Talking Down Olli’s Multipliers… ?
April 16, 2013

You remember Olli’s chastising for talking down the multipliers?


holy coding error batman

The intellectual edifice of austerity economics rests largely on two academic papers that were seized on by policy makers, without ever having been properly vetted, because they said what the Very Serious People wanted to hear. One was Alesina/Ardagna on the macroeconomic effects of austerity, which immediately became exhibit A for those who wanted to believe in expansionary austerity. Unfortunately, even aside from the paper’s failure to distinguish between episodes in which monetary policy was available and those in which it wasn’t, it turned out that their approach to measuring austerity was all wrong; when the IMF used a measure that tracked actual policy, it turned out that contractionary policy was contractionary.The other paper, which has had immense influence — largely because in the VSP world it is taken to have established a definitive result — was Reinhart/Rogoff on the negative effects of debt on growth. Very quickly, everyone “knew” that terrible things happen when debt passes 90 percent of GDP.


raining on Reinhoff and Rogoff 

First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don’t get their controversial result.

So what do Herndon-Ash-Pollin conclude? They find “the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [Reinhart-Rogoff claim].” Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly.


..and Krugman again

But it seems that this is just what happened. According to the review paper, R-R mysteriously excluded data on some high-debt countries with decent growth immediately after World War II, which would have greatly weakened their result; they used an eccentric weighting scheme in which a single year of bad growth in one high-debt country counts as much as multiple years of good growth in another high-debt country; and they dropped a whole bunch of additional data through a simple coding error.

Fix all that, say Herndon et al., and the result apparently melts away.

If true, this is embarrassing and worse for R-R. But the really guilty parties here are all the people who seized on a disputed research result, knowing nothing about the research, because it said what they wanted to hear.

There is no alternative folks. Taking bets now on Irish coverage


Dr. FIVE   16 April 2013

Europe on Austerity’s Knife-Edge – How Long is this Going On For ? Forever ?
October 17, 2012

As of 15/10/2012 we see yet another few days of unfinished business, in the ongoing “Troika vs. Greece” sparring match. Greek political “leaders” are walking a very fine line. On the one hand the politicians need to be seen to please the Troika, on the other hand, they can’t afford to alienate themselves any further from the Greek people. Greece’s political leaders tell us that if they can’t get agreement with and from the Troika, Greece will not get the next 30 billion tranche of the bailout, and the country will be bankrupt. We’ve heard that three times so far, and each time, without any apparent agreement with the Troika, money has magically appeared from somewhere, and things stumble along again for a few months. Then we are told we will bankrupt again, and magically, money appears….

Conflicting pressures on politicians, to say the least.   The latest opinion poll will no doubt have frightened both Greek politicians and their European handlers like never before. It indicates a serious political polarization in Greece; with a 48% majority intending to vote SYRIZA should an election be held tomorrow, while the far right Chrysi Avgi holds its ground.   Evangelos Venizelos, leader of Pasok, has special reason to worry. Despite his defiant rhetoric, the party is on the slippery slope and is polling less than 10%. This downward trend is now pointing to the serious possibility of the once mighty Pasok polling around 5% or less, with a very real danger of the party not even reaching the required 3% of the vote to claim representation in the parliament.

Under this pressure, popular stances need to be taken, and both Venizelos and Kouvelis have started opposing various Troika demands, resulting in the announcement on 15/10/2012 by the Greek Finance minister Yiannis Stournaras that talks with the Troika will continue after the EU Summit.   At the same time, some 20 Greek government MPs have made it clear that they will not support the measures demanded by the Troika in terms of 15,000 immediate redundancies in the civil service and complete abandoning of all the provisions currently enshrined in the various labour laws to protect the basic rights of the Greek workers. More and more international voices are echoing the idea that Greece will indeed need not only more time, but also more money. And the question is being asked in Greece and across the EU

“How long is this going to go on? Forever?”

In order to answer that question one has to understand what is really going on in Europe. Let’s make one thing very clear from the outset. Despite all the talk of Greece, Ireland, Portugal, and others being “bailed-out”, nothing could be further from the truth. Neither Greece, nor Ireland, Portugal, Spain, Slovakia or any of the current or future “bailout programs” are intended or designed to bail out the respective countries to which they are allocated.   In simple terms, the so called bailout allocated to these countries is in reality the amount of internationally held bank debt these countries have been “volunteered” to clear. This can be understood by looking back at the financial developments of the last 15 years or so.  Around 1995, the “Home owners’ market” came into the sights of financial houses. Home owners in general have no other corporate exposure, and their only means of investing and “creating wealth” is by investing in their houses. It was therefor in the interest of the financial institutions to have as many home owners as possible. Millions of people did however not fit the traditional “safe borrower” profile, and needed to be brought into the “home owners’ market” some other way. Subprime lending, a system of high risk, high interest lending, often more correctly referred to as predatory lending, was born.

And then something strange happened. In an effort to reduce the high risk element of this kind of reckless lending, while keeping the high interest component, financial houses started repackaging loans, and selling packaged debt to each other. This was a completely new, and as we now know, very dangerous development. Rather than debt backed up with bricks and mortar, or government guarantees, or something with value at least, we now had people investing in debt backed up by debt, backed up by debt, backed up … The perceived value of this debt was seen as wealth “locked in” to the debt, which would be released upon settlement of the debt.

