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Michael Hudson: Will Greece Let EU Central Bankers Destroy Democracy?

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Yves here. This is a long and important post. Hudson reports that he has gotten a great deal of correspondence from Greece saying that articles like this arguing against the pending stripping of Greece by banks are being translated and circulated widely to provide moral support. If you cannot read this piece in full, please be sure to read the discussion at the end of how Iceland stared down its foreign creditors.

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.

The Greek bailout provides an opportunity for privatization grab

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

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

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

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

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

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

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

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

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

Promoting the financial sector at the economy’s expense

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

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

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

The Greek budget crisis in perspective

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

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

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

The reality, of course, was a virtual debt. The government was obligated to pay Wall Street billions of euros out of future airport landing fees and the national lottery as “the so-called cross currency swaps … mature, and swell the country’s already bloated deficit.” Translated into straightforward terms, the deal left Greece’s public-sector budget deficit at 12 percent of GDP, four times the Maastricht limit.

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

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

The intellectual deception at work

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

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

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

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

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

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

Banks that lent to the public sector (at above-market interest rates reflecting the risk), they were to be bailed out at public expense. (At the time of the spring 2010 bailout French banks held €31 billion of Greek bonds, compared to €23 billion by German banks. This helps explain why French President Nicolas Sarkozy sought to take major credit for the bailout, based on a May 7, 2010 discussions with EU Commission President José Manuel Barroso, ECB President Jean-Claude Trichet and Eurogroup President Jean-Claude Juncker.)

Demanding that Greece not impose a “haircut” on creditors, the ECB and related EU bureaucracy demanded a better deal for European bondholders than creditors received from the Brady bonds that resolved Latin American and Third World debts in the 1980s. In an interview with the Financial Times, ECB executive board member Lorenzo Bini Smaghi insisted:

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

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

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

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

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

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

Unless Greece signed onto this nonsense, neither the ECB nor the IMF would extend loans to save its banking system from insolvency. On May 31, 2011, Europe agreed to provide $86 billion in euros if Greece “puts off for the time being a restructuring, hard or soft, of Greece’s huge debt burden.” The pretense was a “hope that in another two years Greece will be in a better position to repay its debts in full.” Anticipation of the faux rescue led the euro to rebound against foreign currencies, and European stocks to jump by 2%. Yields on Greek 10-year bonds fell to “only” a 15.7 percent distress level, down one percentage point from the previous week’s high of 16.8 percent when a Greek official made the threatening announcement that “Restructuring is off the table. For now it is all about growth, growth, growth.”

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

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

Meanwhile, the shift of 60 billion euros off the balance sheets of banks onto the private sector threatened to raise the ratio of public debt to GDP over 150 percent. There was talk that another 100 billion euros would be needed to “socialize the losses” that otherwise would be suffered by German, French and other European bankers who had their eyes set on a windfall if heavily discounted Greek bonds were made risk-free by carving up Greece in much the same way that the Versailles Treaty did to Germany after World War I.

The Greek population certainly saw that the world was at financial war. Increasingly large crowds gathered each day to protest in Syntagma Square in front of the Parliament, much as Icelandic crowds had done earlier under similar threats by their Social Democrats to sell out the nation to European creditors. And just as Iceland’s Prime Minister Sigurdardottir held on arrogantly against public opinion, so did Greek Socialist Prime Minister George Papandreou. This prompted EU Fisheries Commissioner Maria Damanaki “to ‘speak openly’ about the dilemma facing her country,” warning: “The scenario of Greece’s exit from the euro is now on the table, as are ways to do this. Either we agree with our creditors on a programme of tough sacrifices and results … or we return to the drachma. Everything else is of secondary importance.” And former Dutch Finance Minister Willem Vermeend wrote in De Telegraaf that ‘Greece should leave the euro,’ given that it will never be able to pay back its debt.”

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

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

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

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

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

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

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

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

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

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

This is what debt slavery looks like on a national level. …

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

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

Making governments pay creditors when banks run aground

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

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

This is what today’s financial War of All against All is about. And it is what the Greeks gathering in Syntagma Square are demonstrating about. At issue is the relationship between the financial sector and the “real” economy. From the perspective of the “real” economy, the proper role of credit – that is, debt – is to fund productive capital investment and economic growth. After all, it is out of the economic surplus that interest is to be paid. This requires a tax system and financial regulatory system to maximize the growth. But that is precisely the fiscal policy that today’s financial sector is fighting against. It demands tax-deductibility for interest, encouraging debt financing rather than equity. It has disabled truth-in-lending laws and regulation keeping prices (the interest rate and fees) in line with costs of production. And it blocks governments from having central banks to freely finance their own operations and provide economies with money.

Banks and their financial lobbyists have not shown much interest in economy-wide wellbeing. It is easier and quicker to make money by being extractive and predatory. Fraud and crime pay, if you can disable the police and regulatory agencies. So that has become the financial agenda, eagerly endorsed by academic spokesmen and media ideologues who applaud bank managers and subprime mortgage brokers, corporate raiders and their bondholders, and the new breed of privatizers, using the one-dimensional measure of how much revenue can be squeezed out and capitalized into debt service. From this neoliberal perspective, an economy’s wealth is measured by the magnitude of debt obligations – mortgages, bonds and packaged bank loans – that capitalize income and even hoped-for capital gains at the going rate of interest.

Iceland belatedly decided that it was wrong to turn over its banking to a few domestic oligarchs without any real oversight or regulation over their self-dealing. From the vantage point of economic theory, was it not madness to imagine that Adam Smith’s quip about not relying on the benevolence of the butcher, brewer or baker for their products, but on their self-interest is applicable to bankers? Their “product” is not a tangible consumption good, but interest-bearing debt. These debts are a claim on output, revenue and wealth; they do not constitute real wealth.

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

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

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

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

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

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

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

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

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

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

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

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

No wonder the EU bureaucracy reacted with such anger. It was a would-be slave rebellion. Returning to the applicable of Newton’s Third Law of motion to politics and economics, it was natural enough for Iceland, as the most thoroughly neoliberalized disaster area, to be the first economy to push back. The past two years have seen its status plunge from having the West’s highest living standards (debt-financed, as matters turn out) to the most deeply debt-leveraged. In such circumstances it is natural for a population and its elected officials to experience a culture shock – in this case, an awareness of the destructive ideology of neoliberal “free market” euphemisms that led to privatization of the nation’s banks and the ensuing debt binge.

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

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

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

Financial Times columnist Martin Wolf writes that the eurozone “has only two options: to go forwards towards a closer union or backwards towards at least partial dissolution. … either default and partial dissolution or open-ended official support.” But ECB intransigence leaves little alternative to breakup. Europe’s payments-surplus nations are waging financial war against the deficit countries. Without a common union based on mutual support within a mixed economy – one capable of checking financial aggression – the European Central Bank replaced the military high command. Its bold gamble is whether the Greeks will be as stupid as the Irish, not as smart as the Icelanders.

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77 comments

  1. Ben

    “(…)There is little thought of wealthier EU economies helping bring less productive ones up to par, e.g. as the United States does with its depressed areas (…)”

    In fact, there are many EU-aid mechanisms designed to bolster competitiveness of lagging members. So-called structural funds are designed to do exactly this. Greece has always been a major recipient of this kind of aid.

