Greece and California: Pt 2.

Okay so I want to continue writing about the parallels between Greece and California. This post is going to be me trying to explain the current crisis as best as I can, and I am not sure that I am 100% correct.

What do Greece and California have in common? Both governments have tremendous deficits and both rely on large loans (in the form of bonds) for revenue.

Now in both instances, the governments are saying that they must dramatically curtail state spending in order to close the deficits. Greece’s governing party PASOK is being told to cut public spending – i.e., cut public worker wages and public programs. Both Athens and Sacramento are under extreme pressure by the financial markets to reign in state spending or risk having their credit ratings be seriously downgraded.

Why do these two governments have such huge deficits? Public sector people in both countries are being told that they must deal with cuts to public programs, layoffs and wage decreases. After all, the governments just don’t have the money to pay these things.

Is this true? No. Actually, laying off workers, cutting wages and cutting public programs will only put these governments on a more severe collision course. These markets are going to have to crash, its just a question of when, and how bad the damage will be. If the governments are allowed to cut their public spending, they will be in much worse shape down the road.

Why?

I want to illustrate this using the example of California, which I think I can explain pretty well. To do this, I want to give some background to how we got here, in chronological order.

Phase 1: The Housing Market Boom

The housing boom was caused by a few things:

1) The rise of sub-prime mortgages.

Sub-prime mortgages are loans that were given to people with low credit ratings. Corrupt banks collaborated with credit rating agencies to approve a bunch of people who did not have the funds to take out these loans. Why? Because these loans were lucrative in two ways:

I. The loans were bundled into big packages of loans. So one package would have 30 different mortgages together, you buy this package and collect the interest from 30 different mortgages at the same time. These are called CDO or collateral debt obligations. Investors were eating them up left and right, and they were profitable, because for a short period, nobody was defaulting. The investors didn’t know (and in some instances, didn’t care) how risky these CDOs were, because they were being rated dishonestly by the rating companies and because the investors traded these CDOs.

II. The banks were able to sell insurance policies or (credit default swaps) on these loans that were incredibly lucrative. These insurance policies are usually taken out by the investors who are buying the debt packages to mitigate their risks. If the 30 people with mortgages default, the third party insurance agent will be responsible for the debt. Of course CDSs are not regulated, and people who sell them are not required to prove they have the capital to actually cover all the loans they are responsible for, should they all collapse at the same time.

2) Housing Market creates artificial pools of value, temporarily.

During bubbles, some people do pretty well. A lot of business occurs. During the housing bubble, people built and built houses like crazy because the demand for housing was pushed up artificially by the newly expanded market of home buyers.

Demand for homes increased because all of a sudden everyone could qualify for a housing loan. This means a few things = more income tax, more jobs (think construction jobs, retail jobs, all kinds of jobs related to housing). Also, consumer spending rises, as people are employed, upper middle class and rich people are making good money so they are spending like crazy. Not to mention there is also a ton of new credit floating around since people are using the increased value in their houses to take out loans. The demand bubble has driven up housing worth (by making it seem like there is a ton of demand for houses, these bubbles make everyone’s houses ‘worth’ more).

3) Now, the government is the beneficiary of these bubbles because they are getting an increased flow of revenue. This means that more people are paying taxes, more people are spending money, etc. etc.

4) During the time when the government is getting this revenue, it is also still being manipulated by business interests and lobbyists who are working hard to get tax breaks for their companies, and they are successful. Over the past 5 or 6 years Californian government has  passed massive tax breaks for rich corporations, making itself more and more dependent on income tax and sales tax as its main source of revenue. Also, as we know, Prop 13 has made it so that California does not tax property, it only taxes income, so the richest class in California is not having its wealth taxed, it is having only its income taxed, and it is of course able to find loopholes to hide its wealth, get around taxes, etc., like most rich people are able to do. Not to mention that a lot of the people who are getting rich off sub-prime business booms are the same people who are at the top of the tax bracket.

