Austerity Lecture

https://www.youtube.com/watch?v=JQuHSQXxsjM

Speaker: Mark Blyth, Professor at Brown University. Author of Great Transformations. Ph.D from Columbia in Economics.

Refers to himself as a great example of welfare empowered social mobility - having gone from orphan to Ivy League professor.

Asset protection + tax cuts + 2 wars = 61% debt/gdp by 2006.

A shortage of T-bills (shrinking debt in early 2000s and increased demand from China) produced a run on the repo market - using AAA mortgages as collateral for repo collateral. This cascaded to a liquidity crunch.

There was no large growth in public spending, the only major growth was asset protection. He argues "We are not in much of a mess" - because we have not been cutting. Our growth projections are looking ok, Britian looks worse and Europe looks bad. Greece had done more damage to it's economy that Germany did to it's own in WWII, in the same period of time.

Debt as %GDP

• USA : 105%
• UK  : 90%
• Spain : 70%
• Japan : 140%
• Italy : 120%
• Ireland : 100%
• Greece : 160%
• Germany : 70%
• France : 80%
• Canada : 80%

Story 1 (The Official Story and Total Crap)

Greece debt had a 25% interest rate (equal default risk), France and Italy were around 15%. As the Euro, generalized in the German Bundis Banks, rolls out everyone converged on the German interest rate (low ~4%) - which is odd. The thinking was that if Germany is printing the money, other countries can't inflate or devalue their way out of debt. The only two options are austerity or fix the broken economies.

Most countries in Europe are running a trade deficit, except Germany. Wages went up driven by cheap debt.

The core of this argument is that the southern countries (the ones whose economies are now collapsing) borrowed too much.

But... and this is where it falls apart... Britian has 1T$ in bad assets and Germany has 500B$ in bad assets - far more than any handful of southern countries.

Story 2 (What actually happened)

You can't have over borrowing without over lending.

European banks leveraged up knowing that if they failed, they had to be saved by the state because their failure could damage their country. They leveraged up (40 to 1) with the high risk debt (Germany, Italy, France) but as the Euro was introduced as those avenues of high return disappeared, they made up for it with volume. The mentality was carried over and banks were able to present a systemic risk to the European Union - except that Germany doesn't bail banks, so as they started to fail, Germany let them fail. The result was core banks holding large quantities of bad bad ranging from 10-40% of GDP. Assets held in Germany, France and UK are double the annual GDP of the entire EU. In France, a single bank has assets equal to 100% of GDP, all told, bank assets are more than 400% of GDP.

For the state there are four answers to these types of problems. Inflate, de-value, austerity or "A Bernanke". The later is taking all the bad assets from banks and moving them to the Federal Reserves books and flush the whole system with liquidity (preventing a crunch).

Now, in the US, the top 7 banks only hold assets equal to 61% of GDP - no single bank, even accounting for systemic effects, can take down the whole system. Even total bank assets in the US is less than 120% of GDP. At the height of the crisis US banks were leveraged 30:1, they're now down to 15:1. Eventually, the bad assets (mortgages) will have value again and can be sold back to the banks.

His argument, this whole thing is about preventing massive collapse in the core (German and French) banks. If they start selling off bad assets, it will cascade. [needs review 22:00]

Beyond Story 2

You can't solve a banking problem with a budget cut. You can run a gold standard in a democracy. You can't solve a solvency problem with a liquidity instrument.

The market is worried about the EU breaking up - it needs guarantees that it won't. When all the economies try to cut spending at the same time - no one is spending and the economy stops moving. Every country that has undergone an austerity program now has more debt than when they started.