04/25/2012 archive

RIP: 1904 – 2012

Count me among those who do not mourn the passing of the childish fantasy of Confidence Fairies and Invisible Bond Vigilanties.

British Economy Slips Back Into Recession

By JULIA WERDIGIER, The New York Times

Published: April 25, 2012

Britain slid back into recession in the first quarter of the year, according to official figures released Wednesday, undercutting the government’s argument that its austerity program was working.

The British economy shrank 0.2 percent in the first quarter after contracting 0.3 percent in the fourth quarter of last year, the Office for National Statistics said Wednesday.

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The weak economic data in Britain comes as the outlook for the euro zone economies is deteriorating. The economy of the 17-nation euro zone, Britain’s largest export market, shrank 0.3 percent in the last quarter of 2011 and the European Central Bank said the regional economy might contract 0.1 percent this year.

Double-dip recession a terrible blow for George Osborne

Larry Elliott, Economics Editor, The Guardian

Wednesday 25 April 2012 05.44 EDT

Double-dip recessions are extremely rare in the UK. It is quite common for the economy to falter during a recovery with one quarter of negative activity but you have to go back to the mid-1970s, when the first oil shock of 1973-74 was followed by stagflation in 1975, to find a genuine double-dip downturn.

In the past, even during the 1930s, recoveries have been well under way by now. This time, despite the massive stimulus that has been chucked at it, four years into the deepest depression of the post-war era Britain is going backwards.

Output is more than 4% below its peak in early 2008, living standards are falling and there is no sign whatsoever of the much-heralded rebalancing of the economy.

IT’S OFFICIAL: Keynes Was Right

By Henry Blodget, Daily Ticker, Yahoo Finance

Tue, Apr 24, 2012 7:22 AM EDT

The “austerity” idea, you’ll remember, was that the continent’s huge debt and deficit problem had ushered in a “crisis of confidence” and that, once business-people saw that governments were serious about debt reduction, they’d get confident and start spending again.

That hasn’t worked.

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In other words, based on the experience of the last five years, it seems that Keynes was right and the austerians are wrong.

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In the aftermath of a massive debt binge like the one we went on from 1980-2007, when the private sector collapses and then retreats to lick its wounds and deleverage, the best way to help the economy work its way out of its hole is for the government to spend like crazy.

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(L)et’s face it: Austerity doesn’t work.

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The reason austerity doesn’t work … is that, when the economy is already struggling, and you cut government spending, you also further damage the economy. And when you further damage the economy, you further reduce tax revenue, which has already been clobbered by the stumbling economy. And when you further reduce tax revenue, you increase the deficit and create the need for more austerity. And that even further clobbers the economy and tax revenue. And so on.

Basically, austerity puts you into a death spiral in which you keep trying to cut your way to prosperity, but all you end up doing is digging a bigger hole. And in the meantime, tens of millions of people are out of work, the economy is retrenching, and everything is generally miserable.

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Most of the debt mountain we’ve piled up is the result of what we did before the crisis, not after it. In the years leading up to 2007, our absurdly undisciplined leaders took a nice big budget surplus and then squandered it. And they created absurdly loose lending standards and encouraged the whole country to lever up and buy stuff we couldn’t afford. And they never said “no” to anything except tax increases, no matter what, and denied all the structural problems that were building up for decades.

And by 2007, they had put us in one hell of a hole.

And, given that, it seems reasonable to think that, as Krugman has long argued, one of the problems with the economy now is that the original stimulus just wasn’t big enough.

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Austerians love to point at the 1930s as “proof” that Keynes was wrong. Look at the huge “New Deal,” they say. Look at all those expensive public works projects. Look at all the spending the government did to try to get us out of the Great Depression, and it never really worked. What got us out of the Depression, the Austerians smugly observe, was World War 2.

But what was World War 2 if not an absolutely gigantic Keynesian stimulus?

The Federal deficit in World War 2 was massive–much bigger than any time during the Great Depression. And we built up a huge Federal debt load. And… we set the stage for two decades of amazing prosperity, in which we worked off those debts.

