Sunday, May 31, 2015

It’s Nestor’s World and We’re Just Living in It

Nestor was an Argonaut…In the Iliad, he often gives advice to the younger warriors….

Homer offers contradictory portrayals of Nestor as a source of advice. On one hand, Homer describes him as a wise man…. Yet at the same time Nestor's advice is frequently ineffective. Some examples include Nestor accepting without question the dream Zeus plants in Agamemnon in Book 2 and urging the Achaeans to battle, instructing the Achaeans in Book 4 to use spear techniques that in actuality would be disastrous, and in Book 11 giving advice to Patroclus that ultimately leads to his death.

Ambrose Evans-Pritchard is out with a piece, “ECB fears 'abrupt reversal' for global assets on Fed tightening.”  The subtitle is telling: “The ECB’s financial stability report describes a 'fragile equilibrium' in world markets, with a host of underlying risks.” 

“Fragile,” after seven years; “a host of underlying risks.”  He is writing of the current financial calamity, taking unmistakable form in 2008, but in reality tied to events at least several decades old.

The roots can be found in the formation of central planning for money and credit – central banking.  However, the most visible incarnation – this game of all financial transactions completely unhinged from economic reality – was fully formed on August 15, 1971, when Nixon closed the gold window. 

Certainly, there were many manipulations prior to this date – the fact that Nixon felt this action necessary was due to the government fiscal and monetary shenanigans that preceded it.  But this date is the most visible and complete sign of the total abandonment of any discipline when it comes to the subject of money and credit.

Yet Nestor is never questioned and instead is frequently praised.

As was Nixon; his move was greeted with cheers:

The American public felt the government was rescuing them from price gougers and from a foreign-caused exchange crisis.  Politically, Nixon's actions were a great success. The Dow rose 33 points the next day, its biggest daily gain ever at that point, and the New York Times editorial read, "We unhesitatingly applaud the boldness with which the President has moved."

What do Nestor and Nixon have to do with this latest piece from Ambrose?

The global asset boom is an accident waiting to happen as the US prepares tighten monetary policy and the Greek crisis escalates, the European Central Bank has warned.

The ECB’s financial stability report described a “fragile equilibrium” in world markets, with a host of underlying risks and the looming threat of an “abrupt reversal” if anything goes wrong.

Even if you magnanimously start the clock in 2008, the wizardly central planners have had seven years to deal with whatever they deemed to be the underlying causes of this calamity.  Ambrose lets slip that their advice – like that of Nestor’s – has been “frequently ineffective.”  Let’s just call it ineffective – in other words, wrong more often than advice given by the man of Greek legend.

Ambrose laments the growth of shadow banking – outside the purview of regulators; yet in 2008 it was the institutions in the purview of regulators that were the source of problems.  Banks are one of the most highly regulated institutions in the world – regulated by political actors and not the market (and in this one will find one major source of the problem).

He does not spare the banks, however:

While banks are in better shape than five years ago, their rate of return on equity has dropped to 3pc, far lower than their cost of equity. They remain damaged.

Damaged?  Seven years later, they remain damaged?  What kind of advice have these advisors been peddling for seven years?  We know that their interventions have allowed short-term rates to stay at or near zero (with corresponding effect on rates of longer maturities) for most of this period.  Hasn’t this grace period solved any underlying issues?

They are worried about Greece, but not only Greece:

The ECB’s report said the former crisis states still have extremely high levels of public and private debt and have yet to clean up government finances. “Fiscal positions remain precarious in some countries,” it said.

The report said aggregate debt levels are much higher than in 2008 at the onset of the last recession.

It is a wonder – why do experts believe that making credit less expensive will move the profligate toward reform, away from credit?  Obviously, this hasn’t worked – the term PIGS, while coined in the 1990s, gained popularity at the beginning of this debt crisis.  The problems have only grown worse.

They are worried about rising interest rates:

…the ECB said the bigger worry is what happens once the US Federal Reserve begins to raise interest rates…

Like seven years of zero is too short a time.

There are more worries:

Less likely, but equally worrying, is a “sudden slowdown” in the global economy that would bring Europe's unresolved debt problems back into focus.

Simon Tilford, from the Centre for European Reform, said the latest cyclical recovery in the eurozone is too weak to undo the damage caused by the crisis…

I guess seven years of “recovery” under the most favorable of monetary circumstances is not sufficient.

…and is unlikely to be enough to restore debt sustainability before the next recession hits.

That leaves us with another seven years (or more) of zero (or less-than-zero) interest rates?  Seven fat years followed by…seven fat years?

Nor has the currency bloc sorted out its essential deformities or embraced any form of fiscal union.

The solution will not be found in fiscal union; a good starting point would be regulatory reform – simplify and make less costly the ability to discharge inefficient labor (layoffs) and inefficient capital (bankruptcy).  Then watch both employment and investment grow.

“As it stands, the eurozone is a mechanism for divergence among its members, not convergence: real interest rates are highest in the weakest countries, lowest in the strongest,” he said.

The most significant issue of “divergence” is not to be found in relative interest rates, but in the union itself.  Politically, no means has yet been found to generate the support from the masses that will be necessary in order to form a more imperfect union.

“Many eurozone governments could face the prospect of further deep recessions despite having barely recovered, amid persistently strong support for populist parties. The politics of this is likely to be combustible. The euro is not out of the woods,” he said.

Not only is the Euro “not out of the woods”; the European Union in its current form remains in a black forest.

