Tax the wealthy to bail out the real economy

Seumas Milne is right that governments should start bailing out the real economy, rather than the banks, with public investment for growth (The elite still can't face up to it: Europe's model has failed, 3 November). But from where will the funds come for this? A Tobin tax will not generate sufficient, even if it could be made to work internationally, but there is alternative.

A central cause of current economic instability has been the astonishing accumulation of private wealth to the richest 10%, and the use of this in deregulated global markets for speculative trading and purchase of assets including property, currencies and commodities (Markets slump after Greek referendum call, 1 November). So the $43bn funding gap of Greece's government is matched by about the same amount going offshore, much of it reported as being put into the London property market by wealthy Greeks. This continues to rise while others slump. On a larger scale we might look at the New York Mellon Bank, which holds the assets of high worth people, and whose website notes that it is "focused to help clients manage and move their financial assets". These, in this one bank are listed as $25.9trn, which is of course enough to pay off the US national debt, solve the euro debt crisis and have change.

The world is awash with cash, while the productive capacity of its peoples and industry is the greatest in human history. But instead of taking some of these assets and using them to promote investment in a sustainable economy, the preferred government solutions are to print money and impose cuts which affect the poorest and create unemployment. The first of these generates inflation, damaging pensions and savings while adding to the financial stress caused by the second.

The obvious solution is a wealth tax on the richest 10%, which we first advocated a year ago. Now the head of the biggest bank in Italy, Corrado Passera, is also promoting the idea, saying that Italy's $2,750bn debt could be resolved by a tax on Italy's private wealth. This is five times the size of its debt. It also shows how misled we are by media and political commentary on "countries going bankrupt", when what is actually being described is a cash flow problem.

Other solutions such as effective income tax will be needed in the long run but what is crucial now is a fundamental restructuring of social wealth to repair the huge damage caused by the release of the free market, and the political courage to plan an economy of the future.

Professor Greg Philo
Glasgow University Media Group

This article first appeared as a letter in The Guardian on 4 November 2011

EU dominos - who's next?

The chart below (from the Bank of England's Charles Bean) shows the 10-year government bond spreads for selected EU nations: Portugal, Ireland, Italy and Spain, as well as France and the UK.



Where is Greece in this 'who's next for disaster' chart? You might ask. Well, Greece is off the chart with its 10 year bond spreads currently attracting interest at somewhere north of 26%, according to Bloomberg.

Off the chart and out of the game. It's debt is unrepayable. The question is if Greece defaults will that have a domino effect? The potential domino effect is twofold:

1. German and French banks are most exposed (see Dexia already), but some debt is held by Spanish, Italian and Portuguese banks. A default or severe 'haircut' (partial write-off) of say 80% would have an impact. These nations would then be faced with a choice: a) let a bank fail; or b) bail-out the bank with more government debt, further worsening the sovereign debt crisis
2. The second domino effect is on the bond markets, which would be spooked by a default and hike interest rates on riskier debtors - in the same way that high street banks have jacked up margins and became more cautious lenderdfollowing the credit crunch, restricting lending to businesses and damaging the economy. This could mean Portugal, Spain, Ireland and Italy paying more for their debt - exacerbating their debt crisis, and potentially sending them into a Greek-style death spiral.

It's worth bearing in mind that if Italy, as the third largest eurozone economy, got in trouble the whole eurozone would be at risk. It currently has 2 trillion euros of debt.

Since the Bank of England produced the above chart, Italy's bond interest rates have risen from around 4% to 6%. If that gets up to Portuguese levels, let alone Greek, then Italy is in serious risk of default. Even a 20 or 30% haircut would be deeply traumatic - crashing banks around the world, with serious domino effects.

That's why the G20 meeting in Cannes is obsessed with this issue: finance capitalism is at risk!

Greece - the people vs global capitalism

Events in Greece over the last 24 hours have resembled the plot from a political thriller – A Very British Coup perhaps. Under fire Greek Prime Minister Papendreou announced a referendum on whether to accept the bailout terms agreed at the recent EU summit. He apparently did so without consulting his Cabinet, and by lunchtime his finance minister was in hospital with a suspected heart attack, and a backbench MP resigned.

He also took the surprising step of replacing all of the military top brass – the heads of the defence staff, army, navy, and air force – all replaced and apparently without any warning to Cabinet or military. Obviously the Greek military has history – a CIA-backed junta ruled Greece from 1967-74 – but did Papendreou believe a coup was on the cards?

