Sunday, 18 September 2011

"Deficit Attention Disorder"

I must admit to being delighted that the EU finance ministers have found unity on one point: dismissal of Tim Geithner as officious, ignorant and unaccountable. He is an example, right up there with George W. Bush, of the privileged American elite who "fail upwards" throughout a career.

Europe's nations may have an escalating debt crisis, but they have been addressing it sensibly and cautiously by trying to rein in further debt through reductions in government spending.

The perfect example from the meeting logistics: EU finance ministers shared a bus to the meeting, while Tim Geithner insisted on a private car.

Geithner seems to abhor austerity and sacrifice, preferring any strategy which keeps debt growing to fund the investment banking, security, prisons and war industries on which the American economy now depends for so much of its GDP. (2 percent of Americans are in prison, while 1 percent work for the Department of Defense.)

He encouraged a ten-fold increase in leverage of the EFSF to create a massive new debt overhang. Madness. The cure for a refinancing crisis is not more leverage to be later refinanced.

Europe has its problems, but one thing I know is that the default setting for Europe is cooperation where the default setting for America is conflict. If Tim Geithner's objective in coming to Poland was to stimulate consensus among European finance ministers, then he can go home happy. He succeeded. They are unified in finding him and his policies discredited. They will work together from that consensus to find a more workable solution for Europe than could ever be conceived in Washington, precisely because they will work together in recognition of mutuality of interest.

UPDATE: As this is being linked elsewhere, I'll add a suggestion about what I would advise the eurozone finance ministers. I would advise them to have every EU state with off balance sheet, hidden liabilities on derivatives - whether undertaken for window dressing to gain admission to the eurozone or any other purpose - to default on any further margin or resettlement payments. The Hammersmith and Fulham defaults of the late 1980s proved a wonderful discipline on the investment banks, schooling them in the limits of preying on local governments. It might be time for another lesson at the national level.

Each of the defaulted derivatives contracts could be referred to an EU committee to determine whether the contract had any legitimate rationale beyond disguising the financial condition or otherwise deceiving the public or other EU governments. If there was no legitimate rationale which served the public interest, then the contract would be declared unenforceable.

This wouldn't address decades of deficit spending, but it would provide a popular demonstration of resolve to shaft Wall Street rather than the taxpayer, at least in the first instance. The politicians should then have enough breathing room to reach a more resilient agreement on fiscal policy and funding going forward.

I appreciate that questioning the validity and enforceability of derivatives contracts might be "extra-legal" in the sense that it would be contrary to accepted legal norms. But since virtually every intervention and liquidity programme innovated by a central bank since 2007 has been without legal or statutory basis, despite the huge redistributions of national wealth, I hardly consider that a sticking point.


Charles Butler said...


The fact is that no one that I have come across displays even the slightest awareness of how the EU actually works. Totally concentrated on its structural insufficiencies, rather than its considerable practical flexibility (in good times and bad), commentators spend their entire careers ridiculing and predicting the demise of an organization that has not done demonstrably worse - and a huge chunk of its economy has done just fine, thank you - in the crisis than any of the other of the world's affected yet is treated as if it had completely failed.

Your last, very true sentence shows considerable courage on your part. I hope you don't get pilloried for it.

edgar said...

i followed a link from zh over here and i gotta call bs on some of that. there is no difference whatsoever between geithner and the euro leadership. they serve at the whim of the bankers, same as they do here in the usa. prove me wrong, i hope you do.

Tailwind said...

I agree with your assessment that others have little understanding of how the EU works. Moreover, Geithner is an officious ass-hat with no clue what to do outside of servicing the political elite. What really intrigues me is what could he say that so inflamed the Germans and the rest of the block? Any ideas?

Anonymous said...

For Geithner, "fail upwards" is an understatement. As President of the FRBNY, Geithner was a key culprit in the financial crisis and outrageous bailout of Wall Street gamblers. Instead of being investigated and punished for high financial crimes, Geithner is named U.S. Secretary of Treasury. No chance that U.S. Secretary of Treasury Geithner will investigate FRBNY President Geithner and the Wall Street giveaways he presided over, such as the AIG fiasco. It we had fearless prosecutors it is likely Geithner would be serving time in a federal penitentiary rather than in the office of U.S. Treasury Secretary.

John East said...

I'm another import from Zero Hedge, and I'm afraid that I agree with my fellow traveller, Edgar, above.

The ruling elite in Europe may well have a different agenda to that of Turbo Timmy, but it is no less evil, no less corrupt, and no less self interested than that of the Americans.

