This is the currency of power today. Fiat truth.

We are not allowed to have any secrets any more.  And yet those who insist they must know the truth about us, who spy upon us to extract our secrets, tell us in return, only lies.

It is a dangerous, corroding imbalance of power, because lies, like debts, compound.

Living the lie

We all know the famous Goebbels quote,

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it.

From Sadam’s weapons of mass destruction and missiles that could hit us in just 40 minutes of sexed up bullshit, to the stress tests that show us every bank is perfectly solvent and however many billions they launder they are never guilty and no one goes to gaol because they are too big to fail and too connected to even question.

The eye of providence looks out and approves of what is done – Annuit cœptis.

But who does the all seeing eye, that sits atop  the pyramid of power on the mighty dollar bill, work for now? Is it really you and me?  That is what we are told to believe. But is it true? I think there are too many secrets but few of them are yours and mine.

The private dealings of the ordinary citizen are considered suspect and must, we are told, be rooted out. The secrets and outright lies of the corporate and governmental worlds, however – they are confidential. They are protected – behind razor-wire threats of  legal action and closed door tribunals of hand picked experts.

A few weeks ago I sat and listened to the former leader of the Conservative party, now an elder statesman of British politics, Michael Howard, tell an audience that governments need to lie. He is a clever man. He quoted Goebbels and then gave this carefully chosen example.

Imagine, he said, that a Chancellor knew that he was going to have to devalue the currency. The evening before the appointed hour, he is asked by a journalist if he is going to devalue. If he tells the truth and says yes, there will be a run on the currency and great damage will be done. So he lies. “No”, he says, “I have absolutely no plans to devalue at all.” And then next morning he devalues as he had planned.

“Was this not”, Mr Howard asked, “the right thing, the only thing to do?” And all agreed it was. The unspoken lesson that everyone seemed to accept was stability is more important than the truth.

I find this a very frightening notion.

But Mr Howard presented his lie well. He went on to quote the next, less well known line from the Goebbels quote.

The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie.

And this, he said smiling at us, is what protects you. The chancellor’s lie only needed to last a few hours. The nation only lived inside his lie overnight.

But now think of the lies we have been told since 2008. Our banking system and the  banks in it, we were told, were basically sound just suffering from a shortage of liquidity. And yet, in reality, it was not a problem of  liquidity, it was insolvency.

The liquidity lie had to be rolled over and the interest on it, paid. So another lie, that  bank assets were not worthless just ‘impaired’, had to be told and maintained. And to do that the truth had to be hidden, off balance sheet, in mark to model and offshore.

Our governments have spent trillions maintaining their lies and have forced us to live those lies for five years now. But there are costs. Living a lie is morally and politically corrosive, not to mention expensive.  Just this week, as reported in the FT, the Italian Treasury ‘uncovered’ a nest of lies. It appears that the Italian government, in the run up to joining the euro,  paid at least one of the big banks to help it hide the true extent of its debts by agreeing  derivative swaps. Greece used similar swaps to massage its debts. The now infamous Titlos agreement with Goldman Sachs being the best known.

The Italian agreements – there were several amounting to around €36 billion in value – would have been known to Mario Draghi who was at the time of some of the agreements at least  (1998-9) Secretary of the Treasury. Shortly after this (2002) he left the government and joined Goldman.

It now turns out the terms of the agreements were such that the Italian tax payer could face billions in losses. Of course those who will be forced to pay, were never consulted, not even told of the agreements. They were …confidential of course. Commercially sensitive and politically secret – so often bedfellows aren’t they? Kept secret from those who would be required to pay the bill when it came due.

Our leaders, our liars, haven’t bothered to protect us from the consequences of the lies at all. Too expensive. So austerity, disparity and stagnation are everywhere around us. Forced on us by those who suffer none of them, insulated as they are by wealth and power and privilege. Consequences are for little people, not their Betters.

Our ‘Betters’ have found Goebbels was wrong. You don’t have to protect the people from the consequences of the lies you tell them, as long as you can blame those consequences on someone else. On unforeseen global economic forces, on conniving foreigners who devalue their currency, or terrorists or whistleblowers. Or even the people themselves for taking on debts they couldn’t afford or on ‘necessity’ and ‘precedent’ – the bond holders cannot be made to pay – it goes against international precedent.

We, the people, need to strike back at the secret deals done between the elites of  the political and financial revolving door, and make it clear that we will not pay for anything about which we were not told.

Once the cry was, “No taxation without representation”. Today the cry must be, “No debt without consultation.”

Suppressing the Truth

What Mr Howard did not quote is the next line from Goebbels.

It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”

But again Goebbels has been superceded. Repression is so last century. Why repress when you can simply drown it out. All it takes is for the media outlets to be owned by a few powerful and like- minded friends. A few media moguls and corporate giants, whose plastic pundits raise their voices while the dolly bird presenters flash their thighs. It’s all so full throttle and frantic, and charged with desire and greed.

Anyone who disagrees is a conspiracy theorist. Anyone who breaks ranks is a whistleblower and whistleblowers are domestic terrorists, dysfunctional loners with personality problems and axes to grind.

When the truth is vilified, hunted, gagged and goaled, then the State has chosen to go to war with the nation.

We are at war.

If the banks were to be wound up it is their [the wealthiest 10%’s] credit/debt backed ‘money and the assets held in it, which would burn to ash….So the simple reason our rulers insist on bailing out the banks is that by doing so the wealthy and the powerful are simply bailing out themselves and guaranteeing the continuation of a system which suits them perfectly.

In part two I argued that while the simple selfishness answer is true there are also theoretical justifications (albeit flawed ones) for the bail and cut policy.

The two aspects of their policy ‘bail and cut’, they will insist are not contradictory at all. Simply put, they will say they are loosening or increasing the  money supply (QE) in order to invest in growth (classic Keynesian) while simultaneously cutting those expenditures which they feel do not generate growth and which are in fact ‘drains’ on productivity – in their view any ‘public’ expenditure (Classic Free-market). Growth, for them, equals the free-market/private sector, while drains on growth equal government, public spending….Basically – Private Debt good, Public Debt bad.

I argued that one of the legion problems with this world view is the fact that whatever the ideology says should happen, the reality is that giving money to the banks for them to invest has simply not worked. It was never going to work because it is founded on a misapprehension about the nature and business of modern banks. Namely – that they invest for growth. They do not – certainly not in the broader economy during a recession. Banks used to ‘invest’. Today they much prefer to speculate. Investing is long and slow and does not make big bonuses. Speculating on food prices, currency fluctuations and sovereign debt, lending for leveraged, debt ladened buy-outs  – now these things can all provide the quick returns and big bonuses which old fashioned investment does not.

