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Financialization of economy as economic parasitism,
the mechanism of redistributing the wealth up under neoliberalism

Financialization and Globalization: Lifting Barriers -- Losing Control

"The financialized economy – including stocks, corporate bonds and real estate – is now booming. Meanwhile, the bulk of the population struggles to meet daily expenses." -- Ellen Brown
News Neoliberalism Recommended Links Financilization of economy as the mechanism of redistributing the wealth up Ayn Rand and her Objectivism Cult Classification of Corporate Psychopaths Neoclassical Pseudo Theories and Crooked and Bought Economists  
Corporatist Corruption: Systemic Fraud under Clinton-Bush-Obama Regime Amorality and criminality of neoliberal elite Audacious Oligarchy and "Democracy for Winners" Financial Sector Induced Systemic Instability of Economy In Goldman Sachs we trust: classic example of regulatory capture by financial system hackers The Deep State Resurgence of neo-fascism as reaction on crisis of neoliberalism
The Great Transformation Neoliberalism as secular religion, "idolatry of money" The Iron Law of Oligarchy   Over-consumption of Luxury Goods as Market Failure Globalization of Financial Flows Globalization of Corporatism
Greenspan as the Chairman of Financial Politburo Friedman --founder of Chicago school of deification of market Pope Francis on danger of neoliberalism Techno-fundamentalism Neoliberalism Bookshelf Greenspan humor Etc
Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic systems at both the macro and micro levels.

Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector, (2) transfer income from the real sector to the financial sector, and (3) increase income inequality and contribute to wage stagnation. Additionally, there are reasons to believe that financialization may put the economy at risk of debt deflation and prolonged recession.

Financialization operates through three different conduits: changes in the structure and operation of financial markets, changes in the behavior of nonfinancial corporations, and changes in economic policy.

Countering financialization calls for a multifaceted agenda that (1) restores policy control over financial markets, (2) challenges the neoliberal economic policy paradigm encouraged by financialization, (3) makes corporations responsive to interests of stakeholders other than just financial markets, and (4) reforms the political process so as to diminish the influence of corporations and wealthy elites.

Thomas Palley, See

Considering both the domestic and international aspects of neoliberalism -- free-market economics, free trade, and the free mobility of capital -- neoliberalism is  definitely big finance friendly social system.  A new more harsh discipline was imposed on labor and new managerial criteria and policies established (with significant differences among countries). The so-called “free market” is an instrument of financial oligarchy and it serves mostly, albeit not exclusively, its objectives.

Globalization of financial flows and one of the most important features of neoliberalism. Although the process of globalization financial flows can be traced back to the early, even preliminary, stages of capitalism, commercial and state barrier for translational financial flows were by and large eliminated since  1990th. “Neoliberal globalization” is first of all global neoliberal financial globalization. As such it is more than a phase of globalization.  It is a new social phenomenon.

Financialization of everything is the essence of neoliberalism. Like globalization, financialization refers to mechanisms as old as capitalism and even to earlier pre-capitalist market economies, but one crucial aspect of the neoliberal decades is certainly the culmination of financial mechanisms reaching unprecedented levels of sophistication and expansion. In the present study, “financialization” always denotes, on the one hand, the expansion of financial institutions and mechanisms (and the corresponding masses of assets and debt), taking account of innovative procedures and, on the other hand, the imposition on them specific managerial criteria such as the creation of value for the shareholder. The comparative size and profit rate of the financial sector is also quite different with  previous stages.  The same is true of the expansion of the financial component of management within financial institutions and within nonfinancial corporations, as well as the spectacular rise of the income paid to financial managers.

Given the role conferred on financial sector under neoliberalism, the term "financialization" is also used in a broader sense in the literature. With the term casino capitalism as equivalent  to the term neoliberalism. There is a lot of sense in this equivalence. in the assertion that neoliberalism is a "financialized capitalism with elevated role of stock market and financial instruments."

In a way, neoliberalism as a class phenomenon puts financial oligarchy in leading role in the society. Several facts support this interpretation. The income of the upper income brackets of financial brass became dramatically higher than others, with the exception of a few owners  of companies in such lucrative spheres as technology, and oil and gas. They simply earn tremendously more money, literally millions.  The second factor is the rise of capital income (interest, dividends, and capital gains) under neoliberalism. Via 401K plans neoliberalism forces everybody play in stock market, whether they wish it or not. That is another side of neoliberalism that confirm aptness of the name "casino capitalism".

Class wise neoliberalism is characterized by the tripolar class configuration of the traditional owners  of capital (capitalists), upper management and upper strats of highly educated professionals (doctors programmers, accountants, etc), and "popular classes" (workers and lower middle class including small entrepreneurs). Capitalists now can be represented indirectly via mutual funds which became an important  feature of neoliberalism.  Which tremendous increase the power of upper management of corporation, who de facto in many cases are the "real" owners  of the company. Regular shareholders are just shmucks, to be exploited for fun and profit.

Excessive financialization of economy might be viewed as a sophisticated form of kleptocracy. Neoliberalism has a proven tendency to install kleptocratic regimes in third world countries and xUSSR. Yeltsin, Kuchma and Yanukovich are pretty telling examples of this tendency.  In Western countries it has slightly different form of outsize role of financial institutions in the economy. But basic mechanism of redistribution of wealth via parasitic rents up stays the same.

Giant financial institutions like Wells Fargo are very adepts in creating parasitic rents.  In some cases using criminal methods.

Financial oligarchy engaged in the gradual dismantling of social protection, enforsing the more demanding labor conditions, and the so-called "flexible" labor market, that is, the freedom to hire and fire and is dominated by cotractors and temporary workers.

Management also had to adapt to the new objectives. The difference between workers and managers is, however, that, in the stick-and-carrot metaphor, workers are on the stick side and upper management on the carrot side. Actually, management, in particular its upper layers, increased gradually its capability to set apart an increasing fraction of the surplus generated within enterprises to their benefit under the form of high wages in the broad sense used here.

Concerning management, besides the inducement to seek high profitability levels, one finds the subjection of private managers to a corporate governance aimed at the maximizing of stock value and the distribution of dividends. But there is also a policy component to these new rules, in which government officials and representatives are involved. Its main aspects are monetary policies intending to curb inflationary pressures instead of stimulating growth and employment, the privatization of social protection, the partial substitution of pension funds for pay-as-you-go public systems, and deregulation.

The two pillars of the international aspect of finacialization (as well neoliberalism in general) are free trade and the free international mobility of capital. The imposition of free trade was the outcome of a long and gradual process since World War II.

Neoliberalism imposed the “open model” around the world, with the collaboration of local elites. Capital controls were gradually dismantled, beginning with the United States during the 1970s. From the 1990s onward, the flows of direct investment abroad (DIA) increased dramatically.

Globalization placed the workers of advanced capitalist countries in a situation of competition with workers of the periphery. The imports of cheap consumption goods from countries where labor costs are particularly low decreased the nominal wages necessary to buy a given basket of goods within advanced countries. They, thus contributed to the restoration of profit rates, given the constancy (or decline) of the purchasing power of the bulk of wage earners.

The rising debt of government and households was a source of large flows of interest. Second, financial deregulation and innovation allowed for the explosion of the activity and income of the financial sector. The procedures tending to the obtainment of high returns were pushed to the extreme, as well as the payment of dividends and very high wages. These practices reached the point when storck market became quote detached from real economy. The collaboration of goverment officials (Fed put) and financial oligarchy was crucial in achiving this stage. The notions of Finance and financial hegemony, as used in this study, refer to the upper segments of the capitalist classes and financial institutions. As is well known, there is a strong hierarchy within capitalist classes from the owners of small or medium enterprises to the holders of large portfolios of shares of transnational corporations. There is a process of concentration of capital historically, but new firms are still created and the traditional hier- archy between larger and smaller business is still there in contemporary capitalism. Small business is often subject to the domination of both large Financial corporations became corporation controlling the whole economy. Many aspects of this preeminence are related to financial mechanisms (but not all, for example, the dependency and control resulting from outsourcing is out of scope) . Due to achived financial hegemony, the overall social dynamics, economics, and politics are dominated by the upper fraction of the capitalist classes. These large owners were the main actors in the establishment of neoliberalism, the neoliberal coup deata in major western countries.

Financial institutions were graduallyderegulated. The new framework emerged consisitng along with traditiona players stock exchanges; mutual, pension, and hedge funds; private equity firms and family offices; agencies and government-sponsored enterprises (GSEs); central banks; international institutions such as the IMF and the World Bank; a wealthmanagement companies and so on

They play a central role within neoliberalism, be they private enterprises, government institutions, such as central banks, or international institutions.

The power of individual capitalists would remain quite limited in the absence of financial institutions. States were the agents of deregulation and imposition of free trade and the free movements of capital interna nionally. But, besides states, financial institutions are the agents of neoliberalism. Central banks impose policies favorable to the stability of prices instead of full employment, intending to increase capital income. Huge masses of capital are handled by asset managers (including the capital of pension funds) imposing neoliberal norms to nonfinancial corporations. More restricted financial institutions concentrate the cutting edge of fi-

See Casino Capitalism for introductory article on financialization.

Also important is the book Profiting Without Producing:  How Finance Exploits Us All Costs by Costas Lapavitsas.  Here is one Amazon review

The concept of "casino capitalism" which was put forward by Susan Strange in her 1983 book is closely related to the concept of "financialization". so this is not new and not the first attempt to analyze this aspect of neoliberalism. But the author managed to write a very interesting and insightful book.

Again, the fact that financialization is at the core of neoliberalism (as the term "Casino Capitalism" implies) is well established, but the details of how this mechanism works and how finance institutions position themselves under neoliberalism as universal intermediates of almost any activities: education (via student loans), pensions (via 401k Plans), heath (via heath insurance), consumption (via credit cards), extracting rents from each of them is not well known or understood. This is the area in which this book provide some deep insights. Brief overview of the book from the author can be found in his lecture on YouTube (Profiting Without Producing How Finance Exploits Us All -- A lecture by Costas Lapavitsas ) and in his Guardian article "Finance's hold on our everyday life must be broken ".

Converting the whole economy into one giant casino where you can bet on almost anything, commodities prices, interests rate and even volatility of the market has profound social effects. And those effects are different on large enterprises and small enterprises and population at large.

The author argues that "Financialization represents a historic and deep-seated transformation of mature capitalism. Big businesses have become "financialized" as they have ample profits to finance investment, rely less on banks for loans and play financial games with available funds. Big banks, in turn, have become more distant from big businesses, turning to profits from trading in open financial markets and from lending to households. Households have become "financialized" too, as public provision in housing, education, health, pensions and other vital areas has been partly replaced by private provision, access to which is mediated by the financial system. Not surprisingly, households have accumulated a tremendous volume of financial assets and liabilities over the past four decades. "

When like in casino sheer luck begins to determine more and more of what happens to financial well-being of people due to their exposition to stock markets (hypertrophied under neoliberalism into some incredible monster due to 401K plans participation) , and skill, effort, initiative, determination and hard work count for less and less, then inevitably faith and confidence in the social and political system quickly fades.

That's what's happens with casino capitalism in the USA and that's why Trump was elected.

Paradoxically, as people more and more play in stock market (including with their 401K money) then respect the system less and less. In a way neoliberalism brings with is 'casino capitalism" mentality" its own demise. Frustration and anger become sharper and prone to be violently expressed when the realm of inequality becomes too large and when the system seems to operate so very unequally and biased toward the top 1% or, more correctly, the top 0.01%. That's what Pope Francis "LAUDATO SI" is about.

As author states "This book has a distinctive argument to make regarding financialization, including particularly the predatory and expropriating character of financial profit and its implications for social stratification. Light could thus be shed on the tendency to crisis that has characterized financialization since its inception."

Highly recommended.

The following is an extended quote extracted from the chapter 1 of this book Profiting Without Producing How Finance Exploits Us All Costs

1. Introduction: the rise and rise of finance

... ... ...

The crisis of the 2000s will prove fertile ground for economic historians for decades to come with regard to both its causes and consequences. However, the crisis has already had one definite outcome: it has finally lifted the curtain on the transformation of mature and developing capitalist economies during the last three decades, confirming the pivotal role of finance, both domestically and internationally. Financial capital permeates economic activity, and interacts with financial markets in ways capable of generating enormous profits but also precipitating global crises. In terms that will be used throughout this book, contemporary capitalism is ‘financialized’ and the turmoil commencing in 2007 is a crisis of ’financialization’.

The economic processes - and the social relations - characteristic of financialization represent a milestone in the development of capitalism. The catalyst of crisis in 2007 was speculative mortgage lending to the poorest workers in the US during the 2000s, the loans being subsequently traded in ‘securitized’ form in global financial markets. It is hard to exaggerate what an extraordinary fact this is. Under conditions of classical, nineteenth-century capitalism it would have been unthinkable for a global disruption of accumulation to materialize because of debts incurred by workers, including the poorest. But this is precisely what has happened under conditions of financialized capitalism, an economic and social system that is much more sophisticated than its nineteenth-century predecessor.

Financialization has emerged gradually during recent decades, and its content and implications are the focus of this book. To be sure, capitalist economies are continually restructured due to pressures of competition and to the underlying drive to maintain profitability. However, some transformations have a distinctive historical significance, and financialization is one of those. The chanee that has taken place in mature capitalist economies and societies since the late 1970s requires appropriate attention to be paid to finance. Consider the following features of financialization to substantiate this claim. Context and structural aspects of financialization

Mature capitalism has been historically marked by deep transformations of economy and society. Toward the end of the nineteenth century, for instance, there emerged new methods of production in heavy industry, accompanied by the rise of monopolistic, joint-stock enterprises. Ihe change coincided with a long depression, 1873-96, and led to a rebalancing of global productive power away from Britain and toward the US and Germany. Similarly, at the end of the Second World War, mass consumption emerged across several developed countries based on methods of mass production. A long boom occurred, lasting until 1973-74, during which production became increasingly dominated by transnational monopolistic enterprises, while finance operated under a system of controls domestically and internationally. For nearly three decades, the US was the dominant economic force in global production and trade.

The transformation represented by financialization is of a similar order of importance. Since the 1970s, there have been profound changes in production methods deriving from information and telecommunications technologies. Transnational enterprises have become dominant over global production and international trade. The centre of gravity of global productive capacity has partly shifted from mature economies in the West toward rising economies in the East, primarily China. Meanwhile, the institutional framework of capitalist activity has been altered as deregulation has prevailed in important markets, above all, for labour and finance. Throughout this period, accumulation has lacked dynamism in mature countries, inequality was exacerbated, and crises have become sharper and more frequent.

The most striking feature of the period, however, has been the rise of finance, the start of which can be usefully placed in the late 1970s. The financial sector had become progressively larger in the 1950s and 1960s, while still operating within the regulatory framework characteristic of the long post-war boom. However, even by the late 1970s, the domestic and international importance of finance remained modest. The three decades that followed have witnessed unprecedented expansion of financial activities, rapid growth of financial profits, permeation of economy and society by financial relations, and domination of economic policy by the concerns of the financial sector. At the same time, the productive sector in mature countries has exhibited mediocre growth performance, profit rates have remained below the levels of the 1950s and 1960s, unemployment has generally risen and become persistent, and real wages have shown no tendency to rise in a sustained manner. An asymmetry has emerged between the sphere of production and the ballooning sphere of circulation. The rise of finance has been predicated 011 a radical alteration of the monetary framework of capitalist accumulation, both internationally and domestically. International monetary conditions have been stamped by the collapse of the Bretton Woods Agreement in 1971-73. Bretton Woods had enforced the convertibility of the US dollar into gold at S35 to the ounce, thus fixing exchange rates during the long boom. Its collapse led to the gradual emergence of alternative international monetary arrangements based on the US dollar functioning as inconvertible quasi-world-money. The new arrangements have generated considerable instability of exchange and interest rates, thereby spurring the growth of international financial markets. Growth of international capital flows during the same period, partly in response to exchange and interest rate instability, has led to financialization in developing countries. Domestic monetary conditions, in contrast, have been marked by the steady accumulation of power by central banks as controllers of credit money backed by the state. Central banks have emerged as the dominant public institution of financialization, the defender of the interests of the financial sector.

The ascendancy of central banks is hardly surprising, since financialization in general would have been impossible without active and continuous intervention by the state. Financialization has depended on the state to deregulate the financial system with regard to prices, quantities, functions and cross-border flows of capital. Equally, financialization has depended on the state to regulate the adequacy of own capital, the management of risk, and the rules of competition among financial institutions. Even more decisively, financialization has depended on the state to intervene periodically to underwrite the solvency of banks, to provide extraordinary liquidity and to guarantee the deposits of the public with banks. Ultimately, however, the rise of finance has resulted from changes deep within capitalist accumulation. Three characteristic tendencies of accumulation in mature countries have shaped financialization as a structural transformation of contemporary capitalism. First, non-financial enterprises have become increasingly involved in financial processes on an independent basis, often undertaking financial market trans-actions on own account. The financialization of industrial and commercial enterprises has affected their profitability, internal organization, and investment outlook. Non-financial enterprises have become relatively more remote from banks and other financial institutions. Second, banks have focused on transacting in open financial markets with the aim of making profits through financial trading rather than through outright borrowing and lending. At the same time banks have turned toward individual and household income as a source of profit, often combining trading in open markets with lending to households, or collecting household savings. Third, individuals and households have come increasingly to rely on the formal financial system to facilitate access to vital goods and services, including housing, education, health, and transport. The savings of households and individuals have also been increasingly mobilized by the formal financial system.

The transformation of the conduct of non-financial enterprises, banks and households constitutes the basis of financialization. Examining these relations theoretically and empirically, and thus establishing the deeper content of financialized capitalism, is the main task of this book. Hie concepts and methods deployed for the purpose derive from Marxist political economy. To summarize, the capitalist economy is treated as a structured whole that comprises different spheres of activity - namely production, circulation, and distribution - among which production is dominant. Both production and circulation possess their own internal logic, even though the two spheres are inextricably linked. Production creates value; its motive is profit (surplus value) deriving from the exploitation of labour; its aim is the accumulation of capital. Circulation does not create value; it results in profits, but these derive mostly - though not exclusively - from redistributing surplus value. Finance is a part of circulation, but also possesses mechanisms standing aside commodity trading and its corresponding flows of money. The traded object of finance is loanable money capital, the cornerstone of capitalist credit. Production, circulation and distribution give rise to class relations, pivoting on the ownership of the means of production, but also determined by the appropriation of profits.

Financialization reflects a growing asymmetry between production and circulation - particularly the financial component of the latter - during the last three decades. The asymmetry has arisen as the financial conduct of non-financial enterprises, banks and households has gradually changed, thus fostering a range of aggregate phenomena of financialization. A telling aspect of the transformation has been the rise of profits accruing through financial transactions, including new forms of profit that could even be unrelated to surplus value. This process is summed up as ‘financial expropriation’ in subsequent chapters. New social layers have emerged as financial profit has burgeoned.

Financial markets and banks

It might seem paradoxical at first sight to associate financialization with the conduct of banks, given that the rise of finance has had far more extravagant aspects. Financializa- tion, for instance, appears to relate more to the global spread of financial markets, the proliferation of traded financial instruments, and the emergence of novel, market-re- lated financial transactions, rather than to the behaviour of banks. Compared to the expanding and rapidly changing world of financial markets, banks seem old-fashioned and even staid. And yet, as is shown in the rest of the book, banks have been a decisive factor in the financialization of capitalism. Banks remain the cornerstone of contempo- rary finance and several of the most visible market-related features of financialization emanate from banks. It is not accidental that the crisis of financialization in the late 2000s has revolved around banks rather than other financial institutions.

To establish the importance of banks in the course ot financialization consider some general features of the derivatives markets, arguably the most prominent finan- cial markets of recent years.1 Simply put, a derivative is a contract that establishes a claim on an underlying asset - or on the cash value of that asset - which must be executed at some definite point in the future. The underlying asset could be a com- modity, such as wheat; or another financial asset, such as a bond; or a financial price, for example the value of a currency; or even an entirely non-economic entity like the weather. The units of the underlying asset stated on the contract and multiplied by the spot price define the notional value of the derivative. Historically, derivatives have been associated with agricultural production: a forward or a futures contract would specify the quantity and price of an agricultural commodity that would be delivered at a definite point in the future. A forward contract would be a private agreement between two parties agreeing to trade some specific output at a certain price and time (e.g., the wheat produced by one of the contracting parties); a futures contract would also be a private agreement between two parties but the commodity traded would be generic (e.g., any wheat of a certain type and quality).

Capitalist farmers could use derivatives to hedge against unforeseen fluctuations in the price of output. In addition to hedging, derivatives could also be used to speculate on the future movement of prices, or to arbitrage among different markets exhibiting unwarranted price divergences in the underlying asset. Thus, the standard way of intro- ducing derivatives in textbooks is as instruments that make for hedging, speculation or arbitrage among market traders.* Derivatives markets are typically perceived as spontaneously emerging entities which supplement the services offered by the markets in underlying assets, and hence improve the efficiency of the capitalist economy. Even with this simple definition of derivatives, a key distinction is apparent - one between a contract that meets the specific conditions of two counterparties (a for- ward) and a contract that is more generic and could be traded freely in open mar- kets (a future). The former is similar to an over-the-counter derivative, the latter to an exchange-traded derivative. They represent two different ways of undertaking the trading process - the forward depends on the specific decisions of the trading parties, the future depends on the impersonal and ‘third’ institution of the ‘exchange’ which organizes the trading. The exchange’ standardizes futures contracts, steps between buyers and sellers to clear purchases and sales by the counterparties and, critically, demands a daily ‘margin’ in cash as protection from failure to meet contracted obli- gations at maturity.

The most important development in the evolution of derivatives trading in recent years has been the move to cash settlement of the contract, thus freeing the counter- parties from the need to deliver the underlying asset.' On this basis, derivatives have become essentially a punt on the future direction of the price of the underlying asset that is subsequently settled in cash. Consequently, the trading of derivatives has come to include underlying assets that could never be delivered, such as a stock market index. In effect, the derivative has become what could be called a contract-for-differ- ences - an agreement between buyer and seller to exchange the difference between the current value of a share, currency, commodity, or index and its value at maturity of the contract. If the difference is positive, the seller pays the buyer; if it is negative, the buyer is the one who loses money. Profit, in this context, depends on the difference between a fixed financial parameter and its uncertain value in the future.4

Spurred by cash settlement, the growth ol derivatives markets in the years of hnan- cialization has been breathtaking: from practical irrelevance in the 1980s, their notion- al sum in 2011 was in the vicinity of 700 trillion US dollars for over-the-counter and probably a similar sum for exchange-traded derivatives.' Yet, at the core of the enor- mously expanded derivatives markets lie a few international banks, which have also been one of the driving forces of financialization. Banks are the pillar of contemporary of the 1980s to the end of the 2000s the notional outstanding appears to have doubled every two or three years for most of the period.

Consider now the role of banks in these enormous markets. The importance of banks is most apparent in the over-the-counter market, which naturally lacks the organizing role played by the exchange’ in the exchange-traded market. Banks func- tion as market-makers, that is, as agents that stand ready to buy and sell in the over- the-counter market; they are the dealers that are integral to market functioning. Banks also provide the necessary market infrastructure through vital market institutions such as the International Swaps and Derivatives Association (ISDA). Table 2 classifies over-the-counter transactions in terms of the counterparties, which are split into dealer banks, other financial institutions, and non-financial customers.8

... ... ...

Approximately US sjotn is not allocated either because it refers to commodity derivatives, or because it represents adjustments in BIS statistics. In practice, over-the-counter derivatives function as banking instruments. Almost a third of the trading in over-the-counter derivatives in 2011 took place in dealer-to-deal- er transactions, while all transactions had at least one dealer bank as a counterparty. There were, perhaps, seventy sizeable dealer banks in about twenty countries transact- ing with many thousands of end users of derivatives; indeed, concentration appears to have been even greater than that, and perhaps fifteen to twenty dealers controlled the overwhelming bulk of over-the-counter trading across the world." These dealers were

large global banks that were also fundamental to financialization. The same banks were among the largest participants in the exchange-traded markets, though data is hard to obtain for the latter. There is no doubt, however, that the large dealer banks were heavily involved in the management of the ‘exchanges’, including determination of risk management procedures and ‘margin’ levels.

Given the dominant presence of banks in the derivatives markets, it is hardly surprising that banks have encouraged the broadening of derivatives trading to include underlying assets with which they are most familiar - financial securities. Table 2 shows that less that ю percent of over-the-counter transactions actually involved non-financial enterprises: the great bulk comprised transactions that took place among financial institutions, and thus referred mostly to financial derivatives. In fact, growth in the derivatives markets has generally been dominated by inter- est-rate and foreign-exchange derivatives; since the early 2000s the strongest growth has been in credit default swaps (CDS), which are briefly discussed in Part III of this book.10

The price of financial derivatives depends, among other factors, on the rate of interest, and the rate that is typically used to value most financial derivatives is the London Interbank Offered Rate (LIBOR). The LIBOR is determined by a committee comprising several of the banks that dominate the derivatives markets; its determination involves the simple averaging of interest rates (excluding outliers) submitted by LIBOR committee banks daily. These are rates at which the LIBOR banks think that they can borrow from each other, although no LIBOR bank is obliged to undertake borrowing at the submitted rate. The LIBOR acts as a rate of interest that determines the value of derivatives, but it is not a rate of interest in the normal sense since no actual transactions need to take place at the rates declared by the committee banks.

In short, the banks that dominate derivatives trading are also the banks that set the interest rate at which derivatives are traded and valued, although the banks are not obliged to trade at the declared rate. No wonder, then, that one of the most egregious scandals of financialization appears to be the manipulation of the LIBOR by large deal- er banks, a matter which has been under police investigation since 2010. The problem is not a few ‘rotten apples’ amidst the LIBOR committee, criminally colluding with each other and with brokers to influence the LIBOR. Rather, a deeply flawed structure has allowed dealer banks to dominate derivatives markets while effectively manipulating the terms of derivatives trading."

Banks are at the heart of the derivatives markets which have been such a prominent feature of financialization. Derivatives markets rely on banks, in particular on the price-making skills and general organizational capabilities of banks. Indeed, banks are so dominant in derivatives markets that they are even capable of manipulating the key rate on the basis of which derivatives prices are formed. The vast growth of derivatives markets reflects in part the turn of banks toward trading in open financial markets, which is one of the fundamental tendencies of financialization. In sum, at the root of financialization lie the vast banks of mature and other economies. The theoretical and empirical analysis of financialization in the rest of this book, therefore, focuses on banks as well as non-financial enterprises and households.

Highlights from Killing the Host- How Financial Parasites and Debt Bondage Destroy the Global Economy by Michael Hudson - Rapid Shift

May 15, 2017

The “Forgash Plan,” named for Florida Senator Morris Forgash, proposed a World Bank for Economic Acceleration with an alternative policy to the existing World Bank – lending in domestic currency for land reform and greater self-sufficiency in food instead of plantation export crops. My first evening’s visit with him transfixed me with two ideas that have become my life’s work. First was his almost poetic description of the flow of funds through the economic system. He explained why most financial crises historically occurred in the autumn when the crops were moved. 39

Finance, natural resources and industry were parts of an interconnected system much like astronomy – and to me, an aesthetic thing of beauty. But unlike astronomical cycles, the mathematics of compound interest leads economies inevitably into a debt crash, because the financial system expands faster than the underlying economy, overburdening it with debt so that crises grow increasingly severe. Economies are torn apart by breaks in the chain of payments. 44

For the next twenty years, Terence and I spoke about an hour a day on current economic events. He had translated A History of Economic Doctrines: From the Physiocrats to Adam Smith, the first English-language version of Marx’s Theories of Surplus Value – which itself was the first real history of economic thought. 49

they are not taught in any university departments: the dynamics of debt, and how the pattern of bank lending inflates land prices, or national income accounting and the rising share absorbed by rent extraction in the Finance, Insurance and Real Estate (FIRE) sector. 55

the more prices rise, the more banks are willing to lend – as long as more people keep joining what looks like a perpetual motion wealth-creating machine. The process works only as long as incomes are rising. Few people notice that most of their rising income is being paid for housing. They feel that they are saving – and getting richer by paying for an investment that will grow. At least, that is what worked for sixty years after World War II ended in 1945. But bubbles always burst, because they are financed with debt, which expands like a chain letter for the economy as a whole. Mortgage debt service absorbs more and more of the rental value of real estate, and of homeowners’ income as new buyers take on more debt to buy homes that are rising in price. Tracking the upsweep of savings and the debt-financed rise in housing prices turned out to be the best way to understand how most “paper wealth” has been created 66

despite the fact that the economy’s largest asset is real estate – and is both the main asset and largest debt for most families – the analysis of land rent and property valuation did not even appear in the courses that I was taught in the evenings working toward my economics PhD. 75

export earnings and other foreign exchange receipts, which served as were a measure of how much revenue might be paid as debt service on new borrowings from U.S. banks. 80

international banks view the hard-currency earnings of foreign countries as potential revenue to be capitalized into loans and paid as interest. The implicit aim of bank marketing departments – and of creditors in general – is to attach the entire economic surplus for payment of debt service. 82

foreign debts mounted up at compound interest, an exponential growth that laid the ground for the crash that occurred in 1982 when Mexico announced that it couldn’t pay. In this respect, lending to Third World governments anticipated the real estate bubble that would crash in 2008. Except that Third World debts were written down in the 1980s (via Brady bonds), unlike mortgage debts. 89

using “flags of convenience” in Liberia and Panama enabled them to avoid paying income taxes either in the producing or consuming countries by giving the illusion that no profits were being made. The key was “transfer pricing.” Shipping affiliates in these tax-avoidance centers bought crude oil at low prices from Near Eastern or Venezuelan branches where oil was produced. These shipping and banking centers – which had no tax on profits – then sold this oil at marked-up prices to refineries in Europe or elsewhere. The transfer prices were set high enough so as not to leave any profit to be declared. 94

My charts revealed that the U.S. payments deficit was entirely military in character throughout the 1960s. The private sector – foreign trade and investment – was exactly in balance, year after year, and “foreign aid” actually produced a dollar surplus (and was required to do so under U.S. law). 110

I quickly discovered that of all the subdisciplines of economics, international trade theory was the silliest. Gunboats and military spending make no appearance in this theorizing, nor do the all-important “errors and omissions,” capital flight, smuggling, or fictitious transfer pricing for tax avoidance. These elisions are needed to steer trade theory toward the perverse and destructive conclusion that any country can pay any amount of debt, simply by lowering wages enough to pay creditors. All that seems to be needed is sufficient devaluation (what mainly is devalued is the cost of local labor), or lowering wages by labor market “reforms” and austerity programs. This theory has been proved false everywhere it has been applied, but it remains the essence of IMF orthodoxy. 116

Academic monetary theory is even worse. Milton Friedman’s “Chicago School” relates the money supply only to commodity prices and wages, not to asset prices for real estate, stocks and bonds. It pretends that money and credit are lent to business for investment in capital goods and new hiring, not to buy real estate, stocks and bonds. There is little attempt to take into account the debt service that must be paid on this credit, diverting spending away from consumer goods and tangible capital goods. So I found academic theory to be the reverse of how the world actually works. 122

early economists recognized the problems of governments (or others) relying on creditors for policy advice. As Adam Smith explained, a creditor of the public, considered merely as such, has no interest in the good condition of any particular portion of land, or in the good management of any particular portion of capital stock. … He has no inspection of it. He can have no care about it. Its ruin may in some cases be unknown to him, and cannot directly affect him. The bondholders’ interest is solely to extricate as much as they can as quickly as possible with little concern for the social devastation they cause. Yet they have managed to sell the idea that sovereign nations as well as individuals have a moral obligation to pay debts, even to act on behalf of creditors instead of their domestic populations. 129

My focus here too was to warn that Third World economies could not pay their foreign debts. Most of these loans were taken on to subsidize trade dependency, not restructure economies to enable them to pay. 158

IMF “structural adjustment” austerity programs – of the type now being imposed across the Eurozone – make the debt situation worse, by raising interest rates and taxes on labor, cutting pensions and social welfare spending, and selling off the public infrastructure (especially banking, water and mineral rights, communications and transportation) to rent-seeking monopolists. This kind of “adjustment” puts the class war back in business, on an international scale. 160

Although Wall Street bankers usually see the handwriting on the wall, their lobbyists insist that all debts can be paid, so that they can blame countries for not “tightening their belts.” Banks have a self-interest in denying the obvious problems of paying “capital transfers” in hard currency. My experience with this kind of bank-sponsored junk economics infecting public agencies inspired me to start compiling a history of how societies through the ages have handled their debt problems. It took me about a year to sketch the history of debt crises as far back as classical Greece and Rome, as well as the Biblical background of the Jubilee Year. But then I began to unearth a prehistory of debt practices going back to Sumer in the third millennium BC. 165

how interest-bearing debt first came into being – in the temples and palaces, not among individuals bartering. Most debts were owed to these large public institutions or their collectors, which is why rulers were able to cancel debts so frequently: They were cancelling debts owed to themselves, to prevent disruption of their economies. 172

shares were sold in Buenos Aires and San Paolo, mainly to the elites who held the high-yielding dollar bonds of their countries in offshore accounts. This showed us that the financial managers would indeed keep paying their governments’ foreign debts, as long as they were paying themselves as “Yankee bondholders” offshore. The Scudder fund achieved the world’s second highest-ranking rate of return in 1990. 184

most of the public is interested in understanding a great crash only after it occurs, not during the run-up when good returns are to be made. 190

the Near Eastern tradition of Biblical debt cancellations was firmly grounded. Two decades ago economic historians and even many Biblical scholars thought that the Jubilee Year was merely a literary creation, a utopian escape from practical reality. I encountered a wall of cognitive dissonance at the thought that the practice was attested to in increasingly detailed Clean Slate proclamations. Each region had its own word for such proclamations: Sumerian amargi, meaning a return to the “mother” (ama) condition, a world in balance; Babylonian misharum, as well as andurarum, from which Judea borrowed as deror, and Hurrian shudutu. Egypt’s Rosetta Stone refers to this tradition of amnesty for debts and for liberating exiles and prisoners. Instead of a sanctity of debt, what was sacred was the regular cancellation of agrarian debts and freeing of bondservants in order to preserve social balance. Such amnesties were not destabilizing, but were essential to preserving social and economic stability. 205

an economics curriculum in Modern Monetary Theory (MMT) at UMKC. For the past twenty years our aim has been to show the steps needed to avoid the unemployment and vast transfer of property from debtors to creditors that is tearing economies apart today. I presented my basic financial model in Kansas City in 2004, with a chart that I repeated in my May 2006 cover story for Harper’s. 225

The disabling force of debt was recognized more clearly in the 18th and 19th centuries (not to mention four thousand years ago in the Bronze Age). This has led pro-creditor economists to exclude the history of economic thought from the curriculum. Mainstream economics has become censorially pro-creditor, pro-austerity (that is, anti-labor) and anti-government (except for insisting on the need for taxpayer bailouts of the largest banks and savers). Yet it has captured Congressional policy, universities and the mass media to broadcast a false map of how economies work. 233

Spouting ostensible free market ideology, the pro-creditor mainstream rejects what the classical economic reformers actually wrote. One is left to choose between central planning by a public bureaucracy, or even more centralized planning by Wall Street’s financial bureaucracy. The middle ground of a mixed public/private economy has been all but forgotten – denounced as “socialism.” Yet every successful economy in history has been a mixed economy. 240

As for financial dynamics in the business sector, today’s “activist shareholders” and corporate raiders are financializing industry in ways that undercut rather than promote tangible capital formation and employment. Credit is increasingly predatory rather than enabling personal, corporate and government debtors to earn the money to pay. This pattern of debt is what classical economists defined as unproductive, favoring unearned income (economic rent) and speculative gains over profits earned by employing labor to produce goods and services. I therefore start by reviewing how the Enlightenment and original free market economists spent two centuries trying to prevent precisely the kind of rentier dominance that is stifling today’s economies and rolling back democracies to create financial oligarchies. 247

what is at work is an Orwellian strategy of rhetorical deception to represent finance and other rentier sectors as being part of the economy, not external to it. This is precisely the strategy that parasites in nature use to deceive their hosts that they are not free riders but part of the host’s own body, deserving careful protection. 254

leeches inject an anti-coagulant enzyme that helps prevent inflammation and thus steers the body to recovery. 270

countries under public sponsorship. Across the political spectrum, from “state socialism” under Bismarck to Marxist theorists, bankers were expected to become the economy’s central planners, by providing credit for the most profitable and presumably socially beneficial uses. A three-way symbiotic relationship emerged to create a “mixed economy” of government, high finance and industry. For thousands of years, from ancient Mesopotamia through classical Greece and Rome, temples and palaces were the major creditors, coining and providing money, creating basic infrastructure and receiving user fees as well as taxes. The Templars and Hospitallers led the revival of banking in medieval Europe, whose Renaissance and Progressive Era economies integrated public investment productively with private financing. To make this symbiosis successful and free immune to special privilege and corruption, 19th-century economists sought to free parliaments from control by the propertied classes that dominated their upper houses. 284

Parliamentary reform extending the vote to all citizens was expected to elect governments that would act in society’s long-term interest. Public authorities would take the lead in major capital investments in roads, ports and other transportation, communications, power production and other basic utilities, including banking, without private rent-extractors intruding into the process. The alternative was for infrastructure to be owned in a pattern much like absentee landlordship, enabling rent-extracting owners to set up tollbooths to charge society whatever the market would bear. Such privatization is contrary to what classical economists meant by a free market. They envisioned a market free from rent paid to a hereditary landlord class, and free from interest and monopoly rent paid to private owners. The ideal system was a morally fair market in which people would be rewarded for their labor and enterprise, but would not receive income without making a positive contribution to production and related social needs. 294

Adam Smith, David Ricardo, John Stuart Mill and their contemporaries warned that rent extraction threatened to siphon off income and bid up prices above the necessary cost of production. Their major aim was to prevent landlords from “reaping where they have not sown,” as Smith put it. Toward this end their labor theory of value (discussed in Chapter 3) aimed at deterring landlords, natural resource owners and monopolists from charging prices above cost-value. Opposing governments controlled by rentiers. 303

Recognizing how most great fortunes had been built up in predatory ways, through usury, war lending and political insider dealings to grab the Commons and carve out burdensome monopoly privileges led to a popular view of financial magnates, landlords and hereditary ruling elite as parasitic by the 19th century, epitomized by the French anarchist Proudhon’s slogan “Property as theft.” 307

Instead of creating a mutually beneficial symbiosis with the economy of production and consumption, today’s financial parasitism siphons off income needed to invest and grow. Bankers and bondholders desiccate the host economy by extracting revenue to pay interest and dividends. Repaying a loan – amortizing or “killing” it – shrinks the host. Like the word amortization, mortgage (“dead hand” of past claims for payment) contains the root mort, “death.” A financialized economy becomes a mortuary when the host economy becomes a meal for the financial free luncher that takes interest, fees and other charges without contributing to production. 311

The answer depends on whether the host can remain self-steering in the face of a parasitic attack. Taking control of the host’s brain/government Modern biology provides the basis for a more elaborate social analogy to financial strategy, by describing the sophisticated strategy that parasites use to control their hosts by disabling their normal defense mechanisms. To be accepted, the parasite must convince the host that no attack is underway. To siphon off a free lunch without triggering resistance, the parasite needs to take control of the host’s brain, at first to dull its awareness that an invader has attached itself, and then to make the host believe that the free rider is helping rather than depleting it and is temperate in its demands, only asking for the necessary expenses of providing its services. In that spirit bankers depict their interest charges as a necessary and benevolent part of the economy, providing credit to facilitate production and thus deserving to share in the surplus it helps create. 319

distinguish financial claims on wealth from real wealth creation. Their interest charges and fees typically eat into the circular flow of payments and income between producers and consumers. To deter protective regulations to limit this incursion, high finance popularizes promotes a “value-free” view that no sector exploits any other part. Whatever creditors and their financial managers take is deemed to be fair value for the services they provide 329

David Ricardo aimed his rent theory at Britain’s landlords while remaining silent about the financial rentiers – the class whose activities John Maynard Keynes playfully suggested should be euthanized. Landed proprietors, financiers and monopolists were singled out as the most visible free lunchers – giving them the strongest motive to deny the concept in principle. Familiar parasites in today’s economy include Wall Street’s investment bankers and hedge fund managers who raid companies and empty out their pension reserves; also, landlords who rack-rent their tenants (threatening eviction if unfair and extortionate demands are not met), and monopolists who gouge consumers with prices not warranted by the actual costs of production. Commercial banks demand that government treasuries or central banks cover their losses, claiming that their credit-steering activity is necessary to allocate resources and avoid economic dissolution. So here again we find the basic rentier demand: “Your money, or your life.” A rentier economy is one in which individuals and entire sectors levy charges for the property and privileges they have obtained, or more often that their ancestors have bequeathed. 352

The great reversal of classical Industrial Era reform ideology to regulate or tax away rentier income occurred after World War I. Bankers came to see their major market to be real estate, mineral rights, and monopolies. Lending mainly to finance the purchase and sale of rent-extracting opportunities in these sectors, banks lent against what buyers of land, mines and monopolies could squeeze out of their rent-extracting “tollbooth” opportunities.  The effect was to pry away the land rent and natural resource rent that classical economists expected to serve as the natural tax base. In industry, Wall Street became the “mother of trusts,” creating mergers into monopolies as vehicles to extract monopoly rent. Precisely because a “free lunch” (rent) was free – if governments did not tax it away – speculators and other buyers sought to borrow to buy such rent-extracting privileges. 382

Biological nature provides a helpful analogy for the banking sector’s ideological ploys. A parasite’s toolkit includes behavior-modifying enzymes to make the host protect and nurture it. Financial intruders into a host economy use Junk Economics to rationalize rentier parasitism as if it makes a productive contribution, as if the tumor they create is part of the host’s own body, not an overgrowth living off the economy. A harmony of interests is depicted between finance and industry, Wall Street and Main Street, and even between creditors and debtors, monopolists and their customers. Nowhere in the National Income and Product Accounts is there a category for unearned income or exploitation. 409

about half of what the media report as “industrial profits” are FIRE-sector rents, that is, finance, insurance and real estate rents – and most of the remaining “profits” are monopoly rents for patents (headed by pharmaceuticals and information technology) and other legal privileges. Rents are conflated with profit. This is the terminology of financial intruders and rentiers seeking to erase the language and concepts of Adam Smith, Ricardo and their contemporaries depicting rents as parasitic. 416

The financial sector’s strategy to dominate labor, industry and government involves disabling the economy’s “brain” – the government – and behind it, democratic reforms to regulate banks and bondholders. Financial lobbyists mount attacks on public planning, accusing public investment and taxes of being a deadweight burden, not as steering economies to maximize prosperity, competitiveness, rising productivity and living standards. Banks become the economy’s central planners, and their plan is for industry and labor to serve finance, not the other way around. 420

today’s high (and low) finance rarely leaves the economy enough tangible capital to reproduce, much less to feed the insatiable exponential dynamics of compound interest and predatory asset stripping. In nature, parasites tend kill hosts that are dying, using their substance as food for the intruder’s own progeny. The economic analogy takes hold when financial managers use depreciation allowances for stock buybacks or to pay out as dividends instead of replenishing and updating their plant and equipment. Tangible capital investment, research and development and employment are cut back to provide purely financial returns. When creditors demand austerity programs to squeeze out “what is owed,” enabling their loans and investments to keep growing exponentially, they starve the industrial economy and create a demographic, economic, political and social crisis. This is what 443

As wages fall, suicide rates rise, life spans shorten, and marriage and birth rates plunge. Failure to reinvest enough earnings in new means of production shrinks the economy, prompting capital flight to less austerity-ravaged economies. 452

Today’s banks don’t finance tangible investment in factories, new means of production or research and development – the “productive lending” that is supposed to provide borrowers with the means to pay off their debt. Banks largely lend against collateral already in place, mainly real estate (80 percent of bank loans), stocks and bonds. The effect is to transfer ownership of these assets, not produce more. 3. Borrowers use these loans to bid up prices for the assets they buy on credit: homes and office buildings, entire companies (by debt-leveraged buyouts), and infrastructure in the public domain on which to install tollbooths and charge access rents. Lending against such assets bids up their prices – Asset-Price Inflation. 4. Paying off these loans with interest leaves less wage or profit income available to spend on consumer goods or capital goods. This Debt Deflation is the inevitable successor to Asset-Price Inflation. Debt service and rent charges shrink markets, consumer spending, employment and wages. 505

Austerity makes it harder to pay debts, by shrinking markets and causing unemployment. That is why John Maynard Keynes urged “euthanasia of the rentier” if industrial capitalism is to thrive. He hoped to shift the focus of fortune-seeking away from banking, and implicitly from its major loan markets in absentee landlordship and privatization of rent-extracting monopolies. 6. Mainstream policy pretends that economies are able to pay their debts without reducing their living standards or losing property. But debts grow exponentially faster than the economy’s ability to pay as interest accrues and is recycled (while new bank credit is created electronically). The “magic of compound interest” doubles and redoubles savings and debt balances by purely mathematical laws that are independent of the economy’s ability to produce and pay. Economies become more debt-leveraged as claims for payment are concentrated in the hands of the One Percent.514

