Five Lessons for Economists From the Financial Crisis

What did the worst financial crisis in 75 years teach academic economists and policymakers?

By Olivier Blanchard

#1: Humility is in order.

The Great Moderation [the economically tranquil period from 1987 to 2007] convinced too many of us that the large-economy crisis -­ a financial crisis, a banking crisis ­- was a thing of the past. It wasn’t going to happen again, except maybe in emerging markets. History was marching on.

My generation, which was born after World War II, lived with the notion that the world was getting to be a better and better place. We knew how to do things better, not only in economics but in other fields as well. What we have learned is that¹s not true. History repeats itself. We should have known.

#2: The financial system matters — a lot.

It’s not the first time that we¹re confronted with [former U.S. Defense Secretary Donald] Rumsfeld called “unknown unknowns,” things that happened that we hadn’t thought about. There is another example in macro-economics:

The oil shocks of the 1970s during which we were students and we hadn’t thought about it. It took a few years, more than a few years, for economists to understand what was going on. After a few years, we concluded that we could think of the oil shock as yet another macroeconomic shock. We did not need to understand the plumbing. We didn’t need to understand the details of the oil market. When there’s an increase in the price of energy or materials, we can just integrate it into our macro models -­ the implications of energy prices on inflation and so on.

This is different. What we have learned about the financial system is that the problem is in the plumbing and that we have to understand the plumbing. Before I came to the Fund, I thought of the financial system as a set of arbitrage equations. Basically the Federal Reserve would chose one interest rate, and then the expectations hypothesis would give all the rates everywhere else with premia which might vary, but not very much. It was really easy. I thought of people on Wall Street as basically doing this for me so I didn¹t have to think about it.

What we have learned is that that’s not the case. In the financial system, a myriad of distortions or small shocks build on each other. When there are enough small shocks, enough distortions, things can go very bad. This has fundamental implications for macro-economics. We do macro on the assumption that we can look at aggregates in some way and then just have them interact in simple models. I still think that¹s the way to go, but this shows the limits of that approach. When it comes to the financial system, it¹s very clear that the details of the plumbing matter.

A transatlantic tipping-point

An historic trade pact between America and Europe needs saving

The Economist

IN AN age of small-bore politics, America and the European Union have a chance to achieve something large: a transatlantic pact that would, at a stroke, liberalise a third of global trade. At a time when emerging powers are closing fast on a fretful West, a free-trade area covering America and the EU would offer something more. Done right, it could anchor a transatlantic economic model favouring openness, free markets, free peoples and the rule of law over the closed, managed visions of state capitalism.

Right now, the pact is in trouble, beset by small-mindedness and mutual suspicion. This is madness. A free-trade pact has never had such support in the chancelleries of Europe, as well as in the West Wing of the White House. It is backed by compelling logic. Yet supporters also know that time is desperately short: this political window may close in just 18 months, says a European official at the heart of the process. This must be done swiftly, on “one tank of gas”, says a senior American.

The risks all involve thinking small. European governments recently sent trade officials to Brussels to a first meeting on their offer to America. Led by the French, envoys from southern and eastern Europe called for a long list of red lines. These covered the usual stuff: agriculture, public services and “audio-visual” content (eg, bungs for French cinéastes, airtime quotas to keep Flemish hip-hop on the radio). That appals Team Obama, though not because Americans are blameless. From financial services to air passenger services, America maintains lots of barriers to trade. The real fear is that if Europe starts setting out red lines, trade sceptics in America will draw their own. What’s more, American trade bureaucrats are “Eeyoreish” and petty, says an insider: a trade pact with Colombia is the summit of their ambition. Then there is Congress to worry about.

Members of the Senate Finance Committee last month quizzed the acting US trade representative, Demetrios Marantis, about EU access for ethanol, biodiesel, beef, pork and poultry from their respective states (for every person in my state, noted a senator from Delaware sternly, “there are 300 chickens”). The chairman, Senator Max Baucus of Montana, grumbled about Europe’s “non science-based regulations”. That glanced at an old philosophical dispute, with American regulations weighing costs and benefits and punishing lapses through market forces and litigation, while the European “precautionary principle” distrusts products or new technologies until they are proved safe.

How to Make Austerity Work

A Question of Spending Discipline and Reform

by Pater Tenebrarum

The Baltic States are unique in Europe in that they went through an austerity crash program a while ago already (beginning right after the 2008 crisis) and have in the meantime recovered strongly. Der Spiegel has an interesting interview with Lithuanian president Dalia Grybauskaite, in which she explains her views on the topic. It can obviously be done successfully.

