Europe Is Running A Giant Ponzi Scheme: Sovereign Debt Crisis Hit The Eurozone

Europe is running a giant Ponzi scheme
By Mario Blejer
Published: May 5 2011 22:47 | Last updated: May 5 2011 22:47
One of the pillars upon which the euro was established was the principle of “no bail-out”. When the sovereign debt
crisis hit the eurozone this principle was ditched. As Greece, Ireland and Portugal were unable to service their
unsustainable levels of debt, a mechanism was instituted to supply them with the financing necessary to service their
obligations. This financing was provided, supposedly, in exchange for their implementing measures that would make
their, now higher, debt burdens sustainable in the future. Yet the mode adopted to resolve the debt problems of
countries in peripheral Europe is, apparently, to increase their level of debt. A case in point is the €78bn ($116bn)
loan to Portugal. It is equivalent to more than 47 per cent of its gross domestic product in 2010, possibly increasing
Portugal’s public debt to about 120 per cent of GDP.
It could be claimed that this mechanism is helping the countries involved since the official loans, although onerous,
carry better conditions than the ones that need to be serviced. But the countries’ debts will increase (as a percentage
of GDP the debts of Greece, Ireland, Portugal and Spain are expected to be higher by the end of 2012 than at the
start of the crisis). The share of debt owed to the official sector will also increase (in addition to the bond purchases
by the European Central Bank, which reportedly owns 17 per cent of these countries’ bonds with a much higher
percentage held as collateral).
Is this ongoing piling of debt an indication of imminent defaults? Probably, but not necessarily. An immediate default
could result in major market commotion, given the high exposure of European banks to peripheral debt. Therefore,
European governments are finding it more convenient to postpone the day of reckoning and continue throwing money
into the peripheral countries, rather than face domestic financial disruption. Consequently, as long as European and
international money (through the International Monetary Fund’s generous financing) is available, the game could go
on.
It is based on the fiction that this is just a temporary liquidity problem and that the official financing helps the countries
involved to make the reforms that will allow them to return to the voluntary market in normal conditions. In other
words, the narrative is that the recipient countries could and would outgrow their debt. To “prove” this scenario is
feasible several debt sustainability exercises are being dreamt up. But the fact is that this situation is only sustainable
as long as additional amounts of money are available to continue the pretence.
Here is where this situation resembles a pyramid or a Ponzi scheme. Some of the original bondholders are being paid
with the official loans that also finance the remaining primary deficits. When it turns out that countries cannot meet the
austerity and structural conditions imposed on them, and therefore cannot return to the voluntary market, these loans
will eventually be rolled over and enhanced by eurozone members and international organisations. This is Greece,
not Chad: does anyone imagine the IMF will stop disbursing loans if performance criteria are not met? Moreover, this
“public sector Ponzi scheme” is more flexible than a private one. In a private scheme, the pyramid collapses when
you cannot find enough new investors willing to hand over their money so old investors can be paid. But in a public
scheme such as this, the Ponzi scheme could, in theory, go on for ever. As long as it is financed with public money,
the peripheral countries’ debt could continue to grow without a hypothetical limit.
But could it, really? The constraint is not financial, but political. We are starting to observe public opposition to
financing this Ponzi scheme in its current form, but it could still have quite a way to go. It is apparent that, if not forced
sooner by politics, the inevitable default will only be allowed to take place when the vast part of the European
distressed debt is transferred from the private to the official sector. As in a pyramid scheme, it will be the last holder
of the “asset” that takes the full loss. In this case, it will be the taxpayer that foots the bill, rather than the original
bondholders that made the wrong investment decisions.
Is this good or bad? It all depends on how one assesses the value of the time gained. Would a bank crisis now be
more damaging to the European economy than a future debt write-off? Or, alternatively, is recognising reality and
accepting a debt restructuring now preferable to increasing the burden on future taxpayers? At the end, it is a political
decision, but it would be refreshing if things are called by their name. Euphemisms may be useful in the short run, but
one finally recognises a Ponzi scheme when it persists.
The writer was governor of Argentina’s central bank and director of the Centre for Central Banking Studies at the
Bank of England. Samuel Brittan is away
Copyright The Financial Times Limited 2011. You may share using our article
Don’t let banks gamble with taxpayer money

April 21, 2011 11:26 am by FT
24
By Roger E.A Farmer

The US is in the process of implementing the Dodd-Frank Wall Street Reform and
Consumer Protection Act. In the UK, the Vickers Commission has released interim
recommendations to “ring-fence” the retail operations of banks from their investment
banking activities. The Vickers report is a model of clarity and if the ring fence proposals
are implemented, they will have bite. But there is already a push from Lloyds to weaken
the proposals of the interim report and that is only the opening salvo. The pressure from
financial institutions for lax regulation will be intense. That pressure should be resisted.
The proposed reforms of both the Dodd-Frank act and the Vickers report will increase
the amount of capital held by financial institutions by reducing leverage. Increased
capital requirements will reduce the probability that any given institution will fail but they
will not eliminate the moral hazard problem created by implicit government support for
large financial institutions. That requires a more radical reform of the kind I have argued
for elsewhere.
High capital requirements do not prevent financial institutions from seeking risk; if
anything, they exacerbate the problem. Bob Diamond, chief executive of Barclays, is
shooting for a return of 13 per cent on equity next year by taking on more risk. This may
please Barclays’ shareholders; it should not please the UK taxpayer since Barclays’
investment strategy involves gambling with deposits that are backed by the public
purse. Unlike Lloyds and RBS, Barclays was not bailed out by the government. But a
successful past is no guarantee of a successful future and it does not mean that
Barclays should be given carte blanche to gamble with taxpayer money.
Mr. Diamond is on record as arguing that banks should not be bailed out. That’s a bit
like arguing that a doctor should not treat a person who catches smallpox because the
unfortunate victim was not prescient enough to buy insurance. Financial crises are like
epidemics. If one bank becomes infected by a crisis of confidence, others will follow.
Nobody wants to see a return to 19th century capitalism where bank failures and
financial crises occurred with alarming frequency. Regulators understand this problem
and bank bailouts are here to stay, although, it may be possible to design a regulatory
system that allows individual banks to fail while protecting the system as a whole.
Retail banks raise capital from savers and lend that capital to small businesses at a
profit. By making riskier loans, a bank can demand higher interest rates from its
creditors. This leads to higher profits on average for the bank’s shareholders. But
because risky loans have a higher probability of default, sometimes the equity holders
will lose money.
If a bank’s loans are extremely risky, its equity holders may be wiped out when there is
a financial collapse. But in modern day regulated economies, the holders of savings
deposits do not suffer; their savings are insured by government guarantees.
Deposit insurance does not only benefit savers, it also benefits the equity holders of the
bank. When savings deposits are guaranteed, it is much easier for a bank to raise
capital. There was no outcry from depositors when Barclays declared that it planned to
take on more risk, precisely because high street customers are not exposed to that risk.
If there is another financial meltdown, it is the British taxpayer who will step in to pick up
the pieces.
In response to a wave of bank failures during the Great Depression, the US passed the
Glass-Steagall Act, a comprehensive piece of legislation that introduced Federal
Deposit Insurance. As a consequence of that legislation, private individuals were able to
have confidence that their money was safe, even if the bank in which they invested
went bust. Uncle Sam, through FDIC, would bail them out. In return for deposit
guarantees, the Fed placed restrictions on the kind of investments that a high street
bank could make. “Casino banking” was ruled out by law for any bank that accepted
federally guaranteed deposits.
In 1999, many of the provisions of the Glass-Steagall act were repealed and the US
entered a new era of universal banking. Under the new legislation, investment banks
were able to compete for retail deposits and commercial banks were able to invest in
high yield assets such as mortgage backed securities and other forms of collateralised
debt obligations. The financial deregulation of 1999 occurred in response to an intense
lobbying effort from financial institutions. It was also backed by the then Fed chairman,
Alan Greenspan. Wall Street bankers argued that deregulation would lead to higher
growth by providing a broader fund base to support lending.
Why should one oppose the universal banking model? Surely a return on capital of 13
per cent is not unreasonable as long as there is enough equity in the bank to absorb
potential losses. Perhaps. But when deposits are protected by government guarantees,
there is an incentive for a bank to compete for customers by offering savers a higher
rate of interest than its competitors. The most successful bank is the one that takes on
the most risk. Ring fencing assets will not remove that incentive since the retail arm of
the bank has the same incentive to seek risk as the investment banking arm.
Current opinion among financial regulators is that the problem of financial instability can
be solved by imposing higher capital requirements on banks. But higher capital
requirements cannot prevent banks from taking excessive risks. In the 2008 crisis,
commercial banks speculated in the US housing market by buying low grade mortgage
backed securities that were mistakenly rated as triple A by the US ratings agencies.
Somebody was asleep at the wheel.
I am not opposed to financial institutions taking risk. Risk is an integral part of the
engine of capitalist growth. But Barclays, and other deposit taking institutions, should
not be allowed to gamble with private deposits that are insured by government
guarantees. There is a strong case to be made that effective reform requires the
complete separation of retail and investment banking. That separation should be
accompanied by restrictions on the assets that can be held by any institution that relies
on government guarantees. Restrictions of that kind were part of the Glass-Steagal act
that led to 60 years of relative economic stability. Dodd-Frank and the Vickers report
make significant steps towards restoring the protections of Depression-era legislation. In
my view, they do not go far enough.
Related reading:
Independent Commission on Banking interim report
Roger Farmer is chair of the economics department at UCLA and the author of two
books on the global economic crisis. How the Economy Works: Confidence, Crashes
and Self-Fulfilling Prophecies, is written for the general reader and specialist alike and
Expectations, Employment and Prices is written for academics and professional
economists. Both are published by Oxford University Press.
© Roger E. A. Farmer
Disclosure: Martin Wolf, the FT’s chief economics commentator, is a member of the
Independent Commission on Banking
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1. Report caldararo | April 22 11:36pm | Permalink