5) While this is all happening, the average working class person’s wage has not risen at all. The only reason people are staying afloat is because credit is plentiful, and they are given a sense of false security due to being able to use their houses as equity, and the fact that the economy is awash with cash. (Not all people, the more privileged layers of the working class). So basically the working class is getting more and more dependent on debt, but it doesn’t realize it yet because there are still jobs and shit hasn’t hit the fan yet.

6) The government in California is in debt because despite the fact that it is getting income tax at a higher rate due to the bubble, it is still giving tax breaks and there’s a gap between the two. Many times the tax breaks the government gives, are to special interests which individual members of government get kickbacks from. They line their own pockets while depriving the state of critical funds it needs.

7) To make up the difference, government increasingly turns to loans in the form of municipal bonds. These bonds are very profitable and lucrative to investors who see them as safe. They are also another investment, just like the subprime loans, that people can sell insurance policies on (i.e. credit default swaps). These are super lucrative insurance policies since governments VERY rarely default, so there is very little risk for the people making money on the insurance policies.

8) The government issues municipal bonds using the leverage of income tax. It guarantees it will pay the funds by pretty much vowing to use the citizen income tax as its source of revenue. At the same time, remember, politicians are also maneuvering to deregulate businesses who are also sources of revenue, and sources of jobs, arguing that if the government does not make it easier for them to do business in the state (i.e. if their profit margin isn’t high enough because they are being taxed too much) they will leave the state and go elsewhere, depriving the government of the income tax from the jobs people have at these companies.

Phase 2: Shit hits the fan.

1) People begin defaulting on housing loans.

Inevitably, we knew that the subprime mortgage fiasco would have to end sometime, because people just did not have the money to buy all those houses. The more people default, the more that investors panic, they start selling their debt packages like crazy, and there is a rapid depreciation in the worth of these financial instruments since the market is flooded with them.

2) The insurance policies on the debt instruments start being called in, but the people who’ve been selling insurance don’t actually have the money to give the people whose loans they’ve guaranteed. Like AIG for example, who was an insurance giant that sold the most Credit Default Swaps out of anyone. Once all the loans started defaulting, people asked AIG for the money they were supposed to get since AIG had insured all those loans. AIG could not possibly pay off all the money it was responsible for—so it was bailed out by the federal government with taxpayer money.

3) People start losing their homes and their jobs. This creates a vicious cycle, the more jobs people lose, the less they spend, the more other businesses close, etc.

4) People start needing MORE government assistance, but paying less income tax. The government’s tax revenues are dramatically decreasing. FINALLY ITS OWN POLICIES OF CUTTING WEALTHY TAX AND CORPORATE TAX ARE HERE TO HAUNT IT, IT CANNOT RAISE THOSE TAXES AGAIN OR RISK THE FLIGHT OF THOSE COMPANIES AND THE JOBS THAT GO ALONG WITH THEM.

IN OTHER WORDS, the government cannot raise taxes on the rich without triggering businesses to flee from the state searching for higher margins of profit. The unemployment sweeping the state has weakened these businesses and their profit margins are more important than ever. They will go wherever they need to raise their profits and they will flee attempts to regulate them during times of crisis.

Furthermore, the credit rating agencies will not tolerate a move to regulate or tax corporations for the same reason. The credit agencies –S&P and Moody’s see this as anti-business, and at times of crisis, the bourgeoise unites together in its own common interest against attempts to regulate by the state.

If California’s credit is downgraded, and the investors are worried that California is going to chase jobs out of its territory and thus cause a rapid profit decrease, they will sell their municipal bonds as fast as possible. The flooding of the market with municipal bonds will cause their value to dramtically decrease, making them unattractive to investors. This means that California will have both chased out business and also restricted its own source of income – loans via bond obligations.

5) HERES A VERY VERY IMPORTANT POINT.

GOVERNMENTS ARE MANDATED TO PRIORITIZE PAYING THEIR OWN BILLS AND COST OF OPERATION FIRST.

Paying government salaries (i.e. public worker salaries) as well as public programs, must be prioritized. Credit agencies demand that public cuts be made, so that they can ensure that income tax revenue does not get spent up on state obligations, before they are able to repay their debt obligations.

