Posts Tagged ‘paul krugman’

Inflation Is Not The Solution To The Economic Crisis

August 20th, 2012 Comments off

Almost instantaneously, as soon as governments across the globe went into unparalleled debt to bail out their financial systems beginning in 2008, economists openly were discussing  the impossibility of ever paying back those sovereign loans, and that a different solution was required. The answer, so the economists said amongst themselves, was targeted inflation. In effect, so argued those economists, inflation significantly higher than recent levels, targeted at a level of at least 5 percent, would be “good.”

Why would inflation, a fiscal and monetary circumstance which human beings by instinct regard as an ill omen, be seen in such positive hues by economists as renowned as Nobel Prize winner Paul Krugman? The answer is that inflation is viewed as the ideal solution for eliminating sovereign debts that can never be repaid. In effect, inflation is the methodology by which a nation-state defaults on its loan obligations stealthily. The printing presses expand money supply beyond the level generated through real economic productivity, in the process depreciating the value of the currency. The nation-state , on paper, doesn’t default on its loan repayments, since the contractual obligation is repaid in monetary terms. However, inflation depreciates the value of the currency, so the outstanding loan obligation shrinks in real terms. In addition, so argue the economists, inflation, by destroying the value of money, discourages savings, leading to higher spending and improved economic growth.

It is a neat gimmick, one resorted to by indebted sovereigns throughout history. However, despite claims by economists that precisely targeted inflation has worked in the past, history tells a different story. In the great majority of examples where countries deliberately employed inflation as a fiscal and economic policy, the results were not only counterproductive; very often the social anguish created by the policymakers resulted in political consequences of dire proportions. One can look back at Weimar Germany’s bout of inflation, which went out of control and morphed into rampant hyperinflation. There are many countries that experimented with inflation at levels far less  than those experienced by Weimar Germany and, more recently, Zimbabwe, which still did no good and much harm economically and socially.

The basic problem with modern economic policymaking is that it is too fixated on fiscal gimmickry to resolve core problems. Whether it  is quantitative easing and “Operation Twist” by the Federal Reserve or stealth sovereign bond purchases by the European Central Bank,  the “experts” play fiscal games rather than address the fundamental factors underlying the global economic crisis; flawed systems and economic architectures that have transformed nations that formerly focused on production into entities of debt-financed consumption.  Regrettably, instead of coming to grips with the true underlying factors responsible for the first global economic depression of the 21st century, the economists advising our policymakers look increasingly towards inflation, and the destruction of whatever financial assets are still retained by the increasingly beleaguered middle class, as the last best hope for resolving the sovereign debt crisis.

It is unfortunate that our modern-day economic gurus have not read Santayana, who warned that those who disregard the mistakes of the past are condemned to repeat them.



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Global Economic Crisis Is Now A Depression: Paul Krugman

December 12th, 2011 Comments off

Nobel Prize winning economist Paul Krugman, in his recent column, has declared that the crisis in the global economy is now a depression.  Since the onset of the global economic crisis, policymakers and media pundits have resisted using the “D” word, instead preferring terms such as the “Great Recession.” However, this is what Paul Krugman wrote in his  December 11, 2011 New York Times column:

It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege. .. Specifically, demands for ever-harsher austerity, with no offsetting effort to foster growth, have done double damage. They have failed as economic policy, worsening unemployment without restoring confidence; a Europe-wide recession now looks likely even if the immediate threat of financial crisis is contained.”

Krugman points out in his piece that the economic disaster now unfolding in Europe threatens a resurgence of anti-democratic, populist authoritarianism of the type that infected European civilization during the Great Depression of the 1930s.Of course, the same dangers also lurk in the United States.

In my book, “Global Economic Forecast 2010-2015: Recession Into Depression,” I predicted in 2009 that the policy responses following the collapse of Lehman Brothers in 2008 would not only fail to resolve the global financial and economic crisis; they would create a sovereign debt contagion that would transform the recession into a depression.  Paul Krugman has confirmed the validity of my forecast made in 2009.

In his closing observation, Paul Krugman offers an ominous warning. After describing how Hungary, one of the new democracies in Eastern Europe, is receding into authoritarian rule as its politics become more extremist, all due to the economic crisis in Europe, Krugman writes about the Eurozone political leaders,  they also need to rethink their failing economic policies. If they don’t, there will be more backsliding on democracy — and the breakup of the euro may be the least of their worries.”