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All traditional societies had means to limit the unequal distribution of wealth. Some of these were
derived from custom, while others were structured by religious dogma and sanctions. It is a shame
that most economists (both socialist and capitalist) of the 20th century regarded capitalism as a
modern phenomenon, when we can see its existence in many societies of the ancient historical
period, and among
traditional societies, as Herskovits so clearly demonstrated in his book, Economic Anthropology
published in 1952. For example, Ancient Egypt was a market economy of credit instruments,
money and contracts enforced by law. I have given other examples for the existence of derivatives
in ancient and traditional society in recent articles and chapters in books (Caldararo, 2009; 2010).
This clothing of modern society in special garb to separate it from past economies is unfortunate
as it prevents us from making useful comparisons of societies under stress ancient and modern.
We might recall that to Adam Smith capitalism was clan warfare. He clearly describes that when
one clan, whether of Mercantilists, bankers or guilds gained the upper hand in an economy and
controls the government, then the economy becomes influenced and out of balance, wealth and
trade become constrained and distorted by the interests of the dominant group. The history of
monopoly he gives and we have seen since amply attests to this scenario.
In modern capitalist countries the distribution of wealth has

generally been poorly regulated by attempts at wage and price controls
and consumption laws that usually only affect the middle and lower
classes. Taxation has been more effective depending on enforcement and
the tax structure. Generally, however, most societies, ancient or
modern fail to deal effectively with inequalities in wealth and
taxation is shifted onto the lower classes resulting in diminishing
returns and unrest as I have shown in my book War, Religion and
Taxation (2009). Tainter (1988) comes to a similar conclusion in his
Collapse of Complex Societies, though we disagree on the role of
taxation.
As in examples from past civilizations, we have seen since the 1980s the tax burden shifted in
America to the middle and lower classes and the inequality of wealth has skyrocketed. Some
conservative websites argue that the share of the Federal tax burden rose for the highest earners
(http://www.taxfoundation.org/...). This obfuscates the situation for it is a means of deflecting
attention from the tremendous increase in wealth of the highest earners at a time when most
Americans have seen their incomes stagnant. Also, it confuses the role of taxation and spending.
If you have 100 tax payers who each pay 10% of their income and that raises $1000 which is the
necessary amount to pay for expenditures, then your tax income is sufficient no matter how the
rate affects the remaining income of each percentile of taxpayers. If however, you decrease the
tax rate on all taxpayers so that the resulting tax proceeds only cover half the expenditures then
you have a deficit and this is what has happened since the Reagan administration. Decreased tax
rates have not resulted in increased tax proceeds to cover expenditures which was the Reagan
theory.
As Patricia Becker has shown in a paper in 2006 (http://books.google.com/...) the income of the
highest earners has increased 3 times as fast as the lowest percentile and this has only become
more divergent since 2006.
Therefore, the amount of that tax relative to the increase in their wealth of the highest earners
declined as the percentage of the lower 95% of earners fell as did their relative earnings. When
other taxes are considered, property, sales and
transfer taxes, for example, the relative tax burden fell even more
significantly on the lower 95%
(http://www.huffingtonpost.com/...
480.html).
The lack of tax revenue due to tax cuts over the past 30 years has created huge debts for the
federal and state governments as well as many localities, thus the anti-tax mentality has been
destructive to the fiscal responsibility of the citizenship.
The idea that the richest earners are using their income to create jobs is also a questionable
argument, they are placing it increasingly in speculation and off-shoring it.
Bernstein Research reported in last week’s Financial Times that there has been a stunning drop in
investment in research and development since a high in 1997. Martin Wolfe reported that gross
investment in the UK and USA has fallen to the lowest level in 3 decades. Venture capital is at a
low as well as people are fleeing real investing and placing their money in hedge funds, Forex
speculation and other non-productive vehicles.
The really troubling effect of the lack of equity in taxation and income has been the replacement of
income for the lower 95% by debt. As their incomes became stagnant from the 1970s to the
present, the lower earners replaced income increases with either credit card debt or borrowing
from home equity. So while the rich got richer, the rest got debt. This situation can only be
corrected by revising the tax code to make it take into account rising incomes of any segment of
the economy. As societies become more unequal in wealth they become less stable. This result
has followed with the French Revolution of 1789, the Russian in 1917 and in 1989 as well as the
recent crises in the Middle East. Currently the financial industry holds the seat of dominance
Adam Smith warned us about, and their influence is destructive and should be ended to restore
the balance of the market place.
2. Report joseph belbruno | April 24 9:39am | Permalink
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@ caldararo - You have it the wrong way around! It is not that "economists" seek to clothe
"ancient capitalism" in modern robes. Quite the contrary! The highest, most pressing need for
bourgeois economics is to do exactly the opposite! That is, to clothe the latest global form of social
relations of production as if.... as if.... they were sub specie aeternitatis (!) - as if they were
ineluctable and unchanging manifestations of "human nature"!!
If you only care to look at Farmer's reply to me in his last post on this Forum, you will find the
expression "human nature" etched in golden characters! This is the kind of nonsense that we
need to combat - because most economists are either blind to it.... or (and I sincerely exclude
Professor Farmer from this) are "paid" to be blind to it. (Farmer is fond of Mark Twain, but was it
not that wise bon pensant who once observed that "a man is most unlikely to understand a
concept, if his income depends on not understanding it"?)
It seems to me that, up to a point, we are all "fellow travellers" here: we all want to change the
constitution (to ape ironically Lennon's bathetic "Revolution"), but where we "need to change our
minds instead" (gosh, Lennon was such a "goody-goody" idiot!) is in the "concepts", the
"theoremata" and the "theorema" that we use to understand capitalism!
Farmer acutely points out the horns of the dilemma where monetary analysis is concerned: -
control of inflation (inflation targeting) has only made more evident the "impossibility" of controlling
asset prices - whether the central bank mandate is single or dual.
And Caldararo here lays the emphasis of the skewed distribution of "income" (not to be confused
with "wealth" - which is indeed the kind of notion that makes us equate Cleopatra with Margaret
Thatcher!).
But the distribution of income never has been and never will be the problem. The problem has to
do with the domination of dead labour over living labour - with the "wage relation". And the wage
relation extends not just to "how much" we produce, but especially to "what" and "how" we
produce!
If indeed "the capitalist state" is f o r c e d by our antagonistic needs to take up an ever-larger
share of social productive activity (otherwise known roughly as GDP), we find that each time its
"need" to uphold the "pretence" of "restoring the balance of the market place" (Caldararo's famous
last few words in his entry), what we find is that each time the "economy" is "re-privatised" we
witness the uncontainable, explosive swelling of "asset bubbles" and financial catastrophes that
threaten the very reproduction of "the society of capital" itself!
THAT is the lesson of the Great Financial Crisis! The attempt "to liberalise the economy", to regain
ground for "private" capitalist enterprise that began under the Arthur Burns and Paul Volcker
regimes at the Fed late in the '70s and in the '80s had the "catastrophic" - "systemically risky" -
effects that we confront now! (I have to pause an instant to indict the cataclysmic stupidity of those
"black swan" explanations!!)
I am writing a chapter ("Notes on Minsky") on these developments - but I must not overburden the
patience of fellow participants and will stop right here. Interested readers can follow me at Gavyn
Davies Blog.
Look: I bear no ill will to Professor Farmer, whose reply to me was admirably civil. But I have been
scarred. People like me would not survive a single week in an "economics" faculty these days
(check the discussion of a Rajan article at Gavyn Davies Blog). And that makes me angry... How
could it not?
Please Professor Farmer: no more of this insensate "risk is the engine of capitalist growth" talk.
Cheers.
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PS: Perhaps as a reward to those who had the temerity to endure my post, I will include a further
comment on "risk" (Farmer's thematic "intuition" of the space between "the horns of the dilemma")
from my "Notes on Minsky" chapter:
"In particular, what we understand is that those “information asymmetries” (the moral hazard, the
free-rider and principal-agent problems) are far more complex than Mishkin makes out and involve
the “functional separation” of capital in its distinctive “moments” of valorisation!! “Risk” is one of
the aspects of this functional separation in that the internal distribution of profit depends on the
perceived amount of “risk” a given investment involves. Let us recall that “risk avoidance” is the
aim of some capitalists – the “rent-seeking behaviour” – which threatens the “stagnation” of the
system. But capital as a whole is oriented to “profit”, which involves the “risk” of the process of
valourisation, from M to M’ through P (the process of production). This is why Keynes acutely
perceived that “money is the bridge between the present and the future”. Every time capital is
“invested” there is a risk that there will not be a “return on capital” or indeed (with Mark Twain) the
“return OF capital”!
But the wage relation cannot stand still – because of its “antagonism”, which pushes the capitalist
to become an “entrepreneur”, to “innovate” so as to re-define and re-structure the political
command of capital as dead labour over living labour. Schumpeter alone of the great bourgeois
economists saw this with enviable perspicacity. He has been cursed with the “Schumpeterian rent”
badge because he identified Cantillon’s “entrepreneurial profit” (the compensation a merchant
receives from the “profits” of capital investment) for “risking” the transition to “market” of produced
goods. But there is no “profit” in Schumpeter’s “Kreislauf” in the Marxian “accumulative” sense;
there is “profit” only as simple reproduction – this is the “neo-Ricardian” meaning of Kalecki’s
“workers spend what they earn and capitalists earn what they spend”. Both Keynes and Kalecki
completely ignore the Schumpeterian “problematic” – the “Dynamik” of capital (versus the “Statik”
of the Kreislauf) – the whole problem of capitalist “Entwicklung” – not “growth” (!) but capitalist
“trans-crescence”, “growth-through-crisis”!...."
4. Report joseph belbruno | April 24 1:43pm | Permalink
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PPS: Sensational! Look what I just found! Hyun Song Shin (at the New York Fed) interviewed by
the Frankfurter Allgemeine Zeitung a couple of days ago:
"Es existiert heute kein theoretischer Rahmen, der die direkte Inflationssteuerung mit monetären
Analysen verbindet. Es ist unsere Aufgabe als Wissenschaftler, diese Dichotomie zu überwinden.
Aber ich bin zuversichtlich, weil sich gerade junge Wissenschaftler diesen Themen zuwenden."
In translation: "There is today no theoretical framework [my "theoria" from previous post] that links
directly inflation targeting with monetary analysis..."
And here is what I just wrote below, praising Farmer for identifying "the horns of the dilemma":
"but where we 'need to change our minds instead'.....is in the "concepts", the 'theoremata' and the
'theoria' that we use to understand capitalism! Farmer acutely points out the horns of the dilemma
where monetary analysis is concerned: - control of inflation (inflation targeting) has only made
more evident the 'impossibility' of controlling asset prices - whether the central bank mandate is
single or dual."
Well well well! Here is the link:

