By John C. Dyer, UK Correspondent
In the Eurozone, the perverse incentive of bailouts in an unregulated financial market have resulted in financial markets that regulate governments and threaten to loot the Eurozone of its assets to boot.
10 Nov 2011. London. James Murdoch, recalled to Parliament to explain discrepancies between his testimony and that of his lawyer Thomas Crone and News of the World editor Colin Myler, insisted on his innocence and accused Crone and Myler of misleading the committee. The committee grilled Murdoch for more than two and one half hours, occupying almost all the attention of BBC.
But another major headline surfaced the same day. Its significance is at least as great.
EU Growth Forecast Downgraded
The European Union Commission downgraded its growth forecast for Europe from 1.8% to .5%. The Commission warned of imminent recession. In a speech here at home Prime Minister David Cameron warned of similar dire consequences for the UK.
But neither the Commission, nor Prime Minister Cameron, nor the BBC questioned the Eurozone's current policy for dealing with the crisis. Their take appears to be that despite the imminence of the risk, European leaders dither in the creation of a “big bazooka” bailout fund and the imposition of austerity measures.
Are the measures themselves the “risk?”
I ask, along with Paul Krugman and others, whether the risk isn't "because" of the measures they advocate.
I ask whether we have paid close enough attention to the (possibly) unintended consequences that have flowed from the process.
First, the Eurozone, the G20, the IMF, and UK's leadership have created a perverse incentive - one which allows private financiers to extort 1) further bailouts and greater sovereign debt to be bailed out (through ever higher interest rates) and 2) the looting of public assets.
Second, these forces have created a perverse mechanism for regime change and centralization diametrically the opposite of the desires of the electorate the democratically elected regimes represented.
Third, instead of delivering prosperity and return to growth, growth and investment have basically flat lined in the UK, the USA, and the Eurozone. Recession is imminent in Europe and not off the table in the US. Is this really any surprise? The money to buy has diminished. The confidence to buy has crashed. And why should business, especially business outside these economies, invest in them if their own leaders will not?
Since the bailouts of 2007, the numerous attempts by the leaders of European governments to please the markets by underwriting government debt have created a perverse incentive to the financial sector to use credit rating downgrades, increased interest rates, and the consequent increases in debt beyond the repayable to extort 1) ever larger bailouts and 2) a centralized European fiscal policy sycophantic in its regard for market mood.
A de facto - whether or not intended - mechanism is now well formed. Interest rates rise, credit ratings are downgraded by private rating firms, and sovereign debt rises as a proportion of Gross Domestic Income. Press releases and analyses fly, interpreting these dynamics to require ever increasing bailout funds, commitments to austerity, and the centralization of power. These taken together become the only options to save the European (and indeed the world) economy.
Things are still going that way despite 4 years of failure.
The UK, Ireland, Portugal, Spain, Greece, Italy, one after the other, saw regime change as a direct consequence of this perverse combination. Only Iceland has thus far held out. As I write, France is now being subjected to the same mechanism.
Sarcozy quickly complied, delivering up more austerity cuts. While the French bailout fund has not yet risen to meet the full desire of the markets, it has risen significantly, and the leadership uniformly and publicly affirms a need to do so, although the leaders squabble amongst themselves over how. The morning of the announcement of the EU’s downgrade in growth forecast no one in the government or the media questioned the mechanism. They were, instead, questioning why the political leadership dithers and doesn't immediately comply with what the markets want.
In fact, the result has not been the promised stability and economic growth. The result has been the looting of public assets, the degrading of the living standards of the average man, the creation of government by market mood as interpreted by the oligarchs of the anonymous “markets,” and the centralization of power in a Eurozone dancing to the tune of “the markets.”
The tail is wagging the dog.
Deregulation of finance has not been corrected. Finance instead regulates government. Entrepreneurs loot the public of its assets. The people suffer. The economy isn't getting better. The West is being held hostage to the imposition of a new socio-economic order imposed by unelected oligarchs of the market.
It is time for governments to return to their proper role as regulator of the market rather than remain as its servant. Governments need to call a halt to the perverse mechanism of ever increasing interest rates by placing controls on interest rates.
Governments need to eliminate the perverse incentive created by the assurance of bailouts, which includes governments considering substituting controlled defaults (with safeguards for pension funds) for the golden lure of bailouts. Governments need to instead use their resources to invest the substantial public funds at their disposal into reinvigorating their economies, while protecting national assets to the extent possible.
If the Eurozone does not change course in this way it will eventually find itself, like the business victim of a loan shark, looted of its assets, utterly bankrupt and unable to rebuild.