Welcome Mark Blyth (Brown University, Watson Institute) (Foreign Affairs) (Audio Interview) and Host Robert Kuttner (The American Prospect, co-founder) (author, Debtor’s Prison: The Politics of Austerity Versus Possibility)

Austerity: History of a Dangerous Idea

By now, it’s been thoroughly proven by events that austerity policies backfire. Cut public spending in a deep downturn, and you only worsen the slump. Europe is the more extreme version of the proof, but even the United States, which is technically out of recession, faces a needlessly slow recovery. We’ve reduced deficits by slashing spending, raising taxes, and making sequester deals, but the supposed reward in the form of restored business confidence never arrives. Austerity, as Mark Blyth writes, neither restores growth not reduces the debt ratio, because slow growth (and in some cases negative growth) makes the debt loom that much larger.

Mark Blyth’s fine book, Austerity: The History of a Dangerous Idea, adds detail, analysis and nuance to this story. He reminds us of what should be obvious: there may be some moments when some belt-tightening is needed, but “we can’t all tighten our belts at the same time” without driving the economy deeper into depression.

More importantly, Mark addresses the “Why?” question. Why is it that so many people still hold fast to the austerity cure, and why has it become so thoroughly lodged in both elite demands and popular conventional wisdom. In today’s forum, with Mark as protagonist, we’ll get deeper into these questions and answers.

Here are some, from Mark’s book:

One answer, which has been widely ignored or underplayed in other writing, is the need to recapitalize the big banks. As Mark observes, the financial collapse of 2007-08 not only crashed the system but revealed just how vulnerable and thinly capitalized the banks were. Austerity is partly a story of the self interest of the banks versus everyone else, and their continuing political influence despite their supposed disgrace. As Mark writes, “This is a banking crisis first and a sovereign debt crisis second.” His book explains an amazing sleight of hand. What was really a crisis of the banking sector was turned into a morality play about public spending, whose levels or sustainability had nothing to do with the crash or its aftermath. Mark also provides a very lucid explanation of how the shadow banking system actually works and why its extreme reliance on borrowing – debt! – led to the collapse and revealed a much deeper fragility in our financial system.

In perhaps the most original part of his book, Mark then turns to the history of austerity, both as an economic idea and as an intermittent and invariably perverse public policy. (I should say that when I first heard of Mark’s book, I got very nervous because I published a book around the same time critical of austerity titled Debtors Prison. But when I read his book, I was delighted that while we are anti-austerity soul-mates, we emphasized different things. I gave more play to the double standards in the treatment of private debt, via such measures as bankruptcy law. So you must read both books!)

His case studies of austerity as practiced by more than a dozen nations during several periods of the last century are instructive and original. The great exception of course was the United States during the New Deal and World War II.

Turning to the present crisis, Mark takes us on a very instructive tour of how the politics and perceived national self interest – perceived by elites, that is – led all of the major nations (except for a very brief Keynesian interlude in 2009) to conclude that austerity was in their self interest.

So I want to begin with a few questions for Mark and for our Salon.

As austerity has been proven to be a practical failure, have financial and policy elites learned any lessons. Or is the self-interest of the one percent so different from the rest of us that it makes sense for them to persist with a policy of bailouts for themselves, belt-tightening for everyone else, and bigger profits than ever?

Structurally, what are the differences between policy gridlock in the US and in Europe? Fiscal and monetary austerity, as you write, seems to work well enough for Germany, but the deflationary consequences are exported to Germany’s partners. We now have a German election coming up in which the Social-Democrats, if anything, are to Chancellor Merkel’s right when it comes to helping the rest of Europe or even changing Germany’s own course. Is there any way out of that box?

What happened to the democratic left? In Europe, center-left parties have been almost as complicit in austerity policies and in the deregulation of finance as center-right parties. Is this a case of Capital taking over all mainstream parties? Is it hegemonic ideology? Campaign finance (which is less important in Europe than in the US)?

Hearing myself talk, I wonder if the world has become more Marxian lately?

There is, as always, some heartening dissent in the academy, but you can hardly find it in mainstream electoral politics – Democrats are almost as austerian as Republicans. There’s a Socialist government in Paris that talks a good game, but the rules of the EU and the pressure of global financial markets on French sovereign debt (and the real weakness of the French banking system) prevent Francois Hollande from going his own way. Mitterrand, in the 1980s, had something of the same dilemma and against his own initial wishes became an austerian, but as finance has become more deregulated and more global, the problem is even worse today.

Has Maggie Thatcher been vindicated? Is there No Alternative?

What’s the Opposition program and where outside academia do we find its champions?

Mark, would you like to begin?

 

[As a courtesy to our guests, please keep comments to the book and be respectful of dissenting opinions.  Please take other conversations to a previous thread. - bev]

162 Responses to “FDL Book Salon Welcomes Mark Blyth, Austerity: History of a Dangerous Idea”

BevW August 18th, 2013 at 1:59 pm

Mark, Welcome to the Lake.

Bob, Welcome back to the Lake and thank you for Hosting today’s Book Salon.


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Mark Blyth August 18th, 2013 at 1:59 pm

Hello Bob, thanks for the kind words and the intro. Shall I pick up from there?

Mark Blyth August 18th, 2013 at 2:00 pm

And hello Bev, thanks for the invitation.

dakine01 August 18th, 2013 at 2:01 pm

Good afternoon Mark and welcome to Firedoglake this afternoon. Welcome back Bob!

Mark, I have not had an opportunity to read your book but I am one of the long term un/underemployed. A few years ago I wrote a blog post asking (rhetorically) why economists were always “surprised” when their predictions were wrong.

From Bob’s intro, you apparently cover this, especially with the push for austerity – can you quickly explain why the folks who are so wrong about things like austerity continue to be listened to instead of the folks who have been correct on economic issues including how bad austerity is for economies?

BevW August 18th, 2013 at 2:02 pm
In response to Mark Blyth @ 2

Mark, If you would like to respond to Bob’s questions at the end of the Introduction, we’d love to hear what you have to say.