The idea that ‘we are all in this together’ coupled with the other idea that the banks are there to help – or are ‘there for the journey’ as a UK bank advert claims, is wishful thinking at best. These notions may make snappy sound bites but that is all they make. Banks are not there to help. They are NOT a service industry. Banks exist to make a profit as fast and as often as possible for those who own them and large bonuses for those who run them. Which is fine. They are a business. As long as we remember that and treat them accordingly I have no problem. I have a massive problem when, in the good times, the banks insist on being recognized as a business in the free market, to be treated with a laissez faire, light touch. But then in bad times insist even more fervently that they are not just a business to be allowed to live and die by the rules of the market like any other business, but claim instead to be an essential, – no, THE essential public service which must be protected above all else. So essential, in fact, that all ‘other’ public services must be cut in in order to better save the banks.

Let’s be clear the banks are not a public service. Banking – rather than the banks – could be a public service, but it is not run as such today. The banks are run as ruthless businesses. They exist according to an almost entirely selfish philosophy which extends from how they imagine human nature to be – no one, they think, would even turn up for work let alone do a good job unless rewarded more than anyone else – to justifying any and all fraud on the basis that if it makes a profit then who could blame you for trying. Be that as it may…

In part three I suggested that the official policy with its armature of ideological justifications and soundbite explanations was today’s Big Lie and looked at how and why Big Lies work.

In this last part, having looked at the origin and ideological justifications for the ‘bail the banks and cut everything else’ policy, I want to look at where the policy goes now. Because I believe the policies of the last four years have brought us to a critical and unstable juncture.

From crisis to opportunity – The top of the hill
For the last four years our Dear Leaders, political and financial, have been labouring to push everything back up the hill from which it slipped. As they have neared the top, however, I think they have come to see that the policies they have forced upon us can do much more for them than simply restore what they had before. Why stop there, they now wonder? The top of a hill is a place of fantastic opportunity. l think our leaders have come to see that shoved hard in the ‘right’ direction they could propell our societies in almost any direction they desired.

But this state of potential is also perilous. The top of a hill  is the place and the moment when the forces are all finely balanced and almost any ‘unauthorized’ push could send the system off in a direction the Dear Leaders would not like. Victory for the powerful and wealthy seems so close at hand and yet the crisis, far from being over, is also at its most critical juncture. So many possibilities exist together, like overlaid quantum states, in this one moment.

Just as our rulers prepare for one last push, to enforce one more round of austerity and bank bail outs upon us, to propel us more firmly to their desired future, they find there is a building and spreading opposition to everything they are doing. I believe we are at, or very near, that  place of maximum potential and maximum uncertainty where things could tumble down any number of quite different paths.  Irreversible victory is within our leader’s reach. Yet at the same time they are only a stumble, a determined opposing push away, from irrevocable disaster.

This place we are almost in, echoes with triumphant proclamations of imminent success while also being full of suspicion, fear and coercion. It is a moment that speaks of victory and a better future while feeling like the cusp of repression and paranoia, where free speech becomes seen as subversion and disagreement as dangerous dissent. This is the fascination of the non-linear moment when the pencil that writes our history is balanced on its end.

Fire sales and fire storms

When a business is so short of operating cash that it must sell assets in order to raise cash just to stay alive, and buyers know it, then the buyers hold all the power and prices tend to plummet. This is called a fire sale. On the high-street we would call it a ‘Closing-Down’ or ‘Everything Must Go’ sale. It is a perfectly normal part of the workings of the ‘free-market which the banks profess to be so keen on. Keen when it doesn’t apply to them, that is.

One of the many things hanging in the balance right now, I think, is who is going to be forced to sell their assets in a fire sale – the banks or us? No prizes for guessing the bankers preference. More revealing is to ask yourself who our current political leaders think should have them.

During the first two years of the bank debt crisis it was the constant worry of the banks and our Dear Leaders that without large and on-going injections of public cash, the banks would become so short of operating cash, or assets they could use as collateral for loans, that it would be the banks who would be forced to sell their assets in fire sales, which would burn the banks. And as I discussed in part one whose wealth do you  think would turn to dust with them? As this 2012 paper from the BIS (Bank for International Settlements the central bank’s central bank) notes,

At their peak, bank funding strains exacerbated fears of forced asset sales, … fears that funding strains and other pressures on European banks to deleverage could lead to forced asset sales,….

These fears were at crisis level globally in 09 and became a crisis again in Europe throughout ’11 and ’12. Each moment of renewed crisis resulted in our leaders releasing a flood of bail out money for the banks, so they did not have to sell their assets at any price, let alone at fire sale prices. On top of which the banks lobbied hard for and got two other measures both of which ‘protected’ the banks and the wealthy from having to sell anything at a price they did not like. Those measures were the suspension of mark to market accounting which they got in 2009 after some very heavy weight lobbying ( I wrote about it in Liar’s Lexicon – Mark to Market) and then being allowed to transfer all sorts of dodgy assets they had been holding in their Trading Books, where they have to be valued, to their Banking Books where they do not.

The amount of effort that has gone in to ‘protecting’ the banks from having to have fire-sales is a direct measure of the threat it posed and still posses to the banks and the wealthy. But that is only the first strand of the ‘bail and cut’ policy. While ‘bail’ is still very much on-going and about to be implemented again with another round of large bank bail outs, the second strand, ‘cutting’, is where we are now.

The official justification for cutting everything, as I argued in part two of this series, is that they are only cutting non-profit making, therefore non-essential things like welfare, and we should see the pain of those cuts as ‘our’ contribution, our part, of being ‘all in this together’.

It may be that this was indeed how they justified it in their own minds…at the start. But things have moved on. Today, the situation is that national central banks and behind them the Fed and ECB have made sure the banks have cash to operate. The ECB paper on bank funding again,

Euro area banks raised large amounts of funding via the ECB’s three-year LTROs [Euro area bank bail outs in 2012] , covering much of their potential funding needs from maturing bonds over the next few years. Across both operations, they bid for slightly more than €1 trillion. This was equivalent to around 80% of their 2012–14 debt redemption, more than covering their uncollateralised redemptions.

The bail out has bought time. Time for the next part of the evolving plan to take its effect.

It is now nations that are short of cash and finding it hard to borrow. And who is now clamouring for nations to reduce their debts by selling assets, even above investing for growth?  The banks.

The banks who refused to have their assets sold  at recessionary prices in a fire sale are delighted at the prospect – which they have helped bring to fruition – of arranging  a fire sale for ours.  The banks who did not want to see their assets valued in the teeth of a recession are happy to  value ours.  No mark to model for our assets. They will go to the lowest bidder.

And who do you think that bidder will be? Yes you got it. The same financial class who own the banks. The banks will bid and so will the leveraged buyout businesses the banks lend to. And what money will the bank use for this? Right again. The bail out money.

Those who keep assuring us that if we give the banks enough money they will start to invest in the real economy again are lying. The banks are not here to invest. They are here to predate, to scavenge. And our leaders have given them our money with which to do it.

