A couple of weeks ago European leaders held another all-night pajama party, staggering out into the morning light to proclaim that they had reached yet another game-changing agreement. The spin from France and the troubled peripheral countries was that the Germans had backed down. The Germans were now willing to have the central bank lend money directly to governments. They were also willing to have the rescue funds invested directly in troubled banks instead of lending to troubled governments to in turn invest in troubled banks.
Confused? So were most of the Germans in Chancellor Angela Merkel's party, who angrily accused her of selling out. Financial markets around the world were astonishingly gullible once again and accepted the spin as if it were the real story, sending stocks everywhere dramatically higher, especially in Greece, Spain, Italy, Portugal and Ireland. Mrs. Merkel returned home to an embarrassing chorus of cheers from her principal opposition, the Social Democrats and the Greens, which only added plausibility to the charge from her own party that she had abandoned its principles of austerity, balanced budgets, and national self-reliance.
However both the cheers and the charges of betrayal were once again sadly misplaced. The very sensible idea of bailing out the banks directly, rather than obliging their already over-indebted governments to take on this additional debt as their own, was in fact reserved only for the Irish banks and their government as a sort of reward for carrying out their austerity program so dutifully without complaining or whining for better terms or allowing their garbage collectors to go on strike. And even this, along with the possibility of direct support of government bonds by the rescue funds, was made dependent on the idea of a pan Eurozone or pan European bank regulatory authority, perhaps thought up in the twinkling of an eye over the penultimate cognac or café at three in the morning and willed into concrete existence no later than the end of this year by the next morning's press release.
Moreover no more money for any of these purposes was proposed or promised that night or the following morning. That leaves approximately 500 billion euros theoretically on tap for bank and sovereign bailouts, a mere life raft before the huge tsunamis of bad bank assets and troubled country debt coming due every six months or so. As if to allay any remaining doubt about her fiscal rectitude, Chancellor Merkel also pronounced on that first day after the overnight summit, that there would not be Eurobonds "for as long as I live." This effectively eliminated the possibility that the governments of the Eurozone would jointly guarantee all or part of each other's debts, a step toward a true United States of Europe that almost all observers agree would be a practical solution to the current "debt crisis".
In his wonderful book, The Great Crash, about the onset of the Great Depression of the 1930s, John Kenneth Galbraith heaps ironic praise on President Herbert Hoover for inventing and perfecting the "no business meeting", a series of gatherings of prominent business executives and occasional celebrities convened at the White House during the three years after the stock market crash of 1929. These meetings featured a "useful exchange of ideas" and unbridled optimism about the imminent prospects for economic recovery, as epitomized by the president's own never to be forgotten declaration that "prosperity is just around the corner." Galbraith observes that these rituals became a regular feature of future U.S. administrations. Now the European pajama parties have given new life to the no business meeting, with their signal declarations of optimism and breakthrough agreements to take decisive action, sometime in the future.
It remains a mystery, or at least a subject of legitimate debate, why austerity and budget balancing remain so potent in policy discussions, not only in Europe but in North America, Japan and many other places. One line of reasoning holds that it is only human nature to blame the victim to maintain a self-image that is above reproach. We blame the subprime borrowers for taking on obligations beyond their means, not "our" people for creating these deceptive products and selling them. The Germans blame the Greeks for being lazy and unproductive, retiring early and not paying their taxes -- all propositions of dubious accuracy.
But this is somehow a bit too easy and slick. A second explanation holds that austerity is perceived by important, dominant elements in our economy as being in their own best interests. The global investment banking industry, which appears to sit astride the economies of the developed world as effectively and profitably as the Mafia once dominated Sicily, has prospered by persuading or coercing governments into bailing it out of, or guaranteeing in advance, all of its liabilities. As European governments appear to be changing into more vulnerable economic entities this naturally appears as a grave threat to the banks' gravy train. To protect governments' abilities to bail them out, they seek to reduce government obligations to everyone else.
In the United States the banks have extorted similar privileged treatment from government. So too the military-industrial complex, which has been capturing a rapidly increasing share of government expenditures and national income for the past decade; and the health care industry which has grown large and highly profitable by enlisting the government to pay for its research, overpay for its drugs and extend it monopoly powers into the future and around the world. In all three cases, the current economic crisis threatens the finances of the government which has been the principal instrument of the excessive success of the banking, military and health care sectors.
This behavior still appears to be irrational, since austerity leads to depression which becomes the cause of still more demands on government from other sources and still more damage to the government's capacity, with disastrous consequences for the top as well as the bottom of the pyramid. Outside of classical economics there are few who would deny that each of us is often irrational, acting in ways that are not in our own best interest no matter how broadly or narrowly defined. In psychology, most of this behavior is attributed to a phenomenon quite similar to the situation that formed the current behavior pattern of today's pro-austerity movers and shakers.
Sometimes as children we adopt a certain mode of behavior that helps us win the love of a parent or stave off the attacks of a sibling. Once learned and practiced, this behavior pattern becomes entrenched into adulthood no matter how counterproductive it turns out to be in those changed circumstances. Successful economic institutions are equally stubborn about letting go of behavior that led to their success. Thus, it took about fifty years for downtown department stores to react to the movement of their customers to the suburbs and shopping malls. And it has taken about thirty years of fruitless expenditure to convince the original giants of the pharmaceutical industry that the potential for new anti-biotic drugs that was unleashed by the discovery of penicillin, has been exhausted, with new discoveries coming from biogenetics and other unfamiliar places.