Did Bill Clinton’s Budgets Really Destroy the American Economy?

I think the “sectoral balances” viewpoint of the macroeconomy, which emphasises that income equals spending, is hugely important for understanding what is going on in today’s global economy.  However, an article today by Joe Weisenthal that appeals to this framework to pin the blame for the global financial crisis on Bill Clinton, struck me as incorrect.  My response here.

Data Sources and Websites for International Money and Banking

Data Sources

Asset and Liabilities of US Banks. From the Federal Reserve.

Statistical Data Warehouse. From the ECB.

FRED. The St. Louis Fed. Very good for charts.

The EONIA rate (European Overnight Interest Average)

Volume of overnight unsecured lending in the Euro area.

The ECB’s Balance Sheet.

The Fed’s Balance Sheet (Factors Supplying Funds is Assets, Factors Absorbing Funds is Liabilities)

Selected Interest Rates from the Federal Reserve.


Economics Blogs That Sometimes Cover Issues Related to this Course

My blog.

FT Alphaville.  Detailed coverage of financial news stories.

Bruegel. Think-tank covering European economic policy issues.

Economist’s View. Academic Mark Thoma from Oregon offers views and links to articles on the US economy.

Calculated Risk. An excellent site for US economic news, with a particular focus on housing.

Paul Krugman. Thoughts on macro from a Nobel prize winner. Best accessed via Twitter or you’ll run into the New York Times’s 10 articles per month limit.

Econbrowser. US macroeconomic commentary from academics Menzie Chinn and Jim Hamilton.

Mainly Macro. A thoughtful UK-oriented blog from Simon-Wren Lewis of Oxford

Monetary Dialogue with the ECB. Not a blog but lots of papers by leading European economists on monetary policy issues.

The ECB’s Secret Letter to Ireland: Some Questions

By announcing it is only willing to purchase Spanish and Italian government bonds if these governments apply for funding from the EFSF bailout fund, the ECB is now exerting pressure on these countries to sign full bailout agreements.  Officially,Mario Dragih’s position on how the ECB engages with governments (as explained at his June press conference) is

I do not view it as the ECB’s task to push governments into doing something. It is really their own decision as to whether they want to access the EFSF or not.

In reality, the record of the ECB’s role in Ireland’s bailout application (admittedly at the time under the leadership of Draghi’s predecessor) suggests it is an organization that is not at all averse to pushing governments into bailout funds.   As the facts below illustrate, this record also doesn’t provide encouragement that the ECB will act in an open and transparent manner when doing so.

In the months leading up to Ireland’s bailout agreement, the ECB had become increasingly concerned about the amount of money it was loaning to Irish banks.  In early November, it appears the ECB decided it needed to intervene.

On Friday November 12, 2010, Reuters reported that Ireland was in talks with the EU to receive emergency funding.   The Irish government denied that any official talks were taking place.  However, Brian Lenihan, Ireland’s Minister for Finance at the time, subsequently told a BBC documentary that, on this same day he received a letter from Jean-Claude Trichet advising him that Ireland should enter an EU-IMF program. Lenihan was adamant that “the major force of pressure for a bailout came from the ECB”.

The Irish Times has reported that

Dublin officials believed the letter to be forthright, with an implicit threat that support for Ireland’s banks was at risk.

Alan Ahearne, Lenihan’s economic adviser at the time, confirmed these reports to the Irish Independent:

“Yeah, the letter came in on the Friday from Trichet. The ECB were getting very hostile about the amount of money that it was having to lend to Ireland’s banks. The ECB demanded something be done about it and it mentioned Ireland going into the bailout. They were keen to get Ireland into the programme.”

He added: “Lenihan rang Trichet that day, and they agreed officials would meet the following day in Brussels. When they met, the ECB put huge pressure on Ireland to go into the programme.”

Ahearne said Lenihan was now at the centre of international chaos and Ireland’s future hung in the balance.

“The following Tuesday, Lenihan went to the eurozone meeting …”

The Independent story does not state the date of arrival of Trichet’s letter but the reference to a Eurozone meeting on the following Tuesday confirms November 12 as the date.


Within weeks of the receipt of this letter, Ireland had entered an EU-IMF financial assistance programme. Given the key role the ECB letter of November 12 appears to have played in such an important event in Europe’s economic history, one might hope that this letter would now be in the public domain.  However, the letter has not been released.

Last December, an Irish journalist, Gavin Sheridan requested that the ECB provide him with “any and all communications from the ECB addressed to the Irish finance minister (or his direct office) in the month of November 2010”.

The ECB responded by supplying one letter dated November 18 (a technical communication relating to payments systems) but refused to supply another letter that dated November 19 (one week after the Reuters story and one day after Central Bank of Ireland Governor Patrick Honohan conceded that a bailout deal was likely).

