Krugman Puts Europe on Suicide Watch

Princeton economist, New York Times columnist and Nobel laureate Paul Krugman wonders if Europe's political leadership has a death wish.

"The question then was whether this brave and effective action [of the European Central Bank] would be the start of a broader rethink, whether European leaders would use the breathing space the bank had created to reconsider the policies that brought matters to a head in the first place.

"But they didn’t. Instead, they doubled down on their failed policies and ideas. And it’s getting harder and harder to believe that anything will get them to change course. 

"Consider the state of affairs in Spain,  which is now the epicenter of the crisis. Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 percent, comparable to America at the depths of the Great Depression,  and the youth unemployment rate over 50 percent. This can’t go on — and the realization that it can’t go on is what is sending Spanish borrowing costs ever higher. 

 "...Nonetheless, the prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.

"This is, not to mince words, just insane. Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies even deeper into depression. And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs."

Krugman argues that if European leaders are to prevent continental economic suicide they have two choices - either scrap the Euro and restore the old national currencies, or keep the Euro bolstered by expansionary monetary policies accepting inevitable inflation and many years of agonizingly slow recovery.

"What we’re actually seeing, however, is complete inflexibility. In March, European leaders signed a fiscal pact that in effect locks in fiscal austerity as the response to any and all problems. Meanwhile, key officials at the central bank are making a point of emphasizing the bank’s willingness to raise rates at the slightest hint of higher inflation.

"So it’s hard to avoid a sense of despair. Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy — and their society — off a cliff. And the whole world will pay the price."

On Barack Obama, Europe is Anxiously Underwhelmed.

It's not just moderates and progressives in the United States who are losing faith in Barack Obama.  So are the Europeans.  Spiegel Online claims that Obama's indecision and weakness are a serious threat to the global economy.

America's president, as the political scientist Richard Neustadt once noted, may be the most powerful man in the world, but he has only one real power: the power of persuasion.

That's why US presidents are so keen to get in front of the TV cameras and address the nation from what Americans refer to as the "presidential pulpit." Barack Obama was back at the pulpit on Monday afternoon, as the world's stock exchanges plummeted.  "No matter what some agency may say, we've always been and always will be a triple-A country," asserted the president. It had taken Obama three days to make a statement on Standard & Poor's decision to strip the United States of its top credit rating. 

But Obama convinced no one. Even while the president was speaking, the Dow fell below 11,000 for the first time in nine months.

 ...The debate is transforming Obama's problem into one for the entire US. "Can America still lead?" asks Washington Post columnist E.J. Dionne Jr..  Millions of people around the world had hoped in vain that Obama "would restore the United States to a position of responsible global leadership," Dionne writes. "America's friends overseas know that the debt crisis was instigated by Obama's opponents. Yet they worry now about how strong Obama is, whether he will draw lines and if he can seize back the initiative."

Indeed, the rest of the world is displaying its uncertainty in a relatively open manner. Christine Lagarde, the new head of the International Monetary Fund, has warned that the fundamental belief in America's economic strength could be permanently undermined. Others can't resist showing schadenfreude. In a strongly worded editorial, Xinhua, China's state-run news agency, advised American leaders to show "some sense of global responsibility." Russian Prime Minister Vladimir Putin went even further, publicly accusing the US of "living like parasites off the global economy."

In a more ominous article, Spiegel Online  ponders whether the world is going bankrupt.

Muddling through, postponing, playing down -- the motto of the crisis managers on both sides of the Atlantic has sent alarm bells ringing in stock markets. Britain's Economist magazine is warning of a double-dip recession in the US, a second downturn just three years after the last one. Many economists have been pointing out that last week's panic resembled the fear that swept financial markets after the collapse of US investment bank Lehman Brothers in September 2008.

Then as now, banks stopped lending each money. Then as now, banks' cash deposits at the central bank doubled within days. The European Central Bank reacted by assuring banks of unlimited liquidity in the coming months. It was an emergency measure that led to short-term relief but sparked anxious questions among bankers and stock market players. How long can the central bank keep up its market-soothing liquidity operations before it finally loses its credibility, the most important asset of a central bank? Is the financial crisis about to escalate? And will the world then be bankrupt?

...The scale of new borrowing is less of a problem than the inability of governments to find a credible strategy for reducing their debts. In the US, the government and opposition have been locked in a dispute over whether the deficit should be removed through tax hikes or cuts in social spending. In Europe, the solvent governments of the northern countries are refusing to underwrite the debt of the struggling Mediterranean countries.

The West faces a dual crisis that has engulfed its most important political leaders. President Barack Obama has failed to mend a gaping rift in US society and to outmaneuver the conservative Tea Party rebels. In Europe, it has become more evident with each European Union summit that German Chancellor Angela Merkel, rather than being in control of the crisis, is being driven along by it.

The West hasn't been this weak since World War II, and never before has a crisis paralyzed Europe, America and Japan at the same time. The problems of the leading industrial nations aren't just sapping the political influence of the so-called Free World, they are also threatening the global economy.

IMF Chief Chimes In - High Prices, Joblessness Lead to "War Within" Nations

IMF head Dominique Strauss-Kahn warns a world economy beset by the twin scourges of high prices and joblessness could lead to trade protectionism and even war within nations.

Strauss-Kahn noted two "  dangerous"   imbalances that he said could sow the seeds of the next crisis.

The first was the unbalanced recovery across countries, as emerging nations grow much faster than developed economies and possibly overheat. The second was the social strains within countries with high unemployment and widening income gaps.

Over the next decade, 400 million young people would join the global labor force, posing a daunting challenge for governments, Strauss-Kahn added.

