Counterparties: The global economy’s Scarlet A

April 30, 2012

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Less than a week ago, we suggested that austerity, Europe’s great experiment in cutting its way out of an economic slump, was coming to an end. Now every bit of economic data, including today’s news that Spain, like the UK, is officially back in recession, seems to come with a gigantic Scarlet A across it.

“The tide appears to be turning” on fiscal austerity, Reuters declares, as European Central Bank President Mario Draghi has called for a “growth compact” to complement the last two years of mass budget cutbacks. The ECB’s internal markets chief agrees and, in characteristically European fashion, is calling for a plan-to-make-a-plan for economic growth.

There’s a flood of anti-austerity op-eds. Larry Summers writes that Europe’s maladies were misdiagnosed: “High deficits are much more a symptom than a cause of their problems,” he argues – and calls for the world to make EU aid contingent on a plan for growth. Mohamed El-Erian slams austerity in Spain, and calls for a focus on both “the deficit containment (numerator) and growth (denominator).” Christina Romer, former top economic adviser to President Obama, argues for a “backloaded consolidation” version of budget cuts in Europe; essentially, spending cuts and tax increases that are slowly implemented as economic growth recovers.

Of course, all of this anti-austerity talk comes much too late. But there’s some reason for optimism: The European Investment Bank may get more funds for real, growth-driving investments. Marc Chandler lays out the early speculation, noting that EIB funds could rise to $264 billion, which could go to infrastructure, technology and renewable energy.

European spending of any kind is politically fraught, and the EIB’s is definitely not a quick fix. Compare, as Reuters did, the EIB’s reported size with the 1 trillion euros created by the ECB to prop up the economy. These are baby steps during a crisis, in other words.

And on to today’s links (scroll down for readers’ suggestions for Occupy Wall Street’s future):

Tax Arcana
How Apple sidesteps billions in taxes – NYT

Occupy Wall Street now “fighting the man through the Byzantine regulatory process” – WashPost

Your latest highly levered, possibly Too Big to Fail nonbank entity: Mortgage REITs – Bloomberg

New Normal
Welcome to housing’s “prolonged bottom” – WSJ

Crisis Retro
Dick Fuld, in an email: “The Bros Always Wins” – Dealbreaker

Welcome to Adulthood
Congress is rethinking the idea that student debt should follow you to the grave – WSJ
Dealing with student loans and a mortgage: It really, really sucks – NYT

EU Mess
Spain is the latest European country to fall back into recession – Macroscope
Spain is the new Greece, except possibly worse – EconoMonitor

Microsoft buys a 17.6% stake in Barnes & Noble’s nook unit – NYT
Microsoft enters the e-book wars – Felix

Our depressed fiscal situation in 4 charts – Krugman
2030: The world in 5 graphs – Finance Addict

The “no-revenue formula” for startups is a real, proven strategy that works (for investors) – Nick Bilton
Yes, there’s a tech bubble, but it’s not that simple – Chris Dixon

The Economist‘s exquisitely refined example of “globollocks” – Crooked Timber

Now He Tells Us
Kashkari: America needs to quickly figure out how to help homeowners – WashPost

Madoff trustee’s legal fees are dwarfing the amount he’s recovered for Madoff Victims – Bloomberg

Financial Arcana
Models don’t cause crises, people do. And models help – FT Alphaville

Romney fundraiser a large crowd of “older white people, mostly men” – The Daily Beast

Your Daily Outrage
NYC considering banning Happy Hour, for some reason – NY Post

Old Normal
A map of LA when streetcars, not freeways, dominated – Flickr

#OWS’s Second Act: Your reactions

Last Thursday, ahead of mass protests planned in hundreds cities on May 1, we asked Counterparties readers to tell us the one issue the Occupy Wall Street movement should hang its hat on. We’ve included the best responses below; they’ve been edited for length. We’ll be sending along books from Felix’s desk to the winners!

Bill writes:
It seems pretty clear to me that Occupy should, at least for the moment, sharply focus on student debt and higher education financing. The iron is hot, with the issue in front of Congress right now, so there is an opportunity to push through a substantive political victory that Occupy never quite had during the first go-round…
That victory would also come on an issue that is acutely important to the constituency the movement is clearly going after – if you think back to a year ago, the “stereotypical” protestor was a recent graduate having trouble finding work, and weighed down by immense educational debts… By starting off the season with an issue of much more direct relevance to its strongest constituency, OWS can 1) make a difference, 2) demonstrate its commitment to effecting actual policy change, and 3) in the process, draw the people and positive media coverage that will give it serious political momentum moving forward.
I don’t even like the Occupy, but I think it’s plainly obvious what they need to do.

