Hudson's "Killing the Host"

[don]

Michael Hudson’s New Book: Wall Street Parasites Have Devoured Their Hosts — Your Retirement Plan and the U.S. Economy


By Pam Martens: August 31, 2015

Michael Hudson

The riveting writer, Michael Hudson, has read our collective minds and the simmering anger in our hearts. Millions of American have long suspected that their inability to get financially ahead is an intentional construct of Wall Street’s central planners. Now Hudson, in an elegant but lethal indictment of the system, confirms that your ongoing struggle to make ends meet is not a reflection of your lack of talent or drive but the only possible outcome of having a blood-sucking financial leech affixed to your body, your retirement plan, and your economic future.

In his new book, “Killing the Host,” Hudson hones an exquisitely gripping journey from Wall Street’s original role as capital allocator to its present-day parasitism that has replaced U.S. capitalism as an entrenched, politically-enforced economic model across America.

This book is a must-read for anyone hoping to escape the most corrupt era in American history with a shirt still on his parasite-riddled back.

Hudson writes from his most powerful perch in chapters describing how these financial parasites have tricked our society into accepting them as a normal, productive part of our economy. (Since we write about these thousands of diabolical tricks four days a week at Wall Street On Parade, poignant examples came springing to mind with every turn of the page in “Killing the Host.” From the well-placed articles in the Wall Street Journal to a front group’s pleas for more Wall Street handouts in a New York Times OpEd, to the dirty backroom manner in which corporate speech was placed on a par with human speech in the Supreme Court’s Citizens United decision, to Wall Street’s private justice system and the Koch brothers’ multi-million dollar machinations to instill Ayn Rand’s brand of “greed is good” in university economic departments across America — America has become a finely tuned kleptocracy with a sprawling, sophisticated public relations base.)

How else to explain, other than kleptocracy, the fact that Wall Street’s richest mega banks collect the life insurance proceeds and tax benefits on the untimely deaths of their workers – all codified into law by the U.S. Congress – making death a profit center on Wall Street. Or, as Frontline revealed, that two-thirds of your 401(k) plan over a working lifetime is likely to be lost to financial fees.

Hudson writes: “A parasite’s toolkit includes behavior-modifying enzymes to make the host protect and nurture it. Financial intruders into a host economy use Junk Economics to rationalize rentier parasitism as if it makes a productive contribution, as if the tumor they create is part of the host’s own body, not an overgrowth living off the economy. A harmony of interests is depicted between finance and industry, Wall Street and Main Street, and even between creditors and debtors, monopolists and their customers.”

What has evolved, says Hudson, is that Wall Street banks have “become the economy’s central planners, and their plan is for industry and labor to serve finance, not the other way around.”

To gloss over the collapse of this depraved economic model in 2008, Hudson says these Wall Street central planners simply depict “any adverse ‘disturbance’ as being self-correcting, not a structural defect leading economies to fall further out of balance. Any given development crisis is said to be a natural product of market forces, so that there is no need to regulate and tax the rentiers.”

Similarly, when citizens rise up en masse to demand a realignment of their economy, as happened with the Occupy Wall Street movement, first the public relations masterminds dismiss them as an unhinged gathering of smelly hippies, followed by their violent eviction in the middle of the night, with military precision, by the Praetorian Guard of the kleptocracy. In Manhattan, the Praetorian Guard (NYPD) has a high-tech surveillance center mutually staffed by cops and Wall Street personnel – and mainstream media find nothing unusual about this.

Hudson correctly calls 2008 a “dress rehearsal,” writing that “Wall Street convinced Congress that the economy could not survive without bailing out bankers and bondholders, whose solvency was deemed a precondition for the ‘real’ economy to function. The banks were saved, not the economy.” Hudson adds that the “debt tumor” was left in place. (This is the nightmare we are presently watching unfold.)

The result of the systemic disabling of regulations on Wall Street has resulted in the following, says Hudson: “…the wealthiest One Percent have captured nearly all the growth in income since the 2008 crash. Holding the rest of society in debt to themselves, they have used their wealth and creditor claims to gain control of the election process and governments by supporting lawmakers who un-tax them, and judges or court systems that refrain from prosecuting them. Obliterating the logic that led society to regulate and tax rentiers in the first place, think tanks and business schools favor economists who portray rentier takings as a contribution to the economy rather than as a subtrahend from it.” (But, of course, those business schools are financially incentivized to think that way.)