THIS IS THE ESSENCE OF STRUCTURAL ADJUSTMENT. A STATE IS FORCED TO CHANGE ITS INFRASTRUCTURE TO PRIORITIZE DEBT REPAYMENT. STRUCTURAL ADJUSTMENT TRULY HAS COME TO ROOST IN CALIFORNIA.

The thing is, once governments have cut taxes, they can’t go back and get them. Think about who was able to profit from the housing bubble—the people who sold financial instruments and then were able to migrate quickly out of that market, selling their assets. They may have taken small hits but the big bourgeoise is most insulated. They have effectively expropriated the working class of whatever profit it could, to make up for its own falling rate of profit, enriched itself, and now want more.

THE HOUSING BUBBLE ESSENTIALLY WAS A MASSIVE TRANSFER OF WEALTH FROM THE WORKING CLASS TO THE RICH CLASS.

The bourgeoise profited from the housing bubble by way of

1. -  subprime loans
2. -  financial instruments – which were subsidized WITH TAXPAYER MONEY once the banks collapsed
3. -  and consumer spending from the products that people bought with their equity loans.

The government pretty much facilitated the expropriation of the working class, and now since it is part of the ruling class, is not going to turn around and ask the ruling class to subsidize its own operations. It is going to demand that the working class subsidize its own operation.

The government is in a double bind—it is suffering from a massive lack of tax revenue. The government does spend a lot, but not on the people, on its own projects and pork, and waste and bureaucracy. It had more money to spend back then, so it grew itself. Now its revenue has decreased A LOT.

So: It needs money to function. It can only come from a few places:

1) Tax the corporations or the rich. This is out of the question, to raise taxes on the rich or the corporations requires politicians to fight their own constituency tooth and nail. Why should they do that? There are not people in the street forcing its hand.

Also, don’t forget, if the government taxes the bourgeoise, S&P and Moody’s will degrade its credit ratings. As I’ve mentioned before, the credit rating agencies are in bed with the financial interests. They are not regulated at all. Speculation alone can determine an area’s credit rating. If California’s credit rating is dropped, investors will panic and sell their municipal bonds like crazy, which will drop their value dramatically and cause more people to sell them. Once the market is flooded with California debt that nobody wants to buy, California can no longer take out the loans it desperately needs to run.

Corporations will threaten to move their business elsewhere, which would cause even more unemployment and thus depress income revenue even further.

2)   California can tax the working class, and reassure investors that government will prioritize the debt repayment. Just like if you were to get a loan, you have to show your expenses to prove you can pay the loan. California government is trying to do this, it wants to rid itself of its expenses to prove to investors that it is a safe place to invest money.

The problem with all of this is that California keeps accruing more and more debt due to the interest on these bonds. The more debt California gets in, the bigger percentage of tax income revenue it must sign away for investors to lend it money. Essentially, the people of California are becoming the indentured servants of the financial industry, and don’t even know it. They are being forced to give up their public programs and take wage decreases, so that business interests can struggle to regain their margin of profit.

But these governments ARE like crack addicts. The more credit they are given, the more they will enrich themselves, and just lean on more credit. The only thing that would stop them from doing this would be the power of the working class limiting its spending habit by imposing a limit on it.

Until today, there is no regulating body in charge of overseeing credit default swaps. NONE. The SEC is begging this other independent agency to start looking over this industry because it is so wildly anarchistic and out of control that they don’t even claim to have the teeth necessary to impose regulation upon it.

People who think that just because we are in a crisis, that means that the business interests have been reigned in are mad. There has been NO blows struck against the fiancnial industry as of yet. Nothing it does to itself alone will discipline it. Only the working class can deal it a blow. As of right now, the working class has not once yet dealt blow back to the ruling class , in the form of a serious massive wide-scale strike. Until it does this, it is naïve and dangerous to think that the business class has learned its lesson from subprime loans and that there is any reason to believe that any of these practices have stopped. THEY HAVE NOT. AT ALL.

