Tensions in Greece are reaching melting point. And the debate is a clear and straightforward one. What we are witnessing is a propaganda battle between the forces calling for Austerity and those (perhaps indirectly) proposing Default.
Those calling for Austerity claim lazy workers, socialism and corrupt politicians created a dire fiscal problem that Greece must now pay up for. The sins of the past must be repented through public sector belt tightening (a squeezing of living standards) and large-scale land and infrastructure privatisations (i.e. asset sales).
Those calling for default state that the very Sovereignty of Greece is being challenged by external enforcement of debt peonage. Debt that was foisted on them without due care or consent.
The justification for Austerity is that Greece must own up to its responsibilities and pay back these debts. It is the honourable thing to do, we are constantly told. This mantra is voiced by many economists, politicians, the Prime Minister of Greece himself and would no doubt be the de facto position of the majority of citizens in Europe. Default is treated with emotive disdain, and the spectre of financial Armageddon is wielded around with fear-mongering fanaticism to scare any wavering spirits into submission.
The suggestion being is that default would reward the feckless and punish the prudent. However, this completely contorts the evidence and all reasoned consideration of the facts. Here are at least six very sound reasons why the implementation of Austerity would be morally, socially and legally reprehensible:
1) Shared responsibility
If a bank made a stupid loan to me or my business, who is the greater fool?
Surely, in cases of poor lending circumstances, an irresponsible lender should be just as much to blame as an irresponsible borrower. To enforce total accountability on the borrower is tantamount to supporting loan shark type tactics. In a civilised world, the lender of money has a duty of care to ensure the standard of lending, and this should manifest through the acknowledgement of accountability in times of poor judgement.
2) The symmetry of risk & reward
The voices calling for Austerity also seem to be the most vocal ones with a conservative / libertarian bent. Yet they don’t even realise the sheer hypocrisy of demanding such asymmetric punishment when the very mantra of the true Laissez-Faire Capitalist is the cure of poor investment stakes through default! Hence the very principle of Equity Investment which correctly balances risk & reward.
Debt peonage is not the symmetrical solution as defined under Libertarian principles. One has to be either deluded or an ignoramus to accept the blatant contradiction of extracting all reward (interest AND principal repayment) for no risk. The true meaning of liberty is to be free from debt bondage, but the modern Libertarian has become trapped by a cunning twist of his own logic to declare us all “free to become contracted into debt without recourse”.
3) Incompetent lending
In addition to the concept of shared / symmetrical responsibility, it should be clear that in all respects a lender should be more accountable for bad investment decisions, as after all they are deemed to be specialists at lending. I am not a professional borrower of money, but my bank manager is a professional lender. They are deemed to be competent, qualified and professional stewards of investment capital.
So let’s review the performance of these lending professionals.
Taking the historical track record of Greek sovereign debt; it has spent 50.6% of years since 1824 in default or re-scheduling. It suffered a severe banking crisis between 1991 and 1995. This is not an auspicious start point, is it? The banking “professionals” may well proclaim that they relied on elaborate and professional risk assessment criteria using the very latest in sophisticated statistics. But a cursory examination of the situation using the techniques of one Rev’d Thomas Bayes would reveal that the Prior Probability of Greek default was in the order of 50%! And in fact, the course of events is no doubt going to support the accuracy of risk assessment by the humble Bayesian probability over the wildly naïve Gaussian statistics of high finance.
Therefore, it’s not just irresponsible lending that has happened, but incompetent lending!
Bear in mind that bankers justify very high salaries and bonuses because they claim to be very good at their job and that they perform socially beneficial activities. Clearly they are not using reliable tools for assessing levels of risk, and nor have they conducted appropriate due diligence on the country’s ability to pay. Not only this but their self-proclamations of societal benefactors is crumbling before our eyes.
4) Odious debt
So we have seen how the lender has to accept an element of responsibility, but now to turn to the borrower. What many voices seem to declare is that each of the people within Greece have been personally complicit in this excessive borrowing. But this is to accept the idea that all nationals are fully accountable for the conduct of their “representative” leaders. It is the notion of “borrowing by proxy”.
