Financial markets are booming. The Dow is up 11% this month. Financial institutions are delighted. (The jobless are, well, still jobless.) Who is responsible? Well, indirectly, or maybe directly, it is German Chancellor Angela Merkel, who dragged the Euro-Zone banks into agreeing to take a fifty percent haircut on their Greek bonds. The markets cheered.
In this morning’s NY Times column Paul Krugman puts it all in perspective. (Italics are mine.
It’s worth stepping back to look at the larger picture, namely the abject failure of an economic doctrine — a doctrine that has inflicted huge damage both in Europe and in the United States.
The doctrine in question amounts to the assertion that, in the aftermath of a financial crisis, banks must be bailed out but the general public must pay the price. So a crisis brought on by deregulation becomes a reason to move even further to the right; a time of mass unemployment, instead of spurring public efforts to create jobs, becomes an era of austerity, in which government spending and social programs are slashed.
This doctrine was sold both with claims that there was no alternative — that both bailouts and spending cuts were necessary to satisfy financial markets — and with claims that fiscal austerity would actually create jobs. The idea was that spending cuts would make consumers and businesses more confident. And this confidence would supposedly stimulate private spending, more than offsetting the depressing effects of government cutbacks.
You all know how successful that has been. The banks are hoarding money that might be leant to business start-ups and the jobless are still jobless. Nothing has trickled down.
Now the results are in and the picture isn’t pretty. Greece has been pushed by its austerity measures into an ever-deepening slump — and that slump, not lack of effort on the part of the Greek government, was the reason a classified report to European leaders concluded last week that the existing program there was unworkable. Britain’s economy has stalled under the impact of austerity, and confidence from both businesses and consumers has slumped, not soared.
Pow! Take that, Confidence Fairy!
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