Lessons unlearned
17/9/17 17:49![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
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talkpoliticsFailed companies, billions worth of lost investments and savings, millions of personal dramas... For many people, the mechanism that translates little digits jumping on the laptop screens of some costumed gentlemen sitting in their Manhattan offices, into a Greek docker losing their job, remains a complete mystery. But as all-encompassing as it may've been, the crisis never really reached to the core of the system. It didn't change the way the markets function, and neither did it prompt us to cleanse the financial system of the piled systematic problems, or to uproot the errors that have led to them.
There's no single theory about the factors causing global financial crises. But if there's some consensus among economists, it's that record levels of debt are at the basis. Debt is a sort of time machine for money. It helps transfer money from the future that one can use today. If it's done for a short period and with amounts that could be paid back, the risk is tiny and calculable. But if everything you're going to produce for years is spent today (or as is with public debt, if everything someone else is going to produce), the risk becomes uncontrollable.
Obviously, debt before the crisis reached colossal levels; what's more, through various techniques of securitisation, a large part of the risks remained concealed. Unraveling and realising what was happening was an abrupt process that happened between 2007-2008. The skyrocketing interest rates demonstrated that much of the US mortgage market was saturated with bad loans. The markets froze because no one believed the other side of each trade deal was solvent any more.
But if that's really at the core of the crisis, then the world doesn't seem to have dealt with it at this point. Through mass capitalisation and nationalisation, the debt was transformed from private to public. Governments scrambled to save banks, and in turn the banks were compelled to save governments by buying out their bonds. The result of this debt roller-coaster was that the debt loans in the world economy for 2017 have not only failed to decrease to healthier levels - they're now much higher!
Rather than the crisis playing a meaningful role in cleansing the piles of bad loans, the general strategy was to stack them in the freezer with the hope their rotting would be postponed. The idea was that when things normalised and the wheel started turning at full speed again, the problems would gradually and painlessly be pulled out of there, and cleared out one by one. But that can hardly happen at a satisfactory rate. The result is a zombified finance and corporate sector that's primarily sustained through the life-line of low interest rates and printing money. And no one dares to open the door of that fridge, because if a new crisis roars again today, almost all tools for dealing with it may turn out to have been used and spent.
If debt is a catalyst to crisis, then the reasons for its accumulation are complex, and there are multiple culprits. The fiscal conservatives would point to governments and politicians, who in their attempt to guarantee themselves political comfort have systematically generated deficits for decades, thus creating a false impression of prosperity at the expense of the future generations. The progressives would throw the blame on deregulation, which has allowed the financial sector to run wild without any control.
Perhaps the most significant factor is the intersection between the two: the sense of impunity. The "too big to fail" syndrome, the notion that the banks are too interconnected to be allowed to fail. This has implicitly created an obligation for governments to intervene and transfer the risk and/or the expenses onto the tax-payer, whenever a problem occurs. The finance sector in many developed countries has become so huge and bloated that allowing the market to heal it through failures (as some theories suggest) is risking a much bigger disaster than pouring public funds into the problem. For instance, in the UK the debt of the finance sector is twice the size of the country's annual GDP, for Japan that ratio is 120%. In the Eurozone, it varies between 60 and 100%.
This was the rationale for the most problematic measure, moral-wise, namely the multi-billion bail-out operations in 2007 and 2008. Buying off assets with money freshly printed by the central banks, has pumped up their balance by trillions of dollars, euros and yens. The three largest central banks have emitted new currency worth a total of 3.3 trillion dollars more in 2007 compared to the previous year, and now 14 trillion in 20017 compared to last year. Printing money is a controversial measure for many reasons: it practically devalues the currency and provides false stimulae by punishing savings. It's even more problematic when it's done to save financial institutions from their own errors. Buying state bond is in itself a way to produce inflation - at first that's not too obvious because of the deflation pressure from the crisis, and because the printed money mostly goes into bonds, stocks, etc, and they pump up balloons elsewhere. But as soon as the economy starts growing again, this over-liquidity that's been poured in for years, is impossible to quickly withdraw, and it could cause a surge of consumer prices. And let's not forget the risk that everything the central banks buy remains their property, and they could suffer tremendous losses at some point, which could practically deprive them of essential capitals. As a whole, the trick with printing money constantly undermines the trust in the central banks themselves, in their independence and in their capacity to look after the price stability in the first place.
