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vatican.va
... Such an economy kills. How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality. Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape.
Human beings are themselves considered consumer goods to be used and then discarded. We have created a "disposable" culture which is now spreading. It is no longer simply about exploitation and oppression, but something new. Exclusion ultimately has to do with what it means to be a part of the society in which we live; those excluded are no longer society's underside or its fringes or its disenfranchised – they are no longer even a part of it. The excluded are not the "exploited" but the outcast, the "leftovers".
54. In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting. To sustain a lifestyle which excludes others, or to sustain enthusiasm for that selfish ideal, a globalization of indifference has developed. Almost without being aware of it, we end up being incapable of feeling compassion at the outcry of the poor, weeping for other people's pain, and feeling a need to help them, as though all this were someone else's responsibility and not our own. The culture of prosperity deadens us; we are thrilled if the market offers us something new to purchase; and in the meantime all those lives stunted for lack of opportunity seem a mere spectacle; they fail to move us.
No to the new idolatry of money
55. One cause of this situation is found in our relationship with money, since we calmly accept its dominion over ourselves and our societies. The current financial crisis can make us overlook the fact that it originated in a profound human crisis: the denial of the primacy of the human person! We have created new idols. The worship of the ancient golden calf (cf. Ex 32:1-35) has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy lays bare their imbalances and, above all, their lack of real concern for human beings; man is reduced to one of his needs alone: consumption.
56. While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules. Debt and the accumulation of interest also make it difficult for countries to realize the potential of their own economies and keep citizens from enjoying their real purchasing power. To all this we can add widespread corruption and self-serving tax evasion, which have taken on worldwide dimensions. The thirst for power and possessions knows no limits. In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market, which become the only rule.
No to a financial system which rules rather than serves
57. Behind this attitude lurks a rejection of ethics and a rejection of God. Ethics has come to be viewed with a certain scornful derision. It is seen as counterproductive, too human, because it makes money and power relative. It is felt to be a threat, since it condemns the manipulation and debasement of the person. In effect, ethics leads to a God who calls for a committed response which is outside of the categories of the marketplace. When these latter are absolutized, God can only be seen as uncontrollable, unmanageable, even dangerous, since he calls human beings to their full realization and to freedom from all forms of enslavement. Ethics – a non-ideological ethics – would make it possible to bring about balance and a more humane social order. With this in mind, I encourage financial experts and political leaders to ponder the words of one of the sages of antiquity: "Not to share one's wealth with the poor is to steal from them and to take away their livelihood. It is not our own goods which we hold, but theirs".[55]
58. A financial reform open to such ethical considerations would require a vigorous change of approach on the part of political leaders. I urge them to face this challenge with determination and an eye to the future, while not ignoring, of course, the specifics of each case. Money must serve, not rule! The Pope loves everyone, rich and poor alike, but he is obliged in the name of Christ to remind all that the rich must help, respect and promote the poor. I exhort you to generous solidarity and a return of economics and finance to an ethical approach which favours human beings.
No to the inequality which spawns violence
59. Today in many places we hear a call for greater security. But until exclusion and inequality in society and between peoples is reversed, it will be impossible to eliminate violence. The poor and the poorer peoples are accused of violence, yet without equal opportunities the different forms of aggression and conflict will find a fertile terrain for growth and eventually explode. When a society – whether local, national or global – is willing to leave a part of itself on the fringes, no political programmes or resources spent on law enforcement or surveillance systems can indefinitely guarantee tranquility. This is not the case simply because inequality provokes a violent reaction from those excluded from the system, but because the socioeconomic system is unjust at its root. Just as goodness tends to spread, the toleration of evil, which is injustice, tends to expand its baneful influence and quietly to undermine any political and social system, no matter how solid it may appear. If every action has its consequences, an evil embedded in the structures of a society has a constant potential for disintegration and death. It is evil crystallized in unjust social structures, which cannot be the basis of hope for a better future. We are far from the so-called "end of history", since the conditions for a sustainable and peaceful development have not yet been adequately articulated and realized.
60. Today's economic mechanisms promote inordinate consumption, yet it is evident that unbridled consumerism combined with inequality proves doubly damaging to the social fabric. Inequality eventually engenders a violence which recourse to arms cannot and never will be able to resolve. This serves only to offer false hopes to those clamouring for heightened security, even though nowadays we know that weapons and violence, rather than providing solutions, create new and more serious conflicts. Some simply content themselves with blaming the poor and the poorer countries themselves for their troubles; indulging in unwarranted generalizations, they claim that the solution is an "education" that would tranquilize them, making them tame and harmless. All this becomes even more exasperating for the marginalized in the light of the widespread and deeply rooted corruption found in many countries – in their governments, businesses and institutions – whatever the political ideology of their leaders.
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Zero Hedge
The root cancer at the core of the U.S., and indeed global economy, is cronyism and an absence of the rule of law when it comes to oligarchs. In the U.S., this cronyism is best described as an insidious relationship between large multi-national corporations and big government to funnel all of the wealth and resources of the nation to themselves at the expense of everyone else. In a genuine free market defined by heightened competition and governed by an equal application of the rule of law to all, the 0.1% does not aggregate all of a nation's wealth. This sort of thing only happens in crony capitalism, which is basically nothing more than complete and total insider deals to aggregate newly created money into the hands of the few. The following profile of Washington D.C.'s so-called "boom" from the St. Louis Post-Dispatch pretty much tells you all you need to know.
* * *
The more corrupt the state, the more numerous the laws.
- TacitusEver since I started writing about what is happening in the world around me, my primary theme has been that the root cancer at the core of the U.S., and indeed global economy, is cronyism and an absence of the rule of law when it comes to oligarchs. In the U.S., this cronyism is best described as an insidious relationship between large multi-national corporations and big government to funnel all of the wealth and resources of the nation to themselves at the expense of everyone else. In a genuine free market defined by heightened competition and governed by an equal application of the rule of law to all, the 0.1% does not aggregate all of a nation's wealth. This sort of thing only happens in crony capitalism, which is basically nothing more than complete and total insider deals to aggregate newly created money into the hands of the few.
The following profile of Washington D.C.'s so-called "boom" from the St. Louis Post-Dispatch pretty much tells you all you need to know. While I think the tone of the article is absurd considering this is no "economic boom," but merely parasitic wealth extraction on a unprecedented scale, it is still quite telling. It is no coincidence that as D.C. has grown wealthier, the nation has become much, much poorer. Key excerpts below:
The avalanche of cash that made Washington rich in the last decade has transformed the culture of a once staid capital and created a new wave of well-heeled insiders.
The winners in the new Washington are not just the former senators, party consiglieri and four-star generals who have always profited from their connections. Now they are also the former bureaucrats, accountants and staff officers for whom unimagined riches are suddenly possible. They are the entrepreneurs attracted to the capital by its aura of prosperity and its super-educated workforce. They are the lawyers, lobbyists and executives who work for companies that barely had a presence in Washington before the boom.
At the same time, big companies realized that a few million spent shaping legislation could produce windfall profits. They nearly doubled the cash they poured into the capital.
Sorry these aren't "entrepreneurs," they are parasitic opportunists.
At Cafe Joe, a greasy spoon near the National Security Agency in suburban Maryland, software engineers with top-secret clearances merely have to look at the place mats under their fried eggs to find federal contractors trying to entice them away from their government jobs with six-figure salaries and stock options. The place-mat ads cost $250 a week. They are sold out through 2014.
During the past decade, the region added 21,000 households in the nation's top 1 percent. No other metro area came close.
Two forces triggered the boom.
The share of money the government spent on weapons and other hardware shrank as service contracts nearly tripled in value. At the peak in 2010, companies based in Rep. James Moran's congressional district in Northern Virginia reaped $43 billion in federal contracts - roughly as much as the state of Texas.
Back in 2000, the company spent a mere $260,000 lobbying Congress, federal records show. Its lobbyists mostly talked to lawmakers about health care: medical manufacturing issues, Medicare reimbursement rates, privacy of health records, and congressional oversight of the Food and Drug Administration.
By the end of the decade, the company had broadened its horizons dramatically. "Government relations" now accounted for $2.6 million - a tenfold increase. On one quarterly disclosure report from 2010, Boston Scientific listed 35 different pieces of legislation on which it was lobbying. They included proposals on patent reform, tax penalties for moving American jobs abroad, tax credits for research and development, rules for transporting lithium batteries, limits on workers' ability to form labor unions and federal regulation of certain types of financial derivatives.
Government relations has become so important to the bottom line of a modern company, Becker said, that it should be a required course at business school. The numbers suggest she's right. Companies spent about $3.5 billion annually on lobbying at the end of the last decade, a nearly 90 percent increase from 1999 after adjusting for inflation, political scientist Lee Drutman notes in a forthcoming book, "The Business of America Is Lobbying."
And you wonder why the economy sucks?
Legal services also boomed, fueled by the growing complexities of federal business regulations. The number of lawyers in the D.C. metro area increased by a third from 2000 to 2012, nearly twice as fast as the growth rate nationwide. And those lawyers have the highest mean salaries in the country, according to George Mason University's Center for Regional Analysis.
The more companies spend on influence, the lower their effective tax rates and the higher their stock returns compared with competitors', according to recent research. A company called Strategas has built an index to track the stock performance of the 50 companies that lobby the most; last year, that index outperformed the rest of the market by 30 percent.
If you still are confused why the U.S. economy is completely stuck in the mud, look no further than the parasites of Washington D.C.
Full article here.
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Nov 6, 2013 | Asia Times
Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.
When Naomi Klein published her ground-breaking book The Shock Doctrine (2007), which compellingly demonstrated how neoliberal policy makers take advantage of overwhelming crisis times to privatize public property and carry out austerity programs, most economists and media pundits scoffed at her arguments as overstating her case. Real world economic developments have since strongly reinforced her views.
Using the unnerving 2008 financial crash, the ensuing long recession and the recurring specter of debt default, the financial oligarchy and their proxies in the governments of core capitalist countries have embarked on an unprecedented economic coup d'état against the people, the ravages of which include extensive privatization of the public sector, systematic application of neoliberal austerity economics and radical redistribution of resources from the bottom to the top. Despite the truly historical and paradigm-shifting importance of these ominous developments, their discussion remains altogether outside the discourse of mainstream economics.
The fact that neoliberal economists and politicians have been cheering these brutal assaults on social safety-net programs should not be surprising. What is regrettable, however, is the liberal/Keynesian economists' and politicians' glaring misdiagnosis of the plague of austerity economics: it is all the "right-wing" Republicans' or Tea Partiers' fault, we are told; the Obama administration and the Democratic Party establishment, including the labor bureaucracy, have no part or responsibility in the relentless drive to austerity economics and privatization of public property.
Keynesian and other liberal economists and politicians routinely blame the abandonment of the New Deal and/or Social-Democratic economics exclusively on Ronald Reagan's supply-side economics, on neoliberal ideology or on economists at the University of Chicago. Indeed, they characterize the 2008 financial collapse, the ensuing long recession and the recurring debt/budgetary turmoil on "bad" policies of "neoliberal capitalism," not on class policies of capitalism per se. [1]
Evidence shows, however, that the transition from Keynesian to neoliberal economics stems from much deeper roots or dynamics than pure ideology [2]; that neoliberal austerity policies are class, not "bad," policies [3]; that the transition started long before Reagan arrived in the White House; and that neoliberal austerity policies have been pursued as vigorously (though less openly and more stealthily) by the Democratic administrations of Bill Clinton and Barack Obama as their Republican counterparts. [4]
Indeed, it could be argued that, due to his uniquely misleading status or station in the socio-political structure of the United States, and equally unique Orwellian characteristics or personality, Obama has served the interests of the powerful financial oligarchy much better or more effectively than any Republican president could do, or has done - including Ronald Reagan. By the same token, he has more skillfully hoodwinked the public and harmed their interests, both in terms of economics and individual/constitutional rights, than any of his predecessors.
Ronald Reagan did not make any bones about the fact that he championed the cause of neoliberal supply-side economics. This meant that opponents of his economic agenda knew where he stood, and could craft their own strategies accordingly.
By contrast, Obama publicly portrays himself as a liberal opponent of neoliberal austerity policies (as he frequently bemoans the escalating economic inequality and occasionally sheds crocodile tears over the plight of the unemployed and economically hard-pressed), while in practice he is a major team player in the debt "crisis" game of charade, designed as a shock therapy scheme in the escalation of austerity economics. [5]
No president or major policy maker before Obama ever dared to touch the hitherto untouchable (and still self-financing) Social Security and Medicare trust funds. He was the first to dare to make these bedrock social programs subject to austerity cuts, as reflected, for example, in his proposed federal budget plan for fiscal year 2014, initially released in April 2013. Commenting on this unprecedented inclusion of entitlements in the social programs to be cut, Christian Science Monitor wrote (on April 9, 2013): "President Obama's new budget proposal ... is a sign that Washington's attitude toward entitlement reform is slowly shifting, with prospects for changes to Social Security and Medicare becoming increasingly likely."
Obama has since turned that "likelihood" of undermining Social Security and Medicare into reality. He did so by taking the first steps in turning the budget crisis that led to government shutdown in the first half of October into negotiations over entitlement cuts. In an interview on the second day of the shutdown (October 3rd), he called for eliminating "unnecessary" social programs and discussing cuts in "long-term entitlement spending". [6]
Five days later on October 5th, Obama repeated his support for cutting Social Security and Medicare in a press conference, reassuring congressional Republicans of his willingness to agree to these cuts (as well as to cuts in corporate tax rates from 35% to 28%) if the Republicans voted to increase the government's debt limit: "If anybody doubts my sincerity about that, I've put forward proposals in my budget to reform entitlement programs for the long haul and reform our tax code in a way that would ... lower rates for corporations". [7]
Only then, that is, only after Obama agreed to collaborate with the Republicans on ways to cut both the entitlements and corporate tax rates, the Republican budget negotiators agreed to the higher budget ceiling and the reopening of the government. The consensus bill that ended the government shutdown extends the automatic across-the-board "sequester" cuts that began last March into the current year. This means that "the budget negotiations in the coming weeks will take as their starting point the $1 trillion in cuts over the next eight years mandated by the sequestration process". [8]
And so, once again, the great compromiser gave in, and gave away - all at the expense of his (unquestioning) supporters.
