Described as the biggest crisis to hit horse racing for years, the revelation that 11 horses from the Godolphin stable had been given banned anabolic steroids has rocked the sport.
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If Reinhart and Rogoff’s ‘error’ has discredited the prevailing policy dogma, now is the time for an alternative that works
The intellectual justification for austerity lies in ruins. It turns out that Harvard economists Carmen Reinhart and Ken Rogoff, who originally framed the argument that too high a “debt-to-GDP ratio” will always, necessarily, lead to economic contraction – and who had aggressively promoted it during Rogoff’s tenure as chief economist for the IMF –, had based their entire argument on a spreadsheet error. The premise behind the cuts turns out to be faulty. There is now no definite proof that high levels of debt necessarily lead to recession.
Will we, then, see a reversal of policy? A sea of mea culpas from politicians who have spent the last few years telling disabled pensioners to give up their bus passes and poor students to forgo college, all on the basis of a mistake? It seems unlikely. After all, as I and many others have long argued, austerity was never really an economic policy: ultimately, it was always about morality. We are talking about a politics of crime and punishment, sin and atonement. True, it’s never been particularly clear exactly what the original sin was: some combination, perhaps, of tax avoidance, laziness, benefit fraud and the election of irresponsible leaders. But in a larger sense, the message was that we were guilty of having dreamed of social security, humane working conditions, pensions, social and economic democracy.
The morality of debt has proved spectacularly good politics. It appears to work just as well whatever form it takes: fiscal sadism (Dutch and German voters really do believe that Greek, Spanish and Irish citizens are all, collectively, as they put it, “debt sinners”, and vow support for politicians willing to punish them) or fiscal masochism (middle-class Britons really will dutifully vote for candidates who tell them that government has been on a binge, that they must tighten their belts, it’ll be hard, but it’s something we can all do for the sake of our grandchildren). Politicians locate economic theories that provide flashy equations to justify the politics; their authors, like Rogoff, are celebrated as oracles; no one bothers to check if the numbers actually add up.
If ever proof was required that the theory is selected to suit the politics, one need only consider the reaction politicians have to economists who dare suggest this moralistic framework is unnecessary; or that there might be solutions that don’t involve widespread human suffering.
Even before we knew Reinhart and Rogoff’s study was simply wrong, many had pointed out their historical survey made no distinction between the effects of debt on countries such as the US or Japan – which issue their own currency and therefore have their debt denominated in that currency – and countries such as Ireland, Greece, that do not. But the real solution to the eurobond crisis, some have argued, lies in precisely this distinction.
Why is Japan not in the same situation as Spain or Italy? It has one of the highest public debt-to-GDP ratios in the world (twice that of Ireland), and is regularly featured in magazines like the Economist as a prima facie example of an economic basket case, or at least, how not to manage a modern industrial economy. Yet they have no problem raising money. In fact the rate on their 10-year bonds is under 1%. Why? Because there’s no danger of default. Everyone knows that in the event of an emergency, the Japanese government could simply print the money. And Japanese money, in turn, will always be good because there is a constant demand for it by anyone who has to pay Japanese taxes.
This is precisely what Ireland, or Spain, or any of the other troubled southern eurozone countries, cannot do. Since only the German-dominated European Central Bank can print euros, investors in Irish bonds fear default, and the interest rates are bid up accordingly. Hence the vicious cycle of austerity. As a larger percentage of government spending has to be redirected to paying rising interest rates, budgets are slashed, workers fired, the economy shrinks, and so does the tax base, further reducing government revenues and further increasing the danger of default. Finally, political representatives of the creditors are forced to offer “rescue packages”, announcing that, if the offending country is willing to sufficiently chastise its sick and elderly, and shatter the dreams and aspirations of a sufficient percentage of its youth, they will take measures to ensure the bonds will not default.
