Michael Hudson: Breakup of the euro? Is Iceland’s rejection of financial bullying a model for Greece and Ireland?

Posted on by

Yves here. This piece describes how voter opposition may derail rule by bankers via IMF, European Commission, and ECB austerity programs in Europe.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College. Cross posted from CounterPunch.

Last month Iceland voted against submitting to British and Dutch demands that it compensate their national bank insurance agencies for bailing out their own domestic Icesave depositors. This was the second vote against settlement (by a ratio of 3:2), and Icelandic support for membership in the Eurozone has fallen to just 30 percent. The feeling is that European politics are being run for the benefit of bankers, not the social democracy that Iceland imagined was the guiding philosophy – as indeed it was when the European Economic Community (Common Market) was formed in 1957.

By permitting Britain and the Netherlands to blackball Iceland to pay for the mistakes of Gordon Brown and his Dutch counterparts, Europe has made Icelandic membership conditional upon imposing financial austerity and poverty on the population – all to pay money that legally it does not owe. The problem is to find an honest court willing to enforce Europe’s own banking laws placing responsibility where it legally lies.

The reason why the EU has fought so hard to make Iceland’s government take responsibility for Icesave debts is what creditors call “contagion.” Ireland and Greece are faced with much larger debts. Europe’s creditor “troika” – the European Central Bank (ECB), European Commission and the IMF – view debt write-downs and progressive taxation to protect their domestic economies as a communicable disease.

Like Greece, Ireland asked for debt relief so that its government would not be forced to slash spending in the face of deepening recession. “The Irish press reported that EU officials ‘hit the roof’ when Irish negotiators talked of broader burden-sharing. The European Central Bank is afraid that any such move would cause instant contagion through the debt markets of southern Europe,” wrote one journalist, warning that the cost of taking reckless public debt onto the national balance sheet threatened to bankrupt the economy. Europe – in effect, German and Dutch banks – refused to let the government scale back the debts it had taken on (except to smaller and less politically influential depositors). “The comments came just as the EU authorities were ruling out investor ‘haircuts’ in Ireland, making this a condition for the country’s €85bn (£72bn) loan package. Dublin has imposed 80 percent haircuts on the junior debt of Anglo Irish Bank but has not extended this to senior debt, viewed as sacrosanct.”

At issue from Europe’s vantage point – at least that of its bankers – is a broad principle: Governments should run their economies on behalf of banks and bondholders. They should bail out at least the senior creditors of banks that fail (that is, the big institutional investors and gamblers) and pay these debts and public debts by selling off enterprises and shifting the tax burden onto labor. To balance their budgets they are to cut back spending programs, lower public employment and wages, and charge more for public services from medical care to education.

This austerity program (“financial rescue”) has come to a head just one year after Greece was advanced $155 billion bailout package in May 2010. Displeased at how slowly the nation has moved to carve up its economy, the ECB has told Greece to start privatizing up to $70 billion by 2015. The sell-offs are to be headed by prime tourist real estate and the remaining government stakes in the national gambling monopoly OPAP, the Postbank, the Athens and Thessaloniki ports, the Thessaloniki Water and Sewer Company and the telephone monopoly. Jean-Claude Juncker, Luxembourg’s Prime Minister and chairman of the Eurozone’s group of finance ministers, warned that only if Greece agreed to start selling off assets (“consolidating its budget”) would the EU agree to stretch out loan maturities for Greek debt and “save” it from default.

The problem is that privatization and regressive tax shifts raise the cost of living and doing business. This makes economies less competitive, and hence even less able to pay debts that are accruing interest, leading toward a larger ultimate default. But turning debtor economies into a set of tollbooths to sell off remains the predatory textbook financial response.

Financial power is achieving what military conquest did in times past. Pretending to make indebted economies more competitive, the actual aim is to squeeze out enough payments so that bondholders (and indeed, voters) will not be obliged to confront the reality that many debts are unpayable except at the price of making the economy too debt-ridden, too regressively tax-ridden and too burdened with rising privatized infrastructure charges to be competitive.

Cutting back public spending and regressive tax shifts dry up capital investment and productivity. Such economies are run like companies taken over by debt-leveraged raiders on credit, who downsize and outsource their labor force so as to squeeze out enough revenue to pay their own creditors – who take what they can and run. The tactic of this financial attack is no longer overt military force as in days of yore, but something less costly because its victims submit more voluntarily. Third World countries demonstrated the destructive consequences from the 1970s onward under IMF austerity planning. Europe is now repeating the same shrinkage.

But the intended financial victims are fighting back. The attackers are not losing their armies and manpower, but their balance sheets are threatened – and hence their own webs of solvency with which they sought to entrap their prey. Greek labor unions (especially in the public enterprises being privatized), the ruling Socialist Party and leading minority parties rejected the radical sacrifices being demanded by Eurozone officials.

The bankers’ response was to insist that Greece respond to its wave of strikes and popular protest by suspending party politics and economic democracy. Financial planning be placed above party politics, and demanded “cross-party agreement on any overhaul of the bail-out.” “The government and the opposition should declare jointly that they commit to the reform agreements with the EU,” Mr. Juncker explained to Der Spiegel.

Criticizing Prime Minister George Papandreou’s delay at starting the sale of state assets, Europe’s financial planners proposed a national privatization agency to act as a face-saving “temporary” intermediary. The idea is to transfer revenue from these assets to foreign creditors – and to pledge its public assets as collateral to be forfeited in case of default in payments to government bondholders. Suggesting that the government “set up an agency to privatize state assets” along the lines of the German Treuhandanstalt that sold off East German enterprises in the 1990s,” Mr. Juncker thought that “Greece could gain more from privatizations than the €50 billion ($71 billion) it has estimated.”

European bankers have their eye on the sale as much as $400 billion of Greek assets – enough to pay off all the government debt. Failing payment, the ECB threatened not to accept Greek government bonds as collateral. This would prevent Greek banks from doing business, wrecking its financial system and paralyzing the economy. This threat was supposed to make privatization “democratically” approved – followed by breaking union power and lowering wages (“internal devaluation”). “Jan Kees de Jager, Dutch finance minister, has proposed that any more loans to Greece should come with collateral arrangements, in which European state lenders would take over Greek assets in the event of a sovereign default.”

And default will become pressing whenever the ECB may choose to pull the plug. It is inevitable, given the debt corner into which governments have recklessly deregulated the banks and cut property taxes and progressive income taxes.

The ECB makes governments unable to finance their spending by central banks of their own

Introduction of the euro in 1999 explicitly prevented the ECB or any national central bank from financing government deficits. This means that no nation has a central bank able to do what those of Britain and the United States were created to do: monetize credit to domestic banks and for public spending generally. The public sector has been made dependent on commercial banks and bondholders. This is a bonanza for them, rolling back three centuries of attempts to create a mixed economy financially and industrially, by privatizing the credit creation monopoly as well as capital investment in the infrastructure monopolies now being pushed onto the sales block for bidders – on credit, with the winner being the one who promises to pay out the most interest to bankers to absorb the access fees (“economic rent”) that can be extracted.

Politics is being financialized while economies are being privatized. The financial strategy is to remove economic planning from democratically elected representatives, centralizing it in the hands of financial managers. What Benito Mussolini called “corporatism” in the 1920s (to give it its polite name) is now being achieved by Europe’s large banks and financial institutions – ironically (but I suppose inevitably) under the euphemism of “free market economics.” It is the financial counterpart to Hayek’s Road to Serfdom – central planning by Wall Street, the City of London and Frankfurt, not Washington.

Language is adopting itself to reflect the economic and political transformation (surrender?) now underway. Central bank “independence” is euphemized as the “hallmark of democracy,” not the victory of oligarchy. The task of such rhetoric is to divert attention from the fact that the financial sector aims not to “free” markets, but to centralize control in the hands of financial managers. Their logic is to subject economies to austerity and even depression, sell off public land and enterprises, and reduce living standards in the face of a sharply increasing concentration of wealth at the top of the economic pyramid. The idea is to slash government employment, lowering public-sector salaries to lead private sector wages downward, while cutting back social services.

Latvia is cited as the model success story. Its government slashed employment and public sector wages fell by 30 percent in 2009-10. Private-sector wages followed the decline. This was applauded as a “success story” and “accepting reality” – despite accelerating emigration. So now, the government has put forth a “balanced budget amendment,” to go with its flat tax on labor (some 59 percent, with only a 1 percent tax on real estate). Former U.S. neoliberal presidential candidate Steve Forbes would find it an economic paradise.

The internal contradiction (as Marxists would say) is that the existing mass of interest-bearing debt must grow as it receives interest that is re-invested to earn yet more interest. This is the “magic” of compound interest. The problem is that its payment diverts revenue away from the circular flow between production and consumption. Say’s Law says that payments by producers (to employees and producers of capital goods) must be spent, in the aggregate, on buying the products that labor and tangible capital produce. Otherwise there is a market glut and business shrinks – with the financial sector’s network of debt claims bearing the brunt.

The financial overhead intrudes into this circular flow. Income spent to pay creditors is not spent on goods and services. It is re-invested in new loans, or on stocks and bonds (assets in the form of financial and property claims on the economy), or on “gambling” (“casino capitalism,” derivatives, the international carry trade – that is, exchange-rate and interest-rate arbitrage) and other financial claims that are independent of the production-and-consumption economy. So as financial assets accrue interest – bolstered by new credit creation on computer keyboards by commercial banks and central banks – the financial rake-off from the “real” economy increases.

The idea of paying debts regardless of social cost is backed by mathematical models as complex as those used by physicists designing atomic reactors. But they have a basic flaw simple enough for a grade-school math student to understand: They assume that economies can pay debts growing exponentially at a higher rate than production or exports are growing. Only by ignoring the ability to pay – by creating an economic surplus over break-even levels – can one believe that debt leveraging can produce enough financial “balance sheet” gains to pay banks, pension funds and other financial institutions that recycle their interest into new loans. Financial engineering is expected to usher in a postindustrial society that make money from money (or rather, from credit) via rising asset prices for real estate, stocks and bonds.

It all seems much easier than earning profit from tangible investment to produce and market goods and services, because banks can fuel asset-price inflation simply by creating credit electronically on their computer keyboards. Until 2008 many families throughout the world saw the price of their home rise by more than they earned in an entire year. This cut out the troublesome M-C-M’ cycle (using capital to produce commodities to sell at a profit), by M-M’ (buying real estate or assets already in place, or stocks and bonds already issued, and waiting for the central bank to inflate their prices by lowering interest rates and untaxing wealth so that high income investors can increase their demand for property and financial securities).

The problem is that credit is debt, and debt must be paid – with interest. And when an economy pays interest, less revenue is left over to spend on goods and services. So markets shrink, sales decline, profits fall, and there is less cash flow to pay interest and dividends. Unemployment spreads, rents fall, mortgage-holders default, and real estate is thrown onto the market at falling prices.

When asset prices crash, these debts remain in place. As the Bubble Economy turns into a nightmare, politicians are taking private (and often fraudulent) bank losses onto the public balance sheet. This is dividing European politics and even threatening to break up the Eurozone.

Breakup of the Eurozone?

Third World countries from the 1960s through 1990s were told to devalue in order to reduce labor’s purchasing power and hence imports of food, fuel and other consumer goods. But Eurozone members are locked into the euro. This leaves only the option of “internal devaluation” – lowering wage rates as an alternative to scaling back payments to creditors atop Europe’s economic pyramid.

So “saving the euro” is a euphemism for governments saving the financial class – and with it a debt dynamic that is nearing its end regardless of what they do. The aim is for euro-debts to Germany, the Netherlands, France and financial institutions (now joined by vulture funds) to preserve their value. (No haircuts for them). The price is to be paid by labor and industry.

Government authority is to lose most of all. Just as the public domain is to be carved up and sold to pay creditors, economic policy is being taken out of the hands of democratically elected representatives and placed in the hands of the ECB, European Commission and IMF. The latter is playing “good cop” for the time being, to the ECB’s “bad cop.” But all financial institutions are willing to see Spain’s unemployment rate rise to 20%, much as in the Baltics, with nearly twice as high an unemployment rate among recent school graduates. As William Nassau Senior is reported to have said when told that a million Irishmen had died in the potato famine: “It is not enough!”

