We’ve all been strictly enjoined to avoid schadenfreude in the current crisis, and indeed few are likely to escape unscathed. Still I’m struck by a couple of examples of historical irony
* Ten years ago, I was debating representatives of the Dutch bank ABN-AMRO, who were pushing for the privatisation of ACT Electricity and Water (ACTEW). A couple of days ago, the Dutch operations of ABN-AMRO were nationalised
* British Bank Northern Rock was nationalised following a run by customers seeking to withdraw their money. Now, seen as safer than it’s competitors, it is being forced to limit deposits.
John Quiggin 
Irony only scratches the surface of the ways that these consequences could be viewed. It is interesting that there are no calls for redundancy payments for those, now out of work, investment bankers as they scurry of into the darkness with their winnings.
Yep plenty of it around.
Here is the messiah on Sub-prime, apparently they are a good idea.
Here is what Sub Prime really looks like, when you let “principle” get in the way of sound judgment.
http://www.2020hindsight.org/2008/10/02/what-the-meltdown-looks-like/
..And plenty of Irony here
Feb 2003, US government body OFHEO on the systemic risk posed by gse/quangos mac and mae.
(thats systemic as in problems within the wider system)
The Bush white house agreed and upgraded the risk assessment and asked congress to reform the GSEs.
the rest is history.
http://66.102.9.104/search?q=cache:xVvDlE8BnkEJ:www.ofheo.gov/Media/Archive/docs/reports/sysrisk.pdf+systemic+risk+fannie+mae&hl=en&ct=clnk&cd=1&gl=uk&client=firefox-a
The recent guarantee the Irish government gave to Irish bank deposits has weakened other European banks because Europeans were shifting their deposits to Ireland. Northern Rock will likewise be weakening other banks.
If you are right Harry all governments will have to give guarantees, to avoid a ‘race to the top’.
But if everyone does it, this reduces the chances of bank runs and lessens the need for guarantees. Ironic, no?
Indeed, the North Rock case is a nice example of ‘competition laws’ limiting individuals’ choices. Not surprisig though, since the unit of analysis in the ‘level playing field’ legislation is the enterprise rather than the individual in a democractic society.
It is amazing that the Republican Party’s youtube ad still does not recognise the relationship between income distribution and loan defaults.
“The recent guarantee the Irish government gave to Irish bank deposits has weakened other European banks”
This is only if people are foolish enough to believe the Irish government could bail their banks out if they went under. If they did, who is going lend Ireland twice their GDP to bail them out anyway?
Ok, but. If you hadn’t won the argument they would have got their hands on ACTEW and made so much money they wouldn’t need to be nationalised.
It appears that the world’s printing presses are to be pressed into service to print lots of bank notes with lots of 0’s in their denominations so sovereign states can pay their debts. Who would have thought we would follow Mugabe and Zimbabwe.
Lets hope big oil and the Saudis are not telling porkies about oil reserves and the AGW denialists are right. If they are wrong we may also be adopting an extreme version of the Somali state model in the near future.
Does irony cover being generous and polite to your warlord when he or his cronies want your food, money, wife, daughter or goat?
The race to guarantee bank deposits is on in earnest. Add Greece and Germany and that inevitably means every country soon including our own. No country can afford not to now, lest it watches its bank deposits flee offshore to the ‘safe’ havens. The fallacy of composition is obvious here and it effectively means central banks will have to print the money to guarantee all depositors and that implicitly means underwriting all those bad debts to a large degree. This in turn means massive inflation and how long will it take fiat money holders to work it out? They must go for gold now as a timeless hedge against that looming monetary inflation. These inexorable market forces (coupled with political lockstep) may just be signalling the end of irredeemable fiat currency as we know it. The gold bugs may well have the last smile yet.
Speaking of irony, we have the Rudd Govt defending the banks not passing on the next official interest rate cuts whilst Turnbull asks why the sudden flip flop from bank bashing guys? As if we didn’t know. Then Rudd comes over all moralising about the Gordon Geckos and their ‘greed is good’ mentality. What he omits to say is how that mentality and easy resort to the printing press and the moral hazard it generated in the first place, so aptly suited those who would tax by stealth and enjoy spending same. That’s the latter’s elephant in the room now, as an article in the Weekend Oz on pge 37 glimpses.
Basically, faced with the collapse of the buiding boom, builder/developers are taking advantage of US tax laws to access tax clawbacks now. DR Horton one of the biggest sold land in California it had purchased for $110mill(and levelled and sewered subsequently) for just $7.8mill to take advantage of tax laws allowing averaging over 2 years(the last very profitable year being 2006 when it has made losses every quarter this year) Consequently it expects a tax clawback of $519mill over the next 2 years as it prunes its business model.
