No sense and nonsense – the European, UK and US decline

 EmailPrint This Post Print This Post

This post is a guest contribution by Paul Sandison *

The European sickness
Well, well. Last week was quite a historical week. So, Christian Noyer, member of the governing council of the European Central Bank (ECB), has apparently:

“criticized the so-called ‘Bad Bank’ plan, which would take troubled assets off the balance sheets of financial institutions, arguing that such a model is difficult to implement and not necessary in France.”

What will he soon say when French farmers cannot sell their apples, and French factories cannot sell their cars and trains and nuclear power? He may as well have said ‘If the people are hungry let them eat cake’. Noyer’s statement is the appalling result when central bankers, out of touch with business realities and the man in the street, jump into the political vacuum left by the abdicating actions of the incompetent European Heads of State.

Then in the same week on 5 March 2009, with European companies folding like nine pins due to an interest rate which should have been lowered six months ago, we have his colleague and Chairman of the same council of the ECB, Jean-Claude Trichet, locking the door after the horse has bolted, as heard in this video clip.

Being a Central Bank ill-prepared for the current crisis by its constitution that precludes focusing on little else than controlling inflation, the European Central Bank has structurally, constitutionally and historically no real innovative macro-economic ideas of its own. It has been behind the curve for over a decade through its narrow focus on inflation control, to the detriment of European employment levels. The latter have continued to drag on in double-digit figures, a continuation of the same situation for almost four decades.

The fault is not only on one side. Naturally, Europe’s marvellously fair-minded trade unions have also contributed to this malaise. Conveniently for themselves they have not lifted a finger to integrate Europe’s immigrant and refugee communities. With very few exceptions, through biting unofficial discrimination by the local population in country after country in Western Europe, the immigrants have been forced to eke out a sorrowful existence on the edges of society in their high-rise para-suburban ghettos, while the unions have preferred to ensure that the native population always has jobs over the foreigners; jobs that are also paid at a higher rate than the equilibrium wage would be if everyone was employed.

This situation is now changing. The economic crisis is sending unemployment levels into heights unseen since the 1970s, with the strong promise of reaching 1920 and 1930 levels already before the end of 2009. Unfortunately, the present younger generation of European politicians and administrators, being privileged and cocooned themselves, have not known serious unemployment, and have no idea what it means on a personal level or for the European union and its international relations.

The new situation in Europe means native workers are also being made redundant.  The order books are down 20-40%. In some places some unions are accepting pay-cuts of 20% rather than redundancies and many municipalities are axing all new projects – even cutting health and education and important infrastructure maintenance. Social unrest is beginning to spread. The usual component of racism and right-wing extremism is beginning to get ever louder with ugly attacks on immigrants and refugees. Even various native population groups have begun attacking each other in an attempt to find a scapegoat to sacrifice for the crisis. Spontaneous uprisings and gang warfare are beginning to become common, as newly unemployed get in the way of drug dealing and become a target for criminal elements.

Few modern European politicians and economists have ever studied John Maynard Keynes’s General Theory of Money and Employment. Ever since Milton Friedman was awarded the Nobel Prize in Economics and particularly after President Reagan came to power in 1980 the European universities have selected textbooks in basic and intermediate Economics that do not include Keynesian Economics. Although Monetarism and Keynesianism are not completely incompatible, Keynes has been widely air-brushed out of the European universities.

The EU is thus ill-equipped for the coming wall of water. At least two generations of economists, who have not been schooled in demand-side management and don’t have any idea what to do in the present economic crisis, are now out there in positions of power and responsibility in banks, government authorities and municipalities. Any fiscal spending actually ordinated is likely to be useless work like digging holes and filling them in again. Europe’s heavy income tax systems, its cumbersome and highly inefficient public authorities, inefficient and elitist educational systems, the increasing wage gap between men and women and its strange socialist penchant for treating research and entrepreneurship as a burden on society are now all coming home to roost.

