Keywords

Ineptocracy; policy of grabbing; ineptocracy leads to bankruptcy; living standards; unsustainable expenditures; lack of ethics; bail-ins; democratic cleptocracy

15.1 Is Public Debt Good or Bad?

Publishers use consultants to advise them whether a book proposal should or should not be published. This is a sound practice. The consultants, or reviewers, are usually well-learned academics or professionals who develop a sound opinion on a new manuscript’s worth (both from a scientific and for a marketing viewpoint). Quite often, they also contribute ideas for improvements to the contents and structure of the proposed work.

One of the publisher’s consultants who reviewed this manuscript suggested that public debt has also positive features, and these should be brought to the reader’s attention. The consultant is right. Up to a point, but only up to a point, public debt may have positive fallout. But nothing is cast in advance. “Win” or “lose” depends on:

There may be a case that a new public debt has to be subscribed by an already bankrupt country, or there is war. Under the fascist regime, the Italians thought of themselves as the owners of the Illyric coast, particularly around Dyrachion where Cesar had landed. Invited by nobody, Mussolini sent two Italian geometers to fix the border between Albania and Greece. A Greek hothead shot them. The Italian dictator demanded $50 million in compensation (big money at the time)—or he would occupy the Island of Corfu.

In short, in 1935 a bankrupt Italy was pressing a bankrupt Greece to get an international loan. It is not easy to obtain a big loan when your creditworthiness is flat,² and as the negotiation went on and on, the glorious Mussolini army landed on Corfu. In a cruel century like the twentieth, this has been the most ridiculous military event on record. Finally, the Italian dictator got the $50 million of extortion money he asked for, and the military comic opera ended. Greece had to increase its already high public debt, after all. But the story is also a reminder that tragedy has a comic dimension.

There can even be a worse scenario. The money borrowed by increasing the public debt is spent on luxuries, an extremely unproductive “investment.” This is a case which bothered lawgivers since antiquity.³ Today, a greater worry is that newly contracted public debt is spent for health care under social security protection in Europe; Medicaid, Medicare, Obamacare in America; and so on and so forth. Health care is an entitlement,⁴ but these are yesterday’s expenses providing absolutely no return. The loan, however, is a future commitment and has to be serviced.

When big social plans like Medicare, Medicaid, Obamacare, and Social Security come in and press on increasing the public debt, what in other days used to be small incremental (and, therefore, more or less controllable) steps in new public loans become a tsunami. Deficit dynamics take over. At the same time, because deficit dynamics is a new discipline and there is not enough research in this domain, spending is accompanied by failure to address the unsustainable old fiscal position in a credible and prudent manner. This:

It is rather difficult to understand how elected officials leave themselves with virtually no margin for error as they seek to navigate between short-term fiscal cliffs and an expanding longer term national debt crisis. This is precisely where ineptocracy⁵ has its heyday. Second-rate politicians (who run the nation’s fortunes (and misfortunes)) hide the problems under the carpet with the result that these accumulate. They become more complex and the solutions sought after require tough decisions which are not forthcoming.

A person may be lacking experience for the job he or she is expected to do, or simply the challenge confronting him is beyond his ability to comprehend and manage. The argument: “I know what I did was wrong, but had to do it because of orders from above,” does not wash. This is Eichmann’s dirty excuse. When confronted with such situations, ethical persons must stand up and say: No! (Section 15.4).

But there is the vanity of power for the sake of power and money; even borrowed money means power when the amount is big. We have spoken of this in Chapter 1 when discussing about gifts difficult to refuse. These are masquerading as easy terms loans the (pseudo) donors don’t even want to have them repaid. What they want is to see them accumulate in the borrower’s account, since this way the borrower keeps on being on the hook.

A different way of making this statement is that the idea of contracting public debt might have had some noble roots, but ineptocracy saw to it that the money has been used for nonproductive activities (see also Chapter 2). If the inept political leaders fail to redress the deteriorating public debt, this will surely cause a negative market reaction, leading to widening risk premiums and perhaps even triggering a fresh wave of banking woes.

If the country which goes through such turmoil is a major player in the world economy and in the global financial markets, then the aftereffects could well serve as catalyst to another global economic and financial crisis. The deeper irony attached to all this is that the winners of the new global financial turmoil will be the same select group of big banks expert in manipulating safe-haven assets.