The politicians did try to introduce some rules, which at least on paper were supposed to break this vicious cycle, and remove the interdependence between government and the banking sector. In the US, that was the Dodd-Frank bill; in Europe, a corresponding directive for bank restructuring and recovery. Both introduced a requirement that before taking money from the tax-payers, the share-holders, bonds holders and large depositors should foot the bill with priority. The banks were required to pay a certain insurance and deposit money in special funds for that purpose; new national (and in the EU, supranational) institutions were created to supervise this process, they were given special prerogatives to split up banks, divide them into "good" and "bad" categories, and guide them through controlled liquidation processes when necessary, instead of allowing chaotic failures.
The problem, is as soon as the first such cases occurred, namely the Italian banks, the new rules were instantly bent in ways that no one could recognise them any longer. They were practically rendered useless. Which only confirmed the notion that the link between state and the finance sector that exceeds the size of the GDP manifold, cannot be possibly broken, and there'd always be some level of implied support between the two, and hence a great amount of moral risks.
Because of the universal refusal to forgive debts, and the general tactic of printing money and devaluing currencies, the crisis failed to play the role of a cleansing factor for the imbalances that had been piling up for decades in the global economy. And these are many, and various.
The classic example is the trade balance. Large exporting economies such as China, Germany and the oil producers are accumulating huge trade surpluses compared to the US and EU; the dollar incomes form reserves that in turn form reversed money flows in the form of investment and US bonds. In the first years after the crisis, China was the main engine that everyone relied on, China was supposed to pull the rest of the global economy out of the hole. There was hardly a leader or a global power in that period who didn't agree that their country would pull itself out of trouble thanks to exports, and China with its unstopping growth was at least partly playing the role of the ultimate importer. Although China itself remained a net exporter of cheap goods, cheap labour and respectively, deflation.
That's why right now the concern is that this engine could slow down and halt. Exactly how China has produced that much growth, has always been a mystery. It's a planned economy, after all. Working in 5-year periods. Beyond the suspicions about the quality of the Chinese stats, many analysts notice at least a few suspicious tricks: mostly the deteriorating picture of the loans, and the excessive unproductive investments. A Moodys analysis shows that for each 1 yuan of GDP growth, 4 new yuans have to be printed or loaned - a ratio that's far above that of the Western economies, and getting worse.
But trade is far from being the only domain plagued by huge imbalances. There are many in terms of incomes, productivity, demographics. The internal imbalances in the EU for example lead to increasing problems, be it in terms of the labour force migration, or the salary levels. Some anti-crisis measures themselves lead to new potential imbalances and balloons, too. The freshly printed money that the banks infuse into the economy, generally look for profit, and when the instruments that are normally reliable no longer provide that in the era of zero-to-negative interest rates, the money tends to be re-directed to anything that could bring some profit. The stocks indexes have long surpassed their pre-crisis peaks, but that's likely only the most visible tip of the money iceberg.
The euro was one of EU's grandest projects, and as such it was built with many compromises. There were voices warning about the risks of creating a common currency without having a common budget, and as soon as the first significant turmoil occurred in the 90s, the cracks started appearing.
The most visible example is Greece. Thanks to a combination of euro funds, cheap financing by the markets, and statistical fraud, Greece managed to accumulate a debt 1.2 times their GDP. And when the economy was struck by recession, that ratio quickly started to jump to entirely unsustainable levels which cut its way off from the markets and brought the country to the edge of the precipice. As Germany rejected the scenario of removing Greece from the Eurozone (which would've removed that imbalance), 7 new years of shrinking economy followed, coupled with a series of bail-outs and partial restructuring, and a banking crisis. The result was a debt that is 180% of the GDP, which remains as unservable as ever in the long term, despite all scenarios for saving the Greek finance sector. Still, Greece somehow managed to get a surplus in its initial post-crisis budget, but the long-term cost of the crisis will be an entire generation that will have grown up in the conditions of perpetual youth unemployment (45%), and a mass exodus of labour force.
Although to a lesser extent, similar problems are plaguing the entire southern EU periphery, including much larger economies. Italy, Spain and Portugal have all spent the bulk of the last decade in almost permanent banking crisis under the weight of bad loans. The Cypriot banking sector also crashed spectacularly in 2012-2013. The northern part of the continent had to swallow a number of unthinkable pills one by one, and explain to their own tax-payers that they should be sending part of their income south without conditions.
