Hudson:

http://www.counterpunch.org/hudson04062009.html


April 6, 2009
Will the Debtors Fight Back?
The IMF Rules the World

By MICHAEL HUDSON

Not much substantive news was expected to come out of the G-20
meetings that ended on April 2 in London – certainly no good news was
even suggested. Europe, China and the United States had too deeply
distinct interests. American diplomats wanted to lock foreign
countries into further dependency on paper dollars. The rest of the
world sought a way to avoid giving up real output and ownership of
their resources and enterprises for yet more hot-potato dollars. In
such cases one expects a parade of smiling faces and statements of
mutual respect for each others’ position – so much respect that they
have agreed to set up a “study group” or two to kick the diplomatic
ball down the road.

The least irrelevant news was not good at all: The attendees agreed to
quadruple IMF funding to $1 trillion. Anything that bolsters IMF
authority cannot be good for countries forced to submit to its
austerity plans. They are designed to squeeze out more money to pay
the world’s most predatory creditors. So in practice this G-20
agreement means that the world’s leading governments are responding to
today’s financial crisis with “planned shrinkage” for debtors –

for starters. This is
quite a contrast with the United States, which is responding to the
downturn with a giant Keynesian deficit spending program, despite its
glaringly unpayable $4 trillion debt to foreign central banks.

So the international financial system’s double standard remains alive
and kicking – at least, kicking countries that are down or are
falling. Debtor countries must borrow a trillion from the IMF not to
revive their own faltering economies, not to pursue counter-cyclical
policies to restore market demand (that is only for creditor nations),
but to pass on the IMF “aid” to the poisonous banks that have made the
irresponsible toxic loans. (If these are toxic, who put in the toxin?
To claim that it was all the “natural” workings of the marketplace is
to say that free markets curdle and sicken. Is this what is
happening?)

In Ukraine, a physical fight broke out in Parliament when the Party of
Regions blocked an agreement with the IMF calling for government
budget cutbacks. And rightly so! The IMF’s operating philosophy is the
destructive (indeed, toxic) belief that imposing a deeper depression
with more unemployment will reduce wage levels and living standards by
enough to pay debts already at unsustainable levels, thanks to the
kleptocracy’s tax “avoidance” and capital flight. The IMF
trillion-dollar bailout is actually for these large international
banks, so that they will be able to take their money and run. The
problem is all being blamed on labor. That is the neo-Malthusian
spirit of today’s neoliberalism.

The main beneficiaries of IMF lending to Latvia, for example, have
been the Swedish banks that have spent the last decade funding that
country’s real estate bubble while doing nothing to help develop an
industrial potential. Latvia has paid for its imports by exporting its
male labor of prime working age, acting as a vehicle for Russian
capital flight – and borrowing mortgage purchase-money in foreign
currency. To pay these debts rather than default, Latvia will have to
lower wages in its public sector by 10 per cent -- and this with an
economy already depressed and that the government expects to shrink by
12 percent this year!

To save the banks from losing on their toxic mortgages, the IMF is
bailing them out, and directing the Latvian government to squeeze
labor all the more – and to charge for education rather than providing
it freely. The idea is for families to take a lifetime of debt not
only to live inside rather than on the sidewalk, but to get an
education. Alcoholism rates are rising, as they did in Russia under
similar circumstances in Yeltsin’s “Harvard Boys” kleptocracy after
1996.

The insolvency problem of the post-Soviet economies is not entirely
the IMF’s fault, to be sure. The European Community deserves a great
deal of blame. Instead of viewing the post-Soviet economies as wards
to be brought up to speed with Western Europe, the last thing the EU
wanted was to develop potential rivals. It wanted customers – not only
for its exports, but most of all for its loans. The Baltic States
passed into the Scandinavian sphere, while Austrian banks carved out
financial spheres of influence in Hungary (and lost their shirt on
real estate loans, much as the Habsburgs and Rothschilds did in times
past). Iceland was neoliberalized, largely in ripoffs organized by
German banks and British financial sharpies.

