Bill Black: Bad Cop; Crazed Cop – the IMF and the ECB

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By Bill Black, an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One. Cross posted from“>New Economic Perspectives

Greetings again from Ireland. One of the many mysteries about the current crisis is why anyone listens to the IMF or anyone that supported its anti-regulatory policies. Prior to the crisis, even the IMF had begun to confess that its austerity programs made poor nations’ financial crises worse. In the lead up to the crisis the IMF was blind to the developing crises. It even praised nations like Ireland during the run up to the crisis, missing the largest bubble (relative to GDP) of any nation, an epidemic of banking control fraud, and the destruction of any pretense to effective Irish banking regulation.

Crises reveal many deficiencies and one of the most glaring was the European Central Bank (ECB). The ECB was set up, unlike the Federal Reserve, to have only one mission and one function – securing price stability through monetary policy. The Fed has three missions and three primary functions. The missions are systemic financial stability, price stability, and full employment. The functions are conducting monetary policy, serving as the lender of last resort, and acting as a financial supervisor. The crisis revealed that both dominant forms of central banking could attain their most fervent goal – near total “independence” in determining and conducting monetary policy – and fail abjectly.

The crisis revealed that the ECB’s narrow mission and function left the EU helpless to deal with a severe economic crisis. The ECB could not save Europe. Only the Fed could, and did, save Europe through currency swaps, serving as a lender of last resort (often on the basis of chimerical collateral) to major European banks, and providing liquidity backstops to myriad financial markets.

The central financial crisis caused a series of national crises in the European periphery, initially in Iceland and Latvia. Individual European nations whose creditors were most at risk joined with the IMF to “bail out” these initial failures. The “bail outs,” however, followed the old, destructive IMF playbook. Greece then slid abruptly into crisis when the new socialist government revealed that its predecessor conservative government (sometimes with the aid of God’s dragoons – Goldman Sachs) had been lying about Greece’s budget deficit for years. The bond markets were not amused and demanded far higher interest rates on Greek debt. Far higher interest rates, for a nation already in deep deficit and lacking any sovereign currency, could only create a destructive feedback cycle that would end in default. The EU’s leaders believed that the future of the euro and perhaps the EU were at risk, so they demanded that the ECB step forward to save Greece.

The ECB could not, under its long-held view of its own rules, save Greece. The ECB reinterpreted its rules to create a second mission and a second function to (belatedly) respond to the EU’s sovereign debt crisis. The ECB became a lender of last resort to euro members. (EU members that retain sovereign currencies with floating values such as the UK are not subject to any involuntary default risk. They can always pay debts denominated in their own currency.)

The ECB managed to get nearly everything wrong in its dealings with Greece. Even the IMF is distressed by the ECB’s response to the crises of the periphery. The first problem was the most understandable. The ECB took too long to respond to the Greek crisis. Delay was inevitable because the ECB did not have a “lender of last resort” program and had taken the position that it could not and should not have such a program because its sole mission and function were achieving price stability through monetary policy. Nevertheless, delay was very harmful. Greece twisted slowly in the wind, taking substantial economic damage. The ECB appeared to lack decisiveness. Speculation arose that other nations on the EU periphery would also need help from the ECB, which led to attacks on their sovereign debt issuances and damage to their budgets and economies.

The ECB compounded the problem by “aiding” Greece by making it loans. Greece’s problems included excessive debt and no sovereign currency, so the ECB’s aid deepened its debt crisis. The ECB did not give Greece grants, which is what it needed. Giving Greece real financial aid, rather than loans was a bridge too far for the ECB. Greece popped a second EU bubble. The second bubble was hyper-inflated by hot air from European politicians (particularly the French and Germans) claiming that the EU and euro were leading the member nations to ever greater political integration and, ultimately, a true “union.” Well, no. Not even close. The EU is moving in the opposite direction. As the Irish columnist David McWilliams aptly observed, it turned out that the Germans didn’t think of the Greeks like the rest of America thought of New Orleans when it was devastated by Hurricane Katrina. They weren’t fellow citizens entitled to draw on the nation’s resources to recover. The French and Germans, the leading proponents of ever greater European unity and solidarity, viewed the crisis as the Greeks’ fault and they believed that the Greeks should pay a stiff price for resolving the self-inflicted crisis.

The ECB’s third error was to “channel” IMF policies and demand that Greece – a nation is serious recession – adopt financial austerity during the recession. This, predictably, intensified a recession. The ECB insisted on the same medicine for Ireland and Portugal – and increased unemployment in both nations. Spain, which the ECB is pretending is sound, is covering up its banking crisis. By keeping its real estate values massively inflated Spain is preventing the markets from clearing. Unemployment is 20 (29% in Andalusia and 45% for you young adults). The ruling Socialist party was just crushed in a series of regional elections and will likely fall once national elections occur. Ireland’s and Portugal’s ruling parties fell. Economic stability generates political instability.

One of the great paradoxes is that the periphery’s generally left-wing governments adopted so enthusiastically the ECB’s ultra-right wing economic nostrums – austerity is an appropriate response to a great recession. Even neoclassical economists know that the ECB’s policies towards the periphery are insane. The IMF and ECB impose pro-cyclical policies that make recessions worse. Embracing theoclassical economics isn’t simply harmful to the economy, it’s also political suicide. Why left-wing parties embrace the advice of the ultra-right wing economists whose anti-regulatory dogmas helped cause the crisis is one of the great mysteries of life. Their policies are self-destructive to the economy and suicidal politically. Lemmings don’t really follow each other and jump off cliffs – that’s fiction. Left-wing European governments, however, continue to support the ultra-right wing policies that the ECB pushes even when they know those policies will harm the economy and cause the left-wing party to be crushed in the next general election. They watch the ECB’s policies fail and their sister parties lose power and then they step forward to do the same.

Fianna Fail, Ireland’s ruling party during the initial crises is only vaguely left-wing, but it won the prize for the worst response to a banking crisis in modern Europe. It remains so clueless that last I checked its website it still boasted:

The measures we have taken have been commended by international bodies such as the European Central Bank, the European Commission, the IMF and the OECD and the approval of the international markets.

The old, and very true, line is that there is always at least one fool in a poker game and if you cannot identify the fool within five minutes of joining the game it’s because you are the fool. Ireland has played the fool in its response to the banking and sovereign debt crises. Fianna Fail, gratuitously, turned a banking crisis into a budgetary and sovereign debt crisis and a severe recession into a economic trap that threatens to make Ireland a mini-Japan. Fianna Fail – even after it performed disastrously and was crushed in the general election – thinks it’s a good thing that the ECB and the IMF “commended” Fianna Fail’s policies. Fianna Fail would think it was a good thing if its poker rivals “commended” how well it played poker. Unfortunately, the Irish people provided Fianna Fail’s stakes in this real-world poker game with the Irish banks’ creditors, the ECB, and the IMF. Fianna Fail still thinks the ECB is Ireland’s friend. “Naïve” is inadequate as a descriptor.

These three ECB errors combined with the inherent dangers that the euro poses for the periphery. A nation that gives up its sovereign currency by joining the euro gives up the three most effective means of responding to a recession. It cannot devalue its currency to make its exports more competitive. It cannot undertake an expansive monetary policy. It does not have any monetary policy and the EU periphery nations have no meaningful influence on the ECB’s monetary policies. It cannot mount an appropriately expansive fiscal policy because of the restrictions of the EU’s growth and stability pact. The pact is a double oxymoron – preventing effective counter-cyclical fiscal policies harms growth and stability throughout the Eurozone. The additional dangers include the German desire for a very strong euro, which makes it harder for the nations of the periphery to recover through exports. Germany’s ability to export even under a strong euro makes it even harder for the periphery to export. The one area of financial sovereignty that remains for the periphery is debt, and that can easily become a severe threat because, unlike a nation with a sovereign, floating currency, a nation that uses the euro can prove The surging interest expense can cause a feedback into budgetary pressures (brought on by the recession – and aggravated by the ECB austerity) that causes recurrent crises in individual nations and, through contagion, much of the periphery.

The ECB has recently compounded these inherent problems of the euro through six additional blunders. It has ruled out debt restructuring and made the argument against restructuring one of morality. The truth is that Greece and Iceland are insolvent. They cannot repay their liabilities. Trying to make them repay their liabilities will further harm their economies and increase ultimate losses. This is why we have bankruptcy laws. It is why the U.S. has non-draconian bankruptcy laws that allow a “fresh start.” This is one of the acts of American genius. It greatly increases entrepreneurial activity by individuals and businesses. It has allowed tens of millions of Americans and tens of thousands of businesses a second chance. Keeping a nation in a grinding economic crisis for a decade is pointlessly inhumane (particularly in a continent that claims to prize European solidarity). It is also self-destructive. It harms the periphery and the core by reducing economic growth and causing a wide range of severe social problems. It is a terrible policy for those that believe in the expansion of the EU to the remaining candidate states. Allowing a fresh start by restructuring debts (a euphemism for partial default) is simply good business. The ECB was foolish to take the best option off the table and to stigmatize it as a moral failure.

