A much needed work to demonstrate the dangerous consequences of some ill-conceived economic policies that are being formulated, nay foisted upon the helpless and the affected across the world under the ruse of ‘austerity’. An unfortunate example is that of Greece. A nation that has been buffeted into virtual submission by both internal economic inefficiencies (to a good extent) and by insidious external policy diktats (to a significant extent) by the European nations headed by Germany.
What Robert Kuttner admirably proves in this marvelous work is the fact that these kind of tragedies are perfectly avoidable. He does not say this sheltered and enriched by the benefit of hindsight. Resorting to a careful analysis of economic polies, relying upon a dissection of both macroeconomic and financial follies and studiously explaining available alternatives, Kuttner in “Debtor’s Prison” launches a very assault on what he terms “The Politics of Austerity”. My personal key takeaways from a reading of this illuminating and trenchant work would be the following:
1. Burgeoning financial industry debt
Rampant financial speculation and the creation of exotic financial instruments by investment banks, hedge funds and unregulated/barely regulated hybrids led to incredulous amounts of leverage in the financial sector. During the so called ‘boom years’, these institutions were typically operating with leverage ratios of 30:1 and in some unbelievable instances, more than 50:1!
2. Wall Street and Social Spending
A coalition of the so called deficit hawks of the likes of the billionaire investor Pete Peterson and his ilk engage in extensive lobbying and intense funding with a view to slash expenditure on social insurance and to direct the focus of the Government towards balancing budgets and cutting deficits.
3. The Greek Fiasco
In a splendid Chapter titled “A Greek Tragedy”, Kuttner chronicles the devastating impact of austerity collectively thrust upon an already suffering Greek populace. Harsh and inexplicable measures imposed in exchange for financial aid, such as cutting pensions, introducing three new tiers of value added taxes, and slashing pay packages of the salaried classes ensured that the Greeks were saddled with the most deflationary package ever imposed on the member of the European Union.
4. The Mortgage Mania
Unscrupulous brokers generating mortgages irrespective of the credit worthiness of the borrower, splicing and dicing of esoteric financial instruments with the covert blessings of credit rating agencies nursing conflicts of interests with the issuers of such instruments and a complicit, if not bewildered bunch of regulatory agencies all combined to create a domino effect that took the wind out of the sails of the global economy. Instead of aiding and assisting the hapless homeowners, Treasuries and Federal Reserve Banks on both sides of the Atlantic, came to the rescue of the very same greedy bunch of bankers responsible for triggering the very crisis which the world was trying to avoid, by mopping of trillions of dollars of toxic assets thereby recapitalizing and bailing out the ogres who were the creators of a dangerous specter.
Even though a decade has passed since the Great Recession, we are still ransom to the murky and shadowy practices adopted by the so called “Too-Big-To-Fail” institutions. The systemic risks posed by them are very real and their penchant for leverage has only exacerbated an appetite for risk taking. Policy mavens will do well to read the prescriptive remedies being offered by Kuttner before it becomes too late to reign in a global catastrophe!