When millions of willing and able workers are unemployed, and economic potential is going to waste to the tune of almost $1 trillion a year, you want policy makers who work on a fast recovery, not people who lecture you on the need for long-run fiscal sustainability.
Unfortunately, giving lectures on long-run fiscal sustainability is a fashionable Washington pastime; it’s what people who want to sound serious do to demonstrate their seriousness. So when the crisis struck and led to big budget deficits — because that’s what happens when the economy shrinks and revenue plunges — many members of our policy elite were all too eager to seize on those deficits as an excuse to change the subject from jobs to their favorite hobbyhorse. And the economy continued to bleed.
What would a real response to our problems involve? First of all, it would involve more, not less, government spending for the time being — with mass unemployment and incredibly low borrowing costs, we should be rebuilding our schools, our roads, our water systems and more. It would involve aggressive moves to reduce household debt via mortgage forgiveness and refinancing. And it would involve an all-out effort by the Federal Reserve to get the economy moving, with the deliberate goal of generating higher inflation to help alleviate debt problems.
The usual suspects will, of course, denounce such ideas as irresponsible. But you know what’s really irresponsible? Hijacking the debate over a crisis to push for the same things you were advocating before the crisis, and letting the economy continue to bleed.
What is written as a recommendation by the NY Times Editorial Board to the leaders of the European Union is actually better considered as a prediction.
Greece is careening toward a disorderly default because the northern European economies won’t accept the idea of forgiving the ‘southerner’s debts’ – even though in reality the debts were caused by the real estate/bank crash of 2008. But the facts shouldn’t get in the way of a morality play, which is what the current austerity regimes are: they are actively damaging the economies they are supposed to be benefiting. And the people won’t stand for it.
Without a new infusion of financial assistance, Greece could default on a $19 billion bond payment as soon as March 20. But Angela Merkel, the German chancellor, and Nicolas Sarkozy, the president of France, have warned that Greece will receive additional funds only after it complies with the terms of its agreement. This includes convincing Greece’s private creditors to accept a 50 percent writedown on some $260 billion of debt, and proceeding with draconian budget cuts that have already forced the government to raise tax rates, cut jobs and pensions and slash spending in the middle of a recession.
But debt relief talks have stalled, with hedge funds and other investors that bought the debt from French and German banks holding out for better terms. And Greece can hardly take more austerity. Its economy contracted by 5.5 percent last year, after shrinking more than 3 percent year-over-year in 2009 and 2010.
The economic implosion is preventing the country from meeting its fiscal commitments by reducing tax revenue and increasing expenditures on automatic programs like unemployment insurance. Despite spending cuts, Greece is likely to have a 9.6 percent budget deficit in 2011, half a percentage point above target.
More importantly, austerity is rending Greek society. Unemployment has mushroomed to 18 percent, with enormous social costs like rising homelessness and crime. Imposing further cuts is becoming politically untenable.
It is time to shift course. Although Greece is a small economy, Europe is in no shape to withstand the financial fallout of a disorderly Greek default, or its abandoning the euro. Greece is likely to need even more money than it has been promised so far. Economists think the 50 percent writedown may not be enough to return Greek debt to manageable levels. What’s more, Greece and its weak neighbors need Europe’s stronger economies, like Germany, to start spending more to help boost their exports.
Germany should realize by now that without growth its beleaguered neighbors will never be able to pay back their debts. Europe’s problems have spiraled so far out of control that no one knows what policy mix will work. What is certain is that a single-minded obsession with austerity will only deepen the crisis.
Can you remember the last time you felt a national leader looked us in the eye and told us there is no easy solution to our major problems, that we’ve gotten into this mess by being self-indulgent or ideologically fixated over two decades and that now we need to spend the next five years rolling up our sleeves, possibly accepting a lower living standard and making up for our excesses?
