And so we read about the Ukraine, which it seems is just not democratic enough for the GIPs. As a result, and again according to the FT (14 February, 2012)

“It’s looking less and less likely that Ukraine, its fragile economy bracing for a eurozone-driven slowdown, will get a boost of confidence and cash any time soon from the International Monetary Fund.

 In a weekend interview on Ukraine’s TVi television channel, Philip H Gordon, US assistant secretary of state, said:

 “Typically the IMF will focus in on more narrow criteria that are solely in the economic area. Those conditions are hard enough to meet. But I do think that in reality if a country is seen to be violating its democratic obligations, it becomes more difficult for international institutions to support them, especially in this climate where there’s a lot of pressure on funding and a lot of countries that need support.”

Our advice to the people of Greece: it would be unwise to alienate one of the Great Imperial Powers by “violating..democratic obligations”. If Greece were to do so, it would become “more and more difficult for international institutions to support them…..”

What’s good for the French democratic Goose it appears, is not applicable to the Greek democratic gander….

From the Financial Times of 13 February, 2012:

“The main opposition candidate for the French presidency has spelt out his intention to reopen discussions on the new European treaty with all signatory countries if he wins the election, a move that would throw into doubt the results of months of negotiations by his opponent Nicolas Sarkozy and the German chancellor Angela Merkel.

“In France the treaty is ratified by parliament, not the head of state … We have a window of opportunity [to renegotiate],” (Françoise Hollande)  said.

From Reuters today:

“Having secured parliamentary approval against a backdrop of violent protest across Greece, Athens must ……produce written commitments from the main party leaders that they will stick to the programme before and after elections which could come as soon as April.”

Dear patient readers: apologies for another long absence. I have been travelling and working in Africa, and have just not had the time – nor the bandwidth – to blog.  Plus, I have found micro-blogging – via Twitter in particular – a satisfying way of staying abreast of developments, as well as logging and archiving both the insights of others and my own comments. I have also joined Google + having despaired of Facebook. The Goldman-Sachs-powered IPO was the last straw. Not an entirely rational reaction, for sure, but I am of an age where my gut instinct increasingly prevails.

I am posting here my contribution to the New Statesman ‘Staggers’ Blog today: on the absurdity of the IFS’s economic analysis, and the malfunctioning of the banking system. Back again soon.

“The humiliation of Fred Goodwin may have appeased a public baying for vengeance, but has done little to fix the broken global banking system or reverse the Second Great Depression. But then the public have been given very little leadership as to how to address the causes of this crisis.  Politicians, economists, central bankers and think-tanks have both created an almighty mess, but also sown confusion as to the true reasons for catastrophic economic failure. Instead the public have deliberately been blind-sided, distracted into focussing on a) the public sector and b) a consequence of the crisis: the public finances.

Fred Goodwin’s hounding shows that while you can fool the people some of the time, you can’t do so all of the time. Nevertheless, stripping Goodwin of his knighthood does not fix the banking system, or help the economy recover.

Last week Jonathan Portes of the NIESR helped subvert some of the propaganda by boldly speaking truth to power. To the consternation of many he showed that the ongoing slump is now longer and deeper than the slump of the 1930s. While the players in stock markets remain unmoved by this truth, it unnerved the establishment and all those who insist on a disastrous form of economic bloodletting: austerity.  These economic ‘quacks’  include MPs in all three major political parties; their friends in the City, the press and economics profession – and not forgetting those at the Institute for Fiscal Studies. Only a year ago the IFS followed the herd and urged the Coalition not to soften its stance on austerity. Now as contraction crushes the life out of the economy, hurts the poor and families with children, the IFS makes a mealy-mouthed appeal for “a significant short-term fiscal stimulus”.  That IFS economists are not embarrassed by the contradictions and absurdity of their analysis is disturbing.  That they remain unchallenged can only be explained by the sustained ideological drum-beat that drowns out sound economic analysis.

The Bank of England helped silence some of this propaganda when it issued figures last week which show, unsurprisingly, that neither austerity nor massive taxpayer bailouts have restored the British banking system to solvency. In the absence of major re-regulation, it remains dangerously dysfunctional.

