The Failure of Neo-Liberal Economics

Crossposted from The Stars Hollow Gazette

Suckers.

That’s what they call the people at the bottom end of a failed Ponzi Scheme and this, unlike Social Security is in fact a Ponzi Scheme.  You see, Social Security pays out 85% of it’s benefits (15% haircut) after 35 years if nothing is done like, oh… say raising the income cap.

Greek Bonds start at a 50% haircut and spiral rapidly to kitty litter.

Road Map to Prepackaged, Orderly Default That Keeps Greece in Euro: View

By the Editors, Bloomberg News

Sep 27, 2011 8:00 PM ET

European leaders swear a Greek default isn’t in the cards. Their parliaments debate whether to bolster an inadequate rescue facility. The International Monetary Fund sends delegates to Athens to make sure it deserves its next tiny tranche of bailout aid. German Chancellor Angela Merkel regularly declares fealty to the euro.

They’re all in denial. Almost no one believes Greece is solvent, not with an economy — and tax receipts — shrinking and debt ballooning to 180 percent of gross domestic product, a burden that no amount of belt-tightening will make bearable. The question now is whether Europe can arrange a controlled and orderly default, or will allow a Greek bankruptcy that is chaotic and destructive to the global economy.

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Expelling Greece from the euro would cause more economic, political and social chaos than the world can bear. The possibilities range from runs on European banks to violent rioting in the streets of Athens — or even civil war. True, leaving the euro would allow Greece to do something it can’t do now — devalue its currency — to be more competitive. But it would also paralyze a drachma-tized economy. One big reason is that companies with euro debts would be hard-pressed to pay them back with a deeply devalued drachma, and would face bankruptcy.

Exiting would also be more expensive than staying. Willem Buiter, the chief economist at Citigroup, says a euro exit would mean a 100 percent write-off of Greek bonds, while staying would mean writing down their value by 60 percent to 80 percent. Greek bonds now trade at discounts of 40 percent to 65 percent of face value.

Without a growth plan, the EU faces financial Waterloo

The latest eurozone rescue scheme may save Greece for now, but it fails on a basic rule of classical economics

Simon Jenkins, The Guardian

27 September 2011

A bad-tempered weekend at the IMF in Washington has reportedly led to a ghost of a plan that makes sense. It involves halving Greece’s debts to German and French banks, repeating the 21% “haircut” default of last July. This in turn will hurt the banks more than they might stand, so the second part of the plan props them with urgent subsidies. In a third part, some 2 trillion euros would be tipped into the European central bank, somehow to “firewall” the sovereign debts of Portugal and Ireland and perhaps even Italy and Spain.

This plan is first aid at the scene of the accident. But when all bad options have failed, desperate men turn to worse ones. The summer’s stress tests, bail-outs, Greek promises and quantitative easings are dead in the water. Europe’s weaker governments have gone on spending and borrowing, and banks lending. Greece’s chief paymaster, Germany, is fed up and Greece is on the brink of bankruptcy. Its workers will soon not get paid and its government might fall – an echo of Weimar.

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The plan currently in circulation makes short-term sense. But it is a rescue plan, not a growth plan. The frightening realisation is that, at a time of recession, the economic conversation is back to the 1930s, as if Keynes had never preached the woes of austerity. In the past three years, 20 million people have lost their jobs worldwide. This staggering waste of human resources is entirely due to human error, to the political mismanagement of economies, which makes Ed Balls’ boasting in his conference speech on Monday the more inexcusable.

The western economy is in the grip of a textbook liquidity squeeze. There is cash everywhere. British companies alone have some £700bn on deposit, which they are unable or unwilling to invest for lack of demand. The Bank of England has printed some £200bn of quantitative easing, mendaciously claiming it will “kick-start the economy”. It has merely added to the pile, and is proposing to add more. It cannot explain where the money has gone, or show one constructive idea as to how to boost demand to mop up this lake of liquidity. The bank is back in the dark ages, starving today to inflate tomorrow.

Where have the government’s Tory monetarists gone? Where are their graphs of M1, M2 and M3 and their equations of the velocity of cash in circulation? The liquidity squeeze is nothing to do with George Osborne’s public sector cuts, which are mild, but with the laws of classical economics. In a recession, you do not save, you spend. Why is Osborne building a cash mountain? If nothing is done to ease the constipation in the British economy, when the rest of Europe recovers it will grow and Britain will merely stumble into stagflation.

In the face of this what is Peter Orzag’s recommmendation (you remember, he was Barack Obama’s Citigroup Budget Director)?

Peter Orszag’s Bid to Get Politicians Out of Policy

By: David Dayen, Firedog Lake

Tuesday September 27, 2011 12:22 pm

Peter Orszag caused a bit of a stir with his call for an enlightened technocracy, and, literally, “less democracy.”

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The very serious technocrats have been wrong about everything in their own right, from the OECD to the ECB to the Fed and on down the line. This is a dodge, an attempt to get elites off the hook for their complete failure to guide the economy by saying that they’re being stymied by “democracy.”

Does Economics Still Progress?

Paul Krugman, The New York Times

September 27, 2011, 4:03 pm

I’ve never liked the notion of talking about economic “science” – it’s much too raw and imperfect a discipline to be paired casually with things like chemistry or biology, and in general when someone talks about economics as a science I immediately suspect that I’m hearing someone who doesn’t know that models are only models. Still, when I was younger I firmly believed that economics was a field that progressed over time, that every generation knew more than the generation before.

The question now is whether that’s still true. In 1971 it was clear that economists knew a lot that they hadn’t known in 1931. Is that clear when we compare 2011 with 1971? I think you can actually make the case that in important ways the profession knew more in 1971 than it does now.

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What I’d add to that is that at this point it seems to me that many economists aren’t even trying to get at the truth. When I look at a lot of what prominent economists have been writing in response to the ongoing economic crisis, I see no sign of intellectual discomfort, no sense that a disaster their models made no allowance for is troubling them; I see only blithe invention of stories to rationalize the disaster in a way that supports their side of the partisan divide.

Brilliant!