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    Unhealthy Austerity

    By Michael Maiello on Tue, 04/30/2013 - 1:57pm | Politics

    An Oxford University economist and a Stanford University epidemiologist have combined their considerable breadth and knowledge to conclude the Great Recession and accompanying austerity have caused 10,000 suicides and a million diagnoses of depression in the U.S. and Europe.  If you find that hard to stomach, here's something more concrete -- AIDS is once again a full blown epidemic in Greece where budgets have been cut from HIV-prevention programs.

    No doubt, we in the U.S. saw blood pressure rise rapidly at major airports over the last week, as furloughed air traffic controllers sat idle while their colleagues were unable to keep flight lanes running smoothly.  While having to cool your heels at the airport Starbucks at George HW Bush International while you try to figure if you'll make your connection to Dubai is definitely a "first world problem," we have also seen, in the first world, people kicked off food assistance, kids not admitted to subsidized preschools and cancer clinics are denying treatment to some Medicare patients.

    There are probably no words in budget speak more full of hope and magical thinking than "waste, fraud and abuse."  In America, it seems, people think you can have everything that we have at a fraction of the cost.  But the budget is around $3 trillion.  The sequester, this year, anyway, is about $85 billion.  The sequester is tiny and yet it is making Americans sicker, it is making them die sooner.

    Yes, the sequester is blunt and stupid.  No doubt, there are better ways to cut more money.  But what's happened in the U.S., where cuts were purposefully blunt and in the U.K., where cuts were at least thought through and debated, is proof that you can't really cut significant expenditures without negatively impacting some, or even a lot, of people.

    We don't go through all of this to please some sort of economy god.  We allow economic thinking to inform our politics for one reason and one reason only -- it helps people live longer and happier lives.  If we are making economic choices for any other reason, we need to stop.  Because no other reason matters.

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    Yes it does need to stop.  I guess once Congress sees their numbers go down in their local districts then they will do something.  People are angry about this and the gun vote.  It is going to be a very long 18 months and sad to say many are going to be hurt.  At least the intellectual underpinning of the austerity movement has crumbled.  It is now just naked meaness on the part of the GOP and their wealthy sponsers. 


    by trkingmomoe on Tue, 04/30/2013 - 6:33pm

    I was just reading Taibi this morning.

     

    You may have heard of the Libor scandal, in which at least three – and perhaps as many as 16 – of the name-brand too-big-to-fail banks have been manipulating global interest rates, in the process messing around with the prices of upward of $500 trillion (that's trillion, with a "t") worth of financial instruments. When that sprawling con burst into public view last year, it was easily the biggest financial scandal in history – MIT professor Andrew Lo even said it "dwarfs by orders of magnitude any financial scam in the history of markets."

    Read more: http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425#ixzz2RzOrNZAt 

    Follow us: @rollingstone on Twitter | RollingStone on Facebook

    500 TRILLION dollars for chrissakes.

    OH BUT WE WANT MORE AND MORE AND MORE!

    Tax the goddamn stock market for starters.

    Then tax and double tax monies hidden from our nation by greedy bastards.

    Oh that is enough.

    Now I need an aspirin.

    hahahahah

     

     


    by Richard Day on Tue, 04/30/2013 - 6:44pm

    To many outside the beltway, we ask; " you mean to tell us, there wasn't any place to find waste in the FAA, except; to inconvenience the public, in hopes the anger over the sequester, would protect the "Sacred Cows" ? ..... It's always going to be "dont touch my bureaucracy, go after the other guys"  It's because, once you're the leader of the bureaucracy, with its many layers upon layers of management; these administrators begin to justify their funding needs and the money these administrators think they are entitled to, because they run such a large organization. Finding waste to save a buck costs them their income....... Removing leaches protects the host, but unfortunately the leach must die or it sucks the life out of the host. .......  Many other mom and pop businesses  are doing more with less and it's about time, those living on the mom and pops tax dollars, do the same...... The mom and pops could hire more people, if their tax burdens weren't so high. (Workers comp, unemployment insurance, health insurance, city, state and federal tax liabilities) I dont know where everyone else lives, but we don't have money trees growing here.


    by Resistance on Tue, 04/30/2013 - 8:09pm

    When Romney asked to meet with LIBOR scandal enabler head-of-Barclay's bank, it was a minor kerfluffle - among west bank types. Otherwise, life goes on.


