John Galbraith (1908 – 2006):
The market will not go on [another] speculative rampage without some rationalization.
[And, needless to say,] during the next boom some newly rediscovered virtuosity of the free enterprise system will be cited. …
Among the first to accept these rationalizations will be some of those responsible for invoking the controls. …
They will say firmly that controls are not needed.
The newspapers, some of them, will agree and speak harshly of those who think action might be in order.
The Wall Street Journal [11 September 1929]:
[The] main body of stocks [continues] to display the characteristics of a major advance temporarily halted for technical readjustment.
Irving Fisher (1867 – 1947) [15 October 1929]:
Stock prices have reach what looks like a permanently high plateau. …
I expect to see the stock market a good deal higher than it is today within a few months.
[Irving lost between $8 and $10 million in net worth in the crash.]
Harvard Economic Society [10 November 1929]:
[A] severe depression … is outside the range of probability.
We are not facing protracted liquidation.
(The Great Crash 1929, Penguin, 1975, p 163)
John Galbraith (1908 – 2006):
Until well into the depression years the United States had no useful figures on the level or distribution of unemployment.
There was a certain classical logic in this; one did not spend money collecting information on what, in [theory,] could not exist.
No legislation in American history was more bitterly [opposed by business] than the … Social Security Act.
(A History of Economics, Penguin, 1987, p 217)
Joseph Schumpeter (1883 – 1950)
[Recurrent] 'recessions' that are due to the disequilibrating impact of new products or methods. …
Economic progress, in capitalist society, means turmoil. …
[Capitalism's performance can, therefore, only be judged] over time, as it unfolds through decades and even centuries.
(Capitalism, Socialism and Democracy, 2nd Ed, 1942)
Robert Lucas (1937):
[The] central problem of depression-prevention has … for all practical purposes … been solved for many decades.
(Presidential Address, American Economic Association, 2003)
Gregory Clark (1957) [Professor of Economics, University of California, Davis]:
The debate about the bank bailout, and the stimulus package, has … been conducted in terms that would be quite familiar to economists in the 1920s and 1930s.
There has essentially been no advance in our knowledge in 80 years.
(Dismal scientists: how the crash is reshaping economics, The Atlantic, 16 February 2009)
George Megalogenis (1964):
[During the 1980's blue] collar workers had delivered their end of the bargain under the wages accord.
Yet their restraint in the boom, could not protect their jobs in the bust.Ken Henry (1957) [Australian Treasury Secretary, 2001-2011]:(Making Australia Great — Inside Our Longest Boom, Episode 2: Growing Pains, ABC Television, March 2015)
[More than half of the] people aged over 45 who lost their jobs in the early 1990's recession, [when unemployment peaked at 11.1%,] never worked a day again in their lives …
Joseph Stiglitz (1943):
In order to bail out the German banks [the Greeks have] had to accept [economic depression:
(Stiglitz on Greece and climate change, RN Drive, 10 July 2015)
- 25% unemployment (including 50% youth unemployment) and
- a 25% decline in GDP. …]
Niall Ferguson (1964):
[Subprime mortgage refinancing deals] allowed borrowers to treat their [over-priced] homes as cash machines, converting their existing equity into cash. …
Between 1997 and 2006, US consumers withdrew an estimated $9 trillion in cash from the equity in their homes.
The final cost of the Savings and Loans crisis between 1986 and 1995 was $153 billion (around 3% of GDP), of which taxpayers had to pay $124 billion, making it the most expensive financial crisis since the Depression.
(The Ascent of Money, 2008, Penguin, p 259)
William Crawford [Commissioner, California Department of Savings and Loans]:
The best way to rob a bank is to own one.
(Henry Pontell and Kitty Calavita, 'White-Collar Crime in the Savings and Loan Scandal', Annals of the American Academy of Political and Social Science, 525, January 1993, p 37)
[The 2007 global financial crisis has cost,] once lost output is included, as much as $13 trillion and, on average, a 40-50% increase in the debt of states hit by the crisis. …
Lost output from 2008 through 2011 alone [averaged] nearly 8% of GDP across the major economies.