The ECB then made things worse in a third way by charging Greece and Ireland too much to borrow. The ECB could have finessed the entire “default” and “morality” rhetoric by providing Greece and Ireland with extremely low interest loans repayable over an extremely long time period. This, of course, would have provided a substantial subsidy to Greece and Ireland, which is exactly what they needed (and what the core needed to escape the crisis that was largely created by the core). Instead, the ECB has charged Greece and Ireland relatively high interest rates. Combined with their recessions, budgetary crises, loss of effective sovereign means to counter the recession because they were members of the euro, and the crippling effects of the ECB’s demands for austerity, the effect of the ECB loans has been to make Greece and Ireland’s debt burdens even more unsustainable.

The ECB’s fourth blunder was blaming the crises overwhelmingly on the periphery. That is overstated in the case of Greece and absurd in Ireland’s case. Ireland ran budgetary surpluses during the height of the lead up to the crisis. It has a budgetary crisis for three reasons. The primary reason is the Irish government’s gratuitous guarantee of the Irish banks’ debts. The secondary reason is the effect of a severe recession triggered by the banking crisis and exacerbated by the ECB’s demands for austerity. The banking crisis was largely the product of accounting control fraud by leading Irish banks. I will develop that analysis in future columns. The tertiary reason is the cost of repaying the ECB and IMF debt. Foreign banks played a dominant role in funding the Irish banking crisis and some of the fraudulent Irish banks. Foreign creditors, particularly foreign banks, were the leading beneficiaries of the insane decision by Fianna Fail to have the Irish people guarantee the Irish banks’ debts to these creditors. The ECB “bailout” of Ireland is in truth primarily a bailout of non-Irish creditors of Irish banks. Those non-Irish creditors are overwhelmingly financial institutions and disproportionately German financial institutions. I trust the reasons why Prime Minister Merkel has continued to support the “Irish bailout” despite the political damage it causes her party is now clear – the “Irish bailout” could more aptly be termed the “German bank bailout.”

The ECB should have explained these realities whenever it discussed the Irish crisis. What should have happened in Ireland, at the minimum, is that the four large, insolvent banks should have been treated as insolvent banks, which was the reality. Bank debts represent contracts. The contract that the Irish banks’ lenders entered into with the banks had these basic terms.

1. We recognize that the loans we make to the Irish banks are not protected by deposit insurance except to the extent we make actual deposits in amounts less than or equal to the deposit insurance limit. (It is important to understand that several of the largest Irish banks were exceptional in how few insured deposits they had.)

2.As to insured deposits, the contract was that Ireland, in the event the bank failed, would repay us the full amount of our deposit up to the insurance limit. In return, as insured depositors we accepted a lower interest rate from the banks because deposit insurance reduced our risk of loss if the bank failed.

3. To the extent that we lend money to the bank other than through insured deposits we are at greater risk of loss if the bank fails so we are compensated for that risk by receiving a higher rate of interest than do insured depositors. If the bank fails we only get repaid a portion of our debts. That portion depends on how insolvent the banks prove to be. If the banks’ losses on assets are 60% (roughly the loss rate at the worst three Irish banks), then we will receive under 40 cents on the euro (because the administrative expenses of receivership will reduce the pro rata recovery of unsecured creditors). The recovery rate for general creditors becomes even smaller when the bank has secured creditors or other creditors with higher priorities (which can include depositors in the U.S. context). The Irish banks’ general creditor, therefore, already received compensation in the form of higher yield that they deemed adequate recompense for the taking the risk of catastrophic loss in the event the bank failed. To pay general creditors in full when the bank is deeply insolvent is to provide them with a windfall – and to create perverse incentives that would further erode “private market discipline” and make future crises more likely and more severe. The Irish banks’ creditors were supposed to suffer catastrophic losses when the banks failed – that was the deal they made and they decided that the extra yield was sufficient. No one made the creditors loan to the Irish banks. The creditors voluntarily did so to make a lot of euros.

4. To the extent that we lent money to Irish banks on a subordinated basis the deal we made was that we would be wiped out entirely if the bank became insolvent. Indeed, that is why subordinated debt is allowed to be treated as tier II capital under the Basel accords. Again, neoclassical economists have claimed that subordinated (“sub”) debt provides the ideal form of capital because it self-selects for financially sophisticated lenders who have superb incentives and ability to provide effective private market discipline precisely because they know they will lose everything if the bank becomes insolvent. In practice, sub debt never provides effective private market discipline, but neoclassical economists cannot admit that. Neoclassical economists, therefore, argue that bailing out sub debt creates perverse incentives and makes future crises more likely and more destructive. Ireland provided a governmental guarantee that covered even the great bulk of the sub debt. (One potentially confusing term from the U.S. perspective used in Ireland is “senior debt.” Irish reports on their banks use this term to refer to general creditors’ claims that have no special priority. They are “senior” only relative to sub debt, not other general creditors.)

The overall impact of all of this is that if the ECB insists on talking in terms of morality and honoring contracts the uninsured creditors should have been the ones to bear the overwhelming bulk of the losses caused by the Irish banks’ insolvency. That’s what their contracts provided. Instead, they are reaping a massive windfall at the direct expense of the Irish people.

I must mention in passing a new analysis by Goldman Sachs related to this issue that is so exceptionally bad that it demands response.

State default would wipe out Ireland’s banks

Goldman figures show banks would take €12bn hit

By Nick Webb
Sunday May 29 2011

“IRISH banks would be all but wiped out if the Government was to default or restructure the State’s borrowings because of their vast holdings of Irish bonds and sovereign debt.

Bank of Ireland and Allied Irish Bank could face loses of as much as €11.4bn if a major haircut was part of any deal, according to a new report from Goldman Sachs, which has been obtained by the Sunday Independent.”

The only thing that these figures on Irish bond holdings demonstrate (which Goldman misses entirely) is what I have been explaining. The Irish government gratuitously bailed out massively insolvent Irish banks. The direct beneficiaries of this bailout included many foreign creditors, particularly banks, and more particularly German banks. The Irish government, because it lacks a sovereign currency and because it has guaranteed these massive debts, is short of euros. The Irish government, therefore, gave the banks Irish bonds. The Irish banks already had some Irish bonds in portfolio. Irish bonds have large market losses because Ireland is insolvent and if it follows the ECB’s austerity dictates it will become more insolvent. (Eurozone bank stress tests excluded sovereign debt risks because they were designed not to be very stressful.)

The title of the article, therefore, is misleading. Ireland’s insolvent banks were “wiped out” years ago when they made epic bad and fraudulent loans. Ireland is insolvent and it does not have a sovereign currency; it cannot afford to convert currently its sovereign debt held by its banks into euros. Ireland’s problem, therefore, is not the consequences of defaulting, but the consequences of failing to default.

Goldman is doubly wrong about a debt default causing the failure of the banks. I’ve explained why this claim reverses causality. One, it was the failure of the banks and the insane guarantee that caused the budgetary and sovereign debt crisis and the greatly increased “funding” of the banks with Irish bonds. It was the failure of the banks and the guarantee that made Ireland insolvent and (absent real aid from the EU) makes some form of Irish default inevitable.

Two, an Irish debt default would not cause the banks to fail (assuming counterfactually that they hadn’t already failed). If Ireland leaves the euro and reestablishes a floating, sovereign currency the Irish banks’ holdings of Irish bonds will be irrelevant. The fact that AIB and the Bank of Ireland hold Irish debt does not impose any net cost on the Irish government of repudiating debt. Ireland, should it find it desirable, can simply provide AIB and the Bank of Ireland with new Irish bonds or with the new, sovereign Irish currency. The only real issue is whether, and to what extent, it makes sense for the Irish government to subsidize AIB and the Bank of Ireland and what it should receive in return for such aid.

The fifth EU blunder has not been limited to the ECB. A series of EU representatives and parliamentarians of individual nation states have decided to demonize the periphery and to “suggest” that the periphery act in a manner designed to humiliate the nations, impair their sovereignty, and create intense enmity towards the core nations. Greece has been told to sell it islands and beaches. This has led to media speculation that it is being asked to sell its national archeological treasures. Prominent representatives of the core nations regularly deride the purported national character flaws of the periphery. The ECB strategy for the recovery of the periphery is for those nations to engage in a “race to the bottom” of wages to “restore competitiveness.” The core has consigned the periphery to a second track – and their track is the road to Bangladeshi salaries.

