Anatomy of the Crash: a Mises book

Anatomy of the Crash: the financial crisis of 2020

Edited by Tho Bishop

Introduction by Jeff Deist

Mises Institute - Auburn, Alabama, 2020

The Great Crash of 2020 was not caused by a virus. It was precipitated by the virus, and made worse by the crazed decision of governments around the world to shut down business and travel. But it was caused by economic fragility.

The purpose of this collection is to highlight the important work of contemporary Austrian economists on the modern financial system. Although the mainstream financial press has been crediting American, European, and Chinese policymakers with upholding the global economy in the aftermath of 2008, Austrians have long been warning that these very same actions have only set the world up for a larger disaster. Promises in 2008 of the ease of normalizing monetary policy—such as by reducing balance sheets and phasing out market intervention—have been proven to be lies, just as Austrians warned.

Published 2020 by the Mises Institute. This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 4.0 International License.

http://creativecommons.org/licenses/by-nc-nd/4.0/

Contents

Preface by Tho Bishop, 7

Introduction by Jeff Deist , 11

Understanding The Current Crisis, 17

1. Financialization: Why the Financial Sector Now

Rules the Global Economy by Ryan McMaken , 19

2. Are Central Banks Nationalizing the Economy

by Daniel Lacalle , 33

3. The Menace of Sub-Zero Interest Rate Policy

by Brendan Brown , 39

4. Central Banks’ Crusade Against Risk

by Thorsten Polleit , 43

5. The Ghosts of Failed Banks Have Returned

by Alasdair Macleod , 49

6. 7 Reasons Why European Banks Are in Trouble

by Philipp Bagus , 63

7. China Is in Trouble

by Ronald-Peter Stöferle and Mark J. Valek , 67

What Central Banks May Do Next , 75

8. How a Fragile Euro May Not Survive

the Next Crisis by Brendan Brown , 77

9. Not-So-Modern Monetary Theory by Arkadiusz Sieroń, 83

10. Central Banks Are Propping Up Stock Prices

by Thorsten Polleit , 87

11. Will the Drive to Devalue the Dollar Lead

to a Plaza Accord 2.0? by Ronald-Peter Stöferle , 93

12. Negative Interest Rates are the Price We Pay for

De-Civilization by Jeff Deist , 103

13. What Will It Take to Get the Public to Embrace

Sound Money? by Brendan Brown , 107

14. Yes, the Fed Really Is Holding Down

Interest Rates by Joseph T. Salerno , 113

15. Why the Government Hates Cash

by Joseph T. Salerno , 127

The Failed Economics of “Neoliberalism” . . 133

16. What’s the Difference Between Liberalism

and Neoliberalism by Ryan McMaken , 135

17. How Today’s Central Bankers Threaten

Civilization by Claudio Grass , 141

18. What Would Mises Think about the West

Today? by Jeff Deist , 147

19. Mises and the “New Economics” by Jeff Deist , 157

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How Brazil was downgraded: PRAlmeida at Yale

My talk debate last week at Yale School of Management. Here is the link: http://som.yale.edu/blog/2015/10/too-introverted-economist-paulo-roberto-de-almeida-brazil

‘Too Introverted’: Economist Paulo Roberto de Almeida on Brazil

By: Meredith Crawford

Yale Communication, October 22, 2015 

 

When Standard & Poors downgraded Brazil’s bonds to junk grade last month, the immediate cause was the country’s struggling economy and growing deficit. But the roots of the crisis, economist Paulo Roberto de Almeida told students at Yale School of Management on October 13, lie in Brazil’s major structural problems, including imbalanced public finance, inadequate savings and investment, high tax burdens, and low productivity.
The Latino Leadership Association hosted the talk by Almeida, deputy consul general of Brazil in Hartford and professor of political economy at University Center of Brasília, at Yale SOM. Almeida discussed Brazil’s current fiscal crisis in a talk titled “How Brazil was Downgraded: Economic Challenges and Political Turmoil.”
Among Brazil’s longstanding problems, Almeida said, is an insular approach to trade that prevents it from playing a major role in the world economy.
“Brazil is too introverted,” Almeida said. “The coefficient of opening [in] the Brazilian economy is less than 20% compared to the world average of more than 40%—China [is] 60%.”

