Hudson: Euro Serfdom

[Raz]

Re: Hudson: Euro Serfdom

That's a little intense for my tastes. The coinage act spelled out death as a punishment for bilking people out of bullion in Sect. 19. It also mandated that half-cents be coins. Old laws are old. Now-a-days we create six dollars by buying a soda with a credit card at the convenience store. I think we're all going down for the long dirtnap if we try to enforce strange old death penalties.

Well, of course you're right. But can't you let a guy have his dreams?

[dcarrigg]

Re: Hudson: Euro Serfdom

Well, of course you're right. But can't you let a guy have his dreams?

The picture reminded me of this from last month:

It was not even covered. But it happened.

[llanlad2]

Re: Hudson: Euro Serfdom

I second that.

It takes a criminal government to flay the hide off its citizens in order to bail-out a bunch of bankers.

I third it. The problem we have though is that criminal governments don't lie down easily. Historically only fear makes them change their ways. Especially fear of the lower classes and the "mob" (not gangsters). Unfortunately they've succeeded in creating (deliberately or otherwise) a pacified, benefit collecting, watch telly, do nothing bunch of slobs who have never had a job, never mind rebelled against anything. Meanwhile the squeezed middle point the blame at the pacified slobs for all their woes. It's genius.

[Chris Coles]

Re: Hudson: Euro Serfdom

I third it. The problem we have though is that criminal governments don't lie down easily. Historically only fear makes them change their ways. Especially fear of the lower classes and the "mob" (not gangsters). Unfortunately they've succeeded in creating (deliberately or otherwise) a pacified, benefit collecting, watch telly, do nothing bunch of slobs who have never had a job, never mind rebelled against anything. Meanwhile the squeezed middle point the blame at the pacified slobs for all their woes. It's genius.

Now that I certainly can agree with.

[Dave Stratman]

Re: Hudson: Euro Serfdom

I third it. The problem we have though is that criminal governments don't lie down easily. Historically only fear makes them change their ways. Especially fear of the lower classes and the "mob" (not gangsters). Unfortunately they've succeeded in creating (deliberately or otherwise) a pacified, benefit collecting, watch telly, do nothing bunch of slobs who have never had a job, never mind rebelled against anything. Meanwhile the squeezed middle point the blame at the pacified slobs for all their woes. It's genius.

Who exactly are you referring to when you mention "a pacified, benefit collecting, watch telly, do nothing bunch of slobs who have never had a job, never mind rebelled against anything?"
----By pacified, do you mean they're not on strike or marching in the streets? Perhaps the problem here is that unionized workers have had thirty years experience in having their strikes betrayed by union leaders and brutally defeated (remember PATCO?), with strikers replaced by scabs. (2009 witnessed the fewest man hours lost to strikes since 1947, when record-keeping began.)
----By benefit collecting, do you mean unemployment benefits, for which workers and employers are taxed? Have you ever been unemployed? Did you give your benefits back to the state or refuse to collect them? I thought not. Or do you mean aid for families of dependent children (welfare)? Are we talking urban-myth welfare Cadillacs here, or single mothers just barely holding their families together? Or are you referring to the 42 million Americans who now rely on food stamps? What would you prefer that they do--starve?
----So the people who are not rebelling are slobs. Do you mean they are overweight? Not well-kempt?
----Why exactly do you think that they have never had a job? Do you know that most homeless people in the US--those who are not children, that is--are employed in full-time jobs, jobs that don't pay enough to cover rent and food and heat and transportation?
----When is the last time you rebelled against something? Spent a lot of time on strike and in the street, have you? I rather doubt it. I think that if you had, you would have a little more knowledge and sympathy for people and not be so eager to fall into the political trap you are warning against, "the middle pointed at the pacified slobs for all their woes."

[Chris Coles]

Re: Hudson: Euro Serfdom

Who exactly are you referring to when you mention "a pacified, benefit collecting, watch telly, do nothing bunch of slobs who have never had a job, never mind rebelled against anything?"
----By pacified, do you mean they're not on strike or marching in the streets? Perhaps the problem here is that unionized workers have had thirty years experience in having their strikes betrayed by union leaders and brutally defeated (remember PATCO?), with strikers replaced by scabs. (2009 witnessed the fewest man hours lost to strikes since 1947, when record-keeping began.)
----By benefit collecting, do you mean unemployment benefits, for which workers and employers are taxed? Have you ever been unemployed? Did you give your benefits back to the state or refuse to collect them? I thought not. Or do you mean aid for families of dependent children (welfare)? Are we talking urban-myth welfare Cadillacs here, or single mothers just barely holding their families together? Or are you referring to the 42 million Americans who now rely on food stamps? What would you prefer that they do--starve?
----So the people who are not rebelling are slobs. Do you mean they are overweight? Not well-kempt?
----Why exactly do you think that they have never had a job? Do you know that most homeless people in the US--those who are not children, that is--are employed in full-time jobs, jobs that don't pay enough to cover rent and food and heat and transportation?
----When is the last time you rebelled against something? Spent a lot of time on strike and in the street, have you? I rather doubt it. I think that if you had, you would have a little more knowledge and sympathy for people and not be so eager to fall into the political trap you are warning against, "the middle pointed at the pacified slobs for all their woes."

In one sense, your criticism is well placed and the point is taken, well, I must add. But there is the other side of all this; that in fact, the welfare costs are a huge proportion of the total expenditure of government.

What many do not realise is that the executive governments of both the US and the UK have made the provision of welfare a VERY successful industry, in turn creating massive opportunity for those that drive it. Indeed, it might well make the subject of a book that will describe welfare as perhaps the largest and most successful business in those two nations.

While the rhetoric was perhaps not perfectly correct; the underlying reasoning has to be recognised.

[Dave Stratman]

Re: Hudson: Euro Serfdom

Europe's New Road to Serfdom

By MICHAEL HUDSON

Soon after the Socialist Party won Greece’s national elections in autumn 2009, it became apparent that the government’s finances were in a shambles. In May 2010, French President Nicolas Sarkozy took the lead in rounding up €120bn ($180 billion) from European governments to subsidize Greece’s unprogressive tax system that had led its government into debt – which Wall Street banks had helped conceal with Enron-style accounting.

The tax system operated as a siphon collecting revenue to pay the German and French banks that were buying government bonds (at rising interest-risk premiums). The bankers are now moving to make this role formal, an official condition for rolling over Greek bonds as they come due, and extend maturities on the short-term financial string that Greece is now operating under. Existing bondholders are to reap a windfall if this plan succeeds. Moody’s lowered Greece’s credit rating to junk status on June 1 (to Caa1, down from B1, which was already pretty low), estimating a 50/50 likelihood of default. The downgrade serves to tighten the screws yet further on the Greek government. Regardless of what European officials do, Moody’s noted, “The increased likelihood that Greece’s supporters (the IMF, ECB and the EU Commission, together known as the “Troika”) will, at some point in the future, require the participation of private creditors in a debt restructuring as a precondition for funding support.”

The conditionality for the new “reformed” loan package is that Greece must initiate a class war by raising its taxes, lowering its social spending – and even private-sector pensions – and sell off public land, tourist sites, islands, ports, water and sewer facilities. This will raise the cost of living and doing business, eroding the nation’s already limited export competitiveness. The bankers sanctimoniously depict this as a “rescue” of Greek finances.

What really were rescued a year ago, in May 2010, were the French banks that held €31 billion of Greek bonds, German banks with €23 billion, and other foreign investors. The problem was how to get the Greeks to go along. Newly elected Prime Minister George Papandreou’s Socialists seemed able to deliver their constituency along similar lines to what neoliberal Social Democrat and Labor parties throughout Europe had followed –privatizing basic infrastructure and pledging future revenue to pay the bankers.

The opportunity never had been better for pulling the financial string to grab property and tighten the fiscal screws. Bankers for their part were eager to make loans to finance buyouts of public gambling, telephones, ports and transport or similar monopoly opportunities. And for Greece’s own wealthier classes, the EU loan package would enable the country to remain within the Eurozone long enough to permit them to move their money out of the country before the point arrived at which Greece would be forced to replace the euro with the drachma and devalue it. Until such a switch to a sinking currency occurred, Greece was to follow Baltic and Irish policy of “internal devaluation,” that is, wage deflation and government spending cutbacks (except for payments to the financial sector) to lower employment and hence wage levels.

What actually is devalued in austerity programs or currency depreciation is the price of labor. That is the main domestic cost, inasmuch as there is a common world price for fuels and minerals, consumer goods, food and even credit. If wages cannot be reduced by “internal devaluation” (unemployment starting with the public sector, leading to falling wages), currency depreciation will do the trick in the end. This is how the Europe’s war of creditors against debtor countries turns into a class war.
But to impose such neoliberal reform, foreign pressure is necessary to bypass domestic, democratically elected Parliaments. Not every country’s voters can be expected to be as passive in acting against their own interests as those of Latvia and Ireland.

