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Let's Just Say It: The Republicans AND the Media Are the Problem
The next time you hear someone (probably in Congress or perhaps even a candidate for President) talk in oh-so-solemn tones about how important it is to slash spending (particularly on education or infrastructure or even the undeserving poor who can't GET A JOB!) and focus on paying down the deficit, please direct them to this essay.
Who knows? Maybe we'll help get the world out of its current financial miasma?
But a funny thing happened on the way to the predicted fiscal crisis: instead of soaring, U.S. borrowing costs have fallen to their lowest level in the nation’s history. And it’s not just America. At this point, every advanced country that borrows in its own currency is able to borrow very cheaply.
The failure of deficits to produce the predicted rise in interest rates is telling us something important about the nature of our economic troubles (and the wisdom, or lack thereof, of the self-appointed guardians of our fiscal virtue).
Money for Nothing
Paul Krugman
July 26, 2012
Comments
For years, allegedly serious people have been issuing dire warnings about the consequences of large budget deficits — deficits that are overwhelmingly the result of our ongoing economic crisis.
In May 2009, Niall Ferguson of Harvard declared that the “tidal wave of debt issuance” would cause U.S. interest rates to soar. In March 2011, Erskine Bowles, the co-chairman of President Obama’s ill-fated deficit commission, warned that unless action was taken on the deficit soon, “the markets will devastate us,” probably within two years.
And so on.
Well, I guess Mr. Bowles has a few months left. But a funny thing happened on the way to the predicted fiscal crisis: instead of soaring, U.S. borrowing costs have fallen to their lowest level in the nation’s history. And it’s not just America. At this point, every advanced country that borrows in its own currency is able to borrow very cheaply.
The failure of deficits to produce the predicted rise in interest rates is telling us something important about the nature of our economic troubles (and the wisdom, or lack thereof, of the self-appointed guardians of our fiscal virtue). Before I get there, however, let’s talk about those low, low borrowing costs — so low that, in some cases, investors are actually paying governments to hold their money.
For the most part, this is happening with “inflation-protected securities” — bonds whose future repayments are linked to consumer prices so that investors need not fear that their investment will be eroded by inflation. Even with this protection, investors used to demand substantial additional payment. Before the crisis, U.S. 10-year inflation-protected bonds generally paid around 2 percent. Recently, however, the rate on those bonds has been minus-0.6 percent. Investors are willing to pay more to buy these bonds than the amount, adjusted for inflation, that the government will eventually pay in interest and principal.
So investors are, in a sense, offering governments free money for the next 10 years; in fact, they’re willing to pay governments a modest fee for keeping their wealth safe.
Now, those with a vested interest in the fiscal crisis story have made various attempts to explain away the failure of that crisis to materialize. One favorite is the claim that the Federal Reserve is keeping interest rates artificially low by buying government bonds. But that theory was put to the test last summer when the Fed temporarily suspended bond purchases. Many people — including Bill Gross of the giant bond fund Pimco — predicted a rate spike. Nothing happened.
Oh, and pay no attention to the warnings that any day now we’ll turn into Greece, Greece I tell you. Countries like Greece, and for that matter Spain, are suffering from their ill-advised decision to give up their own currencies for the euro, which has left them vulnerable in a way that America just isn’t.
So what is going on? The main answer is that this is what happens when you have a “deleveraging shock,” in which everyone is trying to pay down debt at the same time.
Household borrowing has plunged; businesses are sitting on cash because there’s no reason to expand capacity when the sales aren’t there; and the result is that investors are all dressed up with nowhere to go, or rather no place to put their money.
So they’re buying government debt, even at very low returns, for lack of alternatives. Moreover, by making money available so cheaply, they are in effect begging governments to issue more debt.
And governments should be granting their wish, not obsessing over short-term deficits.
Obligatory caveat: yes, we have a long-run budget problem, and we should be taking steps to address that problem, mainly by reining in health care costs. But it’s simply crazy to be laying off schoolteachers and canceling infrastructure projects at a time when investors are offering zero- or negative-interest financing.
You don’t even have to make a Keynesian argument about jobs to see that. All you have to do is note that when money is cheap, that’s a good time to invest. And both education and infrastructure are investments in America’s future; we’ll eventually pay a large and completely gratuitous price for the way they’re being savaged.
That said, you should be a Keynesian, too. The experience of the past few years — above all, the spectacular failure of austerity policies in Europe — has been a dramatic demonstration of Keynes’s basic point: slashing spending in a depressed economy depresses that economy further.