To prepare the public for the long-awaited attack on Social Security, Medicare and other socially vital programs, the bipartisan ruling establishment has in recent years invented a very useful hobgoblin to scare the people into submission: occasional budget/debt crises and the specter or the actual pain of government shutdown. As Sheldon Richman recently pointed out:
"Wherever we look, there are hobgoblins. The latest is … DEFAULT. Oooooo.Economic policy makers in the White House and the Congress have invoked the debt/deficit hobgoblin at least three times in less than two years: the 2011 debt-ceiling panic, the 2012 "fiscal cliff" and, more recently, the 2013 debt-ceiling/government shutdown crisis - all designed to frighten the people into accepting the slashing of vital social programs. Interestingly, when Wall Street speculators needed trillions of dollars to be bailed out, or as the Fed routinely showers these gamblers with nearly interest-free money through the so-called quantitative easing, debt hobgoblins were/are nowhere to be seen!Apparently the threats of international terror and China rising aren't enough to keep us alarmed and eager for the tether. These things do tend to wear thin with time. But good old default can be taken off the shelf every now and then. It works like a charm every time.
No, no, not default! Anything but default!". [9]
The outcome of the latest (2013) "debt crisis management," which led to the 16-day government shutdown (October 1-16), confirmed the view that the "crisis" was essentially bogus. Following the pattern of the 2010, 2011 and 2012 budget/debt negotiations, the bipartisan policy makers kept the phony crisis alive by simply pushing its "resolution" several months back to early 2014. In other words, they did not bury the hobgoblin; they simply shelved it for a while to be taken off when it is needed to, once again, frighten the people into accepting additional austerity cuts - including Social Security and Medicare.
The outcome of the budget "crisis" also highlighted the fact that, behind the apparent bipartisan gridlock and mutual denunciations, there is a "fundamental consensus between these parties for destroying all of the social gains won by the working class over the course of the twentieth century". [10] To the extent there were disagreements, they were mainly over the tone, the temp, the magnitude, the tactics, and the means, not the end. At the heart of all the (largely contrived) bipartisan bickering was how best to escalate, justify or camouflage the brutal cuts in the vitally necessary social spending.
The left/liberal supporters of Obama, who bemoan his being "pressured" or "coerced" by the Tea Party Republicans into right-wing compromises, should look past his liberal/populist posturing. Evidence shows that, contrary to Barack Obama's claims, his presidential campaigns were heavily financed by the Wall Street financial titans and their influential lobbyists. Large Wall Street contributions began pouring into his campaign only after he was thoroughly vetted by powerful Wall Street interests, through rigorous Q & A sessions by the financial oligarchy, and was deemed to be their "ideal" candidate for presidency. [11]
Obama's unquestioning followers should also note that, to the extent that he is being "pressured" by his political opponents into compromises/concessions, he has no one to blame but himself: while the Republican Party systematically mobilizes its social base through offshoots like Tea Partiers, Obama tends to deceive, demobilize and disarm his base of supporters. Instead of mobilizing and encouraging his much wider base of supporters (whose more numerous voices could easily drown the shrill voices of Tea Partiers) to political action, he frequently pleads with them to "be patient," and "keep hope alive."
As Andre Damon and Barry Grey have keenly observed, "There was not a single mass organization that denounced the [government] shutdown or opposed it. The trade unions are completely allied with the Obama administration and support its policies of austerity and war". [12]
Obama's supporters also need to open their eyes to the fact that, as I have shown in an earlier essay, [13] Obama harbors ideological affinities that are more in tune with Ronald Reagan than with FDR. This is clearly revealed in his book, The Audacity of Hope, where he shows his disdain for
"...those who still champion the old time religion, defending every New Deal and Great Society program from Republican encroachment, achieving ratings of 100% from the liberal interest groups. But these efforts seem exhausted…bereft of energy and new ideas needed to address the changing circumstances of globalization". [14]
(Her own shortcomings aside, Hillary Clinton was right when, in her bid for the White House against Obama, she pointed out that Obama's economic philosophy was inspired largely by Reagan' supply-side economics. However, because the Wall Street and/or the ruling establishment had already decided that Obama was the preferred choice for the White House, the corporate media let Clinton's comment pass without dwelling much on the reasons behind it; which could readily be examined by simply browsing through his own book.)
The repeated claim that the entitlements are the main drag on the federal budget is false - for at least three reasons. To begin with, the assertion that the large number of retiring baby-boomers is a major culprit in budgetary shortfalls is bogus because while it is true that baby-boomers are retiring in larger than usual numbers they do not come from another planet; before retiring, they also worked and contributed to the entitlement trust fund in larger than usual numbers. This means that, over time, the outflow and inflow of baby-boomers' funds into the entitlement trust fund must necessarily even each other out.
Second, even assuming that this claim is valid, the "problem" can easily be fixed (for many years to come) by simply raising the ceiling of taxable income for Social Security from the current level of $113,700 to a slightly higher level, let's say, $140,000.
Third, the bipartisan policy makers' hue and cry about the alleged budget/debt crisis is also false because if it were true, they would not shy away from facing the real culprits for the crisis: the uncontrollable and escalating health care cost, the equally uncontrollable and escalating military/war/security cost, the massive transfer of private/Wall Street debt to public debt in response to the 2008 financial crash, and the considerable drop since the early 1980s in the revenue side of the government budget, which is the result of the drastic overhaul of the taxation system in favor of the wealthy.
A major scheme of the financial oligarchy and their bagmen in the government to substitute the New Deal with neoliberal economics has (since the early 1980s) been to deliberately create budget deficits in order to justify cuts in social spending. This sinister feat has often been accomplished through a combination of tax cuts for the wealthy and spending hikes for military/wars/security programs.
David Stockman, President Reagan's budget director and one of the main architects of his supply-side tax cuts, confirmed the Reagan administration's policy of simultaneously raising military spending and cutting taxes on the wealthy in order to force cuts in non-military public spending: "My aim had always been to force down the size of the domestic welfare state to the point where it could be adequately funded with the revenues after the tax cut". [15] That insidious policy of intentionally creating budget deficits in order to force neoliberal austerity cuts on vital social needs has continued to this day - under both Republican and Democratic administrations.
Although the bipartisan tactics of austerity cuts are subtle and obfuscating, they can be illustrated with the help of a few simple (hypothetical) numbers: first (and behind the scenes), the two sides agree on cutting non-military public spending by, let's say, $100 billion. To reach this goal, Republicans would ask for a $200 billion cut, for example.
The Obama administration/Democratic Party, pretending to represent the poor and working families, would vehemently object that this is too much ... and that all they can offer is $50 billion, again for example. Next, the Republican negotiators would come up with their own counter-offer of, let's say, $150 billion. Then come months of fake haggling and passionate speeches in defense of their positions ... until they meet eventually half way between $50 billion and $150 billion, which has been their hidden goal ($100 billion) from the beginning.
This is, of course, an overly simplified hypothetical example. But it captures, in broad outlines, the essence of the political game that the Republican and Democratic parties - increasingly both representing big finance/big business - play on the American people. All the while the duplicitous corporate media plays along with this political charade in order to confuse the public by creating the impression that there are no alternatives to austerity cuts, and that all the bipartisan public bickering over debt/budgetary issues vividly represents "democracy in action."
The atmosphere of panic and anxiety surrounding the debt/deficit negotiations is fabricated because the central claim behind the feigned crisis that "there is no money" for jobs, education, health care, Social Security, Medicare, housing, pensions and the like is a lie. Generous subsidies to major Wall Street players since the 2008 market crash has lifted financial markets to new highs, as evinced by the Dow Jones Industrial Average's new bubble above the 15000 mark.
The massive cuts in employment, wages and benefits, as well as in social spending, have resulted in an enormous transfer of economic resources from the bottom up. The wealthiest 1% of Americans now own more than 40% of the entire country's wealth; while the bottom 80% own only 7%. Likewise, the richest 1% now takes home 24% of the country's total income, compared to only 9% four decades ago. [16]
This means that there really is no need for the brutal austerity cuts as there really is no shortage of financial resources. The purported lack of resources is due to the fact that they are concentrated largely in the deep coffers of the financial oligarchy.
Ismael Hossein-zadeh is Professor Emeritus of Economics, Drake University, Des Moines, Iowa. He is the author of The Political Economy of U.S. Militarism (Palgrave-Macmillan 2007) and Soviet Non-capitalist Development: The Case of Nasser's Egypt (Praeger Publishers 1989). His latest book, Beyond Mainstream Explanations of the Financial Crisis: Parasitic Finance Capital, will be forthcoming from Routledge Books.
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Sep 11, 2013 | Asia Times
"The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole." - Prof Caroll Quigley, Georgetown University, Tragedy and Hope (1966).
Iraq and Libya have been taken out, and Iran has been heavily boycotted. Syria is now in the cross-hairs. Why? Here is one overlooked scenario.
In an August 2013 article titled "Larry Summers and the Secret 'End-game' Memo," Greg Palast posted evidence of a secret late-1990s plan devised by Wall Street and US Treasury officials to open banking to the lucrative derivatives business. To pull this off required the relaxation of banking regulations not just in the US but globally. The vehicle to be used was the Financial Services Agreement (FSA) of the World Trade Organization (WTO).
The "end-game" would require not just coercing support among WTO members but taking down those countries refusing to join. Some key countries remained holdouts from the WTO, including Iraq, Libya, Iran and Syria. In these Islamic countries, banks are largely state-owned, and "usury" - charging rent for the "use" of money - is viewed as a sin, if not a crime.
That puts them at odds with the Western model of rent extraction by private middlemen. Publicly owned banks are also a threat to the mushrooming derivatives business, since governments with their own banks don't need interest rate swaps, credit default swaps, or investment-grade ratings by private rating agencies in order to finance their operations.
Bank deregulation proceeded according to plan, and the government-sanctioned and -nurtured derivatives business mushroomed into a US$700-plus trillion pyramid scheme. Highly leveraged, completely unregulated, and dangerously unsustainable, it collapsed in 2008 when investment bank Lehman Brothers went bankrupt, taking a large segment of the global economy with it. The countries that managed to escape were those sustained by public banking models outside the international banking net.
These countries were not all Islamic. Forty percent of banks globally are publicly owned. They are largely in the BRIC countries - Brazil, Russia, India and China - which house 40% of the global population. They also escaped the 2008 credit crisis, but they at least made a show of conforming to Western banking rules.
This was not true of the "rogue" Islamic nations, where usury was forbidden by Islamic teaching. To make the world safe for usury, these rogue states had to be silenced by other means. Having failed to succumb to economic coercion, they wound up in the crosshairs of the powerful US military.
Here is some data in support of that thesis.
The end-game memo
In his August 22 article, Greg Palast posted a screenshot of a 1997 memo from Timothy Geithner, then assistant secretary of international affairs under Robert Rubin, to Larry Summers, then deputy secretary of the Treasury. Geithner referred in the memo to the "end-game of WTO financial services negotiations" and urged Summers to touch base with the CEOs of Goldman Sachs, Merrill Lynch, Bank of America, Citibank, and Chase Manhattan Bank, for whom private phone numbers were provided.
The game then in play was the deregulation of banks so that they could gamble in the lucrative new field of derivatives. To pull this off required, first, the repeal of Glass-Steagall, the 1933 Act that imposed a firewall between investment banking and depository banking in order to protect depositors' funds from bank gambling. But the plan required more than just deregulating US banks. Banking controls had to be eliminated globally so that money would not flee to nations with safer banking laws.
The "endgame" was to achieve this global deregulation through an obscure addendum to the international trade agreements policed by the World Trade Organization, called the Financial Services Agreement. Palast wrote:
Until the bankers began their play, the WTO agreements dealt simply with trade in goods - that is, my cars for your bananas. The new rules ginned-up by Summers and the banks would force all nations to accept trade in "bads" - toxic assets like financial derivatives.WTO members were induced to sign the agreement by threatening their access to global markets if they refused; and they all did sign, except Brazil. Brazil was then threatened with an embargo, but its resistance paid off, since it alone among Western nations survived and thrived during the 2007-2009 crisis.Until the bankers' re-draft of the FSA each nation controlled and chartered the banks within their own borders. The new rules of the game would force every nation to open their markets to Citibank, JP Morgan and their derivatives "products".
And all 156 nations in the WTO would have to smash down their own Glass-Steagall divisions between commercial savings banks and the investment banks that gamble with derivatives.
The job of turning the FSA into the bankers' battering ram was given to Geithner, who was named Ambassador to the World Trade Organization.
As for the others:
The new FSA pulled the lid off the Pandora's box of worldwide derivatives trade. Among the notorious transactions legalized: Goldman Sachs (where Treasury Secretary Rubin had been Co-Chairman) worked a secret euro-derivatives swap with Greece which, ultimately, destroyed that nation. Ecuador, its own banking sector de-regulated and demolished, exploded into riots. Argentina had to sell off its oil companies (to the Spanish) and water systems (to Enron) while its teachers hunted for food in garbage cans. Then, Bankers Gone Wild in the Eurozone dove head-first into derivatives pools without knowing how to swim - and the continent is now being sold off in tiny, cheap pieces to Germany.... ... ...
Ellen Brown is an attorney and president of the Public Banking Institute, PublicBankingInstitute.org. In Web of Debt, her latest of 11 books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are WebofDebt.com and EllenBrown.com.
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Feb 4, 2013 | youtube.com
Written and spoken by Michael Rivero. The written version is here: http://whatreallyhappened.com/WRHARTI...
