Taking stock of the Global and Euro Crisis

A Spanish journalist interviewed me on the Spanish language edition of The Global Minotaur. Her questions, however, gave me an opportunity to look retrospectively at the Global Crisis, its Eurozone offshoot and, of course, the worst aspect of the latter, the Greek calamity. In the process, I refer to what I call the ‘death of social democracy’, and its causes, the role of ethics and morality in all this, why Spain is becoming an Iberian Greece even though its public debt and deficit were less than those of Germany in 2008 etc. Read on:

What are the origins of your Global Minotaur theory?

It evolved over many years, beginning with an attempt to explain the manner in which America managed to do something remarkable: to be the first ‘Empire’ that extends its authority and increases its hegemony on the basis of ballooning deficits. The analysis began when, together with friend and colleague Joseph Halevi, we tried to elucidate the global surplus recycling mechanism that had taken over, without warning or international agreement, from the Bretton Woods system. And since the new mechanism, upon which global capitalism was now resting, was based on an incessant flow of tribute (in the form of huge capital inflows) from the Rest of the World to the hegemonic US, the idea came to me that we were living in the age of a new Global Minotaur, with the US deficits in the role of the beast and the rest of the world in the role of the Athenians who were feeding the beast in return for trade, growth and stability.

You claim that it all began in 1971, when USA decided increased its deficits and became a kind of Europe’s vacuum cleaner. Why didn’t anyone stop this action? Why did nobody realise that this system could break down?

There was no one with the power to stop it who also had an interest in stopping it. German and Japanese industrial capital were only too happy to see the demand for their manufactured goods burgeon. Governments in the surplus countries of Europe and Asia benefitted from the growth of their local multinationals. Banks and states in the deficit areas of Europe (from Greece to Spain and, indeed, to Ireland) saw a major influx of capital from Wall Street and the City of London, money that was seeking higher returns in hitherto under-financialised regions. As the Global Minotaur went from strength to strength, the potential instability that it was creating seemed, especially to those who were benefitting immensely from financialisation, like a Great Moderation; an era of permanently zero risk. This is what was so interesting and destructive about the Global Minotaur’s reign: the greater the instability that it was cultivating behind the scenes the more convinced the elites were becoming that a crisis had become impossible.

Your theory resembles Griftopia (Matt Taibbi). It sounds like we woke to discover that we were robbed. Was it a system failure or an organised robbery?

There is no doubt that financiers went well over the borderline into the realm of corruption and graft. And that politicians aided and abetted them. But, all in all, I think that our experiences have the hallmarks of a major tragedy in which, just like in Sophocles and Shakespeare, the protagonists are not necessarily bad men and women. Each did what he or she thought was right, or necessary, at the moment when they are doing it. (We must never underestimate our human capacity to find excuses for what we do.) It is only when the catastrophe hit that they realised they were embroiled in a dynamic that could only lead to disaster. And even when they did recognise it, every attempt to escape the tragedy only immersed them further in it. Perhaps the worst crimes were committed afterwards, while trying to save themselves by pilling up the costs of these ‘bailouts’ on the shoulders of the people they had been defrauding for decades.

In his book, we can notice the economists’ incompetence (Why didn’t they notice the Crisis?, asked the Queen of England? The perversity. The naked greed. Does money fuel Evil?

It was not mere incompetence. It was much, much worse than that. At the time the Global Minotaur was taking over world capitalism, some time in the early to mid 1970s, the economics profession mirrored this development by lobotomising itself; by ceasing to ask pertinent questions and by turning instead to pristine mathematical models which, by design, left no analytical room for real life phenomena like involuntary unemployment, financial sector implosions, recessions caused by ineffective demand. Economists’ careers became wholly dependent on whether they could ‘close’ (that is ‘solve’) their mathematical models. But to do this, they had to impose upon their models assumptions which ensured that these models, or theories, had nothing whatsoever to do with really existing capitalism. In this sense, the less the economists’ models had to say about capitalism the greater their academic and professional career. Furthermore, since their mathematical models contained no systematic probability of a crisis, they were perfectly suited to the needs of financiers who profited handsomely from economic models which ‘valued’ their cherished financial derivatives (thus enhancing their appeal to investors) as if no crisis, no credit crunch, was ever possible. In short, to answer you question directly, economists were coopted by the Global Minotaur, mostly unwittingly. They became, as a profession, and without realising it, the beast’s loyal handmaidens.

You present an interesting theory about power gone: first, self-control is prevalent, second, success comes, third, naked greed appears, and then self-control is lost. How can we escape from this circle?

The only way that almost infinite power can be forced to exercise restraint is if it is forced to submit to democratic scrutiny. During the era of Bretton Woods, which I refer to as the Global Plan, the powers that be in Washington felt that they would rule the world without being accountable to it. Then, during the Global Minotaur era, it was the turn of the financial sector to feel a similar sense of unlimited power. We now live with the results. Democratic control of power is sine qua non for civilised societies.

