This article was first published by Frankfurter Allgemeine Zeitung, Dec. 3, 2011, as “Der Krieg der Banken gegen das Volk.”
The easiest way to understand
Europe’s financial crisis is to look at the solutions being proposed to resolve
it. They are a banker’s dream, a grab bag of giveaways that few voters would be
likely to approve in a democratic referendum. Bank strategists learned not to
risk submitting their plans to democratic vote after Icelanders twice refused
in 2010-11 to approve their government’s capitulation to pay Britain and the
Netherlands for losses run up by badly regulated Icelandic banks operating
abroad. Lacking such a referendum, mass demonstrations were the only way for
Greek voters to register their opposition to the €50 billion in privatization
sell-offs demanded by the European Central Bank (ECB) in autumn 2011.
The problem
is that Greece lacks the ready money to redeem its debts and pay the interest
charges. The ECB is demanding that it sell off public assets – land, water and
sewer systems, ports and other assets in the public domain, and also cut back
pensions and other payments to its population. The “bottom 99%” understandably
are angry to be informed that the wealthiest layer of the population is largely responsible for the budget
shortfall by stashing away a reported €45 billion of funds stashed away in
Swiss banks alone. The idea of normal wage-earners being obliged to forfeit
their pensions to pay for tax evaders – and for the general un-taxing of wealth
since the regime of the colonels – makes most people understandably angry. For
the ECB, EU and IMF “troika” to say that whatever the wealthy take, steal or
evade paying must be made up by the population at large is not a politically
neutral position. It comes down hard on the side of wealth that has been
unfairly taken.
A democratic
tax policy would reinstate progressive taxation on income and property, and
would enforce its collection – with penalties for evasion. Ever since the 19th
century, democratic reformers have sought to free economies from waste,
corruption and “unearned income.” But the ECB “troika” is imposing a regressive
tax – one that can be imposed only by turning government policy-making over to
a set of unelected “technocrats.”
To
call the administrators of so anti-democratic a policy “technocrats” seems to
be a cynical scientific-sounding euphemism for financial lobbyists or
bureaucrats deemed suitably tunnel-visioned to act as useful idiots on behalf
of their sponsors. Their
ideology is the same austerity philosophy that the IMF imposed on Third World
debtors from the 1960s through the 1980s. Claiming to stabilize the balance of
payments while introducing free markets, these officials sold off export
sectors and basic infrastructure to creditor-nation buyers. The effect was to
drive austerity-ridden economies even deeper into debt – to foreign bankers and
their own domestic oligarchies.
This
is the treadmill on which Eurozone social democracies are now being placed.
Under the political umbrella of financial emergency, wages and living standards
are to be scaled back and political power shifted from elected government to
technocrats governing on behalf of large banks and financial institutions.
Public-sector labor is to be privatized – and de-unionized, while Social
Security, pension plans and health insurance are scaled back.
This
is the basic playbook that corporate raiders follow when they empty out
corporate pension plans to pay their financial backers in leveraged buyouts. It
also is how the former Soviet Union’s economy was privatized after 1991, transferring
public assets into the hands of kleptocrats, who worked with Western investment
bankers to make the Russian and other stock exchanges the darlings of the
global financial markets. Property taxes were scaled back while flat taxes were
imposed on wages (a cumulative 59 percent in Latvia). Industry was dismantled
as land and mineral rights were transferred to foreigners, economies driven
into debt and skilled and unskilled labor alike was obliged to emigrate to find
work.
Pretending
to be committed to price stability and free markets, bankers inflated a real
estate bubble on credit. Rental income was capitalized into bank loans and paid
out as interest. This was enormously profitable for bankers, but it left the
Baltics and much of Central Europe debt strapped and in negative equity by
2008. Neoliberals applaud their plunging wage levels and shrinking GDP as a
success story, because these countries shifted the tax burden onto employment
rather than property or finance. Governments bailed out banks at taxpayer
expense.
It
is axiomatic that the solution to any major social problem tends to create even
larger problems – not always unintended! From the financial sector’s vantage
point, the “solution” to the Eurozone crisis is to reverse the aims of the
Progressive Era a century ago – what John Maynard Keynes gently termed
“euthanasia of the rentier” in 1936.
