Barry Eichengreen: Ireland’s rescue package – Disaster for Ireland, bad omen for the Eurozone

By Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley; and formerly Senior Policy Advisor at the International Monetary Fund. Cross posted from VoxEU

Irish interest spreads did not fall and contagion continues. Here one of the world’s leading international economists explains why. Short-sighted, wishful thinking by EU and German leadership designed a package that is not economically feasible in the long run (it would trigger a vicious debt deflation spiral) and it is not politically sustainable in the short run. The Eurozone had better have a Plan B for when the new Irish government rejects the package next year and imposes a haircut on Irish bank bondholders.

The Irish “rescue package” finalised over the weekend is a disaster. You can say one thing for the European Commission, the ECB, and the German government – they never miss an opportunity to make things worse.

It pains me to say this. I’m probably the most pro-euro economist on my side of the Atlantic. Not because I think the Eurozone is the perfect monetary union, but because I have always thought that a Europe of scores of national currencies would be even less stable. I’m also a believer in the grand European project. But given this weekend’s abject failure of EU and German leadership, I am going to have to rethink my position.

A solvency problem postponed is a problem made intractable

The Irish “programme” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130% of GDP has not been reduced by a single cent. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent, given the rate of 5.8% on the international loan.

According to the deal, not just interest but also principal is supposed to begin to be repaid after a couple of years. At that point, Ireland will be transferring nearly 10% of its national income as “reparations” to the bondholders, year after painful year.

The inevitable populist backlash

This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable. The Commission, the ECB, and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor.

Do Mr Trichet and Mrs Merkel have a contingency plan for this?

Infeasibility of a wage-cutting exit plan

Nor is the situation economically sustainable. Ireland is told to reduce wages and costs. It must engage in “internal devaluation” because the traditional option of external devaluation is not available to a country that lacks its own national currency.

But the more successful it is at reducing wages and costs, the heavier will be its inherited debt load.

Public spending then has to be cut even more deeply. Taxes have to rise even higher to service the debt of the government and its wards such as the banks.

This in turn implies the need for yet more internal devaluation, which further heightens the burden of the debt in a vicious spiral. This is the phenomenon of “debt deflation” about which the Yale economist Irving Fisher wrote in a famous article at the nadir of the Great Depression.

What should have been done

For internal devaluation to work, therefore, the value of debts, expressed in euros, has to be reduced. This would have been particularly easy in the Irish case.

A bright red line could have been drawn between the third of the government debt that guarantees the obligations of the banks, on the one hand, and the rest of the government’s debt, on the other hand.
The third representing the debts of the Irish banking system could have been restructured.

Bondholders could have been offered 20 cents on the euro, assuming that the Irish banks still have some residual economic value.

If those banks are insolvent, the bondholders could – and should – have been wiped out.

Irish public debt would then have topped out at maybe 100% of GDP. And the Irish programme would have had a hope of working. As it is, the programme will have to be revisited, perhaps as soon as next year. Investors know this, which is why Irish spreads have barely budged.

In fact, this is exactly the policy that the IMF, which at least knows how to add, has been pushing for over the last week. But the Fund was unable to overcome the objections of the Commission, the ECB, and the German government.

Why the mistakes?

One can interpret the intransigence of the German government and its EU allies in two ways.

First, they understand neither economics nor politics. As Tallyrand said of the Bourbons, “They have learned nothing, and they have forgotten nothing.”

Second, policymakers in Germany – and in France and Britain – are scared to death over what Ireland restructuring its bank debt would do to their own banking systems.

If the second interpretation is correct, the appropriate response is not to lend to Ireland – to pile yet more debt on the country’s existing debt – but to properly capitalise the French, German, and British banking systems so that they can withstand the inevitable Irish restructuring.

But European officials are scared to death not just by their banks but by their public who don’t want to hear that public money is required for bank recapitalisation. It’s safer, in their view, to kick the can down the road in the hope that something good will turn up – to rely on “the luck of the Irish.”

As John Maynard Keynes – who knew about matters like reparations – once said, leadership involves “ruthless truth telling.” In Europe today, as recent events make clear, such leadership is in short supply.

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  1. Richard Kline

    Eichengreen: “In Europe today, as recent events make clear, such leadership is in short supply.” Not merely in Europe but in the world as a whole. To me, this is the salient observation of international policy action in response to the bursting of the Securities Bubble thus far: the pervasive, indeed near total, failure of political leadership. The failure not merely to generate ‘solutions’ nor simply to contain ‘problems’ but in fact the failure of most political leadership to meaningfully engage with _problems_. Political leadership have had extraordinary scales of resource at their disposal to heave hook rugs and carpet bombs of paper over massive, non-self-solving problems, resources put in their hands by central banks among other enablers, and so political leaderships have heaved and averted their gazes from the result.

    This aspect—gross leadership incapacity in developed economies—strikes me as a phenomenon of real interest regarding the present crisis in and of itself, which is not to say that I readily understand it. Leave aside the economic and financial particulars of crisis and consider it as a socio-political conjuncture: to solve the crisis, someone has to engage with it, so presuming that someone _could_ engage with it (a result by no means certain), why is it that present leadership doesn’t? Is it that the systemic complexities of this particular crisis are simply so snarled that minds refuse to un-plait the bloody spaghetti? Is it that said leadership operates in a 24/7 news-and-briefing environment whose pace paralyzes interaction with the general by forcing so many particulars at ones attention? Is it the 365-day-forevermore election cycle—most of these developed economies are putative democracies of republican form—which rucks up tired little shills in suits too big for them good at nothing but standing still before a camera? Is it the outcome of the creeping fungus of technocracy, where every problem is deemed the purview of a qualified ‘experts’ who have only to press the proper button on their consoles to make everything better; therefore the only role of political leadership is ‘to call for calm’ until the Mammonmachine reboots? Is it because the governing class is not _personally_ feeling much if any pain, being too rich and too insulated, so that sticking ones fingers in ones ears not to hear the squeeks of citizen pips being mashed in the gears and the ruins is a functional approach, i.e. ‘muddling through’ in the choice historical phrase for those at the wealth class level. While all of these appear to me to be factors, with many more that others are welcome to add, they don’t seem by themselves sufficient explanation to our leadership insufficiency. I might add another here: that the types of personalities capable of rising to the top in electoral politics like globules of fat in stew are not those with any capacity, let alone flair, for actual governance; indeed, if one is any _good_ at governance they are automatically extruded from ‘the process’ as unmanagebly autonomous to the 1% who fund political factions and benefit most from them.

    A larger issue is simply that most leadership/governance is poor to bad most of the time most anywhere from the historical standpoint. I don’t consider that a proven conclusion, but it’s certainly the most evident working hypothesis. People are complicated, and societies are hard to manage outside of gross repression (which is hard to sustain, thankfully). Actors are inevitably self-interested in processes where that kind of bias near guarantees suboptimal outcomes. And so on, and so on, but look folks, folks just aren’t particularly good at governance, and societies are not notably manageable, and thus those good at leadership are likely to get frustrated and pursue interests where they can actually lead, such as armies, corporations, and sporting clubs. One could even advance an hypothesis—I haven’t tested it but I rather like it—that in the main leadership is bad, and one only gets good leadership as a direct result of crisies because the normal run of bad leadership fails so quickly and spectacularly in those instances that some few actually good at leadership or governance get a shot at it, by hook or by crook or by acclaimation. That is certainly true for military leadership, though to be sure political leadership has different selection dynamics much of the time.

