Richard D. Wolff
Over the weekend, Fitch -- the major rating company that, with its fellow majors, Moody's and Standard and Poor's, dominate the business of assessing the riskiness of debt instruments -- took a highly publicized step. It downgraded the credit-worthiness of the sovereign debts of many European countries. What a spectacle! These rating companies were distinguished by their laughably inaccurate (to be extremely polite) assessments of the risks associated with asset-backed securities. Those assessments contributed to the economic crisis we are living through. Now the world is supposed to hang on -- rather than laugh at -- their credit reports.
Europe's debts -- and social tensions swirling around them -- are clearly problems. Governments collapsing in Greece, Italy, and Spain show that, among other signs of the obvious. The rating companies' downgrades of European debt are rather like downgrading the likelihood of good weather while the rest of us are already rushing to close the windows against pouring rain.
Still worse are the usual media reports and discussions of the Fitch action. They are once again full of eerie references to steps European governments must take "to satisfy the markets." This strange metaphorical abstraction -- "the markets" -- is portrayed as some sort of Frankenstein monster threatening to eat Europe's children unless the parents support government austerity programs. Those austerity programs are, of course, already making those parents and their children suffer.
Let's take a momentary step back from what is an ideological -- or better said, propagandistic -- usage of the term. "The markets" is a conceptual device that serves to hide and disguise those particular corporations that stand behind and work those markets to pursue their interests. The politicians' and mass media's language makes it seem as if self-interested pursuit by those corporations were the machine-like operations of some unalterable, fixed institution. We need to remember that markets, like all other institutions, are human inventions filled with a mix of positive and negative aspects and open to change. After all, the mixed effects of markets have made them objects of deep suspicion and skepticism at least since Plato and Aristotle profoundly criticized markets as enemies of community thousands of years ago.
The chief creditors of European governments today are banks, insurance companies, large corporations, pension funds, some other (mostly non-European) governments, and wealthy individuals. When politicians and media speak of the need for European governments to "satisfy the markets," what they mean is to satisfy those creditors. The chief influences among those creditors are the major banks that represent and/or advise all or most of the rest of them. The major European banks were and are the chief recipients of the costly bailouts by those European governments since 2008. Indeed, those bailouts sharply increased the indebtedness of European governments because the latter paid for those bailouts by borrowing.
The bailouts worked in Europe much as they did in the US. Banks had speculated badly in asset-backed securities and their associated derivatives leading up to late 2008. When borrowers (e.g., mortgagors in the US) increasingly defaulted on the loans comprising those asset-backed securities, the values of the latter collapsed. Banks stopped trusting one another to repay loans between them -- central to the global credit system -- because all banks knew that they all held huge amounts of asset-backed securities whose values had collapsed. Each major bank feared that others -- like itself - might have to default on its debts.
Bank transactions with one another stopped and thereby produced a credit "freeze" or "crunch." In modern capitalist economies, businesses, governments, and consumers have all become more credit-dependent than ever. Such a freeze or crunch therefore threatened wholesale economic non-functioning (collapse).
The solution was for governments to intervene massively to unfreeze the credit system. They did this on multiple fronts simultaneously, so serious was the crisis. First, governments lent freely to the major banks that could not borrow from each other. Second, governments guaranteed various sorts of loans and debts so banks that had feared to lend would resume lending. Thirdly, governments borrowed massively so private lenders -- especially banks -- would have a safe and profitable outlet for their loanable funds. In these ways, as agent of the people, European governments unfroze and rebooted a collapsed private credit system at enormous public expense. They thereby enabled the survival and continued profitability of the banks and their major clients.
Over the last year or so, those banks and their clients -- freed by government bailouts from worrying about loans to one another -- have begun to worry about their loans to European governments. They fear one thing: aroused and angry publics. People in the streets may not permit their governments to impose "austerity." The people may not accept government cuts in basic public employment and services to save money and to pay off creditors that were bailed out at public expense just a short while ago.
So the creditors are now pressing governments to ensure the safety of the national debt (to themselves). The Fitch downgrade is part of that pressure. The references to "satisfying the markets" simply disguise the whole outrageous process. The crisis drama deepens: creditors' pressure on governments increases austerity policies that increase mass opposition that frightens creditors who increase their pressure on governments. . . .
The contradictions driving this vicious cycle agitate all of European society and the global economy interlinked with Europe. European governments fear the creditors and fear their rising domestic oppositions to austerity. They express irritation against Fitch and the other rating companies for making their dilemma worse. They have no solution, bend toward "satisfying the markets," and thus pursue austerity in fits, starts, and retreats. Like animals frozen in the headlights of oncoming disaster, the players in this absurd European drama issue redundant credit reports (Fitch), hold endless and fruitless conferences and summits (Sarkozy, Merkel, et al.), and twitch with anxiety as general strikes proliferate and governments teeter and fall. Meanwhile, phantoms like "the markets" haunt the media analyses and politicians' statements, serving mostly to fragment and obscure what is happening.