    by PeraclesPlease on Tue, 04/30/2013 - 8:41pm

    As someone who was born at the end of the boomer generation, enjoying the middle class post wwii boom, I've not only not experienced real austerity, I've also grown up believing it wouldn't be something America would experience in my lifetime when push came to shove. When we cleaning out my grandmother's house after moving her into an assisted living, I can still remember the sea of toilet paper she had stockpiled in the attic. Her generation remembered those days when the government wasn't there. Maybe the majority of us need a 2x4 reality to get some economic enlightenment.

    by Elusive Trope on Tue, 04/30/2013 - 9:35pm

    I grew up in the 1950's and remember hearing stories about the 1930's.  Many of the ladies in the neighborhood still practiced thrift by saving things.  Everyone saved the waxed paper from loaves of bread to wrap sandwiches in.  I learned all kinds of make do tricks and repurpose things.  My own family after I was married teased me about reusing zippers and buttons when making cloths.  When my great aunt died, she also had hoarded things like soap and cleaning products.  Her attic was full too.  I don't get teased now about saving plastic bags, large glass jars and recipes.  I spent Saturday teaching a neighbor how to patch school uniform pants for her kids.(Public school required uniforms this year)  They had taken the knees out of all of their cloths.  She didn't know how she was going to replace them in the fall because she had bought larger sizes and hemmed them so they could wear them 2 years. She didn't want to cut them off because she had enough shorts for them.  So I took her to Goodwill and we found a used pair of men's pants the same fabric to cut up.  I taught her how to patch with needle and thread with out a sewing machine.  She had never seen pants patched like that before and they looked presentable when we were done.  They will get another years worth of wear out of them.  I learned how to do that for a girl scout badge in plain sewing. Yes, this has turned out to be a real 2x4 on the side of the head for a lot of people. 


    by trkingmomoe on Wed, 05/01/2013 - 2:21am

    As a little kid, I remember my grandpa showing me the "right way" to use toilet paper in order to get the maximum use out of every square.

    I am not of the camp which believes the only way to go forward is for the people to made to suffer, e.g. better to have Romney / GOP in control now so we get all the 2x4 effort done and over with.  But what is is what is right now, so if we have these cuts, maybe we can at least use it as a  learning opportunity.

     


    by Elusive Trope on Wed, 05/01/2013 - 11:49am

    Austerity, I hate.

    Clever frugality?  You have to respect that.


    by Michael Maiello on Wed, 05/01/2013 - 2:09pm

    Portugal, which has the worst dropout rate in Western Europe, is being forced to cut its education budget.

    That tragedy--one tragedy anyway--is that some of these countries could benefit from intelligent austerity. Austerity isn't the right word. Call it good government. Greece's tax collection system was abysmal and still is. If the EU had just focused on pressuring the Greeks to crack down on tax evasion, they might have done Greece some good.


    by Michael Wolraich on Tue, 04/30/2013 - 10:09pm

    This is why, what really needs to happen, is that bondholder should just take their lumps or get wiped out.  That Greece's tax collection system has been in shambles is just not new news.  Anyone who bought Greek bonds, counting on a eurozone bailout while they collected 400 bps over risk free Treasuries should have known the risks.  Forget fixing Greece.  Greece should be run as Greeks want it run.  Hold bond investors responsible for their choices and let people run their own politics.


    by Michael Maiello on Wed, 05/01/2013 - 8:58am

    Was that really feasible? Letting the bondholders "take their lumps" is a nice slogan, but when some of them got "wiped out," it could have sparked a contagion with dangerous consequences. Remember, this all went down in the wake of Lehman. Even the haircut the bondholders took ended up crashing Cyprus's banking system.

    My sense was that the EC believed that a bailout was necessary to avoid a meltdown. Then, because of domestic politics and a punish-the-spendthrift mentality, they attached conditions to "rehabilitate" Greece.


    by Michael Wolraich on Wed, 05/01/2013 - 10:59am

    Cordoning off contagion is the ECB's job.  If you look at Spain, which was running surpluses right until the financial crisis or Italy, which was showing legitimate balance sheet improvement, I think you can at least see the reasoning behind the bankers who bought those higher yielding bonds.  But, Greece?  It's not like its economic problems had been truly hidden.  The same people buying the bonds were joking about how badly the country was being run.  They were counting on either being able to get out before the truth became undeniable or on international finance authorities to punish Greece's citizens before its bondholders.  It was just such a cynical trade.  Let them eat olive pits.


    by Michael Maiello on Wed, 05/01/2013 - 2:14pm

    "Let them eat olive pits" is an even better slogan, but it's just as specious. It doesn't matter whether the creditors were cynical or stupid. If they fall, they can bring down others and start a contagion. Look at Cyprus. The Cypriot banks were overexposed to Greece debt. The bondholder haircut (a 50 percent haircut, I might add), triggered a run on the Cypriot banks. Who cares, a bunch of Russian oligarchs, right? Except of course that ordinary Cypriots would have lost their savings if ECB hadn't bailed out the Cypriot banks, not to mention the repercussions to other institutions if the banks failed. So Europe gets stuck bailing out those cynical bondholders.