Robert Kuttner August 18th, 2013 at 2:02 pm

Welcome, everyone.

Floor’s open.

Bob Kuttner

Mark Blyth August 18th, 2013 at 2:04 pm

Sure. A version of it goes back to one of Bob’s early books “The revolt of the haves”. Basically, what we have in Europe especially in the aftermath of 08 is a creditor/debtor standoff. You can’t have over borrowing without overlending, and when the lending is done through a hugely levered banking system, the resulting bust would kill the banks. This much we know.

Mark Blyth August 18th, 2013 at 2:05 pm

So imagine a country like Ireland. Banks 400 percent of GDP go bust and troika enforced austerity results. They lose 50k graduates a year to migration,. Unemployment is 14 percent. And quarter after quarter economists say “ist getting better” when it isn’t, so why the pretense?

Mark Blyth August 18th, 2013 at 2:07 pm

Imagine a society where the top 20 percent got their assets bailed out and the bottom 20 have to pay for it. The next 20 percent up from the bottom (the precariat) are so worried about keeping a job they will take wage cuts and all sort. The next 20 percent are simply glad that they are not paying, and the last 20 percent hope one day to have enough to be bailed out. Now, if that’s the politics, who wants to tell the trust? Its ugly, but tehre it is.

Mark Blyth August 18th, 2013 at 2:08 pm

Bob’s right to say that the world is more Marxian now. I like to see this as a ‘class specific put option’ (in the language of finance) where someone high up gets insurance paid by someone lower down.

Mark Blyth August 18th, 2013 at 2:10 pm

If no one else is jumping in I will go for Bob’s US and EU gridlock comparison…so jump in.

Mark Blyth August 18th, 2013 at 2:10 pm

OK, here goes.

masaccio August 18th, 2013 at 2:11 pm

Mark, hi and thanks for coming by. In Chapter 1, in your discussion of the causes of the Great Crash, you say that one important cause was the drying up of liquidity in the repo market; and not the state, and not the “individual moral failings of the bankers”.

It seems to me that there is plenty of evidence of systemic fraud in the origination and securitization of home mortgages. As you point out, these were a big chunk of collateral in the repo market. These lost value suddenly, and I bet that a big reason for the dramatic fall was the insider knowledge on Wall Street that the RMBS were wildly overvalued.

Both of these feel like corruption and criminality, even if no one seems willing to prosecute.

So, in what sense is this not a problem of individual moral failings of bankers?

Robert Kuttner August 18th, 2013 at 2:12 pm
In response to Mark Blyth @ 11

Europe seems a more serious structural gridlock, where the entire system is biased towards deflation. US seems partisan deadlock, with constitutional bias against activism and excessive Wall Street influence on Dems, but in Europe there literally seems no way out.

BevW August 18th, 2013 at 2:13 pm

Yesterday during the salon the Credit Crisis of 1966 was mentioned – was this an example of austerity also?

The credit crisis was sparked by the first real rise in interest rates in the postwar era — the beginnings of Vietnam Era inflation. The Federal Reserve and the Federal Home Loan Bank, each trying to take care of their constituent industries, implemented policies that forced banks and savings and loans to go head-to-head in a fight for deposits. Many savings and loans were in real trouble.

Mark Blyth August 18th, 2013 at 2:13 pm

Gridlock in the US has been a blessing. It means that the GOP didn’t get to cut. As a result the US is growing (albeit sequester impaired) faster than, for example, the UK. The UK has all the same advantages as the US (real central bank, own currency) but decided to squeeze. As a result its flatlined for four years and is now growing due to a new housing bubble. the EU has cut the most and is falling off a cliff. The periphery has lost between 20 and 30 percent of GDP and unemployment is above 20 percent in the south. The US has gridlocked fiscal institutions and that has been a blessing. The EU forgot to build them and with the Commission and the ECB in charge, austerity has been the only game in town.

Robert Kuttner August 18th, 2013 at 2:14 pm
In response to masaccio @ 13

too big to fail meets too big to jail

Mark Blyth August 18th, 2013 at 2:15 pm

On point 13. Criminality is a symptom of excess, not the cause. The cause was a set of structural incentives that allowed the growth of Too Big to Fail as a business model. That’s not about morality, its policy (failure)

Mark Blyth August 18th, 2013 at 2:16 pm

On Bob’s point at 14, I don’t see Europe as gridlock since they simply don’t have the institutions to be gridlocked. Hence its ECB and EC enforcing a creditors put on the south to minimize the haircuts in the north.

bluedot12 August 18th, 2013 at 2:17 pm
In response to Mark Blyth @ 16

Would you recommend that Europe or some of the nations in the south abandon the euro?

BevW August 18th, 2013 at 2:17 pm
In response to Mark Blyth @ 18

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Mark Blyth August 18th, 2013 at 2:18 pm

Best policy is for germany to leave and suffer its real effective exchange rate sans the Euro subsidy. They would then have to focus more on domestic consumption, which would be good for the rest of the EU. But as Homer Simpson has it “that’ll never happen.”

Mark Blyth August 18th, 2013 at 2:18 pm
In response to BevW @ 21

Oh yeah – forgot about that

Robert Kuttner August 18th, 2013 at 2:19 pm
In response to Mark Blyth @ 19

By gridlock, I mean no politically possible alternative to austerity because of structural lock on policy

Mark Blyth August 18th, 2013 at 2:20 pm

If you folks want something substantive to chew over that’s a quick summary of where I am coming from here’s an op ed I did for the financial times.

Don’t Learn the Wrong Lesson if Europe Recovers

Mark Blyth (Brown University)
Simon Tilford (Center for European Reform)

According to the European Commission the eurozone is on the mend and austerity policies are responsible. The first part of this statement is, we hope, supportable. The second is not and needs to be called-out. If the eurozone recovers and the lesson learned is that austerity worked, then we are, like Marx’s historical stooges, doomed to compound the current tragedy by repeating it as farce the next time we are faced with an economic crisis. With 26 million unemployed in the eurozone and a periphery burdened with more debts than it can ever hope to pay back as a result of this policy, the notion that austerity worked, or even targeted the right problem, is exactly the wrong lesson to learn.

