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Whither Greece

By Michael Hudson June 26 2011 Information Clearing House The fight for Europes future is being waged in Athens and other Greek cities to resist financial demands that are the 21st centurys version of an outright military attack. The threat of bank overlordship is not the kind of economy -killing policy that affords opportunities for heroism in armed battle, to be sure. Destructive financial policies are more like an exercise in the banality of evil in this case, the pro-creditor assumptions of the European Central Bank (ECB), EU and IMF (egged on by the U.S. Treasury).

As Vladimir Putin pointed out some years ago, the neoliberal reforms put in Boris Yeltsins hands by the Harvard Boys in the 1990s caused Russia to suffer lower birth rates, shortening life spans and emigration the greatest loss in population growth since World War II. Capital flight is another consequence of financial austerity. The ECBs proposed solutio n to Greeces debt problem is thus self -defeating. It only buys time for the ECB to take on yet more Greek government debt, leaving all EU taxpayers to get the bill. It is to avoid this shift of bank losses onto taxpayers that Angela Merkel in Germany has insisted that private bondholders must absorb some of the loss resulting from their bad investments. The bankers are trying to get a windfall by using the debt hammer to achieve what warfare did in times past. They are demanding privatization of public assets (on credit, with tax deductibility for interest so as to leave more cash flow to pay the bankers). This transfer of land, public utilities and interest as financial booty and tribute to creditor economies is what makes financial austerity like war in its effect. Socrates said that ignorance must be the root of all evil, because no one deliberately sets out to be bad. But the economic medicine of driving debtors into poverty and forcing the selloff of their public domain has become socially accepted wisdom taught in todays business schools. One would think that after fifty years of austerity programs and privatization selloffs to pay bad debts, the world had learned enough about causes and consequences. The banking profession chooses deliberately to b e ignorant. Good accepted practice is bolstered by Nobel Economics Prizes to provide a cloak of plausible deniability when markets unexpectedly are hollowed out and new investment slows as a result of financially bleeding economies, medieval -style, while wealth is siphoned up to the top of the economic pyramid.

My friend David Kelley likes to cite Molly Ivins quip: Its hard to convince people that you are killing them for their own good. The EUs attempt to do this didnt succeed in Iceland. And lik e the Icelanders, the Greek protesters have had their fill of neoliberal learned ignorance that austerity, unemployment and shrinking markets are the path to prosperity, not deeper poverty. So we must ask what motivates central banks to promote tunnel-visioned managers who follow the orders and logic of a system that imposes needless suffering and waste all to pursue the banal obsession that banks must not lose money? One must conclude that the EUs new central planners (isnt that what Hayek said was the Road to Serfdom?) are acting as class warriors by demanding that all losses are to be suffered by economies imposing debt deflation and permitting creditors to grab assets as if this wont make the problem worse. This ECB hard line is backed by U.S. Treasury Secretary Geithner, evidently so that U.S. institutions not lose their bets on derivative plays they have written up. This is a repeat of Mr. Geithners intervention to prevent Irish debt alleviation. The result is that we enter absurdist territory when the ECB and Treasury insist on voluntary renegotiation on the ground that some banks may have taken an AIG-type gamble in offering default insurance or bets that would make it lose so much money that yet another bailout would be necessary[1]. It is as if financial gambling is economically necessary, not part of Las Vegas. Why should this matter a drachma to the Greeks? It is an intra -European bank regulatory problem. Yet to sidestep it, the ECB is telling Greece to sell off its water and sewer rights, ports, islands and other infrastructure. This veers on financial theater of the absurd. Of course some special interest always benefits from systemic absurdity, banal as it may be. Financial markets already have priced in the expectation that Greece will default in the end. It is only a question of when. Banks are using the time to take as much as they can and pass the losses onto the ECB, EU and IMF public institutions that have more leverage than private creditors. So bankers become the sponsors of absurdity and of the junk economics spouted so unthinkingly by the enforcers, cheerleaders for the banality of evil. It doesnt really matter if their names are Trichet, Geithner or Papandreou. They are just kindred lumps on the vampire squid of creditor claims. The Greek crowds demonstrating before Parliament in Syntagma Square are providing their counterpart to Arab spring. But what really can they