How much austerity is “enough” – for more than the short run? “Helping Greece remain solvent” means, in practice, helping it avoid taxing wealth (“too rich to pay” is the new corollary to “too big to fail”) and roll back wages while obliging labor to pay more in taxes while the government (“taxpayers,” a.k.a. workers) sells off public land and enterprises to bail out foreign banks and bondholders while slashing its social spending, industrial subsidies and infrastructure investment.

One Greek friend in my age bracket has said that his private pension (from a computing company) was slashed by the government. And when his son went to collect his own unemployment check, it was cut in half on the ground that his parents allegedly had the money to support them. The price of the house they bought a few years ago has plunged. They tell me that they are no more eager to remain part of the Eurozone than the Icelandic voters showed themselves last month.

The strikes continue. Anger is rising. When incoming IMF head Christine Lagarde was French trade minister, she suggested that: “France had to revamp its labor code. Labor unions and fellow ministers balked, and Ms. Lagarde backtracked, saying she had expressed a personal opinion.” This opinion is about to become official policy – from the IMF that was acting as “good cop” to the ECB’s “bad cop.”

I suppose that all that really is needed is for people to understand just what dynamics are at work that make these attempts to pay in vain. Creditors know that the game is up. All they can do is take as much as they can, as long as they can, pay themselves bonuses that are “free” from recapture by public prosecutors, and run to their offshore banking centers.

*This article is an excerpt from Prof. Hudson’s upcoming book, “Debts that Can’t be Paid, Won’t Be,” to be published later this year.

Print Friendly
Tweet about this on TwitterDigg thisShare on Reddit0Share on StumbleUpon0Share on Facebook0Share on LinkedIn0Share on Google+0Buffer this pageEmail this to someone

117 comments

  1. Maju

    Excellent analysis.

    The Greek People has today occupied Syntagma Square in imitation of Egyptian and Spanish protesters, establishing a de facto democracy against a deaf and illegitimate parliament (and hence government and overall political system).

    The difference between Iceland and Greece is that the first has a functional democracy (barely so, they were lucky enough to have a patriotic President who vetoed highly unpopular laws) and the latter does not.

    On the other hand Greece has a very deep revolutionary tradition, which will no doubt take power soon one way or another.

    What will the ECB do then? Let me guess: attempt a military coup which will unavoidably fail. Then attempt to manipulate Turkey or maybe even Albania into attacking Greece so they can pretext a “humanitarian intervention” as in Libya.

    But there is a growing risk of the revolutionary movement becoming closer to pan-European at each step. And that is something really interesting – because for such a Revolution to succeed it probably needs to be at continental level.

    1. leroguetradeur

      The comments here have become totally lunatic. Of course these people are not going to attack Greece.

      The underlying issue here is how to run an economy from a fiscal point of view. The conventional wisdom is that what you need to do is balance the budget across the business cycle, that is, deficit in recession, surplus in boom.

      There’s a lunatic chorus here which seems to think that all you have to do is get your own central bank and print as much money as you feel like.

      Well, its been tried. It always ends in tears. The problem with Greece is not membership of the euro. The fiscal policies Greece was following would have ended in a crash regardless of whether it were in the euro. You simply cannot have a public sector with the salary and pension arrangements they had, and finance it from borrowing as they did. It is not sustainable, and what cannot be sustained will not continue.

      What was going on in Greece was looting. Of course what went on in the US prior to the recent crisis was also looting. Looting is not the sole province of the banks. Any group that has a chance will loot. They will use the government to do it at every opportunity.

      Whether Greece is inside the euro or not, makes no difference. The country cannot afford that public sector or that level of spending, so it will come to a stop. They may have the finest revolutionary tradition in the world, its going to stop. Their problem is too small an economy to finance what they would like to be their lifestyle.

      1. /L

        The conventional wisdom is that what you need to do is balance the budget across the business cycle

        It’s not conventional wisdom, it’s neo-liberal class war that touted these ideas.

        Before the neoliberal onslaught on the working people and public sector deficits was the norm. No one is advocating some printing press mania, periods of known hyperinflation is usually happens when there is serious supply side slumps.

        US Federal Deficits – 1910 – 2010
        What we can see in this graph is that those rare periods of surplus is followed by serious recessions/depressions.

        Greece have its political problems, no one is denying that. When the euro was in its making there was solemn declarations that there would be European spirit of community and it was the end of European beggar thy neighbour politics. The first thing Germany did was implementing so called Harts reforms that internal devalued German workers, squeezed down Real Unit Labour Cost. Not by superior productivity growth but by suppressed real wages.
        EMU: Real unit labour costs, 2000-2009 (March 2000=100).
        the less industrial advantaged “competitors” was back tied in the Euro system and the free and open internal market. Of course they could have countered that with their own onslaught of their people. But have that been in the peoples best interest?

        1. DownSouth

          /L,

          Thanks a million for the graph.

          You have to realize, however, that people like leroguetradeur and RebelEconomist don’t do reality.

        2. lerogetradeur

          Well, the important thing is to put a stop to this neoliberal assault on working people, to take note from the chart that deficits are unproblematic, in fact they are good, they promote economic growth and well being, and to implement a new financial management regime which has large deficits all the time.

          This way the bankers will have to end their authoritarian oppression of the workers, the neoliberal conspiracy will be ended, unions will thrive, those not in unions, well they are idiots so who cares, and all will be well!

          Good luck with that one. I was going to say, with persuading people to vote for that, but then realized that no-one will or should be asked to vote for that. Voting is also a neoliberal con game, the votes of the people are crippled by false consciousness. What we have to do is in the short term, to overcome this false consciousness, compel them to be free. We must compel them to act in their own interests.

          Because the sad fact is that the neoliberal banksters have so oppressed the minds of the workers that they no longer know what is in their interests. So we have to tenaciously and at times sternly bring them into reality and reeducate them.

          Its an inspiring prospect.

  2. DownSouth

    Michael Hudson said: “Financial power is achieving what military conquest did in times past.”

    I disagree. It just isn’t ShowTime yet. Liberal imperialism—-neoliberalism—-is always imposed with violence. People never accept it lying down. Here’s a little history lesson from Jonathan Schell writing in The Unconquerable World:

    From Laissez-Faire to the Military Revoluton

    A parallel process of militarization occurred in the evolution of the industrial revolution. In Clausewitz’s day, the effect of industrialization had yet to make themselves fully felt in war. The early champions of the free market, most of them British, had in fact looked to industry mainly to create the wealth of nations, as the title of Adam Smith’s classic book had it, not the power of nations, which had been the preoccupation of their mercantilist predecessors. The advocates of laissez-faire declared the independence of economics from state power. (The eventual coining of the word “economics,” identifying a distinct realm of human activity subject to its own laws, was one sign of their faith in that independence.) The market worked best, the worldly philosophers of the late eighteenth century believed, when the government kept its hands off it. Classical economics, in fact, “had not place for the nation, or any collectivity larger than the firm.”

    Smith’s successors proceeded even further in this line of thinking. In the early nineteenth century, the most prominent champions of the market, including the British champions of laissez-faire Richard Cobden and John Bright, contended that free trade, by breaking down or ignoring national boundaries, naturally tended to foster world peace. The market, they ardently believed, was a solvent of national units and a pacifier of national conflicts. “I see in the Free Trade principle,” Richard Cobden said in a speech in 1846, “that which shall act on the moral world as the principle of gravitation in the universe, drawing men together, thrusting aside the antagonism of race, and creed, and language, and uniting us in the bonds of eternal peace.” …. An unbroken thread of faith in free trade as an abettor of peace runs through the entire tradition of liberal internationalism, surviving many disappointments and continuing, if in attenuated for, to this day.

    [….]

    However, events did not proceed as the liberal imperialists expected—-neither in Asia nor in Africa nor in the Ottoman Empire. The economic arrangements forced upon those lands did not strengthen and liberalize their governments but undermined them and drove them, one after another, toward collapse. The Egyptian government, for example, accepted loans from Europe, spent the funds on large but unproductive public projects, and, when these failed, sought to keep up payments on the loans by raising taxes on the poor, who grew discontented and rebellious. The imperial powers then were faced with what seemed a drastic choice: between withdrawing entirely and imposing direct rule. They chose direct rule.

    By the turn of the century, most of the territories of the globe had been incorporated by imperialism into the European vortex. Any move anywhere—-in the heart of Africa, in the Bay of Bengal, in the Strait of Tsushima—-by any of the great powers now seemed to the others likely to upset a global balance of power and to require a countermove. The conservative British politician Lord Curzon spoke for his whole generation of statesmen when, after a long journey to the Middle East in 1890, he wrote, “Turkestan, Afghanistan, Transcaspia, Persia—-to many these names breathe only a sense of utter remoteness or a memory of strange vicissitudes and of moribund romance. To me, I confess, they are the pieces on a chessboard upon which is being played out a game for the dominion of the world.”

    ▬Jonathan Schell, The Unconquerable World

    1. Anonymous Jones

      The only time violence ever disappears from the organization of social conduct is when it creeps just below the surface. The potentiality of violence underlies almost all social interaction, from the rearing of children to the enforcement of contracts between or among adults to the obvious example of incarceration of individuals for breaking some entity’s or some individual’s rules. I think one can, however, on some level, distinguish private violence, police violence, military violence and the threat of violence. I think Hudson’s point is that this sort of restructuring of society is happening with far less military intervention than it previously did.

      In any event, Hudson’s stuff (this included) is some of the best I’ve ever read on the subject (and the discussion of Hudson was the best part of the uneven book Treasure Islands). I’m in favor of anything that widens his audience.

  3. F. Beard

    The problem is that credit is debt, and debt must be paid – with interest. Michael Hudson

    Furthermore, banks don’t extend credit in their own goods and services; they extend it in other people’s goods and services. They are thus credit counterfeiters. And the extent to which they can counterfeit is heavily dependent on the amount of government privilege they enjoy such as a central bank, legal tender laws for private debt, etc.

    If banking is to be a public utility then it should be run exclusively by government but if not then ALL government privilege for it should be removed.

    1. petridish

      I heartily second that recommendation, and I am continuously surprised that “The Shock Doctrine” is cited as infrequently as it seems to be in discussions of this subject.

      1. Psychoanalystus

        My friend, the reason Noemi Klein’s Shock Doctrine is not cited more often in this blog is simply because most people here have long ago memorized that book from cover to cover. :)

        Psychoanalystus

        1. illusionist

          “My friend, the reason Noemi Klein’s Shock Doctrine is not cited more often in this blog is simply because most people here have long ago memorized that book from cover to cover. :)”

          Haven’t read it but I have heard that is like “The collected wisdom of Chairman Mao” or the “Little red book”.

          Is it Commie manifesto in disguise, if so, I would rather not read it.

          1. Rabid Limburgher

            It’s been banned by Rush Limbaugh Dittoheads, Cokeheads, and Dickheads League (RLDCD) if that’s what you’re wondering.

    2. spark

      …and Hudson’s Super Imperialism: The Origin and Fundamentals of US World Dominance.

    3. Cahal

      Although I haven’t read it, I’m aware it has received widespread criticism for misrepresenting Friedman and for being a bit too extreme in general. Is any of this criticism founded?

      1. al

        Everyone misrepresents Freidman (and Marx, and the Bible…)
        Klein responds to what everyone seems to take Freidman to mean.

        I don’t know what you mean about a bit too extreme. Read it for yourself and see!

        If I had any criticism of it at all, it would be that it doesn’t go far enough in its critique. While there is usually a plan to create disaster and use this to ram through regressive policy, there are usually even more sinister forces at work that don’t get critiqued since the book is tightly argued around this one tactic.

      2. Foppe

        Insofar as it is founded on anything, it’s on trivialities. It seems to me that the major reason why reviewers criticize her interpretation of Friedman and his legacy is because they don’t want to have to respond to anything else she writes in the book, as this is far more damning than any belief Friedman may or may not have had.
        As such, I would really suggest that you read it, and then decide whether you really care whether Friedman is done an injustice or not. Because I suspect you’ll have more interesting things to think about by then.

