Austerity: The History of a Dangerous Idea by Mark Blyth (read in 2015)

Published by marco on

Disclaimer: these are notes I took while reading this book. They include citations I found interesting or enlightening or particularly well-written. In some cases, I’ve pointed out which of these applies to which citation; in others, I have not. Any benefit you gain from reading these notes is purely incidental to the purpose they serve of reminding me what I once read. Please see Wikipedia for a summary if I’ve failed to provide one sufficient for your purposes. If my notes serve to trigger an interest in this book, then I’m happy for you.

This excellent book provides an approachable analysis of the recent history of the financial crisis that started in 2006, exploded in 2008 and is still being sorely felt by many in 2015. Blyth skewers the main idea for solving the crisis: austerity for the majority of the public. Why is austerity not the solution? He lists many reasons, but the main one is that it doesn’t work. It has never worked. Accurate histories show that it doesn’t work. Inaccurate studies claim that it might work.

Worse, the crisis was caused by private machinations and profit-taking and the price is paid by the public—who’ve already paid the price in the form of a severely impacted economy. The public pays twice for the mistakescrimes of the few, while the few take their profit, take no punishment and line themselves up for the next reaping.

How do they get away with it? By selling the idea of austerity of all: if our economy tanked, then it must be our collective fault and we must all shoulder the blame and tighten our belts. The private losses are bailed out by the state and instantly transformed into a story of state profligacy. It’s like a child who crashes his car, gets his father to buy him a new one, then mocks said father for not being able to pay the rent.

Never mind that it is exactly these jackasses who aren’t tightening their belts—we can’t police everyone, can we? Never mind that exactly those who aren’t tightening their belts are actually the ones who caused the problems in the first place. With their crimes. Some will argue that what happened was perfectly legal—but that is only because those who commit crimes at high levels are careful to ensure that the crimes they wish to commit are first made legal.

This is an important book. Blyth cover the minutiae of recent history, covers the history of austerity over the last century, examines the writings and recommendations of oft-cited and great economists of the past—Locke, Hume, Smith, Keynes, among others—and looks at recent academic studies that are clearly if not deliberately fraudulent. He is a bit cagey about coming right out and accusing world leaders of collusion and corruption to serve their rich buddies and financial partners, but we can excuse an academic a bit of hedging. See below for my less-generous analysis and Blyth’s possible solutions.

“When world leaders keen to legitimize the damage that they have already done to the lives of millions of their fellow citizens reach for examples such as these to vindicate their actions, applauding these countries for creating misery, it shows us one this above all. Austerity remains an ideology immune to facts and basic empirical refutation.”
Page 226

Citations

“What changed was of course the global financial crisis of 2007–2008 that rumbles along in a new form today. The cost of bailing, recapitalizing, and otherwise saving the global banking system has been, depending on , as we shall see later, how you count it, between 3 and 13 trillion dollars. Most of that has ended up on the balance sheets of governments as they absorb the costs of the bust, which is why we mistakenly call this a sovereign debt crisis when in fact it is a transmuted and well-camouflaged banking crisis.”
Page 5
“This is, as we shall see over the next two chapters, why all of Europe needs to be austere, because each national state’s balance sheet has to act as a shock absorber for the entire system. Having already bailed out the banks, we have to make sure that there is room on the public balance sheet to backstop them. That’s why we have austerity. It’s still all about saving the banks.”
Page 7

Or, more precisely: having already used up an entire buffer to save the banks, we have to cut corners everywhere else in order to build up enough of a buffer to be able to save them again when the time comes, which it certainly will. That is, it’s not about saving the banks (present tense) but about being able to save the banks again (future, not subjunctive tense, because it’s certainly going to happen).

