Debt.

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FionaK
view post Posted on 28/10/2011, 13:13




The current financial crisis is all about debt. That, at least, is the view which is promulgated in the financial press and by governments. It is related to other topics in this forum: economic growth abolishes debt in the long run; inflation erodes the burden of it; questions about the gold standard are related as well. So it seems that debt is the bedrock of all of these topics. Once again the term debt is simple in dictionary terms: and utterly confusing when you come to look at specifics. So let us have a think about debt. Will take a lot of thought and posts, but I hope you will think along with me for it is important.

If we begin with the experience of ordinary people it starts out quite simple. Dickens' Mr McCawber summed it up:

""Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

That is how many people look at debt, and some of us don't think much further than that: I am certainly one of those people, and I am afraid of debt. That fear comes from my family: the consequences of debt, as I perceive them, actually derive from the thread embodied in Mr Micawber and also from the experience of the depression in the 1930's and the means test imposed at that time. I didn't live through that; nor did my parents. It doesn't matter. Some events are so enormous in their impact that the lessons learned (or narrative adopted, if you prefer) are culturally transmitted. We have views about the meaning of events in history which are tied to that type of transmission, if we are not historians: and those are part of national self image, but also of tribal or class or gender identifications.

Each group has their own story and they are not necessarily shared. Thus, for example, in this country the generally shared perception of Winston Churchill is that he was a great war leader: beyond that some groups believe he was a great man in wider ways, and they point to his various achievements in other fields: in the writing of history, for example. Others do not believe that, and in their story his books don't matter at all: what matters is that he shot the workers in 1926: this means he was an unmitigated bastard, despite his wartime achievements, and that is how he is perceived. Obviously this is not to do with historical reality: I merely use this example to illustrate the fact that such stories are handed down through cultural transmission and they stand in parallel with "history" as normally understood. They matter. The comedian Jeremy Hardy has a very funny take on that kind of thing when he takes those stories which are important to the UK population and mixes them all up: the same kind of self deprecating humour about our national tales is intrinsic to "1066 And All That", so Hardy is carrying on tradition of poking fun at this kind of transmission and the impressions it leaves on us all. But they are not monolithic.

The depression of the 1930's is one of those stories: but it is not shared equally by all. Nor is it promoted in the way that the Battle of Waterloo, or the defeat of the Spanish Armada, is: as unifying concepts which foster national identity. The depression is not a unifying story, and so it is not in the interests of the nation to incorporate it when "socialising" children: a lot of education is designed to make little brits or little americans out of children with no national identity: and all states have a mainstream tale to transmit which furthers that aim. Some big events are in that tale and some are definitely not: but the people have their own tale which is slightly oblique: and that depends on other kinds of identification.

I have digressed, and you may be wondering what this has to do with the notion of debt. The reason I raise it is because cultural transmission which is not central to the state's purpose is more vulnerable to being lost when circumstances change: or to annihilation if the state or other powerful interests find it useful to attack those perceptions. The wisdom gained by oppressed groups is often lost in that way: and so each generation must re-invent the wheel. Standing on the shoulders of giants is not open to ethnic minorities or to women educated and formed in a society where the national narrative does not include them as central figures in history: they must start anew each time they come to a consciousness of a shared and separate identity. It seems to me that we are living in a period when the fear of debt has been extinguished to quite a large extent, in just this way. Not for the first time, I would suggest. Mr Micawber predated the shift in attitude to debt in the 1920's and that was a factor in the genesis of the depression.

QUOTE
As a result of these trends, in 1929 the top 0.1 percent of American families had a total income equal to that of the bottom 42 percent. This meant that many people who were willing to listen to the advertisers and purchase new products did not have enough money to do so. To get around this difficulty, the 1920s produced another innovation - "credit," an attractive name for consumer debt. People were allowed to "buy now, pay later." But this only put off the day when consumers accumulated so much debt that they could not keep buying up all the products coming off assembly lines. That day came in 1929.

www.brucekelly.com/library/great-depression.html

The people knew that, and it frightened them for 50 years: but time passes and people forget the lessons learned especially when other forces are intent on helping them to forget. That must have happened between Mr Micawber and 1920: and it has been happening again since about 1980. There are many threads in achieving such a shift. There is the naked imposition of debt on those reluctant to accept it: student loans are an example of that; withdrawal of social housing so that the poor must take mortgages is another. There is the use of the media to create new wants and "needs" remorselessly, and to hold up rich life styles as reasonable aspirations by the exhibition of celebrities, and in particular celebrities who came from poor backgrounds: like footballers, for example. There is the suppression of any narrative of social improvement in favour of individual advancement, embodied in the statment "there is no such thing as society". Together these things and others serve to reduce the fear of debt: for if we must have debt, and if debt is the norm for our neighbours as well, we cannot continue to fear it in the same way: we would go mad with worry. And so this change is achieved.

Is it a bad thing? Mr Micawber's simple statement tells us that it is. But it is too simple to help us much. His statement is about income and expenditure: but the relationship between that and debt is not simple. If his prescription is followed then it is certainly rational to take on a mortgage if the repayment of that mortgage is less in a month than the alternative rent would be. The debt is divorced from the simple balancing of incomings and outgoings, and if it is ignored in the calculation then the way to happiness, in his terms, is to incur the debt. That truth was well understood by the neocons: the sale of social housing was made at an enormous discount so that the debt was relatively small: the asset underpinning that debt was more than enough to cover it (that is, it was oversecured): the alternative rent for the same property was being systematically and cynically raised to "market levels"; and interest rates were low, so that rent was higher than the cost of the mortgage. If you did not default you ended with an asset you would not have had before as well: with the prospect of helping your children in future, by leaving them something rather than nothing. That is both the story that was told, and part of the truth as well:but only part of it.

The other side is more obscure but it was also known: the discounted sale of social housing only applied to sitting tenants: those same children who were to benefit from the legacy could not find anywhere to live at a price they could afford while their parents lived. There was no social housing for them. Families did not factor in the cost of repairs and maintenance into their calculation of income v expenditure: because major repair costs are not regular and are not predicatable: also those costs were unfamiliar to social tenants because in social housing they are the responsibility of the landlord. Even running repair costs were alien to them, and they were not taken into account. Families which grew and needed larger houses were previously eligible for a move to meet their needs just on the basis of those needs: there were waiting lists through inadequate supply, but in the end the people were housed in accommodation which suited the family size. Once they bought the property there was no more obligation to ensure that: they must buy in the free market. Certainly they could sell: but they needed to upgrade and they had no surplus of that size: could not have. So they got stuck in overcrowding, with the tensions and indignities that imposes. That is not in the initial calculation either. If in later life they became ill and required residential care the house was an asset taken into account for means testing the costs: and when it came to be sold the proceeds went to pay for that care: so the children who were to inherit could not: the asset value was gone.

These aspects are all consequences of accepting the private debt and abandoning the social contract. They are not trivial and they go a long way to explaining some of the problems we now face. The problem of debt is not only a problem for the individual: it is a problem for the wider society quite directly. But those social consequences are no part of the neoliberal agenda: they are invisible because if there is no such thing as society then society cannot be harmed: it is incoherent.
 
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FionaK
view post Posted on 28/10/2011, 19:16




If it is accepted that a change in the attitude to debt was part of the programme promoted by the neoliberals since their accession around 1980, it is obvious that that change can do nothing by itself. Before they came to power credit was rationed in the UK. There were direct limits on bank lending and on consumer credit. There were restrictions on foreign participation in the financial sector and there were restriction on foreign exchanges. From about 1980 that changed. Foreign exchange restrictions were lifted: requirements for banks to make special deposits with the bank of england were also removed and the freed capital led them to enter the mortgage markets in greater strength. Restrictions on what building societies could do were also relaxed and they became more like banks over time: to the extent that some actually converted into banks at a later date. Foreign companies were allowed to enter the credit market too. The effect was to make credit extremely easy to come by, where it had previously been difficult. This was promoted as a freeing of the market which would lead to prosperity and at the same time the people were told that it was not for the "nanny state" to tell people how to manage their affairs: they should make their own decisions about how to manage their money and their debt. From 1980 - 1989 household debt/income ratios doubled and inflation adjusted house prices also doubled in the same period. It is a matter of dispute which came first: but there is no denying that the sale of social housing was a part of the debt increase: and in its turn it forced young people to enter a rising private housing market if they wanted somewhere to live. Previously all those in social housing had no housing debt: now they did. Previously young couples on low incomes formed part of that group:now they didn't. This pattern in the uk was also seen in some of the Scandinavian countries though I do not know if the sale of social housing was part of it, there: the cost of houses rose sharply in Denmark, Norway, Sweden and Finland: and, as in the UK, household savings fell at the same time.

That fall in savings has a knock-on effect: if you do not save because you are paying an enormous mortgage, then you cannot pay for other goods as you did previously: you cannot save for them for you have not enough income. You might cut back on some things (spam valley effect, we call that here: where you have an ok home, but only because you eat spam all week) but you cannot live without a bed or a table or a chair. So your new house needs to be furnished, and that leads to yet more debt. The house value is going up, so you can get the credit for that, though. By the end of that decade lenders were advancing more than 100% of what people were paying for the house.

