With acknowledgements to the Economist: front cover 26 November, 2011

Dear readers…posted this last night, but  failed to add links…so have updated this morning….And now at 12.54 on 28 Nov, following revelations from Bloomberg, am adding in a reference to the extent that Morgan Stanley was bailed out in 2008.

A petard, I am reliably informed by the Web,

“was a bell-shaped metal grenade typically filled with five or six pounds of gunpowder and set off by a fuse. Unfortunately, the devices were unreliable and often went off unexpectedly. Hence the expression, where hoist meant to be lifted up, an understated description of the result of being blown up by your own bomb.”

Correct or not, this is a helpful analogy for the crisis of the Euro. The grenade that is the Euro has a fizzing fuse that threatens to explode imminently, causing visible panic in markets, in parliaments and treasuries across the world. Mainstream economists are either dodging the bullets and like the cowards they are, pretending that ‘it’s nothing to do with me guv’.  Or else they’re panicking in ways that are crass and unhelpful, banging their heads against the brick wall that is the Bundesbank and ECB, and demanding that someone, somewhere defuses the bomb.

The Economist has a dramatic leader this week (“Is this really the end?”) warning of grave threats and offering Chancellor Merkel and other EU leaders ways of avoiding a comet-like crash. Like many others, leader writers on the Economist, somewhat belatedly, want the ECB to act as a central bank, and to  provide liquidity to sovereign members of the Eurozone.

“Vast monetary loosening should cushion the recession and buy time” argues its leader.

Too late. By calling for ‘monetary loosening’ the Economist is indulging in a form of mindless head-banging.  Like so many others desperate to preserve the Euro, leader writers at the Economist cannot fully face up to the contradictions inherent in their own orthodoxy, and in the Eurozone currency and monetary system created and cheered on by mainstream economists – including those on the Economist. Contradictions that are so strongly held by the ideologues that drafted the Maastricht and other texts, that they are carved in legal stone into the Eurozone’s various treaties – and will not easily be erased.

The fact is that the ECB is designed to be the very antithesis of a central bank. Its purpose is to ensure that sovereign governments do not ever draw on the kind of ‘liquidity’ provided by publicly-backed, nationalised central banks such as the Bank of England. The latter is now providing £75 billion of ‘liquidity’ support to the British government, albeit indirectly, and plans to print more of the stuff in February.  Similarly, the Federal Reserve has provided vast sums in support of the US public and private sectors (see this story on Bloomberg (29 Nov, 2011) about the secret Fed loans to private banks in 2008 and the $13 billion of income reaped by same banks taking advantage of the Fed’s below-market rates. Also see this chart’s revelations of how Morgan Stanley was rescued by the Fed – at a time it pretended to be whole: Felix Salmon, Reuters, 27 Nov 2011.)  The Bank of Japan provides generous support to the Japanese Treasury and Japanese industry.

And good that they do so too. At times of crisis, when private bankers fail – society needs a lender of last resort – a public central bank that stabilises the financial system, allows the real economy to carry on working, and acts as a backstop to a private financial system that regularly fails society.

But this is not the purpose of the Euro, the ECB and the monetary system created first, by the Maastricht Treaty, and then by subsequent Treaties.  Instead its purpose is to deny governments a sound monetary system that acts in this way, and that works for society as a whole. All these Treaties force Eurozone governments to turn to, and depend on the private banking sector for financial resources.

That is why the Euro is the wet-dream of private wealth. (For more on this, see “Open Letter to the people of Greece: restore the drachma.” 21 June, 2011.)

As a result of its construction by conservative and orthodox economists and policy-makers – heavily influenced by private bankers –  sovereign governments (like Greece, Spain, Italy) upon joining the Eurozone have to borrow from private banks. They can no longer rely on a publicly-backed central bank  for borrowing; to help compensate for a slump, mitigate a private financial crisis or manage public finances.

Furthermore, the rules of the Eurozone oblige these governments to borrow in what is effectively a foreign currency – or at least a currency over whose value they have very little influence (unlike the influence that governments have over the Dollar, Sterling and the Yen).  And to do so on the basis of rates of interest set by a group of technocrats – with no real commitment to the health and success of individual sovereign economies. Instead these technocrats – on the board and staff of the European Central Bank – have an overwhelming commitment to an economic ideology that demonises the wider public interest, and upholds, almost as sacred, the interests of the private banking system.

That interest is most clearly expressed as an abhorrence for ‘inflation’ – the phenomenon that lowers the value of a creditor or banker’s chief asset: an outstanding loan. Inflation erodes the value of that loan, and is the thing most loathed by creditors. By its fixation on inflation and private creditor interests, the ECB is inured to, and intransigent when it comes to the wider, public interest: the interests of Europe’s democracies. More frighteningly, the ECB is inured to the much graver threat of debt-deflation. (See Irving Fisher’s Debt-Deflation Theory of Great Depressions.)

That much most of us know. What few will publicly acknowledge is that in persuading policy-makers and orthodox economists to construct the Eurozone monetary system, private bankers had reached a form of nirvana. Not only had they eliminated competition in the sovereign lending markets from publicly-backed central banks; but they had also been given effective guarantees that they could lend vast sums (far more than e.g.they lend to corporates) to sovereigns such as Greece, without fear of loss. Greece would not be allowed to default, the treaties ensured that. And if sovereign governments were slow in paying, the stronger members of the Eurozone (most particularly Germany) could be expected to cover and guarantee no private losses.

Of course it takes two to tango.  Greece also got to borrow at levels she could not do before; and at rates of interest more appropriate to the German economy. So Greece’s reckless politicians turned up at the bankers’ party – and gorged themselves on debt.

The bankers never lost a night’s sleep. They had all those treaty guarantees – drafted by clever economists.