The outgrowth of these tricks to make parasites appear to be a natural appendage to a well-functioning economy results in a “veritable Stockholm Syndrome.” Hudson explains:

“Popular morality blames victims for going into debt – not only individuals, but also national governments. The trick in this ideological war is to convince debtors to imagine that general prosperity depends on paying bankers and making bondholders rich – a veritable Stockholm Syndrome in which debtors identify with their financial captors.”

Hudson has much to say on the perversity of corporations buying back their own stock. In one chapter, Hudson writes:

“In nature, parasites tend to kill hosts that are dying, using their substance as food for the intruder’s own progeny. The economic analogy takes hold when financial managers use depreciation allowances for stock buybacks or to pay out as dividends instead of replenishing and updating their plant and equipment. Tangible capital investment, research and development and employment are cut back to provide purely financial returns.”

On the timely debate over wealth and income inequality, Hudson writes that “Asset-price inflation is the primary dynamic explaining today’s polarization of wealth and income. Yet most newscasts applaud daily rises in the stock averages as if the wealth of the One Percent, who own the great bulk of stocks and other financial assets, is a proxy for how well the economy is doing. What actually occurs is that financing corporate buyouts on credit factors interest payments and fees into the prices that companies must charge for their products.”

Where this leads, says Hudson, is that “Paying these financial charges leaves less available to invest or hire more labor. Likewise for the overall economy, the effect of a debt-leveraged real estate bubble and asset-price inflation is that interest payments and fees to bankers and bondholders leave less available to spend on goods and services. The financial overhead rises, squeezing the ‘real’ economy and slowing new investment and hiring.”

Hudson is clearly on to something. The U.S. seems to be crashing like clockwork every 8 years with the crashes gaining in intensity.

The 2000 dot.com crash wiped $4 trillion out of investment accounts while, 8 years later, the 2008 crash brought down the whole financial system, the U.S. and global economy, and it’s still producing a dead weight on economic growth. Next year will mark the eighth year since the 2008 crash and if last week’s market convulsions were any indication, we’re in for some very rough sledding.

Chapter 8 of “Killing the Host” begins with this quotation from John Maynard Keynes: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” Hudson expands further:

“Instead of warning against turning the stock market into a predatory financial system that is de-industrializing the economy, [business schools] have jumped on the bandwagon of debt leveraging and stock buybacks. Financial wealth is the aim, not industrial wealth creation or overall prosperity. The result is that while raiders and activist shareholders have debt- leveraged companies from the outside, their internal management has followed the post-modern business school philosophy viewing ‘wealth creation’ narrowly in terms of a company’s share price. The result is financial engineering that links the remuneration of managers to how much they can increase the stock price, and by rewarding them with stock options. This gives managers an incentive to buy up company shares and even to borrow to finance such buybacks instead of to invest in expanding production and markets.”

The net result of this, says Hudson, is an effective “debt-financed takeover from within.”

Hudson writes about the revealing September 2014 Harvard Business Review article by William Lazonick, who noted:

“Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings.”

“This management strategy created financial wealth by elevating the stock price,” writes Hudson, “not by producing more goods. Earnings per share rose not because companies actually earned more, but because there were fewer shares outstanding among which to spread the earnings. Many of the companies downsized and outsourced their employment and production. The immediate beneficiaries were corporate officers exercising their stock options.”

Hudson quotes another prolific writer on the subject of our bankster-controlled society, Paul Craig Roberts, who has noted the following about corporations buying back their own stock: “The debt incurred will have to be serviced by future earnings. This is not a picture of capitalism that is driving the economy by investment.”

Hudson says that what is happening today in corporate America is very different from the corporate raiders of the 1980s who used leveraged buyouts to gobble up companies. Today, says Hudson, “corporate executives raid their own company’s revenue stream. They are backed by self-proclaimed shareholder activists. The result is financial short-termism by managers who take the money and run. The management philosophy is extractive, not productive in the sense of adding to society’s means of production or living standards.”

