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Europe is running a giant Ponzi schemeBy Mario BlejerPublished: May 5 2011 22:47 | Last updated: May 5 2011 22:47

One of the pillars upon which the euro was established was the principle of no bail-out. When thesovereign debt

crisis hit the eurozonethis principle was ditched. As Greece, Ireland and Portugal were unable to service theirunsustainable levels of debt, a mechanism was instituted to supply them with the financing necessary to service theirobligations. This financing was provided, supposedly, in exchange for their implementing measures that would maketheir, now higher, debt burdens sustainable in the future. Yet the mode adopted to resolve the debt problems ofcountries in peripheral Europe is, apparently, to increase their level of debt. A case in point is the 78bn ($116bn)loan to Portugal. It is equivalent to more than 47 per cent of its gross domestic product in 2010, possibly increasingPortugals public debt to about 120 per cent of GDP.

It could be claimed that this mechanism is helping the countries involved since the official loans, although onerous,carry better conditions than the ones that need to be serviced. But the countries debts will increase (as a percentageof GDP the debts of Greece, Ireland, Portugal and Spain are expected to be higher by the end of 2012 than at thestart of the crisis). The share of debt owed to the official sector will also increase (in addition to the bond purchasesby the European Central Bank, which reportedly owns 17 per cent of these countries bonds with a much higherpercentage held as collateral).

Is this ongoing piling of debt an indication of imminent defaults? Probably, but not necessarily. An immediate defaultcould result in major market commotion, given the high exposure of European banks to peripheral debt. Therefore,European governments are finding it more convenient to postpone the day of reckoning and continue throwing moneyinto the peripheral countries, rather than face domestic financial disruption. Consequently, as long as European andinternational money (through the International Monetary Funds generous financing) is available, the game could goon.

It is based on the fiction that this is just a temporary liquidity problem and that the official financing helps the countriesinvolved to make the reforms that will allow them to return to the voluntary market in normal conditions. In otherwords, the narrative is that the recipient countries could and would outgrow their debt. To prove this scenario isfeasible several debt sustainability exercises are being dreamt up. But the fact is that this situation is only sustainableas long as additional amounts of money are available to continue the pretence.

Here is where this situation resembles a pyramid or a Ponzi scheme. Some of the original bondholders are being paidwith the official loans that also finance the remaining primary deficits. When it turns out that countries cannot meet theausterity and structural conditions imposed on them, and therefore cannot return to the voluntary market, these loanswill eventually be rolled over and enhanced by eurozone members and international organisations. This is Greece,not Chad: does anyone imagine the IMF will stop disbursing loans if performance criteria are not met? Moreover, thispublic sector Ponzi scheme is more flexible than a private one. In a private scheme, the pyramid collapses whenyou cannot find enough new investors willing to hand over their money so old investors can be paid. But in a publicscheme such as this, the Ponzi scheme could, in theory, go on for ever. As long as it is financed with public money,the peripheral countries debt could continue to grow without a hypothetical limit.

But could it, really? The constraint is not financial, but political. We are starting to observe public opposition tofinancing this Ponzi scheme in its current form, but it could still have quite a way to go. It is apparent that, if not forcedsooner by politics, the inevitable default will only be allowed to take place when the vast part of the Europeandistressed debt is transferred from the private to the official sector. As in a pyramid scheme, it will be the last holderof the asset that takes the full loss. In this case, it will be the taxpayer that foots the bill, rather than the original

bondholders that made the wrong investment decisions.

Is this good or bad? It all depends on how one assesses the value of the time gained. Would a bank crisis now bemore damaging to the European economy than a future debt write-off? Or, alternatively, is recognising reality andaccepting a debt restructuring now preferable to increasing the burden on future taxpayers? At the end, it is a politicaldecision, but it would be refreshing if things are called by their name. Euphemisms may be useful in the short run, butone finally recognises a Ponzi scheme when it persists.

The writer was governor of Argentinas central bank and director of the Centre for Central Banking Studies at theBank of England. Samuel Brittan is away
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CopyrightThe Financial Times Limited 2011. You may share using our article

Dont let banks gamble with taxpayer money

April 21, 2011 11:26 am by FT

24

By Roger E.A Farmer

The US is in the process of implementing the Dodd-Frank Wall Street Reform and

Consumer Protection Act. In the UK, the Vickers Commission has released interim

recommendations to ring-fence the retail operations of banks from their investment

banking activities. The Vickers report is a model of clarity and if the ring fence proposals

are implemented, they will have bite. But there is already a push from Lloyds to weaken

the proposals of the interim report and that is only the opening salvo. The pressure from

financial institutions for lax regulation will be intense. That pressure should be resisted.

The proposed reforms of both the Dodd-Frank act and the Vickers report will increase

the amount of capital held by financial institutions by reducing leverage. Increased

capital requirements will reduce the probability that any given institution will fail but they

will not eliminate the moral hazard problem created by implicit government support for

large financial institutions. That requires a more radical reform of the kind I have argued

for elsewhere.

High capital requirements do not prevent financial institutions from seeking risk; if

anything, they exacerbate the problem. Bob Diamond, chief executive of Barclays, is

shooting for a return of 13 per centon equity next year by taking on more risk. This may

please Barclays shareholders; it should not please the UK taxpayer since Barclays

investment strategy involves gambling with deposits that are backed by the public

purse. Unlike Lloyds and RBS, Barclays was not bailed out by the government. But a

successful past is no guarantee of a successful future and it does not mean that

Barclays should be given carte blanche to gamble with taxpayer money.

Mr. Diamond is on record as arguing that banks should not be bailed out. Thats a bit

like arguing that a doctor should not treat a person who catches smallpox because the

unfortunate victim was not prescient enough to buy insurance. Financial crises are like

epidemics. If one bank becomes infected by a crisis of confidence, others will follow.Nobody wants to see a return to 19th century capitalism where bank failures and

financial crises occurred with alarming frequency. Regulators understand this problem

and bank bailouts are here to stay, although, it may be possible to design a regulatory

system that allows individual banks to fail while protecting the system as a whole.

Retail banks raise capital from savers and lend that capital to small businesses at a

profit. By making riskier loans, a bank can demand higher interest rates from its
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creditors. This leads to higher profits on average for the banks shareholders. But

because risky loans have a higher probability of default, sometimes the equity holders

will lose money.

If a banks loans are extremely risky, its equity holders may be wiped out when there is

a financial collapse. But in modern day regulated economies, the holders of savingsdeposits do not suffer; their savings are insured by government guarantees.

Deposit insurance does not only benefit savers, it also benefits the equity holders of the

bank. When savings deposits are guaranteed, it is much easier for a bank to raise

capital. There was no outcry from depositors when Barclays declared that it planned to

take on more risk, precisely because high street customers are not exposed to that risk.

If there is another financial meltdown, it is the British taxpayer who will step in to pick up

the pieces.

