Pretty much proving today's field of Economics to be a bunch of quackery.
In every respectable field of study there are certain basic scientific expectations - supporting your positions with evidence and data, reversing your views when your theory has been disproved etc. At the onset of the 2008 crisis, some people very accurately predicted the type of crisis it was (a financial panic) and recommended policies that were tested and proven to work. The mainstream camp however, thought otherwise and most of the world followed their advice.
With 4 years of data we now know who was right and who was wrong, and yet that has done almost nothing in the field of Economics. Few high profile economists have reversed their deeply flawed views and the views of those baked by data and correct predictions are still not taken seriously. It's as if the LHC found the Higgs, yet most physicists still denying it exists - the situation really is THAT absurd.
Economics is deeply corrupted by politics and the financial interests of its practitioners. If the quacks and charlatans aren't purged soon, the either field will be discredited. You can't practice alchemy or voodoo and expect people to treat you like a scientist.
Indeed it is odd that many people can agree the best way forwards for GM was to give the shareholders a total loss and the bondholders a severe haircut. But when it comes time for a country to do the same thing - everyone disagrees and says what is needed is for the original bondholders to be made whole by issuing new debt. There is not some miracle line where obvious solutions jump over to being wrong based on size. Defaulting on payments is a scalable strategy, from the underwater home owner to the overly-indebted bank to the hopelessly over-borrowed national government. It's not pleasant for anyone involved, but confronting the problem is far better than trying to sweep it under the carpet.
There has arisen a pervasive myth that only debtors should lose when creditors are unable to keep a loan performing. For sure, the rights of the creditor exceed that of the debtor, but it's plain wrong to expect a creditor not to suffer losses when extensive bad loans are found.
The problem is that, by being locked into the Euro, Ireland was unable to use the shock-absorber of a floating exchange rate. People rightly dumped their Icelandic currency, because they got burnt. The Icelandic people lost a lot of wealth. The Icelandic government rightly stripped the banks of their independence. But now the decks are cleared and people can get back to working and being productive, and getting their economy growing again.
Why people will continue to insist that the best measure for an indebted government is to borrow more money and hope for a miracle of growth to fix the payments is beyond me.
The only result from drunkenness is a hangover. You can resume drinking to postpone the symptoms, but they will always arrive, and the further you push it out, the worse it gets.
There has arisen a pervasive myth that only debtors should lose when creditors are unable to keep a loan performing. For sure, the rights of the creditor exceed that of the debtor, but it's plain wrong to expect a creditor not to suffer losses when extensive bad loans are found.
I would say: morally, the creditor has greater rights, but economically, the debtor must have greater rights. When a guarantee exists that creditors will always be made whole no matter what must be done, debt-slavery becomes possible and profitable.
Ireland is in the EU and it was the EU that apparently decided that losses for senior bank debt holders were not going to happen. This is because of externalities it would probably have bankrupted most banks due to increased borrowing costs and upset the cosy setup where most government debt is funded by banks in southern Europe. But it was not Ireland's problem and Ireland should have made other countries pay to bail out the bond holders.
Ah now, that is somewhat true and also somewhat false.
I lived in Ireland for most of this period, and really what caused the problem was the blanket bank guarentee which was introduced against the advice of Goldman Sachs. More specifically, the attempt to save a bank known then as Anglo Irish Bank (http://en.wikipedia.org/wiki/Anglo_Irish_Bank).
Now, Anglo Irish really only lent for construction development, and were majorly tied up with the ruling political party of the time, Fianna Fail.
This bank was not systematically important, but they were politically important. The government put approx 30 bn into this bank, and tried to pass it off as a loan. Eurostat, quite rightly said no, you'll never get this money back, and ordered Ireland to count it as debt in 2010. This spiked the irish debt levels, spooked the markets and led to the bailout of Ireland by the IMF and EU.
The worst part is, even though the agreement with these external bodies was to cut costs everywhere (in profession such as law, accountancy and medicine) the brunt of the cuts have so far fallen on poor people.
If one could go back to September 2008, a blanket guarenetee had not been issued and Anglo had been allowed to go bust, then ireland would be in a very different position.
That being said, Irish people appear to be taking austerity quite well, and given the demographics, will probably recover over the next ten years. This all could have been avoided, and while the EU certainly didn't want banks to fail, the majority of the problems were caused by Irish political corruption.
The worst part is, the party responsible for this will be back in power within ten years, where they will have a fourth shot at bankrupting the country. Ireland, my country, has serious issues with stupid governance which is mostly disguised by the willingness of the people to work hard and ignore the stupidity.
It was Merrill Lynch, not Goldman Sachs. Goldman Sachs role in the guarantee is murky, several ex members of their staff have been associated with the events, e.g. Geithner, who it is claimed torpedoed efforts to default on bank debt.
Timothy Geithner really screwed Ireland. He was probably under a lot of pressure to maintain the illusion that banking debt was more secure than it actually was in that time period (along with his colleagues in the ECB), but it was still no excuse for the Irish Government to bow to the external pressure. My generation will be paying for this mistake for decades. The correct move was to "do an Iceland" and wipe out the unsustainable bank debt.
Here's one article (not the best source but there are others available):
And here's the story of how a dodgy deal lead to the former (now deceased) Irish Minister of Finance enacting the blanket bank guarantee (this single meeting is the reason the country is so screwed):
Ireland really could have chosen to let some banks fail. There was a lot of pressure from countries that were trying to pretend their banking sectors were healthier than they were (esp. Germany), but several people then on the Bank of England Monetary Policy Committee (e.g., Willem Buiter) said it was a mistake for Ireland to guarantee all creditors.
> Ireland really could have chosen to let some banks fail.
And the funny thing is the Irish Government still could wipe out the bank bondholders (with no repercussions apart from a ding to our credit rating for a few years).
The real issue is they lack the political will to look bad to the EC, ECB and Merkel. It's a fucking joke. The Irish taxpayer will be paying for this disaster for decades. If we didn't have the sovereign debt burden, the country would be doing pretty ok, as exports in Ireland are doing reasonably well given the anemic global economy.
Could someone help me out why this Middlebrow Dismissive Comment has been voted up? It contains no information, takes no position, and merely lobs cynical derision at everyone.
Marty's other comment in this thread was cogent and interesting, comparing Iceland's actions to earlier crises Sweden and Argentina. But this comment, useless.
It makes a great deal of statements, and does take positions. Factual positions no less. For example:
"At the onset of the 2008 crisis, some people very accurately predicted the type of crisis it was (a financial panic) and recommended policies that were tested and proven to work."
Position taken. Factual assertion made. Is this true or false?
"The mainstream camp however, thought otherwise and most of the world followed their advice."
Position taken. Factual assertion made. Is this true or false?
"With 4 years of data we now know who was right and who was wrong"
Position taken. Factual assertion made. Is this true or false?
"Few high profile economists have reversed their deeply flawed views and the views of those baked by data and correct predictions are still not taken seriously. "
Position taken. Factual assertion made. Is this true or false?
"Economics is deeply corrupted by politics and the financial interests of its practitioners."
Position taken. Factual assertion made. Is this true or false?
Everything I have seen over the past few years indicates to me his assertions are true. In particular the case of Iceland and Ireland.
"some people" recommended "policies that were tested and proven to work"? -- What people, what policies? What position has been taken?
"mainstream camp thought otherwise" - otherwise to what?
"and followed their advice" - Really? So how is it that Ireland and the US and Iceland all responded very differently, if everyone followed the same flawed advice?
"we know who was right and wrong" - Much to my own surprise, we see that most of the solutions have worked to some degree, and the widely predicted great disaster has not occurred. Really the jury is still out.
There is a book, "Freefall: America, Free Markets, and the Sinking of the World Economy"(2010), by Joseph Stiglitz - an economist of Nobel prize fame and former Chief Economist of the World Bank, who very early saw the coming of the global crisis and was laughed at in 2005-2006 for his opinion, esp. at a then held Davos summit.
In his book he elaborates deeply - but accessibly for "laymen" - what went wrong, how it could be fixed, but against whose interests in US the ideal public policy solution would have been, and so why just a dubious set of half-measures were taken, by whom, and how it might all worsen as situation in the near future.
So far, for the period from 2010 to 2012, what he claims and predicts seems right and rings true to me.
