Should We Expect Another Round Of Bailouts?

By Simon Johnson

In the wake of recent equity market declines, the clamor for bailouts of various kinds grows ever louder around the world.  Influential voices call for “leadership” from the US and Western Europe, and for policymakers in those countries to “get ahead of the curve”.  This is all code for a simple and familiar plea: Do something that will protect investors, particularly creditors who have lent a lot of money to banks and countries that now appear to be in serious difficulty.

But providing another round of unconditional creditor bailouts in this situation would be a mistake.  What we need is a combination of transparent losses where bad loans were made, combined with a ring fencing approach that protects sound governments and firms.  There is no sign yet that policymakers are willing to make that distinction clear.

The situation around the world is undeniably bad.  As Peter Boone and I argued in a Peterson Institute policy paper released a couple of weeks ago, Europe is most definitely “On the Brink” of a serious economic crisis that could involve widespread defaults or significant inflation or both.  At the same time, Bank of America shares this week fell to their lowest in 2 years; with other large banks under pressure, there is a legitimate fear of rerunning the parts of the financial crisis of 2008-09.

The Financial Stability Oversight Council’s recently released first annual report does not provide particularly up-to-date numbers, but most of the global warning lights that they discuss in Chapter 7 must now be flashing red.   As recently as 2008-09, there were three kinds of government support available to the US and European economies when such systemic financial trouble hit.  But all three traditional forms of bailout are now much harder to pull off.

First, over the past 30 years interest rate cuts and other forms of expansionary monetary policy became standard practice in the face of potential financial market disruption – this is the original meaning of the “Greenspan put”.  But short-term interest rates are already very low in the United States.  The European Central Bank (ECB) has room to cut rates – but both the ECB and the Federal Reserve fear that inflation may soon return.  Unlike fall 2008, they are reluctant to respond to the latest round of stock market declines with a dramatic easing of monetary policy. 

Second, after the initial monetary policy response in fall 2008, it was fiscal policy that took the lead in preventing global economic freefall – with significant attempts to provide countercyclical stimulus in the US, much of Western Europe, and China. 

Now the eurozone faces a series of fiscal crises (see my paper with Peter Boone).  Further stimulus is out of the question – the issue in Europe is who will do what kind of austerity and how fast.

The fiscal crisis in the US is more imagined than real.  The S&P downgrade of long-term US government debt sparked a massive sell-off – but not in government debt.  Investors around the world vote with their feet; they see US government assets as one of the safest available assets.  Still, further fiscal stimulus is most definitely not on the political table in Washington.

And even Chinese fiscal policy shows signs of tightening – as the authorities try to prevent any overheating that could accelerate inflation.

Third, in 2008-09, monetary and fiscal policies were complemented by government capital injections directly into US and European banks.  But these became harder to do under the Dodd-Frank financial reform legislation – unless there is a large-scale systemic approach, which would be very hard to get through this Congress.

The worst financial sector problems are in Europe.  But the recent banking stress tests there were completely unrealistic as they did not include default events that now appear inevitable.  To run one set of misleading stress tests (in 2010) might be considered excusable, to do this twice during the same crisis is unconscionable.  There is no coherent financial sector policy within the eurozone.

What are the policy options now?  The people in charge of European and US policy would clearly prefer to do nothing or postpone dealing with the underlying issues.  This is a bad idea as it puts markets in charge – and these markets are panicked.

The core to any feasible strategy must be bank capital.  As Anat Admati and her colleagues have been arguing, without sufficient capital large banks and other financial institutions are prone to failure – this is what spreads failure and panic far and wide (see this link for a recap).  The Basel III framework, negotiated just last year, is crumbling before our eyes; the failure to ensure sufficient capital is at the heart of the European meltdown – and why the pressure on US banks is mounting.

The Europeans have to decide, once and for all, which sovereigns will restructure their debts and which will be protected – to an unlimited degree – by the European Central Bank (again, my paper with Peter Boone has more details and proposals).   A full-scale bank recapitalization program is required, along with management changes at almost all major European financial institutions.

If the Europeans fail to get a grip on their economic situation, the FDIC will be pressed to use its Dodd-Frank resolution powers to take over and manage the unwinding of a major financial institution.  In that scenario, creditors are supposed to face losses that are transparent and clearly understood; the theory is that this will stabilize market expectations.  The FDIC has argued that it could have done this in the case of Lehman Brothers.  I have my doubts.

The Dodd-Frank reform process decided not to break up global megabanks, but rather to handle them under the FDIC’s resolution framework.  We’re about to find out if this was a good idea – or if we are just on the brink of more unconditional bailouts.

An edited version of this post appeared Thursday morning on the NYT.com’s Economix blog; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

46 thoughts on “Should We Expect Another Round Of Bailouts?”

  1. I’m trying to remember what Simon Johnson saw as the time to the next financial crisis in a discussion with Bill Moyers two or three years ago (in what might have been one of the last editions of the Bill Moyers Journal before Moyers retired). Certainly, Johnson predicted no more than ten years to the next crisis, but my recollection is that he said something like three to seven years. That’s just my recollection, but we can be sure of one thing — Barack Obama, Democrats and Republicans, despite weak public protestations to the contrary, have sent very clear substantive signals. Wall Street and megabank risk-taking, misconduct, and even criminality will be thoroughly underwritten by the United States government and, by extension, a willfully ignorant American populace.

