Speculators circling Puerto Rico latest mode of colonialism

Puerto Rico’s governor may have said the commonwealth’s debt is unpayable, but that doesn’t mean Puerto Ricans aren’t going to pay for it. Vulture capitalists are circling the island, ready to extract still more wealth from the impoverished island.

You already know the drill: Capital is sucked out by corporate interests that pay little in taxes, budget deficits grow and speculators swoop in to take advantage, leaving working people holding the bag. Already, the Puerto Rican government is considering imposing an 11 percent cut to Medicare and Medicaid for 2016 and more than 600 schools may be closed in the next five years on top of the 150 already closed by budget cuts.

To ensure more austerity, a group of hedge funds hired three former International Monetary Fund economists to issue a report on what Puerto Rico should do. And — surprise! — the report, released this week, says to lay off teachers, cut education spending and sell public assets to provide money for hedge funds.

Caribbean National Rain Forest of El Yunque, Puerto Rico (photo by Alessandro Cai)

Caribbean National Rain Forest of El Yunque, Puerto Rico (photo by Alessandro Cai)

The crisis has already been profitable for Wall Street as banks and law firms racked up $1.4 billion in fees from 86 bond deals that raised $62 billion for the island between 2006 and 2013 alone. Because of downgrades in Puerto Rico’s credit rating, Wall Street can demand hundreds of millions more in lending fees, credit-default-swap termination fees and higher interest rates.

What has a century of colonialism — a century of domination by U.S. corporations — wrought? An activist with the island’s Party of the Working People, Rafael Bernabe, puts it in stark terms:

“Puerto Rico’s economy has not grown since 2006. During that period, total employment has fallen by 20 percent or 250,000 jobs. Since 1996 manufacturing employment in particular has fallen by half (from close to 160,000 to less than 80,000). The labor force participation rate has dipped under 40 percent. Through firings and attrition, since 2007 public employment has fallen by 20 percent or 50,000 jobs. Migration has accelerated to levels unseen since the 1950s. …

Not only does mass unemployment result in significant migration, it also depresses wages, which consequently deepens economic inequality and insures high levels of poverty. This helps explain the persistence of the wide gap in living standards between Puerto Rico and the U.S. mainland. Contrary to neoliberal dogma, after more than a century of a colonial experiment in free trade, free mobility of capital, and even the free movement of people between Puerto Rico and the United States, Puerto Rico’s per capita income is a third of the U.S. figure.”

Although the neoliberal clamp has recently tightened on the island, its current subaltern position is many years in the making.

A century of colonialism and the repression that goes with it

Puerto Rico’s tenure as an independent nation lasted exactly eight days in 1898, ending when the United States invaded it during the Spanish-American War. Quickly taking control of the island’s economy, the U.S. response to a hurricane that wiped out the coffee crop in 1899 was not to send aid but instead impose a 40 percent devaluation on Puerto Rico’s monetary holdings. (The source for this and the following two paragraphs is the “historical overview” page of Nelson Denis’ War Against All Puerto Ricans web site, an excellent trove of information.) The devaluation forced Puerto Rican farmers to borrow money from U.S. banks and within a decade, thanks to usurious interest rates, farmers defaulted on their loans, giving the banks possession of their land.

One of those banks was the Riggs National Bank, and a member of the family that owned the banks, E. Francis Riggs, became Puerto Rico’s chief of police. By 1931, Mr. Denis reports, 41 sugar syndicates, 80 percent of which were owned by U.S. corporations, owned essentially all of the island’s farmland. Just four of them controlled half the island’s arable land. When the island’s legislature enacted a minimum-wage law, the U.S. Supreme Court declared it illegal. An island-wide agricultural strike in 1934 was answered by Police Chief Riggs, the member of the banking family, with this response: “There will be war to the death against all Puerto Ricans.” The following years saw a series of massacres, and mass arrests and torture of independence activists, and a 1948 law criminalized advocacy of independence, with penalties of 10 years in jail and massive fines. Even owning a Puerto Rican flag was made illegal.

In 1976, the tax code was amended so that U.S. companies operating on the island would pay no corporate taxes. For the next 30 years, until 2006, U.S. pharmaceutical companies took advantage of this tax loophole to generate massive profits. Mr. Denis reports that in 2002 the combined profits for the ten drug companies in the Fortune 500 ($35.9 billion) were more than the profits for all the other 490 businesses combined ($33.7 billion).

An independent Puerto Rico could not exploited to such a degree, so repression was particularly aimed at anybody with independence sympathies but especially leaders of the Nationalist Party. In a Democracy Now! commentary in 2010 on the 60th anniversary of the Jayuya independence uprising, Juan Gonzalez said:

“Between a thousand, two thousand people were arrested. Anybody who had any kind of political leanings toward independence or was seen as a leader was thrown into jail. And for years afterwards, it was impossible for supporters of independence to get jobs in the government. It really was an enormous repression and crackdown that occurred in the years following.”

One legacy of these decades of repression is the electoral silencing of independence advocates. Voting on the island tends to split evenly between the parties of statehood and continued commonwealth status. Mr. Bernabe wrote:

“The vote for the Partido Independentista Puertorriqueño (the Puerto Rican Independence Party or PIP) was less than 3 percent in the 2008 and 2012 elections. Independentistas, of course, have a far more significant presence and often play a leading role in labor, environmental, student, and other struggles. Many vote for the [pro-commonwealth Popular Democratic Party] in accordance with the same ‘lesser-evil’ logic that leads many U.S. progressives into the orbit of the Democratic Party.”

Education, health care cuts so hedge funds get paid

Having profited on the backs of Puerto Ricans, can Wall Street really be the solution to the island’s massive $73 billion debt? Common sense says no, but the island’s political leaders believe otherwise. Lest there be any lingering doubt about what the vulture capitalists circling their next target have in mind, a group of them issued a report this week, “For Puerto Rico, There is a Better Way,” that complains Puerto Rico spends too much money on education, even though the island spends about 80 percent of the U.S. average on a per-student basis.

The report’s three authors each had long careers with the International Monetary Fund, and they have not strayed from the IMF’s usual “one size fits all” austerity model. Although there are a couple of reasonable suggestions in the report — most notably, increasing the island’s low tax-compliance rate — it calls for much sacrifice by working people and none by hedge-fund billionaires. Among other recommendations, it calls for an increase in the sales tax, a flat income tax (always a benefit for the richest), cuts to education and Medicaid, and loosening labor laws that protect pay and vacation.

Hedge funds that own a significant part of the island’s debt have had a series of meetings with officials. But just who these hedge funds are can be difficult to ascertain. Puerto Rico’s Center for Investigative Journalism reports it received “runarounds and silence” from several government officials when it requested a list of those who hold the debt and what conditions bondholders are seeking. But the Center has been able to put together what it calls “the most complete list of the companies that are getting ready to renegotiate or demand complete payment of the debt.”

Several of the hedge funds seeking payment have also held bonds issued by Argentina, Greece and the city of Detroit. Three of them — Aurelius Capital Management, Monarch Alternative Capital and Canyon Capital — have held bonds for all three plus Puerto Rico.

Aurelius is a notorious speculator that joined with vulture-capitalist Paul Singer to demand Argentina pay full face value on bonds bought at tiny fractions of that price. Aurelius is seeking a 1,600 percent profit on its Argentine bonds, regardless of the cost to others. The principal of Aurelius, Mark Brodsky, was previously involved in squeezing the Republic of Congo-Brazzaville, an episode in which $400 million was demanded on bonds bought for less than $10 million from a country where children die from malnutrition.