Some folk were happy with this: some were not. But people must live somewhere and sit on something. Although we are told that consumerism has triumphed I think that this was not a change which was made through free choice: a lot of it was forced. Later the attitude to debt became much more relaxed as a second generation grew up knowing nothing else. Yet throughout the period there were occasional panics over "negative equity" when economic crises hit. Young people could no longer afford a house even if both were in work in many instances: and so we have the problem of young people staying with their parents for a longer and longer time, as referenced in the other thread. The profit goes to the surveyors and the lawyers and the banks: people pay much more for housing than is reasonable in comparison to their incomes even when they can afford it; young people are infantilised. And some end homeless or in sink ghettos which is all that is left of social housing. If by their lights, contractual relationships of this sort are no business of government I have to wonder why they interfered in this way. Oh btw: a lot of them are bankers, or lawyers and estate agents or own a lot of property. Just saying....

If the neoliberal approach denies the existence of society, then what applies to individual debt also applies to institutional debt. That is much harder to sustain, because it is extremely difficult to ignore the fact that institution are not really like individuals, nor yet families. But the fact that firms are now characterised as "corporate persons" seems to suggest that this makes sense to an economist, if not to me. I do not understand how we have been led to accept that: especially not since it is only partial: corporations have some of the privileges of personhood: but not some of the obligations. Or so it appears. (The question of corporate personhood predates the current neoliberal hegemony and I do not mean to suggest that it is a consequence of that, btw) The issues surrounding the concept are beyond the scope of this thread, but it a very interesting subject in itself.

If we accept the proposition that debt is a private matter without consequence for the non- existent society, it follows that corporate debts are no business of anyone else either, so long as they are paid. Any interference by the state to limit indebtedness centrally is unjustifiable.
 
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FionaK
view post Posted on 29/10/2011, 11:22




The normalisaton of debt has many consequences. What those are is not a matter of objective fact, for we don't have enough information. But perceptions of those consequences has real and quite profound effects. For example, for some of the hard right those consequences were seen to be political, and there was the rather disgusting episode of Dame Shirley Porter and Westminster council. It was Shirley Porter's belief that house ownership was a direct route to support for the Tory party, and so she gerrymandered the wards in the Westminster local authority area in order to remove people more likely to vote for opposition parties. This was quite deliberate and wholly illegal. But what Porter did was an extension of what the Thatcher government also did deliberately: Porter just omitted to change the law to make her actions fall within it. I suppose she saw that as "red tape", and that too was part of the mantra of the right:most law and regulation had no other function than to hamper enterprise, in their view: and so they pursued deregulation avidly. Porter is possibly the best example we have in this country of the profoundly undemocratic outlook which underpins this ideological movement. It is possible to argue that she was atypical: but while most of the right would say that the project must proceed according to law, all that means is that law must conform to the project's requirements. They observe the niceties to some extent: and it is not trivial that they see a need for winning election before they can implement policies. But we have a FPTP system: they need not tell the electorate what they are going to do on these issues: they can win by talking about something else.

By the end of the 80's there had been a huge expansion in personal debt. Although it was accompanied by a shift in attitudes which let people live with the burden it is perfectly clear that the change was not quite as presented. People still dreamed of a debt free life. The only way that ordinary people could achieve that was to make money which would clear that debt. And the only source of wealth was, again, the house. Gradually a house changed from being somewhere to live: it became an "investment". Similarly, and as we have also discussed, education changed its character: it moved from being a good in itself into being a route to higher income. As the costs of housing the population were shifted from the group to the individuals, so the costs of educating them at the higher levels were also exported. During the 1970's students were paid to go to university: although there had been an expansion in the numbers of places in the 1960's and 1970's the costs of higher education remained with the state, very largely. Maintenance grants were means tested, certainly: but tuition was free for all, and a grant for books was automatic, even for the wealthiest. Access was restricted by the relatively small number of places. As with consumer credit, it was rationed.

Education at that time was seen as a public good. There was a certain naivety in that, but it was not different from the attitude to apprenticeships. Ordinary people made choices to sacrifice income early in life for a premium wage after they gained qualifications, whether those be a journeyman's ticket or a degree. The society benefitted from those choices by having a proportion of well educated people: and companies benefitted from a pool of skilled worker. Viewed in this way it is logical that companies paid for apprentices' education: and the state paid for students. Companies directed the flow of technical education according to their needs: but the needs of the wider society were less direct and predictable: so there was no attempt to direct students into particular fields of study. Very little was vocational: the professions were: but for many education was seen to have a worth in itself and vocational training was expected to be provided by the employer, once the student secured a job.

As plutocratic values became dominant that changed. Emphasis was placed on the wage premium of a degree, and from a social good it was recharacterised as a private benefit: it followed that the person gaining that benefit should pay the costs of acquiring it. And so it came about that the student should pay the state rather than the other way around. It is utterly astonishing to me that people were led to that radical shift in their narrative. It is true that there had always been some resentment of students: they did have many privileges not shared by their contemporaries who were in work at the same age. It is also true that they enjoyed high income after graduation, if they chose such careers. It is true that the rationing meant the opportunity was not available to all, as well. By now that seems to be the accepted truth and it serves to justify the change: as with the sale of council houses it is part of the truth: but it is not all.

As an example of the other side of the question: the wage premium existed and is much touted as a reason for people to go on in education. But it is important to remember that at the time that system was in place income tax was not a dirty word. Those who gained high paying jobs paid very high levels of tax: when that was factored in over a life time's earnings there was much more equality than there is today. In recent times there has been discussion of imposing a "graduate" tax because of the premium: but that is a poor solution. It is based on an average, and averages do not reflect real lives. If the "payback" is based on tax on earnings it has this consequence: graduates can choose to go into lower paid work because other values are important to them. The benefits (if you accept that education has benefits for the work place) are thus distributed over all of society: not evenly, certainly: many will pursue high income first: but to some extent. That is a less viable option of the student has debt to repay: it is lost completely if there is a graduate tax; because that is paid whether the income is high or low.

In addition, and as already noted, the premium is there because of scarcity: if everyone has a degree then there is no chance the premium will continue to exist. So the student will have debt in anticipation of higher earnings: but those earnings will not materialise. And it is nobody's fault: magic of the market, just. Or a broken contract, if you see it that way. Curiously, contracts of that sort between the citiizen and the state are not enforceable: if the government persuades you to do something against your own interest; or breaks the contract of employment you entered, in taking a lower paid public service job taking account of pension arrangements, you have no recourse. Yet the same neoliberals who promote those policies are very gung ho for enforceable, fair contracts: they are one of the few things they think the state is any good for.

So the normalisation of debt contributed to the atomisation of society: in effect the belief that there is no such thing as society is self fulfilling: it leads to policies which make it functionally true in many ways. The imposition of debt is just such a mechanism, because no matter how relaxed about debt we perciever ourselves to be, debt causes insecurity: you stand over the abyss and your choices are thereby restricted. All this in the name of increased personal freedom.

Edited by FionaK - 9/10/2012, 12:19
 
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FionaK
view post Posted on 29/10/2011, 20:26




One of the axioms of the neoliberal project is that increased debt does not matter. It is difficult for me to understand the reasoning but it seems to go something like this:

Every time someone borrows money he incurs a debt: and that debt is precisely balanced by his obligation to repay: which belongs to the lender. Leaving aside interest, from the economists' point of view we have not created or destroyed anything: we have merely moved it about. Where could be the harm in that? If you do not consider the individual case, but rather the aggregate of debt across a region or nation that sounds right. Individual harm may arise: but the assumption is that most people will repay, and so all will be well. Indeed there are people who are paid to work out the likely proportion of debt default in particular sectors: so that the lender, if an institution like a bank, can factor in the rise. Also, the parties can insure the debt so that if the borrower cannot repay for some reason, either he or the lender can be reimbursed through the insurance. Actuaries work out the premiums for such insurance schemes too. What could possibly go wrong?

There are two types of debt: debt which is secured by pledging something: and debt which is not secured.

A debt which is secured is most familiar in the form of a mortgage. The person who wants to buy a house cannot afford to do that in a reasonable time frame, if they have to pay for it in cash. A house costs much more than the annual income of most people, and they can't save up that fast. But a house is a valuable asset. Traditionally the expectation is that a house will keep its value, at least.

