg­er, longer-term dis­as­ter that the Euro­pean Project has become:

    The New York Times
    The Con­science of a Lib­er­al

    Brex­it: The Morn­ing After

    June 24, 2016 10:21 am
    Paul Krug­man

    Well, that was pret­ty awe­some – and I mean that in the worst way. A num­ber of peo­ple deserve vast con­dem­na­tion here, from David Cameron, who may go down in his­to­ry as the man who risked wreck­ing Europe and his own nation for the sake of a momen­tary polit­i­cal advan­tage, to the seri­ous­ly evil edi­tors of Britain’s tabloids, who fed the pub­lic a steady diet of lies.

    That said, I’m find­ing myself less hor­ri­fied by Brex­it than one might have expect­ed – in fact, less than I myself expect­ed. The eco­nom­ic con­se­quences will be bad, but not, I’d argue, as bad as many are claim­ing. The polit­i­cal con­se­quences might be much more dire; but many of the bad things I fear would prob­a­bly have hap­pened even if Remain had won.

    Start with the eco­nom­ics.

    Yes, Brex­it will make Britain poor­er. It’s hard to put a num­ber on the trade effects of leav­ing the EU, but it will be sub­stan­tial. True, nor­mal WTO tar­iffs (the tar­iffs mem­bers of the World Trade Orga­ni­za­tion, like Britain, the US, and the EU levy on each oth­ers’ exports) are low and oth­er tra­di­tion­al restraints on trade rel­a­tive­ly mild. But every­thing we’ve seen in both Europe and North Amer­i­ca sug­gests that the assur­ance of mar­ket access has a big effect in encour­ag­ing long-term invest­ments aimed at sell­ing across bor­ders; revok­ing that assur­ance will, over time, erode trade even if there isn’t any kind of trade war. And Britain will become less pro­duc­tive as a result.

    But right now all the talk is about finan­cial reper­cus­sions – plung­ing mar­kets, reces­sion in Britain and maybe around the world, and so on. I still don’t see it.

    It’s true that the pound has fall­en by a lot com­pared with nor­mal dai­ly fluc­tu­a­tions. But for those of us who cut our teeth on emerg­ing-mar­ket crises, the fall isn’t that big – in fact, it’s not that big com­pared with British his­tor­i­cal episodes. The pound fell by a third dur­ing the 70s cri­sis; it fell by a quar­ter dur­ing Britain’s exit from the Exchange Rate Mech­a­nism in 1992; it’s down about 8 per­cent as I write this.


    Fur­ther­more, Britain is a nation that bor­rows in its own cur­ren­cy, not sub­ject to a clas­sic bal­ance-sheet cri­sis due to cur­ren­cy deval­u­a­tion – that is, it’s not like Argenti­na, where the fall in the peso wreaked hav­oc with firms and con­sumers who had bor­rowed in dol­lars. If you were wor­ried that fears about Brex­it would cause cap­i­tal flight and dri­ve up inter­est rates, well, no sign of that – if any­thing the oppo­site. Here, again from Bloomberg, is the inter­est rate on British 10-year bonds over the past five years:
    [see graph­ic]

    Now, it’s true that world stock mar­kets are down; so are inter­est rates around the world, pre­sum­ably reflect­ing fears of eco­nom­ic weak­ness that will force cen­tral banks to keep mon­e­tary pol­i­cy very loose. Why these fears?

    One answer is that uncer­tain­ty might depress invest­ment. We don’t know how the process of Brex­it plays out, and I could see CEOs choos­ing to delay spend­ing until mat­ter clar­i­fy.

    A big­ger issue might be fears of very bad polit­i­cal con­se­quences, both in Europe and with­in the UK. Which brings me to the pol­i­tics.

    It seems clear that the Euro­pean project – the whole effort to pro­mote peace and grow­ing polit­i­cal union through eco­nom­ic inte­gra­tion – is in deep, deep trou­ble. Brex­it is prob­a­bly just the begin­ning, as populist/separatist/xenophobic move­ments gain influ­ence across the con­ti­nent. Add to this the under­ly­ing weak­ness of the Euro­pean econ­o­my, which is a prime can­di­date for “sec­u­lar stag­na­tion” – per­sis­tent low-grade depres­sion dri­ven by things like demo­graph­ic decline that deters invest­ment. Lots of peo­ple are now very pes­simistic about Europe’s future, and I share their wor­ries.