    This all fits into what a growing number (including Paul Krugman and Nouriel Roubini . . . I don’t know about Messrs. Johnson and Kwak) have described as a large, perhaps the largest, transfer of wealth from labor to capital ever.

    My own few is that the phenomenon is even broader than that, encompassing economic and legal, even constitutional, features. A transfer of wealth and economic and political power from the general population to an increasingly rapacious class of American oligarchs is underway. My view unifies developments across the economic and political spectrum:
    – the Supreme Court’s creeping grant of the status of personhood to corporations,
    – the gross disparities in wealth and income (and all concomitant benefits, like health, education, longevity, etc.),
    – Bush and Obama attacks on civil liberties (including Habeus Corpus, Posse Comitatus, whistleblower protections, protections for journalists — the few who actually investigate US government misconduct),
    – the Democratic-Republican assault economic protections for elderly Americans.
    – the effective criminalization of poverty,
    – the cultural glorification of the New American Virtues — wealth, fame, good looks, longevity, fashion, etc.

    I do not like the “tipping point” terminology, but the trends that accelerated in the Reagan years (having arguably begun in the Carter years) and have continued through every president since may now crossed some threshold, an increasingly formal grant of power to a tiny percentage of elite Americans. Any new bailouts will only be part of larger developments.

  2. @ Hugh, ALWAYS great reading your posts, absolutely terrific.

    The patient died, flatlined, turned blue and stiff. Hello? You can inject funny money into these ZOMBIE BANKS from now until doomsday, all with the same outcome: the buying of slightly more time to deceive the world the patient is mending, but, alas, how do you heal a corpse?

    It’s over, fellas. The greedy bankers killed the thing, and there are no two ways around it.

  3. Bankrupt banks should be turned over to the bond holders they would hold the equity and dividends would be paid with profits when they return. Additional capital could be supplied by the governments in return for shares at fair market value to be sold for a profit later. The present share holders loose since they took the risk which paid in the past. This is not socialisim but capitalisim. This will not happen of course because the looses not the profits will be socialized.

    Mike

  4. Well, I have to say – Simon’s ahead of the curve. Let’s wait and see.

    Credit where it’s due though, the Bank of England gave a clear message to UK banks about this, back in December 2010, just before bonus season, so I know UK banks will be just fine:

    “The Bank of England sends a clear message to banks today to cut staff bonuses and share dividends so that they can bolster their capital cushions while maintaining lending to businesses and households.” The Bank highlighted that “potential issues from the eurozone crisis that could hurt UK banks even though they do not have large direct exposures to European sovereign debt. ….Against this backdrop it is in banks’ collective interest to build resilience gradually through retention of earnings, which would be boosted if banks restrain distribution of profits to equity holders and staff,” the report says.

    http://www.guardian.co.uk/business/2010/dec/17/bank-of-england-cut-bonuses-boost-capital

  5. “The FDIC will be pressed to use its Dodd-Frank powers to take over and manage the unwinding of a major financial institution.” Are you speaking of Citigroup?

  8. Many thanks for a clear, dispassionate explanation of what appears to be a confusing situation to most of us ‘civilians’.

    When the bailouts began in ’08, I remember calling one of my Senators, incredulous that firms like AIG and GMAC were feeding at the public trough. Now, I find myself just inured to it all.

    Of course, the bankers will continue to act like riverboat gamblers, and governments will print up whatever quantity of cash needed to make them appear solvent.

    This can only end in tears. I just hope it doesn’t end with the rise of yet another European dictator and another war.

  9. I was willing to go along with the first “bailout” as commercial paper was at a near standstill…but I was not willing to stick myself with the bill and the current administration has done just that…no further

  10. “A full-scale bank recapitalization program is required, along with management changes at almost all major European financial institutions.”

    Simon,

    I disagree; this “full-scale bank recapitalisation” you suggest will be nothing else but another bailout!

    Why would any private third party recapitalise any bank, if the bad debts (and any trailing Bad Bank) wouldn’t be taken over by who else but the tax-payer and how would you recapitalise and sort out e.g. the ECB, the Worst Bank next to the FED, I guess, sitting and whining on stacks or call it bombs of worthless PIIGS bonds?

    And, what you call “management changes” – I suggest you replace the “almost” by the term “all” and add a “complete” – is what James K. Galbreith put into simple words in March 2009 , already – nobody listened, the Banksters got bigger and even more successful, since:

    …as long as the old management is in place, there are no incentives to cooperate in the evaluation you need to make.

    There was clearly a systematic failure. But that does not mean there was no criminal energy around.

    When a bank is insolvent, the incentives for normal banking practice disappear. They become perverse.

    “Perverse” might sound inappropriate, but it hits the nail on the head of a trade that lost its function, purpose and dignity – ong ago.

    One more point: even bailing out the banks again would not take us anywhere if at the same time this EURO problem wouldn’t be solved. It is a Catch 22 situation; call it a Gordian knot which according to the myth needs one hard swing of a sword to cut it, only; but then there is the Dollar, the YEN, China, peak everything and anything.

    All in all it is going to be one long da.. hard touch down!