The credit default swaps have just moved from the housing market, to the municipal and sovereign bond market.

The reason governments are not able to pay their own bills has to do with the fact that the working class has been so badly expropriated of their wealth. They are paying less income tax than ever, and are losing their jobs left and right. More and more businesses have sought to displace their costs back onto the working class in order to gain a larger margin of profit, the effort to cut the public sector is a continuation of that. But as we know from Marx, the more the ruling class is able to do this, the more we lose, not win.

The interests of the working class and the ruling class are diametrically opposed. The more the ruling class is able to enrich itself, the more effectively it seeks to exploit the working class, to extract higher and higher levels of profit in order to offset the constantly falling rate of profit, and the stagnation of the economy.

If the working class does not strike back soon, the ruling class will just keep finding more and more catastrophic ways to buffer itself from the impending fall. The longer they are able to do this, and stave off the crisis, the more intense and horrific it is going to be when it reaches its APEX.

Conclusion:

Both the California and Greece states are both in contradictory situations caused by their contradictory dual characters.

1 - On the one hand they are entrusted with running a state infrastructure, and managing the economies of that state infrastructure.

2 - On the other hand they are also the bourgeoise, and they want to maximize profit and protect the interests of themselves and their ruling class constituencies. This is also due to the fact, on some level, that labor is actually dependent on Capital, but is also exploited by it. The more capital successfully sets up business, the more jobs are created, but also the more profitable capital is, the more it seeks to successfully exploit the workers to gain a competitive edge on its margins of profit against other capitalists.

The U.S. and the EU are doing what Greece and California are doing, on larger scales. Both are selling off debt, providing tax breaks for the bourgeois while also paying higher and higher interest on deficits. Except that EU and U.S. are worried about their currencies. Currencies are not tied to any material substance so they are always being traded and there is always a fluctuation as investors switch from one currency to another. The U.S. keeps printing money to give itself, and causing tremendous inflation, while also selling its debt. The U.S.’ tactical advantage here is that its currency is the universal equivalent, in a way. The world measures its currency against dollars because they are ubiquitous. But the U.S. can’t continue to do this forever. As it sells more and more debt to China, while printing more and more notes, China and other countries are getting worried. If the U.S. prints so much money that its notes are worthless, that is a significant problem for countries holding a tremendous amount of U.S. debt as assets.

To be continued… I doubt this is all coherent, but its good for me to try to write out what I understand anyway. I welcome questions and comments, as well as corrections.

Hell yes! In the face of the immense pressure from the European Union, Greek public sector workers go on strike AGAIN!

Its interesting that early into the article on this strike, the NYTIMES quickly reiterates the slimy attack on public workers that is often used here in the U.S. against public sector workers. The charge? They accuse the public sector workers of being “privileged”.

In Greece, commentators said the economic problems had exposed a general ignorance about the harsh realities of the global economy, while laying bare the strong sense of entitlement in a country where one out of three Greeks is employed in a civil service that guarantees jobs for life.

What does that mean though? With the price of living in Greece having skyrocketed so badly with the inflation and introduction of the Euro, these wages are not liveable wages. And why shouldn’t people have guaranteed jobs for life?

“People in other countries like Germany, France and the United States learned about the workings of the economy the hard way, by seeing their jobs on the line,” said Babis Papadimitriou, an economic analyst at the Skai radio and television group. “This hasn’t been the case in Greece.”

Yeah so this guy, Papadimitriou, says that Greek workers have not “learned” the workings of the economy. But this quote tells me otherwise:

But the Greek government’s proposals for deep spending cuts to rein in the deficit have met significant resistance.

“We won’t pay for their crisis!” loudspeakers blared from Klafthmonos Square, otherwise known as “the square of the crying people,” where disenchanted Greek workers have come for centuries to express their discontent. “Not one euro to be sacrificed to the bankers!”