“There is no crisis of sovereign debt caused b sovereigns’ spending unless you take account of actual spending and continuing liabilities caused by the rupture of national banking systems. What begins as a banking crisis ends with a banking crisis, even it if goes through the states’ accounts. But there is a politics of making it appear to be the states’ fault such that those who made the bust don’t have to pay for it. Austerity is not just the price of saving the banks. It’s the price that the banks want someone else to pay.”
Page 7
“Since there are usually more debtors than creditors at any given time, and since creditors are by definition people with money to lend, democracy has, according to some, an inflationary bias. The politics of cutting inflation therefore take of [sic] the form of restoring the “real” value of money by pushing the inflation rate down through “independent” (from the rest of us) central banks. Creditors win, debtors lose. One can argue about the balance of benefits, but it’s still a class-specific tax.”
Page 9
“In essence, democracy, and the redistributions it makes possible, is a form of asset insurance for the rich, and yet, through austerity, we find that those with the most assets are skipping on the insurance payments.”
Page 14
"We have spent too much” those at the top say, rather blithely ignoring the fact that this “spending” was the cost of saving their assets with the public purse. Meanwhile, those at the bottom are being told to “tighten their belts” by people who are wearing massively larger pants and who show little interest in contributing to the cleanup.
Page 15
“You can blame regulators for being lax or negligent and politicians for caving to banking interests all you like, but this was a quintessentially private-sector crisis, and it was precisely how you get a multi-billion-dollar financial panic out of a bunch of defaulting mortgages. But it was not yet sufficient to cause a global crisis. To get there, you have to understand how the structure of these mortgage securities combined with unbacked insurance policies called “credit default swaps” (CDSs)[1] to produce a “correlation bomb” that spread the repo[2] market crisis into the global banking system. Again, this had nothing to do with states and their supposedly profligate spending habits and everything to do with weaknesses internal to the private sector.”
Page 26
“With a decade of house-price increases telling everyone that house prices only go up, and with these new mortgage derivatives seemingly eliminating a correlation problem that was deemed small to being with and was now insurable with a CDS, you could almost being to believe that you had what bankers call a “free option”: an asset with zero downside and a potentially unlimited upside, and one that is rated AAA by the ratings agencies. The fact that many investment funds are legally required to hold a specific proportion of their assets as AAA securities pumped demand still further.”
Page 29
“Repo runs can start it, and derivatives can amplify it, but to be truly blindsided by a crisis of this magnitude you need to have a theory of risk that denies that catastrophic events can happen in the first place, and then leave it entirely to the self-interested private sector to manage that risk. Unfortunately, almost the entire global financial system worked with just such a theory of risk management.”
Page 31

The last sentence here betrays a writing style—and thinking style—that presumes innocence in the face of a tremendous amount of evidence to the contrary. Blyth is not a prosecutor and has no obligation to avoid the obvious hypothesis that the entire financial system did exactly this because it allowed them to capitalize on massive short-term gains while letting the rest of the world clean up the mess. His formulation leaves the door open to them just having fooled themselves into thinking that a good thing could last forever. They didn’t fool themselves. They knew it was bullshit. But if they could convince everyone else that it wasn’t bullshit, they could get away with some massive short-terms gains before the whole game blew up, they pulled up stakes and got the hell out of dodge. A classic con, no more, no less. Just at a global scale.

“Like the proverbial drunk looking for his keys only under the lamppost, we are drawn to see the “normal” distributions in decidedly nonnormal worlds because that is where we find the light.”
Page 37
“The flaw in the logic was once again the expectation that the whole cannot be different from its component parts, that the denial of fallacies of composition haunts us once again. The neoclassical insistence on grounding everything in the micro suggested that if you make the parts safe (individual banks armed with the right risk models), then you make the whole (banking system) safe. But it turned out that the whole was quite different from the sum of its parts because the interaction of the parts produced outcomes miles away from the expectation of the instruction sheet, a sheet that was quite wrong about the world in the first place.”
Page 43
“I hope this demonstrates that any narrative that locates wasteful spending by governments prior to 2007 as the cause of the crsis is more than just simply wrong; it is disingenuous and partisan. In fact, average OECD debt before the crisis was doing down, not up. What happened was banks promised growth, delivered losses, passed the cost on to the state, and then the state got the blame for generating the debt, and the crisis, in the first place, which of course, must be paid for by expenditure cuts. The banks may have made the losses, but the citizenry will pay for them. This is a pattern we see repeatedly in the crisis.”
Page 47

“Maybe the $13 trillion coast to date was a price worth paying? Perhaps. But only if the costs had been shared according to both ability to pay and responsibility for the bust, but they were not.

“As we shall see in the next chapter, what was a private-sector banking crisis was rechristened by political and financial elites as a crisis of sovereign state in a matter of months. […] Europe usually sits to the left of the United states politically, but it was acting far to its right economically by mid-2010.”