This crisis has seen the paper wealth of the banks and the wealthiest 10% imperiled. The securities, derivatives and shares that make up so much of what the wealthy own, have all lost a great deal of their worth. That has left the banks with large holes in their balance sheets and for the wealthy, whose assets they hold, large losses if ever they were forced to admit them. Let’s not forget, when the banks are allowed to not mark to market it is not just the banks whose wealth is protected. The top 10% of all our nations also own huge swathes of this paper wealth. If the ‘assets’ – were marked to market or forced in to the market to be sold then those people, the people who own and run the banks, insurance companies, accountancy firms, law firms, media companies, the Senators and Members of Parliament, the Cabinet Ministers, lobbyists and experts would also see their ‘wealth’ go up in smoke.

But then along came the story which says nations are now in terrible debt and these debts are so large they cannot be carried, are in fact stifling growth (though how is never made clear) and must be paid down even if it means not only taxing the middle classes and cutting benefits to the poorer, but also also – sad though it makes us to tell you – also selling state assets.

Austerity is a wonderful thing if you want to force a fire sale. And not just any old fire sale either. It will be, if the banks and our leaders get their way, a fire-sale fire-storm.

A fire storm is created when a fire becomes so hot  that it creates a self sustaining feedback loop of in-rushing air which super-charges the original fire causing it to suck in even more air and so on. They have been known where brush fires have spread in tinder dry forests and famously in the carpet bombing of the German cities of Dresden and Hamburg in WWII.

If the banks had been forced to sell their assets, as each bank brought its assets to market they would have exposed the worthlessness of similar assets at other banks and the fire would have spread. An empire of debt backed wealth, that had long since ceased to be worth more than the paper upon which it was written, would have been lost. This did not happen.

Instead we now have banks who have secret losses; Vaults full of paper wealth whose value is still eroding. The question for the banks and our leaders has always been, not how to rescue us, but  how to replace all that lost value?

The answer to start with was just to buy time. Give the banks cash flow with bail outs. They thought that might be enough. But the rot was too deep. The paper assets could not be re-animated. Four years in, a new answer has emerged – an epic-fire storm fire-sale of public wealth and assets. Such a fire sale, if it can be made to sweep from nation to nation, will allow the banks to buy up assets, real ones, electricity grids, power stations, ports, water companies, telecoms companies, airports and roads. Things which produce real wealth not just paper valuations of derelict properties and derivative claims on other people’s debts.  The ‘cut everything’ austerity part of the official plan allows the banks to move from simply staving off admitting their losses to replacing their losses with real wealth producing assets. If the austerity plan can be maintained long enough, the fire will become self sustaining.

The Greek people already rejected the terms of the Austerity programme being force upon them once. This week their rulers will try to vote it through anyway. The plan whose details you can read here is to sell off Greece’s main airports and ports, its Gas company, Nickle industry, Phone company and mobile phone company, its water companies, its power company, Post system and motorways, plus sundry state owned properties, land and investments.

If the Greek fire-sale goes ahead it will set a bench mark, a low one, and a pressure, for similar sales in Portugal, Italy and Spain.  And it will not stop there. The fire will be spread, welcomed, enforced, in Britain and France and Belgium and Holland. Only Germany may escape. For a while.

A fire will have started and the banks will fan its flames. If the banks can force a fire sale they will have created a buying opportunity the likes of which only Russia has seen when it it was looted by the Oligarchs. And our banks and their owners will become the Oligarchs of the fading twilight of our democracy.

This is the bank’s chance to replace the shrinking value of their paper assets with new, ‘real’ assets that produce real wealth. With these assets they can rebuild their paper world of virtual assets and start their game over. All they need is for austerity to reach critical so that the fire storm takes hold.

Could they have acted differently?

I think they could. Still could. They could have put money in to the economy without using the banks. For example the UK has put up £1.4 trillion.  There are about 70 million people in the UK. The government could have ‘given’ £20K to every person earmarked to pay off their debts, with any remaining to be used as the person saw fit.  Or if you balk at funding for large families, and prefer something more modest how about £20K for each adult. My family would have got 40K. That would have paid off our mortgage. I would then have had more of my income to spend on other things. I would have bought double-glazing for my house.  The result would have been the banks having 40K paid off most household’s mortgage debt. That is 40K going in to the banks. So the banks would have still got their pound of flesh. But this way round would also have help the ordinary citizen. I think it was Steven Keen who first suggested this idea and it could still be done.

How different such a scheme would be. Giving money to the banks to lend means if we borrow it we owe them. If the money was given to us and we deposited any of it in the banks, then they would owe us.

“Moral hazard!” I hear someone crying.  Why should we bail out the feckless who got themselves in to debt?  Yet our leaders are happy we should reward the reckless and feckless banks. Moreover we apparently do not worry about the moral hazard of making those who did not create this mess pay to clean it up. What about those of us who did not partake of the orgy of credit and debt? What about those who saved and now see those savings and pensions being eroded?  Apparently the banks and our rulers are sensitive to the moral hazard of giving to us but not of taking.

Had we used stimulus money to pay off peoples’ debts, rather than the banks’ debts, that money would have still made its way to the banks. It would have shrunk their balance sheets, reduced their risk and made them safer – for us.  They would not have had the chance to divert the money to use it for speculating on food and currencies. All good so far. It would have left ordinary people with fewer debts and with more money to spend. This would have helped industry and therefore employment.

….But it would have come from the bottom up. People, ordinary people, would have decided what to do with whatever part of their bail out they had left. That, to me, IS the market deciding.  It is as Free Market as it comes. Financial decisions by the people for the people. Giving the money to the banks and asking them to lend to us, is letting them – just a few huge corporations and the handful of billionaires who own and run them – decide. That is NOT free market. It is banana republic cronyism.

In our present policy of bailing out the banks, they can then lend to us and we owe them interest.  In the bottom up bail out we would be lending to the banks. Remember putting money in to the bank is lending it to them.  They would therefore pay interest to us. Funny how the banks and the wealthy, rentier class who own them prefer the present arrangement where they get the money for cheap and IF they lend it to us, we owe them. In the other version, the heretical version, they would be paying us.

Wealth management and Povert management

The future our leaders see from the hill top is one where banks are there to manage the wealth of the wealthy and governments are there to manage the poverty of the rest. Wealth Investment and Austerity Enforcement – a perfect division of power. IF we let it happen.

The Moving Finger writes; and, having writ,

Moves on: nor all thy Piety nor Wit

Shall lure it back to cancel half a Line,

Nor all thy Tears wash out a Word of it.

From the Rubáiyát of Omar Khayyám

I ended by suggesting that true though I felt this was, there were also theoretical reasons why some people felt the banks must be protected at all costs -as long as the burden of paying that cost was placed firmly upon the backs of the little people, you understand.

So….

Today’s Economic policy: Print, Bail and Cut

The mainstream response to what I presented in part one is to say, I have simply, perhaps wilfully, failed to understand what they have been and still are, heroically, trying to do. They will insist there is no contradiction in their position of cutting public spending and bailing out the banks at the same time. So allow me to present what I believe that logic is.