Most of the Greek population recognizes just what has been happening as this scenario has unfolded over the past year. “Papandreou himself has admitted we had no say in the economic measures thrust upon us,” said Manolis Glezos on the left. “They were decided by the EU and IMF. We are now under foreign supervision and that raises questions about our economic, military and political independence.” On the right wing of the political spectrum, conservative leader Antonis Samaras said on May 27 as negotiations with the European troika escalated: “We don’t agree with a policy that kills the economy and destroys society. … There is only one way out for Greece, the renegotiation of the [EU/IMF] bailout deal.”

But the EU creditors upped the ante: To refuse the deal, they threatened, would result in a withdrawal of funds causing a bank collapse and economic anarchy.

The Greeks refused to surrender quietly. Strikes spread from the public-sector unions to become a nationwide “I won’t pay” movement as Greeks refused to pay road tolls or other public access charges. Police and other collectors did not try to enforce collections. The emerging populist consensus prompted Luxembourg’s Prime Minister Jean-Claude Juncker to make a similar threat to that which Britain’s Gordon Brown had made to Iceland: If Greece would not knuckle under to European finance ministers, they would block IMF release of its scheduled June tranche of its loan package. This would block the government from paying foreign bankers and the vulture funds that have been buying up Greek debt at a deepening discount.

To many Greeks, this is a threat by finance ministers to shoot themselves in the foot. If there is no money to pay, foreign bondholders will suffer – as long as Greece puts its own economy first. But that is a big “if.” Socialist Prime Minister Papandreou emulated Iceland’s Social Democratic Sigurdardottir in urging a “consensus” to obey EU finance ministers. “Opposition parties reject his latest austerity package on the grounds that the belt-tightening agreed in return for a €110bn ($155bn) bail-out is choking the life out of the economy.”

At issue is whether Greece, Ireland, Spain, Portugal and the rest of Europe will roll back democratic reform and move toward financial oligarchy. The financial objective is to bypass parliament by demanding a “consensus” to put foreign creditors first, above the economy at large. Parliaments are being asked to relinquish their policy-making power. The very definition of a “free market” has now become centralized planning – in the hands of central bankers. This is the new road to serfdom that financialized “free markets” are leading to: markets free for privatizers to charge monopoly prices for basic services “free” of price regulation and anti-trust regulation, “free” of limits on credit to protect debtors, and above all free of interference from elected parliaments. Prising natural monopolies in transportation, communications, lotteries and the land itself away from the public domain is called the alternative to serfdom, not the road to debt peonage and a financialized neofeudalism that looms as the new future reality. Such is the upside-down economic philosophy of our age.

Concentration of financial power in non-democratic hands is inherent in the way that Europe’s centralized planning in financial hands was achieved in the first place. The European Central Bank has no elected government behind it that can levy taxes. The EU constitution prevents the ECB from bailing out governments. Indeed, the IMF Articles of Agreement also block it from giving domestic fiscal support for budget deficits. “A member state may obtain IMF credits only on the condition that it has ‘a need to make the purchase because of its balance of payments or its reserve position or developments in its reserves.’ Greece, Ireland, and Portugal are certainly not short of foreign exchange reserves … The IMF is lending because of budgetary problems, and that is not what it is supposed to do. The Deutsche Bundesbank made this point very clear in its monthly report of March 2010: ‘Any financial contribution by the IMF to solve problems that do not imply a need for foreign currency – such as the direct financing of budget deficits – would be incompatible with its monetary mandate.’ IMF head Dominique Strauss-Kahn and chief economist Olivier Blanchard are leading the IMF into forbidden territory, and there is no court which can stop them.” (Roland Vaubel, “Europe’s Bailout Politics,” The International Economy, Spring 2011, p. 40.)

The moral is that when it comes to bailing out bankers, rules are ignored – in order to serve the “higher justice” of saving banks and their high-finance counterparties from taking a loss. This is quite a contrast compared to IMF policy toward labor and “taxpayers.” The class war is back in business – with a vengeance, and bankers are the winners this time around.

The European Economic Community that preceded the European Union was created by a generation of leaders whose prime objective was to end the internecine warfare that tore Europe apart for a thousand years. The aim by many was to end the phenomenon of nation states themselves – on the premise that it is nations that go to war. The general expectation was that economic democracy would oppose the royalist and aristocratic mind-sets that sought glory in conquest. Domestically, economic reform was to purify European economies from the legacy of past feudal conquests of the land, of the public commons in general. The aim was to benefit the population at large. That was the reform program of classical political economy.

European integration started with trade as the path of least resistance – the Coal and Steel Community promoted by Robert Schuman in 1952, followed by the European Economic Community (EEC, the Common Market) in 1957. Customs union integration and the Common Agricultural Policy (CAP) were topped by financial integration. But without a real continental Parliament to write laws, set tax rates, protect labor’s working conditions and consumers, and control offshore banking centers, centralized planning passes by default into the hands of bankers and financial institutions. This is the effect of replacing nation states with planning by bankers. It is how democratic politics gets replaced with financial oligarchy.

Finance is a form of warfare. Like military conquest, its aim is to gain control of land, public infrastructure, and to impose tribute. This involves dictating laws to its subjects, and concentrating social as well as economic planning in centralized hands. This is what now is being done by financial means, without the cost to the aggressor of fielding an army. But the economies under attacked may be devastated as deeply by financial stringency as by military attack when it comes to demographic shrinkage, shortened life spans, emigration and capital flight.

This attack is being mounted not by nation states as such, but by a cosmopolitan financial class. Finance always has been cosmopolitan more than nationalistic – and always has sought to impose its priorities and lawmaking power over those of parliamentary democracies.

Like any monopoly or vested interest, the financial strategy seeks to block government power to regulate or tax it. From the financial vantage point, the ideal function of government is to enhance and protect finance capital and “the miracle of compound interest” that keeps fortunes multiplying exponentially, faster than the economy can grow, until they eat into the economic substance and do to the economy what predatory creditors and rentiers did to the Roman Empire.

This financial dynamic is what threatens to break up Europe today. But the financial class has gained sufficient power to turn the ideological tables and insist that what threatens European unity is national populations acting to resist the cosmopolitan claims of finance capital to impose austerity on labor. Debts that already have become unpayable are to be taken onto the public balance sheet – without a military struggle, needless to say. At least such bloodshed is now in the past. From the vantage point of the Irish and Greek populations (perhaps soon to be joined by those of Portugal and Spain), national parliamentary governments are to be mobilized to impose the terms of national surrender to financial planners. One almost can say that the ideal is to reduce parliaments to local puppet regimes serving the cosmopolitan financial class by using debt leverage to carve up what is left of the public domain that used to be called “the commons.” As such, we now are entering a post-medieval world of enclosures – an Enclosure Movement driven by financial law that overrides public and common law, against the common good.

Within Europe, financial power is concentrated in Germany, France and the Netherlands. It is their banks that held most of the bonds of the Greek government now being called on to impose austerity, and of the Irish banks that already have been bailed out by Irish taxpayers.

On Thursday, June 2, 2011, ECB President Jean-Claude Trichet spelled out the blueprint for how to establish financial oligarchy over all Europe. Appropriately, he announced his plan upon receiving the Charlemagne prize at Aachen, Germany – symbolically expressing how Europe was to be unified not on the grounds of economic peace as dreamed of by the architects of the Common Market in the 1950s, but on diametrically opposite oligarchic grounds.

At the outset of his speech on “Building Europe, building institutions,” Trichet appropriately credited the European Council led by Mr. Van Rompuy for giving direction and momentum from the highest level, and the Eurogroup of finance ministers led by Mr. Juncker. Together, they formed what the popular press calls Europe’s creditor “troika.” Mr. Trichet’s speech refers to “the ‘trialogue’ between the Parliament, the Commission and the Council.”

Europe’s task, he explained, was to follow Erasmus in bringing Europe beyond its traditional “strict concept of nationhood.” The debt problem called for new “monetary policy measures – we call them ‘non standard’ decisions, strictly separated from the ‘standard’ decisions, and aimed at restoring a better transmission of our monetary policy in these abnormal market conditions.” The problem at hand is to make these conditions a new normalcy – that of paying debts, and re-defining solvency to reflect a nation’s ability to pay by selling off its public domain.