So there you are, with excess cash and you already have a house of your own. You might decide to start a business: but maybe you are lazy, or the business you want to start costs more capital than you have, or you do not see an opportunity, or you are already doing what you want to do and don't have time to start something new. So what are you going to do with that money? Lots of options. You can keep it under the mattress. It is there for a rainy day, and that feels quite safe. Might need to spend some on burglar alarms and fire safety and stuff like that: and it isn't going to keep up with inflation over the long term (there is always inflation in the long term: not sure why) so it will be getting less valuable. But maybe that does not matter if you have a comfortable income from elsewhere. It does matter to lots of people though: they want their money to keep its value. Maybe you are one of them. You can put it in the bank. It will be safe and it will earn some interest there. The interest rate might be quite good, but it won't always be: sometimes it will be less than inflation. So again it might lose real value, though not face value. If keeping the capital intact is important to you that kind of option is good: as is lending it to the government. But if the money really is surplus to foreseeable requirements you might decide to take some risks with it. You might lend it to a business you think will do well. You can buy shares in that business and you will get a dividend, and the capital value of the shares will grow, if the business grows. That is reasonably attractive if you think you understand some aspect of business well enough to know whether a firm is a good bet: otherwise you have to trust someone else to advise you, and such people do not come cheap. You might lose your money altogether.

But everyone knows about housing. So the idea of lending the money to someone else to buy a house with is very attractive indeed. They do not take ownership of the house until they repay the debt: you do. So really you have just bought another house. You know all about that because you have done it before. In theory you lend the money to someone else to use to buy a house: and he repays you. But the whole reason why this is an attractive option is this: he does not really own the house till after he has repaid you. Effectively what you have done is buy a second house. He gets to live in it while he is paying you back the money which bought it: but if he does not pay you can throw him out. It is not quite the same as rent, because he has bought part of the house with the money he did pay you: but you sell the house and split the proceeds: he gets what is left once you have your money back, and the legal costs of the sale, and some interest for your trouble and ....whatever. You can't really lose.

Secured assets like this are supposed to be very safe, and this is the same thing that happens with financial companies. They borrow money to buy assets, and those assets are supposedly secure in the same way as the house is: they are valuable in themselves. Once again the lender cant really lose. If the borrower can't pay, the assets are sold to repay the lender. Simple.

As far as I can tell the international debt crisis arose like this. You had your surplus cash and you decided to lend it to someone who wanted to buy a house, as before. You wrote your agreement in just the same way, so he would pay you back over a fixed term, including the interest; and as before, if he did not pay you had control over the house and you could sell it to get your money back. But this time he did not buy a house. He told you he bought a house: he showed you a picture of a house; he showed a piece of paper that said it was a widget, and he explained a widget was a new kind of house, and that he had bought it:and because this new type of house was so well made it was going to go up in value faster than a normal house: and he would give you a bit more interest on your loan because of that. So you would share his good fortune in finding a widget for sale. It was really a bit of a movie set. The "house" was a flat piece of plywood painted to look like a house. And you did not take any time or trouble to discover that: you were dead excited about the new kind of house called a widget, because he told you that widgets were the coming thing. He was really quite persuasive, and after all he was paying you higher interest: which proved how confident he was in this new thing.

Your debtor made his payments for a time, so you had no reason to be worried. He had a lot more of your money than his widget cost. So he could pay you with your money for a while. But his widget cost something, which meant he could not pay you the full amount that way. So he bought another widget with someone else's money, in just the same way he bought the first one with yours. And again he borrowed more than it cost, so he could pay both of you out of that for a while. And obviously at some point that money runs out. Or if he carries on, somebody eventually discovers what a widget is: and when they do the people (including you) want their money back. He hasn't got it. You have lost your money and you have a widget. A widget is nowhere near valuable enough to cover your losses.

At this point you have lost, even though your risk should have been so minimal that it couldn't happen. But you are ok: the money was surplus, so it is unpleasant but not fatal. A lesson learned, just.

But the guy who lent the money for the second widget was a bit more exuberant than you. He really liked the fact he was getting high interest from the guy with the widget. So he borrowed some money himself at a normal rate of interest, and he gave that to the debtor to buy another widget. No risk: the widget was security and the payments and interest he was getting were higher than the repayments he was making. So it worked fine and he did it again. And again. When the money stopped coming in (or the nature of widgets was discovered) this guy owes a lot of money which he had borrowed to finance widgets: and he is not getting income in to pay that back: and he has widgets too. Now there are a lot of widgets for sale so they are not even worth what the early ones cost so that makes the situation even worse.

But this guy is a bank. He is too big to fail (that is if he goes down all the folk who lent him money to buy widgets are going down too) and so he runs to the government and says: you need to give me money or all those other folk are going bankrupt as well, and there wont be any jobs or any stuff made: and the government says yes. So the government gives him money to pay his creditors: but the government doesn't have that money really. So now the government has the debt he owed to all these folk because it borrowed the money to pay him with. Curiously, this second guy is said to be very smart: and we can 't afford not to have his talents: so the government agrees that nobody could possibly have been expected to foresee this: nobody could possibly have thought it necessary to find out a bit more about widgets: it is preposterous to imagine that this guy actually did know about widgets but didn't care. So they give him the dosh and let him carry on as before.

Now the government has all that debt and the second guy can pay his creditors, so he does not have any debt any more: he is back where he started. That means he has excess capital, which was what he used to finance he widgets at the outset. So he generously agrees to lend the government some money. But because the government has all this debt it is risky: and he demands a high rate of interest. This is apparently perfectly reasonable. But it means that the government is getting further into debt because it is paying him more interest on this new loan that it had to pay before it took on all this extra debt and so increased the risk. And of course the bank is making more money because of the high rate it is getting from the government bonds: so he is due a big bonus for being so clever. Trebles all round!!

As far as I can see the whole thing arose because secured debt wasn't secured on real assets at all. And that is the flaw in the theory: assets like houses do not usually lose value: but where there is a bubble on any asset the price is not related to the value in any meaningful way. Things like houses don't have a real value in that sense: they are worth what the market will pay. And a bubble means that the market is drunk: but it will be sober in the morning.
 
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FionaK
view post Posted on 30/10/2011, 20:55




Why do we have banks? Well it depends on whether you are talking about a traditional bank: by which I mean one subject to tight government regulation: or a new one, which is not so constrained. But whichever type you are talking about there are some basic things that they do and which are central to their business.

1. Banks advance money to countries
2. Banks make loans to individuals (in the form of mortgages and credit cards, for example)
3. Banks make credit available to companies big and small.
4. Banks take deposits from people who want to have their money looked after safely.

Advances to countries are made because it is very unlikely that a country will default, and so those loans are suppose to be very safe indeed.

As outlined above, advances to companies and individuals are secured on assets of one kind or another and, again, are supposed to be safe.

Loans which are not secured, like credit cards, are not so safe: and therefore they are made at ridiculously high rates of interest. That is the safeguard for the lender in those cases.

Bankers and other financial institutions are supposed to be skilled in assessing risk. That is, in fact, the only skill they can claim to have. Before deregulation they were cautious and that led to some frustration for the propective borrower: it was not easy to get loans. Nor should it be. But that changed when the regulations were lifted.

Imagine you are a bank and you make your money in the traditional way: you get money from deposits, when people who wish to put their excess money somewhere safe give it to you to look after. You take that money and you hold some of it in reserve and you use the rest to make loans to people who wish to raise money for some purpose. You pay interest to the person who made the deposit at x%: you charge interest on the loan you made to the borrower at x+y%. The difference is your profit.

Over many years you have learned how much to keep in reserve so that you can give people their money back when they ask for it: Let us say that experience shows that over time, when all is going fine, only 40% of your depositors want to take out their money at the same time: if you keep 50% of those deposits in reserve you can always meet those demands, and you can lend out the other 50% quite safely. Naturally it might happen that folk suddenly panic for whatever reason, and might come to believe you are not solvent: and they they will all want their money at once, then. You can't make any money if you organise your affairs on that assumption: for that to be the norm you would have to make a direct charge for looking after the money, and for any other services you offer to depositors. That was done in the past, I believe, and it was called bank charges. They appear to have been abolished (apart from charges if the depositor does something naughty) but I do not know how that came about. What I do know is that this is not how things are done normally now. Rather, it is recognised that won't happen if everybody is responsible and the people trust the banks: and to foster that confidence the government has a central (national) bank which acts as a lender of last resort. Basically the government guarantees the depositors money if you go bust: and so the depositors are comfy and such guarantees never needs to be invoked.

To make sure that everybody is responsible the government makes rules about what you can and cannot do with this money. I have already mentioned that bank activity was restricted in the UK till 1980: similarly the american banks were restricted by something called the Glass-Steigal Act. That act was passed in 1933 because it was recognised that the crash of 1929 was largely due to banks using deposits to make reckless speculations and irresponsible loans: that they were also doing that in their own interests and with conflicts of interests ignored was also of concern. Glass Steigal made banks choose whether they were to be "investment" banks or ordinary "commercial" banks: they could not be both. It also introduced the government guarantee of deposits mentioned above.

This kind of regulation seems to have worked very well for a long time. Long enough for people to forget the reason for it: and for the bankers and others to revise history, explaining the crash in other ways. In face of their claim that the act was hindering the banking and financial industries the act was repealed in 1999: it was suggested that in these days of bigger banks which relied on their reputation for their profit, they would regulate themselves. Since there has never been a time a bank did NOT rely on its reputation that seems thin, at best. Perhaps more important was the fact that London had already reduced the regulation, and the city of London was competing without the constraints still placed on American banks. Not sure about that. Whatever happened (and capture of government by the neoliberals has to be part of that) the underlying theory was that this leopard had indeed changed its spots: as ever, "this time is different": but in reality, as ever, "it is always tulips".