Welcome to the ‘tax is good’, Louie Leech mentality and their looming problem now. That’s why they desperately want to keep the music playing and pumping up the Kiddies Castle, rather than seeing the plugs pulled. The Gordon Geckos and Louie Leeches don’t want playtime to end but it’s way past your bedtime now children.
I’m not sure that I follow you Ernestine. Hasn’t it been a conservative policy to keep the minimum wage low and a liberal policy to increase it. Why would the Republicans want to highlight that?
Dear John Quiggin
I have remained silent for a while here in Vientiane, Lao PDR. It is certainly interesting to observe the world from here.
Here are a couple of ironies for you.
1. The provision of social housing would have been cheaper if it had been undertaken by governments, rather than the cabal of speculative builders and greedy sub prime mortgage lenders.
2. Some of the people who helped to bleed the system are likely to score jobs with the bailout authority which is to distribute the money with government oversight.
3. None of the political operatives and their advisors will lose their entitlements after a. advocating deregulation of the banks and finance industries, b. telling us we had a “strong economy” and “all is well” and c. lying about how serious the crisis was right up to the time they were changing the message to “this is the greatest challenge since the Great Depression”.
4. Where is the long-discredited former Prime Minister of Australia, John Winston Howard? Can anyone see the irony of his irrelevance today?
Willy Bach
In 2003 the Republicans had control of the senate, the house of representatives and the presidency. Yes it is ironic.
Nice post sean. Pity it cuts him off mid-sentence. It’s a bit like BillO not letting people finish what they’re saying. We couldn’t allow that now, could we. They might actually have a point that they’re trying to express.
I bet he was going to say something about negative amortisation and how it is not a good thing. I want the hear/read the full speech, not the truncated one.
smiley, what does it matter who controls Congress? Party politics and discipline in the United States doesn’t operate as it does in Australia. The Republicans sponsors came up against GSE-backed Democrats in the Senate Banking committee, who signalled that the reform would be contested in a partisan fashion. I suppose you could argue that the Republicans should have been more organised and should have gotten the numbers together to go ahead on a partisan basis. And fair enough, too. The Republicans were pretty ineffectual on this one. But the irony that sean is highlighting is really the fact that bad things happened when the regulatory reforms Democrats opposed didn’t pass and yet they feel entitled to blame Republicans for a lack of prudent regulation. Wait, is that irony? Or is just plain old Democrat hypocrisy?
BBB
All water under the bridge now. The overarching problem was that nobody really understood the price we’d have to pay for creating so much money out of thin air. Not the Gordon Geckos, the Louie Leeches, or anyone in between, bar perhaps Austrian economists grimacing in the background. Each monetary expansion and consequent credit boom must be followed by the bust of resulting malinvestments. Each monetary expansion has its similarities but also its peculiarities. This time the peculiarity daddy of them all was demographics that allowed those low interest rates to do the underlying damage for so long i.e. the credit creation went into asset prices rather than general price inflation and so the central banks were comfortable with their false settings for so long. That has created a monster of fearful proportions to slay now. So much so that I now believe it seriously threatens the very existence of fiat money.
It’s like a B grade movie now where the plot is so time worn we can only watch the cardboard cutout actors move with grinding predictability. Protect the depositors by printing more money but more credit can’t fix insolvency. They’re mouthing the usual soothing platitudes while pushing forlornly on their monetary string now. What to do with my monopoly money now? Me, I’m going to spend it on factory improvements and more gold pronto because I reckon I’ll never buy them cheaper. It’s high time someone else owned my share of the dubious stuff.
Questions and observations, no particular ironic order:
1) commodity prices have fallen off a cliff, even as talking heads and politicians say Australia is safe from the economic crisis because of the commodities boom;
2) credit has frozen up throughout the free market capitalist countries and yet deregulation is all the rage;
3) inflation is inadequately measured and monitored, even at this late stage;
4) old fashioned 10–20% house deposits long forgotten;
5) no-one has investigated the overarching issue of why such confusing derivatives are created: the answer might be to disguise risk exposure for the purpose of passing it on;
6) what happens if banks have assets frozen due to third-party bankruptcies;
7) wasn’t Ben Bernanke heralded as a great expert on the Great Depression only last year on Fox TV?
8) in times of inflation and failing financial institutions, should a reserve bank hold to targetting inflation to help us in the long run, or massively drop interest rates to “help” people who can’t pay their mortgages, at the risk of restarting a property boom?