The impression you give, that the European movers and shakers are somehow more benevolent or more wise, is not how I see things. Their strategy is perhaps more clandestine and a bit more sophisticated, but just because their policies are somewhat counter to those of Geithner and Bernanke, we shouldn't confuse this opposition with common sense.

Good blog, by the way. I've added you to my favourites list.

svg1234 said...

It's a shame you couldn't resist taking a shot at Bush. BDS is alive and well. I agree re: Geithner, which is at least relevant.

London Banker said...

@ Charles and Tailwind, Many thanks. It is difficult to school people raised on the endless television themes of crime and militarism on the social values that promote unity and progress in Europe. Europe leads more by example than rhetoric, which is the opposite of what we see in Washington.

@ Edgar and John East, I do not deny that EU politicians are corrupt, but they serve a variety of masters - not just Wall Street and the police/prison/military industries. Labour remains a potent force in most of Europe, and so too do farmers, manufacturers and civil servants. The variety of political masters ensures some level of dialogue and compromise that usually reaches for a principle or two to help it along the way toward consensus.

@ svg1234, The term "failing upwards" was coined by Ronald Reagan to describe George H.W. Bush. It was apt applied to the father, and even more so to the son.

Bob the Horse said...

Struggle to believe you can claim European ministers are interested in saving costs - the entire EU political edifice is a huge burden on the people, it cannot even get the accounts signed off it is so corrupt.

Anonymous said...

My Dear London Banker,

I appreciate your insight into the world of banking but I cant help but find your description of the American economy as "investment banks, prisons, and the defense department" as sorely lacking.

America has a vibrant agricultural lobby that does nearly as good of a job as its French counterparts in ensuring fat, rich white guys receive subsidies in the millions to farm cotton/rice/tobacco/corn that a skinny African/Latin/Asian could do for a fraction of the cost.

Ditto its Aerospace industry that is just as reliant as your lovely Airbus on massive hidden state subsidies. The Americans just happen to route theirs via the Defense department instead of outright transfers.

I hesitate to add this for you surely realize it yourself but for an Englishman to call out Americans for having a strong investment banking industry is a bit amusing, no? After all the City *was* the heart of 'new labors' tax cuts for all, services for all program and continues to be one of the world's largest offshore tax shelters. [Not to mention Jersey, the Isle of Man, and your various Caribbean island dependencies]

Tim Geithner might be an incompetent baboon but Europe's finance ministers have not covered themselves in glory at any point in the last 10 years.

London Banker said...

@ Anon 09:36,
May I suggest that the test of a man's character is not whether he drinks and gambles in the saloon of the Titanic while it peacefully cruises, but how he behaves once the ship is listing horribly. Does he elbow the women and children out of the way to secure a seat in a lifeboat? Or does he escort such women and children he finds nearby, see them safely over the side, and then return to the saloon to enjoy another scotch and soda at the bar?

Anonymous said...

"...and a huge chunk of its economy has done just fine, thank you..."

An excellent point, and generally ignored. The EU does not solve the debt crisis because it is working in the favor of many of its members through a depressed euro. Why should it stop what is such a profitable "crisis."

TheIllusionist said...

"Geithner seems to abhor austerity and sacrifice, preferring any strategy which keeps debt growing..."

Yeah, what an idiot. Greece has clearly demonstrated that austerity is a workable policy alternative.

As for the idea that the eurocrats are dealing with the crisis in a manner that is sensible. Talk to me when you come back in from the wilderness.

Anonymous said...

genauer says: what a crap, "depressed euro". "Fair value" would be 1.2 $/€,

Anonymous said...

Well done on this piece! I did not understand what the hell Geithner was thinking of achieving by participating and then to have the audacity to call out the Europeans. Have a look what the US achieved over the last 10 years with their policy repsonses. More indebted, declining wealth and destroyed their own growth. Europe is looking for a balanced way to address the debt issues and preserving wealth. They accept slower growth in exchange for that.

Chindit13 said...

While you write that you would like to see how one behaves in bad times, I believe it was Abraham Lincoln who first said that the true measure of a man’s character is not how he behaves in bad times, but rather in good times.

When I look at the EU, I see that during good times they ignored their own rules regarding deficit limits amongst members. I wonder if they will enforce austerity in any stricter manner. The jury remains out.

Spot on regarding Geithner, however. Having stumbled upon him when he was trolling Tokyo as a mediocre Asst Treasury Attache at the US Embassy, I was surprised to see him turn up at the NY Fed. Of course, I am not the least bit surprised that he would ignore his own IMF advice---given to Asian governments during the ‘97 crisis---and bail out failed institutions, plus advise for constant stimulus, when he became SecTreas.

