The architects of the Euro hung by their own petard

With acknowledgements to the Economist: front cover 26 November, 2011

Dear readers…posted this last night, but  failed to add links…so have updated this morning….And now at 12.54 on 28 Nov, following revelations from Bloomberg, am adding in a reference to the extent that Morgan Stanley was bailed out in 2008.

A petard, I am reliably informed by the Web,

“was a bell-shaped metal grenade typically filled with five or six pounds of gunpowder and set off by a fuse. Unfortunately, the devices were unreliable and often went off unexpectedly. Hence the expression, where hoist meant to be lifted up, an understated description of the result of being blown up by your own bomb.”

Correct or not, this is a helpful analogy for the crisis of the Euro. The grenade that is the Euro has a fizzing fuse that threatens to explode imminently, causing visible panic in markets, in parliaments and treasuries across the world. Mainstream economists are either dodging the bullets and like the cowards they are, pretending that ‘it’s nothing to do with me guv’.  Or else they’re panicking in ways that are crass and unhelpful, banging their heads against the brick wall that is the Bundesbank and ECB, and demanding that someone, somewhere defuses the bomb.

The Economist has a dramatic leader this week (“Is this really the end?”) warning of grave threats and offering Chancellor Merkel and other EU leaders ways of avoiding a comet-like crash. Like many others, leader writers on the Economist, somewhat belatedly, want the ECB to act as a central bank, and to  provide liquidity to sovereign members of the Eurozone.

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The game is up: the age of liberal finance over. The Left's Plan B?

By Ann Pettifor. An edited version of this piece was published on Left Foot Forward, 14 September, 2011. This original, longer version posted 19 September, 2011. 

The game is up. The 2007-9 private banking crisis that started with the unpayable debts of the US sub-prime sector, was never over. The crisis has now moved on to include the unpayable debts of sovereigns owed to private European bankers. It is increasingly clear that there is declining political and institutional support for further private bank bailouts. The dramatic resignation on Friday 9th September of Jürgen Stark, architect of Europe’s equivalent of the Gold Standard – the Growth and Stability Pact – marks an important step in the resistance to bailouts by the ECB; in the inevitable collapse of the Maastricht Pact, and with it, the utopian vision of the neoliberal Euro.

And so the age of liberalised, de-regulated finance appears to be over – at least in Europe. That is the conclusion of investors in both Wall St and the City of London and explains the collapse of confidence in banks and the volatility of stock markets as investors rush for the exits, transferring speculative gains into the safety of government bonds.

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Capital flows, financial crises & implications for poor countries

Last month I was invited to join the ‘Labour Party Policy Review: Making growth work for the poor and generating resources for development’. The overall group was led by Harriet Harman, and the development section was chaired by Rushnara Ali MP.

Below is my short background note on mobility of capital flows, financial crises & implications for poor countries:

Capital Mobility: what others are saying

“Experience shows that when policies falter in managing capital flows, there is no limit to the damage that international finance can inflict on an economy.”

Yilmaz Akyüz, “Capital Flows to Developing Countries in a Historical Perspective: Will the current Boom End with a Bust?”  South Centre:Research Paper 37, March 2011

“ flows, it’s like with fire. Fire can be used to turn raw meat into a wonderful steak. But it can also burn your house down.”

Jagdish Bagwhati, Professor of Economics, Columbia University, on Big Think, 17 November, 2007.

“Looking back on the crisis, the US, like some emerging-market nations during the 1990s, has learned that the interaction of strong capital inflows and weaknesses in the domestic financial system can produce unintended and devastating results. The appropriate response is…to improve private sector financial practices and strengthen financial regulation, including macroprudential oversight.”

Ben Bernanke, governor of the US’s Federal Reserve in speech to Banque de France February, 2011.

“So we have to make some choices. Let me be clear about mine: democracy and national determination should trump hyper-globalization. Democracies have the right to protect their social arrangements, and when this right clashes with the requirements of the global economy, it is the latter that should give way.” (Author’s emphasis)

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Coming soon: another global financial crash? Capital mobility and the commodity mania

Tin produced at a Glencore plant in Vinto, Bolivia

“Experience shows that when policies falter in managing capital flows, there is no limit to the damage that international finance can inflict on an economy.”

Yilmaz Akyüz, “Capital Flows to Developing Countries in a Historical Perspective: Will the current Boom End with a Bust?”

Today, as speculation and leverage in global, financialised commodity markets reach manic levels; as we witness an ‘epic rout’ (FT 5 May, 2011) in commodity prices, and as the boom in capital flows peaks, is another crash inevitable? And is it coming soon?

I know from experience that while it may be possible to analyse fundamentals, it is always difficult to predict precisely what dynamic will trigger the next crisis, and when it will happen. Back in 2003, together with colleagues at the new economics foundation in London, and with very little funding, I assembled and edited a series of essays on the ‘outlook’ for the global economy. We titled it: ‘Real world economic outlook’, and added a subtitle, ‘the legacy of globalization: debt and deflation’. We intended the report to be annual, and to act as a counter to the IMF’s annual World Economic Outlook, which in our view was irrationally optimistic about developments in the global economy.