Despite some historical periods during which Brazil had a larger share in world trade—during the post-World War II era, for example—insularity has long been the norm for the Brazilian economy, Almeida said.
“Historically, Brazil [accounts for] just 1% of the world trade,” he said. “Even in the last decade, when Brazil benefited from the Chinese bonanza, there was much more increase in value than in volume. For an economy who pretends to be the sixth- or the seventh-largest economy, it’s too low a share.”

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Stress Test: Timothy Geithner's book on financial crises of 2008-2009 - Charles Lane (WP)

STRESS TEST

Reflections on Financial Crises

By Timothy F. Geithner

Crown. 580 pp. $35

Book review: ‘Stress Test: Reflections on Financial Crises,’ by Timothy F. Geithner

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By Charles Lane

The Washington Post, Friday, May 16, 2:45 PM E-mail the writer

Unlike most of his recent predecessors as treasury secretary, Timothy F. Geithner had no experience on Wall Street or in corporate America. He did not have a PhD in economics. Nor was he a politician or even a lawyer. Far from being a presidential confidante, Geithner barely knew Barack Obama before his nomination.

What he did bring to the job was a deep-seated belief: Policymaking is a fundamentally tragic business, often involving choices between two or more bad options, and the best that can be hoped for is to avoid making matters worse. He is, as he confesses in his memoir, “Stress Test,” “reflexively skeptical of excess conviction in any form, especially excess optimism.”

It is a sensibility worthy of his first powerful mentor, the uber-realist former secretary of state Henry Kissinger, who gave Geithner a job as a researcher when the younger man was fresh out of the international affairs school at Johns Hopkins. Thereafter, Geithner refined and internalized his sense of government-as-damage-control during his career managing financial crises for the Treasury Department, the International Monetary Fund and, just before joining the Obama administration, the Federal Reserve Bank of New York, which he headed from 2003 through 2008.

And it was this mind-set that informed Geithner’s embrace of massive taxpayer aid to Wall Street firms amid the financial panic of 2008 and 2009, which he defended then — and vigorously defends again in “Stress Test” — as the price of averting general economic catastrophe.

Geithner’s selection by Obama made sense as a gesture of continuity toward a financial sector still in the throes of an epic crisis, but he was an unlikely member of a hope-and-change administration. As the U.S. economy spiraled downward between November 2008 and Inauguration Day, the president-elect asked Geithner what he should try to accomplish in his first term. Geithner, who admits that he “wasn’t wrapped up in the spirit of limitless possibility and new beginnings that had driven the Obama campaign,” defined success in negative terms: “Your accomplishment is going to be preventing a second Great Depression.”

Half a decade later, it’s fair to say that Obama did achieve that much — or at least that no second Great Depression happened on his watch. Historians will debate how much credit belongs to the president and how much to Federal Reserve Board Chairman Ben Bernanke. Geithner’s version emphasizes the administration’s contribution — and, not surprisingly, casts Geithner in a favorable light, as a kind of Sancho Panza to more quixotic officials who saw the Great Recession as a political opportunity to be exploited, not a disaster to be mitigated.

History will be especially kind to the Geithner innovation that gave his book its title. In early 2009, the largest U.S. banks were still in financial cardiac arrest, unable to make loans or attract investment because markets doubted the adequacy of their capital. Many inside and outside the White House advocated nationalizing the banks, as Sweden had done to help cure a financial panic in the 1990s. Geithner resisted, citing unintended negative consequences from entangling the U.S. government in the banks’ hideously complex affairs. He proposed instead a “stress test,” conducted by the Federal Reserve, which would scour the banks’ books, then tell the markets how well they could withstand a further economic downturn. When the results came in, they credibly showed that the banks’ capital needs were manageable, inducing a renewed flow of private investment and obviating nationalization.

As for the bailouts, the charge that Geithner advocated taxpayer relief for Wall Street regardless of the financial community’s sins will probably follow him to his grave. “Stress Test” is his definitive rebuttal to critics whom he derides, repetitiously, as “populists” or “fundamentalists” gripped by an “Old Testament” mentality.

Whether aimed at Geithner from the left or right, the basic criticism of his approach was essentially the same: that shielding reckless financiers from the full consequences of their actions, monetary and legal, is not only wrong but also encourages similar behavior by others in the future. And Geithner himself acknowledges that “moral hazard” is an inherent feature of government intervention in financial crises.

