Yves here. I’ve reframed this recap of a talk by Yanis Varoufakis at NYU as a challenge to neoliberalism, not a challenge to economics, since its theme is the tension between modern economics (and indeed many forms of capitalism) and democracy.
There are some points he made that he made that I quibble with. He says he was shocked when he learned, early in his negotiations with the Wolfgang Schauble, that his counterparts took the position that the will of the Greek people counted for very little. I know some readers may take umbrage, but this was a fundamental failure on behalf of the Syriza side, not just Varoufakis, of what they were up against. In fact, the Eurozone treaties that Greece has signed had the government explicitly ceding certain aspects of national sovereignity to the Eurozone. In addition, as we pointed out at the time, the ECB had the power to bring the Greek economy to its knees by cutting off liquidity support to the Greek banks, and if anything, was predisposed to do so. From the ECB’s perspective, it had already stretched the rules of its supposedly temporary liquidity facilities to the breaking point.
Mind you, I’m not saying the Trokia position was right or sound. Varoufakis clearly had the better economic argument. But he didn’t begin to have the runway to persuade his opponents, and he thought the threat of a Grexit gave him far more bargaining leverage than he had. But Varoufakis’ past writings showed he was firmly convinced that this path would do Greece great harm, and Syriza didn’t have public support for that course of action either. Greece did have some bargaining chips, in that the Eurocrats were keen to have Greece improve tax collections and the operations of government generally, but it was clear given how the negotiations were framed that the two sides would remain at loggerheads, eventually giving the Troika what it though was an adequate excuse to use brute force.
A second point Varoufakis made where I beg to differ is, as reported by Lynn Parramore, “It is the brute force of the state that ensures compliance with the rules of capitalism.” In fact, it is the hidden coercion of the market that forces compliance, which is why neoliberals fetishize markets. A major focus of the Robert Heilbroner book, Behind the Veil of Economics, is the contrast between the source of discipline under feudalism versus under capitalism. Heilbroner argues it was the bailiff and the lash, that lord would incarcerate and beat serf who didn’t pull their weight. But the lord had obligations to his serfs too, so this relationship was not as one-sided as it might seem. By contrast, Heilbroner argues that the power structure under capitalism is far less obvious:
This negative form of power contrasts sharply with with that of the privileged elites in precapitalist social formations. In these imperial kingdoms or feudal holdings, disciplinary power is exercised by the direct use or display of coercive power. The social power of capital is of a different kind….The capitalist may deny others access to his resources, but he may not force them to work with him. Clearly, such power requires circumstances that make the withholding of access of critical consequence. These circumstances can only arise if the general populace is unable to secure a living unless it can gain access to privately owned resources or wealth…
The organization of production is generally regarded as a wholly “economic” activity, ignoring the political function served by the wage-labor relationships in lieu of baliffs and senechals. In a like fashion, the discharge of political authority is regarded as essentially separable from the operation of the economic realm, ignoring the provision of the legal, military, and material contributions without which the private sphere could not function properly or even exist. In this way, the presence of the two realms, each responsible for part of the activities necessary for the maintenance of the social formation, not only gives capitalism a structure entirely different from that of any precapitalist society, but also establishes the basis for a problem that uniquely preoccupies capitalism, namely, the appropriate role of the state vis-a-vis the sphere of production and distribution.
Shorter Heilbroner: capitalism requires that non-capitalists sell their labor as a condition of survival. The capitalist can exert power by denying access to work, hence income, hence survival. The state has “brute force” when capitalists control resources (recall that a lot of what is now private, such as common pasturelands, were once communal property) and in modern times, when social safety nets are weak. This is not a given under capitalism, but it is certainly the preferred order among Western elites.
By Lynn Parramore. Originally published at the Institute for New Economic Thinking website
Yanis Varoufakis’ first meeting with the Troika of Greece’s creditors revealed what he believes is a perilous disdain among top economic decision-makers for the democratic process. The then-Finance Minister arrived armed with tables and graphs to make what he believed was a self-evident case that the austerity program imposed on Athens was untenable and unsustainable, and would therefore not produce desirable results for Greece or for its creditors. As the representative of a leftist government elected on a promise to restructure the austerity program, Varoufakis was aware of the need for a moderate tone to alleviate fears that he was a wild-eyed radical, and he readily acknowledged the need for continuity with terms agreed by the previous Greek administration. But he hoped to persuade the Troika to balance those obligations with the desire of the Greek electorate for a sustainable plan that offered them more than permanent penury.
According to Varoufakis, Wolfgang Schäuble, the formidable German finance minister, abruptly interrupted his presentation, declaring, “Elections cannot be allowed to change the economic policies applied to Greece.”
