Defaulting banks - where will it stop?

[Jan Klimkowski]

Michael Hudson's article, linked above by Peter Presland, is a very powerful and insightful analysis.

As Hudson suggests, They are about to impose economic Shock Therapy on First World European countries. How this plays out - peacefully, violently - will be crucial.

Icelanders for their part feel that the EU has treated them as a financial colony while backing a neoliberal kleptocracy preying on an increasingly indebted population. In many ways Iceland is the tip of the iceberg – the proverbial canary in the coalmine showing the need to better cope with over-indebted economies. The EU and IMF-style austerity programs to pay off foreign debts that corrupt insiders have run up is not what was promised in 1991 the post-Soviet economies or Third World debtors. It is not the promise of industrial capitalism. It is a financialized post-industrial dystopia, an imperial neofeudalism.

Why Iceland's move is so important for international financial restructuring

For the past decade Iceland has been a kind of controlled experiment, an extreme test case of neoliberal free-market ideology. What has been tested has been whether there is a limit to how far a population can be pushed into debt-dependency. Is there a limit, a point at which government will draw a line against by taking on public responsibility for private debts beyond any reasonable capacity to pay without drastically slashing public spending on education, health care and other basic services?

At issue is the relationship between the financial sector and the “real” economy. From the perspective of the “real” economy, the proper role of credit – that is, debt – is to fund tangible capital investment and economic growth. The objective is to create a tax system and financial regulatory system to maximize the latter.

After all, it is out of the economic surplus that interest is to be paid, if it is not to be extractive and outright predatory. But creditors have not shown much interest in economy-wide wellbeing. Bank managers and subprime mortgage brokers, corporate raiders and their bondholders, and especially the new breed of kleptocratic privatizers applauded so loudly by neoliberal economic ideologues simply (and crassly, I have found) ask how much of a surplus can be squeezed out and capitalized into debt service. From their perspective, an economy’s wealth is measured by the magnitude of debt obligations – mortgages, bonds and packaged bank loans – that capitalize income and even hoped-for capital gains at the going rate of interest.

Iceland has decided that it was wrong to turn over its banking to a few domestic oligarchs without any real oversight or regulation, on the by-now discredited assumption that their self-dealing somehow will benefit the economy. From the vantage point of economic theory, was it not madness to imagine that Adam Smith’s quip about not relying on the benevolence of the butcher, brewer or baker for their products but on their self-interest is applicable to bankers. Their “product” is not a tangible consumption good, but debt – indeed, interest-bearing debt. And debts are a claim on output, revenue and wealth, not wealth itself.

This is what pro-financial neoliberals fail to understand. For them, debt creation is “wealth creation” (Alan Greenspan’s favorite euphemism), because it is credit – that is, debt – that bids up prices for property, stocks and bonds and thus increases financial balance sheets. The mathematically convoluted “equilibrium theory” that underlies neoliberal orthodoxy treats asset prices (wealth in the financial sense of the term) as reflecting prospective income. But in today’s Bubble Economy, asset prices reflect whatever bankers will lend – and rather than being based on rational calculation their loans are based merely on what investment bankers are able to package and sell to gullible financial institutions trying to pay pensions out of the process of running economies into debt, or otherwise disposing of credit that banks freely create.

The amount of debt that can be paid is limited by the size of the economic surplus – corporate profits and personal income for the private sector, and the net fiscal revenue paid to the tax collector for the public sector. But for the past generation neither financial theory nor global practice has recognized any capacity-to-pay constraint. So debt service has been permitted to eat into capital formation and reduce living standards.

http://www.globalresearch.ca/index.php?c...leId=14800