We are seeing an unfolding crisis in the breakup of the European
Union when we should be designing the break up of the giant "too big to
fail" banks and hedge funds that have brought us to the edge of
economic depression. As hedge funds manipulate the credit markets to
drive EU member states into bankruptcy, the EU is made ever more
unstable. The relationship should not be mistaken. The central banks
from New York to Berlin have been lending to the banks and bailing out
financial and other institutions now for 4 years. Instead they should
have been buying up their own debt and creating development banks to
put people to work so that they would have money to pay their bills and
continue the consumption that drives our current irrational economies.
Austerity is not the means to correct the crisis now, but a change in
consumption and attitudes toward debt are necessary. So, however, is a
new plan for banking and finance. International finance is governed by
irrational ideological concepts that limit transparency and have
created financial instruments that are understood by a very few.
Whether the current banking system is organized by design in this way
is immaterial. It cannot continue as it has.
The ECB should start the end to the crisis by buying up peripheral
short term debt and enforcing new credit terms on all long term debt.
This is not an "Argentine solution," rather let's call it a
"California" solution of sorts. Periodically California's legislature
cannot agree on a budget and the State is faced with default on its
debt. Since it cannot pay its bills and is restrained by Federal law
from certain kinds of financing, it requires all those who it owes
(employees, vendors, etc.) to accept "warrants" which have no due date,
but assume that a budget will be passed at some time in the near
future. For the EU a similar action is possible. Such warrants pay no
interest. Such a change could be created by the EU under existing
contract law relating to bonds in the same way that on 30 June 1932
Neville Chamberlain announced that the Government would be exercising
its right to call in the 5% War Loan, offering a choice of taking cash
or continuing the loan at 3.5%. Although they were obliged to give 90
days notice of such a change, a 1% tax-free cash bonus was offered to
holders who acted by 31 July. This conversion saved the government
about £23 million net per year.Although legal, some commentators such
regard this voluntary conversion as a default by the British
government. As of March 2012 £1,939 million of War Loan is still
outstanding; recent low interest rates have meant that it could be
refinanced at lower rates, but no action has yet been taken. See:
Smart, Nick (2010), "Neville Chamberlain." Also see: Sustainability of
High Public Debt: What the Historical Record Shows
Albrecht Ritschl, 1996.