http://www.faz.net...mmon~Scontent.html
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Incidentally, what I call "dilemma", Shin calls "dichotomy" ("Dichotomie", further down the German
quotation). Regards and apologies for long posts.
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@Joseph Belbruno
(1) Interesting that you draw attention via Vittori to the fact that financial stability policy is but a
form of fiscal policy, and that FED circumscription to `prix de liquidite et ciblage de l´ inflation´ has
runned its (to the wall) course.
(2) and of course (paraphrasing a hyperlink on an earlier post to krugman: "RMB not allowed to
appreciate generates inflation in China") that RMB not allowed to appreciate meant that US
(mal)investment was worth less than otherwise priced by the market (bubble).
(3) economic theory is a subdiscipline of applied mathematics and its vocation is positive thought.
(4) economics is meaningless without the broader social sciences thread; philosophy and history
in particular. But it seems to me that you abhor the term positive economics; but that is only
because a set of idiotic politicos, charlatans (of the right, madmen distilling their frenzy), have
appropriated and manipulated knowingly or herdily its terms to play their rethorical tunes. You are
far above harangue and "political" electoral speeches. Think about it: there is such a (valuable if
complemented) thing as positive economics, if you want to use "economics" as the proper
(metonymic) noun of that hodgepodge of "politics", "economics", " I belong to the riffle
association", "free to choose charabia" fine. But consider economics as a positive science for all
its worth.
6. Report RDD | April 25 3:12pm | Permalink
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@joseph belbruno, other quick notes
(5) I would like to note again, as I mention in earlier GD blogs, that paleo-homo sapiens
accumulated capital when working and storing sylex intruments, and so did communist soviet
union; indeed it is genotypic/phenotypic of humans to accumulate capital (beavers do it as well...)
and communist societies were in that sense (and it doesn t seem minor to me) capitalistic, just
that Stalin and the party decided how much and how to accumulate it.
(6) Remember that bourgeois society appeared in the soviet union in a new guise if you will,
different words same content: (let me gloss the banal: parents anxiously preparing their offspring
to pass the public examinations that warranted positions for example in high party offices, or
foreign embassies, or the highest academic posts, or the highest technical posts in industrial
concerns (all at the same time allowing to sincerely profess soviet conviction and at the same time
providing non negligible privileges above a lower classes). Distribution is not about about absolute
wealth but relative wealth....
That is what soviet planners are bankers, traders, enginners ....
(7) Lenin what a f****** lethal idiot. To note another banality: intelligent idiots are so dangerous.
(8) By truth=memory you mean utopia=something forgotten?
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@ RDD - Very briefly (must not get too far off the Forum topic):
"Positive economics" as the "measurement" (more or less reliable) of "existing" productive
behaviour and conditions is the only raison d'etre that one can concede to "economics". To that
extent, I agree with you. The point was made by Gunner Myrdal in 'The Political Element in the
Development of Economic Theory' (and copied by Hannah Arendt in the first part of "The Human
Condition"). This could apply even to that most pestilential form of mystification called "equilibrium
analysis" - something that my Cambridge don Tony Lawson does not quite understand (just
google him). (If you really wish to brush up on your "lycee philo", a close reading of Nietzsche's
first chapter of "Beyond Good and Evil" on "scientificity" is recommended.)
That, alas, most known forms of human communities have been less than.... "u-topian" cannot be
denied. But who is talking about "utopia"? We are merely striving for a society better than the one
that "economics" is telling us is "the only scientific rational one" even as it threatens all forms of
life on this planet!
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Given that this thread has been a little quiet despite the evident importance of the topic, it may not
be remiss of me some snippet from those "Notes on Minsky" that seek to trace the "origins" of the
present crisis. Here goes:
We know that capital seeks “to valourise” itself as “safely” as possible – indeed, if this circle could
be squared, capital would “wish” to be “profitable” as “naturally” as trees bear fruit! (- Whence
comes the notion of “fructiferous capital” and of that more ignominious one, the Wicksellian
“natural rate of interest”! – or finally that most infamous of bourgeois phantoms, “the natural rate of
unemployment”!)
And when, in one fell swoop, two decades ago, one of the most bestial dictatorships this world has
ever seen, the Chinese Politburo, decided to make “the great leap forward”, all the prayers of
capital seemed to be answered – it was Christmas all year round! Here were a billion potential
“workers” that could produce consumption goods to keep workers in advanced capitalist countries
“pacified” and maintain nominal wages stable whilst the cost of wage goods for capitalists declined
dramatically! This was the basis of the Great Moderation. Again, Fahr at alii fail to mention this,
and list the “effects” rather than “the ultimate source”: “The period before the financial crisis,
known as the great moderation, was the result of a number of factors that can be grouped into: a)
structural change, e.g. better inventory management (McConnel and Perez-Quiros, 2000) or
financial innovation and better risk sharing (Blanchard and Simon, 2001), b) improved macro-
economic policies, such as the establishment of stability-oriented monetary policies, and c) good
luck, i.e. the absence of large shocks such as the oil price crises of 1974 and 1979.11 The relative
importance of those factors has been hotly debated, but all three factors are likely to have
contributed to a reduction of volatility.12”
It is this paper by Blanchard and Simon (http://www.brookin...bpea_blanchard.pdf ) that Bernanke
mentions in the very first paragraph of his address launching the phrase “the Great Moderation”
(here http://www.federal...040220/default.htm ): “One of the most striking features of the economic
landscape over the past twenty years or so has been a substantial decline in macroeconomic
volatility. In a recent article, Olivier Blanchard and John Simon (2001) documented that the
variability of quarterly growth in real output (as measured by its standard deviation) has declined
by half since the mid-1980s, while the variability of quarterly inflation has declined by about two
thirds.1 Several writers on the topic have dubbed this remarkable decline in the variability of both
output and inflation ‘the Great Moderation’”.
A remarkable decline, indeed! So remarkable that finally it seemed as if central banks could be
given a “technical mandate” to target inflation simply by means of small “corrections” to the
interest rates they set – and this could be “set in stone” even in bourgeois constitutions as part of
“economic management” without the need to bother about anything else. “The Jackson Hole
Consensus” (the last mantra spun out of “the Greenspan put”) was that “asset prices” are not and
cannot be the concern of central banks – “price stability” alone will suffice, and “the market” will
take care of the allocation of capital to various investments. The entire wave of “financial
deregulation and liberalisation” that culminated with the repeal of the Glass-Steagall Act by the US
Congress in 1999 gathered its tsunami-like strength from this “Great Moderation”. (The tide of
capitalist opinion toward “privatization” from the ‘80s is wonderfully summarized by the doyen of
Italian central bankers, T Padoa-Schioppa in this, “The Genesis of EMU”, here
http://www.eui.eu/...Texts/JM96_40.html )
Because, just as in the 1920s under Fordism, the sudden reduction in the cost of wage goods for
capital made possible by the opening of “the Chinese frontier” could allow capital “to undo”, to
demolish and reverse what had been the unstoppable and ominous expansion of the role of the
State in the US economy and worldwide. The industrial analogue of “financial liberalization” was
the “re-privatisation” of entire areas of social productive activity that had fallen under the direct
management of the State since the New Deal. The unprecedented profits and “global savings glut”
(again the title of a Bernanke speech, here http://www.federal...050414/default.htm ) coming from
China and other “emerging economies” that were concomitant with the “globalization” of the
capitalist economy (see P Lamy here http://www.ft.com/...html#axzz1C2IqIb63 ) – all this had
“silenced” the real “motor”, the true “engine” of capitalist accumulation, just as Fordism did in the
1920s – the working class, the antagonism of workers in the workplace and in society, the one
and only true “test” of the real “value” and “profitability” of capitalist “investment”!
Without its continuous “conflict and confrontation” with living labour (with workers) in the
workplace and in society, capital is deaf and blind, it has “no senses” because it cannot “gauge”
the actual political command it can exercise over workers and over society at large without
encountering their “resistance” in its stages of “valourisation” (the productive process) and of
“realization” (the sale of products). The real life of capital is precisely this: - command over living
labour in the process of production – a “process” that through workers’ antagonism then becomes
“extended” to the whole of “society” and that causes “the State” to intervene (and “interfere”!) in
the notionally “private” capitalist “market” economy. To the extent that capital fails to engineer
“growth”, the State needs “to control growth”, and this leads inevitably to the “growth of its control”
over the economy and the society of capital as a whole.
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Who would have thought that the chairman of Wal-Mart, none other than Mike Duke, would
endorse my "Marxist" views? If you read my last entry, and then compare this report of how he
summarises "the Great Moderation".... why, they are one and the same!
http://www.busines...rc=sph&src=rot
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Oooops! Sorry, that was Crispin Odey from Odey Asset Management who has obviously been
reading this Forum. Here is a snippet of what he had to say:
"Odey argues that inflationary pressures have been suppressed over the past twenty years,
following the fall of the Berlin Wall, and the growth of the emerging markets, with undervalued
currencies and a desire to compete.
“That has been of great benefit in terms of the inflationary side; it has kept costs down, it has
ensured that wages have not risen in the West, it has brought down interest rates and it has been
very good for the bond market.”
But it was less a boon for equities. Share markets rose happily during the 90s, but then with the
bursting of the dot.com bubble, profits slumped in 2003. From that point, the US central bank,
under Alan Greenspan, decided to boost US housing prices, in order to fuel consumer spending
and keep the global economy kicking along.
11. Report RDD | April 30 1:21am | Permalink
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@joseph belbruno
(I ve been on holiday without internet access) Thanks for corresponding my "notes" and your
reference to Beyond good and evil (chap 1, FN): I will read it.
By the way there are also words I abhor: capitalist and communist. I know they are terms with a
defined meaning but I just don t like them period (it must be a case of very mild nonetheless
phobia). Especially because they tend to be used out of their terminological context (historical,
cultural, social, mass psychological zeitgeist-ical).
And yes the cleaness of the planet: the biggest tragedy of the commons. To the majority it is not
dirty enough yet hence no resolution of the prisonner´s dilemma.
Future: communitarian solution (1) or communitarian solution (2)
(1)agreement/negotiation with or without twisting of arms.
(2)disagreement/confrontation, taking literally the arms out. With possibility of moving to (1)
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Perhaps before we leave "Bernanke" (save to return to him - so "central" is his contribution, if read
critically, to the theorisation of the present "crisis"), could I rapidly "situate" the discussion in a
"theoretical" context - an essential task if we are to rise above the "noise" of the quotidian "random
walk". Indeed, it will be recalled that in neoclassical theory, it is the very assumption of "perfect
information" (Modigliani-Miller), of "common knowledge" (game theory), and Walrasian
"tatonnement" (in equilibrium analysis) that make the exchange of information "symmetrical" and
that reduce the entire field of "economic science" to "the problem of co-ordination" (just google
Hayek's "Individualism and Economic Order", discussed in Loasby's "Equilibrium and Evolution"
for an attempt to "historicise" the problem).
It is evident that there can be no space in all of these "theories" for central banks, nor indeed for
"financial intermediation" (hence Hayek's virulent opposition to central banks and fractinal
reserves as a "negation" of the market pricing mechanism). The "separation" of borrower's risk
and lender's risk first raised by Kalecki and Keynes - and the consequent recognition that "money
is not neutral" - remains "internal" to the function of capital: it is, as it were, a "division of labour".
But an understanding of why, how and where "information asymmetries" arise in the "channel"
that links investment decisions with financial structure is absolutely essential. To leave the entire
matter to "asymmetric information" arising "after" some "exogenous shock" (see any of Mishkin's
papers on the subject) is quite simply inadequate. (Similarly, the "New Institutional Economics" of
Coase, Williamson and Demsetz, explain away the "internalisation" of these "asymmetries" as the
need to minimise "transaction costs" - which then raises the conundrum of why the capitalist
economy is not constituted by one "mega-firm"!)
In this paper ( http://docs.google...RZZR4PoOaJYKaKF07Q ) , Bernanke and Gertler identify the