do, short of violence as long as the police and military side with the government that itself is siding with foreign creditors? The most effective tactic is to demand a national referendum on whether to accept the ECBs terms for austerity, tax increases, public spending cutbacks and selloffs. This is how Icelands President stopped his countrys Social Democratic leadership from committing the economy to ruinous (and legally unnecessary) payments to Gordon Browns Labour Party demands and those of the Dutch for the Icesave and even the Kaupthing bailouts. The only legal basis for demanding payment of the EU s bailout of French and German banks and U.S. Treasury Secretary Tim Geithners demand that debts be sacrosanct, not the lives of citizens is public acceptance and acquiescence in such policy. Otherwise the imposition of debt may be treated simply as an act of financial warfare. National economies have the right to defend themselves against such aggression. The crowds leaders can insist that in the absence of a referendum, they intend to elect a political slate committed to outright debt annulment. Across the board, including the Greek banks as well as foreign banks, the IMF and EU central planners. International law prohibits nations from treating their own nationals differently from foreigners, so all debts in specified categories would have to be an nulled to create a Clean Slate. (The German Monetary Reform of 1947 imposed by the Allied Powers was the most successful Clean Slate in modern times. Freeing the German economy from debt, it became the basis of that nations economic miracle.) This is not the first such proposal for Greece. Toward the end of the 3rd century BC, Spartas kings Agis and Cleomenes urged a debt cancellation, as did Nabis after them. Plutarch tells the story, and also explains the tragic flaw of this policy. Absentee owners who had borrowed to buy real estate backed the debt cancellation, gaining an enormous windfall. This would be much more the case today than in times past, now that the great bulk of debt is mortgage debt. Imagine what a debt cancellation would do for the Donald Trumps of the economy having acquired property on credit with minimum equity investment of their own, suddenly owing nothing to the banks! The aim of financial -fiscal reform should be to free the economy from financial overhead that is technologically unnecessary. To avoid a free lunch to absentee owners, a debt cancellation would have to go hand in hand with an economic rent tax. The public sector would receive the lands rental value as its fiscal base.

This happens to have been the basic aim of 19th -century free market economists: tax land and nature and natural monopolies rather than taxing labor and capital goods. The aim was to keep for the public what nature and public infrastructure spending create. A century ago it was believed that monopolies such as the privatizers now set their eyes upon should be operated by the public sector; or, if left in public hands, their prices would be regulated to keep them in line with actual costs of production. Where private owners already have taken possessio n of land, mines or monopolies, the rental revenue from such ownership privileges would be fully taxed. This would include the financial privilege that banks enjoy in credit creation. The way to lower costs is to lower bad taxes that add to the price of production, headed by taxes on labor and capital, sales taxes and value added taxes. By contrast, rent taxes collect the economys free lunch, and thus leave less available to be pledged to banks to capitalize into debt service on higher loans. Shifting the Greek tax burden off labor onto property would reduce the supply price of labor, and also reduce the price of housing that is being bid up by bank credit. A land tax shift was the primary reform proposal from the 18th and 19th century, from the Physiocrats and Adam Smith down through John Stuart Mill and Americas Progressive Era reformers. The aim was to free markets from the landed aristocracys hereditary rents stemming from the medieval Viking conquest. This would free economies from feudalism, bringing prices in line with socially necessary costs of production. Every government has the right to levy taxes, as long as they do it uniformly to domestic property owners as well as to foreign owners. Short of re-nationalizing the land and infrastructure, fully taxing its economic rent (access payments for sites whose value is created by nature or by public improvements) would take back for the Greek authorities what creditors are trying to grab. This classical threat of 19th century reformers is the respon se that the Greeks can make to the European Central Bank. They can remind the rest of the world that it was, after all, the ideal of free markets as expressed from Adam Smith through John Stuart Mill in England, and which underlay (I still prefer underlaid) U.S. public spending, regulatory agencies and tax policy during its period of take -off. How strange (and sad) that Greeces own ruling Socialist Party, whose leader heads the Second International, has rejected this centuries -old reform program. It is not Communism. It is not even inherently