    But those wor­ries wouldn’t have gone away even if Remain had won. The big mis­takes were the adop­tion of the euro with­out care­ful thought about how a sin­gle cur­ren­cy would work with­out a uni­fied gov­ern­ment; the dis­as­trous fram­ing of the euro cri­sis as a moral­i­ty play brought on by irre­spon­si­ble south­ern­ers; the estab­lish­ment of free labor mobil­i­ty among cul­tur­al­ly diverse coun­tries with very dif­fer­ent income lev­els, with­out care­ful thought about how that would work. Brex­it is main­ly a symp­tom of those prob­lems, and the loss of offi­cial cred­i­bil­i­ty that came with them. (That cred­i­bil­i­ty loss is why the euro dis­as­ter played a role in Brex­it even though Britain itself had the good sense to stay out.)

    At the Euro­pean lev­el, in oth­er words, I would argue that Brex­it just brings to a head an abscess that would have burst fair­ly soon in any case.

    Where I think there has been real addi­tion­al dam­age done, dam­age that wouldn’t have hap­pened but for Cameron’s pol­i­cy malfea­sance, is with­in the UK itself. I am of course not an expert here, but it looks all too like­ly that the vote will both empow­er the worst ele­ments in British polit­i­cal life and lead to the breakup of the UK itself. Prime Min­is­ter Boris looks a lot more like­ly than Pres­i­dent Don­ald; but he may find him­self Prime Min­is­ter of Eng­land – full stop.

    So calm down about the short-run macro­eco­nom­ics; grieve for Europe, but you should have been doing that already; wor­ry about Britain.

    “But those wor­ries wouldn’t have gone away even if Remain had won. The big mis­takes were the adop­tion of the euro with­out care­ful thought about how a sin­gle cur­ren­cy would work with­out a uni­fied gov­ern­ment; the dis­as­trous fram­ing of the euro cri­sis as a moral­i­ty play brought on by irre­spon­si­ble south­ern­ers; the estab­lish­ment of free labor mobil­i­ty among cul­tur­al­ly diverse coun­tries with very dif­fer­ent income lev­els, with­out care­ful thought about how that would work. Brex­it is main­ly a symp­tom of those prob­lems, and the loss of offi­cial cred­i­bil­i­ty that came with them. (That cred­i­bil­i­ty loss is why the euro dis­as­ter played a role in Brex­it even though Britain itself had the good sense to stay out.)”

    Just imag­ine how much xeno­pho­bia and immi­grant bash­ing could have been avoid­ed if the UK and Europe made the pro­tec­tion of stan­dards of liv­ing for the peo­ple who would obvi­ous­ly be dis­placed from inter­nal immi­gra­tion one of the core uni­fy­ing val­ues of the Euro­pean Project.

    It’s also worth not­ing that, while the aus­ter­i­ty vol­un­tar­i­ly imposed on the UK by the Cameron gov­ern­ment (the UK nev­er signed the Fis­cal Com­pact treaty, so it can’t blame the EU for its aus­ter­i­ty) inevitably exac­er­bat­ed sup­port for the Brex­it, the aus­ter­i­ty imposed on the rest of the EU, and espe­cial­ly in the euro­zone, almost cer­tain­ly increased the vol­ume of EU immi­gra­tion since the start of the cri­sis. For instance, as this arti­cle from 2010 reminds us, one of the polit­i­cal con­cerns at the time was that the Cameron gov­ern­ment would­n’t be able to stick to its promis­es to cut net immi­gra­tion from “hun­dreds of thou­sands” per year to “tens of thou­sands”. Why? EU aus­ter­i­ty:

    The Inde­pen­dent

    Euro­zone cri­sis ‘will bring influx of migrants’

    By Nigel Mor­ris, Deputy Polit­i­cal Edi­tor
    Wednes­day 29 Decem­ber 2010

    David Cameron faces a major set­back next year in his dri­ve to slash immi­gra­tion lev­els as the eco­nom­ic cri­sis in the euro­zone prompts more Euro­pean work­ers to seek jobs in Britain, a report warns today.

    The Prime Min­is­ter has repeat­ed­ly promised to cut net immi­gra­tion from “hun­dreds of thou­sands” per year to “tens of thou­sands”. But an analy­sis by the Insti­tute for Pub­lic Pol­i­cy Research (IPPR) think-tank con­cludes that next year it is unlike­ly to fall much below the 200,000 annu­al aver­age expe­ri­enced dur­ing much of the last decade.