For Varoufakis, the encounter with Schäuble signaled that neoliberal economic managers no longer even pretended to support the principle of democracy. As a result, he argued, Greece was facing dogmatic enforcement of an austerity program whose effects would likely preclude it recovering sufficiently to repay its debts. And more broadly, the future of European capitalism was in growing jeopardy amid rising electoral discontent.
Speaking Monday at New York City’s New School on the future of capitalism and democracy, Varoufakis distinguished between ancient Athenian democracy — which gave equal weight to the views expressed by (admittedly only male) citizens regardless of the wealth they possessed — and its modern form. The latter, he said, had historically been shaped by systems of economic inequality. The Magna Carta, he noted, negotiated the rights of the barons to prevent the king from poaching their serfs — “a social contract between lords and the monarch.”
Eventually, those lords were replaced by merchants and industrialists, and later still, organized labor demanded its own say. “The modern state emerged as a mechanism for regulation class conflict,” he said. “That is liberal democracy.”
The assumption that capitalism is innately linked to liberal democracy is of recent vintage, Varoufakis contended. He noted that classical economic thinkers — Smith, Ricardo, Marx, and Schumpeter — all focused on the process of the commoditization of everything, including human beings, a notion that he suggested did not bode well for democratic practices. The ideological cover for this concept, today, was “the illusion of apolitical, ahistorical, mathematized economics.”
Economists see themselves as scientists who have no need for history — after all, aren’t past scientific models full of errors? But economics is not a science, Varoufakis explained. Unlike in physics, where the latest textbook offers knowledge more advanced than its predecessors did, economists seem to have a knack for ignoring past truths, a phenomenon particularly apparent in treatments of capitalism.
Today’s economic models not only can’t deal with democracy, but they have become embedded in economic behavior, influencing economic actors, policy makers, and elected officials. He warned that policies derived from the impulse of orthodox economics to reduce human beings into elastic, mechanized inputs threatened capitalism’s future: It destroys human creativity and freedom, which (among other things) generates new ideas and technologies that drive productivity and creates profits for capital.
Paradoxes abound: the more capitalism succeeds in commodifying human beings, the worse things become for capitalism — powerless and poor, their buying power is degraded, and with it, aggregate demand.
And the failure to respond to human need expressed through democratic politics — as he experienced in his dealings with the Troika — threatens to spur citizen rebellions against the system.
Varoufakis cited economist Kenneth Arrow — whose impossibility theorem (also known as social-choice theory) shows the impossibility of fully determining a common will while using a set of fair and democratic procedures— to argue that democracy, messy it may be, remains the best path. Edicts from technocrats, no matter how smart and well-meaning, will not reflect the interests of the people. “Democracy is dialectic,” explained Varoufakis, “a system for people who are not sure about what they think. They are not sure about what is good for society.” They argue, debate, and take from each other’s positions to modify their own.
But capitalism hasn’t always worked well with democracy. Just as the notion of hell was essential to achieving obedience to the tenets of Christianity in the middle ages, quipped Varoufakis, so it is the brute force of the state that ensures compliance with the rules of capitalism.
The United States Constitution, he argued, was designed to keep the poor away from the levers of power, while legitimizing the system through their participation. “Democracy was to be used in name in order to be breached in substance,” he said, and served to keep capitalism out of crisis without having to really give the poor much power.
Crises came anyway. The Great Depression sufficiently shocked elites into creating the Bretton Woods system, an international financial system predicated on an imperial American role that, together with the Marshall Plan, laid the foundation of postwar capitalist expansion. But the golden era of capitalism didn’t last. As U.S. hegemony declined, cracks in the system appeared and widened. Global financial markets became imbalanced and storms of mounting amplitude followed. Eventually, deregulation and financialization turned corporations like GM into “financial companies that produce a few cars on the side.” The Great Recession, as Varoufakis saw it, has signaled citizens that their economies are not functioning, and neither are their political systems.
“The world we live in is rudderless, in a slow-burning recession,” he said, referring what some have called ‘secular stagnation.’ Varoufakis rejected further lending to Greece if the current austerity program cannot be modified or reversed. Continued austerity makes it impossible for Greece to grow, which means that paying off new debts would only be possible through further austerity and cuts in public budgets, which will drive the economy deeper into recession. For Varoufakis, this counterproductive policy ignores lessons from Europe’s recovery after World War II, including forgiving German debt in 1953.
The Eurozone remains dominated by policies that make debt repayment, rather than growth, the central focus of policy makers. For Varoufakis, this underscores the bankrupt nature of much current economic thinking, ignoring alternative analyses of the crisis and alternative ideas for addressing it, including both debt relief and fiscal stimulus rather than austerity.
