watermock
04-05-2009, 03:54 AM
Financial Crisis: Sustaining Unsustainability
$1 Trillion more to sustain the economic crisis. G-20 message to indebted countries. "Drop Dead!"
by Prof. Michael Hudson
There was not much substantive news from the G-20 meetings that ended on April 2 in London, but the least irrelevant news was that the attendees agreed to quadruple IMF funding to $1 trillion. Anything that bolsters IMF authority cannot be good news for countries forced to submit to its austerity plans designed to squeeze out more money to pay the world’s most predatory creditors. The world’s leading governments have responded to today’s financial crisis with “planned shrinkage” for debtors (10% cut in wage payments in hapless Latvia, Hungary put on rations, and permanent debt peonage for Iceland for starters) while America – whose foreign debt is even more unpayable – pursues Keynesian deficit spending. Debtor countries must borrow this $1 trillion from the IMF not to revive their own faltering economies, not to pursue counter-cyclical policies to restore market demand (that is only for creditor nations), but to pass on the poisonous IMF “aid” to the bad banks that have made the irresponsible loans. In Ukraine, a physical fight broke out in Parliament as the Party of Regions sought to block an agreement with the IMF calling for government budget cutbacks in the typically mistaken belief that imposing a deeper recession will reduce wage levels even further by enough to pay debts already at unsustainable levels (thanks largely to the kleptocracy’s tax “avoidance” and capital flight, to be sure). All this seems to be a dress rehearsal for what is to come over the next year or so.1
The main beneficiaries of IMF lending to Latvia, for example, have been the Swedish banks that have spent the last decade funding that country’s real estate bubble while doing nothing to help develop an industrial potential to enable Latvia to pay for its imports by exporting something besides its emigrant male labor and act as a vehicle for Russian capital flight.
This is not entirely the IMF’s fault, to be sure. It is the European Community deserves a great deal of blame. Instead of viewing the post-Soviet economies as wards to be brought up to speed with Western Europe, the last thing the EU wanted was to develop potential rivals. It wanted customers – not only for its exports, but most of all for its loans. Austrian banks carved out financial spheres of influence in Hungary (and lost their shirt on real estate loans, much as the Habsburgs had done over a century ago), while the Baltic States passed into the Scandinavian sphere. Iceland was neoliberalized, largely in ripoffs organized by Deutsche Bank.
The G-20’s announcement continues the U.S. Treasury and Federal Reserve bank bailout over the past half- year. In a nutshell, the solution to a debt crisis is to be yet more debt. If debtors can’t pay out of what they are able to earn, lend them enough to keep current on their carrying charges. Collateralize this with their property, their public domain, their political autonomy – their democracy itself. The aim is to keep the debt overhead in place. This means in practice, keeping the volume of debt growing exponentially as they accrue interest and arrears. That is the essence of the “magic of compound interest.” And Iceland’s interest rate is now 18%, causing the highest unemployment rate since the Great Depression.
This is “equilibrium” neoliberal style. In addition to paying exorbitant interest, homeowners must pay another 18% indexation of their debts to the inflation rate (the consumer price index) so that creditors will not lose the purchasing power over consumer goods. (The wealthy oligarchy here consists of billionaires who have chosen to join their Russian counterparts by living in London). Labor’s wages are not indexed, so defaults are spreading and the country is being torn apart with bankruptcy. And behind this, the democracy is being torn apart by a financial oligarchy, whose interests have become increasingly cosmopolitan, looking at the economy as prey to be looted. And in today’s world, the easiest way to obtain wealth by old-fashioned “primitive accumulation” is by financial manipulation. This is the essence of the Washington Consensus that the G-20 support, using the IMF in its usual role as enforcer.
The alternative is for debtor countries to suffer the same kind of economic sanctions as Iran, Cuba and similar countries. Perhaps soon enough there will be sufficient economies in this state to establish a common trading area among themselves, along with Venezuela, Colombia and so forth. In fact, Russia made a formal offer of $4 billion aid to Iceland, but retracted it presumably when Britain gave it a plum as a tradeoff. To other countries, aid to Iceland and “doing the right thing” is simply a bargaining chip in the international diplomatic game.
So the IMF’s $1 trillion aims at providing more bailouts for international bankers as the post-Soviet and Third World countries suffer currency pressure. Finding it effectively impossible for them to pay their foreign debts, especially real estate denominated in foreign currency. This violates the First Law of national fiscal prudence: Only permit debts to be taken on that rae in the same currency as the income that is expected to be earned to pay them off.