“Countries that have not lived up to the letter or the spirit of the rules have experienced difficulties,” Trichet noted. “Via contagion, these difficulties have affected other countries in EMU. Strengthening the rules to prevent unsound policies is therefore an urgent priority.” His use of the term “contagion” depicted democratic government and protection of debtors as a disease. Reminiscent of the Greek colonels’ speech that opened the famous 1969 film “Z”: to combat leftism as if it were an agricultural pest to be exterminated by proper ideological pesticide. Mr. Trichet adopted the colonels’ rhetoric. The task of the Greek Socialists evidently is to do what the colonels and their conservative successors could not do: deliver labor to irreversible economic reforms.

“Arrangements are currently in place, involving financial assistance under strict conditions, fully in line with the IMF policy. I am aware that some observers have concerns about where this leads. The line between regional solidarity and individual responsibility could become blurred if the conditionality is not rigorously complied with. “In my view, it could be appropriate to foresee for the medium term two stages for countries in difficulty. This would naturally demand a change of the Treaty.

“As a first stage, it is justified to provide financial assistance in the context of a strong adjustment program. It is appropriate to give countries an opportunity to put the situation right themselves and to restore stability.

“At the same time, such assistance is in the interests of the euro area as a whole, as it prevents crises spreading in a way that could cause harm to other countries.

It is of paramount importance that adjustment occurs; that countries – governments and opposition – unite behind the effort; and that contributing countries survey with great care the implementation of the programme.

But if a country is still not delivering, I think all would agree that the second stage has to be different. Would it go too far if we envisaged, at this second stage, giving euro area authorities a much deeper and authoritative say in the formation of the country’s economic policies if these go harmfully astray? A direct influence, well over and above the reinforced surveillance that is presently envisaged? … (my emphasis)

The ECB President then gave the key political premise of his reform program (if it is not a travesty to use the term “reform” for today’s counter-Enlightenment):

“We can see before our eyes that membership of the EU, and even more so of EMU, introduces a new understanding in the way sovereignty is exerted. Interdependence means that countries de facto do not have complete internal authority. They can experience crises caused entirely by the unsound economic policies of others.

“With a new concept of a second stage, we would change drastically the present governance based upon the dialectics of surveillance, recommendations and sanctions. In the present concept, all the decisions remain in the hands of the country concerned, even if the recommendations are not applied, and even if this attitude triggers major difficulties for other member countries. In the new concept, it would be not only possible, but in some cases compulsory, in a second stage for the European authorities – namely the Council on the basis of a proposal by the Commission, in liaison with the ECB – to take themselves decisions applicable in the economy concerned.

“One way this could be imagined is for European authorities to have the right to veto some national economic policy decisions. The remit could include in particular major fiscal spending items and elements essential for the country’s competitiveness. …

By “unsound economic policies,” Mr. Trichet means not paying debts – by writing them down to the ability to pay without forfeiting land and monopolies in the public domain, and refusing to replace political and economic democracy with control by bankers. Twisting the knife into the long history of European idealism, he deceptively depicted his proposed financial coup d’état as if it were in the spirit of Jean Monnet, Robert Schuman and other liberals who promoted European integration in hope of creating a more peaceful world – one that would be more prosperous and productive, not one based on financial asset stripping.

“Jean Monnet in his memoirs 35 years ago wrote: ‘Nobody can say today what will be the institutional framework of Europe tomorrow because the future changes, which will be fostered by today’s changes, are unpredictable.’

“In this Union of tomorrow, or of the day after tomorrow, would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the Union? Not necessarily a ministry of finance that administers a large federal budget.

But a ministry of finance that would exert direct responsibilities in at least three domains: first, the surveillance of both fiscal policies and competitiveness policies, as well as the direct responsibilities mentioned earlier as regards countries in a ‘second stage’ inside the euro area; second, all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration of financial services; and third, the representation of the union confederation in international financial institutions.

“Husserl concluded his lecture in a visionary way: ‘Europe’s existential crisis can end in only one of two ways: in its demise (…) lapsing into a hatred of the spirit and into barbarism ; or in its rebirth from the spirit of philosophy, through a heroism of reason (…).’”

As my friend Marshall Auerback remarked in response to this speech, its message is familiar enough as a description of what is happening in the United States: “This is the Republican answer in Michigan. Take over the cities in crisis run by disfavored minorities, remove their democratically elected governments from power, and use extraordinary powers to mandate austerity.” In other words, no room for any agency like that advocated by Elizabeth Warren is to exist in the EU. That is not the kind of idealistic integration toward which Trichet and the ECB aim. He is leading toward what the closing credits of the film “Z” put on the screen: The things banned by the junta include: “peace movements, strikes, labor unions, long hair on men, The Beatles, other modern and popular music (‘la musique populaire’), Sophocles, Leo Tolstoy, Aeschylus, writing that Socrates was homosexual, Eugène Ionesco, Jean-Paul Sartre, Anton Chekhov, Harold Pinter, Edward Albee, Mark Twain, Samuel Beckett, the bar association, sociology, international encyclopedias, free press, and new math. Also banned is the letter Z, which was used as a symbolic reminder that Grigoris Lambrakis and by extension the spirit of resistance lives (zi = ‘he (Lambrakis) lives’).”

As the Wall Street Journal accurately summarized the political thrust of Mr. Trichet’s speech, “if a bailed-out country isn’t delivering on its fiscal-adjustment program, then a ‘second stage’ could be required, which could possibly involve ‘giving euro-area authorities a much deeper and authoritative say in the formation of the county's economic policies …’” Eurozone authorities – specifically, their financial institutions, not democratic institutions aimed at protecting labor and consumers, raising living standards and so forth – “could have ‘the right to veto some national economic-policy decisions’ under such a regime. In particular, a veto could apply for ‘major fiscal spending items and elements essential for the country’s competitiveness.’”

Paraphrasing Mr. Trichet’s lugubrious query, “In this union of tomorrow ... would it be too bold in the economic field ... to envisage a ministry of finance for the union?” the article noted that “Such a ministry wouldn’t necessarily have a large federal budget but would be involved in surveillance and issuing vetoes, and would represent the currency bloc at international financial institutions.”

My own memory is that socialist idealism after World War II was world-weary (60 million dead will do that) in seeing nation states as the instruments for military warfare. This pacifist ideology came to overshadow the original socialist ideology of the late 19th century, which sought to reform governments to take law-making power, taxing power and property itself out of the hands of the classes who had possessed it ever since the Viking invasions of Europe had established feudal privilege, absentee landownership and financial control of trading monopolies and, increasingly, the banking privilege of money creation.

But somehow, as my UMKC colleague, Prof. Bill Black commented recently in the UMKC economics blog: “One of the great paradoxes is that the periphery’s generally left-wing governments adopted so enthusiastically the ECB’s ultra-right wing economic nostrums – austerity is an appropriate response to a great recession. ... Why left-wing parties embrace the advice of the ultra-right wing economists whose anti-regulatory dogmas helped cause the crisis is one of the great mysteries of life. Their policies are self-destructive to the economy and suicidal politically.”

Greece and Ireland have become the litmus test for whether economies will be sacrificed in attempts to pay debts that cannot be paid. An interregnum is threatened during which the road to default and permanent austerity will carve out more and more land and public enterprises from the public domain, divert more and more consumer income to pay debt service and taxes for governments to pay bondholders, and more business income to pay the bankers.

If this is not war, what is?

Michael Hudson is a former Wall Street economist.

http://www.counterpunch.org/hudson06032011.html

Thanks, Don, for another brilliant post.

Reading Hudson reminded me of John Perkins book, Economic Hitman. Perkins describes the strategy through which the U.S., working with the IMF, the World Bank, and private bankers like Goldman Sachs, brought whole countries under their control, stripped them of their assets, and kept them as vassal states. The strategy was to loan countries more money than they could possibly repay, working with bought-off or deceived national elites. When payment came due, the countries had little recourse but to hand over the economy to the IMF and the bankers, subject their working class to brutal austerity measures, and privatize their most valuable assets to enrich the bankers. (In the case of Greece, a key device in overloading the country with loans it could not repay was Goldman Sachs' hiding $15 billion of those loans in derivative instruments.)

This strategy was formerly employed to ensare Third World and Eastern European countries. It seems now that it is the principle strategy of class war by European elites against their own laboring classes. Austerity is intended to dismantle the Social-Democratic welfare state and leave workers less protected against the capitalist onslaught.

In the context of this banker/ruler strategy of deliberately encumbering countries with loans they cannot afford, it is madness to argue, as some on this list have done, that the Greeks are "deadbeats" and deserve their fate. (Someone else on this list once pointed out that Greek workers work more hours per year than those of any other Euopean country or the U.S.) The focus should be on the criminal classes, both the bankers and the national elites who assist in betraying their countries for their own enrichment.

