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LQD: Stiglitz lambastes baNama republic

by Frank Schnittger Thu Oct 15th, 2009 at 10:55:26 AM EST

David McWilliams, one of the best Irish economists has a good piece on an interview he did with an old acquaintance in Ireland recently - Joe Stiglitz, winner of the Nobel Prize in economics, former chief economist of the World Bank, and the head of former US president Bill Clinton's Council of Economic Advisers who presided over the US's sustainable boom of the 1990s.  It's worth reading in full, but here is an extract.
Nama is highway robbery | David McWilliams

When asked whether he would implement a Nama-style bailout for the banks, he responded: ``No, this is the kind of highway robbery which we see happening all over the world, with guns pointing at the heads of the political leaders and the bankers claiming the sky will fall down and the economy will be devastated unless they get this money."

He went on to compare the employment of mass fear as the single justification for bank bailouts with the same weapon of mass fear that was deployed by President George W Bush after 9/11.

``It was invoked to justify anything the president wanted to do, such as the Iraq invasion," Stiglitz said. ``Well, the bankers now use 15/9 [September 15, 2008 was the day Lehman Bros went bankrupt] as the new weapon of choice to force politicians into the huge bailouts, which will bring us enormous debts on our balance sheets with no real assets on the other side. But the bankers will be saved. When we gave them the money, the bankers said `don't worry, you will get your money back', but no one believes that now."


Nama is highway robbery | David McWilliams

When asked if letting the banks go would be the end of the world, which is the default position of Ireland’s current government and banking and economic establishment, Stiglitz laughed.

‘‘This is nonsense,” he said. ‘‘Countries which allow banks to go under by following the ordinary rules of capitalism have done fine. The US has let 100 banks go this year alone, as did Sweden and Norway in their crises. In the US, it’s just the big, politically-powerful banks that have not been allowed to go down, for political reasons.

‘‘The important thing to remember about financial markets is that they are forward-looking, but what they do remember is the size of your national debt.

If you spend money in bailing out banks without taking all the equity, you will end up having a huge national debt, a liability with no assets to show for it. Now that will scare off investors in the future.

“[In Ireland], this bank bailout is a simple transfer from taxpayers to bondholders, and it will saddle generations to come. The only thing that might give you solace is that, as chief economist of the World Bank, we see this type of thing happening in banana republics all over the world. Whenever a banking crisis happens, the financial sector uses the turmoil as a mechanism to transfer wealth from the general population to themselves. I’ve been very disappointed to see that it has happened, not only in banana republics, but in advanced industrialised countries.”

And how did our esteemed Finance Minister, Brian Lenhan respond?

The Irish Economy » Blog Archive » Lenihan on Stiglitz

The Minister for Finance has responded to Stiglitz's criticisms. According to Bloomberg:

Lenihan pointed to the U.S. as an example of a rescue package that was attacked before succeeding.

"I simply do not accept his analysis," Lenihan said. "As far as Professor Stiglitz is concerned, he made the same criticism of the U.S. bank package, which is now proved to be a tremendous success."

Of course, the US TARP bank package, which Minister Lenihan is referring to as a tremendous success, started life like NAMA as a plan to overpay for troubled assets but was changed to become a plan in which the US government made equity investments in the leading financial institutions.

Stiglitz has argued that the terms of the TARP equity investments were insufficiently generous to the US taxpayer--see here for a report from TARP's Congressional Oversight Panel which endorses this viewpoint. It would be misleading, however, to characterise the Stiglitz's criticisms of TARP as being directly related to his views on NAMA. On this issue, see here for an interview with Joe from Feburary in which, among other things, he discusses proposals then being floated for the US government to purchase bad assets--he characterises Paulson's orginal TARP plan as "cash for trash".

I find it really worrying with our Finance Minister can so easily dismiss the comments of such a well qualified and experienced economist as Joe Stiglitz.  Just who's advice is he taking and where is it coming from?  The disconnect with reality only seems to be getting worse.