A year ago the IMF had no customers. Nobody wanted to submit to its destructive “conditionalities,” anti-labor policies designed to shrink the domestic market (in the false promise that this will “free” more output for export rather than being consumed at home. In reality it simply discourages domestic investment, and hence employment. The result is that economies submitting to the IMF’s “Washington Consensus” become more and more dependent upon their foreign creditors and suppliers.
If you are going to recommend more of this consensus, then the only way to sell it is to do what British Prime Minister Gordon Brown did at the meetings: announce that “The Washington Consensus is dead.” (He might have saved matters by saying “deadly,” but used the adjective instead of the adverb.)
The United States and Britain would never follow such conditionalities. The Washington Consensus is only for export. (“Do as we say, not as we do.”) Mr. Obama’s stimulus program is Keynesian, not an austerity plan – yet the United States owes $4 trillion to foreign central banks, primarily to the G-20 heads of state assembled with him in London.
The real estate bubble is how the Baltics covered the foreign-exchange costs of their trade deficit, in the face of neoliberal policies whose concept of financial “equilibrium” was to watch “market forces” shorten lifespans, demolish what industrial potential they had, increase emigration and disease, and run up an enormous foreign debt with no visible way of earning the money to pay it off. This real estate bubble credit was not productive. It was extractive, and hence parasitic in character. The World Bank applauded the Baltics as a success story, ranking them near the top of nations in terms of “ease of doing business.”
This poses a problem of just how these debtor countries are going to politicize their non-payment of foreign debt. The neoliberal solution is for them to do what Latin American and other third World countries have been doing since the 1980s: sell off their public domain and public enterprises at distress prices.
Is there no alternative to submitting to what really is debt peonage and neofeudalism?
First, some practical facts. Debts that can’t be paid, won’t be. Adam Smith observed in The Wealth of Nations that no government in history had ever repaid their debts. Today, this may be said of the public sector as well. Creditors know this (and I speak as a former balance-of-payments analyst of Third World debt for nearly fifty years, from Chase Manhattan in the 1960s through the United Nations Institute for Training and Research [UNITAR] in the 1970s to Scudder Stevens & Clark in 1990, where I started the first Third World sovereign debt fund.) But from the creditor’s vantage point, the trick is to deter debtor countries from acting on this principle.
The preferred tactic is to pound on the old morality, “A debt is a debt, and must be paid.” This is what Herbert Hoover said of the Inter-Ally debts owed by Britain, France and other allies of the United States in World War I. These debts led to the Great Depression. “We loaned them the money!” he said curtly.
So let’s look at the moral argument. Coming as I do from New York, I find an excellent model in that state’s Law of Fraudulent Conveyance. Enacted when the state was still a colony, it rules that if a creditor makes a loan without having a clear and reasonable understanding of how the debtor can repay the money out of the normal course of doing business, then the loan is deemed to be predatory and therefore null and void.
[History of this law: British speculators making loans to upstate farmers, and then foreclosing, to get the land on the cheap.] At the national level, no country should be subjected to debt peonage. That is the opposite of democratic self-determination – and of Enlightenment moral philosophy that economic policies should encourage economic growth, not shrinkage; and greater economic equality, not polarization between wealthy creditors and impoverished debtors.
Another moral consideration is that like the post-Soviet economies, Iceland was sold a neoliberal bill of goods: a self-destructive Junk Economics. Just how moral – and perhaps even more important, how legal – is the responsibility for the Washington Consensus, IMF, World Bank and Bank of England, whose economies and banks benefited from this wrong-headed advice?
At state ultimately from the moral and political view is the concept of just what a “free market” is. It’s supposed to be one of choice. Indebted countries lose discretionary choice over their economic future, because their economic surplus is pledged abroad as financial tribute – and all without the overhead costs of a military occupation. They relinquish their policy making from democratically elected political representatives to bureaucratic financial managers, often foreign – the new Central Planners in today’s neoliberal world – who seek to extract as much as they can as fast as they can. That’s what you do when you know the game is over, and hope the other side doesn’t realize it.