When banks are not tightly controlled they cheat. There does not seem to be a time in history where this is not true: there never will be. Everybody has a price and the rewards are enormous: as we have seen yet again. It is not enough to rely on integrity; or on expertise; or on the wish to make sure the business has a future: for money like that they will gamble and they will cheat. So they have to be stopped. Only government can stop them: and so predictably they will try to tie government in to their narrative: they will spend to make sure that those elected support their "freedom"; they will point to the apparent success of their prescriptions (and they will be successful at first) and deride those who are not convinced as enemies of prosperity or as dinosaurs. Sadly, as with a lot of things, cause and effect is in play: but the lag is long. Governments think short term and people's memories are short. With the right backing and the right climate and the right legislation they can capture not just the regulators and government: but the surface zeitgeist too. And so they did. Many people who did not like these financiers and bankers were admiring of them in a way: they said they had solved the problem of perpetual growth without adverse effect: and this was believed. The fact that they had actually invented a perpetual motion machine was somehow missed.

So what could we expect of a bank and what has happened?

1. They lend to countries. Even under tight regulation banks could buy government bonds. This is because government bonds were very safe indeed. If push comes to shove, a government can print money to pay the interest and capital on the bonds it has issued, and since governments need credit all the time that is what they will do when necessary. Might lead to inflation, and that is seen as a problem: but since everyone agrees that too much inflation is a bad thing they will take steps to keep it in check. So they are all on the same side.

However that is not always true: there are rogue states and there are unstable states and there are destitute states. It follows that a bank which is buying government bonds needs to take a view on the risk, just as with everything else. That is their skill.

In the current situation we are told that sovereign debt is at risk of default. The banks did not anticipate this, and they have lent an awful lot of money to countries they say are not now certain to repay them. They have done this in two ways: the traditional way of using your money and mine (deposits they held for us): and the other way of using money that does not exist: that is notional assets which are not worth what they are valued at on the balance sheet: like derivatives and subprime mortgages.

If the banks were doing their job they would assess risk. And as shown, the reason lending to a country is safe is because a country can print money if necessary. Only, that is not true in the eurozone. None of those countries can do that because none of them has control of their currency. That is fairly obvious. And it changes the game in their own terms. These expert risk assessors should have noticed that, and it does not seem unreasonable to see them as incompetent if they did not. But in fact they did, I am sure. They relied on the political will to maintain that currency and therefore expected that they would not face the losses arising from their failure to take elementary precautions. They were right. But the bail out, as currently implemented, won't work: the only way that will work in the terms envisaged is the establishment of a proper central bank. And the countries are not ready to do that because in the end it is tantamount to becoming a united states of europe. So instead they have asked the banks to forego 50% of the loans. They might or might not agree: but if they do, having received a lot of money, they will not lend any more. We have already asked them nicely after giving them loads of money and not asking that they accept a loss: it is vanishingly unlikely they will get back to their proper function if we ask them again now. If you doubt that, there is no need to guess: this has already happened in Japan.

I can see no reason to let them suffer only half the loss they risked: it was their risk and they lost: for everyone else if you gamble and lose you lose 100% of your money: and that is what should happen.

2. They lend to individuals on secured and unsecured terms. Secured loans were mainly based on houses, as discussed above. Again, what is a bank supposed to do: assess risk. If house prices rise at astronomical rates it is perfectly obvious that is a bubble. We have seen them before. Any bank which decided to lend on the basis of that inflated value knew fine well it was a gamble. Well not so much a gamble, as absolutely certain not to cover the loan eventually. They knew that, else they would not have bundled those loans up and hidden the danger from other folk they sold them to. Some of those banks face charges over that in America: they probably will get off: they usually do. But the fact is they knew and that this is fraud. It follows they should face the consequences of that: they are awfully keen on that for other folk. Those banks should take the losses: and if they outstrip their real assets they are bankrupt. Limited liability means that the money individuals stole in the form of bonuses and high wages are not legally touchable: but we an fix that. They are the proceeds of crime and can be confiscated. Simple.

If we do that there is no bank, and that is apparently disastrous. Can't see why: I can see nothing at all wrong with taking them over and running them as nationalised industries. It seems that when that is mentioned everybody rushes to say: "of course nobody wants that": indeed, where we have been forced to do it the main aim is to get them back into the private sector ASAP. Why? They can't do any worse in the public sector, and at least the money we give them would be used as we wish to see it used: no more asking nicely. What is the downside?

3. They lend to companies, large and small. Well small companies say they don't: they can't get finance and it is hurting them. They do lend to big companies: but not without conflict of interest: the big companies and the banks and the finance houses are a closed shop and they are complicit in the system they run, so far as I can see. Even companies which makes something make more of their money through finance than through manufacturing: so in effect they are part of the problem.

I cannot see that these banks have done their job in any way: I cannot see what advantage we get from protecting them from their losses: and I cannot see that their loss would be a problem, since we can make loans and take deposits directly in nationalised banks which do what is necessary for society and not for themselves. As with economists, I am not persuaded these people have any skills at all: they are gamblers and they are gambling with your money. Seems odd to let them continue, to me

Edited by FionaK - 30/10/2011, 23:20
 
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view post Posted on 31/10/2011, 00:27
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In your last post you are going from letting them go bankrupt to nationalizing them: Is there a difference?

Also, I understand the pension funds are also at the banks. And all kinds of public institutes have their assets at banks (e.g. various municipalities had funds in Iceland at their crash). Aren't those assets tied to the failed loans? What happens there?
 
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FionaK
view post Posted on 31/10/2011, 00:33




The reason you let them go bankrupt first (or rather admit that they are bankrupt) is because then you take them over without buying them: on account of the fact they are not worth anything. If you do not get them to admit it first, they will demand money, saying you are buying something worthwhile: see the history of nationalsing the railways and the mines in the UK. If the are nationalised because they have failed you may have to pay something for the buildings etc: but since you are going to confiscate the money made through fraud that can probably be set off.

Indeed part of the problem is that other funds are in the banks: either they stole them or they didn't. If they did then they are replaced by the money we are putting in the nationalise banks: which is no different from the current bailouts except we take control. If those funds are still there they are still there: ownership of the bank makes no difference.
 
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FionaK
view post Posted on 2/11/2011, 01:28




The sovereign debt crisis is exercising everyone at the moment and I have found it virtually impossible to get any real information about what this is about. Everything I read seems to take certain things for granted: and I am increasingly persuaded that this is not much to do with anything objective. There seems to be a few things at work: speculative attacks on one country after another for no reason other than private profit: and an ideology which is using the problem to ruthlessly further an agenda and to consolidate the power of corporations while undermining democracy. The shocked reaction to the proposal to hold a referendum in Greece is telling, IMO.

In order to try to follow this I have been having a look at Italy. Italy is the country currently under attack and I have been wondering why. There are a few facts which seem to be agreed:

1. Italy's government debt is 118% of GDP
2. Italy's economic growth is low compared to that in other european countries
3. Italy's current account is not in deficit
4. Italy has relatively high inflation
5. Italy only has to borrow at all in order to service its existing debt.

On the face of it there is no problem. Italy has had a high debt for a long time and nothing bad has happened: things are not much different now.

When a country has debt to service there are a number of ways of doing that. Inflation is one way: economic growth is another: diverting tax revenue from the provision of services into debt repayment is a third: raising tax income is a fourth: borrowing more money is a fifth. I am not sure if there are other ways of doing this so these are the only things I can consider. There is also printing more money, but that seems to not be allowed in the eurozone.

All countries get the money to do what they need to do from tax, in the first place. The group agrees to donate a proportion of the money they make to the state, so that the state can do some things which are seen to be for the benefit of all. What the government should do, and how much the proportion paid in tax ought to be, is a political decision: not an economic one. In a democracy it is the result of a complex compromise between competing groups with different interests and the aim is to arrive at a balance everybody can live with: though nobody is going to be entirely happy. From time to time different groups gain ascendancy, and the balance shifts in one direction or another. But on the whole, the matter is internal, and in fact that is what a sovereign state is: it is a group of people who sort out how they will allocate their resources for themselves.

Let us say that there is a country of 100,000 people. Between them those people make goods and services and the money (gdp) that generates is £1,000,000. They now have a fight (election).

Some of them want to have an army, which would cost £25000 and a system of justice, which would also cost £25000, and nothing else. So they would like to pay tax of 5%.

Another group of people don't want to have an army: but they do want the system of justice (£25,000) and they want to make sure that people who cannot work are ok, which would cost £100,000; and they would like some education for everybody, costing £75,000; and also a health care system estimated at £100,000. They would therefore like to pay tax of 30%.