The European Union has great inner structural contradictions. These include an enormous democratic deficit with a heavily circumscribed Parliament largely out of the legislative loop and a Ministers Council system very like a country club – ‘we meet up for a day once a month, say and eat what we like and then go home’. When the masters have gone the servants stay behind at the club to try to bring some semblance of reason to the rules decided on, in between feathering their own nests with their own deals, information angling and status climbing. All this will now be tested to destruction in the coming storm.

Despite the dire straits in Eastern Europe – already one government has fallen, in Latvia, with others soon to follow – no co-ordinated assistance to Easten Europe has been put together by Western Europe because the leaders of the latter have arrogantly forgotten that they are elected to serve their peoples both individually and collectively, rather than serve their own careers. The comfortable status quo which they are wedded to has blinded them from understanding that integration, co-operation and mutual security is the essence of the 21st Century we are now in, and in fact the best that globalisation has to offer.

Functioning well, globalisation does not merely mean fair trade between continents. Charity will always have a role in human lives and charity begins at home as well as abroad. But the European Union is very hypocritical about both fair trade and charity. It penalises emerging economies with import tariffs and on top of that subsidises its own industries. It refers floundering Eastern European countries to the European Bank for Reconstruction and Development. Yet, although these are not normal times, the Western European countries will not directly assist their sister countries in Eastern Europe, for example with common infrastructure projects that would benefit both. It begs the question: what is the Union for if it is not for all the member countries to assist each other for the common good? The true selfish nature of the European Union is being revealed before our eyes.

Even Germany has forgotten what Marshall help meant to it after the Second World War, but then of course Angela Merkel was not even born then and grew up in East Germany anyway, which was a communist country at the time. Western Europe does not even realise that it would benefit itself by assisting Eastern Europe not to collapse. Europe is now facing a crucial crossroad in its own development. Either it fulfils the objective of a common destiny for its member states, or it reverts to a Free Trade system and an ‘I’m all right, Jack’ mentality. Bluntly, if Eastern Europe goes down with cancer, the European Union project is finished, and Western Europe could face a terminal decline.

On 5 March 2009, just a few days after the recent EU meeting of ministers, with several European governments threatening to default on their payments the ECB was finally forced to accept that a crisis really has begun to hit Europe badly, including in its beloved Euro area, and that it had to try to do something to stave off the revolt.

Just days before, the EU heads of state had abdicated their political responsibilities by not developing a common structure for coping with the crisis with immediate effect. Also, they will not meet again for some time and the G20 meeting will take place before that. In view of this delay and the storm brewing in various parts of the EU, the ECB was forced to come to the rescue and do something to calm the waters or face an immediate breakdown. However, instead of actually doing anything of great importance, when he met the press to announce that the ECB had decided to lower the interest rates in the Euro area to 1,5%, Jean-Claude Trichet mostly chose to try to pour oil on troubled waters by talking about maybe doing something in the future. That kind of tactic can only work once.

That the jejune ECB has no ideas of its own is crystal clear in the latest statements by Trichet. Despite dark hints at ‘further measures’ and that ‘nothing is off the table’, the real content shows that the ECB has merely lamely and unashamedly begun to copy the types of unusual, unique and extraordinary measures already launched or prepared by the US Treasury and Federal Reserve Bank.

This is in itself not so strange. In actual fact the ECB has no authority to begin any kind of macro-economic jiggery-pokery. If it goes just one step away from its constitution it will be venturing ultra vires, just as the US House of Representatives and Senate have no constitutional authority freely to disburse trillions of Americans’ dollars in order to save institutions like AIG, which had cleverly-stupidly insured all the millions of get-rich-quick options and derivative traders and risk-mad investment banks who lost in the speculative bubble.

However, just talking about possible future measures will not fool the markets for one day. The ECB talk of the IMF bailing out Eastern Europe with loans is also just foolish bluster – the IMF is running out of funds. It remains to be seen whether the Eastern European countries plus Ireland can keep their cool until the coming G20 meeting. If nothing concrete comes out of that, expect fireworks.