Debts that can’t be paid, won’t be. The question is: how won’t they be paid? There are two ways not to pay. The most drastic and disruptive way (euphemized as “business as usual”) is for individuals, companies or governments to sell off or forfeit their assets. The second way to resolve matters is to write down debts to a level that can be paid. Bankers and bondholders prefer the former option, and insist that all debts can be paid, given the “will to do so,” that is, the will to transfer property into their hands. This is the solution that mainstream monetarist economists, government policy and the mass media popularize as basic morality. But it destroys Economy #1 to enrich the 1 percent who dominate Economy #2.522

Banks and bondholders oppose debt write-downs to bring debt in line with earnings and historical asset valuations. Creditor demands for payment run the economy in the interest of the financialized Economy #2 instead of protecting the indebted production-and-consumption Economy #1. The effect is to drive both economies bankrupt. 10. The financial sector (the One Percent) backs oligarchies. Eurozone creditors recently imposed “technocrats” to govern debt-strapped Greece and Italy, and blocked democratic referendums on whether to accept the bailouts and their associated austerity terms. This policy dates from the 1960s and ’70s when the IMF and U.S. Government began backing creditor-friendly Third World oligarchies and military dictatorships. 11. Every economy is planned. The question is, who will do the planning: banks or elected governments? Will planning and structuring the economy serve short-term financial interests (making asset-price gains and extracting rent) or will it promote the long-term upgrading of industry and living standards?536

That is why consumer spending has not risen since 2008. Even when income rises, many families find their paychecks eaten up by debt service. That is what debt deflation means. Income paid to creditors is not available for spending on goods and services. 566

Debt deflation leads to defaults and foreclosures, while bondholders and banks get bailed out at government expense. In the workplace, many employees are so deep in debt that they are afraid to complain about working conditions out of fear losing their jobs and thus missing a mortgage payment or utility bill, which would bump their credit-card interest rates up to the penalty range of circa 29 percent. This has been called the debt-traumatized worker effect, and it is a major cause of wage stagnation. 572

Finance and land rent: How bankers replaced the landed aristocracy The Norman Conquest of Britain in 1066 and similar conquests of the land in other European realms led to a constant fiscal struggle over who should receive the land’s rent: the king as his tax base, or the nobility to whom the land had been parceled out for them to manage, nominally on behalf of the palace. Increasingly, the hereditary landlord class privatized this rent, obliging kings to tax labor and industry. This rent grab set the stage for the great fight of classical free market economists, from the French Physiocrats to Adam Smith, John Stuart Mill, Henry George and their contemporaries to tax land and natural resource rents as the fiscal base. Their aim was to replace the vested aristocracy of rent recipients with public taxation or ownership of what was a gift of nature 576

The main aim of political economy for the past three centuries has been to recover the flow of privatized land and natural resource rent that medieval kings had lost. The political dimension of this effort involved democratic constitutional reform to overpower the rent-levying class. By the late 19th century political pressure was rising to tax landowners in Britain, the United States and other countries. In Britain a constitutional crisis over land taxation in 1910 ended the landed aristocracy’s power in the House of Lords to block House of Commons tax policy. Sun Yat-Sen’s revolution in China in 1911 to overthrow the Qing dynasty was fueled by demands for land taxation as the fiscal base. And when the United States instituted the income tax in 1913, it fell mainly on rentier income from real estate, natural resources and financial gains. Similar democratic tax reform was spreading throughout the world. 588

most of the rental income hitherto paid to a landlord class is now paid to banks as mortgage interest, not to the government as classical doctrine had urged. Today’s financial sector thus has taken over the role that the landed aristocracy played in feudal Europe. But although rent no longer supports a landed aristocracy, it does not serve as the tax base either. It is paid to the banks as mortgage interest. Homebuyers, commercial investors and property speculators are obliged to pay the rental value to bankers as the price of acquiring it. 604

The buyer who takes out the biggest mortgage to pay the bank the most gets the asset. So real estate ends up being worth whatever banks will lend against it. 608

Finance as the mother of monopolies The other form of rent that Adam Smith and other classical economists sought to minimize was that of natural monopolies such as the East India Companies of Britain, France and Holland, and kindred special trade privileges. This was what free trade basically meant. Most European countries kept basic infrastructure in the public domain – roads and railroads, communications, water, education, health care and pensions so as to minimize the economy’s cost of living and doing business by providing basic services at cost, at subsidized rates or even freely. 609

The financial sector’s aim is not to minimize the cost of roads, electric power, transportation, water or education, but to maximize what can be charged as monopoly rent. Since 1980 the privatization of this infrastructure has been greatly accelerated. Having financialized oil and gas, mining, power utilities, financial centers are now seeking to de-socialize society’s most important infrastructure, largely to provide public revenue to cut taxes on finance, insurance and real estate (FIRE). 615

The reality is that debt service (interest and dividends), exorbitant management fees, stock options, underwriting fees, mergers and acquisitions add to the cost of doing business. 624

Property speculators and buyers of price-gouging opportunities for monopoly rent on credit have a similar operating philosophy: “rent is for paying interest.” The steeper the rate of monopoly rent, the more privatizers will pay bankers and bond investors for ownership rights. The financial sector ends up as the main recipient of monopoly rents and land rents, receiving what the landlord class used to obtain. 625

banks rarely fund new means of production. They prefer to lend for mergers, management buyouts or raids of companies already in place. As for bondholders, they found a new market in the 1980s wave of high-interest “junk-bond” takeovers. Lower interest rates make it easier to borrow and take over companies – and then break them up, bleed them via management fees, and scale back pensions by threatening bankruptcy. 639

Bank lending focused on trade financing, not capital investment. 643

industry has become financialized, “activist shareholders” treat corporate industry as a vehicle to produce financial gains. Managers are paid according to how rapidly they can increase their companies’ stock price, which is done most easily by debt leveraging. This has turned the stock market into an arena for asset stripping, using corporate profits for share buybacks and higher dividend payouts instead of for long-term investment (Chapter 8). 645

Financializing industry thus has changed the character of class warfare from what socialists and labor leaders envisioned in the late 19th century and early 20th century. Then, the great struggle was between employers and labor over wages and benefits. Today’s finance is cannibalizing industrial capital, imposing austerity and shrinking employment while its drive to privatize monopolies increases the cost of living. 649

budget deficits have increased the power of financial lobbyists who have pushed politicians to reverse progressive income taxation and cut taxes on capital gains. Instead of central banks monetizing deficit spending to help the economy recover, they create money mainly to lend to banks for the purpose of increasing the economy’s debt overhead. Since 2008 the U.S. Federal Reserve has monetized $4 trillion in Quantitative Easing credit to banks. The aim is to re-inflate asset prices for the real estate, bonds and stocks held as collateral by financial institutions (and the One Percent), not to help the “real” economy recover. 655

Financial sector advocates have sought to control democracies by shifting tax policy and bank regulation out of the hands of elected representatives to nominees from world’s financial centers. The aim of this planning is not for the classical progressive objectives of mobilizing savings to increase productivity and raise populations out of poverty. The objective of finance capitalism is not capital formation, but acquisition of rent-yielding privileges for real estate, natural resources and monopolies. These are precisely the forms of revenue that centuries of classical economists sought to tax away or minimize. By allying itself with the rentier sectors and lobbying on their behalf – so as to extract their rent as interest – banking and high finance have become part of the economic overhead from which classical economists sought to free society. 667

The result of moving into a symbiosis with real estate, mining, oil, other natural resources and monopolies has been to financialize these sectors. As this has occurred, bank lobbyists have urged that land be un-taxed so as to leave more rent (and other natural resource rent) “free” to be paid as interest – while forcing governments to tax labor and industry instead. To promote this tax shift and debt leveraging, financial lobbyists have created a smokescreen of deception that depicts financialization as helping economies grow. They accuse central bank monetizing of budget deficits as being inherently inflationary – despite no evidence of this, and despite the vast inflation of real estate prices and stock prices by predatory bank credit. 674

Money creation is now monopolized by banks, which use this power to finance the transfer of property – with the source of the quickest and largest fortunes being infrastructure and natural resources pried out of the public domain of debtor countries by a combination of political insider dealing and debt leverage – a merger of kleptocracy with the world’s financial centers. 680

The financial strategy is capped by creating international financial institutions (the International Monetary Fund, European Central Bank) to bring pressure on debtor economies to take fiscal policy out of the hands of elected parliaments and into those of institutions ruling on behalf of bankers and bondholders. This global power has enabled finance to override potentially debtor-friendly governments. 683

Financial oligarchy replaces democracy All this contradicts what the 18th, 19th and most of the 20th century fought for in their drive to free economies from landlords, monopolists and “coupon clippers” living off bonds, stocks and real estate (largely inherited). Their income was a technologically and economically unnecessary vestige of past conquests – privileges bequeathed to subsequent generations. When parliamentary reform dislodged the landed aristocracy’s control of government, the hope was that extending the vote to the population at large would lead to policies that would manage land, natural resources and natural monopolies in the long-term public interest. Yet what Thorstein Veblen called the vested interests have rebuilt their political dominance, led by the financial sector which used its wealth to gain control of the election process to create a neo-rentier society imposing austerity. 686

A cultural counter-revolution has taken place. If few people have noticed, it is because the financial sector has rewritten history and re-defined the public’s idea of what economic progress and a fair society is all about. The financial alternative to classical economics calls itself “neoliberalism,” but it is the opposite of what the Enlightenment’s original liberal reformers called themselves. Land rent has not ended up in government hands, and more and more public services have been privatized to squeeze out monopoly rent. Banks have gained control of government and their central banks to create money only to bail out creditor losses, not to finance public spending. 696

finance has backed the rent-extracting sectors. And instead of central banks creating money to finance their budget deficits, governments are now forced to rely on bondholders, leaving it up to commercial banks and other creditors to provide the credit that economies need to grow. The result is that today’s society is indeed moving toward the central planning that financial lobbyists have long denounced. But the planning has been shifted to financial centers (Wall Street, the City of London or Frankfurt). And its plan is to create a neo-rentier society. Instead of helping the host economy grow, banking, bond markets and even the stock market have become part of a predatory, extractive dynamic. 704

This destructive scenario would not have been possible if memory of the classical critique of rentiers had remained at the center of political discussion. Chapter 2 therefore reviews how three centuries of Enlightenment reform sought to free industrial capitalism from the rentier overhead bequeathed by feudalism. Only by understanding this legacy can we see how today’s financial counter-Enlightenment is leading us back to a neo-feudal economy. 710

Marxism diagnosed the main inner contradiction of industrial capitalism to be that its drive to increase profit by paying labor as little as possible would dry up the domestic market. The inner contradiction of finance capitalism is similar: Debt deflation strips away the economy’s land rent, natural resource rent, industrial profits, disposable personal income and tax revenue – leaving economies unable to carry their exponential rise in credit. Austerity leads to default, as we are seeing today in Greece. The financial sector’s response is to double down and try to lend enough to enable debtors to pay. When this financial bubble bursts, creditors foreclose on the public domain of debtor economies, much as they foreclose on the homes of defaulting mortgage debtors. Central banks flood the economy with credit in an attempt to inflate a new asset-price bubble by lowering interest rates. U.S. Treasury bonds yield less than 1 percent, and the interest rate on German government bonds is actually negative, reflecting the “flight to safety” when debt write-downs look inevitable. In the end even zero-interest loans cannot be paid. 713

The underlying theme of this book thus can be summarized in a single sentence: Debts that can’t be paid, won’t be. But trying to pay such debts will plunge economies into prolonged depression. 723

The Long Fight to Free Economies from Feudalism’s Rentier Legacy If you do not own them, they will in time own you. They will destroy your politics [and] corrupt your institutions. — Cleveland mayor Tom Johnson (1901-09) speaking of power utilities726

Classical economics was part of a reform process to bring Europe out of the feudal era into the industrial age. This required overcoming the power of the landed aristocracy, bankers and monopolies to levy charges that were unfair because they did not reflect actual labor or enterprise. Such revenue was deemed “unearned.” The original fight for free markets meant freeing them from exploitation by rent extractors: owners of land, natural resources, monopoly rights and money fortunes that provided income without corresponding work – and usually without tax liability. Where hereditary rental and financial revenue supported the richest aristocracies, the tax burden was shifted most heavily onto labor and industry, in addition to their rent and debt burden. 730

The classical reform program of Adam Smith and his followers was to tax the income deriving from privileges that were the legacy of feudal Europe and its military conquests, and to make land, banking and monopolies publicly regulated functions. 736

Neoliberals have re-defined “free markets” to mean an economy free for rent-seekers, that is, “free” of government regulation or taxation of unearned rentier income (rents and financial returns). 738

The best way to undo their counter-revolution is to revive the classical distinction between earned and unearned income, and the analysis of financial and debt relations (the “magic of compound interest”) as being predatory on the economy at large. This original critique of landlords, bankers and monopolists has been stripped out of the current political debate in favor of what is best characterized as trickle-down junk economics. 741

The title of Adam Smith’s chair at the University of Edinburgh was Moral Philosophy. This remained the name for economics courses taught in Britain and America through most of the 19th century. Another name was Political Economy, and 17th-century writers used the term Political Arithmetic. The common aim was to influence public policy: above all how to finance government, what best to tax, and what rules should govern banking and credit. 744

The French Physiocrats were the first to call themselves économistes. Their leader François Quesnay (1694-1774) developed the first national income models in the process of explaining why France should shift taxes off labor and industry onto its landed aristocracy. Adam Smith endorsed the view of the Marquis de Mirabeau (father of Honoré, Comte de Mirabeau, an early leader of the French Revolution) that Quesnay’s Tableau Économique was one of the three great inventions of history (along with writing and money) for distinguishing between earned and unearned income. The subsequent debate between David Ricardo and Thomas Malthus over whether to protect agricultural landlords with high tariffs (the Corn Laws) added the concept of land rent to the Physiocratic analysis of how the economic surplus is created, who ends up with it and how they spend their income. 749

The guiding principle was that everyone deserves to receive the fruits of their own labor, but not that of others. Classical value and price theory provided the analytic tool to define and measure unearned income as overhead classical economics. It aimed to distinguish the necessary costs of production – value – from the unnecessary (and hence, parasitic) excess of price over and above these costs. This monopoly rent, along with land rent or credit over intrinsic worth came to be called economic rent, the source of rentier income. An efficient economy should minimize economic rent in order to prevent dissipation and exploitation by the rentier classes. 756

For the past eight centuries the political aim of value theory has been to liberate nations from the three legacies of feudal Europe’s military and financial conquests: land rent, monopoly pricing and interest. Land rent is what landlords charge in payment for the ground that someone’s forbears conquered. Monopoly rent is price gouging by businesses with special privileges or market power. These privileges were called patents: rights to charge whatever the market would bear, without regard for the actual cost of doing business. Bankers, for instance, charge more than what really is needed to provide their services. 761

Bringing prices and incomes into line with the actual costs of production would free economies from in these rents and financial charges. Landlords do not have to work to demand higher rents. Land prices rise as economies become more prosperous, while public agencies build roads, schools and public transportation to increase site values. Likewise, in banking, money does not “work” to pay interest; debtors do the work. 766

Distinguishing the return to labor from that to special privilege (headed by monopolies) became part of the Enlightenment’s reform program to make economies more fair, and also lower-cost and more industrially competitive. But the rent-receiving classes – rentiers – argue that their charges do not add to the cost of living and doing business. Claiming that their gains are invested productively (not to acquire more assets or luxuries or extend more loans), their supporters seek to distract attention from how excessive charges polarize and impoverish economies. The essence of today’s neoliberal economics is to deny that any income or wealth is unearned, or that market prices may contain an unnecessary excessive rake-off over intrinsic value. If true, it would mean that no public regulation is necessary, or public ownership of infrastructure or basic services. Income at the top is held to trickle down, so that the One Percent serve the 99 Percent, creating rather than destroying jobs and prosperity. 770

The Churchmen’s theory of Just Price was an incipient labor theory of value: The cost of producing any commodity ultimately consists of the cost of labor, including that needed to produce the raw materials, plant and equipment used up in its production. Thomas Aquinas (122574) wrote that bankers and tradesmen should earn enough to support their families in a manner appropriate for their station, including enough to give to charity and pay taxes. The problem that he Aquinas and his fellow Scholastics addressed was much like today’s: it was deemed unfair for bankers to earn so much more for the services they performed (such as transferring funds from one currency or realm to another, or lending to business ventures) than what other professionals earned. It resembles today’s arguments over how much Wall Street investment bankers should make. The logic of Church theorists was that bankers should have a living standard much like professionals of similar station. This required holding down the price of services they could charge (e.g., by the usury laws enacted by most of the world prior to the 1980s), by regulating prices for their services, and by taxing high incomes and luxuries. 786

It took four centuries to extend the concept of Just Price to ground rent paid to the landlord class. Two decades after the Norman Conquest in 1066, for instance, William the Conqueror ordered compilation of the Domesday Book (1086). This tributary tax came to be privatized into ground rent paid to the nobility when it revolted against the greedy King John Lackland (1199-1216). The Magna Carta (1215) and Revolt of the Barons were largely moves by the landed aristocracy to avoid taxes and keep the rent for themselves, shift the fiscal burden onto labor and the towns. The ground rent they imposed thus was a legacy of the military conquest of Europe by warlords who appropriated the land’s crop surplus as tribute. 796

By the 18th century, attempts to free economies from the rent-extracting privileges and monopoly of political power that originated in conquest inspired criticisms of land rent and the aristocracy’s burdensome role (“the idle rich”). These flowered into a full-blown moral philosophy that became the ideology driving the Industrial Revolution. Its political dimension advocated democratic reform to limit the aristocracy’s power over government. The aim was not to dismantle the state as such, but to mobilize its tax policy, money creation and public regulations to limit predatory rentier levies. That was the essence of John Stuart Mill’s “Ricardian socialist” theory and those of America’s reform era with its anti-trust regulations and public utility regulatory boards. 802

Tax favoritism for rentiers and the decline of nations What makes these early discussions relevant today is that economies are in danger of succumbing to a new rentier syndrome. Spain might have used the vast inflows of silver and gold from its New World conquests to become Europe’s leading industrial power. Instead, the bullion it looted from the New World flowed right through its economy like water through a sieve. Spain’s aristocracy of post-feudal landowners monopolized the inflow, dissipating it on luxury, more land acquisition, money lending, and more wars of conquest. The nobility squeezed rent out of the rural population, taxed the urban population so steeply as to impose poverty everywhere, and provided little of the education, science and technology that was flowering in northern European realms more democratic and less stifled by their landed aristocracy. 808

The “Spanish Syndrome” became an object lesson for what to avoid. It inspired economists to define the various ways in which rentier wealth – and the tax and war policies it supported – blocked progress and led to the decline and fall of nations. Dean Josiah Tucker, a Welsh clergyman and political economist, pointed out in 1774 that it made a great difference whether nations obtained money by employing their population productively, or by piracy or simply looting of silver and gold, as Spain and Portugal had done with such debilitating effects, in which “very few Hands were employed in getting this Mass of Wealth … and fewer still are supposed to retain what is gotten.” 816

…Taxes were tripled between 1556 and 1577. Spending went up even faster… By 1600, interest on the national debt took 40 percent of the budget. Spain descended into bankruptcy and never recovered. Despite its vast stream of gold and silver, Spain became the most debt-ridden country in Europe – with its tax burden shifted entirely onto the least affluent, blocking development of a home market. Yet today’s neoliberal lobbyists are urging similar tax favoritism to un-tax finance and real estate, shift the tax burden onto labor and consumers, cut public infrastructure and social spending, and put rentier managers in charge of government. The main difference from Spain and other post-feudal economies is that interest to the financial sector has replaced the rent paid to feudal landlords. And as far as economic discussion is concerned, there is no singling out of rentier income as such. 825

The main distinction between today’s mode of conquest and that of 16th-century Spain (and 18th-century France) is that it is now largely financial, not military. Land, natural resources, public infrastructure and industrial corporations are acquired by borrowing money. The cost of this conquest turns out to be as heavy as overt military warfare. Landlords pay out their net rent as interest to the banks that provide mortgage credit for them to acquire property. Corporate raiders likewise pay their cash flow as interest to the bondholders who finance their takeovers. Even tax revenue is increasingly earmarked to pay creditors (often foreign, as in medieval times), not to invest in infrastructure, pay pensions or spend for economic recovery and social welfare. 835

Today’s monopolization of affluence by a rentier class avoiding taxes and public regulation by buying control of government is the same problem that confronted the classical economists. Their struggle to create a fairer economy produced the tools most appropriate to understand how today’s economies are polarizing while becoming less productive. The Physiocrats, Adam Smith, David Ricardo and their successors refined the analysis of how rent-seeking siphons off income from the economy’s flow of spending. 842

The classical critique of economic rent Classical value theory provides the clearest conceptual tools to analyze the dynamics that are polarizing and impoverishing today’s economies. The labor theory of value went hand-in-hand with a “rent theory” of prices, broadening the concept of economic rent imposed by landholders, monopolists and bankers. Rent theory became the basis for distinguishing between earned and unearned income. Nearly all public regulatory policy of the 20th century has followed the groundwork laid by this Enlightenment ideology and political reform from John Locke onward, defining value, price and rent as a guide to progressive tax philosophy, anti-monopoly price regulation, usury laws and rent controls. 846

Defenders of landlords fought back. Malthus argued that landlords would not simply collect rent passively, but would invest it productively to increase productivity. Subsequent apologists simply left unearned income out of their models, hoping to leave it invisible so that it would not be taxed or regulated. 853

Instead of acknowledging the reality of predatory rentier behavior, financial lobbyists depict lending as being productive, as if it normally provides borrowers with the means to make enough gain to pay. Yet little such lending has occurred in history, apart from investing in trade ventures. Most bank loans are not to create new means of production but are made against real estate, financial securities or other assets already in place. The main source of gain for borrowers since the 1980s has not derived from earnings but seeing the real estate, stocks or bonds they have bought on credit rise as a result of asset-price inflation – that is, to get rich from the debt-leveraged Bubble Economy. 859

What makes classical economics more insightful than today’s mainstream orthodoxy is its focus on wealth ownership and the special privileges used to extract income without producing a corresponding value of product or service. Most inequality does not reflect differing levels of productivity, but distortions resulting from property rights and other special privileges. Distinguishing between earned and unearned income, classical economists asked what tax philosophy and public policy would lead to the most efficient and fair prices, incomes and economic growth. 865

Government was situated to play a key role in allocating resources. But although nearly all economies in history have been mixed public/private economic systems, today’s anti-government pressure seeks to create a one-sided economy whose control is centralized in Wall Street and similar financial centers abroad. Democratic political reforms were expected to prevent this development, by replacing inherited privilege with equality of opportunity. The aim was to do away with such privileges and put everyone and every business on an equal footing. Economies were to be freed by turning natural monopolies and land into public utilities. 869

This is how classical free market reforms evolved toward socialism of one form or another on the eve of the 20th century. The hereditary landlord class was selling its land to buyers on credit. That is how land and home ownership were democratized. The unanticipated result has been that banks receive as mortgage interest the rental income formerly paid to landlords. The financial sector has replaced land ownership as the most important rentier sector, today’s post-industrial aristocracy. 874

In Britain, the House of Lords lost its ability to block revenue bills passed by the House of Commons in 1910. 881

The objective of most lending is to extract interest charges by attaching debt to real estate rent, corporate profits and personal income streams, turning them into a flow of interest charges. The “real” economy slows in the face of these exponentially growing financial claims (bank loans, stocks and bonds) that enrich primarily the One Percent. Instead of finance being industrialized, industry has become financialized. The stock and bond markets have been turned into arenas for debt-leveraged buyouts and asset stripping (described in Chapters 9 and 10 below). These dynamics represent a counter-revolution against classical ideas of free markets. Today’s neoliberal tax and financial philosophy is corrosive and destructive, not productive. Instead of promoting industry, capital formation and infrastructure, finance has moved into a symbiosis with the other rentier sectors: real estate, natural resource extraction, and natural monopolies.Acquisition of rent-yielding privileges on credit (or simply by insider dealing and legal maneuvering) does not require the fixed capital investment that manufacturing entails. 884

The Critique and Defense of Economic Rent, From Locke to Mill The main substantive achievement of neoliberalization … has been to redistribute, rather than to generate, wealth and income. [By] ‘accumulation by dispossession’ I mean … the commodification and privatization of land and the forceful expulsion of peasant populations; conversion of various forms of property rights (common, collective, state, etc.) into exclusive private property rights; suppression of rights to the commons; … colonial, neocolonial, and imperial processes of appropriation of assets (including natural resources); …and usury, the national debt and, most devastating of all, the use of the credit system as a radical means of accumulation by dispossession. … To this list of mechanisms we may now add a raft of techniques such as the extraction of rents from patents and intellectual property rights and the diminution or erasure of various forms of common property rights (such as state pensions, paid vacations, and access to education and health care) won through a generation or more of class struggle. The proposal to privatize all state pension rights (pioneered in Chile under the dictatorship) is, for example, one of the cherished objectives of the Republicans in the US. —David Harvey, A Brief History of Neoliberalism (Oxford, 2005)895

The phenomena cited by Harvey represent opportunities for rent extraction. Neoliberals claim that such special privileges and expropriation of hitherto public assets promote economic efficiency. Classical free marketers defined the rents they yielded as neither earned nor necessary for production to occur. They were a post-feudal overhead. 907

The year 1690 usually is treated as the takeoff point for the classical distinction between earned and unearned wealth and its income stream. At issue then was the contrast between real wealth created by labor, and special privileges – mainly post-feudal overhead – from which society could free itself and thus lower its cost structure. John Locke’s guiding axiom was that all men have a natural right to the fruits of their labor. A corollary to this logic was that landlords have a right only to what they themselves produce, not to exploit and appropriate the labor of their tenants: Though the earth and all inferior creatures be common to all men, yet every man has a property in his own person … The labour of his body and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. … For this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to, at least where there is enough and as good left in common for others. 910

Locke’s labor theory of property and wealth ownership set the stage for distinguishing between the portion of land rent that resulted from its owner’s expenditure of labor and capital investment, and what was received simply from ownership rights without labor effort. This contrast guided tax reform down through the Progressive Era in the early 20th century. Despite his conflation of former and present landholder’s labor, Locke’s exposition initiated a centuries-long discussion. By the 19th century the rising price of land sites was seen as occurring independently of effort by landlords. The rent they charged reflected prosperity by the rest of the economy, not their own effort. Economists call this kind of gain a windfall. It is like winning a lottery, including in many cases the inheritance lottery of how much wealth one’s parents have. 922

Classical economists argued that labor and capital goods require a cost necessary to bring them into production. Labor must receive wages sufficient to cover its basic subsistence, at living standards that tend to rise over time to sustain personal investment in better skills, education and health. And capital investment will not take place without the prospect of earning a profit. More problematic are accounting for land and natural resources. Production cannot take place without land, sunlight, air and water, but no labor or capital cost is necessary to provide them. They can be privatized by force, legal right or political fiat (sale by the state). 931

Classical economists focused on this kind of property claim in defining a fair distribution of income from land and other natural resources as between their initial appropriators, heirs and the tax collector. At issue was how much revenue should belong to the economy at large as its natural patrimony, and how much should be left in the hands of discoverers or appropriators and their descendants. The resulting theory of economic rent has been extended to monopoly rights and patents such as those which pharmaceutical companies obtain to charge for their price gouging. 938

The history of property acquisition is one of force and political intrigue, not labor by its existing owners. The wealthiest property owners have tended to be the most predatory – military conquerors, landed aristocracies, bankers, bondholders and monopolists. Their property rights to collect rent for land, mines, patents or monopolized trade are legal privileges produced by the legal system they control, not by labor. Medieval land grants typically were given to royal companions in return for their political loyalty. This land acquisition process continued from colonial times down through America’s land grants to the railroad barons and many other political giveaways to supporters in most countries, often for bribery and similar kinds of corruption. Most recently, the post-Soviet economies gave political insiders privatization rights to oil and gas, minerals, real estate and infrastructure at giveaway prices in the 1990s. 943

Russia and other countries followed American and World Bank advice to simply give property to individuals, as if this would automatically produce an efficient (idealized) Western European-style free market. What it actually did was to empower a class of oligarchs who obtained these assets by insider dealings. Popular usage coined the word “grabitization” to describe “red company” managers getting rich by registering natural resources, public utilities or factories in their own name, obtaining high prices for their shares by selling large chunks to Western investors, and keeping most of their receipts for these shares abroad as flight capital (about $25 billion annually since 1991 for Russia). This neoliberal privatization capped the Cold War by dismantling the Soviet Union’s public sector and reducing it to a neofeudal society. 950

The great challenge confronting post-Soviet economies is how to undo the effects of these kleptocratic grabs. One way would be to re-nationalize them. This is difficult politically, given the influence that great wealth is able to buy. A more “market oriented” solution is to leave these assets in their current hands but tax their land or resource rent to recapture portions of the windfall for the benefit of society. Without such restructuring, all that Vladimir Putin can do is informal “jawboning”: pressuring Russia’s oligarchs to invest their revenue at home. 957

these economies are going directly into neoliberal rentier decadence. The problem of how an economy can best recover from such grabitization is not new. Classical economists in Britain and France spent two centuries analyzing how to recapture the rents attached to such appropriations. Their solution was a rent tax. Today’s vested interests fight viciously to suppress their concept of economic rent and the associated distinction between earned and unearned income. It would save today’s reformers from having to reinvent the methodology of what constitutes fair value. Censoring or rewriting the history of economic thought aims at thwarting the logic for taxing rent-yielding assets. 962

Seeking to reform the French monarchy in the decades preceding the 1789 Revolution, the Physiocrats popularized the term laissez faire, “let us be.” Coined in the 1750s to oppose royal regulations to keep grain prices and hence land rents high, the school’s founder, Francois Quesnay, extended the slogan to represent freedom from the aristocracy living off its rents in courtly luxury while taxes fell on the population at large. Quesnay was a surgeon. The word Physiocracy reflected his analogy of the circulation of income and spending in the national economy with the flow of blood through the human body. This concept of circular flow inspired him to develop the first national income accounting format, the Tableau Économique in 1759 to show how France’s economic surplus – what was left after defraying basic living and business expenses – ended up in the hands of landlords as groundrent. 969

they did not characterize landlords as taking rent by virtue of their labor. The crop surplus was produced by the sun’s energy. This logic underlay their policy proposal: a Single Tax on land, l’impôt unique. Taxing land rent would collect what nature provided freely (sunlight and land) and hence what should belong to the public sector as the tax base. The 19th century came to characterize landlords and other rentiers as the Idle Rich. 979

Quesnay’s ploy was to claim that the class that produces the surplus is the natural source of taxation. Depicting agricultural land as the ultimate source of surplus implied that all taxes would end up being paid out of it. Deeming manufacturing to be “sterile,” merely working up the raw materials supplied by nature, meant that taxing industry or the labor it hired would raise the break-even cost that business needed to cover. Any taxes on industry or labor would simply be passed on to the source of the surplus (agricultural landlords). In effect, the Physiocrats said: “Indeed you landowners are the source of our nation’s wealth. That is why all taxes end up being paid by you, indirectly if not directly. Let us avoid the convoluted pretenses at work and tax you directly by our Single Tax instead of impoverishing French industry and commerce.” 990

the net surplus (produit net), defined as income over and above break-even costs. They asked who ends up with it, and who ended up bearing the tax? 997

Adam Smith broadens Physiocratic rent theory Adam Smith met Quesnay and Les Économistes on his travels in France during 1764-66. He agreed with the need to free labor and industry from the land rent imposed by Europe’s privileged nobilities: “Ground-rents and the ordinary rent of land are … the species of revenue which can best bear to have a peculiar tax imposed on them.” But in contrast to the Physiocratic description of industry being too “sterile” to tax, Smith said manufacturing was productive. In his lectures at Edinburgh a decade before he wrote The Wealth of Nations, Smith generalized the concept of rent as passive, unearned income – and used the labor theory of value to extend this idea to finance as well as land ownership: The labour and time of the poor is in civilized countries sacrificed to the maintaining of the rich in ease and luxury. The landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his exactions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full enjoyment of the fruits of his own labours; there are no landlords, no usurers, no tax gatherers. 1003

Failure to tax this rent burden shifted taxes onto commerce and industry, eroding its profits and hence capital accumulation. In addition to bearing the cost of land rents, populations had to pay excise taxes levied to pay interest on public debt run up as a result of the failure to tax landlords. 1016

In 1848, John Stuart Mill explained the logic of taxing it away from the landlord class: “Suppose that there is a kind of income which constantly tends to increase, without any exertion or sacrifice on the part of the owners: those owners constituting a class in the community.” Rejecting the moral justification that Locke provided for landownership – that their land owed its value to their own labor – Mill wrote that landlords grow richer, as it were in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches? In what would they have been wronged if society had, from the beginning, reserved the right of taxing the spontaneous increase of rent … ? The value of land rose as a result of the efforts of the entire community. Mill concluded that rising site value should belong to the public as the natural tax base rather than leaving it as “an unearned appendage to the riches of a particular class.” 1020

Mill justified taxing land rent on grounds of national interest as well as moral philosophy. The aim was to avoid taxing labor and industry, but on income that had no counterpart in labor. In time the labor theory of value was applied to monopoly rents. The remainder of the 19th century was filled with proposals as to how best to tax or nationalize the land’s economic rent. 1029

orthodox trade theory explaining the (supposed) virtues of global specialization of labor. Ricardo’s logic reflected the self-interest of his banking class: Globalization promoted commerce, which was still the major market for bank lending in the early 19th century. 1050

The desirability of sites in good neighborhoods is enhanced by public infrastructure investment in transportation and other improvements, combined with the general level of prosperity – and most of all in recent times, by bank credit on easier (that is, more debt-leveraged) lending terms. Owners enjoy a price rise without having to invest more of their own money – the situation Ricardo described with regard to agricultural landowners. 1073

Contrary to Ricardo’s description of rent as “a transfer of wealth, advantageous to the landlords and proportionally injurious to the consumers,” Malthus countered that new capital investment in the land could not be afforded without high crop prices: 1086

Landlords were what today’s One Percent call themselves: “job creators” who hired coachmen, tailors and seamstresses, butlers and other servants, and bought coaches, fine clothes and furnishings. So even when rent recipients spent their revenue on luxuries, they augmented the demand for labor. This argument failed to recognize that if workers did not have to pay such high food prices, they could spend more on the products of industry – or, if they still earned only the subsistence wage (as Ricardo assumed), industrial profits would be higher at the expense of land rent. The real choice thus was between luxury consumption by the landed aristocracy or higher living standards for the rest of the population and more industrial investment. 1093

what Malthus described is best characterized as rentier demand by the One Percent. He was justifying what the late 19th-century cartoonist Thomas Nast depicted: Wall Street plutocrats dressed in finery and so fat from gluttonous over-eating that the buttons on their jackets nearly burst. 1100

defining economic rent as the excess of price over costs of production shaped subsequent conceptualization of rent theory. 1106

in the cheapest market leaves the economy dependent on foreign producers. The long-term risk of dependency on imported food and basic consumer goods escaped Ricardo’s attention, as did the problem of financing trade deficits 1111

As Parliamentary spokesman for his fellow financiers, he accused only landlords of draining income out of the economy, not creditors. So his blind spot reflects his profession and that of his banking family. (The Ricardo Brothers handled Greece’s first Independence Loan of 1824, for instance, on quite ruinous terms for Greece.) Seeing no parallel between paying interest to bankers and paying rents to landlords, Ricardo sidestepped Adam Smith’s warning about how excise taxes levied on food and other necessities to pay bondholders on Britain’s war debt drove up the nation’s subsistence wage level. His one-sided focus on land rent diverted attention from how rising debt service – the financial analogue to land rent – increases break-even costs while leaving less income available for spending on goods and services. Treating money merely as a veil – as if debt and its carrying charges were not relevant to cost and price levels – Ricardo insisted that payment of foreign debts would be entirely recycled into purchases of the paying-nation’s exports. There was no recognition of how paying debt service put downward pressure on exchange rates or led to domestic austerity. 1132

keeping debts on the books while prices decline enhances the value of creditor claims for payment. This polarization between creditors and debtors is what happened after the Napoleonic Wars, and also after America’s Civil War, crucifying indebted farmers and the rest of the economy “on a cross of gold,” as William Jennings Bryan characterized price deflation. The financial sector now occupies the dominant position that landlords did in times past. Debt service plays the extractive role that land rent did in Ricardo’s day. 1143

creditors recycle most of their receipt of interest into new loans. This increases the debt burden without raising output or living standards. 1148

Today, banking has found its major market in lending to real estate and monopolies, adding financial charges to land and monopoly rent overhead. The financial counterpart to diminishing returns that raise the cost of living and doing business takes two forms. Interest rates rise to cover the growing risks of lending to debt-strapped economies. And the “magic of compound interest” extracts an exponential expansion of debt service as creditors recycle their interest income into new loans. The result is that debts grow more rapidly and inexorably than the host economy’s ability to pay. 1153

The All-Devouring “Magic of Compound Interest”1158

overgrowth of debt is at the root of today’s economic crisis. Creditors make money by leaving their savings to accrue interest, doubling and redoubling their claims on the economy. This dynamic draws more and more control over labor, land, industry and tax revenue into the hands of creditors, concentrating property ownership and government in their hands. The way societies have coped with this deepening indebtedness should be the starting point of financial theorizing. 1163

Money is not a “factor of production.” It is a claim on the output or income that others produce. Debtors do the work, not the lenders. Before a formal market for wage labor developed in antiquity, money lending was the major way to obtain the services of bondservants who were compelled to work off the interest that was owed. Debtors’ family members were pledged to their creditors. In India, and many other parts of the world, debt peonage still persists as a way to force labor to work for their creditors. In a similar way, getting inducing landholders into debt was the first step to pry away their subsistence lands, beaching archaic communalistic land tenure systems. In this respect creditors are like landlords, obtaining the labor of others and growing richer in the way that J. S. Mill described: “in their sleep,” without working. 1166

The idea of such exponential growth is expressed in an Egyptian proverb: “If wealth is placed where it bears interest, it comes back to you redoubled.” A Babylonian image compared making a loan to having a baby. This analogy reflects the fact that the word for “interest” in every ancient language meant a newborn: a goat-kind (mash) in Sumerian, or a young calf: tokos in Greek or foenus in Latin. The “newborn” paid as interest was born of silver or gold, not from borrowed cattle (as some economists once believed, missing the metaphor at work). What was born was the “baby” fraction of the principal, 1/60th each month. (In Greece, interest was due on the new moon.) The growth was purely mathematical with a “gestation period” for doubling dependent on the interest rate. 1195

Sumer in the third millennium BC, which already had a term mashmash, “interest (mash) on the interest.” Students were asked to calculate how long it will take for one mina to multiply 64 times, that is, 26 – in other words, six doubling times of five years each. The solution involves calculating powers of 2 (22 = 4, 23 = 8 and so forth). A mina multiplies fourfold in 10 years (two gestation periods), eightfold in 15 years (three periods), sixteenfold in 20 years (four periods), and 64 times in 30 years. The 30-year span consisted of six fiveyear doubling periods. 1203

Martin Luther depicted usurers scheming “to amass wealth and get rich, to be lazy and idle and live in luxury on the labor of others.” The growing mass of usurious claims was depicted graphically as a “great huge monster … who lays waste all … Cacus.” Imbuing victims with an insatiable desire for money, Cacus encouraged an insatiable greed that “would eat up the world in a few years.” A “usurer and money-glutton … would have the whole world perish of hunger and thirst, misery and want, so far as in him lies, so that he may have all to himself, and every one may receive from him as from a God, and be his serf for ever. … For Cacus means the villain that is a pious usurer, and steals, robs, eats everything.” 1213

the 19th century German economist, Michael Flürscheim, cast this exponential doubling and redoubling principle into the form of a Persian proverb telling of a Shah who wished to reward a subject who had invented chess, and asked what he would like. The man asked only “that the Shah would give him a single grain of corn, which was to be put on the first square of the chess-board, and to be doubled on each successive square,” until all sixty-four squares were filled with grain. Upon calculating 64 doublings of each square from the preceding, starting from the first gain and proceeding 1, 2, 4, 8, 16, 32, 64 and so on. At first the compounding of grain remained well within the physical ability of the kingdom to pay, even after twenty squares were passed. But by the time the hypothetical chessboard was filled halfway, the compounding was growing by leaps and bounds. The Shah realized that this he had promised “an amount larger than what the treasures of his whole kingdom could buy.” The moral is that no matter how much technology increases humanity’s productive powers, the revenue it produces will be overtaken by the growth of debt multiplying at compound interest. The major source of loanable funds is repayments on existing loans, re-lent to finance yet new debts – often on an increasingly risky basis as the repertory of “sound projects” is exhausted. Strictly speaking, it is savings that compound, not debts themselves. Each individual debt is settled one way or another, but creditors recycle their interest and amortization into new interest-bearing loans. The only problem for savers is to find enough debtors to take on new obligations. 1224

The Rule of 72 A mathematical principle called the “Rule of 72” provides a quick way to calculate such doubling times: Divide 72 by any given rate of interest, and you have the doubling time. To double money at 8 percent annual interest, divide 72 by 8. The answer is 9 years. In another 9 years the original principal will have multiplied fourfold, and in 27 years it will have grown to eight times the original sum. A loan at 6 percent doubles in 12 years, and at 4 percent in 18 years. This rule provides a quick way to approximate the number of years needed for savings accounts or prices to double at a given compound rate of increase. 1238

The exponential growth of savings (= other peoples’ debts) One of Adam Smith’s contemporaries, the Anglican minister and actuarial mathematician Richard Price, graphically explained the seemingly magical nature of how debts multiplied exponentially. As he described in his 1772 Appeal to the Public on the Subject of the National Debt: Money bearing compound interest increases at first slowly. But, the rate of increase being continually accelerated, it becomes in some time so rapid, as to mock all the powers of the imagination. One penny, put out at our Saviour’s birth at 5% compound interest, would, before this time, have increased to a greater sum than would be obtained in a 150 millions of Earths, all solid gold. But if put out to simple interest, it would, in the same time, have amounted to no more than 7 shillings 4½d. 1246

In his Observations on Reversionary Payments, first published in 1769 and running through six editions by 1803, Price elaborated how the rate of multiplication would be even higher at 6 percent: “A shilling put out at 6% compound interest at our Saviour’s birth would … have increased to a greater sum than the whole solar system could hold, supposing it a sphere equal in diameter to the diameter of Saturn’s orbit.” 1254

Balances snowball in the hands of bankers, bondholders and other savers, as if there always will be enough opportunities to find remunerative projects and credit-worthy borrowers to pay the interest that is accruing. The moral is that the economy’s ability to produce and earn enough of a surplus to pay exponentially rising interest charges is limited. The more it is stripped to pay creditors, the less able it is to produce and pay as a result of unemployment, underutilization of resources, emigration and capital flight. 1265

In the two thousand years since the birth of Christ, the European economy has grown at a compound annual rate of 0.2 percent, far lower than the level at which interest rates have stood. Yet financial fortunes have crashed again and again – in part because interest payments have absorbed the revenue that otherwise would have been available for new direct investment. The inability of productive investment opportunities to keep pace with the expansion of credit is the Achilles heel of finance-based growth. How can compound interest be paid? Who will end up paying it? Who will receive it, and what will they do with it? If banks and a creditor class receive this money, will they spend it domestically to maintain balance, or will they drain the economy’s income stream and shift it abroad to new loan markets, leaving the economy strapped by the need to pay interest on the growing debt? If the state accrues this money, how will it recirculate it back into the economy? 1270

“The Magic of Compound Interest” vs. The Economy’s Ability to Pay 1. Neither money nor credit is a factor of production. Debtors do the work to pay their creditors. This means that interest is not a “return to a factor of production.” Little credit is used to expand production or capital investment. Most is to transfer asset ownership. 2. If loan proceeds are not used to make gains sufficient to pay the creditor (productive credit), then interest and principal must be paid out of the debtor’s other income or asset sales. Such lending is predatory. 3. The aim of predatory lending in much of the world is to obtain labor to work off debts (debt peonage), to foreclose on the land of debtors, and in modern times to force debt-strapped governments to privatize natural resources and public infrastructure. 1278

Most inheritance consists of financial claims on the economy at large. In antiquity, foreclosure for non-payment was the major lever to pry land away from traditional tenure rights inheritable within the family. (Early creditors got themselves adopted as Number One sons.) Today, most financial claims are on the land’s rent, leaving ownership “democratized” – on credit. 5. Most interest-bearing debt always has been predatory, apart from lending for commerce. Carrying a rising debt overhead slows material investment and economic growth.1286