Make no mistake about it: this is a dangerous book to the status quo. It is truth-telling at its finest in America’s darkest age of entrenched lies. Michael Hudson has clanged the alarm bells over more continuity government from the likes of Hillary Clinton and her fellow Wall Street Democrats. He’s also scuttled the chances that Donald Trump will be able to reengineer America from “Give me your tired, your poor, your huddled masses yearning to breathe free” to the evil fortress that kicks out infants by directing hatred and blame for America’s woes to impoverished immigrants running from their own leeches.

Hudson’s masterful book comes at the perfect juncture of stock market convulsions and an early election season when Americans are turning out by the tens of thousands to hear what the candidates for the Oval Office plan to do to return the wealth and the soul of America to the people.

“Killing the Host” is available as an e-book at CounterPunch and in print at Amazon.com.

[Mega]

Re: Hudson's "Killing the Host"

I tried to discuss what is happening in work, they either don't get it..........or would rather NOT get it. I had to trim my sails a bit because most have or are BUYING new homes etc.

My banter would i fear make a stress-ful life more so for them...........

Mike

[don]

Re: Hudson's "Killing the Host"

I tried to discuss what is happening in work, they either don't get it..........or would rather NOT get it. I had to trim my sails a bit because most have or are BUYING new homes etc.

My banter would i fear make a stress-ful life more so for them...........

Mike

Nothing gained waking a smiling dreamer . . . .

[gwynedd1]

Re: Hudson's "Killing the Host"

I tried to discuss what is happening in work, they either don't get it..........or would rather NOT get it. I had to trim my sails a bit because most have or are BUYING new homes etc.

My banter would i fear make a stress-ful life more so for them...........

Mike

Yeah I guess over there they never really got that pop like we did in 2008.

[don]

Re: Hudson's "Killing the Host"

of course if Hudson is a bit too rough to read, there's always Barron's . . . .


Market Rout: The Trend Ain’t Your Friend – No Matter What JPMorgan Says

Dow Transports (Blue) Versus Dow Jones Industrial Average (Red), November 25, 2014 Through August 31, 2015

By Pam Martens and Russ Martens: September 1, 2015

JPMorgan Asset Management is running “sponsored content” at Barron’s, the financial publication, with today’s date and a remarkably rosy economic outlook given last week’s market rout and this morning’s Dow futures plunging to down 396 points at 9:02 a.m. – just 28 minutes before the market was set to open in New York.

There used to be a time when advertising in newspapers was called advertising and you knew money was changing hands. All Barron’s is saying about JPMorgan’s “sponsored content” is this: “Barron’s news organization was not involved in the creation of this content.”

Here’s the curious part of what JPMorgan Asset Management has to say about the U.S. economy:

“…we find little to indicate that a slowdown is imminent. In any event, historically there’s been a long lag between signals of a downturn and the onset of recession. In the past, it has taken about a year for an inverted yield curve, the classic symptom of diminished expectations, to translate into a business downturn. It has taken more than four years on average for a recession to follow on the Federal Reserve’s first rate hike of a cycle—and after nearly a decade we are still awaiting that first hike.

“No scenario is immune to shocks, of course, and the current environment contains several threats—the Greek tragedy, the prospect of a hard landing in China and the ultimate certainty of rising rates in the U.S. — that might give investors pause. Of the three, we take the prospect of a Chinese hard landing most seriously because of that economy’s global importance.”

Let’s start first with the notion that there is “very little” to suggest a “slowdown is imminent.” Off the top of our head, we can think of an alarming number of suggestions. Let’s start with the Dow Transports.

Markets trade not on what they see looking out the window today but on what they contemplate will be the situation six months down the road. This is why markets are known as predicting or discounting mechanisms: they are a pricing mechanism based on future prospects. Parts of the market see things differently than the broader market and over time they have shown themselves to be early predictors of a trend. One of those sectors is the Dow Transports, otherwise known as the Dow Jones Transportation Average.

The Dow Transports was the first-ever stock index, initiated in 1884 by Charles Dow and originally known as the Dow Jones Railroad Average. (It assumed its current name in 1970.)

