Lehman Brothers delakoaz: ez dugu ezer ulertu, ezta ikasi ere ez!

Bill Mitchell-en Precarious private balance sheets driven by fiscal austerity is the problem


(i) Kazetariak1

(ii) Matt Taibbi2

(iii) Oso gutxi ikasi dugu3

(iv) Elise J. Beans4

(a) ‘PSI’5

(b) “Deconstructing the Financial Crisis”6

(c) Big banks7

(v) Eskandaloak8

(vi) Afera legalak9

(vii) Ekonomilariak erabat galduta, Martin Feldstein10

(viii) Bill Mitchell 2010ean eta 2016an: moneta jaulkitzaileko gobernuak eta defizitak11

(ix) Espazioa fiskalaz12

(x) Diru Teoria Modernoa (DTM) eta krisia13

(xi) Laburbilduz14

Gehigarria: Australiako kasuaz

Household debt at elevated levels in Australia

In recent weeks, there has been more discussion about the elevated levels of household debt in Australia.


Ondorioak (bereziki Australiari dagozkionak)

(1)… this discussion that is lost in the mainstream media.

(2) A government surplus is exactly equal to the non-government deficit.

(3) Taking more out of the expenditure and income generating stream (via taxation) than is being put in (by government spending) forces the non-government sector into a state of liquidity squeeze.

(4) It can maintain expenditure growth for a time by running down saving (as it is) and increasing borrowing (as it is).

(5) But that cannot last, especially as the growth in asset values that have driven the debt start to taper off.

(6) But as long as the financial press doesn’t make the link between what is going in the fiscal space with what is going on with respect to non-government debt and asset prices we will see this dichotomised discussion.

(7) The right-wingers will rave on about public debt and the evils of deficits.

(8) The others will rave on about the dangers of household debt.

(9) Neither will realise or articulate the idea that to provide some security to the non-government sector, it is likely that the government sector will have to run continuous fiscal deficits.


Nahita sortu zuten krisia

Krisia? Zer krisi mota?

Krisiaz, berriz

Krisia nahita izan da induzitua

Krisia: ikusiz nola etorri zen…

Finantza krisia: historia sekretua

Krisia: nondik zetorren, zerk bultzatua, nortzuek aurreikusi zuten edo nor den nor

Krisia: nahita induzitua

Krisia: galdera zuzena

2007ko krisia (GFK): zein zen kausa?

Ingelesez: “The media has been giving a lot of attention in the last week to the 10-year anniversary of the Lehman Brothers crash which occurred on September 15, 2008 and marked the realisation, after months of denial, that there was a financial crisis underway. Lots of articles have been published recently about what we have learned from this historical episode.”

Ingelesez: “I thought that the Rolling Stone article by Matt Taibbi (September 13, 2018) – Ten Years After the Crash, We’ve Learned Nothing – pretty much summed it up.”

Ingelesez: “We have learned very little. Commentators still construct the crisis as a sovereign debt problem and demand that governments reduce fiscal deficits to give them ‘space’ to defend the economy in the next crisis. They are also noting that the balance sheets of the non-government sector components – households and firms – are looking rather precarious. They also tie that in with flat wages growth and a run down in household saving. But the link between the fiscal data and the non-government borrowing data is never made. So we are moving headlong into the next crisis with very little understanding of the relationship between government and non-government. And we are increasingly relying on private sector debt buildup to fund growth as governments retreat. Everything about that is wrong.”

Ingelesez: “The recently published book – Financial Exposure: Carl Levin’s Senate Investigations into Finance and Tax Abuse (Palgrave Macmillan) by Elise J. Bean is worth reading. Elise Bean was an investigative lawyer for the US Senate Permanent Subcommittee on Investigations (PSI).

The book recounts the workings of the PSI.”

5 Ingelesez: ” We read that the PSI has:

faced down corrupt bankers, arrogant executives, and sleazy lawyers. We’d confronted tax dodgers of all stripes, from billionaires to multinationals. We’d interviewed crooks in prison, North Korean representatives, and tax have operatives. We’d protected whistleblowers, championed victims, and defended honest government employees battling abuses. We’d stood up to dirty tricks, assaults on PSI’s bipartisanship, and attacks on our bosses.

Never was this environment more loaded than when they started looking into the financial services sector.”

Ingelesez: “The chapter on “Deconstructing the Financial Crisis” is particularly interesting, given the current attention the decade-anniversary is receiving.