Just to get this out of the way up front: we are aware that every case is unique. The problems are not the same in every country, and due to cultural norms and traditions, it may be easier to enact reform in certain countries than others. Nevertheless, no matter how many times Paul Krugman insists that no Baltic nation can possibly be held up as an example, the fact remains that they have imposed fiscal austerity and implemented wide-ranging reform measures and have succeeded.

Here are a few notable excerpts from the interview:

“SPIEGEL ONLINE: In spite of the ongoing crisis, Lithuania wants to join the euro zone in January 2015. Why? 

Grybauskaite:This is not a crisis of the euro zone, but a debt crisis. Some states, inside and outside the euro zone, have difficulties because of their irresponsible economic and fiscal policies. […]

The Twilight of Entitlement

We blurred the distinction between progress and perfection

By Robert Samuelson 

We are passing through something more than a period of disappointing economic growth and increasing political polarization. What's happening is more powerful: the collapse of "entitlement." By this, I do not mean primarily cuts in specific government benefits, most prominently Social Security, but the demise of a broader mindset -- attitudes and beliefs -- that, in one form or another, has gripped Americans since the 1960s. The breakdown of these ideas has rattled us psychologically as well as politically and economically.

In my 1995 book, "The Good Life and Its Discontents," I defined entitlement as our expectations "about the kind of nation we were creating and what that meant for all of us individually":

We had a grand vision. We didn't merely expect things to get better. We expected all social problems to be solved. We expected business cycles, economic insecurity, poverty, and racism to end. We expected almost limitless personal freedom and self-fulfillment. For those who couldn't live life to its fullest (as a result of old age, disability, or bad luck), we expected a generous social safety net to guarantee decent lives. We blurred the distinction between progress and perfection.

Bill Clinton has a pithier formulation: "If you work hard and play by the rules, you'll have the freedom and opportunity to pursue your own dreams." That's entitlement. "Responsible" Americans should be able to attain realistic ambitions.

No more. Millions of Americans who have "played by the rules" are in distress or fear that they might be. In a new Allstate/National Journal survey, 65 percent of respondents said today's middle class has less "job and financial security" than their parents' generation; 52 percent asserted there is less "opportunity to get ahead." The middle class is "more anxious than aspirational," concluded the poll's sponsors. Similarly, the Employee Benefit Research Institute found that only 51 percent of workers are confident they'll have enough money to retire comfortably, down from 70 percent in 2007.

Popular national goals remain elusive. Poverty is stubborn. Many schools seem inadequate. The "safety net," private and public, is besieged. Our expansive notion of entitlement rested on optimistic and, ultimately, unrealistic assumptions:

First, that economists knew enough to moderate the business cycle, guaranteeing jobs for most people who wanted them. This seemed true for many years; from 1980 to 2007, the economy created 47 million non-farm jobs. The Great Recession revealed the limits of economic management. The faith in a crude stability vanished.

Second, that large corporations (think: General Motors, AT&T) were so dominant that they could provide secure jobs and generous benefits -- health insurance, pensions -- for much of the labor force. Deregulation, foreign competition and new technologies changed all this. Companies became more cost-conscious, cutting jobs and squeezing fringe benefits. The private "safety net" has shrunk.

The British Evasion

Cameron raised taxes and strangled the economy

BY NICOLE GELINAS

When the financial hurricane struck in 2008, Britain found itself in a crisis very much like the American one. A giant credit bubble had fueled an unsustainable rise in the price of real estate. British homeowners, feeling rich, had spent and spent, pushing up their household debt to a staggering 106 percent of GDP, up from 61 percent just eight years earlier. When the bubble burst, hitting house prices and making people feel poorer and afraid, British consumers went on strike; employers promptly imitated them, and the United Kingdom lost 1.6 percent of its jobs between 2008 and 2009. (America, with its easier hire-and-fire culture, lost 5 percent.) With bubble-era tax revenues gone, a British government deficit that had seemed manageable became cavernous, expanding from 3.5 percent of GDP over the 2004–08 period to 11.5 percent in 2009.

