Podcast • May 26, 2011

Mark Blyth (4): Why they call it “going for broke”

Click to listen to Chris’ conversation with Mark Blyth (20 minutes, 10 mb mp3) Photo from Mark Blyth’s Austerity video Mark Blyth confirms the the sneaking suspicion that the meltdown is still melting down — ...

Click to listen to Chris’ conversation with Mark Blyth (20 minutes, 10 mb mp3)

Photo from Mark Blyth’s Austerity video

Mark Blyth confirms the the sneaking suspicion that the meltdown is still melting down — and that you get sharper economic news in from the noisy guy in a Glasgow pub than from the newspapers covering the IMF sex scandal.

“It’s like watching Fukushima — it literally is.” First: how could this happen? Then: ah, they didn’t build the wall high enough, whatever. An institutional design problem! World catastrophe averted, but then another crisis, and another. Then a kind of creeping meltdown. Not on page one any more. The problem isn’t fixed, but people are used to it. “In the Eurozone, it’s ‘Oh, yawn, another European crisis. Uh, tell me something I don’t know.’ You know what? Eventually this thing gets to a tipping point. You don’t know where it is, and then bad things happen.”

We haven’t learned a damned thing from the banking crisis. Dodd-Frank will basically put a little bit of a speed bump into the road and some airbags into the car. Other than that the model remains unchanged. And because of that, we are now more exposed and more at risk than ever. There’s no reason that this model won’t go bang again, and the next time they do that, they won’t be landing on public balance sheets with a 40 percent debt to GDP ration, they’ll be doing it with 80 percent. And that means there’s no money to bail them next time. So when they go down next time they really go down.

Now if you’re a banker at the top of the game you know that. So what’s your incentive? Is it to play nice, to reduce your profitability, to downsize your business? Or is it to go for broke before the whole thing goes up? We’re not going to bankrupt ourselves because of the so-called profligacy of the state. This is all politics by other means. What’s going to get us once again is a credit cycle: a super-boom followed by a  super-bust. Only this time we’re doing it on really highly-levered state and public balance sheets. That’s the real problem. We’re kicking the state and the state is the thing that will save you. We’re kicking away the foundations of the building that we’re relying on to protect us from the hurricane as the hurricane approaches. It’s beyond stupid.

Political economist Mark Blyth with Chris Lydon at the Watson Institute, Brown University, May 25, 2011.

Podcast • December 1, 2010

Mark Blyth on Ireland: The Circle will not be Squared

Mark Blyth, of Austerity fame and the Watson Institute, has a Scot’s vernacular gift for clarifying economics. Is the situation explosive? “You’ve got 300 million Americans and 500 million handguns. And 72 percent of Americans ...

Mark Blyth, of Austerity fame and the Watson Institute, has a Scot’s vernacular gift for clarifying economics. Is the situation explosive? “You’ve got 300 million Americans and 500 million handguns. And 72 percent of Americans that live paycheck to paycheck. Do the math!”

We’re talking in particular about the Euro crisis spreading out of Ireland. Short form: tiny country, continental meltdown in the offing.

It was never a “Celtic Tiger,” in the first place, in the Blyth telling. “It was a small ocelot with a roar.” A population the size of Brooklyn, NY, producing about 2 percent of the European GDP. And now, in deep pain of cuts in education and health services, it’s having an utterly illusory shouting match, not so unlike ours in the US of A.

“People want to say: look at those profligate governments, spending all that money. We’ve got to restore fiscal sanity. But it wasn’t fiscal insanity that got us here. It was private-sector leverage and the insanity of banking that brought us to this point. So the bankers put it on the state, and the state turned around it put it on the taxpayer. It’s the biggest bait-and-switch in human history.”

As the Euro bankers try to transfer risk and responsibility for their crisis back and forth from private to “sovereign” public debt, I’m asking Mark Blyth — using Ireland as a manageably small example — to find the point where justice could be said to meet necessity. It turns out, he says, that there’s no such point. Not in sight yet, anyway.

The just thing is that the banks should pay. No question. You made the mess. Clean it up. It’s a pretty simple rule. But the basic line is this: if you let the banks fail, there’s nothing coming back. So if you’re Ireland, the Celtic Tiger, and over 10 percent of your GDP is in the financial sector, that’s where you make a lot of money, bankers’ salaries and all that. So let’s say you decide to blow up 10 percent of the economy. What’s your next trick? We can try to reflate it. We can hope that it comes back. We can hope to raise the patient from the dead basically. In order to do that you need to have a growing economy. So obviously hacking away at austerity politics is not going to bring back the bankers’ balance sheets. But on the other hand, it’s not clear what else you do with them. They don’t have any money to pay back, unless you bring the corpse back to life.