      3. Psychoanalystus

        Friedman did not invent the neoliberal tactics. He is just putting a face on an age-old scam. The same approaches were used in Eastern Europe before WW2, which is largely why those countries were so open to communism. If you read history books from former communist countries, you will encounter statements such as “the foreigners stole our country”, which is precisely what the ECB, EU, and the IMF would like to do to Greece now.

        Psychoanalystus

        1. illusionist

          The difference between the Colonizers et al (not excluding Alexander) and this situation is that in the current instance the Greeks choose to borrow. Now having enjoyed the credit they seem to want to not pay. Would you walk into a restaurant & expect not to pay or would find it odd that if you bought a car on credit the collector shows up if you don’t pay?

          How come no government was voted out for borrowing too much in the go-go days?

  4. Schofield

    Excellent article. Well done! This is the sorry story of the conversion of the real economy into the self-sabotaging virtual economy of financial rentier capitalism! Clearly until nations get their financial sectors under control democracy will continue to decay and developed economies will continue to spiral dowwards. Money’s invention delivered benefits but also selfishness and until a majority see this clearly and put safeguards in place to prevent their own abuse matters will continue to deteriorate.

  5. DownSouth

    Michael Hudson said:

    The financial strategy is to remove economic planning from democratically elected representatives, centralizing it in the hands of financial managers. What Benito Mussolini called “corporatism” in the 1920s (to give it its polite name) is now being achieved by Europe’s large banks and financial institutions – ironically (but I suppose inevitably) under the euphemism of “free market economics.” It is the financial counterpart to Hayek’s Road to Serfdom – central planning by Wall Street, the City of London and Frankfurt, not Washington.

    ———————————————————

    Of course it is important to the political and social sciences that the essence of totalitarian government, and perhaps the nature of every bureaucracy, is to make functionaries and mere cogs in the administrative machinery out of men, and thus to dehumanize them… True, we have become very much accustomed by modern psychology and sociology, not to speak of modern bureaucracy, to explaining away the responsibility of the doer for his deed in terms of this or that kind of determinism… When Hitler said that a day would come in Germany when it would be considered a “disgrace” to be a jurist, he was speaking with utter consistency of his dream of a perfect bureaucracy.
    ▬Hannah Arendt, Eichmann in Jerusalem

    1. Foppe

      That’s not the point he was making; it’s a second step, and much further removed from political-democratic control. Hudson’s point is that the Neoliberals are explicitly trying to depoliticize decisions that were at one time recognized to be political choices, made by elected officials, by arguing that “the technocrat (or really the market) knows best”. Both of these things are insidious, and the argument for both of these moves is broadly similar (to remove the supposed inferior or damnable influence of irrationality or emotion from decision processes), but they are not directly comparable in a democratic country (or supranational entity like the EU).

      1. pebird

        That is a very good point. A related area is in the interpretation of the spirit of the law. Even when democratic processes deliver a somewhat reasonable law, the administration of that law via regulations and enforcement must go through the necesary process of bureaucracy and administration.

        With capture of the government apparatus by neoliberalism, the spirit of the law can be compromised continually, adding to public frustration and cynicism.

      2. Uwe

        Correct, and although he doesn’t say so in this article, in previous articles he’s used the term “neo-feudalism.”

        “Neo-feudalism” means that you reinstitute an aristocracy like in feudal Europe but because of diffuse governance through labyrinthine institutions and complex interconnections, they don’t have any of the responsibilities they used to have. It’s an aristocrat’s wet dream.

      3. DownSouth

        Foppe,

        You say “democratic country”? Or “democratic supranational entity like the EU”?

        Where?

        All I can say is that you must live on a different planet than I do.

        Personally, I’m fed up with dictatorships, whether they be so-called “dictatorships of virtue” like Marxism (the dictatorship of the proletariat) or progressivism (the dictatorship of the intelligentsia); or dictatorships of evil like libertarianism/neoliberalism (the dictatorship of selfish corporations). I’m ready to experiment with some real, bona fide democracy.

        And indeed, my point may not be the same point Hudson is making, but it is the point that I am making. For it is absolutely necessary to ask how it is that these European Central Bank (ECB), European Commission and IMF bureaucrats have become so unbelievably callous and indifferent to the great human suffering they are inflicting. Granted, the degree of their depravity has not reached that of the Nazis, yet. But the behavior of Frederick von Hayek and Milton Friedman was definitely Naziesque when they traipsed down to Chile and threw their unbridled support behind the murdering dictator Augusto Pinochet. And why should comparing the ethics of the current crop of libertarian/neoliberals to the Nazis or Bolsheviks be off limits? As Andrew M. Lobaczewski put it in Political Ponerology:

        If physicians behaved like ethicists, i.e. relegated to the shadow of their personal experience relatively un-esthetic disease phenomena because they were primarily interested in studying questions of physical and mental hygiene, there would be no such thing as modern medicine. Even the roots of this health-maintenance science would be hidden in similar shadows. In spite of the fact that the theory of hygiene has been linked to medicine since its ancient beginnings, physicians were correct in their emphasis upon studying disease above all. They risked their own health and made sacrifices in order to discover the causes and biological properties of illnesses and, afterwards, to understand the pathodynamics of the courses of these illnesses. A comprehension of the nature of a disease, and the course it runs, after all, enables the proper curative means to be elaborated.

        Martha Stout, who has worked extensively with victims of psychopaths, writes:

        Imagine—-if you can—-not having a conscience, none at all, no feelings of guilt or remorse no matter what you do, no limiting sense of concern for the well-being of strangers, friends, or even family members. Imagine no struggles with shame, not a single one in your whole life, no matter what kind of selfish, lazy, harmful, or immoral action you had taken.

        And pretend that the concept of responsibility is unknown to you, except as a burden others seem to accept without question, like gullible fools.

        Now add to this strange fantasy the ability to conceal from other people that your psychological makeup is radically different from theirs. Since everyone simply assumes that conscience is universal among human beings, hiding the fact that you are conscience-free is nearly effortless.

        You are not held back from any of your desires by guilt or shame, and you are never confronted by others for your cold-bloodedness. The ice water in your veins is so bizarre, so completely outside of their personal experience, that they seldom even guess at your condition.

        In other word, you are completely free of internal restraints, and your unhampered liberty to do just as you please, with no pangs of conscience, is conveniently invisible to the world.

        You can do anything at all, and still your strange advantage over the majority of people, who are kept in line by their consciences will most likely remain undiscovered.

        How will you live your life?

        What will you do with your huge and secret advantage, and with the corresponding handicap of other people (conscience)?

        The answer will depend largely on just what your desires happen to be, because people are not all the same. Even the profoundly unscrupulous are not all the same. Some people—-whether they have a conscience or not—-favor the ease of inertia, while others are filled with dreams and wild ambitions. Some human beings are brilliant and talented, some are dull-witted, and most, conscience or not, are somewhat in between. There are violent people and non-violent ones, individuals who are motivated by blood lust and those who have no such appetites….

        Provide you are not forcibly stopped, you can do anything at all…

        [….]

        The high incidence of sociopathy in human society has a profound effect on the rest of us who must live on this planet, too, even those of us who have not been clinically traumatized. The individuals who constitute this 4 percent drain our relationships, our bank accounts, our accomplishments, our self-esteem, our very peace on earth.

        Yet surprisingly, many people know noting about this disorder, or if they do, they think only in terms of violent psychopathy—-murderers, serial killers, mass murderers—-people who have conspicuously broken the law many times over, and who, if caught, will be imprisoned, maybe even put to death by our legal system.

        We are not commonly aware of, nor do we usually identify, the larger number of nonviolent sociopaths among us, people who often are not blatant lawbreakers, and against whom our formal legal system provides little defense.

        Most of us would not imagine any correspondence between conceiving an ethnic genocide and, say, guiltlessly lying to one’s boss about a coworker. But the psychological correspondence is not only there; it is chilling. Simple and profound, the link is the absence of the inner mechanism that beats up on us, emotionally speaking, when we make a choice we view as immoral, unethical, neglectful, or selfish.

        Most of us feel mildly guilty if we eat the last piece of cake in the kitchen let alone what we would feel if we intentionally and methodically set about to hurt another person.

        Those who have no conscience at all are a group unto themselves, whether they be homicidal tyrants or merely ruthless social snipers.

        The presence or absence of conscience is a deep human division, arguably more significant than intelligence, race, or even gender.

        What differentiates a sociopath who lives off the labors of others from one who occasionally robs convenience stores, or from one who is a contemporary robber baron—-or what makes the difference between an ordinary bully and a sociopathic murderer—-is nothing more than social status, drive, intellect, blood lust, or simple opportunity.

        What distinguishes all of these people from the rest of us is an utterly empty hole in the psyche, where there should be the most evolved of all humanizing functions.
        ▬Martha Stout, The Sociopath Next Door

        1. Foppe

          You say “democratic country”? Or “democratic supranational entity like the EU”?
          Where?
          All I can say is that you must live on a different planet than I do.

          It is, in my experience, analytically rather unhelpful to deny or refuse to recognize relevant gradations (in this case of corruption and capture of political systems) in the name of normative claims-making.

          Anyway, while it is of course your right to respond in whatever way you wish (so long as Yves approves), I do think that it would be helpful if you were to do slightly more work to relate your quotes to the topic of the blog post at hand.
          Right now, you state

          For it is absolutely necessary to ask how it is that these European Central Bank (ECB), European Commission and IMF bureaucrats have become so unbelievably callous and indifferent to the great human suffering they are inflicting. And why should comparing the ethics of the current crop of libertarian/neoliberals to the Nazis or Bolsheviks be off limits?

          Now, I absolutely agree that the EU/ECB/IMF are action in a morally reprehensible way. However, there is a substantial amount of drift between your first and second questions, and while the first is quite relevant to the topic at hand, the second one really isn’t. I really don’t care about the answer to the question whether I can or cannot call behavior sociopathic or not, what I want is an empirical account of what someone’s been up to so I can make up my own mind.

          1. DownSouth

            Foppe,

            Are you unaware of James Madison’s great fear of what he called the “abuses of republican liberty” or what Elbridge Gerry called “an excess of democracy”? And are you also unaware of the fact that Madison designed the U.S. Constitution with the express intent to greatly curtail popular democratic participation?

            Are you also unaware, as Hannah Arendt points out in On Revolution, that even that great revolution in the sky—-the French Revolution—-succumbed to elite rule:

            However, no sooner had Robespierre risen to power and become the political head of the new revolutionary government—-which happened in the summer of 1793, a matter of weeks, not even of months, after he had uttered some of the comments which I have just quoted—-than he reversed his position completely. Now it was he who fought relentlessly against what he chose to name ‘the so-called popular societies’ and invoked against them ‘the great popular Society of the whole French people’, one and indivisible. The later, alas, in contrast to the small popular societies of artisans or neighbors, could never be assembled in one place, since no ‘room would hold all’; it could exist only in the form of representation, in a Chamber of Deputies who assumedly held in their hands the centralized, indivisible power of the French nation. The only exception he now was ready to make was in favour of the Jacobins, and this not merely because their club belonged to his own party but, even more importantly, because it never had been a ‘popular’ club or society; it had developed in 1789 out of the original meeting of the States-General, and it had been a club for deputies ever since.

            So The Reign of Terror (5 September 1793, to 28 July 1794) was not visited upon France by the French common man, or any “excess of democracy,” as the mythmakers would have us believe, but by the French elite.

            Are you also unaware of what is going on in Spain? For a little primer there’s this video that sets out the philosophy of the movement underfoot there—-“True Democracy Now”—-which can be seen here. Here are some of the principle themes voiced in the video:

            • The day has come, we have taken to the streets for a True Democracy Now

            • We are not safe in politicians and bankers hands

            • They don’t represent us! They don’t represent us!

            • Today the citizens of this country—-free, conscious and outraged. We have taken to the streets in the whole country from Oviedo to Cadiz, from Vigo to Barcelona, demanding that the politicians and financial leaders to change the course and stop stealing our democracy.

