IMF chief warns second wave of countries will require bail-out - International Social/Political

IMF chief warns second wave of countries will require bail-out
by Edmund Conway via reed - Telegraph UK Tuesday, Feb 17 2009, 1:15am
international / social/political / other press

lovin' the spin we're in ..

The IMF managing director also said the rich world was now in the midst of a "deep recession". It came as the G7 pledged to avoid slipping into protectionism and repeating the same political and economic mistakes as were made in the 1930s. Ministers also pledged to do more to support their banking systems, sparking speculation that a number of countries, including Germany and France, will unveil new bail-outs and possibly set up "bad banks" as they scramble to fight the crisis.

But with some countries' economies effectively dwarfed by the size of their banking sector and its financial liabilities, there are fears they could fall victim to balance of payments and currency crises, much as Iceland did before receiving emergency assistance from the IMF last year.

Some have speculated that the UK may have to seek IMF support if capital markets become frightened of the size of its foreign financial liabilities, which increasingly appear to have become supported by the state. But there are a swathe of Eastern European countries which appear particularly vulnerable and may need IMF support.

With the Fund's warchest expected to run dry later this year, the Japanese confirmed in Rome that they would supply an extra $200bn of capital to the Washington-based institution.

Mr Strauss-Kahn, who warned recently that his resources could run dry within six months, said: "This is the largest loan ever made in the history of humanity.

"The biggest concrete result of this summit is the loan by the Japanese... now I will continue with the objective of doubling the Fund's resources."

He added that it was now essential for countries to support their banking sectors.

© 2009 Telegraph Media Group Limited

Statistics released Thursday by the European Union's Eurostat agency reveal that production plummeted across Europe at the end of 2008. The figures announced were far worse than analysts had anticipated. Industrial production declined across Europe by 2.6 percent in December compared to the previous month. On a year-to-year basis, European production has slumped 12 percent.

For some time, leading European politicians have attempted to put a positive gloss on declining figures for European production, but the results released Thursday ushered in a new tone. European Union Industry Commissioner Günter Verheugen told the Financial Times Deutschland, "The extent and speed of the crisis is completely new."

One day previously, an Ifo Institute for Economic Research survey revealed that business sentiment within the 16-country common-currency eurozone declined for the sixth consecutive quarter, plunging to its lowest point since the survey began 16 years ago. The European Central Bank (ECB) also issued a warning that the recession gripping Europe will not be short-lived. Rather, it will be a "long-lasting and clear downturn," the ECB said.

The response of the individual European nations to the growing crisis has been to embrace a raft of protectionist measures. Italian Premier Silvio Berlusconi recently warned appliance maker Indesit SpA not to transfer production and jobs to Poland, and in Britain, trade unions and politicians are demanding "British jobs for British workers."

On Wednesday, the acting EU Council president, Czech Prime Minister Mirek Topolanek, appeared before the press in Brussels and warned of a "protectionist race" in Europe, while acknowledging that national economies in the European Union were being hit hard by the international crisis and losing ground with unanticipated speed.

Topolanek said, "Problems are emerging in the wake of the economic and financial crisis which the European Union considered to be relics of the past century and long since solved."

After a meeting with EU Commission President José Manuel Barroso, Topolanek described the situation in Europe "as worse than it has ever been." The confidence of citizens in the economic and political system had been shaken, he said, and warned that the battening down of national markets endangered the European domestic market and the world economy.

The Süddeutsche Zeitung echoed the statements of the EU Council president, writing, "Any politician seeking to solve the economic crisis by protectionist measures only worsens the situation."

Barroso also warned against states going it alone. European heads of state and government should put an end to any "nationalist navel gazing," he said. Otherwise, there was a danger of "intensifying the powerful downward trend."

The European automotive industry is being especially hard hit by the lack of credit. A European Union analysis stated: "Broad access to credit plays an important role in the automotive industry, with between 60 and 80 percent of private car sales in Europe carried out on a credit basis." In the steel industry, European Commission experts have reported a slump in orders of 43 to 57 percent.

