Iceland: Repudiate the Debt

by Michael Hudson

Iceland is under attack – not militarily­ but financially. It owes more than it can pay. This threatens debtors with forfeiture of what remains of their homes and other assets. The government is being told to sell off the nation’s public domain, its natural resources and public enterprises to pay the financial gambling debts run up irresponsibly by a new banking class. This class is seeking to increase its wealth and power despite the fact that its debt-leveraging strategy already has plunged the economy into bankruptcy. On top of this, creditors are seeking to enact permanent taxes and sell off public assets to pay for bailouts to themselves.


Being defeated by debt is as deadly as outright military warfare. Faced with loss of their property and means of self-support, many citizens will get sick, lead lives of increasing desperation and die early if they do not repudiate most of the fraudulently offered loans of the past five years. And defending its civil society will not be as easy as it is in a war where the citizenry stands together in coping with a visible aggressor. Iceland is confronted by more powerful nations, headed by the United States and Britain. They are unleashing their propagandists and mobilizing the IMF and World Bank to demand that Iceland not defend itself by wiping out its bad debts. Yet these creditor nations so far have taken no responsibility for the current credit mess. And indeed, the United States and Britain are net debtors on balance. But when it comes to their stance vis-à-vis Iceland, they are demanding that it impoverish its citizens by paying debts in ways that these nations themselves would never follow. They know that it lacks the money to pay, but they are quite willing to take payment in the form of foreclosure on the nation’s natural resources, land and housing, and a mortgage on the next few centuries of its future.


If this sounds like the spoils of war, it is – and always has been. Debt bondage is the name of this game. And the major weapon in this conflict of interest is how people perceive it. Debtors must be convinced to pay voluntarily, to put creditor interests above of the economy’s prosperity as a whole, and even to put foreign demands above their own national interest. This is not a policy that my country, the United States, follows. But popular discussion in Iceland to date has been one-sided in defense of creditor interests, not that of its own domestic debtors.


Ultimately, Iceland’s adversary is not a nation or even a class, but impersonal financial dynamics working globally and domestically. To cope with its current debt pressure, Iceland must recognize how uniquely destructive an economic regime its bankers have created, through self-serving legislation and outright fraud. With eager foreign complicity, its banks have managed to create enough foreign debt to cause chronic currency depreciation and hence domestic price inflation for many decades to come.


To put Iceland’s financial dilemma in perspective, examine how other countries have dealt with huge debt obligations. Historically, the path of least resistance has been to “inflate their way out of debt.” The idea is to pay debts with “cheap money” in terms of its reduced purchasing power. Governments do this by printing money and running budget deficits (spending more than they take in through taxes) large enough to raise prices as this new money chases the same volume of goods. That is how Rome depreciated its currency in antiquity, and how America managed to erode much of its own debt in the 1970s – and how the dollar’s falling international value has wiped out much of the U.S. international debt in recent years. This price inflation reduces the debt burden – as long as wages and other income rise in tandem.


Faced with an unprecedented explosion of debt obligations – many of them apparently fraudulent, and certainly in violation of traditional credit practice – Iceland has turned this inflationary solution inside out. Instead of permitting the classic credit cure of inflating the currency, it has created a dream economy for creditors, preventing the classical escape from debt. Iceland has found a way to inflate its way into debt, not out of it. By indexing debt to the rate of inflation, it has guaranteed a unique windfall for banks that vastly increases what they receive in a “down market,” at the expense of wage earners and industrial profits. Linking mortgage loans to the consumer price index (CPI) in the face of a depreciating currency and heavy balance-of-payments drain to foreigners can have only one result: destruction of Iceland’s society and its traditional way of life.


Iceland needs to repudiate this debt bomb. Under present policy its debts will never lose value, because they are indexed to inflation. This in turn is being caused in large part by foreign debt service collapsing the currency, raising import prices and thus causing even larger debt payments in an endless treadmill. The economy shrinks, wages fall and assets lose value, yet debt obligations continue to grow and grow. The resulting evisceration of wages, living standards and consumer spending will further shrink the economy – a prescription for economic virus that threatens to plague Iceland for many decades if it is not reversed now. Capital formation will plunge as consumers lack money to spend. Many may not have enough to survive. The economy will be “crucified on a cross of gold,” to use William Jennings Bryan’s famous phrase in the 1896 American presidential election when he advocated an inflationary coinage of silver to alleviate debt pressure on U.S. farmers and labor.



Another side to the discussion?


Despite having spent the past half-century focusing on countries with balance-of-payments problems, even I find Iceland’s uniquely self-destructive financial regime shocking. Before you dismiss my candor, I should offer a short personal résumé so that you understand that my conclusions are based mainly on having been an insider to the game of imperial-style plundering of nations for forty years. In the mid-1960s I was the balance-of-payments economist for the Chase Manhattan Bank and then for Arthur Anderson, and later for the United Nations Institute for Training and Research (UNITAR). I have taught international economics at the graduate level since 1969, and now head an international group on economic and financial history based at Harvard. In 1990 at Scudder Stevens and Clark, I organized the world’s first sovereign-debt fund. All these jobs involved analyzing the limited ability of debtor countries to pay – how much could be extracted from them through foreign-currency loans and how much public infrastructure was available to be sold off in a voluntary virtual foreclosure process by countries willing to submit to creditor-dictated rules.


I first wrote about monetary imperialism in the 1970s in my book Super Imperialism. It should have been entitled “Monetary Imperialism” because it detailed how replacing gold with paper dollar IOUs for trade and balance-of-payments deficits in 1971 allowed the United States to exploit the rest of the world without limit. Phasing out gold payments among central banks in favor of fiat paper money allowed the United States to run up massive debts equal to its cumulative payments deficit, far beyond its ability to pay. It currently owes over $4 trillion, while running a chronic trade deficit with enormous overseas military spending, financed entirely by other countries through their central banks. This is euphemized as the “international monetary system.”


I also was an advisor to the Canadian government in the 1970s. My main work was to write a monograph explaining why countries should not borrow in foreign currencies, but should monetize their own credit for domestic spending and investment. In recent years I have taught in Latvia and given this same advice to its officials. I provide this background because it has obvious relevance to Iceland’s financial situation today. It has broken the cardinal rule of international finance: Never borrow in a foreign currency for credit that you can create freely at home. Governments can inflate their way out of domestic debt – but not out of foreign debt. That is a large part of the problem that Iceland now faces.


The main thrust of my comments therefore will focus on the international dimension of Iceland’s debt problem, especially with regard to its relations with Europe. It therefore is relevant to look at what is happening in today’s “expanded Europe.” As the financial press has been reporting, post-Soviet economies have met with disastrous results after having moved to join the European Union during the past decade. The recent riots of debtors, farmers and labor union members from the Baltics to Hungary are symptomatic of the deep economic woes surging over these countries. Resentment is growing that instead of helping them industrialize and become more efficient, Europe and its Lisbon Treaty simply handed matters over to its bankers, who looked at these countries simply as credit customers to be loaded down with debt – not for loans to build up manufacturing and the infrastructure sorely needed by these countries, but loans mainly against existing real estate and infrastructure collateral already in place. That is the quickest way to make money, after all – and finance traditionally has lived in the short run.

This problem was bound to arise, given Europe’s postindustrial faith that whatever increases “wealth” – even by the trick of puffing up real estate and other asset prices – is as productive as building new industrial capacity and infrastructure. The result of this ideology was a set of bubble economies built on debt-financed real estate and stock market inflation. Such bubbles always burst at some point. Only belatedly are nations re-discovering the classical axiom that the only way to pay for imports on a sustainable basis is to produce exports.


Unfortunately, neither foreign banks nor European advisors encouraged this. Their policy de-industrialized the post-Soviet countries, which financed deepening trade deficits by borrowing in foreign currency against their real estate. The Baltic States borrowed euros, sterling and Swiss francs, mainly from Swedish banks to finance a real estate bubble, while Hungary and its Central European neighbors borrowed heavily from Austrian banks. Their economies are shrinking now that their casino economies gambling on asset-price inflation have burst. Rental income and hence property prices are plunging, and exchange rates are following suit. This makes a foreign-currency mortgage cost more than local property is yielding. The result is widespread mortgage default, causing severe losses for Swedish and Austrian banks.


Bad real estate debts also are pulling down banks in the two leading creditor nations, Britain and the United States. Real estate prices, stock market prices and employment are going down in a straight line unprecedented even in the Great Depression of the 1930s. This has turned the neoliberal financial dream of “creating wealth” by inflating asset prices, by creating credit without actually increasing tangible capital formation (wages and living standards) into a nightmare. Just as individuals can’t live off a credit card forever, neither can nations. As any classical economist knows, societies that only manufacture debt are unsustainable. Casinos may be fun places to visit (customers pay by losing their money), but no place to live. The same is true of casino economies.



No help from the EU or the current global economy


The European Union is not in a position to offer much help in solving Iceland’s financial problems. The continent’s integration in the 1950s was pioneered by social democrats and pro-industrial idealistic capitalists such as Konrad Adenauer and Charles de Gaulle hoping to end the continent’s internecine wars forever. They succeeded, by forming the seven-nation Common Market in 1957. But further European expansion occurred largely on the financial sector’s terms. That is the source of problems fracturing “old” and “new” Europe today. It is the context in which Iceland’s debt problem is now being played out.


It seems natural enough for people to pay debts that have been taken on honestly. The normal expectation is that people will borrow – and banks will make loans – only for sound investments, ones that are able make a profit enabling the debtor to pay back the lender with interest. This is how banks have worked for many centuries – hence, the image of the prudent bankers who says “no” to any questionable deals brought before them.


At least that was the old way of doing things. Almost nobody anticipated a world in which bankers would create credit irresponsibly, leading to the massive defaults we are seeing throughout the world today. In the United States, for example, no less than a third of home mortgages have fallen into a state of Negative Equity. That is to say, the mortgage exceeds the market price of the real estate pledged as collateral. The U.S. national debt has tripled during the past year, from $5 trillion to $15 trillion as a result of financial bailouts including the government taking on the $5.2 trillion mortgage-packaging giants, Fannie Mae and Freddie Mac. A single insurance company, A.I.G., has been slated to receive a quarter-trillion dollars of bailout money, and a single bank, Citibank, has received over $70 billion and still counting. The stocks of these hitherto financial giants have fallen to just pennies, and Congress is now debating whether finally to nationalize them and wipe out their stockholders and even their bondholders.


In Britain much the same has occurred. Sitting in the lounge of Heathrow airport last month, I watched the hearings on BBC where members of Parliament expressed amazement that the most seriously affected banks were not led by bankers but by marketing men. Their job was not to calculate prudent loans, but to sell as much debt as possible, without regard for the debtor’s ability to pay. The result is that the Bank of England – like the U.S. Treasury – is printing new bonds whose interest charges will have to be paid by taxes on labor and industry.


How can Iceland be expected to cope in this kind of financial environment? To get a perspective on what would be a dystopian future, one may look at the dress rehearsal for the so-called financial “reforms” played out in the 1990s in Russia and other post-Soviet countries. These are reforms that creditors – including the European banks, I’m sorry to say – now wish to impose on Iceland. In Russia, life expectancies sharply declined, while health, prosperity and hope withered as outside forces imposed austerity measures and high interest rates. Russians woke up to find that the devastation of the reforms foisted on them were as severe as the Second World War in reducing population, destroying industry, spreading disease and losing control of their economy. Living standards plunged, especially for retirees, while employment prospects closed for the young. Much the same occurred throughout the former Soviet Union.


This policy remains the “fix” for debtor countries: Sell off assets for pennies on the dollar to kleptocrats across the globe, and gut the nation’s social welfare programs just at a time they are needed most. By contrast, look at the nations calling most loudly for Iceland to pay the loans made by global speculators and arbitrageurs. They include the largest debtor nations, headed by the United States and Britain, led by politicians who never would dream of imposing such hardship on themselves. While cutting their own taxes and increasing their own government budget deficits, these nations are attempting to extricate financial tribute from smaller, weaker countries that they can bully, as they did to Third World debtors in the 1980s and ‘90s.



Dismantling industrial capitalism


This is a crisis that calls for blunt truths. What creditor nations and their international financial institutions are promoting is not capitalism as traditionally understood. Instead of helping industrialize the countries to which they extended credit so as to make them viable and self-reliant with new means of paying for their imports – and indeed, paying the debts taken on to rebuild their productive capacity – European planners oversaw the dismantling of manufacturing.


Even worse, they did so in a way that empowered a neo-feudal set of financial oligarchs. Indebted economies have been turned into a gaggle of casinos, with special games (e.g., opaque financial instruments such as credit-default swaps) reserved exclusively for insiders. Even to get into this game, one must be at last a millionaire, signing legal releases that one can afford to lose the entire investment and still survive economically. The European Union thus adds insult to injury by presenting its financial agencies euphemistically as donors bringing aid. They turn out to be the same ideologues that have crippled industrial capitalism across the globe by proliferating debt-leveraged gambles that have redistributed wealth upwards wherever they have operated.


This policy creates debt peonage for most citizens, above all in the newer countries seeking to join the European Union. Even in the richest nation on earth – the United States – nearly half of all citizens now have no net worth, and the gulf between the wealthiest 10 percent and the rest of society has widened geometrically since 1980. This is the unfair system that the world’s top creditors would export to Iceland – if they can convince its voters to accept neoliberal debt pyramiding as a way to get rich. The recent riots throughout the post-Soviet states suggest that this plan is not working. Their populations are now feeling how deeply the so-called financial reforms (e.g., financial deregulation) promoted by European banks and the Lisbon Agreements have polarized their economies.



Recognizing the enemy within


The only defense against such disastrous policy is to recognize that there are better alternatives. It simply is not possible for today’s astronomically indebted economies to “work their way out of debt” with the old trick of inflating the money supply. Trying to do so will collapse the currency’s exchange rate and divert so much revenue to pay creditors – and transfer so much property out of local hands – that a new kind of post-capitalist, non-production/consumption economy will be created, one less and less able to be self-reliant and independent, to say nothing about being just and sustainable.


Iceland’s financial crisis today is less an issue of international law as of outright lawlessness perpetrated by the purveyors of so-called free market democracy. Nations pressing Iceland for payment impose one set of laws for others while following quite a different set for themselves. Preaching to Iceland about international law, the United States and Great Britain themselves have broken the clearest of international laws – those against waging aggressive war. Their propagandists are skillful at using the language of capitalism and morality, yet they are neither capitalist nor moral. Their financial strategy is to play an ages-old psychological game. Make countries like Iceland feel guilty about being debtors rather than recognizing they have been victims of an international Ponzi scheme. In a nutshell, the game is to lay down “laws” for debtors in the form of destructive austerity programs fashioned by irresponsible and indeed, parasitic creditors. This “aid advice” ends in outright asset stripping, both public and private.


Asset stripping to pay debts has caused collapse time and again in history, but is strangely downplayed in today’s academic curriculum as an “inconvenient truth” as far as vested financial interests are concerned. Income is siphoned off by a scheme that is elegant and simple. Hapless victims – and now entire economies, not just individuals – are maneuvered onto a debt treadmill from which there is no escape. Creditors pile on credit and let the debts grow at the “magic of compound interest,” knowing that their loans cannot be repaid – except by asset sell-offs. No economy’s productivity can keep pace with exponentially compounding debt. Whatever was owned (and indeed, financed originally by public debt but now paid off) is stripped away for interest payments that never end. The aim is for these payments to absorb as much of the surplus as possible, so that the national economy in effect works to pay tribute to the new global financial class – bankers and money managers of mutual funds, pension funds and hedge funds.


The product they are selling is debt. They build up their own wealth by indebting others, and then forcing sell-offs to buyers who take on their own debt in the hope of making asset-price gains as property prices are impossibly inflated relative to the wages of living labor. This has become the new, euphemistically dubbed post-industrial form of wealth creation – a strategy that is now collapsing economies throughout the world.



The role of the United States


The United States has trapped other countries into a nightmarish system in which they have little practical choice but to recycle their excess balance-of-payments dollar inflows back to the United States, mainly in the form of loans to the U.S. Treasury. When foreign central banks receive dollars for their exports (or for the sale of their companies), they are limited in what they can do with these dollars. The U.S. Congress will not let them buy up important domestic companies or resources, and will not part with U.S. gold holdings. So foreign central banks are obliged to buy Treasury bonds – or, as the supply of these bonds has run out (being limited by the domestic budget deficit), mortgage-backed securities issued by the now-public Fannie Mae and Freddie Mac packagers of subprime mortgages. These two semi-official agencies were formally nationalized last year after a series of financial frauds and disastrous investments wiped out their capital, obliging the U.S. Government to step in and mollify governments from China to Israel whose central banks had been recycling their surplus dollar inflows into these securities.


Icelanders should keep one basic principle uppermost in their minds. The United States is the world’s largest debtor nation, and will never repay its own foreign debt. Over and above its presently outstanding four trillion dollars, its Treasury intends to keep on issuing new paper IOUs in exchange for the goods, services and real assets of China, Japan and other creditor nations – until governments stuck with these paper dollars turn their back on this Madoff-Ponzi scheme (note that these schemes always are named for American operators), recognizing what Adam Smith explained in The Wealth of Nations: No nation has ever repaid its debts. Small nations like Iceland, along with small taxpayers in wealthy countries, may be coerced with propaganda, mind games and outright threats into paying – until they have no assets left to hand over. But the big boys are above the law. They control the courts (which often rule without much regard for the actual law), just as they write history and newspaper coverage – and business school curricula – to serve their own interests.


The second important principle is how radically today’s post-capitalist order has inverted traditional ways of making money. Instead of making profits on new capital investment, the easiest path to quick riches in today’s global financial system is to foreclose at pennies on the dollar, and make a “capital gain” by flipping property onto world financial markets that are being inflated by central banks. While financial spokespersons promise that “there is no such thing as a free lunch,” today’s hit-and-run financial bubble, fraud and insider privatizations culminating in public-sector bailouts (“socializing the risk” while privatizing the profits and capital gains) – has become all about obtaining a free lunch.



Iceland’s zero-sum financial gamble


But it is a zero-sum gambling game, with losers on the other side of the table from the winners. One party’s gain is another’s loss – and indeed, this kind of game ends up shrinking the economy by diverting resources away from real investment in tangible capital formation. Unlike industrial capitalism, which employs labor and invests in capital equipment to turn raw materials into salable commodities, today’s post-industrial financialized system only offers the virtual (and temporary) wealth of asset bubbles. Its financial managers claim to be acting in the tradition of classical economists and share their concept of free markets, but in actuality they have been part of an intellectual fraud that depicts their system as something other than the financialized wealth extraction on the real economy of production and consumption that it is. Financialized wealth is extractive, not productive. That is because loans, stocks and bond securities are claims on wealth, not real wealth itself.


This is the context in which today’s financial war against Iceland is being waged. Homeowners are paying tribute, not in the form of taxes to an invading occupying force, but in interest to local sponsors of the debt pyramiding that has got Iceland into such deep trouble, and to the international creditors and enablers of this over-financialization of the economy. The nation’s public domain, its land and geothermal resources, its tourist industry and public assets are being eyed by foreign creditors as prey to be seized in the way that has occurred in many Third World countries. It is what ruined Turkey and Egypt in the late 19th century and brought down other kingdoms for centuries before that. Yet many Icelanders are heading into this future voluntarily, as if it somehow is fair rather than an exercise in predatory finance led by nations that have shown no willingness (or ability) to pay their own international debts.


Nations know when they are being attacked militarily. Defense forces fight to prevent invaders from seizing their land and imposing tribute. No country would think of welcoming a foreign army to do what William the Conqueror did to England after 1066. He ordered his accountants to compile the Domesday Book within thirty years (it was ready by 1086), calculating the rental value of English land in order to tax it for the Crown.


That is how most of Europe’s kingdoms were created. The rent was paid to the companions of military warlords, and their heirs ruled as absentee Lords for nine centuries. They quickly moved to keep what started out as royal revenue for themselves, celebrating this as the victory for free-market “democracy” in the Magna Carta liberatum (1215) and subsequent Revolt of the Barons (1258-65). Today, these lords of the land and those who have bought their property have run up mortgage debt, paying creditors what formerly was paid first as taxes and then taken as rent.


What took centuries to achieve in feudal Europe is now being threatened in Iceland, compressed into the space of just a decade or so. And in many ways this financial situation doesn’t make sense – unless one looks through history to see how the same tragedy has happened again and again.


The United States, Britain and the International Monetary Fund (“the global investment community”) are couching their demands for draconian austerity policies in the language of capitalism. But what they actually are promoting is a financial system that threatens to end in debt peonage, not democratic capitalism. Across the globe, from the Baltics to Hungary in Europe, and indeed from Russia to China, riots and wildcat strikes recently have broken out to protest this post-capitalist financial dynamic. It already has destroyed the industrial capacity of debtor countries subjected to the cruel austerity programs imposed by the IMF as acting agent for the global financial class. This merely repeats what the British did in India. Industrial growth has been replaced with a financialized real estate bubble. The “final stage” of this dynamic is to foreclose and sell off the assets of debtors at giveaway prices. Talk about democracy from the financial elite is a public-relations cover story. Their “magic of compound interest” sales pitch threatens to destroy entire nations.


Fortunately, this need not happen in countries that do not impose debt leveraging on themselves, but only in countries that let the public utility of money and credit creation be privatized in the hands of a cosmopolitan financial class. Iceland still has an alternative future before it, if voters recognize this in time. But to achieve the better future that most of its citizens want, it must understand the predatory debt trap into which it has fallen – or more accurately, been pushed by believing in the same illegitimate financial doctrine that has ruined Russia and other post-Soviet economies, as well as Third World countries before them under decades of IMF “austerity plans” designed to stifle domestic growth (and competition) and economic stability to pay foreign creditors. History provides tragic examples – the aftermath of World War I, and England itself in the centuries of its seemingly perpetual wars with France.



Industrial economies reverting to “tollbooth economies”


The world is plunging “back to the future,” to an epoch of neo-feudalism and debt peonage. It is a travesty of the promise of industrial capitalism as it seemed to be evolving on the eve of the 20th century and the Progressive Era of social democracy. What was not recognized was the financial time bomb implanted in the DNA of Europe as it evolved out of the Middle Ages.


As European feudalism gave way to the formation of nation-states, most kingdoms became dependent on foreign loans to fight their wars – starting with the Crusades, whose looting of Byzantium provided an enormous influx of gold and silver. This is what broke down Church bans on usury. Once governments paid interest to elite Church orders such as the Templars and Hospitallers, it became permissible for banks to join in lending at interest – to kings, the nobility and the merchant classes as major customers.


The birth of international post-medieval banking proved disastrous for many family banks that foundered on what turned out to be bad loans to the leading powers of early Europe, from Spain to France and England. The historian Richard Ehrenberg notes that Spanish bankruptcies “occurred at intervals of about twenty years – 1557, 1575, 1596, 1607, 1627, 1647,” often being rationalized by pious allusions to Church prohibitions against usury. England declared bankruptcy under Edward III in 1339, and Charles II shut down the Exchequer in 1672 and suspended payment on its floating debt. Wiping out debts was the only way to retain basic economic and political relations and national independence. In view of this long experience, England’s advice to Iceland today is in the character of “Do as we say, not as we ourselves have done and are doing.”


Central banks were formed to advance credit to governments, and commercial banks to help finance the Industrial Revolution’s expanding trade and related infrastructure spending, mining and shipping, capped by infrastructure monopolies such as canals, railroads and ports, and later by fuel and power. The medieval epoch’s “primitive accumulation” – the extraction of revenue by military seizure – was replaced by the more peaceful and seemingly civilized practice of creditors appropriating the economic surplus by making interest-bearing loans, and by foreclosing on property when the interest charges could not be paid.


In recent years financial managers have persuaded many countries to sell off public enterprises like their water or energy supplies, mainly to raise the money to pay debts or to cut taxes on the highest wealth brackets. This sale of the “commons” by naïve, myopic leaders (and the “useful idiots” promoted by financial lobbyists to be their economic advisors) turns debtor countries into “tollbooth economies” in which basic services become a vehicle to extract greater and greater portions of national income and wealth for the benefit of the few. This is the antithesis of “free markets” as classical economists understood the term. They are markets designed and controlled by the financial sector to appropriate for itself the surplus produced by labor and tangible capital investment.


To promote this siphoning off of surplus income, the rich have funded extensive disinformation (propaganda) campaigns around the world. Their tactic is to use familiar and revered ideological terms such as “free markets,” “economic democracy” and “fairness” to win the hearts and minds of the population while actually imposing a set of policies in stark contrast to Enlightenment ideology, classical political economy, Progressive Era reform and 20th century social democracy – the ideals of freedom-loving peoples everywhere. Financial lobbyists have spent billions of dollars spent on public-relations think tanks to achieve this ideological con job. They have endowed business schools and gained control of government agencies to promote their creditor-oriented point of view, headed by central banks to serve as the ideological wedge for today’s anti-democratic forces. This is the ideology that has pushed much of the Third World into poverty since the 1960s, as well as today’s tragically debt-ridden post-Soviet economies.



Financial warfare


Finance seems at first sight to be quite different from outright warfare. Everyone knows well enough that invading armies do not come on friendly terms. Foreign navies and troops are not welcomed, even if they promise to help build up the economy by constructing new roads and bridges (the better for their tanks and troops to travel on), hydropower and geothermal stations to export electricity (keeping the earnings for themselves), hotels and spas for themselves and foreigners to enjoy (and keep the rental incomes and site values), and create detailed statistical analyses (such as the Domesday Book alluded to above) to manage the economy in their favor.


Today this financial strategy has become multilateral. The IMF acts as enforcer for global creditors to appropriate the income of real estate, national infrastructure and industry as a financial boondoggle. What is remarkable is that countries throughout the world are losing their economic and fiscal independence peacefully – at least it is peaceful when target countries do not fight back. (Chile, Cuba and Iran are object lessons for the punitive economic sanctions imposed on countries that do not accept today’s predatory economic ethic.) Financial conquest is thus more covert than military warfare. It relies more on the educational and psychological dimension, and is most successful when the victim does not even realize it is being attacked.


But the effects are as devastating on human life as what Russia suffered at the hands of Western “reformers” in the 1990s. The financial austerity imposed by creditor-run regimes shortens life spans, reduces birth rates, and increases labor flight, suicide rates, disease, alcoholism and drug abuse. Just as war kills an economy’s males of fighting age (25-35), financial austerity drives them to emigrate to find work. This is why U.S. investor Warren Buffett has called collateralized debt obligations (CDOs), credit default swaps and similar debt-leveraging instruments “weapons of mass financial destruction.”


Consider the role of banking in this neo-feudal order. Banks do not create credit to finance manufacturing – that is done mainly out of retained earnings and equity. Banks create credit primarily to lend against collateral already in place – loans that simply extract money from the economy. This is an inherently destructive act, one that is anti-capitalist in the sense that it undercuts industrial growth in favor of interest extraction and short-term speculative gains.


The trick is to get this policy welcomed as if it were progress, as “post-industrial” rather than a lapse backward. Only today is it becoming apparent that the collateral-based lending of banks “creates wealth” mainly by inflating asset-price bubbles, especially in real estate. Bankers calculate how much debt a given flow of residential or commercial real estate income can support, and create enough credit to make a loan large enough to absorb this surplus revenue. Bankers do the same with industry by lending corporate raiders enough money in take-over “junk” bonds to turn profits into a flow of interest payments for themselves, and with capital gains for the raiders. Central banks fuel this process by swamping economies with easy credit (that is, debt) that keeps the financial sector fat while impoverishing the increasingly indebted nation.


Finance thus is the historical antithesis of property, sanctifying its own right to expropriate indebted property owners. Originally denounced by Christianity, Judaism and Islam, interest-bearing debt has sanctified itself as the predominant form of wealth. This is not what the classical economists and democratic political reformers expected to see. They explained how to avoid this economic dystopia by appropriate government tax policy and regulation to minimize the economic role and political power of post-feudal bankers and rentiers. (Rentiers are people who live off interest and rents, that is, off absentee incomes paid on a regular basis. A rente was a French government bond paying interest at regular intervals; the idea was extended to landlords.)



How banks and the financial sector gained dominant power


This supremacy of the banks and the financial sector took thousands of years to achieve. It was not easy to overthrow traditional social values and to impoverish so many economies by subordinating customary property relations with legal priority for creditors. Iceland only recently has come under this kind of financial attack by creditors operating globally. Bankers managed to convince ambitious fortune-seekers that the way to wealth and economic growth lay in debt leveraging, not in staying free of debt. Selling debt as their product, banks and speculators at the world’s financial core needed to prepare for what they must have known would lead to economic collapse and destroyed economies throughout history. They prepared the path to ruin by ideological engineering aimed at shaping how populations think about history, so as to accept debt pyramiding as a good economic strategy.


As an example of their warped thinking, consider an attractively priced home. Would you rather own 100% of a home free of all debt with a market value of 100,000 euros if free of debt – or, would you rather own 60% of the same home at an inflated market price valued at 250,000 euros? In the second scenario you would have 50,000 euros of “surplus wealth” (60% x 250,000 = 150,000 euros, compared to 100,000 in the first example). People across the globe have been convinced that the second scenario represents “wealth creation.” What is overlooked is that the higher-priced home carries interest charges on its higher market price. This charge would amount to 6,000 euros a year, or 500 euros a month, at 6% interest. The same property is worth more, but includes a much larger debt overhead – income for the financial sector.


In Iceland – but nowhere else – home mortgages have a uniquely bad twist. Creditors have managed to protect the weight of their claims on debtors by indexing mortgage loans to the nation’s consumer price inflation (CPI) rate. Each month the debt principal is increased by the CPI increase – and so is the interest charge. During 2008 that index rose by 14.2%, so a 100,000-euro mortgage at the start of 2008 would have grown to 114,230 euros by yearend. These monthly adjustments also would added an entire percentage point onto the interest payment – an extra 100 euros to be paid to creditors monthly, in addition to the growing principal to be amortized. Talk about making money without effort …!


Such heavy debt charges would shrink any economy, and that is what is happening in Iceland. Prices for real estate declined by an estimated 21 percent for housing in 2008. So in the above example, the market price of the house worth 100,000 euros at the beginning of the year would have been worth only 79,000 at yearend, while the mortgage would have grown by 14% to 114,230. This would have plunged the homeowner 35,000 euros into negative equity – a remarkable 35% change.


In every other country, investors lose out when prices decline for real estate, stocks and bonds, while creditors find the purchasing power of their loans eroded by inflation. That is how most countries have “inflated their way out of debt” for many centuries. But Iceland’s creditors have created a system in which their position actually is improved as the rest of the economy suffers inflationary price erosion. Their claims rise in proportion to the rate at which consumer-price inflation eats away at wages and business profits. Where is the sense in this?


What makes this so ironic is that the purpose of calculating the consumer-price index in all countries has been to support consumer income. It was to protect wage earners and retirees against inflation eating away at their ability to maintain their standard of living. That is why in the United States, Social Security retirees receive an annual cost-of-living adjustment based on the CPI. But Iceland inverts this political aim, protecting the claims of creditors against debtors (and hence against most wage-earners). The creditor’s objective is to maximize the power of debt over living labor. That is the literal meaning of “mortgage:” a “dead hand” of the past over the present, of past wealth and credit over the living. For Iceland the debts run up during the “wealth creation” phase of the financial bubble are to be left in place and even grow at an accelerating rate reflecting the pace of currency depreciation and hence import prices and consumer prices generally. Debtors lose out as prices plunge for the homes they own, while creditors maintain their economic grip intact and even strengthen their hand by increasing their take.



Turning economic power into political power


Creditors in most countries have been able to turn their economic power into political power with the aim of shifting the tax burden off themselves and onto labor and industry. The final coup de grace occurs when they get the government to bail them out from their losses on bad loans. In the United States, Congress has tripled the national debt in less than a year to bail out creditors with little thought of helping debtors, or even of prosecuting the massive financial fraud involved in its subprime real estate bubble and the sale of junk mortgages to gullible foreign buyers.


Iceland’s citizens will own a smaller and smaller proportion of their homes as its banks become the main claimants on the nation’s property value. By subjecting Iceland to this unique kind of financial squeeze, Icelandic policy stands in diametrical contrast to that of the United States. The U.S. policy is to stabilize its economy and avoid depression by writing down debts to bring them in line with today’s lower market prices and, more specifically, to bring carrying charges on mortgage debt within the ability of homeowners to pay no more than 32% of their income. Other countries also are writing down their debts to bring them in line with the ability to pay. But Iceland is subjecting its own homeowners and consumers into debt deflation and plunging them into Negative Equity status – by law!