If you are to note upwardly failed bureaucrats, let’s not forget another stellar member of Obama’s Keystone Collection, Larry Summers.

Stephan said...

I really like your blog but this post is a display of shocking ignorance. Whatever is wrong with Geithner his advice to the Eurozone finance ministers was on the point. The reaction by them only demonstrates that they are still in denial and completely clueless.

This austerity mania and calls for more self-flagellation produces economic miracles everywhere, right? I would suggest you leave for some hours your banking ivory tower and inspect the truly stunning economic success of one of Europe's first austerity laboratory rats — the UK.

Mammoth said...

"The perfect example from the meeting logistics: EU finance ministers shared a bus to the meeting, while Tim Geithner insisted on a private car."
Can't help but notice the similarity of when Gorbachev visited the US years ago. Riding in his car in the presidential motorcade, he stepped outside to meet & shake hands with the crowd.

Meanwhile, one-term President bush remaimed enconsed within his secure limousine. This just screamed, 'INEFFECTIVE.'

Philby said...

'rather than its considerable practical flexibility (in good times and bad) ?'
What the months & years they've Spent perfecting the old Cup & Ball guessing game ?
I hope the expenses were pretty low for all that Sitting & Head-scratching.
Now that they've dug themselves deeper into a hole - admittedly perhaps not as deep as the US yet & wisely avoiding further depths. (such as leverage on borrowing)

Knute Rife said...

@Stephan and Theillusionist
Geithner is not proposing debt to avoid austerity measures. He's proposing it to continue to shore up his financial industry friends. LB is proposing calling the bogus paper now instead of continuing to extend and pretend, thereby making the inevitable default worse when it finally happens.

@Anonymous 0936
I don't think you understand the US agricultural lobby. In France and Japan, it's job is to protect farm owners. In the US, its job is to destroy individual farm owners and funnel tax dollars to multi-billion dollar agribusinesses, which are basically bio-chem and finance conglomerates. As for US aerospace, it's an integral part of defense. The commercial side is just window dressing.

"Failing upward" has become the norm here. The Peter Principle has proved too optimistic, as wealth and power mask incompetence and allow promotion far beyond any semblance of capacity.

London Banker said...

@ Knute,
Next time we have a drink together, I'm buying.
Cheers. LB

GlibFIghter said...

@LB: "It is difficult to school people raised on the endless television themes of crime and militarism on the social values that promote unity and progress in Europe." Do you suggest that the past 18 months of EZ negotiations on Greek debt are truly signs of "unity and progress in Europe"? If "yes," it would seem you have a rather flexible definition of unity and progress. Do the tea-bagging Finns know about this notion of unity? And German FM Schaeuble?

Concerning the US hyper-militarism which apparently offends you much, did you object when the 1995 "NATO" (aka US) bombing campaign led to the Dayton Peace Agreement? Or perhaps you would preferred to see the fall of Srebrenica followed by yet another ""un échec de la France" and other W. European protectors of innocents in Bosnia; moral wonders were waiting for Kosovars sans US "militarism." Free-riding is cheap for those who ride.

Anonymous said...

Dear London Banker,

I know this is still a 'financial crisis' and Europe has to find its own way to solve the debt mess, not blindly follow the USA and implement infinite QEs.

I would really like your opinion on one possible solution proposed by Lisa Pollack via Martin.


Thank you so much for your honest and informative blog.

London Banker said...

@ Anon 05:56
I think netting off the debt obligations would be an elegant solution. The difficulty is the number of different parties holding the debt, the diversity of their interests, and all the myriad, ill-transparent and mis-priced derivatives written on the back of the debt. In some ways, a default helps clarify who holds what and has what claims in to a degree that a negotiated settlement cannot construct.

PDR Vet said...

The pretentiousness and ignorance of this post is quite astounding. It is as uninformed and as poorly investigated as the media reports surrounding the event. Did you actually read beyond the headlines? Did the fact that all the articles regurgitated the same 2 or 3 quotes from small country finance ministers not raise any suspicion? It's a given that the media is lazy but must you be as well?

But that doesn't matter when it's clear you are just looking for anytying to affirm your pre-conceptions.

Some food for thought:

In a September 18 interview on radio Europe 1, Economy Minister
Baroin rejected the idea that Treasury Secretary Geithner had lectured
European ministers at the EcoFin meeting in Wroclaw, Poland on September
17. Baroin stressed that Geithner had been invited, and "shared his
experience in handling the 2008-2009 banking crisis in the U.S." Baroin
said Geithner was "humble and explained with lucidity the U.S. situation
and its high indebtedness." He said he and others found it helpful.

