海角大神

The pain of restoring investor confidence

Americans and Europeans have bailed out banks, run public deficits, and added to debts. What will it take to restore investor confidence?

Yesterday, the Dow continued to fall 鈥� down 130 points. Oil slipped lower too. And gold rose. Just as you鈥檇 expect. But two days a trend does not make.

And what鈥檚 in the news this morning?

鈥�Europe left reeling as the people revolt against austerity measures,鈥� says a headline in the TIMES.

Spain鈥檚 ruling Socialists got hammered at the polls. Borrowing costs are rising 鈥� pushing Italy, Spain and Greece closer to default. There is really no way out. The IMF 鈥� under DSK 鈥� made things worse by lending more money to governments that can鈥檛 pay it back. And now, day by day, the whole smelly pile of European government and bank debt gets closer to the fan.

Of course, debt deflation 鈥� writing down, defaulting, foreclosing 鈥� is what a is meant to do.

In America, except at the household level, the authorities have been able to push off the moment of truth鈥�apparently indefinitely. The feds have a 鈥榣ittle technology called the printing press.鈥� And they鈥檙e ready to use it!

In Europe, it鈥檚 not so easy. The Germans don鈥檛 want to see their cash cheapened so that the lazy Zorbas, carefree Guidos, and sun-browned Rauls can continue to live in a style to which they have become accustomed.

Naturally, the Greeks are miffed. A Reuters report provides more detail:

鈥�a large majority of Greeks reject more austerity, according to a poll published on Saturday, which also shows the ruling socialists losing their lead versus the conservative opposition for the first time since their 2009 election victory.

鈥淒ebt restructuring is not under discussion,鈥� Papandreou said in an interview in Sunday newspaper Ethnos.

One year into its EU/IMF 110-billion euro bailout, Greece is struggling with weak revenues and deep recession, fuelling speculation that it will have to restructure its debt to pull itself out of the fiscal mess that triggered a euro zone crisis.

Everyone sees this tension between the strong center and the weak periphery as a 鈥榳eakness鈥� of the European system. We see it as a strength. Not being able to debauch your currency is not a bad thing.

But over on the editorial pages of The New York Times, Paul Krugman tells us that austerity is a losing battle. He refers to people who call for spending cutbacks 鈥� in the US as in Europe 鈥� as the 鈥減ain caucus.鈥�

As usual, Krugman sees the superficial mechanics of the system, but misunderstands its deep moral structure. Pain is for losers, he seems to say, as if enlightened economists could rid the world of suffering forever.

Sensible, solid finances bring forth long-term investment, capital formation and real growth. But not without some pain. Everyone makes mistakes; owning up to them is always painful. Ask Dominique Strauss-Kahn. By taking some pain now economies will be able to rebuild confidence鈥�a苍诲 thereby encourage greater investment and prosperity in the future. That鈥檚 the argument in favor of austerity measures. After all, banks and governments of the European periphery states borrowed too much and gambled too recklessly during the boom years. They need to pay for those mistakes before their economies can build on a more solid foundation.

Krugman ridicules the idea. He believes there is no payoff to austerity. He must think the 鈥榓usterians鈥� want pain for its own sake.

鈥淭he confidence fairy hasn鈥檛 shown up yet,鈥� he writes.

What does he expect? You don鈥檛 get confidence overnight. Besides, what have the Europeans done to deserve it? Like their American counterparts, they鈥檝e generally listened to simpletons like Krugman. They鈥檝e bailed out their banks, run public deficits, and added to their debts.

And now 鈥榗onfidence is plunging,鈥� says Krugman. Well, yes. Investors don鈥檛 know what to expect. Will there be another round of bailouts? A 鈥榮oft default鈥� by restructuring and 鈥榬e-profiling鈥� debt? Will Greece be booted out of the EU? Who could have confidence in this?

Krugman worries that the ECB will show some backbone 鈥� refusing any more bailouts to Greece. Then, 鈥渋t鈥檚 all too easy to see how it could start financial dominoes falling across Europe.鈥� That would be a disaster to the Nobel winner. Just like the failure of Wall Street 产补苍办蝉鈥�a苍诲 Fannie Mae鈥�a苍诲 Freddie Mac鈥�a苍诲 GM鈥�would have been disasters.

The man learns nothing. Central banks have spent the last 4 years trying to prevent a reckoning of the worlds鈥� debts. And the debts just get larger.

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