First, averages hide a lot. Remove Germany and France from the data and the eurozone is not recovering. Portugal’s unexpected return to growth, like France’s, comes partly from missing, not meeting, troika targets, allowing automatic stabilizers to work. That is, not doing austerity. Germany’s rebound is, as usual, export led, which is dependent upon growth outside the eurozone. Second, one swallow makes neither a summer nor a recovery. Go back 18 months to the last time the eurozone supposedly recovered and we find those same predictions turned out to be quite wide of the mark. Let us hope that the forecasters’ lens has improved. Third, if this is a genuine recovery, it is sclerotic at best and will do little to restore employment and growth give the depth of the pit that austerity policy has dug. It’s going to take a very long time for growth of between 1 to 2 percent, to even get back to where these economies started.

To see why austerity hasn’t promoted recovery consider that the entire Western world has been running an austerity experiment for the past few years. The economy that has grown the most and reduced deficits the fastest has been the US, which has not cut, at least until very recently. The UK has crawled along for the past four years because of voluntary tightening, and its recent rebound has a lot to do with giving everyone in the country their own personal Fannie and Freddie, with £1.3 billion hitting the housing market in the past six months. Peripheral Europe has cut the most and now has more debt not less, massive unemployment, and a much lower GDP. Given this, claims that austerity came good in the end has no evidence going for it. Indeed, austerity was the wrong policy applied to the wrong target right from the start. The underlying problem in Europe is not, and never has been, the debt loads of sovereigns. That there was a crisis in the sovereign debt markets is indisputable, but the debt loads of European sovereigns of all stripes have gone up, not down, over the past four years, in some cases spectacularly so, while the yields on eurozone government debt have gone down.

The problem that Europe actually faces is a banking sector that is three times the size and twice as levered as its US counterpart choc-full of toxic assets that the European Central Bank, unlike the US Federal Reserve, can neither swap for cash, sterilize by burial on its balance sheet, nor mutualize with other assets. Recognizing this lack of a credible central bank insurance policy for their euro-denominated assets, markets began to price in break-up risk in early 2010 and yields spiked accordingly. Having such a policy in place, dollar and sterling assets barely moved. The markets did not demand austerity, they wanted insurance, which was only provided when the LTRO and ELA programs, plus Drahgi’s “whatever it takes’ promise was put in place. Given this, if the whole point of austerity was to lower yields by reducing debts it was at best useless and, given its impact on the targeted sovereigns economic wellbeing, downright toxic.

Rather than learn the wrong lesson from Europe’s austerity binge, it’s perhaps better to recognize that it is impossible to cure a crippled banking system with fiscal reform. The stalled Banking Union is where to push in this regard, not more cuts. And while there is no doubt that peripheral economies need deep structural reforms, doing so in the midst of a policy-induced depression is never going to restore the growth that is needed to actually reduce debt. Austerity has not brought about this nascent recovery. Growth is occurring despite the cuts, not because of them.

bluedot12 August 18th, 2013 at 2:20 pm
In response to Mark Blyth @ 22

But then why wouldn’t Greece, Spain Portugal leave the euro? What benefit do they get from it?

Robert Kuttner August 18th, 2013 at 2:21 pm
In response to Mark Blyth @ 22

apart from best policy in an ideal world, what imaginable politics, especially in Europe, might move away from the elite austerity consensus? A small nation refusing to play? A mass movement (where is it?!)

Mark Blyth August 18th, 2013 at 2:21 pm
In response to Robert Kuttner @ 24

Yes and no. The alternative is to have a real central bank and not a currency board with a liquidity pump. Draghi is fighting for that and the Germans will not let him have it since they will end up paying the most.

Robert Kuttner August 18th, 2013 at 2:23 pm
In response to bluedot12 @ 26

Good point, but as a practical matter, what would happen if one of the smaller nations left? What would happen to its bonds, Euro-denominated debt, ability to finance trade, etc.? In practice, would’t the IMF/ECB need to support its decision, or catastrophe would result? Could they win this game of chicken?

Mark Blyth August 18th, 2013 at 2:24 pm
In response to bluedot12 @ 26

The problem in the periphery is that Austerity compounds an underlying reality: they have no business model in the small states. Globalization killed Portugal and Greece and they became dependent upon Northern credit flows. They export nothing of value. So austerity is kicking an already sick patient. Spain was 8th industrial nation in the world in 1979. Today its 17th and dependent upon external capital flows. Leaving alone doesn’t do much. sadly.

Robert Kuttner August 18th, 2013 at 2:24 pm
In response to Mark Blyth @ 28

What are we to make of Draghi? He seems to be trying to be all things to all people.

Robert Kuttner August 18th, 2013 at 2:26 pm
In response to Mark Blyth @ 30

So, is there no alternative strategy possible for Spain/Portugal other than credit imports and as the Germans would say, living beyond their means? Assuming transition could be navigated, would euro exit and devaluation be better than status quo?

Mark Blyth August 18th, 2013 at 2:26 pm
In response to Robert Kuttner @ 29

The whole point of giving countries already in debt even more debt they can never pay back is precisely to stop a small one leaving since if that happened and they defaulted, banking holding EU sov debt (its all seen as equivalent in interbank borrowing) would have to liquidate the next most weak set of debts, thus beginning a bank run around the bond markets that ends up in the core. That’s what austerity is really all about. So they are going nowhere.

Mark Blyth August 18th, 2013 at 2:26 pm
In response to Robert Kuttner @ 32

It would take a brave (mad?) politician to tell the truth in these countries. I do not know what their alternative is. Truly.

Mark Blyth August 18th, 2013 at 2:28 pm
In response to Robert Kuttner @ 31

Draghi believes that central banks should be a lender of last resort. The markets want this. The germans know they will pay for it if he succeeds. No good deed goes unpunished.