The transition in public debt exposure we have seen in this section has been from a rather comfortable environment of small public debt packages which have outgrown themselves, almost unconsciously, into a leveraged environment of large dimensions carrying along with it a huge amount of risk. Gigantism has its own dynamics and, at least so far, we have not been patient enough to learn how to deal with its many unknowns. Let me rephrase this statement:

A major part of the challenge confronting sovereigns and their advisors is that nowadays the will of politicians, central bank governors, and others in the so-called high places is no more oriented toward doing one’s homework. Decisions have become a sort of rule of thumb largely served by a hit and run approach. In Section 15.3, I take the case of Unilever, Goldsmith, and Lipton Tea to explain what I mean by a well done homework and the benefit derived from it. As an example, this has been a deliberate choice.

15.2 Ineptocracy Increases the Complexity of Sovereign Bankruptcy

Some of the deeper roots of social disparities can be found in government debt, not in one but in several countries around the globe, which keeps rising. Most economies now agree that the aggressive monetary expansion of the last 6 years will have to be unwound at some point. This means that people will pay for it—and not necessarily the people who benefited while the public debt wave kept on growing. Bank deleveraging will also be a headwind to economic development, and the same is true of ineptocracy.

Section 15.1 explained that ineptocracy is the system of government where the least capable of leading a nation, of executing public functions, or of running business enterprises are in charge; and to whom the other members of society are subservient. This system works by the accumulation of public debt which quite likely will be paid through the confiscation of the wealth of the community’s common citizen. Ineptocracy brought along with it an innovation. Until quite recently:

The March 2013, Cyprus event which involved the IMF, ECB, and EU, provides the evidence on the grab policy, but contrary to a general belief this is not its first instance. Also known under the names, state gangsterism and banksterism, this policy is a shame. Tomorrow, however, the ineptocracy behind the system may well see to it that it becomes the “normal” state of affairs in society obliging the common citizen to run for cover.

Section 15.1 stated that bureaucracy and ineptocracy are not exactly the same. Their correlation comes from the fact that the great protector of ineptocracy, and opponent to change, is the huge bureaucracy which in the post-World War II years has been rising en masse with one goal: perpetuate the status quo which is its baby and manna from heaven. This does not mean at all a more efficient society whose success is uncertain because politicians and the entrenched bureaucracy buy public opinion, and votes, by:

To confront the massive outlays made necessary by extracurricular activities, like the salvage of big banks, sovereigns went deep into debt. Both in the United States and also in Europe, central banks were happy to provide the money by printing it, while at the same time, they extended their authority into the sovereign’s turf.

There has been no “Stop!” signal in that road because the show was run by ineptocracy which found it difficult to understand that with interminable money printing of money sovereigns and central banks are essentially in a lose-lose game. The market may wake up to the risks slowly, but unless there is a reversal in monetary policies:

The self-proclaimed Neo-Keynesians say that by printing all the money it needs, a sovereign will not default. This is total nonsense. Printing money nonstop leads investors to losing part of their wealth through currency debasement. In late February 2013, in Britain, after Moody’s downgrade, the pound suffered a 9 percent currency exchange loss. Sterling was already weak and the downgrade reinforced sterling’s plunge to the lowest level since July 2010. A few weeks later, on April 19, 2013 Fitch stripped Britain of one of its AAAs.

Credit downgrades have the effect of putting an economy in the spotlight and thereby influencing market sentiment. Currency devaluation in today’s global economy is like a truck zigzagging between lanes. There may be no accident in switching lanes once or twice, but the accident is sure to come if that practice becomes a habit. In the real economy, this raises two issues which have not been properly studied in terms of aftermath because:

1. Western sovereign risk is poorly known in its medium to longer term implications.

2. Little research is done in this vast area of crisis management, where exposure is generally understated.

• Lender of last resort, and

• Ultimate crisis manager.

• Earnings,

• Quality management,

• Political decisions, and

• Central bank action.

15.3 Western Living Standards Have Become Unsustainable

Ineptocracy saw a rapid development in the post-WWII years while easy money made available through the “democratization of lending” without bounds, and corresponding socialization of risk, led people to the belief that there is nothing wrong with living on debt. More and more individuals and families have been able to borrow, so that in America, Britain, and France household debt is at the level of about 120 percent of annual family income.⁸ Worse still, an important amount of this debt has been subsidized by the sovereign.

Easy mortgages is one example. Under the Clinton Administration they created opportunities for all sorts of crooks and speculators, as mortgages were sold to families who could not afford them and they were sure to default. The lowest (CCC) credit quality of mortgages became the one most rapidly growing, the infamous subprimes, immediately repackaged and sold to investors as “assets” with credit rated AAA by rating agencies. This:

An easily definable characteristic of the socialization of risk has been the government-undertaken salvage of self-wounded banks after the speculative hurricane passed by. An early example from the late 1980s has been America’s Savings & Loans, which today pales compared to the massive pulling up from under of derelict big banks both in the United States and in Europe. To do so, sovereigns used inordinate amounts of taxpayer money. In effect, by standing behind big banks, even if they were high stakes speculators, governments removed the oldest franchise in banking: safekeeping—which had started being chipped away in the 1930s with deposit insurance.