The idea was to subordinate the banking system to serve the economy rather than
the other way around. Instead, finance has become the new mode of warfare –
less ostensibly bloody, but with the same objectives as the Viking invasions
over a thousand years ago, and Europe’s subsequent colonial conquests:
appropriation of land and natural resources, infrastructure and whatever other
assets can provide a revenue stream. It was to capitalize and estimate such
values, for instance, that William the Conqueror compiled the Domesday Book
after 1066, a model of ECB and IMF-style calculations today.
This
appropriation of the economic surplus to pay bankers is turning the traditional
values of most Europeans upside down. Imposition of economic austerity,
dismantling social spending, sell-offs of public assets, de-unionization of
labor, falling wage levels, scaled-back pension plans and health care in
countries subject to democratic rules requires convincing voters that there is
no alternative. It is claimed that without a profitable banking sector (no
matter how predatory) the economy will break down as bank losses on bad loans
and gambles pull down the payments system. No regulatory agencies can help, no
better tax policy, nothing except to turn over control to lobbyists to save
banks from losing the financial claims they have built up.
What banks want
is for the economic surplus to be paid out as interest, not used for rising
living standards, public social spending or even for new capital investment.
Research and development takes too long. Finance lives in the short run. This
short-termism is self-defeating, yet it is presented as science. The
alternative, voters are told, is the road to serfdom: interfering with the
“free market” by financial regulation and even progressive taxation.
There
is an alternative, of course. It is what European civilization from the 13th-century
Schoolmen through the Enlightenment and the flowering of classical political
economy sought to create: an economy free of unearned income, free of vested
interests using special privileges for “rent extraction.” At the hands of the
neoliberals, by contrast, a free market is one free for a tax-favored rentier
class to extract interest, economic rent and monopoly prices.
Rentier interests present their behavior
as efficient “wealth creation.” Business schools teach privatizers how to
arrange bank loans and bond financing by pledging whatever they can charge for
the public infrastructure services being sold by governments. The idea is to
pay this revenue to banks and bondholders as interest, and then make a capital
gain by raising access fees for roads and ports, water and sewer usage and
other basic services. Governments are told that economies can be run more
efficiently by dismantling public programs and selling off assets.
Never
has the gap between pretended aim and actual effect been more hypocritical.
Making interest payments (and even capital gains) tax-exempt deprives governments
of revenue from the user fees they are relinquishing, increasing their budget
deficits. And instead of promoting price stability (the ECB’s ostensible
priority), privatization increases prices for infrastructure, housing and other
costs of living and doing business by building in interest charges and other
financial overhead – and much higher salaries for management. So it is merely a
knee-jerk ideological claim that this policy is more efficient simply because
privatizers do the borrowing rather than government.
There
is no technological or economic need for Europe’s financial managers to impose
depression on much of its population. But there is a great opportunity to gain
for the banks that have gained control of ECB economic policy. Since the 1960s,
balance-of-payments crises have provided opportunities for bankers and liquid
investors to seize control of fiscal policy – to shift the tax burden onto
labor and dismantle social spending in favor of subsidizing foreign investors
and the financial sector. They gain from austerity policies that lower living
standards and scale back social spending. A debt crisis enables the domestic
financial elite and foreign bankers to indebt the rest of society, using their
privilege of credit (or savings built up as a result of less progressive tax
policies) as a lever to grab assets and reduce populations to a state of debt
dependency.
The
kind of warfare now engulfing Europe is thus more than just economic in scope.
It threatens to become a historic dividing line between the past half-century’s
epoch of hope and technological potential to a new era of polarization as a
financial oligarchy replaces democratic governments and reduces populations to
debt peonage.
For so bold
an asset and power grab to succeed, it needs a crisis to suspend the normal
political and democratic legislative processes that would oppose it. Political
panic and anarchy create a vacuum into which grabbers can move quickly, using
the rhetoric of financial deception and a junk economics to rationalize
self-serving solutions by a false view of economic history – and in the case of
today’s ECB, German history in particular.