    Now suppose that the haircut was 100 percent, as you advocate? How many other banks were overexposed to Greece? Who else would Europe have to bail out? And how is Greece supposed to get a loan if Europe won't back back its bonds? Harsh as the austerity is, it would be a hell of a lot harsher if Greece were unable to borrow.

    Krugman often makes the argument that government budgets aren't like personal budgets. All the talk of "belt-tightening" is nonsensical in that context. Well so is the "let them eat nuts" talk. We're not talking about some random guy down the street down who made dumb investments. The dumbest, most corrupt lender in the world can bring down the world economy if its fall is spectacular enough. We should certainly pass legislation to limit our exposure to such lenders, but we're unfortunately bound to them in an interconnected economy. If they eat nuts, so do we.


    by Michael Wolraich on Wed, 05/01/2013 - 3:51pm

    The central bank can defend depositors (though, depositors are technically creditors) without also bailing out bondholders.  Central banks can be far more targeted than they have been.  Bailing out bondholders and bank executives is a choice.  It's not necessary in order to bail out depositors or to stop contagion.

    Though, again the Cypriot depositors are not a sympathetic lot.  They went there for two reasons:  1) higher interest payments, which they must have known was not a free lunch in terms of risk and 2) protection from Putin. But who watches the watchmen?

    Same thing happened in Iceland where English depositors sought both higher interest rates and tax avoidance.  They made a bad bet.  I hope worse on Edquardo Saverin, some day.


    by Michael Maiello on Wed, 05/01/2013 - 7:55pm

    As I mentioned, ordinary Cypriots would have lost their savings--not just Russian oligarchs and other international investors.

    But I think you're missing the point. Cyprus was merely an example of how economic consequences spread. Do you not believe in economic contagions? They always start with the riskiest speculators, but they never end with them. And once they start, they are incredibly hard to stop. The only reason we are not personally familiar with the devastation that results is because central banks have learned the hard way. So now they attack nascent contagions immediately. One of the ways they attack them is to offer loans to failing companies (or countries) that no one else will loan to. That is one of the primary reasons we have central banks.

    My second point--that the Greeks would be in far worse shape if Europe hadn't bailed them out--you just ignored. For all the austerity, Greece's primary budget deficit (which excludes debt payments) is still 5% of its GDP. If Europe had simply let Greece default, that deficit would be zero. And not in a good way. It would be zero because Greece wouldn't be able to borrow money, so its budget cuts would have been far more drastic than any Europe-imposed austerity.


    by Michael Wolraich on Thu, 05/02/2013 - 9:09pm

    I do believe in economic contagions and in a central bank's responsibility to stop them.  I just think they can be more targeted in their actions.  A central bank does not have to treat a foreign depositor and a domestic depositor in the same way.  It doesn't have to treat the bond trading desk the same way it treats the commercial loan department.  To take AIG as an example -- the government could have better directed payments to counter parties.

    As for Greece in default vs. Greece in Austerity -- were Greece to have defaulted and re-adopted a devalued drachma the consequences might well have been worse.  Or, it would have revitalized its tourism industry and its exports (Greece does, despite jokes, export things beyond olive oil, including construction materials) and created a path out of stagnation.  Argentina had positive GDP growth every year following its default, up until the financial crisis and global recession.  Why not Greece?


    by Michael Maiello on Fri, 05/03/2013 - 9:29am

    I was taking Greek participation in the euro as a given. Greek and Argentina are not equivalent since Argentina was never in a monetary union, but I agree that there may be long-term advantages for Greece to return to the drachma. I see that mostly as a failure of ECB, which should have eased the euro to stimulate growth and abate the debt pressure on Southern Europe. But regardless, if Greece did not get the bailout, the short-term suffering would be far worse than the austerity we've been reading about.

    How do you see targeting bondholders working, other than the foreign / domestic distinction? This issue with preventing a contagion is that you can't let large institutions fail. So you'd have to evaluate each bondholder's exposure, balance sheet, and the consequences of it failing. Ironically, you might end up rewarding the biggest banks with the highest risk exposure.