    All that’s to say that the present flatulent, trembly-lipped inefficacy of governmental leadership in this particular crisis isn’t historically unique, it’s the historical norm. And a kind of norm which can run for quite a long time. One could think of periods such as 1530-80, 1720-50, 1885-1914 in Europe, or the first half of the 19th century in China, or many other times when leadership was conspicuous by not only its absence but its near impossibility. Those periods weren’t selected at random, and should fairly be balanced by counterexamples, but they all lead to the collapse of their particular ‘systems’ and the re-ordering of the problem sets behind them. There is a consequence to an extended period of non-leadership, of not knowing where you’re going or how. Problems can be run from or run around only so long before something valuable runs out or gets run over.

    We’ve had no leadership anywhere for at least fifteen years, not to call the leadership before then necessarily good. (Pick you’re own deflection point; I mean, I do.) The ruling class isn’t worried by either ‘Long War’ or ‘Long Slide’ and hence there’s little urgency at their altitude to engage with sticky, messy, ultra-disruptive problems. So we can safely assume that fat asses will correlate with fat heads for some time to come. No one can really say when ‘too long’ runs the clock out on muddling through; could be fifteen years, could be five, could be thirty. Depends when you started counting from. But extended absence of leadership turns failure into catastrophic failure. And that, on present evidence, is our current trajectory: Waiting for Goddamn.

    [Barry Eichengreen, btw, is one of my preferred observers.]

    1. Dirk

      Sounds like a philosophical crisis. Nonetheless, in this local problem of debt that their leaders have foisted upon the Irish, this article and others by Richard Smith, etc., make me optimistic. The Irish are a well educated lot, and if effort is spent to make them aware of the issue (assuming all of them don’t know it already), I think them demanding a large haircut from the bondholders and getting it or just defaulting completely could be likely and an important step forward for everyone.

    2. Sufferin' Succotash

      An Apres Nous Le Deluge attitude is pretty tempting at the moment, though I’m not sure if your historical periodization holds up under close scrutiny.
      I agree that there’s a strong sense of living through the twilight period of an Old Regime, or as George Orwell wrote regarding the 1930s, of sitting in a drafty room and waiting for the guns to start going off.
      The parallels with the 18th century get more convincing when you look at the role that war played in the unmaking of old regimes back in the day. Whether preparing for wars or fighting wars, the costs involved were too much of a burden for either the 18th century British Empire or France’s absolutist monarchy. In both cases something had to give and in both cases the consequences were revolutionary: 1776 and 1789. Without the costs of preparing for and waging war both regimes might well have survived.
      We’ve seen the same thing happen over the past 40 years regarding the Soviet Union and the USA. The USSR eventually fell apart trying to keep up its end of the Cold War. The US might have learned a thing or two from the Soviet case, but, as the late John Belushi might have put it, Noooooooooooo! So now, the US is facing the payoff with two possible consequences: territorial “restructuring” like Russia and former Soviet republics (or the British empire after 1783), or revolutionary transformation as in France after 1789.
      Quoting Aldous Huxley, “you pays your money and you takes your choice.”

      1. Richard Kline

        So Sufferin’, my examples are not rigourous, no; just off the cuff and, as I indicated, selective. Indicative of my mood more than my certainty. I could have as well pasted Yeats’ ‘Second Coming’ in the comment box to the same end.

        Your examples of 1776 and 1789 as war-debt driven strike me as sound. It would be easy to envision the French Bourbons hanging on another century but for the weight of war-debt. —But without the wars there were no Bourbans, no Empire, and for good matter no ‘France,’ so war was baked into the souffle. It’s little understood by most, though I expect you have the background, how profound for the 18th century states were the extraordinary costs of standing militaries and the wars for which they were deployed.

        And as of today, “You pays your money and _they_ takes _their_ choice,” they being the oligarchy. I wouldn’t envision a 1989-style implosion moment for the US, however. More like a sequential failure of the French post-War type, one failed venture after another, each closer to the core; failed because already lost as time’s page had turned but pride said Not for US. After Afghanistan, then Pakistan; after Pakistan, Egypt; after Egypt, Korea; after Korea, Mexico: each stupider, dirtier, less achievable than the one before: all to a background of currency crashes, permanent double digit unemployment, and Keystone Gestapo bungle-uglying at home until it all . . . just . . . stops. The RotW is damned tired of our stuff and nonesense, that much is plain, and the only real crush-crisis to envisage is all of them piling out the door away from us at the same time come the day.

    3. LJR

      Roosevelt acted in a time when the sea of computations we swam in constituted marks on paper placed there by humans. Television was cutting edge and radio was the dominant broadcast media. Roosevelt, through conversation and thought, could model the system accurately enough to propose changes that he didn’t think would destabilize the system catastrophically. The system back then responded rather slowly compared to today’s “flash crashes” and high speed trading. Leadership was a word that most people could attribute to Roosevelt regardless of their opinion of his policies.

      Today we live inside an economic “black box” tended by quants with their gorilla overlords standing behind them with baseball bats in hand. The systems we have are not “designed” but are those that emerged as a consequence of our lowest emotions – greed and avarice – powered by millions of computers that use elaborate and probably unstable feed forward predictive algorithms that attempt to profit using any legal means including dithering the market to shake out the weak hands and then come in to buy on the self-generated weakness.

      The point being that we simply can’t understand or model what’s happening right now with money flows. Anything we do to correct or “throw sand in the gears” will be greeted with a chorus of wails by the moneyed interests who are doing quite well with things as they stand. Most likely the system can’t be slowed down without inducing instabilities that will cause it to crash.

      Our true overlord today is not human but, rather, a speed of light terabit/second information processing network that obeys no laws but its own. Those “laws” are more like everchanging strange attractor basins and god knows what happens when a dynamic system this size, sitting on the edge of chaos, is pushed over the edge of a hillock by some well-meaning “leader.” There’s no way of predicting what will happen next past saying it’s not likely to be a desired state. If everybody rushes to one side of the ship in a panic, the ship will certainly sink. Neither the Fed nor the ECB has the ballast needed to keep it afloat.

      Not to say there aren’t some humans I’d like to see fed to the lions. But, I’m afraid, by the time that comes to pass the system will be in tatters and we’ll individually be concerned with survival more than revenge.

      Until the system encounters a positive feedback loop that makes it fibrillate we can simply expect more of the same incompetent expostulations from the lackeys of the rich who infest our political system. Meanwhile the weapons manufacturers are gearing up production for what usually happens when a society goes nuts. War is the time tested way to distract attention from problems at home. And it’s a very profitable undertaking for the banker class.

      In this country we spend our time collecting “friends” on Facebook but we can’t seem to create politically viable Home Owner’s Associations in our own neighborhoods. That says a lot to me. Effective politics starts at home. If we can’t govern our neighborhoods then what hope for choosing effective leaders? How can we judge a skill we don’t individually possess?

