False Profits: We Will Be Suffering from Greenspan and Bernanke’s Ineptitude for a Long Time
Dean Baker, alternet
The following is an excerpt from Dean Baker’s new book: False Profits: Recovering from the Bubble Economy (PoliPointPress, 2010).
As the nation struggles to recover from the worst economic downturn since the Great Depression, the people who got us here are desperately working to rewrite history. The basic story of this economic collapse is very simple. The Federal Reserve Board, guided by its revered chairman, Alan Green span, allowed an $8 trillion housing bubble to grow unchecked.
Arguably, the Fed even fostered the bubble’s growth, seeing it as the only source of dynamism in an economy that was suffering from the aftershocks of the collapse of a $10 trillion stock bubble. Greenspan repeatedly insisted that the housing market was just fine, even as a small group of economists and analysts raised concerns about the unprecedented run-up in house prices. He also dismissed concerns about the questionable mortgages the banks were issuing on a massive scale during the bubble years. In fact, he even encouraged people to take out adjustable-rate mortgages (ARMs) at a time when fixed-rate mortgages were near a 50-year low.
…[T]he devastating consequences for the economy of the collapse of the housing bubble were inevitable. Housing wealth, unlike stock wealth, is relatively evenly distributed among the population. For the vast majority of middle-class families, home equity is their financial asset. When the collapse of the bubble resulted in the disappearance of $8 trillion of housing bubble wealth ($110,000 per homeowner on average), tens of millions of homeowners had no choice but to sharply curtail their consumption.
…However, the political elites do not want the official story to be that simple. They don’t want the public to know that the people holding the top economic policy positions are incompetent, corrupt, or both. By burying the story in complexity, these elites are trying to confuse the American public. The confusion begins when the media and the politicians routinely refer to the recession as a “financial crisis.”
The implication is that the financial system is at the root of the problem and that fixing the financial system is the way to restore the economy to its normal growth path. Although the failings of financial regulation certainly allowed the bubble to grow much larger than otherwise would have been possible, and the troubles in the financial system have aggravated the downturn, the current economic situation would be little changed if the financial system were instantly restored to perfect health.
The core problem is that the economy developed serious imbalances as a result of the growth of the housing bubble. In the short term, the only way to offset the loss of demand caused by the collapse of the housing bubble is through massive deficit spending. In the longer term, a reduction in the value of the dollar will be necessary to restore more balance to our U.S. trade. However, the political elites, led by the managers of the financial industry, do not want to allow for a discussion that results in a policy prescription of large deficits and a lower valued dollar. Such policies would go directly against their financial interests and directly indict the policy agenda they have promoted for more than a decade…
(9 Feb 2010)
More about the book here.
G7 close to accord on banks paying for global recession
Larry Elliot, The Guardian
Alistair Darling believes plans for a new global levy or tax on banks could be agreed within 18 months after finance ministers from the G7 industrial nations insisted at the weekend that financial institutions should bear the cost of taxpayers’ bailouts.
The chancellor is confident that a series of summits this year will narrow down the options to just one by the end of the year, with the Treasury currently seeing an insurance levy as the likeliest option.
G7 ministers are now waiting for a study by the International Monetary Fund – which is considering four options including a financial transaction tax and an insurance levy – to help push the debate forward when it is published in April.
The IMF report will form the basis for discussions at two meetings of the G20 group of developed and developing countries later this year…
(7 Feb 2010)
How Brussels Is Trying to Prevent a Collapse of the Euro
Armin Mahler, Christian Reiermann, Wolfgang Reuter and Hans-Jürgen Schlamp, Spiegel
The problems facing Greece are just the beginning. The countries belonging to Europe’s common currency zone are drifting further and further apart, and national bankruptcies are a distinct possibility. Brussels is faced with a number of choices, none of them good.
Men like Wilhelm Nölling, former member of the German Central Bank Council, and Wilhelm Hankel, an economics professor critical of the euro, have been out of the spotlight for years. In the 1990s, they fought against the introduction of the common currency, even calling on Germany’s high court to prevent the creation of the euro zone. But none of it worked.
Now both men are in demand again, and the old euro critics’ beliefs are more relevant than ever. Were the skeptics right back then, when they said Europe wasn’t ready for the euro zone? Were the differences too great and the politicians too weak to ensure a strict and stable course?
