Tag Archives: financial crisis

The effects of QE

21 Oct

Of all the new terms that have been invented since the beginning of the crisis in 2008, quantitative easing is perhaps the most bizarre. A purely technical term, it has entered into everyday language as ‘QE’. Monetary policy has taken centre stage as the main tool governments have to do something about growth and QE is it.

Tucked away in the small money supplement of the FT weekend was a long piece on QE. Its discussion of the effects of quantitative easing is worth commenting on. QE is basically a monetary stimulus programme, where central banks create money and use it to buy assets from banks and other financial institutions. The main thing central banks have bought are government bonds. Holders of bonds have therefore exchanged them for cash and that cash is what the governments hope will be spent in ways that stimulate the economy. QE was dreamed up at a time when interests were so low that they couldn’t really go any lower, making a traditional monetary policy response to an economic downturn impossible. The standard approach had been to cut interest rates in a downturn, raise them when the economy seemed to be overheating. Unable to do that with rates so low, QE was the radical alternative.

QE has been striking by its ubiquity: it has been the key policy response of the US Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan. What is surprising is how prevalently it has been used but how sceptical people are of its effects. The idea is that cash injected into the economy would generate new economic activity. There is little evidence, however, that QE has done that. Banks have tended to use the money to boost their capital ratios rather than to increase lending to businesses. Companies have sat on increasing piles of cash. QE in general is seen as having had little effect on the real economy.

Where has its impact been felt? After all, the US Federal Reserve has been buying $85bn a month of US government bonds since it started its QE. Intervention on such a huge scale cannot be free of effects. According to the FT, the main impact of QE has been on asset prices rather than on the real economy as such. These prices have risen considerably, boosting the wealth of those who own such assets. Predictably enough, that means the already very wealthy. The FT cites a Bank of England study that finds that in the UK, the top 5% of households hold 40% of the assets whose price has risen most because of QE. The central banks’ policy of printing money has inflated some asset prices, to the great benefit of those that hold them.

For everyone else, the effect has been more mixed. By keeping interest rates at very low levels, QE has obviously favoured the lenders over the savers. All those hoping to earn some return on their savings have been disappointed. Home owners, especially those with big mortgages, have been happy.  This view of QE helps us understand some of the curious features of this current economic downturn: as the real economy data continues to give cause for real concern (unemployment remains high, growth is anaemic, business investment remains very low), the price of fine art, the best wines and the high end properties in London, Paris and New York have all soared. With low interest rates and with central banks injecting so much liquidity into the bond markets, investors are looking for some return wherever they can. And that includes in a Monet or a large house in Neuilly or Richmond.

The best defence of QE cited by the FT was that things could have been worse without it. It returned confidence to markets and investors, and so helped us avoid the complete collapse that could have occurred in 2008 or 2009. As the FT admits, this argument is difficult to prove: “we just don’t know what would have happened without QE”. It is surprising that a policy with such obvious distributional effects has not been the subject of greater debate or disagreement. This is perhaps because the term itself is so euphemistically technical. Or because it has been carried out by central banks whose place is somewhat outside the terrain of partisan politics. It may also be that governments have been good at convincing people that there is no alternative to QE, which is tantamount to saying that they have no way of tackling problems in the real economy directly but can only work through asset prices.

This, of course, is not true. Governments could intervene far more directly in the economy. However, QE sits alongside the view that governments are fiscally constrained and need to reduce their outgoings as much as possible. Fiscal austerity combined with QE gives us the policy mix for the current period: a massive boost in the prices of assets owned by the wealthiest section of society and extensive cuts in government spending on public services. However technical it may sound, there is nothing ideologically neutral about QE and its effect.

 

François Hollande, a year on

7 May

hollande

A year into his Presidency, François Hollande is struggling. Of all the analyses made of his first year in office, very few have been positive. At The Current Moment, we commented extensively on the elections a year ago and on Hollande as a leader (see here, here and here). A few points are worth reiterating to make sense of today’s widespread disappointment.

It is important to remember that what secured Hollande’s victory a year ago was the prevailing anti-Sarkozy sentiment. Some of that feeling came from a rejection of the substance of Sarkozy’s presidency and so signalled a real endorsement of Hollande’s agenda. But much of the anti-Sarkozy feeling came from a reaction against his style: showy, celebrity-focused, hyperactive, lacking the gravitas expected of the President of the Republic. This list could go on.

Far from challenging this superficial rendering of politics as a matter of competing styles and personalities, the Socialists launched their own brand: normality, embodied in the rotund (but much-slimmed) cheeriness of François Hollande. He enjoys football, he makes jokes, he will govern through the country’s institutions and not above or alongside them. The notion of the ‘normal presidency’ never really stuck, not least because it lacks any capacity to inspire. But it did just enough to give Hollande the election victory on May 6th. Other factors counted too of course: his promise of a 75 per cent tax on incomes above 1 million Euros was timed perfectly to play on the anger felt towards high earners living in luxury at a time of social crisis. Even then, Hollande’s victory was wafer thin. He edged in front of Sarkozy by very little in the first round (28.63% to Sarkozy’s 27.08%) in comparison to Sarkozy’s thumping victory against Ségolène Royal back in 2008. In the second round, Hollande secured 51.64% of the vote, to Sarkozy’s 48.36%.

Throughout the campaign, the gap narrowed between the two leading contenders, transforming what many thought would be a sure victory for the Socialists into a very narrow one indeed. Hollande, an unremarkable figure until then, tipped by few as a likely winner for the presidency, certainly held his nerve. More than anything else, though, he was in the right place at the right time. This explains why his popularity has plummeted. Constructed on the back of the antipathy towards Sarkozy, the fading memory of the latter brings with it a steady erosion in Hollande’s popularity. This is not a problem of voters forgetting the past too easily. It is a product of the negative and opportunistic campaign of the Socialists in 2012.

