More than 5 years into this crisis, and there is little sign of long lasting recovery. In fact, if the warnings of non-orthodox economists are to be believed, then we face an even starker future ahead.
There will be much ink spilled (and maybe blood and tears too) over whether it is the “state” or the “free market” that has caused this crisis. This argument has filled many a blog debate over the years, and has also gestated fringe movements as the Tea Party and Occupy.
However, much evidence does point to an unholy collusion between state and “free” markets. Again, much ink could get spilled in unpicking whether there has always been this alliance of interests. As only when the tide is going out can we see who has been swimming a bit too close to whom.
In the end, both the state and the free market are both ambiguous social conventions, and so straw men of only moderately differing qualities (but also of nebulous identity) will be attacked and defended in equal measure.
At their core, both social conventions of state and market are ultimately comprised of individuals. Many of these individuals deftly segue between private & public roles (e.g. Robert Rubin, Hank Paulson and our own Tony Blair) to the point that they can effortlessly appear on whichever side of the argument they choose.
However, what the current and past elite cannot avoid is their personal accountability for specific decisions and actions that they took whilst in positions of power and influence (whether privately employed or state representatives). They may proclaim that they made decisions in good faith, just a shame about the outcomes. However, they cannot be allowed to absolve themselves entirely from blame. At best their defence could only consist of admitting “economic manslaughter through diminished responsibility”.
This crisis is more than just a collective failure of ideology. It has been based on poor decision making by people who did know better, and yet actively dismissed warnings. Above all else, the position of power bestows on them perpetual accountability. They cannot have power without responsibility.
If we allow ourselves to engage in theoretic debate on such an abstract level of state versus free markets, we merely grant the real perpetrators immunity from their specific and individual culpability, regardless of which side of the fence they sit.
We are in the midst of a depression / debt deflation, but one unlike anything beforehand. This is truly global. Truly interconnected, and truly uber-leveraged.
No bank is safe, no asset is safe. No currency is safe and no country is safe.
The pyramid scheme is collapsing under its own weight. Yet the twin vortices of inflation and deflation are disorientating us all. Disguising the underlying tensions and masking the future collapse.
The real economy is unable to supply productive capacity growth. We are hitting the buffers in terms of efficiency gain and real economic growth.
With the extortionate rise in money, debt, assets and derivatives we have deluded ourselves into thinking this reflects the true potential of future productive capacity. But that cannot be realised in the real world. The monetary assets actually represent negative inventory (belief that one holds a permanent claim on something tangible in the future – a long term call option as it were).
As energy declines, then real productive capacity is likely to fall too, which means that there will be less REAL assets for consumption to go around. The longer we continue to try and prop up the fictitious leverage, the longer the divergence between ever rising expectations and yet declining real capacity.
Deposits have been rehypothecated, mortagages have been rehypothecated. The nation’s Gold has been too, and in a very real sense our whole economy has.
The amount of claims far exceed the real assets to back them. It is nothing but naked leverage; the only thing holding up our fabricated sense of wealth and international power. Leverage that lurks in the shadow (banking system) until the claims start coming in. So how does this get settled? Are all claims on assets devalued equally, or do only a select few get to keep their claims whilst the rest of us get our fingers burned?
This excellent post on Golem-XIV so graphically highlights both that the claims are coming in (and so the leverage is collapsing behind the scenes), but also that the pyramid builders are making their exit and blocking the rest of us from escaping. They don’t want to get trampled as everyone dashes for the exits.
Ever since this financial crisis exploded in 2008 there have been commentators likening it to the 1930s. Steve Keen explains that private debt levels (never mind the sovereign debt sideshow) are higher than they were in the late 1920s. Paul Mason recently drew parallels with the 1930s in order to discuss various policy responses that might occur.
From an economic policy view, the 1930s crisis was often viewed as a problem of lack of demand. So demand stimulation came to the recue in various different guises. The diagnosis of the 1930s by Karl Polanyi viewed the crisis in terms of social reactions to the damage caused by un-fettered market economics. The blog post Wall of Illusions covers this viewpoint quite succinctly.
