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Quantitative Easing for Whom?

Why the European Central Bank’s Trillion Euro Plan will Only Help Keep the Banks Afloat

By MICHAEL HUDSON and SHARMINI PERIES | CounterPunch | March 13, 2015

SHARMINI PERIES: In an effort to relieve some pressure on the struggling European economies, Mario Draghi, president of the European Central Bank, announced a 1 trillion euro quantitative easing package on Monday. Quantitative easing is an unconventional form of monetary policy where a central bank creates new money electronically to buy financial assets like government bonds. And this process aims to directly increase private-sector spending in the economy and return inflation to target.

Well, what does that mean and what might be wrong with it is our next topic with Michael Hudson. Michael Hudson is a distinguished research professor of economics at the University of Missouri-Kansas City. His two newest books are The Bubble and Beyond and Finance Capitalism and Its Discontents. His upcoming book is titled Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.

Michael, the Fed and some economists will argue that this is what got the U.S. out of its 2008 financial crisis. In fact, they put several QE measures into place. So what’s wrong with quantitative easing? 

MICHAEL HUDSON: Well, the cover story is that it’s supposed to help employment. The pretense is an old model that used to be taught in textbooks a hundred years ago: that banks lend money to companies to invest and build equipment and hire people.

But that’s not what banks do. Banks lend money mainly to transfer ownership of real estate. They also lend money to corporate raiders. They lend money to buy assets. But they don’t lend money for companies to invest in equipment and hire more workers. Just the opposite. When they lend money to corporate raiders to take over companies, the new buyers outsource labor, downsize the work force, and try to squeeze out more work. They also try to grab the pensions.

The Fed was pretty open in what quantitative easing is supposed to do since 2008. It’s supposed to lower the interest rates, which raises bond prices and inflates the stock market. Since 2008 they’ve had the largest monetary inflation history – $4 trillion of quantitative easing by the Fed. But it’s gone via the banks into the stock and bond market.

What has this done for the economy as a whole? For starters, it’s obviously helped stock and bond holders get richer. And who are they? They’re the 1 percent and the 10 percent.

People are wringing their hands and saying, why isn’t the economy getting richer? Why is it that since 2008, economic inequality and the distribution of wealth have worsened instead of gotten closer together? Well, it’s largely because of quantitative easing. It’s because quantitative easing has increased the value of the stocks and the bonds that are held mainly by the 1 percent or the 10 percent hold. This hasn’t helped the economy because the Fed is really concerned with its constituency, which are the banks.

Quantitative easing hasn’t helped one class of investors in particular: pension funds. It’s done just the opposite. Pension funds made the assumption a few years ago that in order to break even with the rate of contributions that corporations, states and municipalities are paying, they have to make eight percent or eight and a half percent a year as a rate of return. But quantitative easing lowers the interest rate.

Today’s lower interest rates have made pension funds desperate. The risk-free rate of return is less than 1 percent on short-term Treasury bills. If you buy longer-term treasuries you can make 2 percent, but then if the interest rates ever go up, you’re going to take a loss as the bond price declines. So pension funds have said, “We’re desperate; what are we going to do?”

They’ve turned their money over to Wall Street money managers and hedge funds. The hedge funds take a huge rake off of fees to begin with. But even worse, when hedge funds and the big banks – Goldman Sachs, Citibank – see a pension fund manager coming through the door, they think, “How can I take what’s in his pocket and put it in mine?” So they rip them off. That is why there are so many big lawsuits against Wall Street for mismanaging pension fund money.

To summarize, the effect of the quantitative easing has been to make pension funds desperate, and to support real estate prices, as if higher costs to obtain housing will help recovery. It doesn’t help recovery, because to the extent that quantitative easing supports a re-inflation of housing prices, new homeowners have to pay even more of their income to the banks as mortgage interest. That means they have less money to pay for goods and services, so markets for goods and services continue to shrink.

What the quantitative easing has not been used for is what was promised in 2008. Before President Obama won the election and took office, Congress said that the TARP bailout and TALF were supposed to go for debt reduction. Some was to write down mortgages, so that people could afford to stay in their homes rather than the millions of home owners that have been foreclosed on and thrown out. But even before Obama came into office, Hank Paulson, the Secretary of the Treasury, told Democrats in Congress, yes, we’re willing to write down debts. But as Barney Frank explained in exasperation, Obama said no, he’s not going to do that. Obama ended up supporting the banks. So almost none of the TARP bailout money has been used for debt write-downs.