After some negotiation they all decide they will have a system of justice they all agree on at £25,000; and they will have an army, though not as good as the first group want, so it will only cost £15,000; they will make do with employment insurance of only £75,000; and the same £75,000 for health care: and they will spent £50,000 on education.

So they will pay 24% in tax and everybody will be unhappy, but only a bit unhappy.

The government therefore has £240,000 to spend on these things and they dutifully set about buying them. The money is not enough to get the best of services for anything except criminal justice: but that is ok. What is not ok is that nobody has thought about roads during all this. And none of the other things can work without roads. The country needs £50,000 worth of roads, and this is realised after a month or two.

They can do a number of things: they can not build any roads this year because there is no money for it: but that means that people wont get to work and wont generate so much money next year. They calculate that income (gdp) will fall by £100,000 if the roads are not built.

They can ask the people to pay a special extra tax to pay for the roads: but the people have likely committed their money and wont be very happy about that:and the costs of collecting it would make it more expensive as well.

They can print some more money. That will devalue the currency somewhat and they are against inflation so that does not appeal

They can borrow the money to build the roads. That will cost more than £50,000 as well: but they should still be able to repay it over time: because they calculate that building the roads will mean folk can work and trade better so it they will have more GDP next year.

So that is what they decide to do.

When governments borrow, what they do is issue a bond. The bond agrees to pay interest twice yearly, and at the end of a fixed period the government repays the principle. So this government issues a bond for £52,000,because it has to pay interest, too, and it finds that private investors will buy that bond if it pays interest at 4% a year. The government thinks that it can repay out of next year's tax, so it says it will repay the whole sum at the end of 12 months.

This Government now has a debt of £52,000 on total income of £240,000: a debt to income ratio of about 21%. They pay one interest installment in year and are left with £51,000 debt. They have built the roads and paid for all the services agreed to.

At the end of the year the people are not especially happy with this. They like fine that they have roads: but they do not especially like the debt. Some of them think the government should have cut something else: but they don't agree what should have been cut. Some think they should have been consulted and insist they would have been perfectly happy to pay a special tax. Some think " I don't use roads and I never agreed to that". Most are disgruntled one way or another. But the deed is done.

This year there are still 100,000 people. The roads and other factors have led to increased growth of 2%: and there is inflation of 1% so they now generate £1,030,000 gdp. There is no election this year so if tax is still 24% the government gets £247,200 to pay for everything. That is unfortunate because the rate of economic growth + inflation is less than the debt+ interest: it had to be at least equal to it if the debt was to be repaid on schedule and all the other things were to be paid for.

They think they will raise tax: but there is an outcry about that. Then they think they will cut everything across the board: and there is an outcry about that too. The want to print some money, but they are part of the EU and that is not allowed. So they decide to take another loan.

This year the government would have to spend £242,400 to keep services as they were last year, because there is 1% inflation. But they also have to maintain the roads they built and which were not factored in: so they need another £10000 for that. Since they did not raise tax they have income of £247,200. and they need to pay £252,400 for services: and they need to pay £51,000 in debt and interest. The shortfall is therefore £56,200. They need to borrow £58,448 to cover that and interest. Around 24% of income.

It is clear that things are getting worse: but it is also clear that if inflation and growth were better that would not be happening. So I now understand how those things interact with government debt. That was probably obvious to you: but it wasn't to me.

But the other thing which is obvious is that the lenders have a lot of power here. One of the things which is happening to Italy is that the lenders in year 2 will not lend at 4%: now they want 6%. This is said to be due to increased risk: but the risk is not demonstrated: it is merely asserted. Italy has run a high sovereign debt since 1991 and nobody was all that worried. Italy is not actually running a deficit as the country in my example is: that is it is not raising less than it is spending on the current account. The shortfall in Italy is almost wholly due to the servicing of the debt. So an increase in the interest is creating the situation it purports to be responding to.

If the lenders are worried about default then the last thing they should do is charge usurious rates of interest. And if Italy was borrowing from a central bank which actually had an interest in solving the problem that would not happen. But that is not the situation.

The lenders are banks and financial institutions. They do not care about anything except profit. They assume that no matter what they do they will not be allowed to fail. And they assume that the politicians will bail out a sovereign country rather than let the euro collapse. One of the things that seems obvious to me is that they have been prevented from making just this kind of profit wrt Ireland and Portugal and Greece, which they were doing before. The bail outs of those countries paid off some of the loans, and so the high interest is not coming in on the bonds. I think they are in the business of income maintenance and so they are increasing their income from the next country down the line: if Italy is bailed out they will turn to Spain or the UK or France and do the same thing. If they actually feared default they would lend at lower rates, not higher: I infer that they don't. I think that explains the shock at the prospect of a referendum in Greece: it makes the possibility of default real: and that was not within their calculations.

Edited by FionaK - 2/11/2011, 19:18
 
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FionaK
view post Posted on 2/11/2011, 05:10




It appears from the previous post that the country in my example could have decided to deal with problem of not budgetting for roads by cutting services instead of taking on debt. That would have meant that the people did not get the health care or education or roads or employment benefits etc at the level they expected. it is reasonable to say that they did not vote enough money for those things and that they should therefore accept the lower level of service. If everything else is equal that is fine, and indeed that is largely what we are asked to assume when thinking about this. The story told is that all these countries in europe have been reckless with spending on services for the people; have funded those services through taking on debt; and must now pay the price for their irresponsibilty. It does not seem to matter how this situation has arisen: the people have to pay the price regardless. But each of these countries has a different history and the problem is not the same everywhere unless you only look at a snapshot of debt right now. Greece is not the same as Italy in a number ways


1. Greece had high economic growth after joining the euro
2. Greece suffered from enormous tax evasion by the rich: running at 30% according to some reports
3. Greece engaged with banks such as Goldman Sachs to get money to fund spending: this money was not conventional loans but was rather characterised as currency transactions and this meant that the liability was hidden.
4. Greece is charged more than 20% interest to borrow money
5. Greece suffered more than most from financial downturns because much of its economy is dependent on tourism and shipping.

If we take our notional country of 100,000 people, as before: and assume they are generating £1,000,000 gdp in year one, then if they agree a tax rate of 24% the government income should be £240,000. On this basis spending agreements of £240,000 are fine. But that assumes that everybody pays the tax. That did not happen anywhere, of course: tax evasion by the rich is a scandal in every country. But it seems to have been particularly bad in Greece: or perhaps not discounted as it is in other places, where it is taken for granted the the rich don't pay. Whatever the reason, Greek people made their decision about what to spend on the assumption that tax would be paid: and it wasnt. If the estimate of 30% evasion is correct then the government only received £168,000 to meet its obligations.

So if the decision was to pay for services as outlined in the previous post then in year one:

Cost is:
Justice: 25000
Army: 15,000
Unemployment: 75,000
Health: 75,000
education: 50,000

Total: 240,000

The actual receipts are £168,000 and the shortfall is £72,000. This country has also forgotten about roads and it also needs roads or GDP will fall. Roads cost £50,000.

The government has fewer options than before: raising tax is not going to work, since the folk are not paying it anyway. Cuts to the services, if implemented, are going to be quite draconian: the total shortfall is more than half of the total. Borrowing is still open to them: but again printing money is not allowed by the EU, so that is not an option.

What happens now is Goldman Sachs. Goldman Sachs has a super wheeze: the government does not need to take a loan or cut services or raise tax: what it can do is something quite new: Goldman Sachs will give the government money in return to the rights to future income from things like the lottery and landing fees at airports. This is not a loan which needs to be disclosed as a liabilty by the EU rules. There is no interest as such: there is no fixed term for repayment; in short there is no bond. Goldman Sachs will do this for a very large fee. For some reason this is classed as a currency transaction. And Goldman Sachs is not alone: lots of banks will do this.

So far as the people know they made their decisions and they paid their tax and the government bought the services: they knew about the shortfall for roads and grumbled as before. But they thought they were in the same position as Italy. That is they have debt of £51,000 from the loan and interest for the roads and they have both roads and services

Greece had economic growth of about 4% in year 2: I do not know the rate of inflation so let us say it was 1% as before. And let us suppose the tax rate stayed the same as before. There are still 100,000 people. This year they generate £1,050,000 gdp through growth and inflation. The tax rate is still 24% and so government income is £252,000, on paper. To keep the original services at the same rate they need to pay £242,400 because of the inflation: and another £10,000 to maintain the roads: and they need to repay the debt of £51,000. The shortfall is £51,400. They are in a slightly worse position than before, and will need to raise another loan or take a different decision. Income to debt ratio is about 20%. So another loan looks fine. But the real situation is quite different: because there is debt of £72,000+large arrangement fees the people know nothing about. What that means it that the tax take in the following year is going to be less: because some of the tax the people pay is through the lottery and the airport fees: and that money is pledged. So the tax which is not paid is higher than it was in year one when there was direct evasion, only. And the real debt ratio is more like 50% than 20%.

I do not know why the government chose to do this: and I do not know how widely known it was inside Greece: but I cannot imagine that ordinary people were aware, because the EU was not.