You write a lot of Keynes. You say that Keynes was an imaginative and creative economist. It seems like we lost all this imagination in recent decades. Maybe we should recover it.

And Marx. And Robinson, Kalecki, Sweezy, Galbraith, even Hayek. As I explained above, the economics profession jettisoned its best thinkers. Economics students and politicians alike were trained by textbooks that purveyed a form of mathematised idiocy, rendering a whole generation economically illiterate and socially disastrous.

You write that this Crisis isn’t an economical crisis, but a political and social crisis. Is it not a ‘moral crisis’ too?

What I say is that it is not a debt crisis. That debt is merely a symptom of a deeper, systemic crisis which, like all serious crises, has many different facets. It manifests itself in the realm of politics (e.g. the Nazis in Greek parliament), of finance (e.g. the banking debacle), in moral conduct (e.g. the sight of social democratic governments attacking the weaker members of society on behalf of bankers) etc.

The Global Minotaur thought that the market can survive alone, without rules. Now we realise that isn’t so. But, is it necessary to begin with a planned economy? Is it the ‘planned economy’ the solution?

One of the great fallacies of our era is that an economy can exist without a state; without a degree of planning. Take the US. It is, supposedly, the least statist, the free-est market economy on the planet. And yet it is very much a planned economy. Without the military-industrial complex on the one hand and the whole gamut of federal planning authorities and institutions on the other hand, America’s economy would collapse tomorrow. More broadly, capitalism had its golden age after the war because Washington planned meticulously the world capitalist economy. So, the question is not whether there should be planning. The question is what kind of plan is implemented, who by, for whose benefit and with what effect. Currently, the banking sector is fully planned and relies entirely on social transfers and central bank operations. Planning is, therefore, used to prop up banks and to keep bankers in profit. What we need is some proper planning of labour markets so that workers’ labour is re-valued and power shifts from what I call today’s Bankruptocracy to society at large.

You worked with the president Papandreou before the ‘crash’. Did nobody see that the crisis coming? Did nobody make a comment about it?

No, they did not see and, moreover, they did not want to hear of it. Social democrats all over Europe, indeed the world, had come to the catastrophic conclusion that capitalism had been tamed, that crises were a thing of the past, and that society’s interests were best served if the financial sector’s wizardry was never questioned. This is, if you want, the main reason why this Crisis has killed of European social democracy.

What do you think about the rise of the extreme right (Amanecer Dorado in Spain too)? Where do you think is the limit? Are we going to have a repeat of Germany in the thirties?

It is the inevitable repercussion of a chain reaction that begins with a Wall Street collapse, a massive real economy recession, a political system that tries to shift the crisis’ costs from the shoulders of those who caused it to the shoulders of the workers, the weak and the disenfranchised, a society that loses its faith in the democratic system and, finally, a serpent’s egg that begins to hatch, spawning little Nazi snakes everywhere.

What is it the solution for Greece? I heard that people are finding it hard to heat themselves in winter

Depression, poverty and deprivation abound. The only solution for Greece is to have a government that says NO to the inane agreements that Europe is forcing it to sign. Simply to say ‘no’ and sit it out while the rest of our European leaders fall over each other trying to find an alternative, a real, solution in place of the current strategy of waterboarding a whole nation.

In Athens it has been a lot of demos and protests, but it seems nothing changes. Why doesn’t civil actions work? Demos and strikes don’t change anything. Is it necessary it should be more violent?

No, certainly not. Violence breeds violence and the only beneficiaries are the extreme right, the segments of the police that want to terrorise society, etc. What we need is European-wide protests, a realisation in Spain, in Italy but also in Germany and the Netherlands that “we are all Greek now”. That even if it does not look and feel like it yet, it is only a matter of time before Europeans north and south, west and east come to see that they have all become Greek.

There are people who say that the citizens have a responsibility in order to get into debt or not. Is it a perversion?

It is a half truth that becomes a perversion when repeated ad nauseum. Every loan requires, like tango, two parties. It is the responsibility of the debtor but equally of the lender to ensure that the loan is viable. And when it ceases to be viable, it is absurd, cruel and stupid to imagine that the responsibility is just that of the debtor’s. Especially when most loans originated during an era of predatory lending, of banks shoving loans down the throats of households and firms.

What are your solution for the crisis, and why does nobody adopt it?