In the spring of 2010, David Cameron ran for Britain’s prime ministership, promising to tell the truth about the country’s fiscal mess and to take the unpopular steps needed to clean it up. Britain was laboring under “the biggest budget deficit of any developed country in the world,” Cameron warned in a televised debate. “If we think that the future is just spending more and more money, we’re profoundly wrong.” British voters, terrified that investors would cut their nation off from global bond markets, ditched the incumbent Labour Party, which had been in power for a decade, and gave Cameron’s Conservative Party a plurality in Parliament. Another party, the Liberal Democrats, joined the Conservatives as the junior partner in a coalition that came to power that May. Rather than bicker and stall, the Conservatives and the Lib Dems—which, like America’s two major parties, hailed from opposite sides of the ideological spectrum—had agreed to get along in order to shrink the enormous deficit.

These seemingly functional politics, however, have produced an economy marked by nonexistent growth. Britain hasn’t fixed the fisc: the Moody’s credit-rating service cut Britain’s triple-A rating a notch in February, something that Cameron had said that his budget would prevent. And public services are deteriorating at an alarming rate. For the many American pundits who insist that Republicans and Democrats should make compromises and moderate their own stances on deficit reduction—lower spending and higher taxes, respectively—the British experience should serve as a warning.

In June 2010, Cameron sent his chancellor of the exchequer, George Osborne, to Parliament to present an emergency midyear budget. Osborne wanted to slash annual spending by £40 billion (about $60 billion) to get Britain off the “road to ruin,” he said. Echoing Cameron in slightly different terms, Osborne told lawmakers that the government had inherited “the largest deficit of any economy in Europe” except Ireland—“this at the very moment when fear about the sustainability of sovereign debt is the greatest risk to the recovery of European economies.” To avoid the investor flight that would precipitate a public debt crisis, as was happening in Greece, an austerity budget was “unavoidable.”

It Just Gets More and More Dismal

Caution: economists at work

By Andrew Ferguson

We moralize with numbers these days, under the guise of disinterested science. The only institution we trust any longer to discover the truth—excuse me, the “truth”—is science, even “social sciences” like economics and psychology and sociology that are sciences in name only. This is what happens when a nation’s intellectual class—excuse me, its “thought leaders”—no longer feel comfortable discussing questions with reference to traditional ethics or moral intuition, much less natural law or, God help us, God. 

Consider the fate suffered in recent weeks by a pair of well-known economists, poor Carmen Reinhart and Kenneth Rogoff, both of Harvard. They are the authors of several scholarly papers, slightly fewer newspaper op-eds, and one big-selling book, This Time Is Different, which aim to prove scientifically that too much debt is bad for you. More precisely—and how could they be scientists if they weren’t precise?—they claim to have discovered that when a government’s debt rises to 90 percent of its country’s gross domestic product, the country’s economy contracts by (on average) one-tenth of one percent per year. This is what masses of historical data from 44 countries around the world show. Really. You could look it up. “Our approach here is decidedly empirical,” they wrote.

Reinhart and Rogoff (RR, as they have come to be known) called this 90 percent figure a threshold—not necessarily a point of no return, but a point beyond which GDP dropped like a plumb. A few too many years at or past the threshold and a government’s appetite for debt would do lasting damage. As it happens, the United States’ debt-GDP ratio is more than 100 percent. Gulp.

RR published their finding in a scholarly paper in 2010, and the 90 percent threshold became a kind of cultural artifact. It captured the post-financial-crisis zeitgeist the way a pop song or a movie or a bestelling novel can summarize the mood of a particular place or time. The financial crisis, which almost no economist foresaw, and the weak economic recovery, which nearly every economist expected to be stronger than it is, have given policymakers a bad case of the jumps, so for an explanation of our present parlous position they have turned to—who else?—economists. By focusing everyone’s attention on a government’s debt load, RR helped inspire the austerity measures that have been enacted throughout the eurozone. Paul Ryan, the chairman of the House Budget Committee, cited them in making the case for the budget cuts outlined in his booklet “Path to Prosperity.” A presentation by RR serves as the dramatic centerpiece ofDebt Bomb, a book by Tom Coburn, one of the Senate’s most insistent budget scolds. The Washington Post editorial page, which occasionally affects the cut-the-crap severity of a true budget hawk, has taken the RR threshold as a proven fact, airily referring here and there to “the 90 percent mark that economists regard as a threat to sustainable economic growth.”