In fact, Iceland ( where I’m writing these lines) looks like a
controlled experiment – a very cruel one – as to how deeply an economy
can be “financialized” and how long its population will submit
voluntarily to predatory financial behavior. If the attack were
military, it would spur a more alert response. The trick is to keep
the population from understanding the financial dynamics at work and
the underlying fraudulent character of the debts with which it has
been saddled – with the complicit aid of its own local oligarchy.

In today’s world, the easiest way to obtain wealth by old-fashioned
“primitive accumulation” is by financial manipulation. This is the
essence of the Washington Consensus that the G-20 support, using the
IMF in its usual role as enforcer. The G-20’s announcement continues
the U.S. Treasury and Federal Reserve bank bailout over the past
half-year. In a nutshell, the solution to a debt crisis is to be yet
more debt. If debtors can’t pay out of what they are able to earn,
lend them enough to keep current on their carrying charges.
Collateralize this with

The aim is to keep the
debt overhead in place. This can be done only by keeping the volume of
debts growing exponentially as they accrue interest, which is added
onto the loan. This is the “magic of compound interest.” It is what
turns entire economies into Ponzi schemes (or Madoff schemes as they
are now called).

This is “equilibrium”, neoliberal style. In addition to paying an
exorbitant basic interest rate, homeowners must pay a special 18 per
cent indexation charge on their debts to reflect the inflation rate
(the consumer price index) so that creditors will not lose the
purchasing power over consumer goods. Labor’s wages are not indexed,
so defaults are spreading and the country is being torn apart with
bankruptcy, causing the highest unemployment rate since the Great
Depression. The IMF approves, announcing that it can find no reason
why homeowners cannot bear this burden!

Meanwhile, democracy is being torn apart by a financial oligarchy,
whose interests have become increasingly cosmopolitan, looking at the
economy as prey to be looted. A new term is emerging: “codfish
republic” (known further south as banana republics). Many of Iceland’s
billionaires these days are choosing to join their Russian
counterparts living in London – and the Russian gangsters are
reciprocating by visiting Iceland even in the dead of winter,
ostensibly merely to enjoy its warm volcanic Blue Lagoon, or so the
press is told.

The alternative is for debtor countries to suffer the same kind of
economic sanctions as Iran, Cuba and pre-invasion Iraq. Perhaps soon
there will be enough such economies to establish a common trading area
among themselves, possibly along with Venezuela, Colombia and Brazil.
But as far as the G-20 is concerned, aid to Iceland and “doing the
right thing” is simply a bargaining chip in the international
diplomatic game. Russia offered $4 billion aid to Iceland, but
retracted it – presumably when Britain gave it a plum as a tradeoff.

The IMF’s $1 trillion won’t help the post-Soviet and Third World
debtor countries pay their foreign debts, especially their real estate
mortgages denominated in foreign currency. This practice has violated
the First Law of national fiscal prudence: Only permit debts to be
taken on that are in the same currency as the income that is expected
to be earned to pay them off. If central bankers really sought to
protect currency stability, they would insist on this rule. Instead,
they act as shills for the international banks, as disloyal to the
actual economic welfare of their countries as expatriate oligarchs.

If you are going to recommend more of this consensus, then the only
way to sell it is to do what British Prime Minister Gordon Brown did
at the meetings: announce that “The Washington Consensus is dead.” (He
might have saved matters by saying “deadly,” but used the adjective
instead of the adverb.) But the G-20’s IMF bailout belies this claim.
As Turkey was closing out its loan last year, the IMF faced a world
with no customers. Nobody wanted to submit to its destructive
“conditionalities,” anti-labor policies designed to shrink the
domestic market in the false assumption that this “frees” more output
for export rather than being consumed at home. In reality, the effect
of austerity is to discourage domestic investment, and hence
employment. Economies submitting to the IMF’s “Washington Consensus”
become more and more dependent on their foreign creditors and
suppliers.

The United States and Britain would never follow such
conditionalities. That is why the United States has not permitted an
IMF advisory team to write up its prescription for U.S. “stability.”
The Washington Consensus is only for export. (“Do as we say, not as we
do.”) Mr. Obama’s stimulus program is Keynesian, not an austerity
plan, despite the fact that the United States is the world’s largest
debtor.