Europe’s elites feel the backlash

Ian Traynor, Europe Editor, The Guardian

Monday 23 April 2012 14.02 EDT

For over two years, the mainstream political elites of Europe have been battling to save the single currency, seeking its salvation in a German-scripted programme of austerity and legally enshrined fiscal rigour that curbs the budgetary sovereignty of elected governments.

In elections in France on Sunday, in the Royal Palace in The Hague on Monday, and on Wenceslas Square in Prague on Saturday, a democratic backlash appeared to be gathering critical mass as the economic prescriptions of the governing class collided with the street and the ballot box. The collision looks likely to bring down three European governments.

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The fall of Sarkozy, if confirmed, and the demise of the Rutte government after only 18 months in office add to the political wreckage littering the chancelleries of Europe.

In the past two years, as a direct result of the debt and deficit crisis, the governments of Ireland, Portugal, Spain, Greece, Finland, Slovakia, and Italy have fallen.

“A majority of voters are kicking out incumbents,” said Thomas Klau of the European Council on Foreign Relations, in Paris, and the author of a book on the euro.

Europe Begins to Wonder About Austerity: Are We Doing This Wrong?

By: Scarecrow, Firedog Lake

Tuesday April 24, 2012 12:17 pm

Could it be that Europe’s financial and political elites are finally coming to a “d’oh!” moment, when an unbroken string of policy failures and the simple logic of  “depression plus austerity = worse depression” finally begin to get through?

Half a dozen Euro nations are now officially in recessions, others nearly so, having accepted a common view that sustained austerity would breed confidence fairies that lead to growth and jobs.  Instead, they’ve seen minimal or negative growth over the last two quarters, while their populations are facing depression level unemployment and impoverishment that show few signs of improving. Few theories have ever been so thoroughly tested and so thoroughly failed.

The destructive consequences of imposing austerity – depressing government and/or private spending in the middle of a serious recession – were predictable from standard economics text books and repeatedly predicted by Paul Krugman and many others, all still ignored prophets in their own lands.

In America, despite clear world-wide evidence their theories are a disaster, deficit hysterics still permeate both parties, religiously in one party, foolishly in the other, and unforgivably among the White House political advisers.   (Why hasn’t a failing President with his reelection on the line fired this entire team?) Together, this ship of fools has effectively blocked all efforts to even examine the devastation wrought by state austerity measures and insufficient federal spending, worsened by flirtations with grand bargains, government shut downs and pending automatic spending cuts.   Unfortunately, in America there is no one on the ballot arguing for any meaningful remedies.

In Europe, however, political leaders are paying a price for their indifference to suffering and logic. The political/financial elites  insisted the confidence fairy would return as soon as they’d squeezed enough wealth out of the their own populations.  When the anemic patient got even weaker, they applied even more leeches.

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The public generally doesn’t know what the technical economic solutions are, and the media keeps telling them, falsely, there are no good alternatives, because the deficit hysterics still control a conversation disconnected from the reality staring them in the face.  But voters now know their elites don’t have a clue and don’t seem to care that the elite solutions fashioned mostly for banks and bond holders are worsening the human suffering without solving any underlying economic problems.

Herr Doktor Professor- I told you so!

The Big Wrong

April 25, 2012, 7:59 am

Recent election results in Europe seem to have raised consciousness in a way literally years of economic data couldn’t: the austerity doctrine that has ruled European policy is a big fat failure.

I could have told you that would happen, and sure enough, I did. Did I mention that after three years of dire warnings that the bond vigilantes are attacking, the interest rate on US 10-years remains below 2 percent?

It’s important to understand that what we’re seeing isn’t a failure of orthodox economics. Standard economics in this case – that is, economics based on what the profession has learned these past three generations, and for that matter on most textbooks – was the Keynesian position. The austerity thing was just invented out of thin air and a few dubious historical examples to serve the prejudices of the elite.

And now the results are in: Keynesians have been completely right, Austerians utterly wrong – at vast human cost.

I wish I could believe that this would really be enough for us to move on and consider what can be done, now that we know that the ideas behind recent policy were all wrong. But that’s wishful thinking, I suppose. Nobody ever admits that they were wrong, and Austerian ideas clearly have an emotional and political appeal that is resilient to any and all evidence.