    So this is just another bland eurobashing article by an uninformed American who doesn’t know the first thing about the workings of the EU and EMU. Pathetic.

    1. foppe

      Yes, because that was indeed the only thing said in the piece, and the single fact Hudson’s entire argument rested on.

      1. Yves Smith Post author

        Foppe that is not accurate, there is an extensive discussion of the politics, the implications of the implementation of the proposed rescue plan, and the contrast with Iceland. You find one fault and you dismiss the entire piece, and it look like that’s because you don’t like where his argument is going, which is for Greece to leave the eurzone.

        1. Richard Smith

          Um, I reckon Foppe is taking a very deadpan pop at Ben there. But anyhow, you spelt it out for whichever one of them needs it.

    2. Yves Smith Post author

      Greeks, as Hudson points out, have the highest productivity rate in Europe. It’s also been reported elsewhere that they work longer hours than Germans.

      So if these two facts are operative, and they’ve received aid to boot, that would suggest the programs are inadequate in scale and/or badly designed.

      1. foppe

        Anyway, the point to remember about the EU is that it still has only a fairly minimal budget (something in the order of 140 billion/year). Of that, roughly 1/3 goes to the “common agricultural policy”, which is a subsidy that has been heavily (ab)used by the French farmers, of which some money is now also going to countries like Romania which are still heavily dependent on farming (for employment if nothing else).
        This budget is so small (compared to the federal US budget) mostly because of historical reasons, and largely because the different member states are wary of losing money/sovereignty to Brussels. (Thatcher very famously reduced the British contribution because she didn’t want to “subsidize french farmers”)
        Additionally, an (in)decent amount of the structural programs are being diverted towards the poorer areas of the rich nations, (e.g. Wallonia in Belgium or Limburg in the Netherlands) because the national politicians have been unwilling to invest in modernization of those parts themselves. Using the structural funds for such purposes seemed convenient, and as such there has been little willingness to prioritize the (real) poorer parts of Europe. (This is in part due to how voting works at the EC level.)
        Having said that, most of these policies and decisions have been and are the result of back-room dealing, as there has been very little discussion about how these things should be used at the national level, while most newspapers basically do not report on EU policy-making. (It’s not dissimilar to the US senate in how well-understood its actions are, only with even less oversight, while the actors are all pretty much unelected officials.)

    3. Michael Hudson

      Yes, of course Greece got “aid.” It was conditional — upon Greece committing economic suicide and agreeing to follow dysfunctional neoliberal policies. That was my point.
      Latvia also got “aid.” The aid, as usual, helped the aid-giver. It was to enable Greece to import from the aid-givers, and to undertake certain Europe-wide transportation, etc.
      The question is, HOW to make Greece more “competitive.” Privatizing and committing rentier hari kari is not really the answer. It is like US food aid to Third World countries — low-priced farm exports that make their domestic agriculture uneconomic. Its function is to spur dependency.
      Michael Hudson

      1. steelhead23

        http://www.ecb.int/press/pr/date/2011/html/pr110603_1.en.html

        In scope, the ECB’s press release reads like an edict – Greece will do this and Greece will do that. Note also, that the ECB did not sugar coat their intent to liquidate Grecian assets – they actually bolded the term privatize. When a non-domestic entity makes demands that undermine a nation’s sovereignty, the action borders on an act of war. It is absolutely clear that Greece MUST leave the EU. It would be tough, but we are talking about national sovereignty here and if the Greeks indeed intend to live free of the banksters boot on their necks, the choice has already been made.

      2. Calgacus

        Yes, the IMF and now the ECB are in the habit of doling out aid. AIDS to be more precise. Their deal is:

        “I will pay your rent for a month. In return, here is an injection of HIV/AIDS virus, destroying that wasteful immune system called sovereign government. In a month, you will be visited by some friendly opportunistic infections called bankers/creditors, and will have to pay your newly raised rent to them. Have a nice day!”

        What a great deal!

    4. TC

      Ben, I found Mr. Hudson’s a rather colorful eurobashing article. Of course, I’m an anti-fascist, so I’m biased I guess.

  2. SidFinster

    To answer the rhetorical question presented:

    Yes, Greece will let EU central bankers destroy democracy.

    1. rafael bolero

      My thoughts were, the Greek politicians and elite will let Greece be destroyed, not the Greek people. The distinction has to be made in all countries. Because they benefit from the sellout, the elite do not care about the little people, or the country, really. Isn’t that a lesson of history? If the elite can be safe in their villas, there is no problem. Iceland is tiny, remote, a tight society, and the people are much closer to the power by a real vote, I think.

  3. RebelEconomist

    I am tired of reading and deconstructing arguments like this. The idea that Iceland (IMF forecast 2011 PPP GDP per capita $37,504) is striking some blow against debt slavery by Britain (IMF forecast 2011 PPP GDP per capita $35,646) is so absurd as to be unworthy of serious discussion. Let Iceland have its day (months?) in court, where (as Lee Buccheit considerately explained to Icelandic television viewers) there is a chance that they could be ordered to pay MORE than Britain is presently asking for, and if they lose, lets see if they pay. No doubt irresponsible attention-seekers like Michael Hudson will then argue against the legitimacy of the court and foment a renewed sense of injustice among Icelanders. At that point, I will advocate a Chagos Islands solution: http://www.timesonline.co.uk/tol/news/environment/article7104267.ece

    1. Yves Smith Post author

      And why exactly is Iceland responsible for foreign depositors? The US has no obligation to rescue foreign depositors of US banks. These deposits were in UK domiciled branches, I believe.

      The US might choose to do so just because our banks that are in the TBTF category and failing to do so would be destabilizing. That isn’t germane with Iceland.

      The stupid councils didn’t check to see whether the deposits were insured, which they weren’t. This is the matter under dispute.

      The Chagos island notion is ridiculous. You are talking about 2000 people versus 300,000 or so in Iceland who spread out over a large land mass. This idea is a classic example of Banker Derangement Syndrome.

      There are plenty of cases where people win in court and cannot collect the judgment. Even if the British and Dutch governments prevail, there is no obvious way for them to force Iceland to pay. The best they might do is impose punitive tariffs but exactly what do they import from Iceland? Probably bupkis.

      1. RebelEconomist

        Where do I begin? In brief, Iceland is responsible for the PART of deposits in Icelandic bank BRANCHES (as opposed to subsidiaries) covered by the Icelandic deposit protection scheme. The Icelandic banks used this guarantee as part of their pitch to depositors, and protested against any hint that it might be deficient by the British and Dutch regulators, who backed off rather than be seen to hinder a small country’s access to the European Single Market. The British and Dutch, who enhanced the Icelandic guarantee with a top-up of their own, paid the full guarantee within the EEA deadline, and have since sought recovery of Iceland’s part from Iceland (meaning that this dispute now has nothing to do with “bailing out bankers”, not that it ever did anyway, since the bank shareholders lost everything). Unguaranteed depositors by the way, including many UK local authorities and charities, have to take their place in the creditor hierarchy. In my view, the legal case against Iceland is strong, but the moral case is overwhelming.

        I am sorry to mention it yet again, but my blog post http://reservedplace.blogspot.com/2010/03/on-thin-ice.html explains the arguments in more detail (although to be fair, the purpose of my blog is to provide a reference to save repeating long explanations in comments elsewhere).