Since the 2008 crisis, [US banks] have awarded themselves $2.2 trillion in compensation.
(p 50, emphasis added)
[When] those at the bottom are expected to pay disproportionately for a problem created by those at the top, and when those at the top actively eschew any responsibility or that problem by blaming the state for their mistakes, not only will squeezing the bottom not produce enough revenue to fix things, it will produce an even more polarized … society in which the conditions for sustainable politics of dealing with more debt and less growth are undermined. …
In such an unequal and austere world, those who start at the bottom of the income distribution will stay at the bottom, and without [hope of advancement,] the only possible movement is a violent one.
[The] true price of saving the banks [may not] just the end of the euro, but the end of the European political project itself, which would be perhaps the ultimate tragedy for Europe.
(Austerity, p 92)
Freeman Dyson (1923):
The gap between technology and needs is wide and growing wider.
If technology continues along its present course, ignoring the [basic] needs of the poor and showering benefits upon the rich, the poor will sooner or later rebel against the tyranny of technology and turn to irrational and violent remedies.
(Imagined Worlds, Harvard University Press, 1998, p 201)
Alexis de Tocqueville (1805 – 1859):
Almost all the revolutions which have changed the aspect of nations have been made to consolidate, or to destroy, social inequality. …
Either the poor have attempted to plunder the rich, or the rich to enslave the poor.
(Democracy in America, 1835, Bantam, 2011, p 789)
Frederick Douglass (1818 – 1895):
neither persons nor property will be safe.
- Where justice is denied,
- where poverty is enforced,
- where ignorance prevails and
- where any one class is made to feel that society is in an organized conspiracy to oppress, rob and degrade them:
Adam Smith (1723 – 1790)
[Wherever] there is property there is great inequality [consequently,] the acquisition of valuable and extensive property … necessarily requires the establishment of civil government. …
In spite of their natural selfishness and rapacity, though they mean only their own convenience, though the sole end which they propose from the labours of all the thousands whom they employ be the gratification of their own vain and insatiable desires, the rich divide with the poor the produce of all their improvements.
They are led by an invisible hand to make nearly the same distribution of the necessities of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus, without intending it, without knowing it, advance the interest of society, and afford means to the multiplication of the species. …
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.
We address ourselves, not to their humanity but to their self-love.
(Book 1, Chapter 2)
[The individual] is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. …
I have never known much good done by those who affected to trade for the public good.
It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
(Book 4, Chapter 2)
The man whose whole life is spent in performing a few simple operations … generally becomes as stupid and ignorant as it it is possible for a human creature to become.
The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment …
Of the great and extensive interests of his own country he is altogether incapable of judging …
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in conspiracy against the public, or in some contrivance to raise prices. …
It is impossible to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.
But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.
(Book 1, Chapter 10, Part 2)
The proposal of any new law or regulation of commerce which comes from [the business elite] ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.
[For it] comes from an order of men,
- whose interest is never exactly the same with that of the public,
- who have generally an interest to deceive and even to oppress the public, and
- who accordingly have, upon many occasions, both deceived and oppressed it.
The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
(Book 5, Chapter 2, Part 2, 1779)
(The Wealth of Nations, 1776)
[The illusion that the accumulation of possessions brings real satisfaction is the] deception which rouses and keeps in continual motion the industry of mankind. …
The great source of both the misery and disorders and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another …
Some of those situations may, no doubt, deserve to be preferred to others …
[But] none of them can deserve to be pursued with that passionate ardour which drives us
- to violate the rules either
- of prudence or
- of justice; or
- to corrupt the future tranquillity of our minds, either
- by shame from the remembrance of our own folly, or
- by remorse from the horror of our own injustice.
(Charles Ferguson, Inside Job, 2010)
Mark Blyth (1967)
- Democracy is Asset Insurance for the Rich
- Redistribution and Debt is Reinsurance for Democracy
- Austerity is Anorexia for the Economy
The Liberal Antistatist Neuralgia
Can't live without the state
The problem is, when you allow markets do what markets do, they create incredible inequality. …
[So] you have to have a state that can police [those inequalities;] otherwise, the people who are on the bad end [of the income distribution are going to come] and burn your house down.