Another on the list is John Paulson, who has been busy buying up luxury properties, including spending $260 million to buy three resorts. Another billionaire, Nicholas Prouty, has invested more than $550 million so that San Juan’s marina can accommodate yachts larger than 200 feet.

Power-company ratepayers expected to pay for profits, too

In line with those speculators, a group of hedge funds that own Puerto Rico Power Authority bonds (a debt separate from the general-obligation government bonds discussed above) propose a plan that would pay bondholders 33 percent less than face value. That sounds like an offer to accept a “haircut,” to use the financial term, but those bonds are currently trading at about half of face value, so the hedge funders would be guaranteeing themselves a profit. The plan would also impose a surcharge on the power authority’s customers, so they would be paying more for electricity to guarantee hedge-fund profits.

Whether buying bonds or real estate, it is profits hedge-fund billionaires are after. Puerto Rican bonds are tax-exempt, one reason for their popularity. Extracting wealth from the island is not new, however. Mr. Bernabe of the Party of Working People, in his commentary, noted the imbalance between profits and what’s available for the common good:

“[T]wo dozen U.S. corporations extract around $35 billion a year in profits from or through their operations in Puerto Rico. Bear in mind that the total income of the government of Puerto Rico is around $9 billion. U.S. corporations benefit from the tax-exemption measures that have been the centerpiece of the government’s development policy since 1947.”

Puerto Rico is due to make $5.15 billion in debt payments in its 2016 fiscal year, which began on July 1, a total that represents more than half of its $9.8 billion budget. Given the previous experiences of Argentina and Detroit, the future does not look rosy for the working people of Puerto Rico.

It is not difficult to notice that, although it is always time for us to cut back, it is never time for financiers to cut back. The financial industry, in contrast to the mythology it loves to peddle, does not create wealth — it confiscates wealth, attempting to profit off every aspect of human activity. Attention is now focused on hedge funds’ manipulation of debt, and although that is a necessary focus, these circling vultures represent only the latest manifestation of a long history of colonialism.

The destruction of Jamaica’s economy through austerity

A small country immiserates itself under orders of international lenders; unemployment and poverty rise, the debt burden increases and investment is starved in favor of paying interest on loans. If this sounds familiar, it is, but the country here is Jamaica.

So disastrous has austerity been for Jamaica that its per capita gross domestic product is lower than it was 20 years ago, the worst performance of any country in the Western Hemisphere. In just three years, from the end of 2011 to the end of 2014, real wages have fallen 17 percent and are expected to fall further in 2015, according to the country’s central bank, the Bank of Jamaica.

Such is the magic of austerity, or “structural adjustment programs,” to use the official euphemism of the International Monetary Fund and World Bank.

A new paper from the Center for Economic and Policy Research, “Partners in Austerity: Jamaica, the United States and the International Monetary Fund,” reports that the amount of money Jamaica will use to pay interest (not even the principal) on its debt will be more than four times what it will spend on capital expenditures in 2015 and 2016. And despite a new loan, the country actually paid more to the IMF than it received in disbursements from the IMF during 2014!

Holywell National Park in Jamaica (photo by Wolmadrian)

Holywell National Park in Jamaica (photo by Wolmadrian)

As a further sign of the times, the current pro-austerity government of Jamaica is led by the National People’s Party, the party of former democratic socialist Prime Minister Michael Manley. Prime Minister Manley took office in 1972 on promises to combat social inequality and injustice, and he is credited with enacting legislation intended to establish a national minimum wage, pay equality for women, maternity leave with pay, the right of workers to join trade unions, free education to the university level, and education reforms that enabled students and teachers to be represented on school boards.

He also became an international figure advocating for progressive programs to be implemented elsewhere. Naturally, this did not sit well with the United States government. When Prime Minister Manley stood with Angola against the invasion by the apartheid South African régime and supported Cuban assistance to Angola, he defied a warning from U.S. Secretary of State Henry Kissinger. The CIA presence in the Jamaican capital, Kingston, was doubled.

A Jamaica Observer commentary noted parallels between the overthrow of Salvador Allende in Chile and unrest in Jamaica later in the 1970s:

“The imperialists applied the same ‘successful’ Chile model of destabilisation in Jamaica. They applied the same strategy of ‘making the economy scream,’ creating artificial shortages of basic items, promoting violence, including the savage murder of 150 people in a home for the elderly. Violence erupted in Jamaica as was never seen before in the ‘shock and awe’ tactics mastered by the imperialists whenever they want to create fundamental change in someone else’s country. Manley and Jamaica yielded under the pressure and eventually took the IMF route.”

Replacing human development with austerity

The conservative who took office in 1980 reversed Prime Minister Manley’s programs. By the time that Prime Minister Manley returned to office in 1989, he had moved well to the right under the impact of changing world geopolitical circumstances and the dominance of neoliberal ideology. As an obituary in The Economist dryly put it, “He did as the IMF told him, liberalised foreign exchange and speeded up the privatisation of state enterprises.”

The one-size-fits-all program, a condition of IMF and World Bank loans, includes currency devaluation (making imports more expensive), mass privatization of state assets (usually done at fire-sale prices), cuts to wages and the prioritization of the profits of foreign capital over a country’s own welfare. The 2001 film Life and Debt, produced and directed by Stephanie Black, depicted a country on its knees thanks to “structural adjustment.” The film’s Web site sets up the picture then this way:

“The port of Kingston is lined with high-security factories, made available to foreign garment companies at low rent. These factories are offered with the additional incentive of the foreign companies being allowed to bring in shiploads of material there tax-free, to have them sewn and assembled and then immediately transported out to foreign markets. Over 10,000 women currently work for foreign companies under sub-standard work conditions. The Jamaican government, in order to ensure the employment offered, has agreed to the stipulation that no unionization is permitted in the Free Trade Zones. Previously, when the women have spoken out and attempted to organize to improve their wages and working conditions, they have been fired and their names included on a blacklist ensuring that they never work again.”

The film shows the destruction of Jamaica’s banana industry and the decimation of its milk-production capacity because the country is forced to open itself to unrestricted penetration by multi-national capital, while those corporations continue to receive subsidies provided them by their home governments. The Life and Debt Web site reports:

“In 1992, liberalization policies demanded that the import taxes placed on imported milk solids from Western countries be eliminated and subsidies to the local industry removed. In 1993, one year after liberalization, millions of dollars of unpasteurized local milk had to be dumped, 700 cows were slaughtered pre-maturely and several dairy farmers closed down operations. At present, the industry has sized down nearly 60% and continues to decline. It is unlikely the dairy industry will ever revitalise its growth.”

Poverty and unemployment continue to rise

Austerity continues its course today. The Center for Economic and Policy Research’s “Partners in Austerity” paper, written by Jake Johnston, notes that conditions in Jamaica are worsening — unemployment, at 14.3 percent as 2014 drew to a close, is higher than it was when the global economic crisis broke out in 2008 and the 2012 poverty rate (latest for which statistics are available) of 20 percent is double that of 2007.

Jamaica currently has a debt-to-GDP ratio of 140 percent, an unsustainable level that has risen. Yet it is required as a condition of its latest IMF loan to maintain an unprecedented budget surplus of 7.5 percent. Thus the paper declares the country is undergoing the world’s most severe austerity because this surplus, the highest dictated to any country, must be extracted from working people on top of what is extracted for interest payments.

