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The Hammer of Debt.

“…nobody would claim that their own thinking was ideological, just as nobody would habitually refer to themselves as Fatso. Ideology, like halitosis, is in this sense what the other person has.”

“Ideology” by Terry Eagleton. P.2

We all see the world through a lens of ideas and assumptions. The courageous man admits this to himself and checks with others who see things differently. The ideologue is the man who ignores and even denigrates anyone who does not see things as he does.

In almost every Western Democracy we are in the grip of dangerously arrogant and selfish ideologues.

Such people are not fast learners and are least inclined to try just when it is most urgent that they do. The ideologue whose world view centres on the ‘nail’, when faced with the screw, having seen them in action and been given a fair summary both of their uses and advantages, will turn to his assistant and say, “Bring me a much larger hammer.”  That is where we are today. It is the imperial, brute power stage.  It is the stage when what matters most about the hammer to those in power, is who has it.

Ideologies, world views, paradigms, whichever term pleases, do not go quietly in to the good night. Those whose power and position arise from and depend upon a particular arrangement of laws and assumptions will defend them no matter what the cost. Those in power can usually arrange matters so that the cost of defence falls on others while they know the cost of loss will fall on them.

Debt is the hammer of our age. Its original purpose was to accelerate growth. Which it does. But like many such accelerants, like steroids or speed, it has disastrous side effects which are never slow to manifest. In the case of debt the problems arise from a basic misunderstanding of what debt does. It is often suggested that debt increases growth. It does not. It hastens it. You can save up what it will cost you to build a new factory or you can borrow and build the factory sooner. The debt allows you to start growing sooner. But at the cost of siphoning away a little of the growth to pay the interest on the debt. So actually debt decreases your growth by the interest you pay on your debt. And that is the kernel of the disaster.

It will be argued that the cost of the interest on the debt is far outweighed by the profits that come from getting to market sooner. And this is of course true, as long as the demand is there when your factory opens. If it is, then you will grow sooner than your more cautious competitor and by growing sooner will grow for longer. So in good times, of growing demand, debt is the wonder tool that hammers all opposition. Everyone understands it, everyone wants it and those who sell it are as gods. Thus in good times of expanding demand, cheap energy and technological innovation, the amount of debt increases and with it, the pace of growth.

It doesn’t take a genius to realize that just as debt can speed up production so it can accelerate consumption as well. Don’t wait till you’ve saved up for your new widget. Borrow and have it now. Which innovation seems to double and triple the genius of debt. Not only can producers expand production quicker but consumers can consume, excrete and consume again all the faster too. And of course each encourages the other, with debt as the necessary laxative. For as long as the happy state flows freely, the sellers of the debt laxative, become immensely rich from the interest and fees they charge to both sides, and powerful from being seen as masters of the miracle of debt which only they can make work.

Sadly the side effect, unseen in the good times, is how dependent the whole miracle becomes on continuing to grow and to do so ever faster and faster, in order to keep ahead of the increasing cost of the interest on the ever growing amount of debt. As soon as the rate of growth falters the instability of a system where both production and consumption have been accelerated by debt become apparent. But by then it is too late. The stupid but seductive answer is to pile more debt on the consumption-side to off-set any ‘temporary’ slow down. Advocates will always say, a slow down, even a crisis, will be temporary, just some animal crisis of confidence, bad weather, bad karma, communists, environmentalists  or sun spots. Whatever it may be it will pass. All that is required is a ‘bridging’ loan to get across the little dip and then normal debt fueled service will resume. Advocates and defenders always say the ‘dip’ is small, contained, local, temporary and will definitely be over by Christmas. All these things were said in the first months of the present Bank and Debt Crisis. They were all absolutely wrong.

Nevertheless the ideologues recommended that if no one wanted mortgage backed securities right now, borrow to set up shell companies who will ‘buy’ the securities no one wants and give the appearance that all was still as it was supposed to be. The banks followed their own advice and did exactly this. And then, they went on, when confidence, buying and growth resume, just sell the stuff you bought in the moment of crisis.

For the merchants of debt and those who worshiped them, our political servants, it was clear. The problem was just a wobble in confidence. People were worried about the cost of the debt they had and were not sure about taking on more debt to out-grow it. Because they weren’t sure, so they didn’t take on more debt and this caused the very slow-down in growth that then did indeed imperil the ability of the entire system to stay ahead of the cost of its own debt. To the merchants of debt this was a self inflicted wound and the answer was to break the disastrous circle of doubt with a massive injection of easy credit and cash which would restore confidence and growth.

And so QEI. It was global but its center piece was in the USA. QEI (USA) From 14th of December ’08 until 30th March 2010

The Fed bought:
$300 Billion of Longer term Treasuries,
$175 Billion of Fannie and Freddie Debt
$1.250 Trillion of Fannie and Freddie Mortgaged Backed Securities (MBS). That was QEI.

All this was debt forced upon the tax payer. It failed. The ideologues said, ‘No it didn’t, it was just not enough.’ So they did it again. That too failed. The ideologues said again. ‘No it didn’t. It would have been so much worse if we hadn’t done all this.’  Then last week, a senior banker told me that the huge French bank, Societe Generale, came within a hair’s breadth of running out of cash and this was the trigger for the sudden opening of the Fed swap lines and the general sudden return to ‘easing’ (think laxative) in money supply.

The ideologues, like the man with the hammer, have learned nothing and have no intention of trying to learn. Why would they. As long as the hammer is unchallenged then as the owners of said hammer they are top dogs. Should they admit the hammer has had its day then they are ripe to fall.

Now you might object that I am wrong about the bankers and their attitude to debt. You might well point out that the bankers have come to recognize how dangerous too much debt can be and hence their insistence on cutting public debt. A hurtful but, as our leaders tell us through crocodile tears, oh-so-necessary imposition of ‘austerity’. Surely this is proof that the bankers have learned?

I think not. You see in the banker’s world ‘public debt’ as they scrupulously refer to it, is absolutely different from the private debt of the financial world. Private, bank-held debt is what they might call, ‘productive’ debt in that, to their mind, it is what fuels the growth of the Private sector. It is what allows growth and consumption to be accelerated and commissions at banks to be engorged. Whereas, according to their ideology, public debt is unproductive in that it does not support growth but only welfare. I use welfare is its general dictionary meaning not the narrower meaning of ‘welfare state’. And welfare does not swell the bonus pool, nor the bottom line of banks nor bring forward consumption or growth.

It is this categorical difference in two kinds of debt which explains how the bankers can roar and threaten about the evils of public debt levels but see nothing contradictory at all in at the same time advocating further easing, printing, borrowing and general bailing out of banks. One is good debt – private growth fueling, the other just a waste of money. Which they might benevolently overlook if it were not that public debt competes directly with private debt, and taxes (seen as allied with public debt) compete with taking on private debts.

In good times such competition can be tollerated but in tough times, when bankers must look to their own welfare, then public debts must be eradicated so that private debts can be made safe and then increased.

This is the hammer of debt. Our leaders worship it while the bankers own it.

At this moment many of us can clearly see the hammer of debt is now no longer a wonder tool nor the answer to our present predicament. Growth and the debt that accelerated it were inventions of the world of steam and then oil and all the technologies of petrochemistry, electricity and computation. It was the wonder tool of the brief moment when we were still small in number and the world was still big. Today we are very many and the world relative to our powers of consumption and destruction is small and shrinking.

But debt is a hammer and at this moment it is a weapon more than a tool. Notice how little now is said of ‘confidence’. It is no longer ‘confidence’ the bankers are primarily concerned to ‘restored’ but discipline. Since people have refused to return to ‘ confidence’, they must now be disciplined.  And debt is the means of enforcement. The hammer of debt has changed from tool to weapon.

We are being bludgeoned with debts and the austerity deemed necessary to pay for them. The Irish have just this evening been told they must suffer yet another two billion euros in austerity cuts to education and health. Yet the bail out of their worthless banks remains firm and will increase. In March the Irish state will still run out of money and more austerity will be called for while their banks will ‘require’ yet more ‘aid’ and ‘support.’

Our leaders believe in the miracle of debt fueled growth. And indeed so deep are the debts that the banks and financial system are in, that only debt fueled growth of the most insanely leveraged and reckless nature will save them now. So it is, that far from reigning in the recklessly unstable gambling of the financial system, it increases month on month. To take just one example, the financial trade in over-the-counter derivatives accelerated in the last six months by a collossal 18%. The total amount of such contracts at the end of June 2011 was $707 Trillion.

The high priests and princes of the ideology of debt and debt fuelled growth are not learning, not about to change or give away their power and position. They are becoming more agressive and more ready to use debt as a weapon to simply bludgeon any perceived problems and batter in to silence any preceived opposition.

Bring me a much bigger hammer!