However, Polanyi may have missed an important aspect of world economic development. Perhaps the US New Deal, the rise of Fascism & state Communism were actually experiments in socioeconomic structures for optimising demand stimulation. The late 19th century and early 20th century bore witness to enormous increases in economic productive capabilities. The challenge for the economic policy maker was to indentify the best method for creating demand to satisfy this tsunami of supply. Naturally warfare is one method for achieving this.
The success of the Social Democratic mixed economies that emerged post World War II could be attributed to it establishing the least worst method for demand stimulation. Therefore, the debt-based demand growth model (whether by Gvt, business or private households) was the most socially acceptable method for ramping up the global economy to exploit the enormous energy and resource supply that was unearthed. The US and dollar reserve currency rode to the challenge of being the engineer and engine of a profitably expansionist global economy.
In the current crisis the enormous debt overhang threatens to constrain demand. Steve Keen’s exellent analysis of the debt burden, highlights how debt payments are prohibiting real economic growth.
But this is only part of the story.
As we actually reaching the peaking out of many natural resources, crucial for economic growth, the current crisis will be mired in insurmountable problems of supply.
This chart of G7 economic growth is showing a secular downward trend. From growth levels of about 3% p/a in the 1990s to stagnation in 2010 – 2015. This confirms a secular slowdown of -1% in growth every 5 years, which a major turning point happening about now.
The chart confirms that major developed economies are platauing in terms of economic productivity. If we link this plateau with the energy & resource constraints staring us in the face and you can only conclude that the world’s major economies are incapable of supplying the necessary cost-effective inputs to power economic production, regardless of fiscal and monetary stimulus. The capitalist economy’s acceleration addiction is getting an unwelcome dose of cold turkey.
The mainstream policy response will be two fold. Firstly, a desperate clinging to the high demand expectations, fully embeded in the zealotry surrounding the neccessity for creditors to be made whole on their expansionist lending practices. All efforts possible will made to maintain (or even grow) debts as the dogma suggests that only this can hope to create the neccessary demand stimulation.
As supply shocks also become apparent, we should also be wary that in a last gasp pique of laissez-faire de-regulation (of labour & environmental protections) will be imposed too. The migration of production capacity to large developing countries has only ever been to achieve the illusion of permanent supply growth. But this has already come at extreme social costs, such as mounting personsal debts, rising unemployment, declining social welfare. The desperation is only likely to push this further and further.
This is the legacy that predatory capitalism is delivering for the world. Energy and resource supply at any cost. Regardless of the impact on the environment, on people’s health or their quality of life.
There is much talk of a plan emerging for addressing the Eurozone’s current economic problems. The broad terms of the plan are that Greece may be permitted a partial default on its debts. But given the consequent impact this “haircut” would have on major banks in other European countries (such as France), plus the risk of default becoming the economic equivalent of herpes, we learn of the strategy for implementing a grand fiscal firewall (a modern day Maginot line as it were!). This takes the form of the European Financial Stability Facility (EFSF) being expanded to something like three trillion Euros.
Not much of the mainstream media has explained where this funding will come from, except for a perceptive interview on Radio 4 by Paul Mason this Sunday. The Eurozone plans to put forward something in the region of four or five hundred billion Euros, but leverage this up to the three trillion. It will achieve this by raising the money in the (private) Capital Markets by pledging various assets (presumably sovereign) as collateral against future tax revenues. In the words of Zerohedge “Europe has just boldly gone where even Goldman’s Abacus has not dared to go before courtesy of the ECB’s acceptance of a CDO squared Enron Special SPV”.
