There IS An Alternative

Margaret Thatcher was fond of saying "There is no alternative," when she proposed draconian cuts of public spending and privatisation of governmental holdings. Now, we hear this same statement made as we are told that we must impose similarly draconian austerity programs in order to make up for the economic damage caused by risky investments by banks and the inevitable result of an economy which relies on fraud and thievery in order to perpetuate itself.

In the past month, we have seen riots and other extreme civil unrest across Europe, the Middle East and the United States and United Kingdom. We have coups of popularly elected governments in Greece and Italy, having their elected leaders replaced by unelected and autocratic bankers installed by the European troika to implement austerity at any cost. Furthermore, we have seen yet another huge bailout of European banks by six Central Banks including the U.S. Federal reserve. The proponents of neo-Liberal economics with its vast privatisation of public holdings and cruel cuts of public spending done in order to prop up the pro-banking system are winning.

The U.S. is next as the 2012 election will inevitably give us more of the same from either of the nominees of the two party hegemony and drastic cuts in domestic spending (and perhaps military spending, but probably not) are on the horizon for all of us, as called for in the cowardly debt ceiling compromise earlier this year.

We will certainly be told that there is no alternative as this is the mantra of the neo-liberals. But the evidence from around the world shows us that austerity is not only not the only alternative, but that the other alternatives are inevitably better, not only for the welfare of the citizens of these banker-states, but for the economy as well. Iceland and Argentina have eschewed the neo-Liberal austerity model (after being destroyed by its policies) and in doing so have become two of the strongest boom economies in the world.

We will look at each of these economies separately and conclude by looking at what alternatives to austerity should be being pursued by the United States and other hugely indebted European nations.

Iceland

Iceland has often been looked to as an example of what a rejection of both neo-Liberal policies and bailout economics can do positively for a nation, and with good reason. Iceland's popular revolt against bailouts for their failed banks and their rejection of the policies which bankrupted their nation show how prosperity can be achieved without the population having to pay for the mistakes of private bankers and the politicians who encouraged their reckless gambles.

Iceland began implementing neo-liberal economic policies of free trade, privatisation and deregulation of markets in the early 1990s. They lifted trade restrictions in 1994. In 1998, they bagan selling off state-owned assets (this resulted in many state-owned assets, especially banks, being bought up by politically connected individuals below market prices). Thoroughout this period, labor was largely deregulated, investment and commercial banks were merged, mortgage requirements were relaxed and both income taxes and VAT were substantially lowered.

Like in the United States and around the world, these policies led to a huge finance bubble especially in mortgage backed securities. Because the normal leverage restrictions were lifted due to deregulation banks overleveraged themselves creating huge short-term gains but ignoring the substantial risk that such over-leveraging creates.

Despite the fact that along with the enormous growth in the financial sector, the policies led to a tremendous increase in income disparity which by 2007 was on par with that in the United States and a huge increase in both deficits and foreign debt, Iceland was hailed as an example of the tremendous success that following neo-Liberal economic policies can bring. Even as cracks showed in the armor of the financial bubble and banks started showing the losses inevitable from tremendous leverage, consummate neo-Liberal economist Arthur Laffer stated in late 2007 "Iceland should be a model for the world," explaining that fast growth, large trade deficits and balooning foreign debt are signs of a healthy economy.

Because of their huge debt, the newly private Icelandic banks started having trouble raising enough cash to repay their creditors. In order to raise enough cash to keep the party going, the banks turned to the business of Internet Savings accounts. These Internet banks (collectively called Icesave) were established in the UK and The Netherlands and offered much more attractive savings interest rates than other banks. Many individuals along with large institutional entities such as local governments started investing their trusts and pension accounts in these online banks since the return was much more attractive than other investments at the time. The other catch with these banks was that although the banks were private (and therefore so were their profits), Icesave was part of the European Economic Area insurance so any losses that were suffered by the investors would be born by the very small population of Iceland.

The three main Icelandic banks took the profits from this newly found source of funds and used it to further leverage themselves, thus increasing both their short-term profits as well as their risks.