These moral principles underlie the legal systems of most nations, even international law itself. In fact, while the G-20 meetings were taking place, Korea was refusing to let itself be victimized by the junk derivatives contracts that foreign banks sold. In the first place, Korea claims, bankers have a fiduciary responsibility to their customers to recommend loans that help them, not strip them of money. There is a tacit understanding (one that the financial sector spends millions of dollars in public relations efforts to undermine and confuse) that banking is a public utility. It is supposed to be a handmaiden to growth – industrial and agricultural growth and self-sufficiency – not a predatory, extractive and hence anti-social dynamic. So Korean victims of junk derivatives are suing the banks. And as New York Times commentator Floyd Norris described the action, it doesn’t look good for the international banks. The home court always has an advantage, and every nation is sovereign, able to pass whatever laws it wants. (And as America’s case abundantly illustrates, the judges need not be honest.)
The post-Soviet economies as well as Latin America must be watching attentively the path that Korea is clearing through international courts. The nightmare of international bankers is that these countries may bring the equivalent of a class action suit against the neoliberal bankers that have brought international diplomatic coercion on these countries to commit financial and economic suicide. “The Seoul Central District Court justified its decision on the kind of logic that would apply in the United States to a lawsuit involving an unsophisticated individual investor and a fast-taking broker. The court pointed to questions of whether the contract was a suitable investment for the company, and to whether the risks were fully disclosed. The judgment also referred to the legal concept of “changed circumstances,” concluding that the parties had expected the exchange rate to remain stable, that the change in circumstances was unforeseeable and that the losses would be too great for the company to bear.”3
As a second cause of action, Korea is claiming that the banks provided creditor for other financial institutions to bet against the very contracts the banks were selling Korea to “protect” its interests. So the banks knew that what they were selling was a time bomb. And they seem to be guilty of conflict of interest. Banks claim that they merely were selling goods with no warranty to “informed individuals.” But the Korean parties in question were no more informed than were Iceland’s debtors. If a bank seeks to mislead and does not provide full disclosure, its victim cannot be said to be “informed.” The proper English word is misinformed (viz. disinformation).
Speaking of information, an important issue concerns the extent to which the big international banks may have conspired with domestic bankers and corporate managers to loot their companies. This is what corporate raiders have done for their junk-bond holders since the high tide of Drexel Burnham and Michael Milken in the 1980s. This would make the banks partners in crime. There needs to be an investigation of the lending pattern that these banks engaged in – including their aid in organizing offshore money laundering and tax evasion to their customers.
Bearing the above in mind, I suppose I can tell Icelandic politicians that I have good news regarding the fate of their country’s foreign and domestic debt: No nation ever has paid its debts. The real question therefore is not whether or not they will be paid, but how not to pay these debts. How will the game play out – in the political sphere, in popular ideology, and in the courts at home and abroad?
The question is whether Iceland will let bankruptcy tear apart its economy slowly, transferring property from debtors to creditors, from Icelandic citizens to foreigners, and from the public domain and national taxing power to the international financial class. Or, will Iceland see where the inherent mathematics of debt are leading, and draw the line? At what point will it say “We won’t pay. These debts are immoral, uneconomic and anti-democratic.” Do they want to continue the fight by Enlightenment and Progressive Era social democracy, or the alternative – a lapse back into neofeudal debt peonage?
One way or another, this choice must be made. It is all a question of timing. And that is what the financial sector plays for – time enough to transfer as much property as it can out of its hands into those of the banks and other investors.
The proper historical perspective
History provides a moral perspective on the need and indeed the inevitability of nations canceling their debts in one way or another – through bankruptcy in which creditors foreclose on the property of most people, companies and the government itself, or whether democracy asserts its sovereign right to keep finance in its place, and say, “You’ve made a false start. So we’ve got to start all over again. We hope you work with us to make the credit and debt system work better this time, so that we can achieve in practice what the textbooks and your public-relations think tanks promise – namely, that finance can be steered to contribute to growth rather than merely undercut it by loading economies down with the deadweight of a debt overhead.”
Ultimately, moral arguments in today’s world turn on the political question of, “What is the effect of debt, in various modes of organization?” What contributes most to economic growth? This practical question is what will determine what people want and ultimately what they think is most fair. Productive credit is fair. If a loan helps a borrower get richer, by using the proceeds to earn the money to pay back the creditor with interest and still come out ahead, then credit will be supported. But unproductive, purely extractive credit is deemed everywhere to be unfair. That is what Aristotle noticed over two thousand years ago.