Today, the Dow Transports include 20 companies involved in the transportation of goods. A sampling of companies with the largest weightings in the index include FedEx, United Parcel Service, Kansas City Southern, Union Pacific and Norfolk Southern. In simple terms, when the U.S. economy is healthy and growing, the Dow Transports index would be rising in value as its companies should be showing solid earnings as consumer demand picks up and they are shipping lots of goods. But as the chart above shows, the Dow Transports began to turn down in late November 2014 while the Dow Jones Industrial Average went in the opposite direction. Notice how they’ve both converged on the same plunging path now.

Next, what few Wall Street analysts want to talk about is that earnings on the Standard and Poor 500, the largest companies that trade publicly in the U.S., have turned negative in the second quarter. Yes, negative. While there seems to be some disagreement about just how much earnings declined in the second quarter, there is no quibbling over the fact that they were negative. On August 25, Bloomberg Business reported that “Profits reported by S&P 500 companies in the second quarter fell 2 percent from a year ago and are projected to slip 5.5 percent in the current period.” FactSet says the decline was 0.7 percent in the second quarter. Of equal alarm, revenue growth fell by 3.4 percent.

The U.S. stock market is now discounting an earnings recession over the next several quarters.

Also, JPMorgan should not be drawing comfort from the Fed; they should be stocking up on ulcer relief medicine over the Fed’s bullet-less monetary gun. JPMorgan’s “sponsored content” in Barron’s noted that “It has taken more than four years on average for a recession to follow on the Federal Reserve’s first rate hike of a cycle — and after nearly a decade we are still awaiting that first hike.”

Clearly, one can’t apply historic norms to a period that includes the greatest economic collapse since the Great Depression, as well as the greatest income and wealth inequality since the Great Depression. The Fed hasn’t been able to hike rates and reload its monetary gun because the bloated and systemically contagious balance sheets of the tyrannical Wall Street mega banks (which includes JPMorgan) are holding their own, fully-loaded gun to the Fed’s head.

But more importantly, the banking tyrants have created the situation where the Fed will find itself entering the next downturn with $4.5 trillion on its own bloated balance sheet because it had to vacuum up Wall Street’s excesses during the collapse. Exactly how much more Quantitative Easing can be expected from the Fed with that size of a balance sheet?

When JPMorgan cautions that there might possibly be the threat of “a hard landing in China,” what it should also be thinking is that a hard landing in China would lead to a full blown currency war in Asia as all the exporting countries scramble to devalue their currencies to compete more aggressively on exports to maintain market share. That, in turn, could lead to the U.S. importing deflation while a stronger U.S. dollar would further curb exports from the U.S., leading to further slumps in the domestic manufacturing sector.

Adding to the increasing likelihood of that scenario, the Institute for Supply Management reported this morning that manufacturing in the U.S. in August fell to a reading of 51.1 from 52.7 in July. That decline is completely consistent with the selloff in the Dow Transports and the contraction in earnings in the S&P 500.

[don]

Return to Crisis: Things Keep Getting Worse

or Mike Whitney . . . .

“Had the economy been fundamentally sound in 1929 the effect of the great stock market crash might have been small…. But business in 1929 was not sound; on the contrary it was exceedingly fragile. It was vulnerable to the kind of blow it received from Wall Street. Those who have emphasized this vulnerability are obviously on strong ground. Yet when a greenhouse succumbs to a hailstorm something more than a purely passive role is normally attributed to the storm. One must accord similar significance to the typhoon which blew out of lower Manhattan in October 1929.”

Extracts from The Great Crash: 1929, John Kenneth Galbraith, First Published 1955, Chapter 10: “Cause and Consequence”, Page 204.

The virus that spread to stock markets around the world and nearly destroyed the global financial system in 2008 has reemerged with a vengeance sending global equities deep into the red and wiping out more than $5 trillion in market capitalization in less than two weeks. On Tuesday, before the opening bell, major market index futures in the US plunged more than 400 points signaling another violent day of selling ahead. Worries that a slowdown in China will impact global growth pushed Asian and European markets deep into negative territory while US futures indicate that the Dow Jones is headed for its ninth triple-digit day in ten sessions. The deluge of bad news has battered confidence in the Fed and “sent global equities to their worst monthly slump in more than three years”. Millions of Mom and Pop investors have sold out already and are headed for the exits. Here’s a recap from Bloomberg:

“Mom and pop are running for the hills. Since July, American households — which account for almost all mutual fund investors — have pulled money both from mutual funds that invest in stocks and those that invest in bonds. It’s the first time since 2008 that both asset classes have recorded back-to-back monthly withdrawals, according to a report by Credit Suisse.

