Daily Archives: November 10, 2011

A Financial Coup d’etat in the Making?

Posted on November 10, 2011 by admin | Comments Off

By Marshall Auerback

It is said that the EuropeanUnion is a remarkably inefficient organization in terms of organizing economicrescue packages, but when it comes to subverting democracy, they are asruthless and efficient as a well-oiled crime syndicate.

Considerthe following: in the space of less than2 weeks, the eurocrats have managed to eliminate two troublesome electedleaders, whose actions dared to interfere with their broader objectives offinalizing the “European Project” – a project which, to put it bluntly, islooking more and more like a financial coup d’etat.

First,Greece, which has in a sense provided the template: Prime Minister George Papandreou, had theaudacity toseek the consent of his own people to decisions that would shape their livesvia referendum. Well, judging from thepetulant reactions of German Chancellor Angela Merkel and French PresidentNicolas Sarkozy, this clearly wouldn’t do. Blatantly interfering with the internal affairs of a fellow democracy(and an ostensible ally), both lobbied (andthreatened) the Greek government, the end result being that Mr. Papandreou wasduly shoved aside after backtracking.

And look who’s the new PM in Greece: LucasPapademos, a former ECB official, (naturally, with the requisite Goldman Sachspedigree), in order to implement the latest set of “structural reforms”, whichwill almost certainly have the effect of deflating the Greek economy evenfurther into the ground. Of course, theprivatizations will go ahead and Greece’s rapacious tax evading oligarchs willscoop them up at distressed values (presumably with the cash they’ve alreadystashed offshore in the London property market, or Swiss banks), therebyconsolidating their control of an increasingly dysfunctional Greek economy. The vast majority of Greeks will sufferhorribly. They have no say, in a sensebeing left with the choice of shooting themselves or a firing squad. Still, it’s not a total loss: no doubt Goldman Sachs will reap substantial feesas it helps to auction off these very same state assets.

Across, the Adriatic, itappears as if the “Merkozy” tandem has also played its cards successfully forRound 2, this time successfully eliminating its troublesome nemesis, Italy PM SilvioBerlusconi. Say what you will about MrBerlusconi, but in this instance he was right to object to a crude political ploy being foisted on him by theECB, the French and Germans to accept an irrational and economicallycounterproductive program fiscal austerity program in exchange for “support”from the likes of the IMF. Ask any Argentinean what IMF “support”entails.

AllBerlusconi had to do was cast his eyes toward Athens to see the likely effectof a renewed assault on the Italian welfare state. But the markets’ euphoric reactionto his resignation was surreal: akin to turkeys voting for Thanksgiving.

InRome, this Franco-German powerplay is being overseen by a canny ex-Communist,President Giorgio Napolitano, who is in the process of engineering life-longeurocrat, Mario Monti, as the next PM in Italy. Look at Monti’sbackground: Impeccable credentials: a virtual “lifer” within the European Union’stechnocratic governing structures, mingled with some private sector“experience” as a director of entities such as Coca Cola and, of course, an “internationaladvisor” to Goldman Sachs.

What is taking place isnothing less than a financial coup d’etat by the Eurozone’s rentier class. And it is one of history’s sad ironies that,at least in the case of Italy, this is all being engineered by an ex-Communist,who likely would have been chased out of the Italian Government (a la JuanBerlinguer) by a Cold War-driven CIA hadthis taken place but 30 years earlier.

How have we come to this passwithin the EU? It is hard to point toone person. We have seen this vastproject moved along by a handful of unelected bureaucrats for several decadesor more. Jacques Delors was a truly seminal figure, but he did not actalone. The whole of the Europeanproject has been increasingly driven by these unelected tenured eurocrats, who have rotated in and out of various positions withinthe EU’s governing structures and spent a few years’ getting the requisiteprivate sector training at a place like GS or JP Morgan.

You could make the case thatthis started when then French President Francois Mitterrand came to power inthe early 1980s, and tried to implement a genuinely fresh progressive economicdirection for France. He was promptly undermined until he learned to “playball” with the powers behind the throne. Since then, the game planhas largely remained the same: EuropeanCommissioners set up multiple diktats, rules, regulations, minus, of course, anyreal kind of democratic recourse when they encounter popular resistance. You start small and build up gradually and create fait accomplis everywhere.