We are now emerging from a financially unique period of history. Never before have people believed that the way to get rich was by running into debt. There was no optimistic term such as debt leveraging.
Government debts were war debts. Until quite recently (1980 really was the turning point), they only went into debt in war – largely, as Adam Smith explained, to conceal the actual costs from the population, by paying creditors out of taxes levied after the war had ended. Other government operations were financed on a pay-as-you-go basis. Only recently – one could call it a class war, I suppose – did governments run into debt as a result of cutting taxes on wealth and property. For most of history the only people living above subsistence levels were well-to-do landowners. So there simply was no opportunity to shift the tax burden onto labor – until around the 18th century governments began to tax essentials that consumers bought. This increased the prices of the commodities being taxed, and thus made the economy less competitive. So debtor governments became high-tax governments that tended fairly quickly dragged down their economy. (Spain in the 16th century is an excellent example of how the grandees shifted taxes onto handicrafts and agriculture, driving out economic initiative to its own former colonies in the Low Countries. The United States today could be cited also.)
Most private-sector debt was short-term trade credit, mainly to finance the exportation or domestic sale of commodities already produced. This was the essence of commercial banking since the 13th century permitted agio – a foreign exchange premium – to be charged as the main financial loophole around the Church’s prohibitions against usury. Only in the 19th century did long-term industrial credit develop, and it was largely equity financing.
As for individual consumers, for many centuries they have sought to avoid “mortgaging the homestead.” It took a neoliberal financial bubble organized by Alan Greenspan to convince them – indeed, panic them – into buying houses. Not to buy was to lose the chance to obtain housing whose price was rising further and further beyond their ability to earn. But as matters have worked out, the price to be paid was to enter a lifetime of debt peonage. The same may now be said for entire industrial sectors and entire nations.
1. Melee at Ukrainian Parliament stalls vote needed for I.M.F. aid,” International Herald Tribune, April 3, 2009.
2. Robert Anderson, “Deficit causes IMF to delay loans to Riga,” Financial Times, April 3, 2009.
3. Floyd Norris, “Winning bet turns sour for big banks,” International Herald Tribune, April 3, 2009.
Michael Hudson is a frequent contributor to Global Research. Global Research Articles by Michael Hudson
$1 Trillion more to sustain the economic crisis. G-20 message to indebted countries. "Drop Dead!"
by Prof. Michael Hudson
There was not much substantive news from the G-20 meetings that ended on April 2 in London, but the least irrelevant news was that the attendees agreed to quadruple IMF funding to $1 trillion. Anything that bolsters IMF authority cannot be good news for countries forced to submit to its austerity plans designed to squeeze out more money to pay the world’s most predatory creditors. The world’s leading governments have responded to today’s financial crisis with “planned shrinkage” for debtors (10% cut in wage payments in hapless Latvia, Hungary put on rations, and permanent debt peonage for Iceland for starters) while America – whose foreign debt is even more unpayable – pursues Keynesian deficit spending. Debtor countries must borrow this $1 trillion from the IMF not to revive their own faltering economies, not to pursue counter-cyclical policies to restore market demand (that is only for creditor nations), but to pass on the poisonous IMF “aid” to the bad banks that have made the irresponsible loans. In Ukraine, a physical fight broke out in Parliament as the Party of Regions sought to block an agreement with the IMF calling for government budget cutbacks in the typically mistaken belief that imposing a deeper recession will reduce wage levels even further by enough to pay debts already at unsustainable levels (thanks largely to the kleptocracy’s tax “avoidance” and capital flight, to be sure). All this seems to be a dress rehearsal for what is to come over the next year or so.1
The main beneficiaries of IMF lending to Latvia, for example, have been the Swedish banks that have spent the last decade funding that country’s real estate bubble while doing nothing to help develop an industrial potential to enable Latvia to pay for its imports by exporting something besides its emigrant male labor and act as a vehicle for Russian capital flight.
This is not entirely the IMF’s fault, to be sure. It is the European Community deserves a great deal of blame. Instead of viewing the post-Soviet economies as wards to be brought up to speed with Western Europe, the last thing the EU wanted was to develop potential rivals. It wanted customers – not only for its exports, but most of all for its loans. Austrian banks carved out financial spheres of influence in Hungary (and lost their shirt on real estate loans, much as the Habsburgs had done over a century ago), while the Baltic States passed into the Scandinavian sphere. Iceland was neoliberalized, largely in ripoffs organized by Deutsche Bank.