As it did with the rest of the global economy, the party came to a screeching halt in 2008 with the collapse of Lehman Brothers. When Lehman went bankrupt, money markets froze giving the overleveraged and for all intents and purposes completely insolvent Icelandic banks no source of funds in order to pay their debts. As a result the banks were nationalized. There was a run on the banks. The Icelandic stock market collapsed and as a result, so did the entire Icelandic economy.

As a result of the losses suffered by UK and Dutch institutions in Icesave, the UK and Dutch governments ended up repaying their citizens' lost deposits, demanding that repayment be made for these expenditures by the Icelandic government (i.e. the citizens). The U.K. even went so far as to freeze Icelandic bank assets in their country under governmental powers contained in post-9/11 anti-terrorism laws.

With their economy in a shambles, a huge foreign debt, crippling deficits and new governmental obligations foisted on it by the collapse of a private bank which swindled its investors, the Icelandic government turned to the IMF for assistance. The IMF agreed to restructure the nation's debt, offering a $2 Billion loan which required severe austerity measures and a repayment of the UK and Dutch bailouts of their Icesave investors.

The citizens of Iceland revolted as a result of these conditions. Large groups of citizens protested the parliament and demanded the resignations of the Prime Minister and the Finance Minister. As a result of the overwhelming outcry from the citizenry, the Icelandic government collapsed in January 2009. The resulting elections put a left-leaning coalition in power.

The IMF, however, withheld the loan demanding an agreement to repay the Icesave debt. The parliament despite the unpopularity of the measure acceded to the IMF demands and passed the measure which would require each Icelandic citizen to pay the equivalent of $137 a month over a five-year period, an amount which was approximately 50% of the nation's GDP.

Surprisingly, when the bill went to the President for his signature, something that is essentially required as the President is mostly a figurehead position, the President refused to sign the bill and instead sent the measure to referrendum. The referrendum was defeated overwhelmingly with over 90% of voters voting against the plan.

The terms of the repayment were re-negotiated and a longer repayment was implemented. In April 2011, this more favorable repayment, which would still require the citizens of Iceland to repay the debts of a private entity was again rejected, this time by nearly 60%.

This second rejection of the IMF repayment requirements resulted in the case going to an international court. In October 2011, the court ruled that the UK and Dutch depositers were given priority over other creditors, allowing the UK and Dutch governments to recoup their bailout of depositors directly from the assets of Icesave rather than the citizens of Iceland having to repay the debts.

What Iceland's rejection of austerity and their refusal to bailout their failed banks forcing the losses to fall on the bank shareholders rather than the citizens did was to disprove the neo-Liberal insistance that a recovery after a recession brought about by a collapse in finance be slow, long and painful. Austerity measures, although implemented to a smaller extent than demanded by the IMF, were largely eschewed resulting in a much quicker and less painful recovery than anticipated. Iceland suffered seven quarters of contraction followed by small but positive growth, something that was unimaginable when you take into account that the entire nation went bankrupt and its economy was completely destroyed in 2008.

Problems still exist in Iceland. Unemployment is still high and there has been a huge devaluation of the nation's currency which has left many mortgage holders with impossibly high payments. However, by allowing their banks to actually fail and refusing to privatize gains while socializing losses, Iceland avoided a much worse outcome for their citizens and started on a road to recovery much more quickly than they would have by the adoption of austerity.

Argentina

A much more agressive approach, and one that is looking more attractive each day to the citizens of Greece if not for their occupied government, is the approach to alleviating the devastating effects of neo-Liberal economic policies taken in Argentina. Argentina instead of agreeing to the harsh austerity policies demanded by the IMF instead defaulted on their obligations and instead of the apocalypse that is always predicted by the elites in these situations,the results actually turned out to be favorable economically for Argentina and proved to be the best move they could have taken.

After the 1976 military coup in Argentina, the nation started incurring foreign debt. By 1981, the growing debt, inflation and defeat of the military in the Falkland War led to the economy's collapse and a severe economic depression. In 1983, Raul Alfonsin was elected and began the implementation of neo-Liberal economic policies. The government became responsible for the debt, over half of which was owned by international banks and corporations. Austerity measures were put into place.

