{"id":10051,"date":"2011-02-14T00:00:13","date_gmt":"2011-02-13T23:00:13","guid":{"rendered":"http:\/\/www.transcend.org\/tms\/?p=10051"},"modified":"2011-02-10T14:05:13","modified_gmt":"2011-02-10T13:05:13","slug":"latvia-financial-interests-dictate-sovereign-policy","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2011\/02\/latvia-financial-interests-dictate-sovereign-policy\/","title":{"rendered":"Financial Interests Dictate Sovereign Policy"},"content":{"rendered":"

1. A recent article of yours, \u201cSchemes of the Rich and Greedy<\/a>,\u201d cites the bailouts in Europe among such schemes. What are the main faults with bailouts, and for whom are they designed?<\/strong><\/p>\n

The financial sector is trying to get politicians to siphon off money from labor and industry to pay bankers. This will impede capital formation and living standards.<\/p>\n

The banks misrepresented the real value of balance sheet and hence what they really were owed under actual market conditions. Now that they have taken the money and run, the \u00abreal\u00bb economy is being told to pay the off their bad loans. The arrogance of this demand prompted Angela Merkel to ask why governments \u2013 meaning \u00abtaxpayers\u00bb \u2013 should pay for bad bank loans and corrupt financial dealing.<\/p>\n

Nice try if bankers can get away with it! But I\u2019m glad to see Germany opposing the EU proposal to double its bailout fund.<\/p>\n

2. You have written that \u201cLatvia has become a testing ground for how far living standards can be depressed, how steeply an economy can be taxed while removing public social support in the face of a wealthy kleptocratic class at the top.\u201d Do you think the same is intended for Greece, Ireland and any other \u201cPIG\u201d that may see its fiscal affairs fall into the control of the EU and IMF?<\/strong><\/p>\n

Foreign bankers are urging Greece \u201cWhy can\u2019t you be like Latvia and sacrifice your economy for our benefit?\u201d The reality is that paying creditors under these conditions is like paying tribute to a power that has conquered you militarily.<\/p>\n

Fortunately, labor in most of Europe is much less passive than in Latvia. The post-Soviet economies have little labor union tradition, and politics are largely ethnic. As a result of the oppressive Stalinist era bringing in Russians to replace local middle class professionals in the 1950s, the ruling neoliberals have been able to turn the frustration of voters mainly against Russian-speakers rather than at what is the most anti-labor, pro-property tax regime in history.<\/p>\n

The rest of Europe now has the bad tax and financial policy of Latvia and the Baltics before its eyes as an object lesson in what to avoid. When the neoliberal bubble burst, Latvia\u2019s government borrowed from the EU and IMF on terms that impose such deep austerity that the economy has plunged by over 20% and unemployment is rising, while the flat-tax rake-off on wages and salaries has now been jacked up to 68%. Over 12% of the population is now working abroad. They send home what they can to help their families survive.<\/p>\n

So rather than being a model to emulate, Latvia shows what is wrong with the neoliberal policy that bankers are telling other countries to adopt. It\u2019s not a bailout of the economy, but of an economic strategy that threatens to make economies poorer.<\/p>\n

3. How do you explain the IMF\u2019s role in Europe\u2019s debt crisis? Is it that the EU lacks the technical expertise to deal with sovereign debt issues, as some have suggested, or because it is a junior partner of multinational finance capital? <\/strong><\/p>\n

What passes for \u2018expertise\u2019 is political, not objective and neutral. At the hands of neoliberals, \u2018financial expertise\u2019 means calculating how much taxable surplus, disposable personal income, rental income and profits the financial sector can grab for itself.<\/p>\n

Real experts would follow the advice that John Maynard Keynes gave in the 1920s regarding German reparations and Inter-Ally debts. It is better to wipe out bad debts than to try to pay creditors at the cost of reducing capital formation, living standards and public spending on education, health care and other basic infrastructure. A wise government would subordinate the financial sector to promote economic growth, capital formation and rising living standards.<\/p>\n

The EU and IMF \u2018Washington Consensus\u2019 policy was applied to Third World dictatorships in the 1960s, \u201870s and \u201880s under gunpoint, but Europe is freer to choose. To follow \u2018expert\u2019 advice as Iceland and Ireland have done quickly turns into an exercise in asset stripping, replacing social democratic government with an extractive financial oligarchy.<\/p>\n

4. Is it in Germany\u2019s interest to drive out of the eurozone the fiscally weak countries?<\/strong><\/p>\n

What really is Germany? Its banks? Its industrial exporters? Or is it German labor? Politicians serving the bank lobby take the following position:<\/p>\n

