Austerity Experiment Gets an “F”

All those eager-beaver budget slashers on the loose on Capitol Hill might want to examine a recent live experiment in austerity as a solution to economic woes and fiscal hard times. According to Colin Barr, writing about Ireland and its austerity binge in Fortune.cnn.com, “fasting is no cure for a giant debt hangover.” Ireland did exactly what the big bankers and bond holders demanded, imposing two years of stark, painful austerity on the Irish people.  Measures included bringing its foreign trade account into balance and ceasing to “spend beyond its means,” by which they mean savage budget cutting. The result?  “Wages have been falling and unemployment has tripled to 13 percent,” young people are “leaving the country in droves,” and the economy has undergone a double digit contraction. All this pain was enforced in order to please bondholders, and secure a bailout for Ireland—- but the self-flagellation has basically gone unrewarded.  The bond investors are still demanding a “back-breaking 8 percent,” which is stifling real recovery. Austerity, in other words, is not a silver bullet, whatever one may think of the need to rein in government spending.  

Ireland, much like the United States (except for a matter of scale), also let its banks run wild, growing too big and taking enormous risks, especially in real estate lending and, apparently derivatives, then sticking the taxpayers with the bill. “…it’s a huge moral hazard, and it’s no way to run a financial system,” said Jan Randolph of IHS Global Insight.  He added that “the high rates for the likes of Greece, Ireland, and Portugal are likely to become entrenched, part of the norm,” which of course will not help any economic recovery.  

It is now apparent to the European Union that the so-called austerity cure is not as effective as expected, it is not worth the extreme pain both politically and morally, and that those bond holders are going to have to share the pain.  The bond holders (i.e., the money lenders) can no longer call the shots.  Their way does not work. Period.  

I find this interesting; here in the U.S., we tried “mortgage modification” in an effort to keep people in their homes and avoid foreclosure, but the banks, in true investor style, refused to modify their bad loans in any sensible way, demanding ridiculous terms that often left struggling homeowners even worse off than before.  That is, the moneyman’s greed for profits sabotaged the program, exactly as their greed for profits created the mess in the first place, and exactly as the bond holders in Europe treated Ireland, Greece, etc. (the famous “PIIGS” of the debt crisis crash). The people, the actual victims in the case, should not be forced to suffer all the pain, and not just for moral reasons or a sense of “fairness.”  The austerity cure turns out to be counter-productive when done under the direction of Big Money. It strangles the economy, creating a requirement for more austerity and more bailouts and higher interest rates, then more austerity, more bailouts, more….

Don’t believe it? Well, we just have evidence from a real live experiment, one conducted on real people in real time in a developed Western country, not some third world former colony pleading for help from the World Bank.  True, the U.S. is not Ireland, we are bigger, richer, and have (for how long?) our dollar as the world’s reserve currency, which enables us to keep printing money in one fiscal surge after another. The experiment, however, is valid. A decades-long binge, such as America has led the world in, cannot be repaired by cold turkey, in a murder of the middle class—- unless, of course, the objective is not recovery, but rather turning the country into a corporate colony of world finance.

Congress and the President are running pasty-faced scared of those mighty bondholders and Wall Street.  All the measures proposed to rein in deficit spending never, ever hint at taxing the Big Money (or any wealthy people, either), making them eat some of the disaster.  The truth is, our looming debt and debt service problem cannot be “solved” without forcing the investors to share the pain. So, when “everything is on the table,” Senator Warner and Senator Chambliss, make sure it really is everything.