Unrestrained Stimulus and Draconian Austerity: Two Sides of the Same Coin

George Washington's picture


The Elite Financial Players Are Manipulating the Game So that They Get the Stimulus ... and the Little Guy Gets the Austerity

Liberal economists and financial wonks say that we need to learn the lesson from the 1930s and stimulate more to unnecessarily avoid falling back into a very deep economic abyss.

Conservative economists and financial gurus say that we need to tighten our belts and live within our means, or the tsunami of debt will wipe out our prosperity, and that of our children and grandchildren.

We've repeatedly noted that neither stimulus or austerity can ever work ... unless and until the basic problems with the economy are fixed.

But stimulus and austerity are not only insufficient on their own ... they are actually 2 sides of the same coin.

Specifically, the central banks' central bank warned in 2008 that bailouts of the big banks would create sovereign debt crises. That is exactly what has happened.

Remember, it is not the people or Main Street who are getting bailed out ... it is the giant banks.

A study of 124 banking crises by the International Monetary Fund found that propping up banks which are only pretending to be solvent often leads to austerity:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.


Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.



All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.

In other words, the "stimulus" to the banks blows up the budget, "squeezing" public services through austerity.

But instead of throwing trillions at the big banks, we could provide stimulus to Main Street. It would work much better at stimulating the economy.

And instead of imposing draconian austerity, we could stop handouts to the big banks, stop getting into imperial military adventures and stop incurring unnecessary interest costs (and see this). This would be better for the economy as well.

Why aren't we doing this?

Because - underneath the false easing-versus-tightening debate - this is not a financial crisis ... it's a bank robbery.

Profits are being privatized and losses are being socialized.  So the big banks get to keep the mana from heaven being poured out of the stimulus firehose, while austerity is forced on the public who has to bear the brunt of Wall Street's bad bets.

The big banks went bust, and so did the debtors.  But the government chose to save the big banks instead of the little guy, thus allowing the banks to continue to try to wring every penny of debt out of debtors.  An analogy might be a huge boxer and a smaller boxer who butt heads and are both rendered unconscious ... just lying on the mat.   But the referee gives smelling salts to the big guy and doesn't help the little guy, so the big guy wakes up and pummels the little guy to a pulp.

And creditor committees dominated by giant banks like Goldman which helped countries like Greece fraudulently cover-up their financial problems are now demanding austerity, and Greece is holding a fire sale of its infrastructure, public utilities, tax base and whole islands to give to the creditors.  Spain, Italy, and even countries like the U.S. are no different.

As we wrote last year:

Economists note:

A substantial portion of the profits of the largest banks is essentially a redistribution from taxpayers to the banks, rather than the outcome of market transactions.

Indeed, all of the monetary and economic policy of the last 3 years has helped the wealthiest and penalized everyone else. See this, this and this.


A “jobless recovery” is basically a redistribution of wealth from the little guy to the big boys.




Economist Steve Keen says:

“This is the biggest transfer of wealth in history”, as the giant banks have handed their toxic debts from fraudulent activities to the countries and their people.

Nobel economist Joseph Stiglitz said in 2009 that Geithner’s toxic asset plan “amounts to robbery of the American people”.


And economist Dean Baker said in 2009 that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”.


The money of individuals, businesses, cities, states and entire nations are disappearing into the abyss …


… and ending up in the pockets of the [fatcats].

Passionate liberal Keynesians and committed fiscal conservatives may each be seeing only part of the picture. We invite everyone to see the bigger picture.

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blindman's picture

SP 500 and NDX Futures Daily Charts - Facebook Face Plant
The Commencement Address That Won’t Be Given
By Robert Reich
Friday, May 18, 2012
Members of the Class of 2012,
As a former secretary of labor and current professor, I feel I owe it to you to tell you the truth about the pieces of parchment you’re picking up today.
You’re f*cked...
Read the rest here.
18 May 2012
Bill Moyers Interviews Simon Johnson on JP Morgan Chase and the Next Financial Crisis
"Financial institutions such as JPMorgan love to buy derivatives because they are opaque, create fictional income that leads to real bonuses and when (not if) they suffer losses so large that they would cause the bank to fail, they will be bailed out."