The rate of interest never has reflected the rate of profit, the rise in physical productivity or the borrower’s ability to pay. The earliest interest rates were set simply for ease in mathematical calculation: 1/60 per month in Mesopotamia, 1/10 annually in Greece, and 1/12 in Rome. (These were all the unit fractions in their respective fractional systems.) In modern times the rate of interest has been set mainly to stabilize the balance of payments and hence exchange rates. Since 2008 it has been set low to re-inflate asset prices and bank profits. 7. Any rate of interest implies a doubling time for money lent out. See the Rule of 72 (e.g., five years in Mesopotamia).1291

Modern creditors avert public cancellation of debts (and making banks a public utility) by pretending that lending provides mutual benefit in which the borrower gains – consumer goods now rather than later, or money to run a business or buy an asset that earns enough to pay back the creditor with interest and still leave a profit for the debtor. 9. This scenario of productive lending does not typify the banking system as a whole. Instead of serving the economy’s production trends, the financial sector (as presently organized) makes the economy top-heavy, by transferring assets and income into the hands of an increasingly hereditary creditor class.1297

The exponential growth of debt shrinks markets and slows and investment, reducing the economy’s ability to pay debts, while increasing the debt/output and debt/income ratios. 11. The rising volume of debt changes the distribution of property ownership unless public authorities intervene to cancel debts and reverse expropriations. In antiquity, royal “Jubilee” proclamations liberated bondservants and restored lands that had been foreclosed. 12. Cancelling debts was politically easiest when governments or public institutions (temples, palaces or civic authorities) were the major creditors, because they were cancelling debts owed to themselves. This is an argument for why governments should be the main suppliers of money and credit as a public utility.1303

Gustavus Myers’ History of the Great American Fortunes. In 1895, J. W. Bennett warned of a rentier caste drawing the world’s wealth into its hands as the inventive powers of industry were outrun by the mathematics of compound interest, “the principle which asserts that a dollar will grow into two dollars in a number of years, and keep on multiplying until it represents all of the wealth on earth.” Although not much noticed at the time, Bennett was one of the first to recognize that financial recycling of interest receipts into new lending was the driving force of the business cycle. Despite the rising role of industry, “financial systems are founded on rent and interest-taking,” and “interest-bearing wealth increases in a ratio which is ever growing more and more rapid,” leaving few assets unattached by debt. The exponential growth of debt makes business conditions more risky, because “there are not available assets to meet [creditor] demands and at the same time keep business moving.” Bankers call in their loans, causing a crash followed by “a trade depression every ten years or oftener and panics every twenty years.” 1319

The mathematics of compound interest explain “the extremely rapid accumulation of wealth in the hands of a comparatively few non-producers,” as well as “the abject poverty of a large percentage of the producing masses.” Non-producers receive “much the largest salaries,” despite the fact that their “income is often in inverse ratio to the service which [they do for their] fellow men.” As a result, Bennett concluded: “The financial group becomes rich more rapidly than the nation at large; and national increase in wealth may not mean prosperity of the producing masses.” All this sounds remarkably modern. The same basic criticisms were made after the 2008 crash, as if the discovery of predatory finance was something new. 1328

Bennett’s contemporary John Brown (not the abolitionist) argued that compound interest “is the subtle principle which makes wealth parasitic in the body of industry – the potent influence which takes from the weak and gives to the strong; which makes the rich richer and the poor poorer; which builds palaces for the idle and hovels for the diligent.” Only the wealthy are able to save up significant amounts and let sums simply accumulate and accrue interest over time. Small savers must live off their savings, drawing them down long before the mathematics of compound interest become truly significant. What is remarkable is that this principle of compound interest has come to be viewed as a way to make populations richer rather than poorer. It is as if workers can ride the exponential growth of financial debt claims, by saving in mutual funds or investing in pension funds to financialize the economy. This rosy scenario assumes that the increase in debt does not dry up the growth in markets, investment and employment in much the way that Ricardo imagined landlords and their rent would stifle industrial capitalism. 1334

How the One Percent Holds the 99 Percent in Exponentially Deepening Debt [W]hat Smith and Marx shared, critically, was the belief that it was entirely possible for an activity to be revenue- and profit-generative without actually contributing to the creation of value. There was no paradox. (Or rather, for Marx at any rate, the paradox was not that banks made profits without producing value, but that industrial capitalists allowed them to do so.) J. P. Morgan and John D. Rockefeller are said to have called the principle of compound interest the Eighth Wonder of the World. For them it meant concentrating financial fortunes in the hands of an emerging oligarchy indebting the economy to itself at an exponential rate. This has been the key factor in polarizing the distribution of wealth and political power in societies that do not take steps to cope with this dynamic. The problem lies in the way that savings and credit are lent out to become other peoples’ debts without actually helping them earn the money to pay them off.1343

the financial sector this poses a banking problem: how to prevent losses to creditors when loan defaults occur. Such defaults prevent banks from paying their depositors and bondholders until they can foreclose on the collateral pledged by debtors and sell it off. But for the economy at large, the problem is bank credit and other loans loading the economy down with more and more debt, “crowding out” spending on current output. Something has to give – meaning that either creditors or debtors must lose. Politicians thus face a choice of whether to save banks and bondholders or the economy. Do they simply reward their major campaign contributors by giving banks enough central bank or taxpayer money to compensate losses on bad loans? Or do they restructure debts downward, imposing losses on large bank depositors, bondholders and other creditors by writing down bad debts so as to keep debt-strapped families solvent and in possession of their homes? It is politically convenient in today’s world to solve the banking dimension of this problem in ways that please the financial sector. After the 1907 crash hit the United States harder than most economies, the Federal Reserve was founded in 1913 to provide public back-up credit in times of crisis. The assumption was that debt problems were merely about short-term liquidity for basically solvent loans whose carrying charges were temporarily interrupted by crop failures or a major industrial bankruptcy. The exponential growth of debt was not anticipated to reach a magnitude that would bring economic growth to a halt. That worry has faded almost entirely from mainstream discussion for the past century. 1352

The Glass Steagall Act, also passed in 1933, separated normal banking from the risky speculation until 1999, when its provisions were gutted under Bill Clinton. Banks were regulated to make loans to borrowers who could provide sound collateral and earn enough to carry their debts. 1372

The economy was idealized as rising and falling fairly smoothly around a steady upward trend. The mathematics of compound interest should have alerted regulators to the need “to take away the punch bowl just as the party gets going,” as McChesney Martin, long-term Federal Reserve Chairman (1951-70) famously quipped. But the combination of New Deal reforms and soporific economic theory (assuming that economies could carry a rising debt burden ad infinitum) led regulators to lower their guard against the strains created by banks and bondholders lending on increasingly risky terms at rising debt/income and debt/asset ratios. Alan Greenspan promised the public before the 2008 crash that a real estate implosion was impossible because such a decline would be only local in scope, not economy-wide. But by this time the pro-Wall Street drive by the Clinton Administration’s orchestrated by Treasury Secretary Robert Rubin (later to chair Citibank, which became the most reckless player) had opened the floodgates that led rapidly to widespread insolvency. Nearly ten million homes fell into foreclosure between 2008 and mid-2014 according to Moody’s Analytics. Cities and states found themselves so indebted that they had to start selling off their infrastructure to Wall Street managers who turned roads, sewer systems and other basic needs into predatory monopolies. 1377

Across the board, the U.S. and European economies were “loaned up” and could not sustain living standards and public spending programs simply by borrowing more. Repayment time had arrived. That meant foreclosures and distress sales. That is the grim condition that the financial sector historically has sought as its backup plan. For creditors, debt produces not only interest, but property ownership as well, by indebting their prey. 1388

Wages and profits rose steadily from 1945 to the late 1970s. So did savings. Banks lent them to fund new construction, as well as to bid up prices for housing already in place. This recycling of savings plus new bank credit into mortgage lending obliged homebuyers to borrow more as interest rates rose for 35 years, from 1945 to 1980. The result was an exponential growth of debt to buy housing, automobiles and consumer durables. Financial wealth – what the economy owes bankers and bondholders – increases the volume of debt claims from one business cycle to the next. Each business recovery since World War II has started with a higher debt level. Adding one cyclical buildup on top of another is the financial equivalent of driving a car with the brake pedal pressed tighter and tighter to the floor, slowing the speed – or like carrying an increasingly heavy burden uphill. The economic brake or burden is debt service. The more this debt service rises, the slower markets can grow, as debtors are left with less to spend on goods and services because they must pay a rising portion of income to banks and bondholders. Markets shrink and a rising proportion of debtors default. New lending stops, and debtors must start repaying their creditors. This is the debt deflation stage in which business upswings culminate. By the mid-1970s entire countries were reaching this point. New York City nearly went bankrupt. Other cities could not raise their traditional source of tax revenue, the property tax, without forcing mortgage defaults. 1400

Deterioration of loan quality to interest-only loans and “Ponzi” lending Hyman Minsky has described the first stage of the financial cycle as the period in which borrowers are able to pay interest and amortization. In the second stage, loans no longer are self-amortizing. Borrowers can only afford to pay the interest charges. In the third stage they cannot even afford to pay the interest. They have to borrow to avoid default. In effect, the interest is simply added onto the debt, compounding it. Default would have obliged banks to write down the value of their loans. To avoid “negative equity” in their loan portfolio, bankers made new loans to enable Third World governments to pay the interest due each year on their foreign debts. That is how Brazil, Mexico, Argentina and other Latin American countries got by until 1982, when Mexico dropped the “debt bomb” by announcing that it could not pay its creditors. Leading up to the 2008 financial crash, the U.S. real estate market had entered the critical stage where banks were lending homeowners the interest as “equity loans.” Housing prices had risen so high that many families could not afford to pay down their debts. To make the loans work “on paper,” real estate brokers and their banks crafted mortgages that automatically added the interest onto the debt, typically up to 120 percent of the property’s purchase price. Bank credit thus played the role of enticing new subscribers into Ponzi schemes and chain letters. Over-lending kept the economy from defaulting until 2008. 1414

These are paid out of the proceeds from more and more new players joining the scheme, e.g., by new homebuyers taking out ever-rising mortgage loans to buy out existing owners. The newcomers hope that returns on their investment (like a chain letter) can keep on expanding ad infinitum. But the scheme inevitably collapses when the inflow of new players dries up or banks stop feeding the scheme. 1430

Higher prices for the houses being borrowed against seemed to justify the process, without much thought about how debts could be paid by actually earning wages or profits. Banks created new credit on their keyboards, while the Federal Reserve facilitated the scheme by sustaining the exponential rise in bank loans (without anyone having to save and deposit the money). However, this credit was not invested to increase the economy’s productive powers. Instead, it saved borrowers from default by inflating property prices – while loading down property, companies and personal incomes with debt. The fact that price gains for real estate are taxed at a much lower rate than wages or profits attracted speculators to ride the inflationary wave as lending standards were loosened, fostering lower down payments, zero-interest loans and outright fictitious “no documentation” income statements, forthrightly called “liars’ loans” by Wall Street. But property prices were bound to crash without roots in the “real” economy. Rental incomes failed to support the debt service that was owed, inaugurating a “fourth” phase of the financial cycle: defaults and foreclosures transferring property to creditors. On the global plane, this kind of asset transfer occurred after Mexico announced its insolvency in 1982. Sovereign governments were bailed out on the condition that they submit to U.S. and IMF pressure to sell off public assets to private investors. Every major debt upswing leads to such transfers. These are the logical consequence of the dynamics of compound interest. 1437

Table B.100 from the Federal Reserve’s flow-of-funds statistics shows the consequences of U.S. debt pyramiding. By 2005, for the first time in recent history, Americans in the aggregate held less than half the market value of their homes free of debt. Bank mortgage claims accounted for more than half. By 2008 the ratio of home equity ownership to mortgage debt had fallen to just 40 percent. Bank mortgages now exceed homeowners’ equity, which fell below 40% in 2011. 1450

What happens when the exponential buildup of debt ends During the financial upswing the financial sector receives interest and capital gains. In the fallback period after the crisis, the economy’s private- and public-sector assets are expropriated to pay the debts that remain in place. A “Minsky moment” erupts at the point when creditors realize that the game is over, run for the exits and call in their loans. The 2008 crash stopped bank lending for mortgages, credit cards and nearly all other lending except for U.S. government-guaranteed student loans. Instead of receiving an infusion of new bank credit to break even, households had to start paying it back. Repayment time arrived. This “saving by paying down debt” interrupts the exponential growth of liquid savings and debt. But that does not slow the financial sector’s dominance over the rest of the economy. Such “intermediate periods” are free-for-alls in which the more powerful rentiers increase their power by acquiring property from distressed parties. 1455

Financial emergencies usually suspend government protection of the economy at large, as unpopular economic measures are said to be necessary to “adjust” and restore “normalcy” – finance-talk for a rollback of public regulatory constraints on finance. “Technocrats” are placed in control to oversee the redistribution of wealth and income from “weak” hands to strong under austerity conditions. 1464

reverse mortgages. Retirees and other homeowners signed agreements with banks or insurance companies to receive a given annuity payment each month, based on the owner’s expected lifetime. The annuity was charged against the homeowner’s equity as pre-payment for taking possession upon the owner-debtor’s death. The banks or insurance companies ended up with the property, not the children of the debtors. (In some cases the husband died and the wife received an eviction notice, on the ground that her name was not on the ownership deed.) The moral is that what is inherited in today’s financialized economy is creditor power, not widespread home ownership. So we are brought back to the fact that compound interest does not merely increase the flow of income to the rentier One Percent, but also transfers property into its hands. 1469

economies veer out of balance as revenue is diverted to pay bankers and bondholders instead of to expand business. Yet this has not discouraged economists from projecting national income or GDP as growing at a steady trend rate year after year, assuming that productivity growth will continue to raise wage levels and enable thrifty individuals to save enough to retire in affluence. The “magic” of compound interest is held to raise the value of savings as if there are no consequences to increasing debt on the other side of the balance sheet. The internal contradiction in this approach is the “fallacy of composition.” Pension funds have long assumed that they and other savers can make money financially without inflicting adverse effects on the economy at large. Until recently most U.S. pension funds assumed that they could make returns of 8.5 percent annually, doubling in less than seven years, quadrupling in 13 years and so forth. This happy assumption suggested that state and local pension funds, corporate pension funds and labor union pension funds would be able to pay retirees with only minimal new contributions. The projected rates of return were much faster than the economy’s growth. Pension funds imagined that they could grow simply by increasing the value of financial claims on a shrinking economy by extracting a rise in interest, dividends and amortization. 1478

It is as if savings can keep accruing interest and make capital gains without shrinking the economy. But a rate of financial growth that exceeds the economy’s ability to produce a surplus must be predatory over time. Financialization intrudes into the economy, imposing austerity and ultimately forcing defaults by siphoning off the circular flow between producers and consumers. To the extent that new bank loans find their counterpart in debtors’ ability to pay in today’s bubble economies, they do so by inflating asset prices. Gains are not made by producing or earning more, but by borrowing to buy assets whose prices are rising, being inflated by credit created on looser, less responsible terms. Today’s self-multiplying debt overhead absorbs profits, rents, personal income and tax revenue in a process whose mathematics is much like that of environmental pollution. 1490

The twenty-ninth day,” that is, one day before the half the pond’s lilies double for the final time, stifling its surface. The end to exponential growth thus comes quickly. The problem is that the pond’s overgrowth of vegetation is not productive growth. It is weeds, choking off the oxygen needed by the fish and other life below the surface. This situation is analogous to debt siphoning off the economic surplus and even the basic needs of an economy for investment to replenish its capital and to maintain basic needs. Financial rentiers float on top of the economy, stifling life below. Financial managers do not encourage understanding of such mathematics for the public at large (or even in academia), but they are observant enough to recognize that the global economy is now hurtling toward this pre-crash “last day.” That is why they are taking their money and running to the safety of government bonds. Even though U.S. Treasury bills yield less than 1 percent, the government can always simply print the money. The tragedy of our times is that it is willing to do so only to preserve the value of assets, not to revive employment or restore real economic growth. Today’s creditors are using their gains not to lend to increase production, but to “cash out” their financial gains and buy more assets. The most lucrative assets are land and rent-yielding opportunities in natural resources and infrastructure monopolies to extract land rent, natural resource rent and monopoly rent. 1500

Finance has converted its economic power into the political power to reverse the classical drive to tax away property rent, monopoly rent and financial income, and to keep potential rent-extracting infrastructure in the public domain. Today’s financial dynamics are leading back to shift the tax burden onto labor and industry while banks and bondholders have obtained bailouts instead of debts being written down. This is the political dimension of the mathematics of compound interest. It is the pro-rentier policy that the French Physiocrats and British liberals sought to reverse by clearing away the legacy of European feudalism. 1515

the forefront of the news by the statistical research of Thomas Piketty 1529

statistical research of Thomas Piketty and Emmanuel Saez showing the increasing concentration of income in the hands of the richest One Percent. The main remedies they propose are a wealth tax (especially on inherited estates) and a return to steeper progressive income taxation. The idea of taxing higher income brackets more without regard for whether their gains are earned “productively” or in extractive rentier ways represents a victory in dissuading critics from focusing on the policy aim of Adam Smith and other classical economists: preventing “unearned” income from being obtained in the first place. As Chapter 3 has described, they recognized not only that rentier revenue (and capital gains) is earned in a predatory and unproductive way, but also that land rent, monopoly rent and financial charges are mainly responsible for the rising wealth of the One Percent as compared to that held by the rest of society. 1530

FIRE sector revenue appears as a cost of producing an equivalent amount to Gross Domestic Product (GDP), not as unearned income or “empty” pricing. And neither the NIPA nor the Federal Reserve’s flow-of-funds statistics recognize how the economy’s wealthiest financial layer makes its fortunes by land-price gains and other “capital” gains. A cloak of invisibility thus is drawn around how FIRE sector fortunes are amassed. 1546

The foundation myth of pro-rentier economics is that everyone receives income in proportion to the contribution they make to production. This denies that economic rent is unearned. Hence, there is no exploitation or unearned income, and no need for the reforms advocated by classical political economy. 1550

Robber barons, landlords and bankers are depicted as part of the production process, and prices are assumed to settle at their cost of production, defined to include whatever rentiers manage to obtain. This closed logical circle excludes any criticism that markets may work in an unfair way. To Clark and other “free market” economists, “the market” is simply the existing status quo, taking for granted the existing distribution of wealth and property rights. Any given distribution of property rights, no matter how inequitable, is thought of as part of economic nature. The logic is that all income is earned by the recipient’s contribution to production. It follows that there is no free lunch – and also that There Is No Alternative to the extent that the existing distribution of wealth is a result of natural law. 1566

Treating any revenue-yielding asset as capital conflates financial and rentier claims on production with the physical means of production. The vantage point is that of financiers or investors buying land and real estate, oil and mineral deposits, patents, monopoly privileges and related rent extraction opportunities without concern for whether economists classify their returns as profit or as rent. Today’s tax laws make no such distinction. 1575

failure to distinguish manmade capital from property rights that did not involve any necessary or intrinsic cost of production. The result, Patten said, was to conflate profits earned on tangible industrial capital investment with land and monopoly rent. To real estate investors or farmers buying properties on mortgage, the financial and monopoly charges built into their acquisition price appear as an investment cost. “The farmer thinks that land values depend on real costs” because he had to pay good money for his property, explained Patten, “and the city land speculator has the same opinion as to town lots.” This individualistic view is antithetical to the socialist and Progressive Era reforms being introduced in the late 19th century. That is what makes classical concerns with the economics of national development different from the financialized investor’s-eye view of the world. At issue was what constitutes the cost of production in terms of real value, as distinct from extractive rentier charges. Freeing economies from such charges seemed to be the destiny of industrial capitalism. 1581

“Institutionalist” and sociological reformers retained rent theory Patten pointed out that land sites, like mineral rights provided by nature and financial privileges provided by legal fiat, do not require labor to create. But instead of describing their economic rent as an element of price without real cost or labor effort, Clark viewed whatever amount investors spent on acquiring such assets as their capital outlay and hence as a market cost of doing business. “According to the economic data he presents,” Patten wrote, “rent in the economic sense, if not wholly disregarded, at least receives no emphasis. Land seems to be a form of capital, its value like other property being due to the labor put upon it.” But its price simply capitalizes property rights and financial charges that are not intrinsic. 1590

For national economies, the problem is that and land rent and natural resource rent are taken at the expense of wage earnings as well as from industrial profits. “It seems to me,” Patten wrote, that the doctrine of Professor Clark, if carried out logically, would deny that the laborers have any right to share in the natural resources of the country. … All the increase of wealth due to fertile fields or productive mines would be taken gradually from workmen with the growth of population, and given to more favored persons … When it is said that the workingman under these conditions gets all he is worth to society, the term ‘society,’ if analyzed, means only the more favored classes … They pay each laborer only the utility of the last laborer to them, and get the whole produce of the nation minus this amount. This is why Patten’s contemporary reformers urged that land, natural resources and monopolies be kept in the public domain, so as to minimize the rake-off of national patrimony “given to more favored persons.” The idea of unearned income as a subtraction from the circular flow of income available for labor and industry as wages and profits has vanished from today’s post-classical NIPA. Now, whatever is paid to rentiers is considered a bona fide cost of doing business as if it embodies intrinsic value for a product. 1606

Clark’s claim that no income is unearned defines all economic activities as being productive in proportion to how much income they obtain. No one way of making money is deemed more or less productive than any other. 1617

Everyone earns just what he or she deserves. Natural law will proportion income and wealth to their recipients’ contribution to production, if not “interfered” with. Today’s highest paying occupations are on Wall Street, running banks, hedge funds or serving as corporate Chief Financial Officers. In Clark’s view they earn everything they get, and everyone else only deserves whatever is left over. Gary Becker, the University of Chicago economist, followed this logic in justifying such incomes as being earned productively, warning that progressive taxation would discourage their enterprise and hence productivity: “A highly progressive income tax structure tends to discourage investment in human capital because it reduces take-home pay and the reward to highly skilled, highly paid occupations.” Rentier income, inherited wealth, landlords and monopolies making money off the economy is thus interpreted as “earnings” on one’s “human capital,” the neoliberal catchall residual to absorb whatever cannot be explained in terms of actual labor effort or cost. It replaces what former economists called unearned income. It is as if the One Percent and the FIRE sector do not make money off the property they have (either inherited or built up far beyond what anyone’s individual labor and enterprise could explain), but out of their own human talents. Finance capital, rentier capital, land and monopoly rights are all conflated with “capital.” 1619

Keynes worried that as economies grew richer, people would save a larger proportion of their income instead of spending on consumption. This drain from the circular flow would lead to depression, unless governments compensated by infusing money into the economy, hiring labor for public works. Keynes depicted saving simply as hoarding – withdrawing revenue from the spending stream of production and consumption. 1647

There always is an economic gain for some party in sponsoring bad theory. Many erroneous economies can be traced to policies endorsed by the bad theorists. Leaving rentier income and spending out of the equation enables anti-labor economists to demand monetary austerity and a balanced government budget as their knee-jerk policy response. The narrow-minded MV=PT tautology enables economists to blame wages for inflationary pressures, not the cost of living being pushed up by debt-leveraged housing prices and other FIRE sector expenses, or by the rising corporate debt service built into the pricing of goods and services. In reality, asset prices rise or fall at a different rate from commodity prices and wages. This is a result precisely of the fact that the Federal Reserve and other central banks “inject” money into the economy via Wall Street, the City of London or other financial centers, by buying and selling Treasury securities or providing commercial bank reserves, e.g., in the post-2008 waves of Quantitative Easing. 1666

The assumption is that people only receive income for what they produce. This assumption rests on a tunnel vision that reflects the ideological victory that landlords and vested financial interests achieved in the late 19th century against the classical drive to tax economic rent. The effect of excluding land rent, natural resource rent and monopoly rent – the drain of income from producers and consumers to pay landlords, privatizers, monopolists and their bankers – is to deter measurement of what I call rent deflation. That is the analogue to debt deflation – the diversion of income to pay debt service. 1687

There also is no measure of criminal income, smuggling or fictitious accounting for tax avoidance. No category of spending is counted as overhead, not even pollution cleanup costs or crime prevention, not to mention financial bailouts. Economists dismiss these as “externalities,” meaning external to the statistics deemed relevant. Yet despite the rising proportion of spending that takes the form of rent extraction, environmental pollution cleanup costs, debt pollution and its bailout costs, GDP is treated as a an accurate measure of economic welfare. The result confuses healthy growth with that of a tumor on the body politic. Taken together, these omissions deter the kind of systemic analysis that would have alerted policy makers and voters to the distortions leading up to the 2008 crash. 1693

Rental income obtained by commercial investors and natural resource owners is called “earnings” on a par with profits and wages. This diverts attention away from how fortunes are made without labor or out-of-pocket production costs. It also requires a convoluted reorganization of statistics to discover how large the actual cash-flow return to absentee real estate ownership is, given the heavy component of interest and the “just pretend” economic category of over-depreciation. 1704

Land rent appears to have disappeared into the Orwellian memory hole. It is as if commercial real estate investors and owners receive no land rent at all. This terminological sleight of hand helped divert attention from how bank over-lending led to the real estate bubble that burst in 2008. It also trivializes international trade theory, by failing to recognize how capitalizing land rent into mortgage loans raises the cost of housing and other debt-leveraged prices. What the NIPA do make clear is that most real estate rental income is paid to the banks as interest. NIPA accountants find real estate and banking are so intertwined in the symbiotic FIRE sector that for many years financial and real estate income was not separated in the statistics. The activities of mortgage brokers and real estate agents seem to belong to Finance, Insurance or Real Estate in common. 1715

The NIPA also show how the tax fiction of over-depreciation (writing off a building more than once, over and over again) offsets otherwise taxable earnings for commercial real estate, enabling commercial real estate, oil and mining companies to operate decade after decade without a reportable taxable profit. An army of accountants has been backed by political lobbyists to write “loopholes” (a euphemism for distorting economic reality) into the tax code to make it appear that landlords and oil companies lose money, not make it! According to the NIPA, real estate earnings do not cover the rate at which landlords pay interest as a cost of production and buildings depreciate. Depreciation and the rate of return For industrial capital that wears out or obsolesces (becoming high-cost as a result of improving technology, e.g., computers that quickly get out of date even though they remain in working order), depreciation is a return of capital, and hence not part of surplus value strictly speaking. But this is not the case in the real estate, because buildings do not wear out – and rather than their technology becoming obsolete, older buildings tend to have much more desirable construction, or else have been renovated as a result of the ongoing maintenance repairs that typically absorb about 10 percent of rental income (or a property’s equivalent rental value). So for real estate, depreciation is largely a fictitious category of income designed to make rental revenue tax-free. The same building can be depreciated all over again – at a rising price – each time the property is sold to a commercial investor. (Homeowners are not allowed this tax subsidy.) 1723

Thus, despite the pretense by accountants that real estate is losing its value, the land’s site value (and the decline in interest rates) actually is increasing its value. Reality and seemingly empirical statistics tell opposite stories. No wonder the wealthiest One Percent have widened their wealth gap over the rest of the economy, defending this just-pretend statistical picture as if it is empirical science and therefore objective simply because its deception has decimal points. 1737

What actually happens is that landlords, oil and gas companies, mining companies, monopolies and banks charge rents for access to the land, natural resources and credit needed for production to take place. These payments drain the circular flow of spending between producers and consumers, shrinking markets and causing unemployment. Rentiers spend their income not only to hire labor and buy its products (as Malthus described, and as Keynes applauded) but also to buy financial assets and more property. Banks use their revenue to make more loans. This creates yet more debt while bidding up asset prices, obliging new homebuyers to borrow even more for ownership rights. 1742

the NIPA provide a cloak of invisibility for rent-extracting activities. The vested interests have won the fight against creating more relevant statistical categories. Their hope evidently is that if exploitative activities are not seen or quantified, they are less likely to be taxed or regulated. 1753

Today’s major rentier sector is banking and high finance. Most bank loans are geared not to produce goods and services, but to transfer ownership rights for real estate, stocks (including those of entire companies) and bonds. This has led national income theorists to propose treating the revenue of such institutions as transfer payments, not payments for producing output or “product.” 1757

Thorstein Veblen 2117

the Paris Bourse and Frankfurt, instead of in public hands as socialists 2141

Most U.S. and European corporations pay for their capital investment out of their current earnings, not by borrowing from bondholders or banks. The financial system extends credit mainly to buy property already in place, from real estate (the focus of most bank lending today) to entire companies. This shift in ownership adds to debt without increasing output, merely transferring ownership. Existing stockowners are bought out by new owners who issue high-interest bonds and borrow takeover loans from banks. And corporations borrow increasingly to buy up their own stock, and even to pay dividends, creating gains by inflating asset prices. 2173

As early as 1910, Rudolf Hilferding’s Finanzkapital described high finance as extractive: “Property ceases to express any specific relation of production and becomes a claim to the yield, apparently unconnected with any particular activity.” 2322

The tax subsidy for debt over stock market financing is a major catalyst to debt-leveraged buyouts (LBOs) and share buybacks. The new breed of corporate raiders and “financial engineers” pay themselves interest and produce capital gains with the profits hitherto shared with federal, state and local tax collectors. The government budget deficits deepens, and the Treasury issues more bonds (and looks to raise taxes from labor and consumers). The entire economy becomes more debt-leveraged, paying income to creditors – headed by the One Percent – instead of investing it or spending to raise living standards. This phenomenon is the major theme of this book. 2346

Debts require interest to be paid at a stipulated pace without regard for what the debtor earns. If a payment is missed, creditors have the right to foreclose on whatever assets are pledged as collateral. To protect themselves, debtors keep a liquid savings cushion on hand to cover the risk of declining income. Paying interest and amortization thus leaves less available to spend. 2356

Banks hesitate to finance new ventures. They prefer to lend against collateral on which they can foreclose if debtors cannot meet their scheduled payment. This obliges debtors to keep liquid savings on hand, leaving less for current spending. In antiquity, debtors who could not pay fell into bondage to their creditors. That is the original literal meaning of bond: a fetter imprisoning the debtor. Now that debtors’ prisons have been phased out, creditors have recourse to the debtor’s property and future earnings. Homeowners pledge their real estate to back their mortgage debts, companies pledge their assets, and clients of payday loan sharks pledge their kneecaps. 2363

The problem is that instead of raising capital to fund new capital investment and avoid debt, the stock market has been turned into a vehicle for debt-financed takeovers, replacing equity with debt. Starting with the high-interest “junk” bonds issued from 1977 onward, a class of raiders and “buyout kings” like Carl Icahn emerged to become Wall Street’s most lucrative market. Financial empire builders borrowed from banks and institutional bond buyers to buy out existing stockholders. Takeover financing pays an interest rate premium because of the relatively high risk that the process will drive targeted companies bankrupt, or at least will strip their capital and slow their growth by raising their debt/equity ratio. The process is called debt leveraging. It has been welcomed as “wealth creation,” as if it enriches the economy rather than leaving less for new investment and hiring. 2368

Researchers at Stanford University have concluded that pressure to meet quarterly earnings targets may be reducing research and development spending, and cutting US growth by 0.1 percentage points a year. Others have found that privately held companies, free to take a longer-term approach, invest at almost 2.5 times the rate of publicly held counterparts in the same industries. This persistent lower investment rate among America’s biggest 350 listed companies may be reducing US growth by an additional 0.2 percentage points a year. Much of the problem stems from the way the vast majority of asset owners pay the people who manage their money. On average, 74 per cent of remuneration is paid in cash, and tied to outperforming an annual stock market benchmark. The result is an obsession with next quarter’s earnings rather than the next 10 years’. — Financial Times, April 1, 2015 2380

The origins of banking, financial partnerships and shares in enterprises are to be found in the temples and palaces of the ancient Near East at the inception of the Bronze Age (3200-1200 BC). From the time interest-bearing debt was innovated in Mesopotamia to finance commerce and provide agricultural credit around 3000 BC, there is no trace of borrowing to manufacture goods in workshops, and rarely to buy land. Business credit came into the picture initially to consign temple handicrafts or commodities to seafaring merchants and caravans for long-distance commerce. 2393

The wealthy used their profits from this commerce and money lending to buy land, which was the major determinant of social status and economic patronage throughout antiquity. (What modern historians call “banks” were family or public lenders using mainly their own money, not deposits.) Purchases of real estate and other assets were for cash. Even in modern times it has been rare for banks to finance investment in industrial production. Until the 19th century most business loans were to fund the sale (usually exportation) of goods after they were produced, not to put workshops and factories in place. Banks thus found their major market in international trade, which helps explain why the British bank spokesman David Ricardo advocated an international specialization of labor instead of national self-sufficiency in food and other basic needs. 2399

Historically, most lending to governments has focused on war borrowing. When the Habsburgs and other rulers had trouble paying their debts, bankers pressed for payment in the form of a transfer of ownership of mines and other natural resources in the public domain. Rulers also created commercial monopolies to privatize: the East and West Indies Companies of Holland, Britain and France, and similar exclusive privileges (literally “private law”) to trade with specific regions or similar. These Crown Corporations paid dividends out of monopoly rent extraction, not profits from industrial manufacturing. 2423

To maximize what they received for these monopolies, governments promoted stock markets as a speculative vehicle. 2432

To dispose of France’s royal debt, he created the Mississippi Company to develop plantation slavery in what later was called the Louisiana territory (named for Louis XIV). Britain emulated the scheme, hoping to retire its war debts by privatizing the asiento slave trade monopoly its navy had won from Spain. This treaty became the sole asset of the newly incorporated South Sea Company, named for the South Atlantic across which slaves were shipped from Africa to the New World. Together, these two government-sponsored bubbles promised enormous wealth from 18th century’s the major growth sector: the African slave trade, that century’s version the bubble of the 1990s. The beneficiaries were the French and British governments, along with insiders who became part of what today is called a pump and dump operation. 2439

The French and British governments accepted payment for stock in these companies in their own bonds – at full par value. This provided a giveaway to bondholders, because the bonds could be bought at a steep discount, reflecting widespread doubt that they could actually be paid. Bond prices rose as new buyers used them to buy shares in the Mississippi and South Sea companies. Almost no money raised by these companies was actually invested to undertake business and generate a profit. What was sold was hope – shares in purely potential gains. Investors only needed to put down about 10 percent of the purchase price of the stock to subscribe. By the time the second payment was due, the stock price may have been bid up by at least that amount, doubling the initial down payment. This debt leveraging – buying on credit with only a small down payment – magnifies gains and losses in asset prices on both the upside and downside. It was the strategy Margaret Thatcher used to popularize the privatization of British Telecom and subsequent selloffs of government assets, providing quick speculative gains to early buyers with small down payments. 2446

The government tactic was to sell stocks in order to retire its bonds instead of defaulting on them, by persuading bondholders to swap their bonds for shares in the new companies. When the swap was completed, the stock price was allowed to plunge. The government shed crocodile tears at the “madness of crowds” that it itself had encouraged! It was a carefully orchestrated madness. Insiders avoided loss by selling out in time. 2455

Making stock market gains from financial leverage and rent extraction The privatization of monopolies, canals or national railroad systems always has been associated with insider dealing and fraud, ending with latecomer buyers holding a collapsing financial bag. Yet despite insider manipulations and subsequent collapse, the idea of making capital gains while putting down only a fraction of the purchase price seized the public imagination. It offered the temptation of outsiders making the huge gains that insiders tended to monopolize. 2459

The irony of the stock market is that corporations were created to replace short-term partnerships for voyages and other such ventures. Instead of having to divide up profits at the end of each voyage or upon the death of major partners, corporations have been given a permanent existence, divided into shares that were transferable. Yet the financial time frame is still short-term. This is especially true of bankers, who did little to finance the Industrial Revolution. The economic historian George W. Edwards has found that Britain’s “investment banking houses had little to do with the financing of corporations or with industrial undertakings. The great investment houses bitterly opposed the numerous corporate issues which were floated in 1824 and 1825,” hoping to control industry by bank credit. “The investment houses for a long time refused to take part even in the financing of the British railways.” Banks and other lenders advanced credit to industry only if proprietors could show orders for their products, or bills falling due for sales. Most of all, banks financed shipments of goods, spanning the time gap between production, delivery and receipt of payment by the customer, usually payable after 90 days. This financing involved foreign exchange fees for the banks as well as interest. But it was a short-term business. 2465

the Industrial Revolution’s leading entrepreneurs could obtain bank credit only after investing their own funds to get production underway. From James Watt’s steam engine in the late 18th century to Henry Ford’s automobile in the early 20th century, banks were not in the foresight business. Stock markets really began to take off in the 19th century for railroads and canals, other basic infrastructure, monopolies and trusts. These undertakings were rife with financial fraud, headed by the Panama and Suez Canal schemes. America’s stock market consisted mainly of railroad stocks during its early years, which transferred enormous sums of British and other European savings to the United States. Wall Street operators skimmed off much of the inflow. A favorite tactic was “stock watering,” a practice of proprietors issuing stock to themselves, “diluting” the ownership of existing shareholders. Banks favored railroads and public utilities whose income streams could be easily forecast, and large real estate borrowers with land pledged as collateral. Manufacturing enterprises only obtained significant bank and stock market credit after companies had grown fairly large with stable earnings. Growth potential hardly qualified. By the 1920s, Britain’s banks were broadly criticized for their failure to finance industry, and for favoring international clients rather than domestic ones. 2477

Apart from infrastructure speculation, the stock market was mainly a vehicle for manipulators to buy ownership rights of natural monopolies and rent-seeking privileges, especially to create large trusts such as U.S. Steel and Standard Oil. Banks, pension funds and other financial institutions have lent increasingly for speculation in stocks and bonds, including today’s debt-leveraged buyouts for mergers, acquisitions and outright raids. Trade financing was evolving into investment banking, focusing on real estate, oil and other natural resources, and funding speculation in stocks, foreign bonds and currencies. These high-risk activities held consumer and business deposits hostage to financial gambling and raiding, leading to the 1929 crash and the Great Depression. 2490

The economic wreckage made it obvious that the U.S. financial system needed to be insulated from such speculation. Congress passed the Glass-Steagall Act in 1933 to isolate financial speculation from personal and basic business banking. Other New Deal reforms included creation of the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corp. (FDIC) and a shift to 30-year home mortgages instead of the short three-year time frame. These reforms succeeded in stabilizing banking through the 1940s up to the 1970s. 2496

high finance has promoted debt at the expense of equity, and used it to make short-term financial returns rather than funding new capital investment. 2510

The result is that despite 20th-century reformers’ hopes to see the stock market promote industrial capital formation, it has become a vehicle for loading companies down with debt and cutting back their long-term investment. Unlike dividends to shareholders, interest charges on debt cannot be reduced when sales and earnings turn down. 2512

Companies that replace equity with debt lose economic flexibility and must live on short financial leashes. 2515

The term “junk bonds” was coined to reflect high-interest bonds issued to corporate raiders and takeover kings to buy companies with borrowed credit (or, less negatively, to finance smaller new business without a track record or deemed too risky to obtain normal bank credit). 2518

Adam Smith long ago remarked that profits often are highest in nations going fastest to ruin. There are many ways to create economic suicide on a national level. The major way throughout history has been by indebting the economy. Debt always expands to reach a point where it cannot be paid by large swaths of the economy. That is the point where austerity is imposed and ownership of wealth polarizes between the One Percent and the 99 Percent. Today is not the first time this has occurred in history. But it is the first time that running into debt has occurred deliberately, applauded as if most debtors can get rich by borrowing, not reduced to a condition of debt peonage. 2664

Finance vs. Industry: Two Opposite Sides of the Balance Sheet Last year, the corporations in the Russell 3000, a broad U.S. stock index, repurchased $567.6 billion worth of their own shares – a 21% increase over 2012 … That brings total buybacks since the beginning of 2005 to $4.21 trillion – or nearly one-fifth of the total value of all U.S. stocks today. — Jason Zweig, “Will Stock Buybacks Bite Back?” Wall Street Journal, March 22, 2014. Today’s financial sector is raiding what was expected a century ago to be the social functions of capital: to expand output and employment. Economies are slowing in the face of exponentially growing financial claims (bank loans, stocks and bonds) that enrich the One Percent at the expense of the 99 Percent. This polarization leads to unemployment and also to corporate underinvestment by leaving companies too cash-strapped to undertake new capital spending to raise productivity.2679

Business schools teach today’s new breed of managers that the proper aim of corporations is not to expand their business but to make money for shareholders by raising the stock price. Instead of warning against turning the stock market into a predatory financial system that is de-industrializing the economy, they have jumped on the bandwagon of debt leveraging and stock buybacks. Financial wealth is the aim, not industrial wealth creation or overall prosperity. The result is that while raiders and activist shareholders have debt-leveraged companies from the outside, their internal management has followed the post-modern business school philosophy viewing “wealth creation” narrowly in terms of a company’s share price. The result is financial engineering that links the remuneration of managers to how much they can increase the stock price, and by rewarding them with stock options. This gives managers an incentive to buy up company shares and even to borrow to finance such buybacks instead of to invest in expanding production and markets. 2688

Conventional wisdom throughout the 20th century described low interest rates as spurring new investment and employment by lowering the cost of borrowing, and hence supposedly the cost of new investment. But few bank loans or bonds are for this purpose. Instead, low interest rates provide easier credit for raiders to attack companies, or simply for mergers and acquisitions. 2707

The effect of financial interlopers buying a company and making it appear more profitable in the short run by “bleeding” its balance sheet (hoping to find a buyer who will believe that the company has been “streamlined,” not depleted) is like a landlord stinting on maintenance and repairs, paying bills more slowly, and letting the property deteriorate by laying off doormen and other niceties. The property is left debt-ridden, with a stagnating rent roll unable to cover the mortgage. If we view industry as part of the economic and social environment, today’s breed of corporate raiders and shareholder activists are strip-mining companies, causing debt pollution, clear-cutting industry and leading to economic drought. Such short-termism is much like a debt-strapped family having to rely on a junk-food diet in order to make ends meet, leading to long-term medical costs and shorter lifespans. Living in the short run does not help make economies lower-cost and more productive. The aim is simply to report bigger profits so that managers and stockholder “activists” can exercise their stock options at a higher price. 2764

Even the public sector has adopted financial management criteria to squeeze out a positive cash flow. Governments are reducing their budget deficits by cutting back on maintenance and repair of bridges, roads and other infrastructure, and selling off public real estate and other assets. The effect is to inject less purchasing power and employment to support economic recovery. 2807

The financial sector promised to inaugurate a postindustrial economy in which bank customers could make money from borrowed credit created on computer keyboards without a need for industrial capital formation or employment. 2821

banking was on its way to becoming a public utility in the years leading up to World War I. 2830

public banking would be less likely to extend credit for the asset-stripping and asset-price inflation that characterizes today’s financial system. 2833

Most futurists a century ago believed that public regulation was needed to keep predatory finance and rent-seeking in check. But bankers and financiers successfully instituted a deregulatory economic philosophy and have seized control of governments to use its money-creating power to subsidize high finance, while leaving creditors “free” to stifle the economy’s real growth with debt deflation. 2834

Today’s financial interests denounce public regulation and rentier taxes as socialism. But “socialism” was not initially a term of invective for classical theorists. John Stuart Mill was called a Ricardian socialist because classical economists were moving toward reforms they themselves characterized as social – and hence, as socialist. Most reformers referred to themselves as socialists of one kind or another, from Christian socialists to Marxist socialists and reformers across the political spectrum. The question was what kind of socialism “free market” capitalism would evolve into. 2838

The resulting financial overhead consists of claims on the economy’s actual means of production. Yet most people think of these bonds, bank loans and stocks and creditor claims as wealth, not its antithesis on the debit side of the balance sheet. This inside-out doublethink is a precondition for the bubble economy to be applauded by the mass media, keeping its corrosive momentum expanding. 2881

Most capital investment in the U.S. and other economies normally is self-financed out of retained corporate earnings, not by borrowing from banks or bondholders. During the 35-year upswing spanning the return to peace after World War II until the late 1980s, “profits and overall net investment in the US tracked each other closely … with both about 9 per cent of gross domestic product,” noted a recent Financial Times report. But this correlation between capital investment and corporate profits “began to break down” in the Reagan/Thatcher era. By 2012 the National Income and Product Accounts (NIPA) were reporting that pre-tax corporate profits had risen to a record 12 per cent-plus of GDP, “while net investment is barely 4 per cent of output.” Although corporate profits have soared in recent years, they are not leading to new tangible investment, output or employment. The explanation for this disconnect is financialization. 2891

Some 40 percent of profits are now registered by the banking and financial sector, not industry. In the manufacturing sector, managers increase reported profits by cutting back basic spending, letting their physical investment run down, and replacing long-term skilled employees with less highly paid new recruits, while using the remaining corporate profits increasingly for share buybacks and higher dividend payouts. These practices have decoupled financial management from investment in new means of production. The idea that economies can get rich mainly from the debit side of the national balance sheet reflects the degree to which creditor interests have taken over the economy’s brain. 2899