      Democracy has failed. Our problems are too complex and what we end up with is a farce serving only to keep those in power who please their real masters – the one percent solution. I have to give them credit – the bankers and the Chinese. They have done an outstanding job of turning us from citizens into consumers. Not that we haven’t done our share as well!

      There’s an old saying in Maine when asked how to reach a certain destination, the laconic response is, “Well, I wouldn’t be starting from here.”

    4. LJR

      P.S. Samuel Beckett certainly hit home, didn’t he? We may not meet Godot but we’ve now had the “pleasure” of meeting Pozzo, the banker and Lucky, the quant. “It passed the time.”

    5. Give Sympathize Control

      Why is it that present leadership doesn’t engage with our current problems? Probably because for the past 25 years or so they have been increasingly dependent on consultants, experts, and other soothsayers to do their thinking for them. Public officials have been outsourcing the “problem analysis” and “problem solving” parts of leadership for so long they probably don’t even remember that they are supposed to have those capabilities themselves rather than just hire a crony with a fat guvmint contract to do a study (which might or might not be of valid methodology) and propose a solution (which might or might not work). They probably even need a consultant on hand to tell them to hire a consultant and which one. And unfortunately for us, their crony-consultants are the ones who created the problems in the first place, so of course the crony-consultants have no idea how to solve them.

      1. Externality

        Our current problems are boring to the globally-oriented elites in DC.

        Why spend time worrying about “minor” domestic problems when you can spend your time on the decades-long Middle East peace process, or the G-20, or going to the endless multinational forums on economics, global security, etc? Going to major international conference means getting to hob-nob with your “peers,” live in a mini-city built especially for the conference and isolated from the local peasants, and avoid dealing mundane domestic problems such as poverty. What is ensuring repairing infrastructure compared to saving the world?

        Just like businesspeople delegate running their houses to maids, nannies, and groundskeepers so that they can focus on travel, our “leaders” delegate running their country to experts who follow what their respective fields consider the “best practices.”

        Or, consider, how Richard the Lionhearted would periodically come back to England from the Crusades, express horror at the people running England in his absence, punish a few, and convince the people he needed more taxes so that he could go back to Crusading. Of course, the “punished” officials and moneylenders were sharing a portion of their profits with him, and would do so again, after they were moved elsewhere in England.

    6. matthew slaughter

      i was about to rant about the failure of modern hierarchy to promote people who are interested in solving problems.

      then i remembered tolstoy. its always been this way. people at the top stay at the top because they are good at… politics. politics is the art of not getting blamed for anything while getting credit for stuff you didn’t do.

      who is really a leader? the guy who goes into the field of conflict alongside ‘the troops’ and gets blown up by a random cannonball. that is the great leader. he is not going to make it in the parlors or salons, or our modern chat shows. he doesnt have a bestseller or get a movie deal. he probably doesn’t care either.

      1. Richard Kline

        So matthew, Tolstoy did have an interesting historical philosophical perspective on this, which it appears you’ve read. I’m by no means convinced of his ‘nobody knows nuthin’ contention, but it’s an interesting one, and though I didn’t cite it it’s echo was on my mind when I commented above.

  2. Jose L Campos

    Kicking the can down the road, a much used trope that is meaningless because life is a perpetual kicking the can down the road. We have breakfast to postpone hunger until lunch, we accept a coronary bypass in order to postpone death. So what is new? New is the repositioning of forces in Europe. Where they are going I don’t know but I know now something with heart warming certainty and it is that all the prescriptions given by economists are simply reflections of their positions in the social tower. Europe is unwittingly experimenting, the motor of history is not leadership it is contingency, the unaccountable, the unforeseen. Some people like Napoleon on horseback seem to be in control and then nothing, death. We may perhaps be in one of those historical moments when old verities are found to be empty.
    History is understood always in retrospect and that word “understood” has an immense baggage of ignorance.

    1. Richard Kline

      So Jose, not to be harsh but I flatly reject the notion that historical change is principally a contingent matter. That is a philosophical position but I don’t see that the evidence supports it. Not that Great Men ever run things as they think, either. If one takes a perspective closer to the longue duree, as I do, historical change is something viewed within long-term trajectories of continuity. Those trajectories do change; change their direction, change their slope, change their composition. But they change slowly and from the margin in the main. Contingents may eventuate ‘events’ but they only potentiate ‘processes’ is one way I’d put it.

      And that perspective is a significant part of the reason I don’t see a rupture in the ‘movement to Europe’ in the present kerfuffle over sovereign debt amongst minor, formerly autonomous nations within the EU. Practically speaking, Ireland and Greece were both ‘failed states’ as of 2006, both for reason of debt if that for reason of entirely different policies: the former had a bubble whilst the latter had a swindle. But here’s the deal: fiscal consolidation was _ALWAYS_ on the cards for the EU. The public has had its heads in, well, in personal holes in the sand because the European publics are attached to the fading banner of independence. Europe won’t get to fiscal consolidation in one bound, and likely won’t get there without serial crises exactlty because of the leadership deficit.

      So consolidation is likely to come in the back door, not by treaty but by small print in a concordat. For example, the ECB is going to have to guarantee individual state debt going forward for the market to accept a ‘Deutsch rate’ for said debt; otherwise (semi)sovereign debt there will only sell on the market at a penalty rate which will make the issuer uncompetitive with its neighbors. So in essence the formerly autonomous states there are going to police _their own_ fiscal policies going forward because they won’t get the ECB seal of approval necessary without such self-control. This is the severed head cum ‘football’ being booted back and forth amongst heads of putative state their now. Of course that process is immensely complicated by the determination at present of Germany, France, and the ECB that their will be no cramdown on existing bank bond debt, in an effort to protect their own personal plutocrats and the institutions in question. That last policy is, to sum, egregiously and selfishly wrong, and thwarts their parallel goal. But there is a nut of sense in that fist of avarice: once the first bonds are shaved, they’ll all get shaved. One writedown will make it politically impossible to withstand the pressure for others, viz if in Ireland, then so in Spain. This is the folly of kicking the can down the road in the frequent metaphor of Yves and in this instance of Eichengreen. Personally, I would hope that the Irish reject the shackle insisted for them by their putative state partners, that the banks are failed, and that the ‘penalty’ settled upon instead by the French and the Germans is a far more functional form of fiscal consolidation. But it would appear that such a result will only be arrived at their after all other efforts fail; pity, that.

      1. Jose L Campos

        Wellington was almost defeated and Blucher appeared with his Prussians and Wellington was crowned with the laurels of victory and fame. Britain was being harassed by Northern peoples and then count Boniface rebelled in Africa and Honorius had to send his troops to Africa and let the Britons free to defend themselves and Britain was lost. But that loss was probably a benefit because England then became one of the jewels of our civilization.
        I acknowledge that my position is in practice useless that we all have to believe in constructs of our own minds in order to act. Whether we prosper or fail is independent of our wishes and then we use language to explain away what is really unknown. I appreciate your comment.

      2. Sid

        IIRC, the internal rules of the Eurozone were supposed to provide a measure of control over the fiscal policies of Eurozone members.

        That has not worked out so good. The Greeks gamed the system, the Irish politicians were too close to their banker constituents, Spain is in the process of getting rocked hard by a slo-mo property crash, Portugal has been in the doldrums for a long while.