In response to a wave of bank failures during the Great Depression, the US passed the

Glass-Steagall Act, a comprehensive piece of legislation that introduced Federal

Deposit Insurance. As a consequence of that legislation, private individuals were able to

have confidence that their money was safe, even if the bank in which they invested

went bust. Uncle Sam, through FDIC, would bail them out. In return for deposit

guarantees, the Fed placed restrictions on the kind of investments that a high street

bank could make. Casino banking was ruled out by law for any bank that accepted

federally guaranteed deposits.

In 1999, many of the provisions of the Glass-Steagall act were repealed and the US

entered a new era of universal banking. Under the new legislation, investment banks

were able to compete for retail deposits and commercial banks were able to invest in

high yield assets such as mortgage backed securities and other forms of collateralised

debt obligations. The financial deregulation of 1999 occurred in response to an intense

lobbying effort from financial institutions. It was also backed by the then Fed chairman,

Alan Greenspan. Wall Street bankers argued that deregulation would lead to higher

growth by providing a broader fund base to support lending.

Why should one oppose the universal banking model? Surely a return on capital of 13

per cent is not unreasonable as long as there is enough equity in the bank to absorb

potential losses. Perhaps. But when deposits are protected by government guarantees,there is an incentive for a bank to compete for customers by offering savers a higher

rate of interest than its competitors. The most successful bank is the one that takes on

the most risk. Ring fencing assets will not remove that incentive since the retail arm of

the bank has the same incentive to seek risk as the investment banking arm.

Current opinion among financial regulators is that the problem of financial instability can

be solved by imposing higher capital requirements on banks. But higher capital
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requirements cannot prevent banks from taking excessive risks. In the 2008 crisis,

commercial banks speculated in the US housing market by buying low grade mortgage

backed securities that were mistakenly rated as triple A by the US ratings agencies.

Somebody was asleep at the wheel.

I am not opposed to financial institutions taking risk. Risk is an integral part of theengine of capitalist growth. But Barclays, and other deposit taking institutions, should

not be allowed to gamble with private deposits that are insured by government

guarantees. There is a strong case to be made that effective reform requires the

complete separation of retail and investment banking. That separation should be

accompanied by restrictions on the assets that can be held by any institution that relies

on government guarantees. Restrictions of that kind were part of the Glass-Steagal act

that led to 60 years of relative economic stability. Dodd-Frank and the Vickers report

make significant steps towards restoring the protections of Depression-era legislation. In

my view, they do not go far enough.Related reading:

Independent Commission on Banking interim report

Roger Farmeris chair of the economics department at UCLA and the author of two

books on the global economic crisis. How the Economy Works: Confidence, Crashes

and Self-Fulfilling Prophecies, is written for the general reader and specialist alike and

Expectations, Employment and Prices is written for academics and professional

economists. Both are published by Oxford University Press.

Roger E. A. FarmerDisclosure: Martin Wolf, the FTs chief economics commentator, is a member of the

Independent Commission on Banking

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1. Report caldararo | April 22 11:36pm | Permalink

| OptionsAll traditional societies had means to limit the unequal distribution of wealth. Some of these were

derived from custom, while others were structured by religious dogma and sanctions. It is a shame

that most economists (both socialist and capitalist) of the 20th century regarded capitalism as a

modern phenomenon, when we can see its existence in many societies of the ancient historical

period, and among

traditional societies, as Herskovits so clearly demonstrated in his book, Economic Anthropology

published in 1952. For example, Ancient Egypt was a market economy of credit instruments,
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money and contracts enforced by law. I have given other examples for the existence of derivatives

in ancient and traditional society in recent articles and chapters in books (Caldararo, 2009; 2010).

This clothing of modern society in special garb to separate it from past economies is unfortunate

as it prevents us from making useful comparisons of societies under stress ancient and modern.

We might recall that to Adam Smith capitalism was clan warfare. He clearly describes that when

one clan, whether of Mercantilists, bankers or guilds gained the upper hand in an economy andcontrols the government, then the economy becomes influenced and out of balance, wealth and

trade become constrained and distorted by the interests of the dominant group. The history of

monopoly he gives and we have seen since amply attests to this scenario.

In modern capitalist countries the distribution of wealth has

generally been poorly regulated by attempts at wage and price controls

and consumption laws that usually only affect the middle and lower

classes. Taxation has been more effective depending on enforcement and

the tax structure. Generally, however, most societies, ancient or

modern fail to deal effectively with inequalities in wealth and

taxation is shifted onto the lower classes resulting in diminishing

returns and unrest as I have shown in my book War, Religion andTaxation (2009). Tainter (1988) comes to a similar conclusion in his

Collapse of Complex Societies, though we disagree on the role of

taxation.

As in examples from past civilizations, we have seen since the 1980s the tax burden shifted in

America to the middle and lower classes and the inequality of wealth has skyrocketed. Some

conservative websites argue that the share of the Federal tax burden rose for the highest earners

(http://www.taxfoundation.org/...). This obfuscates the situation for it is a means of deflecting

attention from the tremendous increase in wealth of the highest earners at a time when most

Americans have seen their incomes stagnant. Also, it confuses the role of taxation and spending.

If you have 100 tax payers who each pay 10% of their income and that raises $1000 which is thenecessary amount to pay for expenditures, then your tax income is sufficient no matter how the

rate affects the remaining income of each percentile of taxpayers. If however, you decrease the

tax rate on all taxpayers so that the resulting tax proceeds only cover half the expenditures then

you have a deficit and this is what has happened since the Reagan administration. Decreased tax

rates have not resulted in increased tax proceeds to cover expenditures which was the Reagan

theory.

As Patricia Becker has shown in a paper in 2006 (http://books.google.com/...) the income of the

highest earners has increased 3 times as fast as the lowest percentile and this has only become

more divergent since 2006.

Therefore, the amount of that tax relative to the increase in their wealth of the highest earners

declined as the percentage of the lower 95% of earners fell as did their relative earnings. Whenother taxes are considered, property, sales and

transfer taxes, for example, the relative tax burden fell even more

significantly on the lower 95%

(http://www.huffingtonpost.com/...

480.html).

The lack of tax revenue due to tax cuts over the past 30 years has created huge debts for the
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federal and state governments as well as many localities, thus the anti-tax mentality has been

destructive to the fiscal responsibility of the citizenship.

The idea that the richest earners are using their income to create jobs is also a questionable

argument, they are placing it increasingly in speculation and off-shoring it.

Bernstein Research reported in last weeks Financial Times that there has been a stunning drop in

investment in research and development since a high in 1997. Martin Wolfe reported that grossinvestment in the UK and USA has fallen to the lowest level in 3 decades. Venture capital is at a

low as well as people are fleeing real investing and placing their money in hedge funds, Forex

speculation and other non-productive vehicles.

