Michael Hudson: The Financial Road to Serfdom – How Bankers are Using the Debt Crisis to Roll Back the Progressive Era

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.

Financial strategists do not intend to let today’s debt crisis go to waste. Foreclosure time has arrived. That means revolution – or more accurately, a counter-revolution to roll back the 20th century’s gains made by social democracy: pensions and social security, public health care and other infrastructure providing essential services at subsidized prices or for free. The basic model follows the former Soviet Union’s post-1991 neoliberal reforms: privatization of public enterprises, a high flat tax on labor but only nominal taxes on real estate and finance, and deregulation of the economy’s prices, working conditions and credit terms.

What is to be reversed is the “modern” agenda. The aim a century ago was to mobilize the Industrial Revolution’s soaring productivity and technology to raise living standards and use progressive taxation, public regulation, central banking and financial reform to distribute wealth fairly and make societies more equal. Today’s financial aim is the opposite: to concentrate wealth at the top of the economic pyramid and lower labor’s returns. High finance loves low wages.

The political lever to achieve this program is financial. The European Union (EU) constitution prevents central banks from financing government deficits, leaving this role to commercial banks, paying interest to them for creating credit that central banks readily monetize for themselves in Britain and the United States. Governments are to go into debt to bail out banks for loans gone bad – as do more and more loans as finance impoverishes the economy, stifling its ability to pay. Yet as long as we live in democracies, voters must agree to pay. Governments are sovereign and debt is ultimately a creature of the law and courts.

But first they need to understand what is happening. From the bankers’ perspective, the economic surplus is what they themselves end up with. Rising consumption standards and even public investment in infrastructure are seen as deadweight. Bankers and bondholders aim to increase the surplus not so much by tangible capital investment increasing the overall surplus, but by more predatory means, headed by rolling back labor’s gains and stiffening working conditions while gaining public subsidy. Banks “create wealth” by providing more credit (that is, debt leverage) to bid up asset prices for real estate and enterprises already in place – assets that either are being foreclosed on or sold off under debt pressure by private owners or governments. One commentator recently characterized the latter strategy of privatization as “tantamount to selling the family silver only to have to rent it back in order to eat dinner.”

Fought in the name of free markets, this counter-revolution rejects the classical ideal of markets free of unearned income paid to special interests. The financial objective is to squeeze out a surplus by maximizing the margin of prices over costs. Opposing government enterprise and infrastructure as the road to serfdom, high finance is seeking to turn public infrastructure into rent-extracting tollbooths to extract economic rent (the “free lunch economy”), while replacing labor unions with non-union labor so as to work it more intensively.

This new road to neoserfdom is an asset grab. But to achieve it, the financial sector needs a political grab to replace democracy with financial technocrats. Their job is to pretend that there is no revolution at all, merely an increase in “efficiency,” “creating wealth” by debt-leveraging the economy to the point where the entire surplus is paid out as interest to the financial managers who are emerging as Western civilization’s new central planners.

Frederick Hayek’s Road to Serfdom portrayed a dystopia of public officials seeking to regulate the economy. In attacking government so one-sidedly, his ideological extremism sought to replace the checks and balances of mixed economies with a private sector “free” of regulation and consumer protection. His vision was of a post-modern economy “free” of the classical reforms to bring market prices into line with cost value. Instead of purifying industrial capitalism from the special rent extraction privileges bequeathed from the feudal epoch, Hayek’s ideology opened the way for unchecked financial power to make a travesty of “free markets.”

The European Union’s financial planners claim that Greece and other debtor countries have a problem that is easy to cure by imposing austerity. Pension savings, Social Security and medical insurance are to be downsized so as to “free” more debt service to be paid to creditors. Insisting that Greece only has a “liquidity problem,” European Central Bank (ECB) extremists deem an economy “solvent” as long as it has assets to privatize. ECB executive board member Lorenzo Bini Smaghi explained the plan in a Financial Times interview:

FT: Otmar Issing, your former colleague, says Greece is insolvent and it “will not be physically possible” for it to repay its debts. Is he right?

LBS: He is wrong because Greece is solvent if it applies the programme. They have assets that they can sell and reduce their debt and they have the instruments to change their tax and expenditure systems to reduce the debt. This is the assessment of the IMF, it is the assessment of the European Commission.

Poor developing countries have no assets, their income is low, and so they become insolvent easily. If you look at the balance sheet of Greece, it is not insolvent.

The key problem is political will on the part of the government and parliament. Privatisation proceeds of €50bn, which is being talked about – some mention more – would reduce the peak debt to GDP ratio from 160 per cent to about 140 per cent or 135 per cent and this could be reduced further.

A week later Mr. Bini Smaghi insisted that the public sector “had marketable assets worth 300 billion euros and was not bankrupt. ‘Greece should be considered solvent and should be asked to service its debts,’ … signaling that the bank remained firmly opposed to any plan to allow Greece to stretch out its debt payments or oblige investors to accept less than full repayment, a so-called haircut.” Speaking from Berlin, he said that Greece “was not insolvent.” It could pay off its bonds owed to German bankers ($22.7 billion), French bankers ($15 billion) and the ECB (reported to be on the hook for $190 billion) by selling off public land and ports, water and sewer rights, ownership of the telephone system and other basic infrastructure. In addition to getting paid in full and receiving high interest rates reflecting “market” expectations of non-payment, the banks would enjoy a new credit market financing privatization buy-outs.

Warning that failure to pay would create windfall gains for speculators who had bet that Greece would default, Mr. Bini Smaghi refused to acknowledge the corollary: to pay the full amount would create windfalls for those who bet that Greece would be forced to pay. He also claimed that: “Restructuring of Greek debt would … discourage Greece from modernizing its economy.” But the less debt service an economy pays, the more revenue it has to invest productively. And to “solve” the problem by throwing public assets on the market would create windfalls for distress buyers. As the Wall Street Journal put matters bluntly: “Greece is for sale – cheap – and Germany is buying. German companies are hunting for bargains in Greece as the debt-stricken government moves to sell state-owned assets to stabilize the country’s finances.”

Rather than raising living standards while creating a more egalitarian and fair society, the ECB’s creditor-oriented “reforms” would roll the time clock back to oligarchy. Not the post-feudal oligarchy of landlords owning land conquered militarily, but a financial oligarchy accumulating banking claims and bonds growing inexorably and exponentially, leaving little over for the rest of the economy to invest or consume.

The distinction between illiquidity and insolvency

If a homeowner loses his job and cannot pay his mortgage, he must sell the house or see the bank foreclose. Is he insolvent, or merely “illiquid”? If he merely has a liquidity problem, a loan will help him earn the funds to pay down the debt. But if he falls into the negative equity that now plagues a quarter of U.S. real estate, taking on more loans will only deepen his net deficit. Ending this process by losing his home does not mean that he is merely illiquid. He is in distress, and is suffering from insolvency. But to the ECB this is merely a liquidity problem.

The public balance sheet includes land and infrastructure as if they are surplus assets that can be forfeited without fundamentally changing the owner’s status or social relations. In reality it is part of the means of survival in today’s world, at least survival as part of the middle class.

For starters, renegotiating his loan won’t help an insolvency situation such as the jobless homeowner above. Lending him the money to pay the bank interest (along with late fees and other financial penalties) or stretching out the loan merely will add to the debt balance, giving the foreclosing bank yet a larger claim on whatever property the debtor may have available to grab.

But the homeowner is in danger of being homeless, living on the street. At issue is whether solvency should be defined in the traditional common-sense way, in terms of the ability of income to carry one’s current obligations, or a purely balance-sheet approach taken by creditors seeking to extract payment by stripping assets. This is Greece’s position. Is it merely a liquidity problem if the government is told to sell off $50 billion in prime tourist sites, ports, water systems and other public assets in order to pay foreign creditors?

At issue is language regarding the legal rights of creditors vis-à-vis debtors. The United States has long had a body of law regarding this issue. A few years ago, for instance, the real estate speculator Sam Zell bought the Chicago Tribune in a debt-leveraged buyout. The newspaper soon went broke, wiping out the employees’ stock ownership plan (ESOP). They sued under the fraudulent conveyance law, which says that if a creditor makes a loan without knowing how the debtor can pay in the normal course of business, the loan is assumed to have been made with the intent of foreclosing on property, and is deemed fraudulent.

This law dates from colonial times, when British speculators eyed rich New York farmland. Their ploy was to extend loans to farmers, and then call in the loans when the farmer’s ability to pay was low, before the crop was harvested. This was indeed a liquidity problem – which financial opportunists turned into an asset grab. Some lenders, to be sure, created a genuine insolvency problem by making loans beyond the ability of the farmers to pay, and then would foreclose on their land. The colonies nullified such loans. Fraudulent conveyance laws have been kept on the books since the United States won its independence from Britain.

Creditors today are using debt leverage to force Greece to sell off its public domain – having extended credit beyond its ability to pay. So the question now being raised is whether the nation should be deemed “solvent” if the only way to carry its public debt (that is, roll it over by replacing bad old loans with newer and more inexorable obligations) is to forfeit its land and basic infrastructure. This would fundamentally alter the relationship between public and private sectors, replacing its mixed economy with a centrally planned one – planned by financial predators with little care that the economy is polarizing between rich and poor, creditors and debtors.

The financial road to serfdom

Financial lobbyists are turning the English language – and economic terminology throughout the world – into a battlefield. Creditors are to be permitted to take the assets of insolvent debtors – from homeowners and companies to entire nations – as if this were a normal working of “the market” and foreclosure was simply a way to restore “liquidity.” As for “solvency,” the ECB would strip Greece clean of its public sector’s assets. Bank officials have spoken of throwing potentially 150 billion euros of property onto the market.

