François Hollande Wins French Presidency: Merkel’s Economic Taliban Austerity Rejected

Sunday’s elections in Europe occurred in three countries with diverse economic circumstances (France, Germany, and Greece); and they were for different levels of government (presidential, regional, and parliamentary respectively). Add to this rout last week’s Dutch rebellion against austerity and the resultant collapse of the Dutch government. The clear common message from the electorate is undeniable, reminiscent of a famous line in the 1976 movie Network: “I’m as mad as hell, and I’m not going to take this anymore!”

Europe’s electorate is angry and has lost confidence in the ability of in-place politicians to solve their crisis. Hollande’s victory means the end of “Merkozy,” the Franco-German confederacy establishing the past two years austerity regime. Stocks moved down initially on the result as conservative investors and business acolytes perceive the french socialist as dangerous to their interests. Perhaps they would have a point if the austerity strategy were working…or, maybe had a reasonable chance of working. Austerity isn’t and doesn’t… time for a changed course.

What’s wrong with the current German Austerity Regime? See previous posts, “Transform France Into A German Economic Model? Me Thinks, Not So Fast…” and “Europe’s Debt Trap: Austerity Is The Wrong Path.”

As American economist Paul Krugman wrote, “Europe’s voters, it turns out, are wiser than the Continent’s best and brightest.” Citizens yearn for alternatives but, as yet, are not coalescing around a common view of what these should be, just as in the United States. As a result, political realities will complicate even more what is an already tenuous economic and financial outlook for Europe, the world’s largest economic area.

Compromise and a new course should rule the day with coordinated stimulus added to mitigate austerity, and this must include,

• greater harmonization of labor markets and corporate taxation,
• imposition of financial transaction fees, and
• proper rebuilding of the eurozone structure/european central bank with,

1. common eurobond issuance funding all national governments in conjunction with the new common fiscal harmonization pact,
2. ECB purchase of government bonds like a U.S.-styled Quarterly Easing program as instituted by our own Fed — and…
3. in particular, to assign a new mission for the European Central Bank away from obsession with inflation and toward focus on growth.

Europe must pull together in their anger and act as one interest, instituting intergovernmental transfer payments from wealthier EU regions (states) to those in need, just as occurs already in individual EU states internally with money transfers ongoing from Western Germany to the former East Germany, Northern Italy to the poorer Southern Italy, London and South England to Northern England/Scotland… just as transfer payments and block grants within the U.S. ameliorate regional economic disharmonies without turmoil (aside from the occasional right-wing rant).

What Europe needs in order for these significant changes to take root is the sudden appearance of decisive leadership at the EU-wide national level to overcome long-standing impediments to growth, jobs and financial stability. What they will receive more immediately is greater fragmentation amongst regions as cross-border coordination and collaboration grow more complicated with new political interests empowered.

I have faith in my beloved Europe that they will kick the s+#t out of each other and then regroup and dynamically move forward on the required reforms mentioned here…for without them, all European political and business leaders know that Europe will devolve into small nation-states at the mercy of jungle-violent globalization…where the a#^-kicking will be unrelenting.

These institutional changes and greater solidarity will only materialize properly in the context of a clearly articulated vision of what a unified Europe should look like in three years’ time. And that will take inspired and inspiring leadership of dynamic Heads-Of-State.

Holland of France is on stage. A Deutsch progressive Chancellor willing to speak for more than just wealthy Germany must replace Merkel in 2013. Then, competent, newly installed pro-business technocrats in Italy and Spain will join in unison, followed by the Benelux and Scandinavian countries. New Europe (the former communist bloc) will have little choice but to take up the mantra and get in line.

Transmission Problems With The Economic Engine Of Prosperity For All

Several decades ago, as I completed earning a university degree in Economics, I contributed to a white paper for the White House and detailed in several newspapers the fact that U.S. living standards were only being maintained because most households had two earners, and I lamented this fact signaled the decline of America’s ability to provide generation after generation with a steadily improving life — that it signaled a sputtering in the economic engine of progress.

Back then, I believed that a monetarist policy at the Fed combined with a supply-side policy instituted by the Reagan administration would be just the right formula to clean out the engine valves and boost the octane fueling the economic engine.

Now, in the second decade of the twenty-first century, it requires well more than two earners working to equal the wages of a one-income household of 40 years ago. In fact, wages have plummeted so low that a two-income household is now (on average) 15% poorer than a one-income household of 40 years ago.

Wages & Standards

With the year 2000 as a base, real wages peaked in 1970 at around $20/hour. The average worker today earns $8.50/hour — more than 57% less than real earnings in 1970. Moreover, as the average wage directly determines society’s standard of living, it may accurately be said that the average standard of living in the U.S. has plummeted by more than half over the last 40 years.

The green line shows average wages, discounted by inflation calculated with the same methodology for all 40 years, properly comparing any data over time… applying identical parameters to it each year.

Then, there is the blue line: showing wage data discounted by the “official” inflation rate. Why two inflation deflators? What’s the problem? The methodology used by government to calculate inflation in 1975 is different from the method used in 1985, which is different than the method utilized in 1995, which is different than the method of 2005.

Technology & Standards

To be certain, technology has improved such that the “standard” has shifted and provided a lifestyle unimaginable or unattainable in the past; i.e., today, nearly all persons of age have a personal cell phone and internet access (hence access to instant communications); access to music proliferates on numerous mobile devises (not just families able to afford large stereo systems, or further back, their own music chambers); and the list goes on.

As they say, though, all things are relative. And, thus, to say that one has access to “absolutely” more of something now, or to something that never previously existed, is not to say that they have access to more or better… relative to what their predecessors had relative to their own time. Standards change.

If the death rate from cancer devolved back to that from 1960, would it be correct to say that’s acceptable because even then it was better than the survival rate from the 18th century? Of course not. Standards improve, and if the average person in a period can’t maintain their relative position over time in that moving standard, then we have declined was a society. Here is where America rests today.

99 To The One

Back to the chart; inflation for the last 40 years has hidden the 57% collapse in the standard of living for the average person. Nonetheless, if you’re fortunate enough to be at or successful enough to have earned a place at the top of the income charts, the situation is significantly reversed in your favor. While average American workers have seen their wages plummet by 57% over the past 40 years, in just 15 years (1992-2007) the 400 wealthiest Americans saw their incomes rise by 700%.