The sixth EU blunder is to threaten not only the periphery but other EU and transnational institutions. The ECB, last week, threatened to cut off all credit to the periphery if Greece entered into a debt restructuring deal brokered by the G-8 or any similar group. The ECB, the least democratic institution in the EU system, seeks to arrogate to itself unprecedented power over EU member nations when they are in crisis. This will produce riots, mass protests, and the return of anarchism in many parts of Europe. The one thing that the citizens of the core and the periphery share is the conviction that “the other” is acting wretchedly and in contravention of ideals underlying the formation and expansion of the EU. Neither the core nor the periphery understands the others’ perspective. The ECB has no idea how much rage it has created in the periphery and the passionate divisions it is creating among Europeans. If the ECB is not curbed it will destroy the European project. The ultimate irony is that it will be the Germans and French who dominate the ECB and represent the two nations that have been the strongest proponents of an ever closer union, who will fracture the union unless they give up their theoclassical dogmas.

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  1. Hubert

    So much to agree here but also some important points to disagree.
    F.e. the Irish bailout being a German bank bailout. My understanding is that Depfa/HRE holes are filled by German taxpayers – so one should not count their banking assets numbers in aggregate Irish positions. The same goes for Tax structures of other German banks. It would be nessecary to look who the unsecured creditors of the REAL IRISH BANKS were. My guess is that they were found to a bigger part in the City of London. I have no prove of that, only indications. After all, Germans and French bankers were stupid/unscrupulous enough to finance Greece, so why not Ireland – but my first guess would be the Anglos. As I find only aggregate numbers – has anybody seen any creditor lists of the pure Irish banks or any idea about it?

      1. Johannes Yo Highness

        screwing them both.

        ~~Susan Truxes~

        Between your lies your beauty sighs


        ECB was set up, unlike the Federal Reserve, to have only one mission and one function – securing price stability through monetary policy. The Fed has three

        ~~Her Iveness Herself~

        The ECB excuse was to regulate against fluctuations of the deflation vs. inflation vector. The reason was to trash the progressive income tax for corporations and individuals, both non-incorporated and incorporated. Can you see how simple it was to stay with the progressive tax which automatically throws everyone into lower bracket when dieFledermausmann deflates your new home price, but instantly pumps everyone up into higher tax bracket as inFlatusSan brings his wage price spiral upwards.

        Voila, with our spiffy new ECB we can now have price/wage stability without taxing the wealthy for the money they have won with control fraud gaming. We can now tax poor instead with hidden and all manner of other taxes as we laugh all the way to the bank. All the way to the ECB. Hey! If Americans can do it with IMF, FG, Fed Government, and WWB, World Wide Bank, we can be a poor-man’s American with our spiffy new ECB.

        EURO-guys do it in hotel rooms with ECB

  2. attempter

    (Before starting, I’ll note that Black has a peculiar notion of what happened in New Orleans post-Katrina. Disaster capitalist corporations “drawing on the nation’s resources”, yes. Citizens, not so much.)

    Greetings again from Ireland. One of the many mysteries about the current crisis is why anyone listens to the IMF or anyone that supported its anti-regulatory policies.

    This puts me in mind of the first of the “Four Letters on Interesting Subjects”, anonymously published in 1776.

    They’re highly topical today. A few excerpts:

    Every man who acts beyond the line of private life, must expect to pass through two severe examinations. First, as to his motives; secondly, as to his conduct. On the former of these depends his character for honesty; on the latter for wisdom. The question is, how are we to know a man’s motives? I answer by tracing his conduct back to himself, as you would a firearm to the fountain-head, and comparing the measures he pursues with his own private interest and dependencies; and the conclusion will be, that if no visible connection appears between them, we are obliged, on the ground of justice and generosity, to believe that such a man acts from reason and principle; for if this criterion be taken away, there is no other general one to know men by. On the other hand, if on examining from a man’s conduct back to the man himself, we find a place of an hundred or a thousand a year at the bottom, or some advantage equivalent thereto, and find likewise that all his measures have been continually and invariably directed to support the part in every thing which supports him in his place or office, we may, without hesitation, set that man down for an interested time-serving tool…

    But to return. There is a more principal consequence for such men to contemplate than bare disappointment and disgrace. A contest for government is not to be considered as an election. The whole affair is now taking a most serious turn. The transition from Toryism to treason is nearly effected, and the rude custom of Tarring and Feathering will soon give way to the severer punishment of the gibbet. Disaffection and treachery have only received strength and encouragement from former lenity; and, until an example be made of some leading ones, the evil will continue increasing. It may perhaps be asked, what sort of people are we now to call Tories. I answer, every one who contends or argues for the supremacy of the king of England over the colonies. We have at this time but two general denominations of persons, Independents and Tories, or, if you please, Traitors, for to endeavour now either by words or ways to unite America to the crown and government of Britain, is the same kind of crime as it would be for a citizen of London to propose uniting England to the crown and government of France. This is plain doctrine, but it may perhaps save some man or other from the gallows, and, however to be relished by many, it is nevertheless a duty due to society to shew such men their danger fully and warn them of the consequences. If, after that, they fall, their blood be upon their own head.

    But the circumstance which most affects a generous mind is, that those men generally draw into their party a number of unwary, unsuspicious persons, by false and fraudulent pretences…You that sculk into holes and corners, and exclaim against independency, can you disprove these things, or even bring the truth of them into suspicion? If you can not, the case will be, that those whom ye deceive will soon turn your accusers.

    A few weak or wicked men among ourselves, for the sake of keeping up a division, may talk of reconciliation, but Britain has no such thought…Pity but we could have taken the hint sooner! for all our present distresses, arising from a scarcity of goods, are owing to our not thinking of independence soon enough… In short, reconciliation is a doctrine which has driven us to the edge of ruin, and the man that hereafter mentions it as a plan, ought to be considered and treated as a traitor to his country.

    Unfortunately, as the post describes, we have lots of interesting subjects today. Or more accurately, two subjects: Kleptocracy, and the democracy we must oppose to it or else perish.

    1. jake chase

      Russ, I am mystified by your interjection of tortuous Eighteenth Century bluster in response to this singularly lucid and intelligent post on the Eurocrisis from the only man in the universe apparently capable of explaining it.

      Thank you, Professor Black. Please keep these coming.

      1. attempter

        Simple. He asked why anyone would still support such an obviously criminal system, as proven by for example this post you yourself admit is lucid. That put me in mind of how we’ve been here before, how in 1776 clear-sighted people were asking the same question about the same strange supporters of tyranny. The 1776 post says the same thing all these posts do. (As for “tortuous”, I don’t think many of us in today’s blogosphere are setting world records for prose style. I’d say many of the old time posters hold up pretty well in that sense.)

        I know you don’t believe anything can or should be done and have surrendered to cynicism, but not all of us have.

        1. DownSouth


          To turn the clock back yet another couple of hundred more years and give the flip side (that of the aristocrats and haute bourgeoisie) to the pamphlet you cited, there’s this account of a pamphlet that was published in the wake of the uprising and putdown of the radical wing of the Paris League—-the Council of Sixteen. The aristocracy and haute bourgeoisie called the Council of Sixteen, which seized control of Paris in 1590, “democracy in the manner of the Swiss.” It wasn’t. It had much more in common with the later, self-serving fanaticism of the Jacobins or Bolsheviks than it did with Swiss democracy. Nevertheless, the aristocracy and haute bourgeoisie branded this as “democracy” and then set about demonizing it:

          This time the Sixteen had gone too far, even for some of their own fervent supporters. The continuing domination of the city by a group of demagogues and fanatics was more than Mayenne was prepared to tolerate. He moved his troops into the capital, seized and hanged four of the ringleaders, and declared the Sixteen disbanded. Jean Bussy-Leclerc, one of the most fanatical of the leaders, was spared, and the duke of Mayenne dared not touch the preachers; but the reign of terror was over. For the nobility and haute bourgeoisie it had been a grueling experience, and its lesson was not lost on them. “Democracy threatens you…the beggars (les gueux) are in command”, an anti-League pamphlet of 1590 had warned the aristocracy. “They have conspired against our lives and have aspired to free themselves from the subjection to which God has ordained them.” Here was the unforgiveable crime. In France, as in the Netherlands, the collapse of authority had aggravated social tensions and had stimulated dangerous egalitarian doctrines. When the Manant could argue that virtue, not birth, should be the criterion for titles of nobility, the moment had come to call a halt. If the League was going to challenge the principle of hierarchy—-the very foundation of the social order—-it was time to turn to the natural defender of that order, the king…
          ▬J.H. Elliott, Europe Divided: 1559-1598

  3. frances snoot

    “The missions are systemic financial stability, price stability, and full employment.”

    Sounds Keynesian. The system is interconnected through the BIS: no?

    1. frances snoot

      Indeed, the stated objective of the BIS is:

      ‘coordinating GLOBAL financial and monetary stability’.

      Bill Black writes the sentence like a lawyer would to do.

  4. billwilson

    Agree with almost everything … but a bit more on Greece.