Banking systems exist to lend money into the economy. Not so today’s. British banks are so over-leveraged (i.e. insolvent) that they cannot fulfil their role as lenders. Instead of acting as a lending machine, the British banking system, bizarrely, is now a borrowing machine. Like giant vacuum cleaners, banks are hoovering up the nation’s public and private resources, while refusing to lend, except at high rates.

The BoE data shows that banks siphoned up £11bn more from the real economy than they lent to firms last year. And to compound the damage, bankers borrowed from the nationalised Bank of England at rock-bottom rates, and then lent to firms at high and rising, real rates of interest. This helps explain the ongoing slump that characterises the Second Great Depression.  Banks are charging a whopping 20% for authorised overdrafts – and rates are set to rise higher. Despite this massive spread, they are still not raking in enough to clean up their balance sheets, render banks solvent, and start lending again.

And still government and the official opposition turn a blind eye. Neither proposes to radically re-structure and re-regulate Britain’s broken financial system – to subordinate arrogant bankers to their proper role in the economy, and to restore stability.”

Despite missing the 2007 global crisis completely and despite dismal policy failures, economists’ predictions for 2011 were uniformly optimistic.

“The recovery is expected to proceed at a reasonably modest pace”

was what the CBI predicted in December, 2010, while as always, warning firmly about the one threat they obsess over:

“We now forecast higher inflation in 2011.”

As 2011 fades away, recovery appears remote, and inflation is expected to fall like a stone in January when George Osborne’s misguided VAT rise drops out.

I am no professor of economics; nor do I have a post at the London School of Economics, but in 2009, at a time when everyone was talking up the recovery, I warned, in an interview with The Times, that ‘ the worst of the slump was still to come’.

I was confident of this prediction because New Labour, Liberal and Conservative politicians were building a consensus around austerity – and had not yet tackled the root causes of the crisis.

So, smart Alec (I hear you say) what lies ahead in 2012?

My humble and not very cheering view is that because of the vast unpayable debts of the global private banking sector; because policy makers will not address the private banking crisis; and finally, because politicians wrongheadedly persist with austerity – we can expect things to get a lot worse.

In fact I believe we are spiralling into a prolonged and ghastly depression. This will lead, in time, to dramatically higher levels of unemployment, the loss of savings, home foreclosures, bankruptcies, emigration, suicides, divorce, social unrest and political upheaval – to name but a few of the consequences.

Why do I, and many others, expect a prolonged depression?

Because the world’s globalised private banks, unable to obtain funding, are now in the process of liquidating the vast expansions of debt generated during the boom, money frequently borrowed for purely speculative purposes.

And let us remind ourselves: these debts were generated because politicians and regulators had removed all meaningful constraints on the creation and pricing of debt, and on the global mobility of capital.

Between 1945 and 1971, when politicians imposed restraints on bankers, on credit creation and on capital mobility, the world enjoyed high levels of employment and stability and virtually no financial crises at all. This is why the Bank of England’s recent paper on reform of the international financial system is welcome.

In Britain, private debts make up about 400 per cent of UK GDP – and public debt only about 65 per cent of GDP. (I am guessing that politicians’ blind spot for Britain’s huge private debts is not accidental, but then I may just be a touch cynical.)

It’s the disorderly de-leveraging (‘liquidation’) of those private debts that is the cause of Britain’s double dip, and of global financial instability. The failure of the global investment bank/brokerage MFGlobal and the downgrading of various banks, is the canary in the global financial gold mine.

The problem is not the UK’s or Eurozone’s public debts or budget deficits. They are both simply a consequence of private sector failure.  Because of this wrong-headed analysis, politicians in all three political parties have been driven down the dead-end of austerity.

Of course, some would prefer not to drive so fast, but they’re all heading in the same direction: towards unnecessary cuts in public spending at a time when private spending is collapsing.

This growing political consensus fills me with foreboding.

Are our politicians planning a government of national unity? A government dominated by ‘technocrats’? Those very architects and defenders of the ‘light touch’ regulatory system that now threatens systemic economic failure?  Will these technocrats impose austerity on Britain’s restless and angry population – regardless?

