The debt-ceiling limit: a guide for the bewildered

Matías Vernengo

It is very difficult to explain American politics to those that are not Americans and/or have not lived here long enough.  Add to that the confusion over basic economic principles, and it becomes almost impossible to explain the debt-ceiling debate to rational people.

As noted by James Galbraith, this is not a fiscal crisis, which should be obvious, since it was a Wall Street driven bubble.  Also, contrary to what you think the Republicans are the big government party.  The graph below shows total federal government spending as a share of GDP (in black), and some spending categories as a share of government spending (in colors).  As it can be seen total spending goes up in 1981, 1989, 2001, when Republicans assumed the administration, and down in 1993, when Clinton did.  Also, note that even if spending went up in 2009, as a result of the crisis, it did come down in 2010 (which is not a good thing, by the way) with Obama.

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Global Monetarism Strikes Back

Matías Vernengo

Olivier Blanchard, the chief economist at the International Monetary Fund (IMF) announced in a triumphalist tone that “earlier fears of a double-dip recession—which we did not share—have not materialized” and defended the need for “fiscal consolidation that is neither too fast, which could kill growth, nor too slow, which would kill credibility.” For Blanchard fiscal expansion has done its job, since “private demand has, for the most part, taken the baton.”  The risks are associated to the higher prices of commodities and inflation.  The Bank of International Settlements (BIS) has added to the IMF’s view that inflation is the main risk on an otherwise recovering world economy.  In their recent Annual Report they argue that: “spread of inflation dangers from major emerging market economies to the advanced economies bolsters the conclusion that policy rates should rise globally.”  That is, add monetary contraction to the policy mix.

However, it is far from clear that private demand is sufficiently strong to maintain the recovery by itself, or that slacking capacity, beyond commodity prices, imply that inflation has become the major risk to the global economy.  The two-speed recovery – sluggish in developed countries and fast in developing countries – remains a fragile one, and the possibilities of rates of growth that are insufficient to bring back the prosperity of the boom years, and increase employment and living standards around the globe are still strong.

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Revisiting Financial Regulation

Triple Crisis Blogger C.P. Chandrasekhar originally published this post on the IDEAs Network.

Don Kohn, deputy to former Federal Reserve Chairman Alan Greenspan at the time when the financial crisis broke, has won himself an unexpected and unusual job. He has been appointed to a new committee which has the mandate to guide the United Kingdom (note not the US) to financial stability. Speaking to British MPs at a confirmation hearing he chose to confess his guilt. According to the Financial Times (May 17, 2011) , he said: ”I deeply regret the pain that was caused to millions of people in the US and around the world by the financial crisis … Most of the blame should be on the private sector: the people that bought and sold those securities, on the credit rating agencies that rated them. But I also agree that the cops weren’t on the beat. The regulators were not as alert to the risks as they could have been and, to the extent they saw the risks, were not as forceful in bringing them to the attention of management, or taking actions, as they could have been.”

Read the full post at the IDEAs Network website.

Africa's Odious Debts

Triple Crisis Blogger James Boyce originally published this article with Léonce Ndikumana in Project Syndicate, on the effects of the crippling debt many countries have  inherited from previous corrupt governments.

One side effect of the American/British occupation of Iraq is that it sparked public debate on a dark secret of international finance: the debts taken on by odious regimes.

As Iraq’s new rulers debate what to do about the billions of dollars in foreign debts inherited from Saddam Hussein’s regime, voices ranging from the charity Oxfam-International to US defence guru Richard Perle are calling for debt repudiation on the grounds that the debts Iraq now bears were contracted to sustain a corrupt, oppressive regime.

Iraq is not the only country burdened by such debts. Across sub-Saharan Africa, many of the world’s poorest people struggle with the crippling legacy of profligate lending to corrupt, oppressive rulers.

During his 32-year dictatorship, Congo’s former president Joseph Mobutu accumulated a personal fortune estimated at $4 billion, while his government ran up a $12 billion foreign debt. More of the same in Angola, where last year an IMF investigation revealed that $4 billion disappeared from Angola’s treasury over the past five years. It so happens that the Angolan government borrowed a similar sum from private banks in this period, mortgaging future oil revenues as security.

