The Troika, the US Hedge Funds and the Diversion of Taxpayers' Money

A guest post by Stephan Lindner

Do you remember John Paulson? In 2007 he became famous for having the highest income of all hedge fund managers on Wall Street, because he bet against the US housing market. Not all of his deals were fair, to say it politely. Later the SEC investigated a deal called ABACUS 2007-AC1, for which Paulson told Goldman Sachs to create a CDO with bad subprime mortgages, so that he could bet against it. Goldman Sachs agreed 2010 to pay $550 million to settle with the SEC and a former vice president of Goldman Sachs, who was responsible for the deal inside of Goldman Sachs was found liable for fraud in front of a jury. With that single deal Paulson earned around $1 billion and never had to justify himself in front of a court. And now he tells the whole world, that he owns shares in two Greek banks, Piraeus Bank and Alpha bank. Reuters cites from a statement: ‘They have good management and we think the Greek economy is improving, which should benefit the banking sector.'


What does this management looks like? In Greece after the haircut the banks are more or less bankrupt and need to be recapitalized. Officially they are solvent thanks to the $50bn. they received from the troika, but most experts still estimate that the non-performing loans are still higher than the injected capital. Normally nobody would like to give capital to such banks. Here is the explanation the owner of Piraeus bank found for this situation: Reuters reported in summer 2012, that he used credit in his own bank to buy shares of his bank (read the full story here). In this New York Times article from June you can read even more of what the president of Piraeus bank did to make his bank grow during the crisis to become the biggest bank in Greece:


If you think you get into trouble if someone finds out about such business practices, you are wrong. Mr Salinas is still the President of Piraeus bank and the Greek Central Bank, which investigated all allegations, could find no evidence of wrongdoing. And they have the ideal informant: the president of the Greek central bank is a former vice president of Piraeus bank. So what happens to people who report about such practices in Greece? It isn’t pretty.

We might also ask how the troika did everything possible to make the buying shares of Greek banks as lucrative as possible? For each Euro someone invests in banks like Piraeus the troika pays an additional nine Euros, and if the share price aises to a certain level, the investor gets the right to buy this additional 90 per cent of shares, not for the then actual much higher price, but for the low price at which they made their first investment. Hurrah for the troika for making such lucrative deals with taxpayers’ money. Read the full explanation of the Paulson deal in todays blogpost of Yanis Varoufakis.

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Get a Life not just a Living Wage

I spent Saturday at a conference on the living wage organised by the regional TUC. It seems sad that you need to campaign for the right to earn enough money to live on but this is the reality of the living wage campaign. It was easy for me to agree with it since the Green party's policy is to raise the minimum wage to living wage of 60% of average earnings (currently around £8.10 per hour). The representatives from the Conservative and Labour parties present similarly supported and the living wage, although their parties do not have it as part of their national policy platform.

The idea that paying workers reasonably is good for everybody in the economy is neither new nor radical. It was the idea that enabled Ford's Detroit workers to buy the cars they were manufacturing, and forgetting this important lesson about capitalism is part of the explanation for the disastrous state of Detroit today.

My own presentation was focused on the living wage as a first step towards the end of wage slavery and needless to say I ranged rather more widely than the idea of bringing wages up to a liveable minimum. The beginning of my story was the way the Empire of Capitalism struck back at the end of the 1970s and the huge impact this had on the income dispersion. This is illustrated in the graphic taken from the work of Danny Dorling, which shows the share of total income going to the richest 1% of people between 1918 and 2005. The impact of trade-union activism and increased worker expectations is clear, as is the counter-effect of the Thatcherite ideology and attacks on union power.

My next graphic, based on ILO data, demonstrates clearly the importance of the Tina narrative in persuading workers not to ask for higher pay. It shows the clear indication of productivity increases on a global basis and the fact that the value generated by these workers working harder has been paid in profits rather than in wages. The argument around globalisation was used to persuade workers that they must compete with those in the lowest-paid economies in the world, and that asking for higher wages would destroy their own jobs. The inevitability of a race to the bottom when this ideology is played out is illustrated clearly in the graphic showing wage rates in different countries.