Germany has produced great composers, physicists and chemists, and also scholars of classical antiquity. But our bankers are gullible. They were stupid enough to trust Icelandic bank looters, Irish speculators and American junk-mortgage salesmen. So they\u2019ve lost a lot of money. They\u2019ve asked us to pass on their request that you Greeks, Irish and other people tax yourselves to death and wreck your economies so that they won\u2019t have to pay for their naivety by bearing all the cost of their expensive education in how today\u2019s world of financial sharpies really works.<\/p>\n

You can\u2019t blame the bankers for trying. But other countries should call their bluff. Germany would be better served helping countries recover from neoliberal fairy tales and to adopt more progressive tax and financial policies. Otherwise, bankers will end up doing at home what they are trying to do to the rest of Europe.<\/p>\n

5. Do you see a way out of Europe\u2019s sovereign crisis? <\/strong><\/p>\n

The economic problem is not caused by sovereign debt but by bad bank loans, deceptive financial practice and neoliberal bank deregulation. Iceland\u2019s Viking raiders, Ireland\u2019s Anglo-Irish bank and other foreign banks are trying to avoid taking losses on financial claims that are largely fictitious, inasmuch as they exceed the ability of indebted economies to pay. The \u2018crisis\u2019 can be solved by making the banks write down their debt claims to realistic \u2018junk\u2019 valuations. There is no need to wreck economies by subjecting them to financial asset-stripping.<\/p>\n

In such cases there\u2019s a basic principle at work: Debts that can\u2019t be paid, won\u2019t be. The question is, just how won\u2019t they be paid? As matters stand, countries are being told to subject themselves to massive foreclosure \u2013 not only a forfeiture of homes, but of national policy.<\/p>\n

In this respect the sovereign crisis is a crisis of sovereignty itself: Who shall be in charge of the economy, its tax philosophy and public spending: elected officials acting in the public interest, or an intrusive financial oligarchy? The EU was wrong to tell governments to pay for following its advice \u2013 and pressure \u2013 to trust financial crooks and deregulate bank oversight. The European Central Bank should reimburse victimized governments for the bailouts that have been paid. This reimbursement can be done by levying a progressive tax policy and creating a central bank to help finance governments.<\/p>\n

The proper aim of a national economy is to promote capital formation and rising living standards for the population as a whole. not a narrowing financial class at the top of the pyramid. So I see two major policies to lead the way out of this mess:<\/p>\n

First, shift taxes back onto land and resource rent, and onto financial and capital gains. This will prevent another real estate bubble from being inflated by debt leveraging. By holding down housing prices, it will save labor from having to pay an equivalent amount in income tax. Low real estate taxes (under 1% until just recently) have not saved homeowners money in Latvia. Low property taxes merely have left more rental income to be pledged to banks, to capitalize into large mortgage loans.<\/p>\n

Second, de-privatize basic utilities and natural monopolies to save Europe from rentiers turning it into a tollbooth economy. Europe needs a central bank that can do what central banks are supposed to do: create money to finance government deficits. But the European Central Bank and article 123 of the European Constitution as amended by the Lisbon Treaty prevents the central bank from lending to governments. This forces governments to levy taxes to pay interest to banks \u2013 for creating electronic credit that a real central bank could just as well create on its own computer keyboards.<\/p>\n

Government banking is not necessarily inflationary. It finances what is necessary for economies to grow: investment in infrastructure and capital formation to raise productivity and minimize the cost of doing business.<\/p>\n

What turns out to be inflationary is commercial bank lending. It inflates asset prices \u2013 unproductively. Banks lend mainly against real estate and other assets already in place, and stocks and bonds already issued. This is unproductive credit, not real wealth creation. The only way to keep this unproductive debt overhead solvent is to inflate asset prices more \u2013 by untaxing assets to leave more revenue to pay bankers on exponentially growing debts.<\/p>\n

It doesn\u2019t have to be this way. The recent 30 years of financial polarization is reversible. The alternative is to succumb to neoliberal austerity.<\/p>\n

___________________<\/p>\n

Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971). He acts as an economic advisor to governments worldwide including Iceland, Latvia and China on finance and tax law.<\/em><\/p>\n

Go to Original \u2013 Michael-hudson.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

\u201cLatvia has become a testing ground for how far living standards can be depressed, how steeply an economy can be taxed while removing public social support in the face of a wealthy kleptocratic class at the top.\u201d<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[166],"tags":[],"class_list":["post-10051","post","type-post","status-publish","format-standard","hentry","category-interview"],"_links":{"self":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/10051","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/comments?post=10051"}],"version-history":[{"count":0,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/10051\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media?parent=10051"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/categories?post=10051"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/tags?post=10051"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}