Credit Suisse estimates $6.5 billion left equity funds in July as $8.4 billion was pulled from bond funds, citing weekly data from the Investment Company Institute as of Aug. 19. Those outflows were followed up in the first three weeks of August, when investors withdrew $1.6 billion from stocks and $8.1 billion from bonds, said economist Dana Saporta.

“Anytime you see something that hasn’t happened since the last quarter of 2008, it’s worth noting,” Saporta said in a phone interview. ….Withdrawals from equity funds are usually accompanied by an influx of money to bonds, and an exit from both at the same time suggests investors aren’t willing to take on risk in any form.” (“Fed Up Investors Yank Cash From Almost Everything Just Like 2008“, Bloomberg)

While the slowdown in China may be the spark for recent volatility, it certainly isn’t the cause. There’s a growing consensus that the real problem originated in 2008 when the Fed refused to write-down the debts from the insolvent banking system thus creating the conditions for another calamitous financial crisis sometime in the future. And while the Fed’s zero rates and titanic doses of liquidity might have helped to ease the symptoms by flooding the system with cash, the underlying issues remain the same. Thus, as the medication has worn off, the virus has reappeared stronger than ever revealing the ineffectiveness of the Fed’s remedies and the urgent need for alternate therapies.

Stocks are massively overpriced due to the setting of interest rates below the rate of inflation which creates a subsidy for speculators. The policy has had the precise effect that the Fed intended, it has generated a humongous asset bubble in stocks and bonds transferring trillions of dollars to Wall Street banks and financial institutions. According to Yale economist Robert Shiller, the only time stocks have been this “high or higher were in 1929, 2000, and 2007—all moments before market crashes.”

Robert Shiller: “…Bonds, and increasingly real estate also look overvalued. This is different from other over-valuation periods such as 1929, when the stock market was very overvalued, but the bond and housing markets for the most part, weren’t. It’s an interesting phenomenon.”

At the same time bankers and hedge fund managers have been raking in record profits on financially-engineered products that neither add to overall productivity or improve the broader economy, ordinary working people have seen their wages stagnate, incomes plunge and their prospects for a comfortable retirement vanish along with their ever-dwindling 401-K. According to investment guru John Hussman:

“U.S. wages and salaries have plunged to the lowest share of GDP in history, while the civilian labor force participation rate has dropped to levels not seen since the 1970s. Yet consumption as a share of GDP is near a record high.”

The problem is that the Fed must prevent the real economy from growing, otherwise, workers wages will improve, prices will rebound, inflation will rise, and the Fed will be forced to raise rates. And, of course, higher rates are what Wall Street fears most, in fact, the six year bull market was built entirely on cheap, plentiful liquidity that has inflated historic bubbles in financial assets across-the-board. Even the slightest uptick in rates will bring the whole fake edifice crashing to earth, which is why any talk of “normalization” sends stocks into a nosedive.

This is why policymakers will continue to slash budget deficits and implement other austerity measures to cut off the vital flow of fiscal support to the real economy. A thriving economy with low unemployment, rising incomes and wages, and positive inflation is the death knell for zero rate shenanigans, like stock buybacks, where a company repurchases its own shares to push prices higher to boost executive compensation and reward shareholders. Buybacks are a type of stock manipulation that used to be banned but are presently all the rage. Interestingly, Barron’s attributes the recent turnaround in the market to a surge in buybacks that staunched the bloodletting on Wall Street. Take a look:

“Like the Wizard of Oz, who was revealed as nothing more than a man behind a curtain working some cool special effects, stock buybacks might not be the great and powerful market force they were thought to be.