The G-20’s announcement continues the U.S. Treasury and Federal Reserve bank bailout over the past half- year. In a nutshell, the solution to a debt crisis is to be yet more debt. If debtors can’t pay out of what they are able to earn, lend them enough to keep current on their carrying charges. Collateralize this with their property, their public domain, their political autonomy – their democracy itself. The aim is to keep the debt overhead in place. This means in practice, keeping the volume of debt growing exponentially as they accrue interest and arrears. That is the essence of the “magic of compound interest.” And Iceland’s interest rate is now 18%, causing the highest unemployment rate since the Great Depression.
This is “equilibrium” neoliberal style. In addition to paying exorbitant interest, homeowners must pay another 18% indexation of their debts to the inflation rate (the consumer price index) so that creditors will not lose the purchasing power over consumer goods. (The wealthy oligarchy here consists of billionaires who have chosen to join their Russian counterparts by living in London). Labor’s wages are not indexed, so defaults are spreading and the country is being torn apart with bankruptcy. And behind this, the democracy is being torn apart by a financial oligarchy, whose interests have become increasingly cosmopolitan, looking at the economy as prey to be looted. And in today’s world, the easiest way to obtain wealth by old-fashioned “primitive accumulation” is by financial manipulation. This is the essence of the Washington Consensus that the G-20 support, using the IMF in its usual role as enforcer.
The alternative is for debtor countries to suffer the same kind of economic sanctions as Iran, Cuba and similar countries. Perhaps soon enough there will be sufficient economies in this state to establish a common trading area among themselves, along with Venezuela, Colombia and so forth. In fact, Russia made a formal offer of $4 billion aid to Iceland, but retracted it presumably when Britain gave it a plum as a tradeoff. To other countries, aid to Iceland and “doing the right thing” is simply a bargaining chip in the international diplomatic game.
So the IMF’s $1 trillion aims at providing more bailouts for international bankers as the post-Soviet and Third World countries suffer currency pressure. Finding it effectively impossible for them to pay their foreign debts, especially real estate denominated in foreign currency. This violates the First Law of national fiscal prudence: Only permit debts to be taken on that rae in the same currency as the income that is expected to be earned to pay them off.
A year ago the IMF had no customers. Nobody wanted to submit to its destructive “conditionalities,” anti-labor policies designed to shrink the domestic market (in the false promise that this will “free” more output for export rather than being consumed at home. In reality it simply discourages domestic investment, and hence employment. The result is that economies submitting to the IMF’s “Washington Consensus” become more and more dependent upon their foreign creditors and suppliers.
If you are going to recommend more of this consensus, then the only way to sell it is to do what British Prime Minister Gordon Brown did at the meetings: announce that “The Washington Consensus is dead.” (He might have saved matters by saying “deadly,” but used the adjective instead of the adverb.)
The United States and Britain would never follow such conditionalities. The Washington Consensus is only for export. (“Do as we say, not as we do.”) Mr. Obama’s stimulus program is Keynesian, not an austerity plan – yet the United States owes $4 trillion to foreign central banks, primarily to the G-20 heads of state assembled with him in London.
The real estate bubble is how the Baltics covered the foreign-exchange costs of their trade deficit, in the face of neoliberal policies whose concept of financial “equilibrium” was to watch “market forces” shorten lifespans, demolish what industrial potential they had, increase emigration and disease, and run up an enormous foreign debt with no visible way of earning the money to pay it off. This real estate bubble credit was not productive. It was extractive, and hence parasitic in character. The World Bank applauded the Baltics as a success story, ranking them near the top of nations in terms of “ease of doing business.”
This poses a problem of just how these debtor countries are going to politicize their non-payment of foreign debt. The neoliberal solution is for them to do what Latin American and other third World countries have been doing since the 1980s: sell off their public domain and public enterprises at distress prices.
Is there no alternative to submitting to what really is debt peonage and neofeudalism?
First, some practical facts. Debts that can’t be paid, won’t be. Adam Smith observed in The Wealth of Nations that no government in history had ever repaid their debts. Today, this may be said of the public sector as well. Creditors know this (and I speak as a former balance-of-payments analyst of Third World debt for nearly fifty years, from Chase Manhattan in the 1960s through the United Nations Institute for Training and Research [UNITAR] in the 1970s to Scudder Stevens & Clark in 1990, where I started the first Third World sovereign debt fund.) But from the creditor’s vantage point, the trick is to deter debtor countries from acting on this principle.