    Greece still remains an economic basket case. After years of progressively devaluing its own currency and paying high rates on debt, its entry into the Euro seemed to provide a free lunch. Lots of debt at low cost!

    Now we have an economy where tax evasion is a national obsession – so no wonder there are deficits. We have a government sector where wages and benefits are way out of line with the economy.

    Solution? Default (restructuring) so that the idiots that lent money to Greece have to take a hit. But also Greece has to learn to live within its means, and that means real tax collection and lower public sector benefits. This is absolutely essential for any long term fix. How? That is the issue – ultimately a crisis is required for change of this magnitude – and therefore an exit from the Euro is probably the best way to achieve this – with a standing offer to be allowed back in in say 5 years if reforms take root.

    1. Ignim Brites

      Just out of curiostiy: Would you support an exit of California from the Fed Reserve Note bloc?

      1. F. Beard

        I don’t see why California could not issue and spend its own “Tax Tokens”. Those tokens would be good for California State taxes so they would have value.

        1. Pixy Dust

          My thoughts too, F.Beard.
          Regional or publicly owned state banks could issue their own scrip – good for tax receipts – to encourage more commerce. How can businesses thrive when bankers are hoarding their loot offshore, not making loans to businesses, and demanding austerity from working people?
          Isn’t it the obligation of governors and legislature to support good business climates and protect the citizenry (among other institutional obligations)?
          A lot of local scrips cropped up during the Great Depression to circulate and cultivate better business climates. Some were really impressive.

      2. dilbert dogbert

        California had its own currency during the civil war. The Goldback in Cali and the Greenback in the US.

  5. SidFinster

    I agree that applying a penalty or market rate to new loans to Peripheral Europe (or whatever you want to call it) is dragging these countries deeper into insolvency with every passing day.

    At the same time, let’s look at the counterfactual: the moral hazard associated with subsidizing such borrowers would eventually make Europe’s problems even worse, not to mention this make German taxpayers and German voters even more livid with rage than they already are.

    1. Susan Truxes

      Its hard to understand how Germans can be too enraged when they have to admit they themselves have set the Euro so high no other countries in the EU can successfully export.

  6. RebelEconomist

    While I agree with Bill Black that Ireland should have let its banks go bust, probably simultaneously nationalising them to stop disruptive closures, I find attitude to the borrowers in this case – ie bank shareholders – at odds with his sympathy for Greece. Greece holds, for example, 111.5 tonnes of gold, which represents one of the highest gold to foreign currency reserves ratios of any country. Why should Greece expect to keep this when it cannot pay its debts? Actually, I think a bit of national humiliation in the circumstances is reasonable, because it is a disincentive to default that does not actually hurt anyone. Moreover, Greek nationalism vis a vis Turkey contributed to Greece’s public debt – Greek defence spending on defence as a percentage of GDP is the highest in the EU. And what goes around comes around – Greece used its relative strength to resist the recognition of FRY Macedonia.

    1. F. Beard

      Why should Greece expect to keep this when it cannot pay its debts? RebelEconomist

      What debts? Bank create money from nothing and lend it out for interest that does not even exist in aggregate. In other words, banking is an inherently risky business. Then let the lenders beware! They gambled; they lost. Boo hoo!

      1. MattJ

        To which banks do you refer? It is Greek sovereign debt that is in danger of defaulting; Greece’s problems have moved beyond their banking system. The conditions being discussed for another loan to the Greek government include selling sovereign assets (e.g., state gold holdings).

        1. F. Beard

          Greece should default and NOT sell its assets. Furthermore, the ability to service debt is the ability to issue one’s own currency debt-free so Greece should not borrow any more either.

      2. JasonRines

        F Beard. The problem runs deeper than this. Lending 10 to 1, perhaps 14 to 1 doesn’t create debt saturation or massive busts. Governments endorsing ‘deruglation’ at 40 to 1 or more is also temporary credit that funds election. Why do you think a guy like you or I these last two decades ever win a national election?

        This kind of collusion between government and banking is called Fascism. The guarantees politicians made to the IMF, ECB, basically BIS were paid most handsomely and now that the leverage party is over exiting. The BIS and company got their end of the bargain fulfilled and had their bad bets coverered.

        The BIS and company has all but telegraphed haircuts for bondholders in 2013. But moral hazard once facilitated creates even larger irrational expectations of profit without risk and now that bankers run sovereigns and have the gun pointed at citizens heads expect them to use it to the max until 2013.

        This global Fascist cycle has played out before from
        the late 1800’s to 1914 and 1920’s to 1939. Fill in the blank
        of what followed these two Fascist cycles to break powerful men of their obsessive incompatibility to self-reform. Imperfection is a bitch and so are cycles of centralization and inevitable decentralization. It’s evolution.

  7. Paul Tioxon

    While there is always a need to focus on the smaller scale of the problem to obtain resolution, in this case financial resolution of Greek and Irish banking collapse, the international scale of the problem is real problem, and not the individual loans in aggregate. The Eurozone, and Germany’s ongoing committment to political integration is what is at issue here, not some tweaking of toxic loans to see who is made whole and who is bled until there is nothing left to bleed. Ireland is 5 million and Greece 10 million people, and as a % of Europe as a whole, not much. Even their debts a relatively small, so the political playing of the core states of Europe, of which Germany is one the longest standing, is key to resolving the political crisis, masquerading as a problem with banks. Here is a Russia TV Interview with Immanuel Wallerstein addressing the financial crisis from 2 years ago.

  8. F. Beard

    “The one area of financial sovereignty that remains for the periphery is debt, and that can easily become a severe threat because, unlike a nation with a sovereign, floating currency, a nation that uses the euro can prove “ Bill Black

    Missing word(s)? Prove what?

  9. F. Beard

    ‘This is why we have bankruptcy laws. It is why the U.S. has non-draconian bankruptcy laws that allow a “fresh start.” ‘ Bill Black

    Aren’t our bankruptcy laws just recognition that the banking system creates more debt than can be repaid in aggregate since the banks create the principal but not the interest for loans?

  10. Jack Straw

    “It is why the U.S. has non-draconian bankruptcy laws that allow a “fresh start.”

    Agree and disagree. BK law has been moving in the wrong direction in the US for roughly a decade, at least for individuals, but for corporations, maybe not so much (WSJ and IBD ed pages regularly seem to want to liquidate, and I would consider them key plutocratic mouthpieces). I’ll leave that to others here who know more about that.

    I further agree with Prof. Black on the “fresh start” concept of BK is a US genius, but the flip-side of that is transparency and willingness to hand over control to a trustee of the estate’s (the state’s or sovereign’s) assets. As a practical matter, I don’t consider myself a BK practitioner; I lose 95%-plus of my prospective clients with my pre-petition questionnaire.

    I guess my idea of “general will” is not very different from individual (or plutocratic) will. Ireland appears to me to be a place where, more than Afganistan, empires just give up. I wouldn’t limit this to them, however. Each of the troubled “peripheries” has its own valiant history – just waiting to be manipulated.

    On a different track, the German economy seems to be based upon providing a “get what you pay for model.” I sometimes borrow a friend’s Mercedes which retailed for 6 figs – he got it for $38k. My Sig Oth has a Mini which retailed for $38K (I had one, too, back in my day). All of the above are truly splendid. But, somehow, I have doubts that the market for them is stable. While my Sig Oth would never, ever, even remotely consider defaulting, my experience with others driving ultimate driving machines is that they frequently check the parking lots for the repo man.

    Germans appear to me to be the least Hegelian of all peoples.

    Take that, Attempter.

    1. frances snoot

      Essence retains a fragrance. We are merely in transition. And one hopes, yes ridiculous hope, that the machine doesn’t print this sentence:

      let them eat cake

  11. Hughson

    The astonishing observing from all the financial crisis bail-out shinanigans is a massive re-distribution of wealth from state (tax payers/public) to private (property class) hands. Indeed the greatest ordinary person robbery in the histroy of the world. All of us will be working for the rest of our lifes and future generation to dig ourselves out of this.

    The only logical conclusion to this REVOLUTION.

    1. Paul Tioxon

      The massive redistribution of wealth from the tax payers to the private sector is THE structure of the modern world intentionally set up this way. The weaker set of social relations within kingdoms was replaced by the modern nation state with the stronger set of social relations characterized by the bureaucracy controlled by a central government with all of the police power of the state to enforce the collection of taxes from the populace. In return, in addition to political domination, we got a small say in the laws, some reforms, and schools, cops and roads to drive our cars when ever we want. WOO HOO!

      Now, the people who have been taking money out the system for years still want their cut, the problem is, the social contract of inclusive political power and wealth sharing is being breached by those who will not accept anything less than the top income that they have been receiving during the top years of the greatest wealth expansion in history. Since they can not get theirs and give out to the populace their share, Social Security, public education, health care, wages, benefits are all being re negotiated unilaterally downward, to keep the privileges of the wealth going upward and onward. THAT IS THE REVOLUTION, what will come if it is not checked is the violent reaction.