The Unbearable Slowness of Internal Devaluation

April 25, 2012, 8:11 am

The euro area’s economic strategy, such as it is, rests on two pillars: confidence through austerity, and “internal devaluation”. You know how the first is going; what about the second?

For the uninitiated, internal devaluation means getting your wages and other costs to a competitive position, not by devaluing your currency, because you don’t have one, but by reducing wages relative to those of your trading partners. This is essential in the crisis countries, which all saw much more rapid inflation than the rest of Europe during the good years, and now need to reverse the process. When the euro was being created, the claim was that reforms would produce “flexible” labor markets, aka markets in which wages could easily fall as well as rise.

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What we see is that even in Ireland, which has made the most progress, wages have fallen only slightly. Since wages have risen in the rest of the euro area (that’s the bar labeled EA17), the actual internal devaluation is bigger – about 5 1/2 percent in Ireland’s case – but still only a fraction of what’s needed.

Oh, and Germany – which should be experiencing substantial internal revaluation, a rise in its relative costs – hasn’t.

Leveraging, Deleveraging, and Fiscal Policy

April 25, 2012, 8:26 am

It’s an awkward fact – for the fiscal responsibility types, anyway – that Spain and Ireland were running budget surpluses, not deficits, before the crisis. It was private borrowing, not public borrowing, that created the mess.

But, say some commenters, this was nonetheless malfeasance on the part of the authorities; they should have been running even bigger surpluses to offset the private credit bubble.

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But here’s my thought: do all the people who believe that it’s appropriate for governments to run big surpluses to offset rising private-sector leverage also believe that it’s appropriate to run big deficits to offset large-scale private deleveraging – which is what’s happening now? If not, why not? Why the asymmetry?

Cameron’s Remarkable Achievement

April 25, 2012, 10:07 am

When David Cameron became PM, and announced his austerity plans – buying completely into both the confidence fairy and the invisible bond vigilantes – many were the hosannas, from both sides of the Atlantic. Pundits here urged Obama to “do a Cameron”; Cameron and Osborne were the toast of Very Serious People everywhere.

Now Britain is officially in double-dip recession, and has achieved the remarkable feat of doing worse this time around than it did in the 1930s.

Britain is also unique in having chosen the Big Wrong freely, facing neither pressure from bond markets nor conditions imposed by Berlin and Frankfurt.

Now, the defense I hear from Cameron apologists is that the austerity mostly hasn’t even hit yet. But that’s really not much of a defense. Remember, the austerity was supposed to work by inspiring confidence; where’s the confidence? Basically, the expansionary aspect should already have kicked in; it’s all contraction from here.

Needless to say, Cameron and Osborne insist that they will not change course, which means that Britain will continue on a death spiral of self-defeating austerity.

“Punting the Pundits” is an Open Thread. It is a selection of editorials and opinions from around the news medium and the internet blogs. The intent is to provide a forum for your reactions and opinions, not just to the opinions presented, but to what ever you find important.

Thanks to ek hornbeck, click on the link and you can access all the past “Punting the Pundits”.

Wednesday is Ladies’ Day

Ilyse Hogue: An Unlikely Coalition in New York Pushes Cuomo on Public Finance

These words, uttered by Governor Andrew Cuomo at his State of the State address in January, could have been discounted as a rhetorical nod to a base issue by a Democratic governor a year into his four-year term. That’s the risk of a system where money in politics feels as pervasive as sand on the beach: its ubiquity creates a dangerous inertia that prevents citizens from seizing real opportunities for change. But thanks to a coalition of New Yorkers dedicated to elevating and actualizing Governor Cuomo’s pledge, this year could not only rewrite the rules in New York but also change the risk calculation on engagement for the entire country.