In a way our Gvt in the UK has also done this covertly. It has taken private sector debt problems and soaked up the responsibility onto the nation’s balance sheet. How many people in this country are aware that our banks have liabilities 5 times our national GDP? Was I consulted on this? Did I vote for this? Did I sign a declaration of acceptance of these terms? No, I did not.
There is a term for this situation and one which may become more prominent in months to come. It is that of “odious debt”. Debt which was incurred for purposes that do not serve the best interests of the nation, and therefore should not be enforceable. This was described in a piece by Golem some three months ago in an article here:
And the concept is now circulating wider:
Iceland serves as an example of this principle in action. The people of Iceland have refused to underwrite the extraordinary liabilities of private banking institutions. They understand all too well the morally unjust nature of letting a few wealthy people prosper during the good times, and the scarper when it goes bad (in fact they are charging their Prime Minister for financial negligence for tolerating such leveraged liabilities).
5) Debt for foreclosure
Returning to the national stereotypes mentioned above, then why in the world would anyone invest money in such a country and then expect to get it back? One can’t turn around and forcefully demand the repayment of debt from a nation, whilst at the same time claim that those peoples were never really good for it in the first place. This is an overt admission of not doing one’s homework, but then still demanding full and fair entitlement. It is nothing less than a deliberate intention to ensnare.
Economist Michael Hudson tells an intriguing story of this very strategy in action more than 200 years ago in the US:
“[In] colonial times, when British speculators eyed rich New York farmland. Their ploy was to extend loans to farmers, and then call in the loans when the farmer’s ability to pay was low, before the crop was harvested. This was indeed a liquidity problem – which financial opportunists turned into an asset grab. Some lenders, to be sure, created a genuine insolvency problem by making loans beyond the ability of the farmers to pay, and then would foreclose on their land.”
“They sued under the fraudulent conveyance law, which says that if a creditor makes a loan without knowing how the debtor can pay in the normal course of business, the loan is assumed to have been made with the intent of foreclosing on property, and is deemed fraudulent.”
In other words, it is a pre-planned strategy on the part of the lender to push the borrower into such a corner that they have to sell up at firesale prices. But, clearly this strategy needs some form of social compliance and legitimacy, otherwise it would / should be deemed legally fraudulent!
To socially and legally tolerate it is to explicitly legitimise loan sharking for the express purposes of asset stripping:
“high finance is seeking to turn public infrastructure into rent-extracting tollbooths to extract economic rent (the “free lunch economy”), while replacing labour unions with non-union labour so as to work it more intensively. This new road to neoserfdom is an asset grab.”
6) And finally, but what if the devil turns on you?
There is a scene in the play “A man for all seasons” in which the young Roper is debating with Thomas More:
More: What would you do? Cut a great road through the law to get after the Devil?
Roper: I’d cut down every law in England to do that!
More: Oh? And when the last law was down, and the Devil turned ’round on you, where would you hide, Roper, the laws all being flat?
There is a stark warning for us all in the events in Greece. If you are happy to play along with the Neoliberal asset stripping and cheer the Austerity along in other countries – then don’t complain when they turn their sights on us. As highlighted above, the UK’s implicit sovereign liabilities are 5 times our GDP (and therefore more than twice our whole country’s national wealth). In a way this means that our nation has mortgaged its own assets twice over!
Hudson’s article later extends the actions happening in Greece to the wider western world. He situates this as a general rolling back of progressive principles which were enacted primarily Post WWII:
”The asset stripping that Europe’s bankers are demanding of Greece looks like a dress rehearsal to prevent the “I won’t pay” movement from spreading to “Indignant Citizens” movements against financial austerity in Spain, Portugal and Italy. Bankers are trying to block governments from writing down debts, stretching out loans and reducing interest rates. “
Also from Zerohedge again:
“The war between liberals and conservatives is a false divide-and-conquer dog-and-pony show created by the powers that be to keep the American people divided and distracted. So before assuming that privatization is a good thing, read on.”