He just disagrees with his opponents that there’s any point in trying to avoid moral hazard, given the need to act swiftly in a crisis and the much higher costs of letting systemically important firms collapse. Geithner’s thinking on this point reflects the global shock that followed the September 2008 bankruptcy of Lehman Brothers, which he, Bernanke and then-Treasury Secretary Hank Paulson failed to prevent. The fallout from Lehman’s demise scarred Geithner — and he expresses deep regret about it in “Stress Test.”

The argument over Wall Street bailouts is one that no one can ever truly win, since both Geithner and his critics make a lot of assumptions about what would have happened if the government had not acted. On balance, Geithner’s probably right, though. The Federal Reserve’s emergency credit programs and the $700 billion Troubled Asset Relief Program that Geithner and others crafted enabled the economy to make a soft landing at much lower cost to taxpayers than many predicted. Another point in Geithner’s favor is that foes of his approach never quite articulated a workable alternative, or at least one that the political system might actually accept.

Geithner’s aversion to “excess optimism” was not always an asset for him at Treasury. A more buoyant secretary might have been better equipped to reassure the public amid hard times, as well as less vulnerable to the political slings and arrows that ultimately made Geithner yearn to leave Washington. Yet to the extent that he had a knack for imagining the worst, and how to avoid it, he may have been the right man for Treasury at the right time. Certainly we could have done a lot worse.

Charles Lane is an opinion writer at The Washington Post.

Existem coisas que sabemos que sabemos, e outras que nao sabemos que nao sabemos... - Donald Rumsfeld (BB)

Some things we know but prefer not to think about, be it the truth about the invasion of Iraq or the failures of the financial system.

< http://www.bbc.co.uk/go/em/fr/-/news/magazine-25680144

10 January 2014 Last updated at 11:01 ET

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A Point of View: See no evil

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• The perils of belief (John Gray)
• Two cheers for human rights (JG)
• A long winter for the Middle East's Christians (William Dalrymple)
• Why Charles Dickens endures (JG)

Some things we know but prefer not to think about, says John Gray - whether it's the truth about the invasion of Iraq or the failures of the financial system that led to the banking crisis.

We'd like to think the financial crisis is safely in the past. The events of 2007-2008, when the world's banking system was on the brink of collapse, seemed like a once-in-a-century upheaval, and it's natural to imagine we've returned to some kind of normalcy. Disaster has been averted, and there may be some signs of recovery in the economy. But have we emerged onto a sunny upland of stability, or are we fooling ourselves? History suggests an upheaval on this scale isn't left behind so easily. Could it be that we know the crisis hasn't been resolved, but prefer not to think about the fact?

Former US secretary of defence Donald Rumsfeld's distinction between known unknowns and unknown unknowns has passed into everyday speech. It's not the things of which we know we're ignorant that we should worry about, he pointed out. It's the things we're unaware of not knowing that can really cause trouble. It's a useful reminder of the vastness of human ignorance. But might there not be another kind of unknown, which Rumsfeld didn't mention - one that consists of things we choose not to know?

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Find out more

• A Point of View is usually broadcast on Fridays on Radio 4 at 20:50 GMT and repeated Sundays 08:50 GMT
• John Gray is a political philosopher and author of False Dawn: The Delusions of Global Capitalism

• Listen to A Point of View on the iPlayer
• BBC Podcasts - A Point of View

Looking back, the purpose of Rumsfeld's distinction may have been to lay the ground for the invasion of Iraq that followed just over a year later. Saddam's supposed weapons of mass destruction were the main justification for the war. As we now know, he had no such capability at the time of the invasion. He'd used chemical weapons in the past - in the war with Iran in the 1980s and later in attacks on the Kurds, for example. But as American-led forces found when they searched the country, any WMD programmes that had existed had long since been abandoned.

Even at the time of Rumsfeld's remark there were good reasons to doubt Saddam was supplying terrorists with weapons. The fact that Saddam had kept Al Qaeda out of Iraq was well known to diplomats, military strategists and security experts. Possibly this is why, when asked at the press conference if the link between Saddam and terrorism was an unknown unknown, Rumsfeld replied, "I'm not going to say which it is."

Gertrude Bell

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“Start Quote

We live on the basis of unknown knowns - intractable facts that we prefer to forget”

Anyone with a little knowledge of history understood that Saddam was unlikely to be in league with Al Qaeda. But for those who launched the war, the history of the country they were planning to invade was irrelevant. Partly this came from a misplaced sense of invincibility. Many 20th Century wars ended with massively superior forces being obliged to accept defeat - think of the French in Algeria or the Americans in Vietnam. Despite this record, few if any of those who supported the invasion considered the possibility of a long drawn-out conflict. They believed that once Saddam's forces had been defeated the whole country would unite in welcoming the occupiers and setting up a US-style democracy.