The two aspects of their policy ‘bail and cut’, they will insist are not contradictory at all. Simply put, they will say they are loosening or increasing the  money supply (QE) in order to invest in growth (classic Keynesian) while simultaneously cutting those expenditures which they feel do not generate growth and which are in fact ‘drains’ on productivity – in their view any ‘public’ expenditure (Classic Free-market ). Growth, for them, equals the free-market/private sector, while drains on growth equal government, public spending. Thus their policy is a strange hybrid of Keynes and his opposite. No wonder then, that as the policy has not delivered, support for it has fractured. The fracturing has not, however, been in a straight left/right way. Please forgive this digression but before we look further at the policy I think it helps to know who is on what side and why.

Who’s who and why

Supporting the printing in order to bail out the banks are the bankers (obviously) but also all those convinced by the propaganda that if we don’t the sky will fall in, which includes many on the left and all those rotten, stinking, slobbering and putrid whores of the ‘centre’ (Sorry – had to get that off my chest). Those from the traditional left parties which have spent a decade telling us ‘We’re not left. We’re on the centre ground!’ find themselves trying to square the ridiculous circle of supporting bailing the banks, assuring their centre-party credentials by being concerned to cut public debt BUT ALSO being against austerity cuts. At least those of the mainstream, traditional right wing parties like the Tories or the Republicns, much as I dislike them , are consistent. They say bail the banks but save money by cutting everything else. Those on the centre left say, ‘Oh yes of course we should save money and cut the debt. But we must bail out the banks no matter what the cost AND ‘no, we shouldn’t save money by having cuts.’ I think the right wing is wrong. I think the centre-left is wrong and inconsistent and stupid. Of course if they did get back in to power they would cut anyway, but with tears in their eyes as opposed to the barely concealed glee of the right. The centre left is so fuddled I wouldn’t give them the steam from my dinner if they were starving, let alone my vote. I can think of gerbils with more brains and integrity.  But my prejudices aside, those ‘in favour’ of the current policy are a heterogeneous bunch who are not all comfortable with their unlikely bed fellows.

The same is true of those opposed. They too are a mixed up bunch. Some of The Opposed are those who regard themselves as true ‘free-market’ believers. For them the banks should have failed like any other business. They hate the debt levels all the QE has created. They also, perhaps particularly, hate the big banks. Because while the ceo’s of the big banks love to talk about Free-market values, they have, in fact, out of pure self interest (see part one), put on hold their belief in the working of the market to punish the failed, in favour of massive printing and public support…for themselves and their otherwise failed banks. They have used their position of power and wealth to arrange a deafening barrage of media, expert and political advocacy for their message that ‘the banks must be saved or the sky will fall in’.

Also opposed to the Bail outs and the Big banks are a motley group of all those who believe in the Austrian school of economics and all the hard-money, Gold Standard believers. For them debt, the fiat currency which allows it, and the banks who live by it, is a form of Satanism. This group come across like cats caught having a poo, when they are spotted in opposition with those on the left who share with them the belief that the banks should not have been bailed.  Of course the left people do not think there should be cuts and do not share any fear of debts. They believe in stimulus spending.

And that last point confuses all. For those on the right look at the bank bail outs and see stimulus spending. And why shouldn’t they? After all that is what all this spending on the banks has been called by those who ordered it. The architects of the policy have said we have bailed the banks in order to stimulate the economy. They have argued that saving the banks IS stimulating the economy, or at least essential to it. If you accept that bailing the banks has been stimulus – therefore Keynesian  spending – then it is clear that stimulus, Keynesian policy has FAILED.

Only I would argue it has not. I argue Keynesian stimulus spending has not failed because, in the main,  it hasn’t even been tried yet. The key is whether or not you believe that putting money in to the banks has led to real investment in the real economy for real growth. If you think that has happened, first – WAKE UP – and second, show me the evidence.

Print, Bail and Fail. 

The classic neo-liberal, Free-Market world view says only the markets produce wealth while the state is parasitic upon it. It is the logic which wants to turn Great Britain in to Britain Plc. It is the IMF mantra which ‘we’ in the West have watched as it has been forced upon others and turned a deaf ear to their cries of anguish and complaint. Now we find it forced upon us and are alarmed.

Karma aside, this ‘Private good, Public bad’ conviction is why our leaders and their economic advisers from the financial class, will live with debt if it supports the banks but not if it is for government hand outs, and pesky, ‘anti-business’ regulations. In their world the articles of faith say that  only the Free-market can provide growth and only the banks can be trusted to invest wisely in that market.  And given the seriousness of our current situation, they will add, we may have to tighten our belts and cut even those ‘nice’ things like welfare, health spending, education and even policing since they are not immediately wealth producing. Basically – Private Debt good, Public Debt bad. Agree or loath, that, I believe, is their logic.

Some of you may be having a seizure right about now (Especially the MMT brigade), while others of a more Free-market frame of mind may be nodding in agreement. Please both hold on a for a few minutes. Let’s look at the above logic and policy in their own terms before we take issue with the terms/assumptions themselves, because I think it is now quite clear, even to its supporters, that the policy has failed.

First lets be clear about the terms; printing for growth or stimulus spending. We need to be clear because we are already standing in the midst of one of today’s most heated and bitter arguments between those who subscribe to mainstream economic theories of how an economy works, who claim all this printing, for whatever reason, will lead to inflation and hyperinflation and opposing them, those of the MMT (Modern Monetary Theory) persuasion who claim that mainstream economics is a fatally flawed theory which does not understand the nature of economies, money or inflation.

I do not wish to be drawn, just yet, into a full fledged argument over which theory is correct and which is rubbish. My view, so you all know where I stand,  is that mainstream economic theory is fatuous at best and that MMT is well on the way to providing a clearer picture of how money and an economy actually works.  That said what I would like to emphasize here is not  one theory over another but what all economic theories agree on. Keynesian, Austrian , Mainstream and MMT, all recognize that a sovereign government with its own currency can expand the supply of money (print). In fact they all recognize that when an economy grows, governments have to print. More economic activity needs more money/tokens of value.  Pretty simple really. The question at the moment is should government expand the money supply (print) when economies are shrinking as a way of kick-starting growth and if so how?

There is also a side issue of whether QE is printing or simply changing one set of paper promises (private ones) for state backed ones. I will tackle this some other time. It doesn’t alter the current argument.

Critically all theories agree that there must be some match between the supply of money and the economic activity it serves. Which means they all agree you can print IF it leads to actual economic growth. This is the basis of Keynesian counter cyclical spending, which simply means that the government, as printer of the money, can help stimulate growth by providing money and investing it in order to off-set times of private economic contraction.  All theories agree it is not a disaster to inflate the money supply as long as the new money promotes real growth. What is important is the ratio of money to economic activity.

All the theories agree if new money helps create new economic growth then that growth will soak up the extra money and the ratio of money to real economic production stays the same. Thus the argument should not really be about how much money has been printed up but whether it has been spent on things that will create real growth. THAT should be the debate.