"  We face the prospect of a 'lost generation' of young people, destined to suffer their whole lives from worse unemployment and social conditions. Creating jobs must be a top priority not only in the advanced economies, but also in many poorer countries."

When will income inequality ever surface on the radar screens of our own mainstream parties?  Why is a guy who should know this stuff inside out, the Liberals' own Michael Ignatieff, not speaking out on this, not challenging the  prime minister?  We're not likely to see insurrection as witnessed spreading through the Middle East but income inequality is already excessive in Canada and takes a very real, tangible, and costly toll on our country and our future.

Stiglitz Counsels Stimulus, Not Austerity - Beware the "Confidence Fairy"

What is it about the Nobel Prize that makes economists think alike?   After all, Stephen Harper is an economist (sort of), he was never even nominated for a Nobel for his (non-existent) work in economics, and yet he sees the global economy and Canada's for that matter entirely differently than guys like Joe Stiglitz and Paul Krugman.

These Nobel Prize winning economists believe this is no time to introduce austerity budgets.  Krugman has been saying so in The New York Times for months.   Stiglitz is saying the same thing in today's Guardian:

The Keynesian policies in the aftermath of the Lehman Brothers bankruptcy were a triumph of economic theory. In Europe, the US and Asia, the stimulus packages worked. Those countries that had the largest (relative to the size of their economy) and best-designed packages did best. China, for instance,maintained growth at a rate in excess of 8%, despite a massive decline in exports. In the US the stimulus was both too small and poorly designed – 40% of it went on household tax cuts, which were known not to provide much bang for the buck – and yet unemployment was reduced from what it otherwise would have been – over 12% – to 10%.

Britain, and the world, cannot afford not to have another stimulus. We cannot afford austerity. In a better world, we might rightfully debate the size of the public sector. Even now there should be a debate about how government spends its money. But today cutbacks in spending will weaken Britain, and even worsen its long-term fiscal position relative to well-designed government spending.

There is a shortage of aggregate demand – the demand for goods and services that generates jobs. Cutbacks in government spending will mean lower output and higher unemployment, unless something else fills the gap. Monetary policy won't. Short-term interest rates can't go any lower, and quantitative easing is not likely to substantially reduce the long-term interest rates government pays – and is even less likely to lead to substantial increases either in consumption or investment. If only one country does it, it might hope to gain an advantage through the weakening of its currency; but if anything the US is more likely to succeed in weakening its currency against sterling through its aggressive quantitative easing, worsening Britain's trade position.

  cutbacks in investments in education, technology and infrastructure will be even more costly in future. For they will spell lower growth – and lower revenues. Indeed, higher unemployment itself, especially if it is persistent, will result in a deterioration of skills, in effect the destruction of human capital, a phenomena which Europe experienced in the eighties and which is called hysteresis.

 Matters may be even worse if consumers and investors realise this. Advocates of austerity believe that mystically, as the deficits come down, confidence in the economy will be restored and investment will boom. 


...Austerity converts downturns into recessions, recessions into depressions. The confidence fairy that the austerity advocates claim will appear never does, partly perhaps because the downturns mean that the deficit reductions are always smaller than was hoped.

...Critics say government won't spend the money well. To be sure, there will be waste – though not on the scale that the private sector in the US and Europe wasted money in the years before 2008. But even if money is not spent perfectly, if experience of the past is a guide to the future, the returns on government investments in education, technology and infrastructure are far higher than the government's cost of capital. 

Stiglitz is right.  Krugman is right.   But Stephen Harper and Jim Flaherty know better.  They know its best to gamble on the same conventional political wisdom that got the developed world in this hole in the first place.   Guys like Krugman and Stiglitz saw the global meltdown coming and warned anyone who would listen but so what?


The past couple of years have been less than stellar for the Parliament of Canada and not just the Tories.  Liberals have plenty to be ashamed of.   As the recession loomed and Harper prorogued Parliament, Ignatieff took it as an extended school holiday and devoted his time to writing an invaluable history of his mother's family.  

The Liberals had months in which they could have and should have been hammering out a stimulus initiative of their own, a package ready to present to the public when Parliament reconvened.   And so the Harvard schoolboy went back to school without his homework.  Harper unveiled his laughable, even pathetic stimulus budget and a woefully unprepared opposition could do little but back it, cloaking their incompetence by pompous nonsense about putting Harper "on probation."

Like the Americans, we handled the stimulus very poorly.  The lack of vision and leadership at the federal level, on both sides of the aisle, among every party was breathtaking.   Instead of identifying where we could get the best bang for the buck, how we could invest those deficits in assets - think education, think technology, think infrastructure - so as to reap a tangible, fiscal return for years or decades to come, our political parties offloaded that responsibility on provincial and municipal governments and tossed the rest away for home improvements.

Now, instead of taking the measure of the building global economic uncertainty and the rising prospect of both currency and trade wars, Mr. Ignatieff and his gang are using the deficit as a political football, hypocritically attacking Harper for the very spending they demanded and approved.  In taking this tack, instead of listening to wiser voices coming from people like Stiglitz and Krugman, the IgLibs are fueling Harper's drive for austerity when they ought to be attacking it.   One thing both Harper and Ignatieff have powerfully demonstrated over the past two years is that neither one of them is remotely fit to lead our country.

Is the West Fated to Follow Ireland?

The deal is done, maybe. Harper got his way as host of the G8/G20 summits when the member states pledged to halve their deficits by 2013. Let the slashing begin. So, what lies in store for the developed world plunged into this new, collective austerity? Ireland may show what's coming and, according to The New York Times, it's an awful lot of very long-term pain:

"...Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.

...Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent. Now, the Irish are being warned of more pain to come.

... Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.

...The budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3 percent of gross domestic product last year — worse than Greece. It continues to deteriorate. Drained of cash after an American-style housing boom went bust, Ireland has had to borrow billions; its once ultralow debt could rise to 77 percent of G.D.P. this year.

“Everybody’s feeling quite sick at what happened because things were going so well for Ireland,” said Patrick Honohan, the Irish central bank governor. “But we don’t have the flexibility to do a spending stimulus now. There’s no one who is even arguing for it.”

Mr. Honohan predicts growth could revive to a rate of about 3 percent by 2012. But that may be optimistic: Ireland, as one of the 16 nations in Europe that has adopted the euro as its common currency, is trying to shrink the deficit to 3 percent of G.D.P. by 2014, a commitment that could weaken its hopes for recovery.

Textbook austerity measures have failed Ireland and the markets are punishing the Irish for it. The best and brightest who flocked to Ireland during its halcyon "Celtic Tiger" days are packing their bags and leaving. Investor confidence in the country has plummeted in response to the austerity policy. Where the Irish government gambled that raising taxes and slashing government spending and programmes would restore investor confidence, it has actually backfired and the Irish people will be paying for that failed bet for years to come.

If this is where the West is heading, a "lost decade" perhaps, don't count on the status quo returning when its over. We may not bounce back, not entirely, not ever. When this finally ends the playing field may look much different than it ever has in our lifetimes. New dominant powers may emerge that dissolve the unipolar superpower world, America's, that has brought us all to the edge of this abyss.

It's going to take more than budget cuts to sort this out. If we're really coming back, we're going to have to give up our addictions. FIRE (finance,insurance,real estate) driven economies don't recover very well from recession/depressions. They're uniquely vulnerable to these collapses because they are, after all, mainly pushing paper. A car has a utilitarian value, a piece of paper has but the notional value assigned to it at any given time. Our addiction to notional wealth and bubble economics got the West into this mess and will not help us get out.

We're going to have to give up the culture of consumption inculcated during the Reagan era and return to what made the West both great and economically stable, a culture of production. Maybe that will mean the end or at least reining in of globalization and the reclaiming of trade sovereignty from the multinational corporate sector by the developed world. That will not be without its own pain, at least temporarily, but the long-term benefits more than justify it.

Some Americans in high places have become acutely aware of the fundamental damage that has been inflicted on their nation's economy by the demise of its manufacturing sector and the attendant devastation of America's middle class. What they have found, however, is that manufacturing, once lost through trade deals, won't come back on its own. You don't catch a lot of fish with an empty hook. You have to bait it. The bait has to be access to markets controlled through the exercise of sovereign tariff powers and other domestic supports. The very idea will send shudders through the ranks of globalized, free traders - the rentier class - but we've tried it their way and it has landed us where we are today.

Could Europe Tip the World Into Depression?

First Bush and then Obama fought America's economic meltdown by pouring money into the US economy. Most now believe they succeeded in downgrading a potential depression into a major recession as America begins the decadal challenge of tackling fiscal imbalances.

The European Union also got swept up in what became a global meltdown and, like the US, most European states went the financial "junk shot" route of pumping money into their economies. It wasn't enough, however, to salvage the weaker, more profligate EU members notably Greece (with Spain, Portugal and Ireland still waiting in the wings). Greece couldn't spend its way out of the mess, it simply couldn't raise the money, and so it teetered between being bailed out by the IMF or the European Union. Faced with the havoc an IMF bailout could cause the Euro, the EU reluctantly took on the burden of aiding Athens.

The Greek fiasco sent a shockwave throughout the capitals of Europe and a tide change in attitudes of how to respond to their financial problems. Now, instead of stimulus spending, Britain, Germany and others are reversing course and opting for austerity. Europe seems poised to repeat Japan's lost decade. From The Guardian:

...We're entering a long period of economic stagnation," said Guy Verhofstadt, the former Belgian prime minister who leads the Liberal caucus in the European parliament. "That will be the main problem for years. Europe is the new Japan."
To an extent it is the speed and suddenness of change in their governments' approach, as well as the effects on their pockets and job security, that has most worried Europeans.

Just a few months ago, before they had fully digested the implications of the Greek crisis, Europe's G20 nations remained, for the most part, wedded to Keynesian stimuli (maintaining government spending) as the way to nurture their economies back to growth. Olli Rehn, the European commissioner for economic and monetary affairs, admitted last Monday, at a meeting of EU finance ministers in Luxembourg, that the turnaround had been very abrupt
.
"One can feel the change of tone in the G20 from fiscal stimulus to fiscal exit, and our policies are an example of this," he said.

In [the UK], also, political leaders have changed tack with extraordinary speed as Gordon Brown has ceded control of policy to the Cameron-Clegg coalition. Before the election on 6 May, Brown regularly taunted Cameron, saying he was the only politician in Europe calling for cuts at this stage of the economic cycle. At his spring conference in March, Nick Clegg declared: "We think that merrily slashing now is an act of economic masochism. If anyone had to rely on our support, and we were involved in government, of course we would say no."

Now, citing Greece as the reason why everything has changed, Clegg is fully signed up to the Tory-Lib Dem coalition's initial £6.2bn of cuts for this year and embryonic plans for far worse to come. On Monday, when Cameron warned that the economy was in a far worse state than he had imagined, he felt able to say that he was now part of the international economic mainstream. "Almost every major country in the world is focusing on the need to cut their deficits," the prime minister said.