Yet 80 years before the war, the British civil servant who as much as anyone created the state of Iraq knew it could never be democratic. Cobbled together from a former province of the Ottoman empire in the early 1920s, the state was to a large extent the work of a single British official - a remarkable woman, the first to have a senior position in the colonial service, called Gertrude Bell. A fluent speaker of the languages of the region and widely respected by its rulers and peoples, she recognised that because power had been placed in the hands of the Sunni minority, any move to majority rule would mean intense and protracted sectarian warfare, along with the secession of the Kurds.

Bell foresaw the chaos that was bound to ensue if there was ever any attempt at democratic regime change. She wouldn't have been surprised when the National Museum of Antiquities, which she had founded as a tribute to a civilisation she admired, was looted soon after the US-led invasion. Dying in 1926, Bell chose to be buried in the British cemetery in Baghdad, which was also vandalised at the time of the invasion. When he heard of the looting, Rumsfeld's only comment was, "Stuff happens." Insignificant events of this sort, he implied, couldn't upset the grand plan that lay behind the war.

An Iraqi Museum official sits amid looted wreckage just after the 2003 invasion

Much has been alleged about disinformation in the run-up to the invasion. But if some of those who launched the war were presenting a distorted picture of the facts, they were also deceiving themselves. Contrary to a common view, it wasn't that Rumsfeld and his fellow war-planners failed to prepare for the situation that would come about in the country after the invasion. If they'd known the chaos and conflict that would follow, they might not have been able to launch the war. So rather than confront the facts, they chose to remain ignorant of them. For Rumsfeld and others who thought like him, the risks of the invasion weren't unknown unknowns. They belonged in another category of human ignorance: that of unknown knowns - things they decided weren't worth thinking about.

It's an attitude that hasn't gone away. A similar denial of reality prevails today in Britain and many other countries in connection with the financial crisis and its aftermath. The bankers and politicians seem genuinely to have believed that a new type of capitalism had been invented in which booms and busts would no longer occur. In the new era we'd entered, they were convinced, a level of prosperity had been reached that would only increase for the foreseeable future.

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'Unknown unknowns'

"There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know."

Rumsfeld's much-discussed comment was made in a press briefing in 2002, but reference to "unknown unknowns" in the US military has been traced as far back as 1969.

The writer Nassim Nicholas Taleb also claims Rumsfeld's statement echoes the theme of a talk he gave to the US defence department a short while earlier.

Again, anyone with a passing acquaintance with history would have known that this had been believed many times in the past, and always mistakenly. Only days before the 1929 stock market crash, one of the best known economists of the time, Professor Irving Fisher of Yale University, announced that "stock prices have reached what looks like a permanently high plateau". Even after the crash occurred, Fisher insisted it was only a market correction that would soon be over. Losing most of his own fortune, the distinguished economist was as deluded as nearly everyone else. In case you're wondering who anticipated the crash, two who did were the mobster Al Capone, who described the stock market in the boom years as a racket, and Charlie Chaplin, who unsuccessfully pleaded with his friend, the songwriter Irving Berlin, to sell out the day before the market collapsed.

A great depression of the kind that followed the crash of 1929 has been avoided, but we've not returned to anything like stability. Near-zero interest rates have led to the near-impossibility of saving, along with a bubble in the stock market and house prices. It's an abnormal state of affairs that can't last. It wouldn't take much to trigger another upset - a worsening in the European situation or a faster-than-expected slowdown in China, for example. But that's an unnerving prospect, so we've decided not to think about it.

The acute fragility of our economic system is just one of many facts we all know but have decided not to think about. Some people suggest this refusal to think is produced by the system itself - it's the only way our current economic and political arrangements can keep on going. This may be so, but the resolute avoidance of unsettling facts is a deep-seated human trait.

While we live surrounded by unknown unknowns, we live on the basis of unknown knowns - intractable facts that we prefer to forget. We'd do better to confront these awkward realities and muddle through more intelligently. We humans are sturdy and resilient animals, with enormous capacities of creativity and adaptability, but consistently realistic thinking seems to be beyond our powers. This may well be the biggest unknown known of them all - in an age that prides itself on its advancing knowledge and superior understanding, we're as anxious as ever to avoid facing up to our actual condition.

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