Hollande’s difficulties today are also to do with what has happened since May 2012. The gay marriage bill has been pushed through but at the expense of a widespread societal mobilization against it, one that brought many people out of their provinces and onto the esplanades of the country’s capital. This author remembers seeing dozens of coaches, all full to the brim, tearing through the Bois de Boulogne on a Sunday morning on their way to an anti-gay marriage demonstration and all coming in from well outside of the capital and its surrounding suburbs.

One event that hit the government particularly hard was the Cahuzac affair: the admission by a government minister, the minister for the budget no less, after many months of denial, that he had a bank account in Switzerland which he kept hidden from the French taxman. The reason the Cahuzac affair has been so damaging for the government is that Hollande’s critique of capitalism, and in particular those private companies and private individuals that escape paying taxes, was always a moralistic one. Hollande presented his case against finance as a moral crusade: it was a war against the vulgar anti-egalitarian materialism of the financial class, fought in the name of the republican values of common good and a sense of patriotic duty attached to contributing to the public coffers.

Cahuzac’s secret Swiss bank account struck at the heart of this moral crusade by bringing those corrupt values into the heart of Hollande’s cabinet. In some ways, Hollande can’t be blamed for having trusted someone who then betrayed him. To misjudge someone’s character is something we have all done at some point. For Hollande, the difficulty was that there was nothing other than this moral crusade underpinning his critique of capitalism. What could have been dismissed as a mere personal failing on the part of an individual, had Hollande’s critique been more substantial, has had the effect of a devastating blow.

This crusade against finance has also been exposed to the harsh winds of the continuing national and European crisis. On this, the French government has managed to achieve very little. A central plank of Hollande’s campaign was his promise to rewrite the European Fiscal Compact, notably by injecting into it a strong growth component. Even at the time, it seemed improbable that Hollande – after the election – would travel to Berlin and tell Angela Merkel what to do. Unsurprisingly, very little in the Compact was changed and Hollande has so far struggled to dent Merkel’s determination to stick to her austerity agenda in the run up to elections in Germany in the Autumn. Promising a radical shake up of France’s sclerotic economy, Hollande commissioned a report from prominent industrialist, Louis Gallois. Focused on competitiveness, Gallois suggested a number of ‘shock’ measures which the government chose to ignore. Hollande may still pursue a reform agenda, by bringing Gallois or someone like Pascal Lamy into a more technocratic cabinet after a summer reshuffle. But there is little momentum in either the reforming or the staunchly anti-austerity direction, leaving all sides unhappy at the government’s immobilism.

Hollande has tended to make his case by courting fellow travellers, latching onto Southern European leaders like Rajoy, or more recently Enrico Letta, whose national difficulties expose the limits of the German austerity agenda. Alliance-building, however, is no substitute for a programme. As remarked upon by Current Moment co-founder Alex Gourevitch, the fact that the case for austerity is currently unravelling has more to do with the pain it is inflicting on European societies and rather less to do with any political alternative being proposed by its growing army of critics.

Buying time and running out

11 Apr

Guest book review of Wolfgang Streeck’s „Gekaufte Zeit: Die vertagte Krise des demokratischen Kapitalismus“. Berlin: Suhrkamp, 2013.

By Philip Mader, Governance Across Borders editor and postdoctoral fellow at the Max Planck Institute for the Study of Societies in Cologne, Germany

streeck cover

Democratic capitalist societies have been “buying time” with money for the past four decades – first via inflation, then public debt, then privatised Keynesianism – but are running out of resources for postponing the inevitable crisis. As a result, we now find ourselves at a crossroads where capitalism and democracy part ways. That in a nutshell is the thesis of Wolfgang Streeck’s new book, currently only available in German, but being translated for publication with Verso.

The book is based on a series of three “Adorno Lectures” given by the director of the Max Planck Institute for the Study of Societies in the summer of 2012 at the renowned Institut für Sozialforschung in Frankfurt (other lecturers in recent years included Judith Butler and Luc Boltanski). Its radical language and conclusions may be surprising for those who remember Streeck’s days as advisor to the “Bündnis für Arbeit” initiated by Germany’s former Chancellor Gerhard Schröder, which precipitated far-reaching labour market and social security reforms, or of Streeck’s demands for institutional reforms to forge a more competitive and flexible low-wage service sector in Germany modelled on the USA (Der Spiegel, 1999). But crises bring new beginnings, and Streeck’s defense of democracy against its subjugation to the market is auspicious. His analysis of the economic, political and ideological straightjacket that states have found themselves in, not just since the crisis but certainly more pronouncedly in its wake, ties together a revamped analysis of capitalism with a compelling critique of the “frivolous” politics of European integration. With some wit, a characteristic taste for good anecdotes, and above all great clarity, Streeck studies the processes of the moyenne durée which produced the “consolidation state” as the supreme fulfilment of a Hayekian liberal market vision, and which brought us to the impasse of the current period.

The book begins with a critical appraisal of how useful the Frankfurt School’s crisis theories from the 1960s and 1970s still are for explaining today’s crises. While their works are by no means invalidated, Streeck contends that yesteryear’s crisis theorists could scarcely imagine how long capitalist societies would be able to “buy time with money” and thereby continually escape the contradictions and tensions diagnosed by their theories of late capitalism. He explains the developments in Western capitalism since the 1970s as “a revolt by capital against the mixed economy of the postwar era”; the disembedding of the economy being a prolonged act of

successful resistance by the owners and managers of capital – the “profit-dependent” class – against the conditions which capitalism had had to accept after 1945 in order to remain politically acceptable in a rivalry of economic systems. (p. 26)*

By the 1970s, Streeck argues, capitalism had encountered severe problems of legitimacy, but less among the masses (as Adorno and Horkheimer had expected) than among the capitalist class. Referring to Kalecki, he suggests that theories of crises have to refocus on the side of capital, understanding modern economic crises as capital “going on strike” by denying society its powers of investment and growth-generation. The 1970s crisis, and the pathways that led out of it, thus were the result of capital’s unwillingness to become a mere beast of burden for the production process – which many Frankfurt theorists had tacitly assumed would happen. Capital’s reaction to its impending domestication set in motion a process of “de-democratising capitalism by de-economising democracy” (Entdemokratisierung des Kapitalismus vermittels Entökonomisierung der Demokratie). This ultimately brought about the specific and novel form of today’s crisis and its pseudo-remedies.