But to suggest there is international consensus is way wide of the mark. Across the Atlantic there is, in some quarters, dismay that EU governments are now taking action in direct contradiction to the approach that the G20 settled upon at the height of the global economic crisis.

Last week the message from the US Treasury department was clear: too much austerity, too fast, could damage the word's fragile economic recovery.

...The wrong message on deficits", thundered an editorial in the New York Times. The piece went on to point out: "The sudden fierce enthusiasm for fiscal austerity, especially among stronger economies, is likely to backfire, condemning Europe to years of stagnation or worse." The New York Times top columnist, Paul Krugman, who has won a Nobel prize for economics, took the same line. He has been a trenchant critic of a rush to austerity, believing that only government stimulus to boost consumer demand will pull the American – and global – economies out of the mire.

Krugman took to his blog to ram home the point. "The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered – specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs... not because the markets are currently demanding it, not because it will make any noticeable difference to their long-run fiscal prospects, but because we think that the markets might demand it (even though they shouldn't) some time in the future. Utter folly posing as wisdom. Incredible."

And what of Canada? Is Harper going to be our homegrown Angela Merkel, Canada's Swabian Housewife? Harper seems poised to sound the economic "all clear" and treat Canadians to the lash of austerity just like the panicked Europeans. Are we really immune to the global dimensions of what the Euros do? I doubt it. This may not be the time for deficit fighting in Canada. Then again, our "economist in chief" has bungled virtually every call since he slithered into power. Remember that the Prince of Darkness wasted no time slashing government revenues, defunding the government and leaving it vulnerable to global economic upheaval. This same guy didn't even see the meltdown coming until it was right on top of us. This clown prince then responded with a blatantly stupid "Pinata Budget" (supported, of course, by the Conservative-Lites) that squandered rather than invested government stimulus funds ensuring we'll be left with a massive debt and no commensurate returns when it comes time to pay it all back. So why would anyone assume that Wrong-Way Corrigan of 24 Sussex Drive has the remotest clue of how to bring Canada out of this recession? All this jerk knows how to do is drive us straight into the ditch.

It Ain't Over Til It's Over - Global Meltdown v. 2.0

Don't you hate it when the air raid siren goes and then the "all clear" goes and then, just when you get out of the bunker, the air raid siren goes again? Well that might just be the story of the global recession, the culmination of Reagan's "Age of Ruin."

The European Union has recently been warning its members to brace themselves for a possible "double dip" recession, a message that's now reverberating through the United States to boot. Robert Reich warns America may already be in the opening throes of another bout of recession:

...Retail sales in May took their biggest nose-dive in eight months, according to today's report from the Commerce Department. Remember: Consumers account for 70 percent of the nation's economic activity.
American Corporations are sitting on huge piles of cash but they're not investing, and they're creating only a measly number of new jobs. And they won't invest and create jobs until they know there are customers out there to buy what they sell.

For three decades, starting in the late 1970s, the biggest economic problem America faced on an ongoing basis was inflation. Demand always seemed to be on the verge of outrunning the productive capacity of the nation. The Fed had to be ready to raise interest rates to stop the party, as it did on several occasions.

During this era of inflation economics, it appeared that John Maynard Keynes - and his Depression-era concern about chronically inadequate demand — was dead. So-called "supply siders" told policy makers that if they cut taxes on corporations and the wealthy, they'd unleash a torrent of investment and innovation - thereby increasing the productive capacity of the nation. The benefits would trickle down to everyone else.

But the pendulum may now be swinging back to the earlier era in which demand always seems on the verge of trailing the nation's productive capacity. The biggest ongoing threats are chronic recession or even deflation, because consumers don't have enough money to what the economy is capable of selling at full or near-full employment. Despite gains in productivity, little has trickled down to America's middle class.

...Keynes prescribed two remedies - both of which are now necessary: Government spending to "prime the pump" and get businesses to invest and hire once again. And, as Keynes wrote, "measures for the redistribution of incomes in a way likely to raise the propensity to consume." Translated: Instead of big tax cuts for corporations and the rich, tax cuts and income supplements for the middle class.

Reich is absolutely right. The key to a successful, developed country lies in a healthy, robust middle class. A big, expansive middle class that embodies everyone from the trades to the professions and everyone in between. A strong middle class is the backbone of progressive democracy, national unity, a sound economy and social mobility. It is a strong middle class that keeps the door open to the less advantaged while also keeping open the door to the so-called "upper classes." And what happens when you shred the middle class? You wind up with today's United States of America.

France & Germany Lead World Out of Recession

France and Germany appear to have come through the recession. Both nations' economies grew, albeit only slightly, during the April-June quarter.

The banking systems in both countries took a real hit during the Made-In-America global meltdown. Canada's banks, by contrast, remained the strongest in the OECD, largely thanks to Liberal fiscal conservatism.

So ask yourself why France and Germany are bouncing back while we're still reeling. Maybe because we're joined at the hip to the US economy and we haven't cultivated the diversity in international markets that might soften the impact.

Remember Pierre Trudeau speaking about the mouse sleeping with the elephant?

And Nobody Saw It Coming?

Either Stephen Harper utterly failed to see this recession coming or, worse, he did see it but froze like a deer caught in the headlights. The extent to which governments throughout the West were seemingly caught unawares by this made-in-America meltdown utterly strains belief.

Some of us knew. I just stumbled across this passage I wrote on this blog in September, 2006 in a post entitled Deutschland Uber Alles - Again? -

"...Think about that. The United States, for all its prowess, is a lumbering debt machine. It sells to the world vastly less than it buys from the world, roughly half a trillion dollars a year worth. America doesn't make what its people want and what it does make isn't wanted anywhere else. What it doesn't buy from the world it borrows, another half trillion a year for the federal government alone and plenty more for state and municipal governments. Hey, somebody is lending the American public the vast sums they're borrowing too. Do you see a pattern here?