What do I mean? Two weeks ago, the Standard & Poor’s 500 began to sell off as concerns about China, commodities, and emerging markets made headlines. But just as the popular benchmark looked like it was entering free fall, it suddenly reversed. Who was the mysterious savior rescuing the markets? Articles published soon after the remarkable rebound were quick to point out that trading desks at Goldman Sachs and Morgan Stanley had seen the most corporate buying on record, suggesting it was share buybacks that kept the market afloat.” (“Pushback on Buybacks,” Barron’s)

So, a surge in buybacks actually turned the markets around and stopped a selloff?

This is how buybacks distort pricing, by countering normal supply-demand dynamics with infusions of capital that would normally be directed towards improving productivity. Weak regulations and cheap cash have changed the incentives structure so that easiest way to enrich stakeholders is by piling on more debt, raking off hefty profits, and leaving the wreckage for someone else to clean up. This is nihilistic rationale that drives buybacks. Keep in mind, the Fed’s low rates were sold to the public as a way to stimulate investment in the real economy. As it happens, hiring for full-time jobs is still at depression era levels while business investment (Capex) has collapsed. The bulk of earnings are being devoted almost-exclusively to goosing stock prices to reward insatiable CEOs and their do-nothing shareholders. Check it out:

“The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees…

Why are such massive resources being devoted to stock repurchases? Corporate executives give several reasons, which I will discuss later. But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets…

If the U.S. is to achieve growth that distributes income equitably and provides stable employment, government and business leaders must take steps to bring both stock buybacks and executive pay under control. The nation’s economic health depends on it….” (“Profits without Prosperity“, William Lazonick, Harvard Business Review)

There’s no chance the Fed will raise rates in the current environment. Corporate earnings and revenues have been shrinking since the forth quarter of 2014 which will make it harder for CEOs to justify adding to their debtload to repurchase more shares. As the appetite for buybacks wanes, stocks are bound to dip even lower putting more pressure on bank balance sheets and forcing corporations to divert more cash to debt servicing. The Fed’s threat to raise rates is merely a bluff to attract foreign capital to US markets and to prevent the dollar from falling off a cliff.

While it’s always possible that the markets could stabilize or stocks could rebound sharply, it’s more likely that we have reached a tipping point where the excesses are about to be wrung from the system through an excruciating downturn followed by an inevitable currency crisis. We expect the six year-long fake recovery to end much like it did in 1929, where one demoralizing selloff followed the other, and where the crashing of stock prices fueled the publics distrust of the central bank, the government and all of the nations main institutions. Here’s a brief summary from Galbraith’s masterpiece:

“The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. The bargains then suffered a ruiness fall. Even the man who waited out all of October and all of November, who saw the volumne of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months. The Coolidge bull market was a remarkable phenonmemon. The ruthlessness of its liquidation was, in its own way, equally remarkable.”

( Extracts from “The Great Crash: 1929″, John Kenneth Galbraith, First Published 1955, Page 130 Things Become More Serious)

As of this writing, the Dow is down 317, the S&P 500, down 37, the Nasdaq, down 71.

[don]

Re: Return to Crisis: Things Keep Getting Worse

Reuters’ Public Relations Missif

September 1, 2015
By Michael Hudson

This autumn may see anti-austerity coalitions gain power in Portugal, Spain and Italy, while Marine le Pen’s National Front in France presses for outright withdrawal from the eurozone. These countries face a common problem: how to resist the economic devastation that the European Central Bank (ECB), European Council and IMF “troika” has inflicted on Greece and is now intending to do the same to southern Europe.

To resist the depression and debt deflation that the troika seeks to deepen, one needs to bear in mind the dynamics that make the IMF un-reformable. Its destructive role in Greece provides an object lesson for how southern Europe must shun its horde of ideologues, as Third World countries learned to avoid it by May 2013, the year that Turkey capped the world’s extrication from IMF “advice.” Already in 2008, Turkey’s prime minister Recep Tayyip Erdogan announced: “We cannot darken our future by bowing to the wishes of the IMF.”[1]Greek voters have now said the same thing.

