
The world economy is heading towards a black hole unless bold action taken - colinprince
http://www.economist.com/node/21530986
======
OstiaAntica
"Bold" action by the politicians and the central banks created much of the
current mess. If we'd just cleared the pipes by letting the banks fail,
recapitalizing new banks, and basically rebooting the financial system, we'd
be much further along.

Instead, we got bailouts and crony capitalism and ad hoc intervention, and
today the global system is in many ways in worse shape now than in 2008.
(Banking is more concentrated and national balance sheets are a mess from the
bailouts)

~~~
anigbrowl
_letting the banks fail, recapitalizing new banks, and basically rebooting the
financial system_

Please tell us how that works in practice rather than in theory. I really,
_really_ want to know how you just 'reboot' the financial system without
massive disruption to retail banking or the payments system. How do you
're'capitalize a new bank? If you just mean create new banks, who is running
these banks? I mean, I'd like to have seen a complete reboot of the system as
well, but it looks like the sort of thing that is much easier said than
actually done. If you're going to mention Sweden, provide specifics of how
long it took and how much capital was involved.

~~~
theoj
Contrary to what some pundits would like you to believe, this is not new
ground. A real estate bubble followed by a balance sheet recession has
happened in at least 2 other places before: Sweden in 1992 and Japan in 1991.
Different choices in these countries led to different outcomes.

In Sweden, the government demanded steep losses from equity holders before it
took over a large part of the financial system (unlike US officials, the
Swedish government officials were not afraid to use their superior bargaining
position to get an excellent deal for the government). The upfront cost for
recapitalization was 4% of GDP, the net cost in the end was less than 2% of
GDP (based on different computation methods some even say 0%). Following asset
sales in 1995, the Bank Support Authority went into a dormant role in 1996, 4
years after the crisis.

[http://www.nytimes.com/2008/09/23/business/worldbusiness/23k...](http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html)

Japan handled things differently and ended up with debt totaling 200% of GDP.
See this excellent YouTube video from economist Richard Koo that explains the
Japanese experience:

<http://www.youtube.com/watch?v=HaNxAzLKegU>

~~~
anigbrowl
I don't listen to media pundits. I'm asking the grandparent poster for
specifics of how s/he intends a reboot of the entire financial sector because
I think this is actually a rather hard problem. I have been through a real
estate bubble followed by a recession before (in the UK, at the same time as
the Swedish one). I think there are some definite upsides to the Swedish
approach, but the people who keep bringing it up seem to overlook the fact
that Sweden is a) small - <10 million people, not much more than NYC and b)
one of the highest-taxed economies in the world, with tax revenues equal to
almost 50% of GDP, and c) is regulated out the yin-yang. The idea that we can
just lift one bit of regulatory policy from there, apply it to our financial
sector, and call our problem solved is not just misguided, it's flat-out
magical thinking.

~~~
jessedhillon
Exactly.

Economic/political discussions on HN are painful because people who are
capable of generating meaningful insights when the topic is technical are
reduced to wishful thinking and trotting out tired, simplistic
misrepresentations of economics.

Let the country's biggest banks become insolvent, then "reboot" them in a
week? When you start proposing that the world's largest economy model itself
on theoretical notions only tested in a country 3% it's size, ideologically
oriented in a completely different direction, and founded on a radically
different social contract, then you are not arguing anymore.

It's not an argument, in the sense of debate and intellectual exchange, it's
dogma.

------
chernevik
All HN threads attract posts with excess ratios of certainty to knowledge.

On the technical stuff, the excesses are met with really knowledgeable
rebuttal, driving up the denominator. People are afraid of embarrassment, so
they write more carefully, driving down the numerator. The dynamic drives the
overall ratio to something like one.

On economics, everyone is really sure the other guy is crazy. They make posts
that drive up the numerator, as that's the only way to get heard, and drive
down the denominator, as they must address the other guy, whether they know
anything about the matter or not. The average blows out hyperbolically -- if
there's a limit, the signal / noise drops too low for even the craziest people
before that limit is approached.

It's kind of remarkable to see how quickly those ratios go to their logical
endpoints.

~~~
kokey
You say that with a lot of certainty. You must be crazy.

Jokes aside, you have a good point.

------
dmfdmf
I agree with OstiaAntica. This Economist article is a thinly veiled call for
more debt and more inflationary spending. Who stands in the way of "recovery"
? The obstinate Germans (who learned the lesson of hyperinflation last
century) with the only sound Euro economy, i.e. they will be paying for the
bailouts. In the USA its the Tea Party and the few Republicans with a spine
who recognize that the problem is the massive debt and adding to it is only
going to delay the inevitable and make it worse. The bold action (that will
never happen) is to let the zombie banks and businesses fail, then pickup the
pieces and start over. It won't happen and everyone had better prepare for
high, if not, hyper-inflation because politically that is the road we are on.