      We have had a more or less stable accommodation with an expanding enfranchisement to people who have been managed to be the outsiders. This politics of inclusion has been fought steadily on many fronts with the recent winning of gay rights in America including in the conservative military. At the same time, political assaults to turn the clock back to preserve wealth is also being waged. There are two clear sides trying to fight for control of the state mechanism to execute their policies, but clearly the revolutionary of the two are the republicans who are using extortion to leverage the necessary fiscal controls of deficit spending into political change without the ballot. The federal debt ceiling is normally a sleep inducing event that has been captured by republican strategist for revolutionary potential. It is a better dead than ‘red ink’ politics that will be a chaos generating event of epic proportions. This reveals just how bold and committed the faction that sees the use of violence in all of its forms, police, military and economic as the main social control, as opposed the more attenuated liberal inclusive strategies of tolerating at least some power and wealth sharing to maintain social control.

      1. DownSouth

        Paul Tioxon said: “This reveals just how bold and committed the faction that sees the use of violence in all of its forms, police, military and economic as the main social control, as opposed the more attenuated liberal inclusive strategies of tolerating at least some power and wealth sharing to maintain social control.”

        It was Gandhi and his invention of the methods of nonviolence—-“To tear the mask of hypocrisy from the face of the enemy, to unmask him and the devious machinations and manipulations that permit him to rule without using violent means, that is, to provoke action even at the risk of annihilation so that the truth may come out” as Hannah Arendt put it—-that has allowed everyone to see how the criminals, sociopaths and psychopaths maintain power. Up until Gandhi, there was a totally different dynamic at work, as J.H. Elliott explains:

        This was a society in which over-population, with a consequent shortage of food and employment, had created tensions which the social and political framework proved unable to contain. The possessing classes reacted by emphasizing with renewed determination the exclusive nature of their rights and their privileges, while the dispossessed responded by resorting to violence in any one of its multifarious forms—-piracy and banditry, riot and rebellion, looting and pillage and frenzied iconoclasm. Violence was no doubt a normal way of life in Early Modern Europe, and war was seen as an accepted institution rather than as an unfortunate aberration from a long cycle of peace. But the very insolubility of the social and economic problems created by over-population, together with the collapse of Europe’s religious consensus, and the fortuitous weakness of many monarchies, had created a situation in which the Sate was no longer able to fulfill its expected function of confining violence within accepted limits. The consequence of this was a descent from (modified) order into total disorder, on the horrors of which Shakespeare was characteristically eloquent:

        “Civil dissention is a viperous worm,
        That gnaws the bowels of the commonwealth.”

        The common response to this frightening situation was predicable enough: extreme political and social conservatism. The radical voice of the early sixteenth-century humanists, protesting against privilege and property, was silent in the later years of the century. An era of social experiment had given way to an era remarkable for its siege mentality…


        Europe’s intellectual order, like its social and political order, was hard hit by the grim struggles of the later sixteenth century. The demands of religious controversy inevitably bred narrow, dogmatic minds. As a result, the fruitful humanist speculation of the earlier part of the century often withered in its later years beneath a stifling orthodoxy. Each faith—-Lutheran, Calvinist, Catholic—-claimed a monopoly of truth, and each created its own private scholasticism which placed fidelity to the letter before originality of the mind. This was an age, anyhow, which tended to rate method above content; an age which was inclined to prefer the classification of old facts to the discover of new. Its tone was set by Petrus Ramus—-Pierre de la Ramee (1515-1572)—-the French Protestant dialectician, whose famous Method, with its curious mnemonic devices, was concerned to sort ideas into convenient groupings and so to provide European youth with an educational system in which logic was the key to all the arts.


        Along with the extreme conservatism of later sixteenth-century societies went another phenomenon highly characteristic of the age—-an enhanced sense of nationalism. A society where divisions ran deep—-where Montaigne’s own family were part Protestant and part Catholic—-may subconsciously have sought compensation for its divisions in the common bonds of nationality. While nationalism could bring a new cohesion to a community threatened with dissolution through religious dissension, so also it might itself draw new vitality from the religious enthusiasm of a community which felt its beliefs imperiled by foreign and domestic enemies. Catholic Spain and Protestant England both displayed an intensified form of providential nationalism under Philip II and Elizabeth. Both considered themselves especially chosen of God to bear aloft His banner. No doubt this conviction led to terrible inhumanities by the nationals of both countries, and to tragic absurdities, as when the Spanish historian Juan de Mariana carefully censored his own writing to avoid giving comfort to Spain’s enemies. But providential nationalism played its part in creating a climate in which a Cervantes or a Shakespeare could attain instinctive insights into the community to which they belonged, and were moved to dig deep into popular and vernacular traditions for fresh sources of inspiration.


        [A] growing awareness of the futility and inconclusiveness of religious conflict led to an increasing acceptance of the necessity for toleration on pragmatic grounds. “Experience teaches us”, wrote De Thou in 1604, “that the sword and flames, exile and proscription, are more likely to exacerbate than to cure an ill.” Such a realization might suffice to make liberty of conscience a fact long before it ever became an article of faith.

        But could so fragile a plant as freedom of conscience ever survive in a dogma-ridden world? Neither Catholic nor dogmatic Calvinist societies would appear conducive to its growth. The best hope lay with those societies where politique principles were sufficiently established to keep the bigots at bay; and these societies, around 1600, were to be found in the Protestant North rather than (with the exception of Venice) in the Catholic South. Neither in the England of Elizabeth, the Scotland of James VI, nor in the United Provinces of William of Orange and Oldenbarnevelt did the Calvinist preachers succeed in securing the supreme power in the State; and Lutheran Sweden successfully resisted the Calvinizing tendencies of Charles IX. In all these countries lay control was preserved, and the Protestant Reformation was partially secularized.


        The conception of power as deriving from God through the people, and the idea of a contractual relationship between the ruler and the ruled—-these were the principles that had been confirmed and vindicated in the great upheavals in France and the Netherlands. Political liberty, as guaranteed by Estates and parliamentary institutions, was a necessary pre-condition for acceptance of liberty of the mind. Constitutionalism in its sixteenth-century form may have been socially conservative and even repressive, but at least it allowed a little more scope for the varieties of individual opinion than an absolute monarchiacal power.
        ▬J.H. Elliott, Europe Divided: 1559-1598

        1. Valissa

          “Which studies? Dictative studies that are slavish to the neoclassical economics faith?”

          WTF are you talking about here downsouth? Such studies wouldn’t even come out of from what very little I know about academic or neoclassical economics, although behavioural economics is better at the human issue. Given your antagonistic response I’m not going to bother looking thru my notes to prove something incredibly obvious… that emotions/desires typically come first and thought/rationalizations afterwards. Some subject areas that address this are psychology, neuroscience and propaganda… not to mention Buddhism, Hinduism, etc.

          It’s not my job to prove anything to you nor you to prove anything to me, just to share and brainstorm thoughts and reflections. This is all just a big conversation and it’s supposed to be fun.

          1. Valissa

            Oops, thought I had responded to a different thread below. At least I’m talking to the right person so it should be clear.

  12. Allen C

    “ECB is not curbed it will destroy the European project.”

    The ECB has already gone far beyond its charter by buying junk bonds.

    Greece is somewhat comparable to Freddie and Fannie; essentially bankrupt institutions kept alive by quarterly cash infusions.

    No one wants to let these deadbeat countries go bankrupt as it is likely to lead to further bankruptcies. The solution is haircuts, but the weasel bankers and their captured politicians are loath to admit that they are losers.

    This is the underlying rot in America as well. Losers are supposed to LOSE! Criminals are supposed to go to jail! Instead these scumbags corrupted the system by capturing loser politicians to foist their losses onto the peoples at large. The situation had allegedly distorted to the point where some consider themselves so far above the law that they can rape a hotel employee without consequence.

    What is remarkable is that the peoples tolerate this most dysfunctional situation. This is indicative of a serious societal problem which is unlikely to be corrected soon.

  13. Valissa

    Very educational post, thanks. One quibble, though:

    “One of the great paradoxes is that the periphery’s generally left-wing governments adopted so enthusiastically the ECB’s ultra-right wing economic nostrums – austerity is an appropriate response to a great recession … Why left-wing parties embrace the advice of the ultra-right wing economists whose anti-regulatory dogmas helped cause the crisis is one of the great mysteries of life.”

    This is only a paradox if one believes the left-right paradigm explains everything that politicians do. Myself and others on this list have pointed out that we need to look beyond the left-right paradigm and start creating/retro-fitting some other paradigms such that this behavior is a logical consequence. As long as Black and other writers perpetuate the increasingly less relevant left-right-center paradigm and attempt to project that onto economic behavior they will continue to be “mystified” and “confused” at choise made and deals done.