    To be honest, I was impressed with the Merkel's 50% haircut negotiation, which erased a big chunk of debt without the stigma of default. I just think her austerity and tight money policies are stupid.


    by Michael Wolraich on Fri, 05/03/2013 - 12:32pm

    Argentina wasn't in a monetary union but it had tied the value of its peso to the U.S. dollar, which is practically the same thing.  Dropping the dollar peg allowed Argentina to devalue and export its way, rather quickly, to positive GDP growth.

    As for the other issue, which amounts to picking winners and losers, you can always target your aim downstream.  How does the failure of one bank cause contagion?  Well, one bank fails and 12 more smaller banks fail as a result, right?  Have the central bank write checks to those 12 banks while you take the big one into receivership.  Then, sell off the big bank, piece by piece, to pay for the costs of rescuing the smaller ones.


    by Michael Maiello on Fri, 05/03/2013 - 3:16pm

    I understand about the peso being fixed to the dollar. I just meant that Greece is bound much tighter to the European monetary union than Argentina was to dollar. For Argentina, it was purely a question of devaluing the peso. It's much more complicated for Greece, and there would be many ramifications beyond devaluation.

    To the main point, the primary threat of contagion is not big failures triggering many small failures; it's big failures triggering even bigger failures. Keep in mind, that economic contagion is largely psychological, so institutions don't even have to be directly exposed to be affected.

    In the case of Europe, the contagion fear was not about companies but countries. Italy, Spain, and Portugal were all reeling, and investors were demanding sky-high rates for their bonds. Everyone was afraid that if Greece defaulted, the rest of southern Europe would follow. A commitment to support Greece's small bondholders would have done almost nothing to mitigate that risk.


    by Michael Wolraich on Sun, 05/05/2013 - 1:10pm

    Merkel's austerity may be stupid, but Germany supporting the half of the Greeks who avoid taxes via Swiss investments or the grey economy is also stupid. 40% of Greek GDP comes from the public sector; tourism (including undeclared income) & shipping do form a huge chunk of the remaining part of the economy. And then Greece's penchant for overspending didn't prevent this crisis, did it?

    There are countries like Ireland where austerity is likely a horrible idea, but I have trouble figuring out what what policy will work for the Greeks in either Greece or Cyprus.


    by PeraclesPlease on Fri, 05/03/2013 - 4:11pm

    It doesn't matter whether the creditors were cynical or stupid. If they fall, they can bring down others and start a contagion.

    And so, Michael, what role do the creditors have to play here in the Greece example sans responsibility for their choices or any potentially negative consequences? Are they "investing" in markets or are they instead granting public monies (in hundreds of billions of dollars!) to other bankers without any effective governmental oversight?

    I think if you re-read the quote above, you understand just how licentious and entitled is this banker-class under the rules of the game as you would have it played. And you also help explain how this recession has been a bonanza for Wall Street and the bankers whilst it has caused real hardship on Main Street. To insist that Austerity is the cure for that dichotomy simply doesn't comport with logic or even common sense.


    by SleepinJeezus on Mon, 05/06/2013 - 5:27am

    Sen. Tim Kane (D-Va) and HRep. Chris Van Hollan (D-Md) have been saying that austerity is the problem not the debt for months.  It looks like the Democrats are starting to move away from debt crisis and talking about growth and jobs.  http://prospect.org/article/are-democrats-moving-away-debt-crisis-rhetoric


    by trkingmomoe on Wed, 05/01/2013 - 1:34am

    Michael & Michael - Just want to thank you for prompting me with your discussion of Greece to finally delve into the story.

    And, WOW! What a story. Definitely qualifies as a candidate for exhibit A in a case against Primary Dealers aka specialists in sovereign debt. 

    It starts with Greece never really qualifying for entry into the EU. With an assist from at least two of its Primary Dealer, Goldman and JPMorgan, it cooked its books to meet EU guidelines.  When that was disclosed and corrected, it turns out that Greece never in a single year met the guidelines.

    Then there is the way the ECB and EU chose to deal with Greece's problems and punish the banks. It reminded me very much of B'rer Rabbit being tossed into a briar patch. I can imagine some of the dealers rofltao. Sure they had to take a haircut on some Greek debt but probably made as much or more naked shorting it sometime between discovery of their misdeeds and the fines and haircuts then bought it back at extremely discounted prices when the news broke.  And since part of the ECB/EU plan to fix Greece deficit problem is to help them buy back their debt at the new discounted prices, it will probably be those same dealers who do the trades because they are the market makers for those bonds.

    From a technical default for not meeting an arbitrary cap to ruin with the help of its friends, a Greek tragedy and farce all in one story.

     

     

     


    by EmmaZahn on Tue, 05/07/2013 - 9:36pm