To anyone who has studied the wonders of modern finance, this shares some similarity to the Capital Asset Pricing Model (CAPM). The theory goes that the price of a company share (stockholding) reflects the summation of all future dividend payments (incorporating the dilution of dividends expected further in the future owing to money being devalued over time). Therefore the price of a share now, reflects all future income generating capacity of the underlying company. In a way, it states that you can have the full cash worth now which is equivalent to the amount it would take the company to earn in something like 10-15 years. So the mere act of selling the share realises this future value and you have the income that the real world hasn’t actually produced yet. All wrapped up with the almost zealous denial of uncertainty surrounding whether the future could turn out better or worse than expected. The theory says that the price now IS a complete and true reflection of the future.
Amazing! Finance has proclaimed itself capable of undertaking time-travel, alchemy and telepathy, all in one simple move.
But we know it isn’t really alchemy, telepathy or time travel. Instead, the future income of these sovereign states is about to be mortgaged beyond belief, rendering them perpetually (and undemocratically) in hock to the buccaneering money changers. This is in effect just another side door bailing out of the banks and their reckless lending. Not a true default as such (i.e. no debt destruction has occurred) but a further transfer of debts onto taxpayer shoulders. And this time a supra-national example of that poisonous strategy of “privatised profits and socialised losses”. But there is something even more sinister about this recent stab in the back to taxpayers. They are not just stealing the built up wealth, income and assets of the ordinary people of these countries (as in the privatisations and asset stripping of Greece), but they are cunningly filching the European citizens’ future too.
The ECB is probably being leaned on by Washington to do everything in its power to prevent debt destruction. Whenever any stresses occur in the system the Washington modus operandi is to fail to accept the losses and double down the bets. Ever since the financial crises of the 1980s onwards (e.g. Mexico, 1987 crash, S&L, LTCM etc.), the strategy has been to expand dollar liquidity & financial sector leverage. The cost for servicing this build-up of unsustainable debts is pushed outwards to the innocent citizens of periphery countries and onto the shoulders of future generations.
If the EU approves the plan to expand the EFSF then they are embarking on a gigantic Collateralised Debt Obligation, taking the yet-to-be earned income of European taxpayers and throwing it at the banks to prop up their traumatised balance sheets. Ultimately just lining the pockets of the wealthy bankers from this leveraged up booty.
In short, they are plundering from the future for its not around to protest against it.
This post is an excerpt from Richard Heinberg’s recent newsletter (Museletter!). Apparently it is based on an op-ed which the mainstream press seemed reluctant to publish. Perhaps because it challenges the endemic assumption that as long as certain policy prescriptions are followed (Austerity from the Right, Stimulus from the Left) then economic growth will continue.
Both mainstream views miss the vital point that Richard lays out below:
During recent weeks, evidence has piled up that U.S. and European economies, far from recovering, are swirling back into recession. Failure of American politicians to address the federal debt crisis, the U.S. credit rating downgrade, and increasing fragility of European economies have investors running for the hills.
Concern is being voiced that we may be at a fundamental economic turning point. Deutsche Bank’s strategist Jim Reid even suggests that the western world’s financial system might be “totally unsustainable.”
As it happens, I’ve just published a book, The End of Growth: Adapting to Our New Economic Reality, that reaches the same conclusion, and that foresaw the economic relapse that’s playing out in headlines. The book’s content was finalized in March, when economic data appeared to show the nation in a recovery. I suppose I’m justified in saying “I told you so,” but others are as well. Herman Daly, former World Bank economist, has pointed out the absurdity of expecting continual economic growth on a planet with limited resources. Paul Gilding, former head of Greenpeace International, explains in his book The Great Disruption why climate change and resource depletion are bringing world economic growth to a close. And Jeremy Grantham, co-founder of GMO (one of the world’s largest investment funds), argues that, with ever more humans competing for a finite supply of natural resources, rising prices of metals, oil, and food are decisively choking off GDP growth.