Can't live with it
So you have a problem right away, which is: the liberal distrust of the state.
[Since] any state powerful enough to defend your property rights might [itself] come after you — hence the second amendment …
Don't want to pay for it
[Finally, any state strong enough to] defend your property rights, is going to be expensive …
Adam Smith [initially] comes out in [favor] of proportional taxation [but then] backs away from it because, of course, rich people would [end up paying] most of the taxes, and he's one of the rich people …
[So he] goes for a very modern solution, [one] which modern day Republicans are fond of: a consumption tax …
(Austerity: The history of a dangerous idea, Big Ideas, ABC Radio National, 14 May 2013)
[Democracy,] and the redistributions it makes possible, is a form of asset insurance for the rich, and yet, through austerity, we find that those with the most assets are skipping on the insurance payments.
[In Europe and in the United States} top marginal incomes are estimated to be no less than 20%age points below those that would maximize tax revenue to the government.
Peter Diamond of the Massachusetts Institute of Technology and Emanuel Saez of the University of California, Berkeley, [argue] that taxing the top 1% at [a marginal rate of] over 80% would raise, not lower, revenue. …
According to their calculations, raising the average income tax for the top income%ile to 43.5% from 22.4%, the level of 2007, would raise revenue by 3% of GDP. which is enough to close the US structural deficit while still leaving very high earners with more after-tax income than they would have had under Nixon.
[The] Tax Justice Network estimates that there is as much as 32 trillion dollars, which is over twice the entire US national debt, hidden away offshore not paying taxes …
A Fallacy of Composition
Adam Smith (1723 – 1790):[What] is true of the parts … is not true of the [whole:] we cannot all be austere at once.
What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.
(The Wealth of Nations, Book 4, Chapter 2, 1776)
All that does is shrink the economy for everyone. …
[If everyone is saving (ie paying back debt) at the same time, then no one is spending; hence, no consumption to stimulate investment.
Likewise, every country cannot pursue export-led growth at the same time because there is no import demand to drive it.]
We cannot all cut our way to growth, just as we cannot all export without any concern for who is importing.
This fallacy of composition problem rather completely undermines the idea of austerity as growth enhancing. …
Austerity is a zombie economic idea because it has been disproven time and again, but it just keeps coming. …
[It] a dangerous idea for three reasons:
- it doesn't work in practice,
- it relies on the poor paying for the mistakes of the rich, and
- it rests upon the absence of a rather large fallacy of composition that is all too present in the modern world.
[We] may have impoverished a few million people to save an industry of dubious social utility that is now on its last legs. …
[Between] 1994 and 2007 Irish GDP grew much more rapidly than in the 1980s and 1990s.
During this boom period, when cheap money was abundant in global markets, Ireland's banking sector also grew rapidly, and on the back of the credit bubble grew a housing bubble.
When the bubble popped in 2008, the Irish government issued a blanket guarantee to its banks and soon after gave five and a half billion euros to three banks:
- Anglo Irish bank,
- Allied Irish Bank, and
- Bank of Ireland.
It kept the banks going [until January 2009] when Anglo-Irish was nationalized — at the same time that 2 billion euros in savings were chopped off the public budget.
[Eventually,] to stop the complete collapse of the economy, the government set up a bad bank, the National Asset Management Agency (NAMA), to take the toxic assets off the banks' books. …
Since then, over 70 billion euros have been injected into [the Irish] banking system [or almost €1,500 for every man, woman and child.]
Some 47 billion euros disappeared into Anglo-Irish alone, never to be seen again.
The cost of bailing out the banks amounts to 45% of GDP, and that figure does not include the cost of the NAMA program, which is over 70 billion euros.
Irish debt to GDP was 32% in 2007.
