Between the Beadle and the Bailiffs: Financial markets get emotional about Debt in Euroland

Anti-Government Graffiti Adorns Athens. December 6th, 2011. Photo by Milos Bicanski/Getty Images, via Public Intelligence.

You want to understand the emotions of an entire nation? What about several countries, even an entire continent?

Look you then to Greece, to Spain and to Italy, England and France where you will find great emotional turmoil and suffering begging for an explanation.

An entire generation of young people is being written off. Downgraded to ‘junk’.

Millions of people are crushed by this ‘debt’ crisis. ‘Austerity’ inscribed on their faces, permeating their bodies, eating away at their will to live.

Some it kills more quickly. There is an epidemic of suicides in these countries, some of them public, all of them tragic, directly caused by this crisis.

Spare a thought for Dimitris Christoulas, a 77 year old retired pharmacist who shot himself in the head in Syntagma Square, just yards from the Greek parliament, Wednesday morning, April 4th, 2012. His suicide note to us:

This traitorous occupation government literally annihilated my ability to survive — which had been based on a decent pension, for which I had paid into (without any government help) for 35 years.

I am of an age that prevents me from offering a decent individual response (without of course ruling out the possibility of being the second person to take arms, should one person decide to do so).

I find no solution other than a dignified end, before resorting to going through garbage in order to cover my nutritional needs.

One day, I believe, the youth with no future will take up arms and hang the national traitors at syntagma square, just like the Italians did with Mussolini in 1945 (at Milan’s Piazzale Loreto).

–Dimitris Christoulas, Syntagma, Athens, April 4th, 2012

There are many more like him.

Those suicides are as much societal as individual phenomena. You affirm your love of your family, your community, your country, as you take your leave of them forever.

And there is simmering, volcanic rage in these countries spilling out of homes onto to the streets and squares. There’s much to be angry about.

One-by-one, social democracies are being subordinated to financial markets and unelected technocrats in the European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF), their citizens robbed of their hard-won rights, crushed and humiliated.

Another day, another demand for financial assistance in the euro-zone, another candidate for austerity.

So, for now, forget about those ‘revolutions’ in the Arab world—they are anything but (yet). Pay attention to the very real counter-revolutions in Europe. For the toxic connection between the economics of debt and the emotions of nations has metastasized and it’s heading your way.


Let’s start with Greece.

Two weeks ago, on Sunday 17th June, Greece held its second general election in less than two months over ‘austerity’.

Would the Greek people vote for a party that upheld the set of conditions imposed on the Greek government by its creditors—the ECB, the EU and the IMF—in exchange for their continuing support in the form of their ‘bailout’ of the Greek economy.

These conditions are astonishing. We know about the cuts to public expenditure, wages and benefits, increased taxation, privatization of the public sector and suspension of industry-wide wage bargaining. In addition, the constitution is to be rewritten to give priority to the rights of banks and other creditors. A task force of the European Union will have a permanent presence and will monitor the economic and social policy of the Greek government.

Or would Greeks vote for a party which would repudiate these conditions, default on the loan?

‘Europe’ was fearful about the result of this election. Fearful, that is, that Greeks might get it ‘wrong’ by choosing a party intending to reject austerity. So important was it for Greece to elect the ‘right’ party that the German chancellor herself felt obliged to tell them which one that is.

It worked too. On June 17th, 2012, the Greek people got the hint and obliged the markets.

Although the majority of the popular vote went to anti-austerity parties, a narrow majority of those elected belong to pro-austerity parties—enough to make a coalition of the willing possible.

Like ailing patients, stock markets around the world, ‘rallied’ upon news of the election result and the euro rose against the dollar. It cheered them up no end. They weren’t going to let the enhanced fortunes of the ne0-Nazi ‘Golden Dawn’, which won 18 seats, get them down.

Alas these gains proved temporary and petered out in but a matter of hours. The Athens stock exchange gained seven percent before midday on the Monday following the election but these gains fell away in late afternoon trade.

The election over, financial markets turned their knitted brows to the ‘race to form a coalition’ government in Greece; a race, that is, to form a coalition before the financial markets got down-in-the-dumps.

‘The leader of Greece’s election-winning party begins talks to form a national coalition, as markets falter and European bank stocks plummet’ (BBC News).

‘Greece raced to form a coalition with broad support by the end of Monday after an election victory by pro-bailout parties which eased fears of a Greek eurozone exit and brought relief to world markets.’ (The Telegraph)

Just to encourage the Greeks: ‘David Cameron has warned Greek politicians that a delay in forming a new Government “could be very dangerous”.’ How very helpful.