revolutionary, or at least was not at the time it was formulated. It is socialism of the reformist type that was the culmination of two centuries of classical political economy culminated in. But it is the kind of free markets against which the ECB is fighting backed by Treasury Secretary Geithners shrill exhortations from the United States. Mr. Obama says nothing, leaving it all to Wall Street bureaucrats to set national economic policy. Is this evil? Or is it just passive and indifferent? Does it make much of a difference as far as the end result is concerned? To sum up, the aims of foreign financial aggression are the same as military conquest: land and the public domain. But nations have the right to tax their rental yield of these resources over and above a return to capital investment. Contrary to EU demands for internal devaluation (wage cuts) as a means of lowering the price of Greek labor to make it more competitive, reducing living standards is not the way to go. That reduces labor productivity while eroding the internal market, leading to a deteriorating spiral of economic shrinkage.
The need for a popular referendum Every government has the right and indeed the political obligation to protect its prosperity and livelihood so as to keep its population at home rather than drive them abroad or drive them into a position of financial dependency on rentiers. At the heart of economic democracy is the principle that no sovereign nation is committed to rel inquish its public domain or its right to tax whatever form of income it specifies. It does not have to sacrifice its economic prosperity and future livelihood, to foreigners or for that matter to a domestic financial class. This is why Iceland voted No in the debt referendum. Its economy is recovering.

Ireland voted Yes and now faces a new Great Emigration to rival that which followed the potato famine of the mid -19th century. If Greece does not draw a line here, it will be a victory for financial and fiscal aggression imposing debt peonage. Finance has become the 21st centurys preferred mode of warfare. Its aim is to appropriate the land and public infrastructure for its own? power elites. Achieving this end financially, by imposing debt peonage on s ubject populations, avoids the sacrifice of life by the aggressor power but only as long as subject debtor countries accept their burden voluntarily. If there is no referendum, the national economy cannot be held liable to pay the debts owed even to senior creditors: the IMF and ECB. Assets that are privatized at foreign bank insistence can be renationalized. And just as

nations under military attack can sue, so Greece can sue for the devastation caused by austerity the lost employment, lost output, lost population, capital flight. The Greek economy will not end up with the proceeds of any ECB bailout. The banks will get the money. They would like to turn around and lend it out afresh to the buyers of the land, monopolies and other properties that Greece is being told to privatize. The user fees they collect (no doubt raising charges in the process, to cover the interest and pay themselves the usual salary jumps on privatized property) will be paid out as interest. Is this not like military tribute? Margret Thatcher used to say There is no alternative (TINA). But of course there is. Greece can simply opt out of this giveaway of assets and economic privilege to creditors. What do Mr. Papandreous Socialist International colleagues have to say about current events in Greece? I suppose it is clear that the old Socialist International is dead, given the fact that Mr. Papandreou is its head, after all. What passes for socialism today is the diametric opposite of the reforms promoted under its name a century ago, in the era prior to World War I. Europes Social Democratic and Labour parties have led the way in privatization, financializing their economies under conditions that have blocked the growth in living standards. The result promises to be an international political realignment.
Economic austerity cannot secure creditor claims in the end On Thursday afternoon the DJIA, having been down 230 points, leapt up at the close to lose only 60 points, on rumors that Greece had agreed to the IMFs austerity plan. But what is Greece? Is it the cabinet alone? Certainly not yet the entire Parliament. Will there be a Parliamentary vote in opposition to the public interest, accepting austerity and privatization?

Only a referendum can commit the Greek government t o repay new debts imposed under austerity. Only a referendum can prevent property that is privatized from being re-nationalized. Such a transfer is not legitimate under commonly accepted ideas of political and economic democracy. And in any event, a rent-tax can recapture for the Greek economy what the financial aggressors are trying to seize. History is rife with instructive examples. Local oligarchies in the region invited Rome to attack Sparta, and it overthrew the kings and their successor Nabis (who may himself have been royal). The sequel is that Rome headed an oligarchic empire, using violence at home to murder

democratic reformers such as the Gracchi brothers after 133 BC, plunging the republic into a century of civil war. The creditor interests ende d up fully in control, and their own banal self -seeking plunged the Western half of the Roman Empire into an economic and social Dark Age. Lets hope the outcome is better this time around. There will indeed be fighting, but more in the financial and fisca l sphere than the overtly military one. The fight ultimately can be won only by understanding the corrosive dynamics of the magic of compound interest and the social need to subordinate creditor interests to those of the overall real economy. But to achieve this, economic theory itself needs to be brought out of its current post-classical neoliberal banality. Michael Hudson is President of The Institute for the Study of Long -Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971). Footnote: [1] Louise Story, Derivatives Cloud the Possible Fallout From a Greek Default, The New York Times, June 23, 2011, quotes Christopher Whalen, editor of The Institutional Risk Analyst, as saying: This is why the Europeans came up with this ridiculous deal, because they dont know whats out there. They are afraid of a default. The industry is still refusing to provide the disclosure needed to understand this. Theyre holding us hostage. The Street doesnt want you to see what theyve written.