Elise Bean writes that the investigation was “the longest, toughest inquiry” the PSI under Carl Levin had ever undertaken.

The “facts were tangled, the players powerful, and the stakes huge”.

She credits the legislative action that led to the “Dodd-Frank Act, the most extensive set of U.S. financial reforms in a generation” as the results of their investigation.

The book leaves no doubt as to what caused the GFC – and the train wreck of Lehmans and others had been gathering pace for a few decades as a result of the neoliberal-inspired deregulation and reduced oversight (mostly due to regulative capture).”

Ingelesez: “The crisis saw governments offer trillions [amerikar trilioia = europar bilioia] to the otherwise failed big banks and related institutions to keep them alive. Those bailouts have had long-term consequences that Matt Taibbi documents.

1. “a radical transformation of the economy”.

2. “Previously, small banks traditionally enjoyed a lending advantage because of their on-the-ground relationships with local businesses. But the effective merger of the state with giant, too-big-to-fail banks has tilted the advantage far in the other direction.”

3. “Big banks post-2008 could now borrow much more cheaply than smaller ones, because lenders no longer worried about them going out of business.”

4. “How much of the record $171.3 billion [amerikar bilioia = europar mila milioi] in profits earned by banks in 2017 was owed to the implicit guarantee?”

5. “The bank-state merger brokered 10 years ago this week socialized the risks of the financial sector, and essentially converted Wall Street into a vehicle for annually privatizing a big chunk of America’s GDP into the hands of a few executives.

And so on.”

Ingelesez: “But if we thought there might be a change in behaviour afterwards (for example, because of Dodd-Frank) we would be wrong.

The scandals have keep coming.

1. The 2010 “flash crash” of the New York Stock Exchange as a result of some rogue traders on Chicago’s derivatives exchange – see The 2010 ‘flash crash’: how it unfolded.

2. The LIBOR scandal – see Libor scandal: the bankers who fixed the world’s most important number rigging HSBC’s $850 million drug money-laundering fiasco

3. HSBC getting caught laundering drug money from Mexico, among other criminal acts – see – HSBC to pay $1.9 billion U.S. fine in money-laundering case

4. Australian readers who have been following the Royal Commission into the financial services sector will be able to catalogue a sequence of criminal acts by bankers, insurance companies etc. Charging fees for no service, cheating customers, etc.

I saw a Tweet last week listing the top 10 financial market players who had gone to prison for their criminal conduct.

The list looked like this (first three only):





In other words, no-one went to prison for their criminal behaviour.

In the recent German TV series, Bad Banks, the major character tells her boss who is about to go down for criminal behaviour that no-one at his level goes to prison.”

Ingelesez: “Matt Taibbi lists other legacy issues arising from the lax way governments dealt with the crisis.

1. “we made Too Big To Fail worse by making the companies even bigger and more dangerous”.

2. “The people responsible for the crisis weren’t just saved, but made beneficiaries of another decade of massive unearned profits”.

I was reading Elise Bean’s book around the same time I was alerted to an Irish Times article (September 13, 2018) – Trader blows €100m hole in Nasdaq’s Nordic power market – which reported that one of the highest earning Norwegian financial market trader had just severely compromised the “stability fund that ensures the safety of derivatives trading in European electricity markets.”


This character was betting on “European power markets” and:

saw his positions collapse on Monday after extreme market moves in German and Nordic energy markets … [he] … had defaulted on Tuesday after they were unable to meet margin calls at its clearing house on loss-making trades … [he] … blew through several layers of safeguards designed to protect it from such losses …

The size of the loss also ate up about two-thirds of a separate €166 million mutual default fund members must contribute to …

And “some of the biggest banks and energy traders such as Morgan Stanley, UBS and Equinor, Norway’s state oil company” will have to make up the losses to the clearing house.

Power is an essential service to communities. Yet, we still allow the financial market casino to bet on it and compromise the stability of the financial system as a consequence.

Enron went bankrupt in 2001.

Australia had power cuts in 2017 because the financial arms of the privatised (previously state-owned) energy companies arranged for generating capacity to be turned off so they could profit on the spikes in the energy prices.

And so it goes.”

10 Ingelesez: “And one of the most powerful narrative that still remains is somehow that governments have to pursue fiscal surpluses to safeguard our financial system – to give them the ammunition to defend the economy from meltdown.

Just this week, economists are coming out claiming there is no government capacity ‘left’ to prevent another crisis.

Remember Martin Feldstein’s appearance in the investigative movie – Inside Job – which the Director Charles Ferguson said was about “the systemic corruption of the United States by the financial services industry and the consequences of that systemic corruption.”