As the year draws to an end, I simply speculate, and may be wrong. After all, George Osborne’s autumn statement represented a small, but significant u-turn: a belated recognition of the scale of the crisis and an attempt at fiscal stimulus to finance infrastructure investment.

But while his mini u-turn is welcome, we need to remind ourselves that fiscal policy can take malevolent as well as benevolent forms. Hitler embarked on an ambitious ‘corporate’ fiscal policy in the 1930s, aimed at enriching big business, especially the military industrial complex.

(For more, read Guerin’s classic “Fascism and Big Business” first published in 1936.) By contrast, Roosevelt’s fiscal policies were aimed at creating full employment; at funding the arts and literature; at protecting the environment.

So we should remain on our guard when it comes to assessing Treasury ‘u-turns’. Whatever the true nature of the coalition government’s fiscal stimulus, at least it recognises that something must be done. The Labour Party will look pretty foolish if it too does not change tack, and instead keeps on backing public spending cuts – but at a slower pace.

The situation is currently most acute in the Eurozone, where the consequences of private economic failure are reflected in rising sovereign debt. These debts cannot be managed in an orderly way, because of the monetary framework and statutes of the Eurozone.

This system prevents a publicly owned, taxpayer-backed institution, the European Central Bank (ECB) from supporting and lending to sovereign governments. Instead that bank is mandated to lend and support – at almost any cost – the private banking system.

The obverse of that policy is that sovereign governments, like Italy and Greece, are obliged by statute to turn to private banks or the private capital markets for financing.

Unlike Britain, they cannot turn to the central bank for ‘quantitative easing’ and other helpful funding injections. (I leave readers to guess which lobbies may have been behind the drafting of these statutes, enshrined now in the Lisbon Treaty.)

However, while the Eurozone is a depressing mess, we must be careful not to wrongly analyse the crisis. European politicians, like those in the UK, are wrongheaded about causes, and therefore solutions. But they are not the root of the problem, of that we must be clear.

The crisis that will come to a head in 2012 is not a European crisis. It is a global financial crisis.

In that sense the Eurozone is a side-show.

We, and many others, expect the banks of all the major OECD economies to collapse over the next few months. This will drag the UK, Eurozone and US down.  In other words, and to be absolutely clear:the Eurozone and the world will be dragged down by the banks, not vice versa.

Politicians, advised by deranged and culpable economists, will hasten, and intensify this global private banking collapse by accelerating austerity. It is those policies that will prolong and deepen the global economic crisis.

So prospects are bleak. Unless and until, that is, politicians in the UK and Eurozone get real, and face reality. It is time now to stop blaming the victims – public sector workers, pensioners, single mothers, the frail and vulnerable – for a global financial crisis designed by bankers, technocrats, economists and politicians.

It’s time now to address the solution: first, subordination of the private banking sector to the interests of society; and second, policies for employment. Only jobs can now generate the income needed to revive the economy, to pay down private debts, and to stabilise the global economy. “Look after employment” said Keynes, “and the budget will look after itself.”

So if our politicians want to sleep at night, and reduce the budget deficit, they should do so by investing in the jobs needed to restore prosperity and stability – because the private sector cannot.  Only then will we be able to look forward, hopefully.

First posted on Left Foot Forward > 

Source - Office for National Statistics

I was asked, along with 9 other top economists, to share my ‘graph of 2011′ with BBC Newsnight as part of their review of the economic year. I chose the chart above:

“This is the chart that struck me most forcibly, both for what it tells us about the debts of the private sector, in particular the private finance sector; but also because of what the Treasury chose not to tell us: that the public debt to GDP ratio is tiny compared to private sector debt to GDP ratio.” 

View a slideshow of all the graphs here:

http://www.bbc.co.uk/news/in-pictures-16090055

With thanks to Nomura International Securities and Bloomberg

I have been banging on about how this is a global banking crisis, not a eurozone crisis, for some time now. So I find it poignant to watch European politicians and their advisers in Brussels, piling the pressure on their own shoulders and frantically sweating over a solution to “the eurozone crisis”.

