The ECB’s Noose Around Greece: How Central Banks Harness Governments

By Ellen Brown, The Web of Debt Blog | News Analysis

(Image: European Central Bank via Shutterstock)

 

Remember when the infamous Goldman Sachs delivered a thinly-veiled threat to the Greek Parliament in December, warning them to elect a pro-austerity prime minister or risk having central bank liquidity cut off to their banks? (See January 6^th post here.) It seems the European Central Bank (headed by Mario Draghi, former managing director of Goldman Sachs International) has now made good on the threat.

The week after the leftwing Syriza candidate Alexis Tsipras was sworn in as prime minister, the ECB announced that it would no longer accept Greek government bonds and government-guaranteed debts as collateral for central bank loans to Greek banks. The banks were reduced to getting their central bank liquidity through “Emergency Liquidity Assistance” (ELA), which is at high interest rates and can also be terminated by the ECB at will.

In an interview reported in the German magazine Der Spiegel on March 6^th, Alexis Tsipras said that the ECB was “holding a noose around Greece’s neck.” If the ECB continued its hardball tactics, he warned, “it will be back to the thriller we saw before February” (referring to the market turmoil accompanying negotiations before a four-month bailout extension was finally agreed to).

The noose around Greece’s neck is this: the ECB will not accept Greek bonds as collateral for the central bank liquidity all banks need, until the new Syriza government accepts the very stringent austerity program imposed by the troika (the EU Commission, ECB and IMF). That means selling off public assets (including ports, airports, electric and petroleum companies), slashing salaries and pensions, drastically increasing taxes and dismantling social services, while creating special funds to save the banking system.

These are the mafia-like extortion tactics by which entire economies are yoked into paying off debts to foreign banks – debts that must be paid with the labor, assets and patrimony of people who had nothing to do with incurring them.

Playing Chicken with the People’s Money

Greece is not the first to feel the noose tightening on its neck. As The Economistnotes, in 2013 the ECB announced that it would cut off Emergency Lending Assistance to Cypriot banks within days, unless the government agreed to its bailout terms. Similar threats were used to get agreement from the Irish government in 2010.

Likewise, says The Economist, the “Greek banks’ growing dependence on ELA leaves the government at the ECB’s mercy as it tries to renegotiate the bailout.”

Mark Weisbrot commented in the Huffington Post:

We should be clear about what this means. The ECB’s move was completely unnecessary . . . . It looks very much like a deliberate attempt to undermine the new government.

. . . The ECB could . . . stabilize Greek bond yields at low levels, but instead it chose . . . to go to the opposite extreme — and I mean extreme — to promote a run on bank deposits, tank the Greek stock market, and drive up Greek borrowing costs.

Weisbrot observed that the troika had plunged the Eurozone into at least two additional years of unnecessary recession beginning in 2011, because “they were playing a similar game of chicken. . . . [T]he ECB deliberately allowed these market actors to create an existential crisis for the euro, in order to force concessions from the governments of Spain, Italy, Greece, Portugal, and Ireland.”

The Tourniquet of Central Bank Liquidity

Not just Greek banks but all banks are reliant on central bank liquidity, because they are all technically insolvent. They all lend money they don’t have. They rely on being able to borrow from other banks, the money market, or the central bank as needed to balance their books. The central bank (which has the power to print money) is the ultimate backstop in this sleight of hand. If that source of liquidity dries up, the banks go down.

In the Eurozone, the national central banks of member countries have relinquished this critical credit power to the European Central Bank. And the ECB, like the US Federal Reserve, marches to the drums of large international banks rather than to the democratic will of the people.

Lest there be any doubt, let’s review Goldman’s December memo to the Greek Parliament, reprinted on Zerohedge. Titled “From GRecovery to GRelapse,” it warned:

[H]erein lies the main risk for Greece. The economy needs the only lender of last resort to the banking system to maintain ample provision of liquidity. And this is not just because banks may require resources to help reduce future refinancing risks for the sovereign. But also because banks are already reliant on government issued or government guaranteed securities to maintain the current levels of liquidity constant.

In the event of a severe Greek government clash with international lenders, interruption of liquidity provision to Greek banks by the ECB could potentially even lead to a Cyprus-style prolonged “bank holiday”. And market fears for potential Euro-exit risks could rise at that point. [Emphasis added.]