As before the situation which was known was getting worse: but very slowly and there was no reason to worry on the face of it. So the people believed they were paying for the services they chose to have. I cannot see any evidence of recklessness from them

I can see it from Goldman Sachs, however. And from the governments.

What is assumed is that the people should be held responsible for this mess: and their lives should be ruined. Curiously it is never suggested that the bankers and the rich people who did not pay their taxes should be reduced to penury instead. And yet there are far fewer of them. If you take a utilitarian view that would seem to be the way to achieve the greatest good for the greatest number. If you think that people should take responsibility for their own actions then that would seem to be the moral outcome too.

So why is that not what is to happen? Well one can argue that some of the other banks were not involved in this, and so lent in good faith: I have no idea how far the debt is of that sort and how much is the goldman sachs sort. But I do know that the level of debt is supposed to be capped by EU rules. If the very high level of debt is a problem then the banks could be expected to know about at least that part which was not hidden: and so should not have lent. But it is interesting to find that the economy was badly hit by the global problems which hit their major industries from 2007 onwards: the Goldman Sachs stuff was revealed in 2010; debt was estimated at 216 billion in 2010: and yet greek government bonds issued in that year were oversubscribed. In other words foreign investment banks lent Greece a great deal of money after the problem was revealed: so far as I can tell. And I say hell mend them.

I see no reason at all that the Greek people should pay this money: and every reason that the banks should. Why should interest and capital take priority over people? Apparently because if we dont pay them they will stop lending: but then if we dont pay them they won't have all the money: we will. It might be argued that is theft: but that is how they got it in the first place, so far as I can see. The biter bit
 
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FionaK
view post Posted on 3/11/2011, 17:34




Apropos tax evasion and how it is factored in, I found this article interesting

http://slatest.slate.com/posts/2011/11/03/...tter_socialflow

Some of the biggest American companies pay no tax at all: others pay very much less than the official rate. They wil not contribute to the society they are supposedly part of: If I were right wing I would be inclined to say that "if you don't work you don't eat" should apply to these corporate persons: just as they are keen to apply it to meat based people.

In fact, come to think of it, I am perfectly happy to starve incorporeal persons who do not contribute to the common good: you don't need to be right wing at all :D
 
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FionaK
view post Posted on 5/11/2011, 03:48




A third country which is central to the european debt crisis is Ireland. Once again the history of the problem is different.

In 2005 Ireland had the second lowest debt to GDP ratio in the European Union. Only Luxembourg had a better record in those terms. The government was not spending more than it took in: it had a surplus of 2.5%, in fact. That surplus was used to establish a Pension Reserve Fund: which seems quite a sensible thing to do. ( it is interesting to note that after the event the IMF has rewritten history, and its own assessment at the time:They now say that there was an underlying deficit: but then they would, wouldn't they? ) Economic growth had been strong from about 1980, outstripping most other european countries quite significantly, too.

One thing which was obvious to the casual visitor to Ireland was that the housing market had gone crazy. I noticed this and many of my friends, who also visit the country as tourists, remarked on it too. Everywhere you looked there were new houses and most of them were big houses. From Donegal to Kerry and all across the Irish midlands huge houses marred an otherwise beautiful landscape. And the house prices were insane. Between 1992 and 2006 property prices increased by 300% in real terms.

This madness was fuelled by the banks in much the same way as we have seen elsewhere: loans were not funded by deposits. In this case the Irish banks raised money by taking loans from outside the country, and they secured them against the hugely inflated housing assets. When the crash came the Irish banks could not repay the debts and they were bankrupt. By that stage about 13% of the Irish working population were employed in construction. The collapse of the housing market thus had a profound direct influence on wages and on economic activity in general.

There were aspects of government policy which contributed to the disaster: in particular there were tax cuts and a climate of deregulation, in line with the prescriptions of the neo-liberal mindset. Indeed in 2007, despite some warnings from analysts and mild concerns expressed by the OECD about the fragility of tax revenues highly dependent on the property market and on consumer spending, on the whole both the EU and the IMF were content with what was happening. For example the IMF reported on financial stabilty in the country in 2006: and it did not point to causes for concern. Ireland was following the mainstream wisdom, and weak regulation was tolerated because the climate was one of reliance on market risk assessment. In short the banks and the market were seen as better at managing the economy than was the state. Few raised serious concerns and those who did were ignored or, in some cases, suppressed.

The Irish banks were incredibly irresponsible and the best parallel I have been able to find is Chile in 1982. A report prepared for the Irish government talks of "mistakes" and "errors of judgement", but it seems quite clear to me that they were no such thing. The Irish banks were not particularly involved with the "new instruments" like derivatives; they were engaging in an old fashioned "bubble". There is little excuse for this and any doubt must be removed by the fact that the true situation was neither properly recorded nor properly disclosed, even after the problems were clear. The Irish banks borrowed more and more money to lend greater and greater sums to a very small number of interconnected borrowers in the property market: particularly the commerical sector. That combination of high borrowing and high concentration could not have been an error: rather it was a policy decision of the major banks

When the crash came the Irish government decided to assume responsibility for the banks' debts. In the first place, in 2008, the government guaranteed the debts of six of the main banks and financial institutions for a year:and that was renewed for a further 12 months in 2009. That same year government established the National Asset Management Agency which was designed to consolidate the bad debts: this too was similar to what chile did after 1982, and I assume that was the model they were following. However that strategy was not a good idea because the government had no idea what they were taking on

It is very clear that the problems with the Irish banks went far beyond reckless borrowing and lending. At least some of the banks were engaged in activities which were criminal, even within the wide limits allowed in a deregulated financial regime. And the underlying liabilities were far far higher than those disclosed when the government made the decision to assume the debts. This particularly involved the Allied Irish Bank which was the centre of a "hidden loans" scam: that scandal ultimately led to the nationalisation of that bank and two others. There are murky dealings attached to that episode, and the extent of the corruption is not clear to me: but it led to a wave of resignations at the highest levels in banking circles in Ireland, and the decision to "recapitalise" those banks directly (in this case, as in so many others, the auditors (Ernst and Young this time) are quite clearly complicit or they are idiots: it is unfortunate the the major auditing firms are so few, and that their role in all of these horrors is largely passed over. Especially here, because Ernst and Young then advised on the "recapitalisation" after the banks were nationalised).
The banks were nationalised in 2009 despite the opposition of other parties in the Dail, who proposed they should be shut down instead.

The Irish debt crisis is a direct result of criminality in the banking sector. While it is clear that the government could have taken a different decision (c/f Iceland) the decision to nationalise the banks was not made on principle: it was a response to that criminality and the consquent impossibility of dealing with the situation through government guarantees or recapitalisation by issuing bonds and assuming the debt in a repurchase scheme a la Chile. There was nobody left within the banks who could be trusted to manage any such scheme, even with close scrutiny. But the level of the liabilities was not known, and have proved to be far greater than first suspected.

In this case it seems clear that Ireland was neither reckless in its spending nor pursuing policies which a neoliberal would see as hampering business or growth: it was doing just what the EU and the IMF and free marketeers in general recommend. Yet like Italy and Greece the people are expected to pay an enormous price for the failings of the banks, and in this case those failings are clearly not due to errors nor exuberance. Yet they are not qualitatively different from other banking behaviour which stays within the law: the effects are identical.

From a consideration of these three very different economies it is really hard to understand the characterisation of them which is common in the mainstream press.

In the case of Greece one can say that the government was complicit in hiding emerging financial problems through the use of complex financial instruments, sold by Goldman Sachs and others, for very big fees: but it not possible to be sure that government understood what it was doing: because the banks bleat that they did not understand them, when the trade in those same instruments led to their own disastrous failings.

In the case of Italy one can say that the government was responsible for low growth etc: but since we are told as a matter of faith that governments are no good at that kind of thing and it is better left to the market , that is an argument that requires watertight boxes in your head so that you can put the blame where you want it to be

In the case of Ireland one can blame lax regulation: but again you need those boxes to do it. And you can also blame the people to some extent, for taking on too much debt in order to find somewhere to live. That is partially legitimate: but as discussed elsewhere it is difficult to avoid when the debt is the only means of putting a roof over your head

What is abundantly clear is that the feckless peripheral nations do not exist in the form normally described, at least so far as I have been able to trace the development of these problems in three different nations. The only things they have in common are viciously self interested banks and financial institutions

In none of these cases is fiscal irresponsibility evident: in none of them have the people been in possession of the facts: in none of them are the proper people suffering much in the way of consequences: and in all of them the population is suffering really severe austerity so as to maintain thoe same banks which have caused the problems.

The cry is they have spent beyond their means and must now pay the price.It does not seem to be true.

Edited by FionaK - 6/11/2011, 18:23
 
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FionaK
view post Posted on 6/11/2011, 22:55




Having said all that, the fact remains that we have this debt and something needs to be done about it. It seems evident that there are no good ideas around in the political and financial circles which have the power to make decisions. I have come to believe that this is due to the fact that they are all wedded to the theories of neoliberal economics. Since that analysis has been shown to be wrong, it follows that one cannot find solutions without abandoning the basic premises on which that system founds. No-one in power at present has the wit to do that, apparently: the very fact that they have given more power to the IMF demonstrates that. The IMF is part of the problem: a big part, so far as I can tell.

