Tuesday, March 26, 2013

Guardian's Seamus Milne calls for change in policy to save real economy

In his Guardian column, Seamus Milne channels what your humble blogger has been saying since the beginning of the financial crisis and makes the case for adopting the Swedish Model for handling a bank solvency crisis to save the EU and UK economies.

Europe's flesheaters are back. The claim that the worst of the eurozone crisis is behind us now looks foolish.
Please recall that your humble blogger predicted at the beginning of the financial crisis that until transparency was brought to all the opaque corners of the financial system that the global economy would spiral downwards (despite the best efforts at economic stimulus by central banks and governments).
The deal forced on Cyprus by the German-led Troika at the weekend isn't a bailout: it will effectively destroy the island's economy. Instead of getting a grip on its grossly inflated banks, it will impose a brutal credit contraction, combined with sweeping cuts and privatisations, wiping out perhaps a quarter of Cyprus's national income. Ordinary Cypriots, not Russian oligarchs, will pay the price. 
Of course Cypriot politicians are to blame for having allowed the country to be turned into an adjunct of a bloated financial sector and a refuge for hot Russian money. 
But what tipped the divided island over wasn't foreign investors' sharp practices, but the impact of Europe's wider crisis on its banks: in particular, their exposure to devastated Greece, currently also in the Troika's tender care. 
Some have hailed the fact the raid was carried out on Cypriot bank deposits over €100,000, rather than the public purse. 
At last the rich and those responsible for private banking failures are being made to cough up, it's been said. Which would have been a good thing. But it's savers, not bankers or shareholders, who are taking the 40% hit.  
And many of the targeted depositors, such as pensioners, are scarcely rich – or are small businesses which will now go bust. 
The Cypriot government should instead have learned from Iceland: taken over the banks, isolated the bad loans, protected deposits, imposed losses on the wealthy, and used a publicly owned banking sector to rebuild the domestic economy. That would have offered its citizens a better future, almost certainly outside the eurozone. 
But it would have also encroached on private capital's privileges and clearly couldn't be tolerated. ...
Please re-read the highlighted text as Mr. Milne has nicely summarized the benefits of the Swedish Model and why bankers are vehemently opposed to its adoption.
As the Greek economist Costas Lapavitsas argues, Cyprus has "reactivated" the European banking crisis. 
Not that it had been resolved. Only last month the Dutch government was forced to nationalise the Netherlands' fourth biggest bank, SNS Reaal, partly because of its over-exposure to losses in Spain.... 
Now the Troika's decision to help itself to Cypriot savings has paved the way for a new contagion. In the short term that may be contained because of the island's minuscule proportion of eurozone output. 
But the move has demolished confidence in bank deposits – a point rammed home by the Dutch finance minister's blundering signal that the deal had set a precedent. That could easily turn into bank runs in states likely to need new bailouts, as investors move cash to safer locations.
Safer locations like German government debt and not Deutsche Bank deposits.  Safer locations like money market mutual funds invested in UK or US government debt and not EU or UK banks.
Given the spectacular failure of austerity across the continent to overcome the crisis, rather than deepen it as output shrinks and debts mount, more such breakdowns are clearly on the cards.
The choice of austerity or stimulus didn't matter for ending the financial crisis.  If stimulus, all that was going to happen is the stimulus would ultimately be swallowed by the burden of debt service on the excess debt in the financial system.

Stimulus could buy a short-term reprieve from the downward spiral, but once the stimulus ended, the real economy would resume its contraction as money needed for growth and reinvestment was diverted to debt service on the excess debt.
The eurozone has now become a zombie zone.... 
Whatever the focus of the meltdown in each country – banking in Cyprus, property in Spain – all flow from the same crisis that erupted in 2007-8 out of a deregulated profit-hunting credit boom across the western world and has delivered a prolonged depression....
In Britain, the power and weight of the City of London are a particular block on sustainable recovery. 
But across Europe, people are being held to ransom by banks, bondholders and corporations determined to ensure that it's not they who bear the costs of the crisis they created – and politicians who regard it as their job to oblige them. 
Please re-read the highlighted text as Mr. Milne nicely summarizes why we have made no progress to addressing the underlying issues that caused the financial crisis and why the financial crisis continues.

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