The Name’s Bond

April 30, 2010

Big Merv

At last, some interesting and possibly even honest words from a public figure, albeit an unelected one. Apparently, the governor of the Bank of England, Mervyn King, has been telling friends that “whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be.”

The Times reports on an American source who has also been told by King that “the markets would take a very aggressive view if no credible plan was contained in the Queen’s Speech on May 25.”

As the Times continues, a “credible” plan is code for extreme measures: “Analysts have said that without commitment to severe austerity in the first weeks of a new Government, Britain could be heading towards a sterling crisis and a boycott of the gilts market.”

Or is this something else entirely? After all, Mr King is likely to be the economic helmsman, piloting the good ship (believed sinking) HMS Britain through the next few years. The Tories have promised to give the BOE a starring role in regulating the financial sector (not a role, it has to be said, that any of its staff have any experience in filling but never mind).

Could Mervyn be paving the way for extreme cuts to save the British economy from the revenge of the bondholders? His words certainly fit into a flurry of briefings (most notably from the Institute for Fiscal Studies) which have place immediate deficit reduction in the centre of the political “debate.”

The IFS has charged the three main parties with dishonesty over the scale of cuts needed to reduce Britain’s budget deficit, and has been joined by the National Institute for Social Research, which has predicted that whoever commands power in 2015 will have to increase the basic rate of income tax by 6 pence. Oh, and another £30 billion in cuts are needed too.

The deficit under discussion is not merely the many billions of pounds injected into ailing banks, or the money set aside by Alasdair Darling to provide a fiscal stimulus to the economy. It concerns spending that will directly concern ordinary Britons. As the Economist notes, “Much of the borrowing, which amounted to 11.6% of GDP in 2009-10, will melt away as the temporary fiscal stimulus is withdrawn, the effects of the financial crisis fade and the economy recovers. But that will still leave a hard-core deficit of nearly 5% of GDP—£70 billion ($106 billion) in today’s money—which will have to be eliminated the hard way, through spending cuts and tax rises.”

Although the article then concludes that the three main parties are strongly favoring spending cuts over taxes. That is, if austerity is necessary, then the rich will not be paying for it via taxation. It will be funded by reducing the standard of living of the majority, so as to benefit the community of international bond investors.

At the precise moment that one of the largest such investors – Goldman Sachs – is being unmasked as a criminal manipulator of the real estate derivatives market in the U.S., European governments are competing to make their economies as favorable as possible to… Goldman Sachs. Remember, it was Goldman who helped the Greek government to hide its own deficit problems with a massive debt swap back in 2002. Banks like Goldman have also been goading European governments into borrowing at higher than market rates just so that such borrowing would not appear in their statistics. And now they want to be reimbursed, by everyone.

The current austerity fever comes after the bursting of history’s greatest financial bubble. In the decade up to 2007, the richest people in Europe made a killing from financial manipulation and speculation, while the living standards of the many were propped up only by huge personal debt levels, offshoring manufacturing to low wage economies and productivity increases resultant from information technologies introduced years before.

Now, those who enriched themselves so mightily – Mervyn King’s friends included no doubt – are running a political campaign which makes the British election look like a game of Ludo. They are telling us that our deficits – the ones we racked up with our recreational CDO swapping sessions – have to be paid for by self sacrifice and misery. And if we don’t agree – then the bondholders will loose their blade and send it hurtling down onto the back of our collective neck.

Well, it doesn’t have to be like that. There are sources of capital beyond the pool of international financial vipers. There are pension funds, for example, which could be wrested from financial managers and held under social control, while bond positions are assessed. There could be publicly owned banks capitalised by taxation or via the market. There is even international solidarity. Ecuador has the worst credit rating in the world, yet it has not collapsed because Standard and Poors decreed that it should do so. Assistance from neighboring countries has helped it through, and will continue to do so.

There are alternatives, just don’t ask fucking Nick, Dave or Gordon.

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6 Responses to “The Name’s Bond”

  1. kiosa Says:

    Surely you should update your blog roll.
    🙂

    In fact, something terrible has happened to postmodern civilizations. All the economies that didn’t get accustomed to the pace and the back stabbing and the faking it to make it (that last one may be debatable) are doing a pretty good job of keeping track of reality.

    Those economies are doing just fine. Because they’re jumped on the new economics boat. Word’ll get around, even with Corporate Media trying to hide everyone’s head up the collective rectum of their dead mandate.

    Watch for it.

