May 5, 2010
Now things are getting really bizarre. A few weeks back, this column highlighted how Ireland had changed from a democracy to a “bankocracy”. A bankocracy is a state where government policy puts the interests of its banks over the interests of its citizens. Our Government is the conduit for the transfer of wealth from our own “outsiders” — in this case the ordinary people — to our own “insiders” in the banking system. But now it is even worse because it is transferring that wealth to the insiders in another country.
Make no mistake about it, the bailout of Greece, which will cost us â‚¬1.3bn, is not a bailout for the Greek people, it is a bailout for the banks that lent money to Greece. It is not a loan either: it is a gift. What has been dressed up as a sovereign bailout with an appeal to our sense of European solidarity is nothing more that a direct transfer of money from you to the foreign creditors of French and German banks. These creditors stood to lose if Greece defaulted last week. The “bankocracy” is now transnational.
Think about this. The bailout to Greece comes with conditions. The Greeks will have to suffer austerity and pay more taxes. But what exactly is the actual cash being used for? A considerable amount of it will be used to roll over old bonds. This means that the original investors in Greece — the banks and investment funds — will be allowed to reduce their exposure to Greece. In turn, the ordinary taxpayer — you — assumes this risk. So the Greek taxpayer and the other European taxpayers are lumped closer together, while the banks that had stood to lose out get away scot-free and are giving the bill for their errors to us, the people who had nothing to do with Greek bonds in the first place.
How could this be?
We are told that this is all being done to enhance the credibility of the euro. But how can a currency’s credibility be enhanced by something so patently incredible? How can the reputation of a financial area be made more solid by rewarding bank failure, not bank success?
When trying to understand why apparently clever people — such as central bankers and senior civil servants — do silly things, it is helpful to look at history. When discussing the fatal attraction to the euro and the inability of mainstream economists to see that the euro, as much as Greece, is the problem, it is useful to consider the similarly flawed Gold Standard.
The Gold Standard in the 1920s and 1930s, like the euro now, was considered an article of faith by the banks, the financiers, civil servants and politicians. They simply couldn’t imagine a world where money wasn’t tied to gold. Anyone who questioned the Gold Standard was ridiculed.
It was the great John Maynard Keynes who, as always, went against consensus and argued that the Gold Standard was forcing governments to cut back when they should be spending in the Depression. He argued that making Germany pay all reparations would cause a crisis because either the Germans wouldn’t be able to pay, leading to chaos in Germany or, if Germany did pay, it would be so competitive as to destroy the competitiveness of the other countries leading to mass unemployment in those other countries. He was laughed at. He then went on to say the Gold Standard should be scrapped. He was ridiculed.
The Gold Standard, like the euro, meant there was no exchange rate risk between all the big economies. This facilitated a huge increase in loans from bankers in one country to lenders in another. Britain owed vast amounts to the USA and Germany owed vast amounts to everyone. France became the banker of Europe and it lent billions to Germany, while at the same time demanding that Germany paid full reparations for the First World War. So, increasingly throughout the 1920s, the Gold Standard became the guarantor of these huge loans among countries’ banking systems.
The banks gambled that the Gold Standard was so important to the prestige of the big powers and so central to the way the big powers thought about the world, that loans would always be repaid. Doing otherwise would “undermine the credibility of the system”. Keynes saw through this canard from an early stage.
If we examine the euro in the boom, we see that it operated in exactly the same way as the Gold Standard. The single currency encouraged banks to take risky bets. The banks lent money to anyone, safe in the assumption that even if there was a crisis, the euro would be so sacrosanct in the minds of politicians, that all their loans — no matter how dodgy — would be paid back. Because to do otherwise would “undermine the credibility of the system”. Sound familiar?
Look at the cartoon above, which would be funny if it wasn’t so serious. It shows you who the Irish banking system owes money to and who owes money to us. You can see that we are at the centre of an intricate web of borrowing and why international banks are worried about possible defaults. It also explains why Greece was saved to protect the international banks rather than the Greek people.
Take the Irish balance sheet with Spain for example. Irish banks have lent â‚¬21,987,000,000 to Spanish banks, while the Spanish banks have lent us â‚¬10,153,000,000. You can see who would lose out if we were to go the way of Greece or if Spain were to topple.
Think now about the relationship in the cartoon between Germany, France and Ireland. Irish banks owe â‚¬127,458,000,000 to the German banks and â‚¬41,844,000,000 to the French banks. These are debts incurred in the good times and most of the cash was lent out to buy property in Ireland. Can we pay them now? I doubt it. Should we repay them after the guarantee expires? We will need a lot of austerity to generate the surplus to repay these loans.
Let’s just go back to history for a second. As the booming 1920s led to the collapse of the 1930s, the governments realised that they couldn’t pay back all the cash. But instead of defaulting, governments everywhere first cut spending and raised taxes. New loans were made conditional on austerity.
So a country like Germany was encouraged to borrow more through its banks to enable it to pay back more — even though, at the same time, the country was forced to embrace austerity.
This is precisely what is happening to the periphery of Europe now. We are being told to deflate, while the core countries of the euro enjoy easier credit conditions. This is hardly a recipe for stability or for an enhanced and more credible euro. It is the recipe for division and instability where unemployment on the periphery begets more instability, more tax increases and more capital flight.
In the 1930s, as Keynes predicted, the upshot was that the centre couldn’t hold and one by one the major countries abandoned the Gold Standard and defaulted on their debts.
Could the same happen the euro? It could. Particularly if, in order to keep it together, politicians have to take money from the poor outsiders to bail out rich insiders while dressing it up as European solidarity. Come off it!