"ultimate source" of asymmetries in the "borrowers' net worth position" - the lower the net worth,
the higher the risk of implosion. Again, this fails to isolate "the virus" responsible for the disease,
but it offers some hints. The first hint is that "high net worth firms" will be "ensconced" from debt-
deflation initially by their "oligopolistic" and hence "systemic" importance (too big to fail). And the
second is that each successive "crisis" brings about a series of "mergers and acquisitions"
whether voluntary or "shot-gun marriages" that increases further the degree of "oligopoly" of
capitalist enterprise and therefore its future "fragility" - the "systemic riskiness" of the system.
And finally (only because I do not wish to impose on the patience of participants further), the
growing "systemic riskiness" of the structure of capitalist enterprise, together with the parallel
"centrality" of State authorities in "crisis management", mean that central banks become "lenders
of first (not last) resort".
I hope this begins to clarify some matters so we can all move to a higher level of analysis and
discourse.
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PS: Just a clarification on the Bernanke-Gertler paper I discussed below. Please note that their
analysis of "borrowers' net worth" as determining "financial fragility" refers to "ex post" conditions
of "liquidity trap" , stagnation or outright deflation following a Fisherian or Minskian "debt-deflation"
implosion. What I am arguing here is that this applies also to "ex ante" situations whose "dynamic"
ought to be explored! My "hint" here is that, not "information asymmetries", but actual social
antagonism (traceable back to the wage relation -something to be tackled later) is what gives rise
to these so-called "asymmetries".
Indeed, both their "internalisation" (in the theory of the firm) or their "crisis management" (by State
authorities) are intended to obviate or "supplement" or "rectify" the "blocked flow of information"
that is due to this "antagonism" rather than to "asymmetries" for which economic theory can find
no rational "cause" or origin! The solution is evident: more democracy in the sphere of
"production", that is, of the allocation of social resources. Good week-end.
14. Report joseph belbruno | May 1 3:57am | Permalink
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There is one final thought with which I want to leave the Bernanke-Gertler article linked below -
and it is the essential point I am trying to establish. Just read carefully what they write at page 89:
"This paper also contains some novel policy results, not discussed in our earlier work. The most
striking of these is that, if "legitimate" entrepreneurs are to some degree identifiable, then a policy
of transfers to these entrepreneurs will increase welfare. We show that a number of standard
policies for fighting financial
fragility can be interpreted along these lines.”
Allow me, please, to leave you with one question: How on this lonely earth can we e v e r
establish or identify who are "legitimate entrepreneurs"? This is the question whose answer "all
the king's horses and all the king's men" of "economic science" (in their looking-glass world)
cannot ever "put together again"! Because the answer goes to the heart of defining what is "real
value" for capital! And we ought to know that the meaning of "value" can be found only in the
antagonism of the wage relation. Regards to all.
15. Report ElevenAlphaDog | May 1 11:12pm | Permalink
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@josephbelbruno, RD, cladararo
What point are you exactly trying to make?
A lot of erudition is on display, not much seeming to be actionable.
Do you think that banks are gambling with taxpayers money?
If so, should Chase, Barclays, Deutsche Bank and Société Générale be broken down?
Clear problem, clear solution.
Can you contribute?
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@ ElevenAlpha - There can be no argument that the financial sector has had to be rescued from
its own folly at stratospheric social cost. Therefore, no-one can doubt legitimately that Professor
Farmer is right on the need for banking reform. And his proposals are unquestionably valuable
and entirely well-supported on rational grounds.
Where we differ is on "theoretical" matters about the real sources of the "disease". I go a lot
further than he does in calling for a thorough reform, not just of the banking system, but also of our
"political" system, because I attribute the excesses of the "financial sector" to social conflicts and
"antagonism" that arises from the system of "production" (on how we decide what, when, and how
we produce) and not just on the financial system (infact, I am arguing that the two are now more
than ever "inseparable" and "indistinguishable" because illiquidity and insolvency cannot be told
apart! [that is the problem with Bernanke's "legitimate entrepreneur" proposal I quoted below]).
Because all orthodox economic theory (which plays right into the hands of capital) deludes itself
that the aim of a capitalist economy is to produce "things" (goods) "efficiently", it leaves no
theoretical room for "money" except as a "facilitator" for the exchange of "things" (goods). What
we argue instead is that the entire aim of capitalist enterprise is "to make money", which means
"profit" - which means ultimately the control of the living labour of workers (the abolition of
"democracy" over production) in exchange for "dead labour" (goods). Profit means therefore that
the capitalist class is able to secure political control over workers by controlling the means of
production. "Crises" occur when this control cannot be secured reliably so that it is difficult to
establish the "value" of financial assets (witness, for instance, the problems involved with "mark-
to-market" that followed the latest financial crisis).
Indeed, I am actually hinting at the fact that the present system is "damned if it does and damned
if it doesn't" in the sense that without reform it will perish catastrophically ("systemic risks"), and
with "reform" it will have to yield to ever-greater "interference" from the State over its operation,
which only worsens the "legitimacy" of the entire system.
Unfairly summarised, my gripe with Caldararo (an economic anthropologist) is that just because
there are "instances" of isolated "capitalist" forms of economic activity (for example the "publicani"
financiers ancient Rome or the Renaissance banking houses or the merchant establishments of
Pisa or the Hanseatic League) that does not mean that our present form of capitalism can be
traced back to Antiquity or even earlier! That would be like saying that nuclear power stations
existed in Ancient Egypt because traces of uranium were found in Cleopatra's diet! (I said I was
going to be unfair!) Regards.
17. Report ElevenAlphaDog | May 2 9:14pm | Permalink
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@ joseph belbruno
You are absolutely correct in your assessment that excesses of the financial sector have roots in
social conflicts, namely that the political clout of the finance industry is grossly atrophied.
However I would suggest that rather than engaging in long-term / utopian discussions of changing
the political system, we should focus our energy on devising the specifics of banking system
reform, for which there is a clear and present opportunity.
I happen to support entirely Professor Farmer’s core proposition that simply imposing higher
capital ratios on banks is not enough and that we also need to carve out investment banks from
universal banks. Dodd Frank falls way short of that. This is a real tragedy.
The problem is that 99% of the general population does not understand the issue at all; and of the
1% who do, 80% get paid to act as if they did not understand it (paraphrasing an earlier quote).
Contrary to what you wrote, my personal experience is that the declared number one aim of
capitalist enterprise has always been "to make money", with no shame whatsoever (in the US at
least). Of the different economic models with which humanity has experienced on a vast scale,
there is ample evidence that a capitalist economy does produce "things" more "efficiently" than
any other. This is not a theory into anybody deludes itself but empirical truth.
By the way, the efficient market theory does not exactly play right into the hands of capital,
because if everybody believed in it no one would ever use the services of stock brokers or hedge
funds (do I need to explain?).
You argue that "profit means ultimately the control of the living labour of workers (the abolition of
"democracy" over production) in exchange for "dead labour" (goods). Profit means therefore that
the capitalist class is able to secure political control over workers by controlling the means of
production.” This just sounds hollow to me. I am an entrepreneur. I use capital owned by others to
enable my projects. My primary goal is to make money. I see nothing wrong with that. In the
process I create jobs. I am not a member of the capital class. I believe that I create a lot more
value for society than my investors do. However I am very well aware that what I do would not be
if for them. The concept of class is completely alien to me in practical life (I noticed that you
spelled labour like an Englishman?).
I can not concur with your assessment that "Crises occur when this control cannot be secured
reliably so that it is difficult to establish the "value" of financial assets (witness, for instance, the
problems involved with "mark-to-market" that followed the latest financial crisis).” Mark to market
is a pure accounting issue. It has nothing to do with the root cause of the crisis. As the crisis was
unfolding, in the absence of strict mark to market reporting obligations, only one bank what more
or less truthful in reporting a picture that vaguely resembled the reality of its toxic assets value:
Goldman. All others were deliberate utter liars. I believe however that Prof Farmer is on the right
track when he places the root cause of the crisis in skewed incentives created in the wake of the
1999 repeal of Glass Steagall.
Your other assessment that “with reform the system will have to yield to ever-greater interference
from the State over its operation, which only worsens its legitimacy” sounds like talk radio-level
economics. Anyone calling himself an economist should know that many economic activities
including the stock market and agricultural production can only function properly if subjected to a
strong regulatory regime. The current problems are specifically due to a retreat of regulatory /
state control. In the US the state does not interfere with the financial system, it makes it possible.
Finally, I agree with you that “just because there are instances of isolated ancient capitalist forms
of economic activity does not mean that our present form of capitalism can be traced back to
Antiquity”: our present form of capitalism dates back to 1933, was torpedoed in 1999 and almost
sank in 2008.
Regards
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@ Alpha - I can see that you have misunderstood and "inverted" (or stood on their heads) my
several arguments. (Incidentally, "atrophy" means "wasting away" - the financial sector has done
the opposite. If I have to begin explaining the meaning of English words to you...well, I hope you
are a finer entrepreneur than a linguist!).
I could n e v e r (!!) have written that the aim of capitalists is "not to make money"....because the
very "definition" of capital is...."the realisation of profit" - which means exactly "to make money"!
You are confusing "money" and "risk" (which is what Farmer did, possibly "in an unguarded
moment", as the refrrain goes). I was saying that the aim of capital is not "risk"!!
(God Almighty! I have not even started with you!)
If you cannot see what the whole meaning of "making money" is - in other words, if you cannot
"understand" the process by means of which you are a b l e "to make money"....then we are
wasting our time...
"Class" is not something you "see"; it is something you understand when you try to make sense of
social reality. Similarly with "the State". They are sociological concepts - but there is certainly a
"reality" behind them, and you see it every time you read a newspaper or you go to a hospital, or
when Madonna is photographed in Beverly Hills. Sadly, you will not find it in the irrelevant twaddle
of "professional economists". But you know what? If there were no "social conflict", why would
these bourgeois have so much trouble with the world? And, believe me, there is a whole lot more
to come! Indeed, the financial crisis (which was a product of that "trouble"), nearly brought the
entire capitalist world crashing down...and we are not even half way through it yet! (Think about
that one.)
Finally, saying that "in the US the state does not interfere with the financial system"...well! I give
up! So what was TARP and QE and Dodd-Frank and Bernanke with public announcements every
half hour...Are you sure you live on THIS planet? Ciao.
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PS: One last thing about "making things efficiently". Sadly, a lot of the "things" capitalist industry
