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Home Publications Blogs Beat the Press Robert Samuelson Calls Me Nobody

Robert Samuelson Calls Me Nobody

Thursday, 04 April 2013 04:22

In his column today Robert Samuelson talks about the euro zone crisis and its latest manifestation in Cyprus in the context of the new book, The Alchemists, by his Washington Post colleague Neil Irwin. At one point he tells readers:

"The constant goal, as Irwin shows, has been to prevent a collapse of the global financial system, which could plunge the world economy into a genuine depression. Everyone embraces the goal..." (emphasis added)

Well not everyone shares the goal of preventing a financial collapse at all costs. That's in part because some of us know that there is no reason that such a collapse would plunge the world into a genuine depression.

The world has the tools to reverse the impact of a financial collapse and restore the economy back to a normal growth path. This was demonstrated a decade ago by Argentina. It defaulted on its debt and broke with the dollar in December of 2001. This led to a full-fledged financial collapse, which was followed by a sharp plunge in output in the first quarter of 2002.

By the second quarter its economy had stabilized. By the second half of 2002 its economy was growing rapidly and by the summer of 2003 it had made up all the ground lost from the financial collapse. It continued to growth rapidly until the world recession brought Argentina's economy to a standstill in 2009.

Source: International Monetary Fund.

While it is possible that the "alchemists," the central bankers in the euro zone and the United States who are the title characters in Irwin's book, are not as competent as Argentina's policy makers, there is no reason that a financial collapse should have led to a full depression. Economists since Keynes have long understood the steps necessary to prevent a depression, so it would require an extraordinary level of incompetence to allow a collapse to lead to a depression.

It certainly would be best to have a solution to the financial crises in Cyprus and the euro zone that did not involve a collapse, as would have been true during the Lehman crisis in the United States in the fall of 2008. However, given the enormously bloated financial sector in the United States and elsewhere in the world, it may well be better to have a solution involving a collapse that would wipe out this powerful interest group than a government bailout that leaves it intact.

The bloated financial sector acts as on ongoing drain on the economy since it pulls out more than it contributes to the economy as was shown in a recent paper from the Bank of International Settlements. In addition, because of the financial industry obsession with inflation, it is likely to use its political power to stifle growth in order to minimize the risk of inflation.

Contrary to Samuelson's assertion, there are people who disagree with him on the need to save the financial industry. (It was the industry whose survival was immediately at stake, not the system as he asserts.) It is striking that he would try to deny the existence of people on the other side but this sort of argument is characteristic of DC elite opinion as when they assert that "nobody" saw this crisis coming. When you have a weak argument it is easiest to just try to exclude the other side from the debate.

Comments (12)Add Comment
Duh. Everyone Wants to Avoid Rape According to Robert Samuelson
written by Last Mover, April 04, 2013 6:03
Rape at the personal level is like a global financial collapse and depression at the global level. Nobody wants it to happen to them. What an insight from Robert Samuelson.

Of course nobody is actually endorsing the act of rape or depression itself. But when it happens, it's God's will that the consequences of such a divine act be allowed to unfold naturally and heal itself in an austere sort of way, free of interference and tampering by the likes of mere mortals who caused it in the first place with original sin.

Financial collapse and depression, like rape, can be avoided altogether if the victims would just stop encouraging it.
written by sherparick, April 04, 2013 7:14
Well, the economic elite of Europe, in decision after decision, seems to show that "Extraordinary Incompetence" is the default position. http://www.bloomberg.com/news/...lan-b.html

Japan has managed this default incompetence for two decades now.

Basically, Europe is turning "Japanese," a decade of no-growth, low inflation or deflation (YEAH, THE ECB IS MEETING ITS MANDATE OF PRICE STABILITY), and high unemployment. How this will play out in a 17 nation state context will make for a lot of interesting news cycles in the coming decade. Meanwhile, the VSPs here in the U.S. also want to endorse policies (Fiscal austerity and terminating QE3)so we can turn "Japanese."