    Christian

  11. Woop, you are entirely wrong as a correner. The patient has been subduded financially because of the potential loss of the elite power structure, should the patient be revived. The patient is threatining world bankruptcy every time the elite chooses to make the wrong decisions, which has been occurring on a more frequent basis lately. I think these countries and people should reconize their losses and mistakes, rather than continuing them because they have so much invested, or because people will lose employment. The problem goes back to the elites ability to reconize their own mistakes, which they are committed to not doing at any cost. This is a side effect of negative real intertest rates, the patient sees the arrogance and hypocrisy of the situation. But the elites demand to be physically removed from the theature before they allow correct choices to be made.

  12. If Republican basturds in Congress can’t give fiscal policy for average taxpayers unemployed, then they don’t have money for bank bailouts. One more dollar for bank bailouts, and they are begging the common man to turn violent and potentially murderous near D.C. and their home state offices. If we have another bank bailout, then Republicans are begging to become background scenery for some crosshairs.

    That’s not a threat, and that is not encouragement. That is a fact of human nature when leaders show more interest to rich interests than the average man on the street. Ask Marie Antoinette about the September Massacres.

  13. Protecting creditors creates a special class of investor. One who can act with impunity and never bear a loss on their investments. It is exactly this reality that has, in part, been responsible for our present economic state and the creation of credit derivatives. The world has gorged on dodgy debt on the expectation that they would be protected and bail out. The government and private sector can no longer afford this “super investment class”. Investment without risk is a toxic mix the will end badly for us all.

  14. I’m not subsidizing Bruce Berkowitz and John Paulson, because they’re too damned dumb to read a balance sheet, learn what a repo is, or ignore shadow market credit!!!! EXCLAMATION MARK Or even subsidize Bruce Berkowitz and John Paulson when they become enablers for large banks to destroy this country with derivatives, destroy small shareholders trust with end of the financial quarter repos, or blowing crap up people’s skirts in specially held webcasts. It ain’t gonna happen!!!!!!!

  15. The government has been captured by the banksters, and all their efforts are to keep the phantom-financial-economy going. In the process we are a seeing a massive transfer (pillaging) of wealth from “the small people” to the uber-rich and their friends and accomplices Washington (D.C.) More bailouts — just more pillaging.

    That Simon can’t see outside of the phanton-financial-economy paradigm is expected. He is, after all, a banker.

    If you want “un-captured” thinking, you’re going to have to turn to people like Michael Hudson or Bill Still.

    We need to turn our attention away from propping up the financial system.

    We NEED debt destruction. Let the risk be born by the lender/creditors as it should be. Let the law suits and prosecutions begin: Of the people who misrepresented what they sold, and trustees, etc. who failed to do due diligence.

    We also desperately NEED the end of the debt-as-money paradigm.

  16. It is my understanding that American banks are sitting on $1.4 trillion in cash, ten percent of GDP. And yet they are not lending or performing the function of banks. This seems to belie the claim — though I have not read the paper yet — that the “core” of the problem is capital. The core seems to be the demand for credit is not robust enough to meet their standards for lending or repaying. Not difficult to understand, since their customers are unemployed, tapped out and burrowing in against uncertainty. The banks of all varieties are trying to hold on to their half of the ill-gotten paper gains and let the rest of the society, governments and households, take the hit. At the same time, they have no function in a depression society.

    Clearly, the robust demand for credit is for the social purposes of hiring people, rebuilding infrastructure and protecting against the looming climate catastrophe. Only when we get people working will the sovereign fiscal situation stabilize. It is time to close down the casinos, socialize investment and get on about our work.

  17. @btraven: “We NEED debt destruction. Let the risk be born by the lender/creditors as it should be. Let the law suits and prosecutions begin: Of the people who misrepresented what they sold, and trustees, etc. who failed to do due diligence.

    We also desperately NEED the end of the debt-as-money paradigm.”

    Thank you. You are right: a debt money system will always keep us in debt! Michael Hudson and Bill Still rule. Now: how to get the word out beyond the confines of this and a few other blogs?

    Can anyone reach Dylan Ratigan, who did that marvelous “Mad As Hell” rant last week?

  18. Yes, more bail outs (at least temporarily) for those with lobbying power…

    The financial asset class with the greatest market value and greatest global participation is the US debt instrument.

    Observe the weekly composite equity and debt charts.
    Equities are in the midst of a nonlinear collapse. US debt instruments
    are the recipients of that nonlinear collapse and are in nonlinear growth
    going to 150 year low interest rates.

    For fifty years western debt expansion has been offset by
    asset and wage inflation allowing further debt expansion. While there
    are natural saturation limits to this process, the world macroeconomy
    with the new Asian labor force participation has reached a
    supersaturation point of debt and wage dysequilibrium.

    50 years of entitlement promises – most disproportionally benefiting the financial and corporate industries who now go into the asset collapse laden with cash – have reelected Pavlovian politicians.

    There is now a defacto consensus among US
    (and eurobond) debt holders that austerity is needed to maintain the
    quality of US debt. Qualitatively further debt expansion which drives
    the real global economy is dead.

    The deceleration in global GDP will be nonlinear. France’s quarterly GDP is one of the canaries in the coal mine.

