This Reuters analysis looks at what comes next in crisis resolution, especially in terms of European debt:

“It took $5 trillion and an unprecedented global coalition of G20 countries to stabilize the economy after investment bank Lehman Brothers collapsed in 2008. Quelling the next phase of the financial crisis may be even harder.

To stop the panic that erupted nearly two years ago, governments transferred a mountain of debt from private to public accounts. Now, those government debts are distressing financial markets and there is nowhere left to shift the burden.

Europe’s clumsy response to Greece’s debt woes highlighted the economic and political headaches that await debt-laden countries and those who finance their borrowing.

European leaders have yet to convince investors that they have a credible short-term plan to contain government deficits and a long-term answer to the region’s slow growth. Until they do, financial markets will remain volatile, and the hard-fought economic recovery is in jeopardy…

Fixing the problem will require money and political will. One cannot work without the other, and both are lacking.

I’ve said before “you cannot borrow your way out of debt anymore than you can drink yourself sober.” The various crisis leaders should keep that in my mind as they take the easy route — throw more and more money at the problems, but fail o make the hard choices when it comes to resolving them.

>

Source:
Next phase of financial crisis may be the hardest
Emily Kaiser
Reuters May 21, 2010   
http://www.reuters.com/article/idUSTRE64K6B120100521

Category: Bailouts, Credit

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

39 Responses to “Increasing Complexity in Resolving Financial Crises”

  1. inessence says:

    Painted with debt into the proverbial corner..current politicos have neither the will nor the fortitude to put into place the necessary programs that will require global consumptive sacrifice. It will be a long and painful disinflationary and deleveraging process that the monetary authorities will fight with every last bank note. El Erain and the new normal…comin’ at ya.

  2. callistenes says:

    So BR what, if any sign/s have to appear before you would then come out and say the end is nigh?

  3. ella says:

    No worries, we will just cut social programs so the taxpayer can pay off all of the private debt that was transfer to the public balance sheet. So very fair, don’t you think?

  4. franklin411 says:

    Barry, you sound like you’re channeling the smartest guys in the room in from 1929-1932. One of America’s most famous political thinkers, Walter Lippmann, complained that the politicians were making a huge mistake. Instead of talking about spending money on relief and recovery, Lippmann said that they should be advocating a “policy of drastic economy and widespread taxation” to restore the markets’ confidence in the government’s balance sheet.

    Guess what? Hoover listened to Lippmann. And guess what happened? 25% unemployment, a huge wave of bank failures, people literally starving to death, and serious political commenters asking how long it would be before hunger drove a Communist or Fascist revolution in the United States.

    Normally, a fat man should eat less, exercise, and try to lose weight. He’ll live longer.

    But a fat man with pneumonia shouldn’t worry about his weight. That’s a long term problem. In the short term, he needs all the strength he can get just to get over the illness. Only an idiot would commit such a fatal errror.

  5. The Curmudgeon says:

    There is no long term answer to Europe’s slow/nonexistent growth, except perhaps replacing the Germans, French, et.al, with Africans or Arabs. The native populations are aging and dying out, and no economy anywhere has sustainably grown when its population was declining. Yet, economic theory seems to ignore this simple fact of biology–dying organisms don’t grow, one of the foundational assumptions of modern economic theory being that growth is the natural state of any economy. It isn’t. This will be a long, wretching ride down. There’s enough accumulated wealth in the west to hold the demographic forces at bay for a good little while, but that will only prevent their being any real reforms instituted, or any true revolutions in thinking, such as the various western states acknowledging to its citizens that, indeed, we promised too much–get back to work. Nobody gets to retire at fifty anymore.

  6. “The various crisis leaders should keep that in.. mind as they take the easy route — throw more and more money at the problems, but fail to make the hard choices when it comes to resolving them.”
    –from the Post, above

    We should wonder..

