David Glasner gives an explanation in EconomistSpeak of how neo-classical economics displaced reality-based Keynesian economics in many institutions and in the most prevalent public narratives about economics. From Explaining the Hegemony of New Classical EconomicsUneasy Money 09/30/2014:
These early attempts at providing microfoundations were largely exercises in applied price theory, explaining why self-interested behavior by rational workers and employers lacking perfect information about all potential jobs and all potential workers would not result in immediate price adjustments that would enable all workers to find employment at a uniform market-clearing wage. Although these largely search-theoretic models led to a more sophisticated and nuanced understanding of labor-market dynamics than economists had previously had, the models ultimately did not provide a fully satisfactory account of cyclical unemployment. But the goal of microfoundations was to explain a certain set of phenomena in the labor market that had not been seriously investigated, in the hope that price and wage stickiness could be analyzed as an economic phenomenon rather than being arbitrarily introduced into models as an ad hoc, albeit seemingly plausible, assumption.
But instead of pursuing microfoundations as an explanatory strategy, the New Classicals chose to impose it as a methodological prerequisite. A macroeconomic model was inadmissible unless it could be explicitly and formally derived from the optimizing choices of fully rational agents. Instead of trying to enrich and potentially transform the Keynesian model with a deeper analysis and understanding of the incentives and constraints under which workers and employers make decisions, the New Classicals used microfoundations as a methodological tool by which to delegitimize Keynesian models, those models being insufficiently or improperly microfounded. Instead of using microfoundations as a method by which to make macroeconomic models conform more closely to the imperfect and limited informational resources available to actual employers deciding to hire or fire employees, and actual workers deciding to accept or reject employment opportunities, the New Classicals chose to use microfoundations as a methodological justification for the extreme unrealism of the rational-expectations assumption, portraying it as nothing more than the consistent application of the rationality postulate underlying standard neoclassical price theory. [my emphasis]
A brief unpacking: Microeconomics is about transactions at the business level; macroeconomics is about the functioning of economies on the national and international levels.
The famous supply-and-demand charts of microeconomics, featuring things like "marginal pricing," are based on several abstract assumptions, including consumers make rational choices based on full information about the prices and products available in the market.
Now, this is valid up a point. If you're going to make a mathematical model of any process, you have to have some limiting assumptions. Otherwise, you'd have to recreate all of the science of astrophysics to model even the simplest process.
The obvious problem with a model that assumes a world of rational customers, with perfect competition, and all actors have full and perfect knowledge of the markets is that it's plainly not the real world. In such world, the entire fields of marketing and advertising wouldn't exist, to mention just one problem.
But expanding these "microfoundations" to macroeconomics allowed conservative economists to demonstrate with impressive mathematical edifices to show, for instance, that a company's stock valuation always represents its real economic value, that the stock market moves are directly connected to real economic activity, that arbitrage and rent-seeking basically can't exist, and that anything corporations actually do makes perfect economic sense. There are never irrational market panics, or corporate conspiracies against the public interest and - most importantly - economic crises like that of 2008 are impossible.
And if the impossible happens, well, the gubment must be to blame. And black people, of course. (Update: the latter refers in particular to the US Republican version of this ideology.)
Yes, a very large part of respectable economics is just that crude. It comes in various packaging. But its based on the same highly ideological construct. Robert Lucas won the Nobel Prize for Economics in 1995 for a variant called "rational expectations theory," (also known as the rational expectations hypothesis [REH]) which basically argued that no government policies can ever have any substantial effect on an economy's performance, except occasionally to muck things up. The basic concept was developed by John Nash, Jr., continued by John Muth and eventually elaborated into its most famous form by Lucas and Thomas Sargent, as related by Yanis Varoufakis, Joseph Halevi and Nicholas Theocarakis in their textbook Modern Political Economics: Making Sense of the Post-2008 World (2011). As they explain:
If the world behaves like this type of theory suggests, it is impossible for output, employment or any other variable that society cares about to be positively affected by means of government intervention. If agents always entertain the correct expectations plus some random noise), then aggregate output and employment is always going to be as high as it can. Inevitably, meddling governments can only undermine perfection!
Remarkably, the REH literature dominated at a time of historically high unemployment. How did it manage that? To be consistent with their model, they had to claim that if observed unemployment is, say, 8 per cent, then 8 per cent is the level of unemployment that it is 'natural' for the economy to have at that point - the 'natural' rate consistent with agents' rational, i.e. correct, expectations. Suppose, they added, government tried to suppress unemployment to below that 'natural' level by means of 'Keynesian' meddling. The ensuing increase in the quantity of money cannot, in this context, change what people expect (in terms of actual output, employment, etc.) since everyone harbours the correct expectations. Everyone will then know in advance, on the basis of their rational expectations, that the government's effort will leave output and employment unaffected. Immediately they will surmise that prices must rise (since there is now more money in the economy chasing after the same quantity of goods and the same amount of actual labour). [my emphasis in bold]
This is kind of thinking that Glasner accurately calls "extreme unrealism."
Rapid, unregulated growth is usually built on the back of a financial sector bubble; also known as irrational exuberance. Credit expands fast, increasingly risky bets are placed and a portion of this is channelled into productive investments in industry (the real economy, as you put it). Then the bubble bursts, liquidity disappears and the real economy entered a vicious cycle, of having to pay back unsustainable debts through austerity that causes investment to plummet, debt-to-income ratios to remain prohibitively high and, alas, growth to turn increasingly negative. In this sense, the answer to your question is bleak: No, there is no guarantee that industry will grow faster than the financial sector now. In fact, quite the opposite: Since governments and central banks are financing the banks, to refloat them, the financial sector is in the process to recovering, and growing again, while at the same time the real economy is continuing to shrink. Especially in the Periphery of the Eurozone where the impossibility of devaluation, coupled with the disproportionate burden of adjustment falling on the deficit countries, guarantees a depression. This is precisely what is meant by the trap of negative growth and high debt. It is a phenomenon that we first encountered in the 1930s, from which Europe seems to have learned almost nothing. [my emphasis]
It really is sobering to see the extent to which policymakers in both Europe and the US have ignored the practical lessons of the Great Depression in the current extended crisis.
