Other economic commentators have framed possible responses to Ireland’s debt crisis in very narrow terms, advocating either a rigorous adherence to austerity programmes or unilateral default on our debt.

Those who promote austerity however have not been fully honest about the risks of this approach. They include the possibility that the Irish economy could enter into a spiral of deflation, economic stagnation and experience a sharp increase in overall levels of unemployment. Given the fragile state of the global economy, these negative trends could prove very difficult to reverse.

Those who support a unilateral default on our debts and taking a chance with the international money markets are being less than honest about the economic and financial difficulties that Ireland will face in such circumstances.

Michael Casey’s helpful contribution to this debate has been to remind us of the unique position of central banks which he points out can “create new money by the stroke of a pen”. Casey proposes that the Irish Central Bank should be permitted to print new money and lend it to the cash-strapped Government in order to relieve current pressure on it. This sets him apart from many other economic commentators who appear to view governments as almost completely dependent on private bond markets to access critical money supplies.

Casey points out that over the years, the Central Bank has occasionally lent money to the government of the day to part-finance its fiscal deficit, and that the central banks of other countries have engaged in similar action. He envisages circumstances in which the Central Bank might lend €3 billion a year, for example, to the Government over the next four years, on a strictly emergency basis. He argues that this would prevent recession becoming entrenched, reduce unemployment and emigration, avoid punitive interest charges and protect the most vulnerable in our society.

While Casey concedes that printing money might cause price inflation later on, he questions whether that would be such a bad thing, given Ireland’s present circumstances. He suggests that it might encourage consumer spending and would also inflate away some of the real burden of our present debt. He reminds us that other countries have done this in extreme situations.

Given Casey’s impeccable economic credentials as former chief economist with the Central Bank and board member of the International Monetary Fund, surely his proposal should be given serious consideration by national and European policy-makers?

Casey is not alone in advocating a more flexible approach on the part of central banks to monetary policy. A pioneering community of economists in the University of Missouri, Kansas have elaborated a new macroeconomic model known as Modern Monetary Theory, which challenges some of the basic assumptions of conventional monetary theory. It advocates a more activist role for governments and central banks in overall economic development and the promotion of full employment.

These economists will be amongst the keynote speakers at a conference in Croke Park on May 9th entitled “Lessons from the Crisis : Money, Taxes and Saving in a Changing World” co-hosted by Tasc (Think Tank for Action on Social Change) and Smart Taxes (Fiscal Policy for Sustainability network). Richard Douthwaite, an Irish economist who has written about the possibilities for the European Central Bank to use its monetary policy to engage in ‘deficit easing’ in order to tackle the debt crisis in the Eurozone, will be another speaker at the conference.

Those interested in attending can register at contact@tascnet.ie.

…I do agree with critics that such a status implies responsibilities—responsibilities that the US has not been living up to. The rest of world needs dollars, especially in a crisis. It obtains those dollars by exporting to the US, and by attracting capital flows. But the US is mired in a deep recession, and it shows no signs of willingness to deal with the financial crisis that makes it impossible for the economy to recover. That is not the behavior that one must expect of the issuer of the international currency. Debasing the currency through policy designed to encourage capital flight or inflation is not appropriate to maintaining the dollar’s status. Critics are right to castigate Washington for short-sighted policy. (See this here)

The best thing that can be done, both for the US as issuer of the dollar and for the rest of the world users of the dollar, is to promote economic recovery in the US. This is not a matter of “affordability”. The US government can “afford” anything for sale in terms of dollars. It is a matter of political will. Can the US overthrow the silly pronouncements of deficit hawks, including today’s statements by the “Fiscal Responsibility” commission, (http://www.fiscalcommission.gov//) to formulate a fiscal stimulus package that will put the US on the road to recovery? If so, the dollar’s problems will disappear. If not, run to gold.