There are two points of argument. The first, is how long you can leave extra money sloshing around trying to stimulate growth before its failure to do so will instead create inflation.  MMT seems quite sanguine saying other factors are more important.  The Austrian school is not at all sanguine. Neither knows for a fact how long is too long. They are theories. The second is who is best suited to invest the printed-up money in order to stimulate growth, government or the private sector? In other words if you are going to create new money to invest in growth who should control the investment of the money, government or the banks? And this is where our present policy is  different from the text book story of FDR and The Great Depression. It is also where our economic situation becomes poisoned by ideology.

The classic FDR/Great Depression answer as to who should invest, was government through huge state programmes of public works: Building dams, roads, houses etc.  This is often referred to, by those who dislike it, as the Statist position. The modern version we have today, unsurprisingly after three decades of neo-liberal, free-market consensus, is that the private sector, not the state, should do the investing. Thus this time around, though we have governments printing and expanding the money supply as before, the governments have not invested the expanded money supply directly ( I know there have been exceptions like GM in America)  but generally they have instead funnelled nearly all the money in to the banks for them to ‘lend’ in to the real economy.

Is this progress? Those who have an ideological hatred of government and see all government as just a means whereby a small group of insiders can chose what is best for them at the expense of everyone else, are tempted to think it is progress simply because it cuts out government control. But take off the distorting lens of of ideological hatred and what have we really done? I argue we have exchanged one group of insiders in big government for another set in big banks.  And worse they have a revolving door to shuttle from one to the other. So now we have a small group of men who control the 50 or so most bailed out global banks and their former colleagues now in government, who decide. Have they invested in us and our futures?

Has the monster worked for us?

In a word, no. It has not. The policy has worked only for those who gave it life – the banks. Five years in to the policy,  recovery and growth in the real economy remains absent. In fact many countries are facing accelerating economic contraction, with destructively high unemployment. A measure of just how distorted our world has become is that we now have the mind boggling spectacle of the IMF warning a Tory UK government that their policy of bail and cut is not working and they should have a plan B which includes spending for growth.That’s like finding Nazis at a Bar Mitzvah.

Anyway, in the face of the abject failure of the bail the banks policy (42 million Americans on food stamps is not just failure it’s an indictment) we have had Obama and the rest of the G8 pathetically claiming, “It would have been much worse without the stimulus.” What seems clear to me is that our leaders, at the behest of the banks and sundry ideologues, have insisted on investing in the one sector of the economy which has not and, I argue, will not invest in growth in the real economy.And steadfastly refused to invest in any sector that might.

In the UK we had Project Merlin. Launched in 2011 amid great fanfare it was supposed to be a model of the new light-touch approach. A voluntary agreement between state and banks that the banks would lend more in to the real economy. It failed absolutely. In every quarter of the year it was launched the banks lent less in to the real economy than they had a year earlier.

I talked to one bank which specializes in loans to small and medium sized businesses and they concurred that there is less and less money available from the big banks. Where did the money go? Lots was returned to the central banks where we paid them interest on it, some was used to plug holes in bank balance sheets where non-performing assets had left bills unpaid, much was used to buy and sell European Government bonds and much of the rest was used to speculate on commodities in emerging markets.

I particularly like the money returned to the central banks. We lend the banks money at a very low rate. They take the money and put it back in to the central bank. Why? Because the central bank pays a higher rate of interest on this deposited money than the rate it charges the banks for borrowing it in the first place. That is better than a license to print money because you don’t even have to pay for the printing.  And then the banks turn around and tell us we must cut welfare because our debts are too high. It’s brilliant. When you borrow from a bank, you pay them interest. When the banks borrow from us..we  pay them.

Anyway, unperturbed by abject failure the UK government has decided to try again. This time they call it “Funding for Lending”. Yet again the banks will be allowed to swap yet more dodgy assets that no one will accept as collateral, for Gilts which they can then use as collateral for getting their own loans in the open market.  Does this inflate the money supply? Well the BoE and other central banks buy the bank assets at inflated prices. And the banks then take the gilts and through layers of  loan creation leverage them like mad. So yes it does inflate the amount of money – but with one massive caveat.  Sadly there is no stipulation that whatever money this process unlocks for the banks has to be used for lending to Small and Medium sized businesses. The fact is they can use it for whatever they like. The financial press has already ridiculed Funding for Lending as Funding for Pretending.

The danger is that banks stock up on profitable, low capital-intensive assets like mortgages, or even high-yielding peripheral sovereign debt, and leave domestic small businesses high and dry.

Which is exactly what will happen. There is more money but not for us. The money either stays in the banks and central bank where it serves only the banks, or it flees the country to speculate elsewhere. So we have more money in existence but little more supply in the real economy than before.

The bailed out banks have no interest in investing for growth. Growth is a slow business where the company invested in has to grow first before the bank gets its reward. Banks have grown accustomed to being served first not second. They have no intention of waiting in line with the rest of us. Waiting is for little people.

So once again why are our rulers continuing to bail out the banks?

I hope you don’t mind if I break here. I know it’s not the best place to stop as it leaves out a lot of salient points but this post is already too long.  I will make my remaining points in the next and final part.

When our leaders embarked on their policy of bailing out the banks’ private debts, even those of us like me, who believed our rulers were hideously wrong to do so, still harboured a hope that they were at least sincere; that they really were, as they claimed, trying to fix things for all of us. I find this impossible to believe now. If any of the bankers, their experts and our politicians ever were sincere when they claimed we would all be in this together, it now seems terribly clear that none of them has any intention of being with us in what is being forced upon us now.

Just this morning George Osborne and his lick spittle coalition partners have agreed to another £10 billion in cuts to welfare, health, education and the rest while saying that imposing any further taxes on the wealthier will have to wait. They promise to look at that …soon. Promise.

The problem with discussing why we are bailing out the banks is that in the 5 years since the bank debt implosion began, ‘saving’ the banks has now become enmeshed in – and in the headlines replaced by – what the banks and our rulers absolutely insist is an entirely separate ‘crisis’.  The financial world and their political friends in all parties have spent two years trying to brainwash us, that the problem is no longer the banks but is a ‘crisis’ of public, sovereign overspend and indebtedness. Putting money in to the banks is now seen as a technical matter rather than anything the public should concern itself about. Indeed there is a desire to return to the idea that the public must stop feeling they should be entitled to have a ‘concern’ about things too technical for them to comprehend ‘in the right way’. The ‘right way’ is to understand that the proper concern of the public should be cutting what the financial experts tell us is the terrible debt problem caused by too much public spending.

The ‘right way’ makes no further mention of public money still supporting the banks nor of the billions more being printed up right now so yet more public money can be lent to them. In fact the right way insists there is no connection between the huge sums nations have pumped in to the banks and the sudden ballooning of sovereign debt in those nations.  The ‘right way’  means refusing to see any connection whatever between policies of  cutting public spending in the real economy and a shrinking of that economy. No connection at all…obviously.  Any economic Phd can see that.