Friedman does it again. Once again he looks at the financial ruin of America and blames the victims. Why do we have to accept a lowered standard of living, and rolling up our sleeves for five years of austerity? The rich 1% own 90% of everything! We’ve been robbed systematically for 30 years, and now the GOP wants to institutionalize it with more tax cuts.
But Friedman never talks about the burglar, living up at the top of the hill. He keeps shaking his head, telling us that we have to pay for the broken window the burglar broke, and pay higher taxes for the cops that didn’t protect us, and then buy another set of silver to replace what the burglar stole. It’s time for the President, he says, to tell us to roll up our sleeves.
We have a culture where individualism has become so pathological that we cannot heap up our collective experience as victims and craft it into solidarity
What I want to know is this: when will the President – or any other credible leader, for that matter – stand up and say that those who have become billionaires by rigging a system to impoverish everyone else are our enemies, and we need to restructure the system – a completely new social contract – so that their wealth is redistributed.
And the working and middle class of America – and the growing ranks of the poor and unemployed – will not accept new privations, new austerities.
We have a culture where individualism has become so pathological that we cannot heap up our collective experience as victims and craft it into solidarity. As Steinbeck said, ‘Socialism never took root in America because the poor see themselves not as an exploited proletariat, but as temporarily embarrassed millionaires’, which is why so many poor people in America vote for the GOP: they identify with the rich, even though the rich are screwing them over.
But a sufficient dose of austerity – once the street lights are turned off, school class size grows to 50+ because of layoffs, and cities and town cannot afford to rebuild streets after floods and fires – that might start to mobilize people.
But we have to reject the implicit individualistic self-loathing, that we brought this on ourselves, by accumulating too much personal credit card debt and buying houses we couldn’t afford in a down market. That we stole our own future from ourselves.
No, Tom, we are not the ones that did this. We borrowed on the credit cards when real wages dropped in the '90s, when two worker families were already the norm. We bought big houses in the '00s to grab onto the American dream, and to own an asset that everyone – including the banks and our leaders – promised us would appreciate. But they all lied to us.
The banks have been bailed out, but now we are told we have to pay our own debts, plus the new debts that our government has taken on to write down the costs of the housing bust. Oh, and a few wars in Asia where we are busy spreading 'democracy’, which loosely translated means global free trade, making billionaires happy again.
Enough. We won’t accept it. We want our money back. We want our future back. We want our country back.
And Tom, stop saying we have to accept what the leaders, the billionaires, and the banks decide for us. This is our world too.
There are good reasons for gloom — incomes have declined, many people cannot find jobs, few trust the government to make things better — but as Federal Reserve chairman, Ben S. Bernanke, noted earlier this year, those problems are not sufficient to explain the depth of the funk.
That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow.
Many say they believe that the bust has permanently changed their financial trajectory.
“People don’t expect their home to regain value, and that’s really led to a change in consumer attitudes about the economy that we’ve just never seen before,” said Richard Curtin, a professor of economics at the University of Michigan who directs its Survey of Consumers. The latest data from the survey, released Friday by Thomson Reuters, shows that expectations for economic growth have fallen to the lowest level since May 1980.
A recent paper by Karl E. Case, an economics professor at Wellesley College, and two co-authors estimated the decline in home prices from 2005 to 2009 caused consumer spending to be $240 billion lower in 2010 than it otherwise would have been. That figure is equal to about 1.7 percent of annual economic activity, enough to be the difference between the mediocre recent growth and healthy growth. And it does not include all the other effects of the housing crash, including the low level of new home construction, that are also weighing on the economy.
People believe that we will never rebound. Should make the elections even more interesting. Plus the civil unrest during the summer of 2012, leading up to the elections.
Look: It’s undeniable that many of the people facing foreclosure bear some responsibility for the crisis. Some borrowed beyond their means. Some even borrowed knowing they would never be able to pay off their debt, either hoping to flip their houses right away or taking on mortgages with low initial teaser rates without bothering to think of the future. The culture of take-for-yourself-now, let-someone-else-pay-later wasn’t completely restricted to Wall Street. It penetrated all the way down to the individual consumer, who in some cases was a knowing accomplice in the bubble mess.