Well the writing is somewhat turgid in its use of nominalizations and the passive voice but that really doesn't mean its saying nothing. It just makes it a bit harder to read.
When I read martythemaniak's comment with its talk of "some people", "the mainstream camp" and "high profile economists" it's unclear who these groups are.
Monetarists? Keynesians? Advocates of lower government spending? Advocates of tax increases to cut government debt? Or tax cuts to spur growth? Advocates of higher government spending? Spending on bailouts? Countercyclical government spending on infrastructure projects? Academic economists at universities, who don't put their money where their mouth is? Big city financiers, who got us into this mess? Government economist-politicians, who have to be perpetually upbeat to try to keep the market confident? 'The Stock Market' which isn't even a person? Bloggers and columnists? Advocates of lower interest rates? Higher interest rates? Republicans? Democrats?
Needless to say, as I didn't know who was being talked about I couldn't derive much meaning from martythemaniak's comment.
I don't disagree with you, it is a sloppy way to write, but quite common when the writer has a lot of emotion and not a lot of patience to go cite the specific conversations.
So lets take one example and work through it, martythemaniak's wrote:
"At the onset of the 2008 crisis, some people very accurately predicted the type of crisis it was (a financial panic) and recommended policies that were tested and proven to work."
Using the search terms "Iceland Bank Reform" lead me to a whitepaper [1] from Mercatus which goes into great detail about the controversy around the decision to eliminate debt, it cites several economists and papers, both from the time period and the present looking back. A similar search for "Ireland banking crisis" leads to a similar set of papers where people discuss how to pull Ireland out of the mud.
So what does this say about Marty's writing style? and our reading of it? Well it says Marty throws out his emotional angst over this (perhaps he advocated the debt canceling path for Ireland, I don't know) with his comment that "some people" recommended things known to work, clearly at least a few of those people were advising the Icelandic government as they implemented those ideas. If we're engaged readers we do our own legwork, we can attach names to those people. It's more work for us, and perhaps less satisfying that way.
The comment was accused of not saying "anything" when in fact it did say things. What it did not do was to lay out evidence for the claims made, Further, the use of the passive voice made pulling out the information which would help the reader research the claims more difficult.
So there are at least three things going on here, one an emotional rant from someone who believed in strategies that Iceland implemented, but were widely criticized in other economies, feeling vindicated. Second, a quickly thrown together narrative about the tunnel vision which lead to this situation. And finally, a turgid writing style which imposes an unnecessary burden on the reader trying to understand the meaning or substance behind the rant.
Perhaps to someone sufficiently well versed in the field and its recent history, including who said what and when, the innuendo could be clearly read. I'd venture to guess that most readers could not; I certainly couldn't.
"Could someone help me out why this Middlebrow Dismissive Comment has been voted up?"
Because is it a view obviously shared by a lot of the smart people in HN.
"It contains no information, takes no position, and merely lobs cynical derision at everyone."
It contains information: That people in the economics field had been corrupted by politics and financial interest, witch is absolutely true.
Money mainly from financial elites goes to fund elite Universities in the US, and so most Ph. D need to think in a certain way for getting their position, the people that control central banks need to lie and deceive every single day, and even the Nobel price of Economics is a farce, created by central banks in order to influence people into believing their propaganda economics is scientific.
I know quite a few good economists, but none of them are in great positions of power. If they are they act like really stupid ones(because they have to, if they know something is going to lose value they can't talk about it), so people that believe in them and lose most of their savings are angry at them, what is completely understandable.
So after the Middlebrow Dismissive Comments we gonna have the Middlebrow Dismissive Comment alerts? Would it be dismissive, the GP was at least about the article, while your comment (and so mine) simply spoils the discussion.
There are two groups of economists: scientists who predicted that austerity wouldn't work and would make things worse, and quarks (aka the Chicago school) who recommended it.
In most areas of science bad ideas don't disappear, it is just that those who support them die and ideas with some evidentiary support become the new norm.
After the response to the 70's oil shocks economists knew that austerity didn't work. Unfortunately measures that are known to work are a political minefield, so those "economists" who don't support it get a lot of support from politicians who don't support it either.
In some ways it is similar to evolution or climate change. You can find "scientists" who deny them both. Economics is worse though, because it is so closely tied to politics.
Incidentally, Krugman has been writing about Iceland since 2010[1].
No economist calls themselves a scientist. They call themselves economists.
The term 'austerity' is meant to apply to a government living within its means. These days it is applied to a government with single digit debt growth instead of double-digit growth. Kind of like how eating balanced meals is now called dieting.
It's true that you can avoid unemployment by borrowing money to pay people to dig holes and fill them in again. What is also true is that, without production there is no consumption. Digging up holes and filling them in is not production, ergo, consumption will not rise.
Nobody knows if Keynes was right - he advocated going into debt during recessions and then paying off the debt in periods of growth. The problem is the way large groups of people vote governments take on debt during recessions... and then take on even more debt during periods of growth.
That is to say, while his prescription may have been sound economically (I doubt it, but let's say it is for the sake of argument), politically it's just an excuse to pile on ever larger debts.
The term 'austerity' is meant to apply to a government living within its means.
No, it is meant to apply to a government radically cutting spending during a recession.
It's true that you can avoid unemployment by borrowing money to pay people to dig holes and fill them in again. What is also true is that, without production there is no consumption. Digging up holes and filling them in is not production, ergo, consumption will not rise.
And yet Keynesian stimulus worked in Australia[1]. Australia was able to implement it properly because the Australian economy had run years of surplus budgets prior to the financial crisis.
The jibe about digging holes is disappointing and ignorant. The Australian program involved a one off payment to tax payers for immediate effect (which ended up supporting the retail sector at Christmas time), traditional infrastructure spending on "ready to go" projects (roads etc) for effect in a couple of months and a very large school building program where building usually started 6-9 months after the initial crisis. These programs were production and - more importantly - all supported employment.
TLDR; Keynesian economics works just fine when the government runs expansionary budgets when growth is needed and surpluses when growth is robust.
Here is why this government spending recommendation is just a head fake: assuming the economy can be in a functional state at all, it is obviously true that if the government would spend money on the right things, it could create a functional economy. The real problem of economics however is resource allocation, or in this case, what should the government spend the money on. The proponents of government spending don't give any details - they don't solve the problem at all. They just market themselves as prophets by spouting trivial truths (spending money on the right things is good).
You'll answer "spending money on infrastructure" but that is not good enough. Even for roads there is a point when enough is enough (imagine every square meter of the country covered in roads).
To fix the economy, you have to devise a mechanism of efficient resource allocation. Just saying "let the government decide" is not an answer.
Advocates of Keynesian spending advocate its usage for public goods and commons goods, the two known categories where "the government" is clearly more efficient than markets.
Does that mean no decisions remain in the realm of politics and everything turns into a technocratic utopia run by Economics majors? No. But that's because in any case there is no such thing as an apolitical economic policy of any kind. All of it, right down the property laws themselves, is political.
In fact, it's generally the very core of politics.
"public goods and commons goods, the two known categories where "the government" is clearly more efficient than markets."
Could you give me a reference for that? I am not an expert in economics, and that claim seems very doubful to me. Unless you are saying governments are good in spending money - yes, they are (getting rid of money, I mean).
The rest of your post, I am not sure what you are going on about. Yes, property laws are political (and some countries famously got rid of them, which for now has to be considered a failure). But what does that have to do with Keynesian spending? Also I admit I am not an expert on Keynes, but I suspect that puts me on par with most other people who have an opinion on it and advocate to just print more money.
The rest of your post, I am not sure what you are going on about. Yes, property laws are political (and some countries famously got rid of them, which for now has to be considered a failure). But what does that have to do with Keynesian spending? Also I admit I am not an expert on Keynes, but I suspect that puts me on par with most other people who have an opinion on it and advocate to just print more money.
Actually, advocating printing money is not a Keynesian position, it's a Modern Monetary Theory position.
But anyway, I'm arguing against your assertion that political decisions cannot and should not be made about the economy.
I did not make that assertion, what I said is that the advocates of government spending only shift the burden of decision making and don't really propose anything at all. Or in other words, the claim "government spending can fix the economy" is trivially true but useless.
The link about public goods doesn't convince me that government spending on public goods is always the best choice, see example of too many roads.
As for printing money, isn't it kind of equivalent to taking on debt?
what I said is that the advocates of government spending only shift the burden of decision making and don't really propose anything at all.