Most people would think of this as a solvency problem. Solvency means the ability to maintain the kind of society one has, with existing public/private checks and balances and living standards. It is incompatible with scaling down pensions, Social Security and medical insurance to save bondholders and bankers from taking a loss. The latter policy is nothing less than a political revolution.

The asset stripping that Europe’s bankers are demanding of Greece looks like a dress rehearsal to prevent the “I won’t pay” movement from spreading to “Indignant Citizens” movements against financial austerity in Spain, Portugal and Italy. Bankers are trying to block governments from writing down debts, stretching out loans and reducing interest rates.

When a nation is directed to replace its mixed economy by transferring ownership of public infrastructure and enterprises to a financial class (mainly foreign), this is not merely “restoring solvency” by using long-term assets to pay short-term debts to maintain its balance-sheet net worth. It is a radical transformation to a centrally planned economy, shifting control out of the hands of elected representatives to those of financial managers whose time frame is short-term and extractive, not long-term and protective of social equity and basic needs.

Creditors are demanding a political transformation to replace democratic lawmakers with technocrats appointed by foreign bankers. When the economic surplus is pledged to bankers rather than invested at home, we are not merely dealing with “insolvency” but with an aggressive attack. Finance becomes a continuation of war, by economic means that are to be politicized. Acting on behalf of the commercial banks (from which most of its directors are drawn, and to which they intend to “descend from heaven” to take their rewards after serving their financial class), the European Central Bank insists on a political revolution to replace democratic government by a technocratic elite – not of industrial engineers, but of “financial engineers,” a polite name for asset stripping financial warriors. If Greece does not comply, they threaten to wreak domestic financial havoc by “pulling the plug” on Greek banks. This “carrot and stick” approach threatens that if Greece does not sign on, the ECB and IMF will withhold loans needed to keep its banking system solvent. The “carrot” was provided on May 31 they agreed to provide $86 billion in euros if Greece “puts off for the time being a restructuring, hard or soft,” of its public debt.

It is a travesty to present this revolution simply as a financial exercise in solving the “liquidity problem” as if it were compatible with Europe’s past four centuries of political and classical economic reforms. This is why the Syntagma Square protest in front of Parliament has been growing each week, peaking at over 70,000 last Sunday, June 5.

Some protestors drew a parallel with the Wisconsin politicians who left the state to prevent a quorum from voting on the anti-labor program that Governor Walker tried to ram through. The next day, on June 6, thirty backbenchers of Prime Minister George Papandreou’s ruling Panhellenic Socialist party (Pasok) were joined by some of his own cabinet ministers threatening “to resign their parliamentary seats rather than vote through measures to cut thousands of public sector jobs, increase taxes again and dispose of €50bn of state assets, according to party insiders. ‘The biggest issue for the party is stringent cuts in the public sector … these go to the heart of Pasok’s model of social protection by providing jobs in state entities for its supporters,’ said a senior Socialist official.”

Seeing the popular reluctance to commit financial suicide, Conservative Opposition leader Antonis Samaras also opposed paying the European bankers, “demanding a renegotiation of the package agreed last week with the ‘troika’ of the EU, IMF and the European Central Bank.” It was obvious that no party could gain popular support for the ECB’s demand that Greece relinquish popular rule and “appoint experienced technocrats to half a dozen essential ministries to implement the EU-IMF programme.”

ECB President Trichet depicts himself as following Erasmus in bringing Europe beyond its “strict concept of nationhood.” This is to be done by replacing elected officials with a bureaucracy of cosmopolitan banker-friendly planners. The debt problem calls for new “monetary policy measures – we call them ‘non standard’ decisions, strictly separated from the ‘standard’ decisions, and aimed at restoring a better transmission of our monetary policy in these abnormal market conditions.” The task at hand is to make these conditions a new normalcy – and re-defining solvency to reflect a nation’s ability to pay debts by selling the public domain.

The ECB and EU claim that Greece is “solvent” as long as it has assets to sell off. But if populations in today’s mixed economies think of solvency as existing under existing public/private proportions, they will resist the financial sector’s attempt to proceed with buyouts and foreclosures until it possesses all the assets in the world, all the hitherto public and corporate assets and those of individuals and partnerships.

To minimize opposition to this dynamic the financial sector’s pet economists understate the debt burden, pretending that it can be paid without disrupting economic life and, in the Greek case for example, by using “mark to model” junk accounting and derivative swaps to simply conceal its magnitude. Dominique Strauss-Kahn at the IMF claims that the post-2008 debt crisis is merely a short-term “liquidity problem” and one of 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” – as if it can “borrow its way out of debt,” Bernanke-style.

This is what today’s financial warfare is about. At issue is the financial sector’s relationship to the “real” economy. From the latter’s perspective the proper role of credit – that is, debt – is to fund productive capital investment and spending, because it is out of the economic surplus that debts are paid. This requires a financial regulatory system and tax system to maximize growth. But that is precisely the fiscal policy that today’s financial sector is fighting against. It demands preferential tax-deductibility for interest to encourage debt financing rather than equity. It has disabled truth-in-lending laws and regulations to keeping interest rates 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. And to cap matters it now demands that democratic society yield to centralized authoritarian financial rule.

Finance and democracy: from mutual reinforcement to antagonism

The relationship between banking and democracy has taken many twists over the centuries. Earlier this year, democratic opposition to the ECB and IMF attempt to impose austerity and privatization selloffs succeeded when Iceland’s President Grímsson insisted on a national referendum on the Icesave debt payment that Althing leaders had negotiated with Britain and the Netherlands (if one can characterize abject capitulation as a real negotiation). To their credit, a heavy 3-to-2 majority of Icelanders voted “No,” saving their economy from being driven into the debt peonage.

Democratic action historically has been needed to enforce debt collection. Until four centuries ago royal treasuries typically were kept in the royal bedroom, and loans to rulers were in the character of personal debts. Bankers repeatedly found themselves burned, especially by Habsburg and Bourbon despots on the thrones of Spain, Austria and France. Loans to such rulers were liable to expire upon their death, unless their successors remained dependent on these same financiers rather than turning to their rivals. The numerous bankruptcies of Spain’s autocratic Habsburg ruler Charles V exhausted his credit, preventing the nation from raising funds to defeat the rebellious Low Countries to the north.

The problem facing bankers was how to make loans permanent national obligations. Solving this problem gave an advantage to parliamentary democracies. It was a major factor enabling the Low Countries to win their independence from Habsburg Spain in the 16th century. The Dutch Republic committed the entire nation to pay its public debts, binding the people themselves, through their elected representatives who earmarked taxes to their creditors. Bankers saw parliamentary democracy as a precondition for making sound loans to governments. This security for bankers could be achieved only from electorates having at least a nominal voice in government. And raising war loans was a key element in military rivalry in an epoch when the maxim for survival was “Money is the sinews of war.”

As long as governments remained despotic, they found that their ability to incur more debt was limited. At this time “the legal position of the King qua borrower was obscure, and it was still doubtful whether his creditors had any remedy against him in case of default.” Earlier Dutch-English financing had not satisfied creditors on this count. When Charles I borrowed 650,000 guilders from the Dutch States-General in 1625, the two countries’ military alliance against Spain helped defer the implicit constitutional struggle over who ultimately was liable for British debts.

The key financial achievement of parliamentary government was thus to establish nations as political bodies whose debts were not merely the personal obligations of rulers, but truly public and binding regardless of who occupied the throne. This is why the first two democratic nations, the Netherlands and Britain after its 1688 dynastic linkage between Holland and Britain in the person of William I, and the emergence of Parliamentary authority over public financing. They developed the most active capital markets and became Europe’s leading military powers. “A funded debt could not be formed so long as the King and Parliament were fighting for the mastery,” concludes the financial historian Richard Ehrenberg. “It was only after the [1688] revolution that the English State became what the Dutch Republic had long been – a real corporation of individuals firmly associated together, a permanent organism.”

In sum, nations emerged in their modern form by adopting the financial characteristics of democratic city states. The financial imperatives of 17th-century warfare helped make these democracies victorious, for the new national financial systems facilitated military spending on a vastly extended scale. Conversely, the more despotic Spain, Austria and France became, the greater the difficulty they found in financing their military adventures. Austria was left “without credit, and consequently without much debt” by the end of the 18th century, the least credit-worthy and worst armed country in Europe, as Sir James Steuart noted in 1767. It became fully dependent on British subsidies and loan guarantees by the time of the Napoleonic Wars.

The modern epoch of war financing therefore went hand in hand with the spread of parliamentary democracy. The situation was similar to that enjoyed by plebeian tribunes in Rome in the early centuries of its Republic. They were able to veto all military funding until the patricians made political concessions. The lesson was not lost on 18th-century Protestant parliaments. For war debts and other national obligations to become binding, the people’s elected representatives had to pledge taxes. This could be achieved only by giving the electorate a voice in government.

It thus was the desire to be repaid that turned the preference of creditors away from autocracies toward democracies. In the end it was only from democracies that they were able to collect. This of course did not necessarily reflect liberal political convictions on the part of creditors. They simply wanted to be paid.

Europe’s sovereign commercial cities developed the best credit ratings, and hence were best able to employ mercenaries. Access to credit was “their most powerful weapon in the struggle for their freedom,” notes Ehrenberg, in an age whose “growth in the use of fire arms had forced them to surround themselves with stronger fortifications.” The problem was that “Anyone who gave credit to a prince knew that the repayment of the debt depended only on his debtor’s capacity and will to pay. The case was very different for the cities, who had power as overlords, but were also corporations, associations of individuals held in common bond. According to the generally accepted law each individual burgher was liable for the debts of the city both with his person and his property.”