Not only do all of these fractures remain unsolved to this day, but these discrepancies will soon be institutionalised, if the proposed Two-Speeds Europe scenario is implemented. Now the idea seems kind of muted because of the livelier economy, but as recent experience suggests, without long-term solutions, the problems are only masked under the surface, not removed. Besides, this temporary economic bustle may well be artificial: growth is exclusively drawn from the extremely loosened policies of the European central bank, and that's bound to end at some point. No one knows if that could happen painlessly, and how the markets would react to an inevitable interest rates hike, and a halt to the monthly liquidity injections. In the US, the Fed is already probing the ground for that, but it's still far away from a real shrinking of its balances. The ECB has already surpassed the Fed in terms of assets (now totaling 5 trillion dollars), still no slowing down of monthly bonds purchases being planned for the time being.
As for the regulations on the banks and finance markets, in general it's hard to say they've remained unchanged after the crisis. Both in the US and EU a new large-scale legislation was introduced that should make banks better capitalised, and thus more stable at times of crises. The credit institutions have gone through multiple inspections of the quality of their assets, and stress tests that were meant to check their health condition. In the Eurozone, the largest banks were moved under the supervision of the ECB in an attempt to cut the amicable relations with the local supervisory authorities and politicians. Attempts were made to limit the huge bonuses for CEOs and managers, and to introduce a mechanism of retrieving those bonuses if public bail-out for said banks was necessary. Many accounting rules were changed, as was the level of information disclosure.
All of this is an expensive exercise, which, apart from direct expenses for the banks, is also translated into a more conservative behaviour, and a weaker crediting respectively. Especially in the Eurozone, despite the heavy ECB stimulus. Furthermore, weighing the benefits against the downsides is fairly complicated. The attempt to appease the voter indignation through draconian regulation (on paper) is not necessarily a fruitful approach, in that it could block a lot of financial and human resource in unproductive efforts for answering a complex of requirements just for its own sake.
But what's probably the most significant criticism is whether this is really addressing the weak spots in the sector. For example, everyone is unhappy about the presence of banks that are too big to fail, but in fact the increased regulations are pushing the smaller finance entities out of the market, and producing a further consolidation of capitals. For smaller markets like those in East Europe for instance, a banking sector share under 5% of the market is unlikely to justify investments with enough returns. Another scenario is that smaller banks, apart from entering the open market and risking getting swallowed by the bigger fish, they could pursue more aggressive strategies, hence riskier investments. Another example of such policy is the full and unconditional government guarantee for all private deposits above a certain amount (say, 100K euros). This removes any stimulus from the mass depositor to be careful if their bank is stable or not. From a rational standpoint, they should be looking for the highest possible interest rate, which by any rules and principles of finance means a higher risk.
And lastly, but not least importantly: now that the most secluded corners of the financial sector have become the reason for a large-scale collapse, a lot more transparency, simplicity and disclosure is required. But that didn't happen. So the bank balances haven't become even one bit more comprehensive, just on the contrary. The reports of any multinational bank include lots of subdivisions, combining a traditional investing and consulting activities with practices that are hard to digest even for the most skilled analysts. For example, in 2016, a large part of the fears around Deutsche Bank gravitated around the magical number of 46 trillion. That was the amount of euros that DB had exposed to derivatives, roughly 20 times Germany's entire GDP. The bank assured the public that the actual risk they had taken was by orders of magnitude smaller, and much of the positions taken were likely hedged, and were mutually cancelling each other out. But no one could really understand what any of this meant - all people could do was trust what the bank was saying, and hope that the overseeing regulator was doing their job impartially. A combination of "ifs" that, I believe you'd agree, has already demonstrated its pitfalls.
There's no single theory about the factors causing global financial crises. But if there's some consensus among economists, it's that record levels of debt are at the basis. Debt is a sort of time machine for money. It helps transfer money from the future that one can use today. If it's done for a short period and with amounts that could be paid back, the risk is tiny and calculable. But if everything you're going to produce for years is spent today (or as is with public debt, if everything someone else is going to produce), the risk becomes uncontrollable.
Obviously, debt before the crisis reached colossal levels; what's more, through various techniques of securitisation, a large part of the risks remained concealed. Unraveling and realising what was happening was an abrupt process that happened between 2007-2008. The skyrocketing interest rates demonstrated that much of the US mortgage market was saturated with bad loans. The markets froze because no one believed the other side of each trade deal was solvent any more.