The European Union leadership expects a sharp rise in the number of unemployed in the coming months. According to EU Industry Commissioner Verheugen, in the past four months companies have shed 158,000 jobs and created just 25,000 new jobs. This is a reversal of the first three quarters of 2008, which saw a general trend toward increased employment.

Last Wednesday, the French automaker Peugeot announced it was shedding at least 11,000 jobs, and one day later, Renault announced its own plans to cut its workforce by 9,000. These job cuts have been agreed to by the French government and trade unions and are bound up with the announcement by French President Nicolas Sarkozy that he plans to subsidise domestic automakers with the sum of €6 billion.

Sarkozy declared that, in his opinion, it was irresponsible "to continue to manufacture French cars in the Czech Republic." He demanded a halt to the transfer of production to other countries. "If we give financial aid to the automotive industry," he said, "we do not want them to set up a factory in the Czech Republic again." He also urged the carmakers to support French industries involved in supplying parts and services to French auto companies.

Czech Prime Minister Topolanek reacted sharply to this openly protectionist policy and called for a special European summit to block it and similar policies.

German Chancellor Angela Merkel (Christian Democratic Union—CDU) also criticised the French action. The defence of free trade and the European domestic market is of crucial importance, Merkel said.

The German economy, which is heavily dependent on its export industries, would be especially vulnerable to any growth of protectionist measures in Europe.

Sarkozy defended his decision and drew attention to the fact that the German chancellor had rejected a joint European stimulus programme just a few weeks before. Now, every government was forced to take its own measures to deal with the crisis, he said. He added that the latest German stimulus programme includes many measures aimed at subsidising German enterprises.

The conflict between Berlin and Paris runs deep. In his role as EU Council president last year, Sarkozy repeatedly raised the demand for an "economic administration" for the eurozone. He made it quite clear that he regarded himself as best suited to head such an administration.

Supported by a majority of the 16 eurozone countries, Sarkozy is seeking to compel the German government to take more responsibility for financial policy. According to the Élysée Palace, Germany, as the continent's biggest national economy, must contribute much more to managing the crisis.

The German government wants precisely to prevent such a development. It regards itself better prepared for the crisis than other euro countries due to the labour market reforms introduced by the previous Social Democratic-Green government, which slashed welfare payments and opened the way for the creation of a huge low-wage sector in Germany.

Backed by the country's business federations, the Merkel government is seeking to exploit the crisis to strengthen Germany's dominant role in Europe. Berlin is vehemently opposed to taking any responsibility for Europe's "weak states"—i.e., those countries that have thus far failed to implement drastic social and welfare cuts.

Behind the German chancellor's appeals for adherence to "free trade" and rejection of protectionism lie the egoistic interests of the German business elite, which profits most from the European domestic market.

The varying economic performances of individual euro countries and the absence of a uniform financial and economic policy have led to increasing discrepancies ("spreads") between the government loans of the euro countries. In mid-January, Greece had to take out a new government loan at an interest rate well above the 3 percent levied on German government securities. Financial experts have said that the trend of rising spreads has "definitely not stopped" and warn that it could have explosive consequences for the fate of the euro as a common currency.

When the chairman of the euro group, Luxembourg Finance Minister and Prime Minister Jean-Claude Juncker, suggested introducing eurobonds to allow weaker member states access to credit on the basis of a pan-European solution, his proposal was immediately rejected by German Finance Minister Peer Steinbrück (Social Democratic Party—SPD). Instead, the German government is seeking to use its EU industry commissioner, Günter Verheugen, to force member states to implement budget cuts and strict austerity policies.

