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Spain’s BALLS. Part Three. A right load of…

Part one was the Bad Bank. Part two was, what might be in the BB courtesy of Bankia and the other Caja. Part three…

Part two of this series ended talking about Recourse and Non-recourse loans. Noting that Spanish mortgages are recourse. Meaning that if  the borrower defaults the lender/bank has recourse to not only the collateral on the loan, i.e. the house, but also all the borrower’s other assets as well. From this one fact I think we can glean a little clarity.

Unlike the situation in America, for example, you cannot walk away form a mortgage in Spain. Thus people haven’t. The Spanish will do almost anything to not default on their mortgage because they fear losing all their assets not just their house.

But at the same time Spain has and has had HUGE unemployment. At present the unemployment rate is a socially destructive 25%. That is 4,630,000 people not earning any money, not paying any taxes. It has been over 20% for a couple of years now. Youth unemployment is over 50%!

How are those 4.63 million Spanish people paying their debts? If many of them have a mortgage, how have they been paying it?

Well we might note that capital has been leaving the Spanish bank at an alarming and accelerating rate.

An article at Zerohedge notes,

Spanish financial institutions suffered the largest deposit outflow on record in the month of July when a whopping EUR74 billion, or 5% of the country’s entire asset base, picked up and left

This is a huge acceleration. In the first three months of the year the outflow was already alarming but was ‘only’ €97 billion or 10% of the nations GDP.  Predictably, it gets worse. CNBC today reports,

On a three-month rolling basis, portfolio and investment outflows from Spain totaled 52.3 percent of the country’s gross domestic product (GDP)

So when we take in to account all kinds of assets, we find capital flight of pretty serious proportions. The article quoting Bank of Spain figures breaks this flow down to find that,

…foreigners were large sellers of Spanish securities in the latest quarter, which generated an outflow of 19.4 percent of GDP.

While a further 16.7% of GDP was Spaniards pulling their money from Spanish Banks and putting it in foreign banks. Pure capital flight. But those figures do not account for all the money being pulled from Spanish banks. Nor for the money that was pulled before.  I have a feeling – its just a feeling, I have no figures – that many, many Spaniards have been pulling money from the banks, from their savings in order t pay off their recourse mortgage. I wonder if many of them are now coming to the end of that road?

You see I think the financial world and our rather wealthy and privileged leaders take so little notice of the lives of ordinary people that they think that ‘people will manage’ without ever wondering ‘how?’ If people have ‘managed’ so far, our leaders cease to think about them – it’s a strain to think about people you never meet, and frankly don’t care to meet – and assume they will continue to ‘manage’ for as long as they are required to. Much like grass is green and will continue to be green so ‘The People’ in the minds of those who rule over us, are just another part of the natural world to be taken for granted and used for profit.

But people cannot ‘manage’ indefinitely. At some point, like over fished seas, polluted rivers and melting ice-caps there comes a point where something gives. I wonder if we are now at that point in Spain.  I think an increasing number of people in Spain, but elsewhere across Europe as well,  are simply beginning to run out of the savings with which they have been keeping their families afloat. Don’t forget money taken from saving to pay for mortgages won’t re-appear back on the bank’s books because the banks did not hold the mortgages. They were securitized and sold on.

If I’m right then capital will leave the banks not just from capital flight but simply as accounts run dry. Is this not inevitable when unemployment runs at 20%+ for year after year? Regardless of my speculation, what is not speculation is that the Spanish Banks are running our of money. And this has rather profound knock on effects for the government. To wit, Spanish banks, which the Spanish government has relied upon to buy Spanish debt/bonds are now not buying but actually selling Spanish sovereign debt/bonds.

As reported in International Financing Review, (IFR)

Spain is beginning to lose the support of its banks as last-resort buyers of government debt, with lenders selling out of their holdings at the fastest pace in more than two years in July….The sales are a blow to Madrid, which was increasingly reliant on domestic banks to buy its debt after an exodus of foreign investors.

Since just March this year Spanish banks have sold €17 billion of Spanish government bonds.

In July alone, domestic lenders reduced their holdings by €9.3bn, in part to meet an outflow of deposits, signalling that money is now too tight to support the sovereign.  (My emphasis)

Banks are running out of money. They have no more assets to pledge to the ECB. The Caja’s assets are too rotten for a dung beetle to bid for, capital is leaving by every door, ordinary people are out of work and have been told they are unlikely to find any this year or next (unemployment is projected to go up in Spain in 2013, not down) and other banks will not lend to Spanish banks at all.

Translate the capital flow from percentage of GDP in to a percentage of bank assets and,

Since June last year, clients have withdrawn €233bn or 13% of the total….

Or in graph form,

 

 

 

 

 

 

 

 

 

 

That isn’t good.As the IFR piece says,

A need to raise cash to meet those withdrawals may have prompted the recent bond sales, as other assets owned by banks – mainly loans and mortgages – are far less liquid.

Spain’s banks have long since been the buyer of last resort for Spain’s sovereign debt. The same is true in Italy and many other nations. When no on else will buy your debt you can still get your banks to dig their hole a little deeper. Till the day they say no. In Spain it is that day. Then you’re stuffed.

Spanish mortgages are turning bad at a faster rate than ever. The Caja have been retaining and hiding the worst of those non-paying loans. The caja and other banks are finding people, foreigners and Spaniards alike pulling what money they have left, out of Spain’s banks. Without those deposits the banks just don’t have the cash to pay their day to day costs let alone have money left over to keep Spain afloat by buying its debt/bonds. In fact the banks are in such a state that they are now selling those bonds for cash, making it even harder and more expensive for Spain to sell more debt. And sadly Spain has a LOT more debt it has to sell.

Spain’s official ‘plan’, I use the word very lightly indeed, is to sell €6 billion a month every month. €3 billion of which will be old debt re-issued/rolled over and €3 billion of new, extra debt. (These figure are from a UBS note published over at Zerohedge.) Then, in 2013, if all goes according to that famous plan, Spain will, when you add in Regional debts that are crashing and burning, need to issue up to and possibly in excess of  €120 billion.

YEAH…RIGHT! Phone call for Mr Draghi!

So what will our lords and masters do about this riot of failure and incompetent neglect? Will they think that possibly they should draw a line under ‘saving’ insolvent banks and corrupt developers? Will they close the banks, sell their assets and recapitalize some clean banks? No of course not. Will they make those who made the stupid loans and who own the losses take them? Never. Will any of those who have ruined a nation ever be made to face a court? No of course not. Don’t be silly.

What they are planning is what they have done so far. Pump more and more money in to failed banks, create new bad banks so they too can be given public money that disappears when they too fail, and then turn around and tell the tax payer that the nation has spent too much and the government will, with crocodile tears in their eyes, have to close some hospitals, cut wages, ‘liberalize’ the work place, fire thousands of lazy, good for nothing public service workers, and then wonder why tax revenues are going down and banks are seeing money leave.

They will pump money in to the one sector of the economy which is NOT going to help any sort of recovery, and absolutely refuse to spend money on any sector that might, and then when all fails they will proceed to sell off the sovereign assets of the nation that are not theirs to sell.

Greece is already planning to sell national assets and now so is Italy. Both governments intend to sell-off businesses particularly utilities. Privatization is about selling stuff that WILL make a profit. The argument is always that the business is ‘badly run’ when in the public sector but will be ‘reformed’ and ‘rationalized’ when taken private. No one ever asks why things were been badly run or sets about reforming and rationalizing them while retaining them IN the public sector. It can be done. The NHS in the UK delivers very good health care for far less per capita than Private health care in the US for example. It is a very efficient system despite its many faults.