But if that's really at the core of the crisis, then the world doesn't seem to have dealt with it at this point. Through mass capitalisation and nationalisation, the debt was transformed from private to public. Governments scrambled to save banks, and in turn the banks were compelled to save governments by buying out their bonds. The result of this debt roller-coaster was that the debt loans in the world economy for 2017 have not only failed to decrease to healthier levels - they're now much higher!
Rather than the crisis playing a meaningful role in cleansing the piles of bad loans, the general strategy was to stack them in the freezer with the hope their rotting would be postponed. The idea was that when things normalised and the wheel started turning at full speed again, the problems would gradually and painlessly be pulled out of there, and cleared out one by one. But that can hardly happen at a satisfactory rate. The result is a zombified finance and corporate sector that's primarily sustained through the life-line of low interest rates and printing money. And no one dares to open the door of that fridge, because if a new crisis roars again today, almost all tools for dealing with it may turn out to have been used and spent.
If debt is a catalyst to crisis, then the reasons for its accumulation are complex, and there are multiple culprits. The fiscal conservatives would point to governments and politicians, who in their attempt to guarantee themselves political comfort have systematically generated deficits for decades, thus creating a false impression of prosperity at the expense of the future generations. The progressives would throw the blame on deregulation, which has allowed the financial sector to run wild without any control.
Perhaps the most significant factor is the intersection between the two: the sense of impunity. The "too big to fail" syndrome, the notion that the banks are too interconnected to be allowed to fail. This has implicitly created an obligation for governments to intervene and transfer the risk and/or the expenses onto the tax-payer, whenever a problem occurs. The finance sector in many developed countries has become so huge and bloated that allowing the market to heal it through failures (as some theories suggest) is risking a much bigger disaster than pouring public funds into the problem. For instance, in the UK the debt of the finance sector is twice the size of the country's annual GDP, for Japan that ratio is 120%. In the Eurozone, it varies between 60 and 100%.
This was the rationale for the most problematic measure, moral-wise, namely the multi-billion bail-out operations in 2007 and 2008. Buying off assets with money freshly printed by the central banks, has pumped up their balance by trillions of dollars, euros and yens. The three largest central banks have emitted new currency worth a total of 3.3 trillion dollars more in 2007 compared to the previous year, and now 14 trillion in 20017 compared to last year. Printing money is a controversial measure for many reasons: it practically devalues the currency and provides false stimulae by punishing savings. It's even more problematic when it's done to save financial institutions from their own errors. Buying state bond is in itself a way to produce inflation - at first that's not too obvious because of the deflation pressure from the crisis, and because the printed money mostly goes into bonds, stocks, etc, and they pump up balloons elsewhere. But as soon as the economy starts growing again, this over-liquidity that's been poured in for years, is impossible to quickly withdraw, and it could cause a surge of consumer prices. And let's not forget the risk that everything the central banks buy remains their property, and they could suffer tremendous losses at some point, which could practically deprive them of essential capitals. As a whole, the trick with printing money constantly undermines the trust in the central banks themselves, in their independence and in their capacity to look after the price stability in the first place.
The politicians did try to introduce some rules, which at least on paper were supposed to break this vicious cycle, and remove the interdependence between government and the banking sector. In the US, that was the Dodd-Frank bill; in Europe, a corresponding directive for bank restructuring and recovery. Both introduced a requirement that before taking money from the tax-payers, the share-holders, bonds holders and large depositors should foot the bill with priority. The banks were required to pay a certain insurance and deposit money in special funds for that purpose; new national (and in the EU, supranational) institutions were created to supervise this process, they were given special prerogatives to split up banks, divide them into "good" and "bad" categories, and guide them through controlled liquidation processes when necessary, instead of allowing chaotic failures.
The problem, is as soon as the first such cases occurred, namely the Italian banks, the new rules were instantly bent in ways that no one could recognise them any longer. They were practically rendered useless. Which only confirmed the notion that the link between state and the finance sector that exceeds the size of the GDP manifold, cannot be possibly broken, and there'd always be some level of implied support between the two, and hence a great amount of moral risks.
Because of the universal refusal to forgive debts, and the general tactic of printing money and devaluing currencies, the crisis failed to play the role of a cleansing factor for the imbalances that had been piling up for decades in the global economy. And these are many, and various.
The classic example is the trade balance. Large exporting economies such as China, Germany and the oil producers are accumulating huge trade surpluses compared to the US and EU; the dollar incomes form reserves that in turn form reversed money flows in the form of investment and US bonds. In the first years after the crisis, China was the main engine that everyone relied on, China was supposed to pull the rest of the global economy out of the hole. There was hardly a leader or a global power in that period who didn't agree that their country would pull itself out of trouble thanks to exports, and China with its unstopping growth was at least partly playing the role of the ultimate importer. Although China itself remained a net exporter of cheap goods, cheap labour and respectively, deflation.