    1. JasonRines

      Excellent comment Valissa! Bankers and corporations bribing politicians that want to win elections on the taxpayers dime is a mystery? Glad you pointed this out. As for the duopoly what ever happened to door number three? How about a formation of a Centrist party? Perfect for this particular historic cycle where we are clamoring for the political center. After things get back to normal right or left politics will naturally be more in favor and Centrists the temporary odd man out.

  14. DownSouth

    Bill Black ponders: “Why left-wing parties embrace the advice of the ultra-right wing economists whose anti-regulatory dogmas helped cause the crisis is one of the great mysteries of life.”

    But then Black answers his own question when he says: “The crisis revealed that both dominant forms of central banking could attain their most fervent goal – near total ‘independence’ in determining and conducting monetary policy – and fail abjectly.”

    The affinity between left Marxism and right neoliberalism is ideological. Both neoliberalism and Marxism have an unshakable faith in what Reinhold Niebuhr called “scientist kings.” Neither is willing to indict the scientist kings. Once people realize that Fichte’s idealism provides the philosophical underpinning upon which both the two reigning utopian ideologies—-Marxism and Neoliberalism—-are built, the “mysteries” that Black speaks of evaporate. As Hannah Arendt explains:

    [Marx’s] adherence to tradition is also the reason for the even more fateful error of Marx as well as Lenin that mere administration, in contrast to government, is the adequate form of men living together under the condition of radical and universal equality. Administration was supposed to be no rule, but it can actually be only rule by nobody, that is, bureaucracy, a form of government without responsibility. Bureaucracy is the form of government in which the personal element of rulership has disappeared, and it is of course true that such a government may even rule in the interest of no class. But this no-man-rule, the fact that in an authentic bureaucracy nobody occupies the empty chair of the ruler, does not mean that the conditions of rule have disappeared. This nobody rules very effectively when looked upon from the side of the ruled, and, what is worse, as a form of government it has one important trait in common with tyranny. Tyrannical power is defined by the tradition as arbitrary power, and this originally signified a rule for which no account need be given, a rule that owes no one any responsibility. The same is true for the bureaucratic rule by nobody, though for an altogether different reason. There are many people in a bureaucracy who may demand an account, but nobody to give it because nobody cannot be held responsible. In the stead of the tyrant’s arbitrary decisions we find the haphazard settlements of universal procedures, settlements that are without malice and arbitrariness because there is no will behind them, but to which there is also no appeal. As far as the ruled are concerned, the net of the patterns in which they are caught is by far more dangerous and more deadly than mere arbitrary tyranny.
    ▬ Hannah Arendt, Karl Marx and the tradition of Western political thought

  15. Keith

    Thanks for posting this. In response to the paragraph starting with “One of the great paradoxes…” – I would respond that the answer is not such a paradox. Just look at where Fianna Fail is situated on ( the most accurate I know of) “political compass”:

    Or where “left” UK Labour is related vs so called right wing parties on the political compass (i.e. no real difference):

    Or to use an Aussie ( example given to us by Wikileaks:

    “According to ALP Senator Dave Feeney, a central figure in the Victorian factional dispute, there is no longer any intellectual integrity in the [political] factions and he describes the current system as unpredictable and ‘byzantine’. Feeney points out, for example, that there is no major policy issue on which he, a Right factional leader, differs from Gillard [The supposedly ‘Left’ prime minister].”

    Won’t even comment on Democrat vs Republican Vs what the rest of the world considers to be “left”.

    Only paradox is why people keep calling them “Left”… I guess the media has a lot to do with that… better if it sounds like your making a meaningful choice.

  16. Jack Straw

    I couldn’t disagree with Down South more. It’s not ideologues who run the show, it’s the persuaders, or the people who pay the persuaders, more likely. I don’t think any ideology prescribed TARP or whatever it became, but fear (loss of money) and the appeal to fear (loss of money, or making money) was – and it turned out to be excellent, for them.

    At the political level, there is wide-spread agreement that you get to say one-plus-one-equals-two once you win an election. You might get people to listen to actually listen if you win a few more times.

    FWIW, I have a particular aversion to applying German philosophy to real historical events where the historical figures are known by name.

  17. Jack Straw

    And, to put a particularly Greek bend on this whole topic, I would say Callicles was “right.”

    1. Valissa

      Went to Wikipedia to follow up on your comment (very short entry).

      “Callicles argued that the institutions and moral code of his time were not established by gods but by men who naturally were looking after their own interests.”

      One can, in most statements, replace the word ‘gods’ with ‘ideologies’ and be very accurate. As a long time student of religion (always fascinated by beliefs and their consequences), I observed that gods are basically ‘ideals’ though more commonly referred to as personifications of virtues.

      Most humans operate by pursuing their self-ish interests and desires first and then applying ideology conveniently after-the-fact as an explanation. Many studies have shown this.

      1. DownSouth

        Valissa said: “Most humans operate by pursuing their self-ish interests and desires first and then applying ideology conveniently after-the-fact as an explanation. Many studies have shown this.”

        Which studies? Dictative studies that are slavish to the neoclassical economics faith?

        §Back in the eighteenth century, the ideas of Mandeville (as those of Machiavelli before him) were still met with great hostility by the public. Mandeville’s book was even convicted as “a nuisance” by the grand jury of Middlesex in 1723. By the end of the century, however, the concept of “Private Vices, Publick Benefits” became a solid part of scientific mainstream, largely due to the work of Adam Smith (1723-90). In his masterpiece ‘The Wealth of Nations’, Smith wrote…”By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”


        Rational self-interested agents cannot join together in a functioning society—-this could be one of the fundamental theorems in sociology. In a world where all individuals behave strictly rationally, armies would run away at the first shot (or would not even get together in the first place). Nobody would vote or pay taxes. IRS agents would accept bribes not to prosecute tax evaders, and then pass some fraction of that to the members of the Senate overseeing committee, to buy them off. The courts would make verdicts in favor of whoever can pay more, or has more power to intimidate the judges and juries. The police would let criminals go in exchange for part of their loot. Actually, I am painting too rosy a picture—-when all behave in a purely self-interested manner, there will be no IRS, courts, or police. There could only be a Hobbesian war of all against all.
        ▬Peter Turchin, War and Peace and War

        §The ideas presented in this book are part of a continuous line of intellectual inheritance from Adam Smith and his friend and mentor David Hume, through Thomas Malthus, Charles Darwin, and Emile Durkheim, and more recently the biologists William Hamilton and Robert Trivers. But Smith’s legacy also led in another direction, through David Ricardo, Francis Edgeworth, and Leon Walras, to contemporary neoclassical economics, that recognizes only self-interested behavior.

        The twentieth century was an era in which economists and policy makers in the market economies paid heed only to the second Adam Smith, seeing social policy as the goal of improving social welfare by devising material incentives that induce agents who care only for their own personal welfare to contribute to the public good. In this paradigm, ethics plays no role in motivating human behavior. Albert Hirschman (1985) underscores the weakness of this approach in dealing with crime and corruption:

        “Economists often propose to deal with unethical or antisocial behavior by raising the cost of that behavior rather than proclaiming standards and imposing prohibitions and sanctions…. [Yet, a] principal purpose of publicly proclaimed laws and regulations is to stigmatize antisocial behavior and thereby to influence citizens’ values and behavior codes.”

        Hirschman argues against a venerable tradition in political philosophy. In 1754, five years before the appearance of Smith’s ‘Theory of Moral Sentiments,’ David Hume advised “that, in contriving any system of government…every man ought to be supposed to be a knave and to have no other end, in all his actions, than his private interest.”
        ▬Herbert Gintis, Samuel Bowles, Robert Boyd and Ernst Fehr, Moral Sentiments and Material Interests

        §The Chicago gospel in this respect is actually at least as old as Adam Smith, who also believed in the harmony of the natural order, grounded in the operation of the law of self-interest. The theologian Paul Tillich once explained that it was characteristic of the thinking of the entire eighteenth century that the “principle of presupposed harmony…produces indirectly what [in an earlier era] was supposed to be produced directly by a divine interference.” Well before the Enlightenment, the natural-law theology of the Roman Catholic Church had sought an improved understanding of a harmonious world operating according to rational laws put in place by God. In the Enlightenment, the secular idea of the “harmony” of nature replaced the earlier transcendent role of “supernatural authority.” Indeed, Tillich found, “the first clear expression…can be seen in the area of economics. It was expressed by Adam Smith…in his idea of harmony” as yielded by the workings of the natural forces of self-interest in society.