The only way its banks can succeed in this ploy is to keep Iceland’s voters unaware of what is happening in the rest of the world – and indeed, to block the government from drawing up a balance sheet of the nation’s debts, a roster of whom these debts are owed to, and a calculation of the economy’s ability to pay.


Iceland’s present policy will lower disposable income for homeowners and other debtors – the great majority of its citizens – while wealth gushes to the top of the economic pyramid, to those who are creating as much credit as they can find borrowers for. The result is not what former Federal Reserve chairman Alan Greenspan and President George W. Bush claimed to be creating in America – an “ownership” society. It really is a “loanship” society, an economy of ersatz assets in which debt pyramiding – owning less and less of a home or other asset – seemed to be a strategy for growing richer instead of the debt trap it is. Has Iceland fallen into a similar semantic trap?



Pensions and retirement


As in the United States, Iceland has convinced labor to “prefund” its retirement. The idea is to save up in advance, so as to provide for retirement in a purely financial way. Of course, the most important way to support retirees is to see that they can afford the basic goods and services needed to live. To the extent that “financializing” an economy ends up eroding the “real” economy, pension funding – and government Social Security funds (regressive taxes that enable the Treasury to cut taxes for the higher wealth brackets) – tends to shrink the economy rather than provide for the expansion in output needed to support an aging population. As matters stand, pension savings are mobilized to increase the volume of interest-extracting debt and fuel financial bubbles (as in America’s “pension-fund capitalism” that pushed up stock markets in the past). Pension savings works against employment most visibly when they are lent to corporate raiders who pay off their bondholders by downsizing the work force and squeezing more “productivity” out of the remaining employees. Economic “growth” under such circumstances takes the form of a financial and property-sector overhead, not growth or stability in living standards or the capacity to produce.


Allowing economies to be crippled with interest payments was unthinkable until recently. To achieve so radical a break in the public’s idea of prosperity and self-reliance, it has been necessary for creditors to wipe out knowledge of how legal systems have been amended to put creditor interests above those of debtors over the past eight centuries – and how the leading classical economists and Enlightenment cultural and religious leaders sought to subordinate creditor interests to those of growth and prosperity for the economy at large. But the new banking class has been clever enough to hire the best propagandists money can buy while remaining blind to the havoc they are wreaking with people’s lives.



The debt game



Like many people, Icelanders tend to think of debt in personal terms, as if creditors are neighbors much like themselves. The normal thing to do when problems arise would be to sit down and reach a common agreement. But Iceland’s creditors are impersonal billion-dollar financial conglomerates, and creditor-debtor relations under such conditions are inherently adversarial, as anyone who has had a recent disagreement with a bank can attest. Whatever creditors can gain in today’s highly politicized, legalistic and ideological tug-of-war will be the debtor’s loss. And the magnitude of Iceland’s prospective loss threatens to plunge its economy into depression for generations, turning it into a Third World oligarchy, or worse, a dictatorship. The price of paying its debts thus threatens to be loss of its national identity and a loss of its future.


The trick is to fool debtors into thinking that “free markets” means paying one’s debts. Creditors can succeed in letting debt leveraging and “the magic of compound interest” empty out economies only by diverting attention from what Adam Smith and other classical economists warned against. For them, a free market was one free of debt – especially foreign debt. In The Wealth of Nations (especially Book V, chapter 3), Smith warned against creditors becoming “free” enough to disable the ability of governments to protect citizens from creditors – especially the Dutch, who were the major investors in British monopolies created to be sold to pay for that nation’s seemingly eternal wars with France. The problem was that creditors sought to extract the wealth of nations for themselves, not to create wealth. Their greed was destructive to society as a whole, because it was easier to simply strip assets than to create real capital.


That is the problem with creditors historically. They tend to care only about how to extract as much as they can, as quickly as possible. “A creditor of the public, considered merely as such,” wrote Smith, “has no interest in the good condition of any particular portion of land, or in the good management of any particular portion of capital stock. As a creditor of the public he has no knowledge of any such particular portion. He has no inspection of it. He can have no care about it. Its ruin may in some cases be unknown to him, and cannot directly affect him.” The problem obviously is worst with absentee creditors.


Smith concluded: “When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about is by bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.”


Adam Smith’s portrait is engraved on England’s £20-pound note, and Andrew Jackson on the US $20 bill. The irony is that Smith denounced public debts and urged wars to be financed on a pay-as-you-go basis so that people would feel their burden – and stay out of debt. As for Andrew Jackson, he closed down the Second Bank of the United States, accusing bankers of ruining the nation and seeking to destroy democracy. Bankers and finance therefore leave something important out of the account when it comes to the views of their own patron saints of democratic free markets.


As noted above, creditors for many centuries now have suffered bankruptcies when foreign countries default. That is the norm, not the exception. Yet today’s popular media greet every new default as “unanticipated” and “surprising,” as if it were not the bankers’ fault that they failed to understand the market’s inability to pay. Dumbed-down economics textbooks chime in with their inbred ignorance voiced by the financial sector’s proverbial “useful idiots” prattling about “equilibrium” and “automatic stabilizers.” These un-learned academics are useful to the bankers because of the passion with which they proclaim that all debts should and can be paid by suitable “adjustments” (including what turns out to be economic and demographic collapse). The question being asked with a straight face is: If it is the fault of victims rather than the bankers, then is it not proper for governments to bail out the banks?


The tacit assumption is not that bankers’ exorbitant greed is achieved at the expense of the economy at large, but that the financial sector’s prosperity is a precondition for the economy to grow. The bankers try to cap matters by trotting out poor retirees (like the widows and orphans of old – presumably those living on “fixed incomes” in the form of trust funds) whose meager savings should be supported. Doing so just happens to save the financial oligarchy of billionaires at the top of the economic pyramid, but not the proverbial victims.


The use of human shields such as union members concerned about the investments of their pension funds to protect the wealth of the kleptocrats is likewise shameless. Wall Street sages in the United States, for example, shed crocodile tears over the fate of the working people suffering from the stock market collapse, knowing full well that financial assets are heavily concentrated at the top of the economic pyramid, with workers having, only a meager share of those stocks and bonds. Ignored is the fact that the government could bail out failing pension funds (like Social Security) directly at just a small fraction of the cost of propping up the assets of the affluent.


Likewise, the volume of government bailout money for the financial sector ostensibly to deal with the subprime mortgage crisis – about $13 trillion during 2008-09 – clashes with the fact that the total value of mortgage debt owed by all households in the entire United States is only $11 trillion as of yearend 2008! The bailout funds ended up being used mainly to buy other banks to create even larger financial conglomerates “too big to fail,” to pay executives whose greed for short-term gains and bonuses caused the financial meltdown, and to pay dividends to stockholders to support their stock price and hence the value of stock options that financial managers gave themselves. The closest parallel to this scandal is the “watered stock” practices of Wall Street’s railroad barons and other financial manipulators in the late 19th-century Gilded Age.


There was a time when banks hesitated to make loans irresponsibly, that is, beyond the ability of debtors – and entire national economies – to generate a surplus to pay their creditors. My job as balance-of-payments economist for the Chase Manhattan Bank in the 1960s was to calculate how much export earnings and other foreign exchange the major Latin American countries could generate. Their balance-of-payments surplus represented how much they could afford to borrow. The aim of New York banks was to lend Third World countries money to absorb their entire economic surplus. From the bankers’ point of view, that was what a national surplus was for – not to sustain higher living standards or invest in becoming economically self-sufficient, but simply to pay creditors. And “wealth” was defined as the capitalized value of the entire economic surplus they could generate – discounted at the going rate of interest, as if it all could be paid as debt service, so that the entire surplus would be paid to carry the debt.


This certainly is not a model of human progress. But it was that decade’s version of “wealth creation,” and it is the concept of “wealth creation” in terms of the market value of debt-financed asset prices that Alan Greenspan would foist on the United States in the 1990s to convince it that an asset bubble was the path to postindustrial wealth, not the road to debt serfdom.

So Adam Smith was right. Today, creditors and bondholders care about foreign economies only to the extent that they can charge interest that will absorb their entire economic surplus. Until recently, creditors thought that lending more than can be repaid would be “irresponsible.” Not any more.



Political checks and balances on the economy


The best path for nations is to put their own economic growth before the interests of creditors. For many generations this ethic supported a set of political checks and balances that kept the growth of international debt in terms considered to be tolerable – much too heavy by the free-market standards of Smith and John Stuart Mill, but not so high as to prompt widespread defaults and debt repudiation.


This ethic has changed in recent years. Countries have accepted creditor propaganda that debts are a “point of honor,” much as the poor believe that paying their debts – even when they are in negative equity – is the “honest thing to do.” Obviously this ethic is not self-applied to the world’s largest financial institutions or real estate speculators. But Iceland accepted it in what is a characteristic of small, closely-knit communities where the word of neighbors is their bond. The root of Iceland’s ethic is mutual aid and prosperity for all. It is a fine, highly socialized attitude, and therefore tragic that it has helped lead the nation to fall prone to the snake oil of debt peonage.


Political leaders who fail to recognize the fact that checks and balances are a proper function of government are liable to sacrifice their nation’s hope for economic growth and rising living standards in a vain attempt to pay creditors. Such attempts must be in vain, because “the magic of compound interest” is a cruel myth: In reality every rate of interest implies a doubling time, and no economy’s “real” growth ever has been able to grow exponentially at a fast enough rate to pay the debts that keep accruing interest.


In today’s deregulated environment where “the sky’s the limit,” these accruals have been recycled in yet new loans. These then are packaged and resold, loading the economy down with more and more debt that so far has been almost impossible to track. And to cap matters, financial speculators then place trillions of dollars of bets on whether the debts can be paid or not, and how much their market prices are likely to change. What was supposed to be a financial system designed to fund new capital investment to produce more and raise living standards has turned into a casino economy – where gamblers are staked by the bankers to play the debt game, with the government standing by to make the winners “whole” in cases where the debtors have lost too much of their play-money to pay up.



Debts that can’t be paid, won’t be


Every economist who has looked at the mathematics of compound interest has pointed out that in the end, debts cannot be paid. Every rate of interest can be viewed in terms of the time that it takes for a debt to double. At 5%, a debt doubles in 14½ years; at 7 percent, in 10 years; at 10 percent, in 7 years. As early as 2000 BC in Babylonia, scribal accountants were trained to calculate how loans principal doubled in five years at the then-current equivalent of 20% annually (1/60th per month for 60 months). “How long does it take a debt to multiply 64 times?” a student exercise asked. The answer is, 30 years – 6 doubling times.


No economy ever has been able to keep on doubling on a steady basis. Debts grow by purely mathematical principles, but “real” economies taper off in S-curves. This too was known in Babylonia, whose economic models calculated the growth of herds, which normally taper off. A major reason why national economic growth slows in today’s economies is that more and more income must be paid to carry the debt burden that mounts up. By leaving less revenue available for direct investment in capital formation and to fuel rising living standards, interest payments end up plunging economies into recession. For the past century or so, it usually has taken 18 years for the typical real estate cycle to run its course.



Nations that have not paid their debts


Let us draw up a roster of nations that have annulled their debts – or run them up with no intention of paying. The list starts with the world’s largest debtor, the United States. Its government owes $4 trillion to foreign central banks. A moment’s thought will show that there is no way it can pay, even if it wanted to do so. The United States is running a chronic trade deficit, on top of which is a deepening outflow of military spending. In addressing this chronic living beyond the nation’s international financial means, American diplomats are almost the only ones in the world who conduct international diplomacy the way that textbooks assume that all countries should do: They act purely and ruthlessly in their own national interest. This interest lies in getting the proverbial free lunch, by giving IOUs for other countries’ real resources and assets, with no intention or ability to pay.


U.S. officials already have suggested that this debt be wiped out. Their plan would convert it into “paper gold.” Foreign central banks would simply stamp their U.S. Treasury bonds “good only for payment among central banks and the International Monetary Fund.” No other nation would be allowed to wipe out its debts in this way. Only the debtor at the center would be able to continue issuing debt-money without foreign constraint.



To be sure, U.S. diplomats have freed countries from debt when they have a political reason to do so. The most famous modern example of an economy-wide debt cancellation is that of Germany in 1947. The Allies cancelled German personal and business debt, on the ground that most were owed to former Nazis. The only debts left on the books were current wage-debts that employers owed to their work force, and basic working balances for companies and families.

A generation earlier, in 1931, the Allies wiped out Germany’s reparations debt stemming from World War I, and negotiated a moratorium on their arms debts to the United States. The world’s leading governments realized that keeping these debts on the books would collapse the global economy. But by the time they reached this conclusion it already was too late. The combination of Inter-Ally arms debts owed to the United States and the reparations debts imposed by the Allies largely to pay America already was one of the major factors pushing the world into a depression.


The U.S. economy was collapsing under the weight of its domestic debt pyramiding. Other countries had used less debt leveraging, but all ended up writing off large swaths of real estate and business debts during the Depression Years. By the time the Second World War ended in 1945, most countries were free of debt. Prices reflected direct production costs, with minimum diversion of revenue to pay banks, absentee property owners and other rentiers.


In the postwar period the World Bank lent dollars for governments to build infrastructure – only to turn around a generation later and help loot what it had financed. After Mexico and other Latin American governments announced that they were insolvent in 1982, U.S. diplomats organized a debt write-down in the form of “Brady bonds.” By 1990, Argentina and Brazil had to pay 45% on new dollarized foreign debt, and Mexico paid 23%.


Having stuck Third World countries with debts beyond their ability to pay, the IMF and World Bank used their creditor leverage to force governments to impose draconian austerity plans that had the effect of preventing growth toward industrial and agricultural self-sufficiency, thereby also crushing prospects for competitiveness. The IMF and World Bank then demanded that debtor countries sell off their public infrastructure, land, subsoil rights and other assets to pay the debts that these institutions sponsored so irresponsibly. (If IMF loans were not simply irresponsible, then they knowingly crippled debtor-country economies.) It is an age-old story of conquest, now accomplished without conventional warfare.


Two thousand years ago Rome stripped Asia Minor and other provinces and colonies of money using military force. Its financial oligarchy then translated their economic power into political power, destroying democracy and bringing on centuries of Dark Ages. The historical lesson is that economies taken over by creditors are plunged into depression as predatory lending strips away the surplus, leaving nothing remaining for subsistence, let alone capital renewal. This prevents nations from paying their debts, leading to widespread foreclosure, an extreme polarization of property and wealth, and impoverishment of its people. The ensuing lack of prosperity ends up crippling the ability to sustain a military overhead, and such countries tend to be conquered, as the Goths overran Rome. Outsiders always were at the gates – but it was the hollowing out of Rome’s domestic economy that left it prone to conquest.


Most recently, creditor-sponsored dirigiste takeover of national economic and social institutions has turned Russia, the Baltic States and other post-Soviet economies into neoliberal kleptocracies, driving skilled labor abroad in tandem with capital flight. Latvia is being pushed back toward subsistence life on the land. Creditor mismanagement is the most important problem that any country today should strive to avert.



Creditors play the terrorism card


9/11 signaled the beginning of a new power grab in the United States and Britain. U.K. officials have used anti-terrorist legislation to seize Icelandic assets abroad. What makes this so ironic is that throughout history it has been creditors who have used violence against debtors, not the other way around. I know of only one exception, and it did not involve bloodshed: Jesus overthrew the tables of the moneychangers in Jerusalem’s temple. It is the only record of a violent act in his life.


Psychologists have explained the creditor proclivity for violence by the tendency for rentiers to fight for unearned income – inheritance, or other “free wealth” that they have obtained without effort of their own. People who work for a living and are able to support themselves believe that they can survive, and so there is less of the kind of panic that creditors and other free lunchers feel at the thought that their extractive revenue may end. They fight passionately against the prospect of having to live on what they produce or earn by their own merits. So the last thing that rentiers really want is a free market. In a shameless irony, they tend to accuse populations of being terrorists if they seek to defend themselves against predatory creditors and land-grabbers!


Describing creditor violence, Plutarch describes how Sparta’s king Agis IV and his successor Cleomenes III sought to cancel the debts late in the 3rd century BC. The city-state’s creditors murdered Agis, drove Cleomenes to suicide in exile, and killed Sparta’s next leader, Nabis – and then called in Rome to fight against pro-debtor democracies throughout Greece. Livy and other Roman historians describe how a century later, in 133 BC, the Roman Senate responded to the Gracchi Brothers attempt at debt and land reform by pushing the democratic Senators over the cliff to their death, inaugurating a century of bloody civil war.


In the 19th century the United States sent gunboats to collect debts from Latin American countries, installing collectors at the local customs houses. England applied similar imperial force to ruin India, Egypt and Turkey, stripping their assets with debt and plunging their populations into poverty that persists to the present day. More recently, America’s hand in the violence that overthrew Chile’s elected president Salvador Allende has continued this policy. Having south to isolate the Soviet Union, Cuba and other countries that rejected creditor-oriented rules and rentier property interests, the United States then capped its Cold War victory over the Soviet Union by promoting a flat-tax regime that imposed the fiscal burden entirely on labor and industry, not on finance and real estate. Instead of being democratized, the post-Communist countries were steered directly into oligarchic kleptocracies that ran up rising debts to the West.


This is just the opposite of the free markets that were promised them back in 1990-91. Instead of economic growth, the “real” economy of production and consumption shrunk, even as foreign financial inflows inflated property prices for housing and office space, fuel and public utilities. Real estate and utility services hitherto provided freely or at subsidy to the economy at large were turned into a predatory vehicle for foreigners to extract income, putting the domestic population on rations, much as what occurs under military occupation. Yet the public media, academic centers and parliaments have persuaded populations that this is part of a natural order, even the product of how a free-market is supposed to operate, rather than a retrogression back to quasi-feudal institutions. The simplistic idea is that making money is itself “capitalist” ipso facto, regardless of whether industrial capital is being created or dismantled and stripped.



How hard times affect people


Public health reports throughout the world document how lifespans shorten as economic inequality and poverty increase. The moral is that “debt kills,” by impoverishing and destroying populations. Those who try to defend themselves are branded as terrorists by their financial predators. Malthus’s population doctrine, after all, was composed to rationalize the free lunch of his landlord class, and World Bank policies to reduce the populations of indebted Third World countries likewise was the natural complement to the financial asset stripping it endorsed. Fewer people to feed, clothe and house in a situation where investors seek mainly the public enterprises for whose construction governments have already run into foreign debt, plus land and resources supplied by nature rather than by human labor.


Nowhere is the violence of creditors more pronounced than in their destruction of education, especially economic studies and knowledge of history. The first act of the Chicago Boys (University of Chicago monetarists, headed by Nobel Prize winner Milton Friedman) in Pinochet’s Chile after the 1974 military coup was to close down every economics and social science department in the nation, except for the monetarist stronghold at the Catholic University where they held sway. The idea was to strip academia of any alternative point of view. Matters are not much different in other countries. At a post-Keynesian economics conference in Berlin on “financialization” last November, I heard many complaints that alternative views to Chicago School orthodoxy were unable to get a hearing in the leading European academic journals. And just this March at the Eastern Economic Association’s annual meeting in New York City, I heard similar complaints that alternative economic ideas were excluded from the major refereed journals in which aspiring academics must gain entry in order to be promoted to tenure track jobs at most U.S. universities. An intellectual Iron Curtain has been lowered by dysfunctional “free market” orthodoxy. Evidently a free market in ideas is anathema to financial free marketers. With such strong intellectual control, of course, overt violence is unnecessary.


Such intellectual intolerance is in the DNA of the creditor mentality because it cannot withstand awareness and understanding of its destructive effects. The “miracle of compound interest” is not achievable in practice beyond the short run. To pretend that it may form the basis for a sustainable model of wealth creation does violence to rationality and economic logic. This is why the economic theory that creditors prefer – and subsidize – is learned ignorance propagated by useful idiots. Its role is to distract attention from society’s most important economic dynamics, those of finance and property polarization via debt, evidently on the premise that what is not seen or analyzed will not be regulated or taxed. One is reminded of Baudelaire’s quip: “The devil wins at the point where he convinces people that he does not exist.” A “free market” for rentiers thus is one “free” of alternative ideas.


That is the political function of mainstream economic theory today. And to cap matters, the creditor-oriented worldview does similar violence to the teachings of world’s major religions.



Christian endorsement of debt cancellation and Clean Slates


From at least as early as 2400 BC it was normal for Sumerian and Babylonian rulers to annul the population’s personal and agrarian “barley” debts upon taking the throne for their first full year of rule. In addition to annulling these debts, Mesopotamian Clean Slates freed bondservants and restored self-support land to former owners who had forfeited their crop rights to foreclosing creditors. The Babylonian word for these Clean Slates was andurarum, and Jewish law adopted them with the cognate Hebrew word deror. But by the first millennium BC, kings had come to represent local oligarchies, so Mosaic Law took Clean Slates out of the hands of rulers and placed them at the center of Judaic religion in the Jubilee Year of Leviticus 25. Like Babylonian law, it cancelled personal debts, freed bondservants and restored land tenure to its “original” holders.


Debt cancellation is at the heart of the laws of Exodus, Leviticus and Deuteronomy calling for debts to be cancelled periodically, and to liberate indebted bondservants. Ezra and Nehemiah describe how they returned from Babylon to restore order by canceling the debts – and re‑discovering the Book of Deuteronomy. But creditor oligarchies were on the rise throughout the Mediterranean region in the centuries that followed. By the time of Jesus the mainstream of Jewish leadership had mounted an attack on the Jubilee Year, endorsing Rabbi Hillel’s prosbul, a legal clause by which creditors forced debtors to sign away their rights to debt annulment at the Jubilee. In his first sermon, Jesus sought to retain the Jubilee year by unrolling the scroll of Isaiah and announcing that he had come to proclaim the Year of Our Lord.


The Jewish oligarchy appealed to Rome to crucify Jesus. As he and his followers gained adherents by advocating debt forgiveness, Rome used violence against them. But Christianity grew by creating communities of mutual aid. Upon achieving political power, the new religion’s most important economic achievement was to outlaw debt bondage throughout Western civilization. However, the idea of a Clean Slate had to be postponed until the Day of Judgment at the end of history.


As creditors drove the post-Roman economy into a Dark Age, Christians banned the charging of interest altogether, even on commercial “silver” loans. Ancient languages had no words to distinguish “interest” from “usury.” This distinction was drawn only in the 13th century, as Church theologians applied the term “interest” to commercial loans in which “silent backers” advanced money to entrepreneurs. It was permissible for bankers to charge a foreign-exchange agio premium (that typically included an interest charge in practice), as long as the charge could be justified by their own labor and related outlays to provide money-transfer and loans. However, mortgages loans and personal loans were deemed usurious. The 13th-century Churchmen treated usury as theft and hence in violation of the Eighth Commandment: “Thou shalt not steal.”


From antiquity through medieval European times, most theft took the form of usury, getting debtors to forfeit collateral they had pledged in exchange for emergency funds. Thomas Aquinas and Martin Luther in 1516 warned that this practice destroyed cities much as a worm destroys an apple from within its core. John Calvin in 1565, the last year of his life, likewise defined usury and fraud as theft on a plane with highwaymen and robbers. This ethic produced a line of development extending down to only a generation ago as Western law became more humane toward debtors. Debtors unable to pay are no longer turned into bondservants to their creditors, and debtors’ prisons have been closed down. Bankruptcy laws permit individuals (and corporations) to annul debts when they cannot pay.


But this eight-century-long historical trend is now being confronted with an anti-Enlightenment threatening to reverse it. In the United States, credit card companies have given enormous sums of campaign contributions to politicians willing to rewrite the bankruptcy laws to make home mortgage debts permanent and beyond the power of judges to write down. Wealthy individuals with more than one home can have their own mortgage debts on these properties written down, but homeowners with just a single residence are confronted with a lifetime of debt peonage. This is just the reverse of ancient law that protected the self-support land of citizens, but not their townhouses and other surplus property.



Credit without oligarchy


Most societies throughout history have sought to provide credit legally in ways that do not permit creditor oligarchies to emerge. Today’s creditor advocates are at war with the spirit of this idea. And in taking this position, they reject the thrust of the Enlightenment’s anti-usury laws, classical political economy’s distinction between productive and sterile investment, the St. Simonian attempt at financial reform, and the Progressive Era’s attempt to mobilize national credit to fund productive industrial investment rather than being extractive, benefiting only the few. The classical idea of economic freedom itself was formulated as the antithesis to feudal-epoch finance. And the ideal of freedom from predatory finance is what is being threatened today, as if society has forgotten how long and hard the reform struggle has been.


The fight to end debt bondage and debtors prisons took many centuries to achieve its humanitarian objective. Handel’s Messiah is a staple of the Christmas and Easter season celebrating the life and teachings of Jesus Christ. What has been forgotten is the context in which Handel arranged the first performance of this oratorio in Dublin, on April 13, 1742. It was a charity concert for the benefit “of the Prisoners in several Gaols, and for the Support of Mercer’s Hospital in Stephen Street, and of the Charitable Infirmary on the Inn's Quay.” Enough money was raised to free a hundred and forty two prisoners. The oratorio’s text accordingly contained references to “breaking bonds asunder” and “casting away yokes,” recalling the early Christian belief that the Messiah’s reign would bring liberty (Hebrew deror or debt cancellation) and release (Greek aphesis) from debt bondage. The “redeemer” was literally the redeemer from debt.


This recalls the original, literal meaning of the Lord’s Prayer. It refers not only to forgiving sins and sinners in the abstract, but specifically to “forgive us our debts” – a translation distorted in much modern reading. “Sin” was the word for “debt” in all Indo-European languages: Schuld (the root of German sollen and English should), and devoir, the root of English debt. It meant obligation – referring in ancient practice to the obligation of an offender to make good payment to atone for his offense, as in European wergild tradition. The original debts were not paid to the rich, but by them, for manslaughter or physical wergild injury to their victims (who typically had to settle for payment rather than taking revenge). Today’s offenders disrupting social harmony are wealthy creditors, but society is paying money to them, not fining them. Seen from the ancient perspective, it is as if indebted society owes retribution to the rich. No wonder the spirit of modern religion has so thoroughly overturned that of its origins!


It therefore seems remarkable that in our own epoch – strained as it is by unprecedented and questionably created debt overhead that reduces not just individuals but entire nations to debt servitude – no major opposition has appeared on religious grounds. Churches have avoided the issue that was the cornerstone of so much of their earlier concern, and moved toward other concerns rather than remaining on the high ground of alleviating the debt burden.



Back to basics, and a call for transparent statistics


The classical economics of Adam Smith and John Stuart Mill, the Progressive Era reforms and Social Democracy are rooted in the moral philosophy of the 17th- and 18th-century Enlightenment. The labor theory of value can be traced from the 13th-century Schoolmen via John Locke to Adam Smith and the Scottish Deists, via David Ricardo’s isolation of economic rent (what Mill called the “unearned increment” that landowners and others receive “in their sleep” rather than through their own labor) as an element of price in excess of cost-value. The distinction between intrinsic value and market price led to socialist and progressive theories of a just society free of economic privilege, free of prices in excess of socially necessary costs of production and of rentier income and wealth without effort.


The common thread in these ideas is that people deserve to receive the fruits of their labor. This means bringing prices in line with actual labor-costs of production. It also means that one’s wealth should be limited to only what one creates – not land and natural resources, or monopoly privileges to extract income via control of roads, the right to create money and other natural monopolies. The aim of social reform for many centuries has been to purge capitalism of its legacy of absentee rentier property ownership patterns and creditor-oriented laws inherited from medieval times. The way to do this is to treat banking like transportation and the broadcasting spectrum, as a public utility to form a just fiscal base, not something to be privatized so that individual rentiers can tax society at large for what rightly is a public utility.


Beyond creating a travesty of international law, rentier interests have turned seemingly empirical statistics into a fictitious set of accounts that understate actual returns to the finance, insurance and real estate (FIRE) sector and the magnitude and information on land and other wealth ownership and distribution. Recent U.S. news has seen a fight by Wall Street to count short-term trading gains in stocks, bonds and financial derivatives as “capital” gains taxed at only a fraction of wages and profits. The financial managers in charge of national statistics likewise describe economy’s largest asset category, real estate, in largely fictitious economic terms. U.S. Federal Reserve statistics on asset values meanwhile depict the rise in real estate prices not as higher land valuation – which the land-price maps of major cities show to be the cause of rising prices, fueled by an exponentially expanding pyramid of credit relative to a fairly fixed land area – but as “replacement cost” of buildings. The inflation of real estate prices is assigned to “capital,” not land. This enables real estate owners to avoid paying income tax by depreciating their property as if it is wearing out, not rising in value. Buyers can start writing off the price of an already written-off building as soon as they buy it, treating its “wearing out” as a tax credit – even though older buildings bring a premium over today’s cost-cutting construction practices. This write-off, of course, is not granted to homeowners, only to absentee owners.


In the sphere of financial wealth, banks have fought truth-in-lending regulations for years in order to conceal the real interest rate their customers are having to pay when all the fees and other charges are added on. They are fighting tooth-and-nail against “mark to market” accounting practices that would oblige them to let depositors and investors know how much their assets actually are worth – and hence, how much they have lost by irresponsible gambling. Whereas economic textbooks claim that a precondition of market efficiency is full knowledge of the market (otherwise, how can a market be deemed to be provide informed choice?), the financial sector always has fought tooth and nail against realizing this condition in practice.


Today the financial sector claims that the U.S. crisis was brought on not by bad investments by bank conglomerates and pension funds or misleadingly high credit ratings given to securities belatedly admitted to be junk, but by banks having to admit that the collateralized debt obligations (CDOs) and credit-default swaps they had been selling to global investments were in fact worthless from the outset. On March 12, 2009, the U.S. Congressional subcommittee in charge of financial reporting backed the bank lobbyists in “freeing” them from having to reveal their actual condition and (lack of) value of the securities they have been pawning off. As a New York Times reporter summed up the issue: “Next time you hear a banker denounce mark-to-market rules, ask if he runs his business that way. Will he offer you a mortgage loan based on what you think your home should be worth, which you can repay only if you make a lot more money than anyone will pay you? … maybe that is not such a good idea. The banks already tried that, with liars’ loans. Those loans did not work out so well.”[1]


This helps explain why every new press release of bad financial news is greeted with the adjectives “unexpected,” “surprising,” “unforeseeable,” “once-in-a-century” and kindred terms. The financial sector seeks to free itself from criticism rather than taking the blame for having plunged headlong over the debt cliff. It can succeed in this economic fiction in proportion to the degree to which the public can be blocked from understanding just what is going on and how the financial sector gains at the expense of the economy at large. Shaping popular perception becomes the name of the game, and statistics are depicted as “empirical” reality rather than the result of intensive lobbying to promote politicians willing to back a distorted economic roadmap.


The problem goes to the very foundation of economic theory. Any set of statistics reflects categories in economic theory, and in recent years the Chicago School has taken the lead in what is now a nationwide trend to exclude the history of economic thought from the academic curriculum. One can get all the way through a Ph.D. without having surveyed the evolution of classical economics from the Physiocrats through Adam Smith, John Stuart Mill and the Progressive Era reformers. The essence of social reform throughout the Enlightenment, and indeed extending all the way back to the Church Schoolmen is no longer taught – the distinctions between earned and unearned income and wealth, and productive and unproductive (or “sterile”) employment and investment. Post-classical thought insists that all income is productive in proportion to whatever it earns – including the collection of economic rent or extortion of monopoly super-profit, or financial charges for interest and credit card fees, and the exorbitant salaries and bonuses that financial managers pay themselves. All revenue – and therefore, all wealth – appears to be “earned.” By their definition. This denies the concept of “investment in zero-sum activities that merely transfer income into the unproductive sector’s pockets, in contrast to creating income.


As a guide to policy reform, classical economics aimed at creating an economic and fiscal system that would bring market prices in line with technologically necessary costs of production. All such costs ultimately are reducible to labor. The necessary complement to the labor theory of value (adjusted for different grades of labor, the cost of their education and the linkage between wage levels and productivity) was the analysis of economic rent – an institutional add-on reflecting property ownership patterns, financial charges and taxes, not inherent costs of production. The classical reform program was to minimize the cost of production and of living, making economies more competitive by purifying industrial capitalism and removing its remaining feudal legacies, above all the right of hereditary absentee owners (landlords) to siphon off a rental charge for access to land for sites supplied by nature and given value by local public spending (e.g., “location, location, and location,” as real estate agents explain matters to prospective buyers) – and the right of bankers to charge for creating credit that governments could freely create themselves.


