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May 23, 2011

Krugman: Waiting the European Confidence Fairy

When Austerity Fails - NYTimes.com
But at least in America members of the pain caucus, those who claim that raising interest rates and slashing government spending in the face of mass unemployment will somehow make things better instead of worse, get some pushback from the Federal Reserve and the Obama administration. In Europe, by contrast, the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer to all problems. Underlying this insistence have been economic fantasies, in particular belief in the confidence fairy — that is, belief that slashing spending will actually create jobs, because fiscal austerity will improve private-sector confidence. Unfortunately, the confidence fairy keeps refusing to make an appearance. And a dispute over how to handle inconvenient reality threatens to make Europe the flashpoint of a new financial crisis. After the creation of the euro in 1999, European nations that had previously been considered risky, and that therefore faced limits on the amount they could borrow, began experiencing huge inflows of capital. After all, investors apparently thought, Greece/Portugal/Ireland/Spain were members of a European monetary union, so what could go wrong? The answer to that question is now, of course, painfully apparent. Greece’s government, finding itself able to borrow at rates only slightly higher than those facing Germany, took on far too much debt. The governments of Ireland and Spain didn’t (Portugal is somewhere in between) — but their banks did, and when the bubble burst, taxpayers found themselves on the hook for bank debts. The problem was made worse by the fact that the 1999-2007 boom left prices and costs in the debtor nations far out of line with those of their neighbors. What to do? European leaders offered emergency loans to nations in crisis, but only in exchange for promises to impose savage austerity programs, mainly consisting of huge spending cuts. Objections that these programs would be self-defeating — not only would they impose large direct pain, but they also would, by worsening the economic slump, reduce revenues — were waved away. Austerity would actually be expansionary, it was claimed, because it would improve confidence.

May 21, 2011

Vice Magazine interviews Matt Taibbi about Goldman Sachs' evil dealings

GOLDMAN SACHS OF SHIT - Viceland Today
In your focus on the financial crisis, why did you decide to really zero in on Goldman Sachs? After the 2008 presidential election we at Rolling Stone kind of collectively decided to do a story about the financial crisis. I did the first story, which was about the AIG bailout. When I was interviewing people for that story I noticed that every single person I talked to was like, “Those motherfuckers at Goldman Sachs…” and then, when I looked at it more broadly, it seemed like Goldman was a major player in something that had gone terribly wrong in every sphere of business that we were looking at. For instance, in the commodities business they were the first company to get these crazy exemptions that allowed speculators to act like consumers. The Internet stock bubble and mortgages—they were everywhere. So we decided doing a story on them would be good because it would allow us to kind of use one bank as a symbol for everything that had gone wrong on Wall Street. Plus, they have a sort of “we’re better than you” attitude that makes them a very attractive literary subject. Would you consider them the biggest perpetrator from the era? Well they’re the most successful investment bank. They’re the richest and the most politically influential. If you go back pre-crash there were five major investment banks: Goldman Sachs, Morgan Stanley, Bear Stearns, Lehman Brothers, and Merrill Lynch. Three of them don’t exist anymore. Goldman and Morgan Stanley are the only ones left, and you could make the argument that Goldman’s fingers were in more pies. Morgan Stanley’s former chief wasn’t the Treasury Secretary twice over [Robert Rubin and Hank Paulson]. Was what they did illegal? Absolutely. It was definitely illegal. And if you read the Levin Report—and Goldman’s going to argue about this—companies are required to disclose adverse pertinent information to their clients. They cannot lie and make representations that aren’t true. If you read this report they did that. For instance, in one deal they told their clients they had “sourced” their assets from the street. In other words they had gone out on the open market and bought the assets to sell to their clients. In fact, it was coming straight out of their own inventory. In other words: they had bad inventory. Think of it as a car dealership. They had a lot full of cars with bad breaks and they told the client they went out and bought these cars somewhere else, when in fact they were coming right off their lot. That’s fraud. That’s lying. And there’s not just one instance of that. There are dozens and dozens of instances. We’re talking billions and billions in client losses. I think there’s a lot of information in the Levin Report alone that could put those guys on trial.