But the tables are now turning, from Icelandic voters to the large crowds gathering in Syntagma Square and elsewhere throughout Greece to oppose the terms on which Prime Minister Papandreou has been negotiating an EU bailout loan for the government – to bail out German and French banks. Now that nations are not raising money for war but to subsidize reckless predatory bankers, Jean-Claude Trichet of the ECB recently suggested taking financial policy out of the hands of democracy.

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

At issue is sovereignty itself, when it comes to government responsibility for debts. And in this respect the war being waged against Greece by the European Central Bank (ECB) may best be seen as a dress rehearsal not only for the rest of Europe, but for what financial lobbyists would like to bring about in the United States.

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  1. RebelEconomist

    This is not free market ideology, let alone war; it is simply a matter of law and contracts. The same law that lets Michael Hudson keep his own assets without a fight every day. It is not unreasonable that a debtor should be expected to sell any reasonably liquid, non-essential assets that they hold before defaulting – eg Greece’s gold reserves. And rejecting this does not help borrowers in the long run, because debt must generally be raised in the market, and that market will demand terms that compensate for any expected losses, and quite possibly a bit more to allow for a legal risk premium.

    1. yankeefrankee

      Oh stop with this silliness. Everyone knows a debtor who has cleared her debts can obtain debt again. And really we must stop with the pretension that this money that is provided as credit is actually savings from hard work that is being put at risk with all the moral logic that would follow: its not Grandma’s pension (and if it is, then the nation can replace that money so irresponsibly lent out by Grandma’s fiduciaries). It is, in almost all cases, fiat currency created at the time of the loan, with the same ease as me typing this reply.

      We must also stop pretending that nations must sell debt to finance anything. They can print money freely without getting in hock to banksters and their ilk. This right here is the BIG LIE… the only lie that keeps the bankster gravy train running.

      The banks lost their only raison d’etre when they decided to blow bubbles instead of funding profitable, society-building ventures. They have shown we don’t need them for efficient allocation of capital; in fact, they squander their right and pretend they have no responsibility to the society that gave them this great gift. They want the power without the responsibility but it doesn’t work that way.

      You can keep pretending that all these crap loans were given out in good faith if you want but nobody is buying it anymore. Only bankster toadies follow that line anymore.

      1. Peripheral Visionary

        “They can print money freely without getting in hock to banksters and their ilk. This right here is the BIG LIE… the only lie that keeps the bankster gravy train running. “

        Yes, the government can print money to cover whatever expenses it pleases; although that game can only be played so long until inflation catches up, which inevitably it does. But the real damage done is not in the inflation; it is in the destruction of trust in the currency and consequently in the government that issued it.

        The fundamental problem that dogs nearly all of modern economics is that economists insist on viewing economic interactions in a deterministic model, which can be safely predicted through mathematical equations. The reason that is a problem is because economic interactions are, at their root, not interactions between parts of a machine, but between human beings, and are heavily dependent on the relationships between those people.

        When the government prints money, the immediate economic impact may be limited (although I suspect you would be hard-pressed to find cases where that is the case), but the real damage is in the relationship between the government and its citizens. Debasement of the currency destroys trust in the economy, trust that is critically important, not just for a healthy economy, but for a stable government and a transparent and accountable society.

        There is an implied contract between the government and the people in the form of the currency, namely, that the government will ensure the future value of that currency by not debasing it. When the government prints money, it breaks that implied contract and steals from the people who own the currency. When the government behaves in such a way, why should anybody else behave differently? Hence, societies whose governments print money have historically been inherently unstable, plagued with corruption, burdened with inflation that destroy economies, and troubled with real hostility between the people and their government. Is that really what we want?

        P.S. Re: lending to those who have previously declared bankruptcy: it was not always thus. Lending to poor credit quality borrowers has historically been nearly absent or limited only to loan sharks, and could very quickly revert to that, particularly as recoveries in bankruptcy courts and foreclosures become less favorable. Perpetual asset inflation and ultra-cheap cost of funding made lending to poor credit quality borrowers both respectable and profitable, but particularly as conditions change, there is no guarantee that that will last.

        1. Demoisel Davignon

          Everything you say is true, and bears reading and re-reading.

          But isn’t it true that once there is switch to paper money not backed by any commodity such as gold or land, the currency is as good as debased? How could it be debased further except by further printing/electronic debt creation?

          Debasement of currency, mercenary armies, unmanageably large empires, circuses for the people–it all seems vaguely familiar…

          1. Moneta

            Money printing already favors hard assets and land…. energy, resources. Try getting a loan on goodwill.

            That’s why social studies are so undervalued and that’s also why why we are in this mess.

            There is no link between science, the way be built our systems and society and what truly quality as quality of life.

            In mt book, a good nanny is more imprtant than a Mercedes, but most will skimp on the nanny and buy the big nhouse and the big car.

          2. Moneta

            And government is there to actually balance it out.

            Unfortunately both corporate America and government have screwed up the whole thing.

        2. Birch


          Banks print money and create inflation. They create inflation because of the debt ponzi scheme – always more debt money to cover interest payments on top of premiums. If government prints money, the only difference is that it deosn’t need a ponzi interest scheme. If a government prints more money than there is productive use for, it’ll lead to inflation. If they doesn’t print enough, there’ll be deflation. If they hire a reasearch council that keeps tabs on things, they can print just enough and keep things stable without ANY inflation (which will never happen with bankster money.)

          Canada printed it’s own money – entirely independent of private banks – to cover it’s government deficits until 1975. They funded our wonderful health care program and other social programs when spending over-ran revenues. They were careful not to create too much (if you create to much, you tax or fee it back again). Did Canada suffer from runaway inflation while the bankster-dependent countries stayed stable? No.

          Your idea is the biggest ideological impediment to constructive reform we face. You may be a visionary on some periphery somewhere, but on this central issue you’re stuck in the impenetrable black box the bansters put you in.

        3. yankeefrankee

          All this worry about inflation is off the mark. For one, we have ridiculous inflation right now, but that’s because all the printing that’s being done is flowing to banks that speculate in commodities, which with all that influx of money, are rising and causing starvation and mass suffering. The only time inflation occurs from money printing is in the above situation as we have now, or when the economy is overheated by over-printing and over-utilization leading to scarcity on the supply side. In our economy right now, we have a massive imbalance between productive capacity (under-utilized) and consumption. If the money that is being printed was put to proper use, rebuilding our infrastructure and manufacturing base, as well as providing health care and better healthcare and education to the populace, we wouldn’t see inflation until the excess productive capacity of the nation was reduced to nothing. At that point, its a simple thing to reduce the supply of money thereby stopping inflation from going wild. What we do now is provide all this sloppy liquidity to criminal bankers who have become a massive drain, redirecting the money away from productive use into speculation. This is so clear it shouldn’t need to be stated, but alas the corruption of our times is so pervasive that the obvious truth is drowned out by those who would continue the destruction of our nation for their short term profit.

        4. Moneta

          it is in the destruction of trust in the currency and consequently in the government that issued it.
          It is more than that. It impacts relationships between people and detroys collaboration and goodwill.

      2. RebelEconomist

        Yes, banks can create money easily, but don’t forget that that money is liability of the bank, which the borrower presumably intends to draw on at some point, whereupon the bank must come up with central bank money to settle the transaction.

        1. Birch

          My understanding is that the borrower will take out the deposit to pay for something. The person that receives that payment puts it into their deposit account. If it’s at a different bank, then some borrow from some other bank will buy something from a person with a deposit account at the first bank. It all balances out, more or less.

          Then the bank tanks most of the deposit account money and invests it in something with a good return, while allowing the owner of that money to beleive that it’s still there in their account. When the bank has invested so much other peoples’ money in money making propositions that they don’t have enough sitting around for the people who want to come and claim their money, then they borrow overnight from the central bank at special low banker interest rates. They pocket the difference between their investment return and the rate they have to pay the central bank, while paying the account holder offensively low interest and charging them through the nose for services they only provide begrudgingly at the best of times.

          With all their special privelages, it is really shocking that a bank could ever be stupid enough to go bankrupt. But I guess that is what greed is all about. Bone-headed foot-shooting stupidity.

          1. Altoid

            “How can the bank take the deposit money and invest it? A deposit is a liability of the bank.”

            But that’s exactly what banks do, and that’s why we have an FDIC and why there used to be “runs” on banks before we had the FDIC.

            Banks are fundamentally in the arbitrage business, or used to be. Take the proverbial community bank. It used to take deposits on which it paid short-term rates, or would maintain checking accounts at no interest. It used to lend at higher, long rates to home buyers and local businesses. If a commercial bank, it used to advance short-term paper, but that’s a complication.

            You’re right that the entire deposit is a liability. But what makes a bank work is that at any given time, only a very small part of a deposit or checking account is actually going to be pulled out. It’s a relatively predictable amount. Banks are required to maintain “reserves” in order to handle that routine flow and usually some extra just in case. The rest they can lend.

            That’s “fractional-reserve banking.” We’ve been doing it for a long time. If the banks maintain enough reserves to handle “normal emergencies” and if there’s no larger economic trouble going on, it’s worked fine.

            But there have been plenty of times when banks have crashed and burned because they didn’t have the resources on hand to pay out the liabilities they kept on their books. “Runs” and “panics” is what they were called. Depositors didn’t get their money out because the banks didn’t have the cash to pay them; people used to line up in a hurry if there was a rumor that their bank didn’t have the cash. To pay in full, a bank would have to liquidate all its loans; that would be completely self-defeating because very few debtors can ever pay off in full on demand.

            IIRC, a central scene in It’s A Wonderful Life is about how the Jimmy Stewart character finds enough money to save the family bank in just this kind of situation. In the 30s, when it was made, people would have remembered runs and understood the scene without any trouble.