Varoufakis argued that blocking of sensible economic policy feeds the electoral success of new, left parties in Greece and Spain, but also the rise of authoritarian right-wing movements in a worrisome echo of the 1930s. This polarization also can be seen in the United States, with the electoral success of Bernie Sanders but also Donald Trump. And if decision-making power continues to moves into “democracy-free zones” such as the European Union or private corporations, the more polarized the political future appears, with attendant opportunities and risks.
In a burst of pop culture flair, Varoufakis predicted that when machines have passed the Turing Test, when you can no longer tell if the person on the phone is a human or a computer, and when 3-D printers can spit out whatever object you need, the logic of capitalism will break down. “At this stage,” he warned, “humanity will face a juncture.” Either we end up with a Star Trek-like utopia where we harness technology and use its wealth-producing capacity for the common good, or we get The Matrix, a dystopia in which the miserable masses have their energy sucked out of them by unseen forces and are fed illusions to keep them quiet. Eventually even the elites will become servants to the machine.
The antidote to that outcome, Varoufakis argued, is a robust democracy in the Athenian vein, one that reflects the voices of and serves all the people, whether they have money or not.
*Varoufakis’s new book, “And the Weak Suffer What They Must? Europe’s Crisis and America’s Future” was released on April 12.
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As long as sociopaths are allowed to infiltrate the leadership of societies bigger than ancient Athens … there will be no common good. As Varoufakis points out, there has to be a dialectic between leaders and citizens, so that the leaders can embody the common good. Sociopaths have no desire to accomplish that goal. This is why in ancient times, Athens was weakened by Spartan opposition (with Persian assistance) and supplanted by Macedon, and eventually Rome. Small scale societies of any type, Athenian or Spartan, couldn’t compete ultimately with large monarchies. Rome was undone by its own success, and had to revert to a monarchy in everything but name. Large scale society tends toward monarchy and autocracy.
The US federal republic, with functioning states, counties and municipalities is an attempt to get the best of all scales. And representative election is an attempt at this dialectic. Direct democracy is not an option even with the Internet … it would be mob rule.
It can be argued that the Athenians were quite attentive to the danger of elite/sometimes sociopathic leadership.
They seem to have mastered the politics of using the knowledge of experts without turning over the management of their city-state to these same individuals.
Unfortunately the modern left in the U.S. seems quite content with turning the power of the national state over to salaried intellectuals who rule in the name of actual citizens.
The left has no political theory of the State which they could offer as an alternative democratic political system– because of their apparent irrational ideological fear of a decentralization which could potentially culminate in more direct democratic rule.
Is the basis of such fear the fact the much of the salaried left(an influential part of the top 20%) is not interested in genuine democratic rule(they distrust the proles as much as the right)– but only their rule?
When you’ve got a big rock stuck in your garden and you want to get rid of it, you need to loosen it first. That means digging and pushing it many times. At first, nothing moves, then it wiggles and finally rolls.
I saw Varoufakis as the one giving the first push that shows no progress. I was hoping to see a little bit of wiggling. Unfortunately, he did not get there. That rock is really entrenched.
It would seem that he saw himself as the one getting the rock out. I’m not surprised. Most men who get to those positions of power have to believe in their aptitudes to get there. If not, they would not make it there.
Varoufakis in conversation with Chomsky at the NYPL a couple of days ago.
many thanks
Thank you for the link! Worth seeing.
Varoufakis in discussion with Amy Goodman on DemocracyNOW
http://www.democracynow.org/2016/4/28/former_greek_finance_minister_massive_imf
I think we’re talking about complementary, cycling phases in the exertion of power. Once the market is set up, its rules are coercive. But setting up the market — e.g. foreclosing land >>> peasants become free labor — require state coercion (+ various assorted ideological sanctifications, some of which may refer to the market). And, keeping players operating by the rules, while at the same time bending them in favor of some players, requires the state.
In response to the dogged, stupid insistence on the part of the Right to insist that the state is a freestanding leviathan screwing up the market utopia, it’s important to point to ways in which the state is an instrument of capital. This gets into trudging through arguments about who’s controlling what, the independence of bureaucracies and such. But that’s better than the gobsmacking naivite that the Right, always shouting about unfettering us from the state that they in fact rely on, would have us fall into.
What was Varoufakis facing? He’s talking with gummint reps who try to integrate oodles of biz interests, with the banks interests coming first since they are most directly vulnerable. But in turn the banks, while selfstanding in the sense that they worry about their loans, also reflect interests that are not only strictly financial, but also the financialized representation of other sectors’ interests.