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I find it really worrying with our Finance Minister can so easily dismiss the comments of such a well qualified and experienced economist as Joe Stiglitz.  Just who's advice is he taking and where is it coming from?

Well, if you have to ask...

In the US, it’s just the big, politically-powerful banks that have not been allowed to go down, for political reasons.

[...]

[W]e see this type of thing happening in banana republics all over the world. Whenever a banking crisis happens, the financial sector uses the turmoil as a mechanism to transfer wealth from the general population to themselves.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 15th, 2009 at 09:58:41 AM EST
I accept the generally prevailing wisdom may support bank bail-outs - although only to a far lesser degree than Nama proposes.  However Lenihan seems to be accepting advice that Ireland needs to do much further and do what TARP didn't do.  Alan Ahearne is his chief economic advisor who has no status within the profession compared to a Stiglitz.  So someone is pressing Lenihan's buttons very effectively...its probably partly the Bank CEOs themselves, but I still can't explain his gullibility on this issue.  He is not a stupid man even if his expertise is primarily legal.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 15th, 2009 at 10:23:20 AM EST
[ Parent ]
It is hard to get a man to understand something if his salary depends on his not understanding it.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 15th, 2009 at 03:44:49 PM EST
[ Parent ]
Lenihan will in all probability lose office at the next election, and will never be politically rehabilitated if Nama goes seriously wrong.  As someone who has reasonable expectations of being Taoiseach some day, that would be quite a career loss for him, not to mention the further career options that open up for an ex-prime minister.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 15th, 2009 at 04:05:12 PM EST
[ Parent ]
not to mention the further career options that open up for an ex-prime minister.

Yeah, well I'm thinking about the further career options that open up for an ex-finance minister. Want to bet that he'll coast straight into some cushy wingnut welfare gig in the lobbying or financial sector?

Besides, he can blame it all on the new government, when this thing blows up in your collective face.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 15th, 2009 at 04:22:19 PM EST
[ Parent ]
If Nama goes seriously wrong he is damaged goods from almost every perspective.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 15th, 2009 at 04:49:03 PM EST
[ Parent ]
One could have been forgiven for thinking similar things about Paulson.

But he had a cushy gig lined up from the moment he went out of the revolving door.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 15th, 2009 at 05:43:03 PM EST
[ Parent ]
So why aren't people marching on their governments all over the world? Are the issues robberies too complex, or is it because no one dares name scapegoats?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Oct 15th, 2009 at 10:30:12 AM EST
They must assume that they don't know better than the government. This is a complex, technical issue, supposedly.

I am mystified that governments aren't calling the banks' bluff

When asked whether he would implement a Nama-style bailout for the banks, he responded: ``No, this is the kind of highway robbery which we see happening all over the world, with guns pointing at the heads of the political leaders and the bankers claiming the sky will fall down and the economy will be devastated unless they get this money."
Why would a government stand for this? Why would the finance minister? Why would the central banker?

What is going on? Is everyone with a degree in economics incapable of thiking outside the mental-capture box?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Oct 15th, 2009 at 10:33:38 AM EST
[ Parent ]
Of course, you could go all the banana republic way and claim the reason is that the primary loyalty of the government is directed not at the country, but at special interests (financial in this case), which would mean the governments are poulated by traitors.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Oct 15th, 2009 at 11:16:27 AM EST
[ Parent ]
I don't have evidence to support such a claim, neither do I consider it entirely credible.  I am also looking for a more specific explanation than the more generic explanation I have offered elsewhere.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 15th, 2009 at 11:26:25 AM EST
[ Parent ]
Frank, ---none of us will ever have such evidence. What might such "evidence" consist of? Videotape of an exchange of money? It's a package of actions that represent a common objective of predation in which all that's needed to precipitate mutually supportive statements, policy, is a commonality of interest, of point of view.
Circumstantial is IT.
But a hell of a lot of citizens are in the slam on circumstantial evidence far less convincing.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Oct 21st, 2009 at 07:49:58 AM EST
[ Parent ]
I think you will find a very good, and a very funny explanation of why he has done what he has done at Nama is rescue plan for the elite  .  It's so good I am thinking of doing a LQD on it...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 21st, 2009 at 07:27:07 PM EST
[ Parent ]
If we look at it from the other side and check the Shock Doctrine the keys appear to monopolize the solutions through the constant narration drawl of the spin machine and then target key persons. The key persons would be individuals that can be swayed and who can then browbeat their parties/ministers into following them without necessarily knowing the actual plan.