        In the case of the US, the FDIC makes clear that it does not cover foreign deposits, which can be taken into account by potential foreign depositors in US banks. You should note, however, that the standing US deposit protection fund covers a similar percentage of US deposits as Iceland’s did, and Iceland’s legal claim is that the state has no obligation to back up its banks’ deposit protection scheme in the event that the standing fund is insufficient. You should bear that in mind if you have a deposit with a large US bank like Citibank.

        1. Paul Jurczak

          “Iceland is responsible for the PART of deposits in Icelandic bank BRANCHES (as opposed to subsidiaries) covered by the Icelandic deposit protection scheme”. Not true. The Depositors’ and Investors’ Guarantee Fund (DIGF), a non-profit organisation is the responsible party, not the Government of Iceland. Implicit responsibility of Icelandic Government was assumed, but this assumption was proven wrong so far. I’m glad that Icelanders are resisting forced socialization of financial sector losses. So far, this is one of the very few positive outcomes of Great Recession.

          “The Icelandic banks used this guarantee as part of their pitch to depositors”. And depositors, helped by enticement of the highest interest rates around, quickly applied their personal reality distortion field and translated this pitch to implicit guarantee by Icelandic Government. Many successful Brooklyn Bridge sales transactions at a very competitive price range were based on this phenomenon. DIGF Q/A page plainly shows 1% funding level and no reference to the Government of Iceland, but what possibly can go wrong with a couple of banks based in small nation island, with comparatively minuscule economy, offering interest rates too good to be true and extending loans at levels multiple of national GDP. Sleep safe, the invisible hand will make us all rich.

          1. RebelEconomist

            You are right that this is a key issue now. See my reply to Michael Hudson on June 6, 2011 at 5:18 pm. I would argue that Iceland is liable by negligence – it failed to ensure the existence of an adequate deposit protection scheme as required by European law, not just ex post (obviously) but ex ante too, by not dedicating enough resources to the DIGF. There are a couple of other reasons too. One is that, despite its interpretation of the law regarding foreign depositors, Iceland ensured that all domestic depositors lost nothing. The other is that, in the days running up to the Landsbanki collapse, various Icelandic officials assured British officials that the Icelandic state would back up the guarantee scheme. And of course, Iceland has not said at any other time, before the Landsbanki collapse and since, that there is no significant guarantee for deposits in Icelandic banks, because of course that would put Icelandic banks at a massive competitive disadvantage.

        2. ObedientEconomist

          You still haven’t answered Yves’ main question. The court decides that Iceland should pay, Iceland holds another referendum and says “We no pay. Look volcano. It very pretty.” Then what? Is the plan to bore them to death by reading out court proceedings in Reykjavik’s main square and hope they pay just to end the suffering?

    2. Michael Hudson

      Well, this “rebel economist” seems a nom de plume for Gordon Brown.
      I’ve outlined the Icelandic legal argument in earlier articles (available on my website, or on Counterpunch, UMKC Economic blog, etc.). The letter of the EU law says that Iceland does not HAVE to pay. That position is supported by the Financial Times, and by articles in The Guardian by the prosecutor (Eva Joly).
      The Icelandic population was quite well aware of the legal argument when it voted not to submit to British and Dutch demands. It’s too bad the “rebel” is rebelling against the rebels here.
      Michael Hudson

      1. RebelEconomist

        I would say that the letter of the law says that Iceland does have to repay Britain and the Netherlands. Basically, the European law says a country is not liable if it has ensured that an adequate deposit protection scheme is in place. This Iceland clearly failed to do – for example, the Icelandic deposit protection scheme was managed by only one part-time employee, meaning that Iceland was not always represented in European meetings where deposit protection was discussed.

        Of course, there is disagreement over this question, so the issue is going to court. But the danger for Iceland is that some of its other actions, including fully protecting Icelandic depositors and changing the law on creditor hierarchy on the eve of the Landsbanki bankruptcy, get ruled illegal, and Iceland ends up being ordered to pay more than the British and Dutch are asking. Lee Buccheit, from whom Iceland sought legal advice, warned them about this, but they decided to go to court anyway.

        I have participated in many blog discussions on this issue, and I would question whether the majority of Icelanders really do appreciate the arguments – many of them seem to think that they are taking a stand against bailing out bankers. I get the impression that Icelanders would have benefited from a more balanced discussion in the Icelandic media which included more representatives from the other side of the argument.

        However, while I am critical of your writing on this subject, I must say that I appreciate you joining the discussion in the comments on your post, unlike some other bloggers I could mention.

      1. RebelEconomist

        I don’t know as much about Kaupthing, but I dare say that the FSA felt similarly constrained as they did with Landsbanki. They could not restrict a foreign bank, especially from a small country, because someone, especially someone who might have an axe to grind, reports that its directors are not “fit and proper”. They need proof.

        1. Skippy

          @RE, you do realize, that by the time this matter comes to any kind of head in court…the point_more than not_will be moot.

          Skippy…maturity on fish stocks and ice[?]…snicker.

          BTW when are we going to leave the little folks alone and address whence this ill wind blew or is this a case of the skirt to high and the blouse too low defence.

  4. Schofield

    Essentially the article is telling us that the Euro was set up to be the ideal Neo-Liberal milk cow for a private banking industry that can pretty much manufacture its own liquidity knowing that any losses will be socialised by the individual bank’s country of corporate registration. For the people of the European countries faced with the depredations of these banks their resistance should be seen for what it is; part of the fight against the corruption of the crony capitalism of the few.

  5. Bruce

    I am just wildly speculating here, so please don’t shoot me.

    My theory is that if the rulers of Greece thought they could default and leave the eurozone and adopt the drachma, they would. No doubt on some level Smaghi is right though – Greece banks and pension funds etc would be decimated, with a devaluation of at least 50% and probably more. Ie, still a haircut, no matter how it’s defined.

    So why not let it play out and take the pain more slowly, then at least they can say ” we tried” and maybe they get to stay in the eurozone after a true creditor haircut.

    And who knows, maybe they are also buying themsleves time in case a withdrawl from eurpzone becomes necessary. Now they have another year (maybe) to withdraw all their banking deposits ( thank you IMF!) and squirrel it away in Swiss franc accounts.

    My point is that Greece (or at least it’s upper class) may have very good economic reasons for playing this game – for now.

  6. uli

    >depositors of US banks. These deposits were in UK domiciled >branches, I believe.
    No the deposit have been in branches / offices WIHTOUT regulation from the UK. They habe been regulated by Icland and account protection was from Iceland to the standard amount ~20.000 Euro (~4-5 bio), afterwards the UK scheme kicked in up to £50.000, therefore Iceland has to pay or no bank from Iceland should be ever allowed again in the future to operate in the EU.

    The governement from Iceland as from Irland totally failed to regulate their banks and the banks have been to big to sustain for this small countries. But if the countries dont pay for their sins/debts, why should a ever again a country pay for past debts or agreements again ?

    War -> that was the government before
    Debt -> that was the government before
    International Agreements -> dont apply to us, that was the government before

    Account protection from Iceland, was the premise for opening a branch without UK regulation. It was not a full bank or subsidiary like Lehman in Germany. Lehmann in Germany was regulated and insured by Germany. They had to pay around ~5 bio because of overnight cash pooling.

    That the people in these countries dont want to pay is naturally, but why should other tax payers pick up the tab, if they didnt even remotly inccour the debt or their governments.