[llanlad2]

Re: Hudson: Euro Serfdom

Thanks, Don, for another brilliant post.

Reading Hudson reminded me of John Perkins book, Economic Hitman. Perkins describes the strategy through which the U.S., working with the IMF, the World Bank, and private bankers like Goldman Sachs, brought whole countries under their control, stripped them of their assets, and kept them as vassal states. The strategy was to loan countries more money than they could possibly repay, working with bought-off or deceived national elites. When payment came due, the countries had little recourse but to hand over the economy to the IMF and the bankers, subject their working class to brutal austerity measures, and privatize their most valuable assets to enrich the bankers. (In the case of Greece, a key device in overloading the country with loans it could not repay was Goldman Sachs' hiding $15 billion of those loans in derivative instruments.)

This strategy was formerly employed to ensare Third World and Eastern European countries. It seems now that it is the principle strategy of class war by European elites against their own laboring classes. Austerity is intended to dismantle the Social-Democratic welfare state and leave workers less protected against the capitalist onslaught.

In the context of this banker/ruler strategy of deliberately encumbering countries with loans they cannot afford, it is madness to argue, as some on this list have done, that the Greeks are "deadbeats" and deserve their fate. (Someone else on this list once pointed out that Greek workers work more hours per year than those of any other Euopean country or the U.S.) The focus should be on the criminal classes, both the bankers and the national elites who assist in betraying their countries for their own enrichment.

Whilst I agree with much of the sentiment of the post (i've read the book too) it's important not to blame capitalism.

.......leave workers less protected against the capitalist onslaught.

. Financialism and capitalism are not the same. It's unfortunate that the two have become synonomous. Socialists blame capitalists when more often than not they should blame financialists.Also financialists have convinced many who believe in capitalism (and possibly even themselves) that financialism IS capitalism. It isn't.

[Chris Coles]

Re: Hudson: Euro Serfdom

Whilst I agree with much of the sentiment of the post (i've read the book too) it's important not to blame capitalism. . Financialism and capitalism are not the same. It's unfortunate that the two have become synonomous. Socialists blame capitalists when more often than not they should blame financialists.Also financialists have convinced many who believe in capitalism (and possibly even themselves) that financialism IS capitalism. It isn't.

This is absolutely correct; although I prefer to use the term feudal mercantile economy. We are watching the creation of a more feudal mercantile, (financialism if you prefer), society than anyone experienced in the European middle ages. We only need to look at the creation of market towns throughout the UK centuries ago to recognise that. Today those same towns are dominated by the banks and related financial interests.

[Dave Stratman]

Re: Hudson: Euro Serfdom

This is absolutely correct; although I prefer to use the term feudal mercantile economy. We are watching the creation of a more feudal mercantile, (financialism if you prefer), society than anyone experienced in the European middle ages. We only need to look at the creation of market towns throughout the UK centuries ago to recognise that. Today those same towns are dominated by the banks and related financial interests.

One can get too particular in trying to characterize economies. Is China capitalist or communist? Is Sweden capitalist? The U.S.? I would characterize all of these, where the foundation of the economy is the exploitation of waged labor, as capitalist. The extent of income support programs or democratic freedoms or sham electoral processes within any of these societies is incidental to their fundamental nature. (I see capitalism and communism as two sides of the same coin.)

Capitalism historically has gone through various stages of development. Lenin called "Imperialism" the "highest stage of capitalism." Apparently he was wrong. It looks as if financialization, or the dominance of finance other all other forms of capital, is the highest and perhaps the last stage.

Captalism is not just an economic system. It is a system of human relations and social control. It is largely the system's responses to class conflict that drive it. For example, the financialization of capital has come about largely in response to the enormous amount of debt created in the 1990s and beyond. Much of that debt was driven by attempts of working and middle class people to maintain their standard of living in the face of declining wages since the early 1970s. The decline in wages was driven by the corporate and government counteroffensive against labor and ordinary people in the wake of the revolution of rising expectations of the 1960s and '70s. Outsourcing jobs overseas was a key corporate strategy in the class war, a strategy which resulted in the hollowing out of American industry. This strategy ironically helped shift the balance of capitalist power from the industrial to the financial sector.

Capital succeeded so well in its counteroffensive against working people--depriving them of jobs and loading them with debt--that power within the capitalist sector migrated to finance capital. But it remains capitalism just the same.

[Starving Steve]

Re: Hudson: Euro Serfdom

SS:
I think you are baffled and lost because your figures are way out-of-line with reality.

You live outside of Vancouver, right? On what planet do you find $100k houses? Did you take the DeLorean back to 1985? Double that and you come closer to 2011's median. There are local markets (not in cities - especially not anywhere within a work-day's drive of salt) that one can still find $100k houses in, but there usually are not many job options in those places.



Add in some change for taxes and upkeep and realize that J6P don't have no 800 FICO score and you're looking at closer to $1,500/mo. At Federal Minimum Wage, $7.25/hr, you're talking $340 more a month than full time gross income. This is why minimum wage workers don't buy anything in the way you're describing. They rent and/or have section 8 vouchers. At least this is the case where I come from.

Besides that, all of this was assuming a vanilla fixed-rate mortgage. Add in the ARMs (only useful for speculation) and all other breed of insanity, and you've got yourself a recipe for trouble. J6P can work, he's not necessarily a deadbeat, but he probably don't get the fine print, especially when a salesman doesn't clearly explain the risk (because there's a fat commission check waiting on the other side for the origination).

It wasn't dead-beats that got us into this mess. Sure, both U.S. parties smiled from ear to ear as more people happily 'bought' their first home and banks happily 'securitized' mortgages. The elite and the rabble were happy - 'till the booze ran out and we got the mess we're in now. Tricky loans can get you booted out of your house in a hurry. A job loss can do the same.

There are people that can't find work but legitimately want to. One million just applied at McDonalds for 62,000 jobs last month. 6.2% success rate. It ain't always just being a dead-beat for the sake of it (although yes, we all know that sometimes it is).

WHAT ARE YOU TALKING ABOUT???????????????????

Five minutes on my computer--- and I am a moron complete with papers---- here is what I found:

SEVEN THOUSAND AND FIVE HUNDRED DOLLARS, median price for a home in DETROIT, MICH. according to THE CHICAGO TRIBUNE newspaper, Mar 1, 2009. Contact: Realcomp listing service to verify and buy.

Hate snow and hate cold, hate rain and gloom? Try PHOENIX, ARIZONA, median sale price for a condo or townhouse, 3rd Quarter, 2010. Price $89,000.

Hate living in the city? How about SUN CITY, ARIZONA? Median sale price for a condo or townhouse = $74,000. Contact About.com/ Phoenix. Those are Qtr 3, 2010 prices, and real estate in America has only dropped in value since then.

I am making up stories? Here: EL PASO, TEXAS, and you can look at the picture for yourself:
MLS# 503131. The house is at 1823 N. Boone Street, El Paso, Texas, Zip code 79903

And you can't find work in a city the size of El Paso or Phoenix??????????????????? Excuse me????????????????????

What you do to-day is pack the wife and kids in your car and move, like NOW!!!!

Oh, I forgot to give you the price of the home in El Paso. How about full listing price: $79,950.

Multiple Listing Service # 503131

I am NOT going to listen to Dr. Hudson or any of his bull sh*t about his so-called, "serfdom" of the poor people.

Oh, who is lending money at 3.47% interest API? Try Quicken Loans. They are advertising on television now to lend at that price for mortgages.

[Dave Stratman]

Re: Hudson: Euro Serfdom

In one sense, your criticism is well placed and the point is taken, well, I must add. But there is the other side of all this; that in fact, the welfare costs are a huge proportion of the total expenditure of government.

What many do not realise is that the executive governments of both the US and the UK have made the provision of welfare a VERY successful industry, in turn creating massive opportunity for those that drive it. Indeed, it might well make the subject of a book that will describe welfare as perhaps the largest and most successful business in those two nations.

While the rhetoric was perhaps not perfectly correct; the underlying reasoning has to be recognised.

I tried but haven't found online a current or near-current accounting of the proportion that "welfare"--by which I assume you means AFDC (Aid to Families of Dependent Children) and food stamps--confiututes of teh state and federal budgets. The closes I could get was from way back in 1992, when the total was less than 1%. Since Clinton's welfare reform act of 1996 drastically cut the numbers of mothers eligible, I assume the welfare portion of the budget is now smaller. What numbers are you working with and what do you include in the term welfare?

[dcarrigg]

Re: Hudson: Euro Serfdom

WHAT ARE YOU TALKING ABOUT???????????????????