Now we have the complete picture: wages crumbling steadily lower year after year, decade after decade for “The 99%,” while earnings skyrocket for “The One Percent.” Is that acceptable? I don’t know… is going back to the cancer death rates of 1960 acceptable to you because that’s still better than it was in 1700?

Transmission Problems

Suffice to say that even after our massive economic/financial collapse of 2007/2008, our economic engine is running strong as the economy has fully recovered… as an engine (output and profitability exceed the high before the collapse). However, as could be observed after recovery from the 2000/2001 recession, ours is no longer an engine of economic progress broadening prosperity. The problem it seems is with our transmission, as the power of the engine is not distributed to improve the standard of life for all — or even just the majority — of Americans.

To this point, the causes of our transmission problems are equally obvious in terms of categories, although the actual analysis of those causes is more complex and beyond a simple blog post.

1) Taxation repression. As has been noted in this Presidential runnup, Romney’s 15% income tax rate because he doesn’t “earn it” though work but through investing his funds in the right slot machines on Wall Street is inherently unjust and inequitable. Billionaires now maintain the largest fortunes in history — while ordinary people who “earn” their income have been turned into “the working poor” paying significantly higher tax rates than the slot machine winners on Wall Street.

2) Systemic/structural unemployment. Technology always eliminates jobs faster than it creates new opportunities. With time though, technology tends to offer up more and better jobs, historically, given a long enough time horizon to adjust to the technological leap. In the meanwhile, gaps and dislocations occur. Given contemporary, unceasing acceleration in technology, our economy is in effect “permanently” reducing jobs (and creating structural unemployment). Today, the technological change and productivity increase is nearly continual…along with job redundancies.

 In our past, we as a society offered up income support and training programs to assist in the transition. Most importantly and effectively, we dealt with this structural unemployment by shortening the work week every few decades…until our current time. The basic work week at the Dawn of the Industrial Revolution was 7 days a week, 12 hours a day — an 84-hour week. For 200 years, our government steadily shortened the work week to our current 5 days a week, 8 hours a day — a 40-hour week — and our society grew steadily more prosperous.

Refusal of our government to shorten the work week (which is really voters’ economic and historic memory lapse put into practice by the reps they elect) is a systematic path that maintains massive unemployment — the strongest downward driver of average wages. Voters support and reinforce this process with a mantra of less government and hopeful/naive belief in the sanctity and divination of unfettered “free markets.” I’ve read other columnists and economists in Europe refer to their own version of this mantra as “Merkel’s Economic Taliban.”

3) Oligopolies. It is elementary (meaning basic Econ 101) capitalist theory that monopolies and oligopolies are cancers to be prevented. By definition they are caustic and anti/non-competitive — they have absolutely no productive place in any capitalist economy. Yet today, the global economy is overwhelmingly enmeshed with gigantic, non/less-competitive oligopolistic entities…the revered multi-nationals. Diminishment of our societies is an inevitable result.

4) Indebtedness. Most Western governments are well past the Rubicon in indebtedness. Nonetheless, it makes no sense to completely hollow-out and starve economies with some form of Milton Friedman-Hayek/Mises Austrian Economics Austerity (as done in Greece and Spain and Italy) — only to end up with an even larger default in the end. Had bond vigilantes accepted a 50% haircut at the beginning of Greece’s debt-crisis, Greece’s economy would have remained intact, and they would have salvaged a larger share of their debt obligations (rather than the 75% default with which they ended). In the end, around the world, all sovereign debt bond holders will take a haircut. It’s a fact. Reality. OK. Build up reserves and get ready for it. Once done, we can implement a proper system of running surpluses in good years and deficits in economic down years…and we the people will have to accept that this is as it must be.

It is time to address and correct this tragedy of the collapse in our standard of living…time to address the transmission problems with the economic engine of prosperity for all.

Transform France Into A German Economic Model? Me Thinks, Not So Fast…

German Chancellor Angela Merkel crossed traditional bounds and now campaigns vigilantly for her center-right colleague, current French President Nicolas Sarkozy, as the beleaguered French president has fallen behind in polls against his rival socialist candidate. Merkel intends to defend center-right policies and the German economic model in France, as she attempts to implement the model across all of the European Union.

Francois Hollande, socialist challenger for the French presidency, has honed his general opposition to the German-led fiscal discipline treaty under EU member states’ consideration by outlining the concrete changes he would like to see made to the document. Hollande suggests that the proposed fiscal discipline treaty imposes too much of Berlin’s belt-tightening policy (Austerity) on the EU and lacks growth initiatives.

Recently, Chancellor Merkel appeared in a joint television interview with the French president, who has fully aligned himself with German economic thinking, and said she would support him “whatever he does.” And what he does is want to transform France into the industrial economic miracle of Germany. The question is begged: why the economic self-doubt by France’s President?

President Sarkozy wants France to become more like Germany, and in a recent speech he made 15 positive references to the German economic model.

Unlike France, he argued, Germany had reformed its economy and was reaping the rewards of improved competitiveness and superior economic performance. He lamented the alleged decline in French industrial prowess and praised Germany’s success at defending its industrial base in the context of globalization.

Is Sarkozy correct in being so self-critical of French performance?  And would it make sense for France to emulate the German model?

Sarkozy is certainly right that Germany is a more industrial economy than France. The share of the French economy accounted for by industrial output is as low as in Britain (a country Sarkozy likes to deride as “having no industry”) and lower than the US. Germany’s share of world export markets has also held up remarkably well over the last ten years, whereas France’s has fallen steadily.

Nonetheless, the relative size of a country’s industrial sector may or may not have implications for its economic success. Observe Italy, with a comparably-sized industrial sector to Germany, but which is readily the worst performing large developed economy. Japan also has a very large industrial sector yet has stagnated most of the last 20 years.

France actually has a reasonable economic record relative to Germany’s.