Whenthere is democratic backlash via a referendum, the setback is onlytemporary. Countries, such as Ireland,which dare to vote the “wrong” way in a national referendum, do not have theresults respected. EU officialdom hasgenerally responded, not by reflecting on a popular expression of democraticwill, but ignoring the results until the silly peasants realize the egregiouserrors of their ways and re-vote the right way.

Ifit takes two, or even three, referenda, so be it. Politically, theinterpretation of any aspect of the Treaties relating to European governancehave always been largely left in the hands of unelected bureaucrats, operatingout of institutions which are devoid of any kind of democraticlegitimacy. This, in turn, has led to an increasing sense of politicalalienation and a corresponding move toward extremist parties hostile to anykind of political and monetary union in other parts of Europe. Underpolitically charged circumstances, these extremist parties might become themainstream.

The one figure who emerges as a tragic figure here isGeorge Papandreaou. However ineffectually, Papandreou had been deeply committedto making the October deal work. But asHarvard economist (and Greek government advisor) Richard Parker has noted,Papandreou faced a firestorm on multiple fronts: competitors in his own partywho wanted his job; parliamentarians in his party who threatened to bolt overnew austerity measures; the wholesale intransigence of Samaras and NewDemocracy; to say nothing of economy that was deflating into the ground beforeany real help had arrived. Calling for a referendum became his onlyinstrument to put out multiple fires at once—by forcing Greek politicians andtheir powerful backers to back down and by forcing European leaders back to thetable immediately to finalize a workable rescue plan in final form.

Of course, he was bound tofail, given the powerful opposition behind him. The Greek PM was being punished on the one hand by his”allies” in the EU, who have imposed collective punishment on theGreek people because of decades of embedded corruption in the system, in spiteof the fact that this Prime Minister had come clean. Making Greece a properfunctioning democracy was Papandreou’s raison d’etre for in getting into Greekpolitics.

And, on the otherside, the parasite Greek oligarchs themselves, who saw his actions asfrontal attack on their control of the Greek economy, fought to destroy himpolitically and in effect moving Greece one step closer to a failed state.

And now Greece has provided aconvenient model. You’ve now manufactured a crisis (that EASILY could have been solved by the ECB years ago – Greece is around 2.5% ofEurope’s GDP), which is now spreading, but providing ample opportunity to getrid of troublesome politicians who don’t do what they are told (effectivelyembrace this “stability culture” that the Germans bleat on about, butwhich in reality is nothing more than consolidation of the rentiers’ control ofthe various governments).

Similarly in Italy, theEuropean Central Bank has been buying Italian bonds, but in very half-heartedfashion and certainly not enough to stem the relentless rise in rates. The ECB’s new chief, Mario Draghi (also anex-Goldman man), kicked off his term with a blunt warning that Europe’s centralbank would not act as a “lender of last resort” (hiding behind dubious legaltechnicalities) and thereby put his fellow countryman in a position where hisresignation was the only course of action to salvage the country from animmediate financial crisis.

Berlusconi was also an easy target, given his colorfuland dubious private history. And hislikely replacement, Mario Monti, is a perfect bagman for the financialoligarchs of Europe. He is, indeed, part of what one can rightly refer toas a “financial mafia” that has wrecked the world economy since 2008. Thesehatchet men of this murky and opaque financial world are now being appointed toimplement austerity on poor working households to save the financial sectorfrom a debt deflation — an artificial crisis created because of thearchitecture of the Euro system, which as we know these same financial“markets” so much celebrated when the euro was launched in 1999. Sadly, a largenumber of Italians still see the euro as their saviour from a corrupt past,which many associate with the Italian lire and high interest rates, even if thecorrupt Berlusconi has been himself intimately linked to the same Euro elite.

And Draghi himself has a dubious past: as wenoted in a recent post,historically, Italyactively exploited ambiguity in accounting rules for swap transactions in orderto mislead EU institutions, other EU national governments, and its own publicas to the true size of its budget deficit.

Itseems indeed fitting that Draghi is now the man forced to deal with theconsequences of this national accounting fraud. But it’s hardly just for the people of Europe, all of whom will continueto get crushed under the boot of yet more fiscal austerity, by an increasinglydetached and democratically unaccountable elite. No wonder the streets of Madrid, Athens, Romeand elsewhere are beginning to burn.