The crisis originated in the US through lax regulation, lax interest rate policy and the resulting neo-criminal lending practices, especially in real estate. Dealing with the crisis has been made difficult by the creaking US legislative system, which involves a laborious and time-consuming politicking and posturing process going back and forth between the White House and Capitol Hill that is not suited to the quick and effective decision-making process required in a modern 21st Century economy.

Never has this been more apparent than during the wait of over two months for the new President to take office while various parts of the economy were shutting down day by day. This period is called the lame duck period because the incumbent President has very little innovative time left in office and the nation, as well as the world, knows who the new President will be and that policy might change radically two months later, and is not inclined to invest the outgoing President with much attention or authority.

The transition period of 2008/2009 until the new President took office on 19 January 2009 was a time during which the ailing economy was largely left in limbo by the wait for the TARP stimulus package to wander back and forth between both houses and the office of the incumbent President George W Bush, with additional waiting time for the amendments.

By way of comparison, the  EU system with an executive of 25 minds with differing agendas who meet only once a month will also be tested, this time perhaps to destruction. While Thomas Jefferson would be aghast that the US has done very little to heed his words that US citizens should always consider reforming the Constitution to improve on the primitive form written by their ancestors, I wonder what he would think of a European Union executive branch where getting member states to agree to an effective plan of action is like trying to herd cats.

The US-UK sickness
The whole 18-month-old crisis of the financial system is now coming to a head one way or another, and it looks as if the method of dealing with the malfunctioning banking system is on the rocks while the financial system is now teetering on the brink of disaster with no time left.

The crux of the question has now come down to this: why should the bonus-driven, risk-mad investment banks that took excessive risks in taking over other banks and toxic assets, now get saved with taxpayers’ money, and the future earnings of the taxpayers’ children and grandchildren? The executives caused the problem. All the other businesses that are now collapsing because of the excesses of the too-clever-by-half financial traders and investment bank chief executives are not getting bailed out.

The bigger picture is that the US and UK governments are rewarding the agents of risk and speculation, i.e. those banks which were involved in selling the proceeds of criminal practices like the mis-selling of mortgages to poor people in the US where mortgage salesmen committed fraud by writing up the mortgagees incomes as five times the real amount, and the attractive low interest rate of 1% on the glossy brochures was only valid for one day.

The present US-UK policies are morally, if not also legally and constitutionally, highly objectionable. For the consequences are that the vast majority of people both inside the United States and around the world, who kept their businesses in good order, dutifully carried out their jobs, and paid their rents and mortgages are being punished while the guilty are being rewarded. The criminal actions are also no small petty crimes. They have resulted in a global depression with the greatly enlarged possibility of lengthy instability and economic decline and even world war. When a society has reached the stage that it rewards the greed and gross irresponsibility of the elite and punishes the common man on a gigantic scale, the social contract has gone.

The other disturbing and parallel element in this development is the dismantling of the fabric of human rights and the rule of law, already ably begun by the previous US administration and the aggressive war-mongering poodles on the UK side of the pond. The very same Labour politicians who have brought ruin to the United Kingdom, the Tony Blair-Gordon Brown pair, lied in the British Parliament and to the British public and concocted false reasons for attacking Iraq, despite widespread opposition to the war. In the UK, however much Tony Blair has the status of God in the US, this deceit and manipulation still rankle deeply with the British people, and the present economic incompetence and privations suffered by the UK population are likely to finish the Labour party off for two full decades, if not for ever.

Then on the vexing and crucial question of the failing US banks, the numbing fact is that the new US administration still will not bite the bullet and nationalise, sanitise, restructure and re-privatise the big banks. Without doing so it will not be able to get inside them, sack the present incompetent CEOs and board members, cancel the bonuses which drive the short-termism by the top bank staff, get hold of the toxic assets, pull them out and clean up the banks. Without clean banks the financial system will die in intensive care, the economy will starve through lack of functioning credit and the stock markets will implode in sheer horror at the continuing terrible economic carnage around the globe.

