Will the real economy rebound, following Wall Street’s resuscitation? And what of Europe? – Interviewed by El Confidencial

Another Spanish newspaper, El Confidencial, were kind enough to interview me on the global and european crisis, on the occasion of the Global Minotaur‘s Spanish translation-edition. Here is the interview, in English (the actual article will appear in Spanish, of course). Read on…

Before the crisis, Wall Street had grown so much, but the productive sector expanded more slowly. Now, after the financial crisis, are we going to see industry grow, instead of the financial sector? Or will we see just the opposite?

Rapid, unregulated growth is usually built on the back of a financial sector bubble; also known as irrational exuberance. Credit expands fast, increasingly risky bets are placed and a portion of this is channelled into productive investments in industry (the real economy, as you put it). Then the bubble bursts, liquidity disappears and the real economy entered a vicious cycle, of having to pay back unsustainable debts through austerity that causes investment to plummet, debt-to-income ratios to remain prohibitively high and, alas, growth to turn increasingly negative. In this sense, the answer to your question is bleak: No, there is no guarantee that industry will grow faster than the financial sector now. In fact, quite the opposite: Since governments and central banks are financing the banks, to refloat them, the financial sector is in the process to recovering, and growing again, while at the same time the real economy is continuing to shrink. Especially in the Periphery of the Eurozone where the impossibility of devaluation, coupled with the disproportionate burden of adjustment falling on the deficit countries, guarantees a depression. This is precisely what is meant by the trap of negative growth and high debt. It is a phenomenon that we first encountered in the 1930s, from which Europe seems to have learned almost nothing.

What has been the role played by economists in this crisis? Are they some kind of new priests?

Economics, as a discipline, is a paradox wrapped up in a contradiction. The more irrelevant its models the greater the profession’s discursive success and, thus, social power. From the 1970s onwards, economics departments were taken over by a particularly narrow-minded quest for ‘solved’ mathematical models of the economy – including of finance. But to ‘solve’ our mathematical models, economists had to impose (often without stating) hidden assumptions which guaranteed that these models had nothing whatsoever to do with really existing capitalism. Yet, these very mathematical models could be used by financiers and politicians to provide a veneer of respectability to their policies and derivative trades (since the models effectively assumed, in order to be solved, that financialised capitalism is immune to crises). Thus economists were popular (and well rewarded by the financial sector and neoliberal governments) for having produced models that were, by design, irrelevant. This is why I refer to economics as a major contradiction; a most peculiar failure: It is the only discipline whose power is proportional to its theoretical failure to illuminate capitalism. And yes, it is a priesthood of sorts, in the sense that young graduates do well in the economics profession if they learn how to set up and solve these mathematical models ritualistically, accepting in the process that they will never have anything useful to say about the real world.

Politicians and officials like Lagarde say that a USA economic problem would seriously affect  everyone. Does it mean that the flow of money into Wall Street should keep coming and the international institutions are going to do everything to make sure it stays that way?

The political elites have already accomplished this. Wall Street, the City of London and Frankfurt are, once more, awash with money. The tragedy is that, unlike what was happening in the pre-2008 era, this capital is failing to bolster investment and consumer demand, the result being a major deficiency of effective demand worldwide. Thus the crisis of the real economy perseveres.

Have the national governments some chance to make policies against the mainstream global economic policies and the interests of investment funds?

Not our governments, not within the Eurozone. Once our states became insolvent, after the Crisis spread its wings to the Eurozone, national investment policies are severely restricted in scope. What we now need to do is focus on shaping a progressive rational investment strategy at the European level. The European Investment Bank and the European Investment Fund must play a major role here and Spain ought to lead in their conversion into the pillars of European growth and development.

Why was there so much consensus in implementing the economic policies that led us to the crisis? Why did no one object against them?

While financialisation was building up incredible pyramids of toxic money, it was almost impossible for our voices to be heard over the din of all this private money making. Those who did object were silenced. It took the catastrophe of 2008 for the voice of reason to be given a modicum of a chance.

Why, after the crisis, are the governments still implementing similar economic policies to what they did before the crisis?