    Who do “The various crisis leaders” work for?

    and, w/that, this: “they take the easy route — throw more and more money at the problems”..

    aren’t they, “The various crisis leaders”, just, making sure that their benefactors are being made whole?, while framing “the problems”, in such a way, to divert attention away from their intent?

    also, here: “fail to make the hard choices when it comes to resolving them”, why should we suppose that they’re, actually, interested in ‘resolution’? Obfuscation seems, more, their style..

    Seriously, what haven’t we learned, already, about who ‘wins’ from these recent, many, actions?

    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Goldman+Sachs+AIG+The+Case+of+the+missing+Billions

    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Banker+Bailout+Banker+Takeover

    All kinds of Cash for ___________, All kinds of Cuts for ___________ .

    “Representative”, for whom?

  7. rktbrkr says:

    Governmental austerity is coming just as a very weak recovery is starting. I don’t think any government at any level created any sort of rainy day fund and the US shot their wad on banks & (hopeless) auto bailouts and now they have nothing left for failing states, munis and pensions.

    We haven’t heard Jamie Dimon declare we’re in X inning lately, he said we were in the 7th inning about 15 innings ago. This is going to be a marathon, at least a double header.

  8. The Curmudgeon says:

    @F411–there is a grave difference between now and 1929-32: Demographics. Growing populations then meant economies could grow their way out of debt. Today, only the US population grows among the developed world, and that only by immigration (which Washington gets and is why it is really pissed at Arizona, but that’s a different matter).

  9. rktbrkr says:

    Weren’t we debating whether consumer spending coulkd be increasing without real jobs growth and while sales tax receipts declined?

    I think the pessimists (realists) were right

    May 28 (Bloomberg) — U.S. stocks fell, with the Standard & Poor’s 500 Index erasing some of yesterday’s advance, as a report showing weaker-than-estimated personal spending boosted concerns about the strength of the economic recovery.

  10. franklin411 says:

    Well the Europeans have had a little problem of killing off a few dozen million of each other periodicially.

  11. inessence says:

    Where does the socialization of foolish return assumptions (public & private pension funds), overly generous entitlement programs (out of control rise in people living directly off government handouts), and tax payer bailouts of inept private and public stupidity end? Damn tired of it!

  12. jonathanb says:

    “you cannot borrow your way out of debt anymore than you can drink yourself sober.”

    Isn’t the real question: What is the debt for? If it’s for roads, bridges, education, unemployment, nuclear waste storage, gulf cleanup, etc. etc. etc. then you’ll never convince me that more debt is bad right now.

    What’s less clear to me is how much money is being thrown down black holes like TBTF banks and GSE’s, and more importantly, what should be done about them. It’s easy if you’re Peter Wallison to come up with a solution for Fan-Fred, but for the rest of us on planet earth, it’s not so simple.

  13. b_thunder says:

    “you cannot borrow your way out of debt anymore than you can drink yourself sober.” – Barry, if this is really your own honest belief, how can you be bullish over anything but the very short term?

    the more debt the nation accumulates, the more likely it is that one of the 2 will follow: either a drastic multi-year austerity program (resulting in a mild depression) or a multi-year period of vicious stagflation. neither are historically correlate with sustained bull markets.

  14. Mutant_Dog says:

    I imagine the book “This Time is Different” (Rogoff and Reinhart) is an informational event of which you are aware. A difficult read, but one that needs to be undertaken regardless. I’m currently mired in the sovereign default chapter; the main take-away from which is, that any government with debt outstanding greater than 90% of GDP has been likely to default, historically. That number encompasses much of the EU today (plus, the US is at 92%, at last check.) I suggest this information, and threshold, will have some effect in the sovereign debt crisis as time arrows onward.

  15. wally says:

    “Fixing the problem will require money and political will. ”

    The assumption in that statement is that this is a government problem; that is true if the governments elect to step in and pick up the slack, as they have (halfheartedly) decided to do. Long term, that means that the government will take over full control. That’s how government works. If the big US banks think their lobbying will keep them in a long-term position of privilege, they are mistaken. When they shifted their losses over to the public, they shifted everything else, ultimately.