Robert Kuttner August 18th, 2013 at 2:28 pm
In response to Mark Blyth @ 34

How about a serious game of chicken with IMF/ECB. Announce intention to devalue and let IMF/ECB either facilitate or create a continental depression

Mark Blyth August 18th, 2013 at 2:29 pm
In response to Robert Kuttner @ 36

Again a brave move, but might happen is Spain ever really wants to clean its banking sector (that folks is the real issue for the germans) and grow again. But that type of politics means an end to the EU as we know it.

bluedot12 August 18th, 2013 at 2:30 pm
In response to Mark Blyth @ 30

That makes it sound like the south is surviving off the good graces of the north. Even if true, those places are in or close to a depression. Exports or not, they should be able to do better?

Mark Blyth August 18th, 2013 at 2:31 pm
In response to bluedot12 @ 38

I agree, but when you have German prices and Chinese wages and nothing much to export that isn’t zero sum against your equally knackered trading partners (italy, for example) you are kind of up against it.

RevBev August 18th, 2013 at 2:32 pm
In response to dakine01 @ 4

Did you get an answer here? Not sure….

Robert Kuttner August 18th, 2013 at 2:32 pm
In response to Mark Blyth @ 37

Feels like Germany is in the role of Typhoid Mary. Their economy does okay, and everyone else sickens. They piss and moan about credit risk all the way to the bank. Why doesn’t the rest of Europe get wise? It’s like that bad joke about European heaven and hell. In European hell, the Germans ran the joint.

bluedot12 August 18th, 2013 at 2:32 pm
In response to Mark Blyth @ 33

That sounds insane. Why not use fiscal policy to improve the economies?

dakine01 August 18th, 2013 at 2:33 pm
In response to RevBev @ 40

Not yet but probably lost the question in the start up…

Mark Blyth August 18th, 2013 at 2:33 pm
In response to bluedot12 @ 38

and its not good graces, its a function of being in the same currency with no fiscal institutions to offset capital flow effects. germans save and recycle into the south, who then buy their goods. Just like the US and China, except in the US case the south is stronger than the north.

masaccio August 18th, 2013 at 2:33 pm
In response to Mark Blyth @ 18

So you think that the people who led the deregulation movement in the financial sector, people like Robert Rubin, Sandy Weill and Larry Summers, and before them, Roget Stone at the CFTC and John Shad at the SEC under Reagan, all of them were just acting in accordance with justified belief, and not in their personal interest or because they were in service to people who had been trying to eviscerate the regulatory state and the legacy of FDR since the mid-30s.

Perhaps. In light of the damage they’ve done, maybe the issue of morality is moot. The outcome is a judgement of sorts. They prospered. Others suffered. They continue to rule. Others continue to suffer. The State has blessed them and that’s enough to control for any feelings I and the rest of the 99.9% might have on the subject.

Mark Blyth August 18th, 2013 at 2:34 pm
In response to RevBev @ 40

I gave it a shot in 7-10. Will try again if asked

bluedot12 August 18th, 2013 at 2:34 pm
In response to Mark Blyth @ 34

They need to exit the euro or suffer forever. Perhaps they need a mad man.

Mark Blyth August 18th, 2013 at 2:35 pm
In response to bluedot12 @ 42

because they forgot to build fiscal institutions of continental reach and the national one’s are out of order pending austerity review.

Cynthia Kouril August 18th, 2013 at 2:35 pm
In response to Robert Kuttner @ 17

But they shouldn’t be too big to jail. Unless they perceive some risk, there is o incentive for MOTU to avoid more criminal behavior in the future. That what’s know as specific deterrence. And if the individuals who did this are not consequenced, all others in the finance industry will be incentivized toward criminality. The lack of general deterrence will ingrain criminality and untoward risk taking permanently into the culture of the finance system at which point the social contract will cease to exist as people vote with their feet.

If the banking and finance industry is not reformed a parallel system, that the public feels it can trust, will grow up and replace it. Reforming the currently criminalized banking system is an existential necessity.

Mark Blyth August 18th, 2013 at 2:36 pm
In response to masaccio @ 45

Agree entirely on a personal level, but if its not against the law at the time there’s no sense monday morning quarter backing the offense. The Dems led the way on this remember.

BearCountry August 18th, 2013 at 2:36 pm

Hello, all. Welcome to Mark Blyth and Robert Kuttner.

Way back @4 dakine01 asked Mark, I have not had an opportunity to read your book but I am one of the long term un/underemployed. A few years ago I wrote a blog post asking (rhetorically) why economists were always “surprised” when their predictions were wrong.

From Bob’s intro, you apparently cover this, especially with the push for austerity – can you quickly explain why the folks who are so wrong about things like austerity continue to be listened to instead of the folks who have been correct on economic issues including how bad austerity is for economies?

I think that you fellows didn’t see the question, but I also am interested in the answer.

Mark Blyth August 18th, 2013 at 2:36 pm
In response to bluedot12 @ 47

that is precisely what I fear the most

Robert Kuttner August 18th, 2013 at 2:37 pm
In response to Cynthia Kouril @ 49

Cynthia, I entirely agree but that would take a more nervy administration than the one we have, and these are Dems. The whole political/governmental system has been substantially captured by the bankers.

bluedot12 August 18th, 2013 at 2:37 pm
In response to Robert Kuttner @ 41

I have wondered out loud if this is not the third time in a hundred years Germany is taking over Europe only this time with no bullets.

Mark Blyth August 18th, 2013 at 2:38 pm
In response to Cynthia Kouril @ 49

Again I agree. But we can only prosecute what is an offense at the time of the offense. Fab Fabrice gets done by the SEC while Goldman pays a fine and moves on. yet where did Fab get his incentives and why were they OK then but not now? That’s my problem with seeing this as criminal. The wee man gets it and we all go home.

Robert Kuttner August 18th, 2013 at 2:39 pm
In response to BearCountry @ 51

The wrong economists continue to be the conventional wisdom because their wrong views are very convenient for elites.

bluedot12 August 18th, 2013 at 2:39 pm
In response to Mark Blyth @ 52

Golly, not sure I agree.

