This is the fifth installment in a seven-part series running throughout this week and into next. Read the first, second, third and fourthparts.

The Bailout Economy

In the single case where government budget deficits are urged to increase—indeed, soar to veritable wartime levels—the purpose is not to revive economies, but to bail out banks for the losses suffered from lending out more than realistically can be repaid. Bad bank loans are to be shifted onto the public balance sheet. If the central bank is blocked from monetizing the cost by buying government bonds and thereby putting money into the economy (something that current EU policy and the German constitution forbids the ECB from doing), then taxes will have to be raised or public spending cut back drastically (as in Ireland since 2010).

This anti-industrial, anti-labor policy rules out writing down debts to what can be paid under normal conditions—that is, paid without widespread forfeiture of property. Wealth is to be siphoned off to the top of the economic pyramid. Someone must lose, of course—and the motto is “Big fish eat little fish,” mediated by the government in today’s financialized travesty of a “free market.”

Most fortunes in history have come from the public domain, after all. The first aim is to take government funding and bailouts and run. The second is to deter prosecution by turning campaign contributions into the right to name (or at least veto) the leading public administrators. For example Sheila Bair, head of the Federal Deposit Insurance Corp. (FDIC), argued that Citibank could have been permitted to go under without disturbing its basic consumer-banking operations. Known for “stretching the legal envelope,” the bank had sufficient assets to back its insured deposits. What would have been wiped out was the financial web of cross claims and gambles among large institutions. Instead, Treasury Secretaries Hank Paulson and Tim Geithner gave Citigroup $45 billion.

They also bailed out the insurance and casino capitalist conglomerate AIG. It could have preserved its “vanilla” retail and business insurance operations, merely defaulting on its insurance contracts its London office had written for junk mortgages that ratings agencies marked AAA prime. The economy-wide tangle of collateralized debt obligations, cross default swaps and other “toxic waste” could have been wiped out, putting the “real” economy first. But the government paid AIG’s counterparties $182 billion in 2008, followed by more giveaways.

A financial “free market” meant that ratings were up for sale, much as Enron-style accounting had corrupted Arthur Andersen. No large Wall Street institution received a single criminal charge or prosecution. Exorbitant financial bonuses and salaries hardly missed a beat while home foreclosures soared for the economy at large. The financial “fat” was saved even at the cost of destroying the industrial “bone.” Interlocking conflicts of interest and non- enforcement of rules preserved the financial parasite at the cost of weakening the industrial host economy. Debts by honest home borrowers were left in place, but debts owed by defaulting financial insiders for bad gambles on which way prices, interest rates, and foreign currencies would move were paid to the winning bettors.

A similar financial favoritism occurs by permitting financial managers to threaten corporate bankruptcy to wipe out pension plans and health obligations. Contractual obligations to employees have been shifted (and downsized) onto the underfunded Public Benefit Guarantee Corp. (PBGC). The “sanctity of contracts” has become one-way, annulling obligations owed to labor. This is said to be a free market, but reflects the financialized takeover of the public sector.

The Age of Junk Economics

Classical economists set out to free Europe from its postfeudal legacy of rentier claims, and to define the surplus being siphoned off to pay a hereditary landlord class and bankers. But the rentiers mounted a counter-reform effort. Recognizing that voter preferences and public policy are shaped by perceptions of how the world operates, rentiers sponsored an effort to turn economic thought into science fiction describing a parallel universe. Switching attention away from empirical reality to “a science based on assumptions” takes the form of defining the task of economic “science” as being to provide a logic demonstrating that economies automatically regulate themselves. Attempts to restore a balanced public/private economy with regulatory checks and balances are defined as adding to the cost of doing business, ipso facto. The resulting tunnel vision dulls the mind from sensing the danger posed by the financial takeover. Economic theory is turned into an anti-labor, anti-government, and anti-regulatory exercise in public relations lobbying.

This inverts the idea of what the word “scientific” means. Neoliberal ideology deems it scientific to restrict analysis, theory, and model building to how economies would work without any government policies. Such policies cannot be “universal” in the same sense as the laws of physics and chemistry. Tax laws, government spending programs, and other institutions differ for every country, giving much leeway for choice. Emphasizing abstract universals excludes at the outset what should be the object of political economy: national policy and changes in the institutional and fiscal framework.

The resulting orthodoxy describes how a hypothetical economy would work if it had no real central bank, if it privatized basic infrastructure and offered its services at cost (including normal profits) despite deregulation of price controls and abolishing anti-monopoly regulations, and if it does away with consumer protection and anti-fraud statutes. Monopoly power is called “free competition” as long as stocks in monopolies can be bought and sold by anyone, domestic and foreign alike.

More specifically, the kind of “scientific” mathematics being employed limits its variables to wage levels, government deficits, and consumer prices, so as to endorse a race to the bottom—and indeed, to imply that “there is no alternative” (TINA). In practical terms, this mathematical “garbage in, garbage out” (GIGO) exercise means no hope for change in the status quo, no hope for countries falling into debt except to accept their dependency on their creditors.

In contrast to the natural sciences that start with empirical reality, neoliberal economics starts with fiction and reasons deductively from a set of carefully selected assumptions designed to prove that public investment and other spending is wasteful, regulation and forward planning are burdensome and ineffectual. The inevitable conclusion, reached purely deductively, is that bankers should be left to decide how to allocate the economy’s resources.