Why would the ECB have to “interrupt liquidity provision” just because of a “clash with international lenders”? As Mark Weisbrot observed, the move was completely unnecessary. The central bank can flick the credit switch on or off at its whim. Any country that resists going along with the troika’s austerity program may find that its banks have been cut off from this critical liquidity, because the government and the banks are no longer considered “good credit risks.” And that damning judgment becomes a self-fulfilling prophecy, as is happening in Greece.

“The Icing on the Cake”

Adding insult to injury, the ballooning Greek debt was incurred to save the very international banks to which it is now largely owed. Worse, those banks bought the debt with cheap loans from the ECB! Pepe Escobar writes:

The troika sold Greece an economic racket . . . . Essentially, Greece’s public debt went from private to public hands when the ECB and the IMF ‘rescued’ private (German, French, Spanish) banks. The debt, of course, ballooned. The troika intervened, not to save Greece, but to save private banking.

The ECB bought public debt from private banks for a fortune, because the ECB could not buy public debt directly from the Greek state. The icing on this layer cake is that private banks had found the cash to buy Greece’s public debt exactly from…the ECB, profiting from ultra-friendly interest rates. This is outright theft. And it’s the thieves that have been setting the rules of the game all along.

That brings us back to the role of Goldman Sachs (dubbed by Matt Taibbi the “Vampire Squid”), which “helped” Greece get into the Eurozone through a highly questionable derivative scheme involving a currency swap that used artificially high exchange rates to conceal Greek debt.

Goldman then turned around and hedged its bets by shorting Greek debt.

Predictably, these derivative bets went very wrong for the less sophisticated of the two players. A €2.8 billion loan to Greece in 2001 became a €5.1 billion debt by 2005.

Despite this debt burden, in 2006 Greece remained within the ECB’s 3% budget deficit guidelines. It got into serious trouble only after the 2008 banking crisis. In late 2009, Goldman joined in bearish bets on Greek debt launched by heavyweight hedge funds to put selling pressure on the euro, forcing Greece into the bailout and austerity measures that have since destroyed its economy.

Ambrose Evans-Pritchard wrote in the UK Telegraph on March 2^nd:

Syriza has long argued that [its post-2009] debt is illegitimate, alleging that the ECB bought Greek bonds in 2010 in order to save the European banking system and prevent contagion at a time when the eurozone did not have a financial firewall, not to help Greece.

Mr. Varoufakis [the newly-appointed Greek finance minister] said the result was to head off a Greek default to private creditors that would have led to a large haircut for foreign banks if events had been allowed to run their normal course, reducing Greece’s debt burden to manageable levels. Instead, the EU authorities took a series of steps to avert this cathartic moment, ultimately foisting €245bn of loan packages onto the Greek taxpayer and pushing public debt to 182pc of GDP.

The Toxic Central Banking System

Pepe Escobar concludes:

Beware of Masters of the Universe dispensing smiles. Draghi and the . . . ECB goons may dispense all the smiles in the world, but what they are graphically demonstrating once again is how toxic central banking is now enshrined as a mortal enemy of democracy.

National central banks are no longer tools of governments for the benefit of the people. Governments have become tools of a global central banking system serving the interests of giant international financial institutions. These “too big to fail” behemoths must be saved at the expense of local banks, their depositors, and local economies generally.

How to escape the tentacles of this toxic squid-like banking hierarchy?

For countries with a bit more room to maneuver than Greece has, one option is to withdraw public and private deposits and put them in publicly-owned banks. The megabanks are deemed too big to fail only because the people’s money is tied up in them. They could be allowed to fail if public funds were not at risk.

The German SBFIC (Savings Banks Foundation for International Cooperation) has proposed a pilot project on the Sparkassen model for Greece. Other provocative options have also been proposed, to be the subject of another article.

Black students were hurt most when Wellesley tried to control grade inflation

by Libby Nelson

A C grade really once was average, or at least typical: In the 1960s, it was the most commonly awarded grade in college courses.

Not anymore. By 2007, 83 percent of all grades at a sample of 200 four-year colleges and universities were A’s and B’s. And research from a former Duke University professor found thatA’s have been the most commonly awarded grade at four-year colleges since the 1990s:

(Stuart Rojstaczer)

But new research suggests it’s possible to reverse the grade inflation trend.

How Wellesley tackled grade inflation

Wellesley College used to be one of the worst offenders. In 2000, the average course grade awarded was a 3.55, an A-minus. Then, in 2003, Wellesley decided enough was enough. The college created a new rule: average final grades in classes at the introductory or intermediate level (a 100-level or 200-level class, in college catalogue terminology) should be no higher than a B-plus.

