Infrastructure Undermines Sovereignty
The Financial Attack on Greece: Where To
By Michael Hudson
July 08, 2015 "Information
The major financial problem tearing economies apart
over the past century has lain more with official inter-governmental
debt than with private-sector debt. That is why the global economy
today faces a similar breakdown to 1929-31, when it became apparent
that the volume of official inter-government debts could not be
paid. The Versailles Treaty had imposed impossibly high reparations
demands on Germany, and the United States imposed equally
destructive demands on the Allies to use their reparations receipts
to pay World War I arms debts to the U.S. Government.
Legal procedures are
well established to cope with corporate and personal bankruptcy.
Courts write down personal and business debts either under “debtor
in control” procedures or foreclosure, and creditors take a loss on
loans gone bad. Personal bankruptcy permits individuals to make a
fresh start with a Clean Slate.
It is much harder to
write down debts owed to or guaranteed by governments. U.S. student
loan debt cannot be written off, but remains to prevent graduates
from earning enough take-home pay (after debt service and FICA
Social Security tax withholding is taken out of their paychecks) to
get married, start families and buy homes of their own. Only the
banks get bailed out, now that they have become in effect the
economy’s central planners.
Most of all, there is
no legal framework for writing down debts owed to the IMF, the
European Central Bank (ECB), or to European and American creditor
governments. Since the 1960s entire nations have been subjected to
austerity and economic shrinkage that makes it less and less
possible to extricate themselves from debt. Governments are
unforgiving, and the IMF and ECB act on behalf of banks and
bondholders – and are ideologically captured by anti-labor,
anti-government financial warriors.
The result is not the
“free market economy” it pretends to be, nor is it the rule of
economically rational law. A genuine market economy would recognize
financial reality and write down debts in keeping with the ability
to be paid, but inter-government debt overrides markets and refuses
to acknowledge the need for a Clean Slate. Today’s guiding theory –
backed by monetarist junk economics – is that debts of any size can
be paid, simply by reducing labor’s wages and living
plus selling off a nation’s public domain – its land, oil and gas
reserves, minerals and water distribution, roads and transport
systems, power plants and sewage systems, and public infrastructure
of all forms.
Imposed by the
monopoly of inter-governmental financial institutions – the IMF, ECB,
U.S. Treasury, and so forth – creditor financial leverage has become
century’s new mode of warfare. It is as devastating as military war
in its effect on population: rising suicide rates, shorter lifespans,
and emigration of the age-cohort that always have been the major
casualties of war: young adults. Instead of being drafted into the
army to fight foreign foes, they are driven from their homes to find
work abroad. What used to be a rural exodus from the land to the
cities from the 17th
century onward is now a “debtor exodus” from countries whose
governments owe unpayably high sums to creditor governments and to
the banks and bondholders on whose behalf they impose their policy.
While pushing the
world economy into a state of war internationally, high finance also
is waging a class war against labor – and ultimately against
governments and thus against democracy.
The ECB’s policy has
been brutal toward Greece this year: “If you do not re-elect a
right-wing party or coalition, we will destroy your banking system.
If you do not sell off your public domain to buyers, we will make
life even harder for you.”
No wonder Greek
Finance Minister Yanis Varoufakis called the Troika’s negotiating
position “financial terrorism.” Their idea of “negotiation” is
surrender. They are unyielding. Official creditor institutions
threaten to isolate, sanction and destroy entire economies,
including their industry as well as labor. It transforms the 19th-century
class war into a purely destructive meltdown.
That is the great
difference between today and 1929-31. Then, the world’s leading
governments finally recognized that debts could not be paid and
suspended German reparations and Inter-Ally debts. Today’s situation
is using the unpayability of debts as leverage for class war.
political aim of this financial warfare in Greece is to replace its
elected government (supported by a remarkable July 5 referendum vote
of 61 to 39) with foreign creditor control by “technocrats,” that
is, bank lobbyists, factotums and former Goldman Sachs managers. The
long-term aim is to impose a war against labor – in the form of
austerity – and against the power of governments to determine their
own tax policy, financial policy and public regulatory policy.
is an alternative. Here is what is needed. (I outlined my
proposals in a presentation before the Brussels Parliament on July
3, following an earlier advocacy at
The Delphi Initiative in Greece, convened by Left Syriza the
reaffirming the rights of sovereign nations
Sovereign nations have
a right to put their own growth ahead of foreign creditors. No
nation should be obliged to impose chronic depression and
unemployment or polarize the distribution of wealth and income in
order to pay debts.
Every nation has the
right to the key criteria of nationhood: the rights to issue its own
money, to levy taxes, and to write its laws, including those
governing relations between creditors and debtors, especially the
terms of bankruptcy and debt forgiveness.
dictates what was recognized by the end of the 1920s: when debts
reach the level that they disturb basic economic balance and derange
society, they should be annulled. Another way of saying this is that
the volume of debt – and its carrying charges – must be brought
within the reasonable ability to pay.