            Back in the 19th century, when we first started chartering banks on a big scale, they were understood to be a two-edged sword because of the fractional-reserve system. Localities needed them in order to do business, but people were afraid of them because of runs and because you couldn’t really trust the owners not to play favorites or just steal money.

            Banks needed special rules and special charters. I think, but am not sure, that one reason for this was that by ordinary accounting, fractional reserves meant they actually were technically insolvent in the course of routine business. I’d be grateful for input from anyone who actually knows about that point.

          2. Altoid

            “A typical liability is a debt”

            A debt I owe to someone else is a liability to me, an asset for the other party. If you borrow from a bank, you’ve taken on a liability that the bank carries as an asset. If you deposit money in a bank, you have an asset that the bank carries as a liability. One man’s liability is another man’s assets, as Paul Simon didn’t write. You can have assets that aren’t a liability to some other party, but most of your liabilities are some other party’s assets.

          3. Altoid

            “Would you sell me an asset in return for taking on MY debts?”

            To answer your direct question, no, and it’s nowhere implied that I would. I’d happily consider selling you a long-term asset of mine for cash or other hard asset from you now; that’s all about the terms. But why would you think I’d even consider what you ask about? Makes no sense.

    2. Philip Pilkington

      “It is not unreasonable that a debtor should be expected to sell any reasonably liquid, non-essential assets that they hold before defaulting – eg Greece’s gold reserves.”

      I think that is, in fact, entirely unreasonable considering the nature of the monetary union that Greece entered.

      You anthropomorphasise the problem — pretending that the laws that apply to an individual should apply to a whole nation. What a load of moralistic nonsense.

      1. Anonymous Jones

        Rebel obviously has no sense of the limitations of his own knowledge. Given that, it seems folly to suggest he investigate the limitations of his metaphors.

        He doesn’t even seem to grasp that his anthropomorphising is even a metaphor. It’s embarrassing, but he insists on doing it to himself. Ignore him…

      2. RebelEconomist

        Exactly; this is a question of morality. I believe that morality has been defined – perhaps even by a Greek philosopher – as behaviour that we can accept both doing and as it affects us. It is moral for a debtor to make every effort to repay, because that is what they would want if and when they lend to someone else. Without morality, there is no lending and borrowing.

        1. F. Beard

          It is moral for a debtor to make every effort to repay, because that is what they would want if and when they lend to someone else. RebelEconomist

          Blah, blah, blah. Debt to a counterfeiting cartel is not morally valid.

          Some Rebel you are!

        2. yankeefrankee

          and should a third party be roped into paying the debt incurred between a corrupt creditor and debtor, both of whom benefit from this corrupt transaction? That is what the Greek people (and Irish, and American, and Spanish, and Icelandic ……) are being forced to do. There is nothing moral about that. Lending money, if done responsibly, can be a beneficial act. But in our current world circumstance (and throughout history in fact) it has been used as a weapon, lending non-existent money (“credit”) to those who could never pay it back, with full knowledge of this condition, and hoping to make an even larger gain when payment falters by possessing the assets of the debtor. Its such an old trick and yet you close your eyes and pretend is doesn’t happen. You are no rebel — you toe the line of financial fascism all the way.

          1. Skippy

            Ambidextrous paws punching sky @yankeefrankee!

            As I stated with regards to the citizens Iceland, being bundled into the debt burlap bag, about to be thrown over the bankster bridge. How is it that, individuals…cough…citizens that had no seat at the table, had no opportunity to peruse the contracts, that only buy the act of voting between a hand full of prearranged takers (politicians) upon the duly appointed time (years between), that whence said politicians_if and when_gave policy gasbaggery_the future is bright_was in fact pure salesmanship predicated on full commission pay scheme.

            Skippy…let the people that made these agreements screw each other over for the_fraudulent scraps_*left over* from the purely vaporous asset (if you can call electron pumping an asset) increases over the last decade[s.

            PS. rebel where do your kids or grand kids go to school. I would like to inform some folks in Mexico where they can peddle their wares, once they get sucked into far, you and your blood get stuck with the bill. It seems like the moral / ethical thing to do in your book.

        3. nonclassical

          “perhaps by a Greek Philosopher”..

          perhaps you would like to discuss relevant discrepancies between Socrates, Aristotle, Plato?

        4. Maju

          Is it “moral” for a debtor to sell their children to repay a debt? That is what Greek parents are being demanded.

          Even in the cruel times of Rome such a practice was eventually outlawed.

          It is moral for a debtor to say: sorry guys I cannot pay back anymore, I must declare myself formally bankrupt. It is moral for a creditor to lose with dignity and not send the thugs to beat the people who simply cannot pay back.

          Hold! Pay back? Did they even get that debt? Are not we talking, as so often happens, of odious debt?

          Or in a purely democratic matter: was this debt approved in referendum? How can the Greek people be held responsible for a debt pile they have not benefited of?

          At some point nations must declare bankruptcy. That’s only fair and part of the risk creditors assume. Greece must do that and must do it NOW!

          1. RebelEconomist

            I agree that at some point Greece should declare / should be declared bankrupt. The first question is, at what point? I would argue that when Greece has not sold things as non-essential as its (unusually large) gold reserves, that point has not been reached. The second question is what happens when bankruptcy is declared. For a business, bankruptcy is not the end. A receiver is appointed to maximise the recovery for various stakeholders, and that process may involve liquidation anyway. What should the equivalent be for a country? I suspect that there is not much chance of a thoughtful discussion of such policy questions on NC these days though.

          2. RebelEconomist

            I agree that at some point, Greece should declare or be declared bankrupt. This raises two questions, however. The first is, at what point? I would argue that, when Greece has yet to give up such non-essential assets as its (relatively large) gold reserves, that point has not yet been reached. The second question is, what happens when a country is bankrupt. A bankrupt does not normally walk away freely. In the case of a business, for example, a received is appointed to extract the maximum value for the various stakeholders involved, and this can involve liquidation.

          3. Maju

            The earliest the better: the benefit of bankers and speculators is no public concern nor interest, the interest of the Greek Nation is. So bankers and speculators must be “sacrificed” ALWAYS before Greece is.

            “A bankrupt does not normally walk away freely”…

            Greece is not a business: it is like a family. Whatever the case, unlike a business or a family, Greece is still to this date a sovereign state which can unilaterally declare bankruptcy and assume the consequences (loss of credit in the foreseeable future… like a few years, decades at most, assuming the Capitalist system survives so much).

            Whatever is better than selling away national treasures, public services, etc. That is high treason and can only be met with beheading. If Papandreou dares to sell off what is of all Greeks, while he does not dare to get all the tax evaders in jail or the banks nationalized, he’s obviously committing high treason and must eventually pay the price. Not that whatever he sells and cannot be taken out of the country is worth the paper is written on.

            In any case nations are not private business and must never be held to such standards.

        5. attempter

          I believe that morality has been defined – perhaps even by a Greek philosopher – as behaviour that we can accept both doing and as it affects us.

          Excellent! That sums up my political and economic morality perfectly.

          I’m willing to do actual work, and I’m willing to recognize others who do actual work, and I’m willing to cooperate with them and have there be sharing among us, and to share political and economic management with them.

          I’m not willing to have even one kernel of corn extracted from myself or from fellow workers by those who do no work, nor am I willing to let such parasites usurp even the tiniest iota of the political and economic management.

          Such useless-eater parasites include, of course, today’s entire political and economic elites as well as all their flunkeys in the media, academia, most professions, “culture”, etc.

          Yes, you sum up morality admirably. Now, how exactly would one of your parasites measure up according to it?

    3. Philip Pilkington

      “And rejecting this does not help borrowers in the long run, because debt must generally be raised in the market…”

      No, governments do not need to borrow from the market. It’s only in the EMU and in other countries that are tied into exchange-rate systems that this happens.

      As I said, since this was, by design, not allowed to the EMU member countries the typical ‘moral’ and legal rules that apply to debtors should not apply here.

      Governments — democratic governments — require full sovereignty to operate properly. Otherwise they are simply vehicles for predatory lenders to extract wealth.

      1. Septeus7

        Yes they are rebels. Rebels against truth, facts, morality and civilization itself. Economics has always rebelled against any idea that social, political, moral realities and considerations play any part in their so-called science.

    4. attempter

      I love the way the most sycophantic pro-bankster suckasses around here like to give themselves names like “rebel”. Cool, man!

      I guess it’s a paradox, like in the title of Fromm’s Escape from Freedom. It’s “Rebellion Against Freedom”, or “Rebellion Against Humanity”, or some such.

      1. RebelEconomist

        I am a rebel against credulity. Believe it or not, I first styled myself RebelEconomist in the days of the debt bubble, which I expected to end in a financial crisis. Nowadays, I am rebelling against a different kind of credulity, here on Naked Capitalism.

        1. yankeefrankee

          In your world there is only one party that must be moral — the debtor. If I steal the fair profit from your work and then lend it back to you so that you can live a decent life, and thereby rope you into debt slavery, you would call that a moral act? If the creditor is immoral then the debtor has no responsibility to be moral. End of story.

          1. attempter

            His moral philosophy can be summed up as:

            Egoism for me, altruism for you.

            Politico-economically, this would be expressed as:

            Capitalism for me, anarchism for you.

            I tell you, if all who are currently called upon by the system to act primarily as altruistic anarchists would embark upon a permanent Work to Rule strike, dealing with all elites only according to their own egoistic, capitalist rules, the system wouldn’t last a day.