This tells me that the Greek workers actually HAVE learned how the economy works, and that’s why they are shutting ‘ish down! What lesson haven’t they learned? That the economic crisis forces the government to cut vital services while bailing out banks to the tune of trillions of dollars? The lesson that when workers cede concessions, they only get asked to take more concessions? 

So far workers in the U.S. have largely not resisted the budget cuts and bailouts to banks. But I think that March 4th (hopefully) and the weeks after, might be the beginning of a movement that will show Papadimitriou (and the rest of the world) otherwise.

Over the past few weeks the financial pages have been filled with panic over the declining value of the Euro, which is being dragged down by a few European countries struggling from huge budget deficits. The budget woes of Greece have attracted the most attention, as Greece is in the worst financial shape of any country in Europe.

Many of us remember the way that Greece was rocked by massive protests and riots last year in response to the murder of Alexander Grigoropoulos.

Students and workers outraged at the police brutality shut down major cities across Greece. But the anger was not just about Alexander, it was also a reflection of Greeks anger and frustration at their desperate economic situation rife with massive unemployment and inflation and at corrupt politicians rocked by scandal after scandal.

In Greece, protests and strikes are fairly common, but following Alexander’s death they reached a frenzied pace, and this unrest effectively ushered out the conservative Greek government and put the Socialist party in power.

The Socialist government, while a minor improvement from the conservative government (think Obama), quickly moved to push forward dramatic and profound structural adjustment (austerity programs) gutting employee benefits and social services in ways that are undoing decades of struggle.

Last week, the Greek socialist government faced one of its biggest challenges yet, a standoff with independent Greek farmers demanding their subsidies be reinstated. Across Greece farmers stood strong in the face of harsh threats from the government condemning their actions. The farmers used their tractors to block the border with Bulgaria as well as highways and main roads.

Across the business pages, the response to this resounded incredibly clear— the global ruling class is demanding Greece take serious steps to discipline its working class and continue pushing forward the austerity programs (budget cuts to government spending).

One of the major tools business interests utilize to make sure the Greek government gets its working class under control, is the mechanism of credit ratings.

Here, we can see a striking example of the similarity between the political/economic situation in Greece and California.

Greece, like California and all other regional/federal/national governments, has a credit rating. What does that mean? It means that governments borrow money much like individuals do, based on a credit score.

How is this credit score determined? Well, its not exactly clear because there are a few companies in charge of calculating these credit scores, the primary debt rating companies are Standard & Poor (or S&P) and Moody’s. S&P issues credit ratings based on a number of factors, through which it “judges” a government’s ability to pay back loans.

Reuters has been reporting that S&P is threatening to severely downgrade Greece’s credit rating if the Greek government does not effectively stand up to protests and strikes.

Standard and Poor΄s could lower Greece΄s debt rating further if the government scales back its fiscal consolidation plans due to political and social pressures, an executive told Reuters on Tuesday.

“Political and social pressures are likely,” Mrsnik told Reuters. “If they build up and impede the government from moving on and water down the budgetary effort, leading to failure to comply with the consolidation strategy, the ratings could be lowered.”

“Political and social pressures are likely,” Mrsnik told Reuters. “If they build up and impede the government from moving on and water down the budgetary effort, leading to failure to comply with the consolidation strategy, the ratings could be lowered.”

These protests and shut downs are especially dangerous because they are contagious and could easily spread to places like Spain which is similarly dealing with a huge budget deficit and an angry working class. Last year, Greece’s protests spread across Europe.

Here’s the parallel — California is and has been going through a similar situation. Last year, during this time, it was dropped to the credit rating of ‘junk’.

When California, which is the most robust state economy in the country, is given the lowest credit rating in the country, its a big deal. Interestingly, this ‘crisis’ got very little play in the general news media but was heavily covered in the business pages. What happens when a state has that low of a credit rating? Well basically it means a few things, as far as I understand it;

• 1) It means that the state government is impeded from borrowing money that it needs to run.
• 2) It means that the state government has a harder time attracting investors to BUY its debt or its bonds, which are basically debt packages backed by the State.