Warren Mosler and Philip Pilkington are two economists who dare to think beyond the shackles of Rogoff-style austerity economics. They belong to the modern money theory school, which starts by looking at how money actually works, rather than at how it should work. On this basis, they have made a powerful case that if we just get back to that basic problem of money-creation, we may well discover that none of this is ever necessary to begin with. In conjunction with the Levy Institute at Bard College, they propose an ingenious, yet elegant solution to the eurobond crisis. Why not simply add a bit of legal language to, say, Irish bonds, declaring that, in the event of default, those bonds could themselves be used to pay Irish taxes? Investors would be reassured the bonds would remain “money good” even in the worst of crises – since even if they weren’t doing business in Ireland, and didn’t have to pay Irish taxes, it would be easy enough to sell them at a slight discount to someone who does. Once potential investors understood the new arrangement, interest rates would fall back from 4-5% to a manageable 1-2%, and the cycle of austerity would be broken.
Why has this plan not been adopted? When it was proposed in the Irish parliament in May 2012, finance minster Michael Noonan rejected the plan on completely arbitrary grounds (he claimed it would mean treating some bond-holders differently than others, and ignored those who quickly pointed out existing bonds could easily be given the same legal status, or else, swapped for tax-backed bonds). No one is quite sure what the real reason was, other than perhaps an instinctual bureaucratic fear of the unknown.
It’s not even clear that anyone would even be hurt by such a plan. Investors would be happy. Citizens would see quick relief from cuts. There’d be no need for further bailouts. It might not work as well in countries such as Greece, where tax collection is, let us say, less reliable, and it might not entirely eliminate the crisis. But it would almost certainly have major salutary effects. If the politicians refuse to consider it – as they so far have done –, it’s hard to see any reason other than sheer incredulity at the thought that the great moral drama of modern times might in fact be nothing more than the product of bad theory and faulty data series.
The US is still suffering the effects of the global financial crisis and many feel Wall Street giants such as JP Morgan, Goldman Sachs and Citigroup have yet to be held accountable.
See the article here: VIDEO: US banking giants too big to fail?
Finance ministers meet in Dublin to discuss crisis in Cyprus and Slovenia situation – with extensions to bailouts for Ireland and Portugal reportedly on the agenda
It is wishful thinking to believe Germany is ready to choose either of Soros options
George Soros was wasting his time in going to Frankfurt to persuade Germans of the merits of eurobonds. Anything that smells remotely like the pooling of debts within the eurozone is off-limits for political debate in Germany, at least before the autumn election. German voters are not in a mood to guarantee jointly the debts of politically rudderless Italy.
And Soros’s second suggestion – that Germany itself should leave the eurozone – is also a non-starter. That would not be defined by chancellor Angela Merkel as a successful way to save the single currency.
Yet Soros’s speech should not be dismissed as an irrelevant ramble. It starts from two accurate premises. First, that the euro crisis is far from resolved, as recession and Cyprus demonstrate. Second, that Germany, whether it likes it or not, is in the driving seat and the present course amounts to “doing the minimum to hold the euro together”.
So Soros is right that something has to give to secure the euro’s survival. But it’s wishful thinking to believe Germany is ready to choose either of his options.
Finance minister reportedly lashed out at mission chiefs from EU, ECB and IMF as pressure builds over next repayments
Almost three years after Greece narrowly avoided bankruptcy with its first bailout from the EU and IMF, the country’s relations with its international creditors have taken an unexpected turn for the worst.
The Greek prime minister Antonis Samaras was forced to step in on Sunday after stalled negotiations became bogged down in acrimony when visiting inspectors resumed talks last week.
Indicative of the tensions, Athens’s normally mild-mannered finance minister, Yiannis Stournaras, reportedly lashed out at mission chiefs from the EU, ECB and IMF during a heated exchange in his office on Thursday, telling them they could “take the keys” to the economy ministry if they continued to demand more austerity from a nation experiencing a sixth straight year of recession.
Emerging from the building, the economics professor uncharacteristically labelled the talks as “very difficult” and gave a taste of his own frustration. “The negotiations for the next loan tranches are still very difficult. I can assure you that things are not simple at all,” he said.
After troika representatives abruptly cancelled a meeting with Stournaras late on Saturday, Samaras tried to smooth over the cracks. At stake are two slices of aid worth €8.8bn (£7.5bn) that have been put on hold because of the slow pace of structural reforms.
