Wednesday, January 2, 2013

Merkel rival threatens to upend Japanese Model media narrative

Since the beginning of the financial crisis, one of the most interesting developments has been the main stream media's unwillingness to critically assess the Japanese Model for handling a bank solvency led financial crisis.

Under the Japanese Model, bank book capital levels and banker bonuses are protected at all costs.  This implies adoption of a series of policies like austerity, bank bailouts and zero interest rates/quantitative easing that squarely place the burden of the excess debt in the financial system on the real economy.

There are predictable harmful consequences from adopting the Japanese Model.  These include the endless Japan-style economic slump that countries that adopt the Japanese Model experience.  In addition, there is the re-writing of the social contract by changing social programs under austerity.

Regular readers know that your humble blogger has been making the economic, political and social case for abandoning the Japanese Model and adopting the Swedish Model for handling a bank solvency led financial crisis.

Under the Swedish Model, banks are required to recognize upfront the losses on the excess debt in the financial system.  This protects the real economy and the social contract with its related programs as capital is not diverted to servicing the excess debt.

The Swedish Model also happens to be the policy choice that is supported by the design of our modern banking system.  Banks can continue to operate with low or negative book capital levels because of the combination of deposit insurance and access to central bank funding.

With deposit insurance, taxpayers become the banks' silent equity partner when the banks have low or negative book capital levels.

According to a column in the Guardian, Mrs. Merkel's challenger for the position of German Chancellor is threatening to upend the Japanese Model media narrative by pointing out all the harmful consequences of the policy choices.

This effectively puts Mrs. Merkel in the position of defending the indefensible (the Japanese Model has harmful consequences and has never been shown to be successful while the Swedish Model has no bad consequences, unless you consider a drop in banker bonuses bad, and has been successful where ever it has been implemented).

This also puts the mainstream media in the position of having to critically assess ongoing choice to pursue the Japanese Model when the Swedish Model could be adopted.

2013 is now upon us and when it comes to German politics it is already clear what the climax of this year will be: the federal elections in September. As 2012 drew to a close, the election campaign was already well under way. 
But rather than focusing on the policies needed to overcome the many issues Europe faces, the focus has been on Peer Steinbrück, Angela Merkel's social democratic challenger. And given the general lack of scrutiny of Merkel's politics one cannot help but feel that large parts of the German media landscape have a much too cosy relationship with the incumbent chancellor.... 
Whether you agree with all of Steinbrück's positions or not, he has two important qualities that are in short supply in the current climate: he is competent and honest. 
A former finance minister whose political stewardship during the financial crisis was widely praised even beyond the borders of Germany, he has for instance published a significant paper on reforming the financial sector.... He has recently also urged that eurozone crisis countries should be allowed more time to get their economies back on track and has also made comments against excessive austerity: a bold move in the current German political climate. 
Steinbrück is also right to accuse Merkel the of not having communicated the real nature of the European crisis: she continues to talk about a sovereign debt crisis even though, apart from Greece, the real macro-economic instability originated in the private sector. 
And she looks set to continue down this path. In her new year address she warned German citizens about difficult economic times in 2013, conveniently without mentioning her own role in bringing these economic risks about.... 
With exceptions such as Wolfgang Münchau of the Financial Times and Spiegel Online, the German media have failed to scrutinise these major mistakes in Merkel's politics, even though we are now entering the fourth crisis year and the situation has only calmed down because of bold action by the ECB.... 
Instead of doing the job of educating the public, most German media outlets seemingly prefer to engage in ad hominem attacks against her social democratic challenger. This, to my mind, is also why the majority of Germans still believe that Angela Merkel is doing a good job in European politics. 
Neither the government nor the German media have properly explained the real issues we face. Often, when I explain the alternative crisis view to one of my compatriots I get asked why this is not discussed more prominently in Germany. This is a good question for which I have no answer. 
But this is also a shortcoming that can be rectified this year. Election years are years of debate and political alternatives. Peer Steinbrück is the right man to challenge Merkel's crisis narrative and take this debate in a more constructive direction. 
And if the German media start to join in and scrutinise the real issues at hand, we are in for a very interesting election year.

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