    The fig­ure is set to remain high despite ini­tia­tives by the Coali­tion Gov­ern­ment to reduce immi­gra­tion lev­els. The IPPR warns that plans will be thrown off course by the eco­nom­ic woes of sev­er­al euro­zone coun­tries, espe­cial­ly if the UK econ­o­my con­tin­ues to per­form more strong­ly than oth­ers across the Chan­nel.

    “The fig­ure is set to remain high despite ini­tia­tives by the Coali­tion Gov­ern­ment to reduce immi­gra­tion lev­els. The IPPR warns that plans will be thrown off course by the eco­nom­ic woes of sev­er­al euro­zone coun­tries, espe­cial­ly if the UK econ­o­my con­tin­ues to per­form more strong­ly than oth­ers across the Chan­nel.

    That was the pre­dic­tion in 2010, before the world real­ized just how insane the gov­er­nance in the EU would end up being and just how far Berlin and the EU right-wing would go in demand­ing an ‘aus­ter­i­ty first, aus­ter­i­ty at all cost’ mod­el on the entire con­ti­nent. And, sur­prise, sur­prise, the UK’s immi­gra­tion from the aus­ter­i­ty-strick­en EU coun­tries made up the bulk of EU immi­gra­tion for the past 5 years:

    Inter­na­tion­al Busi­ness Times UK

    Sharp rise in EU migra­tion to UK amid Euro­zone jobs cri­sis

    By Romil Patel
    April 13, 2016 06:48 BST

    The jobs cri­sis grip­ping the Euro­zone is dri­ving thou­sands of migrants from south­ern Europe to the UK, accord­ing to the Migra­tion Obser­va­to­ry. The Oxford Uni­ver­si­ty-based think tank said that while there is no sin­gle “pull” fac­tor that attracts EU migrants to the UK, “a com­bi­na­tion of eco­nom­ic and social fac­tors” does appear to have made the coun­try an attrac­tive des­ti­na­tion.

    EU nation­als resid­ing in the UK now stands at 3.3m – an increase of almost 700,000 in the past five years. South­ern Euro­pean nations Spain, Italy and Por­tu­gal were named along­side east­ern Euro­pean coun­ter­parts Poland, Roma­nia and Hun­gary as the six coun­tries respon­si­ble for 80% of the growth in Britain’s EU-born pop­u­la­tion between 2011 and 2015.

    Since 2011, 696,000 EU cit­i­zens have moved to the UK. Of these, 553,000 hailed from those six Euro­pean coun­tries.

    Wage gaps between coun­tries has been iden­ti­fied as a key fac­tor behind the surge in migra­tion, with income in the UK con­sid­er­ably high­er than in many oth­er EU coun­tries. Dis­pos­able income in the UK was 1.8 times high­er than Poland and 4.2 times high­er than in Roma­nia.

    “There is no sin­gle fac­tor dri­ving high lev­els of EU migra­tion in recent years,” said Madeleine Sump­tion, direc­tor of the Migra­tion Obser­va­to­ry. “Some dri­vers are like­ly to remain in place for some years, such as the rel­a­tive­ly low wages in new EU mem­ber states, par­tic­u­lar­ly Roma­nia.

    “Oth­ers could poten­tial­ly dis­si­pate more quick­ly, like high unem­ploy­ment in Spain,” she added. “Migra­tion may respond more to fac­tors that gov­ern­ments don’t direct­ly con­trol, like demo­graph­ics and eco­nom­ic growth in oth­er EU coun­tries.”

    The organ­i­sa­tion said it is dif­fi­cult to pre­dict what effect the Nation­al Liv­ing Wage would have on migra­tion. While mov­ing to the UK from a low­er-income EU coun­try to secure a jump in salary is an attrac­tive propo­si­tion, the organ­i­sa­tion not­ed that high­er wages could force employ­ers to rely less on low-wage work­ers.

    Migra­tion is a cen­tral theme in the EU ref­er­en­dum debate ahead of the cru­cial 23 June vote. While the prime min­is­ter pledged to reduce net migra­tion to the tens of thou­sands, the fig­ure cur­rent­ly stands at 323,000.

    “Since 2011, 696,000 EU cit­i­zens have moved to the UK. Of these, 553,000 hailed from those six Euro­pean coun­tries.