That’s a treacherous phrase, economists regard. Economists do not speak with a single voice; indeed, their tedious and endless disputations are one way they convince themselves they’re practicing science. The green-eyeshades of the World Bank and the International Monetary Fund gazed with horror at RR’s finding, but more partisan liberal economists dismissed RR’s obsession with debt as a magic key to our economic fortunes, obsessing instead over their own magic keys—higher government spending, higher government borrowing, and higher taxes on rich people. Few challenged RR on methodological grounds until this April, when three economists—informally called HAP, an acronym of their last names—released a paper debunking the idea of a threshold. Fondling the same sets of figures that RR had used, HAP found that RR had neglected to include some important historical data in their calculations. When those figures were factored in, the threshold vanished. On the graphs, GDP no longer dropped like a plumb after the debt-to-GDP ratio reached 90 percent. 

Of Monetary Cranks, Bureaucratic Meddlers, And The Reinhart-Rogoff Faux Pas

The reason for the crisis lies in too great an accumulation of debt during the boom years

by Sean Corrigan

In what has been a banner weak for the many serial inflationists and fans of Big Government out there, equity markets have largely reversed the declines of the previous period on the hope for – what else? – yet more pump priming....

On the fiscal front, much heart has been taken at EU Commission President Barroso’s assertion that the time has come to move beyond an exclusive reliance on ‘austerity’ and to begin to focus on encouraging growth....

Needless to say [Barroso's actual words, were] far less radical than anything whipped up by the journalists – the crux being that it was mainly matter of paying lip service to the ongoing need to trim debts and deficits, while calling for a range of largely unspecified microeconomic reforms and, as such, representing more of an exercise in expectations management than the signal of a clear break with the line being toed across the Rhine.

In the circumstances, however, the wilful desire to over interpret (if not actively misinterpret) the message was far too powerful to resist, especially in the wake of the academic catfight going on over the state of Reinhart and Rogoff’s Excel skills.

For those who have real lives to lead, the briefest of synopses of this spat will suffice and, indeed, it is only introduced here to illustrate the heedless Flucht nach Vorne mentality of the Krugmanites, ever eager as they are to peddle the line that the only reason stimulus has ‘failed’ is because there has been nowhere near enough of it, that the violation of both the principles of accounting and the tenets of good housekeeping on the part of the Provider State has somehow been too timid.

Danes as Most-Indebted in World Resist Credit and Mortgages

Mortgage borrowing slowing down is not necessarily a bad thing

Pedestrians look at residential apartments and houses displayed for sale in the window display of an estate agent in Copenhagen. Danes’ personal debt is 267.31 percent of income, according to Eurostat data compiled by Bloomberg.

By Frances Schwartzkopff

Danes, the most indebted people in the world, are losing their appetite for credit.

After amassing personal debt equal to almost three times income, mortgage borrowing grew at the slowest pace last quarter since 2000, the Association of Danish Mortgage Banks said this month. Bank lending at Nordea Bank Denmark A/S, the country’s second-largest lender, fell to its lowest in more than a year.

From a risk perspective, it’s good that consumers are deleveraging,” Anders Jensen, chief executive officer of Nordea Bank Danmark A/S, said in an interview. “From an income perspective, we won’t make any money from lending.”

Denmark is the Scandinavian economy hardest hit by the global financial crisis. Households have watched their personal wealth drop by 400,000 kroner ($69,900) on average since theproperty market peaked in 2007, according to Danske Bank A/S. (DANSKE) After the real estate bubble burst in 2008, house prices plunged more than 20 percent, wiping out more than 12 banks and driving the economy into a recession that lasted into 2009.

Gross domestic product contracted 0.5 percent in 2012, the country’s worst economic performance in three years. Consumer spending, which makes up half the $300 billion economy, dropped 0.1 percent in the fourth quarter, declining for a third consecutive period,Statistics Denmark said April 4.

Denmark’s government estimates the economy will grow 0.5 percent to 1 percent this year, less than both Sweden and Norway. While Denmark’s krone peg to the euro has protected exporters from currency gains, the nation’s housing crisis has undermined consumer confidence.

Spending Declines

Against that backdrop, consumers don’t dare borrow more, said Las Olsen, a senior economist at Danske Bank. Danes are taking advantage of lower interest rates to make bigger principal repayments on their mortgages, central bank data showed today.

In the first quarter, homeowners amortized 7.5 billion kroner, compared with 6.7 billion kroner a year earlier, the central bank estimates.

“When rates are low, the principal payment makes up a larger portion of a debt instalment,” Ane Arnth Jensen, head of the Association of Danish Mortgage Banks, said today in a note. “That’s what we’re seeing now, with an average effective rate on mortgages at an historic low of 2.9 percent.”