Professors could exceed those limits, but they’d have to explain themselves in writing to the administration if they did. The change applied to about two-thirds of Wellesley’s academic departments, which were awarding grades that exceeded the cap.

Research on the effects of the change, published in the Journal of Economic Perspectives in 2014, suggested it successfully reversed the upward trend in GPAs. Here’s what the college learned.

1) When you require professors to give lower grades, they give lower grades

The researchers —  Kristin F. Butcher and Patrick J. McEwan, both Wellesley economics professors, and Akila Weerapana, an associate professor at Wellesley — found the effect on the grades students received in their classes was immediate and unsurprising:

(Journal of Economic Perspectives)

Students were about 18 percentage points less likely to get an A or A-minus after the change than they were before. B’s became much more common. And the proportion of students who graduated magna cum laude — the second-highest honor for graduating seniors — dropped from 20 percent to 16 percent.

But students in departments that historically had given high grades continued to get high grades, relatively speaking. Academic departments that weren’t subject to the cap, which included biological sciences, chemistry, physics, and economics all still gave slightly lower grades than departments where the restriction took effect.

2) Students were more likely to major in economics and the sciences

So were higher grades in humanities classes luring students away from science? The Wellesley data, while a small sample, indicates that grades affected students’ choice of major. But students were more likely to switch within disciplines (from sociology to economics, for example) than they were to leave the humanities.

Economics, the most popular major at Wellesley and one that had not been affected by grade inflation in the past, gained new students; other social science disciplines saw enrollments decline.

3) Students weren’t as happy with their professors

Research has suggested evaluations of professors can turn into a feedback loop: good grades make students more likely to rate professors highly. Because those ratings can come into play when professors are being considered for tenure or promotion, faculty become more lenient graders to curry favor with students. At Wellesley, students in departments affected by the grade cap tended to give professors lower ratings after the change took effect.

4) Black students were disproportionately affected

After the grade cap was imposed, the proportion of B’s increased as the proportion of A’s fell. This suggests that students who were receiving the “lowest A-minus” — barely meeting the bar for the grade — were more likely to receive a B-plus after the change. Black students saw a larger-than-average drop in grades, as did students with lower SAT scores.

The researchers put the best possible interpretation on this, suggesting that a more equal grading policy among different departments at the college will do a better job of demonstrating which students need help. But grading is an imperfect, subjective science. The burden of grade deflation appears to have fallen harder on black students than on others.

5) Some students report that lower grades could hurt their job prospects

In the grade inflation arms race, Wellesley disarmed unilaterally. As grades at the private liberal arts college fell after the policy change, they continued to rise everywhere else. That has led to worries from students and recent alumni that the college is putting its graduates behind in the job market.

“They point to examples of web-based job application systems that will not let them proceed if their GPA is below a 3.5,” the authors wrote. “The economist’s answer that firms relying on poor information to hire are likely to fare poorly and to be poor employers in the long run proves remarkably uncomforting to undergraduates.”

The answer, the authors suggest, is for other colleges to join Wellesley to stop grade inflation.

When a Summer Job Could Pay the Tuition

Timothy Taylor
conversableeconomist@gmail.com

When I was graduating from high school in 1978, a number of my friends went to the hometown University of Minnesota. At the time, it was possible to pay tuition and a substantial share of living expenses with the earnings from a full-time job in the summer and a part-time job during the school year. Given the trends in costs of higher education and the path of the minimum wage since then, this is no longer true.

Here’s an illustration of the point with the University of Minnesota, with its current enrollment of about 41,000 undergraduates,as an example. (The figure is taken from a presentation by David Ernst, who among his other responsibilities is Executive Director of the Open Textbook Network, which provides links to about 170 free and open-license textbooks in a variety of subjects.)

Just to put this in perspective, say that a full-time student works 40 hours per week for 12 weeks of summer vacation, and then 10 hours per week for 30 weeks during the school year–while taking a break during vacations and finals. That schedule would total 780 hours per year. Back in the late 1970s, even being paid the minimum wage, this work schedule easily covered tuition. By the early 1990s, it no longer covered tuition. According to the OECD, the average annual hours worked by a US worker was 1,788 in 2013. At the minimum wage, that’s now just enough to cover tuition–although it doesn’t leave much space for being a full-time student.