This reminds me, "depression" doesn't have the same kind of precise technical definition that "recession" does. I generally use the term to describe the current situation in Europe and the US, in which recovery from the recession that began in 2007 is slow, interest rates in the US are are up against the zero bound, and growth is fragile enough that a negative shock in aggregate demand could easily push economies back into recession. Varoufakis in that statement uses it more specifically for the conditions eurozone "periphery" countries like Cyprus, Greece, Ireland, Italy, Portugal and Spain are facing.
Exactly which system he means isn't entirely clear in his blog post, Insane in Spain 04/15/2012. I'm guessing he means the euro system:
So, the euro crisis is risk on again. And this time it’s centered on Spain — which in a way is a good thing, because now the essential craziness of the orthodox German-inspired diagnosis of the crisis is on full display.
For this is really, really not about fiscal irresponsibility. ...
What happened to Spain was a housing bubble — fueled, to an important degree, by lending from German banks — that burst, taking the economy down with it. Now the country has 23.6 percent unemployment, 50.5 percent among the young.
And what is the EU prescription? More Angienomics: austerity, austerity, austerity - for the 99%, of course!
This is, not to mince words, just insane. Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies even deeper into depression. And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.
What is the alternative? Well, in the 1930s — an era that modern Europe is starting to replicate in ever more faithful detail — the essential condition for recovery was exit from the gold standard. The equivalent move now would be exit from the euro, and restoration of national currencies. You may say that this is inconceivable, and it would indeed be a hugely disruptive event both economically and politically. But continuing on the present course, imposing ever-harsher austerity on countries that are already suffering Depression-era unemployment, is what’s truly inconceivable.
And then, there's also the democracy thing, which also didn't fair as well as one might have hoped in Europe in the 1930s. Something our establishment press and Pod Pundits seem to have forgotten all but entirely. Not Krugman. But then he's considered "shrill" and, as he often notes, not one of the Very Serious People. He concludes his column:
So it's hard to avoid a sense of despair. Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy — and their society — off a cliff. And the whole world will pay the price.
Paul Krugman explains what economists call "downward nominal wage rigidity" in Screw Your Analysis to the Sticky Point 04/03/2012. It's also calls the stickiness of wages.
These observations have huge implications for policy. Let me stress two implications, in particular. This refers to the notion that even when unemployment rises, the wages of those working does not fall so quickly. Referencing a recent confirming study by the
San Francisco Federal Reserve, he makes two policy-related points:
1. The prevalence of zero-change wages constitutes overwhelming evidence that we're suffering from lack of demand, not lack of supply. It also undercuts one of the favorite arguments of those claiming that we really do have a supply-side problem, the persistence of (low) inflation and positive wage growth despite the low level of employment. The reason we have positive wage growth is that workers with a good bargaining position are still managing to eke out increases, while those without aren't facing wage cuts. ...
2. The stickiness of wages even in the United States — which has one of the most "flexible", aka brutal, labor markets in the advanced world, makes it clear just how huge the costs of the eurozone strategy of "internal devaluation" — getting wages down in peripheral economies, until competitiveness is regained — really is. By asking that Ireland, Spain, Portugal achieve double-digit falls in nominal wages, the Germans and the ECB are actually demanding something that basically never happens. [my emphasis]
Cartoonist Daniel Paz addresses the EU crisis this way in Página 12 this way:
International Monetary Fund Guy at Desk:If Europe falls, the United States will suffer the consequences.
Guy Standing:What? Are we going to apply our prescriptions to the United States?
The IMF is notorious for demanding that countries pursue privatization, austerity and generally Hebert Hoover economics. Also known (by me) as Angienomics, the kind of policies that German Chancellor Angela Merkel is imposing on the eurozone members. Britain isn't part of the eurozone, but Prime Minister David Cameron is apply Angienomics there, too.
I haven't posted so much lately about the euro and the depression and related political crises in Europe. It's not because I'm any less worried. It's mainly because nothing essential has changed.
There has been some immediate relief, with the European Central Bank (ECB) providing additional cheap credit to banks to help them support the sovereign debt market among EU members. This is a short-term, backdoor way of doing what the ECB should be doing as part of its ongoing mission, acting as a buyer of last resort for EU member bonds.
But it's a short-term measure. And the destructive hold of Angienomics, the austerity policies demanded by German Chancellor Angela Merkel that focus on driving down workers' salaries, rolling back workers' rights and promoting financial and industrial deregulation, still has firm hold in the EU countries.
Anger has flared up in Spain once again, as thousands flooded the streets to protest against tough government cuts and the recently passed new labor laws. Spanish unions staged mass rallies in 60 cities.
Spain's jobless rate is the highest in the Eurozone, with almost half of its young population unemployed. ...
Paul Ames summarizes the current state of economics affairs there in The end of the euro crisis?Global Post 03/21/2012:
The immediate risk of catastrophe has receded, but the euro zone is far from finding its way out of the woods — and the big bad wolf of currency collapse is still lurking among the trees. ...