But many of these homeowners are just ordinary Joes who had no idea what they were getting into. Some were pushed into dangerous loans when they qualified for safe ones. Others were told not to worry about future jumps in interest rates because they could just refinance down the road, or discovered that the value of their homes had been overinflated by brokers looking to pad their commissions. And that’s not even accounting for the fact that most of this credit wouldn’t have been available in the first place without the Ponzi-like bubble scheme cooked up by Wall Street, about which the average homeowner knew nothing — hell, even the average U.S. senator didn’t know about it.
At worst, these ordinary homeowners were stupid or uninformed — while the banks that lent them the money are guilty of committing a baldfaced crime on a grand scale. These banks robbed investors and conned homeowners, blew themselves up chasing the fraud, then begged the taxpayers to bail them out. And bail them out we did: We ponied up billions to help Wells Fargo buy Wachovia, paid Bank of America to buy Merrill Lynch, and watched as the Fed opened up special facilities to buy up the assets in defective mortgage trusts at inflated prices. And after all that effort by the state to buy back these phony assets so the thieves could all stay in business and keep their bonuses, what did the banks do? They put their foot on the foreclosure gas pedal and stepped up the effort to kick people out of their homes as fast as possible, before the world caught on to how these loans were made in the first place.
Why don’t the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them. According to the rules of the mortgage trusts, a lender like Bank of America, which controls all the Countrywide loans, is required by law to buy back from investors every faulty loan the crooks at Countrywide ever issued. Think about what that would do to Bank of America’s bottom line the next time you wonder why they’re trying so hard to rush these loans into someone else’s hands.
When you meet people who are losing their homes in this foreclosure crisis, they almost all have the same look of deep shame and anguish. Nowhere else on the planet is it such a crime to be down on your luck, even if you were put there by some of the world’s richest banks, which continue to rake in record profits purely because they got a big fat handout from the government. That’s why one banker CEO after another keeps going on TV to explain that despite their own deceptive loans and fraudulent paperwork, the real problem is these deadbeat homeowners who won’t pay their fucking bills. And that’s why most people in this country are so ready to buy that explanation. Because in America, it’s far more shameful to owe money than it is to steal it.
The recent skirmishes all dance around the central issue: the United States is in the midst of the world’s largest debt crisis. The Treasury now owes the public almost $10 trillion, including $4.5 trillion to foreigners — and that doesn’t include what households and companies owe. For decades to come, Americans will face the core problem of every heavily indebted nation: who will bear the burden of adjustment?
Countries borrow for many purposes: canals and railroads in the 19th century, factories and highways in the 20th, and in the last decade, a housing and financial boom in Europe and America. When the projects don’t pan out and the debtor country falls into crisis, what happens to the accumulated debts? Who pays? Creditors or debtors? Workers or investors? Rich or poor? The European Union is tearing itself apart over this question, which divides creditor nations from debtor nations and which divides groups within nations. The American variant of this conflict is just beginning.
Perhaps, some Americans believe, we can shunt the adjustment costs onto foreigners. Indeed, our creditors worry that the United States will reduce its debt burden the old-fashioned way, by inflating it away. A few years of moderate inflation, and a weaker dollar, would significantly lessen the real cost of servicing the country’s debts — at our creditors’ expense.
But adjusting to the reality of America’s accumulated debts will inevitably require sacrifices at home. The battle over who will be sacrificing has already begun, albeit under veils of rhetoric. The Republicans seem unconcerned about stimulating recovery, and primarily concerned that none of the long-term costs of balancing our budget be paid by upper-income taxpayers. No surprise: unemployment among the one-third of Americans with the highest incomes is barely 4 percent, while for the lowest third it is more than four times that level.
The Democrats, for their part, seem content to insist that the adjustment burden not fall on beneficiaries of government spending, whether public employees or recipients of social spending. This reflects their base in the labor movement, the public sector and the poor.