Jamaica has re-financed its debt twice in the past three years, and its latest IMF loan, agreed to in 2013, comes two years after previous loans were cut off because the government said it would pay promised wage increases to public-sector employees. The debt exchanges lowered the interest rates and extended the payment period, a combination that does not necessarily mean less interest will ultimately be paid out. Without debt relief, there is no exit from this vicious circle. The “Partners in Austerity” paper says:

“Crippled with devastatingly high debt levels and anemic growth for years, Jamaica is certainly in need of financing. But it is also the case that, after billions of dollars of previous World Bank, [Inter-American Development Bank] and IMF loans, much of its debt is actually owed to the very same institutions that are now offering new loans.” [page 2]

Financing schemes, whatever negative consequences it might ultimately have for the debtor country, are lucrative for investment banks. For example, banks underwriting Argentine government bonds earned an estimated US$1 billion in fees between 1991 and 2001, profiting from public debt. Yet the foreign debt continued to grow. In one example during this period, a brief pause in Argentina’s payment schedule was granted in exchange for higher interest payments — Argentina’s debt increased under the deal, but the investment bank that arranged this restructuring, Credit Suisse First Boston, racked up a fee of US$100 million.

Less for public needs

As a result of the new austerity measures, Jamaican government spending on infrastructure has fallen to 2.6 percent of gross domestic product, as opposed to 4.2 percent as recently as 2009. Moreover, the government is required to siphon $4.4 billion over four years from its National Housing Trust to replenish government coffers drained to pay off the loans. The trust, a legacy of Prime Minister Manley, is mandated to provide affordable housing, and yet it is the same National People’s Party that is raiding it under IMF orders.

The country’s economic difficulties would be still more severe if it were not for aid from Venezuela and investments from China, according to “Partners in Austerity.” The paper reports:

“Venezuelan funding comes through the Petrocaribe agreement, where Jamaica receives oil from Venezuela, paying a portion up front and keeping the rest as a long-term loan. Jamaica pays a lower interest on the Petrocaribe funds than it does to its multilateral partners. According to the IMF, net disbursements through Petrocaribe totaled over $1 billion over the last three years, averaging 2.5 percent of GDP per year. … A significant portion of the Petrocaribe funds are being used to refinance domestic debt, in support of the IMF program. Additionally, a portion of funds takes the form of grants and is used for social development, bolstering support to the neediest who have been most impacted by continued austerity. … Without the Venezuelan and Chinese investments staving off recession, it’s likely the IMF program would fail due to serious public opposition.” [page 13]

It is possible to provide aid that actually assists development rather than as a cover for exploitation, as Venezuela demonstrates.

Why do disastrous “structural adjustment” programs continue to be foisted on countries around the world despite the results? Undoubtedly many who prescribe “structural adjustment” continue to believe in neoliberalism in the face of all evidence. But this ideology doesn’t fall out of the sky; it is an ideology in service of the biggest industrialists and financiers, presenting the inequality and excess of capitalism as natural as the tides. But anything made by humans can be unmade by humans.

Will a Syriza victory be the first blow against austerity?

Is the first step toward the unraveling of European austerity about to begin, courtesy of Greek voters? The future direction of the European Union certainly won’t turn merely on the results of Greece’s January 25 parliamentary election, nor will the world slip off its axis if the expected Syriza victory materializes.

Nonetheless, the first blow has to be struck some time, by somebody. If Syriza does take office and if it can hold firm against the withering pressure that it will immediately be subjected to, an alternative to financial industry diktats could provide an example elsewhere in the E.U., particularly within the eurozone. That example can not be taken up too soon, given the many economic weapons likely to be deployed against a Syriza-led Greece. (Perhaps in Spain, where Podemos, the party organized a year ago by the Indignados movement, already is a near three-way dead heat with Spain’s biggest parties, Popular and Socialist, according to recent polling.) There is no Greek solution to Greece’s economic collapse, only a European solution.

View of Vikos Gorge, Greece (photo by Skamnelis)

View of Vikos Gorge, Greece (photo by Skamnelis)

As the Greek parliament was in the process of failing to elect a new president last month, thereby triggering automatic parliamentary elections, Syriza issued this statement about the New Democracy/Pasok coalition government that had continued to impose punishing austerity:

“The only option left to them is the policy of fear and terrorization of the society, the creation of false dilemmas and fake polarization. This option is triggered by the fact that the government as well as the dominant economic and media system and forces inside and outside the country are very well aware that they have a lot to lose.”

Such fear-mongering won’t only come from the Greek establishment. European governments have alternated between ordering Greek voters to vote for pro-austerity parties and to insisting that both a Greek exit from the eurozone and any changes to Greece’s debt obligations are unthinkable. These have not only come from German Finance Minister Wolfgang Schäuble, as would be expected, but from French President François Hollande, continuing his journey to becoming Paris’ Monsieur 1%.

Certainly the financiers who hold decisive power over the undemocratic institutions of the European Union, nor their representatives such as Finance Minister Schäuble, can be expected to welcome the basic self-description of Syriza’s intentions:

“Syriza insists strongly on its position that it will abolish the memoranda signed with the Troika of lenders when it assumes office and will re-negotiate the loans. At the same time it will promote a programme of social and economical reconstruction, aiming at development that promotes human needs and well-being and respects nature. … Syriza is fighting for the re-foundation of Europe away from artificial divisions and cold-war alliances such as NATO. As for the E.U., Syriza denounces the dominant extreme neoliberal and euro-atlantic policies and believes that they must and can be transformed radically in the direction of a democratic, social, peaceful, ecological and feminist Europe, open to a socialist and democratic future.”

Putting forth a program of reforms

Syriza — the Coalition of the Radical Left — re-constituted itself as a single party at its first congress in July 2013. Nearly 500 organizations were represented at the congress, which elected Alexis Tsipras as party president and a 201-member central committee. Close to 20 groups comprised Syriza prior to this congress (when it was formally a coalition), most of which remain as part of the party while a few became “allied groups.” The party includes Trotskyist, Maoist, Eurocommunist and other non-orthodox communist Leftist groups, but that does not mean it intends to implement a revolutionary program.

The “Thessaloniki Program,” announced last September by Mr. Tsipras in the Greek city of that name, promises that Syriza will:

  • Re-negotiate the national debt and a “haircut” on the foreign debt.
  • Impose higher taxation on the rich.
  • Raise salaries for some low-paid employees.
  • Abolish a recently enacted property tax.
  • Provide more money for the municipalities and the local authorities.
  • Create 300,000 new jobs.
  • Re-open public radio and television, which were summarily shut by the outgoing government.
  • Establish a new national development bank.
  • Restore Greece’s previous monthly minimum wage of €751.

Ilias Milonas, a member of the Left Platform grouping within Syriza writing on The Socialist Network web site, in pointing out that the Thessaloniki Program consists of reforms that fall short of effecting a necessary structural change, said:

“In the Syriza leadership’s programme also absent is the most crucial matter of the nationalisation of the banks, a policy that was decided on at the last congress of Syriza – almost all the banks in Greece have been privatised in recent years. We believe that there is not one programme that can be implemented without the nationalisation of the banking system along with and the rest of the economic system. In contrast, the leadership’s proposal for the establishment of a New Development Bank with a budget of one billion Euros is like planting a tree in the Sahara in the hope of greening the desert. Indeed, all they propose for the banks is a vague form of “social control.”

Even within Germany, the Left Party advocates a nationalization of banks, so Syriza doing so would not be outlandish (especially as public control of banking and the elimination of speculation are prerequisites for a democratic economy). And a restoration of the previous Greek minimum wage of €751 a month is not living in luxury — at current exchange rates, that’s US$893 or £589. Nobody is living well on that.

The program, Mr. Tsipras said, is to cost about €13.5 billion. The Greek newspaper To Vima reports that, of that total, about €2 billion would go toward addressing the humanitarian crisis, €6.5 billion would be used in measures to help restore the economy (with an estimated €3 billion toward benefits), and €5 billion would be invested in restoring employment. This cost is six percent of the total of the loans by the troika (the European Commission, European Central Bank and International Monetary Fund).