Mainstream economists called the 1990-2007 era the Great Moderation. But then, bankers were in charge of naming it (in this case, David Shulman of Salomon Brothers). In reality it was the Great Indebtedness, leading to the Great Polarization that paved the way for today’s Great Austerity. When the bubble crashed, Wall Street blamed “the madness of crowds.” This blame-the-victim view depicted borrowers as being immoderate and greedy, and it seemed only moral that the “mad crowd” should now pay the price for its reckless indebtedness, not the creditors. So the most reckless banks were bailed out, as if it were not they and the Federal Reserve that were mad and immoderate. What made this period immoderate was deregulation of the financial sector. 2919

To new homebuyers, housing prices rose so high that by 2008 taking out a mortgage to buy a home meant cutting back consumption and living standards – unless one ran up credit-card debt and other borrowing. Many homeowners took out home equity loans (“second mortgages”), using their homes as an ATM to draw against a bank account. 2930

Every economic recovery since 1945 has started with a higher debt level than the one before it, and each successive recovery has been weaker. The rising debt overhead explains why the bank bailout that resolved the 2008 financial crisis has failed to yield a real “recovery.” To banks and other creditors, recovery means keeping the debts on the books, and indeed, re-inflating prices for homes by creating yet new debt. The bankers’ “solution” is to extend a new wave of credit to bid real estate, stock and bond prices back up. But debt is the problem. What is depressing today’s economies is that the debts have been kept in place, acting as a financial brake blocking a business upswing. The “solution” that banks offer is austerity: Most of the economy is geared to work off its debts, not write them down to levels that can be paid without pushing the economy into austerity. Austerity is Wall Street’s (and the Eurozone’s) new definition of “moderation.” 2933

Creditors and debtors thus have naturally opposing worldviews. Labor (“consumers”) and industry are obliged to pay a rising proportion of their income in the form of rent and interest to the Financial and Property sector for access to property rights, savings and credit. This leaves insufficient wages and profits to sustain market demand for consumer goods and investment in new means of production (capital goods). The main causes of economic austerity and polarization are rent deflation (payments to landlords and monopolists) and debt deflation (payments to banks, bondholders and other creditors). To the banks, “moderation” simply means not defaulting. From the 1990s to 2007, this eventuality was postponed by consumers running deeper into debt to pay their scheduled debt service and other rentier charges. Banks created enough new credit to finance rising personal budget deficits by lending mortgage credit and home equity loans to a widening segment of the population, without much regard for their ability to pay. Supplemented by soaring credit-card debt, this bank credit enabled consumers to support the living standards that their wages were unable to cover. The hope was that somehow they would come out ahead, as long as bank credit continued to bid up prices for real estate, stocks and bonds. 2941

Government deficits are deemed “good” as long as they are spent to bail out banks and bondholders. They are only “bad” when they are spent on labor and the “real” economy. Federal Reserve credit (“Quantitative Easing”) is good if it helps inflate asset prices for the One Percent and improves bank balance sheets. But public money creation is deemed “irresponsible” if it spurs recovery in employment and wages, helping the 99 Percent break even and recover its former share of national income and wealth. Rising asset prices for real estate, stocks and bonds are “good” because they increase the power of the One Percent over the rest of the economy. Rising wages and commodity prices are deemed bad, because they threaten to erode this power of debt over the economy. 2958

The reality is that bank loans do not fund direct investment and employment. They extract debt service while inflating asset prices to provide “capital” gains. This makes homes more expensive to buy, requiring new owners to take out larger mortgage loans. That is the Asset-Price Inflation phase of the financial cycle. At some point, repayment time arrives. Paying off debts absorbs income that otherwise would be available for spending on the goods and services that labor produces. This is the Debt Deflation phase. Each business upswing leaves a higher level of debt, diverting a rising proportion of income to pay debt service. The post-2008 bailout and imposition of austerity aimed to squeeze out enough income to carry the debt claims. But austerity generates even more defaults and a deeper crash. 2985

In contrast to industrial profits, capital gains are the product largely of the wave of asset-price inflation – that is, the wave of bank credit on easier terms for debt leveraging. Since interest rates began their 30-year decline in 1980, a financial wave of credit has enabled borrowers to buy these assets and their flow of incomes with higher amounts of low-interest credit. Price/earnings ratios rise when interest rates fall (described below). Making such gains therefore is different from earning them by labor and enterprise. These profits are what 19th-century writers called the “unearned increment,” especially when they accrue for the land’s rising site value. 3011

Public investment in roads and other transportation, schools and parks, water and other infrastructure is provided freely or at prices subsidized by taxpayers as a whole. The result is that taxpayers as well as rent-payers end up paying to create wealth for landlords – enabling them to borrow more or obliging new homebuyers to borrow more to obtain ownership of such sites. To the extent that rental values are paid to the banks as interest, landlords as well as taxpayers end up creating revenue and wealth for the financial sector. 3036

Capital gains are fueled mainly by debt leveraging – buying with as little of one’s own money as possible. As financial wealth mounts up, banks compete for new business by loosening their lending terms. The process becomes self-feeding as property prices rise. Speculators and homeowners are willing to pay their banks the rental value, hoping to get a capital gain. The logical end is reached at the point where the financial carrying charges absorb all the rental income or profits. This willingness of borrowers to pay all the rental income to creditors is the driving force behind asset-price bubbles. 3041

Pension funds diversified into junk bonds in the 1980s, and into packaged mortgages after the bubble burst in 2000. Mortgages became the highest-yielding form of security, steering pension savings into the real estate market by providing banks with a market for loans they originated. Tax favoritism for capital gains and inherited wealth When the U.S. income tax was inaugurated in 1913, capital gains were taxed as normal income. The logic was that a price gain for a stock, bond or real estate builds up the owner’s net worth just as do savings out of wages or profits. 3052

The Reagan-Bush Administration eased it yet more, especially for real estate. Landlords were allowed to pretend that their buildings depreciated in just over seven years, creating a fictitious charge that offset the rental income. This made commercial and absentee real estate basically income-tax free. Real estate gains are not taxed if they are re-invested in new property acquisition. Many European countries do not tax capital gains at all. British landlords can evade taxes by holding their property in an Isle of Man account or other tax-avoidance enclave. This favoritism has enabled real estate fortunes to be built up largely free of income and capital gains taxes. When owners die, all tax liability is forgiven and the heirs can continue the buildup. No wonder the One Percent now controls the lion’s share of U.S. wealth and income! 3059

selling the mortgage loans it has originated 3093

Together these payments to the FIRE sector (and the tax shift off it onto consumers) absorb roughly two-thirds of many blue-collar family budgets, leaving only about a third available to spend on current output: Rent or home ownership costs (incl. property tax): 35 to 40% Other debt service (credit cards, student loans etc.): 10% FICA wage withholding (Social Security and Medicare): 7.5%  Other taxes (income and sales taxes and health insurance): 10 to 15% TOTAL: about 67% There is no way for an economy with such high debt service, real estate and tax charges to compete with less financialized economies where housing is not so debt-leveraged, where family budgets do not have such high debt carrying charges, and where taxes have not been shifted so regressively off the FIRE sector onto labor and industry. Debt Deflation Meanwhile, the rentier overhead leaves consumers with less to spend on current output. This imposes deepening austerity as asset-price inflation gives way to debt deflation: 3110

(Phase 1) Consumer Demand = wages + new borrowing (that is, increase in debt) Paying back the rising debt taken on prior to 2008 led to the Debt Deflation phase of the credit cycle: (Phase 2) Demand = wages minus debt service. Asset-price inflation turns into debt deflation when paying amortization and interest (not to mention late fees) drains income from the economy’s circular flow of production and consumption spending (“Say’s Law” discussed in Chapter 3). This slows growth. The economy tapers off while the volume of credit and debt grows exponentially. Carrying this rising debt leaves less available to spend on goods and services, while government tax revenues and new money creation are paid to bondholders instead of being spent on public infrastructure, education, health and other social programs. 3121

Bernanke’s denial that rising debt levels do not reduce overall market demand for goods and services is reminiscent of Malthus’s argument that landlords spend their rents back into the economy. In trying to absolve the financial sector from causing austerity, Bernanke claimed that “debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects.” In other words, if creditors (or real estate moguls) spend the same proportion of their income and capital gains on consumer goods and investment goods as do average wage earners, there would be no debt deflation or general spending shortfall, but simply a transfer of purchasing power from debtors to creditors and their fellow rentiers. 3139

But the whole point is that “spending propensities” do differ between the One Percent and the 99 Percent, between rentiers on the one hand, and consumers and producers on the other. 3145

when today’s Wall Street financiers do spend their multi-million dollar salaries and bonuses money on themselves, it is largely on fine art trophies, luxury apartments that already have been built, on yachts and high fashion – largely imported, as was noted already in Malthus’s day. But most important, the super-rich lend out most of their gains, indebting the rest of the economy to themselves. 3148

President Obama and Republicans sought to reduce the government’s budget deficit, not spend more money into the economy. For Bernanke, monetary inflation after 2008 was limited to providing easy Federal Reserve credit money for banks. He expressed the hope that they would extend credit to the real estate, stock and bond markets to re-inflate asset prices. The “real” economy was left to suffer debt deflation. But more debt overhead involves carrying charges that drain consumption and investment spending. And paying down the debt overhead intensifies the austerity. This transforms the character of “saving” to mean a pay-down of debt, not money in the bank. 3155

The “saving” in question was an accounting entry in the national income accounts – a negation of a negation, and hence a positive. The only way these savings were “money in the bank” was that they were paid by debtors to their banks and credit card companies. This debt deflation shows how false the image is of using one’s home like the proverbial piggy bank. Running up a debt is not at all like withdrawing cash from a savings account. Bankers euphemize taking out equity loans (borrowing more against the property’s rising market price) as “cashing out” on one’s equity, as if this does not leave a legacy of debts, which constrain future spending by diverting more income to pay creditors. The more the “savings rate” rose in the post-2008 world, the less money “savers” had to spend. Debtors ate cheaper foods and ran down whatever liquid savings they had. This “upside down” saving led to debt deflation. 3178

To restore prosperity, the way the economy operates must be changed – mainly by writing down the debt overhead. Piketty and Saez have documented the extent to which just One Percent of the population owns most of the stocks and bonds in the banks and other firms, and receive their surplus in the form of dividends, profits, interest, rent and capital gains. A realistic model or picture of how the economy operates would require separating the “wealthy” households from the wage earners that live by their own labor rather than on dividends, rents, interest and capital gains. There is no way for markets to maintain full employment and grow in the face of debt deflation and regressive tax systems that have reached today’s magnitudes. 3190

at the heart of Citigroup’s loss. Nobody could know in advance precisely 3264

mainstream economics has become a lobbying effort to dismantle government power to regulate and tax rentiers. Well-subsidized models promote a trickle-down rationalization for the status quo, as if it were produced by inexorable economic laws. “Free market” ideologues then reason backward to construct a logic “proving” that economies become lower-cost and more efficient by lowering wage levels, removing taxes on wealth, cutting back public spending and privatizing infrastructure monopolies. In the resulting symbiosis between bankers and other rentiers, debt is created mainly to purchase rent-extracting privileges and other rent-yielding properties, turning their economic rent into interest and related financial fees. Nearly all new credit since 1980 has been extended to the FIRE sector – credit to transfer ownership of assets while running the economy into debt, not to create new wealth. 3288

The intended effect is to leave financial management to “technocrats,” who turn out to be bank lobbyists toting around a few academics as useful idiots embedded in well-subsidized “think tanks.” Much as the oil industry subsidizes Junk Science to deny how carbon emissions contribute to global warming, so Wall Street subsidizes Junk Economics to deny that debt pollution plunges economies into chronic austerity and unemployment. Their conclusion is that no public regulation is needed, and no cleanup charges to compensate for the damage being caused. 3297

Much as the oil industry subsidizes Junk Science to deny how carbon emissions contribute to global warming, so Wall Street subsidizes Junk Economics to deny that debt pollution plunges economies into chronic austerity and unemployment. 3298

Questions that a relevant economic theory needs to answer Today, years after the 2008 financial crisis, the most pressing task for economic theory should be to explain why employment and consumption spending have not recovered. The Federal Reserve has given banks $4 trillion and the European Central Bank €1 trillion in Quantitative Easing to help the financial layer atop the economic pyramid, not to write down debts or revive the “real” economy by public spending. This enormous act of money creation could have enabled debtors to free themselves of debt so that they could resume spending to keep the circular flow of production and consumption in motion. Instead, governments have left the economy debt-strapped, creating money only to give to financial institutions. Orwellian rhetoric is invoked to describe governments running budget deficits and creating central bank credit to help banks and bondholders but not employment and production. This is called “preserving the system.” However, what is intended to be preserved is not the indebted economy, but the debt overhead owed to the financial sector. Central banks assiduously avoid any attempt to quantify how far wages, profits and tax revenue can be diverted to pay creditors without causing economic collapse and insolvency. 3301

through the early 1970s, wages had risen faster than overall prices. But since the late 1970s, they have hardly moved. Consumer prices also have stabilized over the past thirty years. What have risen are asset prices, fueled by a tidal wave of bank credit inflating the greatest bond market rally in history. More money has been made in the stock market, bonds and real estate than by employing labor to produce goods for sale. 3320

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[Apr 26, 2021] Services, which accounted for about 40% of GDP in the 1950s, now account for about 60% of it

Apr 26, 2021 |

The U.S. isn't driven by manufacturing like it once was. Services, which accounted for about 40% of GDP in the 1950s, now account for about 60% of it. Many of the effects of the Covid-crisis were also unique, such as the way it hammered services like travel and restaurant spending while touching manufacturing far more lightly.

That makes it easy to spin plausible stories where things go well or poorly. For example, the work-from-home revolution the crisis helped spark might help businesses run more efficiently, boosting productivity, raising potential GDP and allowing the economy to run faster over the long run without overheating. Or, the thicket of supply-chain problems the crisis caused , and difficulties scaling up services to meet demand, could cause a more serious bout of inflation than most economists expect. Other uncertainties abound, including how successful President Biden will be getting his remaining spending and tax plans passed.

[Apr 24, 2021] -Our Bullish Conviction Is Now Lower-- JPM Joins Major Banks In Turning Bearish On -Easy- Market Gains - ZeroHedge

Apr 24, 2021 |

Yen Cross 21 hours ago

FOAD- JPM. What you really mean to say is the stimmy money is running down so you're running outta sheep to fleece.

Rainman 21 hours ago

There's been so much stimmy the shoeshine boy who are doing dollar averaging...

Soloamber 20 hours ago

Criminal investment bank speaks and no one listerns .

venturen 21 hours ago (Edited)

We are on a Permanent High Plataue of Zero Interest Easy Money... We don't need jobs, businesses or revenue!

Soloamber 20 hours ago

Translation JP Morgan has it's shorts in place .

Time to kick the legs out of the casino .

Hezekiah PREMIUM 17 hours ago (Edited)

Even those with half a brain can twig that JP Morgan are a bunch of crooks. Simply Google "JP Morgan fines".

Those who are market savvy should Google "JP Morgan fines".

Surely in literally everly market segment the CEO, Jamie Dimond, would be banged up in prison?!!!!!!!!!!!!!!!!!!

nsurf9 21 hours ago (Edited)

You think this guy understands that, even with more than 50% of the, country in plandemic lock-down, shutter/closed and/or bankrupt for a solid year, the "markets" have literally doubled.

Wake me up when the Treasury Securities Operational Details daily theft goes to zero.

Gentleman Bastard 21 hours ago remove link

This just means that JPM like the other whores have taken their short positions and will now do everything in their power to ensure that they cash out.

[Apr 01, 2021] Archegos's Collapse Is a Wakeup Call for Regulators

Apr 01, 2021 |

...history shows that one messy unwind can easily spread. The U.S. Office of Financial Research finds that the ten largest hedge funds were leveraged far more heavily than the next 40 largest funds, as of June. And many family offices may not be counted in these statistics at all, which mostly rely on disclosure forms they are able to avoid.

There are some obvious responses for regulators, such as mandating disclosure of the total return swaps that allowed Archegos to build big positions out of the public eye. But there are no easy answers to the wider challenge of overseeing leverage within the broadest financial complex when debt is almost free.

The system has held up under the latest strain, but this isn't a victory. Archegos means one who leads the way. Regulators must do what they can to ensure as few as possible follow.

Write to Rochelle Toplensky at [email protected] and Telis Demos at [email protected]

[Apr 01, 2021] Deutsche Bank Dodged Archegos Hit With Quick $4 Billion Sale - Bloomberg

Apr 01, 2021 |

Swiss rival Credit Suisse expects a hit in the billions of dollars from Archegos, people with knowledge of the matter have said, while Nomura Holdings Inc. has signaled it may lose as much as $2 billion. Analysts at JPMorgan Chase & Co. estimate the Archegos blowup may cause as much as $10 billion of combined losses for banks.

David Herro, chief investment officer of Harris Associates -- one of Credit Suisse's biggest shareholders -- said on Bloomberg Television on Wednesday that the Archegos incident was a "wake-up call" for Credit Suisse and should lead to sweeping changes to its culture and oversight practices.

Shares of Credit Suisse tumbled 21% this week on concern over the size of its potential Archegos hit. Deutsche Bank is down 2.9%.

[Mar 31, 2021] Looks like Goldman and Morgan managed to sell thier shares in Archegos meltdown first as usual pushing other clients under the bus: Billions in Secret Derivatives at Center of Archegos Blowup

Casino capitalism is the fertile ground for the most sleazy types of speculators. The stock market has become a giant slot machine financed by 401K lemmings. The marks here are 401K investors.
Excessive leverage is a immanent feature of the pre-collapse stage of Minsky cycle. So those who argue that we are close to another crash get some additional confirmation due to this event. The Masters of the Universe rediscovered the hidden areas of huge risk, and like in 2008 are afraid but can't and do not want to anything.
TBTF such as Goldman and Morgan aid the most sleazy types as they bring outsized profits for them. So this a catch 22 as Goldman and other TBFT controls SEC not the other way around.
It would be prudent to view banksters as a special type of mafia and treat accordingly and prohibit for them serving in government. But this is impossible under neoliberal as financial oligarchy has all political power.
The question is: Is there another fund that's larger, that's more leveraged with the same characteristics that could prove to be a more systemic event? That's the major concern right now." Wall Street's hottest trades such as pure-tech plays and high-flying tech/media like the ones bet on by Hwang -- could be unwound. The Hwang blowup wakes up investors to the realization that many parts of the market are overvalued and it's time to sell -- and quickly as yields are going up. For the the FAANGS, the Tesla's out there -- the fundamentals don't support the stock. So it would be logical to a large correction.
Notable quotes:
"... The idea that one firm can quietly amass outsized positions through the use of derivatives could set off another wave of criticism directed against loosely regulated firms that have the power to destabilize markets. ..."
Mar 31, 2021 |

Much of the leverage used by Hwang's Archegos Capital Management was provided by banks including Nomura Holdings Inc. and Credit Suisse Group AG through swaps and so-called contracts-for-difference, according to people with direct knowledge of the deals. It means Archegos may never actually have owned most of the underlying securities -- if any at all.

While investors who own a stake of more than 5% in a U.S.-listed company usually have to disclose their holdings and subsequent transactions, that's not the case with positions built through the type of derivatives apparently used by Archegos. The products, which are transacted off exchanges, allow managers like Hwang to amass exposure to publicly-traded companies without having to declare it.

The swift unwinding of Archegos has reverberated across the globe, after banks such as Goldman Sachs Group Inc. and Morgan Stanley forced Hwang's firm to sell billions of dollars in investments accumulated through highly leveraged bets. The selloff roiled stocks from Baidu Inc. to ViacomCBS Inc., and prompted Nomura and Credit Suisse to disclose that they face potentially significant losses on their exposure.

One reason for the widening fallout is the borrowed funds that investors use to magnify their bets: a margin call occurs when the market goes against a large, leveraged position, forcing the hedge fund to deposit more cash or securities with its broker to cover any losses. Archegos was probably required to deposit only a small percentage of the total value of trades.

The chain of events set off by this massive unwinding is yet another reminder of the role that hedge funds play in the global capital markets. A hedge fund short squeeze during a Reddit-fueled frenzy for Gamestop Corp. and other shares earlier this year spurred a $6 billion loss for Gabe Plotkin's Melvin Capital and sparked scrutiny from U.S. regulators and politicians.

The idea that one firm can quietly amass outsized positions through the use of derivatives could set off another wave of criticism directed against loosely regulated firms that have the power to destabilize markets.

Bob 2 days ago This is another major reminder that the stock market is not as rational as we want to believe. A small group of very large, leveraged funds can have far more impact on the market than dozens or hundreds of well thought out and researched programs. Sigh. Take your lumps and move on. Hasso 2 days ago 2008 - Hwang's Tiger Asia suffered losses from the Volkswagen short, 2012 - Hwang's Tiger Asia paid $44M to settle insider trading charges, banned 2014- Hong Kong fined him $5.3M & banned him for four years. 2021 - And here we are again.
Tyrone 2 days ago Gee, Credit Suisse involved in sleezy investments. Again. I'm shocked, just shocked!
Manohar 2 days ago Banks haven't learnt anything know why? Because its other people's money and the no one gets prosecuted when they are caught with hand in the cookie jar.
killer klown 2 days ago it's a sign that the market and it's regulators have learned even pretend that a penny difference in assumed earnings versus actual earnings using the GAAP accounting (which itself says it's not exact but generally accepted accounting principles)moves a stock is in itself a joke, this situation of a BIG BLACK BOX calls for the complete dismantle of the derivatives market which was created to lay off risk. Bill Hawng should be FLAT Broke his possesions seized, The board of Credit Suisse and Nomura et all should be unemployed as of 8:31 this morning. But they won't and it's only going to happen again and again.
Amvet 2 days ago Market manipulators have a free rein in the USA. Are politicians also involved? Reply 16 3 George 2 days ago Just amazing how some of the world's most sleazy characters have access to cosmic sums of money and remain under the radar and legal(???). Then nothing seems to happen except that loads of other folk get burned while they move on to the next bright idea. Reply 13 1 Rick 2 days ago So clearly limiting those who can purchase these to exclude amateur players has not been successful. Recklessness is not limited to amateurs. Mr. H. 2 days ago In 2008 high finance was playing very high risk games with clients money at the undefined edge between legal and illegal. A bunch of firms went away along with many billions of dollars because a bunch of players were playing CYA. They came up with the term "too big to fail" when they were picking winners and losers. "too big to fail" is is fetid bovine excrement. The SEC, that is the administrative government, was not doing its job! There were many questions about government employee competence to do those jobs. The government should have let the market place pick the winners and losers, then the government should have prosecuted everyone who failed to perform their fiduciary duty and set a major precedent about high risk play with other people's money; keep it legal or go to jail and lose your shirt. That is what should happen this time too! Noone 2 days ago Almost like something that is so dangerous and risky to both the market AND the "investor" that retail traders ARE BANNED from doing it should.. idk.. BE ILLEGAL FOR EVERYONE? Useless SEC. Do your job right.
Philip 2 days ago Ironic that Hedge Funds are the most unhedged game going.... Dan 1 day ago The managers of these HFs lack morality, they steal from other companies because they believe in their twisted little minds if they set up a system whereby they can trade in dark pools with illegal naked shorting, counterfeit shares and stock manipulation under the radar -- it makes the crime okay. All of this criminality is been done with the aid of supplementary leverage ratio (SLR) If they can manage to bankrupt the company they short with Government SLR they end up paying no tax and pocket the money GME/AMC and more for example.. Bingo the most audacious robbery attempt in the history of the state. Oh boys did they fail, wow what a spectacular failure. Now they have to deleverage destabilizing the entire market. Do these HF managers rank their values differently to the moral code we all live by? Obviously they do! There's no doubt they'll get lots of time to think about their behaviour when they're in the slammer. Each case will have to be evaluated on its own merit at some stage of course. On the face of it, all indications points to a tradeoff that benefits themselves at the disadvantaging of other. Sad for them! I rest my case!
Jodes 1 day ago The spikes in shares like ROKU, BIDU, SHOP and many more have huge parabolic spikes at the top accounting for the disfunctional market as we were seeing it at the top. They had huge buy orders to artificially spike the prices keep them up and then experts come in after and raise price targets and put a BUY rating on the stock. Then get retail to buy in and then drop them like a rock. Greedy and dispicibale. All probably done for a huge bonus. While retail suffers for their greed.
Vince 2 days ago More than 100 Trillion (with a T) are moving around the world in Derivatives each and every day., some say closer to 200 Trillion! You figure it our when THAT bubble bursts! Reply 2 1 SniffMopWho 2 days ago Interesting how these guys make millions and billions, just by pressing keys on a keyboard.
... 2 days ago More sleaze trying to bring down the market by making risky bets with swaps and derivatives, yet the regulators are caught asleep again. Just more proof of incompetence by Biden and his hired idiots at the SEC.

[Mar 31, 2021] Us market collapsed in March2020, but nobody has courage to admit that.

Mar 31, 2021 |

anon [406] Disclaimer , says:

[Mar 29, 2021] Hedge fund blowup sends shockwaves through Wall Street and the City

Mar 29, 2021 |

A little known hedge fund that blew up last week has sent shockwaves through the world of investment banking.

Shares in Credit Suisse ( CSGN.SW ) and Nomura ( 8604.T ) sunk over 10% on Monday after both warned they faced potentially billions in losses linked to hedge fund Archegos Capital.

Banks that worked with Archegos and lent it money to buy shares were scrambling to offload Archegos' investments after a handful of risky bets made by the hedge fund went bad. The rush to exit these positions hit public shares prices, leaving banks with huge losses.

Hedge funds typically borrow money from banks to invest, a process known as margin trading. This allows funds to leverage up the cash they hold and increase their positions -- potentially earning far greater returns if their bets come good. However, it also means hedge funds can theoretically lose more money than they hold in client funds.

If trades made on margin turn sour, banks will ask a client to put up more money as collateral to limit potential losses. This process is known as a margin call.

Archegos faced margin calls on its positions last week but failed to provide extra cash. As a result, banks began selling off stocks held on the hedge fund's behalf -- a fire sale known in the City as liquidating positions. The business press reported on Friday that Goldman Sachs ( GS ) and Morgan Stanley ( MS ) were selling huge chunks of shares in businesses including ViacomCBS ( VIAC ), Discovery ( DISCA ) and Chinese stocks Baidu ( BIDU ) and Tencent Music ( TME ). The block sales are estimated to be worth around $20bn (£14.5bn), according to the Financial Times .

Shares in Credit Suisse sunk after it warned of 'significant losses' linked to the blow up at Archegos Capital. Photo: Fabrice Coffrini/AFP via Getty Images

A little known hedge fund that blew up last week has sent shockwaves through the world of investment banking.

Shares in Credit Suisse ( CSGN.SW ) and Nomura ( 8604.T ) sunk over 10% on Monday after both warned they faced potentially billions in losses linked to hedge fund Archegos Capital.

Banks that worked with Archegos and lent it money to buy shares were scrambling to offload Archegos' investments after a handful of risky bets made by the hedge fund went bad. The rush to exit these positions hit public shares prices, leaving banks with huge losses.

Hedge funds typically borrow money from banks to invest, a process known as margin trading. This allows funds to leverage up the cash they hold and increase their positions -- potentially earning far greater returns if their bets come good. However, it also means hedge funds can theoretically lose more money than they hold in client funds.

If trades made on margin turn sour, banks will ask a client to put up more money as collateral to limit potential losses. This process is known as a margin call.

Archegos faced margin calls on its positions last week but failed to provide extra cash. As a result, banks began selling off stocks held on the hedge fund's behalf -- a fire sale known in the City as liquidating positions. The business press reported on Friday that Goldman Sachs ( GS ) and Morgan Stanley ( MS ) were selling huge chunks of shares in businesses including ViacomCBS ( VIAC ), Discovery ( DISCA ) and Chinese stocks Baidu ( BIDU ) and Tencent Music ( TME ). The block sales are estimated to be worth around $20bn (£14.5bn), according to the Financial Times .

"Things started going wrong for Archegos when shares of companies such as Viacom started to slide mid-last week," said Michael Brown, a senior market analyst at Caxton Business. "It was at that point that margins were called, and couldn't be provided, hence the block sales seen Friday."

A fire sale can have a negative impact on stock prices and shares in both ViacomCBS and Discovery sunk 27% on Friday. Banks therefore risked making less back from the sales than they lent to clients to fund the investments.

Credit Suisse on Monday warned it was facing "highly significant" losses linked to Archegos that could be "material to our first quarter results".

The Swiss lender didn't name Archegos but said: "A significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks."

Credit Suisse said it was "in the process" of selling shares held by Archegos. The bank said it was "premature" to estimate how much it would likely lose from the crisis.

"We intend to provide an update on this matter in due course," Credit Suisse said.

Shares sunk 13.4% in Zurich.

"One would assume that, judging by the size of positions sold, the 'game is up' for Archegos," Brown said.

He said it was "unlikely" that Archegos would pose a systemic risk to the financial system. Neil Wilson, chief market analyst at, said the hedge fund "appears to have been too concentrated in a number of risky stocks."

A hedge fund blow up is relatively unusual and Archegos' undoing has raised concerns that other funds could find themselves in similar positions.

"Block equity-trades stemming from margin-calls on Archegos will have sent the market's spidey senses a tingle," said Bill Blain, a senior strategist at Shard Capital. "Who is next?"

Alex Harvey, a portfolio manager at Momentum, said: "We tend to find out after the event that other funds get caught up as sometimes hedge funds may be crowded into similar trades."

"When we look at this and think about the GameStop saga and the decline in Tesla as two examples -- what we're seeing are more and more pockets of very unusual trading activity in some stocks," he said. "You worry that this sort of frothy trading activity in turn creates pockets of distress among investors and banks that leads to larger unwinds and losses for financials."

[Mar 26, 2021] Absurd NFT PRices Expose a Global Financial House of Cards - ZeroHedge

Mar 26, 2021 |

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Absurd NFT PRices Expose a Global Financial House of Cards BY SKWEALTHACADEMY FRIDAY, MAR 26, 2021 - 5:59

The insanity of absurd NFT prices reveals the fraud of the global currency system. The pricing for assets worldwide has gone insane at a time when the vast majority of the world's population became poorer, not wealthier, over the past 12 months due to the global economic lockdowns. As an example, there was an article in the Philadelphia Inquirer the other day of a cassette tape of hip hop icon Nas's Illmatic album selling for $13,999 . Not a CD, but a cassette tape. A rectangular piece of cardboard, known as an NBA trading card, for star Luka Doncic's rookie trading card, recently auctioned for $4.6M. Luka Doncic is not a star that played in 1925, and for this reason, his rookie card is worth so much. Luka Doncic entered the NBA in the 2018-19 season, less than three years ago. Nostalgic or collector items are simply selling for insane price because, in my opinion, wealthy people have captured so much of the world's wealth through a global currency system designed and engineered to produce this end result, that they have no better use for their money than to pay $14,000 for a music item that the vast majority of people do not even have the necessary hardware to actually play and to pay more than $4.5M for a piece of cardboard. Anyone that truly understands the difference between a sound and an unsound monetary system realizes that the likelihood, under a sound monetary system, of people paying exorbitant prices for the types of assets and NFTs described above would be a fraction of the probability at which they are occurring today.

Banksy, a UK-based street artist infamous for mocking the very wealthy people that pay millions for his artwork, even titling a piece "Morons" which depicted an art auction with a framed picture of the words "I can't believe you morons actually buy this shit". Instead of being offended by the artist's mockery, someone paid nearly 44,000 pounds for it and it recently sold for nearly 10 times the original purchase price when the piece was destroyed and the act of destruction was turned into an NFT. By the way Banksy also sold a very simple drawing of a girl with a red balloon that was mounted inside a frame in which he had hidden a shredder. After it sold for $1.4M, Banksy remotely activated the hidden shredder and shredded his artwork into thin strips as perhaps "revenge" against the idiocy of narcissistic, wealthy art collectors that can't find any better use of their money than purchasing stencil created art for which no rational person would ever pay $1.4M. To demonstrate the idiocy of the art world, Sotheby's immediately coined the shredding of the art piece as "the first work in history ever created during a live auction", which art collectors worldwide seemed to accept, and thereby increased the value of the destroyed piece of art to perhaps as high as double the original auction price at the current time and avoiding a more rational valuation for the art piece to near zero.

I once read a book called the $12M Stuffed Shark, in which the author revealed that US hedge fund manager Steve Cohen paid $12M to an artist to kill a shark and put it in a vat of plexiglass sealed formaldehyde that he could display in the foyer of his house and basically concluded, after a careful introspection into the art world, that pieces of art like pyramids built from tiny Godiva chocolates and stainless-steel colored balloon animals ($58M or more) would be priced at whatever price dealers could convince the dumbest rich person it was worth. Certainly this conclusion seemed to be supported when someone purchased an "art installation" of a banana taped to the wall with duct tape at a Miami Beach art gallery for $120,000 at the end of 2019 . When people conclude that the best use for $5M or $58M is to buy a piece of cardboard or a steel balloon animal during a period in which Rome is burning (i.e. exploding homelessness numbers in Los Angeles nearing 70,000 as evidenced here and here ), either this is a sign of the fraud of the monetary system, the decline of civilization, or both. If you have ever lived in Los Angeles, as I have, and watch the video referenced in the second link, you will find it astonishing that massive homeless encampments have sprung up throughout Los Angeles in areas that prior to recent years, had no homelessness. (depending on the social media platform you may be watching this on, the soaring prices for which art that I consider to be the lowest form of art that many do not even consider as art is selling for such absurd prices, including NFTs that I will soon discuss, is certainly reflective of the rapid decline of civilization.

This rapid decline of civilization is also reflected in the fact that giant titans of the tech world and social media platforms continue to promote and push the most morally reprehensible content to the top positions of success on their platforms. When popular YouTube Logan Paul visited the "suicide forest" in Japan and found a dead body hanging from the tree, he filmed it and mocked the dead person and YouTube quickly promoted his video as one of their top trending videos on their entire platform for 24 hours, until Logan Paul, not YouTube executives, deleted the video due to the outrage it provoked. Another popular YouTuber, David Dobrik, has had many of his reprehensible videos monetize bullying and belittling of others, often promoted on YouTube among the top trending videos. Recently Dobrik came under fire for allegedly monetizing a video of an actual rape on his channel, and he was roundly mocked when his initial apology consisted of trying to blame the rape victim, who was allegedly underage and too drunk to consent to sex. In his "apology", Dobrik stated he always gains consent for his videos, but sometimes people he victimizes consent at first but then change their minds later, and that is why it appears in many of his videos that he is monetizing morally reprehensible behavior. In any event, YouTube executives allegedly allowed such morally and cowardly behavior to be monetized to massive sums of income for such YouTubers and seem to be more focused on demonetizing anyone that challenges a narrative, true or false, forwarded by the oligarchs.

And as ludicrous as are the prices paid for some of the assets I've mentioned above, the level of insanity paid for NFTs, in my opinion, are at an even exponentially higher level. For those of you that may not know what are NFTs, Non-Fungible Tokens are unique blockchain-based digital assets that represent an increasing number of commodities, from art and real estate to collectibles like sports trading cards. One platform, Original Protocol, recently auctioned off the world's first NFT music album by American DJ 3LAU. Collectively, the artist's fanbase paid out more than $11 million for 33 NFTs contained on 3LAU's album Ultraviolet. In this case, since musicians are routinely ripped off by giant record labels and often have such suffocating, unfair contracts that make it near impossible to earn any significant income from album releases, the digitization of music in the form of NFTs that allow musicians to control their income is a wonderful aspect of the new digital economy of NFTs.

The Non-Fungibility of NFTs and Most Cryptocurrencies Disqualify Them for Use in Financial Derivative Currency Swaps

NFTs sell digital representations of items, including some that used to be represented in the physical world, like trading cards and pieces of art. As is the case in the fine art world, an NFT's price is the highest price you can convince someone to pay for it, a pool of clients that often overlaps with the over indulgent, narcissistic people that comprise the bidders for modern art pieces that sell for millions of dollars. Perhaps the most amazing quality of NFTs is that they actually have a more meaningful value than any cryptocurrency not backed by any type of hard asset. For example, bitcoin is a digital asset, but one would be hard pressed to describe its intrinsic value. One cannot say its fungibility is its price because its price is denominated in fiat currencies with intrinsic values of near zero. Furthermore, for those that constantly and very wrongly argue that non hard-asset backed cryptocurrencies are sound money, if bankers truly believed that bitcoin even remotely qualified as sound money, they would have zero problem offering currency swap derivative contracts between any fiat currency and bitcoin.

Yet, there is not a single corporation in the entire world that has a currency swap that hedges their corporate cash treasury holdings with bitcoin. You can never have any type of financial contract without unlimited risk if it is denominated in bitcoin in which both parties realistically have no idea of the price range of that currency for the maturity of that contract. No rational party will lock themselves into a contract in which a currency presents unlimited risk to them. The simple understanding of why there are no derivative currency swaps or hedging contracts denominated in bitcoin should easily explain to any rational person the very reason why BTC is not considered as sound money by a single banker in the entire world. On the contrary, even as volatile in price as gold and silver may be, gold and silver mining companies routinely hedge their inventory risk and their revenue risk of yet-to-be-mined gold and silver ounces by establishing open positions of gold and silver futures contracts years into the future.

You can't argue that BTC's intrinsic value is the block of the blockchain that records the transaction, because whether that block is used to record an NFT, BTC, or ownership of real estate, a photo or song, the price represented by that block could possibly vary from just a few dollars to several million dollars. So the blockchain has no intrinsic value either. However, with NFTs, its value, is more uniquely determinable than the block upon which a bitcoin transaction is stored that records the price of bitcoin, because that value is simply the highest price willing to be paid by all available bidders at any given time. If there are no available bidders willing to bid on a particular NFT for weeks or perhaps months on end, then one can assume the price of that NFT, even if the last paid price was $100,000, is likely zero. But even if there is one available bidder for that NFT at a price of $1,000,000 then the market price of that NFT is $1M. Though one may state that the bidding mechanism is much more controlled in BTC markets and that BTC could never be priced at zero or $1M per BTC in such a cavalier manner that mimics the pricing of NFTs, the similarities between the pricing mechanisms based upon lack of fungibility should not be ignored when considering the inherent risk imbedded in the price of BTC in its near $60,000 per coin current price. You will either understand this risk and behave accordingly, or ignore this risk and likely expose yourself to strong downside risk in the future at some point that should be expected but will remain unexpected to those that cannot, or will not, accept this existing risk.

The five biggest whales that own BTC in order from top to bottom, are believed to be as follows: (1) The collective of institutions/people called Satoshi Nakamoto; (2) The FBI; (3) The Winklevoss Twins; (4) Micree Zhan; and (5) Jihan Wu. Other notable owners among the top 10 BTC whales are Huobi, Tim Draper and the North Korean State. In 2017, Bloomberg reported that only 1,000 people owned 40% of all BTC in the entire world. Given that in the past two years, it has been reported that the top whales had been cornering the BTC market and increasing their market share, it would not be surprising if they had increased their market share to 50% or perhaps even higher by 2021. In any event, this translates into 0.00012658% of the world's population likely controlling majority ownership of BTC. I don't know of any world in which such a statistic does not translate into enormous risk.

Unanswered Questions

But fungibility is what reveals why cryptocurrencies like BTC and NFTs cannot ever qualify as sound money. For those that don't understand why sound money needs to be a fungible asset, take gold for example. Fungibility essentially means that money should never vary in its qualitative properties but only its quantitative properties. All gold has electroconductivity properties no matter its form. Electroconductivity is an intrinsic quality of gold. Because all purified four nine gold has the same density, the same volume will always be measured by the exact same weight in grams, again another fungible quality of gold. However, depending on how paper gold futures markets are being manipulated and the date, that same gram of gold will vary wildly in fiat currency price. Fiat currency price, thus can never be the quantitative property used to value gold. Weight is the constant that should be used for gold's value when it is to be used as sound money, because this quantitative property is always unwavering, always constant no matter if one is using gold as money in Moscow, Capetown, Montevideo, Santiago, Montreal, Phoenix, Miami, Mogadishu, Kiev, Paris, Heidelberg, Reykjavik, Chiangmai, or Seoul.

What quantitative property of bitcoin that is consistent and always the same across all uses? This is a question without an answer. For this same reason, NFTs could never serve as sound money either. No matter the latest fiat currency price paid for a Banksy "Morons" drawing set on fire, how can one determine the exchange rate for this NFT and an NFT representing a Mark Cuban tweet. Should the Banksy NFT be priced 10 million times higher than a Mark Cuban tweet NFT? Is an NBA TopShot NFT worth 1/1000 the price of a Banksy burning piece of art NFT? And even though NFTs have more uniqueness than say, a satoshi of BTC, because price assigned to that uniqueness is entirely subjective, the uniqueness leaves it no more fit to use as sound money than a cryptocurrency that has no backing of a hard asset. Miami-based art collector Pablo Rodriguez-Fraile proved the absurd pricing mechanism for NFT when he recently sold an NFT that he acquired for $66,666 in October, a 10-second computer-generated video clip of a slogan-covered giant Donald Trump created by digital artist Beeple , for mor than 100 times his original cost at $6.6M.

The last point of irony in the BTC is the solution to the unsound global fiat currency system narrative is that many HODLers of BTC are well aware of the oligarch's use of their power consolidation strategy of (1) Create a crisis; (2) Present the solution to the artificially created crisis; and (3) Implement the solution to consolidate power, yet will never give any type of consideration to the possibility of how perfectly the creation of BTC, in response to the 2008 global financial crisis, fits this exact historical narrative that oligarchs have repeatedly implemented, instead choosing to believe that BTC is the special unique exception to this oft-deployed strategy.

This despite, three US employees of the Central Bank, Galina Hale, Marianna Kudlyak, and Patrick Shultz, and one US university professor, Arvind Krishnamurthy, admitting that the premise I presented to my social media followers in December of 2017, when BTC hit $20,000, that the introduction of the US bitcoin futures market was going to be used to slash the BTC price drastically, essentially writing the premise for the referenced US Central Banker paper five months before it was written. In that paper, titled "How Futures Changed Bitcoin Prices", the four authors basically echoed my premise, and stated,

"We suggest that the rapid rise of the price of bitcoin and its decline following issuance of futures on the CME is consistent with pricing dynamics suggested elsewhere in financial theory and with previously observed trading behavior. Namely, optimists bid up the price before financial instruments are available to short the market (Fostel and Geanakoplos 2012). Once derivatives markets become sufficiently deep, short-selling pressure from pessimists leads to a sharp decline in value. While we understand some of the factors that play a role in determining the long-run price of bitcoin, our understanding of the transactional benefits of bitcoin is too imprecise to quantify this long-run price. But as speculative dynamics disappear from the bitcoin market, the transactional benefits are likely to be the factor that will drive valuation."

While they did not name the players in the BTC futures markets that drove BTC prices downward from $20,000 to $3,000 in 2018, the implication is that Central Bankers were involved in this downward spiral. And if Central Bankers were involved in this downward spiral, the downward price spiral would of course, been far easier to execute, if Central Bankers were also among the members of the collective that constitutes the largest BTC whale, Satoshi Nakamoto. Even though these dots, though purely speculative, are clearly possible, most every BTC HODLer that is confident in the achievement of end-year $300,000 BTC prices or higher, will never consider this possibility, even for a nanosecond, despite heavy suggestions of three US Central Bank employees that Central Bankers were involved in the 2018 BTC price crash. But if one did, as is the rational and logical thing to do, then one would have far greater difficulties distinguishing the mechanisms that set the price for NFTs and BTC. And as the introduction of the first BTC ETFs seem to be on the near horizon now, one would be smart to heed the lessons learned after trading of BTC futures was introduced at the end of 2017. Subscribe to my youtube channel here , to my free newsletter here , to my podcast here , and to learn more about bonus content delivered to skwealthacademy patreons every week, click here , and to download the skwealthacademy fact sheet, click here .

[Mar 24, 2021] BlackRock, others' risks should be studied, 'systemic' tag may not be best- Yellen

Mar.24 -- Senator Elizabeth Warren (D-MA) asks Treasury Secretary Janet Yellen if she would direct the Financial Stability Oversight Council (FSOC) to consider designating BlackRock as a firm whose failure could threaten the financial system.
Mar 24, 2021 |

(Reuters) - Treasury Secretary Janet Yellen said on Wednesday it is important to "look carefully" at systemic risks posed by asset managers, including BlackRock Inc, but said designating them as systematically important financial institutions may not be the right approach.

Yellen's remarks came in response to questions from Senator Elizabeth Warren, a longtime Wall Street critic, who demanded to know why BlackRock and other large asset managers had not been added to the list of designated institutions.

"I believe it is important to look very carefully at the risks posed by the asset management industry, including BlackRock and other firms," Yellen, who as Treasury secretary, chairs the Financial Stability Oversight Council (FSOC), which is charged with making such designations.

"FSOC began to do that, I believe, in 2016 and 2017, but the risks it focused on were ones having to do with open-end mutual funds that can experience massive withdrawals and be forced to sell off assets that could create fire sales. That is actually a risk we saw materialize last spring in March," she said.

In 2014, BlackRock and other asset managers won a battle in their fight against tighter regulation when a panel of top financial regulators agreed to revamp their review of asset-management firms to focus on potentially risky products and activities rather than individual firms.

