Rogoff & Reinhart Redux

They’re baaack.

Nicely done, I have to say.  Full disclosure: Ken Rogoff was a childhood neighbor of mine in Rochester, New York.

But, see here.  What R&R are really advocating is a kind of soft austerity.  They actually bring up the subject of “debt write-downs”, which maybe, I guess, would take the form of some across the board percentage. But if it doesn’t, then how exactly do R&R hope to accomplish debt write downs? The central bank will strong-arm certain players to do that? What if they won’t? What about the others, the ones the central bank doesn’t strong-arm? Who gets the strong arm and who doesn’t?

A lot more to that, methinks.  Again, the law is involved, and it’s kind of amazing to see these very smart people at Harvard walk right up to that door and then leave it closed as if they’re terrified of what’s inside the next room.

If you’re not going to be “dismissive” of debt then to the extent you’re not writing debt down you’re advocating some version of austerity. This is what it means to be economically austere.  Then again, aren’t R&R being dismissive of debt when they advocate that it should be increased?

A higher borrowing trajectory is warranted, given weak demand and low  interest rates, where governments can identify high-return infrastructure  projects. Borrowing to finance productive infrastructure raises long-run  potential growth, ultimately pulling debt ratios lower. We have argued this  consistently since the outset of the crisis.

And then there is this concern, and it has to do with interest rates:

No one fully understands why rates have fallen so far so fast, and therefore no one can be sure for how long their current low level will be sustained…Economists simply have little idea how long it will be until rates begin to  rise. If one accepts that maybe, just maybe, a significant rise in interest  rates in the next decade might be a possibility, then plans for an unlimited  open-ended surge in debt should give one pause.

Why should it give us pause, R&R?  Why shouldn’t people just be snapping up all the “free money”?  This is a revealing quote. The concern, the “pause” is the risk to lenders from a rising interest rate environment. Their portfolio of low interest receivables gets decimated.

Why did rates fall “so far so fast”? It’s quite simple, really. The parasite has killed the host. The potential borrowers are all tapped out, they can’t borrow anymore, so there’s no demand for loans and rates descend in an effort to lure borrowers who no longer exist. The parasitical financial “industry” makes its money by making loans and they’ve made all the money they’re going to make. At least that way. At least from the same pool of borrowers anyway.

How long can it all go on? It’s been going on in Japan for nearly a quarter century. No reason to think we can’t meet or exceed that mark.

H/T my friend from across the pond, Frances Coppola.

“…a society that punishes people for trying to be decent human beings is profoundly inhuman.”

An interview with David Graeber over at Naked Capitalism.

He’s talking mainly about economic disincentives to doing good in the world that appear to be a feature of our “capitalist” economy.

I can’t agree with a lot of Graeber’s verbiage – you know, “power structures”, things like that – and like the founding fathers I don’t care much for “democracy” either.  In other words, the democracy leaning to anarchy that characterized the Occupy movement and Graeber’s thinking about what to do at this point doesn’t strike me as being much of a solution to anything.

But in terms of identifying what’s wrong now, Graeber and I are in complete agreement.  While of course I approach all this from a different and somewhat less scholarly position – more ‘lawyerly’ than scholarly – the basics of the issue are the same for both Graeber and me.  In fact, I identified the debt problem – and a solution (updated here) – publicly before his most recent magnum opus (Debt – the First 5,000 Years) came out.

Graeber’s insight that the debt game has altered the role of government (“…which is increasingly becoming the legal cover and muscle behind debt and rent extraction”) is also important, but the solution to that is not so much to turn all of government and society upside down, which is the constant temptation of the revolutionary, but rather a return to first principles by the third branch of government (the judiciary) in general, and the legal profession in particular.

To take just one example, evictions are judicial processes.  As I have noted before, they are ridiculously easy to do, not to mention the fastest existing judicial process by far.  This is a reflection of a lot of what is wrong, true, but the solution is so simple:  change the law.

Do we have to change hearts and minds as well?  Certainly, and especially in the legal profession and the judiciary.

The anthropological approach to these issues is academically interesting and has a lot to offer, but it still amazes me how little regard there is for the legal profession and by extension – and somewhat distressingly – the rule of law.  The problems Graeber is speaking about fit very neatly – and pretty much entirely – into the ‘law’ category, much more so than the ‘anthropology’ category, but no one talks to lawyers about it.

That’s strange, I think, and maybe even a big part of the underlying problem:  a pall of despair over the rule of law and lawyers.

We’ve probably brought it on ourselves.

Lawyers Strike In the UK

Over cuts to Legal Aid funding.

Now, I don’t know enough about the situation to say for sure, but it certainly sounds like business as usual:  the most politically powerless will experience “austerity” first.  The only austerity the politically powerful will feel is less body weight when they literally lose their heads.  So in the interim, at least someone is making a fuss.  And it’s good to see lawyers assuming their proper role in the whole thing.

You would think we might have learned something, in the social sense, since the 18th century, but it appears we’re going down the same road the French did.

Anybody Want To Strike?