 

91 Responses to The Hammer of Debt.

  1. Charles Wheeler December 5, 2011 at 10:49 pm #

    As David Orrell says, the credit crunch has put the ‘Eek! back into economics’:

    From Warren Mosler (via Marshall Auerback):
    “There is no plan B. Just keep raising taxes and cutting spending even as
    those actions work to cause deficits to go higher rather than lower.

    So while the solvency and funding issue is likely to be resolved, the relief rally won’t last long as the funding will continue to be conditional to ongoing austerity and negative growth.

    And the austerity looks likely to not only continue but also to intensify,
    even as the euro zone has already slipped into recession.

    So from what I can see, there’s no chance that the ECB would fund and at the same time mandate the higher deficits needed for a recovery, In which case the only thing that will end the austerity is blood on the streets in sufficient quantity to trigger chaos and a change in governance.” (our emphasis)
    http://goo.gl/1JzAQ

  2. Fitzy103 December 5, 2011 at 11:03 pm #

    Great post Golem.

    Lets hope they can’t find a bigger hammer…

  3. Phil December 5, 2011 at 11:38 pm #

    I still don’t fully understand derivatives and the $707trn figure. Can someone explain please?

    Cheers

    • Charles Wheeler December 6, 2011 at 12:52 pm #

      Lots of explanations on YouTube: e.g. this on Credit Default Swaps: http://goo.gl/kVpSg
      What they fail to mention is that AIG is under no obligation to cover their swaps in the same way as a plain vanilla insurance company – which is why they had no chance of paying out on their swaps on Lehman bonds when they when bankrupt – which is why Hank Paulson – ex-CEO of Goldman Sachs – had to bail out AIG, so they could cover the swaps Goldman Sachs had secured through AIG.

      Derivatives can be used for hedging/insurance, which is beneficial, or speculation/betting, which can be detrimental because they can create perverse incentives: e.g. take out CDS on Greek debt, then short (sell) as much as you can – if Greece defaults you’re in the money – assuming the counter-party can pay. What many suspect is that the ISDA called the recent proposed ‘haircut’ on Greek debt ‘voluntary’ because it would otherwise trigger a cascade of default swap payouts – which probably couldn’t be honoured.

      Warren Buffet has called the cocktail of derivatives now available ‘economic WMDs’. Brooksley Born famously tried to bring derivatives under the control of regulators when head of the Commodity Futures Trading Commission, but was frozen out by Greenspan, Rubin and Summers – all fierce advocates of the ‘free market’ (with Greenspan a follower of Ayn Rand’s more extreme indvidualist libertarianism (see Frontline’s The Warning for the full story: http://goo.gl/S1TL

      Max Keiser explained the ‘carry trade’ – an interest rate swap – by travelling to Iceland before the collapse – predicting that it would all end in tears here: http://goo.gl/9sGOK

      Derivatives aren’t a recent phenomenon, they were used extensively during the ‘tulipomania’ in Holland in the 17th C. and back into antiquity, but as financial markets have been deregulated since the ’80s there’s been an explosion in their use, alongside a step-up in technology-driven complexity – which is all good for those controlling them because, in spite of what the neoliberal textbook says about transparency and the transmission of information being essential to price discovery in markets – derivative salesmen thrive on opacity – the more complex and difficult to understand the better because they can trade on ignorance. In the real world it is asymmetry of information that creates profit – convince the greater fool that he’s getting a better deal than he thinks and you can charge that bit more (think second-hand car salesman) – see: Satyajit Das’s Traders, Guns and Money for an insider’s account. Which is one reason why no one really knows what anything is worth any more! The absurdity of the situation is that the circle of debt got so impenetrable that (thanks to the creation of derivatives squared/cubed) that the market could no longer function. It’s as if a whole group of market traders were selling each other rotten fruit, with a few ripe apples on top – after a while no one trusts the anyone else and the system breaks down.

      That’s precisely why effective regulation is the necessary foundation of any market – otherwise bad practice drives out good; take away the referee and the game descends into anarchy. Instead we have seen even those regulations that remain regularly flouted, and the miscreants go unpunished. Norman Hunter would have a field day.

      Many argue that the ‘notional value’ of derivatives exaggerates the problem but, in any case, the complexity and lack of regulation has led to huge uncertainties about the true value, or exposure to, a wide range of assets and debts – freezing markets.

      • shiningrain December 7, 2011 at 10:13 am #

        Thanks for an excellent response.

    • John Souter December 6, 2011 at 3:34 pm #

      Phil derivatives are a bet on a horse race that never reaches the finishing line.

      • Phil December 6, 2011 at 9:33 pm #

        Thanks Charles and John. I enjoy and learn from your posts very much.

        • Phil December 6, 2011 at 9:52 pm #

          Sorry, I realised I knew what CDSs were but I don’t understand short selling vs. CDSs. – ”take out CDS on Greek debt, then short (sell) as much as you can – if Greece defaults you’re in the money – assuming the counter-party can pay.”

          And also which is the greater threat – the debts or the derivatives? Which have the global elite invested more in?

  4. Steve Edward December 5, 2011 at 11:38 pm #

    A very articulate narrative explaining the role of debt in good and bad times.

    Thanks

  5. cynicalHighlander December 5, 2011 at 11:54 pm #

    Bring me a much bigger hammer!

    Needs refurbished.

  6. richard in norway December 6, 2011 at 12:32 am #

    Golem

    I don’t know if you are a fan of terry prattchet he might not be serious enough for you(I think he’s very serious) but this whole euro crisis thing makes me think about scenes from his books where the gods are playing games with the fates of men. Every new twist is just another manipulation. We are all being played. Anyhow I thought it might be a good theme for one of your posts

    Thanks for this site, an oasis of sanity in a mad mad world

  7. RickB December 6, 2011 at 1:13 am #

    Or, Hammer Into Anvil as Mr McGoohan would have it:-

    When Number Two calls Number Six to the Green Dome the first time, he threatens to break him, quoting Johann Wolfgang von Goethe: “Du mußt Amboß oder Hammer sein” (“You must be Anvil or Hammer”). “And you see me as the anvil?” asks Number Six, to which Number Two answers “Precisely. I am going to hammer you.” The interesting thing is that Number Two has the analogy backwards; as George Orwell wrote in “Politics and the English Language”: “In real life it is always the anvil that breaks the hammer, never the other way about.”

  8. Mike December 6, 2011 at 1:16 am #

    Phil, here’s the best explanation I can give you at midnight after a long day:

    http://en.wikipedia.org/wiki/Derivative_%28finance%29

    The key to understanding derivatives is that they are treated differently than other financial instruments in terms of the law, and they are very useful for devising, increasing, swapping and extending credit (i.e. debt). Derivatives are exempt from most regulations in the US, for example, and because of this there are actually very few people, especially in Wall Street, who actually know how they work. Any bet, any deal, any way of hedging or staking money on some future outcome, can be a derivative if someone else is willing to take the wager.

    Because there are no rules governing derivatives, or even any real definition of what a derivative is, you end up with the situation we have, namely a global economy worth around $63 trillion but a derivatives market trading at more than ten times that.

    I hope that my explanation is accurate (better experts, please correct me) and helpful.

    • Hawkeye December 6, 2011 at 10:33 am #

      Phil

      Satyajit Das is very good at explaining derivatives in laymans terms. He writes a lot at Naked Capitalism. His book “Traders, guns and money” is an excellent primer on the workings of derivatives, and how it can easily be used to embark on corrupt & devious practices.

      I’m about to start reading his latest book “Extreme Money”:

      http://www.amazon.co.uk/Extreme-Money-Masters-Universe-Financial/dp/0273723979

      • Phil December 6, 2011 at 9:55 pm #

        Many thanks guys, love your posts too.

        I’ve just got ‘Traders, Guns and money’ : )

  9. Toby December 6, 2011 at 2:07 am #

    There are two ways of creating fiat money; spending it into existence (printing without debt or interest), or borrowing it into existence (printing with debt and interest). In fractional reserve banking there are two types of money which we punters immediately recognize as money; high powered money and credit money. High powered money (HMP) may only be created by central banks, credit money is created by commercial banks (always as loans, and always out of thin air). HPM is what sits in reserve accounts held by commercial banks at the central bank of that currency. Because we are talking about fractional reserve banking, there need only be some fraction of HPM in these reserve accounts relative to the amount of credit money lent into existence by the commercial banks. ‘Legally’ this ratio varies from country to country, with Canada ‘enjoying’ a 0% reserve ratio (their commercial banks need have no HPM in their reserve accounts), to 10% in the US. In this way these HPM reserves are similar to the gold which used to back money before Nixon did the ‘dirty deed,’ and took the US off the gold standard. Credit money is for-profit created claims on that ‘gold’ (HPM). A dollar or pound or euro note you draw from a cash machine is ‘owned’ by ten or more other people. You share it with the community, as it were. You spend it on something, and likely it ends up in another cash machine somewhere else. Then someone else holds it for a while. In a bank run everyone wants their money in notes and coins NOW, but because this is a fractional reserve system, there cannot be enough HPM by definition. That’s why bank runs are possible, always possible. And why mood, confidence, and vibe so important to commercial banks. “You can take that to the bank!”