William K. Black
Scary Medical Story of the Day

blindman's picture

well done mr. washington,
let them not take comfort in
some false sense of ignorance
nor let them falsely claim the
complexity of systems and markets
made them unaware of the facts.
the charges are serious as the repercussions
and consequences.
you have done a brilliant job of putting forth
the facts in a coherent and accurate manner,
now the response will be to ignore the facts
or trifle with them (to the disservice of
the detractors) until such time as the people
learn the facts and press the issue to its
rectitude, so to speak.
it has been about stealing with an appointment
and it does not hold the center.
what i find to be the saddest thing is that so
many of the best and brightest have thrown in
with the criminal cabal by concluding that there
is nothing they can do to change things and have
decided to work around the utter corruption of
the basic principles and foundations of the "system"
to achieve some bit of influence or luxury.
admiration to you for not sacrificing the truth.

Oldyeller's picture

Why isn't this arguement out in the public domain? Why is it that only on bolgs such as this one are these 'facts' discused?  You never see this stuff on Bloomberg, BNN etc. Is there really some sort of secret conspiracy out there between Banks, News Media, and government?  Is Bernancke really just the honest wonk fanatic who acually believes, in all sincerity, in the 'Truths' he tells Congress and fails to notice/understand the predatory nature of the present Fractional Reserve banking system? They tell us that they are geniuses, it is just tooo... complicated for ordinary mortals to understand. It is as if we have all consented to be screwed by these guys, in a reasonable democratic way.

Perhaps America has reached it's "Ignorance is Strength" moment, where it is best for all concerned, not to understand what has been perpetrated and just carry on, cover the evidence of crime, pretend there was none and get back to your jobs as Tax Mules!

As Bugs Bunny would say "EHHHA.....What a bunch of joiks!....Ehhhha.....What pack of Moroons!!"

Westcoastliberal's picture

Thanks for pointing this out GW, unfortunately the illuminati/bilderberger/1%er trash seem to have the format down pat for stealing the wealth of nations, then making taxpayers foot the bill for the missing loot.

Anyone here remember Rumsfeld's press conference on 9/10/01 when he announced $2.3 Trillion could not be accounted for in the Pentagon?  IMHO that was the beginning of the loot-taking (and we've never heard ANYTHING more about where THAT money went, did we?).

Unless and until the people realize the discourse is no longer GOP vs DEM, Obama vs Romney, Liberal vs Conservative this looting will continue.  At some point, the realization needs to occur that it's really US vs THEM.  Then perhaps the people will take appropriate action to set things straight.  I hope I live long enough to see this.

W10321303's picture

Meanwhile, the sheep are all on FACEBOOK....bahhhhh bahhhhhhh

America....."Land of the sheep, Home of the distracted"

NotApplicable's picture

The "basic problem with the economy" is the existence of voters, who have no choice but to empower criminals, who then destroy everything they can't steal.

Until these evil-dogooder ballot-boxers are dealt with (along with the zealots who write these articles to "fight the good fight" by "strengthening their resolve"), the criminals reign with impunity, as their system of plunder is reinforced each and every election day.

Why do voters hate freedom and America?

I am on to you's picture

You might be right on that,but nobody breaks peoples arms to put the X where they do,they do it volunterily.

So if you meen, no matter where you put your vote your lost,due to the hole corrupted system,bought and payd for,i agree.

Nobody hates freedom,they just dont know it,they were born to slavedom,like been there done it,escaped the box,and wont go back,kind of my sence to this world:

My face; cant nomore be booked,its mine,al mine,most importent the inside of it!

George Washington's picture

Huh?  I have NO IDEA what you're talking about. Please explain

yabyum's picture

Privatize the profit, socalize the loss......any questions??

navy62802's picture

It's called fascist economics. It's the same model that Mussolini instituted while he was in power in Italy.

Judge Arrow's picture

What government anywhere will not be a functioning police state, more or less, mostly more, over the next 24 months? - apparently the US government has prepared for its role -  and when the parasite parade ends, soon enough - a thinning of the herd will follow - we enter the Dark Ages, once again.... 