        Hence, as the intellectual historian J.L. Tlamon comments, all manner of social thinkers throughout the eighteenth century regarded self-interest as “the most real and most vital element in man and human relations.” Or, as Louis Bredvold explained, for the Enlightenment self-interest was the “moral law of gravitation.” Francis Hutcheson, a teacher and mentor to Adam Smith, had declared that the force of “self-love” was as central “to the regular State of the Whole of Gravitation” was to the harmonious workings of the physical universe.

        The elements were now all in place for a new Newtonian science of society. Adam Smith became the founder of modern economics by putting it all together effectively in one grand picture, supported by a great wealth of practical detail. The free market portrayed by Smith showed a Newtonian mechanism operating in perfect harmony according to the natural laws of the force of self-interest. For “Smith, if something is truly natural,” in effect “it is right because it conforms to the will of the Deity.” All that is necessary to achieve the wonderful prospect of living in strict conformance with the laws of the universe is that governments, churches, and other social institutions cease to interfere with individual actions in pursuit of self-interest in the market. The result in the late eighteenth century was “the spiritualization of economic life.”


        The Protestant Reformation had introduced a new individualism into the relationship of human beings and God, abolishing the large intermediary church role as found in Roman Catholicism. Salvation was “by faith alone” and only God could know what was really in the heart of a man or woman. In the free market of Adam Smith, conformance the natural laws of self-interest was also to conform to the laws of God. Here as well there was no need to consult with any state bureaucracy or other outside church or other official body in order for a person to do the will of God. As the mention of God would gradually be dropped from free-market theories, the old individualism of the Protestant relationship to God would take anew secular form in the actions of individuals in the free market.
        ▬Robert H. Nelson, Economics as Religion

        §By the end of the Enlightenment, many thinkers treated human beings as quasi-divine. This is especially clear in someone like Kant who asserts that human beings are infinitely valuable ends in themselves. Such a view is only possible because of the transference of what hitherto were considered divine attributes to human beings. The Enlightenment (and post-Enlightenment) exaltation of human individuality is thus in fact a form of radical (although concealed) Pelagianism. Divine or at least quasi-divine powers reemerge although always in disguise. Nature is an embodied rational will; the social world is governed by an “invisible hand” that almost miraculously produces a rational distribution of goods and services; and history is the progressive development of humanity toward perfection.
        ▬Michael Allen Gillespie, The Theological Origins of Modernity

        It is David Sloan Wilson, however, that takes a chain saw to the minimalistic assumptions that you and Jack Straw seem to be mired in:

        Mandeville’s fable of the bees, along with Adam Smith’s metaphor of the invisible hand, has long been used to convey the idea that a well-functioning society can be forged out of individual self-interest. This idea has become such a tenet of modern thought that for many it is an unquestioned axiom and for decades it has served as the foundation of formal economic theory.


        …I think the concept of self-interest in both evolution and economics owes its popularity to at least two factors. First, natural selection and rational choice can both often be represented as an optimization process in which a single variable is maximized, even when it is a very complex function of other variables. Second, self-interest is a highly simplified and intuitive case of optimization, in which an individual juggles costs and benefits to maximize a single utility. Thus, any optimization argument can be made intuitive by employing the metaphor of self-interest. Unfortunately, the intuitive appeal of self-interest is obtained at a cost. The details of what constitutes self-interest must change with the particular optimization model, which means that there can be no single concept of self-interest. In addition, optimization in general is poorly suited for addressing the specific question of when groups evolve into adaptive units. Among-group selection by itself maximizes the relative fitness of groups and within-group selection by itself maximizes the relative fitness of individuals within groups, but the entire process of evolution in multi-group populations is a messy combination of these opposing forces, along with other forces that prevent adaptations from evolving in any sense. Showing how groups evolve into adaptive units requires a consideration of opposing forces, not a process in which a single quantity is being maximized.

          1. DownSouth


            In his 2:24 pm comment, Hugh observes that “Kleptocracy has explanatory power.”

            I agree. But I also believe that psychopathology and ideology have explanatory power.

            Here are the four items that are most often mentioned on the NC comment section that are alleged to have explanatory power in regards to the behavior of our economics and political elite:

            • Self-interest

            • Psychopathology

            • Ideology

            • Ignorance, stupidity or incompetence

            Now consider the three following propositions: Self-interest doesn’t matter. Self-interest matters. Self-interest is the only thing that matters. You, Hugh and Jack Straw profess to hew to the latter proposition. I subscribe to the middle proposition.

            Now the fun is just beginning, because neoclassical economists also hew to the same proposition that you and Hugh do—-that self-interest is the only thing that matters. But there’s a huge difference between you and Hugh and the neoclassical economists, because the neoclassicists believe that greed and selfishness are the best thing since sliced bread, whereas you and Hugh believe inordinate greed and selfishness are immoral, criminal.

            I won’t spend any time explaining what your position is, because you seem to be quite clear on that. However, you seem to have almost no awareness of what the position of the neoclassical economists is.

            Neoclassical economists have defined down deviancy (or should I say have come to celebrate deviancy?) to the point where the word “criminal” no longer exists. Here’s Robert H. Nelson, writing in his book Economics as Religion in a section entitled “Thou Shalt Steal (If It Pays),” about the Nobel-Prize-winning Chicago economist Gary Becker. Becker is one of the world’s leading lights of neoclassical economics:

            It says in the Ten Commandments in the Bible, Thou shalt not steal (Exodus 20:15). For Becker, however, understanding (and preventing) crime is explained not by such Christian homilies, but by hard economic motives. Indeed, stealing is simply another form of rational maximization of individual income and utility. Most people refrain from stealing because it would not be profitable for them; for some people it happens to be profitable and they become thieves. Economically, a theft is a “redistribution” of resources, in much the same broad category, technically speaking, as government welfare programs.

            Of course, most people would naively object that stealing is morally wrong, but that the welfare form of redistribution of income is legitimate because it has been approved by a democratic process. However, the Chicago school also finds that official rationales in politics often cannot be taken at face value. Welfare programs really involve coercively taking money from some people to give it to others. If collective “theft” by government can be analyzed without one’s feeling a need to interject extensive moral commentary, why not put theft by ordinary criminals in the same economic category? As Becker argues, the “basic motivation” of criminals is the same as that of “other persons.” Criminals are distinguished not by their lack of moral character, but by the fact that “their benefits and costs differ,” perhaps in part a consequence of their having different physical and mental endowments for crime.

            Becker at one point comments that stealing per se is not inefficient. In a sense, “frauds, thefts, etc., do not involve true social costs but are simply transfers, with the loss to victims being compensated by equal gains to criminals.” However, responding to their private incentives, people will steal up to the point where the objects gained (stolen) have a money value equal to the work effort in doing the stealing. It is only in this sense that it is possible to judge criminal actions as inefficient (“wrong” in the morality of economics) because acts of stealing produce no useful outputs, and yet can absorb considerable productive resources of society (the time and effort of the criminals themselves).
            In considering how society should deal with crime, Becker argues that the total social welfare function must also include “the social value of the gain to offenders” from crime. Criminal activities should be treated in the same way as building cars and engaging in other economic activities, although they have certain special economic characteristics—-they are, for example, “an important subset of the class of activities that cause diseconomies” to others (i.e., to the victims of crime), a class which also include such things as factories that emit smoke and other public nuisances.

            Nelson goes on to conclude that:

            Becker’s treatment of crime highlights the absence of any absolute social concepts such as “justice” or “morality” in the framework of thought that he applies to human behavior. Individuals may constrain their behavior of their own accord (based on some concept of “justice” in their mind) but there is no place where “society” meaningfully says, “this is not allowed because it is ‘wrong.’ “

          2. DownSouth

            Where I wrote:

            “Now the fun is just beginning, because neoclassical economists also hew to the same proposition that you and Hugh do—-that self-interest is the only thing that matters.”

            I should have wrote:

            “Now the fun is just beginning, because neoclassical economists also hew to the same proposition that you and Hugh do—-that self-interest explains everything.”

  18. xct

    Excellent post, it feels here like somebody turned on the light in a room full of smoke and dust. These institutions should be denounced for their fraud and hypocrisy.

  19. Hugh

    For one who came up with the term “criminogenic environment”, it is odd and increasingly discordant that Bill Black continues to duck characterizing what is happening as kleptocracy.

    Not doing so creates a torturous narrative where actors repeatedly pursue inexplicable courses of action. Indeed who the actors are can get a bit dodgy. Take the ECB. Black treats it as essentially an independent player right through to the very end of his post where in a throwaway line he notes belatedly that the ECB is really a creature of the French and Germans (I would say primarily of the Germans.) However it greatly changes the tenor of the piece if we were to go back and re-read it replacing ECB with the Germans (or the French and the Germans).

    Kleptocracy has explanatory power. Black is reduced to describing policies as foolish and even insane which from a kleptocratic view are nothing of the kind. Kleptocracy is not about fixing (as in repairing) anything. It is all about the looting, and leaving ordinary taxpayers holding the bag. Black marvels at why the nominally left Fianna Fail would suicidally choose to bail out the Irish banks. Yet how is this any different from the nominally left Democrats in this country doing the same but on a far vaster scale and losing the House in the 2010 elections?