• Between 1992 and 2001, France managed annual GDP growth of 2.1 percent compared to Germany’s 1.6 percent. Over the subsequent ten years -– 2002 to 2011 -– both countries grew by 1.1 percent per year.
• Although the German economy performed better in 2010 and 2011 than its French counterpart, the two countries’ growth prospects are very similar according to the European Commission, the IMF and the OECD — all three forecast growth of 0.5 percent in 2012 and 1.5 percent in 2013.
• Productivity may be a good indicator of economic performance: Productivity per French worker is higher than in Germany, while productivity growth averaged 0.7 per year in both countries between 2002 and 2011.
• As recently as mid-2008, rates of joblessness were the same in the two countries. But Germany’s labor market performance has been superior to France’s over the last three years. By the end of 2011 the rate of unemployment had fallen below 6 percent in Germany, whereas it has risen to nearly 10 percent in France. However, a significant demographic element led to this change –- due to a very low birthrate, Germany has far fewer people entering the labor market than France.

Something far more vital than a better, finely tuned industrial economy effected the change in balance between Germany and France.

The “Hartz reforms” of former German Chancellor Gerhard Schröder’s government undercut the bargaining power of labor, and succeeded in “pricing workers back into employment,” albeit often at much lower wages than previously known in Germany. Adjusted for inflation, employee wages fell by 2 percent from 2002 to 2011, compared with a rise of over 10 percent in France. In turn, this reduction in relative wages impacted private consumption negatively, and over the same period, private consumption grew by just 4 percent in Germany, against 17 percent growth in France.

To the extent that Germany has become more “competitive,” it is not because of  German superior productivity growth but rather because of wage restraint — and the resultant reduction of wage-based inflation. As a result of such income compression, Germany’s real effective exchange rate within the eurozone fell by 17 percent between 1999 and 2011, making its exports much more price competitive. Meanwhile, for the same period, France’s real effective exchange rate rose by 4.4 percent.

Germany’s internal devaluation contributed to a big divergence in the two countries’ relative trade positions. Whereas ten years ago France and Germany both had small current account surpluses, France is now running a deficit of around 3 percent of GDP, while Germany is running a surplus of 6 percent. To be truthful, such an effect was indeed the goal of Germany’s labor market changes… but at the expense of workers’ incomes, domestic consumption, and the social condition.

German Austerity Model For France?

France and Germany have similar levels of public debt, at just over 80 percent of GDP. Concerning the yearly budget deficit, whereas Germany’s fell from 4.3 percent in 2010 to a little over 1 percent of GDP in 2011, France’s yearly deficit came in at 5.7 percent (down from 7.1 percent in 2010). Sure, France has need to strengthen its public finances, but mitigating factors deserve acknowledgement.

First, the French government has been more concerned with maintaining growth in domestic demand than its German counterpart.

Second, over a third of the difference in the size of the deficits in 2011 was accounted for by much higher levels of public investment in France — 3.2 percent of GDP compared with 1.7 percent in Germany (the second-lowest level in the EU).

Neglecting public investment harms the overall good of the nation eventually, though… witness the crumbling infrastructure of the United States. Germany’s rail system has already fallen greatly behind that of France.

German Hartz Reforms For France & EU?

French President Sarkozy is right to be concerned about France’s economic performance. In common with most of Europe, the country seems stuck. Nonetheless, the second largest economy in Europe must draw the right conclusions from what has happened within its neighbor, Germany.

Yes, France absolutely must reform its labor market — retirement age is too young and it is too difficult to terminate non-performers. Currently, those with full-time jobs earn employee rights and generous entitlements — the hallmarks of an advanced society — even while these same benefits are a disincentive for firms to hire people on a full-time basis and relegate the youth to a tenuous reliance on temporary jobs.

However, Germany’s labor market reforms might not be the best solution for France… or Europe. Germany has been able to pursue such a strategy only as other EU countries have not. Should France attempt to emulate German wage constraint, it would prove a largely zero-sum game as the move would depress domestic demand in France and across Europe, in the process worsening the eurozone crisis and leading to more layoffs.

Certainly, Germany offers many examples for France and other EU countries to follow. Still, a large industrial sector and a big trade surplus are not the exclusive indicators of economic ability and capacity. Note that, for every country running a trade surplus, another must run a deficit, and it shall never be otherwise.

Economist Milton Friedman argued that trade deficits were not intrinsically bad. Who, he asked, has done better when one trades 10 dollars worth of goods in exchange for 15 dollars worth of goods? The one nation sold more of what it produced (which employs labor and expands business) while the other got more for less. The answer as to who has the advantage is unclear.

France has its share of weaknesses, but in important aspects, the French model — where the economy is largely propelled by domestic demand, high productivity, and extended leisure time — holds out better prospects for a return to economic growth across the eurozone than does the German economic model, I must protest.

Conservative’s Talk Taken For Granted As Truth — The Social Contract & US Debt

Why is it that when one is a conservative Republican, the most unsupported and absurd comments about the economy or economics are said and taken for granted as truth?

Here’s just one recent example that raised my gall:

Dorsey D. Farr, co-founder and head of investment strategy and portfolio management for French Wolf & Farr, told the Rotary Club of Buckhead in Atlanta at a January 30, 2012 luncheon that ongoing labor market weakness, household deleveraging, consumption growth and sovereign debt will continue to be tough issues with which to tangle in 2012.

Well, fair enough, and who could argue with the assessment?

But then Farr went on to say with professorial certainty…

“…defeating the debt monster requires a revision to the social contract that created it. That takes either enormous political will or a crisis.”

Really? No, I mean, REALLY!?

As Bill Clinton left office, we ran budget surpluses and were well on the path to paying off the total US debt. So, what we really want to look at is what caused the dramatic change in direction, the rising yearly budget deficits, and the yawning total US debt after Clinton… meaning W. Bush and Obama.

First… the social contracts for Social Security have run surpluses and helped to fund the deficit spending… not contributed to the deficits.

Moreover, doing absolutely nothing but following the law, Social Security and associated social spending will not and cannot contribute to the deficits, as Social Security may only spend what money it has and takes in. Thus, when fifteen to twenty years from now it is out of excess cash, it can only pay out to retirees the amount of money raised each year from Social Security taxes.

All this means is that given no other changes, future retirees will see a somewhat reduced monthly payout — NOT a stoppage of payout… NOT any deficit spending…

OK… none of that causes or contributes to the deficit or debt, so I’m still lost as to how the Social Contract led to our deficits and unsustainable debt or threatens the debt future, Mr Farr.