    Equities are undergoing exquisitely predictable Lammert quantitative
    fractal collapse. The daily fractal pattern for the first segment of the
    collapse is 3/8/4 of 6-8/5 days.

    Read more: http://curiouscapitalist.blogs.time.com/2011/08/12/help-ive-been-downgraded-by-sp/#ixzz1Uv4sa2ZN

  19. You know, I have made a lot of jokes about Alex Jones on different blogs. And I still think the guy spreads a lot of misinformation and things which could mislead people. For instance plugging the gold hoarding (which will do people little good in a real crisis) and hoarding well preserved food (maybe a month’s worth of canned might be good for natural disasters, but basically it’s tying your money into something you’ll never need). I put Alex Jones only like a half step above Glenn Beck who is an out and out nutjob and would probably have been institutionalized in a 1950s nutfarm had he come into adulthood in that era.

    But….and it is an important “but”, you will hear things on Jones show occasionally which makes you realize why blogging and radio, and “alternative” media is important (I respect old school newspapers still but I’m wandering off topic). Did any readers of this blog know Rick Perry was Al Gore’s 1988 presidential campaign manager in Texas???
    http://trailblazersblog.dallasnews.com/archives/2009/12/perry-blasts-former-buddy-al-g.html
    I highly doubt the corporate pansy hosting NBC’s “Meet The Press” will discuss this with whatever Republican allows the dope to shine his shoes this week.

    Fascinating how quickly these guys can change team jerseys eh??? I wonder how Rick Perry is going to answer that one when asked about it at a Republican debate.

  20. Economiester, are you a brit? You walk like one, sound like one, smell like one, and profit like one. Don’t forget, I’m an old irishman watching efficiency collapse.

  21. Should we expect another round of bailouts, the most excellent Simon asks his readers?

    But, of course. Anything to perpetuate the belief the world financial system hasn’t collapsed in impossible debt and worthless contracts, will be forthcoming. Helicopter Ben is making similar noises.

    Who’s paying for all the bad debts, all of the criminally fraudulent schemes, all of the rating agencies abusing their authority in deceiving the public? WORKERS all around the world are being forced to take the hit, for a bunch of rich con men scattered around the globe.

    Forget QE 3, forget the European stabilization fund, it’s time we send the bankers to Hell, where they rightfully belong, and from where their eternal destiny is written.

    And a Hat tip to STRIKING “verizon” workers, it’s them now, it’s all of us, soon.

  22. so basically *corporations* had to go zombie, also, destroying producers and production gains and manufacturing of any kind of life-sustaining products through rapid *unemployment* (how many MILLION in six months?) in order to hoard *cash* away from the banksters (AKA War Lords and Drug Lords) who handed USA taxpayer with the stick up note…you the stupid who don’t deserve a home, health through public infrastructure hygiene, food or air must pay for our *cheap* decade long WAR that we put on OUR credit card…?!

    all to stop Iran from going *nuclear*…? What? Neighboring *Asian labor force* a bunch of wusies?

    The fact that no one is even considering *recapitalizing* the banks by putting the stolen *cash* into the working classes’s bank accounts which fend the Ponzi-ists and all manner of *enronists* WILL CAUSE ENORMOUS SOCIAL VIOLENCE to erupt…

    without even trying, I found the cabal of INDIVIDUALS personally responsible for this insanity via wikipedia links! Of course, I knew the ORIGIN of their madness – a BOOK – but, still, it’s all there – including the big move among the banksters on – get this – September 11, 2000 hint, the bank that does *god’s work*…

    Socialize the losses, privatize the profits. Same TRUTH all these years later after BILLIONS of words spewed across all human communication channels 24/7 to try and pretend it was something other than a HEIST…

    Also true that WAR is the suspension of the rule of law and the current Supreme Court is proof of that.

    So, let’s set up the *ThunderDome* – get Tina Turner – or probably Kim Kardashian, huh? – to introduce the first combatants – TimmyG and AnnieD…

    I can take him – :-)

    Weapon of choice…?

    Paint Ball gun….

    Why? Loser has to pick up a shovel and start cleaning out 100 year old sewers in NYC….you KNOW it’s going to end up being sold as *volunteer public service* anyway – austerity and all that jazz….

    I keep trying to joke because that is the quickest way to strip power away from the DELUSIONAL…

    No one gave the INSANE permission to turn earth into a deeper circle of hell than it already was…by taking away our RIGHTS –

    RIGHTS we gave each other a LONG time ago in WESTERN CIVILIZATION – the RIGHT to make our lives LESS MISERABLE through honest work

    via the new *religion* – “…in the beginning there was *MONEY* and then came life…”

    NOT even the Supreme Court Justices have the RIGHT to do this – JUSTICE has always rested with what the MAJORITY agrees to as FAIR and, in 2011, SANE.

    Recapitalize OUR bank accounts…between 5 of us girls, it’s 2.5 million…that’s MY *prize* for paintballing TimmyG first….