produces at present (especially in the US) are "things" like military equipment (very "efficient"!),
the destruction of the environment (from greenhouse gases to the suffocation of marine life in the
Gulf of Mexico to the degradation of living conditions in cities) - but above all, a myriad "objects"
that are "sold" on the basis of "marketing strategies" (advertising) and a model of social
organisation that truly threatens life on the planet. "Consumerism" will probably kill our planet if a
thermonuclear war doesn't. The "social conflict" that "causes" these "systemic risks" (black swans
indeed!) is what we need to understand...before it's "late for the sky".
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PPS: Oh, the "mark-to-market" concept. (Gee, you really don't get "it", do you?!) I know it's an
"accounting" problem. But that is "precisely" the problem! The accountants no longer know what
the heck they are counting!! Not how much (in money terms), but how to "value" assets (in
"money" terms)...Kapisch Alpha? They do not know what the "value" of the blasted "assets"
is....their "worth"! Now, does that sound "political" to you? And do you think that Farmer and all the
bourgeois economists put together would have a clue about that?
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Just a brief comment to remind participants to this Forum that reforming the banking and financial
sector will not remove “the root of all evil” – and as you know I identify that as the social
antagonism that arises from the wage relation and the “value” that capital must “realize” in its
“circulation” as “money-as-capital”, from M to M’ (meaning “profit”). In a nutshell, what this means
is that the “dis-connection” between “profit” and “value” as a result of social antagonism will
always result in “credit crises”.
Now, in an effort “to re-connect” the political link between “profit” (or money-as-capital”) and
“value”, the State will, on one hand, intervene “to rescue” the financial system (through “easing”
and reflation) and, on the other, seek “to enforce” the “value of existing money contracts or
obligations” (in other words, of existing “debt obligations”) through measures of “austerity”. What is
crucial to austerity or fiscal contraction is that it tends to remove purchasing power from working
households because the State invests generally in labour-intensive and welfare sectors. This will
reduce demand for consumption goods whilst existing unused productive capacity will not result in
greater capital expenditure even at low inflation rates. Even the conventional financial framework
envisaged by Bernanke-Gertler that I discussed below prescribes that following a financial crisis
the only way to stimulate investment ("legitimate enterprise") is that the net worth of borrowers
(reduced by the deflationary or contractionary pressures) will have to be restored through
monetary easing and fiscal measures - certainly not by efforts by governments to "make whole"
bondholders and financial institutions. Bluntly put, we need a transfer of wealth and income from
lenders to borrowers.
So these are the real “horns of the dilemma” that Farmer’s pieces are trying to grab. Yet countries
like Britain and Germany and France have opted for austerity! - With the complication that the
euro is even appreciating and the PIGS... Well, if you read the recent FT Analysis column on
Greece there is enough to want to make you scream. The situation there is absolutely alarming...
And the ECB is tightening! God help us!
With any luck, the Fed will come to the rescue if the US recover and play the "locomotive" role
whilst at the same time "compelling" Germany and China to expand domestic demand instead of
engaging in "wage suppression" and "export subsidies" through the "savings channel". (Please
see Michael Pettis's latest blog at www.mpettis.com on these matters.) But each step of the way,
these essential measures will be opposed by those who wish to impose their "laws of economics"
on us. One of those laws is that "contracts must be enforced and performed" - including bond-
interest repayments. Even if we manage to "persuade" governments to engineer avoidance of
these "obligations" (the Latin name for bonds, denoting a “moral” commitment; the German
“Schuld” for debt means also “guilt”!), "bond vigilantes" would seek to impose "capital strikes" - but
these could be avoided with a "determined" co-ordinated policy from Western capitalist
governments.
The next difficulty could be "inflation" - because we must not forget that, once empowered, trade
unions can be as "unreasonable" as any gang of capitalists - just take a look at that Analysis piece
on Greece if you don't believe me! This is why ultimately a thoroughgoing "democratisation" of our
society, preferably extending to all Western countries (the only place where capital can "reside"
safely) is the answer. We can start with financial sector reform and with fiscal and monetary
policy. In Europe, the rot starts in Germany with its capitalist elites and those economies closely
integrated with the Modell Deutschland.
(I note that Axel Weber, having been "spiked" from his "king-in-waiting" at the ECB is moving to
Chicago University - one more example, if any were needed, of the "collusion" between State
authorities and academic establishments: ask Professor Farmer what this means in terms of
"information asymmetries" of the "principal-agent" type!!)
22. Report ElevenAlpha | May 3 12:08pm | Permalink
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@ joseph belbruno
OK, I slipped. I meant hypertrophy. Happy? I do not believe that this kind of sniping is giving any
more weight to your points.
You did indeed not write that the aim of capitalists is "not to make money". But you implied that
they denied it and pretend instead that their goal is to produce things efficiently. That is incorrect.
The goal of any private company and individual is (should be?) to maximize profit. The role of the
state / political process is to regulate imbalances and redistribute the wealth created by the
economic process in a way agreed upon by a majority of voters.
Trust me I am not confusing money and risk - my living depends on it. But when you are
amalgamating financiers and entrepreneurs under one “capital class” I believe that you are
making a gross oversimplification.
“The financial crisis nearly brought the entire capitalist world crashing down”? I don’t think so. It
nearly lead to the nationalization of a large number of US banks. That is quite different from the
collapse of the capitalist world. There does not seem to be any credible alternative to the capitalist
system, as evidenced by the poor electoral showing of left parties all over Europe as the crisis
was unfolding.
One should not amalgamate the financial system, the role of the state in the later, and the
capitalistic economic production model.
On mark-to-market: accountants do know how to count the beans. At most banks in the past 3
years they chose not to tell the truth. That is a different thing that not knowing how to do it. Issues
about the truthful representation of the value of toxic assets AFTER the crisis hit, certainly cannot
be the root cause for the crisis itself, can it?
On the role of the state in the financial system: you were mixing concepts of legitimacy and
interference. Interference is loaded with negativity (a curious choice of word for someone who
seems to define himself as an anti-bourgeois economist). My point is that the state has the
positive and necessary role of intervening (not interfering) and that such intervention does not
delegitimize the financial system in any way.
On “Axel Weber moving to University of Chicago [being] an example of the collusion between
State authorities and academic establishments”: what exactly is wrong with that? Where should
top technocrats come from / go to if not from / to the best universities (second best of course
because the best is on the north shore)?
“In Europe, the rot starts in Germany with its capitalist elites”. I’m quite puzzled by that statement
since Germany is probably the country in the world that best combines a vibrant economy, strong
redistribution of wealth and environmental protection.
Would you care to articulate exactly how you suggest we should “remove the cause of all evil”?
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Just wished to point out Krugman's view that Bernanke is being "intimidated" by conservative
forces in the US (and, it must be said, by a President that has the backbone of an amoeba or an
invertebrate). Here is the NYT link: http://www.nytimes...rssnyt&emc=rss
Two further notes: first, pricing is not determined at the margin. The flow only records what is
happening "at the exit or the entrance" as investors trade in and out of positions. But those
investors will be aware of who "the big guns" are, and that is what will "shape" their expectations.
When "the big gun" is the US Fed, then everybody can drop their bazookas because we are
talking thermonuclear war - and foreign central banks have little or no firepower to counter what
the Fed can throw at them (just look at the pitiful state of the ECB having to combat nearly 30%
unemployment in Italy and a eurozone inflation of nearly 3% already! And the Fed isn't nearly
done yet...)
A corollary of my first point is that only fools and horses take very little notice of what the Fed
does! As I have amply demonstrated below, "the march of events" (with or without Fed
"intimidation") is solidly in favour of Fed policy - and the Great Depression together with the history
of the international monetary system since World War Two offer ample and inconfutable instances
of this! It is not unfair to say that those who cry loudest about "the irrelevance of the Fed" are
those who stand to lose most by their "the Devil take the hindmost" stance.... a stance with which
any sensible observer (from Martin Wolf to Krugman) simply has to agree. To recall Keynes's
fatidic words in mid-1933: "Chairman Bernanke is magnificently right!"
2. JB
30 3:13am | Permalink
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@ Don Peppe - Shucks! You are quite right - it was either a lapsus calami (forgetting to insert
"youth", I got the data from "Repubblica" the day before) or a Freudian slip (pomp for "wishful
thinking"). But I plead not guilty to the latter because, in veritate, there never was a need for it:
what passes for "employment" in Italy is in fact a motley spectrum of "precarious jobs"
(precariato)...and real unemployment is much higher than "i dati ISTAT" reveal. Of course, the
situation is even worse in Greece, Portugal, Ireland and Spain - and not much better in France
and Germany either. Which leads us into a brief reflection on the relevance of all this to social
reality overall. I really have to say that to anyone coming from Australia most Europeans live in
conditions that we would describe as "penurious" (though most Australians would have not the
slightest clue what the word means - mercifully even in the "literal" sense!). Di questo passo,
chissa' come andra' a finire (this way, who knows how it will all end!). Buon fine settimana.
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Perhaps before we leave "Bernanke" (save to return to him - so "central" is his contribution, if read
critically, to the theorisation of the present "crisis"), could I rapidly "situate" the discussion in a
"theoretical" context - an essential task if we are to rise above the "noise" of the quotidian "random
walk". Indeed, it will be recalled that in neoclassical theory, it is the very assumption of "perfect
information" (Modigliani-Miller), of "common knowledge" (game theory), and Walrasian
"tatonnement" (in equilibrium analysis) that make the exchange of information "symmetrical" and
that reduce the entire field of "economic science" to "the problem of co-ordination" (just google
Hayek's "Individualism and Economic Order", discussed in Loasby's "Equilibrium and Evolution"
for an attempt to "historicise" the problem).
It is evident that there can be no space in all of these "theories" for central banks, nor indeed for
"financial intermediation" (hence Hayek's virulent opposition to central banks and fractinal
reserves as a "negation" of the market pricing mechanism). The "separation" of borrower's risk
and lender's risk first raised by Kalecki and Keynes - and the consequent recognition that "money
is not neutral" - remains "internal" to the function of capital: it is, as it were, a "division of labour".
But an understanding of why, how and where "information asymmetries" arise in the "channel"
that links investment decisions with financial structure is absolutely essential. To leave the entire
matter to "asymmetric information" arising "after" some "exogenous shock" (see any of Mishkin's
papers on the subject) is quite simply inadequate. (Similarly, the "New Institutional Economics" of
Coase, Williamson and Demsetz, explain away the "internalisation" of these "asymmetries" as the
need to minimise "transaction costs" - which then raises the conundrum of why the capitalist
economy is not constituted by one "mega-firm"!)
In this paper ( http://docs.google...RZZR4PoOaJYKaKF07Q ) , Bernanke and Gertler identify the

