Three things all serious people know are true
This post was written by Kevin O’Rourke
A holy trinity — or perhaps a troika? — of beliefs has guided policy since 2010. These are that austerity is expansionary; that the sky will fall in if ever the debt to GDP ratio exceeds 90%; and that the way to do austerity is to cut expenditure rather than raise taxes.
All of which is very convenient if what you really want to do is shrink the state.
We know how well the first two nostrums have performed when confronted with empirical evidence, so you might think that people would be just a wee bit cautious about stating the third as gospel truth. But no, here is Mario Draghi:
First, fiscal consolidation should be based on reductions in current expenditure rather than increases in taxes. Unfortunately, many of the fiscal consolidation measures were implemented in an emergency situation, with most governments choosing the simplest route, which was to raise taxes. And here we are talking about raising taxes in an area of the world where taxes are already very high, so it is no wonder that this had a contractionary effect.
Paul Krugman helpfully reminds us where this belief came from, and what happened next. The ECB is constantly telling us that it has a narrowly restricted mandate, with its primary concern being inflation. In that case, then surely the least that we are entitled to expect is that it keeps its views about the composition of fiscal adjustments to itself?
There seems to be a myth doing the rounds at the moment that the 2008 Blanket Bank Guarantee, which ran for 2 years from September 2008 until 2010, wasn’t put in place to simply stop both Anglo Irish Bank and Irish Nationwide from collapsing in order to protect, as far as possible, the considerable interests that a small group of Irish people had in those cauldrons of greed and corruption.
Rather, popular thinking now goes, the notorious guarantee was put in place because of pressure from the ECB who were eager to ensure that revenue from Irish taxes would be used to pay bondholders in the banks of Core EU countries in full.
Take this recent article published on the 27th of March last which has the headline: “Germany’s rethink on just where the blame lies for the Irish bank bailout”. The implication behind the headline is that the bailout was required because of the guarantee, but also suggests that the statement made by the German Finance Minister that the Irish guarantee was a solely Irish initiative is a ‘rethink’, that is, an attempt to change the narrative that the bailout, and the guarantee that made it inevitable, was dictated by interests of big German banks.
“It was the Irish government that imposed the farthest-reaching guarantee for its banking system at the start of the crisis – on its own initiative,” said German finance minister Wolfgang Schäuble.
The statement itself was prompted by comments made by Irish politicians while negotiating on bank debt. Such comments, of course, are tailored to an Irish audience who are increasingly convinced that the enormous and unsustainable burden of Irish bank debt which the residents of Ireland are being forced to finance is being imposed by the ECB and Germany in order to protect their own struggling banks. This particular framing of the story feeds into the tale told about Timothy Geithner’s phone call and the posthumous yarn about the letters Brian Lenihan received from Jean-Claude Triche.
These Irish politicians are entirely aware, however, that the decision to provide such a broad guarantee was made without the advanced knowledge of the ECB. It is a consequence of this decision which was only put in place to maintain access for Anglo Irish Bank and Irish Nationwide to the interbank market that the vast majority of bonds have been paid off in full.
We know this because on the 3rd of Oct 2008 the ECB published an opinion on the Irish bank guarantee. Here’s the relevant excerpt.
“As a further general comment, the ECB notes that the Irish authorities have opted for an individual response to the current financial situation and not sought to consult their EU partners. In view of the similarities of the causes and consequences of the current financial distress across EU Member States and the potential interdependencies of policy responses, it would have been advisable to properly consult other EU authorities on the envisaged legislative plans.
2.5 A further point relates to the risks to the Government’s budgetary position arising from any financial support to Irish credit institutions. While the ECB appreciates that any guarantees provided by the Minister under the draft law would be contingent in nature, given that the financial exposure of the Irish State under such guarantees is potentially very large, the Irish Government could be obliged to make significant payments in case these guarantees are called over the next two years. At a point in time when the Irish budgetary position is deteriorating and may risk exceeding the 3 % of GDP reference value for public deficits, as specified under Community law12, this is a cause for concern, even when the provision of financial support would, under the draft law, as far as possible ultimately have to be recouped from the credit institution or subsidiary in question.”
via Irish Left Review.
via Irish Left Review.