Of course, advocates of privatization are doing the same thing: shifting the decision-making and not really proposing anything at all. Both markets and governments are voting mechanisms.
Difference is, in a market, the dollars vote, and in a government, the people vote.
Then we have to start talking about the signal/noise ratios of both mechanisms...
Of course, there is neither the perfect market nor the perfect government.
It seems to me that the potential for abuse is greater in the government, though. There is one vote every x years, and good tracking mechanisms of what is really being done don't exist yet.
Signal/noise - the difference is that in the market, participants can not simply spend other people's money. They have to come up with real money somehow, which might be a pretty strong signal.
Actually, austerity means the government using a lot of it's money to bail out failing banks and other private institutions and then saying it has no more money for the people and social services.
I think you missed the point of that whole exercise... Latvia and Estonia have tiny, almost insignificant economies, literally smaller than 49/50 US states. The lessons there are clearly not applicable to the US, or if you prefer, policies for the US shouldn't be applied to either of them.
Additionally, they aren't doing "pretty well" with austerity by any honest metric. Even four years after the GFC, their GDPs are still below where they were in 2007/2008, significantly in Latvia's case. Unemployment is extremely high (From 4%/6% in 2007 to 10%/14% today) and wages have fallen.
Note that the MR post is polite and humble, and gives fair consideration to both sides of the issue, unlike just about anything written by a certain ny times columnist.
Is it cherry-picking? I don't feel that it is. That GDP graph shows a normal moderate growth from 2000 right through to the crash. There was the slightest of upticks in the last year before the crash, but hardly enough to qualify as a boom. Which means that it is entirely fair to categorize Estonia's economic performance as normal just before the crash, and pretty lousy since.
At any rate, I was in Tallinn in June of this year, and the locals I talked to in bars and cafes were all very pessimistic about how the country was going. Maybe pessimism is just a cultural norm, but everyone that I asked felt that Estonia had gone backwards since the crash, and was still doing so...
If you look at the graph with the longer time horizon, you can see that Estonia, Lithuania and Latvia had stronger growth pre-crisis, a bigger bubble, a bigger collapse from the bubble, and a stronger recovery from the performance trough. Only by measuring by performance from their GDP peak do they look bad, and it's not obvious why this is the natural measure of recovery policies. You would think performance from the trough of the crisis or from some neutral pre-crisis point would be more relevant.
It's not even the real unemployment number, because that unemployment only counts the registed unemployed (who are registered at the Employment Office and receiving financial aid for job-seeking). The actual number of unemployed and people working without taxes is much higher (how much higher, nobody knows).
I'm glad you were the one to point out that Krugman has become so fixated with denying the obvious that it has become embarrassing. Continually pointing out that Japan hasn't get gone broke isn't much of a defense when their economy - once the envy of the world - has completed two decades of stagnation and shows no signs of recovery.
Had Japan done a Iceland-style cleanout, they would probably be still striking fear into the hearts of governments and corporates everywhere.
Except for one complication. Japan's public debt is largely owed to it's own citizens, such a large proportion being internal debt. Even if they defaulted on the external component, they'd still have a problem of the type Iceland could avoid. Iceland wrote off banking debt, which was something like 70% of their external debt.
You're right, my language was imprecise, and I'm conflating two events. The Icelandic government declined to recapitalize failing banks, even when under enormous pressure to do so by the UK government and others. The pressure you may know was partly due to various local government bodies and other institutions having deposits with Icelandic banks.
Because the Icelandic government declined to act as insurer for those deposits, the insolvency of them was seen as an effective write off of national indebtedness to other sovereigns.
No problem. I just get worried that people hear about corporations or nations "writing off" debt and wonder why the system is rigged so they can't "write off" their own debts. Of course you can, as long as those debts are owed to you and not by you.
OK, it's true that by some metrics (government debt for example), Estonia is doing pretty well. But Estonia's private sector debt (personal loans) is still over the top and is actually killing the workforce right now. Because of these loans, the wages aren't rising, even though the cost of living is thanks to joining the euro zone. http://statistikaamet.wordpress.com/2011/05/27/eestist-valja... (Estonia's department of statistics blog) has statistics about the year 2010, where the graph shows the most dominant age group of emigrants are men in the age of 25-29 and most people leave the country because of high unemployment. That's men and women leaving in their best working age, most of whom will never return.
So, yeah, Estonia might be doing fine by some short-term metrics, but in the long term austerity measures have done irreparable harm.
>There are two groups of economists: scientists who predicted that austerity wouldn't work and would make things worse, and quarks (aka the Chicago school) who recommended it.
Oh please. The idea that you can spend your way out of debt has been shown to be disastrous over and over, and yet like the Marxist "scientists" before them these Neo-Keynesians are going to claim everything is peachy until even the slowest among us can see they're wrong (and not scientists, either). But like any good faith healer they'll say "You didn't do it hard enough". Does that sound familiar?
In the short run austerity is painful. In the long run it's the only option, and putting off the pain only makes it worse when you're out of options. Either you do it honestly by cutting expenditures, or you do it the normal way by printing money.
The idea you can derive globally applicable lessons from a country the size of Cleveland is a bit daft.
"The idea that you can spend your way out of debt has been shown to be disastrous over and over,"
The idea is not that you can spend your way out of debt, that would be silly. The idea is that you can and should spend money to compensate for lack of demand in a recession, because the markets overshoot. Once you are out of recession, you must pay back the debt.
So austerity when the economy is good, spending when it is bad. Anti-cyclical government behavior.
Austerity in a recession is pro-cyclical. As was predicted and Greece (for example) has shown, a government cannot save itself out of debt in a recession, because tanking the economy at a crucial time like that makes the debt worse (as percent of GDP, and that's the crucial number in terms of ability to repay).
Update:
I am German, "living within your means" is sort of part of my DNA, and not living within your means is going to cause problems. But timing does matter!
Totally agree. But then the question becomes, what do you do when countries actually increase spending and debt when the economy is good, and therefore have nothing to spend when the bad times arrive. The main distinction between Iceland and Ireland is that Iceland can print its own money.
In the UK it seems that 'nasty' parties that advocate spending cuts in the good times get voted out of office, and replaced by parties that increase spending.
So it becomes less a question of economics and more one of politics. For the moment Germany might see "living within your means" part of the DNA, but few other countries do. And I imagine that, as Germany gets further integrated with the rest of Europe, that kind of thinking will be weakened.
"But then the question becomes, what do you do when countries actually increase spending and debt when the economy is good, and therefore have nothing to spend when the bad times arrive." "So it becomes less a question of economics and more one of politics."
Precisely. And all the western countries have been guilty of this, the only difference is that of degree. Which is why debt has generally only crept up and politics has slowly but surely ceded sovereignty to the banks, especially in Europe where new currency is apparently only created via commercial banks (unlike the US, which just prints it).
"And I imagine that, as Germany gets further integrated with the rest of Europe, that kind of thinking will be weakened."
As far as I can tell that's the current political struggle, especially between the North and South.
If Cleveland had its own currency, you could derive globally applicable lessons. But it doesn't.
The "normal way" is much much better than deflationary expenditure cutting. Deflation increases the debt burden in real terms.
The underlying reason governments are following austerity is because protecting old people's benefits & pensions (the people on the credit side of the debt, i.e. claims on future production) is more important than growing the economy for young people, because that's how the votes are structured in the economies that matter (Germany in Europe). Politics and demographics are pro-austerity, not economists.
Going into endless debt does not grow economies any more than running up your credit cards makes you wealthier. It just gives you the illusion of growth. If you want to see where this leads look at what happens in Japan over the next 12 to 18 months.
And anybody who lived through the Carter years understands high inflation is something to be avoided at all costs. It's not a stimulant to the economy, it's a drag. Companies don't know what the real return on their money will be so they don't make investments.
>Politics and demographics are pro-austerity, not economists.
Nonsense. Politics is very, very, very anti-austerity. Governments do not get smaller without a major upheaval. Look at the UK, where you hear much wailing and gnashing of teeth over "austerity" that's simply a tiny cut in the rate of growth of the budget.
Projected cuts of 10% next year on top of the already in the pipeline cuts of 25% would be difficult to sell as "a tiny cut in the _rate of growth_ of the budget". The cuts to government capital expenditure has been largely the cause for the contraction in the construction [1], which has in turn contributed to the UK going back into recession.
