Monday, November 29, 2010

Kid Gloves for Banks: the Opposite of a Stimulus

A central issue of the current financial period is whether the financial sector will manage to transfer all of its liabilities to the public sector and keep them there.  Many people have tied this issue to the Ireland crisis.  The Irish public sector is getting slashed not because it ran deficits before the crash, and then saw them become unsustainable, but because the Irish government became the guarantor of 100% of the liabilities of Irish banks. These liabilities far exceeded Irish gross domestic product, and they still do.

The Financial Times ran a good overview on November 17th about the growing isolation of Angela Merkel among European leaders on the debt question. Most commentary presents the German position as hostile austerity: force the Greek public to pay for their debt crimes with austerity and poverty for years to come. There's something to that - much of the German public seems to feel that they sacrificed themselves (with few if any wage increases and service cuts throughout the past ten years) while other countries like Greece did not.  But in fact the current German government is also trying to force private investors to share some of the cost.  This has been an enormous problem for Western societies, as the financial sector gets governments to pass on the cost of their mistakes to citizens, who pay several times over - actual money and guarantees, zero-cost access to funds for banks that prop restored profits, public service cuts, austerity-induced low growth, and reduced investment in innovation for the future.