Even if we are being proven right, this is no time for victory laps. Here’s the point. Daly, Gilding, Grantham, and I are saying that as humanity has chewed through the low-hanging fruit of our natural resources and has turned to lower-grade and more expensive ores and fuels, managers of the economy have attempted to keep growth going by piling up debt in the mistaken belief that it is money that makes the economy run rather than energy and raw materials. Now we’ve reached limits to government and consumer debt, and the realization of that fact is sending financial markets into fibrillation. If energy supplies and debt are both stretched tight, that means more economic growth isn’t possible. Worse, if policy makers fail to realize this and continue assuming that the current crisis is merely another turning of the business cycle, then we lose whatever opportunity still remains to avert a crash that could bring civilization to its knees.
Admittedly this is still a minority point of view. After all, in the “real” worlds of politics and economics, growth is essential to creating more jobs and increasing returns on investments. Questioning growth is like arguing against gasoline at a NASCAR race.
Liberals believe that stimulus spending by government will boost employment and consumer spending, thus flipping the economy back to its “normal” growth setting. But stimulus packages of the past few years have produced only anemic results, and governments can’t afford more of the same.
Conservatives nurture faith that if government spending shrinks, that will liberate private enterprise to grow profits and jobs. Yet countries that implement austerity programs show less economic growth than those whose governments borrow and spend—until the spending spree ends in bond market mayhem.
Neither side wants to acknowledge that its prescription no longer works, because that would imply the other side is correct. But maybe both liberals and conservatives are wrong, and growth is finished.
If Daly, Gilding, Grantham, and I are right, this is scary business. But there will be life after growth, and it doesn’t have to play out under conditions of misery. With less energy to fuel globalization and mechanization, there should be increasing need for local production and labor. We can reorganize our financial and production systems so that everyone’s basic needs are met. Indeed, if we focus on improving quality of life rather than increasing quantity of consumption, we could all be happier even as our economy downsizes to fit Nature’s limits.
But that benign future is unlikely to transpire if we all continue living in a dream world where growth knows no bounds.
The alarm bells are ringing. Wake up to the post-growth economy.
I’m afraid a second Great Depression is a possibility.
The only doctor that can cure the problem is the G20.
The debt situation is far bigger than 1929 when many US citizens jumped on the stock bubble with credit. But many would be less than 10% unlike the many that jumped on the worldwide property bubble.
We cannot unilaterally change our interest rate without consequences affecting FOREX, capital movements and balance of trade. The US can.
The US is like the sun and the rest of us are like planets. If the US gets hot or cold the rest of us get hot or cold.
We have just witnessed a bubble busting, the tech bubble of 2001. We couldn’t possibly walk right into another, but we did.
The tech bubble burst thanks to tiny calculations showing that the emperor had no clothes and 90% of the new Internet companies disappeared overnight. It cost the US 2m jobs and Alan Greenspan took advantage of the US’s reserve currency status to reduce interest rates every 6 weeks 11 times in a row.
I’m not looking at any references. This is all from memory. I follow these things like a hawk.
Easy money put on 7m new US jobs.
When the US reduces interest rates we, and others, can follow and we did. We went down to 3.5% and it occurred to me that that was ¼ of the base rate when I bought here. Therefore, another person could get 4 times his mortgage for the same cost as his 1991 mortgage and that is what happened here and across the world.
The UK house price rose to 9.3 times average income when the norm is 3. US house prices went to 6.
We first heard the term sub-prime mortgagee in 2007. But the fact is that since Carter the NINJAs basically had to be given a mortgage and if he didn’t get one he could get legal assistance from Barack Obama, the solicitor, to get his right to a mortgage. The banks found a way of selling on sub-prime mortgages as securitized bonds (mortgages are securitized loans as the lender has his name on the title and can reposess the asset and sell it if the mortgagee fails to pay). The rip-roaring Northern Rock was giving 125% loans but it was selling them on and was outstanding in the building society market with a great business model for many years.
