Tuesday, January 27, 2015

We Need More "Irresponsible Populists"

Alas, I cannot find it, but around the time of the last Greek election there was a column so caustic that it could be only shown online because the print it might have eaten away the paper and ink.  The overall gist, however, was that while the Germans think that destroying a quarter of the Greek for the sake of its creditors seems eminently reasonable, the Greeks should be forgiven for disagreeing.  The current reaction to Syriza winning in Greece is nothing new.  It was the reaction to Francoise Hollande winning in France.  And Lula da Silva winning in Brazil.  And any candidate winning who runs on a platform of putting the well-being of the domestic population ahead of international banks.

Can we face facts?  The current convention of our global elite -- the VSP's, if you will -- is that a "responsible" government means one that runs the country for the benefit of international banks.  An "irresponsible populist" means a government that runs the country for the benefit of the domestic population.  Whenever an "irresponsible populist" won an election, there would invariably be dire warnings that he must reassure international banks that all that talk about putting the domestic population first was just something he said to get elected, and that really the country will continue to be run for the benefit of banks.  When Lula da Silva won in Brazil, I recall calls for him to start his administration by taking some harsh measure to hurt poor people, not because it made any sense, but just to reassure that banks of his good faith.  And when a financial crisis hits, countries are invariably urged to inflict maximum damage on their economies as a means of reassuring creditors.

And it can't be emphasized strongly enough -- none of this is new.  How long has it been going on? A lot of it happened in the 1930's in Europe.  After WWII, we were supposed to have learned something from the experience.  How long did it take to unlearn the lesson?  I honestly don't know, except that I first became aware of it in the 1980's in college with a debt crisis going on in Latin America.  The VSP's behaved exactly the same as they are behaving in Europe today, with much the same result.* It happened again in Eastern Europe in the 1990's with the VSP's always pushing for countries moving away from Communism to take the most drastic and painful approach possible.  And in the late 1990's with the Asian crisis, although there for the first time was the glimmering of a recognition that the fault might be with the financial system as much as with debtor countries.  And here we are now back full circle to Europe.

Back in the 1980's, I couldn't find much out there but despair.  Conventional wisdom of the VSP's seemed unanimous.  When bankers are faced with losing payments, poor people eating is a luxury that countries simply can't afford.  Any attempt to put the domestic population ahead of foreign banks will only end up with foreign banks cutting off lending and hurting countries more.  Any attempt to ask sacrifices of the rich will lead to capital flight.  Any benefits of growth reaching the general population will destroy incentives to invest.  So the only option is a system in which the poor bear the burden of adjustment in bad times and the rich reap the benefits in good times.  And if that doesn't seem fair, well, who cares, being fair is a luxury banks won't allow you.

VSP's haven't changed their opinions since, but their are more challenges to VSP logic than in the past.  Default ceases to be unthinkable once countries have defaulted and prospered.  Debt deflation theories make clear that when a country shrinks its economy, its debt burden increases and its ability to repay suffers.  Common sense and experience agree that inflicting economic devastation on oneself to attract foreign investment doesn't work because economic devastation is not an attractive investment.  And the assumption that foreign investment is the be-all and end-all of economic growth has been challenged.  It appears that too much foreign investment is dangerous because it leads to bubbles that sooner or later are sure to burst.  (No one has figured out yet how to to avoid bubbles). The IMF, once the very embodiment of VSP wisdom and the assumption that domestic economies should be sacrificed to foreign creditors, has learned the lessons of its errors and changed its mind.** Central bankers are slowly beginning to learn.  That leaves the political, business, and media VSP's to be convinced.  It's a tall order, but better than in the past.

So here's to Greece, and the hopes that they will play their part!

*One important difference: Latin America really did have hyperinflation during its debt crisis.  Europe today is drifting closer and closer to deflation. I don't at present know either why the difference, or whether the memory of Latin America's hyperinflation is playing a role in the outsized 
fears of inflation in Europe today.
**It is very hard for members of my generation to think of the IMF as anything but a villain given its past record, but we really should learn to.

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