Time to end UK art’s dependency culture

State funding suffocates the arts with policy making imperatives

by Denis Joe 

Maria Miller took up her post as secretary of state for culture, media and sport last September. After the distraction of the Leveson Inquiry, she has finally got round to discussing the ‘culture‘ bit of her brief.

Her speech, ‘Testing times: fighting culture’s corner in an age of austerity’, delivered at the British Museum last week, was brimful with ministerial cliche: the arts are ‘educational’, ‘socially beneficial’, ‘good for trade’, and so on. But the central tenet of Miller’s speech was that art can be profitable. Miller went on to list recent success stories such as the Olympics and Liverpool’s year as Capital of Culture in 2008, highlighting how much money those events brought into the cities.

But here’s the thing: pouring money into the arts has little impact on broader society. It does, however, have a negative impact on the arts themselves.

In the case of Liverpool, there was a spectacular increase in revenue during 2008, but five years on very little has changed. As a report from Liverpool Hope University noted recently, ‘since being announced as the 2008 Capital of Culture, the urban-regeneration focus has… shifted toward the city centre and away from the city’s marginalised communities… Liverpool still contains some of the most disadvantaged areas in the UK and is the UK’s most deprived local authority.’

The people of Liverpool do not seem to have been any more inspired by Capital of Culture year either. The Royal Court Theatre continues with its endless cycle of ‘taking the piss out of Scousers’ shows. Operas at the Empire still play to a third of the venue’s capacity, unless it’s Puccini or Verdi’s better-known works. Audiences for poetry events continue to attract only poets. The only people who still talk about 2008 are councillors.

The development of the Mersey Docks and the Liverpool-Manchester canal are the sorts of projects that have a real economic value: they provide jobs and they improve transport infrastructure. Art is useless. The only value it has is that which we impose on it.

The Great Society needs to be replaced by the Free Society

America on Welfare

By Doug Bandow 

Living the good life on welfare. Even the Europeans recognize that they pay a high price for creating an increasingly dependent society. 

Denmark has been transfixed by the revelation of a 36-year-old single mother who collects more in benefits than many Danes earn at work, and has done so for two decades. Worried Karen Haekkerup, Minister of Social Affairs and Integration, people “think of these benefits as their rights. The rights have just expanded and expanded.”

But it’s really not that much different in the U.S., the nominal home of the free. Nearly two decades ago welfare reform briefly captured political attention and won bipartisan support. The effort was a great success. But most welfare programs remained untouched and the gains have been steadily eroded. 

Today nearly 48 million people, almost one out of every six Americans, receive Food Stamps. Outlays on this program alone have quadrupled in just a decade. Indeed, the government actively promotes the program, encouraging people to sign up. Other welfare programs also are growing in reach and cost. The Congressional Budget Office recently pointed to “increases in the number of people participating in those programs and increases in spending per participant.” The U.S. isn’t that far behind Europe.

Indeed, America, like Europe, has a veritable welfare industry. A forthcoming report from the Carleson Center for Public Policy, named after Reagan administration welfare chief Robert Carleson, charges that “The federal government has spawned a vast array of redundant, overlapping and poorly targeted assistance programs.” Authors Susan Carleson and John Mashburn count 157 means-tested programs intended to alleviate poverty. There were more than two score housing programs, more than a score of nutrition programs, almost as many employment/training and health programs, and lesser numbers of cash assistance, community development, and disability programs. More expansive definitions count even more programs — 185 total, according to Peter Ferrara.

No surprise, the welfare industry is expensive. Social Security is the single most costly program, but more goes collectively to welfare. Today government at all levels spends around $1 trillion a year on means tested anti-poverty programs. And that amount is just going up and up. 

Total federal and state welfare spending rose from $431 billion in 2000 to $927 billion in 2011. Both parties are responsible, but President Obama bears particular responsibility. Last year, explained my Cato Institute colleague Michael Tanner: “Welfare spending increased significantly under President George W. Bush and has exploded under President Barack Obama. In fact, since President Obama took office, federal welfare spending has increased by 41 percent, more than $193 billion per year.”

And this is just the start. From 2009 to 2018, figured Heritage Foundation scholars Robert Rector, Katherine Bradley, and Rachel Sheffield, at current rates the federal government will spend $7.5 trillion and states will spend $2.8 trillion on welfare, for a total of $10.3 trillion.