            • The politicians and economic power have perverted the democratic ideal, plundering the welfare state, cutting back the rights of all people, students, workers, unemployed, citizens all

            • Today has been the beginning of something unstoppable: the true democracy of people who consciously choose their path for a fair, free and egalitarian society; for a decent, solid and sustainable future; and above all, for common sense.

            You seem to be deeply into historical revisionism. And denial. To claim that a “supranational entity like the EU” is “democratic” is totally beyond the pale.

            And why do you take such great umbrage when I raise the specter of psychopathology? It’s less damning than labeling the heartless EU-ECB-IMF mandarins as kleptocrats. Or could it be that the lady doth protest too much? As Lobaczewski explains: The asthenic psychopath’s “behavior towards people who do not notice their faults is urbane, even friendly; however, the same people manifest a preemptive hostility and aggression against persons who have a talent for psychology, or demonstrate knowledge in this field.”

            Whether we judge the unfeeling technocrats to be criminal, psychopathological or merely incompetent certainly is relevant to the discussion at hand. In this regard you are quick to deride me for “normative claims-making,” asserting that “what I want is an empirical account of what someone’s been up to so I can make up my own mind.” That exposes you for having the same sort of technocratic mindset that you so fervently condemn. The scientist kings always think they know better. As Daniel Yankelovich explains in Coming to Public Judgment:

            [F]or the experts the key factors are the “hard” technical variables. For the public, the key factors are qualitative, especially the fear that America’s moral fiber is deteriorating…

            The experts see the importance of technical skills in the workplace; the public sees human strivings and moral virtues.

            Yankelovich takes a wrecking bar to your condemnation of subjectivism and judgment—-also a hallmark of the technocrats—-too:
            [J]udgment is not a substitute for information but a separate and independent variable playing a different role in the decision-making process than information does…

            Facts and judgments are not reducible to one another, and they are not fungible. No amount of good information can compensate for bad judgment. The widely held assumption that good information leads to sound policy decisions is almost deliberately wrong-headed…

            History abounds in examples of knowledgeable, well-informed people making stupid, vile, atrocious policy decisions… That point was the central message of David Halberstam’s book The Best and the Brightest. The title says it all: the people who made the worst policy decisions about involving America in the quagmire of Vietnam were among the best and the brightest our society produces, certainly in the sense of being among the best informed and most knowledgeable. Their superior information did not, however, prevent them from making policy mistakes—-not from faulty information but from faulty judgment.

          2. Foppe

            You seem to be deeply into historical revisionism. And denial. To claim that a “supranational entity like the EU” is “democratic” is totally beyond the pale. … Or could it be that the lady doth protest too much?

            You seem to be into the rather unabashed spouting of unwarranted, self-righteous generalizations whenever you feel that people do not sufficiently respect you for displaying unwavering zeal on the internet. To claim that I am “deeply into historical revisionism and denial” based on a single statement which you decide to tear out of context is beyond puerile and rude. But I guess humility isn’t one of your strong suits.

            And why do you take such great umbrage when I raise the specter of psychopathology?

            The reason why I disapproved of your lengthy quote there is a. because you do no work at all to show that it actually applies, and b. because your immediate jump to theorizing is keeping you from actually analyzing the situation to check if it actually applies. You import so many biases into the discussion/analysis by immediately appealing to such a loaded theory that little good can come of it.

            Whether we judge the unfeeling technocrats to be criminal, psychopathological or merely incompetent certainly is relevant to the discussion at hand.

            Being able to distinguish between criminal and incompetent — yes. Morally reprehensible or not — yes. “sufficiently akin to Hitler”, no. Utterly uninteresting.

            In this regard you are quick to deride me for “normative claims-making,” asserting that “what I want is an empirical account of what someone’s been up to so I can make up my own mind.” That exposes you for having the same sort of technocratic mindset that you so fervently condemn.

            My oh my how little you trust in others’ capacity for exercising good judgment. Are you seriously trying to suggest that only when the author laces his ‘account’ with lots of normative statements, the reader will be able to recognize this? Suggesting that demanding some space for personal interpretation is the first step down the path towards ‘the technocratic mindset’ is the most condescending suggestion i’ve encountered in days.

            Yankelovich takes a wrecking bar to your condemnation of subjectivism and judgment—-also a hallmark of the technocrats—-too: Facts and judgments are not reducible to one another, and they are not fungible. No amount of good information can compensate for bad judgment. The widely held assumption that good information leads to sound policy decisions is almost deliberately wrong-headed…
            History abounds in examples of knowledgeable, well-informed people making stupid, vile, atrocious policy decisions… That point was the central message of David Halberstam’s book The Best and the Brightest. The title says it all: the people who made the worst policy decisions about involving America in the quagmire of Vietnam were among the best and the brightest our society produces, certainly in the sense of being among the best informed and most knowledgeable. Their superior information did not, however, prevent them from making policy mistakes—-not from faulty information but from faulty judgment.

            It would really be helpful if you could keep the ad hominem attacks below 20% of any given reply. Especially considering the fact that I nowhere suggested that facts and judgments are one and the same thing.
            As I suggested above, you should really learn to trust that other people also have a capacity for exercising moral judgment, and that they are generally quite capable of assessing some state of affairs themselves, without you hammering them over the head with the “correct moral interpretation of the situation”. By suggesting that you have to help them judge a situation you are in effect saying that you consider them morally immature.

          3. DownSouth

            Foppe,

            Why do you insist on running interference for these EU and ECB bastards?

            You wrote all that and managed to say nothing, absolutley nothing, except about me! Now I sincerely appreciate all the attention you lavish upon me, but I’m sorry, the issue is hardly about me.

            So let’s go back to your original comment:

            Hudson’s point is that the Neoliberals are explicitly trying to depoliticize decisions that were at one time recognized to be political choices, made by elected officials, by arguing that “the technocrat (or really the market) knows best”. Both of these things are insidious, and the argument for both of these moves is broadly similar (to remove the supposed inferior or damnable influence of irrationality or emotion from decision processes), but they are not directly comparable in a democratic country (or supranational entity like the EU).

            And let’s reduce it to its conclsuion:

            Hudson’s point[s]…are not directly comparable in a democratic country (or supranational entity like the EU).

            So now let me get this straight. Greece, Spain, Portugal and Ireland are democratic countries, meaning they have functional democracies? The EU is a democratic entity?

            To which I say: You’re more full of bullshit than a Christmas turkey.

            Hudson is exactly right.

            Democracy in the countries that make up the European Union, as well as the EU itself, has been kidnapped. The economic policy being implemented by the governments of the various countries, and especially by the EU, no more represents the popular will than a man on the moon. It is dictatorship by corporations. It is “the perfect dictatorship,” as Peruvian poet Mario Vargas Llosa called Mexico in a debate with Octavio Paz. It has all the bells and whistles of democracy, but lurking underneath this benign façade is the iron fist of dictatorship.

            So instead of launching into these long tirades against me, why don’t you try explaining to us why you believe these countries and the EU have truly democratic institutions?

          4. Foppe

            I am sorry, Downsouth, but after all of the ad hominem attacks you have launched on me (“you are ignorant of what is really going on”, “you are a technocrat”, “you are running interference for them”) I find I have lost interest in responding to your pathetic accusation, based on an intentional misreading of something I said, that I am “rewriting history”. You are simply too hypocritical in your responses for me to care to engage in discussion with you any more.

          5. DownSouth

            Foppe,

            Can’t defend your original claim that democracy in Europe is doing OK, hun?

            Just what I thought.

  6. Eric

    If you organize your national life around principles that require borrowed funds to sustain, your nation needs to exert itself to keep parties with funds investing in your nation. Do you think that 24 months after the “revolution” starts in Syntagma Greek retirees will be more comfortable and secure or less?

  7. Uli

    Why should the EU give money to Greece ?

    Let greece strike until full democracy is reached.
    They should stop paying their debts and EU should pay nothing!

    But the outcome is that greek banks go to bank hell and savings of the greek people / firms are destroyed (and no government there to make good for the savings account á la FDIC) and afterwards the greece economy goes into full stall.

    But What, thats democracy!

    But greece has a primary deficit and therefore could not convert to pay as you go even after stopping paying there debts. The economy lives on borrowed money, without new debts the greek economy goes down the toilet.

    But What striking let the Greek people feel good ;)

    1. Uwe

      The problem in Greece was that no one wanted to pay taxes and no one did. Wiping out their savings can be thought of as collecting back taxes. It’s a nice proportional tax, because the size of the savings is directly proportional to the taxes avoided.

      1. Roberto

        Along those lines, my concern with the article is that it treats all the so-called “PIGS” (what a horrid acronym) as equally victimized. As I understand, Ireland, Spain and Iceland all ran fairly disciplined fiscal ships. They’re in trouble because their bankers went crazy and now the EU insists on protecting its bankers at the expense of Irish, Icelandic and Spanish citizens. Hence, the author’s point about Iceland not legally owing anyone anything.

        But is this true about Greece? Not from what I’ve read.

      2. Glenn Condell

        ‘The problem in Greece was that no one wanted to pay taxes and no one did.’

        Oh some people paid their taxes. Public servants and much of the low-paid private workforce had no choice, it was garnished from their wages, as indeed was their contribution to their pension. But the officers’ rule permitted not just corporations and the wealthy but the professionals and the middle class to opt out of paying their fair share of tax, and most of them naturally took that option. Add the usual corruption of junta-style governance and you end up with the sort of economic weakness and instability that has characterised Greece for yonks.

        So workers paid their taxes and put money aside for retirement while businesses, the rich and the canny lived high on the hog the workers had provided. It ended in tears as it had to one day, in a welter of deception and self-dealing involving the inevitable ringleaders from Wall St, but of course the rich and the corporations and the politicians and the fat and lazy middle class are not being asked to pawn the family silver, are they? No, workers, who paid their dues all the way through the good times and the bad, are being asked to decimate their own lives and the chances of their children in order to keep elite thieves in the style to which they’ve become accustomed.

        No wonder they’re angry. I’m less than gruntled about it myself, and I’m an Australian whose connection with Greece extends no further than feta cheese and moussaka.

  8. Mannwich

    Really great stuff, Michael. Well done. Keep repeating it over and over though. It’s the only way this has a chance of getting through the mass denial and delusion out there.

  9. DownSouth

    Michael Hudson said: “As the Bubble Economy turns into a nightmare, politicians are taking private (and often fraudulent) bank losses onto the public balance sheet. This is dividing European politics and even threatening to break up the Eurozone.”

    That is the crux of the complaint that the man on the street has. Most German rank and file, for instance, are probably well aware of who their real enemy is—-the German banksters and their paid liars and bumsuckers—-and not some worker in Greece or Spain.

    Here in the comments section we see quite a number of people running interference for the banksters, trying to convince the German worker that his or her number one enemy is Greece or Spain, or vice versa. Will they succeed? If Andrew M. Lobaczewski is correct, they more than likely will not:

    Thus, if we speak of man’s general intelligence, we must take into account both its internal structure and the individual differences occurring at every level of this structure. The substratum of our intelligence, after all, contains nature’s instinctual heritage of wisdom and error, giving rise to the basic intelligence of life experience. Superimposed upon this construct, thanks to memory and the associative capacity, is our ability to effect complex operations of thought, crowned by the act of internal projection, and to constantly improve their correctness. We are variously endowed with these capabilities, which makes for a mosaic of individually variegated talents.

    Basic intelligence grows from this instinctual substratum under the influence of an amicable environment and a readily accessible compendium of human experience; it is intertwined with higher effect, enabling us to understand others and to intuit their psychological state by means of some naive realism. This conditions the development of moral reason.

    This layer of our intelligence is widely distributed within society; the overwhelming majority of people have it, which is why we can so often admire the tact, the intuition, of social relationships, and sensible morality of people whose intellectual gifts are only average. We also see people with an outstanding intellect who lack these natural values.

    [….]