  16. Mike in Nola says:

    Rosie this morning has a paraphrase of an FT article that sums up the situation quite nicely:

    “So let’s get the story correct. We are still in the midst of a credit collapse where there is simply too much debt and debt service globally relative to worldwide income. The fact that we had a year-long respite does not alter this view. It was a respite that was induced by what is now an apparent unsustainable pace of bailout and fiscal stimulus in practically every country on the planet, not just the United States. What has happened was that governments bailed out the banks and massively stimulated the economy but because the revenue cupboard was bare, in part due to the savage effects of the global recession, public sector debt loads exploded at all levels of government, and to varying degrees, in every jurisdiction.

    “But someone had to buy these government bonds, and who else, but the very same banks that the governments rescued! And, they had a super-steep yield curve to generate profits from this bond-buying activity. Talk about a symbiotic relationship.

    Not only that, but because of global bank capital rules, these financial institutions were not compelled to put any new capital into reserve against these government bonds because of their investment-grade status from the ratings agencies, when in fact, very few countries actually deserve the ratings they have when one assesses structural deficit ratios, debt/GDP ratios and interest costs/revenue ratios appropriately. Now, ironically, the governments, having saved the banks, only to then rely on the banks to fund their bloated deficits, are now in a situation where their banks need help again because of the eroding quality of the government debt on these bank balance sheets. Talk about a dangerous game of musical chairs. In any event, the Lex column on page 14 of the FT goes to the root of this today and concludes “with most of the worlds’ banks still woefully undercapitalized, Basel’s capital adequacy rules should end zero weightings.”

  17. Mike in Nola says:

    F411: your comparison to the 1930′s is not apt. The problem is that the government bailed out the banks instead of resolving them, and, in the process took on a sh#tload of debt. This is the opposite of what was done in the 1930′s. That debt has to be paid for in higher taxes sooner or later unless the dollar gets inflated away to nothing.

    The money instead should have gone into another WPA to repair our infrastructure and gotten something for it. Instead it has wound up in the pockets of bankers and municipal bureaucrats who produce nothing.

    The fact that this fact is being acknowledged now does not clothe Barry in a top hat, tails and monocle, nor does it give him a Snidely Whiplash moustache. Arithmetic is still valid, whatever Bernanke says.

  18. Tom K says:

    The comments here go to prove liberals believe “never” is the right time to start paying down debt.

  19. Mysticdog says:

    I feel like there is more debt in the world than there is actual currency (real and electronic). Is that true? If so, when antity 1 loans entity 2 money, was there really currency involved? Are they trading future currency? Are they creating currency? Is china such a resevoir for money that it can feed the world’s desire for debt?

    It seems like there is an significant implication for how things bought with that debt are valued based on this as well, but I can’t quite get my head around it. That debt money that flows through economy goes to pay for so many things, so much government, and so many people’s wages… Any help?

  20. bsneath says:

    One has to ask why have our policy makers have elected to borrow their way out of debt and what would be the consequences if they didn’t?

    Current income and wages are simply not adequate to support the economy. Consumer debt is at historic highs. The result is sovereign debt-funded fiscal stimulus to prop it up. Take away the latter and the economy will collapse since most individuals within the economy do not have the where with all to borrow or spend.

    To this point, I would assert that you also cannot allow wealth and incomes to concentrate within the top 10%/1% tiers of society and then expect the rest of society to drive the economy through a combination of consumer debt and debt-funded federal programs.

    The concentration of wealth and income was theorized as one of the causes of the Great Depression. It is interesting (perplexing) that we do not hear much about this with respect to the current crisis even though wealth and income concentrations are even greater now than then.

  21. Evoo Kermartin says:

    @f411:

    That’s the problem with days of reckoning: innocent people get badly hurt. Sadly, governments really stink at ex-ante social planning. So you get New Deal reforms like Glass-Steagall only after the fact. The New Deal reforms were peeled away over a few decades and the lever-pulling of the masters of the universe once again was allowed to cause humanitarian calamity. It’s the ounce of prevention thing.