    Let Greece default and pick up the tab afterwards, this would a good example of not throwing good money in a sink hole. Greece defaults when all debts are held by IWF, ECB or the taxpayers from other countries. The tensions between the countries will explode, because the premise auf of the EUR was the no bailout.

    1. Sean Peters

      These moral hazard arguments are simply beside the point. The fact of the matter is that the debtors can’t pay. Not that they’d rather not, not that they’ve decided not to, it’s that they simply can’t (I mean, unless they want to starve). The real question, given this, is what should happen. The creditors want to extract the money from taxpayers, while the author is claiming the creditors need to take the loss – after all, they made the loans KNOWING their “clients” couldn’t pay.

  7. FatCat!

    European FatCat here, so listen up, my little Euro peasants.

    Let me make this clear: Obese Euro kittens like ME despise democracy. But we like using the term often just for the benefit of hungry morons like the Eastern Europeans and those dumb Greeks. Those morons actually believed that WE, the proud imperial FatCats from lovely cat-friendly places like France, the UK, Germany, The Netherlands, Austria, actually have their best interest at heart.

    Wow! What morons! Sometimes I amaze myself at my brilliance when devising these strategies. Not only did we get them to join MY European Union, but a few of them even swallowed MY Euro currency, and gave up their sovereignty in exchange. Imagine that!

    I have to confess, when I first thought about allowing these peasants to taste MY democracy, I was only hoping to steal (oops, I meant “privatize”) their oil fields, and their factories, and then sell them some of MY junk at high prices. But I never expected to actually own their countries.

    Man, I’m good. I am the god of FatCats!

    Did you hear that? I am your god! Your god is here, so, bow down and kiss my feet, you moronic peasants! Do it now, or I’ll turn your countries (well, MY countries, now) into another Haiti. And, lest you forget, Haiti is the richest country in the Western Hemisphere, but its people are poor and naked and have been so for 200 years because MY imperial FatCat brother from France wants to keep those niggers that way. So you better watch out, because to ME, you’re all niggers!

    Let me make this clear: if you’re not French, British, German, Austrian, or Dutch, you’re a nigger. You’re MY nigger!

    Is that clear?!!!

    FatCat!

    1. A Good Bankster

      FatCat,

      I’m licking my chops.

      First comes the Big Fat Greek Auction. Sell off the Parthenon, the Islands, art treasures, all that historical shit. Next comes the Big Fat Slave Auction where we sell off peasants to the good banksters of France, Germany, Austria, Netherlands….

      Ha ha ha ha

      How much you want for that black- and red-figure Athenian vase painting? How about 500 Greek peasants? Whaddaya say, bro, we got ourselves a deal?

    2. xmachina

      Hi FatCat!,

      well said, but I do not worry. We have learned how to deal with Germany and Austria. And you know it too: from at least two major events in the previous century ;)

  8. eric smith

    Touche. You have hit the nail on the head. Profit for the financial sector has become decoupled from production of real wealth (real stuff- washing machines, cars,etc.) and is once again (like believing spending on health care of an ever sicker population, or rebuilding after climate change induced disaster is “growth”) is just a snake eating its own tail. What you are all missing though is that wealth is now more based upon having healthy ecosystems that can provide water, food, trees and a things like a stable climate are the future of wealth as much as and even more than the traditional manufactered economy. This is what we must get our head around. Its currently called Permaculture. We have to get there although it may already be too late. Once the Arctic fully melts and releases the methane and CO2 stored there we are almost certainlty toast- literaly and figuratively.Its happening very, very fast.

    1. readerOfTeaLeaves

      Oh, my God. I was grinning like a fool when I read FatCat’s edict. (I’ll bet 1,200 Greek slaves on the Parthenon, a kind of redux of that old Laurium silver mine scenario**. I think it will make a nice Timeshare Condo project /s).

      But this comment puts a bounce in my step for the rest of the day.

      In my own mind, it’s related to the post’s mention of Galbraith’s observation — that people engage in cognitive dissonance because they can’t believe people bankers really get free lunch (or more accurately: free islands, big boats, private jets…). I know people who don’t grasp this simple fact. If they understood it, they’d do a better job of protecting their own interests, but at present they’re about as capable of protecting themselves as a polar bear is capable of stopping global warming.

      I attribute this in part to the Psychology of the Neoliberal Plantation Owner. These people honestly believe that lending money, hedging bets, and generating massive amounts of compound interest ‘entitles’ them to infinite wealth. What galls me is to watch them behave as if they honestly believe they’ve ‘earned’ all that lucre (!).

      Then again, as FatCat alludes to earlier in this thread, it is not in their interests to see reality; that’s the last thing on the planet they want to see, and they’re willing to pay a bundle to anyone who keeps the fiction functioning.

      Too bad they – like the woeful polar bears – can’t prevent the Arctic ice from melting. Dude, it’s going to totally mess with their economic ignorance when too much ice is gone. Sooooooo inconvenient. (Cue the ‘Al Gore is a know-it-all pansy’ soundtrack…) But hey, who needs polar bears anyway? They’re not that cute.

      And now, it’s off to the slag mines for the rest of us while the ice continues melting and the carbon levels continue to rise… While I head off to slave again today, The Neoliberal Plantation Owners cling to their economic delusions that they’ll never have to pay a price for the externalities accumulating all around us.

      The Greeks at the played out silver mines, OTOH, may beg to differ.
      I hope by Zeus, by Hera, by Apollo, and by Heracles they do!
      Otherwise, it’s slavery in the silver mines ahead…

      http://en.wikipedia.org/wiki/Laurium
      The [silver] mines, which were the property of the state, were usually farmed out for a certain fixed sum and a percentage on the working; slave labour was exclusively employed. Towards the end of the 5th century, the output fell, partly owing to the Spartan occupation of Decelea. But the mines continued to be worked, though Strabo records that in his time the tailings were being worked over, and Pausanias speaks of the mines as a thing of the past.

  9. /L

    Yes they will let EU and its Central Bank destroy democracy. There is hardly no alternative economic ideas, the neoliberals is in absolute control of the economic “facts” in universities and the public debate, the “socialist” politicians have been brain washed for more than 3 decades now. Those who did experience and did see (in working age) with their own eyes that actually did functioning when neoliberal economic “facts” was obscure fringe ideas are on the way to die off. Those who are in their let’s say 40s haven’t lived in another economic world than the one where neoliberal economics is the facts. They have never experienced a society with real full employment and have no idea how that was achieved.

    It have been said by critics from the beginning that only people did see and understand the idiocy of neoliberal economics it would be thrown out. But it didn’t happen it have rather gone from bad to worse. And it won’t happen, the dark-ages are her to stay for a long time.

  10. Allen C

    Another nice piece on the realities of life -

    1) Debt creation for consumption purposes is unsustainable
    2) Extend and Pretend for the unsustainable remains unsustainable and in fact leads to further misery

    This is all no different that a person spending beyond their means via credit. The game is up once income growth and asset liquidation are insufficient to pay P&I.

    A once rich household like a once rich nation can continue to make promises until way too many promises are made. The salient difference is that the nation typically has more options. We know for certain in both cases that all promises are unpayable in full. Default is the logical path in the case where national debts are significantly external.

    Either Greece defaults in the near future or they Extend and Pretend for awhile longer. We know for certain that the promises are unpayable in full.