Yes, the GOP wants to spare the wealthy from any pain, either increased taxes or a write down of the value of their treasuries.
And, perhaps the authors are right about the Democrats – that they are working only for those with entitlements. At any rate, they are trying to make sure that the poor, the old and the young aren’t the first thrown from the lifeboat.
But the missing question is ‘Who is responsible? Who is to blame?’
Why are we incapable of pointing at the folks who created this mess and saying they are responsible and should pay? The banks, the wall street traders, the CEOs of organizations that gambled and lost, and then paid off the politicos so that the debts would become ours, added to the government’s deficit?
If the government only exists as a means for the wealthy and the corporations to abrogate their obligations, and the Democrat-led government prosecutes no one, then its clear that GOP and Democrats alike are incapable of leading us.
The New Depression is casting its growing shadow, and there seems no will to do what is needed: a massive jobs bill, to restart the stalled American economy, and grow our way back.
Obama has been emasculated by the GOP terrorists, and there is no voice of reason, aside from shunned economists and progressives, all deemed too far left for today’s realpolitik that considers Obama’s policies – far to the right of Reagan and Nixon – socialism.
Who speaks for us? Where is the Martin Luther King or Franklin Delano Roosevelt for our time?
We thought it was Obama, but he’s faded: the light’s gone out of him, like a firefly too long in a corked bottle.
Who will lead? We seem to have no plan, no direction. We have no leaders worthy of us.
The next time you hear people invoking the European example to demand that we destroy our social safety net or slash spending in the face of a deeply depressed economy, here’s what you need to know: they have no idea what they’re talking about.
Portugal is now embarking on what will be its third international bailout since returning to democracy in the 1970s, with previous interventions by the I.M.F. in 1978 and 1983. This time, however, “the sense of punishment will be much stronger because the expectations of citizens are much higher than three decades ago, when Portugal was not even in the E.U.,” said António Vitorino, who was in the Portuguese government that negotiated the 1983 rescue and a former European commissioner.
In 1983, Mr. Vitorino noted, Portugal was able to revive an export-led recovery by significantly devaluing its currency — no longer an option under euro membership. “The money injection that we received had a much stronger short-term effect on our economy than it could have this time,” he said.
Once you understand the imperatives Republicans face, however, it all makes sense. By slashing future-oriented programs, they can deliver the instant spending cuts Tea Partiers demand, without imposing too much immediate pain on voters. And as for the future costs — a population damaged by childhood malnutrition, an increased chance of terrorist attacks, a revenue system undermined by widespread tax evasion — well, tomorrow is another day.
In a better world, politicians would talk to voters as if they were adults. They would explain that discretionary spending has little to do with the long-run imbalance between spending and revenues. They would then explain that solving that long-run problem requires two main things: reining in health-care costs and, realistically, increasing taxes to pay for the programs that Americans really want.
But Republican leaders can’t do that, of course: they refuse to admit that taxes ever need to rise, and they spent much of the last two years screaming “death panels!” in response to even the most modest, sensible efforts to ensure that Medicare dollars are well spent.
And so they had to produce something like Friday’s proposal, a plan that would save remarkably little money but would do a remarkably large amount of harm.
The Republicans are painted into an ideological corner, and to get out they must hurt us and themselves.
The Troika doesn’t think the Greek technocratic government is moving fast enough to make demanded ‘structural reforms’ – like breaking union agreements and pension promises – so they surprised everyone by demanding more austerity:
Greece’s so-called troika of foreign lenders — the European Commission, European Central Bank and International Monetary Fund — has demanded sweeping austerity measures in exchange for $170 billion in bailout money that Greece needs in order to avert default. The troika has also made passage of the measures a condition for sealing a deal in which private creditors will take voluntary losses of up to 70 percent of Greek debt.