So, it’s the Bronx.  And in the courtrooms of the Bronx, unlike almost everywhere else in New York State including Manhattan, regular people – not just celebrities – are acquitted of crimes and awarded substantial damages in personal injury actions with some regularity.  Seems to be something about the jury pool.

But there’s no jury at the Appellate Division, First Department, to which the losing party can appeal.

So this jury in the Bronx awards some guy over $2 million on an excessive force claim because the police tased him when he was having a seizure, and it’s pretty lucky under those circumstances the guy wasn’t killed.  And on the appeal the Appellate Division reverses, throws out the entire jury award and directs that the case be dismissed. (h/t Scott Greenfield)

Their rationale for doing this was, basically, they took exception to the jury’s reasoning.

Now as I have noted many times in earnest (most recently here and here) - and as one of my colleagues has better illustrated through his/her customary satire – when it comes to jury verdicts there appears to be a rather pronounced double standard in the intermediate appellate courts:

In Part I, I trace the origin and history of courts’ purported deference to jury credibility determinations. I say “purported” because, when it comes to important matters like money settlements, courts have no hesitation about setting aside jury verdicts. See Behemoth Leviathan RR Co. vs. The Widow Jukes (1920). It’s only in criminal matters that the jury’s sense impressions become sacrosanct.

To call it a “double standard” is, of course, putting it mildly.  It’s as if when a jury finds a criminal defendant guilty we wax poetic about the sanctity of the jury; but when a jury awards “too much” to some regular schmuck we’re practically delighted to second guess them.

Consider just this one aspect of such a ruling:  even if it is the Bronx, getting a jury exercised enough to award $2 million or more for a regular person takes a lot of doing by the attorney.  A lot.  No one who hasn’t done it could possibly understand what’s involved in any tangible way, and “no one” assuredly includes every member of the Appellate Division’s panel.

So one effect of the ruling is to generate discouragement and even despair among the Plaintiff’s bar.

And here’s another thing.  Just because a jury awarded $2 million doesn’t mean the Plaintiff can collect it, even if the appellate court doesn’t fuck with the verdict.  There might not be insurance available to cover it, for example.  Although in this case there probably was coverage, which is why the AD took such an interest and reversed, whereas in almost every other case where the favored litigant wins and the disfavored litigant loses the AD just mindlessly affirms.

That, too, lends itself to satire.

How does this go on in the appellate courts?  A very big part of the answer to that question is that the power differential between favored litigants (government, bank, insurance company) and disfavored litigant (non-famous, non-wealthy regular individual) is huge and there’s no way to bridge it.  No conventional way, that is.

Anonymous satire is all well and good, and we need to keep our sense of humor, but ultimately this is a classically corrupt court decision – and make no mistake that gross favoritism to the powerful is corruption, whether it’s conscious or not – that calls for a lawyers’ strike by the members of the disfavored litigants’ bar; that is, the criminal defense guys and the PI Plaintiff guys.

Unless and until the judges on the Appellate Divisions and elsewhere pay some price for their outrageous partisanship and toadying for the more powerful against the weaker there is no reason for it to stop.  Surely that decision deserves at least a one-day work stoppage and protest in the First Department.

You – we – have to make them pay.  We have a simple, easily accomplished, traditional and non-violent way to do that.  If we refuse to even try then the “system’s” continuing dysfunction is not just the Appellate Division’s fault.

Low Interest Rates And Austerity (Updated)

I have said this a number of times.  It’s unarguable, and is a significant piece of the ‘financial crisis’ puzzle, but no one seems to take it into consideration, unlike everything else I write on this blog about the financial crisis which is immedately picked up by prestigious academic journals on its way to becoming the new orthodoxy.

Wait, did I say that?

Anyway, the problem is that even very bright and economics-knowledgeable people, when they discuss the seemingly perpetual low interest rate environment, see the situation in terms of “easing” and “easy money” and how “lax” and “accomodating” the Fed is being by keeping rates low, not to mention promising to keep rates low basically forever.  And the truth is that although you might argue this, I think the better argument is precisely the opposite:  the low interest rate environment is not about stimulating the economy and easing economic burdens, it is about preserving the status quo and keeping burdens where they are:  keep the rabble in debt and servitude to the creditors.

And now you don’t have to take my word for it, because someone else with an actual pedigree has actually acknowledged this idea.  Not the implications of it, you can still find that only here on this blog, but the basic economic fact of low interest rates and their impact on existing debt:

Also, the price of debt fluctuates with interest rates. Debt issued at low interest rates can be repurchased at steep discounts when interest rates rise. This means that if debt-to-GDP ratios are what matters, we will have a great opportunity to quickly reduce this ratio when interest rates rise later in the decade as is widely predicted.