Fighting against progressive reforms, banks and other financial institutions have sought to preserve their special privileges by law, minimizing taxes on themselves by shifting the burden onto labor and industry. What they have achieved by financializing economies is (1) to raise the cost of living and the cost of doing business; (2) to free their major customers – mortgage borrowers – from taxation so as to leave as much surplus as possible available to be paid as interest; (3) to collect revenue hitherto used to finance the public sector by capitalizing it into interest charges and to inflate the price of housing and other real estate and privatized monopolies; (4) to effectively shift taxes onto labor and industry, thereby raising prices and undermining the competitive power of financialized economies. This is a travesty of classical “free market” policy. It is a policy for predators that mainly burdens economies with high interest and fees while also making the tax burden more oppressive while they reap the benefits.


John Maynard Keynes believed that the proper task of governments was to prevent over-indebtedness from leading to economic depression. He concluded his General Theory (1936) with a call for “euthanasia of the rentier.” Hoping to make credit productive, not extractive, his followers have advocated making banking a public utility so as to steer debt creation to fund growth in the means of production, not economic overhead by inflating property bubbles. Radical as this may appear today, this was the aim of the 19th century classical economists, and underlay the financial reforms that shaped the 20th-century economic takeoff. Only quite recently has the global financial press rediscovered this logic in the wake of today’s bubble meltdown. In a recent Financial Times column, Martin Wolf pointed out that in view of the huge bailouts that banks are demanding from the government to make the industrial economy and labor force pay for their losses, “banks are not commercial operations; they are expensive wards of the state and must be treated as such.” He concludes: “The UK government has to make a decision. If it believes that costly bail-out must be piled upon ever more costly bail-out, then the banking system can never be treated as a commercial activity again: it is a regulated utility – end of story. If the government does want it to be a commercial activity, then defaults are necessary, as some now argue. Take your pick. But do not believe you can have both. The UK cannot afford it.”[2] Neither can Iceland or any other country.



Backed by global creditors, the IMF wants to keep its power


But the financial sector is fighting back. Its global lobbyist, the International Monetary Fund, has sought to consolidate financial control of economies irreversibly. Article VIII of its charter, drawn up in a period of reaction against the blocked currency practices and tariff protectionism of the 1930s, rules that once a country has removed controls on its “current account” transactions, it is not legal to re-impose any new controls. The current account is defined to include not only import and export trade in goods and services, but also interest on foreign debt and the remittance of profits on foreign-owned investment. In the 1930s, interest payments were conceptually integrated with credit and debts on capital account. But in the 1940s the IMF and other countries changed their balance-of-payments accounting formats away from this logic.


Ostensibly aimed at freeing trade, the IMF’s Article VIII in reality created “free capital movements,” that is, the ability of financial gangs to freely raid currencies such as occurred in the 1997 Asian crisis and similar speculations. Governments were not permitted to protect their currency and exchange rates by limiting such raids or erecting barriers to predatory credit and destructive debt (or from U.S.-subsidized agricultural exports, for that matter). The legal effect of the IMF’s ruling was to block governments from regulating their financial sector, despite its rentier role as a public utility. For Iceland, this means that the government cannot keep the nation’s international debt within the economy’s ability to carry. The most basic criterion for national sovereignty thus is ruled illegal!


In practice, nearly every country has simply added the interest accrual onto its national debt balance each year. Nominally, it “borrows the interest,” but the effect is more like an accrual than a true new loan. Over time these public debts grow at an exponential rate – far in excess of the “real” economy’s rate of growth, a recurring theme in today’s post-classical economies.



Lessons for Icelandic financial policy


The first thing that Iceland needs to do is to realize that it is under financial attack from outside as well as from within – by foreigners supported by a domestic banking class. To succeed, these creditors are trying to convince the population that all debt is productive, and that the economy benefits to the extent that its net worth rises (the price of assets in excess of debt). The fatal error is the assumption that prices will never go down, and if they do, debts should be left in place even when this causes negative equity. To their erroneous way of thinking, a price plunge (recession or depression) is an accident that happens once in a century, not the inevitable result of debts growing at compound interest without a concurrent increase in earning power to pay higher prices and interest.


This deceptive mythology is capped by a mind game being played with Icelandic voters. The game is to promote the myth that there is no alternative but to pay the debts that a few insiders have rung up, debts that accrue interest when they go unpaid. This myth can be dispelled by recognizing that the volume of debt payments being demanded is beyond the country’s capacity to pay. The financial strategy is to postpone awareness of this fact as long as is possible, so as to proceed with the foreclosure and voluntary pre-bankruptcy sell-off of national assets to pay creditors. The one question that creditors do not want to be asked is, “Just how do you propose that we should pay you?” Creditors hesitate to come right out and answer, “By shrinking your economy, by shifting your wealth and property into the hands of a small and shrinking financial oligarchy, and by pricing your labor and industry out of world markets as a result of the heavy financial charges built into your pricing system.” They prefer to act “surprised” when economic force majeur obliges economies to replace defined-benefit pension programs with “defined contribution” plans in which all that workers know is how much they pay into the plan, not what they will end up with.



Iceland as a model test case for economic justice


The realization of the impossibility of paying its debts while maintaining a fair society with a financially level playing field in which people live by what they produce (rather than a debt peonage society headed by creditors) will help Iceland confront reality sooner rather than later. Some form of Clean Slate moratorium should be inevitable. The extent cannot be known until an accounting of who owes what to whom is made. But as a sovereign nation, Iceland can apply whatever economic laws it wishes, as long as these do not discriminate specifically against foreigners. (That can be the result of a general law, as long as foreigners are subject to the same laws as domestic citizens.)


Global creditors will complain mightily, hoping to convince Iceland to let finance make itself an extra-legal sector, beyond the scope of national law to regulate – or to tax. The aim is to place financial dynamics beyond the ability of legal systems throughout the world to contain or otherwise control, so as to make debt collection autonomous from democratic regulation. To achieve this victory, financial interests seek to dismantle the power of governments to limit the ability of creditors to engage in predatory lending and foreclosure. Financial lobbyists accuse government power of being a “road to serfdom,” whereas in reality only governments can protect populations from creditor-imposed debt peonage.


As another tactic in today’s debt crisis, creditors are trying to rush matters. The United States provides an object lesson in the pitfalls of not giving the government enough time to reason things through so as trace how the losses came to be suffered. Treasury Secretary Paulson represented the interest of his own firm, Goldman Sachs, in ramming through an $800 billion “bailout” giveaway package to Wall Street’s leading investment bankers. The sum included $180 billion dispersed so far to A.I.G. to pay speculators in derivatives (including $12 billion to its largest counterparty, Paulson’s own firm,), and $45 billion for Citigroup to pay its counterparty gamblers on the winning side of casino-style bets.


95% of American voters opposed this giveaway. The Treasury Secretary made the usual glib promises that this package would be used largely for debt relief and mortgage renegotiation. It was all a lie –which Mr. Paulson clearly knew to be a lie, because the terse three-page draft law he sent to Congress demanded that no government or law enforcement agency could punish financial lying under his program. The bankers took the money and ran. They used the money to pay themselves enormous bonuses and dividends to stockholders in a vain effort to support the stock price – and to buy smaller banks so as to create yet more giant financial conglomerates “too big to fail,” that is, too big to fail without bringing the entire U.S. financial system crashing down.


Unfortunately, a rush to judgment will give money to bankers irrecoverably. They then will do like U.S. Federal Reserve Chairman Ben Bernanke has done, and wring their hands and offer crocodile tears of apology. Such talk is costly! American voters are now angrier than ever at the government for voting this giveaway.


On national television on March 15, Mr. Bernanke used a false analogy already popularized by President Obama. He asked what people should do if an irresponsible smoker let his bed catch fire so that the house burn down. Should the neighbor say, “it’s his fault, let the house burn”? This would threaten the whole neighborhood, Mr. Bernanke said. The implication, he said, was that economic recovery required a strong banking and financial system.


But banking houses are not in the same neighborhood where most people live. In effect the United States is taking over houses that have not burned down, throwing out their owners and occupants to turn over to the culprits who burned down their own house. To Mr. Bernanke the “solution” to the debt problem is to get the banks lending again. They are to lend enough money so that their clients can borrow the money to pay them the stipulated interest charges. The aim is a return to “normalcy,” defined as new exponential growth in the volume of debt – more of the bubble economics that has just crashed all around us!



Iceland can lead the way


This clearly is not something that Iceland can afford. In fact, the United States cannot afford it either, as much real estate already has sunk into negative equity so that banks are not going to be willing to lend in any event. Fortunately, Iceland’s situation is so extreme that it may be saved even from the thought of creating yet new debt. It can face the financial problem and start to write down the debt overhead, to bring it in line with the economy’s ability to pay or in many cases simply write it off altogether.


First, Iceland needs to take a census of the magnitude of debts owed at home and abroad, and of the institutions to which these debts are owed. Second, it needs to assess the economy’s ability to pay these debts. This was the principle on which the world’s creditor nations founded the Bank for International Settlements in 1931, to assess Germany’s capacity to pay. Reference must be made both to the magnitude of debt relative to current price trends for the collateral supposedly backing this debt, and to the economy’s ability to produce a domestic-currency and foreign-exchange surplus over and above basic needs, including capital replenishment to grow at historical rates over time.


By insisting on a fully transparent financial analysis of who owes how much to whom, Iceland can toss the ball back into the creditors’ court and ask the bankers to explain just how they propose that Iceland should pay – and what they anticipate will be the economy-wide effect of such payment. How much can Iceland afford to pay in the next few years without losing its democratic home ownership and property ownership patterns and without abandoning its social democratic public policies? How can Iceland pay its debts without bankrupting itself, abandoning its social democracy and polarizing its hitherto homogeneous population between a tiny creditor oligarchy and the rest of the population? The island is in danger of creating a new ruling class that will control its destiny for the next century. Again, Adam Smith warned that financial oligarchies act with concern only for how much they can extract, not what they can help produce. They are not good forward planners and do not act responsibly because it is easier for creditors to strip assets than to create new capital.


In taking this position Iceland will simply be following the moral philosophy laid down by every major religion and every body of ancient and modern law as a core principle: the idea that credit must be kept within the ability to pay. It is obvious enough that global lenders have extended credit far beyond Iceland’s ability to pay. For over two centuries the United States has an excellent tradition in how to deal with this problem. Already in the colonial period New York State enacted the Fraudulent Conveyance law, which has remained on the books ever since New York joined the new nation. The problem it faced was British creditors and speculators coming to upstate New York to cheat local farmers out of their rich, well-situated land. The ploy was to extend a loan to a needy farmer, and then call it in just before harvest-time when the debtor lacked the money to pay. Alternatively, the speculator might simply lend more than the farmer could afford to pay even under normal conditions. So New York blocked this predatory practice by passing a law saying that if a bank or other creditor made a loan without knowing just how the debtor was to repay it, the loan would be declared null and void. It would be wiped off the books.


This law received considerable attention in the 1980s when Drexel Burnham and its emulators began providing junk-bond credit to corporate raiders. Companies defended themselves by pointing out that the only way that these high-interest bonds could be paid was by breaking up the target company and downsizing its labor force. But most of all, the law has international relevance. Most U.S. bank consortia have a New York City lead bank negotiate with Third World governments and other foreign borrowers. So far, none of these debtors have sought to annul their loans on the ground that the only way they can pay is to sell off their public enterprises and other government assets. But the enabling legislation is there, and provides an excellent model for Iceland to emulate. By pursuing this policy Iceland would achieve the kind of economic freedom defined by the classical economists – a market free of technologically unnecessary overhead charges, headed by surplus extraction by a vested oligarchy.


For financial interests, by contrast, their idea free market is one that leaves them free to do the economic planning “free” from government regulation and democratic constraint on their extractive, predatory credit and foreclosure practices. Wherever they have gained sway they have shrunk economies. Since the 1960s their proxies at the IMF and World Bank have imposed austerity programs on Third World countries, extending foreign-currency loans whose effect has been to make these countries more dependent and driven them even deeper into debt. In the post-Soviet economies since 1991, financial strategists have focused on prying away public enterprise, selling it off or using it as collateral for loans. The result of “financializing” these economies has been to provide a free field for predatory vested interests in league with globalized domestic financial oligarchies. In sum, the neoliberal model victimizes debtors, preventing them from paying their debts. Instead of funding new capital formation, it strips economies of their assets and empties them out. Ultimately this drags down the creditor economies themselves, as occurred in ancient Rome, medieval Spain, and the United States and Britain in the Great Depression (not to mention what is unfolding today).


Iceland is facing a bold con job. Should it feel obliged to pay countries that have no intention of ever paying their own debts? To get paid, creditors must convince their prey to accept the falsehood that debts can and indeed should be paid. The lie is that they can be paid without dismantling social democracy, selling off the public domain and polarizing society between creditors and debtors.


The point of reference should be Iceland’s broad long-term picture – the economy’s survival and growth prospects for the future. Foreign-currency loans should be denominated in domestic currency at written-down (and de-indexed) interest rates, or repudiated outright. The guiding principle should be to annul debts taken out under terms that are destructive and extractive.


As for the nitty-gritty of negotiating a resolution to Iceland’s debt crisis, the nation needs to re-frame the terms of the debate by removing fictitious assumptions that have no basis in reality. The first trammel of the mind is the assumption that Iceland needs to negotiate in a way that wins the creditors’ approval in a compromise. It is not possible for any fair agreement to be reached in this way. Any negotiation between creditors and debtors is adversarial, and creditors have spent many decades refining demagogic public relations ploys to divert attention to abstractions about “fairness.” A typical ploy is to ask whether it is fair for some debtors to receive larger write-offs than others. Is it fair for the most highly indebted individuals to gain the most – more than people who were more responsible? The aim here is to inflame popular resentment that some debtors will get a bigger write-off than others (and some debtors are indeed as as guilty as the perpetrators who sold them on the idea that home prices only go up), so as to blame the poor and most highly indebted rather than reckless creditors.


The real issue is the health of the overall economy. The parties seeking the most are not the most indebted individuals, but the largest creditors. Their aim is to increase their dominion over the rest of society. Above all, their aim is to maximize the power of debt over labor. The worse the economy does, the stronger the creditor position will grow. This is a recipe for economic suicide that will lead to outright debt peonage as domestic depression intensifies. Creditors everywhere else in the world are writing down their claims for payment to reflect plunging property values. Iceland has an opportunity to make itself a model test case for economic justice. What better time to post the basic principle of what is to be saved – an unsupportable debt burden that must collapse in the end, or a society’s survival? Will the government defend its citizens from financial predators, or turn the economy over to them? That is the question.



NOTES

[1] Floyd Norris, “The Problem? Bankers Point to the Rules,” The New York Times, March 13, 2009.

[2] Martin Wolf, “Big risks for the insurer of last resort,” Financial Times, March 6, 2009.

by Michael Hudson

Iceland is under attack – not militarily­ but financially. It owes more than it can pay. This threatens debtors with forfeiture of what remains of their homes and other assets. The government is being told to sell off the nation’s public domain, its natural resources and public enterprises to pay the financial gambling debts run up irresponsibly by a new banking class. This class is seeking to increase its wealth and power despite the fact that its debt-leveraging strategy already has plunged the economy into bankruptcy. On top of this, creditors are seeking to enact permanent taxes and sell off public assets to pay for bailouts to themselves.


Being defeated by debt is as deadly as outright military warfare. Faced with loss of their property and means of self-support, many citizens will get sick, lead lives of increasing desperation and die early if they do not repudiate most of the fraudulently offered loans of the past five years. And defending its civil society will not be as easy as it is in a war where the citizenry stands together in coping with a visible aggressor. Iceland is confronted by more powerful nations, headed by the United States and Britain. They are unleashing their propagandists and mobilizing the IMF and World Bank to demand that Iceland not defend itself by wiping out its bad debts. Yet these creditor nations so far have taken no responsibility for the current credit mess. And indeed, the United States and Britain are net debtors on balance. But when it comes to their stance vis-à-vis Iceland, they are demanding that it impoverish its citizens by paying debts in ways that these nations themselves would never follow. They know that it lacks the money to pay, but they are quite willing to take payment in the form of foreclosure on the nation’s natural resources, land and housing, and a mortgage on the next few centuries of its future.


If this sounds like the spoils of war, it is – and always has been. Debt bondage is the name of this game. And the major weapon in this conflict of interest is how people perceive it. Debtors must be convinced to pay voluntarily, to put creditor interests above of the economy’s prosperity as a whole, and even to put foreign demands above their own national interest. This is not a policy that my country, the United States, follows. But popular discussion in Iceland to date has been one-sided in defense of creditor interests, not that of its own domestic debtors.


Ultimately, Iceland’s adversary is not a nation or even a class, but impersonal financial dynamics working globally and domestically. To cope with its current debt pressure, Iceland must recognize how uniquely destructive an economic regime its bankers have created, through self-serving legislation and outright fraud. With eager foreign complicity, its banks have managed to create enough foreign debt to cause chronic currency depreciation and hence domestic price inflation for many decades to come.


To put Iceland’s financial dilemma in perspective, examine how other countries have dealt with huge debt obligations. Historically, the path of least resistance has been to “inflate their way out of debt.” The idea is to pay debts with “cheap money” in terms of its reduced purchasing power. Governments do this by printing money and running budget deficits (spending more than they take in through taxes) large enough to raise prices as this new money chases the same volume of goods. That is how Rome depreciated its currency in antiquity, and how America managed to erode much of its own debt in the 1970s – and how the dollar’s falling international value has wiped out much of the U.S. international debt in recent years. This price inflation reduces the debt burden – as long as wages and other income rise in tandem.


Faced with an unprecedented explosion of debt obligations – many of them apparently fraudulent, and certainly in violation of traditional credit practice – Iceland has turned this inflationary solution inside out. Instead of permitting the classic credit cure of inflating the currency, it has created a dream economy for creditors, preventing the classical escape from debt. Iceland has found a way to inflate its way into debt, not out of it. By indexing debt to the rate of inflation, it has guaranteed a unique windfall for banks that vastly increases what they receive in a “down market,” at the expense of wage earners and industrial profits. Linking mortgage loans to the consumer price index (CPI) in the face of a depreciating currency and heavy balance-of-payments drain to foreigners can have only one result: destruction of Iceland’s society and its traditional way of life.


Iceland needs to repudiate this debt bomb. Under present policy its debts will never lose value, because they are indexed to inflation. This in turn is being caused in large part by foreign debt service collapsing the currency, raising import prices and thus causing even larger debt payments in an endless treadmill. The economy shrinks, wages fall and assets lose value, yet debt obligations continue to grow and grow. The resulting evisceration of wages, living standards and consumer spending will further shrink the economy – a prescription for economic virus that threatens to plague Iceland for many decades if it is not reversed now. Capital formation will plunge as consumers lack money to spend. Many may not have enough to survive. The economy will be “crucified on a cross of gold,” to use William Jennings Bryan’s famous phrase in the 1896 American presidential election when he advocated an inflationary coinage of silver to alleviate debt pressure on U.S. farmers and labor.



Another side to the discussion?


Despite having spent the past half-century focusing on countries with balance-of-payments problems, even I find Iceland’s uniquely self-destructive financial regime shocking. Before you dismiss my candor, I should offer a short personal résumé so that you understand that my conclusions are based mainly on having been an insider to the game of imperial-style plundering of nations for forty years. In the mid-1960s I was the balance-of-payments economist for the Chase Manhattan Bank and then for Arthur Anderson, and later for the United Nations Institute for Training and Research (UNITAR). I have taught international economics at the graduate level since 1969, and now head an international group on economic and financial history based at Harvard. In 1990 at Scudder Stevens and Clark, I organized the world’s first sovereign-debt fund. All these jobs involved analyzing the limited ability of debtor countries to pay – how much could be extracted from them through foreign-currency loans and how much public infrastructure was available to be sold off in a voluntary virtual foreclosure process by countries willing to submit to creditor-dictated rules.


I first wrote about monetary imperialism in the 1970s in my book Super Imperialism. It should have been entitled “Monetary Imperialism” because it detailed how replacing gold with paper dollar IOUs for trade and balance-of-payments deficits in 1971 allowed the United States to exploit the rest of the world without limit. Phasing out gold payments among central banks in favor of fiat paper money allowed the United States to run up massive debts equal to its cumulative payments deficit, far beyond its ability to pay. It currently owes over $4 trillion, while running a chronic trade deficit with enormous overseas military spending, financed entirely by other countries through their central banks. This is euphemized as the “international monetary system.”


I also was an advisor to the Canadian government in the 1970s. My main work was to write a monograph explaining why countries should not borrow in foreign currencies, but should monetize their own credit for domestic spending and investment. In recent years I have taught in Latvia and given this same advice to its officials. I provide this background because it has obvious relevance to Iceland’s financial situation today. It has broken the cardinal rule of international finance: Never borrow in a foreign currency for credit that you can create freely at home. Governments can inflate their way out of domestic debt – but not out of foreign debt. That is a large part of the problem that Iceland now faces.


The main thrust of my comments therefore will focus on the international dimension of Iceland’s debt problem, especially with regard to its relations with Europe. It therefore is relevant to look at what is happening in today’s “expanded Europe.” As the financial press has been reporting, post-Soviet economies have met with disastrous results after having moved to join the European Union during the past decade. The recent riots of debtors, farmers and labor union members from the Baltics to Hungary are symptomatic of the deep economic woes surging over these countries. Resentment is growing that instead of helping them industrialize and become more efficient, Europe and its Lisbon Treaty simply handed matters over to its bankers, who looked at these countries simply as credit customers to be loaded down with debt – not for loans to build up manufacturing and the infrastructure sorely needed by these countries, but loans mainly against existing real estate and infrastructure collateral already in place. That is the quickest way to make money, after all – and finance traditionally has lived in the short run.

This problem was bound to arise, given Europe’s postindustrial faith that whatever increases “wealth” – even by the trick of puffing up real estate and other asset prices – is as productive as building new industrial capacity and infrastructure. The result of this ideology was a set of bubble economies built on debt-financed real estate and stock market inflation. Such bubbles always burst at some point. Only belatedly are nations re-discovering the classical axiom that the only way to pay for imports on a sustainable basis is to produce exports.


Unfortunately, neither foreign banks nor European advisors encouraged this. Their policy de-industrialized the post-Soviet countries, which financed deepening trade deficits by borrowing in foreign currency against their real estate. The Baltic States borrowed euros, sterling and Swiss francs, mainly from Swedish banks to finance a real estate bubble, while Hungary and its Central European neighbors borrowed heavily from Austrian banks. Their economies are shrinking now that their casino economies gambling on asset-price inflation have burst. Rental income and hence property prices are plunging, and exchange rates are following suit. This makes a foreign-currency mortgage cost more than local property is yielding. The result is widespread mortgage default, causing severe losses for Swedish and Austrian banks.


Bad real estate debts also are pulling down banks in the two leading creditor nations, Britain and the United States. Real estate prices, stock market prices and employment are going down in a straight line unprecedented even in the Great Depression of the 1930s. This has turned the neoliberal financial dream of “creating wealth” by inflating asset prices, by creating credit without actually increasing tangible capital formation (wages and living standards) into a nightmare. Just as individuals can’t live off a credit card forever, neither can nations. As any classical economist knows, societies that only manufacture debt are unsustainable. Casinos may be fun places to visit (customers pay by losing their money), but no place to live. The same is true of casino economies.



No help from the EU or the current global economy


The European Union is not in a position to offer much help in solving Iceland’s financial problems. The continent’s integration in the 1950s was pioneered by social democrats and pro-industrial idealistic capitalists such as Konrad Adenauer and Charles de Gaulle hoping to end the continent’s internecine wars forever. They succeeded, by forming the seven-nation Common Market in 1957. But further European expansion occurred largely on the financial sector’s terms. That is the source of problems fracturing “old” and “new” Europe today. It is the context in which Iceland’s debt problem is now being played out.


It seems natural enough for people to pay debts that have been taken on honestly. The normal expectation is that people will borrow – and banks will make loans – only for sound investments, ones that are able make a profit enabling the debtor to pay back the lender with interest. This is how banks have worked for many centuries – hence, the image of the prudent bankers who says “no” to any questionable deals brought before them.


At least that was the old way of doing things. Almost nobody anticipated a world in which bankers would create credit irresponsibly, leading to the massive defaults we are seeing throughout the world today. In the United States, for example, no less than a third of home mortgages have fallen into a state of Negative Equity. That is to say, the mortgage exceeds the market price of the real estate pledged as collateral. The U.S. national debt has tripled during the past year, from $5 trillion to $15 trillion as a result of financial bailouts including the government taking on the $5.2 trillion mortgage-packaging giants, Fannie Mae and Freddie Mac. A single insurance company, A.I.G., has been slated to receive a quarter-trillion dollars of bailout money, and a single bank, Citibank, has received over $70 billion and still counting. The stocks of these hitherto financial giants have fallen to just pennies, and Congress is now debating whether finally to nationalize them and wipe out their stockholders and even their bondholders.


In Britain much the same has occurred. Sitting in the lounge of Heathrow airport last month, I watched the hearings on BBC where members of Parliament expressed amazement that the most seriously affected banks were not led by bankers but by marketing men. Their job was not to calculate prudent loans, but to sell as much debt as possible, without regard for the debtor’s ability to pay. The result is that the Bank of England – like the U.S. Treasury – is printing new bonds whose interest charges will have to be paid by taxes on labor and industry.


How can Iceland be expected to cope in this kind of financial environment? To get a perspective on what would be a dystopian future, one may look at the dress rehearsal for the so-called financial “reforms” played out in the 1990s in Russia and other post-Soviet countries. These are reforms that creditors – including the European banks, I’m sorry to say – now wish to impose on Iceland. In Russia, life expectancies sharply declined, while health, prosperity and hope withered as outside forces imposed austerity measures and high interest rates. Russians woke up to find that the devastation of the reforms foisted on them were as severe as the Second World War in reducing population, destroying industry, spreading disease and losing control of their economy. Living standards plunged, especially for retirees, while employment prospects closed for the young. Much the same occurred throughout the former Soviet Union.


This policy remains the “fix” for debtor countries: Sell off assets for pennies on the dollar to kleptocrats across the globe, and gut the nation’s social welfare programs just at a time they are needed most. By contrast, look at the nations calling most loudly for Iceland to pay the loans made by global speculators and arbitrageurs. They include the largest debtor nations, headed by the United States and Britain, led by politicians who never would dream of imposing such hardship on themselves. While cutting their own taxes and increasing their own government budget deficits, these nations are attempting to extricate financial tribute from smaller, weaker countries that they can bully, as they did to Third World debtors in the 1980s and ‘90s.



Dismantling industrial capitalism


This is a crisis that calls for blunt truths. What creditor nations and their international financial institutions are promoting is not capitalism as traditionally understood. Instead of helping industrialize the countries to which they extended credit so as to make them viable and self-reliant with new means of paying for their imports – and indeed, paying the debts taken on to rebuild their productive capacity – European planners oversaw the dismantling of manufacturing.


Even worse, they did so in a way that empowered a neo-feudal set of financial oligarchs. Indebted economies have been turned into a gaggle of casinos, with special games (e.g., opaque financial instruments such as credit-default swaps) reserved exclusively for insiders. Even to get into this game, one must be at last a millionaire, signing legal releases that one can afford to lose the entire investment and still survive economically. The European Union thus adds insult to injury by presenting its financial agencies euphemistically as donors bringing aid. They turn out to be the same ideologues that have crippled industrial capitalism across the globe by proliferating debt-leveraged gambles that have redistributed wealth upwards wherever they have operated.


This policy creates debt peonage for most citizens, above all in the newer countries seeking to join the European Union. Even in the richest nation on earth – the United States – nearly half of all citizens now have no net worth, and the gulf between the wealthiest 10 percent and the rest of society has widened geometrically since 1980. This is the unfair system that the world’s top creditors would export to Iceland – if they can convince its voters to accept neoliberal debt pyramiding as a way to get rich. The recent riots throughout the post-Soviet states suggest that this plan is not working. Their populations are now feeling how deeply the so-called financial reforms (e.g., financial deregulation) promoted by European banks and the Lisbon Agreements have polarized their economies.



Recognizing the enemy within


The only defense against such disastrous policy is to recognize that there are better alternatives. It simply is not possible for today’s astronomically indebted economies to “work their way out of debt” with the old trick of inflating the money supply. Trying to do so will collapse the currency’s exchange rate and divert so much revenue to pay creditors – and transfer so much property out of local hands – that a new kind of post-capitalist, non-production/consumption economy will be created, one less and less able to be self-reliant and independent, to say nothing about being just and sustainable.


Iceland’s financial crisis today is less an issue of international law as of outright lawlessness perpetrated by the purveyors of so-called free market democracy. Nations pressing Iceland for payment impose one set of laws for others while following quite a different set for themselves. Preaching to Iceland about international law, the United States and Great Britain themselves have broken the clearest of international laws – those against waging aggressive war. Their propagandists are skillful at using the language of capitalism and morality, yet they are neither capitalist nor moral. Their financial strategy is to play an ages-old psychological game. Make countries like Iceland feel guilty about being debtors rather than recognizing they have been victims of an international Ponzi scheme. In a nutshell, the game is to lay down “laws” for debtors in the form of destructive austerity programs fashioned by irresponsible and indeed, parasitic creditors. This “aid advice” ends in outright asset stripping, both public and private.


Asset stripping to pay debts has caused collapse time and again in history, but is strangely downplayed in today’s academic curriculum as an “inconvenient truth” as far as vested financial interests are concerned. Income is siphoned off by a scheme that is elegant and simple. Hapless victims – and now entire economies, not just individuals – are maneuvered onto a debt treadmill from which there is no escape. Creditors pile on credit and let the debts grow at the “magic of compound interest,” knowing that their loans cannot be repaid – except by asset sell-offs. No economy’s productivity can keep pace with exponentially compounding debt. Whatever was owned (and indeed, financed originally by public debt but now paid off) is stripped away for interest payments that never end. The aim is for these payments to absorb as much of the surplus as possible, so that the national economy in effect works to pay tribute to the new global financial class – bankers and money managers of mutual funds, pension funds and hedge funds.


The product they are selling is debt. They build up their own wealth by indebting others, and then forcing sell-offs to buyers who take on their own debt in the hope of making asset-price gains as property prices are impossibly inflated relative to the wages of living labor. This has become the new, euphemistically dubbed post-industrial form of wealth creation – a strategy that is now collapsing economies throughout the world.



The role of the United States


The United States has trapped other countries into a nightmarish system in which they have little practical choice but to recycle their excess balance-of-payments dollar inflows back to the United States, mainly in the form of loans to the U.S. Treasury. When foreign central banks receive dollars for their exports (or for the sale of their companies), they are limited in what they can do with these dollars. The U.S. Congress will not let them buy up important domestic companies or resources, and will not part with U.S. gold holdings. So foreign central banks are obliged to buy Treasury bonds – or, as the supply of these bonds has run out (being limited by the domestic budget deficit), mortgage-backed securities issued by the now-public Fannie Mae and Freddie Mac packagers of subprime mortgages. These two semi-official agencies were formally nationalized last year after a series of financial frauds and disastrous investments wiped out their capital, obliging the U.S. Government to step in and mollify governments from China to Israel whose central banks had been recycling their surplus dollar inflows into these securities.


Icelanders should keep one basic principle uppermost in their minds. The United States is the world’s largest debtor nation, and will never repay its own foreign debt. Over and above its presently outstanding four trillion dollars, its Treasury intends to keep on issuing new paper IOUs in exchange for the goods, services and real assets of China, Japan and other creditor nations – until governments stuck with these paper dollars turn their back on this Madoff-Ponzi scheme (note that these schemes always are named for American operators), recognizing what Adam Smith explained in The Wealth of Nations: No nation has ever repaid its debts. Small nations like Iceland, along with small taxpayers in wealthy countries, may be coerced with propaganda, mind games and outright threats into paying – until they have no assets left to hand over. But the big boys are above the law. They control the courts (which often rule without much regard for the actual law), just as they write history and newspaper coverage – and business school curricula – to serve their own interests.


