Democracy and Debt - Hudson

[Peter Lemkin]

By MICHAEL HUDSON
If it is in the debt crisis is a silver lining on the horizon, then there is the awareness that things continue to go with the banks may not. We are left with no choice other than to restructure the system. The crucial question is who has the last word in the economy - the state or the financial sector. A century ago, they still knew how one should look more productive banking sector. But of this we have a long way.

Previously entrusted to banks lent them further deposits, which they paid for short-term deposits less interest than they charged for less liquid loans. The risks were just the banks. Today, loans for speculative trading transactions are used. Financial crises worsen and affect more people because the mountain of debt continues to grow.

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To escape the control of the state, banks have accused this to distort the free market. You want to do the planning in their own hands. The problem is that they think in short, self-destructive periods and happy place to reckless activities, so that countries end up being in debt. By threatening to the economy would collapse if they are legal limitations imposed on the banks take the government to liability. Without more rescue systems, central bank loans and government loan guarantees, the economy will be damaged. Does the state of the power of banks to surrender?

Financing of productive assets
Formerly bad debts were written off eventually. This meant losses for banks and investors. Today, the debt load is maintained, the financial system remains intact. The rescue operation is, it should enable the banks in a position to give so much credit that the economy recovers and the country can pay its debts.

The indebted countries, it is claimed, could return to growth by borrowing. However, it is mathematically impossible to carry the existing debt without austerity, without debt deflation and depression. Since the financial crash of 2008, states the main shareholder of troubled banks. Instead of taking the opportunity to hold these banks as a public service and reduce credit card fees - or to stop lending to gamblers - these banks can continue to practice casino capitalism. We are therefore faced with the question of what role the bank plays. About this issue was discussed at length before the First World War - it is now more urgent than ever.

England was the starting point of the industrial revolution, but there was little long-term loans for investment in factories and other production equipment. British and Dutch commercial banks lending money on real estate or short-term supply contracts, and business was so good that we stuck to the practice. In France and Germany, however, encouraged the banking industry. The Saint-Simonian inspired the creation of an industrial loan system, which should be used to finance productive assets. They suggested the establishment of cooperative banks organized. The first was founded in 1852 by brothers Péreire Crédit Mobilier.

Clash of the financial systems
The aim was to get away from debt financing and to practice an equity award, be paid at the rates instead of dividends, the increase depending on the location of the debtor or fall. Such a practice that gives companies the opportunity to pay lower dividends in lost revenue, avoids the problem that must be paid in such cases, interest. Subscribe to default of interest payments, the debtor may be insolvent.

In Bismarck's Germany long-term financing was expressed in the Reichsbank and other industrial banks, in the sense of "trinity" of banks, industry and government planning. The German banks accounted a virtue of necessity. British banks, which consisted mainly of deposits funds, savings and financial assets diverted into trade financing. Local companies were therefore forced to finance investments from their own resources. In Germany, however, "had to be the industry because of lack of capital apply to the banks," writes financial historian George Edwards. The German banks were devoted mainly to the investment business.

The initial successes in the First World War were widely seen as an expression of the superiority of the German financial system and the war as a struggle between rival organizational forms of finance. It was not just about who was the leading European power, but which form of economy would prevail. Germany, Friedrich Naumann wrote in 1915, was recognized more clearly than other nations, that industrial development need long-term financing and government support. His book "Central Europe" inspired by Professor HS Foxwell in 1917 to two remarkable essays in "Economic Journal", where he focused on Naumann's thesis was referring to the old individualist, English capitalism, a new, more impersonal organization make room, the disciplined, scientific capitalism German expression. Industry, banks and government involved in it, the success of the modern German economy owed primarily to the financial sector. German banks had experts who were concerned with the industry.

Banks and industrial development
Foxwell warned that British manufacturers would get increasingly behind. In Germany, however, banks are essential instruments for the promotion of foreign trade and strengthening the power of the empire. British banks based their lending decisions not based on new products and income, which generated their loans potentially, but on assurances given them as obeyed by the insolvency of a debtor. Instead of investing in the company, they paid mostly from profits as dividends. Contractor had to pay cash, and therefore could not pursue a long-term strategies. German banks paid dividends only half as much as the British banks, as they zurückbehielten income as capital reserves and invested in shares of their customers. Banks, who considered such companies as partners and not merely as customers, which should preferably throw quickly much profit, sent representatives to the boards of directors and supported the business by the States made loans available, provided that these German entrepreneurs would be used for investments.

In the early days no bank loans flowed into British industry. Even the stock market was not much help. England had with the establishment of state-owned companies like the East India Company, the Bank of England or the South Sea Company, set early in a signal. The London Stock Exchange was a popular investment vehicle for British and foreign investors. Dominant but were railroads, canals, and large public utilities, industrial companies were not well-known to the issuer. British stockbroker failed just like the banks, when it came to the financing of industrial development. Once they had pocketed their commission, they turned to the next issue, without thinking about what had happened to the investors.