    After a while, the perspective of “good people making bad decisions” simply becomes untenable. Yes, good people can make bad decisions. The problem comes in reconciling their goodness with a steadfast refusal to change those bad decisions long after they are seen to be bad. Take the Greek government’s failure to go after the country’s rich tax cheats and take measures to insure that they couldn’t ship their wealth out of the country before it was taxed. Even if you accepted the extremely dubious proposition that the Greek government was unable or unaware to take action before this crisis, there is really no explanation why it still hasn’t acted, except one: kleptocracy. Rather than go after the rich who could afford it, the Greek government (and the Germans) inflicted austerity on ordinary Greeks who could not. Again how is this any different from us, where the rich get tax cuts and austerism here takes the form of no jobs program, no fix for the housing crisis, and continued attacks on social programs like Medicare, Medicaid, and Social Security?

    Black is left in the unbelievably lame position where he must wonder after such a lapse of time why the European players embraced and continue to embrace solutions that have patently failed. He seems unable to accept certain basic truths, that what we have here, in Europe, and around the world is kleptocracy. Kleptocracy is inherently destructive and unsustainable. It cannot be reformed. It follows a kind of Gresham’s law where bad policies drives out good policy. Kleptocracy will crash the system. Indeed it already has, as we saw in 2007-2008. Left in place and to its own devices, it will loot and crash the recovery, which is what we are seeing now.

    This whole frame, rickety as it is, that liberal economists like Black cling to that this is about bad, not criminal, decisions facilitates and enables the looters and their looting. It suggests the problem is not with them but their policies. It would have us believe that all we have to do is change those policies, not the elites who make them. But here’s the thing, and the place that Black and others will not go: as long as we keep our current elites, those policies will not change, real solutions will not be enacted, kleptocracy will remain supreme. The question is how long will the Bill Blacks of this world give us pretend critiques, and pretend solutions, and not get to the crux of the matter? How long and how late will it be before they recognize that it is far more than criminals in the system, but that it is the system itself that has become criminal. That the criminals aren’t just on Wall Street but in the White House, Congress, in Athens, Dublin, Paris, Berlin, in Beijing and Tokyo? That they aren’t just financiers, but politicians, regulators, academics, and media?

    1. Susan Truxes

      Hugh, I think Prof. Black pretty much agrees with you. But what is a sovereign country to do? Call the Hague? We have to use our own laws. And we have them. We just have no political will. Yet. It is nice to see that China is learning from this farce and is bailing out their provincial banks. For China to allow economic “stability” to generate political instability would be suicide.

      1. Valissa

        It’s hard to know for sure whether Black agrees with Hugh or not. But Black used words like paradoxical and mystifying to describe the elites economic behaviors. Kleptocracy is very straight forward and not in the least mystifying. I quite agree with all Hugh’s points and have myself tried on other econ type posts to bring in the point of how looting and kleptocracy must be discussed and addressed by any economic theories or those theories are meaningless in the real world. Perhaps eventually someone in the E-CON world will address this issue, but I haven’t seen it yet. Not even on this blog. The E-CON folks dance around it… it’s THE elephant in the living room!

        1. Mark P.

          Valissa wrote –

          ” …have myself tried on other econ type posts to bring in the point of how looting and kleptocracy must be discussed … Perhaps eventually someone in the E-CON world will address this issue, but I haven’t seen it yet. Not even on this blog.”

          George Akerlof and Paul Romer’s “Looting: the Economic Underworld of Bankruptcy for Profit” from 1994 is (or has become) one of the most famous economics papers of its time.

          Everybody who is not ignorant knows about it, though some do not care to acknowledge it. Please educate yourself.

          Hugh wrote –

          “I really don’t think (Bill Black) does (know)”

          Black knows. He developed most of the concept you are attempting to apply.

          The Akerlof and Romer paper, for instance, thanked Black profusely for the wealth of help he had given them regarding understand the S&L crisis, in whose aftermath Black had been chief regulator. Please educate yourself.

          1. attempter

            That’s a paper everybody knows and cites in an ad hoc way, but whose implications almost no one wants to systematically apply.

            Thus we have even the better commentators remaining mired in a smeared out state where from day to day they may call it organized crime, or bad apples, or negligence and stupidity, or even honest mistakes. The hesitation in the vocabulary is characteristic.

            This is because in the end most of them still want to keep the rackets and the elites but just in a “reformed” version. They don’t want to follow the logic of the facts which leads inexorably to one conclusion only: that the terminally criminal system has to be completely destroyed.

          2. Hugh

            There is a huge difference between looting that occurs in certain areas and when looting becomes the purpose and goal of the system in general. Various kinds of looting have taken place for centuries. One has only to think of war profiteering and the Age of Shoddy during the Civil War. But that is very different from systemic looting, that is the conversion of the economy into a vehicle for looting and, as much as possible, only for looting.

          3. Valissa

            “Everybody who is not ignorant knows about it, though some do not care to acknowledge it. Please educate yourself.”

            I have always been very clear on this site that my background is not economics and that I only have a little knowledge in this area. As far as I understand, the purpose of this site is to educate people on financial and economic matters which is why I come here. I also read books and articles as I find them. Therefore I am quite surprised that I never heard of this very famous economics article from 1994 about events back in the 80’s, and really rather shocked that I’ve never seen the link referred to at NC before. So thank you for pointing it out to me.

            What I find quite fascinating is how whenever I dare to question anything about economics theory I get a cheap snotty elitist remark like your from at least one person. Do you feel more superior after having been so disdainful? From my perspective you lose status for a remark like that. Cheers!

      2. Hugh

        I really don’t think he does. If he did, he would not be surprised at what is happening in Europe. It is very predictable that nothing is being fixed or that the “cures” are worse than the disease. Kleptocracy is about looting. There is an individual survival instinct among kleptocrats. They all wish to get out ahead of the collapse, but this does not translate into doing anything to keep the system itself from collapsing. I think this is a great misconception about “extend and pretend”. It is not about keeping the system going. That is an incidental effect. It is about keeping the looting going as long as possible. My concern is that even liberal economists are effectively giving cover, whether they mean to or not, to the looters, precisely because they won’t come out and say who they are and what they are doing, and above all why they are doing it.

        About political will, it is important to keep in mind the class war we have been in for the last 35 years and that we have all been propagandized on politics and economics to the point of imbecility.

        I am more pessimistic about China. Bailing out provincial banks looks to me more like extend and pretend. China’s real problems have been a failure to develop its internal markets, that is substantially improve the standard of living for the majority of its population, its overcapacity, its serial bubbles, and its mercantilism.

        1. Foppe

          I agree. this is probably the weirdest article i’ve seen by him; almost as though he didn’t write it. The similarities between the US and EU cases are so obvious that it’s hard to believe he missed them.

          Beside that, the remarks about the US caring about the NOLA survivors, and the suggestion that US consumer bankruptcy laws are functional are just as weird.

        2. Mark P.

          Yeah. Michael Hudson’s analysis of the scope of the damage and the looting is probably more apropos than Black’s at this stage.

          We have a financial overclass and a subaltern political class, which both seem largely composed of individuals who are (a) clearly thinking only short-term and (b) aiming at getting as much for themselves as possible before the system collapses.

    2. Allen C

      I prefer to distill the dynamics into simpler terms. See post above. At the core it is about losers LOSING, criminals going to prison, and widespread corruption. These long diatribes serve the kleptocracy by complicating what are fundamentally basic concepts.

      Black avoids the EU construction topic. The ECB and the EU were never designed to deal with sovereign bankruptcy and failed, country banking systems larger than the country’s GDP.

      The New Orleans analogy is poor as well. Sovereign backstops were never part of the original deal!

      1. KnotRP

        Fraudulent conveyance and control fraud are subject to reclaimation, even if it’s government employees who give it to private interests. Heck, a stolen dvd player has to be returned even if one pays for it off the back of a truck….so why are the bigger crimes special, in the South Park “…and it’s gone” sort
        of way?

        Try stealing something from your neighbor, then tell
        them they are right that you stole it, but they are too
        late…can’t have it back. As if that would fly….

  20. herman sniffles

    Wonderful article by professor Black. Let’s get this guy a dog catcher’s noose and a cattle prod, and let him loose in the Hamptons.

  21. Postkey

    “Why left-wing parties embrace the advice of the ultra-right wing economists whose anti-regulatory dogmas helped cause the crisis is one of the great mysteries of life.”

    If they believed that they followed their advice, when output had, unprecedently, increased for 14-15 years then it seems natural to turn to the same economists when faced with ‘problems’? Especially with all the propaganda re the dangers of large national debts and deficits?

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