It appears that the global economic crisis, and Eurozone debt crisis, are increasingly becoming a political crisis.



Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

Belief that U.S. is in an Economic Depression is Growing: Paul Krugman and Ambrose Evans-Pritchard Join the Chorus of Gloom and Doom

July 6th, 2010 Comments off

Just in the past week, economic media pundits as diverse as Nobel laureate Paul Krugman, who writes for The New York Times, and Ambrose Evans-Pritchard, the international business editor for the British newspaper, the Telegraph, have warned that the United States is already in the initial phases of an economic depression. Their chilly characterization of the U.S. economy after more than a year of the Obama stimulus, preceded by TARP, is sterile is its uninhibited gloominess.

In the case of Paul Krugman, his focus is on the disastrous unemployment rate in America, and his conviction that fiscal crisis and deficits be damned, the U.S. must borrow and spend whatever it takes to drive down the unemployment rate, or face an even more grave economic emergency. As I have stated before, while I concur with Krugman’s description of the American economy, I don’t think his prescription is supportable, based on the mathematical realities and the fact that excessive private debt sparked the global financial and economic crisis.

Ambrose Evans-Pritchard’s most recent column had the melancholy headline, “With the U.S. trapped in depression, this really is starting to feel like 1932.” He lays out the case for why the U.S. is in the throes of a depression; dismal home and retail sales, collapsing state budgets and the resulting fiscal cuts abetting even more bad economic indicators. In his eyes, the only hope are the central banks engaging in another round of quantitative easing (being dubbed by some as QE 2) and debt monetization, the inevitable inflation actually being preferable to a deflationary spiral.

What is clear from reading these two esteemed economic observers is that very intelligent economists are losing hope over the state of the U.S. economy (which also means the global economy) and in their despair are grasping at extraordinary policy measures that are likely to further exacerbate all the macro-economic indicators they are rightfully perturbed by. The concluding comments in Evans-Pritchard’s column sum up the dire gloom that permeates his appreciation of the situation:

“Perhaps naively, I still think central banks have the tools to head off disaster. The question is whether they will do so fast enough, or even whether they wish to resist the chorus of 1930s liquidation taking charge of the debate. Last week the Bank for International Settlements called for combined fiscal and monetary tightening, lending its great authority to the forces of debt-deflation and mass unemployment. If even the BIS has lost the plot, God help us.”

Deficit Hawks Versus Deficit Worshippers: Paul Krugman Leads the Charge

December 1st, 2009 Comments off

As the U.S. federal government sinks ever deeper into irreversible fiscal imbalance, a cadre of pro-deficit economists, led by Nobel laureate Paul Krugman, have been pounding the airwaves, making the case for an emergency government jobs program, funded by, no surprise, an even larger dose of deficit spending. The case presented by Krugman rests on two pillars: 1. The rate of unemployment is so severe, it risks undermining any sustained economic recovery, threatening larger deficits down the road; 2. Low interest rates mean the U.S. government can fund  additional debt cheaply, those rates in turn assured by the current state of the bond market.

I sympathize with Paul Krugman’s concern about unemployment. Clearly, TARP and the other bailout and stimulus measures were aimed at Wall Street’s recovery, not Main Street’s. But I disagree with his optimism regarding the ability of the United States economy to absorb more sovereign debt. In only nine years, America’s national debt to GDP ratio has doubled, currently standing at 80%. Furthermore, his belief that interest rates offered on U.S. government debt can be maintained at perpetually low rates is based on theology, not economic science. It is inevitable that interest rates will rise for a host of reasons, not the least being that  the U.S. will find increasing competition in the sovereign debt market from other deficit-seduced governments. Even a modest rise in bond yields will utterly devastate the capacity of the American government to service its public debts. Fiscal collapse would be the result, bringing in its wake a level of unemployment that would leave even Paul Krugman pining for the jobless rates of late 2009.

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website,   


World Bank Issues Gloomy Forecast on Global Economic Crisis

June 24th, 2009 Comments off
The World Bank has issued an updated forecast on global economic growth. Its previous report in March was dismal enough; it projected a decline in worldwide GDP of 1.7%. The IMF will shortly present its own report, and issue a somewhat rosier picture for the global economy. However, the World Bank is peering at the global economic downturn through a different set of lenses than more optimistic observers, who seem inclined towards finding “green shoots” amid the financial weeds. The World Bank’s June report is now showing a projected contraction in the global economy of negative 2.9%.

