Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.
His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.
“The French are a free people, who will not allow their future to be determined by the pressure of markets or finance.”
-French presidential candidate François Hollande, Ecole Nationale d’Administration (ENA), class of 1980, April 19, 2012
Hollande expressed an ardent belief of every ENA graduate (popularly known as énarques, a popularity not often witnessed beyond the campus gates.) Economics professors from Harvard, Princeton, and Oxbridge also dismiss markets. They went so far as to claim all markets identify the right price all the time, thus avoiding the need to understand them. Markets are there to be used: a means to institute public policy. Such policies are imposed by the ruling few.
The Bretton Woods gold standard constrained the ambitions of superior persons. When President Nixon defaulted on the United States’ gold payment obligation in 1971, he opened the floodgates to Policy Making without Consequences.
In Debt and Delusion: Central Bank Follies That Threaten Economic Disaster (1999), Peter Warburton wrote: “It is easy to forget that, as recently as in the 1960s, the government budgets of the OECD countries were in approximate balance and that net issues of debt were comparatively rare. The outstanding stock of debt in public hands was a meager $800 billion at the end of 1970….While Italy, Ireland, and Belgium were already experimenting with deficit finance in 1970, the USA avoided its first budgetary lapse until 1975.”
The developed world (OECD countries) recorded their last balanced budget in 1973, with 12 of the 18 countries in surplus. Rising oil prices was the primary culprit for the 1973 blemish. Discovering markets were no longer constrained by the gold fulcrum; politicians, government bureaucrats, and academic opportunists conducted their social experiments with greater liberty. Previously, governments could only spend so much before the markets said “enough.” Coming to understand their new dispensation slowly, then in a hurry, the technocrats found the costs of their experiments on populations could be absorbed by the rising tide of debt. Restraint in policy reformation, as in most every other human endeavor, was fading in the western world.
Government debt has accumulated year-after-year, akin to regulations imposed from Brussels and Washington. The comparison is not gratuitous. Impositions; crony handouts; and abstract, social improvement programs that should have been quarantined in the Ph.D graveyard; carry costs. According to the OECD, the government net financial liabilities had risen to 52.2% of GDP in Germany by 2010. In France, the figure was 58.9%; in Austria, 44.0%; in the Netherlands, 34.4%. Since budgets had been in balance, these numbers rose from approximately zero in 1970.
The percentage of debt-to-GDP might be likened to a dependency ratio of the bureaucracies. They have been more than willing to use the bond markets to finance their indulgences, but now are turning against them. Other European politicians and Brussels bureaucrats have also blustered about and interfered in stock, bond and credit-default swap markets. (The U.S. énarques have imposed their pricing model in every market, another terminally ill construct.)
Gideon Richman was skeptical of Hollande’s resolve in the April 24, 2012, Financial Times. Of Hollande’s demand for French freedom from the markets: “Which is all very well, unless you need to borrow billions from those vile markets to meet your campaign promises, such as the creation of 60,000 new jobs for teachers (a key constituency for the Socialist Party.)”
Presidential candidate François Hollande, as is true of Federal Reserve Chairman Ben Bernanke, believes he can order nature around. Both have lived inside the fishbowl their entire adult lives. Hollande was an ENA classmate of Dominique de Villepin: poet, biographer of Napoleon, and former Prime Minister of France; and of Ségoléne Royal, the losing Socialist candidate (to Nicholas Sarkozy) in the 2007 presidential race. Hollande and Royal went so far as to produce four children together as tribute to the class of ’80. Their allegiance was so fervent they never stopped to get married. (As happens in the best of classes, they barely speak today.)
From the halls of the ENA to the Eccles building, it is inconceivable that 30 years – really a century or more – of social uplift, advancement, and progress – is in the hands of the markets. We read: “Euro Crisis Back Again.” Where had it gone? The bad debt grows and can only be smothered by ever-larger quantities of ECB loans, since commercial banks either will not or can not lend.
The énarques (the class as a type, not only the French) are entirely responsible. They imposed the ECB and euro by preventing referendums in most European countries. They instituted the policies from which it is now impossible to retreat. This is true in the United States, too.
All channels of the European banking system now flow through the ECB. Jim Bianco (Bianco Research) told me it is not possible for the ECB to reduce its control of the plumbing. The ECB cannot back away from its pivotal, interbank lending position, since it would be immediately apparent which banks were trouble banks – better banks would only lend to worse banks (if at all) by charging a higher rate of interest. A run on the bad banks would follow. The banks and official channels cannot announce phony rates, because of the legal trouble banks now face from charges that they fixed LIBOR rates.
Bernard Connolly, the economist who foresaw the End before the Beginning: that is, before the ECB was founded, wrote in the The Rotten Heart of Europe: The Dirty War for Europe’s Money (1995):
“As we have seen, German monetary leadership in Europe has been simultaneously embraced in France, if only by the Vichy tendency in the French elite, as necessary expiation for past sins (suffering being inflicted on ordinary people, who do not matter, not on the elite themselves) and bitterly resented. By hamstringing the ability of the French governments to act on behalf of the French people – or, to put it more realistically, by giving them an excuse for not so acting – that embrace has destroyed political legitimacy in France. It has contributed to a contempt for democratic politics so profound, among both rulers and ruled, that the survival of the Fifth Republic may be brought into doubt in the next few years, ‘Europe’ or no ‘Europe.'”
Over the last few months, governments have been pushed out of office in Ireland, Greece, Portugal, Spain, Italy, and now (on April 23, 2012) in the Netherlands. In each case, the standing government was unable to persuade the voters that it stood for the people rather than being subservient to or in league with the bureaucrats in Brussels. The uncomprehending “policy makers” (it is significant that Bernanke loves to refer to himself under that label, rather than as an economist) have dug their own grave.
I met with Bernard Connolly recently in New York. He believes the fate of France is now in Germany’s hands. As for Southern Europe, the banking systems will collapse, governments will lose whatever legitimacy they still retain, with war and bloodshed to follow.