    This average majority accepts and respects the social role of people whose talents and education are superior, as long as they occupy appropriate positions within the social structure. The same people, however, will react with criticism, disrespect, and even contempt, whenever someone as average as themselves compensates for his deficiencies by flaunting an upwardly-adjusted position. The judgments pronounced by this sphere of average but sensible people can often be highly accurate, which can and should be all the more remarkable if we take into account that said people could not possibly have had sufficient knowledge of many of the actual problems, be they scientific, technical or economic.
    ▬Andrew M. Lobaczewski, Political Ponerology

    1. craazyman

      I don’t know where all these bankster lackeys are here in the peanut gallery. unless that’s them over in the corner, whispering and pointing at us. But that sounds paranoid. ;)

      looks to me more like the Red Brigade around here — well, maybe not, I just googled Red Bridgade and all that bloodshed is not what I had in mind. Apologies to all the humanists here for my metaphorical malaprop. Cherrio Oh.

      I’m not sure this post has all the vectors pointing with the right magnitudes and directions. ”==I think a few are spinning like the wings on lawn geese, the wooden ones that live on the top of a pole and don’t fly anwhere, unless the pole goes with them.

      If an economy pays interest to bondholders, sometimes they actually spend it. and when money is lent on credit, sometimes it’s invested profitably and pulls in more money over time than is ever paid out in interest. Of course, that may only be luck. it probably is, but it can happen.

      If the Greeks were clever and unified they’d sell enough of their assets to pay off the debt, then they’d boycott the same assets and build new ones instead, with their own currency, and use those while the ones they sold went belly up. they could even buy them back at a huge discount. Sort of like a Big Short.

      ha ha. How funny would that be? They could still come out of this mess with a huge profit. Even now. But they’d have to let go of each other’s throats first. That’s always the problem it seems.

  10. Schofield

    Foppe says:

    “That’s not the point he was making; it’s a second step, and much further removed from political-democratic control. Hudson’s point is that the Neoliberals are explicitly trying to depoliticize decisions that were at one time recognized to be political choices, made by elected officials, by arguing that “the technocrat (or really the market) knows best”. Both of these things are insidious, and the argument for both of these moves is broadly similar (to remove the supposed inferior or damnable influence of irrationality or emotion from decision processes), but they are not directly comparable in a democratic country (or supranational entity like the EU).”

    This is essentially the point that Phillip Mirowski and Dieter Plehwe make in their book the history of the secretive and organised campaign for Neo-Liberalism “The Road From Mont Pelerin.” Neo-Liberalism they see as fundamentally the attempt to shift democracy into the marketplace and away from the councils, or parliaments, of citizens. By achieving this, decision making is placed into the hands of the few, the manipulators of capital, particularly the manipulators of very large sums of capital, the financiers.

    1. Foppe

      The book I would recommend is David Harvey’s A Brief History of Neoliberalism (2005). (excuse quote length)

      From the mid-1970s onwards, the Swedish Employers’ Federation (doubtless emulating its counterpart in the US) increased its membership, mobilized a massive war-chest, and launched a propaganda campaign against excessive regulation and for the increasing liberalization of the economy, the reduction of the tax burden, and the rolling back of excessive welfare state commitments which, in its view, caused economic stagnation. But when a centre-right Conservative Party came to power in 1976, replacing the Social Democrats for the first time since the 1930s, it failed to act on the employers’ proposals. The labour unions were too strong and the public was not persuaded. When it became clear that direct confrontation with the labour unions through lock-outs and non-collaboration in wage negotiations did not work either, the employers moved more towards undermining rather than confronting the institutional arrangements of the corporatist state. In 1983 they refused to participate in central bargaining. Thenceforth, wage and benefits negotiations would have to proceed on a company-by-company basis. They managed to persuade one union to go along with this, and so seriously damaged the collective power of labour. But most efficacious of all was the propaganda campaign waged by the employers. They used their control over the Nobel Prize in Economics to consolidate neoliberalism within Swedish economic thinking. Long-standing complaints on the part of intellectuals and professionals regarding the oppressive universalisms and high taxation policies of the Swedish state were assiduously cultivated through a rising tide of rhetoric lauding individual liberties and freedoms. These debates reverberated throughout the media and gained increasing currency in the popular imagination. Above all, the employers’ think-tank––the Center for Business and Policy Studies (SNS)––funded serious research on economic structures and prospects (like the NBER in the US) that again and again proved ‘scientifically’ to policy elites and to the public that the welfare state was the fundamental cause of economic stagnation.37 The real shift towards neoliberalism came with the election of a Conservative government in 1991. But the way had already been partially prepared by the Social Democrats, who were increasingly pressed to find ways out of the economic stagnation. Their partial implementation of some parts of the neoliberal agenda suggested acceptance of the persuasive analyses of the SNS. It was the left rather than the right that now lacked ideas. The unions were persuaded to exercise wage restraint in order to raise profits and encourage investment. Deregulation of banking (which led to a classic speculative bubble in credit allocation and the housing market) and tax cuts for the wealthiest (again supposedly to encourage investment) had already occurred in the late 1980s. The central bank (always Conservative) finally switched its mission to fighting inflation rather than maintaining full employment. The collapse of the speculative bubble in asset prices that followed upon the oil price rise of 1991 led to capital flight and internal bankruptcies that cost the Swedish government dear. The blame for the crash was instinctively placed upon the inefficiencies of the welfare state and the Conservative government that came to power listened sympathetically to the Swedish Chamber of Commerce’s plan for the complete privatization of the welfare state.
      Blyth considers that the proposed remedies were wholly inappropriate to the circumstances. The problem, he argues, was ‘cognitive locking’––the inability to think of any other policy solution than that prescribed by neoliberal orthodoxy. ‘It was this homogeneity of personnel and ideas, coupled with the politicization of business, that thrust these new ideas onto the agenda and ultimately led to the transformation of Swedish liberalism.’ The practical result was a serious depression that diminished output and doubled unemployment rates in two years. With the government losing public confidence, another way had to be found to sustain the neoliberal reforms. The answer was to join the European Union, a move that is ‘perhaps best understood as an attempt by business and the Conservatives to let the economic ideas and institutions of the EU achieve by international convergence what they had failed to do through domestic reform’. Joining the EU in 1993–4 deprived the state of many of the tools it had previously maintained to fight unemployment and advance the social wage.38 The result was that even when the Social Democrats returned to power in 1994, the neoliberal programme of ‘deficit reduction, inflation control and balanced budgets rather than full employment and an equitable distribution of income became cornerstones of macroeconomic policy’.39 Privatization of pensions and of welfare provision was accepted as inevitable. Blyth interprets this as a case of ‘path dependency’––a certain logic of decision-making powered by hegemonic ideas carries all before it. Embedded liberalism was eroded, but by no means fully dismantled. The public still remained broadly attached to its welfare structures. Inequality certainly increased, but by no means to the levels seen in the US or the UK. Poverty levels remained low and levels of social provision remained high. Sweden is an example of what might be called ‘circumscribed neoliberalization’, and its generally superior social condition reflects that fact.

      1. Foppe

        Apologies; i forgot to add a highlight to the section I found most interesting in the current context.

        The answer was to join the European Union, a move that is ‘perhaps best understood as an attempt by business and the Conservatives to let the economic ideas and institutions of the EU achieve by international convergence what they had failed to do through domestic reform’. Joining the EU in 1993–4 deprived the state of many of the tools it had previously maintained to fight unemployment and advance the social wage. The result was that even when the Social Democrats returned to power in 1994, the neoliberal programme of ‘deficit reduction, inflation control and balanced budgets rather than full employment and an equitable distribution of income became cornerstones of macroeconomic policy’. Privatization of pensions and of welfare provision was accepted as inevitable.

    2. Glenn Condell

      ‘Neo-Liberalism they see as fundamentally the attempt to shift democracy into the marketplace and away from the councils, or parliaments, of citizens. By achieving this, decision making is placed into the hands of the few, the manipulators of capital, particularly the manipulators of very large sums of capital, the financiers.’

      Neo-Liberalism is just a new name for a very old creed. Was the term current in 1913? The Fed shifted democracy into the upper niche of the marketplace, away from the councils and parliaments, and has been manipulating capital and therefore the economy and therefore politics ever since. Lord Acton and old man Rothschild’s observations surely pre-date neo-anything, and Andrew Jackson’s comments are as true today as they ever were, perhaps more so.

      1. Crixus

        Wrong. The FED was already there in “spirit” long before 1913. It was the fractional reserve banking structure that created the market catching power.

        The FED was then a tool the “market” saw as a necessity to battle the cycles of fractional reserve banking’s payment transfer crisis.

        I am amazed people still cannot understand this salient point. The Federal Reserve has most like all “central banking” has become overblown, overworshipped and over critized.

    1. Uwe

      It helps for them to be unemployed. Then they have plenty of time to consider such things.

      1. ambrit

        Dear Fiendes;
        I put it all up to education. Remember, the first things the true revolutionary takes over are the media and the schools. Hence, when, as Uwe suggests, people become unemployed, thay free up much of their time and ‘attention’ and so are amenable to learning formerly willfully obscured subjects. There is a very concrete reason for the teaching of “time keeping” and heirarchy in public schools, even today. The old time factory owners and industrial oligarchs demanded it from public school systems in order to socialize the young in such a way as to fit them to industry and commerce. Suddenly becoming long term un or underemployed frees one from the yoke of economic conformism, when done right.
        I just hope that Germany doesn’t form a “Condor Economic Rescue Legion” to send to Spain.

  11. LillithMc

    Put simply debt is used to force the sale of assets like prime tourist property in Greece. The lender demands austerity from the government. The transfer or looting of assets is as effective as the old style of war, but done without fighting. The reason the debt-war works so well is that debt compounds. To pay debt there needs to be an improvement in the financial situation from the use of the money obtained from the debt. The combination of crashing the economy as in Shock Doctrine and looting from issuing predatory loans creates the same effect as historical war, but for those with massive cash is a much easier process.
    Either with war or debt-war, average people are wiped out.
    The downside would be a people-led revolution.

    1. Valissa

      “The transfer or looting of assets is as effective as the old style of war, but done without fighting.”

      A kinder, gentler form of warfare. It’s a financial jungle out there and the law of the jungle is what we are reverting to.

      Isn’t that special! (cue the Church lady)

  12. Geoff Willis

    There is a subtlety that is often missed when discussing the Icelandic case. When Iceland took over their failed banks they gave generous compensation to Icelandic citizens but none to UK and Dutch citizens. This sort of discrimination is strictly illegal under EFTA law never mind EU law. The moral hazard here is enormous. Iceland has set up a precedent of allowing national banks to run wild without supervision, take profits off other EU citizens, compensate their own citizens, then disclaim all responsibility. If a Nordic country is allowed to get away with this trick, it will be carte blanche for every other dodgy country in the EU to do the same. Iceland should either have paid low compensation to all EFTA citizens affected or none, then they wouldn’t be in this situation.

    1. astregard

      Oh poor UK and Dutch citizens! Their governments and banks teamed up with some corrupt Icelanders to screw the Icelanders out of all their property and accidentally caught a few of their own people in this fraudulent scheme! Oh no! What to do?

      Clearly, Iceland must compensate these unwitting depositors because in these situations everyone must be treated equally.

    2. Foppe

      “Iceland has set up a precedent of allowing national banks to run wild without supervision”

      Huh? It was Iceland that set the precedent?

      “disclaim all responsibility”?
      It is my impression that that the Icelandic people are merely refusing to accept the current “deal”, and that they have not categorically refused to accept any kind of deal.

      Anyway, it may well be that this behavior of compensating your own citizens more than foreign citizens is illegal under EFTA law. (Though I’m having a heck of a time caring, as it seems rather doubtful to me that such laws would be applied equally to all anyway; I seem to recall far more important rules being flouted by Germany and France when they didn’t feel like living up to the rules stipulated in the Euro stability&growth Pact, and nobody caring in that case either. Of course, Iceland is politically fairly weak, and thus a nice target for righteous anger like yours.)
      However, as it stands Iceland is not part of the EU. And as such, the fact that such “discriminatory” behavior is “illegal under EU law” is quite irrelevant to your argument, and it somewhat saddens me to see that you’ve proffered it anyway, hoping to make your moral case.

    3. Ming

      Having banks run wild without supervision is bad thing. Iceland should complete the circle of responsibility; they should fully audit and expose the machinations of their banks and their counterparties, then permanently jail their bank executives and officers for gross negligence. It will set a good example for other nations to do the same.