    Notes and coins are HPM, but not all HPM exists as notes and coins. In the US I believe the figures are 3% of their money supply is in notes and coins, but around 10% (so it is claimed) is HPM, in the form of digibits; 0s and 1s on computer disks. Those cannot be withdrawn in a bank run, so 3% or thereabouts is the ‘real’ money in a FRB system.

    So what about debt? Well, HPM need not be swapped in and out of ‘existence’ via government debt, it can be spent into existence, but borrowing is the standard way of doing business. The mantra is, when government spends money into existence it is ‘printing’, which is Bad. When they borrow into existence, on the other hand, when they owe that money back, plus interest, they are apparently not printing, and this is Good. But of course both spending and borrowing are printing, because money is an artificial construct; it don’t grow on trees. You can’t harvest it. It doesn’t grow in your pockets when you do valuable work.

    So why interest and debt, then? The answer to that burning question depends on whom you ask, but my answer would be that the owners of money just love making money from money, and don’t want that little earner to disappear any time soon. Your money has to work for you, don’t you know, mustn’t lie around idly doing SFA. Of course there’s more to it than that, but I believe that is the central nub.

    But anyway, and as Golem elegantly points out, interest comes at a cost; Perpetual Growth. What interest functionally is, at its most fundamental, is money growing. Money growing away, as if by magic, at some percentage rate (exponentially, in other words). Whether loaned into existence with more owed back than was created, or ‘sitting’ in a savings account (which is actually the same thing, with bank as borrower), interest is the Magic Ingredient that forces money to grow. And money is not organic, not alive, so there’s something weird about this, something supernatural. And, if there is not a corresponding growth of goods and services in the economy, of course more and more money is then inflationary. Hence, while we have interest driving the money system, the economy must also grow forever, otherwise the money system begins to break apart, as it is now. Then all that debt-created money can find no profit, is not met ‘out there’ by economic growth. As Golem says, that’s when debt becomes a drag, not a fuel.

    To my mind, our money system is like a car that can only accelerate. Not drive only fast, but ever fastER. If it slows down, it breaks to bits. To me, that is a very bad design.

    Debt, generally speaking, is very subtle. “I owe you one, mate!” is a debt. Only, it’s not a measured debt. It’s an open agreement. If you owe lots of people in this way, and never return the favours, you end up lonely and isolated. There’s no interest to pay, no itemized bill, no minutely observed ledger, but things work out one way or the other just the same. Money is debt in a very odd way; money-debt says we can measure value of “I owe you one!” exactly. But of course there is far more to value than a number with a symbol attached to it. What is the value of your left leg to you? To my cat? To Robert Mugabe? Value, like beauty, lies in the eye of the beholder. Money claims otherwise. And the best book I’ve read on this aspect of the great Money Puzzle is “Debt: The First 5,000 Years”, by David Graeber.

    Value, debt, work, play, control, wealth, money, life. These are the concepts at the foundation of any paradigm (since money anyway), and these are all on the table today, to be discussed, re-learned, re-defined. Doing this will create a new money system which will harness human ingenuity in new ways. Unless we don’t wise up soon enough and go the way of the dodo.

    • Dush December 6, 2011 at 12:48 pm #

      Really nice comment, thanks.

    • Nell December 6, 2011 at 1:50 pm #

      I second that – also great post Golem

  10. Roger Lewis December 6, 2011 at 7:34 am #

    Ideologues a short step from Zealots. It seems our Leaders and the so called experts have been Indoctrinated not Educated. The crocodile tears of Austerity. this will hurt me more than it hurts you?
    You’ve hit the Nail on the Head again David, I just read a Stephanie Flanders piece on the BBC web site and thought I’d look across here to see what was happening, i’m now going back there to post a link here in the comments.

  11. Pat Flannery December 6, 2011 at 9:21 am #

    Golem et al:

    Here’s what I do not understand: if the Europeans are unable to save themselves by continuing to create debt (i.e. by lending to themselves as the Americans are doing), where did their current mountain of sovereign debt come from? As far as I can tell it must have come from the only source of self-created debt in the world – the Fed.

    The Europeans were at least pretending to abide by fractional reserve banking rules (even tough, as we know from the Whistleblower in Dublin, each country was going way beyond the bounds set by their own central banks). The Americans on the other hand were not even pretending to practice fractional reserve banking; they “borrowed” from their inexhaustible source, their Fed, which made no pretense to enforce fractional reserves. Wall Street threw traditional banking out the window once Glass-Seagall was repealed.

    Surely then the ultimate source of the bubble-money in Europe is Wall Street and the Fed. And as the Fed lends only to American banks, is not the entire European bond bubble owed to American banks?

    If this is a correct analysis then should not the Euro countries simply be doing what the Irish are (cleverly?) doing: let the storm rage and see what’s left when it has done its worst? In the end of the day (after the storm) will not America (the Fed) either have to see its American client banks go to the wall or bail out the Europeans? And we all know that not even the Fed can print enough dollars to do that. Therefore who would invest on Wall Street right now?

    Am I confused or what?

    All I know is that for every debtor there has to be a creditor. Then who does Europe owe all that money to? To itself? If so, then there is no problem, just a little internal wealth adjustment, that’s all. That is not a crisis. But if it owes the money to the Americans, then this is not a European crisis it is an American crisis. America over-lent to the Europeans and will pay the price.

    What part of all this do I not understand? It’s midnight here on the Pacific coast and maybe it’s just past my bedtime. I’ll check in the morning and see if anybody has answered.

    Goodnight.

    • Nell December 6, 2011 at 1:52 pm #

      check out this graphic – europes web of debt – http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html

    • Charles Wheeler December 6, 2011 at 2:10 pm #

      ” … where did their current mountain of sovereign debt come from? As far as I can tell it must have come from the only source of self-created debt in the world – the Fed.”

      Private banks create debt (“The process by which banks create money is so simple that the mind is repelled.”, JK Galbraith) – private banks create debt that can never be repaid, because they are ‘too big to fail’, if one goes down they will all go down – so governments have to step in to bail them out with taxpayers’ money, creating a sovereign debt crisis, meaning the governments have to ask the bank for loans.

      It’s that simple!

      Huh …

      “. . . there is an absurdity about this whole exercise. This is not a crisis driven by over-borrowing by states. Yes, the former Greek government spent too much and deceived its eurozone partners about its finances. But the governments of Ireland and Spain were running budget surpluses right up to the moment the roof fell in on them in 2008. It was the banking sectors of those countries – facilitated by profligate financial institutions in France and Germany – that were out of control and effectively destroyed their public finances. Ms Merkel’s treaty changes will not address that fundamental flaw – and they will not help to alleviate the present crisis. As such, the German Chancellor is engaged in elaborate displacement activity.

      Ben Chu: http://goo.gl/m2g48

      p.s. European banks were allegedly leveraging 40x – 50x – heading towards Greenspan’s nirvana of ‘reserveless banking’ (he didn’t think reserves were necessary) – and that’s not even considering the ‘shadow banking’/’off balance sheet’ system which Max Keiser likens to ‘dark matter’!

    • Charles Wheeler December 6, 2011 at 2:39 pm #

      “All I know is that for every debtor there has to be a creditor.”

      This is the assumption on which neoclassical economics bases its contention that debt doesn’t really matter it can be parsed out of any equation. Even relative renegades like Paul Krugman held to this view until it was no longer tenable.

      But as Steve Keen, drawing on Minsky, argues, this is a fatal oversimplfication. Every creditor may be balanced by a borrower – but what if that borrower can’t pay – or what if the asset used as collateral has lost value?

      If I go into a bank and take out a mortgage – the loan is ‘created’ by the bank and backed by the value of the house I want to buy. As long as it retains its value there’s no problem, but Minsky’s asset-price feedback loop kicks in – as more people borrow, so the value if the housing market rises, facilitating more borrowing and repeat.

      At some point, though the price will be out of reach of new entrants into the market (because suppy and demand doesn’t tend to equilibrium as in the textbooks) and the whole loop goes into reverse (that’s why sub-prime loans were made – to keep the system turning – when you’ve run out of people who can easily afford a mortgage, you have to turn to people who can barely afford one, to people who plainly can’t – in the hope that rising prices will cover any defaults – sub-prime was thus an effect of the credit bubble, not a cause).

      As prices fall, fewer people want to buy, exacerbating the problem, the economy starts to falter, construction stalls, people lose jobs, more homes come onto the market, more job loses, and so on.

      But the debts retain their nominal value. Your house may be worth 20% less, but the loan you took out isn’t. You may have lost your job, but the loan remains on the books. People stop paying back on loans, but interest is still being charged so the debt is getting bigger while income is falling – a classic debt-deflationary death spiral. Then governments start cutting back, increasing unemployment and lowering national income – pouring fuel onto the fire.