Another financial development of the last decades of the twentieth century worth noting is the reinvention of unsecured debt. Junk bonds, which essentially mean junk loans, played an expansive role in the boom of the 1980s and 1990s. With the socialization of risk, not only did creditors lend more freely than they had in the past, but also the sovereign intervened more actively than it had ever done to absorb the inevitable losses.

Still, of all the spending schemes (and there have been a great lot of them in the posy-WWII years) none exceeded the voracity of capital than entitlements. The French term tells it all: “les acquis sociaux”; these have been the presents (or acquisitions) by common citizen as a result of intense social pressure. The 99 percent of the population benefited from them, and saw entitlements as its compensation for the awfully (and wrongly) overpaid 1 percent.

“Social conquests” yes, but can the economy afford them? At the end of the day somebody will pay for them; by now we all know that this somebody will be next generations of western citizens. Fathers and grandfathers leave the public debt mess to their sons and grandsons. Till then,

No sovereign that I know followed the wisdom of James Goldsmith to thoroughly study the file of new “social conquests,” prior to committing himself to them. In the 1960s, President Johnson, at the spur of a moment, decreed that America is a rich country and can simultaneously pursue the war in Vietnam and expensive health care services. He launched Medicare and Medicaid, and we all know what has followed in terms of unfunded liabilities.

Contrast this unstudied approach to the case of Unilever and Goldsmith (to which reference has been made in Section 15.1). This is an interesting case study because it documents the high ground gained by thorough research against the ineptocracy which characterizes Medicare/Medicaid/Obamacare and similar unstudied decisions.

First a brief background. In the 1990s, James Goldsmith, the Franco-British financier, wanted to take control of Allied Suppliers. While it did not actively participate in the takeover, Unilever helped him to reach his goal. The payoff would have been the sale to Unilever of Allied Suppliers’ Lipton Tea interests, at a price to be decided through adjudication after the deal was complete.

When he heard a date had been set for the hearing in connection to the Lipton Tea adjudication, Goldsmith summoned his financial advisers and told them that he had no intention assigning somebody else to represent his interests at the hearing. He himself intended to appear and directly deal with the case.

Following this, and anxious to get as much as he possibly could from the sale, Goldsmith spent a whole week going through every single argument that could be used. He knew that Unilever only expected to pay £10–12 million for the tea interests which he had valued at higher price. His challenge, and the very nature of his homework, was to find and provide the proof that Lipton’s worth was much higher.

Big-headed, as big company executives usually are, Unilever managers thought the matter would quickly be decided in their favor. The executive delegated to appear at the adjudication had studied his papers only on the night before the hearing. He was no match for Goldsmith and his thorough analysis of facts and figures. After 3 hours of Goldsmith’s evidence, it became clear to everyone around the negotiating table that Unilever were going to end up paying much more than they had expected for Allied Suppliers’ tea interests; may be up to £20 million.

So it was. Sir Robert Leach, the adjudicator, decided that Unilever should pay £18.5 million for Lipton Tea. As it was confirmed at the time of the original deal, his decision was not subject to appeal. The £7.5 million difference between what Unilever thought it would pay (an average of £11 million) and what it paid was the direct result of Goldsmith’s homework, and of the fact he had taken his challenge seriously.

Today we seem to have totally drained the inventory of people who take their work seriously, whether they are chiefs of state, ministers of finance, governors of central banks, or presidents of transnational institutions. So either there is no homework done at all, or it is relegated to the ineptocracy and we go from one snafu to the next, often repeating the same mistakes.

This, quite evidently, has dire consequences both on public debt and on the standard of living of the common citizen. Second rate politicians had the crazy idea to tell the voting public that everybody has “the right” to “free medicaments” and “free everything” else. Could the economy afford such unstoppable “free” gifts? Cheap populist policies have been a reversal of the gradual development (albeit with ups and downs) which for centuries characterized the rise of western society improving the standard of living of western citizens.

Fake promises, populism and ineptocracy took over, unfair competition flourished, miscalculation followed, and at the end, the western countries landed themselves in serious economic trouble. In the second half of the twentieth century, the United States, Europe, and Japan prospered largely by buying primary commodities at low price, then shipping and selling manufactured goods to each other, while less developed countries continued to concentrate on low cost goods.