5 years on and more people are more confused than ever. People cannot understand how the same politicians can insist it is essential to keep ‘helping’ the banks with ever larger sums (trillion is the new billion) regardless of what debt it incurs, while with equal fervor insisting it is absolutely imperative that we cut spending on anything other than the banks – because we are in debt. And so with their certainties chained to our legs, we are sinking in to a mire of suffocating confusion, lies and fraud.

Sometimes in a world of increasing confusion it is good to ask simple questions. Why are we bailing out the banks?

In the Beginning.

We have been given various answers in the years since the ‘save the banks’ policy began in 2007. Yes, the first one was back then. From the beginning of  The Debt Generation,

On July 19, 2007 the Dow Jones average closed the day at its highest point ever.

Three weeks later, on August 9, the huge French Bank PNB Paribas suddenly closed three very large subprime US mortgage funds. The European Central Bank (ECB) was forced to pump €95bn into the market to steady nerves, but the shockwaves had already spread and it wasn’t enough. The next day central banks around the globe were drawn in. The ECB pumped in a further €156bn, the US Federal Reserve, more commonly known as the Fed, put in $43bn and the Bank of Japan a trillion yen – all to try to steady global markets.  Those markets held their breath.

Just think about those numbers.  A quarter of a trillion in Euro liquidity pumped in to the banks from the ECB alone – on day one. And ever since, the torrent of liquidity and ‘investment’ provided to the banks has not ceased. The promise was that this was a crisis of bank funding not bank solvency and therefore the solution was not to wind them down in an orderly fashion but to pump money in to them. This would, we were assured, stabilize the banks, allow them to start lending again, first to each other and then later to the rest of the real economy.

The result? Well, 5 years on and the banks are stabilized in the sense that they are still alive but not stabilized in any meaningful sense. They are only alive because they continue to rely on massive injections of cheap loans from the public purse, they still rely on  state guarantees/insurance for  vast amounts of their rotten and valueless assets/loans and would not survive a day without the continuation of the policy of nearly zero percent interest rates which gives the banks cheap loans from the Treasury but is killing savings and pensions. So by any measure at all the policy, followed for 5 years, has not done what it was claimed it would. It has not worked.

And yet our leaders refuse to change. 5 years on and instead of trying a different policy, the Fed is now looking at an open ended QE 3 in order to pump  yet more money in to the banks(read – canular now stitched to your bruised and bleeding vein), the ECB/EU is in the midst of widespread calls for LTRO3 (LTRO is euro speak for QE – cheap lending to the banks) to follow the trillion Euros worth of LTRO 1 and 2 already pumped in, the BoE is sticking at a mere £345 billion in bond buying and £1.4 trillion committed over all to the financial system (Gov.’s own figures) and finally The Bank of Japan just a week ago squeezed out another ¥10 Trillion. That brings Japan’s bank stimulus ‘policy’ to over ¥80 trillion which is about $1 trillion which is about a fifth of Japan’s GDP. And then just to round out the policy triumph, just a few days ago a Bank of Japan Board member, Mr Sato, was reported as saying, that because the global crisis is, quite inexplicably, still not fixed,

We [The Bank of Japan] won’t hesitate in taking additional monetary easing steps….

Which eerily echoes both Mr Draghi’s now infamous ‘Whatever it takes’ pronouncement from the ECB and the Fed saying it could ‘do more’ if necessary. More of what? The same? In 2008 sub-prime was contained, in 2009  the crisis would be over by Christmas. The actions taken were ’emergency’ and ‘temporary’. Except that now, those temporary, ‘extraordinary government measures’ have been so ‘successful’ that now they have to be open ended. Does this sound like a disease responding to the appropriate treatment?

Whatever your view the fact remains that we are now in a world where we simultaneously have money being printed by all the central banks, so that it can be put in to the private banks, while also being told we must cut spending in the public sector in order to reduce ‘public’/state debts. 5 years on we have confusion being heaped upon failure. We are told the cuts are necessary because we must bring down sovereign debts, while also being told we must continue to bail out the banks even if doing so increases sovereign debt.

I am aware that MMT takes a radically different view of  sovereign debts and the mainstream’s insistant belief that nations must borrow to repay them. I will come to that later.

To most people, however, especially those facing the cuts, the seeming paradox of cutting spending to reduce debt while bailing out banks which increases it, seems to be a straightforward case of bail out the banks, AKA the wealthy who own them and work in them, while impoverishing the poor. Seen that way  the answer to why we are bailing out the banks is simple – we are bailing out the banks because it suits the wealthy. In which case something is very, very wrong, with our our political system as well as the economic theories that seeks to justify it. Is it right to see it that way? Is this why we are bailing out the banks?

Well I think there are good reasons for thinking this simple view is actually correct. Lets quote some well known figures and then look a little closer.

In the UK , according to the Office for National Statistics’s wealth survey, the top 10% own 46% of the total privately held wealth; £4.5 trillion out of the total of £10.3 Trillion. And they have actually increased their share and the rate at which they are aquiring it since the bank crisis began. In contrast the bottom 50% of GB households have only 10%  of the nation’s private wealth. In the US the disparity between rich and poor is even starker. In America the top single one percent own 35% of all the wealth. The top 5% own 63.5%. Of the rest, the vast majority of americans, 80% of them own just 12% of all of America’s wealth.

And it gets worse for Americans. A very good article in The National Journal points out that from the 90’s onwards,

“It wasn’t just that the top was doing better than the rest, but that the very top was    absorbing most of the economy’s growth. This was a more extreme and dynamic  kind of inequality than the country was accustomed to.

According to a recent Congressional Budget Office report, those in the top 1  percent of households doubled their share of pretax income from 1979 to 2007; the  bottom 80 percent saw their share fall. Worse, while the average income for the  top 1 percent more than tripled (after inflation), the bottom 80 percent saw only  feeble income growth, on the order of just 20 percent over nearly 30 years. The  rising tide was raising a few boats hugely and most other boats not very much.”

Land of the shat upon and home of the craven or blind.

These figures are for total wealth and income.If, however, we look at financial wealth the disparity grows even larger. These pie graphs are taken from an article by Prof. Domhoff of UC Santa Cruz.

Think of your own situation. How much of your wealth is held in the value of your house and how much in stocks and bonds? Almost all my wealth is contained in my  house.  The super rich, the top 1-10% hold much, much more of their wealth, vast bulk of it, in financial form. That huge increase  in ‘wealth’ from the 90’s onwards was concentrated in financial wealth. That is the kind of wealth that made and still makes the super rich, super rich.

What these two graphs tell us is that if the big banks had been wound up 80% of Americans would have lost almost nothing. Whereas the top 5% would have lost the vast bulk of their wealth and therefore their power.

It will be countered that we would have all lost  from the decline in our pensions. True. But there is still no getting away from the above charts. The wealthy have most of the pensions. In fact they own most of the pension companies. The poorer you are the less pension you have to lose. Many of those at the  bottom have no pension at all. That is what these charts say.