    5. StrayCat

      This situation is not about reckless debtors defaulting. It is about warfare by financial attack. The bankers and corporate managers of the bank are no different than the post Roman brigands who seized land and made serfs out of the inhabitants. These corporations are not any longer multinational, they are extranational, and they do not have the same characteristics as the banking families if the early capital era. Today, it’s not about just wanting to be paid. it is about supranational power over the means of production and transport, and of oil. Hudson is perfectly correct that the new demands by the financiers are a new thing on the earth. The banks and their allies, or co-conspirators are insisting on “experts” in charge of everything from cities in Michigan, usurping the elected officials, to binding financial treaties that amount to U.S. law, but are, at least to the present shielded from claims of unconstitutionality, either facially or or as applied. Laws passed by both houses of Congress do not enjoy this kind of supra-legal status.
      One of the most pressing problems countries face today is the erosion of public law and the substitution of private contract in the place of law. The issues change, the remedies are inadequate to the damage caused by this radical change over the last 40 years. Combined with the stripping away of all of the protective legal element that inhered in contracts before the legal positivist revolution, such as mutuality and consideration, contracts today are mere documents of serfdom and lifelong indebtedness. Once this is fully realized by the citizens, there may, I hope, be hell to be paid by the corporate predators.

      1. Stray Dog

        Excellent insights into supra-nationality and the death of public law and replacement by a very debased form of contract law.

        The irresponsible debtor is not entirely fiction. Rather it is part of the strategy for total world domination. The money was intended to be lent to irresponsible debtors knowing they were irresponsible knowing they would default with the idea of imposing the penalties of default. The intention was not to make an ordinary loan hoping for repayment at interest. The intention was to skip straight to default and impose penalties effectuating the will of the bankers. If you look at these transactions from sub-prime borrowers to sub-prime debtor countries in the Euro zone this was always the intention and formed the heart of the scam.

        1. Brian

          Right on Stray Dog! That is Goldman Sachs modus operandi and the other merchants of evil on Wall Street.

    6. decora

      So, let’s say that Russia had persuaded China to call it’s US debt in 2008.

      Would the US have been able to pay?

      Should China and Russia then have been able to seize, say, the State of Texas and sell it? How about a few aircraft carriers? Maybe the Statue of Liberty?

  2. Maju

    Hudson is correct but I have the impression that 3/4 of the article are in excess (either repetitive or anecdotal or pure fill-up ranting). He could have said the same and much better in much less space.

    In any case, it is pointless what banksters want because they are only going to achieve much violence and they are not going to be spared. I’ll explain myself: in caste systems or otherwise old regime feudal systems, these machinations may end up with people being sold and nothing happens – but in modern conditions this can only trigger increased social organization and unrest and unavoidably violence from bottom to top that will be condoned by a majority who sees no other exit and is pushed to lose all trust in the system.

    We are going the way of total social disintegration. It may be the only way ahead (in order to build something has to be destroyed) but let’s not forget this is a toxic and nuclear materials depot the one being demolished. So it’d be a zillion times better if somehow this deconstruction could be avoided and banksters removed without need to go through the total dissolution phase.

    1. StrayCat

      While I agree with your substantive points, I disagree with your opening salvo. The historical sketch and the analysis could not have been done in shorter form without subtracting from the whole piece. It was a delight to read, and was as short and elegant as it needed to be.

    2. sgt_doom

      ” He could have said the same and much better in much less space.”

      I suspect that when an economist and economics professor has been attempting to convince the masses for over forty years, it would be necessary to lean on the tedious side so as not to be consistently trivialized by the proles.

      This was obvious to Prof. Hudson back in the ’70s, as it should have been obvious to the rest of us long before this day!

    3. ScottS

      I think the historical context is fascinating. I never bought that democracy rose up spontaneously because it’s “right.” The idea of an immortal monarch who can never discharge debts fits the facts much better. Call me cynical.

      Even a popular uprising would likely be stoked by some exogenous influence, like bankers attempting to put pressure on monarchs. As always, money and journalism go together like peanut butter and jelly.

      Good job, Michael. You’re two for two.

  3. Jim Haygood

    ‘It is a radical transformation to a centrally planned economy, shifting control out of the hands of elected representatives to those of financial managers whose time frame is short-term and extractive, not long-term and protective of social equity and basic needs.’ — Michael Hudson

    Here, Michael Hudson employs ‘centrally planned’ pejoratively, but in a bizarre sense. Traditionally, ‘central planning’ refers to monolithic state control. Now Hudson uses it to describe the owners of privatized assets. Even if they collude, they are certainly not as monolithic as the state. Thus Hudson’s terminology is simply incoherent.

    Hudson implies that the time horizon of elected representatives (as opposed to financial managers) is ‘long-term.’ He should read Hans-Hermann Hoppe on the subject of time horizons. Why, for instance, does the U.S. still lack a credible energy policy, or a coherent health care system? Because the time horizon of all U.S. elected representatives varies from 2 to 6 years, meaning that short-term fixes are the order of the day.

    Michael Hudson’s best work focuses on the tendency of the FIRE (Finance, Insurance and Real Estate) economy to outstrip the real productive economy. This is what has made the U.S. economy into a finance-driven Ponzi scheme.

    Hudson could apply his diagnosis of an overgrown FIRE sector to Greece, in order to reach the same conclusions. Instead, he has based this essay on incoherent definitions and dubious propositions.

    1. Paul Tioxon

      Jim Haywood’s criticisms are the laughable grasping at false consciousness by someone who pays no attention to the facts. Here is one case relevant to political dominance by formerly exclusive financial business:

      From the BNY Mellon website, a total of $26.7 Trillion USD is under their firm control.

      About BNY Mellon

      Established in 2007 from the merger of Mellon Financial Corporation and The Bank of New York Company, Inc., BNY Mellon is a leading investment management and investment services company, uniquely focused to help clients manage and move their financial assets and succeed in the rapidly changing global marketplace. Headquartered in New York, BNY Mellon has $25.5 trillion in assets under custody or administration and $1.2 trillion under management.


      Since that amount exceeds the GNP of the 2 largest economies in the world, you have to ask the question, just when did capitalism die, bequeathing its invisible hand to the private bureaucracy of bankers? Furthermore, since the UCC proscribes the limits of the banks operation purview, limited solely to the current stockholders, and not future stockholders or anyone else in the social order that granted the bank charter to begin with, how can it be anything other than short term? At any given moment, it can taken over, bought out by new ownership by buyers willing to pay a premium that must be accepted by the board in the best financial interests of the shareholders. The sovereign nation state calls this intrusive activity an act of war.

      There are quick fixes in politics. But they are not a function of 2 and 4 and 6 year terms. Short terms in office can add up to decades, an obvious flaw in your one dimensional view of elections. Charlie Wrangle, Nancy Pelosi and George Bush are examples of long political careers. Bush I was CIA director, VP and then President in only a partial segment of his federal political career, which went from Congress in 1967 to 1992 in the White House.

      1. Jim Haygood

        ‘Charlie Wrangle’

        If I multiply misspelled the Congressman’s name in this manner, it would be to make a feeble pun. Paul Tioxon, one suspects, thinks ‘Wrangle’ is actually the man’s surname. Impressive. Must have got it from his jeans label whilst doing his threadbare wash at the laundromat.


    2. attempter

      How is it possible for concentrated wealth and “property” to exist without a big, aggressive, centralized State?

      (Or warlordism, I suppose, which is what some “libertarians” like Nozick and Rothbard want.)

    3. Maju

      Private monopoly (or oligopoly) is always much worse than public one because they owe nobody loyalty: not to the state, not to the people, not to the workers… they only owe loyalty to their private fat accounts in some tax haven.

      Anyhow, what is the difference between a formally constituted state and an obscure mafia or oligarchs? That the first one has some legitimacy, while the latter can only be dangerous for all. But many states have been constituted as oligarchic mafia coalitions, just that they are not democracies in any sense of the word: they are feudal realms.

    4. sgt_doom

      “…they are certainly not as monolithic as the state…”

      So righteously bogus. When it is a monopoly economy, you are most certainly wrong, as usual…..

    5. decora

      “Here, Michael Hudson employs ‘centrally planned’ pejoratively, but in a bizarre sense. Traditionally, ‘central planning’ refers to monolithic state control. ”

      I disagree. There are variations of monoliths, and when a corporation is telling thousands of local governments how to run their own affairs, that is definitely sliding along the spectrum away from ‘non monolithic’ to ‘monolithic’.

      An example: In McLean and Nocera’s “All the Devils are Here”, the federal government, at the behest of large banks, actively prohibited local and state governments from enacting laws that prevented mortgage fraud. When the Federal government, at the direction of big corporations, starts deciding what laws local governments can and cannot pass regarding finance and economics – that is in some ways analogous to ‘central planning’ and it is a useful metaphor.
      He is not simply talking about private ownership of ‘privatized’ assets, he is talking about a small group of people making economic decisions for a large group of people, by means of the government.

      Incoherence would imply that the readers cannot understand the author’s point, but I figure I understood it well enough to disagree with your interpretation.

    6. decora

      “‘central planning’ refers to monolithic state control. ”

      I disagree. There are variations of monoliths, and when a corporation is telling thousands of local governments how to run their own affairs, that is definitely sliding along the spectrum away from ‘non monolithic’ to ‘monolithic’.

      An example: In McLean and Nocera’s “All the Devils are Here”, the federal government, at the behest of large banks, actively prohibited local and state governments from enacting laws that prevented mortgage fraud. When the Federal government, at the direction of big corporations, starts deciding what laws local governments can and cannot pass regarding finance and economics – that is in some ways analogous to ‘central planning’ and it is a useful metaphor.
      He is not simply talking about private ownership of ‘privatized’ assets, he is talking about a small group of people making economic decisions for a large group of people, by means of the government.