Globalization, however, brought in a sense of global competition, and this prescription for one-sided economic growth could no more deliver. New players came in, targeted the soft underbelly of Western economies, capitalized on the lack of leadership and the advent of ineptocracy in the West, and managed to master the upper ground.

The lazy West with its “free” medicaments got once again indebted to buy the low cost (but fair quality) goods of the new massive producers. Borrowing a leaf from the Western book of financial dominance, China and the other major emerging countries were not bothered by this indebtedness. They knew that eventually too much debt will mean Western slavery to the East (Chapter 2). They were therefore ready to buy the Treasury Bonds of the United States. As of March 2013, the major foreign holders of Treasury securities have been:

Practically, everyone knows that this cannot go on forever. The West searched for a new supremacy through financial globalization, but this was suddenly interrupted through the excesses which led to the great economic, financial, and banking crisis (starting in July/August 2007). Right after, the standard of living in western countries bifurcated toward the:

Essentially what has happened crashed the middle class which was and is the pillar of democracy. It also wiped out a swarm of jobs in Western countries which migrated East. A report by Bank of America Merrill Lynch states: “Roughly 95 percent of net job loss during the recession⁹ was in middle-skilled occupations. Since the recession, job growth has been clustered in high-skilled fields inaccessible to workers without advanced degrees or in lower paying industries. The United States now has larger patches of affluence and poverty, while the middle-class is shrinking.”¹⁰

Fat cats, particularly big bank bosses and those of other king-size firms, saw their salaries doubled and got a shower of bonuses which exceeded the salaries. To the contrary, salaries and pensions of those who do not belong to the new money aristocracy shrank down to 50 percent of what they used to be. Disparities characterizing our society is the theme of Section 15.4.

15.4 Lack of Ethics and Ineptocracy Lead to a Dark End

Fedor M. Dostoyevsky, the Russian author of the human soul, was opposed to the movement of his epoch (mid-nineteenth century) which professed that major social events and social developments could be preprogrammed. To Dostoyevsky’s opinion, there could be no recipe for the creation of “the new man”—the way socialism and communism professed. “The basis of ethics is individual freedom,” Dostoyevsky said.¹¹

Nowadays, in our society, individual freedom is in hibernation while ethical behavior has taken a leave. Lack of ethics, not insurmountable technical challenges, has been behind the tragic accident of BP Houston’s refinery. And again, some years later, lack of business ethics was the reason for 2010 explosion in the Deepwater Horizon rig that killed 11 men and caused the worst offshore oil spill in American history.¹²

In neighboring Mejico lindo, Elba Esther Gordillo, the leader of Mexico’s powerful teachers’ union, was living a dream life, making other people wonder how she is able to maintain her lavish lifestyle on a public servant’s salary. On February 26, 2013 Gordillo was arrested and charged with embezzling $159 million from union and school funds.

The attorney general said Gordillo and two other union officials “had spent the money on designer clothes, art, property and cosmetic surgery. That was the Mexican schools’ and union members’ money”, if you don’t mind. Some of the funds were transferred to companies abroad before being used to buy houses in San Diego, and as an article in The Economist had it, “This may not be the full extent of the swindle.”¹³

Scams come sometimes in disguise. It is lack of professional ethics when, on April 8, 2013, in an interview to the Financial Times, Jean-Yves Hocher, Crédit Agricole’s CEO asserts: “We are well positioned,”¹⁴ when it is widely known in the market that his bank is bleeding blood since years—and that bleeding is unstoppable. Lack of ethical concern is also shown in the repeated assertion that: “Crédit Agricole aims to turn round its lossmaking investment bank by further shrinking its activities and costs, in order to focus on becoming a European debt house”¹⁵ (whatever that might mean).

In making such statement, Jean-Yves Hocher forgets that since the most unfortunate purchase by Crédit Agricole of Crédit Lyonnais—a bankrupt bank specializing in scams, employing gamblers and with an amount of accumulating liabilities unknown and incalculable—his predecessors tried to do what he plans, and they have failed miserably.

Lack of ethics leads to the rogue behavior of banks, and this has spread all the way to central banking. Commercial banks tackle their intrabank counterparty loan risk by collateralizing the debt with government bonds. As the sovereign risk increases, it is prudent to ask for more collateral. But like a rogue trader, ECB and the Federal Reserve are doubling up their risk by relaxing the rules for collateral (the ECB lowered it from 20 to 12 percent).