Why would investors buy Californian debt to begin with? Well they buy it because it is an investment that can yield high percentages of interest. If you were to put your money in the bank it may yield you, for example, .9% interest. If you instead use your money to buy debt, you can collect 5% interest and make more money instead. How come you can collect 5% interest? California has to pay a high interest rate because its a “risky loan”, thus banks lending money to the state are able to charge more interest.

Now, for years the Californian economy has been discussed within business journals as a major problem. Pressure to cut public spending did not begin with the financial crisis. The plan to cut deeply into public sector spending in California, actually predates the financial crisis. The financial crisis provided both pretext and an increased impetus for the governance in California to push forward cuts to the public sector. As one person put it in the Wall Street Journal;

“They have realized Reagan’s vision of a smaller state and local government,” said Bruce Cain, a political-science professor at the University of California at Berkeley. “They forced [Democrats] to make very deep cuts in services, to schools and to state salaries and state benefits.”

Why? Well California does not operate in a bubble. California, like Greece, and everywhere else is subjected to pressures from capitalist business interests looking for bigger margins of profit. What happens if you raise taxes on corporations? You create a less hospitable climate for business.

In a Wall Street Journal article from last year, a business analysts sheds light on some of the logic underlying how politicians approach this crisis and proposed solutions to it,

»On paper, the state could solve its budget problems by raising taxes further. But in practice, that might backfire by weakening the economy and tax base. California scores poorly in state ratings of business climate. In a CNBC survey, it ranked 32nd overall but last in “cost of business” and 49th in “business friendliness.” Information technology (Intel, Google, Hewlett Packard) and biotechnology remain strengths, but some traditional industries are struggling. High costs, as well as tax breaks from other states, have caused movie studios to shift production from Southern California. In 1996, feature films involved 14,500 production days in the Los Angeles area, says Film L.A.; in 2008, the figure was half that.«

So State governments like California are torn between the pressure to both keep taxes down, in order to make the state hospitable for businesses (which creates a larger and larger debt load, as the state borrows to make ends meet).

The debt itself also creates a very real danger and need to cut public services. Why? Funding public services are mandated federally (state governments can lose federal funding if their spending on certain public programs falls below a certain level).

Also, and perhaps most importantly, governments are forced to spend revenue in ways that prioritize certain things (like public infrastructure, public programs, GOVERNMENT SALARIES) etc., SO basically, before they can pay back the debt they owe and the interest accruing on it, they have to pay their pressing bills.

Thus, California’s budget cuts are a way of reassuring investors and/or S&P/Moody’s that they will not have budget obligations that will get in the way of the State’s ability to pay back the loans they are taking out.

Recently S&P put out a number of warnings, basically telling California that the investing community did not have faith that California governance had the ‘will’ to deal with the ‘political cost’ of dramatically reigning in spending. The business community knows these cuts are not popular, and they want to make sure governments have the muscle to withstand pressure from angry people.

Furthermore, these credit rating companies are often in bed with the business interests that rely on them, so they are prone to using credit ratings politically, often to pressure governments to allow private business more autonomy in their dealings. As soon as Governor Schwarzenegger announced the dramatic cuts to social spending that he did, the market rallied and the credit rating got bumped up.

Cuts to the public sector, and public spending in general, are often characterized as a failure of ‘upside-down priorities’. This analogy deceives people into thinking that budget cuts are merely bad policy, and that if we only get enough pressure from below we can convince politicians that they are making hurtful decisions.

If reading anything about Greece and California has taught me anything, its that governments are not suffering from bad priorities, they are dealing with the very real pressures of a capitalist market.

Greece is a very small country. It is incredibly inspiring to see the Greek working class stand up to the pressures of global business interests and the EU. There are other countries facing major deficits besides Greece, but Greece is under the spotlight because its working class has put up the fiercest fight yet. The resistance of Greeks to the violence of this economic crisis inspired and continues to inspire people all over the world, myself included. This resistance and the way it is being considered carefully by credit agencies and regional governments alike should clue us into what kinds of resistance are actually reckoned with seriously by the capitalist class.