The first instalment, of €2.8bn, is contingent on the governing coalition agreeing to sack 25,000 civil servants by the end of the year and 150,000 by 2015. The demand has placed what is being called “intolerable pressure” on Samaras’s already fragile administration, with his two junior leftwing partners openly opposing the measure at a time when unemployment is nearing a record 30%.
Highlighting the discord, the administrative reform minister, Antonis Manitakis, in charge of streamlining the bloated public sector and aligned with the small Democratic Left party, threatened to resign – a move that would dramatically undermine the government’s unity.
Other sticking points, according to well-placed sources, include the recapitalisation of Greek banks – and a possible merger between the National Bank of Greece and Eurobank – and a highly contentious property tax levied through electricity bills the conservative-led coalition pledged to scrap when it assumed power last June.
Household incomes have fallen by as much as 50% since the debt crisis erupted in Athens more than three years ago. In an attempt to placate lenders and keep a restive population at bay, Samaras and his coalition partners proposed last week that the property levy be substantially reduced by broadening the tax base to include farmland and undeveloped real estate. Creditors, so far, have failed to react.
Greece faces two debt repayments, including €3.6bn in maturing treasury bills, this month and next. “Not reaching an agreement is not an option,” said Pandelis Kapsis, a prominent political commentator and former government spokesman. “There may be a delay [in disbursement of rescue funds] but there is absolutely no way we can move ahead without an agreement,” he told the Guardian.
Greece is likely to suffer from the turmoil in Cyprus, whose economy is expected to contract sharply following its own bailout agreement. But last week Samaras spoke for the first time of an economic recovery amid signs that fiscal consolidation was finally beginning to pay off.
“Even those who until recently had their doubts are today convinced that we can make it,” he told an audience in Athens, insisting that with private sector hirings outpacing firings in March the country was at long last breaking the vicious cycle of recession.
The investment bank Morgan Stanley also predicted that Greece would achieve a primary surplus by the end of the year, saying it was now optimistic about the country.
Separate reports into the crises at two of Britain’s largest lenders revealed a common cause of their problems, but widely varying careers in the aftermath of the crash
In the early hours of 15 September 2008, as the US bank Lehman Brothers was collapsing, many feared the worst, and they were proved correct: markets crumbled and, in the coming days and weeks, so did some 30 banks around the world. But few would have guessed that, five years on, the fallout from that crisis would still be front-page news.
Last week, two reports into two banks that fared very differently after the crisis – Barclays and HBOS – were published, shedding light once more on a furious fight for survival in the dark days of 2008. Barclays succeeded and HBOS failed spectacularly.
What both banks had in common was that their problems were rooted in the phenomenal race for growth during the go-go years of the early 2000s. The traditional caution of bankers was thrown aside and a dash for expansion, fuelled by lending and financial engineering, took hold. Barclays moved into tax avoidance – its structured capital markets division generated more than £1bn in revenue in the four years to 2010 – and failed to stop its traders rigging the Libor interest rate, which eventually resulted in a £290m fine.
The two reports could not be more different. The 244 pages detailing the cultural crisis inside Barclays were commissioned by the bank itself, as a demonstration of its determination to clean up its act. It employed a lawyer – City grandee Anthony Salz, a director of the Scott Trust, which owns the Observer – to investigate how and why standards had hit rock bottom. Salz interviewed 600 individuals in nine months, although none is quoted even anonymously in the analysis.
On its way to making 34 recommendations, the report concludes that the bank overpaid its staff, chased an ambition to become a top five player at all cost and failed to make its 140,000 staff understand they worked for the same organisation. Barclays’ new chairman, Sir David Walker, who is writing a cheque for £17m to cover the costs of the review, described its contents as “uncomfortable reading at times”.
In contrast, the 96 pages on HBOS produced by the parliamentary commission on banking standards, whose members include MPs and peers and the new archbishop of Canterbury, was an excoriating attack on the incompetence of the three men at the bank’s helm. It pulled no punches and called for City regulators to conduct an investigation into whether the three – long-standing chairman Lord Stevenson, and chief executives Sir James Crosby and Andy Hornby – should be banned from the City for life. None has commented on the scathing attack on their “toxic” mistakes. Just how much the HBOS report has cost the taxpayer is unclear, but it will be a fraction of the Barclays bill.