Now imagine if you were a farmer, wanting to sell tomatoes to sovereign governments across Europe. Would such treaties as the Maastricht treaty and the one that governs the ECB not have been of enormous help to a) guarantee sales of tomatoes b) remove competition from other tomato sellers and c) ensure compensation, should buyers go bust and fail to pay up?

Given that conditions were set up in this way for the private banking system – the bleating of the Economist and others for the ECB ‘to print money’ – is a) many years too late; b) hypocritical, but most importantly c): an open admission of the catastrophic failure of economic orthodoxy and its construction of the Euro. Above all, of its complete subordination to the interests of private finance.

The tragedy is this: when the Euro blows up, as it must, harm will not be restricted to its architects, or the private finance sector.

By Ann Pettifor. An edited version of this piece was published on Left Foot Forward, 14 September, 2011. This original, longer version posted 19 September, 2011. 

The game is up. The 2007-9 private banking crisis that started with the unpayable debts of the US sub-prime sector, was never over. The crisis has now moved on to include the unpayable debts of sovereigns owed to private European bankers. It is increasingly clear that there is declining political and institutional support for further private bank bailouts. The dramatic resignation on Friday 9th September of Jürgen Stark, architect of Europe’s equivalent of the Gold Standard – the Growth and Stability Pact – marks an important step in the resistance to bailouts by the ECB; in the inevitable collapse of the Maastricht Pact, and with it, the utopian vision of the neoliberal Euro.

And so the age of liberalised, de-regulated finance appears to be over – at least in Europe. That is the conclusion of investors in both Wall St and the City of London and explains the collapse of confidence in banks and the volatility of stock markets as investors rush for the exits, transferring speculative gains into the safety of government bonds.

The Growth and Stability Pact was, and is repeatedly flouted by Greece and other eurozone countries – even by Germany under Gerhard Schröder. The ECB, led by Jean Claude Trichet is also obliged to flout its terms, by effectively adopting a fiscal role – buying up the bonds of deficit countries – and thereby causing the resignation of not just Mr Stark, but also Germany’s Axel Weber.

This resistance represents a Polanyian counter-movement – however weak – which defies orthodox economists, central bankers and Haute Finance. Across the Eurozone, Europeans resist further private sector bailouts; and refuse to march like lemmings to their own destruction across cliffs of unemployment, deflation and social unrest.

The Eurozone and its economic framework was designed as a financial ‘straitjacket’; to undermine the sovereignty of Europe’s elected governments; to transfer power over financial and therefore economic policy to unaccountable central bankers; powers then enforced by ‘the invisible hand’ – ‘the markets’ – international speculators on foreign exchange and financial markets. It was also, its protagonists argued, designed to ensure peace across Europe.

But so utopian is the vision of liberalised, unaccountable finance, that it has achieved the very reverse: the divergence, not convergence of European economies; sovereign insolvency, bank failures, rising unemployment, the degradation of public services, and with it the intensification of tensions and conflict across Europe.

Regrettably we have been here before. The very same policies – and liberal finance model – were tried in the 1930s, under the Gold Standard. By 1933 their failure was complete, challenged effectively by both Karl Polanyi and John Maynard Keynes. The latter took on the responsibility of outlining and implementing a ‘Plan B’ – one which endured until overturned by neoliberals in the late 1960s and early 1970s.

So as we witness the death throes of this second experiment in liberal finance, what is today’s progressive alternative? What is the left’s Plan B?

The failure of the left to pose an alternative to liberal finance was striking both before, during and after the 2007-9 financial crisis. In the wake of the greatest financial catastrophe of our lifetimes, the loudest complaints were aimed at bankers’ bonuses, and at the failure of rich elites to pay taxes. Recently, the pro-austerity Institute for Fiscal Studies has tried to turn this into a debate about the mal-distribution of wealth.

But while these are important issues, they do not touch on the structural injustice of a liberalised financial system that is capable of wrecking the global economy; denies economic sovereignty to democratic states, and that stratifies the polarisation of wealth between rich and poor. Nor does the debate on bonuses or the addition of taxes structurally alter the role of Haute Finance as ‘stupid master’ (to quote Labour’s Employment manifesto of 1944) as opposed to ‘servant’ of the real economy.

So what should the left’s macro-economic Plan B look like? Clearly it will have to embrace both monetary and fiscal policy, with monetary policy more important in the long-run; but fiscal expansion needed immediately to deal with the collapse of employment and private sector activity.

The first element of any plan must be the careful and coordinated sequencing of both quantitative easing and fiscal expansion. This will involve the financing of a programme of public works expenditures designed not just for socially and ecologically essential projects, but also to stimulate private economic activity. Central banks are eager to supply liquidity to private bankers when they wreck both their own institutions and threaten the global economy; they should now act to supply liquidity to governments that need to stimulate economic recovery, and finance the transformation of the economy away from fossil fuels. (For more on this see ‘The Green New Deal’ co-authored by this blogger.)

Next, it will be essential to manage in an orderly fashion the massive write-off or ‘re-structuring’ of unpayable debts – to replace the current disorder of random de-leveraging by sovereigns, corporations, households and individuals. Many of these debts are phantom debts, and cannot ever be repaid. That reality must be faced. It is time for another debt Jubilee.

The third element should be the introduction by sovereign states of capital controls over the mobility of finance across borders, to strengthen democratic, accountable policy-making. In the words of Brazil’s President Rousseff, governments must protect their “internal markets.” The form these controls take will depend on local conditions and circumstances, and should be agreed by elected representatives of democratic states, with central bankers acting in the interests of domestic economies, not the proverbial ‘gnomes of Zurich’. Fourteen countries already impose capital controls, including China and Iceland; but each week new reports appear. The most recent is Indonesia which will require companies to repatriate about $33bn of foreign currency earned each year on exports (FT 9 September, 2011).