Borrowing in order to increase sales (taxes in the case of governments) or to decrease costs (increase economic efficiency, spending on infrastructure and the like) is a good idea; both companies and governments do this all the time. Borrowing to spend frivolously is a bad idea no matter who you are.
>Borrowing in order to increase sales (taxes in the case of governments) or to decrease costs (increase economic efficiency, spending on infrastructure and the like) is a good idea
It can be a good idea if the economic activity that results covers the cost of borrowing. But that's not an easy thing to determine, and any rational start to the process tends to get warped by political reality. The fetish for infrastructure spending results in, for example, rail projects that lose ¥32 for every ¥1 they take in:
And anybody who lived through the Carter years understands high inflation is something to be avoided at all costs. It's not a stimulant to the economy, it's a drag.
And everyone who remembers the Great Depression says the same thing about deflationary spirals.
The scary thing about Krugman is that his whole ideology seems to depend on that example of one babysitting exchange ring that didn't print enough money and therefore couldn't trade. It's an interesting story, but I wouldn't simply translate it to whole economies of nations. I can think of a lots of other factors that might have made the babysitting ring fail.
> The mainstream camp however, thought otherwise and most of the world followed their advice.
Not the mainstream -- a vocal minority. Ordinary Macro 101 textbooks predicted the consequences of the policies in the the US and Europe pretty accurately.
This. If you look at the right ideas of Macro 101, the success rate is pretty high. Bailouts, demand-side policy, properly applied monetary stimulus, expectations management and confidence. If you look at famous wrong ideas, their failure rate has been pretty high. Austerity, strong currencies, lazy ZIRP stimulus, do-nothing policy, inflation paranoia. What is true in macro before the recession has become more true. The econ pundits who focused on these Macro 101 truths have been mostly right, with the monetary guys being perhaps a little more right than the fiscal stimulus guys. This should not be surprising as the things that are "true" in econ are such by virtue of hundreds of years of examination and highly reasonable philosophy, which anyone who's bothered to study econ would know.
Most people who say "econ is not a science" have had little to no experience with people who conduct economics as a science. I understand the cargo-cultists and pundits are much louder voices, but someone good at "science" shouldn't lazily examine the most shallow voices and use that to conclude deep things about a field of study.
There's cargo cult science, and then there's cargo cult scientific criticism.
>This. If you look at the right ideas of Macro 101, the success rate is pretty high. Bailouts, demand-side policy, properly applied monetary stimulus, expectations management and confidence.
This is ridiculous. Economies recover from recessions and "Macro 101" people claim victory. But economies recover from recessions if you do nothing. Or you implement austerity measures.
>Most people who say "econ is not a science" have had little to no experience with people who conduct economics as a science.
People who "conduct economics as a science" have little or no connection to reality. They have grossly oversimplified models that fail to make meaningful predictions and congratulate themselves on the accuracy of their models in the complete absence of evidence.
Talk about cargo cult science. Economics isn't a science. It's just a way to fit the world into your political template.
Perhaps your economy won't recover to its former glory, like the way Japan's didn't. Then you'll have at least one first-hand empirical data point, even if you're unable to learn from observing others.
I think you are mistaken only in assuming that economists don't know this. It's blatantly obvious as soon as you learn about the philosophy of science.
The problem is that economic decisions still need to be made and "confidence" actually is a big factor in how markets react to news.
Since you can't start doing science in economics at this point then you better look to your preferred economic philosophy for some pointers and rules of thumb. And you god damn better make sure people have confidence in you (since it literally makes things work better and because then you get less blame for mistakes).
Since the creation of a fake Nobel prize in Economics to borrow some of that sweet sweet confidence people have in Physics and Chemistry it's been seen as an image problem. A branding problem.
It's very Straussian I suppose, in that "the masses must be lied to for their own good, rulers need to show strength and project confidence" kind of way.
It's definitely gotten out of hand in my opinion, so little effort going towards moving economics towards science and so much on religious arguments when all sides know they can't really model or predict anything.
The opinion that the Nobel Prize in Economics is a "fake" prize is not shared by the Nobel Foundation, which treats it as equal to Nobel's prizes and awards them in the same way, with the same people, by the same criteria as the other science prizes. They differ only in name as they were named after different benefactors. I wish people would stop saying this. On the other hand, it's a sure sign you don't know what you're talking about.
True, using "fake" was just to be pejorative. It is not one of the original Nobel prizes, it doesn't fit the original prize philosophy of Alfred Nobel but it is the only non-Nobel prize that is officially associated with the Nobel Foundation.
The same people (Royal Swedish Academy of Sciences) also award the Crafoord Prize as well as others, but only the Economics one put "Nobel" in the name and the fact that this was done to improve the image of Economics is just history.
I don't think you're being accurate to say they differ "only in name". There is plenty of controversy about the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel being called "The Nobel Prize in Economics". The Nobel family doesn't like their name being attached to it since it wasn't Alfred Nobel that created it. Hayek was given the prize and stated that he, if he had been asked, would have advised against it because "the Nobel Prize confers on an individual an authority which in economics no man ought to possess... This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally". I like that quote because it nicely encapsulates the difference in the fields of hard science and economics and the different effects of this kind of prize.
Just like you can reliably model a gas but not its particles, i think you can reliably model a crowd but not its individuals. To me economics is the science of predicting the interactions of crowds.
It aspires to be and everyone certainly hopes it will be, the behavioural economics crowd thinks they are headed towards that certainly. Their argument that the reason for the lack of predictive power in economics is the reliance on models that assume individuals are rational actors seems to have a lot of merit.
At the moment the techniques available and the predictive power puts it far down the spectruum that has the hard sciences on one side and pseudoscience on the other with the soft/social sciences in the middle.
>With 4 years of data we now know who was right and who was wrong
Do we? I think at best you could argue that what was done was wrong, that doesn't imply the other alternative was right. There exists more than two possible courses of action and thus we can't simply anoint one as right and the other as wrong, they could in fact both be wrong. I think that is one big problem with macro-economics as a science, you can't really have controlled experiments whereby we try each of N hypothesis in turn, controlling externalities, and see which yields the most accurate outcome vis-a-vis the predictions that that hypothesis made. Even repeating what worked N years ago isn't a guarantee of anything, since it is highly unlikely that all the confounding variables are the same.
You seem to be implying that because economists can't run clean experiments like physicists, they can't prove or disprove anything, they can't tell us what happened and they certainly can't guide us. At this point I have to ask, how is your view of economics different from theology? What is the point of such a useless field of study?
Of course, economics can be useful. Economists have a ton of data and a wide variety of tools with which to conduct their study, and while they can't achieve the purity of physics, economics can still be a valid and useful field of study. The problem isn't economics itself, but practitioners whose views are clouded by politics, ego and money.
> You seem to be implying that because economists can't run clean experiments like physicists, they can't prove or disprove anything, they can't tell us what happened and they certainly can't guide us.
This is exactly correct. Just because we don't have the means to do the kinds of experiments we want, doesn't mean we get to change the definition of proof. And if you do, you certainly shouldn't call it science. If there was no good way to do a falsifiable experiment in physics we wouldn't say "oh we have a lot of data though, so i guess we should just look at the correlations and assume causation in this case". The question would simply remain open, perhaps indefinitely. This is the most frustrating thing about discussing economics with anyone: if you're truly honest, you should admit that you can pluck examples in history to prove just about anything. Each side will say "oh that's not comparable because ____". And you know what, they're right! Since no two situations are the same, we rely on our "gut" to tell us what variables, despite being different, "didn't really influence or matter". The idea that you can for example draw any conclusions about economic policy from the 50s, a ridiculously unique time where all the production of the world except the US was more or less destroyed, is absurd. The idea that you can look at the effect of ONE policy in Germany, a country of different size, culture, laws, and other policies, and say the same would happen here is equally crazy. It's data sure, but not particularly useful data if you are honest about the science of it. Those techniques would get you laughed out of any other scientific field.
> At this point I have to ask, how is your view of economics different from theology? What is the point of such a useless field of study?