*Varoufakis’s new book, “And the Weak Suffer What They Must? Europe’s Crisis and America’s Future” was released on April 12.
This quote is a translation of what is referred to as “The Melian Dialogue” from Thucydides. Thucydides might have invented the quote for dramatic effect. I recall thinking and commenting to several folks as the “negotiations” were ongoing that Varoufakis must have chosen to ignore it, since he would have studied this in secondary school. https://en.wikipedia.org/wiki/Melian_Dialogue
I fear the Melians’ interpretation is proving all too true as we look at the debate over a Brexit.
“The Athenians offer the Melians an ultimatum: surrender and pay tribute to Athens, or be destroyed. The Athenians do not wish to argue over the morality of the situation, because in practice might makes right (or, in their own words, “the strong do what they can and the weak suffer what they must”[3]).
“The Melians argue that they are a neutral city and not an enemy, so Athens has no need to conquer them. The Athenians counter that if they accept Melos’ neutrality and independence, they would look weak: people would think they spared Melos because they were not strong enough to conquer it.
“The Melians argue that an invasion will alarm the other neutral Greek states, who will become hostile to Athens for fear of being invaded themselves. The Athenians counter that the Greek states on the mainland are unlikely to act this way. It is the independent island states and the disgruntled subjects that Athens has already conquered that are more likely to take up arms against Athens.
“The Melians argue that it would be shameful and cowardly of them to submit without a fight. The Athenians counter that the stakes are too high for the Melians to worry about shame.”
Then I would suggest to Yanis (and others) to read Thucydides’ own parallel to the Melian situation, namely the earlier revolt of Mytilene. The language of the Melian dialogue borrows directly from (and in many cases inverts) the language of the intercourse between the Mytilenians and the Spartans and the later debate at Athens over what to do about the revolt. It’s also worth noting that Thuc.’s typical pattern is to first present the ideal or better course of action then in a later parallel show how things degenerate, so what happens with Mytilene is, to my mind, meant to be more instructive. From bk. 3 par. 11, the Mytilenian ambassador to the Spartans, complaining about the imbalance of power:
Now, the Mytilenian situation is not a perfect parallel–real historical events never are–but they saw with rather clear eyes the true nature of these broadly based alliances, namely that there is actually someone in charge, and that someone will use their position to benefit themselves at others’ expense. As the Myt. ambassador shows, it is incumbent upon the lesser parties to recognize the position they are in and antagonize where needed.
I like how the word democracy is used over and over without the obvious necessity of coupling a mechanism for power with democracy. That mechanism, for starters, is voting. There is no democracy without the decision making process that has been developed since the ancient Greeks called voting. And the accepted final decision is when a majority of the people deciding is achieved. The rules of the decision making process, written laws prescribing the limits of acceptable policy making, are the founding principles, the constituting formulas for running the social order with the voice of the people provided with input into the governing of the social order.
Voluntary abandonment of voting due to frustration over relative powerlessness does not provide a solution to providing for democracy. There is no democracy without voting. Just as there is no market without money. Or there is no money without debt. Voting is providing your individual say so, your input which constitutes what we call democracy. You can’t talk about democracy without talking about elections. Varis is pointing out this self evident truth. If the elected officials or an unelected Troika deny the need for the results of elections, placing a political party into the offices of state power, by demanding that only the rules of economic power be observed and the results of democractic elections be rendered useless in the face of the need to pay back loans, we have a problem much larger than huge swathes of the citizenry abandoning electoral participation.
While voter apathy is one thing, the people who remain faithful to the rule of democracy are betrayed when they participate in sustaining the social order by carrying out the ritual of voting, the mechanism of democracy. With contempt after being elected displayed by the newly installed political party in Greece or anywhere else for the citizenry who chose them, this is truly unsustainable, politically and of course with the exact opposite outcome for the Troika’s desired out comes. Austerity will be a long term prospect if successful at all and more likely bring higher costs due to societal disintegration, than the debt austerity is implemented to collect in the first place.
The modern liberal state requires operating an actual faithful and regular democratic mechanism, to ensure all of the other aspects of the social order, including the market or private sector of the economy. To strip the citizenry of its citizenship and replacing it with no other other purpose than to sell yourself for a price in order to survive and replace social relationships with financial debts to the exclusion of all other claims, other social debts to family, community, to strongly held personal religious beliefs that place you meaningfully into the larger universe, leaves no reason to live but the enrichment of a faceless other, the wealthy ruling class. Of course, this is nothing but an impossible life, and unsustainable policy, ticking like a real time bomb because as a human being, there is only so much stress and pressure that can be endured.