Fourth, central bankers, while regulating the creation of credit by private bankers to ensure loans are repayable, should also seek to bring down interest rates across the spectrum of lending: for safe and risky loans, short and long-term loans. Adam Posen’s recent proposal for a public bank that would make cheap loans available to SMEs should be given serious consideration. In other words, the rule should be ‘tight but cheap’ money.

Fifth, governments and central banks should be mandated to promote a) full employment and b) sustainable, localised economic activity, supporting the domestic economy – not a globalised financial elite. For just as employment makes things affordable for individuals and households so full employment will make things – including the transformation of the economy away from fossil fuels – affordable for government.

“Look after employment” as Keynes argued, “and the budget will look after itself.”

Add to the above, terms and conditions for banks bailed out by taxpayers; and a reformed taxation system and you have a coherent and plausible Plan B. Correct me if I am wrong, but so far it seems the most comprehensive one on the table.

End

Tin produced at a Glencore plant in Vinto, Bolivia

“Experience shows that when policies falter in managing capital flows, there is no limit to the damage that international finance can inflict on an economy.”

Yilmaz Akyüz, “Capital Flows to Developing Countries in a Historical Perspective: Will the current Boom End with a Bust?”

Today, as speculation and leverage in global, financialised commodity markets reach manic levels; as we witness an ‘epic rout’ (FT 5 May, 2011) in commodity prices, and as the boom in capital flows peaks, is another crash inevitable? And is it coming soon?

I know from experience that while it may be possible to analyse fundamentals, it is always difficult to predict precisely what dynamic will trigger the next crisis, and when it will happen. Back in 2003, together with colleagues at the new economics foundation in London, and with very little funding, I assembled and edited a series of essays on the ‘outlook’ for the global economy. We titled it: ‘Real world economic outlook’, and added a subtitle, ‘the legacy of globalization: debt and deflation’. We intended the report to be annual, and to act as a counter to the IMF’s annual World Economic Outlook, which in our view was irrationally optimistic about developments in the global economy.

We were pretty pessimistic about global imbalances, and predicted a crash. Sadly, our timing was way out: the crash was four years away. It does not always help to be right on the fundamentals. Given the inevitability of the then forthcoming crash, we argued that there was once more a need for a ‘great transformation’ of the global economy. The starting point we wrote ‘will be to reverse the most pernicious elements of the ‘globalization’ experiment’ by the ‘taming of financial markets through the re-introduction of capital controls; restraints in the growth of credit; the establishment of an International Clearing Agency; and a Tobin Tax’.

Back then it was hard to talk/write about these matters – and be heard. Our cheerfully-titled report and predictions did not hit the best-seller lists. Funding for the project was withdrawn, and the project wound down. It’s major flaw? We had breached areas of economic debate that at the time were carefully circumscribed. It took the financial crisis of 2007-9 to loosen the intellectual chains to which orthodox economics had so heavily tied economic debate.   Today the Tobin Tax, or Robin Hood Tax is a high-profile issue, with some signs that EU governments are considering implementation of such a tax. (See point 8 of Euro leaders’ statement, March 11, 2011). So that taboo has been broken.

Another taboo subject then – control over capital flows (now re-designated as ‘capital flows management’ by the IMF) is now, in contrast to 2003, actively discussed, even though debate is limited to controls on inward flows. Debate on controls over outward flows – illicit capital flight that makes it so easy for corporations and elites to export their gains– are still taboo.

The big change came in February, 2010, when to the surprise of many, IMF staff accepted that ‘capital controls are part of the policy mix’. And by April, 2011, the Fund had developed a ‘framework’ to help countries manage capital flows.

This framework was promptly rejected by the G24, led by India and Brazil, for several reasons. First because the IMF was dealing with symptoms, not causes – i.e. the easy money policies of the Federal Reserve.  Quantitative easing (QE) was and is, intended to pump liquidity into the US economy; to allow funds to cascade down through the banking system, for lending to companies that would, in turn, invest in infrastructure and the creation of jobs.  Because, as Prof. Chick has noted, there is neither economic debate about the money supply, nor overt management of the money supply, there is no control over how banks deploy low-interest rate funds generated by the Fed.  US and US-based foreign banks are free to ignore the Fed’s mandate or the US administration’s priorities. Like the public utilities they effectively are, banks instead are free to draw down from the Fed’s easy and cheap money-creation – QE – to speculate, and accrue private gains in mainly developing and emerging markets (DEEs).  The IMF shows little interest in the implications for the global money supply of credit-creation by central banks and, in the view of many, turns a blind eye to these de-stabilising activities. Instead fund staff lecture poor countries on the management of capital inflows.  The G24 will have none of this, and instead demands that a light be shone on the causes of the boom in speculative capital flows.

Second, as Lesetja Kganyago, chairman of the G-24 and director-general of South Africa’s National Treasury told the Wall St Journal: the group opposed the IMF framework because the fund proposed to integrate it into its surveillance program and policy recommendations. G24 leaders – especially those leading some of the world’s biggest democracies – rightly expect to enjoy the same policy autonomy privileges usually reserved for leaders of the G8.

All of this makes a recent paper on the current boom in capital flows by Yilmaz Akyüz of the South Centre so timely, comprehensive and insightful. Akyüz is chief economist at the South Centre, Geneva and former director of the Division on Globalization and Development Strategies at UNCTAD, where he edited a range of UNCTAD’s annual reports.