"ultimate source" of asymmetries in the "borrowers' net worth position" - the lower the net worth,
the higher the risk of implosion. Again, this fails to isolate "the virus" responsible for the disease,
but it offers some hints. The first hint is that "high net worth firms" will be "ensconced" from debt-
deflation initially by their "oligopolistic" and hence "systemic" importance (too big to fail). And the
second is that each successive "crisis" brings about a series of "mergers and acquisitions"
whether voluntary or "shot-gun marriages" that increases further the degree of "oligopoly" of
capitalist enterprise and therefore its future "fragility" - the "systemic riskiness" of the system.
And finally (only because I do not wish to impose on the patience of participants further), the
growing "systemic riskiness" of the structure of capitalist enterprise, together with the parallel
"centrality" of State authorities in "crisis management", mean that central banks become "lenders
of first (not last) resort".
I hope this begins to clarify some matters so we can all move to a higher level of analysis and
discourse.
4. Report Don Peppe di Prata | April 30 12:16pm | Permalink
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For just to post the same comment which blatantly enough was dropped:
Italian overall unemployment is currently at 8.3%
Italian juvenile unemployment is currently at 28.6%
Please see:
http://www.istat.i...cprov/20110429_00/
Why my previous post was dropped?
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@ Don Peppe - I think it was due to your querying my proficiency in Italian (diplomatically put). Not
to worry, I have much thicker epidermis than that! Regards.
Just a clarification on the Bernanke-Gertler paper I discussed below. Please note that their
analysis of "borrowers' net worth" as determining "financial fragility" refers to "ex post" conditions
of "liquidity trap" , stagnation or outright deflation following a Fisherian or Minskian "debt-deflation"
implosion. What I am arguing here is that this applies also to "ex ante" situations whose "dynamic"
ought to be explored! My "hint" here is that, not "information asymmetries", but actual social
antagonism (traceable back to the wage relation -something to be tackled later) is what gives rise
to these so-called "asymmetries".
Indeed, both their "internalisation" (in the theory of the firm) or their "crisis management" (by State
authorities) are intended to obviate or "supplement" or "rectify" the "blocked flow of information"
that is due to this "antagonism" rather than to "asymmetries" for which economic theory can find
no rational "cause" or origin! The solution is evident: more democracy in the sphere of
"production", that is, of the allocation of social resources. Good week-end.
Anglo Saxon GDP not as weak as it appears