      1. al

        That’s a good plan, but how do you wrest control of your country away from criminals?

  13. Pat

    I like Michael Hudson’s articles but it is a mistake to portray Iceland as some sort of noble freedom-fighter against global capitalism.
    The Icelandic people voted 70% for the parties (both free-market corrupt crony capitalists) that got them into this mess, and even today 40% still vote for those parties. The Icelanders happily supported the corrupt banks and politicians and enjoyed one of the highest standards of living in the world when the going was good, but when the Ponzi scheme banks went down, the Icelanders cry “persecution” and “odious debt”. The Icelanders screamed that they would prosecute the bankers and politicians but over two years later, the prosecutions have gone nowhere, due to the lack of political will. A huge amount of money still sits uncollected in the Cayman Islands accounts of a handful of rich Icelandic kleptocrats. There has been almost no reform of the political system and many of the bankers responsible for the mess still sit in their old positions. There were some protesters, some 5000 at the peak, but this was a tiny proportion in a country where more than 200,000 live within 15 minutes of where the protests were held. Most Icelanders couldn’t be bothered to show up.
    Roughly 90-100 billion Euros (belonging mostly to foreign banks) disappeared in the Icelandic bank Ponzi scheme. The foreign creditors are not demanding that Iceland pay that money back (as Ireland has agreed to do). Instead, the UK and Netherlands simply want to get some money back for the most outrageous part of the Ponzi scheme, the siphoning off of Icesave deposits. Most of the Icesave money is sitting in assets in the UK and Iceland will never get it anyways. What UK/Nl are asking for is an admission of responsibility (the Icelanders are clearly responsible under EEA/EU law) and possibly payments of 500m to 1 billion if the UK assets are not enough. That amount is the equivalent of 12-25% of the Icelandic budget for just one year. Iceland could easily raise that money if necessary by raising the taxes on the aluminum smelting companies that operate there. Currently these companies enjoy the lowest energy rates anywhere in the world.
    When the Icelandic President Olafur Ragnar Grimsson rejected the Icesave repayment agreement, he did not do so out of principle, but because he himself was directly implicated in the corruption of the banks. Grimsson was simply trying to rescue his reputation and save his skin by becoming a populist.
    As for the Icelanders – it is well known that nobody in Iceland ever takes responsibility for anything. When something bad happens, it is always somebody else’s fault and the excuses and rationalizations flow like water. 70% of the people voted for the corrupt parties – but no, the Icelanders say, we are not responsible for anything and will not pay even the smallest amount. And no, we won’t try to change our corrupt little society either. The Icelanders voted against the Icesave repayment scheme purely out of personal self-interest, because nobody wants to pay debts that they can avoid.
    Save your tears for the Icelanders and instead shed them for real victims like the Irish.

    1. astregard

      “As for the Icelanders – it is well known that nobody in Iceland ever takes responsibility for anything. When something bad happens, it is always somebody else’s fault and the and rationalizations flow like water. ”

      Spoken like a true subject of her Majesty the Queen.
      Why doesn’t anyone in your country go after the kleptocrats?
      Why stick it to the common people of Iceland who also lost money? Oh, I forgot, you hate Iceland!

      1. Richard

        Pain needs to be administered to all parties as proper incentive against future financial misadventures.

        Iceland banks, government, and voters all share in the blame for overspecializing in finance. They need to default and be cut off from global bond markets for a few decades to properly enforce living within national means. They have their own currency and thus much more freedom to competitively devalue. The people can be free to choose how they want to be governed. If they’re smart, they’ll choose long-term sustainability over party it up and crash every so often.

        Anglo and Dutch banks that made bad investments in Iceland have to take their losses (a total default, not merely a restructuring). The concept of bailouts has made everyone trigger happy at taking risk. One of the tenets of capitalism is that investors must suffer consequences for their choices, not be protected from them.

        The same thing should happen for Greece. Default and let Germany worry about propping up its banks. Exit the Euro and devalue competitively. Reform the public sector and start collecting taxes.

        1. al

          Yours is a very strange comment. Suppose Iceland was a old woman who had her life savings stolen in a fraudulent scheme. Do you ignore the fact that a criminal made off with the money and tell her “Now you need to learn to live within your (much reduced) means. Your creditors will also be hurt, poor guys. Eat dog food for 20 years so you don’t make such stupid mistakes again.” Or do you say “Let’s catch the criminals and try to get some of your money back”?

  14. Uli

    Neoliberlism is, when the german goverment pledging money to other countries without asking the parliament first. This is neopotism and not democracy.

    Taxation without reprenstation is not in the constitution!

    This will not end well. The one side is parties loosing power in Greec,Icland,.. for making budget cuts, the other side of the medal will be parties loosing power for giving money away. The sums are just to big and this will not be a one time pledge. Why save money, if other will pick up the bill ?

    The rift between the countries will increase and euro skeptism explode, the outcome will be ugly.

    Look at Italy or Germany, where one part doesnt want to pay permanently for the other part of the country.

    If this exists in within a country, what if the money goes across countries, thats just nuts to believe the people will accept this forever, with transfers forever.

    The euro was political from the start, without looking at the fundamentals, thats what you get when politicians mess with the economy or banks.

    1. Uwe

      It used to be that politicians would be elected and then corruptly transfer money directly to their friends. People gradually caught on, and made it harder for them. So they made deals with other countries to reward the friends of corrupt politicians in these countries if those politicians would in turn reward their friends.

      Now, as you say, people will naturally be confused and blame “the Greeks” when it was the corrupt Greek government who took the money and ran. And the Greeks will blame “the Germans” when “the Germans” again never authorized it. It’s too bad people can’t make finer distinctions, but for the corrupt actors it will be a bonanza–a new way to steal money without consequences.

  15. Cahal

    ‘the European Central Bank (ECB), European Commission and the IMF – view debt write-downs and progressive taxation to protect their domestic economies as a communicable disease.’

    Spot on. Hudson remains my favourite economist (with Yves as a close second of course!).

  16. Jim

    David Harvey in “A Brief History of Neoliberalism” makes a key distinction which seems to be at the core of the debate and discussion of various political/economic alternatives in both Europe and the U.S.

    Harvey saw “embedded liberalism” emerge and became the general policy consensus between 1933 and the mid 1970s.

    Harvey defines “embedded liberalism” as meaning “that the state should focus on full employment, growth, and the welfare of its citizens, and the state power should be freely deployed aongside of or, if necessary, intervening in or substituting for market procesess to achieve these ends. Fiscal and monetary policies usually dubbed “Keynesian” were widely deployed to dampen business cycles and to ensure reasonably full employment. A class compromise between capital and labor was generally advocated as the key guarantor of domestic peace and tranquility. States actively intervened in industrial policy and moved to set standards for the social wage by constructing a variety of welfare system (health care, education and the like).

    By the late 1970s Harvey argues that the neoliberal project was to “disembed” capital from the earlier social and political constraints which had been constructed between the 1930s and the mid-1970s.

    Harvey defined the mechanism of “disembed liberalism” as:
    “valuing market exchange as an ethic in itself, capable of acting as a guide to all human action and substituting for previously held ethical beliefs. It emphasizes the significance of contractual relations to the marketplace. It holds that social good will be maximized by maximizing the reach and frequency of market transactions, and it seeks to bring all human action into the domain of the market.”

    Many on this blog argue that what we need is a return to some typ of “embedded liberalism.”(i.e. many MMT advocates, many New Deal 2.0 commentators and possibly Yves herself).

    Other, more outcast perspectives of various sorts, (i.e. anarchists of left and right persuasions, decentralists of various types, syndicalists and traditionsal Marxists along with some increasingly disillusioned Democrats and Repulicans) offer differing critiques of “embedded” and “disembedded” liberalism.

    In my opinion, the most insightful commentary (all using somewhat different terminology) now sees that the distinctions between the market and the state are dissolving–that both the “central state” and the “free market” are now colluding and consequently that traditional “left” and “right” policy options are also becoming the same.

    We are collectively trying to formulate a genuine alternative(on a political/economic/financial/cultural level) to the present situation in which a centralized bureaucratic state becomes the supreme guarantor of a centralize bureaucratic market and this same market is enthroned as the principle delivery mechanism to meet the standards set by the state.

    Many of us now sense that we are beginning to experience a post-democratic age and are now diligently searching for a new political form which can again make democracy a reality.

    1. Valissa

      “Many of us now sense that we are beginning to experience a post-democratic age and are now diligently searching for a new political form which can again make democracy a reality.”

      Excellent comment overall! I highlighted this part because I think there is a step needed before searching for a new political form. That is… finding new political ‘language’ (or rehabbing ancient terms) and a new intellectual framework for political discussion that is NOT based on the Left-Right paradigm (or referential to it). The existing paradigm is so deeply embedded and people are so used to it as a referential starting point for anaylsis, that it still clouds discussion. Need to envision a new referential starting point in order to minimize old/habitual enmities based on language used to describe the world.

  17. Allen C

    The Extend & Pretend Phase ends when the bankers are unable to further milk their insolvent entities. And then many are likely to milk the bankruptcy phase ala AIGFP (yes, we know AIG avoided formal bankruptcy). Make the mess complicated enough to garner bonuses assisting cleanup. The ultimate scam.

    This collateral concept is an Extend & Pretend scam as well. Greece can void the collateral seizure in the end perhaps claiming duress. They can compensate in drachmas.

  18. steelhead23

    What I find missing from articles such as this is a frank discussion on how to change the system and how the system would fare if those changes were enacted.

    Allow me to empathize with the financial elite for a moment. These are folks with +140 IQs. They likely recognize the unsustainable nature of the current system. But hey, they and their peers are reaping huge sums. The question for them is this: Am I better sucking down as much wealth as possible now, in the knowledge that systemic collapse would reduce my bottom line (except perhaps if I am crafty and create schemes to win when the economy loses – e.g. Magnetar). If the system is not reformed, it will collapse and I would lose some wealth, but would remain better able to extract profit from future growth than would the proles. On the other hand, if they work to fix the system, force haircuts on senior bondholders, etc., the bank I work for would collapse (insufficient reserves). It would not be surprising for the banksters to choose driving the bus over the edge of a cliff rather than face unemployment and loss of wealth.

    But, from the vantage of governments, this same view cannot hold. An all-on economic collapse would be much, much worse for political stability than a banking crisis. Problem is, it appears that most politicians are in it for themselves and are eyeing jobs in the financial sector. Until we repair the revolving door/campaign contribution connection, we are doomed.

    1. Glenn Condell

      ‘What I find missing from articles such as this is a frank discussion on how to change the system and how the system would fare if those changes were enacted.’

      You would need some bandwidth to do that properly. And you would get the academic and industry shills taking over, with duelling models of what effect this or that bell or whistle would have, long footnoted articles full of formulae about what ‘rational expectations’ would lead you to expect under particular circumstances, etc. Still, it is worth a try.

      Here is my laundry list of good ideas (all other peoples’ of course and some I suppose incompatible with others):

      Audit/end the Fed and remove private credit creation privileges from primary dealers, creating NDakota type state banks with public charters to fund productive activity rather than speculation

      set TBTF policy and practice, re-install Glass/Steagall and repeal Gramm/Leach/Bliley, beefing up a more independent and accountable SEC to vigorously (think Bill Black in the S&L crisis) police finance and to set up regulated trading desks for the ‘shadow banking’ sector of esp OTC derivatives

      Re-introduce strict FASB mark to market reporting requirements, make off the balance sheet entities and transactions illegal, and introduce genuine and regular bank stress tests

      bring in a Tobin tax and re-engineer the tax base to lighten load on labour and productive activity, increasing it on property and the fruits of private economic rent-seeking. Repeal Bush tax cuts at the very least.

      institute an official MMT-style approach to consideration of the national accounts, with a view to targeted deficit spending on education, health, infrastructure, manufacturing, etc and an explicit emphasis on increasing aggregate demand via putting money in the hands of people who will spend rather than hoard or gamble with it

      utilise massive US military and intelligence advantages to audit then shut down offshore tax havens where ill-gotten gains totalling as much as one third of the world’s wealth have been stashed away from any licit authority

      re-monetize silver gradually until currency sits on a sounder foundation

      a debt jubilee?