Akyüz begins by noting that there have been three generalised boom-bust cycles in private capital flows since the end of the Second World War: all with devastating impacts on developing and emerging markets. The first started in the late 1970s, and ended with the Latin American debt crisis in the early 1980s. The second started in the early 1990s and was followed by the East Asian financial crisis of 1997/8; and by defaults in Latin America and Russia. ‘The third cycle’ argues Akyüz ‘started in the early years of the new millennium and ended in the second half of 2008 with the subprime crisis. This was soon followed by a new boom, the fourth in the post-war era, which started in the first half of 2009 and is continuing with full force as of early 2011.’

Akyüz argues that this current cycle will most likely end with a reversal in the upswing in commodity prices, because commodity “markets have become more like financial markets…with several commodities treated as a distinct asset class, attracting growing amounts of money in search for profits from price movements…”

The commodity bubble began with a new financial instrument invented by Goldman Sachs – the Goldman Sachs’ Commodity Index (GSCI) – so argues Frederick Kaufman in the April, 2011 edition of Foreign Policy. Next, commodity price inflation received a boost in 1999, when the US Commodities Futures Trading Commission deregulated futures markets. “All of a sudden, bankers could take as large a position in grains as they liked, an opportunity that had, since the Great Depression, only been available to those who actually had something to do with the production of our food” writes Kaufman.   “Since the bursting of the tech bubble in 2000, there has been a 50-fold increase in dollars invested in commodity index funds.  In the first 55 days of 2008, speculators poured $55 billion into commodity markets, and by July, $318 billion was roiling the markets.”

As has been well documented, rising commodity markets have enriched the few, but impoverished millions of people. Driven in part by higher fuel costs, global food prices are 36 percent above their levels a year ago and remain volatile, the World Bank argued in a recent report: “A further 10 percent increase in global prices could drive an additional 10 million people below the $1.25 extreme poverty line. A 30 percent price hike could lead to 34 million more poor. This is in addition to the 44 million people who have been driven into poverty since last June as a result of the spikes. The World Bank estimates there are about 1.2 billion people living below the poverty line of US$1.25 a day.”

Falling commodity prices, therefore, are central to any strategy for reducing global poverty.

Have they begun to fall? As I write this (6 May, 2011) global commodity markets have been subject to what the FT calls an ‘epic rout’ “…the worst sell-off for many commodities since the collapse of Lehman Brothers and, in dollar terms, the biggest-ever for Brent crude.”

While these markets may well stabilise, and be talked up (and down) again, it daily becomes clear to even the most orthodox economists that, in the real world, the global economic ‘recovery’ is very weak indeed. As that reality dawns on speculators (and long before it dawns on policy-makers) will there follow a collapse in index-traded commodity prices?

Furthermore, margin debt — the amount that speculators borrow for speculative purposes — is rising quickly, just as it did in advance of the 1929 stock market crash, the Nasdaq bubble and the subprime crash of 2006/7. Indeed, as the blogger, Cullen Roche of ‘Pragmatic Economist’ notes, margin debt is now at ‘manic levels’.   Debit balances at margin accounts skyrocketed to $20.7 billion in February.  ‘Only two other times historically have we seen leverage rise so much so fast and both times it was during a manic phase – during the tech bubble of the late 1990s and the credit bubble just a short four years ago.’

These debit balances, as an anonymous player at an investment boutique notes:

‘increase speculative volatility in things like oil, which goes from $40 to $150 to $50 to $130 over and over. Paper profits change accounts but the real economy is not theoretically affected, except that it is held hostage to this casino game of rapidly changing prices for basic materials and necessities that businesses and consumers use to make decisions. So the economy is in actuality disrupted by the casino, the casino creates no net wealth, and everyone is worse off as this charade continues.’

We’ve been here before. Akyüz argues that the post-2000 ‘swings in commodity markets show strong correlation with those in capital flows’ to developing and emerging markets (DEEs) and with it  ‘the exchange rate of the dollar’. After rising constantly, both commodity prices and flows declined in 2008, when falling prices triggered the exit of capital from commodity-rich economies.  Both recovered rapidly afterwards.

These factors are reinforcing with ‘greater force’ argues Akyüz, the ‘macroeconomic imbalances and financial fragility in several DEEs….Imbalances that started with the subprime bubble but were interrupted by the Lehman collapse.’

Akyüz cautions that the continued boom in commodity prices could eventually cause rampant inflation in China, which could lead to a sizeable slowdown. ‘This, together with the global oversupply built during the boom, would bring down commodity prices, and the downturn would be aggravated by an exit of large sums of money from commodity futures. This would make investment in commodity-rich countries unviable and loans non-performing, leading to risk aversion, flight to safety and a reversal of capital flows to DEEs.’ The most vulnerable of these are countries in Latin America and Africa that have enjoyed the twin benefits of global liquidity and the boom in commodity prices. They could be hit twice – by falling capital flows and commodity prices, he argues. South East Asian economies are less vulnerable, because they have built up substantial current account surpluses and large stocks of reserves.

Akyüz concludes correctly that these unstable capital flows and commodity price booms show that ‘the international monetary and financial system needs urgent reforms’. He quotes Ben Bernanke’s speech to the Banque de France in February, 2011:

“Looking back on the crisis, the US, like some emerging-market nations during the 1990s, has learned that the interaction of strong capital inflows and weaknesses in the domestic financial system can produce unintended and devastating results. The appropriate response is…to improve private sector financial practices and strengthen financial regulation, including macroprudential oversight. The ultimate objective should be to be able to manage even very large flows of domestic and international financial capital in ways that are both productive and conducive to financial stability.”

Fine words indeed. But words are not enough. Akyüz argues that ‘macroprudential regulations, as usually defined, would not be sufficient to contain the fragilities that capital flows can create’. Instead, controls over both inflows and outflows should be part of the arsenal of public policy, used as and when necessary and in areas and doses needed, rather than introduced as ad hoc, temporary measures.