This is a disaster-laden forecast, which essentially describes a developed global economy mired in staggering contraction, while the developing world is experiencing a collective growth rate of just above 1%, which undoubtedly would have slipped into negative territory without the inclusion of China’s GDP, which received the only positive projection from the World Bank, which has upped its China GDP forecast to a growth level of just above 7%. However, China’s economic growth is almost entirely based on borrowed money; a massive stimulus program comprising nearly $600 billion to subsidize domestic demand as a counterweight to the sharp decline in Chinese exports.

In 2010, the global economy is projected to return to growth, though on a lackadaisical scale. Even in projecting growth for next year, the World Bank reduced its already weak forecast. What the data seems to reflect, on the macroeconomic level, is that global trade is in free fall, and with the severe contraction of export-driven economic growth, massive borrowing by the sovereign to fund domestic stimulus activity is about the only major economic expansion still occurring. Unfortunately, fiscal policy is only a short-term driver of growth. Even sovereign states eventually exhaust their capacity to borrow and engage in vast levels of deficit spending.

With the World Bank pointing towards more bad news for the global economy, the European Central Bank has come out with a wet blanket of its own. The ECB is warning that pump priming by governments as their primary policy response to the Global Economic Crisis must soon come to an end, or create unacceptable levels of risk to sustained economic development. In particular, the ECB is concerned about the danger of rampant inflation and uncontrolled fiscal imbalances, as national debts of major developed economies, especially within the Eurozone, comprise a growing proportion of their GDP. More alarmingly, the ECB is not alone; other central bankers and economists are also warning that economic policymakers must soon find what they refer to as an “exit strategy” from the massive fiscal deficits that are currently being accumulated with such reckless abandon.

The World Bank’s June forecast data presents economic decision-makers with a conundrum. With 2009 shaping up to be the single worst year for global economic performance since World War II, and 2010 being projected as a year of anemic growth at best, there will be immense pressure on policymakers to enact follow-up stimulus programs, with even greater levels of public borrowing. For example, Nobel Prize wining economist Paul Krugman has consistently called for a much larger stimulus package than the nearly $800 billion Obama package. The argument will be that without more deficits, the globalized recession will be prolonged, and create higher levels of unemployment. However, the fact that in this fragile economic environment some voices within the policymaking establishment are beginning to question the continuation of debt-driven public financing is a sign that there is no clear consensus on how to resolve the Global Economic Crisis.

To add to all the other bad news, economist Nouriel Roubini, the most astute observer of the global financial and economic contraction, is now warning that while a slight economic upturn is possible in early 2010, there is now a growing risk of a “double dip” recession towards the end of 2010, facilitated in large part by the fractured finances of sovereigns that have accumulated staggering levels of public debt.

Finally, even the most optimistic projections concur that global unemployment will continue to accelerate, well into 2010. With fewer wage earners and a continuing credit contraction, it is hard to see any tangible basis for a sustained economic recovery. Remove deficit spending from the equation, and we could see a second Great Depression. Maintain high levels of public borrowing, and the global credit and bond markets will impose their own will, leading to equally cataclysmic economic consequences.

The World Bank’s updated economic forecast does not present a clear roadmap for the future of the global economy. What it does provides is more evidence that the Global Economic Crisis is far from over, and that there is no clear answer to the question of how to bring this globalized disaster to an end, and restore healthy, sustained growth to a battered world economy.