Page 49
“The ideal policy back in 2009 would have cost around 50 billion euros. It would have required either the ECB, or Germany as its major creditor, to buy the secondary-market Greek debt that was subject to near-term rollover risk, bury it somewhere deep in its balance sheet, and walk away. Why didn’t they do so? One answer lies in German politics. There was a regional election coming up in Germany, and it was politically easier to blame the Greeks for being feckless than it was to explain to the German public that the ECB needed to bail them out for reasons of systemic risk.[3] The other answer lies in the ECB statutes that forbid one country to bail out another for fear of generating moral hazard.”
Page 64
“Fearing financial Armageddon, the Irish government issued a blanket guarantee for the entire banking system’s liabilities, and that 400 percent of assets as GDP on the private sector’s balance sheet very suddenly became the Irish public’s problem.”
Page 66
“Ireland and Spain were quintessential private-sector-housing-cum-banking crises, governed by states more fiscally prudent than Germany, where the risks were socialized while the profits were privatized. In all cases, private-sector weaknesses ended up creating public-sector liabilities that European publics now have to pay for with austerity programs that make the situation worse rather than better. The fiscal crisis in all these countries was the consequence of the financial crisis washing up on their shores, not its cause. To say it is the cause is to deliberately, and politically, confuse cause and effect.”
Page 73
“Just as in 2008, these banks were borrowing overnight to fund loans over much longer periods.”
Page 85
“recall that in the United States in 2008, the collateral being posted for repo borrowing began to lose value. As such, the firms involved had to post more collateral to borrow the same amount of money, or they ran out of liquidity real fast, which is what happened to the US banking system. The same thing began to happen in Europe. While mortgage-backed securities, the collateral of choice for US borrowers in the US repo markets, were AAA-rated, for European borrowers in London the collateral of choice was AAA-rated European sovereign debt. Just as US borrowers needed a substitute for T-bills and turned to AAA mortgage bonds, so European borrowers had too-few nice, safe German bonds to pledge as collateral since the core banks were busy dumping them for periphery debt. So they began to pledge the periphery debt they had purchased en masse, which was, after all, rated almost the same, an policy that was turbocharged by a EC directive that “established that the bonds of Eurozone sovereigns would be treated equally in repo transactions” in order to build more liquid European markets. By 2008, PIIGS debt was collateralizing 25 percent of all European repo transactions. You can begin to see the problem.”
Page 85

From a hypothetical letter to the Voting Public:

“The entire economy is in recession, people are paying back their debts, and no one is borrowing. This causes prices to fall, thus making the banks even more impaired and economy ever more sclerotic. This is literally nothing we can do about this. We need to keep the banks solvent or they collapse, and they are so big and interconnected that even one of them going down could blow up the whole system. As awful as austerity is, it’s nothing compared to a general collapse of the financial system, really.

“So we can’t inflate and pass the cost on to savers, we can’t devalue and pass the cost on to foreigners, and we can’t default without killing ourselves, so we need to deflate, for as long as it takes to get the balance sheets of these banks into some kind of sustainable shape. This is why we can’t let anyone out of the euro. If the Greeks, for example, left the euro,we might be able to weather i, since most banks have managed to sell on their Greek assets. But you can’t sell on Italy. There’s too much of it. The contagion risk would destroy everyone’s banks. So the only policy tool we have to stabilize the system is for everyone to deflate against Germany, which is a really hard thing to do even in the best of times. it’s horrible, but there it is. Your unemployment will save the banks, and in the process save the sovereigns who cannot save the banks themselves, and thus save the euro. We, the political classes of Europe, would like to thank you for your sacrifice.”

Page 89–90
“It turns out that cross-border borrowing in euros is, when bond markets reflect true risk premiums, just like borrowing in a foreign currency, with the result that banks increasingly want to match local loans with local assets. Although there is no exchange-rate risk to cover, if your sovereign’s yields go up and your parent economy deflates, then your ability to pay back your loans declines as if you were making payments in a depreciating currency.”
Page 91
“There was of course a worry that some states may not follow the rules, so more rules were put in place. But there was never much attention paid to the possibility that private actors, such as banks, would behave badly. Yet this is exactly what happened, and the EU is still blaming sovereigns, tying them down with new rules, and insisting that this will solve the problem. We can but think again about the old adage that drinks only look for their keys under the lamppost because that’s where the light is.”
Page 92
“However, as Karl Polanyi noted at the end of World War II, there is nothing natural about markets. Turning people into wage laborers, securing the private ownership of land, even inventing capital and preserving its monetary form are all deeply political projects that involve courts, regulation, enforcement, bureaucracy, and all the rest. Indeed, gaining control of the state by the merchant class was a defining feature of early capitalism.”
Page 99