It’s a fundamental truth that drives the bond market:  a rising interest rate environment is terrible for bonds; a declining interest rate environment is great for bonds.  Because, as the quote above rightly points out, the face value of the bond rises or falls accordingly.  If I have a $100K bond paying 2% interest and market interest rates are 8%, who’s going to pay $100K for my bond?  If I want to sell it, I have to “discount” the price, you know, a lot.  Maybe my $100K bond would only sell for $25K.  But if the situation is the reverse, and I have a $100K bond paying 8% and market interest rates are 2%, well then so many people want my $100K bond that I can prally sell it for $150K, because where else are they going to get an 8% yield?

This is not rocket science, as they say.

But here is where my take on this situation has been what you might call unique.  At least I haven’t seen it anywhere else.  Apply this unarguable, basic principle to the economic situation as a whole, where you have a highly indebted populace, whether in Greece, or the EU or Japan or God help us all the United States of America.  Who benefits from the low interest rate environment?

Why, creditors of course.  They are the bond holders.  And that this is actually the same word root as “bondage” is not a coincidence.

Thus low interest rates are a mechanism to keep debtors in bondage to their creditors.  To keep people in thrall to the banks.  This is so clearly the result of the low interest rate environment that it’s hard to believe it isn’t the intended result.  And if it’s the intended result then all the talk about “easing” and “accomodating” and so forth is not only wrong but deceptive.

But they let the cat out of the bag when they start talking about “austerity”.  Forget that the whole idea – this “austerity” thing – is the product of paternalistic bankster ideology coupled with elementary errors in data collection and interpretation that any hard-partying grad student can figure out, because what else could you possibly expect from anointed Harvard economics professors like Rogoff and Reinhart?  I mean, that’s why they’re anointed in the first place.

They’re very reliable, I mean.  That’s how you get anointed.

No, what I would like you to focus on here is that no one, anywhere, not nohow, not no way, has ever suggested that the most oppressive “austerity” you can think of is in any way incompatible with a low interest rate environment.  All I have done is take that very unexceptionable consistency a step further and declared that, in truth, artificially low interest rates are a fully intended feature of austerity, not the “accomodation” to borrowers that is so often portrayed.

The social science of economics in a “managed” economy is about obfuscating, not illuminating.  If you’re running the economy and you’re too clear about what you are doing and why, people might change their behavior accordingly and that ruins the experiment.

And, oh, you have to keep this in mind:  the experiment is more important than you are.  They’re not being gratuitously cruel, it’s just that any real fix for the situation that doesn’t involve further oppressing you would break all the models.  So you’re going to be oppressed some more, but not too much, at least not in the near term, and at least not so much as you and the other rubes will notice or if you do at least you won’t be able to discern who your oppressors are.

In other words, it’s coming to a theater near you – “austerity”, that is – but eventually it will be called something less inflammatory.

And less truthful too, of course.

Update:  Another feature of “austerity”:  20% of households on food stamps.  Gotta keep them fed or they’ll riot.

SCOTUS’ True Leanings

It is the common thread that ties all of the otherwise seemingly diverse rulings and ideologies together:  contempt for, or maybe fear of, freedom and equality before the law for what might be termed “ordinary” folk.  This was on display in a unanimous ruling issued earlier this week in the case of Kiobel v. Royal Dutch Petroleum.

The statute at issue, 28 U.S.C. 1350 (known as the Alien Torts Statute) is a model of elegant clarity and simplicity from an earlier era, namely the era right around our nation’s founding:

The district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.

The one line statute gets clubbed to death in 35 pages of “statutory interpretation“, and eventually of course it winds up not meaning what it obviously says at all; indeed it more or less means nothing after the SCOTUS is through with it.  Sort of like 42 U.S.C. 1983, which ostensibly deals with an entirely different sort of wrong but to the SCOTUS it’s the same issue:  how to keep down the rabble in fly-over country and their ilk anywhere else in the world with the temerity to come into a federal court – a federal court! – making outrageous demands.  Remember the scene from the Wizard of Oz when they finally get in to see the Wizard?

Bad Wizard, SCOTUS!

https://www.youtube.com/watch?v=NZR64EF3OpA

Technically, the issue in the Kiobel case is whether the statute can be applied to conduct occurring outside the United States.  The obvious answer to that question is that this is precisely what the statute is for, and indeed it has no other intelligible purpose.  How the SCOTUS winds up deciding the opposite is illustrative.

First, let’s stipulate to the legion of cases dealing with questions of statutory interpretation wherein it is said that if the statute has a plain meaning, no further interpretation should be done.  The “plain meaning” thing is a favorite of conservatives in other contexts, such as when it makes a criminal defendant or a personal injury plaintiff or any other litigant who’s an individual going up against some institution lose; this time, however, the plain meaning of the statute favors the little against the big and so suddenly we don’t like “plain meaning” anymore.  Now we get to “interpret” the statute, which means we can rationalize throwing the little guy out of court, which is what we want to do in the first place because: a) little people are messy and unappealing; and b) if we open the courthouse doors to them they’ll clog up our dockets with their silly little concerns - like in this case, oh, genocide – when we have important criminal cases brought by the government that we have to address.

So how is this “interpreting” done so that it doesn’t seem to be the thought process I just described even though that’s what it really is?