And we do not have to re-invent the wheel. ‘The instruments are well known and many of them were widely used in the advanced economies during the 1960s and 1970s.’

While politicians, economists and regulators may be more alert than they were in advance of the 2007-9 slump, they remain submissive to a global banking lobby and passive at the wheel of the global economy. This leaves commodity speculators unfettered by regulation and free to steer the global economy towards another financial precipice. Only this time central bankers and governments will have fewer tools and resources (i.e. taxpayer largesse) available with which to rescue bankers and speculators from their reckless and worthless endeavours.

Nevertheless, soon after this coming crisis – which will again cause massive economic failure and dislocation, intense human suffering and pain – controls on capital flows will finally be applied. Be sure of that. But by then, it will be too late.

This article was simultaneously posted on PRIME (Policy Research in Macroeconomics).

4th March 2010

With Saturday’s Iceland referendum due in just a couple of days (6th March), Advocacy International’s directors have an op-ed article critical of the UK and Netherlands governments in today’s Morgunbladid, Iceland’s main daily newspaper.

English version> Icelandic version> Press release>

Full text of the article:

So the negotiations have broken down, British and Dutch “bullying” (FT 27 February, 2010) continues and the referendum goes ahead. What next?

We emphasize that this is not a sovereign debt crisis, even if the British and Dutch want us to think it is.

It is a crisis of EU regulatory failure, and of the Anglo-American economic model.

The people of Iceland have a deep democratic tradition, and through the referendum have the opportunity to assert their sovereignty and autonomy.

Their leadership and example will encourage people in other democracies to reject harsh cuts in public services and living standards made at the behest of the very people and institutions responsible for the crisis. For through the wholesale nationalisation of private losses, we are all – not only in Iceland – asked to pay the price of private, reckless risk-taking.

Co-responsibility

A key principle in resolving the dispute is co-responsibility. President Grímmson has made a similar point, referring to “a shared international responsibility”.

The previous Icelandic government allowed a deregulated financial sector to run wild.

The subsequent collapse of Iceland’s banking sector was not a sudden bolt from the blue. The risks were visible and widely reported, including by one of the authors of this article.¹

And the deposit guarantee scheme was totally under-resourced to deal with a systemic meltdown.

So Iceland cannot escape some share of political responsibility for the Icesave fiasco.

But Iceland was far from alone in this negligence. The political establishments of Britain and the Netherlands – indeed those of the European Union and EEA as a whole – encouraged financial deregulation and a more extensive Single Market in financial services, without almost any regard for the wholly predictable risks of large-scale economic failure.

The EU and Deposit Guarantee Schemes

The UK and Dutch authorities also failed in their duty of supervision under EU law.

Icesave in Britain was a branch not a subsidiary of Landsbanki. The European Union Directive 94/19/EC, whose inadequacy is now obvious to all, requires that EU states:

• “… shall check that branches established by a credit institution which has its head office out with the Community have cover equivalent to that prescribed in this Directive.”
  (Article 6.1)

Iceland may be a member of the EEA, but it is still “outwith” the European Community, and neither Britain nor the Netherlands fulfilled this supervisory duty.

So whether one sees the obligations as moral, political or legal, there is a heavy responsibility on the part of the British and Dutch governments.

Proportionality

Proportionality is a key principle of EU law – but one ignored by the British and Dutch governments.

In our letter to the Financial Times (7th January) we pointed out that the combined population of the UK and Netherlands is 76 million, compared to Iceland’s 317 000, and that:

• “repayment of the nationalised losses of a private bank amounts to €12 000 per Icelandic citizen…By contrast, the cost to Dutch and British tax-payers of the bail-out will be about €50 per capita.”

Not a sovereign debt crisis

The British and Dutch governments have, by political sleight of hand, given the world the impression that this is an issue of sovereign debt default.

This is quite false.

These governments chose for understandable reasons, to compensate domestic Icesavers whose deposits were at risk. They did this without consulting the government of Iceland. But from the start, they used economic and political force majeure to try to place the whole burden of compensation on to the state and people of Iceland. Only retrospectively, and through duress, was an agreement made with Iceland’s Depositors and Investors Guarantee Fund to compensate the British and Dutch governments for the cost of bailing out their own citizens.

This retroactive arm-twisting is now defined as a loan contract – even though the “loan” was not contracted at the outset by the borrower, but forced on it by the “lenders”. And the UK and Dutch governments’ fiercely desired, but missing, link of an onerous sovereign guarantee is still…. missing!

The terms

The proposed interest rate of 5.5% is particularly unfair, given that the UK’s Financial Services Compensation Service has, according to the UK Treasury, “financed its payout [to UK depositors] through a loan from the Bank of England.” ² The Treasury does not disclose the rate of interest on this loan – a rate over which it had absolute discretion. The Bank of England’s base rate is today 0.5% (1.5% in January, 2009). The ECB’s base rate was 2.0% in January 2009, yet the Netherlands government had even greater audacity in seeking, initially, interest at 6.7%!

What are the strategic options for Iceland and its people?

One option in the referendum is to accept the proposal based on force majeure, to pay the full price demanded (cuts in public services, unemployment, widespread emigration…) and hope to slowly rebuild the fabric of the economy. However this strategy will make recovery and reconstruction in the short run well nigh impossible. And in the long run, as JM Keynes argued, we are all dead!

All other options would be enhanced by a strong rejection of the UK/Dutch proposal, since the bigger the turnout for a ‘no’ vote, the stronger Iceland’s negotiating position will be, whichever option is adopted.

The dispute could be referred to the courts, to arbitration or (preferably) mediation. It is a striking feature of the story so far that the UK and Dutch governments have gone to great lengths to avoid legal resolution of the dispute, despite the Icelandic government’s constant denial of legal liability.