In view of increasing tensions, the EU presidency and the European Commission have announced plans for no fewer than three separate summits in the coming three months. On March 1, the heads of state and government will meet in Brussels to "coordinate national stimulus packages." The agenda is to include the struggle against protectionist tendencies, measures to revive the circulation of credit, the handling of "toxic" securities, and policies directed against the rise of unemployment. Three weeks later, the regular spring summit of the EU takes place in Brussels, which is also likely to concentrate on the economic and financial crisis. In May, the Czech council president has invited member countries to Prague for an employment summit.

Behind this summit frenzy are fears of a possible break-up of the European Union and increasing social unrest, as nations face mass unemployment and growing poverty.

© 2009 Ulrich Rippert, Global Research

The Obama Team has a big problem on their hands; Timothy Geithner. Geithner was picked as Treasury Secretary because he is a trusted ally of the big banks and has a good grasp of the intricacies of the financial system. The problem is that Geithner can't handle the public relations part of his job. His big debut in prime-time last Tuesday turned out to be a complete dud. He was thoroughly unconvincing and looked like a nervous teenager at a speech contest. He fizzled on stage for 25 minutes while the little red box in the corner of the TV screen--which shows the current Dow Jones Industrials--plummeted nearly 400 points. It was a total disaster and one that is sure to be repeated over and over as long as Geithner is at Treasury. Not everyone can be a charismatic orator like Obama and nothing short of a personality transplant will fix Geithner. He lacks gravitas and doesn't inspire confidence. That's a problem since, the administration's main objective is to restore public confidence and get people spending again. They're just shooting themselves in the foot by using him as their pitchman. Eventually, Geithner will either have to be tossed overboard or strapped to Obama like a papoose so he can share in the president's popularity. Otherwise he will continue to be a millstone.

In truth, Geithner did us all a big favor on Tuesday by exposing himself as a stooge of the banking industry. Now everyone can see that the banks are working the deal from the inside. Geithner has assembled a phalanx of Wall Street flim-flam men to fill out the roster at Treasury. "His chief-of-staff is lobbyist from Goldman Sachs. The new deputy secretary of state is a former CEO of Citigroup. Another CFO from Citigroup is now assistant to the president, and deputy national security adviser for International Economic Affairs. And one of his deputies also came from Citigroup. One new member of the president's Economic Recovery Advisory Board comes from UBS, which is currently being investigated for helping rich clients evade taxes." The Obama White House is a beehive of big money guys and Wall Street speculators whose only goal is to nuzzle up to the public trough while strengthening their grip on political power.

The banking lobby has already set the agenda. All the hooplah about "financial rescue" is just a smokescreen to hide the fact that the same scofflaws who ripped off investors for zillions of dollars are back for their next big sting; a quick vacuuming of the public till to save themselves from bankruptcy. It's a joke. Obama floated into office on a wave of Wall Street campaign contributions and now it's payback time. Prepare to get fleeced. Geithner is fine-tuning a "public-private" partnership for his scotch-swilling buddies so they can keep their fiefdom in tack while shifting trillions of dollars of toxic assets onto the people's balance sheet. They've affixed themselves to Treasury like scabs on a leper and are now zeroing in for the kill. Geithner is "their guy", a Trojan Horse for the banking oligarchs. He's already admitted that his main goal is to, "keep the banks in private hands". That says it all, doesn't it?

Of course, the administration is not alone in their support for the banks and Wall Street. Congress has its fair share of bank-loyalists, too. That was evident last week at the hearings of the House Financial Services Committee. 8 CEOs of the nations biggest banks were marched off Capital Hill (ostensibly) for public rebuke. For a minute, it looked like Congress might do its job and actually grill the bastards who blew up the financial system. But, no, that's not what happened. The 7 hours of testimony produced few fireworks and no mention of accountability. For the most part, the bankers were treated like honored guests instead of the chiselers they are. That's because nearly every member of the committee rakes in contributions from the same banks that are being investigated. As Bill Moyers points out on Friday's Bill Moyers Journal, "Last year, the securities and investment industry made $146 million in campaign contributions. Commercial banks, another $34 million." The banks own congress just like they own the White House and anything else of value in the USA. They left the hearings unscathed.