Certainly anyone for whom their personal interest will be clearly served through the enactment of Austerity will never even raise these points or acknowledge their legitimate discussion. But if we are to hope for an enlightened resolution to the mounting debt woes of the world, we must at least confront each one of these points with the full force of conviction. To have no debate on these points is to unconditionally surrender ourselves to economic genocide.
Correct!
The question you neglect except to refer to negligence by Iceland's prime minister, is why are there so few supporters of this sensible view?
Do they not realize we are now in Depression?
Are they bought off? There are no anti-corruption agencies in any of these countries!
Bankers make money available for supporters! Debt peonage exists at highg levels before being foist upon the public!
And right on cue Moodys piles in with the threat to downgrade Italy. Plenty of rich pickings there. And plenty more riots to come if they try to impose austerity there.
Italy apparently has an "inflexible labour market" So the IMF's solution is to follow the UK/US model of lower wages, outsourced jobs, fewer benefits and worse conditions.
Then having exported/outsourced the wealth creating ability of these people they get blamed for being unable to service debts they never asked for in the first place.
This is the economics of the madhouse.
Bill
You've just summed up in one powerful sentence what took me two pages of blurb!
"Then having exported/outsourced the wealth creating ability of these people they get blamed for being unable to service debts they never asked for in the first place."
– Hawkeye
"Those calling for Austerity claim […] Those calling for default state that […]"
Just a minor point to say that austerity is the necessary outcome of either solution.
"In other words, it is a pre-planned strategy on the part of the lender to push the borrower into such a corner that they have to sell up at firesale prices. But, clearly this strategy needs some form of social compliance and legitimacy, otherwise it would / should be deemed legally fraudulent!
To socially and legally tolerate it is to explicitly legitimise loan sharking for the express purposes of asset stripping:"
This is exactly what a Debt Based Fiat Monetary System aims to do. Someone in these pages made the parallel with a con; specifically a long con. But that is not so. In a long con, the perpetrator invests time and resources into perpetrating a scheme that may eventually pay off at the end. DBFM is much more profitable and fun. DBFM pays off immediately. At the outset of the cycle, DBFM rewards the monetary authority with interest from the get go. As the dynamic progresses and as the mathematical limits of the system are reached, the monetary authority along with the entities that are closest to it, get first picking of prime all assets.
What is happening now in the West is similar to what happened in Russia in the early 90s. A restricted band of crony businessmen and politicians will end up owning significant stretches of productive capital and assets.
It is intended to be so.
guido
Fair point about a degree of Austerity is inevitable either way. I guess the main difference is that IMF austerity is debt peonage asymmetrically rewarding the rentier class, whereas default levels the playing field. Iceland shows that this method is far more equitable and although painful in the short run is the only socially sustainable outcome.
DBFM is a part of the problem, but as I outline in a comment below, it's only a problem now because we don't let privately created fictional credit get destroyed if the lender was negligent:
http://golemxiv-credo.blogspot.com/2011/06/guest-blog-by-hawkeye-potemkin.html?showComment=1308402276417#c7606643804890256457
The main issue is that bad debts are not getting destroyed. DBFM did work reasonably well at disciplining borrowers and lenders whilst facilitating a useful elasticity to economic investment; but only through acceptance of default.
– Hawkeye
"DBFM is a part of the problem, but as I outline in a comment below, it's only a problem now because we don't let privately created fictional credit get destroyed if the lender was negligent:"
Absolutely.
DBFM is predicated just on not purging bad debt. DBFM is the preferred choice of the "independent" monetary authority just because it allows perpetual expansion of debt and the money base. This is how interest is earned.
There is no point is opting for DBFM if you intend to purge bad debt. If you did allow bad debt to be purged, then you would not need DBFM. You could very well make do with either a fixed amount of money or value based money but you certainly would not need DBFM.