America does generate a lot of money that goes into investment, just not in the U.S. America invests it's money in other countries, places like China, where the returns are better. The trouble is that this is a telltale symptom of a country in decline. It's happened to all the grand empires in the past - Holland, Spain and Britain, each in turn. When you pump your wealth into growing somebody else's economy instead of your own it's just a matter of time.

The American economy is now driven by its housing market and even the World Bank fears the global consequences of a burst bubble there. This is a fascinating phenonmenon, a veritable Mardi Gras of indulgence fueled by cheap rates and tax deductible mortgage interest. Fully half of new mortgages in California are "interest only." At the same time, American homeowner equity levels have never been lower. Americans use the mortgage-interest deductibility to expand their purchasing power. They siphon the notional equity out of their homes to buy - well, to buy all those BMWs and Infinitys.

Canada, of course, is a net exporter to the U.S. We have a substantial and potentially dangerous balance of trade surplus with America which buys something in the order of 70 plus percent of our exports. Thanks to NAFTA, we're tied to the American economy as never before. What do the Europeans buy from us, maple syrup? Here, we're a lot like the U.S. Canada runs a very large balance of trade deficit with Europe. Our economic ties to the European Union are broken.

We have a balance of trade surplus thanks only to our natural resources and to America's insatiable appetite for our fossil fuels. Without that, where are we? That's a question you need to ponder for a while.

Economically, America is the luxury cruiser and we're the dinghy tied fast and floating merrily along behind. The trouble is the cruiser has sprung a lot of leaks and is taking on water. If it sinks, it's taking us down with it. Let's see: we know the big boat is shipping water and may well sink. What should we do? The obvious thing would be to cut the line or at least leave it tied very loosely so that we don't have to go down if the cruiser sinks. Does that make sense?"

I wrote that in September, 2006 but that wasn't the first time I'd spoken out against the obvious Ponzi scheme underway south of the border. I'm pointing this out not to suggest that I'm brilliant but to show that anyone, including Stephen Harper, who didn't see this runaway freight train coming down the track is/was either delusional or grossly incompetent.

To not see this meltdown coming you had to believe that it was actually possible to defy gravity. It was that obvious - even to a layman. So, why was nothing done to protect Canada against the consequences of the inevitable? Steve - over to you.

The New, New World Order

A very important skill in the 18th century was the ability to discern that point when the natives realized we white folks were only humans, just like them. That was always a decisive moment that forever altered social, political, economic and sometimes even military relationships. When a bunch of people think you're a god, a snap of the fingers or a barked command can produce wonderful results. When those people see you as just another mortal, not so much.

We're witnessing that shifting dynamic being played out again in the course of the global meltdown. In the postwar era, most of the Third World and developing world took its economic marching orders from those super bright white guys we call the West, especially the biggest and strongest and richest of those super bright white guys, the United States. And then along came the global meltdown and a look under the carpet where the US had swept its subprime mortgage derivatives and its credit default swaps. That was one of 'those moments' of awakening.

From The Guardian:

The run-up to the G-20 meeting has been interesting and colorful. President Lula Da Silva of Brazil declared that "this crisis was caused by the irrational behavior of white people with blue eyes, who before the crisis appeared to know everything and now demonstrate that they know nothing." His full remarks made it clear that he was not promoting biological race theories but calling attention to the injustice that the vast majority of the world, who happen to be both poor and non-white, should suffer for the greed and stupidity of a few. China also let loose with an uncharacteristic broadside against the United States, basically saying that we (the Chinese) have gotten our act together and are mobilizing massive resources internally to counter the downturn; now how about you clowns who made this mess step up to the plate, before we take more losses on your stinking treasury bonds? It was worded somewhat less rudely, but still a stunning departure from the "hide brilliance, cherish obscurity" motto that has guided Chinese foreign policy.

... U.S. leadership is taking an immediate hit because it was at the forefront in creating the current world recession. It's hard to believe that Nicolas Sarkozy won the presidency of France barely two years ago by promising to make French capitalism more like the American brand. The idea that the "American model" was superior in economic terms has been promoted for years by the European press even though the statistical evidence has always been weak or non-existent (e.g. France has a productivity level about the same as the United States). But from now on these ideas will be a much harder sell.

You really can't blame them for their anger. For decades 'we've' been using the International Monetary Fund like some sort of travelling Bible show for these 3rd Worlders, always ready to preach our gospel of fiscal responsibility and economic prudence which usually took the form of IMF loans in exchange for often painful compliance to our dictates. For a few million dollars here or there, barely more than shiny beads, we got to snap our fingers and bark commands just like the old days. We even got to restructure little nations' economies to conform to our own.

And then George Bush, the Republican Congress and the immortals of Wall Street had to go and bugger it all up. Now the Third World, which never really saw the Promised Land we said they'd reach by following our rules, is reeling from our wanton excesses and greed. Now the third and second-tier states are seeing they had jumped into the car with a drunk driver - us. They want out. They don't want to ride with us anymore. They're looking to park their trust with someone else, China perhaps.

Remember that neo-con outfit that brazenly called itself "The Project for The New American Century"? Those guys were so deranged as to believe that America really had the right to use its military superiority to thwart potential economic rivals. America was going to cruise through the 21st century as Number One and if you thought otherwise, they were going to whack you silly.