Once ‘the markets’ understood that Greece’s exit from the euro was not imminent, they started worrying about the debt problems of Spain. It took a rise in Spain’s 10-year bond yields to 7 pc to make them feel better. Then it was Italy’s turn: Italy’s  10-year yield shot past 6pc.

This out of the way, the boost provided by Greece’s election result turned to uncertainty over the upcoming G20 summit in Los Cabos. (‘G’, incidentally, stands for ‘growth’. Shouldn’t it be the A20?)

For financial markets there’s no rest. If it’s not one thing, it’s another.


Wait a moment. ‘European shares hit by fears EU summit will not deliver’. Since when did financial markets have emotions? Here are some more emotional headlines:

Wall Street climbs as Greek election fears ease

Markets higher on Greece hope

Markets happy with job figures

Stock market opens higher on hope for China

Global stock markets too calm before the storm

Anxiety deepens in markets

The negative economic news dampened the mood on the markets.

We’ve grown so accustomed to mention of the emotional disposition of financial markets that we scarcely notice, let alone find it odd. There’s more mention of emotions on the financial pages than in the entertainment section.

These headlines are interesting because financial markets are supposed to be rational and emotions, one supposes, interfere with that. And yet haven’t we all seen pictures of these emotional traders. Anxious faces watching computer screens. Loosened ties and collars. Hands through hair. Shouting out orders.

Not any more they don’t.

Most trading occurs among massive computer networks programmed to make decisions using unfeeling algorithms geared towards ‘how might what is happening effect my interests?’ They can buy and sell in a fraction of a second, without human intervention.

What happens in these computer networks is distilled into headlines and given a narrative by financial commentators. Absent from this narrative is the unspoken truth that the overriding emotion or passion in financial markets is love of lucre, avarice, a lust to accumulate—in the guise of neutral, virtuous self-interest.

Other emotions—such as hope, envy and fear—measure themselves to this cloth.

Perhaps this, said 300 years ago, is true after all:

Reason … is nothing but the act of choosing those passions which we must follow for the sake of our happiness (d’Holbach).

Avarice used to be a deadly sin. Now it can get you a fortune and a knighthood.

Hope and fear are the dominant emotions in financial markets, because they are emotions about the future and these markets trade in expectations.

Cycles in financial markets are cycles of emotions. The balance between envy or hope and fear decides whether the market is bullish or bearish, whether it’s buying or selling.

As with individual people, the emotions of financial markets are driven by comparisons. They compare what is with what they think should be and pass judgement accordingly. They are especially prone to envy.

They have no shame though. You’ll never read ‘Bond markets ashamed of shunning Greek bond sale’.

Financial markets’ emotions are also trigger-sensitive. Happening X can send stock markets tumbling, rather like a maiden aunt fainting at the sight of something untoward. That very same Happening X can send those very same stock markets soaring, even on the same day. You’ve got to admire that versatility.

In the US there’s even a volatility index, known affectionately as an index of fear.

If they were people, financial markets would be locked up. No one, however, questions the emotional health of financial markets. The reasonableness of their feelings is beyond question apparently.

But let’s question it all the same.

Financial markets’ potential for volatility means that, whatever we—or our governments do—we must not upset them. They don’t like it. They’ll get upset. There’s no telling what they might do. Above all we must retain their ‘confidence’.

It’s like trying to humour a psychopath, appease a dictator or satisfy an extortionist.

There’s no future in it.

Ask the Greeks, the Italians, ask the Spanish.


We give financial institutions and markets the benefit of any doubt because they are the experts at investing in productive activity and we need this if our economy is to recover and thrive. We wince when we hear that the  ‘markets’ took another ‘beating’, on the assumption that investment in the ‘real’ economy will suffer.

This view is endearing and nostalgic. It’s also wrong.

Much of what occurs in financial markets these days is not investing in the real economy—it’s speculative gambling on fictitious capital.

With the exception of the issue of new shares, most of what is bought and sold on stock exchanges, for example, cannot be regarded as investment in productive capacity, i.e., in new new machines and buildings. Rather, what is bought and sold is the right to flows of income. Shares are commodities in their own right and the markets gamble on whether their price will rise or fall.

But the really serious gambling is on ‘derivatives’, ‘credit default swaps’ and ‘interest rate swaps’.

Derivatives are bundles of commodified consumer debt and the risk it carries for creditors. They are bought and sold for profit among financial institutions. The derivatives market, then, trades in risk.