My view (I am not the op), is that yes, most people who believe in macro economics principles are closer to theologists than scientists. It is indeed quite possibly a useless field of study, given that there are huge disagreements and it doesn't even matter because a politician will usually do something completely based on the next election or special interests anyways, so even if we did know for sure it wouldn't matter. ( a funny article by mr Krugman himself on this: http://www.nytimes.com/2000/06/07/opinion/reckonings-a-rent-... )
Now, there are alternative forms of establishing knowledge other than science (for example there are no experiments in math, and math isnt science), and you can argue that the position "I don't know" can be a very wise one and an economic policy all in itself. But the idea that "doing x will for sure do y" is silly, ESPECIALLY since a timeframe is rarely ever attached to it.
If there was no good way to do a falsifiable experiment in physics we wouldn't say "oh we have a lot of data though, so i guess we should just look at the correlations and assume causation in this case". The question would simply remain open, perhaps indefinitely
What do you think of astronomy? Science, or should we wait for the development of experimental astronomy (yes, I know a lot of it is based on experimentally based physics, but none of that gets tested at interstellar distances, objects the size of stars, etc)
What about Kepler, and Newton with his laws of gravitation? Science, or did it only become science once we had machinery to measure gravity?
I think economists can do science, but their subject is much harder/less anemable to the scientific method than e.g. physics. Because of that, their results are less spectacular then those of physicists (psychologists, similarly, have a harder time than physicists applying the scientific method)
Also, that is harder to discriminate between true and false theories makes it easier for 'crackpots' to make a living in those fields.
The funny thing is that the "mainstream economists" should have been discredited since the crisis started. Because none of them was able to predict the crisis, because all of them pushed for the policies that led to that crisis. So of course they weren't going to cry disaster when they proposed it. I remember them being blamed for a while, but in the end nothing has changed.
The fun thing with economic predictions: make enough of them, and some of them are bound to come true. The whole fond business seems to dwell on that, publishing lists of successful predictors by the end of the year. Research has shown that the successes are actually just random, but by cherry picking the success stories you can create a nice story for advertising.
In any case, it would be interesting to get more references from you (who predicted what, and what are the suggested steps).
I think there are always a lot of people predicting doom for the near future. Every now and then they are bound to be right, but it doesn't prove anything.
It is true. John B. Clarck and Edwin Seligman (two leading figures in the development of the Neo Classical Economy) sold out in the late 1800's to the wealthiest of the day and transformed the science of economics into something that is as reliable in predicting the economy and offering solutions as your average fortune teller.
The rich industrialists of the 19th century made sure that the universities (on whos board they sat) taught only the flawed neo-classical economy so entire generations of young minds were corrupted.
It's thanks to Seligman by the way that we are all paying taxes on the labor we perform while the act of speculation (which destablizes the economy) remains largely un(der)taxed.
Economists should go back to basics: Smith, Ricardo, Mill, George, ... and rebuild their field as a true science.
I invite everyone to read "The Corruption of Economics" by Mason Gaffney for the full story.
are you saying the only value of econ is its predictive value or the lack thereof ? if some PL hotshot predicts that 10 years from now imperative languages will go the way of the dodo, must we mock his particular prediction or his field in general? shaw is supposed to have quipped "If all economists were laid end to end, they would not reach a conclusion." - but some actually see that bug as a feature. disagreement in social science != quackery
You are right when you say the economics is deeply corrupted by politics. At least mainstrean economics.
The problem is one of propaganda first and foremost: the only thing that is widely thaught in universities and that we keep hearing all the times is Keynes.
The problem is: Keynesianism is totally unable to predict anything further than two or three years. It also inevitably leads to the country defaulting. There's no other way. There never has been any other way for a country run under the Keynesian dogma.
I'll give an example: before the first euro even circulated there have been economists (of course non-Keynesian ones) who predicted the very exact scenario that happened to the eurozone 13 years later. Too many houses in Spain, too many industries in Germany, too many public servants in France and as well the default of Greece and Spain (Greece is going to default again btw and Spain is going to eventually default too).
These were quite impressive "predictions" for some. For others it was simply about applying what Friedman has been telling since forever.
That's the problem: Keynesianism can only predict up to two or three years in advance and that at the cost of sinking the country.
But Keynesianism is precisely what politicians wants to hear: they take it as a free ticket allowing them to create an always bigger public sector (and hence they can feel always more and more "important").
The result? Deeply corrupted economists that happily sing the only song that politicians want to hear.
The non-Keynesian economists who precisely predicted the mess we're in today? Nobody is listening to them (well I am for my positions, because it nets me a lot of money but not a single politican want to listen to them).
This is really a sad state of affair and it shall stay like that as long as the fraud that Keynesianism is is going to be taught in universities as if it was the holy gospel.
Note that the disciples of Friedman who predicted Spain and Greece's defaults did not just say: "Spain and Greece are eventually going to default". They did predict precisely the mechanism, over a decade and a half, that would lead to the defaults. They were already right for Greece and the future is going to prove them correct again.
Note that since then they've explained why there's no way on earth Greece is ever going to repay its debt and that inevitably Greece would default again.
While the Keynesians are all wrong and keep telling us that more public debt is going to solve all the eurozone issues.
The problem is that once countries reach about 100% of public debt (which they inevitably do when run under the Keynesian dogma), there's simply no way out using Keynesian tactics.
So, yup, to me Keynesianism is an utter failure and it's going to get uglier and uglier.
You don't want to be jobless in Greece today.
The fact is: Friedman disciples predicted precisely that in 1999. Keynesians didn't.
Iceland did what any sovereign nation should do in that situation. They fixed it, and importantly they did it not by bailing out the bad guys but by taking everything from them!
Iceland also apparently knew that so-called investor confidence is a joke as far as countries are concerned. A few years on, who is even going to remember this? Of those who remember, who is going to think this might happen again - particularly since iron clad policy was put in place to prevent it from happening again.
Maybe Irish and Greek politicians are just too chicken to do the right thing. Or, and I think thats unfortunately more likely, they are fighting for vested interests of a few that pay them money rather than their country or their people. Iceland stands out in that the politicians acted in the interest of the people.
There are more than 50 US cities bigger than the whole country of Iceland. I think the kinds of conclusions you can draw from Iceland's experience is a bit limited.
"But we are so much bigger" seems to be the standard excuse for the US not looking at what other countries are doing successfully and learning from them.
> "But we are so much bigger" seems to be the standard excuse for the US not looking at what other countries are doing successfully and learning from them.
Except we have evidence of what happens when a much larger fraction of the economy does what Iceland did. It was called the Great Depression. Small economies can borrow from abroad without destabilizing everything. Unless you are willing to directly take on the analogy of the Great Depression the 'Iceland for everyone!' argument is dead in the water.
If the argument that scale hurts (all small western countries are very rich, but big countries complain "we're too big because we can't do that and that), then the obvious solution would be to split up. For me it seems just too easy. I think the reasons are more related to the culture than to the size.
It's not that scale hurts; there are many benefits to scale. But obviously, it makes some things harder to deal with. Iceland has a population of 320,000 or so people and only one major city. Politics is a lot simpler with a population that small.
Indeed. Scale has benefits, one can see that for big companies, which have, despite bureaucracy and politics, quite some advantages - scale, wide skills, easier access to financing, global resource access etc.
I am not assuming anything. As a recent citizen of the US I am just observing that the US doesn't seem to be willing to look at other countries and learn from them because somehow the US is perceived as special. Examples where the US could learn a lot IMO are:
- health system
- broadband coverage (argument "the US has low population density". But why does the coverage in LA suck then? It should be a dream for a competitive market.
- murder rates
- incarceration rates
- poverty rates
Reflexively rejecting other countries' experiences is hurting this country big time.
But it's a pretty valid excuse. Luxembourg has the highest GDP per capita in the world, but you can certainly find places in the US with roughly the same population that would have a higher GDP per capita were they independent countries.
Why bother with Iceland when we can be following the economic policies of Beverly Hills?
What Iceland did was say to the bankers if you stuff up then it's your problem. Where're not here to bail you out.
In the US the bankers stuffed up, the tax payers bailed them out and the bankers got a nice big pay rise.
What this has taught the US bankers is they can safely put a gun to the head of the American people and their government will gladly hand over the money. No questions asked.
When the banks get bailed out its not of primary importance that bankers keep their jobs or "get a raise". The people being bailed out are the banks creditors. Iceland didn't tell the bankers stuff it (well they may have too--it's just less important), they told the lenders stuff it.
