It's the Paradigm

Bankia, one of Spain’s largest banks, is needing a €23 billion bailout, to compensate for their over-zealous investments in the country’s late real estate boom gone bust. Throw in a few other teetering banks and the price tag rises to €50. The only way to thrive or even survive in a scenario of irrationally exuberant lending is to borrow more to keep the growth paradigm going. In other words, as long as the value of property is expanding, it’s not necessary to be rational in your investments. But then, as always happens with bubbles, they burst - it is a part of their nature, after all.

There are two ways that happens, though they’re often intertwined. One is inflated prices. At a certain point, prices have to reflect reality. The other is larger economic movements. The general economic malaise that pervades the country depresses optimism and growth. Either way, the loan is defaulted and somebody is going to have to pay.

Spain wants the European Central Bank to bailout the banks directly. That makes sense, since it’s the system, the paradigm, which encourages, almost demands imprudent lending. Used to be you had to put 20% down to buy a house. A buyer who’s accumulated that much cash will generally be a low level risk. However that would also constrict the market and slow down construction so we can’t have any of that. Instead the establishment wisdom is to push the economy to the limit, go for broke, the more growth the better.

The country is also at fault since it could’ve established rules and policies designed more for stability and prudence than growth at any cost. That would not be an easy task in today’s financial environment. There are only so many Hugo Chavez’s in the world who could ignore the dictates of the establishment view.

The borrower, of course, must take a substantial portion of the blame for the broken contract, but ultimately is has to rest with the bank to assume responsibility and take the loss. Banking is about risk; banksters know the level of risk they are undertaking. If you aren’t smart about lending your money, who else is supposed to compensate for your inadequacy?

Actually it’s the taxpayer who coughs up since some type of deposit insurance is essential to a functioning banking system. (But not in Cambodia, here you’re on your own.) There should be no question or hesitation when a bank gets into trouble; it should be shut down and small depositors paid off. There’s no good reason to keep a stupidly or irresponsibly run bank alive. Also as long as the taxpayer is on the hook to insure depositors the government has responsibility to properly regulate to prevent speculation that has the potential to get the bank into trouble. However, since the banksters own the government, at least in the US, we know there can be no changes on that front.

In Europe it may be different, since they have a more socialist, egalitarian political outlook and the people are hopping mad. Still, there’s a very powerful push on the part of the financial establishment for European countries to ‘take their medicine’, that is, to strip any benefits that might aid the 99% so that they’d have the money to feed the banksters.

Still, can you imagine, Spain coughs up €50 to protect the banks at the same time they’re slashing safety net funds in an economy with 25% unemployment? In fact, latest news is that the Spanish government has accepted a $125 billion loan to bailout its banks… anything to protect the banksters.

The European establishment may be forced to change the paradigm but Americans will never get it together if the recent recall result in Wisconsin is any indicator. Governor Scott Walker, who was elected in a Tea Party surge in 2010, started off giving $180 million in tax breaks to business and then discovered there wasn’t enough money to pay public employees. His ultimate goal, unstated in the campaign, was to break the public unions, which he proceeded to do by virtue of Repug control of both houses of state government.

This didn’t sit well with the unions or the progressive community so they fought back with a signature gathering campaign to recall the governor. The got the necessary signatures, all right, but lost badly in the election with Walker sustained in office by a 53% to 46% vote. There are two immediate reasons why the Repug won. The most important was the flood of money from right-wing billionaire assholes. According to the US Supreme Court - which today garners the support of only 44% of the people - money has the right of free speech. The other reason was that Obama gave the campaign neither financial or moral support. The feckless wonder did not stand by the people. The Dem running against Walker had $4 million and was outspent 8 to 1. Obama made $3.5 million in one fundraising event but couldn’t see his way to helping a fellow Dem.

The fundamental reason for the Dem’s defeat is that Americans, at least a lot of them, are political morons. It’s called the Fox News effect: A recent study showed people who watched Fox were less informed than people who watched no news at all. It’s people who rail against socialism at the same time they love their Medicare, that socialist program that would save the country $400 billion a year if it applied to everyone. It isn’t just the average low IQ wingnut dolt that doesn’t know their ass from a hole in the ground. You’ve got Romney and the Repugs insisting on programs of slashing public services to pay for tax cuts for the wealthy as a path to economic recovery when that’s been an abject failure since Reagan.

Once again Americans face a disheartening lack of choice this November, though the country will slide downhill a little slower with Obama at the helm. In the end result, the people get the politics they deserve… unfortunately.

  

Default

Default

The third topic of thunderous geopolitical import I’ve needed lately to write about after Fukushima, which keeps getting worse, and the regression of American politics, which probably can’t get any worse, is the Eurozone debt crisis which will later, if not sooner, see Greece, as the first of several countries, default on its debts or at minimum force a restructuring of its debt.