“As Locke argued, “whatsoever then he removes out of eh state [of] nature…[and] mixed his labor with…[he] thereby makes it his property.” Now, you might think that other folks at the time would object to someone taking possession of the common land this way. But Locke insists that, “the taking of this or that part [of land] does not depend on the express consent of all the commoners” because “there was still enough [for all] and as good left.”

“Having dispatched the problem of distribution by assuming infinite abundance, Locke maintains that the only real argument against private property is the issue of spoilage, that more is taken than can be used, which God would not like. Luckily, then, time and habits have given us a device called money that allows us to get over the problem of spoilage because we can store money and swap it for consumables at any given time.”

Page 105

I’m assuming that Blyth’s tongue was planted firmly in his cheek when writing the last sentence.

“For Hume, merchants are the catalyst for trade and the creators of wealth. They are, according to Hume, “one of the most useful races of men, who serve as agents between …parts of the state.” As a consequence, “it is necessary, and reasonable, that a considerable part of the commodities and labor [produced] should belong to the merchant, to whom, in great measure, they are owing.” While “lawyers and physicians beget no industry,” only merchants can “encrease industry, and by also increasing frugality, give a great command of that industry to particular members of society.” Those “particular members of society” would, of course, be Hume and those like him: the merchant classes.”
Page 107
“For [Adam] Smith, the act of saving drives investment, not consumption. Why? Because the wealth of the nation is its total income. Take what is used for the reproduction of labor (wages) out of this income, and what is left is profit. Profits are then reinvested in the economy via merchants’ savings, which are lent out to the productive members of society (other merchants) to invest. Today we call this supply-side economics. Investment both drives consumption and makes consumption possible—not the other way around. Because of this “the greater part of it [income] will naturally be destined for the employment of industry.” Underlying this worldview is a particularly Scottish psychology that is worth unpacking because it suggests why the idea of austerity has such moral force, even today.”
Page 111
“Most interestingly, [Smith] is disarmingly honest concerning the political effects of capitalism, noting that “wherever there is property there is great inequality,” such that “ the acquisition of valuable and extensive property…necessarily requires the establishment of civil government.” A civil government that, “ in so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.””
Page 112
“First, [Keynes] showed that although any worker can accept a wage cut to price himself into employment, if all workers did this, it would in the aggregate lower consumption and prices, and thus increase the real wage (the wage-minus-price effects), leaving the worker who “adjusted” poorer and just as unemployed. Second, he showed that under conditions of uncertainty about the future, it is irrational for any investor to invest rather than sit on cash, with the result that if investors look to each other for signals about what to do, they all sit on cash and no one will invest. Thus we bring about, by out collective self-interested actions, the very depression we are individually trying to avoid.”
Page 127
“In this world spending, and with it debt, especially by the government, becomes good policy. Individual saving as a virtue, in contrast, falls to the paradox of thrift: if we all save (the very definition of austerity), we all fail together as the economy shrinks form want of demand.”
Page 128
“Most importantly for Schumpeter, this scale-shift takes a cultural toll. Whereas in the past “the rugged individualism of Galileo was the individualism of the rising capitalist class”, today, technology and bureaucracy have together removed the possibilities for such individuals to thrive. As he laments, “the capitalist process rationalizes behavior and ideas and by doing so chases from our minds…metaphysical belief” such that “economic progress becomes depersonalized and automatized.” When large firms take over production it is not the entrepreneur’s income that is replaced. After all, he gets shares in these new conglomerates. Rather, his social function is made redundant, “the stock exchange [being] a poor substitute for the holy grail” This may lead to a material progress, to more consumption and all that Keynes thinks important, but it is for Schumpeter a morally empty future. It is also one that invites jealousy from the lower orders who, led on by classes of functionless left-leaning intellectual who resent capitalism, have become accustomed to ever-rising standards of living and can no longer accept the dislocations of the market. Thus, the disorder of the previous decades is little more than the inability of the spoiled masses to accept necessary adjustments.”
Page 130
“If Schumpeter reminds you of Ayn Rand’s character John Galt, he should: he’s cut from the same conservative cloth. And, as in Galt’s long speech at the end of Atlas Shrugged, what started as a robust defense of economic liberalism ends up being a weak retreat from it. With the Keynesian view ascendant, conservatives like Schumpeter had a choice: admit that they were wrong (or at least accommodate themselves to the new ideas that seemed to fit the facts better than the old ones) or find something else to talk about. Schumpeter chose the latter path, and so he spoke about the death of saving, the end of family virtue, and the triumph of bureaucracy.”
Page 130–131
“Especially when parliaments get involved, elements of the administrative order can be captured by the most powerful members of the transactional order, hence the fear of cartels and private power.”
Page 136