For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, 




Paul Krugman is Wrong on Inflation

May 31st, 2009 Comments off
In an Alice in Wonderland column published in The New York Times on May 29, economist Paul Krugman launched an attack on those such as myself who have expressed concern that the profligate budget deficits being enacted by the Obama administration are laying the foundation for high inflation. In my piece published in the Huffington Post, “U.S. Economy Risks Dire Prospect of Hyperinflation,” I made specific reference to the possibility that the Obama economic team may be pursuing an inflationary course as a strategy to reduce the real value of the exploding national debt. It seems that this point in particular caught the ire of Professor Krugman.
There is one point in Krugman’s piece that I concur with; we are enduring an unprecedented economic crisis. This calls for thoughtful debate and deliberative argumentation. Unfortunately, even as distinguished an economist as Paul Krugman can at times slip into a mode of petty banalities. As such, his New York Times polemic adds nothing consequential to the discourse on critical issues such as the risks as well as benefits of massive fiscal and monetary intervention on the part of the Obama administration and Federal Reserve. There are, however, a number of points raised by Krugman that warrant a response.
One point promulgated by Professor Krugman is that the unprecedented level of quantitative easing by the Fed is not inflationary, and that those such as myself who have raised this concern are “just wrong.” This is what Krugman had to say on this matter, “Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices. But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them.”
So, Krugman agrees that quantitative easing in ordinary times is “highly inflationary” but in our present predicament those rules are suspended. What is left out of Paul Krugman’s rationalization is that banks are sitting on the infusion of liquidity they have received from the Fed because of their chronic need to shore up their balance sheets, which are saturated with toxic assets. However, it is the intention of the Fed to facilitate credit easing on the part of financial institutions through its quantitative easing, which leads to the possibility of future inflation, unless the Federal Reserve is a model of perfection in tightening up on the money supply when the credit crunch abates. Based on the overall performance of the Federal Reserve since the initial stages of the subprime mortgage meltdown, I would not be sanguine about their ability to inhibit the expansion of the money supply when inflationary pressures return.
Professor Krugman also adds that the primary concern currently is deflation, which I agree with in my Huffington Post piece, however, I disagree when he claims that there are currently no inflationary pressures. Due in large part to the falling value of the U.S. dollar, we have recently witnessed a substantial increase in the price of oil, despite weak demand due to the ongoing synchronized global recession. What appears to be an anomaly is actually a harbinger of future trends, in my view. Excessive deficit spending is contributing to the weakening of the dollar, which has price consequences for an economy as dependent on imported goods and commodities as is the case with the United States.

A major point made by others and me is that a high ratio of national debt to GDP creates a substantially elevated risk of inflation. Furthermore, I suggest that this may lead to a conclusion by decision-makers that the only policy response that can reduce this dangerous ratio of public indebtedness is to allow high levels of inflation, which in turn “grows” the nominal GDP not through higher output of goods and services, but through reduction of the constant value of the currency. Professor Krugman is dismissive of this point, making reference to the United States having a level of public debt that exceeded the GDP right after World War II, without severe consequences.

Let us look at the facts. The United States ended World War II with a labor force, including a substantial military, which was fully employed but had been restricted in the opportunities to spend disposable income. This was due to rationing on basic commodities such as foodstuffs, and the termination of production of major consumer durables such as automobiles owing to industrial mobilization in support of the war effort. After VJ day the pent-up consumer demand exploded, while consumer goods remained in short supply in the immediate post-war period. The result was a combination of real growth and high inflation, both dynamics contributing to the attenuation of the public debt to GDP ratio. Thus in 1946, the national debt ratio reached its highest level, 121%. By 1948, that ratio had declined significantly, at 93.7%. Now, let us observe the inflation rate during this period: 8.3% in 1946, a staggering 14.4% in 1947 and 8.1% in 1948. These figures clearly demonstrate that having a level of public debt exceeding 100% of the GDP does have inflationary consequences, and suggests that inflation in turn reduces the real value of the nominal public debt as a proportion of national GDP.

Perhaps the most disturbing aspect of Paul Krugman’s piece, beyond superficial and trivializing dismissal of those he disagrees with on the question of high levels of deficit spending, is his marginalization of those he disputes by resorting to rhetorical generalizations. Thus, he issues this inexplicable diagnosis of those who hold economic views that are contrary to his own: “But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.”

One of the inflation fear mongers is a supporter of President Obama’s stimulus spending program, NYU economics professor Nouriel Roubini. This is what he had to say at a recent symposium on the economic crisis, which Professor Krugman also participated in: “…we have to worry about the long run. If we’re going to finance budget deficits by printing money, we may have high inflation, even risk of hyperinflation in some countries. That’s what happened in Germany in the 1920s during the Weimar Republic. We are having large budget deficits and increasing the public debt, we don’t know whether it’s going to be $5 trillion or $10 trillion of more debt. But there are only a few ways of resolving that debt problem: either you default on it as countries like Argentina did; or you use the inflation tax to wipe out the real value of the debt; or you have to raise taxes and cut government spending. And given the size of the deficits, over time that’s going to be a painful political choice to make. So we need the stimulus in the short run, but we need to restore medium-term fiscal sustainability.”