Debt relief for Germany

These reforms — which would do nothing to challenge the prevailing power relations and amount to a program of Keynesian initiatives — are nonetheless presented as the crazy schemes of dreamers. “Every new government needs to fulfil the contractual agreements of its predecessors. … But if Greece goes in another direction then that’s going to be a difficult situation,” Finance Minister Schäuble said, as reported by Reuters. Well, no need for any more elections, then.

Most of all, it would be some sort of moral outrage, scream European leaders and echoed by the corporate media on both sides of the Atlantic. Conveniently overlooked is the huge debt forgiveness given to Germany after World War II, which surely helped the Federal Republic recover. Germany’s pre-war debt amounted to 22.6 billion marks, including interest, and its postwar debt was estimated at 16.2 billion marks, according to the Committee for the Abolition of Third World Debt. Yet the U.S., the U.K. and France agreed in 1953 to forgive nearly two-thirds of that total, and allowed Germany to negotiate payment schedules in cases of financial difficulty. On top of that, the allies voluntarily reduced the amount of goods they would export into the Federal Republic so that it could reduce its trade deficit and give a boost to its internal manufacturers.

Syriza argues, not unreasonably, that what was done for Germany in 1953 should be done for Greece today. And, although debt writedowns and aid programs such as the Marshall Plan went toward raising living standards of Germans, the €227 billion of loans that have gone to Greece benefits large financial institutions elsewhere, none more so than German and French banks. By one estimate, only €15 billion has gone to state operations; none after 2012. The Greek government has been a pass-through, taking the loans given it and promptly sending it the financiers who own the debt. At the end of 2008, more than 50 percent of the debt was owed to banks in Germany, France and Italy alone.

The troika has not been propping up the Greek government, it has been propping up Europe’s banks and financial houses.

That derives from the neoliberal concept is that people exist to serve markets rather than markets existing to serve people. Entire countries have been harnessed to the dictates of “markets.” This has long been the pattern imposed by the global North on the South through institutions like the IMF; now the stronger countries of the North are imposing it on their weaker neighbors. Taxpayers in those stronger countries are on the hook, also, as some of their taxes go toward the bailout funds, for which bailed-out countries are merely a conduit to pass the money to financiers, often from their own country.

If it looks like a depression, talks like a depression …

What has Greece received from the troika’s loans? Greek gross domestic product has contracted by 25 percent, unemployment is above 25 percent, real wages have fallen by 30 percent and industrial output has declined by 35 percent. The country’s foreign debt has actually risen, to 175 percent of GDP from approximately 130 percent in 2009. This is what the International Monetary Fund hailed as “progress” two years ago!

Just as “the market” dictates a race to the bottom for labor, the harshest terms that can be imposed are mandated for debtors, always wrapped in a hypocritical, sanctimonious “morality.” German Chancellor Angela Merkel is not stubborn nor obsessed with Weimar-era inflation, as she is sometimes portrayed; she is simply reminding other national political leaders that economic harmonization will conform to the tightest policy among them and Germany so happens to have that tightest policy. This is the will of the “market” to which they chained themselves.

None of the eurozone’s national leaders are reducible to “puppets,” but their perceived national interests are distorted by whatever consensus their industrialist and financiers arrive at. Big industrialists and financiers dominate their societies through control of the mass media and a range of other institutions to the point that their preferred policies become, through repetition, the dominant ideas across society and the ideas adopted by the political leaders who become dependent on them. Their aggregate interests constitute the “market.”

Greece can not be a socialist island in a capitalist Europe, nor can any other country; that understanding is reflected in Syriza’s program. What might a different Europe look like? Various non-orthodox economists have proposed programs, some envisioning Greece remaining in the eurozone and some envisioning Greece dropping the euro and returning to the drachma. What these programs have in common is a vision of a European-wide economic restructuring.

To summarize some of these ideas: The E.U. should be leveraged to internationalize the resistance of working people; full employment demanded as an explicit goal; banks should become publicly owned and democratically controlled so that capital is directed toward socially useful investment instead of speculation; a highly progressive taxation system should be coordinated at the E.U. level; wages raised to account for improved productivity that has, for three decades, gone to capitalists; governments should default at least some of their debts to banks; bank deposits should be guaranteed; and there should be more investment in education to enhance future productivity.

Impossible? In a capitalist Europe, yes. But in a better world, these kinds of ideas would simply be common sense. Why shouldn’t they be?

When water is a commodity instead of a human right

The shutoff of water to thousands of Detroit residents, the proposed privatization of the water system and the diversion of the system’s revenue to banks are possible because the most basic human requirement, water, is becoming nothing more than a commodity.

The potential sale of the Detroit Water and Sewerage Department is one more development of the idea that water, as with any commodity, exists to produce private profit rather than to be a public necessity. And if corporate plunder is to be the guiding principal, then those seen as most easy to push around will be expected to shoulder the burden.

Thus, 17,000 Detroit residents have had their water shut off — regardless of ability to pay — while large corporate users have faced no such turnoff. The Detroit Water and Sewerage Department began its shutoff policy in March with a goal of shutting off the water to 3,000 accounts per week. Residents can be shut off for owing as little as $150. That is only two months of an average bill.

Water is a human right, the people of Detroit say. (Photo by Moratorium NOW! Coalition to Stop Foreclosures, Evictions, amd Utility Shutoffs)

Water is a human right, the people of Detroit say. (Photo by Moratorium NOW! Coalition to Stop Foreclosures, Evictions, and Utility Shutoffs)

Detroit water rates have more than doubled during the past decade, according to Left Labor Reporter, and in June another 8.7 percent raise was implemented. Yet only in July, months after residential water shutoffs began, did the water department announce it would send warning notices to delinquent businesses. There is no report, however, that any business has had its water turned off.

About half of the city’s overdue water payments are owed by commercial and industrial customers. Forty offenders, according to the department, have past-due accounts ranging from around $35,000 to more than $430,000. One golf course operator is said to owe hundreds of thousands of dollars.

The same week that the residential water shutoffs began, Detroit Emergency Manager Kevyn Orr put the water department up for sale. The department takes in about $1 billion in revenue per year, The Wall Street Journal reports, and collects more revenue than it spends. The system would potentially be a valuable asset for one of the multi-national corporations that have taken over privatized water systems around the world, mostly to the regret of the local governments and ratepayers.

Reversing the privatization of water

If Emergency Manager Orr succeeds in selling off Detroit’s water system, he will be bucking a trend. Dozens of cities in France and Germany have reversed earlier privatizations and are taking back their water systems after finding that higher prices and reduced services had been the norm post-privatization. French private water prices are on average 31 percent higher than in public water services. Five Pennsylvania towns that privatized their water saw their rates more than triple on average.

That rate differential shouldn’t come as a surprise — a government doesn’t need to generate a profit like a corporation. A water company, like any other capitalist enterprise, is expected to generate large profits for its investors and giant payouts to its executives, and thus must extract more money out of its property.

If the water system is privatized, Detroit’s city budget will receive a one-time boost, but forgo future revenues and lose control of a public good built with public money. Nor is there any guarantee that it would be sold at market value. A utility undervalued would produce quicker profits for any water company that got its hands on it, and every incentive is for it to be bought at as low a price as possible.

Banks, however, have already extracted huge profits from Detroit’s infrastructure. The water department is believed to have paid banks penalties of $537 million to escape its disastrous interest-rate default swaps. Instead of simply selling plain-vanilla bonds — paying bond holders a set amount on a set schedule — Detroit (like many municipal governments) became entangled in various complicated financial derivatives layered on top of its bonds.