Portugal might still be forced into a Greek-style default. Greece could still backslide after its impending elections. The frontrunner in France’s presidential election wants to pick apart new rules on fiscal discipline.
Soaring oil prices may still drag the euro zone recession down to unsustainable levels, and southern Europe’s inability to generate growth could vanquish all efforts to stem those countries’ rising debt. ...
"Greece's debt situation is as unsustainable as ever; so is Portugal's; so is the European banking sector's and so is Spain's," the influential Financial Times commentator Wolfgang Munchau wrote Monday. "The worst, I fear, is yet to come."
Southern Europe's moribund growth is rooted in the long-term decline of competitiveness in countries like Italy, Spain and Portugal. Reforms to free up labor markets, cut business costs and slash red tape could pay off in the long term. But right now, austerity measures to bring budgets down are compounding the no-growth problem.
Greece's economy is set to contract for the fifth successive year with a 4.4 percent drop in 2012. Portugal's will drop by 3 percent, Italy's by 1.3 percent and Spain's by 1 percent.
Although Spain isn't yet receiving any kind of bailout, the EU (read: Merkel) is insisting on even more severe budget cuts in Spain than those imposed on Greece, Ireland and Portugal. (Claudi Pérez, Bruselas impone a España más recortes que a Grecia, Portugal e IrlandaEl País 26.03.2012) This is madness. A madness driven by Angie's total dedication to "ordoliberalism", which means the continual weakening of organized labor, drastic reductions in salaries and public services, massive privatization and deregulation, and general subservience of democratic government to the One Percent. As Pérez puts it in his report:
No hay en la historia económica contemporánea un ajuste semejante; en los últimos años, lo más parecido se ha producido en Grecia, Portugal e Irlanda. Con consecuencias devastadoras: Grecia está hundida en una depresión; Portugal va camino del segundo rescate, e Irlanda, que parecía estar en una situación algo mejor, puede tener problemas para devolver sus préstamos al BCE. España está ante un endiablado cruce de caminos: el abultado déficit obliga a poner en marcha los recortes, y a su vez eso agravará el precario estado de salud de la economía.
[There is no similar adjustment in contemporary economic history [to that currently demanded by the EU of Spain]; in recent years, the most similar have occurred in Greece, Portugal and Ireland. With devastating consequences: Greece was hounded into a depression; Portugal is one the road to a second rescue, and Ireland, which seemed to be in a somewhat better position, could have problem repaying its loans to the ECB. Spain is indubitably at a crossroads: the bulging deficit requires putting the cuts into effect, and at the same time this will aggravate the precarious state of the economy's health.]
When will the economic death march end? One small positive sign in Spain is that the conservative government elected in November experienced a setback in Sunday's local elections in Andalusia and Asturias, where the ruling Partido Popular (PP) of Prime Minister Mariano Rajoy fell far below its performance in the November elections. Carlos E. Cué reports (Desolación en el entorno de Rajoy ante el tropiezo en Andalucía y AsturiasEl País 26.03.2012) characterizes the results for the PP in Andalusia as "desolation", those in Asturias as "catastrophic". The PP tried to put the best face on it, but there seems to be a general assumption (and a plausible one) that Rajoy's extreme austerity measures taken in obedience to Angie's demands were responsible for the poor performance Sunday.
You can't say women are running the global economy these days. But German Chancellor Angela Merkel and IMF Managing Director Christine Lagarde are certainly two key players in international finance right now.
Lagarde comes down pretty hard on Merkel's "ordoliberal" austerity policies in her message Global Challenges in 2012 (prepared remarks) 01/23/2012.
One of my former professors always made a reference to "my good friend so-and-so" if he was about to rake that particular "good friend" across the coals. Legarde opens with a reference to "my good and highly-respected friends Chancellor Merkel and Minister Schäuble", so you know it's going to be bad.
This presentation takes off from IMF findings that will be released Tuesday which, in Lagarde's words, "will lower growth forecasts for most parts of the world. Even these lower forecasts assume a constructive policy path that is by no means assured."
And she gives a sobering reminder that not so long ago would have seemed commonplace, that a depression can really screw a lot of things up. But in our real existing depression, our ruling elites in Europe and the US seem to have forgotten that to an astonishing extent, to a 1914-level-of-dysfunction extent:
Yet before we indulge in yet another bout of collective pessimism, which is becoming something of a global sport, let me ask a simple question—why did 2011 turn out so badly?
I would argue that it was not because of any fresh wound to the global economy. No, it was driven instead by a lack of a collective determination to reach a cooperative solution. We saw many false starts and half measures in 2011 — in Europe, but also, for instance, in the United States with its debt ceiling debacle.
Put simply, policymakers let an old wound fester, and in doing so made the situation worse.
Looking at it from this perspective, 2012 must be a year of healing. But as Hippocrates put it long ago: "Healing is a matter of time, but it is sometimes also a matter of opportunity".
And today, it has to be an opportunity of our making. Otherwise, we could easily slide into a "1930s moment". A moment where trust and cooperation break down and countries turn inward. A moment, ultimately, leading to a downward spiral that could engulf the entire world.
Now when an IMF head starts talking 1930s gloom-and-doom, my first instinct is to think, oh, here comes a pitch for deregulation and letting banksters run wild.
But that's not what Legrande does here. She of the creation of the the European Financial Stability Facility (EFSF) and its upcoming successor the European Stability Mechanism (the ESM), "only two years ago, this was heresy". (Yes, by the time we all learn the initials EFSF, they'll change to ESM.) Her comments are made in a fusion of diplomat-speak and bankerese. But she is encouraging policies that are still considered heretical by Angie and and the German banking Establishment.