Mark Blyth August 18th, 2013 at 2:40 pm
In response to BearCountry @ 51

My answer about Ireland was an attempt to answer this. If the most powerful 40 percent of Ireland is getting the weakest 20 percent to pay for the errors of the powerful, why vary the hymn sheet. Keep talking the same line. Its not about truth. Its about telling a consistent story that keeps the powerful powerful.

bluedot12 August 18th, 2013 at 2:40 pm
In response to Robert Kuttner @ 56

Yes indeed keep a reserve army of unemployed and keep wages and inflation low.

Robert Kuttner August 18th, 2013 at 2:41 pm
In response to Mark Blyth @ 55

I do think a prosecutor could have gone after the big Wall Street houses for securities fraud, telling investors one thing while doing the opposite with the house’s money. But as Holder admitted in so many words, they were afraid of bringing down the system.

RevBev August 18th, 2013 at 2:41 pm
In response to Robert Kuttner @ 56

Thank you. Is there a way to disrupt that hold by the elites?

Mark Blyth August 18th, 2013 at 2:41 pm
In response to bluedot12 @ 54

But they time they don’t want it. Austerity is about getting everyone else to pay the bill.

Mark Blyth August 18th, 2013 at 2:42 pm
In response to Robert Kuttner @ 60

Exactly. So don’t focus on individuals. Focus on the system and why we got this system

bluedot12 August 18th, 2013 at 2:43 pm
In response to Mark Blyth @ 58

The elites are good at that. Like we all know that debt will kill the economy. R&R told us.

Robert Kuttner August 18th, 2013 at 2:43 pm
In response to RevBev @ 61

mass movement, courageous progressive leader

Mark Blyth August 18th, 2013 at 2:44 pm
In response to Mark Blyth @ 63

to me the outrage is the fact that we still have a banking system with TBTF at its heart where you and I are a subsidy for capital and an insurance policy so that a tiny elite can earn 10X everyone else. Its rotten.

Mark Blyth August 18th, 2013 at 2:44 pm
In response to Robert Kuttner @ 65

In Europe’s case its more likely an anti-immigrant, anti-progressive, populist nationalist leader.

Mark Blyth August 18th, 2013 at 2:45 pm
In response to bluedot12 @ 64

My fave one like that is the “we can’t leave this debt to our grandchildren” line.

Yes, its so much better to make the parents unemployed and defund the schools so that they grow up in poverty with less life chances. Yes, so long as you guys don’t have to pay anything today.

Robert Kuttner August 18th, 2013 at 2:46 pm
In response to Mark Blyth @ 62

Well, I’d say Germany is hegemonic in Europe, at least economically, because they effectively control fiscal and monetary policy for the continent, and said policy disproportionately benefits Germany at the expense of others. Much more subtle than occupations. Your book is excellent on the origins and logic of German ordoliberalism.

bluedot12 August 18th, 2013 at 2:47 pm
In response to Mark Blyth @ 68

Yep.

Mark Blyth August 18th, 2013 at 2:47 pm
In response to Mark Blyth @ 58

To clarify, these are not wrong predictions. They are useful wrong predictions

Robert Kuttner August 18th, 2013 at 2:48 pm
In response to Mark Blyth @ 67

Yes, another reason why Europe is even more gridlocked than the US. The most likely response is the wrong kind of populism rather than left response

masaccio August 18th, 2013 at 2:48 pm
In response to Mark Blyth @ 50

Well, for what its worth, there must be 50 posts here from me and Cynthia and others showing how to prosecute these crimes. Not worth much I agree, but there is moral culpability.

BearCountry August 18th, 2013 at 2:48 pm

The collapse of the housing bubble came as part of the ignoring of the possibility of crashing the economy. When it crashed (I’m not sure that criminality was not involved) the foreclosures started and they were illegal. No consequences came of those illegal foreclosures and no reforms to the banking system came out of that. It seems to me that the elected leadership of the country said “do as you please, we’ll make the have-nots pay.” The true goal of austerity, to me, is driving the 99% into abject poverty and enriching the 1%.

RFShunt August 18th, 2013 at 2:48 pm
In response to Mark Blyth @ 30

One thing I never see mentioned in discussions of the problems of Greece, Spain, Portugal etc is the roll of collapsed fishing industries. All those countries are maritime nations and fishing used to be a big part of their economies.

What’s your take on that?

BevW August 18th, 2013 at 2:49 pm

The elites are good at that. Like we all know that debt will kill the economy. R&R told us.

Would the elites have been able to push the austerity program as well without the R&R study? How much did this study actually add to the US and European crisis?

Mark Blyth August 18th, 2013 at 2:49 pm
In response to Robert Kuttner @ 69

Thanks. But it is a hegemony of rules, not leaders. That matters. Germany is a E4t economy. The EU economy is $15t. Total EU bank assets are E45t. If the banks are a toilet and germany is a cistern (sorry) then its simply not big enough to flush the pan – hence the policy of austerity as ‘squeeze, add liquidity, and limit losses.’

BearCountry August 18th, 2013 at 2:50 pm
In response to BearCountry @ 74

You all answered my view while I was tapping away. Ignore me.;)

Mark Blyth August 18th, 2013 at 2:51 pm
In response to masaccio @ 73

They would be in court of for years. Its hard to prosecute a firm as a criminal enterprise. And if you do and its TBTF, you crash the economy. Nice insurance policy.

Mark Blyth August 18th, 2013 at 2:51 pm
In response to BearCountry @ 74

Yes. agree. period.

RevBev August 18th, 2013 at 2:52 pm

I wonder if Obama has been the perfect leader to make this all more palatable? What do you think of the possible return of Summers?

Mark Blyth August 18th, 2013 at 2:52 pm
In response to RFShunt @ 75

Hugely important, as was leather goods for Portugal. Basically these were almost 19th century economies papered over with private credit flows. When it went bang, the underlying weaknesses were revealed and austerity made them terminal.

BearCountry August 18th, 2013 at 2:53 pm
In response to Mark Blyth @ 79

I think that if we had courageous leaders we could chip away at the tbtf and make them manageable.