Certainly there are the siren calls for a government of national unity from opposition MPs (and the PASOK MP who resigned yesterday). The major opposition party is right wing, and the security establishment will have been rocked by the massive and occasionally violent protests and strikes in Greece which have intensified and grown in recent weeks.

Plus by calling for a referendum, he will have infuriated the EU and IMF – and therefore NATO (of which Greece is a member) – and so the Greek military and political right (supportive of the bailout terms) would have potentially had international support.

Twenty four hours after issuing the referendum call, the Cabinet has unanimously backed it, and it will take place in December according to rumours. With no further resignations, Papendreou seems likely to survive a confidence vote on Friday too.

While all this clandestine backroom activity may have been necessary to get the referendum (and avert a coup?) it was the very public protests that have won it. The marches, rallies, strikes, direct action and street-fighting against the government, banks and police have been a demonstration of the commitment of the Greek people to resist austerity.

Now the people have the final say in a referendum, which as Papendreou has said will effectively be on membership of the euro.

So what would a yes or no vote mean?

A yes vote would mean misery heaped upon misery for the Greek people. With a stagnant and contracting economy, high and rising unemployment (16% nationally, but 40% for young people – double the respective UK rates), jobs and services already slashed, taxes increased and wages cut or frozen.

The bailout demands an intensification of austerity to satisfy creditor nations and banks.

A no vote is more complex. It would mean defaulting on debts, an exit from the euro (so as not to further weaken the currency). It would mean reinstating a national currency (drachma mk2).

As Greece would still be an economic mess, this is no silver bullet. The Greek economy is heavily flawed and needs urgent investment. Tax evasion is rife and needs to be immediately addressed, but so does investment – in order to create jobs and bring unemployment down.

Greece would need a friendly nation to support it – to lend to it on a comparatively favourable long-term basis. Which nation could do this? That would depend on the nature of the government in place at the time. A possibility would be one of the BRICs least affected by Greek default, or by going to the Latin America via Mercosur or even ALBA for an extraordinary loan.

To avoid the money markets playing havoc with the new currency, and a descent into Weimar hyperinflation, there would have to be firm capital and export controls – which would in turn necessitate breach EU rules, and presumably necessitate exit from the union entirely. Bilateral arrangements, such as those achieved by other non-EU states should be possible but will take time.

Much of the above is necessarily speculative – we are entering unchartered waters – but one thing is clear the people of Greece have forced this referendum through considerable struggle. They now need to realise their power and create a vision that can unite what they are for too.

Their victory (albeit partial)* should also inspire anti-austerity struggles across Europe, particularly in Spain, Italy and Portugal.

*It is a victory to have forced their right to have a say, when the EU and IMF though they had done a deal to salvage banks and creditor nations at the Greek people’s expense. But the victory is partial because – without winning a no vote in the referendum and then, crucially, having a unifying vision that their movement can force into the political arena – it may only be kicking the can down the road. But for now, it is the Greek people doing the kicking.

Socialism or barbarism for eurozone

Andrew Fisher, LEAP co-ordinator, analyses the eurozone crisis

The eurozone crisis is complex, and the cause of the crisis varies from country to country. One could glibly (albeit accurately) argue that the crisis is capitalism, but that would not give an understanding of the different processes that have led us to where we are now.

There are however several common themes for many of the key crisis countries: the failure to collect tax revenues, deregulation of the finance sector, the bursting of the construction bubble, and the dismantling of social infrastructure as a solution (more palatably referred to as ‘austerity’). The latter of course is imposed to solve the crisis, but in fact exacerbates it.

In Ireland tax revenues were deliberately slashed by government policy to cut corporation tax, in Greece and Spain tax collection infrastructure is woeful. In Spain and Ireland a construction boom eventually outstripped demand – as it did in the US – with housing prices now up to 50% on average below their peak in many cities.

However, an overarching problem that played a part in causing the crisis and has hindered any solution is the structure of the eurozone: in which fiscal policy has been made in the interests of the larger economies to the detriment of those in the periphery, and by an unaccountable (or ‘independent’ as Gordon Brown would describe it) central bank.

The same dynamic is playing out now. Greece will inevitably have to default, and should have been allowed to immediately, to save its people from wave after wave of austerity measures.

The opposition to Greek default came from the creditor nations, who fear having to bail out their banks which loaned massive sums to Greece. The French-Belgian bank Dexia has already required assistance due to the ‘haircuts’ to its Greek debts.