Apart from the infrequent fulminations of congressmen clowning for the cameras, the hearings were tedious and unproductive. Same old, same old. The bankers remained stonefaced throughout, while the committee turned in their typical sub par performance. Congress doesn't do oversight anymore, and even if they did, there's no one with the cohones to apply the rules. Besides, no one in the House has the foggiest idea of how the financial system really works. If they did, they'd know that the banks HAVE actually been lending despite congress's spurious accusations. Some of the banks even produced documented evidence to prove it. This has been a flashpoint for taxpayers who think that they were duped by financial institutions that took the $165 billion TARP money and used it for bonuses or to buy smaller banks. Not so. The truth is more complicated.

The banks have been hoarding; that much is certain. In fact, The St Louis Fed's charts show that:

"Until September, excess reserves hovered at or below about US $2 billion, but have ballooned to over $600 billion as of November 19, 2008....The Fed has thrown money at the banking system, but the banks are hoarding the cash, they do not lend." (Axel Merk, "Monetizing the Debt") Excess reserves are reserves that are beyond the required capital limits. The steady buildup--which now exceeds $700 billion--suggests that the banks are hunkering down for long and deep recession. They are in survival mode. Still, that does not mean they are not lending. In fact, "Bank Credit expanded $459bn year-over-year, or 4.9%. Bank Credit jumped $356bn over the past 21 weeks." (Doug Noland Credit Bubble Bulletin) It's true; bank lending has actually increased even though standards have gotten tougher and consumers are saving for the first time in decades.

How can the banks be lending and hoarding at the same time; aren't the two mutually exclusive? And why is credit draining from the system in trillions of dollars if the banks continue to lend?

This is big mystery of the financial crisis, but one that can be solved by reviewing the facts. J P MorganChase's Jamie Dimon explained it like this:

"There's a huge amount of non bank lending which has disappeared which is the same thing to the consumer (as the banks)...Finance companies, car finance companies, money funds, bond funds..that withdrew money from the system (when the credit crunch took hold) making it much harder on the system. That created the crisis we now have."

The Wall Street Journal summed it up even more succinctly:

"Chairman Barney Frank's hearing was intended to flay the CEOs for not lending enough. It fell flat as political theater because banks have actually increased their lending in recent months. The people who aren't lending more are investors in nonbank financing such as asset-backed securities.

In fact, the nonbank credit market is normally much bigger than bank lending. But new issues backed by auto loans, credit cards and the like have been rare this year, as markets wonder how the government's next move will change the value of such investments. Buyers and sellers of existing securities are "sitting on the sidelines," according to Asset-Backed Alert, waiting for still another Washington recalibration of risk and reward." ("Committee on Doubt and Uncertainty" Wall Street Journal)

This is how the financial system really works--something which seems to be completely beyond the grasp of congress. A shadow banking system has grown up around the process of securitization, which packages pools of debt (mortgages, commercial real estate, student loans, car loans and credit card debt) and sells them as securities to foreign banks, hedge funds, insurance companies etc. Wall Street has muscled into an area of finance that used to be the domain of the commercial banks. According to Treasury Secretary Timothy Geithner, "40 percent of consumer lending" depends on this shadow system for credit. That's why he is determined to resurrect securitization whatever the cost. The Fed has already expanded its balance sheet to $2.2 trillion while providing loan guarantees for over $9.3 trillion dollars. The entire financial system is now backstopped by loans from the Fed without which the global financial system would collapse. The present Fed funding of financial markets forces us to rethink our outdated ideas of the "free market" which now exists only in theory.