9) in Australia, during 1987–1988 conferences and public workshops were held on the issue of global warming: will today’s change in economic climate kill off action on global warming, just as the ’87 crash and ’91 housing market crash did in the late 80’s/early 90’s, and if so will we lose yet another 20 years to talk of market solutions to global warming?
10) A 700Bil USD could have funded a Mars mission, another Hubble-like telescope, decent health system for the non-participants in the CD orgy, taking renewable energy technologies right to market, etc. Instead it helps out a few “mates” already in the Cayman or Lichtenstein, whatever.
11) Ratings agencies are always the last to know, so why the stubborn persistence in using them as information sources?
Enough irony. Must be in a melancholy mood today…
It’s obviously your intention here to make it look like the Democrats were the only ones receiving some sort of kick-back from the GSE’s, and the Republicans were just lazy. How partisan is that?
One of McCain’s advisers was recently caught receiving donations from a GSE and I would be surprised to find that Republicans on the Banking committee had also received kick-backs. But of course you fail to mention it, because it doesn’t suit your argument.
The real argument here is about deregulation and as we’ve seen from disasters in other industries (Enron comes to mind) deregulations leads to market players gaming the system. Enron wasn’t a quango and it successfuly drove up the price of electricity by reducing the supply. No guesses who Keny-boy carried influence with.
Ideologically the Republicans have been against regulation and you cannot get away from that fact. Except here they seem to be suggesting regulating the GSEs while allowing the private investment banks to endanger the banking system for exactly the same reasons that the GSEs were dangerous. The short term profit motive of the investment bankers and the mortgage brokers would have still diven the subprime industry.
You can see the real hypocrisy of the Republicans in many of their statements. Cheney had the gaul to state that Reagan proved that deficits were not important, after the Republicans had forced Clinton to balance the budget throughout his term. Now that’s what I call hypocrisy.
that should have read “wouldn’t be surprised”
Smiley
Wait, your contention is that the Republicans who wanted to subject the GSEs to greater regulation (with the probable effect of lowering the GSEs’ profits and by extension the earnings of its executives) were in fact taking kickbacks from the GSEs?
Anyway my (narrow) point was merely that your vacuous ‘but the Republicans controlled Congress’ response to sean’s comment was just that: vacuous. The broader issues of congressional majorities are neither here nor there when we are talking about the Democrats’ irresponsible protection of the GSEs who bankrolled them (at least in part). I have said elsewhere that Teh Left and its representatives in the legislature refuse to take the least bit responsibility for its part in these myriad crises, however small or marginal their contributions may be. Your comment was a classic example of the apologetics I have been talking about.
As for the hypocrisy of the present Republican administration on the budgetary matters, we are in violent agreement.
BBB
PS. I thought Cheney hated the French?
Donald,re-
“commodity prices have fallen off a cliff, even as talking heads and politicians say Australia is safe from the economic crisis because of the commodities boom”
You need to read between the lines of the cardboard cutout actors. Clearly a slump in world demand for resources would see the prices drop but nevertheless we are still very lucky bastards at having so much valuable dirt per capita than so many other poor unfortunates.
“credit has frozen up throughout the free market capitalist countries and yet deregulation is all the rage”
The free market is working perfectly to try and reduce the price of assets to economic reality(ie real returns) but is being resisted by the usual suspects for some reason that is beyond market men to fathom. Presumably they think long and painful stagflation beats short, sharp and horrible deflation. It’s a matter of taste I guess. You need to bear in mind who started all this by rolling the printing press and it’s no good the Louie Leeches bitching about the Gordon Geckos cottoning onto the game and ruining their party. We’re the poor bastards who have to clean up the mess and make sure these unruly gatecrashers are kept out in future.
“old fashioned 10–20% house deposits long forgotten”
Not any more they’re not and they’re about to be etched into a new generation’s memory banks for life.
“A 700Bil USD could have funded…”
Only if it was real forgone consumption (ie real savings)rather than funny money hot off the press or simply more taxpayer unfunded liability like Medicare and social security pensions in the US and the like.
“will today’s change in economic climate kill off action on global warming”
Well it should put to bed once and for all the fantasmagoric notion that ETS, carbon credits, carbon offsets and all the confounded derivatives that could possibly sail with it and be traded internationally, can be safely left to the Gordon Geckos and Louie Leeches to work out and don’t you ignoramuses worry your silly heads about such things as they know what’s best for you and the planet dumbos!
If the financial news this morning is to believed it seems we are being battered by historical (and hysterical) forces. What is now happening globally on world financial markets is magnitudes of leverage worse than 1929.
The straw man of the political and financial talking heads that the Australian property markets, banks and Federal Government finances are fundamentally sound and are insulating us from the worst of the crisis is being put to the sword.