“In the case of Greece and Italy, if that meant deposing a few democratically elected governments, then so be it.

“[…] The basic objection made by late-developing states, such as the countries of East Asia, to the Washington Consensus/Anglo-American idea “liberalize and then growth follows” was twofold. First, this understanding mistakes the outcomes of growth, stable public finances, low inflation, cost competitiveness, and so on, for the causes of growth. second, the liberal path to growth only makes sense if you are an early developer, since you have no competitors—pace the United Kingdom in the eighteenth century and the United States in the nineteenth century. Yet in the contemporary world, development is almost always state led.”

Page 142

Blyth references Ha-Joon Chang’s Kicking Away the Ladder in a footnote, but it seems to me that he either mis-stated or at least failed to emphasize the full point. He got the first half right: liberalization of an economy before it is on at least somewhat equal footing with potential competitors or trade partners is a fool’s game that benefits only those competitors or trade partners. The second point that Chang made was that neither Britain nor the US did this either during their own buildup. In fact, they were both highly protectionist, despite there being no real competition, as Blyth notes. Chang would go on to show that every economy considered great today started off extremely protectionist and gradually dropped trade barriers and increased liberalization only after it knew it would be the primary beneficiary of such policies.

“Suitably incentivized, entrepreneurs hire more people and buy more materials, which pushes up prices and wages. This produces a classic short-run monetary stimulus effect that beings to show up in rising prices, particularly asset prices, which encourages still more borrowing. The underlying economy, however, has not changed. There is simply more money chasing fewer goods: an inflation. Realizing their error, banks now stand to make losses, so they do everything they can to not realize those losses. They extend more credit, lower interest rates further, and generally kick the can down the road.”
Page 146
“Companies may be sitting on piles of ash and not investing, but the recession is no, as Keynes would have you believe, the capitalists’ fault. Rather, investors are quite reasonably covering the risk of backdoor expropriation by the state through inflation or devaluation. The fear of the state taking away your property—the original liberal nightmare—rears its head once more. Instead, “public opinion is perfectly right to see the crisis…as the consequence of the policy of the banks” Consequently, the sum of the Austrian view is that we should have let the banks fail and the restart the system.”
Page 148
“One of America’s Great Depression-era monetary economists, Irving Fisher, analyzed how, much to his dismay, depressions do not in fact “right themselves” owing to a phenomenon called debt inflation. Simply put, as the economy deflates, debts increase as incomes shrink, making it harder to pay off debt the more the economy craters. This, in turn, causes consumption to shrink, which in the aggregate pulls the economy down further and makes the debt to be paid back all the greater.”
Page 150
“It’s a great instruction sheet—so long as you are indeed the late-developing, high-savings, high-technology, and export-driven economy in question. If you are not, as the periphery of the Eurozone is finding out, then it’s a one-way ticket to permanent austerity.”
Page 151

“As a consequence, policy making should be delegated away from democratically elected politicians to independent conservative central bankers who will dish out the bad medicine when required because their jobs do not depend upon pleasing constituents—except, perhaps, their constituents in the financial sector who benefit from ultralow inflation […]

“[…]

“Their evidentiary basis, however, was another matter entirely. The fact that these theories rest upon incredibly narrow operational premises and have scant evidence going for them is beside the point. That they are highly effective policy rhetorics that only narrow the menu of choice for governments is what matters.”