As a reminder, I considered his qualification to comment on macroeconomics in this blog post – Martin Feldstein should be ignored (May 3, 2011).

Feldstein, a Harvard economics professor, was a board member of AIG, which was paying massive fees in that role. He was also a board member of the subsidiary company that made all the credit default swaps that bankrupted AIG.

His appearance on the Inside Job was a classic example of the disgraceful hubris that the mainstream of my profession exuded then, and now.

He recently wrote a Wall Street Journal article (June 10, 2018) – The Fed Can’t Save Jobs From AI and Robots – which ran the line that Artificial Intelligence and Robots will create mass unemployment in the US (millions will become unemployed as a consequence) but the central bank should not deviate from maintaining low inflation.

His solution is that government should further deregulate the labour market (cut wages) rather than try to engage in demand stimulus to generate higher labour demand.

In an article published today (September 17, 2018) in the UK Daily Telegraph (but syndicated to Fairfax) – ‘We don’t have any strategy to deal with it’: experts warn next recession could rival the Great DepressionFeldstein is quoted as saying:

We have no ability to turn the economy around … When the next recession comes, it is going to be deeper and last longer than in the past. We don’t have any strategy to deal with it … Fiscal deficits are heading for $US1 trillion dollars and the debt ratio is already twice as high as a decade ago, so there is little room for fiscal expansion.

Of course, none of this Feldstein nonsense is remotely correct.”

11 Ingelesez: “As I explained in these blog posts – There is no financial crisis so deep that cannot be dealt with by public spending – still! (October 11, 2010) and The government has all the tools it needs, anytime, to resist recession (August 20, 2016) – a currency-issuing government can always attenuate the impacts of a financial crisis that has its origins in a non-government spending collapse.

This capacity is independent of what policy positions the same government has run prior to the crisis. Any notion that a running a deficit now (of any scale) in some way reduces the capacity to run a similar scale deficit in the future is plain wrong.

There is not even a nuance that we can bring to that proposition – a conditionality. Plain wrong is plain wrong.

12 Ingelesez: “When Feldstein is saying that “there is little room for fiscal expansion” he is just rehearsing the fake knowledge of the mainstream economists who define fiscal space in circular terms.

Sort of like this:

1. Fiscal expansion can only occur if deficits and debt ratios are low.

2. Currently deficits and debt ratios are higher than they were at some point in the past.

3. Therefore we have run out of fiscal space.

A circular, self-referencing proposition. Which begins wrongly and thus concludes wrongly.

13 Ingelesez: “If there is a new crisis, then there will be massive fiscal space which will be defined by the idle resources in the non-government sector that have become unemployed because non-government spending collapses.

That is the only way in which we can talk about ‘fiscal space’. If there are productive resources that are idle and available to be brought back into productive use, then there is fiscal space.

The fact is that there is no crisis large enough that the government through appropriate fiscal policy implementation cannot respond to.

There is no non-government spending collapse big enough that the government cannot maintain full employment through appropriate fiscal policy implementation.

A currency-issuing government can always use that capacity to buy whatever idle resources there are for sale in the currency it issues, and that includes all idle labour.

A currency-issuing government always chooses what the unemployment rate will be in their nation.

If there is mass unemployment (higher than frictional – what you would expect as people move between jobs in any week), then the government’s net spending (its deficit is too low or surplus too high).

I explain the so-called helicopter money option in this blog (also cited above) – Keep the helicopters on their pads and just spend (December 20, 2012).”

14 Ingelesez: “By way of summary (although I urge you to read that blog post if you are uncertain):

1. Introducing new spending capacity into the economy will always stimulate demand and real output and, as long as there is excess productive capacity, will not constitute an inflation threat.

2. When there is weak non-government spending, relative to total productive capacity (and unemployment) then that spending capacity has to come from government.

3. The government can always put the brakes on when the economy approaches the inflation threshold.

4. A currency-issuing governments does not have to issue debt to match any spending in excess of its tax receipts (that is, to match its deficit) with debt-issuance. That is a hangover from the fixed-exchange rate, convertible currency era that collapsed in August 1971.

5. Quantitative easing where the central bank exchanges bank reserves for a government bond – is just a financial asset swap – between the government and non-government sector. The only way it can impact positively on aggregate demand is if the lower interest rates it brings in the maturity range of the bond being bought stimulates private borrowing and spending.