Rejecting the “hard
money” (really a “hard creditor”) position of anti-German,
anti-labor economists Bertil Ohlin and Jacques Rueff, Keynes argued
that creditors had an obligation to explain to Germany just how
they would enable it to pay its reparations. He meant at that time
specifically that France, Britain and other recipients of
reparations should specify just what German exports they would agree
to buy. But today, creditors define a nation’s ability to pay not
in terms of how it can earn the money to pay, but rather what
public domain assets it can sell off in what is a national
bankruptcy proceeding. Debtor countries are to let their public
infrastructure be sold off to rent-extractors to create a neofeudal
law, no nation is legally obliged to do this. And under the moral
definition of nationhood, they should not be forced to do so.
Their right to resist this is what makes them sovereign, after all.
It is true that the
principle of the European Union was that individual nations would
cede their rights to a larger entity. The union itself was to
exercise the rights of nationhood, democratically on the basis of a
But this is not what
has happened. The EU has no common ability to tax and spend; that
remains local. The one area where it does govern taxes is
dysfunctional: EU ideologues insist on taxing consumers (via the
Value Added Tax, VAT) and labor via pension set-asides.
More fatally, the
eurozone has no ability – or at least, no willingness – to create
money to fund deficit spending. What it calls a “central bank” is
only designed to provide money to domestic banks and, even worse, to
lobby for the interest of private bankers against the
principle of public central bank money creation.
The EU does not even
have a meaningful legal system empowered to fight fraud and
financial crime, to prosecute or clean up insider dealing and
corrupt oligarchies. In the case of Greece, where the ECB at least
insisted on the need to clean up such behavior, it was only to
“free” more revenue for foreign investors from public agencies
scheduled to be privatized. Furthermore, this revenue stream was to
pay debts to the ECB and its crony institutions for the money they
had paid private bondholders and banks in the face of economies
shrinking from a combination of debt deflation and fiscal deflation.
Taken together, these
defects mean that the Eurozone and EU were malstructured from the
start. Control was placed so firmly in the hands of bankers and
anti-labor ideologues that it may not be reformable – in which case
a new start must be made.
In any event, here are
the institutional reforms that are urgently needed. In view of the
financial sector’s control of the main institutions, these reforms
require entirely new institutions not governed by the pro-rentier
logic that has deformed the eurozone. The most pressing needs are
for the following institutions.
forum to adjudicate the ability (or inability) to pay debts
What is needed to put
this basic principle into practice is creation of a new
international forum to adjudicate how much debt can
reasonably be paid – and how much should be annulled.
In 1929 the Young Plan (which replaced the Dawes Plan to deal
more rationally with German reparations) called for creation of such
an institution – what became the Bank for International Settlements
(BIS) in 1931 to stop the economic destruction of Germany by
bringing its reparations back within the ability to pay.
The BIS no longer can
play such a role, because it has become the main meeting place for
the world’s central banks, and as such has adopted the hardline “all
debts must be paid” position that it originally was intended to
Likewise the IMF no
longer can play this position. It is hopelessly political. Despite
its technical staff ruling in 2010-11 that Greece’s foreign debts
could not be paid and hence needed to be written off, its heads –
first Dominique Strauss-Kahn and then Lagarde – acted in blatant
conflict of interest to support the French bankers demands for
payment in full, and U.S. demands by President Obama and Wall Street
lobbyist Tim Geithner to insist there be no writedown at all. That
was the price for French bank support for Strauss-Kahn’s intended
bid for the French presidency, and recently for Lagarde’s support.
Given the U.S. veto power by Wall Street and the insistence that
right-wing anti-labor ideologues (usually French) be appointed head
of the IMF, a new organization representing the kind of economic
logic outlined by Keynes, Harold Moulton and others in the 1920s is
Creation of such an
institution should be a leading plank of Euro-left politics.
A Law of Fraudulent
Conveyance, applicable to governments
The private sector has
long had laws that prevent money-lenders from lending a borrower
more funds than the debtor can reasonably be expected to pay back in
the normal course of business. If a lender advances, say, $10,000 as
a mortgage loan against a house worth more (say, $100,000), and then
insists that the debtor pay or lose his home, the courts may assume
that the loan was made with this aim in mind, and annul the debt.