Roger writes that it’s still too early for Occupy to rally around a single cause:

OWS and Tea Party together have public support approaching 75%, though neither alone has the power to produce anything meaningful. The forces of the status quo will continue to prevail unless and until both movements unite on a common theme. The movements are so ideologically different that their only area of common ground lies in opposition to the status quo. “Opposition” must, at this time, be the one and only objective of all insurgents. We’ll deal with what replaces the status quo AFTER the status quo has been displaced from power, not before then.
Andrew adds:
The one single issue that the OWS movement should concentrate on is very simple, but at the same time controversial, and that is the idea of debt relief. By removing at least a large percentage of the outstanding personal debt pile, OWS would be able to have an issue that is controversial for most media outlets and a significant amount of the population, but at the same time a serious proposal that resonates with a large minority of the population and actually works to decrease the last decades’ increases in inequality.




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Debt relief is one area where Occupy and the Tea Party have wildly divergent interests. Occupy represents the young, who resent the debts that constitute the retirement plans of the older Tea Party types. Focussing on debt relief immediately mobilizes a huge resistance to Occupy (“They’re going to take our retirement savings away!”) and guarantees that the movement will stop dead in its tracks.

Posted by JayCM | Report as abusive

@JayCM – you got it right. Addressing debt relief, or really any other substantive issues at this time, will accomplish nothing except to divide and destroy the insurgent movements – OWS and Tea Party. The only hope for progress is for them to stand together, and the only issues they agree on are “out with the status quo” and “in with Constitutional reform of the electoral process”.

The Founders didn’t write the Constitution until like 6 years after Yorktown. Today’s insurgents should deal with matters of substance only after they have deposed the current ruling elites. The intellectual beacons of both movements (Niall Ferguson and Lawrence Lessig) have to prepare a package of Constitutional Amendments and legislations that all insurgents can embrace. And when the time is right, millions descend on DC and Wall Street and compel the immediate enactment of the package.

OBTW: Keep the book – just please return – “a slice of lime in the soda” – to the page-header, thanks.

Posted by MrRFox | Report as abusive

How does OWS and the tea party have 75% of public support?

Given the number of people who turned out for OWS – even when it was sunny – a closer estimate would zero, rounded to the nearest 0.1% of the population.

Posted by Danny_Black | Report as abusive

@DB, The Street’s Black Knight –

Thanks for asking, Danny – The high-water mark for Tea
Party was 36% in April’11. OWS was consistently at 39% approval in Q4’11. That’s pretty close to 75% combined. They can each get back there, and more IMO – and will when things get bad enough.

Between now and then, plans should be laid. Wanna’ help, Danny?

Posted by MrRFox | Report as abusive

@MrFox: I’m also not a fan of the “tear it down now and we’ll worry about what to build later” school of thought. Revolutions tend to get away from their roots, and we could easily wind up in a much worse situation that way. And I can’t help but think that whatever amendments get proposed are likely to divide the movements.

Basically, I see us as the Soviet Union circa 1975. We’re failing, and it’s becoming evident to most people, but it will take a few decades before things get bad enough that the system’s defenses can’t cope.

Posted by JayCM | Report as abusive

@JayCM – You hit all the big issues in just a few sentences. Gonna need more than that to respond to you. Take yours from the bottom up -

We’re talking revolutionary change here – nothing less will amount to anything. That’s not going to happen unless there’s intense distress felt by the general population, and until there is – nothing happens. When will that come to pass? – IDK, maybe never, but sooner than most of us suspect IMO. (If you’re wondering, yes – it is possible to accelerate the process, but that’s another subject.)

The system has no defenses to change imposed from the bottom up, Jay. The US isn’t China or Russia – when the general population insists on something it gets it, one way or the other.

IMO both movements can be united in a package of reforms that removes big money from the electoral process, eliminates career legislators, enforces conflict of interest and other ethical standards, and imposes some obligations on the very richest among us to get us past the current crisis. A program composed of those ingredients will get the job done, and should alienate no one but the 1%.