      And that’s not even considering the massive leverage (debt) banks themselves took on – much of it ‘off balance sheet’ to magnify their gains – and losses.

      As Michael Hudson repeats: ‘Debt that cannot be repaid, won’t be repaid”

      • Hawkeye December 6, 2011 at 3:29 pm #

        That’s right Charles.

        Neoclassical economics completely ignores CREDIT CREATION. It is blindingly obvious to any normal human being that debt growth must play a role. This BIS paper gets to the heart of the issue, but was quietly ignored:

        http://www.nakedcapitalism.com/2011/09/the-very-important-and-of-course-blacklisted-bis-paper-about-the-crisis.html

        At least there is also some acknowledgement within the BoE of the role of this (even if they do somewhat cryptically refer to it as “Balance sheet expansion”):

        http://www.bankofengland.co.uk/publications/fsr/fs_paper10.pdf

        There are a few voices in the establishment that get it, but they tend to get ignored / silenced.

        Banking always has, and always will operate in the manner as follows:

        “The deliberate obscuring of ownership title”

        • Charles Wheeler December 6, 2011 at 6:35 pm #

          That first link is very good on the ‘savings glut’ theory/myth.

          And contains this interesting point:
          “Despite the overwhelming evidence of their colossal pre-crisis screw-up, most academic economists are unwilling to admit much if any error. And they are generally respectful towards Bernanke (the fact that the Fed is the biggest single source of funding for academic research no doubt contributes to the deference shown to the central bank).”

          This ideological straitjacket is elaborated on by James Galbraith:
          http://youtu.be/1yOdicriZ4k

  12. Patrick Donnelly December 6, 2011 at 9:57 am #

    Good analysis. Bit late to help!

    Pat Flannery

    The USA fed bad assets, mortgages from NINJAs, into Europe and the bankers there passed it on in reckless lending. The USA has to print a lot of money to pay off that debt!

    The media are being managed and promised that they will survive which many will not. They are pretending that things are and are not being done when all know that the borrowing of future growth and repayment of past debt make economic contraction inevitable. Delay merely increases the debts due! As interest rates in the real market, not central bankster, increase, the austerity is more inevitable. All those mal-invested billions to create industries and now the jobs have to go. Embarrassing for the supermen and odd lady who controlled the universe, but like the Wizard of Oz, lied about their power and simply stole with the assistance of auditors….

  13. Patrick Donnelly December 6, 2011 at 10:00 am #

    This depression, DEPRESSION, was predicted years ago and plans put inplace to take advantage of it.

    9/11 enabled more plunder, but it started in 1999. Europe boomed for years after, due to the increased lending. Those who had quite properly made plans allowed it to happen!!!!!!!!

    • Charles Wheeler December 6, 2011 at 2:45 pm #

      Read Robert Sherrill’s article on the Savings & Loans collapse in The Nation, written in 1990.

      That was the dress rehearsal. The main event was a natural and inevitable result of the same deregulatory zeal.

      Ayn Rand wrote the blueprint.

  14. Sir Harry December 6, 2011 at 10:43 am #

    @ Hawk Eye

    Enjoy. It’s a good read, possibly the best on the crisis.

  15. Hawkeye December 6, 2011 at 10:45 am #

    The three hammers of debt
    ———————————–

    The key learning from Reinhart & Rogoff’s study of financial crises is that there is an escalation process:
    1) Banking crisis (Private debt)
    2) Sovereign Crisis (Gvt debt)
    3) Currency crisis

    If credit excesses build up within the banking system, then problems occur between private individuals and institutions (whether borrowers, creditors or shareholders).

    In times of such crisis, the bigger hammer of Gvt steps up to the plate (e.g. UK Gvt debt to GDP has doubled since 2007). The productive sectors of society have to fund the losses either by tax increase or spending reduction (austerity).

    If that fails (and we are seing the biggest stresses in Europe – for now, but the UK, US etc. are not immune) then the final hammer will bear down; the very value of money itself will become debauched. Money is the “we owe you” note that the holder believes can and will be honoured by the rest of society.

    Therefore, as the crisis deepens the burden becomes successively socialised. All in the name of repaying private credit creation excesses.

  16. Dush December 6, 2011 at 12:51 pm #

    When people are willing to lend money to us at cheap rates and unemployment is high why is debt the only thing people seem to want to talk about?

    Long run deficits are important, but focusing on debt right now while unemployment is high is getting things backward. You should concentrate on the thing of most immediate concern. The confidence fairy isn’t going to reduce unemployment.

    The story is pretty simple: there was a housing bubble, it burst, debts then became unaffordable as economies stopped growing so as a % they became burdensome. However, on the eve of the crisis only Greece was a debt story. The rest of Europe had falling debts as a % of GDP.

  17. Sir Harry December 6, 2011 at 1:41 pm #

    @ Hawkeye

    Thank you. I will get it for the holiday season reading.

  18. Mike Hall December 6, 2011 at 1:44 pm #

    Steve Keen interviewed by the Institute for New Economic Thinking (INET) is very illuminating on the subject of debt. ‘The Naked Emperor Dethroned’ on youtube in 7 short parts, part 1 here:

    http://www.youtube.com/watch?v=CehLP2iNzMA&feature=relmfu

    As Keen points out (in agreement with MMT) banks are not reserve or deposit constrained in creating new money as debt. This fallacious assumption is at heart of why orthodox, mainstream economists (& their models) completely ignored the role of debt. Even as it was pointed out by Keen & others that it was growing at an utterly unsustainable mathematically exponential rate in most (Western) countries in the early 2000s.

    What is happening in the Eurozone is directly analagous to what the IMF has done for decades in loading debt in a foreign currency (the euro is ‘foreign’ to its user countries) onto to vulnerable 3rd world countries. (With suitably well rewarded local puppets in charge.) At the first economic downturn, the debt spirals out of control & the creditors take over & turn the population into debt peons.

    Of course, it’s the big banking/creditor interests represented by the ECB & its cronies in the primary role this time, rather than the IMF, but the policy is the same. And its quite clear no one’s interests but theirs matter.

    Naomi Klein’s concept of ‘disaster capitalism’ rings very true indeed in Europe at the moment as the financial oligarchy are using the ratcheting up of debt pressure to steamroller in even more draconian control over sovereign countries. If they succeed, the result will be loss of sovreignty in any meaningful sense, & complete control by oligarchy. The agenda of the financial oligarchy might best be described as the ‘Indianisation’ of Europe. An illusion of ‘democracy’ in a hugely divided & unequal neo-feudal state.

  19. Charles Wheeler December 6, 2011 at 2:01 pm #

    Talking of ideology, Frontline’s Inside the Meltdown is replete with unintentional hilarity as it tracks the hapless Hank Paulson’s attempts to stem the bleeding of the US/global financial system – largely because the programme itself is trapped in an ideological bubble.

    Time and again the programme makers have to impress on the viewer just how smart these guys (and it is exclusively men) are – and how Ben Bernanke is the world expert on the Great Depression, as if that’s some comfort.

    Paulson is depicted as an ‘unapologetic free marketeer’ trapped in a world that won’t bend to his convictions – but ultimately, it’s not his ideology that is at fault – it’s the pesky real world that’s at fault for not doing what its told.

    Charles Duhigg of the New York Times describes how a spokesperson at AIG put its imminent collapse: “We just promised to pay millions and millions of dollars in Credit Default Swaps if Lehman went bankrupt, assuming that Lehman could never possibly go bankrupt, and now Lehman has gone bankrupt.” There’s no sense of irony, no thought that maybe profiting from selling insurance you think is unnecessary might be questionable – or that selling that insurance without making any contingency could be unethical. Aren’t insurance companies supposed to be in a position to pay out on claims? But then, CDS are officially ‘not insurance’ – so don’t require any of the regulations that would otherwise prevent AIG taking on risk it can’t possibly cover. Which is why ithad to be bailed out: ‘So much or moral hazard’ – the free market is sacrosanct, until it isn’t.

    Another contributor: “They had to throw their principles out of the door and save the economy and whatever criticism there would be of govt. intervention was a small price to pay for the deluge that would have occurred if AIG had collapsed.” But the underlying message is, it wasn’t their ‘principles’ (which seem to be: what’s good for me and my company is what counts above any social cost) which were wrong, but rather the direct results of applying those principles – hence the need for an $85bn bail-out as Hank ‘unapologetic free-marketeer’ Paulson effectively nationalises AIG by taking an 80% ownership – socialising the losses.

    The feeling on Wall Street is ‘maybe Paulson/Bernanke had lost control of the situation, there was a sense that there was no overarching plan, that there wasn’t someone in control – and that was damaging to confidence’ (Gretchen Morgenson, New York Times). That section is beyond parody – the concern that ‘no one was in control’ coming from Wall Streeters who had spent the last 30 years lobbying to make sure ‘no one was in control’, that there could be ‘no overarching plan’ – indeed, that there need be ‘no overarching plan’ or anyone ‘in control’ precisely because the market didn’t need anyone in control – the invisible hands of Goldman Sachs, JPMorgan, AIG, et al would take care of business. ‘Government is the problem, not the solution’ was the refrain – now those very same people were asking what government was going to do about it. Hank Paulson as Treasury Secretary wasn’t a case of ‘poacher turned gamekeeper’ – the poacher was the gamekeeper – intent on preserving the interests of his fellow poachers.