It has been lack of professional ethics when, in September 2012, in an effort to cut off the tail risk of a Euroland implosion, EU officials were quick to tout its differences from previous schemes: the central bank’s intervention would not only be “unlimited,” like OMT,¹⁶ but it will also be conditional on a struggling country living up to Brussels-mandated economic reforms. The decision on whether it lives or does not live “up to mandated reforms” is left up to ineptocracy, with plenty of room for special favors and nepotism.

In the wake of the late February 2013, chaotic Italian elections, economists, investors, and analysts were concerned that the strings attached to OMT to assure its proper usage, once hailed as the program’s strength, may in fact be its Achilles heel. Without a government, Italy was without the kind of credible policy decisions needed to gaining access to ECB assistance—unless there has been another special favor.

Critics regard as lack of ethics and of the ECB’s statutory obligations that of the euro 208 billion ($270 billion) the ECB deployed with the SMP government bond buying program, by far the greatest share: a king-size euro 99 billion went toward buying Italian debt.¹⁷ This has happened at a time when Berlusconi, as prime minister, had failed to implement structural reforms explicitly detailed by Jean-Claude Trichet, the ECB president who initiated the SMP program.

Nobody should of course expect that the bending of ethical values is something happening only in Europe. In a letter to the Economist Balakrishna Adiga of Bangalore laments India’s plight: “The biggest obstacle is corruption. We are fast becoming a cleptocracy. Dynastic politics and crony capitalism are helping India achieve a landmark which it can ill afford: most corrupt nation in the world.”¹⁸

Whether we talk of Greece (Section 15.6), Italy, India, or any other of the better known countries, cleptocracy, nepotism, and ineptocracy have become a sort of new universal Para Olympics. Nepotism has characterized the relationship between ECB and the Italian sovereign, if one also counts the “other euro 103 billion” said to be transferred from ECB to the Italian Treasury (as anecdotal evidence has it).

The better way to describe the situation in which we find ourselves and have difficulty getting out is one of permanent economic drift. Yet, there are Italian leaders who foresaw the inevitability of descend to the abyss. Two decades ago, clear minds called for a change in course. But they were not heard. Back in July 1990, the late Italian philosopher Dr. Vittorio Vaccari wrote in Operare:

The frenzied pace of contemporary living, the fleeting nature of intentions and commitments, the slavery to consumerism, the indulging tolerance of permissiveness, the capricious adoring of fashion, the idolization of the unnecessary, the celebration of vice…, all of these mask a wound of contemporary humanity, a wound that plagues the human heart. They act like an anesthetic.

Thus in the course of a few short years, man has become indifferent to the ideals of civilization and to the values that throughout history have promoted, reinforced, and upheld civilization.¹⁹

Lack of ethics and ineptocracy see to it that a sense of balance is not observed even by those who preach social justice and aid to the poor. When in 2007 Nicolas Sarkozy, of the French center-right UMP party, was inaugurated at Elysée, the bill of the festivities has been euro 1,123,000—way too high. Five years later, the cost of the festivities for the inauguration of François Hollande of the Socialist Party, reached euro 4,502,000; a 400 percent increase. That Socialist bill included:

The Socialist Party’s care for the poor was forgotten. The top brass of the left-leaning political establishment celebrated its return to presidential power and that called for thousands of bottles of champagne and sumptuous dinners at taxpayer’s expense. Who said that Socialism was dead or dying? It is not only alive and well but also entertaining.

When it comes to throwing sand in the voters’ eyes, and make them forget the extravaganzas, the politicians are inventive. To amuse the gallery, they find all sorts of stories, some of which may even be true but ballooned. Such is the case of the global fiscal fraud guesstimated at $25 trillion,²⁰ which allegedly escapes taxes.

In 2009, after the G20 London summit, Nicolas Sarkozy, then president of France said that the fiscal paradises were taken care of.²¹ Four years later, not only the so-called paradises are kicking but also the worth under their wings is growing. Indeed, they are thriving.

Trade in drugs and counterfeit and contraband goods is another “industry” sovereigns and their consorts—a few of them theorists, the others card-carrying members of ineptocracy—proudly announce to have wiped out. Interviewed on April 16, 2013 by Bloomberg News, an expert on illegal trade on drugs and goods said that it generates $90 billion per year. Catch them, if you can.

With the western economy in dire straits, the time has come to abandon the grandiose pronouncements and concentrate on serious homework, the way James Goldsmith has shown that should be done when one is decided to win (Section 15.3). The “take it easy” time is past. The European Union needs a lot of uplifting. Like Concordia, the cruise ship, its reputation has fallen on the rocks.