Because they are co-opted to what I call Bankruptocracy; a new regime that emerged after 2008, where the power to exploit society’s surpluses has passed on to the bankrupt bankers, in direct proportion to the black hole they burnt into their banks!

What will be the medium-term future of Greece in the context of sovereign debt crisis? And the future of Spain? What kind of life can expect to live as southern European citizens?

I am tempted to reply using Thomas Hobbes’ expression; that our lives will be “brutish, nasty and short”. Only, they will not be short. Just brutish and nasty, as the vicious cycle of recession-austerity-debt-more austerity-depression unfolds. Until and unless, of course, our governments do the only thing they can: Stand up to our northern partners, in some EU Summit, and simply say ‘No!’

Without China’s growth, there wouldn’t have been growth in South America or Africa. What is going to be the role of China from now on?

Chinese growth is unsustainable without a recovery in the United States which, in turn, relies heavily on a European recovery. At the same time, Latin American, South African and Indian growth relies entirely on Chinese growth. This is why Europe’s silliness, which has created an unnecessary and utterly avoidable recession in the Eurozone, is so detrimental to the planet’s well being.

You say that the crisis is the laboratory of history, and conformity is the main driving force. I think conformity still prevails, despite all that has happened. Do you see any signs of change?

Only a few. I see some welcome change of heart and mind within the International Monetary Fund and a new sense of purpose in the US Treasury. But nothing, so far, that might signal a decisive U-turn. 

15 thoughts on “Will the real economy rebound, following Wall Street’s resuscitation? And what of Europe? – Interviewed by El Confidencial

  1. Probably Yani and some of you might say “good riddance”, but I think the Greek banks are done. Is there a way to save them?

    I also know Yani does not care about banks in general, but here is the deal. The more unhealthy and sick the banking sector is in Greece the more burdens the Greek people would have to shoulder.

    In my view there is no way that the Greek banking sector could become an engine of growth and therefore this whole recap effort might become a giant waste of time:

    http://www.bankingnews.gr/τραπεζικά_νέα/item/71321-επενδυτική-ευκαιρία-ή-παγίδα-οι-μετοχές-των-τραπεζών-ενδέχεται-να-μην-έχουν-δει-ακόμη-τα-ιστορικά-τους-χαμηλά-τα-28-δισ-κεφάλαια-δεν-επαρκούν-να-αντιστρέψουν-το-δυσμενές-οικονομικό-τους-προφίλ-φτωχές-και-άρρωστες-οι-τράπεζες

    • Dean – I am not clear as to why you prefer to support bankrupt banks rather than healthy banks. Surely it would be cheaper and better for the Greek taxpayer if the insolvent banks were allowed to fail and allow healthy banks to fill the vacuum? That has to be the logical choice no?

    • Hello Dean, Merry Christmas. Where would the healthy banks come from? There are many and the test is simple. Any bank which does NOT claim the right or the need to coerce citizens into bailing it out is healthy ie any bank which is self sufficient. As I have mentioned before on this blog. The money center banks (the banks which lend to governments) which we are told are crucial to our existence are a tiny part of the economy. In relation to the labour and the assets of the citizens they are inconsequential. The only thing threatened by money center bank collapse are the money center banks themselves and government largess. To go back to a developed country which had no central bank ie the USA before 1913, there were no bank runs that effected GDP by more than one percent (and I think the actual figure is actually 0.1% but let me give The Fed the benefit of the doubt). In short, central banks are, *at best*, unnecessary.

  2. Pingback: The Problem With The EU & Greece – The Problem With Closer Integration « independence4wales.com

  3. In almost every way I can only completely agree with you Yanis; except with the part of your proposal that cites the European Investment Bank, the EIB. With the very greatest of respects; the EIB has no track record whatsoever of delivering a solution to the need for the delivery of the equity capital to underpin the creation of millions of new, free enterprise based, private sector, and very small businesses; to create the now many tens of millions of new, prosperous jobs that will have to be created to underpin the return to a long term stable and prosperous economy. Rather than try to teach old dogs new tricks, (which they have shown no sense that they truly understand the underlying problems you so ably set out herein), we must surely accept that we need new institutions; specifically designed for the responsibilities of delivering that new prosperity.