Now the only way you can do that is by having growth-enhancing policies, and that’s why austerity is not one of them. But there’s another short-run way you can do this. If you had to take all the debt off the banks and put it on the public balance sheet, thereby making the bondholders of sovereign bonds concerned about the value of their holdings, those sovereign bondholders are going to go to the EU and Germany, and remind the bankers in those countries about all the different bonds they’re holding in all these peripheral and non-peripheral countries, and say: do you want a bank run on this?

Because here’s the deal: if the Irish decide that they’re going to put it on the banks, and the banks can’t pay it — if they say: Screw it, we’re not going to take austerity politics anymore. Hell with it, we’re not going to do this! — okay, what’s your next trick, Ireland? Well, we’re going to default, we’re going to back out of the Euro! Oh, really? The minute I know that, I’m going to dump every Irish bond I can, and the minute I do that I’m going to look at my holdings in bonds and I’m going to say: there’s other guys out there. They can default, too, and probably the Spanish are going to go as well. So then I start dumping the Spanish and then the Portugese. And then everybody’s dumping all these bonds together. You’ve got a massive run that wipes out not just 2 percent of Europe’s GDP, Ireland. It basically takes out the European banking system.

So from the point of view of Europe and the Germans in particular, they’re saying to the Irish: You’re not going anywhere, Ireland. And you’re taking this austerity, and you’re going to like it! The only problem is: they’re not going to. There’s a democracy in Ireland. They’re going to vote the rascals out. And when they vote them out they’re going to get a government that says: maybe the banks should pay for this. And then you’re back to your problem: the banks don’t have any money left. So how are you going to do it? You can’t square a circle!

Mark Blyth with Chris Lydon at the Watson Institute, Brown University, November 30, 2010

Podcast • June 3, 2010

Nassim Nicholas Taleb: The "Fragility" Crisis is Just Begun

Nassim Nicholas Taleb is one of the great wiseguys or wisemen of the moment. Quite possibly both. For a world that wants better than the fatuous “perfect storm” account of the economic meltdown — or ...

nassim-taleb.jpg

Nassim Nicholas Taleb is one of the great wiseguys or wisemen of the moment. Quite possibly both.

For a world that wants better than the fatuous “perfect storm” account of the economic meltdown — or of BP’s gusher in the Gulf, or of 9.11 for that matter — Taleb has revised and extended his cult classic, The Black Swan. His anomalous “black swan” (since swans are by definition white) has three properties: it’s (1) any one of those unforeseen developments that comes (2) with big consequences and (3) a concocted cause-and-effect after-story. In conversation, Taleb is trying to get us to let go of “causes” and fix on the word “fragility.” He is explaining — sometimes elliptically, aphoristically, through metaphors, jokes and old folk wisdom — why “the economic crisis has barely begun,” why indeed we seem to have entered the Age of the Black Swan.

In a Letterman List, our conversation might be reduced to this:

10. Mother Nature is robust. Large modern corporations are fragile.

9. When the big bridge collapses, the “news” interest will be in the last truck that made it over, when the real story should be about the fragility of the bridge.

8. Somewhere in every Black Swan story there’s a turkey. The turkey has a clear understanding of history, and of growth. The nice farmer feeds him every day, and the turkey keeps getting fatter. Then comes Thanksgiving. It’s a Black Swan for the turkey. But not for the butcher.

7. We can say safely that the Black Swan started entering society with agriculture, with the fact that we started settling. Complexification started then… In my tableau of what’s fragile and what’s robust, the nation-state is a fragile entity, whereas city-states are more robust. So the creation of the nation-state created this big unpredictable event, that First War. Even those who saw it coming didn’t see the damage it was about to cause. So the First War probably is the most consequential one, and it came in two volumes…

6. I think that today we are entering a different world of Black Swans because of the Internet.

5. Newspapers make us stupid. They overexplain with “causes” of things that can’t be checked. And because they are driven by the sensational, they misrepresent risk. I prefer the social filter of news, over dinner or lunch. Anything that draws me away from face-to-face contact is harmful to my health.

4. Grandmothers had a rule of thumb after the Great Depression: work and save for a few years before you get into risk… Unpredictability and debt are not friends.

3. On bailouts: My analogy is to the gambler who is now gambling with the trust fund of his unborn great-great-granchildren… Prudence should be the first thing on the agenda of governments, not speculation. Stimulus packages are speculation… We are gambling on a massive recovery. It’s too big a gamble, and besides it’s immoral.

2. In the economic crisis, and in the Gulf of Mexico, what we should be discovering is not who made what mistake, but the fact of fragility. Alas, what we don’t learn is… that we don’t learn.

1. No government can fortify something that’s inherently fragile.

Quotes and paraphrases from Nassim Nicholas Taleb with Chris Lydon in Providence, June 2, 2010.