The IMF and European Central Bank think they are bending over backwards to help Greece avoid default. In the event, their prescriptions for recovery and the onerous conditions placed on their ‘generosity’, only delay the inevitable. By the time the latest bailout is added to their debt, it’ll equal more than 160% of GDP and debt service an unsustainable 6% plus of GDP. In contrast, US debt is about 100% of GDP and debt service about 1.2%. If the US were paying debt service equivalent to Greece’s that would come to about $1 trillion a year. The total US budget is now about $3.4 trillion.

Part of the problem is the high interest rates – 5.5% - the monetary agencies are charging Greece. The money made available to the ECB and IMF to help countries in distress should be doled out at low interest rates, they are, after all, not commercial banks looking for profits, but public entities financed with public money established for the public good. Why then would the IMF want to make money from a country that is dealing with social unrest, political upheaval and imminent default? Their mindset is so far from humanitarian they don’t even know they’re being assholes and helping to bring the country down instead of saving it.

That is combined with required austerity measures which, ostensibly, are to rein in excess government, but in reality add greatly to unemployment, and thus reduce tax revenue. Since affluent Greeks are adept at avoiding taxes it’s only the commoners that pay and only when they are working. Moreover, with the economy going downhill those who do have jobs aren’t spending in fear they might join the ranks of the unemployed. The finance community is participating in bringing the country down and making it impossible for Greece to ever pay its debt.

When an individual reaches an equivalent level of debt and it’s clear that they’ll never have the ability to pay, they declare bankruptcy. Their remaining assets are divvied up amongst creditors and they start over. Once you’ve gone that route, you’re on your own, you’ve no choice but to live within your means since borrowing is no longer an option.

The head of the ECB said Greek default is unthinkable because that would mean recapitalizing the big banks that have invested in Greek bonds. When the masses face unemployment and poverty, they’re told to buck up and tough it out. When banks and investors stand to lose out because they gambled (that’s what investing is) on the wrong investments, they get money thrown at them. Germans are widely opposed to bailing out Greece, but if they don’t, they’ll be bailing out their banks.

Greek prime minister Georges Papandreou has warned default will be catastrophic. Very true, but sometimes that’s exactly what’s needed to right the ship of state. For the Greek people who’ve been let down by their government and in some ways their culture, whether they go down by way of default or unsustainable debt, it’ll be catastrophe either way. They were let down by their government (the previous conservative administration) because it used Goldman Sachs’ expertise in deceit and underhandedness to hide the amount of debt they were accumulating. Let down by their culture because of a bloated civil service and widespread tax avoidance where doctors are able to claim annual incomes of $25,000 because they’ve bribed the tax authorities to look the other way.

It’s important to note that the Greek government could’ve continued on its merry profligate debtor’s way if the financial crisis of 2008 hadn’t intervened to throw a lightening bolt into the endless growth bubble. That’s why you’re supposed to save for a rainy day, make hay while the sun shines, bury your acorns in fall to get through the tough times of winter. Most people are aware of the half of Keynesian economics which says countries should deficit spend in times of recession to keep their economies going, but few remember the other half where he said they should put money aside during good times to have available during hard times.

The problem of excessive sovereign debt has arisen because dominant bankster economic philosophy over the past few decades requires that taxes on the wealthy and corporations be low which serves to starve government of revenues and simultaneously make it easy for governments to borrow because those with money have a lot of it laying around needing to do something with it. As mentioned previously, it’s a lot easier to use borrowing to make an economy look good than actually raise the necessary money through taxation. The borrowing is justified by assuming that a growing economy will make it easy to service the debt, and to a certain point, it will… until it stops growing, which inevitably must happen since nothing can grow indefinitely.

If world financial institutions actually wanted to help the people of Greece, they’d provide low or no interest loans to consolidate debt and an equivalent amount to finance infrastructure improvements and sustainable energy production to put people to work. They’d also force creditors to restructure their loans by extending their payback dates and lowering interest rates. Instead they are punishing the people with pay cuts, worsening working conditions, very high unemployment and increased taxes, all while the country’s elite continue to shirk their responsibility to help fund government. They are forcing a debt death spiral.

Ironically, default will change Greece in just the manner prescribed by the bankster community. The difference is that a lot of rich people will also share the pain and get hits in their deep pockets. Wouldn’t that be nice. And isn’t it about time. The banking system will be in crisis and lots of investors will get haircuts… well great, there’s too much money at the top, time to cut the elite down to a fairer, more equitable size.

The workers and salarymen and women will get hit hard, but they’ll also be able to start fresh and create a new society. Think about it: If a country is getting 40% of its budget from borrowing and suddenly that money is no longer available (that’s the percentage for America, I don’t know the exact figure for Greece) it will be a formidable challenge to keep the country afloat. The outsized civil service will be pared drastically. All government functions will be sliced to the bare bones. With the public sector starved for cash, the tax collectors will be, or should be, out doing their jobs with a vengeance. At least they won’t be spending a huge portion of their income on debt service.

It’ll be chaos and turmoil in the beginning with mass unemployment and poverty. In two or three years they’ll be back to some semblance of normality. In seven to ten years they’ll be going strong, starting from a much stronger, more equitable base. And it’ll be a warning to other countries to keep their books in order – including the US. And a warning to banksters and investors that they won’t always get bailed out.

