Only yesterday, La Stampa (Turin’s daily newspaper) reported that Brussels is contemplating three possibilities regarding Eurobonds. The paper is quoting from the so-called Green Book on the Feasibility of Stability Bonds:

(1) complete transfer of national treasury bonds to a European agency with joint guarantees (EU and member states)

(2) Blue vs Red bonds, with the former covering the Maastricht compliant debt 60% (as per our Modest Proposal and that of Breugel)

(3) Keep national sovereign bonds but have them deposited and guaranteed by some EU agency.

My reaction? It is good to see signs of intellectual life coming from Brussels. Alas, the proposals, while in the right direction, are similarly flawed in one particular respect: They require Treaty changes that will never come on stream before the eurozone has collapsed. They insist on the notion of eurobonds backed by member-states (jointly and severally guaranteed by national treasuries); a notion that is not only in contravention of the Lisbon Treaty but also financially problematic as the interest rates these bonds will incur will be some weighted average of Germany and the periphery (rates, that is, which are too high for Germany and not low enough for the periphery). If only Brussels could take one more subtle, yet crucial, step in the direction of the Modest Proposal, their plan would acquire both credibility and persuasive powers. Which step? The recommendation that the blue bonds are issued (or backed) by the ECB. In its own name. Without German guarantees.

Lastly, I very much fear that Mr Baroso’s Commission is putting these ideas about in a game of chess with Berlin and Paris; in order to assert his authority; as a protest at the effective sidelining of the Commission. If so, the Green Book’s eurobond proposals will be blasted out of the water by a German government determined to take matters in its own hands and to, in this sense, push Brussels into the margins of EU decision making.

He ends with this …
Part of the reason this may be so hard for progressives to wrap our minds around is that not only does it upend conventional wisdom about the role of money, government spending and taxes — it also requires that we rethink our views regarding the economic “success” of the Clinton administration.

Getting back to the quote from masaccio at the top of the post… The old structures (policy prescriptions from orthodox economists, either saltwater and freshwater) haven’t worked and aren’t working. Recognizing that is step one. Step two is learning to think away from the formal structures learned in school. Yes, it may be hard… but we are lucky: We have a community of heterodox economists who are in the business of developing a new macroeconomics, who have a track record unmatched by orthodox economists and who want to teach us, all of us — from Paul Krugman to a random pseudonym on the web — what they know.

We ordinary citizens have no standing to complain about the blindered and ignorant ideology of our country’s economists and politicians if we are unwilling to take off our own blinders and consider, with an genuinely open mind, these new ideas…

Too much is at stake not to try.

Progressives in Ireland will get to hear three MMT stars, Randlall Wray, Marshall Auerback and Stephanie Kelton in Dublin on the 9th of May 2011.  Conference title; ‘Learning from the Crisis’, Croke Park Conference Centre.   Details on this site and on TASC soon.  The visit was instigated by Smart Taxes and partnered by TASC.

Nama was painted as a socially responsible undertaking that will be reporting to the Government ministers on the issues of ‘social dividend’. It will provide housing for the poor and will take off the market vast surpluses of unwanted properties. Nama will also deliver a healthy dividend by charging local authorities for this ‘service’. But the local authorities will still somehow come on top by saving money.

Perhaps mindful of having produced too much gibberish of the above variety, our public representatives have started talking up the discounts that Nama will apply on loans it buys from the banks. Just 6 months or so ago Nama enthusiasts were saying that a 12-20 percent average discount will reflect the ‘true long term economic value’ of the loans? Now we are into 30-35 percent haircuts and rising.

The iron logic of finance tells us that the greater the discount Nama imposes the greater proportion of the original loan will have to be written down by the banks as a loss. This will require fresh capital, of which the taxpayers are the only source for no investor will be willing to buy new shares in Irish banks voluntarily.

By my estimates from some 9 months ago, the Irish banks will require Euro 10-13 billion of fresh capital the minute Nama goes through their books. After months of ignoring this prediction, the Government now admits as much.  ….

