Franklin's Focus 6/27/10

The appended article is one of the clearest pieces of its kind I've
ever read. There is scarcely a single word written in econobabble.
Economic or fiscal analyses are written this clearly about once in a
decade.

Michael Hudson offers a clear, naked exposé of just where Europe is
headed and where Obama is planning to take this nation. There is not a
word in this piece that is murky, technical, or ostentatious. I
breezed through it without once wrinkling my brow or cursing the
writer. This kind of expositional writing is a joy.

The message, however, is depressing. The future, as planned by Obama,
the DLC, and Obama's TC 'shadow cabinet', looks very dark. Social
Security, Medicare, pensions, and so on, are future targets. Old
people, handicapped people, jobless people, blue collar workers, and
so on ad infinitum are facing a grim future if Obama and his
conservative friends have their way.

The 'friends' of Obama I speak of include the members of the
Democratic Leadership Conference, which has controlled the Democratic
Party ever since the Clintons created this rightwing body within the
Democratic Party. DLC members are closeted extreme rightwingers who
have exploited the party to attain office in the nation's capital and
sabotage socioeconomic reforms by the Democratic Party.

If one combines the power of the TC with that of the DLC, it is easy
to see why the recent alleged recent financial 'reform' never got
around to banning derivatives, which were the main cause of the huge
financial scandal and near collapse of Wall Street. This means
derivatives will march along their merry way, but more clandestinely
than ever before. In other words, they have now become more lethal.

Oh yes, they will now be monitored by former Wall Street fat cats.
Obama tells us this insures that derivatives are not 'abused',
whatever that vague term means. The truth is Obama never thought the
derivatives were really abused in the first place. The only problem in
his eyes is that the gang of criminals producing and exploiting them
were not slick enough in doing so. People of the same ilk will now
operate more securely with the blessing of former Wall Street fat cats
covering their rear ends.

As for the failure to limit the size of banks, I reserve my comments
on that Obama- favored crime for another day.

But I digress.

Read the Hudson article just to see how clear such corruption and
merciless treatment of the masses of American people can be when
explained by a writer who writes in English.

Note: he often directs his comments toward what is happening in
England and other European states with an understanding that the U.S.
will soon follow by copying those nations.

Today's Quotation

'Old people have a duty to die and get out of the way.'

Richard Lamm, governor of Colorado, 1981

Warmest regards,

Richard

=====================================================

June 25, 2010 www.globalresearch

Europe’s Fiscal Dystopia: The “New Austerity” Road to Financial Serfdom
Massive Cutbacks in Public Spending

by Prof. Michael Hudson

Europe is committing fiscal suicide – and will have little trouble
finding allies at this weekend’s G-20 meetings in Toronto. Despite the
deepening Great Recession threatening to bring on outright depression,
European Central Bank (ECB) president Jean-Claude Trichet and prime
ministers from Britain’s David Cameron to Greece’s George Papandreou
(president of the Socialist International) and Canada’s host,
Conservative Premier Stephen Harper, are calling for cutbacks in
public spending.

The United States is playing an ambiguous role. The Obama
Administration is all for slashing Social Security and pensions,
euphemized as “balancing the budget.” Wall Street is demanding
“realistic” write-downs of state and local pensions in keeping with
the “ability to pay” (that is, to pay without taxing real estate,
finance or the upper income brackets). These local have been left
unfunded so that communities can cut real estate taxes, enabling site-
rental values to be pledged to the banks of interest. Without a debt
write-down (by mortgage bankers or bondholders), there is no way that
any mathematical model can come up with a means of paying these
pensions. To enable workers to live “freely” after their working days
are over would require either (1) that bondholders not be paid
(“unthinkable”) or (2) that property taxes be raised, forcing even
more homes into negative equity and leading to even more walkaways and
bank losses on their junk mortgages. Given the fact that the banks are
writing national economic policy these days, it doesn’t look good for
people expecting a leisure society to materialize any time soon.

The problem for U.S. officials is that Europe’s sudden passion for
slashing public pensions and other social spending will shrink
European economies, slowing U.S. export growth. U.S. officials are
urging Europe not to wage its fiscal war against labor quite yet. Best
to coordinate with the United States after a modicum of recovery.

Saturday and Sunday will see the six-month mark in a carefully
orchestrated financial war against the “real” economy. The buildup
began here in the United States. On February 18, President Obama
stacked his White House Deficit Commission (formally the National
Commission on Fiscal Responsibility and Reform) with the same brand of
neoliberal ideologues who comprised the notorious 1982 Greenspan
Commission on Social Security “reform.”