Securitized bonds paid as much as 18% and there was massive appetite for them. The more sub-prime the better the bond paid and house prices just went up and up and up (as bubbles do). US banks were actively seeking NINJAs and Northern Rock was reaping them in with its 125% deals. In the US you got a three-year easy start to draw you in. These bonds were triple A and when you think that interest rates in Japan were 0% for seven years you can see where the appetite came from. Foreigners held 80% of US treasuries. They were AAA and paid 4% when your bank paid 0%. Buyers of Mortgaged Backed Securities (MBS) looked no further than the 18% and the word “securitized”.
So my point is that the US, with its reserve currency status, had a licence to reduce interest rates and it paid them well, putting on 7m extra jobs and expanding GDP. The cost of Medicare and Medicaid increased 10 fold in twenty years and Bush signed the cheques. The cost of Iraq was small fry by comparison. The US debt ceiling was increased with a nod some twenty times and no one was bothered.
That is what was happening to the world economy. The sun was getting hot and we all benefited from the low interest rates.
But back home we were wanting in parliamentary debate and scrutiny. This is what parliament does. The massive Labour majority of 1997 led to a situation where it was not necessary for Labour MPs to attend debate but only to attend for the vote. Typically few or no Labour backbenchers attended a Finance Bill debate. Try keeping Ken Clarke, John Redwood or Peter Lilley away when money was on the table. But Labour MPs, who actually thought that Gordon Brown was a super economist (when he only studied modern history), never received or contributed to debate and scrutiny.
Labour (when we talk about labour we are only talking about the handful of middle class privately educated politics, philosophy and economics graduates, PPEs, who traditionally take all the top jobs) (prior to 1965 every member of a conservative cabinet had a PPE from Oxford, you need a PPE to govern) jumped on the easy money decade. They borrowed £30-£40bn every year since 2003, grabbed £15bn pa from pension funds (forcing employers to scrap their defined benefit schemes or fund the missing £15bn from profits which in turn takes £15bn from investment in UK wealth creation), drove people into property as the FTSE suffered the loss of £15bn pa, ran up an off-balance sheet debt of £300bn in PFI, allowed mortgage debt to sky-rocket to £1.2tr, allowed £400bn of home equity release and allowed banks to multiply their lending reserve by as much as 30 times deposits.
The result is that today we have personal debt of 1.06 x GDP, corporate debt of 1.26 x GDP and sovereign debt of 89% of GDP. All affordable when interest rates are low but all having to be paid back.
Debt is where you go when you cannot make ends meet. It is bringing forward future earnings. It is like earning £100 per week and taking a one-week sub and telling everyone you are on £200 per week.
GDP is measured in three ways that all give the same answer. It is basically the summation of all transactions. It peaked at £1.5tr in 2007, as did personal debt (£1.2tr of which was mortgages).
Nevermind Gordon Brown’s claim of 53 quarters of growth and the best chancellor ever. Just looking at a simple model; personal debt rising from 0 to equal to GDP between 1997 and 2007, and assuming it is linear, it takes real GDP from +3% to –7%. We were spending money and providing jobs that derived from home equity release, PFI, mortgages and personal, corporate and sovereign loans.
30,000 extra doctors, 90,000 extra nurses, 80,000 teaching assistants and 118 brand new schools in 2007. It all sounded great. A doubling in the spend on pupils pa and a tripling of NHS spend but all based on borrowing and not what we can afford but passed off as the latter.
The illusion was first broken when the Daily Mail ran the story that 90% of all the new jobs that Labour boasted about went to migrants who came here from 2004 onwards to get paid 6 times what they could get back home for the same work. The £ fell and the Zloty rose and many went home but we still have 1.35m doing work that Brits will not do because they are much better off on benefits. Then it transpires that many of the 5.2m Brits on benefits are basically unemployable and industry will always choose a migrant over a Brit because the Brit is less educated, less presentable and has a lower work ethic.
I broke the story that to halve the deficit in four years also meant to increase the national debt in five years. I put it on lots of financial sites prior to the election. Obama first used the phrase and I thought it was good news until I realised that he would be halving the deficit and not the debt. Labour picked up on it and even made it law and I knew it was a persuasive mantra.