Video This video is in the public domain. The producers have waived their copyright to this video. Listen to a post production conversation between the producers by clicking on this mp3: https://soundcloud.com/eonitao-state/...
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Aug 17, 2013 | Safehaven.com
The Fed has been talking about bubbles for 20 years. I've been diligently studying bubbles and Money & Credit for longer. I'm here with a sense of humility. After all, I'm again relegated to wearing the proverbial "dunce cap," as I persevere through my third major bull market, "new era" and "new paradigm."
The great American economist Hyman Minsky is best known for "stability is destabilizing" and the "Financial Instability Hypothesis" - the evolution of finance from "hedge finance" to "speculative finance" and finally to highly unstable "Ponzi finance."
Minsky delineated the "Stages of Development of Capitalist Finance":
"In both Keynes and Schumpeter the in-place financial structure is a central determinant of the behaviour of a capitalist economy. But among the players in financial markets are entrepreneurial profit-seekers who innovate. As a result these markets evolve in response to profit opportunities which emerge as the productive apparatus changes. The evolutionary properties of market economies are evident in the changing structure of financial institutions as well as in the productive structure... To understand the short-term dynamics of business cycles and the longer-term evolution of economies it is necessary to understand the financing relations that rule, and how the profit-seeking activities of businessmen, bankers and portfolio managers lead to the evolution of financial structures."
Minsky saw the evolution Capitalist finance as having developed in four stages: Commercial Capitalism, Finance Capitalism, Managerial Capitalism and Money Manager Capitalism. "These stages are related to what is financed and who does the proximate financing - the structure of relations among businesses, households, the government and finance."
Commercial Capitalism:
"The essence of commercial capitalism was bankers providing merchant finance for goods trading and manufacturing. Financing of inventories but not capital investment."
Early economic thinkers focused on seasonal monetary phenomenon. Credit and economic cycles were prominent, although relatively short in duration.
Finance Capitalism:
"Industrial Revolution and the huge capital requirements for durable long-term capital investment... The capital development of these economies mainly depended upon market financing. Flotations of stocks and bonds - securities markets, investment bankers and the Rothchilds, JP Morgan and the other money barons... The great crash of 1929-1933 marked the end of the era in which investment bankers dominated financial markets."
Managerial Capitalism:
"During the great depression, the Second World War and the peace that followed government became and remained a much larger part of the economy... Government deficits led to profits - the government took over responsibility for the adequacy of profits and aggregate demand. The flaw in managerial capitalism is the assumption that enterprise divorced from banker and owner pressure and control would remain efficient... As the era progressed, individual wealth holdings increasingly took the form of ownership of the liabilities of managed funds..."
Money Manager Capitalism:
"The emergence of return and capital-gains-oriented block of managed money resulted in financial markets once again being a major influence in determining the performance of the economy... Unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather upon the quick turn of the speculator, upon trading profits... A peculiar regime emerged in which the main business in the financial markets became far removed from the financing of the capital development of the country. Furthermore, the main purpose of those who controlled corporations was no longer making profits from production and trade but rather to assure that the liabilities of the corporations were fully priced in the financial market..."
Late in life Minsky wrote
"Today's financial structure is more akin to Keynes' characterization of the financial arrangements of advanced capitalism as a casino."
The above quotes were from a Minsky paper published in 1993. That year was notable for the inflation of a major bond market speculative Bubble. This Bubble began to burst on February 4, 1994 when Fed raised rates 25bps.
I still view 1994 as a seminal year in finance. The highly leveraged hedge funds were caught in a bond Bubble; there were serious derivative problems; and speculative deleveraging was having significant global effects, most notably the financial and economic collapse in Mexico.
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Posted on January 25, 2013 by James Kwak | 70 CommentsBy James Kwak
One of the last things I did in law school was write a paper about the concept of "cultural capture," which Simon and I discussed briefly in 13 Bankers as one of the elements of the "Wall Street takeover." The basic idea was that you can observe the same outcomes that you get with traditional regulatory capture without there being any actual corruption. The hard part in writing the paper was distinguishing cultural capture from plain old ideology-regulators making decisions because of their views about the world.
Anyway, the result is being included in a collection of papers on regulatory capture organized by the Tobin Project. It will be published by Cambridge sometime this year, but for now you can download the various chapters here. It features a lineup including many authors far more distinguished than I, including Richard Posner, Luigi Zingales, Tino Cuéllar, Richard Revesz, David Moss, Dan Carpenter, Nolan McCarty, and others. Enjoy.
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The Wall Street Journal
The nation's biggest banks are going on the offensive to fend off growing efforts in Washington to rein them in.
The banks have hired longtime, influential Washington hands to deflect regulatory and political pressure to strengthen their finances and to sell assets. Regulators and some lawmakers have raised concern that large banks remain "too big to fail" and could require another government bailout in the event of a new financial meltdown.
Associated Press Former Bush aide Tony Fratto has been hired by banks.The effort by banks marks a lobbying turning point for the industry, which adopted a mostly low-profile stance to new regulations in the wake of the financial crisis. It also comes as banks such as Morgan Stanley, Bank of America Corp. and Goldman Sachs Group Inc. are shedding lucrative assets that would have required them to hold more capital to compensate for their risk.
While the banks are joining forces, much of the work is being coordinated through trade groups.
Several banks and the Financial Services Forum, a top trade association, have hired Tony Fratto, a former Bush administration official, to provide what they call a "rapid response" to criticism that banks remain too large. The too big to fail notion implies that the government would have to step in and provide funding to institutions whose failure could disrupt the financial system, as it did during the 2008 financial crisis.
Regulators and lawmakers increasingly are signaling that more work is needed to lessen the risk posed by large, complex banks, including bigger capital cushions and minimum amounts of expensive long-term debt.
The moves by banks include pushing back against bipartisan legislation sponsored by Sens. David Vitter, a Louisiana Republican, and Sherrod Brown, an Ohio Democrat, that would sharply increase capital cushions at large banks to the point where most analysts expect firms would be forced to shrink.
Stephanie Cutter, a former adviser to President Barack Obama, and Ed Gillespie, a former Bush administration official, are providing strategic advice to Bank of America on several issues, including efforts to break up the banks. Morgan Stanley recently hired Michele Davis, a top aide to former Bush administration Treasury Secretary Henry Paulson, to help bolster the firm's credibility in Washington.
The more-aggressive profile comes as the big banks that received 2008 bailout money provided under the Troubled Asset Relief Program have repaid it.
Top bank officials are trying to coordinate more closely and present a united front. On April 10, top officials from five major banks gathered for a strategy session at Bank of America's Washington office to discuss what they should do about the growing perception that big banks continue to pose a threat to financial stability, according to several people with knowledge of the session.
For about 30 minutes, U.S. Bancorp Chief Executive Richard Davis, Citigroup Inc. CEO Michael Corbat, Bank of America Chief Brian Moynihan, Wells Fargo & Co. CEO John Stumpf, and Michael Cavanagh, a top official from J.P. Morgan Chase & Co., talked about the recent surge of momentum in the too-big-to-fail debate, including where it came from and what to do about it.
The chiefs identified several catalysts, including the more than $6 billion trading loss last year by the so-called London whale at J.P. Morgan, repeated calls by some top bank regulators for a breakup of big banks and recent comments from Attorney General Eric Holder that some banks were too big to "jail," suggesting some firms are so large and interconnected that prosecuting them could harm the economy.
U.S. Bancorp's Mr. Davis, who called for the meeting, urged the other executives to join with regional and community banks in pursuing a strategy to stop the breakup efforts. A united front, he said, might be more effective in tamping down the momentum.
"If just the big banks oppose it, it will be a problem," Mr. Davis said, according to a person familiar with the conversation.
Ultimately, the CEOs rejected Mr. Davis's suggestion and decided to hand the effort over to the Financial Services Forum, which represents the CEOs of the nation's 19-largest financial institutions. In a Forum-organized meeting the next day with President Obama, a bank official briefly raised concerns about capital levels, saying that banks were under growing regulatory pressure to boost their capital cushions and cautioned it could hinder their ability to lend and affect the broader economy, according to people who attended the White House meeting.
Banks are making a similar pitch in meetings with lawmakers, telling members of Congress that every additional dollar in capital they are required to hold translates into $8 to $10 less to lend, according to industry representatives.
"One of the things we've been saying for some time is no one knows what the cumulative effects of the changes on the system are going to be," said Kenneth Bentsen Jr., acting president and CEO of the Securities Industry and Financial Markets Association. "Some of them aren't even done, and the industry has legitimate concerns that it will be hard to make loans and raise capital for businesses."
The desire to push back has picked up urgency amid recent comments by top Federal Reserve officials that current regulatory efforts to reduce the systemic footprint of large banks may not be enough.
Yet the bank effort is somewhat hampered by disagreement among institutions and as some regional banks seek to distance themselves from their larger peers.
Two weeks ago, officials from U.S. Bancorp, Wells Fargo, J.P. Morgan and other banks called off a planned meeting to discuss the Fed's effort to require that companies hold minimum amounts of long-term unsecured debt after it became clear there wasn't agreement among the banks, according to people familiar with the meeting.
Justin Baer and Michael Crittenden contributed to this article.Write to Deborah Solomon at [email protected], Robin Sidel at [email protected] and Aaron Lucchetti at [email protected]
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August 23, 2010 | FT.com
The conservative economic counter-revolution associated with the names of Ronald Reagan and Margaret Thatcher began some three decades ago. The Great Recession almost certainly marks its end. What follows will be something different, though how different it will is still unclear. This is a good opportunity to assess the broad economic consequences of that revolution.
For the sake of simplicity, I focus on gross domestic product per head in the six biggest high-income economies: the US; Japan; Germany; the UK; France; and Italy. (I also use the Conference Board database. These data are in purchasing power parity (Elteto-Koves-Szulc (EKS) method).)
There is much more to performance than GDP per head. These data ignore the distribution of income, which is of crucial importance, especially for the US, where a very large proportion of additional income seems to have accrued to the wealthiest. The data also ignore the underlying causes of changes in GDP per head: changes in output per hour, in hours per worker and in employment. Even so, they are revealing.
The single most important point from the chart on relative GDP per head is that the US remains where it has been for over a century: the most productive large economy in the world. At its peak, in 1991, Japan's GDP per head reached 89 per cent of US levels. It then fell substantially in the 1990s. United Germany, France and Italy also experienced substantial relative declines in GDP per head over this period. The UK was the only one of these five countries to have achieved rising GDP per head, relative to the US, since 1990. This surely suggests that reforms led by American and British policymakers did bear some fruit.
The chart on growth of GDP per head elaborates this picture somewhat. The UK and US had the highest trend growth of GDP per head between 1980 and 2009. (All-German data are unavailable for the entire period.) But there are other interesting events: first, there is a progressive deceleration in trend growth: only Japan achieved faster trend growth in GDP per head between 2000-07 (that is, before the recent deep recession) than it did in the 1990s; second, the US growth deceleration in the most recent periods is marked, with growth in GDP per head only at the same rate as Japan between 2000 and 2007 – so much for the magic of the Bush-era tax cuts - and also between 2000 and 2009; third, GDP per head grew at less than 1 per cent a year in Germany, France and Italy in the most recent decade.
At first glance, then, the conservative revolution seems to have achieved some improvements in the previously lagging US and UK economies. But the magic potion started to lose effectiveness in the 2000s, particularly in the US.
The more interesting question, however, is how far this improved performance of the US and UK will turn out to have been a blip. There are two reasons for believing this.
- First, the expansion of the financial sector and associated leveraging of the household sector played a big part in the growth of the economies of the US and UK. The question is how far growth driven by these two linked developments will turn out to have been a mirage. It is not difficult to see why that might be the case. The financial sector creates money and credit not only used to pay fees to itself and to a host of brokers and agents, but also to finance construction booms. Furthermore, the next decade is likely to see deleveraging in the US and UK, in both household and financial sectors, while the willingness to leverage up the government sector seems set to hit political or economic limits. This combination of factors might make these countries' performance look a little like that of Japan in the 1990s, with chronically weak aggregate demand.
- Second, the US and UK have run substantial current account deficits in recent decades. Andrew Smithers of London-based Smithers & Co argues that this has allowed the relative shrinkage of manufacturing, a capital-intensive sector. That, in turn, has permitted the two economies to grow quite fast, despite relatively low rates of investment in physical capital. In the coming decade, this process is likely to be reversed. Savings and investment would then have to rise substantially to sustain given rates of overall economic growth. Should this not happen, growth would slow further.
Bubbles induce severe over-estimates of underlying economic performance. Will the same prove true of the US and UK? I would guess so. Might the next decade belong to Germany or Japan, instead? That would not surprise me either. Expect the unexpected. It is a good rule.
- Kevin Alexander | August 23 9:07pm
The "Great Recession"? It may yet to turn out as the neo-Dark Ages, where stupidity reigns.
- Gavyn Davies | August 23 10:19pm
Martin - I think we need to ask four separate questions.
- First, did the Reagan/Thatcher reforms help the relative performance of the US and UK, compared to other economies, in sectors other than the financial sector? My answer to this would be a resounding "yes".
- Second, did the US and the UK also gain because they had comparative advantages in the financial sector, which was the area of the global economy which expanded most rapidly from 1982-2007. My answer would be "yes" again.
- Third, did the conservative revolution itself contribute to the forces which triggered the growth in the global financial sector? Clearly, yes again.
- And, fourthly, can the pre-2007 growth in financial services be maintained in the long run? That seems very doubtful, to say the least.
If this is all true, then the conservative revolution may have improved the performance of the non-financial sectors in the UK/US, while also shifting resources excessively towards finance in those economies.
We may not be able to judge the final outcome until finance has settled down its sustainable share of global GDP, which is probably less than it was in 2007.
But we can ask ourselves this: is it possible to design the next revolution so that non financial sectors improve their performance, without also shifting resources (perhaps wastefully) into finance? It may require us to encourage market forces in some sectors, while regulating them in others. Not an easy message for politicians to get across.