Obama Vs. W. Bush On The Deficit

So, Mr Farr, let’s see where since Clinton our deficits and the burgeoning debt originated:

Humm, well, I grant that the Part D Medicare Drug benefit that was not initially funded properly contributed to the debt and is part of a social contract. That means that of the $15 Trillion total US debt, $5 Trillion came from W. Bush in non-social contract spending!

Bottom line: W. Bush’s non-social contract spending and tax cuts caused one-third of our total US debt… not, sir, as you and other Republicans nonchalantly propound.

Sustainable & Non-Sustainable Debt

One complaint of the current debt situation is that it is 100% of yearly GDP. History has shown this amount to be a drag on economic growth and the overall financial health of a nation. What has been deemed historically supportable is a US debt level of 62-65%.

Well, take out W. Bush’s non-social contract deficit and debt contributing contributions, and you have a $10 Trillion debt against a $15 Trillion economy… or 66%!

Wow, so the un-sustainability of our US debt is NOT from social contract spending but from Bush’s absurd tax cuts, two unfunded wars (Iraq and Afghanistan), non-defense discretionary spending, and the effects of his crashing the economy!

Mr Farr, get a grip and do your research… do not just assume that because you’re conservative and Republican that your pontifications are granted truth.

Final Thought: The Absurdity of Austerity

As once practitioners and the ill, alike, advocated blood-letting and leeching to cure sickness and disease — draining vital life fluid and energy from the frail and weak… so today must society suffer self-imposed and popular austerity to cure an anemic economy. In both times, the hope was that the patient didn’t die from the cure.

In our dystopian world today, Republicans propose drastic budget cuts to the social contract that in no way contributed to our current debt problem. Yes, in a world where 70% of the economy is consumer driven, conservatives propose starving the consumer of cash by reneging on pre-agreed social programs and austerity.

Good luck with that.

Hope I live through it! Hope most of us patients live through it, too. As for the bloodletters and their supporters, ah, not so much : )

Europe’s Debt Trap: Austerity Is The Wrong Path

Europe’s Debt Trap by George Irvin - http://blogs.euobserver.com/irvin/2012/01/14/europes-debt-trap/

Europe is obsessed with the growing stock of public sector debt; fiscal austerity has become the watchword of our time.

Little does it seem to matter that fiscal austerity means reducing aggregate demand, thus leading to economic stagnation and recession throughout the EU as all the main forecasts are now suggesting. Even the credit rating agencies are worried, as S&P’s downgrading of France and eight other countries shows. Whether it’s Angela Merkel or David Cameron speaking, public debt is denounced as deplorable, and all are told to get used to hard times. As Larry Elliot puts it: “The notion that economic pain is the only route to pleasure was once the preserve of the British public school-educated elite, now it’s European economic policy”.

In Britain, immediately after the general election, the Tory-led coalition decreed that in light of the large government current deficit, harsh cuts were necessary to win the confidence of the financial markets. But although the current deficit was high, the stock of debt (typically measured by the debt/GDP ratio) was relatively low and of long maturity, the real interest rate on debt was zero (and at times negative) and, crucially, Britain had its own Central Bank and could devalue. As Harriet Harman argued in June 2010, Osborne’s cuts were ideologically motivated. The aim was to shrink the public sector, and the LibDems—fearing a new general election—chose to go along with the policy.

In the Eurozone (EZ), where a balance of payments crisis at the periphery has turned into a sovereign debt crisis, the German public has been sold the idea that if only all EZ countries could be like Germany and adhere to strict fiscal discipline, all would be well. The ultra-orthodox Stability and Growth Pact (SGP) has now been repackaged under the heading of ‘economic governance’ under which Germany and its allies will vet members’ fiscal policies and impose punitive fines on those failing to observe the deflationary budget rules to be adopted. Never mind the fact that indebtedness in countries like Spain and Ireland was mainly private, or that the draconian fiscal measures imposed on Greece have, far from reducing public indebtedness, increased it.

Is debt always a bad thing?

In the private sector, obviously not since corporations regularly borrow money for expenditure they don’t want to meet out of retained earnings, while most households aim to hold long-term mortgages. Public debt instruments like gilts in the UK or bunds in Germany are much sought after by the private sector, mainly because such instruments are thought to act as an excellent hedge against risk. Remember, too, that when a pension fund buys a government bond, it is held as an asset which produces a future cash stream which benefits the private sector. So ‘public debt’ is not a burden passed on from one generation to the next. The stock of public debt is only a problem when its servicing (ie, payment of interest) is unaffordable; ie, in times of recession when growth is zero or negative and/or interest rates demanded by the financial market are soaring.

The question is when is debt sustainable? Sustainability means keeping the ratio of debt to GDP stable in the longer term. If GDP at the start of the year is €1,000bn and the government’s total stock of debt is €600bn, then the debt ratio is 60%; the fiscal deficit is the extra borrowing that the government makes in a year – so it adds to the stock of debt. But although the stock of debt may be rising, as long as GDP is rising proportionately, the debt/GDP ratio can be kept constant or may even be falling.

Consider the following example. Suppose the real rate of interest on debt is 2% (say 5% nominal but with inflation at 3%, so 5 – 3 = 2). That means government must pay €12bn per annum of interest in real terms. But as long as real GDP, too, is rising—say at 2% per year—there’s no problem since real GDP at the year’s end will be €1020bn. Even if the government were to pay none of the interest, the end-of-year debt/GDP ratio would be 612/1020 or 60%; ie, the debt ratio remains unchanged. By contrast, if real GDP growth is zero, the ratio would be 612/1000 = 61.2; ie, the debt ratio rises only slightly. The rule is that as long as the real economy is growing by at least as much as the real rate of interest on debt, the debt/GDP ratio doesn’t rise. Moreover, this holds true irrespective of whether the debt ratio is 60% or 600%.

But there’s a catch. In a modern economy, the public sector accounts for about half the economy. If a country panics about its debt ratio and cuts back sharply on public sector spending, this reduces aggregate demand and may lead to stagnation or even recession. When a country stops growing, financial markets decide that its debt ratio may rise and so become more cautious about lending and demand a higher bond yield (ie, interest rate). The gloomy prophecy of growing public indebtedness becomes self-fulfilling.

This is exactly the sort of ‘debt trap’ which faces much of the EU and other rich countries. The way out cannot be greater austerity.