The risk of individual loans could be diluted and spread, it was assumed, by bundling them together and rendered more liquid by buying and selling them. The risk could always be passed on to the next purchaser.

Why not, then, lend money to ‘sub-prime’ debtors, people lacking collateral who could not reasonably be expected to repay what had been so generously extended to them? This was one cause of the 2008 financial crisis. What about sub-prime countries? Now there’s an idea.

Credit-default swaps (CDS) are a form of derivative taken out by creditors as insurance against debtors defaulting. These also were commodified and used to speculate on credit quality. Since all this is unregulated, there is no requirement that the insurer actually have the funds to pay up. The is one reason financial markets fear a default of sovereign debt—they don’t have the money to cover the loss.

Interest rate swaps (IRS) are a form of derivative used to protect against sudden sharp moves in interest rates. Almost 80% of the derivatives market takes this form. J.P. Morgan alone holds around $57 trillion of these. There has long been suspicion that IRSs are used to manipulate interest rates and control bond markets. Only the other day, Barclays Bank was found to have fraudulently manipulated interest rates underpinning contracts worth $350 trillion using this instrument. (See Rate-rigging at Barclays was ‘pervasive, Financial Times, June 27, 2012.) It’s pervasive in other banks too.

Little more than a year ago, someone was jailed for 6 months for stealing a bottle of water during the riots in England, August, 2011. Let’s see how many are jailed for this theft.

It is money made from betting on derivatives that finances the obscene bank profits and bonuses.

Bob Diamond, CEO of Barclays, acknowledging that his banks fraud was ‘wholly inappropriate’, as if he’d merely infringed some dress code, generously agreed to forgo his $12 million bonus this year.

It is money lost from gambling on derivatives that required governments to bail out the bank and triggered a series of global financial crises beginning in 2008 that continue to this day.


Financial institutions ran up massive debts gambling on derivatives, unmatched by tangible collateral, and so they borrowed and lent to each other to keep the whole scam afloat.

When the casino was revealed to be insolvent, as it was during the 2008 crisis, financial institutions managed to persuade most governments in the Western world to give them trillions of dollars of tax payers’ money.

For otherwise—the Sky would Fall. No, really it would. Trust us on this.

So afraid were these governments, so intimidated by financial markets, so utterly clue-less about what is going on, that they agreed to move the private debt of banks onto the public balance sheets of government treasuries, whereupon they became the liability of tax payers. The ‘next purchaser’ of derivatives turned out to be us.

But afloat this scam still is—just. It’s us that’s sinking. ‘Afloat’ in the same sense that the Pacific Trash Vortex is afloat. Free-floating toxic debt, polluting global capitalism, drifting with the currents.

It’s not like a Ponzi-scheme: it is a Ponzi scheme. A financial fraud.

Most financial commentary misses the distinction between investing and gambling. For this reason, it finds the nature of the global economic crisis hard to pin down.

In 2008 it was a ‘few bad apples’ in the US financial services sector. Then it was a ‘crisis of confidence’ among employers, shortly followed by a  ‘credit crunch’ among consumers.

Now it’s a ‘debt problem’ among some shady Mediterranean countries which need to get ‘austere’ pretty damn quick or they’ll drag us all under for goodness sake.

According to this narrative Greeks, Spaniards and Italians—they’ll do for now—have been ‘living beyond their means’ and getting their governments into debt.

Cue homilies about the parallels between good housekeeping and sound economic management. Belts must be tightened. Sacrifices must be made. Until balance is restored. Yes, people will suffer. Some will not make it. But, to drag Shakespeare into this, Financial markets are being cruel, only to be kind.

Is this not an example of that deliciously sinful emotion—pleasure-in-others’ misfortune?

OK they’re suffering, but they should have thought of that when they were swanning around having fun, downing wine and taking siestas while we were hard at work. Chickens have come home to roost.  What goes around comes around. And so on.

Austerity has a long history. It’s part of capitalism. Some times to create one first has to destroy. Hence ‘creative destruction’. But austerity imposed on a nation by an external body is ingeniously novel in the Western world. (The IMF makes a living doing this to Third World countries.) Quite wickedly so.

Imposed austerity succeeds only in turning a recession into a depression and in breaking up a country’s infrastructure so that it can be snapped up at bargain prices by foreign speculators. That’s what’s happening in Greece right now.

But this criticism misses the point. Austerity isn’t an economic strategy at all—it’s an emotional, moral strategy.