When did Corporate America begin?

by matiasvernengo

This graph is a bit old, from Alfred D. Chandler Jr.  and James W. Cortada’s book A Nation Transformed by Information: How Information Has Shaped the United States from Colonial Times to the Present, and more precisely from Chandler’s introductory chapter. It shows the founding dates of the 1994 Fortune 500 corporations.

The story is that most were founded in the 5 decades starting in 1880. So from the rise of the Robber Barons to just before the New Deal. Not surprising. Chandler is well-known for showing the rise of big business in the late 19th century, and the role of railroads, and the telegraph, transportation and telecommunications, as well as the managerial revolution in the process. It would be interesting to see how many corporations that are now in the Fortune 500 have been founded in the post-deregulation, financialization, venture capital, Silicon Valley era. That is, in the new era of Robber Barons.

PS: It opens up another question. Chandler seems to think, like Landes in another debate, that technology caused the rise of the corporation. The alternative would be like Marglin to suggest that the rise of the corporation allowed for the use of the technology in a more widespread way. The debate between Marglin and Landes was on the origins of the factory system, by the way. Marglin’ paper was published in the Review of Radical Political Economics here.

Bottled water is a scam: PepsiCo, Coca-Cola and the beverage industry’s greatest con

Multinationals have made billions off the myth that tap water is unhealthy. Here’s what they don’t want you to know

CLIFF WEATHERS, ALTERNET

This article originally appeared on AlterNet.

The following is the latest in a new series of articles on AlterNet called Fear in America that launched this March. Read the introduction to the series.

The biggest con job perpetrated on the consumer is not some shady operation selling bogus cures through TV infomercials. America’s biggest snake-oil salesman is actually the beverage industry, or Big Bev, which resells the simplest and most vital product for thousands of times its value. That product is drinking water.

Multinationals like PepsiCo, the Coca-Cola Company and Nestle rake in a combined $110 billion a year selling bottled water worldwide. In the U.S. alone, more than half the population drinks bottled water, which accounts for about 30% of liquid refreshment sales, far exceeding the sales of milk and beer (only soft drinks sell more).

But the expensive water the beverage industry sells is no better — and possibly worse — than the water you get from your tap (and often, the water they sell is tap water). So how did these companies fool the public into paying a few bucks for something that costs a few pennies per gallon from a faucet?

Fear. These multinationals have spent millions on marketing to convince consumers that tap water tastes bad, contains high levels of contaminants and poses a danger to human health. Municipal water, they claim, is a scourge, and the only way you get drink healthy water is to buy it through private beverage companies, at up to 2,000 times the cost of getting it from a tap.

And it appears that their tactics are working. With some 92% of tap water meeting state and federal standards, the U.S. has the cleanest and safest public water supply in the world. Yet polls have shown that that a great majority of Americans worry a great deal about the public water supply.

To make matters worse, the supposedly healthy alternative is virtually unregulated. The water from a public utility is constantly monitored under Environmental Protection Agency standards, but bottled water does not have to meet those standards. In fact, independent testing of bottled water has indicated that microbiological impurities and high levels of fluoride and arsenic posed health concerns.

---

---

Misplaced Doubts

“Water fountains used to be everywhere, but they have slowly disappeared as public water is increasingly pushed out in favor of private control and profit,” writes Peter Gleick in his book Bottled & Sold. “[They] have become an anachronism, or even a liability, a symbol of the days when homes didn’t have taps and bottled water wasn’t available from every convenience store and corner concession stand. In our health-conscious society, we are afraid that public fountains, and our tap water in general, are sources of contamination and contagion.”

When towns and cities still didn’t have the means to provide all homes access to clean water, sanitary water fountains were a benefit to public health. The irony today is that public water is no longer viewed as a safe option, yet poorly regulated bottled water is.

Nine years ago, the high-end bottled-water brand Fiji began a marketing campaign in which it sniffed, “The label says Fiji because it’s not bottled in Cleveland.”

Clevelanders, angered they were being unfairly insulted because of some issues with their water decades back, took action. The city’s water utility even bought some bottles of Fiji and other top brands like Dasani, Evian and Aquafina and tested them against Cleveland tap water. And guess what? Cleveland’s tap water was the purest of them all. Moreover, Fiji had a 6.31 micrograms of arsenic per bottle. While under the amount of 10 micrograms allowed by the EPA and Food and Drug Administration, it was notably high in comparison.