The same phenomenon is happening in Europe.

PERIES: So, Michael, what’s wrong with what the ECB has announced in terms of a trillion euros worth of quantitative easing for Europe?

HUDSON: They head of the European Central Bank, Mario Draghi, has said that he’ll do whatever it takes to keep banks afloat. He doesn’t say that he’ll do whatever it takes to help economic recovery, or to help labor more. The ECB’s job is to help banks make more money.

Draghi was vice chairman of Goldman Sachs during 2002 to 2005. His view is that of Wall Street. It’s not a vantage point helping labor or helping economies grow. So it’s not surprising that the trillion euros of new money that the eurozone’s central bank is creating hasn’t gone to help Greece, for instance, survive. It hasn’t gone to help Greece, Spain, Italy, or Portugal get out of depression by fueling government spending. It’s simply been given away to the banks to buy bonds and stocks, including buying American stocks and bonds.

Behind this policy is the trickle-down theory that if you can make the financial sector richer, if you can make the one percent and the 10 percent richer, it’s all going to trickle down. This is the view of Paul Krugman, and it’s the view of the advisers that Obama has had. But instead of trickling down, the stock and bond price gains by the 1% and 10% drive a wedge in the economy, by increasing the value of stocks and bonds and real estate and wealth against labor. So quantitative easing is largely behind the fact that the distribution of wealth has become worse rather than better since 2008.

PERIES: One of the things that has happened in Europe that you wrote to me actually in an email was the disappearing central banks’ role in stimulating economies. Why is this an issue?

HUDSON: Central banks originally were designed to monetize government deficits. Governments are supposed to spend money into the economy, because that helps economies grow. But in Europe the Lisbon agreements say governments can’t run a deficit more than 3 percent of national income.

Furthermore, the role of the European Central Bank is not to give a penny to governments. They say that if you give a penny to government, you’ll have hyperinflation like you had in Weimar. So the central bank can only give money to banks – to invest in stocks and bonds. But the ECB won’t buy fresh bonds to finance new government spending. The result of this policy of not funding government deficits is that if the economy is to grow, it has to be entirely dependent on commercial banks for credit.

We had this situation in the United States in the last few years of the Clinton administration when the United States actually ran a budget surplus instead of a deficit. Now, how do you think the United States could grow when there’s a budget surplus sucking money out of the economy?

The answer is that commercial banks and bondholders have to supply the money. But the banks only supplied money in the form of junk mortgages and other forms of an economic bubble, such as takeover loans and a stock market bubble.

The interest of banks is not to help economies grow; it’s to extract interest from the economy. The financial sector uses part of its rising wealth to lobby for privatization sell-offs. The problem with this is that when you privatize a public utility, you give away a monopoly – and if you deregulate the economy, you let the monopoly set up tollbooths over the economy, for toll roads, communications or whatever is being privatized.

The ECB is telling Greece to privatize to raise the money to pay its bondholders, the ECB and IMF. So you have quantitative easing going hand-in-hand with the insistence on privatization. The result is debt deflation as the economy is forced to depend more and more on banks for the money to grow, instead of on government spending into the economy. You’re having the governments not being able to spend on infrastructure, letting it fall apart, as is happening with bridges and tunnels in the United States.

The next step is for the government to say, “I’m sorry, the central bank doesn’t have enough money to help us build new infrastructure. So we’ve got to sell it off to private investors who do have the money.” The next thing you know, you have the economy ending up looking like Chicago. That city sold off its sidewalks and its parking meters to Goldman Sachs and to other Wall Street firms. All of a sudden the prices of parking, driving, and living in Chicago went way, way up instead of lowering the costs as privatization promised.

You have the same phenomenon here that England suffered under Margaret Thatcher: costs for hitherto public services go up. Transportation costs go way up. Road costs go up. Communications, internet costs, telephone costs, everything that is privatized goes way up. Financialization leads to a rent-extractive, almost neo-feudal economy.

In that sense, quantitative easing and the refusal of central banks to fund governments (except to pay bondholders and bail out commercial banks) is a new kind of class war. It’s not the old kind of class war, which was between employers and their workforce over what wages will be. It’s by the financial sector trying to take over the economy, and especially to take over the public sector, to take over the public domain, to take over public utilities and whatever assets a government has. If governments cannot borrow from central banks, they have to begin selling off property.