This may be sensible, since the 1994 Directive is badly drafted, and the outcome unpredictable for all.

Winning hearts and minds

After the referendum it will be vital that the government and people of Iceland inform and win over public and official opinion in Britain and the Netherlands, and the EU.

To date, the issues have not been clearly explained to the British and Dutch publics.

As a result, the two governments are under little public pressure to change their strong-arm tactics.

The voices of the Icelandic government and of Icelandic civil society need to be heard more loudly in more targeted campaigns in the UK, the Netherlands and EU. Coming general elections in both countries will make this difficult in the short-term, but in the long-term the Icelandic position is bound to prevail – if put across coherently.

Now is the time to spread more understanding of the issues – the shared responsibility, the flawed and excessive nature of UK and Dutch government demands, their impact on ordinary Icelandic citizens, and the positive ideas and proposals that emerge as a result of democratic debate in Iceland.

In this way we can lay the foundation for a just resolution of the dispute.

Advocacy International is working with InDefence, a civil society group of Icelandic citizens.

(1) “The coming first world debt crisis” by Ann Pettifor, Palgrave, 2006
(2)   HM Treasury Press Release, 9 October, 2009

I promised to explain – to Alastair, a reader of this blog -  the link made earlier between 1945 and today’s supposed government ‘debt crises’.  Sorry if its a little long – but a promise is a promise.

I consider the scaremongering around government debt to be nothing more than an over-egged and salted buttermilk pudding dished up by the economic quackery of the Her Majesty’s Opposition.  Not unlike that ancient remedy for (verbal) diarrhoea, it is intended to induce intellectual constipation – in those that absorb it in spoonfuls at the Institute of Fiscal Studies, the Treasury and City of London.

We should have nothing to do with such childish prescriptions.

To illuminate and evidence my point let me offer you (below) a chart – with data provided by Her Majesty’s Treasury (Public finances databank, Table A10 http://www.hm-treasury.gov.uk/d/public_finances_databank.xls)  and with thanks to my colleagues in the Green New Deal group.

This is a chart of Britain’s public debt as a share of GDP – from 1858 until 2002. For American readers I will paste a chart of US public debt for a similar period on my Huff Post blog in a day or two. The same economic lessons apply, even though much of the history is different.

Britain’s debt today – as a proportion of the national cake or GDP – is about 55% and rising. It is expected to hit 70% soon. Study the chart and you will see that it was twice that in 1858 – about 100% of GDP.

After the outbreak of war in 1914 it started rising. The 1929 crisis caused it to rocket upwards, as indeed did the financing of a very destructive war – World War II.  In 1945 Britain’s debt stood at 250% of GDP – roughly 5 times what it is today.  At that point an extraordinary thing happened (largely as a result of Keynes’ sound advice.)

The heavily indebted Labour government began to spend – as soon as legislation was agreed by Parliament.

Labour started to invest in a bold and visionary project: – a publicly funded health service free at the point of use -  the NHS – in 1946. (The American Congress is today proposing a similarly bold investment in a ‘public option’ for their health service.)  Back then, the Labour government carried out a massive slum clearance programme, and built houses. They revived the ancient universities, provided pensions and welfare to the poor. They trained ex-soldiers to become teachers.

What happened, you might ask, to the total public debt, as a result of this flouting of the economic orthodoxy – and  flagrant extravagance?   Well – exactly what Keynes had predicted would happen.  The debt fell.   Steadily, but unremittingly – as a share of GDP.    Look closely at the chart.

This is because government spending kick-started economic activity. (Of course it had done so during the war too – but on destructive, not productive activity. That had helped defeat a profound threat – Nazism – but had not helped much to fix losses and generate income.)

So thanks to government intervention, economic activity revived the comatose and exhausted body that was the post-war UK economy. Soon it began to recover. With recovery, government revenues rose, expenditure on  unemployment benefits fell – and hey presto! – government repaid its debts, which fell dramatically as a share of GDP.  Soon the spending began to pay for itself.

So there you have it. Government spending encourages economic activity, brings down unemployment and hauls in tax revenues from economically active citizens, consumers and private entrepreneurs. These taxes then lower the government’s debt – and before you can say Nye Bevan – the spending has paid for itself!

And please if another Tory or Lib Dem MP repeats the childish and tiresome mantra: “just as we balance our household budget, so should we balance the government’s budget” – just smack them on the wrists, and send them back to school.

When I – a householder  – spend into the economy – on say, insulating my property – nobody rewards me by paying tax revenues into my bank account – to help reduce my overdraft and balance the books.   On the contrary, builders, the local hardware store, insulation experts, energy advisers -  drain my bank account and offer only their goods and services in exchange.

When the government spends or invests in the economy – and creates jobs -  it is rewarded with tax revenues – not just from individual taxpayers, but from businesses where the newly employed spend their earnings. Businesses that in turn use that newly-found income to spend on new investments which create more jobs and more and more taxes for government……over, and over again! ( In economics this is known as ‘the multiplier’. It involves arithmetic – don’t go there unless you are good at sums.)

That is why,  and how, government investment is different from household investment.

And that is why government investment pays for itself.

And to top it all, if government stops paying out unemployment benefit – equivalent to say, a household stopping its contributions to an unemployed student – it saves money – in this case, just like a household.

“Look after the unemployment, and the budget will look after itself.” (Keynes, January 1933, CW XXI, p. 150)

Oh,  and two more rebuttals for those Tory and Lib Dem MPs: sterling falls when government debt rises for one reason alone: a lack of confidence in the British economy.  (US government debt is rising dramatically, but the dollar rose yesterday. Why? Because investors still have confidence in the US economy.)