What works for a single household or firm doesn’t work for the economy as a whole. A household can tighten its belt by spending less, saving more, and thus ‘balancing the books’, but an economy cannot. If everybody saves more, national income falls. Of course, Germany and some Nordic countries can balance the government books because an export surplus offsets domestic private saving. But the Club-Med countries cannot match them. When no EZ country can devalue, to ask each EZ country to balance the books by running an export surplus is empirically and logically impossible. Even if all could devalue, what would follow is 1930s-style competitive devaluation.

The way out of the ‘debt trap’ is the same as the way out of recession: if the private sector won’t invest, the public sector must become investor of the last resort.

It doesn’t matter whether new investment is financed by more government borrowing, quantitative easing or redistribution (some combination of the three would be optimal). What matters is growth.

Europe Needs A Federal Reserve System To Save The Eurozone

The entire world worries about the state and future of the “Euro.”

America’s common man on the streets can be heard sniping, “See, Europe’s social-welfare system bankrupt it… socialist fools.”

Even billionaire investor Warren Buffett said Europe’s debt crisis had shown up a “major flaw” in the 17-member euro zone system and it would take more than words to fix it. “There is a major flaw in the euro system… I do know the system as presently designed has a major flaw and that flaw won’t be corrected just by words.”

Of the two comments and sentiments, Buffett is correct.

Europeans think it is all quite unfair. They point out that, in sum, the eurozone is in no worse an economic position than the US: 1) its public finances are in better shape than the US, and 2) its overall level of private sector debt is actually lower.

Yet for the past two years, financial markets have beat up the eurozone with increasing brutality. While the cited facts may be correct, European leaders and citizens would be better served reflecting on why the eurozone faces crisis while the US does not: the two are very different monetary unions.

First off, the eurozone is a much more decentralized monetary union than the US.

The eurozone has no federal budget to speak of. The EU budget, is minuscule by comparison (at just 1 per cent of GDP) and cannot go into deficit. Transfer payments are paid out of the EU budget, and these are not welfare-related but, rather, farm subsidies. The problem is that the euro is a currency shared by fiscally independent countries, much like American conservatives would prefer to see in the US – deficit-financing, debt issuance, welfare payments, bank deposit protection, and so on.. issues at federal level… taking place at state level, or national level in the eurozone.

Sitting atop the eurozone’s fiscally decentralized structure is a central bank (the ECB) which — as really just a successor to the former Deutsche Bundesbank (German Federal Bank) — is a more cautious institution than the US Federal Reserve, with a narrower interpretation of its function, resulting in it being more inflation-averse than the US Fed and more reluctant to implement “monetary financing” (acting as a lender of last resort to governments). In the current extreme situation, the ECB has implemented limited government bond purchase programs, but it has done so with aversion at meaningless levels.

Thus, second off, the US is a full-fledged federation with a relatively flexible central bank… while the eurozone is a fiscally decentralized confederation with a conservative and limited purpose central bank.

These differences are critical to understanding why the eurozone is the focus of market turmoil and the US is not. The eurozone’s constituents interact very differently with each other than do those of the US: Germany does not stand in relation to Spain the way that New York does to North Carolina, or eurozone countries in relation to the ECB the way that US states do to the Fed.

The structure of the eurozone creates a whole host of problems that do not arise in a full-fledged federation such as the US. Consider three problems:

First, because they do not monopolize control of the currency in which they issue their debt, some countries are treated as if they issued sovereign debt in a foreign currency — witness Spain paying 5 percentage points more than the UK to issue 10-year debt, even though its public finances are in no worse shape.

Second, unlike the US, the eurozone lacks a joint fiscal backstop to the banking sector — thus plunging Ireland into a sovereign debt crisis, while the U.S. State of Delaware (where AIG is incorporated) was not.

Third, banks and individual states interact differently: in the US, confidence in banks is not affected by the fiscal position of the state in which they are incorporated, but in the eurozone it is thus.

The eurozone’s structure, therefore, makes it a more fragile monetary union than the US.

As a fiscally decentralized monetary union, the euro zone is vulnerable to ‘death spirals’ in some of its member countries, driven by negative feed-back loops in which concerns about bank and sovereign solvency feed on and amplify each other. So far, eurozone policy-makers have done nothing to repair the inadequate structure that gives rise to these deadly spirals. Instead, Germany has led an effort to preserve the feeble structure while making it more rigid and less accommodating.

The eurozone remains a fiscally decentralized currency bloc, with a Germanic central bank. The only change implemented — and driven by Germany — is that member-states are now subject to tighter (and more pro-cyclical) fiscal rules. More instability and crashing economies is this arrangement’s future.

The Germans — willfully — do not accept that the eurozone is institutionally flawed. Germany argues that the cause of the crisis is primarily behavioral, not institutional. The road to salvation, from the German perspective, is not to deepen integration by establishing a common bank deposit protection scheme or issuing debt jointly (thereby increasing moral hazard [oh my!]). No, the German-imposed road to salvation is to deepen integration by imposing puritan fiscal rules to stop errant conduct.

Ever since the crisis broke out, the German mantra has all been about fiscal consolidation and structural reforms, undergirded by their assumption that the eurozone will be fine — thank you, very much — if it will turn itself economically into a larger version of Germany: countries that consolidate their public finances and reform their economies will end up with low German borrowing costs.

German citizens feel like they have made very real sacrifices for the euro over the years (for the past decade, German workers’ wages have barely increased in real terms). Plus, their feelings of being slighted are supported by clear evidence of corruption and poor decision-making elsewhere: Greece certainly mismanaged its public finances and Europe’s Mediterranean countries did too little to reform their economies. Nonetheless, what the German narrative failed to address is why the eurozone has proven so much less stable than the US, even though some of its underlying problems are no worse.

Rather than a vote of confidence in the German economy, the significant disparity in government bond yields inside the eurozone represents a loss of confidence in the eurozone structure, itself. Perhaps financial markets now understand that… the euro is a post-national/federal currency shared by resistant countries that remain attached to an outdated fiscal sovereignty.

The problem, in other words, is not financial, but political.

The eurozone does not need financial assistance from China, the IMF, United States, or anyone else. Rather, Europe needs its leaders to pool their fiscal resources together into a federal reserve and treasury. Whether citizens will provide permission and momentum to their elected representatives for such an endeavor is also whether or not Europe will grow into a modern, thriving economy able to perform on the world stage.