In Australia, voting is a duty, not a right. It’s mandatory and you are fined if you don’t vote.
I found the caliber of political discourse way higher at my local Aussie pub (which has a vey wide cross section of people) than at any Manhattan gathering of supposedly highly educated professionals.
Didn’t they also outlaw all kinds of rifles, assault, long guns, hunters scoped bolt action, anything, to amazing effect? You have to vote and you can’t be armed to the teeth! Participation in democracy mitigates the need for arming yourself against a potential tyranny. People don’t need to be heavily armed, they need political power. We can’t be heading for civil war in America whenever our country is facing an unresolvable political or economic crisis.
Every ‘four score and seven’ or thereabouts, our country has hitched up its britches, looked back at the previous eighty years and rewrote the algorithms for law making. Each period or basic law rewriting had a prelude of great turbulence. The major pillars of a History of the United States that anyone would care to write, would need to delineate Founding, Reconstruction, New Deal and in a movement that arrived too early (or too late as it should have been part of the new Deal) the Civil Rights movement. Each time the earth shaking prelude occurred, the rebuilding after the earthquake caused reactions that were as hidebound and cruel as the Spanish Inquisition. Founding left the nation with slavery, Reconstruction fostered Jim Crowism and The New Deal fostered neoliberalism couched in the rhetoric of the epic journeys of the Cold Warrior as a reaction against attempts to regulate the capitalist engine.
Taking a closer look at the New Deal what this observer sees is a Congress that was too lazy to write laws and instead passed those duties over to the Executive branch. The Supreme Court objected and well, the rest is history. Mind you, I am not in aligning myself with the archaic views of justices who attempted to write laws based on the principles of Neo-Darwinistic social evolutionary theory espoused by Herbert Spencer. However, I am saying those same justices, whatever their theories were on evolution, did know how to read the Constitution of the United States and clearly found that document forbade Congress to delegate powers to the executive branch merely to play a politicized version of kick the can-down-the-street. Congress was merely attempting-during the New Deal especially but ever after as well, to avoid controversy (a perennial favorite), shirk its duty in writing laws that specify a problem and outline specific solutions (another favorite pastime) and engage in ‘sit down, sit down, you’re rockin’ the boat.’
The emergent, counter-revolutionary forces of the ‘new’ liberalism are ascendant everywhere and we find our government, at the municipal, county, state and national level captured by a Naked Capitalism that is tribal in its outlook, hell bent on confiscating all financial transactions, all property, and forcing a review before itself, like the tyrants of ancient Greece, of every attempt to finally renew a fresh purpose to law making. No spring revolution, no occupy resurgence, no cries for reason, justice, or a drive for a restoration of the Bill of Rights, will be allowed to survive. Any attempts to renew the dying flame of the original revolution (as in Martin Luther King’s passionate and powerful rhetoric) will be dealt with swiftly and concretely.
Prepare for the long winter of the New History of the United States of America.
It’s not democracy when the only thing you’re choosing is which representative will betray your interests.
Representative democracy is a failure, and the majorities who don’t vote in country after country back me up. I won’t blame people who don’t participate in the farce.
Very well said!
We are seeing this disintegration here in the U.S. in the early 21st century. The assassinations of the 1960s, the police-state violence at Kent State, etc., were shocking indeed. Yet, during those turbulent times the illusion was maintained that we had an “actual democratic mechanism.”
The Florida fiasco of 2000, where our unelected Supreme Court determined that the actual votes cast, of actual citizens, was no longer the deciding factor in who would take over the highest office in the U.S., killed this illusion. The carelessness of our sociopathic elites today, who barely attempt to conceal how they are suppressing the rights of actual citizens to actually vote, reveals the lesson they think they learned from Bush v. Gore in 2000.
I feel the elites are wrong on this: people didn’t revolt in 2000, and they may not revolt in 2016, but there is a breaking point somewhere and our sociopathic elites are pushing us closer to that line every day.
https://www.youtube.com/watch?v=SYqDpL0YCvI
The Wasteland of The Free by Iris Dement
youtube has songs by all kinds of singers, some more famous than others but so many that portray the bullshit people have to live with everyday, from the Black Ghettos to the Appalachian Ghettos and every nook and cranny of humanity, and everyone knows this is nowhere and no way to live. We are held back by people with more power than we currently have that keep us living below the standards of a decent, healthy, happy life.
But he [Varoufakis ] didn’t begin to have the runway to persuade his opponents, and he thought the threat of a Grexit gave him far more bargaining leverage than he had.
Didn’t Varoufakis, not just Tsipras, but Varoufakis say – and repeat over and over – that Grexit was absolutely off the table at the beginning of negotiations? If he was counting on the threat of a Grexit for bargaining power, he sure went about it in a strange way.