The really troubling effect of the lack of equity in taxation and income has been the replacement of

income for the lower 95% by debt. As their incomes became stagnant from the 1970s to the

present, the lower earners replaced income increases with either credit card debt or borrowing

from home equity. So while the rich got richer, the rest got debt. This situation can only be

corrected by revising the tax code to make it take into account rising incomes of any segment of

the economy. As societies become more unequal in wealth they become less stable. This result

has followed with the French Revolution of 1789, the Russian in 1917 and in 1989 as well as the

recent crises in the Middle East. Currently the financial industry holds the seat of dominanceAdam Smith warned us about, and their influence is destructive and should be ended to restore

the balance of the market place.

2. Reportjoseph belbruno | April 24 9:39am | Permalink

| Options

@ caldararo - You have it the wrong way around! It is not that "economists" seek to clothe

"ancient capitalism" in modern robes. Quite the contrary! The highest, most pressing need for

bourgeois economics is to do exactly the opposite! That is, to clothe the latest global form of social

relations of production as if.... as if.... they were sub specie aeternitatis (!) - as if they were

ineluctable and unchanging manifestations of "human nature"!!

If you only care to look at Farmer's reply to me in his last post on this Forum, you will find the

expression "human nature" etched in golden characters! This is the kind of nonsense that we

need to combat - because most economists are either blind to it.... or (and I sincerely exclude

Professor Farmer from this) are "paid" to be blind to it. (Farmer is fond of Mark Twain, but was it

not that wise bon pensant who once observed that "a man is most unlikely to understand a

concept, if his income depends on not understanding it"?)

It seems to me that, up to a point, we are all "fellow travellers" here: we all want to change the

constitution (to ape ironically Lennon's bathetic "Revolution"), but where we "need to change our

minds instead" (gosh, Lennon was such a "goody-goody" idiot!) is in the "concepts", the

"theoremata" and the "theorema" that we use to understand capitalism!

Farmer acutely points out the horns of the dilemma where monetary analysis is concerned: -

control of inflation (inflation targeting) has only made more evident the "impossibility" of controlling

asset prices - whether the central bank mandate is single or dual.And Caldararo here lays the emphasis of the skewed distribution of "income" (not to be confused

with "wealth" - which is indeed the kind of notion that makes us equate Cleopatra with Margaret

Thatcher!).

But the distribution of income never has been and never will be the problem. The problem has to

do with the domination of dead labour over living labour - with the "wage relation". And the wage

relation extends not just to "how much" we produce, but especially to "what" and "how" we

produce!
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If indeed "the capitalist state" is f o r c e d by our antagonistic needs to take up an ever-larger

share of social productive activity (otherwise known roughly as GDP), we find that each time its

"need" to uphold the "pretence" of "restoring the balance of the market place" (Caldararo's famous

last few words in his entry), what we find is that each time the "economy" is "re-privatised" we

witness the uncontainable, explosive swelling of "asset bubbles" and financial catastrophes that

threaten the very reproduction of "the society of capital" itself!THAT is the lesson of the Great Financial Crisis! The attempt "to liberalise the economy", to regain

ground for "private" capitalist enterprise that began under the Arthur Burns and Paul Volcker

regimes at the Fed late in the '70s and in the '80s had the "catastrophic" - "systemically risky" -

effects that we confront now! (I have to pause an instant to indict the cataclysmic stupidity of those

"black swan" explanations!!)

I am writing a chapter ("Notes on Minsky") on these developments - but I must not overburden the

patience of fellow participants and will stop right here. Interested readers can follow me at Gavyn

Davies Blog.

Look: I bear no ill will to Professor Farmer, whose reply to me was admirably civil. But I have been

scarred. People like me would not survive a single week in an "economics" faculty these days

(check the discussion of a Rajan article at Gavyn Davies Blog). And that makes me angry... How

could it not?Please Professor Farmer: no more of this insensate "risk is the engine of capitalist growth" talk.

Cheers.


| Options

PS: Perhaps as a reward to those who had the temerity to endure my post, I will include a further

comment on "risk" (Farmer's thematic "intuition" of the space between "the horns of the dilemma")

from my "Notes on Minsky" chapter:

"In particular, what we understand is that those information asymmetries (the moral hazard, the

free-rider and principal-agent problems) are far more complex than Mishkin makes out and involve

the functional separation of capital in its distinctive moments of valorisation!! Risk is one of

the aspects of this functional separation in that the internal distribution of profit depends on the

perceived amount of risk a given investment involves. Let us recall that risk avoidance is the

aim of some capitalists the rent-seeking behaviour which threatens the stagnation of the

system. But capital as a whole is oriented to profit, which involves the risk of the process of

valourisation, from M to M through P (the process of production). This is why Keynes acutely

perceived that money is the bridge between the present and the future. Every time capital is

invested there is a risk that there will not be a return on capital or indeed (with Mark Twain) the

return OF capital!

But the wage relation cannot stand still because of its antagonism, which pushes the capitalist

to become an entrepreneur, to innovate so as to re-define and re-structure the political

command of capital as dead labour over living labour. Schumpeter alone of the great bourgeois

economists saw this with enviable perspicacity. He has been cursed with the Schumpeterian rentbadge because he identified Cantillons entrepreneurial profit (the compensation a merchant

receives from the profits of capital investment) for risking the transition to market of produced

goods. But there is no profit in Schumpeters Kreislauf in the Marxian accumulative sense;

there is profit only as simple reproduction this is the neo-Ricardian meaning of Kaleckis

workers spend what they earn and capitalists earn what they spend. Both Keynes and Kalecki

completely ignore the Schumpeterian problematic the Dynamik of capital (versus the Statik


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of the Kreislauf) the whole problem of capitalist Entwicklung not growth (!) but capitalist

trans-crescence, growth-through-crisis!...."

4. Reportjoseph belbruno | April 24 1:43pm | Permalink

| Options

PPS: Sensational! Look what I just found! Hyun Song Shin (at the New York Fed) interviewed by

the Frankfurter Allgemeine Zeitung a couple of days ago:"Es existiert heute kein theoretischer Rahmen, der die direkte Inflationssteuerung mit monetren

Analysen verbindet. Es ist unsere Aufgabe als Wissenschaftler, diese Dichotomie zu berwinden.

Aber ich bin zuversichtlich, weil sich gerade junge Wissenschaftler diesen Themen zuwenden."

In translation: "There is today no theoretical framework [my "theoria" from previous post] that links

directly inflation targeting with monetary analysis..."

And here is what I just wrote below, praising Farmer for identifying "the horns of the dilemma":

"but where we 'need to change our minds instead'.....is in the "concepts", the 'theoremata' and the

'theoria' that we use to understand capitalism! Farmer acutely points out the horns of the dilemma

where monetary analysis is concerned: - control of inflation (inflation targeting) has only made

more evident the 'impossibility' of controlling asset prices - whether the central bank mandate issingle or dual."