The great disparity of wages across EU countries which are part of the same single market is surely an issue that requires political debate. Why do we accept the very low pay offered to workers in central and eastern Europe? The deal we are offered is cheap goods rather than well-paid jobs, encouraging us to focus on our role as consumers rather than producers. The political economy underpinning this is not discussed but should surely be open for democratic debate.

The gains in wages illustrated in the earlier graphic were the result of solidarity across industries within a market. Globalisation undermined this but if we are to return to international solidarity in a globalised economy then surely a global minimum wage must be our ultimate demand, rather than a low wage, even if a living wage, subsidised by corporate welfare in the form of tax credits.

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How Rising House Prices Serve George's Friends in the City

There is a lot of controversy about the potential of the Help to Buy scheme to restart the housing bubble. I must say that I share this concern and am disturbed by the thought that Osborne may be deliberately reflating the value of the housing market to enable himself to portray the government as having tackled the problem of the deficit. To portray this policy as one of compassion for the homeless, and to encourage homeowners to celebrate rising house prices, as Cameron did on the Andrew Marr show yesterday, is disingenuous.

The PM  may sanguinely say people can afford these high-proportion mortgages but how much do interest rates need to rise until this is no longer the case? Cameron used the example of two people earning £20,000 or £25,000 per year and an average house price of £200,000. Leaving aside the 5% deposit to make the maths simple, the BBC mortgage calculator indicates that if interest rates rise to only 3% this couple will now be paying nearly £1000 a month to fund their mortgage.

Clearly the Tories think that offering young people homes financed through large amounts of debt will be politically popular, but the historic pattern in Britain of high and rising house prices and high rates of home ownership financed through a mortgage actually serves the financial sector much more than it serves British citizens. The explanation is simple: if your house costs twice as much you pay the bank twice as much in interest.

Useful data from the land registry indicates that the house price index has risen to more than 250 compared with January 1995 (the graphic indicates the ratio of prices to earnings during this period). At its peak before the crash the index reached nearly 300, which means that prices had undergone a threefold increase net of price inflation. As I teach my students, because of the compounding nature of interest, you are likely to pay back something like double the principal when you take out a loan over 25 years. This means that when house prices double, twice as much is paid back to financial corporations in interest. No wonder that those with friends in the City encourage us to celebrate house price rises.

House price inflation serves financiers and those who welcome the increasing value of their home as though it were an asset are missing the point. Those who still have mortgages are simply celebrating an increase in their housing costs; if their house is a home then they have no greater value from it even if its financial value has doubled. As it turns out in Britain the house is not a machine for living in, as Le Corbusier once suggested, but rather a machine for increasing bank profits.

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How Public is Public Money?

Of the many deceitful slogans which the Conservatives used when they came to power the 'bonfire of the quangos' has perhaps had the least justification in practice. A whole range of boards and partnerships are creeping back into existence, responsible for public money, but with no clear sense of how the public view will be represented or how they will be accountable to the public.

My own particular source of concern is the Local Enterprise Partnership. These were first mooted some 18 months ago, at which point they had no clearly defined powers and there was apparently no funding to accompany the establishment of such bodies. I remember thinking how unlikely it was that anybody would take on the challenge of local economic regeneration without any financial support. How foolish I was, and how cunning others were, because over time large amounts of public money have been promised to these bodies that those with foresight or perhaps inside information made their own.

The GLEPs are supposed to represent the country's 'natural economic areas', although there is no theoretical consideration about how such economic areas might be defined. The work that the LEPs might undertake is limited by the narrow and pro-growth conceptualisation of the problem we face according to the government rubric:

'Our economy is currently too dependent on a narrow range of industry sectors. We need an economy driven by private sector growth, with business opportunities evenly balanced across the country and between industries. We also need to reduce burdens for businesses, particularly in terms of lower tax levels, planning and other administrative burdens.'