Here’s why the situation is unsustainable. What has enabled the
Baltics and other post-Soviet countries to cover the foreign-exchange
costs of their trade dependency and capital flight has been their real
estate bubble. The neoliberal idea of financial “equilibrium” has been
to watch “market forces” shorten lifespans, demolish what industrial
potential they had, increase emigration and disease, and run up an
enormous foreign debt with no visible way of earning the money to pay
it off. This real estate bubble credit was extractive and parasitic,
not productive. Yet the World Bank applauds the Baltics as a success
story, ranking them near the top of nations in terms of “ease of doing
business.”

One practical fact trumps all the junk economics at work from the IMF
and G-20: Debts that can’t be paid, won’t be. Adam Smith observed in
The Wealth of Nations that no government in history had ever repaid
its national debt. Today, the same may be said of the public sector as
well. This poses a problem of just how these debtor countries are not
going to pay their foreign and domestic debts. How will they frame and
politicize their non-payment?

Creditors know that these debts can’t be paid. (I say this as former
balance-of-payments analyst of Third World debt for nearly fifty
years, from Chase Manhattan in the 1960s through the United Nations
Institute for Training and Research [UNITAR] in the 1970s, to Scudder
Stevens & Clark in 1990, where I started the first Third World
sovereign debt fund.) From the creditor’s vantage point, knowing that
the Great Neoliberal Bubble is over, the trick is to deter debtor
countries from acting to resolve its collapse in a way that benefits
themselves. The aim is to take as much as possible – and to get the
IMF and central banks to bail out the poisonous banks that have loaded
these countries down with toxic debt. Grab what you can while the
grabbing is good. And demand that debtors do what Latin American and
other third World countries have been doing since the 1980s: sell off
their public domain and public enterprises at distress prices. That
way, the international banks not only will get paid, they will get new
business lending to the buyers of the assets being privatized – on the
usual highly debt-leveraged terms!

The preferred tactic do [to] deter debtor countries from acting in their
self-interest is to pound on the old morality, “A debt is a debt, and
must be paid.” That is what Herbert Hoover said of the Inter-Ally
debts owed by Britain, France and other allies of the United States in
World War I. These debts led to the Great Depression. “We loaned them
the money, didn’t we?” he said curtly.

Let’s look more closely at the moral argument. Living in New York, I
find an excellent model in that state’s Law of Fraudulent Conveyance.
Enacted when the state was still a colony, it was enacted in response
British speculators making loans to upstate farmers, and demanding
payment just before the harvest was in, when the debtors could not
pay. The sharpies then foreclosed, getting the land on the cheap. So
New York’s Fraudulent Conveyance law responded by establishing the
legal principle that if a creditor makes a loan without having a clear
and reasonable understanding of how the debtor can repay the money in
the normal course of doing business, the loan is deemed to be
predatory and therefore null and void.

Just like the post-Soviet economies, Iceland was sold a neoliberal
bill of goods: a self-destructive Junk Economics. Just how moral a
responsibility – and perhaps even more important, how large a legal
liability –should fall on the IMF and World Bank, the U.S. Treasury
and Bank of England whose economies and banks benefited from this
toxic Washington Consensus junk economics?

For me, the moral principle is that no country should be subjected to
debt peonage. That is the opposite of democratic self-determination,
after all – and of Enlightenment moral philosophy that economic
policies should encourage economic growth, not shrinkage. They should
promote greater economic equality, not polarization between wealthy
creditors and impoverished debtors.

At issue is just what a “free market” is. It’s supposed to be one of
choice. Indebted countries lose discretionary choice over their
economic future. Their economic surplus is pledged abroad as financial
tribute. Without the overhead costs of a military occupation, they are
relinquishing their policy making from democratically elected
political representatives to bureaucratic financial managers, often
foreign – the new Central Planners in today’s neoliberal world. The
best they can do, knowing the game is over, is to hope that the other
side doesn’t realize it – and to do everything you can to confuse
debtor countries while extracting as much as they can as fast as they
can.