She argues for expansionary budget and spending policies in the better-off countries to stimulate the economies of the so-called periphery like Greece and Spain; boosting the resources of the EFSF and folding it more quickly than planned into the ESM; addressing the problem of bank undercapitalization head-on; and, the creation of eurobonds or their functional equivalent. She observes that Europe "is at the epicenter of the current crisis and thus key to the global outlook."
She also pushes the Obama Administration for more mortgage relief, though she tosses in a bit of the tired and misguided conventional wisdom about bringing down the public debt. But in the section on the US, she makes this statement that also seems to be a whack at Herbert Hoover economics in Europe:
This brings me to another worrisome tendency in many quarters—to view fiscal policy as a morality play between profligacy and responsibility. Political and market commentary is too often cast in these terms. Yet markets themselves have been schizophrenic about fiscal tightening, at times rewarding it with lower interest rates, and at other times recoiling at the implied growth slowdown and pushing up interest rates.
That's exactly the perspective of Angie's "ordoliberalism", and it has promoted a retrograde, nationalist outlook in Germany toward other European countries.
And I wish this were the actual perspective of the current American President:
One more point: We must not let financial regulation slip off the policy agenda. We simply cannot carry on with the financial sector that gave us the global financial crisis. We need a safer and more stable financial system, one that serves rather than destabilizes the real economy. While policymakers have made a lot of progress, they still need to complete the reform agenda and ensure that the new standards are implemented in a way that is consistent across countries. [my emphasis]
And these remarks at the end are clearly directed toward Bundeskanzlerin Merkel in particular:
But what we must all understand is that this is a defining moment. It is not about saving any one country or region. It is about saving the world from a downward economic spiral. It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand.
The longer we wait, the worse it will get. The only solution is to move forward together. Our collective economic future depends on it.
More than most, Germany understands the virtues of determined solidarity. Through its experiences with its Soziale Marktwirtschaft and unification, it showed what can be accomplished by bringing everybody together in service of the common good. The world needs a strong leadership role from Germany today, and it is Germany’s core interest to provide such a role.
Let me end with a quote from Goethe: "It is not enough to know, we must apply. It is not enough to will, we must do." (Es ist nicht genug, zu wissen, man muß auch anwenden; es ist nicht genug, zu wollen, man muß auch tun). This is the challenge of our year ahead.
If you argue that austerity works in cutting deficits over the longer-term but the short-term pain is worth it, that’s a different argument than the one Republicans are making – and one not likely to get one elected, which is why they’re not making it. But even so, the spectre of debt deflation looms heavily as much in the US as in Europe. After all, BofA is not trading in the single digits because of irrational despondence. The banking sector in the US is still very sick – and will remain so for the foreseeable future. [my emphasis]
Debt deflation means when the value of debt held by the lender as an asset decreases. A bond purchased at a market price of $1,000 may decrease in its market value due to changes in the borrower's credit status. A decrease in assets with liabilities unchanged means a decline in the equity ratios of the lender and therefore a higher vulnerability of the lender to unfavorable business and economic events.
The best time to tackle the real problems of the banks was in 2009 when the Obama Administration first came to office and had maximum credibility among the public in undertaking to fix the problems of the financial sector. Obama's timidity and deference to the financial lobby had seriously negative consequences.
A crackup in the eurozone - a very possible and likely event - could take down some big American banks and compound US economic problems.
President Obama was being cautious in 2009 in his approach to the financial crisis. After the recklessness of the Cheney-Bush Administration, caution didn't look all bad. But sometimes caution produces sub-optimal decisions and policies.
There is nothing — nothing — in what we see suggesting that this current depression is more than a problem of inadequate demand. This could be turned around in months with the right policies. Our problem isn’t, ultimately, economic; it’s political, brought on by an elite that would rather cling to its prejudices than turn the nation around.
McClatchy is providing some good coverage of the European/EU/eurozone financial crisis. Kevin hall In Global financial turmoil follows call for Greek debt referendum 11/02/2011 gives some informed speculation on how events could unfold, though cautioning:
"How do you want me to make long-term predictions?" quipped Nicolas Veron, a senior economist at the European research center Bruegel, when asked what may unfold over the next 48 hours.
He quotes this view of what Greek PASOK Prime Miniter Georgios Papandreou may have in mind in calling the referendum:
"It's an attempt to force the main opposition party into sharing responsibility for the agreement," said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, and a Danish national. "Everybody knows that a referendum is extremely risky. If it's a 'no,' the reality would be that the (bailout) program would end because Europeans would cut them off."
And Hall reports:
The legal mechanism for the exit of Greece from the EU is murky. No member ever has left the EU. Greece's departure would raise investor fears of who's next.
If the Greek government collapses or a new one takes over and refuses to honor the debt agreement, the EU would cut off all bailout funding to Greece, Kirkegaard said. The European Central Bank would stop taking Greek financial assets as collateral and Greece would become a financial-pariah nation, untouchable for lenders everywhere.
That in turn would push what's been a protracted downturn in Greece into a possible depression. EU leaders would spend their energy trying to keep Greece's problems from spreading and bringing down other economies. Banks would have to set aside even more money as protective buffers and a credit freeze probably would spread across Europe, as it did during the U.S. financial crisis in 2008.
The European Central Bank, Kirkegaard said, probably would emulate the U.S. Federal Reserve and aggressively purchase bonds from member nations at rates more favorable than market participants would demand. Rating agencies such as Moody's Investors Service and Standard & Poor's could downgrade the credit ratings of Italy, Spain and France, raising borrowing costs for them all and making it hard for these nations to pull out of a downward economic spiral.