Baroin said comments on Geithner's participation in Wroclaw were
exaggerated and did not correspond to the message he delivered, or the

How about that? A French minister publicly defending a U.S. counterpart. So much for affirming your stereotypes.

PDR Vet said...

A couple of more comments:

Virtues of EU governance -- supranational governance is very difficult and the Euros deserve credit for trying. But are EU citizens happy with what they have? I don't think the public opinion survey data argue they are. Why have all the attempts at governance reform if it is reasonably satisfactory? Also, how can one defend a system which allows a right-wing nationalist party in Finland (country of 5 million) effectively hold the entire eurozone crisis response hostage? As a result of the governance structure, Ecofin meetings for months have been dominated by Finnish demands for collateral for their tiny share of loans.

Bottom line -- the eurozone crisis is not a crisis of capacity or competence but one of governance.

On LB's netting out debts idea -- Doesn't each country's net international investment position basically show what would happen if you did that? The NIIPs for the periphery (ex. Ireland) are large and negative as a percentage of GDP. In fact, Portugal and Spain look much worse than Greece from a NIIP perspective.

Contrast that with Belgium which has high public debt but a large, positive NIIP.

Charles Butler said...

PDR Vet-

--But are EU citizens happy with what they have?--

You're presenting this as some sort of anomaly that proves that the EU doesn't work. This, of course and immediately, makes it incumbent on you to come up with a list of countries in which anybody's satisfied with the governance they've got right now.

The US and UK won't make the cut. May we suggest Monaco?

PDR Vet said...

CB -- The U.S. also has a crisis of governance no doubt. The downgrade was justified and our crisis is entirely of our making. But the eurozone crisis is also very much one of governance so saying that critics don't understand how the EU works is not a viable retort.

The "flexibility" you mentioned is arguably at the heart of the problem because in practice it's meant that rules could be broken without consequence -- Germany and France killed the SGP back in 2004 and now they're paying the price with Greece. The EC/ECB have pushed hard to make sanctions bigger and more automatic, or put another way less "flexible".

PDR Vet said...

Further evidence that Geithner may not be as clueless as you claim:

From Pisani-Ferry at Bruegel in Brussels --

To stabilise Italy and Spain, the euro area should make clear that it will do whatever it takes to quell self-fulfilling debt crises. At present this is the task of the European Central Bank, but it has no explicit mandate for it and central bankers are divided about bond purchases. This leads markets to doubt its resolve. In a few weeks, hopefully, the baton will be passed to the EFSF, which will have a mandate. But it lacks significant firepower. The solution is to leverage the EFSF by giving it a credit line from the ECB and the possibility to repo sovereign bonds purchased on the secondary market. A scheme of this sort would give it at least €2,000bn in firepower, perhaps significantly more. Secretary Geithner alluded to the idea in Wroclaw last week. The Europeans should seriously consider it.

Mark said...

I recommend re-reading Memoirs of Extraordinary Popular Delusions and the Madness of Crowds: in particular the chapters on the South Sea Bubble and John Law and the Mississippi Scheme and paper livres.

Parliament had the guts to banish the Chancellor to the Tower (his indictment save for his greed could read perfectly for Brown today), and sequester the bulk of the fortunes of South Sea directors and other miscreants (rather than execute them a la francais). It decided and enforced the levels of haircut. It happily prosecuted this course although as Gibbon noted technical breaches of the law could not be proved in most cases.

Meantime in France, sorting out the mess was left to the perpetrators, which only served to make it worse as the county underwent hyperinflation and monetary collapse.

The danger for us all is that we revisit 1345.

Anonymous said...

Re Mark

I lost my remaining confidence in the ECB. It is obvious that they want the taxpayers to pay the bill for the financial crises. May the German government put a stop to it.

Trichet Knocks Back Irish Senior Bank Bond Talk-Irish Times

Charles Butler said...

PDR Vet -

-- The U.S. also has a crisis of governance no doubt --

To be frank, you just changed the topic. I certainly never stated there was a crisis of governance. Nor had you. There is a crisis of public perceptions of governance, but these are not synonyms or even vaguely proxies for one another. Two really simple examples of this are:

1). Greek angry public reaction to the presumably good governance embodied in deficit reduction.