We’re going to need a bigger acronym.
In the beginning, it was just the “Greek debt crisis“. Then markets realized Portugal, Ireland, Italy, and Spain were in bad shape too, and the PIIGS (or GIIPS) were born. But now Cyprus and Slovenia have run into trouble as well, giving us the … SIC(K) PIGS? At this rate, we’re going to have to buy a vowel soon, assuming Estonia doesn’t end up needing a bailout.
The euro crisis is entering its fourth year, and, sorry world, this won’t be its last. Now, its long periods of boredom have gotten a bit longer, and its moments of sheer financial terror a bit less terrifying ever since the European Central Bank (ECB) promised to do “whatever it takes” to save the common currency. But, as Cyprus and Slovenia show, the battle for the euro isn’t over yet. Not even close.
Here’s the Cliff Notes version of the euro crisis. The euro zone doesn’t have the fiscal or banking unions it needs to make monetary union work, and it’s not close to changing that. In the meantime, the euro’s continuing flaws continue to suck countries into crisis. And their politics get radicalized. Most recently, Cyprus was forced to accept a bailout and bail-in, because its too-big-to-save banks made some horrendously bad bets on Greek bonds. Slovenia looks like it could next on the euro-bailout tour, because, as Dylan Matthews of the Washington Post points out, its too-big-to-save-ish banks made some horrendously bad bets on its own companies. Now, banks make bad bets all the time, but those bad bets can bankrupt you as a country if you don’t have your own central bank. Like euro countries.
Of course, this “diabolic loop” between weak banks and weak sovereigns isn’t the only problem in euroland. The common currency has plenty of other flaws. Here’s why the euro, as it’s currently constructed, is a doomsday device for mass bankruptcy. (How’s that for solidarity?).
1. Too Tight Money
The euro zone isn’t what economists call an “optimal currency area”. In other words, it was a bad idea. Its different members are different enough that they should have different monetary policies. But they don’t. They have the ECB setting a single policy for all 17 of them. That’s a particular problem for southern Europe now, because their wages are uncompetitively high relative to northern European ones, and the ECB isn’t helping them out.
There are two ways to fix this intra-euro competitiveness gap. Either northern European wages rise faster than normal while southern wages stay flat, or northern European wages grow normally while southern European wages fall. It’s the difference between a bit more inflation or not — in other words, between looser ECB policy or the status quo. Now, it might not sound like it really matters which option they choose, but it very much does. Falling wages make it harder to pay back debts that don’t fall, setting off a vicious circle into economic oblivion. The ECB apparently prefers pushing more and more countries into oblivion with too tight money than risk anything resembling more inflation.
2. Too Tight Budgets
Austerity has been a complete disaster. It’s actually increased debt burdens across southern Europe, because it’s reduced growth more than it’s reduced borrowing costs. And now northern Europe is getting in on the act. France (which is really somewhere in between “southern” and “northern”) just missed its deficit target, and is set to slash more; the Netherlands has put through contentious tax hikes and spending cuts, even as its economy has shrunk; and even Germany is contemplating new budget-saving measures. In other words, the euro has become an austerity suicide pact.
3. Too Little Trade
Excluding Germany, just over half of all euro trade is with each other. But with bad policy pushing southern Europe into depression and northern Europe towards recession, euro zone countries can’t afford to buy as much stuff from each other. That adds a degree of difficulty to recovery for southern European countries that need to export their way out of trouble. As you can see in the chart below from Eurostat, intra-euro zone trade has stagnated the past few years after rebounding from its post-crash depths. The euro zone’s weak links are dragging the rest down — but only because the rest refuse to pull the weak ones up.
