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Thursday, January 30, 2014

Paul Krugman, "Talking Troubled Turkey": Ignoring Contagion From Avian Flu

Did you listen to Obama's State of the Union address? Did you hear any mention by the president of his pre-election promise to recognize the Armenian Genocide by Turkey? No way! You see, autocratic Turkish Prime Minister Erdogan has been declared by Obama to be one of his best overseas friends (see: http://english.alarabiya.net/en/views/news/world/2013/05/16/Erdogan-and-Obama-Best-friends-no-more.html).

The radical Islamization of Turkey and the end of that country's civil liberties? Why should Obama care (no pun intended)?

Of course there was the rioting in Turkey in 2013 (see: http://jgcaesarea.blogspot.co.il/2013/06/thomas-friedman-postcard-from-turkey.html), and the question looms whether the military in Turkey will take heart from events in Egypt and also act to overthrow an increasingly authoritarian regime in Ankara, as was done on more than one occasion in the past (see: http://www.reuters.com/article/2013/06/12/us-turkey-protests-military-analysis-idUSBRE95B0XK20130612).

However, Erdogan is aware of this threat, and one-in-five Turkish generals (see: http://www.commentarymagazine.com/2012/05/14/one-in-five-turkish-generals-now-in-prison/) and more than half of the country's admirals (see: http://www.economist.com/news/europe/21571147-once-all-powerful-turkish-armed-forces-are-cowed-if-not-quite-impotent-erdogan-and-his) are now sitting in prison.

Could a recent bribe probe, involving the laundering of payments for Iranian oil and construction bribes (see: http://www.bbc.co.uk/news/world-europe-25514579), also engender another Turkish financial crisis as I suggested in December (http://jgcaesarea.blogspot.co.il/2013/12/huge-corruption-scandal-hits-turkey.html)?

The next Turkish financial crisis appears to be on its way, but Paul Krugman isn't troubled by it.

In his latest New York Times op-ed entitled "Talking Troubled Turkey" (http://www.nytimes.com/2014/01/31/opinion/krugman-talking-troubled-turkey.html?partner=rssnyt&emc=rss), Krugman dismisses fear of "contagion" from another Turkish economic downturn. Krugman writes:

"The larger point is that Turkey isn’t really the problem; neither are South Africa, Russia, Hungary, India, and whoever else is getting hit right now. The real problem is that the world’s wealthy economies — the United States, the euro area, and smaller players, too — have failed to deal with their own underlying weaknesses. Most obviously, faced with a private sector that wants to save too much and invest too little, we have pursued austerity policies that deepen the forces of depression. Worse yet, all indications are that, by allowing unemployment to fester, we’re depressing our long-run as well as short-run growth prospects, which will depress private investment even more."

Paul is again out to lunch.

What Paul doesn't understand is that in order to reap the benefits of commissions from Turkish trade, i.e. letters of credit and guarantees, the world's banks have been forced to pay something akin to a bribe in the form of participation in enormous loan consortiums to Turkish banks. If the Turkish economy tanks, some or even many of these loans might not be paid with resultant losses and shock waves throughout the world's banking system. Will Turkey then step in and rescue its banks? That will all depend on the size of the disaster.

The effect on the world economy as the big banks lick their wounds and reassess their exposure to emerging market debt? In fact, notwithstanding Krugman's attempt to provide reasons why it won't happen, it could prove something of a tsunami, as we have painfully learned from past experience.

But why learn from the past? Krugman would again have us believe that all the world's ills derive from "austerity," which depresses private investment.

Well, let's see what will be the effects of another Turkish financial crisis on the willingness of the big banks to loan funds and the world's appetite for risky private investment if we should experience another bout of "avian flu."

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