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Screw The People And Save The Banks

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The economic crisis in Ireland (and the rest of Europe) has resulted in a morass of published commentaries, some of which make sense and most of which don’t.  Sometimes it appears as though the writer hasn’t really formed an opinion on the issue, even though the tone of the article seems to be expressing one.  The problem experienced in Ireland is the same as it is everywhere else:  During tough economic times, governments always choose to bail out the banks regardless of the expense and suffering to be endured by the citizens.  The Pragmatic Capitalist recently upbraided the writer of one of the more poorly-thought-out essays dealing with the Irish predicament:

Sheila Bair, the head of the FDIC, has remained one of the more levelheaded and helpful leaders during the financial crisis.  But in an op-ed in the Washington Post this morning she took a decisive turn for the worse when she waded into waters that were certain to drown her.  Bair is now echoing the cries that have been heard across Ireland for the last 2 years – cries of fiscal austerity.  Of course, the USA is nothing like Ireland and has an entirely different monetary system, but Bair ignores all of this (in fact proves she is entirely ignorant of this).  What’s sad is that Bair clearly understands that this crisis is still largely hurting Main Street America   .   .   .

To the extent that the Irish situation bears any resemblance to what we are experiencing (or may soon experience) in the United States, economist John Hussman has written the best essay on this issue.  Hussman began with this point, made by another economist:

“If you have bad banks then you very urgently want to clean up your banks because bad banks go only one way:  they get worse. In the end every bank is a fiscal problem.  When you have bad banks, it is in a political environment where it is totally understood that the government is going to bail them out in the end.  And that’s why they are so bad, and that’s why they get worse.  So cleaning up the banks is an essential counterpart of any attempt to have a well functioning economy.  It is a counterpart of any attempt to have a dull, uninteresting macroeconomy.  And there is no excuse to do it slowly because it is very expensive to postpone the cleanup.  There is no technical issue in doing the cleanup.  It’s mostly to decide to start to grow up and stop the mess.”

MIT Economist Rudiger Dornbusch, November 1998

The TARP bailout was not the only time when our government chose a temporary fix (as in cure or heroin injection) at great taxpayer expense.  I’ve complained many times about President Obama’s decision to scoff at using the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  John Hussman discussed the consequences:

If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced.  Unfortunately, we have built our house on a ledge of ice.

*   *   *

As I’ve frequently noted, even if a bank “fails,” it doesn’t mean that depositors lose money.  It means that the stockholders and bondholders do.  So if it turns out, after all is said and done, that the bank is insolvent, the government should get its money back and the remaining entity should be taken into receivership, cut away from the stockholder liabilities, restructured as to bondholder liabilities, recapitalized, and reissued.  We did this with GM, and we can do it with banks.  I suspect that these issues will again become relevant within the next few years.

The present situation

Europe will clearly be in the spotlight early this week, as a run on Irish banks coupled with large fiscal deficits has created a solvency crisis for the Irish government itself and has been (temporarily) concluded with a bailout agreement.  Ireland’s difficulties are the result of a post-Lehman guarantee that the Irish government gave to its banking system in 2008.  The resulting strains will now result in a bailout, in return for Ireland’s agreement to slash welfare payments and other forms of spending to recipients that are evidently less valuable to society than bankers.

*   *   *

Over the short run, Ireland will promise “austerity” measures like Greece did – large cuts in government spending aimed at reducing the deficit.  Unfortunately, imposing austerity on a weak economy typically results in further economic weakness and a shortfall on the revenue side, meaning that Ireland will most probably face additional problems shortly anyway.

The “austerity” approach is more frequently being used as a dividing line to distinguish “liberal” economists from “conservative” economists.  The irony here is that many so-called liberal politicians are as deeply in the pocket of the banking lobby as their conservative counterparts.  Economist Dean Baker recently wrote an article for The Guardian, urging Ireland to follow the example of Argentina and simply default on its debt:

The failure of the ECB or IMF to take steps to rein in the bubble before the crisis has not made these international financial institutions shy about using a heavy hand in imposing conditions now.  The plan is to impose stiff austerity, requiring much of Ireland’s workforce to suffer unemployment for years to come as a result of the failure of their bankers and the ECB.