Although, if a Greek pullout from the eurozone could prompt the ECB to become a buyer of last resort for eurozone countries' bonds, wouldn't it make much more sense for the ECB to do that now, before a Greek pullout sets off an unwholesome chain of events?
Greece faces a tough choice, obviously. But going the route Argentina went, defaulting on excessive debt and saving their economy and democracy from the madness of externally imposed, self-destructive austerity policies, certainly looks to be by far the more promising choice.
Sven Böll describes the incredible violation of Greece's democracy and national independence that the European austerity regime represents in a column praising the idea of a Greek referendum, Volksabstimmung über Euro: Bravo, Herr Papandreou!Spiegel Online 01.11.2011:
Sie hatten schon länger keine echte Gelegenheit mehr dazu. Seit anderthalb Jahren steht das einst stolze Land unter fremder Verwaltung, es ist de facto kein souveräner Staat mehr. Wichtigste Aufgabe der Regierung ist es, die Sparprogramme und Strukturreformen durchs Parlament zu bringen und umzusetzen. Diktiert werden sie von der stets strengen Troika aus EU-Kommission, Europäischer Zentralbank (EZB) und Internationalem Währungsfonds (IWF). Sonst gibt es kein neues Geld, und das Land wäre von jetzt auf gleich bankrott.
Nicht mehr Herr über seine Finanzen zu sein, um Geld betteln und dafür fast alles tun zu müssen, das ist für mittellose Staaten genauso würdelos wie für arme Menschen. Es kränkt die Seele, macht wütend und lässt einen verzweifeln. Wenn man weiß, dass die eigene Lage auch noch weitgehend selbstverschuldet ist, macht es das nicht besser, sondern nur noch schlimmer.
[They [the Greek people] haven't had a real opportunity to do that for a long time. Since a year and a half ago, it has no longer been a sovereign state. The most important job of the government is [now] to get a savings program and structural reforms through Parliament and implement them. That duty is dictated by the ever-severe Troika made up of the European Council, the European Central Bank (ECB) and the International Monetary Fund (IMF). Otherwise there will be no new money [for Greece], and the country would be bankrupt starting at that very moment.
To be no longer master of its finances, to beg for money and to have to do practically everything for it, that is just as degrading for a state without resources as it is for poor individuals. It sickens the soul, makes one furious and drives one to despair. And it doesn't make it better if one knows that his own situation is also to a large extent his own fault; rather it makes it much worse.]
President Obama will be focusing on the European debt crisis at the G-20 summit in France on Thursday and Friday. He will not exactly be carrying the banner for Occupy Wall Street. Lesley Clark reports for McClatchy,
G-20 leaders arrive in Cannes aiming to quell global economic turmoil 11/02/2011:
The summit’s host, French President Sarkozy has expressed support for the financial transaction tax [also known as a Tobin tax], as has Rowan Williams, the Archbishop of Canterbury, who in a column in Wednesday's Financial Times called on the UK government to embrace such a tax. The White House response to such a proposal has been muted.
Under Secretary of Treasury for International Affairs Lael Brainard told reporters at the White House Monday that the administration was "very much in sync with Europe on their goal of ensuring both that large financial institutions bear their fair share of the burden, but also that they're discouraged from taking the kind of risky behavior that led to the crisis."
But she said the White House has proposed a "financial crisis responsibility fee" that would be paid by the largest financial institutions, not retail investors.
A Tobin tax would be one helpful measure in discouraging some kinds of speculation and would also reduce some of the pressure for corporations to jazz up every quarter's earnings. But the Obama Administration obviously isn't enthusiastic about it. And that's only one piece of a what realistic financial regulation would be.
This is a report from the 11/01/2011 PBS Newshour on the collapse of MF Global, its relation to European sovereign debt and how 2008-style financial meltdowns are still not only possible but, in the case of MF Global, are still happening. MF Global's Risky Bets on Europe Backfire and Raise Big Questions:
Jared Bernstein explains in Two Lessons from MF GlobalOn the Economy 11/02/2011, MF Global's high-leverage bet on eurozone bonds was based on the assumption that the European leadership would stabilize the situation:
... there’s interesting moral hazard in the MF case. The firm, and its benighted chief, former Gov Corzine, appears to have been betting on a bailout. And it probably wasn’t a crazy bet, except for the timing, which was what sunk the firm. (I know it’s 20-20 hindsight, but betting on the alacrity of the European’s timing in their debt crisis is really a very risky bet.)
The firm surmised that the banks exposed to troubled sovereign debt would get bailed out, and thus leveraged up to buy a lot of that debt at a steep discount. Had the bailout come sooner, MF and their investors would have made a lot of money—at the expense of European taxpayers. A classic case of socializing losses and privatizing gains.
Spanish Prime Minister José Luis Rodríguez Zapatero (Socialist Party; SPOE) just gave a speech on economics that I can't decide whether it's sad or just pathetic.
For anyone who might be under the impression that the SPOE is partisan of the working class against the wealthy, this speech should help disabuse them of that notion. Zapatero expressed his approval of the latest stopgap measures of the EU to deal with the debt crisis. He says the key to moving the Spanish economy forward is to knuckle under to the demands of the financial sector as dictated by the EU and the European Central Bank (ECB) for more austerity economics. In order to induce the Confidence Fairy to come to their rescus.
Has everyone in the world forgotten that the phrases "con job", "con man", etc. comes from the word "confidence"? A "confidence man" is someone who defrauds his victims by winning their confidence in him and his false claims for whatever his scam is. Herman Melville did a wonderful novel called The Confidence-Man about one of that profession.