Perhaps success on this modernization will come from pressure within the European Commission and its impact on Germany. Chancellor Merkel clearly seeks to first implement German financial governance standards through an enforced fiscal unity before acquiescing to establishing a proper monetary union. The Eurozone member nations, however, may force the issue by seeking first to establish “Eurobonds,” in a first step to full monetary and fiscal union . A proper activist “Fed” [ECB] and federalized euro zone “Treasury Department” would next be required… Alexander Hamilton would approve.

This week, the European Commission is set to make its clearest demand yet that Merkel agree to the creation of such eurobonds. According to media reports, European Commission President Jose Manuel Barroso plans on Wednesday to present three different options for issuing such bonds, backed by the euro zone as a whole instead of by individual members of the common currency area. Doing so — according to the European Commission report — would “stabilize the euro zone, make the financial sector more robust and would make the refinancing of state debt cheaper.”

Long-term, the viable solution is for all government bond issues in the euro zone to be replaced by euro bonds. Credit risk would be pooled, meaning that all currency union members would guarantee the debt of all the others.

Such a model would require significant changes to the Lisbon Treaty because of the treaty’s prohibition of one member state bailing out another.

Treaty change should begin immediately, with all national political heads aligning with the change or removing themselves or their nation from the process and the euro zone.

As I Recover… “Occupy” Is Others’ Hope To Recovery

As I recover from my own very serious spinal surgery and appreciate to my very core that the $100,000+ cost is covered by insurance…

I also contemplate the human situation after learning that my Aunt’s current chemotherapy treatments are covered 80% by insurance, with her and my Uncle left to pick up the balance…

And, I think how fortunate I am that my Life-Partner’s employer affords me the benefit of complete health insurance at my time of need…

And I appreciate how fortunate my Aunt and Uncle are to have the financial success in life such that their massive “out-of-pocket” chemo expenses are afforded by themselves.

Then my heart wrenches to think what would each of our lives be like had we not had the health care access life and circumstance afforded us.

I don’t have to look far, for those harmed by our inequitable and deficient system stand front and center as stark reminder…

… and plead for recovery, that a better system be established:

We can do better… Listen… OCCUPY LIFE!

What Caused The Financial Crisis & Housing Bubble? NOT The Myth About Fannie Mae & Freddie Mac

What did cause the Crash? Many factors: failed government and financial market policy, failed federal and corporate governance, failed ethics and oversight, failed human integrity, greed, and ideology.

First, let’s just look at a chart documenting that the Housing Bubble — and, thence, the Financial Crash — was NOT caused by a government policy encouraging “sub-prime’ mortgages by HUD through Fannie Mae & Freddie Mac.

Then, we will look at the myth that free-marketeer conservatives and the Republican Party espouse… followed by the “doesn’t-matter-what-is-your-ideology” logical reasons for the collapse of housing and financial markets.

Proof That Fannie And Freddie Policies Didn’t Cause The Housing Bubble

The role of government agencies in causing the housing bubble continues to be debated ad nauseam: “It’s all about the ‘sub-prime’ loans forced onto the market.”

Perhaps this chart of various housing bubbles around the world will shed some light.

If one truly thinks the “Crash” was all Fannie and Freddie’s fault, then one must explain how nearly every other industrialized nation at the same time experienced the same basic arc of a housing boom and bust… when the other nations did not have Fannie or Freddie with which to contend?

Take note of the exceptions: Germany never followed US fiscal or monetary (that’s EU/ECB territory) or deregulatory policies. Independent Switzerland never follows anyone’s policies and is not part of the EU/ECB. And, Japan had already experienced it’s housing bubble a decade earlier. Other than that, the balance did not have US policies supposedly encouraging sub-prime lending through Fannie or Freddie, but they did have other policies and actions in common with the U.S, and we will explore those toward the end.

The Myth Espoused By Conservatives And The Republican Party

One group has stood out and apart reshaping the narrative about the housing bubble, financial market collapse, and economic crisis… those whose bad judgment and failed ideology facilitated the crisis: the Ayn Rand-loving, free-marketeer, deregulators.

The game is afoot, and it’s an active campaign to rewrite history. Until the truth is set free from this history re-writing effort, the process of repairing what was broken is greatly hindered. It prevents us from holding guilty parties responsible (and foments the passion of the “Occupy” movement). The charade prevents implementation of measures to prevent another crisis.

Unfortunately, the storytellers shout louder than truth tellers.

Wall Street and its acolytes have their revised tale: “They are mere victims, as the entire boom and bust was caused by dictatorial government policies shoving sub-prime mortgages down their throats by HUD through Fannie Mae and Freddie Mac… Couldn’t possibly be irresponsible lending… not derivatives… not extreme leverage… not excessive compensation packages… Nope, it is, rather, long-standing housing policies of Clinton and Democrats at fault.”

This “blame Fannie & Freddie” story has been articulated by commenters to past articles on Faustian urGe. It is offered in numerous editorials and commentaries over the last couple years in the Wall Street Journal. Rush Limbaugh propagates the myth in speeches and on his radio program. It has been a story delivered in Congressional testimony and by congress members, themselves.

Even just a couple weeks ago, New York Mayor Michael Bloomberg encouraged the distortion field to move the “eye of blame” off his compatriots in the industry where he became wealthy when he stated the mistruth to the ”Occupy Wall Street” protestors,

“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”

This line of argument simply does not hold up… Um, policies designed to facilitate home ownership of “some” lower-income folk just below the normal means of attaining prime mortgages was not mandated upon ANY mortgage originator, nor their derivative-selling brethren. Nope.

Such a line of reasoning does, however, serve the interest of partisan interest groups who advocated for financial market deregulation and serve the interests of those politicians best positioned if deregulation does not receive any blame for the crisis. But, this does not change the truth even a little.

Moreover, the financial incentives offered by the government for “some” mortgage originators to offer these products to “some” home buyers NEVER negated the financial due diligence of originators, lenders, packagers, cds funds… everyone in the financial industry. The fault lay clearly at the feet of the financial titans who lost sight of their fiduciary obligation to their shareholders and oversight bodies. In a word, GREED of the marketplace encouraged by lax deregulatory and monetary policy caused the crashes.