Well well well! Here is the link:

http://www.faz.net...mmon~Scontent.html


| Options

Incidentally, what I call "dilemma", Shin calls "dichotomy" ("Dichotomie", further down the German

quotation). Regards and apologies for long posts.

| Options

@Joseph Belbruno

(1) Interesting that you draw attention via Vittori to the fact that financial stability policy is but a

form of fiscal policy, and that FED circumscription to `prix de liquidite et ciblage de l inflation has

runned its (to the wall) course.

(2) and of course (paraphrasing a hyperlink on an earlier post to krugman: "RMB not allowed to

appreciate generates inflation in China") that RMB not allowed to appreciate meant that US

(mal)investment was worth less than otherwise priced by the market (bubble).

(3) economic theory is a subdiscipline of applied mathematics and its vocation is positive thought.

(4) economics is meaningless without the broader social sciences thread; philosophy and history

in particular. But it seems to me that you abhor the term positive economics; but that is only

because a set of idiotic politicos, charlatans (of the right, madmen distilling their frenzy), have

appropriated and manipulated knowingly or herdily its terms to play their rethorical tunes. You are

far above harangue and "political" electoral speeches. Think about it: there is such a (valuable ifcomplemented) thing as positive economics, if you want to use "economics" as the proper

(metonymic) noun of that hodgepodge of "politics", "economics", " I belong to the riffle

association", "free to choose charabia" fine. But consider economics as a positive science for all

its worth.

6. Report RDD | April 25 3:12pm | Permalink

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9/29

@joseph belbruno, other quick notes

(5) I would like to note again, as I mention in earlier GD blogs, that paleo-homo sapiens

accumulated capital when working and storing sylex intruments, and so did communist soviet

union; indeed it is genotypic/phenotypic of humans to accumulate capital (beavers do it as well...)

and communist societies were in that sense (and it doesn t seem minor to me) capitalistic, just

that Stalin and the party decided how much and how to accumulate it.(6) Remember that bourgeois society appeared in the soviet union in a new guise if you will,

different words same content: (let me gloss the banal: parents anxiously preparing their offspring

to pass the public examinations that warranted positions for example in high party offices, or

foreign embassies, or the highest academic posts, or the highest technical posts in industrial

concerns (all at the same time allowing to sincerely profess soviet conviction and at the same time

providing non negligible privileges above a lower classes). Distribution is not about about absolute

wealth but relative wealth....

That is what soviet planners are bankers, traders, enginners ....

(7) Lenin what a f****** lethal idiot. To note another banality: intelligent idiots are so dangerous.

(8) By truth=memory you mean utopia=something forgotten?


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@ RDD - Very briefly (must not get too far off the Forum topic):

"Positive economics" as the "measurement" (more or less reliable) of "existing" productive

behaviour and conditions is the only raison d'etre that one can concede to "economics". To that

extent, I agree with you. The point was made by Gunner Myrdal in 'The Political Element in the

Development of Economic Theory' (and copied by Hannah Arendt in the first part of "The Human

Condition"). This could apply even to that most pestilential form of mystification called "equilibrium

analysis" - something that my Cambridge don Tony Lawson does not quite understand (just

google him). (If you really wish to brush up on your "lycee philo", a close reading of Nietzsche's

first chapter of "Beyond Good and Evil" on "scientificity" is recommended.)

That, alas, most known forms of human communities have been less than.... "u-topian" cannot be

denied. But who is talking about "utopia"? We are merely striving for a society better than the one

that "economics" is telling us is "the only scientific rational one" even as it threatens all forms of

life on this planet!


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Given that this thread has been a little quiet despite the evident importance of the topic, it may not

be remiss of me some snippet from those "Notes on Minsky" that seek to trace the "origins" of the

present crisis. Here goes:

We know that capital seeks to valourise itself as safely as possible indeed, if this circle could

be squared, capital would wish to be profitable as naturally as trees bear fruit! (- Whence

comes the notion of fructiferous capital and of that more ignominious one, the Wickselliannatural rate of interest! or finally that most infamous of bourgeois phantoms, the natural rate of

unemployment!)

And when, in one fell swoop, two decades ago, one of the most bestial dictatorships this world has

ever seen, the Chinese Politburo, decided to make the great leap forward, all the prayers of

capital seemed to be answered it was Christmas all year round! Here were a billion potential

workers that could produce consumption goods to keep workers in advanced capitalist countries

pacified and maintain nominal wages stable whilst the cost of wage goods for capitalists declined
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10/29

dramatically! This was the basis of the Great Moderation. Again, Fahr at alii fail to mention this,

and list the effects rather than the ultimate source: The period before the financial crisis,

known as the great moderation, was the result of a number of factors that can be grouped into: a)

structural change, e.g. better inventory management (McConnel and Perez-Quiros, 2000) or

financial innovation and better risk sharing (Blanchard and Simon, 2001), b) improved macro-

economic policies, such as the establishment of stability-oriented monetary policies, and c) goodluck, i.e. the absence of large shocks such as the oil price crises of 1974 and 1979.11 The relative

importance of those factors has been hotly debated, but all three factors are likely to have

contributed to a reduction of volatility.12

It is this paper by Blanchard and Simon (http://www.brookin...bpea_blanchard.pdf) that Bernanke

mentions in the very first paragraph of his address launching the phrase the Great Moderation

(here http://www.federal...040220/default.htm ): One of the most striking features of the economic

landscape over the past twenty years or so has been a substantial decline in macroeconomic

volatility. In a recent article, Olivier Blanchard and John Simon (2001) documented that the

variability of quarterly growth in real output (as measured by its standard deviation) has declined

by half since the mid-1980s, while the variability of quarterly inflation has declined by about two

thirds.1 Several writers on the topic have dubbed this remarkable decline in the variability of both

output and inflation the Great Moderation.A remarkable decline, indeed! So remarkable that finally it seemed as if central banks could be

given a technical mandate to target inflation simply by means of small corrections to the

interest rates they set and this could be set in stone even in bourgeois constitutions as part of

economic management without the need to bother about anything else. The Jackson Hole

Consensus (the last mantra spun out of the Greenspan put) was that asset prices are not and

cannot be the concern of central banks price stability alone will suffice, and the market will

take care of the allocation of capital to various investments. The entire wave of financial

deregulation and liberalisation that culminated with the repeal of the Glass-Steagall Act by the US

Congress in 1999 gathered its tsunami-like strength from this Great Moderation. (The tide of

capitalist opinion toward privatization from the 80s is wonderfully summarized by the doyen of

Italian central bankers, T Padoa-Schioppa in this, The Genesis of EMU, herehttp://www.eui.eu/...Texts/JM96_40.html )

Because, just as in the 1920s under Fordism, the sudden reduction in the cost of wage goods for

capital made possible by the opening of the Chinese frontier could allow capital to undo, to

demolish and reverse what had been the unstoppable and ominous expansion of the role of the

State in the US economy and worldwide. The industrial analogue of financial liberalization was

the re-privatisation of entire areas of social productive activity that had fallen under the direct

management of the State since the New Deal. The unprecedented profits and global savings glut

(again the title of a Bernanke speech, here http://www.federal...050414/default.htm ) coming from

China and other emerging economies that were concomitant with the globalization of the

capitalist economy (see P Lamy herehttp://www.ft.com/...html#axzz1C2IqIb63) all this hadsilenced the real motor, the true engine of capitalist accumulation, just as Fordism did in the

1920s the working class, the antagonism of workers in the workplace and in society, the one

and only true test of the real value and profitability of capitalist investment!