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Blog #23: Sovereign Debt Limits: Response to Comments

Posted on November 10, 2011 by admin | 2 comments

Thanks for comments and apologies for being late. I justreturned from Rio. And lest you think I was just tanning on the beach, I wasactually indoors at a conference—underground, no less.

Rather than repeating the questions, let me justsummarize six key issues raised.

Weneed to tie ourselves to the masthead of budget limits to keep politicians fromspending too much. For better or worse we have a budgeting process throughwhich Congress decides how much to allocate to programs, then submits the planto the President. Once approved, this authorizes spending. That is the“democratic” process through which our elected representatives decide whichprograms are worthy of funding—and at what levels. Much of the spending is“open-ended” in the sense that it is contingent (unemployment benefits paidwill depend on economic performance, for example). I do not see how adding aconstraint beyond this is either necessary or consistent with democraticcontrol and accountability. Certainly I do not support many or even most of theprograms Congress and the President decide to fund. I can vote to throw thebums out. If I’m rich enough, I can try to buy them off with campaigncontributions. By its very nature a debt limit is arbitrary and inconsistentwith the budgeting process. In the past, it never mattered—the budget trumpedthe limit and Congress routinely raised the limit. Now the politics of aminority is trying to subvert the budgeting process. In truth, the biggerdanger is the new super-duper hand-picked for ignorance deficit committee thatis authorized to ignore Congress’s will as expressed in the budget and to slashand burn programs in a thoroughly undemocratic manner.

Publicgoods provision is always less efficient than private goods provision; andproduction of public goods crowds-out private goods and hence must reduceoverall efficiency. This is faith-based economics of the worst sort. It hasabsolutely no evidence to support it and defies any logic. Outside of communistor socialist societies, I truthfully cannot see any legitimate use for the hazyterm “efficiency” in economics. Unlike communist societies, capitalistsocieties never operate near to full capacity (with World Wars the onlypossible exception) and hence it is never a simple matter of taking resourcesaway from private use to support public use. And in any case, one cannotimagine any private production without first having in place publicprovisioning.

Abloated government is a drag on growth and causes inflation. Could be true.However, everywhere I look in the West (that is to say, among developednations) the problem is government that is far too small to succeed in thetasks at hand. Too much privatization, too many idle resources, inadequateprovision of essential public services.

Whohas the authority to issue “warrants” or “platinum coins”? As discussed above,Congress and the President first work out a budget. That authorizes Treasuryspending. We can come up with all sorts of procedures to allow Treasury toaccomplish that task. A relatively primitive but effective one would be for itto simply print up Treasury notes and spend. Or it can directly keystrokeentries into the deposit accounts of recipients—but that requires that Treasurycan also keystroke reserves onto bank balance sheets. Since we divide the tasksbetween Treasury and Fed, having banks “bank at the Fed”, it must be the Fedthat keystrokes the reserves. There is no fundamental reason for this—bankscould have accounts at the Treasury used for clearing and then the Treasurywould keystroke the reserves. But we don’t do it that way. So we could have theFed act as the Treasury’s bank, accepting a Treasury IOU and keystroking bankreserves. But we don’t do that either—we say that although the Fed is theTreasury’s bank, it is prohibited from directly accepting a Treasury IOU. Andhence we created complex procedures that involve private banks, the Fed and theTreasury to accomplish the same thing.
Now I went through all that simply as an introductionto the warrant and platinum coins proposals. Treasury has the authority toissue platinum coins in any denomination, so could for example make largepayments for military weapons by stamping large denomination platinum coins. Itwould thereby skip the Fed and private banks. And since coins (and reserves andFederal Reserve notes) don’t count as government debt for purposes of the debtlimit this also allows the Treasury to avoid increasing debt as it spendsplatinum coins. Similarly we could create some new IOU we call a warrant thatis made acceptable (for example) in tax payment. It would be a Treasury IOU butwould not be counted among the bills and bonds that total to the governmentdebt. Like currency it would be “redeemed” in tax payment, hence demanded bythose with taxes due. So it is just another finesse to get around arbitrarylimits or procedures put on Treasury spending.

TotalFed commitments (so far) to bailout Wall Street: $29 trillion. That figureresults from a close study by two UMKC PhD students who will soon be releasingtheir study.

Whatabout Italy (etc)? Do they face market imposed debt limits (rather than simplytying their shoes together voluntarily)? Yes. Go to my GLF blog today.They are now more like US states, users not issuers of the currency.