May 1, 2011 4:33 pm by Gavyn Davies
31
The past week has seen the publication of disappointing Q1 GDP data for both the US
and the UK. On the surface, this seems worrying, since these two economies have
always been the most vulnerable to double dip recessions, because of their exposure to
housing and their bloated financial sectors. In both economies, the slowing GDP figures
have led to calls for further fiscal or monetary stimulus. However, the official GDP
statistics are probably exaggerating the extent to which the economies have in fact
slowed down since the beginning of 2011.
As this blog argued last week, the official expenditure data which have been published
in the US so far this year have been much weaker than the business survey data,
manufacturing output figures, and labour market statistics.
In the event, the real GDP growth rate in Q1
dropped to 1.8 per cent annualised, down from 3.1 per cent in the previous quarter.
However, much of this decline in growth was explained by the extreme weakness of two
sectors: government expenditure (-5.2 per cent) and private non-residential
construction (-21.8 per cent). Without the negative impact from these two sectors, both
of which were depressed for exceptional reasons, the GDP growth rate would have
been around 3.3 per cent, little changed from the recent run rate.
Furthermore, as the accompanying graphs show, there has been no real sign of any
significant slowdown in business survey data in the US.
What seems to have happened in Q1 is that

the damage to growth which would have occurred as a result of higher oil prices has
been almost entirely offset by the cut in the payroll tax rate which occurred in January,
thus helping final expenditure in the household and corporate sector to continue
expanding at fairly healthy rates during the quarter. Without the cut in payroll taxes, the
underlying behaviour of the economy would have been much weaker.
What about the UK? The rise of 0.5 per cent in real GDP in Q1 (2.0 per cent
annualised) exactly offset the drop which had occurred in Q2, so the two-quarter growth
rate has now declined to zero. However, it seems unlikely that this represents a true
reflection of the underlying growth rate in the economy at present.
Apart from weather effects (which cancel out over the two quarters), construction, oil
and utilities all fell sharply in Q1, which depressed the growth rate by about 1.2 per cent
annualised. Much more importantly, however, the weakness in the official GDP data has
not been confirmed by any decline in business survey data, or by any signs of renewed
trouble in the UK labour market. Although the media tend to assume that early versions
of the official GDP statistics are more reliable indicators of underlying economic growth
than other sources of information, this is highly questionable in the case of the UK.
According to Kevin Daly at Goldman Sachs, this tends to be especially the case during
and immediately after recessions. Of the 31 occasions since 1975 when the initial
estimate of GDP was negative, the average upward revision was as much as 4 per cent
at an annual rate. And in the two years following the trough of a recession, the average
upward revision was less than this, but still amounted to 1 per cent at an annual rate. In
other words, it is quite likely that UK real GDP growth in the past two quarters will be
revised up markedly from the zero rate which is currently estimated.
According to Daly, four separate sources of business survey data indicate that the
growth rate has been running at or a little above trend, despite the combined effect of
higher oil prices, and the onset of a fiscal tightening equivalent to 2 per cent of GDP per
annum since April 2010. If this is right, it would suggest that net exports and corporate
investment have been responding to zero interest rates and a super-competitive
currency, and that these stimulative effects have been able to offset some or all of the
impact of the weakening in consumers’ expenditure, which has clearly become a major
drag on the growth rate.
Overall, while I readily concede that the official Q1 GDP figures in the US and the UK
have been far weaker than I expected a few weeks ago, my best guess is that they
have exaggerated the extent to which these two economies have really slowed down –
so far. As to the immediate future, much will depend on the course of the oil price. If it
continues to rise at recent rates, the depressive effects on consumers’ expenditure
could easily prove too much for these, and many other, economies to bear. But it hasn’t
happened yet.
Open for comments. Click to closeClosed. Click to open for commenting
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1. Report Ed Beaugard | May 1 6:47pm | Permalink

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So the fiscal austerity policies now being put into effect in the UK and US have nothing to do with
this decrease in the annual GDP rate? I guess we'll find out soon enough if that's true. If it were
true, it would be remarkably different from othe G20 countries implementing austerity such as
Ireland, Greece, etc. all of whom are now going through severe economic contraction(last time I
checked).
Sincerely,
Ed Beaugard
P.S. First!
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@ Ed Beaugard - Exchange rates, Ed. Exchange rates! The US and the UK can let their
currencies fall, the PIGS are stuck with Germany...pardon!...with the Bundsesban...(cripes!) I
mean, with the "teuro" (Austrain for "expensive euro"). Martin Wolf genially linked this study by
one of my favourites, Paul de Grauwe (whom I visited in 1990 at the Katholiek), that explains a lot.
Here it is: http://docs.google...PG6sTIe3GWx2HQVuMA
3. Report Ed Beaugard | May 2 2:28am | Permalink
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@joseph belbruno
Are you implying that exports will make up for the contraction in the domestic economy due to the
(insane in my opinion) austerity policies of the US-UK govts.? Or, are you saying something else?
Or...is this even worth getting into? I don't have time to read:
The Paper That Will Explain Everything.
Although I take your point about the Eurozone straitjacket, the question might(could) be, even
without the Eurozone, would the psychotic(in my opinion) cutbacks in the PIGS still overwhelm the
effect of currency devaluation(if the PIGS could do that)?
My general point is that there is far too much optimism about the world economy, and far too little
worrying about all the problems in the world financial system that have not been fixed and that
very NEARLY DESTROYED US ALL a mere two years ago.
The utter lunacy of budget cutbacks going on now in the G8 is accepted with far too much
nonchalance by mainstream academic economists, who as I never tire of reminding them:
FAILED, FAILED FAILED in every way possible and thus are completely discredited now and
forever.
Thank you,
Ed Beaugard
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@ Beaugard - Yes, definitely the US and UK are already benefiting from lower exchange rates.
The deGrauwe paper was intended to allay fears of bondholders selling gilts and pressuring
interest rates. These are "benefits" that are not available to the PIGS which are seeing the euro
shoot up to $1.50 (it was 1.35 last time I checked!!). Because firms in advanced credit markets
finance themselves largely through securities, declines in exchange rates do not have large
effects on their financial debt-contract term structure.
What I am saying is that exchange-rate adjustments certainly help lighten the load of indebted
countries (provided their trading partners do not reciprocate) and of course the countries that have
control over their currencies can limit the damage of "credit strikes".
I certainly share your vehemence about the gravity of the situation: how could anyone have
forgotten those dramatic September 2008 days? (Not to mention, of course, March 6, 2009!)
Banking and finance reforms are "vital" at the moment. Longer term, we need to change our
political system! All my work is oriented in this direction - if you care to look at my discussions in
the previous Davies Blog, at Economists' Forum (commenting on Professor Farmer's article) and
my comments on Simon Schama's piece on the monarchy (the monarchy itself is insignificant -
the system that it symbolises is!). Cheers.
5. Report Ed Beaugard | May 2 5:05am | Permalink
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@joseph belbruno
So where we might disagree is will(or would) currency devaluations be enough to overcome the
gobsmacking, psychotic idiocy of fiscal austerity policies in the G8 now. I'm almost certain
it(devaluation) won't in the case of the US-UK, given the weakness of this so-called recovery and
also that nothing has been done about the financial system.
Time will tell, I suppose.
This is what I meant about academic economists. They're talking about currency devaluations
helping a "recovery" in the Anglo-American world, but they're ignoring inconveniant things like the
hundreds of trillions of dollars of exotic derivatives still out there in the system, that exotic
derivatives haven't been banned(no one understands them), the almost entirely corrupt US
financial system, that Glass-Stegall hasn't been restored, the foreclosure disaster, and so on.
It's baffling, to me anyway, why someone like Mr. Davies among many others, isn't raising the
alarm.
Sincerely,
Ed Beaugard
P.S. did I mention that mainstream, academic, New Keynesian, behavioral, Freshwater,
Saltwater(for the most part), Lucasian economics is entirely discredited? That econometrics is
useless? That the DSGE is a piece of worthless rhetoric? That 2007-2009 has discredited all
academic economics completely?
And why do I think this? For one reason:
THEY FAILED, THEIR POLICIES FAILED, THEIR IDEAS FAILED, THEIR "INSIGHTS" ARE
USELESS.
ACADEMIC ECONOMISTS CAN EXPLAIN NOTHING ABOUT THE FINANCIAL CRISIS.
THEREFORE:
THEY HAVE FAILED - THEY HAVE FAILED POLICYMAKERS, THE PUBLIC AND THEY HAVE
BROUGHT ONLY MISERY AND SUFFERING TO MILLIONS OR HUNDREDS OF MILLIONS OF
PEOPLE.
They do make very nice salaries on Wall Street, though.
Thank you, and Good Night.

