Friday, October 10, 2014

Evil or stupid? the Troika in action

Whenever there is a financial calamity caused by standard classical prescriptions, my first instinct is to see these things as conceptual errors.  Turning an economic problem into a calamity isn't all that hard to do so it is well within your typical economic expert's power to pull off.  Then there is the problem of religious fanaticism—neoliberalism is based on ideas that have ALWAYS produced disasters so the only reason anyone can believe this horseshit is that it appeals to the irrational that seems to exist in us all.  Worse, these folks are selected for their willingness to conform so they are badly practiced in innovation.

Before we can believe that the people who staff the working level positions of places like IMF are just hopelessly evil, however, we must get past that they are relentlessly mediocre people who create economic structural adjustments for national economies that are little more than checking off boxes.  I mean, this isn't much of a defense but it should keep them from the guillotines when they have finally collected enough really angry victims.

But Auerback makes a strong case for the truly evil nature of the financial actors.  He argues that they knew exactly what they were doing when they pawned off all that real estate speculation on the Irish citizens.  In fact, they threatened the country with bankruptcy if they burned the bondholders—which is exactly what should have happened both from the point of justice and sound economic policy.

Of course, this naked extortion could also be explained away with a sort of "Predators will be Predators" description of human behavior.  Banksters prey on the Producers because it is the only survival strategy they know.  I am not sure this explanation will stave off the mobs, but you can bet it will be proffered.

The Troika In All Of Its Awfulness Exposed

October 7, 2014 Marshall Auerback

According to Irish newspapers, senior European and European Central Bank (ECB) officials agreed to threaten Ireland with national bankruptcy if the government made any attempt to burn bondholders.

Yet another case of the Troika acting in the interests of a few bankers who went way over the top in Ireland, but still get paid 100 cents on the dollar for their egregious banking mistakes. Ireland’s central bank governor, Dr. Patrick Honohan, revealed the account to the Irish Independent last Sunday.

“The Troika staff told Brian in categorical terms that burning the bondholders would mean no programme and, accordingly, could not be countenanced,” Dr Honohan writes. “For whatever reason, they waited until after this showdown to inform me of this decision, which had apparently been taken at a very high-level teleconference to which no Irish representative was invited.”

Yet again, the incoherence of the Eurozone’s policy makers is on full display. The Troika, and ECB are sort of playing that role but in a totally perverse way. They are prepared to bail the banks out and hold bond yields down low but then insist on killing growth to ensure they have to keep bailing out banks and buying public debt. It is irrational in the extreme and the only explanation is one that is based on ideology. There is no economic credibility to their overall strategy. They were prepared to bankrupt a country in order to satisfy the rapacious interests of bank bondholders,

It has been suggested that because Anglo-Irish bank (the largest Irish bank involved in the bailout) was a systemically important institution, Ireland had no choice but to accept full payments to the bondholders. This is, in fact, the line taken by The Daily Telegraph’s Ambrose Evans-Pritchard, who suggested that “A haircut for EMU bond-holders at that very dangerous moment – before the Eurozone had built up buffers and sorted out its crisis regime – would have led to instant contagion and incalculable consequences (as later spasms of the EMU debt crisis were to show).”

Not so. The ECB, which is the Eurozone’s currency issuer, could easily have stood behind the sovereign bonds and ensured that a banking crisis did not metastistise into a fully-fledged sovereign debt crisis. If anything, the debt deflation was exacerbated by the refusal to force a haircut on the bond holders, combined with a punitive policy of fiscal austerity. It’s akin to someone deliberately kicking a bottle of tar onto a white carpet and then forcing the innocent occupants to clean up the mess (unaided) and depriving them of the proper cleaning materials to do the job properly.

All of the rescue plans that were introduced to “rescue” Ireland, in fact were bank bailouts achieved on the backs of the Irish population. And we see that this was done under coercion of the worst kind. The worse thing about it was the assumption that, with more time, the Eurozone’s problem children could get their fiscal houses in order — and Europe could somehow grow its way out of trouble. But in the case of Ireland, it only became a problem “fiscal child” when it was forced to socialise its private sector banking debt and pay the bond holders out 100 cents on the dollar. Then there was an insistence on fiscal austerity being offered as the “medicine”, which turned out to be worse than the disease. It has exacerbated the downturn and unleashed a horrible debt deflation dynamic in all of the areas where it was reluctantly implemented.

Also lost is the reason why this has metastasized into a far greater crisis: as part of the Eurozone, Ireland does not have the fiscal freedom to come up with a sufficiently robust government response. The UK had a comparable real estate bubble in the late 1980s, which culminated with the Soros attack on the pound in 1992 and the ejection of sterling from Exchange Rate Mechanism (the precursor to the EMU). This was a blessing in disguise. Withdrawal from the ERM saved the UK because it allowed the country sufficient latitude to reflate. Yes, the country had a major recession (in many ways a consequence of the surrender of fiscal freedom as a result of joining the ERM in the first place), but there was never a systemic risk that posed a threat to the country’s overall solvency as is the case in Ireland today. And this is exacerbating the problem in Ireland because it persists in chasing its tail repeatedly with futile fiscal austerity measures.

The truth of the matter is this: the Eurozone seems rotten to the core, literally. This latest revelation simply confirms the fundamental corruption that lies at the heart of the European Monetary Union. more

1 comment:

  1. excellent work. Every 'investor' should have a look at this before buying property as a sure thing. Only goes up? Maybe if you got in early, before th bubble, and can wait out the crash, then the long term may pay off, but most people, especially now, belive they can make half a million dollers if they wait three years. Not gonna happen - more like lose it.houses for sale in Sedona AZ