PERIES: Michael, this is exactly what’s happening in Greece right now. The SYRIZA government is somewhat forced to continue privatization as a part of the agreement of the loans that they have been given by European banks. What could they do in this situation?

HUDSON: This is really a scandal, because most privatizations are corrupt insider dealings. The SYRIZA Party came in and said, wait a minute, the privatizations that have been done are by governmental officials to their own cronies at a giveaway price. How can we balance the budget if we’re giving away the public utilities instead of getting a fair price for them?

The European Central Bank said, no, you have to give away privatization to cronies at pennies on the dollar just like Russia did under Yeltsin, just like the United States did with the railroad giveaways of the 19th century.

Remember, the American privatization to the railroad barons and their financial backers created essentially the ruling class of the 20th century. It created the American stock market. The same thing is happening in Greece. It’s being told to continue the former politicians’ drive to endow a new oligarchy, a new kind of a feudal monopoly lord, by these privatization giveaways. The ECB says that if you don’t do that, we’re going to bankrupt the banking system.

Yanis Varoufakis went back to the party congress in Parliament and asked whether they would approve this. The left wing in Greece has said, no, we won’t approve the giveaways.

The pretense is that privatization is to make money, but the European Central Bank is saying, no, you can’t make money; you have to give it away to our cronies. It’s all one happy financial family. This is escalating financial warfare.

I can assure you that neither Varoufakis nor SYRIZA has any interest in this kind of privatization giveaway. It’s trying to figure out some way of perhaps prosecuting the cronies for bribery, for internal connections, or figuring out some way of legally stopping the rotten policies that they’re told to follow by the European Central Bank – which isn’t giving a single euro to help Greece get over the economic depression that debt deflation has brought on. The euros are only given to the financial sector, basically to help declare war on the Greek government, the Spanish government, the Italian government.

This financial warfare is trying to achieve the same thing that military warfare did in the past. It’s aim is to grab the land, to grab control of the public infrastructure, to grab control of governments themselves. But it’s doing it financially rather than militarily.

PERIES: Right. The SYRIZA Party last week did agree to the conditions of privatization, that they would not roll back on the existing agreements that had been made by previous government. They agreed to not roll back on ones that are underway, and that they’re actually not even averse to privatization as a statement by Yanis Varoufakis. What does all this mean for Greece?

HUDSON: The financial gun was put to their head. If they wouldn’t have said that, there would have been a total breakdown, and the European Central Bank would have tried to bankrupt the Greek banks. So he didn’t have much of a choice. Everything that Varoufakis has written, and all that the political leader of SYRIZA has said, has been exactly the opposite. But they had to give lip service to what they were told to do, and any agreement that’s made has to be ratified by Parliament. So, what they’ve said is, okay, we’re going to play good cop, bad cop. We’ll be the good cops with you, and let Parliament and our left wing be the bad cops and say that we’re not going to stand for this.

March 14, 2015 Posted by | Corruption, Economics | , , , , , , , , , | Leave a comment

The Left Radicalism of Jean-Luc Mélenchon

By PHILIPPE MARLIERE | CounterPunch | April 17, 2012

Superbly ignored by the media until recently, Jean-Luc Mélenchon is the new flavour of the day in the French presidential campaign. In truth, while trying to account for his dramatic rise in the polls – latest reports put him at 17% of the vote – most commentators could not help pour scorn on the Left Front candidate.

A survey of the main articles recently published in the British media provides a compelling case study of political prejudice and misunderstanding. Mélenchon is described as an “Anglo-Saxon basher with a whiny voice” (the Independent), a “populist” who’s “on the hard-left” (all newspapers) and a “bully and a narcissist, out to provoke” (BBC). More sympathetic commentaries compare him to George Galloway or depict him as a “far-left firebrand”, a “maverick” and the “pitbull of anti-capitalism”.

It is striking that the more favourable assessment of Mélenchon’s politics remains off the mark. Mélenchon is seen as a “lovable but old-fashioned leftwinger”. This fails to capture the essence of his political ambitions. Mélenchon’s rise has nothing to do with “1970s-style politics and nostalgia”, but is linked instead to his resolute take on the current capitalist crisis. He tells audiences that the austerity policies implemented across Europe are not only unfair but also counterproductive (even the Financial Times agrees). Mélenchon’s debating skills serve his cause, but he is also a lettered pedagogue: a dignified politician who has never participated in vulgar reality shows. What is more, Mélenchon is a French republican and a socialist, not a “far-left” or a fringe politician. He spent 30 years in the Socialist party unsuccessfully arguing that it should be a force at the service of ordinary workers, and he was a cabinet minister in Lionel Jospin’s government.