4. Too Much Financial Interconnection
Other country’s problems can quickly become your own if your banks own their bonds. Especially if your banks are bigger than your economy. That’s the lesson Cyprus learned the very hard way after its banks loaded up on Greek debt in 2010, only to get wiped out a year later. The Financial Times has a great infographic (that you should play around with) on which country’s banks are exposed to which other country’s debt across the euro zone. As you can see below, any kind of Italian restructuring would be tremendously bad for French banks.
The euro is the gold standard minus the shiny rocks. Both force countries to give up their ability to fight recessions in return for fixed exchange rates and open capital flows. But giving up the ability to fight recessions just makes it easier for recessions to turn into depressions. And that puts all of the pressure on wages to adjust down when a shock hits — the most painful and destructive way of doing things.
But the gold standard had an even bigger design flaw than creating depressions. That was perpetuating depressions. Under the rules of the game, countries short on gold were supposed to raise interest rates, which would push down wages, and push up exports. More exports would mean more gold, and then lower interest rates. But there was an asymmetry. Countries needed gold to create money, but countries didn’t need to create money if they had gold. During the Great Depression, the U.S. and France sucked up most of the world’s gold, but didn’t turn it into money out of fear of nonexistent inflation. Countries that needed gold needed to push down wages even more to make their exports competitive — not that there were any booming markets for them to export to, due to the self-inflicted economics wounds of the U.S. and France. Instead, the depression just fed on itself.
The euro suffers from a similar asymmetry. Debtor-euro countries are to cut wages and deficits, but creditor-euro countries aren’t forced to increase wages and deficits. Perversely, the opposite. In other words, northern Europe isn’t doing enough to offset the demand destruction in southern Europe. And it’s sinking them all. Even worse, this slow-motion collapse is turning loans that would have otherwise been good into losses — losses that force bailouts and faster collapses. But, to be clear, this isn’t only a problem for the periphery. As the U.S. and France found out in the 1930s, it’s generally not a good idea to force your customers into bankruptcy. That just creates depression without end — until the gold (or euro) standard ends. It’s no coincidence that the countries that ditched the gold standard first recovered from the Great Depression first.
History doesn’t need to repeat, or even rhyme. Europe doesn’t have to keep crucifying itself on a cross of euros, the gold standard of the 21st-century. The euro’s northern bloc could decide to let the ECB do more. Or it could decide to start spending more. Or not. Eurocrats seem content to do just enough to keep everything from falling apart, and nothing more. It’s one part inflationphobia, and another part strategy. Indeed, it’s how they try to keep the pressure on the southern bloc to push through unpopular labor market reforms. But doing enough today eventually won’t be enough tomorrow if the southern bloc doesn’t have any hope of recovering within the euro. The politics will turn against the common currency long before that.
By that point, Europe won’t need an acronym anymore.
The protestors from Ballyhea and Charleville in Co Cork are meeting members of the European Parliament’s Economic and Monetary Affairs committee, including its chairwoman, Sharon Bowles from Britain’s Liberal Democrats.
The group said the ultimate goal of its travel was to seek assistance in securing a meeting with the European Central Bank, which it holds responsible for pushing Ireland into a sovereign bailout to save its banking sector.
Campaign founder Diarmuid O’Flynn told radioep.ie it was his ultimate goal to get a meeting at the Frankfurt-based bank so he could ask it to explain its actions.
Members have already travelled to Frankfurt to seek such meetings, but have met with little success.
“We’re hoping that first of all as a member of the parliament – but secondly as a member of the Economic Committee – that she [Bowles] has some influence with the ECB,” O’Flynn told radioep.ie’s Karen Coleman. “We’re hoping she can do something for us. I don’t know if she can.”
O’Flynn – a sports writer with the Irish Examiner by day – said ultimately it was his hope to speak and negotiate directly with the bank.
I would like to somebody in the eye in the ECB, and ask them to justify what they have done to the Irish people.
To justify what they have done: all the lies that they told us, all the bullying that went on, all the blackmailing that went on… that unless you accept this bank debt, we’re going to pull the plug on the other funding.