15.5 Bail-In Is Blessed by the Masters of Indecision

Pushed and pulled by the EU, ECB, and IMF, and desperate to get a loan, the new Cyprus government grabbed the money of depositors in the country’s banks. This has been a clear break with 500 years of European tradition in banking and finance. Led by the internal and external forces of ineptocracy (including those which chose their residence in the IMF, EU, and ECB) Europe violated the sacrosanct guaranty of deposits.

Labeled the “Great Euro Bank Robbery,” this has been one of the most Byzantine twists on record in finance; quite likely an unavoidable aftereffect of poorly studied (or totally unstudied) “solutions” invented by the European Union during the last few years. While hard evidence is missing, rumor has it that originally the Great Euro Bank Robbery fiasco was supposed to be “a very intelligent approach” killing three birds with one well-placed stone:

None of the three objectives has been reached; all three remaining in dreamland. EU’s bail-in was a measure of rush and unpreparedness in confronting the challenges associated to Cyprus’ public debt but not to the debt of the “too bit to fail” Italy and Spain. The Great Euro Bank Robbery has its supporters and its nonbelievers, but the new bail-in provisions have their own set of problems.

Classically, the banks’ senior bond risk premium has no risk layer reflecting the event of bail-in, which is creating downside risks for senior bond valuations. Critics remark that the action by Euroland, ECB, and IMF made the institution of much wider and credible deposit insurance a necessity.

Critics moreover add that as bail-in risk rises, it makes evident that the Cyprus decision was made in a rush, and the market has ceased believing what the EU, ECB, and IMF say that this has been a unique event. Not only the bail-in will be institutionalized but also in 2015 (instead of originally stated 2018), the EU will implement:

A study by a major investment bank which looked at this issue came to the conclusion that “the bail-in of investors in senior bank bonds of a systemically important financial institution, would be a plausible case.” The analysts raised the probability of such an event occurring from the formerly lower end of the 10–15 percent range to 20 percent or even higher, emulating the Cyprus grab.

For some time, the old and new methods of refilling a wounded bank’s treasury will probably coexist. In January 2013 due to a large loss on derivatives, the Italian bank Monte dei Paschi di Siena needed a second bailout, a first capital injection having taken place in 2012. However, Italy did not force losses on any bond class despite the total bailout amounting to euro 7.7 billion ($10 billion), nearly the debt of Cyprus. (Anecdotal evidence suggests that the EU complained to Monte dei Paschi that no attention was paid to the RRD in the making—which talks volumes of the impertinence of the new grab policy pushed down the throat of financial institutions.)

With the institutionalization of the bail-in, the market will evidently ask for higher premiums to cover that extra risk. Some experts think that when the EU’s Recovery and Resolution Directive is fully implemented, it will be possible to price in risk more accurately, but critics doubt whether the RRD bank resolution framework will achieve more credibility than today’s piecemeal approach given the many uncertainties remaining in the market not only in connection to the bail-in but, as well, to many other projects—the often tooted but never well-defined banking union being an example. All these half-baked notions and projects have come out of the hands of the same masters of indecision. In essence with RRD:

One of the opinions I heard in the course of my research is that from the beginning of the deep economic, financial and banking crisis which started July/August 2007 in the United States and spread to Europe, in the short space of half a dozen years, Euroland managed to create an internal grand depression like 1929. Then, having lost the sense of direction, its politicians made a bad situation worse by legalizing the grabbing of deposits.²⁴

Grabbing per se is not the only problem. One of the more scary aspects of the Cyprus IMF/ECB/EU “loan” conditions is the very light way key decisions have been made. Homework has taken a leave²⁵ and personal responsibility went along. The situation is very serious, said Dominique Straus-Kahn, the former boss of IMF, in his September 19, 2011 interview by TF1, the French TV station. To his opinion, if things continue as usual in 25 years from now (which is more or less “tomorrow”), Europe will be a desolate continent.

To Strauss-Kahn’s mind, America’s future will not be better. Tough decisions and rigorous measures are urgently needed at both sides of North Atlantic, but they are not forthcoming. The citizens seem to simply not understand the depth of the public debt problem and the way it affects them, neither are the politicians aware of the volcano on which they sit.

Public opinion, and the political leaders who try to manipulate it, refuse to recognize that one must accept his losses particularly if there is plenty of them. Hence the search for ill-studied unorthodox “solution” and for inertia, both classical signs of the reign of ineptocracy.