But all such arguments are denied and ignored in favour of the chance to asset strip a nation. And that is where we have arrived.

Privatization targets utilities because they are monopoly businesses whose services people cannot do without. If you sell water you are the only supplier and no one can say no. Same with electricity (the grid that is) and the roads, the trains, the ports etc. All built up over decades with tax payers money. Now those assets and the profits they can generate will be privatized. Of course it is quite true that in the case of Spain and Greece much of the rot was not only in private banks, but in regional and even national government. But does that make the looting of a nation somehow better? So the ordinary people were betrayed by a small subset of wealthy and powerful  people who ran local banks and local government. Certainly the ordinary people are guilty of laziness and a willingness to believe the vapid blather of the bankers and the politicians. But even so, does that justify stripping the assets owned and paid for by the citizens of a nation and selling them at recessionary prices to the wealthy few, in order to better bail out those same wealthy few?

The whole rationale for the bail-outs is that the banks need cash but should not , must not be forced to sell-off their own ‘assets’ to raise that cash. And why not?  Because in a recesssion they would not get a good price for them.  But the assets of the people, apparently, MUST be sold now, right now, in the recession at recessionary prices. And who advises this so adamantly? The banks.

And then there is the land of  the nations itself. I find it sad that wars have been fought to protect it, but now the traitorous few are simply going to sell it to their friends. Who needs tanks when you have banks? Greece will sell or long lease islands. Italy will sell beaches and historical landmarks.

And the people, us, what will we do?

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61 Responses to Spain’s BALLS. Part Three. A right load of…

  1. Joe Taylor September 5, 2012 at 6:44 pm #

    >And the people, us, what will we do?

    The $64,000 question!

    • ch-ch-changes September 5, 2012 at 11:11 pm #

      Place your bets on what we could do

      A) Rediscover what we can do – refuse to use tax avoiding “moved our head office to a PO Box in Switzerland” types and put our cash in Building Societies and Credit Unions

      Or

      B) Look amazed when that $64000 isn’t worth the paper it’s not even printed on anymore for us – and wonder how at the other end the 1% have discovered the alchemic genius of creating an extra nought for themselves every five years.

      Clever wheeze creating noughts from nothing – we should all have a go. Must be better than health, education, travel and all the other stuff we’ll be told we can’t afford eh

      Doh

    • simon December 28, 2012 at 11:30 am #

      Buy a home for €160,000 and you can get permanent residency for free in Spain.
      LARRONDOSI.com REAL ESTATE MEDITERRANEA
      http://www.larrondosi.com/en/

      SPAIN BARCELONA PENISCOLA ALICANTE REAL ESTATE LARRONDOSI.com
      Venta y alquiler de viviendas en la costa mediterranea desde 20.000€ hasta 2.000.000€, cerca del golf, mar.Grandes oportunidad, Casas embargadas de bancos, en Barcelona, Tarragona, Peniscola, Alicante, etc.
      Sale and rental of homes on the Mediterranean coast from 20,000 € to 2,000,000 €, about golf, sea. Great opportunity, bank foreclosed homes in Barcelona, Tarragona, Peniscola, Alicante, etc..

  2. Pat Flannery September 5, 2012 at 7:32 pm #

    It would be interesting to see if any Spanish group has challenged whether a securitized mortgage retains its recourse status. I suspect the recourse privilege was originally extended to protect banks. Do banks lose that privilege when they securitize their loan portfolio? It should be challenged.

    As for the second part of your piece, the next wave of bonds will probably be from securitizing income from public assets. That is an almost bottomless pot of bond money, as I saw beginning to happen in San Diego.

    The way it works is: a city, or any public agency, simply “sells” a public asset e.g. fire station, police station, library etc. for $1 to a special purpose city-owned private corporation who “leases” the asset back to the city. The corporation then issues revenue bonds based on that lease. These bonds enjoy municipal status as this corporation is part of a city structure making the bonds tax free to the investor – who of course is, you guessed it, a bank.

    Once a concept works in one country, especially the U.S., it goes viral, spread by the big international accounting and law firms. Look out for that concept appearing in Spain

  3. steviefinn September 6, 2012 at 12:19 am #

    I did a google search earlier for ” Repossessed houses Spain *, it came up with countless sites trying to flog properties for 40 -50% of their initial developer price. There was also a lot of info on Spanish banks offering 105% mortgages on these properties. Firesale ? Obviously different to the US but foreclosed houses seem to have been gobbled up by investors over there for rentals.

    http://www.bloomberg.com/news/2012-06-13/private-equity-has-too-much-money-to-spend-on-homes-mortgages.html

    Insult to injury I would have thought, especially to Spanish people who due to the banker inflicted crisis lose their jobs, savings, home & then unlike in the US, their shirts as well, & probably due to Draghi blackmail.in order to qualify for more funny money their quisling government slashes more holes in the safety net which will probably result in the return of Rachmanite type slum landlords.

    Sometimes I despair of the human race, we allow the ruination of a beautiful world by empty vessels of insatiable greed, aided by their cocksucker careerist lapdogs.

    Are bad banks limited to use as in Nama’s case to toxic property debt or could they be used for other dodgy stuff, as in Italy which I think, doesn’t have property bubble problems ?

    • Joe R September 6, 2012 at 3:20 am #

      http://www.pisosembargadosdebancos.com/

      Repossessed property site.

      piso = apartment , casa = house, nuevo = new, semi nuevo = almost new , segundo mano = 2nd hand.

      If you are not familiar with spain you will need a provinical not regional map to refer to…and not a lot of stuff is new…

    • Jim M. September 6, 2012 at 2:48 pm #

      Sometimes I despair of the human race, we allow the ruination of a beautiful world by empty vessels of insatiable greed, aided by their cocksucker careerist lapdogs.

      T’was ever thus, Stevie, and I fear t’will ever be so. I think this is probably due to a moral version of Gresham’s Law, whereby good folk either lower their preferred standards or get buried in the rush to the trough.

      I believe the (imo) under-rated poet Norman Cameron grew weary of this very thing:

      http://courses.nus.edu.sg/course/ellpatke/Miscellany/Poetry/Cameron.htm

      • steviefinn September 6, 2012 at 11:51 pm #

        Jim M

        As you say T’was ever thus & t’will ever be so.

        ” All that is necessary for evil to triumph is for good men to do nothing “. I would add – All that is necessary for good men to do nothing is for evil to write the news.

        Thanks for the poem.

  4. Daniel September 6, 2012 at 3:59 am #

    We have had a financial coup d’etat. Except in Britains case it happened under Thatcher. The remains of the Health and Education system are the last target.
    1,000 years ago, it took a military army to come in and conquer a country , to take control and grab the land and charge the conquered people rent and taxes. Now, in today’s world, they do not use an army anymore.
    Finance today is the means of conquering a country and getting what in the past took an army. Financial conquest is how you shift the taxes onto the population to pay the financial sector, by privatisation of essential utilities, electricity, water ,gas, transport. It is how you load a population down with debt and make a population pay interest and penalties on debt service, you make a population pay for schooling and medical care , you make a population take on a lifetime of debt in order to buy a home , you make the governments go into debt to the private banks. This is debt serfdom into posterity .
    You essentially empty out an economy, and you take its economic surplus financially without an army, just by promoting, what really is junk economics and junk politics. A good analogy, is to liken it to, a tapeworm draining the sustenance from a body.
    Behind the politicians and mainstream commentators, who do not have a clue about the causes or mechanics of the current financial and economic situation, there are people who understand it well and, actually, engineered this “crisis”. They take full advantage of it. They oil the wheels of the system, giving politicians sinecured well-paid Directorships in the finance sector ,which they are not professionally qualified or competent to fulfil. All in payment for their complicity in continuing the corrupt system.
    The financiers today can be equated with robber barons of old. They plunder and steal under a cloak of respectability, and even worship from their complicit and suborned politicians.