We were pretty pessimistic about global imbalances, and predicted a crash. Sadly, our timing was way out: the crash was four years away. It does not always help to be right on the fundamentals. Given the inevitability of the then forthcoming crash, we argued that there was once more a need for a ‘great transformation’ of the global economy. The starting point we wrote ‘will be to reverse the most pernicious elements of the ‘globalization’ experiment’ by the ‘taming of financial markets through the re-introduction of capital controls; restraints in the growth of credit; the establishment of an International Clearing Agency; and a Tobin Tax’.

Back then it was hard to talk/write about these matters – and be heard. Our cheerfully-titled report and predictions did not hit the best-seller lists. Funding for the project was withdrawn, and the project wound down. It’s major flaw? We had breached areas of economic debate that at the time were carefully circumscribed. It took the financial crisis of 2007-9 to loosen the intellectual chains to which orthodox economics had so heavily tied economic debate.   Today the Tobin Tax, or Robin Hood Tax is a high-profile issue, with some signs that EU governments are considering implementation of such a tax. (See point 8 of Euro leaders’ statement, March 11, 2011). So that taboo has been broken.

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After Iceland’s Referendum, What Next?

4th March 2010

With Saturday’s Iceland referendum due in just a couple of days (6th March), Advocacy International’s directors have an op-ed article critical of the UK and Netherlands governments in today’s Morgunbladid, Iceland’s main daily newspaper.

English version> Icelandic version> Press release>

Full text of the article:

So the negotiations have broken down, British and Dutch “bullying” (FT 27 February, 2010) continues and the referendum goes ahead. What next?

We emphasize that this is not a sovereign debt crisis, even if the British and Dutch want us to think it is.

It is a crisis of EU regulatory failure, and of the Anglo-American economic model.

The people of Iceland have a deep democratic tradition, and through the referendum have the opportunity to assert their sovereignty and autonomy.

Their leadership and example will encourage people in other democracies to reject harsh cuts in public services and living standards made at the behest of the very people and institutions responsible for the crisis. For through the wholesale nationalisation of private losses, we are all – not only in Iceland – asked to pay the price of private, reckless risk-taking. Continue reading… ›

A fair deal for Iceland

8th January, 2009

This piece appeared on the Guardian’s Comment site:

“Today the people of Iceland, a country whose population, at 317,000, is somewhat smaller than Leicester’s, are required by the British political, financial and economic establishment to carry the full burden of the losses suffered by Landsbanki’s depositor programme Icesave.

We consider this to be unfair, for the following reasons.

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1945, government debt, bond markets, sterling – and all that.

27 October, 2009

I promised to explain – to Alastair, a reader of this blog –  the link made earlier between 1945 and today’s supposed government ‘debt crises’.  Sorry if its a little long – but a promise is a promise.

I consider the scaremongering around government debt to be nothing more than an over-egged and salted buttermilk pudding dished up by the economic quackery of the Her Majesty’s Opposition.  Not unlike that ancient remedy for (verbal) diarrhoea, it is intended to induce intellectual constipation – in those that absorb it in spoonfuls at the Institute of Fiscal Studies, the Treasury and City of London.

We should have nothing to do with such childish prescriptions.

To illuminate and evidence my point let me offer you (below) a chart – with data provided by Her Majesty’s Treasury (Public finances databank, Table A10  and with thanks to my colleagues in the Green New Deal group.

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How globalisation ends: Debtonation Day, plus two

From Open Democracy: August 13, 2009

“A single day, 9 August 2007, will go down in history as ‘Debtonation Day’ – the beginning of the end of the deregulation and privatisation of finance that marks the era of globalisation.”

I wrote these words on 13 August 2007, in anticipation that the great stock-market collapse of four days earlier presaged the end of the era of neo-liberal globalisation.

So it has proved.

Read Open Democracy article>

‘Radicaal? Dat is de crisis ook’

De Standaard:  Brussels 18th June, 2009.

Interview:Ann Pettifor over de ‘Green New Deal’ — BRUSSEL –
De westerse overheden moeten dringend de hand aan de ploeg slaan en de almacht van de financiële sector inperken. Dat vindt Ann Pettifor, econome en activiste.

Van onze redacteur

Weg met de banken, leve de overheid. Als je het gedachtegoed van Ann Pettifor in zeven woorden zou moeten samenvatten, zou het ongeveer zo klinken. Pettifor is het meest bekend als drijvende kracht achter Jubilee 2000, de campagne om de schulden van de ontwikkelingslanden grotendeels kwijt te schelden. Een campagne die een succesvolle apotheose kreeg toen de G8 in 1999 besloot om 100 miljard dollar van deze schulden af te schrijven. Nu werkt Pettifor, die al in 2003 in het boek ‘The Credit Crunch’ waarschuwde voor de komende kredietcrisis , voor de Londense denktank New Economics Foundation. Die heeft het rapport ‘AGreen New Deal’ uitgegeven. De titel verwijst naar de New Deal waarmee president Roosevelt de crisis van de jaren30 aanpakte. De daadkracht en voortvarendheid van toen is nu schrijnend afwezig, vindt ze. Pettifor was deze week op uitnodiging van het tijdschrift Mo* in Brussel om haar plan toe te lichten, en erover in debat te gaan met VBO-voorzitter Thomas Leysen

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Green New Deal in the news

15th December, 2008

Last week there were several media pieces that mentioned the Green New Deal, including The Times, The Observer, and The Independent on Sunday.

Also, UN Secretary General Ban Ki-moon has followed his colleagues at UNEP in calling for a Green New Deal.

You can also read nef’s Green New Deal Round-up here.