Without its continuous conflict and confrontation with living labour (with workers) in the

workplace and in society, capital is deaf and blind, it has no senses because it cannot gauge

the actual political command it can exercise over workers and over society at large without

encountering their resistance in its stages of valourisation (the productive process) and of
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11/29

realization (the sale of products). The real life of capital is precisely this: - command over living

labour in the process of production a process that through workers antagonism then becomes

extended to the whole of society and that causes the State to intervene (and interfere!) in

the notionally private capitalist market economy. To the extent that capital fails to engineer

growth, the State needs to control growth, and this leads inevitably to the growth of its control

over the economy and the society of capital as a whole.9. Reportjoseph belbruno | April 29 3:15am | Permalink

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Who would have thought that the chairman of Wal-Mart, none other than Mike Duke, would

endorse my "Marxist" views? If you read my last entry, and then compare this report of how he

summarises "the Great Moderation".... why, they are one and the same!

http://www.busines...rc=sph&src=rot


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Oooops! Sorry, that was Crispin Odey from Odey Asset Management who has obviously been

reading this Forum. Here is a snippet of what he had to say:

"Odey argues that inflationary pressures have been suppressed over the past twenty years,

following the fall of the Berlin Wall, and the growth of the emerging markets, with undervalued

currencies and a desire to compete.

That has been of great benefit in terms of the inflationary side; it has kept costs down, it has

ensured that wages have not risen in the West, it has brought down interest rates and it has been

very good for the bond market.

But it was less a boon for equities. Share markets rose happily during the 90s, but then with the

bursting of the dot.com bubble, profits slumped in 2003. From that point, the US central bank,

under Alan Greenspan, decided to boost US housing prices, in order to fuel consumer spending

and keep the global economy kicking along.

11. Report RDD | April 30 1:21am | Permalink

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@joseph belbruno

(I ve been on holiday without internet access) Thanks for corresponding my "notes" and your

reference to Beyond good and evil (chap 1, FN): I will read it.

By the way there are also words I abhor: capitalist and communist. I know they are terms with a

defined meaning but I just don t like them period (it must be a case of very mild nonetheless

phobia). Especially because they tend to be used out of their terminological context (historical,

cultural, social, mass psychological zeitgeist-ical).

And yes the cleaness of the planet: the biggest tragedy of the commons. To the majority it is not

dirty enough yet hence no resolution of the prisonners dilemma.

Future: communitarian solution (1) or communitarian solution (2)

(1)agreement/negotiation with or without twisting of arms.

(2)disagreement/confrontation, taking literally the arms out. With possibility of moving to (1)


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Perhaps before we leave "Bernanke" (save to return to him - so "central" is his contribution, if read

critically, to the theorisation of the present "crisis"), could I rapidly "situate" the discussion in a

"theoretical" context - an essential task if we are to rise above the "noise" of the quotidian "random
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12/29

walk". Indeed, it will be recalled that in neoclassical theory, it is the very assumption of "perfect

information" (Modigliani-Miller), of "common knowledge" (game theory), and Walrasian

"tatonnement" (in equilibrium analysis) that make the exchange of information "symmetrical" and

that reduce the entire field of "economic science" to "the problem of co-ordination" (just google

Hayek's "Individualism and Economic Order", discussed in Loasby's "Equilibrium and Evolution"

for an attempt to "historicise" the problem).

It is evident that there can be no space in all of these "theories" for central banks, nor indeed for

"financial intermediation" (hence Hayek's virulent opposition to central banks and fractinal

reserves as a "negation" of the market pricing mechanism). The "separation" of borrower's risk

and lender's risk first raised by Kalecki and Keynes - and the consequent recognition that "money

is not neutral" - remains "internal" to the function of capital: it is, as it were, a "division of labour".

But an understanding of why, how and where "information asymmetries" arise in the "channel"

that links investment decisions with financial structure is absolutely essential. To leave the entire

matter to "asymmetric information" arising "after" some "exogenous shock" (see any of Mishkin's

papers on the subject) is quite simply inadequate. (Similarly, the "New Institutional Economics" of

Coase, Williamson and Demsetz, explain away the "internalisation" of these "asymmetries" as the

need to minimise "transaction costs" - which then raises the conundrum of why the capitalisteconomy is not constituted by one "mega-firm"!)

In this paper (http://docs.google...RZZR4PoOaJYKaKF07Q ) , Bernanke and Gertler identify the

"ultimate source" of asymmetries in the "borrowers' net worth position" - the lower the net worth,

the higher the risk of implosion. Again, this fails to isolate "the virus" responsible for the disease,

but it offers some hints. The first hint is that "high net worth firms" will be "ensconced" from debt-

deflation initially by their "oligopolistic" and hence "systemic" importance (too big to fail). And the

second is that each successive "crisis" brings about a series of "mergers and acquisitions"

whether voluntary or "shot-gun marriages" that increases further the degree of "oligopoly" of

capitalist enterprise and therefore its future "fragility" - the "systemic riskiness" of the system.

And finally (only because I do not wish to impose on the patience of participants further), thegrowing "systemic riskiness" of the structure of capitalist enterprise, together with the parallel

"centrality" of State authorities in "crisis management", mean that central banks become "lenders

of first (not last) resort".

I hope this begins to clarify some matters so we can all move to a higher level of analysis and

discourse.


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PS: Just a clarification on the Bernanke-Gertler paper I discussed below. Please note that their

analysis of "borrowers' net worth" as determining "financial fragility" refers to "ex post" conditions

of "liquidity trap" , stagnation or outright deflation following a Fisherian or Minskian "debt-deflation"

implosion. What I am arguing here is that this applies also to "ex ante" situations whose "dynamic"ought to be explored! My "hint" here is that, not "information asymmetries", but actual social

antagonism (traceable back to the wage relation -something to be tackled later) is what gives rise

to these so-called "asymmetries".

Indeed, both their "internalisation" (in the theory of the firm) or their "crisis management" (by State

authorities) are intended to obviate or "supplement" or "rectify" the "blocked flow of information"

that is due to this "antagonism" rather than to "asymmetries" for which economic theory can find
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13/29

no rational "cause" or origin! The solution is evident: more democracy in the sphere of

"production", that is, of the allocation of social resources. Good week-end.