You only had to add a few numbers together to understand that halving the deficit in four years meant doubling the debt in five. Debt was £700bn. Add £178bn, £130bn, £110bn, £89bn and a further year and you doubled the debt. I posted it on Jeff Randall’s Telegraph column and the following day was budget day. He never mentioned the budget on his Sky news show when every other channel was budget, budget, and budget. He just repeated that debt was different to deficit and the debt would double in five years. The Treasury Secretary, Steven Timms, was a guest and Jeff asked him what would happen to debt and Steve didn’t know. Jeff pointed out that it would double and that it was in the budget document that Steven had just written.
We are paying £43bn pa in debt service charges and this will grow to £63bn at the end of the coalition term. But we will miss this target, as it is so difficult to get the structural deficit down to 0 in a five year term.
Please ask yourself what you think about halving the deficit in four years? It does mean paying £120b pa in debt servicing in four years time, equal to the cost of the NHS.
The NHS costs £120b pa out of a total government spend of £700b pa of which £400b goes on benefits and pensions. Does any one really think that paying the cost of the NHS in debt service charges is a good idea?
The numbers are the key to understanding the problem and understanding a problem is the key to solving it.
Management is what we need.
Spending money on the most vulnerable in society was hard to control and ended up multiplying the poor and diverting money from the most vulnerable in society.
We introduced IB (incapacity benefit) for a target audience of 175,000 but soon there were 20 times that number claiming that they couldn’t work a day in their lives due to incapacity. Including 200,000 teenagers.
We went easy on single mums and their numbers grew by three fold in the last twenty years. Often due to LAT’s (live apparts). Those who choose to recover the lost income of the female when a child occurs by claiming to live apart and get everything funded by the state (or as I put it, by their neighbour).
We have to swallow some facts about Labour’s Britain that are not well aired by the media.
-The BBC delighted in telling us that the kids would go back to 118 brand new schools in September 2007 but omitted to tell us that even the primary school children would have to pay the PFI (generally 17% pa over 20 years) as it would load their council tax in years to come.
-600,000 LAT’s all getting all their home bills paid by the taxpayer.
-a career choice for 3.5m, less 175,000, was to graduate from JSA (job seeker’s allowance) to IB for the extra money and to save Labour the embarrassment of high unemployment figures. The most common illness being depression.
-1.35m guest workers doing the work we refuse to do.
-14,000 children excluded from school who will never learn to read and write.
-the average cost of a truant was £2m some 15 years ago. Yet we have more truancy today than ever
-15% leave school with no qualifications despite a doubling of the spend on schooling.
-public sector workers get 43% greater remuneration than private sector workers doing the same work when their 7% extra wages, lower hours, longer holidays, earlier retirement and better pensions are accounted for. The reason being that for 13 years the union (Labour) has sat in the employer’s chair.
-only 64% of working age men work, one in four children live in a home without a father (2m children), 5.2 m of working age do not work, one in four households of working age has no worker.
This list is endless.
I have not mentioned all the assaults on employers. We are beginning to realise that we quite like employers as they provide employment. That is what it says on the can. If you kill an employer you lose the tax they provide and the rest of us have to pick up the tab for benefits necessary to fund the workers that he funded before you hit him with CGL (climate change levy), NMW (national minimum wage) and increased employer NI and UBR (uniform business rates).
None of the Labour stimulus went to employers.
Before going forward let us please get the problem properly identified. There is no point in trying to solve the wrong problem.
Do we all agree that the above is the correct characterisation of the problem?
Tensions in Greece are reaching melting point. And the debate is a clear and straightforward one. What we are witnessing is a propaganda battle between the forces calling for Austerity and those (perhaps indirectly) proposing Default.
