[R-G] [BillTottenWeblog] The IMF Rules the World

[Bill Totten]

Will the Debtors Fight Back?

by Michael Hudson

CounterPunch (April 06 2009)


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 - a ten per cent cut in wage
payments in hapless Latvia, Hungary put on rations, and permanent debt
peonage for Iceland 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 ten per cent - and this with an economy already depressed and
that the government expects to shrink by twelve 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 US
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 their
property, their public domain, their political autonomy - their
democracy itself. 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 eighteen
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 US "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 (1776) 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 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 One. 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 US 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 edition, Pluto Press, 2002) He can be
reached at mh at michael-hudson.com

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


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