Zapatero the Socialist leader does express his regret over the high unemployment in his own country he was elected to lead, which now affects a fifth of the labor force; the Spanish unemployment rate is over 21%. Zapatero feels their pain. He even said, "Yo me siento el principal responsable" ("I feel like the main one responsible"). Not that he would go so far as to defy the European lords of finance on behalf of unemployed Spaniards. But he's sorry about their situation.
He also peeped about how it would be nice if Germany and some of the emerging economies of the world would do something to get the world economy growing faster. I suppose this was kind of a pitch to India and China to give the EU money to put into their rescue fund to prevent private banks from having to take losses from their bad bets on Greek debt.
Zapatero made his statements at the Cumbre Iberoamericana (Ibero-American Summit) in Paraguay.
Bob Kuttner writes about the huge piece of the world economic crisis on the other side of the Atlantic in Europe on the BrinkHuffington Post 10/23/2011:
Beginning in 2008, the collapse of Bear Stearns revealed the extent of pyramid schemes and interlocking risks that had come to characterize the global banking system. But Western leaders have stuck to the same pro-Wall-Street strategy: throw money at the problem, disguise the true extent of the vulnerability, provide flimsy reassurances to money markets, and don't require any fundamental changes in the business models of the world's banks to bring greater simplicity, transparency or insulation from contagion.
As a consequence, we face a repeat of 2008. Precisely the same kinds of off-balance sheet pyramids of debts and interlocking risks that caused Bear Stearns, then AIG, Lehman Brothers and Merrill Lynch to blow up are still in place.
And he explains the gerbel-wheel on which the EU's leaders decided to place themselves:
The Greek situation reveals the deeper potential for contagion, and the Ponzi scheme that now characterizes the banking system. Europe's banks hold some in $121 billion Greek government bonds that are trading at about 40 cents on the dollar. Europe's leaders, meeting in a summit conference over the weekend, admitted that Greece needs a reduction in its debt load of 50 to 60 percent, and not the 21 percent that was agreed to by the banks back in July.
So Europe's banks will need to take much a bigger hit, and it's not clear that they have the capital to sustain it. But Europe's governments and the European Central Bank are balking at providing this money directly. Instead, they hope to double down with a bailout fund, the $606 billion European Financial Stability Facility that, in effect, borrows against the credit of Europe's soundest economies.
Kuttner comes up with a nice turn of phrase here:
The banks' own shaky condition makes them risk-averse about holding not just Greek sovereign debt, but also the bonds of Portugal, Ireland, Italy and Spain.
The financial industry has coined the acronym PIGS to denote these nations, implying that the crisis is their own fault for living beyond their means. But the true pigs of the story are the banks.
It gets dizzying, but these bank policies are putting the world's economy at risk. As Kuttner explains, banks holding Greek and other now-dubious sovereign debt have used derivatives (interest-rate swaps, in this case) to insure themselves against losses. When they have to take those losses, the insurance provided by the derivatives will kick in and create new problems for the banks that provided the derivatives. Something very similar to that is what happened with AIG's collapse.
Kuttner is also good on this point:
Euro-skeptics are saying, "We told you so" -- the Euro was always a doomed idea. It's true that creating a monetary unit to be used by 17 separate nations with diverse economic strengths and budgetary conditions was a risky proposition. The Euro was a vessel designed for calm seas, not for once-in-a-century storms.
But to solely blame Europe and its institutions is to excuse the source of the storms. That is the political power of the banks to block fundamental reform.
Democratic government should be providing the offset to the power of the financial institutions. And in that sense, in the US and most of Europe, our governments are failing badly on their responsibilities to the people.
This is Part 2 of 4 of the of the Aljeera English documentary, Meltdown, about the global financial crisis, which I couldn't figure out how to embed earlier, entitled A global financial tsunami:
And this is the fourth and final part of Meltdown titled After the fall:
I earlier posted the embedded video of Part 1 of 4 of the Aljazeera English series on the 2007-8 financial crash, "Meltdown".
Two of the other three parts are available to view at the AJE website, all dated 09/21/2011, but apparently only the first and third are available for embedding as of this writing.
This 42-minute documentary from Al Jazeera English is the first of four parts on the 2007-8 financial crisis and collapse. This one is dated 09/21/2011.
I remember going to some non-discrimination-in-the-workplace course at a company where I used to work. The most memorable part of it was a documentary about an elementary-school teacher who did a controversial experiment with her class to teach them about the irrationality of racism. She divided the class in half with one half designated as "blue-eyes" and the other as "brown-eyes". She then for some period of days would give lectures about how the blue-eyes were good and the brown-eyes were inferior. Later the designations were flip-flopped and the previous "inferior" group got to be the "superior" group.
Now, I have my doubts about both the ethics of that exercise with school kids and also any value it may have as a psychological experiment. But it did show that the kids in that situation would adopt behaviors that in some way internalized their external designation as "blue-eyes" or "brown-eyes". The fact that the designation was arbitrary and counterfactual (all the kids were designated "blue-eyes" and "brown-eyes" at some stage of the experiment) highlighted the irrationality of it and how prejudices based on external designations can be completely misleading.
Today, Maureen Dowd devotes her entire New York Times column to - apparently seriously - talking about in what areas of life blue-eyed people are better and in which brown-eyed people are better: Blue Eyed Greed? 03/26/09. It's idiotic even by MoDo's current standards.
Her hook for this truly weird column was a comment made by Brazilian President Lula de Silva last Thursday in a press conference with Gordon Brown in Brasilia. Lula and other Latin American leaders have complained that the world financial crisis was caused by the United States and other major economies and that the developing world is being dragged down because of it, and so the developed world should contribute heavily to assisting the underdeveloped world in pulling out of the crisis. Aside from being pretty much true, it's an understandable position for the leaders of the developing world to take. And, reluctant as Americans might be to acknowledge it, bitching about Yankee and European imperialism is good politics in Latin America. Argentina still has an ongoing dispute with Britain dating back nearly two centuries over the Malvinas/Falklands Islands.