The second important principle is how radically today’s post-capitalist order has inverted traditional ways of making money. Instead of making profits on new capital investment, the easiest path to quick riches in today’s global financial system is to foreclose at pennies on the dollar, and make a “capital gain” by flipping property onto world financial markets that are being inflated by central banks. While financial spokespersons promise that “there is no such thing as a free lunch,” today’s hit-and-run financial bubble, fraud and insider privatizations culminating in public-sector bailouts (“socializing the risk” while privatizing the profits and capital gains) – has become all about obtaining a free lunch.



Iceland’s zero-sum financial gamble


But it is a zero-sum gambling game, with losers on the other side of the table from the winners. One party’s gain is another’s loss – and indeed, this kind of game ends up shrinking the economy by diverting resources away from real investment in tangible capital formation. Unlike industrial capitalism, which employs labor and invests in capital equipment to turn raw materials into salable commodities, today’s post-industrial financialized system only offers the virtual (and temporary) wealth of asset bubbles. Its financial managers claim to be acting in the tradition of classical economists and share their concept of free markets, but in actuality they have been part of an intellectual fraud that depicts their system as something other than the financialized wealth extraction on the real economy of production and consumption that it is. Financialized wealth is extractive, not productive. That is because loans, stocks and bond securities are claims on wealth, not real wealth itself.


This is the context in which today’s financial war against Iceland is being waged. Homeowners are paying tribute, not in the form of taxes to an invading occupying force, but in interest to local sponsors of the debt pyramiding that has got Iceland into such deep trouble, and to the international creditors and enablers of this over-financialization of the economy. The nation’s public domain, its land and geothermal resources, its tourist industry and public assets are being eyed by foreign creditors as prey to be seized in the way that has occurred in many Third World countries. It is what ruined Turkey and Egypt in the late 19th century and brought down other kingdoms for centuries before that. Yet many Icelanders are heading into this future voluntarily, as if it somehow is fair rather than an exercise in predatory finance led by nations that have shown no willingness (or ability) to pay their own international debts.


Nations know when they are being attacked militarily. Defense forces fight to prevent invaders from seizing their land and imposing tribute. No country would think of welcoming a foreign army to do what William the Conqueror did to England after 1066. He ordered his accountants to compile the Domesday Book within thirty years (it was ready by 1086), calculating the rental value of English land in order to tax it for the Crown.


That is how most of Europe’s kingdoms were created. The rent was paid to the companions of military warlords, and their heirs ruled as absentee Lords for nine centuries. They quickly moved to keep what started out as royal revenue for themselves, celebrating this as the victory for free-market “democracy” in the Magna Carta liberatum (1215) and subsequent Revolt of the Barons (1258-65). Today, these lords of the land and those who have bought their property have run up mortgage debt, paying creditors what formerly was paid first as taxes and then taken as rent.


What took centuries to achieve in feudal Europe is now being threatened in Iceland, compressed into the space of just a decade or so. And in many ways this financial situation doesn’t make sense – unless one looks through history to see how the same tragedy has happened again and again.


The United States, Britain and the International Monetary Fund (“the global investment community”) are couching their demands for draconian austerity policies in the language of capitalism. But what they actually are promoting is a financial system that threatens to end in debt peonage, not democratic capitalism. Across the globe, from the Baltics to Hungary in Europe, and indeed from Russia to China, riots and wildcat strikes recently have broken out to protest this post-capitalist financial dynamic. It already has destroyed the industrial capacity of debtor countries subjected to the cruel austerity programs imposed by the IMF as acting agent for the global financial class. This merely repeats what the British did in India. Industrial growth has been replaced with a financialized real estate bubble. The “final stage” of this dynamic is to foreclose and sell off the assets of debtors at giveaway prices. Talk about democracy from the financial elite is a public-relations cover story. Their “magic of compound interest” sales pitch threatens to destroy entire nations.


Fortunately, this need not happen in countries that do not impose debt leveraging on themselves, but only in countries that let the public utility of money and credit creation be privatized in the hands of a cosmopolitan financial class. Iceland still has an alternative future before it, if voters recognize this in time. But to achieve the better future that most of its citizens want, it must understand the predatory debt trap into which it has fallen – or more accurately, been pushed by believing in the same illegitimate financial doctrine that has ruined Russia and other post-Soviet economies, as well as Third World countries before them under decades of IMF “austerity plans” designed to stifle domestic growth (and competition) and economic stability to pay foreign creditors. History provides tragic examples – the aftermath of World War I, and England itself in the centuries of its seemingly perpetual wars with France.



Industrial economies reverting to “tollbooth economies”


The world is plunging “back to the future,” to an epoch of neo-feudalism and debt peonage. It is a travesty of the promise of industrial capitalism as it seemed to be evolving on the eve of the 20th century and the Progressive Era of social democracy. What was not recognized was the financial time bomb implanted in the DNA of Europe as it evolved out of the Middle Ages.


As European feudalism gave way to the formation of nation-states, most kingdoms became dependent on foreign loans to fight their wars – starting with the Crusades, whose looting of Byzantium provided an enormous influx of gold and silver. This is what broke down Church bans on usury. Once governments paid interest to elite Church orders such as the Templars and Hospitallers, it became permissible for banks to join in lending at interest – to kings, the nobility and the merchant classes as major customers.


The birth of international post-medieval banking proved disastrous for many family banks that foundered on what turned out to be bad loans to the leading powers of early Europe, from Spain to France and England. The historian Richard Ehrenberg notes that Spanish bankruptcies “occurred at intervals of about twenty years – 1557, 1575, 1596, 1607, 1627, 1647,” often being rationalized by pious allusions to Church prohibitions against usury. England declared bankruptcy under Edward III in 1339, and Charles II shut down the Exchequer in 1672 and suspended payment on its floating debt. Wiping out debts was the only way to retain basic economic and political relations and national independence. In view of this long experience, England’s advice to Iceland today is in the character of “Do as we say, not as we ourselves have done and are doing.”


Central banks were formed to advance credit to governments, and commercial banks to help finance the Industrial Revolution’s expanding trade and related infrastructure spending, mining and shipping, capped by infrastructure monopolies such as canals, railroads and ports, and later by fuel and power. The medieval epoch’s “primitive accumulation” – the extraction of revenue by military seizure – was replaced by the more peaceful and seemingly civilized practice of creditors appropriating the economic surplus by making interest-bearing loans, and by foreclosing on property when the interest charges could not be paid.


In recent years financial managers have persuaded many countries to sell off public enterprises like their water or energy supplies, mainly to raise the money to pay debts or to cut taxes on the highest wealth brackets. This sale of the “commons” by naïve, myopic leaders (and the “useful idiots” promoted by financial lobbyists to be their economic advisors) turns debtor countries into “tollbooth economies” in which basic services become a vehicle to extract greater and greater portions of national income and wealth for the benefit of the few. This is the antithesis of “free markets” as classical economists understood the term. They are markets designed and controlled by the financial sector to appropriate for itself the surplus produced by labor and tangible capital investment.


To promote this siphoning off of surplus income, the rich have funded extensive disinformation (propaganda) campaigns around the world. Their tactic is to use familiar and revered ideological terms such as “free markets,” “economic democracy” and “fairness” to win the hearts and minds of the population while actually imposing a set of policies in stark contrast to Enlightenment ideology, classical political economy, Progressive Era reform and 20th century social democracy – the ideals of freedom-loving peoples everywhere. Financial lobbyists have spent billions of dollars spent on public-relations think tanks to achieve this ideological con job. They have endowed business schools and gained control of government agencies to promote their creditor-oriented point of view, headed by central banks to serve as the ideological wedge for today’s anti-democratic forces. This is the ideology that has pushed much of the Third World into poverty since the 1960s, as well as today’s tragically debt-ridden post-Soviet economies.



Financial warfare


Finance seems at first sight to be quite different from outright warfare. Everyone knows well enough that invading armies do not come on friendly terms. Foreign navies and troops are not welcomed, even if they promise to help build up the economy by constructing new roads and bridges (the better for their tanks and troops to travel on), hydropower and geothermal stations to export electricity (keeping the earnings for themselves), hotels and spas for themselves and foreigners to enjoy (and keep the rental incomes and site values), and create detailed statistical analyses (such as the Domesday Book alluded to above) to manage the economy in their favor.


Today this financial strategy has become multilateral. The IMF acts as enforcer for global creditors to appropriate the income of real estate, national infrastructure and industry as a financial boondoggle. What is remarkable is that countries throughout the world are losing their economic and fiscal independence peacefully – at least it is peaceful when target countries do not fight back. (Chile, Cuba and Iran are object lessons for the punitive economic sanctions imposed on countries that do not accept today’s predatory economic ethic.) Financial conquest is thus more covert than military warfare. It relies more on the educational and psychological dimension, and is most successful when the victim does not even realize it is being attacked.


But the effects are as devastating on human life as what Russia suffered at the hands of Western “reformers” in the 1990s. The financial austerity imposed by creditor-run regimes shortens life spans, reduces birth rates, and increases labor flight, suicide rates, disease, alcoholism and drug abuse. Just as war kills an economy’s males of fighting age (25-35), financial austerity drives them to emigrate to find work. This is why U.S. investor Warren Buffett has called collateralized debt obligations (CDOs), credit default swaps and similar debt-leveraging instruments “weapons of mass financial destruction.”


Consider the role of banking in this neo-feudal order. Banks do not create credit to finance manufacturing – that is done mainly out of retained earnings and equity. Banks create credit primarily to lend against collateral already in place – loans that simply extract money from the economy. This is an inherently destructive act, one that is anti-capitalist in the sense that it undercuts industrial growth in favor of interest extraction and short-term speculative gains.


The trick is to get this policy welcomed as if it were progress, as “post-industrial” rather than a lapse backward. Only today is it becoming apparent that the collateral-based lending of banks “creates wealth” mainly by inflating asset-price bubbles, especially in real estate. Bankers calculate how much debt a given flow of residential or commercial real estate income can support, and create enough credit to make a loan large enough to absorb this surplus revenue. Bankers do the same with industry by lending corporate raiders enough money in take-over “junk” bonds to turn profits into a flow of interest payments for themselves, and with capital gains for the raiders. Central banks fuel this process by swamping economies with easy credit (that is, debt) that keeps the financial sector fat while impoverishing the increasingly indebted nation.


Finance thus is the historical antithesis of property, sanctifying its own right to expropriate indebted property owners. Originally denounced by Christianity, Judaism and Islam, interest-bearing debt has sanctified itself as the predominant form of wealth. This is not what the classical economists and democratic political reformers expected to see. They explained how to avoid this economic dystopia by appropriate government tax policy and regulation to minimize the economic role and political power of post-feudal bankers and rentiers. (Rentiers are people who live off interest and rents, that is, off absentee incomes paid on a regular basis. A rente was a French government bond paying interest at regular intervals; the idea was extended to landlords.)



How banks and the financial sector gained dominant power


This supremacy of the banks and the financial sector took thousands of years to achieve. It was not easy to overthrow traditional social values and to impoverish so many economies by subordinating customary property relations with legal priority for creditors. Iceland only recently has come under this kind of financial attack by creditors operating globally. Bankers managed to convince ambitious fortune-seekers that the way to wealth and economic growth lay in debt leveraging, not in staying free of debt. Selling debt as their product, banks and speculators at the world’s financial core needed to prepare for what they must have known would lead to economic collapse and destroyed economies throughout history. They prepared the path to ruin by ideological engineering aimed at shaping how populations think about history, so as to accept debt pyramiding as a good economic strategy.


As an example of their warped thinking, consider an attractively priced home. Would you rather own 100% of a home free of all debt with a market value of 100,000 euros if free of debt – or, would you rather own 60% of the same home at an inflated market price valued at 250,000 euros? In the second scenario you would have 50,000 euros of “surplus wealth” (60% x 250,000 = 150,000 euros, compared to 100,000 in the first example). People across the globe have been convinced that the second scenario represents “wealth creation.” What is overlooked is that the higher-priced home carries interest charges on its higher market price. This charge would amount to 6,000 euros a year, or 500 euros a month, at 6% interest. The same property is worth more, but includes a much larger debt overhead – income for the financial sector.


In Iceland – but nowhere else – home mortgages have a uniquely bad twist. Creditors have managed to protect the weight of their claims on debtors by indexing mortgage loans to the nation’s consumer price inflation (CPI) rate. Each month the debt principal is increased by the CPI increase – and so is the interest charge. During 2008 that index rose by 14.2%, so a 100,000-euro mortgage at the start of 2008 would have grown to 114,230 euros by yearend. These monthly adjustments also would added an entire percentage point onto the interest payment – an extra 100 euros to be paid to creditors monthly, in addition to the growing principal to be amortized. Talk about making money without effort …!


Such heavy debt charges would shrink any economy, and that is what is happening in Iceland. Prices for real estate declined by an estimated 21 percent for housing in 2008. So in the above example, the market price of the house worth 100,000 euros at the beginning of the year would have been worth only 79,000 at yearend, while the mortgage would have grown by 14% to 114,230. This would have plunged the homeowner 35,000 euros into negative equity – a remarkable 35% change.


In every other country, investors lose out when prices decline for real estate, stocks and bonds, while creditors find the purchasing power of their loans eroded by inflation. That is how most countries have “inflated their way out of debt” for many centuries. But Iceland’s creditors have created a system in which their position actually is improved as the rest of the economy suffers inflationary price erosion. Their claims rise in proportion to the rate at which consumer-price inflation eats away at wages and business profits. Where is the sense in this?


What makes this so ironic is that the purpose of calculating the consumer-price index in all countries has been to support consumer income. It was to protect wage earners and retirees against inflation eating away at their ability to maintain their standard of living. That is why in the United States, Social Security retirees receive an annual cost-of-living adjustment based on the CPI. But Iceland inverts this political aim, protecting the claims of creditors against debtors (and hence against most wage-earners). The creditor’s objective is to maximize the power of debt over living labor. That is the literal meaning of “mortgage:” a “dead hand” of the past over the present, of past wealth and credit over the living. For Iceland the debts run up during the “wealth creation” phase of the financial bubble are to be left in place and even grow at an accelerating rate reflecting the pace of currency depreciation and hence import prices and consumer prices generally. Debtors lose out as prices plunge for the homes they own, while creditors maintain their economic grip intact and even strengthen their hand by increasing their take.



Turning economic power into political power


Creditors in most countries have been able to turn their economic power into political power with the aim of shifting the tax burden off themselves and onto labor and industry. The final coup de grace occurs when they get the government to bail them out from their losses on bad loans. In the United States, Congress has tripled the national debt in less than a year to bail out creditors with little thought of helping debtors, or even of prosecuting the massive financial fraud involved in its subprime real estate bubble and the sale of junk mortgages to gullible foreign buyers.


Iceland’s citizens will own a smaller and smaller proportion of their homes as its banks become the main claimants on the nation’s property value. By subjecting Iceland to this unique kind of financial squeeze, Icelandic policy stands in diametrical contrast to that of the United States. The U.S. policy is to stabilize its economy and avoid depression by writing down debts to bring them in line with today’s lower market prices and, more specifically, to bring carrying charges on mortgage debt within the ability of homeowners to pay no more than 32% of their income. Other countries also are writing down their debts to bring them in line with the ability to pay. But Iceland is subjecting its own homeowners and consumers into debt deflation and plunging them into Negative Equity status – by law!


The only way its banks can succeed in this ploy is to keep Iceland’s voters unaware of what is happening in the rest of the world – and indeed, to block the government from drawing up a balance sheet of the nation’s debts, a roster of whom these debts are owed to, and a calculation of the economy’s ability to pay.


Iceland’s present policy will lower disposable income for homeowners and other debtors – the great majority of its citizens – while wealth gushes to the top of the economic pyramid, to those who are creating as much credit as they can find borrowers for. The result is not what former Federal Reserve chairman Alan Greenspan and President George W. Bush claimed to be creating in America – an “ownership” society. It really is a “loanship” society, an economy of ersatz assets in which debt pyramiding – owning less and less of a home or other asset – seemed to be a strategy for growing richer instead of the debt trap it is. Has Iceland fallen into a similar semantic trap?



Pensions and retirement


As in the United States, Iceland has convinced labor to “prefund” its retirement. The idea is to save up in advance, so as to provide for retirement in a purely financial way. Of course, the most important way to support retirees is to see that they can afford the basic goods and services needed to live. To the extent that “financializing” an economy ends up eroding the “real” economy, pension funding – and government Social Security funds (regressive taxes that enable the Treasury to cut taxes for the higher wealth brackets) – tends to shrink the economy rather than provide for the expansion in output needed to support an aging population. As matters stand, pension savings are mobilized to increase the volume of interest-extracting debt and fuel financial bubbles (as in America’s “pension-fund capitalism” that pushed up stock markets in the past). Pension savings works against employment most visibly when they are lent to corporate raiders who pay off their bondholders by downsizing the work force and squeezing more “productivity” out of the remaining employees. Economic “growth” under such circumstances takes the form of a financial and property-sector overhead, not growth or stability in living standards or the capacity to produce.


Allowing economies to be crippled with interest payments was unthinkable until recently. To achieve so radical a break in the public’s idea of prosperity and self-reliance, it has been necessary for creditors to wipe out knowledge of how legal systems have been amended to put creditor interests above those of debtors over the past eight centuries – and how the leading classical economists and Enlightenment cultural and religious leaders sought to subordinate creditor interests to those of growth and prosperity for the economy at large. But the new banking class has been clever enough to hire the best propagandists money can buy while remaining blind to the havoc they are wreaking with people’s lives.



The debt game



Like many people, Icelanders tend to think of debt in personal terms, as if creditors are neighbors much like themselves. The normal thing to do when problems arise would be to sit down and reach a common agreement. But Iceland’s creditors are impersonal billion-dollar financial conglomerates, and creditor-debtor relations under such conditions are inherently adversarial, as anyone who has had a recent disagreement with a bank can attest. Whatever creditors can gain in today’s highly politicized, legalistic and ideological tug-of-war will be the debtor’s loss. And the magnitude of Iceland’s prospective loss threatens to plunge its economy into depression for generations, turning it into a Third World oligarchy, or worse, a dictatorship. The price of paying its debts thus threatens to be loss of its national identity and a loss of its future.


The trick is to fool debtors into thinking that “free markets” means paying one’s debts. Creditors can succeed in letting debt leveraging and “the magic of compound interest” empty out economies only by diverting attention from what Adam Smith and other classical economists warned against. For them, a free market was one free of debt – especially foreign debt. In The Wealth of Nations (especially Book V, chapter 3), Smith warned against creditors becoming “free” enough to disable the ability of governments to protect citizens from creditors – especially the Dutch, who were the major investors in British monopolies created to be sold to pay for that nation’s seemingly eternal wars with France. The problem was that creditors sought to extract the wealth of nations for themselves, not to create wealth. Their greed was destructive to society as a whole, because it was easier to simply strip assets than to create real capital.


That is the problem with creditors historically. They tend to care only about how to extract as much as they can, as quickly as possible. “A creditor of the public, considered merely as such,” wrote Smith, “has no interest in the good condition of any particular portion of land, or in the good management of any particular portion of capital stock. As a creditor of the public he has no knowledge of any such particular portion. He has no inspection of it. He can have no care about it. Its ruin may in some cases be unknown to him, and cannot directly affect him.” The problem obviously is worst with absentee creditors.


Smith concluded: “When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about is by bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.”


Adam Smith’s portrait is engraved on England’s £20-pound note, and Andrew Jackson on the US $20 bill. The irony is that Smith denounced public debts and urged wars to be financed on a pay-as-you-go basis so that people would feel their burden – and stay out of debt. As for Andrew Jackson, he closed down the Second Bank of the United States, accusing bankers of ruining the nation and seeking to destroy democracy. Bankers and finance therefore leave something important out of the account when it comes to the views of their own patron saints of democratic free markets.


As noted above, creditors for many centuries now have suffered bankruptcies when foreign countries default. That is the norm, not the exception. Yet today’s popular media greet every new default as “unanticipated” and “surprising,” as if it were not the bankers’ fault that they failed to understand the market’s inability to pay. Dumbed-down economics textbooks chime in with their inbred ignorance voiced by the financial sector’s proverbial “useful idiots” prattling about “equilibrium” and “automatic stabilizers.” These un-learned academics are useful to the bankers because of the passion with which they proclaim that all debts should and can be paid by suitable “adjustments” (including what turns out to be economic and demographic collapse). The question being asked with a straight face is: If it is the fault of victims rather than the bankers, then is it not proper for governments to bail out the banks?


The tacit assumption is not that bankers’ exorbitant greed is achieved at the expense of the economy at large, but that the financial sector’s prosperity is a precondition for the economy to grow. The bankers try to cap matters by trotting out poor retirees (like the widows and orphans of old – presumably those living on “fixed incomes” in the form of trust funds) whose meager savings should be supported. Doing so just happens to save the financial oligarchy of billionaires at the top of the economic pyramid, but not the proverbial victims.


The use of human shields such as union members concerned about the investments of their pension funds to protect the wealth of the kleptocrats is likewise shameless. Wall Street sages in the United States, for example, shed crocodile tears over the fate of the working people suffering from the stock market collapse, knowing full well that financial assets are heavily concentrated at the top of the economic pyramid, with workers having, only a meager share of those stocks and bonds. Ignored is the fact that the government could bail out failing pension funds (like Social Security) directly at just a small fraction of the cost of propping up the assets of the affluent.


Likewise, the volume of government bailout money for the financial sector ostensibly to deal with the subprime mortgage crisis – about $13 trillion during 2008-09 – clashes with the fact that the total value of mortgage debt owed by all households in the entire United States is only $11 trillion as of yearend 2008! The bailout funds ended up being used mainly to buy other banks to create even larger financial conglomerates “too big to fail,” to pay executives whose greed for short-term gains and bonuses caused the financial meltdown, and to pay dividends to stockholders to support their stock price and hence the value of stock options that financial managers gave themselves. The closest parallel to this scandal is the “watered stock” practices of Wall Street’s railroad barons and other financial manipulators in the late 19th-century Gilded Age.


There was a time when banks hesitated to make loans irresponsibly, that is, beyond the ability of debtors – and entire national economies – to generate a surplus to pay their creditors. My job as balance-of-payments economist for the Chase Manhattan Bank in the 1960s was to calculate how much export earnings and other foreign exchange the major Latin American countries could generate. Their balance-of-payments surplus represented how much they could afford to borrow. The aim of New York banks was to lend Third World countries money to absorb their entire economic surplus. From the bankers’ point of view, that was what a national surplus was for – not to sustain higher living standards or invest in becoming economically self-sufficient, but simply to pay creditors. And “wealth” was defined as the capitalized value of the entire economic surplus they could generate – discounted at the going rate of interest, as if it all could be paid as debt service, so that the entire surplus would be paid to carry the debt.


This certainly is not a model of human progress. But it was that decade’s version of “wealth creation,” and it is the concept of “wealth creation” in terms of the market value of debt-financed asset prices that Alan Greenspan would foist on the United States in the 1990s to convince it that an asset bubble was the path to postindustrial wealth, not the road to debt serfdom.

So Adam Smith was right. Today, creditors and bondholders care about foreign economies only to the extent that they can charge interest that will absorb their entire economic surplus. Until recently, creditors thought that lending more than can be repaid would be “irresponsible.” Not any more.



Political checks and balances on the economy


The best path for nations is to put their own economic growth before the interests of creditors. For many generations this ethic supported a set of political checks and balances that kept the growth of international debt in terms considered to be tolerable – much too heavy by the free-market standards of Smith and John Stuart Mill, but not so high as to prompt widespread defaults and debt repudiation.


This ethic has changed in recent years. Countries have accepted creditor propaganda that debts are a “point of honor,” much as the poor believe that paying their debts – even when they are in negative equity – is the “honest thing to do.” Obviously this ethic is not self-applied to the world’s largest financial institutions or real estate speculators. But Iceland accepted it in what is a characteristic of small, closely-knit communities where the word of neighbors is their bond. The root of Iceland’s ethic is mutual aid and prosperity for all. It is a fine, highly socialized attitude, and therefore tragic that it has helped lead the nation to fall prone to the snake oil of debt peonage.


Political leaders who fail to recognize the fact that checks and balances are a proper function of government are liable to sacrifice their nation’s hope for economic growth and rising living standards in a vain attempt to pay creditors. Such attempts must be in vain, because “the magic of compound interest” is a cruel myth: In reality every rate of interest implies a doubling time, and no economy’s “real” growth ever has been able to grow exponentially at a fast enough rate to pay the debts that keep accruing interest.


In today’s deregulated environment where “the sky’s the limit,” these accruals have been recycled in yet new loans. These then are packaged and resold, loading the economy down with more and more debt that so far has been almost impossible to track. And to cap matters, financial speculators then place trillions of dollars of bets on whether the debts can be paid or not, and how much their market prices are likely to change. What was supposed to be a financial system designed to fund new capital investment to produce more and raise living standards has turned into a casino economy – where gamblers are staked by the bankers to play the debt game, with the government standing by to make the winners “whole” in cases where the debtors have lost too much of their play-money to pay up.



Debts that can’t be paid, won’t be


Every economist who has looked at the mathematics of compound interest has pointed out that in the end, debts cannot be paid. Every rate of interest can be viewed in terms of the time that it takes for a debt to double. At 5%, a debt doubles in 14½ years; at 7 percent, in 10 years; at 10 percent, in 7 years. As early as 2000 BC in Babylonia, scribal accountants were trained to calculate how loans principal doubled in five years at the then-current equivalent of 20% annually (1/60th per month for 60 months). “How long does it take a debt to multiply 64 times?” a student exercise asked. The answer is, 30 years – 6 doubling times.


No economy ever has been able to keep on doubling on a steady basis. Debts grow by purely mathematical principles, but “real” economies taper off in S-curves. This too was known in Babylonia, whose economic models calculated the growth of herds, which normally taper off. A major reason why national economic growth slows in today’s economies is that more and more income must be paid to carry the debt burden that mounts up. By leaving less revenue available for direct investment in capital formation and to fuel rising living standards, interest payments end up plunging economies into recession. For the past century or so, it usually has taken 18 years for the typical real estate cycle to run its course.



Nations that have not paid their debts


Let us draw up a roster of nations that have annulled their debts – or run them up with no intention of paying. The list starts with the world’s largest debtor, the United States. Its government owes $4 trillion to foreign central banks. A moment’s thought will show that there is no way it can pay, even if it wanted to do so. The United States is running a chronic trade deficit, on top of which is a deepening outflow of military spending. In addressing this chronic living beyond the nation’s international financial means, American diplomats are almost the only ones in the world who conduct international diplomacy the way that textbooks assume that all countries should do: They act purely and ruthlessly in their own national interest. This interest lies in getting the proverbial free lunch, by giving IOUs for other countries’ real resources and assets, with no intention or ability to pay.


U.S. officials already have suggested that this debt be wiped out. Their plan would convert it into “paper gold.” Foreign central banks would simply stamp their U.S. Treasury bonds “good only for payment among central banks and the International Monetary Fund.” No other nation would be allowed to wipe out its debts in this way. Only the debtor at the center would be able to continue issuing debt-money without foreign constraint.



To be sure, U.S. diplomats have freed countries from debt when they have a political reason to do so. The most famous modern example of an economy-wide debt cancellation is that of Germany in 1947. The Allies cancelled German personal and business debt, on the ground that most were owed to former Nazis. The only debts left on the books were current wage-debts that employers owed to their work force, and basic working balances for companies and families.

A generation earlier, in 1931, the Allies wiped out Germany’s reparations debt stemming from World War I, and negotiated a moratorium on their arms debts to the United States. The world’s leading governments realized that keeping these debts on the books would collapse the global economy. But by the time they reached this conclusion it already was too late. The combination of Inter-Ally arms debts owed to the United States and the reparations debts imposed by the Allies largely to pay America already was one of the major factors pushing the world into a depression.


The U.S. economy was collapsing under the weight of its domestic debt pyramiding. Other countries had used less debt leveraging, but all ended up writing off large swaths of real estate and business debts during the Depression Years. By the time the Second World War ended in 1945, most countries were free of debt. Prices reflected direct production costs, with minimum diversion of revenue to pay banks, absentee property owners and other rentiers.


In the postwar period the World Bank lent dollars for governments to build infrastructure – only to turn around a generation later and help loot what it had financed. After Mexico and other Latin American governments announced that they were insolvent in 1982, U.S. diplomats organized a debt write-down in the form of “Brady bonds.” By 1990, Argentina and Brazil had to pay 45% on new dollarized foreign debt, and Mexico paid 23%.


Having stuck Third World countries with debts beyond their ability to pay, the IMF and World Bank used their creditor leverage to force governments to impose draconian austerity plans that had the effect of preventing growth toward industrial and agricultural self-sufficiency, thereby also crushing prospects for competitiveness. The IMF and World Bank then demanded that debtor countries sell off their public infrastructure, land, subsoil rights and other assets to pay the debts that these institutions sponsored so irresponsibly. (If IMF loans were not simply irresponsible, then they knowingly crippled debtor-country economies.) It is an age-old story of conquest, now accomplished without conventional warfare.


Two thousand years ago Rome stripped Asia Minor and other provinces and colonies of money using military force. Its financial oligarchy then translated their economic power into political power, destroying democracy and bringing on centuries of Dark Ages. The historical lesson is that economies taken over by creditors are plunged into depression as predatory lending strips away the surplus, leaving nothing remaining for subsistence, let alone capital renewal. This prevents nations from paying their debts, leading to widespread foreclosure, an extreme polarization of property and wealth, and impoverishment of its people. The ensuing lack of prosperity ends up crippling the ability to sustain a military overhead, and such countries tend to be conquered, as the Goths overran Rome. Outsiders always were at the gates – but it was the hollowing out of Rome’s domestic economy that left it prone to conquest.


Most recently, creditor-sponsored dirigiste takeover of national economic and social institutions has turned Russia, the Baltic States and other post-Soviet economies into neoliberal kleptocracies, driving skilled labor abroad in tandem with capital flight. Latvia is being pushed back toward subsistence life on the land. Creditor mismanagement is the most important problem that any country today should strive to avert.



Creditors play the terrorism card


9/11 signaled the beginning of a new power grab in the United States and Britain. U.K. officials have used anti-terrorist legislation to seize Icelandic assets abroad. What makes this so ironic is that throughout history it has been creditors who have used violence against debtors, not the other way around. I know of only one exception, and it did not involve bloodshed: Jesus overthrew the tables of the moneychangers in Jerusalem’s temple. It is the only record of a violent act in his life.


Psychologists have explained the creditor proclivity for violence by the tendency for rentiers to fight for unearned income – inheritance, or other “free wealth” that they have obtained without effort of their own. People who work for a living and are able to support themselves believe that they can survive, and so there is less of the kind of panic that creditors and other free lunchers feel at the thought that their extractive revenue may end. They fight passionately against the prospect of having to live on what they produce or earn by their own merits. So the last thing that rentiers really want is a free market. In a shameless irony, they tend to accuse populations of being terrorists if they seek to defend themselves against predatory creditors and land-grabbers!


Describing creditor violence, Plutarch describes how Sparta’s king Agis IV and his successor Cleomenes III sought to cancel the debts late in the 3rd century BC. The city-state’s creditors murdered Agis, drove Cleomenes to suicide in exile, and killed Sparta’s next leader, Nabis – and then called in Rome to fight against pro-debtor democracies throughout Greece. Livy and other Roman historians describe how a century later, in 133 BC, the Roman Senate responded to the Gracchi Brothers attempt at debt and land reform by pushing the democratic Senators over the cliff to their death, inaugurating a century of bloody civil war.


In the 19th century the United States sent gunboats to collect debts from Latin American countries, installing collectors at the local customs houses. England applied similar imperial force to ruin India, Egypt and Turkey, stripping their assets with debt and plunging their populations into poverty that persists to the present day. More recently, America’s hand in the violence that overthrew Chile’s elected president Salvador Allende has continued this policy. Having south to isolate the Soviet Union, Cuba and other countries that rejected creditor-oriented rules and rentier property interests, the United States then capped its Cold War victory over the Soviet Union by promoting a flat-tax regime that imposed the fiscal burden entirely on labor and industry, not on finance and real estate. Instead of being democratized, the post-Communist countries were steered directly into oligarchic kleptocracies that ran up rising debts to the West.