Five minutes on my computer--- and I am a moron complete with papers---- here is what I found:

SEVEN THOUSAND AND FIVE HUNDRED DOLLARS, median price for a home in DETROIT, MICH. according to THE CHICAGO TRIBUNE newspaper, Mar 1, 2009. Contact: Realcomp listing service to verify and buy.

Detroit's no job Mecca. There's nearly 30% unemployment. And this was, if it's even correct, a one-month aberration in December cherry-picked for a headline. Here's an article from right around the same time positing a true rate of nearly 50% unemployment. The real median asking price right now is close to your $100k mark, but finding work in Detroit is far from easy. Motown's hard up.

But, assuming your point is valid, why aren't you buying up the glut of $7,500 homes and profiting by selling these great homes to all of the potential deadbeat buyers? Hell, you could rent them for $50/month and keep up with the mortgage. At $100 you doubled your money. And you'd still be cheeper than the rent listings. Here's a nice one for $325/mo. I mean, it must be nice, it says 'beautiful' right in the posting.

Hate snow and hate cold, hate rain and gloom? Try PHOENIX, ARIZONA, median sale price for a condo or townhouse, 3rd Quarter, 2010. Price $89,000.

I'm showing a median asking price of $150k in Phoenix. I could find you something cheaper in Youngstown, OH or Elmira, NY too. Of course there are places with a combination of lack of job opportunities, crime, and cheap real estate. They tend to be far away from the coasts (like I said) and/or have heavy unemployment in depressed urban areas. But this brings me to your next point:

And you can't find work in a city the size of El Paso or Phoenix??????????????????? Excuse me????????????????????

What you do to-day is pack the wife and kids in your car and move, like NOW!!!!

Assuming one has a wife and kids and no obligations to other family in a place that they grow up, they could just move. Unemployment is still a lot higher than it was five years ago and landing a job is not so easy as you think - especially for people with less education / experience, but they could do it. That is, if they're not underwater on a mortgage already and have a down payment and a credit rating good enough etc. etc.

I am NOT going to listen to Dr. Hudson or any of his bull sh*t about his so-called, "serfdom" of the poor people.

That's your prerogative, but he wasn't talking about serfdom of poor people. He was talking about the Eurozone debt crisis. He was talking about the willingness for political leaders and central bankers to wreck their own economies before they ever consider not repaying debt that cannot be repaid. It was a macro-scale discussion, which is unfortunately not what this has devolved into now.

Oh, who is lending money at 3.47% interest API? Try Quicken Loans. They are advertising on television now to lend at that price for mortgages.

Was that for an ARM? What were the credit requirements? I'm showing 4.75% at Quicken Loans. The average fixed 30yr is going for 4.48% right now.

The bottom line is that this wasn't about deadbeats - even though you deigned to call the nations of Portugal, Ireland, Italy, Greece and Spain such a name. The point was about debt to income ratios being unsustainable. I think that that point exists on the individual level as well. Sure, there are those who game the system and are lazy - and Alvaro Spain has pointed this out lately.

But do you really think that they caused the entirety of the global financial mess we're in right now?

[KGW]

Re: Hudson: Euro Serfdom

Further confirmation, if it was needed, that whomever this blithering idiot calling himself SS might be, you couldn't float a paper cup in the puddle of his "wisdom."

[don]

Re: Hudson: Euro Serfdom

Hudson reiterates and expands . . .

A World at Financial War

By MICHAEL HUDSON

When Greece exchanged its drachma for the euro in 2000, most voters were all for joining the Eurozone. Their hope was that it would ensure stability, and that this would promote rising wages and living standards. Few saw that the stumbling point was tax policy. Greece was excluded from the eurozone the previous year as a result of failing to meet the 1992 Maastricht criteria for EU membership, limiting budget deficits to 3 percent of GDP, and government debt to 60 percent.

The euro also had other serious fiscal and monetary problems at the outset. There is little thought of wealthier EU economies helping bring less productive ones up to par, e.g. as the United States does with its depressed areas (as in the rescue of the auto industry in 2010) or when the federal government does declares a state of emergency for floods, tornados or other disruptions. As with the United States and indeed nearly all countries, EU “aid” is largely self-serving – a combination of export promotion and bailouts for debtor economies to pay banks in Europe’s main creditor nations: Germany, France and the Netherlands. The EU charter banned the European Central Bank (ECB) from financing government deficits, and prevents (indeed, “saves”) members from having to pay for the “fiscal irresponsibility” of countries running budget deficits. This “hard” tax policy was the price that lower-income countries had to sign onto when they joined the European Union.

Also unlike the United States (or almost any nation), Europe’s parliament was merely ceremonial. It had no power to set and administer EU-wide taxes. Politically, the continent remains a loose federation. Every member is expected to pay its own way. The central bank does not monetize deficits, and there is minimal federal sharing with member states. Public spending deficits – even for capital investment in infrastructure – must be financed by running into debt, at rising interest rates as countries running deficits become more risky.

This means that spending on transportation, power and other basic infrastructure that was publicly financed in North America and the leading European economies (providing services at subsidized rates) must be privatized. Prices for these services must be set high enough to cover interest and other financing charges, high salaries and bonuses, and be run for profit – indeed, for rent extraction as public regulatory authority is disabled.

This makes countries going this route less competitive. It also means they will run into debt to Germany, France and the Netherlands, causing the financial strains that now are leading to showdowns with democratically elected governments. At issue is whether Europe should succumb to centralized planning – on the right wing of the political spectrum, under the banner of “free markets” defined as economies free from public price regulation and oversight, free from consumer protection, and free from taxes on the rich.

The crisis for Greece – as for Iceland, Ireland and debt-plagued economies capped by the United States – is occurring as bank lobbyists demand that “taxpayers” pay for the bailouts of bad speculations and government debts stemming largely from tax cuts for the rich and for real estate, shifting the fiscal burden as well as the debt burden onto labor and industry. The financial sector’s growing power to achieve this tax favoritism is crippling economies, driving them further into reliance on yet more debt financing to remain solvent. Aid is conditional upon recipient countries reducing their wage levels (“internal devaluation”) and selling off public enterprises.

The tunnel vision that guides these policies is self-reinforcing. Europe, America and Japan draw their economic managers from the ranks of professionals sliding back and forth between the banks and finance ministries – what the Japanese call “descent from heaven” to the private sector where worldly rewards are greatest. It is not merely delayed payment for past service. Their government experience and contacts helps them influence the remaining public bureaucracy and lobby their equally opportunistic replacements to promote pro-financial fiscal and monetary policies – that is, to handcuff government and deter regulation and taxation of the financial sector and its real estate and monopoly clients, and to use the government’s taxing and money-creating power to provide bailouts when the inevitable financial collapse occurs as the economy shrinks below break-even levels into negative equity territory.

Regressive tax policies – shifting taxes off the rich and off property onto labor – cause budget deficits financed by public debt. When bondholders pull the plug, the resulting debt pressure forces governments to pay off debts by selling land and other public assets to private buyers (unless governments repudiate the debt or recover by restoring progressive taxation). Most such sales are done on credit. This benefits the banks by creating a loan market for the buyouts. Meanwhile, interest absorbs the earnings, depriving the government of tax revenue it formerly could have received as user fees. The tax gift to financiers is based on the bad policy of treating debt financing as a necessary cost of doing business, not as a policy choice – one that indeed is induced by the tax distortion of making interest payments tax-deductible.

Buyers borrow credit to appropriate “the commons” in the same way they bid for commercial real estate. The winner is whoever raises the largest buyout loan – by pledging the most revenue to pay the bank as interest. So the financial sector ends up with the revenue hitherto paid to governments as taxes or user fees. This is euphemized as a free market.

Promoting the financial sector at the economy’s expense

The resulting debt leveraging is not a solvable problem. It is a quandary from which economies can escape only by focusing on production and consumption rather than merely subsidizing the financial system to enable players to make money from money by inflating asset prices on free electronic keyboard credit. Austerity causes unemployment, which lowers wages and prevents labor from sharing in the surplus. It enables companies to force their employees to work overtime and harder in order to get or keep a job, but does not really raise productivity and living standards in the way envisioned a century ago. Increasing housing prices on credit – requiring larger debts for access to home ownership – is not real prosperity.

To contrast the “real” economy from the financial sector requires distinctions to be drawn between productive and unproductive credit and investment. One needs the concept of economic rent as an institutional and political return to privilege without a corresponding cost of production. Classical political economy was all about distinguishing earned from unearned income, cost-value from market price. But pro-financial lobbyists deny that any income or rentier wealth is unearned or parasitic. The national income and product accounts (NIPA) do not draw any such distinction. This blind spot is not accidental. It is the essence of post-classical economics. And it explains why Europe is so crippled.