Anyone buying sterling can see – because they read the  newspapers – that Britain’s economy is not recovering. It is still weakening.  Once Britain’s economy recovers, confidence in sterling will recover. But the economy will not recover, unless government investment is allowed to substitute for a collapse in private investment.  Once it does – sterling will rise again.  As night follows day.

Third and final rebuttal: ‘the bond markets will not buy government debt – government debt will ‘crowd out’ private sector debt – and will force up interest rates. The government will be held to ransom by the bond markets.’

It is tiresome to have to rebut such arguments, but rebut we must.

The bond markets are not the King of England. They are servants to a sovereign state, begging to make a quick, safe, but effortless capital gain.  (And since the financial crisis, many of these investors (like my old mother) would not dream of putting their money anywhere else except into safe UK government bonds.)  Keynes’ advice to the British government way back then was to ignore the bond markets. Instead – back in 1940 – he persuaded the Treasury to oblige (perhaps the word is force) the banks – some of which are today already in public ownership or part-public ownership – to lend to the Treasury at very low rates of interest.  The bankers were not given a choice.   Their loans were given a fancy name: “Treasury Deposit Receipts” or TDRs – and they helped to finance the war, as well as post-war economic recovery.  (I am grateful to Prof Vicky Chick and Dr. Geoff Tily for these historical references.)

As the economy recovered on the back of affordable interest rates, so the banks thrived.

And a final piece of advice to the Labour government should it consider following Keynes’s remedies: if the banks prove difficult – remove all taxpayer-backed guarantees and subsidies – and embark on a heavy programme of regulation.

After all, forget not: you are the government – and they owe you.

“A single day, 9 August 2007, will go down in history as ‘Debtonation Day’ – the beginning of the end of the deregulation and privatisation of finance that marks the era of globalisation.”

I wrote these words on 13 August 2007, in anticipation that the great stock-market collapse of four days earlier presaged the end of the era of neo-liberal globalisation.

So it has proved.

Read Open Democracy article>

De Standaard:  Brussels 18th June, 2009.

Interview:Ann Pettifor over de ‘Green New Deal’ — BRUSSEL -
De westerse overheden moeten dringend de hand aan de ploeg slaan en de almacht van de financiële sector inperken. Dat vindt Ann Pettifor, econome en activiste.

Van onze redacteur

Weg met de banken, leve de overheid. Als je het gedachtegoed van Ann Pettifor in zeven woorden zou moeten samenvatten, zou het ongeveer zo klinken. Pettifor is het meest bekend als drijvende kracht achter Jubilee 2000, de campagne om de schulden van de ontwikkelingslanden grotendeels kwijt te schelden. Een campagne die een succesvolle apotheose kreeg toen de G8 in 1999 besloot om 100 miljard dollar van deze schulden af te schrijven. Nu werkt Pettifor, die al in 2003 in het boek ‘The Credit Crunch’ waarschuwde voor de komende kredietcrisis , voor de Londense denktank New Economics Foundation. Die heeft het rapport ‘AGreen New Deal’ uitgegeven. De titel verwijst naar de New Deal waarmee president Roosevelt de crisis van de jaren30 aanpakte. De daadkracht en voortvarendheid van toen is nu schrijnend afwezig, vindt ze. Pettifor was deze week op uitnodiging van het tijdschrift Mo* in Brussel om haar plan toe te lichten, en erover in debat te gaan met VBO-voorzitter Thomas Leysen

Met uw Green New Deal pakt u drie crisissen tegelijk aan. De kredietcrisis, de opwarming van de aarde en de dreigende uitputting van de energievoorraden. Is het niet erg ambitieus om drie crisissen in één keer te willen oplossen?

Misschien wel. Maar we spreken over crisissen van een enorme schaal. En we moeten ze nu aanpakken, anders zitten we later met grote problemen. En wij zijn niet de enigen die dat zeggen. Verscheidene landen hebben al een Green New Deal. Zuid-Korea bijvoorbeeld, Japan, en ook China. In dat laatste land heeft men zich gerealiseerd dat je de kredietcrisis kunt aanpakken met maatregelen die een duurzaam karakter hebben. Zo sla je drie vliegen in één klap: je schept banen, je wordt minder afhankelijk van fossiele brandstoffen en je pakt de klimaatverandering aan. In China doen ze het, ze staan niet passief toe te kijken zoals bij ons.

Voor een dictatuur is het makkelijker om doortastende maatregelen te nemen dan voor een democratie.

Dat klopt, maar bij ons kan het ook. Het probleem hier is dat onze leiders niet luisteren. Kijk naar de uitslag van de Europese verkiezingen. Er was duidelijk winst voor leiders die kritisch waren over de banken, zoals Merkel en Sarkozy. Maar een politicus die de financiële sector niet durft aan te pakken, zoals Gordon Brown, werd afgestraft. De gewone burger dreigt het slachtoffer te worden van de crisis, maar het zijn de banken die miljarden aan overheidssteun krijgen. Terwijl zij juist de oorzaak van de problemen zijn.

Een greep uit de voorstellen van de Green New Deal: herinvoering van kapitaalcontroles, het uit elkaar trekken van grote banken, massale investeringen in een groene economie, de prijzen van energie verhogen. Het klinkt allemaal vrij….

…. Radicaal? Tja, de crisis is ook radicaal. We kunnen niet volstaan met halve maatregelen. De opwarming van het klimaat is al bezig. We kunnen lijdzaam toekijken naar de gevolgen, of we kunnen in actie komen en de oorzaken aanpakken.

De prijzen van energie verhogen lijkt moeilijk verkoopbaar. De gewone burger, die al het slachtoffer is van de kredietcrisis, dreigt zo nog eens extra gepakt te worden.