As the Supreme Court has chipped away at the protections in McCain-Feingold (a k a the Bi-Partisan Campaign Reform Act) and Citizens United has opened the flood gates to corporate money in the political system, the collective frustration has risen to an astonishing 83 percent of Americans who believe that there’s too much money in politics. But despite the rare across-the-board consensus, federal policy solutions have been at a standstill. The vicious cycle that gives rise to big-money candidates has produced overwhelmingly negative incentives to stepping out on government accountability. That gives wealthy and corporate interests a virtual lock on the status quo.

New York’s public finance legislation, if it comes to a vote in June, could be the beginning of the end of that dynamic, which is why it’s worth exploring the key elements that make this issue viable again.

Katrina vanden Heuvel: A vote for universal registration

I recently visited Russia, where a mild-mannered historian from the city of Astrakhan, Oleg Shein, is on a hunger strike protesting a stolen mayoral election he believes he won. But as Russia starves for free and fair elections, Republicans across the United States are starving our democracy – and too few have noticed. And their furious assault on voting rights is no less destructive to democracy than the vote-rigging we deplore in Russia.

Over the past year, Republican legislators in 34 states have proposed legislation that would drastically restrict voting for an estimated 5 million eligible voters. Seven states have passed laws requiring voters to show photo ID – which more than one in 10 Americans lacks – and dozens of others have eliminated early voting, disenfranchised ex-felons or limited the ability of civic organizations to register voters. The consequences are clear in Texas, for example, where you can now register to vote with a handgun license but not a college ID.

This is your morning Open Thread. Pour your favorite beverage and review the past and comment on the future.

Find the past “On This Day in History” here.

April 25 is the 115th day of the year (116th in leap years) in the Gregorian calendar. There are 250 days remaining until the end of the year.

On this day in 1859, ground broken is for Suez Canal

At Port Said, Egypt, ground is broken for the Suez Canal, an artificial waterway intended to stretch 101 miles across the isthmus of Suez and connect the Mediterranean and the Red seas. Ferdinand de Lesseps, the French diplomat who organized the colossal undertaking, delivered the pickax blow that inaugurated construction.

Artificial canals have been built on the Suez region, which connects the continents of Asia and Africa, since ancient times. Under the Ptolemaic rulers of Egypt, a channel connected the Bitter Lakes to the Red Sea, and a canal reached northward from Lake Timsah as far as the Nile River. These canals fell into disrepair or were intentionally destroyed for military reasons. As early as the 15th century, Europeans speculated about building a canal across the Suez, which would allow traders to sail from the Mediterranean to the Indian Ocean via the Red Sea, rather than having to sail the great distance around Africa’s Cape of Good Hope.

The Suez Canal, when first built, was 164 km (102 mi) long and 8 m (26 ft) deep. After multiple enlargements, the canal is 193.30 km (120.11 mi) long, 24 m (79 ft) deep, and 205 metres (673 ft) wide as of 2010. It consists of the northern access channel of 22 km/14 mi, the canal itself of 162.25 km/100.82 mi and of the southern access channel of 9 km/5.6 mi.

It is single-lane with passing places in Ballah By-Pass and in the Great Bitter Lake. It contains no locks; seawater flows freely through the canal. In general, the Canal north of the Bitter Lakes flows north in winter and south in summer. The current south of the lakes changes with the tide at Suez.

The canal is owned and maintained by the Suez Canal Authority (SCA) of the Arab Republic of Egypt. Under international treaty, it may be used “in time of war as in time of peace, by every vessel of commerce or of war, without distinction of flag.”

Construction by Suez Canal Company

In 1854 and 1856 Ferdinand de Lesseps obtained a concession from Sa’id Pasha, the Khedive of Egypt and Sudan, to create a company to construct a canal open to ships of all nations. The company was to operate the canal for 99 years from its opening. De Lesseps had used his friendly relationship with Sa’id, which he had developed while he was a French diplomat during the 1830s. As stipulated in the concessions, Lesseps convened the International Commission for the piercing of the isthmus of Suez (Commission Internationale pour le percement de l’isthme des Suez) consisting of thirteen experts from seven countries, among them McClean, President of the Institution of Civil Engineers in London, and again Negrelli, to examine the plans of Linant de Bellefonds and to advise on the feasibility of and on the best route for the canal. After surveys and analyses in Egypt and discussions in Paris on various aspects of the canal, where many of Negrelli’s ideas prevailed, the commission produced a final unanimous report in December 1856 containing a detailed description of the canal complete with plans and profiles. The Suez Canal Company (Compagnie Universelle du Canal Maritime de Suez) came into being on 15 December 1858 and work started on the shore of the future Port Said on April 25, 1859.