Investment banks sold local governments interest-rate swaps as a form of insurance as a hedge against rising interest rates. But if interest rates went down — which they did — then the governments would be on the hook for large sums of money. (That rates would fall was predictable; central banks cut interest rates as a matter of routine during recessions.) Thanks to financial engineering falsely sold as “insurance,” the Financial Times reports it will cost Detroit $2.7 billion to pay back $1.4 billion in borrowing — this total includes $502 million in interest payments and $770 million as the cost of the derivatives.

The $537 million the Detroit water department handed to banks to escape continued extra payments to cover the swaps is more than four times the entire past-due water bill, residential and commercial, at the start of the water shutoffs in March.

Not so quick to challenge the banks

Yet there appears to be no effort to recoup any of that penalty money or to investigate if there was any illegality in the deals. Curt Guyette, writing for a Detroit alternative publication, Metro Times, said:

“Given the fact that former Mayor Kwame Kilpatrick, who is now is serving a decades-long sentence in federal prison for running the city as if it were a criminal enterprise when these deals went down, [was then in office] it doesn’t seem unreasonable to at least suspect that something shady might have been going on.

Nonetheless, Orr and the legal team from [corporate law firm] Jones Day — where Orr was a former partner, and which has as clients both Bank of America and a division of UBS — have, as the complaint [filed in federal court by community activists] points out, ‘failed to investigate the misconduct or take measures to recoup any portion of the $537 million in suspect termination fees paid to the banks.’ ”

Both Bank of America and UBS profited enormously from the interest-rate swaps. Emergency Manager Orr does not seem terribly bothered by democratic processes, however. He is going ahead with a separate plan to privatize Detroit’s parking department despite the fact that the City Council voted, 6-2, against it. The Detroit Free Press reports that the parking system generates $23 million in revenue with only $11 million in expenses. This would be another revenue stream leaving public hands, and the same needs of a private owner to generate profits would be expected to lead to the same results that privatizations of water systems and other public services have led.

The people of Detroit are fighting back, through demonstrations, lawsuits, appeals to the United Nations and in physically blocking crews assigned to turn off the water. Water is also being turned back on without asking for permission from authorities. Activists demand the immediate resumption of water service for everyone and to make water affordable. Detroit Debt Moratorium, for example, is calling for water bills to be capped at two percent of household income.

These efforts have borne some fruit as Emergency Manager Orr issued an order handing Mayor Mike Duggan managerial control over the water department in late July. The department subsequently declared a moratorium on water shutoffs until August 25.

A commodity is privately owned for the purpose of profit, regardless of human need; that the commodity is something as necessary as water does not alter that a commodity goes to those who can pay the most. The market determines who gets what, or if you get it at all — and the market is simply the aggregate interests of the most powerful industrialists and financiers. The agony of Detroit is the logical conclusion of reducing social and economic decisions to market forces. Detroit just happens to the be the locality that got there first.

Eminent domain to save homeowners a nice reform but falls well short

“Reverse eminent domain” — the seizure of mortgages by municipal governments to keep people in their homes — has yet to be put to the test, but the strong opposition mounted by Wall Street is perhaps negative proof that it is a good idea.

Financial industry opposition has so far cowed any government from actually implementing such a plan, even though one suit filed in California was thrown out as premature. That suit was aimed at Richmond, California, where the city government in July 2013 declared its intent to use eminent domain — U.S. laws ordinarily used to seize properties to clear land for construction projects — to buy mortgages and refinance them.

Cold feet on the part of some city council members has prevented Richmond from actually implementing its plan. But a second city on the other side of the country — Irvington, New Jersey — has voted to carry out a similar program. Fear of being the first has been a factor in the lack of action and if others announce similar intentions, perhaps an interesting experiment will yet be conducted.

Rosie the Riveter monument, Richmond, California

Rosie the Riveter monument, Richmond, California

The basic idea is this: A local government would buy the mortgage of a home at 80 percent of “fair market value,” which in these cases would be far less than what is owed on the mortgage, and then allow the homeowner to refinance at the new, lower amount. The new loan would be refinanced through a private company contracting with the local government.

This would not be an act of charity. The local government and the private finance company would split the profit that would result from the difference between what the homeowner would owe after the refinancing forced by the use of eminent domain (the property’s assessed “fair market value”) and the lower price at which the private finance company would buy the mortgage (80 percent of “fair market value”). The private company could not do this without a government using its power of eminent domain, which is the power to seize property for a public purpose.

The city council of Richmond, a poor city northeast of San Francisco, voted 4-3 in favor of this plan in July. Under California law, however, it can’t actually implement its plan unless the council has a “super-majority” of five votes, and that fifth vote has proved illusive. Opposed council members variously cite that no other city has stepped forward and a fear that the city would be too exposed to possible liability.

A small reform, not an overturning of economic relations

Although the banks and speculators who have profited enormously from the housing bubble would have you believe that refinancing mortgages proffered by predatory lenders is some sort of socialist outrage, the idea is in actuality a capitalist reform. The person most credited with conceptualizing the idea is a Cornell University professor, Robert Hockett, and he published a paper promoting it on the web site of the Federal Reserve’s New York branch.

The Federal Reserve? The part of the government that exists to see to the expensive needs of financiers hasn’t become a socialist bastion, has it? No, it surely hasn’t. Professor Hockett’s paper can’t be taken as, and isn’t, the policy of the New York Fed. But the mere fact of the Fed publishing it demonstrates that we are not discussing anything remotely resembling a threat to the capitalist order.

The paper simply acknowledges that providing assistance to “underwater” homeowners is the “best way” to assist them. Most mortgages have been bundled into pools of “mortgage-backed securities” nearly impossible to unravel; attempting to make a deal with the holders of these securitized mortgages, assuming they could even be determined, can be avoided by instead using local governments as the dealmakers. Professor Hockett advocates this in the context of refusing to blame homeowners for a bubble not of their making:

“[O]wing to asset-price bubbles’ status as collective action problems, it is doubtful that many homebuyers during the bubble years had much choice when it came to buying overvalued homes. That most homes were overvalued is what rendered the bubble a bubble. It therefore seems mistaken to blame homeowners as a class, or to characterize write-downs as per se unfair or morally hazardous.” [page 8]

Professor Hockett elsewhere argues that the plan would actually increase the value of the targeted loans. Writing on the Web of Debt Blog, he argues that the very fact that it is the loans “most deeply underwater” that are targeted is what makes the plan beneficial:

“[D]eeply underwater loans are subject to enormous default risk (just look at Fannie [Mae]’s and Freddie [Mac]’s [Securities and Exchange Commission] filings for a hint as to how high that risk is — nearly 70% for non-prime and 40% even for prime loans), such that one actually RAISES the actuarial value of the targeted loans by purchasing them and writing down principal so long as one targets the RIGHT loans. … The whole POINT of the plan is to target ONLY deeply underwater loans and associated securities that will be POSITIVELY affected. Those are EXACTLY the loans Richmond and other cities are looking at.” [emphases in original]

Predators profit, prices plunge

Cities like Richmond, with a large minority population, were particularly targeted by predatory lenders. Housing values in Contra Costa County, which includes Richmond, fell 47 percent in 2008 and another 24 percent in 2009. Prices have not recovered. The Richmond plan targets more than 600 mortgages, although that represents only a fraction of the city’s foreclosure-threatened houses.

The private company working with the city is Mortgage Resolution Partners, which refers to itself as a “community advisory firm” and says on its web site that it “will earn a government approved flat fee per mortgage — the same fee that any major bank earns today if it successfully modifies a loan under the federal government’s Home Affordable Modification Program.” (That fee is in addition to the expected profits to be shared with local governments.) The company’s head has worked as an asset manager for several financial companies.

