Bill Black: ECB facilitates speculators taking a run at one European country after another
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. The global economic crisis is just that–global. But as we know, it’s triggered by and its home begins in the United States, which is also the global manager of global capitalism. But much of this crisis is also unfolding in Europe. And certainly the crash on Monday to a large extent was triggered by lack of confidence, which seems to be the word these days, not in the American T-bill that Standard & Poor’s was talking about, but actual–the real lack of confidence was what’s happening with the euro and Europe. And the actor at the core of all of this or center of it is the European Central Bank. It doesn’t get as much attention in the popular media as perhaps it should. Now joining us to talk about the ECB is Bill Black, who just recently returned from Europe. Bill is associate professor of economics and law at the University of Missouri-Kansas City. He’s also the author of the book The Best Way to Rob a Bank Is to Own One. And he now joins us from Kansas City. Thanks, Bill.
WILLIAM K. BLACK, PROFESSOR, UMKC: Thank you.
JAY: So you’re–just came back from Europe. You’ve been following the European crisis and the ECB. What’s your take?
BLACK: Well, the ECB is trapped in a situation where, under its statutory mandate, it would have to sit back and watch the euro system collapse. And so it is managing to rise above its principles–and the law–and instead actively seek to do things which the European Central Bank was ordered not to do, which is to serve as a lender of last resort and to fight recessions. The ECB’s sole statutory mandate is to fight against inflation, but that has triggered a crisis that would bring down the whole euro system.
JAY: Now, that went along with the sort of ideology–or some would suggest even dogma–that was in place with the founding of the ECB, that the issue’s inflation, and even if you have to live with unemployment or even high unemployment, you still focus on inflation. So, first of all, unpack that. Why was inflation such a single-minded target?
BLACK: Ah, because the United States still can export some things. One thing we export is really stupid economic ideas. And we train much of the leadership of European central banks in our doctoral programs in economics, and then we send them off to do mischief in many parts of the world, Europe being one of the places where they became completely dominant. So the logic went: if you stop inflation, you will get highest employment you can get, and therefore you should only worry about inflation, and all will be well, because under this theo-classical economic model, economic crises really couldn’t occur–they were a thing of the past. And these people went around congratulating themselves about creating the, quote, great moderation, unquote, which they said was a result of almost total central bank independence from the government (of course, it was not independent from the banks) and their new, improved, very conservative economic views. And indeed the current head of the European Central Bank, the ECB, Trichet, went to Ireland about three and a half, four years ago and said Ireland should be the model for the entire EU, all the new states should do what Ireland is doing. And that was, of course, just before what Ireland was doing, which was massively fraudulent, went right over the cliffs and caused an economic disaster.
JAY: Okay. Let’s just back up a sec. When you say inflation was at the core of their economic theory–but that really meant, to them, keep wages down, didn’t it? That this–they have this idea that higher wages always causes higher inflation. They don’t want to ever go suggest that it might actually just mean less profits. But they were just very focused on the issue of wages, were they not?
BLACK: They were focused on inflation generally, and yes, they believed in the Phillips curve. And the Phillips curve was this thing that no one much believes in anymore that says there’s a tradeoff between unemployment and inflation, and essentially there’s not much you can do about it. And therefore, since inflation is everything, you just simply have to allow a lot of unemployment so that we can keep inflation very low. Now, at this juncture, even the conservatives don’t much believe in that part, because we’ve seen that you can have very low unemployment with no inflation at all. But, yes, that was their mindset, especially 15 years ago.
JAY: So where are we now? That theory don’t seem to be doing so well.
BLACK: No. And indeed, you know, the head, former chief economist of the IMF, the International Monetary Fund, which shared this theo-classical dogma, recently came out with a new book. I was listening to his book talk. It was fantastic. He said, well, the problem with his old book was that none of the crises that actually happened in the world were possible under his theories. So they had a book which wasn’t real good in terms of being useful, because the things that actually happened in the world couldn’t happen.
JAY: That sounds like that Greenspan oops moment where there was a flaw in my theory. But, of course, that was then. Now, even Greenspan doesn’t seem to want to talk about the flaw in his theory anymore. But where we’re at now, the need for the ECB (and I guess that to a large extent means Germany) to actually up or pay out in terms of defending the periphery, rather than pushing the crisis even more into the periphery, they seem to be still so reluctant to actually take those kinds of steps.