It appears that the US and UK are loathe to copy the example of little Sweden, which had a long recession and a severe financial crisis at the beginning of the 1990s and resolutely nationalised most of its banks, pulled out the bad assets, restructured them and re-privatised them in record time. Four of the five major banks were restructured in this way. The fifth did not need any intervention. It has been said by the new US administration that this approach would not work in the US because the US has thousands of banks. One recoils at this superficial, ignorant and sophist answer. The US has thousands of local and regional banks that are solid and liquid and have no need for any intervention. The crisis was not brought about by them, and they do not hold toxic assets. It is the giant banks, like Citibank and Bank of America, that are the culprits and whose shareholders deserve nothing in compensation for allowing crooks to run them.

What is the real reason for not following Sweden’s example? Sweden has not registered a patent on the method, in fact its Riksbank recently issued an account of exactly how it was done, in an effort to try to help. Could it be that the US, UK and the European Central Bank are so petulant and arrogant that they simply do not want to acknowledge that a small country can supply them with a fresh, effective and proven solution to the banking crisis? ‘Pride comes before a fall’ was something I thought every young child was taught in primary school. Evidently not anymore, which bodes very ill indeed. Pride and hubris are the drivers of war and calamity. It seems the world and the US, UK and the EU in particular, are keen for another world-wide bout of suffering.

Toxic doctors and toxic policies
A short two months in office has revealed the first grave and telling defect in Barack Obama’s leadership. In a laudable attempt to be a bi-partisan and listening President, he has confused this principle with re-employing officials and politicians who are themselves a liability because they were an integral part of the prior regimes which allowed the huge bubble of toxic assets to develop and did nothing to stop them. Bernanke and Geithner at least should be sacked immediately. They should never have been allowed on the team and are an integral part of the problem.

What right do I have for demanding this, people may ask. My reply is the following: are we not all part of a global village? Does what we do not have an effect on others, in another part of the world? What many Americans and Brits are obviously not aware of, insular and egocentric as so many who pose this question are, is that the US and UK with their housing bubbles, debt-funded excessive lifestyles and boom-and-bust deregulated economies, have hurt the whole world. They have broken the world economic system that had at least some seeds of hope for the eradication of poverty and elimination of pollution and for saving the thousands of flora and fauna that become extinct every year through our hitherto shocking stewardship of the planet.

Yet I have not heard one word of apology or contrition from any American or Brit in public debate, let alone from any of their leaders. Some apologies need to be forthcoming for relationships with the populations in the rest of the world to be healed in the future. On top of an unnecessary war in Iraq, and selfish and obstinate American and UK policy on alternative energy, American and British greed has become the third knife attack on the rest of us. Maybe Barack Obama with his generous soul will issue an apology to the rest of the world in due course.

The new President will certainly have a difficult time from now on. A golden opportunity has been lost to put clear blue water between his new administration and the bad regime of the old. Machiavelli would have had a fit at Obama’s grave mistake. In Machiavelli’s day the top officials of the old administration would have been executed, for he believed they would otherwise connive to destroy any progress made by the new administration. Today there are other ways of keeping prior incompetents from sabotaging new regimes and we have a more civilised and humane view of regime change within  a country. Yet in this case the co-culprits are still in power!

If there is any person on earth wondering why the US policies emerging now are not doing the trick, it is this. These individuals are the walking and talking incorporated reasons why fresh economic thinking and real economic change have not hit Washington. They aided and abetted the relaxation of vital financial regulation and allowed the creation of toxic assets by their ideological obstinacy and their incompetence and total lack of wisdom and common sense. They themselves are toxic. Wedded to what they have already done, they are presently making things infinitely worse. They are now the problem. They need to be extirpated and Bernanke and his helicopter fantasies need to be grounded.