In 1989, Carlos Menem was elected ostensibly as a reformer. He was governor of one of the poorest provinces in Argentina and had immense populist support. However, despite his promises of reform of the economic policies of Alfonsin, Menem immediately instituted the same neo-Liberal policies and in fact doubled down on the policies of Alfonsin.

Menem's policies included the "Reform of the State" which was his plan to privatise public entities, which was nothing more than a looting of state enterprises for private profit as the public institutions were sold at ridiculous losses for the government. Menem also privatised public pensions.

He instituted a convertability plan wherin the Argentine peso was tied directly to the value of the dollar (one peso=one dollar). This had an immediate effect on stopping inflation, but left the entire economy vulnerable as it vastly overinflated the value of their currency. Because of this, small businesses couldn't afford to stay in business and shut down, credit became very expensive and income disparity and poverty increased immensely, while banks pillaged the economy. As a result, the Argentine middle class was effectively wiped out.

In 2003, Argentina elected Nestor Kirchner as its president. Kirchner immediately reversed the policies of Menem. He intervened in the economy to stablize the exchange rate. The Kirchner approach focused on the stability of the exchange rate, raising or lowering the value of the peso accordingly, which helped stabilize the economy.

Shortly after his election, Kirchner allowed Argentina to default on its IMF debt. Although this was a significant shock to the Argentine economy, which was already left in a shambles by the previous administration's policies, it resulted in a renegotiation of the nation's debt which wouldn't have otherwise occurred. Because Argentina was willing to default, the IMF was forced to renegotiate the debt resulting in more than two-thirds of its debt to be wiped out. Within two years of the default, Argentina was able to cancel its debt with the IMF offering a one-time single payment.

Other economic polices that were implemented by Nestor Kirchner were an export tax that allowed the government to recoup some of the windfall profits that foreign companies were receiving due to the devaluation of the peso following the economic collapse. He also implemented a financial transactions tax, which further cut down on the pillaging of the economy by international banks and financial institutions as well as further bolstering the Argentine government. He attacked poverty and unemployment by instituting a monthly stipend to the unemployed heads of households.

These policies were continued following the election in 2007 (and re-election in 2011) of Kirchner's wife Cristina to the presidency following Nestor's decision not to run for re-election. The result of the Kirchner's policies are significant to Argentina. Between 2002 and 2011, there has been a 94% growth in Argentine GDP making it one of the fastest growing economies in the world. Unemployment has dropped by more than fifty percent (18.4% in 2002 compared to 8% in 2011). Income inequality has decreased dramatically and this is due more to increases in income of the poor than to decreases in the incomes of the wealthy. Poverty has dropped dramatically. In 2002 poverty reached a peak of 45.5% of the population of Argentina with 29.2% of the population living in extreme poverty. By 2011 only 14.3% of the nation lived in poverty and 6.6% in extreme poverty, a decrease of more than two-thirds.

Unfortunately, inflation has increased significantly in Argentina as a result of these policies. At one point in 2008 inflation was as high as 31% and was at 27% at the beginning of 2011. However, despite this problem, the effect of the inflation has been dampened by the fact that incomes for most Argeninians have increased along with the inflation resulting in the dramatic decreases in poverty and rises in standards of living.

One of the most significant things to come out of the Kirchner experiment is the way in which Argentina dealt with the IMF. The neo-Liberal policies of previous administrations in Argentina led to a collapse of the Argentinian economy, a run on the banks and significant increases in poverty and income disparity. When faced with the specter of Argentina's inability to pay back the $40billion+ in loans that the IMF had given Argentina, instead of assisting in a renegotiation of the loans, the IMF demanded austerity measures that they are currently implementing throughout Europe (and which will be coming to the U.S. soon enough). Rather than investing in the economy, the IMF was taking money out of Argentina further exacerbating an already dire situation. They worked for the banks against the Argentine people, forcing Argentina to give concessions to the banks and to take on more private debt incurred by financial institutions. They pressured the government to cease programs that were implimented to stop foreclosures and to pay stipends to heads of households in danger of losing their homes. And in a purely Machiavellian move, the IMF forecasted negative growth forecasts on Argentina in an attempt to impede the recovery efforts implemented after the collapse in order to force them to accept the IMF's policies and loans.