Iceland was in a position to hang out the creditors, because 1) they were all foreign; and 2) they didn't have an immediate, present need to tap the capital markets.
While not being in precisely the same situation as Iceland, Ireland probably could have done something similar. Greece cannot, because they continue to need to borrow immediately.
I think the (correct) point of the original article was that listening to and following the advice of your creditors is typically the best thing for them, but not for you.
Isn't Greece trying to run a primary budget surplus, i.e. before interest payments. If they managed that, they wouldn't need to tap capital markets after defaulting.
Do you actually know what you're talking about or are you just joining the large chorus of whiners that exist everywhere these days? People don't want to exchange knowledge and learn, it's one huge rant. I wish I could figure out how to stop this.
Anyway, I think salaries in many Wall Street jobs have been declining. And many of the banks that took TARP money paid it back with interest. Those that haven't, should be forced to at some point. Also, I think some of that money went to Detroit.
To be clear, Fed action isn't spending. Look at page 32. It's all in the form of interest paying loans (and $10 trillion went to other central banks, not even private institutions). Much of it is to provide liquidity to banks already eligible to borrow through the discount window - already a source of unlimited loans from the Fed, at under 1% since 2008 (http://en.wikipedia.org/wiki/Discount_window). Much of the rest is to provide liquidity to other institutions that couldn't borrow directly, because the liquidity that's supposed to be indirectly ensured by the discount rate had dried up.
So yes, the Fed responded to the financial crisis by increasing liquidity. That it mostly occurred through ad-hoc programs and instruments doesn't change the fact that it's the basic function of the central bank. It's in no way paying for Wall Street salaries.
That's a completely ridiculous number, because you're adding up short term transactions. If you lend me, and I pay back immediately, $100 every day for a year, you did not lend me $36,500.
But this supposes there is some line, that, if crossed, means that you must make creditors whole, even if that means handing people who didn't make bad decisions (ie, the public) the bill.
If this line exists, then it would be interesting for people to suggest at what size the line lies at. Because I believe the line 'too big to fail' is a weak defense of vested interests making sure they aren't left holding the bag.
Think about what you just said. Complex systems generally don't scale linearly.
Of course everyone else could do the same thing. But would it have the same effect? I don't know.
Edit: That said, my intuition is that default + devaluation is actually the right way to go for many countries. But the effects will be much more complex if many countries do it, and if bigger countries do.
The Irish Government retains the power to unilaterally renege on our bank debt. They lack the political balls to do the right thing- the phrase used by chicken shit Irish politicians and Eurocrats is "the bomb won't go off in Frankfurt, it'll go off in Dublin".
The European Commission, the European Central Bank, Angela Merkel, and amazingly, US Treasury Secretary Tim Geithner have all leaned on Ireland to keep this bullshit charade of paying back all this bank debt.
The IMF and the UK Chancellor are the only external parties who've said there's too much austerity in Ireland and paying off this massive debt pile is not right.
Ctrl+F my username, I've posted links elsewhere to back this up.
Brian Lenihan converted the "bank debt" to sovereign debt when he guaranteed it. That never should have happened. To renege on that debt is a default now whatever way you slice it.
I think part of the problem with Greece and Ireland is also that they are part of EU and are no more sovereign and in full control of their financial policies.
>Iceland did what any sovereign nation should do in that situation. They fixed it, and importantly they did it not by bailing out the bad guys but by taking everything from them!
Well, you can always solve your debt problems by refusing to pay creditors. I wouldn't read too much in to the doings of a country with the population of a mid-sized city.
I wonder though if this is something that can only work on a small scale. Iceland has only 320,000 people, which means that even as huge as their debt was, the economic ramifications of their default were quite small on a global scale. It seems to me that the effects of this kind of thing would scale up in a highly non-linear way and you can't just assume that an economy 10x the size will behave the same way a smaller one would, let alone the US or other major economies. For example, the primary reason Iceland is doing OK now is that the rest of the world economy (despite being in extremely poor shape) managed to survive, so Iceland's export industries have somewhere to export to. If the whole world economy had collapsed Iceland might be in the worst shape of all.
Of course that was a factor. Every time I ask anyone I know from Iceland about stories like these, they roll their eyes and say it's BS.
Also, notice that this is published in the Irish Independent, a fairly newspaper which traditionally supports what is now the opposition party and which dug the country into a hole in the first place. It would be a mistake to assume this commentary is wholly objective; likewise it would be a mistake to overlook the historical record, in which Ireland has been through past periods of austerity and emerged sooner than its peers for having taken the bull by the horns. In the meantime, it's useful to remember an Irish proverb: 'faraway hills look green.'
And its written by Dan White, he of get on the property ladder and the time to buy is now. Seriously, I cannot understand how anyone still listens to him, but apparently they do.
Iceland did what numerous other countries have done in the past to deal with the same situation, including Argentina in the 2000s, Sweden in the 90s and the US during the 30s.
One of those things is not like the others: the Argentinian financial crisis was about the Argentine government defaulting on its sovereign debt, which did not happen in the other cases.
The Argentine crisis was about the government (i) borrowing excessively, (ii) having its debts in a foreign currency (dollars), and (iii) maintaining a fixed exchange rate. Rather like the Greek situation.
Sweden was in a similar situation to Iceland (though not as extreme), but chose to guarantee bank creditors - so it behaved in the opposite manner to Iceland, making the same choice that Ireland did, though it was much smarter in how it went about recapitalising banks than Ireland was.
The US during the 30's ended up remaining in a deep depression that didn't let up for well over a decade, something that casts doubt on any of the actions the US government took during the time.
The financial types might have been giving bad advice, but that wasn't necessarily mainstream economics - and seems like it might have been a bit self-interested too.
"Iceland did almost everything right. They stiffed the bank creditors to avoid aggravating the moral hazard problem, just like the textbooks recommend. In the eurozone the bank creditors are being bailed out. They relied of fiscal policy to address S/I and debt issues, and let monetary policy address AD, just as the New Keynesians were recommending in the 1990s. In the eurozone they combined tight money with reckless deficits. And now Iceland is growing fast and the eurozone is stagnating."
http://www.themoneyillusion.com/?p=14895
Maybe a simpler explain was that Ireland was in deeper trouble, part of it due to being bound to a currency which could not depreciate, since most of the "weight" was outside Ireland, in a german speaking country of continental europe. (and which is being far too patient with some creditors that are showing less willingness than Ireland)
EDIT: oops bad proofreading, a word was missing. It is "in deeper trouble"- fixed that
Because as part of the Eurozone your national bank and sovereign state has monetary and fiscal obligations to the ECB and Eurozone creditors.
From a naive perspective, reneging on any of these obligations would put your Eurozone membership at risk.
In practice, the situation is almost the reverse. It is/was far easier to maintain the status quo as long as possible to enable the use (abuse?) of monetary policy transmission mechanisms of the ECB and other EU state bailout facilities than to take unilateral action like elective default.
Elective default would have meant any Eurozone state would almost certainly be required to leave the Eurozone, including rescinding ECB support and incurring the huge upfront cost of reintroducing their own currency.
TL;DR. Comparing Iceland's situation directly to any Eurozone state is an economic fallacy, especially since the Eurozone has no mechanisms at all that support leaving it (e.g. transition to a parallal ECU2-like currency while retaining access to ECB or other Eurozone facilities).
"Because as part of the Eurozone your national bank and sovereign state has monetary and fiscal obligations to the ECB and Eurozone creditors."
But the point was that these were private bank debts, not debts of either the national bank or the state. Once they the state took on those debts, yes, there were obligations.
It's effectively the same under ECB's monetary policy mechanisms. Those bank debts are used as collateral for borrowing from the ECB or the Eurozone inter-national bank payment processing system (called TARGET2) or Eurozone creditors.
Imagine if Iceland could only issue debts, both public and private in US dollars. That, its interest rates were set by the Fed. That, its banks could tap short and medium unlimited liquidity against this collateral. That, its USD payments went first through a US-based payment processing system. But only if you never default on this collateral.
Then, you would have something similar to the situation Ireland faced.
It is true Ireland could have tried to hold out for an externally-led, Greek-style debt restructuring, though I suspect it would have been harder for them due to the private bank debt transfer. But even that still is not elective default to their own currency with full debt control. Therefore, not the same as Iceland.