The excavation took some 10 years using forced labour (Corvée) of Egyptian workers during a certain period. Some sources estimate that over 30,000 people were working on the canal at any given period, that altogether more than 1.5 million people from various countries were employed, and that thousands of laborers died on the project.

The British government had opposed the project of the canal from the outset to its completion. As one of the diplomatic moves against the canal, it disapproved the use the slave labor of forced workers on the canal. The British Empire was the major global naval force and officially condemned the forced work and sent armed bedouins to start a revolt among workers. Involuntary labour on the project ceased, and the viceroy condemned the Corvée, halting the project.

Angered by the British opportunism, de Lesseps sent a letter to the British government remarking on the British lack of remorse a few years earlier when forced workers died in similar conditions building the British railway in Egypt.

Initially international opinion was skeptical and Suez Canal Company shares did not sell well overseas. Britain, the United States, Austria, and Russia did not buy any significant number of shares. All French shares were quickly sold in France

Not a lot of cable companies carry Al Jazeera TV, mine sure doesn’t.  This broadcast from yesterday takes a look at the fall out from this year’s Bahrain Grand Prix.

Can Formula One unite Bahrain?

We ask if the race the country’s rulers called a “force for good” has been a human rights and public relations disaster.

Al Jazeera TV

23 Apr 2012

Joining Inside Story with presenter Shakuntala Santhiran to discuss this are guests: Ali al-Aswad, a former Bahraini opposition MP and member of the al-Wefaq Party; Mahjoob Zweiri, an assistant professor in Contemporary History and Politics of the Middle East at Qatar University; and Fahad al-Binali, a media official for Bahrain’s Information Affairs Authority.

I’ve recently seen a commenter on one of my ‘usual suspect’ blogs describe Al Jazeera as just as much a slave to corporate interests as CNN, only they’re different corporations.  I think you know that my answer to the subtitle question is that it was BOTH a Human Rights AND Public Relations disaster.

“as opposed to looking backwards.”

Jon Corzine Is the Original George Zimmerman

Matt Taibbi, Rolling Stone

POSTED: April 24, 8:37 AM ET

Nobody disputes the fact that MF Global officials dipped into customer accounts and took over $1.6 billion of customer money. We not only know that company officials reached into customer accounts, we know they brazenly lied to bondholders, ratings agencies and investors about the firm’s financial condition (“MF Global’s capital and liquidity has never been stronger,” wrote the CFO of MF Global’s holding company, on the same day Moody’s downgraded it to junk status).

We even know that eighteen days before the firm went bust, company officers discussed how quickly to return money to customers, and even contemplated, in writing, the possibility of not returning the money right away.

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MF Global is different. This is not complicated at all. This is just stealing. You owe money, you don’t have the cash to cover it, and so you take money belonging to someone else to cover your debts. There’s no room at all here for an argument that this money was just lost due to a bad investment, an erroneous calculation based on someone’s poor understanding of a complex transaction, etc. It’s straight-up embezzlement.

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It’s incredible that people are offering as a defense the idea that a financial company could be so overwhelmed by transactions that it could just lose track of $1.6 billion. If you’re so terrible at managing money that you can honestly lose a billion dollars – especially after swearing up and down to the whole world that you were the right choice to manage the cherished millions and billions of scads of farmers, ranchers, and other investors – you should go to jail just for that, just on general principle.

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(T)hese people stole over a billion dollars, right out in the open, and nobody is doing anything about it. Instead, we get a lot of chin-scratching legislative hearings, and an almost academic-style public discussion about whether or not a crime even took place. If there aren’t arrests in this case soon, ordinary people will correctly deduce that it simply isn’t a crime to steal in America, if the thefts are executed with a computer by white people in suits.