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Wall Street and the Crisis in Greece

Occasionally a simple story, trivial even, is a useful metaphor for an historical epic. One such story: last week the New York State Attorney General’s office charged four major retailers with selling nutritional supplements that contained none of their advertised ingredients. This wasn’t / isn’t a case of low quality or of poor quality control. The manufacturers put cheap filler into pill form and sold as much as people would buy knowing that ‘consumers’ don’t have the resources to determine whether the products contained their advertised ingredients. No ‘market mechanism’ uncovered the fraud. It was / is undetectable in the ‘market’ frame. And while no one died as a result of the fraud, the same can’t be said of the broader circumstance for which the incident is metaphor.

Western economists call this ‘asymmetric’ information— the manufacturers knew that they are selling fraudulent goods but ‘consumers’ didn’t. The same principle was at work when Wall Street banks, including major French and German banks, created and sold faulty Mortgage-Backed Securities (MBS) to pension funds, insurance companies and smaller European banks in the run up to crisis in 2008. On the other side of the transactions, the home mortgages that backed the MBS resulted from predatory lending by Wall Street banks into the property bubble that Wall Street created. When these ‘assets’ inevitably imploded the liabilities were shifted from bank balance sheets to the public under the guise of ‘bailouts.’

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Graph (1) above: Western mythology has it that the dissolution of the Soviet Union was the result of an untenable economic system when the economic system didn’t become truly untenable until neo-liberal economists, mainly from Harvard University, began ‘advising’ the Russian leadership in the early 1990s. Debate persists around whether Larry Summers and his minions intended to destroy Russia or the combination of their corruption and improbable ideology accomplished to task. The outcome for the Russian people was utter economic catastrophe. Mr. Summers also had a large hand in the deregulation of Wall Street that still reverberates around the globe, including in Greece. Source: World Bank via St. Louis Fed.

The explanation provided by the Obama administration for the Wall Street bailouts, for shifting misbegotten ‘assets’ from bank balance sheets to the public, is that ‘the economy’ needed a functioning banking system to recover. Left substantially unaddressed is what constitutes a ‘functioning’ banking system. The system that preceded the crisis, the same one that has been recovered, can hardly be considered ‘functioning’ after it crashed the global economy, required the commitment of tens of trillions of dollars in contingent bailout money and continues to wreak economic havoc around the globe even today. And again, this system includes major German and French banks. The U.S. Federal Reserve most certainly understood this when it bailed out foreign banks in 2008.

When the ECB (European Central Bank) asserts, as it currently is with Greece, that national debts are sacrosanct, it is either taking a radically anti-historical stance or it is tipping its hand as to the troika’s true intentions. Debt ‘forgiveness,’ jubilees, has been public policy since credit was conceived. WWII became an extension of WWI in some measure because of residual war debts— reparations. In The World in Depression, economist Charles Kindleberger relates national debts to the development and perpetuation of the Great Depression. And while tiny Greece is no military threat to Germany and the European North, ongoing economic Depression in the European South caused by troika policies threatens broader economic and political stability around the globe.

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Picture (1) above: the Time Magazine cover proclaiming three of the most economically destructive people who ever lived, Alan Greenspan, Larry Summers and Robert Rubin, the ‘Committee to Save the World’ would be ironic if it weren’t still indicative of the age. Former Fed Chair Greenspan believed that ‘reputational risk’ would prevent businesses, from Wall Street to nutritional supplement manufacturers, from defrauding ‘their’ customers. Robert Rubin’s acolytes still consume the Democrat Party, including Barack Obama, with neo-liberal dogma. And from Harvard to Russia to Asia to Wall Street, few others alive embody economic malpractice more than Larry Summers. Source: Time Magazine.

The dominant storyline of the German / ECB view towards Greece is of obstinacy— Greece is in an ongoing economic Depression and its capacity to repay debt is declining. Under no configuration of circumstance can Greece repay debt in the amount owed. So, what do the Germans, the IMF and the ECB really want from Greece? A rough analogy can be found in IMF loans to Ukraine in the midst of a coup engineered by the Obama administration. The coup in Ukraine is about energy and geopolitics— from whom and by what route will oil and gas be supplied to Europe and in what form will the U.S. renew its Cold War against Russia? With the loan the IMF, a/k/a American and European banking interests, now owns Ukraine. And in addition to ‘gifting’ Ukraine with war, the IMF is implementing austerity policies along the lines of the Greek model.

The Obama administration’s refusal to prosecute Wall Street for its malfeasance in the run-up to crisis (and since) has had the broader political effect of ‘legitimating’ the consequences in official channels. It was well understood by the Wall Street banks that many, if not the preponderance, of the mortgage loans made in the housing bubble were unlikely to be paid back. The Obama administration’s practice of allowing the banks to leave debts in place while taking houses in foreclosure (the difference between the amount the house is sold for and what was owed remained) finds analog in Germany’s insistence that Greeks repay money borrowed to replace that which Western interests had taken. And chief among the Wall Street banks responsible for crisis in 2008 was Germany’s Deutsche Bank.

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Graph (2) above: since crisis struck in 2008 the Greek unemployment rate has risen from 8% to 27%. This is Great Depression level unemployment representing a degree of economic misery that is both gratuitous and difficult to conceive. It is gratuitous because the ECB has the wherewithal to eliminate the Greek debt, the rationale for austerity policies, with a few computer keystrokes. And it is difficult to conceive because it is being lived in wasted lives, suicides, shortened life spans, hunger and homelessness. Source: St. Louis Fed.

The role of Deutsche Bank in producing fraudulent financial products should give Germans pause. The head of Deutsche Bank’s structured products desk told me quite openly in 2005 that they were betting against the mortgage bonds they were selling to their customers to the full extent the bank would allow them to. This is to say that senior bankers at Deutsche Bank, like the rest of Wall Street, knew that they were creating faulty products and they intended to profit from their inevitable decline in value. The loans to the European periphery that Germany and the troika are now insisting that Greece repay went to ‘nationalize,’ convert to the public balance sheet, money ‘borrowed’ to purchase French and German goods. The strategy is explained here by economic ‘hit man’ John Perkins.

The question for the troika vis-à-vis Greece is: what do they really want? The ‘extend and pretend’ logic of making new loans on the premise that Greece can grow its way out of debt only makes sense if economic surplus accrues at a faster rate than what is extracted for debt repayment. The troika’s austerity policies assure that this will never happen. And any junior bond analyst can do the arithmetic and conclude that the Greek debt won’t be paid. The situation between Germany and Greece may be more complicated because of the monetary union and related concerns, but the imbalance in economic power between them preceded the union and Greek debt was in some significant measure undertaken to benefit French and German corporations, not the people of Greece.

With history as a guide, there are no good intentions coming from the U.S. and Northern Europe toward the European periphery. The very concept of a monetary union without a political union is premised in primitive neo-liberal ideology that assumes away the influence that political and economic power imbalances have over economic relations. The question then is: under what arrangement of circumstance is it in the Greek people’s interest to stay in the monetary union? This is a question that the troika should be answering as well. When there are only bad choices, bad choices will be made. Across the West imbalances in economic and political power are increasing, not diminishing. This trajectory suggests that declaring a different path today will be less painful than doing so tomorrow.

Rob Urie is an artist and political economist. His book Zen Economics is written and awaiting publication. A sampling of Rob’s art can be found here.

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Rob Urie is an artist and political economist. His book Zen Economics is published by CounterPunch Books.

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