Mark Blyth August 18th, 2013 at 2:53 pm
In response to BevW @ 76

It was less important than the work of a bunch of Italian and American economists in a series of papers on ‘expansionary fiscal consolidations’ – that is – cuts lead to growth. The book goes into this s detail.

Robert Kuttner August 18th, 2013 at 2:54 pm
In response to Mark Blyth @ 77

I agree, though a “hegemony of rules” (nice phrase) can be really insidious since (German) leaders don’t have to get their hands dirty, and subjugated economies are just as screwed.

Mark Blyth August 18th, 2013 at 2:55 pm
In response to RevBev @ 81

Its tempting too see him as a bogey man, but what is the real difference between him and yellen? More QE? All that is doing is making the top 1 percent even more money by creating an equities boom. I see little policy difference whoever takes the helm at the FED

Mark Blyth August 18th, 2013 at 2:55 pm
In response to Robert Kuttner @ 85

Precisely why rules are there to be written :-)

Mark Blyth August 18th, 2013 at 2:56 pm
In response to BearCountry @ 83

Agree. And its not Obama (sadly). The problem with bailing the powerful is that it makes them even more powerful. You only get serious reform when they are allowed to fail.

Robert Kuttner August 18th, 2013 at 2:56 pm
In response to Mark Blyth @ 86

Oh, boy. I don’t want Summers-Yellen to hijack this discussion, but there are big differences. She’s never been on the take from Wall Street, and is much tougher on financial regulation, as well as a much more collegial person.
Summers is more of a martinet.

Mark Blyth August 18th, 2013 at 2:57 pm
In response to Robert Kuttner @ 89

On a personal level, sure. But once in the job the constraints hit hard.

RFShunt August 18th, 2013 at 2:58 pm
In response to Mark Blyth @ 82

When I visited Greece for the first time in the early 1980′s (my parent’s homeland) I was expecting to gorge on fantastic seafood. There wasn’t a fish dinner to be had.

Because of demand from the (then) European common market, they has fished it out. Fishermen used dynamite – about 1/3 of the school of fish would float to the surface, depending on buoyant they were. The remaining 2/3 would sink and be lost. A few seasons of that and the sea was barren.

frmrirprsn August 18th, 2013 at 2:58 pm
In response to Mark Blyth @ 22

This is the finest one sentence solution to a complex problem I have ever read. Thank you.

If Austerity is out in ebook form I’ll own it this evening.

bluedot12 August 18th, 2013 at 2:59 pm
In response to Robert Kuttner @ 89

I agree. Summers already had his bite of the apple and he took a big bite.

Mark Blyth August 18th, 2013 at 2:59 pm
In response to Robert Kuttner @ 89

No one uses Martinet as an epithet any more. Nice one.

Mark Blyth August 18th, 2013 at 3:00 pm
In response to RFShunt @ 91

In Iceland it was worse. They securitized their fishing grounds and used the money to open banks. The heads of the banks that went bang were all ex-Trawlermen! You can’t make this stuff up!

BearCountry August 18th, 2013 at 3:01 pm
In response to RFShunt @ 91

That seems to be a problem in many places that fish is a major part of the economy.

Mark Blyth August 18th, 2013 at 3:01 pm
In response to frmrirprsn @ 92

Thanks! It is.

Robert Kuttner August 18th, 2013 at 3:02 pm
In response to Mark Blyth @ 95

Yes, but the problem was less with stocks of fish than with fishy stocks.

Mark Blyth August 18th, 2013 at 3:02 pm
In response to bluedot12 @ 93

While it is true that he is a Sith Lord, its not as if he is being asked to be the banker for the Rebel Alliance. We are the Empire you know…sadly…

Mark Blyth August 18th, 2013 at 3:02 pm
In response to Robert Kuttner @ 98

Ouch! Pa Da Boom!

bluedot12 August 18th, 2013 at 3:04 pm
In response to Mark Blyth @ 99

Ha. Son of Darth.

masaccio August 18th, 2013 at 3:04 pm

The part of your book that interested me the most was your discussion of “liberal economics”. It’s a liberal idea that the role of the legislature is to protect private property from the depredations of the conniving monarch, which has morphed into the idea that the point of the state has become the augmentation of the right of the rich to grab all the money.

It is especially funny because Locke advocated that the rich seize the commons, throwing the commoners into abject penury, so he could say with a straight face that it was good that industrialists provided jobs to three and four year old kids working the looms so they wouldn’t starve.

RFShunt August 18th, 2013 at 3:04 pm
In response to Robert Kuttner @ 98

Nice

Mark Blyth August 18th, 2013 at 3:06 pm
In response to masaccio @ 102

Exactly. The double whammy is of course the ‘need the state to keep me safe but don;t trust it and don;’t want to pay for it’ problem that leads to public debt as the only solution for how to fund the state since ‘good liberals (qua classical liberals) don;t want to pay taxes. That’s my fave part of the book too. Thanks.

BearCountry August 18th, 2013 at 3:07 pm

In case I’m not here when this salon closes for the day, I want to thank Mark and Robert for being here and providing good insights. Thanks to Bev for setting this up.

Mark Blyth August 18th, 2013 at 3:07 pm
In response to bluedot12 @ 101

Maybe we need to blow up the debt star? :-)

Mark Blyth August 18th, 2013 at 3:07 pm

Really fun being here – thanks for being a part of it.

Mark Blyth August 18th, 2013 at 3:09 pm

While I have a moment, let me plug Bob’s book too. He goes into all the stuff I don’t and especially his work on the role debt forgiveness plays in a recovery is really important. And if you can get a copy of “revolt of the haves” (still one of my fave books) its still a great intro to American politics as it really is.

Mark Blyth August 18th, 2013 at 3:11 pm

Has everyone gone to make a cocktail since it is after 6pm?

bluedot12 August 18th, 2013 at 3:11 pm
In response to Mark Blyth @ 106

I can get behind that one.

dakine01 August 18th, 2013 at 3:12 pm
In response to Mark Blyth @ 109

Probably catching their breath at the speed of the comments

BevW August 18th, 2013 at 3:12 pm

I listened to your interview with Christopher Lydon, where you ask a room full of successful people – who was educated in the public school system, most raise their hands, and then you asked them, who sends their children to private schools? I’ll leave you to complete the story. Fascinating example.