Well, they start with this “presumption” on the first page of the opinion:

“[w]hen a statute gives no clear indication of an extraterritorial application, it has none,”

One might think that it’s a pretty clear indication that a statute has “extraterritorial application” if, without it, it’s unintelligible and without purpose – and of course you are never supposed to interpret a statute out of existence, that’s another rule of “interpretation” -but never mind that for now.

As support for this “presumption” the SCOTUS can go all the way back to 1932 and a case called Blackmer v. United States, but since the linguistic formulation of the presumption in Blackmer isn’t quite good enough for our purposes here – which is to screw the little guy – we’ve changed it in our oh-so-clever SCOTUS fashion.  See, Blackmer in referring to this presumption says: “… the legislation of the Congress, unless the contrary intent appears, is construed to apply only within the territorial jurisdiction of the United States…” and if you read that in context it’s not clear that the 1932 SCOTUS is setting up any kind of formal “presumption” at all; it’s probably just stating the obvious matter of factly.

But again, never mind.  We have an agenda - remember?  – screw the little guy.

So we go up to 1949 and now the off handed musings of the 1932 SCOTUS are formalized into a rule of interpretation, but of course intellectual honesty was more common then so they didn’t change the wording:

The canon of construction which teaches that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States, Blackmer v. United States, supra, at 437, is a valid approach whereby unexpressed congressional intent may be ascertained.

That case is Foley Bros. v. Filardo.

Then we bring ourselves up to 1957 and the case of Benz v. Compania Naviera Hidalgo, and the language of the “canon of construction” has not been altered, but the 1957 SCOTUS adds by way of explaining itself further:

And so here such a “sweeping provision” as to foreign applicability was not specified in the Act.^[7] The seamen agreed in Germany to work on the foreign ship under British articles. We cannot read into the Labor Management Relations Act an intent to change the contractual 147*147 provisions made by these parties. For us to run interference in such a delicate field of international relations there must be present the affirmative intention of the Congress clearly expressed.

This language was dicta, summarizing the Court’s rationale not modifying the rule, but it sure came in handy as the Rehnquist SCOTUS began to come into its own in the 1990′s, with its barely disguised hostility to any ordinary-individual-initiated litigation, which apparently all belongs in small claims court, or maybe on Judge Judy, where the rabble can go and obtain whatever piddling relief they might deem themselves entitled to.  I mean, who cares, right?  We’ll let them sue each other.  Gives them something to do.

But again, we can’t come right out and say things like that, so we do a little mixing and matching:

In applying this rule of construction, we look to see whether “language in the [relevant Act] gives any indication of a congressional purpose to extend its coverage beyond places over which the United States has sovereignty or has some measure of legislative control.” Foley Bros., supra, at 285. We assume that Congress legislates against the backdrop of the presumption against extraterritoriality. Therefore, unless there is “the affirmative intention of the Congress clearly expressed,” Benz, supra, at 147, we must presume it “is primarily concerned with domestic conditions.” Foley Bros., supra, at 285.

The dicta of Benz gets combined with the rule of Foley Bros, and presto!  The “presumption” has acquired that draconian strictness pressed mercilessly down upon the rabble for which the Rehnquist court, Lloyd Blankfein and Jamie Dimon have become so widely admired.

It was 1991 and the case was EEOC v. ARAMCO.  That case dealt with the extraterritorial application of Title VII civil rights claims, a claim that would have failed under the older, less draconian formulation of the presumption anyway, but this is the Rehnquist SCOTUS and we’re really getting fond of applying really strict rules even when we don’t have to, as long as it permits us to tell the little guy ‘no’.

So now we’ve gone from 1932 musings, to a “rule of construction” and “presumption” by 1949 providing that “…unless a contrary intention appears…” US statutes do not apply extraterritorially to a tentative “..unless there is the affirmative intention of the Congress clearly expressed…” US statutes do not apply extraterritorially in 1991.  And this becomes how we do things.

And then by 2010 some poor slob is trying to sue an Australian bank in the wake of all that bankster perfidy, and of course we can’t have the rabble suing banks because we have our “policies” doncha know that this will all be handled by some “Troika” or other, and by this time we have our rationale “well settled” even though it’s a pretty major deviation from the original idea in 1932, but anyway it’s really handy and ladies and gentlemen I give you Morrison v. National Autrailian Bank.  And all the verbiage doesn’t really matter because the bottom line is, as it has been for so long now, that the bank wins and the little guy loses.

And so finally – and it had to come to this – the question becomes are we going to extend our illegitimate “presumption” so far that we will toss the rabble out of court even when the issue is human rights abuses under international law, which would seem to be specifically contemplated by the Alien Tort Statute when it mentions the “laws of nations”.  Of course this means, and the Plaintiffs in Kiobel alleged, things like extrajudicial killings, crimes against humanity, torture, arbitrary arrest and detention, and so forth.  The idea is that the international companies doing business (and having copious assets) both in Nigeria, where these things allegedly occurred, and the United States - to which the Plaintiffs fled and were in fact granted asylum – had a hand in these atrocities and by being forced to compensate the victims maybe they would think better of participating in such things and maybe even take some affirmative steps to ameliorate them, what with all the financial pressure of having to compensate victims and all.

