Economics and finance links

Why did Madoff’s Ponzi scheme last so long?

Bank Regulation’s Capital Mistake

Imagine that the arguments triggered by the Hindenberg disaster were about the fire extinguishers and parachutes that airships should carry, rather than about the design flaws that might cause them to ignite. Unfortunately, today’s debates about banking reform have just this character.

The curse of negativity can be an albatross around your investment neck. In the final analysis, what I have learned over the years is that the fear of being out should trump the fear of being in over nearly any meaningful time frame.

Portuguese 10-Year Government Bond Yield Soars to 13.05%; Italy, Portugal, Ireland, all Fresh New Highs; Focus On the "Unsaved"

Greek Sovereignty Massively Limited; You Cannot Roll Over What You Do Not Have; Railing Against the Truth; EU Seeks to Curb Big Three Rating Firms

Greece is a fairly small country, but for the past year it has been causing an awfully big uproar. Burdened by a pile of government debt that could force it into default (and the European banking system into a meltdown), Greece has had to adopt ever more stringent austerity plans in order to secure a bailout from the European Union. Explanations of how Greece got in this mess typically focus on profligate public spending. But its fiscal woes are also due to a simple fact: tax evasion is the national pastime.

CHART OF THE DAY: Portugal's Unbelievable Bond Crash

Another Fantastic Jeff Gundlach Presentation About Our Train-Wreck Economy And Crushing Debt Load

Obscure Provision In New Patents Bill Suggests That Wall Street Owns The U.S. Congress

17 Facts About Australia That Will Blow Your Mind

The Sorrow and the Pity of Another Liquidity Trap: Brad DeLong

As Plastic Reigns, the Treasury Slows Its Printing Presses

Special Report: A little house of secrets on the Great Plains

Big Business Leaves Deficit to Politicians

The Balance Sheet Recession Continues

The Political Dynasties That Destroyed Greece, And The Real Reason The Country Is Such A Mess

ECB Suspends Collateral Rules for Portuguese Debt, Hikes Rates .25; Trichet Says "No" to Selective Default, Market Yawns

Europe, Free Speech, and the sinister repression of the Rating Agencies

Ladies And Gentlemen, We Have A Totally New Scariest Jobs Chart Ever

Now Check Out How Government Jobs Have Exploded Under Obama

CHART OF THE DAY: The Scariest Jobs Chart Ever Is Now Scarier Than Ever

Fewer Americans Are Working Than Any Time Since 1983

What Nobody Ever Told You About The Bill Clinton Budget Surpluses

Europe Is For Sale

Non-U.S. Banks Make Up 79% of ‘Too Big to Fail’

IMF: AUSTERITY DOESN’T LEAD TO GROWTH

Household Debt Is at Heart of Weak U.S. Economy: Business Class

Elizabeth Warren, Champion of Consumer Financial Protection

State and Local Job Losses Are Largest Since 1955

The long-term impact of unemployment

A Tale of Two Defaults

Once Greece goes…

There is a good moment in one of the otherwise terrible Star Trek movies, in which Spock quotes an ancient Vulcan proverb: ‘Only Nixon could go to China.’ Similarly, it is probably true that only George Papandreou could confront the fundamental economic structure of the modern Greek state, since his father Andreas did more than anyone else to build it. Greece joined the EEC in 1981, the same year that he became prime minister, and subsequently the Greek government created a client state in which direct subsidies and transfers from the EEC were supplemented by easy loans from Western European banks. Money poured into Greece, and was used to fund a huge boom in public-sector jobs, most of them linked to political patronage. Various forms of corruption permeated the system, where cash gifts in fakelaki or ‘little envelopes’ were a fact of life, and where, crucially, the rich regarded paying tax as something that only the poor and stupid would ever choose to do. This latter fact meant that Greece was in certain vital respects a country without a functioning version of the social contract. To outside observers, all this was largely familiar, but the younger Papandreou, on becoming prime minister in 2009, was the first prominent Greek politician to admit it and promise to challenge it head-on. ‘Corruption, cronyism, clientelistic politics; a lot of money was wasted basically through these types of practices.’ Papandreou’s admission was jaw-dropping: everyone knew it was true, but since when do prominent politicians say very unpopular things which everyone knows to be true? The EU lent Greece the money to see Papandreou through his programme of cuts and crossed its fingers that this would buy enough time for the deficit to narrow – the deficit being the gap between what Greece was spending and what it was raising in tax.
That was the old plan A, and it didn’t work. Papandreou made deep cuts across public-sector spending, but two things went wrong. One, the Greek economy kept crashing. Economists have varying theories about the practical effects of ‘austerity’, meaning sharp cuts in public spending. To an outsider, it’s a little alarming how they differ about something so big and basic as the effect of large public spending cuts. But if you ignore the economics and look at the history, it seems to be the case that you can’t simply cut your way to growth. (There are a couple of contentious counter-examples, but this is the broad rule.) Holding public spending flat while other parts of the economy grow is historically a more valid model – and, by the way, holding public spending flat is in itself a huge struggle, being roughly what Mrs Thatcher did in the UK. So the first problem was that the Greek cuts led to a worsening of the Greek predicament: the economy kept contracting, and unemployment hit a record high of 16.2 per cent. The second problem was that those richer Greeks who had never fancied paying their taxes showed no increased desire to do so, and, much worse, the state showed no new ability or desire to make them. Without the ability to raise more tax, the old plan A was invalid.
So this is the new plan A: the Greeks borrow another €120 billion, the bondholders allow their debt to be rolled over, Papandreou’s government introduces further austerity measures and privatisations, rich Greeks start paying their taxes, the Greek economy recovers, and by the time the next huge chunks of debt repayment are due – from mid-2012 – Greece can afford to pay back its lenders and the crisis is over.