Read the full article at Project Syndicate.

Africa’s Odious Debts

Triple Crisis Blogger James Boyce originally published this article with Léonce Ndikumana in Project Syndicate, on the effects of the crippling debt many countries have  inherited from previous corrupt governments.

One side effect of the American/British occupation of Iraq is that it sparked public debate on a dark secret of international finance: the debts taken on by odious regimes.

As Iraq’s new rulers debate what to do about the billions of dollars in foreign debts inherited from Saddam Hussein’s regime, voices ranging from the charity Oxfam-International to US defence guru Richard Perle are calling for debt repudiation on the grounds that the debts Iraq now bears were contracted to sustain a corrupt, oppressive regime.

Iraq is not the only country burdened by such debts. Across sub-Saharan Africa, many of the world’s poorest people struggle with the crippling legacy of profligate lending to corrupt, oppressive rulers.

During his 32-year dictatorship, Congo’s former president Joseph Mobutu accumulated a personal fortune estimated at $4 billion, while his government ran up a $12 billion foreign debt. More of the same in Angola, where last year an IMF investigation revealed that $4 billion disappeared from Angola’s treasury over the past five years. It so happens that the Angolan government borrowed a similar sum from private banks in this period, mortgaging future oil revenues as security.

Read the full article at Project Syndicate.

Lagarde at the IMF: A lot of stones to touch, but the only way to cross the pond

Kevin P. Gallagher

Christine Lagarde will be giving an acceptance speech of sorts today.  She has a lot to cover.  First and foremost she will have to show that she has fully taken off her French Finance Minister hat and put on a global financial institution hat.  She no longer represents French banks and citizens.  She will have to strike a delicate balance that on the one hand shows she is serious about the Eurozone crisis but on the other shows that she recognizes that there are many other global challenges to be concerned with.

On the Greek crisis she should call for a fresh approach that puts all possible tools on the table, including a negotiated debt restructuring.  She should then quickly recognize that there are other key problems that need to be addressed globally, such as the massive surge in “hot money” to East Asia and Latin America, and the need for a diverse set of tools (that includes capital controls) to address that problem as well.  Furthermore, she should call on the need to address the problem of odious debt in Africa and beyond.  And of course, she should also note the debt ceiling debate in the United States and send a signal to the US of the disastrous consequences of not raising the ceiling.

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Grassing the State

Triple Crisis Blogger CP Chandrasekhar originally published the following article in the Indian magazine Frontline, on the liberalization of India’s oil exploration and production policy.

The real problem facing the country is the neoliberal reform that seeks to attract private capital into a lucrative and sensitive area such as petroleum.

The Comptroller and Auditor General’s (CAG) performance audit of some production-sharing contracts (PSCs) instituted as part of the liberalisation of India’s oil exploration and production policy may turn out to be the next big scam, with more than a whiff of corruption. But, in this season of scams, danger lurks. The danger that much of society can for a considerable period of time miss the wood for the trees. Circumstances strengthen this tendency. In particular, the surprising coincidence of a host of revelations of lack of due diligence, bending of rules, outright manipulation or a combination of all of this that hugely enriches a few individuals and corporations in the private sector and a few functionaries of the state, most often at the expense of the exchequer. Not a day passes without evidence of some new scam.

Whatever may be the cause for this recent increase in scam-related revelations, the surge feeds the notion that corruption has reached unprecedented levels and constitutes the fundamental problem facing India today. The fact that corruption, besides being ethically wrong or morally abhorrent, can influence growth in ways that serve the interests of a few and can therefore be deeply inequalising cannot be denied. But the reason for these developments – which are seen as mere instances of corruption – multiplying in number could be systemic and reflect policy shifts that aim to use state resources to inflate private profit.

Read the full article at Frontline.

The Greek Crisis: The EU’s Wasted Year

Daniela Schwarzer

In May 2010, the EU could praise itself for its ability to put together a 110 bn € rescue package for Greece in cooperation with the IMF and, only weeks later, for agreeing on a 750 bn € rescue fund for other potentially illiquid Eurozone members. At the time, these steps appeared as an important demonstration of European solidarity, as a signal of the Eurozone’s ability to get its act together although it had no tested crisis management instruments at its disposal, and as a manifestation of strength in the face of financial markets ready to speculate on the bankruptcy of Eurozone member states or even a breaking apart of the currency union.