MoDo rendered Lula's statement this way, beginning with a gratuitous condom reference:
As international lunacy goes, it was hard to beat the pope saying that condoms spread AIDS.
But Brazil’s president, known simply as Lula, gave it his best shot.
At a press conference Thursday in Brasilia with Prime Minister Gordon Brown of Britain — who has a talent for getting himself into dicey spots — Lula started off coughing from some cheese bread he’d wolfed down. Then he suddenly turned accusatory.
“This crisis was caused by the irrational behavior of white people with blue eyes, who before the crisis appeared to know everything and now demonstrate that they know nothing,” charged the brown-eyed, bearded socialist president.
As the brown-eyed Brown grew a whiter shade of pale, Lula hammered the obvious point that the poor of the world were suffering in the global crash because of the misdeeds of the rich.
“I do not know any black or indigenous bankers,” said Lula.
MoDo shows scorn for what she quotes Lula as saying. But her column is devoted to promoting the idea that there really are meaningful differences between the blue-eyed and the brown-eyed!
Since MoDo is focused on the urgent issue of eye color, she mocks Lula's supposed hypocrisy as a brown-eye. (How did the kids in that experiment start processing information about eye color? Just like MoDo.) She doesn't bother to observe that Lula, like large numbers of his constituents and large numbers all over Latin America are white and of European descent. So it is probably pretty safe to assume that he wasn't saying something he thought would be understood at home as a slam at racial deficiencies of white people. Though most of the children in our American press core can probably process it only that way.
Brazilian President Lula de Silva: MoDo thinks he's loony
I wrote this post in kind of a stream-of-consciousness order. But below I located the Portuguese orginal. And MoDo's translation is hackwork, at best. I'm leaving the other references in though they make the post long because it's a reminder to me how tricky actually getting one of these stories right can be. Of course, if you're MoDo, you don't even have to try.
But populist Lula, who like his countryman Pele is known by a single name, warned talks at the gathering would be "spicy".
And he took the opportunity to lay into rich nations.
The president, white and bearded, said: "I am not acquainted with any black bankers. This is a crisis that was caused by people, white with blue eyes. Before the crisis they looked like they knew everything about economics.
"Now they have demonstrated they don't know anything about economics."
Lula said people who caused the slump - financiers who saw themselves as "gods of wisdom" - were not the ones paying the price.
He continued: "The part of humanity that is responsible should pay for the crisis." Mr Brown looked ill at ease as the president went on. Cabinet minister Douglas Alexander, who was in the audience, rolled his eyes.
MoDo, who in the Beltway Village is still bizarrely considered a "liberal", refers to the conservative tabloid New York Post and adopts their label of "Brazil nut" for Lula. The Post reported on this by focusing on what they and MoDo apparently thought was a delightful "gotcha" moment in stories like Gordon Brown's Rotten Month and What a Brazil Nut! 'Blame White Bankers' Blast a Lula Lulu, Madame MoDo finding the latter phrase delightful.
Does MoDo even go through the motions of checking on these quotes? I think the white bankers quote was a little crass and certainly not appropriate for American politicians. But Brazil has it's own racial history, as does Latin America, and, guess what, it's not identical to that of the United States! In fact, in the former Spanish colonies, the New World colonization was simultaneous with the beginning of the Spanish Inquisition and an obsession with "limpieza", which in social matters meant "pure blood", meaning white and not Arab or Jewish and certainly not black or New World natives. And those deeply-entrenched social stratifications based on race are still significant today. Only in recent years, for instance, did indigenous politicians first elected to the presidencies of Bolivia and Paraguay, for example. And Bolivia's Evo Morales has not been a Washington favorite, to put it mildly, under the Cheney-Bush administration.
I don't know much Portuguese (though it's similar enough to Spanish that I can make my way through a news article) so I have no idea about the nuances of political language in Brazil. I would guess that Latin American audiences would have understood the reference against that historical background of social stratification by race and resentment of the former colonial powers. The "liberal" MoDo and conservative papers like the Daily Mirror and the New York Post apparently could only procees it as a racialist comment pure and simple. I would like to think that a prestigious New York Times columnist would have at least checked with someone in their Latin American section or a translation service to double-check whether what came out in English as "white with blue eyes" might be a figure of speech or a literary reference with a particular meaning. But this is MoDo, who is known for pimping false quotes from Al Gore and John Kerry.
Jornal do Brasil did run this cartoon at their Web site:
I'm guessed that Lula was speaking in his native Portuguese, because the Guardian reported the same statement in somewhat different English wording ('Blue-eyed bankers' to blame for crash, Lula tells Brown by Nicholas Watt The Guardian 03/26/09. This later Guardian article, 'Blue-eyed bankers' prompt G20 divide by Gaby Hinsliff 03/29/09, actually discussed the more substantive issue of what Brazil's position means in potential policy decisions, a topic presumably much too boring (and much less comprehensible) to Lady MoDo than blue eyes and brown eyes:
The attack last week by Brazil's president, Luis da Silva, on "white blue-eyed bankers" revealed a new anger among some of the world's most populous countries at being dragged into a mess not of their making - and a determination to hold the west to account.
India's prime minister will use the summit to challenge what it says is creeping protectionism costing Asian jobs. China will exact more influence over the IMF in return for bailing it out. Chile's Michele Bachelet used a joint appearance with Brown to stress how, unlike Britain, her country saved vast revenues "during the good times" - which it is now having to spend.