A central bank that is blocked from acing like one
Governments
do not need to borrow from commercial bankers or other lenders. Ever since the
Bank of England was founded in 1694, central banks have printed money to
finance public spending. Bankers also create credit feely – when they make a
loan and credit the customer’s account, in exchange for a promissory note
bearing interest. Today, these banks can borrow reserves from the government
central bank at a low annual interest rate (0.25% in the United States) and
lend it out at a higher rate. So banks are glad to see the government’s central
bank create credit to lend to them. But when it comes to governments creating
money to finance their budget deficits for spending in the rest of the economy,
banks would prefer to have this market and its interest return for themselves.
European
commercial banks are especially adamant that the European Central Bank should
not finance government budget deficits. But private credit creation is not
necessarily less inflationary than governments monetizing their deficits
(simply by printing the money needed). Most commercial bank loans are made
against real estate, stocks and bonds – providing credit that is used to bid up
housing prices, and prices for financial securities (as in loans for leveraged
buyouts).
It
is mainly government that spends credit on the “real” economy, to the extent
that public budget deficits employ labor or are spent on goods and services. If
governments avoid paying interest by having their central banks printing money
on their own computer keyboards rather than borrowing from banks that do the
same thing on their own keyboards. (Abraham Lincoln simply printed currency
when he financed the U.S. Civil War with “greenbacks.”)
Banks
would like to use their credit-creating privilege to obtain interest for
lending to governments to finance public budget deficits. So they have a
self-interest in limiting the government’s “public option” to monetize its
budget deficits. To secure a monopoly on their credit-creating privilege, banks
have mounted a vast character assassination on government spending, and indeed
on government authority in general – which happens to be the only authority
with sufficient power to control their power or provide an alternative public
financial option, as Post Office savings banks do in Japan, Russia and other
countries. This competition between banks and government explains the false
accusations made that government credit creation is more inflationary than when
commercial banks do it.
The
reality is made clear by comparing the ways in which the United States, Britain
and Europe handle their public financing. The U.S. Treasury is by far the
world’s largest debtor, and its largest banks seem to be in negative equity,
liable to their depositors and to other financial institutions for much larger
sums that can be paid by their portfolio of loans, investments and assorted
financial gambles. Yet as global financial turmoil escalates, institutional
investors are putting their money into U.S. Treasury bonds – so much that these
bonds now yield less than 1%. By contrast, a quarter of U.S. real estate is in
negative equity, American states and cities are facing insolvency and must
scale back spending. Large companies are going bankrupt, pension plans are
falling deeper into arrears, yet the U.S. economy remains a magnet for global
savings.
Britain’s
economy also is staggering, yet its government is paying just 2% interest. But
European governments are now paying over 7%. The reason for this disparity is
that they lack a “public option” in money creation. Having a Federal Reserve Bank
or Bank of England that can print the money to pay interest or roll over
existing debts is what makes the United States and Britain different from
Europe. Nobody expects these two nations to be forced to sell off their public
lands and other assets to raise the money to pay (although they may do this as
a policy choice). Given that the U.S. Treasury and Federal Reserve can create
new money, it follows that as long as government debts are denominated in
dollars, they can print enough IOUs on their computer keyboards so that the
only risk that holders of Treasury bonds bear is the dollar’s exchange rate
vis-à-vis other currencies.
By
contrast, the Eurozone has a central bank, but Article 123 of the Lisbon treaty
forbids the ECB from doing what central banks were created to do: create the
money to finance government budget deficits or roll over their debt falling
due. Future historians no doubt will find it remarkable that there actually is
a rationale behind this policy – or at least the pretense of a cover story. It
is so flimsy that any student of history can see how distorted it is. The claim
is that if a central bank creates credit, this threatens price stability. Only
government spending is deemed to be inflationary, not private credit!
The
Clinton Administration balanced the U.S. Government budget in the late 1990s,
yet the Bubble Economy was exploding. On the other hand, the Federal Reserve
and Treasury flooded the economy with $13 trillion in credit to the banking
system credit after September 2008, and $800 billion more last summer in the
Federal Reserve’s Quantitative Easing program (QE2). Yet consumer and commodity
prices are not rising. Not even real estate or stock market prices are being
bid up. So the idea that more money will bid up prices (MV=PT) is not operating
today.