"I think that with respect to asset management, rather than focus on designation of companies, I think it is important to focus on an activity like that and consider what the appropriate restrictions are," Yellen said.

"The past two administrations in the US, and numerous global regulators, have studied our industry for a decade and concluded that asset managers should be regulated differently from banks, with the primary focus being on the industry's products and services," BlackRock said in a statement.

[Mar 23, 2021] The Collapse Of Greensill- 'Unwise Enablers' A Dearth Of Due Diligence - ZeroHedge

How many additional Greenville exists?
Mar 23, 2021 |

The collapse of Greensill involved a predicable cast of unwise enablers, but it should serve as a warning to the growing number of Alternative Asset buyers on the dangers of complex deals which promise much but deliver less. Due diligence is critical in the highly illiquid alternatives sector.

You really can't make it up when it comes to the collapse of supply chain charlatan Greensill. I suspect it will make a great film It should also send a judder down our spines, reminding us things are seldom what they seem in complex structured finance:

At least former UK premier David Cameron will be happy. A majority comprising Tory MPs on the UK's Treasury Select Committee blocked an inquiry into Greensill yesterday on the basis it may be politically influenced. The fact Call-Me-Dave was texting chancellor Rishi Sunak pleading for GFC to be a special case for Covid Bailout loans says it all about the dangers of lobbying. The SNP will be equally delighted at the lack of scrutiny of dodgy dealings up in the Highlands.

The Greensill collapse is unlikely to be the last time financial chicanery is exposed as sham. And that is why holders of European Alternatives and Asset backed transactions should be nervous. The lessons of the Greensill deals are multiple:

Let's review the unfolding Greensill mess:

There over 1000 holders of the $10 bln plus of defaulted Greensill investment structures packaged and issued by Credit Suisse – which marketed them as ultra-safe secured investments. Under the law, what the holders recover on these deals will rather depend on how much the administrator and the courts can jemmy out of Sanjay Gupta's dead-firm walking ; steel and commodities business GFC Alliance. (I have no hesitation in saying GFC will go to the wall – there can't be a single sane financial firm on the planet willing to finance them as the story of its' Greensill relationship emerges and its connected in-house banking arrangements become clearer – although, apparently, a state rescue is under consideration to save jobs.)

Investors will be lucky to see much more than the 30% recovery already in the pot from non-Gupta related investments in the Greensill funds – but Credit Suisse may decide to make its investors good. The reputational damage of seeing their private and investment banking clients clobbered for their stupidity, which would negate their private banking brand, may mean it's worth taking the hit. No wonder CS staff are very grumpy about their bonuses.

Successful financial scams require willing participants. All the usual fools are there in the mix.

Yet again the German regulator missed what was going on in Greensill's German bank and its exposures to Gupta. The team at Credit Suisse who agreed to warehouse Greensill originated "future receivables" and sell them as pristine secured assets have a limited shelf life. The insurance broker who managed to convince an insurance fund the underlyings were AAA quality looks vulnerable. Or what about the sales teams in Morgan Stanley who actually marketed the deals. Yet again Softbank is in the frame after it invested in excess of $1.5 bln at a $4-7 bln valuation, hailing Greensill as a leading Finech, when the actual truth is that its high-tech driven lending algos were nothing more than basic Excel spread sheets.

Greensill's financial magic was little more than sheer chutzpah – being able to persuade investors that the dull old low margin conservative business of factoring – short-term secured lending against invoices and accounts receivable, was something incredibly clever, undervalued and able to generate huge returns based on unique proprietary tech.

Greensill deals went further. Rather than just factoring Gupta's bills to suppliers and its invoices, the firm conjured up "future receivables" – pledging the company's expected future earnings for lending now. That's not necessarily a bad thing – its basic credit – but it only works if these earnings were completely predictable like obligated mortgage payments. What Greensill was doing was lending on future earnings on very volatile commodities. Remember – oil prices went negative in 2020.

In return for funding challenging names we know Greensill took divots out these clients. It made over £36 mm financing Gupta's deals in Scotland, and an amazing $108mm in fees from the $850mm Bluestone coal deals in the US – for which it is now being taken to court. All these fees gave Lex Greensill the wherewithal for his private Air Greensill fleet – but didn't make the financings any safer.

Any smart investors would probably have asked questions – but what's not to like about a deal that's secured on receivables, offers a high coupon, is wrapped with an insurance package from reputable insurer and involves major investment firms like Credit Suisse banking them, and Morgan Stanley marketing them?

One question is how did Greensill get away with it so long?

It was clear as early as 2017 there were major issues with some of the supply chain financing deals Greensill was putting together. The following year a major Swiss investment group, GAM, blew up when deals a leading fund manager had bet the shop on were questioned internally. A review by external investigators discovered a lack of information and documentation on a whole series of Greensill deals. They questioned how due diligence was done on the deals. The fund manager was suspended and later dismissed – triggering a redemption run on the fund. The whistle-blower was also shown the door on the back of massive client exits.

GAM invested in the funds because it's very hard to turn down the promise of a low risk / high return deal that promised so much more than the tiny yields available in conventional credit markets.

Despite the events at GAM, Credit Suisse went on to package $10 bln plus of Greensill deals. It was all done with an insurance wrap from a single name put them in its safe bucket. I know other insurance firms refused the deals. The trigger for the collapse of the Greensill scam was the withdrawl of that critical insurance – causing Credit Suisse to stop. Greensill has known for a year Tokyo Marine (which sacked the underwriter involved) would not renew and had been unable to find alternative cover.

Perhaps Credit Suisse bought the story and Softbank link that Greensill was a remarkable new Fintech with the Midas touch of changing dull, conservative factoring into a money machine? All that glitters is not gold.

One of the major developing themes in markets has been a shift from financial assets – which are seriously mispriced due to monetary distortion and financial asset inflation – into real assets, the so-called alternatives market. Alternative because they are not stocks or bonds, but cash flows and real assets. The collapse of Greensill will heighten awareness of due diligence risks in these non-standard, off-market, asset backed alternatives. Alternative asset holders will be looking at holdings for what else might be wobbly.

For instance, I might urge them not to be hypnotised by the assumptions underlying a well-known fund investing in music royalties, the basis of which is also being questioned by analysts. (I certainly won't mention the fund by name as the manager is a well-known litigant.) I have no reason to believe or disbelieve what analysts, the FT and a US investment bank have said about it overpaying for assets or questioning the valuation hikes it puts on future revenues when it acquires catalogues. Personally I like music assets, know their value, and, given certain circumstances the fund in question might come good. Equally.. it might not.

To understand how these deals works its critical to understand exactly what's occurring within the structures – how real are the assets, how the cash flows, how its accounted, and where it goes. That's why having top notch accountants and lawyers is such an important requirement for any deal. However, if they are working in the interests of the issuers and bankers – then investors are the likely patsies. There is a real difference between the way US and European Asset Backed deals are structured – basically US deals are transparent. European deals tend to be opaque.

Alternative deals based on real assets and tangible cash flows are often, but not always, decorrelated from distorted financial assets, allowing low risk deals to yield better long- term returns. They tick can the box in terms of risk vs return and provide significant diversification away from conventional markets. The major negative is there is little pretence they will be liquid assets. If you want to sell – even in good markets it will not be easy.

The only way you should participate in Alternative type deals is by knowing exactly what's going on. And – yes, my day job is Head of Alternative Assets. Happy to discuss in depth any time.

[Mar 19, 2021] The US and Europe are pretty much controlled by the same set of oligarchs and the most powerful of the oligarchs are the bankers. Once you realise that it is the bankers driving most of this garbage all of the elephants are explained.

Mar 19, 2021 |

MarkU , Mar 18 2021 23:14 utc | 39

I don't understand why so many otherwise intelligent people are seemingly unable to bring themselves to question the fundamental 'model' that supposedly describes what is going on in the 'West'. If political 'models' were subjected to the same sort of analysis that scientific ones were, then the model used by b and most of the people who comment here would undoubtedly be rejected. There are simply too many elephants in the room.

Why are European countries going along with all the stupidity? Such as America's rampage through the middle east, originating and perpetuated with proven lies, flooding Europe with migrants as a result.

Why are European countries apparently happy to go along with the Russophobia and the Sinophobia. Are their leaders really so lame-brained that they took the ludicrous Skripal poisoning story and the even more ridiculous Navalny yarn at face value?

Why are European countries going along with the stupid and unfair sanctions? sanctions that cost Europe far more than they do America.

Why is Europe going along with the increased militarisation of the of the border with the Russian federation and the open war-mongering? Surely European leaders realise that they are wantonly courting WW3 and risking a nuclear conflagration? Could they really be so stupid as to imagine that lining the border they share with the Russians with ABM's was actually 'defensive' in nature?

Last but certainly not least, why is Israel so important? How come a tiny country in the middle east gets to thumb its nose at international law on a daily basis? Why is it OK for them to have nukes? Why is it OK when they shoot literally thousands of unarmed protesters? killing hundreds. How come they can build walls and that is OK, How come they can run an openly apartheid state but somehow be immune to criticism?

The answer to all these questions is actually quite simple, the US and Europe are pretty much controlled by the same set of oligarchs and the most powerful of the oligarchs are the bankers. Once you realise that it is the bankers driving most of this garbage all of the elephants are explained.

norecovery , Mar 18 2021 23:44 utc | 40

MarkU @ 39 -- HossKara struck gold with his suggestion @34, to which I responded @35.

It's all about the Benjamins, particularly the Petrodollar controlled by what Psychohistorian euphemistically calls "Private Finance" and is the world's reserve currency. Any attempt to circumvent the Petrodollar in trade, especially energy resources, brings violent aggression to punish the wayward country and its leaders.

"Private Finance" in this context really means the thug standing behind you with a baseball bat. "You don't know who you're dealing with, punk." Iran trades with other countries in other currencies, so does Venezuela, so does China, so does Russia. Get the picture?

Saddam Hussein announced that he was going to accept other currencies than the dollar for Iraq's oil -- look what happened to him. Same with Gaddafi. They and their countries were made examples of what happens when you deny Uncle Ratschild his pound of flesh.

[Mar 07, 2021] SEC Issues Devastating Risk Alert on Private Equity Abuses; Effectively Admits Failure of Last 5+ Years of Enforcement by Yves Smith

Notable quotes:
"... In the Risk Alert below, the itemization of various forms of abuses, such as the many ways private equity firms parcel out interests in the businesses they buy among various funds and insiders to their, as opposed to investors' benefit, alone should give pause. And the lengthy discussion of these conflicts does suggest the SEC has learned something over the years. Experts who dealt with the agency in its early years of examining private equity firms found the examiners allergic to considering, much the less pursuing, complex abuses. ..."
"... Undermining legislative intent of new supervisory authority the SEC never embraced its new responsibilities to ride herd on private equity and hedge funds. ..."
"... The agency is operating in such a cozy manner with private equity firms that as one investor described it: It's like FBI sitting down with the Mafia to tell them each year, "Don't cross these lines because that's what we are focusing on." ..."
"... Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses ..."
"... Current SEC chairman Jay Clayton came from Sullivan & Cromwell, bringing with him Steven Peikin as co-head of enforcement. And the Clayton SEC looks to have accomplished the impressive task of being even weaker on enforcement than Mary Jo White. ..."
"... On the same side though, fraud is a criminal offence, and it's SEC's duty to prosecute. And I believe that a lot of what PE engage in would happily fall under fraud, if SEC really wanted. ..."
"... Crimogenic: Producing or tending to produce crime or criminality. An additional factor is that, in the main, the criminals do not take their money and leave the gaming tables but pour it back in and the crime metastasizes. AKA, Kleptocracy. ..."
"... You might add that the threat of consequences for these crimes makes the criminals extremely motivated to elect officials who will not prosecute them (e.g. Obama). They're not running for office, they're avoiding incarceration. ..."
"... Andrew Levitt, for instance, complained bitterly that Joe Lieberman would regularly threaten to cut the SEC's budget for allegedly being too aggressive about enforcement. Lieberman was the Senator from Hedgistan. ..."
"... More banana republic level grift. What happens when investors figure out they can't believe anything they are told? ..."
"... Can we come up with a better descriptor for "private equity"? I suggest "billionaire looters". ..."
"... Where is the SEC when Bain Capital (Romney) wipes out Toys-R-Us and Dianne Feinstein's husband Richard Blum wipes out Payless Shoes. They gain control of the companies, pile on massive debt and take the proceeds of the loan, and they know the company cannot service the loan and a BK is around the corner. ..."
"... Thousands lose their jobs. And this is legal? And we also lost Glass-Steagal and legalized stock buy-backs. The Elite are screwing the people. It's Socialism for the Rich, the Politicians and Govt Employees and Feudalism for the rest of us. ..."
Jun 26, 2020 |

We've embedded an SEC Risk Alert on private equity abuses at the end of this post. 1 What is remarkable about this document is that it contains a far longer and more detailed list of private abuses than the SEC flagged in its initial round of examinations of private equity firms in 2014 and 2015. Those examinations occurred in parallel with groundbreaking exposes by Gretchen Morgenson at the New York Times and Mark Maremont in the Wall Street Journal.

At least some of the SEC enforcement actions in that era look to have been triggered by the press effectively getting ahead of the SEC. And the SEC even admitted the misconduct was more common at the most prominent firms.

Yet despite front-page articles on private equity abuses, the SEC engaged in wet noodle lashings. Its pattern was to file only one major enforcement action over a particular abuse. Even then, the SEC went to some lengths to spread the filings out among the biggest firms. That meant it was pointedly engaging in selective enforcement, punishing only "poster child" examples and letting other firms who'd engaged in precisely the same abuses get off scot free.

The very fact of this Risk Alert is an admission of failure by the SEC. It indicates that the misconduct it highlighted five years ago continues and if anything is even more pervasive than in the 2014-2015 era. It also confirms that its oft-stated premise then, that the abuses it found then had somehow been made by firms with integrity that would of course clean up their acts, and that now-better-informed investors would also be more vigilant and would crack down on misconduct, was laughably false.

In particular, the second section of the Risk Alert, on Fees and Expenses (starting on page 4) describes how fund managers are charging inflated or unwarranted fees and expenses. In any other line of work, this would be called theft. Yet all the SEC is willing to do is publish a Risk Alert, rather than impose fines as well as require disgorgements?

The SEC's Abject Failure

In the Risk Alert below, the itemization of various forms of abuses, such as the many ways private equity firms parcel out interests in the businesses they buy among various funds and insiders to their, as opposed to investors' benefit, alone should give pause. And the lengthy discussion of these conflicts does suggest the SEC has learned something over the years. Experts who dealt with the agency in its early years of examining private equity firms found the examiners allergic to considering, much the less pursuing, complex abuses.

Undermining legislative intent of new supervisory authority the SEC never embraced its new responsibilities to ride herd on private equity and hedge funds.

The SEC has long maintained a division between the retail investors and so-called "accredited investors" who by virtue of having higher net worths and investment portfolios, are treated by the agency as able to afford to lose more money. The justification is that richer means more sophisticated. But as anyone who is a manager for a top sports professional or entertainer, that is often not the case. And as we've seen, that goes double for public pension funds.

Starting with the era of Clinton appointee Arthur Levitt, the agency has taken the view that it is in the business of defending presumed-to-be-hapless retail investors and has left "accredited investor" and most of all, institutional investors, on their own. This was a policy decision by the agency when deregulation was venerated; there was no statutory basis for this change in priorities.

Congress tasked the SEC with supervising the fund management activities of private equity funds with over $150 million in assets under management. All of their investors are accredited investors. In other words, Congress mandated the SEC to make sure these firms complied with relevant laws as well as making adequate disclosures of what they were going to do with the money entrusted to them. Saying one thing in the investor contracts and doing another is a vastly worse breach than misrepresentations in marketing materials, yet the SEC acted as if slap-on-the-wrist-level enforcement was adequate.

We made fun when thirteen prominent public pension fund trustees wrote the SEC asking for them to force greater transparency of private equity fees and costs. The agency's position effectively was "You are grownups. No one is holding a gun to your head to make these investments. If you don't like the terms, walk away." They might have done better if they could have positioned their demand as consistent with the new Dodd Frank oversight requirements.

Actively covering up for bad conduct . In 2014, the SEC started working at giving malfeasance a free pass. Specifically, the SEC told private equity firms that they could continue their abuses if they 'fessed up in their annual disclosure filings, the so-called Form ADV. The term of art is "enhanced disclosure". Since when are contracts like confession, that if you admit to a breach, all is forgiven? Only in the topsy-turvy world of SEC enforcement.

And the coddling of crookedness continued. From a January post :

The agency is operating in such a cozy manner with private equity firms that as one investor described it: It's like FBI sitting down with the Mafia to tell them each year, "Don't cross these lines because that's what we are focusing on."

Specifically, as we indicated, the SEC was giving advanced warning of the issues it would focus on in its upcoming exams, in order to give investment managers the time to get their stories together and purge files. And rather than view its periodic exams as being designed to make sure private equity firms comply with the law and their representations, the agency views them as "cooperative" exercises! Misconduct is assumed to be the result of misunderstanding and error, and not design.

It's pretty hard to see conduct like this, from the SEC's Risk Alert, as being an accident:

Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses

The staff observed private fund advisers that did not value client assets in accordance with their valuation processes or in accordance with disclosures to clients (such as that the assets would be valued in accordance with GAAP). In some cases, the staff observed that this failure to value a private fund's holdings in accordance with the disclosed valuation process led to overcharging management fees and carried interest because such fees were based on inappropriately overvalued holdings .

Advisers failed to apply or calculate management fee offsets in accordance with disclosures and therefore caused investors to overpay management fees.

We're highlighting this skimming simply because it is easier for laypeople to understand than some of the other types of cheating the SEC described. Even so, industry insiders and investors complained that the description of the misconduct in this Risk Alert was too general to give them enough of a roadmap to look for it at particular funds.

Ignoring how investors continue to be fleeced . The SEC's list includes every abuse it sanctioned or mentioned in the 2014 to 2015 period, including undisclosed termination of monitoring fees, failure to disclose that investors were paying for "senior advisers/operating partners," fraudulent charges, overcharging for services provided by affiliated companies, plus lots of types of bad-faith conduct on fund restructurings and allocations of fees and expenses on transactions allocated across funds.

The SEC assumed institutional investors would insist on better conduct once they were informed that they'd been had. In reality, not only did private equity investors fail to demand better, they accepted new fund agreements that described the sort of objectionable behavior they'd been engaging in. Remember, the big requirement in SEC land is disclosure. So if a fund manager says he might do Bad Things and then proceeds accordingly, the investor can't complain about not having been warned.

Moreover, the SEC's very long list of bad acts says the industry is continuing to misbehave even after it has defined deviancy down via more permissive limited partnership agreements!

Why This Risk Alert Now?

Keep in mind what a Risk Alert is and isn't. The best way to conceptualize it is as a press release from the SEC's Office of Compliance Inspections and Examinations. It does not have any legal or regulatory force. Risk Alerts are not even considered to be SEC official views. They are strictly the product of OCIE staff.

On the first page of this Risk Alert, the OCIE blandly states that:

This Risk Alert is intended to assist private fund advisers in reviewing and enhancing their compliance programs, and also to provide investors with information concerning private fund adviser deficiencies.

Cutely, footnotes point out that not everyone examined got a deficiency letter (!!!), that the SEC has taken enforcement actions on "many" of the abuses described in the Risk Alert, yet "OCIE continues to observe some of these practices during examinations."

Several of our contacts who met in person with the SEC to discuss private equity grifting back in 2014-2015 pressed the agency to issue a Risk Alert as a way of underscoring the seriousness of the issues it was unearthing. The staffers demurred then.

In fairness, the SEC may have regarded a Risk Alert as having the potential to undermine its not-completed enforcement actions. But why not publish one afterwards, particularly since the intent then had clearly been to single out prominent examples of particular types of misconduct, rather than tackle it systematically? 2

So why is the OCIE stepping out a bit now? The most likely reason is as an effort to compensate for the lack of enforcement actions. Recall that all the OCIE can do is refer a case to the Enforcement Division; it's their call as to whether or not to take it up.

The SEC looks to have institutionalized the practice of borrowing lawyers from prominent firms. Mary Jo White of Debevoise brought Andrew Ceresney with her from Debeviose to be her head of enforcement. Both returned to Debevoise.

Current SEC chairman Jay Clayton came from Sullivan & Cromwell, bringing with him Steven Peikin as co-head of enforcement. And the Clayton SEC looks to have accomplished the impressive task of being even weaker on enforcement than Mary Jo White. Clayton made clear his focus was on "mom and pop" investors, meaning he chose to overlook much more consequential abuses by private equity firms and hedgies. The New York Times determined that the average amount of SEC fines against corporate perps fell markedly in 2018 compared to the final 20 months of the Obama Administration. The SEC since then levied $1 billion fine against the Woodbridge Group of Companies and its one-time owner for running a Ponzi scheme that fleeced over 8,400, so that would bring the average penalty up a bit. But it still confirms that Clayton is concerned about small fry, and not deeper but just as pickable pockets.

David Sirota argues that the OCIE was out to embarrass Clayton and sabotage what Sirota depicted as an SEC initiative to let retail investors invest in private equity. Sirota appears to have missed that that horse has left the barn and is in the next county, and the SEC had squat to do with it.

The overwhelming majority of retail funds is not in discretionary accounts but in retirement accounts, overwhelmingly 401(k)s. And it is the Department of Labor, which regulates ERISA plans, and not the SEC, that decides what those go and no go zones are. The DoL has already green-lighted allowing large swathes of 401(k) funds to include private equity holdings. From a post earlier this month :

Until now, regulations have kept private equity out of the retail market by prohibiting managers from accepting capital from individuals who lack significant net worth.

Private equity firms have succeeded in storming that barricade. The Department of Labor published a June 3 information letter that allows private equity funds, or more accurately funds of funds, to be included in certain 401(k) plan offerings, namely, target date funds and balanced funds. This is significant because despite the SEC regularly calling out bad practices with target date funds, they are the strategy used to manage the majority of 401(k) assets .

Moreover, even though Sirota pointed out that Clayton had spoken out in favor of allowing retail investors more access to private equity investments, the proposed regulation on the definition of accredited investors in fact not only does not lower income or net worth requirements (save for allowing spouses to combine their holdings) it in fact solicited comments on the idea of raising the limits. From a K&L Gates write up :

Previously, the Concept Release requested comment on whether the SEC should revise the current individual income ($200,000) and net worth ($1,000,000) thresholds. In the Proposing Release, the SEC further considered these thresholds, noting that the figures have not been adjusted since 1982. The SEC concluded that it does not believe modifications to the thresholds are necessary at this time, but it has requested comments on whether the final should instead make a one-time increase to the thresholds in the account for inflation, or whether the final rule should reflect a figure that is indexed to inflation on a going-forward basis.

It is not clear how many people would be picked up by the proposed change, which was being fleshed out, that of letting some presumed sophisticated but not rich individuals, like junior hedge fund professionals and holders of securities licenses, be treated as accredited investors. In other words, despite Clayton's talk about wanting ordinary investors to have more access to private equity funds, the agency's proposed rule change falls short of that.

Moreover, if the OCIE staff had wanted to undermine even the limited liberalization of the definition of accredited investor so as to stymie more private equity investment, the time to do so would have been immediately before or while the comments period was open. It ended March 16 .

The New York Times reported that Senate Republicans deemed Clayton's odds of confirmation as US Attorney for the Southern District of New York as remote even before the Trump fired Geoffrey Berman to clear a path for Clayton. So the idea that a technical release by the OCIE would derail Clayton's confirmation is a stretch.

So again, why now? One possibility is that the timing is purely a coincidence. For instance, the SEC staffers might have been waiting until Covid-19 news overload died down a bit so their work might get a hearing (and Covid-19 remote work complications may also have delayed its release).

The second possibility is that OCIE is indeed very frustrated with the enforcement chief Peikin's inaction on private equity. The fact that Peikin's boss and protector Clayton has made himself a lame duck meant a salvo against Peikin was now a much lower risk. If any readers have better insight into the internal workings of the SEC these days, please pipe up.


1 Formally, as you can see, this Risk Alert addresses both private equity and hedge fund misconduct, but on reading the details, the citing of both types of funds reflects the degree to which hedge funds have been engaging in the buying and selling of stakes in private companies. For instance, Chatham Asset Management, which has become notorious through its ownership of American Media, which in turn owns the National Enquirer, calls itself a hedge fund. Moreover, when the SEC started examining both private equity and hedge funds under new authority granted by Dodd Frank, it described the sort of misconduct described in this Risk Alert as coming out of exams of private equity firms, and its limited round of enforcement actions then were against brand name private equity firms like KKR, Blackstone, Apollo, and TPG. Thus for convenience as well as historical reasons, we refer only to private equity firms as perps.

2 Media stories at the time, including some of our posts, provided substantial evidence that particular abuses, such as undisclosed termination of monitoring fees and failure to disclose that "senior advisers" presented as general partner "team members" were in fact consultants being separately billed to fund investments, were common practices. Yet the SEC chose to lodge only marquee enforcement actions against one prominent firm for each abuse, as if token enforcement would serve as an adequate deterrent. The message was the reverse, that the overwhelming majority of the abuses were able to keep their ill-gotten gains and not even face public embarrassment.

skippy , June 26, 2020 at 4:27 am

Peter Sellers I'll say now – ????

vlade , June 26, 2020 at 4:35 am

TBH, in the view of Calpers ignoring its advisors, I do have a little understanding of the SEC's point "you're grown ups" (the worse problem is that the advisors who leach themselves to the various accredited investors are often not worth the money.

On the same side though, fraud is a criminal offence, and it's SEC's duty to prosecute. And I believe that a lot of what PE engage in would happily fall under fraud, if SEC really wanted.

Susan the other , June 26, 2020 at 11:43 am

Yes, the SEC conveniently claims a conflicted authority – 1. to regulate compliance but without an "enforcement authority", and 2. report egregious behavior to their "enforcement authority". So the SEC is less than a permissive nanny. Sort of like "access" to enforcement authority. Sounds like health care to me.

Yves Smith Post author , June 26, 2020 at 4:06 pm

No, this is false. The SEC has an examination division and an enforcement division. The SEC can and does take enforcement actions that result in fines and disgorgements, see the $1 billion fine mentioned in the post. So the exam division can recommend enforcement to the enforcement division. That does not mean it will get done. Some enforcement actions originate from within the enforcement division, like insider trading cases, and the SEC long has had a tendency to prioritize insider trading cases.

The SEC cannot prosecute. It has to refer cases that it thinks are criminal to the DoJ and try to get them to saddle up.

Maritimer , June 26, 2020 at 5:04 am

Crimogenic: Producing or tending to produce crime or criminality. An additional factor is that, in the main, the criminals do not take their money and leave the gaming tables but pour it back in and the crime metastasizes. AKA, Kleptocracy.

Thus in 2008 and thereafter the criminal damage required 2-3 trillion, now 7-10 trillion.

Any economic expert who does not recognize crime as the number one problem in the criminogenic US economy I disregard. Why read all that analysis when, at the end of the run, it all just boils down to bailing out the criminals and trying to reset the criminogenic system?

(Can I get my economics degree now?)

Adam Eran , June 26, 2020 at 1:33 pm

You might add that the threat of consequences for these crimes makes the criminals extremely motivated to elect officials who will not prosecute them (e.g. Obama). They're not running for office, they're avoiding incarceration.

The Rev Kev , June 26, 2020 at 5:17 am

The SEC has been captured for years now. It was not that long ago that SEC Examination chief Andrew Bowden made a grovelling speech to these players and even asked them to give his son a job which was so wrong-

But there is no point in reforming the SEC as it was the politicians, at the beck and call of these players, that de-fanged the SEC – and it was a bipartisan effort! So it becomes a chicken-or-the-egg problem in the matter of reform. Who do you reform first?

Can't leave this comment without mentioning something about a private equity company. One of the two major internal airlines in Oz went broke due to the virus and a private equity buyer has been found to buy it. A union rep said that they will be good for jobs and that they are a good company. Their name? Bain Capital!

Yves Smith Post author , June 26, 2020 at 5:44 am

We broke the story about Andrew Bowden! Give credit where credit is due!!!! Even though Taibbi points to us in his first line, linking to Rolling Stone says to those who don't bother clicking through that it was their story.

Plus we transcribed his fawning remarks.

And he resigned three weeks later.

The Rev Kev , June 26, 2020 at 5:56 am

Of course I remember that story. I was going to mention it but thought to let people see it in virtually the opening line of that story where he gives you credit. More of a jolt of recognition seeing it rather than being told about it first.

Jesper , June 26, 2020 at 6:36 am

Of the three branches of government which ones are not captured by big business? If two out of three were to captured then does it matter what the third does?

In my opinion too much power has been centralised, too much of the productivity gains of the past 40 years have been monetised and therefore made possible to hoard and centralise. SEC should (in my opinion) try to enforce more but without more support then I do not believe (it is my opinion, nothing more and nothing less) that they can accomplish much.

Susan the other , June 26, 2020 at 11:57 am

The SEC is a mysterious agency which (?) must fall under the jurisdiction of the Treasury because it is a monetary regulatory agency in the business of regulating securities and exchanges. But it has no authority to do much of anything. The Treasury itself falls under the executive administration but as we have recently seen, Mnuchin himself managed to get a nice skim for his banking pals from the money Congress legislated.

That's because Congress doesn't know how to effectuate a damn thing – they legislate stuff that morphs before our very eyes and goes to the grifters without a hitch. So why don't we demand that consumer protection be made into hard law with no wiggle room; that since investing is complex in this world of embedded funds and glossy prospectuses, we the consumer should not have to wade through all the nonsense to make decisions – that everything be on the table. And if PE can't manage to do that and still steal its billions then PE should be declared to be flat-out illegal.

Yves Smith Post author , June 26, 2020 at 4:08 pm

Please stop spreading disinformation. This is the second time on this post. The SEC has nada to do with the Treasury. It is an independent regulatory agency. It however is the only financial regulator that does not keep what it kills (its own fees and fines) but is instead subject to Congressional appropriations.

Andrew Levitt, for instance, complained bitterly that Joe Lieberman would regularly threaten to cut the SEC's budget for allegedly being too aggressive about enforcement. Lieberman was the Senator from Hedgistan.

Edward , June 26, 2020 at 7:16 am

More banana republic level grift. What happens when investors figure out they can't believe anything they are told?

RJMc, MD , June 26, 2020 at 8:43 am

It should be noted that out here in the countryside of northern Michigan that embezzlement (a winter sport here while the men are out ice fishing), theft and fraud are still considered punishable felonies. Perhaps that is simply a quaint holdover from a bygone time. Dudley set the tone for the C of C with his Green Book on bank deregulation. One of the subsequent heads of C of C was reported as seeing his position as "being the spiritual resource for banks". If bank regulation is treated in a farcical fashion why should be the SEC be any different?

Susan the other , June 26, 2020 at 12:08 pm

I was shocked to just now learn that ERISA/the Dept of Labor is in regulatory control of allowing pension funds to buy PE fund of funds and "balanced PE funds". What VERBIAGE. Are "PE Fund of Balanced Funds" an actual category? And what distinguishes them from good old straightforward Index Funds? And also too – what is happening before our very glazed-over eyes is that PE is high grading not just the stock market but the US Treasury itself. Ordinary investors should be buying US Treasuries directly and retirement funds should too. It will be a big bite but if it knocks PE out of business it would be worth it. PE is in the business of cooking its books, ravaging struggling corporations, and boldly privatizing the goddamned Treasury. WTF?

Kouros , June 26, 2020 at 12:27 pm

I want to bring this to Yves' attention: the recent SCOTUS decision on Thole v. U.S. Bank that opens the doors wide for corporate America to steal with impunity from the pension plans:

Glen , June 26, 2020 at 12:51 pm

Can we come up with a better descriptor for "private equity"? I suggest "billionaire looters".

Olivier , June 26, 2020 at 2:00 pm

What about the wanton destruction of the purchased companies? If this solely about the harm done to the poor investors? If so, that is seriously wrong.

flora , June 26, 2020 at 3:27 pm

If, you know, the neoliberal "because markets" is the ruling paradigm then of course there is no harm done. The questions then become: is "because markets" a sensible paradigm? What is it a sensible paradigm of? Is "because markets" even sensible for the long term?

flora , June 26, 2020 at 3:19 pm

an aside: farewell, Olympus camera. A sad day. Farewell, OM-1 and OM-2. Film photography is really not replicated by digital photography but the larger market has gone to digital. Speed and cost vs quality. Because markets. Now the vulture swoop.

Stan Sexton , June 26, 2020 at 8:17 pm

Where is the SEC when Bain Capital (Romney) wipes out Toys-R-Us and Dianne Feinstein's husband Richard Blum wipes out Payless Shoes. They gain control of the companies, pile on massive debt and take the proceeds of the loan, and they know the company cannot service the loan and a BK is around the corner.

Thousands lose their jobs. And this is legal? And we also lost Glass-Steagal and legalized stock buy-backs. The Elite are screwing the people. It's Socialism for the Rich, the Politicians and Govt Employees and Feudalism for the rest of us.

[Mar 07, 2021] Bank Regulation Can not Be Heads Banks Win, Tails Taxpayers Lose

Notable quotes:
"... Kane, who coined the term "zombie bank" and who famously raised early alarms about American savings and loans, analyzed European banks and how regulators, including the U.S. Federal Reserve, backstop them. ..."
"... We are only interested observers of the arm wrestling between the various EU countries over the costs of bank rescues, state expenditures, and such. But we do think there is a clear lesson from the long history of how governments have dealt with bank failures . [If] the European Union needs to step in to save banks, there is no reason why they have to do it for free best practice in banking rescues is to save banks, but not bankers. That is, prevent the system from melting down with all the many years of broad economic losses that would bring, but force out those responsible and make sure the public gets paid back for rescuing the financial system. ..."
"... In 2019, another question, alas, is also piercing. In country after country, Social Democratic center-left parties have shrunk, in many instances almost to nothingness. In Germany the SPD gives every sign of following the French Socialist Party into oblivion. Would a government coalition in which the SPD holds the Finance Ministry even consider anything but guaranteeing the public a huge piece of any upside if they rescue two failing institutions? ..."
Mar 31, 2019 |
... ... ...

Running in the background, though, was a new, darker theme: That the post-2008 reforms had gone too far in restricting policymakers' discretion in crises. The trio most responsible for making the post-Lehman bailout revolution -- Ben Bernanke, Timothy Geithner, and Henry Paulson -- expressed their misgivings in a joint op-ed :

But in its post-crisis reforms, Congress also took away some of the most powerful tools used by the FDIC, the Fed and the Treasury the FDIC can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed's emergency lending powers have been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds.

These powers were critical in stopping the 2008 panic The paradox of any financial crisis is that the policies necessary to stop it are always politically unpopular. But if that unpopularity delays or prevents a strong response, the costs to the economy become greater.

We need to make sure that future generations of financial firefighters have the emergency powers they need to prevent the next fire from becoming a conflagration.

Sotto voce fears of this sort go back to the earliest reform discussions. But the question surfaced dramatically in Timothy Geithner's 2016 Per Jacobsson Lecture, " Are We Safer? The Case for Strengthening the Bagehot Arsenal ." More recently, the Group of Thirty has advanced similar suggestions -- not too surprisingly, since Geithner was co-project manager of the report, along with Guillermo Ortiz, the former Governor of the Mexican Central Bank, who introduced the former Treasury Secretary at the Per Jacobson lecture.

Aside from the financial collapse itself, probably nothing has so shaken public confidence in democratic institutions as the wave of bailouts in the aftermath of the collapse. The redistribution of wealth and opportunity that the bailouts wrought surely helped fuel the populist surges that have swept over Europe and the United States in the last decade. The spectacle of policymakers rubber stamping literally unlimited sums for financial institutions while preaching the importance of austerity for everyone else has been unbearable to millions of people.

Especially in money-driven political systems, affording policymakers unlimited discretion also plainly courts serious risks. Put simply, too big to fail banks enjoy a uniquely splendid situation of "heads I win, tails you lose" when they take risks. Scholars whose research INET has supported, notably Edward Kane , have shown how the certainty of government bailouts advantages large financial institutions, directly affecting prices of their bonds and stocks.

For these reasons INET convened a panel at a G20 preparatory meeting in Berlin on " Moral Hazard Issues in Extended Financial Safety Nets ." The Power Point presentations of the three panelists are presented in the order in which they gave them, since the latter ones sometimes comment on Edward Kane 's analysis of the European banks. Kane, who coined the term "zombie bank" and who famously raised early alarms about American savings and loans, analyzed European banks and how regulators, including the U.S. Federal Reserve, backstop them.

Peter Bofinger , Professor of International and Monetary Economics at the University of Würzburg and an outgoing member of the German Economic Council, followed with a discussion of how the system has changed since 2008. Helene Schuberth , Head of the Foreign Research Division of the Austrian National Bank, analyzed changes in the global financial governance system since the collapse.

The panel took place as public discussion of a proposed merger between two giant German banks, the Deutsche Bank and Commerzbank, reached fever pitch. The panelists explored issues directly relevant to such fusions, without necessarily agreeing among themselves or with anyone at INET.

But the point Robert Johnson, INET's President, and I made some years back , amid an earlier wave of talk about using public money to bail out European banks, remains on target:

We are only interested observers of the arm wrestling between the various EU countries over the costs of bank rescues, state expenditures, and such. But we do think there is a clear lesson from the long history of how governments have dealt with bank failures . [If] the European Union needs to step in to save banks, there is no reason why they have to do it for free best practice in banking rescues is to save banks, but not bankers. That is, prevent the system from melting down with all the many years of broad economic losses that would bring, but force out those responsible and make sure the public gets paid back for rescuing the financial system.

The simplest way to do that is to have the state take equity in the banks it rescues and write down the equity of bank shareholders in proportion. This can be done in several ways -- direct equity as a condition for bailout, requiring warrants that can be exercised later, etc. The key points are for the state to take over the banks, get the bad loans rapidly out of those and into a "bad bank," and hold the junk for a decent interval so the rest of the market does not crater. When the banks come back to profitability, you can cash in the warrants and sell the stock if you don't like state ownership. That way the public gets its money back .at times states have even made a profit.

In 2019, another question, alas, is also piercing. In country after country, Social Democratic center-left parties have shrunk, in many instances almost to nothingness. In Germany the SPD gives every sign of following the French Socialist Party into oblivion. Would a government coalition in which the SPD holds the Finance Ministry even consider anything but guaranteeing the public a huge piece of any upside if they rescue two failing institutions?

The full article of Edward Kane

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WheresOurTeddy , March 29, 2019 at 11:49 am

Enforcement of financial laws is not our thing. Just ask Chuck Schumer of the #Non-Resistance:

Louis Fyne , March 29, 2019 at 12:17 pm

There needs to be an asset tax on/break up of the megas. End the hyper-agglomeration of deposits at the tail end. Not holding my breath though. (see NY state congressional delegation)

To be generous, tax starts at $300 billion. Even then it affects only a dozen or so US banks. But would be enough to clamp down on the hyper-scale of the largest US/world banks. The world would be better off with lot more mid-sized regional players.

thesaucymugwump , March 29, 2019 at 12:17 pm

Anyone who mentions Timmy Geithner without spitting did not pay attention during the Obama reign of terror. He and Obama crowed about the Making Home Affordable Act, implying that it would save all homeowners in mortgage trouble, but conveniently neglected to mention that less than 100 banks had signed up. The thousands of non-signatories simply continued to foreclose.

Not to mention Eric Holder's intentional non-prosecution of banksters. For these and many other reasons, especially his "Islamic State is only the JV team" crack, Obama was one of our worst presidents.

chuck roast , March 29, 2019 at 12:21 pm

Thank you Yves and Tom Ferguson.

Fergusons graph on DBK's default probabilities coincides with the ECB's ending its asset purchase programme and entering the "reinvestment phase of the asset purchase programme".
The worst of the euro zombie banks appear to be getting tense and nervous.
Maybe that is why Jerome Powell did his volte-face last month on gradually raising interest rates. Note that the Fed also reduced its automatic asset roll-off. I'm curious if the other euro-zombies in the "peers" return on equity chart are are experiencing volatility also.

Craig H. , March 29, 2019 at 1:04 pm

Apparently the worst fate you can suffer as long as you don't go Madoff is Fuld. According to Wikipedia his company manages a hundred million which must be humiliating. It's not as humiliating as locking the guy up in prison would be by a very long stretch.

Greenspan famously lamented that there isn't anything the regulators can really do except make empty threats. This is dishonest. The regulations are not carved in stone like the ten commandments. In China they execute incorrigible financiers all the time.

John Wright , March 30, 2019 at 10:31 am

Greenspan was never willing to counter any problem that might irritate powerful financial constituencies. For example, during the internet stock bubble of the late 1990's, Greenspan decried the "irrational exuberance" of the stock market. The Greenspan Fed could have raised the margin requirement for stocks to buttress this view, but did not. As I remembered reading, Greenspan was in poor financial shape when he got his Fed job.

His subsequent performance at the Fed apparently left him a wealthy man. Real regulation by Greenspan may have adversely affected his wealth. It may explain why Alan Greenspan would much rather let a financial bubble grow until it pops and then "fix it".

Procopius , March 31, 2019 at 12:30 am

Everybody forgets (or at least does not mention) that Greenspan was a member of the Class of '43, the (mostly Canadian) earliest members of the Objectivist Cult with guru Ayn Rand. Expecting him to act rationally is foolish. It may happen accidentally (we do not know why he chose to let the economy expand unhindered in 1999), but you cannot count on it. In a world with information asymmetry expecting markets to be concerned about reputation is ridiculous. To expect them to police themselves for long term benefit is even more ridiculous.

rd , March 29, 2019 at 3:06 pm

I think Finance is currently about 13% of the S&P 500, down from the peak of about 18% or so in 2007. I think we will have a healthy economy and improved political climate when Finance is about 8-10% of the S&P 500 which is about where I think finance plays a healthy, but not overwhelming rentier role in the economy.

Inode_buddha , March 29, 2019 at 4:51 pm

I think things will be much better when finance is about ~3% of the S&P 500, but no more than that.

[Mar 07, 2021] Regulatory Capture: The Banks and the System That They Have Corrupted

Notable quotes:
"... She soldiered through her painful stomach ailments and secretly tape-recorded 46 hours of conversations between New York Fed officials and Goldman Sachs. After being fired for refusing to soften her examination opinion on Goldman Sachs, Segarra released the tapes to ProPublica and the radio program This American Life and the story went viral from there... ..."
"... In a nutshell, the whoring works like this. There are huge financial incentives to go along, get along, and keep your mouth shut about fraud. The financial incentives encompass both the salary, pension and benefits at the New York Fed as well as the high-paying job waiting for you at a Wall Street bank or Wall Street law firm if you show you are a team player . ..."
Mar 14, 2019 |

"But the impotence one feels today -- an impotence we should never consider permanent -- does not excuse one from remaining true to oneself, nor does it excuse capitulation to the enemy, what ever mask he may wear. Not the one facing us across the frontier or the battle lines, which is not so much our enemy as our brothers' enemy, but the one that calls itself our protector and makes us its slaves. The worst betrayal will always be to subordinate ourselves to this Apparatus, and to trample underfoot, in its service, all human values in ourselves and in others."

Simone Weil

"And in some ways, it creates this false illusion that there are people out there looking out for the interest of taxpayers, the checks and balances that are built into the system are operational, when in fact they're not. And what you're going to see and what we are seeing is it'll be a breakdown of those governmental institutions. And you'll see governments that continue to have policies that feed the interests of -- and I don't want to get clichéd, but the one percent or the .1 percent -- to the detriment of everyone else...

If TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car... I think it's inevitable. I mean, I don't think how you can look at all the incentives that were in place going up to 2008 and see that in many ways they've only gotten worse and come to any other conclusion."

Neil Barofsky

"Written by Carmen Segarra, the petite lawyer turned bank examiner turned whistleblower turned one-woman swat team, the 340-page tome takes the reader along on her gut-wrenching workdays for an entire seven months inside one of the most powerful and corrupted watchdogs of the powerful and corrupted players on Wall Street – the Federal Reserve Bank of New York.

The days were literally gut-wrenching. Segarra reports that after months of being alternately gas-lighted and bullied at the New York Fed to whip her into the ranks of the corrupted, she had to go to a gastroenterologist and learned her stomach lining was gone.

She soldiered through her painful stomach ailments and secretly tape-recorded 46 hours of conversations between New York Fed officials and Goldman Sachs. After being fired for refusing to soften her examination opinion on Goldman Sachs, Segarra released the tapes to ProPublica and the radio program This American Life and the story went viral from there...

In a nutshell, the whoring works like this. There are huge financial incentives to go along, get along, and keep your mouth shut about fraud. The financial incentives encompass both the salary, pension and benefits at the New York Fed as well as the high-paying job waiting for you at a Wall Street bank or Wall Street law firm if you show you are a team player .

