This week, Reinhart and Rogoff gave a non-walkback walkback of their debt research somewhat reminiscent of Michael Ignatieff’s apology for supporting the war. Roughly ‘but my opponents are still even more wrong!’ In RR’s case, just plug in “ultra-Keynesians” for Ignatieff’s anti-war “academics and commentators” and you get, in fewer and less tortured sentences, the same thing.
Meanwhile, the reality of austerity continues unfold. This week, James Meek reports in the LRB on the consequences of the Cyprus ‘bail-in.’ Turns out, unsurprisingly, that evil Russian oligarchs were not the only ones who got screwed, and that they were another bogeyman trotted out in the European attempt to refuse collective solutions to a systemic problem. Though he doesn’t provide us general numbers, Meek notes that many depositors with more than 100,000 euros in Cypriot banks were retirees who had to live off the interest, not high-flying spenders. Moreover, the key thing about the strategy for dealing with the Cyprus was that it localized the solution.
“Was there anything else the IMF and the Northern Europeans could have done? Yes; they could have rescued the Cypriot banks directly, from pooled European funds, as a trial of what is due to happen in future Eurozone bank emergencies. That would have got Cyprus off the hook. But there was never the will in Northern Europe to do this.”
Meek is referring to the proposed banking union, which would give the ECB power to resolve bad banks directly. The proposal is stalled for a number of reasons, including the status of so-called ‘legacy assets,’ or toxic assets – like the loads of mortgage-backed securities that banks took on during the bubble – currently on bank balance sheets.
Meek’s piece is worth the read just for the reporting alone, and especially for some of the pieces it adds to the puzzle of the Cypriot financial system, but largely for the reminder that the European strategy remains ostrich-like. Each banking system – Portuguese, Spanish, Greek, Irish, Icelandic, Cypriot, not to mention French, German, and Dutch – is being treated as if it were non-systemic, in either its origins or ongoing effects. The world of finance loves the public health metaphor of ‘contagion’ but this time their metaphors are the opposite – it is as if each country has a different, local disease that the in-house doctors can treat on their own. It’s true that everyone has a bad case of austeritis, and, as TCM editor Alex Gourevitch noted last week, austerity fatigue is increasing. In fact, at this point, austerity is seeming less like a recipe for resolving the crisis and more like an attempt to kick the can down the road. After all, the one thing Meek doesn’t point out is that nobody has enough money to bail out existing European banks. They are, as Mark Blyth reminds us in his new austerity book, “too big to bail.” What good is a banking union if it will cost so much to bail out all the bad banks? At the very least, the pain of even less radical solutions, like systematic financial repression, will be severe and will run its own major risks. Austerity and the attempt to localize the problem isn’t just a product of German cussedness or ECB ordoliberal ideology. It is a displacement exercise. Europe’s current rulers simply have no answers to the problems they have created, and don’t want responsibility for the risks of changing their dead-end course.