Doom! Post author By Philip Lane Post date September 20, 2011 Paul Krugman points us to this interesting article in the New Republic. Categories In Uncategorized 18 Comments on Doom! ← Feasta Conference: National Strategies for Dealing with Ireland’s Debt Crisis → Explaining the European Debt Crisis with LEGO 18 replies on “Doom!” @Philip Lane A fascinating, informative and persuasive article. It is certainly doomladen and with good reason. We are witnessing incompetance, ineptitude, and corruption on an unprecedented scale. Our democratic institutions seem at best powerless, and at worst complicit in the face of crisis afer crisis, and scandal after scandal. I firmly believe that the credibility of democracy has been severly damaged in the public mind over the last three years. The biggest threat to our economies and democracies is the incompetance of our ruling Economic Ascendancy, and above all the established Church of Economics to which it adheres. Since at least 1982, a “democracy” has meant a free market consumer economy, operating on top of a nominally free and representative society. Democracy has hitched itself to marketism and the two are by now, probably inextricably linked. Every decision, every strategy, every policy and certainly every election in the modern democracy is focused around one thing: the economy. Nothing else matters; nothing. Not society, not progress, not religion, not justice, not equality, not fraternity, not liberty–nothing matters but the economy. This has become a matter of faith for governments around the globe. And lo and behold, when the economy collapses, democracy goes down with it. Economics has become the religion of liberal democracy, and now that the church is in crisis, the people lose their faith and turn to other gods. This wouldn’t have happened if civic virtues other than unenlighted self interest were promoted. (Not that many were explicitly part of the established church; they just paid their tithes to it). Personally, I feel that a “financial/democratic reformation” is needed in our society. Something literally of the magnitude of the Protestant reformation in the 1500s. We need to turn away from the corrupt established church of business and economics and find new philosophies of goverance. We need to find a system which prevents grubbers, and psychopaths, and incompetants from running our companies and governments. We need a system in which shareholders are investors instead of gamblers. Where voters are citizens instead of consumers. However, we’ll probably just get a pretty ugly shift to the right, as predicted by Morgan Kelly. (I’ve recycled this comment from others I’ve made elsewhere, on the general topic of the failure of modern econo-democracy as it is practiced today.) The article is rubbish. We are doomed because so many people agree with it. Only an idiot, or someone with a PhD in economics, could possibly believe that consumption creates wealth. Unfortunately, there are thousands of highly-qualified economists in the world, who want to break windows and “stimulate” “demand”. Or start wars: http://krugman.blogs.nytimes.com/2011/08/15/oh-what-a-lovely-war/ From the New Republic article: “They (China, Asia) have funded U.S. deficits, but also helped provide the money that inflated the housing bubble.” NO, this is fundamentally wrong. The responsiblity for the bubble lies with the EU & US financial institutions & lack of oversight or proper regulation. See the recent (but little publicised) report from two BIS researchers linked here with some commentary: http://www.nakedcapitalism.com/2011/09/the-very-important-and-of-course-blacklisted-bis-paper-about-the-crisis.html @ OMF I entirely agree, well said. The system you’re looking for (which of course needs reforms to remove the power of big Money from democracy to accompany it) is MMT. Read Prof Bill Mitchell’s excellent commentaries on the mess at his blog: http://bilbo.economicoutlook.net/blog/ @ Mike Hall, The article that Mike Hall references is a synopsis by Andrew Dittmer of a paper by Claudio Borio and Piti Disyatat of the BIS. Bario and William White “went public (as public as you can go in the BIS) in 2003 with their contention that an international housing bubble was underway and action was warranted.” A key contention of the article is: “So what caused the crisis? Clearly, the shadow banking system (mainly based around US and European financial institutions) succeeding in generating huge amounts of leverage and financing all by itself (24, 28). Banks can expand credit independently of their reserve requirements (30) – the central bank’s role is limited to setting short-term interest rates (30). European banks deliberately levered themselves up so they could take advantage of opportunities to use ABS in strategies (11), many of which were ultimately aimed at looting these same banks for the benefit of bank employees.” I understood that the function of banks is to facilitate savers and investors in increasing the value of their assets. Investors, by using savers money and their ingenuity to improve their economic performance; savers, by