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posted on 03 July 2016

Brexit And Failed Neoliberal Europe

from William K. Black, New Economic Perspectives

Andrew Ross Sorkin is back, so unintentional self-parody is again the order of the day. Wall Street's sycophant-in-chief, introduces his column with a 98 m.p.h. fastball aimed at the reader's chin.

knock.down.pitch

Sorkin wrote:

This isn't meant to scare you, but let's consider the absolute worst-case scenarios of "Brexit."

Sorkin's column then presents his specific example of his absolute worst-case scenario. See if you can spot what is missing from that scenario.

Consider this: Italy's government is considering pumping as much as $45 billion into its banking system after the Brexit vote. Shares of the biggest Italian banks have fallen more than 20 percent since the results of the vote were announced. And Italian banks are considered particularly vulnerable because they hold hundreds of billions of euros in bad loans. If Brexit forces a material economic slowdown across the Continent, Italy's banks - without a rescue plan - could significantly suffer.

OK, Italy's elite bankers made "hundreds of billions of euros in bad loans" that are still on their books nine years after the onset of the Great Recession. That should have prompted deep analysis by Sorkin about why the bankers made the loans, what role they caused in producing Italy's crises, and why the regulators have allowed the bankers to "extend and pretend" the bad loans as if they were good loans for nine years.

No one reads Sorkin for financial analytical expertise. We read Sorkin because he regurgitates to the public the elite bankers' concerns and propaganda. So, ignore real analytics for the moment and focus on the last sentence of the quotation. "A material economic slowdown across the Continent" is Sorkin's euphemism for a European-wide return to recession. Such a recession would, of course, be enormously harmful. Much of Europe is still suffering Great Depression-levels of unemployment.

If the Continent fell back into recession the harm to people in Southern Europe would be catastrophic and the harm to the inhabitants of several other parts of Europe would be severe. Tens of millions of Europeans would remain trapped in long-term unemployment and tens of millions of young adults would be forced to emigrate to try to find work. A continent-wide recession in Europe would, even in a modestly "worst-case" scenario, trigger a recession in most of the world. In an "absolute worst-case" scenario it would trigger a global Great Depression.

Recall that Sorkin promised his column would describe the "absolute worst-case." So, how did Sorkin picture the implications of creating yet another continent-wide recession in Europe? "Italy's banks ... could significantly suffer" if the EU did not (again) bail them out through "a rescue plan." "Banks," of course, can neither "suffer" nor "significantly suffer." People suffer. The return to recession "across the Continent" is not what Sorkin views as the "absolute worst-case," nor is a global recession or a global Great Depression. The Continental recession, as Sorkin envisions it, is what prompts the following "absolute worst-case" scenario - "Italy's banks ... could significantly suffer" unless they receive another public bailout.

You can see how faithfully Sorkin channels Wall Street CEOs' unique perspective on what constitutes the "absolute worst-case scenarios." Sorkin became Wall Street's sycophant-in-chief (SIC) on the basis of his uncanny ability to suspend all empathy for the public and worry instead about the unlikely possibility that a continent-wide recession might cause an enormously wealthy bank CEO to lose his job because the bank he led into failure, often by looting it, was not bailed out by the public. Sorkin's columns are must reads because they unintentionally expose on a regular basis the depravity of the Wall Street CEOs that wine (and whine) and dine him so sumptuously.

Sorkin next goes in for unintended humor.

Remember: There's no need to panic now, at least not yet.

First, there is never a "need to panic." There is always a need not to panic and the more severe and urgent the crisis the greater the need not to panic. Sorkin has never had to stop a financial emergency. Many of us have. Among the first things you do is throw anyone who panics out of the room. What Sorkin should be saying is that in a crisis you cannot stay in a business-as-usual mode and you cannot "reinforce defeat" by continuing failed policies.

Second, Italy is a real country and the Great Recession and the EU's economically illiterate austerity policies are real events as are the Italian banks' massive bad debts and the death of effective financial regulation that has allowed the elite bankers to "extend and pretend" those debts for nine years. Sorkin is spinning an elaborate hypothetical, one in which the suffering of tens of millions of Italians is ignored in favor of the fictional suffering of "banks." So the real policy issue is what to do about the suffering of the Italian people. Roberto Orsi has written two brief articles that convey key aspects of that suffering. His first article explains that Italy has been in a second Great Depression.

The situation of the Italian economy is simply dramatic. Recently, a study has appeared which reveals how the current crisis (2007-2013) is in many ways much worse than the 1929-1934 contraction. In the present crisis, investments have collapsed by 27.6% in the five year period, against 12.8% in the interwar depression. GDP has declined by 6.9% against 5.1%. Italy, with the second largest manufacturing sector in Europe after Germany, has lost about 24% of its industrial production, going back to the 1980s level.

Unemployment in Italy over the last nine years has frequently been higher than in the comparable number of years after the onset of the crisis during the original Great Depression. Youth unemployment approached 50 percent.

Orsi's second article adds a component that adds greatly to the urgency of ending the EU's self-destructive austerity. Italy, like many other eurozone nations, is losing its best and brightest and ruining any prospects for robust growth in the future.

