Micheal Hudson on National Bankruptcies and the Flavors of Civil Rebellion
Mort Zuckerman
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Subject: Micheal Hudson on National Bankruptcies and the Flavors of
Civil Rebellion
Date: May 12, 2009 5:46 AM
Once the people find out that the drugs were
introduced and then prosecuted by the Rockefellers
http://www.actionlyme.org/BRITISH_PSYCHIATRY.htm
and that it was meant to induce lethargy and retardation
(inability to focus on the real perps of our social
disintegration), and, Once the people find out that
the dot guv unions have been cannibalizing the people
(see the class action where a Yale lawyer, Shelley
Gabelle indicts the CT DCF for defrauding Uncle Sam
over their TANF funds:
http://www.actionlyme.org/CLASS_ACTION_PROVIDENCE_27_July_05.htm
http://www.actionlyme.org/andersonpenisbiter.htm )
then the people would be less likely to take out
their frustrations on each other and instead refuse
to pay taxes and take up local farming and local
new energy and the like. It could go either way.
We could fight each other over petty items or
we could organize against the Bigs (this fascist
government of America) and their Retarded Dronies
Corps, the dot guv unions, like duh Corrupticops
and duh Corrupticourts, and duh DCF Whorey Glories:
http://www.actionlyme.org/VIKING_INTERVIEWS.htm ,
the tards in uniform who pork wid duh DCF and the
racist "judges:"
http://www.actionlyme.org/KAPLAN_IRISH_PEOPLE_BAD.htm
KMDickson
http://www.actionlyme.org
====================================================================
http://www.counterpunch.org/hudson05112009.html
May 11, 2009
Make Iceland Pay for Incompetent British Bank Deregulation!
Gordon Brown Spills the Beans on the IMF
By MICHAEL HUDSON
Last month the G-20 authorized the International Monetary Fund to
increase its loan resources to $1 trillion. It’s not hard to see why.
Weakening currencies in the post-Soviet states threaten to raise
default rates on foreign-currency mortgages as collapse of the Baltic
real estate bubble drags down Swedish banks, while the Hungarian
property plunge threatens Austrian banks. It seems reasonable to infer
that creditor-nation banks hope to be bailed out. The IMF is expected
to lend the Baltic, central European and other debtor-country
governments money to pay them. These hapless debtor economies are then
to follow IMF “conditionalities” to squeeze enough money out of their
populations to pay foreign creditors – and repay the Fund by imposing
yet more onerous taxes on their labor and industry, making them even
more high-cost and therefore pushing them even further into trade and
credit dependency. This is why there have been so many riots recently
in Latvia, Lithuania, Estonia and Ukraine, as was the case for so many
decades throughout the Latin American countries that introduced the
term “IMF riot” to the global vocabulary.
For fifty years the IMF has organized such payouts to creditor
nations. Loans are made to debtor-country governments to “promote
exchange-rate and price stability.” In practice this means pouring
tens of billions of dollars into currency markets to make bad gambles
against raiders. This is supposed to avert the beggar-my-neighbor
nationalism and financial protectionism that aggravated depression in
the 1930s. But the practical effect of IMF lending is to demand that
debtor countries impose onerous IMF “conditionalities” that stifle
their domestic markets. This is why the IMF was left with almost no
customers until last year’s debt crisis deranged the world’s foreign
exchange markets.
It is supposed to be merely incidental that the largest IMF
shareholders, the United States and Britain, happen to be the major
creditor nations and their banks the main beneficiaries of IMF loans.
But in a Parliamentary question-and-answer session on May 6, Britain’s
Prime Minister Gordon Brown spilled the beans. Under pressure for his
notorious “light-touch regulation” as Chancellor of the Exchequer
(1997-2007), he undid half a century of rhetorical pretense by
announcing that he was pressuring the IMF to bail out Britain in its
nasty dispute with the Icelandic owners of a British bank that went
under. He was in a position to know the nitty-gritty of who owed what
and which nation’s monetary authorities were responsible for which
banks. So when he said that he was strong-arming the IMF and other
organizations to force Iceland’s government to pay for his own
government’s mistakes, he must have known this was breaking the
unwritten law of pretending that the IMF is not the servant of
creditor nations in bilateral disputes with smaller economies.