The ECB’s justifications for not releasing the letter included the following paragraph:

The second letter, dated 19 November 2010, is a strictly confidential communication between the ECB President and the Irish Minister of Finance and concerns measures addressing the extraordinarily severe and difficult situation of the Irish financial sector and their repercussions on the integrity of the euro area monetary policy and the stability of the Irish financial sector.

The content of the letter was alluded to as follows:

The ECB must be in a position to convey pertinent and candid messages to European and national authorities in the manner judged to be the most effective to serve the public interest as regards the fulfilment of its mandate. If required and in the best interest of the public also effective informal and confidential communication must be possible and should not be undermined by the prospect of publicity.  In this case, the confidential communication was aimed at discussing measures conducive to protecting the effectiveness and integrity of the ECB’s monetary policy and fostering an environment that ultimately contribute to restoring confidence among investors in the overall solvency and sustainability of the Irish financial sector and markets, which, in turn, is of overriding importance for the smooth conduct of monetary policy.

These communications raise a number of questions:

  1. Did the ECB communicate with Brian Lenihan on November 12, 2010? If so, why was this letter not referred to in response to Mr. Sheridan’s request?
  2. Did the ECB threaten to withdraw funding from Irish banks unless Ireland entered an EU-IMF program, either in a letter dated November 12 or in meetings the following weekend?
  3. What are the contents of the November 19 letter and why is this letter considered so sensitive given that it was clear to all after Governor Honohan’s remarks on November 18 that a bailout deal was being concluded?

I believe the Irish and wider European public deserve a better explanation of the events of November 2010 from the ECB. The public release of all communications from Mr. Trichet to Minister Lenihan should be part of this explanation.

Would A Greek Exit Really Be Manageable?

Jean-Claude Juncker, Luxembourg prime minster and head of the Eurogroup of finance ministers has said that he believes that a Greek exit from the euro would be “manageable”  Partially based on my recent experience of Ireland’s banking crisis, which was “manageable” until suddenly it wasn’t, I don’t take much reassurance from politicians using this phrase.

In many ways, this was a fairly typical intervention from Juncker, who has a touch of foot-in-mouth disease.  His comments appear to have begun as a dismissal of German politicians saying they are not worried about Greek exit with Juncker pointing out “it would be better if more people in Europe kept their mouth closed more often”.  Indeed. But then this particular piece of reassurance comes from the man who, when caught lying last year about an emergency finance ministers meeting on Greece, responded “When it becomes serious, you have to lie.”

So what’s the case for a Greek exit being manageable? One could argue that the euro existed for a time without Greece and functioned fine, that allowing Greece to join was a mistake, and thus that a euro without Greece would be more stable.  While some of the countries that would remain in the euro also have severe debt problems, you could argue that they were not as intractable as Greece’s.

Finally, you could argue that the Eurosystem would provide full support to the governments and banks in the remaining countries provided, of course, that they don’t go the Greek route and fail to control their debt problems.  In other words, some believe a Greek exit could reinforce the rules required to maintain the stability of the euro by showing that the core countries are serious about their enforcement.

I think these arguments under-estimate the seismic impact a Greek exit would have and I have severe doubts as to whether these impacts could be managed in a way that saves the euro.

A Greek exit would forever shatter the illusion that the euro is a fixed and irrevocable union. European politicians will claim that Greece is a unique case but they have made far too many false claims in the past to be considered credible.

A Greek exit would likely trigger a massive flight of bank deposits from the periphery as the current “bank jog”—largely driven by large corporate accounts and non-residents—turns into a full retail bank run.  If default on deposits is to be avoided, this would require a massive injection of central bank funding by the Eurosystem into these countries.  This would raise severe tensions: Will Germans be willing to allow the Banca d’Italia to print enormous amounts of euros to facilitate Italians to move their money to Germany and have their deposits stand on an equal footing with German resident deposits after a euro break-up?

Another possible response to a bank run would be the introduction of euro-wide deposit insurance. However, this plan would only work provided it guaranteed that people retained the original value of their euro deposits even after they had been re-donominated into pesetas or lira.  Otherwise, people will still have an incentive to move their money.  But re-denomination insurance provides a huge incentive for countries to leave.  People can have their debts re-denominated into a weaker currency and the EU will kindly pick up the tab in relation to the money people lose on their deposits.  This proposal would not be acceptable to the core Eurozone countries.

A Greek exit would trigger a broad range of different legal problems as various parties sue each other to claim they are owed euros, not drachmas.  The resolution of these problems would illustrate which kinds of parties are at risk when a country exits the euro and their Spanish and Italian counterparts would come under severe pressure.

A Greek exit would place pressure under peripheral Eurozone economies no matter what the outcome is.  A disastrous post-euro outcome in Greece will convince many investors that any economy in the euro area at risk of leaving should be avoided.  Alternatively, a healthy Greek rebound after the initial chaos would place pressure on governments in countries suffering inside the Eurozone that Greece is an example to be followed.

The European authorities may have some secret plan for holding the euro together after a Greek exit but, frankly, I have my doubts.