Even George Soros, the currency speculator and major Africa donor, yesterday warned that the G20 must insulate developing countries "against a calamity that is not of their making".
Lula, que siempre dice lamentar que una crisis ajena a Brasil venga a interrumpir el ciclo de crecimiento del país, fue gráfico al describir la situación financiera mundial, que, en su opinión, ha sido originada por "gente blanca de ojos azules"; el mandatario brasileño se refería así a los especuladores internacionales del primer mundo. Interrogado por un periodista británico sobre si estaba adoptando una postura ideológica en el combate a la crisis, Lula ha respondido que se limitaba a dar fe de un hecho: "No conozco ningún banquero negro o indio... Lo que yo percibo es que, una vez más, una gran parte de los pobres del mundo son las primeras víctimas de la crisis".
Además, Lula ha criticado el actual sistema financiero internacional. "No es posible una sociedad en la que usted entra en una tienda del aeropuerto y es filmado y vigilado, y que sin embargo el sistema financiero no esté vigilado ni regulado", afirma.
Arias explains for his readers that Lula is referring by the white-people-with-blue-eyes comment to international speculators of the First World.
Here are some articles from Brazilian news sources:
Não podemos permitir que os pobres paguem por uma crise feita por ricos, sobretudo porque ela não foi gerada por nenhum negro, índio ou pobre. Essa crise foi feita por gente branca, de olhos azuis que antes da crise sabiam tudo e, agora, não sabem de nada.
If the Spanish cognates are a decent guide, my translation would be:
We cannot allow the poor to pay the cost of a crisis caused by the rich, above all because I don't know any black, Indian [indigenous] or poor bankers. This crisis was caused by white people with blue eyes, who before the crisis knew everything and, now, they know nothing.
However, this video from UAO Noticias shows what presumably was the actual statement, which doesn't quite match exactly with the text quote, which may have been from a prepared text.
"Resolver o problema da crise é resolver o problema da imigração. Porque nós também não temos o direito de permitir que sejam os pobres, que viajam o mundo a procura de uma oportunidade, de um emprego, de um salário, de uma renda, que sejam os primeiros a pagar a conta de uma crise feita pelos pelos ricos. Que não foi causada por nenhum negro, nenhum índio e por nenhum pobre. Uma crise causada, fomentada, por comportamentos irracionais de gente branca, de olhos azuis, que antes da crise pareciam que sabiam tudo e que agora demonstram não saber nada", afirmou Lula.
A declaração foi questionada por jornalistas ingleses. Ao responder, o presidente abordou a questão do preconceito contra imigrantes nos países ricos. "Não existe nenhum viés ideológico, existe a constatação de um fato", disse. "Como eu não conheço nenhum banqueiro negro e nenhum banqueiro índio, só posso dizer que não posso permitir que essa parte da humanidade pague por isso", acrescentou.
{Solving the problem of the crisis and resolving the problem of immigration. Because we also have no right to permit that the poor to be, who travel the world to secure an opportunity, a job, a salary, an income, to be the first to pay the price for a crisis caused by the rich. Above all, not by any black person, any indigenous person, or any poor person. A crisis caused, fomented, by irrational behavior by white people, with blue eyes, who before the crisis seemed to know everything and, now, have demonstrated that they know nothing. ...
[Responding to a question by an English journalist, he said it wasn't a matter of "prejudices against immigrants nor rich countries":] There is no ideological bias, it's an awareness of a fact. Just as I don't know any black banker or any indigenous banker, I can only say that it should not be allowed that this part of humanity pays for this.}
The English translation is mine, with a slight correction where the text version clearly differs from the video.
Compare my translation of the video and text statement just above to MoDo's quotation in English in the sequence it appears in her column:
This crisis was caused by the irrational behavior of white people with blue eyes, who before the crisis appeared to know everything and now demonstrate that they know nothing. ... I do not know any black or indigenous bankers.
Lula was clearly framing this as an issue of the poor countries being damaged by a crisis caused by the rich countries, a theme which Argentina's President Cristina Fernández has also been emphasizing for months. It's not a matter of the proverbial "being taken out of context". Even if someone thinks the statement might sound inappropriate in American or Brazilian politics, the original statement just doesn't come off like MoDo's translation. Her version makes it come off like a purely racial comment.
Lula's statement was about poor and rich countries, and more specifically about the fact that poor people didn't cause the economic crisis, with ethnic references (appropriate or not) amplifying it.
This Globo.com page has video of Lula responding to questions about the statement, also from O Globo; Lula seems to be spinning the original statement as a reference to the hardships suffered by emigrants to rich countries. That's not precisely what his original statement says. But maybe in Brazil the career track to become a star columnist doesn't give such a heavy preference to the brain-dead as in America. So he may have thought he needed to come up with a spin that even American pundits could almost grasp. And his original statement on the video did emphasize the problem of immigrants looking for work who are some of the primary victims of the current crisis.
And like the perfect courtier alarmed at the scruffy masses milling around the palance gates, MoDo immediately follows her quote above with this:
He also told CNN he would press this theme at the G-20 meeting in London this week. He says his past as a poor, hungry, unemployed lathe operator gives him special insight.
"I lived in houses that were flooded by water," he said, adding, "Sometimes, I had to fight over space with rats and cockroaches, and waste would come in when it flooded."
How dreadful for Madame MoDo to have to concern herself with what such a low-bred character might have to say! But she then proceeds to a more pleasant topic, i.e., completely airhead chatter about blue-eyed and brown-eyed people.