Page 157–158

“Similarly, the notion that unemployment is voluntary is, in the context of the current self-inflicted wound in Europe, downright offensive. Real workers must pay bills and feed families from jobs that have fixed hours and fixed wage rates. The idea that workers “trade off” labor against leisure by figuring out the real wage rate and then slacking off or going on an indefinite unpaid leave is the type of thinking that leads us to see the Great Depression as a giant, unexpected, and astonishingly long unpaid vacation for millions of people: original, yes; helpful no.

“Public choice theory, like any universal gizmo, has not only helped revolutionize the institutional relationship between voters, politicians, and bankers in democratic societies, it has become, as Daniel Dennett said about evolution in Darwin’s Dangerous Idea, the “universal acid” that eats away everything it touches by turning everything into a principal-agent/rent-seeking problem.”

Page 159
“What Karl Polanyi once said about the failed ideas of an earlier era also rings true in this instance: by the standards of the IMF, the Washington Consensus’s “spectacular failure…did not destroy its authority at all. Indeed, its partial eclipse may have even strengthened its hold since it enabled its defenders to argue that the incomplete application of its principles was the reason for every and any difficulty laid to its charge.” Once again, when it comes to austerity, mere facts seldom get in the way of a good ideology. And a good ideology, in the absence of supporting facts, can always supply a few good models to generate those facts when needed.”
Page 165
“Alesina and Ardagna being by noting that the ballooning of debts and deficits across the OECD is due in large part to the “bailout[s] of various types in the financial sector.” However, about this they “have nothing to say”. What they do have to say is that regardless of how we got into this mess, the only way out is through cutting the state.”
Page 173
“Austerity’s continuing application may well result in the eventual breakup of the Eurozone and have political repercussions that the weak institutions of the EU are unlikely to withstand.”
Page 176
“As Fred Block put it with justified irony, “The American contribution to…the problem was to lend Germany huge sums of capital, which were then used to finance reparations payments.” If you think this sounds a little like continually giving the European periphery loans that those countries can never hope to pay back because of their already high debt burdens, again, you would not be completely wrong.”
Page 185
“Given the relatively large size of the US domestic economy, increasing domestic demand was bound to have a significant effect. Second, as a consequence, the net effect of Roosevelt’s policies was to increase government spending and debt while bringing unemployment down to 17 percent by 1936. No good dead goes unpunished, of course, and this turnaround in the economy by late 1936 created demands for a return to balanced budgets, sound finance, and America’s second round of austerity in 1937.”
Page 188
“So when Churchill put Britain back on gold in 1925, the domestic economy was quite deliberately going to be squeezed so that the value of sterling and, not coincidentally, the profits of finance, would be maintained.”
Page 189
“The currency depreciation that getting off gold facilitated helped restore exports, but with the Treasury view of the economy still dominant, Britain continued to stagnate with endemic high unemployment until rearmament, the crudest form of stimulus, created the conditions for recovery. Inflation, the great fear of the rentier class, never appeared. Never once did austerity help.”
Page 191
“In Vienna in 2009, and long before any Greek or Irish bailout, an agreement was signed between the Western banks, the troika (EU-IMF-EC), and Romania, Hungary, and Latvia that committed Western European banks to keeping their funds in their Eastern European banks if these governments committed to austerity to stabilize local banks’ balance sheets. The Vienna agreement prevented the liquidity crunch from spreading to the rest of the REBLLS, so long as the same balance-sheet guarantee (austerity) was applied elsewhere—and it was. Once again, it was all about saving the banks, and the bill for doing so, in the form of austerity, high interest rates, unemployment, and the rest, was dumped once again on the public sector balance sheet of the states concerned.”
Page 221
“Let’s stop for a moment and take this all in. A set of patently unsustainable and unstable economies financed by foreign credit bubbles blew up, quite predictably, the minute there was a shock to these economies. These countries are now supposed to be the role models for the rest of the world to follow? Spain is in bad shape, certainly, but is it really supposed to hollow out its economy entirely and live off more foreign borrowed money? Is Italy supposed to abandon its competitive export sector and sell of its banks? That would be what “following the example of the REBLLs” actually means. In fact, these so-called “models” are little more than the worst features of Ireland, Spain, and Greece combined, with no compensatory airbags, a sideline in divide-and-rule ethnic politics, and a libertarian instruction sheet.”
Page 222
“When world leaders keen to legitimize the damage that they have already done to the lives of millions of their fellow citizens reach for examples such as these to vindicate their actions, applauding these countries for creating misery, it shows us one this above all. Austerity remains an ideology immune to facts and basic empirical refutation.”
Page 226
“Part of what follows is a conjecture—the business model of investment banking may be dying. If so, all the money we spent and have lost in recession was wasted on a system that may be in terminal decline anyway.”
Page 231
“[…] deprived of fuel for the asset cycle, all those wonderful paper assets that can be based off these booms—commodity ETFs, interest rate swaps, CDOs and CDSs—to name but a few—will cease to be the great money machine that they have been to date. Having pumped and dumped every asset class on the planet, finance may have exhausted its own growth model. The banks’ business model for the past twenty-five years may be dying. If so, saving it in the bust is merely, and most expensively, prolonging the agony.”
Page 234