Those calling for Austerity claim lazy workers, socialism and corrupt politicians created a dire fiscal problem that Greece must now pay up for. The sins of the past must be repented through public sector belt tightening (a squeezing of living standards) and large-scale land and infrastructure privatisations (i.e. asset sales).
Those calling for default state that the very Sovereignty of Greece is being challenged by external enforcement of debt peonage. Debt that was foisted on them without due care or consent.
The justification for Austerity is that Greece must own up to its responsibilities and pay back these debts. It is the honourable thing to do, we are constantly told. This mantra is voiced by many economists, politicians, the Prime Minister of Greece himself and would no doubt be the de facto position of the majority of citizens in Europe. Default is treated with emotive disdain, and the spectre of financial Armageddon is wielded around with fear-mongering fanaticism to scare any wavering spirits into submission.
The suggestion being is that default would reward the feckless and punish the prudent. However, this conclusion misses out some more profound behaviour re-enforcement which could be demonstrably more harmful.
Here are at least six very sound reasons why the implementation of Austerity would be morally, socially and legally reprehensible:
1) Shared responsibility
If a bank made a stupid loan to me or my business, who is the greater fool?
Surely, in cases of poor lending circumstances, an irresponsible lender should be just as much to blame as an irresponsible borrower. To enforce total accountability on the borrower is tantamount to supporting loan shark type tactics. In a civilised world, the lender of money has a duty of care to ensure the standard of lending, and this should manifest through the acknowledgement of accountability in times of poor judgement.
2) The symmetry of risk & reward
The voices calling for Austerity also seem to be the most vocal ones with a conservative / libertarian bent. Yet they don’t even realise the sheer hypocrisy of demanding such asymmetric punishment when the very mantra of the true Laissez-Faire Capitalist is the cure of poor investment stakes through default!
Hence the very principle of Equity Investment which correctly balances risk & reward. Debt peonage is not the symmetrical solution as defined under Libertarian principles. One has to be either deluded or an ignoramus to accept the blatant contradiction of extracting all reward (interest AND principal repayment) for no risk.
3) Incompetent lending
In addition to the concept of shared / symmetrical responsibility, it should be clear that in all respects a lender should be more accountable for bad investment decisions, as after all they are deemed to be specialists at lending. I am not a professional borrower of money, but my bank manager is a professional lender. They are deemed to be competent, qualified and professional stewards of investment capital.
So let’s review the performance of these lending professionals.
Taking the historical track record of Greek sovereign debt; it has spent 50.6% of years since 1824 in default or re-scheduling. It suffered a severe banking crisis between 1991 and 1995. This is not an auspicious start point, is it? The banking “professionals” may well proclaim that they relied on elaborate and professional risk assessment criteria using the very latest in sophisticated statistics. But a cursory examination of the situation using the techniques of one Rev’d Thomas Bayes would reveal that the Prior Probability of Greek default was in the order of 50%! And in fact, the course of events is no doubt going to support the accuracy of risk assessment by the humble Bayesian probability over the wildly naïve Gaussian statistics of high finance.
Therefore, it’s not just irresponsible lending that has happened, but incompetent lending!
Bear in mind that bankers justify very high salaries and bonuses because they claim to be very good at their job and that they perform socially beneficial activities. Clearly they are not using reliable tools for assessing levels of risk, and nor have they conducted appropriate due diligence on the country’s ability to pay. Not only this but their self-proclamations of societal benefactors is crumbling before our eyes.
4) Odious debt
So we have seen how the lender has to accept an element of responsibility, but now to turn to the borrower. What many voices seem to declare is that each of the people within Greece have been personally complicit in this excessive borrowing. But this is to accept the idea that all nationals are fully accountable for the conduct of their “representative” leaders. It is the notion of “borrowing by proxy”.
In a way our Gvt in the UK has also done this covertly. It has taken private sector debt problems and soaked up the responsibility onto the nation’s balance sheet. How many people in this country are aware that our banks have liabilities 5 times our national GDP? Was I consulted on this? Did I vote for this? Did I sign a declaration of acceptance of these terms? No, I did not.