But nearly two years after Greece’s first bailout, Athens and its lenders are at a dangerous impasse. Europe has lost confidence that the Greek government has the will or capacity to follow through on its commitments to structural changes. Greeks, whose standard of living is dropping precipitously with no end in sight, have lost confidence that the bailout will actually save the country from default.
With so many variables and so little time, some experts said that almost any outcome was possible, from disorderly default and chaos to a new agreement and at least temporary calm. “Greece defaulting is probably just as likely to happen as a result of an accident as an act of will,” said Platon Tinios, an economist at the University of Piraeus. “If you are skating at the edge of a precipice, the slightest push could push you over.”
For now, both sides appear to lack a viable Plan B. Behind closed doors in Brussels at a meeting of euro zone finance ministers on Thursday, the lack of trust was evident — and may have put the entire bailout at risk.
The ministers had been expected to approve with little fuss the austerity package negotiated among Greek politicians. Instead, the European ministers made it plain that they did not believe the figures provided by Greece. They jolted Athens by insisting that it find an additional $428 million in savings — to make up for a shortfall created by the refusal of political leaders to slash supplemental pensions — before their next meeting, expected on Wednesday.
So, if European leaders don’t believe that Greece can sustain the current loan levels, and there is no way that country can grow out of its paralyzing depression, what then? No one will want to give them more loans to simply pay older loans.
The only option – as many have said for years – is for Greece to drop the Euro, reintroduce the Drachma, and to default on the loans. That’s what Argentinia did, for all intents and purposes, in the 90s, when it dropped the linkage of the peso to dollars, and defaulted. This would create a large productivity shift, because Greek goods and services would be competitively priced.
It’s odd that the authors suggest there is no 'Plan B’ when the stark option of leaving the Eurozone is so obvious.
[… ] Most of our high unemployment is still the consequence of low demand. Consumers remain hesitant to spend because unemployment and debt are high. Companies are unwilling or unable to invest because customers are few and credit is still tight.
This diagnosis suggests that the appropriate remedy is to stimulate demand. In February, I suggested a number of steps the Federal Reserve could take. Some additional fiscal measures would also be useful. More public investment (as the president has advocated), additional aid to state and local governments, and a cut in payroll taxes for employers would all help. Given the severity of the long-run budget problem, short-run fiscal stimulus should only be undertaken as part of a comprehensive package of gradual spending cuts and tax increases. That would give the economy the jolt it needs, while providing reassurance that the United States will remain solvent over the long haul.
Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.
Robert Reich thinks there is still hope to turn the tide before another collapse, but I doubt it:
The real reason for America’s Great Regression was political. As income and wealth became more concentrated in fewer hands, American politics reverted to what Marriner S. Eccles, a former chairman of the Federal Reserve, described in the 1920s, when people “with great economic power had an undue influence in making the rules of the economic game.” With hefty campaign contributions and platoons of lobbyists and public relations spinners, America’s executive class has gained lower tax rates while resisting reforms that would spread the gains from growth.
Yet the rich are now being bitten by their own success. Those at the top would be better off with a smaller share of a rapidly growing economy than a large share of one that’s almost dead in the water.
The economy cannot possibly get out of its current doldrums without a strategy to revive the purchasing power of America’s vast middle class. The spending of the richest 5 percent alone will not lead to a virtuous cycle of more jobs and higher living standards. Nor can we rely on exports to fill the gap. It is impossible for every large economy, including the United States, to become a net exporter.
Reviving the middle class requires that we reverse the nation’s decades-long trend toward widening inequality. This is possible notwithstanding the political power of the executive class. So many people are now being hit by job losses, sagging incomes and declining home values that Americans could be mobilized.
Moreover, an economy is not a zero-sum game. Even the executive class has an enlightened self-interest in reversing the trend; just as a rising tide lifts all boats, the ebbing tide is now threatening to beach many of the yachts. The question is whether, and when, we will summon the political will. We have summoned it before in even bleaker times.
As the historian James Truslow Adams defined the American Dream when he coined the term at the depths of the Great Depression, what we seek is “a land in which life should be better and richer and fuller for everyone.”