While it is often claimed that these institutions are not political, only the braindead could still believe this.  The decision to make Ireland’s workers, along with workers in Spain, Portugal, Latvia and elsewhere, pay for the recklessness of their country’s bankers is entirely a political one.  There is no economic imperative that says that workers must pay; this is a political decision being imposed by the ECB and IMF.

Bloomberg News columnist, Matthew Lynn wrote a great article for the Pittsburgh Tribune-Review, setting out five reasons why Ireland should refuse a bailout from the European Union and the International Monetary Fund to opt for default as the logical approach.

Pay close attention to how your favorite politicians weigh-in on the Irish situation.  It should give you a fairly good tip as to what actions those pols can be expected to take when the Wall Street bankers dash back to Capitol Hill for TARP 2 The Sequel.


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Party Out Of Bounds

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October 4, 2010

It’s refreshing to witness the expansion in the number of people looking forward to the demise of our two-party political system.  Tom Friedman of The New York Times recently gushed with enthusiasm about the idea of  “a serious third party”, capable of rising to the challenge of enacting important, urgently-needed legislation without offending the far left, the far right or “coal state Democrats”.  Friedman is only half-right.  We need a third, a fourth, a fifth and a sixth party, as well.  Placing all of one’s hope in THE Third Party is a formula for more disappointment.

I frequently complain that we no longer have two distinct political parties running America.  We are currently stuck under the regime of the Republi-cratic Corporatist Party.  The widely-expressed disappointment resulting from President Obama’s failure to keep his campaign promises was discussed in my previous four postings.

Salena Zito of the Pittsburgh Tribune-Review wrote a great article about her year of traveling 6,609 miles to interview 432 people identifying themselves as Democrats.  Here’s what she learned:

In coffee shops, on streetcorners and farms, at factories, the narrative was always the same:  How could such great promise have let the country down so much, so quickly?

Ms. Zito reached the conclusion that the man elected President by these voters was really no improvement from the 2004 candidate, John Kerry:

Obama is no less out of touch than the Kerry whom America watched windsurf  before the 2004 election — the same man who said last week that one reason Democrats will lose this year is that “we have an electorate that doesn’t always pay that much attention to what’s going on, so people are influenced by a simple slogan rather than the facts or the truth or what’s happening.”

Here’s where Kerry and Obama are both wrong:  The electorate that was influenced by a simple slogan – “Yes, we can” — in 2008 actually is very well-informed.

This time, that electorate isn’t voting for a dream, but for its pocketbook.

Throughout the current election cycle, the Democratic establishment has avoided the sort of challenge experienced by the Republican establishment in the form of the Tea Party movement.  That will change after November 2, at which point disgruntled Democrats will feel more comfortable jumping ship.  It took consecutive humiliations at the polls in 2006 and 2008 before the Tea Partiers were motivated to break ranks with the Republican powers that be and undertake campaigns to challenge Republican incumbents.  Their efforts paid off so well, many Tea Partiers have become enthused about having a distinct party from the Republican organization.  After the 2010 elections are concluded, we can expect to see splinter groups breaking away from the Democratic Party.

Back on April 22, Mark Willen, Senior Political Editor of The Kiplinger Letter, wrote an interesting piece, lamenting the disadvantage experienced by moderate candidates because the political primary process facilitates victory for the choices of extremist voters as a result of the enthusiasm gap.  (Extremists are more motivated to vote in primaries than moderate voters, who don’t consider themselves crusaders for a particular agenda.)  Willen sees the two parties being pushed to ideological extremes, despite the fact that most Americans consider themselves to be in the center of the political spectrum.  Another important point from that piece concerns the fact that info-tainment programs presenting extremist views get better ratings than programs featuring commentary that really is “fair and balanced”.  As a result, cable television audiences are regularly exposed to a bombardment of caustic rhetoric.

The 2012 elections could bring us a significant increase in the number of  “independent” candidates, as well as nominees from new political parties.  A change of that nature could close future mid-term enthusiasm gaps, occurring in the November elections (such as the one expected for this year).  The prospects for a larger, more diverse group of political parties are looking better with each passing day.



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