The rest, as they say, is history. In the second part, Steeck outlines how public debt rose with the neoliberal revolution, something mainstream economics and public choice quickly and falsely explained away as an instance of the “tragedy of the commons” with voters demanding too much from the state. However, the rise in debt came in fact with a curtailment of the power of democracy over the state and the economy. First, the good old “tax state” was ideologically restrained – starving the beast – and gradually found itself rendered a meek “debtor state” increasingly impervious to any remaining calls for redistribution by virtue of its objective impotence. Then, the resulting power shift to what Streeck calls the state’s “second constituency” – the creditor class, which asserts control over its stake in public debt and demands “bondholder value” – generated a standoff which Streeck observes between the conflicting demands of Staatsvolk und Marktvolk. The fact that the debtor state owes its subsistence less to contributions from the taxpaying “state people” and more to the trust of its creditor “market people” leads to a situation in which debtor states must continually credibly signal their prioritisation of creditors’ demands, even if it harms growth and welfare. Creditors, in their conflict with citizens, aim to secure fulfilment of their claims in the face of (potential) crises. The ultimate power balance remains unclear, but the “market people’s” trump card is that they can mobilise other states to fulfil their demands, leading to a kind of international financial diplomacy in their interest.

The archetype of such a transnational financial diplomacy, Streeck contends in the third and final part, is Europe under the Euro, where we encounter an even more wretched type: the “consolidation state”. Consolidation, Streeck argues, is a process of state re-structuring to better match the expectations of financial markets, and the consolidation state is a sort of perverse antithesis to the Keynesian state, acting in vain appeasement of the financial markets in hope of one day again being permitted to grow its economy. Its story begins with Friedrich Hayek, whose 1939 essay The Economic Conditions of Interstate Federalism Streeck presents as a strikingly accurate blueprint for the modern European Union, complete with references to the common market as assuring interstate peace. The European “liberalisation machine” slowly and successively reduced national-level capacity for discretionary intervention in markets; but it was European Monetary Union which ultimately rendered one of the last powerful (yet blunt) instruments available to states impracticable: currency devaluation. The resulting multi-level regime, a regime built on an unshakable belief in European “Durchregierbarkeit” (roughly: the capacity to govern Europe) and driven by a bureaucratic centre (or centres) increasingly well-insulated from democratic meddling, completes the actual European consolidation state of the early 21st century. Within this kind of hollowed-out supra-state individual countries have to fulfil their duties to pay before fulfilling any duties to protect, and recent “growth pacts” like Hollande’s are mere political showmanship. In the present framework even more substantial programmes would be likely to fail, Streeck argues with reference to Germany’s and Italy’s huge and hugely unsuccessful regional growth programmes. Stemming the decline of the southern Europe with transfer payments while adhering to monetary union with Germany is as much an impossibility as it is fuel for future discord.

Now, with tighter financial means, the cohesion of the Brussels bloc of states depends on hopes invested in neoliberal ‘structural adjustment’ with a parallel neutralisation of national democracies by supranational institutions and a targeted cultivation of local support through ‘modern’ middle classes and state apparatuses, who see their future in western European ways of business and life. Additional packages for structural reform, stimulus and growth from the centre are mainly of symbolic value, serving as discussion fodder for the greater public and for the mise-en-scène of summit decisions, as well as for politically and rhetorically absorbing whatever is left over of social democracy. Finally, puny as these may be financially, they can also be used to distribute loyalty premiums and patronage to local supporters: instruments of elite co-optation by doling out advantages in the Hayekisation process of European capitalism and its state system. (p. 203)

What can be done? It would be wrong to describe Streeck’s conclusions as optimistic. The capacity of populations or politicians to resist the imperatives of the consolidation state appears small, even where he argues that popular opposition is key, pointing to some rays of light in recent social movements. Streeck characterises present capitalist society as a “deeply divided and disorganised society, weakened by state repression and numbed by the products of a culture industry which Adorno could hardly have imagined even in his most pessimistic moments” (p. 217). It is furthermore politically held in check by a transnational plutocracy which has far greater sway over parliaments and parties than citizens. Given the likely failure of the consolidation state at restoring normality, we have thus arrived at a crossroads where capitalism and democracy must go their separate ways.

The likeliest outcome, as of today, would be the completion of the Hayekian social model with the dictatorship of a capitalist market economy protected against democratic correctives. Its legitimacy would depend on those who were once its Staatsvolk learning to accept market justice and social justice as one and the same thing, and understand themselves as part of one unified Marktvolk. Its stability would additionally require effective instruments to ensure that others, who do not want to accept this, can be ideologically marginalised, politically dis-organised and physically kept in check. […] The alternative to a capitalism without democracy would be democracy without capitalism, at least without capitalism as we know it. This would be the other utopia, contending with Hayek’s. But in contrast, this one wouldn’t be following the present historical trend, and rather would require its reversal. (p. 236)

Small acts of resistance, Streeck notes, can throw a spanner in the works, and the system is more vulnerable than it may appear; the Draghis and Bernankes still fear nothing more than social unrest. For Streeck, projects for democratising Europe, calls for which have recently gained momentum, can hardly work in a Europe of diverging interests. They would have to be implemented top-down, and furthermore have to succeed both amidst a deep (public) legitimacy crisis of Europe and against an already firmly embedded neoliberal programme with a decades-long head-start.