The way in which the euro was created in 1999 reflects this shallow vision. The Maastricht fiscal and financial rules maximize the commercial loan market by preventing central banks from supplying governments (and hence, the economy) with credit to grow. Commercial banks are to be the sole source of financing budget deficits – defined to include infrastructure investment in transportation, communication, power and water. Privatization of these basic services blocks governments from supplying them at subsidized rates or freely. So roads are turned into toll roads, charging access fees that are readily monopolized. Economies are turned into sets of tollbooths, paying out their access charges as interest to creditors. These extractive rents make privatized economies high-cost. But to the financial sector that is “wealth creation.” It is enhanced by untaxing interest payments to banks and bondholders – aggravating fiscal deficits in the process, however.

The Greek budget crisis in perspective

A fiscal legacy of the colonels’ 1967-74 junta was tax evasion by the well to do. The “business-friendly” parties that followed were reluctant to tax the wealthy. A 2010 report stated that nearly a third of Greek income was undeclared, with “fewer than 15,000 Greeks declar[ing] incomes of over €100,000, despite tens of thousands living in opulent wealth on the outskirts of the capital. A new drive by the Socialists to track down swimming pool owners by deploying Google Earth was met with a virulent response as Greeks invested in fake grass, camouflage and asphalt to hide the tax liabilities from the spies in space.” (Helena Smith, “The Greek spirit of resistance turns its guns on the IMF,” The Observer, May 9, 2010.)

As a result of the military dictatorship depressing public spending below the European norm, infrastructure needed to be rebuilt – and this required budget deficits. The only way to avoid running them would have been to make the rich pay the taxes they were supposed to. But squeezing public spending to the level that wealthy Greeks were willing to pay in taxes did not seem politically feasible. (Since the 1980s almost no country has enacted Progressive Era tax policies.) The 3 per cent Maastricht limit on budget deficits refused to count capital spending by government as capital formation, on the ideological assumption that all government spending is deadweight waste and only private investment is productive.

The path of least resistance was to engage in fiscal deception. Wall Street bankers helped the “conservative” (that is, fiscally regressive and financially profligate) parties conceal the extent of the public debt with the kind of junk accounting that financial engineers had pioneered for Enron. And as usual when financial deception in search of fees and profits is concerned, Goldman Sachs was in the middle. In February 2010, the German magazine Der Spiegel exposed how the firm had helped Greece conceal the rise in public debt, by mortgaging assets in a convoluted derivatives deal – legal but with the covert intent of circumventing the Maastricht limitation on deficits. “Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives,” so Greece’s obligation appeared as a cross-currency swap rather than as a debt. The government used off-balance-sheet entities and derivatives similar to what Icelandic and Irish banks later would use to indulge in fictitious debt disappearance and an illusion of financial solvency.

The reality, of course, was a virtual debt. The government was obligated to pay Wall Street billions of euros out of future airport landing fees and the national lottery as “the so-called cross currency swaps … mature, and swell the country’s already bloated deficit.” (Beat Balzli, “How Goldman Sachs Helped Greece to Mask its True Debt,” Der Spiegel, February 8, 2010. The report adds: “One time, gigantic military expenditures were left out, and another time billions in hospital debt.” Translated into straightforward terms, the deal left Greece’s public-sector budget deficit at 12 percent of GDP, four times the Maastricht limit.

Using derivatives to engineer Enron-style accounting enabled Greece to mask a debt as a market swap based on foreign currency options, to be unwound over ten to fifteen years. Goldman was paid some $300 million in fees and commissions for its aid orchestrating the 2001 scheme. “A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans.” JPMorgan Chase and other banks helped orchestrate similar deals across Europe, providing “cash upfront in return for government payments in the future, with those liabilities then left off the books.”

The financial sector has an interest in understating the debt burden – first, by using “mark to model” junk accounting, and second, by pretending that the debt burden can be paid without disrupting economic life. Financial spokesmen from Tim Geithner in the United States to Dominique Strauss-Kahn at the IMF claimed that the post-2008 debt crisis is merely a short-term “liquidity problem” (lack of “confidence”), not insolvency reflecting an underlying inability to pay. Banks promise that everything will be all right when the economy “returns to normal” – if only the government will buy their junk mortgages and bad loans (“sound long-term investments”) for ready cash.

The intellectual deception at work

Financial lobbyists seek to distract voters and policy makers from realizing that “normalcy” cannot be restored without wiping out the debts that have made the economy abnormal. The larger the debt burden grows, the more economy-wide austerity is required to pay debts to banks and bondholders instead of investing in capital formation and real growth.

Austerity makes the problem worse, by intensifying debt deflation. To pretend that austerity helps economies rather than destroys them, bank lobbyists claim that shrinking markets will lower wage rates and “make the economy more competitive” by “squeezing out the fat.” But the actual “fat” is the debt overhead – the interest, amortization, financial fees and penalties built into the cost of doing business, the cost of living and the cost of government.

When difficulty arises in paying debts, the path of least resistance is to provide more credit – to enable debtors to pay. This keeps the system solvent by increasing the debt overhead – seemingly an oxymoron. As financial institutions see the point approaching where debts cannot be paid, they try to get “senior creditors” – the ECB and IMF – to lend governments enough money to pay, and ideally to shift risky debts onto the government (“taxpayers”). This gets them off the books of banks and other large financial institutions that otherwise would have to take losses on Greek government bonds, Irish bank obligations bonds, etc., just as these institutions lost on their holdings of junk mortgages. The banks use the resulting breathing room to try and dump their bond holdings and bad bets on the proverbial “greater fool.”

In the end the debts cannot be paid. For the economy’s high-financial managers the problem is how to postpone defaults for as long as possible – and then to bail out, leaving governments (“taxpayers”) holding the bag, taking over the obligations of insolvent debtors (such as A.I.G. in the United States). But to do this in the face of popular opposition, it is necessary to override democratic politics. So the divestment by erstwhile financial losers requires that economic policy be taken out of the hands of elected government bodies and transferred to those of financial planners. This is how financial oligarchy replaces democracy.

Paying higher interest for higher risk, while protecting banks from losses

The role of the ECB, IMF and other financial oversight agencies has been to make sure that bankers got paid. As the past decade of fiscal laxity and deceptive accounting came to light, bankers and speculators made fortunes jacking up the interest rate that Greece had to pay for its increasing risk of default. To make sure they did not lose, bankers shifted the risk onto the European “troika” empowered to demand payment from Greek taxpayers.

Banks that lent to the public sector (at above-market interest rates reflecting the risk), were to be bailed out at public expense. Demanding that Greece not impose a “haircut” on creditors, the ECB and related EU bureaucracy demanded a better deal for European bondholders than creditors received from the Brady bonds that resolved Latin American and Third World debts in the 1980s. In an interview with the Financial Times, ECB executive board member Lorenzo Bini Smaghi insisted that:

First, the Brady bonds solution was a solution for American banks, which were basically allowed not to ‘mark to market’ the restructured bonds. There was regulatory forbearance, which was possible in the 1980 but would not be possible today.

Second, the Latin American crisis was a foreign debt crisis. The main problem in the Greek crisis is Greece, its banks and its own financial system. Latin America had borrowed in dollars and the lines of credit were mainly with foreigners. Here, a large part of the debt is with Greeks. If Greece defaulted, the Greek banking system would collapse. It would then need a huge recapitalization - but where would the money come from?

Third, after default the Latin American countries still had central banks that could print money to pay for civil servants’ wages, pensions. They did this and created inflation. So they got out [of the crisis] through inflation, depreciation and so forth. In Greece you would not have a central bank that could finance the government, and it would have to partly shut down some of its operations, like the health system.

Bini Smaghi threatened that Europe would destroy the Greek economy if the latter tried to scale back its debts or even stretch out maturities to reflect the ability to pay. Greece’s choice was between or anarchy. Restructuring would not benefit “the Greek people. It would entail a major economic, social and even humanitarian disaster, within Europe. Orderly implies things go smoothly, but if you wipe out the banking system, how can it be smooth?” The ECB’s “position [is] based on principle ... In the euro area debts have to be repaid and countries have to be solvent. That has to be the principle of a market-based economy.” (Ralph Atkins, “Transcript:Lorenzo Bini Smaghi,” Financial Times, May 30, 2011. The interview took place on May 27.)

A creditor-oriented economy is not really a market-based, of course. The banks destroyed the market by their own central financial planning -- using debt leverage to leave Greece with a bare choice: Either it would permit EU officials to come in and carve up its economy, selling its major tourist sites and monopolistic rent-extracting opportunities to foreign creditors in a gigantic national foreclosure movement, or it could bite the bullet and withdraw from the Eurozone. That was the deal Bini Smaghi offered: “if there are sufficient privatizations, and so forth – then the IMF can disburse and the Europeans will do their share. But the key lies in Athens, not elsewhere. The key element for the return of Greece to the market is to stop discussions about restructuring.”