    The most farcical sequence, however, is the passage dealing with the bailout, when the heads of the nine largest banks are ‘summoned’ to a meeting with Paulson and read the riot act – effectively Paulson has to hold a gun to their heads to accept the largesse of nearly a trillion dollars of taxpayers’ money or face a global meltdown – ‘this wasn’t for negotiation’. The bankers are angry, we don’t want your money they say, we believe in free markets, our principles are more important than next years’ bonuses … oh, alright then, if you insist – but don’t let it happen again.

    When Paulson announces the bailout ‘you could almost sense the regret in his eyes’ – though you didn’t need to because he says he ‘regrets’ having to give private bankers taxpayers’ future earnings. But the regret is not so much that his system has failed, or his principles been abandoned – it’s because the real world has let him down.

    That’s the essence of the spin put on the bailout – and when a programme like Frontline can produce such guff (having also made the excellent The Warning on the trials of Brooksley Born), it reminds you just how trapped the mainstream is in the ‘free market’ paradigm, just how enmeshed we are in the Matrix.

    It’s fun to watch – but also very depressing: http://goo.gl/zmSs4

  20. Diarmid Weir December 6, 2011 at 2:44 pm #

    There is no doubt that the many are being traduced by the few, but it’s important we understand the mechanism.

    Debt itself is not the driver of the problem, although it’s certainly an enabler. Interest is a flow, and as long as the productivity of the debt-enabled activity can support this flow there is no necessary problem. I have written on this issue at http://www.futureeconomics.org/2010/07/on-the-impossibility-of-paying-interest

    What is at issue is the question of who benefits from debt and growth and why. This is as much about the interaction of economics and politics, as it is about economics itself.

    • Charles Wheeler December 6, 2011 at 6:04 pm #

      Yes. Max Keiser covers this here: http://youtu.be/P4hVZYHW2So
      and here: http://youtu.be/49n8TzvQJjk?t=12m50s in his chat with Josh Brown

      There seems to have been no official (innocent) explanation of why Paulson would have considered it a good idea (not to mention ethical) to reveal the state of Fannie/Freddie to a closed group of selected bankers – knowing that should any be proven to have acted on that information would have been against the law. One of those present was worried enough to call his lawyer to check what to do!

      Josh Brown seems too charitable when he suggests Paulson wouldn’t have been ‘stupid’ enough to tip off his former Goldman Sachs colleagues – after all: he was stupid enough to make it look as if he was that stupid!

  21. steviefinn December 6, 2011 at 3:04 pm #

    I am going to pay a visit to a bunch of terrorists in Belfast tommorrow, but not the usual suspects. I am going to pass on my support to occupy Belfast, for what it is worth. Great to see in this divided corner of the world, it must be cross community in order to exist, will see what the craic is, they must be bloody freezing.

    I’m driving, my partner Sue will be watching for unmanned drones.

    http://www.guardian.co.uk/uk/2011/dec/05/occupy-london-police-terrorism-document

    • Phil December 6, 2011 at 10:06 pm #

      Good on you, Stevie. Have a good one.

  22. John Souter December 6, 2011 at 3:42 pm #

    The Technical Glitch & Freezers (Part 2)

    “The role of Nature accepted, we then have to ask; whether in the affairs of humanity, any concept, system, practice or ideology which doesn’t improve the wellbeing, contentment, security and advancement of the majority of the species and its survival, has any claim to legitimacy or continuance by establishment or custom?”

    I make no apology for repeating the questioned I posed in the Introduction to The People Business.

    Our World today is, we are told, struggling through a major crisis; one that threatens our societies, the role and values we inherit from our stake in the business, and the balance sheet of improvement we leave for future generations.

    Perhaps, given what’s at stake, we need to analyse very carefully, logically and judicially the pros and cons being claimed as the reality that demands we must react to this crises.

    Undoubtedly this is a world crisis. But it’s a crises of our World; a systemic failure that can only have been created through manipulation by our species.

    The ‘product’ at the core of this crisis has no natural function and even within the role of nurture has only a tenuous link to the measurement of value and fundamentally no legitimacy when it attempts to exploit nature ; which is exactly the intent when it attempts to grade and categorise the micro and macrocosm of our species.

    We – Us are as natural a part of nature as the air we breath, the land we live on and the Earth and Cosmos that makes it all possible. We have a legitimate right to life and the development of our values. Why then should we be subject to ‘commodity’ crisis which to a large extent has been labelled and usurped by the few as a means of control over the many.

    Is this financial hybrid sensible and functional in the models of riches it assumes when weighed against the scales of effects it demands,

    Does it ‘drive’ the economics of societies evolution or merely distorts and diverts it by the smoke and mirrors of delusional gobbledegook.

    Has science strived and pled in vain for sanity only to have a secular commodity, of no intrinsic value, to be raised on the plinth of idolatry and awarded the right of impunity to the effects of its actions and of those who proselytize its function.

    Within the terms and statutes of The People Business has the executive –either elected or unelected – been granted the legitimate power to downgrade the quality of life dividends to its shareholders to that of serfdom, wage slave or debt peonage in order to conserve and continue its own incompetence?
    This is the hellish morning we have woken to.

    The one where you’ve stubbed your toe on the file you were swotting up on for the scheduled ‘crucial’ meeting. The morning where the electric toothbrush is flat, the towel still damp and where the shirt button drops off; then the replacement goes into the wrong button hole. The tie dips into the cereal milk and the lace of a shoe you polished the night before breaks and the infallible country road short cut you take in order to avoid the gridlock to catch your commuter train has been invaded by a thousand cows who found a hole in the hedge. The morning when you give a sigh of relief when you find a seat on the next train to the one you intended then settle in the belief that you can still, by the skin of your teeth, make the meeting only to find the crucial file, the one you stubbed your toe on, is still lying in disgrace in your bedroom. Your life is in ruins. A fool clickety clacking on the track to purgatory, esteem of self has withdrawn leaving only the shadow of the person you were to slide into your niche of ‘routine’ business.

    There’s a message on your desk. The meetings cancelled. Immediately you re-instate esteem and with it comes total recall of every coma, full stop and decimal point contained within the file – now you want to know why and who caused the ‘crucial’ meeting to be cancelled.

    In The People Business it’s our board of directors who have cancelled the meeting. They have chosen not to hear our arguments; to stifle debate in the certainty it would include criticism of their incompetence with little by way of mitigation in support of the path they have chosen and, as a group, have levied rich rewards and remuneration from.

    Without the fear of repercussion has responsibility any claim to power or reward?

    They are fully aware the games up. That, they’re in full pelt down the slippery slope leading to the cliff edge. Their only hope is in the amount of collateral bodies (Us) they can push before them to act either as a redoubt before they face the edge or, as a last resort, act as a mattress of apathy to break their fall.

    It seems mindsets die harder than habits – mine are, we should grease the slope, give them clear passage and, leave their fate to the laws of physics.

    These are the cons of the technical glitch we are facing. The analysis of the pros and the failures of our board to maximise their potential and distribute them as dividends will be covered in Part 3.

  23. Pat December 6, 2011 at 8:54 pm #

    The latest scare tactic to smooth the way for treaty change and further destruction of democracy? S&P is already threatening to cut the rating of the EFSF:

    http://www.irishtimes.com/newspaper/breaking/2011/1206/breaking7.html

    Don’t these ratings always tend to be self-fulfilling prophecies? Though it’s hard to see how an EFSF could be any kind of a solution anyway.

    How many times will they ‘ask’ the Irish to vote this time round? I fear that people will be brainwashed or scared in sufficient numbers into compliantly voting away the sovereignty that our forebears fought and died for. Even if the alternative of returning to a worthless punt is unattractive, I would rather be poor and free. But this may turn out to be a minority position, who knows?

    The lunacy of this stuff makes my head spin.

    • Charles Wheeler December 6, 2011 at 9:53 pm #

      Heard this on the radio this morning:
      “I see a clinic full of cynics
      Who want to twist the peoples’ wrist
      They’re watching every move we make
      We’re all included on the list”

      Problem is, they’ve locked us all in and are intent on throwing away the key before our media-induced coma wears off!
      http://goo.gl/SyFyd (bit out of date but the faces are pretty interchangeable)

  24. backwardsevolution December 6, 2011 at 9:50 pm #

    Re: Derivatives (from Marketticker)

    “Recently Bank of America transferred a bunch of derivatives into their banking arm. “A bunch” means somewhere around $80 trillion worth.