Yes, I didn’t get into the details, but that didn’t help. But the strategy was widely described as chicken, which implies what people in the market called “accidental” Grexit. So it looked as if Varoufakis was playing as if Grexit were an option but Syriza would be able to tell voters (from whom they had no mandate) that it was the other side’s fault. It really did look like they thought they could force the other side to make concessions. But they kept agreeing to stuff in Brussels or Berlin (not just made up but the Trokia, this was remarks by Tsipras or Varoufakis in public) and then within 24 hours they’d reverse themselves in public in Greece. This made everyone increasing furious with them, particularly since the negotiations were becoming time consuming and physically taxing.
Thanks, that brings it back exactly. When ever I read something about or particularly by Varoufakis, I am a little leery since that painful episode.
Is it not possible that Yanis is/was inexperienced in negotiation? Looking at his actions then and words now, it appears that he was as much trying to win an argument as rescue the Greek economy. I note that he presents the Greek people not as debtors, but as demos, and the question isn’t how to best manage Greece’s debts, but how to conform the will of the Greeks with the will of the banksters – an impossibility. Yet, the appeal has merit, considering the timing. Greece is in serious trouble. With large fractions of the bailout loans going to creditors, Greeks aren’t merely suffering under austerity, they are simultaneously having more debt thrust upon them to pay back their creditors (didn’t most of the bailout funds go to European banks?). And yet, another set of “contingent reforms” are being courteously offered their masters in Brussels. Perhaps Yanis just wants everyone to understand who truly rules Greece.
You have gotten at the real issue. Most people should never negotiate on their own behalf. This is a mistake many CEOs make. They really overestimate their skills. I would never never negotiate for myself if was in a position to hire someone else to do it for me, even though I have been party to a fair number of negotiations. Varoufakis seems to have assumed that being a good presenter, analyst, and debater meant he would be a good negotiator, when they are very different skills.
and then within 24 hours they’d reverse themselves in public in Greece.
Poor negotiating skills indeed, but for the people of Greece, It bordered on the duplicitous and over time was clearly self serving. From what I understand, Varoufakis has spent a fair amount of time and effort trying to re-write this episode rather than face up to it and offer it as a teachable lesson.
‘zactly!
This is a far deeper argument here than the last one I encountered! In a macroeconomics course about 4-5 years ago, I found myself in the middle of a fervently-argued dialog on the ‘Greek problem.’
The textbook, written from the voice of the IMF, presented the position of Germany and the Eurozone. They needed (not wanted but needed), to get Greece to accept austerity and whatever terms the Eurozone asked of them. Greece was threatening the German livelihood. This was simply good, solid, basic macroeconomic theory.
Student-after-student wrote page-after-page on the unfairness of the Greek position and how they simply need to be brought around. I was alone in challenging that explaining even with the Eurozone agreements, a democratic nation still couldn’t simply overrule the sovereign will of another democratic nation.
But wait, what? This was baffling! What did I mean by ‘sovereignty’? Surely, that didn’t have anything to do with the issue at stake here. The Greeks owed money and the money was due. For Greece to balk on the agreement threatened the stronger Eurozone nations who had followed the rules and had done what they were supposed to do.
I asked, “If there is no sovereignty issue, then why are the citizens of Greece protesting in the streets right now?”
I went on to explain (because apparently there is some confusion as to the fundamental nature of the EU itself) that t’s not analogous to our United States. As a united nation-state, our individual states have individual state’s rights, but (as clarified in our civil war) these states are all still subject to a single centralized Federal government. The European Union, on the other hand, is not a single unified nation-state. The model is closer to that of a financial cooperative . These financial agreements and trade treaties (including Schengen) produce claims against them, but they don’t determine domestic policy (nor should they).
While my instructor understood and appreciated my criticism, it clearly wasn’t a mainstream perception over here at that time.
Take that with a grain of salt though because I’ve also sat through discussions in favor of resurrecting Adjustable Rate Mortgages as a way to pump new life into our economy. Fun stuff!
I hate to tell you, but there are very sound reasons for having adjustable rate mortgages. The US in the only country in the world to have a 30 year, fixed rate mortgage with the borrower having a free refi option. The result is Fannie and Freddie engage in massive pro-cyclical hedging to deal with the prepayment risk. “Pro cyclical” means it intensifies economic cycles, which is a very bad thing from a macro perspective. The impact on the economy was so severe that it was an issue in 2003. That was why Greenspan was pushing ARMs, BTW.