Likewise, if a company
is raided by borrowers loading it down with high-interest junk
bonds, and then seize its pension funds and sell off assets to pay
their debts, the company under attack can sue under fraudulent
conveyance rules. They did so in the 1980s.
ploy is the game that the Troika have played with Greece. They lent
its government money that the IMF economists explained quite clearly
in 2010-11 (and reaffirmed this year just before the Greek
referendum) could not be paid. But the ECB then came in and said,
“Sell off your infrastructure, sell your ports, your gas rights in
the Aegean, and entire islands, to get the money to pay what the IMF
and ECB have paid French, German and other bondholders on your
behalf (while saving U.S. investment banks and hedge funds from
losing their bets that Greek debts would indeed be paid).
Application of this
principle requires an international court to rule on the point at
which debt service becomes intrusive, and write down debts
No such set of
institutions exists today.
Treasuries as national central banks to monetize deficit spending
Central banks today
only lend money to banks, for the purpose of loading economies down
with debt. The irrational demand by bankers to prevent a public
option from creating credit on its own computer keyboards (the same
way that banks create loans and deposits) is designed simply to
create a private monopoly to extract economic rent in the form of
interest, fees, and finally to foreclose on defaulting creditors –
all guaranteed by “taxpayers.”
The European Central
Bank is not suited for this duty. First of all, it is based on the
ideology that public money creation is inflationary. The reality is
that central bank money creation has just financed the greatest
inflation of modern history – asset price inflation of the real
estate market by junk mortgages, inflation of stock prices by junk
bond issues, and central bank Quantitative Easing to create the
fastest and largest bond market rally in history. The post-1980
experience with central banks has removed any moral or economic
logic in their behavior as lobbyists for commercial banks, defenders
of their special privileges, deregulator of financial crime, and
extremist right-wing blockers of a public option in banking to bring
basic services in line with actual costs. In short, if commercial
banking systems in nearly every country have become
de-industrialized and perverse, their enablers have become central
The remedy is to
replace these central banks with what preceded them: national
Treasuries, whose proper function is to monetize government spending
into the economy. The basic principle at work should be that
any economy’s monetary and credit needs should be met by public
spending and monetization, not by commercial banks creating
interest-bearing credit to finance the transfer of assets (e.g.,
real estate mortgages, corporate buyouts and raids, arbitrage and
Every nation has a
right to defend itself against attack – financial attack just as
overt military attack. That is part of the principle of
Portugal, Italy and other debtor countries have been under the same
mode of attack as that of the IMF and its austerity doctrine that
bankrupted Latin America from the 1970s onward. International law
needs to be updated to recognize that finance has become the
modern-day mode of warfare. Its objectives are the same: acquisition
of land, raw materials and monopolies.
A byproduct of this
warfare has been to make today’s financial network so dysfunctional
that nations need a financial Clean Slate. The most successful one
in modern times was Germany’s Economic Miracle – the post-World War
II Allied Monetary Reform. All domestic German debts were annulled,
except employer wage debts to their labor force, and basic working
balances. Later, in 1953, its international debts were written down.
The logic prompting both these acts needs to be re-applied today.
With specific regard
to Greece, Syriza’s leaders have said that they want to save Europe.
Principally, from the eurozone’s destructive economic irrationality
in not having a real central bank. This defect was deliberately
built into the eurozone, to enforce a monopoly of commercial banks
and bondholders powerful enough to gain control of governments,
overruling democratic politics and referendums.
Eurozone rules – the
Maastricht and Lisbon treaties – aimed at blocking governments from
running budget deficits in a way that spend money into the economy
to revive employment. The new aim
is only to rescue bondholders and banks from making bad loans
and even fraudulent loans, bailing them out at public expense.
Economies are obliged to turn to commercial banks for loans to
obtain the money that any economy needs to grow. This principle
needs to be rejected on grounds that it violates a basic sovereign
right of governments and economic democracy.
Once an economy is
fiscally crippled by (1) not having a central bank to finance
government spending, and (2) by limiting government budget deficits
to just 3% of GDP, the economy must shrink. A shrinking economy will
mean fewer tax revenues, and hence deeper government budget deficits
and rising government debt.
The ultimate killer is
for the ECB, IMF and EC to demand that governments pay their debts
by privatizing public infrastructure, natural resources, land and
other assets in the public domain. To compound this demand, the
Troika have blocked Greece from selling to the highest bidder, if
that turns out to be Gazprom or another Russian company. Financial
politics thus has become militarized as part of NATO New Cold War
politics. Debtor economies are directed to sell to euro-kleptocrats
– on terms financed by banks, so that interest charges on the deal
absorb all the profits, leaving governments without much income tax.
Michael Hudson is President of The Institute for
the Study of Long-Term Economic Trends (ISLET), a Wall Street
Financial Analyst, Distinguished Research Professor of Economics at
the University of Missouri, Kansas City and author of
The Bubble and Beyond (2012), Super-Imperialism: The Economic
Strategy of American Empire (1968 & 2003), Trade, Development and
Foreign Debt (1992 & 2009) and of The Myth of Aid (1971).