Neoliberalism is an ideology and a compulsion

The symbol of the Euro in front of the Europea...

Mike Whitney and Dean Baker argue that those leading the European Central Bank, the European Union, and the International Monetary Fund (The Troika) find it difficult to experience the world but through the lens of their idiotic economic theory. Baker had the recent opportunity to observe the Troika in action. He drew this conclusion:

There is no economic reasoning behind the troika’s positions. For practical purposes, Greece and the other debt-burdened countries are dealing with crazy people. The pain being imposed is not a route to economic health; rather it is a gruesome bleeding process that will only leave the patient worse off. The economic doctors at the troika are clueless when it comes to understanding a modern economy.

Mike Whitney’s analysis affirms Baker’s assessment. Whitney notes that, “If Greece’s €130 billion loan was going to be used for fiscal stimulus, then it might be worth the commitment. Because that kind of money could put a lot people back to work and kick-start the economy fast.” Yet…he continues by observing:

But the loan isn’t going to be used for stimulus. It’s going to be used to recapitalize the banks and pay off creditors, neither of which will do anything to boost activity or create jobs. So, why bother? Why dig an even deeper hole if it achieves nothing? If that’s the case, then Greece should just default now and start rebuilding the economy ASAP. There’s no point in putting it off any longer.

Indeed, why would Greece accept the bitter medicine dispensed by the European Union?

The troika (the European Central Bank, the European Union, and the International Monetary Fund) is demanding another €3 billion in spending cuts even though unemployment is tipping 20 percent and the economy shrank 7 percent in the last quarter. What sense does that make? You don’t have to be a genius to figure out that Greece won’t reach its budget targets if tax revenues continue to fall because everyone’s either been laid off or taking a pay-cut. It will just make a bad situation even worse. But the troika doesn’t worry about these type of things. They don’t care that their lamebrain economic theories have failed miserably so far, or that their austerity measures have been a complete flop. They just keep plugging along making the same mistakes over and over again, impervious to the criticism of reputable economists, oblivious to the abysmal results, they remain steadfast in their commitment to belt tightening, sure that a strict diet of breadcrumbs and water is the best way to nurse an ailing economy back to health. It doesn’t bother them that the facts prove otherwise.

An austerity politics entails personal suffering for many people. It immiserates them by design. This effect is considered a feature of an austerity regime. And the Greeks have already suffered, as we know. But an austerity politics also makes little sense during a recession. It is a policy regime a crazy person recommends.

The upshot: The government of Greece, if it were rational, would take the Argentinean path to recovery. Country debt and risk are not perpetual prison sentences. If Greece were to take this path, it would default on its obligations and exit the European Union (advocated here). It ought to do so because its current predicament and the proposed — or imposed — ‘remedy’ for it will only serve to transfer wealth to the financial institutions holding Greece’s debt and, of course, to plunder the country of those assets worth owning (discussed by Michael Hudson here). Greek “have-nots” have and continue to protest this imperial imposition on their country. It is rational for them to do this just as it is rational for the Greek government default on its financial obligations and jettison the Euro.

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Quote of the day

Eurozone

The Eurozone

Mike Whitney discusses the Eurozone crisis:

Funding fears, political gridlock and plunging stocks have pulled the eurozone deeper into crisis. On Friday, the gauges of market stress continued to widen signalling [sic] more turbulence in the days ahead. Libor — the rate at which London-based banks borrow from each other — increased for the eleventh straight day, while the Libor-OIS spread, (which indicates the reluctance of banks to lend to each other) soared to levels not seen since Lehman Brothers blew up in 2008. And the VIX — better known as the “fear gauge” — has been surging for more than a week.

What does it all mean?

It means the eurozone is in the throes of a vicious credit crunch, but its leaders are frozen in the headlights. That’s a recipe for disaster.