    Yep. Giv­en the UK’s rel­a­tive wealth com­pared to the rest of the EU it was a guar­an­teed immi­gra­tion des­ti­na­tion. But thanks to EU-wide aus­ter­i­ty, the UK, which kept its cur­ren­cy and did­n’t expe­ri­ence the euro­zone night­mares, became an even more tempt­ing des­ti­na­tion from the euro­zone’s new gen­er­a­tion of eco­nom­ic refugees and there was no indi­ca­tion of what would change that dynam­ic.

    It’s some­thing worth keep­ing in mind when pon­der­ing the like­li­hood that the Brex­it might inspire oth­er nations to fol­low the same path. Because with aus­ter­i­ty a con­sti­tu­tion­al­ly enshrined law of the land across all the EU (the Czech Repub­lic is now the only remain­ing EU nation not to rat­i­fy the Fis­cal Com­pact), the euro­zone’s eco­nom­ic refugees have one less wealthy EU nation to flee to but they’re still going to have to flee. So where are the future euro­zone aus­ter­i­ty refugees going to go? Pre­sum­ably the remain­ing wealthy EU nations like Ger­many and France, which is prob­a­bly just going to result in increas­ing the same atti­tudes in those nations that led to the Brex­it. In oth­er words, the EU did­n’t just lose one of it’s wealth­i­est mem­bers. It lost one of its socioe­co­nom­ic safe­ty-valves while the grand exper­i­ment in con­ti­nen­tal Ordolib­er­al­ism con­tin­ues.

    What, if any, pos­i­tive changes the Brex­it inspires the EU to imple­ment remains to be seen, but note the part in the above study about wage gaps and the pos­si­ble util­i­ty of a Nation­al Liv­ing Wage in stem­ming large vol­umes of migra­tion:


    Wage gaps between coun­tries has been iden­ti­fied as a key fac­tor behind the surge in migra­tion, with income in the UK con­sid­er­ably high­er than in many oth­er EU coun­tries. Dis­pos­able income in the UK was 1.8 times high­er than Poland and 4.2 times high­er than in Roma­nia.

    “There is no sin­gle fac­tor dri­ving high lev­els of EU migra­tion in recent years,” said Madeleine Sump­tion, direc­tor of the Migra­tion Obser­va­to­ry. “Some dri­vers are like­ly to remain in place for some years, such as the rel­a­tive­ly low wages in new EU mem­ber states, par­tic­u­lar­ly Roma­nia.


    The organ­i­sa­tion said it is dif­fi­cult to pre­dict what effect the Nation­al Liv­ing Wage would have on migra­tion. While mov­ing to the UK from a low­er-income EU coun­try to secure a jump in salary is an attrac­tive propo­si­tion, the organ­i­sa­tion not­ed that high­er wages could force employ­ers to rely less on low-wage work­ers.


    “The organ­i­sa­tion said it is dif­fi­cult to pre­dict what effect the Nation­al Liv­ing Wage would have on migra­tion. While mov­ing to the UK from a low­er-income EU coun­try to secure a jump in salary is an attrac­tive propo­si­tion, the organ­i­sa­tion not­ed that high­er wages could force employ­ers to rely less on low-wage work­ers.

    Well, it looks like there’s a pos­si­ble solu­tion to the EU’s immi­gra­tion freak­out: raise work­ers wages to a liv­ing wage. That sure seems like a solu­tion wor­thy of inves­ti­ga­tion. But since that could end up actu­al­ly increas­ing the wage gaps if only the wealth­i­est nations insti­tut­ed a Nation­al Liv­ing Wage, why not do the thing the EU, and espe­cial­ly the euro­zone, should have been doing all along if Europe want Europe to actu­al­ly have a “we’re all in this togeth­er” iden­ti­ty: fis­cal trans­fers. Just have the rich nations like Ger­many and the UK sys­tem­at­i­cal­ly give mon­ey to the poor­er nations so they can afford the kinds of invest­ments and life-enhanc­ing pub­lic ser­vices. If you have hope for a life that does­n’t suck in your home coun­try, you’re a lot less like­ly to move.

    So let’s hope the Brex­it can at least prompt a rethink of the not just the EU’s aus­ter­i­ty mad­ness but also the wealth­i­er nations’ resis­tance to the fis­cal trans­fers to their poor­er neigh­bors that should have been set up already if the EU ever wants to become a func­tion­al “Unit­ed States of Europe”. Is that pos­si­ble after a shock this big? Prob­a­bly not, but we’ll see.

    Posted by Pterrafractyl | June 24, 2016, 2:54 pm

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