Austerity Can’t Be Just for Regular People

May 9, 2012   ·   1 Comments

Source: Rolling Stone

A protester holds a banner that reads 'Austerity enough is enough' during a demonstration in Paris. (Getty Images)

By Matt Taibbi:

It didn’t take long to crank up the backlash against European voters. This is inevitable whenever a socialist wins a major election, but particularly now, when new French president François Hollande rode to victory shouting, “Austerity can no longer be inevitable!”

This sounds like the beginning of what will be a very heated debate over who has to pay for the excesses of the financial crisis. It was previously assumed that everybody but the actual financial services sector would have to pay, but voters in Europe now are refusing to go along, sparking a wave of eye-rolling editorials in the financial press. Even David Brooks got into the act [yesterday], penning a lugubrious editorial about the errant political instincts of the populist masses here and abroad.

Markets all over the world freaked out over the prospect of having ignorant European voters meddling in the recovery process the geniuses of the high finance world had already painstakingly laid out for them. The model for economic progress in the financial bubble era, after all, is supposed to go something like this:

1. Let banks inflate massive asset bubbles with the aid of cheap or even free government cash, and tons of leverage;
2. Before it all explodes, carve out gigantic sums for bonuses and compensation for the companies that inflated those bubbles;
3. After it explodes, get the various governments to bail those companies out;
4. Pay for it all by slashing services to what’s left of the middle class.

This is the model we used in America. We had a monster asset bubble based on phony mortgages, which Wall Street was allowed to inflate to spectacular dimensions with minimal reserve capital, huge amounts of leverage, and tons of fraud for good measure. When that bubble exploded, we first rescued the banks who inflated the thing in the first place, and then our plan for paying for it mostly revolved around folks like Paul Ryan and Chris Christie, who made great political hay by trying to take an ax to “entitlements” like health care and retirement benefits.

They’re replaying the same script in Europe, sort of. The causes of crises in places like Spain, Greece, Portugal and Italy vary somewhat and are less simple to define, but a common denominator in all of them is weak growth mixed with giant budget deficits.

In most all of these cases, you had enormous sums of money entering these countries in the middle and late 2000s as global financiers in the midst of the bubble boom looked for higher-yield investments around the world – Spanish real estate, Greek debt, etc.

The local economies sucked up the bubble money, and in Greece’s case they used it to ramp up state benefits, which they could no longer afford once the bubble burst. A lot of these countries turned to Wall Street to finance their way out of budgetary messes using swap deals and other hocus-pocus moves, kicking the can down the road as it were, and those decisions are now blowing up in their faces.

Now that it’s the next morning, and everyone has a severe hangover from the bubble, the dominant narrative is that these countries brought their troubles on themselves by being reckless spenders with unsustainable welfare states. The solution, naturally, is going to be “austerity,” slashing state budgets, reining in those wasteful citizens with their unreasonable demands for returns on taxes.

Take [...] Brooks column in the Times, for instance, which seems aimed at his colleague Paul Krugman (who has been arguing that cutting public spending and job stimulus in European countries will be disastrous). Brooks claims that the financial crisis was caused by “structural” problems, the first of which is that we’ve simply grown out of a need to pay low-skilled workers real wages:

Hyperefficient globalized companies need fewer workers. As a result, unemployment rises, superstar salaries surge while lower-skilled wages stagnate, the middle gets hollowed out and inequality grows.

According to Brooks, this organic trend toward lower salaries for everyone but the “superstars”  managing those hyperefficient companies has forced politicians into the bad decision of borrowing and taxing to extend more welfare/charity to the less fortunate:

Politicians tried to compensate by reducing the tax bill, increasing deficit spending, ensuring easy credit for homebuyers and by helping workers shift out of the hypercompetitive, globalized part of the economy and into the less productive and more sheltered parts of the economy – mostly into health care, government and education.