But wait, as the saying goes, there is more. In America there is about $1.6 trillion in printed dollars and deposits for which currency backing exists. That is state printed, state backed money. This is the stuff that you and I get paid in and have in our bank account.  However there is another $5.4 trillion in unbacked ‘money substitutes’ and somewhere around $53 Trillion in credit. For credit read debt backed assets and derivatives of all sorts. These are the forms of ‘money’, electronic, banking money in which the wealthy have most of their wealth. These are also what would be wiped out if the banks were not continually bailed out but were to be wound down instead.

This is what frightens them and what has dictated that the banks be bailed out. Unlike us in the 80%, the financial class hold most of their wealth in financial and ‘paper’ debt-backed form. If the present crop of huge banks were to be wound up, what would virtually disappear would be that thunder cloud of debt/credit-held, derivative wealth.

This is the size of that credit/debt and derivative cloud relative to the real economy. The black line is the total credit/debt and derivative cloud. The red line is GDP.

Your wealth is tied to your house and your job They are both part of GDP. But the total ‘wealth’ now based upon, I would say parasitic upon your house and in fact the entire real economy of stuff and jobs, is far greater than you will ever know. Your mortgage was securitized and sold to another bank you’ve never even heard of. But that bank long ago hypothecated that security to yet another bank as collateral for a loan. And that bank re-hypothecated it to another bank and so on 40 times over. Along the way other banks created derivatives  based on the security in which your mortgage was packaged and sold. The derivatives do not produce employment nor add to the world”s stock of food or shelter. They are a form of paper wealth much like a betting stub on a horse race is wealth. If a punter losses his betting stub it does nothing to the health of the horse. Our present policy is to starve the horse in order to protect the value of the betting stubs and the business and wealth of those who trade in those stubs.

If the phantom economy were to be wound up, there would still be factories, people to work in them and even people with dollars, euros and pounds to spend. Our nations would still have the means of producing goods and services. It has been argued that if the banks went down it would destroy our currencies. But is this threat real? I think it is not. In a world where credit backed assets are worthless, state printed money becomes more not less desirable. Just take a look at how the banks are desperate for nations to print more of their state backed money.

If the banks were to be wound up it is their credit/debt backed ‘money and the assets held in it, which would burn to ash. not our state backed currency.  The $53 trillion in credit/debt backed wealth would largely dissapear, not the 5 trillion in state backed money. The super rich would be the massively disproportionate losers.  This they would not and never will countenance. Instead they have engineered the saving of the form of ‘money’ in which their wealth is held and the institutions which control it, and done so at your expense rather than theirs.

So the simple reason our rulers insist on bailing out the banks is that by doing so the wealthy and the powerful are simply bailing out themselves and guaranteeing the continuation of a system which suits them perfectly.

So is that it? Just selfishness? Actually no. While I believe this simple reason is true , such naked selfishness could never have survived for 5 years were there not a covering of legitimating  theory to confuse critics and lull the unwary.  That is what we will look at in part 2.

The object of this jibe was, of course, Alexis Tsipras, whom even The Guardian newspaper described as 

…leader of the radical left Syriza party, [who] is demanding a renegotiation of Greece’s bailout package.

What is it that Syriza and Mr Tsipras have actually said they want, which qualifies them for being described as ‘radical’ and ‘cranky’?

Well Mr Tsipras is on record as saying that if given a mandate to set up a government, he would set up a Debt Commission to investigate the legality of the various debts the Greek Nation and its banking system have accumulated. Is this radical and cranky?

For those who may  not know what a Debt Commission is, it is a panel drawn from a wide range of groups within society who will analyze all the country’s debts, one by one, to see if they were taken on legally and for whose benefit.  Those taken on legally and for the good of those who are paying – IE the Greek people, are deemed legally binding. Those which were done fraudulently or taken on to benefit those doing the deal, to the detriment of those left with the bill are considered Odious or worse and are torn up without further discussion.

Is this so radical? The banks and the leaders of the nations whose banks might be effected by the process think so. But is it? Is it radcial and cranky to think there might have been some fraudulent loans made, some corrupt kick-backs and pocket-lining deals done? Is it cranky to think some of Greece’s political class could have lined their own pockets and the pockets of those with whom they were cosily doing business behind the curtain of ‘confidentiality’? Is it radical to think some of the Global Banks might have done deals which were never going to help the Greek people but would line the pockets of the bankers? We have a long public record of evidence that virtually all the global banks have engaged in widespread and intentional fraud.

So is it so radical to want to see the details of a bill that other people, untrustworthy people, ran up, but which you have been left to pay?  A Debt Commission is no more than asking for an itemized bill.

Does it make you a dangerous radical if upon receipt of a huge bill at a restaurant, you ask for an itemized bill? Is it cranky to want to know what you are paying for?

The process of a Debt Commission has international legal standing and has been done before.

70% of the votes cast in the Greek election, though not giving a majority to any one party, were cast against austerity measures and the parties who advocated them. So there is a clear mandate from the people of Greece. Are the people themselves and the mandate they seem to have voted for, radical and cranky? Well  only if you regard democracy itself as a dangerous intrusion of the Great Unwashed into realms that should be reserved for their betters. It is a small detail of Democracy that I think our present rulers overlook, that Democracy IS radical and allows for radical decisions. And most important of all, the democratic decisions of a free and sovereign people, take precedence over ALL other agreements and contracts. The people and their democratically expressed will are, and absolutely must always be, supreme. Contract law, the law governing private agreements between private entities,  is NOT and MUST NOT ever become superior to the will of the People. The day it is, Democracy dies. Yet that is precisely what our leaders and the global bankers are trying to insist upon.

A free people must have the right to change their mind or Democracy is dead.

And that is our present impasse. The banks and our present rulers have agreed between them that the decisions made, not just by elected leaders, but also those collosal decisions taken by unelected ‘experts’ at central banks and financial quangos, to print or borrow money in order to bail out the private banks and their private debts – decision made without any recourse to the people-expected-to-pay (the public) and often without even a public discussion, that those decisions should be legally binding and irreversably above the will of the people.

If we allow this then we have allowed a coup, as surely as if it had been carried out with tanks and soldiers rather than computer models and ‘experts’.

The problem in Greece, is is that a Debt Commission requires time. And during the time it would take for such a Commission to do its work, Greece would need financial support .

It sounds reasonable to say – why should we – those who have been supporting you, continue to support you while you run your Debt Commission. Germany and its tax payers will balk. But is it not also quite reasonable for the Greeks to say we would like our itemized bill if you please and do not feel it is right to be told we must pay NOW, in full,  and never mind the details.

The reality is our banks – those in France Germany, the UK and America, have been caught engaged in fraud and vastly stupid and greedy dealings. Our regulators knew and were largely complicit. During the time Greece was supposed to have been hiding and lying about its debts – it was also under ‘Special scrutiny’ by the European regulator Eccofin

Here is a press release of the agreement between Ecofin and the Greek government in 2007.