The choice of DBFM is deliberate. The fact that DBFM is imposed upon society is a deliberate executive decision. The fact that interest rates are managed behind closed doors by decree is deliberate.
Hence the reason that despite myriad red flags, things like Enron happen. Hence the reason that GM no longer makes money on their principle product but rather they make profits on their finance operations. Hence the reason that not two years after the Enron debacle, despite the fact that Fannie Mae was unable to publish their books, nobody thought it desirable to take a closer looksie…
DBFM is predicated on a logic that conforms to the law of diminishing marginal utility. Thus as the dynamic progresses and inches towards its mathematical limits, government must by necessity first close an eye on practices that may be border line legal, but then must progressively tolerate till, towards the end, must collude in and, finally, perpetrate fraud directly.
What is happening today is scripted and intended. Worse still, it could be and was predicted. Basic arithmetic here; not rocket science.
In a dog eat dog world; when all the dogs have been eaten except the last two -what do they do?
DBFM like any other system would work if administered by angels. All systems are operated by good old fashioned corruptible men, hence they all fail through greed.
The best hope is open honest, and above all, accountable politicians to enforce it. It is clear the politicos are fully bought and paid for vassels of the powers that be.
I hope to God there are better brains than mine on the planet to come up with a solution.
Hi Rebecca,
As Bill says, no system is full proof. That said, DBFM is much more destructive than other monetary systems because it allows leverage orders of magnitude greater. Whilst any system can be debased (and electoral politics ensures it will be) it is much more laborious to debase value based money or a fixed amount of interest rate free money.
In a monetary system that is interest rate free at the point of creation, productive wealth will still change hands and be accumulated but it does not leak out of society.
DBFM is ultimately detrimental because the productive capacity of society is leaked out to a third party that stands outside of and is independent from society. This is the nature of DBFM and yet it is not questioned; at least it is not questioned by anyone of relevance.
"there are vast differences between taking it on the chin as it were for the sake of preserving our European values and way of life and taking it on the chin so we can all be led by the nose into a society where inequalities will widen and becoe more entrenched."
I am not clear on which option (default with intrinsic austerity or bailout with mandated austerity), in your opinion, will result in which outcome as you point out above.
"I think it was in Zeitgiest that it was pointed out that what matters most for social cohesion and happiness is not wealth as in the zeros in your bank balance but realtive wealth."
Relative to what? The fundamental problem of DBFM is that it precludes references to intrinsic value. Since DBFM requires ever greater degrees of inflation, it follows that financial value must run away from intrinsic value. There is no other way on God's green earth that the alphabet soup of derivatives created by financialization could have been created and peddled otherwise. Not on the back of what were otherwise assets of far more modest intrinsic value. But on a relative basis, everyone was happy to blow bubble upon bubble. For as long as everyone was happy to exchange garbage and make a nominal profit, everyone was happy. The point at which financial value becomes too great to be sustained by underlying nominal revenue… pop goes the bubble…
Bubbles have a dynamic too. Initially they are isolated and specialized. As DBFM progresses, bubbles become more pervasive and interconnected.
@ Rebecca,
OK, I see what you mean now when you say "relative wealth". You mean relative with respect to all other members of society.
Trouble is that DBFM is geared towards the concentration of profits. Thus, even though you may have relative wealth at the outset of the dynamic, as you reach the mathematical limits of the system, wealth concentrates at an accelerating pace. And, once again, the wealth that concentrates in the hands of the few is removed from society.
The Collapse of Nations All By The Hand Of Corrupt Bankers
World debt is unpayable, especially that of the US, UK and the euro zone. The only solution is collapse. There can be no saving the system. It is only a matter of time and what the catalyst is. It could be Greece.
The bottom line as usual, thanks folks.