It should be noted, banks and other financial institution’s actions are — and always will be — a risk to the entire economy (that’s why we had and need to reinstate the “Glass-Steagall Act”); thus, reducing this risk by increasing capital reserve requirements and reducing extreme leveraging is required, even while this also reduces profitability. Oh well, the trade off is having a secure and predictable market in which to make profits.

Still, fear of increased regulations and constrained financial market profits due to the public and congress acknowledging the industry’s failures make for profound motivation to distort the reality field.

But, the biggest reason for the continued distortions is likely much more human… “cognitive dissonance” — the state of having inconsistent thoughts, beliefs, or attitudes, esp. as relating to behavioral decisions and attitude change, such as happens when a belief system or ideology fails profoundly.

“Doesn’t-Matter-What-Is-Your-Ideology” Explanation For Housing & Financial Market Collapse

So what are the facts; what is the reality field? The US economy is quite complex and intricate, so certainly, no single problem or matter was the cause. But, to be sure, there is a cause.

Check it out:

● Former Federal Reserve Chair Alan Greenspan reduced rates to 1 percent — lowest in 50 years — and kept them there for a uniquely long time…

● Low rates led to lower general yields on municipal bonds or Treasurys. Fund managers then turned to high-yield mortgage-backed securities — failing to do adequate due diligence before buying them.

● Fund managers made this error and relied on credit ratings agencies to do their work — Moody’s, S&P and Fitch. But, the ratings agencies had placed AAA ratings on junk securities, claiming they were as safe as U.S. Treasurys.

● Derivatives became an unregulated financial instrument hiding the truth of real risk. Exempt from proper oversight, insurance supervision, and reserve requirements, derivatives permitted AIG to write $3 trillion in instruments while reserving absolutely nothing against future claims.

● The Securities and Exchange Commission changed the leverage rules for the exclusive pleasure of five Wall Street banks in 2004. The “Bear Stearns exemption” replaced the previous capitalization rule  leverage limit and permitted unlimited leverage for Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns.

● Wall Street’s compensation system encouraged a short-term performance perspective, and offered traders great upside with none of the downside, leading to excessive risk-taking.

● The demand for higher-yields led Wall Street to begin bundling mortgages, with the highest yields coming from subprime mortgages cleverly buried in piles with prime mortgages. This deceptive market for packaging mortgage-backed instruments was exempt from most regulations. The Federal Reserve could and should have provided oversight, but Greenspan chose not to… ever the Ayn Rand free marketeer.

● The mortgage originators’ unregulated scheme saw them holding mortgages for a very short period, thus allowing them to be creative/unscrupulous with underwriting standards, ignoring all traditional lending metrics such as income, credit rating, debt-service history and loan-to-value.

● New mortgage products came on the market to attract more subprime borrowers to create higher yielding packaged instruments — adjustable-rate mortgages, interest-only, piggy-back mortgages (concurrent mortgage and home-equity line) and negative amortization loans (borrower’s indebtedness goes up each month). These “innovative” private-sector mortgages — not those encouraged by HUD policies — defaulted in hugely disproportionate frequency compared to traditional 30-year fixed mortgages.

● To remain competitive and satisfy demanding boards and shareholders, traditional banks developed computerized underwriting systems for mortgages and relied on software programs instead of thoughtful managers. Employees were paid on loan volume, not quality.

● The Glass-Steagall Act — previously the fire wall separating Wall Street investment banks and Main Street commercial banks — was repealed in 1999 during our deregulatory zeal, thus allowing FDIC-insured banks (deposits guaranteed by the government) to enter into excessively risky business arrangements. The law’s repeal also permitted industry consolidation to the extreme.

● In 2004, the Office of the Comptroller of the Currency preempted state laws regulating mortgage credit and national banks. Thereafter, national lenders sold increasingly risky mortgage products in those states. Then… default and foreclosure rates skyrocketed.

Deregulating the financial sector, jettisoning protections that had succeeded for decades is THE FATAL FLAW.

Congress failed its obligation and permitted Wall Street to self-regulate, and Greenspan through the Fed ignored financial market abuses, falling prey to his own coined phrase of “irrational exuberance.” His exuberance was his belief in the purity of free markets.

The discredited belief that free markets require no adult supervision is the reason for our crisis and why a new false narrative has been created.

So Here’s The Big Truth Bottom Line

1) The Fed kept its policy interest rate, the federal funds rate, below the natural or neutral interest rate for an extended period.

2) Given the excessive monetary easing shown above, the Fed helped create a credit boom that found its way–via financial innovation, lax governance (both private and public), and misaligned incentives–into the housing market.

3) Given the Fed’s monetary worldwide influence, its too-loose, too-long monetary policy was exported across the globe. As a result, the Fed helped create a global liquidity glut that in turn helped fuel a global housing boom.

4) The G7-G20 regularly meet to synchronize their fiscal and monetary policies, which would effect the money supply and interest rates across the economies in the housing chart atop this post. Other than Germany (note its line in the housing chart), most of Europe is right there with the US of A. Though Eurofund/ECB rates were held relatively high due to Germany’s insistence, the ECB rates generally followed the curve of Fed rates while most of Europe followed US-style fiscal policies.

5) Imitation takes hold with the drastic financial market deregulatory path: Europe, after watching the U.S. bubble up since 1980, took a page from our deregulatory manual and started their own financial and economic liberalization, ala Reagan. For example, the same irresponsible and deregulated private-sector behavior as seen in the US can be noted in the UK, “During the period 2001-2007, many lenders began offering loans of increasing multiples of income sometimes to people with poor credit ratings; products that did not require a deposit became more common — 125% mortgage products appeared.” ( Simon Lambert, “This is MONEY,” Daily Mail UK). Deregulated loans became too easy to get in the UK, as in the US., connected with Thatcher’s banking deregulation that happened in the 1980s. Spain, France, Belgium, et al… followed suit.

SCOTUS To Review ObamaCare: Where Is U.S. Health Care Compared To The World?

The U.S. Supreme Court is going to review the constitutionality of ObamaCare… sounds like a good time to review what this plan is designed to address — namely, controlling costs while increasing health outcomes and providing health care access to all citizens.