Streeck places his highest hopes in restoring options for currency devaluation via a kind of European Bretton Woods framework; “a blunt instrument – rough justice –, but from the perspective of social justice better than nothing” (p. 247). Indeed, a newly flexible currency regime would re-open some alternatives to so-called “internal devaluation” – nothing but a euphemism for already-euphemistic “structural adjustment” – and thereby permit a more heterogeneous political economy within Europe which could better match cultural differences (the book’s references to which sometimes seem to teeter on the edge of calls for national liberation). The Euro as a “frivolous experiment” needs to be undone, Streeck claims. But would that really mean a return to social justice? States like Great Britain or Switzerland hardly suggest a linkage, least of all an automatic one. Furthermore, declines in real wages from currency devaluation can mirror those of internal devaluation, merely with the difference of how politically expensive the process is (and it would still likely be central bankers, not democratic institutions, taking the decision). A return to national currencies looks like an all too easy way out, falling short of political-economic transformations for restoring some semblance of social justice to capitalism – let alone social justice as an alternative to capitalism.

Nonetheless, Streeck’s is a forceful argument in favour of preserving what vestiges remain of national sovereignty in face of capitalism’s attacks on democracy, as tools for gradually pushing back the transnational regime of market sovereignty. He concludes that the greatest threat to Western Europe today is not nationalism, but “Hayekian market liberalism” – whether the one could be the dialectical product of the other remains another question. Above all his analysis of capital as a collective player capable of acting with guile (Williamson) to ensure capitalism remains in its better interests – intellectual traces of Streeck’s days as a scholar of collective bargaining, perhaps – is clearly one of the most innovative approaches to understanding the class dimension of the political economy of the present crisis. His anatomy of the type of regime we increasingly have to deal with, the consolidation state moulded to address capital’s own legitimacy crisis yet sacrificing democratic legitimacy in the process, perhaps offers the most cogent picture of the present multi-level political economy of debt in Europe (and beyond). Taking back the consolidation state and re-appropriating democracy from capitalism’s clutches at the crossroads, of course, is a task beyond the reach of any book.

(*All quotations are the reviewer’s own translations from the German original.)

The Florange affair

6 Dec

As long-time observer of French politics Art Goldhammer has pointed out, there is little in the French government’s battle with the Indian steel magnate, Lakshmi Mittal, that makes sense. Uncertainty prevails over what deal the government has done with Mittal, what promises he may or may not have given, and what the future is for the Florange plant that is at the centre of the whole affair.

One thing that seems to be clear: there will be no forced nationalization of the plant, as argued for by France’s industry minister, Arnaud Montebourg. Well-known as a voice on the left of an otherwise rather centrist Socialist government, Montebourg has long championed the cause of “de-globalization”: a return to national protection and a more traditional national industrial policy of old. Montebourg plunged into the Mittal affair by criticizing publicly the Indian businessman, accusing him of not keeping his promises. His proposed solution – that gave much hope to the workers of the steel plant threatened with closure – was to force a nationalization of the plant. Mittal resisted, saying he was willing to let the government take over some of the plant but he wanted to retain those elements he thought could be profitable. At issue are two blast furnaces at Florange which Mittal argues are no longer worth keeping given the overcapacity of steel production in Europe. As demand for steel has fallen, so Mittal has been forced to rationalize production. Existing demand can be met by steel production in other sites, such as Dunkirk (read economist Elie Cohen on this here), leaving the Florange furnances without customers. As the government wasn’t ready to cough up the cash needed for a full nationalization, and many in the government were opposed to doing so, it made a deal with Mittal. Though Mittal committed himself to 180 million Euros of investment in cold steel processing at Florange, the issue of the blast furnaces remains unsolved. The government is claiming that it has saved the 629 jobs that were threatened but the unions don’t think Mittal will keep his word.

What is really at stake in this affair? In many ways, it seems distinctly French and confirms much of what The Economist wrote about France a few weeks ago in its special report on the country. Loud union reps camping out at the entrance to the site, vitriolic anti-capitalist rhetoric from leftwing ministers, behind-the-scene deals brokered between political and business interests: all evidence of the poor state of corporate France.

Beyond some of these clichés, two issues stand out. One is to do with Montebourg. His appointment as minister responsible for revitalizing French industry was surprising. As someone who harbours ambitions far grander than saving a few hundred jobs on the Franco-Luxembourg border, Montebourg could have been expected to resist the poisoned portfolio. It was obviously going to mean fighting a losing battle over unproductive sites like Florange and yet he accepted the job. What has been tested in the Florange affair is Montebourg’s representativeness. Does he stand for a strong current in French opinion and within the Socialist Party about a state-led route for industrial rejuvenation? Is it correct to see France as torn between its Colbertian instincts of old and a new recognition of the need for liberalisation and market-driven competitiveness? This is the kind of ideological battle The Economist likes but events over the last few days suggest something rather less dramatic is going on in France. Montebourg doesn’t seem to have his own industrial strategy but nor does the government. At the very least, strategies are about choices and priorities. What the government’s response over Florange has demonstrated is immobility and fright: unwilling to give up on the Florange workers and yet unable to place their intervention in this case within a wider plan for French industry. Montebourg appears as the fire-fighter in chief more than as a voice for an alternative French industrial strategy.

The second issue is about nationalization itself. Elie Cohen argues that the Florange affair is different from other recent instances of nationalization: General Motors in the US, Alstom in France. He is right to point to differences: there is little in common between Florange and the company-wide restructuring that resulted from the government takeover of General Motors. But he doesn’t mention the other obvious case of nationalization, that of banking and financial institutions. Via bail-outs, some of these have become the property of tax-payers. In all cases, this was evidence of massive strategic intervention by public actors to save a financial system they believed was on the rocks. Why is it that such interventions are free from the sense of helplessness and pointlessness that government involvement in failing manufacturing industries evokes for all observers?