        I am not sure that the ECB or whatever could do much better, especially if the locals are intent on playing along.

  3. DownSouth

    So the IMF has realists and idealists too, Eichengreen being very much in the realists’ camp.

    Eichengreen seems intent upon salvaging as much for his banker employers (Or is it “former” employers?) as is possible. For instance, he asserts “A bright red line could have been drawn between the third of the government debt that guarantees the obligations of the banks, on the one hand, and the rest of the government’s debt, on the other hand.” Oh well, as the old saying goes, Pigs get fat. Hogs get slaughtered. Two-thirds of a loaf is better than no loaf, no?

    Well no. Two-thirds a loaf is better than no loaf only for realists, like Eichengreen.

    Here is a definition of realism and idealism as they relate to diplomacy from The Encyclopedia of American Foreign Policy:

    Philosophically, realism and idealism comprise opposing approaches to the definition and pursuit of national objectives abroad. Realists tend to accept conditions as they are and to define the ends and means of policy by the measures of anticipated gains, costs, necessities, and chances of success. Idealists tend to define goals in ideal, often visionary, forms, and presume that the means for their achievement lie less in measured policies, relying on diplomacy or force, than in the attractiveness of the goals themselves.

    It is important to remember that the IMF is and always has been nothing but the enforcement arm and think tank for the international criminal banking cartel. The inordinate role the IMF played in Argentina’s economic demise has been well documented in two studies: Rise and Collapse of Neoliberalism in Argentina: The Role of Economic Groups by Miguel Teubal and Argentina’s Quarter Century
    Experiment with Neoliberalism:
    From Dictatorship to Depression
    by Paul Cooney.

    My ruminations should be taken neither as a blanket condemnation of Eichengreen nor of his realism. We all saw what happened in Iraq and Afghanistan when the idealists (Bush, Cheney, Rumsfeld, Wolfowitz, Frum, Perle, etc) got their way. And as the The Longshoreman Philosopher, Eric Hoffer once said:

    Every era has a currency that buys souls. In some the currency is pride, in others it is hope, in still others it is a holy cause. There are of course times when hard cash will buy souls, and the remarkable thing is that such times are marked by civility, tolerance, and the smooth working of everyday life.

    1. DownSouth

      Hoffer argued that effective leadership achieves a delicate balance between realism and idealism, that neither the cold rational calculation that inheres within classical economic theory nor the idealism of a Rousseau can serve a nation well:

      The leader has to be practical and a realist, yet must talk the language of the visionary and the idealist.

      It’s a tightrope that few leaders have the necessary skills to walk.

    2. Sufferin' Succotash

      I don’t know if PNAC Inc. could be slotted into an idealist-realist axis.
      Post-1991 US imperialism, exemplified by Cheney, Rummy, Wolfie Oh My, consisted partly of crude “crackpot realism”. You could see that in the fashionable buzz phrases of the period: “new world order”, “revolution in military affairs”, “world’s only superpower”–coded ways of saying that thanks to the Soviet implosion and to US military technology, America is now unquestionably Uber Alles. At the same time, there was an element of helium-headed idealism as well–see Fukuyama’s “End of History” essay.
      In any case, it was this kind of sloppy, fatuous, ill-informed thinking that over the past 20 years has put the US into the position that the Soviet Union was in approximately 20 years ago.

      1. DownSouth

        Fukuyama heralded the supposed triumph of liberal democracy over the other two dominant 20th-century models of government: fascism (state capitalism) and communism (state socialism).

        A consensus on liberal democracy was especially promising. It laid the basis in Europe for the European Union, which institutionalizes liberal democratic principles on a regional level.

        A lot of people are now waking up to the fact that the brand of “liberal democracy” practiced by the West really isn’t all that democratic. Democracy in the U.S. and throughout Europe is being shown to be pretty superficial.

        I believe Hoffer would put Cheney, Rummy and Wolfie in the same category as Hitler, Franco and Mussolini. You call the ideology of the neocons “crude crackpot realism.” But you have to remember that the Nazis also claimed to be cool-headed and realistic. Nazism “mirrored scientific knowledge,” according to its most avowed disciples. Hoffer disagreed.

        If you’ll take a look at Peter Adam’s Art of the Third Reich I think you can see that Nazism, despite the claims of its adherents to the contrary, was an extremely idealistic ideology. The ideals of the Volk, the blut, the Nordic master race, the German soil, and the claiming of the accomplishments of certain ancient civilizations as being uniquely “German,” are all highly idealistic notions, and hardly realistic. Here’s how an SS Training Manual put it:

        The high cultures of the Indians, Persians, Greeks, and Romans were Indo-Germanic creations. They unmistakably show Nordic creativity… Even today we feel an affinity with those cultures of the same racial origin. People of other races also created cultures, but when we approach the culture of ancient China, of Babylon, of the Aztecs and the Incas, we feel something different. They too are high cultures but they are alien to us. They are not of our race; they transmit a different spirit. They have never reached the same heights as those created by the Nordic Spirit.

        I don’t see how the ideology of Cheney, Rummy and Wolfie is any less idealistic. The Vietnam War marked the triumph of people’s war over the sort of obsolete war system the neocons championed. The collapse of the Soviet Union and its satellite regimes in Eastern Europe were a sweeping demonstration of the power of “politics” without violence. But whether people’s war or nonviolence was the means, the end was always sovereignty. And the neocons’ racial ideologies are certainly no less evolved, and no less unrealistic, than those of the Nazis, as Edward W. Said lays out in Orientalism.

        I just got through buying a large collection of vintage art books, and included was Five Millenniums of Art in Mesopotamia by E. Strommenger and M. Hirmer. It’s loaded with illustrations, and I’d say a good half of them were of objects housed in the Museum of Iraq in Bagdad. Some of the objects date from 5000 B.C. Some are quite primitive, but some, such as those from the Mes-kalam-dug period (2685-2645 B.C.) and the Gudea period (2290-2255 B.C.) must rank amongst the most beautiful and sophisticated art objects in the world. Where are these art works today? The sneering disdain the neocons exhibited for these objects and the cultural achievements they represent indicate that the Nazi racial ideologies are still alive and well in the United States.

        1. Externality

          Downsouth writes:

          The sneering disdain the neocons exhibited for these objects and the cultural achievements they represent indicate that the Nazi racial ideologies are still alive and well in the United States.

          The overwhelming majority of the neo-conservatives are J*wish and want to create, in the Middle East, a ethnically J*wish Greater Israel to control the Middle East. Many of their views on, for example, the need for the expansion of Israeli settlements or intermarriage between Jews and non-Jews in Israel, could easily have been taken from the Nuremberg laws or rallies.

          And yes, there were J*ws who supported the National Socialists. Luftwaffe Marshal Erhard Milch, for example, was repeatedly promoted after Herman Goering disregarded evidence that Milch was J*wish, stating “Wer Jude ist, bestimme ich” (I decide who is a J*w). After the war, Milch was convicted of war crimes and crimes against humanity, including, but not limited to, his use and mistreatment of slave laborers. Others were allowed to serve the Reich or its defense contractors (e.g., IG Farben) because they served in World War I, were early Nazi party members, or had valuable technical skills.