  24. The answer to the title of the article is “yes”: With a gun to their heads, the Europeans will learn the virtues of printing money; a sprinkling of “haircuts” of bondholders will provide cover for the German politicians. The Americans are already on track for the biggest bail-out of capitalism to date; I refer to the bipartisan screwing of the Many by the joint Congressional committee and/or the U.S. Congress. Trashing Medicare will succor big Pharma and big Insurance; trashing Social Security will succor Wall Street in general; trashing environmental regulation will succor big Energy; trashing the remnants of the welfare state, including collective bargaining, will sow more fear and despair in U.S. have-not’s, rendering them even more compliant to capital’s demands for cutbacks and throwbacks. (Recall that no less an authority than Alan “Easy Al” Greenspan lauded the salutary effects of working-class fear . . . .) –And yes, once again nobody in power will heed Prof. Johnson’s ingenious plans to save the system from itself. (Whatever happened to that appoint-Elizabeth-Warren-just-to-promote-discussion thing?)

  25. @soloduff – perception is reality?

    ho hum

    nothing is going to happen other than what is already happening….so everything is super-cool….

  26. @ soloduff, according to an email I received recently from a progressive group, Elizabeth Warren has PUBLICLY stated she is considering a run for US Senate, contesting Scott Brown’s sea, in MASS

    This would be a positive development for us humans. Go Elizabeth, Go!!

  27. Yes. The banksters are in charge and any future bailouts would be for them. But the mantra persists
    and Simon’s language has gotten mushy.

    Here’s something on more mushy economic thinking and writing:

    “Epistemic Closure” at The New Yorker?

    Matt Welch | August 11, 2011

    How much do you want to bet that their median reader (let alone writer) is richer than ours?Many people are excited about Ryan Lizza’s New Yorker profile of Michele Bachmann, but while procrastinating before diving into the 9,000-word monster, I came across something of note in the same issue of the magazine (yes, that’s the cover on the right). Namely, a startling (and startlingly familiar) unanimity of opinion when it comes to economic policy. To wit:

    John Cassidy, in the lead comment:

    A political system that responded rationally to the country’s problems would be concentrating on creating jobs. Washington is moving in the opposite direction: toward austerity and job cuts. […]

    [T]he downgrade should not be allowed to distract attention from the unemployment crisis. What is needed, and what the system appears unable to deliver, is short-term action on jobs and credible long-term deficit reduction. About the best that can be said of the debt-ceiling agreement is that it doesn’t entail major spending cuts for this year or next. […]

    A substantive jobs bill is what’s called for, and the White House should send one to Congress as soon as possible after it returns from the summer recess.

    Good morning, grumpy pants!What sort of policies might make a real dent in unemployment? Providing subsidies to businesses that hire new workers is one. Extending extra tax cuts to firms that build new factories and offices is another. More radical ideas include investing in infrastructure projects, importing a version of the job-sharing scheme that Germany has used, and launching a national community-service program. Most of these things would involve the federal government’s borrowing and spending more money, but that, of course, is what governments are supposed to do in an economic downturn. […]

    The real barrier to a meaningful jobs program is not the markets or the ratings agencies but the G.O.P.

    James Surowiecki, in his “Financial Page” column:

    Even though the spending cuts are backloaded, so that the major ones are still more than a year away, they will likely hit precisely the kind of public spending—on infrastructure, basic research, and defense—from which corporate America reaps great, if often unacknowledged, benefits. More important, the debt-ceiling fight made clear that, even as the economy struggles to avoid recession, no help can be expected from Washington. President Obama may be talking about the need to create jobs, but, with the advocates of austerity in charge, it’s hard to see where support for any new government initiatives is going to come from. Indeed, it’s possible that Republicans will block the extension of unemployment-insurance benefits and of the current payroll-tax cut. That would deliver a significant hit to the economy next year. And the austerity advocates will also be emboldened in their attacks on the Federal Reserve, which they argue has been overly loose in its monetary policy (when in fact it’s been too tight). The economy needs strong doses of both fiscal and monetary policy. The debt deal makes it more likely that we’ll get neither.

    Move ahead!Ed “Slut” Schultz, MSNBC host, in a lunch-counter/regular-guy advertisement between the above two pieces:

    We don’t have a tax problem, we have a revenue problem. We’ve told American workers they’re not valuable anymore, that it’s better to do it overseas than it is right here. That’s wrong. We need to reinvest in people, reinvest in manufacturing. That’s how we’re going to turn our economy around.

    I put that last bit in for a laff, though the glove does fit.

    I don’t open up The New Yorker to agree with its economics, and I’m sure the feeling would be mutual. But what’s striking here is the absence of any engagement with the critique that we’ve already been dosing the economy with fiscal and monetary stimulus, we’ve already been pushing a “jobs, jobs, jobs, and jobs” agenda from Washington, and after three full years of this approach (which itself came after an eight-year federal spending binge whose multiplier effect can be scientifically calculated as bupkus), we have…the lowest labor-force participation since 1983.

    I understand the counter-arguments, on those occasions when people stir themselves to make them–bailout economics saved us from an unimaginable financial meltdown, the stimulus needed to be several times larger, the Great Credit Unwind is greater and unwindier than we thought. That’s why it’s important to, you know, engage those counter-arguments.