I do not have the Shock Doctrine at hand right now but I think it was in Bolivia that an incoming leftist government started with an extreme project of privatization. This was started as soon as the leftist president was elected, by inviting him and his closest to a small conference with the richest people in the country and their pet economists. There it was explained that crises was bigger then expected and a radical project was needed to avoid complete collapse. Fortunately the economists had a plan ready to go.

The president and his closest men were convinced and when at the first meeting of the new cabinet they dropped the program on the table and declared that this was the plan and anyone that did not agree could resign as minister right there and then. (The sources was interviews some 15 years later with some of the ministers.)

Generally, the stick is the threat of economic collapse, the carrots are access to markets, capital (in the form of credits) and also personal economic success for the key persons (how much so depending on the level of corruption).

If anyone have not read the Shock Doctrine by now, you really should.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Fri Oct 16th, 2009 at 10:56:39 AM EST
[ Parent ]
Additionally, this kind of meetings are kept of the record and their actual existence (and threats made) must not be published lest the country will collapse in economic turmoil.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Fri Oct 16th, 2009 at 11:00:57 AM EST
[ Parent ]
State expects Nama to pay taxpayer €5.5bn profit by 2020 - The Irish Times - Thu, Oct 15, 2009

THE GOVERNMENT predicts that the National Asset Management Agency (Nama) will give a return to the taxpayer of €4.8 billion when the "bad bank" is wound up in 2020.

The forecast is contained in a draft business plan published by the Department of Finance last night showing the projections on the cost of running the loans agency and how it will be set up and operated.

Nama is expected to make a profit of €5.5 billion by 2020, which amounts to €4.8 billion when inflation is taken into account.

The Government plans to buy loans of €77 billion from five lenders through Nama at a price of €54 billion in a bid to unclog the banks of their most toxic assets and free up the flow of credit into the economy.

The plan anticipates borrowers owing €15 billion to Nama to default on the loans over the projected 10-year lifespan of the agency. Nama expects to be able to recover €4 billion of these loans by selling assets, mostly properties, backing the loans over four years from 2014 to 2017.

The Government expects the remaining €62 billion owing by borrowers to be repaid over the 10 years, primarily between 2013 and 2020 at about €7 billion a year.

The plan says this default rate of 20 per cent is based on "conservative and prudent assumptions" given the risk of a prolonged recession and the "concentrated nature" of the loans.

This compares with a default rate of less than 10 per cent experienced by Barclays in the UK in the early 1990s, according to the plan. Barclays was the hardest hit of the British banks during the collapse of the UK property market.

Minister for Finance Brian Lenihan last night again ruled out full nationalisation of the banks.



notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Oct 15th, 2009 at 12:16:51 PM EST
The real trade-off is between calling the bank's bluff now and seeing if the sky falls or accepting their demands now and waiting for the sky to most assuredly fall.
"As far as Professor Stiglitz is concerned, he made the same criticism of the U.S. bank package, which is now proved to be a tremendous success."

Two words: "Just wait!

Bailouts are preventing recovery. By this time during the Great Depression of the 1930s the bad debt had been dealt with and was no longer a millstone around the neck of the economy.  But other actions or refusal of actions by the Fed and the US Government made things worse.  We have learned about not repeating the latter.  But the bailouts have prevented any resolution of the bad debt overhang and this is poisoning the economy.  Lenihan can speak of the US bailout as having "proved to be a tremendous success" when unemployment is back to 6%, the remaining banks actually are solvent and the GDP/National Debt is back to within 10% of where it was prior to the crisis.