Then along came Afghanistan and along came Iraq and the world's illusions about America's military prowess were shattered on the streets of Fallujah and Baghdad. The quagmires that followed exposed America, left it looking plainly vulnerable, incapable of achieving victory by the application of brute force. That was the first mistake. Then came the US meltdown that triggered the global meltdown. That was the second mistake.

Suddenly it's become clear that America isn't going to just jump back up on its perch this time. From here on in it's going to be among us, no longer above us, an equal but no longer the 'first among equals' stature it had claimed going straight back to the days when Hitler was still winning WWII.

'The New American Century' has morphed into the 'Last Picture Show of American Superpowerdom.' It's sort of fitting in a way. We white guys, The West, have had a pretty good run these past two millenia or more going back to the Greeks and Romans, through the Middle Ages and into the rockstars of the Industrial Revolution where we really learned to throw our weight around. We got astonishingly good at sucking the wealth out of everybody else, taking for ourselves the lion's share of world resources to ensure our prosperity. We had a pretty good run while it lasted but we took far too much for granted. We blew it.

There's a new order emerging, one in which the West will no longer have exclusive control. It'll be a world in which the third-tier countries suddenly have options, new suitors vying for their loyalty. The funny thing is, this was all our own doing.

The Comeback of Karl Marx

Apparently Das Kapital has a new gaggle of admirers - in Britain anyway. According to The Independent, Karl Marx is all the rage in the business sections of British papers, even The Times.

[Marx] might also dispute the idea attributed to him, that slumps make the collapse of capitalism inevitable. Because while he said SLUMPS were inevitable, he also said the outcome wasn't inevitable at all, but depended on whether the poor allow the rich to make them pay for it.

http://www.independent.co.uk/opinion/commentators/mark-steel/mark-steel-so-karl-marx-was-right-after-all-1636864.html

CIA Now Briefing Obama on Global Meltdown

It's not just about terrorism or nuclear proliferation any more. Now the Central Intelligence Agency is also briefing president Obama on potentially dangerous fallout from the global financial meltdown. From McClatchey News:

The CIA this week began sending the White House a new classified daily briefing on the worldwide economic crisis, CIA Director Leon Panetta said Wednesday, underscoring growing concern that the global financial meltdown could topple governments or lead to sharp swerves in the foreign policies of hard-hit nations.

The report for President Barack Obama and other top officials, called the Economic Intelligence Brief, is an effort "to make sure that we aren't surprised by the implications of the worldwide economic crisis," Panetta said in his first meeting with reporters since being sworn in Feb. 13.
"It's beginning to have impacts not only in China and . . . countries throughout Europe," but also increasingly in Latin America, where there are fresh signs of economic instability, Panetta said. He specifically cited Argentina, Ecuador and Venezuela.

Great, with everything else destabilizing the world - climate change, overpopulation, fundamentalism, nuclear proliferation - now we get to add Wall Street to the mix.

http://www.mcclatchydc.com/251/story/62853.html

Where Did All The Money Go?

Just a year or two ago it seemed that everyone was flying high. Money was plentiful, interest rates were cheap. Today the $ signs are used as a measure of debts and deficits instead. So what happened, where did all that money go? If you're curious, check out this informative presentation from The Guardian:

http://www.guardian.co.uk/business/dan-roberts-on-business-blog/interactive/2009/jan/29/financial-pyramid

The notional value of all derivatives, including credit default swaps, is estimated as high as EIGHT HUNDRED AND SIXTY THREE TRILLION DOLLARS! Impossible, you say? Well, you're right and you're wrong. We've entered an era where fiction and reality have combined.

Take credit default swaps, for example. They're a recently decriminalized form of bogus insurance. The Wall Street house wanted to sell you derivatives - hodgepodge bundles of bits of countless mortgages. You wanted extra protection so, to cinch the sale, the Wall Street house sold you a side bet called a credit default swap. The Wall Street house was, for pennies on the dollar, promising to insure your investment.

Now here's the thing. Anyone in his right mind who looked at these mortgage derivatives and the associated credit default swaps would know the Wall Street houses never had the mountain of retained assets that would be needed to make good those credit default swap insurance policies.

All of a sudden you have both notional assets plus notional debt obligations. It's not a lot better than buying a billion dollar IOU from the bum begging on the street corner.

I still maintain that the global financial crisis would be manageable if all this notional debt was parcelled out of the equation and recognized as debt only to the value actually paid for these swaps, pennies on the dollar. These were assets that were worthless to begin with. Why should anyone, especially innocent tax payers footing the bill, recognize them for a dime more than that? In fact you could argue that they should just be declared null and void. The mind boggles.

Britain's Economic Ice Age

It's something every Canadian kid understands. Sure the water feels cold when you gingerly put a toe in but it's not until that water reaches the equator that you fully grasp just how cold, cold can truly be.

Brits seem to be getting the idea that they're just beginning to get immersed in the cold water, that they're going to get in a lot deeper and that water is going to get a lot higher before they ever see dry land again.

Like their American counterparts, the Brits got a bad case of dormophrenia or house madness. By some accounts, Britain's housing bubble was almost twice as inflated as America's and, like America, Britain became insanely dependent on and, hence, vulnerable to its financial sector as its economic engine of prosperity. Today the pound sterling tumbled to $1.36 US, its lowest point in 23 years and no one knows where the bottom will be found.

The Brit newspaper The Independent says it's time the Brown government, and all Britons for that matter, came clean:

Yes, the downturn is global. But it was the failure of Mr Brown as Chancellor to curb the excesses of our financial services sector in the boom years that lies at the root of our particular troubles. The liabilities of our stricken banking sector are more than four times the size of our national output. That is why the value of the pound is slumping so dramatically on international currency exchanges.