Though I can’t fathom that anyone — liberal or conservative — would possibly be against these benchmarks (we can disagree how to get there), ideology and lack of empathy seem to predominate our national discussion. Still, it’s worth reviewing why extending health care access to all citizens, improving our national health outcomes, and controlling costs should be attempted.

And, the main points are that we have the most expensive system in the world with the poorest outcomes of all industrialized nations.

Oh? So what’s that mean? Let’s take a look at how far off base we are from a reasonably efficient and effective system compared to the world.

It’s the best health care system in the world!? But, compared to what?

It’s well known (among folks that care about such things) that the United States spends a lot more per person on health care than comparable countries and that our actual health outcomes are anywhere from average to bad. See, for example, the chart below from a 2008 paper by Gerard Anderson and Bianca Frogner.

This chart above shows the extent to which each nation’s health care spending and life expectancy differ from what is expected, based upon the income of the nation (per capita GDP) and standard deviations. As readily seen, the U.S. spends a HUGE amount more with lives a lot SHORTER.

Sure that doesn’t look good… But aren’t we improving?

OK, so that’s where the U.S. is today, but where we are going? Hasn’t the nation been in the midst of a decade’s long pursuit of cost containment and cost sharing? Surely we’re seeing some results and improvements for all the efforts and increased financial burdens upon individuals and families?

Change in a massive system such as the U.S. health system takes time to occur. So even if we have a inefficient, expensive health care system, maybe it is getting relatively better and relatively less expensive. Nope. We’re getting worse… so all this effort is not working.

The chart below, from the OECD data, highlights the change seen in each nation’s per capita spending and life expectancy relative to all other countries. The data are standardized so that we’re seeing the number of standard deviations of each country away from the statistical mean of the whole in 1992 and in 2007.

Obviously, not only is the United States the outlier in terms of spending, we are moving in the wrong direction altogether!

The U.S. is becoming more of a spending anomaly, as our average life expectancy degrades into the lower group (currently surpassing only Turkey, Hungary, Mexico, Poland, and Czech Republic)!

Are you sure you’re looking at that right?

Another way to look at the situation is to look at actual values rather than standard deviations, as in the chart below, indicating actual increases in life expectancy and percentage increases in nominal per capita health care spending. The axes are located at the averages of these countries: the average spending increase was 132 percent and the average life expectancy gain was 3.7 years.

So, in percentage terms, health care costs have been growing in the United States a bit faster than in other comparable countries (poorer countries increased spending more rapidly).

Our life expectancy gain was the absolute lowest of the whole group, however  — starting from a low level already.

Isn’t the Marketplace supposed to correct for these disparities?

According to market theory, one would expect to see convergence across countries over time — meaning that since other countries spend less and live longer, the U.S. would learn from their examples and adjust accordingly… fulfilling the mantra of global competition. Instead we’re moving the wrong way on both dimensions.

WE NEED OBAMACARE… AND WE NEED IT TO WORK.

Occupy Wall Street Message? First Declaration Makes Clear

Since the occupation of Wall Street first began on September 17th, the mainstream media criticized the general assembly for lack of a cohesive list of complaints or demands.

On the night of September 29, 2011, Occupy Wall Street participants voted on and approved the first official “Declaration of the Occupation of New York City.”

The first declaration from Occupy Wall Street, is reprinted in its entirety (Seems to be a very clear message):

As we gather together in solidarity to express a feeling of mass injustice, we must not lose sight of what brought us together. We write so that all people who feel wronged by the corporate forces of the world can know that we are your allies.

As one people, united, we acknowledge the reality: that the future of the human race requires the cooperation of its members; that our system must protect our rights, and upon corruption of that system, it is up to the individuals to protect their own rights, and those of their neighbors; that a democratic government derives its just power from the people, but corporations do not seek consent to extract wealth from the people and the Earth; and that no true democracy is attainable when the process is determined by economic power. We come to you at a time when corporations, which place profit over people, self-interest over justice, and oppression over equality, run our governments. We have peaceably assembled here, as is our right, to let these facts be known.

• They have taken our houses through an illegal foreclosure process, despite not having the original mortgage.
• They have taken bailouts from taxpayers with impunity, and continue to give Executives exorbitant bonuses.
• They have perpetuated inequality and discrimination in the workplace based on age, the color of one’s skin, sex, gender identity and sexual orientation.
• They have poisoned the food supply through negligence, and undermined the farming system through monopolization.
• They have profited off of the torture, confinement, and cruel treatment of countless nonhuman animals, and actively hide these practices.
• They have continuously sought to strip employees of the right to negotiate for better pay and safer working conditions.
• They have held students hostage with tens of thousands of dollars of debt on education, which is itself a human right.
• They have consistently outsourced labor and used that outsourcing as leverage to cut workers’ healthcare and pay.
• They have influenced the courts to achieve the same rights as people, with none of the culpability or responsibility.
• They have spent millions of dollars on legal teams that look for ways to get them out of contracts in regards to health insurance.
• They have sold our privacy as a commodity.
• They have used the military and police force to prevent freedom of the press.
• They have deliberately declined to recall faulty products endangering lives in pursuit of profit.
• They determine economic policy, despite the catastrophic failures their policies have produced and continue to produce.
• They have donated large sums of money to politicians supposed to be regulating them.
• They continue to block alternate forms of energy to keep us dependent on oil.
• They continue to block generic forms of medicine that could save people’s lives in order to protect investments that have already turned a substantive profit.
• They have purposely covered up oil spills, accidents, faulty bookkeeping, and inactive ingredients in pursuit of profit.
• They purposefully keep people misinformed and fearful through their control of the media.
• They have accepted private contracts to murder prisoners even when presented with serious doubts about their guilt.
• They have perpetuated colonialism at home and abroad.
• They have participated in the torture and murder of innocent civilians overseas.
• They continue to create weapons of mass destruction in order to receive government contracts.*

To the people of the world,

We, the New York City General Assembly occupying Wall Street in Liberty Square, urge you to assert your power.

Exercise your right to peaceably assemble; occupy public space; create a process to address the problems we face, and generate solutions accessible to everyone.

To all communities that take action and form groups in the spirit of direct democracy, we offer support, documentation, and all of the resources at our disposal.

Join us and make your voices heard!

*These grievances are not all-inclusive.