Finally, maintaining the dollar’s international appeal also requires imposition of the rule of law in the US. Currently, the fraud perpetrated by the biggest banks is far worse than anything the Russian kleptocrats and mafia combined could possibly imagine. The US is in the grips of the worst scandals in world history, with the financial sector no longer constrained by anything that would be recognizable as lawful practice. And that is the biggest threat to the dollar as international reserve currency. Unless the top banks are closed, with their management jailed, there really is no hope for the US dollar or for its economy. (link to full article)

Obama’s Problem Simply Defined: It Was the Banks

Friday, 11/5/2010 – 4:09 pm by James K. Galbraith | 18 Comments

Obama must break his devil’s pact with the banks in order to succeed.

Bruce Bartlett says it was a failure to focus. Paul Krugman says it was a failure of nerve. Nancy Pelosi says it was the economy’s failure. Barack Obama says it was his own failure — to explain that he was, in fact, focused on the economy.

As Krugman rightly stipulates, Monday-morning quarterbacks should say exactly what different play they would have called. Paul’s answer is that the stimulus package should have been bigger. No disagreement: I was one voice calling for a much larger program back when. Yet this answer is not sufficient.

The original sin of Obama’s presidency was to assign economic policy to a closed circle of bank-friendly economists and Bush carryovers. Larry Summers. Timothy Geithner. Ben Bernanke. These men had no personal commitment to the goal of an early recovery, no stake in the Democratic Party, no interest in the larger success of Barack Obama. Their primary goal, instead, was and remains to protect their own past decisions and their own professional futures.

(link to full article)

…Fiscal policy is the only way to deal with both the problem of lack of aggregate demand and resource allocation. In particular, if we want to encourage private sector deleveraging, short of mass default or repudiation, this has to be supported by government spending, which means fiscal policy. This can take the form of direct government spending, but it can also take the form of tax cuts. That is a political/distributional question, as opposed to an economic one.

But for both, the underlying reality is the same: As the private sector withdraws spending (aggregate demand) and starts reducing its debt levels, the only way that GDP can continue growing is if there is an external trade boom (unlikely overall, especially since all countries by definition can’t become net exporters) and/or fiscal support….(link to full article)

….”Tim Congdon from International Monetary Research said the Fed has been wasting its powder by using the wrong mechanism to inject monetary stimulus. Instead of buying bonds from pension funds, insurance companies and other bodies outside the banking system, as the Bank of England did with its £200bn gilts purchase, it has been buying from banks. This method has different effects. It has gained less traction because banks have sat on “dead cash”. This has not increased the deposits held by companies and households.

“A really powerful way for the Fed to boost the economy is to buy bonds directly from the public, which will increase the quantity of broad money. They won’t do that because they have a totally different model and in my view they are confused about the transmission mechanism. If they bought say $1.5 trillion of long-dated Treasuries from non-banks I believe they would get the US out of its liquidity trap very quickly,” Mr Congdon said.

Even better to give it to households

Score another one, then, for the high priests of fiscal rectitude. Harsh cuts, tax increases — this is by no means a recovery policy. The capital markets have got their pound of flesh. But Greece is no more able to reduce its deficit under these circumstances than it is possible to get blood out of a stone. Politically, it means ceding control of EU macro policy to an external consortium dominated by France and Germany. Greece becomes a colony.

Nor will the policies work, as the ’strict enough conditions’ imposed will further weaken demand in Greece and, consequently, the rest of the European Union. Furthermore, the rapidly expanding deficit of Greece has benefited the entire EU because it supported aggregated demand at the margin, and the sudden reversal contemplated by this package will reverse those forces.  (link to article)

Check out the discussion following the post by ‘Art’ and ‘Reality’ and Marshal Auerbach himself for a succinct overview of Neo Keynesian v Neo Liberal  viewpoints.