Bubblemania

When the Greek debt/deficit crisis first bubbled up at the beginning of the year it was said to be a problem for that country but wouldn’t extend to others of the Euro zone. Greece after all only makes up about 2% of the Euro zone economy and the mainstays of that area, Germany, France, in particular, were not in bad shape.

Just a few months later there’s talk of doom for the Euro and it’s lost about 20% of its value against the dollar… as if the US didn’t have its own serious fiscal problems with debt and deficit of huge proportions. Fear, however, is contagious and investors - banks, fat cats and institutions - are getting spooked and that is leading to demands for high interest to compensate for the very real possibility of default.

Greece is being forced to tighten its belt, but while that’s inevitable, frugality may also exacerbate its fiscal problem by slowing the economy and consequently reducing tax receipts. But the country was living beyond its means before the recent sharp downturn. Borrowing is just too easy as a means of paying bills and stimulating the economy. It’s a nearly painless way to make everyone happy; that is, until the payments come due.

Sovereign debt is addictive. It’s fed by the neighborhood pushers - the banks, etc. - who generally aren’t worried about your ability to pay it back because they expect you to get bailed out if you run into trouble. That, however, adds to the total debt, only stretching out the payment schedule. In the case of Greece, accepting the bailout will bring its national debt to 150% of GDP from the current 115% and still leave it in precarious financial straits. Ultimately, the choices are narrow and stark: pay it back with great difficulty or default with the resulting chaos.

Borrowing has also of late been made easier by the existence the vast amount of wealth held by the filthy rich who need to have something do with their oodles of cash. The politics of the past 30 years has had governments throwing money at the wealthy in the (absurd) belief that their having it will accrue to the benefit of all. As a result they have far more than they know what to do with.

The result is a situation where the top dogs are flush while governments are put through the ringer. Everything governments do for ordinary people gets squeezed so the wealthy can have more money to play with. But they can’t spend very much of it since they already have everything. According to the theory, they will use their money to start new businesses, but they hardly ever do that. In the event, they buy securities or real estate but that does nothing to put people to work unless it’s part of creating a bubble and that obviously is only temporary.

Today, it’s clear that America’s run up in real estate values was in large part the result of sub-prime lending. Without all that extra cash floating around looking for something to do, there would’ve been no bubble. Real estate values tend to go up in the long run but do not necessarily create bubbles.

Many commentators on the left have been and still are pushing for additional stimulus spending. This is fine. Maintenance and construction of infrastructure is needed and important, especially if it involves electric rail transportation or conversion to alternate energy. Supplementing state budgets so they don’t have to lay off so many teachers, et.al., also is important. This however, does not require deficit spending. No borrowing is necessary to stimulate the economy, it can easily be done by taxing corporations and the wealthy. Furthermore, in contrast to taxing the lower classes which reduces disposable income and can bring the economy down, taxing the upper classes is a win-win situation, except for the wealthy, of course.

In addition to the needed revenue, curbing the wealthy also curbs speculation. If they have less money, they’ll have less ability to jack up prices of real estate and less of an impact on commodity prices. Until the recent real estate market crash, ordinary people were being priced out of the market by skyrocketing prices… tax the wealthy and prices will tend to stay more reasonable. In 2008 when oil prices hit $148 per barrel, 30% of that number was said to be attributed to speculation. Take away the fat cats’ money and you get a lot less speculation.

And I haven’t even touched on the moral imperative of correcting the great income disparity in America which is wider than at any time since 1929. It’s morally wrong, it’s economically wrong and yet Obama came into office promising tax breaks for everyone earning up to $250,000 per year. That may be politically astute, but it’s part of a blindness which will eventually have disastrous economic consequences. Those upper middle class people would be far better off in the long run paying extra taxes so that the US could balance its books rather than having the extra few thousand bucks to blow on totally unnecessary luxuries – they already have everything they truly need – or use the money to put in the bank or buy stocks.

Besides, considering the world is already using up its resources with abandon, it’s wacky and counterproductive to give people who are already comfortable more money to indulge in the superfluous.

People like to bring up the economic philosophy of John Maynard Keynes to justify deficit spending. He famously suggested back in the early 30’s that it was ok for countries to go into debt during hard times to keep the economy afloat. He was responding to President Hoover cutting the federal budget in response to declining revenues which only served to plunge the American economy further into depression. Those proponents of deficit spending conveniently forget, as noted in a previous post, that Keynes also said governments should put money away during good times to be prepared for bad times. Today it’s either high deficits during relatively good times or very high deficits during bad and not even a suggestion of getting the deficit down to a reasonable level, let alone balancing the budget for many years in the future.

However, the world is still owned by the banksters, thanks to generous government subsidies, and they will start to get freaked about huge deficits and begin to withhold their money or demand much higher interest rates… and that day is not far off, and the consequences will not be pretty.