I would like to look someone [in the eye] in the ECB – not somebody at the bottom, somebody at the top – to justify what they have done to us.
The group is bringing a number of letters, directly addressed to Bowles, written by ordinary people in Ireland outlining how they have been affected by the crash and by the austerity that has followed the bailout.
On the group’s Facebook page, O’Flynn acknowledged that trying to unilaterally seek negotiations with the ECB was “a big ask”, but said:
“If you don’t ask, and our highly-paid government negotiators didn’t, then you have no chance.”
Two senior executives from the Ombudsman travelled to the ECB’s headquarters in Frankfurt in December to view the letter which the bank is refusing to allow the citizens of Ireland to see.
The decision to carry out an investigation follows a complaint against the ECB of “maladministration” by journalist Gavin Sheridan. The ECB has refused to release the letter dated November 19, 2010, for over a year on the basis that it claims it is not in the “public interest” for Irish citizens to see “candid communications” between the ECB and national authorities.
“Not in the Public Interest’ this is rich coming from an unelected EU official.In short it is a two fingers to democracy and your democratic rights
This letter is marked “secret”, and its publication has been blocked at the highest levels of the ECB.
The ECB’s justifications for not releasing the letter included the following paragraph:
The second letter, dated 19 November 2010, is a strictly confidential communication between the ECB President and the Irish Minister of Finance and concerns measures addressing the extraordinarily severe and difficult situation of the Irish financial sector and their repercussions on the integrity of the euro area monetary policy and the stability of the Irish financial sector.
The content of the letter was alluded to as follows:
The ECB must be in a position to convey pertinent and candid messages to European and national authorities in the manner judged to be the most effective to serve the public interest as regards the fulfilment of its mandate. If required and in the best interest of the public also effective informal and confidential communication must be possible and should not be undermined by the prospect of publicity. In this case, the confidential communication was aimed at discussing measures conducive to protecting the effectiveness and integrity of the ECB’s monetary policy and fostering an environment that ultimately contribute to restoring confidence among investors in the overall solvency and sustainability of the Irish financial sector and markets, which, in turn, is of overriding importance for the smooth conduct of monetary policy.
The Irish public deserve deserve better than this tardy treatment from both the EU and the Irish Government
For the past 35 years, the world’s largest financial institutions and most Western governments have worked to strip away all obstacles to the free flow of money from country to country,” and the results have been disastrous, the New Economics Foundation reports.
“Neoliberalism has come to dominate economic policy in the modern world,” the foundation says in a short film on the subject. “As the wisdom goes, removing restrictions on the flow of capital will ensure that investment naturally makes its way from rich countries to poorer ones. But this doesn’t seem to be happening.”
Economist columnist Philip Coggan says in the film that “We’ve had 40 years of money being freely available, of no real restrictions on exchange rates in the developed world to move. The result of all that has been a whole series of asset bubbles and a huge expansion of debt relative to GDP. It’s very hard to see how that’s sustainable.
“How to put the genie back in the bottle?” he asks. “One answer would be to have capital controls,” ways to monitor and regulate the flow of money in and out of economies. Critics in the business and especially at the top level of the global financial community say such regulation would reduce investment in countries that need it by inhibiting competition. (This same class of people tells us that competition is the most important factor in the health of an economy.)
But Peter Chowla, a coordinator of global finance watchdog Bretton Woods Project who also appears in the film, says that “[t]heories which predict that you might have some costs from regulating capital flows actually don’t bear any relation to reality as we experience it.”
Examples of the harmful effects of unregulated money flows are numerous. “A classic example perhaps was Thailand in the 1990s,” reports Coggan. “They had this huge bubble and boom. As money went into the economy, it all went into building new office blocks and other speculative property investments. And then all the money went out again. So it was as if you had this massive storm which went all through the sewers at one moment. A lot of stuff flowed out of the sewers as a result, not all of which … smelling very pleasant and Thailand went through a very deep recession after they were forced to devalue their currency in the late 1990s.”