    Now pay very careful attention, because part of the bankruptcy “reform” law in 2005 placed derivative claims in front of depositors in a business failure – including a bank failure.

    What JP Morgan is claiming in the MF Global case is that the derivative trade (which is exactly what a “Repo to Maturity” trade is – it’s a derivative) is entitled to preference in the case of MF Global over those who had cash there for safekeeping either as a margin deposit or just as free cash as you would hold free cash in a bank.

    If a major bank blows up, this very same claim, supported in existing Bankruptcy Law with the changes signed by George Bush in 2005, will be used to steal the entirety of your bank account, and if you detect the impending blowup shortly before it happens — say, 90 days before — you’re still exposed to the risk through clawback! […]

    There is a fairly cogent argument to be made that what BofA [Bank of America] did is tantamount to intentionally placing an armed financial nuclear device in the center of the board room table and then daring anyone — including the government — to come tamper with it and risk setting it off, knowing full well that if it explodes it is utterly impossible to contain the damage to our economy and financial system.”

    http://market-ticker.org/akcs-www?post=198650

    Are these banks ensuring that they will be paid out first, that if they are thwarted in their desires to keep kicking the can down the road until they are all bailed out, they will set off a bomb that will take the whole system down?

  25. Charles Wheeler December 6, 2011 at 10:03 pm #

    I’ve seen the future and it’s called . . . Latvia?!

    “The Baltic states have discovered a new way to cut unemployment and cut budgets for social services: emigration. If enough people of working age are forced to leave to find work abroad, unemployment and social service budgets will both drop.

    This simple mathematics explains what the algebra of austerity-plan advocates are applauding today as the “New Baltic Miracle” for Greece, Spain, and Italy to emulate. The reality, however, is a model predicated on economic shrinkage as a result of wage cuts. In the case of Latvia, this was some 30 percent for Latvian public-sector employees (euphemized as “internal devaluation”). With a set of flat taxes on employment adding up to 59% in Latvia (while property taxes are only 1%), it would seem hard indeed to present this as a success story.

    But one hears only celebratory praise from the neoliberal lobbyists whose policies have de-industrialized and stripped the Baltic economies of Lithuania and Latvia, leaving them debt-ridden and uncompetitive. It is as if their real estate collapse from bubble-level debt leveraging that left their basic infrastructure in the hands of kleptocrats, is a free market success story.
    http://goo.gl/be5AO

    • Hawkeye December 7, 2011 at 11:27 am #

      Expect the future world to be a hideous collection of dispairing “reservations” for the millions / billions of poor, whilst the wealthy retreat to compact nation states little different to gated communities – or worse still the heavily fortified Bagdad Green Zone template that’s been refined over the last 8-10 years.

      • Pat December 7, 2011 at 12:40 pm #

        @ Hawkeye

        I fear that this is the logical outcome of current policies. If people are forced to emigrate, where are they to go? They will become unpersons, undesirables, enemies of the state. This kind of reservation has been called different things at different times – refugee camp, concentration camp, gulag, Bantustan, re-education centre; whatever new form it appears in will doubtless be given some similarly appalling Orwellian euphemism.

        I am currently reading ‘Hitler’s Beneficiaries’ by Gotz Aly, which seeks to explain how the German people allowed the Nazi regime to come to power. His argument is that those defined under the regime as Germans were privileged and protected at the expense of those defined as not German. In that case, a spurious ethnic distinction was used; today, perhaps it will be ‘European’ versus ‘unEuropean’ (consider the use of ‘unAmerican’ in the McCarthyite era.)

        • Hawkeye December 7, 2011 at 2:27 pm #

          @Pat

          I think it could even happen within countries / continents, without neccessarily refering directly to race or origin.

          The divide will be between the “civilised” and the “savages”. The civilised will purport to hold higher moral standards of conduct. However they will just be extensions of the current psychopathic kleptocrats. Anyone who dares to challenge their immoral (and even illegal) wealth acquisition will be deemed an ignorant savage.

          Just look at the way the Occupy movement is being portrayed – as “savages”.

          • Pat December 7, 2011 at 3:29 pm #

            @ Hawkeye

            Absolutely. Any label will do, as long as it serves to denote an ‘other’ or an ‘outsider’ – even when these troublemakers are the very citizens whom their governments purport to represent. ‘Savages’ was a favourite of English propagandists such as Edmund Spenser during the genocidal Elizabethan plantations in Ireland, as in countless other imperialist campaigns around the world. But although this type of activity is often racist in nature, it can equally well take other forms – sexual discrimination, political blacklisting etc. Whatever rationale is used, the essential MO doesn’t change – first demonise your enemy, then it will be easier to do horrendous things to him with a clear conscience.

            Popular pejorative terms in contemporary discourse include ‘luddite’, ‘economically illiterate’ and, of course, ‘smelly hippy’. This name-calling goes hand in hand with the positing of false dichotomies – e.g. if you have the temerity to point out the flaws of the status quo, then you must be a dyed-in-the-wool Stalinist.

  26. Charles Wheeler December 6, 2011 at 10:26 pm #

    ‘The Paradox of . . . grinding people into the ground’

    Bank Withdrawals Worsening Crisis

    ” . . . Greeks today only have €170 billion in savings — almost 30 percent less than at the start of 2010.

    The hemorrhaging of bank savings has had a disastrous impact on the economy. Many companies have had to tap into their reserves during the recession because banks have become more reluctant to lend. More Greek families are now living off their savings because they have lost their jobs or have had their salaries or pensions cut.

    In August, unemployment reached 18.4 percent. Many Greeks now hoard their savings in their homes because they are worried the banking system may collapse.

    Those who can are trying to shift their funds abroad. The Greek central bank estimates that around a fifth of the deposits withdrawn have been moved out of the country. “There is a lot of uncertainty,” says Panagiotis Nikoloudis, president of the National Agency for Combating Money Laundering.

    The banks are exploiting that insecurity. “They are asking their customers whether they wouldn’t rather invest their money in Liechtenstein, Switzerland or Germany.”

    Nikoloudis has detected a further trend. At first, it was just a few people trying to withdraw large sums of money. Now it’s large numbers of people moving small sums. Ypatia K., a 55-year-old bank worker from Athens, can confirm that. “The customers, especially small savers, have recently been withdrawing sums of €3,000, €4,000 or €5,000. That was panic,” she said.
    http://goo.gl/tKuNu

    • Wirplit December 8, 2011 at 10:55 am #

      Charles, seems like the Greeks are not the only ones pulling their savings…
      (whether from direct need or precaution as to the future?)

      http://www.zerohedge.com/news/past-week-americans-pull-most-money-stock-market-farce-us-downgrade-despite-market-surge

      i have a friend in Spain and I mentioned that some Spanish banks may be in trouble he replied he already had a lot of his money ‘inside the mattress” . So I guess more and more people are worried enough to pull some of their savings from the banks or from the markets. But unless you have the gold its just paper in the end.

      • Pat December 8, 2011 at 4:17 pm #

        It is certainly not only Greeks who have been withdrawing their savings. I have been doing it myself! Not hoarding possibly soon to be worthless paper or buying something as useless as gold, but spending it on vegetable seeds, home brew equipment, materials for building a polytunnel… It won’t help me pay the rent or buy electricity or oil, but it’s something. If I owned my own home, I would probably have been investing in solar panels. Nature makes a mockery of monetary growth – plant a garlic clove and you get a tenfold return in six months!

        Perhaps in the future we may see a world where things are reckoned in terms of their true value rather than their price. The worth of food is a function of the nutrition it affords and the environmental costs in its production. The worth of a house is dependent on how well it fulfils the function of a house – is it warm, does it provide good shelter, is its construction method sustainable? – not on the vagaries of the market. The worth of a person is assessed not by how much they love money or power, but usually the opposite.

  27. Neil (the original one) December 6, 2011 at 11:12 pm #

    On Greece, listen to this Radio 4 documentary, recorded on the spot: http://www.bbc.co.uk/programmes/b017x7kf .

    Includes the story of a pensioner who gets 400 euros pension a month, and then got hit with the tax collected through electricity bills at over half that.

  28. Neil (the original one) December 6, 2011 at 11:22 pm #

    Telegraph:

    Eurozone debt crisis: safeguard the City or I’ll veto new EU treaty, warns David Cameron
    http://www.telegraph.co.uk/finance/financialcrisis/8939421/Eurozone-debt-crisis-safeguard-the-City-or-Ill-veto-new-EU-treaty-warns-David-Cameron.html

    Bank of France debts jump tenfold on capital flight
    http://www.telegraph.co.uk/finance/financialcrisis/8939146/Bank-of-France-debts-jump-tenfold-on-capital-flight.html

  29. Charles Wheeler December 7, 2011 at 12:03 am #

    At some point you have to just laugh: http://goo.gl/wKud3

    No holds barred. The gloves are off. It’s every man/woman for him/herself.

    I’m starting to think Max Keiser is guilty of understatement!