That's why right now the concern is that this engine could slow down and halt. Exactly how China has produced that much growth, has always been a mystery. It's a planned economy, after all. Working in 5-year periods. Beyond the suspicions about the quality of the Chinese stats, many analysts notice at least a few suspicious tricks: mostly the deteriorating picture of the loans, and the excessive unproductive investments. A Moodys analysis shows that for each 1 yuan of GDP growth, 4 new yuans have to be printed or loaned - a ratio that's far above that of the Western economies, and getting worse.
But trade is far from being the only domain plagued by huge imbalances. There are many in terms of incomes, productivity, demographics. The internal imbalances in the EU for example lead to increasing problems, be it in terms of the labour force migration, or the salary levels. Some anti-crisis measures themselves lead to new potential imbalances and balloons, too. The freshly printed money that the banks infuse into the economy, generally look for profit, and when the instruments that are normally reliable no longer provide that in the era of zero-to-negative interest rates, the money tends to be re-directed to anything that could bring some profit. The stocks indexes have long surpassed their pre-crisis peaks, but that's likely only the most visible tip of the money iceberg.
The euro was one of EU's grandest projects, and as such it was built with many compromises. There were voices warning about the risks of creating a common currency without having a common budget, and as soon as the first significant turmoil occurred in the 90s, the cracks started appearing.
The most visible example is Greece. Thanks to a combination of euro funds, cheap financing by the markets, and statistical fraud, Greece managed to accumulate a debt 1.2 times their GDP. And when the economy was struck by recession, that ratio quickly started to jump to entirely unsustainable levels which cut its way off from the markets and brought the country to the edge of the precipice. As Germany rejected the scenario of removing Greece from the Eurozone (which would've removed that imbalance), 7 new years of shrinking economy followed, coupled with a series of bail-outs and partial restructuring, and a banking crisis. The result was a debt that is 180% of the GDP, which remains as unservable as ever in the long term, despite all scenarios for saving the Greek finance sector. Still, Greece somehow managed to get a surplus in its initial post-crisis budget, but the long-term cost of the crisis will be an entire generation that will have grown up in the conditions of perpetual youth unemployment (45%), and a mass exodus of labour force.
Although to a lesser extent, similar problems are plaguing the entire southern EU periphery, including much larger economies. Italy, Spain and Portugal have all spent the bulk of the last decade in almost permanent banking crisis under the weight of bad loans. The Cypriot banking sector also crashed spectacularly in 2012-2013. The northern part of the continent had to swallow a number of unthinkable pills one by one, and explain to their own tax-payers that they should be sending part of their income south without conditions.
Not only do all of these fractures remain unsolved to this day, but these discrepancies will soon be institutionalised, if the proposed Two-Speeds Europe scenario is implemented. Now the idea seems kind of muted because of the livelier economy, but as recent experience suggests, without long-term solutions, the problems are only masked under the surface, not removed. Besides, this temporary economic bustle may well be artificial: growth is exclusively drawn from the extremely loosened policies of the European central bank, and that's bound to end at some point. No one knows if that could happen painlessly, and how the markets would react to an inevitable interest rates hike, and a halt to the monthly liquidity injections. In the US, the Fed is already probing the ground for that, but it's still far away from a real shrinking of its balances. The ECB has already surpassed the Fed in terms of assets (now totaling 5 trillion dollars), still no slowing down of monthly bonds purchases being planned for the time being.
As for the regulations on the banks and finance markets, in general it's hard to say they've remained unchanged after the crisis. Both in the US and EU a new large-scale legislation was introduced that should make banks better capitalised, and thus more stable at times of crises. The credit institutions have gone through multiple inspections of the quality of their assets, and stress tests that were meant to check their health condition. In the Eurozone, the largest banks were moved under the supervision of the ECB in an attempt to cut the amicable relations with the local supervisory authorities and politicians. Attempts were made to limit the huge bonuses for CEOs and managers, and to introduce a mechanism of retrieving those bonuses if public bail-out for said banks was necessary. Many accounting rules were changed, as was the level of information disclosure.