14. Reportjoseph belbruno | May 1 3:57am | Permalink

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There is one final thought with which I want to leave the Bernanke-Gertler article linked below -

and it is the essential point I am trying to establish. Just read carefully what they write at page 89:

"This paper also contains some novel policy results, not discussed in our earlier work. The most

striking of these is that, if "legitimate" entrepreneurs are to some degree identifiable, then a policy

of transfers to these entrepreneurs will increase welfare. We show that a number of standard

policies for fighting financial

fragility can be interpreted along these lines.

Allow me, please, to leave you with one question: How on this lonely earth can we e v e r

establish or identify who are "legitimate entrepreneurs"? This is the question whose answer "all

the king's horses and all the king's men" of "economic science" (in their looking-glass world)

cannot ever "put together again"! Because the answer goes to the heart of defining what is "realvalue" for capital! And we ought to know that the meaning of "value" can be found only in the

antagonism of the wage relation. Regards to all.

15. Report ElevenAlphaDog | May 1 11:12pm | Permalink

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@josephbelbruno, RD, cladararo

What point are you exactly trying to make?

A lot of erudition is on display, not much seeming to be actionable.

Do you think that banks are gambling with taxpayers money?

If so, should Chase, Barclays, Deutsche Bank and Socit Gnrale be broken down?

Clear problem, clear solution.

Can you contribute?


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@ ElevenAlpha - There can be no argument that the financial sector has had to be rescued from

its own folly at stratospheric social cost. Therefore, no-one can doubt legitimately that Professor

Farmer is right on the need for banking reform. And his proposals are unquestionably valuable

and entirely well-supported on rational grounds.

Where we differ is on "theoretical" matters about the real sources of the "disease". I go a lot

further than he does in calling for a thorough reform, not just of the banking system, but also of our

"political" system, because I attribute the excesses of the "financial sector" to social conflicts and

"antagonism" that arises from the system of "production" (on how we decide what, when, and how

we produce) and not just on the financial system (infact, I am arguing that the two are now more

than ever "inseparable" and "indistinguishable" because illiquidity and insolvency cannot be told

apart! [that is the problem with Bernanke's "legitimate entrepreneur" proposal I quoted below]).

Because all orthodox economic theory (which plays right into the hands of capital) deludes itself

that the aim of a capitalist economy is to produce "things" (goods) "efficiently", it leaves no

theoretical room for "money" except as a "facilitator" for the exchange of "things" (goods). What

we argue instead is that the entire aim of capitalist enterprise is "to make money", which means
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14/29

"profit" - which means ultimately the control of the living labour of workers (the abolition of

"democracy" over production) in exchange for "dead labour" (goods). Profit means therefore that

the capitalist class is able to secure political control over workers by controlling the means of

production. "Crises" occur when this control cannot be secured reliably so that it is difficult to

establish the "value" of financial assets (witness, for instance, the problems involved with "mark-

to-market" that followed the latest financial crisis).

Indeed, I am actually hinting at the fact that the present system is "damned if it does and damned

if it doesn't" in the sense that without reform it will perish catastrophically ("systemic risks"), and

with "reform" it will have to yield to ever-greater "interference" from the State over its operation,

which only worsens the "legitimacy" of the entire system.

Unfairly summarised, my gripe with Caldararo (an economic anthropologist) is that just because

there are "instances" of isolated "capitalist" forms of economic activity (for example the "publicani"

financiers ancient Rome or the Renaissance banking houses or the merchant establishments of

Pisa or the Hanseatic League) that does not mean that our present form of capitalism can be

traced back to Antiquity or even earlier! That would be like saying that nuclear power stations

existed in Ancient Egypt because traces of uranium were found in Cleopatra's diet! (I said I wasgoing to be unfair!) Regards.

17. Report ElevenAlphaDog | May 2 9:14pm | Permalink

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@ joseph belbruno

You are absolutely correct in your assessment that excesses of the financial sector have roots in

social conflicts, namely that the political clout of the finance industry is grossly atrophied.

However I would suggest that rather than engaging in long-term / utopian discussions of changing

the political system, we should focus our energy on devising the specifics of banking system

reform, for which there is a clear and present opportunity.

I happen to support entirely Professor Farmers core proposition that simply imposing higher

capital ratios on banks is not enough and that we also need to carve out investment banks from

universal banks. Dodd Frank falls way short of that. This is a real tragedy.

The problem is that 99% of the general population does not understand the issue at all; and of the

1% who do, 80% get paid to act as if they did not understand it (paraphrasing an earlier quote).

Contrary to what you wrote, my personal experience is that the declared number one aim of

capitalist enterprise has always been "to make money", with no shame whatsoever (in the US at

least). Of the different economic models with which humanity has experienced on a vast scale,

there is ample evidence that a capitalist economy does produce "things" more "efficiently" than

any other. This is not a theory into anybody deludes itself but empirical truth.

By the way, the efficient market theory does not exactly play right into the hands of capital,

because if everybody believed in it no one would ever use the services of stock brokers or hedgefunds (do I need to explain?).

You argue that "profit means ultimately the control of the living labour of workers (the abolition of

"democracy" over production) in exchange for "dead labour" (goods). Profit means therefore that

the capitalist class is able to secure political control over workers by controlling the means of

production. This just sounds hollow to me. I am an entrepreneur. I use capital owned by others to

enable my projects. My primary goal is to make money. I see nothing wrong with that. In the

process I create jobs. I am not a member of the capital class. I believe that I create a lot more


15/29

value for society than my investors do. However I am very well aware that what I do would not be

if for them. The concept of class is completely alien to me in practical life (I noticed that you

spelled labour like an Englishman?).

I can not concur with your assessment that "Crises occur when this control cannot be secured

reliably so that it is difficult to establish the "value" of financial assets (witness, for instance, theproblems involved with "mark-to-market" that followed the latest financial crisis). Mark to market

is a pure accounting issue. It has nothing to do with the root cause of the crisis. As the crisis was

unfolding, in the absence of strict mark to market reporting obligations, only one bank what more

or less truthful in reporting a picture that vaguely resembled the reality of its toxic assets value:

Goldman. All others were deliberate utter liars. I believe however that Prof Farmer is on the right

track when he places the root cause of the crisis in skewed incentives created in the wake of the

1999 repeal of Glass Steagall.

Your other assessment that with reform the system will have to yield to ever-greater interference

from the State over its operation, which only worsens its legitimacy sounds like talk radio-level

economics. Anyone calling himself an economist should know that many economic activities

including the stock market and agricultural production can only function properly if subjected to astrong regulatory regime. The current problems are specifically due to a retreat of regulatory /

state control. In the US the state does not interfere with the financial system, it makes it possible.

Finally, I agree with you that just because there are instances of isolated ancient capitalist forms

of economic activity does not mean that our present form of capitalism can be traced back to

Antiquity: our present form of capitalism dates back to 1933, was torpedoed in 1999 and almost

sank in 2008.

Regards


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@ Alpha - I can see that you have misunderstood and "inverted" (or stood on their heads) my

several arguments. (Incidentally, "atrophy" means "wasting away" - the financial sector has done

the opposite. If I have to begin explaining the meaning of English words to you...well, I hope you

are a finer entrepreneur than a linguist!).