This is just the opposite of the free markets that were promised them back in 1990-91. Instead of economic growth, the “real” economy of production and consumption shrunk, even as foreign financial inflows inflated property prices for housing and office space, fuel and public utilities. Real estate and utility services hitherto provided freely or at subsidy to the economy at large were turned into a predatory vehicle for foreigners to extract income, putting the domestic population on rations, much as what occurs under military occupation. Yet the public media, academic centers and parliaments have persuaded populations that this is part of a natural order, even the product of how a free-market is supposed to operate, rather than a retrogression back to quasi-feudal institutions. The simplistic idea is that making money is itself “capitalist” ipso facto, regardless of whether industrial capital is being created or dismantled and stripped.



How hard times affect people


Public health reports throughout the world document how lifespans shorten as economic inequality and poverty increase. The moral is that “debt kills,” by impoverishing and destroying populations. Those who try to defend themselves are branded as terrorists by their financial predators. Malthus’s population doctrine, after all, was composed to rationalize the free lunch of his landlord class, and World Bank policies to reduce the populations of indebted Third World countries likewise was the natural complement to the financial asset stripping it endorsed. Fewer people to feed, clothe and house in a situation where investors seek mainly the public enterprises for whose construction governments have already run into foreign debt, plus land and resources supplied by nature rather than by human labor.


Nowhere is the violence of creditors more pronounced than in their destruction of education, especially economic studies and knowledge of history. The first act of the Chicago Boys (University of Chicago monetarists, headed by Nobel Prize winner Milton Friedman) in Pinochet’s Chile after the 1974 military coup was to close down every economics and social science department in the nation, except for the monetarist stronghold at the Catholic University where they held sway. The idea was to strip academia of any alternative point of view. Matters are not much different in other countries. At a post-Keynesian economics conference in Berlin on “financialization” last November, I heard many complaints that alternative views to Chicago School orthodoxy were unable to get a hearing in the leading European academic journals. And just this March at the Eastern Economic Association’s annual meeting in New York City, I heard similar complaints that alternative economic ideas were excluded from the major refereed journals in which aspiring academics must gain entry in order to be promoted to tenure track jobs at most U.S. universities. An intellectual Iron Curtain has been lowered by dysfunctional “free market” orthodoxy. Evidently a free market in ideas is anathema to financial free marketers. With such strong intellectual control, of course, overt violence is unnecessary.


Such intellectual intolerance is in the DNA of the creditor mentality because it cannot withstand awareness and understanding of its destructive effects. The “miracle of compound interest” is not achievable in practice beyond the short run. To pretend that it may form the basis for a sustainable model of wealth creation does violence to rationality and economic logic. This is why the economic theory that creditors prefer – and subsidize – is learned ignorance propagated by useful idiots. Its role is to distract attention from society’s most important economic dynamics, those of finance and property polarization via debt, evidently on the premise that what is not seen or analyzed will not be regulated or taxed. One is reminded of Baudelaire’s quip: “The devil wins at the point where he convinces people that he does not exist.” A “free market” for rentiers thus is one “free” of alternative ideas.


That is the political function of mainstream economic theory today. And to cap matters, the creditor-oriented worldview does similar violence to the teachings of world’s major religions.



Christian endorsement of debt cancellation and Clean Slates


From at least as early as 2400 BC it was normal for Sumerian and Babylonian rulers to annul the population’s personal and agrarian “barley” debts upon taking the throne for their first full year of rule. In addition to annulling these debts, Mesopotamian Clean Slates freed bondservants and restored self-support land to former owners who had forfeited their crop rights to foreclosing creditors. The Babylonian word for these Clean Slates was andurarum, and Jewish law adopted them with the cognate Hebrew word deror. But by the first millennium BC, kings had come to represent local oligarchies, so Mosaic Law took Clean Slates out of the hands of rulers and placed them at the center of Judaic religion in the Jubilee Year of Leviticus 25. Like Babylonian law, it cancelled personal debts, freed bondservants and restored land tenure to its “original” holders.


Debt cancellation is at the heart of the laws of Exodus, Leviticus and Deuteronomy calling for debts to be cancelled periodically, and to liberate indebted bondservants. Ezra and Nehemiah describe how they returned from Babylon to restore order by canceling the debts – and re‑discovering the Book of Deuteronomy. But creditor oligarchies were on the rise throughout the Mediterranean region in the centuries that followed. By the time of Jesus the mainstream of Jewish leadership had mounted an attack on the Jubilee Year, endorsing Rabbi Hillel’s prosbul, a legal clause by which creditors forced debtors to sign away their rights to debt annulment at the Jubilee. In his first sermon, Jesus sought to retain the Jubilee year by unrolling the scroll of Isaiah and announcing that he had come to proclaim the Year of Our Lord.


The Jewish oligarchy appealed to Rome to crucify Jesus. As he and his followers gained adherents by advocating debt forgiveness, Rome used violence against them. But Christianity grew by creating communities of mutual aid. Upon achieving political power, the new religion’s most important economic achievement was to outlaw debt bondage throughout Western civilization. However, the idea of a Clean Slate had to be postponed until the Day of Judgment at the end of history.


As creditors drove the post-Roman economy into a Dark Age, Christians banned the charging of interest altogether, even on commercial “silver” loans. Ancient languages had no words to distinguish “interest” from “usury.” This distinction was drawn only in the 13th century, as Church theologians applied the term “interest” to commercial loans in which “silent backers” advanced money to entrepreneurs. It was permissible for bankers to charge a foreign-exchange agio premium (that typically included an interest charge in practice), as long as the charge could be justified by their own labor and related outlays to provide money-transfer and loans. However, mortgages loans and personal loans were deemed usurious. The 13th-century Churchmen treated usury as theft and hence in violation of the Eighth Commandment: “Thou shalt not steal.”


From antiquity through medieval European times, most theft took the form of usury, getting debtors to forfeit collateral they had pledged in exchange for emergency funds. Thomas Aquinas and Martin Luther in 1516 warned that this practice destroyed cities much as a worm destroys an apple from within its core. John Calvin in 1565, the last year of his life, likewise defined usury and fraud as theft on a plane with highwaymen and robbers. This ethic produced a line of development extending down to only a generation ago as Western law became more humane toward debtors. Debtors unable to pay are no longer turned into bondservants to their creditors, and debtors’ prisons have been closed down. Bankruptcy laws permit individuals (and corporations) to annul debts when they cannot pay.


But this eight-century-long historical trend is now being confronted with an anti-Enlightenment threatening to reverse it. In the United States, credit card companies have given enormous sums of campaign contributions to politicians willing to rewrite the bankruptcy laws to make home mortgage debts permanent and beyond the power of judges to write down. Wealthy individuals with more than one home can have their own mortgage debts on these properties written down, but homeowners with just a single residence are confronted with a lifetime of debt peonage. This is just the reverse of ancient law that protected the self-support land of citizens, but not their townhouses and other surplus property.



Credit without oligarchy


Most societies throughout history have sought to provide credit legally in ways that do not permit creditor oligarchies to emerge. Today’s creditor advocates are at war with the spirit of this idea. And in taking this position, they reject the thrust of the Enlightenment’s anti-usury laws, classical political economy’s distinction between productive and sterile investment, the St. Simonian attempt at financial reform, and the Progressive Era’s attempt to mobilize national credit to fund productive industrial investment rather than being extractive, benefiting only the few. The classical idea of economic freedom itself was formulated as the antithesis to feudal-epoch finance. And the ideal of freedom from predatory finance is what is being threatened today, as if society has forgotten how long and hard the reform struggle has been.


The fight to end debt bondage and debtors prisons took many centuries to achieve its humanitarian objective. Handel’s Messiah is a staple of the Christmas and Easter season celebrating the life and teachings of Jesus Christ. What has been forgotten is the context in which Handel arranged the first performance of this oratorio in Dublin, on April 13, 1742. It was a charity concert for the benefit “of the Prisoners in several Gaols, and for the Support of Mercer’s Hospital in Stephen Street, and of the Charitable Infirmary on the Inn's Quay.” Enough money was raised to free a hundred and forty two prisoners. The oratorio’s text accordingly contained references to “breaking bonds asunder” and “casting away yokes,” recalling the early Christian belief that the Messiah’s reign would bring liberty (Hebrew deror or debt cancellation) and release (Greek aphesis) from debt bondage. The “redeemer” was literally the redeemer from debt.


This recalls the original, literal meaning of the Lord’s Prayer. It refers not only to forgiving sins and sinners in the abstract, but specifically to “forgive us our debts” – a translation distorted in much modern reading. “Sin” was the word for “debt” in all Indo-European languages: Schuld (the root of German sollen and English should), and devoir, the root of English debt. It meant obligation – referring in ancient practice to the obligation of an offender to make good payment to atone for his offense, as in European wergild tradition. The original debts were not paid to the rich, but by them, for manslaughter or physical wergild injury to their victims (who typically had to settle for payment rather than taking revenge). Today’s offenders disrupting social harmony are wealthy creditors, but society is paying money to them, not fining them. Seen from the ancient perspective, it is as if indebted society owes retribution to the rich. No wonder the spirit of modern religion has so thoroughly overturned that of its origins!


It therefore seems remarkable that in our own epoch – strained as it is by unprecedented and questionably created debt overhead that reduces not just individuals but entire nations to debt servitude – no major opposition has appeared on religious grounds. Churches have avoided the issue that was the cornerstone of so much of their earlier concern, and moved toward other concerns rather than remaining on the high ground of alleviating the debt burden.



Back to basics, and a call for transparent statistics


The classical economics of Adam Smith and John Stuart Mill, the Progressive Era reforms and Social Democracy are rooted in the moral philosophy of the 17th- and 18th-century Enlightenment. The labor theory of value can be traced from the 13th-century Schoolmen via John Locke to Adam Smith and the Scottish Deists, via David Ricardo’s isolation of economic rent (what Mill called the “unearned increment” that landowners and others receive “in their sleep” rather than through their own labor) as an element of price in excess of cost-value. The distinction between intrinsic value and market price led to socialist and progressive theories of a just society free of economic privilege, free of prices in excess of socially necessary costs of production and of rentier income and wealth without effort.


The common thread in these ideas is that people deserve to receive the fruits of their labor. This means bringing prices in line with actual labor-costs of production. It also means that one’s wealth should be limited to only what one creates – not land and natural resources, or monopoly privileges to extract income via control of roads, the right to create money and other natural monopolies. The aim of social reform for many centuries has been to purge capitalism of its legacy of absentee rentier property ownership patterns and creditor-oriented laws inherited from medieval times. The way to do this is to treat banking like transportation and the broadcasting spectrum, as a public utility to form a just fiscal base, not something to be privatized so that individual rentiers can tax society at large for what rightly is a public utility.


Beyond creating a travesty of international law, rentier interests have turned seemingly empirical statistics into a fictitious set of accounts that understate actual returns to the finance, insurance and real estate (FIRE) sector and the magnitude and information on land and other wealth ownership and distribution. Recent U.S. news has seen a fight by Wall Street to count short-term trading gains in stocks, bonds and financial derivatives as “capital” gains taxed at only a fraction of wages and profits. The financial managers in charge of national statistics likewise describe economy’s largest asset category, real estate, in largely fictitious economic terms. U.S. Federal Reserve statistics on asset values meanwhile depict the rise in real estate prices not as higher land valuation – which the land-price maps of major cities show to be the cause of rising prices, fueled by an exponentially expanding pyramid of credit relative to a fairly fixed land area – but as “replacement cost” of buildings. The inflation of real estate prices is assigned to “capital,” not land. This enables real estate owners to avoid paying income tax by depreciating their property as if it is wearing out, not rising in value. Buyers can start writing off the price of an already written-off building as soon as they buy it, treating its “wearing out” as a tax credit – even though older buildings bring a premium over today’s cost-cutting construction practices. This write-off, of course, is not granted to homeowners, only to absentee owners.


In the sphere of financial wealth, banks have fought truth-in-lending regulations for years in order to conceal the real interest rate their customers are having to pay when all the fees and other charges are added on. They are fighting tooth-and-nail against “mark to market” accounting practices that would oblige them to let depositors and investors know how much their assets actually are worth – and hence, how much they have lost by irresponsible gambling. Whereas economic textbooks claim that a precondition of market efficiency is full knowledge of the market (otherwise, how can a market be deemed to be provide informed choice?), the financial sector always has fought tooth and nail against realizing this condition in practice.


Today the financial sector claims that the U.S. crisis was brought on not by bad investments by bank conglomerates and pension funds or misleadingly high credit ratings given to securities belatedly admitted to be junk, but by banks having to admit that the collateralized debt obligations (CDOs) and credit-default swaps they had been selling to global investments were in fact worthless from the outset. On March 12, 2009, the U.S. Congressional subcommittee in charge of financial reporting backed the bank lobbyists in “freeing” them from having to reveal their actual condition and (lack of) value of the securities they have been pawning off. As a New York Times reporter summed up the issue: “Next time you hear a banker denounce mark-to-market rules, ask if he runs his business that way. Will he offer you a mortgage loan based on what you think your home should be worth, which you can repay only if you make a lot more money than anyone will pay you? … maybe that is not such a good idea. The banks already tried that, with liars’ loans. Those loans did not work out so well.”[1]


This helps explain why every new press release of bad financial news is greeted with the adjectives “unexpected,” “surprising,” “unforeseeable,” “once-in-a-century” and kindred terms. The financial sector seeks to free itself from criticism rather than taking the blame for having plunged headlong over the debt cliff. It can succeed in this economic fiction in proportion to the degree to which the public can be blocked from understanding just what is going on and how the financial sector gains at the expense of the economy at large. Shaping popular perception becomes the name of the game, and statistics are depicted as “empirical” reality rather than the result of intensive lobbying to promote politicians willing to back a distorted economic roadmap.


The problem goes to the very foundation of economic theory. Any set of statistics reflects categories in economic theory, and in recent years the Chicago School has taken the lead in what is now a nationwide trend to exclude the history of economic thought from the academic curriculum. One can get all the way through a Ph.D. without having surveyed the evolution of classical economics from the Physiocrats through Adam Smith, John Stuart Mill and the Progressive Era reformers. The essence of social reform throughout the Enlightenment, and indeed extending all the way back to the Church Schoolmen is no longer taught – the distinctions between earned and unearned income and wealth, and productive and unproductive (or “sterile”) employment and investment. Post-classical thought insists that all income is productive in proportion to whatever it earns – including the collection of economic rent or extortion of monopoly super-profit, or financial charges for interest and credit card fees, and the exorbitant salaries and bonuses that financial managers pay themselves. All revenue – and therefore, all wealth – appears to be “earned.” By their definition. This denies the concept of “investment in zero-sum activities that merely transfer income into the unproductive sector’s pockets, in contrast to creating income.


As a guide to policy reform, classical economics aimed at creating an economic and fiscal system that would bring market prices in line with technologically necessary costs of production. All such costs ultimately are reducible to labor. The necessary complement to the labor theory of value (adjusted for different grades of labor, the cost of their education and the linkage between wage levels and productivity) was the analysis of economic rent – an institutional add-on reflecting property ownership patterns, financial charges and taxes, not inherent costs of production. The classical reform program was to minimize the cost of production and of living, making economies more competitive by purifying industrial capitalism and removing its remaining feudal legacies, above all the right of hereditary absentee owners (landlords) to siphon off a rental charge for access to land for sites supplied by nature and given value by local public spending (e.g., “location, location, and location,” as real estate agents explain matters to prospective buyers) – and the right of bankers to charge for creating credit that governments could freely create themselves.


Fighting against progressive reforms, banks and other financial institutions have sought to preserve their special privileges by law, minimizing taxes on themselves by shifting the burden onto labor and industry. What they have achieved by financializing economies is (1) to raise the cost of living and the cost of doing business; (2) to free their major customers – mortgage borrowers – from taxation so as to leave as much surplus as possible available to be paid as interest; (3) to collect revenue hitherto used to finance the public sector by capitalizing it into interest charges and to inflate the price of housing and other real estate and privatized monopolies; (4) to effectively shift taxes onto labor and industry, thereby raising prices and undermining the competitive power of financialized economies. This is a travesty of classical “free market” policy. It is a policy for predators that mainly burdens economies with high interest and fees while also making the tax burden more oppressive while they reap the benefits.


John Maynard Keynes believed that the proper task of governments was to prevent over-indebtedness from leading to economic depression. He concluded his General Theory (1936) with a call for “euthanasia of the rentier.” Hoping to make credit productive, not extractive, his followers have advocated making banking a public utility so as to steer debt creation to fund growth in the means of production, not economic overhead by inflating property bubbles. Radical as this may appear today, this was the aim of the 19th century classical economists, and underlay the financial reforms that shaped the 20th-century economic takeoff. Only quite recently has the global financial press rediscovered this logic in the wake of today’s bubble meltdown. In a recent Financial Times column, Martin Wolf pointed out that in view of the huge bailouts that banks are demanding from the government to make the industrial economy and labor force pay for their losses, “banks are not commercial operations; they are expensive wards of the state and must be treated as such.” He concludes: “The UK government has to make a decision. If it believes that costly bail-out must be piled upon ever more costly bail-out, then the banking system can never be treated as a commercial activity again: it is a regulated utility – end of story. If the government does want it to be a commercial activity, then defaults are necessary, as some now argue. Take your pick. But do not believe you can have both. The UK cannot afford it.”[2] Neither can Iceland or any other country.



Backed by global creditors, the IMF wants to keep its power


But the financial sector is fighting back. Its global lobbyist, the International Monetary Fund, has sought to consolidate financial control of economies irreversibly. Article VIII of its charter, drawn up in a period of reaction against the blocked currency practices and tariff protectionism of the 1930s, rules that once a country has removed controls on its “current account” transactions, it is not legal to re-impose any new controls. The current account is defined to include not only import and export trade in goods and services, but also interest on foreign debt and the remittance of profits on foreign-owned investment. In the 1930s, interest payments were conceptually integrated with credit and debts on capital account. But in the 1940s the IMF and other countries changed their balance-of-payments accounting formats away from this logic.


Ostensibly aimed at freeing trade, the IMF’s Article VIII in reality created “free capital movements,” that is, the ability of financial gangs to freely raid currencies such as occurred in the 1997 Asian crisis and similar speculations. Governments were not permitted to protect their currency and exchange rates by limiting such raids or erecting barriers to predatory credit and destructive debt (or from U.S.-subsidized agricultural exports, for that matter). The legal effect of the IMF’s ruling was to block governments from regulating their financial sector, despite its rentier role as a public utility. For Iceland, this means that the government cannot keep the nation’s international debt within the economy’s ability to carry. The most basic criterion for national sovereignty thus is ruled illegal!


In practice, nearly every country has simply added the interest accrual onto its national debt balance each year. Nominally, it “borrows the interest,” but the effect is more like an accrual than a true new loan. Over time these public debts grow at an exponential rate – far in excess of the “real” economy’s rate of growth, a recurring theme in today’s post-classical economies.



Lessons for Icelandic financial policy


The first thing that Iceland needs to do is to realize that it is under financial attack from outside as well as from within – by foreigners supported by a domestic banking class. To succeed, these creditors are trying to convince the population that all debt is productive, and that the economy benefits to the extent that its net worth rises (the price of assets in excess of debt). The fatal error is the assumption that prices will never go down, and if they do, debts should be left in place even when this causes negative equity. To their erroneous way of thinking, a price plunge (recession or depression) is an accident that happens once in a century, not the inevitable result of debts growing at compound interest without a concurrent increase in earning power to pay higher prices and interest.


This deceptive mythology is capped by a mind game being played with Icelandic voters. The game is to promote the myth that there is no alternative but to pay the debts that a few insiders have rung up, debts that accrue interest when they go unpaid. This myth can be dispelled by recognizing that the volume of debt payments being demanded is beyond the country’s capacity to pay. The financial strategy is to postpone awareness of this fact as long as is possible, so as to proceed with the foreclosure and voluntary pre-bankruptcy sell-off of national assets to pay creditors. The one question that creditors do not want to be asked is, “Just how do you propose that we should pay you?” Creditors hesitate to come right out and answer, “By shrinking your economy, by shifting your wealth and property into the hands of a small and shrinking financial oligarchy, and by pricing your labor and industry out of world markets as a result of the heavy financial charges built into your pricing system.” They prefer to act “surprised” when economic force majeur obliges economies to replace defined-benefit pension programs with “defined contribution” plans in which all that workers know is how much they pay into the plan, not what they will end up with.



Iceland as a model test case for economic justice


The realization of the impossibility of paying its debts while maintaining a fair society with a financially level playing field in which people live by what they produce (rather than a debt peonage society headed by creditors) will help Iceland confront reality sooner rather than later. Some form of Clean Slate moratorium should be inevitable. The extent cannot be known until an accounting of who owes what to whom is made. But as a sovereign nation, Iceland can apply whatever economic laws it wishes, as long as these do not discriminate specifically against foreigners. (That can be the result of a general law, as long as foreigners are subject to the same laws as domestic citizens.)


Global creditors will complain mightily, hoping to convince Iceland to let finance make itself an extra-legal sector, beyond the scope of national law to regulate – or to tax. The aim is to place financial dynamics beyond the ability of legal systems throughout the world to contain or otherwise control, so as to make debt collection autonomous from democratic regulation. To achieve this victory, financial interests seek to dismantle the power of governments to limit the ability of creditors to engage in predatory lending and foreclosure. Financial lobbyists accuse government power of being a “road to serfdom,” whereas in reality only governments can protect populations from creditor-imposed debt peonage.


As another tactic in today’s debt crisis, creditors are trying to rush matters. The United States provides an object lesson in the pitfalls of not giving the government enough time to reason things through so as trace how the losses came to be suffered. Treasury Secretary Paulson represented the interest of his own firm, Goldman Sachs, in ramming through an $800 billion “bailout” giveaway package to Wall Street’s leading investment bankers. The sum included $180 billion dispersed so far to A.I.G. to pay speculators in derivatives (including $12 billion to its largest counterparty, Paulson’s own firm,), and $45 billion for Citigroup to pay its counterparty gamblers on the winning side of casino-style bets.


95% of American voters opposed this giveaway. The Treasury Secretary made the usual glib promises that this package would be used largely for debt relief and mortgage renegotiation. It was all a lie –which Mr. Paulson clearly knew to be a lie, because the terse three-page draft law he sent to Congress demanded that no government or law enforcement agency could punish financial lying under his program. The bankers took the money and ran. They used the money to pay themselves enormous bonuses and dividends to stockholders in a vain effort to support the stock price – and to buy smaller banks so as to create yet more giant financial conglomerates “too big to fail,” that is, too big to fail without bringing the entire U.S. financial system crashing down.


Unfortunately, a rush to judgment will give money to bankers irrecoverably. They then will do like U.S. Federal Reserve Chairman Ben Bernanke has done, and wring their hands and offer crocodile tears of apology. Such talk is costly! American voters are now angrier than ever at the government for voting this giveaway.


On national television on March 15, Mr. Bernanke used a false analogy already popularized by President Obama. He asked what people should do if an irresponsible smoker let his bed catch fire so that the house burn down. Should the neighbor say, “it’s his fault, let the house burn”? This would threaten the whole neighborhood, Mr. Bernanke said. The implication, he said, was that economic recovery required a strong banking and financial system.


But banking houses are not in the same neighborhood where most people live. In effect the United States is taking over houses that have not burned down, throwing out their owners and occupants to turn over to the culprits who burned down their own house. To Mr. Bernanke the “solution” to the debt problem is to get the banks lending again. They are to lend enough money so that their clients can borrow the money to pay them the stipulated interest charges. The aim is a return to “normalcy,” defined as new exponential growth in the volume of debt – more of the bubble economics that has just crashed all around us!



Iceland can lead the way


This clearly is not something that Iceland can afford. In fact, the United States cannot afford it either, as much real estate already has sunk into negative equity so that banks are not going to be willing to lend in any event. Fortunately, Iceland’s situation is so extreme that it may be saved even from the thought of creating yet new debt. It can face the financial problem and start to write down the debt overhead, to bring it in line with the economy’s ability to pay or in many cases simply write it off altogether.


First, Iceland needs to take a census of the magnitude of debts owed at home and abroad, and of the institutions to which these debts are owed. Second, it needs to assess the economy’s ability to pay these debts. This was the principle on which the world’s creditor nations founded the Bank for International Settlements in 1931, to assess Germany’s capacity to pay. Reference must be made both to the magnitude of debt relative to current price trends for the collateral supposedly backing this debt, and to the economy’s ability to produce a domestic-currency and foreign-exchange surplus over and above basic needs, including capital replenishment to grow at historical rates over time.


By insisting on a fully transparent financial analysis of who owes how much to whom, Iceland can toss the ball back into the creditors’ court and ask the bankers to explain just how they propose that Iceland should pay – and what they anticipate will be the economy-wide effect of such payment. How much can Iceland afford to pay in the next few years without losing its democratic home ownership and property ownership patterns and without abandoning its social democratic public policies? How can Iceland pay its debts without bankrupting itself, abandoning its social democracy and polarizing its hitherto homogeneous population between a tiny creditor oligarchy and the rest of the population? The island is in danger of creating a new ruling class that will control its destiny for the next century. Again, Adam Smith warned that financial oligarchies act with concern only for how much they can extract, not what they can help produce. They are not good forward planners and do not act responsibly because it is easier for creditors to strip assets than to create new capital.


In taking this position Iceland will simply be following the moral philosophy laid down by every major religion and every body of ancient and modern law as a core principle: the idea that credit must be kept within the ability to pay. It is obvious enough that global lenders have extended credit far beyond Iceland’s ability to pay. For over two centuries the United States has an excellent tradition in how to deal with this problem. Already in the colonial period New York State enacted the Fraudulent Conveyance law, which has remained on the books ever since New York joined the new nation. The problem it faced was British creditors and speculators coming to upstate New York to cheat local farmers out of their rich, well-situated land. The ploy was to extend a loan to a needy farmer, and then call it in just before harvest-time when the debtor lacked the money to pay. Alternatively, the speculator might simply lend more than the farmer could afford to pay even under normal conditions. So New York blocked this predatory practice by passing a law saying that if a bank or other creditor made a loan without knowing just how the debtor was to repay it, the loan would be declared null and void. It would be wiped off the books.


This law received considerable attention in the 1980s when Drexel Burnham and its emulators began providing junk-bond credit to corporate raiders. Companies defended themselves by pointing out that the only way that these high-interest bonds could be paid was by breaking up the target company and downsizing its labor force. But most of all, the law has international relevance. Most U.S. bank consortia have a New York City lead bank negotiate with Third World governments and other foreign borrowers. So far, none of these debtors have sought to annul their loans on the ground that the only way they can pay is to sell off their public enterprises and other government assets. But the enabling legislation is there, and provides an excellent model for Iceland to emulate. By pursuing this policy Iceland would achieve the kind of economic freedom defined by the classical economists – a market free of technologically unnecessary overhead charges, headed by surplus extraction by a vested oligarchy.


For financial interests, by contrast, their idea free market is one that leaves them free to do the economic planning “free” from government regulation and democratic constraint on their extractive, predatory credit and foreclosure practices. Wherever they have gained sway they have shrunk economies. Since the 1960s their proxies at the IMF and World Bank have imposed austerity programs on Third World countries, extending foreign-currency loans whose effect has been to make these countries more dependent and driven them even deeper into debt. In the post-Soviet economies since 1991, financial strategists have focused on prying away public enterprise, selling it off or using it as collateral for loans. The result of “financializing” these economies has been to provide a free field for predatory vested interests in league with globalized domestic financial oligarchies. In sum, the neoliberal model victimizes debtors, preventing them from paying their debts. Instead of funding new capital formation, it strips economies of their assets and empties them out. Ultimately this drags down the creditor economies themselves, as occurred in ancient Rome, medieval Spain, and the United States and Britain in the Great Depression (not to mention what is unfolding today).


Iceland is facing a bold con job. Should it feel obliged to pay countries that have no intention of ever paying their own debts? To get paid, creditors must convince their prey to accept the falsehood that debts can and indeed should be paid. The lie is that they can be paid without dismantling social democracy, selling off the public domain and polarizing society between creditors and debtors.


The point of reference should be Iceland’s broad long-term picture – the economy’s survival and growth prospects for the future. Foreign-currency loans should be denominated in domestic currency at written-down (and de-indexed) interest rates, or repudiated outright. The guiding principle should be to annul debts taken out under terms that are destructive and extractive.


As for the nitty-gritty of negotiating a resolution to Iceland’s debt crisis, the nation needs to re-frame the terms of the debate by removing fictitious assumptions that have no basis in reality. The first trammel of the mind is the assumption that Iceland needs to negotiate in a way that wins the creditors’ approval in a compromise. It is not possible for any fair agreement to be reached in this way. Any negotiation between creditors and debtors is adversarial, and creditors have spent many decades refining demagogic public relations ploys to divert attention to abstractions about “fairness.” A typical ploy is to ask whether it is fair for some debtors to receive larger write-offs than others. Is it fair for the most highly indebted individuals to gain the most – more than people who were more responsible? The aim here is to inflame popular resentment that some debtors will get a bigger write-off than others (and some debtors are indeed as as guilty as the perpetrators who sold them on the idea that home prices only go up), so as to blame the poor and most highly indebted rather than reckless creditors.


The real issue is the health of the overall economy. The parties seeking the most are not the most indebted individuals, but the largest creditors. Their aim is to increase their dominion over the rest of society. Above all, their aim is to maximize the power of debt over labor. The worse the economy does, the stronger the creditor position will grow. This is a recipe for economic suicide that will lead to outright debt peonage as domestic depression intensifies. Creditors everywhere else in the world are writing down their claims for payment to reflect plunging property values. Iceland has an opportunity to make itself a model test case for economic justice. What better time to post the basic principle of what is to be saved – an unsupportable debt burden that must collapse in the end, or a society’s survival? Will the government defend its citizens from financial predators, or turn the economy over to them? That is the question.



NOTES

[1] Floyd Norris, “The Problem? Bankers Point to the Rules,” The New York Times, March 13, 2009.

[2] Martin Wolf, “Big risks for the insurer of last resort,” Financial Times, March 6, 2009.

Iceland: Repudiate the Debt

The Anti-Empire Report April 4th, 2009

The Anti-Empire Report

April 4th, 2009
by William Blum
www.killinghope.org

Some thoughts about socialism

"History is littered with post-crisis regulations. If there are undue restrictions on the operations of businesses, they may view it to be their job to get around them, and you sow the seeds of the next crisis."
– Liz Ann Sonders, chief investment analyst, CharlesSchwab & Co., a leading US provider of investment services.1

And so it goes. Corporations, whether financial or not, strive to maximize profit as inevitably as water seeks its own level. We've been trying to "regulate" them since the 19th century. Or is it the 18th? Nothing helps for long. You close one loophole and the slime oozes out of another hole. Wall Street has not only an army of lawyers and accountants, but a horde of mathematicians with advanced degrees searching for the perfect equations to separate people from their money. After all the stimulus money has come and gone, after all the speeches by our leaders condemning greed and swearing to reforms, after the last congressional hearing deploring the corporate executives to their faces, the boys of Wall Street, shrugging off a few bruises, will resume churning out their assortment of financial entities, documents, and packages that go by names like hedge funds, derivatives, collateralized debt obligations, index funds, credit default swaps, structured investment vehicles, subprime mortgages, and many other pieces of paper with exotic names, for which, it must be kept in mind, there had been no public need or strident demand. Speculation, bonuses, and scotch will flow again, and the boys will be all the wiser, perhaps shaken a bit that they're so reviled, but knowing better now what to flaunt and what to disguise.

This is another reminder that communism or socialism have almost always been given just one chance to work, if that much, while capitalism has been given numerous chances to do so following its perennial fiascos. Ralph Nader has observed: "Capitalism will never fail because socialism will always be there to bail it out."

In the West, one of the most unfortunate results of the Cold War was that 70 years of anti-communist education and media stamped in people's minds a lasting association between socialism and what the Soviet Union called communism. Socialism meant a dictatorship, it meant Stalinist repression, a suffocating "command economy", no freedom of enterprise, no freedom to change jobs, few avenues for personal expression, and other similar truths and untruths. This is a set of beliefs clung to even amongst many Americans opposed to US foreign policy. No matter how bad the economy is, Americans think, the only alternative available is something called "communism", and they know how awful that is.

Adding to the purposeful confusion, the conservatives in England, for 30 years following the end of World War 2, filled the minds of the public with the idea that the Labour Party was socialist, and when recession hit (as it does regularly in capitalist countries) the public was then told, and believed, that "socialism had failed".