The pro-financial, anti-labor and anti-government restructurings since
1980 have given the word “reform” a bad name. The commission is headed
by former Republican Wyoming Senator Alan Simpson (who explained
derisively that Social Security is for the “lesser people”) and
Clinton neoliberal Erskine Bowles, who led the fight for the Balanced
Budget Act of 1997. Also on the committee are bluedog Democrat Max
Baucus of Montana (the pro-Wall Street Finance Committee chairman).
The result is an Obama anti-change dream: bipartisan advocacy for
balanced budgets, which means in practice to stop running budget
deficits – the deficits that Keynes explained were necessary to fuel
economic recovery by providing liquidity and purchasing power.

A balanced budget in an economic downturn means shrinkage for the
private sector. Coming as the Western economies move into a debt
deflation, the policy means shrinking markets for goods and services –
all to support banking claims on the “real” economy.

The exercise in managing public perceptions to imagine that all this
is a good thing was escalated in April with the manufactured Greek
crisis. Newspapers throughout the world breathlessly discovered that
Greece was not taxing the wealthy classes. They joined in a chorus to
demand that workers be taxed more to make up for the tax shift off
wealth. It was their version of the Obama Plan (that is, old-time
Rubinomics).

On June 3, the World Bank reiterated the New Austerity doctrine, as if
it were a new discovery: The way to prosperity is via austerity. “Rich
counties can help developing economies grow faster by rapidly cutting
government spending or raising taxes.”[1] The New Fiscal Conservatism
aims to corral all countries to scale back social spending in order to
“stabilize” economies by a balanced budget. This is to be achieved by
impoverishing labor, slashing wages, reducing social spending and
rolling back the clock to the good old class war as it flourished
before the Progressive Era.

The rationale is the discredited “crowding out” theory: Budget
deficits mean more borrowing, which bids up interest rates. And this
is supposed to help countries – or would, if borrowing was for
productive capital formation. But this is not how financial markets
operate in today’s world. Lower interest rates simply make it cheaper
and easier for corporate raiders or speculators to capitalize a given
flow of earnings at a higher multiple, loading the economy down with
even more debt!

Alan Greenspan parroted the World Bank announcement almost word for
word in a June 18 Wall Street Journal op-ed. Running deficits is
supposed to increase interest rates. It looks like the stage is being
set for a bit interest-rate jump – and corresponding stock and bond
market crash as the “sucker’s rally” comes to an abrupt end in months
to come.

The idea is to create an artificial financial crisis, to come in and
“save” it by imposing on Europe and North America a “Greek-style”
cutbacks in social security and pensions. For the United States, state
and local pensions in particular are to be cut back by “emergency”
measures to “free” government budgets.

All this is quite an inversion of the social philosophy that most
voters hold. This is the political problem inherent in the neoliberal
worldview. It is diametrically opposed to the original liberalism of
Adam Smith and his successors. The idea of a free market in the 19th
century was one free from predatory rentier financial and property
claims. Today, a “free market” Alan Greenspan and Ayn Rand style is a
market free for predators. The world is being treated to a travesty of
liberalism and free markets.

This shows the usual ignorance of how interest really are set – a
blind spot which is a precondition for being approved for the post of
central banker these days. Ignored is the fact that central banks
determine interest rates by creating credit. Under the ECB rules,
central banks cannot do this. Yet that is precisely what central banks
were created to do. European governments are obliged to borrow from
commercial banks.

This financial stranglehold threatens either to break up Europe or to
plunge it into the same kind of poverty that the EU is imposing on the
Baltics. Latvia is the prime example. Despite a plunge of over 20% in
its GDP, its central bankers are running a budget surplus, in the hope
of lowering wage rates. Public-sector wages have been driven down by
over 30%, and the government expresses the hope for yet further cuts –
spreading to the private sector. Spending on hospitals, ambulance care
and schooling has been drastically cut back.

What is missing from this argument? The cost of labor can be lowered
by a classical restoration of progressive taxes and a tax shift back
onto property – land and rentier income. Instead, the cost of living
is to be raised, by shifting the tax burden further onto labor and off
real estate and finance. The idea is for the economic surplus to be
pledged for debt service.

In England, Ambrose Evans-Pritchard has described a “euro mutiny”
against regressive fiscal policy.[2] But is more than that. Beyond
merely shrinking the economy, the neoliberal aim is to change the
shape of the trajectory along which Western civilization has been
moving for the past two centuries. It is nothing less than to roll
back Social Security and pensions for labor, health care, education
and other public spending, to dismantle the social welfare state, the
Progressive Era and even classical liberalism.