HBOS did not survive the Lehman fallout: within three days it had been rescued by Lloyds TSB. A month later, it was bailed out with £20bn of taxpayers’ cash. Barclays did scrape through, but only by going cap in hand to Middle Eastern investors; the circumstances of that venture are now being investigated by the Serious Fraud Office. Salz describes this desperate battle to avoid a bailout as making Barclays look “too clever by half”, damaging its relationship with overstretched regulators and its own investors.
While HBOS was being rescued, Barclays was still chasing growth, snapping up the Wall Street operations of the collapsed Lehman Brothers – a move that Salz said added to the management challenges facing a bank that was already stretched.
Stories had circulated for years about splits inside Barclays. The high street tellers felt no link to Bob Diamond’s casino operations, which the report said had a win-at-all-costs attitude that came to dominate the organisation. Diamond’s chief operating officer, Paul Idzik, was infamous for his behaviour, which included cutting off people’s ties and snapping pens that did not bear the company logo.
But the Salz report shows the retail bank was not blameless either. Salz details a culture of fear that pervaded the division when it was run by the Dutchman Frits Seegers, who left suddenly in 2009. Sales targets were tough, and staff incentivised to push loans with profitable payment protection insurance (PPI) attached.
Diamond and Seegers were put in charge of the two big businesses inside Barclays by the then chief executive John Varley, who failed to prevent them running the two divisions as separate silos. Salz said that while this was not Varley’s intention, he had failed to create a “cohesive” top team.
Barclays’s new boss, Antony Jenkins, who is trying to reinvent the bank, is not entirely spared criticism either. It is not levelled directly at him, but Jenkins ran the Barclaycard operation that sold millions of pounds of useless PPI to cardholders.
At HBOS, there was no hope of surviving the Lehman fallout. In fact, the parliamentary report makes it clear that it would have gone bust even if there had been no financial crisis because of the £47bn of losses racked up in just three of its divisions.
Only one person – Peter Cummings, who ran the HBOS corporate lending arm – has so far faced any official sanction. At Barclays, the SFO continues to investigate former and current executives. But at HBOS, the chances of action seem slim. Crosby quit as an adviser to private equity group Bridgepoint after the report was published and is under pressure to relinquish his seat on the board at caterer Compass. Hornby has a top job at bookmaker Coral and Stevenson continues to hold directorships at the Tate and Glyndebourne. A three-year rule makes it difficult for City regulators to take any action against the trio.
In addition, the Financial Services Authority closed its enforcement investigation last year when Cummings was fined – even though it is yet to publish its own report into the catastrophe.
Bank so poorly run it would have gone bust even without 2008 crash, parliamentary commission finds
The three executives who ran HBOS bank in the runup to its near-catastrophic collapse have been slated for their “colossal failure” of management in a scathing report which calls for them to be held to account by the City regulator.
The highly critical account of the events that led to HBOS being rescued by Lloyds in September 2008 said the responsibility for the management failings rested with the former chairman Lord Stevenson, and the former chief executives Sir James Crosby and Andy Hornby, and says the bank would have gone bust even if the global financial meltdown of that year had not happened. The bank, formed out of Bank of Scotland and Halifax in 2001, racked up £47bn of losses on bad loans.
In a report entitled An Accident Waiting to Happen, the parliamentary commission on banking standards calls on the trio to apologise for their “toxic” mistakes which caused the downfall of the bank and prompted a £20bn taxpayer bailout.
The HBOS report comes in another torrid week for the banking industry after a report commissioned by Barclays found its bankers “seemed to lose a sense of proportion and humility” in their race for big bonuses. The regulation of HBOS by the Financial Services Authority – which was shut down last weekend – is described as “thoroughly inadequate”, but the responsibility for the management failures is placed squarely on the three
Gold prices have pulled back as Cyprus moves away from crisis mode, but it may just be a temporary blip.
View original post here: Gold prices fall as Cyprus fears ebb