“The euro should really be called the Icarus,” Hankel suggested back then. He predicted the currency would meet the same end as the hero of Greek legend, who paid for his dream of flight with his life.
Is the euro’s high flight over now too? The news these days is alarming. It’s causing a commotion on financial markets and intense discussion in capitals across Europe, as well as in Frankfurt, seat of the European Central Bank (ECB).
Brussels took a hard line with Athens last week. Greece must cut costs drastically under close European Union supervision, a sacrifice of a share of its sovereignty. Risk premiums for Greek government bonds have risen drastically, and the country has to pay higher and higher charges…
(9 Feb 2010)
Europe loses seat at top table
Ian Traynor, The Guardian
Sitting in parkland in the shadow of the European parliament, the Bibliothèque Solvay is that rare thing in Brussels’s dismal European quarter – a pretty building.
But when heads of government or state from 27 countries meet here on Thursday under their new president, Herman Van Rompuy of Belgium, they will have little time for the art nouveau fittings or for the old books lining the wood-panelled walls of the 1902 library.
The first EU summit under Van Rompuy’s stewardship sees Europe slumped in a mood of unusually persistent gloom. Van Rompuy, Gordon Brown, Nicolas Sarkozy, Angela Merkel and the rest are in charge of a Europe engulfed by a sense of defeatism and decline and exhausted by nine long years of trying to construct a new European regime. The reasons for the ennui are clear. According to senior officials, analysts, and diplomats in Brussels, Paris, London and Berlin, Europe suddenly seems to matter a lot less in the world. Additionally, its leaders appear unsure of how to tackle their single currency’s biggest ever crisis, and are engaged in petty power struggles and point-scoring over how to use the EU’s new rulebook – the Lisbon treaty.
“There are a lot of blame games,” said a senior European diplomat. “A lot of handwringing and bitching. No one is coming through to lead. It’s not a pretty picture at all and it looks pathetic to the rest of the world.”
Since EU leaders last met in Brussels before Christmas, the mood has soured. For the Europeans who claimed for two years to be leading the world on climate change, the global warming summit in Copenhagen was the gamechanger, a moment when the global balance of power tilted and relegated the EU to the second division.
“What we saw in Copenhagen is that Europe does not count,” Daniel Gros, director of the Centre for European Policy Studies, told a conference of Brussels thinktanks…
(8 Feb 2010)
Corruption, Culpability and Short-Termism
Stoneleigh, The Automatic Earth
People are increasingly collectively horrified at the extent of the fraud and corruption that lies at the heart of our financial and broader governance structures. They seem surprised, as if this were something new, when it has actually been growing in tandem with our credit hyper-expansion for decades. Corruption in complex systems never goes away, it merely waxes and wanes, and goes through phases where it is more or less visible.
During long manic periods, all manner of abuses occur, but no one notices while the party continues, because no one wants to notice. As long as people generally have access to easy credit and the illusory wealth effect it brings, they don’t ask hard questions and are largely oblivious to risk. Even if they lied on their own mortgage application, in order to qualify for a larger loan than they could really afford, and know others who did the same, they cannot seem to imagine what the consequences might one day be, both for themselves and for the financial system as a whole. To paraphrase one journalist who commented on the national pyramid bubble in Albania in the mid 1990s, when people feel they are operating within the bounds of properly structured criminality, they feel no personal responsibility and do not fear consequences.
Both the predators and the prey are complicit in the development of a mania. Predators lent money into existence without regard to risk, since they were selling that on to Wall Street investors through securitization. Just like those they preyed upon by actively enticing people into loans they could not afford, they turned a blind eye to the blatant lies on mortgage applications, inflated assessments and other fraudulent aspects of the developing bubble. They made their money through fees anyway, but did not contemplate the creation of systemic risk which would ultimately bring them down as well.
Both sides had an interest in the party continuing because it benefited them personally in the short term. The prey were insisting on being handed the empty bag, which is all that’s left at the height of a bubble, while the predators were only too pleased to oblige. Of the two, the predators were certainly in a better position to assess the situation and must be regarded as the more culpable party, but without the greed of the prey, the exploitation would not have been possible…
