Markets react rationally to austerity
The piece below was posted on the “Left Foot Forward” website on Monday, 8th August, 2011
“It is important that we understand the events of last week not as a new outbreak of crisis, but as a continuation of the banking crisis that first came to the public’s attention in 2007-9.
It is now just four years since the ‘debtonation’ on 9 August, 2007, when banks lost confidence in the viability of other banks, and stopped lending to each other. After a year when the fuse of huge debts endured a ‘slow burn’, the 2008 Lehman bankruptcy exploded the financial system and threatened systemic failure.
Without consulting taxpayers, central bankers and politicians rushed to the aid of bankrupt financiers. Private losses were socialised, and attempts at recovery were nursed by central bankers who pushed interest rates down to very low levels. Thanks to the weakness of politicians and central bankers this nationalisation of private losses was offered almost unconditionally to an immensely wealthy, and unaccountable elite.
Since then politicians and central bankers, the IMF, the ECB and the EU have left the finance sector free to engage in reckless lending and speculation. Instead of disciplining financiers, they have disciplined taxpayers, and used ‘austerity’ policies to force the broader economy to bow to the will of an extremely fragile finance sector. The purpose of ‘austerity’ we have been told, by e.g. the ECB’s Mr Trichet is to shore up the public finances, and prepare for further stages in the financial crisis, when bankers need to be bailed out again.
Only it has not quite turned out that way.
Because the result of ‘austerity’ is now clear for all to see. Far from shoring up the public finances across western economies it has weakened public finances. As economies have faltered, tax revenues have fallen and welfare payments have rocketed. This added to the immense liabilities of the bank bail-outs, has of course strained government deficits.
And because of the policy of austerity, the global economy is weakening. Economic activity and investment has not recovered since 2009. Unemployment and insolvencies in the EU are rising and consumers are snapping their purses shut. If the US now starts cutting back further on government investment, this will lead to a further weakening of the global economy. That much is now clear for all to see.
While their disastrous impact on economic activity and employment is felt across the US and the Eurozone, austerity policies impact first and most forcefully on the poorest, weakest economies: Ireland, Greece and Portugal.
As a result, they are the first to fail the challenge of meeting foreign debt repayment obligations. These debts are the consequence of unwise, if not reckless lending and borrowing that in some cases was fraudulent. The lenders were private banks in Germany, France and the UK. The consequence of the threat of non-payment of loans is disastrous for these private banks. Why? Because many of them are effectively insolvent already, and any further damage to their balance sheets could cause shareholders and investors to lose confidence, and lead to bankruptcy.
Hence the panic in last week’s financial markets. Bankers can’t wait for EU leaders to consult with parliaments in September on the size of taxpayer resources that must now be poured into yet another taxpayer-backed bail-out fund for the wealthy – the European Financial Stability Facility. Their banks are too fragile. They are too close to bankruptcy.
So markets repeated the blackmail they applied on 29 September, 2009, when the US Congress appeared to baulk at providing the private banking system with $750 billion of taxpayer funds (TARP).They tried hard to frighten the hell out of EU politicians on holiday.
In the process millions of investors were hurt, and billions of pounds were wiped off the value of e.g. pension funds and other investments.
That – for you and me – is the bad news.
The good news is this. Something else happened last week. It gradually began to dawn on the British and European establishment that the so-called “recovery” – based as it is on financial speculation (in e.g. food and oil) and not investment in real, socially useful economic activity – is illusory.
Second, it dawned on our estimable leaders that the financial chaos created by liberalised, de-regulated finance has not been cleared up. Far from it. Despite all the hundreds of billions of dollars poured into the banking system – the private banking system is still close to insolvency.
Finally, and this is the most hopeful development: it finally dawned on at least the British establishment that “austerity” is not all it is cooked up to be. Of course we had warned of this, but ideologues in the Tea Party, the Coalition and the ECB prevailed over more rational arguments.
But now certain luminaries in our media are beginning to recognise that cuts in US government spending really will plunge the world back into recession, or even depression. Just as we at PRIME predicted. Cutting government spending at a time of financial fragility and economic weakness is unsound economics.
While recognition of this is a hopeful development, it is overshadowed by the influence of powerful bankers that persist in backing Tea Party ideologues: and who maintain their attacks on the taxpayer hand that has so sumptuously fed them.
Last week Bob Diamond, the head of Barclays, called for UK taxpayers to swallow more doses of the poisonous ‘austerity’. Stephen Hester of RBS flatly denied that banks faced “Armageddon” and instead blamed governments/taxpayers for the crisis.
It is time for our elected leaders to call the bankers’ bluff. It is possible, desirable even, to break loose from the cords that yoke the taxpayers of Britain and the rest of Europe to the interests of an immensely wealthy, greedy and stupid financial elite
So we call on our political leaders, to stand up to bankers. After all, dear leaders, you have only your chains to lose.