      Re-affirm some of free-market capitalism’s founding tenets – that businesses succeed or fail without government intervention, if you make bad investments, you pay for them and if that means you go under, you go under, so that there remains some healthy ventilation, a circulation of the elites, ensuring good up and coming producers keep replacing complacent rentiers.

      But before that we might need a re-affirmation of what government means and how we might better form governance that protects the weak and reins in the worst excesses of the strong, for the benefit of all.

      As I said somewhere else, there is no shortage of measures which may each fall short of the term ‘solution’, but which make more sense from any genuinely rational point of view than the ‘more of the same for us and less of everything for you’ mentality that currently obtains in all the corridors of power that matter.

      ‘Allow me to empathize with the financial elite for a moment. These are folks with +140 IQs. They likely recognize the unsustainable nature of the current system. But hey, they and their peers are reaping huge sums.’

      People being people will justify maximising benefits to themselves for as long as they can. Was it John Mack who made that crack about staying on the dancefloor while the music is playing? We cannot rely on the dancers to stop the music.

      The moves must be from government, armed with authorisation from the people. For that reason, there’s a most important laundry item to end the list, a political rather than economic panacea, which if it were enacted would make achievement of the others a lot easier – publicly funded paper trail elections.

    2. Glenn Condell

      To expand on the debt jubilee idea – just saw this at the excellent Golem XIV:

      http://golemxiv-credo.blogspot.com/2011/05/how-to-destroy-web-of-debt.html

      ‘The web site contains details of a ‘proof of concept’ study of the Jubilee idea done by Professor Anthony Evans and his colleagues at The ESCP Europe Business School. The study used up to date figures from the IMF and the Bank of International Settlement (BIS) to see what would happen if Portugal, Ireland, Italy, Greece, Spain, Britain, France, and Germany simply cross cancelled all the foreign debt they owed each other – a Sovereign debt jubilee.

      The web of mutually destroying debt they studied looks something like this (a nice simple graphic follows)

      Professor Evans said what he and his colleagues found “was astounding”.

      * The countries can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58%
      * Six countries – Ireland, Italy, Spain, Britain, France and Germany – can write off more than 50% of their outstanding debt
      * Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP
      * France can virtually eliminate its debt – reducing it to just 0.06% of GDP

      Among the ‘debtor’ nations a Debt Jubilee means Ireland reduces its debt load to from 130% of GDP to under 20%! That would virtually wipe out the crippling cuts being forced upon the Irish. While even among the ‘Creditor’ nations France benefits by nearly eliminating its debt. So the French people too would benefit. Which does beg the question – who is benefiting by enforcing all the debts? I’ll give you one guess.’

    3. Tao Jonesing

      @steelhead23,

      Ah, the “voice of reason” speaks, calling for incrementalism while showing some love for really high IQ technocrats.

      C’mon, man, are you serious? We’ve only had the current system for the last 30 years, and you think that changing from the horrendous and failed neoliberal system to a more classical liberal paradigm, which lasted for three hundred years– for slow people like you, that is 10x as long– will cause the collapse of economies?

      Really? The fact that somebody has a high IQ does not mean they actually know what to do NEXT any better than a simpleton does. None of us is an oracle, but anybody who is HONEST and has a brain can see that the neoliberal system has reached its limits as a world of finite resources cannot sustaine the illusion of perpetual exponential growth. Unfortunately, those banksters you are empathizing with aren’t honest, so the fact that they have an outsized brain doesn’t help them see a truth they refuse to accept.

      What I find so appalling about what you’ve said is the sad reality that what will paralyze our world, if anything, is the fiction of accounting, which is completely disembodied from reality. What we know of the world is complete fantasy, as some philosopher-boy says later on in comments (although nowhere near as clearly). Look at your books all you want, but what is written there doesn’t make it so.

  19. jon livesey

    The main problem with Hudson’s article is that on several points he is simply not telling the truth either about events or about the legal requirements.

    Rather than duplicate the material, let me just point readers to the Wikipedia article about the affair.

    http://en.wikipedia.org/wiki/Icesave_dispute

    I think I will comment, however, that Ives would have done far better to simply point to this article in the first place, rather the publishing this tendentious and frankly pretty dishonest piece by Hudson.

    I’d say that publishing the Hudson article has done nothing for NC’s already somewhat dubious credibility.

    1. al

      I read the Wikipedia article. At the top it reads “This article’s factual accuracy may be compromised because of out-of-date information”

      I challenge you to find even one point where Hudson doesn’t tell the truth. Hudson has first hand experience in Iceland. Have you ever even been to Iceland? He’s advising them on economic matters. He’s an economist, possibly the only one living, with impeccable integrity.

    2. Sunny

      ‘pretty dishonest piece’?

      in what way? Could you please elaborate?

      If you are one of those depositors with Icesave accounts, I can see your ‘angle’ here.

      Why should the Icelandic citizens penalized for ‘stupid’ loans by ‘stupid’ banks? The ‘fiduciary duty’ lies with the lender and NOT the borrowers on either side of Atlantic! The whole Banking system is getting away with loot and fraud with Central bankers and regulators in complicit!

    3. Tao Jonesing

      @jon livesey,

      That’s a nice bit of misdirection, although I suppose Prof. Hudson opened himself up to it by mentioning Iceland in the title of the post, as well as in five whole paragraphs of a thirty three paragraph post (i.e., less than 15% of the post has much to do with Iceland).

      As anybody with a modicum of reading comprehension and integrity would realize, the post is not about Iceland per se, but about the neoliberal process of creating and enforcing central planning by unaccountable, non-democratic, neo-feudal corporations by using debt to strip mine national wealth. The M-M’ circuit that now drives the world economy– and much of the world’s misery– has no C, i.e., capital, in it.

      If you are trolling this blog because you think you are defending capitalism, think again. If you are trolling this blog because you can’t earn a living otherwise, well, God bless you and good luck.

    4. RebelEconomist

      I agree; Hudson’s article is more polemic than analytical. He is pandering to a market for simple narratives that confirm the prejudices of a certain group of readers. As I have written here on several occasions previously, I think that this is damaging because it often obscures the real reasons for problems. In the case of Iceland, I believe that a substantial contributor was nationalist hubris. Iceland was trying to compete in a fashionable business for which it was too small to provide the necessary expertise and infrastructure. In particular, it uncritically imported an FDIC-style deposit protection model which was not viable for such a small country. But I fear that such details are lost on the type of NC reader who prefers to read what panders to their own prejudice against “banksters”. As in an earlier comment, I offer my own analysis of the Icesave dispute for those who are willing to go into the detail before making a judgment: http://reservedplace.blogspot.com/2010/03/on-thin-ice.html

      1. Otter

        If it was obvious to you that Iceland was too small and inexpert, then it was obvious to those AngloDutch “investors” who were sophisticated enough to bet their wealth in an offshore ponzi. Caveat emptor.

        Indeed, the AngloDutch should be grateful that nobody has prosecuted them for attempting to defraud victims who so obviously neither did give nor could give informed consent.

  20. DavidE

    I don’t agree with many things Hudson says. But I do agree that the debts can’t be paid. I think the bankers have been playing a Ponzi scheme long enough. You can’t keep on lending money so that the Greeks can pay the money back. You really need a big reduction in the debt in exchange for making timely payments of some of the amount.

    1. Tao Jonesing

      Please identify where you disagree with Prof. Hudson.

      As you go through the exercise, and I hope you do, ask yourself whether your disagreements are ideological as opposed to factual.

      Thanks, and I look forward to your response.

      1. RebelEconomist

        I did not see anything flat wrong in what Hudson wrote, but what he does do is make questionable assertions. For example, he cannot say that Iceland “legally does not owe” Britain and the Netherlands, when that remains to be decided by an EEA court (as Icelanders insisted). The EEA law in question is certainly not for the benefit of bankers; it is designed to allow small countries to compete in a European single market in all types of business. That, sadly was its flaw in this case. Icelandic banks were allowed to open branches in the UK and Netherlands, without solvency supervision by British and Dutch bank regulators, whether “Gordon Brown and his Dutch counterparts” liked it or not.

        1. Otter

          How many RebelEconomists do we have here?

          Make up your mind: is it the fault of the hubristic Islanders? or of the derelect British and Dutch bank regulators?

          Or the fraudsters?

  21. Sunny

    Excellent analysis of the grip on the power and the modus-operandi of Global Financial oligarchy’s grand agenda!

  22. PMM

    Professor,

    I enjoyed your excerpt. What you are describing is essentially the tyranny of time value, however, this is not a new problem as you know. Most religions acknowledged the issue of compound interest on debts as a form of slavery thousands of years ago. Rent seekers are not the sole problem. In my view, the real problem is that most voting citizens are financially uneducated or simply don’t care about the larger picture and most politicians are eager to play on this and in some cases are themselves uneducated. Since the Greeks cannot monetize ( and make a profit from their own monetization ) like America, they should have payed a bit more attention to the income statement. Since they chose not to, they now have a balance sheet problem which again cannot be solely pushed onto the rent seekers (although I understand where you are coming from as I was raised middle class). In the end, however, this is mostly politics as the Greeks can always threaten a Prince John and try to sell assets to the middle east, China or cozy up to Turkey. All they need to do is show the Germans a Map of 17th century Europe.

  23. ambrit

    Brothers and Sisters;
    Given the dynamic of the present contretemps, we are heading for a big old fashioned Year of Jubilee.

  24. /L

    Ecuador

    Ecuador declares 70% of debt illegitimate/odius debt, bondholders start to sell of at down to 20% of its value, Ecuador buys secretly 3 billion of debt for 800 million. A nice little hair cut.

  25. John Breek

    Social Constructs and Symbolism
    Most people seem to forget that there is an important difference between
    the abstract world of our symbols and the real world that supplies our
    food, water, fuel, etc; that’s why people are willingly going along with
    projects that threaten their ability to support themselves from the land
    that surrounds them, whether it’s more deepwater drilling that kills
    marine life or hydraulic fracturing poisoning the aquifer or simply the
    enforced dependence of almost everybody on a food supply that comes from
    a long way off and is heavily dependent on petroleum every step of its way
    into our mouths. As long as what we’re doing seems to make sense in this
    world of our symbols–or as long as everyone else trusts that the much
    smaller group of people who currently benefit from it have their interests
    at heart–we ignore what’s under our noses, go to our jobs (if we have
    them), exchange the symbols we are rewarded with for a whole slew of other
    symbols (salary dollars for interest payments), and then for the
    necessities of life if there’s anything left over.

    World-class philosopher John Searle lets the cat out of the bag about how
    it all works in his recent book Making the Social World, explaining how
    corporations come into being through a series of symbolic actions: an
    attorney writes certain symbols on pieces of paper, brings the papers
    before a judge, and the judge makes a declaration, bringing the
    corporation into “existence” by fiat–but it’s actually all just “words,
    words, words,” so nothing is really created in any physical sense. So why
    are corporations thought of as powerful “things” that can interfere with
    our lives in so many ways? Searle explains this (p. 107), under the
    heading “How Do We Get Away With It?”:

    “The short answer to the question is that we get away with it to the
    extent that we can get other people to accept it.”

    An important reason why people accept such symbolic entities being created
    in this way, of course, is that the whole process is backed by the force
    of an enormous network of institutions, economic, legal, police, and
    military. But these institutions themselves are also patterns of human
    organization ultimately dependent upon people’s acceptance of symbols, and
    Searle goes on to ask why people accept these large-scale institutional
    structures. A very general answer to this question is that we believe our
    institutions work for our benefit, and many of them do, much of the time,
    or so we used to think. But, Searle points out, there are all sorts of
    institutions that people continue to cooperate in maintaining that do not
    work in their own interest at all, institutions that structure our human
    activities in ways that are most unjust, in fact, so he has to repeat the
    question, and finally answers it this way:

    “In accepting the institutional facts, people do not typically understand
    what is going on. They do not think of private property, and the
    institutions for allocating private property, or human rights, or
    governments as human creations. They tend to think of them as part of the
    natural order of things, to be taken for granted in the same way they take
    for granted the weather of the force of gravity.”

