Wed May 30th, 2012 at 05:44:17 AM EST
Edward Harrison on Credit Writedowns:
Why can't people understand national accounting? | Credit Writedowns
In my view, austerity is a failed paradigm. (...) the deficit is the result of an ex-post accounting identity between private savings, and capital account and government balances. It makes zero sense to target the effect (deficits) instead of the cause (excess credit growth and malinvestment). (...) Focus on the policy and policy goals, not deficits.
(...) The right narrative for what has happened is that the depression has been the result of significant malinvestment that was built up during the so-called ‘Great Moderation’ [link added by afew] as a result of loose monetary policy at the Fed and other central banks in a world awash in fiat money. The real policy question should be how to eliminate the malinvestment and reallocate capital investment to useful productive enterprises without creating a deflationary spiral. When credit is written down, GDP drops and people are thrown out of work. That can be mitigated. It is bank runs that create deflationary spirals. So the answer is to write down assets and recapitalise the banking system quickly rather than dragging it out. The goal should be to allow increased savings and debt and debt interest reduction to combine with increased income to accelerate the deleveraging process without causing runs.
Sounds good, but given that the ECB has just rejected helping Spain recapitalise Bankia -- in other words, the European economic establishment is far from accepting Harrison's prescriptions -- what hope is there of sanity prevailing before it's too late?
And isn't it too late anyway? Peter Boone and Simon Johnson (h/t ARGeezer):
The End Of The Euro: A Survivor’s Guide | The Baseline Scenario
Jacek Rostowski, the Polish Finance Minister, recently warned that the calamity of a Greek default is likely to result in a flight from banks and sovereign debt across the periphery, and that – to avoid a greater calamity – all remaining member nations need to be provided with unlimited funding for at least 18 months. Mr. Rostowski expresses concern, however, that the ECB is not prepared to provide such a firewall, and no other entity has the capacity, legitimacy, or will to do so. (...)
The end of the euro system looks like this. The periphery suffers ever deeper recessions — failing to meet targets set by the troika — and their public debt burdens will become more obviously unaffordable. The euro falls significantly against other currencies, but not in a manner that makes Europe more attractive as a place for investment.
Instead, there will be recognition that the ECB has lost control of monetary policy, is being forced to create credits to finance capital flight and prop up troubled sovereigns — and that those credits may not get repaid in full. The world will no longer think of the euro as a safe currency; rather investors will shun bonds from the whole region, and even Germany may have trouble issuing debt at reasonable interest rates.
Doom is inevitable, or is there hope anywhere?