Chowla says, “I think the evidence has been that countries that have done this haven’t experienced any drop in the kind of investment that they want. On the contrary actually, as you put in these kind of regulations, you make your economy more stable, you make things more predictable, you make your exchange rate more stable, and then investors actually have a better prospect for investing in the longer term.
“We should also remember that this is not the way it always is,” he says. “This is not the natural state of affairs. In the past we actually had quite strict rules about where money could move and how. Originally, back in 1945, the IMF actually believed very strongly in using capital controls and they believe that for the first 30 years of their existence.”
Examples of the benefits of regulating capital flows are also numerous. “Brazil … has implemented a financial transaction tax, otherwise known as a ‘Robin Hood’ tax,” the New Economics Foundation’s Lydia Prieg notes in the film. “And this is explicitly to try to penalize and thus reduce speculation. Other examples include countries like China, which have enjoyed extraordinary levels of growth recently. China has strict limitations on what non-residents can invest in with regards to shares and bonds. And then you’ve got countries like India which effectively banned foreign investment in Indian banks.
“Joseph Stiglitz … a Nobel Prize-winning economist and the former chief economist at the World Bank, did lots of studies into the Asian financial crisis,” she continues. “And he found that countries that implemented capital controls … had much shorter and much shallower downturns than countries that didn’t.”
—Posted by Alexander Reed Kelly.
Any bets on what is going to happen in this situation. I have a bad feeling this is leading in the direction of Johnny Citizen.
Will we have a special tax to pay off this installment?
However Mr Noonan said he was “still confident of a positive outcome” to negotiations with the ECB.
He referred to the negotiations as “pussyfooting” and said Ireland should be seeking a write-down of debt, not an extension of the term for paying it back.
Mr Doherty also asked for details of whether the ECB had rejected a proposal, if an alternative proposal would be ready for the next meeting of the ECB board; and what the Government would regard as a satisfactory outcome.
Mr Noonan said it would not be helpful to go into detail, and accused Sinn Féin of positioning itself to reject whatever deal was agreed.
He reiterated his expectation of a deal on the note in the coming weeks and said it was his belief that the Government will get a satisfactory arrangement by the 31 March deadline.
1 Recall The Bailout, 2 Remove The Corrupt Politicians, 3 Pay NO Taxes Until 1&2 Are Completed!! Follow Iceland!! « Political Vel Craft
Icelanders who pelted parliament with rocks in 2009 demanding their leaders and bankers answer for the country’s economic and financial collapse are reaping the benefits of their anger.
Iceland Continues To Grow Using ‘Startups’ By Replacing ‘Banks’: Iceland Refused To Bailout Rothschild’s Corrupt Banking Cabal.
Executives At Collapsed Iceland Bank Jailed For Fraud.
Since the end of 2008, the island’s banks have forgiven loans equivalent to 13 percent of gross domestic product, easing the debt burdens of more than a quarter of the population.
“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs.” – Thomas Jefferson
The island’s steps to resurrect itself since 2008, when its banks defaulted on $85 billion, are proving effective. Iceland’s economy will this year outgrow the euro area and the developed world on average, the Organization for Economic Cooperation and Development estimates.
Iceland’s approach to dealing with the meltdown has put the needs of its population ahead of the markets at every turn. Once it became clear back in October 2008 that the island’s banks were beyond saving, the government stepped in, ring-fenced the domestic accounts, and left international creditors in the lurch. The central bank imposed capital controls to halt the ensuing sell-off of the krona and new state-controlled banks were created from the remnants of the lenders that failed.
“Europe can learn from Iceland”
Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges. That compares with the U.S., where no top bank executives have faced criminal prosecution for their roles in the subprime mortgage meltdown. The Securities and Exchange Commission said last year it had sanctioned 39 senior officers for conduct related to the housing market meltdown.