  2. watsonlow Says:

    Who buys government bonds? The straightforward and obvious answer is “investors”, operating on professional risk-reward principles. The fact that Ecuador’s neighbours help her out is genuinely heart-warming. There is something going on there beyond the naked capitalism of the money markets. One could call it a sense of community, and I believe this is also in play in the case of the European Union’s support of Greece. In this case, the main lender, Germany is clearly irritated by the failure of the Greeks to balance their books. “Austerity” is a word that keeps cropping up. There are demonstrations in the streets which lead one to believe that many Greeks are not willing to submit to lifestyle changes. On the other side the lenders believe that the Greeks have had an easy ride for too long. There will be big trouble in the cradle of democracy because there is little prospect of the government achieving a consensus with the population and the lenders about the economic measures needed. Greece appears to be ripe for another colonels’ coup, or for the emergence of some demagogue announcing the failure of democracy. Britain is not far away from a similar fate. When George Osborne peers into the Black Hole next Friday he will see financial liabilities which will dwarf any output to date from the Office of National Statistics. He will feign surprise and hurl scorn and derision at the outgoing government. Then, in short order, he will announce measures which will satisfy the lenders and retain for us our triple A. Almost certainly the main burden of the cuts will fall on those least able to bear it, and there will be civil unrest as a result. I think Osborne’s fiscal objectives will be no different from those of any other party. Where he will differ is in his methods of reducing expenditure and raising revenue. I think it will be the task of radical activists to ensure that the poor get a fair shake from Osborne or whoever wins the election.

  3. Szamko Says:

    “One could call it a sense of community, and I believe this is also in play in the case of the European Union’s support of Greece. In this case, the main lender, Germany is clearly irritated by the failure of the Greeks to balance their books.”

    Well, that’s debatable. The Community in question is dominated by the Euro, to which Greece should probably not have been admitted. But Germany is now keen to prop up the single currency, not to help out Greek people, hence the focus on “austerity measures.”

    And German investors are heavily exposed to Greek bonds as well, which makes the deal all the more important for them.

    But I think we need to look closely at what is being asked of Greece. Is the Greek public sector so bloated? Not by European standards. The public sector in France constitutes about 50 percent of GDP. In Greece, it’s about 40 percent. In the UK, it’s about the same.

    I don’t agree that the problem with Greece is its overly large public sector, and greedy unions, which is a theme that crops up in the media. A large problem is corruption, facilitated by multinational banking and, yes, EU integration (ie bribery and capital flight/tax evasion). Another problem is “lack of competitiveness” vis a vis both richer nations (ie the lack of infrastructure to compete with high-tech goods and research) and poorer nations (the Greek workforce won’t work for Estonian, let alone Bangladeshi wages).

    Both of these major problems have their root in the economic architecture erected by financial institutions and the governments that they buy off. Hence the quite valid call to reject austerity measures and make the rich pay. Indeed, given that Greece’s main problems are (in my opinion) about its relation to the so-called “global economy” – beating up on workers, making them work more for less, reducing services etc… will probably be counter-productive.

    Obviously German capital plays a pretty key role in the financial architecture we are talking about here, and would much rather make ordinary Greeks pay rather than a) closing tax evasion loop holes and regulating capital movements between EU states or b) Working seriously to raise global wages rather than cultivating the “race to the bottom” mentality.

    Thankfully, the Greeks have a strong labour movement, anarchist groups, civil society etc.. and memories of dictatorship which make that eventuality rather unlikely, but we’ll see.

  4. watsonlow Says:

    As a banker I know that when you lend money it is wise to identify the ultimate beneficiary and to understand the use to which the money will be put. In this way you establish confidence that you will get your money back. What also helps is collateral, like a charge on the beneficiary’s house. In such a case you make sure that the collateral comprises real fungible assets, which you can realise should the borrower default.
    It seems that in lending to the Greek government you have no assurance of ever getting your money back. You can preach austerity until you are blue in the face but if the government has no mandate they have no way of controlling the economy short of brute force. This is clearly in their plans, but it is a desperate and doomed strategy which may well end in NATO tanks rolling over the country to restore stability etc and to retrieve a few bob for the foreign investors.
    Greece could be Europe’s Afghanistan or Lebanon.
    What the foreign governments should be doing is to offer to poor Greeks the opportunity to emigrate. At some point they might decide that living in a corrupt and financially unviable homeland is worse than moving to a foreign country where you can eat, stay warm and keep the family secure.

  5. Szamko Says:

    Yet Greek’s deficit is comparable to the British, and lower than Italy or Japan. Why is Greece being singled out for harsh treatment as a basket case? Is it because Goldman Sachs and JP Morgan are up to their elbows in debt swaps which are effectively shorting the Greek economy? Goldman organized the debt swap in 2002 which helped to hide Greece’s budget deficit, so its reasonable to guess that they are playing the other side too. It’s what they do.

    There is nothing exceptional about Greece – that’s a crucial message. This is a financial punishment beating, not a product of Greek domestic policies or corruption (though the latter makes it impossible to engineer a domestic solution without massive austerity).

    • watsonlow Says:

      “Punishment beating” is a bit strong. Major market players can depress share prices by short selling, and drive the market price of shares, companies and currencies down. However, the strategy only works if they can subsequently buy back in at a lower price and can then shift the asset again at a profit. How would you stop this happening? It is the age old problem of how to stop the big guy bullying the little guy. In this case there is no legal authority the victim can turn to. Perhaps a start would be a global ban on short selling at pain of disqualification from market participation. Of course the hydra would re-emerge in another form but it tickles me to think of Goldman Sachs being banned from trading. As a challenge for the UN I would have this as somewhat easier than countering climate change. I would truly look forward to hearing Barack Obama or any other politician explain why it would not be a good thing for the world.


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