Greece’s fiscal deficit was reduced below 3% of GDP in a “credible and sustainable manner,” the EU’s Economic and Financial Affairs Council (ECOFIN) announced, closing the excessive deficit procedure it opened with regard to Greece in 2004.

Ecofin knew about the currency swap deals Greece had done and was doing with JP Morgan and Goldman. Deals which they later described as how Greece ‘hid’ its real level of debts. Debts were certainly hidden. But not from Ecofin. Not from the banks who now claim they are owed money. They were indeed hidden …from those who are now told they MUST PAY and without seeing what it is they are to pay for.

I would say that is what is radical and dangerous.

I don’t know how many of you know much about Vulture Funds, what they do and how they do it, but it forms the basis of my horrid thought.

Nations issue debt. After it is bought, it often gets re-sold on what is called the secondary market. The price of debt on the secondary market changes much as stock prices change. The market is big.

When a nation looks like it might default the price of its debt begins to sink. What was bought for full price is offered for sale at a reduced price – say 60 cents on the dollar. Buyers and sellers have to decide if they think the nation will proceed to default or avoid it. The decision is, sell now and accept a loss but avoid a potentially larger loss later, or buy now at a discount and if the nation avoids default, profit as the value of that cheaply bought debt recovers its original value.

But then there are the vulture funds. They follow a quite different path. They are creatures of the law not of finance and there are not many. One of the biggest, most notorious and best connected is Elliot Associates of Manhattan. They have very close links with the Republican Party and to Mitt Romney in particular ( They are large donors to his campaign). Another is FG Capital management. These companies are financial companies all founded and largely owned by Wall Street  lawyers. FG Capital Management was founded by a former Morgan Stanley consultant.

Vulture funds buy the bonds others have given up on. They buy what is often referred to as ‘distressed debt’. That is debt that has been defaulted upon and is, for the ordinary bond manager, worthless. The vulture buys it and then sues the defaulting nation. It is a very specialized area of the law and of finance. As an IMF study from 2003 said of vulture funds,

“Investors in this market posses specialized knowledge of bankruptcy law and international litigation and are willing to hold out for many years before seeing any recovery”

The study looked at Elliott Assciaites and others and found that those vulture funds trading in distressed sovereign debts who resorted to litigation to force repayment made profits of between 50-333% net of legal fees. Elliot Associates, for example, sued Peru.

You might wonder to what court you could take a whole nation? And what sanction could any court have over a sovereign nation? The answer is rather clever and like many clever things also simple. You sue a nation in the jurisdictions in which that nation does other sovereign business, such as transferring its sovereign funds in order, for example, to pay its debts. And where is that ?

Most nations have funds residing outside the nation most often in the global centres of finance, New York and London. All Nations have to move money around, albeit electronically, in order to conduct business, such as selling more debt to finance its on-going activities, or to pay debt. Central banks of all nations buy and sell on the foreign exchanges and debt markets in order to keep a balance of currencies  to facilitate the international trade of businesses in that nation. In all these examples the wealth of a nation is outside that nation under the jurisdiction of the place the business is being done. Vulture funds attack those points. The main one is the Southern District of New York – Wall Street’s Court.

For example, Elliott Associates sued Peru in the Southern Distric Court of Manhattan by filing to seize money Peru had in the vaults of Chase Manhattan Bank. Chase was acting as agent for Peru when Peru was paying certain other debts. Elliott argued that if Peru had money to pay other creditors then it – and more importantly Chase – had a legal duty to treat Elliott and its claim equally.  The suit held up payments and seemed to threaten Peru with financial paralysis. The threat worked. Peru paid. Elliott had bought the distressed debt for cents on the dollar and got the whole dollar plus interest. This is only one of several strategies used by Vulture funds.

Now to my horrid thought.

The ECB had been accepting lots and lots of dubious sovereign debt as collateral for ECB loans. This has been done direct from the ECB, via the ‘temporary’ bail-out fund (the EFSF), the larger temporary bail-out mechanism (the LTRO) and the other bail out mechanism (the ESM).

One way of interpreting this policy, as I and many others have done, is to say it’s a frontal attack on democracy and justice. The transferring of the private debts of private banks, to National Central Banks and then onwards to the ECB, is a multi layered scam run by the financial and political elite to transfer their private bank debts beyond the reach of our democratic accountability.

But what if a European nation did default? What then? Well what is to stop the ECB going vulture? It has ‘bought’ up assets from various European nations at a discount. If one of those nations were to default after,… oh I don’t know – a referendum (think Greece’s disallowed attempt at democracy) or elections that might derail imposed austerity measures (think Spain’s forthcoming elections)? What is to stop the ECB or better yet one of it’s arm’s length funds turning vulture and suing the defaulting nation? Who says the major creditor nations, France and Germany, or those who are themselves hanging by a thread, like Italy, have to accept default?

Of course for Germany or France to actually pursue Greece or Spain and their people, in order to squeeze more blood from the open wounds would be ugly. Granted. But then I ask myself why was so much effort put in to creating the complicated and seemingly nonsensical funding structures of the EFSF. ESM and the LTRO? They seemed typically Eurocratic, designed just to hide and confuse the real extent of the bail-outs, the lack of actual cash underlying those bail-outs and thus the frightening extent of the empty leverage involved. BUT they did create legal entities which are arm’s length from the funding nations and the EU itself. How much less ugly if something called the EFSF were to sue the Greek or Spanish people should the default. And of course it is the threat that it could be done, rather than actually doing it, that is the main weapon.

I wonder, in the run up to the massively important elections in Spain, when the Spanish people might want to reject the slash and burn edicts of the ECB and IMF, if certain unelected financial eurocrats might not mention in passing to the leaders of the main Spanish parties what nasty creatures vultures can be.

Far fetched? Look at what our rulers have been happy to do so far. The Greek Prime Minister suggests a referndum to ask ask the Greek people for authority and legitimacy. He is removed. The referendum is killed. In Italy a wholly unelected government and new ruler – a Prime Minister in name only since he was not elected – is intalled at the head of what is called a ‘government of national unity’. Except that ‘the nation’ had no say whatsoever in its imposition. In Portugal critical and far reaching measures were pushed through by the interim government before elections took place.

Does anyoe think a result in Spain, which might reject the latest round of austerity measures, will be allowed? Unlike Ireland or Greece, a default in Spain, or an election result which would lead to one through a rejection of more austerity. could not be survived. An election result in Spain which set in motion a rejection of austerity would signal a terminal crisis for european bank debt and those nations currently hiding it. Do you really think they will allow such a result.

Our political and moral landscape has already altered. Those who rule over us have accepted without discussion, on our behalf, that some banks are  too big to fail and that inconvenient laws that threaten them can and must be routinely set aside. I see no reason why our leaders won’t also decide that certain nations whose debts are considered too big and too important for other nations, shouldn’t be seen as too big to be allowed to vote.