The preferred tactic is to pound on the old morality, “A debt is a debt, and must be paid.” This is what Herbert Hoover said of the Inter-Ally debts owed by Britain, France and other allies of the United States in World War I. These debts led to the Great Depression. “We loaned them the money!” he said curtly.
So let’s look at the moral argument. Coming as I do from New York, I find an excellent model in that state’s Law of Fraudulent Conveyance. Enacted when the state was still a colony, it rules that if a creditor makes a loan without having a clear and reasonable understanding of how the debtor can repay the money out of the normal course of doing business, then the loan is deemed to be predatory and therefore null and void.
[History of this law: British speculators making loans to upstate farmers, and then foreclosing, to get the land on the cheap.] At the national level, no country should be subjected to debt peonage. That is the opposite of democratic self-determination – and of Enlightenment moral philosophy that economic policies should encourage economic growth, not shrinkage; and greater economic equality, not polarization between wealthy creditors and impoverished debtors.
Another moral consideration is that like the post-Soviet economies, Iceland was sold a neoliberal bill of goods: a self-destructive Junk Economics. Just how moral – and perhaps even more important, how legal – is the responsibility for the Washington Consensus, IMF, World Bank and Bank of England, whose economies and banks benefited from this wrong-headed advice?
At state ultimately from the moral and political view is the concept of just what a “free market” is. It’s supposed to be one of choice. Indebted countries lose discretionary choice over their economic future, because their economic surplus is pledged abroad as financial tribute – and all without the overhead costs of a military occupation. They relinquish their policy making from democratically elected political representatives to bureaucratic financial managers, often foreign – the new Central Planners in today’s neoliberal world – who seek to extract as much as they can as fast as they can. That’s what you do when you know the game is over, and hope the other side doesn’t realize it.
These moral principles underlie the legal systems of most nations, even international law itself. In fact, while the G-20 meetings were taking place, Korea was refusing to let itself be victimized by the junk derivatives contracts that foreign banks sold. In the first place, Korea claims, bankers have a fiduciary responsibility to their customers to recommend loans that help them, not strip them of money. There is a tacit understanding (one that the financial sector spends millions of dollars in public relations efforts to undermine and confuse) that banking is a public utility. It is supposed to be a handmaiden to growth – industrial and agricultural growth and self-sufficiency – not a predatory, extractive and hence anti-social dynamic. So Korean victims of junk derivatives are suing the banks. And as New York Times commentator Floyd Norris described the action, it doesn’t look good for the international banks. The home court always has an advantage, and every nation is sovereign, able to pass whatever laws it wants. (And as America’s case abundantly illustrates, the judges need not be honest.)
The post-Soviet economies as well as Latin America must be watching attentively the path that Korea is clearing through international courts. The nightmare of international bankers is that these countries may bring the equivalent of a class action suit against the neoliberal bankers that have brought international diplomatic coercion on these countries to commit financial and economic suicide. “The Seoul Central District Court justified its decision on the kind of logic that would apply in the United States to a lawsuit involving an unsophisticated individual investor and a fast-taking broker. The court pointed to questions of whether the contract was a suitable investment for the company, and to whether the risks were fully disclosed. The judgment also referred to the legal concept of “changed circumstances,” concluding that the parties had expected the exchange rate to remain stable, that the change in circumstances was unforeseeable and that the losses would be too great for the company to bear.”3
As a second cause of action, Korea is claiming that the banks provided creditor for other financial institutions to bet against the very contracts the banks were selling Korea to “protect” its interests. So the banks knew that what they were selling was a time bomb. And they seem to be guilty of conflict of interest. Banks claim that they merely were selling goods with no warranty to “informed individuals.” But the Korean parties in question were no more informed than were Iceland’s debtors. If a bank seeks to mislead and does not provide full disclosure, its victim cannot be said to be “informed.” The proper English word is misinformed (viz. disinformation).
Speaking of information, an important issue concerns the extent to which the big international banks may have conspired with domestic bankers and corporate managers to loot their companies. This is what corporate raiders have done for their junk-bond holders since the high tide of Drexel Burnham and Michael Milken in the 1980s. This would make the banks partners in crime. There needs to be an investigation of the lending pattern that these banks engaged in – including their aid in organizing offshore money laundering and tax evasion to their customers.