Yet, ever since the dissolution of the Soviet Union in 1991, polls taken in Russia have shown a nostalgia for the old system. In the latest example, "Russia Now", a Moscow publication that appears as a supplement in the Washington Post, asked Russians: "What socio-economic system do you favor?" The results were: "State planning and distribution": 58% ... "Based on private property and market relations": 28% ... "Hard to say": 14%.2

In 1994, Mark Brzezinski (son of Zbigniew) was a Fulbright Scholar teaching in Warsaw. He has written: "I asked my students to define democracy. Expecting a discussion on individual liberties and authentically elected institutions, I was surprised to hear my students respond that to them, democracy means a government obligation to maintain a certain standard of living and to provide health care, education and housing for all. In other words, socialism."3

Many Americans cannot go along with the notion of a planned, centralized society. To some extent it's the terminology that bothers them because they were raised to equate a planned society with the worst excesses of Stalinism. Okay, let's forget the scary labels; let's describe it as people sitting down to discuss a particular serious societal problem, what the available options there are to solve the problem, and what institutions and forces in the society have the best access, experience, and assets to deliver those options. So, the idea is to prepare these institutions and forces to deal with the problem in a highly organized, rational manner without having to worry about which corporation's profits might be adversely affected, without relying on "the magic of the marketplace". Now it happens that all this is usually called "planning" and if the organization and planning stem from a government body it can be called "centralized". There's no reason to assume that this has to result in some kind of very authoritarian regime. All of us over a certain age —individually and collectively — have learned a lot about such things from the past. We know the warning signs; that's why the Bush administration's authoritarianism was so early and so strongly condemned.

The overwhelming majority of people in the United States work for a salary. They don't need to be motivated by the quest for profit. It's not in our genes. Virtually everybody, if given the choice, would prefer to work at jobs where the main motivations are to produce goods and services that improve the quality of life of the society, to help others, and to provide themselves with meaningful and satisfying work. It's not natural to be primarily motivated by trying to win or steal "customers" from other people, no holds barred, survival of the fittest or the most ruthless.

A major war can be the supreme test of a nation, a time when it's put under the greatest stress. In World War 2, the US government commandeered the auto manufacturers to make tanks and jeeps instead of private cars. When a pressing need for an atom bomb was seen, Washington did not ask for bids from the private sector; it created the Manhattan Project to do it itself, with no concern for balance sheets or profit and loss statements. Women and blacks were given skilled factory jobs they had been traditionally denied. Hollywood was enlisted to make propaganda films. Indeed, much of the nation's activities, including farming, manufacturing, mining, communications, labor, education, and cultural undertakings were in some fashion brought under new and significant government control, with the war effort coming before private profit. In peacetime, we can think of socialism as putting people before profit, with all the basics guaranteed — health care, all education, decent housing, food, jobs. Those who swear by free enterprise argue that the "socialism" of World War 2 was instituted only because of the exigencies of the war. That's true, but it doesn't alter the key point that it had been immediately recognized by the government that the wasteful and inefficient capitalist system, always in need of proper financial care and feeding, was no way to run a country trying to win a war.

It's also no way to run a society of human beings with human needs. Most Americans agree with this but are not consciously aware that they hold such a belief. In 1987, nearly half of 1,004 Americans surveyed by the Hearst press believed Karl Marx's aphorism: "From each according to his ability, to each according to his need" was to be found in the US Constitution.4

Along these lines, I've written an essay entitled: "The United States invades, bombs, and kills for it, but do Americans really believe in free enterprise?"5

I cannot describe in detail what every nut and bolt of my socialist system would look like. That might appear rather pretentious on my part; most of it would evolve through trial and error anyway; the important thing is that the foundation — the crucial factors in making the important decisions — would rest on people's welfare and the common good coming before profit. Humankind's desperate need to halt environmental degradation regularly runs smack into the profit motive, as does the American health-care system. It's more than a matter of ideology; it's a matter of the quality of life, sustainability, and survival.

"Omission is the most powerful form of lie." – George Orwell

I am asked occasionally why I am so critical of the mainstream media when I quote from them repeatedly in my writings. The answer is simple. The American media's gravest shortcoming is much more their errors of omission than their errors of commission. It's what they leave out that distorts the news more than any factual errors or out-and-out lies. So I can make good use of the facts they report, which a large, rich organization can easier provide than the alternative media.

In early March, the Washington Post ran an article about Iran which stated that "Iranian leaders ... reiterated that the Holocaust was 'a lie'." The article then went on to add that Iranian president Mahmoud Ahmadinejad "repeated his assertion that the Holocaust is a 'big lie'."6 That's all we're told. What is the poor reader to conclude but that some Iranian leaders must be amongst that much vilified and ridiculed group called "Holocaust deniers"?

What the article fails to mention is that these Iranian leaders use the word "lie" to refer to only particular features of the Holocaust. There is no report of any of them simply, clearly, unambiguously, and unequivocally asserting that what we know as the Holocaust never took place. Ahmadinejad, for example, has instead commented about the peculiarity and injustice of a Holocaust which took place in Europe resulting in a state for the Jews in the Middle East instead of in Europe. Why are the Palestinians paying a price for a German crime? he asks. And he wonders about the accuracy of the number of Jews — six million — allegedly killed in the Holocaust, as have many other people of all political stripes and nationalities, including the noted Italian author Primo Levi, a Holocaust survivor. Even Mahmoud Abbas, President of the Palestinian National Authority — Israel and Washington's favorite Palestinian because of his opposition to Hamas, their least favored Palestinians — wrote in his doctoral dissertation: "The truth of the matter is that no one can verify this number, or completely deny it. In other words, the number of Jewish victims might be 6 million and might be much smaller — even less than 1 million."7

It is also worth noting that at the end of the Post article we learn that "a senior Israeli official in Washington, who spoke on the condition of anonymity because he was not cleared to discuss such matters publicly" has asserted that "Iran would be unlikely to use its missiles in an attack [against Israel] because of the certainty of retaliation." Really? That's what I and others have been saying for years. It should have been the story's headline, not the very last sentence, literally. Yet, we can be certain that Israeli and American officials and their disciples will continue to warn the world of the danger of Iranian missile attacks. So will the Washington Post, engaging in future omissions of its own news story.

What actually has long worried Israeli and US officials about possible Iranian nuclear weapons is not that Iran might attack anyone, but that Israel's beloved security blanket — being the only nuclear power in the Middle East — would be at risk, as might be Washington's dominance of the area.

Later in March, the Los Angeles Times ran an obituary of Janet Jagan, the former president of Guyana and widow of Cheddi Jagan who had earlier also been president. The obituary says not a word about the fact that for 11 years, 1953-64, two of the oldest democracies in the world, Great Britain and the United States, went to great lengths in their repeated attempts to prevent the democratically elected Cheddi Jagan from occupying his office.8

I've selected these examples of omission virtually at random. If I wanted to report on each media omission concerning significant US foreign policy matters I could fill this newsletter each month with nothing else.

It happens that in late March the Washington Post also provided us with the less common out-and-out lie. In an editorial about the leftist former guerillas in El Salvador, the FMLN, winning the presidential election with their candidate Mauricio Funes, the Post said: "If Mr. Funes as well as the election's losers now respect the rule of law, the result could be the consolidation of the political system the United States was aiming for when it intervened in El Salvador's civil war during the 1980s. At the time, the goal of a successful Salvadoran democracy was dismissed as a mission impossible, just as some now say democracy is unattainable in Iraq and Afghanistan."9

The idea that the US intervention in the Salvadoran civil war stemmed from a desire to bring democracy to the country is so breathtaking in its audacity that it's conceivable the Post editorial writer is suffering from early-stage Alzheimer's; it's wholly comparable to saying that the Apartheid regime of South Africa strove to increase harmony and equality between blacks and whites. In the process of supporting a Salvadoran government of remarkable tyranny, brutality and human-rights violations, the United States provided the country's armed forces with a never-ending supply of funds, weapons and training that brought continual destruction and suffering to the people of El Salvador. The Post's "disclosure" will not send historians scurrying to rewrite their books. Nor can it serve to conceal the fact that the United States is not fighting for "democracy" in Iraq and Afghanistan any more than it did in El Salvador.

The ideology of Barack Obama

In the past two months:

* US Vice President Joe Biden was asked by reporters at a summit in Chile if Washington plans to put an end to the near-50-year-old economic embargo against Cuba. He replied "No."10
* Israeli authorities broke up a series of Palestinian cultural events in Jerusalem, disrupting a children's march and bursting balloons at a schoolyard celebration.11 There has not been, nor will there be, any embargo of any kind by the United States against Israel. Nor will President Obama make any comment about what he really feels about invading a children's party and bursting their balloons.
* The White House and the Pentagon appear to be having a competition over who can announce the most troops being sent to Afghanistan. Is anyone keeping a body count?
* US drones continue to drop bombs on people's homes and wedding parties in Pakistan. No one in Washington publicly admits to this or comments in any way about the legality or morality of it all.
* Bolivia and Ecuador have expelled American diplomats for what their hosts saw as conspiring to undermine the government.

Any number of other examples can be given of how alike the foreign policies of the Bush and Obama administrations are, how little, if any, change has occurred; certainly nothing of any significance. Yet, my saying such a thing is precisely what most often bothers Obama supporters who read or hear my comments. They're in love with the man with the toothpaste-advertisement smile, who's "smart" (whatever that means), who plays basketball, and is not George W. Bush, and his wife who puts her arm around the queen of England.

Obama's popularity around the world is enhanced, to an important extent, by the fact that he has endeavored to conceal or obscure his real ideology. As an example, in early March, in an interview with the New York Times, he was asked: "Is there a one word name for your philosophy? If you're not a socialist, are you a liberal? Are you progressive? One word?"

"No, I'm not going to engage in that," replied the president.12

The next day he called the Times reporter, telling him: "It was hard for me to believe that you were entirely serious about that socialist question". Obama then gave the reporter several examples of why his policies show that he isn't a socialist.13

He didn't have to convince me. Obama's centrist bent is clear to anyone who bothers to look. But after the Times incident — which apparently bothered him — he may have felt the need to be more clear about his ideological leanings to avoid any further silly "socialist" episodes. The next day, meeting at the White House with members of the New Democrat Coalition, a group of centrist Democratic members of the House, Obama said at one point: "I am a New Democrat."14

Most conservatives will probably continue to see him as a dangerous leftist. They should be happy that Obama is the president and not any kind of real progressive or socialist or even a genuine liberal, but the right wing is greedy.
Notes

1. Washington Post, March 29, 2009 ↩
2. "Russia Now", in Washington Post, March 25, 2009 ↩
3. Los Angeles Times, September 2, 1994 ↩
4. Frank Bernack, Jr., Hearst Corp. President, address to the American Bar Association, early 1987, reported in In These Times magazine (Chicago), June 24 - July 7, 1987 ↩
5. William Blum, "Rogue State: A Guide to the World's Only Superpower", chapter 26 ↩
6. Washington Post, March 5, 2009 ↩
7. The Middle East Media Research Institute, "Inquiry and Analysis", No. 95, May 30, 2002; also see Wikipedia, entry for Mahmoud Abbas, "Doctoral Dissertation" section. ↩
8. Los Angeles Times, March 29, 2009. See William Blum, "Killing Hope: US Military and CIA Interventions Since World War II", chapter 16 for what was left out. ↩
9. Washington Post, March 21, 2009 ↩
10. Miami Herald, March 28, 2009 ↩
11. Washington Post, March 22, 2009 ↩
12. New York Times, March 7, 2009 ↩
13. New York Times, March 8 2009 ↩
14. Politico magazine, online, March 10, 2009 ↩

–

William Blum is the author of:

* Killing Hope: US Military and CIA Interventions Since World War 2
* Rogue State: A Guide to the World's Only Superpower
* West-Bloc Dissident: A Cold War Memoir
* Freeing the World to Death: Essays on the American Empire

Portions of the books can be read, and signed copies purchased, at www.killinghope.org

Previous Anti-Empire Reports can be read at this website.

To add yourself to this mailing list simply send an email to bblum6@aol.com with "add" in the subject line. I'd like your name and city in the message, but that's optional. I ask for your city only in case I'll be speaking in your area.

(Or put "remove" in the subject line to do the opposite.)

Any part of this report may be disseminated without permission. I'd appreciate it if the website were mentioned.

The Anti-Empire Report

April 4th, 2009
by William Blum
www.killinghope.org

Some thoughts about socialism

"History is littered with post-crisis regulations. If there are undue restrictions on the operations of businesses, they may view it to be their job to get around them, and you sow the seeds of the next crisis."
– Liz Ann Sonders, chief investment analyst, CharlesSchwab & Co., a leading US provider of investment services.1

And so it goes. Corporations, whether financial or not, strive to maximize profit as inevitably as water seeks its own level. We've been trying to "regulate" them since the 19th century. Or is it the 18th? Nothing helps for long. You close one loophole and the slime oozes out of another hole. Wall Street has not only an army of lawyers and accountants, but a horde of mathematicians with advanced degrees searching for the perfect equations to separate people from their money. After all the stimulus money has come and gone, after all the speeches by our leaders condemning greed and swearing to reforms, after the last congressional hearing deploring the corporate executives to their faces, the boys of Wall Street, shrugging off a few bruises, will resume churning out their assortment of financial entities, documents, and packages that go by names like hedge funds, derivatives, collateralized debt obligations, index funds, credit default swaps, structured investment vehicles, subprime mortgages, and many other pieces of paper with exotic names, for which, it must be kept in mind, there had been no public need or strident demand. Speculation, bonuses, and scotch will flow again, and the boys will be all the wiser, perhaps shaken a bit that they're so reviled, but knowing better now what to flaunt and what to disguise.

This is another reminder that communism or socialism have almost always been given just one chance to work, if that much, while capitalism has been given numerous chances to do so following its perennial fiascos. Ralph Nader has observed: "Capitalism will never fail because socialism will always be there to bail it out."

In the West, one of the most unfortunate results of the Cold War was that 70 years of anti-communist education and media stamped in people's minds a lasting association between socialism and what the Soviet Union called communism. Socialism meant a dictatorship, it meant Stalinist repression, a suffocating "command economy", no freedom of enterprise, no freedom to change jobs, few avenues for personal expression, and other similar truths and untruths. This is a set of beliefs clung to even amongst many Americans opposed to US foreign policy. No matter how bad the economy is, Americans think, the only alternative available is something called "communism", and they know how awful that is.

Adding to the purposeful confusion, the conservatives in England, for 30 years following the end of World War 2, filled the minds of the public with the idea that the Labour Party was socialist, and when recession hit (as it does regularly in capitalist countries) the public was then told, and believed, that "socialism had failed".

Yet, ever since the dissolution of the Soviet Union in 1991, polls taken in Russia have shown a nostalgia for the old system. In the latest example, "Russia Now", a Moscow publication that appears as a supplement in the Washington Post, asked Russians: "What socio-economic system do you favor?" The results were: "State planning and distribution": 58% ... "Based on private property and market relations": 28% ... "Hard to say": 14%.2

In 1994, Mark Brzezinski (son of Zbigniew) was a Fulbright Scholar teaching in Warsaw. He has written: "I asked my students to define democracy. Expecting a discussion on individual liberties and authentically elected institutions, I was surprised to hear my students respond that to them, democracy means a government obligation to maintain a certain standard of living and to provide health care, education and housing for all. In other words, socialism."3

Many Americans cannot go along with the notion of a planned, centralized society. To some extent it's the terminology that bothers them because they were raised to equate a planned society with the worst excesses of Stalinism. Okay, let's forget the scary labels; let's describe it as people sitting down to discuss a particular serious societal problem, what the available options there are to solve the problem, and what institutions and forces in the society have the best access, experience, and assets to deliver those options. So, the idea is to prepare these institutions and forces to deal with the problem in a highly organized, rational manner without having to worry about which corporation's profits might be adversely affected, without relying on "the magic of the marketplace". Now it happens that all this is usually called "planning" and if the organization and planning stem from a government body it can be called "centralized". There's no reason to assume that this has to result in some kind of very authoritarian regime. All of us over a certain age —individually and collectively — have learned a lot about such things from the past. We know the warning signs; that's why the Bush administration's authoritarianism was so early and so strongly condemned.

The overwhelming majority of people in the United States work for a salary. They don't need to be motivated by the quest for profit. It's not in our genes. Virtually everybody, if given the choice, would prefer to work at jobs where the main motivations are to produce goods and services that improve the quality of life of the society, to help others, and to provide themselves with meaningful and satisfying work. It's not natural to be primarily motivated by trying to win or steal "customers" from other people, no holds barred, survival of the fittest or the most ruthless.

A major war can be the supreme test of a nation, a time when it's put under the greatest stress. In World War 2, the US government commandeered the auto manufacturers to make tanks and jeeps instead of private cars. When a pressing need for an atom bomb was seen, Washington did not ask for bids from the private sector; it created the Manhattan Project to do it itself, with no concern for balance sheets or profit and loss statements. Women and blacks were given skilled factory jobs they had been traditionally denied. Hollywood was enlisted to make propaganda films. Indeed, much of the nation's activities, including farming, manufacturing, mining, communications, labor, education, and cultural undertakings were in some fashion brought under new and significant government control, with the war effort coming before private profit. In peacetime, we can think of socialism as putting people before profit, with all the basics guaranteed — health care, all education, decent housing, food, jobs. Those who swear by free enterprise argue that the "socialism" of World War 2 was instituted only because of the exigencies of the war. That's true, but it doesn't alter the key point that it had been immediately recognized by the government that the wasteful and inefficient capitalist system, always in need of proper financial care and feeding, was no way to run a country trying to win a war.

It's also no way to run a society of human beings with human needs. Most Americans agree with this but are not consciously aware that they hold such a belief. In 1987, nearly half of 1,004 Americans surveyed by the Hearst press believed Karl Marx's aphorism: "From each according to his ability, to each according to his need" was to be found in the US Constitution.4

Along these lines, I've written an essay entitled: "The United States invades, bombs, and kills for it, but do Americans really believe in free enterprise?"5

I cannot describe in detail what every nut and bolt of my socialist system would look like. That might appear rather pretentious on my part; most of it would evolve through trial and error anyway; the important thing is that the foundation — the crucial factors in making the important decisions — would rest on people's welfare and the common good coming before profit. Humankind's desperate need to halt environmental degradation regularly runs smack into the profit motive, as does the American health-care system. It's more than a matter of ideology; it's a matter of the quality of life, sustainability, and survival.

"Omission is the most powerful form of lie." – George Orwell

I am asked occasionally why I am so critical of the mainstream media when I quote from them repeatedly in my writings. The answer is simple. The American media's gravest shortcoming is much more their errors of omission than their errors of commission. It's what they leave out that distorts the news more than any factual errors or out-and-out lies. So I can make good use of the facts they report, which a large, rich organization can easier provide than the alternative media.

In early March, the Washington Post ran an article about Iran which stated that "Iranian leaders ... reiterated that the Holocaust was 'a lie'." The article then went on to add that Iranian president Mahmoud Ahmadinejad "repeated his assertion that the Holocaust is a 'big lie'."6 That's all we're told. What is the poor reader to conclude but that some Iranian leaders must be amongst that much vilified and ridiculed group called "Holocaust deniers"?

What the article fails to mention is that these Iranian leaders use the word "lie" to refer to only particular features of the Holocaust. There is no report of any of them simply, clearly, unambiguously, and unequivocally asserting that what we know as the Holocaust never took place. Ahmadinejad, for example, has instead commented about the peculiarity and injustice of a Holocaust which took place in Europe resulting in a state for the Jews in the Middle East instead of in Europe. Why are the Palestinians paying a price for a German crime? he asks. And he wonders about the accuracy of the number of Jews — six million — allegedly killed in the Holocaust, as have many other people of all political stripes and nationalities, including the noted Italian author Primo Levi, a Holocaust survivor. Even Mahmoud Abbas, President of the Palestinian National Authority — Israel and Washington's favorite Palestinian because of his opposition to Hamas, their least favored Palestinians — wrote in his doctoral dissertation: "The truth of the matter is that no one can verify this number, or completely deny it. In other words, the number of Jewish victims might be 6 million and might be much smaller — even less than 1 million."7

It is also worth noting that at the end of the Post article we learn that "a senior Israeli official in Washington, who spoke on the condition of anonymity because he was not cleared to discuss such matters publicly" has asserted that "Iran would be unlikely to use its missiles in an attack [against Israel] because of the certainty of retaliation." Really? That's what I and others have been saying for years. It should have been the story's headline, not the very last sentence, literally. Yet, we can be certain that Israeli and American officials and their disciples will continue to warn the world of the danger of Iranian missile attacks. So will the Washington Post, engaging in future omissions of its own news story.

What actually has long worried Israeli and US officials about possible Iranian nuclear weapons is not that Iran might attack anyone, but that Israel's beloved security blanket — being the only nuclear power in the Middle East — would be at risk, as might be Washington's dominance of the area.

Later in March, the Los Angeles Times ran an obituary of Janet Jagan, the former president of Guyana and widow of Cheddi Jagan who had earlier also been president. The obituary says not a word about the fact that for 11 years, 1953-64, two of the oldest democracies in the world, Great Britain and the United States, went to great lengths in their repeated attempts to prevent the democratically elected Cheddi Jagan from occupying his office.8

I've selected these examples of omission virtually at random. If I wanted to report on each media omission concerning significant US foreign policy matters I could fill this newsletter each month with nothing else.

It happens that in late March the Washington Post also provided us with the less common out-and-out lie. In an editorial about the leftist former guerillas in El Salvador, the FMLN, winning the presidential election with their candidate Mauricio Funes, the Post said: "If Mr. Funes as well as the election's losers now respect the rule of law, the result could be the consolidation of the political system the United States was aiming for when it intervened in El Salvador's civil war during the 1980s. At the time, the goal of a successful Salvadoran democracy was dismissed as a mission impossible, just as some now say democracy is unattainable in Iraq and Afghanistan."9

The idea that the US intervention in the Salvadoran civil war stemmed from a desire to bring democracy to the country is so breathtaking in its audacity that it's conceivable the Post editorial writer is suffering from early-stage Alzheimer's; it's wholly comparable to saying that the Apartheid regime of South Africa strove to increase harmony and equality between blacks and whites. In the process of supporting a Salvadoran government of remarkable tyranny, brutality and human-rights violations, the United States provided the country's armed forces with a never-ending supply of funds, weapons and training that brought continual destruction and suffering to the people of El Salvador. The Post's "disclosure" will not send historians scurrying to rewrite their books. Nor can it serve to conceal the fact that the United States is not fighting for "democracy" in Iraq and Afghanistan any more than it did in El Salvador.

The ideology of Barack Obama

In the past two months:

* US Vice President Joe Biden was asked by reporters at a summit in Chile if Washington plans to put an end to the near-50-year-old economic embargo against Cuba. He replied "No."10
* Israeli authorities broke up a series of Palestinian cultural events in Jerusalem, disrupting a children's march and bursting balloons at a schoolyard celebration.11 There has not been, nor will there be, any embargo of any kind by the United States against Israel. Nor will President Obama make any comment about what he really feels about invading a children's party and bursting their balloons.
* The White House and the Pentagon appear to be having a competition over who can announce the most troops being sent to Afghanistan. Is anyone keeping a body count?
* US drones continue to drop bombs on people's homes and wedding parties in Pakistan. No one in Washington publicly admits to this or comments in any way about the legality or morality of it all.
* Bolivia and Ecuador have expelled American diplomats for what their hosts saw as conspiring to undermine the government.

Any number of other examples can be given of how alike the foreign policies of the Bush and Obama administrations are, how little, if any, change has occurred; certainly nothing of any significance. Yet, my saying such a thing is precisely what most often bothers Obama supporters who read or hear my comments. They're in love with the man with the toothpaste-advertisement smile, who's "smart" (whatever that means), who plays basketball, and is not George W. Bush, and his wife who puts her arm around the queen of England.

Obama's popularity around the world is enhanced, to an important extent, by the fact that he has endeavored to conceal or obscure his real ideology. As an example, in early March, in an interview with the New York Times, he was asked: "Is there a one word name for your philosophy? If you're not a socialist, are you a liberal? Are you progressive? One word?"

"No, I'm not going to engage in that," replied the president.12

The next day he called the Times reporter, telling him: "It was hard for me to believe that you were entirely serious about that socialist question". Obama then gave the reporter several examples of why his policies show that he isn't a socialist.13

He didn't have to convince me. Obama's centrist bent is clear to anyone who bothers to look. But after the Times incident — which apparently bothered him — he may have felt the need to be more clear about his ideological leanings to avoid any further silly "socialist" episodes. The next day, meeting at the White House with members of the New Democrat Coalition, a group of centrist Democratic members of the House, Obama said at one point: "I am a New Democrat."14

Most conservatives will probably continue to see him as a dangerous leftist. They should be happy that Obama is the president and not any kind of real progressive or socialist or even a genuine liberal, but the right wing is greedy.
Notes

1. Washington Post, March 29, 2009 ↩
2. "Russia Now", in Washington Post, March 25, 2009 ↩
3. Los Angeles Times, September 2, 1994 ↩
4. Frank Bernack, Jr., Hearst Corp. President, address to the American Bar Association, early 1987, reported in In These Times magazine (Chicago), June 24 - July 7, 1987 ↩
5. William Blum, "Rogue State: A Guide to the World's Only Superpower", chapter 26 ↩
6. Washington Post, March 5, 2009 ↩
7. The Middle East Media Research Institute, "Inquiry and Analysis", No. 95, May 30, 2002; also see Wikipedia, entry for Mahmoud Abbas, "Doctoral Dissertation" section. ↩
8. Los Angeles Times, March 29, 2009. See William Blum, "Killing Hope: US Military and CIA Interventions Since World War II", chapter 16 for what was left out. ↩
9. Washington Post, March 21, 2009 ↩
10. Miami Herald, March 28, 2009 ↩
11. Washington Post, March 22, 2009 ↩
12. New York Times, March 7, 2009 ↩
13. New York Times, March 8 2009 ↩
14. Politico magazine, online, March 10, 2009 ↩

–

William Blum is the author of:

* Killing Hope: US Military and CIA Interventions Since World War 2
* Rogue State: A Guide to the World's Only Superpower
* West-Bloc Dissident: A Cold War Memoir
* Freeing the World to Death: Essays on the American Empire

Portions of the books can be read, and signed copies purchased, at www.killinghope.org

Previous Anti-Empire Reports can be read at this website.

To add yourself to this mailing list simply send an email to bblum6@aol.com with "add" in the subject line. I'd like your name and city in the message, but that's optional. I ask for your city only in case I'll be speaking in your area.

(Or put "remove" in the subject line to do the opposite.)

Any part of this report may be disseminated without permission. I'd appreciate it if the website were mentioned.

The Anti-Empire Report April 4th, 2009

A criminally stupid war on drugs in the US

Financial Times:

How much misery can a policy cause before it is acknowledged as a failure and reversed? The US “war on drugs” suggests there is no upper limit. The country’s implacable blend of prohibition and punitive criminal justice is wrong-headed in every way: immoral in principle, since it prosecutes victimless crimes, and in practice a disaster of remarkable proportions. Yet for a US politician to suggest wholesale reform of this brainless regime is still seen as an act of reckless self-harm.

Even a casual observer can see that much of the damage done in the US by illegal drugs is a result of the fact that they are illegal, not the fact that they are drugs. Vastly more lives are blighted by the brutality of prohibition, and by the enormous criminal networks it has created, than by the substances themselves. This is true of cocaine and heroin as well as of soft drugs such as marijuana. But the assault on consumption of marijuana sets the standard for the policy’s stupidity.

I think there are two special factors which make it hard for drug law reform: the simply colossal sums of money involved, all of which by definition supports massive corruption across the world; and the involvement of secret police and intelligence agencies in drug trafficking, as a source of covert revenue.

But of course drug prohibition should be completely abandoned. A better response to the problem of drug and substance abuse is a regime of taxation, regulation and education.

Financial Times:

How much misery can a policy cause before it is acknowledged as a failure and reversed? The US “war on drugs” suggests there is no upper limit. The country’s implacable blend of prohibition and punitive criminal justice is wrong-headed in every way: immoral in principle, since it prosecutes victimless crimes, and in practice a disaster of remarkable proportions. Yet for a US politician to suggest wholesale reform of this brainless regime is still seen as an act of reckless self-harm.

Even a casual observer can see that much of the damage done in the US by illegal drugs is a result of the fact that they are illegal, not the fact that they are drugs. Vastly more lives are blighted by the brutality of prohibition, and by the enormous criminal networks it has created, than by the substances themselves. This is true of cocaine and heroin as well as of soft drugs such as marijuana. But the assault on consumption of marijuana sets the standard for the policy’s stupidity.

I think there are two special factors which make it hard for drug law reform: the simply colossal sums of money involved, all of which by definition supports massive corruption across the world; and the involvement of secret police and intelligence agencies in drug trafficking, as a source of covert revenue.

But of course drug prohibition should be completely abandoned. A better response to the problem of drug and substance abuse is a regime of taxation, regulation and education.

A criminally stupid war on drugs in the US

Turnbull attacks Ruddnet

Using the unquestioned dogma of neo-classical economics, that if the private sector can't finance it or make a profit out of it, it should not be built, Opposition Leader Turnbull criticises the Ruddnet:

MALCOLM Turnbull has likened Kevin Rudd's $43 billion high-speed broadband plan to the failed business case for Sydney's Cross City Tunnel, which cost nearly $1 billion to build but went broke, with shareholders losing their investment.

The Opposition Leader writes in The Australian today that just as the tunnel venture went broke because of "wildly optimistic" traffic assumptions, the Prime Minister's failure to research the business case for the broadband venture could produce a catastrophe for taxpayers.

Time for a paradigm shift: the function of government is to build infrastructure, and it should not be operated for a profit. Its purpose is to provide a benefit.

Rudd proposes to fund the Ruddnet by issuing bonds but in my view a better funding method would be rating land values. Infrastructure creates land value and thus the economic surplus or economic rent is the ideal and natural source of funding for infrastructure investment. Pricing of the service once built should follow what's been called 'marginal cost pricing', ie price it cheaply or even make it free to encourage maximum usage and takeup. All of this of course is nearly the exact opposite of the neo-liberal, neo-classical cult of "privatize and deregulate and let the market supply the cargo" (in spite of the fact as Turnbull admits in regards both to the Ruddnet and the cross city tunnel) that the cargo will not arrive.

Using the unquestioned dogma of neo-classical economics, that if the private sector can't finance it or make a profit out of it, it should not be built, Opposition Leader Turnbull criticises the Ruddnet:

MALCOLM Turnbull has likened Kevin Rudd's $43 billion high-speed broadband plan to the failed business case for Sydney's Cross City Tunnel, which cost nearly $1 billion to build but went broke, with shareholders losing their investment.

The Opposition Leader writes in The Australian today that just as the tunnel venture went broke because of "wildly optimistic" traffic assumptions, the Prime Minister's failure to research the business case for the broadband venture could produce a catastrophe for taxpayers.

Time for a paradigm shift: the function of government is to build infrastructure, and it should not be operated for a profit. Its purpose is to provide a benefit.

Rudd proposes to fund the Ruddnet by issuing bonds but in my view a better funding method would be rating land values. Infrastructure creates land value and thus the economic surplus or economic rent is the ideal and natural source of funding for infrastructure investment. Pricing of the service once built should follow what's been called 'marginal cost pricing', ie price it cheaply or even make it free to encourage maximum usage and takeup. All of this of course is nearly the exact opposite of the neo-liberal, neo-classical cult of "privatize and deregulate and let the market supply the cargo" (in spite of the fact as Turnbull admits in regards both to the Ruddnet and the cross city tunnel) that the cargo will not arrive.

Turnbull attacks Ruddnet

Broadband Infrastruture: Govt does the right thing!

A lot of people seem to be responding with surprise the Federal Government's announcement that it will itself build a nationwide Fibre to the Premises (FTTP) broadband network.

It's telling for me that one of the most basic functions of government - to build and maintain physical infrastructure that is in the nature of a natural monopoly - is so neglected that the right decision comes as a surprise. Neo-classical economics (which declares the cargo cult of the market will provide) and neo-liberalism (which loudly says privatize and let the chaos of the market rule) have conspired with both major parties to nearly eliminate Government's basic role.

T-Cwp infrastructure (transport, communications, water, power) can and should be funded by land revenue as well. See how much 'property values' are worth when every bridge has been bombed, every road potholed, every telecommunications exchange, power generation and water sanitation plant destroyed as we did in Iraq.