Foreign investors increasingly doubt the ability of British taxpayers to meet those liabilities if called upon to do so. David Cameron's prediction that Britain could be forced to turn to the International Monetary Fund for help looks extreme, but certainly not impossible.

...But the true root of this crisis was not excessive Government spending; it was the stupid lending and irresponsible risk-taking of our hubristic banks.

Stupid lending. Irresponsible risk taking? Does that sound familiar? Even poor Ireland is again, well, poor. The Celtic Tiger revolution that saw the Irish economy become the most open and vibrant in the European Union is crashing down. One account this past week predicted that Irish real estate could drop up to 80% in value before this is over.

Does anyone remember when Stephen Harper used to ridicule Canada as a Northern European-style welfare state that was punished by higher taxes and lower growth causing a lower standard of living than our enlightened, adventuresome neighbours to the south? Compared to the United States and England, Canada looked downright backward to Steve.

Canada is indeed lucky. We were backward with our banks, our entire financial sector for that matter. Successive Liberal governments resisted the financial sector's demands for permission to have their own Mardi Gras north of the 49th. We're also lucky that we remained such lowly hewers of wood and drawers of water with a hefty resource base that has and will do much to insulate us from the worst of the travails facing our Anglo-Saxon cousins.

Wedgwood Shattered

Wedgwood china, Waterford crystal and Royal Doulton porcelain are brands that are nothing short of iconic. They're also now in receivership or, as the Brits call it, "administration."

Waterford and Wedgwood merged in 1987 but the heavily indebted firm quickly fell victim to the global economic downturn. BBC business editor Robert Peston said the writing was on the wall:

"Waterford Wedgwood's collapse is a resonant event, that speaks of a noxious global squeeze on consumer spending. Almost everything that it manufactures is a nice-to-have rather than a must-have. And most of us are thinking twice about shelling out on nice-to-haves."

The receiver is optimistic that a buyer will be found to keep the companies in business.

In This Hour of Wrack and Ruin

It's remarkable when you think of it - ordinary, wage-earning taxpayers getting saddled with debt and more taxes so their government can borrow vast sums, the very medicine needed to heal the self-indulgence and greed of the rich and powerful.

While pondering a world in which logic, reason and just about everything else has been stood on its head I stumbled across RadioLiberty.com where I found posted these fascinating insights from the past:

"Since I entered politics, I have chiefly had men's views confided to me privately. Some of the biggest men in the United States, in the field of commerce and manufacture, are afraid of somebody, are afraid of something. They know that there is a power somewhere so organized, so subtle, so watchful, so interlocked, so complete, so pervasive, that they had better not speak above their breath when they speak in condemnation of it."Woodrow Wilson, The New Freedom, 1913

"The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson."President Roosevelt, Letter to Colonel House, November 1933.

"There is no such thing in America as an independent press. . . . There is not one of you who dare to write his honest opinions. . . . I am paid $150 a week for keeping my honest opinions out of the paper. . . . We are the jumping-jacks; they pull the strings and we dance. Our talents, our possibilities and our lives are all the property of other men. We are intellectual prostitutes."John Swinton, addressing a group of journalists, April 12, 1883.

And this timely warning from noneother than the great pamphleteer himself, Thomas Paine:

"These are the times that try men's souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph. What we obtain too cheap, we esteem too lightly; 'tis dearness only that gives everything its value. Heaven knows how to put a proper price upon its goods; and it would be strange indeed, if so celestial an article as Freedom should not be highly rated."

These passages and many more, plus the appropriate citations, can be found here:

http://www.radioliberty.com/nlsept04.html

Recipe for Success for G20 Summit

This may be one for the books - the very conservative Times of London hailing very liberal Nobel laureate economist Paul Krugman for praising British prime minister Gordon Brown.

As one of the foremost neo-Keynesian economists in the United States, Mr Krugman supports the need for pump-priming through either tax cuts or increased spending.

He is arguing for an economic boost US next year of around 4 per cent of GDP, or $600 billion, to help Americans through "the scariest crisis since the 1930s".

After meeting Brown for drinks in New York, Krugman praised the British PM, saying he'd make a great academic "if this prime minister thing doesn't work out." Krugman also said, while he's worked on globalization for a long time, even he was surprised at how closely the world's major economies have become coupled together.

In other words, thanks to globalization, when one of us gets the flu, we all get it. Yipee!

Meanwhile, The Guardian weighed in with its four-point recipe for success at the G20 Summit:

The benchmark of success for this meeting should be its progress towards four goals, one short-run and the rest longer-term. In the short term, all governments must acknowledge that these are extraordinary times demanding extraordinary measures: the slashing of interest rates and far more public spending. Otherwise a global recession will turn into a depression.
The other three objectives could be summed up as regulation, stability and governance. In the US and UK in particular, finance has been allowed to run wild. It now needs taming, with banks keeping money aside for rainy days, and tax havens clamped down upon. Instead of lecturing other leaders, Mr Brown would do well to wag his finger at those British banks he already owns part of, but still feels the need to keep at arm's length. Greater stability is also needed on financial exchanges, so that businesses are better able to make investment decisions without worrying about volatile currencies. Exchange rates need to be managed, and more taxes ought to be put on speculative transactions. Finally, the institutions that govern the world economy need to give more say to the global south. This is a big wishlist, but it could be bigger. And that will be the measure of this summit's success: its ability to think big.