Sara Horowitz thinks President Obama should put together a skunkworks to come up with innovative ways to get people back to work in America:
Sara Horowitz via The Atlantic
The simple truth is that we can’t count on Congress to lead us out of this economic mess. But, Mr. President, you could make a big difference by transforming your Executive Branch so it works for today’s workers.
In the business and engineering worlds, there is something called a “skunk works” team: an independent group of innovators inside a larger organization that spark change. It should be tight and mighty - just 7 to 15 empowered, smart voices. And it should have only one goal: to look at the fungible money in the Executive Branch and direct it where it can do the most good for 21st century workers.
The story of postwar Europe is deeply inspiring. Out of the ruins of war, Europeans built a system of peace and democracy, constructing along the way societies that, while imperfect — what society isn’t? — are arguably the most decent in human history.
Yet that achievement is under threat because the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.
Now maybe European leaders will come up with a truly credible rescue plan. I hope so, but I don’t expect it.
The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later.
To put matters in perspective, the Greek economy is less than 2 percent of the overall economy of the European Union. That seems a manageable size for an aid-based solution; estimates in the neighborhood of 200 billion euros in aid (close to $300 billion) are common. The real difficulty is in maintaining global financial confidence while the losses are distributed in an orderly manner.
That isn’t as easy as it may sound. About 30 percent of the Greek debt is held by Greek sources, including the banks and the Greek government, in its social security funds. A default on the latter assets would mean that the Greek government was defaulting on itself. It would still have to come up with much of that money or face a total political and economic meltdown.
The private sector can be persuaded to realize some losses on Greek debt, but there is a risk of setting off a Lehman Brothers-like financial panic, especially if there is a judgment of complete or selective default from the credit agencies. Standard & Poor’s warned of such a judgment last week. Big penalties for private creditors may also have weighty implications, because of the potential for a chain reaction — in which credit dries up for Ireland and for Portugal, which ran into fresh trouble when Moody’s downgraded its debt last week. Furthermore, the private sector holds only about a third of the Greek debt total — and that involvement is falling rapidly — so bondholders cannot be the only fall guys.
Then there is the European Central Bank, which holds about 18 percent of the debt. The wealthier European Union nations could transfer funds to Greece and the central bank as permanent debt relief, rather than continuing with debt rollovers that may look similar to Ponzi schemes. As it stands, vulnerable countries are being pushed into ever-higher debt levels. Yet the central bank has strict rules, including a no-bailout clause and price stability as the sole goal of monetary policy, while the European Union often requires member unanimity for major changes.
In other words, these rules were written to prevent what is now the only coherent response to Greece’s troubles — namely, a timely recognition of the losses and an agreement that they will be shared jointly in some way.
Look, I understand why influential people are reluctant to admit that policy ideas they thought reflected deep wisdom actually amounted to utter, destructive folly. But it’s time to put delusional beliefs about the virtues of austerity in a depressed economy behind us.
Looks like the Greek government will fall because of the recent hiccups about launching a referendum on further debt restructuring and austerity. Likely outcome will be a new government and less public willingness for austerity measures.
Conferências do Estoril 2011 - Nouriel Roubini - Parte II (by GeracaoCCascais)
If you can’t grow you way out of your debt problems, and you can’t save you way out of your debt problems, and you can’t inflate your way out of your debt problems, the only other solution that is available [..] is an orderly restructuring of your debt.
Roubini gives a masterful recap of how we got here (Parte I), and what the options are for the peripheral nations of the Eurozone, like Greece, Spain, Portugal, Ireland, and Italy. Basically, if they don’t leave the Eurozone and deflate their currency – which I think is their best course – then defaulting on the debt is the inevitable outcome.
So, if the financial sector gets ahead of that idea, what will happen? There should be a real drop in bank stocks, who are the holders of most of the sovereign debt. And the banking sector is the scene of enormous carnage in the last week’s market plunge, losing 20% or more.