What alleviated the problem then was that the accounting scandals at Freddie led to them having restrictions placed on balance sheet growth, and then the Fed started increasing rates in 2004, which reduced demand for prime mortgages but not for subprime, for reasons I discuss at length in ECONNED.
Adjustable rate mortgages are a perfectly fine product IF they have interest rate floors and ceilings (this was how coop loans in NYC were structured in the early 1980s, and you could pencil out your worst case scenario and make sure you could live with that). ARMs also allow consumers to get the benefit of interest rate reductions without a refi. The dirty secret of a refi is the consumer loses a lot of the benefit of lower interest rates due to the fees and costs of getting a new mortgage.
I’ve dug around some and read the original Greenspan statements in favor of them.
I still believe the underlying damage they can do outweighs these identified potential benefits and I haven’t seen that we’ve changed enough in the aftermath to reintroduce them as a good thing. Financial derivatives don’t have to be sinister but when they are, they are exceedingly so.
When I get the chance I’ll read your book. I’d love to hear more views.
ARM and derivatives based on them are not the same thing. I think you’re conflating two financial products here.
My view is that lending for homes should be banned (how’s that for radical?). Why? Because making loans available for something just leads to inflation of the price of that commodity. Imagine, if everyone had to pay for their house with cash on hand, the price of houses would have to come down dramatically, right? Property values would plummet, which would be a good thing. There would be a one-time write-down of a bunch of RE assets, but then prices would actually have to align with what people can pay, instead of what banks are willing to finance — which, as we have seen, is essentially limitless. And for the bankers, of course, the more expensive the housing stock is, the larger the nominal return for providing the loan.
Look at what happened with State college tuition prices and tell me that’s got nothing to do with student loans. Whenever some rich f-er in a suit offers to help the poor by giving them a loan, grab your wallet and head for the hills….
Floating rate mtges with scaling increases allow for the usual ups and downs of the economy to not overly effect the underlying collateral (before the intl markets began to substitute american mtg paper for unavailable us treasuries to comply with basel 2 growth capital requirements). Recessions historically have not lasted for multiple years…25 basis points per quarter increase for two years would take a homeowner to par or at most 100 basis points above where they might have been had they stuck to a fixed loan…over the average 7 to 8 year life of most home loans, it worked well for the homeowner…but when germany decided that eastern european and other new markets for german products needed to lend locally so that german companies could sell products with local financing…basel 2 rules were foamed by having german landesbanks give guarantee$ to synthetic american mortgage based instruments to get the aaa ratings needed and required by basel 2…
Did you miss the part about interest rate floors and ceilings? What is wrong with that? I had precisely that type of mortgage for my first apt. and had no problem with it.
The reason this product got a bad name here was NOT that the mortgages were adjustable. It was that some mortgages were designed for people who would not qualify for a 30 year fixed rate mortgage AND had nasty features, specifically 2 year “teaser” rates and then a reset, like 2% going to 7%. Those mortgages were designed with the idea (scam) that the borrower would refi before the reset, earning everybody lots of fees with each churn. Everyone knew these borrowers could never afford the reset rate. When the subprime market started becoming only sporadically open (end of 2006) and then shut for good in June 2007, they started hitting the wall in big numbers.
Another product that was perfectly fine in the abstract but was grossly abused was the option ARM. It’s a great product for people with erratic but generally very high incomes. You set the fixed payment at a low rate, and then make a really big payment when you have big income. It’s was a very good product for Wall Street people (big chunk of $ every year with their bonus) or high end commercial real estate brokers. It’s a terrible product for someone on a regular salary. It’s meant for a very narrow niche of people with a particular income pattern and should never have been sold outside that niche.
“The reason this product got a bad name here was NOT that the mortgages were adjustable. It was that some mortgages were designed for people who would not qualify for a 30 year fixed rate mortgage AND had nasty features, specifically 2 year “teaser” rates and then a reset, like 2% going to 7%.”
Yeah, that was our largest concern at the height of the bubble and why we refused to sell our house to anyone who was going to go that route. We knew that many families were stretching things to limits just to get into the homes and that rates would reset later when they weren’t prepared for it. It was the way they were pushed at people, “Oh you’ll have plenty of time, you’ll be fiiiine!”
I wrap the whole process up because I personally believe it was premeditated.
The banks played a great Laurel and Hardy routine afterwards when asked to explain, but I don’t buy it. Look at what happened, at what they’ve gained from it, and where they are now.