All of this is an expensive exercise, which, apart from direct expenses for the banks, is also translated into a more conservative behaviour, and a weaker crediting respectively. Especially in the Eurozone, despite the heavy ECB stimulus. Furthermore, weighing the benefits against the downsides is fairly complicated. The attempt to appease the voter indignation through draconian regulation (on paper) is not necessarily a fruitful approach, in that it could block a lot of financial and human resource in unproductive efforts for answering a complex of requirements just for its own sake.
But what's probably the most significant criticism is whether this is really addressing the weak spots in the sector. For example, everyone is unhappy about the presence of banks that are too big to fail, but in fact the increased regulations are pushing the smaller finance entities out of the market, and producing a further consolidation of capitals. For smaller markets like those in East Europe for instance, a banking sector share under 5% of the market is unlikely to justify investments with enough returns. Another scenario is that smaller banks, apart from entering the open market and risking getting swallowed by the bigger fish, they could pursue more aggressive strategies, hence riskier investments. Another example of such policy is the full and unconditional government guarantee for all private deposits above a certain amount (say, 100K euros). This removes any stimulus from the mass depositor to be careful if their bank is stable or not. From a rational standpoint, they should be looking for the highest possible interest rate, which by any rules and principles of finance means a higher risk.
And lastly, but not least importantly: now that the most secluded corners of the financial sector have become the reason for a large-scale collapse, a lot more transparency, simplicity and disclosure is required. But that didn't happen. So the bank balances haven't become even one bit more comprehensive, just on the contrary. The reports of any multinational bank include lots of subdivisions, combining a traditional investing and consulting activities with practices that are hard to digest even for the most skilled analysts. For example, in 2016, a large part of the fears around Deutsche Bank gravitated around the magical number of 46 trillion. That was the amount of euros that DB had exposed to derivatives, roughly 20 times Germany's entire GDP. The bank assured the public that the actual risk they had taken was by orders of magnitude smaller, and much of the positions taken were likely hedged, and were mutually cancelling each other out. But no one could really understand what any of this meant - all people could do was trust what the bank was saying, and hope that the overseeing regulator was doing their job impartially. A combination of "ifs" that, I believe you'd agree, has already demonstrated its pitfalls.
(no subject)
Date: 22/9/17 02:37 (UTC)Debt is a sort of time machine for money…. If it's done for a short period and with amounts that could be paid back, the risk is tiny and calculable.
I would add another caveat to the list: the debt should be incurred only on long-term economic improvements, that is, improvements that make daily living more economically efficient.
As I've said in the past, in the case of debt incurred in commercial banks, debt is money. It comes into existence as spendable cash, and is slowly extinguished as the debt is returned to the bank in payments.
When incurred debt does not improve economic efficiency, when it is instead speculative——that is, incurred to bet on whether a commodity/asset will increase in price to create a profitable resale——then yes, it becomes the stinking stuff in the freezer when the power to that cold box is cut off. Fisher and later Minsky dive into this paradigm of debt.
If debt is a catalyst to crisis, then the reasons for its accumulation are complex…
…or not. The structure of the accumulation is complex, yes; but the cause? Pretty simple, really. Over the years, banks have tried to establish themselves as a branch of society that is more scientific than it really is. If you are scientific, then your pronouncements and actions are just the workings of technocrats who work for the betterment of humanity, and——importantly!——cannot be questioned by mere bureaucracies… or democracies.
Hence moves like the Swedish Central Bank's endowment of what is erroneously called the Nobel Prize in Economics in 1968. Alfred Nobel himself recognized that economics is properly called "political economy," simply because politics makes it work, not laws discovered in the natural world. Economics is not a science and never will be.
But having it perceived as a science means bankers can make substantial profits… and not be challenged when they do so. It allows the bankers to force on debtors an irrational requirement, as you note: …the universal refusal to forgive debts.
Creating the Euro was the biggest coup ever pulled over Europe's nations. Why? No nation that has ceded control over its currency can declare itself sovereign, as the so-called PIIGS have learned to their chagrin. These countries cannot destroy their debts, cannot repay their debts, can do nothing democratically even to alleviate their debts.
And if they did, what would happen? Complete collapse, notes Mark Blyth in his book, Austerity: The History of a Dangerous Idea (Oxford University Press, 2013).
If Greece or Italy or any other debtor nation were able to declare their debts null and void, the banks holding that debt would collapse beyond the scale of the US banking crisis. Well beyond that scale.
Bankers have adopted a policy of privatizing fortune accumulation, but socializing the risks. That and very little else is at the heart of our current debt crisis.