BLACK: Yeah. Here’s what’s happening. And this one, many economists actually got it pretty right a long time back, when Europe was thinking of creating the euro and the economists said, this is a dumb idea because you’re not really forming a union like the United States of America where, if there’s a big, you know, hurricane, Katrina, then you use federal funds to bail out the states to the tune of, if necessary, hundreds of billions of dollars. But you are putting everybody in a straitjacket of the euro was going to have the same value everywhere. And what economists warned was: what happens when you have the first really big recession? And what happens if that recession, like most recessions, isn’t uniform but is more concentrated in the weaker states? Then you’re going to have a system where you have no ability to respond to the recession. So what do you do? How do you get out of a recession, or especially a really bad one? Well, the first thing you do is devalue your currency. But if you’re a member of the euro, you can’t do that. The second thing you think about doing is to run a budget deficit, because the reason you have a great recession is that private demand is insufficient. And so what you do is add governmental demand, and then you recover more quickly. But the growth and stability pact of the EU–which is an oxymoron, because it really stands for anti-growth and disaster–says you can’t run anything more than a trivial budget deficit, even when you find yourself in a recession. And a third thing you might do is have a really easy monetary policy. But if you’re the periphery, there’s only one monetary policy for the EU. It’s set by the ECB. And Germany and France completely dominate what the ECB will do, which is to say, if you’re in the periphery and there’s a big recession, you are in a world of hurt, because Germany and France are going to run the EU and the ECB in the way they want, and that means throwing you to the wolves where you have no ability to recover.
JAY: And let’s talk a bit about the wolves. There was a money manager on TV in the last day or two. He used the term sovereign raiders, which I thought was pretty good. What’s he talking about? And he’s talking about the next raid being Belgian.
BLACK: Yeah. So what I’ve just described is that all the nations that joined the euro gave up their fiscal sovereignty, indeed, their economic sovereignty. But they still have an Achilles heel, and that’s their sovereign debt. In other words, the debt issued by the national government, or indeed in many cases they’re state governments [incompr.] federal system, because that debt you’re still on the hook for. And unlike the euro, which of course has one price, that debt is going to get set in a marketplace that is subject to speculative attack. And that means massive volumes of shorting can occur, and they can attack anybody’s debt that they want, and they can move from one target to another and whipsaw them.
JAY: And what’s the objective of the attack? What do they get out of it?
BLACK: Make money. They’re betting that the interest rates will increase for that country’s debt–in other words, the debt will fall in value. And if you’re shorting it, that means you make money when that happens. So if you can generate a crisis and a feeling of crisis, that’s perfect. And as I say, these kind of rolling–if you think of World War I with rolling barrages of artillery that are sequenced carefully to permit your attack to go forward, that’s somewhat analogous to how they’re going to do these things. Now, that means that you become completely untenable if you’re Greece or whatever, because you can’t pay those kind of interest expenses and you no longer have a sovereign currency which allows you to pay. So the United States is nothing like Greece. And indeed Warren Mosler’s famous line is, because we’re afraid of becoming the next Greece, we’re becoming the next Japan.
JAY: So they get you in this vice. On one side, you pay higher interest rates. And then, because you can’t really sustain that, they get [you to] start a privatization of state-owned assets. As we know in Greece, they’re even going after some islands. But that’s happening in all of these countries.
BLACK: Right. So you create a budgetary crisis because the debt becomes so expensive. Again, if you were a nation like the United States, it wouldn’t be a crisis. You would be paying it off in your own currency. But that’s no longer true of any nation that’s part of the euro system.
JAY: And then you have a situation like Iceland, who has a referendum, and they say, well, screw the banks; we ain’t paying. Is that an alternative?
BLACK: That’s right, indeed. One of the reasons I was brought over to Ireland–we had an economics festival, and we brought, deliberately, experts from Iceland and from Argentina to explain to the Irish there were real alternatives. So the periphery is not all one uniform group. Ireland ran a budgetary surplus. What happened in Ireland is the government went insane. The banks, the big four or five banks in Ireland, were engaged in massive growth and lots of accounting fraud, and they got into huge trouble. And this finally was triggered, but not caused, by Lehman Brothers’ collapse. And so the Irish government, without consulting the population, without consulting experts, without consulting the opposition, decided to give virtually a blanket guarantee of all the debts of the Irish banks. Now, the Irish banks, of course, their deal was, we will pay you to the extent we can pay you, and if we don’t have enough money, you get $0.12 on the dollar. The Irish banks borrowed enormous amounts of money to fund their growth from European banks, particularly German banks. And that’s why Germany holds its nose and ultimately votes in favor of the bailouts, ’cause these bailouts are not really of Ireland or Greece; these are really bailouts of European, huge banks, particularly German banks. And so, if you don’t do the bailout, bank after bank fails or has to be bailed out, and then you have to pay the political cost of bailing out your bank. If it sounds like you’re bailing out Ireland, you pay some political cost, but it’s actually less.
JAY: And, of course, then you can feed the right-wing nationalist forces in Germany and blame it all on Irish workers and Greek workers and Spanish workers. But the reality is it’s a bailing out, as you said, of German banks. Thanks very much for joining us, Bill.
BLACK: Thank you.
JAY: And thank you for joining us on The Real News Network.