Here’s the background. Mr. Brown and his New Labour predecessor Tony
Blair have saddled British taxpayers with a generation of payments to
pay for their decade of deregulating London’s financial sector. Bad
mortgage lending led to the failure first of Northern Rock and then
the Royal Bank of Scotland, whose ambitious junk-mortgage program had
made it the world’s largest bank. At $3.8 trillion before it
collapsed, it was nearly twice the size of Britain’s $2.1 trillion
gross domestic product (GDP). (For a review of New Labour’s
deregulatory policies see Philip Augar, Chasing Alpha: How Reckless
Growth and Unchecked Ambition Ruined the City's Golden Decade [2009].)
So one can understand why Mr. Brown was flailing around to blame
someone for New Labour’s “Don’t see, don’t ask” policy.
Last autumn one of Iceland’s most reckless banks, Landsbanki,
announced that it had made so many bad gambles that its loans and
investments could not cover what it owed its depositors. It had drawn
many deposits from abroad by setting up foreign branches, including
Icesave in Britain. And in a striking variation from normal practice,
these branches were not incorporated as separate affiliates, which
would have led them to be regulated by local British authorities. As
branches of the Icelandic head office, Icesave was regulated only by
Icelandic authorities – which were as thoroughly neoliberalized as
those of Britain, and didn’t really have a clue as to what was going
on.
When Icesave went broke in October, British monetary authorities
panicked. Mr. Brown sought above all to prevent its owner, Landsbanki,
from doing what Lehman Brothers had just done on Sept. 14 when its New
York office emptied out the funds in the account of its London
affiliate just before the U.S. firm declared bankruptcy. Trying to
grab whatever Icelandic assets he could, Mr. Brown overreacted (hardly
a new experience for him). Responding far beyond Icesave itself, he
resorted to anti-terrorist legislation passed in 2001 in the wake of
the 9/11 attack on New York’s World Trade Center to freeze Icesave’s
accounts – and also those of other banks in Britain owned by Iceland.
Evidently he thought that classifying his peaceful NATO partner as a
terrorist economy would panic its government into paying. But the
effect was to cause a run on Iceland’s currency, making payment
impossible. The króna entered a period of freefall on foreign exchange
markets.
Mr. Brown’s bellicose behavior escalated as Britain’s own currency
sank. This set the stage for his explosion last Wednesday when he
explained how he intended to make Iceland pay, not only for Icesave
but also for Kaupthing S&F, for which the British authorities were
responsible in the case of depositors who had lost money. Unlike the
unfortunate IceSave (administered as a branch of Iceland’s Landsbanki
and hence subject to Icelandic regulatory authority), Kaupthing S&F is
incorporated as a distinct British affiliate, and regulated and
insured as such. The UK authorities accordingly have not claimed that
Iceland’s government has any obligations to reimburse British
depositors who have lost money. Yet when asked about the “£6 million
that the Christie hospital [in Manchester] stands to lose in the
Icelandic bank Kaupthing,” central banker Brown pretended that
Kaupthing was not a British bank overseen by domestic deposit
insurance authorities. “The fact is that we are not the regulatory
authority and that many, many more people had finances in institutions
regulated by the Icelandic authorities,” he insisted before
Parliament. “The first responsibility is for the Icelandic authorities
to pay up, which is why we are in negotiations with the International
Monetary Fund and other organisations about the rate at which Iceland
can repay the losses that they are responsible for.”
This naturally has prompted Icelanders to ask British authorities just
which “other institutions” they may be talking to, and what they may
be hoping to gain. The IMF’s representative in Iceland, Franek
Rozwadowski, was quick to explain to the Icelandic newspaper
Fréttablaðið that it was not the IMF’s role to intervene in “a
bilateral matter that needs to be resolved bilaterally.” But fears
remain that Iceland’s government will be pressured to squeeze out
money from the economy to reimburse foreign speculators on the winning
end of the many bad gambles that Iceland’s banks made before being de-
privatized.