While this is the rhetoric, the reality is that those who have always had their snouts in the trough of government subsidy to business have created structures to funnel public money in their direction, resulting in a map of meaningless and unplanned areas on the government website.

In Gloucestershire our LEP is called G1st LEP, G1st being an unsuccessful regional development company that has already received large amounts of money from the county but with no clear evidence of its having created jobs or brought prosperity. But it cleverly included the letters LEP in its name, built a new website, and was accepted by the Business Secretary as being the regeneration body for the whole of our county. At this stage, remember, there was no indication that money was coming and so it had no serious competitors.

But money has certainly followed and with increasing speed since the publication of the Heseltine report No Stone Unturned--In Pursuit of Growth, a report which has only proved that under those stones lurk a regiment of people who have made a career of parroting the same pro-growth, pro-business catechism without the need for a track-record of success. All money to be invested in regeneration by central government, or £2 billion of it in 2015-16, will now be funneled through these bodies. Yet there has been no opportunity for the public to become involved in discussions about how they might like to see regeneration happen, whether economic growth is in fact beneficial for local communities, whether we might focus on resilience and sustainability instead, or whether bioregions might be better natural economic areas than the curious regions illustrated in the map.

In Stroud we are particularly angry that money which was originally our money is now to be sent to the LEP, to be controlled by people with no democratic authority over this money, and we have to make a case to have some of it spent in our area. When the government cut our central funding grant they told us that in future we would receive money through a New Homes Bonus, already requiring us to build new houses in order to be properly funded. But now 40% of this New Homes Bonus will go to the LEP directly and we will not see any of it back unless we subscribe to the sort of view of economic development that this unaccountable body dictates. There is also talk of funding for further education institutions similarly passing through the LEP before being received by them.

Martin Whiteside, one of our district councillors here in Stroud, has referred to the birth of the GLEP as the immaculate reconception of the quango and, while we feel the parentage of our county body is particularly unclear, the accountability of these bodies that will use public money according to their own political priorities and without proper accountability should be questioned everywhere that LEPs lurk.

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What Price Democracy?

The politics of austerity has many political objectives but an important one you learn about quickly as a local councillor is its use as a mantra to incapacitate you. Anything you might want to do cannot be done, you are told, because we are living in a time of austerity and nothing can be afforded. With many Tory councillors in Stroud this appears to extend to democracy, which itself must be undermined and diminished because it is just too expensive.

In Stroud we are presently being subjected to a boundary review, triggered because one of our wards had slightly more than the 10% above the average number of voters per representative that is considered acceptable. So the Local Government Boundary Commission for England has fallen on our heads to undertake a review (curiously there is no problem with funding their work in spite of the austerity we hear of daily). While you might expect them to begin their work with objectives such as improving local democracy, enhancing citizen participation, or making representatives more accountable, in fact they have one aim: to reduce the number of councillors.

This caused me to question how well we are represented compared to our European neighbours: how much do we, as the home of democracy and children of the mother of parliaments, invest in our elected representatives? You will be shocked to read the comparisons in a report carried out recently by academics at Birmingham University. In France there are 118 citizens per elected member, which rises to around 600 in Italy and Spain, and 1075 in Greence. In the UK it is 2603: the largest number of any EU country. We are the least well represented of all, and yet the politics of austerity is being used to reduce our representation even further.

Anecdotally I have also received a lot of evidence about the disastrous levels of connection between citizens and their councils in some of the vast new unitary authorities that have been introduced under the Tory aegis. In both Wiltshire and Cornwall people report that they have no idea who to contact about local services and that the geographical areas they are supposed to identify with make no sense to them. The mantra of austerity is matched by the chorus of complaints about the quality of politicians, yet how can local politicians perform well when the areas they represent make no sense and are too vast to be comprehended?