A 40 percent decline in consumer credit is more than sufficient to push the world into another Great Depression. The sharp decrease in foreign exports, shipping, auto sales, and other vital areas of commerce--all in the 30 to 40 percent range--suggest that the global economy depends on Wall Street's credit-generating mechanism more than anyone imagined. The breakdown in securitization has sent tremors across the planet triggering a decline in asset prices and an accelerating fall in personal consumption. Before the Fed and Treasury try to restore securitization to its former glory, politicians and pundits should decide whether it is a viable system for long-term growth. There's reason to believe that transforming of debt into securities creates incentives for fraudulent loans and mortgages since they can be dumped on Wall Street and sold to gullible investors. The reason the mortgage lenders and banks bundled off crappy loans to the the big brokerage houses, is because they thought there was no risk involved. (for themselves!) They were wrong and now the entire market for structured debt is in a deep freeze. Geithner and Bernanke should suspend all funding for securitized loans until they can show that the kinks have been worked out and we won't fall into the same trap again. One financial meltdown is more than enough.

The TARP funds should not be used to exhume the corpse of a dysfunctional financial system. The money should be used to create more jobs, extend unemployment benefits, provide food stamps, public works projects or cram downs for struggling homeowners trying to avoid foreclosure. People don't need more credit; they need debt relief. That means higher wages and better jobs. Obama should realize this, even if Geithner and Co. don't. The Geithner-Paulson policy of limitless credit expansion is the path to ruin. That's why Geithner is the wrong man for the job. His fundamental worldview leads to economic calamity.

Geithner's resume alone should have precluded him from consideration as Treasury Secretary. He started his career at Kissinger and Associates, which speaks for itself. From there, he went to International Affairs division of the Treasury Dept. where he served under Robert Rubin and Lawrence Summers both of who were major proponents of deregulation. He's presently a senior fellow at the Council on Foreign Relations and served as director of Policy Development and Review Department at the IMF. In 2003, he became president of the New York Fed and was Vice Chairman of the FOMC. He's also a member of the G-30, an international body of financiers and powerbrokers, and the former chairman of the Bank for International Settlements. If there's an internationalist organization Geithner doesn't belong to, we haven't found it yet. He's been thoroughly marinated in a globalist culture that wreaks of banking conspiracies and clandestine junkets to Jeckyll Island. Is it really that hard to find a good economist who just wants to serve his country?

There was a revealing incident in the Senate Finance Committee last week when Senator Bernie Sanders challenged Geithner. Here's the transcript:

SENATOR BERNARD SANDERS: "In 2006 and 2007, Lloyd Blankfein, the CEO of Goldman Sachs, was the highest paid executive on Wall Street, making over $125 million in total compensation. Due to its risky investments, Goldman Sachs now has over $168 billion in total outstanding debt. It's laid off over 10 percent of its workforce. Late last year, the financial situation at Goldman was so dire that the taxpayers of this country provided Goldman Sachs with a $10 billion bailout.
Very simple question that I think the American people want to know. Yes or no, should Mr. Blankfein be fired from his job and new leadership be brought in?"

SECRETARY GEITHNER: "Senator, that's a judgment his board of directors have to make.

I want to say one thing which is very important. Everything we do going forward has to be judged against the impact we're going to have on the American people and the prospects for recovery. And every dollar we spend will have to be measured against the benefits we bring in terms of---"

SENATOR SANDERS: "Mr. Secretary, you're not answering my question. You have a person who made hundreds of millions for himself as he led his institution that helped cause a great financial crisis. We have put, as taxpayers, $10 billion to bail him out and we have no say about whether or not he should stay on the job?"

SECRETARY GEITHNER: "No, I didn't say that. I think there will be circumstances, as there have been already, where the government intervention will have to come with very tough conditions, including changes in management and leadership of institutions. And where we believe that makes sense, we will do that."