    But what we’ve largely seen on both the left and the great do-something center these past several days is not a willingness to persuade a skeptical nation, nor to grapple with the many inconvenient real-world after-effects of bailouts and stimuli, but rather a series of petulant declarations of allegedly settled economic facts, accompanied by some general stomping around and a crossing of the arms. To do this in one breath, then in the next condemn the Tea Party tendency as “ideological,” strikes me at minimum as being a little lacking on the self-awareness side.
    ——-
    Now, altho Simon has always been a tad more diplomatic, here’s the kind of straight thinking we
    need on the economy from a Brit comic, Pat Condell, who does these diatribes once every couple of month. Each is more brilliant than the last. He puts the “thinkers” to shame. This is about the British
    riots:

    We need to stop the political and economic doublespeak. …..Lady in Red

  28. You may call Pat Condell’s “analysis” straight thinking. I endured the entire video and found it to be yet another sad and pathetic example of how the rich think they are better in every possible way than the lower classes. By his rationale, we should just do the world a favor and wipe out the vast majority of those who have not grown up in a life of privilege and its attendant trappings.

    The line from his rant to support of a despot like Hitler is a short one indeed.

  29. I don’t know who this self-righteous prig happens to be in the above video, and don’t really want to know.
    He said police haven’t been allowed to do their jobs?

    Well, if an apparent ambush and murder of Mark Duggan by a special squad of British “law enforcement” is part of the “job”, then I would agree: why WOULD anyone want to be a British policeman?

    Another right wing crank, another waste of bandwidth. Besides, it ain’t about finance.

  30. @Anonymous: If, as you report, E. Warren is considering standing for the U.S. senate, I infer that Prof. Johnson’s appoint-E. Warren-to-stimulate-discussion nostrum has gone the way of his previous nostrums. As to Warren vs. Brown: Don’t include me in the ‘benefited’ humanity that you prophesy. The U.S. senate is nowadays “a place where good ideas go to die,” just like the Consumer Bureau set up by Warren, already eviscerated by weak regulations, malleable regulators and funding tied to the Congressional (read: corrupt) purse. The “reality” (your term) that counts is the class balance of political forces; a topic that featured strongly in what used to be called “political economy”; which was euthanized by modern professional economics, a.k.a. neoclassical economics, a temporizing claque of clueless hacks overpaid to broadcast the “perception” (your term) that capitalism is the best of all possible economic worlds, needing only a few cosmetic tweaks from academics such as your E. Warren and Prof. Johnson. –I don’t think so. Hasn’t quite panned out yet, now has it?

  31. I realize, I am over-commenting in this thread, but I can’t stop myself.

    I think some above commenters might think about using quotation marks when using other people’s words from print (New Yorker) or TV (Ed Schultz). People have a right to put right-wing comments on this blog, it adds diversity, color, and once in a blue moon (or a passing of Halley’s comet) Republicans might even add insight. But if nothing else, you might want to make it easier to decipher where others’ words end and your words begin (and vice versa). That’s something I think I learned somewhere around 5th grade.

    As far as Pat Condell—wow—where to start. You said Condell is a “comic”. Really??? I think you mean “commentator”. If he is a “comic” Condell has a morbid sense of humor, and a morbid view of life. Wow, and I thought I was the cynical grump. This guy Condell has me beat by miles.

    Ok, here is what I say—no we cannot call the violence and riots in Britain a good thing. It is a riot, violent, and does not qualify for the definition “protest”. Protests are justified, and non-violent. This was neither. Especially for a country renowned for its civilized and gentlemanly ways (at least since its very justified War against Nazi germany). It is a very embarrassing thing.

    But I would argue that there is only a very small relationship to the acceptance of welfare causing an individual to behave that way. My guess is there was a very large group (not only large in absolute numbers, but large as a % of welfare recipients) of welfare recipients who stayed peacefully inside their homes, probably just as scared or more scared than those working for their daily bread. More scared, because welfare recipients were more apt to live in those areas struck by violence or arson.

    What causes people to behave in random violence is bad parenting, bad social support structure, and lack of morals/values. I don’t think the receiving of welfare is related to someone’s values or morals. Should we call Jesus “immoral” because he asked Judas to carry around some money in a box??? Maybe Mr. Condell has the courage to make that charge. I do not.

    Republicans and ramblers like Mr. Condell would like to put welfare recipients and the violent rioters in one single lump. I guess if you can put two very separate groups (with a small amount of crossover) in one box it makes it easier to rationalize not giving them tax dollars, which is quite convenient for Republicans and bitter people like Mr. Condell. But that convenience doesn’t make it any less of a LIE.

  32. This little side road dedicated to British welfare recipients and the working poor that chose not to protest, and stayed at home quiet watching the madness on BBC.

    “I Sit and Look Out”

    I sit and look out upon all the sorrows of the world, and upon all
    oppression and shame,
    I hear secret convulsive sobs from young men at anguish with
    themselves, remorseful after deeds done,
    I see in low life the mother misused by her children, dying,
    neglected, gaunt, desperate,
    I see the wife misused by her husband, I see the treacherous seducer
    of young women,
    I mark the ranklings of jealousy and unrequited love attempted to be
    hid, I see these sights on the earth,
    I see the workings of battle, pestilence, tyranny, I see martyrs and
    prisoners,
    I observe a famine at sea, I observe the sailors casting lots who
    shall be kill’d to preserve the lives of the rest,
    I observe the slights and degradations cast by arrogant persons upon
    laborers, the poor, and upon negroes, and the like;
    All these–all the meanness and agony without end I sitting look out upon,
    See, hear, and am silent.
    —–a poem written by Walt Whitman

  33. Moses, thank you for your comments directed to that so-called “Lady” in Red.

    But thank you much more for the Walt Whitman poem.