Such fears are aggravated by the worry that Mr. Brown may have found
help from a fifth column within Iceland itself. After the bank crisis
last autumn, the Independence Party fell, and its coalition partner
for the last six years, the Social Democrats, took charge of the
administration. The government divided the failed Icelandic banks into
“good” and “bad” parts so as to save what could be salvaged for
Icelandic depositors to back their deposits (the “good” bank). The
government then commissioned two British accounting firms to survey
the loan portfolios of Landsbanki and Kaupthing to evaluate their
assets at “fair value.” But much as the U.S. stress test surrendered
to the banking system’s insistence on blue-sky optimism regarding what
will be left over on high-risk loans and gambles, so the Icelandic
contract defined “fair value” as it would exist if the global
financial collapse was completely reversed and everything went back to
normal as if nothing had happened. Under this assumption the good and
bad bank assets would be worth much more than is the case under
today’s real-world conditions. This dangerously over-states the net
worth of Iceland’s failed banks.
It was dangerous to retain firms closely associated with major
clients – and hence, their source of future business – that include
the parties with whom Iceland’s government stands in a potential
adversarial relationship. Another problem is political pressure for a
cover-up on the part of the vested Icelandic interests that had
engaged in reckless behavior, and perhaps crooked self-dealing via
foreign transactions.
In any event, the report was not made public on its scheduled date in
mid-April, which was supposed to be just prior to the national
elections on April 25. When a report on major bankruptcy by political
insiders is not released on the promised date before a major election,
one naturally suspects political pressure at work. Yet despite the
financial crisis that plunged most Icelanders into a debt-strapped
condition, the election turned mainly on political factors. The Social
Democrats advocated joining the European Union and adopting the euro,
hoping that this in itself may lead to domestic economic reform. The
Left-Green coalition opposed giving up Icelandic political and
economic sovereignty and pressed for domestic reform, as did the
centrist Progressive Party. As for the Independence Party, it was
swamped by one scandal after another concerning election financing,
insider crony dealing and the usual array of dirty neoliberal
political practices.
All this occurred in an economy structured to be a creditor paradise –
that is, a debtor’s hell. On top of normal mortgage interest,
Icelandic personal and real estate debts are subject to indexation of
the principal to reflect the consumer price index – which in turn
mirrors the fall in the króna’s exchange rate, about 20% over the past
year. This means that if someone bought a house for the equivalent of
$100,000 a year ago with a 100% mortgage, the debt would now have
risen to $120,000. But the collapse of Iceland’s economy has sent
unemployment soaring and business crashing, so real estate prices have
fallen by about 25%. The former $100,000 house would now have a market
value of only $75,000 – just 62% of its re-indexed $120,000 mortgage,
some $45,000 in negative equity.
The situation actually is about to get much worse in the near future.
The US$ is currently at 125 krónur (IKR), down from 62 at yearend-2007
– a 100% increase. (For the euro, the increase over the same period is
85%.) Iceland’s banks have linked many business loans, as well as auto
loans and other debts to a market basket of foreign currencies, on the
logic that they themselves have had to obtain money by borrowing yen,
euros, sterling or dollars. Although these loans are denominated in
krónur, their payment is indexed, so the effect is similar to
denominating loans in foreign currency. Many loans are still
benefiting from the moratorium placed on re-indexing the principal
when the crisis hit last autumn, but many loans are about to be reset.
Icelandic debtors who borrowed in the belief that the IKR was as
stable as the dollar are now paying the price for their optimism – an
optimism fed by the banks’ marketing departments, which depicted these
indexing arrangements simply as an accounting formality! Business
debts are especially at risk.
This shows how urgently Iceland needs to straighten out its banking
mess and restructure the economy to free the population from the
unique debt squeeze its laws and a decade of neoliberal mismanagement
have created. Now that the banks have been de-privatized and taken
back into the public domain, credit needs to be turned back into what
it was before – a public utility. But this cannot be organized without
knowing how much can be recovered from the failed banks to back
domestic depositors. And the reports from the British accounting
consultancy firms still have not been made public. Only the major
creditors have received copies!