Bearing the above in mind, I suppose I can tell Icelandic politicians that I have good news regarding the fate of their country’s foreign and domestic debt: No nation ever has paid its debts. The real question therefore is not whether or not they will be paid, but how not to pay these debts. How will the game play out – in the political sphere, in popular ideology, and in the courts at home and abroad?
The question is whether Iceland will let bankruptcy tear apart its economy slowly, transferring property from debtors to creditors, from Icelandic citizens to foreigners, and from the public domain and national taxing power to the international financial class. Or, will Iceland see where the inherent mathematics of debt are leading, and draw the line? At what point will it say “We won’t pay. These debts are immoral, uneconomic and anti-democratic.” Do they want to continue the fight by Enlightenment and Progressive Era social democracy, or the alternative – a lapse back into neofeudal debt peonage?
One way or another, this choice must be made. It is all a question of timing. And that is what the financial sector plays for – time enough to transfer as much property as it can out of its hands into those of the banks and other investors.
The proper historical perspective
History provides a moral perspective on the need and indeed the inevitability of nations canceling their debts in one way or another – through bankruptcy in which creditors foreclose on the property of most people, companies and the government itself, or whether democracy asserts its sovereign right to keep finance in its place, and say, “You’ve made a false start. So we’ve got to start all over again. We hope you work with us to make the credit and debt system work better this time, so that we can achieve in practice what the textbooks and your public-relations think tanks promise – namely, that finance can be steered to contribute to growth rather than merely undercut it by loading economies down with the deadweight of a debt overhead.”
Ultimately, moral arguments in today’s world turn on the political question of, “What is the effect of debt, in various modes of organization?” What contributes most to economic growth? This practical question is what will determine what people want and ultimately what they think is most fair. Productive credit is fair. If a loan helps a borrower get richer, by using the proceeds to earn the money to pay back the creditor with interest and still come out ahead, then credit will be supported. But unproductive, purely extractive credit is deemed everywhere to be unfair. That is what Aristotle noticed over two thousand years ago.
We are now emerging from a financially unique period of history. Never before have people believed that the way to get rich was by running into debt. There was no optimistic term such as debt leveraging.
Government debts were war debts. Until quite recently (1980 really was the turning point), they only went into debt in war – largely, as Adam Smith explained, to conceal the actual costs from the population, by paying creditors out of taxes levied after the war had ended. Other government operations were financed on a pay-as-you-go basis. Only recently – one could call it a class war, I suppose – did governments run into debt as a result of cutting taxes on wealth and property. For most of history the only people living above subsistence levels were well-to-do landowners. So there simply was no opportunity to shift the tax burden onto labor – until around the 18th century governments began to tax essentials that consumers bought. This increased the prices of the commodities being taxed, and thus made the economy less competitive. So debtor governments became high-tax governments that tended fairly quickly dragged down their economy. (Spain in the 16th century is an excellent example of how the grandees shifted taxes onto handicrafts and agriculture, driving out economic initiative to its own former colonies in the Low Countries. The United States today could be cited also.)
Most private-sector debt was short-term trade credit, mainly to finance the exportation or domestic sale of commodities already produced. This was the essence of commercial banking since the 13th century permitted agio – a foreign exchange premium – to be charged as the main financial loophole around the Church’s prohibitions against usury. Only in the 19th century did long-term industrial credit develop, and it was largely equity financing.
As for individual consumers, for many centuries they have sought to avoid “mortgaging the homestead.” It took a neoliberal financial bubble organized by Alan Greenspan to convince them – indeed, panic them – into buying houses. Not to buy was to lose the chance to obtain housing whose price was rising further and further beyond their ability to earn. But as matters have worked out, the price to be paid was to enter a lifetime of debt peonage. The same may now be said for entire industrial sectors and entire nations.
1. Melee at Ukrainian Parliament stalls vote needed for I.M.F. aid,” International Herald Tribune, April 3, 2009.
2. Robert Anderson, “Deficit causes IMF to delay loans to Riga,” Financial Times, April 3, 2009.
3. Floyd Norris, “Winning bet turns sour for big banks,” International Herald Tribune, April 3, 2009.
Michael Hudson is a frequent contributor to Global Research. Global Research Articles by Michael Hudson