All of this advice and counsel – given and implemented not only over the last seven years, but the last forty-four – has brought the world financial and economic system to this point.  There is no recovery this time, there is no prospect of recovery, there is no alternative playbook, and there is nothing but hope in magic.  Don’t believe me?  Ambrose offered as much, three years ago when stagnation was only four years old:

The question is whether the public welfare is best served by popping the bubble and allowing Austro-liquidation to purge the toxins, or whether this would be ruinously destructive. Many readers think it is past time to dynamite this edifice. I have much sympathy with this view. Yet in the end, I prefer magic. (Emphasis added)

One day, if Ambrose is anything like an honest broker, he will come to praise the Austrian position of liquidation and allowing free markets to determine outcomes.

This condition brings to mind the futility offered to Sisyphus:

As a punishment for his trickery, King Sisyphus was made to endlessly roll a huge boulder up a steep hill.  The maddening nature of the punishment was reserved for King Sisyphus due to his hubristic belief that his cleverness surpassed that of Zeus himself. Zeus accordingly displayed his own cleverness by enchanting the boulder into rolling away from King Sisyphus before he reached the top which ended up consigning Sisyphus to an eternity of useless efforts and unending frustration.

Yet, this isn’t quite right.  Those whose actions are futile are not the ones suffering via an ever escaping stone.  It is us, living in the futility offered by the so-called wise advisors.  Therefore, for the efforts of these wise advisors, I find more accurate a wisdom to be found in the Bible, in Ecclesiastes 1:

2 “Absolute futility,” says the Teacher.  “Absolute futility. Everything is futile.”  3 What does a man gain for all his efforts that he labors at under the sun?

12 I, the Teacher, have been king over Israel in Jerusalem.  13 I applied my mind to seek and explore through wisdom all that is done under heaven.

16 I said to myself, “Look, I have amassed wisdom far beyond all those who were over Jerusalem before me, and my mind has thoroughly grasped wisdom and knowledge.”  17 I applied my mind to know wisdom and knowledge, madness and folly; I learned that this too is a pursuit of the wind.

Yet the folly continues.  Why?  Why do the people allow it?  Again, the story of Nestor offers a possible explanation:

Hanna Roisman explains that the characters in the Iliad ignore the discrepancy between the quality of Nestor's advice and its outcomes because, in the world of the Iliad, "outcomes are ultimately in the hands of the ever arbitrary and fickle gods ... heroes are not necessarily viewed as responsible when things go awry." In the Iliad, people are judged not necessarily in the modern view of results, but as people.  Therefore Nestor should be viewed as a good counselor because of the qualities he possesses as described in his introduction in Book 1 – as a man of "sweet words," a "clear-voiced orator," and whose voice "flows sweeter than honey."  These are elements that make up Nestor, and they parallel the elements that Homer describes as part of a good counselor at Iliad 3.150–152.

These wise advisors sound smart, they sound like they understand, they sound like they are really trying to do the right thing for the average Joe.  That nothing they say or do is beneficial is irrelevant.  They mean well.  It is enough for most; they continue to offer support.

There is one other lesson to be learned from Nestor’s world:

Nestor's advice in the Iliad has also been interpreted to have sinister undertones.


  1. Great article as usual.

    Seven years is but the blink of an eye in diplomatic parlance. The Japanese have taken their financial folly from a lost decade to a lost generation. It will turn around - just you wait and see.

    Why, it was only recently that a certain excise tax was removed from my phone bill; one that began during the Spanish-American War. After all, what's a century to government?

    Good intentions of the the fatally conceited can carry them far, but an event like the '08 housing bubble took extra explanatory effort. So, they plucked Nassim Nicholas Taleb's obscure work on Black Swan events and shoved it to the fore of that discussion. It was so convenient... nobody saw this coming! Never mind that Austrian Economists, and others, had been warning about it for quite some time. Many of the same political and financial pundits are still giving advice to this day and people are still listening to it. ( Ben Stein is at the top of my grievance list.)

    The signs were everywhere. Foreclosures were rising as were payment delinquency rates. A new term had been added to the lexicon: "jingle mail" - a phenomenon where mortgage-owners abandoned their properties while mailing their keys back to the bank. Another sign was payment resets as the sub-prime loans started using that fine print on those who borrowed (prime mortgages were showing equal foreclosure rates). On top of higher payments, high inflation in areas other than housing was making things very difficult on homeowners. A large section of the country was borrowing against their homes' increasing value. The commercial side was showing the same overextended tendencies.

    Upon all of that, add to it the practice by investors and banks, who were borrowing short and lending long. When Bernanke and the Federal Reserve raised rates, borrowing cooled as did the investment returns needed to pay or roll over the short term loans. Pension funds took a big hit as well, thanks to the government-sponsored agencies allowing junk bonds to be sold as AAA paper. Both private and government pension agencies loaded up on mortgage-backed securities which have now proven disastrous.

    Rather than a surprise, one wonders how anyone missed it. I don't think they did. I believe they saw it coming, but what politician wants to commit political suicide by derailing a gravy train? The Fed acted way too late regarding the madness of crowds they themselves created.

    In stepped the Keynesians with the same old money-printing solution that is sure to cause morally hazardous havoc down the road. When that happens, the "grate" minds need only start a war… it's just too easy for them.

    1. "Seven years is but the blink of an eye in diplomatic parlance."

      You are quite correct. I also got a chuckle, in a pathetic sort of way, about the 100 year excise tax....

    2. Give Congress credit for being honest about rolling the dice.


  2. AEP always seems to hedge his bets. He is all the way for Keynes and QE, but should it fail, he has the inbuilt excuse (like Paul Krugman): There was not enough QE, I told you so! By the way, what happened to the predicted collapse of Russia due to sanctions?

  3. "I also got a chuckle, in a pathetic sort of way, about the 100 year excise tax...."

    That's always a hit at dinner parties.