- Richard W | August 23 10:38pm
I think in the context of future growth for Germany and Japan you would also need to calculate what impact a declining population will have on growth. Both countries have a declining population and an ageing population through declining births. Although the declining population will likely see GDP per capita growing. I would think nominal GDP will disappoint. Moreover, the demographics of an ageing population must have effects on the rate of new startup firms. Much will depend on whether the young can increase their per-capita output to support the inverted population pyramid. Although the US and UK face problems with deleveraging they do not have the declining population problem.
- Munzoenix | August 23 10:42pm
I agree with Martin on his last point -- that the relatively high growth in the US and UK could be due to higher leverage, and less investment in capital-intensive sectors like manufacturing.
But, I think Martin also did not mention two points I think are very valuable:1) that growth rates in various countries are reported in domestic currencies. The US and UK have shown to have high growth rates, but when you standardize/normalize all the growth rates using one currency for comparison, the US and UK economy shrunk markedly in the past decade if all these economies were compared in euros or yens. The pound had lost almost 20% of its value in the last year, which in euro terms is a 20% decline in the UK's per capita income measured in euros. So, all the growth the UK experienced in relation to Germany, France and Italy is a mirage already.
2) per capita incomes are usually measured in purchasing power parity (and looking at how low Japan's figures were in Martin's graph, I'm assuming PPP was used). But this can be somewhat misleading. There is value in reading PPP, because it allows economists to measure what people can actually buy because it adjusts for varying price levels across countries. But, looking at nominal exchange rate also has value.
US PPP per capita income is high because prices levels are low -- NOT FOR GOOD reasons like higher productivity from greater capital-intensive utilization. US price levels are low because 1/3rd of the labor force lost their job in the manufacturing sector due to an overvalued dollar (thanks to Reagan excessive government debt). All this manufacturing labor flooded into the "booming" service sector, putting downward wage and price presses on service goods from restaurant meals to haircuts. Thus, haircuts and other services that comprise a country's price level are lower in America than a country like Sweden -- Thus using PPP makes Sweden look poorer, when in reality, the economy is more balanced for having more labor employed in a highly competitive goods-producing, capital-intensive manufacturing sector, that there is less labor in services that overall price levels are higher.
Therefore, using nominal market exchange rate to measure per capita income in the above countries maybe useful (alongside PPP).
In that case, Japan and Germany are far better off (and balanced) than the US and UK. In addition, growth is far more equal across those societies than in the US where all growth is top heavy, as Martin mentioned.
Overall, good article, nonetheless.
- Francobollo | August 24 1:08am
The idea that finance and leverage have made up part of the relative gains of US/UK seems eminently plausible. Nevertheless it doesn't seem, despite the Great Recession, that neo-con policies are dead. An example is Cameron's 'Big Society' concept which seems to be pure Gordon Tullock in seeking to transfer government activities to the voluntary sector.
- Padmanabha Rao Hari Prasad | August 24 2:07am
The relatively poor and declining quality of physical and human capital in the US will surely limit its growth over the next decade or more.
Raghuram Rajan has quite an extensive discussion in "Fault Lines" of how the US educational system and society are failing to provide an increasing portion of the population with the skills (and the socializing for the attitudes and work habits) needed for the more technologically sophisticated jobs of today.
The policy consensus to address these constraints seems all the more difficult to achieve in a highly polarized political environment.
- Akira Chimura | August 24 4:14am
I am surprised by Martin's analysis, based on PPP. I can choose nothing but to seriouly doubt the economic theory or further all logical theories as well as logical and abstract thinking itself. Only one ironical conclusion is "I think, therefore I am", just as Descarters said.
Concretely, Japan must unchangeably seek for a new catch-up model, successful in Ex-Japan Asia, signifying that more and more savings and capital-intensive investments in physical assets should be made. Does this signify a stronger inertia of continuing the conventionalities of the past, and so a more helpless vicious cycle of the debt-deflation dynamics, basically different from recently rising Germany? Greater havoc or collapse for Japan? Because no matter how based on PPP, the revenue by corporat tax peaked at a level of 13.4 trillion yen in 1991 and then sharply declined to a level of 5 trillion yen in FY 2009, and also other tax revenues similarly declined, except the revenue by consumption tax. Therefore, the country cannot stand up. Even though the tax system is the basics of the country, if Japan's tax system could be changed into the European-style tax system, centering around added value tax, would Japan get out from the vicious cycle of the debt-deflation dynamics and be really revived? What matters most importantly is that this task is the genuine difficulty for Japan, because it crucially and vitally needs a really strong leadership, differently different from "Leadersless Japan" ( The economist criticised ).
- Bryan Lewis | August 24 4:23am
Mr. Wolf.
I am in Japan. I just bought a new computer that is half the price of one I bought 5 years ago. It is much faster and has better features. If this pricing and growth in efficiency was carried across the board the GDP would fall by half.
So what kind of a measure of the economy is the GDP used in your graphs?- Liberty | August 24 4:52am
Everyone can quote others' data and say "expect the unexpected." Wolf should find another job. Thatcher and Reagan did not achieve turning the tide of socialism in the west. They just stopped its progress for a while. That's why the West is not doing well. The real counter-revolutions were in China, India and eastern Europe, which are significantly less socialist now than before.
- Mycroft | August 24 6:38am
Reagan/Thatcher slowed the growth of the State, but hardly did they roll it back by any objective measure... just look at the budget numbers, number of govt. employees, etc..
Reagan in particular disillusioned his Goldwaterite supporters on every front.. from failing to abolish the Dept. of Education, to burying the Gold Comission, to incurring in huge deficits... Since then the US Empire and it's Welfare state have done nothing but grow.
If you want to see the triumph of market reforms, look to China, where a little more freedom has gone a long way...
- Roy | August 24 7:55am
honestly.. this is a bit of a joke.. in these decadent days we call anything a revolution... even if it's just tinkering around the edges.
If you want a measuring rod which will show you just how lame Reagan reforms were... contrast to Thomas Jefferson's spending cuts (almost 50% of the Federal budget in 4 years)..
- kedarsat | August 24 8:04am
Does conservatism allow for ZIRP?
In my book, low interest rates and a pernicious form of crony-capitalism brought the UK and US down. These need to be abandoned, rather than the conservatism that never was.
The decline in US public finances will lead to a partial dismantling of US public education, which could be the beginning of the re-skilling of the US.
- sceptic | August 24 8:16am
I love the way Krugman, Wolf and co. are trying to drive the keynesian dual narrative of "deregulation caused the bust" and "austerity killed the recovery".
Anything to focus the debate away from establishment sacred cows. I'll leave it to the reader to figure out what those are.
- Econoclast | August 24 8:29am
I am amazed by some of the comments here, which seem to imply quasi-socialism is a major constraint on the US and the UK.
As Martin Wolf points out, we've had 30 years of deregulation, which simply encouraged massive over-investment in housing to the detriment of other physical capital.
Thatcher-Reagan deregulation has failed. I regard the comparisons with China, India and eastern Europe has completely misplaced.
Look at the mess in many eastern European economies who shared in the financial/housing mania. And China and India are reaping the benefits of putting hundreds of millions of people to work. The true test for their political and economic systems will come over the next 20 years.
- central economic plannning | August 24 8:31am
10 Planks of the Communist manifesto:
5. Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.
- Gaute | August 24 9:58am
@ econoclast, "The true test for their political and economic systems will come over the next 20 years"
20 years is a very short perspective. Remember what Chou En Lai allegdly answered when asked about his opinion on the outcome of the French revolution. It was too early to tell.
- Brian Reading | August 24 10:15am
US industrial ICOR fell substantially from the early 1980s (measured over 7 years to smooth the cycle). Less investment was needed. Meanwhile LSR calculates that TFE was close to zero in the 1970s, rose to over 0.5% pa over the next two decades and in the noughties fell back to zero. I wonder how far the take-up of new technology has substantially increased TFP.
From 1985 US NIPA does allow for quality changes using hedonic pricing covering 20% of expenditure categories. Non-residential investment has been on a declining trend as a share of nominal GDP while on a rising trend on chain linked.
A good many years ago I devised a method of looking at relative performance using the errors in successive OECD GDP growth and inflation forecasts. The idea was that models are slow to capture changes in regression relationships. The result of a structural improvement should show up as a bias towards under estimating growth and over estimating inflation. There was such a bias for the US and UK but not for Germany, France and Japan. I have not repeated this exercise for many years. How long ago this was can be guess by the fact that Anthony Harris reported in in the FT.
- StuBails | August 24 10:23am
@ Martin Wolf
You said that the conservative revolution seems to have achieved some improvements in the previously lagging US/ UK economies.
Is there an alternative explanation here? Could it be that in the early 90s outsourcing started in earnest? The US & UK farmed out commodity production to the East and concentrated on comparative advantages in Financial Services/ property/ professional services. Was it this that accelerated growth rather than the deregulation of the US/ UK economies?
Either way, both countries are facing monster issues in the coming thirty years. The UK does have to concentrate more on exports, but my guess is that this will not result in manufacturing comprising a bigger % of GDP than it currently does.
- Luis H Arroyo | August 24 10:40am
I do not think the conservative revolution was the direct cause of the crisis. Therefore, I do not think the solution is the return of Keynesianism. Keynesianism has had its day, and lost the battle miserably. Moreover, much of today's problems come from the debts accumulated by the European countries that have chosen to follow Keynes.
There are many factors that have strayed from their beds Conservative revolution. for example, the commercialism of China, which has devastated the productive sectors of the world. In the West we have praised China as a simpleton when it has never been a credible rival.Then the history of the euro has played a key role in the crisis, as determined interest rates very low in the countries which embarked on the bubble. Now, the Euro is a huge barrier for these countries to adjust their failure competitiveness.
These and other conditions can not be charged to the account of the Conservative Revolution, that brought capitalism to depressed areas that are now very close to us.
- Itzman | August 24 10:50am
The history of civilization is the history of economics, but it is not the history of economic theory or of political interference with it.
They merely lag the true economic history of it.
Wolf, Krugman et al would do well to step back from theories that express the conditions of limited populations with access to more resource bases than they can exploit, (the politics and economics of expansion) and look to develop an economics that reflects the situation today, of the only unlimited thing being our ability to generate people we have no hope of ever finding useful employment for. And print empty promises on banknotes.
Everything else is in short supply.
In short, stop behaving as though by believing in it, the world will become what we think it ought to be, and start treating with it, as it is, and must inevitably be. With or without political an economic fiddling.
The economic wealth of a nation is nothing more or less than the the resource bases it has access to, and its efficiency in exploiting them into desirable product, divided by its population (squared) . As higher density populations need proportionality higher use of resource per capita to regulate and organise. One man on an island needs no government or defence force or police force or waste disposal....60M need rather more..
Which leads to a simple conclusion. The only way forward to greater prosperity lies in managing populations down. The longer this distasteful alternative so at odds with expansionist economic and political theory is shied away from, the bigger will be the crash when some externality does what politicians and economists are so afraid to face.
The rest may be safely left to those engaged in economic activity: The best that government can do is not stand in the way. Economists, may not be worth the paper they write upon, sadly.
- Per Andersson | August 24 11:47am
Mr Wolf overestimates the influence of individual politicians (Reagan/Thatcher). What he calls 'the conservative counter-revolution' consists of two developments:
- The growth of the welfare state was halted.
- Technology enabled product markets to be deregulated (or, perhaps more appropriate, de-monopolized) to a much larger extent than before.
Both these developments took place in other industrialized nations, even in those that did not have political forces as strongly identified as 'conservative' as Reagan or Thatcher.
The welfare state itself was not significantly cut back, either by Reagan or Thatcher. This is because the welfare state was and is overwhelmingly popular. A large-scale reduction in the size of government through a dismantling of the welfare state simply is not politically feasible, despite the protestations of 'Tea-Partiers'.
- maximus | August 24 11:50am
Yes, Interesting article although I suspect that there is a bit of a sub text here- i.e all this deregulation - did it really deliver? Some really don't want to buy that argument! I think that RichardW below is on the right lines, although it is obviously variable by country/region. The developed world post WW II baby boom has coincided with much of these changes... looking at the UK.. greatly expanded higher education, student power, new families, house acquisition, overseas travel and rising real incomes, financial service needs, now retirement for many. It has run its course. You can measure some of these by tracking the "Branson Empire" as it has morphed along with that generation. I think it has very little to do with conventional economic theory and much to do with the available choices to most of those baby boomers. This has now run its course- ergo the pile of problems from pensions et al.
- Barry Thornton | August 24 1:05pm
A curious article.
you start by mentioning the deficiencies of using GDP as a metric, but then proceed to use it anyway and finally question the conclusions that can be drawn from the limited data.
It is not very surprising that since the 80s the GDP of the US and UK have surged ahead, what with the expansion of the financial sector and the flow of credit. However, the big gripe with conservative policies has been that this has only benefited a tiny minority (as you mention).
A far more instructive comparison would include median wages, inflation (including property inflation), average number of hours worked, employment (not unemployment), health care and crime.
I appreciate that the conservative reforms were mostly economic and financial in nature, but the success or otherwise of these reforms should be judged with a broad range of metrics, not just economic ones.
I suspect in such an analysis, the conservative revolution would not look as good.
- antitrust | August 24 1:27pm
Anybody who talks about regulation.. or deregulation.. and fails to mention that the monetary and banking system is set up as a government orchestrated cartel, that the whole financial sphere of economic life is, if not outright nationalized, pretty much directed by governments and a few govt-licensed players... is being short-sighted at best.
- Driftersescape | August 24 1:35pm
I would have thought that when one talks of 'Reganomics' in the very next breath Milton Friedman would be mentioned and then inevitably monetarism. John Maynard Keynes, one of the most brilliant minds of his generation has become persona non grata.
Rather oddly the article above mentions none of these. Those of a certain age will recall not awaiting the next unemployment number but that of the latest M4 and then M0.