We zouden onszelf bedriegen als we denken dat de olieprijs altijd laag blijft. Ik groeide op in het plaatsje Welkom, in Oranje Vrijstaat in Zuid-Afrika. De voornaamste economisch activiteit daar was de goudmijn. Het idee dat dat goud ooit op zou zijn, kwam niet in ons hoofd op. Toch is het gebeurd. Nu worden de terrils in Welkom uitgekamd op zoek naar het allerlaatste goud. Zo zal het ook met olie gaan. Dus moeten we ons nu al voorbereiden op een economie zonder fossiele brandstoffen. Dat kan bijvoorbeeld door het systeem van de handel in emissierechten aan te pakken. Daar is veel mis mee. En we moeten de alternatieven meer subsidiëren. In Duitsland krijgen gezinnen subsidie als ze stroom aan het net toevoegen in plaats van afnemen. Waarom gebeuren dat soort dingen niet overal? Niet omdat er geen geld voor is. Geld is er genoeg, als je het maar productief inzet. En dat is nu juist het probleem. De overheid heeft de controle over het financiële systeem uit handen gegeven aan de banken. Het resultaat is dat het geld werd ingezet voor niet-productieve zaken, zoals een overmaat aan krediet die leidde tot een enorme stijging van de vastgoedprijzen. Keynes heeft aangetoond dat er veel geld ingezet kan worden voor een herstelbeleid zonder dat uit de hand lopende interestniveaus. Voorwaarde is wel dat de overheid de touwtjes in handen houdt. Tijdens de Tweede Wereldoorlog heeft Groot-Brittannië dankzij Keynes massaal veel geld geïnvesteerd in de oorlogseconomie, terwijl de rente niet boven de 3procent steeg.

Is zoiets nu ook haalbaar? Kapitaalcontroles lijken moeilijk realiseerbaar in een Europa met vrij verkeer van kapitaal.

Het verdrag van Rome zegt dat kapitaalcontroles in tijden van crisis wel degelijk toegelaten zijn. Ik weet dat het invoeren van kapitaalcontroles ondenkbaar lijkt in de hedendaagse economische context. Maar kijk eens naar IJsland. Daar hebben ze het ook gedaan. Kapitaalcontroles zijn nodig om de prijs van geld laag te houden. Als je verdrinkt in de schulden, moet je investeren om er weer uit te geraken. En om bedrijven te laten investeren, heb je lage interesten nodig, ook voor de langetermijnrente. Daarvoor moet de overheid zorgen, je kan dat niet overlaten aan de markt.

Een schuldencrisis oplossen door meer schulden te maken. Dat klinkt tegenstrijdig.

Maar dat is het niet. De schuldencrisis is ontstaan doordat het geleende geld niet productief werd aangewend. De overheid kan ervoor zorgen dat dat wel gebeurt. Als je schulden maakt om vervolgens alle huizen in een land degelijk te isoleren, is dat perfect verdedigbaar. Want zo’n programma zorgt voor werkgelegenheid en lager energieverbruik. Door de opbrengsten van die extra jobs en besparingen kan je de schulden weer afbetalen. Maar als je geleend geld gebruikt om een zeepbel van opgeblazen vastgoedprijzen te creëren, zoals tijdens de kredietcrisis is gebeurd, dan kan je na het uiteenspatten van die kunstmatige zeepbel je schulden niet afbetalen. Dat is het verschil.

Wat vindt u van het beleid van Obama, die de crisis aanpakt door de staatsschuld enorm te laten oplopen, met mogelijk nadelige gevolgen voor de dollarkoers?

Ik denk dat met de Amerikaanse aanpak de kans op herstel groter is dan met de Europese aanpak. Maar ik denk dat de Chinese aanpak nog beter is. Een mogelijke dollardepreciatie zal er niet komen door het overheidstekort, maar wel door de obligatiemarkt die de rente bepaalt en zo het Amerikaanse beleid teniet kan doen. Het is de obligatiemarkt die aangepakt moet worden. De obligatiehandelaars kunnen de VS als het ware gijzelen, zoals ook de banken dat gedaan hebben.

Dus de markt moet uitgeschakeld worden?

Voor een product zonder natuurlijke schaarste, zoals geld, zou de markt niet bepalend moeten zijn. Wel voor tulpenbollen, of olie, of iets anders waar een beperkte hoeveelheid van voorradig is. Maar van geld is er genoeg. Er is geen limiet op de kredietverlening en de geldschepping. Een krediet verstrekken is een kwestie van een paar cijfers invullen op een computer. Juist daarom moet de prijs ervan bepaald worden door de overheid, niet door de markt.

Nog even over de groene voorstellen in uw Green New Deal. Die zijn grotendeels terug te vinden in de politieke programma’s van de Groenen. Maar die vormen niet bepaald een belangrijke politieke factor. Wat zegt dat over het draagvlak voor dergelijke maatregelen?

Ik zou willen dat dergelijke groene maatregelen niet alleen door de Groenen worden verdedigd. In feite overstijgt dit thema de links-rechts-tegenstelling. In Groot-Brittannië is Conservative op sommige vlakken linkser dan Labour. Wat we nodig hebben, is een coalitie van de industrie en de werknemers om veranderingen door te drukken. Waarom kon het in de jaren30 wel en nu niet? Ik weet dat onze voorstellen radicaal lijken, maar in de context van een nog veel radicalere crisis zijn ze heel redelijk.

15th December, 2008

Last week there were several media pieces that mentioned the Green New Deal, including The Times, The Observer, and The Independent on Sunday.

Also, UN Secretary General Ban Ki-moon has followed his colleagues at UNEP in calling for a Green New Deal.

You can also read nef’s Green New Deal Round-up here.