6. But non-government borrowing is a function of aggregate demand itself (and expectations of where demand is heading). When elevated levels of unemployment persist and there are widespread firm failures, borrowers will be scarce, irrespective of lower interest rates.

7. Moreover, bank lending is not constrained by available reserves. QE was based on the false belief that banks would lend if they had more reserves.

Please read the following blogs – Building bank reserves will not expand credit (December 13, 2009) and Building bank reserves is not inflationary (December 13, 2009) – for further discussion.

8. Governments always spend in the same way – by issuing cheques or crediting relevant bank accounts. There is no such thing as spending by ‘printing money’ as opposed to spending ‘by raising tax receipts or issuing debt’. Irrespective of these other operations, spending occurs in the same way every day.

9. A sovereign government is never revenue constrained because it is the monopoly issuer of the currency.

10. If the government didn’t issue debt to match their deficit, then like all government spending, the Treasury would credit the reserve accounts held by the commercial bank at the central bank. The commercial bank in question would be where the target of the spending had an account. So the commercial bank’s assets rise and its liabilities also increase because a deposit would be made.

11. Taxation does the opposite – commercial bank assets fall and liabilities also fall because deposits are reduced. Further, the payee of the tax has decreased financial assets (bank deposit) and declining net worth (a liability/equity entry on their balance sheet).

12. A central bank can always credit bank accounts on behalf of the treasury department and facilitate government spending. This is the so-called ‘central bank financing’ option in textbooks (that is, ‘helicopter money’). It is a misnomer.

And the point is that all this talk of sovereign debt crises and the central bank running out of firepower is actually raising the probability of a renewed financial crisis emanating from the non-government sector, which is clearly, despite all the myths that have been told, was the source of the GFC.”

Iruzkinak (1)

  • joseba

    Michael Hudson-en The Lehman 10th Anniversary spin as a Teachable Moment

    Wall Street did not let the Lehman Brothers crisis go to waste. The banks that have paid the largest fines for financial fraud are now much bigger and more profitable. The victims of their junk mortgage loans are poorer, and the economy is facing debt deflation.
    Was it worth it? What was not saved was the economy.
    Today’s financial malaise for pension funds, state and local budgets and underemployment is largely a result of the 2008 bailout, not the crash. What was saved was not only the banks – or more to the point, as Sheila Bair pointed out, their bondholders – but the financial overhead that continues to burden today’s economy.
    Trying to save the financial overgrowth of debt service by borrowing one’s way out of debt, or by monetary Quantitative Easing re-inflating real estate, stock and bond prices, enables the creditor One Percent to gain, not the indebted 99 Percent in the economy at large. (…)
    (…) “Saving the economy from a meltdown” has become the euphemism for saving bondholders and other members of the One Percent from taking losses on their bad loans. The “rescue” is Orwellian doublespeak for expropriating over nine million indebted Americans from their homes, while leaving surviving homeowners saddled with enormous bubble-mortgage payments to the FIRE sector’s owners.
    The $4.3 trillion [trilioi amerikarra = bilioi europarra] that could have been used to save debtors was given to the banks and Wall Street firms whose recklessness and outright fraud caused the crisis. The Federal Reserve “cash for trash” swaps with insolvent banks did not restore normalcy or the statu quo ante. What occurred was a financial revolution by stealth, reversing the traditional responsibility of creditors to make prudent loans.
    Can this bailout without debt writedowns really bring prosperity? Can economies achieve growth by “borrowing their way out of debt,” by creating enough new credit to cover the interest charges out of capital gains from the asset-price inflation fueled by new bank credit. That is the logic that has guided the Federal Reserve’s net $4.3 trillion in Quantitative Easing, and the parallel credit creation by the European Central Bank under Mario “Whatever it takes” Draghi. (…)
    An Athenian antecedent to today’s financial takeover
    What is needed now is to follow up the primary policy perception that today’s financially dysfunctional economy cannot be saved without a bank crash. That means rolling back the enormous gains that the FIRE sector has made since 1980 at the expense of the “real” economy. Banks have ceased to be an “engine of growth.” They are not making loans to create new means of production. They are lending to asset strippers, not asset creators. It is not hard to show this statistically. (I drafted an attempt in Killing the Host, and am now working with Democracy Collaborative to prepare a larger study.)
    At stake is whether the U.S. and Western European economies are going to end up looking like those of Greece, Latvia and Argentina – or imperial Rome for that matter. Neoliberals applaud today’s victorious finance capitalism as the “end of history.” (…)

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