Friday 20 July 2012

We Couldn't Have Known! - Myths of the Crisis Part I: The World Was Caught By Surprise

The purpose of this series of posts is to debunk some of the myths of the crisis that have been fed to us by media and governments. The first such myth is the idea that the crisis was unexpected and caught the world by surprise. We do not distinguish here between the euro crisis and the financial crisis, which, as we will argue in the next post, form part of the same overarching crisis. The purpose of this myth is to remove any kind of responsibility from policy-makers and bankers – no one is really to blame, the crisis just happened, like that, and no one could have known. Right.

Before discussing the specificities of the contemporary crisis, let us explore how the thing that the crisis is all about was created in the first place, because this will give us some clues why crises in the capitalist system are endemic and inevitable. Money is created by the central bank, which in our case is the ECB, and which in the American case is the Federal Reserve. States go to the central bank, and hand the bank a piece of the state that’s called a government bond. If the state wants to create, let’s say, €1 billion, it has to give the central bank government bonds worth €1 billion. The state will then go on to deposit those €1 billion into a bank account with one of the numerous commercial banks that exist. This is how money is created; it is now possible to take out loans from those commercial banks, making the money available to the general public. When a state receives money from the central bank in exchange for government bonds, the state promised to pay back that amount – in other words, all existing money is debt. And not only do states have to pay back that money, but they also have to pay interest, which is why the amount that needs to be paid back is always larger than the amount of money in existence. States always have to take out new loans from the central bank to pay their interest, which constantly increases the existing money supply, and which is commonly referred to as inflation: an increase in the money supply causes money to be devalued. The existing money in circulation is thus always slightly less than the current debt level, causing an exponential increase in money supply as well as in the debt level. A default (i.e. someone stops paying the money back) is therefore at some point inevitable. The subprime was about ‘toxic’ loans which were sold from one bank to the next, causing a systemic toxicity build-up – once house owners were unable to service their loans, some banks went bankrupt, while others were saved by national governments. In the euro crisis states are unable to service their loans, potentially leading to the same development. All this is indeed well known, and there were numerous economists who predicted these developments (e.g. Bernd Senf, Heiner Flassbeck, the documentary Maxed Out, as well as mainstream economists like Dean Baker, Fred Harrison, Kurt Richebächer… This list is very long).

Eurozone: absolute debt level in million euros

I recently came across a paper by Gernot Köhler called Global Keynesianism and Beyond from 1999. In that paper, there is a section titled ‘Controlling Global Financial Capital’, where Köhler calls for the introduction of a “frequently quoted proposal” known at the “‘Tobin tax’, namely, a tax on international financial capital transactions.” This proposal is now being discussed, but it is undeniable that it was well-known that an uncontrolled banking system is extremely dangerous. It is all the more tragic that this kind of system has brought unemployment and poverty on tens of thousands of people in Southern Europe.

The money system is the systemic root of the crisis, and the introduction of a financial transaction tax is an essential step towards controlling the financial ‘industry’. Everybody knew that the system we have makes crises inevitable, which is why the idea that the crisis caught everyone by surprise is a myth. 

Harald Köpping

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