    • Pat Flannery September 6, 2012 at 10:11 am #

      Thank you for that. It says it all.

    • Andrea September 6, 2012 at 6:29 pm #

      Well said, Daniel. Still the ‘war’ industry, military lobby / defense / arms industry etc. in the US is very powerful.

    • MrShigemitsu September 10, 2012 at 10:41 am #

      Excellent post, Daniel.

    • Paul September 14, 2012 at 8:37 pm #

      Well and succinctly stated, sadly.

    • Chris G September 20, 2012 at 12:58 pm #

      Very well said Daniel.

      We’ve been stitched up like kippers by the overlords, oh yes, another 1000 years of servitude

      But with that knowledge, I don’t know what to do other than cry. Or just commit suicide. Screw it all

  5. John Souter September 6, 2012 at 12:43 pm #

    Yesterday religion -today finance – the eternal scam of humanity of the no cost ephemeral promise of a heaven and jam tomorrow, composed, choreographed and acted by fraudsters for their own amusement and self grandisement.

    When will it end? Possibly never if we allow them to retain control and simply change the script and modify the choreography.

    What’s our best hope for change? Think for your self, value your soul and fight for real democracy.

    The constant refinement of the democratic process may never reach perfection, but it is the best we have for now; and its the cynical contempt and corruption of it that has reduced its substance to a flaky film over a cauldron of toxic soup.

    If we expect the money men, power brokers or politicians to change our apathy has fuelled our naivety. They after all are already well stocked in jam and only an arms-length away from their concept of heaven. They’re not going to give it up, no matter how much we plead or clamour at their gates. What we should be doing is isolating them within their compounds while firmly, but not unkindly, treating their delusions of power and elitism to the values of common good and the peoples sovereignty.

    Will it ever happen? I hope so, perhaps not in our but, optimistically in our grandchildren’s lifetime. Otherwise the buggy in Mars may be transmitting messages that are never acknowledged.

  6. Pat Flannery September 6, 2012 at 6:46 pm #

    I would like to hear from any of you who wishes to comment on our new “Outright Monetary Transactions” http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html

    I watched Draghi’s press conference http://www.ecb.europa.eu/press/tvservices/webcast/html/webcast_120906.en.html

    I assume like most others that the dissenting voice was Germany.

    Are these OMTs effectively QE by another name? I know Draghi is stressing their conditionality on austerity measures but he has no way of enforcing that except by blackmail. Can he do that? There are calls in Ireland to challenge the legality of policy enforcement by central banks. Any thoughts?

      • steviefinn September 8, 2012 at 10:44 am #

        Seems as though German citizens would have to pick up the tab, I wonder whether Merkel will tell them :

        http://brucekrasting.com/on-marios-shock-and-awe/

        Noam Chomsky & Bill Moyers from 1988 talking about things I wish I had then been aware of :

        https://www.youtube.com/watch?v=zJU2c7YfQTE&feature=player_detailpage

        • Mike Hall September 8, 2012 at 12:16 pm #

          Can’t say I’m a fan of Bruce Krasting’s hyperbole. He makes a number of accurate points about this OMT deal, tho’ nothing more than the obvious, & then makes this howler (& repeated) about Germany being on the hook for the ECB’s bond buying.

          This last is pure nonsense & displays a fundamental lack of understanding of what a central bank is – issuer of currency (by keyboard).

          The fact that no one picks up the tab for ECB OMT operations is precisely the real point of doing this – to break the default risk merry-go-round of over indebted sovereigns bailing over indebted banks. And thus stop the financial markets taking the piss with completely unsustainable interest rates on sovereign bonds.

          The reason for doing this at this time is surely to help veer off Spain & Italy from crashing out of the Euro – which would end the currency. (Note George Soros’ rather accurate ‘3 months to act’ said, well….3 months ago.) We don’t hear too much on the Anglo-Saxon media, but social unrest is rising in both countries. In Andalucia, a local mayor recently led a bunch of citizens into a supermarket to load trolleys with food & exit without bothering with the ‘checkout’. The fact that there wasn’t much enthusiasm for arresting these citizens for theft speaks volumes about the political knife edge operating in parts of Spain.

          The really key element in all this, studiously avoided by Draghi, is any public suggestion of what the ECB intervention interest rate ‘peg’ wil be. Draghi knows full well this will be a matter of politics & political judgement – or rather brinkmanship between a full blown citizens’ revolt & their neo-fuedal elites. As will the detailed ‘conditionality’ rules.

          In any case, it’s unlikely that the ECB will actually buy many sovereign bonds. An interest rate sufficiently attractive to the markets will be chosen – & I’m sure it will pay considerably more than current $, Yen or £ bonds.

          To the observant, any pretence that the ECB is not up to its gilded necks in (unelected) political action is firmly blown. The MSM still feed us the BS tho’.

          The overall game remains. No fundamental change in the ongoing brinkmanship in pushing the interests of the elites (paticularly financial) as far as possible short of causing violent uprising of citizens. Returns to Labour are to be lowered as far as possible, Governments’ action in the interests of citizens to be reduced as much as possible. As many public assets transferred to the elites at firesale prices as possible.

          • Patricia September 9, 2012 at 2:13 am #

            Could anyone refer me to an article that explains what happened in Germany in the 1920s and more importantly what caused that hyper inflation. I need to have a good answer because whenever I bring up printing money as a possible answer I have Germany in the 1920s and now Zimbabwe thrown at me

          • Mike Hall September 9, 2012 at 7:43 pm #

            Zimbabwe for hyperventilators 101

            http://bilbo.economicoutlook.net/blog/?p=3773

            The key to both Zimbabwe & Weimar is that in both cases their productive capacity (farming & industry mainly, respectively) was completely decimated.

            In Zimbabwe by Mugabe’s thugs removing the (mainly) white farmers from their farms – the thugs had no idea whatever how to run the farms. Agricultural & food output plummeted, previously their main economic activity.

            In Weimar Germany, their industrial base was devastated by war & also annexation by France of their most heavily industrialised area. Also massive war reparations led to Germany attempting to print currency to pay, but there wasn’t enough German goods for their own population to buy, let alone purchases by foreign recipients of German cash.

            The key question on inflation is – are their goods & services to be bought, or readily available labour & productive capacity to supply them? If the answer is ‘yes’, more goods are supplied, prices do not rise.

            With short time working & major distribution ‘channel stuffing’ in the European motor industry, for example, their is no doubt whatever that the production capacity we actually had 5 years ago is still fully in place. The same is true for the US. We can be certain we could return to those previously existing levels of output & employment quite quickly if the aggrgate demand – consumers’ ability to spend (& indeed the money supply) could return back to that level).

