Sunday, May 29, 2011

Michael Hudson — "EU: Politics Financialized, Economies Privatized"

Here is an excerpt from Kansas City School economist Michael Hudson's forthcoming book, taken from a longer excerpt introducing it that he recently posted:

"Politics is being financialized while economies are being privatized. The financial strategy was to remove economic planning from democratically elected representatives, centralizing it in the hands of financial managers. What Benito Mussolini called 'corporatism' in the 1920s (to give it its polite name) is now being achieved by Europe’s large banks and financial institutions – ironically (but I suppose inevitably) under the euphemism of 'free market economics.'

"Language is adopting itself to reflect the economic and political transformation (surrender?) now underway. Central bank 'independence'was euphemized as the 'hallmark of democracy,' not the victory of financial oligarchy. The task of rhetoric is to divert attention from the fact that the financial sector aims not to 'free' markets, but to place control in the hands of financial managers – whose logic is to subject economies to austerity and even depression, sell off public land and enterprises, suffer emigration and reduce living standards in the face of a sharply increasing concentration of wealth at the top of the economic pyramid. The idea is to slash government employment, lowering public-sector salaries to lead private sector wages downward, while cutting back social services.

"The internal contradiction (as Marxists would say) is that the existing mass of interest-bearing debt must grow, as it receives interest – which is re-invested to earn yet more interest. This is the 'magic' or 'miracle' of compound interest. The problem is that paying interest diverts revenue away from the circular flow between production and consumption. Say’s Law says that payments by producers (to employees and to producers of capital goods) must be spent, in the aggregate, on buying the products that labor and tangible capital produces. Otherwise there is a market glut and business shrinks – with the financial sector’s network of debt claims bearing the brunt."

Here is a post by Jim O’Reilly at Comments on Global Political Economy that looks at this issue from a global perspective:

What is the problem? Rent-seeking, defining economic rent as land rent, monopoly rent, and financial rent.

From a Minskyian viewpoint of financial instability arising from private debt, this political/economic model is unstable and is not going to end well. Iceland has already said, "No deal," and we are already seeing social unrest rising in MENA, the EU periphery, the UK, and parts of the US.

Yves Smith suggests a solution:

"Here is Hans Gersbach’s solution:
 When banks failed, the government paid up. But the bankers responsible kept their bonuses from the years of excess. This column argues for 'crisis contracts'….

"Crisis contracts are designed specifically for members of the bank’s management. The nature of a crisis contract is as follows:

"Definition of a crisis: A crisis occurs when the average equity capital in the banking system (relative to the assets) falls below a critical predefined threshold.
When a crisis occurs, the top managers of major or highly interconnected banks contribute a portion of their earnings from the previous years to a rescue fund for the recapitalisation of the banking system."

This is similar to re-instituting the partnership model that dominated banking and finance until recently. That was a good model since it placed responsibility on the shoulders of those ultimately responsible for extending credit and aligned incentives with reality.


Chaos said...

That's not a solution, it's a non-solution.

The current financial system is crapp and unsustainable, banks as they exist now are destined to die and being zombifies in a non-growing (or very low groth) economy.

And that's the destiny of most occidental economies: non-growth or even degrowth. Capital markets and investment funds should provide major investment capital, and the importance of debt-money and credit will have to decrease soon or later because compounded growth is not anylonger possible.

Employment and other problems will have to solved by policy (fiscal or labour) and not by economic growth based on explosive credit bubbles.

The solution is diminish the importance of banks or transform them to real investment not based on finanical rentism based on debt and inflation.

Time to seek a more sustainable financial model.

Tom Hickey said...

Chaos, have you seen Warren Mosler's poposals of the banking system?

googleheim said...

Copy centers are the verge of extinction, so why not Banks ?

Banks only pass on credits like Norman frequently says.

Therefore, maybe they are basically not needed when you have internet, smart phones, and encryption.

There is no interest to offer, so why should I park with them? I'd rather cut to the chase with a bank account with the fed.

As for MMT and Deregulation, I am highly surprised that Harvey, Hickey, Norman and Mosler and the rest have not covered the following point :

a. Deregulation markets since 80's and 90's has obviously allowed commodity prices to run high and be manipulated by Goldman Sachs, Morgan, etc ... especially oil. Why is oil and gasoline so high ?

b. Tax rates on oil and gasoline have either stayed the same or gone up.

c. Oil and gas companies enjoy huge tax breaks and subsidies.

Does the increase in oil and gas prices mean that the consumer pays MORE taxes ?


Does that mean that the oil and gas companies and consumers are bringing in bigger receipts for taxation income for Fed and possibly states if there are any ?


Does that mean that the deficit terrorists austrians austeritistas are going to lower taxes on oil and gas ?


Does that means that the libertarian repukingclans are going to reign in speculation and deregulation which makes us pay for taxes ?


It's all trivial to see that after a conversation with a 7 year old who asks why gasoline prices go too high, that the market is rigged and truly taxation is not fair.

$60 / tank is nothing for someone who makes over $30,000 a year
since yearly tank is 10% of that.

Therefore the burden of a country without efficient infrastructure to mobilize people is on the the poor who are taxed by the following :

a. deregulation
b. direct taxes on oil / gas
c. speculation
d. etc

googleheim said...


by giving Obama the Nobel Peace Prize what sort of time did the EURO by itself ?

open swap lines
negligible depreciation in face of debt in member zone

less chance of Iraq part III ?

Tom Hickey said...

goog, I have commented extensively on corporatism v. market capitalism and have said that until the money is gone from politics, the revolving door closed, and the military-industrial-governmental complex is shut down, we will live in a plutocratic oligarchy dominated by the ruling elite of this age.

Economics cannot change this. Only politics by one means or another can end it. I suspect that it is going to take a revolt to do it. See Ravi Batra, The New Golden Age: The Coming Revolution against Political Corruption and Economic Chaos (2007) for a rationale.

googleheim said...

ok 10-4

beowulf said...

Tom, Batra's duel exchange rate idea is interesting.

In theory it should have the same economic effect as an import tariff, but I wonder if Tsy and Fed trying to manipulate the yuan market (which the Chinese keep such a tight lid on) would be like climbing into the water to fight the shark.

Chaos said...

Tom, thanks for the link. It's better than Yves Smith proposal, but I'm not sure it will be enough.

It would depend on lending interest rates, money would have to be way cheap because otherwise you need strong growth to pay the interests on loans. And hen you will need to prevent asset bubbles with cheap credit, this means better control of banking and regulation.

We know there is a built-in danger in that because conflict of interests.

Tom Hickey said...

See Warren's paper, The Natural Rate of Interest Is Zero.

googleheim said...

if the natural rate of interest is zero, then is this cool with the various religious entities which forbide usury and interest on loans ?