          1. DownSouth

            Surely the problems are more global than that and cannot all be laid at the feet of the Jews.

            The neocons want world hegemony, not just hegemony in the Middle East.

            The neocons play the religion card in the Middle East for a simple reason: It is there to be played. If the religion card wasn’t there, they’d find some other idological card to play. The fact that there’s no Jewish-Muslim conflict in Latin America certainly hasn’t crimped their style in that region.

          2. Externality

            “The fact that there’s no Jewish-Muslim conflict in Latin America certainly hasn’t crimped their style in that region.”

            Actually, the neo-cons claim that the Jewish-Muslim conflict does extended to Latin America, with the US, international banks, and Jews being threatened by a hostile Red-Green alliance. Reds (Hugo Chavez, secretly communist Russia) are purportedly conspiring with Islamic Greens (Iran, Muslim Brotherhood, Al Queda, Hezbollah) to overthrow the US, nationalize assets, promote Islamic terrorism, default on debts to foreign banks, and spread antisemitism. Venezuela supposedly has secret Iranian bases, training camps for Hezbollah, is working on WMDs, etc. Some or all of these groups, the neo-cons claim, are also working with the Irish Republican Army.

            See for example,

            _Shadow World: Resurgent Russia, The Global New Left, and Radical Islam__

            “FBI Raid in MN Reveals New Global Terror Alliances:
            The FBI arrests affirm an emerging terror alliance between American-based leftists, Islamic terror organizations, Colombia’s FARC, and Irish Republican groups.”

          3. ip

            Hmm, those J*ws are everywhere… Somehow, you fail to mention that many of the most vocal opponents of Iraq war (e.g. senators Feingold, Levin, Boxer) were also J*ws. And many people now pointing out the inconvenient truth about Irish debt / austerity (Eichengreen, Krugman) are also Jews.
            Now, some people would think that J*ws, just like non-Jews, have diverse opinions and often belong to opposing camps.
            Other people however, would, in a post about Ireland, bring up religion of Milch’s father (why not discuss Jonas Salk’s religion, once you are at it?). You are entitled to your convictions, of course; as I am entitled to my conviction that you an anti-S*m*tic lowlife, asterisks and all.

          4. Externality

            Actually, the neo-cons claim that the Jewish-Muslim conflict does extend to Latin America, with the US, international banks, and Jews being threatened by a hostile Red-Green alliance

          5. matthew slaughter


            Richard? Richard Nixon? Is that you?

            Wandering the halls at midnight, talking to Lincoln’s portrait, going on and on about the Jews and the Blacks?

            If only Richard Nixon had had the internet! He could have posted his lunatic ravings on message boards. Then again he probably would have had all of them recorded too…

            Ah but Nixon, your greatest enemy was always yourself.

      2. Hugh

        We were well on our way to kleptocracy even 20 years ago, but I still think that’s a great point. Hegemons become hegemons by being ahead of the curve, even if that curve is a bloody rapacious piece of work. But once in place as hegemons, they invariably suffer from the “fat ass” syndrome. They sit back on their “laurels” and let the curve pass them by, and so lose their hegemonic position. There is no morality in any of that. It is just the historical pattern. All that we proved in our time as hegemon is that we were no different.

  4. M.G. in Progress

    EU bonds is a solution to the debt crisis that I had been advocating since March 2009 on
    Never say never again…I believe it to be the right contingency plan.
    I have been writing about again recently on
    When EU foreign currencies were attacked by speculation we got the Euro to replace them. If now we get sovereign bonds to be attacked we need the EU bond to replace them…
    It’s true that simple things are never done or understood immediately….

    1. Thomas Barton, JD

      An EU bond will merely perpetuate this unsustainable debt. Bondholders must be brought into this universe of money and risk where they bought bonds at a time of gross disregard for the effects of leveraging. Now the lever must snap back on those who think their ilk is immune to the vagaries of what we humans call money.

    2. Paul Repstock

      This looks suspiciously like threads from the same piece of cloth to me. I can only too well imagine that the “speculators” attacking individual currecies to force adoption of the Euro were aided and abbeted by central bankers in France and Germany?? Isn’t the same true of the bond situation? What is next? The local police forces are judged unable to deal with citizen unrest in greece and Ireland..enter EU forces or perhaps just Nato forces…Then, the old national governments can be replaced in the same manner. No need to have those pesky elections where politicians promise all sorts of things they can or won’t deliver anyway, specially when an external authority can just appoint some compliant puppet functionary.

      On the bright side, I think they may have miscalculated the timeline. I don’t think the Euro Government can handle all the live grenades they are now juggling. If there is a single government in Europe with the integrity to say no to the payolla, then everything will crash. Too bad Iceland was not larger.

  5. Jake

    With regard to leadership, Sinn Féin, is now more popular than the current ruling party, Fianna Fáil.
    And, Brian Cowen’s approval rating is lower than the ten year bond. Pretty amazing…

    1. Paul Repstock

      I wouldn’t cheer for Sinn Féin. Where were they when all this debt as being concocted?? If they hadn’t had their snouts deep in the trough, they might just have found voice to complain about the governments actions.

  6. F. Beard

    For internal devaluation to work, therefore, the value of debts, expressed in euros, has to be reduced. Barry Eichengreen

    Yep. If wages are forced to come down then the debt of the wage earners should be forced down as well.

    Or alternatively, the entire population could be bailed out with new, debt and interest free, legal tender fiat. That would fix the banks too. Too bad for Ireland that it gave up that right.

  7. Jake Watts

    Seems things are getting a little dicey in Europe. The Spanish government has just pronounced a “state of alarm” to militarize all air traffic controlers who have walked out, effectively shutting down all flights. They are now under direct military control and if they do not return to work face prison. This is the first time for the government to use the state of alarm in the history of current democratic Spain.

  8. Hubert

    good article from Eichengreen but, as most, misses the crucial point: Ireland can default at any time whenever they like. Sure, it would have been better to default on bank obligations than on loans from the Funds – but they still can.
    As does Greece.
    Sure, after defaulting hard times will come. But they will come anyway and for everybody. Party is over.
    5,8% is not realistic but so what? Ireland will not “pay” it in a sense that they will only send money loaned to them back.
    MEanwhile the banking systems are bleeding Euros out of the Periphery into the Core.
    Ceterum Censeo: There is no solution for this thing. The blow-up can be postponed as long as new money can be created to fill old holes. But meanwhile the holes will get much bigger due to capital flight.
    So please, let´s get over with it …..

    1. F. Beard

      Ireland will not “pay” it in a sense that they will only send money loaned to them back. Hubert

      Money that was created from nothing via keyboard entries in German and French Banks? Is debt to counterfeiters morally valid? To ask that question is to answer it. No!

  9. leroguetradeur

    The Bourbons had learned nothing but forgotten everything.

    Nice article. The bondholders haircut is coming, the only question is when.

  10. Sean

    People here in Ireland are well aware of the sell out by our own politicians.Thats why the governing party ,Fianna Fail, is now at 13% in the a ‘Red C’ poll published here yesterday.Brian Cowen ,the PM,came in at 8% approval.

    Its also true to say there is a feeling of quiet despair,helplessness amongst the population.People are punchdrunk emotionally from the incessant gloom and the trashing of our identity through loss of sovereignty.