Former Danish Prime Minister, Poul Rasmussen, an articulate European social democrat, once made the observation that many Western politicians appear unwilling to accept a shrinking of their country’s financial sector but they are willing to run down almost entirely their manufacturing sectors. He put this down to a deference elected representatives felt in the face of suave and sophisticated bankers. He perhaps exaggerated the point but it is certainly true that whilst government intervention to save failing industries appears to us anachronistic, intervention to prop up a tottering financial sector is seen as far-sighted and brave. This is surely as much about sentiment as it is an objective assessment. After all, a reason why the government couldn’t afford to nationalize Florange is that it still hasn’t paid off the debts incurred in saving its banks. These are the kinds of priorities the French government cannot articulate but they are nevertheless there in the background and structure government action over the mid to long term. There is no strategy there, but an underlying structure of interests and relations of power upon which French society rests.

A comment on Soros

18 Sep

For a long-time a bête noire amongst pro-Europeans because of his status as the financier that forced Britain out of the Exchange Rate Mechanism and thus cemented the UK’s outsider status in European monetary integration, George Soros has recently emerged as one of the most authoritative commentators on the ongoing Eurozone sovereign debt crisis. His most recent article in the New York Review of Books was one in a long line of alarmist but thoughtful interventions into the debate.

Soros’ main argument is that Germany needs to choose between either fully backing the Euro or leaving the Eurozone altogether. Lacking the will to act as paymaster, but determined to keep the Euro together, Germany has been accepting the bare minimum that is needed to keep the currency union together. According to Soros, this is a case of the cure being worse than the disease. By insisting on national responsibility for EU-incurred debts, Germany risks recasting the egalitarian European integration project around the twin poles of creditor and debtor. Debtors are pushed into deflationary traps as they struggle under debt burdens and national antagonisms deepen as debtor states survive on a Euro drip provided by miserly creditors. All in exchange for deep cuts in social protection and welfare.

The novelty of Soros’ argument lies in his claim that a German exit from the Euro would save rather than sink the currency. His reasoning is clear. When a debtor – like Greece – leaves the Euro, the benefits of a depreciating new currency are offset by the strangling effect of Euro-denominated debts rising dramatically in value. When a creditor like Germany leaves the Euro, however, the situation is different. The creditor, of course, faces a loss. But those remaining in the currency zone benefit enormously: depreciation of the Euro would bring competitiveness back to Eurozone members and the main political obstacle to further political integration –German obstructionism – would have disappeared. The Eurozone would be free to introduce key measures – debt mutualisation, for instance – that would exist were it not for Germany.

By blaming Germany, Soros’ argument appears as part of a more generalized anti-German sentiment popular all across Europe. In fact, Soros himself seems rather comfortable with the idea of a German-dominated Europe. He would just rather that Germany accept the responsibility that comes with empire. As he puts it, “imperial power can bring great benefits but it must be earned by looking after those who live under its aegis”. Soros’ advocacy of German paternalism is hardly a compelling vision. But his focus on the German origins of the crisis are welcome as they challenge the notion that profligate spending by Southern cone European governments is at the heart of the current mess. But there are limits to the blame game.

It is certainly the case that German banks and businesses benefitted from the introduction of the Euro. In particular, it meant that consumers in Southern Europe could – via public or private borrowing made possible by the low risk premiums brought about by monetary union – buy German exports. But it is also the case that in the late 1990s and early 2000s, Germany was – as The Economist put it – the “sick man of Europe”. The changes put in place by Chancellor Schroder were far from socially neutral: labour markets were liberalized and wages were frozen or cut in real terms. Only the Social Democrat’s hold over the trade unions made this possible. Germany underwent an internal devaluation with the burden of adjustment squarely pushed onto the German working class. It was in this period that Die Linke, a party to the left of the SPD, was created. The sentiment driving German caution in this crisis is thus a complex one. It certainly involves some miserliness and a good dose of anti-Southern prejudices. But it also includes an understandable fatigue on the part of German workers at having to bear the burden of adjustment. When we read that in recent weeks banks have been holding over 700 billion Euros in surplus liquidity at the ECB, it seems that there is ample room for some adjustment on the part of German capitalists.

Soros’ account of the crisis is also curiously Eurocentric. As someone aware of the global dimensions of the current economic and financial crisis, he chooses to focus on the unique features of Eurozone governance. Had the Eurozone been armed with a common treasury, and not just a European central bank, Soros suggests that there would have been no Eurozone crisis. Policy mistakes, tied to the short-sightedness of Eurozone policymakers, have caused the crisis. This is at best a partial explanation. Outside of the Eurozone, the British and US economy are struggling to exit a major economic downturn. The crisis itself – beginning with the Lehman Brother’s collapse – originated in the US. Popular mobilization against the inequalities that have build up in recent decades is not European either. It was unwise to create a common currency without institutions capable of exercising the required political discretion in a time of crisis. But the crisis is one of capitalism, not just of the Eurozone. Were the right institutional fixes to be introduced, we would still be faced with the twin problems of financialization and debt-financed growth. And endlessly replicating an export-based growth model raises the question of who will be the “market of last resort”? In focusing on the Eurozone, Soros misses the wider dimension of the crisis.

The Zombie Currency and the Fetters of Europe

4 Sep

Hobbes once said that money is the “Sanguification of the Commonwealth” Wherever it circulates, so it brings goods from those who produced them to those who need them, and in the process sustains the life of the body politic, the same way blood sustains the life of the body. If Hobbes was right, that is a bad sign for the euro. The euro was supposed to be the lifeblood of the European Union, circulating through and nourishing the political institutions of the Euro-Leviathan. Instead it is sucking the life out of it.