    One salient issue is often missed – High quality income growth helps to pay for past spending sins. The rise of China and other lower costs nations are a hugely significant factor. Many nations are in structurally horrible positions as they offshored significant manufacturing with insufficient economic offset leaving many with an inability to earn a wage at the standard of living. While the depression grinds on, China et al continue to gain economic ground exacerbating the dismal dynamics.

  11. financial matters

    ‘The Bank of England has been called the “the Mother of Central Banks”. It was chartered in 1694 to William Paterson, a Scotsman who had previously lived in Amsterdam. A cicular distributed to attract subscribers to the Bank’s initial stock offering said, “The Bank hath benefit of interest on all moneys which it, the Bank, creates out of nothing”.

    The lenders would be allowed to secure payment on the national debt by direct taxation of the people. Taxes were immediately imposed on a whole range of goods to pay the interest owed to the Bank. ((Web of Debt))

    1. Susan Truxes

      If the Basel (?) regulations, (or are they some general European authority regulations regarding sustainable corporate banking protocol of some kind?), are now preventing big commercial banks from being chartered in little countries (Switzerland) without the tax base to bail them out when their shit hits the fan, why don’t those same protocols also prevent these monster banks from preying on little countries that are likewise too small to absorb their toxic loans? The Europeans are steeped in contradictions. That’s why they should call a big summit and all get drunk. Really drunk. Burn out those overgrown brain cells awash in neoliberalism. Getting drunk makes you considerably smarter (afterward). They could then just admit it is all just really screwed up and they will fix it equitably without socializing losses. And they should also apologize to each other for all their imperialist blather.

  12. Sauron

    If the people are to rein the financial overlords in, they need to understand two central facts: the creation of money and the nature of compound interest.

    The FO’s have a substantial political and moral advantage in dealing with the State: most people think paying one’s debts is the honourable and honest thing to do, that default and creditor haircuts are a regrettable last resort.

    Once it is understood that the FO’s can create money out of thin air and turn around and charge interest on it, the idea that we have a moral debt to them is put in its proper place. Our relationship with them becomes a simple matter of contract and law that SHOULD be treated pragmatically, rather than morally.

    This point is reinforced once “the miracle of compound interest” is understood. That debt will always increase faster than our ability to pay entails that it MUST be treated pragmatically, not morally. As Kant would say, ought implies can.

    Sauron

    1. foppe

      You do know germans are very serious, and not very likely to have picked up on the satirical undertone, right? They probably read your piece and thought it was a good idea.

      But in all seriousness, yes. Although you are incorrect in that it isn’t Germany buying up Greece, but German firms (and investors) with political clout that are pushing the German government to go for this course of action.

    2. Floyd T. Bankster

      I’m all for it. I’ve had my eye on buying the parthenon for a while. I’d open a really big Starbucks there. (Jobs anyone?) Maybe also a Walmart next door on the Acropolis.

      I’d also hold banking conferences there that would compete with Davos. Who wants to be in Davos when they can take their rightful place among the Greek Gods?

      I’d be willing to pay, say 300,000 euro for both. Think it over Greeks,\. You know you need the money.

      1. Lloyd C. Bankster

        For the Parthenon, I was thinking of turning it into a monstrous mega Theme Park. Maybe 35 to 40 waterslides, 15 to 20 roller coasters, including one modeled after the “Hades” roller coaster (in Wisconsin, 3rd best roller coaster in the USA), only this one would be the best. And a megalodonic “Poseidon’s Rage” with 9 feet high surfing waves, waterslides, and the world’s largest go-kart with huge go-kart tracks, and a giant wave pool.

        Also numerous child rides, for the good children of good banksters from all around the world.

        However none of this would interfere with your giant Starbucks and a Walmart SuperCenter.

        And how about adding a Bungee Jump from off the top of the Acropolis?

        1. Floyd T. Bankster

          Right on Brother Lloyd. Your idea is so much better than mine. I was going to cart off all those old stones and build an elevated parking garage for the Walmart.

          Do you think I’m overpaying at 300,000 euros since really all you have is a bunch of old stones on a hill and limited parking? I think it’s a bit high for the commercial space, but it has a certain amount of name recognition. We tend to overpay for these intangibles.

          1. Lloyd C. Bankster

            Brother Floyd,

            Nah, I’d try to lowball it around 150,000. You can always go higher.

  13. EoH

    One thing governments ought to do when they choose not to pay specified debts is to declare them null and void so that sovereign vultures cannot buy it up offshore and lay waste to a country’s assets worldwide. This is devastating parts of Africa, and will do the same elsewhere.

    Long past time, non, to reinvigorate the rule of law and financial regulators. If we fail to do that before we get off the back of the financial tiger, we may all end up inside it, not just those poor “others” who live in Greece, Iceland, Ireland or sub-Saharan Africa.

  14. mvw

    A reoccuring theme in this “maze” of debt/insolvency/bailout mania is the inability to (God forbid!) tax the rich. The common mantra is “the rich create jobs!” Tax rates on the wealthy are the lowest in years. Has this created the job panacea predicted? (NO of course) Let them have their grand experiment and take the top personal and corporate tax rates to 0% and I think job creation would remain a disaster.

    1. F. Beard

      Let them have their grand experiment and take the top personal and corporate tax rates to 0% and I think job creation would remain a disaster. mvw

      Yep. The Right hates taxes while ignoring the government backed counterfeiting cartel, the banking system, that allows them to loot the poor.

    2. Sauron

      Of course. The sole imperative of business, or so we are taught, is to do God’s work by maximizing profit. And

      (0 taxes) + (minimal pay) is better than just 0 taxes. And minimal pay = minimal demand = few jobs

      1. greg

        Unfortunately, our masters don’t seem to have grasped the next term in the equation: minimal demand => minimal profits.

        Or if they have, their real goal is different from profits.
        Slaves?

    3. hermanas

      If the wealthy created businesses wouldn’t there be tax breaks? And doesn’t providing breaks aforehand relieve them of the effort?

    4. Floyd T. Bankster

      Ha ha! People actually take ‘no taxes on the rich=job creation’ seriously enough to try to refute it!

      How about this one, if you give me money, I’ll create some jobs. Ha Ha! Bet you fall for that one too!

  15. Gaby

    “The policy of government and the Troika is on deadlock” said for one more time Yanis Varoufakis, professor for economic theory at the University of Athens. Varoufakis, one of the main Greek opponents of the austerity program and the applied economic models,has repeatedly stressed that even if Greece achieves all goals by 2015, the public debt will have reached 200% of GDP in three years. Such an unbearable loan cannot help and in 2013 a major restructuring will be imminent. He considers a European Marshall Plan as an alternative to Greece’s and Euro crisis. Now, Varoufakis has issued an open letter addressed to Prime Minister George Papandreou. and he even invites him to join Monday’s open discussion at Syntagma Square…

    Open letter to the Greek Prime Minister, 6 June 2011

    Dear George,

    A few days after the 2009 election that brought you to power, you told your cabinet in a televised meeting: “We are anti-authoritarians in authority”. Most of your cabinet, men and women who had been craving authority for years, looked at you incredulously, while your detractors mocked you. You seemed rather lonesome at that moment. And yet, to the degree that I know you, you were utterly authentic in uttering that thought.