The fortunes of Australian banks need booming property prices. Scary when you consider that the price of the average home in Australia expressed as a multiple of average earnings hit double that reached in the US. Australian property prices are just leaping off the high board.
The little Aussie dollar is in free fall and one can only imagine what this is doing to external debt. The wheels are falling of the infamous truck, as foreshadowed in the article at the following link. http://www.rgemonitor.com/blog/roubini/122420
The much vaunted mineral boom that provided the revenue to offset tax cuts and tax breaks for the uber rich will live on, mostly as toxic water filled holes in the ground.
Much of Australia’s infrastructure is reaching the end of its productive life. Just ask the good burghers of the Northern suburbs of Darwin. The state of Darwin’s electricity grid is such that the the NT government has set up a Disaster Planning group while advising people to buy generators and maintain a ‘no electricity’ kit. As a consolation on a hot no air conditioner night they can drive to the city and look out over the harbour at the lights of Conoco Phillips CNG plant while wafting in the aroma of the sewerage of the rich being discharged into the not so pristine harbour through the “poo shooter”
The label ‘Made in Australia’ is rapidly becoming a collectors item.
The life savings of Australians are evaporating faster than the remaining water in the Murray as will be the hopes of a rise in the old age pension.
As for irony – the government is lending the future fund to the banks.
Ah, thank god we live in the lucky country. Advance Australia Fair! Aussie, Aussie, Ausie. Oi! Oi! Oi!
for anyone who thinks who really wants to understand the bailout
go to youtube and put in
sherman martial law
Well, absent (or in addition to) schadenfreude we could choose to do something about it.
For your reading delectation:
http://www.monthlyreview.org/081006tabb.php
This essay examines aspects of the global political economy that I hope will inform progressive governments and movements for social change. It evaluates the constraints and opportunities presented in the current conjuncture of world capitalist development by analyzing four areas of crisis in the contemporary world capitalist system. These are not the only contradictory elements in the contemporary conjuncture, but they are, in my view, the most salient.
The first problem is the financial turbulence that has gripped the economy of the United States and has had widespread effects. It is a crisis that further discredits mainstream Anglo-American economics. I do not know that it is the crisis of capitalism. For this to be the case it would not only have to become much deeper, but its impacts would have to be felt more dramatically as a systemic failure. Most importantly, a party formation capable of explaining how such crises are inherent in the nature of the functioning of capitalism and of inspiring a socialist alternative would have to mobilize a movement of the sort that ended apartheid in South Africa. Without the last, even a deep and painful crisis will be, at best, only the occasion for reforming and not abolishing capitalism.
A second crisis is that of U.S.-led imperialism, which has been discredited both in terms of its regime-change-wars-of-choice and the increasingly effective resistance to the international financial and trade regime we know as the Washington Consensus. Because of the incalculable harm neoliberalism has done, and continues to do, it is now ideologically on the defensive. A third point of crisis is the rise of new centers of power in what had been the peripheries of the capitalist system and the tensions this has unleashed, providing room to maneuver for countries wishing to break with the United States. A fourth area of crisis has to do with resource usage, the uneven distribution of the necessities of life, and a growth paradigm that is no longer sustainable. Here grassroots social movements in South Africa and elsewhere are leading actors in resisting privatizations and the imposition of a hyper-individualism that brings disaster for the most oppressed and exploited.
BBB @23,
Neither party could reign in Fanny & Freddie.
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/13/AR2008091302638_pf.html
The pressure on the mortgage companies was from industry, not Congress.
And they were small players in the financial markets.
Low interest rates fueld the mortgage problem.
http://economistsview.typepad.com/economistsview/2008/10/barry-ritholtz.html
If we try to keep our eyes on the ball, we’ll note $1.14 Quadrillion in the international derivatives market.
http://jutiagroup.com/2008/07/24/global-derivatives-market-now-valued-at-114-quadrillion/
Doug Noland has a bit of trouble seeing a way out of this mess given the history of credit creation-http://www.atimes.com/atimes/Global_Economy/JJ07Dj01.html
Personally I don’t think the overseers of the printing presses can crank them fast enough now either Doug. We are all Zimbabweans now!
Irony is not my response. I ‘blame’ the economics profession and the theory they have been peddling in universities and government departments in all OECD economies.
The textbooks are seriously wrong in many places (particularly based on assumptions). Economic textbooks also ignore political economy. The work of economists is always jeopardised by externalities they have no hope of understanding.