"[Public & Private bank debt] effectively the same [under TARGET2]"
Interesting assertion, as it would mean there effectively are no private banks and "too big to fail" is enshrined in basic EU mechanisms, and independent of size -> automatic bailouts all the time.
Are you referring to Sinn's analysis? While that's an interesting read (intro: http://en.wikipedia.org/wiki/TARGET2), it doesn't seem to quite support such a staggering claim.
However, I do see that European politicians are acting this way, so that supports what you are saying, but they actually have to act to do so, which contradicts it.
Certainly the rest your text simply assumes the equivalence of public and private debt, rather than showing that this is the case.
"you never defaulted on this collateral" -> There are two different "you" in this case. So what happens if one of these two "you" does default?
You are implying that the default of one "you" automatically means the other "you" never gets money again (the bond vigilantes and all that), but as the fine article showed, the same was said for Iceland and it didn't happen.
I know you claim that there is only one "you", but I just don't see that in your analysis (or in what Sinn wrote).
"It is true Ireland could have tried to hold out for an externally-led, Greek-style debt restructuring" -> again, that only applies after taking on the bank debts.
Considering there is no official way to leave the Eurozone nor to be expelled by other members, your whole premise is false.
The truth is actually the opposite: "rich" Euro countries are de facto forced to carry their weaker partners, one way or the other, to stop their own currency from sinking. The whole austerity-vs-default debate is just a game of chicken that Irish/Greek/Italian/etc elites were not good at playing (or did not want to play, in order to safeguard some specific economic interests).
the harsh truth of being a eurozone member is that the country's taxpayers are not necessarily intended to be involved in a decision to default on debts. Case in point, there was swift and sound backlash when the former Greek prime minister proposed a referendum on one of the many Greek bailout packages.
Oh for fucks sake. How many times does this bullshit get promoted. Iceland != Ireland! Or any other distressed european nation for that matter. It's FUCKING TINY. Population: 320k. GDP: $14bn, or 1/1000 that of the US, or 1/100 that of a peripheral european nation. The impact of Iceland defaulting on it's debt does not compare to a "full-sized" nation. </rant>
But honestly, when I read a lot of what the foreign press is saying about us Icelanders it almost seems like they are telling a fairytale. We are being used as an example for some mythological "We should have done that!" type thing. There are no delusions here that what we did would never work for a larger country, and what we did was indeed morally questionable.
But it is fun reading about the miracle of iceland on the net tho :)
The only thing worse than making a mistake is failing to own up to it and suffer the consequences. The entire Western world, not just Ireland, is a victim of this.
It is naive to apply this to the current situation. Financial institutions aren't people and most importantly they aren't normal businesses. They make up the core infrastructure that every business and consumer needs just like power, water, electricity etc.
Every time someone says "just let them fail" ask if they would they say the same thing if it was a water company that needed bailing out.
I never said let them fail, I said that we are all victims of moral hazard. I don't profess to be able to solve all the world's problems in a HN thread, but the controllers of these companies were never held accountable for their failings and no message was ever sent to financiers that they have the same level of public responsibility that a water company does.
I don't necessarily think that straight failure is a great answer but I think that the culture needs to be changed and I know for a fact that the internal culture of the banks has not changed one iota from pre-GFC to now.
>I know for a fact that the internal culture of the banks has not changed one iota from pre-GFC to now.
Do you work at one? I work at a Canadian bank and the culture has shifted enormously here, but I'm entirely unfamiliar with how things are in the United States.
I'm curious, in what ways do you feel the culture has changed in your organization? Are there concrete changes to investment strategy/policy? Or a more general zeitgeist-type shift and people at the company have come to the general conclusion that some risks are too severe to take no matter the possible reward? Both/Else?
For starters, they've cut back on proprietary trading considerably. Before we had quite a few prop traders who would invest the bank's funds in equities and I believe only five of them remain. So the bank as a whole is less willing to risk its own funds through traders and prefers to make its money facilitating access to various markets or offering retail trading services.
Management has shifted their focus and puts a lot more emphasis put on generating small and steady profits as opposed to massive bonuses for large profits.
But to be bluntly honest I feel like all it will take is some time to pass and the next boom cycle to come and the same gunslinger-types will regain the management reigns with the same old outcome.
Edit: Just want to add I don't have any particular idea how to solve this type of problem, so I'm not trying to condemn you or those in your profession.
Isn't the point of the article that Iceland "let them fail" and things got better instead of worse?
If an individual goes bankrupt through poor decisions, we castigate them. When a financial institution does the same, there are often little or no consequences.
What's the incentive for them to improve their behavior?
> ask if they would they say the same thing if it was a water company that needed bailing out
The difference between water companies and financial institutions is that if the San Francisco water utility goes under, you have to move to a new city. But if the bank that offers you credit goes under, you just send your checks to a different address.
The water company is based on a real, tangible resource. Stock markets and financial instruments are tools of imagination based on speculation and 'confidence.'
No. Financial institutions do a LOT more than just speculate and invest.
They also handle and manage capital for everyone from consumers, businesses, enterprise to other banks. And capital is every bit a tangible resource as something like electricity is.
I personally was outside the Northern Rock branch in the UK when it went under. Over 3/4 of the people in line were scared and worried senior citizens. People forget that financial institutions affect EVERYONE.
There is institution and institution. The problem with Northern Rock and friends was exactly that they were playing recklessly with "senior citizens' money"; in a better world, that sort of reserve would be handled by a different entity with stricter, more conservative policies than you'll find in a "grow at all costs", ambitious little company.
Pretty sure most of the decisions of western nations (US/UK in particular) decisions were not based on purely economic reasons. I suspect those in power, the background, and their political ties (big banks) played more into the decision makings rather than pure economics.
Geitner, Bernanke, etc. are all big bank people. Krugman and other "independent" (yes, I know there are caveats) economists had other ideas.
At the end of the lenders chain there are some rich people who want to get their money back and who have ties to the government. The whole thing is basically a scam to relieve the average population of their riches. At least that is my impression of the affair...
Makes sense, it is not irresponsible to refuse to entertain debts to shady creditors. One is responsible for the fate of one's investments, but not when the investment itself is betraying certain ethical and business standards that would be impossible to consistently audit of every investment one made. So unless future investors in Iceland are planning to skate the line between legal and illegal, there's no reason to doubt the future economic potential of Iceland.
>Makes sense, it is not irresponsible to refuse to entertain debts to shady creditors.
It's not irresponsible to refuse to borrow money from shady creditors. But no matter how you dress it up refusing to pay debt freely taken on is theft.
It is not theft by any legal or everyday definition I have ever heard. Even if it were illegal, the crime would not be called theft. Are there any types of debt in the US in which a default is considered considered illegal?
Among the many differences between a loan and a theft, is that the transaction is entered into by the choice of both parties. Whether it is a true free choice is another question, as is the issue of fraud in creation or discharge of the obligation.
>It is not theft by any legal or everyday definition I have ever heard. Even if it were illegal, the crime would not be called theft.
I wasn't talking about legality. Clearly what Iceland did was legal. It's still theft if you can pay the money back and you don't.
>Are there any types of debt in the US in which a default is considered considered illegal?
As a matter of fact, yes. Student loans are not dischargeable in bankruptcy.
>Among the many differences between a loan and a theft, is that the transaction is entered into by the choice of both parties. Whether it is a true free choice is another question, as is the issue of fraud in creation or discharge of the obligation.
Which all amounts to rationalization in this case. This isn't a case of someone being forced to take on debt by a loan shark.
> Would-be investors in Icelandic bonds focus most of their attention, not on what happened in the past, but on what is likely to happen in the future.
Once you understand that, you basically understand the entire financial industry. It has no memory. Hell, it barely even has any perception of the present.
If a country defaults, and tells the banks(who ever) to sod off, why cant it then funnel the money it was spending on servicing these debt(s) in to beefing up its own economy again? Could it not then become an attractive investment to those same banks it dumped on? Since all businesses care about is future money and profit, then surely the defaulting country is back in favour again, assuming it can deliver some sort of surplus or profit?
Its just a reset. The country blue screens, reboots and every one is happy again.
I believe they would have to leave the Euro and return to a national currency. But that is certainly a better prospect than the austerity project Germany and France are wishing upon them.
Not so fast: Greek "prosperity" for the last decade has largely rested on indirect transfers due to being able to borrow at "German" interest rates, which they did with abandon.