But you can only mask structural problems for so long …. The current model, in which we try to compensate for structural economic weakness with tax cuts and an unsustainable welfare state, simply cannot last.

Naturally, since that welfare state is “unsustainable”” we need to be real about things and stop the deficit spending and the stimulus, etc.

This world view ignores the fact that those “superstar” leaders of “hyperefficient” companies have been sucking up a thousand times as much welfare as those low-skilled workers Brooks is talking about. Here’s how the “superstars” of the banking world sometimes earn their bonuses: they borrow trillions from the U.S. Federal Reserve at zero or near zero interest, then they turn right around and lend chunks of that free money to a place like Greece (ex-FDIC Sheila Bair, in a hilarious editorial on the subject, pegged the ten-year yield at 21%), then they pocket the proceeds and call it capitalism.

Brooks’ analysis of the financial crisis leaves out things like the $16 trillion in emergency loans the banks secretly got from the Fed in the years since the crisis. It ignores quantitative easing, bailouts, and the trillions of dollars of bets Wall Street made on the unreal economy during the bubble years that we all ended up paying for, either through taxes or reduced home values or lowered interest on our savings.

The point is, when people talk about “austerity,” they only ever talk about the pain the general population should voluntarily accept, in the form of reduced services and curtailed “stimulus.” No one ever says the financial services sector should have to cut back on its access to easy money, and there hasn’t been much in the way of serious plans to restore some sanity and prudence to the lending and investing business.

Instead, governments have stood by and allowed banks to lend thirty and forty dollars for every one on the books, they’ve watched lenders almost completely do away with underwriting standards, they’ve continually pumped the big firms full of cheap cash from the Fed and the ECB (printing new trillions when the real money runs out), and they’ve allowed Wall Street to build giant sandcastles of illusory wealth using synthetic derivatives, all with minimal reserve requirements.

The result of all of this easy money is an endless succession of speculative bubbles that simply shift from one market to another as financial companies run around the globe in search of high yields. It was Spanish real estate yesterday, and Euro sovereign debt before that, and American home mortgages at other times, and then it was wheat and corn and other food commodities last year (which led to the social unrest in the middle East), and it was oil in 2008, oil in 2011, and oil again this year, and so on.

In addition to the direct consequence of huge stunning losses when these bubbles collapse, the insane volatility of all of these markets creates panic in the business community, and puts a brake on real lending to grow real businesses. When you don’t know if oil is going to cost $40 a barrel or $140 three months from now, it’s pretty hard to invest in a new airline, or a chain of supermarkets (as commodities, many food prices will also rise and fall with oil), or anything at all, really. It’s not surprising that no one wants to lend in this environment.

I agree with Brooks, all of this is unsustainable. But if pain’s coming, it can’t just be regular people who pay. Bankers have to find new ways of making money that don’t just involve betting the hot table and taking out instant billion-dollar profits. They have to go back to building real businesses and being content with gradual returns over time. If there’s going to be austerity, it has to be for everybody.


Readers Comments (1)

  1. maineprep says:

    Matt, This truly needs to be said again and again. It is maddening that our society has chosen to heap rewards on those who gambled away pension funds along with the tax revenues of entire cities and counties. The Occupy movement has at the very least demonstrated that many people are disturbed that our government seems to think nothing needs to be done to curb the excesses of the financial sector or even claw back the ill-gotten gains of those who blew the most hot air into the housing bubble and then sucked out billions in “bonuses” as the economy quickly deflated.

    Simon Johnson has a persuasive article in the Times about the seeming bipartisan support for breaking up or at least slimming down the TBTF banks. I think that you would agree that breaking them up would at least address the moral hazard that currently exists.

    Matt, you and Krugman have been the brightest beacons shining light into the murky depths of our dysfunctional banking system. One last thing, though: The next time a blot on society like Breitbart dies, I suggest this comment: “Tant pis.” We really can’t afford to have you taken out of the conversation the way you’ve been missing since that ill-received obituary.



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