But, most importantly, the purveyors of the dying business model are able to escape any negative effects of its death. Instead, those that never benefited from it in the first place will bear the cost of its funeral. The bankers have a win-win. They win while the public is still willing to be fleeced by the game, and they win when the public buys the next con: that the banks must be bailed or it will be worse for everyone.

“Meanwhile, what growth there is seems to be on the retail rather than the investment banking side. But retail depends more directly on the real economy, which is shrinking because of austerity. In sum, we may have impoverished a few million people to save an industry of dubious social utility that is now on its last legs.”
Page 234

I would strike “dubious” here.

“Irish debt to GDP was 32 percent in 2007. Today it stands at 108.2 percent after three years of austerity. Indeed, if the cost of NAMA is added to the national accounts, Ireland’s debt-to-GDP ratio would rival that of Greece. Ireland bailed its banks, and then banked on an export-led recovery without a devaluation that was based upon phantom exports that create very few jobs and that are only made possible by tax dodging. Apparently this is Greece’s role model.”
Page 237

NAMA is the National Asset Management Agency, which was formed to manage the debt burden of 4x GDP taken on by the Irish government when it agreed to bail out its banks for 100 cents on the dollar. The tax dodgers to which Blyth refers are American high-tech companies—primarily Google and Apple—that expatriate their profits in order to avoid paying US taxes.

“So we are talking taxes, which no one likes. But since I found out that in 2010 I paid more in taxes than the General Electric Corporation—really, I did, and so did you—I’m willing to give financial repression a chance. Yes, it will greatly limit my opportunities to buy and trade exotic derivatives and engage in international financial arbitrage games, but you know what? I’m willing to give it up. After thirty years of all the gains and all the tax guts going to the people you who brought us the bubble, payback is coming. Not because of Occupy Wall Street and not because of my personal preferences, but because it’s so much easier and more effective to do than it is to enforce self-defeating austerity that it’s bound to happen.”
Page 241–242

I’m afraid that while I share Blyth’s sentiment, I don’t share his confidence in the inevitability of repression, which is tax on captive bondholders. Under repression, bondholders are forced to hold on to their investments even when the interest rates are no longer satisfactory (or something very much like that). Essentially, it’s a way of slowing down the hopping-around of the investor class and making them bear at least some of the brunt of downturns rather than letting their capital skip around willy-nilly, pulling in only positive results everywhere while letting someone else—read: the public—bear the costs. The concept is similar to the brake that would be exacted by a transaction tax—which would make hopping directly expensive—but people have been talking about something like that for four decades and the powers-that-be have so far mostly avoided it (except for some countries in Europe, which have it, and the EU as a whole, which is, at least, discussing….or was).


[1]
“If anything, it’s the absence of the state in the repo markets that’s worth commenting upon, since the absence of the state’s guarantee of insurance explains the system’s vulnerability to a bank run.”
Endnote 10 on page 248
[2]
“A CDS is called a swap but is actually quite different from most swaps. It was called a swap mostly to avoid regulations that would kick in it it were named what it really is, an insurance contract. Insurance requires reserves to be set aside, but swaps don’t, which was a huge part of their problem.”
Endnote 13 on page 248
[3]
“[…] if everyone tries to become fully diversified, then, paradoxically, they will end up buying more or less the same assets, and using the same hedges to cover their exposures, which is what had happened by 2006. Their individual portfolios may be diversified even if the sum of those portfolios is not. This is why so-called systemic risk, which is in part the risk you cannot diversify, never really goes away.”
Endnote 23 on page 249