To soften resistance to the IMF’s austerity demands, a public relations drive is being mounted to rehabilitate the myth that the Fund can act as an honest broker mediating between anti-labor finance ministers and the PIIGS – Portugal, Italy, Ireland, Greece and Spain. On Friday, August 28, three Reuters reporters published a long “think piece” trying to show that the IMF is changing and that its head, Christine Lagarde, has seen the light and seeks to promote real debt relief.[2]

The timing of this report seems significant. The IMF got “back in business” in 2010 when its head, Dominique Strauss-Kahn, overrode its staff and many Board members in order to join the troika and shift the country’s bad debt from French and German bankers onto the Greek people. That is the story I tell in Killing the Host, which CounterPunch published in an e-version last week. (The hard-print and Kindle versions are now available on Amazon.)

President Obama and Treasury Secretary Tim Geithner insisted that Angela Merkel and French President Sarkozy pressure the IMF to go against the opposition of its own staff and join the European Central Bank’s hardline demands that Greece impose austerity. Geithner and Obama warned that if Greek bondholders were not paid in full, some giant U.S. banks would lose heavily on the default insurance contracts and derivatives they had written, and their losses could spread “contagion” to Europe.

It was at this 2011 G8 meeting that Merkel told Greek PM George Papandreou that he had to cancel his proposed referendum on whether Greece should surrender to austerity to help foreign bondholders. As the late Frankfurt Allgemeine Zeitung editor Frank Schirrmacher observed at the time, this meant that “Democracy is Junk.”

Papandreou’s acquiescence led his PASOK party to be swept utterly away, having lost all credibility – the same credibility that the IMF has lost. Papandreou was replaced by a pro-bank puppet. Italy’s Prime Minister suffered the same fate later that week, in a continent-wide crisis turning the eurozone into an economic dead zone.

It took until last July, four years later, for Greek voters finally to be given their say in a referendum. And just as Merkel, Sarkozy and Obama feared, they voted by an overwhelming 61 percent (a 3:2 margin) to reject austerity.
The Reuters piece quotes the same complaints by IMF insiders that my book records – as if this is a revelation that has just came out in their “examination of previously unreported IMF board minutes.” Actually, the information has been out for a year. So the question is, why is this information being reported as if it were new?

The aim seems to be to distract attention from the political dynamics that actually were going on and the conflicts of interest that were at work – and still are. In addition to my own book published last week, former Greek finance minister Yanis Varoufakis has gone public with his own sad experience with Lagarde and the European Central Bank (ECB) demanding further austerity and mass privatizations.[3]“If you were a fly on the wall watching our negotiations,” he reports, “you would see as well as I saw that Ms Lagarde, Mr Draghi, Mr Juncker, certainly Dr Schäuble, were interested in one thing: In dictating to us ‘terms of surrender’. Terms that put an end to the Athens Spring.”

By comparison, the Reuters whitewash distorts history, dumbing it down and censoring the U.S. role of Obama and Geithner, while trying to depict Christine Lagarde as urging an alleviation of Greek debt and austerity.

The world needs to know the whole story, because it will show the degree to which the IMF is under the thumb of Wall Street and European banks, and of U.S. political leaders backing hardline creditor interests. This in turn shows the impossibility of reforming the IMF (or World Bank, whose presidents traditionally are drawn from the U.S. Defense Department or its Cold War supporters).
Killing the Host discloses complaints leaked by angry IMF officials who became whistleblowers and published their complaints at Canada’s prestigious Center for International Governance Innovation (CIGI). These same quotes were just cited breathlessly by Reuters. What the wire service did not report was the point that the IMF’s former economists made.

Lagarde continues to insist that Greek debts can be paid by “extend and pretend,” lowering the interest rate and stretching out the maturities. This is her definition of “writing down Greek debts.” Most peoples’ definition would mean writing down the debt principal. Reading Reuters’ selective quotes, it is almost as if the seemingly detailed report was written to counter the political points Varoufakis, I and others have been making.

What Reuters excluded from its report that provides the key to unlock what is most politically embarrassing: The behavior of Obama and Geithner in protecting Wall Street’s casino bets that Greece could be arm-twisted to pay. Dominique Strauss-Kahn had two conflicts of interest: He wanted to run for the presidency of France, gaining favor by protecting French banks; and he wanted to get the IMF back into the austerity advice business, by joining the Eurozone troika. When Christine Lagarde started to repeat his refusal to back the recent IMF staff report endorsing write-down of Greek debt, the staff leaked it this spring, much to her embarrassment when the IMF signed onto a troika program with no real debt relief.[4]

The Reuters report throws up a cloud of disinformation saying that she backs debt relief, as if this means backing a writedown of unpayably high Greek debt. Quite the contrary, Lagarde has said again and again that her idea of debt relief is simply to extend and pretend – to stretch out the maturity of Greece’s debt, to lower the interest rate charged.