    Since then much poisoned water has flowed under the proverbial bridge. The utopian declarations were swamped by an angst-ridden effort to save the country. It forced you not only to clench your teeth, and to drown out your utopian self, but also to renounce some of your basic convictions about what ought, and what ought not, to be done by those in authority. To the extent that I know you, I am convinced you considered your harsh decisions to have been the best of a hideous lot. And I can imagine your loneliness just after you took each one of them.

    Thus we arrived in May 2010, a juncture where you were ambushed by the most momentous decision any peacetime Prime Minister has had to face hitherto. You know that we disagreed on whether it was the correct decision. It matters little now. They convinced you that the deal you put your signature to was a genuine bailout; a lifejacket offered after a shocking shipwreck for the purposes of allowing the shipwrecked a chance to buy time and find their way, through stormy waters, toward some terra firma. I considered the same ‘bailout’ a massive ball-in-chain, attached to our collective ankles, dragging the whole of the eurozone toward the bottom (surplus and deficit nations alike, North and South bound together in a deathtrap). You chose to follow the advice of your councilors, and of the captains of finance, judging that the ‘bailout’ was, indeed, buying you precious time. Nevertheless, to the extent that I know you, your decision filled you with angst and sadness.

    For months now you knew that the ‘bailout’ was failing because it was in its DNA to fail (and not because it was not followed as best as it could have been by your government). We, economists, as you well know, disagree on almost everything. History has, however, taught us two lessons: (1) You cannot save the bankrupt by means of expensive, new loans; and (2) Swinging austerity cannot and will not reduce the deficits and debts of a macro-economy caught in a savage recession, especially when it is unable to devalue its currency and, to boot, forced to operate in a recessionary global and regional environment. Last year’s ‘bailout’ violated both principles. Is it any wonder it failed?

    Did you not know that it would? It is possible that you were hoping for a miracle of an economic (e.g. some major spurt of growth in the European economy that would help drag Greece out of the mire) or perhaps a political kind (some visitation upon Mrs Merkel by the holy spirit). Alas, it did not come. And now you are being called upon, for a second time in a year, to go against the grain of you beliefs, your facts, your instincts, your experiences (of the past year, at least). They tell you, just as they did last year: “Prime Minister, think of what will befall our nation if we do not secure fresh loans. How will we pay public sector wages and pensions?” To the extent that I know you, I know that you are biting your tongue.

    read the full letter (as Prof. Varoufakis invites Papandreou to speak at Syntagma tonight) at keeptalkinggreece

    http://www.keeptalkinggreece.com/2011/06/06/economy-professor-sent-open-letter-to-greek-pm-invites-him-to-syntagma-sq/

    Best

    Gaby

    1. Tortoise

      Varoufakis is right that Greece cannot repay the debt — impossible politically as well as economically!

      But Greece cannot negotiate right now because Greece is not led by a strong leader who has the confidence of his people. The prime minister is a real fox when it comes to political maneuvering but he does not appear to be a strong and decisive leader. He lost the confidence of his people exactly because he came to power promising MORE of the same (he pre-election statement was that “money can be found” to maintain the spending) even though he clearly knew that the country was bankrupt. I know detractors of his who claim that the prime minister is simply a pathological liar who will never speak the truth when a lie can suffice. I do not want to believe it. I think he is simply not cut out for the huge challenges he is facing. But only History will show whether, as they say challenges and events make the man.

  16. Hugh

    You know this is a really excellent description of kleptocracy in action. How else would you characterize Hudson’s statement:

    “the financial sector will proceed with buyouts and foreclosures until it possesses all the assets in the world, all the hitherto public assets, corporate assets and those of individuals and partnerships.”

    If that is not the systemic looting of kleptocracy, what is? I wish Hudson would just say so, but it says a lot about how constrained and controlled our economic and political discourse is that while kleptocracy is the abiding reality of our times, almost no one will call it by its name, for fear I suspect that they would not then be taken seriously. But taken seriously by whom, I have to wonder? The banksters, their bought and paid for minions in government, the media, and academia? These are all people who are never going to be persuaded under any circumstances. Their profits and paychecks come from denying the existence of kleptocracy so that they can all benefit from kleptocracy’s looting for as long as possible. So why the hesitance?

    I would just say too that for banksters debt creation is wealth creation because it is wealth for them even if it does imporverish the wider society.

  17. Valissa

    The title of this post doesn’t seem quite right somehow.

    How about this?

    “Will EU Central Bankers Let Greece Destroy the Illusion of Democracy?

  18. Tortoise

    I lived in Athens 1969-1974, and I have a house in Greece where I spend part of every summer. I believe I know a few things about Greece. I have to dispute the claims of the author and his understanding of recent history. After all, not only all politics are local but also local are all economics.

    Until 1974, Greece was a low-tax place, probably by design. Only the salaried employees seemed to pay some income taxes and there were heavy “luxury” taxes. The cost of government was very low so the budget was roughly balanced until 1973 even though the Greeks were repaying accumulated debts from all the way back to the nineteenth century. It was said that “The Greeks are rich in their own country” a reflection of the very low cost of living and the efficient way society was organized. (Most Americans cannot even imagine what this means but it is important.) I believe this held true for most Greeks and anyone who visited Greece in the seventies as a tourist can attest to the fact that the cost of living was surprising low and the quality of life good.

    When the junta fell and was replaced by parliamentary democracy, things started changing, gradually at the beginning. As salaries were increasing, a lot of companies defaulted and fell on the government’s lap, i.e., nationalization through bankruptcy. If you worked for a successful private company, you had strong incentives to undermine it so that it would go bankrupt and thus you could get all the benefits of working for the government. Look up
    http://en.wikipedia.org/wiki/Peiraiki-Patraiki
    as a classic example. A very successful company went under due to unreasonable demands and the crippling strikes of the syndicates — and, guess what, the bosses of the syndicates went on to successful political careers.
    While government expenses went up, taxes did not keep up. Greece has not had a single year of surplus since the mid seventies and has not had a year of primary surplus since 1986, which was about the time Greece had paid back its old debts and was, alas, borrowing again. (This can be seen in the evolution of the debt, since some large expenses appear with delay in the debt but never in the deficit — an accounting shenanigan not limited to Greece.)

    Fast forward to 2009: Greeks live in a country where practically every family depends on the government for part of their income through salaries and pensions and too many of the businesses that are left standing depend on government contracts (the word for them is “katikodiaitos” or “on the government trough”). For every euro the government collects in taxes, the government spends at least 1.4! Yet, paradise on Earth has not been achieved. Greece is now a very expensive place and there are no more jobs for the young. The father who is a watchman may have a steady job at 80K euro a year while the son with a PhD cannot find a job or must work for 10K a year. At the same time, a high percentage of Greeks, feeling affluent thanks to ridiculously overvalued real estate, have adopted an American-style suburban lifestyle, the kind that most Americans cannot afford.

    And now? There is no escaping the fact that the Greeks will pay a heavy price for their follies. This story may result in a catastrophe (surely a Greek word you do not like to hear often).

    Which leaves me with a few questions, related to the other fools. What kind of demented idiots lent them so much money? And why exactly should the aforementioned cretins expect to get their money back?

    1. readerOfTeaLeaves

      Which leaves me with a few questions, related to the other fools. What kind of demented idiots lent them so much money? And why exactly should the aforementioned cretins expect to get their money back?