So Greece was able to spend way beyond what they produced.
For a while.
There was never any way this could go on indefinitely, spending had to come down at some point, because you can't spend more than you take in in the long run - so called "austerity". And that's even without taking into account that you usually have to pay back debts.
The fact that this hits the little people rather than the tax-avoiders at the top is an internal Greek problem.
Although they should not have been admitted to the Euro, leaving it now would not improve things: their debt is valued in Euro, so if they return to the Drachma and then devalue their currency, their debt goes up even more!
Of course, they should never have been admitted to Euro, and it turns out that the so-called Euro crisis (which is yet another banking crisis) was precipitated by Goldman Sachs letting slip that there was "something fishy" with Greece.
How did Goldman Sachs know this? They were the ones who had cooked the books for the Greek government in order to gain entry to the Euro.
IMHO, the EU should seize Goldman Sachs assets in order to pay for the Greek bailouts.
Note. That's a technical default or externally-led debt restructuring. It is not within full control of the Greek state as it would be under its own currency.
For example, a price for remaining within the Eurozone was for ensuring none of the ECB's large Greek bond holdings (approx. EUR 50bn), now or in future, will be exposed to enforced losses. This has always been politically understood.
The former. There was no mechanism to allow someone to leave the Euro - it just was never an option and the "coherence" of the system depends on this not happening. So, once you permit a member to do so, the whole Euro system becomes precarious, to say the least.
The drive for greater fiscal union, a common regulatory authority, etc, that we see now is an attempt to fix such issues - ie having so much control that these defaults never happen.
Please excuse me while I try to suppress my cynicism.
"The former. There was no mechanism to allow someone to leave the Euro"
Hmm...this is once again conflating defaulting with leaving the Euro. From the article you cited:
"Actually, a second [default], as Greece technically defaulted on its debts when it renegotiated a 50% write-off of its debts with its creditors earlier this year."
So Greece has defaulted, but they haven't left the Euro.
"The drive for greater fiscal union, a common regulatory authority, etc, that we see now is an attempt to fix such issues - ie having so much control that these defaults never happen."
I would say: "...that this sort of debt-binge on someone else's dime can't happen."
If you have a common currency, you also need these other mechanisms. It wasn't politically feasible to get this at the time, so the Euro was used as a "forcing function". Once you had the Euro, there really wasn't a way around more common financial control.
Greece is paying, as Italy and Ireland are doing. Not sure for how long and what will happen, though. Whenever, back in history, populations are pissed off the hard way for reasons they are not accountable for or not even understand, bad things happen. I don't know what's the feeling up in Ireland, but for what I see in Italy and Greece, there will be sooner or later a breaking point.
Sorry but the people are the reason Greece/Italy are in the mess they are in. Tax evasion and corruption is rampant at all levels especially amongst the rich. Many in Europe believe that the people are simply getting what they deserved.
Tax evasion was basically 100%. Sure, it's easy to say "I'm only cheating a little, blame the big cheaters" but everybody was in on it. The ones paying for it chose to be unaware of what was happening.
Yes, as far as I know this is correct. In fact, reports by the monitors said that there wasn't even a capability to actually collect taxes in the tax collecting agencies, apart from no willingness and no real idea of how/why.
The people to blame are the ones who got Greece into the Euro in the first place. If they had stayed on a sovereign currency they would, almost definitely, have a lower GDP than they did on the Euro, but:
* They wouldn't have as much of an external debt problem.
* Their ability to export and attract foreign investment would be much better.
If you are curious about the Icelandic economy, the lessons learned, fact and fiction, you should follow the blog "Icelandic Economics" by Olafur Margeirsson. He writes interesting, fact-based posts on the Iceland Economy, like this one on the recovery: http://icelandicecon.blogspot.no/2012/07/is-iceland-ok-now-e...
I have no personal involvment in the blog or they author, am just a follower.
The opening statement is a crock of bull. Creditors were not told to take a hike. The creditors became the owners of the banks erected to maintain the banking system. I'm sure they took a haircut of some sort and the capital controls forced them to maintain their assets in Iceland, but to the population at large it does not feel like the banks lost at all. They have been profitable EVERY QUARTER since then. The new banks got a firesale deal on the paper assets and have been making out like gangbusters.
I hate how the Icelandic Economic Wonder is held up as a model for others. Monetary policy is crap. The Fed (or our anemic facsimile thereof) blindly believes in the disproven assumption that interest rates control inflation (at least for microeconomies).
Meanwhile wages are stagnating, unemployment is high, social programs are under siege EVEN with the most left leaning government we have seen EVER in the history of Iceland. Mortgages are adjusted with the CPI but wages are not. I for the life of me can't see why the higher price of tomatoes or ketchup should raise my debt with the bank.
I have much more to say on the issue but need to maintain my anger below flashpoint so I can do some work. Christmas is coming.
Imagine that 200 people are living in a town with minimum rules that can barely ensure they don't kill each other. Everything else is up to individual whims and fancies. Most of them have enough power to threaten others and there is no leader than can rap them when they fall out of line.
Maybe we should look at things in this lens instead of our commonly held views at the individual level to make sense of various things to take the right decisions.
This has some parallels in the ability to declare personal bankruptcy; to start anew. Unlike the US, many countries still don't allow this and hold past debts over you forever. In Victorian England, there were special debtors prisons and workhouses where you had to spend x years literally working off your debt.
I don't understand how Economics is considered a science. It doesn't follow one of the underlying principles of the scientific method, mainly: If an experiment cannot be repeated to produce the same results, this implies that the original results were in error.
I imagine there's a tipping point with countries defaulting whereby suddenly the entire complexion of the sovereign debt market changes radically and every nation needs to rethink its fiscal policy. Maybe Ireland could do it, but if say Spain were to follow suit...
I think Greece could have taken a lesson from this too - in my view they would have been better off allowing their currency to devalue and just write off their debts. But they are probably past the point of no return now in terms of being able to do that.
Seems you got this the wrong way around.
Unless by dollar you meant "whatever their local currency is called ... which for me happens to be dollar ... so I will just call everybody's currency a dollar"
But isn't tourism a huge part of their economy... i.e. foreign tourists bringing in foreign currency which would be great when the local currency is low?
Which is not totally surprising since it's this imbalance of trade that resulted in them running up their massive 'credit card' bill in the first place.
Indeed. Unfortunately the Greece public valued the Euro too much to tell the ECB to f' off. Now their economy is entering serious depression territory with none of the devaluation benefits.
"Self-delusion is a characteristic of Irish society. In the old days we were told things about ourselves that in retrospect seem laughable. We were morally superior to other races, O’Connell Street was the widest street in Europe, the Shannon was going to be drained, the country reunited and the Irish language restored.
Such was the pathetic nature of the society that it tended to grasp at any idea, no matter how absurd, seen as positive to our warped sense of nationhood."
Great, yet depressing description of the Irish psyche.
This part in particular rang true:
"The Republic of Ireland has never been truly independent. This could be because the best and the brightest were and are the most likely to emigrate, leaving behind the more deferential, insecure and apathetic people. British rule was overthrown in this part of the country in 1922 only to be replaced by an equally abusive system controlled from Rome.
This itself is in the process of being gradually overturned, but is being replaced by a regime controlled from Frankfurt, whose intentions are, as yet, unclear. Unless something fundamental changes in the public psyche, Ireland seems doomed to endlessly repeat its history of failure and to be a society that is deferential and provincial in outlook."
In every respectable field of study there are certain basic scientific expectations - supporting your positions with evidence and data, reversing your views when your theory has been disproved etc. At the onset of the 2008 crisis, some people very accurately predicted the type of crisis it was (a financial panic) and recommended policies that were tested and proven to work. The mainstream camp however, thought otherwise and most of the world followed their advice.
With 4 years of data we now know who was right and who was wrong, and yet that has done almost nothing in the field of Economics. Few high profile economists have reversed their deeply flawed views and the views of those baked by data and correct predictions are still not taken seriously. It's as if the LHC found the Higgs, yet most physicists still denying it exists - the situation really is THAT absurd.
Economics is deeply corrupted by politics and the financial interests of its practitioners. If the quacks and charlatans aren't purged soon, the either field will be discredited. You can't practice alchemy or voodoo and expect people to treat you like a scientist.