Mortgage Resolution Partners pitched the plan to Richmond, whose Green Party mayor, Gayle McLaughlin, continues to support it. She led a community delegation across the bay to Wells Fargo to negotiate, only to have the bank lock its doors and refuse to negotiate. Wells Fargo and Deutsche Bank were the two banks that sued the city last summer after its vote in favor of the reverse eminent domain plan.

A federal judge threw out the suit because no mortgages had yet been seized, but it is likely new suits would swiftly follow should Richmond or any other city begin to implement such a program. Moreover, the Obama administration’s Federal Housing Finance Agency has threatened sanctions against any jurisdiction that seizes mortgages. An additional threat, that of a capital strike against Richmond, seems to have dissipated, at least for now. A bond offering by Richmond in August 2013 was snubbed, but the city successfully sold $28 million worth of bonds last month.

Perhaps the most likely factor to make reverse eminent domain work would be for it to be widely adopted. Irvington, New Jersey, a poor city bordering Newark, on March 25 became the second U.S. municipality to approve such a plan. Irvington has already been threatened with refusals to issue loans to the city’s government or to any of its residents — an illegal “red-lining” of an entire municipality. Several other cities, including Newark, have discussed reverse eminent domain plans, although San Bernardino County in California dropped its plans in the face of threatened court challenges.

These plans are not without legitimate controversy. Public pension funds are invested in all sorts of financial products, and widespread reductions in mortgages could affect others than banks and speculators. The California Public Employees Retirement System, which holds about $11 billion of mortgage-backed securities, has expressed concern about the Richmond plan, although it has not opposed it. Plan proponents, however, argue that value will be added because the mortgages most at risk of default will be the targets, avoiding default and allowing homeowners to remain in their homes.

There are no magic elixirs here. The voracious growth of financialization has ensnared retirement funds, meaning that write-downs of debt are not simple matters. There has been much swooning at first sight of the reverse eminent domain idea, and it certainly does have appeal because it would undoubtedly help victims of predatory lenders. Yet plans such as Richmond’s can be no more than temporary fixes helping small numbers of people; expecting the same economic system that has created such a colossal mess to clean up its mess will end in disappointment.

As long as financiers and landlords are allowed to haul in massive profits without constraint, struggling homeowners and renters alike will continue to having their homes subject to being taken away when a larger pot of profit beckons.

In the short term, creative solutions to ameliorate the predatory behavior of financial elites and provide some measure of stability to embattled communities should be welcomed. Nonetheless, it is tinkering at the margins. Lasting solutions, rooted in community control, will require dramatic structural changes far beyond what so far is contemplated.

Wall Street plunders Detroit while pensioners take blame

The Detroit bankruptcy has been portrayed as a simple morality tale of city mismanagement, but the crucial role of financial industry chicanery has been conveniently ignored. Municipal debt is a largely unknown but very lucrative field — lucrative, that is, for speculators.

There are so many questions that can be asked about Detroit’s bankruptcy filing. What is Wall Street’s role in municipal debt? How is it that almost $300 million is available for a new ice hockey arena when there is no money for pensions? How is that business taxes can be cut by 80 percent at a time of fiscal crisis? Why did the total of pension liabilities suddenly increase fivefold from earlier this year?

Ambassador BridgeThese are questions that are rarely raised in the corporate media. Asking such questions disarms the narrative of public-employee retirees bleeding taxpayers dry and masks larger systemic issues. It is quite difficult to believe the same folks who brought you the economic crash of 2008, and five years and counting of hard times, are completely innocent of fleecing local governments. Indeed, they are not.

Although it is the stock market that draws the lions’ share of the public’s attention, the bond market is much larger (and, in turn, foreign exchange is a far bigger market than bonds). Municipal bonds, although a relatively small portion of the overall bond universe, are big business — US$3.7 trillion. Yes, you read that correctly — trillions of dollars. That is one big pot of money to tap, and tap it financiers do.

Why pay taxes when you can loan it and earn interest instead?

Absent from discussions about Detroit is why governments have to issue so much debt. The reason is not complicated: Big business, and the wealthy, would much rather loan money at interest to governments rather than pay taxes. It’s not only national governments that are in debt, it’s local and regional governments as well. That is so around the world, demonstrated most vividly by the ongoing European Union crises as one country after another imposes austerity in the face of unsustainable debt.

In North America, Detroit fulfills the same function as Greece does for Europe: A scapegoat. Although it is true that Detroit’s city government is due a share of the blame for poor management, larger economic and social forces, disinvestment and financial industry legerdemain loom much larger. Complex, and poorly understood, derivatives were decisive in Detroit’s fiscal downfall. When local governments had to borrow money (ordinarily to finance large infrastructure projects) in the past, they would issue “plain vanilla” bonds — a set amount of debt paying back a set amount of interest on a specific schedule. A safe, if conservative, investment for buyers of these bonds and  predictable payment terms for the issuer.

Wall Street wanted higher profits from this once staid market, so an ever more dizzying assortment of exotic instruments were conjured, allowing the financial institutions that handle these bond sales to skim off ever more money. Explaining how Wall Street plunders public finances, Alexander Arapoglou and Jerri-Lynn Scofield, wrote on AlterNet:

“Many municipalities invested in flawed ‘structured finance’ deals on the advice of bankers who said these complex transactions would give them a better deal than simpler, traditional products. So trusting public finance officials lined up to follow their advice — only to be told later that advice was not to be relied upon.

“Tellingly, few (if any) corporations used similar structures to meet their funding needs. Nor did the banks themselves. Unfortunately, these products didn’t work as advertised, and public funding costs exploded as a result.”

A common structure, the authors wrote, combines three instruments: variable-rate demand bonds, letters of credit and interest-rate swaps. These are supposed to be forms of insurance to protect cities from rising interest rates, but in actuality are designed to siphon money to the banks, in a classic game of “heads I win, tails you lose.” Municipal treasurers sought to pay below-market fixed interest rates for paying back long-term debt. But institutional investors want to be able to rapidly buy and sell such bonds. Variable-rate demand bonds enable bond buyers to get their money back on demand, in periods as short as a week. The AlterNet authors wrote:

“Alas, there’s no such thing as a free lunch. A bond that can be returned, with no penalty charges, every week doesn’t sound at all like the long-term infrastructure financing the city or state wanted. So banks promised municipal clients that if investors wanted to return bonds, the bank would find another buyer. Sounds like it might work out okay, right? But what would happen if no one wanted to buy these returned bonds?”

The necessity of answering that question leads to the letters of credit and interest-rate swaps, which are forms of insurance. On paper. When financial markets froze in the wake of the Lehman Brothers collapse in September 2008, nobody would buy the variable-rate demand bonds. The interest-rate swaps were sold to local governments as a hedge against rising interest rates. But the buyers of these products had to pay penalties because the bank’s credit ratings dropped and interest rates fell.

Interest rates fell because central banks like the Federal Reserve wanted to shovel piles of cheap money at “too big to fail” banks to keep them solvent. That interest rates would fall was quite predictable, as cutting rates is a standard tool of central banks during recessions.

Financial derivatives cost Detroit dearly

Here’s how this scam worked for Detroit, according to Bloomberg, far from a news source hostile to the financial industry:

“The swaps were a bet on the direction of interest rates. Because rates fell rather than increasing, the city owes the banks. Under the terms of the contracts, cuts to the city’s credit ratings allowed the companies to demand the money. Under agreements in 2009, the city pledged casino revenue to cover the payments. [Emergency manager Kevyn] Orr gave the swaps payments, as secured debt, priority over retirees and holders of unsecured debt, including the pension borrowings. While swaps holders would take a 25 percent cut in payments, other creditors would receive much less.”

