The Indignant Generation

2011 is the year of global indignation. We have not seen such mass reaction since May 1968: the Spanish 'indignados' ; the Arab revolutions;  the riots in London; the protests of young Israelis in Tel Aviv against high costs of living; protests of Chilean students demanding higher social spending; massive demonstrations against austerity in Greece, Portugal and Italy; India’s movement against corruption; and now the “Occupy Wall Street” movement in New York and across the United States. These movements are now turning into global protests:  from America to Asia, from Africa to Europe, people are rising up to claim their rights and demand  a true democracy. On 15 October, people met pacifically  in the streets in 951 cities from 82 countries to initiate global change. 

Many of these revolts have a common ground. They represent a powerful critique to globalization which has benefited to the wealthy and has produced an international labour market that held down the wages of the  unskilled workers in western economies. It is a genuine expression of anger of a generation without future and distrust of  traditional institutions, political as well as financial, being responsible of the crisis and having caused an enormous damage to our societies. The indignados of Madrid, Athens and Paris claim they do not belong to any political party, but they are not conservatives. They demand support for a “European social model”, which promises free education and healthcare and a decent income for all. 

Some may argue that this is a reminiscence of utopian communism, a sort of City of the Sun (Civitas Solis) where all public goods would be put in common. We cannot agree more but is this possible on Earth? Of course, water is a public good of common use; forests should not be destroyed; the air should not be contaminated; banks should not commit fraud and cheat out for profit. Citizens should have a say in the organisation of public life. The risk is that utopian ideas may be exploited by populist leaders to their own profit. 

The consciousness of the indignant  is about their future stolen for an entire generation. Our societies don't have anything to offer to them: no jobs, less public services, erosion of middle classes living standards. In a sense, they express an alternative economic model, a more egalitarian society based on the satisfaction of  basic needs and the respect of human dignity. Is there anything wrong with that? 

As N.Roubini put it, "any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are re-balanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare".

World leaders are too busy to find solutions for re-capitalizing the banks but don't listen to the pacific and silent revolution of an entire generation. They must act before it is too late. But global change is at our door !

Omnia cum tempore !


P.S: In October 2010, Stéphane Hessel, a former French-German resistance fighter published a pamphlet called    Time for Outrage! (original French title: Indignez-Vous! ) which  has sold more than 3.5 million copies worldwide. The essay calls on young people for peaceful and non-violent insurrection against  the growing gap between the very rich and the very poor,  the need to re-establish a free press,  to protect the environment and the welfare system, and the plight of Palestinians. It inspired  one of the names given to the Spanish protests against corruption and bipartisan politics, Los Indignados . These protests, in conjunction with the Arab Spring, later helped to inspire other protests in many countries, including Greece, Israel, and the United States.

Keynes speaks

We must defend citizens, not banks

Europe is on the verge of  collapsing. The eurozone crisis seems unstoppable and  despite of  measures taken so far by the European governments, the European Central Bank as well as other central banks from other countries,  it still feeds panic in financial markets.

European governments now recognise that they have to do more if they want to save the eurozone.  They have to tackle several problems at the same time, e.g. the rescue plan for Greece,  recapitalization of the banks, protect from contagion Spain and Italy. But there is no consensus so far  on a comprehensive plan which provides a durable solution to the eurozone.

An elaborated proposal  has been put forward recently by  G.Soros  who writes :  "Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation. They need to regain control, and they need to do so now". He suggests three main steps: "first, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone. In the meantime, the major banks must be put under the direction of the European Central Bank in exchange for a temporary guarantee and permanent recapitalization. Third, the ECB would enable countries such as Italy and Spain temporarily to refinance their debt at a very low cost".

In a pure financial logic, this would contribute to 'calm the markets'. We should give him some credit given  his expertise in financial speculation, but he understands that capitalism is digging its own grave  and that a collapse of the euro would have dramatic consequences for the entire world economy.