The demise of Italy as an industrial nation is also reflected by the unprecedented level of brain drain, with tens of thousands young researchers, scientists, technicians emigrating to Germany, France, Britain, Scandinavia, as well as to North America and East Asia.

In sum, everybody in the country producing anything of value, together with most of the educated people is leaving, planning to leave, or would like to leave. Indeed, Italy has become a place for some sort of demographic pillaging from the perspective of other, more organized countries, which have long seen the opportunity to easily attract highly qualified workers, often trained at the expenses of the Italian state, simply by offering them reasonable economic prospects which they will never see if they remain in Italy.

The EU has responded to these horrific results by making Italy's people suffer far more, and pointlessly, through austerity. They have maintained that self-destructive, failed policy for nine years. Sorkin and the EU elites consider none of this worthy of mention, much less urgent action.

In fairness to Sorkin, his hypothetical has a second round of "absolute worst-case." Sadly, the second round provides more unintentional humor and proof of Sorkin's moral blindness.

[I]f, down the line, Italy's economy were to falter and help from the European Union was not forthcoming without tough conditions - remember Greece and the possibility of Grexit? - we could witness the seceding of Italy, which will be the third-largest member of the consortium after Germany and France (assuming that Britain does officially leave).

That, in turn, could lead to a true catastrophe: Italy would probably be forced to return to the lira, which would most likely be tremendously devalued. An unstable lira would cause huge problems for investors and banks across the globe that have interests in Italy, as well as a massive credit crunch within the country.

Italy is still struggling to emerge from its second Great Depression, so what Sorkin envisages in his second round hypothetical is Italy falling back into that Great Depression. He prefers the euphemism "falter," which helps hide the human suffering. If Italy falls back into its recent Great Depression it is likely that it would receive the same "help" from the EU that it received during the depths of its recent Great Depression.

  • The ECB will keep interest rates low on Italian public debt offerings.

  • The ECB and the European Commission will "help" Italy by demanding austerity, which will exacerbate the Great Depression.

Austerity is not a "tough" condition, it is a stupid, self-destructive condition. The EU has forced this insanity on Italy for nine years even though they know it is an epic failure. Tens of millions of Italians will live in households that will suffer job and wage losses. Emigration of university students will continue to be the norm as soon as they graduate. That means Italy's future will be crippled. In short, the Italian people would suffer another five years (minimum) of "catastrophe."

Sorkin sees a very different "true catastrophe" - Italy leaving the euro and returning to a sovereign currency. That true catastrophe would occur because Italy would follow a well-proven route to recovering from the renewed Great Depression by devaluing the lira.

I will now leave the Sorkin fantasy world to return to the real world and actual economics. Austerity is a self-destructive, economically illiterate response to a recession, much less a renewed Great Depression. Sovereign currencies are vastly more stable than currencies like the euro. Devaluation of a sovereign currency in response to a Great Depression is economically sensible.

In Sorkin-land, however, each of these three facts is reversed. But the key takeaway is Sorkin's insights as to what Wall Street CEOs define as a "true catastrophe" - it is one where events "cause huge problems for investors and banks across the globe that have interests in Italy." Silly me, I thought a "true catastrophe" in the economic sphere occurred when tens of millions of people lost their jobs and homes and were forced to emigrate. Wall Street CEOs know that a "true catastrophe" occurs in finance when they lose even a portion of their vast wealth.

It is only when Sorkin quotes Wall Street technical experts near the end of his column that the first notes of reality and humanity make their way into Sorkin's column. Sadly, this did not lead to the interjection of much in the way of logic.

Given the low growth of so many countries in the union, it is hard to imagine that a populistic revolt won't emerge.

"The global economy remains stuck in a deflationary expansion of minimal growth and minimal rates," Merrill Lynch wrote in a note to investors on Monday. "And electorates are increasingly voting in the developed world against wage deflation, high unemployment, immigration and inequality."

Nine years after the onset of what would become the Great Recession, the "global economy" is providing only "minimal growth." Minimal growth after Great Depression levels of unemployment means that it can take 15 years simply to crawl out of the hole. It is a "true catastrophe" that lasts an entire generation.

Focus on Merrill Lynch's final sentence. The "developed world" is characterized by "wage deflation [falling wages], high unemployment, immigration, and inequality." Anyone can predict the reaction of workers to that combination of four results that come directly from the workers' hides and redound directly to the benefit of the top 0.0001 percent.

Workers will "increasingly vot[e]" against the policies that produced that quadruple assault on workers. Sorkin labels this a "populistic revolt," but what he has described is simple rationality that would be the inevitable reaction of any group that had been successfully targeted for attack the way workers were targeted.

What Sorkin is describing is called democracy and rationality. "Populistic" is simply an insult that demonstrates that Sorkin treats a purely rational, peaceful, and democratic response by workers to the quadruple assault on them as illegitimate.

Does anyone doubt that bank CEOs or doctors, had they been repeatedly subjected to an analogous quadruple assault for 35 years that resulted in them suffering falling real wages, would respond by "increasingly voting" against those policies? No one believes that their voting against such an assault would be described by Sorkin as a "populistic revolt."

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