            Sovereign issuers of fiat, free-floating currency can stimulate their economies directly, without any borrowing or debt required – eg US, UK & most others except Eurozone countries. However, the Euro is a fiat, free floating currency & only ‘politics’ stands in the way of identical fiscal stimulus measures (free of debt).

            Inflation will be a constraint at some point – near full employment/capacity utilisation. But this is easily regulated by reducing fiscal spending &/or increasing taxation (‘extinguishing’ money).

            Maximising production & stabilising prices in this way is termed ‘functional finance’ after Abba Lerner & further developed by MMT economists.

  7. John Souter September 6, 2012 at 9:36 pm #

    Pat F – I doubt if there is anything quantative in their easing other than electronic digits as a salve to the anxieties of the uber rich.

    But it adds to the perceived legitimacy of the practitioners of the black arts while enhancing their control by increasing their access to the pockets of the poor.

    With half the world struggling towards freedom, Europe is re-introducing serfdom.

  8. Dilon September 6, 2012 at 11:09 pm #

    For many years now people have been almost brainwashed into taking no interest in matters such as politics and economics and by no mistake. Taking advantage of this the wealthy elite have seized control of entire nations and squeezed everything they can from them until breaking point.

    Now we are faced with the choice of going back to a pre 20th century society where a tiny elite rule and the rest are left in poverty and squalor. Or people could take action and get the change needed to bring back equality and fairness. Movements such as occupy are only the beginning if everybody took action then chnage is possible

    • Geowaverider September 7, 2012 at 8:23 am #

      Count me in.

      Moved my bank accounts (personal & business) to Coop Bank as a start.

      I’m getting angrier by the day and cannot understand why I’ve believed the illusion that has been presented to me since I can’t remember when!

      I am feeling very let down by the “leaders” of our society. I placed trust in them to do the right thing and they have failed everyone including themselves as it is all going to end in sadness. Don’t they understand this? In the end they will lose too.

      Just me having an early morning rant!

      What do I do next?

      • Roger Lewis September 7, 2012 at 8:46 am #

        Tell your freinds and family.
        We should all start a new boston tea party. Have a cup of tea and share our perceptions and concerns.

      • Golem XIV September 7, 2012 at 8:48 am #

        Hello Geowaverider,

        Wecome. You ask what do I do next. Can I ask you to remember, or if you don’t mind, tell us, what were the things that made you see the ‘illusion’?

        Because whatever those things were, they are what you need to do for at least two other people. If you can set two people on the path you are now on, then the rate of spread of dissent has become an arithmetic function which grows unbelievably fast.

        I wonder if people might n ot take strength from hearing the stories of what made the ‘illusion’ crumble for others.

        • Geowaverider September 7, 2012 at 9:20 am #

          Roger/David

          Unfortunately, I’m of the engineering class and I’m a better “doer” than “sayer”. I try to warn friends and family. They don’t want to listen and that makes me angry and sad. They all believe as I once did that we will all be taken care of by our so called leaders and so they all wander along as lambs to the slaughter.

          Where I come from “You don’t get owt for nowt”.

          I will return….

          Brian

          • John Souter September 7, 2012 at 11:10 am #

            Geowaverider – unfortunately, like many other old epithets the counter approach has attracted the parasites.

            Not only do they get plenty of owt for less than nowt, they rob you for the privilege.

            I suspect from time to time we all get the feeling we’re wailing in the wilderness.

            Good luck with your contemplations, you might come up with the spark that feeds a flame.

          • Roger September 7, 2012 at 1:48 pm #

            Don’t give up. Never preach and be ready with a concise explanation about how money created as debt causes great gyrations in the financial system. When you explain to people that they have less money as we all do simply because there is less of the stuff going around the penny drops as people do notice that there is less money around. I have started an active program of ringing up former business partners and associates and chatting through whats happening with their businesses and pointing them towards the positive money campaign. On illusions I tend to refer people to Epictetus The Enchiridion and Plato’s Allegory of the cave some how people seem re assured when reminded that we are really just replaying a pantomime thats has played out countless times in the past 5000 years.

  9. Pat Flannery September 7, 2012 at 9:03 am #

    Dilon & Geowaverider: become an unashamed “civic activist”. The word “activist” has become debased, a pejorative word. Start in your immediate neighbourhood. Go to the next public meeting, no matter what it is about. If there is no public meeting, call one. It doesn’t matter what the issue. Just call one. Make sure that it is not dominated by your local politician or your local reporter. Ask them to sit at the back as we have been doing for too long. Good luck. Let us know how it worked out.

  10. Jim M. September 7, 2012 at 2:26 pm #

    It’s all ok, folks!

    We can all calm down, take a chill-pill or some Soma or a glass of Scotch. Our beloved leaders Van Rompuy and Barroso have fully engaged with modern media and networking technologies and will doubtless be leading us forward to the bright sunny uplands of economic recovery.

    Pay no heed to the Doubters and the Nay-sayers… Herman & Manuel* are on the case and we are barely a tweet or two from turning the corner!

    http://1.bp.blogspot.com/-iMMrThREyBw/UEg-TeNBehI/AAAAAAAAJss/ntx4h-mAiQQ/s1600/Barroso%2BTwitter.JPG

    *Herman & Manuel… it’s like Gilbert & George, but without the camp charm!

    /sarcasm off.

  11. Daniel September 8, 2012 at 5:15 am #

    Democracy is a total fraud, a charade to make people think that they have control.

    All over the world, political hopefuls pound the campaign trail whipping voters into frenzied ecstasy like a group of howling lapdogs. There’s never a rational discussion about actual plans… just high-sounding bombastic talk masquerading as substance.

    Then the guys get in office. They wage wars. Drop bombs. Spend like drunken sailors. Indebt future generations. Pollute the currency. Spy on citizens. Suspend the rule of law whenever it suits them. And in short, they do nothing that they promised.

    Curiously, voters are always surprised when ‘their guy’ never turns out to be the principled leader they voted for… as if this doesn’t happen after every single election.

    Of course there’s always somebody else to blame. The other party. Evil terrorists. The Chinese. Rich people. Ziionists, immigrants etc.. And so, with blame appropriately assigned, the same cycle of frenzy and folly starts right over again at the next election.

    Meanwhile, unelected central bankers who are accountable to no one play God with the economy… destroying their currencies and the functions of the free market along the way.

    European Central Bank president Mario Draghi (one of the aforementioned unelected false gods) was telling the world that he would indefinitely continue printing money in unprecedented quantities.

    Stocks, bonds, gold, oil, agricultural commodities… absolutely everything reacted to Draghi’s statement. A single individual utters 472 words about devaluing his currency and it moves markets around the world. It’s utterly absurd.

    This is what passes as democracy today, and it is not something that should be celebrated. Because any government, whether a democratic republic or anything else, is based on the principle of awarding a very tiny group of people nearly unlimited power– to kill, steal, start wars, control the money supply, etc.

    These are powers that no single person or small elite should have. Yet it comes with the territory in every system of government, awarded to people whose only qualification is their desire to control others. The only difference is that, in a democracy, people cling to an illusion that they’re free.

    This deceit is definitely not something to celebrate… or participate in… or reflect on how it made the world a better place.