Right Said Fred
https://youtu.be/pVxoqF3fQWA
A bit more background is needed I believe. The bailouts of Greece in the form of loans forestalled a default by Greece. In return for new loans to pay off foreign (Mostly French and German) banks, the money borrowed from the IMF supplemented by EU and ECB monies was used to pay off these obligations. There was a fair bit of kicking the can down the road until the loans to foreign banks were paid off, then the memoranda started kicking in. The old loans from banks were contracted under sovereign Greek law, while the new ones were contracted under UK law if I recall correctly. UK law is much more strict. Both PASOK and New Democracy were filled with cronies, and patronage was rampant along with theft and and tax evasion. This had been the case for much of the period from 1974 until SYRIZA was elected last year. Two useful books on the situation are
https://www.amazon.co.uk/Greeces-Odious-Debt-Political-Investment/dp/0857287710/ref=sr_1_1?s=books&ie=UTF8&qid=1461855628&sr=1-1&keywords=GREECE%27S+ODIOUS+DEBT
and https://www.amazon.co.uk/s/ref=nb_sb_noss?url=search-alias%3Dstripbooks&field-keywords=Bust%3AGreece%2C+the+Euro%2C+and+the+Sovereign+Debt+Crisis+
Despite my handle, I am not Greek, but I have lived in Europe for the past 38 years, the bulk of it in Greece. I recall seeing ads in bank offices here in 2006-2007 offering mortgages at 3.95% in Swiss Francs instead of the 7%+ that was the rate for mortgages denominated in Euros. I warned everyone I knew that they should not opt for the lower rate unless they had a steady, secure revenue stream in SFr.
Capitalists use force to make people labor for them all the time. In the South through the 30s it was common for capitalists to pay sheriffs to round up black men, sentence them to hard labor, and essentially sell them to the local boss as laborers. This was part of the reason for the great migration to northern cities. When workers form unions, historically capitalists have had no compunction about sending in skull-crackers to break strikes. And of course people who have “no alternative” but to sell their labor only lack the alternative of theft because the police stand by guaranteeing the “property rights” of absentee owners and wealth hoarders. Peasant farmers were pushed off the commons and their historical lands (where they could support themselves) by force. Overseas markets were only expanded through military force and colonialism. This was the explicit aim of the first corporations.
Force underlies everything capitalists do.
‘zactly
I am not sure the Star Trek analogy is a good one. The later spinoff years had some fairly mean captains like Janeway and Sisko who tended to prefer to blow things to get there way instead of negotiating. Overall I find Star Trek to be quite violent for a utopia(in it’s later years). There are all sorts of arms dealers, smugglers, warlords, the “Maquis” Movement, and all around bad people like Michael Eddington, Luther Sloan, and Doc Zimmerman.
https://www.youtube.com/watch?v=-iNq3325Emo
Varoufakis’s big problem is that he can’t let go of the dream of EU as the big European social understanding project.
Frankly that has never existed beyond the minds of the academic elite that all talk virtually fluent english, and can do their thing anywhere with a net connection and a credit card terminal.
The vast majority of the population of the European nations are tied to their place of living. Either by work, by language, by family, or a combination of the above.
I am not in a position to dispute your point beyond my anecdotal take from here in Greece over the past 40 years. Many parents we have are unhappy about seeing their children go abroad to study or work, and many students are keen to do so. The parents, nonetheless, pay us to help their children jump through the hoops to get there at both the undergraduate level and graduate level. Virtually all of them have at least three languages and often more at a high level of proficiency.
Many get full scholarships to top-tier US universities or fellowships at graduate schools in the US and EU. Admittedly, my data are anecdotal.
Several former French students from many years ago are working for MSF and other aid organizations.
Others from Greece are working for the EU.
I would welcome your data on your observation.
The Heilbroner quote is conventional and rather dated. Yes, capitalism depends on “free” labor. But it emerged historically in tandem with the formation of the modern sovereign state, at first in its absolutist form and later in its constitutional form. Yes, there is institutional differentiation in modern capitalist societies between state and economy, but the two systems are thoroughly cross-implicated, and capitalism would never have emerged without state backing. Polanyi covered this in his classic book, refuting the 19th century classical liberal ideology that Heilbroner repeats. But nowadays in the neo-liberal era, that liberalism has been inverted. Not only have states been weakened by globalization, but the current neo-liberal doctrine makes the only legitimate function of the state the enforcement if the dictates of the “market”, even to the point of creating markets in areas where there previously were none. The imperative is to privatize everything, including the very idea of the public sphere itself.
Classical economics is no longer taught as its teachings would go directly against current ideas, they are hidden and forgotten on purpose.
As Michael Hudson points out in “Killing The Host” the world would be a much better place if we remembered the classical economists distinction between “earned” and “unearned” income.
Protecting economic coercion is why capitalism is so intent on cutting people off from the land, whether by destroying rural economies or attacking urban agriculture. People who can grow their own food are not so easily coerced.