This arithmetic is not escaping the ECB. Since December, we are painfully aware of Frankfurt’s intentions to close the discount window through which Irish banks have already pumped some Euro 98 billion worth of junk-rated assets in exchange for cash. By all Euro area standards, Ireland – a minnow accounting for roughly 1.8 percent of the entire common currency economy – has swallowed about 19% of all cash released by the ECB since the beginning of the crisis. More than any other country in absolute terms. Add to that the prospect of Euro 59 billion worth of Nama bonds, plus another Euro 10-12 billion for banks recapitalization, Irish banking system bailout can cost ECB up to Euro 170 billion in loans secured against, you’ve guessed it – unfinished estates in the middle of nowhere.

So understandably, the ECB folks are worried. By May they will start reversing junk securities they loaned against out of their vaults and back into the banks. Should they succeed, Irish taxpayers will be stuck for more cash to plug the new hole in banks balancesheets.

Which in turn will drive the quality of our collateral even lower. Mortgage rates will climb by 100-150 basis points for those of us who are still paying them down. Cost of credit for businesses will rise well into double-digit figures. Credit cards, car loans, consumer loans – all will become as rare in Ireland as polar bears in Sahara. Taxes and charges will increase – by 15-20 percent on average over 2011-2013. Instead of banks stimulating demand for credit, as Alan Ahearne suggests, Ireland Inc will be back on the slippery slope toward deeper recession.

Ultimately, it is the prospect of Ireland sliding back to rival Greece as the drag on the Euro that has been bothering my friends, as well as the ECB and the EU Commission. Sadly, their concerns are our last line of defense against Nama. (link to article)

The European Union and the European Central Bank should create a crisis mechanism akin to the US Federal Reserve to help debt-hit member-states such as Greece, Nobel lauriat economist Joseph Stiglitz said Tuesday.

“(There is) a lack of European macroeconomic structure to help countries with particular difficulties,” he told a conference in Athens.

“In the United States we have a huge national budget that can be allocated to parts of the country that are suffering,” he said.

While the European Central Bank regularly lends money to national banks at income rates lower than the international market, the same option is not currently available to governments, Stiglitz noted.

“If you are willing to lend to banks, why not lend to governments? Does Europe not have confidence in the governments that constitute it?” he argued.  (link to article)

To work we have to believe that the civil and public servants we all know and sometimes love, have the creative and energetic capacity to help rebuild our shattered economy.   In my experience a public sector company, the ESB has been the single greatest obstacle to developing a viable renewable energy sector in Ireland – how are they to work in partnership in the new dispensation with those they seeked to destroy?.

We also have to hope that other problems facing us- resource constraints and system limits, for which this particular set of socio-economic spectacles has a complete blind spot, are indeed of little consequence because they do not feature at all in this scenario.  Publicly owned Coillte and Bord na Mona have proved to be poor stewards of the resources in their care by any set of economic or environmental  criteria – are they our great hope for the future?

The time of great achievement of the public sector company may be in the past, and there were indeed, great achievements – Ardnacrusha was a feat of global significance.

Might it be the Left is still fighting the last war with the ‘old enemy’ of  ‘the free interplay of market forces’ when in fact the enemy is within corrupting both sides, unrecognised – the money system.

March 16th Afternoon: The Recession Diaries

Public Ownership of Banks

Back in November, while the bank guarantee had alerted us to the fragile state of the Irish banking system, no one could imagine what was laying in wait for us: collapse, fraud, and irresponsibility on a frightening scale. The issue is now not whether the banks should be taken into public ownership; that’s a given. The debate is now what we do with the banks.

I would suggest a radical refiguring of the banking landscape following a flushing out of the bad assets (either through a ‘bad’ bank or ‘good’ bank process) with the creation of:

• An infrastructural and long-term bank
• A venture / seed development capital bank
• Banks dedicated to ofering new credit lines for small and medium enterprises
• A public enterprise retail bank

Money is utility, banks are instruments: they are (or should be) servants of the real economy. Nationalise them immediately and start making that service happen.

Borrowing

Quaintly, I had thought that increasing borrowing to 55 percent of the GDP would provide considerable resources for a stimulus programme. Our public finances, however, have deteriorated to such a point that 55 percent of GDP would now imply massive cutbacks. So let’s no get hung up on percentages, etc. (even now, we are still well below the Euorzone average).