Like the inmates of 19th century workhouses and debtors’ prisons—charitable institutions no less—citizens of austere nations are being punished as a moral example to the rest of us: ‘do not do as they did or this could happen to you’. It will do ‘sinful’ debtors no good whatsoever—everyone knows that—but it makes charitable creditors feel more virtuous and more powerful. And are we not chastened by these examples?

Angela Merkel, the German chancellor, comes across like a Dickensian beadle, responsible for running the eurozone parish’s charitable institutions. A Mrs. Bumble. And in Oliver Twist, didn’t Mr. and Mrs. Bumble end up living in the workhouse they used to lord over? I think they did.

Here’s the dead giveaway that ‘austerity’ is intended as punishment: while austerity is imposed on ‘bailed out’ nations, in the name of ‘market freedom,’ bailed out financial institutions, if they say they’re sorry, are let off with a caution. (See ‘Truly sorry’ Barclays chairman Marcus Agius resigns. Telegraph, July 2, 2012). Let off … to return to swindling their customers, if the latest slew of financial scandals is any guide. (The gathering storm, Financial Times, June 29. 2012).

Austerity is not the solution to the global debt crisis because consumers (at least not these consumers) ‘living-beyond-their means’ is not its cause.

Certainly, most capitalist societies are now driven by consumer demand rather than by manufacturing and much of this demand was financed by enormous debts using credit cards, car-loans, lines-of-credit, much of it backed with home equity.

In large parts of the West the ‘real’ economy has all but disappeared. A lot of cities are starting to look like Detroit.

The trend is for domestic corporations to import and brand what S.E. Asia manufactures. Money can be made without the bother of actually creating anything tangible. Simply use emotional marketing to develop emotional connections between people and things rather than with other people. Enlist neuroscience if you like. Create insatiable cravings, egged on by envy, for things people want but don’t really need.

The manufacturing of things is ‘off-shored’. The manufacture of emotional experiences is what the West specializes in these days. Just look around you. In this sense, the impetus behind the massive consumer indebtedness was emotional.

This lend-spend cycle, however, does not cause government indebtedness—it causes consumer indebtedness. Banks may have been bailed out, but consumers haven’t. Their indebtedness remains. And if interest rates rise it is going to be a very big problem.

So what caused the crisis of government indebtedness?

The largest contribution to the rising national debt in Europe and North America is governments bailing out banks for their gambling debts on derivatives, and, in ‘austere’ countries, the exorbitant cost of servicing this debt.


In these austere times, entire nations are destroyed and turned into workhouses, their inmates condemned to a living death.

In a 19th century workhouse, the walls hold you in place. But in 21st century workhouses, inmates are held in debt-bondage by a pincer movement of social forces. For ‘austere’ countries, such as Greece, this is how it works:

Once private bank debt is brought on to the public balance sheet it becomes ‘sovereign’ debt. To attempt to balance these books, governments must:

  1. Secure their own bail-out from the ECB and the IMF and implement its conditions,
  2. Sell bonds to finance their day-to-day operations.

A bond is an ‘obligation, duty, a binding agreement.’ A government bond is a way of obtaining a loan. It is a commitment to pay the holder or bearer a certain sum of money at some specified time. Until such time, it will pay interest to the bond holder.

That interest rate is the price of borrowing/lending, and is determined at auction in the bond market. It is influenced by lenders/purchasers’  ‘confidence’ in the government’s ability to honour the bond. The less the confidence the greater the rate of interest they will demand.

Or they may refuse to buy government bonds at all. If the market thinks a government is dissolute, living beyond its means, then they will want to see ‘corrective action’ before it lends or before it buys its bonds. This, in essence, is the problem facing some of the weaker economies in Europe.

For example, the yield on Greek 10-year bonds is one of highest in the world. The bond market demands 18% from Greece for its bonds. At that rate Greece’s debt will double in 4 years. This is the main reason Greece is struggling to repay its debts. Similarly, on news that the government of Spain had applied for a 100 billion euro eurozone rescue facility, its cost of borrowing almost doubled.

‘Market’ implies a ‘free market’, but financial markets are anything but. They are dominated by a few organizations powerful enough to demand and set conditions for the sale. In extreme cases it resembles extortion.

Last November, for example, the German finance minister Wolfgang Schaeuble announced that, not unreasonably, in exchange for the bailout they had received, private banks holding sovereign debt from Greece, Italy and Spain must be prepared to write off some of it. The banks refused to buy German bonds. Two days later, Schaeuble changed his mind.