~~~
guelo
Can you please explain your theory of how massive cuts to government and the
ensuing massive layoffs of government workers, and the government buying less
stuff from businesses, is going to fix the economy? Please take into account
in your explanation that the US is able to borrow at record low rates right
now.

~~~
Retric
And also note that inflation is next to non existent right now. A few years of
3% inflation would do more to fix the housing market than all government
assistance put together at this point in time.

PS: I still think we should cut government spending by around 30% AND remove
the home mortgage tax deduction but both of those need to be slow changes or
they are going to cause a great deal of harm.

~~~
steve8918
Removing the home mortgage tax deduction will cause the price of houses to
drop, because no one would be able to afford the more expensive houses
anymore, and they would have to drop the price to make them affordable.

The only thing that the tax deduction did was to raise the price of houses.

------
nradov
Let me guess: the "bold action" they want is to throw a few more trillions at
bank shareholders and prodigal borrowers.

No thanks. We would be better off to head straight through the black hole,
full speed ahead. It will be painful for a few years but we'll come through
the other side with cleaner balance sheets and sustainable government budgets.

------
ChrisLTD
They _almost_ made it the entire article without throwing in a bit of Both
Sides Do It nonsense.

"In America the Republicans are guilty of outrageous obstructionism and
misleading simplification, while Mr Obama has favoured class warfare over
fiscal leadership."

~~~
michaelochurch
Obama class warfare? No sign of it. I think Obama's a great human being, but
he's a essentially a conservative by any sane standard. With the economic
stance he holds now, he'd have been a Republican in 1970 (a time in which
Republicans were not all horrible).

~~~
rick888
If Obama is your idea of a Republican, I don't want your idea of a Democrat in
office...ever.

~~~
Confusion
The horror... you might just end up like Germany or France.

~~~
rick888
70%+ taxes, no thanks. I thought this was HN, not reddit...

~~~
ChrisLTD
According to Wikipedia, the German and French personal tax rates are in the
area of 50%:

<http://en.wikipedia.org/wiki/Tax_rates_around_the_world>

~~~
rick888
This doesn't include VAT and increased taxes in other areas, so personal
income tax might be 50%, but you are actually paying a much higher rate.

~~~
Confusion
You're making numbers up and don't actually know what the aggregate taxes for
an average consumer in France, Germany and the US are.

~~~
rick888
..and you are basing an individuals total tax rate based on income tax alone,
which doesn't account for the many other taxes that someone has to pay.

I suppose if you made money, didn't live in a house, and didn't spend your
money in any way, your tax rate would be 50% in France. This just isn't the
case for the average consumer.

------
silverbax88
That article has almost zero factual content to back up it's assertions. This
kind of nonsensical ravings really grate me. Don't write something like
'witness the increasingly dark economic backdrop' or 'America’s economy is
still limping along' without some hard numbers. This article attempts to
support those statements with broad general commentary like 'summer slump in
share prices and consumer confidence suggest future spending will weaken
further'...that's not proof, that's an interpretation of data that the author
isn't sharing.

The worst part about that article is that the meatiest statement 'That could
change if Congress came to its senses, passed Barack Obama’s jobs plan and
agreed on a medium-term deficit-reduction deal by November' is dead on, but
delivered in such a clumsy manner it's almost a throwaway piece.

~~~
mcphilip
This is an online version of an article in the Leaders section of the
Economist magazine. The articles in that section are mostly short summaries of
topics discussed in greater detail in the relevant subsections of the issue.

For instance, the same print issue as this 'nonsensical raving' has a much
more detailed summary of the euro crisis in the Briefings section if you're
looking for the gory details alluded to in the leader[1].

[1]<http://www.economist.com/node/21530960>