The fact is the eurozone is a side show. This is a global financial crisis, and Graph 1 proves it. It shows the Credit Default Swap (CDS) Spreads on EU and US banks (hat tip to Uldis Zelmenis).

CDS’s are an unregulated form of insurance against default by a borrower. Unregulated because speculators can take out this insurance against assets (e.g. loans) they do not own. That is akin to taking insurance out on your neighbour’s house.

The incentive to burn it down and collect is a powerful one – which is why regulators bar you from doing so. But hey, in the City of London’s shadow banking system, anything goes. The rise in these CDSs, and the ‘spread’ or gap between the price of European and American bank CDSs, tells the whole terrifying story.

Namely, while naive European politicians are focusing the attention of their citizens on an issue that is largely marginal to the crisis – eurozone budget deficits – speculators are betting on something far more calamitous: a collapse of the global financial system.

And American banks are deemed more risky than European banks.

Given this context, it is deeply ironic the British prime minister is in Brussels today to defend the interests of the City of London. Ironic because it is the City’s “loose, lax and unregulated system” – not the US or Europe’s – that has got American banks into trouble, and is likely to precipitate a second, more destructive and prolonged systemic failure of the global financial system.

This failure – which daily grows more imminent – will quickly engulf the eurozone, and eclipse the more trivial issue of budget deficits that has so consumed EU leaders, Labour party politicians, and their flawed, and orthodox economic advisers.

The burning fuse that is likely to ignite this conflagration? A failed global financial derivatives broker, MF Global, run by Jon Corzine, formerly chairman of Goldman Sachs. According to Christopher Elias of Thomson Reuters, MF Global slipped the noose of US regulators to shelter within the ‘loose and lax’ systems run by London’s more obliging Financial Services Authority (FSA).

Now each day brings more evidence of how this lax regulation enabled MF Global to use its own clients’ funds:

“…to finance an enormous $6.2 billion eurozone repo bet… a position more than five times the firm’s book value, or net worth.”

The euphemism for this form of gambling with other peoples’ money is “hyper-hypothecation” – a device by which banks create billions of “liquidity” for their own purposes, much of which has no real asset backing. (I strongly recommend that interested readers study both Elias’s report from Thomson Reuters, and this piece by Tyler Durden for brilliant, if eye-watering analyses of the scam.)

Hypothecation is just another way of ripping off foolish investors to leverage Big Monies – or, to quote Damon Runyon, “Big Potatoes” – for the broker.

As Christopher Elias argues, the really scary bit is this: hypothecation by the shadow banking system may have enabled bankers and brokers to increase:

“…the financial footprint of Eurozone bonds by at least four fold. (If so) then a eurozone sovereign default could be apocalyptic.”

That is why yesterday, in a badly-timed action signifying deep alarm, the ECB cut its benchmark interest rate by a quarter – for the second month in a row – to 1%. But it was the ECB’s second action that betrayed the sense of panic that has engulfed Frankfurt.

Europe’s central bank ‘loosened collateral standards’ for all those shadowy banks borrowing for – amongst other forms of speculation – hypothecation. The ECB is acknowledging that most bank collateral is not real. It is phantom.

Touchingly, the banks supported by the ECB are not European banks. They are global banks and/or financial institutions with branches/subsidiaries in Europe, most of which shelter under the regulatory umbrella of the City of London. Their practices are not unlike those of MF Global; but the bulk of their losses, when they come, will almost certainly be transferred to the taxpayers of Europe.

The tragedy is this: when the global financial system implodes in an ‘apocalyptic’ collapse, both our politicians, central bankers and regulators will once again be guilty of wilful and gross neglect. Corrupted by financial interests; ideologically bound to the ‘light-touch regulation’ of monetarists and other quack-economists, they have (deliberately?) been distracted by a far less serious matter: the debts of sovereigns.

These, compared to the debts of the shadow private banking system, can be considered trivial. Furthermore, the rise in public debts is nothing but the consequence of the debts of the private financial system. Without fixing the broken global banking system, there can be little hope of even the European Court of Justice imposing and enforcing ‘budgetary discipline’.

Which is why today’s EU summitry is so futile.