In the meantime,  while every day counts, the world’s political and economic elite carry blithely on, appearing to believe that the measures they have already announced, or the measures they say they are holding in reserve, ‘will surely´ be enough to restart their economies. They sound almost exactly how American and European Presidents, bankers, economists and politicians ‘talked up’ the economy all during the terrible series of slides down from 1929 through to 1932.  The closest recent examples of a modern protaganist who publicly denied reality and proclaimed the very opposite was ‘Comical Ali’, Saddam Hussein’s minister who declared an Iraqi victory over the Allied invasion of Iraq in front of the television cameras at the very moment US tanks were driving right past them.

Today, when the rumours and false information multiply, it is a sure sign that a society does not believe its leaders and is in an unresolved crisis with no clear outcome in sight, and that the words and actions of the politicians are both wrong and insufficient.

Misplaced rationalisations and superficial quotes now abound, like ‘the only thing to fear is fear itself’. Tell that to someone not knowing where the next meal is going to come from or how to pay for the medical care of a sick child. The clear evidence of this dithering and lack of decisive action is the endless palaver and splitting of ideological hairs on blogs and websites and talkshows, for example about what is nationalisation and what isn’t. In the economy itself the indecision and incompetence by the US and EU governments and their Central Banks look like becoming very costly indeed.

In a new further detour at this eleventh hour, the most recent convoluted idea is one of sidelining banks and instead supplying companies with credit directly from the Central Banks on a mass scale. This is not only untried policy but will be fraught with great danger and delays.

In essence the sheer scale involved in such an idea precludes Central Banks managing anything else except lending to larger companies. If a Central Bank took on the job of dealing with every business in the country needing credit, then the Central Bank would de facto be transformed into a Soviet-type Gosplan ministry and would need the workforce of a whole city.

Such a project is impossible anyway, and merely a PR spiel for the public. A Central Bank simply does not have the intimate knowledge of all the hundreds of millions of local customers and the borrowing needs of millions of small and medium-sized businesses around the country and cannot safely decide on these matters. If normal banking lending practice were to be thrown to the winds and lending were to take place indiscriminately, e.g. over the internet via <www.Bernanke’s helicopter.gov> then this will merely cause hyperinflation and more disaster as well as further lending losses in a short space of time. But this is a digression into the surreal.

Other schemes abound, like using a variety of methods to force the banks to lend. However, so many banks are still busy repairing their capital ratios that the lending will be insufficient, and the economy will still contract because some businesses will not be able to secure credit to operate. All the similar previous fixes aimed at reflating the ailing banks in this crisis have so far failed.

Sadly, what does remain is the vain idea that if the Central Banks somehow just continue to provide enough liquidity through all means possible, then at some stage, at some trillionth or 10-trillionth dollar (a real unknown unknown!), all the big banks around the world will begin to lend to each other again, businesses will be humming, people will be employed and paid, and savers will dig out their savings from under their mattresses and rush to the stock market to invest. Halcyon days will be here again. Unfortunately, hopes and dreams are poor substitutes for dealing with the real hindrance that has blocked up the system.

Anna Schwartz and Milton Friedman were the two economists who studied the Great Depression and together discovered that the reason for the Great Depression was a lack of liquidity. However, in a comment on the present crisis last year, Ms Schwartz said that the present crisis was not caused by a lack of liquidity at all but by a lack of trust between the banks (due to the fear of the toxic assets they could be holding). Amazingly, the US elections in November 2008 have made no difference to US financial policy. Largely the same approach to solving the crisis is being used by the present Obama administration as was carried out by the Bush administration. Meanwhile, the confusion, collapse and the destruction of companies and jobs just continue day after day and week after week, around the globe, while the US, UK and Europe sleepwalk into a hurricane.

The effects on the financial sectors
Nothing that has been done up to now has fully unfrozen the credit markets, and until this happens the stock markets will not function. Stock market prices are the monetised appraisal by  hundreds of millions of people on the activities and policies of companies, plus the condition of all the world’s stock markets on a daily basis, including their regulators, their governments, their banks and their Central Banks. Collectively investors are an extremely powerful force. Individually they make up their own minds on what part of government policy will work. Investors are forced to be very realistic.  They work with a vital part of the economic system daily. They suffer daily corrections on their judgement calls and still have work out how to survive. Their job is to appraise the viability of economic endeavours and corporate and government policies and develop a strong sense of what will work and what will never work.