      I have the same questions.
      I think they should be asked more frequently, and probably more loudly and persistently.

      And ‘cretin’ is so fitting…

  19. Joe Rebholz

    I have been reading Naked Capitalism to try to understand the present world mess. Some posts and comments leave me less than satisfied that they have really explained anything, for example, recently discussions of the “necessity” of debt. But Michael Hudson’s “Will Greece Let EU Central Bankers Destroy Democracy? seems so clear, so sensible, so rational that I want to quote from it more extensively than is usually appropriate.
    Is he wrong in the following quotes? Please tell me in understandable English if he is wrong. Please list any factual errors or mistakes in logic. Remember the Greeks invented logic a couple thousand years ago and non logical arguments are still wrong.

    “Financial politics are now dominated by the drive to replace debt defaults by running a fiscal surplus to pay bankers and bondholders. The financial system wants to be paid. But mathematically this is impossible, because the “magic of compound interest” outruns the economy’s ability to pay – unless central banks flood asset markets with new bubble credit, as U.S. policy has done since 2008. When debtors cannot pay, and when the banks in turn cannot pay their depositors and other counterparties, the financial system turns to the government to extract the revenue from “taxpayers” (not the financial sector itself). The policy bails out insolvent banks by plunging domestic economies into debt deflation, making taxpayers bear the cost of banks gone bad.”
    “These financial claims are virtually a demand for tribute. And since 2010 they have been applied to the PIIGS countries. The problem is that revenue used to pay creditors is not available for spending within the economy. So investment and employment shrink, and defaults spread. Something must give, politically as well as economically as society is brought back to the “Copernican problem”: Will the “real” economy of production and consumption revolve around finance, or will financial demands for interest devour the economic surplus and begin to eat into the economy?”
    “Technological determinists believe that technology drives. If this were so, rising productivity would have made everybody in Europe and the United States wealthy by now, rich enough to be out of debt. But there is a Chicago School inquisition insisting that today’s needless suffering is perfectly natural and even necessary to rescue economies by saving their banks and debt overhead – as if all this is the economic core, not wrapped around the core.”
    “Meanwhile, economies are falling deeper into debt, despite rising productivity measures. The seeming riddle has been explained many times, but is so counter-intuitive that it elicits a wall of cognitive dissonance. The natural view is to think that the world shouldn’t be this way, letting credit creation load down economies with debt without financing the means to pay it off. But this imbalance is the key dynamic defining whether economies will grow or shrink”
    “They can hold onto their privilege and avert a debt write-down only as long as they can prevent widespread moral objection to the idea that the economy is all about saving creditor claims from being scaled back to the economy’s ability to pay – by claiming that the financial brake is actually the key to growth, not a free transfer payment.”

    So unregulated lending, debt creation, money creation to be paid back with compound interest must lead to, actually is, sooner or later exponential growth of debt. Exponential growth of anything in the real world is unsustainable. Exponential growth cannot continue in the real world. It must stop. This is a law of Nature (Physics) not a human made law.

    If the present course with respect to Greece were to be continued — pledging Greek property for ever more debt, — then there would come a day when every square meter of Greek land and all Greek property would be owned by foreign bankers. Then how will they get paid? They won’t. So the exponential growth of their ownership of Greek property will come to a halt.

    “Is a government – or economy – be said to be solvent as long as it has enough land and buildings, roads, railroads, phone systems and other infrastructure to sell off to pay interest on debts mounting exponentially? Or should we think of solvency as existing under existing proportions in our mixed public/private economies? If populations can be convinced of the latter definition – as those of the former Soviet Union were, and as the ECB, EU and IMF are now demanding – then the financial sector will proceed with buyouts and foreclosures until it possesses all the assets in the world, all the hitherto public assets, corporate assets and those of individuals and partnerships.”
    “ … At issue is the relationship between the financial sector and the “real” economy. From the perspective of the “real” economy, the proper role of credit – that is, debt – is to fund productive capital investment and economic growth. After all, it is out of the economic surplus that interest is to be paid. This requires a tax system and financial regulatory system to maximize the growth. But that is precisely the fiscal policy that today’s financial sector is fighting against. It demands tax-deductibility for interest, encouraging debt financing rather than equity. It has disabled truth-in-lending laws and regulation keeping prices (the interest rate and fees) in line with costs of production. And it blocks governments from having central banks to freely finance their own operations and provide economies with money.”
    “Banks and their financial lobbyists have not shown much interest in economy-wide wellbeing. It is easier and quicker to make money by being extractive and predatory. Fraud and crime pay, if you can disable the police and regulatory agencies. So that has become the financial agenda, eagerly endorsed by academic spokesmen and media ideologues who applaud bank managers and subprime mortgage brokers, corporate raiders and their bondholders, and the new breed of privatizers, using the one-dimensional measure of how much revenue can be squeezed out and capitalized into debt service. From this neoliberal perspective, an economy’s wealth is measured by the magnitude of debt obligations – mortgages, bonds and packaged bank loans – that capitalize income and even hoped-for capital gains at the going rate of interest.”
    “ … bankers? Their “product” is not a tangible consumption good, but interest-bearing debt. These debts are a claim on output, revenue and wealth; they do not constitute real wealth.
    This is what pro-financial neoliberals fail to understand. For them, debt creation is “wealth creation””
    “ … Rather than being based on rational calculation, their loans are based on what investment bankers are able to package and sell to frequently gullible financial institutions. This logic leads to attempts to pay pensions out of a “wealth creating” process that runs economies into debt.”
    “ …The[re] amount of debt that an economy can pay is limited by the size of its surplus, defined as corporate profits and personal income for the private sector, and net fiscal revenue paid to the public sector. But neither today’s financial theory nor global practice recognizes a capacity-to-pay constraint. So debt service has been permitted to eat into capital formation and reduce living standards – and now, to demand privatization sell-offs.”

    What Iceland did is important, and what Greece will do is important. Greece will have to default sooner or later, and if it defaults sooner the Greeks may still own some of Greece. If they default later, somebody else, the bankers, will own all of Greece.
    But I Thank You Michael Hudson for your explanation. You have made it all so clear.

  20. Jim

    Did not know about referendum until I read NC. Just researched it…

    ——————

    http://blogs.wsj.com/marketbeat/2011/06/06/greece-talk-frightens-market-pt-2439/

    The stock market has stumbled near the close, and short-term Treasurys are in a little hotter demand, partly on the news stream out of Europe.

    Perhaps the thing that could be the most nervous-making is this report from the AP:

    Greece’s prime minister says he would consider holding a referendum on austerity measures essential for the country to continue drawing on funds from an international bailout.

    ——————–

  21. Joe Rebholz

    To the Greeks:

    Go, Greeks, Go! Do it now! Renounce those impossible, unsustainable, exponentlally growing as if to infinity debts. It must be done. The sooner the better.

    And, if you do, maybe it will be the dicontinuity point that will break neoliberalism once and for all. Because if you do it now, other countries now sinking into debt slavery will follow you. This will break the present crazy money sustem for the good of the whole world.

    Greeks, you invented logic. Read Michael Hudson’s article: “Will Greece Let EU Central Bankers Destroy Democracy?”. Read it and think. Do you want to see Greece disappear from the earth? Decide. Decide now. You can’t pay off infinitely growing debt. The sooner you stop paying, the better. The longer you put it off the worse it will be for all of us.