In other words, this would be litigation having the salutary effects of compensating victims of human rights abuses and providing economic incentives to human rights abusers to stop being, well, human rights abusers.  And we have lots of lawyers in this country that need good paying work and maybe this would be good paying work for them so you kill two birds with one stone.

But this is the SCOTUS, and so obviously such litigation cannot be permitted.  This kind of thing is all handled by the State Department, just like financial institution corruption and wrongdoing is all handled by the Securities and Exchange Commission.  That way everything truly ‘important’ gets run through Washington, important referring to any sizable amount of money changing hands, or anything coming within arguable range of some DC determined ”policy” or other which increasingly means pretty much anything, period.  Because Washington apparatchiks and wonks like Ilya Shapiro are really smart and they should run everything, along with the morons prestigious economists at the Federal Reserve.

And I’ll just throw in that the SCOTUS is obviously wrong here.  The Alien Tort Statute’s only discernible purpose is to authorize just the kind of lawsuit the Petitioners in Kiobel brought, that is, a tort occurring outside the US.  Torts occurring inside the US are obviously cognizable in some state or federal court anyway, so the way they’re reading it the statute is purposeless nonsense.  And, are they going to apply that same “presumption” the same way when the USG wants a criminal statute to have extraterritorial application?

Ugh.

Golden Conspiracy Theories

Conspiracy theories are very popular among the gold bug set.  They are especially popular after the dollar price of gold takes a beating for some reason.  Thus you have articles like this, which I would recommend not because I necessarily agree with it but because it does have information, such as details concerning how the “physical” gold market operates, that you probably won’t see elsewhere.

Here’s something to consider, though.  The dollar price of gold really doesn’t matter at all except to three groups:  a) gold bugs who are holding gold as an investment; and b) monetary authorities (central bankers) and their high priests (economists) and other followers, who are very hostile to gold as a matter of preserving their job security, prestige and power; and c) those who oppose (b) for ideological, political or moral reasons.

In other words, more than other economic data the price of gold is a heavily political thing.  And very polarized, very difficult to compromise.  You go one way or the other on it and it doesn’t just change one thing, it changes everything.

Which is kind of scary, when you think about it.

What’s Up With Cyprus? (Updated)

Maybe cozying up to Russia is not such a good idea if you’re a member of the EU :

Emergency loan (2012)

Since January 2012, Cyprus has been relying on a €2.5bn (US$3.236 billion) emergency loan from Russia to cover its budget deficit and re-finance maturing debt. The loan has an interest rate of 4.5% and it is valid for 4.5 years.^[19][20] It was originally expected that Cyprus would be able to fund itself again by the first quarter of 2013.^[20]

…………….

On 13 March 2012, Moody’s slashed Cyprus’s credit rating to Junk status, warning that the Cyprus government would have to inject more fresh capital into its banks to cover losses incurred through Greece’s debt swap. On 25 June 2012, the day when Fitch downgraded bonds issued by Cyprus to BB+, which disqualified them from being accepted as collateral by the European Central Bank, the Cypriot government requested a bailout from the European Financial Stability Facility or the European Stability Mechanism.^[16]

So Moody’s, which is at this point little more than an enforcement arm of the Fed, the ECB and the IMF, upgrading and downgrading pretty much as they see fit, tightens the screws on Cyprus and fucks up their relationship with Russia, whereupon the Cyprus government inexplicably begs its tormentors, those same internationalist bullies – amazingly operating under the foreboding handle of the “Troika” – for “help”.  The Troika then steals from depositors in Cypriot banks and confiscates the country’s gold.

Nice.

Power and money seem so closely connected some days.

Meanwhile, even as the Troika seems desperate to get its hands on some gold, the price of gold plunges amid much breathless fanfare and media coverage.  Perhaps the Troika’s impressive show of force in the Cyprus fiasco has people thinking that the banksters are firmly in control for the foreseeable future.

Update:  Meanwhile, Greece has been such a good, good little boy that there’s even some debt relief dessert on the table! Yay!

A Glimpse… (Updated)(x2)

…inside the mind of a central banker.  Very interesting stuff.

Let’s go step by step through this important interview.

SPIEGEL: Ms. Reinhart, central banks around the world are flooding the markets with cheap money in order to spur economies and support governments. Are these institutions losing their independence?

And here we come to our first objection:  the premise of the question is wrong.  Central banks are not “flooding the markets” with cheap money; what they have done so far is to shore up failed financial institutions through injection of reserves, which for the most part are just sitting there.  Very important to understand this.

Anyway, her answer to the misleading question begins:

No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits.