Predictably evasive, Geithner refused to say whether or not Blanfein should be fired. That's because Geithner believes that the function of government is to serve the interests of the big banks not the public. The lip-service to democracy is just rhetorical claptrap. It's meaningless. The government's role is to facilitate the exploitation of its people to fatten the bottom line of the top-hat capitalists. This is why Geithner never made any reference to regulations during Tuesday's speech. There was no mention of Glass Steagal, or reducing the amount of leverage financial institutions can use, or forcing all derivatives contracts onto a regulated exchange, or suspending off-balances sheets operations, or reclassifying all Level 3 assets so shareholders know how much garbage the banks have on their books, or even rethinking the whole securitization model which collapsed the financial system and thrust the world towards a 1930s-type slump. He stayed away from regulation entirely, just as he defiantly withheld details about the impending multi-billion dollar bank bailout.

But don't think that the slippery Mr. Geithner doesn't have a solution for our present economic malaise. He does! He would like to see Congress appoint an Uber-regulator that has the authority to monitor market activity and decide whether individual players pose a threat to the overall system.

Sounds great. And to whom should these sweeping new powers be entrusted?

You guessed it; the Federal Reserve, the wealth-shifting, price-fixing, social-engineering scamsters who preside over the bankers cartel which just blew up the financial system. Is there any doubt where Geithner's loyalties really lie?

Author retains copyright.

The financial “wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the 60-year global run-up has run its course. Finance capitalism is in a state of collapse, and marginal palliatives cannot revive it. The U.S. economy cannot “inflate its way out of debt,” because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. A quarter to a third of U.S. real estate has fallen into Negative Equity, so no banks will lend to them. The economy has hit a debt wall and is falling into Negative Equity, where it may remain for as far as the eye can see until there is a debt write-down.

Mr. Obama’s “recovery” plan based on infrastructure spending will make real estate fortunes for well-situated properties along the new public transport routes, but there is no sign of cities levying a windfall property tax to save their finances. Their mayors would rather keep the cities broke than to tax real estate and finance. The aim is to re-inflate property markets to enable owners to pay the banks, not to help the public sector break even. So state and local pension plans will remain underfunded while more corporate pension plans go broke.

One would think that politicians would be willing to do the math and realize that debts that can’t be paid, won’t be. But the debts are being kept on the books, continuing to extract interest to pay the creditors that have made the bad loans. The resulting debt deflation threatens to keep the economy in depression until a radical shift in policy occurs – a shift to save the “real” economy, not just the financial sector and the wealthiest 10% of American families.

There is no sign that Mr. Obama’s economic advisors, Treasury officials and heads of the relevant Congressional committees recognize the need for a write-down. After all, they have been placed in their positions precisely because they do not understand that debt leveraging is a form of economic overhead, not real “wealth creation.” But their tunnel vision is what makes them “reliable” to Wall Street, which doesn’t like surprises. And the entire character of today’s financial crisis continues to be labeled “surprising” and “unexpected” by the press as each new surprisingly pessimistic statistic hits the news. It’s safe to be surprised; suspicious to have expected bad news and being a “premature doomsayer.” One must have faith in the system above all. And the system was the Greenspan Bubble. That is why “Ayn Rand Alan” was put in charge in the first place, after all.

So the government tries to recover the happy Bubble Economy years by getting debt growing again, hoping to re-inflate real estate and stock market prices. That was, after all, the Golden Age of finance capital’s world of using debt leverage to bid up the book-price of fictitious capital assets. Everyone loved it as long as it lasted. Voters thought they had a chance to become millionaires, and approved happily. And at least it made Wall Street richer than ever before – while almost doubling the share of wealth held by the wealthiest 1% of America’s families. For Washington policy makers, they are synonymous with “the economy” – at least the economy for which national economic policy is being formulated these days.

The Obama-Geithner plan to restart the Bubble Economy’s debt growth so as to inflate asset prices by enough to pay off the debt overhang out of new “capital gains” cannot possibly work. But that is the only trick these ponies know. We have entered an era of asset-price deflation, not inflation. Economic data charts throughout the world have hit a wall and every trend has been plunging vertically downward since last autumn. U.S. consumer prices experienced their fastest plunge since the Great Depression of the 1930s, along with consumer “confidence,” international shipping, real estate and stock market prices, oil and the exchange rate for British sterling. The global economy is falling into depression, and cannot recover until debts are written down.