      Incoherence would imply that the readers cannot understand the author’s point, but I figure I understood it well enough to disagree with your interpretation.

  4. Dave of Maryland

    So Hudson tells us the solution is a local Capo we all pledge fealty to.

    I’m all for it. Back 20 years ago there were endless “nuclear free zone” resolutions passed by many localities. As if there were any nukes around that needed banning.

    I will vote for the town counselor or mayor who pledges to make my town a foreclosure free zone & who pledges the police and sheriff to make it so. If that means the whole town stops paying their mortgages, that would be a good thing. Money that’s not being sucked out to Wall Street is money that’s available to build the local economy.

    Won’t that pit the local courts against the town council? Sure will. What’s the point of having separate branches of government if they won’t get into a knockdown drag-out? The three branches of government ain’t supposed to cooperate. What are the Feds going to do? Not give us any money? They already don’t do that.

    Think local. Act local. You already know the big elections next year will be a fraud & a scam.

  5. Peripheral Visionary

    “Solvency means the ability to maintain the kind of society one has, with existing public/private checks and balances and living standards.”

    Given that Europe’s birthrate is below the replacement rate, then Europe is, even by this narrow definition, insolvent. They will not be able to maintain the society they currently have going forward, and will therefore have to make drastic and far-reaching changes, will almost certainly will result in a major reduction in services provided (even if those changes are only limited to such things as increasing the retirement age and tightening requirements for receiving unemployment assistance).

    Europe was only able to maintain its way of life at the optimal demographic point where the vast majority of its population was of working age; but the dependency ratio, having gone down in the decades following the war, is now increasing as the population ages and retires. As that happens, the system of government benefits and services provided will become impossible to maintain as the ratio of those paying taxes to those drawing services worsens. The peripheral countries are the first to be reaching the inflection point, but the rest of Europe will be there soon enough.

    1. European

      Nah, that’s bollox. (European slang – look it up)

      Next time round let’s just let the banks go bust instead of bailing them out to the tune of a couple of trillion.

      And then we’ll be able to spend the money on pensions instead of bankers’ bonuses.

    2. Maju

      Europe’s birth rate is ABOVE the replacement rate. But anyhow, the real problem is not to have low birth rates (who cares when many many qualified young workers can’t get a job?) but actually high birth rates, which are unsustainable. I do not want to get the debate off-topic but it’s birth rates are only a problem in a World of 7 billion people when they are high.

  6. PghMike

    And we’re seeing this locally already in the United States. For example, Pittsburgh’s pension funds are underfunded, and the city is forbidden by state law from even changing from defined benefits pensions. These pensions are bankrupting the city, and the current mayor is trying to sell city assets (today, the rights to set parking rates on city owned lots and meters) in order to cover the pension bill.

    Of course, such properties are hard to value accurately, and their value changes as the owner approaches monopolistic domination of the parking market (in this case). It’s one thing for a city government to control the vast majority of parking spaces in a city; the city’s representatives have to answer regularly to the governed. But once you’ve privatized those spaces, all bets are off, and the price will raise to whatever the market will bear.

    1. sgt_doom


      The Privatization of Everything!

      Now where have I been hearing that phrase for over thirty years now……

  7. LillithMc

    I have lived in my house in Sacramento for 30 years. We are in the heart of the mortgage melt-down. Some homes are underwater by 50%. On my two-block-long street last week, four homeowners walked away. Supposedly we now have flippers ready to come in, buy for 30% under the bank price and flip except I think there will be no buyers. Our economy is stalled and in reverse. The point is that lenders can be irresponsible and think others will follow the plan, but when holding the debt is impossible or makes no sense, people and countries will act in their self-interest. Predatory lending, as I think happened with Greece, will be a Trojan horse.

  8. Altoid

    And so it turns out that the ultimate enemy of the Westphalian system of state sovereignty in effect since 1648 is financiers, acting here under the aegis of the trans-national European project. I hate to think this, but if sovereignty means anything, maybe the Brits were actually right to be wary of the EU for all those years. And without sovereignty, democracy is meaningless.

    1. Maju

      But how is EU different from NATO, the IMF, WTO, World Bank, etc? Maybe not so much the Brits (who are not being spared anyhow) but the rest of us were pushed to believe that EU was something different: a super-democracy, when it is in fact a neofeudal system ruled by a bunch of oligarchs at the service of the US Empire (mind you).

      This does not mean that EU is wrong in the overall conceptual aspect: some sort of continental federation must exist, that’s clear, what is wrong is the concept that this federation and its parts must obey Big Capital (and be part of NATO). We need a sovereign Europe made up of sovereign peoples freely allied. We do not need capitalism however, much less oligopolistic capitalism lead by bloodsucking banks. Let’s nationalize all banks and let’s stop pretending that competence can happen in the electric or many other service sectors (and collectivize them too).

      1. Altoid

        The EU ultimately came out of the French-German pooling of coal and steel immediately after the war. In the late 60s it was morphed into the major West European countries’ vehicle for pulling themselves out of the US orbit. One of their concerns was military (NATO would sacrifice the Germans and other theater peoples to protect the US, eg), another was fiscal (exporting Vietnam war-era inflation to them long before it became domestic US inflation by issuing vast amounts of Euro-dollars), and another was cultural (Hollywood, English-language predominance, etc).

        But the key thing is that at time when the EEC became the EC and the EU, it was principally about retrieving West European sovereignty and self-determination. That’s why I find it ironic and sad that the ECB and the rest of the EU financing apparatus seems so determined to destroy state sovereignty.

        Maybe they lost their way after the collapse of the Soviet bloc, I don’t know. A lot of what they do, like harmonizing national legal systems, seems to be done in a way that respects individual national systems. But from what I’ve seen, the finance system doesn’t so much.

        1. Balance of Power

          lost their way after the collapse of the Soviet bloc,

          Was EuroLand merely and antiparticle? AntiSoviet particle? When USSR collapsed the antiparticle collapsed with it? EuroLand Rationale dissolved into free space? The over-sized nucleus of the Euro atom became unstable? Fission?

          Stay tuned

          1. Altoid

            Not *entirely* sure I get your point. But try this: suppose you’re a collection of about eight or ten large and medium-sized barleycorns. For 45 years you’ve been rolled around between two behemoth-sized millstones that might or might not want to destroy each other, but can certainly destroy you. So far you’ve played the game well enough to keep them apart and even gain a little rolling room.

            Then suddenly the top stone shatters. And some of its pieces are about the same size as your own barleycorns, and they say “you know what? we’re really cousins– one or two of us are really your brothers– and we want to be with you so we can be our true selves. We were never part of that millstone, they just glued us in and made us pretend. Besides we’re poor and hungry and you and us, you know, we can help each other. And you don’t need to be afraid of the biggest piece of what’s left. In fact, it’ll cooperate too.”

            Not perfect, I’ll grant. What analogy is? But what it says is that when surrounding circumstances change completely, it can be hard to know where to go and what to do. Original goals and purposes have to be rethought and recast. Especially when the single most important member state suddenly deserts its pan-European game and decides its own national project is really the only game that matters.

  9. Matt

    I find it bizarre that the same people who are loaning Greece money at 15+% (because of “default risk”) are now pretending that default would be some sort of terrible moral failing. It’s like they put their money in high-risk penny stocks and then got mad that there was RISK involved!

    1. sgt_doom

      Personally speaking (and not meaning to detract from your well-taken point), I find it most repititive.

    2. RebelEconomist

      They are not lending to Greece at 15% – those are secondary market yields.

      In general though, I think that it is dangerous to take default more lightly when higher interest rates are charged on a loan because of the probability of default. I once met an Argentinian finance minister who took that view. It is easy to see that, taken to its logical conclusion, you end up with no lending and borrowing at all.

      1. ambrit

        Howdy Reb;
        Considering how hard it is to get a small business ‘start up’ loan right now, we’re already in that ‘no loan zone’ at the present. What’s really at issue here is the mis-allocation of seed money. The banks sit on the cash or play games with non productive financial instruments. Marx and Engels spoke of the “Alienation of Labour” in “Capital.” Are we seeing the “Alienation of Capital” today?

  10. d dekk

    2 profs “W. go’v’s borrow to pay int. only cant pay prin.
    U .S. total debts c$75 tril pim…co fund co ”
    or $200t …13x gdp of $14t/yr”

  11. Mark P.

    Hudson has dropped on readers’ heads some big-picture economic history here. Maybe this is what some readers regard as irrelevant.

    It isn’t. All this history is the reason why “neofeudalism” is absolutely the correct term for what the financial overclass is attempting to push on global society today. If we don’t know where we’ve been, we don’t know where we are now: understanding the big-picture history is essential to understanding what’s going on today.

    Specifically, Hudson writes:-

    “In sum, nations emerged in their modern form by adopting the financial characteristics of democratic city states. The financial imperatives of 17th-century warfare helped make these democracies victorious, for the new national financial systems facilitated military spending on a vastly extended scale.”

    This is very relevant. The beginning of the modern nation-state during the Renaissance was triggered by the invasion of the Italian peninsula in 1494 by the French King Charles VIII, who brought with him a technological innovation: forty artillery pieces cast from bronze. Alongside the printing press, these cannon enabled the rise and spread of Renaissance values through Europe.

    In 1453, Constantinople had fallen to Islam – within living memory then – after its walls were broken by projectile-firing cannon. But the huge cannons with which Mehmed II had destroyed Constantinople’s fortress walls were difficult to transport and slow to load. France’s Charles VIII thus financed the development of bronze cannon, so light that they could be easily transported. Thereafter, where sieges of medieval cities and castles had been protracted affairs that might last three years and still fail, suddenly walls, towers and moats were all rendered obsolete. Writing in 1519, Machiavelli observed that: “No wall now exists, however thick, that artillery cannot destroy in a few days.”

