Monday, May 23, 2011
Mélenchon's Problem With Economics
Qu'ils s'en aillent tous. The title of Jean-Luc Mélenchon's book encapcsulates a sentiment that we all share from time to time. Get rid of the lot of them. But if we followed that advice, who would manage our economic institutions? After listening to the first ten minutes of this interview with Mélenchon, I can only hope and pray that it isn't Mélenchon. To illustrate the greed of our elites, he tells us that "they raised interest rates" after the crisis and thus "served themselves again," having already made a fortune on dubious loans and credit default swaps. But in fact central banks lowered rates. To be sure, interest rates rose in countries like Greece, because their precarious financial situation made default more likely. Buyers of Greek debt disappeared, and investors tried to dump their holdings. But this rise in interest rates corresponded to a fall in the price of the bonds already held by banks, pension funds, and other institutions, so they weren't "serving themselves," as Mélenchon implies, but losing their shirts. To be sure, not everyone lost, but Mélenchon doesn't seem to understand the basics of state finance, as he illustrates in his next remark, which is to say that the European Central Bank should have "lent directly" to Greece. But it did buy Greek sovereign debt when no one else would, which gave Greece needed liquidity. How could it "lend directly" to Greece in any other way? Simply by transferring cash to Greece without taking any notes in return? Neither Mélenchon's criticism nor his remedy makes any sense. His emotion, however, is perfectly comprehensible. And that is the problem.