Part of the problem is that the euro was not just supposed to nourish existing institutions but conjure into being a set of institutions that had not yet been fully created. It was a political project through and through. It was supposed to compensate for the EU’s democratic deficit and confusion of powers: a kind of European version of post-Tiananmen China – economic vitality in the place of more democratic institutions. But, unlike China, the EU never went all the way to creating a highly coordinated, if undemocratic, Euro-Leviathan. What the euro promised was financial integration, macroeconomic stability, and technocratic peace. A common currency managed via European Central Bank monetary policy would bring borrowing costs down, given the implicit continental wide guarantee. This is exactly what happened at first. Sovereign debt yields converged rapidly, such that where Greek yields had been almost 25% in 1992 compared with German 7% yields, by the end of 2000, two years after the introduction of the euro, their yield were nearly the same. Credit flowed freely across borders, as did capital, consumer goods, and even labor.

But as we have seen over the past months, the background guarantee of supranational monetary support was not actually there, the Leviathan was a many-headed hydra, and the underlying economies diverged rather than converged. The ECB’s mandate is to control inflation not save banks or engage in fiscal transfers. There is no coordinated continental-wide fiscal policy. The responses to the recent crisis have been short-term, ad hoc moves, like the Long Term Refinancing Operations, in which the ECB loaned money to national banks to buy sovereign debt, in an attempt to keep yields low and increase liquidity.

The effect has been to extend the sclerotic features of the European political system into the economy, rather than to have that economy breathe life into the political institutions. Consider the following three facts, which together reveal just how rapidly the European economy has financially dis-integrated, even as the euro ghosts along preventing this dis-integration from becoming an economic reorganization:

  1. First, as everyone has noticed, sovereign debt yields have radically diverged to reflect not the strength of a continental economy with a coordinated economic policy, but rather dramatic differences in national economic potentiality. Germany is safe, France moderate, the PIIGS increasingly risky. (Note both the convergence from 1999-2009, and the rapid divergence from 2009 onwards. Graph from the ECB)

  1. Second, as Gillian Tett reported in May, cross-border private lending has seized up. An essential feature of eurozone financial integration had been the willingness of banks to make loans in one country backed by assets from another. Lending to Greek consumers were matched by German funds; lending to Spanish borrowers covered by French assets. Now, as Tett observes, “banks are increasingly reordering their European exposure along national lines…the fracture has already arrived for many banks’ risk management departments.”  Banks now demand that any loan to a particular country be backed by funding from that country. Where the economic strength of Germany thus facilitated borrowing, speanding and investment in weaker economies, it now subtracts from that same provision of credit. Given the economic contraction, Greece, Spain, Italy now have fewer good assets to put up against loans that now has to be backed nationally. This “asset-liability matching” is an indication that banks are already treating the european economies as breaking up, even if this break up is not registered at the level of different currencies able to register these different economic potentials. An April ECB report on financial disintegration notes that the standard deviation in interbank lending rates across countries has continued to grow and fluctuate wildly since 2009, and an August report confirms continuation of the trend in various financial markets: “the pricing of risk in the repo market…has become more dependent on the geographic origin of both the coutnerparty and the collateral, in particular when these stem from the same country.”
  1. Recently, the Financial Times reported corporations have had to seek financing from the corporate bond market, because bank loans are in short supply, and that the yields on corporate bonds are nationally divergent. According to the FT, “Interest rates paid by companies in the eurozone’s weaker economies have surged, highlighting the bloc’s fragmentation as the European Central Bank loses control of borrowing costs.” Further, this particular instance of fragmentation heavily favors large businesses that can sell bonds on corporate bond markets, and some countries have many more corporations with access to these markets than others. Money is going into already established avenues for investment, not new growth areas. Once again, financial markets are reflecting the fragmentation of the European economy.

In sum, diverging national bond yields, diverging bank loan structures, diverging corporate borrowing costs. The blood is running through the arteries of a foreign host.

The ECB is not so much keeping the euro alive as keeping it from dying. Public funding by the ECB is replacing private funding at the cost of sinking more and more money into going concerns, suppressing new avenues for investment. Banks are not lending to companies, they are investing in their own sovereign debt or parking cash back at the central bank. Major companies are sitting on cash hoards rather than investing.

The Euro is a zombie currency – a monetary undead, wandering around feeding off the flesh of living economic entities. Of course, there is an alternative to trying to goad skittish banks and bearish companies into investing. One could sequester savings and force investment through a massive, European wide investment plan. But that would require decapitating the zombie, or however else one finally kills the walking dead. The fetters of the EU political structure weigh too heavily on the economic forces of the Eurozone to allow such a radical act. There may be a European solution to the continent’s economic malaise, but it won’t come from the EU.

On the LIBOR scandal

17 Jul

A feature of economic crises is that they propel into the spotlight the more obscure parts of markets and of capitalism. The Eurozone crisis has made everyone roughly conversant about government bonds and sovereign debt. Acronyms like the EFSF and the EFSM, triple A ratings and CDSs (credit default swaps), are regularly bandied about. The BBC’s website now has a handy online dictionary, the crisis jargon-buster, that defines various economic terms, from base rates through to liquidity traps. The murky world of lenders of last resort and the practices of seignorage have also entered into public discussion. Most recently, it has been the turn of LIBOR, otherwise known as the London inter-bank offered rate.

LIBOR, as its name would suggest, is the rate at which banks in London lend to each other. It is determined as a kind of average of the different estimates given by the banks of how much they think they would need to pay by way of interest to borrow money. Those estimates are given daily and LIBOR is calculated for different kinds of loan instruments and in different currencies. Banks in a bad way and likely to pay more for their loans would be expected to submit higher estimates. Banks with solid balance sheets would submit lower estimates. One would expect LIBOR in good times of financial calm to be low and steady. One would expect it to rise in dangerous moments of finance crisis (see here for the late 2008 movements of LIBOR).