Those have of course been assigned to the trashcan of history (about 1987) I think i.e. the same place as the conservative revolution you refer to.
The list of failures is too long to mention but in the charge sheet is rapid deregulation though to the shameless 'jacking up' of the UK economy to win the 1987 general election. Result, an overheating economy and galloping inflation brought under control, for many business and individuals by sky high interest rates leading to a very painful recession that lasted from 1989 to 1993/4.
You are right in one thing, it surely did begin thirty years ago and tragically that flawed theme (deregulation morphing into light touch regulation) was brought to a shuddering halt in the blood bath of that late 2008 early 2009 credit crunch.
The final analysis of the conservative revolution? An unmitigated disaster.
- Alasdair Rankin | August 24 1:42pm
The problem is essentially one of goals. Wasn't the conservative counter-revolution simply a piece of ideological special pleading by the owners of capital? Look at the proportion of the increase in GDP in the US which went to the owners of capital. They also seem to believe that the state should only spend money on things they like. All the rest is best left to the "private sector". But what's "private" about driving the global economy into a deep recession, which would have been a depression without international government intervention?
The goal of capital is ever more capital. Conservative theorists will tell you at great length about the merits of individual responsibility but what do they have to say about economic responsibility or the responsibilities of capital? Rather less. Their economic theory, including "trickle-down"and Laffer curves, is no more than intellectual window-dressing.
Health care provision in the US is a classic case. The UK's health service has long consumed less GDP per head than the US health sector. That is, it is more efficient. But overall efficiency and human welfare have come second in the US to vested interests and maximizing private profit. We shouldn't be surprised - the economic system is set up that way.
For balanced, sustainable economic development find, and maintain, the balance between democratic goals and wealth creation. If there is an economic holy grail, maybe that's it.
- eian | August 24 2:17pm
I wonder if the US data on GDP per capita include the 10-12 million undocumented workers -- the vast majority active in the workforce -- who contributed to that GDP growth?
If not, we should estimate and subtract their contribution to US GDP to make a fair comparison. Of course, other countries also have undocumented workers. But of the ones compared here, I would think that the scale of US reliance on such workers far exceeds the others.
- The Slog | August 24 2:39pm
The Conservative Agenda made one entirely erroneous assumption: that the ethics of those in banks and business were up to less regulation.
We've all been paying for the mistake ever since.
For instance - the recent EU bank stress tests - Why has Barclays' exposure to Italian sovereign debt risen tenfold since the stress-tests? Stupidity - or economical reporting?
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Zero Hedge
As David Stockman, Reagan's infamous Budget Director, writes in his bestseller, The Great Deformation: The Corruption Of Capitalism In America – "the last thing hedge funds do is hedge." The hedge fund complex is "not so much a conventional industry as it is a giant moveable trade": Wall Street trading desks frequently morph into independent hedge fund partnerships, and senior hedge funds often sire "cubs" and then sons of cubs. The protean ability of this arrangement to spawn, fund, and replicate successful momentum trades cannot be overstated, and has "generated trillions of permanent momentum-chasing capital." Ultimately, he warns, "apologists for the Fed's evisceration of the capital markets could not see... they had unleashed the financial furies in the violent momentum trading modus operandi of the hedge fund casino."
Until winning trades finally finish their run and reverse direction, copycat replication is low risk because it is facilitated by the prime brokerage desks of the Wall Street banks. These desks keep their hedge fund clients posted on "what's working" for the hottest funds and, mirabile dictu, the flavor-of- the-moment bandwagon rapidly gains riders.
To be sure, Wall Street prime brokerage operations perform valid services such as margin lending, consolidated reporting, trade execution, and clearing and settlement. Indeed, it is the independent clearing functions of the prime brokers which safeguard against the Bernie Madoff style of self-cleared "trades" that were actually not all that.
In this independent trading and clearing function, however, Wall Street banking houses take in each other's laundry, unlike Madoff's in-house method. This means that the hedge funds embedded in each of the big banks-operations which are otherwise pleased to characterize themselves with meaningless distinctions such as "prop," "flow," and "hedge" traders-use one of the other banks as their prime broker.
JPMorgan's now infamous "London Whale" trading operation, for example, used Goldman Sachs as its prime broker. It would require a heavy dose of naïveté to believe that the invisible Chinese walls maintained by these two banking behemoths actually stop any useful trading and position information from circulating throughout the hedge fund complex.
Besides a steady diet of tips about hot trades, the hedge fund complex also needs incremental cash, preferably from low cost loans, in order to pile into rising trades. This, too, the prime brokers provide in abundance through what amounts to a variation of fractional reserve banking. The mechanism here is "rehypothecation," and it amounts to a miracle of modern finance.
Prime brokers are essentially in the business of selling used cars twice, or even multiple times. When they execute trades for a hot hand among their hedge fund customers, for example, they retain custody of the securities purchased on behalf of the customer. But under typical arrangements, the prime broker promptly posts these securities as collateral for its own borrowings; that is, it hocks its customer's property and uses the cash proceeds for its own benefit.
The precise benefit is that the prime broker relends the proceeds to another client who is advised to jump on the same trade with the new money. The resulting purchase of securities by the second customer begets even more collateral, which triggers another round of rehypothecation. Needless to say, this enables the prime broker to lend and whisper yet a third time, imparting even more momentum into the original trade. In this manner, financial rocket ships are born.
It is not surprising, therefore, that the hedge fund industry remains arrayed tightly around the brand name prime brokers: Goldman, Morgan Stanley, JPMorgan, Merrill Lynch, and Barclays (nee Lehman). Indeed, the whole nexus of the Wall Street–hedge fund arena is cut from a single cloth.
The Wall Street investment banking departments supply financial engineering catalysts for the momentum trades, while their prime brokerages supply back-office services, cash, and inside tips to hedge fund customers, including prop traders and "hedging" desks within the Wall Street banks. The hallmark of this vast momentum trading arrangement, therefore, is that it is both incestuous and so highly fluid as to resemble a giant, undulating financial amoeba rather than a classic atomized marketplace of independent firms.
To this end, hedge funds come in and out of existence at dizzying rates, reflecting fluidity not even remotely matched in any other industry. In 2010, for example, 935 new hedge funds came into existence, while in 2009 more than 1,000 hedge funds were liquidated. Using common back-office infrastructure maintained by the prime brokers, the hedge fund complex is not so much a conventional industry as it is a giant moveable trade: Wall Street trading desks frequently morph into independent hedge fund partnerships, and senior hedge funds often sire "cubs" and then sons of cubs. The protean ability of this arrangement to spawn, fund, and replicate successful momentum trades cannot be overstated, and has generated trillions of permanent momentum-chasing capital.
The hedge funds run by John Paulson, the celebrated trader who massively broke the sub-prime mortgage market, demonstrates the manner in which momentum-chasing hot money had come to dominate the Wall Street casino. The one constant illustrated by the Paulson saga is that the pool of hedge fund money lives by the law of relentless reallocation.
The Hot Hands Went Stone Cold
For most of his career Paulson was a steady and astute journeyman who managed a modest-sized hedge fund specializing in merger arbitrage. But in 2005–2006 he chanced upon the "greatest trade ever"-the monumental subprime short-and during the next several years generated astounding investment returns. His fund profits measured out at more than a 300 percent annual rate.
The inflow of new money to the several Paulson hedge funds was astonishing and instantaneous, even by the standards of contemporary Wall Street. Paulson's AUM (assets under management) went from $4 billion to $40 billion in a financial heartbeat. The inflow of capital was so great, and the timing of his momentum trades so effective, that during 2006–2010 Paulson's personal share of profits was reputed to be nearly $15 billion, a figure that exceeded the entire AUM of the largest hedge fund as recently as 2001.
Still, these heaving pools of hedge fund capital care only about what managers have done for them lately. The violent unwind of the Paulson funds is dramatic proof. By early 2012 his funds had shrunk to $20 billion and investors had fled in droves.
This breathtaking rise and fall is not about capitalist freedom to succeed and fail, or even a morality play about an investor becoming overconfident in his own genius. Instead, it is evidence that the great financial deformation has spiked the system with opportunities for huge, misshapen speculations that could never arise on the free market.
On the free market uncorrupted by the state-and especially the money-printing and Wall Street coddling policies of its central banking branch-there would have been no reckless boom in mortgage lending nor the resulting rampant inflation of housing prices. In turn, there would also have been no "big short" against bad real estate prices and bad housing debt.
As it happened, however, this wager amounted to the chance of a lifetime to extract billions of windfall profits and attract billions more of momentum-chasing hedge fund capital. Furthermore, these enormous windfalls from busted mortgages enabled the suddenly giant hedge funds run by Paulson to pivot on a dime and place tens of billions of new bets behind highly speculative theories which soon proved to be disastrously wrong.
After early 2009, for example, Paulson wagered that the United States would experience an inflationary boom and therefore bet heavily on gold, banks, home builders, and other sectors that would benefit. John Paulson had no special macroeconomic expertise, but he had chanced upon a dogeared copy of Milton Friedman's quantity theory of money. When Bernanke flooded the economy with a humongous quantity of money in the fall and winter of 2008–2009, Paulson placed his bets accordingly.
Unsung economic forecasters have been making erroneous bets for decades based on Professor Friedman's faulty theories about money, but this time upward of $30 billion had been placed on Friedman's money supply growth equation. So when the inflationary boom didn't happen, Paulson's funds experienced shocking losses which amounted to 45 percent by the end of 2011.
Still, apologists for the Fed's evisceration of the capital markets could not see that the tens of billions flowing first toward the Paulson bets and then in headlong flight from them were evidence of profound financial disorder. Indeed, the apparent view from the Eccles Building was that John Paulson was just some kind of hedge fund Casey-a mighty trader who aimed for the fences and had struck out at the plate.
Yet the truth was more nearly the opposite. The Fed had unleashed the financial furies in the violent momentum trading modus operandi of the hedge fund casino. Paulson was only the most visible practitioner.
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From the event at the Philadelphia Fed on April 17th, 2013 (04/17/2013) conference segment "Fixing the Banking System for Good" .
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March 25, 2009 | Volatility
(See also the rest of the five-part series)
We are experiencing an attempted corporatist coup. It's the same old disaster capitalist battle plan: trigger the disaster, in this case the financial crisis; shock, confuse, and frighten the people with Too Big To Fail and an unending litany of miserable economic news; use this chaotic environment to push through a plan which would never have any chance of success if the people could calmly understand and deliberate on it.
- http://attempter.wordpress.com/2009/03/24/the-bailout-war-part-i-aig/
- http://attempter.wordpress.com/2009/03/24/the-bailout-war-ii-too-big-to-fail/
- http://attempter.wordpress.com/2009/03/26/the-bailout-war-part-iv-toxic-bank-assets-and-the-bailouts/
- http://attempter.wordpress.com/2009/03/27/the-bailout-war-v-nationalization-and-relocalization/
The finance elite claim to be capitalists seeking a "free market", but what they really want is a free-fire zone. They want to be free of all government oversight, free of all antitrust, consumer, of labor protection, free of any obstacle to the most predatory and anticompetitive practices, free of environmental regulations, free of any limit on socializing the costs of externalities, free of any regulation aimed at economic stability, free of all social responsibility, and of course free of taxes and anything else which in any way compromises feudal accumulation. At the same time they want the full cooperation and protection of the public bureaucracy, police, courts, prisons, and military, which are all to be deputized in the service of private profit even as they are paid for with public funds.
Feudalism masquerades as capitalism, but it seeks rent rather than innovation (though Orwell-style this is called "innovation", just as swindler "talent" is called talent as such). Banks, insurance companies, and the real estate industry , who together comprise what Michael Hudson calls the FIRE trust, use debt creation not for productive loans or to raise living standards but to inflate bubbles in real estate, stocks and bonds, luxury novelty markets and so on. They concentrate in a trust to enforce a de facto central economic planning power where all losses are socialized. The "free market" function of the FIRE trust is really a fake rentier function, enabled by the government, which shouldn't exist at all. Corporatism is pure gangsterism.
Corporatism as an ideology and an agenda seeks to topple democratic capitalism and replace it with a de facto unaccountable autocratic government which serves as a wealth conveyor from the public to a rentier elite. Elected representatives and public officials are first captured with bribes and threats and then selected for ideology and obedience. A complaisant media cooperates. The result is an industry/government/media cabal which wages a civil war from above, treating the public and the public domain as a mine and a dump.
The FIRE trust is based on nothing productive. Rather it manages the production of bubbles and worthless luxury items priced for the consumer through (1) the exponential debt economic model, and (2) Walmartization, which brings only temporary low prices, but permanently destroys local economies and small business and drives the globalist race to gut all labor and environmental regulation. A basic feature of the debt economy is that the worker is disempowered through a divide and conquer process, where just as in any totalitarian society each individual trembles for himself and fears everyone else. In this case each worker trembles for his job since he's deeply in debt. Thanks to this fear workers are afraid to claim their rights or organize for better conditions, and the result is a steady deterioration of their position.
This in turn intensifies the steep, radical, antidemocratic and antisocial concentration of wealth. Since the financialization of the economy in the 1970s, the protion of the national income going to the top 1% of wealth gatherers has more than doubled, while real wages have decreased by 16%. This concentration process ahs become ever more intense in recent years. The public is steadily stripped of all property and power and reduced to serfdom while power and wealth concentrate among an oligarchy.
The finance and political elite uses the creation and control of debt, of debt-enabled addiction to sham luxury, privatization, deregulation, destroying social services and protections, setting up barriers against relief in the courts, turning the law itself into the infinitely pliable tool of corporate lawyers, to accumulate and deploy power and wealth. Too Big to Fail and its bailouts, the Global War on Terror and its wars, are nominally administration, not even "American" projects. They're really private wars waged using hijacked public resources.