Another supporter of President Obama’s economic policies, who also opposed George W. Bush’s deficit-financed tax cuts, is billionaire investor Warren Buffet. This is what the oracle of Omaha had to say about the linkage between high public debt to GDP ratios and the risk of inflation: “A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt.”

In writing off those observers who are concerned about the inflationary dangers emerging from the exploding national debt, Paul Krugman resorts to paraphrasing Franklin Roosevelt, claiming the only thing we have to fear about inflation is the fear of inflation itself. It seems, however, that there is one authority that is of like mind with Professor Krugman. In December 2002, Treasury Secretary Paul O’Neill, about to be fired for opposing the Bush tax cuts, had a meeting with Vice President Dick Cheney. In response to O’Neill’s warning of the long-term implications for the nation’s economic health of escalating federal deficits, Cheney told the soon-to-be but prescient ex-Treasury Secretary, “You know, Paul, Reagan proved deficits don’t matter.”

I never thought I would witness the day when Paul Krugman and Dick Cheney agree on economic policy.


For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, 








Paul Krugman Angers Austria’s Bankers, Politicians By Stating The Obvious

April 18th, 2009 Comments off
Nobel laureate Paul Krugman stirred the ire and indignation of Austria’s political and financial establishment by merely stating the obvious. While speaking at the Foreign Press Club, Krugman responded to a query regarding Austria’s exposure to flimsy debt in over-leveraged Eastern Europe. The Princeton University economics professor and New York Times columnist had the audacity to provide a factual response. As Paul Krugman restated in his blog, ” I responded by saying what everyone knows: Austrian lending to Eastern Europe is off the charts compared with anyone else’s, and that means some serious risk given that emerging Europe is experiencing the mother of all currency crises.” Hell knows no fury than an economist stating the obvious.
Austria’s irate Vice-Chancellor and Economy Minister, Josef Proell, denounced Krugman’s comments as “totally wrong.” To make sure everyone understood his point, he added, “absolutely absurd.” Adding to the amen chorus of aggrieved Austrian politicos was the International Monetary Fund. The head of the IMF, Dominique Strauss-Kahn, informed the Austrian media, “I do believe that the Austrian situation is fairly good, so I have no particular concern about the Austrian economy these days.”
No concern? The Austrian banking situation vis a vis East European loans is “fairly good?” What planet is Dominique Strauss-Kahn living on? It’s perhaps time for a little financial history, which the Austrian and European political establishment seems to have forgotten. Does anyone still remember the collapse of the Credit-Anstalt?
Created in 1855, with links to the Austro-Hungarian nobility and Rothschild banking family, Credit-Anstalt was the world’s first investment bank. It was the catalyst of many of the most important infrastructure projects in the last decades of existence of the Habsburg Empire. In the years after World War I, this Austrian bank engaged in major speculation throughout Europe, giving all the appearances of being a highly profitable financial institution. Even after the stock market crash on Wall Street in 1929, Credit-Anstalt sought to conduct business as usual, though the economic contraction that followed the 1929 crash transformed a growing proportion of its balance sheet into non-performing assets. When the bubble burst on May 11, 1931, it sent shock waves throughout the world’s financial system.
Contrary to public perception, the Wall Street Crash of 1929 was not the major catastrophe of the Great Depression; it was merely the precipitating event. In fact it was the bankruptcy of Credit-Anstalt in 1931 that made the Depression truly global, and crippled banks throughout Europe and North America. The resulting run on banks throughout the world, with numerous banking failures, was the catalyst that accelerated the rise in global unemployment. When Franklin Roosevelt assumed the U.S. presidency in 1933, his first major task was to attend to the deplorable state of U.S. banking. That reality was at least in part attributable to a chain reaction of financial failures that stemmed from the insolvency of Credit-Anstalt.

Now we are in 2009, with the subprime mortgage securities debacle having been the underlying cause of the state of insolvency afflicting America’s largest banks. The U.S. government, including Congress, Treasury and the Fed, have injected or issued backstop guarantees to the tune of $13 trillion, in a frantic effort aimed at keeping these zombie financial institutions artificially alive. Yet, in this truly global economic and financial crisis, events in other parts of the world may render mute and futile all the trillions of dollars the U.S. is borrowing to save the American and global financial system. As in 1931, it may well be the Austrian banking sector that is the final nail in the coffin of the current globalized financial order.