    Hoover didn’t cause 25% unemployment; an uncontained speculative bubble over 10 years did.

    I am afraid that Ben Bernanke, the renowned expert on the Great Depression, is proving what we already should have known about surviving speculative bubbles: you can tough out a cold and it will go away in 10 days or you can take medicine and it will go away in a week and a half.

    @Mike in Nola: No one knows better than the folks in Louisiana how many corners were cut on national infrastructure and opportunities lost during the period of alleged prosperity leading up to this mess.

  22. Greg0658 says:

    Curmudgeon at 10:01am – “we promised too much–get back to work. Nobody gets to retire at fifty anymore”

    tell me what is it that we need as a human race that doesn’t exist .. another song and dance number .. another blog another building .. maybe something more real .. like cheap energy – I’ll get right on it – send investment cash to my link – when I have enough I’ll take on the TBTFight and win at it .. I promise

  23. Mike in Nola says:

    Evoo:

    you got it right. For almost almost all of the City, Katrina would have meant cleaning up branches and fences, new roofs, and a couple of weeks with no power. The defective levees courtesy of the Corp of Engineers turned it into a major disaster.

  24. Mysticdog says:

    Thanks Mark, that will be a lot of reading, but it sounds like its as bad as I’m imagining from the synopses. Will take some time this weekend to wade through all that.

  25. wally says:

    “The defective levees courtesy of the Corp of Engineers..”

    Nobody owes anybody the unencumbered right to build their house below sea level and expect to remain dry.

  26. The Curmudgeon says:

    Wally, please, the federal government owes everybody protection from any and all calamities that might befall them. Haven’t you been paying attention?

  27. Mysticdog,

    in addition, or to simplify, Rothbard, for one, delivers a cogent take on the ‘scene’..
    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Rothbard+Central+Banking

    and, tangentially, http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Free+Banking+Free+Markets+Free+People

    delivers some further detail around the matters at stake..

    good thing it’s a long Weekend, right? (:

  28. soloduff says:

    Barry Ritholtz concludes, “I’ve said before ‘you cannot borrow your way out of debt anymore than you can drink yourself sober.’ The various crisis leaders should keep that in my mind as they take the easy route — throw more and more money at the problems, but fail to make the hard choices when it comes to resolving them.” –A tantalizing analogy, but it should occur to all that the point of the alcoholic is not to get sober, but to party on without limit. And this is precisely what the Keynesian advocates of Quantitative Easing promise: Debt does not matter if it is truly sovereign debt, such as enjoyed exclusively by USA today, printer of the the world’s reserve currency. The “austerity” talk is then revealed as but the scramble for fatter bottom lines for the corporate elite, whether under the Keynesian dispensation or not. Writes a prominent “left” Keynesian, James K. Galbraith, “In Defense of Deficits,” The Nation magazine, 3/22/10: “A big deficit-reduction program would destroy the economy . . . . With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer . . . . Since it is the source of money, government can’t run out . . . . for true sovereigns, bankruptcy is an irrelevant concept . . . . public debt does not ever have to be repaid . . . . So the public debt simply increases from one year to the next . . . . Far from being a burden, these debts are the foundation of economic growth.” –This website would provide a public service by exploring the theoretical divide between Ritholtz and Galbraith. Perhaps a testable “crucial experiment” for the debate could be devised: If Ritholtz is right, the Keynesian printing press will lose efficacy at such-and-such level of world GDP, etc., with such-and-such symptoms. But if Galbraith is right . . . .

  29. DeDude says:

    Look at the total GDP and divide it with the number of people. There is plenty to ensure that everybody gets a nice home and food and cloths etc. There is plenty of wealth – it just has to be redistributed. The problem is that we have a dysfunctional capitalistic system that distribute the majority of the created resources to a few absurdly wealthy and overcompensated individuals, and leave large numbers of people with not enough. In the long term that kind of system kills itself because without a consumer class, there is not much of an economy. Question is how do we ensure that the wealth created is distributed in a more fair and equitable way so we can get a sustainable growing economy without increasing debt (and taxing by inflation). Neither the old USSR socialism nor the current capitalism has been able to do that.