This raises a question about whether it is incompetence or something else. Cui Bono?
Effect of Argentina's default
written by Rick Beckley, April 04, 2013 8:00
What was the effect of Argentina's default of foreign debt? Who suffered because of it?
written by skeptonomist, April 04, 2013 9:03
At the time of the crisis I thought Dean was right in calling for takeover of the banks by the FDIC rather than bailout (and still do). Another alternative was bailout compensated by government equity, which is what Sweden did in their banking crisis of 1992.

The solution that Argentina pursued is a different matter - here there was mostly just outright default (although the liability is still being debated in world courts). Argentinians suffered relatively little, while the cost was dispersed through the rest of the world. Iceland's resolution of its banking crisis was similar, and Cyprus at least has the option of doing the same. But in the worldwide crisis of 2008 all nations could not default on each other - each country had to absorb its own defaults, had they occurred.

Sweden is better model than Argentina for massive default threat as in 2008. The solution for the future is not to count on stiffing foreign investors, but to tighten banking regulations all over, realizing the consequences of default.
written by skeptonomist, April 04, 2013 9:21
Argentina's default in 2001 was not a new or unique event. Many Latin American and other nations have defaulted wholly or partially from time to time. Sometimes the recovery has been good, sometimes not. Foreign investors know about the risk and accept it for high rates of return. The crisis of 2008 was an affair of a different magnitude, brought on by a major decrease in banking regulation and specifically by failure to recognize that credit-default swaps actually increase systemic risk.
written by liberal, April 04, 2013 9:28
skeptonomistg wrote,
Sweden is better model than Argentina for massive default threat as in 2008.

Sweden's a poor model. IIRC the Swedes made bondholders whole. In a "just" bailout, equity would be completely wiped out, and bondholders would take as large a haircut as necessary to stabilize the system, except to the extent that they have explicit state guarantees.

...and specifically by failure to recognize that credit-default swaps actually increase systemic risk.

Right. Any rational finance reform would abolish CDSs or eliminate as rapidly as possible.
Illegitimi non carborundum
written by David M, April 04, 2013 10:25
Don't listen to Samuelson, Dean. You're somebody to us. ???
written by Seth B, April 04, 2013 10:34
Are you the same Nobody who expected the Spanish Inquisition?
purge the system
written by Peter K., April 04, 2013 10:35
I'm starting to come around to Dean Baker's way of thinking, given our lost decade of crappy recovery (partly due to Republicans blocking fiscal policy and shrinking government.)

I doubt there will be bailouts the next time around - given how bad the recovery has been - and we'll see how bad it could get. But there's a chance things could go very wrong. Still in hindsight this lost decade was very wrong as well and the financial industry needs to be punished for blocking reform.

written by watermelonpunch, April 04, 2013 7:47
Just wanted to say, I've been enjoying Last Mover's satirical comments.
Argentina alone versus the global system?
written by Melissa, April 05, 2013 5:59
I wonder if it's valid to use a single country's recovery from financial collapse to conclude that if the entire global financial system collapsed, it could recover as easily. After all, Argentina's recovery was in a context of uncollapsed economies around it who could continue to purchase their exports and make investments in it. If everything fell at once, there would be no one to "help".
written by Chris Engel, April 06, 2013 3:30
I was with Last Mover's satirical comment until the last part.

I think the combination of sarcasm and snark took a dark turn there at the "victims encourage" part as it was inconsistent with the angle of analogy taken :>

As for Samuelson's dismissal of the loud minority that was in fact correctly calling a spade a spade, it's more of the same from that dope.

There were plenty of other options, if we didn't have a Goldman Sachs exec running Treasury at the time, to hold the private financial industry responsible while maintaining liquidity in the financial system and preserving its integrity.

I haven't read Irwin's book yet, but I'm hesitant to begin from some of the reviews I've read from progressives. And his work at WaPo has generally been okay, but I've just caught a certain overly-lauding-to-the-elite tone in some pieces.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.