    In my opinion,Nigel Farage,of the UKIP party, summed this up brilliantly in a speech before the EU parliament on the 24th November (its on U tube).
    Its also true to say how quickly enmity towards the EU has risen in recent weeks.

    If the euro collapses then the Maastricht treaty which enabled the creation of the euro also falls.As each EU treaty is layered upon the previous ones and interdependent this logically means the Nice and Lisbon treaties will also be defunct.
    The ten accession states which became EU members in 2004 will no longer be members and the EU itself will start to unravel.
    Like an increasing number of the populations in Europe I too long for the destruction of this tyranny.


    The Bank Lobby is simply too strong for most governments.

    What for the Bourbons goes, goes for the Banks: they’ve learned nothing and forgot everything. A current report in the Netherlands that Bank self regulation does not worked. Big Bugs and Bonusses still rule.

  12. Hugh

    I agree with Richard Kline. This is about the failure of the elites. We have it here. Europe has it too. For them, it occurs at the European level, at the nation-state level, and at the executive corporate level.

    Eichgreen is correct too that this is another non-fix, in a long line of non-fixes.

    I am still amazed by the obvious hucksterism of our elites. Again and again we see the embrace of policies by our elites that we know must fail, not because we are liberal or conservative, but because the math doesn’t work. These aren’t even difficult calls.

    People are probably tired of me invoking kleptocracy, but it explains why elites turn repeatedly to solutions that don’t work. It is not about fixing the problem. It is about keeping the casino open and the stealing going as long as possible.

  13. required

    Is it just me or does anyone else see the entire world economy for what it is, an enormous ponzi scam?

  14. Psychoanalystus

    It is obvious that democracy, capitalism, the West, and current leadership have all failed. It îs only a matter of time before another Hitler or Stalin rises, with equally disastruous results.


    1. solo

      Quite so, Psychoanalystus, and thank you for being the poster who finally names the system for what it is, namely, “capitalism.” Your political prognosis is also spot on: Mature capitalism in acute crisis breeds fascism like stench on a corpse. We will be hearing much more from such as Palin, Beck, Limbaugh and their petite bourgeois “base” in the near future. Notable too: Many posters eloquently decry the corrupt incompetence of our rulers. Again, quite so, but the real point is the failure of the capitalist system to work as idealized by Adam Smith et al.; whereby a bunch of greedy, myopic folks bumping heads would, by the very randomness of their collisions, unconsciously produce a law-governed system working for the benefit of all. Arguably, this helter-skelter procedure “worked” up until the twentieth century; but the advent of classic fascism signaled that the “invisible hand” had transmuted into the club of the brute. And all of the above makes no mention of the medium-term prospect of global warming, which will make the economic idiocy of our rulers look benign by comparison. (Consider the hurricane Katrina disaster a harbinger.) Alas, the only alternative to capitalist insanity has failed–I refer to that collective and conscious regulation of society generically known as “socialism.” It remains as true today as a century ago when Ambrose Bierce declared, “Socialism is the true principle of [small-“r”] republican government. Unfortunately, no people in the world is fit for it.” –So what do you “do” when there is nothing to be done? Answer: Work on acceptance. Societies fail; species fail. These things happen.

      1. Yves Smith Post author

        You misrepresent Adam Smith, as has the economics discipline. From ECONNED:

        In 1776, Adam Smith published The Wealth of Nations. In it, he argued that the uncoordinated actions of large numbers of individuals, each acting out of self interest, sometimes produced, as if by “an invisible hand,” results that were beneficial to broader society. Smith also pointed out that self-interested actions frequently led to injustice or even ruin. He fiercely criticized both how employers colluded with each other to keep wages low, as well as the “savage injustice” that European mercantilist interests had “commit[ted] with impunity” in colonies in Asia and the Americas.

        Smith’s ideas were cherry-picked and turned into a simplistic ideology that now dominates university economics departments. This theory proclaims that the “invisible hand” ensures that economic self-interest will always lead to the best outcomes imaginable. It follows that any restrictions on the profit-seeking activities of individuals and corporations interfere with this invisible hand, and therefore are “inefficient” and nonsensical.

        According to this line of thinking, individuals have perfect knowledge both
        of what they want and of everything happening in the world at large, and so
        they pass their lives making intelligent decisions. Prices may change in ways that appear random, but this randomness follows predictable, unchanging rules and is never violently chaotic. It is therefore possible for corporations to use clever techniques and systems to reduce or even eliminate the risks associated with their business. The result is a stable, productive economy that represents the apex of civilization.

        This heartwarming picture airbrushes out nearly all of the real business world. Yet uncritical allegiance to these precepts over the last thirty years has produced a world in which corporations, especially in finance, are far less restricted in their pursuit of profit. We show in this book how this lawless environment has led the financial services industry to pursue its own unenlightened self-interest. The industry has become systematically predatory. Employees of industry firms have not confined their predation to outsiders; their efforts to loot their own firms nearly destroyed the industry and the entire global economy. Similarly destructive behavior by other players, often viewed through a distorted lens that saw all unconstrained commercial behavior as virtuous, added more fuel to the conflagration.

        Some economists have opposed this prevailing ideology; indeed, comparatively new lines of inquiry focus explicitly on how economic actors can fool themselves or others into making poor, even destructive, choices.

        But when the economics profession has used the megaphone of its authority
        to dominate discussions with policymakers and the public, it has spoken with one voice, and the message has been the one described here. We therefore confine our criticism to these particularly influential ideas.

        1. solo

          Yves Smith: You seem not to have noticed that the very first sentence that you quote from ECONNED confirms my representation of Adam Smith. You then cite Smith’s caveat (firms like monopoly, etc.) as if it gainsaid the first sentence. The remainder of your quotation from ECONNED confirms that, in the contemporary age of oligopolistic capitalism, Smith’s caveat has been relegated to a PR disclaimer–on the order of G.W. Bush’s We Do Not Torture–while his laissez-faire concept has come to the fore in the hegemony of the oligopolists over not only the economy but also the political state. In any event, our apparent agreement on the behavior of modern oligopoly masks a deeper disagreement: You are a sincere and well-informed reformist, i.e., one who believes that we can “turn the clock back” to a more civilized capitalism. I disagree, observing that major economic evolution is as irreversible as major biological evolution. Yes, it would be a better world if you were right; but, by the same token, in all honesty you should consider your view without wish-fulfillment, asking like a good scientist, How Could I Be Proven Wrong?

  15. sean

    On rte (state run) radio today John Gormley , a government minister stated in an interview that the decision to guarantee all the banks on the 29th September 2008 was in fact made at a cabinet meeting days earlier.

    This is explosive for several reasons .It means government ministers lied to Parliament (The Dail) and to the people .It also means the reasons given that the banks were in immediate danger of collapse and that this was the first ministers knew of it resulting in the guarantee on the night of the 29th by the Prime minister and the Finance minister is a fabrication.

    Apart from the ramifications it has for Irish domestic politics a wider issue is involved.The finance minister,Brian Lenihan has also stated that Jean Claude Trichet,the ECB President was unavailable on the night of the 29th of September and so the decision went ahead without consultation with either him or other EU governments.
    This now is also a lie .Its probable ( and this will require more digging) that Trichet had been made aware of the situation prior to the guarantee.