The scandal is based on the rather intuitive idea that given that banks are setting themselves the rate at which they have to borrow and lend, they have a strong incentive to fiddle those rates. The discussion underway at the moment has a strong whiff of the unreal about it. Complaints are made about the temptation to manipulate and the lack of honesty in setting LIBOR. But what else do we expect to see? Are we meant to be surprised that banks are not the best judge of their own financial health, a least when such judgements will have self-fulfilling knock-on effects for them? And that they should shy away from honestly communicating the state of their balance sheets to other competing banks within the City? Is it not obvious that banks in a bad way would tend to systematically propose rates that are lower than what their troubled loan book would suggest? At the very least, the indignation betrays a seriously naïve view of how markets work. It is also not surprising that the Bank of England should have been complicit in the manipulation of this inter-bank rate given its proximity to the government’s involvement in mopping up the massive losses made by British banks after the Lehman collapse. It was after all in the Bank of England’s interest to make it as easy as possible for British banks to have access to liquidity. Otherwise, claim Bank of England officials, the inter-bank loans market would have dried up altogether and brought some banks down with it.

Making sense of this kind of scandal needs more than a bout of shoulder-shrugging “well, what do you expect?” from cynics. It needs a strong done of realism about the nature of markets and of capitalism. Redirecting private accumulation towards public ends has always been a matter of political struggle and state coercion. Political control over economic activity did not happen by accident. The indignation we see today about the LIBOR scandal needs to be transformed into a political movement capable of articulating a vision that goes well beyond the myth of munificent and self-regulating markets.

Stat of the day

9 Jul

In an otherwise curious article critiquing traditional Keynesian policies, British peer – and Labour guru – Maurice Glasman writes that:

“Of the £1.3 trillion lent by banks in the British economy between 1997 and 2007, 84% was in mortgages and financial services”.

This clearly suggests a change in the function of the banking system in the UK: rather than lending in ways that contribute to large-scale capital and labour intensive projects, it has been the facilitator of a debt-dependent growth model.

Economists, stop talking like that for God’s sake!

10 Apr

Today, we publish a guest post by Ivan Manokha. Lecturer of international political economy at Sciences Po, Paris, and Vice Dean of the graduate school at Sciences Po, Manokha’s post unpicks the rarefied language with which economists speak of daily life and takes issue with the presumption of choice that is made in mainstream economic theory to explain people’s behaviour.

By Ivan Manokha

How is it that the unemployed are still able to consume? The answer is found on page 45 of Olivier Blanchard’s famous textbook on Macroeconomics. Their ‘consumption cycle’, argues Blanchard, carries on simply because in order to subsist they opt to ‘dissave’, i.e. spend the money that they have on their savings account. Saving in the good times thus nicely offsets dissaving in the bad times.

This kind of statement is symptomatic of a number of problems that characterize the science of Economics and which, I would argue, account in part for its failure to understand the current crisis and to come up with solutions to deal with it.

First, the statement of Blanchard is symptomatic of a total disconnect between the assumptions and models of economists and social reality. Indeed, in their world, rational individuals, even when they fall into the category of ‘liquidity constrained households’ (read:  the poor) always enjoy the liberty of arbitrating between employment and leisure. Unemployment is voluntary and those who do not have a job find themselves unemployed because they have arbitrated in favour of leisure (because, the argument of the Real Business Cycle theory goes, wages are currently not high enough and these rational individuals wait for the job market to become ‘tighter’ when they will accept to work). Well, I suggest they go and speak to all the existing jobless, whose number has increased dramatically since 2008, in order to find out why is it that they still choose leisure over employment.

Second, and even more importantly, there are no social antagonisms or conflicts in the dream world of Economics. Indeed, all Economics textbooks will tell you that there are people who have capital, there are those who have land, and there are those who do not have either of the two, but, don’t worry, they have … ‘human capital’. The inequality of possessions is thus rationalized away by the very categories used to describe social reality and is never itself explained. To be fair, the classical economists who came up with these assumptions felt that this state of affairs could not be left unexplained and tried to offer some justification. Adam Smith, for instance, stated that “more industrious and prudent persons, rather than spending the full produce of their labour, ‘saved’ part of it and gradually accumulated capital.” Out of these individual choices the social fabric of inequality was made. This was more fiction than fact but at least Smith was compelled to say something, an urge that is completely foreign to modern day Economics. Now, all these proprietors of different ‘factors of production’ – capital, land and ‘human capital’ – meet in the place of ‘freedom and opportunity’ and enter into an exchange relation from which they all benefit (they all ‘maximize their utility’). In other words, for lucky owners of ‘human capital’ there is no compulsion to look for employment in order to survive. They do so willingly because they will obtain a net gain from it.

There is one major obstacle to the functioning of the ‘invisible hand’ – the State. This structure does not act as economists might predict. Instead of simply providing for the security of private possessions of capital and land and concentrating on national defense,  it intervenes in the economy in order to ‘de-commodify’ certain things (e.g. health and education) and to establish certain rules for labour markets (minimum wage, conditions for making people redundant, etc.). There are also these damn unions because of which wages exceed ‘the market clearing wage’… As a result, we are told there is inefficiency and waste; state spending, given the fact that there is a limited amount of money in the economy, necessarily ‘crowds out’ private investment. We can guess that it is because of such ‘crowding out’ that big corporations like Apple are sitting on so much cash and are not investing it back into the economy… Fortunately for us, there is the current crisis which has exposed the fact that certain accounting identities are not in fact accounting identities at all. State spending in Greece went down 20% but did private investment go up by 20%?

It is time for Economists to realize that the absolute majority of the world’s population does not have a choice between leisure and work but is compelled to look for a job; that not all of those who do not find a job will be able to ‘dissave’; that when those lucky ones who are employed are told that they have to accept cuts in wages and benefits and that their contracts have to be changed to make their firing easier (that the labour market has to be made more ‘flexible’) there is a chance that they will go to the streets and rebel. The real world is not characterized by a harmony of interests but it is a world of inequality of possessions, of inequality of opportunity, of inequality of power. So long as our thinking continues to be dominated by the fiction of Economics, we will not be able to deal with the crisis.

