Why Dumb Bankers Love Keynesianism
by Gary North: Five
Mainstream Economists Sound a Warning
love government bailouts. So do Keynesians. Dumb bankers abhor negative
economic feedback for stupid decisions. So do Keynesians. Dumb bankers
love monetary inflation that leads to banking profits. So do Keynesians.
Dumb bankers love national governments large enough to bail out
large banks. So do Keynesians. Dumb bankers hate bank runs. So do
Keynesians. Dumb bankers want tenure without personal liability.
So do Keynesians.
is the chief spokesman for Keynesianism in our time. He sees his
job as making sure that taxpayers bail out large multinational banks.
When taxpayers resist, he ridicules them for being short-sighted.
his position as a defender of banking interests by coming in the
name of the workers. But big bank bailouts are the inescapable implication
of his recommended policies. He is the multinational bankers' friend.
So is his Princeton colleague, Ben Bernanke.
We can see
this in his recent article calling for the German government and
the International Monetary Fund and the European Central Bank to
lend more money to Spain's government even though the government
refuses to cut spending.
He wants the
economy to avoid the cost of repaying loans from the North. There
must be more loans to the government so there can be more payments
to people on the dole, who will spend money, and get the economy
rolling. Then this will let Spanish debtors meet their interest
payments to German banks.
So, once caught
in the trap of bad loans to deadbeats, bankers must make more bad
loans. Why will they do this? Because the German government, the
ECB, and the IMF will keep buying Spain's government's bonds.
If this sounds
like Bernanke and Paulson in 2008, that's because they set the pattern.
entering into a recession. There is a continuing fiscal crisis in
Greece, Portugal, and Spain, which is huge.
now moved into a recession. Great Britain probably has.
appalled by the requirements of the IMF, the ECB, and Germany's
politicians that reduced spending by PIIGS's governments must be
a condition for receiving IMF aid and German aid. He is a Keynesian.
He hates the idea of austerity, which means austerity for government
bureaucracies. He wants more spending by governments.
It is always
possible to get an article out of refuting one of his articles.
He is of course anti-austerity, he is in favor of deficits.
ECB TO THE RESCUE
He began his
article with a summary of the European Central Bank's promise to
keep governments solvent by purchasing their debt. This has been
illegal in the past. But the ECB has broken the rules of the eurozone's
treaty. This violation of the rules had "soothed" markets, he said.
All a debtor nation had to do was ask for help, meaning bailout
broke out in Greece and Spain to protest "austerity," meaning government
budget cuts. It's very bad economically, he said. "With unemployment
at Great Depression levels and with erstwhile middle-class workers
reduced to picking through garbage in search of food, austerity
has already gone too far. And this means that there may not be a
deal after all."
the financial media, which thinks that the deadbeat nations will
commentary suggests that the citizens of Spain and Greece are just
delaying the inevitable, protesting against sacrifices that must,
in fact, be made. But the truth is that the protesters are right.
More austerity serves no useful purpose; the truly irrational players
here are the allegedly serious politicians and officials demanding
ever more pain.
This is pure
Krugman. He never met a federal deficit that he didn't like. He
never met a government labor union he didn't like.
He said that
Spain is suffering because of the aftermath of its popped housing
bubble. He said it caused a boom and forced up prices. He did not
explain how. Why did housing prices rise? Low interest rates. Why
were there low interest rates? Because northern European banks lent
newly created money to Spanish government bonds. German banks were
the bubble burst, Spain was left with the difficult problem of regaining
competitiveness, a painful process that will take years. Unless
Spain leaves the euro a step nobody wants to take it is condemned
to years of high unemployment.
had much competitiveness in the first place. That was the heart
of the matter. But they borrowed at rates that applied to Germans,
who are competitive. This was stupidity on the part of German bankers.
Now they are loaded up on bad debt issued by a nation that was never
competitive going back to the seventeenth century.
this arguably inevitable suffering is being greatly magnified by
harsh spending cuts; and these spending cuts are a case of inflicting
pain for the sake of inflicting pain.
This is Keynesian
rhetoric. The cuts are not being called for to increase pain for
its own sake. The cuts are being demanded because Spain is running
a huge deficit. Lenders want to be paid interest on time, and in
He said that
the government ran a small surplus until 2009. "Large deficits emerged
when the economy tanked, taking revenues with it, but, even so,
Spain doesn't appear to have all that high a debt burden."
what happened? It's simple: dumb bankers in the North lend euros
at low rates. When rates are held low by stupid bond investors,
this forces down other long-rate debt. Mortgage debt soared. The
true that Spain is now having trouble borrowing to finance its deficits.
That trouble is, however, mainly because of fears about the nation's
broader difficulties not least the fear of political turmoil
in the face of very high unemployment. And shaving a few points
off the budget deficit won't resolve those fears. In fact, research
by the International Monetary Fund suggests that spending cuts in
deeply depressed economies may actually reduce investor confidence
because they accelerate the pace of economic decline.
government spending hastens economic decline. Why? Why is it unproductive
to let the private sector keep this money? This is the heart of
Keynesianism's error from the beginning.
other words, the straight economics of the situation suggests that
Spain doesn't need more austerity. It shouldn't throw a party, and,
in fact, it probably has no alternative (short of euro exit) to
a protracted period of hard times. But savage cuts to essential
public services, to aid to the needy, and so on actually hurt the
country's prospects for successful adjustment.
what he is saying. Cuts are "savage." What is the evidence? What
constitutes savage cuts? For a Keynesian, any cuts are savage.
He wrote that
there will be "a protracted period of hard times." I agree. There
are already very hard times. There is 50% unemployment for people
in their early twenties. But why does Spain have no alternative
(short of a eurozone exit.)
Now I must
ask some decidedly non-Keynesian questions. First, why would Spain's
departure from the eurozone keep away hard times? This is what Krugman
indicates would be the case, but it is not self-evident to me as
to why it should be the case. What is it about the euro, meaning
the use of the euro within a free-trade zone, that has created such
A strong euro
is creating hard times in Spain, because there is almost nothing
that Spain can export that anybody in northern Europe wants to buy.
So, Spaniards cannot get enough money in euros for the government
to collect from the public to meet its payments on its debt.
other words, the government sold its IOUs in the boom. The economy
has collapsed. The economy has collapsed, because the inefficiencies
of Spanish production do not enable it to compete effectively with
economies in the North.
leaving the eurozone help Spain? There would be some increase in
exports, but only if the new currency unit, probably the peseta,
will fall in value in relationship to the euro. Why would it do
that? Because Spain's central bank would legally have the power
to produce pesetas in large quantities. It would inflate the currency.
That would lower the value of the peseta in relationship to the
euro. So, Spain would get more exports. But, in contrast, Spain's
citizens would not be able to afford to import very much from outside
Spain. That would dramatically cut imports, which would raise domestic
prices. The public would not be able to buy as many goods and services,
precisely because the supply of services coming in from Germany
in the North would be cut off.
of available goods from northern Europe would mean austerity for
the public. It would mean that people would have to cut back on
spending. There would be a real hardship among those people who
still have jobs.
the rest of the article
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 31-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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