Today it stands at 108.2% after three years of austerity. …
The Irish government, which has implemented 24 billion euros in cuts since 2008, plans another 8.3 billion in taxes and another 3.5 billion in cuts for 2013. …
[By contrast,] Iceland
- let its banks go bankrupt,
- devalued its currency,
- put up capital controls, and
- bolstered welfare measures. …
The [Icelandic] banks were to be allowed to go bankrupt and be taken into receivership.
Their debts were not socialized; instead bondholders and foreign creditors bore the brunt of adjustment.
Everyone tightened their belts as the cuts were accompanied by a shift to a more progressive tax code that included
- substantial tax hikes for top earners and
- measures to help low- and middle-income families. …
[In] 2011 growth returned at 3% [— compared to 0.71% in Ireland; and, by 2012 Iceland was] near the top of OECD growth performance.
With higher marginal rates of taxation, returning growth, capital control, and equal fiscal tightening, Iceland is on target to eliminate its budget deficit in 2014 and have a budget surplus of 5% in 2016.
[And, unlike in Ireland,] employment growth in Iceland has been strong.
Even at its height [9% in 2009,] unemployment in Iceland was lower than the European average …
Unemployment stands at just under 6% in October 2012 [— compared to 14.8% in Ireland.]
[Real] wages have been rising at a brisk pace.
This has helped reverse the trend of growing inequality witnessed between 1995 and 2007 … mostly because of the high incomes of top earners — a phenomenon seen in all highly financialized societies. …
Iceland not only survived letting its banks go bust, it became a healthier and more equal society in doing so.
Thank You For Your Sacrifice
To: The [Citizens of Portugal, Italy, Ireland, Greece and Spain]
From: [The Political Classes of Europe]
We have been telling you for the past four years that the reason you are out of work and that the next decade will be miserable is that states have spent too much.
So now we all need to be austere and return to something called "sustainable public finances."
It is, however, time to tell the truth.
The explosion of sovereign debt is a symptom, not a cause, of the crisis we find ourselves in today.
What actually happened was that the biggest banks in the core countries of Europe bought lots of sovereign debt from their periphery neighbors, the PIIGS.
This flooded the PIIGS with cheap money to buy core country products, hence the current account imbalances in the Eurozone that we hear so much about and the consequent loss of competitiveness in these periphery economies.
After all, why make a car to compete with BMW if the French will lend you the money to buy one?
This was all going well until the markets panicked over Greece and figured out via our "kick the can down the road" responses that the institutions we designed to run the EU couldn't deal with any of this.
The money greasing the wheels suddenly stopped, and our bond payments went through the roof.
The problem was that we had given up our money presses and independent exchange rates — our economic shock absorbers — to adopt the euro.
Meanwhile, the European Central Bank, the institution that was supposed to stabilize the system, turned out to be a bit of fake central bank.
It exercises no real lender-of-last-resort function.
It exists to fight an inflation that died in 1923, regardless of actual economic conditions.
Whereas the Fed and the Bank of England can accept whatever assets they want in exchange for however much cash they want to give out, the ECB is both constitutionally and intellectually limited in what it can accept.
- It cannot monetize or mutualize debt,
- it cannot bail out countries,
- it cannot lend directly to banks in sufficient quantity.
It's been developing new powers bit-by-bit throughout the crisis to help us survive, but its capacities are still quite limited.
Now, add to this the fact that the European banking system as a whole is three times the size and nearly twice as levered up as the US banking system; accept that it is filled with crappy assets the ECB can't take off its books, and you can see we have a problem.
We have had over twenty summits and countless more meetings, promised each other fiscal treaties and bailout mechanisms, and even replaced a democratically elected government or two to solve this crisis, and yet have not managed to do so.
It's time to come clean about why we have not succeeded.
The short answer is, we can't fix it.
All we can do is kick the can down the road, which takes the form of you suffering a lost decade of growth and employment.
You see, the banks we bailed in 2008 caused us to take on a whole load of new sovereign debt to pay for their losses and ensure their solvency.
But the banks never really recovered, and in 2010 and 2011 they began to run out of money.
So the ECB had to act against its instincts and flood the banks with a billion euros of very cheap money, the [Long Term Refinancing Operations,] when European banks were no longer able to borrow money in the United States.