These actions on the part of the IMF, working at the behest of the multinational financial institutions which owned the significant part of Argentina's debt and which had looted the Argentinian economy for at least two decades can best be described as economic terrorism. The decision of the Kirchner government to stand up to this terrorism and face it down is not only heroic in nature, but most importantly IT WORKED!!!!!!!!

When faced with actual default, the IMF and its institutions backed down and abandoned its demands of austerity and suspended its salvos against the Argentian economy. The default resulted in a very severe contraction to the Argentinan economy. The quarter following the default showed a 5% contraction in the economy. But this short sharp shock to the system seems to be what the economy needed to be able to reboot. After that one quarter of significant contraction, the Argentine economy started growing, first slowly, but then more and more strongly. Furthermore, it appears that Argentina was able to weather the economic disaster of 2008 much better than most economies (especially Europe and the United States). Following the collapse of Lehman and the crisis of 2008, Argentina suffered just two quarters of very slight economic contraction, followed by rapid growth of more than 8% GDP annually.

Looking at the resounding success of the Kirchner policies in dealing with sovereign debt and demands by the IMF for the implementation of severe austerity measures which would have ended up hurting the citizens of Argentina even more, it would appear that Argentina presents a blueprint to Greece and possibly many other European nations facing significant sovereign debt crises currently. Of course, the decision of Greece and others to default and thereby renegotiate their debt would cause significant short term economic pain in those countries and would result in those nations exiting the Euro. However, the long term ramifications for their citizens not to mention the regaining of their sovereignty would be of much greater benefit than the policies being forced upon them by the unelected "technocratic" regimes that have taken power there now.

Conclusion


Despite the repeated calls for severe austerity measures for Greece, Italy, Ireland, Spain and Portugal by the European Union and the IMF, the examples noted above would show that doing the complete opposite is in the best interests of these nations and their citizens.

Austerity creates a vicious cycle which makes it nearly impossible for nations to escape the economic downturn in which they find themselves. Austerity leads to falling overall revenue, which leads to more austerity, which leads to even more falling revenues, and so on and so on and so on. All of this leads to higher interest rates which sucks more assets out of the country and only serves to fill the coffers of the banks and vulture economists which feed off of these types of policies.

The bottom line for the nations that are subject to the austerity measures is a loss of sovereignty, further destruction of their economy and a falling standard of living and death for its citizens.

Iceland has shown us that actually refusing to bailout the bad decisions of their banks and allowing the banks to fail, be put into bankruptcy and allowing the shareholders of the bank to pay the losses of the banks rather than the government (read citizens) is the best policy. If the United States had followed a similar policy in regard to our financial industries, we would have emerged not only with a stronger, more vigorous economy, but we would have emerged also with a stronger, more vigorous financial sector which no longer had the bad assets on its books which all of the TBTF banks have and were so so large that they were systemically dangerous as the TBTF banks are.

Greece (and probably Ireland and Italy as well) would have best been served by following the example of Argentina and actually defaulting on its sovereign debt. This would have allowed them to renegotiate their debt, while preserving their national sovereignty and the living standards of their citizens.

As it stands now, austerity is the plan du jour. Many still believe the words of Thatcher from decades past that "There is no alternative." However, if our leaders would simply stop and think for just a second, and have the courage to embark on plans such as those implemented by the Icelandic people and the Kirchners in Argentina, they would see that there are indeed alternatives which not only bypass the deprivations demanded by austerity, but result in a stronger and more prosperous economy for their nations.

In short austerity equals death and occupation, while the alternative equals prosperity and freedom. Which do you want? Better make up your mind fast, because the leadership of both parties in the U.S. is putting us on a path to austerity, trying to convince us that no alternative exists.