Robert Kuttner August 18th, 2013 at 3:13 pm
In response to Mark Blyth @ 108

Thanks, Mark,

Revolt of the Haves is, alas, out of print. New book to plug is Debtors Prison. Nice bookend to yours.
As for cocktails, I’ve been drinking steadily…

BevW August 18th, 2013 at 3:14 pm
Mark Blyth August 18th, 2013 at 3:15 pm

Going back to TBTF for a moment, why is it so hard to get good regulation? Seriously, I can write it on half a page. No bank to have more than $100 billion in assets. No bank concentration above 5 percent of the market. 14:1 leverage ratio. Simple.

So why no rules like that?

Because if you tried it, a billion dollars of lobbying would be on your elected backside in a heart beat.

So what do we do? Dodd Frank – deleveraging by 100 cuts in 220 pages. Same result, just harder to lobby against directly. Your thoughts?

RevBev August 18th, 2013 at 3:16 pm
In response to Mark Blyth @ 109

Appropriate to the topic, I do believe.

masaccio August 18th, 2013 at 3:17 pm

At the end of your book you talk about the twin solutions to the mess, financial repression and higher taxes. Which do you think is more likely in Europe?

BevW August 18th, 2013 at 3:17 pm

No bank to have more than $100 billion in assets. No bank concentration above 5 percent of the market. 14:1 leverage ratio. Simple.

For comparison – would this be like a “regional bank” or state wide / national bank?

RFShunt August 18th, 2013 at 3:17 pm

I’m off to have dinner.

Thank you to both Mark and Robert. So interesting. Your books are now on my must-read list.

Robert Kuttner August 18th, 2013 at 3:18 pm
In response to Mark Blyth @ 115

Yes, it’s all about power. One hopeful sign is a populist left-right alliance, as in the Brown-Vitter bill to break up the big banks. A lot of heartland Republicans don’t much like Wall Street. No accident that Sheila Bair, a Kansas Republican, was to the left of the Rublinista Dems.

Mark Blyth August 18th, 2013 at 3:18 pm
In response to BevW @ 112

Sure. It gets to the heart again of why this is not about individuals and their morality. I asked 600 private equity investors who among them went to a public school? 80 percent kept their hands in the air. I then asked that 80 percent how many of them sent their kids? 80 percent of the remainder (at least) went down. I then asked the room – “So the reasons the schools suck is teacher’s unions or the fact that all the folks with the money, the social capital and the power have existed the system? come on!”

No come back. They knew. What’s individually rational can be collectively disastrous.

Mark Blyth August 18th, 2013 at 3:21 pm
In response to masaccio @ 117

They actually go together, as you note, but as Wolfgang Streeck (Max Planck Institute in germany) pointed out to me, for that to happen you need growth, and Europe is pretty awful at that in the best of times since they have been in the sado-monetarist EMU. I am very depressed bout the EU in general.

Robert Kuttner August 18th, 2013 at 3:21 pm
In response to Mark Blyth @ 121

public schools in non-poverty districts, as measured by eligibility for federal school lunch program, have test scores comparable to Finland and Taiwan. It’s all about poverty and middle class staying in the system or not. Teachers and teachers unions are a perfect scapegoat

Mark Blyth August 18th, 2013 at 3:21 pm
In response to BevW @ 118

Any bank with multiple branches that has that size. period.

Mark Blyth August 18th, 2013 at 3:22 pm

Exactly. At one point the best public schools in the world by test scores in the 1990s were in Columbia Maryland (NSA math genius kids)

Mark Blyth August 18th, 2013 at 3:24 pm

I hope that goes much further. It could be a re-run of the North/South demo coalition that made the New Deal happen. Distasteful but effective and this time not (overtly) racist. See Katznelson’s Fear Itself on this topic.

Robert Kuttner August 18th, 2013 at 3:24 pm
In response to Mark Blyth @ 122

We need financial repression, fiscal stimulus, and public investment. You generally get that in a general war. Maybe the left program is the war program (for energy and infrastructure) without the war.

Mark Blyth August 18th, 2013 at 3:24 pm

But for that we need a clear and present danger and climate change just isn’t doing it (till its too late perhaps…)

Robert Kuttner August 18th, 2013 at 3:25 pm
In response to Mark Blyth @ 125

Maybe the NSA spooks fiddle the test results?

Mark Blyth August 18th, 2013 at 3:25 pm

That is too good! You are on fire tonight! And now they will read your emails (again)

Robert Kuttner August 18th, 2013 at 3:27 pm
In response to Mark Blyth @ 130

It’s the cocktail that you suggested. I think I’m ready to sign off.

Thanks, Mark and Bev,

Buy Mark’s book, everyone!

Bob

RevBev August 18th, 2013 at 3:27 pm

And here I had thought that we had been at war…endlessly.

Mark Blyth August 18th, 2013 at 3:28 pm
In response to RevBev @ 132

Yes, but just enough to privatize the gains to companies like KBR and Halliyouknowwho.

Robert Kuttner August 18th, 2013 at 3:29 pm
In response to RevBev @ 132

As fiscal stimulus, ongoing war is not enough to do the job. And we’ve had the opposite of repression of finance. We’ve had finance repressing everyone else.

Mark Blyth August 18th, 2013 at 3:29 pm

Bob, if you are off are we wrapping? I am sans cocktail and my two year old is beating up her mom (who happens to be german BTW..)

masaccio August 18th, 2013 at 3:29 pm

We have financial repression from the Fed, and the only people getting hurt are small savers and retirees. The former get no return, and saving for retirement becomes a no win proposition. The latter either have less and spend less, or invest in more risky assets. Studies show that older people are lousy investors.

The rich seem to be doing swell, though, so that fits nicely with the capital augmentation program of the modern state.

Robert Kuttner August 18th, 2013 at 3:30 pm
In response to Mark Blyth @ 135

Up to you and Bev, Everyone else seems to be at dinner….