I seriously doubt that he, or most of us, will live so long as to see that in the USA or Ireland unless the course of action of the respective governments is radically changed.  

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 16th, 2009 at 10:18:52 AM EST
ARGeezer:
By this time during the Great Depression of the 1930s the bad debt had been dealt with and was no longer a millstone around the neck of the economy.
In Globalization and its Discontents, Stiglitz criticised the bank bailouts that were seen during the 1997 Asian crisis and its aftershocks, so he's being consistent.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Fri Oct 16th, 2009 at 10:31:38 AM EST
[ Parent ]
I liked that book a lot, but loaned it out before I was finished, expecting it back.  Looks like I'll have to buy another copy.  The Brazilian economist Dr.  André Lara Resende made similar claims in a guest column in Wm. Buiter's Mavrecon.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 16th, 2009 at 12:36:54 PM EST
[ Parent ]
Geezer's law:
BQ (book quality)=1/ROR (ROR=the rate of return).


Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Wed Oct 21st, 2009 at 07:56:34 AM EST
[ Parent ]
Strangely enough, Larry Summers has been consistently making a similar claim: he argues that the banking system in the US has averaged a major collapse requiring government bailout every 3 years since the 1970s and that this indicates systemic trouble.

To me, the trouble with Stiglitz's arguments, and to a much greater extent the trouble with people like Krugman is that they are starting from a from a more orthodox economic analysis than even Summers. In actuality, the banks do have a gun to the head of the world governments and the difference between banana republics and Ireland or UK and USA in this case is not so great. If you begin from the position that the banks have captured decisive political control over the last 20 years, then the naivete of the idea that "governments" should just put their feet down and let "the market" clean up, becomes more apparent.

Contrary to conventional wisdom, Summers has been articulating a more "radical" critique of the banking system than Krugman, and perhaps than Stiglitz.

by rootless2 on Tue Oct 20th, 2009 at 05:12:32 AM EST
[ Parent ]
rootless2:
Larry Summers has been consistently making a similar claim: he argues that the banking system in the US has averaged a major collapse requiring government bailout every 3 years since the 1970s and that this indicates systemic trouble.
Do you have references to this? I'd like to read more...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Tue Oct 20th, 2009 at 05:44:26 AM EST
[ Parent ]
Supposedly he has been saying this since 2007

http://agonist.org/sean_paul_kelley/20091016/a_crisis_every_three_years

by rootless2 on Tue Oct 20th, 2009 at 06:10:48 AM EST
[ Parent ]
He says "the financial system functions in America and around the world", i.e, including the Asian crisis, for example.
by gk (g k quattro due due sette "at" gmail.com) on Tue Oct 20th, 2009 at 06:45:22 AM EST
[ Parent ]

They must assume that they don't know better than the government. This is a complex, technical issue, supposedly.

I am mystified that governments aren't calling the banks' bluff

I used to wonder too, then light struck.  Just as the US Department of the Treasury has become a branch of Goldman Sachs, the Irish Department of Finance has been captured and run as a section of the Irish retail banks and representatives of bond holders.  His advisers come from a culture of revolving doors between the financial sector and the department of finance.  NAMA is an unsurprising product of this cabal.  The one formerly (somewhat) independent economist on his team is part of the very small minority of Irish economists who don't view NAMA as a disaster.

Minister Lenihan is lawyer with little knowledge of economics from a party with very close relationships with property developers and bankers.  Think of his relationship to this power nexus as rather like the relationship of the lawyer Levy to the Barksdale gang in The Wire.

To continue the analogy - think of Irish taxpayers as drug addicts, with wealth continually trickling upwards.  Will the addicts ever wake up and realise they have power over the dealers?  I don't know.

by Pope Epopt on Wed Oct 21st, 2009 at 05:41:05 AM EST


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