The real story is not simply the warnings that Reuters published so breathlessly from IMF staff members and board members that Greece could not pay its debts and that attempting to do so would bring on depression. The real story is why Strauss-Kahn overrode them in 2010. The IMF officials who resigned blamed his action on his political ambitions in French politics and his opportunism in trying to finally get the IMF “back in business” rather than being left out by the ECB for not being sufficiently pro-creditor. To override the fact that the IMF was violating its own directives, the Fund introduced a “contagion” escape clause that nullified the demand that it not endorse loans that could not be paid. (I describe the small print in Killing the Host.)

Lagarde is still adhering to the demand that Greece must repay all the debt principal, including what IMF staff members urged to be written off four years ago. Like Strauss-Kahn, she was about to override her own staff when they leaked their report on Greece’s inability to pay. An indication of her position was her statement at a May 2012 IMF meeting in Riga, where they came to celebrate Latvia’s punishing austerity model that could be exported to “serve as an inspiration for European leaders grappling with the economic crisis.”

The fact that the IMF’s head has to be a French pro-bank, pro-austerity ideologue, taking orders from Washington officials wield veto power on behalf of Wall Street bankers and bondholders, makes the IMF hopelessly compromised. The icing on the cake is its recent loan to Ukraine, money that Ukrainian President Poroshenko has said will be spent to wage war on Russian-speakers in eastern Ukraine where most of the export industry was located.

By no stretch of the imagination can Ukraine pay this debt. It already has negotiated a 20 percent writedown of its debt to private bondholders, and both Poroshenko and “Yats” insist that they will default on their $3 billion debt to Russia’s sovereign wealth fund falling due this December. That alone will require the IMF to withdraw, because the terms of its Articles of Agreement prevent it from lending to countries that unilaterally default on debts owed to official institutions. (The original idea had in mind the United States, not Russia or China.)

Yet the IMF has not warned that Ukraine must either pay or see itself turned into a financial pariah Greek-style. The Fund has been pulled into the New Cold War in addition to the financial war against labor and against government ability to resist austerity.

Past Reuters reports (and those of the New York Times and other neoliberal press) have popularized the trivializing idea that the reason China, Russia and other BRICS countries have created their own alternative development banks and international currency institutions is merely because they don’t have a large enough vote within the IMF. (Congress has blocked new U.S. contributions to the IMF, preventing a renegotiation of quotas.)

This is not what the BRICS countries say. Their disagreement is that the development philosophy of the IMF and World Bank is to promote austerity to pay bondholders and sell off the public domain to U.S. and other foreign financial investors. No matter how large the foreign quota, the U.S. Government retains veto power to enforce these U.S.-centered rules. The BRICS want a different development philosophy, an alternative to austerity economics and IMF “stabilization plans” whose effect is to destabilize countries submitting to their austerity.

The tragic Greek experience should stand as a warning of the need to withdraw from the rules that have turned the eurozone into an economic dead zone, and the IMF and Troika into brutal debt collectors for European, U.S. and British banks and bondholders. This is not a story that the mainstream press is happy to popularize. And as for the academic economists trotted out as talking heads, they still don’t get it.

Notes
[1] Delphine Strauss, “Turkish politicians argue over need for IMF help as crunch bites,” Financial Times, October 28, 2008.
[2] Lesley Wroughton, Howard Schneider and Dina Kyriakidou, “How the IMF’s misadventure in Greece is changing the fund,” Reuters, Aug. 28, 2015,
[3] Introduction: Our Athens Spring
[4] Jack Ewing, “I.M.F. Report Shines Uncomfortable Light on Greece’s Financing Gap,” The New York Times, July 15, 2015, and Peter Spiegel and Shawn Donnan, “IMF raises doubts over its bailout role,” Financial Times, July 15, 2015.