Mon, Aug 29, 2011
From The Market Ticker
We should, you know, especially when the head of the IMF spews crap like this:
As we all know, a major cause of the crisis was too much debt and leverage in key advanced economies. Financial institutions engaged in practices that magnified, disguised and fragmented risk, while households borrowed too much.
Right. There’s the admission. But let’s remember that without the financial institutions households could not have borrowed too much. It’s somewhat like a crack addict – you can want all the crack you want, but if nobody is selling it you’re not going to be smoking it.
So where is the accountability for those institutions? Oh, it’s missing – indeed Christine calls for more theft from you through public balance sheets to prop these jackasses up!
Put simply, while fiscal consolidation remains an imperative, macroeconomic policies must support growth. Fiscal policy must navigate between the twin perils of losing credibility and undercutting recovery. The precise path is different for each country. But to meet the credibility test, each country needs a dual focus: a primary emphasis on durable measures that will deliver savings tomorrow which, in turn, will help to create as much space as possible for supporting growth today—at least by permitting a slower pace of consolidation where possible. For instance—measures that change the rate of growth of entitlements, health or retirement.
Monetary policy also should remain highly accommodative, as the risk of recession outweighs the risk of inflation. This is particularly true as (i) in most advanced economies inflation expectations are well anchored; and (ii) pressures from energy and food prices are abating. So policymakers should stand ready, as needed, to dive back into unconventional waters.
Micro-level policy actions to relieve balance sheet pressures—felt by households, banks, and governments—are equally important. We must get to the root of the problem. Without this, we will endure a painful and drawn-out adjustment process. Structural reforms will surely help boost productivity and growth over time, but we should take care not to weaken demand in the short term.
In a word, no. What should be done is to impose the corporate death penalty on those institutions that cannot cover their own debt loads. We should force the bad debt into the open and default it. We must return to a sustainable level of public and private debt, and in the United States that’s about half of what’s outstanding right now.
Pretending that we can “grow” out of this is a lie. We cannot. To do so we would need to double GDP over the next decade, and yet do so without taking on one penny of additional debt anywhere in the system. That amounts to 7% growth each and every year for the next ten, with zero additional debt. That exceeds any long-run GDP growth the United States has experienced on a debt-adjusted basis at any point in the modern era and as such is simply not going to happen.
The dreams of political fools must accede to mathematical and historical facts, and on this point the data is clear – we cannot grow out of this. We must instead consolidate out of it and accept the economic pain that will result.
First, sovereign finances need to be sustainable. Such a strategy means more fiscal action and more financing. It does not necessarily mean drastic upfront belt-tightening—if countries address long-term fiscal risks like rising pension costs or healthcare spending, they will have more space in the short run to support growth and jobs. But without a credible financing path, fiscal adjustment will be doomed to fail. After all, deciding on a deficit path is one thing, getting the money to finance it is another. Sufficient financing can come from the private or official sector—including continued support from the ECB, with full backup of the euro area members.
Again, no. There is no reason on God’s Green Earth that those nations with reasonable fiscal policies should subsidize those who do not. Since the Euro zone failed to put in place actual incentive and punishment mechanisms for those nations that fail to act in a reasonable fashion there is now only one reasonable outcome – those nations must default and those entities that lent them money they cannot pay must lose part or all of that investment.
After all, lending money is an investment and comes with risk. This is why you earn a return; removing risk makes it not an investment at all but rather a tax.
Second, banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary. One option would be to mobilize EFSF or other European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns.
Those institutions that cannot raise private funds must be closed. No European should stand for any attempt to force them to cover the bad bets of private companies that have been more than happy to pocket the profits. Such acts, if attempted, should be met with open resistance using any means necessary as they are open declarations of war.
Not all wars are initiated with the discharge of firearms. Some are initiated with briefcases, suits and dresses. But all initiations of force are deserving of the same response.
Third, Europe needs a common vision for its future. The current economic turmoil has exposed some serious flaws in the architecture of the eurozone, flaws that threaten the sustainability of the entire project. In such an atmosphere, there is no room for ambivalence about its future direction. An unclear or confused message will add to market uncertainty and magnify the eurozone’s economic tensions. So Europe must recommit credibly to a common vision, and it needs to be built on solid foundations—including, for example, fiscal rules that actually work.
This is absolutely true. But such negotiation must take place free of the use of force. If the use of force to bail out private institutions is the means by which these negotiations are “entered” or “maintained”, then the people of Europe must rise and forbid such actions – again, by any means necessary.
In the United States, policymakers must strike the right balance between reducing public debt and sustaining the recovery—especially by making a serious dent in long-term unemployment. A fair amount has been done to restore financial sector health, but house price declines continue to weaken household balance sheets. With falling house prices still holding down consumption and creating economic uncertainty, there is simply no room for half-measures or delay.
Baloney. House prices rose for thirty years at an unsustainable rate. This is not a ten year problem and won’t be fixed that way. In particular:
First—the nexus of fiscal consolidation and growth. At first blush, these challenges seem contradictory. But they are actually mutually reinforcing. Credible decisions on future consolidation—involving both revenue and expenditure—create space for policies that support growth and jobs today. At the same time, growth is necessary for fiscal credibility—after all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?
Revenue and expenditure are easy problems. The government cannot provide that which we are unwilling or unable to pay for with current tax revenues. Period. That’s the beginning and end of this, and it’s not that hard to figure out. We simply must stop screwing around and deal with the facts – our government has promised things that our people have not been asked to pay for.
It may be that we’re unwilling to pay. If that’s the case then we cannot have those things. It’s that simple.
Second—halting the downward spiral of foreclosures, falling house prices and deteriorating household spending. This could involve more aggressive principal reduction programs for homeowners, stronger intervention by the government housing finance agencies, or steps to help homeowners take advantage of the low interest rate environment.
Nonsense. Those institutions that unreasonably lent against nothing but speculative fervor must be forced to eat their losses. If this blows them up then so be it. Home prices must come down. It is specifically this problem – the attempted prevention of a normal market adjustment that is 30 years in the making – that is causing our difficulties. This abuse of leverage is not limited to homes – it also infests medical care and college educations, to name two parts of our economy. It must end – everywhere – if we are to return to a stable and prosperous economic environment for everyone, not just a handful on Wall Street.
It is rather amusing to watch the IMF chair speak of “consolidation” and “sustainability” when in fact the IMF has a nearly-unbroken record of exploiting a crisis for its own aggrandizement and the protection of the banksters. The people of this nation and indeed the world would be far better off without these jackals. Banking’s essential purpose in the clearing of payments does not have to intersect with the building and maintenance of Ponzi Schemes that are nothing more than a way to asset-strip the populace.
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