Here is a snippit

Reality, you should only retract government spending when it becomes inflationary, not because of some arbitrary idea that it somehow “distorts” the free market. The point I was making in the previous article on Greece was that the choice of these voluntary “funding” arrangements for governments that are not intrinsically revenue-constrained is always political and never financial. I argued that if citizens realised these were political choices only (reflecting ideology) then they would be better able to compare them with other political decisions such as the austerity measures. In making this point, I argued that once citizens had a better comparison and were not forced into thinking that the financial constraints were real then governments might be more carefully scrutinised and forced into making better decisions with advance public purpose rather than simply fall prey to the notion that the “markets are always right” and “always determine interest rates”.the notion of a “government budget constraint” only applies ex post, as a statement of an accounting identity that has no significance as an economic constraint. In an accounting sense, it is certainly true that any increase of government spending will be matched by an increase of taxes, an increase of high powered money (reserves and cash) and/or an increase of sovereign debt held. But this does not mean that taxes or bonds actually “finance” the government spending. They do not!See this if you want an explanation. Then you’ll be approaching your ‘nom de plume’ , “Reality”:

• http://bilbo.economicoutlook.net/blog/?p=1266

NB: By all accounts, Greece has an uneven taxation collection system and a crazy pensions policy both of which need reform.  But the case for not using savings from cuts in these areas to make productive public investments or for the pre-distribution of an emergency per capita payments has not been made by any commentator. Borrowing to spend on such a fair stimulatory package – following public sector and payments reform – could be justified and might even be supported by the bond market.

The very same critique could be made of the current discourse re Irish government policy. Why are the options only A) maintaining excessive public and semi-state salaries, pensions and consultants fees (promoted by the Unions) versus B)  cuts to the above (promoted by the employers and government). Smart Taxes want to  explore C) which is B) plus major public investment programme and an emergency citizen dividend.

Having said that, Marshal’s plan should be also be considered under whatever scenario A, B, and C.

The word “recession” implies that economic trends will return to normal almost naturally

Any dream of “recovery” in today’s debt-leveraged economy is a false hope. Yet high financial circles expect Mr. Obama to insist that the economy cannot recover without first reimbursing and enriching Wall Street. To re-inflate asset prices, Mr. Obama’s team looks to Japan’s post-1990 model. A compliant Federal Reserve is to flood the credit markets to lower interest rates to revive bank lending –interest-bearing debt borrowed to buy real estate already in place (and stocks and bonds already issued), enabling banks to work out of their negative equity position by inflating asset prices relative to wages.

The promise is that re-inflating prices will help the “real” economy. But what will “recover” is the rising trend of consumer and homeowner debt responsible for stifling the economy with debt deflation in the first place. This end-result of the Clinton-Bush bubble economy is still being applauded as a model for recovery.

We are not really emerging from a “recession.” The word means literally a falling below a trend line. The economy cannot “recover” its past exponential growth, because it was not really normal. GDP is rising mainly for the FIRE sector – finance, insurance and real estate – not the “real economy.” Financial and corporate managers are paying themselves more for their success in paying their employees less.
This is the antithesis of recovery for Main Street. That is what makes the FIRE sector so self-destructive, and what has ended America’s great post-1945 upswing.

There are two economies – and the extractive FIRE sector dominates the “real” economy

When listening to the State of the Union speech, one should ask just which economy Mr. Obama means when he talks about recovery. Most wage earners and taxpayers will think of the “real” economy of production and consumption. But Mr. Obama believes that this “Economy #1” is dependent on that of Wall Street. His major campaign contributors and “wealth creators” in the FIRE sector – Economy #2, wrapped around the “real” Economy #1.

Economy #2 is the “balance sheet” economy of property and debt. The wealthiest 10% lend out their savings to become debts owed by the bottom 90%. A rising share of gains are made in extractive ways, by charging rent and interest, by financial speculation (“capital gains”), and by shifting taxes off itself onto the “real” Economy #1.

John Edwards talked about “the two economies,” but never explained what he meant operationally. Back in the 1960s when Michael Harrington wrote The Other America, the term meant affluent vs. poor America. For 19th-century novelists such as Charles Dickens and Benjamin Disraeli, it referred to property owners vs. renters. Today, it is finance vs. debtors. Any discussion of economic polarization betweens rich and poor must focus on the deepening indebtedness of most families, companies, real estate, cities and states to an emerging financial oligarchy.