Quote of the day

Le Soir quotes Jacques Delors as saying (see also this):

“Open your eyes: the euro and Europe are on the brink. And not to fall, the choice seems simple: either member states accept the closer economic cooperation that I have always claimed, or they transfer more powers to the Union.”

On the brink of what? Mike Whitney will tell us:

It means the [European financial] system is under great stress and beginning to slow down. It means investors have lost faith in the ability of policymakers to fix the system. It means there’s a panic underway and people are moving into cash. It means the eurozone is headed for a crackup. It means we are on the brink of another financial crisis.

Quote of the day

Mike Whitney wrote:

When the recovery began 2 years ago, the rate of unemployment was 9.5 percent. Today it’s 9.1 percent. Think about that for a minute. Doesn’t that prove that the market isn’t really self-correcting after all? I mean, if the market was self-correcting then unemployment would have gone down by now, right? But, it hasn’t. Why?

There’s a long answer for that, and a short answer. The short answer is that unemployment can stay high forever if the wrong policies are in place. If you don’t believe that, then vote Republican in 2012 and watch what happens when they start hacking away at public spending. Unemployment will soar to 15 or 20 percent in the blink of an eye.

Whitney’s preferred solution to the high-unemployment of the day: Revive the Humphrey-Hawkins Full Employment bill!

Just in time for summer

Mike Whitney provides a tale of economic doom and gloom:

The slowdown has begun. The economy has started to sputter and unemployment claims have tipped 400,000 for the last seven weeks. That means new investment is too weak to lower the jobless rate which is presently stuck at 9 percent. Manufacturing — which had been the one bright-spot in the recovery — has also started to retreat with some areas in the country now contracting. Housing, of course, continues its downward trek putting more pressure on bank balance sheets and plunging more homeowners into negative equity.

The likelihood of another credit expansion in this environment is next-to-none. Total private sector debt is still at a historic high at 270% of GDP which augurs years of digging out and painful deleveraging. Analysts have already started slicing their estimates for 2nd Quarter GDP which will be considerably lower than their original predictions.

Help will not be forthcoming:

This is more than just a “rough patch”. The economy is stalling and needs help, but consumers and households are not in a position to take on more debt, and every recovery since the end of WW2 has seen an increase in debt-fueled consumption. So, where will the spending come from this time? That’s the mystery.

And:

When spending slows, the economy contracts. It’s that simple. Without emergency stimulus, commodities will fall hard and stocks will follow. Look out below.

We have a demand-constrained economy, a macroeconomic limit or effective constraint placed upon economic growth by presence of insufficient effective demand for the goods produced by that economy. If neither the government nor consumers can purchase finished goods, the effects produced by this incapacity will produce a recession or worse. Yet, although knowledge of this problem is common, these days, official Washington does not care much about the plight of common Americans — Alan Simpson’s “lesser people.” If it cared, it would promote and even achieve full employment and living wage policies. It would promote these goals if only to overcome a demand-constrained deceleration of America’s economic growth. It cares instead about appeasing finance capital. It cares a lot. As we have seen over the past year, the primary goal of both parties is to adopt a Federal deficit reduction plan, with the Republicans still taking the lead on the issue and using chicanery to finesse the matter:

In a bit of political stagecraft, House Republicans plan to bring to a vote on Tuesday evening a measure that President Obama and the Democrats were demanding not so long ago: a clean increase in the national debt ceiling, unencumbered by any requirement that spending be cut.

Given that all Republicans and more than a few Democrats oppose any debt-limit increase that is not accompanied by some commitment to future fiscal restraint, the measure is doomed to fail. And for all the talk of economic crisis should Congress fail to raise the debt ceiling by August, the financial markets are likely to yawn at this vote — if only because Republican leaders have privately assured Wall Street executives that this is a show intended to make the point to Mr. Obama that an increase cannot pass absent his agreement to rein in domestic programs.

“Wall Street is in on the joke,” said R. Bruce Josten, executive vice president of the U.S. Chamber of Commerce.