So we are witnessing a policy long in the planning, now being
unleashed in a full-court press. The rentier interests, the vested
interests that a century of Progressive Era, New Deal and kindred
reforms sought to subordinate to the economy at large, are fighting
back. And they are in control, with their own representatives in power
– ironically, as Social Democrats and Labour party leaders, from
President Obama here to President Papandreou in Greece and President
Jose Luis Rodriguez Zapatero in Spain.

Having bided their time for the past few years the global predatory
class is now making its move to “free” economies from the social
philosophy long thought to have been built into the economic system
irreversibly: Social Security and old-age pensions so that labor
didn’t have to be paid higher wages to save for its own retirement;
public education and health care to raise labor productivity; basic
infrastructure spending to lower the costs of doing business; anti-
monopoly price regulation to prevent prices from rising above the
necessary costs of production; and central banking to stabilize
economies by monetizing government deficits rather than forcing the
economy to rely on commercial bank credit under conditions where
property and income are collateralized to pay the interest-bearing
debts culminating in forfeitures as the logical culmination of the
Miracle of Compound Interest.

This is the Junk Economics that financial lobbyists are trying to sell
to voters: “Prosperity requires austerity.” “An independent central
bank is the hallmark of democracy.” “Governments are just like
families: they have to balance the budget.” “It is all the result of
aging populations, not debt overload.” These are the oxymorons to
which the world will be treated during the coming week in Toronto.

It is the rhetoric of fiscal and financial class war. The problem is
that there is not enough economic surplus available to pay the
financial sector on its bad loans while also paying pensions and
social security. Something has to give. The commission is to provide a
cover story for a revived Rubinomics, this time aimed not at the
former Soviet Union but here at home. Its aim is to scale back Social
Security while reviving George Bush’s aborted privatization plan to
send FICA paycheck withholding into the stock market – that is, into
the hands of money managers to stick into an array of junk financial
packages designed to skim off labor’s savings.

So Mr. Obama is hypocritical in warning Europe not to go too far too
fast to shrink its economy and squeeze out a rising army of the
unemployed. His idea at home is to do the same thing. The strategy is
to panic voters about the federal debt – panic them enough to oppose
spending on the social programs designed to help them. The fiscal
crisis is being blamed on demographic mathematics of an aging
population – not on the exponentially soaring debt overhead, junk
loans and massive financial fraud that the government is bailing out.

What really is causing the financial and fiscal squeeze, of course, is
the fact that that government funding is now needed to compensate the
financial sector for what promises to be year after year of losses as
loans go bad in economies that are all loaned up and sinking into
negative equity.

When politicians let the financial sector run the show, their natural
preference is to turn the economy into a grab bag. And they usually
come out ahead. That’s what the words “foreclosure,” “forfeiture” and
“liquidate” mean – along with “sound money,” “business confidence” and
the usual consequences, “debt deflation” and “debt peonage.”

Somebody must take a loss on the economy’s bad loans – and bankers
want the economy to take the loss, to “save the financial system.”
From the financial sector’s vantage point, the economy is to be
managed to preserve bank liquidity, rather than the financial system
run to serve the economy. Government social spending (on everything
apart from bank bailouts and financial subsidies), disposable personal
income are to be cut back to keep the debt overhead from being written
down. Corporate cash flow is to be used to pay creditors, not employ
more labor and make long-term capital investment.

The economy is to be sacrificed to subsidize the fantasy that debts
can be paid, if only banks can be “made whole” to begin lending again
– that is, to resume loading the economy down with even more debt,
causing yet more intrusive debt deflation.

This is not the familiar old 19th-century class war of industrial
employers against labor, although that is part of what is happening.
It is above all a war of the financial sector against the “real”
economy: industry as well as labor.

The underlying reality is indeed that pensions cannot be paid – at
least, not paid out of financial gains. For the past fifty years the
Western economies have indulged the fantasy of paying retirees out of
purely financial gains (M-M’ as Marxists would put it), not out of an
expanding economy (M-C-M’, employing labor to produce more output).
The myth was that finance would take the form of productive loans to
increase capital formation and hiring. The reality is that finance
takes the form of debt – and gambling. Its gains therefore were made
from the economy at large. They were extractive, not productive.
Wealth at the rentier top of the economic pyramid shrank the base
below. So something has to give. The question is, what form will the
“give” take? And who will do the giving – and be the recipients?

The Greek government has been unwilling to tax the rich. So labor must
make up the fiscal gap, by permitting its socialist government to cut
back pensions, health care, education and other social spending – all
to bail out the financial sector from an exponential growth that is
impossible to realize in practice. The economy is being sacrificed to
an impossible dream. Yet instead of blaming the problem on the
exponential growth in bank claims that cannot be paid, bank lobbyists
– and the G-20 politicians dependent on their campaign funding – are
promoting the myth that the problem is demographic: an aging
population expecting Social Security and employer pensions. Instead of
paying these, governments are being told to use their taxing and
credit-creating power to bail out the financial sector’s claims for
payment.