    Human beings are one of the most adaptable species on the planet. We don’t need masters telling us what to do or how much freedom we can have. And the truth is, it doesn’t have to be that way.
    There are solutions to this financial crisis.
    First, we need to remove the ability of the Bankers to create money out of thin air. This is the cause of the crisis. It is their compound interest bearing, debt based money, that expands exponentially to infinity, that is the problem. It can never be repaid. The debt must be forgiven or defaulted on.
    The ancient Babylonians ,knew this 3000 years ago and the Law of Hammurabai is the source. They knew the only solution was ‘debt that cannot be paid..will not be paid’.
    The alternative then was a starving nation,as farmers could not find credit to buy seed to plant.
    Secondly, Govt must use this money making power. In Greeks case, they must exit the Euro . Revert to the Drachma and issue their own debt free money, but only to productive ,wealth creating industry, and not to the FIRE sector, ( finance,insurance ,real estate).
    This has been Mervyn Kings ,BIG MISTAKE when he issued over £375billion to the banking sector, and Camerons plan to build 70k more new houses is wrong and a misdirection of money.
    The issue of this money must be controlled by a non-political Monetary Panel. This is the difficult part ,to prevent corruption of this panel.
    Productive industry will create ,wealth and jobs. The taxes accrued will cancel out the Investment money issued.
    Money is a means of exchange, a token and a tool to assist trade and industry,in itself it is worthless and not wealth.
    The present Capitalist system is dysfunctional and not fit for purpose. The Financiers broke it and they think they are the ones to fix it and go back to business as normal. This is not going to happen.

    • Golem XIV September 8, 2012 at 9:11 am #

      I find myself largely agreeing with your assessment of the failures of our present financial and political system.

      To me this means we absolutely must find a means for taking back democracy. I am a believer that democracty is still our least awful system.

    • Pat Flannery September 8, 2012 at 12:01 pm #

      Daniel: “The only difference is that, in a democracy, people cling to an illusion that they’re free. ” Hmmm. Hence apathy? So we need to make people aware of their chains. How do we do that? We seem a long way away from that tipping point. People seem to like their illusions. How do we make them appear as chains? People criticize politicians in general but defend their own local pol. Golem: yes, we must take back democracy, but first we must understand it. Right now it appears we don’t.

    • John Souter September 8, 2012 at 9:16 pm #

      Daniel -it is not democracy that is fraudulent, but the people who supposedly claim to be capable of administering it for our benefit and as our representatives when in practice and fact they’re either free loaders or tyrants.

      Our failure occurred when we allowed the democratic process to be sold to the highest bidders.

  12. thomas fowler September 8, 2012 at 10:50 am #

    Again, I see a great article, Golem XIV. Still, please don´t trust those numbers that come out of Spain: you´d be amazed at the amount of people working that are not declaring said work, how else can you explain that the country is still going? to be honest, not even we -Spaniards- know how many people work. The same applies to economic activitiy, with an increase on the VAT rate from 16% to 21% in two years…the fact that the Government collects less VAT doesn´t always mean that there is less business going on, it also means that you push the taxpayers to not declare (we see it as a moral obligation not to pay taxes, after all, the politicians either burn our money or just hand it over to the banks).

    Due to my work, I know many regional and local bank managers, employees, etc, and the picture they give you is grim. The Cajas are the bigget mess by far (no one actually knows what´s going on yet), and whatever crap Rajoy fed Merkel in her visit of yesterday, the truth is that sooner or later the timebomb is going to explode. This we all know, however much we try to distract ourselves with football and party.

    Concerning the comments on democracy, etc: I don´t know how this would fare in your countries, but Spain needs to hit bottom again, to come back up. We are a poor rich country. Very poor in resources but “rich” in needs, especially in the south, were we traditionally have very few needs (food, health, entertainment). Most of you live in countries with a longer tradition of industrialisation and capitalism, which has favoured the autonomy of the individual, therefore you have a stronger “democracy”, for which I envy you, especially when you believe you have rights and that you can protect them with a mere protest to whomever menaces you. I am under the impression that if you stop trusting in your institutions and stand up to them, then you may find an easier way to a better democracy.

    Have a great weekend and don´t forget to enjoy yourselves.

  13. shaun o'hara September 8, 2012 at 5:18 pm #

    thanku golem for 3 excellent articles.
    i emigrated to spain in 1984. It is ironic that 30 years later my grown up kids are leaving spain to look for work in engerland. Thousands of young spaniards have already made the move

  14. gatopeich September 9, 2012 at 2:00 pm #

    Thanks, its the best summary I have read so far. Thinking of a translation to Spanish… But people who didn’t grasp it yet are the people who will never care to read anyway. They believe in TV, they follow TV.

    • Joe R September 10, 2012 at 5:26 am #

      jajajaja…..muy diverto! yo no puedo dizer lo que los españoles van a pensar exactamente – más yo creo que lo menos, ellos van a pensar que los americanos de Iowa no saben nada sobre España….

  15. John Souter September 9, 2012 at 6:15 pm #

    David et al – have a read of this -the Fed bailing out or buying the world?

    http://www.standupamericaus.org/politics-washington-dc/reprise-fed-audit-16-trillion-in-secret-bailouts/

  16. Roger September 10, 2012 at 10:14 am #

    This is an interesting Article on Japans Contribution of funny money to the intrevenous drip of debt for the Euro / Dollar/ Stirling Axis of evil.
    http://www.globalresearch.ca/the-myth-that-japan-is-broke-the-worlds-largest-debtor-is-now-the-worlds-largest-creditor/

    • John Souter September 10, 2012 at 12:11 pm #

      Roger – interesting!

      Read in conjunction with the Feds $16 trillion bailout and Mike Hall’s two excellent comments on this thread gives a clear indication of the Anglo/American/Euro axis to maintain the power of the elite at the expense of all others.

      On an earlier thread Mike referred to and article by Bill Black, in which he accuses the Republican vice presidential candidate of advocating policies similar in their ideological bigotry to these adopted by Westminster during the Irish Famine.

      I believe this sophistry is again endemic throughout America, UK and Europe, hence my reasoning behind my comment of ‘democracy being sold to the highest bidders.’

      If the article you refer too is substantially based on fact, I think your use of ‘interesting’ would verge on being an understatement.

    • Mike Hall September 10, 2012 at 3:02 pm #

      I believe Japan’s ‘assistance’ in lending to the Eurozone has little to do with altruism but a lot to do with stopping the Yen increasing in value too much & harming their export trade.

      I read recently that exchange rates now are far more affected by capital transfers than actual trade balances. Which is not a particularly good thing, as it enables serious speculation & manipulation by private entities to skim off profit to no productive purpose. Given the ballooning size of the financialised economy compared to the real economy in the last decade or two, such manipulations should come as no surprise.

      Towards the end of the article Ellen Brown is clearly stating the (correct) MMT understanding of the monetary system (& macro economics possibilities that flow from that). Tho’ she doesn’t explicitly use term ‘sectoral balances’, it’s quite obvious she recognises this accounting identity in stating that government defecits = the gain in the non-government sector’s financial assets.

      As has often been pointed out in MMT literature, New York’s famous ‘debt clock’, rather being something of concern – gov debt – should be something for citizens to celebrate as a measure of their (non-government sector) wealth! ($ for $, but including foreign held $ assets as well)

      It’s interesting that the MSM media routinely slag the Japanese economic performance, yet anywhere in the midst of the GFC their unemployment hasn’t risen above 5%. (That’s as good as Ireland got in the ‘boom’!) Without changes of government, flip-flopping somewhat over the last 20 years in fiscal policy, they could have done even better. Bill Mitchell has written a lot about Japan on his blog – well worth reading. Clearly the ‘threat of a good (-ish) example’ is not something the western authorities like to tolerate – if they can’t crush it they’ll at least try to propagandise it out of existence.

