Friday, April 19, 2013

Today's links

1---The debt we shouldn't pay, Robert Kuttner, NYRB

Not until the Great Depression and the Franklin Roosevelt era did the US government became serious about debt relief, with a series of policies that refinanced distressed home mortgages, reformed and recapitalized banks, extended relief to bankrupt consumers, financed a huge war debt at below-market interest rates, and wrote off some of the international debts of allies and enemies alike.
 (Britain, America’s closest ally, received near-total forgiveness of wartime Lend-Lease debt.)

Germany, today’s enforcer of Euro-austerity, was the beneficiary of one of history’s most magnanimous acts of debt amnesty in 1948. The Allies in the 1920s made the catastrophic error of helping to destroy Germany’s economy with reparations and debt collection policies. In the 1940s, after a brief flirtation with World War I–style reparations, the occupying powers agreed to behave differently: they wrote off 93 percent of the Nazi-era debt and postponed collection of other debts for nearly half a century. So Germany, whose debt-to-GDP ratio in 1939 was 675 percent, had a debt load of about 12 percent in the early 1950s—far less than that of the victorious Allies—helping to produce postwar Germany’s economic miracle. Almost every German can cite the Marshall Plan, but this larger act of macroeconomic mercy has disappeared from the political consciousness of Germany’s current austerity police. Whatever fiscal sins the Greeks committed, the Nazis did worse.

The debt write-offs of the 1930s in the US and the 1940s in Germany were a short-lived interlude in a long history in which debt politics as applied to common people usually favored creditors. From biblical times through the nineteenth century, debt peonage—a state of servitude in which the debtor is stripped of rights—and debtors’ prisons were more the norm. The question of who gets debt relief reflects the distribution of political power—and power normally lies with large creditors such as banks. The Roosevelt era stands out as an exception...

Trickle up?

Reinhart, in a subsequent paper co-written in 2011 with M. Belen Sbrancia,5 reviewed the experience between 1945 and 1980, and found that there had been continuing financial repression. Real interest rates (i.e., adjusted for inflation), they calculated, were negative on average for the entire period, helping to “liquidate” public debt, partly because the Federal Reserve had a policy of financing the large expenditures of World War II at low costs. During the same era, tight regulation limited speculation by large financial institutions and other investors, so that cheap credit could flow to the real economy without inviting financial bubbles. The 1933 Glass-Steagall Act, for example, prohibited commercial banks from underwriting or trading securities. Yet despite a controlled bond market whose investors suffered negative returns of -3 to -4 percent, the years between 1945 and 1980 were the era of the greatest boom ever.

These findings defy a core precept of conservative economics, the premise that economic growth requires financial investors to be richly rewarded, an idea disparaged by critics as trickle-down economics. The postwar era, by contrast, was an age of trickle-up. Some creditors lost in the short run, but broadly shared prosperity stimulated private business. Eventually, the rising tide lifted even the yachts.

Chapter 11 for countries

Another former IMF official, Anne O. Krueger, an appointee of George W. Bush, recently reiterated her call for Chapter 11 bankruptcy for indebted countries. When she first proposed the idea as deputy managing director of the IMF in 2002, Krueger was fairly shouted down by officials of the US Treasury and leading bankers. In January 2013, she argued that “a clear mechanism [to allow nations to use bankruptcy] could have prevented all sorts of problems in the eurozone.” With a Chapter 11 law, Greece could have written off old debt and used new borrowing to finance new growth, just like a private corporation. Even acknowledging past bad behavior (as in the case of many corporate bankruptcies), a Chapter 11 for countries could sensibly combine incentives for honest bookkeeping with macroeconomic policies that write off old debt for the sake of recovery.

Mortgage refis at 2%?

These debt traps are not immutable. Government could refinance mortgages directly using the Treasury’s own low borrowing rate, as was done by Franklin Roosevelt’s Home Owners’ Loan Corporation. Fannie and Freddie, remade into true public institutions, could provide the refinancing. The Obama administration’s existing mortgage relief program, run through private banks, excludes the most seriously underwater homeowners. The terms largely prohibit significant reductions in mortgage principal owed, and these limitations should be liberalized by the administration.

Student loan reprieve

For students, an Obama administration program permits about 1.6 million of the 37 million college borrowers to finance education costs by paying a small surcharge on their future income taxes, instead of incurring debt. This option could be made universal. The group Campus Progress proposes allowing college debtors, who currently pay an average of almost 7 percent interest, to refinance their debt at the ten-year Treasury borrowing rate of about 2 percent. This would save young adults $14 billion this year alone.

2---Reasons behind emerging markets correction, sober look

3---Jeffrey Sachs conversion, naked capitalism

a lot of what’s happened and what’s been revealed is in my view prima facie criminal behavior. It’s financial fraud on a very large extent. There’s also a tremendous amount of insider trading. You can even watch it when you are living in New York, how that works.

(12:30) I believe we have a crisis of values that is extremely deep, because the regulations and the legal structures need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I’m going to put it very bluntly. I regard the moral environment as pathological. And I’m talking about the human interactions that I have. I’ve not seen anything like this, not felt it so palpably. These people are out to make billions of dollars and nothing should stop them from that.

They have no responsibility to pay taxes, they have no responsibility to their clients, they have no responsibility to people… counterparties in transactions. They are tough, greedy, aggressive, and feel absolutely out of control, in a quite literal sense. And they have gamed the system to a remarkable extent and they have a docile president, a docile White House and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies.

4---Cyprus bail-out vote stirs fresh jitters as slump fears grow in Europe, Telegraph

a defiant statement, an alliance of the ECB, Commission and Eurogroup said the “evidence is clear” that EMU crisis policies have been a success and recovery is in sight. “The eurozone has shown a degree of resilience and problem-solving capacity that many observers and policy makers would not have predicted even a year ago.”
The claims are flatly contradicted by the IMF, which warned this week that the eurozone remains “the epicentre of potential risk” in the world, and is endangering stability by dragging its feet on an EU banking union
The International Monetary Fund has already warned eurozone leaders that the “fiscal multiplier” is much higher than originally thought in the EMU crisis countries, implying that austerity cuts have a much greater impact.

Greece, Portugal, Ireland, Spain, Italy and, most recently, France are all caught in a vicious circle where economic contraction erodes the tax base, causing them to miss deficits targets. They then have to cut deeper, fuelling a downward spiral.

5---Home sales drop in California, central valley

Total home sales in California last month, including both distressed and non-distressed property, fell 12.9 percent compared to March 2012, according to figures compiled by ForeclosureRadar Inc., of Truckee, formerly of Discovery Bay.

6--Japan rewarded for launching the currency war, sober look

7---No Time for Austerity: US Edition, econbrowser

8---The Disappearing Middle is a Cover-up for Bad Economic Policy Coming from the Top, CEPR

9--Obama in Boston, wsws

The next disaster that prompts Obama to invoke scripture, he might consider the following, from Proverbs 6, which declares “six things doth the Lord hate,” first among them, “A proud look, a lying tongue, and hands that shed innocent blood.” One could hardly ask for a more concise description of the American president.

Obama’s biblical quotations are generally followed by thumb-nail descriptions of the victims and a hymn to the indomitable spirit of the American people. The survivors are then assured that they are not alone, when in fact they will be quickly forgotten by the politicians and the media as the next massacre and the one after that takes place.

When it comes to explaining the source of these terrible events, why they have happened, the president offers nothing beyond references to senseless “evil.”
As he declared in his Tucson speech, “Scripture tells us that there is evil in the world, and that terrible things happen for reasons that defy human understanding.”

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