The money that the ECB gave the banks was used to buy some short-term government debt (to get our bond yields down a little), but most of it stayed at the ECB as catastrophe insurance rather than circulate into the real economy and help you get back to work.
After all, we are in the middle of a recession that is being turbocharged by austerity policies.
Who would borrow and invest in the midst of that mess?
The entire economy is in recession, people are paying back debts, and no one is borrowing.
This causes prices to fall, thus making the banks ever more impaired and the economy ever more sclerotic.
There is literally nothing we can do about this.
We need to keep the banks solvent or they collapse, and they are so big and interconnected that even one of them going down could blow up the whole system.
As awful as austerity is, it's nothing compared to a general collapse of the financial system, really.
- we can't inflate and pass the cost on to savers,
- we can't devalue and pass the cost on to foreigners, and
- we can't default without killing ourselves …
(p 89, emphasis added)
This is why we can't let anyone out of the euro.
If the Greeks, for example, left the euro we might be able to weather it, since most banks have managed to sell on their Greek assets.
But you can't sell on Italy.
There's too much of it.
The contagion risk would destroy everyone's banks.
So the only policy tool we have to stabilize the system is for everyone to deflate against Germany, which is a really hard thing to do even in the best of times.
It's horrible, but there it is.
Your unemployment will save the banks, and in the process save the sovereigns who cannot save the banks themselves, and thus save the euro.
We, the political classes of Europe, would like to thank you for your sacrifice.
Austerity and the Fall of France
Although [the Bank of France] was the fiscal agent for the French Treasury, it was also a private institution with 40,000 shareholders whose 200 largest shareholders, often called "the 200 families," determined both personnel and policy.
They paid the governor's (large) salary in return for the usual diet of gold, cuts, and budget balance, all of which benefited the rentier class at the expense of everyone else.
[During the interwar years] the Bank of France continually vetoed budget increases that would have allowed the French military to modernize, and even mobilize, to meet the German threat.
As a result, French defense spending between 1934 and 1938 was one-tenth that of Germany.
[The] French financial elites were so afraid of inflation, and were so determined to maintain the value of the franc, that they paralyzed the French military's ability to mobilize against Hitler.
The Mother Of All Moral Hazard Trades
Would you like to know more?
Mark Blyth (1967)
Professor of International Political Economy, Brown University.
- Global Trumpism, Foreign Affairs, 15 November 2016.
- Austerity: The history of a dangerous idea, Big Ideas, ABC Radio National, 14 May 2013.
- Austerity: The History of a Dangerous Idea, Oxford University Press, 2013.
What actually happened in Europe was that over the decade of the introduction of the euro, very large core-country European banks
- bought lots of peripheral sovereign debt (which is now worth much less) and
- levered up (reduced their equity and increased their debt to make more profits) far more than their American cousins.
Having already bailed out the banks [in 2008,] we have to make sure that there is room on the public balance sheet to backstop them.
That's why we have austerity.
It's still all about saving the banks. …
This is a banking crisis first and a sovereign debt crisis second. …
There was no orgy of government spending to get us there. …
Austerity is not just the price of saving the banks.
It's the price that the banks want someone else to pay.
[We] have turned the politics of debt into a morality play, one that has shifted the blame from the banks to the state.
Austerity is the penance — the virtuous pain after the immoral party …
[A party] few of us were invited [but which] we are all being asked to pay the bill [for.]
[A Credit Default Swap is a tradable] insurance policy [that] insures the purchaser of the CDS against the default of the bond upon which it is written [eg a mortgage backed security like a Collateralised Debt Obligation.]
In return, the issuer of the CDS, the writer of the insurance policy, receives a regular income stream from the purchaser, just as an insurance company receives customers' insurance premiums.
A CDS is called a swap [rather than an insurance contract] mostly to avoid regulations that would kick in if it were named what it really is …
Insurance requires reserves to be set aside, but swaps don't …
(Note 13, p 248)
With a decade of house-price increases telling everyone that house prices only go up … you could almost begin to believe that you had what bankers call a "free option": an asset with zero downside and a potentially unlimited upside, and one that is rated AAA by the ratings agencies.