    I guess the big question for all of us is, how much do we see and hear, and yet remain “silent” — regarding actually making a change? — as in “this isn’t good enough, and WE are going to do something BETTER. MUCH BETTER.”

  34. Uh ooh, Simon Johnson again relying on Admati’s theatrics to argue we are re-living 2008? Ha HA!! does anyone believe this joker anymore?

    Today in another article Johhny boy quotes, “Watch Bank of America in the weeks ahead for the
    next demonstration of what it means to be too big to fail.”

    Really? taken to astrology? or maybe a secret bird told you something that nobody knows? Afetr all you rely on Admati’s “research” where the central point is that Banks should have 30% capital because they are financial services firms because REITS have survived with a 30% capitalization!! Ha Ha!

    For some real, cutting edge research, read this:

    Click to access wp11-27.pdf

  36. @ Simon,

    Thank you for a most wonderfully informative post and link to your paper, “Europe on the Brink.” It reminds me of Gillian Tett’s warnings about the U.S. repo market which even with a truly functional central bank and political “union” still has risks.

    I might add again your post contrasts strongly with the puerile posts of your understudy, Kwak. After trying to dig out from under his “So What” post re the S&P downgrade, he finds that markets are not the stuff of Efficient Market Hypothesis. Oh really?

    Have you thought seriously about shedding this albatross, named Kwak? Or do you want to sing, “He ain’t heavy, he’s my brother…” for the rest of your days?

  39. “The situation around the world is undeniably bad.” Yes, it’s obviously the pause before hell breaks loose. Is the U.S. economy faring better than the European one in light of Euroland’s sovereign debt explosion? Hardly.
    ——————————————————
    “Despite a deepening global depression, establishment economists are in denial.”

    “Weakness and imbalances are extreme. American and European sovereign debt are overextended and troubled. “Anyone who thinks this gets contained (especially in Europe) slept through the last financial crisis after Lehman failed.”

    “In fact, a deepening global Depression just began. It’ll last years before ending, and cause grave harm to billions worldwide, not responsible for their leaders’ malfeasance, especially those domiciled on Wall Street, complicit with political puppets in Washington they own.”

    http://www.thepeoplesvoice.org/TPV3/Voices.php/2011/08/17/economic-end-times#more18542

  40. (1)
    Analysis of Financial Terrorism in America
    By David DeGraw, AmpedStatus Report

    http://ampedstatus.org/exclusive-analysis-of-financial-terrorism-in-america-over-1-million-deaths-annually-62-million-people-with-zero-net-worth-as-the-economic-elite-make-off-with-46-trillion/

    (2)
    Is the SEC Covering Up Wall Street Crimes?
    By Matt Taibbi
    August 17, 2011 8:00 AM ET

    http://www.rollingstone.com/politics/news/is-the-sec-covering-up-wall-street-crimes-20110817

    (3)
    Daylight Robbery, Meet Nighttime Robbery
    Naomi Klein
    August 16, 2011

    http://www.thenation.com/article/162809/daylight-robbery-meet-nighttime-robbery

    The question of “Bailouts” are now a “set-up” and is a matter of timing. By the time we get it at the macro-level/…we won’t get it at all at the micro level.

    For example: As things get worse for working people in the North East we find the Metropolitan construction unions (paid off?) supporting a doubling of the PATH rates to enter NYC. The prices are not only restrictive and meant to offset “other” debt created by massive expansion by another “too big to question” agency that brokers freedom of access to resources, but while the citizens abruptly complain the organized Union leaders are claiming that it will support jobs. The schism effect! Citizens divided and half of them asking for the pretty poison. Unions now working against common cause and supporting the apparatus and the hand that feeds them.

    Order from chaos; or chaos made to order? The manipulations are all in place and they are just playing out the sequences that will place the succession plan into action. Obama is a fraud leading a country whose economy is based upon fraud, with a narrative that legitimates the fraud and a crisis at every junction to justify our compliance, our “compromise” and our dumb-down complacency and capitulations to the power of the hour.

    And we get to read the tea leaves from the Greek Chorus!

  41. It is interesting to note that the “legitimation” of crisis reaction not only lends itself to a demand to pull back entitlements, but once again we are beginning to see the “narrative” of why “bailout” will be the talk of the town as speculative Mega-finance looks to flash crash and burn out the middle class investors with these market manipulations we are witnessing. Why is a restriction on “short selling” not even questioned as a tool to manage the markets? Why are hedge funds permitted to run their computer games against an unstable market that simply shifts wealth once again away from the middle class and gives the mass advantage to the vulture capital and big money transactions that float or crash the system to its decisive (and insider predictive) advantage?

    Now we have a growing middle class clamor for placing another bailout into the potent pot of delusional corrections. The Bank Tax or transaction tax gets no traffic and the idea of finally fishing “offshore” for tax cheating industrial waste is out of the question (what? rock the real boat??? Don’t even think of it…that’s the way the system works.

