Home > debt crisis, depression > Michael Hudson on the making of the crisis

Michael Hudson on the making of the crisis

from Merijn Knibbe

I stumbled upon what for me is the best analysis of the crisis I’ve read up to know: an article from Michael Hudson. An excerpt:

In this new financialized warfare, governments are being directed to act as enforcement agents on behalf of the financial conquerors against their own domestic populations. This is not new, to be sure. We have seen the IMF and World Bank impose austerity on Latin American dictatorships, African military chiefdoms and other client oligarchies from the 1960s through the 1980s. Ireland and Greece, Spain and Portugal are now to be subjected to similar asset stripping as public policy making is shifted into the hands of supra-governmental financial agencies acting on behalf of bankers – and thereby for the top 1% of the population.

When debts cannot be paid or rolled over, foreclosure time arrives. For governments, this means privatization selloffs to pay creditors. In addition to being a property grab, privatization aims at replacing public sector labor with a non-union work force having fewer pension rights, health care or voice in working conditions. The old class war is thus back in business – with a financial twist. By shrinking the economy, debt deflation helps break the power of labor to resist.

It also gives creditors control of fiscal policy. In the absence of a pan-European Parliament empowered to set tax rules, fiscal policy passes to the ECB. Acting on behalf of banks, the ECB seems to favor reversing the 20th century’s drive for progressive taxation. And as U.S. financial lobbyists have made clear, the creditor demand is for governments to re-classify public social obligations as “user fees,” to be financed by wage withholding turned over to banks to manage (or mismanage, as the case may be). Shifting the tax burden off real estate and finance onto labor and the “real” economy thus threatens to become a fiscal grab coming on top of the privatization grab.

This is self-destructive short-termism. The irony is that the PIIGS budget deficits stem largely from un-taxing property, and a further tax shift will worsen rather than help stabilize government budgets. But bankers are looking only at what they can take in the short run. They know that whatever revenue the tax collector relinquishes from real estate and business is “free” for buyers to pledge to the banks as interest. So Greece and other oligarchic economies are told to “pay their way” by slashing government social spending (but not military spending for the purchase of German and French arms) and shifting taxes onto labor and industry, and onto consumers in the form of higher user fees for public services not yet privatized.

In Britain, Prime Minister Cameron claims that scaling back government even more along Thatcherite-Blairite lines will leave more labor and resources available for private business to hire. Fiscal cutbacks will indeed throw labor out of work, or at least oblige it to find lower-paid jobs with fewer rights. But cutting back public spending will shrink the business sector as well, worsening the fiscal and debt problems by pushing economies deeper into recession.

If governments cut back their spending to reduce the size of their budget deficits – or if they raise taxes on the economy at large, to run a surplus – then these surpluses will suck money out of the economy, leaving less to be spent on goods and services. The result can only be unemployment, further debt defaults and bankruptcies. We may look to Iceland and Latvia as canaries in this financial coalmine. Their recent experience shows that debt deflation leads to emigration, shortening life spans, lower birth rates, marriages and family formation – but provides great opportunities for vulture funds to suck wealth upward to the top of the financial pyramid.

Today’s economic crisis is a matter of policy choice, not necessity.

Read the whole thing.

  1. Keith Wilde
    January 13, 2012 at 10:42 pm

    This is the third of such superlative endorsements I have seen. The other two were by a young executive who is pursuing an MBA and by a veteran campaigner for macroeconomic reform and long-time MP and cabinet minister.

  2. Alice
    January 14, 2012 at 1:52 am

    It total agreement with Michael’s comments. The current situation of highly unstable and unhealthy european economies (and elsewhere) is and has been a policy choice by economic policy makers working for and blatantly taking their advice from the worlds too powerful financial firms. Allowing them to get that powerful was the key policy error. They were never that important that they had to be bailed out, at the greater cost of whole nations failing. Violates the raison d’etre of economics. Governments have been working against their own citizens welfare and causing people to leave stricken nations.. Quite where those people are going to find a half decent environment to go to (in this global policy mess) in search of productive work is beyond me. Somewhere the ordinary man hasnt been robbed by fiscal and privatisation grabs yet? Could be hard to find..Is there any place left that hasnt swallowed the finance industries poisoned policy koolaid?

  3. Alice
    January 14, 2012 at 2:15 am

    The Greek nation is being held to the fiscal auterity measures by one, two or three hedge funds leading the way – who wont take a haircut on their Greek debt instruments.. Right – I thought the investor copped the risk but not so – it seems these three hedge funds are refusing to take a haircut because they have credit default swapped the risk to someone else and they simply dont care if Greece cant pay…the hedgies dont need to take a haircut.
    Gee, the US credit default swapped its housing mortgage risk to the euro zone and now it seems that the debt crisis in the Piigs nations could be credit default swapped back to the US a nd elsewhere. How interesting. Its like pass the credit default time bomb parcel and every one else duck while hedge funds blow up whole nations isnt it?
    Nice. Is there anyone at all capable of regulating these hot shot bankers …..?? How about the military? Are they too busy for civil duties?

  4. Alice
    January 14, 2012 at 2:17 am
  5. BTU
    January 14, 2012 at 4:49 am

    Thanks for the link. An insightful piece that brought to mind William Greider’s “Rolling Back the 20th Century,” http://www.thenation.com/article/rolling-back-20th-century .

    A few years ago, _The New Yorker_ published a cartoon that relates to the discussion here. It has at least two levels of meaning and shows more understanding of economics than does all too many an economist ( http://www.condenaststore.com/-sp/There-there-it-is-again-the-invisible-hand-of-the-marketplace-giving-us-Prints_i8534417_.htm ).

    The time has come when a paradigm shift is urgently needed, so let’s hope Max Planck was wrong when he said:

    “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.”

  6. Bruce E. Woych
    January 15, 2012 at 5:01 pm

    I posted this on an earlier baseline, but I think you might possibly like to see it (and frankly it fits in the current traffic of ideas):
    http://www.statecraft.org/index.html
    Excerpt: From Chapter 11…Tactical Totalitarianism
    “The Cold War provided the international framework and ideological rationale for the new U. S. role. Counterinsurgency doctrine would provide a substitute for the Europeans’ imperial policies and an alternative to repetition of the United States’ own neocolonial experience in the Philippines and Latin America before World War II. U. S. doctrine presumed that in a world of limitless menace, internal disorder reflected external aggression, and so legitimized an unlimited response. The unilateralism of colonialism would yield to joint action on the invitation of “host” governments, thereby relieving the United States of responsibility for actions taken. The ease with which intervention and illegal action could be plausibly denied, or hived off on the indigenous “host,” encouraged its proliferation.”

    So when you bring this up to date you get the “crazies” in D.C. writing up the planning blueprint for the “Great Game” by usurping the opportunities of lawless capital petro-stroika. The instrument of looting and monetarization can hide money better than cumbersome offshore machination, while the driving ideology of market base fosters the controlling interest in the global enterprise of political-military domination. All this in the name of global financial security and domestic assurances that this pain will be rewarded; all the while insuring capture and control fraud by its secret operations community under National Security and Intelligence doctrines that manipulate the meaning of stability and instability. In terms utilized by Edward G. Lansdale..a .”demotic strategy” that entraps entire peoples to work directly for the interests that bound them…under the great lie of a more compassionate rule of order…as we deregulate the LAWS that restrict them from acting out the endgame plan they like to call realism and the end of history..
    posted:
    http://baselinescenario.com/2011/11/10/wall-street-v-elizabeth-warren/

    also see comment discussion:
    http://baselinescenario.com/2012/01/05/ron-paul-and-the-banks/#comment-99925

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