The worries of Strauss-Kahn are corroborated by Jim Rogers, the American investor. In an interview he gave to CNBC, Rogers put his opinion on the current situation and its risks in these terms: “It’s pretty scary what’s going on in Europe, especially when they’re taking money out of people’s bank accounts … with Cyprus, politicians are saying that this is a special case and urging people not to worry, but that is exactly why investors should be concerned… the IMF has said ‘sure, loot the bank account’, the EU has said ‘loot the bank accounts’ so you can be sure that other countries when problems come, are going to say ‘well, it’s condoned by the EU, it’s condoned by the IMF, so let’s do it too’.”²⁶

We are far away from the time when the sovereign cared for his subjects, and the institutions he made aimed to help the common citizen (albeit, not always). The drift did not start last night. By the 1960s, when the WWII damages were repaired, European governments chose the easy solution of generalizing “for free” university education (at great costs), so that young people can study what attracts their fancy and don’t take to the streets.

The policy has been spend, spend without appropriate control. Spend and spend piled up debt.²⁷ Higher taxes were supposed to do a miracle. But as the reader is already aware, taxing has limits, and sovereigns found themselves both swimming in red ink and making commitments without provisions. There exist as well other rotten fruits of ineptocracy which inhibit society’s effort to renew itself:

Mario Monti, Italy’s former prime minister, suggested that governments need to educate their parliaments. I would agree provided the first subject is ethics and the second effectiveness. The third should be to open the mind of members of parliament and of the senators on the further-out perils of debt—as well as the personal responsibility and accountability associated to:

Educating the parliamentarians is nearly synonymous to increasing their ability to see through little more complex situations and their aftermaths, hence improving their potential. There is nothing more important than developing the human potential of the country if, and only if, it is done the right way which is far from being the general case.

Based on his long experience in politics and government, Nikita Khrushchev put it in this way: “I’ve known plenty of highly educated people who had no brains, and I’ve known people without formal education but with good heads on their shoulders.”²⁸

15.6 The Parliament Votes in Favor of Democratic Cleptocracy

For good or bad, western man gave himself a lot of power over his destiny. His secret has been science as well as persistence in what he was doing till a successful end. The sequel is beautifully described in IF, Rudyard Kippling’s poem. At the same time, however, man and the human race as a whole failed to provide itself with an evolving, refined set of ethical values and moral standards with which to plan and control the newly found power.

Instead, man increasingly surrounded himself with the illusion that he was searching for the external truth. The deep things in science are not found because they are useful, they are found because it was possible to find them, Robert Oppenheimer taught his students. And they are not necessarily used because they are needed. They are used because once found they have to be used.

Oppenheimer had good reasons for his statement. One of the principles in the scientific effort is that results must be visible. We should not let them hide for eternity. If we do so, there is no continuity of effort and, therefore, no more results. “I start having doubts about scientific truth when the atomic bomb was thrown on Hiroshima,” another nuclear scientist suggested.

At the same time, however, this urge for visible results brings in perspective some of the rotten parts of man’s values. We find that humility is the exception not the rule. Credos are often invented for the deception of the masses. “Jedem das Seine”²⁹ was written at the gate of Buchenwald. Deception has always been at man’s service. Walter Lippmann believed that heroes are incarnated; devils are made by the same mechanism.

Every system perishes of its own excesses, Pericles stated in one of his speeches to the Athenians, adding that any in-depth appraisal of human society is bound to uncover lots of excesses. That’s the environment in which we currently live, which widely misses ethics, trust, and confidence because of events which took place in the recent past. Outraged at the excesses that led to the economic and financial crisis, society is deeply cynical about:

“Wisdom cannot be bought,” says Edith Hamilton. “It is the reward for righteousness.”³⁰ The prerequisite for righteousness is personal accountability for what each one of us has done (or has not done, but should have done). People must be directly accountable for whatever they do not only in front of God but also in front of the Court on the High Street.

Nowadays, however, “in front of the Court on the High Street” has become questionable as a universal principle because a growing number of people in the so-called high places have become too big to jail (Chapter 11). Since the 2008 descend to the abyss of the banking industry, due to its self-created deep wounds, the “Geithner doctrine”³¹ made the preservation of big banks a top government priority no matter the consequences. The sovereign shields the wrongdoers from the Courts.

In an article he published in The Financial Times, Neil Barofsky points out that “Aside from moral hazard (this) has also meant the perversion of the US criminal justice system. The US faces a two-tiered system of justice that, if left unchecked by the incoming Treasury and regulatory teams, (it) all but assure:

The government’s benevolence toward big banks is easily demonstrated not only through the use of taxpayer money to refill their treasury but also by the stunning dearth of criminal prosecutions. According to the Geithner doctrine, a correct (albeit more aggressive) stance against big financial institutions could have a negative impact on the stability of the financial markets.³³ Another “principle” is that wrongdoers should not be bothered in their work—a funny way of thinking which makes the biggest and wealthiest amongst them not only too big to fail but also too big to jail.