Robert Kuttner August 18th, 2013 at 3:31 pm
In response to masaccio @ 136

But financial repression done right represses the bankers, not the small savers!

Mark Blyth August 18th, 2013 at 3:31 pm
In response to masaccio @ 136

while actually gross domestic capital formation is at an historical low as profits are at an all time high. Krugman is right to riff off Kalacki.

Mark Blyth August 18th, 2013 at 3:31 pm

Hey Bev – what say you?

RevBev August 18th, 2013 at 3:32 pm
In response to Mark Blyth @ 135

A 2 year old….drunks without a cocktail. Have fun. It’s been a great afternoon even if the topic is very depressing.

Dearie August 18th, 2013 at 3:32 pm

Mark, before you hit the bar, have you any hopeful information/ideas for us?

Robert Kuttner August 18th, 2013 at 3:32 pm
In response to Mark Blyth @ 139

That, BTW, was very courageous on Paul’s part. Neo-Marxian political-economy insights are looking better and better…

BevW August 18th, 2013 at 3:32 pm

Mark, Bob, Is there any last questions, thoughts you’d like to leave us with, unless we get some questions?

Mark Blyth August 18th, 2013 at 3:33 pm
In response to masaccio @ 136

and ultimately the low but positive inflation reduces the retirees debts, while the state assumes the pension liabilities – that’s how it usually ends.

BearCountry August 18th, 2013 at 3:34 pm

As dakine01 said @111, people are probably catching their collective breath. The speed and depth of the comments has been very overwhelming and I will need to think about what was said. I do very much appreciate the discussion.

Dearie August 18th, 2013 at 3:35 pm

And to both Mark and Robert….. there are probably many more ‘lurkers’ out here than myself. I just don’t even know what to ask. I’m just a granny holding on to what I have and hoping for the best. Sad state of affairs. And, like some others, I do think the banksters were deeply immoral.

Mark Blyth August 18th, 2013 at 3:35 pm
In response to Dearie @ 142

I am actually quite optimistic long term for the reasons I give at the end of the book. The Big Bank/Free public option TBTF model is dying. Finance is downsizing. Its going to be a tough few years, but there is a different future out there. One where finance is incentivized to actually invest in real businesses.

However, if you want to get really depressed go see Elysium with Matt Damon.

fatster August 18th, 2013 at 3:35 pm

I’ve immensely benefited from this Book Salon, Professor Blyth, even more than I anticipated (and I anticipated a lot!).

Many thanks.

Mark Blyth August 18th, 2013 at 3:36 pm

Thank you all for reading along and joining in. We are all in this together and together we will get past this period of non-growth. Things continue till they don’t, even for the powerful.

RevBev August 18th, 2013 at 3:37 pm
In response to Mark Blyth @ 148

Or Mudd if you do not want to be depressed…Thanks for the suggestion.

Mark Blyth August 18th, 2013 at 3:38 pm

Bev – do we hear the clinking of glasses? Call it.

RevBev August 18th, 2013 at 3:39 pm
In response to RevBev @ 151

Last Call?

BevW August 18th, 2013 at 3:39 pm

As we come to the last few minutes of this great Book Salon discussion,

Mark, Thank you for stopping by the Lake and spending the afternoon with us discussing your new book, and the history of Austerity.

Bob, Thank you very much for Hosting this great Book Salon.

Everyone, if you would like more information:

Mark’s website and book

Bob’s website and books

Thanks all, Have a great week. If you would like to contact the FDL Book Salon: FiredoglakeBookSalon@gmail.com

CTuttle August 18th, 2013 at 3:40 pm

Mahalo, Bob, Mark and Bev, for this excellent Book Salon…! *g*

Mark Blyth August 18th, 2013 at 3:40 pm
In response to Dearie @ 147

I do too. But the reason I resist the immoral story is because while individuals can be immoral its the system that makes immorality normal that needs to be challenged first and foremost.

Mark Blyth August 18th, 2013 at 3:42 pm

Great speaking with you all. Thanks for hosting Bev and a pleasure to chat Bob.

p.s. Bob’s book, now out of print, The Revolt of the Haves, was late 1970s or early 1980s. I read it as an undergrad. It made me want to become a political economist. His new one will want to make you one too. Go get it.

Dearie August 18th, 2013 at 3:43 pm

Mark @156: Thanks for that. I do understand that the system is corrupt. And I did like your optimistic take. I also know that the mortgage market is heating up again and no doc loans are available again. :(

karenjj2 August 18th, 2013 at 3:52 pm
In response to Mark Blyth @ 115

enjoying the discussion with you, Mark.

speaking of “deleveraging,” i saw an interesting factoid recently that may make for interesting times ahead: many of the wealthy are holding 35-38% of their wealth in cash and many property sales are all cash. Vaccuming up tangible property at low prices strikes me as wise; but i feel that it also reflects the fact that the DOW’s dueling data programs may have reached the limit of creduity.

Add in the fact that the banks really have nothing tangible on their books except “i.o.u’s” from over-leveraged data (a/k/a $,£,€) in stressed countries and FIRE, data processing and transmission corps, it does seem like we may see some interesting economic times.

karenjj2 August 18th, 2013 at 3:59 pm
In response to karenjj2 @ 159

oops! landed in EPU. 707!

erik August 18th, 2013 at 4:38 pm
In response to dakine01 @ 4

So many distractions. One becomes fatigued by the sheer volume of assaults on reason tossed our way bukkake style by the propagandist machine hellbent on cementing a false narrative for ideological (religious) satisfaction-:)

The “brutal” and “savage” austerity imposed upon the poor, poor general populations of the simply marvelous E.U. project do definitely elicit in one a fondness for ‘marxism’ ….
Right?
LMFAO

Epoch Calypso August 18th, 2013 at 5:21 pm

Strikes me Mr Blyth that we definitely have a morality problem here. The capitalist class pretends no class responsibility – Europe had to learn it’s lesson the hard way with the WW’s.

Your optimism at the end is rather jarring.

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