This logic begins by choosing assumptions that will lead to the conclusion being sponsored, and working backward. The cooked conclusion is that economies get rich by cutting social spending (defined as an “interference with the free market”), dismantling government regulations (except for the central bank, which is to be controlled “independently” by the financial sector and given veto power over all other public agencies), and charging user fees for education, health care, and other public services. Wages are to be lowered in order to increase competitive export power to earn the money to pay creditors, on the assumption that this will not reduce labor productivity.

Banks are to act as the economy’s planners, as if this is not more centralized than planning by elected officials. Public office itself is to be made part of the “free market” by permitting campaign contributions by Wall Street and other business lobbyists without limit to buy TV and media time, and endow public relations “think tanks” to shape voter opinion, along with business schools to craft a body of airy mathematics purporting to demonstrate that neoliberal counter-reforms are efficient. Lenin may not actually have coined the term often attributed to him to describe such people, “useful idiots,” but the phrase certainly is apt.

This is the logic that rationalizes privatizing land rent and public monopolies on credit instead of taxing or socializing their ownership privileges. Banks, mineral resource ownership, basic infrastructure, and monopolies have been organized into corporations selling shares. They have become the new “land barons.” Their claims for economic rent and financial returns can be passed down to the heirs of whoever buys them. So rentier income is still being concentrated at the top of the economic pyramid, albeit in the hands of a postfeudal creditor class. The new mode of conquest is financial, no longer overtly military. Unless, of course, countries resist being “financialized.” In such cases they are isolated by sanctions, Cuba- or Iran-style.

The trick is to distract attention from how debt deflation shrinks economies and dries up new investment and employment. And when resources really become scarce, economists call it a crisis. This usually is the point where they agree that the time has come to suspend democracy and bring in the “technocrats” (a euphemism for bank lobbyists), as they did in Greece and Italy in 2012.

All this has reversed the direction in which Western civilization was moving until World War I. Economies are retrogressing toward pre-Enlightenment rentier societies. The classical ideal of regulating prices in line with cost-value is now denounced as an exercise in bad “statist” economics. It is as if the past three or four centuries have been a great mistake— what Frederick Hayek called a road to serfdom, not away from it by limiting rentier power.

This reaction turns the idea of free markets into the opposite of what classical economists meant—a market free of unearned income. Prices and incomes were to be brought in line with cost-value. The “unearned increment” was supposed to be taxed away: land-price gains (groundrent), mineral rents (provided by nature and rightly treated as national patrimony), and what manmade monopolies charged over and above normal profit rates for providing their services. Governments would invest the tax revenue from economic rent in infrastructure providing basic transportation, communication, and other services at subsidized prices, and ultimately freely, just as already was being done for roads, public education, and health.

As governments provided a widening range of infrastructure services, industrial capitalism in the classical economic vision was expected to evolve into socialism. In Britain, Prime Minister Benjamin Disraeli’s social welfare legislation was capped by the public health system introduced from 1874 to 1881 and promoted under his motto Sanitas sanitatum, “Health, all is health.” This helped the Conservative Party evolve as a nationalist, sometimes “state socialist” party, especially after World War II under Harold Macmillan in the 1960s. In Germany, Bismarck enacted a pension plan for the population at large, not just army members as in times past.

By contrast, today’s financial interests use the mathematical language of physical scientists to pretend that austerity will cure the government’s budget deficit and balance of payments. The reality is that a shrinking economy is less able to pay taxes and debts. Upon any truly empirical scientific examination, neoliberal logic is a public relations tactic in today’s financial war against society at large. The aim is to lock in power the way Rome did: by reducing as much of the population as possible to debt dependency.

And just as in Rome, today’s debt overhead cannot be paid. The question is, just how will it not be paid? Will society realize the need for debt write-downs, or will it permit massive foreclosure to tear society apart and reduce debtors to neo-serfdom?

Today’s bankers explain that debt crises should be solved by yet more lending, as if this will “get economies moving gain.” It is as if economies could borrow their way out of debt. If we are indeed to take Germany’s hyperinflation as paradigmatic, as bankers argue, we must recognize that the mark was stabilized in the same way France had paid after the Franco-Prussian war ended in 1871: by borrowing. German states and cities borrowed dollars in New York, and converted them into marks that the Reichsbank printed. It then used these dollars to pay the Allies—who turned around and paid them back to the United States for their arms debts stemming from World War I. The illusion of stability was achieved simply by running up private-sector debt (to US bondholders) to replace intergovernmental arms debts and reparations. This was just the opposite of today’s European and US taking bad commercial bank debts onto the public balance sheet.

In 1931, the pretense finally was ended by a moratorium. This must be how today’s debt overhead also must end because debts that can’t be paid won’t be. Trying to prolong the day of reckoning will only impose an interregnum of austerity during which the financial sector will extract as much revenue as it can get away with, and foreclose on as much property as society will permit. Making itself a new ruling elite to lord it over what remains of the 21st century, Wall Street’s conquest promises to join Spain’s conquest of the New World and the Nordic conquests of Europe—and is in much the same spirit as Rome’s conquest of its Empire two thousand years ago. The results for society at large threaten to be equally devastating today.

Originally published by Levy Economics Institute