Germany's Perspective

Southern Europe's Shadow Economies

by Christopher Sultan

Much has been said about the relative disparity of wealth between Germany and the rest of Europe, with the conventional wisdom being that Germans are rich and everyone else poor. This assumption has been challenged to the core recently, with some studies even suggesting that median household wealth in places like Cyprus is far, far greater than that of Germany, contrary to previous assumptions. In turn, this helps to explain the lack of "eagerness" of the Germans to constantly "assist" with the bailouts of peripheral countries by directly funding or assuming debt guarantees, or otherwise be loaded with the primary burden of future inflation if and when the ECB's creeping monetization of European debt, both directly and indirectly via PIIG bank collateral, unleashes the Weimar flashback tsunami. In this context, it is easy why it was the Germans who were intent on demolishing not only Russian billionaire savings (which as the Spiegel article below demonstrates, Germans are convinced are largely ill-gotten and hidden), but also why the punishment should stretch to uninsured depositors.

After reading the Spiegel article below, which reveals so much about German thinking, it becomes very clear that not only is Cyprus the "benchmark", but that the second some other PIIG country runs into trouble again, and its soaring non-performing loans inevitably demand a liability "resolution" a la Cyprus, it will be Germany once again at the helm, demanding more of the same equity, unsecured debt and ultimately depositor impairment. As the following punchline from Spiegel summarizes, "It would be more sensible -- and fairer -- for the crisis-ridden countries to exercise their own power to reduce their debts, namely by reaching for the assets of their citizens more than they have so far. As the most recent ECB study shows, there is certainly enough money available to do this." And that is the crux of the wealth-disparity demand of the European Disunion.

From Spiegel, by its staff

The Poverty Lie: How Europe's Crisis Countries Hide their Wealth

How fair is the effort to save the euro if the people living in the countries that receive aid are wealthier than the citizens of donor countries like Germany? A debate over a redistribution of the burdens is long overdue.

The images we see from the capitals of Europe's crisis-ridden countries are confusing to say the least. In the Cypriot capital Nicosia, for example, thousands protested against the levy on bank deposits, carrying images of Hitler and anti-Merkel signs, one of which read: "Merkel, your Nazi money is bloodier than any laundered money."

UK Austerity?

Sluggish growth shows Big Government still holding back economy

By Rory Meakin

Five years on from the start of the recession, with GDP still 2.5 per cent lower than it was then, it speaks volumes about the feebleness of the economy that today’s announcement of meagre growth last quarter was greeted with relief. But it’s not just the overall level of growth which is worrying, the dominance of Government growth is also a major concern.

GDP was up a paltry 0.3 per cent compared to the previous quarter, and up 0.6 per cent on the same quarter last year. Compared to 2008, it was down 0.5 per cent. But Government was up 0.5 per cent on last quarter, up 1.2 per cent on the same quarter last year and up 6.9 per cent on 2008. Our bloated and still growing Government might give the economy some short term relief from adjusting to new circumstances. But five years on, we’re not in the short term anymore.  

Luxembourg Is Not The Next Cyprus, Not Yet, But....

It's getting closer

By Wolf Richter   

The Grand Duchy of Luxembourg, with a population of just over half a million, smaller even than the other speck in the Eurozone, the Republic of Cyprus, ranks in the top three worldwide in per-capita GDP. In a Eurozone wealth survey, it had the highest average household wealth – €710,100. Only Cyprus, a former off-shore banking center in the Eurozone, came close. Yet Luxembourg is threatened with ruin.

It has 141 banks – bank companies, not ATMs. One bank per 3,808 people. Most of them do private banking. The financial sector added 38% to GDP in 2010 and contributed 30% to the country’s tax revenues, according to the Luxembourg Bankers’ Association (ABBL). All due to bank secrecy and tax laws. But suddenly, after Cyprus had been massacred, Luxembourg buckled.

With the big German guns, and the smaller guns from other nations, swinging in its direction, Luxembourg agreed to participate in an international automatic data-sharing arrangement that would send banking data of foreign clients to their countries, starting in 2015. Prime Minister Jean-Claude Juncker, somewhat defensively, proclaimed that lifting bank secrecy wasn’t such a big deal, that Luxembourg didn’t live from tax evasion. For the banks, the “lights won’t go out in 2015,” he said.

During the entire Eurozone bailout debacle that he presided over until February as President of the Eurogroup, he’d proven to be time and again an inveterate optimist.