The corporatist oligarchy, unlike true capitalism, seeks a centrally planned economy. The government taxes the people and borrows in their name, and saddles them with the debt. It then distributes this wealth to the maximum benefit of big industry, according to plans laid out by the finance industry. Today's Bailout War is just the most brazen and thorough-going manifestation of the standard program. There's seldom a need for policy conclaves, since the top government officials like Paulson or Geithner almost without exception started out on the private side, and many return after their government service for the industry.
So we have an economy run by bankers and captured Fed and Treasury planners rather than democracy. Through deregulation and regulatory neglect they developed an economic anarchy zone where anything went. The finance industry inhabited this anarchy with increasingly large, ramified, interconnected structures. Hudson calls them grupos after the feudal finance trusts of Pinochet's Chile. In good Orwellian fashion they called this generation of bubbles and debt "wealth creation". They used this position to develop a command economy where nothing except at the lowest, smallest level can work except according to the top-down central plan.
The basic activity of the FIRE trust is according to Hudson to "make money by creating and selling debt". The finance industry seeks to inflate bubbles: Asian debt, dot-com, housing. The insurance giant AIG spurred a $30 trillion market in credit default swaps. The basis of this market is not insurance of real assets (a steady, frumpy profit) but betting on derivative paper. The real estate business was no longer based on the real assets of land and house but turned the housing market into a casino whose features were predatory lending, speculators flipping houses, and encouraging Americans to view a house not as a home but as a retirement vehicle (which also, in a vicious circle, politically helped justify and further the shredding of the safety net, placing people ever more at the mercy of this bubble).
The origin of corporatism lies in the instability of capitalism itself. According to James Livingston under normal circumstances the finance industry is merely an epiphenomenon, a subsidiary factor within a productive real economy. But the unstable tendency within capitalism is for the proceeds of economic activity to shift toward wealth inequality to the point that there aren't enough investment outlets for this surplus wealth. Different things can cause this shift. Of course the capitalist always seeks to maximize his profit. As for systemic shift, back in the 20s there was machinery, Taylorism, and monopoly centralization. In recent decades we have modern technology and Hobbesian globalization. The result in both cases is that productivity can be maintained while the economy undergoes a massive shift form wages to profits. With the advent of this surplus, the epiphenomenal finance industry turns into a monster reality. Where there's too much capital which can't be productively reinvested, it becomes rent-seeking.
[As Livingston points out, this is why tax cuts for the rich in a debt bubble economy can never increase productivity; why trickle-down can never work. It's because the extra money just seeks an unproductive rent-maximizing investment. It's just used to further blow up bubbles.]
[We also see here the incipience of collapse and Depression. This surplus capital is the result of a systemic shift to greater inequality. Its quest for investment outlets conjures up the FIRE trust. As it blows up bubbles and heats up inflation the finance industry exacerbates wealth inequality. So it's a vicious circle: inequality -> surplus capital and rise of FIRE trust -> aggravate inequality -> more surplus, ever more concentrated finance action and so on, until: (1) the debt load on the consumer is unsustainable, (2) some proximate cause sets off the crash, (3) overproduction and asset deflation crashes the system.
This is the risk and result as disaster capitalism seeks an interior financial frontier where denied an external physical plunder frontier. The late 20s were a hiatus between the heyday of colonial imperialism and the rise of globalist imperialism, while in spite of his best efforts Bush wasn't able to achieve a sufficient new economic disaster zone in Iraq, even as globalism in its most predatory aspect was starting to be rolled back elsewhere.
In 2008 Peak Oil and energy issues triggered the unravelling. The American suburbanite got simultaneously hit three ways: (1) as commuter, oil supply constriction and speculation over it sent oil and gasoline prices soaring, while biofuel mandates and extreme energy prices were major factors in food price inflation; fuel and food inflation drove general inflation which hit the suburbanite (2) as consumer; and at the same time as he was beleaguered by a higher cost of living and already finding it more difficult to make his mortgage payments, (3) these conditions and higher interest rates triggered the ARMs in those mortgages, and for more and more people it was too much. The defaults started avalanching and the crash was on.]
What to do with the surplus? It seeks to inflate a bubble. The proximate bubble can be inflated by just blowing up whatever balloons happen to be laying around – real estate, stocks, toxic paper, overhyped startups. In modern times, the global economy was fully financialized starting in the 70s. It took the form of an exponential debt economy. It was all based on the dollar's reserve currency status. Now "all previous bubbles [were] folded into a 'Treasury bubble' ", as John Bellamy Foster put it. The dollar was the reserve currency; at the same time it floated free of any reality-based anchor once it was detached from gold in 1971; to complete the picture OPEC agreed to require dollars as payment for oil deliveries, and all other market sellers followed.
Now the basic pattern was in place. Economic growth was based on exponential debt. Petrodollars sloshed around the world as the financial trusts blew up bubbles wherever they could. Globalization drove the infamous "race to the bottom" for wages, privatization, social spending, labor and environmental regulation (and for that matter public participation, democracy itself). Multinational corporations urged on this downward race while rushing to help inflate the bubbles and, under the auspices of the corporatist-captured World Bank and IMF, rushed as disaster capitalists to exploit any burst bubble or other disaster. All the while the American middle class was placated with a consumer debt binge and flashy worthless technological gadgets, even as its wages and social protections were eroded.
Under these conditions where corporatist speculation depends upon inflating and imploding bubbles, triumphs and disasters, surging and crashing prices, volatility became the new normal. Orwell visits us again to coin the term "Great Moderation" for a world of permanent upheaval and tension and instability where the only thing perceived as constant was the disaster capitalist's uncanny ability to surf the wave of destruction and always come out profitable. (We can place Great Moderation alongside the Washington Consensus, that self-congratulatory affirmation to drown out the cries of rage and pain of millions who most definitely did not "consent".)
But in spite of its soothing, moderate name the exponential debt economy was not only unstable but intrinsically unsustainable. Over the years it experienced a diminishing growth return on debt. $1 of created debt generated a 60 cent rise in GDP back in the 70s. The same real dollar in 2000 generated only 20 cents. The reason exponential debt is in itself unsustainable is because each debt-creating entity reaches its limit where it cannot borrow another cent and must crash at the first margin call. We watched this repeatedly in 2008. So to keep any bubble inflating the players need to appeal to larger entities. This drives the merger and consolidation process, but eventually everything must be enfolded in the Treasury bubble, where the US government is the ponzi schemer, the good name of the US government and its dollar is the bubble, and this debt bubble must run up against the limits of the dollar itself, and there's no higher body to whom to appeal.
That's the point we're now reaching. As a nominally private set of structures the FIRE trust bubbled as far as it could. Now it can do nothing but de facto privatize the government and be de facto nationalized by it. Its only other option is terminal collapse.
Similarly we the people now face a fork in the road. The scenario I just described is also doomed. The government itself cannot maintain the dollar's position even as an out-and-out feudal cabal. So the choices are to let them go ahead and continue taking the debt bubble civilization to its extreme, becoming enserfed along the way, and then suffer the complete collapse while going form mere dreary poverty to absolute destitution.
Or, we can stop corporatism in its tracks right now, defy the terroristic threats of "Too Big to Fail", recover our country and what wealth we have left, and use it to guide us through a transformation to a sustainable and just economy and society. And best of all we can do it as a free people.
See also:
- John Bellamy Foster http://www.monthlyreview.org/090302foster.php
- James Livingston http://72.36.139.202/politicsandletters/showDiary.do?diaryId=159
- Michael Hudson http://www.globalresearch.ca/index.php?context=va&aid=12265
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EconoSpeak
Reading this excerpt from an interview with UNCTAD economist Heiner Flassbeck posted at Naked Capitalism prompts these thoughts on how financialization has altered the way capitalism functions.
Consider two ways an enterprise can be privately owned and managed. (For simplicity I will talk about two discrete models, but of course there is a continuum between them.) In the first way, which I'll call institutional, a set of residual claimants are tied to the enterprise: there are substantial exit costs to their ownership, and thus they are forced to accept less diversification of their wealth portfolio than would otherwise be optimal-for them. They could be family members with longstanding ties to the enterprise, perhaps dating from some ancestral founding, top executives whose career paths do not easily extend horizontally to other enterprises, perhaps because of a perception that firm-specific knowledge is critical in executive competence, or investment banks or other intermediaries who hold long-term equity positions. It has to be emphasized that, from a purely risk-weighted wealth maximization point of view, such tied asset positions are unfavorable.
The second way, which can be called financial, takes the form of possession of paper claims on the enterprise tradeable in liquid markets or executive positions also tradeable for comparable positions in other enterprises. Exit costs, in other words, are much lower. This greatly reduces the risk of those in positions of transitory ownership and control: the owners can maintain a diversified and shifting portfolio of equity positions, while the executives can preserve outside employment options that substantially reduce the variability of expected permanent income.
In a world of perfect foresight or unitary ("rational") expectations it could be shown that these two models converge. In the real world of fundamental uncertainty, asymmetric information and conflicting expectations they don't. Rather, the institutional approach compels owners and managers to extend their time horizons and lower their discount rates when forecasting future performance of the enterprise to which they are tied. The availability of low-cost exit reduces this incentive for comparable parties under the financial approach.
One consequence of a longer-term orientation is an incentive for greater investment, and an important venue for this investment is the enterprise's workforce. A high-investment personnel strategy is one in which more resources are devoted to cultivating human capital and worker attachment to the firm. The latter is fostered through internal labor markets, rent-sharing and a more favorable, or at least less resistant, attitude toward worker voice. (This also depends, of course, on the production regime; under a technologically regimented regime such as one finds in commodity mass production like apparel, the drive system can coexist with a long-term orientation.) Financialization is linked to inequality and greater precariousness of work because there is little incentive to expend resources in the present to capture the return to investments in the workforce that materialize (uncertainly) well into the future.
There is also a political economic dimension to financialization. Those who are wealthy or hold positions at the top of organizational pyramids have disproportionate influence over public policy everywhere. If personal interests play a central role, directly or indirectly via ideology, in the kinds of policies economic elites favor, one would expect systematic differences between these two varieties of capitalism. Perhaps the most important is that the sort of sectoral jockeying one associates with institutionalized capitalism will give way to policies that are favorable to wealth-holders in general. Such policies will be those that promote capital mobility, reduce effective taxes on financial income, limit inflation or intensify disinflation, and backstop credit market positions. Again, I am not claiming that economic elites necessarily operate from a stance of naked self-interest; in fact, it is more likely that they will base their claims on sophisticated arguments that these things are in the public interest, as developed, for example, by like-minded economists.
So why the wave of financialization? The key, in my opinion, is to recognize that tying one's fortune to any particular enterprise is always costly. Active entrepreneurs do this because their commitment to the enterprise, during this stage, is irreplaceable: there is simply no option for them to diversify their investments. Beyond this, elites seek diversification if they can get it. One reason institutional capitalism has prevailed in certain times and places is that rules were put in place to require it; labor laws, for instance, have served this function in many countries. Capital market regulations have also sheltered tied investors, in effect subsidizing their commitment to particular enterprises. This suggests that one reason we have seen the shift toward financialization is the dismantling, in most countries, of such rules. (The European Union has been explicit in opposing any national regulation that sheltered tied investors in the name of the single capital market.) Another factor is globalization, which is both a consequence of capital liberalization but also an inducement to it: as geographically dispersed markets with radically different economic opportunities and price structures are integrated, the costs of inhibiting capital mobility go up. At the same time, cultural shifts have taken place which devalue the kinds of commitment on which institutional capitalism depends and even celebrate the wealth of those who time their ship-jumping with exquisite accuracy. In the world we live in today, a radical lack of commitment to any specific enterprise is the default position, at least among those at the top of the hierarchy, and conscious social intervention is required to create countervailing pressures.
Two political observations to conclude:
- Elites recognize as a fundamental conceptual point that a short-term orientation is dangerous. Of course, the point of financialization is that they dare not point this gun at themselves. Thus they project their concerns onto the public sector: it is government's short-sightedness in fiscal matters alone that causes financial instability. This is a nice option, enabling them to adopt the posture of one who is wise and thinks in the long run while resisting any proposal that would cause them to forego their own private short-run orientation.
- It is truly unfortunate that the rise of financialization and its political economic fallout has coincided with the emergence of a drastic problem whose solution depends on governments' adopting much longer time frames than ever before, climate change.
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May 8, 2013 | The Wall Street Journal
The nation's biggest banks are going on the offensive to fend off growing efforts in Washington to rein them in.
The banks have hired longtime, influential Washington hands to deflect regulatory and political pressure to strengthen their finances and to sell assets. Regulators and some lawmakers have raised concern that large banks remain "too big to fail" and could require another government bailout in the event of a new financial meltdown.
Associated Press Former Bush aide Tony Fratto has been hired by banks.The effort by banks marks a lobbying turning point for the industry, which adopted a mostly low-profile stance to new regulations in the wake of the financial crisis. It also comes as banks such as Morgan Stanley, Bank of America Corp. and Goldman Sachs Group Inc. are shedding lucrative assets that would have required them to hold more capital to compensate for their risk.
While the banks are joining forces, much of the work is being coordinated through trade groups. Several banks and the Financial Services Forum, a top trade association, have hired Tony Fratto, a former Bush administration official, to provide what they call a "rapid response" to criticism that banks remain too large. The too big to fail notion implies that the government would have to step in and provide funding to institutions whose failure could disrupt the financial system, as it did during the 2008 financial crisis.
Regulators and lawmakers increasingly are signaling that more work is needed to lessen the risk posed by large, complex banks, including bigger capital cushions and minimum amounts of expensive long-term debt.
The moves by banks include pushing back against bipartisan legislation sponsored by Sens. David Vitter, a Louisiana Republican, and Sherrod Brown, an Ohio Democrat, that would sharply increase capital cushions at large banks to the point where most analysts expect firms would be forced to shrink.
Stephanie Cutter, a former adviser to President Barack Obama, and Ed Gillespie, a former Bush administration official, are providing strategic advice to Bank of America on several issues, including efforts to break up the banks. Morgan Stanley recently hired Michele Davis, a top aide to former Bush administration Treasury Secretary Henry Paulson, to help bolster the firm's credibility in Washington.