A particularly bad example is Samuelson’s well used text. While the Australian edition is usually used (and is more realistic) the American edition includes such domatic clangers as:
“By means of appropriate monetary and fiscal policies, (capitalism) can avoid the excesses of boom and bust and can look forward to healthy progressive growth”. [pg352 American 7th edition, pg 348 in 11th American ed].
The size of the bailout, is now fully 7% of American GDP, and 10% of UK GDP – so far. See data at:
http://news.bbc.co.uk/1/hi/business/7644238.stm
So instead of irony or schadenfreude, I recommend laughter.
It is my understanding that it is the US dollar’s position as the world’s reserve currency that has thus far allowed the USA’s fiat-based budget to defy gravity. However this subject is so seldom brought up in the economics commentary. Is it not, in fact, so important?
It gets mentioned from time to time, but perhaps not as often as it should. They get a free ride on their twin deficits, but it’s not just them tied up. The whole world has a mountain of savings in USD so they are unlikely to let it collapse. The Chinese in particular aren’t going to let it sink without a decent fight. But in the end, the massive imbalances are going to have to be worked out of the system. Fiat currency strikes again!
BBB
Irony or Laughter?
So as the world weathers the storm, what is the solution according to the relatively well- protected rich.
The solution according to Donald Trump, (when asked what can people do) was…
“All they can do is dream, Wolf. They can dream. They can dream about things getting better, and they will get better.”
I am not making this comedy up. See Trumps interview with Wolf Blitzer at;
http://economix.blogs.nytimes.com/2008/10/06/you-may-say-im-a-dreamer/
Of course Trump and other magnates are probably laughing behind our backs as they now have an opportunity to pick up assets at cheap prices. During 1987, Rene Rivkin was almost joyful reciting his “buy in gloom – sell in boom” tune to journalists.
Not at all. Obviously not all republicans voted for this legislation (you’ve admitted that much). My contention was that it was probably not just lazyness as you seem to be suggesting. I certanly haven’t researched the subject as much as you, but I offered John McCains adviser as an example of a Republican who has recently been identified as receiving kick-backs from a GSE.
And further to this I suggested that subprime fiasco cannot be completely blamed on the GSEs. Lots of private banks have been involved.
Smiley, as usual it is the more mundane confluence of misguided government intervention, imprudent regulation and private greed. But really what do people expect from this debate? We get mildly hysterical and wildly wrong ‘teh neoliberalizm is ded’ talking points from people who should know better, and the American neo-conservatives fall into line with their own shallow talking points. When leftist triumphalism kicks things off, there’s really only one way the game plays out. Happily that triumphalism will end once it becomes clear that the social democratic regulatory frameworks of Europe are equally ill-equipped to handle low-interest-rate- and credit-fuelled asset price booms and their aftermaths. It’s also clear that central bank incompetence spans the political divide between social democracy and neoliberalism. I suppose that is why the Austrians out there hold neoliberals in such contempt: the enemy of my enemy is just another fiat-money-sucking fractional-reserve-loving sucker.
BBB
No private greed seems to do a pretty good job of stuffing things up all by itself. You know having a deposit to prove that you could save for large purchases like property solved two problems. It kept housing costs low and made the banking system safe.
I’d also say the “wild west” view of the world offered by most libertarians is more mundane. At least in a social democracy they teach us how to be skeptical of the snake-oil salesmen. In the wild west everyone is a snake-oil salesman or worse – a gun slinger.
So which European social democrats are you talking about BBB. Would it be the New Labour in the UK or maybe Berlusconi, or Sarkozy… I’m actually struggling to think of one European state that I’d reguard as a social democracy.
If Tony Blair is your exemplar, I don’t think that is what JQ means, and neither do I. Though I also have trouble with the exact meaning of neo-liberal. I’ll have to revisit JQ’s post.
I totally agree. One of the main roles of government is to keep the economy in a steady state, not encouraging booms and the massive misallocation of wealth and resources that they create.
Sounds like you’re about ready to have an argument with AR.
‘I ‘blame’ the economics profession and the theory they have been peddling in universities and government departments in all OECD economies.’
sic-
“By means of appropriate monetary and fiscal policies, (capitalism) can avoid the excesses of boom and bust and can look forward to healthy progressive growth�.
Well Austrian economics fans certainly wouldn’t want to be tarred with that Keynesian brush Chris. We find that text as laughable as you do, particularly so under the circumstances at present. In that regard you might like to ask Glenn Stevens for his comments about his last 2 official imterest rate rises in light of his latest cut today. We’re all ears.
It is govt action that is weakening the financial business, by rewarding losers and tweaking regulation they have increased risk and distorted the market
Next we will have bailout of the car business, then agriculture, retailing, construction – totalitarianism