Unfortunately, we've arrived at a world today where crises demand holistic responses. We can hope to patch up the worst leaks in the world economic hull but it'll be a patch job at best. If a truly global economy is going to survive, answers will also have to be found to a host of other destabilizing problems including global warming, pollution, and resource depletion. Even failing to find suitable replacement for fossil fuels could be enough to doom globalization. Its vulnerability reflects the fact that the global system was never designed to cope with these fundamental, even existential challenges. It was largely a free for all with few effective regulatory and monitoring mechanisms in place. That's how all those garbage derivative securities managed to infect economies around the world.

Global Meltdown Dissected

Governments around the world are throwing trillions of dollars into their financial sector industries in what increasingly appears to be a failed attempt to arrest the global economic meltdown.

We didn't hear much about it, but the Brits just came through with their very own, 500-billion pound rescue package (just over one trillion Cdn.) Like the trillion dollar American deal it doesn't seem to be curing the problems.

Last weekend, 60 Minutes introduced many of us to what might be the culprit, the real malignancy in the global markets - up to $60-trillion in scam insurance contracts called Credit Default Swaps used by the big financial houses to squeeze out the last drops of profit from selling the ticking time bombs we now know as ABCP, asset backed commercial paper, or derivatives made up of bundled good and bad mortgages.

In today's English paper, The Observer, Will Hutton argues that all the government bailouts won't work without tackling the Credit Default Swaps:

What needs to happen on top is an assault on the dark heart of the global financial system - the $55 trillion market in credit derivatives and, in particular, credit default swaps, the mechanisms routinely used to insure banks against losses on risky investments. This is a market more than twice the size of the combined GDP of the US, Japan and the EU. Until it is cleaned up and the toxic threat it poses is removed, the pandemic will continue. Even nationalised banks, and the countries standing behind them, could be overwhelmed by the scale of the losses now emerging.

This market in credit derivatives has grown explosively over the last decade largely in response to the $10 trillion market in securitised assets - the packaging up of income from a huge variety of sources (office rents, port charges, mortgage payments, sport stadiums) and its subsequent sale as a 'security' to be traded between banks.

Plainly, these securities are risky, so the markets invented a system of insurance. A buyer of a securitised bond can purchase what is in effect an insurance contract that will protect him or her against default - a credit default swap (CDS).

Their purpose was a market solution to make securitisation less risky; in fact, they make it more risky, as we are now witnessing. The collapse of Lehman Brothers - the refusal to bail it out has had cataclysmic consequences - means that it can no longer honour $110bn of bonds, nor $440bn of CDSs it had written. On Friday, the dud contracts were auctioned, with buyers paying a paltry eight cents for every dollar. Put another way, there is now a $414bn hole which somebody holding these contracts has to honour. And if your head is spinning now, add the three bust Icelandic banks. They can no longer honour more than $50bn of bonds, nor a mind-boggling $200bn of CDSs.

While every bank tries to pass the toxic parcel on to somebody else, the system has to find the money. So will compensation for the near valueless contracts and thus now uninsured debt ultimately be made - and by whom? And because nobody knows - not the regulators, banks or governments - who owns the swaps and whether they are credit-worthy, nobody can answer the question. Maybe holders of insurance policies will get the cash due to them, but will that weaken somebody else? The result - panic.

This is the ultra-dangerous downward vortex in which the system is locked. It is why share prices are plummeting. As recession deepens, there will be defaults on securitised bonds and the potential collapse of more banks outside the G7 ring-fence. Nobody knows what proportion of the $55 trillion of credit default contracts that have actually been written will be honoured and who might bear losses running into trillions of dollars.

One element of the necessary response is in the making - giving banks access to unlimited taxpayers' capital, guaranteeing interbank lending and pumping cash into the system. I suspect that only majority government control of the West's major banks will now stabilise matters. But that is not enough. The markets no longer believe in the financial market structures they have invented. As a result, the US Fed, the European Central Bank, the Bank of Japan and Bank of England must become not just lenders, but insurers of last resort, providing the insurance contracts that the markets have stopped. Governments must write CDSs themselves.

Most of those who should be leading the world's recovery are, politically speaking, numbered among the politically walking wounded or dead; either near the end of office like George Bush, in a fractious coalition like Angela Merkel, or leading a dysfunctional party like the weak Taro Aso of Japan.

For 30 years, greedy, callow, ignorant financiers, supported by no less callow politicians from all the political parties, have proclaimed the wonders of financial innovation and how proud we all should be of the City of London. The price tag for their behaviour is an economic calamity. We should never have bought such snake oil. The consolation in these dark times is that we never will again.

What I find most vexing about these Credit Default Swaps is that they were essentially fraudulent. McCain economic advisor Phil Gramm introduced and spearheaded the legislation allowing these contracts and preventing anyone from regulating them. By calling them "swaps" (they could just as easily have been called doorbells or mustard) instead of "insurance" they remained outside the purview of US regulators. And yet they were in every respect insurance contracts. What set them apart and has led to the crisis today is that they were unfunded obligations that were, themselves, traded as securities. Regulators make sure that insurance companies have enough assets to meet their obligations. No one required that for GDS's.

To my simple mind, selling what you know to be an insurance contract while knowing you have no means to satisfy your obligation is fraudulent. It's like me selling you my neighbour's car and pocketing the sale price. I can't deliver what I've promised - title to the car - because I don't have it.

Phil Gramm & company have unleashed an economic maelstrom on everyone and somebody has to atone. The US government in particular ought to be lining up all those good Republicans who perpetrated this fraud - the CEO's and the executives of these investment banks and insurance companies and securities houses - and they should be marched away in irons. Everyone who facilitated the perpetration of this, the greatest and most cataclysmic swindel in history, ought to be slung into a cell, stripped of every penny of assets and locked away forever. The lasting damage each of these kingpins has caused makes any serial killer look like a jaywalker.