In the mainstream press there is more than one proposed solution: and it is clear that even within the narrow limits of plutocracy, and the paucity of possibilities it allows, there is no likelihood of agreement, beyond austerity measures which amount to taking the money from the ordinary people. That won't work because they haven't got it. The bankers and the very wealthy have got it.

If there is doubt that the economic theory which holds sway is preventing a solution, one need look no further than the fact that those nations which do still have control of their currency are not considering different solutions than those which don't. If there were an open minded approach that would not be true, I don't think.

So far as I can see, there is in fact a question as to whether this crisis is about debt at all. I say that because there is a pattern to this crisis: and it does not seem to relate to the things we are told it relates to.

http://epp.eurostat.ec.europa.eu/cache/ITY...02011-AP-EN.PDF

In April 2011 Eurostat produced the figures for both debt and deficit for each of the European countries, including the UK (which is not part of the eurozone). It is interesting to note that the UK had the third largest budget deficit after Ireland and Greece. So Spain and Italy and Portugal were in a better position on this measure than the UK: and yet the pressure was not directed to this country in anything like the same way. One might think that is explained by the total debt figure, and it is true the UK fared better on that measure: but the top three debtor nations were Greece, Italy and Belgium. I have not heard much about the Belgian debt in all of this: I wonder why not. It is also interesting to note that the UK, at 80% debt to GDP ratio, did worse than Spain (60%) and Portugal on this measure too: yet they are seen as vulnerable and the UK is not, or at least not in the same way.

How they are seen is central to this whole debate: because it is how they are seen which determines the interest they have to pay on loans they need to raise: and, as shown above, the interest rate is in fact causing or exacerbating the problems for the nations under threat.

The UK government has adopted a rutheless austerity programme which is in line with the prescriptions of the plutocrats, and is, indeed, the only thing they will accept as evidence that a country can pay its debt. By contrast the "feckless" nations have not adopted such measures or have not carried them through. And this seems to me to be the difference.

If lenders do not believe that the borrower is able to pay its debts they will charge more interest: that is presented as if it was a law of nature. Let us accept that for a moment. If we do, it is reasonable to think that the current position is not the final word: the steps taken to repay the debt are also important. If the lender believes there is only one way to do that then any borrower which is not taking that route will find credit hard to come by. That is understandable. But there is no evidence at all that the views of the lender are correct, and that is the problem.



Imagine that you are an ordinary person who has an income of £20,000 per year. You had reason to believe your job was fairly secure and you needed to buy a house. So you obtained a mortgage: it was higher than you would like because there is a bit of a bubble in the housing market: but you managed to get a loan of £60,000 and that was enough to get you a little flat. Let us say that the interest rate was 3% and so you had to pay £200 a month to repay the capital over the term of the loan: and £150 in monthly interest. Your income is £1666 gross per month and you pay 1/3 of it in tax and national insurance etc. So you take home £1,111 per month and you have £761 per month after you have met your housing costs. You can manage ok at this point.

Let us say that you budget looks something like this:

Power: £100 per month
Food: £200 per month
Car loan: £150 per month
Petrol: £50 per month
Road tax etc £15 per month
Car insurance £30 per month
Council tax: £100 per month
Home insurance £20 per month
Clothes: £20 per month

Total: £685

You have £76 per month uncommitted income from which you need haircuts and repairs/replacements to household items and entertainment and a phone and anything else you can think of: but you can get by. Just.

The next year there is inflation of 5.6% on average. But it happens that power has gone up 18%, petrol has gone up 8%; car insurance has gone up 6%; and food has gone up 10%. Your employer has imposed a wage freeze.

Power: £118 per month
Food: £220 per month
Car loan: £150 per month
Petrol: £54 per month
Road tax etc £15 per month
Car insurance £31.8 per month
Council tax: £100 per month
Home insurance £20 per month
Clothes: £20 per month

Total £728.80

You now have £32 per month uncommitted income and you can no longer get by. So you go and talk to the bank about your mortgage. What you want is a restructuring: that is a reduction in your payments. You suggest that the term of the loan is extended to 30 years because that will bring down your repayments by £33 per month: and you propose to cover the other £11 per month by cutting back on what you spend.

The bank says no. They think that there will be more inflation next year and so your position will be worse then. What they want you to do is get rid of your car. That will leave you in a fine position, vis a vis the loan: you will have an extra £250 a month which means you can easily pay your mortgage and cover your essential costs.

You explain that you need your car in order to work: and they don't care. You are in deficit and they insist that the only way you can meet your obligations is to get rid of your car. They say you should use public transport. You can't do that because it is not just a matter of getting to work: you have to have your car to do the job when you get there. And it is part of your contract with the employer that you provide that car. You tell the bank that: they don't care. They say that if you do not pay the full amount of your mortgage they will take the house off you.

So you sell the car and lose your job. Your income is now £292.50 per month. With no car your outgoings are as before, less the car and the council tax (which you do not now pay as you are on benefit, so the state covers it). You cut back on food and fuel and everything else a bit: so your outgoings now look like this:

Power: £80 per month
Food: £150 per month


Total £230

But you need to pay £350 for the mortgage, and you only have £62.50 left.

What happens to this individual is what happens with austerity measures applied to a country. They throw a lot of people out of work; a lot of businesses no longer have customers; and the tax revenue goes down: so the debt as a proportion of income increases. And meantime the costs go up because the government has to feed the people who no longer have a job. The government ends up with £62.50 with which to pay £350, just as you do.

Now what? Well the bank is quite happy at first: it will sell your house and get its money back. But you are not alone. Loads of people have suffered in this way and so there are a lot of mortgages being foreclosed and the house is no longer worth £60,000. Especially since you could not afford to repair the hole in the roof. Seems the bank is not going to get its money back after all. So what they do now is apply that hard nosed business sense to the problem: and increase the interest they charge you on the loan for the house which is not worth the money you paid for it. You can't pay the current rate: so this is a stupid thing to do. But to the banking mind it is a law of nature, and so they do it anyway.

If you have any sense you now declare yourself bankrupt: that is what a business would do and it is even what the bank would do. If an individual is bankrupt they have to get rid of quite a lot of their assets (including the house) but can keep enough to live an ordinary life: and they have to make an effort to repay the debt during the period of bankruptcy, by passing over what is left after essential expenses are met. So you will pay £62.50 a month maximum: and probably slightly less because the court may determine you have cut back more than is reasonable. But you will only pay that till the debt is cleared: or for the period of the bankruptcy which is usually a year.

So the bank will get: the proceeds of the house and 12 times your monthly surplus: let us say £30,000 +£750.

You will lose the house and have to find rented accommodation which the state will pay for: and have a very lean year before the debt is discharged.

In a sane world, the bank would not insist on the austerity of getting rid of your car: because it ends up worse off. Indeed I think that would seldom happen in the case of a mortgage holder: they would force the sale of the house perhaps, but where the house has lost substantial value even that makes not much sense.

Restructuring the loan is a better option. The bank gets its money over a longer period, but it gets it. You keep your job and with any luck the pay freeze does not last forever.

However it is likely the bank is right and inflation is 5% again next year. Then you will not be able to pay the new structured loan either. Extending the term again makes no sense, for you might not live so long. So another option is the bank has to take some of the loss. As bankers themselves say, they are in the business of taking risk: and if you take a risk sometimes it will end in loss. That is the nature of the beast. A properly constituted bank will have provision for this:and it will not be a disaster for them. So what makes sense is for the whole mortgage to be renegotiated so that you are put back in the position you were in before. You need about £80 left after paying all the costs you are committed to: and so your mortgage needs to come down.

Before you went to see the bank you had £32 left and the shortfall was £44. You have said you can cover £11 of that. So if the bank reduces the value of the house to something nearer its true worth, your repayments on that outstanding balance will fall. Let us say it decides that the house is now worth £50,000. Capital repayments you have to make now will be £166 a month, rather than £200 as before. YOur income is still £1,111 a month: and your payments for essentials are now £316 for the house, and £729 for everything else. You have £66 left and you cut back by £10. That leaves no room for the predicted inflation next year; and you are paying 3.6% interest on the loan, rather than 3% as before. If the interest rate is not increased you have another £25 a month to part meet any inflation next year

Your house is not in fact worth £50,000 this year: the banks were complicit in overvaluing the asset and it was by more than that: so by rights they should write it down to market value, which, as we saw, was £30,000. If it is written down to that figure you will be fine this year and next. If we split the difference, and write the loan down to £40,000 you will still be fine, if inflation is as expected.

One may say why should the bank take this loss, or indeed any loss? The way I see it is this: the bank was partly responsible for the inflated price of the house, through overlending: so they should pay a penalty for that, as it has damaged us all. You, as the borrower, have not put a foot wrong so far: you had no control over asset price and none over the inflation which followed from it. So it makes no sense that you should pay, and every kind of sense that the bank should.