The first proposal requires a change in the EU Treaty and cannot be readily be implemented as it would require the unanimity of all Member States. But, despite political difficulties, it would certainly be a step forward toward the creation of a fiscal union which would then imply the emission of eurobonds. In the meantime, who will fill the vacuum:?  The European Central Bank is not a political authority and even an intergovernmental body would require the approval of the Bundestag and other EU countries.

The second one is more problematic. The proposal is to use the European Financial Stability Facility (EFSF) to recapitalize major banks  which are heavily exposed on sovereign bonds of Greece, in particular. This would be done under the aegis of the ECB, which will monitor risks, and so doing will the remove the incentive to de-leveraging. In return, the ECB would lower its discount rate to relieve the pressure on Spain and Italy.  The conclusion is that these measures would be sufficient to ensure an orderly default of Greece without 'causing a global meltdown' and the "EFSF could underwrite a “voluntary” restructuring at, say, 50 cents on the euro. The EFSF would have enough money left to guarantee and recapitalize the European banks, and it would be left to the IMF to recapitalize the Greek banks".

The second rescue plan, which was agreed on 21 July still needs ratification from the Bundestag in October.   After the latest austerity measures imposed to Greece - with thousands of public sector jobs to be axed -  there is a chance that Greece  will get (hopefully by mid-October) another tranche to replenish its budget. If Greece meets its 'targets', the rescue plan - perhaps in a revised form- will in fact be used to repay the creditors (such as Deutsche Bank), which, in fact were largely involved in the plan. But in exchange of the 'voluntary' restructuring, banks will ask for being recapitalized, which means benefiting from another injection of tax payers money.

 Europe's debt crisis is now turning into a banking crisis.   Eurozone banks heavily exposed on sovereign debts are likely to cause 'collateral damage' and contagion for other eurozone countries  But, despite the measures taken and the amounts of money devoted to stimulate the economy through banks, the amount of credit provided to the 'real economy' is still very low. In fact, the money which will be mobilised will pay back the banks for their high risk investments. Greek people will not benefit from the new rescue plan, which will just reimburse the banks and continue feeding international speculation. Actually, they suffer from severe budget cuts which affect directly their living conditions:  higher prices, lower wages, poorer health and education services.

Before deciding on a further recapitalization, there are certainly other options which could be pursued while preserving the general interest. In a recent interview, Jacques Delors, former president of the European Commission said: "The ideology of finances which frightens us continues to dominate. It is necessary to restore the balance of politics, economics and people’s needs, which definitely existed during the creation of united Europe".  We risk the collapse of not just the euro but the whole European project, which was built up with political vision and perseverance. Now, the high tide risks to throw away everything and citizens will have to pay a high price for it.

Sign the appeal: http://www.avaaz.org/en/eu_people_vs_banks/?fp

Balanced Budget

Balanced budget is a consistent topic of debate among economists. Mainstream economics advocates that budget deficits are always harmful and provides a series of arguments such as forward looking expectations of economic agents, crowding out effects and other pseudo-scientific ideas . On the other hand, alternative theories of heterodox economics (especially Keynes and post-Keynesian economists) argue that budget deficits may be useful, and even necessary in times of crisis as they provide fiscal stimulus to sustain aggregate demand. A common view is that budgets did not need to be balanced year on year, but over the economic cycle,  that is with a surplus in booming years and a deficit in recession years, which result over the period in a balanced budget. This view was seen as a synthesis between the two schools of thought but it is now being widely contested by the more radical right wing economists.

The Chicago school of economics - which advocates minimum government intervention and self regulated markets - came under attack in the wake of the financial crisis of 2007-08 . In fact, their economic theory was regarded at that time as an intellectual failure with serious economic consequences. Their belief in rational behaviour and self regulation of markets has contributed to the formation of financial bubbles and therefore to the growing income inequality. Many economists from that school argue that fiscal stimulus plans just create debt-financed government spending which crowds out an private investment - in thes sense that debt absorbs the savings that would normally go to private investment-, even if the economy is depressed , and therefore, they don't contribute to economic growth. P.Krugman is right to say that their ideas about the financial crisis were simply a product of  the 'Dark Age of Macroeconomics ! If public funds are used effectively, i.e. they are geared to finance growth enhancing  investments, they can generate high social returns in the medium to long term. In simple words, public spending does not reduce total investment (in the same proportion), but increases GDP which leads to more savings and tax revenues, and therefore reduces the budget deficit.