    While Dean Baker wrote a critique of the blown-up myth of “ratings” to push for long sought after destruction of the middle class “ENTITLEMENTS” programs for the working class (think tank anxiety for decades and Peter G. Peterson Foundation’s priority agenda that propagates a falsely premised but fear ridden “IOUSA” brain washing program …); it is fascinating that this same “crisis” also goes to service the upcoming potential idea of bailing out the revenue share of the progressively raped and plundered middle class investor (no real future there…without a bailout of course).

    Here’s the way Baker puts it about entitlements but keep in mind it also applies directly to the “stand-by” bailout narrative of saving grace!

    http://rwer.wordpress.com/2011/08/17/the-sp-downgrade-market-plunge-myth/
    The S&P downgrade market plunge myth

    August 17, 2011

    from Dean Baker
    “They are now setting the stage to have the Congressional “super-committee” produce a deal that will mean large cuts in both programs. The backdrop for these cuts is that the country is in crisis and that we have no choice. A central part of this story is that the stock market crashed last week in response to the Standard and Poor’s downgrade of U.S. government debt. The Wall Street crew and their allies in the media and Congress will tell the country that if we don’t have the cuts in Social Security and Medicare demanded by S&P then we run the risk of further downgrades. This raises the prospect of further market panics and the complete wreckage of the economy.”

  42. The SEC reportedly is “asking questions” to the S $ P, but anything the SEC can do is civil, in nature.

    What is needed is a FULL BLOWN criminal investigation into the activities of this company, possible criminal fraud, potential criminal collusion, and goodness only knows what plethora of sordid misdeeds are awaiting discovery.

    This S & P threat utterance of further downgrades, as Woych so nimbly points out, means more justifications for the austerity ghouls to degrade, destroy, and defeat the great social nets that have kept countless millions of Americans out of the gutters, and with a decent standard of health care, such as my 84 yr old mom.

    INVESTIGATE INVESTIGATE INVESTIGATE………the challenge here is not letting yet another a right wing corporation wreck civilized America. The ghost of FDR needs to infiltrate the soul of this administration, and carry it forward into the light of day. Grow a set, will ya?

  43. @WOOP! Ever since “WaterGate” the only thing we have not seen from the true “politically protection rackets” and supposed “Gate-keepers” for the public trust has been a truthful: INVESTI-GATE and the political economists as well as economists play a direct hand in this theatrical fallacy and culture of fraud.

    In Theatre there is an idea of a “fourth wall” which represents the imaginary wall between the performance and the audience. (There is also a 5th wall, somewhat equal to a “permeable membrane” of “shared experiences” and mutual consensus (or dissent) between critical analysis and creative performance). The idea of “suspended disbelief” exists at the 4th wall and that is where the American Public exists. This is reinforced with “cognitive dissonance” from our con-artist President who performs beautifully on the political stage. Meanwhile, the 5th wall of political arena gets convoluted with orchestrated premises and the wish fulfillment / fear mongering political constructivists who manage the narrative and set it all into print with the instrumentalists in media (all self serving).

    “Breaking the 4th Wall” is a media game of credibility and it is supposed to convince us that people like Rupert Murdoch and the “Free” market of media watchdogs are going to frame attention against corruption and fraud and discovery process at large in the system. Breaking the 5th wall is academia. Case closed. it doesn’t serve us it serves itself (Economics included for the most part but there are good works out there if you search for an unpopular realistic truth). But “light of day” is not really on the horizon. Manipulated selective attention rules; cognitive dissonance are the tools, and wishful thinking is a membership among fools.

    As POGO put it: “We have met the enemy; and he is us.”

  44. Woop: Hope this addndum to above is useful:
    A basic perspective worth noting: Theoretically this is old hat “legitimation crisis” as espoused by Habermas as a major socio-political theory of the public arena. Specifically, it seems to be a well practices methodology under “chaos” and opportunity in the pragmatists and “realist” camps of “seize and capture” of financing the real politik of action and reactive status rank and power. In any case, here’s Dean Baker with a very substantial yet all too obvious (even boring?) truth to the political class dynamic:

    http://rwer.wordpress.com/2011/08/17/the-sp-downgrade-market-plunge-myth/
    The S&P downgrade market plunge myth
    August 17, 2011

    Excerpt from Dean Baker:

    “Needless to say, those pushing for cuts in Social Security and Medicare will freely use the story of the downgrade market plunge to advance their agenda without fear of ridicule from the media. As a result, we can expect a continual parade of public figures saying that we need big cuts in these programs in order to prevent another market crash and economic collapse.

    If these programs are to be protected, it is essential that the public provide the missing ridicule. Any politician who has so little understanding of financial markets and the economy to blame the stock market plunge on the downgrade should not be involved in designing economic policy. Any reporter or columnist who makes such a connection should be in a different line of work.” [end Quote}

  45. An economy built on debt must include liberal debtor bankruptcy if it is to keep growing. Creditor bailouts won’t do it. That should be clear enough by now. Bailout the debtors, and the creditors can get back to their sordid business in peace and prosperity.
    The Jubilee is a very old and sound economic theory. Never put into practice because it’s just too egalitarian. Nobody wants the undeserving neighbor to benefit. Much better to all go down together than take the chance on that neighbor getting more than I deserve.
    The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was as predictive of the current state of affairs as anything that has happened in the past 15 years.

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