      It seems that at least some people in authority in Japan actually understand the monetary system.

      The first point being that if it is desired that the non gov sector, over time, accumulate net financial assets (wealth), then the issuer of currency must go into ‘defecit’ to provide it, Yen for Yen, $ for $ – this is just ‘accountancy’, not ‘opinion’. Whilst all & sundry elites, ideolgues & useful idiots like to equate such government negative balances as similar to household ‘debt’, somehow requiring repayment, it is clearly not the same thing at all. It cannot be, & has not ever been ‘repaid’ – otherwise every cent of net non-government financial assets would be ‘extinguished’!

      It thus follows that long run gov budgets in balance or surplus will reduce aggregate demand spending & increase unemployment & reduce output in the real economy, as the non-gov sector tries to hold on to (or increase) their wealth in financial assets. Ultimately fostering a divided & callous beggar-thy-neighbour society ‘competing’ over diminishing output of goods & services.

      Such money need not of course be issued as interest bearing ‘debt’ at all – government bonds are purely a convenience for large financial deposits where depositers want the risk free backing of a government & interest a bit higher than the CB rate on reserves.

      Whether notionally ‘debt’, or simple issuance, the constraint on quantity – similar in either case – is inflation. And as Ellen Brown points out, where & how governments spend such money is important in this regard. As is where & how private banks issue new money as debt (regulation)..

      • Golem XIV September 10, 2012 at 7:48 pm #

        Are you really holding up Japan as a ‘good’ example?

        Why do feel it is ‘good’ to have allocated trillions of Yen to propping up moribund banks and their bad private debts rather than to have alloocated those same trillions to invest in productive enterprise?

        Unemployment has indeed been kept low. But at a cost. The wages and living standards of the middle class and working class have been forced steadily down. I see this as a direct result of the massive misallocation of public money.

        Just because they haven’t gone in for the lunacy of austerity doesn’t make what they have done ‘good’.

        • Roger Lewis September 11, 2012 at 10:35 am #

          The Evil of two lessers.
          I wonder if the finance ministers demise has something to do wth this story emerging. For me it reminded me of the Popes Bankker and Blackfriaras bridge, haven’t dusted off the browser to follow up the hunch yet. I have half been expecting Mervyn King or Paul Tucker to meet with some misfortune , having been less than charitable in their analysis of the Spivvy ways of the City Banks.

        • Mike Hall September 11, 2012 at 11:59 am #

          An overall good example, no. I’d be sure their FIRE sector is just as rapacious as ours – & that is why they have suffered lower returns to labour over the last 2 or 3 decades.

          But their living standards are still relatively high & they have kept far more people in employment. A friend’s wife works for a Japanese owned company & visits there regularly. She thinks their standard of living, public services & infrasructure are way better than ours. They also have higher life expectancy. Wage comparison stats are very difficult to use given the complexities in benefits & services (or lack thereof) in different countries.

          They haven’t been consistent in using gov spending to maintain economic output, nor has it been optimally designed, but the effect is clear.

          There’s no sign of gov bond interest rising or their currency weakening much despite the wider global stagnation.

  17. Phil September 10, 2012 at 4:12 pm #

    I thought this paragraph was very succinct:

    ”You see I think the financial world and our rather wealthy and privileged leaders take so little notice of the lives of ordinary people that they think that ‘people will manage’ without ever wondering ‘how?’ If people have ‘managed’ so far, our leaders cease to think about them – it’s a strain to think about people you never meet, and frankly don’t care to meet – and assume they will continue to ‘manage’ for as long as they are required to. Much like grass is green and will continue to be green so ‘The People’ in the minds of those who rule over us, are just another part of the natural world to be taken for granted and used for profit.”

    Which reminded me to repost the views of a friend of mine on a few issues:

    http://mattyrichy.wordpress.com/2012/07/03/some-thoughts-on-power-and-reality/

    http://mattyrichy.wordpress.com/2012/09/06/lets-talk-about-culture-mr-starkey/

    http://mattyrichy.wordpress.com/2011/10/17/an-idiots-guide-to-arguing-with-bankers/

    • Syzygy September 11, 2012 at 12:46 am #

      That was the couple of paragraphs which hit me as very real too. It reminded me of the Citicorps pitch in 2005:

      ‘ Citigroup believed that we had moved in to a new kind of macro-economy, where growth was primarily driven by the rich and enjoyed by the rich. Everyone else was fairly irrelevant, as was the global imbalance in trade between the US and everyone else and the strength of the dollar. The fact that inequality was massively widening was not seen as a big issue – the important thing was to keep the rich and their stocks, getting richer.’

      http://www.neweconomics.org/blog/2011/08/22/“plutonomy”-guaranteed-by-the-tax-payer

      Btw.. I don’t want to be picky but tapeworms are not very pathogenic. They just absorb some of the predigested food that would probably be wasted anyway. A much better analogy would be hookworm infection. Hookworms are bloodsuckers but also leave lesions in the gut wall which continue to ooze blood after the hookworm has had its fill. This causes anaemia and leaves the host open to secondary infections. Amoebic dysentery would be another good choice.

  18. CArratiaM September 11, 2012 at 3:14 am #

    Thank you Golem, fantastic series.

  19. John Souter September 11, 2012 at 1:01 pm #

    Who is getting fat in Spain?

    (Extract from Bob Cant in SR)

    “Some people imagined that this crisis might provide an opportunity for the government to engage with the tax perks of the Catholic Church. Despite the fact that Spain is a non-confessional state, their property – and they own 100,000 properties – is entirely exempt from property tax. They are also exempt from paying VAT and they receive a state grant of something like 13 million euros per month. There is some dispute about whether their annual income is four billion euros or six billion or even more, but whatever it is, the church is clearly a wealthy state-subsidised body.”

    Clever – obviously prayer has been priced?

  20. James Woroble Jr September 11, 2012 at 5:39 pm #

    Wait ’till you see the size of America’s balls when it’s entitlements get cut by 50%… then another 50%! They’ll have their own gravitational field. Did you really think all the government’s security organization, preparations and institution of draconian laws over the past 11 years have been about foreign terrorism? You think you would have permitted these if you knew they were really meant for YOU.

  21. steviefinn September 12, 2012 at 1:53 pm #

    One of the first of major unforeseen consequences to evolve from the crisis ?

    http://world.time.com/2012/09/11/barcelona-warns-madrid-pay-up-or-catalonia-leaves-spain/

    Probably a not so surprising consequence in Greece – Golden Dawn’s support rising to 12%, youtube comments that could have been voiced during Kristallnacht in 1938.

    http://www.digitaljournal.com/article/332656

  22. steviefinn September 12, 2012 at 3:11 pm #

    Make of this what you will, Tony Blair admirer Barrosa, laying down the law -” New world order ” ?

    “More than ever our citizens and the new world order need an active and influential Europe. This is not just for us, for the rest of the world it is important that we succeed. A Europe that stands by its values. And a Europe that stands up for its belief that human rights are not a luxury for the developed world, they should be seen as universal values

    The appalling situation in Syria reminds us that we can not afford to be by-standers. A new and democratic Syria must emerge. We have a joint responsibility to make this happen. And to work with those in the global order who need to give also their co-operation to this goal

    The world needs an EU that keeps its leadership at the forefront of development and humanitarian assistance. That stands by open economies and fights protectionism. That leads the fight against climate change.

