Austerity.... a "How to" Guide

This started as a comment and I needed more space to flesh this thinking out.

"Austerity to do or not to do? "...  has sort of been the academic economists question of  the last decade (hard to believe how long its been since the crisis onset). I know everyone has heard the tightening your belts analogy amongst others.  The thinking here is that when you have taken on too much debt you need to tighten your belt and spend less..... thereby dedicating more to debt re- payments. All this sounds familiar to anyone in a household, which is everyone even if your household is only one person.  All of us know when we have taken on too much credit card or car or mortgage debt we need to stop taking on more debt and use our incomes to pay down what we already accumulated until we get a little more wiggle room in our budgets.  Sometimes our best option is to default or declare bankruptcy.  For most,  bankruptcy is not a desirable place to go.
Anything that puts an individual closer to bankruptcy is bad anything that moves him further away is good.  Some austerity policies increase the risk of household sector bankruptcy others decrease it.

In the aftermath of our most recent private debt bubble (notice how I slipped the "private" qualifier in there....... eh!) which took down some major financial institutions and wrecked balance sheets everywhere in the world, our neoliberal overlords have been admonishing us as irresponsible and reckless. They saw it all as the fault of the borrowers, never bothering to see what the other side of the contract had to do with the final terms and conditions. Putting aside the discussion of  blame for  credit relationships and there ultimate success or failure for just a moment, Id like to next examine the absurdity of some of the recommendations of our thought leaders.

So we have this private credit bubble which threatens banks, households and businesses everywhere (I know banks are businesses too but they should be viewed separately at times because they have a special place in our economies) and there are drops in economic activity everywhere.  This leads to falling GDP.  At this point all focus (of our thought leaders) is simply on restoring bank balance sheets to health, to hell with household balance sheets.  They do this by massive restructuring of debt contracts so that a lot of liabilities of these institutions become liabilities of the Federal govt and its agencies, which ..... ahem..... includes our Central Bank ( a NOT private entity).  So massive private debt magically becomes.................... massive public debt!!   Next, in quite short order, we get cries about rising and unsustainable public debt, from many of the same people who orchestrated the private debt to public debt alchemy described above.  I should probably note that I am at present okay with the alchemy described above ( I was NOT then but was quite ignorant of economic matters in 2007) because I know that it, it being the transfer from private to public balance sheets,  was the right thing to do.  Its how one can stabilize banking systems when you have a currency you control.  Thats how sovereign countries are supposed to function. Its actually quite a Keynesian concept.

However, to do this and then cry about rising public debts is the classic example of the kid charged with murdering his parents pleading for the courts mercy on grounds he IS an orphan.  Of course the response to these cries of rising public debt is to cut govt spending/deficits so we can stop the rise of govt debts.  This is the austerity that is being recommended.  These cuts are in the form of reduced transfer payments and cutting public sector pay and public sector positions. All these recommendations increase the risk of bankruptcy for the household sector.  So not only do these recommendations define chutzpah, as in the case of murderous orphan, they also define ignorance; "We are dismayed by all the households who can no longer pay their mortgages and credit cards as it has caused great stress to our banking system. We will respond by doing what is necessary to relieve the banks stress but we will ask millions more Americans to get closer to bankruptcy by cutting incomes until you have become responsible enough borrowers.....  TINA!!"  This is bad austerity, stupid austerity, austerity imposed by someone seeking retribution.

Now lets look at good austerity.  We should look at differences between how the US and the Euro area have responded to these crises, and how the austerity pushes and responses have been.  Countries within the Euro are not like the US.   They didn't have individual control of their balance sheets because they share balance sheets to a degree with every other Euro user.  This sharing is reflected only in the ECB balance sheets but it is there.  But lets talk about how two countries , Greece and Iceland, have managed the crisis differently and what "austerity" means to both. Iceland left the Euro soon after the crisis.  They went back to their own currency and restarted.  This was certainly a drop from their previous standard of living, but Icelanders were not  in a position to have to listen to Germans or Americans demanding a lay off of their librarians and  a cut to pensions by 30% or whatever.  They suffered and accepted their lowered living standards (without large job losses) and learned to live with less..... temporarily in many cases but even in other cases the lower living standards were dealt with voluntarily and with a reforming of priorities, which is all healthy.
Greece on the other hand has had to listen to their task masters for seven long years.  Europe did the same thing as USA at first. Each countries branch of the ECB took on the household debts that were blowing up the private banks balance sheets (most of them German French or British banks BTW) which resulted in massive expansion of each countries public debt ratios.  Of course the response was the same as here, the same as that murderous  orphan.  "Look at what you did now you lazy Greeks!  You expanded your public balance sheets to take on bad household debt held by banks (as we told you to do)and now your public debt is sky high!!!!  Cut your public wages and spending or our investors won't hold any of your shaky debt!!"   The absurdity of it all really hurts

Greece is still being asked to cut more even though they have cut massively.  The cuts have not resulted in a better economy by any definition of the word and there is a real possibility they will follow Iceland and simply restructure in a new currency.  Only then will they be able to do good austerity.  There is no good austerity imposed on you by others.  Its never enough.  They always want more.  They want more because the first round doesn't give them the increase in their incomes they were wanting form YOUR austerity.  They are playing a zero sum game. They fear their own incomes falling so they want to take a little from a lot of people.  When those gains don't materialize, because austerity leads to less spending/incomes for many, they go back and ask for more.... and more..... and more.

Good austerity is self generated, coming from a place of reflection on wants vs needs. You do things under these conditions which make you less likely to default or go bankrupt.  Bad austerity is imposed on you by some authority deciding you need to pay for something, even if it was something you didn't do.  These things put you closer to bankruptcy.  Oddly enough putting more households closer to bankruptcy seems to be THE POINT of our current cries for austerity out of our leaders. That is why they should be fought...... by the banks as well.