Interview with Hillel Ticktin

5 Apr

Following up on last year’s Current Moment interviews, today we are publishing an interview with Hillel Ticktin, Emeritus Professor of Marxist Studies at the University of Glasgow. An internationally renowned Marxist scholar, Professor Ticktin co-founded in the early 1970s the journal Critique.  He has published numerous books and articles over the years. In 2010, Critique published a special issue on the current crisis to which Ticktin and others contributed.

Eurozone leaders are going on record saying that the worst of the sovereign debt crisis is over. Are they right to be so optimistic?

No. But then, the Eurozone country politicians are not going to tell the truth as to what they think, as it would spook the markets. Without growth, it will be impossible to solve the indebtedness problem, and Germany is insisting on harsh terms for giving loans, so harsh that there will be negative growth. This is clear in the case of Greece, where the newspapers are talking of the need for a future Third Bailout. But in reality it is highly likely that other countries will require further substantial loans. While Portugal will not be too much of a problem, a Spanish or Italian bailout cannot be financed on present Eurozone funds.

Yields have fallen on sovereign debt as the European Central Bank (ECB) has injected over 1 trillion Euros of liquidity into the European banking system in the form of longer-term refinancing operations. How has the crisis changed the ECB and has the ECB been the saviour of the situation?

The ECB has clearly put off the day when the crisis will have to be faced down. Banks have acquired sufficient liquidity to avoid problems and have invested money in their governmental bonds. The rational solution would have been the issuance of sufficient Eurobonds which would be used to fund the various countries involved. Since the Eurobonds would be backed by the successful Eurozone countries, investors will buy them. The ECB has produced a temporary measure but the amount of money involved is insufficient. Until the ECB can act as the Central Bank of an independent country in order to issue as much liquidity as it sees fit, and can help to issue Eurobonds, it is not fit for purpose.

The European approach has combined the backdoor provision of liquidity to its banking system with a frontdoor assault on government budget deficits and on national labour markets. What is your assessment of this approach overall?

Crazy. It is not really a European approach so much as a Conservative policy supported by the UK Conservative party, the Christian Democrats and Free Democrats in Germany, the Republican Party in the USA etc. It is not supported by the social democrats in France or Germany. Hollande has made that very clear. Of course in practice the social democrats do not live up to their promises, but they would ease the situation and might be pushed further by popular pressure. The question is why such a policy is being adopted at all, given that it cannot possibly work, and indeed is not working. It looks as if a section of the bourgeoisie has decided to take the opportunity to attack the working class so far that they would end up with a 19th century approach to social relations. That, in turn, would ultimately destroy the social democratic parties and replace them with revolutionary left wing parties. Whom the Gods would destroy they first make mad.

A feature of the politics of the Eurozone crisis has been the replacement of democratically-elected governments with technocrats. This occurred in both Italy and Greece. Does this signal a trend of some kind, that economic imperatives are being placed above political ones for instance? And does it suggest that European integration today is really about preserving the Euro?

This is an inevitable feature of the present. Once the majority of the population began to turn to the left, as in Greece, the capitalist system itself began to be threatened. The use of the army is not possible at the present time. Nor is a far right popular movement based on the so-called ‘middle class’, So they have had the ingenuity to invent a new undemocratic category of a non-political government,  which makes a mockery of the Parliamentary system.  This is much like the idea that US judges of the Supreme Court are above politics when they pronounce on political measures, even though they have been specifically appointed for political reasons. It does not fool the working class but people may be grateful that it is not worse. Since it will not work, there will have to be even more undemocratic solutions. In the UK during the Great Depression, there was a National Government. In effect a coalition of all the large parties. The fact is that the Parliamentary system was already cracking, so this is another stake in its heart.

There is no question that ‘economics is being placed above politics’. The only rational way to run a union with a common currency is to accept that the richer areas will help fund the poorer areas, in order both to help them catch up but also to maintain cohesion, based on principles of human rights. European countries usually accept such obligations, unless they accept that parts of their country will break away. After all, Germany taxed the West Germans to help the absorption of East Germany. Today, however, the ruling parties in Germany, the Netherlands and Finland appear to reject such an approach. The reason ultimately lies in the fear of instability in those countries. So, economics is not really being placed above politics, depending on one’s definitions of politics and economics. Instead one politics is replacing another. The reason is discussed in the answer to the next question.

Is there an alternative to this approach of national budgetary austerity combined with a pan-European fund intended to offset any threats to Europe’s banking system.

As the current approach is being widely applied and is widely distrusted, and can only fail, there has to be another alternative if humanity is to survive, whether in or out of the Eurozone.

We are in a downturn of depression proportions. The last Great Depression only ended with the World War. War, on that scale, is however, excluded at the present time. The only way out of the present impasse is for a rationally planned economic reconstructive process, with governments playing a leading role. As the ruling class supports small government and the extension of private enterprise, it will oppose any such move. On the contrary, it is afraid that any attempt to go for reflation with government participation will lead to a political upheaval. In my view, they are right that the population will demand increased economic and political participation under conditions of full employment. That is in effect the immediate alternative, which is why the ruling class wants to take the opportunity, instead, to achieve a defeat of the working class of epochal proportions. Looked at this way, the policy of austerity is a defensive measure to preserve capitalism. Seen this way the policy is not crazy but rational, even if its application is mad.

The future is not as apocalyptic as it might seem from that last sentence, since the most likely result for the present is that the austerity policy will be pulled back, even if only by social democrats. Growth will be low, poverty increasing and discontent rising. Ultimately there will be a denouement, but when is not yet clear.

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