Commercial
banks create debt. That is their product. This debt leveraging was used for
more than a decade to bid up prices – making housing and buying a retirement
income more expensive for Americans – but today’s economy is suffering from
debt deflation as personal income, business and tax revenue is diverted to pay
debt service rather than to spend on goods or invest or hire labor.
Much
more striking is the travesty of German history that is being repeated again
and again, as if repetition somehow will stop people from remembering what
actually happened in the 20th century. To hear ECB officials tell
the story, it would be reckless for a central bank to lend to government,
because of the danger of hyperinflation. Memories are conjured up of the Weimar
inflation in Germany in the 1920s. But upon examination, this turns out to be
what psychiatrists call an implanted memory – a condition in which a patient is
convinced that they have suffered a trauma that seems real, but which did not
exist in reality.
What
happened back in 1921 was not a case of governments borrowing from central
banks to finance domestic spending such as social programs, pensions or health
care as today. Rather, Germany’s obligation to pay reparations led the
Reichsbank to flood the foreign exchange markets with deutsche marks to obtain
the currency to buy pounds sterling, French francs and other currency to pay
the Allies – which used the money to pay their Inter-Ally arms debts to the
United States. The nation’s hyperinflation stemmed from its obligation to pay
reparations in foreign currency. No amount of domestic taxation could have
raised the foreign exchange that was scheduled to be paid.
By
the 1930s this was a well-understood phenomenon, explained by Keynes and others
who analyzed the structural limits on the ability to pay foreign debt imposed without regard for the ability to pay out of
current domestic-currency budgets. From Salomon Flink’s The Reichsbank and Economic Germany (1931) to studies of the
Chilean and other Third World hyperinflations, economists have found a common
causality at work, based on the balance of payments. First comes a fall in the
exchange rate. This raises the price of imports, and hence the domestic price
level. More money is then needed to transact purchases at the higher price
level. The statistical sequence and line
of causation leads from balance-of-payments deficits to currency depreciation
raising import costs, and from these price increases to the money supply, not the other way around.
Today’s
“free marketers” writing in the Chicago monetarist tradition (basically that of
David Ricardo) leaves the foreign and domestic debt dimensions out of account.
It is as if “money” and “credit” are assets to be bartered against goods. But a
bank account or other form of credit means debt on the opposite side of the
balance sheet. One party’s debt is another party’s saving – and most savings
today are lent out at interest, absorbing money from the non-financial sectors of the economy. The discussion is
stripped down to a simplistic relationship between the money supply and price
level – and indeed, only consumer prices, not asset prices. In their eagerness
to oppose government spending – and indeed to dismantle government and replace
it with financial planners – neoliberal monetarists neglect the debt burden
being imposed today from Latvia and Iceland to Ireland and Greece, Italy, Spain
and Portugal.
If
the euro breaks up, it is because of the obligation of governments to pay bankers
in money that must be borrowed rather than created through their own central
bank. Unlike the United States and Britain which can create central bank credit
on their own computer keyboards to keep their economy from shrinking or
becoming insolvent, the German constitution and the Lisbon Treaty prevent the
central bank from doing this.
The
effect is to oblige governments to borrow from commercial banks at interest.
This gives bankers the ability to create a crisis – threatening to drive
economies out of the Eurozone if they do not submit to “conditionalities” being
imposed in what quickly is becoming a new class war of finance against labor.
Disabling Europe’s central bank to deprive governments of the power to
create money
One
of the three defining characteristics of a nation-state is the power to create
money. A second characteristic is the power to levy taxes. Both of these powers
are being transferred out of the hands of democratically elected
representatives to the financial sector, as a result of tying the hands of
government.
The
third characteristic of a nation-state is the power to declare war. What is
happening today is the equivalent of warfare – but against the power of government! It is above all a financial mode
of warfare – and the aims of this financial appropriation are the same as those
of military conquest: first, the land and subsoil riches on which to charge
rents as tribute; second, public infrastructure to extract rent as access fees;
and third, any other enterprises or assets in the public domain.