Seems as though from reading different blogs & articles that there are a lot of people ready to start giving out yellow triangles to the Greeks, for being lazy etc etc. Here's an article from a Greek that gives some statistics that disprove most of the ugly generalisations being made. It's also a heartfelt passionate call for resistance.
http://sturdyblog.wordpress.com/2011/06/18/democracy-vs-mythology-the-battle-in-syntagma-square/#comment-861
thanks for that guido,
I suppose that one of the difficulties is that alot of people (like me) don't deal on a normal basis with the concept of 'exponential' anything so what might seem like simple maths to you, seems to complicated to even hold an opinion on to the average joe, and then when some of the proponents of getting rid of DBFM seem a bit way out, then the whole idea gets judged on them rather than on its own merit.
On a related not I have another question for you or anybody who can tell me – if the US incurs debt (owed to the Fed?) when it issues money – does that mean that a large amount of what would be quoted as the government debt figure for the US, would actually just be owed to themselves as it were? Unlike in Eurozone countries where all the debt would be to actual lenders.
I mean I know the Fed is a private company officially but in reality its probably not uite the same as the Euro debt situation is it? I'm just wondering for comparing national debt figures are we really comparing like with like?
@ guido,
I hope that didn't sound like I was calling you way out – specifically it seems that on the one hand you have Ron Paul(about as far to the right as you can go) and the other Zeitgeist (lets all live in a John Lennon inspired utopia) as the most well known proponents of the anti-DBFM theory, and between them they're enough to put pretty much everyone.
Well, I've just been watching videos from the recent Dublin conference organised by smarttaxes.org
They are about half way down the page entitled 'Videos of Lessons from The Crisis'
Most important are the presentations by Stepanie Kelton, Bill Black & Randall Wray (all of the University of Missouri Kansas City – same as Michael Hudson) are an absolute MUST SEE. A superb critique of the Euro common currency as set up. An explanation of 'Modern Monetary Theory' (MMT) & how it's ideas contrast with the current neo-liberal mess – everyone should understand this. And more. It's completely obvious that if MMT's principles were adopted, we could have a way out of the banksters' scam, the debt & austerity nightmare. This is what the current 'authorities' – be they mainstream economists, politicians or media – do not want people to know.
@Stevifinn
Thanks for your Greek link, I'm going to post this over there too, they need this info!
"it's not just the money lent to Greece that's at stake. It's the insurance that was taken out against those loans going bust. The dreaded credit default swap – or CDS – market, as it's known. And here the detail is much more murky because no-one really knows who's sitting on what CDS contracts or how big they are. But we do know Britain has played a central role in underwriting and parcelling up huge chunks of them." Siobhan Kennedy, Channel 4 News, http://www.channel4.com/news/greeces-debt-crisis-threatens-to-sink-the-euro .
So once again the lending banks can't lose (assuming they took the precaution of insuring themselves in this way). But whoever bought the CDS contracts is in real trouble. It's pass the parcel with a bomb inside.
This is a great piece. I'm quite late to it but just wanted to say thanks to hawkeye for this.
For a fascinating German economic historians view of defaults and Germany's own background in this here A view that Merkel might do well to take account of before strong arming Greece.
princesschipchops
Thanks for the feedback!
It's an absolute traversty that not even one of these 6 legitimate points is ever raised by so-called experts in the media or on TV.
Make sure that anyone and everyone you speak to understands that there are rational and legitimate counter arguments to the principle of Austerity.
All the best,
– Hawkeye (the forensic statistician)
Hawkeye — seconded PrincessCC on the thanks.
I've sent the link to family and friends to introduce the concept of odious debt for those who weren't aware already.
frog2
Thirded!
Excellent work Hawkeye. I fear many more assests will be in the hands of the financial elite before there's enough opposition to start reversing the trend. We can but keep shouting, I suppose.
I'd also like to thank whoever it was that recommended The Collapse of Chaos by Ian Stewart and Jack Cohen – a wonderful book.
Hi Jamie
Thanks for the thirding!
I must also confess to the book recommendation too! You did well to get through that. It's quite a chunky book, but wow what a voyage!! One of those rare "this book will completely change the way your brain works".
Time I read it again.
– Hawkeye
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