~~~
wtvanhest
Then for future reference, link to that article. The one posted was a gigantic
waste of time and had no information.

~~~
waqf
We should write a filter for HN that makes it impossible to submit articles
from the Leaders section!

------
anigbrowl
Although the _Economist_ tends to oscillate between sanguinity and (mild)
hyperbole, this is as close to panicked as I have seen it in a decade.
Situation downgraded from 'worrying' to 'grave.'

------
wtvanhest
This article has no depth and is not worth discussing.

Here are two quotes taken from the article:

1) "That could change if Congress came to its senses, passed Barack Obama’s
jobs plan and agreed on a medium-term deficit-reduction deal by November." -
Author favors Obama's plan and says it will fix the problem.

2)"while Mr Obama has favoured class warfare over fiscal leadership." - Author
refers to the exact same policy, but now calls it favoured class warfare.

This has a ton of link bate and zero information anyone actually cares about.

------
blackhole
I am continuously amused by people vehemently arguing about topics they have
almost no expertise in and thinking whatever insane batshit theory they have
is better than a PhD doctorate's advice.

~~~
learc83
When it comes to economics, you can find a set of PhDs to support whatever
wild theory you happen to fancy.

~~~
Tyrannosaurs
The great quote "Economists have successfully predicted seven out of the last
three recessions".

------
nhebb
"That could change if Congress came to its senses, passed Barack Obama’s jobs
plan"

The jobs plan doesn't even have enough Democratic support to pass the Senate,
so the likelihood of it making it through both houses is nil. It's more of a
political plan than an economic one.

I also think that we have limited capability to make expedient investments in
infrastructure with a positive ROI. Take a look at the Columbia River Crossing
project between Oregon and Washington states - six years after project
inception, the final environmental impact study still hasn't been released.
Construction would start in 2013 at the earliest and is estimated to take 5-7
years. Time lines like that are common with large infrastructure projects in
the US.

------
capkutay
When discussing "bold action" to save the economy, we should really be
reevaluating the incentives of the traders on Wall Street. This makes me think
of Mark Cuban's article "What Business is Wall Street In?"

[http://blogmaverick.com/2011/08/08/what-business-is-wall-
str...](http://blogmaverick.com/2011/08/08/what-business-is-wall-street-in-2/)

These traders on Wall Street have little interest in creating capital for the
companies that stem innovation. Their main incentive is profit, even if it
means making money off economic downswings. We need to put them back on the
proper track via taxes or a complete restructuring of the capital gains
system.

------
crag
My god this article is spot on:

"If Democrats and Republicans fail to hash out a compromise on the deficit,
draconian spending cuts will follow in 2013. For all the tirades against the
Europeans, America’s economy risks being pushed into recession by its own
fiscal policy—and by the fact that both parties are more interested in
positioning themselves for the 2012 elections than in reaching the compromises
needed to steer away from that hazardous course."

Says it all right there.

------
bd_at_rivenhill
_building a firewall around illiquid but solvent countries like Italy_

I'm not entirely sure I understand the distinction being made between
illiquidity and insolvency here, could someone please explain it? It seems to
me that if you are in a state in which a high enough interest rate on your
debt will put you in a death spiral from which you cannot feasibly recover,
then your problem is bigger than liquidity.

~~~
cwp
That's exactly the distinction being made. Italy's debt is highish but
manageable; it budget deficit is small. If it can borrow at reasonable rates
for the next few years, it's not in danger of default. That's illiquidity.
Compare to Greece, which, even if it could get loans at low interest, is never
going to be able to repay what it already owes. That's insolvent.

~~~
bd_at_rivenhill
So the only thing that really separates Italy from Greece is the market's
expectation that Germany won't let any of the other sovereign nations default.
Absent that expectation, Italy and Spain are one good speculative attack (a la
Soros vs. the British Pound) away from insolvency.

------
asdkl234890
Bold action _might_ help us.

This "bold action" depends on politicians. -> Forget about it!

Strap in, change is opportunity, get ready for an exciting ride.

~~~
zobzu
I don't think all the new homeless people, or whoever is going to get very
poor are going to find the ride all that exciting.