But Cleveland only tested a few samples of bottled water. Consumers can’t be sure what they’re getting, as the contents can vary from bottle to bottle. That’s because bottled water, which is regulated by the FDA, doesn’t have to meetthe stricter standards the EPA requires. Tap water needs to undergo regular testing for bacteria and microbes such as E. coli, while bottled water doesn’t. Further, the EPA requires water suppliers to use certified labs to test their water, but there’s no such FDA requirement for water bottlers. The bottlers also don’t need to send off reports to regulators about problems they might find with their product. There are no requirements for disinfection or filtration for bottlers that water utilities must meet. Consumers are left at the mercy of a corporation to protect them from their product.

What’s in a Name?

While Fiji water actually comes from the South Pacific Island that bears its name, close to half of the bottled water bought by consumers is nothing more than filtered tap water with fancy names, according to Food & Water Watch. Much of the bottled water Americans drink, including top brands like Aquafina and Dasani, is pretty much the same stuff you get from your own faucet, perhaps run through an additional filter by the bottler.

“These are the numbers the bottled water industry doesn’t want you to see,” says Food & Water Watch executive director Wenonah Hauter. “These figures reveal that more and more bottled water is basically the same product that flows from consumer taps, subsidized by taxpayer dollars—then poured into an environmentally destructive package, and sold for thousands of times its actual value.”

The environmental concerns of bottled water are well documented. Made from fossil fuels, the plastic bottles are often not subject to state bottle-return programs and end up littering the landscape, even invading our waterways and oceans where they break down, leaching petrochemicals back into the water and severely impacting marine life. There are even some questions about the industrial chemicals the bottles are made out of mixing with the water contained inside. Bisphenol A is notably worrisome. It’s an endocrine disruptorthat could lead to reproductive issues, is known to disrupt normal heart muscle function and has been linked to some cancers.

Why are the health issues of bottled water so widely ignored, while at the same time consumers are fed Big Bev’s horror stories about tap water? It’s clear the industry works hard creating a climate of fear regarding tap water in order to maximize its profits. And seeing how we consume bottled water in such great quantities, it’s obvious that the public has bought into this nonsense.

Tap water has a bad reputation, which is not well deserved, making it an easy target for the beverage industry. And while Big Bev has lobbyists, industry organizations and public relations companies to boost its profile, this is not really an option for our nation’s water utilities. There’s nobody to put a correct perspective on unfortunate events such as water main breaks and cryptosporidium and E. coli contamination on the rare occasion that they impact water quality in an area. In the U.S., our water utilities are very safe overall, but we only hear about them when something goes wrong. This has led to mistrust of the utilities and even conspiracy theories about public water.

Fluoridated water, in particular, is widely believed to be proof of some government malevolence. As far back as the Cold War era, anti-fluoride activists claimed that fluoridation was part of a mind-control scheme. Critics of fluoride point to a pile of other health consequences that have never been proven. To date, the only known negative consequence of proper water fluoridation is dental fluorosis, which can create pitting and mottling on children’s teeth, a condition which is mostly cosmetic.

There is a legitimate debate as to whether governments have the legal basis to add chemicals, such as fluoride, to drinking water that do not improve its safety. There’s also a point to be made that people can’t opt out of public fluoridated water. But unfortunately, any valid discussion of the topic is overshadowed by conspiracy theories that further fuel fears of tap water.

But while public water resources must reveal the contents of their water, including fluoridation, you have to do some digging to find out if your bottled water contains it; this information is not on any label. Unsuspecting consumers who thinking they’re avoiding fluoride by drinking bottled water could be getting a good dose of it anyway.

This lack of transparency helps Big Bev in its mission to convince the consumer that its product is superior, and that tap water is dirty and contaminated. Such omissions help the beverage industry create a perceived need for bottled water.

Now that it’s got people genuinely afraid of tap water, Big Bev is trying to take public water sources away from the public. After all, “the biggest enemy is tap water,” according to Robert S. Morrison, the vice chairperson of PepsiCo in 2000.

The industry is working on restaurants, convincing them to sell customers bottled water instead of giving them tap water as they’re seated. Even worse, whole sports stadiums, where beverage companies heavily market their products, are being built without any drinking fountains in order to force thirsty fans to buy bottled water and other beverages at inflated prices.

“When we’re done, tap water will be relegated to showers and washing dishes,” says one beverage executive.