“It’s expected that only 60 to 70 banks will survive in the coming years,” declared Alain Steichen, a prominent Luxembourgian tax lawyer, at a conference about the consequences of the data-sharing agreement. He should know. Per his online profile, he “assisted Thomson in the merger acquisition of Reuters in order to form Thomson Reuters, with the group’s main holding location being Luxembourg.” He also “assisted Chase Manhattan in the merger acquisition of JP Morgan in order to form their main holding company in Luxembourg.” Yup, there are a lot of benefits to doing business through Luxembourg.

Combine bank secrecy with nominee corporations to get a particularly juicy cocktail. An entire industry of “fiduciaries” has formed around the banks for that purpose. These accounting, audit, and law firms set up and maintain tax-advantaged nominee corporations, the infamous mailbox companies, whose directors and top executives are principals of the fiduciary firm. The client and the source of money remain anonymous to the outside world. A perfect setup for money laundering. Because the bank is doing business with a Luxembourg mailbox company, not a foreigner, and because the signatories are pillars of Luxembourg’s society, the setup is impervious to the automatic data-sharing arrangement. But now mailbox companies too are under attack, not only in Europe, but also in the US Congress.

“I expect a serious change of the banking landscape because there will be customer withdrawals,” Alain Steichen explained. Some banks, he said, “would lose the critical mass needed to survive.”

The Scam Wall Street Learned From the Mafia

How America's biggest banks took part in a bid-rigging conspiracy

by MATT TAIBBI

Someday, it will go down in history as the first trial of the modern American mafia. Of course, you won't hear the recent financial corruption case, United States of America v. Carollo, Goldberg and Grimm, called anything like that. If you heard about it at all, you're probably either in the municipal bond business or married to an antitrust lawyer. Even then, all you probably heard was that a threesome of bit players on Wall Street got convicted of obscure antitrust violations in one of the most inscrutable, jargon-packed legal snoozefests since the government's massive case against Microsoft in the Nineties – not exactly the thrilling courtroom drama offered by the famed trials of old-school mobsters like Al Capone or Anthony "Tony Ducks" Corallo.

But this just-completed trial in downtown New York against three faceless financial executives really was historic. Over 10 years in the making, the case allowed federal prosecutors to make public for the first time the astonishing inner workings of the reigning American crime syndicate, which now operates not out of Little Italy and Las Vegas, but out of Wall Street.

The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked for GE Capital, the finance arm of General Electric. Along with virtually every major bank and finance company on Wall Street – not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more – these three Wall Street wiseguys spent the past decade taking part in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America. The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes – from "virtually every state, district and territory in the United States," according to one settlement. And they did it so cleverly that the victims never even knew they were being ­cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime.

German firms eye investment in crisis-battered euro states

Crisis vs Opportunity

By Annika Breidthardt

German companies are setting their sights on southern Europe as fears of a euro zone breakup fade and economic reforms transform the crisis-battered region into an attractive place to invest once again.

Countries like Portugal, Italy, Greece and Spain are still struggling with deep recessions and high unemployment but have also attracted attention for the opportunities they present, not just the risks.

Strong companies are attracting interest among the "Mittelstand", medium-sized and often family-owned manufacturing firms to which Germany owes much of its exporting prowess.

That is in large part due to the economic and labour market reforms bailout countries have been forced to implement - making it easier to hire and fire and reducing wage costs - which less stricken countries such as France have been slower to embrace.

"For financially strong German Mittelstand firms, the crisis is turning out to be an opportunity. They are increasingly active with acquisitions in Spain," said Christoph Himmelskamp, a consultant at Roedl & Partner who advises smaller German firms on deals with Spanish counterparts.

Himmelskamp says he has seen a 30 to 40 percent increase in German acquisitions of Spanish firms since 2009, when the euro zone debt crisis first flared in Greece.

"The mood was subdued when there was speculation Spain could leave the euro. Some of our clients started putting the brakes on transactions ... Once that discussion ended, investment returned."

German firms are buying up strong competitors, clients or suppliers at a time when those companies are struggling to stay afloat through years of recession in their home markets and as shaky banks restrict access to credit.

AZ Group, a German fittings maker, bought Italian competitor Fiber in 2012, when insolvency loomed under its previous owner.

German material producer SGL Carbon bought Portugal's fibre maker Fisipe last year.

