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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 (TM).

    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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