In
this new financialized warfare, governments are being directed to act as
enforcement agents on behalf of the financial conquerors against their own
domestic populations. This is not new, to be sure. We have seen the IMF and
World Bank impose austerity on Latin American dictatorships, African military
chiefdoms and other client oligarchies from the 1960s through the 1980s.
Ireland and Greece, Spain and Portugal are now to be subjected to similar asset
stripping as public policy making is shifted into the hands of
supra-governmental financial agencies acting on behalf of bankers – and thereby
for the top 1% of the population.
When
debts cannot be paid or rolled over, foreclosure time arrives. For governments,
this means privatization selloffs to pay creditors. In addition to being a
property grab, privatization aims at replacing public sector labor with a
non-union work force having fewer pension rights, health care or voice in
working conditions. The old class war is thus back in business – with a
financial twist. By shrinking the economy, debt deflation helps break the power
of labor to resist.
It
also gives creditors control of fiscal policy. In the absence of a pan-European
Parliament empowered to set tax rules, fiscal policy passes to the ECB. Acting on
behalf of banks, the ECB seems to favor reversing the 20th century’s
drive for progressive taxation. And as U.S. financial lobbyists have made
clear, the creditor demand is for governments to re-classify public social
obligations as “user fees,” to be financed by wage withholding turned over to
banks to manage (or mismanage, as the case may be). Shifting the tax burden off
real estate and finance onto labor and the “real” economy thus threatens to
become a fiscal grab coming on top of the privatization grab.
This
is self-destructive short-termism. The irony is that the PIIGS budget deficits
stem largely from un-taxing property, and a further tax shift will worsen
rather than help stabilize government budgets. But bankers are looking only at
what they can take in the short run. They know that whatever revenue the tax
collector relinquishes from real estate and business is “free” for buyers to
pledge to the banks as interest. So Greece and other oligarchic economies are
told to “pay their way” by slashing government social spending (but not
military spending for the purchase of German and French arms) and shifting
taxes onto labor and industry, and onto consumers in the form of higher user
fees for public services not yet privatized.
In Britain,
Prime Minister Cameron claims that scaling back government even more along
Thatcherite-Blairite lines will leave more labor and resources available for
private business to hire. Fiscal cutbacks will indeed throw labor out of work,
or at least oblige it to find lower-paid jobs with fewer rights. But cutting
back public spending will shrink the business sector as well, worsening the
fiscal and debt problems by pushing economies deeper into recession.
If
governments cut back their spending to reduce the size of their budget deficits
– or if they raise taxes on the economy at large, to run a surplus – then these
surpluses will suck money out of the economy, leaving less to be spent on goods
and services. The result can only be unemployment, further debt defaults and
bankruptcies. We may look to Iceland and Latvia as canaries in this financial
coalmine. Their recent experience shows that debt deflation leads to
emigration, shortening life spans, lower birth rates, marriages and family
formation – but provides great opportunities for vulture funds to suck wealth
upward to the top of the financial pyramid.
Today’s
economic crisis is a matter of policy choice, not necessity. As President
Obama’s chief of staff Rahm Emanuel quipped: “A crisis is too good an
opportunity to let go to waste.” In such cases the most logical explanation is
that some special interest must be benefiting. Depressions increase
unemployment, helping to break the power of unionized as well as non-union
labor. The United States is seeing a state and local budget squeeze (as
bankruptcies begin to be announced), with the first cutbacks coming in the
sphere of pension defaults. High finance is being paid – by not paying the
working population for savings and promises made as part of labor contracts and
employee retirement plans. Big fish are eating little fish.
This
seems to be the financial sector’s idea of good economic planning. But it is
worse than a zero-sum plan, in which one party’s gain is another’s loss.
Economies as a whole will shrink – and change their shape, polarizing between
creditors and debtors. Economic democracy will give way to financial oligarchy,
reversing the trend of the past few centuries.
Is
Europe really ready to take this step? Do its voters recognize that stripping
the government of the public option of money creation will hand the privilege
over to banks as a monopoly? How many observers have traced the almost
inevitable result: shifting economic planning and credit allocation to the
banks?