I could n e v e r (!!) have written that the aim of capitalists is "not to make money"....because the

very "definition" of capital is...."the realisation of profit" - which means exactly "to make money"!

You are confusing "money" and "risk" (which is what Farmer did, possibly "in an unguarded

moment", as the refrrain goes). I was saying that the aim of capital is not "risk"!!

(God Almighty! I have not even started with you!)

If you cannot see what the whole meaning of "making money" is - in other words, if you cannot

"understand" the process by means of which you are a b l e "to make money"....then we are

wasting our time..."Class" is not something you "see"; it is something you understand when you try to make sense of

social reality. Similarly with "the State". They are sociological concepts - but there is certainly a

"reality" behind them, and you see it every time you read a newspaper or you go to a hospital, or

when Madonna is photographed in Beverly Hills. Sadly, you will not find it in the irrelevant twaddle

of "professional economists". But you know what? If there were no "social conflict", why would

these bourgeois have so much trouble with the world? And, believe me, there is a whole lot more

to come! Indeed, the financial crisis (which was a product of that "trouble"), nearly brought the


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entire capitalist world crashing down...and we are not even half way through it yet! (Think about

that one.)

Finally, saying that "in the US the state does not interfere with the financial system"...well! I give

up! So what was TARP and QE and Dodd-Frank and Bernanke with public announcements every

half hour...Are you sure you live on THIS planet? Ciao.

19. Reportjoseph belbruno | May 3 12:16am | Permalink| Options

PS: One last thing about "making things efficiently". Sadly, a lot of the "things" capitalist industry

produces at present (especially in the US) are "things" like military equipment (very "efficient"!),

the destruction of the environment (from greenhouse gases to the suffocation of marine life in the

Gulf of Mexico to the degradation of living conditions in cities) - but above all, a myriad "objects"

that are "sold" on the basis of "marketing strategies" (advertising) and a model of social

organisation that truly threatens life on the planet. "Consumerism" will probably kill our planet if a

thermonuclear war doesn't. The "social conflict" that "causes" these "systemic risks" (black swans

indeed!) is what we need to understand...before it's "late for the sky".


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PPS: Oh, the "mark-to-market" concept. (Gee, you really don't get "it", do you?!) I know it's an

"accounting" problem. But that is "precisely" the problem! The accountants no longer know what

the heck they are counting!! Not how much (in money terms), but how to "value" assets (in

"money" terms)...Kapisch Alpha? They do not know what the "value" of the blasted "assets"

is....their "worth"! Now, does that sound "political" to you? And do you think that Farmer and all the

bourgeois economists put together would have a clue about that?


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Just a brief comment to remind participants to this Forum that reforming the banking and financial

sector will not remove the root of all evil and as you know I identify that as the socialantagonism that arises from the wage relation and the value that capital must realize in its

circulation as money-as-capital, from M to M (meaning profit). In a nutshell, what this means

is that the dis-connection between profit and value as a result of social antagonism will

always result in credit crises.

Now, in an effort to re-connect the political link between profit (or money-as-capital) and

value, the State will, on one hand, intervene to rescue the financial system (through easing

and reflation) and, on the other, seek to enforce the value of existing money contracts or

obligations (in other words, of existing debt obligations) through measures of austerity. What is

crucial to austerity or fiscal contraction is that it tends to remove purchasing power from working

households because the State invests generally in labour-intensive and welfare sectors. This will

reduce demand for consumption goods whilst existing unused productive capacity will not result in

greater capital expenditure even at low inflation rates. Even the conventional financial framework

envisaged by Bernanke-Gertler that I discussed below prescribes that following a financial crisis

the only way to stimulate investment ("legitimate enterprise") is that the net worth of borrowers

(reduced by the deflationary or contractionary pressures) will have to be restored through

monetary easing and fiscal measures - certainly not by efforts by governments to "make whole"

bondholders and financial institutions. Bluntly put, we need a transfer of wealth and income from

lenders to borrowers.

So these are the real horns of the dilemma that Farmers pieces are trying to grab. Yet countries
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like Britain and Germany and France have opted for austerity! - With the complication that the

euro is even appreciating and the PIGS... Well, if you read the recent FT Analysis column on

Greece there is enough to want to make you scream. The situation there is absolutely alarming...

And the ECB is tightening! God help us!

With any luck, the Fed will come to the rescue if the US recover and play the "locomotive" rolewhilst at the same time "compelling" Germany and China to expand domestic demand instead of

engaging in "wage suppression" and "export subsidies" through the "savings channel". (Please

see Michael Pettis's latest blog at www.mpettis.comon these matters.) But each step of the way,

these essential measures will be opposed by those who wish to impose their "laws of economics"

on us. One of those laws is that "contracts must be enforced and performed" - including bond-

interest repayments. Even if we manage to "persuade" governments to engineer avoidance of

these "obligations" (the Latin name for bonds, denoting a moral commitment; the German

Schuld for debt means also guilt!), "bond vigilantes" would seek to impose "capital strikes" - but

these could be avoided with a "determined" co-ordinated policy from Western capitalist

governments.

The next difficulty could be "inflation" - because we must not forget that, once empowered, trade

unions can be as "unreasonable" as any gang of capitalists - just take a look at that Analysis pieceon Greece if you don't believe me! This is why ultimately a thoroughgoing "democratisation" of our

society, preferably extending to all Western countries (the only place where capital can "reside"

safely) is the answer. We can start with financial sector reform and with fiscal and monetary

policy. In Europe, the rot starts in Germany with its capitalist elites and those economies closely

integrated with the Modell Deutschland.

(I note that Axel Weber, having been "spiked" from his "king-in-waiting" at the ECB is moving to

Chicago University - one more example, if any were needed, of the "collusion" between State

authorities and academic establishments: ask Professor Farmer what this means in terms of

"information asymmetries" of the "principal-agent" type!!)

22. Report ElevenAlpha | May 3 12:08pm | Permalink

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@ joseph belbruno

OK, I slipped. I meant hypertrophy. Happy? I do not believe that this kind of sniping is giving any

more weight to your points.

You did indeed not write that the aim of capitalists is "not to make money". But you implied that

they denied it and pretend instead that their goal is to produce things efficiently. That is incorrect.

The goal of any private company and individual is (should be?) to maximize profit. The role of the

state / political process is to regulate imbalances and redistribute the wealth created by the

economic process in a way agreed upon by a majority of voters.

Trust me I am not confusing money and risk - my living depends on it. But when you are

amalgamating financiers and entrepreneurs under one capital class I believe that you are

making a gross oversimplification.The financial crisis nearly brought the entire capitalist world crashing down? I dont think so. It

nearly lead to the nationalization of a large number of US banks. That is quite different from the

collapse of the capitalist world. There does not seem to be any credible alternative to the capitalist

system, as evidenced by the poor electoral showing of left parties all over Europe as the crisis

was unfolding.