That last sentence refers to a deal that Emergency Manager Orr attempted to make before the declaration of bankruptcy, in which derivatives speculators would be paid far more than pensioners. Detroit absorbed losses totaling hundreds of millions of dollars due to these derivatives. The Financial Times reports that, due in part to the extra costs sustained from the derivatives, Detroit owes nearly double the principal — in other words, Detroit is effectively paying nearly 100 percent interest:

“As of the end of June, the negative value of the derivatives was almost $300m, according to material from Ernst & Young submitted as part of the bankruptcy court filings. By the time the city ultimately pays off the $1.4bn in borrowing, the total bill just from 2013 onwards will be over $2.7bn, or almost double the original debt, of which $770m will be the cost of the derivatives — far more than the $502m in interest payments, these filings add.”

Merrill Lynch (a subsidiary of Bank of America) and UBS sold Detroit the interest-rate swaps, and when interest rates fell and Detroit’s credit rating was cut, the city signed a deal that pledged tax revenues from the city’s casinos to cover its extra costs, according to the Financial Times. That transaction transformed UBS and Merrill Lynch from unsecured into secured creditors, putting them at the head of the payment line. Prior to the bankruptcy, the two investment banks offered to absorb a 25 percent cut to what they are owed, but at the same time municipal workers were asked to take a 90 percent cut.

Remember that government workers are not eligible for Social Security, so their pensions are what they will have to live on. The average Detroit city government pension is $19,000 a year.

Secured creditors are those who hold debt backed by some kind of legal claim to a physical asset of the city, such as, for example, Detroit’s bond obligations relating to its water and sewer department. Unsecured creditors face steep cuts, including the pension funds scapegoated for the fiscal crisis. Hedge funds are said to be buying up other unsecured Detroit debt, and the more these hedge funds extract, the less there will be for city workers. This is a tactic, used recently by hedge funds speculating on Argentine debt, in which debt is bought at pennies to the dollar with an eye toward getting much more out of the issuer.

A tool for financiers to extract billions of dollars per year

The cost to taxpayers from derivatives is enormous. A group called the ReFund Transit Coalition recently released a study, “Riding the Gravy Train,” in which it reported that researchers have found about 1,100 swap deals in the United States entered into by 100 government agencies that cumulatively are losing more than $2.5 billion per year. The coalition believes that there hundreds of other such deals out there not yet added to the total.

This comes at a time when four out of five transit agencies are cutting service or increasing fares in the wake of the economic downturn. Getting out of these deals is costly — for example, New York state recently paid $243 million to terminate a swaps deal, and $191 million of that fee is being financed by more borrowing.

But there’s plenty of money for corporate subsidies

As Detroit headed toward its declaration of bankruptcy, Michigan Governor Rick Snyder handed some presents to his wealthy benefactors. In December 2011, he signed two anti-union bills that render union membership as a condition of employment illegal; the language of the bills was virtually identical to “model” bills written by the infamous American Legislative Exchange Council (ALEC), a lavishly funded group that writes legislation for state legislatures that will directly benefit its corporate funders.

A less noticed gift by Governor Snyder is a massive tax cut for Michigan businesses that will be paid for by severe reductions in social spending and higher individual taxes. Taking effect in 2012, business taxes were cut by 80 percent (or $1.7 billion per year) under the excuse that such cuts will lead to job creation, although there is no evidence that such cuts actually lead to more jobs. In real life, jobs are created by demand for a product, not tax rates. Low-income people were already paying the largest share of their income in state and local taxes while those making more than $385,000 a year paid the smallest, and lower- and middle-income people are being hit with the highest increases in taxes.

And yes friends, that’s not all. Michigan, on a per capita basis, spends more money on corporate subsidies than any other U.S. state — a total of $6.2 billion per year. When we add these corporate subsidies with the business tax cuts, that’s almost $8 billion per year of subsidies handed out. Note that the total amount of unfunded pension obligations cited by Emergency Manager Orr is $3.5 billion — and that number may be inflated. (More on that below.) Yet there is a steady propaganda barrage that insists the problem is retirees and current workers expecting to be able to retire some day.

So the problem of pensions is easily solvable. Michiganders outside Detroit shouldn’t have to pay, some might say. But that ignores that the state, certainly the counties surrounding Detroit, benefits from the city’s infrastructure. Corporations that once had operations in Detroit benefited from the investments the city made in its physical environment and from the workers who were educated in public schools and universities. The city’s social amenities also provide benefits that cross borders. Corporations and better-off people fled to the suburbs — to the north, crossing county lines — to avoid paying for such services, a familiar tactic of capital.

But some infrastructure, evidently, is worth an investment. At the same time pensioners on fixed incomes are facing large cuts and city services are drastically reduced, $283 million of public money are proposed to be lavished on a new ice hockey arena, for a team (the Detroit Red Wings) owned by Mike Ilitch, who is worth $2.7 billion. This in an area that is already paying off two football stadiums, and has two arenas in current use.

Detroit can do this because a separate entity, the Detroit Development Authority, will hand out the subsidies, and the authority has a special stream of revenue from property taxes that its can tap before revenues are sent to the city treasury. Ultimately, the state is said to control these funds, and as it is the state that forced Detroit’s declaration of bankruptcy, it could divert that money to, say, fixing street lights or repairing ambulances.

Is the size of Detroit’s pension shortfall being inflated?

One final question is: What is the size of the pension shortfall? As recently as February 2013 — five months before the bankruptcy filing — Detroit’s unfunded pension liability was listed as $650 million by the state, yet Emergency Manager Orr has claimed the liability is $3.5 billion without providing any details as to the reasons for the fivefold increase. The investment management firm BlackRock, in an analysis on the ramifications of Detroit’s bankruptcy filing, said:

“There is question as to whether the [emergency manager’s] plan is inflating pension and [other post-employment benefits] liabilities. … This $3.5 billion now represents nearly one-third of the amount Detroit owes to its unsecured creditors, and raises required pension contributions to approximately 100% of the city’s $1 billion forecasted budget deficit over the next five years.”

The dramatic increase in the size of the pension liabilities seems to be based on a report prepared by an actuarial consultant that used a different methodology to calculate the liabilities — but the emergency manager refuses to release the report. Meanwhile, there are indications that the consultant did a less than rigorous job of tallying its numbers. Cate Long, writing in the MuniLand blog, in discussing this issue, asked:

“A ‘very rough preliminary guesstimate’ is what Orr was using in his ‘good faith’ negotiations and is now taking to bankruptcy court? … Pension calculations can seem to be a form of voodoo. Moody’s applies a lower discount rate, like the [consultant’s] report did, to pension liabilities, while the two other major raters do not. Pension liability methodologies are, in essence, just opinions. … Orr could help everyone understand his case by releasing the [consultant’s] report for study by actuaries and others.”

As recently as 2005, Detroit’s pension obligations were fully funded. But when the pensions’ portfolios suffered losses from the economic downturn, the city government decided to issue bonds to fulfill its obligations. A series of refinancings, underwriting fees and penalties for credit-rating cuts has cost the city hundreds of millions of dollars. It is currently impossible to say definitively that Emergency Manager Orr is artificially inflating the pension shortfall, but it is not difficult to see the rationale for doing so: The greater the liability, the deeper the cuts that can be imposed, especially on pensions.