With the fall of communism, former East Bloc European states were encouraged to borrow heavily by their Western brethren, with Austrian banks leading the way. Governments in Eastern Europe borrowed massively to finance the modernization of their industries, with the goal of providing lower-cost industrial goods and commodities to consumers throughout Western Europe. In addition, consumers in Eastern Europe were encouraged to borrow money in Euro currency at low interest rates for homes and consumer durables. When the Global Economic Crisis hit Europe, demand destruction afflicted the highly leveraged new industrial plants in Eastern Europe. In addition, the consumers who unwisely borrowed money from Western banks in Euros were devastated by the collapse of their home currencies. A new housing crisis has arisen in lands as diverse as Hungary, Bulgaria and Romania.

The non-performing assets on the balance sheets of European banks are enormous, and have affected many countries throughout the Eurozone. However, in terms of percentage of toxic assets to GDP, no European state is in as precarious a state as Austria. More than $250 billion in bad assets are poisoning the balance sheets of Austrian banks, a sum equal to more than 62% of the nation’s GDP. By way of comparison, if the admittedly shaky U.S. banks held toxic assets in the same ratio to GDP, this would equal $8.7 trillion dollars in bad assets. If America’s banking disaster was on the same scale as Austria’s, it would require a dozen TARP programs to cover the holes on the balance sheets.

Is another Credit-Anstalt catastrophe in the works? The macroeconomic data emerging from Europe looks increasingly gloomy. In addition, the European Union is proving to be both disunited and uncoordinated in facing up to mounting evidence of a financial avalanche that may bury the Union and everything else with it, including the common currency. Policymakers throughout Europe are arguing over Eastern European stabilization funds, protectionism versus “free trade,” and other issues, both real and distractions, while the financial underpinning of the entire European economic system is ablaze.

Just as Iceland was the first nation to become nationally insolvent due to bank failures stemming from the Global Economic Crisis, Austria may be fated to endure a similar disastrous outcome. Should Austria’s banks fail as spectacularly as did the Credit-Anstalt back in 1931, the impact on the world’s financial and economic order will be at least as catastrophic and likely much worse. It is indeed timely for Paul Krugman to state the obvious regarding the looming Austrian banking crisis, irrespective of the indignation pouring out of Vienna.

Will 2009 prove to be 1931 redux? The indicators favor the pessimists far more than the optimists. Nobel Prize winning economist Paul Krugman has issued a sober warning, which hopefully will not be drowned out by the hyperbole of reality-denying European politicians.


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Timothy Geithner Proposes A “Cure” For Toxic Assets: Take A Poison Pill