Even if
governments provide a “public option,” creating their own money to finance
their budget deficits and supplying the economy with productive credit to
rebuild infrastructure, a serious problem remains: how to dispose of the
existing debt overhead now acts as a deadweight on the economy. Bankers and the
politicians they back are refusing to write down debts to reflect the ability
to pay. Lawmakers have not prepared society with a legal procedure for debt
write-downs – except for New York State’s Fraudulent Conveyance Law, calling
for debts to be annulled if lenders made loans without first assuring
themselves of the debtor’s ability to pay.
Bankers do
not want to take responsibility for bad loans. This poses the financial problem
of just what policy-makers should do when banks have been so irresponsible in
allocating credit. But somebody has to take a loss. Should it be society at
large, or the bankers?
It is not a
problem that bankers are prepared to solve. They want to turn the problem over
to governments – and define the problem as how governments can “make them
whole.” What they call a “solution” to the bad-debt problem is for the
government to give them good bonds for bad loans (“cash for trash”) – to be
paid in full by taxpayers. Having engineered an enormous increase in wealth for
themselves, bankers now want to take the money and run – leaving economies debt
ridden. The revenue that debtors cannot pay will now be spread over the entire
economy to pay – vastly increasing everyone’s cost of living and doing business.
Why
should they be “made whole,” at the cost of shrinking the rest of the economy? The
bankers’ answer is that debts are owed to labor’s pension funds, to consumers
with bank deposits, and the whole system will come crashing down if governments
miss a bond payment. When pressed, bankers admit that they have taken out risk
insurance – collateralized debt obligations and other risk swaps. But the
insurers are largely U.S. banks, and the American Government is pressuring
Europe not to default and thereby hurt the U.S. banking system. So the debt
tangle has become politicized internationally.
So
for bankers, the line of least resistance is to foster an illusion that there
is no need for them to accept defaults on the unpayably high debts they have
encouraged. Creditors always insist that
the debt overhead can be maintained – if governments simply will reduce other
expenditures, while raising taxes on individuals and non-financial business.
The reason why
this won’t work is that trying to collect today’s magnitude of debt will injure
the underlying “real” economy, making it even less able to pay its debts. What
started as a financial problem (bad debts) will now be turned into a fiscal
problem (bad taxes). Taxes are a cost of doing business just as paying debt
service is a cost. Both costs must be reflected in product prices. When
taxpayers are saddled with taxes and debts, they have less revenue free to
spend on consumption. So markets shrink, putting further pressure on the
profitability of domestic enterprises. The combination makes any country
following such policy a high-cost producer and hence less competitive in global
markets.
This
kind of financial planning – and its parallel fiscal tax shift – leads toward
de-industrialization. Creating ECB or IMF inter-government fiat money leaves
the debts in place, while preserving wealth and economic control in the hands
of the financial sector. Banks can receive debt payments on overly mortgaged
properties only if debtors are relieved of some real estate taxes. Debt-strapped
industrial companies can pay their debts only by scaling back pension
obligations, health care and wages to their employees – or tax payments to the
government. In practice, “honoring debts” turns out to mean debt deflation and general economic shrinkage.
This
is the financiers’ business plan. But to leave tax policy and centralized
planning in the hands of bankers turns out to be the opposite of what the past
few centuries of free market economics have been all about. The classical
objective was to minimize the debt overhead, to tax land and natural resource
rents, and to keep monopoly prices in line with actual costs of production
(“value”). Bankers have lent increasingly against the same revenues that free
market economists believed should be the natural tax base.
So
something has to give. Will it be the past few centuries of liberal free-market
economic philosophy, relinquishing planning the economic surplus to bankers? Or
will society re-assert classical economic philosophy and Progressive Era
principles, and re-assert social shaping of financial markets to promote
long-term growth with minimum costs of living and doing business?
At least in the most badly indebted
countries, European voters are waking up to an oligarchic coup in which taxation
and government budgetary planning and control is passing into the hands of
executives nominated by the international bankers’ cartel. This result is the
opposite of what the past few centuries of free market economics has been all
about.
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