Since November, we have now discovered that the National Treasury Management Agency has accumulated a cash balance of €20 billion. Let’s not hoard it – use it: start getting people back to work, increasing economic activity, investing and lending and spending.  This is the seed-capital, if you will, for a medium-term stimulus programme.

Fiscal Deficit and Unemployment

Again, such has been the deterioration of our public finances that the orthodoxy has been able to confine the national debate to fiscal measures. They never ask the more fundamental question: why is tax revenue collapsing, why is government expenditure (i.e. social welfare costs) rising? Unemployment is the answer they never come up with. To solve the fiscal crisis is to first solve the unemployment crisis. And to do that requires a stimulus – an expansion of government expenditure, both current and capital.

Save Jobs – Subsidise Businesses

The rate of job losses was not as pronounced in November. Now it’s an avalanche. We should subsidise businesses to stay in business – especially in critical traded sectors. Germany has recently launched a €100 billion enterprise aid package; pro-rata, that would be equivalent to €7 billion here. This aid package would include a range of measures: underwriting loans/overdrafts, temporary sterling stabilisation scheme, avoidance redundancy schemes (e.g. topping up short-timed workers’ pay to avoid redundancies), etc. Of course, this must come with strings attached –enterprises must become high-road companies, granting their workforce the right to collectively bargain being just one of many labour-inclusive strategies at the local level. But, yes, subsidise firms to stay in business. At the end of the day, it will cost less than letting firms go to the wall.

Save Businesses – ‘Nationalise’ Them

Public enterprise – something I will be exploring in later posts – is one of the great weapons in our enterprise arsenal. The last thing we should let happen is to watch firms with key skill-sets and global brands in key economic sectors go down the tubes. In the last instance, they should be brought into public enterprise. This could mean public sector equity, public-private partnerships; public enterprise companies are only one aspect of bringing key companies into the public realm. The modern Irish economy owes much to public enterprise – energy, transport, banking, insurance and finance, natural resources; it is now time to employ this strategy to current economic and social needs.  Better than to let ‘the free interplay of market forces’ destroy our economic base.

Bring Back Telesis

In the early 1980s Telesis caused a storm with its proposal that the state should actively ‘select’ 75 to 100 indigenous companies to become national champions – giving them every aid and support to break into export markets. It was attacked for being ‘statist’ and ‘anti-market’ (even though Telesis was a US consultancy firm). But it was correct.

So use Enterprise Ireland as the vehicle for creating economic champions in our traded sectors. If we don’t have potential champions in key sectors – create them through public enterprise. Whatever, get business up and moving. Export markets may be difficult now but we need to urgently start building the foundations for new state-sponsored and state-driven high-road enterprises whether in the formal private or public sector; to be in a position to take advantage of any recovery in international demand.

* * *

As I look out at the wreckage that the Irish economy has become since last November when I penned that essay, I only see one solution: more and more social democracy, more public realm, more inter-penetration of the private and public spheres to the point that the distinction between the two becomes ever more blurred. To understand that all our economic assets are, first and foremost, social assets is to prepare the ideological ground for creative strategies of growth and expansion. And democracy.

For there is no going back to normal. Normal is dead and gone. This recession must give way to a new order – a progressive order; one that reconciles abilities and needs, economy and society, where profit is instrumental and prosperity for all is no longer an aspiration but an economic and political necessity.

And, if in a few months, if I have to rewrite this again, so be it. But better still, let’s get ahead of the curve rather than trying to catch up.

In the past, several of our readers have asked if we could help organize some sort of popular political movement to protest some of the policies that we have criticized. That isn’t anything we have any experience or expertise in, however.But in case you are interested, I wanted to let you know about a new group called A New Way Forward that is organizing rallies on April 11. Their platform is pretty straightforward:

NATIONALIZE: Experts agree — Insolvent banks that are too big to fail must incur a temporary FDIC intervention – no more blank check taxpayer handouts.

REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused.

DECENTRALIZE: Banks must be broken up and sold back to the private market with new antitrust rules in place– new banks, managed by new people. Any bank that’s “too big to fail” means that it’s too big for a free market to function.