A year later devastating pictures from all over Europe hit the covers of the newspapers and magazines: people flock to the streets in Greece to demonstrate against austerity measures and structural reforms which they blame on the European Union. Protesters are also out in Lisbon, Portugal, just like in Spain which so far has not requested financial assistance from the EU and the IMF, but which implements a long list of reforms and budgetary cuts in order not to lose further credibility in the financial markets. In France, the Eurozone’s second largest member state after Germany, a right-wing extremist, Marine Le Pen, wants the country to leave the Euro – and roughly a fifth of French voters would chose her if Presidential elections were held tomorrow. In Germany, skepticism towards the single currency and in particular towards the Southern European members of the Eurozone, has grown tremendously since the package for Greece was launched in spring last year.

In June 2011 –  just as in spring 2010 – the European Monetary Union finds itself at a crossroads. The choice is once again to provide Greece with credit and guarantees, or to let the country slip into bankruptcy within weeks.  This would indeed occur if the so-called Troika, which consists of the European Commission, the European Central Bank und the IMF, refuses to hand out the next 12 bn € tranche of the loan package agreed last year since Greece’s restructuring and consolidation programme is not going far enough.

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The Greek Crisis: The EU's Wasted Year

Daniela Schwarzer

In May 2010, the EU could praise itself for its ability to put together a 110 bn € rescue package for Greece in cooperation with the IMF and, only weeks later, for agreeing on a 750 bn € rescue fund for other potentially illiquid Eurozone members. At the time, these steps appeared as an important demonstration of European solidarity, as a signal of the Eurozone’s ability to get its act together although it had no tested crisis management instruments at its disposal, and as a manifestation of strength in the face of financial markets ready to speculate on the bankruptcy of Eurozone member states or even a breaking apart of the currency union.

A year later devastating pictures from all over Europe hit the covers of the newspapers and magazines: people flock to the streets in Greece to demonstrate against austerity measures and structural reforms which they blame on the European Union. Protesters are also out in Lisbon, Portugal, just like in Spain which so far has not requested financial assistance from the EU and the IMF, but which implements a long list of reforms and budgetary cuts in order not to lose further credibility in the financial markets. In France, the Eurozone’s second largest member state after Germany, a right-wing extremist, Marine Le Pen, wants the country to leave the Euro – and roughly a fifth of French voters would chose her if Presidential elections were held tomorrow. In Germany, skepticism towards the single currency and in particular towards the Southern European members of the Eurozone, has grown tremendously since the package for Greece was launched in spring last year.

In June 2011 –  just as in spring 2010 – the European Monetary Union finds itself at a crossroads. The choice is once again to provide Greece with credit and guarantees, or to let the country slip into bankruptcy within weeks.  This would indeed occur if the so-called Troika, which consists of the European Commission, the European Central Bank und the IMF, refuses to hand out the next 12 bn € tranche of the loan package agreed last year since Greece’s restructuring and consolidation programme is not going far enough.

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The Greek Crisis: Uttering the Other “D Word”

Matías Vernengo

Default is not the dirty word that nobody wants to say.  Almost everybody now accepts that Greece will default.  Several people will prefer to use the euphemism of “re-profiling debts,” but we all know what it means.  The interesting thing is that at least some authors, like Martin Wolf in a recent Financial Times column, also acknowledge that default is not sufficient.  The surprising thing that almost nobody asks is whether a default would actually solve the Greek problem.

Of course that would require understanding the problem in the first place.  And herein lies the problem, since most people still argue that the Greek problem is fundamentally fiscal.  In other words, in the conventional view the Greek government spent too much (and lied about it), and the solution must rely on the generation of sufficient fiscal surpluses to pay for the outstanding debt.  Further, to obtain the funds it is assumed that austerity is the way to go, privatizing public firms, cutting public sector wages, and reducing pensions.

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