    Bearing in mind the evolution of events in the past couple of weeks, the duplicity of the Irish government and the ECB is now approaching that of criminal sociopathy.

    This has the potential to hasten the end of the Irish government and blow the ‘bailout agreement ‘ with the ECB/IMF out of the water.

  16. Paul Wilson

    I think it is a touch arrogant of Professor Eichengreen to suggest successful politicians know nothing of politics. Perhaps they sense a political danger which even the finest economists cannot. After all, some of them must owe some measure of their political success to political judgement. Certainly more so than an economist.

    Angela Merkel is having a difficult enough time keeping her party and her coalition together without rushing out and spilling out the whole truth to the German people and the world. It would be the instant end of her political career and her replacement could be someone willing to deny the problem. She knows this and as a result moves forward cautiously, looking for opportunities to nudge things in the right general direction.

    I know this is maddening for technocrat economists who fancy they have all the answers (but cannot agree among themselves). But it is how it will be for now. It does not mean society will break down or we will have civil wars. It just means progress will be slow, politics will be difficult and recovery will be slower than if technocrat economists ruled the world.

    1. shtove

      The politics will move much quicker than you anticipate if the Irish government collapses.

      The leading party, Fianna Fail, is returning opinion poll figures of 13% (mentioned above and widely reported in Ireland yesterday). This party has been the mainstay in Irish politics since the 1930s, but is at risk of outright collapse. Irish polling experts are freely comparing the situation to the rout of the Canadian conservatives in the 1990s.

    2. Hugh

      The captain of the Titanic knew a lot about sailing. It didn’t stop him from plowing his ship into an iceberg. Politicians have been warned about the risks of collapse and the ineffectiveness of their responses. They have had the iceberg pointed out to them well in advance and they are sailing straight at it anyway.

      1. Paul Wilson

        What the politicians understand, and the economists don’t, is that you cannot lead people where they will not go, as Obama has demonstrated. Yes, there will be lots of failures because success will also require a lot of good fortune as well as political skill. But failure will not be because the political judgement of most of the leaders is inferior to the political judgement of economists or bloggers.

        Most of these leaders have reached their position because they have proven to have some ability to politically manage multiple, often conflicting, variables at different levels sometimes with nothing but the most vague information. They are also skilled at withstanding personal and group conflict and managing it to their benefit. It is an extremely difficult role to play, no less so now.

        1. DownSouth

          Your comment very much reminds me of this passage from Tolstoy’s War and Peace:

          The soldiers of the French army went to kill the Russian soldiers at Borodino not because of Napoleon’s orders, but by their own volition. At the sight of an army barring their road to Moscow, the whole army—-the French, Italians, Germans, Poles—-hungry, ragged, and exhausted by the campaign, felt that the wine was drawn and must be drunk. Had Napoleon then forbidden them to fight the Russians, they would have killed him and would have proceeded to fight the Russians because it was inevitable.

          Needless to say, Tolstoy did not subscribe to the Great Man Theory of history.

          The most outspoken critic of the Great Man theory was not Tolstoy, however, but Herbert Spencer. “[Y]ou must admit that the genesis of a great man depends on the long series of complex influences which has produced the race in which he appears, and the social state into which that race has slowly grown,” Spencer wrote in The Study of Sociology. “Before he can remake his society, his society must make him.”

          To counter the Great Man theory Spencer formulated the theory called social Darwinism. As Robert H. Nelson explains in Economics as Religion:

          Spencer is yet another of the economic determinists of the late nineteenth century and early twentieth centuries. No less than for Marx, the underlying workings of economic forces in history determine everything important that happens in society. In the advance of the world, old ideals like social justice, fairness, equality and so forth will do more harm than good; they impede—-even though they can never permanently frustrate—-the evolutionary workings of the iron laws of economic progress. Social planning is an impossibility because it is beyond human capacity to redirect the laws of nature, as they are embodied in the survival of the economic fittest.


          For Spencer, it might be a different kind of “invisible hand,” but some force beyond human control—-some kind of secular divinity operating in history, one might say—-was still acting to ensure that the common good would be served by the individual pursuit of self-interest in the market. It was necessary only that governments stay out of the way.

          Calvinist theology had decreed in the sixteenth century that those predestined by God for salvation might be identified by their success in a business or other calling. This notion would be carried over into social Darwinist thought where, as historian Robert McCloskey once commented, the economically successful—-the survivors of the evolutionary struggle in the marketplace—-constituted “the elite, the saints of the new religion.” The market winners “had proved their native superiority by their survival value. This will be recognized as the Puritan [and Calvinist] idea of ‘election ‘ in modern dress.”

          Tolstoy and Spencer both recoiled at the notion of great men and the types of interventions, the social planning that great men invariably undertake. But they arrive at this conclusion by very different routes. For Spencer it was counterproductive for great leaders to interfere with scientific determinism—-social Darwinism. For Tolstoy it was counterproductive for great leaders to interfere with divine determinism—the law of union and love (which cannot be fulfilled unless it is based upon the law of non-resistance to evil).

          To both Tolstoy and Spencer I say: “Hogwash!” Will and Ariel Durant in The Lessons of History got it right:

          When the group or a civilization declines, it is through…the failure of its political or intellectual leaders to meet the challenge of change.

          1. Paul Wilson

            A very interesting post. But I don’t believe my approach is deterministic. Merely that those skilled at politics are probably best at understanding the political challenges and risks. Or how it would benefit Napoleon to be slaughtered by his own troops.
            Not an easy calculation to make but I will take the political calculations of Angela Merkel and Nicolas Sarkozy over the political calculations of Professors Eichengreen and Krugman. Krugman believes it is as simple as some formula that Paul Samuelson proved in 1947.
            It is true they may be lacking in courage by not jumping out of the foxhole and charging across no-mans-land toward the enemy trenches. Sometimes courage is an over-rated quality. None of the professors or bloggers have to go out and try to sell these solutions to their own parties and their own nations. Or negotiate the details with a multitude of partners and interested parties.

          2. Skippy

            One big ALBA vs ALCA mosh pit.

            Ah…how soon some forget…

            U.S. controlling presence in the Triple Frontier

            The Argentine film called Sed, Invasión Gota a Gota (“Thirst, Invasion Drop by Drop”), directed by Mausi Martínez, portrays the military of the United States as slowly but steadily increasing its presence in the Triple Frontera (Triple Frontier, the area around the common borders of Paraguay, Argentina and Brazil). The overt reason for the increasing presence of U.S. troops and joint exercises, mainly with Paraguay, is to monitor the large Arab population which resides in the area. However, Martínez alleges that it is the water of the Guarani Aquifer which brings the Americans to the area, and she fears a subtle takeover before the local governments even realize what is going on.