The guys who make money, the rich, however, certainly will. These recessions
and all are always a pretty good opportunity to make more money.

~~~
redthrowaway
Right, so with a deeper recession looming, those of us with the wherewithal to
foresee it should be asking ourselves how best we can benefit from it.

Look, it's shitty that it's going to hurt a lot of people. I wish it didn't.
But, the fact that it will doesn't mean that it should hurt _me_.

------
naeem
The scariest part of all this, is that for the first time in the past century,
we no longer have any options. Less regulation, more regulation,
centralization, de-centralization, it's all been tried. We're out of options,
and the policy makers and central bankers have clued in (Bernanke's recent
speeches have been dreadful to listen to).

Maybe, just maybe, things are going to go really, really badly this time
around. Maybe.

------
pnathan
I find the preaching of fear distasteful.

It is better to gravely recognize the scope of the problem, assemble facts
regarding the situation, and then to move to positively affect the situation
on all levels, from globally to locally.

The bold action that is needed is to not panic, but to take measured steps
regardless of ideology and re-election chances.

I wish I was in a position to do more than work hard, invest, and not panic.

------
scarmig
On one hand, I really hate the Economist. It's a magazine that thinks an
ideology, a smart tone, and providing the only decent coverage of world events
widely available makes for a compelling magazine. Even if that coverage is
ridiculously biased and not really knowledgeable about facts on the ground.

On the other, it's perhaps the pre-eminent mouthpiece for the ruling Anglo-
American elite, and it's comforting that they're sounding the alarms to what's
happening. I think it's too little too late, but I genuinely hope that people
and policymakers hear them.

Because this is really bad, folks. Really, really bad. It's pretty clear the
dominoes that will fall: Greece fails, setting off markets and destroying
banks across the continent, causing Spain to fail, doing the same, causing
Italy, Belgium, maybe even France to fail. Who knows what after that. The EU's
demise will signal the financial collapse of an economy larger than the United
States; it's already either at the brink or already in a new recession, and
this will be the deathblow. The quick succession of collapses, happening all
within the span of a month or two, reverberate throughout the entire world,
throwing the USA back into a second, possibly harsher recession than the first
we have yet to recover from.

The only other solution is converting the European Union into a fiscal union.
On the face of it this is implausible: you'd be asking Germans, who in their
self imagination see themselves as pure as snow, to pony up hundreds of
billions of dollars to subsidize what they see as the lavish lifestyles of
lazy unproductive Mediterranean types. Even if you could form some political
consensus to do this, though, it's not even clear that politicians could
coordinate the solution in time to cut off the collapse. Effectively
consolidating dozens of countries into the same fiscal union isn't a change
you can implement by sheer willpower; it'd be a herculean task even with years
of preparation.

And, stateside, any attempt to counteract or prepare for this tidal wave is
simply doomed because of our ridiculously broken institutions. One side has
the ability to co-operate and try to fix the situation, but because of how our
government is set up all the incentives on their side are to actively sabotage
the economy--regardless of causes, if it does badly, the party of the current
President will be blamed.

Because people (Americans, Germans, Greeks, Chinese) are all idiots, from the
man on the street to the upper echelons of power.

~~~
Estragon
Greece's failure will only destroy banks that France and Germany aren't
interested in preserving. They can play the zombie-bank game for a long time.

Also, I really disagree that this crisis has evolved from idiocy. It's more a
matter of misaligned incentives. Many of the people who have caused this mess
have already profited handsomely from it.

~~~
bd_at_rivenhill
Greece's failure will invite a sustained speculative attack on Spain and Italy
which would probably require coordinated actions between European and non-
European (i.e. American and Chinese) governments to stop.

I agree that the crisis is a matter of misaligned incentives, but I include
politicians and bureaucrats from pretty much every country in the set of those
who have directly misaligned incentives (i.e. not just indirectly misaligned
by campaign contributions from wealthy bankers), so I have very little faith
in the ability of regulation to solve the problem.

------
jwingy
Get money out of politics so politicians can make unbiased, level-headed
decisions.

I don't doubt the complexity of our current economic situation, but the way
our government is currently run by lobbyists who naturally have their own
myopic view, I think it would be more an accident than on purpose that our
economy gets better.

------
jcromartie
Lately, I've noticed that political and financial systems seem to behave
according to the laws of increasing entropy in closed systems. For that
reason, sometimes I fear that there is no fixing it, and that only a new
system will be better.

------
JerkyTreatz
Nothing new here.

What I find interesting is how an impending Chinese squeeze would affect
American markets. Their economy has been steadily dropping, but with all eyes
on Europe no one has really looked into it.

<http://macro-man.blogspot.com/2011/09/china-squeeze.html>

------
sandee
Why the date is shown as "Oct 1st 2011" ? (Current GMT is Sept 30, 6:06 am)

~~~
sateesh
It is the date of the print edition.

------
yaix
Scary news sell newspapers. This article is way to sensationalist for my
taste. The one thing I find worrying is the large shift in power from people
to financial corporations that has happened in the past decade.

------
Sym3tri
I feel like I've heard that headline before.

------
skrebbel
Bold action is for sissies. We'll deal with the black hole when it comes!