  30. DeDude says:

    “The concentration of wealth and income was theorized as one of the causes of the Great Depression. It is interesting (perplexing) that we do not hear much about this with respect to the current crisis even though wealth and income concentrations are even greater now than then.”

    It is easy to understand why we do not hear much about that. The natural conclusion is that the wealthy (who own our corporate media) have to stop their greed and allow some of all their wealth and income to flow to the masses (so consumption and the economy can grow). Those individual media owners do not want that debate to begin because they know (and don’t like) how it will end. So we will keep ignoring what is the only sustainable solution.

  31. WoodyinNYC says:

    “tell me what is it that we need as a human race that doesn’t exist .. another song and dance number .. another blog another building .. maybe something more real .. like cheap energy – ”

    At last a question that I may presume to attempt an answer.

    Can we start with, worldwide, of course , some more real things –
    * safe clean water for drinking and hygiene,
    * affordable healthcare — including
    access to birth control information and materials,
    * free education from pre-K until the child has learned to read, write, do arithmetic, and use a computer,
    * decent housing,
    * clean oceans and clean atmosphere …

    I’ll put aside peace & justice for now. The other stuff is more conventionally measured as part of Gross Planetary Product. Attempting to meet the demand for these basic goods and services, for which there is a dire and urgent worldwide shortage, would create enormous wealth to be spread among those who most need it, while providing useful employment for all involved in producing them.

    OTOH We do not need more –
    * summerhouse mansions in the Hamptons,
    * executive jets,
    * single meals costing more than the annual income of most people in Africa,
    * granite countertops,
    * spoiled brats,
    * taxpayer built stadiums,
    * yachts on the Riviera,
    * cars costing over $100,000,
    * bonuses to the self-appointed ruling class,or
    * other wretched excess of conspicuous consumption by the same.

    Well, it’s a start.

  32. But I love my new Green Emerald granite counter top . . .

  33. scsurfer says:

    One thought I have is the G20 will forgive each other loans and start over. What do you think about this idea Barry?

  34. philipat says:

    “Until they do, financial markets will remain volatile, and the hard-fought economic recovery is in jeopardy”

    Isn’t that mistaking the egg for the chicken?

  35. bman says:

    Global Consumptive sacrifice…
    hmm lets see where should we start with that, perhaps some of the big firms…

    Try austerity programs on Exec compenstaion. The folks just won’t put up with an austerity program unless the fat cats get Mohawked.

  36. bsneath says:

    DeDude Says: “The natural conclusion is that the wealthy (who own our corporate media) have to stop their greed and allow some of all their wealth and income to flow to the masses (so consumption and the economy can grow). Those individual media owners do not want that debate to begin because they know (and don’t like) how it will end. So we will keep ignoring what is the only sustainable solution.”

    I agree with you. I suspect this is why some pretty smart folks are projecting an end to capitalism – they see this as the ultimate end game. I am going to guess that it gets turned around but not until the final hour so to speak.

  37. engineerd1 says:

    Both at home and in school in the 50′s we were taught to revere hard work, honesty, and self control. This was from our “great generation” elders, who had stopped believing it themselves…but we got a faint echo that carried us for a few decades, as long as the rest of the world was prostrate and the pickins’ was easy…..Now its unashamedly toys, getting over, and hooking up. Those who think the fix is a different fiscal, monetary, or legislative plan are deeply deluded.

  38. bsneath says:

    engineerd1 – I would add to your list integrity. We were also taught that the end does not justify the means. Much of what we are facing today is the result of manipulations for a greater good that have backfired. Quid pro quo agreements between politicians and the banks to encourage inappropriate housing loans to individuals who did not have the ability to repay is but one example.