That's one thing that could be said for neoliberal/neoconservative ideology: they dont know how to fund and build infrastructure but they sure know how to wreck it.

One can compare this decision to the brain dead decision of earlier years to allow 'competing' telecommunications companies to run two cables down some streets but none down others. Almost incredible that such stupidity would be allowed to actually materialize, but it did.

The government's decision raises some rather obvious issues: it was a mistake to privatize Telstra (the monopoloy carrier) in the first place; so why do they insist of also privatizing the new network once it is built? Time to re-embrace public ownership. Infrastructure is not for 'profit', its for public benefit. The charges should the least that can be done to build and maintain the network to the desired standard. And instead of selling 'Aussie Infrastructure Bonds' to finance it (not a bad idea in itself), why not raise revenue from land rates? (see above re property values). Here's the slogan: T-CWP by LR.

There's a deal of interesting commentary on this decision, mostly positive:

Crikey: Packer would have stopped it

End of the Copper Monopoly

Australia to lead the world at something good

Shiny New Network

Government got it right

The people on whirlpool have got some interesting comments

A lot of people seem to be responding with surprise the Federal Government's announcement that it will itself build a nationwide Fibre to the Premises (FTTP) broadband network.

It's telling for me that one of the most basic functions of government - to build and maintain physical infrastructure that is in the nature of a natural monopoly - is so neglected that the right decision comes as a surprise. Neo-classical economics (which declares the cargo cult of the market will provide) and neo-liberalism (which loudly says privatize and let the chaos of the market rule) have conspired with both major parties to nearly eliminate Government's basic role.

T-Cwp infrastructure (transport, communications, water, power) can and should be funded by land revenue as well. See how much 'property values' are worth when every bridge has been bombed, every road potholed, every telecommunications exchange, power generation and water sanitation plant destroyed as we did in Iraq.

That's one thing that could be said for neoliberal/neoconservative ideology: they dont know how to fund and build infrastructure but they sure know how to wreck it.

One can compare this decision to the brain dead decision of earlier years to allow 'competing' telecommunications companies to run two cables down some streets but none down others. Almost incredible that such stupidity would be allowed to actually materialize, but it did.

The government's decision raises some rather obvious issues: it was a mistake to privatize Telstra (the monopoloy carrier) in the first place; so why do they insist of also privatizing the new network once it is built? Time to re-embrace public ownership. Infrastructure is not for 'profit', its for public benefit. The charges should the least that can be done to build and maintain the network to the desired standard. And instead of selling 'Aussie Infrastructure Bonds' to finance it (not a bad idea in itself), why not raise revenue from land rates? (see above re property values). Here's the slogan: T-CWP by LR.

There's a deal of interesting commentary on this decision, mostly positive:

Crikey: Packer would have stopped it

End of the Copper Monopoly

Australia to lead the world at something good

Shiny New Network

Government got it right

The people on whirlpool have got some interesting comments

Broadband Infrastruture: Govt does the right thing!

More on Ayn Rand

More on the horror that is (or was) Ayn Rand. Amazingly, it's even worse than many of us have long thought.

Admiring the Psychopath

In her defence it's claimed she was 'still under the spell of Nietzsche' - but this is a perverted, distorted, Nazi-like Nietzsche, no doubt very popular in the heyday of fascism and nazism. (And despite a setback involving a bullet to the hero's head, still rather more popular than many people want to admit.)

It's awfully telling that the right promoted Rand as a 'philosopher'. Between her, the anti-evolutionists, Strauss and the neocons, and the AGW deniers, there's some powerful thought, isn't there?

"At this point in my life, I did not think it was possible to significantly lower my estimate of Ayn Rand, or to regard her as even more of a psychological and moral mess than I had already taken her to be."

"-- There are two novels that can change a bookish fourteen-year old's life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs."

More on the horror that is (or was) Ayn Rand. Amazingly, it's even worse than many of us have long thought.

Admiring the Psychopath

In her defence it's claimed she was 'still under the spell of Nietzsche' - but this is a perverted, distorted, Nazi-like Nietzsche, no doubt very popular in the heyday of fascism and nazism. (And despite a setback involving a bullet to the hero's head, still rather more popular than many people want to admit.)

It's awfully telling that the right promoted Rand as a 'philosopher'. Between her, the anti-evolutionists, Strauss and the neocons, and the AGW deniers, there's some powerful thought, isn't there?

"At this point in my life, I did not think it was possible to significantly lower my estimate of Ayn Rand, or to regard her as even more of a psychological and moral mess than I had already taken her to be."

"-- There are two novels that can change a bookish fourteen-year old's life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs."

More on Ayn Rand

Does the US Face G20 Mutiny? Financing the Empire

By MICHAEL HUDSON

I am travelling in Europe for three weeks to discuss the global financial crisis with government officials, politicians and labor leaders. What is most remarkable is how differently the financial problem is perceived over here. It’s like being in another economic universe, not just another continent.

The U.S. media are silent about the most important topic policy makers are discussing here (and I suspect in Asia too): how to protect their countries from three inter-related dynamics:

(1) the surplus dollars pouring into the rest of the world for yet further financial speculation and corporate takeovers;

(2) the fact that central banks are obliged to recycle these dollar inflows to buy U.S. Treasury bonds to finance the federal U.S. budget deficit; and most important (but most suppressed in the U.S. media,

(3) the military character of the U.S. payments deficit and the domestic federal budget deficit.

Strange as it may seem – and irrational as it would be in a more logical system of world diplomacy – the “dollar glut” is what finances America’s global military build-up. It forces foreign central banks to bear the costs of America’s expanding military empire – effective “taxation without representation.” Keeping international reserves in “dollars” means recycling their dollar inflows to buy U.S. Treasury bills – U.S. government debt issued largely to finance the military.

To date, countries have been as powerless to defend themselves against the fact that this compulsory financing of U.S. military spending is built into the global financial system. Neoliberal economists applaud this as “equilibrium,” as if it is part of economic nature and “free markets” rather than bare-knuckle diplomacy wielded with increasing aggressiveness by U.S. officials. The mass media chime in, pretending that recycling the dollar glut to finance U.S. military spending is “showing their faith in U.S. economic strength” by sending “their” dollars here to “invest.” It is as if a choice is involved, not financial and diplomatic compulsion to choose merely between “Yes” (from China, reluctantly), “Yes, please” (from Japan and the European Union) and “Yes, thank you” (Britain, Georgia and Australia).

It is not “foreign faith in the U.S. economy” that leads foreigners to “put their money here.” That’s a silly cartoon of a more sinister dynamic. The “foreigners” in question are not consumers buying U.S. exports, nor are they private-sector “investors” buying U.S. stocks and bonds. The largest and most important foreign entities putting “their money” here are central banks, and it is not “their money” at all. They are sending back the dollars that foreign exporters and other recipients turn over to their central banks for domestic currency.

When the U.S. payments deficit pumps dollars into foreign economies, these banks are being given little option except to buy U.S. Treasury bills and bonds – which the Treasury spends on financing an enormous, hostile military build-up to encircle the major dollar-recyclers – China, Japan and Arab OPEC oil producers. Yet these governments are forced to recycle dollar inflows in a way that funds U.S. military policies in which they have no say in formulating, and which threaten them more and more belligerently. That is why China and Russia took the lead in forming the Shanghai Cooperation Organization (SCO) a few years ago.

Here in Europe there is a clear awareness that the U.S. payments deficit is much larger than just the trade deficit. One need merely look at Table 5 of the U.S. balance-of-payments data compiled by the Bureau of Economic Analysis (BEA) and published by the Dept. of Commerce in its Survey of Current Business to see that the deficit does not stem merely from consumers buying more imports than the United States exports as the financial sector de-industrializes its economy. U.S. imports are now plunging as the economy shrinks and consumers are now finding themselves obliged to pay down the debts they have taken on.

Congress has told foreign investors in the largest dollar holder, China, not to buy anything except perhaps used-car dealerships and maybe more packaged mortgages and Fannie Mae stock – the equivalent of Japanese investors being steered into spending $1 billion for Rockefeller Center, on which they subsequently took a 100 per cent loss, and Saudi investment in Citigroup. That’s the kind of “international equilibrium” that U.S. officials love to see. “CNOOK go home” is the motto when it comes to serious attempts by foreign governments and their sovereign wealth funds (central bank departments trying to figure out what to do with their dollar glut) to make direct investments in American industry.

So we are left with the extent to which the U.S. payments deficit stems from military spending. The problem is not only the war in Iraq, now being extended to Afghanistan and Pakistan. It is the expensive build-up of U.S. military bases in Asian, European, post-Soviet and Third World countries. The Obama administration has promised to make the actual amount of this military spending more transparent. That presumably means publishing a revised set of balance of payments figures as well as domestic federal budget statistics.

The military overhead is much like a debt overhead, extracting revenue from the economy. In this case it is to pay the military-industrial complex, not merely Wall Street banks and other financial institutions. The domestic federal budget deficit does not stem only from “priming the pump” to give away enormous sums to create a new financial oligarchy. It contains an enormous and rapidly growing military component.

So Europeans and Asians see U.S. companies pumping more and more dollars into their economies. Not just to buy their exports in excess of providing them with goods and services in return; not just to buy their companies and “commanding heights” of privatized public enterprises without giving them reciprocal rights to buy important U.S. companies (remember the U.S. turn-down of China’s attempt to buy into the U.S. oil distribution business); not just to buy foreign stocks, bonds and real estate. The U.S. media somehow neglect to mention that the U.S. government is spending hundreds of billions of dollars abroad – not only in the Near East for direct combat, but to build enormous military bases to encircle the rest of the world, to install radar systems, guided missile systems and other forms of military coercion, including the “color revolutions” that have been funded – and are still being funded – all around the former Soviet Union.

Pallets of shrink-wrapped $100 bills adding up to tens of millions of the dollars at a time have become familiar “visuals” on some TV broadcasts, but the link is not made with U.S. military and diplomatic spending and foreign central-bank dollar holdings, which are reported simply as “wonderful faith in the U.S. economic recovery” and presumably the “monetary magic” being worked by Wall Street’s Tim Geithner at Treasury and Helicopter Ben Bernanke at the Federal Reserve.

Here’s the problem: The Coca Cola company recently tried to buy China’s largest fruit-juice producer and distributor. China already holds nearly $2 trillion in U.S. securities – way more than it needs or can use, inasmuch as the United States government refuses to let it buy meaningful U.S. companies. If the U.S. buyout would have been permitted to go through, this would have confronted China with a dilemma: Choice #1 would be to let the sale go through and accept payment in dollars, reinvesting them in what the U.S. Treasury tells it to do – U.S. Treasury bonds yielding about 1 per cent. China would take a capital loss on these when U.S. interest rates rise or when the dollar declines as the United States alone is pursuing expansionary Keynesian policies in an attempt to enable the U.S. economy to carry its debt overhead.

Choice #2 is not to recycle the dollar inflows. This would lead the renminbi to rise against the dollar, thereby eroding China’s export competitiveness in world markets. So China chose a third way, which brought U.S. protests. It turned the sale of its tangible company for merely “paper” U.S. dollars – which went with the “choice” to fund further U.S. military encirclement of the Shanghai Cooperative Agreement. The only people who seem not to be drawing this connection are the American mass media, and hence public. I can assure you from personal experience, it is being drawn here in Europe. (Here’s a good diplomatic question to discuss: Which will be the first European country besides Russia to join the S.C.O.?)

Academic textbooks have nothing to say about how “equilibrium” in foreign capital movements – speculative as well as for direct investment – is infinite as far as the U.S. economy is concerned. The U.S. economy can create dollars freely, now that they no longer are convertible into gold or even into purchases of U.S. companies, inasmuch as America remains the world’s most protected economy. It alone is permitted to protect its agriculture by import quotas, having “grandfathered” these into world trade rules half a century ago. Congress refuses to let “sovereign wealth” funds invest in important U.S. sectors.

So we are confronted with the fact that the U.S. Treasury prefers foreign central banks to keep on funding its domestic budget deficit, which means financing the cost of America’s war in the Near East and encirclement of foreign countries with rings of military bases. The more “capital outflows” U.S. investors spend to buy up foreign economies –the most profitable sectors, where the new U.S. owners can extract the highest monopoly rents – the more funds end up in foreign central banks to support America’s global military build-up. No textbook on political theory or international relations has suggested axioms to explain how nations act in a way so adverse to their own political, military and economic interests. Yet this is just what has been happening for the past generation.

So the ultimate question turns out to be what countries can do to counter this financial attack. A Basque labor union asked me whether I thought that controlling speculative capital movements would ensure that the financial system would act in the public interest. Or is outright nationalization necessary to better develop the real economy?

It is not simply a problem of “regulation” or “control of speculative capital movements.” The question is how nations can act as real nations, in their own interest rather than being roped into serving whatever the American government decides is in America’s interest.

Any country trying to do what the United States has done for the past 150 years is accused of being “socialist” – and this from the most anti-socialist economy in the world, except when it calls bailouts for its banks “socialism for the rich,” a.k.a. financial oligarchy. This rhetorical inflation almost leaves no alternative but outright nationalization of credit as a basic public utility.

Of course, the word “nationalization” has become a synonym for bailing out the largest and most reckless banks from their bad loans, and bailing out hedge funds and non-bank counterparties for losses on “casino capitalism,” gambling on derivatives that AIG and other insurers or players on the losing side of these gambles are unable to pay. Bailout in this form is not nationalization in the traditional sense of the term – bringing credit creation and other basic financial functions back into the public domain. It is the opposite. It prints new government bonds to turn over – along with self-regulatory power – to the financial sector, blocking the citizenry from taking back these functions.

Framing the issue as a choice between democracy and oligarchy turns the question into one of who will control the government doing the regulation and “nationalizing.” If it is done by a government whose central bank and major congressional committees dealing with finance are run by Wall Street, this will not help steer credit into productive uses. It will merely continue the Greenspan-Paulson-Geithner era of more and larger free lunches for their financial constituencies.

The financial oligarchy’s idea of “regulation” is to make sure that deregulators are installed in the key positions and given only a minimal skeleton staff and little funding. Despite Alan Greenspan’s announcement that he has come to see the light and realizes that self-regulation doesn’t work, the Treasury is still run by a Wall Street official and the Fed is run by a lobbyist for Wall Street. To lobbyists the real concern isn’t ideology as such – it’s naked self-interest for their clients. They may seek out well-meaning fools, especially prestigious figures from academia. But these are only front men, headed as they are by the followers of Milton Friedman at the University of Chicago. Such individuals are put in place as “gate-keepers” of the major academic journals to keep out ideas that do not well serve the financial lobbyists.

This pretence for excluding government from meaningful regulation is that finance is so technical that only someone from the financial “industry” is capable of regulating it. To add insult to injury, the additional counter-intuitive claim is made that a hallmark of democracy is to make the central bank “independent” of elected government. In reality, of course, that is just the opposite of democracy. Finance is the crux of the economic system. If it is not regulated democratically in the public interest, then it is “free” to be captured by special interests. So this becomes the oligarchic definition of “market freedom.”

The danger is that governments will let the financial sector determine how “regulation” will be applied. Special interests seek to make money from the economy, and the financial sector does this in an extractive way. That is its marketing plan. Finance today is acting in a way that de-industrializes economies, not builds them up. The “plan” is austerity for labor, industry and all sectors outside of finance, as in the IMF programs imposed on hapless Third World debtor countries. The experience of Iceland, Latvia and other “financialized” economies should be examined as object lessons, if only because they top the World Bank’s ranking of countries in terms of the “ease of doing business.”

The only meaningful regulation can come from outside the financial sector. Otherwise, countries will suffer what the Japanese call “descent from heaven”: regulators are selected from the ranks of bankers and their “useful idiots.” Upon retiring from government they return to the financial sector to receive lucrative jobs, “speaking engagements” and kindred paybacks. Knowing this, they regulate in favor of financial special interests, not that of the public at large.

The problem of speculative capital movements goes beyond drawing up a set of specific regulations. It concerns the scope of national government power. The International Monetary Fund’s Articles of Agreement prevent countries from restoring the “dual exchange rate” systems that many retained down through the 1950s and even into the ‘60s. It was widespread practice for countries to have one exchange rate for goods and services (sometimes various exchange rates for different import and export categories) and another for “capital movements.” Under American pressure, the IMF enforced the pretence that there is an “equilibrium” rate that just happens to be the same for goods and services as it is for capital movements. Governments that did not buy into this ideology were excluded from membership in the IMF and World Bank – or were overthrown.

The implication today is that the only way a nation can block capital movements is to withdraw from the IMF, the World Bank and the World Trade Organization (WTO). For the first time since the 1950s this looks like a real possibility, thanks to worldwide awareness of how the U.S. economy is glutting the global economy with surplus “paper” dollars – and U.S. intransigence at stopping its free ride. From the U.S. vantage point, this is nothing less than an attempt to curtail its international military program.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be at: mh@michael-hudson.com

By MICHAEL HUDSON

I am travelling in Europe for three weeks to discuss the global financial crisis with government officials, politicians and labor leaders. What is most remarkable is how differently the financial problem is perceived over here. It’s like being in another economic universe, not just another continent.

The U.S. media are silent about the most important topic policy makers are discussing here (and I suspect in Asia too): how to protect their countries from three inter-related dynamics:

(1) the surplus dollars pouring into the rest of the world for yet further financial speculation and corporate takeovers;

(2) the fact that central banks are obliged to recycle these dollar inflows to buy U.S. Treasury bonds to finance the federal U.S. budget deficit; and most important (but most suppressed in the U.S. media,

(3) the military character of the U.S. payments deficit and the domestic federal budget deficit.

Strange as it may seem – and irrational as it would be in a more logical system of world diplomacy – the “dollar glut” is what finances America’s global military build-up. It forces foreign central banks to bear the costs of America’s expanding military empire – effective “taxation without representation.” Keeping international reserves in “dollars” means recycling their dollar inflows to buy U.S. Treasury bills – U.S. government debt issued largely to finance the military.

To date, countries have been as powerless to defend themselves against the fact that this compulsory financing of U.S. military spending is built into the global financial system. Neoliberal economists applaud this as “equilibrium,” as if it is part of economic nature and “free markets” rather than bare-knuckle diplomacy wielded with increasing aggressiveness by U.S. officials. The mass media chime in, pretending that recycling the dollar glut to finance U.S. military spending is “showing their faith in U.S. economic strength” by sending “their” dollars here to “invest.” It is as if a choice is involved, not financial and diplomatic compulsion to choose merely between “Yes” (from China, reluctantly), “Yes, please” (from Japan and the European Union) and “Yes, thank you” (Britain, Georgia and Australia).

It is not “foreign faith in the U.S. economy” that leads foreigners to “put their money here.” That’s a silly cartoon of a more sinister dynamic. The “foreigners” in question are not consumers buying U.S. exports, nor are they private-sector “investors” buying U.S. stocks and bonds. The largest and most important foreign entities putting “their money” here are central banks, and it is not “their money” at all. They are sending back the dollars that foreign exporters and other recipients turn over to their central banks for domestic currency.

When the U.S. payments deficit pumps dollars into foreign economies, these banks are being given little option except to buy U.S. Treasury bills and bonds – which the Treasury spends on financing an enormous, hostile military build-up to encircle the major dollar-recyclers – China, Japan and Arab OPEC oil producers. Yet these governments are forced to recycle dollar inflows in a way that funds U.S. military policies in which they have no say in formulating, and which threaten them more and more belligerently. That is why China and Russia took the lead in forming the Shanghai Cooperation Organization (SCO) a few years ago.

Here in Europe there is a clear awareness that the U.S. payments deficit is much larger than just the trade deficit. One need merely look at Table 5 of the U.S. balance-of-payments data compiled by the Bureau of Economic Analysis (BEA) and published by the Dept. of Commerce in its Survey of Current Business to see that the deficit does not stem merely from consumers buying more imports than the United States exports as the financial sector de-industrializes its economy. U.S. imports are now plunging as the economy shrinks and consumers are now finding themselves obliged to pay down the debts they have taken on.

Congress has told foreign investors in the largest dollar holder, China, not to buy anything except perhaps used-car dealerships and maybe more packaged mortgages and Fannie Mae stock – the equivalent of Japanese investors being steered into spending $1 billion for Rockefeller Center, on which they subsequently took a 100 per cent loss, and Saudi investment in Citigroup. That’s the kind of “international equilibrium” that U.S. officials love to see. “CNOOK go home” is the motto when it comes to serious attempts by foreign governments and their sovereign wealth funds (central bank departments trying to figure out what to do with their dollar glut) to make direct investments in American industry.

So we are left with the extent to which the U.S. payments deficit stems from military spending. The problem is not only the war in Iraq, now being extended to Afghanistan and Pakistan. It is the expensive build-up of U.S. military bases in Asian, European, post-Soviet and Third World countries. The Obama administration has promised to make the actual amount of this military spending more transparent. That presumably means publishing a revised set of balance of payments figures as well as domestic federal budget statistics.

The military overhead is much like a debt overhead, extracting revenue from the economy. In this case it is to pay the military-industrial complex, not merely Wall Street banks and other financial institutions. The domestic federal budget deficit does not stem only from “priming the pump” to give away enormous sums to create a new financial oligarchy. It contains an enormous and rapidly growing military component.

So Europeans and Asians see U.S. companies pumping more and more dollars into their economies. Not just to buy their exports in excess of providing them with goods and services in return; not just to buy their companies and “commanding heights” of privatized public enterprises without giving them reciprocal rights to buy important U.S. companies (remember the U.S. turn-down of China’s attempt to buy into the U.S. oil distribution business); not just to buy foreign stocks, bonds and real estate. The U.S. media somehow neglect to mention that the U.S. government is spending hundreds of billions of dollars abroad – not only in the Near East for direct combat, but to build enormous military bases to encircle the rest of the world, to install radar systems, guided missile systems and other forms of military coercion, including the “color revolutions” that have been funded – and are still being funded – all around the former Soviet Union.

Pallets of shrink-wrapped $100 bills adding up to tens of millions of the dollars at a time have become familiar “visuals” on some TV broadcasts, but the link is not made with U.S. military and diplomatic spending and foreign central-bank dollar holdings, which are reported simply as “wonderful faith in the U.S. economic recovery” and presumably the “monetary magic” being worked by Wall Street’s Tim Geithner at Treasury and Helicopter Ben Bernanke at the Federal Reserve.

Here’s the problem: The Coca Cola company recently tried to buy China’s largest fruit-juice producer and distributor. China already holds nearly $2 trillion in U.S. securities – way more than it needs or can use, inasmuch as the United States government refuses to let it buy meaningful U.S. companies. If the U.S. buyout would have been permitted to go through, this would have confronted China with a dilemma: Choice #1 would be to let the sale go through and accept payment in dollars, reinvesting them in what the U.S. Treasury tells it to do – U.S. Treasury bonds yielding about 1 per cent. China would take a capital loss on these when U.S. interest rates rise or when the dollar declines as the United States alone is pursuing expansionary Keynesian policies in an attempt to enable the U.S. economy to carry its debt overhead.

Choice #2 is not to recycle the dollar inflows. This would lead the renminbi to rise against the dollar, thereby eroding China’s export competitiveness in world markets. So China chose a third way, which brought U.S. protests. It turned the sale of its tangible company for merely “paper” U.S. dollars – which went with the “choice” to fund further U.S. military encirclement of the Shanghai Cooperative Agreement. The only people who seem not to be drawing this connection are the American mass media, and hence public. I can assure you from personal experience, it is being drawn here in Europe. (Here’s a good diplomatic question to discuss: Which will be the first European country besides Russia to join the S.C.O.?)

Academic textbooks have nothing to say about how “equilibrium” in foreign capital movements – speculative as well as for direct investment – is infinite as far as the U.S. economy is concerned. The U.S. economy can create dollars freely, now that they no longer are convertible into gold or even into purchases of U.S. companies, inasmuch as America remains the world’s most protected economy. It alone is permitted to protect its agriculture by import quotas, having “grandfathered” these into world trade rules half a century ago. Congress refuses to let “sovereign wealth” funds invest in important U.S. sectors.

So we are confronted with the fact that the U.S. Treasury prefers foreign central banks to keep on funding its domestic budget deficit, which means financing the cost of America’s war in the Near East and encirclement of foreign countries with rings of military bases. The more “capital outflows” U.S. investors spend to buy up foreign economies –the most profitable sectors, where the new U.S. owners can extract the highest monopoly rents – the more funds end up in foreign central banks to support America’s global military build-up. No textbook on political theory or international relations has suggested axioms to explain how nations act in a way so adverse to their own political, military and economic interests. Yet this is just what has been happening for the past generation.

So the ultimate question turns out to be what countries can do to counter this financial attack. A Basque labor union asked me whether I thought that controlling speculative capital movements would ensure that the financial system would act in the public interest. Or is outright nationalization necessary to better develop the real economy?

It is not simply a problem of “regulation” or “control of speculative capital movements.” The question is how nations can act as real nations, in their own interest rather than being roped into serving whatever the American government decides is in America’s interest.

Any country trying to do what the United States has done for the past 150 years is accused of being “socialist” – and this from the most anti-socialist economy in the world, except when it calls bailouts for its banks “socialism for the rich,” a.k.a. financial oligarchy. This rhetorical inflation almost leaves no alternative but outright nationalization of credit as a basic public utility.

Of course, the word “nationalization” has become a synonym for bailing out the largest and most reckless banks from their bad loans, and bailing out hedge funds and non-bank counterparties for losses on “casino capitalism,” gambling on derivatives that AIG and other insurers or players on the losing side of these gambles are unable to pay. Bailout in this form is not nationalization in the traditional sense of the term – bringing credit creation and other basic financial functions back into the public domain. It is the opposite. It prints new government bonds to turn over – along with self-regulatory power – to the financial sector, blocking the citizenry from taking back these functions.

Framing the issue as a choice between democracy and oligarchy turns the question into one of who will control the government doing the regulation and “nationalizing.” If it is done by a government whose central bank and major congressional committees dealing with finance are run by Wall Street, this will not help steer credit into productive uses. It will merely continue the Greenspan-Paulson-Geithner era of more and larger free lunches for their financial constituencies.

The financial oligarchy’s idea of “regulation” is to make sure that deregulators are installed in the key positions and given only a minimal skeleton staff and little funding. Despite Alan Greenspan’s announcement that he has come to see the light and realizes that self-regulation doesn’t work, the Treasury is still run by a Wall Street official and the Fed is run by a lobbyist for Wall Street. To lobbyists the real concern isn’t ideology as such – it’s naked self-interest for their clients. They may seek out well-meaning fools, especially prestigious figures from academia. But these are only front men, headed as they are by the followers of Milton Friedman at the University of Chicago. Such individuals are put in place as “gate-keepers” of the major academic journals to keep out ideas that do not well serve the financial lobbyists.

This pretence for excluding government from meaningful regulation is that finance is so technical that only someone from the financial “industry” is capable of regulating it. To add insult to injury, the additional counter-intuitive claim is made that a hallmark of democracy is to make the central bank “independent” of elected government. In reality, of course, that is just the opposite of democracy. Finance is the crux of the economic system. If it is not regulated democratically in the public interest, then it is “free” to be captured by special interests. So this becomes the oligarchic definition of “market freedom.”

The danger is that governments will let the financial sector determine how “regulation” will be applied. Special interests seek to make money from the economy, and the financial sector does this in an extractive way. That is its marketing plan. Finance today is acting in a way that de-industrializes economies, not builds them up. The “plan” is austerity for labor, industry and all sectors outside of finance, as in the IMF programs imposed on hapless Third World debtor countries. The experience of Iceland, Latvia and other “financialized” economies should be examined as object lessons, if only because they top the World Bank’s ranking of countries in terms of the “ease of doing business.”

The only meaningful regulation can come from outside the financial sector. Otherwise, countries will suffer what the Japanese call “descent from heaven”: regulators are selected from the ranks of bankers and their “useful idiots.” Upon retiring from government they return to the financial sector to receive lucrative jobs, “speaking engagements” and kindred paybacks. Knowing this, they regulate in favor of financial special interests, not that of the public at large.

The problem of speculative capital movements goes beyond drawing up a set of specific regulations. It concerns the scope of national government power. The International Monetary Fund’s Articles of Agreement prevent countries from restoring the “dual exchange rate” systems that many retained down through the 1950s and even into the ‘60s. It was widespread practice for countries to have one exchange rate for goods and services (sometimes various exchange rates for different import and export categories) and another for “capital movements.” Under American pressure, the IMF enforced the pretence that there is an “equilibrium” rate that just happens to be the same for goods and services as it is for capital movements. Governments that did not buy into this ideology were excluded from membership in the IMF and World Bank – or were overthrown.

The implication today is that the only way a nation can block capital movements is to withdraw from the IMF, the World Bank and the World Trade Organization (WTO). For the first time since the 1950s this looks like a real possibility, thanks to worldwide awareness of how the U.S. economy is glutting the global economy with surplus “paper” dollars – and U.S. intransigence at stopping its free ride. From the U.S. vantage point, this is nothing less than an attempt to curtail its international military program.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be at: mh@michael-hudson.com

Does the US Face G20 Mutiny? Financing the Empire

The Recovery Plan From Hell: What Wall Street Wants

By MICHAEL HUDSON

Tuesday’s announcement of the Obama-Geithner recovery plan is basically an extension of the Bush-Paulson plan – yet more giveaways to financial insiders, with a view to concentrating the U.S. banking system into a cartel of just a few large banks. This is not altogether bad news for the still relatively healthy part of the banking system (healthy in the sense of still avoiding negative equity). Smaller, less troubled banks will be bought out by the large “troubled” ones, to the personal financial benefit of their stockholders. This cannot solve today’s financial problem: the fact that the debt overhead far exceeds the economy’s ability to pay. In fact, it will spread the distortions that the large banks have introduced, until the entire system presumably looks like Citibank, Bank of America, JP Morgan Chase and Wells Fargo.

But this clearly is only Stage One of a two-stage plan that has not yet been announced, although the Wall Street Journal’s op-ed page has provided enough hints trickling out for the past three months to tip the hand of Wall Street’s “dream recovery plan.”

It is not exactly what most people are hoping for. In fact, it threatens to be a nightmare scenario for the economy at large. Watch for the magic phrase: “equity kicker,” first heard in the S&L mortgage crisis of the 1980s.

The first question to ask about the Recovery Program is, “recovery for whom?” The answer is, for the people who design the Recovery Program and their constituency, the bank lobby. The second question is, what is it they want to recover? The answer is, another Bubble economy, having seen the Greenspan Bubble make them so rich with his particular kind of “wealth creation”: wealth in the form of indebtedness of the “real” economy at large to the banking system, and unprecedented capital gains to be made by riding the wave of asset-price inflation.

For the financial elites, the problem is that it is not possible to inflate another bubble from today’s debt levels, widespread negative equity, and still-high level of real estate, stock and bond prices. No amount of new credit or capital for the banking system will induce banks to provide credit to real estate that already is over-mortgaged, or to individuals and corporations already over-indebted. All professional observers have forecast property prices to keep on plunging for at least the next year, which is as far as the eye can see in unstable conditions such as we are experiencing today.

While the Obama administration’s financial planners wring their hands in public and say “We feel your pain” to debtors at large, they also recognize that the past ten years have been a golden age for the banking system and Wall Street. The wealthiest 1 per cent of the population has raised its share of the returns to wealth – dividends, interest, rent and capital gains – from 37 per cent of the total ten years ago to 57 per cent five years ago, and an estimated 70 per cent today. Over two-thirds of the returns to wealth now go to the wealthiest 1 per cent of the population. This is the highest on record. We are approaching Russian kleptocratic levels.

Yet the financial Hard Right of the political spectrum – the lobbyists now in control of the Treasury, the Federal Reserve and the Justice Departments for starters – repeats the new Big Lie: that it is the poor who have brought the system down, “exploiting” the rich by trying to ape their betters and live beyond their means. Subprime families have taken out subprime loans, the lying poor have signed documents to obtain “liars’ loans,” as Alt-A, no-documentation loans are called in the financial junk-paper trade.

I learned the reality a few years ago in London, talking to a commercial bank strategist there. “We’ve had an intellectual breakthrough,” he said. “It’s changed our credit philosophy.”

“What is it?” I asked, imagining that he was about to come out with yet a new junk mathematics formula?

“The poor are honest,” he said, accompanying his words with his jaw dropping open as if to say, “Who could have guessed?”