Instead of doing this, the government is doing just the opposite. It is proposing to take bad debts onto the public-sector balance sheet, printing new Treasury bonds give the banks – bonds whose interest charges will have to be paid by taxing labor and industry.

The oligarchy’s plans for a bailout (at least of its own financial position)

In periods of looming collapse, wealthy elites protect their funds like rats fleeing a sinking ship. In times past they bought gold when currencies started to weaken. (Patriotism never has been a characteristic of cosmopolitan finance capital.) Since the 1950s the International Monetary Fund has made loans to support Third World exchange rates long enough to subsidize capital flight. In the United States over the past half-year, bankers and Wall Street investors have tapped the Treasury and Federal Reserve to support prices of their bad loans and financial gambles, buying out or guaranteeing $12 trillion of these junk debts. Protection for the U.S. financial elite thus takes the form of domestic public debt, not foreign currency.

It is all in vain as far as the real economy is concerned. When the Treasury gives banks newly printed government bonds in “cash for trash” swaps, it leaves today’s unpayably high private-sector debt in place. All that happens is that this debt is now owed to (or guaranteed by) the government, which will have to impose taxes to pay the interest charges.

The new twist is a variant on the IMF “stabilization” plans that lend money to central banks to support their currencies – for long enough to enable local oligarchs and foreign investors to move their savings and investments offshore at a good exchange rate. The currency then is permitted to collapse, enabling currency speculators to rake in enough gains to empty out the central bank’s reserves. Speculators view these central bank holdings as a target to be raided – the larger the better. The IMF will lend a central bank, say, $10 billion to “support the currency.” Domestic holders will flee the currency at a high exchange rate. Then, when the loan proceeds are depleted, the currency plunges. Wages are squeezed in the usual IMF austerity program, and the economy is forced to earn enough foreign exchange to pay back the IMF.

As a condition for getting this kind of IMF “support,” governments are told to run a budget surplus, cut back social spending, lower wages and raise taxes on labor so as to squeeze out enough exports to repay the IMF loans. But inasmuch as this kind “stabilization plan” cripples their domestic economy, they are obliged to sell off public infrastructure at distress prices – to foreign buyers who themselves borrow the money. The effect is to make such countries even more dependent on less “neoliberalized” economies.

Latvia is a poster child for this kind of disaster. Its recent agreement with Europe is a case in point. To help the Swedish banks withdraw their funds from the sinking ship, EU support is conditional on Latvia’s government agreeing to cut salaries in the private sector – and not to raise property taxes (currently almost zero).

The problem is that Latvia, like other post-Soviet economies, has scant domestic output to export. Industry throughout the former Soviet Union was torn up and scrapped in the 1990s. (Welcome to victorious finance capitalism, Western-style.) What they had was real estate and public infrastructure free of debt – and hence, available to be pledged as collateral for loans to finance their imports. Ever since its independence from Russia in 1991, Latvia has paid for its imported consumer goods and other purchases by borrowing mortgage credit in foreign currency from Scandinavian and other banks. The effect has been one of the world’s biggest property bubbles – in an economy with no means of breaking even except by loading down its real estate with more and more debt. In practice the loans took the form of mortgage borrowing from foreign banks to finance a real estate bubble – and their import dependency on foreign suppliers.

So instead of helping it and other post-Soviet nations develop self-reliant economies, the West has viewed them as economic oysters to be broken up to indebt them in order to extract interest charges and capital gains, leaving them empty shells. This policy crested on January 26, 2009, when Joaquin Almunia of the European Commission wrote a letter to Latvia’s Prime Minister spelling out the terms on which Europe will bail out the Swedish and other foreign banks operating in Latvia – at Latvia’s own expense:

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