The fear stalking the meeting of European Finance Ministers in mid-October was a domino effect across European banks. If Greece or Ireland or Spain or Portugal, or even Italy start defaulting on their debts, then banks could fail throughout the eurozone. Those banks in turn have debts with other banks, and we could be back to 2008/09 when much of the global banking system needed assistance.

There are two things that are clear. The first is that austerity is making the situation worse. By raising unemployment, suppressing wages and slashing benefits the risk of default on personal loans and mortgages increases – further destabilising banks. Likewise suppressed consumer demand is making life difficult for retail businesses, which in turn affects manufacturing –and because of the increased risk of personal and business debt defaults, banks are far more cautious about extending credit.

The Greek trade unions – taking strike action in mid-October – were absolutely right to describe their nation’s plight as a “death spiral”. There simply is no way out.

The second clear conclusion on EU policy is that a second round of mass bailouts will be necessary. This can either be in a controlled and co-ordinated way of managed debt default that writes off bad debts through public ownership or it will be an each country for itself panic in which nations like France and Germany go for a UK style bailout while the peripheral nations – unable to borrow on the international markets – watch their financial institutions fold. This will in turn create a tide that even the larger economies of Germany and France are unable to stem.

The reality encroaching on eurozone finance ministers is that their European Financial Stability Fund has nowhere near enough funds to actually cope with the scale of the bad debts. The markets know this, hence the downgrades of eurozone nations and banks.

The promises to make good on these debts cannot be paid, so defaults will be necessary. By acting swiftly this crisis could have been contained. Instead the situation has been aggravated by austerity and mounting interest rates, especially for nations and financial institutions deemed riskier.

The economic crisis of the 1930s was only resolved through rearmament, militarisation and horrific war. This crisis requires that we take into public ownership and control the finance and credit system. Without that we face each nation scrapping for its own skin and mass social upheaval as depression bites.

The irony of this is that the eurozone was allegedly designed to prevent such beggar-thy-neighbour behaviour. In fact the inherent instability of the eurozone, with a single interest rate and restricted deficit spending combined with neoliberal deregulatory policies, has actually caused precisely that.

In the words of a truly great European leader: it’s socialism or barbarism.

• This article first appeared in the November 2011 issue of Labour Briefing and was written before the European summit concluded in the early hours of 27 October

End the rule of the 1% as economy implodes

The force of the global economic implosion, which has seen unemployment skyrocket to a 17-year high in the UK, overwhelmed its first eurozone government last night. It is unlikely to be the last.

The Slovakian parliament voted to reject a stronger European Financial Stability Fund (EFSF) and hence a second rescue package for Greece. This was despite immense political pressure from the European Central Bank, the European Commission and the International Monetary Fund, as well as the US administration.

They all warned of the systemic nature of the worsening crisis and the direst of consequences for the world capitalist economy should Greece be allowed to fail. As a result of the vote, the coalition government of Slovak Prime Minister Iveta Radicova fell after a small party in her ruling coalition refused to back the plans.

The EFSF is the capitalist powers’ main weapon in dealing with the debt crisis that threatens the European common currency, the region's banks and the global financial system. But eurozone rules require all of the 17 member states to ratify the new plan and Slovakia was the last to vote after all the others had given their agreement.

Now the international lending agencies, responsible for holding the crumbling system together, have to stitch together a new interpretation of the rules allowing the package to be put into operation, whilst they wait to see if a more compliant government will emerge in Slovakia.

Just a few short weeks remain before the Greek government will run out of money and cease to be able to pay wages or pensions for the public sector employees who make up one fifth of the country’s workforce. But the price of the new, wholly inadequate deal would see further tax rises, jobs destroyed, wages cut and – to the banks’ horror – a write-down of the money they are owed by the Greek government by as much as 50%.

As those in the race to contain or deflect the impact of the deepening crisis struggle with its European expression, insolvency practitioners in the United States and elsewhere are gearing up for a busy time ahead.
Bankrupt book chain Borders, for instance, recently closed its doors after failing to find a buyer. Moody's credit rating agency says the number of troubled companies rose for the third month in a row in September, an ominous sign similar to the third quarter of 2007 when the economy slid into recession and the ensuing crash engulfed the world.

And in another blow for the New Green Dealers who are promoting an eco- friendly growth-oriented capitalist solution to climate change, recent failures included renewable energy companies Evergreen Solar and Solyndra. The latter collapsed in a politically-charged bankruptcy after taking a $535 million loan from the US federal government.