receiving some of the gains from that economic improvement. The theory was that a float of about 7-8% for the banks was sufficient reserve of liquidity to keep the system functioning. When the banks were allowed to deliberately lever themselves up it was inevitable that property and commodities would be inflated. If the net output of a cow at €400 is roughly equivalent to the value of a small computer then doubling the figure to €800 is not going to change the quantity of labour and resources required for either. Nor is it going to lead to an increase in output or profit for either. But it does increase the prices -not the value- of the property and resources used. The belief system accepted by the Central Banks of Europe – and later the ECB- of ignoring the leveraging and debt creation by financial companies led directly to the bubble. The Irish CB, DoF and financial institutions were as culpable as everyone else in the system: but only as culpable. For the ECB to insist that it is solely an Irish problem is like a gombeen merchant insisting that teh family of an alcoholic pay its bills for food and also for the drink that he has poured into the husband. Either that or sell the farm. We can accept the sale of the farm: or we can take our courage in our hands, chastise the alcoholic and expose the gombeens thinking to the point that he backs off. @Rothbard “Only an idiot, or someone with a PhD in economics, could possibly believe that consumption creates wealth.” You’re kind of making his point for him there…. @Zhou To my surprise, I admit, he never mentions the word “consumption” or “consumer”. But he does invoke “the paradox of thrift”, which is – is it not? – the contention that when there is “underconsumption”, consumption creates wealth. On re-reading, I found this doozy: “In the ’40s, it finally took a world war to bring about the conditions for reforming the world’s leading economies.” Yikes! Re: BIS paper of Claudio Borio and Piti Disyatat. It looks to me like a well presented paper, a huge, huge amount of references at the end of it. I must get it printed and put it on my pile for later attention. Thanks for the link above. BoH. What’s going on in the Republican Party is scary http://www.nybooks.com/articles/archives/2011/sep/29/republican-days-wrath/?pagination=false @Rothbard You can’t generate wealth without somebody consuming. That somebody does not exist. Living with less is not the problem. Living with nothing – no jobs, no income and no security is the problem. Inflation and deficit spending create employment while reducing income. They also create more taxes and can make the deficit smaller. As the article says, running the international economy is not the same as running a household or a business. @ zhou_enlai “….running the international economy is not the same running a household or a business.” Absolutely. Or to put it more succinctly MACRO economics (of fiat currency ISSUER authorities) is +profoundly+ different from MICRO economics (of currency USERS). And yet, AD NAUSEAM, the mainstream media, politicians & economics ‘experts’ +constantly+ conflate micro with macro….everywhere. Watch the BBC News, who in one 3 minute piece can show a graphic of the (UK) government ‘credit card’ & spout rubbish about the need to ‘balance books’ whilst going on to describe the creation (out of nothing but a keyboard) of £Billions in ‘QE’. The cognitive dissonance is truly mind numbing. Of course, Ireland is a currency USER, but my position is that Ireland should seek to have Eurozone authorities to become a fully functioning, +macro+ economic thinking & acting entity, with all the powers to resolve the Euro crisis that entails. OR, if that is not feasible in a reasonable (short) timeframe (before Ireland is reduced to debt peonage wasteland), then Ireland should exit & revert to its own sovereign currency with the ability to have proper macro economic ability. That is, recognising that MMT +is+ the correct interpretation of real world monetary operations, and that the principles of Abba Lerner’s ‘functional finance is it’s appropriate accompanying framework for fiscal policy. Until these issues are properly considered, there is NO SOLUTION short of perpetual impoverishment of citizens by the banking elites. @OMF “We are witnessing incompetence, ineptitude, and corruption on an unprecedented scale. ” What David Halberstam said of Robert McNamara in The Best and the Brightest : “they were brilliant, and they were fools.” @ Mike Hall “whilst going on to describe the creation (out of nothing but a keyboard) of £Billions in ‘QE’” As a matter of interest, what would happen if the Bank of England simply declared it had created the money to cover the UK national debt? Would the universe explode? Mike Hall wrote: NO, this is fundamentally wrong. The responsiblity for the bubble lies with the EU & US financial institutions & lack of oversight or proper regulation. See the recent (but little publicised) report from two BIS researchers linked here with some commentary: Has this paper by Borio and Disyatat ever been discussed here at the Irish Economy blog site? I was