This is not puposely untruthful.  Certainly, a primary beneficiary of a low interest environment is the borrower of last resort, which is the government, which when it swings into action in that role is a thing to behold.  I mean look at US deficits over the last few years.  But what is inadvertently revealing here is that in Carmen’s mind the government and the central bank are separate, and the central bank “helps” the government out of its “debt crisis”.  Yet the central bank is a creature of government, created by statute.  And it answers to the government.  And it would not exist unless that were true.  Carmen suffers from cognitive dissonance, at least a little, because in this whole area you have to get used to people talking out of both sides of their mouths.  Especially central bankers.

And this particular central banker is perhaps more candid than she should be for her own good:

You have to deal with the debt overhang one way or the other because the high debt levels are an impediment to growth, they paralyze the financial system and the credit process. One way to cope with this is to write off part of the debt.

Discussion of debt write offs is off the table.  Except around here.

Moving on, then:

But we are in an environment where politicians are very reluctant to do write-offs. So what happens is that money is transferred from savers to borrowers via negative interest rates.

She’s not even part right.  It isn’t “money” that’s being transferred; it’s income.  To a central banker the two are almost synonymous.  That is a category error, I think.  In any case, keeping interest rates artificially low might be bad for a lender’s income in theory, but generally isn’t in practice.  Because as interest rates descend into the zero bound range “spreads” tend to increase in percentage terms.  To illustrate, at 20% interest rates for savings I might be able to get away with lending at 25% or even 30%, making the spread between what is saved and what is lent 20-50%.  But at 1% interest for savings I can still get away with lending at, say, 4% making the spread between what is saved and what is lent 300%.

See?  A low interest rate environment might be terrible for savers, but it’s great for lenders.

Continuing, then:

SPIEGEL: Do you think it is wrong for Europe to focus on austerity measures with inflation at such a low level?

Reinhart: No. Restructuring, inflation und financial repression are not substitutes for austerity. All these measures reduce your existing stock of debt. Unless you do austerity you keep adding to the debt. There is no either-or. You need a combination of both to bring down debt to a sustainable level.

I think she’s misspeaking a bit here, but the core idea she is expressing is that “austerity” reduces the rate at which you add to the debt.  I mean, it isn’t as if any sane person, and especially a central banker, would advocate an out and out reduction of debt, even by the government.  That would be disastrous.

She’s a little clearer here:

SPIEGEL: So what should be done?

Reinhart: The best way of dealing with a debt overhang is to never get into one. Once you have one, what can you do? You can pray for higher growth, but good luck! Historically it doesn’t happen — you seldom just grow yourself out of debt. You need a combination of austerity, so that you don’t add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation …

There’s the prescription:  Austerity plus “higher inflation”.  Higher growth is impossible, she thinks.  But of course she is egregiously wrong about that, although it would take another fairly long post to explain why.

But in any case, here’s the problem.  “Austerity” means the government cuts back its spending; but to achieve “inflation”, there has to be new circulating money; and the central bank can essentially only funnel new money into the economy at this point through loans to the government, because private borrowers are tapped out and the government is effectively the only borrower left.  And as regular readers over here should know by now, new money can only be borrowed into existence.  There is (as a practical matter) no other way, the system does not permit any other way, and the “helicopter drop” allusion was meant as a joke precisely because the audience knew that new money can only be borrowed into existence, not dropped from helicopters.

So here is what the central bankers are doing about the “crisis”.  They began by recapitalizing and further consolidating the “banking sector”, which had pretty much already become a creaking socialist boondoggle and now was transformed into a complete zombie 20th century artifact:  not “failing” (dying) anymore since it is being propped up through literally trillions of dollars of “loans” – like keeping a dead person twitching with copious shots of adrenaline or something – but all that money just sits there because there’s no one to loan to.

This effort has failed and the central bankers know it.  Nevertheless, the second phase of their “rescue” is to buy up huge amounts of government debt, the only rational purpose of which is for the government to spend the money into the economy so that we might see some”inflation”; but at the same time admonishing the government that it must not spend the money into the economy because unless we have “austerity” we’ll just keep “adding to the debt”.

This is incoherent, although it may have this one virtue:  to stave off collapse of the financial system and governments for a little while longer than it would otherwise occur.

But here’s an interesting thought I had about all this.  At least it’s interesting to me.  The central bank is just a debt machine, and “debt” of course shares etymology with “death”.  And having essentially given us a zombie banking system they are now proposing to give us zombie governments.

Somehow this – transforming our governing institutions into the collectivist equivalent of the undead – doesn’t seem like much of a solution to me.  But this is where the economists are taking us.  You heard it right from the horse’s mouth.

Update:  One thing we can do, apparently, is steal seize the gold from the relevant government when we’re not sure if the “austerity-inflation” prescription is working.  Hmm.  One question arising from this development is the degree to which the Eurocrats will resort to this option faster than the Fed, which after all still has “reserve currency” privileges.  Not to mention, ultimately, the biggest stick.

Update 2:  Here’s one potential consequence of the government becoming over-indebted:  you have to start turning real estate over on the cheap to the daughters of foreign billionaires, just to keep the lights on.  On the bright side, it will go well with their Easter bonnets.

Foreclosure Nation – Redux

This is, of course, entirely predictable.  If you’ve been paying attention.

