Mark Blyth – US Banks too big to fail. Europe Banks too big to bail. Caused by private sector blamed on public sector (run away spending – spending to bail banks) paid for by people.
Sovereign debt crisis. Says gov spent too much. Really banking crisis as Gov plugs holes rent by banks levered bad debt to insolvency. No orgy of public spending. Make it public fault, banks off hook. France 2.5 x GDPUS 1.2x GDP and can print cash. Still peg currency. Our debt still best bet. System very tilted towards us. Europe can’t. Bond Yield go up. If banks fail, cost absorbed by country, not EU. Risk local, not system wide. No country has resources to bail as banks more leverage.
Bond Yield – interest we have to pay in debt. Shoulda gone up if people worried about US downgrade. People take refuge in stock market. But all went down indicating worry about slow economy, not solvency of Gov.
Austerity cut spending. When Econ contracting. Force wages down. Raise taxes if needed. Debt will decrease. Debt usually rises. Wages remain low and under investment in society undermine growth. Gains from cuts can easily given away later in tax cut.
Spend money, raise wages – Econ actually grows. Repression is best way for most of us. Fallacy of composition- Can’t all cut at same time. Someone must spend for someone else save. Can’t all increase imports. If all austerity, all Econ go down.
Our debt isn’t bad. If not size is growth will undermine growth. States balance sheets must reduced. But method of paying is not even. Those who make money, made problems not pay their share. Choices made at time made choices, now ask bottom to pay.
Crisis not moral failing of individuals. Not mean we need austerity.
Crisis caused by: all private sector. Structure of repo market Structure of collateral deals in repo. Structure of mortgage backed derivatives Correlation and tail risk in amplifying risk. Intellectual belief of agents. Uncorralted assets – real estate seems as such. Prices in San Diego not impact Lincoln. Cut up risky mortgages across countries – lace them together. Different offers owned by different people on uncorralted assists couldn’t all go bad. Then add that offered by institutions that could go bad, risk hidden, capital requirements light. When did start to go bad, no cash to cover and all related, one big market. Insurance pay out if fail
Risk management Models of thin tail had fat tails.
Markets efficient in aggravated if in parts. Parts are by definition so must be in total. Circular logic.
$13 trillion to bailout. Debt increase 13%_40%. Loss of GDP incorporated. Loss of GDP not covered by banks. 8% of GDP. Covered by borrowing. Stimulus help transfer bank debt to public. We spent to plug gap of bank failure. Stimulus only 12% of cost. Adds to cost not explain cost. 88% by banks.
311 people, 64% over 16158 million workers. 72% paycheck to paycheck with little savings. Trouble raising $2000 in cash. 70 million handguns in USNo cash in ATM, no paycheck fear that spurred bailout
Banks bubbles. Banking crisis cause public debt problem 80% of the time. Sovereign debt caused by credit bubbles burst.
Nothing natural open markets. Don’t naturally appear if remove gov. Needs lots of state. Wage labor, land ownership, establish, courts, enforcement and maintain money are all political action supported by State.
Smith, Locke Hume chapter 6. Can’t live with State, can’t live without it. Don’t want to pay for it.
Public choice infection. All actors seems as agents. Paranoia about moral hazard replaces trust. Only way out rules, not trust anyone.
Washington consensus Deregulation, Discipline, tax reform, privatization, liberal trade policy, fdiNot reflect practices of OECD states. We not do it. Made others do it. iMF WB. Instruction sheet. Terrible results. Capital crisis, flat growth or shrinking.
Debt ballooning. IMF cushion currency shocks. All pegged to dollar and dollar to gold. 71 dollar floats all float IMF has no rules.
Rational expectations Why cuts work. Workers calculate based on signal to cut sent by gov. Consumers see cuts will lower bond rates, which we know will result in cheaper loans. So we spend now knowing money cheaper later. Cutting seen as far.
Deflation has worked. 32 Sweden 25% unemployment. Left austerity. Spending on public, resisted protectionism, tax to stimulus. Wage. Balanced price and wage. Full employment, economic growth, fair distribution. Costs and benefits shared. Also worked in Germany a Japan in 30s.
France 30s. Conservatives purposely hurt economy to undermine left. Bank of France served a few families. Not let gov spend or leave gold. Devalue must spend. Germans knew France would defend frank at all cost.
Sweden 90s expectations. Tax cuts in slump signals future growth. 24%-67% of GDP debt growth. Policies mix matters. wage, devalue demand for exports.
Ireland min recovery. Hide nama – phantom exports. Hide us profits. Iceland let banks fail. Leveraged nearly 1,000. Self investment of banks 70%. Swapping debt securities with each other. Let fail. Devalued currency, capital controls and increased welfare. 2009 gov took over bank. Bond holders paid, not public. Capital controls locked investors in. New banks established with good assets. Bad left in defunct banks. Investors could take those. Less drain on state. Expansionist policy. All tightened belt. 10% 6.9, 3 nowCapital control, taxes and careful spending. Running surplus. Unemployment down. Real wages up. 10:1 bank debt and making it. US 1:1.
Repression Captive audience investors encourage to hold lots of Gov bonds. Capital control. Gov pays low yeild on bond while running balance budget. Low inflation rate. Negative interest on bond. Value of debt shrinks. Econ grows. Rich not public pays. Works if banks owe you. 2008 was perfect. WWII.Limit our ability to play fancy finance. But so what ?
CRS studyCuts in taxes and cuts in capital gains leads to more income inequality. Does not lead to more growth. US Gov spends 25% of GDP. Raises only 18%. Raise from wealthy. Peter Diamond. 80% for top will raise revenues. Close gap and still leave more than Nixon