Monday, August 29, 2011

Economic Denial from the OECD

Last Wednesday's Wall Street Journal contained an editorial by Jose Angel Gurria, secretary-general of the OECD. It's a study in either institutional denial or simply complete ignorance of economic reality.

Gurria wrote of the recent pronouncements by Sarkozy and Merkel,

"The new Franco-German proposal to strengthen euro-area governance and to speak with one voice is welcome. That clearly has been lacking. But even more important is the call from German Chancellor Angela Merkel and French President Nicolas Sarkozy that the commitment to balanced budgets over the medium term should become legally binding in euro-area countries. Sounder national regulations and institutions coupled with stronger European Union rules and discipline will reduce the need to use the European Financial Stability Fund, which was established last year to issue guaranteed debt to member countries that can't borrow in the markets."

Can you seriously imagine "legally binding" balanced budgets "in the euro-area countries?" The US is one nation and we can't even manage it. The harsh truth that the Euro has benefited southern European economies, to the detriment of the northern ones, is apparently too bitter a pill for Gurria to swallow.

Then Gurria moves to the ECB. Here, he openly calls for the bank to prop up bad sovereign debt, which will insure that private credit risks gone bad become taxpayer obligations.

"The European Central Bank should for the time being continue to play a key role in crisis containment, not least as a buyer of last resort of sovereign debt. But we need to consider greater involvement by private-sector creditors to tackle the debt problems of some European nations, so that the resources of taxpayers support the growth prospects of the countries in trouble rather than being used to pay their private creditors."

Just guessing here, but I would think that means German and perhaps French taxpayers, those being the largest European economies. Curiously, Gurria seems to be hypocritical within a single paragraph. First he argues for the ECB to rescue troubled Euro banks, then writes that those banks need to clean up their own messes. Which do you suppose he actually means?

The secretary-general then turns to general monetary and fiscal policy, writing,

"Given the weaker outlook, central banks should postpone or even reverse their previous plans for tightening. The U.S. Federal Reserve's signal that it expects rates to stay exceptionally low for another two years is very forceful.

Given that state coffers are empty in most cases, governments need to go structural. Reforms to product and labor markets should be a primary focus of the long-term strategy to restore sustained growth. This will create jobs and help tackle debt."

Pretty funny, eh? Near-zero rates, which distort private investment decisions and suppress investment generally, are lauded. Meanwhile, governments will magically "reform...product and labor markets" because that will "restore sustained growth....(and) create jobs."

I know that in America, low rates have completely screwed up asset pricing since 2008. Meanwhile, lots of government intervention, such as abrogating bankruptcy laws and favoring unions in the GM and Chrysler bailouts, plus obstructing business with lots of new regulations, has slowed business activity and hiring to a near-halt.

But my favorite head-in-the-sand passage by Gurria is this one,

"Governments should also go social, focusing on policies to help those made most vulnerable by the crisis. The urgency of this is evident in the streets of a growing number of cities in countries at different levels of development. Unemployment benefits or targeted job-creating measures should be enhanced, both to reduce hardship and to stimulate demand. Help for overindebted households and those with "underwater" mortgages also needs to be more effective. Giving people hope and a sense of common purpose is not only crucial for their involvement but also for creating the necessary consensus to support the reforms."

Already-lush unemployment benefits are to be further sweetened. Again, we see the wrong-headed notion that paying more for people not to work is really a 'demand stimulus'.

Let's hope Gurria doesn't actually hold an economics degree.
Then he addresses housing by declaring that those who unwisely bought homes in hopes of ever-rising prices, and now cannot afford those homes, should not be expected to comply with standing legal processes of loss, foreclosure and resale, at lower prices, to families who can actually afford the houses. Instead, more financial aid must be given so those who took unwise risks may continue to enjoy the benefits of those risks without any of the pain of their mistakes.

Nevermind the support of those who behaved prudently and now could afford those homes as their foreclosure provides housing markets with their much-needed bottoms.

Well, with economic thinking like this, is it any wonder nobody looks to the OECD to help solve any serious global economic problems?

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