financial interests dictate sovereign policy

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Financial Interests Dictate Sovereign PolicyDecember 18, 2010

By Michael Hudson

Interview with Michael Hudson,Eleftherotypia, Sunday December 12, 2010.

1. A recent article of yours, Schemes of the Rich and Greedy, cites the bailouts in Europe among

such schemes. What are the main faults with bailouts, and for whom are they designed?

The financial sector is trying to get politicians to siphon off money from labor and industry to pay

bankers. This will impede capital formation and living standards.

The banks misrepresented the real value of balance sheet and hence what they really were owed

under actual market conditions. Now that they have taken the money and run, the real economy is

being told to pay the off their bad loans. The arrogance of this demand prompted Angela Merkel to

ask why governments meaning taxpayers should pay for bad bank loans and corrupt financial

dealing.

Nice try if bankers can get away with it! But Im glad to see Germany opposing the EU proposal to

double its bailout fund.

2. You have written that Latvia has become a testing ground for how far living standards can be

depressed, how steeply an economy can be taxed while removing public social support in the face

of a wealthy kleptocratic class at the top. Do you think the same is intended for Greece, Ireland

and any other PIG that may see its fiscal affairs fall into the control of the EU and IMF?

Foreign bankers are urging Greece Why cant you be like Latvia and sacrifice your economy for

our benefit? The reality is that paying creditors under these conditions is like paying tribute to a

power that has conquered you militarily.Fortunately, labor in most of Europe is much less passive than in Latvia. The post-Soviet economies

have little labor union tradition, and politics are largely ethnic. As a result of the oppressive Stalinist

era bringing in Russians to replace local middle class professionals in the 1950s, the ruling

neoliberals have been able to turn the frustration of voters mainly against Russian-speakers rather

than at what is the most anti-labor, pro-property tax regime in history.

The rest of Europe now has the bad tax and financial policy of Latvia and the Baltics before its eyes

as an object lesson in what to avoid. When the neoliberal bubble burst, Latvias government

borrowed from the EU and IMF on terms that impose such deep austerity that the economy has

plunged by over 20% and unemployment is rising, while the flat-tax rake-off on wages and salaries

has now been jacked up to 68%. Over 12% of the population is now working abroad. They sendhome what they can to help their families survive.

So rather than being a model to emulate, Latvia shows what is wrong with the neoliberal policy that

bankers are telling other countries to adopt. Its not a bailout of the economy, but of an economic

strategy that threatens to make economies poorer.

3. How do you explain the IMFs role in Europes debt crisis? Is it that the EU lacks the technical

expertise to deal with sovereign debt issues, as some have suggested, or because it is a junior

partner of multinational finance capital?

What passes for expertise is political, not objective and neutral. At the hands of neoliberals,

financial expertise means calculating how much taxable surplus, disposable personal income,

rental income and profits the financial sector can grab for itself.

Real experts would follow the advice that John Maynard Keynes gave in the 1920s regarding
http://michael-hudson.com/author/Michael%20Hudsom/http://www.enet.gr/?i=arthra-sthles.el.interviews&id=232571http://michael-hudson.com/2010/11/schemes-o%20f-the-rich-and-greedy/http://michael-hudson.com/author/Michael%20Hudsom/http://www.enet.gr/?i=arthra-sthles.el.interviews&id=232571http://michael-hudson.com/2010/11/schemes-o%20f-the-rich-and-greedy/


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German reparations and Inter-Ally debts. It is better to wipe out bad debts than to try to pay

creditors at the cost of reducing capital formation, living standards and public spending on

education, health care and other basic infrastructure. A wise government would subordinate the

financial sector to promote economic growth, capital formation and rising living standards.

The EU and IMF Washington Consensus policy was applied to Third World dictatorships in the

1960s, 70s and 80s under gunpoint, but Europe is freer to choose. To follow expert advice as

Iceland and Ireland have done quickly turns into an exercise in asset stripping, replacing socialdemocratic government with an extractive financial oligarchy.