2). General European satisfaction, until the onset of the financial crisis, with the post-war social welfare state. It was fairly evident 25 years ago that, in the face of declining birth rates and increases in longevity, that it stood a good chance of being unsustainable. Good governance would have put a brake on it. Popular governance did not.

3). Not to leave anyone out here, the same can be said about the American solution to the problem of making people believe that they could have everything forever - the cancerous growth of unsecured consumer credit. Bad, but popular, governance by ommission.

The incredibly clumsy way in which the EU functions is caused by the necessity to respect a whole variety of often incompatible demands. This is a feature, not a bug, generally indicative of a well-behaved democracy - and remains so until someone can show me that a vertical power structure, such as the one that Geithner represents, actually manages even marginally to make some greater headway in the face of the present circumstances.

Given that the outcomes, to date, have mostly been depressingly indistinguishable from one another - except for the interesting fact that no other afflicted economy seems to have a Germany within its borders, I'll take governance subject to a pummelling from a potpourri of interests any day.

Knute Rife said...

I doubt I'm getting across the pond any time soon, but you're on at the first opportunity. I don't think netting off debt is in the realm of the possible, though. Rather like netting off a fungal system from the soil it inhabits.

The US pulled the big oar in the Balkans, but that operation was multilateral and stabilized the region. The Afghanistan and Iraq operations have destabilized the region (Afghanistan as executed and Iraq under any scenario), and to the extent they were ever multilateral, they have devolved to corporate gang wars fronted by the US.

@PDR Vet
Cut the snark. I agree with Charles Butler (even though I despise him for getting to live in Andalu), and I would add: 1) What do you expect Baroin to say? He can take the high ground since everyone else is already shooting at Timmeh; 2)No one is claiming he's clueless in substance (just style). Substantively he knows exactly what he's after: using tax money to support the Finanz Bloc while falsely characterizing it as stimulus. The comments you refer to unfortunately indicate that Geithner, for any defeat he may presently be suffering, has continued the neocon/neolib string of semantic victories; he has people lumping his extend and pretend Ponzi scheme under the same label as real stimulus proposals.

Richard said...


Thanks for an insightful post. I too think that there is an alternative to trying to end a solvency crisis by accruing more debt.

My roadmap for solving Europe's problem can be found at

The idea is fairly straight forward. It involves actually disclosing what is going on inside the banks.

Right now the markets are operating under the fear of contagion. With disclosure, this fear would be constrained by actual facts.

For example, would all of Germany's banks really be insolvent if Greece defaults? Sounds like a nice fact for the market to know.

Once the facts are available, the market is perfectly capable of analyzing them and helping the policymakers develop a solution that solves the problem.

Anonymous said...

When you say Mr. G "fails upwards" you demonstrate an unawareness of exactly what agenda guides Mr. G's career.
When one assumes that ones own motives would be the guiding light of another's actions one is easily beguiled. This is the how and why of our current situation world wide. We can not understand the actions of Mr. G and his cohorts and masters. We believe in fiduciary relationship to the post in which we are serving. The people who are associated w/ the central banking cartel in the uS(S)A and UK and the worshipful guilds and companies simply have a different and opposing agenda. Mr. G and the others in this deployment are serving most competently, if one views their actions from the perspective of their agenda rather than our own

Anonymous said...

Well, from some of the other things I know about Geithner, I think his arrogance and stupidity are measured and calculating for those he works for.

This guy was a laughing stock in China a couple years ago. He also helped crash the Indonesia (?) government...If I remember correctly, I think it was Indonesia.

With his track record it would seem he would have a hard time getting a job at Home Depot as a paint salesman. So what gives with this guy. Everyone is blasting this guy, as well as others in that camp, yet the guy keeps going and going. Has to be orchestrated...just need to find out why.

Is his ignorance and arrogance a planned strategy?...Is what I'm trying to ask? If so what is the purpose?

Anonymous said...

"Have a look what the US achieved over the last 10 years with their policy repsonses. More indebted, declining wealth and destroyed their own growth."


GDP per capita, United States: $46,860
GDP per capita, United Kingdom: $35,059

Economic growth, United States: 2.834%
Economic growth, United Kingdom: 1.251%

Government debt as a percentage of GDP, United States: 62.3%
Government debt as a percentage of GDP, United Kingdom: 76.1%

Certainly, you can criticize much what the US has done, but to hold Europe up as a shining example? Greece? Italy? Spain? Ireland? What a mess!

Oh, and that per capita income is not a consequence of spending on prisons, or defense:

Government spending as a percentage of GDP, US: 19.9%
Government spending as a percentage of GDP, UK: 50%