The financial world embarked on an insane orgy of buying and selling debt, the amounts involved became ever larger, fooling themselves and everybody else into thinking that they were “creating wealth”. In reality, all they were doing was creating a phenomenal amount of unsecured, and unsecurable debt. In order to maintain the momentum, and create more POTENTIAL wealth, enormous amounts of cheap money were released in to fragile economic systems like the whole Southern periphery of Europe, officially enabling those economies to import product from the export oriented Northern European economies. In reality, all the banks were doing was increasing the amount of debt they owned, and still believing that the wealth locked into that debt would at some stage make it all worth the risk. Believing their own hype, the financial madmen of the day started investing heavily in the very Ponzi scheme they devised, buying the debt they created, creating more debt, and the vicious circle became an ever faster turning merry-go-round of buying and selling debt. Essentially, it was always the same debt, simple repackaged and re-priced, and made more expensive. In other words, more debt created from existing debt. And it was only a matter of time before the whole thing would come to a crashing halt.

The collapse of Lehman bank was the trigger for the financial master minds of the world to try and safeguard their insane investments. The banking crisis hit, and with it the most fragile economies went into a downward spiral. Of course, local corruption and manipulation by “interested parties” only helped to make a bad situation worse. Debt could not be paid, wealth locked into that debt could not be realized, and the very rich were not happy in seeing a possibility of not getting what they think is their God given right to get, yet more money. Lehman bank had shown them just how much they stood to lose, and they were not going to let this happen on a world wide scale. Banks holding debt, or in their sick minds “Potential Wealth” could not be left go ever again, no matter what the cost.

The fact that they brought this upon themselves is an inconvenient little side note. There is of course also the very real consequence to the larger economies in Europe, who were only too happy to supply cheap money to fuel their own export-based economy, would end up holding the debt they created. So a firewall needed to be erected that would prevent “contagion”. And somebody had to pay for this. To use the words of the late Brian Lenihan “We were bounced into a program”.

But this was not just in Ireland. The same treatment was dished out to Portugal and Greece. The method used to stop “contagion” is the bailout mechanism. Every cent of bailout money “given” to the various countries goes straight back to the so called lenders, with a handsome 7% interest in this case Greece, for the privilege of having their respective countries used in what is nothing short of a gigantic money laundering operation. The system was invented by the so called lenders, and is operated by the EU through the ECB, EMS, etc. According to those in charge of the plan, the firewall guarding against contagion is now in place. But more money is needed. A second firewall must be erected. This firewall is to guard against bank insolvency. Joe Soap must cough up even more money to fund this, so Spain and soon enough Italy will get “bounced into a program” to provide the extra cash. Meaning, Joe Soap in the various countries has everything, including his very livelihood stolen of him through “austerity” in order to safeguard the solvency of the banks, and thus realize the wealth locked into the debt created by those very same banks.

When Poul Thomsen, the IMF representative assigned to the “Greek case”, admits that the IMF got it wrong, he does not mean they got it wrong in the sense that they are sorry for leaning too hard on Greek Joe Soap and pushing him into levels of poverty not even experienced during the Nazi occupation of the country. What he does mean is that they are sorry for leaning on Greek Joe Soap so heavily that they endangered the possibility of recovering the wealth locked into Greece’s allocated slice of international bank debt. There is,no apology to Greek, Irish or whatever Joe Soap. In fact, they couldn’t care less about Joe Soap.

The problem the financial gangsters are facing is that, until this second firewall is in place, not only does the situation get worse by the day, the merry-go-round, of which the likes of Greece, Ireland, Portugal are fixed components, must be kept turning, and the debt contained in this merry-go-round must keep going round. Buying bonds, selling sovereign paper, propping up banks, whatever, it must be kept moving between ALL the components making up the merry-go-round. The money stolen out of pockets of Europe’s Joe Soap ensures this, while it reduces the bank debt slowly, or looking at it another way increases the bank’s wealth.

If one element is allowed to drop out, through sovereign bankruptcy, or Euro-exit, the merry-go-round suddenly becomes a deadly game of musical chairs, and the last one standing picks up an enormous bill. By the nature of things, that last one will be the stronger components in the merry-go-round. And instead of realizing the potential wealth held in all this debt, they will be left holding the debt. That is the real reason behind the bailout/austerity scam. Joe Soap is being made pay for the debt mountain created by the corrupt and often criminal bankers, on behalf of the richest 5% of the world population. Once this scam is seen to be working, they will want yet more again, this time encouraged by the knowledge that Joe Soap will pay, willingly or otherwise.

How long will this go on for? The answer is very simple, until Joe Soap says, and means, enough. No sooner. Joe Soap would be a wise man to say enough now. If he waits till the second firewall is ready, the whole Southern Periphery and Ireland will be dropped like a hot potato, and Joe Soap will be left wondering what happened, and how long it is going to go on for…

Ephilant  16 October 2012   Greece

Greek students protest against the award of the Nobel Peace Prize to the EU

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