Debt Redistribution is the Aim, Scaremongering is the Means


Ronan Jack, 9 April 2011 | 1 Comment

Categories: Politics | Finance | Democracy | European Union |


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As the financial crisis staggers on, lurching from country to country like a drunk from one lamppost to the next, the gap between reality and what the media tell us expands.

Across the world, there is a significant restructuring taking place, as financial institutions and the wealthy try to push the costs of the global financial crisis onto the remainder. One of the main ways in which this is currently happening is through our subservience to the bond markets, and the ratings agencies.

We are being told that we are regrettably having to pay the price for the outrageous overspending "we" have been engaged in. We are told that we have debts which are too high, and that if we don't cut back public spending, our national credit rating will be downgraded, the markets will take fright, the cost of borrowing to fund government spending will escalate, or even that we won't be able to borrow at all, and will have no money.

We hear this so often, that it becomes like the air we breathe. It's all around us. Take for example the casual observation from John Humphrys on the Today programme that Portugal have got themselves into a mess, and that "part of the answer, obviously, is that they cut their spending savagely", or the Daily Mail assertion that "had the Coalition not taken decisive action to cut state spending here, Britain would have suffered the same fate (as Portugal)... with families facing misery far beyond the painful but necessary belt-tightening required by Chancellor George Osborne’s austerity measures".

The argument runs that it is crucial to reassure the bond markets, and that they want to see drastic cuts in public spending because this shows a country is acting "responsibly". For example, the Telegraph reports that though Spain was thought to be next in line for problems, it is making cuts, and so markets are reassured: "as Portugal goes cap in hand to the international authorities, the tone has changed. "We think the contagion stops here," said Erik Nielsen, chief European economist at Goldman Sachs – and many agreed." The Independent notes that political considerations are swept aside by the reality of the markets: "The harsh mathematics that you have to pay debts as they fall due overrides everything."

So, we all need to face up to reality, recognise that whether we like it or not we have to borrow money, and this means that like any borrower, we are subject to the discipline of the creditor. In this case, it's "the markets" and the ratings agencies.

The three main agencies are Moody's, Standard and Poor, and Fitch. They are private companies which rate bonds in terms of risk. They are largely unregulated, and until recently, were completely unregulated. They rely on the US constitution's first amendment, freedom of speech, to claim that their ratings are just a matter of opinion, and that they bear no responsibility for them.

Their track record is shameful and appalling, and they bear a central responsibility for the current financial crisis, because they gave the best possible rating to the subprime bonds which turned out to be worthless. This meant that all sorts of institutions bought them at inflated prices. We are now paying the price for this shockingly poor set of judgements. Their multiple failings are described in many places, for example in the New York Times, Bloomberg, and the Financial Times. Many other references can be found by googling "ratings agencies incompetence" or similar.

Our credit rating is "triple A", the highest, meaning there is no realistic prospect of default on our debts. However, we are meant to fear the prospect of the ratings agencies downgrading that rating, and this is part of the rationale for following economic policies which these agencies approve. Sometimes, it seems as though the agencies are instructing us on what policies we should follow. The Telegraph reports that "The government's ongoing commitment to large-scale deficit reduction is very important to the AAA rating and stable outlook," Moody's said the day after George Osborne downgraded growth forecasts in his 2011 Budget.

The markets take the ratings agencies seriously, despite their atrocious record, and it is certain that if a country's rating is downgraded, the cost of borrowing on the money markets will increase. This is the logic of the situation of Portugal, where the request for a bailout was triggered by an auction of government bonds where the interest rates demanded by the market reached unsustainable levels. This is the "harsh mathematics" referred to in the Independent, mentioned above.

So the markets and the agencies instruct us to follow a cuts programme to reduce the deficit, and if we don't comply, like Portugal, they will reduce our rating, increase the cost of borrowing, and bring about an economic crisis. It makes you wonder who runs the country.

In fact, it's becoming clear who does run the country, and the answer seems to be the markets. In the case of both Ireland and Portugal, the democratic process seems unable to control the decisions being taken. It has recently been revealed that when Ireland took the massive decision in 2008 to guarantee the losses made by the banks, which propelled the country into this crisis, not only did the Irish people get no say in the decision, but neither did the Cabinet. More recently, the 2011 election offered no real choice on the EU bailout, with both main parties accepting the situation and disagreeing only on detail. The new administration is however seeking to renegotiate some of the terms of the deal.

In Portugal, the EU and the banks are keen to tie down the decisions even tighter. They are demanding that the political parties agree a package of cuts even harsher than the one recently rejected. The Guardian reports that The Portuguese will need to embark on "ambitious fiscal adjustment to restore fiscal sustainability", "an ambitious privatisation programme" as well as labour market reform and policies combating "macro-economic imbalances", and disburse state aid to keep the banking sector "liquid and solvent" – measures that should please the big European banks exposed in Portugal.

Crucially, they want this signed off before the election in June, precisely in order to deny the Portuguese people any say in the matter. Iceland is voting on whether to accept the debts being forced on the country, and of course this sort of vote is the last thing the financiers want to see. Better to get it agreed behind closed doors. Michael Hudson has written a good explanation of what is happening.

So, we come back to George Osborne's argument, uncritically repeated by the media, that we have to accept the austerity package because otherwise the markets will punish us and bring about economic collapse by not lending us money, or ending only at unsustainable rates.

And it is here that we come to the central point which is never, ever, discussed in the media. We don't have to take out these loans at all. We are not dependent on being lent money by the markets. It is a convention, a policy, a course of action which we choose to take but need not.

When people borrow from banks, the banks don't actually have the money they lend - they simply create it as debt, out of nothing. The banks and the markets are very much in favour of this. They get interest payments as well as having the loan repaid, and if the debtor defaults, they can seize assets. In the case of countries, the equivalent is demanding privatisation programmes. So the banks are demanding that their losses be taken on by the public, and to pay for them there must be a programme of pay cuts, public spending cuts, and asset-stripping. It is the most astonishingly bare-faced and brazen attempt at theft that could be imagined.

Bill Mitchell has pointed out that in Australia, when the government was in surplus and was retiring large swathes of the national debt, the financial sector protested, because they were being deprived of risk-free returns and a safe haven for investments - so the government started issuing bonds again. This is not about financing public debts, more like a money-making scheme for the private sector.

The alternative to dependence on the bond markets is simple. Money can be issued by governments, or else by central banks - not issued as debt by private banks. That would mean that we could free ourselves from the absurd demands of the money markets and the ratings agencies, not force ourselves into hardship and recession in order to let them make profits at our expense.

The wider question then becomes reform of the money system. There is a growing number of people who are calling for an end to the current system. One MP, Michael Meacher, has now called for control of the money supply to be brought back under public control, and for the whole banking system to be radically reformed. This remains very much a minority voice. It is also a bigger discussion, beyond the scope of this article, but perhaps a subject for another time. In the meantime, don't expect to hear too much about it in the mainstream media.


Categories in which this article appears: Politics | Finance | Democracy | European Union |

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Comments (1)

1. FreergeOthesk25th July 2011 01:44


logically



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