If the Democratic leadership of the House Financial Services Committee is smart, it will reopen the Senate's aborted inquiry into the New York Fed's labyrinthine conflicts of interest in supervising Wall Street and make removing that supervisory role a core component of the Democrat's 2020 platform. Senator Bernie Sanders' platform can certainly be expected to continue the accurate battle cry that 'the business model of Wall Street is fraud.'"

Pam Martens, Wall Street on Parade

[Feb 27, 2021] The book tells the story about a slow coup d'etat that happened in Japan during the 70's and late 80's and how Japan was transformed from a centralized command economy where credit creation was "window-dressed" by the powerful Finance Ministry by means of an artificially created housing bubble into one that is dominated by a neoliberalized Central Bank with all the monetary, financial and social ramifications we can see today

Feb 27, 2021 |

vato , Feb 27 2021 11:19 utc | 41

Regarding the Renegade Inc. link @Karlof has provided and the interview with Richard A. Werner, the research paper he talks about in the midsection can be read here: Can banks create money out of nothing? .
Strangeley enough, it's probably the first empirical reasarch attempt on how a bank "loan" is indicated on a bank balance sheet. He does it by taking a fictitious loan from one of these small local community banks he talks about in the interview.

The paper is easily accessible and also contains a brief history of the perception on how money is created and how banks operate.

And since the documentary The Spider's Web has been mentioned, there are two complementary films to banking and finance which are worth watching: 97% Owned and Princes of Yen , the latter based on Richard Werner's same-titled book. The book tells the story about a slow coup d'etat that happened in Japan during the 70's and late 80's and how Japan was transformed from a centralized command economy where credit creation was "window-dressed" by the powerful Finance Ministry by means of an artificially created housing bubble into one that is dominated by a neoliberalized Central Bank with all the monetary, financial and social ramifications we can see today, not just in Japan but around the globe.

[Feb 20, 2021] Why China, with same size of power grid, won't suffer outage like in the US

Feb 20, 2021 |

vk , Feb 18 2021 18:40 utc | 142

Why China, with same size of power grid, won't suffer outage like in the US

"Why does the US use the winter storm as the excuse every time?" Shu Bin, director of the State Grid Beijing Economics Research Institute, told the Global Times on Thursday, noting that the power grid system is very vulnerable and requires constant maintenance and upgrade.

A report from the US Department of Energy (DOE) in 2015 said that 70 percent of power transformers in the country were 25 years or older, 60 percent of circuit breakers were 30 years or older, and 70 percent of transmission lines are 25 years or older. And the age of these components "degrades their ability to withstand physical stresses and can result in higher failure rates," the report noted.


"The US has no nationwide power grid network allocation plan like China. When it encounters extreme weather, a state won't help another state like some Chinese provinces and regions do with flexible allocation plans," Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, told the Global Times on Thursday.


"China uses 50Hz across the country, like the country has the same heartbeat," he said, adding that China has never experienced such a scale of blackouts as the US.


China has mastered the top technologies such as "UHV transmission" and "flexible DC transmission" and started the strategic "west-east electricity transmission" and "north-south electricity transmission" projects, which in turn offer an opportunity for the development of the country's western region.

[Feb 19, 2021] The infrastructure failed - the people paid to manage this failed - everybody is angry, 10 people died so far last I heard.

Feb 19, 2021 |

Grieved , Feb 18 2021 0:45 utc | 52

@36 oldhippie

Not as apocalyptic as it may seem. I wrote a comment on the situation in the earlier thread here .

Temps are starting to move up and tomorrow (Thursday) should begin the thaw. Friday is sunny and 47 deg F for a high, then sunny weekend and following. So we're over the worst of it. The lowest it ever got was around 0 deg F.

The infrastructure failed - the people paid to manage this failed - everybody is angry, 10 people died so far last I heard.

Rolling blackouts, some people very much suffering, townships opening warming shelters - probably not millions of pipes bursting. Not totally iced in, just nowhere to go. People stayed home. Businesses stayed closed. Not totally without food, people stocked up staples in 2020.

Not that dire. Absolutely fucking disgusting, and a hardship that touched everyone - some people got really screwed and I don't know why the treatment was uneven like that - not demographics, something with the grid. Dire, yes, and life-threatening to some or perhaps many (numbers not clear to me yet), but not so dire as your picture suggests. Nothing like Katrina, except the same ineptness.

But heads will roll. The governor has mandated an investigation into the regulator, ERCOT. What follows next is of great interest. Facts will appear. I'll post anything useful.

I heard a rumor it was getting better. Could be less blackouts. Will post now in case power goes off ;)

vk , Feb 18 2021 2:24 utc | 63

Texas Could Have Kept the Lights On

This Texas debacle may light a heated debate in the USA for the next weeks, for two reasons:

1) Texas is the big alt-right/Trumpist Festung for the foreseeable future. Their nation-building process involve catapulting Texas as the anti-California , the conservative version of the Shining City on the Hill, around which the USA will be rebuilt;

2) What is happening in Texas right now goes directly to the heart of neoliberalism, which is the political doctrine that vertebrates the alt-right. That's why conservative ideologues such as Tucker Carlson et al are desperately scrambling on TV and social media to blame the outage on the so-called Green New Deal.

What is happening right now in Texas, therefore, may be another episode on the battle for the soul of the American Empire.

vetinLA , Feb 18 2021 2:27 utc | 64

Thom Hartmann podcast on the Texas SNAFU;

[Feb 14, 2021] Financial oligarchy and Jewish factor

Feb 14, 2021 |

Anon [256] Disclaimer , says: February 14, 2021 at 8:50 am GMT • 6.5 hours ago


Most to these so-called "jews" are NOT ACTUAL JEWS although they claim to be. Rather, they superficially converted to Judaism about 1200 years ago, for political and financial advantages. Think of them more like a criminal organization (Rothschild Khazarian Mafia) which uses the terms "jew" and "anti-semitism" as Liability Shields: designed to Deflect-Accountability and Evoke False-Trust and Sympathy with which to deceive the victims of their Banking-Financial-$cams, War-Profiteering, Cultural-$ubversion, and other Massive Cons.

This is why it's Important not to fall for their Primary Trap THEY RELY ON BEING PERSECUTED so they can continue using their main go-to (anti-semitism) get out of jail free card.

[Feb 10, 2021] the holding of mortgages by financial entities as de facto landlordism

Feb 10, 2021 |

Jonny Appleseed , February 6, 2021 at 9:10 am

I am curious as to why Prof. Hudson does not describe the holding of mortgages by financial entities as de facto landlordism, even if it is decentralized and theoretically time-limited (tho' not so with infinite re-fi and heloc).If the mortgage lenders are granted the monopoly of literally creating a debt on a ledger, rather than it being a public utility, and the benefits (read as: interest payments) accrue solely to those private entities, how is that substantially different than hereditary land title and rent? I concede that at the end of the lengthy mortgage term, the aristos cede the deed, but the parasitism is considerable, often over the entire working life of a person or couple.

michael hudson , February 6, 2021 at 11:09 am

My whole point, which I hope I've stated repeatedly clearly enough, is that "Rent is for paying interest." The financial class today has replaced the 19th-century's post-feudal landlord class.

Mikel , February 6, 2021 at 3:59 pm

Loans are also taken out against financial assets such as stocks/bonds. Is that another reason for propping up the stock market to the bizarre levels now seen?

Carolinian , February 6, 2021 at 10:05 am

Great stuff. While some of us are resistant to using money and debt to explain everything , who can deny that this country has always been about money above all with a not altogether insincere love of freedom on the side. Perhaps that latter is the source of the "you're not the boss of me" approach to the rest of the world that Hudson talks about.

ex-PFC Chuck , February 6, 2021 at 10:22 am

Although I'm more text than video oriented, this time I watched the latter first instead of reading the transcript. It was like sitting in a master class about the ongoing pernicious influence of the American financial sector on our country's foreign policy since early in the 20th century. Even if you've already read the transcript you should watch the video as well.

[Feb 06, 2021] Everything Makes Sense, But Nothing Is Logical by Bill Blain

Feb 06, 2021 |

Authored by Bill Blain via,

The thing to really wonder about is how society is changing and what that means for financial markets. After all, it's the madness of crowds, sentiment and human behaviours that drive market prices. Modern communications via immediate 24/7 news, social media, the ease and gamification of trading, and the influences of inputs such as Reddit and Fake News are changing the way markets function. It was revealing how quickly a loose internet shock-flock of aligned retail investors swiped the market this week.

Their anger at the financial machine was palpable. They demonstrate a fundamental change at the heart of market capitalism.

The basis of " shareholder capitalism " was best summed up by Gordon Gecko: "Greed is Good" . It was utterly corrupting. Anything to improve returns to the owners, the shareholders, was apparently justified. It was justified by the belief free markets would achieve an equilibrium where shareholders would make optimal profits by providing maximum utility to their customers.

Just like communism, it didn't quite work out the way the economists and sociologists predicted. Everyone talks a good talk about fair shares of the cake, but try a simple experiment and ask you kids to divide it. Everyone wants a bigger slice. (My father's solution was simple: whoever cuts the cake chooses last.)

In reality nothing is really fair. Inequality is a driver of the human condition. Companies cut corners to improve their share of the cake - often the management sneak in and take the rewards, cutting out shareholders and customers. To make profits big corporates will compromise what they can: safety, the environment, law and justice – everything from poisoning the planet, unsafe aircraft, or bursting dams. Costs were seen as externalities addressed through insurance, or hiring the best lawyers.

Its no wonder we now have kickback against it, and a new mantra of "stakeholder" capitalism trying to ensure we all get that fairer slice of the pie.

Every single big investor now swears by their strict adoption of the principals and importance of Corporate Social Responsibility (CSR), Environment, Social and Governance (ESG) investment, and Sustainability. (I have serious concerns these valid and laudable goals have been diminished into mere tickbox investing by corporate bureaucracy.)

Yet for all the noise and stakeholders sharing the pie, we are still seeing the steepest ever transfer of wealth from the poor to the rich. Income inequality is rising. Across the Occidental Western economies the poor have become desperately poor. Witness the growth in Foodbanks in Europe and the US and the success of Marcus Rashford in addressing the appalling reality of kids arriving in school unfed, penalising their life chances from the get-go.

And it's not just the poorest in society. The middle classes have also been hollowed out by the difficulties of stretching static incomes to cover every rising living costs, and TAXES.

Oh yes these two great certainties in life; death and taxes. Except . If you are rich enough ..

As we've seen the concept of Shareholder capitalism stopped delivering anything much to any but the wealthiest. Since 2008, and particularly since the outbreak of the Covid Pandemic, we've seen the bulk of QE money creation and government stimulus work its way into financial assets, with the effect of driving up the price of stocks. As I wrote a few weeks ago a rough number is that $3 trillion out of $5 trillion subsidy money in the US has gone into the pockets of the richest in society through the inflation of their financial assets.

Try and explain how that has worked – will immediately get you branded a communist. But it's really simple. Stocks go up because bond yields are so low – and bond yields are so low because its policy. How to correct it?

This is why Taxes are really interesting.

If you look at the new generation of the uber-wealthy Tech barons, and the last US President, they all share a common theme – the belief that minimising tax payments is a signal of entrepreneurial genius. However, the reality, at the end of the day, is tax optimisation through complex tax structures is pretty much the same as tax evasion.

Ask any right of centre American what raising taxes would do to the economy – and they will immediately counter it's the success of tax cuts that's driven growth and markets. Tax cuts/handouts to the rich are credited as the singular success of the last White House administration – creating thousands of low-paid jobs across the states. If you were to tax the rich they wouldn't invest their money in job creation, and there would be no trickle down to the poor. Even questioning the efficacy of tax burdens on the rich could apparently shake the edifice of US shareholder capitalism to the ground.

The thing is.. we might not actually need taxes at all. If central banks can create limitless money with zero consequences, then why does anyone have to pay taxes? Let the rich keep it all and we can print more money to keep the poor happy.

But Taxes have an important role in society. They are a fee members of society pay to be part of it – you work in order to pay the taxes that allow you membership of society. The more you pay, the greater your contribution – the more society should value you. You want the benefits of society, then be willing to pay for it.

In an ideal world we would laud billionaires for their hard work, effort, and paying the bulk of their earnings in taxes to raise the up rest of us. Instead, they impress their equals by avoiding taxes, while the rest of us increasingly resent their conspicuous wealth – earned off our backs which is very much how anyone under 30 working hard to save a deposit for a rabbit-hutch flat they can never afford increasingly feels about the world.

We are only now beginning to questioning tax equality and tax evasion. The papers will make some righteous noise about the dislikeable high-street retailer who has emptied the company pension fund to finance his yachts in a tax-haven, or it might expose a singer who has not paid a penny in tax. We almost feel sympathy for the entertainer whose stellar career ends up on the skids because they can't meet a tax-demand.

We regard the Inland Revenue as the ultimate baddie for harassing us to pay our modest amounts of tax – it's easy for them to go after little people. If they try to catch the big tax-avoiders they face a battery of lawyers and accountants and deliberately complex webs to be unravelled.

In short, the rich get away with not paying Tax while poor get harassed and get poorer. Inequality rises.

And this where we return to Norges Bank and why their decision to act on bad tax players is so critical.

NBIM own 1.5% of the global stock market, with stakes in over 9ooo companies. They've not named the seven stocks they dumped – there is no blacklist, it says – but clearly it should set every CFO thinking about their tax transparency – including paying tax where value creation takes place. That's a clear shot across the bows for any of the big tech firms currently selling stuff over the internet, delivering it your front door and booking all the revenues somewhere low tax, and repatriating profits via somewhere that's agreed a zero-taxes deal in exchange for opening a HQ office.

Some of the most valuable firms on the planet have the least transparent tax policies. Just saying but there is a fascinating article in the Garuniad y'day: "Inside the mind of Jeff Bezos". It reports Jeff (till recently the richest guy on the planet) saying: " the only way I can see to deploy this much financial resource is by converting my Amazon winnings into space travel ."

Personally, I would love to mine asteroids, but Bezos could probably ensure every child on the planet has access to clean water, or cure cancer and have statues to himself erected across the planet proclaiming what a wonderful philanthropic champion.

Or he and every single other billionaire could just pay taxes, thankful for the opportunities they had to realise their dreams building their companies, while making society better. I'm not saying take every penny – but let's be realistic who can spend a couple of billion dollars? Even the first Mrs Blain would have struggled with that one (although I suspect young Ms Blain could make a significant dent )

I know exactly what posts will be made on this website and Zerohedge on this article. I will be screamed at for being a socialist. Some libertarian idiot will call himself "John Galt" and declare a belief that helping others is weakness. Not interested. The only way we make the world better as politicians keep reminding us – is to remember we are in this together, on a very small planet. [ZH: 'fair and balanced' - everyone deserves to speak their mind and be heard.]

High taxation economies – like the Scandinavians – tend to be fairly happy places. Entrepreneurs live well and are held in high regard. Their taxes fund social provision, health and education that are the envy of the rest of us.

In low tax countries the wealth creators live in bunker complexes protected by guards while the masses eke out their miserable crusts .

... ... ...

[Feb 05, 2021] The Old Mantra Of -Too Big To Fail- Is Exposed As A Lie... - ZeroHedge

Feb 05, 2021 |

Authored by Brandon Smith via,

It is a general rule that corrupt economies tend to operate on faith and not on fundamentals. And to be clear, it's not so much about naive faith that the system is stable or functional. No, it's more about the masses having faith that the corruption and instability will never be derailed. Most people are not as stupid as the establishment and central bankers think they are – Almost everyone knows the system is broken, they just refuse to consider the possibility that the fraud will be disrupted, or that it will be allowed to fail.

The old mantra "too big to fail" is a lie. NOTHING is too big to fail, and that includes the US economy, the dollar and the elaborate Kabuki theater that keeps them both afloat. All it takes is a single moment, an epiphany that the Ponzi scheme is unsustainable rather than unstoppable.

I'm reminded specifically of the inflationary crisis of Argentina in 2001 – 2002.

Argentina's economy was highly dependent on foreign capital inflows, and its currency peg to the US dollar, not to mention they were precariously reliant on support from the IMF. The IMF openly validated the government of Argentina and their currency peg model, but foreign capital began to decline and the peg became unsustainable. Without tangible growth in manufacturing and a strong middle class, an economy cannot survive for long. A top down system based on illusory "financial products" and creative accounting is doomed to crash eventually.

All it took was for the IMF to criticize the policies they initially endorsed and announced that they were removing financial aid, and all hell broke loose in Argentina.

Almost overnight the Argentina peso plunged in value, interest rates spiked and inflation struck hard. People poured into the streets and civil unrest erupted. The IMF would later admit it made "errors" in its handling of the Argentina situation, but this was simply spin control designed to protect them from further scrutiny. The IMF avoided most of the blame and has been growing into a monstrous global centralization machine ever since.

I think we are witnessing the beginning of a similar end of mass faith in fraud in the US. The recent Robinhood short squeeze event as well as the current decoupling of physical silver prices from the paper ETF market have accelerated the timetable. Not surprisingly, these moves have forced the establishment to intervene to some extent to essentially stop renegade traders from freely investing. Accusations are flying and deplatforming has ensued. The idea that the system is a functional fraud is gone; The world now knows it is a dysfunctional fraud, and collapse cannot be very far behind.

Furthermore the collusion between banks, hedge funds and Big Tech is blatantly revealed. These relationships are supposed to remain hidden in the ether. They are obvious to anyone with any financial knowledge and sense, but they aren't supposed to be wielded in the open. Conspirators aren't supposed to admit to the conspiracy? Right?



me title=

Some people might say the establishment has been forced to unmask by activists. Maybe. But, as I have been warning for many years, when criminals start openly admitting to their crimes it is probably because they think that it's too late for anyone to do anything about it.

The point is, bankers and globalists have ways of avoiding responsibility for the disasters they engineer. When the con-game breaks, they always have patsies to take the fall.

This sets up a bizarre dynamic in which the money elites that constructed the economy like a time-bomb are treated like victims (or heroes) and the people telling the truth about the fraud are treated like villains and criminals. Are activist stock market traders and silver market guerrillas to blame for any crisis that erupts in the near future? No, of course not, but they will be blamed anyway.

That said, propaganda narratives and scapegoats may not be enough to save the bankers this time. They will never allow a major fiscal crash to develop in a vacuum. They need more cover, and they need to have the means to lock down the public to prevent civil unrest or rebellion from spilling over into their backyards. I have long suspected that the covid pandemic is a useful tool in this regard. As I noted in my article 'How Viral Pandemic Benefits The Globalist Agenda' , published in January of 2020:

" Even if a pandemic does not kill a large number of people, it still disrupts international travel, it disrupts exports and imports, it disrupts consumer behavior and retail sales, and it disrupts domestic trade. If it does kill a large number of people, and if the Chinese government's response is any indication, it could result in global martial law. With many economies including the US economy already in a precarious balancing act of historic debt vs. crashing demand and useless central bank repo market intervention, there is little chance that the system can withstand such a tsunami "

As we all know, medical martial law in the name of "public health" is being established in most countries regardless of the actual death rate. The insane globalist rantings of the World Economic Forum and Klaus Schwab have been very revealing; Schwab and other elites have even called the pandemic a "perfect opportunity" to execute there agenda for the "Great Reset".

However, the globalists are highly fallible, and mistakes in judgment have been made. During the Event 201 pandemic wargame on a coronavirus outbreak (conveniently held two months before the real thing happened), the elites forecast at least 65 million initial deaths globally from such a virus. We are a year into the pandemic and nowhere near that kind of death rate. In fact, the death rate is so minuscule (0.26%) , that the public is beginning to realize the lockdown mandates are pointless.



In the US, conservative states are moving on and keeping their economies wide open. Half the population is refusing to take the vaccines, and many members of law enforcement are refusing to implement lockdown policies. I don't think this is what the globalists expected at all. They needed mass fear and they are getting mass defiance.

They're going to need a bigger threat, or a bigger virus.

This is why I have been repeatedly warning that the talk of reopenings by Biden and other democrats is going to be very short lived. I have predicted that Biden will attempt a federal lockdown similar to the Level 4 lockdowns used in Europe and Australia after a couple of months of relative calm. I based this prediction on the covid "mutation" narrative being spread right now by the mainstream media and establishment cronies like Anthony Fauci. It is not hard to see where this is headed.

The globalists must have the "legal" option of restricting public movement as well as large gatherings, and they must have the option of surveillance on individuals 24/7 through contact tracing. This is the only way to prevent rebellion against the Reset and rising anger due to economic turmoil. The veil has been lifted, the conspiracy is being widely broadcast. Martial law alone would only inspire more dissent, medical tyranny in the name of "saving lives" is the ONLY play the globalists have. They have to have help from a large portion of the citizenry, so they must maintain the appearance that they are operating from the moral high ground.

The covid mutation story is clearly the next play, and Bank of America economists appear to agree with me . They recently stated that they see little optimism in terms of a reopening of the economy, and that hard lockdowns will return, possibly in March or April.

Another factor to consider is that the economic crash will have to reach a peak soon because Joe Biden now resides in the White House. If the crash happens in the near term, activist investors can be blamed, Trump can be blamed, and conservatives and liberty activists can be blamed. If the crash happens a year or two from now, only Biden and the globalists will get the blame.

Without lockdowns and scapegoats the scenario will end very badly for the globalists. It might end badly for them anyway. Be ready for more chaos by Spring; I suspect the elites are getting desperate, and if they allow America to go back to normal and for the pandemic to end with a whimper they will never get another chance at their precious Reset.

[Feb 04, 2021] The GameStop Rebels Vs. -Too Big To Fail- - ZeroHedge

Feb 04, 2021 |

The GameStop Rebels Vs. "Too Big To Fail" BY TYLER DURDEN WEDNESDAY, FEB 03, 2021 - 6:10

Authored by Ryan McMaken via The Mises Institute,

Last week, a large number of small-time investors drove up the price of GameStop's (GME) stock a historic 1,784 percent . But this was no mere spike in some obscure stock. The stock's price spiked in part as a result of efforts by "an army of smaller investors who have been rallying on Reddit and elsewhere online to support GameStop's stock and beat back the professionals." These professionals were hedge fund managers who had shorted GameStop's stock. In other words, hedge funders were betting billions that GameStop's stock would go down. But the price went up instead, meaning hedge funds like Melvin Capital (and Citron Research) took "a significant loss," possibly totaling $70 billion.

There surely were plenty of insiders on both sides of this deal. Given the complexity of various schemes employed by seasoned investors, it seems it is very unlikely that this is just a simple matter of little Davids taking on Wall Street Goliaths.

But it also looks like that's not all that was going on. Had this only been just another scheme by some Wall Street insiders against some other Wall Street insiders the story would probably have ended there.

But that's not what happened. Rather, it appears that, for many of the smaller investors who were involved, much of this "short squeeze" was conducted for the purposes of throwing a monkey wrench in the plans of Wall Street hedge funds which exist within the rarified world of billionaires and their friends.

Pro–Wall Street Fearmongering

The reactions to the event from media pundits and other commentators were telling in that there was clearly fear and outrage over the fact that business as usual on Wall Street wasn't being enforced. Predictably, much of the reaction to the Reddit rebellion was to label it a "fiasco," " insanity ," and something sure to leave a " trail of destruction ." The important thing was to use words designed to make it all look like the threat to hedge funds represents some sort of grave threat to the overall economy. Jim Lebenthal at CNBC, for example, declared the "short-squeeze fiasco is a threat to the proper functioning of financial markets."

The fearmongering went beyond even the usual places we hear about financial news. On The View , for example, Meghan McCain delivered the sort of status quo –defending bromides we've come to expect from her. She insisted the GameStop affair could spiral into an economy-killing disaster because

If the stock ends up plunging because of this, because of GameStop and Wall Street loses billions, at a certain point, it will impact stocks like Apple and Disney and stocks that a lot of average Americans do invest in, and if that happens, average Americans will end up losing even more money.

Her comment doesn't rally make any sense, and she doesn't seem to have even a rudimentary understanding of what happened. But her comment delivered the important point: namely, that anything that causes volatility in the market could be a disaster for every American household. Translation: and we should all be very, very afraid if something isn't done to keep these Reddit people -- whom she compared to the Capitol "insurrectionists" -- under control.

Of course, in a functioning and relatively unhampered market, unusual, unexpected things happen all the time. Entrepreneurial actors do things the incumbent firms and "experts" hadn't counted on. This leads to "instability" and big swings in prices. This is actual capitalism, and it doesn't mean the marketplace isn't functioning properly. In fact, it probably means the marketplace is dynamic and responsive to consumers and other market participants.

But that's not something Wall Street insiders or their pals in Washington like in the modern era. Although Wall Streeters love to portray themselves as capitalist captains of industry, the fact is they have very little interest in real, competitive capitalism.

Rather, we live in the era of "too big to fail" (TBTF), when market freedom means nothing and preserving the portfolios of powerful Wall Street institutions is what really matters.

Decades of "Too Big to Fail"

It's based on the idea that Wall Street is just too important to the whole economy, and Washington must intervene to make sure rich guys on Wall Street stay rich. David Stockman explains this philosophy:

[It is] the notion that the "threat of systemic risk" and a cascading contagion of losses form the failure of any big Wall Street institution would be so calamitous that it warranted an exemption from free market discipline.

This goes back at least to the 1994 Mexican bailout -- which was really a bailout of investors, not of Mexico -- which solidified the process of normalizing huge transfers of wealth from taxpayers and dollar holders to the Wall Street elite. By then, the "Greenspan put" was already in place, with the central bank forever poised to embrace more easy money in pursuit of propping up stock prices. Then came the bailouts of 2008 and the covd-19 avalanche of easy money -- all of which lopsidedly benefited Wall Street over the rest of the economy.

This "exemption from free market discipline" is what Wall Street is all about these days. The financial sector has become accustomed to enjoying bailouts, easy money, and the resulting financialization which puts ever greater amounts of the US economy into the hands of Wall Street money managers. The sector is now built on corporate welfare, not "free markets." No matter what happens, Wall Street expects the deck to be stacked in its favor.

This is why "volatility" has become a bad word, and "stability" is now the name of the game. It's why Lebenthal thinks anything out of the ordinary is a threat to the "proper functioning of financial markets." If some free market innovation and inventiveness actually takes place in some small corner of the marketplace, well, then we're all expected to get very upset.

That's the way Wall Street likes it. ay_arrow 1

Kayman 8 hours ago

The marketing slogan "Too Big Too Fail" conveniently presumed Wall Street was more important than the Real Economy. A fatal presumption.

Wall Street is a Parasite, backstopped by the Fed, who, in turn, are backstopped by the Nation. A crumbling nation, where the Fed strangles lending/savings intermediation, and saves the blood suckers by bleeding the dying core of America.

wmbz 8 hours ago

"The sector is now built on corporate welfare, not "free markets."

This is NOT a new thing. Corporate welfare has been in play for a long, long time. I am amazed how long it has taken otherwise "smart" people to grasp this fact.

The only difference is, it is out in the glaring sunlight for all to see. TPTB are damn proud of it!

junction 7 hours ago (Edited)

Except for the involvement of WallStreetBets in temporarily blocking the hedge fund bear raid on GameStop using "naked" shorts, it is still business as usual on Wall Street. No one at the SEC does anything but collect a salary, issue press releases and go to lunch as the Mafia crime families. . . oops, hedge funds run "bust out" operations on businesses. The lapdog financial press cheered on the hedge funds as they demolished American businesses. The same gutter journalists who are not yet linking micro-manager Bezos giving up total control of Amazon right after his cloud service illegally de-platformed Parler for violation of bogus. made-up community standards. But then, bigger things are afoot. Bolshevik president Biden just approved deploying B-1 bomber to Norway for the first time. Nuclear bomb carrying B-1 bombers. Anything to distract people from how rotten things are.

Cognitive rationalist 7 hours ago

Banking financial sector: private profits for me, public losses for thee

gladitsover 8 hours ago remove link

"..the table is tilted folks. The game is rigged.."

George Carlin

Lokiban 8 hours ago

I think it was all about showing to those unawares how corrupt and rigged Wall street truly is and they have gotten the message out bigtime.
The only question to be asked is who became the proverbial bagholder when average people saw their 'Bitcoin-Tulipmania' chance to get out with amazing profits and with that breaking the promise to continue pumping gme till it hits $1500.
One has always to be carefull if these kind of actions are true populism going against the controllers or is it controllers playing their hideous games again for a reason, like the great reset.
Greed has never been a good advisor in these times, easy sheoplemoney. It works all the time..

dustinthewind 9 hours ago

" Curiosity v Manipulation"

COMMENT: Message: Re Reddit "WallStreetBets"
Hi Marty,
Thanks for this blog post but I think they are not trying to make money out of short squeezing GME really, they are trying to make a point. If you follow some of the posts you see many stories about how badly people and their families were hurt in 2008 when not a single banker went to prison. Stories of Fathers losing jobs and houses and descending into alcoholism in front of their children who now are part of WallStreetBets, others who had to live off of beans and rice or what Mama could grow in the garden and went hungry etc.

So they are not buying GME to see it rise, though that is fine, they are spending money "they can afford to lose" to punish the hedge funds that have along with bankers hurt the little guy repeatedly. These same people IMO have bought off our politicians, removed regulations like Glass Steagal etc all to reap profits to the top while crushing everyone else.

Listen in June 2008 I got laid off from Palm, in July I broke my arm ( badly ), in August some tenants left so I tried to put that property up for sale but in September Lehman fell and the real estate agent told me the market was OFF that I could not sell and needed to rent it with no one renting for 5 more months. At the same time in September I had a 100K home equity line I took out just for emergencies and since I was having one I wanted to use it – but then Wells Fargo pulled the whole thing.

So there I was Marty, sitting on the couch with a cast from fingers to shoulder watching the world meltdown on a tiny TV set while on lots of pain killers
I was forced to use my small 401K, and ended up using the whole thing through 9 months of disability, two surgeries and a job search that did not yield a job until the fall of 2011.
So IMO these arrogant SOB cheating hedge fund guys should pound sand on GME for once because the casino is rigged, heads they win, tails they win, and the taxpayers lose their jobs, homes, and pay for their bailouts.
I say give it to 'em.
Off my soapbox

REPLY: I fully understand that. I have fought against these people my whole life. I was more interested in learning HOW the economy functioned where they were only interested in guaranteed trades. I guess I was the Leonardo da Vinci of finance. Instead of digging up bodies to figure out how the anatomy functioned, I searched history and developed a computer model to try to ascertain what made the world economy tick.

A professor from Princeton where Einstein taught said to me that I reminded him of Einstein. I was surprised, for I did not see myself as comparable to Einstein in any way. He then explained that what he meant was my curiosity which moved me to try to figure out what made it all function. I came to understand what he meant. If you are not CURIOUS and seek out knowledge, then you will NEVER discover anything new! I was not dealing with the physics of the world, but the finance. People are attracted by this blog and Socrates for that same reason. They have that spark of curiosity and seek to also understand what makes it all tick! We need to teach students to be curious. That is the key to all progress we desperately need to survive this never-ending battle of authoritarianism v independence and freedom.

I have stated many times that I had discovered the 8.6-year frequency in my research I conducted at Princeton, University in the Firestone Library. Those were fond memories for it was an amazing resource back then as was the Royal British Newspaper Library, which I gathered my FOREX database by sifting through the largest newspaper collection in the world.

This was the difference between me and the "club" where I tried to understand the movement of the ages that caused the rise and fall of civilization and therein the economy/markets, and the "club" which seeks to manipulate everything by sheer force armed with bribes. They own the Southern District of New York courts, the Second Circuit, and the Department of Justice along with the SEC and CFTC. Goldman Sachs has even stacked the SEC and CFTC with their former people. Nobody was prosecuted despite the fact that they were involved in the looting of capital in Malaysia and Greece. And people have the audacity to claim there was absolutely no election fraud? There is nothing we can trust that goes on in government anymore and it will only get far worse as we head into 2032.

I am well aware of the sentiment behind this Reddit trend. My concern is simple. Don't put it past the "club" to be in there making this seem like a sure bet and then set everyone up for the big crash. Be careful here going into Feb/March 2021.

[Feb 03, 2021] The GameStop Rebels Vs. -Too Big To Fail- - ZeroHedge

Feb 03, 2021 |

The GameStop Rebels Vs. "Too Big To Fail" BY TYLER DURDEN WEDNESDAY, FEB 03, 2021 - 6:10

Authored by Ryan McMaken via The Mises Institute,

Last week, a large number of small-time investors drove up the price of GameStop's (GME) stock a historic 1,784 percent . But this was no mere spike in some obscure stock. The stock's price spiked in part as a result of efforts by "an army of smaller investors who have been rallying on Reddit and elsewhere online to support GameStop's stock and beat back the professionals." These professionals were hedge fund managers who had shorted GameStop's stock. In other words, hedge funders were betting billions that GameStop's stock would go down. But the price went up instead, meaning hedge funds like Melvin Capital (and Citron Research) took "a significant loss," possibly totaling $70 billion.

There surely were plenty of insiders on both sides of this deal. Given the complexity of various schemes employed by seasoned investors, it seems it is very unlikely that this is just a simple matter of little Davids taking on Wall Street Goliaths.

But it also looks like that's not all that was going on. Had this only been just another scheme by some Wall Street insiders against some other Wall Street insiders the story would probably have ended there.

But that's not what happened. Rather, it appears that, for many of the smaller investors who were involved, much of this "short squeeze" was conducted for the purposes of throwing a monkey wrench in the plans of Wall Street hedge funds which exist within the rarified world of billionaires and their friends.

Pro–Wall Street Fearmongering

The reactions to the event from media pundits and other commentators were telling in that there was clearly fear and outrage over the fact that business as usual on Wall Street wasn't being enforced. Predictably, much of the reaction to the Reddit rebellion was to label it a "fiasco," " insanity ," and something sure to leave a " trail of destruction ." The important thing was to use words designed to make it all look like the threat to hedge funds represents some sort of grave threat to the overall economy. Jim Lebenthal at CNBC, for example, declared the "short-squeeze fiasco is a threat to the proper functioning of financial markets."

The fearmongering went beyond even the usual places we hear about financial news. On The View , for example, Meghan McCain delivered the sort of status quo –defending bromides we've come to expect from her. She insisted the GameStop affair could spiral into an economy-killing disaster because

If the stock ends up plunging because of this, because of GameStop and Wall Street loses billions, at a certain point, it will impact stocks like Apple and Disney and stocks that a lot of average Americans do invest in, and if that happens, average Americans will end up losing even more money.

Her comment doesn't rally make any sense, and she doesn't seem to have even a rudimentary understanding of what happened. But her comment delivered the important point: namely, that anything that causes volatility in the market could be a disaster for every American household. Translation: and we should all be very, very afraid if something isn't done to keep these Reddit people -- whom she compared to the Capitol "insurrectionists" -- under control.

Of course, in a functioning and relatively unhampered market, unusual, unexpected things happen all the time. Entrepreneurial actors do things the incumbent firms and "experts" hadn't counted on. This leads to "instability" and big swings in prices. This is actual capitalism, and it doesn't mean the marketplace isn't functioning properly. In fact, it probably means the marketplace is dynamic and responsive to consumers and other market participants.

But that's not something Wall Street insiders or their pals in Washington like in the modern era. Although Wall Streeters love to portray themselves as capitalist captains of industry, the fact is they have very little interest in real, competitive capitalism.

Rather, we live in the era of "too big to fail" (TBTF), when market freedom means nothing and preserving the portfolios of powerful Wall Street institutions is what really matters.

Decades of "Too Big to Fail"

It's based on the idea that Wall Street is just too important to the whole economy, and Washington must intervene to make sure rich guys on Wall Street stay rich. David Stockman explains this philosophy:

[It is] the notion that the "threat of systemic risk" and a cascading contagion of losses form the failure of any big Wall Street institution would be so calamitous that it warranted an exemption from free market discipline.

This goes back at least to the 1994 Mexican bailout -- which was really a bailout of investors, not of Mexico -- which solidified the process of normalizing huge transfers of wealth from taxpayers and dollar holders to the Wall Street elite. By then, the "Greenspan put" was already in place, with the central bank forever poised to embrace more easy money in pursuit of propping up stock prices. Then came the bailouts of 2008 and the covd-19 avalanche of easy money -- all of which lopsidedly benefited Wall Street over the rest of the economy.

This "exemption from free market discipline" is what Wall Street is all about these days. The financial sector has become accustomed to enjoying bailouts, easy money, and the resulting financialization which puts ever greater amounts of the US economy into the hands of Wall Street money managers. The sector is now built on corporate welfare, not "free markets." No matter what happens, Wall Street expects the deck to be stacked in its favor.

This is why "volatility" has become a bad word, and "stability" is now the name of the game. It's why Lebenthal thinks anything out of the ordinary is a threat to the "proper functioning of financial markets." If some free market innovation and inventiveness actually takes place in some small corner of the marketplace, well, then we're all expected to get very upset.

That's the way Wall Street likes it. ay_arrow 1

Kayman 8 hours ago

The marketing slogan "Too Big Too Fail" conveniently presumed Wall Street was more important than the Real Economy. A fatal presumption.

Wall Street is a Parasite, backstopped by the Fed, who, in turn, are backstopped by the Nation. A crumbling nation, where the Fed strangles lending/savings intermediation, and saves the blood suckers by bleeding the dying core of America.

wmbz 8 hours ago

"The sector is now built on corporate welfare, not "free markets."

This is NOT a new thing. Corporate welfare has been in play for a long, long time. I am amazed how long it has taken otherwise "smart" people to grasp this fact.

The only difference is, it is out in the glaring sunlight for all to see. TPTB are damn proud of it!

junction 7 hours ago (Edited)

Except for the involvement of WallStreetBets in temporarily blocking the hedge fund bear raid on GameStop using "naked" shorts, it is still business as usual on Wall Street. No one at the SEC does anything but collect a salary, issue press releases and go to lunch as the Mafia crime families. . . oops, hedge funds run "bust out" operations on businesses. The lapdog financial press cheered on the hedge funds as they demolished American businesses. The same gutter journalists who are not yet linking micro-manager Bezos giving up total control of Amazon right after his cloud service illegally de-platformed Parler for violation of bogus. made-up community standards. But then, bigger things are afoot. Bolshevik president Biden just approved deploying B-1 bomber to Norway for the first time. Nuclear bomb carrying B-1 bombers. Anything to distract people from how rotten things are.

Cognitive rationalist 7 hours ago

Banking financial sector: private profits for me, public losses for thee

gladitsover 8 hours ago remove link

"..the table is tilted folks. The game is rigged.."

George Carlin

Lokiban 8 hours ago

I think it was all about showing to those unawares how corrupt and rigged Wall street truly is and they have gotten the message out bigtime.
The only question to be asked is who became the proverbial bagholder when average people saw their 'Bitcoin-Tulipmania' chance to get out with amazing profits and with that breaking the promise to continue pumping gme till it hits $1500.
One has always to be carefull if these kind of actions are true populism going against the controllers or is it controllers playing their hideous games again for a reason, like the great reset.
Greed has never been a good advisor in these times, easy sheoplemoney. It works all the time..

[Feb 03, 2021] Naked Short Selling- The Truth Is Much Worse Than You Have Been Told

Feb 03, 2021 |

There is a massive threat to our capital markets, the free market in general, and fair dealings overall. And no, it's not China. It's a homegrown threat that everyone has been afraid to talk about.

Until now.

That fear has now turned into rage.

Hordes of new retail investors are banding together to take on Wall Street. They are not willing to sit back and watch naked short sellers, funded by big banks, manipulate stocks, harm companies, and fleece shareholders.

The battle that launched this week over GameStop between retail investors and Wall Street-backed naked short sellers is the beginning of a war that could change everything.

It's a global problem, but it poses the greatest threat to Canadian capital markets, where naked short selling -- the process of selling shares you don't own, thereby creating counterfeit or 'phantom' shares -- survives and remains under the regulatory radar because Broker-Dealers do not have to report failing trades until they exceed 10 days.

This is an egregious act against capital markets, and it's caused billions of dollars in damage.

Make no mistake about the enormity of this threat: Both foreign and domestic schemers have attacked Canada in an effort to bring down the stock prices of its publicly listed companies.

In Canada alone, hundreds of billions of dollars have been vaporized from pension funds and regular, everyday Canadians because of this, according to Texas-based lawyer James W. Christian. Christian and his firm Christian Smith & Jewell LLP are heavy hitters in litigation related to stock manipulation and have prosecuted over 20 cases involving naked short selling and spoofing in the last 20 years.

"Hundreds of billions have been stolen from everyday Canadians and Americans and pension funds alike, and this has jeopardized the integrity of Canada's capital markets and the integral process of capital creation for entrepreneurs and job creation for the economy," Christian told

The Dangerous Naked Short-Selling MO

In order to [legally] sell a stock short, traders must first locate and secure a borrow against the shares they intend to sell. A broker who enters such a trade must have assurance that his client will make settlement.

While "long" sales mean the seller owns the stock, short sales can be either "covered" or "naked" . A covered short means that the short seller has already "borrowed" or has located or arranged to borrow the shares when the short sale is made. Whereas, a naked short means the short seller is selling shares it doesn't own and has made no arrangements to buy. The seller cannot cover or "settle" in this instance, which means they are selling "ghost" or "phantom" shares that simply do not exist without their action.

When you have the ability to sell an unlimited number of non-existent phantom shares in a publicly-traded company, you then have the power to destroy and manipulate the share price at your own will.

And big banks and financial institutions are turning a blind eye to some of the accounts that routinely participate in these illegal transactions because of the large fees they collect from them. These institutions are actively facilitating the destruction of shareholder value in return for short term windfalls in the form of trading fees. They are a major part of the problem and are complicit in aiding these accounts to create counterfeit shares.

The funds behind this are hyper sophisticated and know all the rules and tricks needed to exploit the regulators to buy themselves time to cover their short positions. According to multiple accounts from traders, lawyers, and businesses who have become victims of the worst of the worst in this game, short-sellers sometimes manage to stay naked for months on end, in clear violation of even the most relaxed securities laws.

The short-sellers and funds who participate in this manipulation almost always finance undisclosed "short reports" which they research & prepare in advance, before paying well-known short-selling groups to publish and market their reports (often without any form of disclosure) to broad audiences in order to further push the stock down artificially. There's no doubt that these reports are intended to create maximum fear amongst retail investors and to push them to sell their shares as quickly as possible.

That is market manipulation. Plain and simple.

Their MO is to short weak, vulnerable companies by putting out negative reports that drive down their share price as much as possible. This ensures that the shorted company in question no longer has the ability to obtain financing, putting them at the mercy of the same funds that were just shorting them. After cratering the shorted company's share price, the funds then start offering these companies financing usually through convertibles with a warrant attachment as a hedge (or potential future cover) against their short; and the companies take the offers because they have no choice left. Rinse and Repeat.

In addition to the foregoing madness, brokers are often complicit in these sorts of crimes through their booking of client shares as "long" when they are in fact "short". This is where the practice moves from a regulatory gray area to conduct worthy of prison time.

Naked short selling was officially labeled illegal in the U.S. and Europe after the 2008/2009 financial crisis.

Making it illegal didn't stop it from happening, however, because some of the more creative traders have discovered convenient gaps between paper and electronic trading systems, and they have taken advantage of those gaps to short stocks.

Still, it gets even more sinister.

According to Christian, "global working groups" coordinate their attacks on specifically targeted companies in a "Mafia-like" strategy.

Journalists are paid off, along with social media influencers and third-party research houses that are funded by what amounts to a conspiracy. Together, they collaborate to spread lies and negative narratives to destroy a stock.

At its most illegal, there is an insider-trading element that should enrage regulators. The MO is to infiltrate a company through disgruntled insiders or lawyers close to the company. These sources are used to obtain insider information that is then leaked to damage the company.

Often, these illegal transactions involve paying off "informants", journalists, influencers, and "researchers" are difficult to trace because they are made from offshore accounts that are shut down once the deed is done.

Likewise, the "shorts" disguised as longs can be difficult to trace when the perpetrators have direct market access to trading systems. These trades are usually undetected until the trades fail or miss settlement. At that point, the account will move the position to another broker-dealer and start the process all over again.

The collusion widens when brokers and financial institutions become complicit in purposefully mislabeling "shorts" as "longs", sweeping the illegal transactions under the rug and off of regulatory radar.

"Spoofing" and "layering" have also become pervasive techniques to avoid regulator attention. Spoofing, as the name suggests, involves short sellers creating fake selling pressure on their targeted stocks to drive prices lower. They accomplish this by submitting fake offerings in "layers" at different prices to create a mirage.

Finally, these bad actors manage to skirt the settlement system, which is supposed to "clear" on what is called a T+2 basis . That means that any failed trades must be bought or dealt with within 3 days. In other words, if you buy on Monday (your "T" or transaction day), it has to be settled by Wednesday.

Unfortunately, Canadian regulators have a hard time keeping up with this system, and failed trades are often left outstanding for much longer periods than T+2. These failing trades are constantly being traded to reset the settlement clock and move the failing trade to the back of the line. The failures of a centralized system

According to Christian, it can be T+12 days before a failed trade is even brought to the attention of the IIROC (the Investment Industry Regulatory Organization of Canada)

Prime Brokers and Banks are Complicit

This is one of Wall Street's biggest profit center and fines levied against them are merely a minor cost of doing business.