  30. shiningrain December 7, 2011 at 10:53 am #

    Thanks Golem for another excellent post. I’m sure you’re busy but I wish you’d blog more often, especially with so much happening. Keep up the good work.

  31. Charles Wheeler December 7, 2011 at 4:05 pm #

    Democracy > Oligarchy?

    “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.
    . . .

    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 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.”
    Michael Hudson: http://goo.gl/IUFt2

    • Hawkeye December 7, 2011 at 5:47 pm #

      Hudson on form again.

      We are witnessing the rise and fall of the Oligarchs.

      They will keep on trying to push for more concentration and more Oligarchy. But at some point the world will snap.

      Even Russia is showing signs of revolting against the Oligarchs.

      But then again, the Oligarchs will try and cling on, because they will still control all the Guns, Gold and Canned Food (bitchez!).

      • Charles Wheeler December 7, 2011 at 6:01 pm #

        Meanwhile, the asset stripping accelerates: http://goo.gl/Kf3mB

      • mikems December 12, 2011 at 7:32 pm #

        No, it is the workers who will control all that.

        Our power lies in the very simple fact that they need us, but we don’t need them.

  32. Charles Wheeler December 7, 2011 at 8:01 pm #

    Touching the Void

    The story so far:

    Starring:
    Simon as ‘Germany’
    Joe as ‘Greece’
    Rope as ECB ‘lifeline’

    http://youtu.be/heDnW7tn76Y

    to be cont. . . .

  33. Charles Wheeler December 7, 2011 at 8:44 pm #

    “S&P, like the other rating firms at work today, is a company operating to make profits for its managers and stockholders. It has no public mandate, and indeed, if it acted under an assumed public-interest mandate, it could find itself sued by its stockholders, whose interest is to profit themselves, not the public.

    These “ratings” of companies and nations lack any objective authority or validated qualification. The company sells opinion (like journalists; but nations and central banks very sensibly do not base their decisions on what journalists write). The potential link of unqualified or biased ratings to market speculation is obvious, but nonetheless accepted on the international markets, despite proven instances of past rating agency malfeasance, including the AAA-rated securitized junk mortgages responsible for creating this world financial crisis.

    The extent to which the economic policy of nations is made on the basis of misinformation or wishful thinking is not generally recognized. Even when error becomes established as part of the conventional wisdom, it rarely is challenged because of the price usually inflicted upon public dissenters.

    Consider how many years Anglo-American corporate and academic economics operated on the transparently implausible assumption that markets are perfectly informed and automatically self-correcting.

    Consider the present all but universal policy of imposing austerity on nations, automatically creating unemployment and depressing consumption, making impossible the growth without which the victim nation can never pay its debts.”
    William, Pfaff: http://goo.gl/sALh6

  34. Charles Wheeler December 7, 2011 at 9:12 pm #

    Shock news . . . legal loophole discovered in bank regulations

    “A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.

    MF Global’s bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.

    If anyone thought that you couldn’t have your cake and eat it too in the world of finance, MF Global shows how you can have your cake, eat it, eat someone else’s cake and then let your clients pick up the bill. Hard cheese for many as their dough goes missing.”
    Christopher Elias: http://goo.gl/1vWHM

  35. backwardsevolution December 7, 2011 at 9:52 pm #

    Zerohedge spells out what the banksters plan on doing:

    • ECB SAID TO CONSIDER LOOSENING RULES ON ABS AS COLLATERAL
    • ECB SAID TO PLAN LOOSENING OF COLLATERAL CRITERIA FOR LOANS
    • ECB SAID TO CONSIDER TWO-YEAR LOANS FOR BANKS
    • ECB SAID TO LOOK AT ALLOWING MORE UNCOVERED BONDS AS COLLATERAL

    http://www.zerohedge.com/news/ecb-confirms-shadow-banking-system-europe-tatters

    What Mish thinks should happen:

    Force banks, not taxpayers, to take losses for stupid lending decisions
    Force banks to raise capital so they are not capital restrained in lending
    Reduce public sector spending
    Reduce taxes on businesses
    Reduce taxes on private citizens

    Confidence? What Confidence?

    There is no confidence. Investors stepped in to buy Italian and Spanish debt hoping to unload to the ECB when it steps up bond purchases in the secondary market. Confidence is nothing more than investors front-running ECB president Mario Draghi’s hint that the ECB is about to purchase more sovereign debt.

    http://globaleconomicanalysis.blogspot.com/2011/12/europes-ass-backwards-plan-to-stimulate.html

    A blogger commented:

    Step 1) Buy Greek government bonds for pennies on the dollar.
    Step 2) Pledge said government bonds as collateral, marked at par.

    • Charles Wheeler December 7, 2011 at 10:45 pm #

      Though it’s difficult to see how they can relax rules already looser than grannie’s knicker elastic after a hot rinse.

      A new word to juggle with: re-hypothecation

      [caution: not for those of a nervous disposition – tags: apocalypse; financial armageddon]
      —————————————————————————

      “Under the U.S. Federal Reserve Board’s Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client’s liability to the prime broker. For example, assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets.

      But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited by clients. Instead it is up to clients to negotiate a limit or prohibition on re-hypothecation. On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500).

      This asymmetry of rules makes exploiting the more lax UK regime incredibly attractive to international brokerage firms such as MF Global or Lehman Brothers which can use European subsidiaries to create pools of funding for their U.S. operations, without the bother of complying with U.S. restrictions.

      In fact, by 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system. Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation.

      Despite the fact that there may only be a quarter of the collateral in the world to back these transactions, successive U.S. governments have softened the requirements for what can back a re-hypothecation transaction.

      Beginning with Clinton-era liberalisation, rules were eased that had until 2000 limited the use of re-hypothecated funds to U.S. Treasury, state and municipal obligations. These rules were slowly cut away (from 2000-2005) so that customer money could be used to enter into repurchase agreements (repos), buy foreign bonds, money market funds and other assorted securities.

      As well as collateral risk, re-hypothecation creates significant counterparty risk and its off-balance sheet treatment contains many hidden nasties. Even without circumventing U.S. limits on re-hypothecation, the off-balance sheet treatment means that the amount of leverage (gearing) and systemic risk created in the system by re-hypothecation is staggering.

      Re-hypothecation transactions are off-balance sheet and are therefore unrestricted by balance sheet controls. Whereas on balance sheet transactions necessitate only appearing as an asset/liability on one bank’s balance sheet and not another, off-balance sheet transactions can, and frequently do, appear on multiple banks’ financial statements. What this creates is chains of counterparty risk, where multiple re-hypothecation borrowers use the same collateral over and over again. Essentially, it is a chain of debt obligations that is only as strong as its weakest link.

      With collateral being re-hypothecated to a factor of four (according to IMF estimates), the actual capital backing banks re-hypothecation transactions may be as little as 25%. This churning of collateral means that re-hypothecation transactions have been creating enormous amounts of liquidity, much of which has no real asset backing.

      With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.

      Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011), Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging), Oppenheimer Holdings ($15.3 million), Credit Suisse (CHF 332 billion), Knight Capital Group ($1.17 billion),Interactive Brokers ($14.5 billion), Wells Fargo ($19.6 billion), JP Morgan($546.2 billion) and Morgan Stanley ($410 billion).

      Nor is lending confined to between banks. Intra-bank re-hypothecation is also possible as evidenced by filings from Wells Fargo. According to disclosures from Wachovia Preferred Funding Corp, its parent, Wells Fargo, acts as collateral custodian and has the right to re-hypothecate and use around $170 million of assets posted as collateral.
      LIQUIDITY CRISIS
      The volume and level of re-hypothecation suggests a frightening alternative hypothesis for the current liquidity crisis being experienced by banks and for why regulators around the world decided to step in to prop up the markets recently. To date, reports have been focused on how Eurozone default concerns were provoking fear in the markets and causing liquidity to dry up.

      Most have been focused on how a Eurozone default would result in huge losses in Eurozone bonds being felt across the world’s banks. However, re-hypothecation suggests an even greater fear. Considering that re-hypothecation may have increased the financial footprint of Eurozone bonds by at least four fold then a Eurozone sovereign default could be apocalyptic.
      http://goo.gl/1vWHM

      • Hawkeye December 8, 2011 at 10:02 am #

        Charles

        Just wait in the years ahead they will just brazenly come out and declare something akin to this:

        “In the interests of stability, growth and market confidence we now declare fraud, manipulation and deceit to be universally acceptable and actively encouraged in the financial sector. Meanwhile in the real world, if you so much as photocopy a fiver, then well, YOU’RE NICKED !”

        • Charles Wheeler December 8, 2011 at 12:59 pm #

          @Hawkeye

          Alan Greenspan is on record as saying he sees no need for the investigation of fraud: counter-party risk – the ‘free market’ will flush it out of the system. He pushed for reserveless banking – reserves being a brake on efficiency. He was a follower of Ayn Rand and her extreme brand of libertarianism. He effectively dictated US/global economic policy for two decades.