The economic debate did not, however, turn into a clear and honest political debate. Fiscal conservatism claims that a budget balance is a primary goal for a society, which means in substance less State intervention and eventually less public services provision, especially to the less favoured groups. This ideology is on the rise  in the US (especially the right wing Republicans) and in Europe (especially Germany and its allies) and its motto is 'no budget deficit', whatever that means. In fact, deficits are not all the same and policy measures to reduce it may vary according to different objectives. But the main point of issue is that austerity alone risks to cause a disaster, as acknowledged by many contemporary analysts (see Martin Wolf in FT 28/06).  

In Europe, wise men say with great conviction that the euro crisis was caused by failure to enforce the stability pact, that is to control limits on deficits and debts. The account balance (i.e. the difference between governments revenues and public expenditure) has worsened in almost all countries, but this is not the cause of the crisis, rather its consequence. Ireland and Spain were considered as the best examples of budget discipline, having budget surplus and low debt level. At the same time, France and Germany, the advocates of financial rigour had high budget deficits and breached the Stability Pact rules during several years for which they never got any sanction and even managed to relax the EU budgetary rules in 2005. Conversely, Spain has exceeded the 3% deficit limit only in 1998 and in the last three years its deficit reached 10%.

Now, the strengthening of the so-called 'economic governance' rules - with sanctions to countries which fail to comply with balanced budget rules - calls for stricter austerity measures which will lead to social turmoil and further economic depression. German and French political leaders urge all the euro area countries to adopt the 'golden rule' - meaning the ban on deficits and debt - and to reform their Constitution in due course. Only Spain has managed to do so, with a bipartisan reform due to internal political reasons. But,  the failure of political leaders to explain the austerity measures in their respective countries  further contributes to the economic mess and makes it even more difficult to solve the current crisis.

Budget deficits are not an economic sin per se.  The idea of a (strictly) balanced budget in times of crisis is not economic wisdom,  but rather a heresy , which in its proper Greek sense,  means 'choice'.

The Unbearable Lightness of Poverty

Rising poverty is an interesting indicator of the depth of the Great recession .  We have a two-speed process which hits most severely the poor whilst the richest seem to have escaped the worst of the recession's impact. Let's take the US situation for which data were published yesterday.

Over the past two decades, poverty has risen dramatically as a result of the financial crisis. More Americans are living in poverty than at any time in US history. According to the US census bureau, in 2010, 46,2 m people fell below the poverty line, calculated as an annual income of $ 22,134 for a family of four and $11,139 for an individual. So, nearly a quarter of Americans !

Nearly a quarter of American children are now living in poverty. Their number increased for the fourth year in a row to 22 per cent, the highest since 1993. Child poverty was the fourth highest in 2010 since the mid-1960s, when the federal “War on Poverty”  programme was launched by Lyndon Johnson.

The median household income of Americans dropped significantly since 2000 and by 2.3 per cent in 2010 from the previous year, due to increasing long-term unemployment, which has depressed wages and left many without income.

FT (14/09)  has reported on the data published by the Census Bureau :

According to Brookings, the poverty rate will continue to rise and hit 16 per cent in 2014. If that happens, nearly 10m American will have sunk into poverty since the recession began in December 2007.

 

In policy terms, poverty is considered by policy makers as a 'light' issue  as opposed to the 'hard' issue of debt and deficits. Neo-liberals will claim that poor always existed and that economic recovery will help them get out from that situation. But for this, they reckon austerity measures are an absolute necessity. At the same time,  the growing income gap is an issue for the US government  which is concerned about the effects on aggregate demand if wages continue to stagnate. Obama is right to launch a recovery plan, which will be funded in large part through the elimination of tax cuts for the richest Americans.