After all, why did people’s homes go into foreclosure in the first place?  Because for whatever reason they weren’t paying their monthly bankster tribute.  Usually this is because they are unable to, or feel they are.  And “usually” is to understate pretty dramatically.

What, if anything, has changed such that people who a couple of years ago could not (or felt they could not) pay their monthly nut now feel differently and are flush with cash?

Nothing.

So the “forebearance” has run its course and the relentless “process” resumes, making people homeless.  Including children.  And people are up in arms over all this because they have seen countless news stories - in print, and on the nation’s airwaves - showing this devastating humanitarian crisis afflicting their neighbors.

Okay, that’s not true.  Nobody’s up in arms over it and the media such as they are don’t report it, if they’re even aware of it, which they probably aren’t because they are busy with all the toadying.  But just because a disaster doesn’t make “news” doesn’t mean we don’t have a disaster on our hands.

It wasn’t long after I started this blog, way back in 2010, that I tossed off some thoughts about the whole foreclosure thing.  I noted how weird things were getting and how there was no end, and no solution, in sight.  I’ve come back to the issue.  Often.  Really often.

Of course, it’s hard to get above the ambient noise.

SS United States

This is a worthy cause.  Other things trump it, of course.  But it’s one of the things that reminds me of how much money is thrown down the rat hole of the Wall Street – Washington – financial class while far better uses go begging.

It’s been in Philly for a long time (too long, from the looks of it in the photo gallery), but for all the years I was on active duty the ship was in Norfolk.  Kind of a fixture on the skyline north of the city between downtown and the enormous naval base.  It would catch your eye every once in a while and you’d wonder:  what are they going to do with it?

Well, unless somebody does something pretty soon what they’re going to do with it is turn it over to the scrap yard.  I agree with the designer’s grand-daughter:  that would be a shame.  I realize more than most people that preserving a large ship, even to keep it tied up to a pier, is a very expensive and labor intensive undertaking.  But that ship is a singular artifact of American history.  I mean, if the Titanic had ever been raised, would anyone dream of scrapping it, no matter how expensive it was to maintain it?

Different league as far as artifacts go.  I know that.  But it’s the same idea.

The Essence Of It

The burden of proof on private plaintiffs in civil litigation is actually higher than it is on the government.

Don’t take my word for it.  A New York judge has written it all down.

“We recognize that it might be unexpected that we are dismissing a substantial portion of plaintiffs’ claims, given that several of the defendants here have already paid penalties to government regulatory agencies reaching into the billions of dollars,” Buchwald wrote. “There are many requirements that private plaintiffs must satisfy but which government agencies need not.”

……

Explaining her decision to dismiss the claims after the regulatory settlements, Buchwald said private cases must be“examined closely” to ensure plaintiffs are “properly entitled to recover and that the suit is, in fact, serving the public purposes.”

“The broad public interests behind the statutes invoked here, such as integrity of the markets and competition, are being addressed by ongoing governmental enforcement,” she said.

 

Not that I have any particular fondness for the Plaintiffs in the action, who are largely other shady Wall Street outfits like Schwab.

But to see a judge actually rule in the open that lawsuits will be subject to different standards and more scrutiny depending on who the litigants are?  It’s a gift, I suppose.  The truth seeps out when no one is looking.

 

Servitude

This is not about helping “troubled borrowers“; it’s about maintaining the status quo, and in particular preserving the biblical adage that the borrower is the servant of the lender.

I would say that it is also dishonest, inasmuch as anyone with any relevant knowledge and minimal intelligence must be aware that this is not a real solution to anything.

There is a simple concept that is vital to understanding why Fannie and Freddie are extending “forebearance” to “troubled borrowers”.  Under the most basic principles of accounting, a loan is an asset – an account receivable – of the lender(s).  If the loan is written off as being uncollectable, the lender can no longer claim that it is an asset.  With enough write-offs like that, a lender goes under when the assets disappear, because the liabilities never do, unless you pay them or go bankrupt.

In other words this is about saving banks, not helping borrowers.

“Forebearance” is the only kind of solution the powers that be can contemplate because it keeps creditors creditors and debtors debtors.  The entire monetary and banking system depends on that.  But the very idea of “leniency” carries with it a class differential that we like to think we left behind us in the middle ages.  You can only be lenient to your inferior.  You can only accept leniency with gratitude towards your superior.

This characterizes a master-slave relationship, not a free market exchange of any kind.  Sooner or later such relationships rupture, often violently, for political reasons.  In the meantime, a solution could be had at any time that would resolve the economic and political problems before they become too serious, but such solutions have not really been seen since antiquity.  Jubilees used to occur because some wise and enlightened ruler realized it was necessary and not only decreed it but smoothed over the inevitable problems that go along with a jubilee.  In modern times, a jubilee will never come from an enlightened ruler.  It will have to come from an enlightened populace.

There is no reason to be optimistic.  As I’ve said many times, the scenario playing out is simply a 21st century version of Dickens’ literary portrayals of the conditions leading up to the French Revolution.