But of course there is an objection: the bank is not using its own money. It magicked the money out of thin air, but once it was lent out it became real:and the real money backing it is pension funds and depositors and shareholders money etc. They were not responsible either. Arguably they should not take a loss. And I think that is correct insofar as it can be avoided. So the new contract should take account of that. And it can. At present your problem is that inflation is eroding your income: but inflation is also going to stabilise the price of houses at a level: and then increase them. So it is perfectly reasonable to provide that when you come to sell the house, any profit over the written down value is used to cover the write down first. That is, you do not make money on the sale till the full amount of the original loan is repaid. The people who provided the money will lose a little because they will lose the interest on that sum: but again that is not a disaster, and it seems that everyone must take something of a loss.

It seems to me that this parallels what is happening with countries: and those countries which are being attacked are the ones who are not willing to sell their car. And that is a direct consequence of the blinkers on the powerful, due to their plutocratic woo.

The objection will be raised that such a strategy will lead to illiquidity and so the financial system will grind to a halt. I don't see that. The transactions suggested are book entries: they do not affect how much money is about. They do affect the balance sheets of the banks, and they might have to raise more money to meet their capital requirements. But if they were nationalised that would not happen: because their current profits would cover some of the actual loss, if loss it be (not convinced): and any shortfall would be made up in the usual way: government would print the money, or guarantee the bank directly.

According to the plutocrats this will not work because the problem is feckess overspending by some countries: but as noted, I see no evidence for that. I think that they are so wedded to their woo that they assume it must be so: and that is not evidence at all

Edited by FionaK - 6/11/2011, 22:17
 
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FionaK
view post Posted on 9/11/2011, 18:16




I happened across a paper by someone called Vincente Navarro, who is professor of public policy at John Hopkins University. He brings an added dimension to consideration of the european debt crisis, because he believes that the post war political history of those nations which have been targetted is a significant factor in their economic situation. His paper considers Greece, Ireland, Spain and Portugal. This is a dimension I had not thought of and it seems to me to be important.

Mr Navarro reminds us that three of those nations were under military or other dictatorshop for a fairly long period (Greece, Spain and Portugal); or under authoritarian right wing political regimes (Ireland) for much of the period 1930's to 1970's. I do not know enough about the Irish governments during that period but that is undoubtedly true for the others.

What I had not thought about is that right wing regimes do not tax rich people as much as other kinds of government do. Of course that is obvious as soon as it is mentioned: but the implications had escaped me.

Navarro says that this lack of taxation has improved since those regimes fell: but that the legacy is still in play. According to his paper state revenue (tax) is much lower in those countries than the EU average. I was aware of that in the case of Greece and have pointed to tax evasion on the part of the rich as a major component of the Greek debt problem: Navarro widens that perception to include the other countries subject to bail out so far. The EU average share of GDP which goes to tax and therefore to state revenue is 44%. But in Portugal it is 39%; Greece 37%; and Ireland and Spain both 34%. This is a result of regressive taxation policies in place for many years.

Far from being profligate in public spending these countries spend very little on welfare compared to the rest of the EU. This confirms my impression when I had my little rant about the fact that "bloated public sector" being all one word when applied to Greece. Navarro gives examples of this: he says, for example, that in the EU the average adult employment within the public sector social welfare sector is 15%. That compares with 14% in Greece; 12% in Ireland; 9% in Spain; and 7% in Portugal. These figures are unlikely to be directly comparable given differences in ways of counting: but any revision will not be all one way: for example 3% of the greek figure is due to services for the army which is not included in all countries.

The significant point here is that once again there is no evidence of the feckless regimes in power now, and spending too much on public sector services: the picture is precisely the opposite. It is true that those populations have been trying to catch up: but the demands of a lazy and feather bedded people have nothing at all to do with it: and the privileges of the rich are certainly in play.

Navarro acknowledges that the right wing regimes are long gone in those countries: and so they are. But economic decisions have a long lag, as I have noted before: and entrenched interests are persistent. In country where the right wing have been in power for a long time and have privileged the rich with tax exemption, those rich people will wield influence by virtue of being rich: we know that this is true everywhere and these countries will be no different.

Again, preparation for entry into the eurozone had consequences for how income was distributed in all four countries, according to the paper. The share of GDP which went to labour fell substantially. Navarro again attributes this to the influence of right wing forces consequent on an undemocratic history: he may well be right. I am inclined to see this as rather the consequence of the wider neoliberal hegemony: though I do accept that their impact will be greater in a country with limited democratic history and an already right wing tax regime which is regressive in its nature. Redistributive policy does not work against that background nearly so well as it does in social democratic states such as Scandinavia: that is hardly a surprise. All 4 countries are more unequal than the EU average if measured by the GINI co-efficient. Navarro does accept that the Brussels consensus, and in particular the treachery of the erstwhile social democratic and left leaning parties has contributed t the problems as well, so my perception is not at odds with his, though I had not taken account of the wider background.

The upshot is that these countries adopted the prescriptions of the hegemony and cut taxes. The tax was already far too low, and it is false to say that there was a boom in public expenditure: there was not. It is an axiom of the those who are in charge of economic policy that cutting tax is a good thing and that cutting public expenditure is a necessary thing,. It does not matter what the evidence shows, for this is faith based. Navarro shows that the reduction of tax is the source of the deficit in all of these countries. I would go further and suggest that low spending on public service hampers genuine economic growth and that is also in part responsible for the troubles now seen. In at least two of those countries the overvaluation of assets was mistaken for economic growth (Ireland and Spain): but it was not real. I could not have happened but for an increase in the money supply predicated on high debt secured on those over valued assets: and by more money around through tax cuts, arguably. Tax cuts for the rich are particularly apt to cause asset balloons: because they "invest" in such things. Poor people may have to buy houses at inflated prices: but they do not do so encouraged by tax cuts: the kinds of cuts they get are not really noticeable: they spend them on things they need.

Navarro comprehensively refutes the mainstream assertion that these countries have been living beyond their means by spending too much on public services. Tax policy and tax fraud are the main problem in Spain, for example. If the Spanish state collected tax at the same rate as its per capita GDP ratio vis a vis the EU average it could easily finance its welfare provision: but it doesn't. That enormous tax avoidance/evasion figure is not unique to Spain: it exists in Spain and in this country: I have not checked other places but I doubt it is different: the rich believe that tax is for little people and the many "tax havens" around the world rely on that belief for their prosperity.

The government relies on tax for its income. If it founds on property tax then its income falls when the asset boom stops. If it founds on taxing wages then its income falls when the economy falters and unemployment rises. If it founds on taxing the rich then this does not happen. The asset boom is less likely in the first place: and while the rich do get a lot of their money from wages they are a lot less likely to be laid off in bad times. As we have seen, they don't suffer pay cuts, either. So state revenue derived from that source is a lot less volatile than other kinds of tax income.

Navarro then goes on to consider alternative solutions and since they are much in line with my my views as already outlined, I will not reiterate them here. The paper is available here:

www.vnavarro.org/?p=6073

While I like this paper because it agees with me it is not content or fact free, and I think it helps to make the case that this is class war perpetrated by the rich: but whether you accept that or not, it is clear that TINA is a lie and, indeed, is likely to make the situation worse


 
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FionaK
view post Posted on 18/11/2011, 11:28




www.bbc.co.uk/news/business-15748696

This is interesting. It shows who owes what to whom in the eurozone. The total foreign debt amalgamates private and sovereign debt: the indebtedness per person therefore seems to assume that private (mainly bank) debt is the responsibility of the people. I have drawn attention to this before and again I ask: what possible justification for this can there be? I do understand that deposits from pension funds etc must be protected: but I do not understand why that means that the whole debt should fall on people who had nothing whatsoever to do with this mess. Socialised losses indeed. I do not understand why we should accept that financiers and banks should set the interest rates appicable to countries they have bankrupted. I get that the private sector can do no wrong: I get that speculators must be free to get rich regardless of the consequences for the rest of us: I get that this is the mindset which is unchallengeable within the prevailing views of the economists who were running the show de facto before and are now doing so de jure, as well. What I don't get is why this makes any sense. Why lump bank debt in with sovereign debt an then say that countries have been profligate in spending when it is perfectly clear that for most of the countries by far the biggest part of the debt is not sovereign. Even where sovereign debt is a high proportion, as in Ireland, the reason for that is they have already transferred an enormous amount of bank debt to the public purse: it was not of their making. It is the banks and financial institutions which are irresponsible: and since the "technocrats" are those same people is there any reason they should be preferred to politicians. It is a really neat trick to bankrupt a country and retain a reputation for competence.
 
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FionaK
view post Posted on 25/11/2011, 11:26




http://www.golemxiv.co.uk/2011/11/debt-or-...tle-fo-our-time

This is a well expressed outline of many of the points I have been trying to make and it is well worth reading
 
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