One way or another, Greece would lose, he explained: “default or restructuring would not help solve the problems of the Greek economy, problems that can be solved only by adopting the kind of structural reforms and fiscal adjustment measures included in the program. On the contrary it would push Greece into a major economic and social depression.” This leverage demanding to be paid or destroying the economy’s savings and monetary system is what central bankers call a “rescue,” or “restoring market forces.” Bankers claim that austerity will revive growth. But to accept as a realistic democratic alternative would be self-immolation.

Unless Greece signed onto this nonsense, neither the ECB nor the IMF would extend loans to save its banking system from insolvency. On May 31, 2011, Europe agreed to provide $86 billion in euros if Greece “puts off for the time being a restructuring, hard or soft, of Greece’s huge debt burden.” The pretense was a “hope that in another two years Greece will be in a better position to repay its debts in full.”

Anticipation of the faux rescue led the euro to rebound against foreign currencies, and European stocks to jump by 2 per cent. Yields on Greek 10-year bonds fell to “only” a 15.7 percent distress level, down one percentage point from the previous week’s high of 16.8 percent when a Greek official made the threatening announcement that “Restructuring is off the table. For now it is all about growth, growth, growth.”

How can austerity be about growth? This idea never has worked, but the pretense was on. The EU would provide enough money for the Greek government to save bondholders from having to suffer losses. The financial sector supports heavy taxpayer expense as long as the burden does not fall on itself or its main customers in the real estate sector or the infrastructure monopolies being privatized.

The loan-for-privatization tradeoff was called “aiding Greece” rather than bailing out German, French and other bondholders. But financial investors knew better. “Since the crisis began, 60 billion euros in deposits have been withdrawn from Greek banks, about a quarter of the country’s output.” (Atkins, FT.) These withdrawals, which were gaining momentum, were the precise size of the loan being offered!

Meanwhile, the shift of 60 billion euros off the balance sheets of banks onto the private sector threatened to raise the ratio of public debt to GDP over 150 per cent.

There was talk that another 100 billion euros would be needed to “socialize the losses” that otherwise would be suffered by German, French and other European bankers who had their eyes set on a windfall if heavily discounted Greek bonds were made risk-free by carving up Greece in much the same way that the Versailles Treaty did to Germany after World War I.

The Greek population certainly saw that the world was at financial war. Increasingly large crowds gathered each day to protest in Syntagma Square in front of the Parliament, much as Icelandic crowds had done earlier under similar threats by their Social Democrats to sell out the nation to European creditors. And just as Iceland’s Prime Minister Sigurdardottir held on arrogantly against public opinion, so did Greek Socialist Prime Minister George Papandreou. This prompted EU Fisheries Commissioner Maria Damanaki “to ‘speak openly’ about the dilemma facing her country,” warning:

“The scenario of Greece’s exit from the euro is now on the table, as are ways to do this. Either we agree with our creditors on a program of tough sacrifices and results ... or we return to the drachma. Everything else is of secondary importance.” And former Dutch Finance Minister Willem Vermeend wrote in De Telegraaf that ‘Greece should leave the euro,’ given that it will never be able to pay back its debt.”

As in Iceland, the Greek austerity measures are to be put to a national referendum – with polls reporting that some 85 percent of Greeks reject the bank-bailout-cum-austerity plan. Its government is paying twice as much for credit as the Germans, despite seemingly having no foreign-exchange risk (using the euro). The upshot may be to help drive Greece out of the eurozone, not only by forcing default (the revenue is not there to pay) but by Newton’s Third Law of Political Motion: Every action creates an equal and opposite reaction. The ECB’s attempt to make Greek labor –(“taxpayers”) pay foreign bondholders is leading to pressure for outright repudiation and the domestic “I won’t pay” movement. Greece’s labor movement always has been strong, and the debt crisis is further radicalizing it.

The aim of commercial banks is to replace governments in creating money, making the economy entirely dependent on them, with public borrowing creating an enormous risk-free “market” for interest-bearing loans. It was to overcome this situation that the Bank of England was created in 1694 – to free the country from reliance on Italian and Dutch credit. Likewise the U.S. Federal Reserve, for all its limitations, was founded to enable the government to create its own money. But European banks have hog-tied their governments, replacing Parliamentary democracy with dictatorship by the ECB, which is blocked constitutionally from creating credit for governments – until German and French banks found it in their own interest for it to do so. As Uuniversity of Missouri-Kansas City Professor Bill Black summarizes the situation:

“A nation that gives up its sovereign currency by joining the euro gives up the three most effective means of responding to a recession. It cannot devalue its currency to make its exports more competitive. It cannot undertake an expansive monetary policy. It does not have any monetary policy and the EU periphery nations have no meaningful influence on the ECB’s monetary policies. It cannot mount an appropriately expansive fiscal policy because of the restrictions of the EU’s growth and stability pact. The pact is a double oxymoron – preventing effective counter-cyclical fiscal policies harms growth and stability throughout the Eurozone.”

Financial politics are now dominated by the drive to replace debt defaults by running a fiscal surplus to pay bankers and bondholders. The financial system wants to be paid. But mathematically this is impossible, because the “magic of compound interest” outruns the economy’s ability to pay – unless central banks flood asset markets with new bubble credit, as U.S. policy has done since 2008. When debtors cannot pay, and when the banks in turn cannot pay their depositors and other counterparties, the financial system turns to the government to extract the revenue from “taxpayers” (not the financial sector itself). The policy bails out insolvent banks by plunging domestic economies into debt deflation, making taxpayers bear the cost of banks gone bad.

These financial claims are virtually a demand for tribute. And since 2010 they have been applied to the PIIGS countries. The problem is that revenue used to pay creditors is not available for spending within the economy. So investment and employment shrink, and defaults spread. Something must give, politically as well as economically as society is brought back to the “Copernican problem”: Will the “real” economy of production and consumption revolve around finance, or will financial demands for interest devour the economic surplus and begin to eat into the economy?

Technological determinists believe that technology drives. If this were so, rising productivity would have made everybody in Europe and the United States wealthy by now, rich enough to be out of debt. But there is a Chicago School inquisition insisting that today’s needless suffering is perfectly natural and even necessary to rescue economies by saving their banks and debt overhead – as if all this is the economic core, not wrapped around the core.

Meanwhile, economies are falling deeper into debt, despite rising productivity measures. The seeming riddle has been explained many times, but is so counter-intuitive that it elicits a wall of cognitive dissonance. The natural view is to think that the world shouldn’t be this way, letting credit creation load down economies with debt without financing the means to pay it off. But this imbalance is the key dynamic defining whether economies will grow or shrink.

John Kenneth Galbraith explained that banking and credit creation is so simple a principle that the mind rejects it – because it is something for nothing, the proverbial free lunch stemming from the principle of banks creating deposits by making loans. Just as nature abhors a vacuum, so most people abhor the idea that there is such a thing as a free lunch. But the financial free lunchers have taken over the political system.

They can hold onto their privilege and avert a debt write-down only as long as they can prevent widespread moral objection to the idea that the economy is all about saving creditor claims from being scaled back to the economy’s ability to pay – by claiming that the financial brake is actually the key to growth, not a free transfer payment.

The upcoming Greek referendum poses this question just as did Iceland’s earlier this spring. As Yves Smith recently commented regarding the ECB’s game of chicken as to whether Greece’s government would accept or reject its hard terms:

“This is what debt slavery looks like on a national level. … Greece looks to be on its way to be under the boot of bankers just as formerly free small Southern farmers were turned into “debtcroppers” after the US Civil War. Deflationary policies had left many with mortgage payments that were increasingly difficult to service. Many fell into ‘crop lien’ peonage. Farmers were cash starved and pledged their crops to merchants who then acted in an abusive parental role, being given lists of goods needed to operate the farm and maintain the farmer’s family and doling out as they saw fit. The merchants not only applied interest to the loans, but further sold the goods to farmers at 30 per cent or higher markups over cash prices. The system was operated, by design, so that the farmer’s crop would never pay him out of his debts (the merchant as the contracted buyer could pay whatever he felt like for the crop; the farmer could not market it to third parties). This debt servitude eventually led to rebellion in the form of the populist movement. (Yves Smith, “Will Greeks Defy Rape and Pillage By Barbarians Bankers? An E-Mail from Athens,” Naked Capitalism, May 30, 2011.)

