Thursday, October 27, 2011

Revised: Once Again the Financial Class Gets Help at the Expense of Ordinary People

Europe Agrees to Basics of Plan to Resolve Euro Crisis -
Belatedly, Europe finds a quick fix to its financial woes - The Globe and Mail

This does little for real people. When the EU talks about saving the economy, they really mean of course banks and their investors, those holding the sovereign debt. So the reason for insisting on further capitalization of the banks is to guard against potential soverign debt defaults and, in turn, to protect investors who hold soverign debt bonds through those banks. In other words, it's about financial panic, serving the 1% again, though if the banks were to collapse, it would indeed affect everyone: small and big businesses and those who work for them.

The big banks can no doubt find the capital by selling some of their assets or shares, but that might affect their balance sheet and tighten lending to their customers. The smaller banks won't have the same option and will probably have to look to governments to bail them out, a desperate move thus increasing the sovereign debt and adding even more pressure to the already deeply burdened taxpayer. It's difficult to say whether there is or will be a liquidity issue. But it's clearly a vicious circle. Add to all this the fact that the European Financial Stability Facility can only be jacked up with borrowed money - probably from China, whose economy itself is slowing down - and we have a recipe for continual disaster.

What I don't understand in this process is at a time when stimulating growth is vital why demanding further austerity measures from Greece and Italy help matters when the bond holders are already asking for premium interest rates on their sovereign debt, and why wouldn't they given that they've been asked to take a voluntary 50% haircut. Won't austerity paradoxically actually increase the amount or extend the term of sovereign debt if governments wish to keep functioning, and won't cutting jobs and slashing services create even more unemployment and thus erode the tax base and government revenues even further? Won't the GDP be further reduced?

All this is becoming a nasty habit, one the occupy movement clearly recognizes, for the real industrial economy and the ordinary citizen once again suffer for the sake of the investor class.

See too elsewhere on this blog: Fiscal Austerity: Does it Work?

1 comment:

  1. Pal Krugman's column says it all:The Path Not Taken: The abject failure of an economic doctrine