Can austerity cure contagion?

By Felix Salmon
November 21, 2011
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I love this video from Mark Fiore:

Sovereign Transmitted Debts don’t have to be embarrassing or keep you from other financial relationships…

Contagion-Ex works by releasing a powerful dose of austerity on troublesome workers, reducing your risk of financial infection so your wealth can be preserved.

It’s easy to believe that this is what Europe’s leaders are up to — after all, Mario Draghi, Mario Monti, and Lucas Papademos are all proud alumni of Goldman Sachs. Aren’t these exactly the kind of unelected technocrats who would shaft their putative constituents so that the 1% can continue to rake it in?

As Paul Krugman points out, though, the prescriptions coming from Europe’s unelected leaders tend to feel “more like a religious proclamation than a technocratic assessment.” For here’s the real irony: austerity will cause untold harm for hundreds of millions of European citizens — and it will harm the fat-cat bankers, too.

Look at the prices of the sovereign bonds that they’re holding, or at the share prices of their banks: austerity doesn’t seem to be helping the bankers at all. We’re in a liquidity crisis, here, and austerity doesn’t provide liquidity to anybody. Quite the opposite.

But here’s the cunning bit: the bankers don’t really have their banks’ best interests at heart. They just want to keep on getting their coupon payments until this year’s bonuses are paid. And then, once those bonus checks are cashed, they’ll start trying to get next year’s bonus payment, too.

The bankers and technocrats know full well that the longer they manage to kick the can down the road, the worse it’ll be for everybody in the long run. But in the short run, they get very wealthy. Even as crucial government services are cut to the bone, and the risk of major social unrest increases greatly.

Update: Sorry for saying that Papademos used to work for Goldman Sachs. He didn’t. But people think he did. Just like Tim Geithner!

8 comments

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Austerity only works if those in the private sector with capital to invest actually do invest it when governments spend less. If governments cut spending, and that spending is not replaced by private consumption or investment, then the economy will enter a downward spiral, and will also spread to other economies that are dependent on trade or financing with the downward spiraling economy.

So no, austerity won’t cure contagion, it will cause it.

Posted by KenG_CA | Report as abusive

I think Michael Hudson is right in saying “Debts that can’t be paid, won’t be”. One way or another there will be losses on those bonds. Easiest way is debt forgiveness. I think Martin Wolf supports (more or less) such development in his latest post, based on the way Iceland cut foreign creditors loose.

Posted by hedonistbot | Report as abusive

“For here’s the real irony: austerity will cause untold harm for hundreds of millions of European citizens — and it will harm the fat-cat bankers, too.”

No, it won’t. Because the Full Monti will ensure that the banks are subsidized for their losses at the people’s expense.

It’s what we call a win-win.

Posted by klhoughton | Report as abusive

I love Mark Fiore’s flash animated commentary. The best. I loved this one on Obama’s Self Defense: http://goo.gl/Kn72H

The script should sound familiar: the debt ceiling debate, and everything in-between.

Posted by GRRR | Report as abusive

I think you nailed it Felix! But I also think there’s one more element to the “compensation” of these technocrats beyond just bonuses: power. There is a whole lot of power on the line, and while the techno’s banks are taking some pain right now, the amount of power accruing in their ranks is soaring exponentially. The longer the can is kicked, the more power there is to grab.

Posted by offpeak34 | Report as abusive

It would be easy to blame malevolent selfishness, but I think that it is far too easy to do so, and it is a mistake. If Draghi and co just wanted to keep getting richer, they would have stayed in Goldman. The real tragedy is that they presumably quit in order to ‘give something back’.

The problem is that they are ‘trained’ as bankers, not macroeconomists. People think that they are competent because they are bankers, _GS bankers_, even. But there is nothing in particular about working in an investment bank (except in the macroeconomic-analytics group, maybe) that equips you with the concepts and perspectives you need to deal with the current situation. All it equips you with is enormous self-confidence in your own ‘common sense’ intuitions and a can-do attitude.

Unfortunately, as in fact several good books have pointed out recently, common sense isn’t, usually, and it certainly isn’t in the current situation. Also note that the ex-GS ‘technocrats’ are not the only ones in thrall to ‘common sense’, Angela Merkel, for one, is too.

Posted by seanmatthews | Report as abusive

Sure it can, it’s remarkably hard to be contagious when you’re dead.

Posted by ARJTurgot2 | Report as abusive

In what extremely cases is austerity needed?

Posted by jjones1125 | Report as abusive