So it’s time to stop paying attention to the alleged wise men who hijacked our policy discussion and made the deficit the center of conversation. They’ve been wrong about everything — and these days even the financial markets are telling us that we should be focused on jobs and growth.
Alec Cockburn was probably my favorite journalist. Right. Of all time.
This is the last essay he wrote when he was very ill. He passed away last week.
Alexander Cockburn
Alexander Cockburn, The Nation's "Beat the Devil" columnist and one of America's best-known radical..
Barclays and the Limits of Financial Reform
July 11, 2012
This article appeared in the July 30-August 6, 2012 edition of The Nation.
Hardly had the boyish visage of JPMorgan Chase’s Jamie Dimon quit CNN screens than it was succeeded by that of Bob Diamond, former chief executive of Barclays, accused of masterminding the greatest financial scandal in the history of Britain. Columnists shook with rage at the “reeking cesspool” being disclosed — disclosed, mind you, four long years after the Wall Street Journal broke the story that the Libor was being fixed.
Libor, which stands for “London interbank offered rate,” is supposed to be based on the average rate of interest banks charge to borrow from one another. The rate is set every morning by a panel of banks. Each bank “submits” the rates at which it believes it can borrow from the collective money pool, from overnight to twelve months.
Libor is the benchmark for investments all over the world — the Financial Times estimates that $350 trillion worth of contracts have been pegged to it. It is also considered a barometer of a bank’s health. Just as customers with bad credit records have to pay higher interest rates, banks deemed in financial distress have to pay more to borrow.
In October 2008, a doomsday month for the world banking industry, it looked like Barclays was next in line for a rescue after taxpayers bailed out the Royal Bank of Scotland and Lloyds/HBOS on October 13. One big warning flare was that beleaguered Barclays could borrow from the common money pool only at a very high rate of interest. The answer was to fix the rate, with Barclays traders secretly winching it down. It was all completely illegal.
Next thing we knew, there was Diamond being reprimanded by a select committee of the House of Commons for being nothing better than a common thief. But then into the hurly-burly suddenly intruded a new actor, actually one in the form of a savior: Paul Tucker, deputy governor of the Bank of England. It turned out that Diamond and Tucker had had a conversation of considerable moment, one prudently recorded by Barclays, on October 29, 2008.
Diamond said Tucker had relayed concerns from “senior Whitehall figures” that Barclays’s Libor was consistently higher than that of other banks. Tucker is alleged to have conveyed the view from Westminster that the bank’s rate did not “always need to appear as high as it had recently.” In other words, Westminster wanted Barclays to massage its rate to a lower level.
But all with full deniability. According to Barclays, “Bob Diamond did not believe he received an instruction from Paul Tucker or that he gave an instruction to [former top Barclays deputy] Jerry del Missier. However, Jerry del Missier concluded that an instruction had been passed down from the Bank of England not to keep Libor so high and he therefore passed down a direction to that effect to the submitters.”
Barclays said there was no allegation by the authorities that this instruction was intended to manipulate the Libor. And when he was questioned by Tory MP David Ruffley on July 9, Tucker testified that “a bell did not go off in my head” that banks were lowering their Libor submissions.
Marvelous: the join between civil society and state was tactfully seamless, with deniability all round.
So first there are the “senior Whitehall figures” (one turned out to be Cabinet Secretary Sir Jeremy Heywood) — i.e., the permanent government running Britain. When a senior Whitehall figure urges the commission of a serious crime, he merely murmurs that the bank’s Libor did not “always need to appear as high as it had recently.”
There then follows a flurry of talk about misunderstandings but, Lord save us, certainly not an order to fix the Libor. Then, unmistakably, there is a huge plunge in Barclays’s rate. The government’s concern — that Barclays might appear to be on the brink — is averted.
But we live in a capitalist world, duly furnished with its rewards and penalties. Barclays has agreed to a $450 million settlement, and Diamond and del Missier have resigned. On his way out the door, Diamond said he’d been promised £18 million ($28 million) as a golden handshake.
The standing committee had a good jeer, but Diamond stuck to his guns, and there the matter rested until July 10, when Barclays announced that Diamond will forfeit up to £20 million ($30 million) in bonuses and incentives but will retain one year’s salary, pension and other benefits worth £2 million ($3 million).