          Perhaps we shouldn’t be so surprised at the unravelling.

  36. backwardsevolution December 7, 2011 at 10:07 pm #

    The great thing about “stalling for time” is you get to pretend there is actually a solution to the problems (there’s not, and TPTB know this) while dumping all of your junk onto the backs of the taxpayers.

    Dump, dump, dump, sacrifice a few banks along the way (just to make it look good), but in the end their plan is to saddle the taxpayers with debt they’ll never get out of.

  37. Wirplit December 8, 2011 at 11:10 am #

    As you wrote David

    “Nevertheless the ideologues recommended that if no one wanted mortgage backed securities right now, borrow to set up shell companies who will ‘buy’ the securities no one wants and give the appearance that all was still as it was supposed to be.”

    An image of those big elaborate store frontages with a tent behind in the Old West as the tumbleweed blows down the “street” …one says BANK

    or

    “Potemkin villages or Potyomkin villages (Russian: Потёмкинские деревни) is an idiom based on a historical myth. According to the myth, there were fake settlements purportedly erected at the direction of Russian minister Grigory Potemkin to fool Empress Catherine II during her visit to Crimea in 1787. According to this story, Potemkin, who led the Crimean military campaign, had hollow facades of villages constructed along the desolate banks of the Dnieper River in order to impress the monarch and her entourage with the value of her new conquests, thus enhancing his standing in the empress’s eyes”
    -Wikipedia

    Moved onto a Potemkin system run by the modern monarchs of the charade…

  38. Wirplit December 8, 2011 at 12:30 pm #

    Been reflecting on your posts and the other posts here and it seems to me that one of the key premises that the ideology you speak of was founded on was an exponential growth. Back in 2008 I was staggered to see how the growth in derivatives had grown over the previous ten years was dwarfing the actual market itself.
    As you wrote above:

    “So it is, that far from reigning in the recklessly unstable gambling of the financial system, it increases month on month. To take just one example, the financial trade in over-the-counter derivatives accelerated in the last six months by a collossal 18%. The total amount of such contracts at the end of June 2011 was $707 Trillion.”

    Seems we are still on the rollercoaster of this curve ( I nearly wrote curse) and they cant think how to get off.
    This short lecture by a Chris Martenson on how such growth curves have figured in just about everything over recent history really helps put a overarching basis for why this ideology got such traction

    (Cant remember where I first saw this so thanks to whoever first posted it.)

    “Since all our money is loaned onto existence, our economy has to grow exponentially. Martenson proves this point empirically by showing a 99.9% fit of the actual growth curve of the last 40 years to an exponential curve. If we wanted to continue on this path, our debt load would have to double again over the next 10 years.”

    As Galbraith famously observed conventional wisdom ( or an ideology or paradigm) are not destroyed by new ideas but by events.
    Seems we have reached that place.

    http://www.zerohedge.com/news/chris-martenson-lecture-why-next-20-years-will-be-mar

  39. steviefinn December 8, 2011 at 12:36 pm #

    This is perhaps a good example of the times we are living in, a report given to MPs that recommends cancer patients undergoing chemotherapy to be assessed as to their capability of being available for work. Maybe I am being over sensitive about this because I was a carer for just over 16 mths for a person who was terminally ill who was given both radiotherapy & chemotherapy. My understanding of chemo is that they pump in as much as possible so as to get the maximum effect. This basically kicks the shit out of you, as illustrated by the fact a person has to have their blood tested prior to the treatment, to ascertain what dose they can safely be given . Maybe there are people out there who are given small doses of chemo, I don’t know, but everybody I came across seemed to be suffering badly from side effects.

    I can only imagine the effect this sort of thing would have had on the person I knew & myself. When you are crawling through ” the valley of the shadow of death” you do not need this kind of shit piled on top of you.

    So there you are with cancer ( according to some reports now it’s all your fault ) you are declared available for work, you probably feel terrible from the treatment, & in a lot of cases you could have put on a few stone because you are taking steroids. If you are female this makes you feel ugly especially if accompanied by the wearing of a badly fitting wig & the effects of surgery.

    You then presumably have to sign on in order to keep getting your jobseekers allowance which has replaced your previous benefit at a lower rate, therefore providing more cash for the government to pass onto the bankers. You are forced to apply for any of the very few jobs that are available. If your particular cancer is a brain tumour on the left side ( if I remember rightly ) your writing ability has almost gone, so actually signing is very difficult never mind filling in an application form.

    Who is going to employ somebody who is probably a physical & mental wreck ?, & even if they are in remission their future prospects are often not very promising. Employers ( in Northern Ireland anyway ) have between 60-100 people applying for each each job. So there you are forced to go through the farce until by some miracle you get totally well & get a job. Or unfortunately in most cases very ill and eventually as Scrooge said ” decrease the surplus population ”

    Empathy is in ever shorter supply, countries are becoming psychopathic. I don’t know whether this comment is appropriate, I just think it highlights the inevitable consequence of everything else that is discussed on this blog, unless of course you are above it all, due to being wealthy. It makes me very very angry to think that ideas like this are even being proposed, I wont tell you the karma I wish on it’s supporters.

    http://www.guardian.co.uk/society/2011/dec/06/cancer-patients-welfare-work-tests?INTCMP=SRCH

    • Charles Wheeler December 8, 2011 at 1:04 pm #

      Stop Press: Damscene conversion at Daily Mail

      “So, just to further re-inforce that the Conservatives are ‘the nasty party’ they target cancer patients currently undergoing chemotherapy and tell them they will need further tests to ascertain how ill they really are and whether they aren’t just being work shirkers.

      And there was I thinking that having Cancer would be enough for any one human to cope with, silly me.

      Really, though. I have to say this: Heaven, Hell and all points in between. This, with no doubt at all, is a level of despicability previously unknown.

      Forget little facts like lack of jobs and that the Coalition have systematically failed to create jobs. The truth is irrelevant when there’s a good opportunity for poor bashing on the agenda.

      Let’s stop sanctioning this hatred among our own and let’s make our elected representatives do what they are paid to do. Make it a healthier and more balanced economy with a substantial re-distribution of wealth.”
      Sonia Poulton: http://goo.gl/HO8Am

      • Nell December 8, 2011 at 3:12 pm #

        I don’t know about the Damscene conversion – did you see any of the comments? One of the great difficulties is that most people who have jobs attribute their success to their own hard work and efforts rather than good fortune, whereas the truth is somewhere in between. The sad truth is that many who cry ‘feckless, lazy scroungers’, are one step from becoming unemployed themselves given the state of the global economy. Unless, of course, they are all pensioners, in which case, say hello to hypothermia.

        • Pat December 8, 2011 at 5:04 pm #

          This is the result of putting a monetary value on anything and everything. The most valuable things we have are beyond price, and our very existence is a gift that we did not earn. How can you put a price on health, freedom, wisdom, justice, love? Many people do not get paid for caring for the old and sick, or for bringing up children, yet what work is more valuable? The cynical system now in place rests on a belief that everyone has a price, and anyone who doesn’t is worthless.

          Money even corrupts the very language we use. Think of ‘profit’ or ‘interest’ and how their meaning has changed over the years. Or ‘welfare’.

        • Charles Wheeler December 9, 2011 at 10:12 pm #

          I would expect Mail readers to react – the article was a sustained attack on everything they believe in!

          At first I thought they must have been hacked!

  40. Dave December 9, 2011 at 1:23 am #

    stevie finn 12.36 –” If your particular cancer is a brain tumour on the left side ( if I remember rightly ) your writing ability has almost gone, so actually signing is very difficult never mind filling in an application form.”

    I can assure you that for right-handed people that is correct !

    In some cases you can’t talk either , rather difficult in communicating with the docs. Three years later even writing a cheque is still slow .

    Been there .

    frog2 @ CiF.

    • StevieFinn December 9, 2011 at 6:59 pm #

      Dave.
      It was on left side, it was a gliablastoma multiforme grade 3, which actually at a late stage was found to be a metastasis from the breast cancer she had suffered from 8 years previous. She didn’t survive, I hope your experience ended more positively, if it was you, then it obviously did, which is good to know.

      • Golem XIV December 9, 2011 at 9:38 pm #

        Dave, Stevie,

        I wish there was something I could say. I know there isn’t. But I still wish.

        • steviefinn December 10, 2011 at 11:54 am #

          As is often said at this time of year, it’s the thought that counts. Aside from the bare facts, I don’t know what to say either.

  41. mikems December 12, 2011 at 7:44 pm #

    As an aside I would strongly recommend Terry Eagleton’s ‘Why Marx was Right’. It’s not an economic treatise, more of a broadside against the calumnies Marx has been subjected to as a result of Stalin’s crimes, the cold war and the constant class stuggle.

    It actually gave me a new way of thinking about things, very rare in a jaded cynic (or realist if you prefer) like me. It is deep and insightful.

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