The fact that many investment funds are legally required to hold a specific proportion of their assets as AAA securities pumped demand still further.
By the mid-2000s … the issuers of [sub-prime mortgage backed CDOs and their associated unbacked CDS insurance contracts] increasingly didn't want to hold any of this dubious risk on their own books and wanted them moved off-book.
To get them off their books, CDO issuers set up a system in which their issuance and funding was moved to so-called [Structured Investment Vehicles.]
These were separately created companies, isolated from the parent company's balance sheet, whose sole activity was to collect the income streams from these mortgages and CDS contracts and pay them out to the different investors holding them.
[So,] with an attractive yield, bond insurance, a quasi-governmental AAA stamp of approval, and rising prices, what could go wrong?
Well, everything, really.
When already tight credit markets froze in September 2008, prices for these securities collapsed. …
With each bank holding similar assets and liabilities, and as each attempted to rid itself of these assets all at once, prices fell through the floor.
But the real surprise, the amplifier, was that the design of these securities, rather than lessening [risk,] actually boosted it.
[If Value at Risk] thinking made the [global financial] crisis statistically impossible, [neoliberal] ideas about how markets work made it theoretically impossible — until it happened. …
(p 39, emphasis added)
[Assuming the Efficient Market Hypothesis and the Rational Expectations Hypothesis are correct,] while we can expect random individuals … to make mistakes, systematic mistakes by markets are impossible because the market is simply the reflection of individual optimal choices that together produce "the right price."
Agents' expectations of the future … will be rational, not random, and the price given by the market under such conditions [necessarily] corresponds to the true value of the [underlying asset.]
Markets are efficient in aggregate if their individual components are efficient, which they are, by definition. …
[Financial operators] like these ideas because they justified letting the financial system do whatever it liked …
If you [believe] markets work this way, the very notion of regulating finance becomes [a] nonsense.
Self-interested actors, whether individuals or financial firms, acting in an efficient market will make optimal trading decisions, and these outcomes will improve everyone's welfare. …
The only real policy problem becomes how to avoid moral hazard.
That is, if individual institutions make bad bets and go bust, bailing them out simply encourages other firms to assume that they will be bailed out too, so don't bail out anyone.
In short, [all] risk is individual [not systemic] and regulation is best left to the banks themselves (since they are the ones with “skin in the game,” anything they get into is good for everyone), and so long as you don't start bailing them out, [everything will] be fine.
There is no public sector, only the the private sector, and it is always in equilibrium. …
[From the neoliberal perspective, the] shadow banks served the real banks by augmenting liquidity and assisting risk transfer.
Derivatives made the system safe by making it possible for individuals to sell risk to those willing to buy it, who were presumed to be best suited to hold it by virtue of wanting to purchase it.
And the banks themselves, those [supposedly] with skin in the game, were assumed to be the best people to judge the risks they were taking using models they designed themselves, even it it turned out [later that they, in fact,] didn't have skin in the game since they were moving everything they could off book into SIVs.
(p 43, emphasis added)
[The] crisis had nothing to do with either personal morality or state profligacy. …
[Fundamentally, it] was the failure of a set of ideas that justified finance doing whatever it liked because whatever it did was by definition the most efficient thing that could be done. …
[Iceland] let its banks fail and is now doing really quite well, especially when compared to Eurozone Europe.
[Ireland] bailed them out and has condemned itself to a generation of misery because of it.
[There] are two other ways out of the crisis in addition to the usual choices of
- inflation [— bad for capital and creditors;]
- devaluation [— bad for workers in the longer term;]
- endless austerity [/ deflation — bad for workers and debtors;] and
- default [— bad for everyone. …]
- financial repression, and …
- a renewed effort to seriously collect taxes on a global scale.
[We] are going to deal with our debts … through taxes and not through austerity.
- Not because austerity is unfair, which it is,
- not because there are more debtors than creditors, which there are, and
- not because democracy has an inflationary bias, which it doesn't,