To a considerable extent, this polarization of society was foreseeable. In the 1930s José Ortega y Gasset, the Spanish political economist and philosopher, had warned that with the rise of the mass society will come the birth of a new kind of politics—the politics of organized pressure groups, with which the West:

Other political economists compared the advent of the mass society, and the changes it bring along, to eighteenth century England which saw the birth of a new sort of economy, one based on exploration and conquest of faraway lands with raw materials. This planted the roots of a global empire which found employment for large strata of the population. The day for Western empires is, however, gone.

With the victors of WWII having mastered the upper ground, the perception of greater wealth (though in most part a fata morgana) made large parts of society comfortable. Endowments filled the gap of the common man’s income, and slowly but surely the new generation got featherbedded. No wonder therefore that plenty of problems are now confronting us, as Western society learned to live with no responsibilities but plenty of demands beyond the sovereign’s means. No elected politician has had the guts to ask his or her electorate:

At her time Golda Meir, a true political leader who left a mark in history, had answered that question. As she relays it in her seminal book My Life: “The government,” I told the nation repeatedly, “cannot do everything all at once. I can’t wave a magic wand and meet everyone’s demands simultaneously: eradicate poverty without imposing taxes, win wars, go on absorbing immigration, develop the economy and still give everyone his dues. No government can do all this at one and the same time.”³⁴

Nowadays, with ineptocracy at the lead, I have never heard a politician asking his electorate: “Do you really think that every citizen can go asking for ‘free’ lunch, ‘free’ health care, ‘free’ medicaments, ‘free’ higher education for his kids, ‘free’ everything any time he or she wants to have it?” They don’t. Their overwhelming desire is to rise in the hierarchy of ineptocracy and from there of cleptocracy.

The depth of ancient Greek tragedy has been divine punishment of people who tried to rise above the Gods. Today, it is not Zeus and his consort at Mount Olympus but the wider public which elects and judges the political protagonists, giving its preference to those who preach spending-and-spending even if it is the citizens’ own money or simply more debt. This has evident consequences which tear to pieces the very fabric of society, eventually leading to:

After having expropriated loans and deposits, increasingly sovereigns look at the PSI (Chapter 4) and Cyprus grabs as the way to ease taxation’s weight: You can be sure that in a few years, grab, grab, grab will become the sovereigns’ new policy—no questions being asked and, if asked, no answers being given. Challenging the grab will become the new “les majesté” of Louis XIV fame.

The way a longer established practice had it, it was the citizens who tried to cheat the state in response to taxes, health care benefits, pensions to people who died 10 years ago and other goodies provided by the nanny state. Now, it is the sovereign searching for whatever hits his fancy to cheat his citizen and keep them subservient.

A “haircut” on bank deposits is the beginning. Higher up in the hierarchy of state gangsterism are the so-called thalassodania³⁵ given without collateral to all sorts of political friends. This is not a hypothesis; it happened 2009–2011 when George Papandreou Jr. was prime minister of Greece. The loans were given by banks to the Socialist Party (Pasok) and to a select list of political friends and entities. The mid-wife has been the Ministry of Development in the name of “developing a friendly environment for strategic and private investments” (I.T.I.).

All this was illegal and had to be legalized. No worry, the politicians thought of it. A new law voted on April 10, 2013 by the Greek parliament legalized the theft of public money for the benefit of the country’s two main political parties and their friends. Ironically, the new law has been introduced by three members of parliament from the New Democracy (the center-right party), not by the Socialists who let others pull the walnuts from the fire.

A nation which had suffered already over 3 years of austerity was stolen euro 400 million in plain daylight by the same people it had elected to safeguard its integrity and respect its laws. This vote in itself confirmed that democracy has become a damaged brand. As per established parliamentary practice, to hide it as much as possible, the new law of looting³⁶ was attached to another, irrelevant legislation.³⁷ According to the clauses of democratic cleptocracy law, the banks which have given loans to political parties:

will not be subject to pursuit by the law if they don’t ask back for their money. They can discharge that obligation to at the expense of the Greek taxpayer who, most evidently, has not been asked if he agrees to pay that high bill. And that’s not all. According to that law of democratic cleptocracy and shame other organizations of private and public law (for instance the Music Palace) will also benefit from the indulgence provided they are not-for-profits. Since when political parties became not-for-profit organizations? Or is this a new mode of grabbing public money under a democratic cleptocracy regime?

End Notes