            Similar concerns were lifted following both the signature of a military training agreement with Paraguay, which accorded immunity to U.S. soldiers from prosecution by the International Criminal Court (ICC) and was indefinitely renewable (something which had never been done before, while Donald Rumsfeld himself visited Paraguay and, for the first time ever, Paraguayan president Nicanor Duarte Frutos went to the White House), and the construction of a U.S. military base near the airport of Mariscal Estigarribia, within 200 km of Argentina and Bolivia and 300 km of Brazil. The airport can receive large planes (B-52, C-130 Hercules, etc.) which the Paraguayan Air Force does not possess.[45][46]. The governments of Paraguay and the United States subsequently ostensibly declared that the use of an airport (Dr Luís María Argaña International)[2] was one point of transfer for few soldiers in Paraguay at the same time. According to the Argentine newspaper Clarín, the U.S. military base is strategic because of its location near the Triple Frontier, its proximity to the Guaraní Aquifer, and its closeness to Bolivia (less than 200 km) at the same “moment that Washington’s magnifying glass goes on the Altiplano [Bolivia] and points toward Venezuelan [president] Hugo Chávez — the regional devil according to the Bush administration — as the instigator of the instability in the region” (El Clarín [46]). In October 2006, US President George W. Bush was reported to be negotiating for purchase of a 400 km² ranch near Marriscal Estigarribia [47][48].

            But Paraguay decided in October 2006 not to renew the immunity granted to US soldiers. The other members of the Mercosur trade bloc (Argentina, which is a Major non-NATO ally, Brazil, Uruguay, Paraguay and Venezuela, which is in the process of entering it have so far refused to grant immunity to U.S. troops [49].


            BTW do you remember this:

            Skippy…my kingdom for sanctuary!!!!!

  17. hermanas

    If the plutocrats are told, “Your dollars aren’t any good here.” the bottom falls out for them doesn’t it?

  18. Sufferin' Succotash

    “Most of these leaders have reached their position because [they hired high-priced consultants, pollsters and fixers who gave the voters the impression that] they have proven to have some ability to politically manage multiple, often conflicting, variables at different levels sometimes with nothing but the most vague information[and that] They are also skilled at withstanding personal and group conflict and managing it to their benefit.”

    There, that’s better!

    1. Give Sympathize Control

      Well, no most of these leaders have reached their position because our election processes have some deep, fundamental flaws. Which is because our social structures have some deep, fundamental flaws. Which is because our primate brains are in some ways still too primitive and in other ways too sophisticated for our own good.

      But once they manage to get in a position of power, they are awfully hard to dislodge because of their abilities to play and manipulate the game of “politics” to their advantage.

  19. leroguetradeur

    Its a sensible article, but the comments, well! This is really weird stuff. It is all down to the Jews, democracy has failed, capitalism has failed and will be replaced by something more to the commenters liking, the apocalypse is now…

    Get real people, get a sense of proportion. These are very serious problems. This is indeed one of a series of periodic credit bubbles and busts. They have happened in Western history for the last several hundred years roughly once every generation. We had our last major credit bubble in 1929.

    Credit bubbles are not specific to and unique to market economies. There is no evidence any other sort of economy is even possible, there are no living examples of them, and none that have been tried have stayed in existence long enough to verify the claim that they would be immune to credit bubbles.

    We will get through this, its unlikely to lead to the fall of American democracy, or Western Democracy in general. The most likely outcome is eventual large write-offs of debts, some corporate failures, a considerable change in the way the euro-zone works – this part is very hard to see clearly, and breakup must be a possibility. But in the end, industrial market society will get through it, will adopt measures to prevent it happening again, and we will soldier on until in another generation from now we abolish all the safeguards because they seem unnecessary.

    Thus creating the great credit bubble of 2080. Which most of us will not be around to see.

    1. matthew slaughter

      “unlikely to lead to the fall of American democracy”

      yeah the problem is everyone who said optimistic things in 05/06 was wrong.

      and now we are starting to think about all the optimists in the 20s and in the 30s, and in 1933, 1936, 1939, and 1940.

      there is no guarantee of civilization continuing to exist. ‘free market capitalism’ as our parents knew it ended in 2008. one of the pillars of American existence, something we told ourselves made us better than others, especially the Soviets, is gone. how long till the other pillars of American existence fall? we are not crazy to wonder.

  20. Swedish Lex

    The EU should have set up the institutional and legal framework to deal with this 10 years ago. The current failure is largely due to the absence of common fiscal rules in the Treaty and sufficient supra national powers for the EU to deal with those. There would still have been problems, of course, some of more or less the same nature as the current ones, but at least there would have been a game plan to follow.

    The issues are simply too complex to deal with in an improvised way as they currently are trying to do, regardless of whether there are great leaders or not.

    A lot of the blame can in my view be pinned on the leaders who were asleep at the wheel when there was still sufficient time to build a roof; Schröder, Chirac, Prodi, Duisenberg, etc.

  21. Paul Repstock

    Yves Smith. You frighten me more than Sarah Palin. How can you be so sweet looking and yet so sharp. The conventional (economic) model suggests you should be a total bimbo..

    LOL sorry joking. Even my wife doesn’t call me sexist, very often.

    Yves wrote, “Smith’s ideas were cherry-picked and turned into a simplistic ideology that now dominates university economics departments.”

    I did have a limited University career and did study economics. I found that even from my youthful and unenlightened viewpoint their theories were painfully simplistic. I could not function in such a system. I found myself continually at loggerheads with the professors, and scorned for all of my doubting “what ifs”. Had I been smarter or more academically inclined, I would perhaps have been able to found a new economic school of thought. That was not to be. I just walked away, thinking that any “science” founded on rote learning of theories so based on artificial and unproven constraints was no place for Mrs, Repstock’s little boy.

    The “Rule of Error” as applied to the Invisible Hand of economics does not hold. The Rule of Error allows for sloppy measurements, fudging, and poor lighting. It does not account for group bias or skewed rulers.

    All the Models of Economic theory from Keynes to Smith and Marx are turned into quasi religious doctrine by their respective proponents. I doubt any of these intellectuals actually intended that. It really takes very little brains to understand that the world and it’s inhabitants are full of random surprises. However, in the interest of dogma various governments will seize on recognized thought from ‘preferably deceased’ authorities and put their own spin on those theories to fit their own agendas.

    The same type of thinking seems to be applied to every government action. The aim of all those actions is to produce ‘controlled’ results. There is no allowance for or recognition of the value of random events. I have alluded to Mr. Greenspan’s “Flaw” many times. Here it is: The “Flaw” was in having the shortsighted arrogance to even attempt to build the “Goldilocks Economy”. The term “Goldilocks Economy” is an oxymoron. Economic systems are fueled by incentives. Profit motives if you like. Those are not present in managed economies. Every attempt at managed economies from wage and price controls to Communism have failed miserably for just that reason. The only way any of these management schemes have ever existed, even briefly, is that people immediately found ways to profit by circumventing them.

    I think that all political hopefuls should be required to first pass a course on cattle herding. The relevant lesson they would learn is that a successful herder merely shows the desired direction and then maintains a generous containment around the beasts to prevent too much straying.

    1. nanute

      In times of stability it would seem your suggestion on cattle herding would be appropriate. Under current circumstances, I think cats is the model.

      1. Paul Repstock

        Perhaps you are correct, though I see economic participants as being more stubborn than Schizophrenic.

        My main point was really to complement Yves. I really need to buy and read Econned. I wish I had had such a resource when I was a student. It would have made a world of difference. For that matter, the articles and posts of this blog wuld provide enough met for several courses.

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