One would expect a similar political movement today. And as in the late 19th century, academic economics will be mobilized to reject it. Subsidized by the financial sector, today’s economic orthodoxy finds it natural to channel productivity gains to the finance, insurance and real estate (FIRE) sector and monopolies rather than to raise wages and living standards. Neoliberal lobbyists and their academic mascots dismiss sharing productivity gains with labor as being unproductive and not conducive to “wealth creation” financial style.

Making governments pay creditors when banks run aground

At issue is not only whether bank debts should be paid by taking them onto the public balance sheet at taxpayer expense, but whether they can reasonably be paid.

If they cannot be, then trying to pay them will shrink economies further, making them even less viable. Many countries already have passed this financial limit. What is now in question is a political step – whether there is a limit to how much further creditor interests can push national populations into debt-dependency. Future generations may look back on our epoch as a great Social Experiment on how far the point may be deferred at which government – or parliaments – will draw a line against taking on public liability for debts beyond any reasonable capacity to pay without drastically slashing public spending on education, health care and other basic services?

Is a government – or economy – be said to be solvent as long as it has enough land and buildings, roads, railroads, phone systems and other infrastructure to sell off to pay interest on debts mounting exponentially? Or should we think of solvency as existing under existing proportions in our mixed public/private economies? If populations can be convinced of the latter definition – as those of the former Soviet Union were, and as the ECB, EU and IMF are now demanding – then the financial sector will proceed with buyouts and foreclosures until it possesses all the assets in the world, all the hitherto public assets, corporate assets and those of individuals and partnerships.

This is what today’s financial War is about. And it is what the Greeks gathering in Syntagma Square are demonstrating about. At issue is the relationship between the financial sector and the “real” economy. From the perspective of the “real” economy, the proper role of credit – that is, debt – is to fund productive capital investment and economic growth. After all, it is out of the economic surplus that interest is to be paid.

This requires a tax system and financial regulatory system to maximize the growth. But that is precisely the fiscal policy that today’s financial sector is fighting against.

It demands tax-deductibility for interest, encouraging debt financing rather than equity. It has disabled truth-in-lending laws and regulation keeping prices (the interest rate and fees) in line with costs of production. And it blocks governments from having central banks to freely finance their own operations and provide economies with money.

Banks and their financial lobbyists have not shown much interest in economy-wide wellbeing. It is easier and quicker to make money by being extractive and predatory.

Fraud and crime pay, if you can disable the police and regulatory agencies. So that has become the financial agenda, eagerly endorsed by academic spokesmen and media ideologues who applaud bank managers and subprime mortgage brokers, corporate raiders and their bondholders, and the new breed of privatizers, using the one-dimensional measure of how much revenue can be squeezed out and capitalized into debt service. From this neoliberal perspective, an economy’s wealth is measured by the magnitude of debt obligations – mortgages, bonds and packaged bank loans – that capitalize income and even hoped-for capital gains at the going rate of interest.

Iceland belatedly decided that it was wrong to turn over its banking to a few domestic oligarchs without any real oversight or regulation over their self-dealing.

From the vantage point of economic theory, was it not madness to imagine that Adam Smith’s quip about not relying on the benevolence of the butcher, brewer or baker for their products, but on their self-interest is applicable to bankers? Their “product” is not a tangible consumption good, but interest-bearing debt. These debts are a claim on output, revenue and wealth; they do not constitute real wealth.

This is what pro-financial neoliberals fail to understand. For them, debt creation is “wealth creation” (Alan Greenspan’s favorite euphemism) when credit – that is, debt – bids up prices for property, stocks and bonds and thus enhances financial balance sheets. The “equilibrium theory” that underlies academic orthodoxy treats asset prices (financialized wealth) as reflecting a capitalization of expected income. But in today’s Bubble Economy, asset prices reflect whatever bankers will lend. Rather than being based on rational calculation, their loans are based on what investment bankers are able to package and sell to frequently gullible financial institutions. This logic leads to attempts to pay pensions out of a “wealth creating” process that runs economies into debt.

It is not hard to statistically illustrate this. The amount of debt that an economy can pay is limited by the size of its surplus, defined as corporate profits and personal income for the private sector, and net fiscal revenue paid to the public sector. But neither today’s financial theory nor global practice recognize a capacity-to-pay constraint. So debt service has been permitted to eat into capital formation and reduce living standards – and now, to demand privatization sell-offs.

As an alternative is to such financial demands, Iceland has provided a model for what Greece may do. Responding to British and Dutch demands that its government guarantee payment of the Icesave bailout, the Althing recently asserted the principle of sovereign debt:

“The preconditions for the extension of government guarantee according to this Act are:

1. That … account shall be taken of the difficult and unprecedented circumstances with which Iceland is faced with and the necessity of deciding on measures which enable it to reconstruct its financial and economic system.

This implies among other things that the contracting parties will agree to a reasoned and objective request by Iceland for a review of the agreements in accordance with their provisions.

2. That Iceland’s position as a sovereign state precludes legal process against its assets which are necessary for it to discharge in an acceptable manner its functions as a sovereign state.”

Instead of imposing the kind of austerity programs that devastated Third World countries from the 1970s to the 1990s and led them to avoid the IMF like a plague, the Althing is changing the rules of the financial system. It is subordinating Iceland’s reimbursement of Britain and Holland to the ability of Iceland’s economy to pay:

“In evaluating the preconditions for a review of the agreements, account shall also be taken to the position of the national economy and government finances at any given time and the prospects in this respect, with special attention being given to foreign exchange issues, exchange rate developments and the balance on current account, economic growth and changes in gross domestic product as well as developments with respect to the size of the population and job market participation.”

This is the Althing proposal to settle its Icesave bank claims that Britain and the Netherlands rejected so passionately as “unthinkable.” So Iceland said, “No, take us to court.” And that is where matters stand right now.

Greece is not in court. But there is talk of a “higher law,” much as was discussed in the United States before the Civil War regarding slavery. At issue today is the financial analogue, debt peonage.

Will it be enough to change the world’s financial environment? For the first time since the 1920s (as far as I know), Iceland made the capacity-to-pay principle the explicit legal basis for international debt service. The amount to be paid is to be limited to a specific proportion of the growth in its GDP (on the admittedly tenuous assumption that this can indeed be converted into export earnings). After Iceland recovers, the Treasury offered to guarantee payment for Britain for the period 2017-2023 up to 4 per cent of the growth of GDP after 2008, plus another 2 per cent for the Dutch. If there is no growth in GDP, there will be no debt service. This meant that if creditors took punitive actions whose effect is to strangle Iceland’s economy, they wouldn’t get paid.

No wonder the EU bureaucracy reacted with such anger. It was a would-be slave rebellion. Returning to the applicable of Newton’s Third Law of motion to politics and economics, it was natural enough for Iceland, as the most thoroughly neoliberalized disaster area, to be the first economy to push back.

The past two years have seen its status plunge from having the West’s highest living standards (debt-financed, as matters turn out) to the most deeply debt-leveraged. In such circumstances it is natural for a population and its elected officials to experience a culture shock – in this case, an awareness of the destructive ideology of neoliberal “free market” euphemisms that led to privatization of the nation’s banks and the ensuing debt binge.

The Greeks gathering in Syntagma Square seem to need no culture shock to reject their Socialist government’s cave-in to European bankers. It looks like they may follow Iceland in leading the ideological pendulum back toward a classical awareness that in practice, this rhetoric turns out to be a junk economics favorable to banks and global creditors. Interest-bearing debt is the “product” that banks sell, after all. What seemed at first blush to be “wealth creation” was more accurately debt-creation, in which banks took no responsibility for the ability to pay. The resulting crash led the financial sector to suddenly believe that it did love centralized government control after all – to the extent of demanding public-sector bailouts that would reduce indebted economies to a generation of fiscal debt peonage and the resulting economic shrinkage.

As far as I am aware, this agreement is the first since the Young Plan for Germany’s reparations debt to subordinate international debt obligations to the capacity-to-pay principle. The Althing’s proposal spells this out in clear terms as an alternative to the neoliberal idea that economies must pay willy-nilly (as Keynes would say), sacrificing their future and driving their population to emigrate in a vain attempt to pay debts that, in the end, can’t be paid but merely leave debtor economies hopelessly dependent on their creditors. In the end, democratic nations are not willing to relinquish political planning authority to an emerging financial oligarchy.

No doubt the post-Soviet countries are watching, along with Latin American, African and other sovereign debtors whose growth has been stunted by predatory austerity programs imposed by IMF, World Bank and EU neoliberals in recent decades. We should all hope that the post-Bretton Woods era is over. But it won’t be until the Greek population follows that of Iceland in saying no – and Ireland finally wakes up.

http://www.counterpunch.org/hudson06062011.html