March 24th, 2009 Comments off
In scientific terms, toxins are regarded as compounds that, if ingested in small quantities, can cause severe organic damage and even death. There are in the natural world, however, compounds which in small quantities are harmless; taken in large doses the same compounds can prove lethal. Such is the case with financial toxicity.
Our modern financial system is the creation of fallible human being, meaning there will be encountered in any modern economy a certain degree of mischievous speculation, outright fraud and chicanery. Often these activities lead to the creation of asset bubbles. If the proportion of inflated or fraudulent assets is a trivial proportion of the gross aggregate assets held by the major institutions in the financial system, the damage can be contained. However, when asset bubbles constitute a significant proportion of the paper wealth of a major economy and then deflate, they become toxic in the truest sense of the term. With our current Global Economic Crisis, it is the size of these deflating assets that contributes to their toxicity. However, their impact on the global credit system is virtually identical to that of chemical toxins on biological mechanisms; they are the penultimate monkey wrench that jams up the whole works. The toxic assets sitting on the balance sheets of financial institutions throughout the world have paralyzed the economic heart of the global economy, starving it of the blood and oxygen of normal flows of credit. The result has been economic paralysis more severe than anything experienced since the Great Depression. However, instead of an antidote, or at least a well conceived therapeutic response, U.S. Treasury Secretary Timothy Geithner has offered up more toxicity.
Perhaps toxicology is too clinical for the Wall Street clique that has dominated policy making in Washington as it applies to the economy. By training and experience Geithner is a creature of Wall Street, and has proposed a solution to the disease of toxic assets that is nothing more than the original brainchild of former Treasury Secretary Hank Paulson. Yet, even Paulson retreated from his original idea of buying up the toxic assets on the balance sheets of U.S. banks, choosing instead to purchase equity in these institutions, an approach that was just as ill conceived.
There are many weaknesses to the Geithner plan, not the least being that it is simply Paulson redux. It pretends that U.S. banks are essentially healthy except for the fact these toxic assets are not really toxic but are in fact “under-valued” by the market. Accordingly, Geithner wants to use taxpayer money to re-inflate the value of these assets, by encouraging private investors to buy them through auctions, thus bidding up their price. This will be accomplished by Treasury using the balance of the TARP money, $75-100 billion, to match private investors direct stake in the purchase of such assets, and then provide cheap loans to the private investors through the Federal Reserve and FDIC to buy up to $1 trillion of the toxic assets. The private investors will only risk the small proportion of their own capital being utilized in the transactions, as the U.S. taxpayer loans will be “secured” by these same toxic assets, which will be the collateral.
Rather than toxicology, Geithner is resorting to folktales and alchemy in providing this witches brew of a curative. The Geithner plan is not only bad in terms of its philosophy; have the taxpayers take almost all the risks, with the private investors subsidized to the tune of nearly a trillion dollars, while these same investors are assured of the great bulk of any upside. There is an even more fundamental problem. Most of the U.S. banking system, and much of Europe’s, is effectively insolvent. Other than radical surgery, which recognizes that maintaining on life support zombie banks can only prolong the Global Economic Crisis, any other solution is doomed to failure.
Geithner is proposing to place U.S. taxpayers at severe risk, by in effect borrowing money to purchase these toxic assets on behalf of hedge funds and other private investors. Yet, as massive a sum as Geithner’s plan envisions, it is not nearly adequate towards addressing the full dimensions of the problem. NYU economics professor Nouriel Roubini has estimated that the U.S. financial system is sitting on $3.6 trillion of bad assets. A leaked document from the European Commission assesses that banks across Europe hold up to $24 trillion in bad assets, suggesting that even Roubini’s gloomy analysis may be unduly optimistic. It is already clear that the banking system in the United Kingdom is comatose. Yet, Geithner asks that we suspend disbelief, accept that the U.S. financial system’s toxic asset exposure is limited to $1 trillion, and we should allow the private sector to do its thing, subsidized by the American taxpayers. Far from being thoughtful, insightful and analytical, Timothy Geithner offers a dish of warmed-over free market cliches and Hank Paulson inanities, avoiding at all costs even a hint of bank nationalization and radical financial surgery.

In his column in The New York Times, Nobel prize-winning economist Paul Krugman summed up the fallacy of Timothy Geithner’s toxic assets rescue plan as follows, “But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus-for that is what the Geithner plan amounts to-will change that fact”

Unfortunately, hocus-pocus is exactly what has been proposed by Geithner, to the delight of Wall Street. It will prove as effective an antidote to our economic and financial crisis as the toxins injected through the fangs of a cobra.







Global Depression Train Has Left The Station: Next Stop Worldwide Economic Catastrophe

February 8th, 2009 Comments off
At first, many politicians and key economists and financial “experts” refused to use the “R” for recession word, as the housing price collapse in the United States unleashed the eruption of the sub-prime mortgage asset bubble. One could look back at the utterances of former U.S. Treasury Secretary Hank Paulson and his collaborator, Fed Chairman Bernanke, of less than a year ago. Amid mounting indicators of impending systemic financial failure, they were still boasting that their “aggressive” tactics were containing the economic fallout resulting from the sub-prime implosion, ensuring not only the avoidance of a recession but the continuation of economic growth, albeit on a more modest scale. The Global Economic Crisis was the furthest thing from their collective minds. That was then. But this is now.
No longer is the recession terminology hidden; it is conceded in the highest circles as a global disaster, requiring unimagined sums of money to save the financial system while also saving jobs being eliminated by the global recession. However, as with the earlier denial on use of the recession terminology, there is an unwillingness to employ the “D” word for depression, as in a replication of the Great Depression of the 1930s.

It is not only those who were myopic a year ago that want to avoid talk of a depression, at all costs. Even the most prescient analysts and experts have held back on their vocabulary in defining the Global Economic Crisis. However, more and more credible economists and experts have begun describing our current economic catastrophe as a depression. The Economist magazine was one such authority, as was the most recent recipient for the Nobel Prize for economics, Paul Krugman.

Perhaps the most astute observer of the unfolding disaster resulting from the implosion of the U.S. housing bubble has been NYU economics professor Nouriel Roubini. A year ago, amid the happy talk being proffered by Hank Paulson and Ben Bernanke, he accurately warned of the systemic financial collapse that would ensue in short order, unless urgent, coordinated steps of global intervention were swiftly undertaken. History vindicated the judgement of Roubini, while also applying to him the moniker of “Dr. Doom.”