always searching for a refutation of the Excess Saving, theory, which has been doing the rounds now in so many circles for most of the 2000’s. I always thought about the Excess Savings, theory as just another one of those hymn sheets that everyone seemed to sign off of. I would particularly enjoy reading a rebuttal of sorts from professor Kevin O’Rourke or others here, to the Borio and Disyatat work. BOH. @Brian O’Hanlon. “I would particularly enjoy reading a rebuttal of sorts from professor Kevin O’Rourke or others here, to the Borio and Disyatat work. BOH.” If their argument stands up, then it means that the banking crisis was a result of unsound assumptions across the banking industry and its regulators. Through the neglect of those charged with supervising it, money in the form of debt was created beyond the needs of the economy. Those debts had no backing in the real economy and resulted in creating a bubble in real estate and commodities which was sustained by expected extraordinary capital gains rather than productive return. The debts are now being treated as absolutely valid and legal by the banking supervisors. Since they cannot be repaid by recourse to the real estate or commodities that they were attached to, they are now attached to the productive economy through their acceptance by governments. The bubble debts are making claim to real assets which have no possibility of generating the expected extraordinary returns. Legally the only option is to repay as much of the real economy as is neccessary to satisfy the credit provided by those whom the supervisory bodies had ignored. That is where we stand now. If Borio and Disyatat are correct, that policy represents a forced transfer of the real economy to those who caused the crisis. I also would appreciate an explanation or a rebuttal of the paper. Conor O’Brien writes, The debts are now being treated as absolutely valid and legal by the banking supervisors. Since they cannot be repaid by recourse to the real estate or commodities that they were attached to, they are now attached to the productive economy through their acceptance by governments. That probably nails it. I am biased in this situation, but for what it is worth: the angle I am coming from, is that in Ireland the only real cash in the game, was that of the shareholders of the Irish banks. That is the poor gombeen men and women on the island of Ireland, who in their best intentions liquidised their assets and converted it into banking share holdings. Everything else around that tiny, minute bit of hard cash, was all invented stuff – all leveraged debt. You got the end result that a few twigs at the bottom, were trying to hold up the entire tree, branches and trunk/root structure above, that was expanding and expanding, and expanding. It was the opposite to what nature had intended I guess. As you rightly pointed out, the real honest to goodness, hard cash that enabled the bankers to create so much of the virtual kind has been eliminated. That is the capital buffer that banks had for a rainy day. That is washed down the river. By some miracle, it seems that all of the cash that was invented out of thin air, now has to somehow be made real. How ironic is that? What is really funny, is that the poor smucks in Ireland who invested their hard earning cash into the Irish banks, are getting caught out a second time now, via austerity and whatever else, to make the debt that is on the books of the banks, real. It is really funny too, thinking back now of that clip of the Irish financial regulator talking about the ‘capital’ of the Irish banks in 2008. Of course, he didn’t give a hoot about the hard earned money that many Irish folk had thrown into banking share positions. He knew they were hosed at that time. He just didn’t want any of them running for the door, in case they might recover some few pence in their euros. It is funny though, that when it comes to Irish banking debt, we seem to want to make whole 100 cents in the Euro, of some rubbish, that never really existed in the first place. BOH. @ All, Actually, the analogy that springs to mind, is that of the Titanic. When there were too few life boats left to cater for third class below in the bottom. It is much the same thing with the Irish banks. You had the Irish ordinary shareholders who were like sectioned off into the bottom quarters of the ship, from the beginning. The debt holders were given much more luxurious cabins in the levels overhead, and special treatment when it came to jumping off the ship in the case of a disaster. I could go on and develop this analogy even further, but I think everyone here has probably seen the movie. Thinking about it now, the Irish financial regulator, reminds me of one of the stewarts on the sinking ship, appealing to the lower desk passengers to remain calm and orderly, as the upper levels are safely dis-embarking on the available life boats. It all has a very nineteenth century, nautical kind of feeling about it. You can almost imagine it, with the gas lamps and the ball gowns, and men smoking cigars with dinner jackets. BoH. Comments are closed.