    The world needs a Europe that is capable of deploying military missions to help stabilize the situation in crisis areas. We need to launch a comprehensive review of European capabilities and begin truly collective defense planning. Yes, we need to reinforce our Common Foreign and Security Policy and a common approach to defense matters because together we have the power, and the scale to shape the world into a fairer, rules based and human rights’ abiding place.”

    http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/12/596&format=HTML&aged=0&language=EN&guiLanguage=en

  23. steviefinn September 12, 2012 at 10:15 pm #

    An alternative view to Barrosa bollocks :

    What does the ECB bond purchase program announced by Mario Draghi last Thursday have to do with French billionaire Bernard Arnault’s application for Belgian citizenship on Saturday? Both reflect a Gordian knot at the heart of the European Union that makes relatively straightforward solutions to the crisis elusive. This Gordian knot is, in turn, the consequence of two forces at the heart of the EU’s functioning—or rather, its epic dysfunctions: a creditor protection dogma and a fiscal black hole.

    The creditor protection dogma and the fiscal black hole are part of the same destructive dynamic, itself the result of decades of intense financial globalization and the political economy to which this globalization has given rise. In a word, private creditors and investors are systematically being put before taxpayers, with disastrous long-run economic, social and political consequences.

    Repudiating the creditor protection dogma would allow distressed Eurozone countries to solve the problem of unsustainable public debt burdens (a stock problem), while tackling the fiscal black hole would help reduce fiscal deficits (a flow problem). Given the powerful vested interests at stake, however, the prospects for policymakers identifying and grappling with these forces are depressingly dim.

    The creditor protection dogma has distorted the way we think about crisis exit options

    Ever since May 2010, EU politicians’ crisis resolution strategies have operated with one binding constraint: avoiding a “credit event” and contagion. The terms were used extensively before the Greek restructuring in the summer of 2011, but the underlying idea has infected conventional wisdom and continues to act as a hard constraint on policymakers.

    One of the most striking and least well recognized facts about the crisis is that those who have ultimately benefited from public EU bailout funds are not the governments or citizens of periphery countries but international bondholders. The degree of financial concentration in the world today is unprecedented; bondholders belong to the richest 5% of people in the world. Yet public bailout money has been used first and foremost to ensure that bondholders are paid in full or with minimal losses. This amounts to a fiscal transfer from taxpayers to private creditors. The cost for the rest of society is enormous: austerity measures in distressed countries have caused unemployment to surge and decades of welfare achievements to be scrapped.

    The conventional wisdom that bondholders must not bear losses is a key reason why the crisis has escalated so dramatically. Fear of a systemic banking crisis has ensured that European leaders have consistently ruled out sovereign restructurings as a way to deal with unsustainable debt burdens.

    So far, despite large and rising debt burdens across most of the Eurozone, the only sovereign default that has occurred is the timid Greek restructuring. In fact, one of the aims of the ECB’s bond purchase program is to make sovereign restructurings as unlikely as possible. (The plan entails potentially “unlimited” sovereign bond purchases by the ECB in exchange for policy conditionality.) Precisely for this reason, the plan is mostly seen (outside of Germany) as a step in the right direction.

    But is this really the correct way of thinking about crisis exit options? There are good reasons to think not. If we accept the principle that many Eurozone countries have real solvency issues that mean that they will eventually have to restructure their sovereign debt, the question of who is to bear these losses becomes crucial.

    Though the notion that even orderly default would a systemic banking crisis is widely accepted, it is highly debatable. As Harald Hau and Ulrich Hege note, “The Greek example has shown how sovereign debt can be restructured without the market upheaval and contagion predicted by many (Landon 2012). The legal instruments can be put in place for Spain, Portugal, Italy, or other countries to undertake exchange offers of existing debt with new debt which include reductions of the principal and postpone interest payments. With primary deficits near zero, such debt restructuring is a real policy alternative. It has proven workable in previous cases, such Uruguay in 2003 (Buchheit and Pam 2004). The historical evidence from the large number of previous sovereign default episodes tends to show that the economic costs are short-lived.”

    There are two broader issues with the ECB’s program. First, because the ECB will remain de facto senior to other bondholders, this will inevitably add a premium to the yields of the bond it purchases for fear of default. Hau and Hege point out that “Ironically, rather than reducing the risk of sovereign default, the ECB’s bond buying will eventually produce the opposite effect. The larger the scale of sovereign debt transfers from domestic investors to the ECB, the less will there be domestic resistance against default. ECB policy might delay sovereign default, but does not make it less likely.”

    Second, not only is the sacrosanct treatment of private creditors socially unfair and economically inefficient (as Willem Buiter noted back in 2008), it threatens the EU’s democratic legitimacy and credibility. Putting the taxpayers of solvent countries on the hook for the debt of insolvent ones and forcing countries to submit to policy conditionality in exchange for bond purchases are not politically tenable propositions.

    What is the alternative to transferring losses to Eurozone taxpayers? Impose losses on bank shareholders and bondholders by allowing orderly sovereign restructurings to take place sooner rather than later, and forcibly recapitalize banks, notably by using the EFSF/ESM.

    To be sure, bank and investor lobbies will fight tooth and nail against this solution. Yet what is at stake is nothing less than the Eurozone’s survival. Either private creditors are made whole, or the Eurozone survives. Europe must choose.

    Even if early sovereign debt restructurings do take place, they would only address part of the problem (the stock) and leave the flow problem unaddressed. On this front, the binding constraint is the fiscal black hole.

    Bernard Arnault and Europe’s fiscal black hole

    The fiscal black hole guarantees the continued prosperity of tax havens at the heart of the EU—from Luxembourg and Belgium to Austria, Ireland and the UK. These deprive EU countries of vital tax revenue and create destructive competition among them. David Cameron’s promise to “roll out the red carpet” for French tax exiles is a case in point.

    Arnault’s (France’s—and Europe’s—richest man) application for Belgian citizenship last week (Belgium has a bank secrecy policy and very low inheritance taxes) is a shocking illustration of the ease with which the wealthiest people in Europe evade national fiscal authorities—without even having to leave the EU.

    Individuals who have benefited the most from European integration are using the extensive means at their disposal to shirk their social and moral responsibilities in the midst of a historic fiscal crisis. Tax havens are helping exiles evade taxes, and the EU is helping tax havens evade scrutiny.

    This fiscal black hole creates a tilted playing field and prevents EU countries from coordinating on corporate and other tax rates. With countries scrambling to cut their deficits, and enormous wealth (which mostly belongs to high net worth EZ citizens) sitting—hidden—at the very heart of the EU, an EU-level crackdown on tax havens would be a powerful tool to raise substantial tax revenues without much hurting economic growth.

    These new tax revenues would significantly reduce the need for growth-killing and self-defeating fiscal austerity, which affects the average citizen far more than the well off, creating social unrest and feeding political disenchantment and the rise of populist, anti-EU parties.

    How big is this fiscal black hole? By all accounts, it is gigantic. According to an edifying 2012 study by Gabriel Zucman, “The Missing Wealth of Nations,” around 8% of global household wealth is held in tax havens. As of end-2008, this amounted to about $6 trillion. A 2012 study by the Tax Justice Network puts this number at $21 trillion by end-2010. According to the study, this offshore fortune belongs to fewer than 10 million people, and almost half of it belongs to fewer than 100,000 people.