Although I must defer to David Graeber on the history and anthropology of all this.  I’m just a lawyer.

Sometimes.

On strike.  Sometimes.

Biggest Story Of The 21st Century

…coming out of the United States Congress.  At least so far.  And for my money unless and until things get serious with some asteroid or some other doomsday scenario pans out, nothing is going to take its place.

Yet the only really informative coverage this story – the financial crisis and banking scandal - is getting is from the Rolling Stone’s Matt Taibbi.

Sometimes the media pick up on a story and play it big.  Huge, even.  The Army-McCarthy hearings of the 1950′s, the Watergate hearings of the 1970′s, the Iran-Contra hearings of the 1980′s, the Clarence Thomas hearings of the 1990′s.  The media were riveted, even if not everyone else was, but a lot more people paid attention because that’s what the media was doing.  Historically this is, of course, the power of the media: to “shape” public opinion.  Some would say “create” public opinion, which they can kind of do, too.  Or at least they used to.  Although in the latter case in can often backfire.  The media never really got what it was out for in the Iran-Contra affair or the Clarence Thomas matter.  They had toppled president Nixon in 1974.  They haven’t repeated that kind of feat since.

Part of the problem, I think, is narcissism, which has increased among the media elite just as it has increased culturally in general.  Being self-referential and self absorbed, the media can’t tell the difference bewteen a story that is really important and a story that takes on the semblance of importance just because they consider it to be important.  That was at least part of the reason president Reagan survived the Iran-Contra scandal whereas the Watergate scandal – grounded a two bit petty crime by comparison – toppled Nixon:  the media went all out, thinking Watergate history was going to repeat itself.  The public saw Oliver North‘s testimony in huge numbers and were no longer convinced that the relentless media narrative had the heroes and villains properly identified in the script.

In any case, the financial crisis represents a new anomaly:  a huge, nay incredibly huge story with the potential to topple presidents and federal reserve chairmen and even the federal reserve itself – in other words, change everything in political terms – and it’s basically being ignored.

The great thing about Taibbi – well, one great thing among many – is that when you read his stuff you know that the lazy media explanation about their utter incompetence here - namely that such stories have “no legs” because they’re “too complicated” for the simple minded public to understand – is a detestable lie.  Just read Taibbi’s stuff.  He has a talent for telling the story, but he’s not the only talented writer working for major media companies.  They could easily play this story up successfully if they wanted to.  The point is, they don’t want to.  I know the reasons, but I’m not going to go into that right now.

The point, for present, is that you should follow the financial crisis on Taibbi’s blog and a few others that I have linked to on the blogroll.  And of course here on this blog, too.  Because that’s another reason the media failed in the Iran-Contra scandal, and failed in the Clarence Thomas hearings, and haven’t really made any similar attempts since:  the landscape has changed, their power has waned, the internet came along and now it’s a lot more difficult – maybe impossible – to marshall public opinion the way they could 40 years ago.

That’s probably a Good Thing.  And it provides an opportunity for someone like me and other bloggers to perform an important service for the public, even if they’re paying no attention (at present) and many of them don’t want to hear.  I needn’t remind many of the readers here that this has often been the case with stories that later turn out to be huge.

Lawyers Strike In India

I’m not saying it’s common there, but this does seem to come up from time to time.

You don’t want to overdo it, of course.  The tactic loses its effectiveness if it is overused.

Here’s a quote from one Tis Hazari:

“Lawyers of the country are very much aggrieved by the misdeeds of the police which has not learnt lesson from the past and has forgotten the fact that lawyers are guardians of democracy and are capable of taking stringent action against the erring police officials,” he said.

And beyond that:

Vinod Bhardwaj, Secretary of Shahdara Bar Association also said there was complete suspension of work at Karkardooma Courts complex and around 300 laywers also staged a protest in the court premises against the government and the police.

This lawyer-striking business is not a ‘market’ phenomenon, but it does address the kinds of problems with police, prosecutors and judges that are also an issue in the United States.  Unless you buy into “American Exceptionalism“, in which case we don’t acknowledge such problems even if they exist, because we’re too special to have them.

The principles are the same here as in India, of course.  The courts can’t function without lawyers on both sides, without losing its pretense to objectivity, fairness and due process.  So if lawyers on one side, and their clients, are constantly getting screwed they can stop playing the game and the system closes.  I wish the courts would do their job without being pressured like that, but they don’t.  In New York State, where I am, the biggest problem is the Appellate Divisions.  Their “jurisprudence” is mainly the stuff of satire.  Of course it’s important to keep your sense of humor, but it’s more important to address the underlying problems in a serious way.

The lawyers in India are doing that; the lawyers in the United States are not.  And this is one of the reasons the United States has come to be regarded as a “prison nation“.

The practicing bar – the part of the legal profession that matters – needs to revisit first principles.  If they do that, it’s hard for me to believe they wouldn’t see the virtue in lawyer strikes, sparingly used as a system corrective when the system is broken and incapable of self-correction.