Some banks are getting rich off of these naked short sellers. The profits off this kind of lending are tantalizing, indeed. Brokers are lending stocks they don't own for massive profit and sizable bonuses.

This layer of what many have now called a "criminal organization" is the toughest for regulators to deal with, regardless of the illegal nature of these activities.

Prime brokers lend cash account shares that are absolutely not allowed to be lent. They lend them to short-sellers in order to facilitate them in settling their naked shorts.

It's not that the regulators are in the dark on this. They are, in fact, handing out fines, left and right -- both for illegal lending and for mismarking "shorts" and "longs" to evade regulatory scrutiny. The problem is that these fines pale in comparison to the profits earned through these activities.

And banks in Canada in particular are basically writing the rules themselves, recently making it easier (and legal) to lend out cash account shares.

Nor do law firms have clean hands. They help short sellers bankrupt targeted companies through court proceedings, a process that eventually leads to the disappearance of evidence of naked shorts on the bank books.

"How much has been stolen through this fraudulent system globally is anyone's guess," says Christian, "but the number begins with a 'T' (trillions)."

The list of fines for enabling and engaging in manipulative activity that destroys companies' stock prices may seem to carry big numbers from the retail investor's perspective, but they are not even close to being significant enough to deter such actions:

- The SEC charged Citigroup's principal U.S. broker-deal subsidiary in 2011 with misleading investors about a $1 billion collateralized debt obligation (CDO) tied to the U.S. housing market. Citigroup had bet against investors as the housing market showed signs of distress. The CDO defaulted only months later, causing severe losses for investors and a profit of $160 million (just in fees and trading profits). Citigroup paid $285 million to settle these SEC charges.

- In 2016, Goldman, Sachs & Co. agreed to pay $15 million to settle SEC charges that its securities lending practices violated federal regulations. To wit: The SEC found that Goldman Sachs was mismarking logs and allowed customers to engage in short selling without determining whether the securities could reasonably be borrowed at settlement.

- In 2013, a Charles Schwab subsidiary was found liable by the SEC for a naked short-selling scheme and fined $8.2 million .

- The SEC charged two Merrill Lynch entities in 2015 with using "inaccurate data in the course of executing short sale orders", fining them $11 million.

- And most recently, Canadian Cormark Securities Inc and two others came under the SEC's radar. On December 21, SEC instituted cease-and-desist orders against Cormark. It also settled charges against Cormark and two other Canada-based broker deals for "providing incorrect order-making information that caused an executing broker's repeated violations of Regulation SHO". According to the SEC, Cormark and ITG Canada caused more than 200 sale orders from a single hedge fund, to the tune of more than $660 million between August 2016 and October 2017, to be mismarked as "long" when they were, in fact, "short" -- a clear violation of Regulation SHO. Cormark agreed to pay a penalty of $800,000 , while ITG Canada -- one of the other broker-dealers charged -- agreed to pay a penalty of $200,000. Charging and fining Cormark is only the tip of the iceberg. The real question is on whose behalf was Cormark making the naked short sells?

- In August 2020, Bank of Nova Scotia (Scotiabank) was fined $127 million over civil and criminal allegations in connection with its role in a massive price-manipulation scheme.

According to one Toronto-based Canadian trader who spoke to on condition of anonymity, "traders are the gatekeeper for the capital markets and they're not doing a very good job because it's lucrative to turn a blind eye." This game is set to end in the near future, and it is only a matter of time.

"These traders are breaking a variety of regulations, and they are taking this risk on because of the size of the account," he said. "They have a responsibility to turn these trades down. Whoever is doing this is breaking regulations [for the short seller] and they know he is not going to be able to make a settlement. As a gatekeeper, it is their regulatory responsibility to turn these trades away. Instead, they are breaking the law willfully and with full knowledge of what they are doing."

"If you control the settlement system, you can do whatever you want," the source said. "The compliance officers have no teeth because the banks are making big money. They over-lend the stocks; they lend from cash account shares to cover some of these fails for instance, if there are 20 million shares they sold 'long', they can cover by borrowing from cash account shares."

The Naked Truth

In what he calls our "ominous financial reality", Tom C.W. Lin, attorney at law, details how "millions of dollars can vanish in seconds, rogue actors can halt trading of billion-dollar companies, and trillion-dollar financial markets can be distorted with a simple click or a few lines of code".

Every investor and every institution is at risk, writes Lin.

The naked truth is this: Investors stand no chance in the face of naked short sellers. It's a game rigged in the favor of a sophisticated short cartel and Wall Street giants.

Now, with online trading making it easier to democratize trading, there are calls for regulators to make moves against these bad actors to ensure that North America's capital markets remain protected, and retail investors are treated fairly.

The recent GameStop saga is retail fighting back against the shorting powers, and it's a wonderful thing to see - but is it a futile punch or the start of something bigger? The positive take away from the events the past week is that the term "short selling" has been introduced to the public and will surely gather more scrutiny.

Washington is gearing up to get involved. That means that we can expect the full power of Washington, not just the regulators, to be thrown behind protecting the retail investors from insidious short sellers and the bankers and prime brokers who are profiting beyond belief from these manipulative schemes.

The pressure is mounting in Canada, too, where laxer rules have been a huge boon for manipulators. The US short cartel has preyed upon the Canadian markets for decades as they know the regulators rarely take action. It is truly the wild west.

Just over a year ago, McMillan published a lengthy report on the issue from the Canadian perspective, concluding that there are significant weaknesses in the regulatory regime.

While covered short-selling itself has undeniable benefits in providing liquidity and facilitating price discovery, and while the Canadian regulators' hands-off approach has attracted many people to its capital markets, there are significant weaknesses that threaten to bring the whole house of cards down.

McMillan also noted that "the number of short campaigns in Canada is utterly disproportionate to the size of our capital markets when compared to the United States, the European Union, and Australia".

Taking Wall Street's side in this battle, Bloomberg notes that Wall Street has survived "numerous other attacks" over the centuries, "but the GameStop uprising could mark the end of an era for the public short", suggesting that these actors are "long-vilified folks who try to root out corporate wrongdoing".

Bloomberg even attempts to victimize Andrew Left's Citron Research, which -- amid all the chaos -- has just announced that it has exited the short-selling game after two decades.

Nothing could be further from the truth. Short sellers, particularly the naked variety, are not helping police the markets and route out bad companies, as Bloomberg suggests. Naked short sellers are not motivated by moral and ethical reasons, but by profit alone. They attack good, but weak and vulnerable companies. They are not the saviors of capital markets, but the destroyers. Andrew Left may be a "casualty", but he is not a victim. Nor likely are the hedge funds with whom he has been working.

In a petition initiated by, the petitioners urge the SEC and FINRA to investigate Left and Citron Research, noting: "While information Citron Research publishes are carefully selected and distributed in ways that do not break the law at first sight, the SEC and FINRA have overlooked the fact that Left and Citron gains are a result of distributing catalysts in an anticipation of substantial price changes due to public response in either panic, encouragement, or simply a catalyst action wave ride. Their job as a company is to create the most amount of panic shortly after taking a trading position so they and their clients can make the most amount of financial gains at the expense of regular investors."

On January 25 th , the Capital Markets Modernization Taskforce published its final report for Ontario's Minister of Finance, noting that while naked short selling has been illegal in the United States since 2008, it remains a legal loophole in Canada. The task force is recommending that the Ministry ban this practice that allows for the short-selling of tradable assets without first borrowing the security.

The National Coalition Against Naked Short Selling - Failing to Deliver Securities (NCANS), which takes pains to emphasize that is not in any way against short-selling, notes: "Naked short-selling transfers the risk exposure and the hedging expense of the derivatives market makers onto the backs of equity investors, without any corresponding benefit to them. This is fundamentally unfair, and must stop."

Across North America, the issue is about to reach a fever pitch over GameStop. For once, regular retail investors have a voice to use against Wall Street. And for once, Washington appears to be listening. The House and Senate both have hearings scheduled over the GameStop saga.

Paradoxically, the same company that basically started the retail investor coup -- zero-fee trading app Robinhood -- is now under fire for pulling the rug out from under the same democratic movement.

After retail investors joined forces against Wall Street short-sellers to push GameStop stock from $20 to a high of over $480 in less than a week, Robinhood made the very unpopular move of instituting a ban on buying for retail investors. Under the rules, Wall Street could still buy and sell, but retail investors could only sell. This new band of investors -- which includes pretty much all of Robinhood's clientele -- are up in arms, with customers now suing. They won't go away, and they have Washington's ear and Twitter and Reddit's social media power. This is shaping up to be an uprising.

What happens with GameStop next could end up dictating a new form of capital markets democracy that levels the playing field and punishes the Mafia-like elements of Wall Street that have been fleecing investors and destroying companies for years.

Retail investors want to clean up capital markets, and they just might be powerful enough to do it now. That's a serious wake-up call for both naked short sellers and the investing public.

Viva la Revolucion.

James Stafford


More Top Reads From

[Feb 02, 2021] The Importance of Usury Laws

Notable quotes:
"... Today's cultural dominance in much of the South and chunks of the Midwest by boobtoob preachers, Dominationists and the highly heretical oxymoronical "Christian" Zioni$ts can be seen as the afterbirth of cultural Calvinism. Calvinism is Talmudic in its essence and squats at the nexus of what they like to call "Judeo-Christian Civilization". ..."
Jan 22, 2021 |

Mefobills , says: January 22, 2021 at 2:34 pm GMT • 9.3 hours ago

The author Jafee is confused on Bentham, because Bentham was confused himself, or was a Jewish agent of mammon.

The highlighted terms accord with Benthamian Utilitarianism -- the greatest human happiness of the greatest human number.[1]
Much (but surely not all) pertinent history suggests that Bentham's thinking influenced the construction of the Preamble

The English philosopher Jeremey Bentham (1748-1832) was a defender of usury, which is the opposite of happiness for the greatest human number.

In 1787 Jeremey Bentham wrote "In Defence of Usury." Bentham was the son of a rich lawyer, and a lawyer himself, not an economist, which is why he was confused. Bentham created the present mis-definition of usury which prevails to today, so he was very damaging. "The taking of grater interest than the law allows, or the taking of greater interest than is usual."

Bentham ignored hundreds of years of the Catholic Scholastics work on usury, and also ignored Aristotle. Actually Bentham attacked Aristotle in order to spread his B.S. Bentham's father was Jewish, and Bentham also ignored the fairly strong Old Testament admonitions against usury.

Bentham spread the same erroneous B.S. that Calvin did, and both men did enormous damage, and whether by design or confusion are NOT for the common good. Their connections to our (((friends))) is suspicious.

A Persian Daric is a gold coin. Bentham said this: Though all money in nature is barren, though a Daric would not beget another Daric yet for a Daric which a man borrowed he might get a ram and couple of ewes and the ewes would probably not be barren (pages 98 to 101 of his screed)

Aristotle and the Catholic Schoolmen clearly showed that it was the Ewes that were fertile, not the coins.

Bentham or Calvin could not read with comprehension and twisted words into new meanings. This twisted language persists in the brains of modern humans as confusion.

As if every Daric is going to buy an Ewe in order to reproduce.

By 1850 John Whipple wrote "The Importance of Usury Laws – An answer to Jeremey Bentham."

"The purpose of money is to facilitate exchange. It was never intended as an article of trade, as an article possessing an inherent value in itself, and further than as representative or test of the value of all other articles."

It undoubtedly admits of private ownership, but of an ownership that is not absolute, like the product of individual industry, but qualified and limited by the special use for which it was designed.


The power of money over every other article, arises out of the artificial character given to it by the STATE , AND NOT OUT OF THE QUALITIES OF THE MATERIAL WHICH IT IS COMPOSED.

Bentham also argued that anti-usury laws were due to prejudice against Jews. Whipple was not frightened by the Jew trick of anti-semitism claims. Whipple said this in reply, "The real truth is this feeling which he calls prejudice is the result of the moral instinct of mankind."

Whipple wasn't afraid of calling out the Jew.

In other words, Bentham did not have the moral instinct of mankind, but instead was a usurer, hiding behind his utilitarianism doctrine.

My view is that the preamble general welfare clause is direct lineage that comes through Benjamin Franklin and his experiences in the Philadelphia Colony. Franklin was definitely NOT a usurer, and was not confused on money.

Abdul Alhazred , says: January 22, 2021 at 3:01 pm GMT • 8.9 hours ago

The Preamble of the constitution reflects a Liebnizian metaphysic reflected in the notion of the pursuit of happiness, were are not talking utilitarianism, but a recognition that man is made in the image of the creator, Imago Dei where happiness reflects an acknowledgement that we are actually creative beings where happiness is a reflection of such creativity, above mere acquisition of 'property' as the Confederacy devolved the phrase to "Life, Liberty and Property"

Majority of One , says: January 22, 2021 at 7:45 pm GMT • 4.2 hours ago
@Mefobills eply distorted by Calvinistic Puritanism and its "Chosen People" mythos.

Much of the religious fervor which dominated the American frontier in the latter decades of the 18th Century and early 19th–they called it "The Great Awakening" -- was infused with the patriarchal form of religiosity as ignited by Calvinistic tropes and memes.

Today's cultural dominance in much of the South and chunks of the Midwest by boobtoob preachers, Dominationists and the highly heretical oxymoronical "Christian" Zioni$ts can be seen as the afterbirth of cultural Calvinism. Calvinism is Talmudic in its essence and squats at the nexus of what they like to call "Judeo-Christian Civilization".

My preference is to employ the more objectively truthful description: the "JudieChristie MagickMindfuck.

Mefobills , says: January 22, 2021 at 11:20 pm GMT • 35 minutes ago
@Leonard R. Jaffee Anti-semitism card. Bentham even attacked Aristotle for corrupting Christianity.

In Bentham's book, Bentham associates some of the positive attributes of thrift with money lending. Money lending becomes on the same plane as thrift in his worldview. An here is the coup-de-gras: Compound interest was forbidden in Bentham's day, and Bentham urged its legalization.

A compound curve for interest is outside of nature, as the claims on nature grow exponentially. Nature does not grow exponentially. Nature and labor cannot pay the claims, and society polarizes. Jesus started his mission on the Jubilee year, as Jubilees are coded in the Bible to prevent polarization.

If Bentham wasn't a Jew, he certainly had the Jewish spirit. Bentham was not for the common good.

[Jan 29, 2021] The System Is Rigged - Episode 4537- Game Stop Corp

Notable quotes:
"... "I am also reading the the next focus of the little people investors is the highly manipulated precious metals markets.....I love the smell of burning Wall Street in the morning." ..."
"... Back in the Oughts when the fraudulent mortgages were grossly inflating Real Estate Investment Trusts (REITs), there were many instances of naked short selling to keep honest REITs down, activities I learned firsthand. We formed a shareholders organization that lobbied the SEC to enforce its laws but to no avail--the regulators were well captured and did zip. ..."
"... There's short selling, and then there's naked short selling. Why do the markets require naked short selling? If those hedge funds already owned the stocks that they are selling short, they would not be in such trouble now. ..."
Jan 29, 2021 |

psychohistorian , Jan 28 2021 18:47 utc | 6

Early this week a few amateur stock trading nerds decided to promote a stock that was heavily shortened by certain hedge funds. The idea was to raise the stock price of Game Stop Corp., a vendor for computer games, by having lots of small stock traders to buy into it. The hedge fund that shortened the stock, and thereby bet on a dropping stock price, would then make huge losses while the many small buyers would potentially profit.

These people, who had joined up in the sub-reddit /r/WallStreetBets, were not driven by greed but by rage against the financial machine :

Instead of greed, this latest bout of speculation, and especially the extraordinary excitement at GameStop, has a different emotional driver: anger. The people investing today are driven by righteous anger, about generational injustice, about what they see as the corruption and unfairness of the way banks were bailed out in 2008 without having to pay legal penalties later, and about lacerating poverty and inequality. This makes it unlike any of the speculative rallies and crashes that have preceded it.

The movement was successful. The stock price of Game Stop Corp. rose from some $10 to over $400 within just a few days. The short seller had to take cover under a larger firm:

Hedge fund Melvin Capital closed out its short position in GameStop on Tuesday after taking huge losses as a target of the army of retail investors. Citadel and Point72 have infused close to $3 billion into Gabe Plotkin's hedge fund to shore up its finances.

I'm shocked! Absolutely shocked to see that the game of finance is rigged!!!!/snark

There have not been market fundamentals since the beginning of financialization in 1971 when money became fiat instead of gold backed. I find it interesting that it has taken 50 years for the cancer of financialization to fully compromise the host. It will be interesting to see where this goes from here.

I think the speed of decline of empire is speeding up as noted by the increase in international investment in China.

I am also reading the the next focus of the little people investors is the highly manipulated precious metals markets.....I love the smell of burning Wall Street in the morning.

Rutherford82 , Jan 28 2021 18:50 utc | 7

@6 psychohistorian

"I am also reading the the next focus of the little people investors is the highly manipulated precious metals markets.....I love the smell of burning Wall Street in the morning."

Is Max Keiser going after the silver market again? I bet he was posting on r/Wallstreetbets to stir things up!

karlof1 , Jan 28 2021 18:50 utc | 8

Back in the Oughts when the fraudulent mortgages were grossly inflating Real Estate Investment Trusts (REITs), there were many instances of naked short selling to keep honest REITs down, activities I learned firsthand. We formed a shareholders organization that lobbied the SEC to enforce its laws but to no avail--the regulators were well captured and did zip.

We even ran full pages ads in the NY Times and WaPost to add visibility to our justifiable outrage, which was well proven when the bubble burst.

But Obama didn't do his job and enforce the law, and the entire mess is far worse now. This episode epitomizes the amazing amounts of corruption masquerading as well regulated markets and an equitable financial system.

I support Hudson's debt forgiveness for the main reason it will bankrupt the debt holders--the Financial Parasites--who are also the beneficiaries of the corrupt system; and with their destruction, will allow for the rise of the Public Financial Utility that will restore law and order to that realm of the economy. Yes, this must be seen as yet another episode of the longstanding Class War, one of the most brazen ever.

lysias , Jan 28 2021 19:41 utc | 18

There's short selling, and then there's naked short selling. Why do the markets require naked short selling? If those hedge funds already owned the stocks that they are selling short, they would not be in such trouble now.

Bemildred , Jan 28 2021 20:20 utc | 24

It's not over yet:

Triden , Jan 28 2021 20:55 utc | 29

Citadel and Point72 have infused close to $3 billion into Gabe Plotkin's hedge fund to shore up its finances.


How Robinhood was rigged:

Robinhood sells its orderflow to Citadel for execution. Citadel then chiselled the retail investor for pennies per trade by frontrunning (think high freq trading) before execution of retail order, inflating the price and cheating the customer. Citadel bailed out Citron, essentially inheriting the short position. Citadel then threatened Robinhood with refusing payment for orderflow

[Jan 28, 2021] Michael Hudson- Finance Capitalism vs. Industrial Capitalism The Rentier Resurgence and Takeover

Jan 26, 2021 |

Yves here. This is another tour de force from Michael Hudson, derived from a paper he presented in early January at the UPRE session during the annual ASSA meeting. This time he turns from his recent focus on the economically destructive but oligarchy-advancing practice of sanctifying debt to another favorite topic, the evolution of capitalism. Hudson looks from the early Industrial Revolution onward and demonstrates that the dominance of financial capital over industrial capital was neither the likely course of events nor desirable. A major feature of this development is the increasing weight of rentier activities and how they drain income from workers and more productive sectors.

One of his key conclusions:

The result is a "deep state" supporting a cosmopolitan financial oligarchy. That is the definition of fascism, reversing democratic government to restore control to the rentier financial and monopoly classes. The beneficiary is the corporate sector, not labor, whose resentment is turned against foreigners and against designated enemies within.

For Hudson, the deep state enforcers are the IMF and the World Bank (which pressed emerging economies to develop capital markets, making them more vulnerable to destabilizing hot money flows). He did not mention them in this article but I imagine Hudson would add domestic law neutering "investor-state dispute settlement" provisions in trade agreements.

Even with its length (get a cup of coffee!), an article that covers so much terrain is bound to simplify a bit. One small quibble: While Hudson correctly depicts China as hewing strictly and successfully to an industrial capital model, and keeping finance in check, Hudson overeggs the pudding a bit in saying, "China has kept banking in the public domain." China's regional governments have supported real-estate development projects, including a non-trivial proportion of ghost cities. often funded by private "wealth management products". China's "shadow banking sector" which officials have just estimated at nearly $13 trillion , or 86% of GDP and nearly 30% of banking assets.

Chinese officials say they are about to crack down on them, after many years of looking the other way, plus the occasional bailout of particular wealth management product issuances gone sour. Similarly, the dominant mobile payment platform player, Alibaba, is private.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is "and forgive them their debts": Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year

Marx and many of his less radical contemporary reformers saw the historical role of industrial capitalism as being to clear away the legacy of feudalism – the landlords, bankers and monopolists extracting economic rent without producing real value. But that reform movement failed. Today, the Finance, Insurance and Real Estate (FIRE) sector has regained control of government, creating neo-rentier economies.

The aim of this post-industrial finance capitalism is the oppositeof that of industrial capitalism as known to 19 th -century economists: It seeks wealth primarily through the extraction of economic rent, not industrial capital formation. Tax favoritism for real estate, privatization of oil and mineral extraction, banking and infrastructure monopolies add to the cost of living and doing business. Labor is being exploited increasingly by bank debt, student debt, credit-card debt, while housing and other prices are inflated on credit, leaving less income to spend on goods and services as economies suffer debt deflation.

Today's New Cold War is a fight to internationalize this rentier capitalism by globally privatizing and financializing transportation, education, health care, prisons and policing, the post office and communications, and other sectors that formerly were kept in the public domain of European and American economies so as to keep their costs low and minimize their cost structure.

In the Western economies such privatizations have reversed the drive of industrial capitalism to minimize socially unnecessary costs of production and distribution. In addition to monopoly prices for privatized services, financial managers are cannibalizing industry by debt leveraging and high dividend payouts to increase stock prices.

* * *

Today's neo- rentier economies obtain wealth mainly by rent seeking, while financialization capitalizes real estate and monopoly rent into bank loans, stocks and bonds. Debt leveraging to bid up prices and create capital gains on credit for this "virtual wealth" has been fueled by central bank Quantitative Easing since 2009.

Financial engineering is replacing industrial engineering. Over 90 percent of recent U.S. corporate income has been earmarked to raise the companies' stock prices by being paid out as dividends to stockholders or spent on stock buyback programs. Many companies even borrow to buy up their own shares, raising their debt/equity ratios.

Households and industry are becoming debt-strapped, owing rent and debt service to the Finance, Insurance and Real Estate (FIRE) sector. This rentier overhead leaves less wage and profit income available to spend on goods and services, bringing to a close the 75-year U.S. and European expansion since World War II ended in 1945.

These rentier dynamics are the opposite of what Marx described as industrial capitalism's laws of motion. German banking was indeed financing heavy industry under Bismarck, in association with the Reichsbank and military. But elsewhere, bank lending rarely has financed new tangible means of production. What promised to be a democratic and ultimately socialist dynamic has relapsed back toward feudalism and debt peonage, with the financial class today playing the role that the landlord class did in post-medieval times.

Marx's View of the Historical Destiny of Capitalism: to Free Economies from Feudalism

The industrial capitalism that Marx described in Volume I of Capital is being dismantled. He saw the historical destiny of capitalism to be to free economies from the legacy of feudalism: a hereditary warlord class imposing tributary land rent, and usurious banking. He thought that as industrial capitalism evolved toward more enlightened management, and indeed toward socialism, it would replace predatory "usurious" finance, cutting away the economically and socially unnecessary rentier income, land rent and financial interest and related fees for unproductive credit. Adam Smith, David Ricardo, John Stuart Mill, Joseph Proudhon and their fellow classical economists had analyzed these phenomena, and Marx summarized their discussion in Volumes II and III of Capital and his parallel Theories of Surplus Value dealing with economic rent and the mathematics of compound interest, which causes debt to grow exponentially at a higher rate than the rest of the economy.

However, Marx devoted Volume I of Capital to industrial capitalism's most obvious characteristic: the drive to make profits by investing in means of production to employ wage labor to produce goods and services to sell at a markup over what labor was paid. Analyzing surplus value by adjusting profit rates to take account of outlays for plant, equipment and materials (the "organic composition of capital"), Marx described a circular flow in which capitalist employers pay wages to their workers and invest their profits in plant and equipment with the surplus not paid to employees.

Finance capitalism has eroded this core circulation between labor and industrial capital. Much of the midwestern United States has been turning into a rust belt. Instead of the financial sector evolving to fund capital investment in manufacturing, industry is being financialized. Making economic gains financially, primarily by debt leverage, far outstrips making profits by hiring employees to produce goods and services.

Capitalism's Alliance of Banks with Industry to Promote Democratic Political Reform

The capitalism of Marx's day still contained many survivals from feudalism, most notably a hereditary landlord class living off the land rents, most of which were spent unproductively on servants and luxuries, not to make a profit. These rents had originated in a tax. Twenty years after the Norman Conquest, William the Conquer had ordered compilation of the Domesday Book in 1086 to calculate the yield that could be extracted as taxes from the English land that he and his companions had seized. As a result of King John's overbearing fiscal demands, the Revolt of the Barons (1215-17) and their Magna Carta enabled the leading warlords to obtain much of this rent for themselves. Marx explained that industrial capitalism was politically radical in seeking to free itself from the burden of having to support this privileged landlord class, receiving income with no basis in cost value or enterprise of its own.

Industrialists sought to win markets by cutting costs below those of their competitors. That aim required freeing the entire economy from the "faux frais" of production, socially unnecessary charges built into the cost of living and doing business. Classical economic rent was defined as the excess of price above intrinsic cost-value, the latter being ultimately reducible to labor costs. Productive labor was defined as that employed to create a profit, in contrast to the servants and retainers (coachmen, butlers, cooks, et al .) on whom landlords spent much of their rent.

The paradigmatic form of economic rent was the ground rent paid to Europe's hereditary aristocracy. As John Stuart Mill explained, landlords reaped rents (and rising land prices) "in their sleep." Ricardo had pointed out (in Chapter 2 of his 1817 Principles of Political Economy and Taxation ) a kindred form of differential rent in natural-resource rent stemming from the ability of mines with high-quality orebodies to sell their lower-cost mineral output at prices set by high-cost mines. Finally, there was monopoly rent paid to owners at choke points in the economy where they could extract rents without a basis in any cost outlay. Such rents logically included financial interest, fees and penalties.

Marx saw the capitalist ideal as freeing economies from the landlord class that controlled the House of Lords in Britain, and similar upper houses of government in other countries. That aim required political reform of Parliament in Britain, ultimately to replace the House of Lords with the Commons, so as to prevent the landlords from protecting their special interests at the expense of Britain's industrial economy. The first great battle in this fight against the landed interest was won in 1846 with repeal of the Corn Laws. The fight to limit landlord power over government culminated in the constitutional crisis of 1909-10, when the Lords rejected the land tax imposed by the Commons. The crisis was resolved by a ruling that the Lords never again could reject a revenue bill passed by the House of Commons.

The Banking Sector Lobbies Against the Real Estate Sector, 1815-1846

It may seem ironic today that Britain's banking sector was whole-heartedly behind the first great fight to minimize land-rent. That alliance occurred after the Napoleonic Wars ended in 1815, which ended the French blockage against British seaborne trade and re-opened the British market to lower-priced grain imports. British landlords demanded tariff protection under the Corn Laws – to raise the price of food, so as to increase the revenue and hence the capitalized rental value of their landholdings – but that has rendered the economy high-cost. A successful capitalist economy would have to minimize these costs in order to win foreign markets and indeed, to defend its own home market. The classical idea of a free market was one free from economic rent – from rentier income in the form of land rent.

This rent – a quasi-tax paid to the heirs of the warlord bands that had conquered Britain in 1066, and the similar Viking bands that had conquered other European realms – threatened to minimize foreign trade. That was a threat to Europe's banking classes, whose major market was the funding of commerce by bills of exchange. The banking class arose as Europe's economy was revived by the vast looting of monetary bullion from Constantinople by the Crusaders. Bankers were permitted a loophole to avoid Christianity's banning of the charging of interest, by taking their return in the form of agio , a fee for transferring money from one currency to another, including from one country to another.

Even domestic credit could use the loophole of "dry exchange," charging agio on domestic transactions cloaked as a foreign-currency transfer, much as modern corporations use "offshore banking centers" today to pretend that they earn their income in tax-avoidance countries that do not charge an income tax.

If Britain was to become the industrial workshop of the world, it would prove highly beneficial to Ricardo's banking class. (He was its Parliamentary spokesman; today we would say lobbyist.) Britain would enjoy an international division of labor in which it exported manufactures and imported food and raw materials from other countries specializing in primary commodities and depending on Britain for their industrial products. But for this to happen, Britain needed a low price of labor. That meant low food costs, which at that time were the largest items in the family budgets of wage labor. And that in turn required ending the power of the landlord class to protect its "free lunch" of land rent, and all recipients of such "unearned income."

It is hard today to imagine industrialists and bankers hand in hand promoting democratic reform against the aristocracy. But that alliance was needed in the early 19 th century. Of course, democratic reform at that time extended only to the extent of unseating the landlord class, not protecting the interest of labor. The hollowness of the industrial and banking class's democratic rhetoric became apparent in Europe's 1848 revolutions, where the vested interests ganged up against extending democracy to the population at large, once the latter had helped end landlord protection of its rents.

Of course, it was socialists who picked up the political fight after 1848. Marx later reminded a correspondent that the first plank of the Communist Manifesto was to socialize land rent, but poked fun at the "free market" rent critics who refused to recognize that rentier-like exploitation existed in the industrial employment of wage labor. Just as landlords obtained land rent in excess of the cost of producing their crops (or renting out housing), so employers obtained profits by selling the products of wage-labor at a markup. To Marx, that made industrialists part of the rentier class in principle, although the overall economic system of industrial capitalism was much different from that of post-feudal rentiers, landlords and bankers.

The Alliance of Banking with Real Estate and Other Rent-Seeking Sectors

With this background of how industrial capitalism was evolving in Marx's day, we can see how overly optimistic he was regarding the drive by industrialists to strip away all unnecessary costs of production – all charges that added to price without adding to value. In that sense he was fully in tune with the classical concept of free markets, as markets free from land rent and other forms of rentier income.

Today's mainstream economics has reversed this concept. In an Orwellian doublethink twist, the vested interests today define a free market as one "free" for the proliferation of various forms of land rent, even to the point of giving special tax advantages to absentee real estate investment, the oil and mining industries (natural-resource rent), and most of all to high finance (the accounting fiction of "carried interest," an obscure term for short-term arbitrage speculation).

Today's world has indeed freed economies from the burden of hereditary ground rent. Almost two-thirds of American families own their own homes (although the rate of homeownership has been falling steadily since the Great Obama Evictions that were a byproduct of the junk-mortgage crisis and Obama Bank Bailouts of 2009-16, which lowered homeowner rates from over 68% to 62%). In Europe, home ownership rates have reached 80% in Scandinavia, and high rates characterize the entire continent. Home ownership – and also the opportunity to purchase commercial real estate – has indeed become democratized.

But it has been democratized on credit. That is the only way for wage-earners to obtain housing, because otherwise they would have to spend their entire working life saving enough to buy a home. After World War II ended in 1945, banks provided the credit to purchase homes (and for speculators to buy commercial properties), by providing mortgage credit to be paid off over the course of 30 years, the likely working life of the young home buyer.

Real estate is by far the banking sector's largest market. Mortgage lending accounts for about 80 percent of U.S. and British bank credit. It played only a minor role back in 1815, when banks focused on financing commerce and international trade. Today we can speak of the Finance, Insurance and Real Estate (FIRE) sector as the economy's dominant rentier sector. This alliance of banking with real estate has led banks to become the major lobbyists protecting real estate owners by opposing the land tax that seemed to be the wave of the future in 1848 in the face of rising advocacy to tax away the land's entire price gains and rent, to make land the tax base as Adam Smith had urged, instead of taxing labor and consumers or profits. Indeed, when the U.S. income tax began to be levied in 1914, it fell only on the wealthiest One Percent of Americans, whose taxable income consisted almost entirely of property and financial claims.

The past century has reversed that tax philosophy. On a national level, real estate has paid almost zero income tax since World War II, thanks to two giveaways. The first is "fictitious depreciation," sometimes called over-depreciation. Landlords can pretend that their buildings are losing value by claiming that they are wearing out at fictitiously high rates. (That is why Donald Trump has said that he loves depreciation.) But by far the largest giveaway is that interest payments are tax deductible. Real estate is taxed locally, to be sure, but typically at only 1% of assessed valuation, which is less than 7 to 10 percent of the actual land rent.[1]

The basic reason why banks support tax favoritism for landlords is that whatever the tax collector relinquishes is available to be paid as interest. Mortgage bankers end up with the vast majority of land rent in the United States. When a property is put up for sale and homeowners bid against each other to buy it, the equilibrium point is where the winner is willing to pay the full rental value to the banker to obtain a mortgage. Commercial investors also are willing to pay the entire rental income to obtain a mortgage, because they are after the "capital" gain – that is, the rise in the land's price.

The policy position of the so-called Ricardian socialists in Britain and their counterparts in France (Proudhon, et al .) was for the state to collect the land's economic rent as its major source of revenue. But today's "capital" gains occur primarily in real estate and finance, and are virtually tax-free for landlords. Owners pay no capital-gains tax as real estate prices rise, or even upon sale if they use their gains to buy another property. And when landlords die, all tax liability is wiped out.

The oil and mining industries likewise are notoriously exempt from income taxation on their natural-resource rents. For a long time the depletion allowance allowed them tax credit for the oil that was sold off, enabling them to buy new oil-producing properties (or whatever they wanted) with their supposed asset loss, defined as the value to recover whatever they had emptied out. There was no real loss, of course. Oil and minerals are provided by nature.

These sectors also make themselves tax exempt on their foreign profits and rents by using "flags of convenience" registered in offshore banking centers. This ploy enables them to claim to make all their profits in Panama, Liberia or other countries that do not charge an income tax or even have a currency of their own, but use the U.S. dollar so as to save American companies from any foreign-exchange risk.

In oil and mining, as with real estate, the banking system has become symbiotic with rent recipients, including companies extracting monopoly rent. Already in the late 19 th century the banking and insurance sector was recognized as "the mother of trusts," financing their creation to extract monopoly rents over and above normal profit rates.

These changes have made rent extraction much more remunerative than industrial profit-seeking – just the opposite of what classical economists urged and expected to be the most likely trajectory of capitalism. Marx expected the logic of industrial capitalism to free society from its rentier legacy and to create public infrastructure investment to lower the economy-wide cost of production. By minimizing labor's expenses that employers had to cover, this public investment would put in place the organizational network that in due course (sometimes needing a revolution, to be sure) would become a socialist economy.

Although banking developed ostensibly to serve foreign trade by the industrial nations, it became a force-in-itself undermining industrial capitalism. In Marxist terms, instead of financing the M-C-M' circulation (money invested in capital to produce a profit and hence yet more money), high finance has abbreviated the process to M-M', making money purely from money and credit, without tangible capital investment.

The Rentier Squeeze on Budgets: Debt Deflation as a Byproduct of Asset-Price Inflation

Democratization of home ownership meant that housing no longer was owned primarily by absentee owners extracting rent, but by owner-occupants. As home ownership spread, new buyers came to support the rentier drives to block land taxation – not realizing that rent that was not taxed would be paid to the banks as interest to absorb the rent-of-location hitherto paid to absentee landlords.

Real estate has risen in price as a result of debt leveraging. The process makes investors, speculators and their bankers wealthy, but raises the cost of housing (and commercial property) for new buyers, who are obliged to take on more debt in order to obtain secure housing. That cost is also passed on to renters. And employers ultimately are obliged to pay their labor force enough to pay these financialized housing costs.

Debt deflation has become the distinguishing feature of today's economies from North America to Europe, imposing austerity as debt service absorbs a rising share of personal and corporate income, leaving less to spend on goods and services. The economy's indebted 90 percent find themselves obliged to pay more and more interest and financial fees. The corporate sector, and now also the state and local government sector, likewise are obliged to pay a rising share of their revenue to creditors.

Investors are willing to pay most of their rental income as interest to the banking sector because they hope to sell their property at some point for a "capital" gain. Modern finance capitalism focuses on "total returns," defined as current income plus asset-price gains, above all for land and real estate. Inasmuch as a home or other property is worth however much banks will lend against it, wealth is created primarily by financial means, by banks lending a rising proportion of the value of assets pledged as collateral.

Chart 10.4: annual changes in GDP and the major components of asset price gains

(nominal, $bn)

The fact that asset-price gains are largely debt-financed explains why economic growth is slowing in the United States and Europe, even as stock market and real estate prices are inflated on credit. The result is a debt-leveraged economy.

Changes in the value of the economy's land from year to year far exceeds the change in GDP. Wealth is obtained primarily by asset-price ("capital") gains in the valuation of land and real estate, stocks, bonds and creditor loans ("virtual wealth"), not so much by saving income (wages, profits and rents).The magnitude of these asset-price gains tends to dwarf profits, rental income and wages.

The tendency has been to imagine that rising prices for real estate, stocks and bonds has been making homeowners richer. But this price rise is fueled by bank credit. A home or other property is worth however much a bank will lend against it – and banks have lent a larger and larger proportion of the home's value since 1945. For U.S. real estate as a whole, debt has come to exceed equity for more than a decade now. Rising real estate prices have made banks and speculators rich, but have left homeowners and commercial real estate debt strapped.

The economy as a whole has suffered. Debt-fueled housing costs in the United States are so high that if all Americans were given their physical consumer goods for free – their food, clothing and so forth – they still could not compete with workers in China or most other countries. That is a major reason why the U.S. economy is de-industrializing. So this policy of "creating wealth" by financialization undercuts the logic of industrial capitalism.

Finance Capital's Fight to Privatize and Monopolize Public Infrastructure

Another reason for deindustrialization is the rising cost of living stemming from conversion of public infrastructure into privatized monopolies. As the United States and Germany overtook British industrial capitalism, a major key to industrial advantage was recognized to be public investment in roads, railroads and other transportation, education, public health, communications and other basic infrastructure. Simon Patten, the first professor of economics at America's first business school, the Wharton School at the University of Pennsylvania, defined public infrastructure as a "fourth factor of production," in addition to labor, capital and land. But unlike capital, Patten explained, its aim was not to make a profit. It was to minimize the cost of living and doing business by providing low-price basic services to make the private sector more competitive.

Unlike the military levies that burdened taxpayers in pre-modern economies, "in an industrial society the object of taxation is to increase industrial prosperity"by creating infrastructure in the form of canals and railroads, a postal service and public education. This infrastructure was a "fourth" factor of production.Taxes would be "burdenless," Patten explained, to the extent that they were invested in public internal improvements, headed by transportation such as the Erie Canal.[2]

The advantage of this public investment is tolower costs instead of letting privatizers impose monopoly rents in the form of access charges to basic infrastructure. Governments can price the services of these natural monopolies (including credit creation, as we are seeing today) at cost or offer them freely, helping labor and its employers undersell industrialists in countries lacking such public enterprise.

In the cities, Patten explained, public transport raises property prices (and hence economic rent) in the outlying periphery, as the Erie Canal had benefited western farms competing with upstate New York farmers.That principle is evident in today's suburban neighborhoods relative to city centers.London's Tube extension along the Jubilee Line, and New York City's Second Avenue Subway, showed that underground and bus transport can be financed publicly by taxing the higher rental value created for sites along such routes. Paying for capital investment out of such tax levies can provide transportation at subsidized prices, minimizing the economy's cost structure accordingly. What Joseph Stiglitz popularized as the "Henry George Law" thus more correctly should be known as "Patten's Law" of burdenless taxation.[3]

Under a regime of "burdenless taxation" the return on public investment does not take the form of profit but aims at lowering the economy's overall price structure to "promote general prosperity." This means that governments should operate natural monopolies directly, or at least regulate them. "Parks, sewers and schools improve the health and intelligence of all classes of producers, and thus enable them to produce more cheaply, and to compete more successfully in other markets."Patten concluded: "If the courts, post office, parks, gas and water works, street, river and harbor improvements, and other public works do not increase the prosperity of society they should not be conducted by the State." But this prosperity for the overall economy was not obtained by treating public enterprises as what today is called a profit center.[4]

In one sense, this can be called "privatizing the profits and socializing the losses." Advocating a mixed economy along these lines is part of the logic of industrial capitalism seeking to minimize private-sector production and employment costs in order to maximize profits. Basic social infrastructure is a subsidy to be supplied by the state.

Britain's Conservative Prime Minister Benjamin Disraeli (1874-80) reflected this principle: "The health of the people is really the foundation upon which all their happiness and all their powers as a state depend."[5]He sponsored the Public Health Act of 1875, followed by the Sale of Food and Drugs Act and, the next year, the Education Act. The government would provide these services, not private employers or private monopoly-seekers.

For a century, public investment helped the United States pursue an Economy of High Wages policy, providing education, food and health standards to make its labor more productive and thus able to undersell low-wage "pauper" labor. The aim wasto create a positive feedback between rising wages and increasing labor productivity.

That is in sharp contrast to today's business plan of finance capitalism – to cut wages, and also cut back long-term capital investment, research and development while privatizing public infrastructure. The neoliberal onslaught by Ronald Reagan in the United States and Margaret Thatcher in Britain in the 1980s was backed by IMF demands that debtor economies balance their budgets by selling off such public enterprises and cutting back social spending. Infrastructure services were privatized as natural monopolies, sharply raising the cost structure of such economies, but creating enormous financial underwriting commissions and stock-market gains for Wall Street and London.

Privatizing hitherto public monopolies has become one of the most lucrative ways to gain wealth financially. But privatized health care and medical insurance is paid for by labor and its employers, not by the government as in industrial capitalism. And in the face of the privatized educational system's rising cost, access to middle-class employment has been financed by student debt. These privatizations have not helped economies become more affluent or competitive. On an economy-wide level this business plan is a race to the bottom, but one that benefits financial wealth at the top.

Finance Capitalism Impoverishes Economies While Increasing Their Cost Structure

Classical economic rent is defined as the excess of price over intrinsic cost-value. Capitalizing this rent – whether land rent or monopoly rent from the privatization described above – into bonds, stocks and bank loans creates "virtual wealth." Finance capitalism's exponential credit creation increases "virtual" wealth – financial securities and property claims – by managing these securities and claims in a way that has made them worth more than tangible real wealth.

The major way to gain fortunes is to get asset-price gains ("capital gains") on stocks, bonds and real estate.However, this exponentially growing debt-leveraged financial overhead polarizes the economy in ways that concentrates ownership of wealth in the hands of creditors, and owners of rental real estate, stocks and bonds, draining the "real" economy to pay the FIRE sector.

Post-classical economics depicts privatized infrastructure, natural resource development and banking as being part of the industrial economy, not superimposed on it by a rent-seeking class. But the dynamic of finance-capitalist economies is not for wealth to be gained mainly by investing in industrial means of production and saving up profits or wages, but by capital gains made primarily from rent-seeking. These gains are not "capital" as classically understood. They are "finance-capital gains," because they result from asset-price inflation fueled by debt leveraging.

By inflating its housing prices and a stock market bubble on credit, America's debt leveraging, along with its financializing and privatizing basic infrastructure, has priced it out of world markets. China and other non-financialized countries have avoided high health insurance costs, education costs and other services freely or at a low cost as a public utility. Public health and medical care costs much less abroad, but is attacked in the United States by neoliberals as "socialized medicine," as if financialized health care would make the U.S. economy more efficient and competitive. Transportation likewise has been financialized and run for profit, not to lower the cost of living and doing business.

One must conclude that America has chosen to no longer industrialize, but to finance its economy by economic rent – monopoly rent, from information technology, banking and speculation, and leave industry, research and development to other countries. Even if China and other Asian countries didn't exist, there is no way that America can regain its export markets or even its internal market with its current debt overhead and its privatized and financialized education, health care, transportation and other basic infrastructure.

The underlying problem is not competition from China, but neoliberal financialization. Finance-capitalism is not industrial capitalism. It is a lapse back into debt peonage and a rentier neo-feudalism. Bankers play the role today that landlords played up through the 19 th century, making fortunes without corresponding value, by capital gains for real estate, stocks and bonds on credit, by debt leveraging whose carrying charges increase the economy's cost of living and doing business.

Today's New Cold War is a Fight by Finance Capitalism Against Industrial Capitalism

Today's world is being fractured by an economic warfare over what kind of economic system it will have. Industrial capitalism is losing the fight to finance capitalism, which is turning to be its antithesis just as industrial capitalism was the antithesis to post-feudal landlordship and predatory banking houses.