    Who holds this wealth? Zucman estimates that about a third of offshore wealth sits in Swiss bank accounts, with 60% of the wealth in those accounts belonging to Europeans (mostly Italian, German, French, Spanish, Portuguese and Greek citizens).

    After taking unrecorded offshore wealth into account, it appears that Europe as a whole is a net creditor—which makes sense given that it is a rich, old, ageing region with a relatively high savings rate. If these hidden sources of wealth can be tapped, the fiscal equation changes dramatically.

    One of the study’s most striking findings is that most of the money in offshore Swiss bank accounts is invested—via “sham corporations” often incorporated in Panama that allow account holders to escape the regulatory gaze of the EU’s 2005 savings taxation directive—in mutual funds based in Luxembourg (Luxembourg does not tax cross-border payments). In other words, huge sums of money are being transferred for tax evasion purposes by wealthy Europeans from one country to another at the very heart of the EU (e.g., from France to Luxembourg via Switzerland).

    Zucman documents several tax evasion mechanisms. Some people buy fictitious services in Switzerland and transfer large sums of money as a payment for those services; financial firms based in London pay their employees in tax-free accounts based in Jersey or Cyprus. An important reason why companies pay their employees in offshore accounts is that they themselves shift their profits to these offshore financial centers in order to avoid taxes.

    As Zucman notes, while it is legal for an EU citizen to send money to an offshore financial bank, it is illegal for her not to report the income generated from that account.

    National and EU policymakers’ lack of will and coordination in cracking down on offshore centers by has for decades allowed—and encouraged—extremely wealthy individuals to break the law. If politicians and regulators decided to put serious pressure on offshore centers to end bank secrecy in a coordinated way, the secrecy would likely end, the amounts being hidden would be revealed, thereby making it possible to raise large amounts of new tax revenue. Wealthy individuals would no doubt find other schemes to hide their wealth, but it would become much harder for them to do so.

    The importance of cutting the Gordian knot

    The challenges faced by the EU are Herculean. The sums involved are huge and rising. They range in the hundreds of billions, if not trillions, of euros. Yet straightforward options do exist. A new perspective—a gestalt shift—would bring new options to the table. Eventually, something is going to have to give. Although anathema to policymakers (and even more so to private creditors), it is hard to envisage a solution that does not involve orderly sovereign debt restructuring.

    Clearly, the public debt dynamics of several large Eurozone countries are not sustainable. Passing on the buck of these restructurings to Eurozone taxpayers is not only unfair and inefficient, it risks jeopardizing the entire euro project by weakening its democratic legitimacy. If European citizens feel that they are being cheated repeatedly and losing their ability to influence decisions that affect them in a big way, notably through politics and the democratic process, their support for Europe will wane.

    A growing number of Europeans are realizing that they have lost, or are in the process of losing, the ability shape their collective future. Ironically, just as Spain has ceded a great deal of fiscal sovereignty to the EU and Germany, Catalonia is demanding fiscal autonomy from Madrid, with 1.5 million people taking to the streets during Catalonia’s national day on September 11.

    This crisis is the biggest democratic test the EU has ever faced. In the words of Mark Mazower, “[Altiero] Spinelli’s vision of an economy run in the service of human needs has been turned on its head. If the human needs being served by the euro—the currency with which the very project of ever closer union has come to be identified—are not primarily those of its citizens, this is not surprising, because they have had less say in the outcome than the bankers.”

    Schopenhauer wrote that “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” The need for early and orderly sovereign debt default—with losses imposed on private creditors rather than taxpayers—is one such idea. The need to finally crack down on tax havens at the European level is another. Either or both of these ideas may have reached the point of transition between the first and second of Schopenhauer’s stages. Let us hope they reach the third stage before it is too late. Then again, as John Galbraith quipped, “The enemy of the conventional wisdom is not ideas but the march of events.”

    http://www.economonitor.com/analysts/2012/09/12/mr-draghi-mr-arnault-and-europes-gordian-knot/

  24. Roger September 18, 2012 at 9:39 am #

    I think David would make an excellent Governor of the Bank Of England. If David is too busy then Maybe Mike Hall or John Souter and various others of the regulars here Might like to apply.
    http://jobs.economist.com/job/3022/governor-of-the-bank-of-england/

  25. Roger Lewis September 18, 2012 at 10:23 am #

    This caught my eye, ask questions live of barosso on You tube.

    http://youtu.be/zC1qApatvZI

    How will the European Union emerge from the economic crisis? This is one of the main questions European Commission President Barroso will address during his 2012 State of the Union speech on 12th September at 09:00 CET

    On 19th September at 19:00 CET, President Barroso will answer your questions on
    the way forward for Europe in a live interview hosted by Euronews, using Google+ Hangout video technology and YouTube.

    You can submit your questions in video or text form – and have your friends and family vote for your question – via the “Ask Barroso” tab on http://www.youtube.com/EUtube the European Commission’s YouTube channel.

    Euronews will select several people from the top-voted questioners to join the President in person, live on 19th September, via Google+ Hangout.

    Questions must be submitted by midday CET on Tuesday 18th September. You can find some guidelines for making a good video question here https://plus.google.com/+EuropeanCommission/posts/gNe2Lw4ydf2

    Just about to trawl through the comments.

    • Roger Lewis September 18, 2012 at 10:25 am #

      Can we formulate a question for David to put and all vote for it and get all our social network connections to vote for Davids question?

      • BobRocket September 18, 2012 at 10:09 pm #

        Five Questions*

        What power have you got?
        Where did you get it from?
        In whose interests do you use it?
        To whom are you accountable?
        How do we get rid of you?

        If I had to pick one it would be the last one.

        If you cannot get rid of the people who govern you, you do not live in a democratic system

        *(I blatantly stole those questions from Tony Benn)

        http://en.wikiquote.org/wiki/Tony_Benn

  26. The Dork of Cork September 21, 2012 at 9:39 pm #

    Spain could operate as a pre 1986 semi national economy again as it has much more capital resourses then back then.

    Ok ….many things are a mess in Spain – it does not quite fit together like in France but they have huge capital assets.
    In Spain I believe the Banks have skin in the rail game……..

    Currently 3 million people still fly between Madrid and Barcelona each year despite the fact a high speed railway is operating since 2008…..it seems cheap to fly but this transport choice exports hard currency out of your domestic economy.

    Its obviously operating withen the context of a over valued non national currency which forces it to export capital / $$$$ to function.

    Essentially the input output dynamics of internal commerce have been destroyed by the Euro …preventing the max use of available domestic resourses.

    In Seville ,for 10 /11 months in the year you can get by without home heating if you push your comfort zone out a bit……you cannot do that in Germany.

    Spain is nothing to lose ….it should have got out of the Euro Yesterday.

    The PIigs main problem is the export of now hard currency $$$ to get around…….domestic currencies however sustain domestic demand.

    The domestic demand crisis in Ireland & Spain is entirely a Euro phenomena….the Euro is a gigantic capital stripping machine.

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  1. Quote of the day: The institutional eurolooters | eats shoots 'n leaves - September 14, 2012

    […] Posted on 2012 September 14 | Leave a comment From documentary filmmaker David Malone, writing at Golem XIV about the institutional looting mandated by the Troika as bailout conditions: Privatization targets […]

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