Behaved similarly and American entrepreneurs. They were individualists, political insiders who often operated on the fringes of legality. A typical figure was Thomas Edison, who, unlike their German colleagues, always ready to enforce patents and monopoly rights.

Never before has a country repaid his debt
The development of the industrial loan brought economists to distinguish between productive and unproductive loans to. In a productive loan, the borrower has on average for his company, and he can earn so much that he can repay the loan plus interest. An unproductive loan must be repaid from other sources. States must wage war bonds with taxpayer money, consumers have to pay back loans with what they deserve. So it can not spend as much money to be spent, the economy shrinks. This leads to crises, be removed at the end of debt, particularly unproductive debt.

After World War II, winner-loser as nations with arms and reparations debts faced. When America demanded by his allies, surprisingly, the repayment of their debt for weapons purchases, England capitulated, true to the old way of thinking, that debt must be repaid, regardless of whether it is even possible. The American demand brought the Allies to Germany to adhere to indemnify. Never before had financial obligations to this degree. Nevertheless, Germany has sought to implement them by taxing the economy. Since taxes are levied in the national currency, had to exchange the Reichsbank this money in pounds sterling and other currencies. England, France and the other recipient countries could now settle their inter-Allied debts to the United States.

Adam Smith pointed out that never before has a country's debt repaid. But not a believer confesses a love that a debtor is insolvent. In his blindness he thinks it's made in his interest to note that even the highest amounts will be repaid. And despite cuts in consumption and investment can only be extractive, want of faith-based economists do not you have that debt can not be met by having shrunk the economy, or that the repayment of foreign debts in its own currency with a worse exchange rate to be paid.

Inflation of asset prices
The more Reichsmarks were exchanged, the lower the price fell against the dollar and other currencies, gold standard. Imports for Germany were always more expensive. Reason for the hyperinflation was the collapse of the exchange rate, not the inflated money supply, as is now claimed by monetarists like. In vain Keynes pointed to the specificity of the German balance of payments, he demanded that the creditor should indicate to what extent they wanted to buy German exports, and say how marks could be converted into foreign currency without the exchange rate collapses and creates a price inflation. Unfortunately, the Allies decided to Ricardo's tunnel vision. Bertil Ohlin and Jacques Rueff explained that flowed back again through the purchase of imported German reparations to Germany and other debtor nations. If income adjustments not provided for stable exchange rates, the decreasing rate of the Reichsmark would result in cheaper exports, in this way, Germany would be able to pay its debts.

This logic was followed by the International Monetary Fund, fifty years later, when he demanded of indebted developing countries, export earnings to be used for debt service, capital flight and to allow pay off the foreign debt in full. This is the neo-liberal policies that are now Greece, Ireland and Italy demanded tough cuts.

Bank lobbyists explain the ECB will set a wage and price inflation in motion, if they do, what central banks have been established - namely, to finance budget deficits. Now take this task and European banks collect interest on something that might central banks generate on their own computers. But why there is less inflation if fiscal deficits of commercial banks and central banks will not finance? Thanks to the bank loans that have been fueled since the eighties, a global financial bubble, we are now faced with a debt that is not very affordable as well as in their twenties, when Germany could not pay its reparation. Government loans have led to such an inflation of asset prices?

We see greed
Under Article 123 of the Lisbon Treaty may ECB and national central banks to the governments make no loans available. But that is what banks were originally created - in order to finance budget deficits. If credit creation by commercial banks is reserved to the States to fight against economic and financial crises do not rely on their own central bank. Meanwhile, European governments need loans in order to balance their budgets in deficit. And the banks want a central bank, which relieves them of bad loans.

Bankers have argued that countries need an honest broker to help you decide whether a credit or public fiscal policy is responsible. In the meantime, they recommend indebted governments to sell state property. The idea is based on the myth that privatization is more efficient. Here here, interest will accrue at higher executive pay, stock options and other costs. Savings are achieved primarily through the employment of cheap labor. This benefits privatizers, banks and bondholders, but not the public. Banks and promote deregulation, rising prices have led to the. The site will be more expensive and less competitive - just the opposite of what was promised.

The banking sector has so far away from the financing of economic growth that he is now enriched at the expense of the general public. This is the great problem of our time. Losses will be borne by the community, depression is taken into account. We see greed and downright antisocial and aggressive behavior.

Democratic option of the public credit creation
Europe needs to decide which interests should take precedence - the banks or the real economy. History provides many examples of how dangerous it is to surrender to the bankers, but also to look like a different policy might pursue in a more productive line of the banks. Are the key questions: Do the banks played its role historically meaningful or they can be restructured to finance productive capital investment is a priority? Government loans can be cheaper and are mainly targeted? Would not it make more sense to boost the economy by cutting debt, rather than submit to aggressive creditors more money in your throat?

Whether banks or states will emerge victorious from the crisis is in sight. The interests of debtors and creditors are diametrically opposite each other, meanwhile, state planning on the banks and their allies goes. In order to retain power and influence, it is easiest for them to insist on their monopoly of credit creation and to block attempts at interference of the central bank or the public sector. Government and central bank should act in accordance with the contract and insist on a democratic option of the public credit creation.