    Well, of course–how many people do you know who have ever thought deeply
    about how the symbols that figure so prominently in our lives these
    days–like the mathematical calculation of compound interest, a purely
    symbolic operation that creates absolutely nothing real–and the
    institutions that support them came into being in the first place?

    The important conclusion, which Searle does not go on to draw but that we
    can draw here, is that when enough of us start to realize that the present
    institutional structures are ultimately a matter of symbols held together
    by people’s continuing acceptance of them, we can start to think
    consciously about how the patterns that these symbols force our activities
    into might be changed to make them more just, in everybody’s interest,
    and, if we’re lucky, maybe even sustainable with our own local soil,
    water, and energy.

    1. Tao Jonesing

      If you have something meaningful to say, you should be able to say it with far fewer words.

      And you’re wrong about pretty much everything you just said. Symbolism is a manifestation of a much more primal, physical limitation in the human brain, which simply cannot accept unfiltered reality. You philospher types assume that human beings are “rational” in a way that they are incapable of being, that they can “realize” that everything they think they know is a big fucking lie without shutting down or getting midieval on somebody’s ass. Sorry, my friend, most humans will take the blue pill, and the “rationality” crutch you use is just one form that the blue pill takes. Realists will eat your lunch while you ponder what your lunch means.

      Good luck with the blog, though.

      1. Valissa

        “You philospher types assume that human beings are “rational” in a way that they are incapable of being”

        Not only philosopher types but many academics think this way as do most economists and scientists. It is a ROOT or axiomatic problem at the basis of current western style thinking/intellectualism in general. Reduction – abstraction – reification. Real human behavior, real social dynamics, and moral complexity are either irrelevant or just too much of a bother.

  26. Psychoanalystus

    I wonder what might happen to Southern and Eastern Europe if a desperate fruit seller in Greece set himself on fire?..

    Psychoanalystus

    1. Tao Jonesing

      Are you volunteering?

      If so, I must caution you, Mr. Greek fruit seller, that your flaming death (and I mean that in the most non-gay way, not that there is anything wrong with being gay), will not be televised.

      1. Psychoanalystus

        Thanks. You talked me out of it. Besides, since I’m not paying any taxes on my fruit business, I really have nothing to complain about… ;)

        Psychoanalystus

  27. gepay

    My vague recollection is that the Iceland government guaranteed 5-10% of the Icesave deposits which they probably have paid but the Netherlands and UK wanted much more returned to their depositors who had made up the bulk of the depositors.
    I am in the Michael Hudson frame of mind camp when thinking about the present state of the global economy. It is quite clear that the banksters are skimming as much as they can from the real economy. They have also made many loans that could not be paid back by the borrowers and are trying to get the the governments (citizens mostly workers – middle class) to pay back the loans – and mostly succeeding.
    One watches the elites try these things out on the 3rd world and perfecting them. Now they are bringing them back home for you and me. One of the problems is that when one introduces the fossil fuels into an economy, that economy can grow like a motherfucker for a few years – up to ten% or so. Then it reaches equilibrium and can only grow at a rate around 2%.But the elites are used to reaping these 10% dividends off the economy and use financial tricks to keep up their returns = leading to bubbles and busts = public disorders – international disputes and finally wars.
    Sometimes there are technological innovations that lead to a bigger pie but there are also disasters – Japan Earthquake – droughts and plagues and famines – Ice ages if you want a climate change that was real and not the present faux AGW.
    I have to think the problem of too much debt will not be solved by more debt. Humans being as they are I can’t see how this present crisis can end without a general disaster of some kind. The US needed Hudson and Stiglitz and got Sumner and Geithner. Warren and Bill Black didn’t get jobs either.

  28. RebelEconomist

    Bad attitude! I agree with Jon Livesey that the discussion on NC is becoming less rigorous and more polemic, and I increasingly disagree with it, but I do not think that is a good reason to stop commenting. There is not much value in a mutual agreement society. As F.Beard, one of the more fixated new commentators, will appreciate, I take the view that “joy shall be in heaven over one sinner that repenteth, more than over ninety and nine just persons, which need no repentance”.

    1. Rabid Limburgher

      But he didn’t say NC is becoming less rigorous and more polemic. You did.

      Livsey accused Hudson of dishonesty, and used a wikipedia article that was in dispute to try to prove it. Never mind that Michael Hudson could easily be a primary source for a wikipedia article on the subject.

      Then he flung epithets like “tendentious” and “dishonest” and insulted Yves’s credibility.

      Now you are gracing his trolling with the idea that it somehow enriches us for people to disagree by insulting each other.

      1. RebelEconomist

        OK; that is my view. Jon Livesey said “dubious credibility”; I am sorry to say that that is increasingly my view too. As I have noted here before, in the UK, this site sometimes carries adverts for payday loans. You can judge for yourself what that does for its credibility.

        As regards Michael Hudson, I would not say “dishonest”, but as I wrote at 5.28 today, he does make some questionable claims. I believe I know as much about this subject as Hudson, but rather than taking my word for it, read my blog post on the subject (no adverts there!).

    2. F. Beard

      As F.Beard, one of the more fixated new commentators, will appreciate … RebelEconomist

      “Focused” is more accurate, I would say.

      I believe the gate to a great society is narrow and the path straight but the other side of that gate opens into a wide, diverse landscape.

      And what is that narrow gate? Ans: Liberty including liberty in private money creation.

  29. xct

    “Latvia is cited as the model success story. Its government slashed employment and public sector wages fell by 30 percent in 2009-10. Private-sector wages followed the decline. This was applauded as a “success story” and “accepting reality” – despite accelerating emigration.”

    The figures for Romania:

    “the center-right government … cut pay for government workers by 25 percent in 2010, slashed pensions and social benefits and raised the rate of value-added tax from 19 to 24 percent.
    …Romania’s austerity program, the harshest in Europe.
    …a country that… is also a low-wage country that experienced a boom for many years as an international production site, followed by a sharp crash during the financial crisis… notorious for its shadow economy, tax evasion and illegal employment.”

    http://www.spiegel.de/international/europe/0,1518,764791,00.html

    1. Psychoanalystus

      Indeed, I too am familiar with Romania’s situation. The president of the country, Basescu, is a fanatical neoliberal supporter and extremely pro-American and pro-NATO. Not only did he instutute the measures you mention, but as a result of his anti-Russian stance Romania (a low wage nation) now pays some of the highest price in the EU for Russian gas.

      And, to further illustrate the stupidity of the Romanian leadership, a few weeks ago its central bank declared that Romania remains on target to join the Eurozone in 2013.

      Unbelievable!

      Psychoanalystus

  30. BinMA

    Heres the thing someone is going to either pay or lose regardless of how we proceed. We can resolve the excessive debts through haircuts or through taxation. Haircuts will happen indiscriminately and that is what frightens the capital owners. A 20% haircut will fall equally and indiscriminately on all classes whereas a tax to pay an excessive debt (assumed by a sovereign) may be levied on certain classes (discriminately) depending upon which tax regime is employed. So whoever controls the politics is going to keep the most capital.

  31. Mrs. Grundy

    Heavens to Betsy! Some of the thoughts expressed in the Michael Hudson post are so unorthodox they risk upsetting conventional standards of propriety.

    I had to stop reading halfway through, and then, to get myself back to feeling normal again, I had to watch The Beltway Boys with Fred Barnes and Mort Kondracke, while reading the WSJ editorial page during commercial breaks.

  32. gf

    Bottom line just one more failure of capitalism.

    The Europeans are figuring that out in spades.

  33. illusionist

    Why will repudiation by Greece of its sovereign debt not be thievery? You may not like the creditors by that is another matter.
    Did Ireland not choose to take on private debt on its Public balance Sheet? If it repudiates what credibility will it ever again have?

    1. F. Beard

      Why will repudiation by Greece of its sovereign debt not be thievery? illusionist

      Is debt to a counterfeiter valid? 97% of those loans might be “money from thin air” so only 3% of the loan would be morally valid.

      1. illusionist

        I repeat -You may not like the creditors by that is another matter. This rationalization of default is all it is – empty rationalization of thievery.

        1. Sauron

          My understanding is that the very top creditors (banks) can basically make money out of nothing, then charge interest on it–basically a rent on our productive labour. Sounds like theft to me. This ‘ultimate power of credit’ should, IMHO be subordinated to social needs, rather than the other way around. We aren’t stealing anything…there is nothing there to steal, other than the power to collect rent.

          That this is ‘nothing money’ is illustrated by the fact that trillions of dollars can be lost virtually overnight without a single bill or concrete asset being destroyed–it’s only that people and businesses are unable/unwilling to take on as much debt/pay the rent. So poof, the money’s gone.

          I wasn’t attacking private property, per se–which I think was the import of your USSR comment.

          Bending over backwards to repay creditors–i.e. austerity–often results in the lack of a pot to piss in too.

          Mind you, on the smaller scale I would agree with you…not paying back your debts is not a good thing to do (except in certain cases.)

  34. Sauron

    Creditor: Fealty to an economic system must trump all–even our ability to feed and cloth ourselves, our jobs, our retirement, our children’s education,and our democratic rights. Those crafty North Koreans have the right idea, though a few details might be off.

    Debtor: Why?

    Creditor: It will make us all richer!

    Debtor: But if we do all the above, then we’re poorer!

    Creditor: Ahem…well then you’ll be even poorer!

    Debtor: How do you know?

    Creditor: (smugly) No one will loan you money!

    Debtor: Why not?

    Creditor: Because you might not repay it.

    Debtor: (exasperated) but if we lose everything we can’t repay it anyways!

    Creditor: We’re the sober and righteous, you have an obligation mumble, mumble.

    Debtor: Oh please! And would you really not make loans even if you had a chance to make a buck? Isn’t that YOUR free market moral obligation?

    Creditor: Hum, haw…

    Debtor: Why don’t we just make laws that help the majority of the country and serve the collective good.

    Creditor: *horrified look*

    1. illusionist

      “Creditor: *horrified look*”

      After getting over the shock of confronting such silliness;

      Creditor : Because they tried that in the Soviet Union and other tin pot republics & ended up not having a pot to piss in.

  35. Uli

    ‘What I find missing from articles such as this is a frank discussion on how to change the system and how the system would fare if those changes were enacted.’

    Just jail the top bankers forever from defunct banks, that need a tax payer rescue and confiscate their personal wealth.

    If you reward them afterwards, why should they bother if their banks are destroyed or they risk the global finance system. They have only a very big personal upside (big bonuses), no responsibility and no downside (jail or their personal assets).

    Banking and finance industrie is just too big relative to GDP in many countries and globally, this is a complete waste of talent, if the best and brighest go there, because you can make a lot of money.

    Banks, headge oder other fonds dont produce anything, they are just a type of needed grease for the economy. If you put to much oil in your motor it just explodes and doesnt run faster.

    The finance industry can make a lot of money in a expanding sector, if money supply/finacial asset increases faster than GDP. But this reverses in a bust or if there is too much debt to sustain.

  36. Uli

    “was nationalist hubris. Iceland was trying to compete in a fashionable business for which it was too small to provide the necessary expertise and infrastructure. In particular, it uncritically imported an FDIC-style deposit protection model which was not viable for such a ”

    All countries imported this model. Look at Lehman.

    If you have a nationally account insurance, but a globally bank with cash poolin on a daily basis to their headquarter you have a big big problem, because the bagholders are the countries without the headquarter and with local account insurance.

    Cashpools from the local subsidiaries to their the headquarter should be regulated like credit to other corporations (with the limits), this would reduce risk but although the benefits from multinationals.

    Look at Lehman oder Icesave. Lehman had a local bank and was locally regulated, therefore the account insurance from the private banks (they pay before the government pays) had to pay around EUR 5 bio to the account holders, because the cash was transfered on a daily basis to the headquarter.

    Look at Iceland / Icesave. In the case of Icesave the problem was, that the branches could be opened without regulation from UK/Netherlands, because it was only a branch and they could accept deposits. Regulation AND account insurance(this was regulated by EU/EFTA-law ~20.000 EUR) was garanteed by Iceland.

    Other Icland banks had subsidiaries with local regulation and with account insurance from the local country.

Comments are closed.