I have reached a point of fury in debates over the cost of democracy when I have to bite my tongue to stop myself pointing out that Mussolini may have appeared cheap but the less-than-immediate costs were rather higher. The fact that this thought even occurs suggests the desperate state of our democracy and the way the politics of austerity is being used to undermine it further.
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Relieved of Debt

When the decision finally came that the Green Party would be adopting a policy that cuts the link between money creation and the parallel creation of debts it came as a huge relief. Following more than a decade of pondering, discussing, educating and campaigning the party's activists were convinced that they could believe in the possiblity of public credit creation to end the centuries of capitalist privatised money and replace it with money produced for the common good. The motion was passed on Sunday at the annual conference in Brighton by 110 votes to 90.

Key to the change of heart of the Green Party have been two members of Kent Green Party, both of whom might be described as 'outraged of Tonbridge'. Brian Leslie has been a campaigner for monetary reform all his life and he recently recruited to the cause Andrew Waldie, who is a tall, softly-spoken accountant with a Scottish accent - exactly the sort of person you want to be on your side in a debate about money. From this most unlikely centre of radicalism has come what Andrew called the final part of the trinity of radical economics policies, taking its place alongside Land Value Tax and Citizens Income on an economic platform that has the potential to liberate working people from the oppression of wage slavery.

I am reproducing Andrew Waldie's proposal speech in full here: read and rejoice!

'This motion strikes a blow at the heart of financial capitalism by removing from banks their power to create money - and restoring the supply of our national currency to democratic and public control. Through their lending, banks create 97% of the money we use in the form of credit.  This gives them enormous power to direct the economy and shape our society - without any form of democratic accountability.

'Our banking system is also unstable.  History shows that debt-fuelled booms and speculative bubbles inevitably turn to bust.  Governments bail out banks that have become “too big to fail” – and the price of these bail outs are savage cuts in public services. The burden of servicing the debt on which our money is based also increases inequality and drives unsustainable growth.  These are issues which are of fundamental concern to the Green Party.

'Simply bringing the banking system under "Social Control" is not enough - more radical reform is required.  Leading green economists have advocated reform based on the principles set out in this motion. The motion avoids the fundamental conflict of interest that has corrupted the current banking system.  It separates the power to create money from the power to decide how that money is first used.  A National Monetary Authority – NMA - appointed by Parliament, would manage the supply of national currency.  Its decisions would be protected by law from influence by financial or other special interests.

'Elected governments would decide how currency created by the NMA is first spent.  This currency would then circulate freely at all levels of society.  Saving and borrowing would continue.  Local currencies could circulate alongside the national currency.  The major benefit of the system we propose is that people would no longer need to go into debt to keep money circulating in the economy.

'Over a transition period of 20 years, the NMA would convert the stock of debt-based money by issuing the same amount of national currency to the Government as additional revenue.  The value from transferring the endowment of our currency to public control has been estimated at £50 billion per year – that’s enough to fund the construction of 300,000 new homes – for each year of the transition period.

'Restoring the supply of our currency to public control would deliver a huge prize that could finance the transformation of our society.  Today, we have the opportunity to commit our party to seizing this prize by passing this motion.'

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Why We Should Not Privatise Royal Mail

I spend a lot of time travelling by train. I have experienced first-hand the way the railways have changed through my lifetime from being a public service to being a private business.  This has brought many subtle changes but it has also brought some significant reductions in service which are relevant to the decision about whether to privatise Royal Mail. Here I consider three ways in which we, the service users, will lose out by, analogy with the railway: through the transfer of costs to the individual; increasing stress for the individual; and the gaming the market.

As an individual traveller we are unsupported and receive barely any personal service from the skeleton staff employed by the private rail companies. They used to sell us tickets, check our tickets, and give us information about rail services. Now we do these things ourselves. As they make their pricing structure more complicated we struggle to keep up and reduce our costs. As a Professor of Economics I have enough money not to worry too much about this but I am obviously mean as well as principled and I try to hold my local company First Great Western to their advertised pledge that they will help me find the cheapest ticket. I also ought to have the mental agility to split my ticket and use cards and discounts to reduce my travelling costs but it astonishes me how much time and mental energy this takes, making me physically sick when juggling so many variables.