Oratory is politically useless if one does not have an important message to deliver. Mélenchon has one: neoliberalism has failed, so it would be suicidal to persist with its inadequate policies. The French MEP also had a credible programme. In didactically crafted speeches or in media interviews, he radically departs from mainstream politicians by explaining that the economic crisis is systemic, that is to say that it is due to our flawed political choices and priorities. Our societies have never been as productive and wealthy as today, but the majority of the population are getting poorer despite working harder and harder. The problem is not a question of wealth production (as neoliberals and Blairite social democrats would have us believe), but of redistribution of wealth.

In France raging pundits and opponents call the Left Front programme an “economic nightmare” or a “delirious fantasy”. Shouldn’t they instead use this terminology to describe the banking debacle or austerity policies across Europe? Mélenchon’s growing number of supporters view it as common sense and salutary: a 100% tax on earnings over £300,000; full pensions for all from the age of 60; reduction of work hours; a 20% increase in the minimum wage; and the European Central Bank should lend to European governments at 1%, as it does for the banks. Here are a few realistic measures to support impoverished populations. Is this a revolution? No, it is radical reformism; an attempt to stop the most unbearable forms of economic domination and deprivation in our societies. Fat cat bosses may leave France; they will be replaced by younger and more competent ones who will work for a fraction of their wages.

“Humans First!” is more than a manifesto title, it is a democratic imperative: a sixth republic in place of the current republican monarchy; the nationalisation of energy companies (as energy sources are public goods) and, less often noticed, the ecological planning of the economy, the core of Mélenchon’s political project.

Mélenchon has done French democracy a further favour. In a memorable TV debate, he emphatically defeated the extreme right for the first time in 30 years. Concentrating on policy details, Mélenchon demonstrated that Marine Le Pen’s programme was regressive for women. Furthermore, he smashed to pieces the myth of the Front National as a party that has the working class’s best interests at heart. Le Pen appeared lost for words and ill at ease.

Mélenchon’s campaign politicises the young. He appeals to the working class, which, contrary to some claims, has largely shunned Le Pen and which has been abstaining from the vote. For the first time in decades, Mélenchon is helping the left to reconnect with the popular classes. For Mélenchon, free market politics does not work and inflicts unnecessary suffering on the people. No other European politician is better placed than he is to convincingly argue that point.

Philippe Marlière is a Professor of French and European politics at University College London (UK). He can be reached at: p.marliere@ucl.ac.uk

April 17, 2012 Posted by | Economics | , , , , , | Leave a comment

Greece’s unions to hold two-day strike over cuts

Press TV – February 9, 2012

Greece’s two largest unions have announced a 48-hour strike over the new austerity measures endorsed by the government in return for bailout loans.

The unions, General confederation of Workers of Greece (GSEE) and Civil Servants Supreme Administrative Council (ADEDY), announced on Thursday that their members will go on a two-day strike from Friday in protest at the controversial decision.

“We will hold a general strike on Friday and Saturday along with the civil servants’ union,” said a spokeswoman with GSEE which represents the private sector.

ADEDY’s Secretary General Ilias Iliopoulos described the measures as “painful” which will “create misery for youths, unemployed and pensioners do not leave us much room.”

“We are moving to a social uprising,” said Iliopoulos.

Greece has been the scene of repeated strikes since the country first resorted to bailouts from international lenders in 2010.

Leaders of the three parties backing Greece’s coalition government approved new austerity measures on Wednesday but failed to agree to creditors’ demands to make 300 million euros ($398 million) in pension cuts.

The country’s Prime Minister Lucas Papademos still hopes that the coalition leaders will strike a comprehensive deal by Thursday evening, his office said on Wednesday.

To secure a bailout package of 130 billion euros, Athens must first persuade the troika — the European Union (EU), International Monetary Fund (IMF), and the European Central Bank (ECB) — that it will implement long-delayed reforms and make further spending cuts.

Greece’s current debt stands at 340 billion euros ($440 billion) — a sum that equals around 31,000 euros debt per person in the country of 11 million people.

The country has, accordingly, the biggest debt burden in proportion to the size of its economy in the entire 17-nation eurozone.

February 9, 2012 Posted by | Economics, Solidarity and Activism | , , , , , | 1 Comment

   

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