The more-aggressive profile comes as the big banks that received 2008 bailout money provided under the Troubled Asset Relief Program have repaid it.
Top bank officials are trying to coordinate more closely and present a united front. On April 10, top officials from five major banks gathered for a strategy session at Bank of America's Washington office to discuss what they should do about the growing perception that big banks continue to pose a threat to financial stability, according to several people with knowledge of the session.
For about 30 minutes, U.S. Bancorp Chief Executive Richard Davis, Citigroup Inc. CEO Michael Corbat, Bank of America Chief Brian Moynihan, Wells Fargo & Co. CEO John Stumpf, and Michael Cavanagh, a top official from J.P. Morgan Chase & Co., talked about the recent surge of momentum in the too-big-to-fail debate, including where it came from and what to do about it.
The chiefs identified several catalysts, including the more than $6 billion trading loss last year by the so-called London whale at J.P. Morgan, repeated calls by some top bank regulators for a breakup of big banks and recent comments from Attorney General Eric Holder that some banks were too big to "jail," suggesting some firms are so large and interconnected that prosecuting them could harm the economy.
U.S. Bancorp's Mr. Davis, who called for the meeting, urged the other executives to join with regional and community banks in pursuing a strategy to stop the breakup efforts. A united front, he said, might be more effective in tamping down the momentum.
"If just the big banks oppose it, it will be a problem," Mr. Davis said, according to a person familiar with the conversation.
Ultimately, the CEOs rejected Mr. Davis's suggestion and decided to hand the effort over to the Financial Services Forum, which represents the CEOs of the nation's 19-largest financial institutions. In a Forum-organized meeting the next day with President Obama, a bank official briefly raised concerns about capital levels, saying that banks were under growing regulatory pressure to boost their capital cushions and cautioned it could hinder their ability to lend and affect the broader economy, according to people who attended the White House meeting.
Banks are making a similar pitch in meetings with lawmakers, telling members of Congress that every additional dollar in capital they are required to hold translates into $8 to $10 less to lend, according to industry representatives.
"One of the things we've been saying for some time is no one knows what the cumulative effects of the changes on the system are going to be," said Kenneth Bentsen Jr., acting president and CEO of the Securities Industry and Financial Markets Association. "Some of them aren't even done, and the industry has legitimate concerns that it will be hard to make loans and raise capital for businesses."
The desire to push back has picked up urgency amid recent comments by top Federal Reserve officials that current regulatory efforts to reduce the systemic footprint of large banks may not be enough.
Yet the bank effort is somewhat hampered by disagreement among institutions and as some regional banks seek to distance themselves from their larger peers.
Two weeks ago, officials from U.S. Bancorp, Wells Fargo, J.P. Morgan and other banks called off a planned meeting to discuss the Fed's effort to require that companies hold minimum amounts of long-term unsecured debt after it became clear there wasn't agreement among the banks, according to people familiar with the meeting.
Justin Baer and Michael Crittenden contributed to this article.Write to Deborah Solomon at [email protected], Robin Sidel at [email protected] and Aaron Lucchetti at [email protected]
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May 6, 2013 | baselinescenario.com | 23 Comments
For years, the world's largest banks have been up in arms over threats by regulators to increase their (equity) capital requirements. Making banks hold more capital, they argue, will force them to reduce lending and will increase their cost of funding, making credit more expensive throughout the economy. One of the chief defenders of the megabanks has been Josef Ackermann, CEO of Deutsche Bank until last year and also chair of the Institute of International Finance, which claimed that higher capital requirements would reduce economic output by a whopping 3.2 percent.
Anat Admati and Martin Hellwig have been tirelessly debunking the myth that higher capital levels will force banks to curtail lending and torpedo the global economy, most recently in their excellent new book, The Banker's New Clothes.
Some of the arguments against higher capital requirements are simply incoherent, like the idea that banks would be forced to set aside capital instead of lending it. (Capital is the difference between assets and liabilities, not cash that you put somewhere for safekeeping; were it not for reserve requirements, which are something else, a bank could lend out 100 percent of the money it can raise.)
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Apr 26, 2013 | youtube.com
Chris Hedges speaks at the New Jersey Green Party meeting on Sunday April, 7 2013
An educational treasure for all students and truly a historical and epic discussion on the state of America and the World as a whole. Here, Hedges gives his opinions on how to effectively make a positive difference in our society and globally in a peaceful, non-violent way. Protesters and Activists can learn a lot from this man, he has seen governments rise and fall.
I paraphrase badly when I say, Hedges is critical but supportive of the Green Party, and gives some good advice if the Green Party wants to be a viable force to be reckoned with as a third party in the next 2016 elections. He stresses that the time has come for action and to stand for justice and peace by "focusing on the concrete" issues; by forming political and ideological alliances with people in our community and standing with and supporting the oppressed, disenfranchised and castaways. Logistical support which will create alliances and dialogues that will begin to challenge corp power is the only option left and the time is short and may be too late.
The planet is in intensive care though we are in denial of this and posterity is at risk of inheriting a irreversibly damaged ecosystem if we do not act now.
If you like this talk, then you can listen to his "Calling All Rebels" speech in Berkeley 2010 to give you a taste of how critical things, politically, socially, morally, financially and environmentally have become.
The clock is ticking and we need to move forward or be left behind in the wake of all the corporate destruction and wasteland of a soon to be future.
Hedges supports these and more: Justice, Truth, the Constitution of America and the Bill of Rights, idle no more, the occupy movement, the Green Party. He is columnist in the online site 'truth dig', is involved in a current an ongoing suit against President Obama, which is the federally judged ruling of the unconstitutionality of section 1021 of the NDAA, National Defense Authorization Act, which allows U.S. citizens to be indefinitely detained without a hearing. If this case is lost, America will have become a "Corporate Dictatorship", Hedges has once stated.
America has undergone a "Corporate Coup d'état in slow motion", and they have won, it is over. But the question is to you, what can I do about it? How do I respond? Listen and learn. Take action. You make a difference.
Hedges was a war correspondent for the New York Time's but no longer retains them as an employer because he denounced the Iraq war. Do a wikipedia search and you'll see his impeccable resume.
If you love Howard Zinn, Noam Chomsky, and being a rebel with a cause, then you'll love Mr. Hedges. I first heard of him when I was gathering footage of the anti-war march the Occupy Tampa peoples organized and enacted in 2012. You can view it for yourself here on the Newsworthyable youtube channel! I interviewed a few of the Occupiers and one of them mentioned Mr. Hedges, whom I never heard of before.
It's amazing what you learn when you go outside your door into the real world, outside of the virtual world of the internet.
Truly an educational archive for all students and workers of our globally corporate controlled society where we unwittingly have found ourselves between the cogs of and greasing the gears to the inevitable destruction of our environment, hearts and minds.
Peace, Love, compassion, strength, courage, truth, understanding, integrity, justice and freedom for all, and to all a good day!
"The time for talk is over, now is the time for action." -Hedges
"Too many Chiefs, jettison the hierarchy" -Hedges (when commenting on the weakness of the Greens and suggestions for effectiveness.
"What the Greens need is an immediate about face!" -HedgesNonMirageTV
A slow motion corporate coup d'état, well put.
Adelaide FOWL
A great example a food truck... the Catholic Workers are doing this in London. They grow food and give out to the homeless. Surely this could happen in the US.
coolmamac
In California they are arresting people for feeding the homeless on the street. Imperial Rome is now here.
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Feb 26, 2013 | Jesse's Café Américain
I wish that C-Span would permit their videos to be 'embeddable.'"I'm a very firm believer that a liar is a cheat and a thief and a crook. I don't like liars. I never lie. I always told my own child, "If you murder somebody, tell me. I'll help you hide the body. But don't you lie to me."
"We don't pay taxes. Only the little people pay taxes."
"There is not a more perilous or immoral habit of mind than the sanctifying of success."
Lord Acton
Greg's talk is excellent, and thanks to C-Span the video quality is good.
Speaking of excellent essays on corruption, Yves Smith has written a wonderful piece titled, Jack Lew's Grotesque Citi Employment Deal and the Institutionalization of Corruption.
Corruption, facilitated by the credibility trap, is the biggest problem facing the West today. That is the real subsidy, the most debilitating entitlement.
It is the belief of the elite that the power of their office is an achievement that rewards them with the right to lie, cheat and steal, both for themselves and their friends.
Although it is most important to understand that they would be shocked and insulted if one uses those words, lie, cheat and steal, to describe what they are doing. They view themselves as exceptionally hard working, as obligated by their natural gifts and superiority.
Through a long indoctrination that starts sometimes in their families, but is most often affirmed in their elite schools and with their circle of privileged friends, they learn to rationalize selective moral behaviour not as immoral but as 'the entitlement of success.' And they are supported by a horde of morally ambivalent enablers who will tell them whatever they wish to hear.
There are one set of rules for themselves and their friends, and another set of rules for the rest.
Few who actually do evil consciously choose to be evil. They rationalize what they do in any number of ways, but the deceit often hinges on their own natural superiority, and the objectification and denigration of the other. We are makers, and they are takers. Although many may work hard, they see their own work as having special value and merit, while the actions of the others are inconsequential and unworthy.
Given enough time, their rationalizations become an ideology, desensitized to the meaning and significance of others outside their own select group. This supremacy of ideology empties their souls, and opens the door to mass privation and even murder, although rarely done by their own hands.
This is what Glenn Greenwald calls 'justice for some.' Or even earlier what George Orwell captured in the slogan, 'Some animals are more equal than others.'
And just to be clear on this, with regard to the Anglo-American political situation, the tragedy is not that just some are corrupted, which is always the case. The tragedy is that the Democrats and the Labor Party learned that they could become as servilely corrupted by Big Money as the Republicans and the Conservative Party, while maintaining the illusion of serving their traditional political base.
And it has rewarded them very well in terms of extraordinarily well-funded political power, and almost unbelievable personal enrichment afterwards.
In such a climate of corruption, political discourse loses the vitality of ideas and compromise for the general good, and take on the character of competing gangs and crime families, engaged in aggressive schemes and protracted turf wars, tottering from one pitched battle and crisis to another.
"A credibility trap is a condition wherein the financial, political and informational functions of a society have been compromised by corruption and fraud, so that the leadership cannot effectively reform, or even honestly address, the problems of that system without impairing and implicating, at least incidentally, a broad swath of the power structure, including themselves.And you know how I feel about this.The status quo tolerates the corruption and the fraud because they have profited at least indirectly from it, and would like to continue to do so. Even the impulse to reform within the power structure is susceptible to various forms of soft blackmail and coercion by the system that maintains and rewards.
And so a failed policy and its support system become self-sustaining, long after it is seen by objective observers to have failed. In its failure it is counterproductive, and an impediment to recovery in the real economy. Admitting failure is not an option for the thought leaders who receive their power from that system.
The continuity of the structural hierarchy must therefore be maintained at all costs, even to the point of becoming a painfully obvious hypocrisy.
The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.The problem which the modern world has not yet grappled is how to react to the rise of a global elite, which considers itself the children of a power which is above national restraints, and a law unto themselves.
Their success has been propelled by the dominance of Anglo-American financialization, and the rise of oligarchies in Russia, China, Latin America, and India. Countervailing power has been co-opted and subsumed. Any opposition has become marginalized and isolated.
The new oligarchs are supported by their fiat currencies, which together the increase of insubstantial 'cashlessness' in wealth, provides the ability to define and allocate value at will.
They have a penchant towards globalization and deregulation to support selective justice, to the extreme detriment of local rule, and individual choice and freedom. Above all, they are a law unto themselves, above what they consider subhuman restraint. Übermenschen.
"Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth. Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition-and many of them, as a result, have an ambivalent attitude toward those of us who didn't succeed so spectacularly. Perhaps most noteworthy, they are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home. Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today's super-rich are increasingly a nation unto themselves...Of course this tendency is not new in history, as it is a facet of the human heart, and the empires of the past. But the scope of it is something rarely seen before this. And it is supported by technologies for mass action and control that seem terrifyingly powerful and new.A multibillion-dollar bailout and Wall Street's swift, subsequent reinstatement of gargantuan bonuses have inspired a narrative of parasitic bankers and other elites rigging the game for their own benefit. And this, in turn, has led to wider-and not unreasonable-fears that we are living in not merely a plutonomy, but a plutocracy, in which the rich display outsize political influence, narrowly self-interested motives, and a casual indifference to anyone outside their own rarefied economic bubble."
Chrystia Freeland, The Rise of the New Global Elite
And as hard as it may be to believe, this too shall pass. But as always, we have some work to do in our own time.
"The mills of God grind slowly, yet they grind exceeding small;
Though with patience He stands waiting, with exactness He grinds all."Henry Wadsworth Longfellow
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Asia Times
The changes since 1970 in the US economy have been more successful in changing workers' behavior than management's. On the shop floor only 7% of the private sector workforce is unionized, and by and large sleepers are absent from modern factories - for one thing, there are so many robots that the few remaining humans all have real jobs to do.
... When large organizations randomly "cut headcount" at frequent intervals without any overpowering need to do so, virtue and diligence become rewarded with lengthy periods of odious "networking" to find somewhere else to be virtuous and diligent.
Needless to say, in such an atmosphere integrity tends to be eroded, and employees look for ways to cut corners and thereby achieve "drop dead" money at an early age so that they never need to network again.
In the public sector unionization has risen sharply, and in areas such as education sleepers abound. The increase of administrative staff in relation to mainline teachers in both public schools and colleges has created a plethora of new jobs in which slumber is the most productive possible activity for the occupant, since any achievements are almost certainly highly damaging to the institution's proper function and expensive for the taxpayer.
Of course, the public sector also contains perverted Industrious Apprentices, whose goals like that of EPA senior manager Al Armendariz, are something like "finding businesses not compliant with the law and make examples of them" - Armendariz compared his strategy to a Roman crucifixion. As soon as the government gets involved, we learn that idleness may sometimes be a relative virtue!