A New Way Forward is being organized by two people from the Participatory Politics Foundation, although the two groups are not officially related.

By James Kwak

The European Central Bank has cut interest rates a half point to an historic low of 1.5pc and opened the door for extreme measures akin to the quantitative easing(QE) underway in America, Britain, and Japan.

“I don’t exclude anything,” said Jean-Claude Trichet, the ECB’s president. “We did not decide that this is the lowest level. We are studying additional non-standard measures.” Bond yields plummeted across the eurozone as the markets instantly priced in further monetary loosening.

None of the eurozone’s sixteen central banks have ever seen interest rates this low. The cut follows a collapse in industrial production over the last five months. The pace of deterioration has been faster than the early 1930s, when falls were mostly stretched over a longer period.

The ECB has torn up its growth forecast for this year and expects an unprecedented contraction 2.7pc for the eurozone. Even this may prove optimistic. Output fell 1.5pc in the fourth quarter and the picture seems to be going from bad to worse. Export orders for German engineering companies fell 47pc in January. Link to full article

Emerging market crises are marked by an increase in tunneling - i.e., borderline legal/illegal smuggling of value out of businesses.  As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves.

Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt.  Confusion helps the powerful, he argued.  When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms.  The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.

This is the prospect now faced by the United States.

Treasury has made it clear that they will proceed with a “mix-and-match” strategy, as advertized.  And people close to the Administration tell me things along the lines of ”it will be messy” and “there is no alternative.”  The people involved are convinced - and hold this almost as an unshakeable ideology – that this is the only way to bring private capital into banks.

This attempt to protect shareholders and insiders in large banks is misguided.  Not only have these shareholders already been almost completely wiped out by the actions and inactions of the executives and boards in these banks (why haven’t these boards resigned?), but the government’s policy is creating toxic financial institutions that no one wants to touch either with equity investments or – increasingly – further credit.

Link to article

David McWilliams, 4 March 2009

….Ireland has abandoned macroeconomics and is now being run by mantras, which allow our leaders to avoid honestly assessing our situation.

Ideally, we would devalue our currency and print money to get us out of this mess. We should also increase government investment, not reduce it. This is after all the core of macroeconomic theory as I learnt it.

When you have a liquidity problem where the people are hoarding, not spending, the state takes up the reins and spends. This is what every country did in the 1930s and goes to the heart of the response to the crisis which President Obama unveiled last week. But the Irish government is trapped, we have got ourselves into a stupid situation whereby we can neither devalue nor spend excessively. Therefore, our present European arrangement is the worst of all worlds.

But we are going to vote on Europe again this year with Lisbon II, so what should we do?

Less Europe and an ability to devalue our currency would help enormously but so too would more Europe and fiscal federalism where real political and budgetary integration accompanies monetary union and free trade.

This implies that the best policy for Ireland is either to dilute our commitment to Europe or enhance it greatly! Both outcomes are better than keeping the present status quo of being full members of the euro in a half-constructed political union. This is a disaster. So something has to give.

The financial markets have twigged this Irish dilemma and are betting that Germany will not tolerate more European integration, which the Germans could rightly see as yet another attempt to extort from the German taxpayer money to pay for Ireland’s sins. This is why the market which measures the risk of an Irish default, known as the credit default swap market, is suggesting that a default in Ireland is likely.

However, as against that, the political class in Europe and in Germany in particular, by proposing a European bond, is moving gradually towards more muscular political integration backed up by these monetary measures.

At the moment Germany, while admittedly footing the EU bill, gains tremendously from the EU because it can export its goods freely in the union, without having to worry too much about the budgetary implication of an EU-wide recession. So German trade benefits are amplified in a Euro boom but its fiscal downsides are capped in a recession. So it is win, win for Germany.

Granted it is the largest contributor to the Euro budget but this budget is modest when compared to a national budget and the national responsibility of proper EU governance.

Thus this crisis is not just a challenge to Ireland but it is also a challenge to Europe. We can improve our lot by taking either radical option.

We would be better off being the most ardent pro-Europeans or by being the first to leave the currency union! Equally, we know that if we stay as we are, we will have a much longer recession than is warranted, which is political and social suicide….Link to full article