In Europe, the austerity measures have left aside the poverty issue, due to the shortsightedness of its political leaders. Ethically, poverty is unbearable for rich societies; economically, it is not sustainable as it further depresses demand and has a negative impact on median wages. We need 'hard' measures to combat poverty, not "light" or constrained policies.

The Great Bank Robbery

Now we understand better what has happened over the last two decades. There has been an enormous bank robbery and the most surprising thing is that there is little discussion about it. We all know that banks have caused the mess we are in, they have been bailed out and now they are even benefiting from the crisis.

According to figures quoted by Nassim Nicholas Taleb ( the author of the best seller ' The Black Swan'), the robbery would amount up to 5 trillion dollars, so more than the amount that the Obama administration will have to cut in the federal budget. There is a clear explanation: banks have taken excessive risks with leveraging, which result in excessive profits and their losses are transferred to shareholders, tax payers and also retirees (for their pension funds). For many years, exposures were hidden and part of the profits continued to be given to investment managers as a remuneration of risk. This is a typical case of 'moral hazard'.

This massive robbery, as we can figure out, is not money invested in public goods such as infrastructure, schools or healthcare but transfers from the productive sector to the banks, which in fact, as Taleb rightly points out, represent a tax on workers and small businesses. The key point here is that a low interest monetary policy favors directly the banking sector as it reduces the rate of return from savings and   transfers the inflation risk to millions of  savers. So, in rescuing the banks, the State is just subsidizing profits to bank mangers and investors. This could explain why banks reimbursed the loans just after one year.

The scandal is the impunity of investment managers, whose remuneration is proportional to the level of risk. It is clear that this is a violation of elementary ethical rules. We should not be naive to believe that a well functioning market would have produced better outcomes and therefore there is no need for regulation and sound corporate responsibility.

The meaning of ethics among bankers and financiers is quite limited: concretely, it is about doing all kinds of financial investment, excluding  tobacco companies or corporations involved in former apartheid in South Africa, but obviously not hedge funds. Banks should do their normal business under strict supervision rules, ensuring that funds are invested in the productive sector and bonuses redirected to promote solidarity with the poor. The world would, indeed, look much different.

Self-destructing Capitalism

Does capitalism have a future ? The question was raised by some economists and analysts who asked (quoting Marx) whether the capitalist system is not self-destructing. In a recent article, N.Roubini writes: "So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand".

In his powerful analysis of the contradictions of capitalism,  Marx maintains that capitalism eventually destroys itself as it exploits more and more people until the great majority of the population is converted into proletarians and thus creates the conditions for socialism. Basically, capital drives out labor, and so destroys its own market, as well as the source of wealth creation. Today, the capitalist system is confronted to a similar contradiction as in every one of its periodic crises. It continues to produce an ever-expanding volume of goods and services, which an impoverished population cannot afford to buy. So Marx was right, and of course we cannot blame the great man, who lived from 1818 until 1883 (the year when Keynes was born!) for the crimes committed decades after his death. 

However, the economic problems of modern capitalism differ greatly from those of the 19th century. There are two relevant features which can explain the current global crisis: the first one is the huge concentration of capital  and power of banks and financiers and the uncontrolled mass of money crossing national boundaries; the second one is the massive shift of wealth from labor to capital and the resulting inequalities in income as real wages decline.  

S.Brittan (Ft 26.08)  argues that 'even if the analysis is right the remedy is wrong. The justification for redistribution is ethical. if the only thing wrong with capitalism is insufficient mass purchasing power then surely the remedy is the helicopter drop of money envisaged by Milton Friedman. for this we need not s much a political as an intellectual revolution, namely the overthrow of the balanced budget fetish". 

Governments and central banks are breaking their heads about how to save capitalism.  The origin of the crisis is not an excess of debt, neither a mere problem of redistribution. The causes are much deeper and old remedies are useless. As Einstein said :"The significant problems we have cannot be solved at the same level of thinking with which we created them".