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."

Read the whole post at EU: Politics Financialized, Economies Privatized

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

The face of the enemy: The “Global 500″ corporations

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."

A Better Way to Make Bankers Pay for Crises?

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.