Latvia has been held out as the poster child for what the EU is
recommending for Greece and the other PIIGS: Slashing public spending
on education and health has reduced public-sector wages by 30 percent,
and they are still falling. Property prices have fallen by 70 percent
– and homeowners and their extended family of co-signers are liable
for the negative equity, plunging them into a life of debt peonage if
they do not take the hint and emigrate.

The bizarre pretense for government budget cutbacks in the face of a
post-bubble economic downturn is that aims to rebuild “confidence.” It
is as if fiscal self-destruction can instill confidence rather than
prompting investors to flee the euro. The logic seems to be the
familiar old class war, rolling back the clock to the hard-line tax
philosophy of a bygone era – rolling back Social Security and public
pensions, rolling back public spending on education and other basic
needs, and above all, increasing unemployment to drive down wage
levels. This was made explicit by Latvia’s central bank – which EU
central bankers hold up as a “model” of economic shrinkage for other
countries to follow.

It is a self-destructive logic. Exacerbating the economic downturn
will reduce tax revenues, making budget deficits even worse in a
declining spiral. Latvia’s experience shows that the response to
economic shrinkage is emigration of skilled labor and capital flight.
Europe’s policy of planned economic shrinkage in fact controverts the
prime assumption of political and economic textbooks: the axiom that
voters act in their self-interest, and that economies choose to grow,
not to destroy themselves. Today, European democracies – and even the
Social Democratic, Socialist and labour Parties – are running for
office on a fiscal and financial policy platform that opposes the
interests of most voters, and even industry.

The explanation, of course, is that today’s economic planning is not
being done by elected representatives. Planning authority has been
relinquished to the hands of “independent” central banks, which in
turn act as the lobbyists for commercial banks selling their product –
debt. From the central bank’s vantage point, the “economic problem” is
how to keep commercial banks and other financial institutions solvent
in a post-bubble economy. How can they get paid for debts that are
beyond the ability of many people to pay, in an environment of rising
defaults?

The answer is that creditors can get paid only at the economy’s
expense. The remaining economic surplus must go to them, not to
capital investment, employment or social spending.

This is the problem with the financial view. It is short-term – and
predatory. Given a choice between operating the banks to promote the
economy, or running the economy to benefit the banks, bankers always
will choose the latter alternative. And so will the politicians they
support.

Governments need huge sums to bail out the banks from their bad loans.
But they cannot borrow more, because of the debt squeeze. So the bad-
debt loss must be passed onto labor and industry. The cover story is
that government bailouts will permit the banks to start lending again,
to reflate the Bubble Economy’s Ponzi-borrowing. But there is already
too much negative equity and there is no leeway left to restart the
bubble. Economies are all “loaned up.” Real estate rents, corporate
cash flow and public taxing power cannot support further borrowing –
no matter how wealth the government gives to banks. Asset prices have
plunged into negative equity territory. Debt deflation is shrinking
markets, corporate profits and cash flow. The Miracle of Compound
Interest dynamic has culminated in defaults, reflecting the inability
of debtors to sustain the exponential rise in carrying charges that
“financial solvency” requires.

If the financial sector can be rescued only by cutting back social
spending on Social Security, health care and education, bolstered by
more privatization sell-offs, is it worth the price? To sacrifice the
economy in this way would violate most peoples’ social values of
equity and fairness rooted deep in Enlightenment philosophy.

That is the political problem: How can bankers persuade voters to
approve this under a democratic system? It is necessary to orchestrate
and manage their perceptions. Their poverty must be portrayed as
desirable – as a step toward future prosperity.

A half-century of failed IMF austerity plans imposed on hapless Third
World debtors should have dispelled forever the idea that the way to
prosperity is via austerity. The ground has been paved for this
attitude by a generation of purging the academic curriculum of
knowledge that there ever was an alternative economic philosophy to
that sponsored by the rentier Counter-Enlightenment. Classical value
and price theory reflected John Locke’s labor theory of property: A
person’s wealth should be what he or she creates with their own labor
and enterprise, not by insider dealing or special privilege.

This is why I say that Europe is dying. If its trajectory is not
changed, the EU must succumb to a financial coup d’êtat rolling back
the past three centuries of Enlightenment social philosophy. The
question is whether a break-up is now the only way to recover its
social democratic ideals from the banks that have taken over its
central planning organs.

Notes:

[1] Alan Beattie, “Wealthy nations urged to make rapid cuts,”
Financial Times, June 10, 2010.
[2] “The euro mutiny begins,” The Telegraph, June 16, 2010.

End