    So what resulted?

    Firstly, Italian cities’ actual physical configurations changed radically. The old architecture of external high city walls was replaced with the configuration called the trace italienne – a star-shaped city – and that spread throughout Europe for the next two centuries:

    Secondly, all this was massive expensive. So, too, were the standing armies – sometimes, conscripted militia – that court officials like Machiavelli recommended as being needed to replace the seasonal mobilizations by medieval knights or small bands of condottieri that had hitherto comprised the Italian cities’ military forces.

    And so the cities’ princes and oligarchs made a pact with the notion of a State: a permanent infrastructure to gather revenue, organize logistical support and determine the command arrangements for the armies that would be required.

    Hence, for instance, in Florence Machiavelli drafted a statute in December 1505, ordering the organization of a Florentine militia. The preamble announces some of Machiavelli’s views, especially the idea that the foundation of a republic is “justice and arms,” which means the intertwining of constitutional and strategic capabilities.

    But if the rulers of Italian cities expected to extract the revenues they needed from their citizens on a permanent basis, the new city-states had to give back services that benefited those citizens in a time when the expansion of a money economy was breaking down the old agricultural feudalism and a new order of legitimacy was needed. (The general appearance of double-entry book-keeping and banking is also relevant hereabouts.)

    Thus, the modern state, which eventually arrived at Bismark’s introduction of universal health care in 1883 in Germany.

    All this trend — state taxation of citizens in return for services for citizens — is what the financial overclass is trying to roll back now. Currently, in the U.S. the model being pushed on us seems to be federal state taxation that goes _only_ towards the military, with services like healthcare or infrastructure provided — and maximum revenue extracted — via privatization and debt.

    Neofeudalism, indeed.

  12. Cahal

    Wow, people like Rebeleconomist really are the bank’s useful idiots.

    If you were to put nibbles out at a dinner party, would you bemoan people for eating them? No, that would be ridiculous – it is your responsibility not to provide them in the first place.

    Similar principles apply to creditors. It is THEIR money, they are supposed to gather the relevant information and ensure that they have a good idea of the risk that it won’t be paid back.

    They are rewarded for this risk, by a premium. It is called ‘interest’. In the bond markets, the rate of interest sends a signal to a bondholder about the approximate risk of that asset. If it is high, he should recognise that there is some risk of default.

    As for insolvency, well, you could argue that few people are ‘truly’ insolvent – even if a man is forced to sell his house, he could be forced to work for the creditor for the rest of his life to try and pay back the debt. So where do you draw the line? Personally, I’d draw it when millions of Greeks are having their living standards destroyed for the gains of relatively few creditors, even when the problem has little or nothing to do with them.

    But obviously RE draws it somewhere else.

    1. RebelEconomist

      And the Germans, Dutch etc whose living standards are going to be reduced if the Greeks don’t repay? Not to mention the Estonians now – the Slovaks wisely refused to participate in the first Greek bailout.

      1. Birch

        The Germans and Dutch will only suffer if their governments bail out their banks, in which case the banks aren’t risking anything by lending to Greece, so their bonds should only yield 2% or so like the rest of us get on our savings. The banks expect to have their ass and sodomize it too. (sorry if that wasn’t appropriate, but the normal saying is too quaint for this situation.)

      2. Maju

        I don’t see how the living standards of Germans or Dutch (or even the French – it’s French banks who own most of Greek collateral, not German ones!) will fall just because some banks go bust.

        As long as the local governments do not aim to save the fat accounts of the fat capitalists, everything should be ok: banks will be quietly nationalized, common accounts guaranteed by the state (which, believe it or not, can still print money: it is individual states who print the real cash euros, not some shadowy entity in Brussels) and everybody will be happy, specially as nationalized banks could again begin serving the people and not just their private owners.

        This is easily (well, more or less easily) solved by nationalizing the banks. But that would retrieve from the oligarchs the privilege of effectively creating money out of nowhere.

        We can in any case live without private banks… as long as there is enough public banking instead.

        So let them go to hell: it’s about time.

      3. Maju

        Or… are you telling me that the Germans and the Dutch (your examples, though I think they are bad ones) are parasitic peoples who live on others’ work? Maybe on Greek work?

        That would be the case if they actually benefited at all from the speculative maneuvers by globalist banking mafias. I do not think it is actually the case: I like to think (and I believe it is correct) that the German, Dutch and other peoples live essentially on their work (minus a plusvalue robbed by the oligarchies) but if they live on a plusvalue robbed to the Greeks or others, then they’d be in a very bad ethical place, as they would have become a bloodsucking people.

        In other words you are saying that the Opium Wars were fair because the European peoples vaguely related to the “investors” in China by reason of nationality could be (somehow, magically) harmed if China did not bow to the imperialist forces. This is not ethically acceptable and defending such absurdity would make those peoples altoger culprit.

        In fact that is what the banskters are doing: rallying working classes organized by ethnicity around their own interests and saying: if we lose this predation, you won’t get the crumbs. Some shrug or even actively oppose but others are effectively rallied along their vampire masters. This last kind is what allowed not so long ago someone like Hitler to take power.

        Hitler after all offered to the German workers (and specially middle classes) the succulent crumbs of an imperialist butchery. He and his generals would conquer Russia for them and make it “the India of Germany” and German denizens (excepted Jews, Gypsies, communists…) would get the crumbs “deserved” for being a “master race”, a master race with master-sized crumbs… but crumbs after all.


  13. Eric

    Greece is a pretty poor example to be using for this type of analysis I think. The “benefits” of excess borrowing for Greeks were quite widespread: tax evasion is extremely common and the expansion of the public and quasi-public payrolls was accomplished upder succeeding goverments from both PASOK and ND. In addition, it seems reasonable to assert that while yields have skyrocketed recently, the Greek state was able to issue debt since they joined the EU – and particularly since they adopted the Euro – at rates that were very favorable to that nation. The money wasn’t stolen by some small favored minority in some comprehensive manner; nor were lenders getting a fantastic return on what they lent. I get a laugh out of the idea that Greeks – average or not – are being punished with austerity measures. Had debt issuance been more restrained and better priced, the Greek nation would not have ever been able to afford many of those expenses, whose scaling back now is viewed as some tremendous sacrifice being made to bankers. Now if the banks lose their shirts, I won’t be crying, but spare me the on-going sob stories about the gang of layabouts to be found in Syntagma, please.

    1. Foppe

      But the points are 1. it was allowed, and hugely profitable to the banks, who could extract enormous sums in interest payments, and 2. it is now being used as cover to loot the greek state of assets. It is certainly true that Greece wouldn’t have “grown” (ugh@gdp as a measure) during the past decade without the borrowing, but the reason that they were allowed to do so is precisely because investors were dreaming of stripping the greek people of more of its assets.

    2. Maju

      How did tax evasion benefit Greeks? Tax evasion benefits capitalist vultures, which may be Greek or not, but it never benefits the common citizen, who cannot evade and who needs of the redistributing role of the state in times of need like the ones we suffer now.

      Also what there is in Syntagma now: it is the Greek People in action and they will overcome. How do you think that any property title can be guaranteed in Greece or anywhere if the common people just rolls over? There’s not enough police in all Greece nor soldiers in all NATO to enforce anything against the will of the People, as long as this People is united as the Greek People is.

      1. Susan Truxes

        Speaking of odious debt, property titles, and tax evasion: Hudson’s reference to a little used law, Fraudulent Conveyance, is interesting. That it was once used by the American Colonies against the usurious British to protect small land holders is astonishing news to me in light of our current big mess. Because my understanding of Fraudulent Conveyance was that it is used by the IRS to corner and catch tax evaders. When they try to hide their assets by “conveying” them off to other people. So this law could be very useful for a number of arguments: individual, local, state and national. Surely Greece must have a similar law.

  14. sgt_doom

    The Great Conspiracy

    After Louis Brandeis’ wrote the brilliant Other People’s Money and How the Bankers Use It, paving the way for the eventual legislation known as the New Deal, the power elites focused on a concentrated effort to hide and obscure their wealth and ownership through an ever-expanding network of holding companies, foundations, trusts, and evolving with the addition of offshore finance centers and tax havens in the 1960s.

    We have been exposed to countless low-ball estimates of the trillion dollars or so hidden offshore, and various low-ball estimates of monies lost to infinite tax avoidance and tax evasion schemes but really, nobody knows the accurate numbers.

    And why is that? Because they’ve structured it to be legal to hide ownership and wealth, and illegal to uncover that ownership.

    This was by design, it didn’t “just happen” – it wasn’t the result of “unintended consequences.”

    And, with the establishment of their financial-intelligence-complex during World War II, i.e., the creation of the intelligence framework, ostensibly for national security purposes, but having nothing to do with such, instead for wealth acquisition and control through financial and global intelligence interception and manipulation, they greatly facilitated their goals.

    Those parties involved with this, of course, were members of the Rockefeller family, Averell Harriman, the Mellon family, Robert Lovett, the Dulles brothers, Richard Bissell (whose brilliance and achievements are still relatively unknown) and Frank Wisner, Sr.

    The end result has been wildly successful!

    Today, almost no American alive knows the ownership of anything!

    One is reminded of the article by a “business journalist” at the Arizona Business Journal some years back who erroneously reported an obscure REIT had purchased the then largest private equity firm in the world, the Blackstone Group. (The reverse, of course, had taken place; the Blackstone Group had purchased the REIT.)

    Similarly, a few years back, the Puget Sound Business Journal listed a small company (4 employees) as the largest employer in Washington state! Evidently the lack of fact verification not only exists at the Washington Post and the New York Times, but equally among the “business journalists” – truly a shocker.