Vegetius's picture

The present status quo will continue until through the ballot box (unlikely) or the barrel of a Gun change occurs. In the years before 1789 the French Government possessed the largest army, navy and Government in Europe making it the de-facto world super power. The state bankrupted itself and next stop -Revolution and a lot of people lost their heads. So let’s not worry too much this has all happened before.

Xkwisetly Paneful's picture

Mean the rich and powerful are using the government to their own benefit?

Nothing new there, it would be why the ultra rich are largely for large government,

there are no better means to keep everyone else down,

and would be why almost every form of governance goes from less to more over time.

But the denial is fun, as if somehow the people will be able to control this dynamic if they just do this a little different or change that a little bit.


Excellent article George,

No one could have said it any better.

Tony B

Gully Foyle's picture

"In other words, the "stimulus" to the banks blows up the budget, "squeezing" public services through austerity."

Fuck dude you just made most ZHers blow a load.

Isn't that the dream, no public services stealing their money for some Pepsi swilling Caddy driving Black hoochie with sixteen kids from twenty different fathers.

Or those damn cripples collecting disability only to eat brie and truffles while being funded by hard working people who could have spent that money on gold and guns and maybe some mre's.



spooz's picture

The looting will continue until the libertarians and the progressives get together and realize that the duopoly is screwing everybody but the 1%.

Gully Foyle's picture



One Percenters Definition: The term "One-Percenters" originated from the July 4, 1947 motorcycle rally held in Hollister, California. The rally, which was attended by approximately 4,000, captured media attention after a fight broke out between two motorcycle clubs, the Boozefighters and the Pissed Off Bastards.

Life magazine ran a pictorial series of the annual rally which sparked both fascination and concern about the violent, unruly nature of the growing subculture of motorcycle groups.

The event became known as the "Hollister Riot" although there is no real documentation that an actual riot occurred.

Afterwards, films about motorcycle clubs with members depicting bad behavior began hitting the movie theaters. The Wild One, starring Marlon Brando, brought particular attention to gang-type behavior displayed by members of motorcycle clubs.

The American Motorcyclist Association (AMA) defended the reputations of its members to the press, stating that 99 percent of bikers are law-abiding citizens, but there's that last "one percent" that are nothing more than "outlaws."

The term caught on and new motorcycle gangs emerged, called the "one-percenters," which included the Hells Angels.

Gully Foyle's picture

George Washington

Two different ideas.

Read the biker thing more carefully.

1% = Criminal, which is more in tune with the modern idea.

Although just where is the line when good business practice, Capitalism, becomes criminal?

The OWS people want Socialism or Communism. Only after they get jobs and earning money will they even consider Capitalism.

The 99% are where they are because they just don't have " the will to power". Even successful drug dealers have it.

The man only keeps those down who can't think and have no motivation. And those who accept their lot in life.

In the end none of this will be about equality or rights, merely about moving up the fiscal ladder.

It ain't like voting rights, civil rights, or abortion rights.

That's why it will wither and die. More hip than ideological.

Xkwisetly Paneful's picture

I am going to coin a new term,

it is called the 10billionth of one percenters.

They are the people that live in the top .00000000001% of all time humanity but whine and complain about those .0000000000005% higher than them.

You know, the obese home and car owners that are considered "poverty stricken"

the government servant retiring at 55yo with four pensions and healthcare,

or living like royalty does in some parts of the world and better than the avg working Euro does.

Call them the 10billionth of one percenters.

Half the world lives on $240 or less a month which makes whining from the likes of people around here fucking hilarious.

spooz's picture

The memes you seek to perpetuate benefit the status quo and the 1%.  You are well programmed.

LetThemEatRand's picture

The Lords especially enjoy it when the serfs tell each other to buck up and stop complaining because there are other serfs who are worse off.   As Kevin Bacon famously stated, "thank you sir, may I have another."

Gully Foyle's picture

Xkwisetly Paneful

"the government servant retiring at 55yo with four pensions and healthcare"

Dick Cheney?