What happens after that is up to whoever is elected under the revised system. That’s when all the divisive issues can be addressed – after we take decision-making authority away from those who have it now. Like you say, people are reluctant to embrace the unknown and untested, but when times get tough enough – they will.

Posted by MrRFox | Report as abusive

MrRFox, utter rubbish. Tea party had many thousands of people out in support and drove elections. OWS had a few hundred out and achieved sweet FA except give left-wing journos and academics orgasms. 39% supported OWS? Really? in any concrete way or just in the a vague “people richer than me should give more of their money to me” – which by the way shows at least 61% of americans are not morons.

Posted by Danny_Black | Report as abusive

MrRFox, History note. Each state had its own Constitution and independent sovereignty. It took 8 years after Yorktown to write the Federal Constitution. It was principally driven by a move to federalize the massive war debt. The movement was started and controlled by the elites and their bankers. Yet, it seems to have worked relatively well.
For those who believe that we must tear it down before we rebuild, I suggest a review of the history of the french revolution. A good read to counter this was of thinking is Burke’s Reflections on the Revolution in France (1790). Destroying society in the interests of vague ideals like liberty, fraternity, and equality creates perfect democracy–mob rule. This is often referred to as anarchy. That is always and everywhere followed by severe repression.
I do hope that both organizations take to the streets. I do hope that they can develop their objectives into clear prose so that the rest of us may determine to embrace the objectives or reject them rationally. The discourse will be good for the country.

Posted by JLRII | Report as abusive

@MrFox: The system’s second line of defense against bottom-up change is the two-party system; most people support a party they dislike to keep power away from the party they loathe. It’s a divide-and-conquer strategy, and it mostly works.

The first line of defense is complexity. There’s a reason bills in Congress are hundreds of pages of extremely obtuse verbiage. The first step in controlling something is paying attention to it, and the American public rarely gets past this first gate.

@JLRII: I’d like to move to your home planet. On this planet, rational discourse has as much to do with politics as whales have to do with the internet.

Posted by JayCM | Report as abusive

JLRII, all you have to do to convince yourself that JayCM is correct – rational discourse is completely divorced from political issues in this country – is read Danny_Black’s comment above that Occupy Wall Street is somehow the same as people who think that people richer than me should give more of their money to me”, when OWS hasn’t said anything like that.

It’s just a way to use rhetoric to undercut what OWS really IS saying.

Posted by Strych09 | Report as abusive

Strych09, and what exactly are they saying then?

Posted by Danny_Black | Report as abusive

@JLRII, @JayCM -

JLR, you wrote – “I do hope that both organizations take to the streets… develop their objectives … so that the rest of us may determine to embrace … or reject them rationally. The discourse will be good for the country.”

Discourse amounts to nothing so long as all levers of power remain in the hands of a self-perpetuating elite. Restructuring the electoral system is an indispensable first-step to progress of any sort, and something substantially all citizens of all political views support. It’s not a matter of anarchic destruction of society – it is a matter of returning ultimate control over government to the general population.

JayCM, you wrote – “The system’s second line of defense against bottom-up change is the two-party system; most people support a party they dislike to keep power away from the party they loathe. It’s a divide-and-conquer strategy, and it mostly works.”

Never in US history has there been more utter disgust with both parties. The view that they are in fact one-in-the-same – owned, taking orders and serving the interests of a moneyed elite, is predominant. The public’s broad and growing rejection of the legitimacy of the existing political process is the fertile soil from which change can emerge.

Posted by MrRFox | Report as abusive

@MrFox: Yeah, the system has been falling back on its third line of defense (riot cops) more than usually lately. Still, the main challengers to the system, OWS and TEA, are divided along the usual American political faultlines, and aren’t likely to start working together. I have a hard time imagining Tea Party activists taking OWS types seriously. OWS, for its part, seems to actively try to prevent leadership from emerging that could organize it into anything capable of challenging the powerful; squatting just doesn’t get it done.

Like I said earlier, I think the best analogy is the Soviet Union circa 1970. The system is losing legitimacy, but it will be a while before it comes down. Just as well, because it’s very likely that what comes next will be worse.

Posted by JayCM | Report as abusive

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