History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance. – James Madison
The squeezing of the elderly and yet they want more
So far, benefit losses to older people.
The demise of the Christmas bonus,
Implementation of Universal Social Charge
Prescription charges, electricity levy
Introduction of household charge,
Reduction in the Fuel Allowance from 32 to 26 weeks,
Increased tax on home heating fuel,
Reduction in medical card cover for dentistry,
Increases in Vat and Dirt (tax on savings),
Cuts in frontline health and social care services
Rising costs of medical insurance;
Yet to kick in water and carbon tax charges
And yet the ghouls want more
European Minister Lucinda Creighton has said she is extremely confident a deal can be reached to improve the terms of Ireland’s bailout “relatively quickly”.
This Lady has no idea what she is talking about waffle without substance seems to be her level of expertise.
My understanding of improving the terms goes hand in hand with more suffering
Embrace positivity was the advice of Minister of State Michael Ring when he officially opened the Tullamore visitors centre.
Maybe he had too much morning dew when he made that statement. Minister we wait with baited breath for you to deliver positivity. Perhaps it is your wish the citizens should die of asphyxiation.
Strong Support to Make the Country’s Debt More Sustainable
Mr Noonan said Ireland now has what he termed “very strong support at political level” to make the country’s debt more sustainable.
He declined to say what countries might have lobbied the ECB on Ireland’s behalf, but did highly praise International Monetary Fund Chief Christine Lagarde. Did he pay the ugly witch a complement?
He said that the next pressure point is March, when Ireland is expected to pay €3bn.
The minister said he was no in rush to complete the deal as it might affect its quality.
This is no more than the usual bluster, blabber, palaver we expect from Skint Piggy when he fails to achieve the stated aims.
asked if this ‘oul democracy’ was too much to be bothering with … his reply: Democracy … “needs to be managed”, “You need a strong party system and a strong whip system”
This is how the vested interest rules; all the parties follow this practice, and the result is that, in reality, private clubs and inner circles decide everything. This is one of the key ways in which politicians commandeer democracy and leave your democratic rights in the land of nowhere.
This man is a true blue a fascist at heart how well he would sit with the likes of Mussolini and Hitler but then again, I suspect his mould is more akin to that of a trujillisto.
Given that the governor of the Central Bank, Patrick Honohan has declared, he deems that both senior and junior bondholders should endure the losses of the failed banks. Perhaps the time is now opportune for the authorities to confront the Troika regarding the terms of the bailout.
To quote Honohan
“The extensive socialization of losses – initially through the September 2008 guarantee and subsequently when the troika refused to countenance burden-sharing with the unguaranteed senior bondholders – has been rightly subject to comprehensive criticism.”
Take cognisance of the fact that the Troika bullied Lenihan and Cowan into agreeing to pay the Bondholders.
The question now is whom were the troikas representing? Overall, one gets the impression that their first priority was to ensure and safeguard the interest of the Bondholders. If this is the case, it would appear the interests of the IMF, and the ECB is secondary. Whatever the case may be Ireland suffers at the hand of all three.
The fact that the Trichet letters remain unreleased would seem to reinforce this view that the contents are controversial.
The Governor of the bank on the surface seems to be speaking sense.
Will Michael Noonan have the mettle to confront the Troika over the bailout terms? Will he have the vigour to say we are going to burn the Bondholders?
Maybe the time is now opportune for the citizens of Ireland to petition the Minister to cast adrift the Bondholders.
His comments follow a clamour from some Irish politicians and economists who believe the letters sent to Mr Lenihan contained threats that somehow forced him into a bailout. They now want the letters published.
Weekend media reports also suggested the letters contained threats but did not provide any quotations or evidence to back-up the assertions.
Without seeing the letters, it is impossible to know whether the ECB was simply expressing concern about the safety of the tens of billions of euro the bank pumped into the Irish economy or something more sinister. No media outlet, government minister or ECB president has ever published the letters and the Department of Finance and ECB’s freedom of information units have declined to release the letters.