Together with Stuart Holland, we have been proposing for three years now what we call a Modest Proposal for the Resolution of the Euro Crisis. Its great merit is that it would attack the crisis’ three facets simultaneously (debt, banking losses and the recession) without the need for Treaty changes, for Germany to be guaranteeing the loans of the Periphery, or for authoritarian transfers of sovereignty from national governments to the centre of Europe. Why have rational solutions like this not been adopted? I think it is a combination of two reasons that explains it: First, surplus countries need to undergo a gestalt shift; a change of midset that allows them to see that the Crisis is not due to the Greeks and the Spaniards having borrowed too much (that these debts are a symptom, not a cause of the problem). Secondly, surplus countries refuse to adopt policy changes that would make it impossible for them to get out of the Eurozone. While they do not want to get out of it, at the same time they do not want to give up the option of doing so because giving it up would diminish their bargaining power within Europe. And so the Crisis goes from strength to strength.

By the way, a recent measure has been the banking union. What do you think about that?

It would be great! Unfortunately, Europe is adopting the ‘language’ of a banking union in order to deny its substance. The point of the banking union ought to be to recapitalise directly the banks that have a chance of being salvaged (i.e. to give them funds from the ESM directly without them being counted as part of the national debt). Germany has insisted that this will not happen. So, the banking union has become an academic exercise that allows Europe to speak the words ‘banking’ and ‘union’ without effecting a genuine banking union. Another smokescreen, in other words, for covering up Europe’s organised idiocy.

You criticise Germany. In Spain Germany is criticised too. Could it cause a xenophobia’s feeling against German people?

It already has. And it is a tragedy because the majority of German people are suffering too as a result of our governments’ ill-conceived policies.

Do you think that Germany will change its economic policy?

No, I am afraid not.

In the case of Spain, we didn’t have a very high deficit in 2008, but then everything crashed. What happened?

All Eurozone countries of the Periphery shared exactly the same experience: huge capital flows rushed into our countries creating gigantic bubbles. In Greece, they inflated public debt as the government was borrowing on behalf of developers, who then went on to build expensive motorways, bridges, metro system extensions etc. In Spain and Ireland, the capital flowed directly into the banks which lent it to the same type of developers to build, primarily, expensive houses. When the financial sector collapsed in 2008, the capital that had flooded our countries either burnt down or escaped back to Frankfurt, London and New York. Thus, the bubbles burst. In Greece, the state (which had taken the debt onto its books directly) went bankrupt. In Ireland and Spain it was the developers that went bust first, then the banks that had lent them and, lastly, the governments which had to salvage the banks. So, in the end, there is no difference between countries like Greece and Spain, even though Spain had a very low level of public debt just before the crisis began (in comparison to Greece that had a very high public debt to begin with). What matters is total debt. The sum of private and public debt. When total debt is large and funded by inflows from the financial centres, then a crises in the financial centres will give rise to a crash and a rapid rise in public debt in the Periphery. And when Europe tries to pretend that these debts can be repaid by means of large loans, given on condition of austerity that shrinks the national income from which old and new loans must be repaid, then a catastrophe befalls us all.

Do you think that Spain could be a new ‘Greece’?

It already is. Unfortunately.

We have a right-wing party in the Spanish government, Partido Popular. It proposes austerity measures. The problem is that social democracy doesn’t offer a serious alternative. The citizens don’t see social democracy as a solution.

As I indicated above and elsewhere, social democracy is dead. The Crisis killed it off because, before the Crisis, social democrats (like PSOE, PASOK, Britain’s Labour Party) had abandoned their traditional agenda of taxing industrial capital in order to fund the welfare state and, instead, they had adopted the new strategy of siding with financial capital, allowing financial capital to do as it pleases, in the hope that financial capital would continue to earn trillions, of which the social demorats would get a small portion from which to fund the welfare state. In this sense, social democratic parties had become, perhaps without even noticing, the lap dogs of the bankers. When, in 2008, the bankers went bust, the social democrats were cornered into consenting to the funding of the bankers using taxpayer-money and then passing the cost of these bank bailouts to labour and to the weaker members of society. It was inevitable that, soon after, society would turn against social democracy. This backlash has signalled social democracy’s death.

What’s Syriza doing in Greece? Is the party getting somehwere?

Syriza is struggling to mature. To turn itself from a party of protest, commanding 4% of the vote, to a party of government. I have to say I am quite impressed by its leadership’s steep learning curve. At the same time, Syriza is particularly worried that, by the time government falls in its lap, the Greek state will have lost all of its degrees of freedom, leaving Syriza in government but not in power.

In which classic tragedy are we right now?

My worst fear is that this may not even be a classic tragedy. Classic tragedies end, at some point, with catharsis. Calamities, on the other hand, do not end in catharsis. Europe is currently engineering a calamity with catharsis nowhere to be seen.

Well, to the end. Despite the tragedy, do we have reasons to be optimistic about the future?

As a friend of mine used to say, we have a moral duty to harbour infinite hope and plentiful opinions (about everything). I try to remain true to his dictum.