There is a term for this situation and one which may become more prominent in months to come. It is that of “odious debt”. Debt which was incurred for purposes that do not serve the best interests of the nation, and therefore should not be enforceable:
Iceland serves as an example of this principle in action. The people of Iceland have refused to underwrite the extraordinary liabilities of private banking institutions. They understand all too well the morally unjust nature of letting a few wealthy people prosper during the good times, and the scarper when it goes bad (in fact they are charging their Prime Minister for financial negligence for tolerating such leveraged liabilities).
5) Debt for foreclosure
Returning to the national stereotypes mentioned above, then why in the world would anyone invest money in such a country and then expect to get it back? One can’t turn around and forcefully demand the repayment of debt from a nation, whilst at the same time claim that those peoples were never really good for it in the first place. This is an overt admission of not doing one’s homework, but then still demanding full and fair entitlement. It is nothing less than a deliberate intention to ensnare.
Economist Michael Hudson tells an intriguing story of this very strategy in action more than 200 years ago in the US:
“[In] colonial times, when British speculators eyed rich New York farmland. Their ploy was to extend loans to farmers, and then call in the loans when the farmer’s ability to pay was low, before the crop was harvested. This was indeed a liquidity problem – which financial opportunists turned into an asset grab. Some lenders, to be sure, created a genuine insolvency problem by making loans beyond the ability of the farmers to pay, and then would foreclose on their land.”
“They sued under the fraudulent conveyance law, which says that if a creditor makes a loan without knowing how the debtor can pay in the normal course of business, the loan is assumed to have been made with the intent of foreclosing on property, and is deemed fraudulent.”
In other words, it is a pre-planned strategy on the part of the lender to push the borrower into such a corner that they have to sell up at firesale prices. But, clearly this strategy needs some form of social compliance and legitimacy, otherwise it would / should be deemed legally fraudulent!
To socially and legally tolerate it is to explicitly legitimise loan sharking:
“high finance is seeking to turn public infrastructure into rent-extracting tollbooths to extract economic rent (the “free lunch economy”), while replacing labour unions with non-union labour so as to work it more intensively. This new road to neoserfdom is an asset grab.”
6) And finally, but what if the devil turns on you?
There is a scene in the play “A man for all seasons” in which the young Roper is debating with Thomas More:
More: What would you do? Cut a great road through the law to get after the Devil?
Roper: I’d cut down every law in England to do that!
More: Oh? And when the last law was down, and the Devil turned ’round on you, where would you hide, Roper, the laws all being flat?
There is a stark warning for us all in the events in Greece. If you are happy to play along with the Neoliberal asset stripping and cheer the Austerity along in other countries – then don’t complain when they turn their sights on us. As highlighted above, the UK’s implicit sovereign liabilities are 5 times our GDP (and therefore more than twice our whole country’s national wealth).
Hudson’s article later extends the actions happening in Greece to the wider western world. He situates this as a general rolling back of progressive principles which were enacted primarily Post WWII:
”The asset stripping that Europe’s bankers are demanding of Greece looks like a dress rehearsal to prevent the “I won’t pay” movement from spreading to “Indignant Citizens” movements against financial austerity in Spain, Portugal and Italy. Bankers are trying to block governments from writing down debts, stretching out loans and reducing interest rates. “
Also from Zerohedge again:
“The war between liberals and conservatives is a false divide-and-conquer dog-and-pony show created by the powers that be to keep the American people divided and distracted. So before assuming that privatization is a good thing, read on.”
Certainly anyone for whom their personal interest will be clearly served through the enactment of Austerity will never even raise these points or acknowledge their legitimate discussion. But if we are to hope for an enlightened resolution to the mounting debt woes of the world, we must at least confront each one of these points with the full force of conviction. To have no debate on these points is to unconditionally surrender ourselves to economic genocide.
This post is now available in Spanish, courtesy of Toponium.es!