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@ Beaugard - Once again, I share your distaste at the "economics profession", including its
"academic" arm. As you may appreciate, my part of the "effort" to change this "system" is almost
exclusively on the "theoretical" side (with Virgil, I would say that this is my 'gift' - "Haec tibi erunt
artes!" [Aenead]). I am personally aggrieved because I was forced to abandon an academic
career and slave it out as a lawyer for 17 years to be independent enough to return to "theory".
The funniest thing for me is that critcs of the system such as myself would be kicked out of
economics faculties within minutes! - Look, I am mustering all the humility in the world, but a lot of
those academic economists could barely polish my shoes in all honesty - so much for "efficient
allocation of resources" in academia!!
The answer or part of it may lie partly in sharing our views on Blogs such as this. I think that things
are not as hopeless as they seem: indeed, I believe that the financial crisis has given us an
opportunity to come out and re-form, and eventually possibly even trans-form the present system.
The answer is: a whole lot more "democracy". If you look at my critique of "economic science", all
the ideas I propound are meant to show how "undemocratic" the economic and, by extension, the
political structures are! Yet, if you call these undemocratic structures "inefficiencies" or
"asymmetric information" or even "transaction costs", you get to lecture about them. But if you call
them what they are: sheer political command on the part of the people who own social resources
at present - then you are a "communist" and a "troublemaker"!
Having said that, I think we ought to be mindful that Blogs such as these are useful to discuss
"ideas" and provide "suggestions" for practical action, not to write "manifestos". And finally, I think
we agree that many people's lives have been destroyed or very severely disrupted by the financial
crisis. And I agree that it is essential that we remind ourselves of this reality from time to time,
even with a little bit of emotion. Cheers and good night from me.
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Right on cue, Paul Krugman has posted this comment on financial reform. As I argue on this Blog
and at Economists' Forum, the problems of the finance industry have m u c h deeper roots than
just that industry - and we really have to tackle those "roots". Obviously, the greater the
"regulation/supervision" of finance, the easier it will be to judge on who are "legitimate
entrepreneurs" (see my discussion of Bernanke-Gertler in the last Davies Blog) and who are not!
That link is here: http://www.nytimes.../02krugman.html?hp
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Just generally (I will try to be lightning-quick) on austerity or fiscal contraction is that it tends to
remove purchasing power from working households because the State invest generally in labour-
intensive and welfare sectors. This will reduce demand for consumption goods whilst existing
unused productive capacity will not result in greater capital expenditure even at low inflation rates.
Even the conventional financial framework envisaged by Bernanke-Gertler that I discussed in the
last Davies Blog prescribes that following a financial crisis the only way to stimulate investment
("legitimate enterprise") the net worth of borrowers (reduced by the deflationary or contractionary
pressures) will have to be restored through monetary easing and fiscal measures - certainly not by
efforts by governments to "make whole" bondholders and financial institutions. Bluntly put, we
need a transfer of wealth and income from lenders to borrowers.
Yet the opposite is what Britain and Germany and France have opted for! With the complication
that the euro is even appreciating and the PIGS... Well, if you read today's FT Analysis column on
Greece there is enough to want to make you scream. The situation there is absolutely alarming...
And the ECB is tightening! God help us!
With any luck, the Fed will come to the rescue if the US recover and play the "locomotive" role
whilst at the same time "compelling" Germany and China to expand domestic demand instead of
engaging in "wage suppression" and "export subsidies" through the "savings channel".
But each step of the way, these essential measures will be opposed by those who wish to impose
their "laws of economics" on us. One of those laws is that "contracts must be enforced and
enforced" - including bond-interest repayments. Even if we manage to "persuade" governments to
engineer avoidance of these "obligations" (the Latin name for bonds), "bond vigilantes" would
seek to impose "capital strikes" - but these could be avoided with a "determined" co-ordinated
policy from Western capitalist governments.
The next difficulty could be "inflation" - because we must not forget that, once empowered, trade
unions can be as "unreasonable" as any gang of capitalists - just take a look at that Analysis piece
on Greece if you don't believe me! This is why ultimately a thoroughgoing "democratisation" of our
society, preferably extending to all Western countries (the only place where capital can "reside"
safely) is the answer. We can start with financial sector reform and with fiscal and monetary
policy. In Europe, the rot starts in Germany with its capitalist elites and those economies closely
integrated with the Modell Deutschland.
For some reason, people seem to pick on Davies today. I think his piece was quite balanced
because, as always, he sticks to the facts and lets us take our choices.
(I won't buy into the "Anglo-Saxon" controversy except to say that I may be a Mediterranean
product of the Norman invasion [1066]. My town in Sicily was an important Norman settlement -
otherwise you could never explain my phenotype! But there is something to the fact that some in
Britain may have "hegemonic" nostalgia for the Atlantic alliance - which explains the neglect of
those Norman, Celtic and Welsh and even "Norse" genealogies!) Regards to all.
9. Report Ed Beaugard | May 2 12:39pm | Permalink
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@joseph belbruno
I'm going to write what I want to write, here and elsewhere. Don't need your advice about that. It's
Gavyn Davies blog, not yours.
That aside, I have a similar story to you as far as the economics profession. That is, I knew back
in the early '80s that the mathematization of economics was a disaster, and therefore, didn't go to
economics graduate school. This came from reading Heilbroner, and Robert Lekachman. But I
didn't know at the time that there were and are a few heterodox departments in the Anglo-
American world, so I continued reading on my own and working in IT.
May I direct you to the Post-Keynesian Study Group based in Cambridge, UK? It's a wonderful
group. Lots of downloadable seminars about Keynes, the General Theory, plus a recording of the
great Joan Robinson at Stanford(I think) back in the mid-1970s. Then there's Soros group, INET
which has brought in a lot of great people including Robert Skidelsky.
Cheers,
Ed Beaugard
P.S. Is there anything in the world more dull than the average undergraduate, micro textbook?
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Professor De Long (his blog is listed on this page on the right) has reflected on the sorry state of
"economics departments" in capitalist countries. Here is the link http://lecercle.le...conomics-in-
crisis
I certainly concur with what he is saying. But the "causes" of this neglect are not what he says
they are: the problem is that universities are funded increasingly through "external private funds".
Worse still, academic economists come in and out of "private industry" (Axel Weber, for instance,
has moved from the ECB to Chicago University) - so when you think of "corruption" you can add a
new dimension to the "principal-agent" problem of "asymmetric information"!
Incidentally, I studied at a supposedly "Keynesian" faculty - the one at Cambridge, England. They
may be more "simpatici" than their neoclassical counterparts, but let me assure you that
"Keynesians" are equally "territorial" and vindictive against anyone who does not share their
narrow views. And if you only recall that "Keynesianism" is really not far removed from
neoclassical theory - it is really only a difference of "emphasis" on the role of money in the
capitalist economy, not about any real divergence about the "meaning" of "money-as-capital" -,
then you realise how difficult the task is of "reforming" economics departments, as DeLong
advocates.
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Just a quick update: Recently on this blog I fastidiously bemoaned Professor Michael Pettis's
seeming espousal of Barry Eichengreen's "multi-polar disorder" with a proposal/exhortation in his
FT Opinion that the US abandon the reserve status of its currency because of its "public good"
costs. I lamented also the fact that comments to his Opinion were not open. Now I am glad to
announce Pettis's "clarification" (or rethink? does he read this blog?), which broadly restates my
position (up to a point - until we get to the "theory" behind it, that is). Here is the interesting
"disavowal/renegation": http://mpettis.com...d-from-the-dollar/
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THIS IS NOT FAIR!!
Look at this post by Paul Krugman dated April 19 that I missed on the "stock-flow" debate about
"treasuries".
http://krugman.blo...and-pimco-wonkish/
And then look at this Blog by Gavyn Davies posted on March 30 - a full twenty days before!!
http://blogs.ft.co...ive-the-feds-exit/
You will notice that in the Readers' Comments I give Bill Gross a veritable hiding for being such a
"wuss".
And that is what Krugman does also.....a full twenty days later!! We are indeed "aggrieved"!
13. Report Gavyn Davies | May 3 10:01am | Permalink
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On the description "Anglo Saxon"....
Maybe I should have said "predominantly English speaking". And I accept that other economies
also fit this description, but the US and the UK are the two largest, and they have been subject to
similar financial/housing shocks in the past few years. I think it makes sense to talk about them
together. The monetary policy stance in the two countries has also been similar, and the fiscal
stance in the US could follow that in the UK, with a lag. The debate on whether these economies
are slipping back into recession is very important, with implications for global macro policy
everywhere.
14. Report Gavyn Davies | May 3 10:35am | Permalink
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Thanks to everyone for comments.
More on the term "Anglo Saxons"....

Just in case I have entirely lost the plot, I have now checked whether others use the term. There
are dozens and dozens of uses in recent IMF documents; and lots in the writings of the Reserve
Bank of Australia, among countless other organisations.
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Europe Is Running A Giant Ponzi Scheme: Sovereign Debt Crisis Hit The Eurozone

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Europe Is Running A Giant Ponzi Scheme: Sovereign Debt Crisis Hit The Eurozone

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Europe is running a giant Ponzi scheme

Don’t let banks gamble with taxpayer money

By Roger E.A Farmer

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1. Report caldararo | April 22 11:36pm | Permalink

In modern capitalist countries the distribution of wealth has

Well well well! Here is the link:

In this paper ( http://docs.google...RZZR4PoOaJYKaKF07Q ) , Bernanke and Gertler identify the

Enter your comment h

1. Report joseph belbruno | April 29 12:48pm | Permalink

In this paper ( http://docs.google...RZZR4PoOaJYKaKF07Q ) , Bernanke and Gertler identify the

Anglo Saxon GDP not as weak as it appears

What seems to have happened in Q1 is that

Post your own comment

1. Report Ed Beaugard | May 1 6:47pm | Permalink

The Paper That Will Explain Everything.

Thank you, and Good Night.

More on the term "Anglo Saxons"....

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