And Happich, an interior outfitter of buses, acquired its rival Auto Carrocerias Riu last year. A previous attempt failed when the Barcelona-based firm decided to seek a Spanish buyer which never materialised.

Himmelskamp's firm is currently closing a deal where a German buyer is taking over a Spanish rival in Madrid. While these firms rarely publish the amount they pay for acquisitions, Himmelskamp said the price tag was in the low double-digit million euros range.

A study by DZ bank showed last year that one in four Mittelstand firms already present in euro zone crisis countries was willing to invest more there, in contrast with 14 percent of all Mittelstand firms.

How America Can Deal With Militant Islam

First, shut down the empire and let Muslim rulers deal with Muslim radicals

By PATRICK J. BUCHANAN

I do not know the method of drawing up an indictment against a whole people,” said Edmund Burke of the rebellious Americans.

The same holds true of Islam, the majority faith of 49 nations from Morocco to Indonesia, a religion that 1.6 billion people profess.

Yet, some assertions appear true.

Islam is growing in militancy and intolerance, evolving again into a fighting faith, and spreading not only through proselytizing, but violence.

How to justify the charge of intolerance?

The Taliban blew up the Bamiyan Buddhas. The Sufi shrines of Timbuktu were blown up by Ansar Dine. In Saudi Arabia, Iran and Afghanistan, Christian converts face the death sentence.

In Nigeria, the Boko Haram attacks churches and kills Christians, as in Ethiopia and the Sudan, where the south seceded over the persecution.

Egyptian Copts are under siege. Assyrian and Chaldean Christians in Iraq have seen churches pillaged, priests murdered. In Indonesia, churches are being shut on the demand of Islamists. Sharia law is being demanded by militants across the Middle East, as Christianity is exterminated in its cradle.

Has Islam become again a fighting faith?

Chechnya, Dagestan and Ingushetia are the sites of Islamist uprisings using terror to rip these statelets from Russia. Muslim Uighurs are fighting to tear off a chunk of China and create an East Turkestan. Muslim Malays in south Thailand have fought a decade-long war of secession. Albania has acquired two sister Muslim states in Europe, Bosnia and Kosovo, both born in blood.

“Islam has bloody borders,” wrote the late Samuel Huntington.

They are bloodier today.

At the time of 9/11, al-Qaida seemed confined to Afghanistan.

Al-Qaida may now be found in the Maghreb, Mali, Iraq and Yemen. Its Syrian auxiliary, the al-Nusra Front, is dominant in the anti-Assad rebellion.

Bankers and the Bourgeois Virtues

The world is what it has always been, a wicked place 

by Theodore Dalrymple

When I was young banks were as solid as a rock and those who managed them were respectable if slightly boring members of the community (probity being the dullest of virtues). Nowadays, however, I doubt that the words ‘bank’ or ‘banker’ would evoke many flattering epithets or synonyms in a word association test. ‘Casino,’ ‘Ponzi scheme’ or ‘card-sharp’ would perhaps be the least unfavorable of them.

As is all too often the case, I cannot quite make up my mind whether my dislike of banks is purely rational or a manifestation of Man’s eternal search for a scapegoat. I really only began to object to my banks’ practices after the crisis became manifest. Until then I had been rather flattered that, when I was slightly overdrawn, the bank sent someone round to my house to ask if I wanted to borrow much more money; and when, within five minutes on another occasion, it offered to lend me a million dollars. How different this was from the days of my youth, when – not more than five dollars overdrawn – I received a stern letter of rebuke from the bank, highly moralistic in tone, telling me that it expected me to ‘correct’ this situation without delay.

Even before the crisis I had observed, more with amusement than in anger, some of the banks’ less principled practices. For example, when I sent what for me was a large sum from my bank in England to my bank in France, the sum was deducted immediately from my account in England without being credited to my account in France. In fact it was not so credited for a period of ten days: and I had fondly thought that we lived in the age of instantaneous electronic transfer! How, then, did the bank send the money? In centime pieces by carrier pigeon? Where was the money in the meantime? Did the sending and recipient banks go fifty-fifty on the profits of the delay, that is five days each? I bothered neither to inquire nor to complain. I am small, the banks are large and would never tell the truth in any case. Financially it didn’t matter to me.

I had an illustration of the banks’ lack of commitment to strict truth not long ago. I have an account in US dollars in England into which I pay US checks. I noticed that the bank took from the sum paid in what seems to me rather a large amount, indeed a considerable proportion of the smaller check. I went to the bank to inquire why this was.