Will the trick work? Maybe not. While the G-20 meetings were taking
place, Korea was refusing to let itself be victimized by the junk
derivatives contracts that foreign banks sold. Korea is claiming that
bankers have a fiduciary responsibility to their customers to
recommend loans that help them, not strip them of money. There is a
tacit understanding (one that the financial sector spends millions of
dollars in public relations efforts to undermine) that banking is a
public utility. It is supposed to be a handmaiden to growth –
industrial and agricultural growth and self-sufficiency – not
predatory, extractive and hence anti-social. So Korean victims of junk
derivatives are suing the banks. As New York Times commentator Floyd
Norris described last week, the legal situation doesn’t look good for
the international banks. The home court always has an advantage, and
every nation is sovereign, able to pass whatever laws it wants. (And
as America’s case abundantly illustrates, judges need not be
unbiased.)

The post-Soviet economies as well as Latin America must be watching
attentively the path that Korea is clearing through international
courts. The nightmare of international bankers is that these countries
may bring the equivalent of a class action suit against the
international diplomatic coercion mounted against these countries to
lead them down the path of financial and economic suicide. “The Seoul
Central District Court justified its decision [to admit the lawsuit]
on the kind of logic that would apply in the United States to a
lawsuit involving an unsophisticated individual investor and a
fast-taking broker. The court pointed to questions of whether the
contract was a suitable investment for the company, and to whether the
risks were fully disclosed. The judgment also referred to the legal
concept of “changed circumstances,” concluding that the parties had
expected the exchange rate to remain stable, that the change in
circumstances was unforeseeable and that the losses would be too great
for the company to bear.”

As a second cause of action, Korea is claiming that the banks provided
creditor for other financial institutions to bet against the very
contracts the banks were selling Korea to “protect” its interests. So
the banks knew that what they were selling was a time bomb, and
therefore seem guilty of conflict of interest. Banks claim that they
merely were selling goods with no warranty to “informed individuals.”
But the Korean parties in question were no more informed than were
Iceland’s debtors. If a bank seeks to mislead and does not provide
full disclosure, its victim cannot be said to be “informed.” The
proper English word is misinformed (viz. disinformation).
.
Speaking of disinformation, an important issue concerns the extent to
which the big international banks may have conspired with domestic
bankers and corporate managers to loot their companies. This is what
corporate raiders have done for their junk-bond holders since the high
tide of Drexel Burnham and Michael Milken in the 1980s. This would
make the banks partners in crime. There needs to be an investigation
of the lending pattern that these banks engaged in – including their
aid in organizing offshore money laundering and tax evasion to their
customers. No wonder the IMF and British bankers are demanding that
Iceland make up its mind in a hurry, and commit itself to pay
astronomical debts without taking the time to ask just how they are to
pay – and investigating the creditor banks’ overall lending pattern!

Bearing the above in mind, I suppose I can tell Icelandic politicians
that I have good news regarding the fate of their country’s foreign
and domestic debt: No nation ever has paid its debts. As I noted
above, this means that the real question is not whether or not they
will be paid, but how not to pay these debts. How will the game play
out – in the political sphere, in popular ideology, and in the courts
at home and abroad?

The question is whether Iceland will let bankruptcy tear apart its
economy slowly, transferring property from debtors to creditors, from
Icelandic citizens to foreigners, and from the public domain and
national taxing power to the international financial class. Or, will
Iceland see where the inherent mathematics of debt are leading, and
draw the line? At what point will it say “We won’t pay. These debts
are immoral, uneconomic and anti-democratic.” Do they want to continue
the fight by Enlightenment and Progressive Era social democracy, or
the alternative – a lapse back into neofeudal debt peonage?

This is the choice must be made. And it is largely a question of
timing. That’s what the financial sector plays for – time enough to
transfer as much property as it can into the hands of the banks and
other investors. That’s what the IMF advises debtor countries to do –
except of course for the United States as largest debtor of all. This
is the underlying lawless character of today’s post-bubble debts.

Michael Hudson is a former Wall Street economist. A Distinguished
Research Professor at University of Missouri, Kansas City (UMKC), he
is the author of many books, including Super Imperialism: The Economic
Strategy of American Empire (new ed., Pluto Press, 2002) He can be
reached at mh@michael-hudson.com