Ha Joon Chang on the crisis: Man\’s a loon

The problem here is that Ha Joon Chang seems not to understand the basics of what he\’s commenting upon. Yes, I know he\’s an academic at Cambridge, clearly vastly brighter than I am (yes, being an academic at an institution I failed to get into probably does mean that) but seriously, what is this drivel?

While this debate is crucial, it should not distract us from the urgent need to reform our financial system, whose dysfunctionality lies at the heart of this crisis. Nowhere is this more obvious than in the case of the rating agencies, whose incompetence and cynicism have become evident following the 2008 crisis, if not before. Despite this, we have done nothing about them, and as a result we are facing absurdities today – European periphery countries have to radically rewrite social contracts at the dictates of these agencies,

No, they\’re not. You\’ve simply got cause and effect the wrong way around. The social contracts (if that\’s what you want to call borrowing from all and sundry to splurge) are not being limited by the ratings agencies. They\’re being limited by people being unwilling to lend more money to be splurged. It\’s that and that alone which is driving up the interest rates those countries just pay: and thus putting a brake upon the borrowin\’n\’the splurgin\’.

Greece has public debt of 150% of GDP, there is going to be a default there. You don\’t need three guys from some ratings agency to make you think about putting your money elsewhere.

Was this inevitable? Hardly. We could have created a public rating agency (a UN agency funded by member states?) that does not charge for its service and thus can be more objective,

Now that\’s a seriously stupid idea. The UN has given us Sudan and Libya as members (and at least one of them as Chairman) of the UN Human Rights thingie. Foxes and henhouses come to mind when considering that organisation.

Oh, and by the way, the ratings agencies do not charge (at least, do not charge the larger) sovereigns for their services. So what bias?

In resolving the European sovereign debt crises, one of the greatest obstacles has been the refusal by bondholders to bear any burden of adjustments, talking as if such a proposal goes against the basic rules of capitalism. However, the principle that the creditor, as well as the debtor, pays for the consequences of an unsuccessful loan is already in full operation at another level in all capitalist economies.

When companies go bankrupt, creditors also have to take a hit – by providing debt standstill, writing off some debts, extending their maturities, or reducing the interest rates charged. The proposal to introduce the same principle to deal with sovereign bankruptcy has been around at least since the days of the 1997 Asian financial crisis. However, this issue was tossed aside because the rich country governments, under the influence of their financial lobbies, would not have it.

You fucking what? It\’s the goddamned banks all along who have been saying that there\’s got to be haircuts to resolve this. It\’s the ECB, the EU, which has been whining about it all. They don\’t want to sully their precious euro with a \”default\”. Look at all the twisting and turning that the authorities have been doing to make sure that whatever they did wasn\’t classified as a default: a definition, by the way, which is not in the hands of the ratings agencies but in the hands of ISDA.

For centuries the banks, investors, have been taking hits in sovereign bankruptcies. The very fact that some Greek bonds are trading at 40%, 50%, or par shows that banks and investors are taking hits right now! What is this shit he\’s on about?

The most important of these is the regulation of complex financial products. Despite the widespread agreement that these are what have made the current crisis so large and intractable, we have done practically nothing to regulate them. The usual refrain is that these products are too complicated to regulate.

No, this crisis is fuck all to do with derivatives. Absolutely no one at all with more than two brain cells to rub together is saying there\’s any influence at all. This is a sovereign debt crisis. We\’ve had hundreds of them over the centuries. Shit, Greece has been in one for 50% of its time as an independent country. Even the much worried about CDS contracts have SFA to do with it. Total London bank exposure to Greek CDS is some £1.5 billion. Equal to somewhere between the annual mineral water and annual wine bill.

Gross exposure to simple sovereign debt of Spain Italy etc is of the order of €3 trillion: that\’s the bloody problem, not the derivatives.

But then why not simply ban products whose safety cannot be convincingly demonstrated, as we do with drugs?

Because the war on drugs works so well, right? Hundreds of billions spent, millions imprisoned, basic civil liberties violated, expunged even, in order to stop people getting a toot: and everyone who wants to toot can still do so. That really isn\’t the best analogy that even a very clever academic at Cambridge can come up with now, is it?

Once again, we could have eliminated or significantly weakened tax havens by simply declaring that all transactions with companies registered in countries/territories that do not meet the minimum regulatory standards are illegal.

Because you can\’t fucking do that you moron. Freedom of contract is a subset of freedom of association: along with freedom of speech the absolute bedrock of a free society.

What you can do is make such contracts not justiciable, as we do with gambling contracts, but you can\’t make them illegal. At least you can\’t in a Common Law jurisdiction and maintain any semblance of freedom and liberty.

And in all of this he doesn\’t even begin to mention that actual, real, problem. Some governments have borrowed more money than they can repay out of what their populations are prepared to cough up in taxation.

That\’s it: that\’s the problem that needs solving. And he doesn\’t even mention it.

Where did this man\’s reputation come from? Is it like the Murph, that he just says what a particular constituency wants to hear?

8 thoughts on “Ha Joon Chang on the crisis: Man\’s a loon”

  1. It was not dysfunctional banks that caused the banking crisis or the current sovereign debt crisis but dysfunctional government.

  2. Well, as I understand it, he’s right about it being bondholders objecting to defaulting – the ECB is apparently now the largest holder of Greek government bonds, and they are also strong opponents of the idea of default.

  3. A small point; I really think the man is talking about pharmaceutical testing in the “drugs” paragraph, not about illegal drugs.
    Given that, I fully support your view on our modern day prohibition fiasco.

  4. “yes, being an academic at an institution I failed to get into probably does mean that”: while the odds favour it, it’s not a sure thing – as you so wisely implied with your “probably”. And even vastly intelligent people talk rot at times. It’s universally agreed that Keynes really was very clever but his lash-up economics seems pretty shallow stuff compared to Hayek’s.

  5. Cambridge has long had a poisonous reputation for Economics (or the lack of it). MIT Economists (hardly a haven for Friedmanites) decided in the 1970s that they no longer had anything to learn from Cambridge in England, and I don’t think the situation has improved that much since.

  6. Since when did swearing a lot pass for reasoned argument? Anyone with even the faintest interest in your retort probably, like me, turned off after a couple of paragraphs.

    Even a lowly Leeds Met graduate like me can fathom that one…

  7. When companies go bankrupt, creditors also have to take a hit – by providing debt standstill, writing off some debts, extending their maturities, or reducing the interest rates charged.

    What you say is true Tim, but an even better argument is – creditors evaluate their best option based on what the company is capable of paying back, i.e. no blood from a stone, and cut their losses accordingly. It’s not out of the goodness of their hearts.

    It just so happens that sovereign governments have more options available to them (taxes, armies, etc), so naturally their creditors hold out longer.

    The UN based ratings agency is the stupidest fucking idea I’ve ever heard, other than the EU based one to compete with the US based agencies. Nope, can’t see any potential bias there.

    Cameron – salty language to emphasise a point is part of the English language. Deal with it.

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