Austerity comes in many flavors, but it is never the financial industry that has to cut back. Detroit’s mayors and councilmembers can, and should, be taken to task for failing to investigate the snake oil financiers were selling them, but that does not ameliorate the rapacious grabbing of public money by the snake-oil salespeople. The financial industry does not create wealth, it confiscates wealth. The time is long past to chop off the vampire squid’s tentacles and reduce banking to a public utility serving the public interest under democratic control.

Debt jubilee: Revolutionary change or reform to stabilize capitalism?

Debt has been a crucial lever in implementing austerity, both as an instrument and a moral cudgel. Eliminating debt, private and public, would have transformative effects — but would doing so be revolutionary or merely a reform to stabilize world capitalism?

Those are not the only two choices, of course, and the mere thought of a debt jubilee would send many a set of teeth gnashing. Debt jubilees are not a new idea; in fact they have existed since long before capitalism was born. But given the unprecedented level of debt, a jubilee today would entail unprecedented complexity.

The Australian economist Steve Keen has for several years energetically promoted the concept of a debt jubilee. His concept is to bail out people instead of banks, reasonably arguing that people would spend the money, reviving the economy. So in this formulation, radical as the concept of a jubilee is (and radical as the idea of helping working people instead of the super-wealthy is), it is conceived as a reform.

Professor Keen conceptualizes a jubilee in a form that would not cause damages to debt holders not responsible for the crisis, such as pension funds:

“Whereas only the moneylenders lost under an ancient Jubilee, debt cancellation today would bankrupt many pension funds, municipalities and the like who purchased securitized debt instruments from banks. I have therefore proposed that a ‘Modern Debt Jubilee’ should take the form of ‘Quantitative Easing for the Public’: monetary injections by the Federal Reserve not into the reserve accounts of banks, but into the bank accounts of the public — but on condition that its first function must be to pay debts down. This would reduce debt directly, but not advantage debtors over savers, and would reduce the profitability of the financial sector while not affecting its solvency.”

large money bills“Quantitative easing” is a government program of massive buying of assets from banks in an effort to promote increased lending and liquidity through increasing the money supply. A “quantitative easing for the public” would give money to everybody. Those with no debt would be free to spend it as they wish, and those who received more money than the size of their debt would similarly have no obligations once they wiped out their debt. Dramatic as this idea is, Professor Keen is no revolutionary; he seeks to put capitalism on a firmer footing:

“Returning capitalism to a financially robust state must involve a dramatic fall in the level of private debt — and the size of the financial sector — as well as policies that return the financial sector to a service role to the real economy.”

His reasoning is that economic recovery is impossible until private and government debt is paid down:

“The standard means of reducing debt — personal and corporate bankruptcies for some, slow repayment of debt in depressed economic conditions for others — could have us mired in deleveraging for one and a half decades, given its current rate. … That fate would in turn mean one and a half decades where the boost to demand that rising debt should provide — when it finances investment rather than speculation — will not be there. The economy will tend to grow more slowly than is needed to absorb new entrants into the workforce, innovation will slow down, and justified political unrest will rise — with potentially unjustified social consequences. … We should, therefore, find a means to reduce the private debt burden now, and reduce the length of time we spend in this damaging process of deleveraging.”

A radical idea, then, to save the system. A radical idea that is not at all revolutionary in the hands of Professor Keen. Considering the mass political movement required to force what would be an extraordinary change in the policies of the world’s central banks and finance ministries — institutions staffed by and run on behalf of financiers — would we be simply content to say, “Well, that’s it, then, we can all go home now”?

Revolutions as ‘transformations of common sense’

The U.S. activist and economist David Graeber also calls for a debt jubilee but, in contrast, conceives this as a revolutionary demand. Writing in the latest edition of The Baffler, Professor Graeber argues that world revolutions consist “above all of planetwide transformations of political common sense.”

Drawing upon the works of “world systems” theorist Immanuel Wallerstein, he argues that the revolutions of 1848 were successful even though none took power because the ideas behind it and the French Revolution widely took root. He similarly sees Russia’s October Revolution as responsible for the New Deal and European welfare states and, on less firm ground, that 1968 “changed everything” because of the personal liberations that grew out of it, including feminism.

Fear of communist revolutions, and large mass movements, did lead to the many advances of the mid-20th century. But as most of those advances have been reversed, it is more realistic to see them as simply reforms — and reforms can, and will, be taken back when movements subside. People can’t stay in the streets forever. The changes of personal liberation spawned by 1968 and beyond are not as susceptible to reversal, and, as with LGBT movements, continue to advance in some ways but, nonetheless, feminist gains in particular are under sustained assaults.

We should be careful to differentiate advances that threaten the system — such as major structural changes in the economic sphere — and those that don’t, such as same-sex marriage or women shattering glass ceilings, however much individual religious fundamentals or tradition-minded men believe themselves to be “threatened.” In no way do I wish to minimize the social gains made by women, LGBT communities, and racial and national minorities, nor ignore that social divisions are integral to the functioning of any system based on inequality and hierarchy. Such freedoms — still only partially attained and still requiring organized defense — are prerequisites for any concept of a better world to have meaning.

Economic inequality has steadily widened as class repression intensifies; objectification of women in mass media is ubiquitous, as exemplified by the pornification and coarseness of corporate-controlled mass culture; and nationalist and other xenophobias are gaining new traction under the impact of economic disintegration and the accompanying social disruptions. It seems premature to declare everything has changed, even keeping in mind that leaps in social zeitgeists are a process rather than a sudden jump.

A jubilee linked to other demands

Given the interconnectedness of struggles, is the idea of a debt jubilee in itself a “revolutionary demand,” as Professor Graeber declares it? In other words, would it actually overturn the current world system, or would it be simply a reform, albeit a welcome and thorough-going one on the scale of the New Deal? He does link the idea of a jubilee with the necessity of slowing down growth:

“We seem to be facing two insoluble problems. On the one hand, we have witnessed an endless series of global debt crises, which have grown only more and more severe since the seventies, to the point where the overall burden of debt — sovereign, municipal, corporate, personal — is obviously unsustainable. On the other, we have an ecological crisis, a galloping process of climate change that is threatening to throw the entire planet into drought, floods, chaos, starvation, and war. The two might seem unrelated. But ultimately they are the same. What is debt, after all, but the promise of future productivity? … [Producing more is] precisely what’s destroying the planet, at an ever-increasing pace.”

Thus, Professor Graeber argues:

“Why not a planetary debt cancellation, as broad as practically possible, followed by a mass reduction in working hours: a four-hour day, perhaps, or a guaranteed five-month vacation? This might not only save the planet but also … begin to change our basic conceptions of what value-creating labor might actually be. … The morality of debt and the morality of work are the most powerful ideological weapons in the hands of those running the current system. That’s why they cling to them even as they are effectively destroying everything else. It’s also why debt cancellation would make the perfect revolutionary demand.”

Such an outcome would require an extraordinarily strong global movement; in this conception a debt jubilee would be a means to an end and linked to broader structural change. For a debt jubilee to be “revolutionary” it would have to be one piece of a more comprehensive struggle. A debt jubilee by itself, in isolation, would be, as Professor Keen intends, a method of stabilizing capitalism. Indeed, he has shown that a jubilee could be brought about using standard capitalist-management tools in a different way.

Saving the current world system would be a temporary salve and nothing more; all the contradictions within it would resurface. But that system is of human creation. When new ideas gain secure social foundations, revolutions can happen — whether it is sovereignty residing in the people rather than a royal family designated by a god, or that democracy is possible only with everyone able to participate on an equal footing rather than only men of a society’s dominant ethnic or racial group, or that political democracy is an empty shell without economic democracy.

A better world can only arise from unleashed human imagination and creating unbreakable links among struggles.