4. Is it in Germanys interest to drive out of the eurozone the fiscally weak countries?

What really is Germany? Its banks? Its industrial exporters? Or is it German labor? Politicians

serving the bank lobby take the following position:

Germany has produced great composers, physicists and chemists, and also scholars of classical

antiquity. But our bankers are gullible. They were stupid enough to trust Icelandic bank looters,

Irish speculators and American junk-mortgage salesmen. So theyve lost a lot of money. Theyve

asked us to pass on their request that you Greeks, Irish and other people tax yourselves to death and

wreck your economies so that they wont have to pay for their naivety by bearing all the cost oftheir expensive education in how todays world of financial sharpies really works.

You cant blame the bankers for trying. But other countries should call their bluff. Germany would

be better served helping countries recover from neoliberal fairy tales and to adopt more progressive

tax and financial policies. Otherwise, bankers will end up doing at home what they are trying to do

to the rest of Europe.

5. Do you see a way out of Europes sovereign crisis?

The economic problem is not caused by sovereign debt but by bad bank loans, deceptive financial

practice and neoliberal bank deregulation. Icelands Viking raiders, Irelands Anglo-Irish bank and

other foreign banks are trying to avoid taking losses on financial claims that are largely fictitious,

inasmuch as they exceed the ability of indebted economies to pay. The crisis can be solved by

making the banks write down their debt claims to realistic junk valuations. There is no need to

wreck economies by subjecting them to financial asset-stripping.

In such cases theres a basic principle at work: Debts that cant be paid, wont be. The question is,

just how wont they be paid? As matters stand, countries are being told to subject themselves to

massive foreclosure not only a forfeiture of homes, but of national policy.

In this respect the sovereign crisis is a crisis of sovereignty itself: Who shall be in charge of the

economy, its tax philosophy and public spending: elected officials acting in the public interest, or an

intrusive financial oligarchy? The EU was wrong to tell governments to pay for following its advice

and pressure to trust financial crooks and deregulate bank oversight. The European Central

Bank should reimburse victimized governments for the bailouts that have been paid. This

reimbursement can be done by levying a progressive tax policy and creating a central bank to help

finance governments.

The proper aim of a national economy is to promote capital formation and rising living standards

for the population as a whole. not a narrowing financial class at the top of the pyramid. So I see two

major policies to lead the way out of this mess:

First, shift taxes back onto land and resource rent, and onto financial and capital gains. This will

prevent another real estate bubble from being inflated by debt leveraging. By holding down housing

prices, it will save labor from having to pay an equivalent amount in income tax. Low real estate

taxes (under 1% until just recently) have not saved homeowners money in Latvia. Low propertytaxes merely have left more rental income to be pledged to banks, to capitalize into large mortgage

loans.


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Second, de-privatize basic utilities and natural monopolies to save Europe from rentiers turning it

into a tollbooth economy. Europe needs a central bank that can do what central banks are supposed

to do: create money to finance government deficits. But the European Central Bank and article 123

of the European Constitution as amended by the Lisbon Treaty prevents the central bank from

lending to governments. This forces governments to levy taxes to pay interest to banks for

creating electronic credit that a real central bank could just as well create on its own computer

keyboards.Government banking is not necessarily inflationary. It finances what is necessary for economies to

grow: investment in infrastructure and capital formation to raise productivity and minimize the cost

of doing business.

What turns out to be inflationary is commercial bank lending. It inflates asset prices

unproductively. Banks lend mainly against real estate and other assets already in place, and stocks

and bonds already issued. This is unproductive credit, not real wealth creation. The only way to

keep this unproductive debt overhead solvent is to inflate asset prices more by untaxing assets to

leave more revenue to pay bankers on exponentially growing debts.

It doesnt have to be this way. The recent 30 years of financial polarization is reversible. The

alternative is to succumb to neoliberal austerity.

Tags: Debt,Latvia, neoliberalism,privatization

2 Responses to Financial Interests Dictate Sovereign Policy

1. Links 12/19/10 naked capitalism on December 19, 2010 at 2:59 am

[...] Financial Interests Dictate Sovereign Policy Michael Hudson [...]

2. Interview met Michael Hudson: Financial Interests Dictate Sovereign

Policy | MRWONKISH.NL on December 19, 2010 at 4:43 am

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