One should not amalgamate the financial system, the role of the state in the later, and the

capitalistic economic production model.
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On mark-to-market: accountants do know how to count the beans. At most banks in the past 3

years they chose not to tell the truth. That is a different thing that not knowing how to do it. Issues

about the truthful representation of the value of toxic assets AFTER the crisis hit, certainly cannot

be the root cause for the crisis itself, can it?

On the role of the state in the financial system: you were mixing concepts of legitimacy and

interference. Interference is loaded with negativity (a curious choice of word for someone whoseems to define himself as an anti-bourgeois economist). My point is that the state has the

positive and necessary role of intervening (not interfering) and that such intervention does not

delegitimize the financial system in any way.

On Axel Weber moving to University of Chicago [being] an example of the collusion between

State authorities and academic establishments: what exactly is wrong with that? Where should

top technocrats come from / go to if not from / to the best universities (second best of course

because the best is on the north shore)?

In Europe, the rot starts in Germany with its capitalist elites. Im quite puzzled by that statement

since Germany is probably the country in the world that best combines a vibrant economy, strong

redistribution of wealth and environmental protection.

Would you care to articulate exactly how you suggest we should remove the cause of all evil?

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Reportjoseph belbruno | April 29 12:48pm | Permalink

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Just wished to point out Krugman's view that Bernanke is being "intimidated" by conservative

forces in the US (and, it must be said, by a President that has the backbone of an amoeba or an

invertebrate). Here is the NYT link: http://www.nytimes...rssnyt&emc=rss

Two further notes: first, pricing is not determined at the margin. The flow only records what ishappening "at the exit or the entrance" as investors trade in and out of positions. But those

investors will be aware of who "the big guns" are, and that is what will "shape" their expectations.

When "the big gun" is the US Fed, then everybody can drop their bazookas because we are

talking thermonuclear war - and foreign central banks have little or no firepower to counter what

the Fed can throw at them (just look at the pitiful state of the ECB having to combat nearly 30%

unemployment in Italy and a eurozone inflation of nearly 3% already! And the Fed isn't nearly

done yet...)

A corollary of my first point is that only fools and horses take very little notice of what the Fed

does! As I have amply demonstrated below, "the march of events" (with or without Fed

"intimidation") is solidly in favour of Fed policy - and the Great Depression together with the history

of the international monetary system since World War Two offer ample and inconfutable instances

of this! It is not unfair to say that those who cry loudest about "the irrelevance of the Fed" are

those who stand to lose most by their "the Devil take the hindmost" stance.... a stance with which

any sensible observer (from Martin Wolf to Krugman) simply has to agree. To recall Keynes's

fatidic words in mid-1933: "Chairman Bernanke is magnificently right!"

2. JB

30 3:13am | Permalink

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@ Don Peppe - Shucks! You are quite right - it was either a lapsus calami (forgetting to insert

"youth", I got the data from "Repubblica" the day before) or a Freudian slip (pomp for "wishful

thinking"). But I plead not guilty to the latter because, in veritate, there never was a need for it:

what passes for "employment" in Italy is in fact a motley spectrum of "precarious jobs"(precariato)...and real unemployment is much higher than "i dati ISTAT" reveal. Of course, the

situation is even worse in Greece, Portugal, Ireland and Spain - and not much better in France

and Germany either. Which leads us into a brief reflection on the relevance of all this to social

reality overall. I really have to say that to anyone coming from Australia most Europeans live in

conditions that we would describe as "penurious" (though most Australians would have not the

slightest clue what the word means - mercifully even in the "literal" sense!). Di questo passo,

chissa' come andra' a finire (this way, who knows how it will all end!). Buon fine settimana.
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Perhaps before we leave "Bernanke" (save to return to him - so "central" is his contribution, if read

critically, to the theorisation of the present "crisis"), could I rapidly "situate" the discussion in a

"theoretical" context - an essential task if we are to rise above the "noise" of the quotidian "random

walk". Indeed, it will be recalled that in neoclassical theory, it is the very assumption of "perfectinformation" (Modigliani-Miller), of "common knowledge" (game theory), and Walrasian

"tatonnement" (in equilibrium analysis) that make the exchange of information "symmetrical" and

that reduce the entire field of "economic science" to "the problem of co-ordination" (just google

Hayek's "Individualism and Economic Order", discussed in Loasby's "Equilibrium and Evolution"

for an attempt to "historicise" the problem).

It is evident that there can be no space in all of these "theories" for central banks, nor indeed for

"financial intermediation" (hence Hayek's virulent opposition to central banks and fractinal

reserves as a "negation" of the market pricing mechanism). The "separation" of borrower's risk

and lender's risk first raised by Kalecki and Keynes - and the consequent recognition that "money

is not neutral" - remains "internal" to the function of capital: it is, as it were, a "division of labour".But an understanding of why, how and where "information asymmetries" arise in the "channel"

that links investment decisions with financial structure is absolutely essential. To leave the entire

matter to "asymmetric information" arising "after" some "exogenous shock" (see any of Mishkin's

papers on the subject) is quite simply inadequate. (Similarly, the "New Institutional Economics" of

Coase, Williamson and Demsetz, explain away the "internalisation" of these "asymmetries" as the

need to minimise "transaction costs" - which then raises the conundrum of why the capitalist

economy is not constituted by one "mega-firm"!)

In this paper (http://docs.google...RZZR4PoOaJYKaKF07Q ) , Bernanke and Gertler identify the

"ultimate source" of asymmetries in the "borrowers' net worth position" - the lower the net worth,

the higher the risk of implosion. Again, this fails to isolate "the virus" responsible for the disease,

but it offers some hints. The first hint is that "high net worth firms" will be "ensconced" from debt-

deflation initially by their "oligopolistic" and hence "systemic" importance (too big to fail). And the

second is that each successive "crisis" brings about a series of "mergers and acquisitions"

whether voluntary or "shot-gun marriages" that increases further the degree of "oligopoly" of

capitalist enterprise and therefore its future "fragility" - the "systemic riskiness" of the system.

And finally (only because I do not wish to impose on the patience of participants further), the

growing "systemic riskiness" of the structure of capitalist enterprise, together with the parallel

"centrality" of State authorities in "crisis management", mean that central banks become "lenders

of first (not last) resort".

I hope this begins to clarify some matters so we can all move to a higher level of analysis and

discourse.

4. Report Don Peppe di Prata | April 30 12:16pm | Permalink

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For just to post the same comment which blatantly enough was dropped:

Italian overall unemployment is currently at 8.3%

Italian juvenile unemployment is currently at 28.6%

Please see:
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http://www.istat.i...cprov/20110429_00/

Why my previous post was dropped?


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@ Don Peppe - I think it was due to your querying my proficiency in Italian (diplomatically put). Not

to worry, I have much thicker epidermis than that! Regards.

Just a c

davies.belbruno1

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