Nevertheless for management, incentives have been re-written, so that the 1970 manager's ambition of improvement to the golf game is no longer permitted (for one thing, golf is now regarded in top management circles as being hopelessly sedentary and not expensive enough). Two factors in particular have changed the outlook: the plethora of takeovers of previously satisfactory public companies by private equity groups and the proliferation of massive stock option schemes.
Takeovers give top management the same job insecurity as ordinary employees. However unlike ordinary employees top management can do something about it; it awards itself massive "golden parachutes" - at which point it doesn't really mind being taken over, since the rewards are so great. Takeovers by larger companies are however not especially attractive for top managers, because they turn them into middle managers in the larger organization - bad for the ego, and in the long run for the earning capacity.
However takeovers by private equity groups are extremely attractive, because they give managers the opportunity to become an "entrepreneur" and achieve entrepreneurial levels of reward. Needless to say, once the company has been taken over by private equity, short-term gains become uppermost, as debt must be paid off and the company prettied up for a sale to a larger company, another private equity group or the general public.
Any Goodchilds in this environment soon get chewed up; their solid long-term virtues are no longer required, as the objective for both company management and the private equity group becomes the quickest exit possible at some substantial multiple of the original equity stake.
For those managers not lucky enough to be bought out by private equity, there are stock options. In the 1990s, when the cost of options did not have to be reported on the income statement, they were a pure greed mechanism as management could siphon off more than 100% of shareholder profits through options. Since the accounting reforms after 2000, they have been somewhat more controlled. However they are still a massive deterrent to long-term oriented Goodchild behavior.
For one thing, Goodchild management produces steady progress, a moderate increase in profits each year, which is normally rewarded by a modest and persistent increase in the stock price. By and large, this is not very interesting to option holders - even five years of modest increases do not provide a real bonanza. In modern companies therefore, management adopts a different technique; it leverages the company, engages in an acquisition spree, and runs it on a short-termist basis, producing bursts of magnificent profit which cause the stock price to soar, interspersed with periods of massive loss and writeoffs, in which the stock price collapses.
For ordinary shareholders with no inside knowledge, this is very unattractive. They are subject to very high volatility on their holdings, receive few or no dividends (which are unattractive to option holders, because they don't get them) and frequently buy in periods of euphoria, when prospects look best, and sell in despair at the bottom.
For management however, this volatility is a godsend; they can cash out their options during periods of euphoria and then reload when the share price collapses, granting themselves rights over a substantial percentage of the company at the bottom. Many option-rewarded managements have discovered they can exacerbate this tendency even further, by carrying out stock buybacks at the top, goosing the price even further, and being "forced" to undertake emergency share issues at the bottom, depressing the share price and allowing management to acquire options over correspondingly more shares.
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03/06/2013
While it is widely assumed that the too-big-to-fail banks in the US (and elsewhere) are beyond the criminal justice system - based on simple empirical fact - when the Attorney General of the United States openly admits to the fact that he is "concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them," since, "it will have a negative impact on the national economy, perhaps even the world economy," one has to stare open-mouthed at the state of our union. It appears, just as the proletariat assumed, that too-big-to-fail banks are indeed too-big-to-jail.
GRASSLEY: On the issue of bank prosecution, I'm concerned that we have a mentality of too-big-to-jail in the financial sector of spreading from fraud cases to terrorist financing and money laundering cases -- and I cite HSBC. So I think we're on a slippery slope.
HOLDER: The concern that you have raised is one that I, frankly, share. And I'm not talking about HSBC now. That (inaudible) be appropriate.
But I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large.
Again, I'm not talking about HSBC. This is just a -- a more general comment. I think it has an inhibiting influence -- impact on our ability to bring resolutions that I think would be more appropriate. And I think that is something that we -- you all need to -- need to consider. So the concern that you raised is actually one that I share.
AlaricBalth
Eric Holder and Asst. AG Lanny Breuer have now stated, on different occasions, that the SIFI banks are untouchable. What more evidence does one need to see who is pulling the strings and running this country. Dimon, Blankfien, etc. are the puppet masters and everything else is just bread and circuses.
Kaiser Sousa
so can we put to rest forever the notion that anyone other than the bankers r the real US Fucking government...and all that play in their debt based currency slave forever to b casino r complicit...
IVE BEEN TELLING YOU MOTHER FUCKERS AINT NOTHING GONNA CHANGE TIL THE BLOOD OF THE SOCIOPATHIC BANKERS FLOWS....WHEN THE REST OF YA'LL R READY FOR ACTION LET ME KNOW...UNTIL THEN I'LL JUST KEEP STACKING MY SHINY....
FUCK THE BERNANKE, THE BANKERS AND THEIR BITCH OWNED POLITICIANS!!!!!
TruthInSunshine
Eric Placeholder didn't get nominated & approved for his current post because he had any desire or intent of actually enforcing laws applicable to the banking complex that owns the legislative puppet assembly
James_Cole:
"But I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy."
And no one seems to care, that's the thing I don't understand, he's basically saying, guess what rule of law doesn't exist - where's the outrage?
The implications on the broader economy / society are pretty ugly, maybe that's why it's not a mainstream discussion.
ZerOhead:
There are actually now 3 distinct rules of law...
- Anyone who commits criminal acivity that can bring the house of cards down or incriminate those in power walks.
- Anyone with special connections to those in power or with substantial financial resources at their disposal walks.
- The small fish who commit petty crimes get battered first... then fried.
Stuck on Zero
The banks are too large to handle but we can go after whole nations and countries and take them over.
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Jesse's Café Américain
Moyers and Wolff: Capitalism Has 'Hit the Fan'
"Even as President Obama's talking points champion the middle class and condemn how our economy caters to the very rich, modern American capitalism is a story of continued inequality and hardship.A symphony of greed.Even a modest increase in the minimum wage - as suggested by the president - faces opposition from those who seem to show allegiance first and foremost to America's wealthy and powerful."
Bill Moyers, Taming Capitalism Run Wild
I would lay the failure of capitalism, or more properly the lapse of market capitalism into crony capitalism and corporatism, at altar of the triumvirate of the false gods of modern economics: globalization, fiat currencies, and naturally efficient markets.
And of course the fact that it is no longer socially unacceptable to be a lying, cheating conman, as long as you are sucessful at it. Greed is good, and so the achievement of wealth by any means available, as long as you beat the system and don't get indicted, is the epitome of human achievement and worth.
The most insidious trend is the adoption of the 'just-world hypothesis' and a Darwinian rationalization in blaming the victims for the outcome of this flawed set of policies and sanctifying of success.
This will very possibly result in yet another century of turmoil, degradation, and blood.
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Mar 9, 2012 | Salon.com
Though Wall Street's brand of "casino capitalism" crashed the American economy in 2008, American capitalists are making a growing profit from real-life casino gambling: commercial (or non-Indian) casinos have generated nearly $98 billion since 2008, including $34.6 billion in gross revenues in 2010 (the last year for which data is available), up from $20 billion in 1998. That's more than three times the sum Americans spend on movie tickets. And only $5.7 billion was generated in Las Vegas. The fantastical upside-down world of American commerce long confined to Nevada and Atlantic City, N.J., is now ubiquitous.
The billions of new dollars spent at casinos represent a net transfer of wealth to big business and to pay workers whose labor is not as productive as, say, repairing the nation's crumbling infrastructure. Casino capitalism is an apt metaphor exactly because - whatever one might think about legalized gambling - it is not generally perceived as a sound operating principle for the entire economy. Yet the steady march of casino gambling now sketches an eerie facsimile of our political economy writ large. In fact, casinos thrive amid economic misery.
Industry leaders tout casinos as a tool for creating jobs and increasing revenue, and recession-weary politicians are listening.
"When you're in recession, what that normally means is that state government suffers with regard to the revenue they have available to fund public services," says Frank Fahrenkopf, CEO of the American Gaming Association, the industry trade group. "When the state legislature needs revenue, this has proven over the years to be a very successful way to bring in capital investment, economic development, jobs, and tax revenue."
The United States has since the early 1990s undergone a piecemeal but profound social and economic transformation: casinos, nearly prohibited nationwide in 1910, are now legal in some form in 40 states, including 24 with legalized commercial operations. The companies involved make a tidy profit: Of the $34.6 billion in revenue (and again, this figure is in addition to the $26.7 billion generated at the nation's 448 tribal casinos), casinos paid just $7.59 billion in taxes and $13.3 billion in wages and benefits.
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July 10, 2012 | The American Conservative
...Manifest incompetence is but one cause of the sinking confidence in our financial elite. In the Latin American debt crisis of the 1980s, our idiot-bankers had to be bailed out with Brady bonds.In 1995, one year after NAFTA passed, Mexico threatened to default. Goldman Sachs was bailed out of its huge Mexican exposure by a loyal alumnus, Treasury's Robert Rubin, who dipped into the U.S. Exchange Stabilization Fund. Mexico devalued and began dumping winter vegetables into the United States, wiping out Florida producers, as U.S. plants moved south to exploit the newly cheapened Mexican labor.
In the Asian debt crisis of the 1990s, Rubin and Alan Greenspan led the bailouts. Asia's nations devalued and began exporting heavily to the United States to earn the dollars to pay back their loans.
Who paid for that bailout?
U.S. workers who lost manufacturing jobs when cheap Asian goods poured into the U.S. market, forcing the closure of U.S. Factories. The Great Recession of 2008-2012, too, is the creation of a financial elite and political class who have largely escaped its consequences.
George W. Bush and Congress pushed banks to make home loans to individuals who were credit risks. Fannie Mae and Freddie Mac bought up the subprime mortgages and bundled them together into securities.
Big banks traded them like gilt-edged bonds. When the whole house of paper collapsed in 2008, the banks screamed: "We're too big to fail. If we go down, the country goes down." They were rescued. The Fed bought up the bad paper, tripled the money supply, and lent at near zero interest to the banks. Profits soared.
But Middle America was not rescued. Middle America has gone through four years of deprivation without precedent since the 1930s. But now something beyond the incompetence of the financial elite and the big banks may be putting capitalism in peril–an unmistakable odor of amorality, sleaziness and corruption.
With the "Robber Barons," one could see a connection between the wealth of the Rockefellers, Harrimans, Carnegies and Henry Ford, and their contributions. Railroads were tying America together. Oil was fueling industry. America was surpassing Britain in steel production. Ford was putting the nation on wheels. When J.P. Morgan took to the floor of the New York Stock Exchange in 1907 to issue a buy order, he stopped a panic.
There was perceived to be a connection between the wealth of these men and their achievements. They were helping make America the most awesome industrial nation known to man. But as scholar William Quirk writes in his essay "Saving the Big Casino," our big banks now seem to rise and fall on profits and losses from the trading of "derivatives," "credit default swaps," and "exotic securities" that not one man in a thousand understands.
Fortunes are lost and made overnight. Names appear on the list of richest Americans no one has ever heard of. Cheating and corner-cutting are constantly being unearthed. Broker- and banker-gamblers in their 30s amass and flaunt nine-figure fortunes.
Were the rest of America doing well, this might not matter. But America is not doing well. And Americans are coming to believe that a system where high-rollers rake in tens of millions playing Monopoly while workers who build things and make things never see a pay raise is rigged and wrong.
Few begrudge a Bill Gates his fortune. But where vast wealth accrues to people whose actions seem unrelated to any contribution to society or country, and to have come simply from rigging the system for their own benefit, that system will not endure. Our casino capitalists are playing with fire.
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Jesse's Café Américain
Personally I think this is the corrosive influence of the credibility trap, the amorality of careerism, and of course, an ambivalence towards white collar corruption as the inherent entitlement of privilege. There seems to have been a shift in perspective amongst the new ruling class from noblesse oblige to droit du seigneur. This is what Robert Johnson calls 'the audacious oligarchy.'"If you follow issues like Too-Big-To-Fail or Wall Street corruption long enough, you realize that the reason things don't get done about them by our government has very little to do with ideology or even politics, in the way most of us understand politics.
Instead, it's a bizarre, almost tribal mentality that rules our capital city – a kind of groupthink that makes extreme myopia and a willingness to ignore the tribe's ostensible connection to the people who elected them a condition for social advancement within."
Matt Taibbi, Neil Barofsky's Adventure in Groupthink
While it is recovering much of this sudden, five minute loss even now, with spot back to 1680 already, the hit on the gold market in the New York trade this morning was fairly blatant.
Perhaps it was just some innocent who had the desire to drop a boatload of contracts into a quiet market, and knock the price down while maximizing their selling loss. Or another 'fat finger' mishap, which seem to happen quite a bit around option expiration for example.
Or perhaps it was some wiseguy trader who looked at the market, having some advantageous insight into the order books, and decided to 'run the stops.'
Thank God the US has the CFTC, whose job it is to look at this sort of thing and to tell us whether it was legitimate, or not.
And we should hear back about this, perhaps as early as January, 2017. And maybe even sooner on this one: 24 Tonnes of Paper Gold Dumped at Market
But it is nice to see that the CFTC is doing something. They are asking the court to overturn the $30 million fine on the Amaranth trader who was caught manipulating the natural gas market, because another regulator did their job for them.
Society
Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers : Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism : The Iron Law of Oligarchy : Libertarian Philosophy
Quotes
War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda : SE quotes : Language Design and Programming Quotes : Random IT-related quotes : Somerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose Bierce : Bernard Shaw : Mark Twain Quotes
Bulletin:
Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 : Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law
History:
Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds : Larry Wall : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOS : Programming Languages History : PL/1 : Simula 67 : C : History of GCC development : Scripting Languages : Perl history : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history
Classic books:
The Peter Principle : Parkinson Law : 1984 : The Mythical Man-Month : How to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite
Most popular humor pages:
Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor
The Last but not Least Technology is dominated by two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt. Ph.D
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Last modified: March, 12, 2019