This time around China cannot come to the aid of the ailing system. As is now becoming clear, its huge injection of spending on infrastructure developments to ward off the impact of the global crisis on its domestic economy, has taken its toll internally.

A Reuters special report on China noted:

Local governments had amassed 10.7 trillion yuan in debt at the end of 2010. The government expects 2.5 to 3 trillion yuan of that will turn sour, while Standard and Chartered reckons as much as 8 to 9 trillion yuan will not be repaid – or about $1.2 trillion to $1.4 trillion. In other words, the potential debt defaults could be even larger than the $700 billion U.S. bail-out programme during the 2008 crisis.

Be warned. Any and every attempt at shoring up the defences of the capitalist system will involve an unimaginable, intolerable assault on the lives of billions of people. Almost a million young people are on the dole in Britain already, according to today’s figures.l

Saturday’s global occupation of city and town squares should become the focus for shaping a new social, economic and democratic political system founded upon the satisfaction of human needs. The 1% cannot be allowed to continue their rule over the 99%.

Gerry Gold
Economics editor
12 October 2011
reposted from
www.aworldtowin.net 

The credit rating agencies

Greek debt was downgraded to 'junk' status by the credit rating agencies earlier this week, and yesterday Spain was taken down a notch from AA+ to AA - but who are these credit rating agencies, and are they right?

One of the major credit rating agencies, Standard & Poors, describes itself as "a leader of financial-market intelligence", while another, Moody's, modestly says its "commitment and expertise contribute to stable, transparent and integrated financial markets, protecting the integrity of credit".

Cast your mind back however to the beginning of this crisis - when the 'credit crunch' euphemism was still being used. What happened? A large number of structured investment vehicles, special purpose vehicles and collateralised debt obligations were found to be worthless - bundled up packages of unrepayable sub-prime mortgages and the like.

Now why would banks have traded these disastrous investments? The answer lies in the credit rating agencies which rated these truly junk investments as AAA in many cases. And who pays credit rating agencies to give a rating? The selling bank. So if you're client comes to you, and pays you lots of money to give something it is trying to sell a rating, do you (a) please your client; or (b) give an honest assessment? The credit crunch answered that question, yet still the credit rating agencies deem themselves fit to tell the world what is a good investment or not.

Is the Greek economy really more risky than a bundle of sub-prime mortgages? No - though there are problems. And what about Spain, Portugal, Italy and the UK, all highly indebted? Let's look at the effect of downgrades or the threat of downgrades:

1) It makes the interest rate on loans higher
2) It deters investors from buying debt / making further loans
3) This forces further austerity measures

The immediate effect on Greece has been further calls from creditors for more 'reform' and 'austerity measures'. This means the market taking more control through privatisation and the Greek people paying with cuts to their services, pensions and benefits. Fearing it could be downgraded to 'junk' next, Portugal announced tougher austerity measures yetserday - held at gunpoint to pay for the crisis by the very people who caused the crisis.

This is the problem of the credit markets being almost entirely unregulated and totally in private hands. Gangster capitalism is thriving

Greece is the word, democracy isn't

Ancient Greece was the birthplace of democracy - the word coming from two Greek words demos (meaning 'the people') and kratos (meaning 'to rule').

It was very clear this week that in modern Greece the people certainly don't rule, though they are fighting back.

By joining the Eurozone, Greece is subject to the Growth and Stability Pact (meaning its deficit cannot exceed 3% of GDP) and its currency is run by the European Central Bank (ECB). As a relatively minor economic force what hope have the people of Greece got of the ECB taking decisions in its favour?

The EU approved austerity plan was reported on the BBC as being:

• Cut budget deficit below EU ceiling of 3% of GDP by 2012, from 12.7% in 2009
• Freeze public sector salaries and cut bonuses
• Replace only one in five of people leaving civil service
• Raise average retirement age by two years to 63, by 2015
• Raise taxes on fuel, tobacco, alcohol and property

In short, freeze public sector pay, cut public sector jobs , make people work longer, raise regressive taxes. Yes, the EU's solution to the crisis of neoliberalism is more neoliberalism.

There are lessons for the UK here too - our deficit is about the same as that of Greece (12.5% to 13%). If the UK was in the Eurozone we might be having austerity packages imposed on us. As ever with the UK though we don't wait to have economic stupidity imposed upon us - we have three political parties fighting a general election on so far mystery austerity packages (cuts: bold, swingeing or savage - the choice is yours!).