So: The ECB and IMF provide the money and set the austere conditions and the financial markets police those conditions. Parish charity and parish bailiffs. The financial markets, on the one hand, and the ECB and IMF, on the other, are the institutional pincers of austerity, throttling the life out of the indebted.


Government bonds themselves were packaged as derivatives and insured against default by credit default swaps. In this way, US banks, Goldman Sachs excelled here, guaranteed around $1 trillion dollars of European sovereign debt.

A government default on this debt would trigger a chain of cross-defaults and payouts throughout the $32 trillion derivatives web of intrigue. In a flash, it would reach the United States and deepen its economic woes.

This is why financial markets are so concerned about ‘austere’ nations defaulting. It is fear of losing out on lucre. Hence the extraordinary lengths—threats, bribes, blackmail—taken to ensure countries do not default. Consider this:

Last November, George Papandreou,then Greece’s Prime Minister, announced a referendum on the austerity package agreed to with the EU. Good idea, one might think. What could be more democratic than that? But the markets didn’t like it one bit. They were ‘rattled’ and ‘shocked’:

‘Greek referendum on austerity package rattles markets’ (Wall Street Journal)

‘Greece shocks markets with referendum on austerity’

The great fear here was that the people of Greece might repudiate those debts forced upon it. Out of fright, stocks and the euro ‘plunged’. Ten year Italian bond rates rose close to their highest levels since the inception of the euro.

Merkel and Sarkozy weren’t too keen on this exercise in democracy either. They summoned Papandreou to a meeting in Nice and did whatever it took to make him back down. There was no more talk of a referendum.

Suitably chastened, he resigned as prime minister shortly thereafter, to be replaced by Dr. Lucas Papademos, previously the Governor of the Bank of Greece, and Vice President of the European Central Bank. Purely incidentally, he has never been elected to any office.

Herein lies a lesson.

Debt is a legal entity. For a debt to be lawful, it must have been incurred voluntarily, with the knowledge and consent of those indebted. Public debts have to be agreed to by that public. They can be repudiated—as in a referendum.

Papandreou knew that. That’s why he was hopeful.

So did the financial markets. That’s why they were so fearful.

And so do the people on the streets in these austere countries. That’s why they are so angry and determined.


All mammals need to be able to tell the difference between emotional authenticity and simulation, threats and bluffs, in other mammals. Their survival depends on it. This is basic Darwin.

Dogs or horses don’t need telling this, but, from time to time, humans do.

This skill is perfected in poker players and other gamblers. For the rest of us there is little opportunity to exercise this skill because postmodernity is a condition of simulation. There is little of the real left to detect, the skill atrophies and people grow naive and gullible.

Having made fortunes betting on derivatives or commodified risk, financial institutions’ luck changed and in 2007-2008 they were landed with losses they couldn’t cover. The casino had bankrupted itself.

No matter. The financial markets switched from roulette to poker.

Pointing to an abyss of collective ruin, they gambled that the US government would fall for this bluff and cover their losses. Rather than chucking these fat cats into the abyss of their own making, the US government obliged them.

This was a monumental mistake. But Obama is funded by Wall Street and it controls his financial and economic policy.

Once the US domino fell, there was little resistance in Europe to this socialism for the rich. Bank bailout followed bank bailout and the bill was passed on to the poor and the weak.

It’s no good looking to government to remedy this wrong. Most of the main political parties in Europe and North America are indebted to financial institutions and they’re not going to act contrary to their interests.

Look instead to the ‘austere’, to the street wise—let us call them, after Aristotle, the Demos—for nothing sharpens the ability to spot a fraud like living in austerity and these people saw through this financial fraud years ago.

From them I pass on the following:

  1. Insolvent banks should not be in business, they should be in receivership.
  2. Fraudulent bankers should not be working, they should be in prison.
  3. If taxpayers are funding the banks, taxpayers should own the banks.
  4. Insolvent banks can and should be taken over so that (a) private deposits are protected and (b) equity holders are allowed to incur the risk they took on.
  5. We certainly need banks, but we don’t need these, rapacious banks. We need banks with the will to invest in local communities and put under-employed people and resources back to work.

Keep these points in mind and follow the Barclays scandal.

Finally, the financial markets—are they real or are they bluffing about the consequences of one of these austere governments ‘failing’?

We must ask, Consequences for whom? Are these ‘bailouts’ to ensure that the banks don’t suffer undue losses, or are they for the benefit of the citizens of Greece, Spain or Italy?

The austere may well call this bluff by exercising their option of repudiating these loans and their conditions.


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