Remarkably, the government said last week that they might not be
released at all. The inference is that the crooked dealing has been so
damning to vested Icelandic interests that it would cause a new
political crisis to resolve the deepening economic crisis. The fear is
that a sweetheart deal has been made with the kleptocrats whose
reckless behavior (and it seems probable, illegitimate bank
maneuverings with offshore accounts) plunged the economy into negative
equity in the first place. The better the financial health of the
failed banks appears on paper, the more presumably will be left over
to pay foreigners – including the offshore accounts of the banks’
former owners in their own dealings with the banks. So from the
vantage point of Icelandic depositors and debtors to these banks, a
realistic pessimistic estimate of the banks’ position would protect
them, while an unrealistic optimism would enable foreigners to siphon
off much more money, leaving less for Iceland.
In fact, the IMF has failed to oblige Iceland’s government to conform
to the Letter of Intent it signed on November 15, 2008. This letter
obliged Iceland to “bring loan values in line with expected market
values” (#4), and to “include an assessment of whether or not managers
and major shareholders have mismanaged or abused the banks” (#6). No
such assessment has been made, and as described above, loan values are
exceeding market values by a rising degree as property, businesses and
households fall into negative equity status.
The Icelandic government’s agreement with the IMF promised to make the
bank assessments public upon their completion “by end-march
2009” (#10). This has not been done – perhaps (one worries) because
the next sentence says that the government “will discuss in advance
with IMF staff any changes to the adopted strategy.” In view of the
secrecy that now shrouds the events that pushed the banks under, one
can only wonder at what developments have prompted the government and
IMF to change strategy.
What the IMF did demand – as it always does – is that once the
government bails out the bankers for their bad loans, the whole
privatization process is to start all over again, paving the
groundwork for yet new rip-offs. In view of the fact that “the banking
crisis will significantly constrain the public sector and burden the
public for years to come” as the government pays off bad loans (#12),
the agreement pledges (#14) that “A significant reduction in
government debt through the sale of the government’s stake in the new
banks could help reduce the needed fiscal adjustment over the medium
term.”
Belatedly, the population is now up in arms – two weeks after the
election! To stabilize the currency, Iceland has agreed to IMF
conditionalities that prevent the government from pursuing the counter-
cyclical Keynesian fiscal policy that Mr. Obama is leading in the
United States. Unless the debt pressure is alleviated, Icelandic
homeowners and businesses will be obliged to run down their savings
each month until they are depleted – at which time they will lose
their homes and forfeit their businesses to foreclosing creditors.
So on Saturday afternoon, May 9, a “pots and pans” protest was
conducted outside of Iceland’s Parliament in Reykjavik. The scenario
is much like that of the color revolutions staged by U.S. neoliberals
throughout the post-Soviet states. But Iceland’s kitchen-utensil
revolution is organized as a protest against neoliberal policies. The
protesters have picked up the thread where it left off last October a
similar set of protests dislodged the Independence Party from power.
The National Labor Association has broken from the new Social
Democratic coalition government, reflecting the growing anger among
Icelanders at their debt squeeze.
Mr. Brown’s statement that he intends to use IMF leverage to deepen
Iceland’s debt position by forcing its government to bail out British
depositors has rubbed salt in this wound – precisely by demanding for
his country what Icelanders are not receiving from their government!
Its citizens want to know what pressure the country is responding to
if it intends to put the interest of foreigners before their own. This
double standard has motivated the population to act in a more
confrontational way than would have occurred had the problem been
merely domestic. Icelanders want to be told the magnitude of the
financial problem – and apparent dishonesty and crony dealings – that
the government is keeping secret. The answer may at long last move
Iceland out of its post-feudal oligarchy. Its neoliberal
privatizations and pro-financial policies may turn out not to be as
entrenched and irreversible as the kleptocrats had hoped would be the
case.
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 via his website, m...@michael-hudson.com
"[Real] scientists are *fiercely* independent. That's the good
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