I was one of the only economists who predicted the financial crash of 2008 – in 2017 we need to make urgent changes The Independent

Economics is driven by ideology – it is ideology, not science, which drives them to assert that bank bailouts are tolerable but policies that protect the poor aren’t. Unsurprisingly, these flawed theories and models are a great comfort to financial elites – which is why so many economists are hired and funded by big banks, corporations and the wealthy

As someone who correctly predicted the financial crisis (first in 2003 and later in a 2006 book) I support Andy Haldane’s assertion that the economics profession is “to some degree in crisis”.

Source: I was one of the only economists who predicted the financial crash of 2008 – in 2017 we need to make urgent changes | The Independent

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In the words of a Greek economist

I found this article in the weekly online magazine for chartered accountants.

Put simply lending money to help a country out of debt is like hosing someone down to dry them off.  In the end you will have to switch the hose off and get out a towel

The damage of deferring Greek debt restructuring

29 July 2015 

The point of restructuring debt is to reduce the volume of new loans needed to salvage an insolvent entity. Creditors offer debt relief to get more value back and to extend as little new finance to the insolvent entity as possible

Remarkably, Greece’s creditors seem unable to appreciate this sound financial principle. Where Greek debt is concerned, a clear pattern has emerged over the past five years. It remains unbroken to this day.

….

For full article go to http://economia.icaew.com/opinion/july-2015/the-damage-of-deferring-greek-debt-restructuring?utm_source=economianews&utm_medium=articles&utm_content=headlines&utm_campaign=july31

It’s not just me

It can be difficult deciding what to write next.  Everything seems to have been said already.

And then along comes the weekend newspaper.  The Times Saturday June 27 and Philip Aldrick.  If you have a subscription you can read his article We ought to be scared: too much debt is being combined with too much blind faith.

In simple terms what he was saying was that some important economic indicators are heading the same way they went before the big crash – the  2008 disaster brought about by banks lending too much to people who could not pay them back.

So – money is cheap thanks to Quantitative Easing and very low (or zero) interest rates.

Probably as a result, lots of borrowing has been going on – according to the article $57 trillion in 7 years – which is massively more than the economic growth in the same period.

So debt is now 286% of GDP.  Is this worrying?  Well it was less than that – 269% of GDP – before the crisis.

And where is the money being lent?  “Emerging markets” seems to be the answer – Latin America, the Middle East and Africa are all running deficits borrowing from Western economies.

As I see it, the problem is simply our debt-ridden system.  Because of low interest rates in the Western economies, bankers need to find someone else to lend money to who will pay high rates of interest.  Germany is financing Greek debt at higher interest rates than it can get elsewhere in the EU, but even this is not enough to produce returns for the financial sectors in the West.

As a result money is lent at higher risks to countries which offer a much higher rate of return.  This means money in junk bonds and frontier bonds.  Or put another way in risky companies and risky countries.

Some risky investments will go bad and the question is whether the financial gurus have got it right this time and balanced the risk with the return or whether, as happened before 2008, they went for return at all costs and ended up offloading the risk onto governments who did not dare to let the banking system (and therefore the banks) collapse and so underwrote the debts in massive bailouts.

My answer is simple.  If commercial debt is outlawed, then bankers and other financiers cannot do this to us again.

This is not an easy fix, because we have been brought up on the present system and imagining a different world is difficult.  And bringing in a ban on commercial debt will require considerable planning and ruthless implementation (because any loophole will be exploited because the financial sector is all about exploiting situations – such as different interest rates in different countries – to make a profit).

Is this a crazy idea?  Possibly, but we have tried for years to bring the banking sector under control in the UK and we keep on ending up with scandals – PPI and other misselling scandals, LIBOR and foreign exchange rate fixing, helping launder drug and terrorist money…

So let’s try something new!

Don’t mention the war

Basil Fawlty would have been proud.

A French economist (Thomas Piketty) was interviewed by a German paper (Die Zeit).  This links to an English translation.

An extract gives you a flavour of Piketty’s no-holds-barred approach

Piketty:… After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP…. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece. Instead … our states employed … debt relief…

ZEIT: That happened because people recognised that the high reparations demanded of Germany after World War I were one of the causes of the Second World War. People wanted to forgive Germany’s sins this time!

Piketty: Nonsense! This had nothing to do with moral clarity; it was a rational political and economic decision….

via Thomas Piketty: ‘Germany Has Never Repaid its Debts. It Has No Right to Lecture Greece’ | The Wire.

This is how we pay our debts

Have a look at this article from the Jubilee Debt campaign.

In simple terms, banks and others lent money to the Greek government.  They should perhaps have known better but they took the risk.

The “bailout” of the government means that these banks and others have been paid off and instead the Greek government now owes other countries.  And Germany (and others) are saying that these international debts will have to be paid.

So instead of banks and other lenders suffering because they took a risk lending to Greece, many have been paid off in full with no risk.  And some banks which were not paid in full have gone bust and the Greek government has had to pick up the pieces by borrowing more money.

And the debt has not gone away but will have to be paid off by the Greek people.

So who has benefited from the “bailout” given to Greece?