Finance capital does not care much for an economic stimulus program. It is only weakly interested in the real economy. It does not care for full employment and a living wage, about a fair distribution of risks, rewards and labor. The well-being of the lesser people is just not one of its concerns. Finance capital wants targeted tax cuts, low inflation and a Federal deficit reduction. And this is what it will get, more or less, while cash-strapped Americans will try to make do with what they have. Sadly, America’s weakly democratic political system is rigged to produce this very outcome. This outcome is a conspicuous feature of its identity. It is what the market fundamentalists refer to when they talk of letting the market do its work.

In praise of Strauss-Kahn

Joseph Stiglitz wrote:

Strauss-Kahn is proving himself a sagacious leader of the IMF. We can only hope that governments and financial markets heed his words.

Stiglitz defends this conclusion by pointing out that:

The annual spring meeting of the International Monetary Fund was notable in marking the Fund’s effort to distance itself from its own long-standing tenets on capital controls and labor-market flexibility. It appears that a new IMF has gradually, and cautiously, emerged under the leadership of Dominique Strauss-Kahn.

Briefly put, according to Stiglitz, a Strauss-Kahn-led International Monetary Fund was beginning to abandon the neoliberal nostrums it promoted over the last decades.

Yet, Strauss-Kahn’s IMF generated a problem, according to Mike Whitney:

Strauss-Kahn had set out on a “kinder and gentler” path, one that would not force foreign leaders to privatize their state-owned industries or crush their labor unions. Naturally, his actions were not warmly received by the bankers and corporatists who look to the IMF to provide legitimacy to their ongoing plunder of the rest of the world. These are the people who think that the current policies are “just fine” because they produce the results they’re looking for, which is bigger profits for themselves and deeper poverty for everyone else.

Whitney continued by stating that:

There’s not going to be any revolution at the IMF. That’s baloney. The institution was created with the clear intention of ripping poor nations off and it’s done an impressive job in that regard.  There’s not going to be any change of policy either. Why would there be? Have the bankers and corporate bilge-rats suddenly grown a conscience and decided to lend a helping hand to long-suffering humanity? Get real.

Threaten the powerful…. There may be something to the conspiracy explanation of Strauss-Kahn’s current predicament.

A concise picture of our current bubble economy

Mike Whitney painted this one:

Assets bubbles require massive amounts of leverage. But too much leverage can destabilize the system, so it needs to be regulated. But Wall Street doesn’t like restrictions on leverage because it can make more money by borrowing like crazy, inflating a ginormous bubble, skimming off the profits, and cashing in before the crash. So, the Fed ignores Wall Street’s “gearing” operations and pretends not to see what’s going on. It becomes a bubble “enabler” by lowering interest rates, easing credit and waving-off tighter regulations. It’s all part of the game. The Fed works to help its core constituents while everyone else is put at risk.

But there’s another reason for bubbles, too. Stagnation is a chronic problem in mature capitalist economies. As businesses become more efficient in their various widget-making operations, demand for their products drops off making it harder for owners to find profitable outlets for investment. And when investment starts to flag, then grip of economic inertia begins to tighten. As author Robert Skidelsky says, “investment fills the gap between production and consumption”, so when investment hits a speed-bump, spending starts to wither and the economy slows to a crawl.

The Fed’s remedy: Zero rates, easy money and more bubbles; Professor Bernanke’s one-size-fits-all, magic elixir for sclerotic economies. In other words, the emerging stock and commodities bubbles are not a sign that the Fed is flubbing the policy. Bubbles are the policy, and have been for a very long time. Bernanke is no fool. He knows that each business cycle is weaker than the last, creating fewer jobs, more slack in the economy, and more anemic growth. His job is to endlessly tweak the process in order to maintain profitability for the people at the top of the economic foodchain, his real bosses.

What sound does this financial dinosaur make when it dies?

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