Archive for January, 2012

The Keynesian Debacle

January 30, 2012 Leave a comment

Remember the articles about The Keynesian Resurgence?  You can still search the topic on Wiki.  It was all about governments taking control of the economy and spending big to counteract the Great Recession and the GFC and lead us to a renewed growth path.  Key point – Keynesians dominated policy-making and were in charge.  Obama was a leftie.  This was going to be a Keynesian recovery.  

Funny thing happened on the way to recovery.  It didn’t.

So the State-propagandists have to be rolled out again, to justify further madness and further insolvency and further borrowing and further slaughter of the innocents.

No one – NO ONE – suggested that the bailing out of the London banking elite and the imposition of taxes on the middle class in the UK would result in a turnaround.  Yet Krugman ignores Greece and falsely uses the UK as the supposed “icon” of austerity.

The “icon” (if there is one) is Iceland, not the UK.  He forgets – or ignores – that data point.

Here he is:

The Austerity Debacle

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

O.K., about those caveats: On one side, British unemployment was much higher in the 1930s than it is now, because the British economy was depressed — mainly thanks to an ill-advised return to the gold standard — even before the Depression struck. On the other side, Britain had a notably mild Depression compared with the United States.

Even so, surpassing the track record of the 1930s shouldn’t be a tough challenge. Haven’t we learned a lot about economic management over the last 80 years? Yes, we have — but in Britain and elsewhere, the policy elite decided to throw that hard-won knowledge out the window, and rely on ideologically convenient wishful thinking instead.

Britain, in particular, was supposed to be a showcase for “expansionary austerity,” the notion that instead of increasing government spending to fight recessions, you should slash spending instead — and that this would lead to faster economic growth. “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.”

How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.

Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.

And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

Categories: Miscellaneous Musings

Why “Economics and Finance” is not “Science”

January 26, 2012 Leave a comment

Ludwig von Mises:

“If you throw a stone into the water, it sinks.  If you throw a stick into the water it floats.  If you throw a man into the water, he must decide whether to sink or swim.”

Categories: Miscellaneous Musings

“Profit and loss is for plebs”

January 25, 2012 Leave a comment

To understand the world we live in, you have to understand that the elites create their own money and their own reality.  Profit and loss is scoffed at.  Respect for figures is scoffed at.  That’s for the plebs to worry about.

Governments have to balance the books.  Businesses do.  But the elite’s don’t.  They make their own reality.

And that’s what makes them so insane – the desire to not play by their own rules.

Categories: Miscellaneous Musings

Stewards of economy f*ck the hostesses then abandon ship when it sinks in a sea of liquidity. Sound familiar?

January 23, 2012 Leave a comment
Categories: Miscellaneous Musings

Visual history of financial crisis

January 23, 2012 Leave a comment


Notice how the frequency and severity of financial crises rose after the Fed was created?

It should be titled “How the Central Banks F*cked Us and Told Us It Was Our Fault.”

How zombies are born…

January 23, 2012 Leave a comment

By government impregnating a bank.

From Bill Bonner:

Last week, Spain and Italy were able to offload 22 billion euros worth of debt. This quieted investors’ fears. Newspapers reported that calm and confidence had returned to the markets. Lenders and borrowers breathed more easily. Bankers put their feet up. Apparently, no major bank in Europe was so far underwater that the European Central Bank couldn’t bring it to the surface. None had its lungs so full of bad debt that the ECB cannot breathe life into it.

Then, on Friday, S&P downgraded several European nations’ debt. This brought the debt of Europe’s stabilization fund, the EFSF, into doubt too. Suddenly, Europe was gurgling again.

Mario Draghi, head of the European Central Bank, wondered on Tuesday if the ratings had any value. After all, he had given the banks 489 billion euros in December. A lack of cash will no longer bring them to grief. Then, what will? That is, of course, what we will find out.

The ECB is scheduled to relax its bungee collateral requirements. The bank will now lend against used cars and day-old bread. But Draghi suggested that he had no intention of following America’s Fed in its irresponsible “quantitative easy” path. Instead of buying the bonds directly, he and the banks will collude to defraud the public. The ECB will pretend to be in control of the situation. The banks will pretend to be solvent.

The conceit of modern public finance is that people with good political skills can do a better job of deciding which banks are solvent than the marketplace. ‘Raw capitalism,’ is just too impulsive, they claim. It makes hasty decisions, often throwing out the baby with the bath water, and the bathtub too. By contrast, wise bureaucrats keep their wits about them, even in a crisis.

The Financial Times is running a series it calls “the Crisis in Capitalism.” The writers claim capitalism needs adult supervision. Samuel Brittan, for example, says it “requires…the use of monetary and fiscal policy…” to keep it doing what it is supposed to do. Where’s that? He thinks he knows. It is “a means to freedom and prosperity, not an end itself.”

We disagree on both points. Capitalism could care less whether people are prosperous or poor. As to fiscal and monetary policy…he presumes settled the very point that is at issue — whether central planning, by bureaucrats, improves market outcomes.

Last Thursday, the US Fed helped to resolve the doubt we never had. It released records of its internal discussions in 2006, when the US housing and finance bubble was reaching its peak. On the evidence provided, the feds never had their wits about them, even when the going was good. Resumed in The New York Times, we discover that “top Federal Reserve officials marveled at the desperate antics of home builders seeking to lure buyers. The officials laughed about the cars that builders were offering as signing bonuses, and about efforts to make empty homes look occupied. They joked about one builder who said that inventory was ‘rising through the roof.’ But the officials, meeting every six weeks to discuss the health of the nation’s economy, gave little credence to the possibility that the faltering housing market would weigh on the broader economy…instead they continued to tell one another throughout 2006 that the greatest danger was inflation — the possibility that the economy would grow too fast.”

While the American authorities couldn’t spot a crisis, the Euro- fixers were actively creating one. Draghi is a veteran of the World Bank, the Italian Treasury, and Goldman Sachs. He was on the job in Rome while Italy was building up the debt it now finds so hard to pay. Christine Lagarde, now head of the IMF, was French finance minister from 2007 to 2010 — when France increased its public debt by about 50%. Dust any financial crime scene from the last 20 years and you will find prints from them and the whole confrerie of public payroll dunces who now claim to be fixing the system. They are the very same people who brought Europe…and the world…to the brink of financial disaster. And now they preside over more monetary and fiscal policy tweaks, more controls, more regulations, more ‘stress tests.’

Most likely, the leading financial institutions…as well as most of the sovereign nations of the developed world… are already insolvent. We say “most likely” because neither we nor anyone else can know. Real solvency — like the value of the ECB’s collateral — is not judged by earnest ratings, phony stress tests, or bureaucrats. It’s determined by the real stress test of the marketplace.

No one ever knows what anything is really worth — especially what financial institutions with complex holdings and obscure business models are worth. Not even their owners know. The accountants had to interrupt Jimmy Cayne, CEO of Bear Stearns, during a bridge tournament in 2008, to tell him his company was broke.

Insolvency is like death. When conditions change, so does life expectancy. You discover when a company is broke by testing it. We saw, for example, what the banks were worth under the benign credit conditions leading up to 2007. Then, market conditions changed. Under the stress of the market’s new challenge, Bear Stearns and Lehman Bros. died. This caused investors to wonder about the rest of them. But instead of allowing the process of price discovery go on, US authorities stopped the test.

What a pity. We don’t know which bank…or which nation… is insolvent. Most likely, they all are.

All you need to know about lying, scheming, gold hording…GOVERNMENTS

January 23, 2012 Leave a comment

Categories: Miscellaneous Musings