    As we are close to Christmas, may I wish you, and yours, (and the same to every other reader of this web site), a very merry Christmas and a Happy and Prosperous New Year, while at one and the same time, reflecting that for many tens of millions throughout the Western economies; this Christmas will not bring any good cheer at all. That we must keep in mind what must be the utter desperation of all the unemployed; the poor and the disadvantaged.

    Their difficulties are surely our intellectual responsibility?

    • Hello Chris, thank you and merry christmas to you as well. About the EIB I have to agree. There is no way to judge as to whether it is better to leave the money in the taxpayers pocket or for the tax payers money to be sent hundreds of miles to a central bureaucracy for it redistribute it back to areas which it judges to be worthy. It could be more efficient & democratic to cut out the bureaucracy and leave local people and local banks work out the best use for the money in their area.

      About the destitute and unemployed. I think people are aware of what is happening to their friends and neighbours however I believe the biggest issue is that most people feel they are powerless victims of circumstance & government policy. When in reality it is the people who create the wealth and it is the people who finance the government that is destroying them.

      You use to be able to depend on the free market to keep governments honest but since 2008 you see the governments working in unison and this elimination of competition between countries for tax revenues and trade has been taken away. Greece being a prime example of this.

      Before the Euro there was no way the Greek government could have got away with such massive tax increases, it may even be possible to say that the curve for tax increases in Greece is parabolic when compared to GDP.

      The free market would have put the Greek government out of business by now. Unfortunately the Greek government is receiving massive aid from foreigners and this is allowing the government to continue on its course of cruel tax increases coupled to massive cuts in pensions and benefits. In short the government in Greece is now the destroyer of wealth, a cancer feeding off the labour and assets of the Greek people it is supposed to represent. It has long departed from its alleged purpose of being in existence to improve the lives of the Greek people.

      Only in an economically unified Europe could this happen. When you eliminate the importance of trade deficits and government deficits governments no longer have motivation to keep taxes low or to spend in a sustainable way. They can simply blame other countries in the union for their own mismanagement and depend on an organisation accountable to no one to print the money to allow the game to continue.

      The tragedy of the whole situation is that we are moving towards an environment where there is less competition between governments and when there is nowhere to run it is open season on the citizens.

      Free trade and free movement of people was enough, it should have stopped there.

  4. Yanis – “From the 1970s onwards, economics departments were taken over by a particularly narrow-minded quest for ‘solved’ mathematical models of the economy – including of finance. But to ‘solve’ our mathematical models, economists had to impose (often without stating) hidden assumptions which guaranteed that these models had nothing whatsoever to do with really existing capitalism. Yet, these very mathematical models could be used by financiers and politicians to provide a veneer of respectability to their policies ” – Exactly and the economists and commentators who sang the praises of the mathematics had their respectability pumped up to unjustified levels, Krugman being a text book example.

    • From the 1970s onwards the US Federal Regulations from nearly 7000 went to 169593 by the year 2009 and simply that was the END. I just don’t want to talk about Europe.
      This is NOT capitalism and free market way of doing things for sure!!!

    • I forgot to mention, all the regulations were prepared by the US Chamber of Commerce, 169593 in total.

    • Thanasis – Exactly. Only the big firms can afford the compliance costs and this plays a part in the growing income gap. As regulations increase big firms have less and less competition from the little guy. Financial services being the most obvious examples but the government has its claws in all parts of the economy. Some might say that communism could not sustain itself when the state owned the means of production. Now it is left in the hands of the private entities and the economy is controlled through regulation instead. But I think this system is going the same way, just look at the trade deficits and government deficits. This much regulation and state involvement in the economy is not sustainable. No matter how much we believe regulation and redistribution of wealth are “moral” activities, they do not do what they claim if it leads to a massive disparity between the rich and the rest of us.

    • Yes, this is the global crisis that we have to face. There are no many people that add value in the real economy because of the lack of competitiveness between big firms and little guys due to increase of regulations.
      In banking we definitely need a free system that allow banks to go bust but at the same time without threatening the whole economic structure, with far less complicated regulations and with more plain rules.

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