    No wonder those business journals fail to mention that the world’s largest hedge funds are owned by the top banks. Now why is that shrouded in mystery?

    The standard reply to who owns this bank, or that oil company, or this pharmaceutical corporation, is always the same: the shareholders, or occasionally, it is a “privately held corporation.”

    Who owns JP Morgan Chase? Morgan Stanley? Goldman Sachs? ExxonMobil? BP? Bank of America? Citigroup?

    Of equal importance, who really are the richest families in North America? These questions are not only crucial but highly interrelated.

    Yes, there is that Forbes list of the richest, researched from public information sources, but of relatively little value when so much of the wealth and ownership is hidden!

    Let us start with Bank of America. From an examination of public information sources, one finds that a number of other banks and hedge funds constitute the majority of shareholders of B of A. Of course, a number of other banks and institutions are the majority shareholders of each of those individual banks who make up the majority shareholders of Bank of America: a never ending ownership puzzle!

    And who owns BP? The largest shareholder of record is Blackrock, supposedly the largest asset management firm (hedge fund) around. And the largest chunk of Blackrock is owned by Merrill Lynch, who in turn is owned by Bank of America.

    Blackrock is also the majority shareholder of Monsanto. So now we have BP and Monsanto tracking back to Bank of America, whose ownership no one is really certain of?

    We are certain that NationsBank Corporation bought out Bank of America some years back, after Bank of America had given an unsecured $1.4 billion loan to the hedge fund, D.E. Shaw, for Russian bonds which then defaulted and D.E. Shaw was unable to repay Bank of America, leaving B of A highly vulnerable for the takeover by NationsBank Corporation, which then took on the name of Bank of America after the buyout.

    We also know that Larry Summers, Jeffrey Sachs and friends, were advising the Russians during this period, and that years later, while Larry Summers was an advisor to Obama during the presidential campaign, D.E. Shaw paid Summers substantial fees for his financial advice.

    A peculiar choice, given that Russian bond default? One wonders who is behind D.E. Shaw?

    External analysis, utilizing pattern analysis and link analysis algorithms, indicates that the three richest fortunes in North America are the Rockefeller, Morgan and Mellon families, yet this differs completely with the popular story today.

    Examination of empirical data further indicates that the majority ownership of JP Morgan Chase is divided among the Rockefeller family and Morgan family (try and find out who the Morgan family is today!), while majority ownership of Morgan Stanley falls to the Morgan family, Citigroup’s ownership falls to the Rockefeller family. (Yes, we realize a Saudi sheik is the largest shareholder on record of Citigroup stock.)

    The ownership of Bank of America appears to be Mellon money, but this is only extrapolated conjecture and hasn’t yet been verified.

    Further examination indicates that the top banks, oil companies, pharmaceuticals and weapons makers (defense contractors) are owned by the same concentrated senior capital pools.

    And yet, this is opposite to the popular mythology that fabulous fortunes are dissipated, handed over to foundations to be doled out to the ungrateful masses.

    A convenient mythology which ignores those taxes evaded by hiding wealth in those foundations which also conveniently hides the ownership of the banks, oil companies, pharmaceutical corporations and weapons makers through the blocks of stocks and bonds controlled within these foundations.

    With over 50,000 foundations in North America, controlling billions and trillions of wealth, it is a wonder we don’t live in a modern day paradise?

    So who owns ExxonMobil, Goldman Sachs, AT&T and the others?

    The time, effort and resources to track down the ownership today are stupendous, but one hopes those questions are eventually answered.

    And then, perhaps, we shall find out who really owns America?

    1. francis

      Claims. You mean claims to own America. These are creepy little wankers in suits, not kings. Americans rid ourselves of kings, and we’ll do the same with these persons.

      1. FatCat!

        Oh yeah?! Just try it, and I’ll have all your family fired, your home and car repossessed, your retirement forfeited, and I’ll have your teenage son thrown in one of MY private prisons for life for jaywalking by one of MY corrupt judges.

        This is MY country now! I make the rules here now! Is that clear?!


    2. Doug Terpstra

      Thanks, Sarge. What a tangled web; funny thing though, such hyper-complexity may well serve to speed its unraveling… soon. I believe we are on the cusp, in 2012, of a mega-cycle collapse that will cause a very great unraveling indeed.

  15. FatCat!

    FatCat! here, so listen up MY little serfs, or else!

    I own Greece. I own Europe. I own America. I own the world. I own all of you. You do what I command you, or I’ll send MY Blackwater to kick some butt. You had better pay me MY due. You had better turn over your children to work in MY mines. You had better surrender your grandmother to MY SoylentGreen Food Processing Corporation. You had better volunteer your little brother to MY Human Organs Harvesting Corporation. You had better volunteer to serve in MY wars of democracy.

    No more Mr. Nice Kiddie!

    Is that clear?!!!


  16. steelhead23

    I’m so late to the party that the punchbowl is empty. Let me start by stating something perfectly ironic: Trichet has a point. If a sovereign relinquishes its right to issue its own currency and allows rivals to provide the only coin of the realm, under the rivals set of rules and expectations, what then is sovereignty? I am not sufficiently versed in Greece’s finances to know to what extent the people of Greece benefited from this deficit. However, I doubt the public was asked directly whether they wanted to incur this debt. Yet, the expectation is that they are willing to see their country parted-out to pay for it. Then what? Would selling off the country’s utilities create new jobs, new prosperity? Indeed, if the globe is to look for higher productivity from labor, destroying a populace’s sense of pride and national honor would seem to be downright counterproductive. Serfdom indeed. Once the elite have it all, there would be enclaves of wealthy surrounded by poverty and hopelessness and protected by legions of armed men, ready, willing, and able to project whatever force might be required. Would this be a world worth living in?

    1. FatCat!

      Listen up my serfs, and get ready for what I have planned for you all.

      The Greeks are just the beginning. The reason I chose to crush them first is because they have been particularly problematic in the past. Their 3000 year history needs to be shattered first, their dignity trashed. I will destroy their sense of honor. I will make things so bad in Greece, they will once again emigrate to foreign lands to do menial work just to survive. I will then dismember their country piece by piece, island by island. I already have agreements as to who will take which Greek island. I will dismantle their archeological sites and sell the relics on eBay piece by piece. I will demolish Athens stone by stone. I will bulldoze down Acropolis and build an oil refinery in its place. I will turn Mount Athos into a strip mining site.

      I will rob Greeks of all their dignity. Greek men will work in my sweatshops and their women will prostitute themselves in Amsterdam, all for a loaf of dry bread.

      This is what I have prepared for you, my stupid Greeks. You thought you were too proud for me? You thought you could defy ME? You will pray that the Ottoman Empire returns to save you, my proud Greek serfs. But there will be no salvation for you. Only eternal bondage.

      Yes, of all MY serfs you were the proudest, this is why I chose to crush you first. After I’m done with you, the rest will be a walk in the park. Are you hearing this, you proud French, British, German, Italians, Russians? You are next.

      I am FatCat! I am the owner of this world. I am your banker, your CEO, your Senator, your central banker. I am the face of David Kock. I am Bill Gates saving the world from Malaria. I shall not rest until I see all of you bound in my oligarchic perpetual chains.

      Tell me, how has capitalism been working out for you lately, my little serfs?…LOL


      PS — don’t forget to vote for MY Tea Party candidate, you stupid morons…LOL

  17. Hugh

    Just to echo some ideas expressed here. The thread began with an invocation of the sanctity of contracts and the rule of law, but what does the sanctity of contract mean in a kleptocracy? More to the point what does the rule of law mean when we have one law for the rich and corporations and another for everyone else?

    Even if we were to set aside the reality of kleptocracy, in theory, a loan is a voluntary transaction between two parties. Each side undertakes a risk for a perceived benefit. The creditor earns interest and the debtor gets the use of the principal. There are also risks, but it seems that all the discussion is focused on the risk to the debtor and not that undertaken by the creditor.

    This is an idealized schema. As some have noted, the creditor is essentially creating the money lent out of nothing. How does this affect the creditor’s risk and possible demand to “be made whole” in the event of nonpayment?

    Also as we have pointed out many, many times, that creditors are by definition virtuous and nonpaying debtors are deadbeats is a kleptocratic fiction. In the case of Germany and the PIIGS, the German economy depended on and benefited from its exports to these countries. Much as with the US-China relationship, to keep this export cycle going, Germany had to loan back to countries like Greece the euros it was getting from them. If it did not, Greece would quickly run out of euros, and the German export market would die. So the benefit to the creditor here was not just a repayment of loan plus interest. There was an entirely other benefit involved, one that is being intentionally obscured but is central to a fair assessment of the balance of benefits to risk between the two parties. This is important because Germany took advantage of this export-import imbalance, did nothing to rectify it, and now acts like it never existed.

    1. Susan Truxes

      So maybe Trichet is cleverer than we think. Just because he is cross-eyed is no reason to distrust him. When Hudson, above, alludes to Trichet’s/ECB’s position it seems to indicate that the EU is willing to sacrifice democracy to enforce crushing debt: “Now that nations are not raising money for war but to stabilize reckless predatory bankers, Trichet… recently suggested taking financial policy out of the hands of democracy.” Hmmm. Does this include German democracy?

  18. RobS

    Greece needs to declare bankruptcy and tell the bond holders they lost the bet this time and no one is covering it.

  19. Jim

    The writer is calling many of the parts of the problem perfectly right.

    It is literally robbing the people of the value of their citizenship as Americans and destroying civic nationalism worldwide.

    The overinvestment in the police state, the military and diversions from wealth creation is hurting the nation but hurting the working class the most.

    Heads on Pikes.

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