The meaning was clear enough. The poor pay their debts as a matter of honor, even at great personal expense. Unlike Donald Trump, the poor are less likely to walk away from their homes when market prices sink below the mortgage level. In today’s neoliberal Chicago School language, the poor behave “uneconomically.” That is, they make choices that do not make economic sense, but rather reflect a group morality. This sociological gullibility is what made them rich pickings for predatory lenders such as Countrywide, Wachovia and Citibank.

As I said above, it was a golden age. The financial and real estate bubble is the world that America’s financial power elite would love to recover. The problem for them is how to start a new bubble and make yet another fortune. The alternative would be to keep what they have taken and run – not so bad, but a scenario that perhaps they can improve on.

Discussions about emergency bailouts have focused on putting in place enough new lending capacity by the banking system to start inflating prices on credit once again. But a new bubble can’t be started from today’s asset-price levels. This week’s $2 trillion or so in new bailout money for the banks (“capital,” and specifically finance capital, not to be confused with industrial capital) will only be lent out once prices fall by another 30 to 50 percent. So this can represent only Stage 1.

The question for Stage 2 is, how can the $10 to $20 trillion capital-gain run-up of the Greenspan years been repeated in an economy that is “all loaned up”?

One thing Wall Street knows is that to make money, you not only need asset prices to rise, they have to go down again – and up again, and down again. Without going down, after all, how can they rise up? The more frenetic the price fibulation, the easier it is for computerized buy-and-sell programs to make money on options and derivatives. What is being planned today looks like a similar up-and-down movement in real estate.

The first trick is to preserve the wealth of the creditor class – Wall Street, the banks and the other financial vehicles that enrich the wealthiest 1 per cent and indeed, the richest 10 per cent of the population. Stage One involves buying out their bad loans at a price that saves them from taking a loss. This is done by shifting the loss onto the “taxpayers” – labor, onto whose shoulders the tax burden has been shifted steadily, step by step since 1980, with the Greenspan Commission imposing an onerous Social Security tax on the middle class and using the proceeds to slash taxes on the higher brackets. Next comes an “aggregator” bank (sounds like “alligator,” from the swamps of toxic waste) to buy the bad debts and put them in a public agency. The government calls this the “bad” bank. But it does good for Wall Street – by buying loans that have gone bad – or perhaps nearer the truth, loans that never were good in the first place.

The harder part is to revive opportunities for creditors to make a new killing. (And it’s the economy that’s being killed.) Here’s how I imagine the plan might work.

Suppose a recent buyer has purchased a home for $500,000, with a $500,000 adjustable-rate mortgage scheduled to reset at 8 per cent. Suppose too that the current market price has fallen to $250,000 – a loss of 50 per cent by the end of 2009. After all, there needs to be enough time for prices to decline. Otherwise, there would be no economy to “rescue.” Mr. Geithner and Summers need to “feel your pain” to come out with the package that I’m describing. The government will swap “cash for trash,” printing new Treasury bonds (interest to be paid by “the taxpayer) in exchange for the $500,000 mortgage that is going bad, heading toward only a $250,000 market price.

The “Bad” bank that the Obama plan decided was not quite ready to be created this week will take the form of a public/private partnership (PPP), of the sort that Tony Blair made so notorious in Britain. It will be financed with private funds – in fact, with the funds now being given to re-capitalize America’s banks (headed by the Wall St. banks that have done so poorly). Banks will use the money they receive from the Treasury for selling their junk mortgages at par – along with other bailout funding – to buy shares in a new $5 trillion institution. Something like Fanny Mae or Freddie Mac will be created and its bonds guaranteed (that’s the “public” part – “socializing” the risk). The PPP institution will start with, say, $3 trillion in funds, and will have the power to buy and renegotiate the mortgages that have passed into the hands of the government and other holders. This “Middle Class Homeowner Recovery Trust” will use its private funding for the “socially responsible” purpose of “saving the taxpayer” and homeowners by renegotiating the mortgage down from its original $500,000 to the new $250,000 price.

Here’s the patter talk you can expect, with the usual Orwellian euphemisms. The “rescue the homeowners” PPP, a veritable Savior Bank, will go to a family strapped by its home mortgage debt and feeling more and more desperate as the price of its major asset plummets deep into Negative Equity territory. An offer will be made: “We’ve got a deal to save you. We’ll renegotiate your mortgage down to $250,000, the current market price, and we’ll also lower your interest rate to just 5.50 per cent. This will cut your monthly debt charges by nearly two thirds. You will escape from negative equity, and you can afford to stay in your home.”

The family probably will say, “Great.”

But they will have to make a concession. That’s where the new public/private partnership makes its killing. Its Savior Bank, funded with private money that is to take the “risk” (and also the rewards) will say to the family that agrees to renegotiate its mortgage: “Now that the government has taken a loss while we’ve let you stay in your home, we need to recover the money that’s been lost. So when the time comes for you to sell, or to renegotiate your mortgage, our Savior Bank will receive the capital gain up to the original amount written off. If we’ve made you whole, we want to be made whole too.”

In other words, if the homeowner sells the property for $400,000, the Savior Bank will get $150,000 of the capital gain. If the property sells for $500,000, the bank will get $250,000. And if it sells for more, thanks to some new clone of Alan Greenspan acting as bubblemeister, the capital gain will be split in some way. If the split is 50/50, then if the home sells for $600,000, the owner at that time will split the $100,000 further capital gain with the Savior Bank. The Savior Bank will thus make much more through its share of capital gains than it extracts in interest!

This plan will be even better for Wall Street than the Greenspan bubble was! Last time around, it was the middle class that got the gains. To be sure, it really was the bank that got the gains, because mortgage interest charges absorbed the entire rental value. But at least homeowners had a chance at the free ride, if they didn’t squander their money in refinancing their mortgages. And many did use their homes “like a piggy bank” to support their living standards.

But this time around, Wall Street is not obliged to make its money by making middle class homeowners rich. Debt-strapped homeowners are willing to settle merely for a plan that leaves them in their homes! It can get for itself the capital gains that have been the driving force of U.S. “wealth creation,” Alan Greenspan bubble-style.

The irony is that the only kind of policies that are politically correct these days are those that make the situation worse: yet more government money in the hope that banks will create yet more credit/debt to raise house prices and make them even more unaffordable; to inflate a new bubble; to give what really should be called the “bad banks” – the Big Four or Five where the junk mortgages, junk CDOs and junk derivatives resulting from junk mathematics are concentrated – yet more money to buy out smaller banks that have not yet been infected with reckless financial opportunism.

And by the same token, lobbyists for these bad banks are screaming at the top of their voices that all solutions to the problem are politically incorrect: debt writedowns to bring the debt burden within the ability to pay. That is what the market is supposed to do – by bankruptcy in an anarchic collapse, if not by reasoned government policy. The bad banks, after demanding “free markets” all these years, have stopped the free market when it comes anywhere near them and their bonuses. For them, markets are free of regulation against predatory lending; free of taxing the wealthy so as to shift the burden onto labor; free for the financial sector to wrap itself around the “real” economy like a parasitic vine around a tree and extract the entire surplus in the form of financial engineering.

This is a travesty of freedom. But worst of all is the “freedom” of today’s economic discussion from the wisdom of classical political economy and from the experience of economic history regarding how societies have coped with the debt overhead through the ages.

An alternative policy to save the economy from being “rescued” by Wall Street

There is an alternative to ward all this off. A debt writedown, followed by a land tax so that the “free lunch” (what John Stuart Mill called the “unearned increment” of rising land prices, a gain that landlords made “in their sleep”) would serve as the tax base rather than labor and industry being burdened with an income tax.

One move would be to prevent banks from lending against the land’s value. They could lend against buildings, but not land. This would cut the maximum permissible loan to 50 to 60 per cent of the total property price – unless the government did what classical economists advocated and tax the land’s market price (its rental value) as the tax base, shifting the tax back off of labor. This would achieve the kind of free markets that Adam Smith, John Stuart Mill and Alfred Marshall described, and which the Progressive Era aimed to achieve with America’s first income tax in 1913.

A land tax would prevent housing prices from rising again. This would save homeowners from taking on so much debt in order to obtain housing. And it would save the economy from seeing “wealth creation” take the form of the “unearned increment” being capitalized into higher bank loans with their associated carrying charges (interest and amortization). The key to real estate bubbles is to inflate site valuations.

By MICHAEL HUDSON

Tuesday’s announcement of the Obama-Geithner recovery plan is basically an extension of the Bush-Paulson plan – yet more giveaways to financial insiders, with a view to concentrating the U.S. banking system into a cartel of just a few large banks. This is not altogether bad news for the still relatively healthy part of the banking system (healthy in the sense of still avoiding negative equity). Smaller, less troubled banks will be bought out by the large “troubled” ones, to the personal financial benefit of their stockholders. This cannot solve today’s financial problem: the fact that the debt overhead far exceeds the economy’s ability to pay. In fact, it will spread the distortions that the large banks have introduced, until the entire system presumably looks like Citibank, Bank of America, JP Morgan Chase and Wells Fargo.

But this clearly is only Stage One of a two-stage plan that has not yet been announced, although the Wall Street Journal’s op-ed page has provided enough hints trickling out for the past three months to tip the hand of Wall Street’s “dream recovery plan.”

It is not exactly what most people are hoping for. In fact, it threatens to be a nightmare scenario for the economy at large. Watch for the magic phrase: “equity kicker,” first heard in the S&L mortgage crisis of the 1980s.

The first question to ask about the Recovery Program is, “recovery for whom?” The answer is, for the people who design the Recovery Program and their constituency, the bank lobby. The second question is, what is it they want to recover? The answer is, another Bubble economy, having seen the Greenspan Bubble make them so rich with his particular kind of “wealth creation”: wealth in the form of indebtedness of the “real” economy at large to the banking system, and unprecedented capital gains to be made by riding the wave of asset-price inflation.

For the financial elites, the problem is that it is not possible to inflate another bubble from today’s debt levels, widespread negative equity, and still-high level of real estate, stock and bond prices. No amount of new credit or capital for the banking system will induce banks to provide credit to real estate that already is over-mortgaged, or to individuals and corporations already over-indebted. All professional observers have forecast property prices to keep on plunging for at least the next year, which is as far as the eye can see in unstable conditions such as we are experiencing today.

While the Obama administration’s financial planners wring their hands in public and say “We feel your pain” to debtors at large, they also recognize that the past ten years have been a golden age for the banking system and Wall Street. The wealthiest 1 per cent of the population has raised its share of the returns to wealth – dividends, interest, rent and capital gains – from 37 per cent of the total ten years ago to 57 per cent five years ago, and an estimated 70 per cent today. Over two-thirds of the returns to wealth now go to the wealthiest 1 per cent of the population. This is the highest on record. We are approaching Russian kleptocratic levels.

Yet the financial Hard Right of the political spectrum – the lobbyists now in control of the Treasury, the Federal Reserve and the Justice Departments for starters – repeats the new Big Lie: that it is the poor who have brought the system down, “exploiting” the rich by trying to ape their betters and live beyond their means. Subprime families have taken out subprime loans, the lying poor have signed documents to obtain “liars’ loans,” as Alt-A, no-documentation loans are called in the financial junk-paper trade.

I learned the reality a few years ago in London, talking to a commercial bank strategist there. “We’ve had an intellectual breakthrough,” he said. “It’s changed our credit philosophy.”

“What is it?” I asked, imagining that he was about to come out with yet a new junk mathematics formula?

“The poor are honest,” he said, accompanying his words with his jaw dropping open as if to say, “Who could have guessed?”

The meaning was clear enough. The poor pay their debts as a matter of honor, even at great personal expense. Unlike Donald Trump, the poor are less likely to walk away from their homes when market prices sink below the mortgage level. In today’s neoliberal Chicago School language, the poor behave “uneconomically.” That is, they make choices that do not make economic sense, but rather reflect a group morality. This sociological gullibility is what made them rich pickings for predatory lenders such as Countrywide, Wachovia and Citibank.

As I said above, it was a golden age. The financial and real estate bubble is the world that America’s financial power elite would love to recover. The problem for them is how to start a new bubble and make yet another fortune. The alternative would be to keep what they have taken and run – not so bad, but a scenario that perhaps they can improve on.

Discussions about emergency bailouts have focused on putting in place enough new lending capacity by the banking system to start inflating prices on credit once again. But a new bubble can’t be started from today’s asset-price levels. This week’s $2 trillion or so in new bailout money for the banks (“capital,” and specifically finance capital, not to be confused with industrial capital) will only be lent out once prices fall by another 30 to 50 percent. So this can represent only Stage 1.

The question for Stage 2 is, how can the $10 to $20 trillion capital-gain run-up of the Greenspan years been repeated in an economy that is “all loaned up”?

One thing Wall Street knows is that to make money, you not only need asset prices to rise, they have to go down again – and up again, and down again. Without going down, after all, how can they rise up? The more frenetic the price fibulation, the easier it is for computerized buy-and-sell programs to make money on options and derivatives. What is being planned today looks like a similar up-and-down movement in real estate.

The first trick is to preserve the wealth of the creditor class – Wall Street, the banks and the other financial vehicles that enrich the wealthiest 1 per cent and indeed, the richest 10 per cent of the population. Stage One involves buying out their bad loans at a price that saves them from taking a loss. This is done by shifting the loss onto the “taxpayers” – labor, onto whose shoulders the tax burden has been shifted steadily, step by step since 1980, with the Greenspan Commission imposing an onerous Social Security tax on the middle class and using the proceeds to slash taxes on the higher brackets. Next comes an “aggregator” bank (sounds like “alligator,” from the swamps of toxic waste) to buy the bad debts and put them in a public agency. The government calls this the “bad” bank. But it does good for Wall Street – by buying loans that have gone bad – or perhaps nearer the truth, loans that never were good in the first place.

The harder part is to revive opportunities for creditors to make a new killing. (And it’s the economy that’s being killed.) Here’s how I imagine the plan might work.

Suppose a recent buyer has purchased a home for $500,000, with a $500,000 adjustable-rate mortgage scheduled to reset at 8 per cent. Suppose too that the current market price has fallen to $250,000 – a loss of 50 per cent by the end of 2009. After all, there needs to be enough time for prices to decline. Otherwise, there would be no economy to “rescue.” Mr. Geithner and Summers need to “feel your pain” to come out with the package that I’m describing. The government will swap “cash for trash,” printing new Treasury bonds (interest to be paid by “the taxpayer) in exchange for the $500,000 mortgage that is going bad, heading toward only a $250,000 market price.

The “Bad” bank that the Obama plan decided was not quite ready to be created this week will take the form of a public/private partnership (PPP), of the sort that Tony Blair made so notorious in Britain. It will be financed with private funds – in fact, with the funds now being given to re-capitalize America’s banks (headed by the Wall St. banks that have done so poorly). Banks will use the money they receive from the Treasury for selling their junk mortgages at par – along with other bailout funding – to buy shares in a new $5 trillion institution. Something like Fanny Mae or Freddie Mac will be created and its bonds guaranteed (that’s the “public” part – “socializing” the risk). The PPP institution will start with, say, $3 trillion in funds, and will have the power to buy and renegotiate the mortgages that have passed into the hands of the government and other holders. This “Middle Class Homeowner Recovery Trust” will use its private funding for the “socially responsible” purpose of “saving the taxpayer” and homeowners by renegotiating the mortgage down from its original $500,000 to the new $250,000 price.

Here’s the patter talk you can expect, with the usual Orwellian euphemisms. The “rescue the homeowners” PPP, a veritable Savior Bank, will go to a family strapped by its home mortgage debt and feeling more and more desperate as the price of its major asset plummets deep into Negative Equity territory. An offer will be made: “We’ve got a deal to save you. We’ll renegotiate your mortgage down to $250,000, the current market price, and we’ll also lower your interest rate to just 5.50 per cent. This will cut your monthly debt charges by nearly two thirds. You will escape from negative equity, and you can afford to stay in your home.”

The family probably will say, “Great.”

But they will have to make a concession. That’s where the new public/private partnership makes its killing. Its Savior Bank, funded with private money that is to take the “risk” (and also the rewards) will say to the family that agrees to renegotiate its mortgage: “Now that the government has taken a loss while we’ve let you stay in your home, we need to recover the money that’s been lost. So when the time comes for you to sell, or to renegotiate your mortgage, our Savior Bank will receive the capital gain up to the original amount written off. If we’ve made you whole, we want to be made whole too.”

In other words, if the homeowner sells the property for $400,000, the Savior Bank will get $150,000 of the capital gain. If the property sells for $500,000, the bank will get $250,000. And if it sells for more, thanks to some new clone of Alan Greenspan acting as bubblemeister, the capital gain will be split in some way. If the split is 50/50, then if the home sells for $600,000, the owner at that time will split the $100,000 further capital gain with the Savior Bank. The Savior Bank will thus make much more through its share of capital gains than it extracts in interest!

This plan will be even better for Wall Street than the Greenspan bubble was! Last time around, it was the middle class that got the gains. To be sure, it really was the bank that got the gains, because mortgage interest charges absorbed the entire rental value. But at least homeowners had a chance at the free ride, if they didn’t squander their money in refinancing their mortgages. And many did use their homes “like a piggy bank” to support their living standards.

But this time around, Wall Street is not obliged to make its money by making middle class homeowners rich. Debt-strapped homeowners are willing to settle merely for a plan that leaves them in their homes! It can get for itself the capital gains that have been the driving force of U.S. “wealth creation,” Alan Greenspan bubble-style.

The irony is that the only kind of policies that are politically correct these days are those that make the situation worse: yet more government money in the hope that banks will create yet more credit/debt to raise house prices and make them even more unaffordable; to inflate a new bubble; to give what really should be called the “bad banks” – the Big Four or Five where the junk mortgages, junk CDOs and junk derivatives resulting from junk mathematics are concentrated – yet more money to buy out smaller banks that have not yet been infected with reckless financial opportunism.

And by the same token, lobbyists for these bad banks are screaming at the top of their voices that all solutions to the problem are politically incorrect: debt writedowns to bring the debt burden within the ability to pay. That is what the market is supposed to do – by bankruptcy in an anarchic collapse, if not by reasoned government policy. The bad banks, after demanding “free markets” all these years, have stopped the free market when it comes anywhere near them and their bonuses. For them, markets are free of regulation against predatory lending; free of taxing the wealthy so as to shift the burden onto labor; free for the financial sector to wrap itself around the “real” economy like a parasitic vine around a tree and extract the entire surplus in the form of financial engineering.

This is a travesty of freedom. But worst of all is the “freedom” of today’s economic discussion from the wisdom of classical political economy and from the experience of economic history regarding how societies have coped with the debt overhead through the ages.

An alternative policy to save the economy from being “rescued” by Wall Street

There is an alternative to ward all this off. A debt writedown, followed by a land tax so that the “free lunch” (what John Stuart Mill called the “unearned increment” of rising land prices, a gain that landlords made “in their sleep”) would serve as the tax base rather than labor and industry being burdened with an income tax.

One move would be to prevent banks from lending against the land’s value. They could lend against buildings, but not land. This would cut the maximum permissible loan to 50 to 60 per cent of the total property price – unless the government did what classical economists advocated and tax the land’s market price (its rental value) as the tax base, shifting the tax back off of labor. This would achieve the kind of free markets that Adam Smith, John Stuart Mill and Alfred Marshall described, and which the Progressive Era aimed to achieve with America’s first income tax in 1913.

A land tax would prevent housing prices from rising again. This would save homeowners from taking on so much debt in order to obtain housing. And it would save the economy from seeing “wealth creation” take the form of the “unearned increment” being capitalized into higher bank loans with their associated carrying charges (interest and amortization). The key to real estate bubbles is to inflate site valuations.

The Recovery Plan From Hell: What Wall Street Wants

Casino Capitalism

This phrase was originally used to describe gambling on the stockmarket but takes on a new and very literal meaning with some of these 'credit default swaps' as described on Moon of Alabama.

Some of these CDS dont have an underlying asset and thus have no connection with the real economy, anymore than gambling at a casino has any connection with real work and value creation (except that it can lead the the ruin of jobs, careers, families and lives - or in the case of CDS, the ruin of the financial sector and the real economy along with it.)

'Credit default swaps' or 'derivatives' are simply a bet or a gamble. And you can bet on anything you like, eg, I'll pay you a dollar now, and if it rains 5mm or more between 4 and 5pm tomorrow, you pay me $100. If you say ok or negotiate a new agreed price, we have a contract.

They can have a useful insurance or hedging purpose, eg a premium paid in case my house gets burned down by a bushfire. But you dont have to own the asset hedged or insured. So what if 20 people who dont own my house also make a bet? There will be a very big payout in total if there is a fire. And they'll have an interest in fire, wont they? Perhaps go for a country drive, carelessly dispose of a cigarette or two, or have a barbecue during a total fire ban?

b:

We are now several month into this and some people still do not 'get it'. I'll try to give a slow but simple answer.

AIG signed insurances against bond defaults in form of Credit Default Swaps in a notional value of more than $450 billion. Some insured bonds defaulted and AIG paid out for these insurances. As it did not have the money to do so, the Bush and Obama administrations decided that the taxpayer should pay.

Up to November $150 billion were given to AIG and on Monday another $30 billion. But AIG still has $300 billion of CDS exposure and will likely make more high losses on that.

When Lehman Brothers went bankrupt -a 'credit event' - people who had insured their holdings of Lehman bonds asked their insurers to pay for their losses. Such a credit event was also triggered when Fannie and Freddie were taken into receivership.

AIG which had written insurances for the debt of those entities faced a big payout and the taxpayer had to cough up the money.

What is the moral justification for this [the taxpayer funded bailout when AIG couldnt pay]?

It was morally okay because the people and institutions insured by AIG were justified to expected the payout as their 'assets', i.e. Lehman bonds had really lost value. They had hedged a real risk like you do when you pay for fire insurance on your house. Insured you are right to expect a payout when your house burns down.

But their is another group of people and institution who got money from the taxpayer through AIG.

This second group never ever owned a Lehman or Freddie or Fannie bond. But they also had bought insurance from AIG against the default of these bonds. These people never invested in 'assets'. They payed a small monthly fee to AIG for a lottery slip and when Lehman failed they had a huge win. They went to AIG, pointed to the 'credit event' and demanded the payout. AIG obliged and the taxpayer gave the money.

Some may ask:

"While it is easy to understand the moral case for bailing out real bondholders that insured against default, what is the moral case for paying out to people who made pure bets? These people never owned a fire insured house at all. Why do they get taxpayer money when my house burns down?"

"If they had be given back the money they payed for the lottery slips, i.e. the small monthly insurance premium, that would probably be understandable, but why do the taxpayers pay out the lottery win when the private lottery organizer is bankrupt?"

Simple answer to those simple questions: Because the administration says so.

There are big numbers behind this.

Of a total of $600 billion real [Lehman Bros] bonds owned by lots of people only $150 billion were credit insured. When Lehman bonds defaulted, owners of $450 billion of its debt lost all their money.

Owners of $150 billion of that debt did not lose any money. They were payed out the insurance they had contracted and the insurers (backed by the taxpayers) carried the loss.

The total economic loss was $600 billion, $450 billion by bond owners and $150 billion by insurances. $600 million left the monetary system - poof.

But on top of that there were written insurances with a notional value of $250-$350 billion that insured people who never had the insured asset but were only playing the lottery. These people demanded money from the insurer and indeed they were payed.

This part of the 'event' did not have a real economic loss. No money left the system.

Instead money was payed from the insurer toward the insurance holder, the buyers of CDS'. As the insurer was backed by the taxpayer every one and his/her children now pays for the enormous lottery win for a few people, who had risked very little. This is money that is moving from the bottom of the society to the top in unprecedented amounts.

What is the moral justification for this?

There is none.

Who are those people who are getting huge payouts from the taxpayer for risking little?

AIG still has $300 billion in CDS exposure. If the Lehman quote of 1/3 real insurance and 2/3 lottery bets is the same with those CDS, which is likely, than a few rich people are waiting for a $200 billion free payout from the taxpayer.

Geithner does not want you or anyone else to know who profits from this scheme without having risked any real money. His rich friends do not want you to know that they are racking in billions of dollars in lottery wins that cost them little money and that the taxpayers are paying out because the private lottery operator went bust. They will pay off Geithner when his job is done and he finally gets kicked out.

People in the known and within the business are not likely to explain this... This is money moving from many persons at the bottom to very few at the top.

Geithner and his masters fear that if the public knew or understood that, they would probably only get the costs of the lottery slip disbursed - if at all.

They want the big one. AIG has still $300 billion at risk that you and your kids will have to pay for.

They want it. And they are getting it. And there is nothing you can do about that.

In comments b spells it out even more brutally:

The whole thing is not about what's cheaper but how do [the rich elite] make the most money out of it.

The Lehman bust made, as explained in my post above, some folks about 200-300bn in cash without having invested much more than a million or two. Did anyone of those people thought of how to make the bust "cheaper" for them - sure they did. If they could have gotten $200bn for a $1 investment they would have taken it.

I am devastate that otherwise intelligent people like you do not get this yet.

IT WAS A SCAM. Lehman was made to go bust because some people made A WHOLE LOT OF MONEY from the Lehman bust - not millions - hundreds of billons!

They "insured" themselves against the bust, then arranged it and the taxpayers paid the "insured" sum. What is so hard to understand with that?

From the taxpayer view there was never ANY need to pay anything at all. Those really insured against losses of assets they owned might have a moral case - might!!!

Those "insured" and never owned the "insured" asset never had a justifiable case to get anything from their bet.

The later make up for two thirds of what the taxpayer is paying out.

Why are the taxpayers, we and our children, paying for these?

---
"Saving Lehman" was never an option. The setup was clear for anyone who could read the market.

The question was and is how to save the taxpayer from taking the losses others take as profits.

If this is true, and I do feel some scepticism that it is as baldly manipulated as all that, then this is simply epic financial and political corruption.

b's solution is to Declare all Credit Default Swaps Null and Void. In comments to this post b is able to point out that a number of informed commentators are also calling for a similar solution to the derivatives nightmare which threatens to bring down the global financial system.

This phrase was originally used to describe gambling on the stockmarket but takes on a new and very literal meaning with some of these 'credit default swaps' as described on Moon of Alabama.

Some of these CDS dont have an underlying asset and thus have no connection with the real economy, anymore than gambling at a casino has any connection with real work and value creation (except that it can lead the the ruin of jobs, careers, families and lives - or in the case of CDS, the ruin of the financial sector and the real economy along with it.)

'Credit default swaps' or 'derivatives' are simply a bet or a gamble. And you can bet on anything you like, eg, I'll pay you a dollar now, and if it rains 5mm or more between 4 and 5pm tomorrow, you pay me $100. If you say ok or negotiate a new agreed price, we have a contract.

They can have a useful insurance or hedging purpose, eg a premium paid in case my house gets burned down by a bushfire. But you dont have to own the asset hedged or insured. So what if 20 people who dont own my house also make a bet? There will be a very big payout in total if there is a fire. And they'll have an interest in fire, wont they? Perhaps go for a country drive, carelessly dispose of a cigarette or two, or have a barbecue during a total fire ban?

b:

We are now several month into this and some people still do not 'get it'. I'll try to give a slow but simple answer.

AIG signed insurances against bond defaults in form of Credit Default Swaps in a notional value of more than $450 billion. Some insured bonds defaulted and AIG paid out for these insurances. As it did not have the money to do so, the Bush and Obama administrations decided that the taxpayer should pay.

Up to November $150 billion were given to AIG and on Monday another $30 billion. But AIG still has $300 billion of CDS exposure and will likely make more high losses on that.

When Lehman Brothers went bankrupt -a 'credit event' - people who had insured their holdings of Lehman bonds asked their insurers to pay for their losses. Such a credit event was also triggered when Fannie and Freddie were taken into receivership.

AIG which had written insurances for the debt of those entities faced a big payout and the taxpayer had to cough up the money.

What is the moral justification for this [the taxpayer funded bailout when AIG couldnt pay]?

It was morally okay because the people and institutions insured by AIG were justified to expected the payout as their 'assets', i.e. Lehman bonds had really lost value. They had hedged a real risk like you do when you pay for fire insurance on your house. Insured you are right to expect a payout when your house burns down.

But their is another group of people and institution who got money from the taxpayer through AIG.

This second group never ever owned a Lehman or Freddie or Fannie bond. But they also had bought insurance from AIG against the default of these bonds. These people never invested in 'assets'. They payed a small monthly fee to AIG for a lottery slip and when Lehman failed they had a huge win. They went to AIG, pointed to the 'credit event' and demanded the payout. AIG obliged and the taxpayer gave the money.

Some may ask:

"While it is easy to understand the moral case for bailing out real bondholders that insured against default, what is the moral case for paying out to people who made pure bets? These people never owned a fire insured house at all. Why do they get taxpayer money when my house burns down?"

"If they had be given back the money they payed for the lottery slips, i.e. the small monthly insurance premium, that would probably be understandable, but why do the taxpayers pay out the lottery win when the private lottery organizer is bankrupt?"

Simple answer to those simple questions: Because the administration says so.

There are big numbers behind this.

Of a total of $600 billion real [Lehman Bros] bonds owned by lots of people only $150 billion were credit insured. When Lehman bonds defaulted, owners of $450 billion of its debt lost all their money.

Owners of $150 billion of that debt did not lose any money. They were payed out the insurance they had contracted and the insurers (backed by the taxpayers) carried the loss.

The total economic loss was $600 billion, $450 billion by bond owners and $150 billion by insurances. $600 million left the monetary system - poof.

But on top of that there were written insurances with a notional value of $250-$350 billion that insured people who never had the insured asset but were only playing the lottery. These people demanded money from the insurer and indeed they were payed.

This part of the 'event' did not have a real economic loss. No money left the system.

Instead money was payed from the insurer toward the insurance holder, the buyers of CDS'. As the insurer was backed by the taxpayer every one and his/her children now pays for the enormous lottery win for a few people, who had risked very little. This is money that is moving from the bottom of the society to the top in unprecedented amounts.

What is the moral justification for this?

There is none.

Who are those people who are getting huge payouts from the taxpayer for risking little?

AIG still has $300 billion in CDS exposure. If the Lehman quote of 1/3 real insurance and 2/3 lottery bets is the same with those CDS, which is likely, than a few rich people are waiting for a $200 billion free payout from the taxpayer.

Geithner does not want you or anyone else to know who profits from this scheme without having risked any real money. His rich friends do not want you to know that they are racking in billions of dollars in lottery wins that cost them little money and that the taxpayers are paying out because the private lottery operator went bust. They will pay off Geithner when his job is done and he finally gets kicked out.

People in the known and within the business are not likely to explain this... This is money moving from many persons at the bottom to very few at the top.

Geithner and his masters fear that if the public knew or understood that, they would probably only get the costs of the lottery slip disbursed - if at all.

They want the big one. AIG has still $300 billion at risk that you and your kids will have to pay for.

They want it. And they are getting it. And there is nothing you can do about that.

In comments b spells it out even more brutally:

The whole thing is not about what's cheaper but how do [the rich elite] make the most money out of it.

The Lehman bust made, as explained in my post above, some folks about 200-300bn in cash without having invested much more than a million or two. Did anyone of those people thought of how to make the bust "cheaper" for them - sure they did. If they could have gotten $200bn for a $1 investment they would have taken it.

I am devastate that otherwise intelligent people like you do not get this yet.

IT WAS A SCAM. Lehman was made to go bust because some people made A WHOLE LOT OF MONEY from the Lehman bust - not millions - hundreds of billons!

They "insured" themselves against the bust, then arranged it and the taxpayers paid the "insured" sum. What is so hard to understand with that?

From the taxpayer view there was never ANY need to pay anything at all. Those really insured against losses of assets they owned might have a moral case - might!!!

Those "insured" and never owned the "insured" asset never had a justifiable case to get anything from their bet.

The later make up for two thirds of what the taxpayer is paying out.

Why are the taxpayers, we and our children, paying for these?

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"Saving Lehman" was never an option. The setup was clear for anyone who could read the market.

The question was and is how to save the taxpayer from taking the losses others take as profits.

If this is true, and I do feel some scepticism that it is as baldly manipulated as all that, then this is simply epic financial and political corruption.

b's solution is to Declare all Credit Default Swaps Null and Void. In comments to this post b is able to point out that a number of informed commentators are also calling for a similar solution to the derivatives nightmare which threatens to bring down the global financial system.

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