Financial oligarchy is antithetical to democracy. That is what the political fight in Washington is all about today. The Corporate Democrats are trying to get democratically elected to bring about oligarchy. I hope that this is a political oxymoron, but I worry about how many people but into the idea that “wealth creation” requires debt creation. While wealth gushes upward through the Wall Street financial siphon, trickle-down economic ideology to fuel a Bubble Economy via debt-leveraged asset-price inflation.

The role of public spending – and hence budget deficits – no longer means taxing citizens to spend on improving their well-being within Economy #1. Since the 2008 financial meltdown the enormous rise in national debt has resulted from reimbursing Wall Street for its bad gambles on derivatives, collateralized debt obligations and credit default swaps that had little to do with the “real” economy. They could have been wiped out without bringing down the economy. That was an idle threat. A.I.G.’s swap insurance department could have collapsed (it was largely in London anyway) while keeping its normal insurance activities unscathed. But the government paid off the financial sector’s bad speculative debts by taking them onto the public balance sheet.

The economy is best viewed as the FIRE sector wrapped around the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs.
Say’s Law of markets, taught to every economics student, states that workers and their employers use their wages and profits to buy what they produce (consumer goods and capital goods). Profits are earned by employing labor to produce goods and services to sell at a markup. (M – C – M’ to the initiated.)

The financial and property sector is wrapped around this core, siphoning off revenue from this circular flow. This FIRE sector is extractive. Its revenue takes the form of what classical economists called “economic rent,” a broad category that includes interest, monopoly super-profits (price gouging) and land rent, as well as “capital” gains. (These are mainly land-price gains and stock-market gains, not gains from industrial capital as such.) Economic rent and capital gains are income without a corresponding necessary cost of production (M – M’ to the initiated). “Banks have lent increasingly to buy up these rentier rights to extract interest, and less and less to promote industrial capital formation. Wealth creation” FIRE-style consists most easily of privatizing the public domain and erecting tollbooths to charge access fees for basic necessities such as health insurance, land sites, home ownership, the communication spectrum (cable and phone rights), patent medicine, water and electricity, and other public utilities, including the use of convenient money (credit cards), or the credit needed to get by. This kind of wealth is not what Adam Smith described in The Wealth of Nations. It is a form of overhead, not a means of production. The revenue it extracts is a zero-sum economic activity, meaning that one party’s gain (that of Wall Street usually) is another’s loss.

Debt deflation resulting from a distorted “financialized” economy

The problem that Mr. Obama faces is one that he cannot voice politically without offending his political constituency. The Bubble Economy has left families, companies, real estate and government so heavily indebted that they must use current income to pay banks and bondholders. The U.S. economy is in a debt deflation. The debt service they pay is not available for spending on goods and services. This is why sales are falling, shops are closing down and employment continues to be cut back.

Banks evidently do not believe that the debt problem can be solved. That is why they have taken the $13 trillion in bailout money and run – by it out in bonuses, or buying other banks and foreign affiliates. They see the domestic economy as being all loaned up. The game is over. Why would they make yet more loans against real estate already in negative equity, with mortgage debt in excess of the market price that can be recovered? Banks are not writing more “equity lines of credit” against homes or making second mortgages in today’s market, so consumers cannot use rising mortgage debt to fuel their spending.

Banks also are cutting back their credit card limits. They are “earning their way out of debt,” making up for the bad gambles they have taken with depositor funds, by raising interest rates, penalties and fees, by borrowing low-interest credit from the Federal Reserve and investing it abroad – preferably in currencies rising against the dollar. This is what Japan did in the “carry trade.” It kept the yen’s exchange rate down, and it is lowering the dollar’s exchange rate today. This threatens to raise prices for imports, on which domestic consumer prices are based. So easy credit for Wall Street means a cost squeeze for consumers.
The President needs a better set of advisors. But Wall Street has obtained veto power over just who they should be. Control over the President’s ear time has been part of the financial sector’s takeover of government. Wall Street has threatened that the stock market will plunge if oligarch-friendly Fed Chairman Bernanke is not reappointed. Mr. Obama insists on keeping him on board, in the belief that what’s good for Wall Street is good for the economy at large.