Thus investors are not only interested in the long-term survival prospects of a particular stock. They are also geo-politically savvy. They know what the effects on a company and its staff will be if the government of their country cannot run the economy. Investors are not gullible people with short memories like the general public who can be excused because they have other jobs and therefore have to forget politics and economics when they work on the daily treadmill with something else.

Investors cannot be gullible or they wouldn’t survive five minutes. Politicians cannot fool investors the way they fool the public. If something concrete that fixes the banking system properly and quickly, does not come out of Washington and New York and London and Frankfurt very very soon, investors will no longer hang on but capitulate. This means turning their backs on the market, and the investment-willing capital will disappear. For a very long time. Last time there was a depression it took 26 years for stock market prices to return (in 1955) to what they had been in 1929.

The fault lies wholly with the politicians. They do not understand how the stock market works and why investment capital is offered or withdrawn. They have no idea how important fresh capital is to the growth of the economy. Above all, the politicians do not understand that what investment-willing capital hates more than anything else is uncertainty, and that capital will not abide one iota of it. Neither do the politicians or officials understand that what Washington, New York, London, and Frankfurt are offering the markets is not only mega uncertainty, or giga uncertainty, but tera uncertainty.  A stock market capitulation crash is not far off.

It is easy to see what will likely follow when the final straw comes that breaks the camel’s back. It will be some insignificant event that normally would not raise any eyebrows by itself. Some little company somewhere in the world will collapse. But it will just so happen that its creditors will then have to declare bankruptcy too, tipping their bank over the brink, which will bring down another, which will bring down a government and so on.

Most investors are deeply aware of the interconnection of economic, social and political stability They are presently sitting on the sidelines because they deeply fear the risk of great economic uncertainty. They fear the dislocation and disintegration of the world economy and deeply distrust the present arrogant and intransigent American and European political establishments that always think they know best. They are deeply unhappy that present conditions hinder them from investing in the stock markets to fulfil their essential task of supplying the international bourses with capital and they fear for the future of the world.

They are aghast at the present relentless and mindless zombie political journey of the world leaders, seeing them full of misplaced hubris and using the wrong kind of ‘can do’ policies while at the same time sleepwalking into the abyss. In a last attempt to shake Washington, New York, London and Frankfurt to their senses and avert catastrophe, and at the same time salvage what they can for the worst to come, there will soon be a next leg down of considerable magnitude as they disinvest from the stock markets.

* Paul Sandison, 61, is a London-based philosopher and a social critic of contemporary society. Although he was born in South Africa, he has lived in Europe for nearly 40 years. His forebears include an ancestor to King Niall of Ireland and Charlemagne. Paul is currently promoting American and European arrangements of contemporary Irish music. His hobbies are reading, development economics and jogging.

 

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

 

OverSeas Radio Network

2 comments to No sense and nonsense – the European, UK and US decline

  • Vince Bruno

    Breathe….Paul…breathe.

    If the next leg comes will you prophesize another leg… Followed by yet another leg. You are not alone in your draconian forcasts. The only thing stopping your predictions is the number 0 at that point I suspect your camp we’ll call the “Kings of forebears” will predict we head into negative numbers on the major indicies.

    Breathe.

    I hope your shorting the market because your negative not negative because your shorting the market.

    1..2…3.. it’s all going to be ok.

  • Simon

    ditto Vince…;)

Leave a Reply

  

  

  

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Top 100 Financial Blogs

Recent Posts

Charts & Indexes

Gold Price (US$)

Don Coxe’s Weekly Webcast

Podcast – Dow Jones


One minute - every hour - weekdays
(requires Windows Media Player)
newsflashr network
National Debt Clock

Calendar of Posts

Feed the Bull