As clear-cut as Nouriel Roubini has been in assessing the Global Economic Crisis, even he has been reluctant to use the “D” word. Now, however, he is warning that the worldwide economic crisis will get much worse, and in the absence of effective global intervention that is coherent and synchronized, a “near depression” was a serious possibility. His most recent warning comes in conjunction with his current assessment of the losses he projects for the global financial system due to “toxic assets,” in the range of $3.6 trillion. His conclusion is chilling in the extreme: the banking system in the U.S. is effectively insolvent.

Added to the mounting evidence of banking insolvency, not only in the United States but other major economies, in particular the U.K., are the horrendous unemployment numbers. The U.S. Labor Department has released its statistics on job losses for January of this year, indicating that another 600,000 Americans joined the ranks of the unemployed. This translates into an official unemployment rate of 7.6%. However, in reality, the situation is far worse than those numbers indicate. In the first place, the Labor Department’s monthly reports are never complete, owing to lagging tabulations from small firms and businesses. This is reflected in that the current report revised substantially higher the unemployment numbers for November and December of 2008. In all probability, more than 700,000 Americans were terminated in January, with every indication that this trend will continue far into 2009. In addition, the official unemployment rate, since the 1960s, subtracts “discouraged” workers, meaning the permanently unemployed, as well as part-time workers unable to find full-time employment. If these numbers are added into the unemployment figure, it exceeds 14%.

At its worst level, the unemployment rate in the U.S. during the Great Depression stood at 25%. After the advent of the New Deal of President Franklin Roosevelt, it temporally declined to near 10%, but then rose to a much higher level, reaching the range of 16-17% prior World War II. Accordingly, a true current unemployment rate of 14% is within the levels experienced by the United States during the 1930s. Factor in the structural insolvency of the American banking sector, the rampant demand destruction infecting the global economy and other catastrophic asset bubbles set to burst during the next several months, and it becomes clear that the United States and the rest of the world have now entered a dark economic territory that can no longer be defined as merely a recession.

The Global Economic Crisis has now achieved levels of economic contraction in all major indices that can only be described as a depression of worldwide dimensions. The global depression train has left the station, and will bring a level of economic and financial carnage to every corner of our world on a scale so staggering, it would have been unimaginable to even the most sober pessimists-until recently.


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Fed Rate Cut Threatens U.S. Economy With Liquidity Trap

December 17th, 2008 Comments off
One of the most acute dangers to an already fragile economy is the phenomenon referred to by economists as a “liquidity trap.” With the radical reduction in its interest rates by the U.S. Federal Reserve, Nobel Prize winning economist Paul Krugman has warned that this very danger now confronts the American economy, courtesy of the Fed, as it continues to act erratically amidst the worst global economic crisis since the 1930s.
A liquidity trap involves radical rate reductions by a nation’s central bank that translates into virtual zero interest being charged. The result, in a recessionary economy, is that the economic downturn becomes even more traumatic, since a zero rate discourages investment by stakeholders retaining capital. A zero interest rate provides no incentive for long-term investing with its concomitant risk-taking. Those with capital tend to hoard it while an effective zero interest rate is maintained, defeating the stated purpose of such monetary policy, which is to inject liquidity into the economy. In actuality, a liquidity trap prevents liquidity from circulating, no matter what other extreme monetary measures are enacted by the central bank. This phenomenon plagued the Japanese economy during its recent “lost decade.”

Though the New York stock market reacted in a celebratory way to the Fed issuing its effectively zero rate, more thoughtful observers are terrified. This is clearly another panicky response by the Fed, acting out of desperation rather than thoughtful analysis. If America through the Fed’s actions does indeed fall into a liquidity trap, the result will go beyond the severe recession already being forecasted. The likely result will be the protraction of the global economic crisis, with the U.S. economy crippled beyond the worst nightmares of even those predicting another Great Depression.

For the American economy, due to the Fed’s actions, the worst outcome possible is practically assured. The real tragedy is that the radical cuts in interest rates by the Fed under the reign of Alan Greenspan are now recognized as a cause of the mortgage meltdown that led to the current global economic crisis. For Ben Bernanke, current chairman of the Federal Reserve, to replicate his predecessor’s disastrous monetary policies is utterly inexplicable.