America Is Being Raped ... Just Like Greece and Other Countries
George Washington's picture
Submitted by George Washington on 06/16/2011 14:55 -0400

Abu Dhabi
Central Banks
Corruption
Council Of Economic Advisors
Countrywide
Credit Default Swaps
Creditors
Deficit Spending
Fannie Mae
Federal Deficit
Federal Reserve
Freddie Mac
Goldman Sachs
Greece
Gross Domestic Product
Indiana
Institutional Investors
International Monetary Fund
Iraq
Larry Summers
Milton Friedman
Monetary Policy
Morgan Stanley
Naomi Klein
National Debt
national security
New Orleans
New York Times
Obama Administration
Prudential
Rahm Emanuel
Rating Agencies
ratings
Ratings Agencies
Real estate
recovery
Sovereigns
SWIFT
The Economist
Unemployment
United Kingdom
White House
World Bank
World Trade



→ Washington’s Blog

Preface: The war between liberals and conservatives is a false divide-and-conquer dog-and-pony show created by the powers that be to keep the American people divided and distracted. See this, this, this, this, this, this, this, this, this and this. So before assuming that privatization is a good thing, read on.

If these resources had always been in the private sector, that would be fine ... that would be free market capitalism.

But if they were purchased with our taxpayer funds and then sold to the big boys for cheap, that is looting.

Greece is thinking of selling some islands. Austria is thinking of selling mountains to pay off their national debt. Cities throughout the U.S. are thinking of privatizing their parking meters.

What's going on?

Well, as I predicted in December 2008, bailing out the giant, insolvent banks would cause a global debt crisis:

The Bank for International Settlements (BIS) is often called the "central banks' central bank", as it coordinates transactions between central banks.



BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:

The scope and magnitude of the bank rescue packages also meant that significant risks had been transferred onto government balance sheets. This was particularly apparent in the market for CDS referencing sovereigns involved either in large individual bank rescues or in broad-based support packages for the financial sector, including the United States. While such CDS were thinly traded prior to the announced rescue packages, spreads widened suddenly on increased demand for credit protection, while corresponding financial sector spreads tightened.

In other words, by assuming huge portions of the risk from banks trading in toxic derivatives, and by spending trillions that they don't have, central banks have put their countries at risk from default.

Top independent experts say that the biggest banks are insolvent (see this, for example), as they have been many times before.

And a study of 124 banking crises by the International Monetary Fund found that propping banks which are only pretending to be solvent hurts the economy:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.



Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.



***

All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.

By failing to break up the giant banks, governments are forced to take counter-productive emergency measures (see this and this) to try to cover up their insolvency. Those measures drain the life blood out of the real economy ... destroying national economies.

Selling the Farm to Pay for Debt Incurred to Make the Rich Richer

Matt Stoller notes:

Privatization takes inherently governmental functions — everything from national defense to mass transit and roads — and turns them over to the control of private actors, whose goal is to extract maximum revenue while costing as little as possible.



***



It isn’t true, as a general rule, that privatization shrinks the public sector. When investor demand for high returns is combined with the natural monopolies of public assets, what often results instead is citizens finding themselves saddled with high fees and poor service.



Even more perniciously, selling infrastructure such as toll roads puts the coercive power of the state in the hands of private actors. We have great public assets built by prior generations. We should and could be building a better country for our children, rather than liquidating what we have.

***

Rep. Peter DeFazio (D-Ore.) pointed out the truth of the Obama administration’s stimulus program: “Larry Summers hates infrastructure. And some of these other economists — they don’t like infrastructure. … They want to have a consumer-driven recovery.â€