  22. gepay

    From reading the bloggers like NC and not say the NYT financial section or Time one can’t help but think Michael Hudson says it so clearly – why do politicians in Greece or Ireland or Washington,DC or…not see it? Upton Sinclair said it clearly,“It is difficult to get a man to understand something when his job depends on not understanding it.”
    Actually it was hard for me to read the article, not because it was poorly written but that it is so painful – the powerlessness one feels when wondering what to do about it.
    Lenin asked, What to do? What to do? And we know how that turned out.
    We know that in the long run this system will collapse because of it greed and faux cleverness. But Keynes, said it – “in the long run we are all dead.”
    It’s to the point where I feel all we can do is keep an eye on what does work and what doesn’t and hope that there is still a viable planet left when we begin to pick up the pieces.

      1. quark

        Then none of this should be alarming. The fact that citizens are not physically dismantling the bankers powers but instead continue to allow the bankers to commit extortion after extortion following incompetent manipulation of the economies of the world while rewarding themselves with job security then calling on the citizens of the free world to sacrifice their property and their jobs is not merely alarming but cowardice and invites more abusive treatment.

    1. Paul Tioxon

      The principle of debt service capacity? As a legal concept? This is banking 101. You lend money ONLY with expectation that it will be repaid. You accomplish this marvelous feat through the underwriting process to see, if among other things, that there is not too much other debt in relation to income, the debt to income ratio. I mean, are you fucking kidding me? They have to establish this as a defense? And of course, this is a nation which any poly sci grad student would carefully explain, does not have a long standing strong central government bureaucracy, as evidenced by the rule under the colonels until 1974, only a nation state recognized by the core states of Europe in 1830. It simply does not have nation state structure that we have come to be most familiar with, as the tax avoiding wealthy of Athens cited in Hudson’s argument demonstrates. This is a key component to sovereign lending, the ability to collect taxes and that ability is through the mechanism only possessed by a strong centrally controlled national bureaucracy. Greece never developed a necessary component to getting a bank loan repaid, the simple capacity to service the debt. Yet, Goldman was there to provide royal access to financing, even through it was apparent that the risk was prohibitive. The point of this sub prime sovereign lending is that you will get cash flow by the tax collection system or you take over the national assets that provide the cash flow in lieu of state taxation. Greece should leave and politically, given the history of the colonels to begin with, this is a homogenous people, a nation that voted in socialism in the 1960′s only to be subjugated by CIA controlled colonels in coup after coup. The Greek have stood up to worse than pin striped extortionist, I would not count on them staying and paying.

  23. herman sniffles

    “There are plenty of cases where people win in court and cannot collect the judgment. Even if the British and Dutch governments prevail, there is no obvious way for them to force Iceland to pay. The best they might do is impose punitive tariffs but exactly what do they import from Iceland?”

    Iceland’s largest export is processed fish fillets. I’m not sure how Holland would react to skyrocketing fish prices due to import tariffs, but double the price of fish & chips in Britain and…I shudder at the thought.

    1. Yves Smith Post author

      All their neighbors will be the happy beneficiaries of less demand for Icelandic fish.

  24. CrisisMaven

    Well, the ECB follows its mandate. I could have sworn the Greek politicians lying their country’s way into the Euro zone upheld the same principles back then.
    While it is true that the alternative is nothing but breaking the Euro zone up again (and indeed the EU as a consequence – all we ever needed was a free-trade zone, not a bureaucratic monster!) that is nothing but what happened when the Soviet Kombinats were split up since due to a market based on free exchange of goods there was no need for a tractor manufacturer to own a steel mill for its metal forges nor a wall paper printer to keep its employees’ spirits up. The EU is just such a kombinat – it tries to regulate even the currency now. Next must be the nationalisation of bakeries lest we all starve, hm?
    The way forward is regionalisation not creating a Roman empire but with oafs at the helm rather than proud citizens as it was back then.
    Let Greece stop the rot by exposing it. Just because the faults of the rest of the EU cannot be exposed simply by looking at Google Earth doesn’t mean the EU wasn’t infrastructurally covered by false asphalt all over. Rather a mud road I can afford than an asphalted one my grand children still pay off while it has become … a mud road by that time!
    Iceland is not a comparison, the Greek situation is entirely different, however, we should wish for the Greek populace to be as intransigent as the Icelanders seem to be, but one can arrive at that same conclusion from totally different starting points.

  25. Horseball

    Interesting theory, except for none of that stuff actually happened. They’re only just now getting around to privatizing. Do you think that Greece has been suffering from under investment in the public sector? Has there been a proliferation of toll roads? Did any of the stuff you say (except for the financial chicanery) happen?

  26. ada tsardounis

    i am very interested in what these ‘deals’ have been ..made by the Greek govt and the banks…..we Greeks here are in fear as we dotn know what ot expect when we visit…strikes, no way to get around..we have heard aweful stuff from those who ahve returned here after selling there lands to try to live ….its a sickness all over the world…Greece ..needs to live with integrity…i am tired of the greedy people who all wanted ot live off the monies in the govt jobs while not being honest!! i was disgusted to see these thigns on my vacation visits..and to have to stand up for my American life here…well….at least we have a tax plan and IRS….Greece NEEDS a system of CHECKS AND BALANCES…THE GOVT IS RUN TOO FREELY…..THYE NEED STRUCTURE!! NOW!..AND THIS IS THERE TIME TO LEARN!! AND GROW!…GREECE HAS GREAT ASSETS IN HISTORICAL PLACES FOR TOURISTS AND WE HAVE LOVELY LANDS TO LIVE AND PROSPER….MANY GREEKS WERE BECOMING SO WEALTHY FOR YEARS B4 THE EURO-IDEA….NEVER SHOULD HAVE JOINED!!! WE LIVED WELL WITH THE DRACHMA….TIRED OF UR INSULTS….I AM UNABLE TO AFFFORD TO GO TO GREECE NOW WITH THE EURO..!!….AND LETS RESTRUCTURE AN –HONEST –WORKING GOVT….ONCE AND FOR ALL….MAYBE –ADOPTING THE DOLLAR IS BETTER….I HATE TO HAVE MY HERITAGE SOLD TO

  27. dianek

    The Greeks are responsible for getting themselves to this place in history. That said, however, the current lot of political leaders, with finance minister George Papaconstantinou first in the line of dunces, are traitors to the country’s national interest and they should be tried as such. There is no growth plan. Crime is up, homelessness, unseen in Greece, is an eyesore in Athens, unemployment is growing like a cancer. The Greeks are at a point in their modern history where they have to look inward and wrench out their national soul and rediscover self-reliance and the spirit that has sustained this country through far worse. If that means restructuring to the detriment of usurious German bankers, so be it. Selling the national treasures and the only state properties that actually turn a profit is counterintuitive to say the least.

  28. James L. Secor

    Well, I must say: I just love these people who are so full of opinions and their rightness using “anonymous” names. Are they ashamed of themselves? of their arrogance in having “the” answer? of their hubris? afraid of official sanctions? Name yourself or be f—–g quiet. You are just dried cowpatties attempting to re-enter the food chain by the back door. So. . .have any of you actually done anything? put yourselves, your life on the line? been jailed or fired blacklisted for what you believe? I do not think Plato’s cave went so far back as you.

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