So how might this transfer of costs work in the postal service? The process has already started with parcel deliveries that are not delivered but left at a distant sorting office, cost savings having led to the centralisation of services in fewer locations. This may be efficient for Parcelforce but it is deeply inefficient for the individual who is waiting for a package especially if, like me, they don't own a car, and the parcel is heavy. In future we can expect to see a more complex pricing structure with the universal service, let's say around £1 per letter, so long as you are prepared to have your letter carried by donkey and arriving after a long delay. The services that make money, the services used by bizniz, will be efficient, rapid and competitively priced; the services used by you and me will become residualised.

The ticket barriers are a classic example of the attack on jobs that privatisation always brings and the way that stress and effort are transferred to the 'customer' and away form the corporation providing the service. Because I travel on railways across Europe I am sensitive to how offensive these barriers are compared with the personal service of a ticket collector. Such an individual also implies that there is some degree of management and control of the rail system as a whole and, in most European countries, rail staff are proud of the national service they work for. What a contrast to the precarious, deskilled workers found throughout our rail system and who our postal workers will soon resemble.

One of the conditions for a free market to work efficiently is that there needs to be what economists call 'perfect knowledge'. The farce of this in the case of rail travel is plain to see: most rail staff themselves are unaware of how to travel for minimum cost and what the validity and availability of the various tickets is. In the case of Royal Mail the removal of the cost from the face of stamps was a classic example of undermining the passengers' knowledge. I bought a huge batch of second-class stamps before the latest exorbitant price increase and was recently horrified to find that a second-class stamp now costs 50p. Hidden charges and subtle price changes will no doubt become a feature of the future postal service, causing us wasted hours and vertigo unless we give in and allow ourselves to be exploited.

Oyster is part of the Transport for London system and so because of its ownership structure does not return value to shareholders. Yet even there money is taken from you without your knowledge. Sometimes the machines fail to register you touching out and you are charged the penalty fare. It is your responsibility, I am told, to check a print-out of your use every evening to ensure that you have not been over-charged. If you notice that something is amiss it becomes your responsibility to stand in a queue and request that it is resolved. Time and stress passing to the passenger again.

I travelled to Brighton this morning for Green Party conference. I travelled in what is defined as 'peak time', a self-defined period that keeps extending with no apparent relationships to the way we travel or when we work. It was immediately apparent that the Brighton-to-London peak works in that direction only. My evidence is that the train I was travelling on was nearly empty and of the dozen ticket barriers only three were open in my direction. People travel from Brighton to London to work but very few travel in the reverse direction so there was no justification for my having to pay £20 extra and being prohibited from using my Network Card.

This is an example of gaming the market that is inevitable when there is a natural monopoly and profit-seeking executives pit their wits against under-resourced regulators. How might such an impulse express itself in the case of the postal service? The most important target of gaming is sure to be the universal service which, like the concept of 'peak travel time', will be used by politicians to limit outright profiteering. As soon as Royal Mail is free of the constraint to serve the public interest the finest minds will be turned to stretching and undermining the meaning of a 'universal service' whether by reducing frequency or geographical extent. Perhaps old ladies in the Hebrides will be required to walk a mile to a neighbour's house to collect letters, or will be offered a weekly rather than daily 'universal service'. Or perhaps clever young men will find a way to redefine what daily means. You get the idea, and you also see that I am not cut out for that sort of game.

I have grown tired of discussing whether there is any economic theory to support the privatisation proposals of successive governments. In the case of natural monopolies like the Internet and sewers there is no reason why we might expect efficiency rather than profiteering from the companies that run them. The same applies to the railways and the post: services fundamental to a functioning society are committed to the tender mercies of profit-seeking executives. We will be conned and over-charged and the value we lose will pass to the same shareholders who gave us the financial crisis. We would be made to vote for this, and madder still that people we voted for are imposing it on us.
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