Of course, there have been furious calls for further punishment and reform. Labour leader Ed Miliband says “we should break the dominance of the big five banks…and strike off those whose conduct lets this country down and prosecute those who break the law.” He also wants to increase competition by forcing the big banks to sell off up to 1,000 of their branches. In the current culture of rabid criminality in the banking system, that would surely be unwise, unleashing 1,000 small-time banksters.
People calling for banking reform on either side of the Atlantic are underestimating the problems of enforcement. A writer on the financial news blog Zero Hedge recently remarked that “the Libor scandal seems to be waking people up to manipulation and fraud by the big banks.”
Of course, there are tools at the ready: sanctions, tribunals, a ban for life for crooked traders. But Libor was meant to be the prime glittering advertisement for the free market.
Now it turns out that the whole thing is a fix—a grimy hand all too visible. It’s like the spy in Conrad’s Secret Agent vowing to destroy the first meridian.
Is it possible to reform the banking system? There are the usual nostrums—tighter regulations, savage penalties for misbehavior, a ban from financial markets for life. But I have to say I’m dubious. I think the system will collapse, but not through our agency.
Comments:
JimmyOlsenCubReporter:
In healthier times and healthier civilizations, usurers were hung. In our time, our Western "Civilization" is of the usurers, by the usurers and, most definitely, for the usurers. And this the the basis of all of the major devastations of our time: the impoverishment of the 99%, rampant environmental degradation, and perpetual wars.
toddboyle:
There is no fundamental need for "banks" at all. There may even be better systems of economic organization than the use of money. Corporations don't use money for organizing their vast, internal operations. They use enterprise ERP and CRM software, scheduling, planning resources. But let's assume you need a system for balances, payments and settlements. Technically, this is childs' play. Any of the major software companies could run the entire thing, worldwide at very little cost.
So could the cellphone carriers. Or the major credit cards. Please explain why we need the "Banks" on every street corner. They're obsolete as Western Union, held in place ONLY ONLY ONLY by federal protection - in misguided belief they're the only way to secure tax revenue, control money laundering, etc. Please, THINK, people. Let them fail, next time. Let them disappear.
theshadowknows:
This excellent article should be available for everyone to read. Alex clearly understands that mere “reform” of the banking system will ultimately only allow the financial services criminals to keep committing crime.
Rather than simply fining individual banks under Dodd-Frank, the U.S. Government should declare the whole system a criminal conspiracy under the RICO statute, and shut down every bank involved.
But, as I have written here before, to achieve criminal prosecution of Wall St. banksters, we would need an Administration and an Attorney General who understand that Wall St. and the globalist investment banks are worse than the mafia, and should be closed down immediately with the banking system being reorganized under Glass-Steagall to prevent such corruption in the future. We would need an Administration and a Congress not in the pay of the criminals.
Philip1:
Only a very few banksters, are the brains behind it, so going through all that is a waste of time, money and resources.
In this day and age, all that is required is to hire actuaries to find out the estimated amount of damages to all involved; and then have the banks write out a check; after a few years (at most) they will go bankrupt.
Beethoven1:
I agree, but the problem is who's going to do it? Evidently every branch of the government is outright owned by the banks you just mentioned. In short, there is no legal recourse against those who write the laws for themselves.
So, either you have to turn the system upside down and start over, prepare for a complete meltdown in the form of a major depression or end up in a civil war where the rich are pitted against everyone else.
I really don't think the corrupt people in D.C. know how much damage their blatant corruption is causing, then again if they are the sociopaths they appear to be, they probably don't give a rip anyway.
Philip1:
I have a few suggestions; from my personal experience, most of what is occurring is old news for me; this stuff, I have been documenting from banksters has been
occurring (for me anyway) from around 1968.
You're correct about most of todays politicians being to incompetent; why they are incompetent, is more a problem voters have to ask themselves as they vote.
As a liberal pacifist; and as a person that tries to see the cup as being half full most of the time it seems that with all the publicity, it would be a opportune time to organize grassroots efforts to hire actuaries and lawyers, to put out numbers of the estimated damages from Liebor...my guess is... the estimated damages would be more like 30 trillion $$$....if one looks at like, for example, had the banks never been bailout out; because if it was public knowledge that they were manipulating Liebor during the time of the bailout, it probably would not of occurred; I could go on and on, but there are many options to counter banksters.
If you're individually interested in trying to understand it; when you read into the language of banksters; even press releases of a bankster, and government regulators do extensive research into the “language” they use, most of it is probably filled with half truths, then write counter arguments, etc.
I miss you already, Alec.
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