But what’s good for the banks is a larger market for their credit – more debt for the families and companies that are their customers, higher fees and penalties, no truth-in-lending laws, harsher bankruptcy terms, and further deregulation and bailouts.

This is the program that Mr. Bernanke has advised Washington to follow. Wall Street hopes that he will be kept on board. Mr. Bernanke’s advice has helped bolster that of Tim Geithner at Treasury and Larry Summers as chief advisor to convince Pres. Obama that “recovery” requires more credit.

Going down this road will make the debt overhead heavier, raising the cost of living and doing business. So we must beware of the President using the term “recovery” in his State of the Union speech to mean a recovery of debt and giving more money to Wall Street Jobs cannot revive without consumers having more to spend. And consumer demand (I don’t like this jargon word, because only Wall Street and the Pentagon’s military-industrial complex really make demands) cannot be revived without reducing the debt burden. Bankers are refusing to write down mortgages and other debts to reflect the ability to pay. That act of economic realism would mean taking a loss on their bad debts. So they have asked the government to lend new buyers enough credit to re-inflate housing prices. This is the aim of the housing subsidy to new homebuyers. It leaves more revenue to be capitalized into higher mortgage loans to support prices for real estate fallen into negative equity.

The pretense is that this is subsidizing the middle class, but homebuyers are only the intermediaries for government credit (debt to be paid off by taxpayers) to mortgage bankers. Nearly 90 percent of new home mortgages are being funded or guaranteed by the FHA, Fannie Mae and Freddie Mac – all providing a concealed subsidy to Wall Street.

Mr. Obama’s most dangerous belief is the myth that the economy needs the financial sector to lead its recovery by providing credit. Every economy needs a means of payment, which is why Wall Street has been able to threaten to wreck the economy if the government does not give in to its demands. But the monetary function should not be confused with predatory lending and casino gambling, not to mention Wall Street’s use of bailout funds on lobbying efforts to spread its gospel. (link to full article)

The first glimpse of the emerging entity for the public at large will be in the report of the Taxation Commission in July.  Smart Taxes sincerely hopes its DNA will express the best of what a property tax can be – i.e. an annual land tax.  But its parentage is not yet clear.  Lessor breeding might prevail and a mediocre, misbegotten proposal might well emerge.  Hopefully, such an arrival will be so misformed as to attract all the outraged fire from the entrenched Left and the Right,  so as to make room for its shapely, smarter fraternal twin.

One of the first government sponsored agencies out of the traps to declare for the new arrival is the National Competiveness Council and it picked up on a major feature of such a tax – its benign impact on productive investment.  But a land tax would be even better we point out, as it would support the struggling construction sector to improve existing properties whereas a tax based on the entire of the property value, land and building is, de facto,  tax on improvements.

Competitiveness council calls for property tax: Irish Times Report

THE INTRODUCTION of a valuation-based property tax on most residential properties in the Republic has been recommended by the National Competitiveness Council (NCC).

In a report entitled Getting Fit Again: The Short Term Priorities to Restore Competitiveness published yesterday, the NCC said that without “immediate and continuing action” to restore Ireland’s international competitiveness, the economy runs the risk of entering “a prolonged period of depressed economic activity”.

One of the key issues facing the economy, he said, is the sustainability of the public finances.

The report recommended that additional revenue should be raised by broadening the tax base through measures such as a property tax, rather than through further increases in taxes on income.

He said one positive feature of a property tax was that, unlike additional income tax, “it does not affect people’s incentive to work”.  Link to article

By PAUL KRUGMAN
Published: May 28, 2009

Suddenly it seems as if everyone is talking about inflation. Stern opinion pieces warn that hyperinflation is just around the corner. And markets may be heeding these warnings: Interest rates on long-term government bonds are up, with fear of future inflation one possible reason for the interest-rate spike.

But does the big inflation scare make any sense? Basically, no — with one caveat I’ll get to later. And I suspect that the scare is at least partly about politics rather than economics. Link to article

Ann Pettifor @ the Huffington Post

New Economist, Author, Debtonation – The Coming First World Debt Crisis