In this respect today's New Cold War is a conflict of economic systems. As such, it is being fought against the dynamic of U.S. industrial capitalism as well as that of China and other economies. Hence, the struggle also is domestic within the United States and Europe, as well as confrontational against China and Russia, Iran, Cuba, Venezuela and their moves to de-dollarize their economies and reject the Washington Consensus and its Dollar Diplomacy. It is a fight by U.S.-centered finance capital to promote neoliberal doctrine giving special tax privileges to rentier income, untaxing land rent, natural resource rent, monopoly rent and the financial sector. This aim includes privatizing and financializing basic infrastructure, maximizing its extraction of economic rent instead of minimizing the cost of living and doing business.

The result is a war to change the character of capitalism as well as that of social democracy. The British Labour Party, European Social Democrats and the U.S. Democratic Party all have jumped on the neoliberal bandwagon. They are all complicit in the austerity that has spread from the Mediterranean to America's Midwestern rust belt.

Finance capitalism exploits labor, but via a rentier sector, which also ends up cannibalizing industrial capital. This drive has become internationalized into a fight against nations that restrict the predatory dynamics of finance capital seeking to privatize and dismantle government regulatory power. The New Cold War is not merely a war being waged by finance capitalism against socialism and public ownership of the means of production. In view of the inherent dynamics of industrial capitalism requiring strong state regulatory and taxing power to check the intrusiveness of finance capital, this post-industrial global conflict is between socialism evolving out of industrial capitalism, and fascism, defined as a rentier reaction to mobilize government to roll back social democracy and restore control to the rentier financial and monopoly classes.

The old Cold War was a fight against "Communism." In addition to freeing itself from land rent, interest charges and privately appropriated industrial profits, socialism favors labor's fight for better wages and working conditions, better public investment in schools, health care and other social welfare support, better job security, and unemployment insurance. All these reforms would cut into the profits of employers. Lower profits mean lower stock-market prices, and hence fewer finance-capital gains.

The aim of finance capitalism is not to become a more productive economy by producing goods and selling them at a lower cost than competitors. What might appear at first sight to be international economic rivalry and jealousy between the United States and China is thus best seen as a fight between economic systems: that of finance capitalism and that of civilization trying to free itself from rentier privileges and submission to creditors, with a more social philosophy of government empowered to check private interests when they act selfishly and injure society at large.

The enemy in this New Cold War is not merely socialist government but government itself, except to the extent that it can be brought under the control of high finance to promote the neoliberal rentier agenda. This reverses the democratic political revolution of the 19 th century that replaced the House of Lords and other upper houses controlled by the hereditary aristocracy with more representative legislators. The aim is to create a corporate state, replacing elected houses of government by central banks – the U.S. Federal Reserve and the European Central Bank, along with external pressure from the International Monetary Fund and World Bank.

The result is a "deep state" supporting a cosmopolitan financial oligarchy. That is the definition of fascism, reversing democratic government to restore control to the rentier financial and monopoly classes. The beneficiary is the corporate sector, not labor, whose resentment is turned against foreigners and against designated enemies within.

Lacking foreign affluence, the U.S. corporate state promotes employment by a military buildup and public infrastructure spending, most of which is turned over to insiders to privatize into rent-seeking monopolies and sinecures. In the United States, the military is being privatized for fighting abroad ( e.g ., Blackwater USA/Academi), and jails are being turned into profit centers using inexpensive convict labor.

What is ironic is that although China is seeking to decouple from Western finance capitalism, it actually has been doing what the United States did in its industrial takeoff in the late 19 th and early 20 th century. As a socialist economy, China has aimed at what industrial capitalism was expected to achieve: freeing its economy from rentier income (landlordship and usurious banking), largely by a progressive income tax policy falling mainly on rentier income.

Above all, China has kept banking in the public domain. Keeping money and credit creation public instead of privatizing it is the most important step to keep down the cost of living and business. China has been able to avoid a debt crisis by forgiving debts instead of closing down indebted enterprises deemed to be in the public interest. In these respects it is socialist China that is achieving the fate that industrial capitalism initially was expected to achieve in the West.

Summary: Finance Capital as Rent-Seeking

The transformation of academic economic theory under today's finance capitalism has reversed the progressive and indeed radical thrust of the classical political economy that evolved into Marxism. Post-classical theory depicts the financial and other rentier sectors as an intrinsic part of the industrial economy. Today's national income and GDP accounting formats are compiled in keeping with this anti-classical reaction depicting the FIRE sector and its allied rent-seeking sectors as an addition to national income, not a subtrahend. Interest, rents and monopoly prices all are counted as "earnings" – as if all income is earned as intrinsic parts of industrial capitalism, not predatory extraction as overhead property and financial claims.

This is the opposite of classical economics. Finance capitalism is a drive to avoid what Marx and indeed the majority of his contemporaries expected: that industrial capitalism would evolve toward socialism, peacefully or otherwise.

Some Final Observations: Financial Takeover of Industry, Government and Ideology

Almost every economy is a mixed economy – public and private, financial, industrial and rent-seeking. Within these mixed economies the financial dynamics – debt growing by compound interest, attaching itself primarily to rent-extracting privileges, and therefore protecting them ideologically, politically and academically. These dynamics are different from those of industrial capitalism, and indeed undercut the industrial economy by diverting income from it to pay the financial sector and its rentier clients.

One expression of this inherent antagonism is the time frame. Industrial capitalism requires long-term planning to develop a product, make a marketing plan, and undertake research and development to keep undercutting competitors. The basic dynamic is M-C-M': capital (money, M) is invested in building factories and other means of production, and employing labor to sell its products (commodities, C) at a profit (M').

Finance capitalism abbreviates this to a M-M', making money purely financially, by charging interest and making capital gains. The financial mode of "wealth creation" is measured by the valuations of real estate, stocks and bonds. This valuation was long based on capitalizing their flow of revenue (rents or profits) at the going rate of interest, but is now based almost entirely on capital gains as the major source of "total returns."

In taking over industrial companies, financial managers focus on the short run, because their salary and bonuses are based on current year's performance. The "performance" in question is stock market performance. Stock prices have largely become independent from sales volume and profits, now that they are enhanced by corporations typically paying out some 92 percent of their revenue in dividends and stock buybacks.[6]

Even more destructively, private capital has created a new process: M-debt-M'. One recent paper calculates that: "Over 40% of firms that make payouts also raise capital during the same year, resulting in 31% of aggregate share repurchases and dividends being externally financed, primarily with debt."[7]This has made the corporate sector financially fragile, above all the airline industry in the wake of the COVID-19 crises.

Private equity has played a big role in increasing corporate leverage, both through their own actions and by disinhibiting large public companies in the use of debt. As Eileen Appelbaum and Rosemary Batt explained, the large buyout firms, following the playbook developed in the 1980s, produce their returns from financial engineering and cost cutting (smaller size deals target "growthier" companies, but while those private equity firms assert that they add value, it may just be that they are skilled at identifying promising companies and riding a performance wave). Contrary to their marketing, private equity fee structures mean they make money even when they bankrupt firms. And they have become so powerful that it's hard to get political support to stop them when they hurt large numbers of citizens though exploitative practices like balance ("surprise")billing. [8]

The classic description of this looting-for-profit practice process is the 1993 paper by George Akerloff and Paul Romer describing how "firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations."[9]

The fact that "paper gains" from stock prices can be wiped out when financial storms occur, makes financial capitalism less resilient than the industrial base of tangible capital investment that remains in place. The United States has painted its economy into a corner by de-industrializing, replacing tangible capital formation with "virtual wealth," that is, financial claims on income and tangible assets. Since 2009, and especially since the Covid crisis of 2020, its economy has been suffering through what is called a K-shaped "recovery." The stock and bond markets have reached all-time highs to benefit the wealthiest families, but the "real" economy of production and consumption, GDP and employment, has declined for the non- rentier sector, that is, the economy at large.

How do we explain this disparity, if not by recognizing that different dynamics and laws of motion are at work? Gains in wealth increasingly take the form of a rising valuation of rentier financial and property claims on the real economy's assets and income, headed by rent-extraction rights, not means of production.

Finance capitalism of this sort can survive only by drawing in exponentially increasing gains from outside the system., either by central bank money creation (Quantitative Easing) or by financializing foreign economies, privatizing them to replace low-priced public infrastructure services with rent-seeking monopolies issuing bonds and stocks, largely financed by dollar-based credit seeking capital gains. The problem with this financial imperialism is that it makes client host economies as high-cost as their U.S. and other sponsors in the world's financial centers.

All economic systems seek to internationalize themselves and extend their rule throughout the world. Today's revived Cold War should be understood as a fight between what kind of economic system the world will have. Finance capitalism is fighting against nations that restrict its intrusive dynamics and sponsorship of privatization and dismantling of public regulatory power. Unlike industrial capitalism, the rentier aim is not to become a more productive economy by producing goods and selling them at a lower cost than competitors. Finance capitalism's dynamics are globalist, seeking to use international organizations (the IMF, NATO, the World Bank and U.S.-designed trade and investment sanctions.) to overrule national governments that are not controlled by the rentier classes. The aim is to make all economies into finance-capitalist layers of hereditary privilege, imposing austerity anti-labor policies to squeeze a dollarized surplus.

Industrial capitalism's resistance to this international pressure is necessarily nationalist, because it needs state subsidy and laws to tax and regulate the FIRE sector. But it is losing the fight to finance capitalism, which is turning to be its nemesis just as industrial capitalism was the nemesis of post-feudal landlordship and predatory banking. Industrial capitalism requires state subsidy and infrastructure investment, along with regulatory and taxing power to check the incursion of finance capital. The resulting global conflict is between socialism (the natural evolution of industrial capitalism) and a pro- rentier fascism, a state-finance-capitalist reaction against socialism's mobilization of state power to roll back the post-feudal rentier interests.

Underlying today's rivalry felt by the United States against China is thus a clash of economic systems. The real conflict is not so much "America vs. China," but finance capitalism vs. industrial "state" capitalism/socialism. At stake is whether "the state" will support financialization benefiting the rentier class or build up the industrial economy and overall prosperity.

Apart from their time frame, the other major contrast between finance capitalism and industrial capitalism is the role of government. Industrial capitalism wants government to help "socialize the costs" by subsidizing infrastructure services. By lowering the cost of living (and hence the minimum wage), this leaves more profits to be privatized. Finance capitalism wants to pry these public utilities away from the public domain and make them privatized rent-yielding assets. That raises the economy's cost structure – and thus is self-defeating from the vantage point of international competition among industrialists.

That is why the lowest-cost and least financialized economies have overtaken the United States, headed by China. The way that Asia, Europe and the United States have reacted to the covid-19 crisis highlights the contrast. The pandemic has forced an estimated 70 percent of local neighborhood restaurants to close in the face of major rent and debt arrears. Renters, unemployed homeowners and commercial real estate investors, as well as numerous consumer sectors are also facing evictions and homelessness, insolvency and foreclosure or distress sales as economic activity plunges.

Less widely noted is how the pandemic has led the Federal Reserve to subsidize the polarization and monopolization of the U.S. economy by making credit available at only a fraction of 1 percent to banks, private equity funds and the nation's largest corporations, helping them gobble up small and medium-sized businesses in distress.

For a decade after the Obama bank-fraud bailout in 2009, the Fed described its purpose as being to keep the banking system liquid and avoid damage to its bondholders, stockholders and large depositors. The Fed infused the commercial banking system with enough lending power to support stock and bond prices. Liquidity was injected into the banking system by buying government securities, as was normal. But after the covid virus hit in March 2020, the Fed began to buy corporate debt for the first time, including junk bonds. Former FDIC head Sheila Bair and Treasury economist Lawrence Goodman note, the Federal Reserve bought the bonds "of 'fallen angels' who sank to junk status during the pandemic" as a result of having indulged in over-leveraged borrowing to pay out dividends and buy their own shares.[10]

Congress considered limiting companies from using the proceeds of the bonds being bought "for outsize executive compensation or shareholder distributions" at the time it approved the facilities. but made no attempt to deter companies from doing this. Noting that "Sysco used the money to pay dividends to its shareholders while laying off a third of its workforce a House committee report found that companies benefiting from the facilities laid off more than one million workers from March to September." Bair and Goodman conclude that "there's little evidence that the Fed's corporate debt buy-up benefited society." Just the opposite: The Fed's actions "created a further unfair opportunity for large corporations to get even bigger by purchasing competitors with government-subsidized credit."

The result, they accuse, is transforming the economy's political shape. "The serial market bailouts by monetary authorities – first the banking system in 2008, and now the entire business world amid the pandemic" has been "a greater threat [to destroy capitalism] than Bernie Sanders." The Fed's "super-low interest rates have favored the equity of large companies over their smaller counterparts," concentrating control of the economy in the hands of firms with the largest access to such credit.

Smaller companies are "the primary source of job creation and innovation," but do not have access to the almost free credit enjoyed by banks and their largest customers. As a result, the financial sector remains the mother of trusts, concentrating financial and corporate wealth by financing a gobbling-up of smaller companies as giant companies to monopolize the debt and bailout market.

The result of this financialized "big fish eat little fish" concentration is a modern-day version of fascism's Corporate State. Radhika Desai calls it "creditocracy," rule by the institutions in control of credit.[11]It is an economic system in which central banks take over economic policy from elected political bodies and the Treasury, thereby completing the process of privatizing economy-wide control.

Industrial Capitalism's aims Finance Capitalism's aims

Make profits by producing products Extract economic rent and interest
Minimize the cost of living and prices Add land and monopoly rent to prices
Favor industry and labor. Give special tax favoritism to the finance, insurance and real estate (FIRE) sectors.
Minimize land rent and housing costs by taxing land rent and other rent-yielding assets, not capital or wages Shift taxes off land-rent taxation to leave it available to pay as interest to mortgage bankers
Provide public infrastructure at low cost Privatize infrastructure into monopolies to extract monopoly rent
Reform parliaments to block rent-seeking

Avoid military spending and wars that require running into foreign debt

Block democratic reform, by shifting control to non-elected officials

Use international organization (such as the IMF or NATO) to force neoliberal policy

Concentrate economic and social planning in the political capital. Shift planning and resource allocation to the financial centers.
Concentrate monetary policy in the national treasury Shift monetary policy to central banks, representing private commercial banking interests.
Bring prices in line with cost-value Maximize opportunities for rent seeking via land ownership, credit and monopoly privileges
Banking should be industrialized to finance tangible capital investment Banks lend against collateral, bidding up asset prices, especially for rent-yielding assets
Recycle corporate revenue is into capital investment in new means of production Pay out revenue as dividends or use it for stock buybacks to increase stock price gains
The time frame is long-term to develop products and marketing plans: M-C-M' The time frame is short-term, hit-and-run by financial speculation, M-M'.
Industrial engineering to raise productivity by research and development and new capital investment. Financial engineering to raise asset prices – by stock buybacks and higher dividend payouts.
Focuses on long-term development of industrial capitalism as a broad economic system. Short-term hit-and-run objectives, mainly by buying and selling assets.
Economy of High Wages, recognizing that well fed, well-educated labor with leisure is more productive than low-priced "pauper" labor, and long-term employment A race to the bottom, burning out employees and replacing them with new hires.

Mechanization of labor treats workers as easily replaceable and hence disposable.

M-C-M' Profits are made by investing in means of production and hiring labor to produce commodities to sell at a higher price than what it costs to employ labor. M-M' "Capital" gains made directly by asset-price inflation
Banking is industrialized, to provide credit mainly to invest in new capital formation. This increased credit tends to bid up commodity prices and hence the living wage. Increased bank credit to finance the bidding up of housing, stocks and bonds raises the cost of housing and of buying pension income, leaving less to spend on goods and services.
Supports democracy to the extent that the lower house will back industrial capital in its fight against the landlord class and other rentiers, whose revenue adds to prices without adding value. Finance capital joins with "late" industrial capitalism to oppose pro-labor policies. It seeks to take over government, and especially central banks, to support prices for stocks, bonds, real estate and packaged bank loans gone bad and threatening banks with insolvency.
Industrial capitalism is inherently nationalistic, requiring government protection and subsidy of industry. Finance capital is cosmopolitan, seeking to prevent capital controls and impose free trade and libertarian anti-government policy.
Supports a mixed economy, with government paying for infrastructure to subsidize private industry. Government works with industry and banking to create a long-term growth plan for prosperity. Seeks to abolish government authority in all areas, so as to shift the center of planning to Wall Street and other financial centers.

The aim is to dismantle protection of labor and industry together.

Banking and credit are industrialized. Industry is financialized, with profits used mainly to increase stock prices via stock buyback programs and dividend payouts, not new R&D or tangible investment.
Favor industry and labor. Give special tax favoritism to the finance, insurance and real estate (FIRE) sectors.


[1]I provide the charts in The Bubble and Beyond (Dresden: 2012), Chapters 7 and 8, and Killing the Host (Dresden: 2015).

[2]"The Theory of Dynamic Economics," Essays in Economic Theory ed. Rexford Guy Tugwell (New York: 1924), pp. 96 and 98, originally in The Publications of the University of Pennsylvania , Political Economy and Public Law Series 3:2 (whole No. 11), 1892, p. 96. Europe's aristocratic governments developed their tax policy "at a time when the state was a mere military organization for the defense of society from foreign foes, or to gratify national feelings by aggressive wars." Such states had a "passive" economic development policy, and their tax philosophy was not based on economic efficiency. I provide the details in "Simon Patten on Public Infrastructure and Economic Rent Capture," American Journal of Economics and Sociology 70 (October 2011), pp. 873-903.

[3]George advocated a land tax, but his opposition to socialism led him to reject the value and price concepts necessary to define economic rent quantitatively. His defense of bankers and interest rendered his policy recommendations ineffective as he moved to the libertarian right wing of the political spectrum, opposing government investment but merely taxing the rent taken by privatizers – the reverse of what Patten and his pro-industrial school of economists were advocating, based on classical value and price theory.

[4]"The Theory of Dynamic Economics," p. 98.

[5]Speech of June 24, 1877. He used Latin and said " Sanitas, Sanitatum " and translated it as "Sanitation, all is sanitation." It was a pun on a more famous aphorism, " Vanitas, vanitatum ," "Vanity, all is vanity."

[6]William Lazonick, "Profits Without Prosperity:Stock Buybacks Manipulate the Market and Leave Most Americans Worse Off," Harvard Business Review , September 2014. And more recently, Lazonick and Jang-Sup Shin, Predatory Value Extraction: How the Looting of the Business Corporation Became the U.S. Norm and How Sustainable Prosperity Can Be Restored (Oxford: 2020).

[7]Joan Farre-Mensa, Roni Michaely, Martin Schmalz, "Financing Payouts," Ross School of Business Paper No. 1263 (December 1, 2020), quoted by Matt Stoller,"How to Get Rich Sabotaging Nuclear Weapons Facilities," BIG, January 3, 2021.

[8] Eileen Appelbaum and Rosemary Batt, Private Equity at Work: When Wall Street Manages Main Street (Russell Sage: 2014). See also Eileen Appelbaum, Written Testimony before the U.S. House of RepresentativesCommittee on Financial Services , November 19, 2020.

[9]George Akerloff and Paul Romer, "Looting: The Economic Underworld of Bankruptcy for Profit,"

[10]Sheila Bair and Lawrence Goodman, "Corporate Debt 'Relief' Is an Economic Dud," Wall Street Journal , January 7, 2021.

[11]Desai, Radhika. 2020.'The Fate of Capitalism Hangs in the Balance of International Power'. Canadian Dimension, 12 October. . See also Geoffrey Gardiner, Towards True Monetarism (Dulwich: 1993) and The Evolution of Creditary Structure and Controls (London: Palgrave, 2006) and the post-Keynesian group Gang of 8 popularized the term "creditary economics" in the 1990s.

Roquentin , January 26, 2021 at 8:21 am

I don't think I'm really on board with this strict separation between finance capital and industrial capital. Marx got a lot right, but one of many things he got wrong was actually buying into the emancipatory potential of capitalism.

He mistakenly saw the market and its logic as some sort of quasi-autonomous, internally functioning thing with scientific laws which governed its motion (this is literal, hence he and Engels talking about "scientific socialism"). He missed that the capitalist marketplace and money itself were always already political, neither of which have any independent existence from the institutions which create them.

I believe we have seen a rise in "rentier" capitalism less because it is fundamentally different than industrial capital and more because the rich and powerful long ago realized that there is no "free market" and that they could construct the market legally and politically in precisely the way which allows them to maintain and expand their wealth and power.

Marx, for all his polemics against capitalism was actually too wrapped up in its logic to see this part of it. He didn't really grasp that the supposed laws of the marketplace could be bent or broken at will be the people with the means to do so (hence, "too big to fail"), thought the laws of capitalism were something like laws of nature instead of pure fiat made by people.

That's the mistake. At some point the elite just realized that the "free market," far from threatening them was the most effective way to maintain their control of society.

Darthbobber , January 26, 2021 at 11:06 am

At least in Capital, I don't see this as Marx's mistake. It is not the dominance of Capital itself that he sees as potentially emancipatory, but the actual increase in the ability to generate surplus that it creates, which could be deployed to other ends if the system were surpassed. (And for Marx, it's "progressive" function was already firmly in the past.)

The absolute Hellscape created for the working class, the degradation of the environment, and other disasters he saw as baked into the system. And this did not depend on whether industrial or finance capital predominated. He certainly would never have deluded himself with the belief that "the euthanasia of the rentiers" would fix things. That was left to a later economist.

I think that Marx regarded the "laws" of capitalism as different from what you seem to be calling laws.

He was of course in no position to observe the ever-accelerating tinkering with the supposed laws of the system that we've been witness to for many decades, but what he did see, and what he analyzed in the form of various proposals to eliminate the "bad" effects of the system while retaining it's essential characteristics he saw as perhaps capable of altering the ways in which crises manifested but not of avoiding the crises.

This isn't really adequately expressed, but I'm working from my little Lenovo touchscreen and am disinclined to do longer exposition until I have a keyboard available.

Susan the other , January 27, 2021 at 1:56 pm

At the end of the 19th C. with capitalism exploiting the environment like never before the reaction in the art world was to romanticize nature. Dream-scapes of mystical nature. Followed soon by goofball tourism in model-Ts. The industrial revolution was the economic singularity at the beginning of automation. It gave us the ability to accumulate wealth in a whirlwind. But it lasted barely a century. At which point nature was no longer beautiful and mystical – it was completely trashed. So this went hand in glove with a population explosion and capitalism because it required both. Which is now totally counterproductive. In fact self-destructive. And instead of letting the whole thing implode, bringing essential resources and services to a screeching halt, we are (apparently) financializing the economy.

M-C-M has become M-debt-M. At least this eliminates the ravaging of the environment at ever accelerated consumption. What we need, I submit, is M – environment – M. We need to increase our national and state legislatures by adding a new branch of lawmakers – scientists, now especially environmental scientists, but science in all its branches. And give science full political authority, along with vested financial interests. Balance sheets can be manipulated; money can be digitized; but the environment is the only thing that counts.

James Simpson , January 26, 2021 at 9:23 am

All this and not a word about the consequences for the world of 'productive' industrial capitalism. The need to produce so-called goods endlessly and in increasing quantities is destroying the planet yet the author seems to regard it as something to which a society should aspire. Capitalism itself, with its inherent drive for endless economic growth, is incompatible with a finite planet. Even some capitalists realise this and suggest, hopelessly, that we must immediately and seriously look for ways to expand beyond this planet. A piece elsewhere on this site today about Jeffrey Epstein labels him a 'child rapist' in a way that suggests his activities promoting capitalism were more respectable. 'Capitalist' should carry the same stigma. Or is the extinction of all complex life – as esteemed climate scientists are telling us we are headed for if we don't stop this growth obsession – a less wicked end than a sex crime?

Ian Ollmann , January 26, 2021 at 9:57 am

We could use more production of solar panels, wind turbines and electric transportation.
We could use an enriched working class with the wherewithal to replace their carbon sourced living standard with a green one.

Roquentin , January 26, 2021 at 10:17 am

This is a really good point. Just producing something doesn't produce a net gain for society. I once had this idea that someone with a better background in economics than I have should write a long essay or a book about how the rise of advertising in the 1950s coincided with the need of industrial capitalists to create demand out of thin air for the products they were producing. When the actual need for your products doesn't exist, we figured out how to manufacture demand as well. Up to that point, capitalism had mostly been concerned with the supply side of production but the advent of marketing, advertising, and PR was all about managing the demand/consumption side as well.

This is another way the rentier/industrial capitalist distinction breaks down. Both are beholden to the same interests.

rob , January 26, 2021 at 10:45 am

There was a book called "from the wonderful folks who brought you pearl harbor", which (in a light hearted way) dealt with madison ave (the series mad men was supposedly taken from this story line) and the creation of "consumers" . in the fifties The real time version would be george seldes' works multiple books.. and he had a publication called "in fact" which dealt with the "association of national manufacturers" and how they were controlling the media of the day though advertising.

He was doing stories about the dangers of tobacco and the industry killing of all stories dealing with negative facts about tobacco, back in the forties and fifties.. A great book was "witness to a century"

It blows my mind that just about everything going on today, has been cooking for about a century and we act like us "figuring it out" is a big deal . we must be one smart species.

Darthbobber , January 26, 2021 at 12:59 pm

This theme gets a significant amount of space in Baran and Sweezy's "Monopoly Capital (1966), in the chapter on the Sales Effort in particular, but also scattered elsewhere throughout the book.

tegnost , January 26, 2021 at 12:15 pm

au contraire. I say it's described as part and parcel of finance capitalism. The extractive industries create a surplus of material that must then be sold (analogous is the need to have a war in order to create the need for more bullets), and the extractors get a massive land rent bonus as the resource is given to them free of charge, and they also benefit from tax advantages and land appreciation facilitated by the aforementioned finance capitalism . How much of the bezos fortune has been acquired through selling counterfeit goods touted by fake reviews on the product quality? More junk, sold faster. delivered by an army of gig workers driving individual polluting cars and the notion that an electric or hybrid bus should be replaced by an army of uber drivers, until they don;)t need them anymore

From the above "The oil and mining industries likewise are notoriously exempt from income taxation on their natural-resource rents. For a long time the depletion allowance allowed them tax credit for the oil that was sold off, enabling them to buy new oil-producing properties (or whatever they wanted) with their supposed asset loss, defined as the value to recover whatever they had emptied out. There was no real loss, of course. Oil and minerals are provided by nature."

Kirk Seidenbecker , January 27, 2021 at 3:33 am

From Buckminster Fuller's last book 'Critical Path' –

" approximately 60 percent of the employed in U.S. America are working at tasks that are not producing any life support .Which would cost society the least: to carry on as at present, trying politically to create more no-wealth producing jobs, or paying everybody handsome fellowships to stay at home and save all those million-dollar-each gallons of petroleum?"

Maybe it's time to give the environment a breather from human 'production'. Ecosystems have been loving COVID-19.

Ian Ollmann , January 26, 2021 at 9:54 am

Excellent article!
Thank you.

It is time we boycott the FIRE sector.

TomDority , January 26, 2021 at 10:25 am

I think their exists a confusion as to what constitutes- or is not included in the term – Productive industrial capitalism.

I think the term 'Industrial' evokes images of smoke stacks, endless pollution, misery and environmental degradation and excludes a positive side that includes polution elimination, contained systems, environmental resoration and blooming, happiness and mission, higher and more meaningfull fullfillment.

I think the term 'Productive' evokes images of so-called goods as being created endlessly while destroying the planet – whereas restoration of soils and environment on an industrial scale and the resultant beneficiary of goods produced for the enablement of biodiversity.

Further, a large component of the term 'productive' having negative connotations is a direct result of Financial capitalism's take over and, deceptive use of terms and language – they were led by the computer revolutions use of terms and language taken from long used context and applied to their own narrow doings – See Michael Hudson's -J is for Junk Economics.

This same de-focusing and sly re-working of definitions has left a majority of folks believing that banks use peoples savings to lend out to people trying to start a business, buy a home, or to business to increase production – and not the reality of most of it being to boost asset prices and de-regulate any type financial gambling and shicanery – . And what does it say about economics as science? where economics pretends that itself is self correcting and not entropic like about everything else, will take bad actors out of the equation of the free market, will produce good corporate citizens, and claims creative destruction without realizing that destruction applies to only those things previously created.

When has the production of good corporate citizens outweighed the destructive capacity of those produced bad corporate citizens.

There seems to be no distinction between the predatory, destructive and harmful capitalist corporation that only contributes to overhead, misery and deductive as opposed to productive – that and, those that are productive, useful and positive for all species and the planet.

Mother nature and this planet does not hold humans in as high esteem as we humans do – if you are religious – I don't think god does either.

Paul Boisvert , January 26, 2021 at 11:40 am

For a critique of Hudson's argument by a fellow marxist economist, JW Mason, to whom NC occasionally has linked, see:

Mason is a careful and thoughtful economist, so his take is well worth reading. He points out that interest payments as a percent of GDP fluctuate with time and Fed-interest rate setting, and in fact are currently back down to roughly the same level as in 1975. I checked some FRED graphs, and this is true for both business interest payments and household interest payments.

He also points out that increases in relative financialization vs. industrialization have generally varied globally, with one area's increase in one aspect balanced by another area's increase in the other. And while US primary manufacturing has decreased, companies like Amazon, Walmart, and Google are still "industry", as they produce usable consumer services (mainly logistical and distributional) that are not "financial". Mason points out that most top fortunes in the US are still made in such "industrial" realms, not financial.

As Hudson agrees that Marx understood, Mason points out that industrial capitalists still extract "exploitative rent", in the form of profit extracted from the labor power of workers, via the capitalists' collective monopoly on the means of production. He feels that both industrial and financial capitalism are largely inseparable and essential (to the extractors) to the extraction of surplus value from workers.

Kilgore Trout , January 26, 2021 at 1:38 pm

Impressive article. Thanks for posting it, Yves.

I'm not sure I fully buy Mason's argument in PB's comment that Amazon, Walmart, et al are "industry". Clearly, they've superseded Main St as agents to abet consumer culture, and may do so more efficiently (thus adding to GDP), but can this part of the service industry truly be labelled as "industrial"? It seems to me they're old wine in new bottles, so isn't it a zero sum, at least in the long run? They've really only made it easier for consumers to increase their indebtedness–it's just a click away instead of a drive away–so are a more efficient way to abet the FIRE sector more than the industrial sector, especially since so much of what is on offer is now made offshore.

Further, as JS points out, we need to know how to get to some sort of sustainable economy before the whole thing collapses. Somehow the financial capitalism vs industrial capitalism conflict has to be replaced, which will require strong government and far-sighted leaders–both in short supply thanks to Neoliberalism. As many at NC have pointed out, we are now in a race between nuclear armageddon and climate armageddon. But it's good to know where we are, and how we got here, if we are to find our way out of our present predicament.

Paul Boisvert , January 26, 2021 at 3:20 pm

Good points. Re Walmart, etc., and the label "industrial", Mason's point is simply that those firms aren't "financial", i.e., not in the FIRE sector, and hence aren't what Hudson says he's upset with. Yet (claims Mason, I haven't checked), they are the sort of firms, rather than FIRE, that comprise the dominant chunk of the wealthiest US firms, and of wealth generation in general.

Mason would agree that the problem isn't about one type of capitalism vs. another, but about the whole inhuman, exploitative, unsustainable capitalist shebang.

One point re FIRE that neither Hudson nor Mason address is Dean Baker's take: that much of what should rightfully be "labor's" share of GDP doesn't actually instead go to "capitalists" as "profit" OR to rentiers as interest or rent. It simply goes as wages/salaries to the very highest-paid (and increasingly so) laborers, as opposed to the bottom 90% of laborers. Most top professionals and managers of firms are not "owners", hence they "work" for a living–but they get paid these days predominatly via wages and salaryies that have skyrocketed. And FIRE is indeed in this case a major offender, as Dean points out.

While one could argue that these are simply "profits by a different name", the point is that such employees actually have no "owners" right to the salaries, unlike true owners' rights to (all) profit. They do have a lot of cronyistic, informal power, however. Baker suggests several ways to regulate and lower their salaries, both for finance (a financial transactions tax), and for all corporations in general. This would free up money to go to the lower-paid workers and/or customers of these extractive firms.

Grebo , January 26, 2021 at 8:24 pm

Shareholders of public companies do not actually own the company [David Ciepley] and very few have a controlling stake either. Given the supine boards of most companies the CEOs have effectively complete control and should be considered functionally equivalent to the "capitalists" of lore. What with their options and so forth they are adept at joining the ranks of "owners" even if they started as "laborers".

Baker has some good ideas, incremental style, but I don't get a sense he has a big picture like Hudson. Mason quibbles over details just for the sake of it, it seems to me.

Yves Smith , January 26, 2021 at 10:06 pm

We've regularly referred to the landmark article by Amar Bhide, Efficient Markets, Deficient Governance, which lays out longer form how US regulations by preferring liquid markets, have created anonymous, transient, arms-length shareholders who do not exercise control over companies, and due to the need to keep strategically sensitive information confidential, are incapable of supervising them properly even if they had the power to do so.

Jeremy Grimm , January 26, 2021 at 5:17 pm

The very first sentence of Michael Hudson's post targets: "the landlords, bankers and monopolists extracting economic rent without producing real value." I believe Amazon, Walmart, et al. fit the category of monopolists extracting economic rent without producing value. The FIRE sector was prominent but not the only target of Hudson's post. I think Mason works hard to mince Hudson's words -- to no useful end. "He[Mason] feels that both industrial and financial capitalism are largely inseparable and essential (to the extractors) to the extraction of surplus value from workers." I believe firms that make physical products, like automobiles or light bulbs, and select top management from their engineering and production staff have proved very different in their operations than the same firms run by top management selected from their financial staff.

KMD , January 26, 2021 at 6:22 pm

Boeing being a prime example of the latter.

McWatt , January 26, 2021 at 12:33 pm

Michael Hudson is a God That Walks the Planet!!!!!!!!!!

Jonathan Holland Becnel , January 27, 2021 at 10:43 am

"WE'RE NOT WORTHY!!!" – Wayne's World

icancho , January 26, 2021 at 5:06 pm

Regarding "Deep States" and such, their enforcers, IMF, WB etc:

A fascinating history of shifts in the structure and functioning of the Japanese economy -- essentially from serving the population to serving the speculators -- promoted by a subverted Japanese Central Bank, facilitated and encouraged by the IMF is to be found in this documentary based on Richard Werner's " Princes of the Yen ":

Sound of the Suburbs , January 27, 2021 at 4:05 am

Don't get confused between making money and creating wealth.

When you equate making money with creating wealth, people try and make money in the easiest way possible, which doesn't actually create any wealth.
In 1984, for the first time in American history, "unearned" income exceeded "earned" income. The American have lost sight of what real wealth creation is, and are just focussed on making money. You might as well do that in the easiest way possible. It looks like a parasitic rentier capitalism because that is what it is.

Bankers make the most money when they are driving your economy into a financial crisis. They will load your economy up with their debt products until you get a financial crisis. On a BBC documentary, comparing 1929 to 2008, it said the last time US bankers made as much money as they did before 2008 was in the 1920s.

At 18 mins. The bankers loaded the US economy up with their debt products until they got financial crises in 1929 and 2008. As you head towards the financial crisis, the economy booms due to the money creation of bank loans.

The financial crisis appears to come out of a clear blue sky when you use an economics that doesn't consider debt, like neoclassical economics.

Once you have a firm grip on what wealth creation and money really are; it all becomes clear.

Banks – What is the idea? The idea is that banks lend into business and industry to increase the productive capacity of the economy. Business and industry don't have to wait until they have the money to expand. They can borrow the money and use it to expand today, and then pay that money back in the future.
The economy can then grow more rapidly than it would without banks.

Debt grows with GDP and there are no problems. The banks create money and use it to create real wealth.

Sound of the Suburbs , January 27, 2021 at 4:11 am

Who are these mugs?
That's us in the UK. We let the bankers load our economy up with their debt products until we got a financial crisis.

Can you see when we started using an economics that doesn't consider private debt? It's not hard, don't over think it.

Ludus57 , January 27, 2021 at 9:21 am

The interesting point about China would seem to be that, having seen the results that Financialisation has produced in the West, they are determined to avoid it.

Of course it might be worth adding that it required overturning the lessons of the '30s and comprehensive deregulation for us to end up where we are, and I cannot see the People's Bank of China ignoring their own analysis of (Western) capitalism to allow a similar fate to befall their own system. Debt has place and role to play, but ruling the system, as today, is certainly not it.

In economics they have obviously heeded their lessons well. It's the social side that needs more attention.

Jonathan Holland Becnel , January 27, 2021 at 10:40 am

As someone whos relatively new to Marxist Literature, I find Michael Hudson's writing to be very readable. Thanks for posting :)


[Jan 27, 2021] The 1932 Glass-Steagall legislation and the act based on it did service in that respect up until the late 1990s when it was repealed by the Clinton government

Notable quotes:
"... In reforming the US financial industry, you would need to separate savings and trading banks from investment banks. The 1932 Glass-Steagall legislation and the act based on it did service in that respect up until the late 1990s when it was repealed by the Clinton government. In some countries (Japan being a notable example), the postal service performs savings bank functions. ..."
Jan 27, 2021 |

karlof1 , Jan 26 2021 23:04 utc | 73

dan of steele @44--

What in your opinion would be the proper approach [for the Outlaw US Empire to engage China]? I ask that seriously.

Assuming my reengineering your query is correct, I provided an answer well prior to the 2016 election--Give up on Neoliberalism, the pursuit of Empire and Zero-sumism; go back to obeying the UN Charter and US Constitution while following the latter's instructions located in the Preamble; and join with normal nations to help others develop via a global BRI as a partner with China. Given current political realities, that's just not going to happen. Instead, I propose the following:

Throw the "vested interests" overboard and work in a Win-Win manner for humanity like China, its Eurasian Bloc partners, and other like-minded nations. Fundamentally, the pursuit of Empire and the #1 policy goal of attaining Full Spectrum Domination must be renounced forever with corresponding adjustments made to the federal government--one of those being an intense auditing of the entire national defense structure and arrest of those who've defrauded it for decades. Second, Repeal the Federal Reserve Act and make banking a public utility, and at the same time arrest the fraudulent banks's and Wall Street firms's people, seize their assets, and reincorporate the mess into the Treasury Department. Third, repeal the 1947 National Security Act and all subsequent acts that are incompatible with the ideal of freedom--Yes, that includes the Patriot Act and such. Fourth, eliminate the Electoral College via a Constitutional amendment that also makes all elections publicly financed, mandates a finite amount of free media coverage, removes restrictions on requirements for appearing on a ballot, and makes "Democracy's Gold Standard" the law of the land. Eliminate the FBI, the Department of Homeland Security and all other armed agencies not directly concerned with safeguarding the public welfare against the designs of Corporations, which was the original regulatory rationale adopted in the late 1890s and 1900s. Use existing Anti-Trust legislation to break up corporations with oligopolistic power. Legislate Social Media and all other natural monopolies to be public utilities, that would also include public health. Eliminate the Death Penalty except for Treason and committing an act of corruption while holding public office at any level of government. Seriously consider removing all regulatory agencies from the Executive and placing them within a Fourth Branch, The Regulatory Branch, which would be non-partisan and electoral for 8 years while eliminating the "Revolving Door." Alter the system of taxation to eliminate any possibility of attaining a "Free Lunch" while paying particular attention to Capital Gains instead of payroll income.

It's very likely I omitted a few items, but IMO the above are the most important. Clearly, the current political paradigm would need drastic alteration for the above, although I doubt any of the above would be objectionable to a majority of the public once reasons were provided--which is to say, none of it's really radical since most of what's being rejected was reactionary to begin with. Doing all that would turn the clock back 120+ years in many cases prior to the time when nascent Neoliberals captured the federal government and began their alterations in 1913. It's very interesting to note the biggest political force against Wilsonian Democracy as it was euphemized was Teddy Roosevelt and his Square Deal for the American Proletariat. Yet ironically, he made it possible for Wilson to win the election, and WW1 would have altered his program in some never to be known manner.

Thanks for asking your question dan of steele as I haven't put any of that together for quite awhile. Until the "vested interests" are removed, however, nothing's going to change for the better, including relations with China, making their removal the required first step.

Jen , Jan 26 2021 23:47 utc | 76

karlof1 @ 73:

In reforming the US financial industry, you would need to separate savings and trading banks from investment banks. The 1932 Glass-Steagall legislation and the act based on it did service in that respect up until the late 1990s when it was repealed by the Clinton government. In some countries (Japan being a notable example), the postal service performs savings bank functions.

The system of taxation to be based on land taxation over income taxation.

Stock market transactions to be subject to a transaction fee charged to sellers that is a percentage of the profit they make on selling stocks. For that matter, stock exchanges should be public utilities subject to regulation.

Investopedia: Who Owns The Stock Exchanges?

... Tokyo Stock Exchange
The third-largest stock exchange in the world is also the largest to not be publicly-traded. Though the Tokyo Stock Exchange is organized as a joint stock corporation, those shares are closely held by member firms like banks and brokerages. By contrast, the smaller Osaka Stock Exchange is publicly-traded, which perhaps befits long-held Japanese stereotypes about Osaka being more entrepreneurial and less hidebound than Tokyo ...

...Shanghai Stock Exchange
This is the largest stock exchange in the world still owned and controlled by a government. [My emphasis - Jen.] The Shanghai exchange is operated as a non-profit entity by the China Securities Regulatory Commission and is arguably one of the most restrictive of the major exchanges in terms of listing and trading criteria ...

...The Bottom Line
Running an exchange is a great business; it is effectively a monopoly. Those who own exchanges can require companies to pay listing fees, traders to pay for market access and investors to pay transaction fees. It is not altogether surprising, then, that there is so much activity in this space. In addition to the aforementioned major mergers, the Singapore Exchange is trying to acquire the Australian Stock Exchange, while Brazil's BM&F Bovespa (once state-owned and now publicly-traded) is looking to expand through acquisition as well.

While these transactions are interesting to a point, they do not generally help the individual investor. Unfortunately, trading stocks listed on foreign exchanges is still difficult (and expensive) for U.S. investors and none of these mergers will change that. Of course, it is up to the brokerages to offer these services and for investors to demand them. (Find out how the third-largest stock exchange in North America came to be. Check out History Of The Toronto Stock Exchange.)

In the meantime, it looks like there is an unmistakable trend in the market of stock markets towards greater global integration and fewer small independent operators...

Needless to say Beijing must be in no hurry not to relinquish control and regulation of the Shanghai Stock Exchange.

uncle tungsten , Jan 27 2021 0:32 utc | 88

Jen #76

In reforming the US financial industry, you would need to separate savings and trading banks from investment banks. The 1932 Glass-Steagall legislation and the act based on it did service in that respect up until the late 1990s when it was repealed by the Clinton government. In some countries (Japan being a notable example), the postal service performs savings bank functions.

My proposition is that cash is the ownership of the common wealth - that the state creates and manages it. Others use it for a transaction tax on each use. Keep it simple and non negotiable.

Glaring inequities can be remediated with a close monitored reimbursement system that is transparent and under continuous audit.

Every account transfer for whatever reason is taxed . If you withdraw cash you pay tax similar to an ATM fee. etc.

Complicated concession systems are avoided as they immediately invite scammers to skate around the rigmarole. Yes there will be minor unfairness issues but that sure beats the major unfairness issues we have in place now. Illegal money laundering requires multiple moves across accounts and diverse banks to obfuscate the nature of the transactors etc. That would generate further taxation on those tricks and perhaps reveal the trail.

Yes there will be double tax. But if transaction tax is set at a low rate to not screw the low income people then it will get their support as they will see that the higher cash users will be paying more for the privilege. Sliding scales can be configured in such systems but avoidance is made incredibly difficult.

As psychohistorian often says : its the global private finance banks that we must seize control of.

[Jan 20, 2021] The Consequences of Moving from Industrial to Financial Capitalism by Michael Hudson and Pepe Escobar

Jan 20, 2021 |

Michael Hudson and Pepe Escobar last month took a hard look at rent and rent-seeking at the Henry George School of Social Science.

Michael Hudson: Well, I'm honored to be here on the same show with Pepe and discuss our mutual concern. And I think you have to frame the whole issue that China is thriving, and the West has reached the end of the whole 75-year expansion it had since 1945.

So, there was an illusion that America is de-industrializing because of competition from China. And the reality is there is no way that America can re-industrialize and regain its export markets with the way that it's organized today, financialized and privatized and if China didn't exist. You'd still have the Rust Belt rusting out. You'd still have American industry not being able to compete abroad simply because the cost structure is so high in the United States.

Michael Hudson. (Wikimedia Commons)

The wealth is no longer made here by industrializing. It's made financially, mainly by making capital gains. Rising prices for real estate or for stocks and for bonds. In the last nine months, since the coronavirus came here, the top 1 percent of the U.S. economy grew by $1 trillion. It's been a windfall for the 1 percent. The stock market is way up, the bond market is up, the real estate market is up while the rest of the economy is going down. Despite the tariffs that Trump put on, Chinese imports, trade with China is going up because we're just not producing materials.

America doesn't make its own shoes. It doesn't make some nuts and bolts or fasteners, it doesn't make industrial things anymore because if money is to be made off an industrial company it's to buy and sell the company, not to make loans to increase the company's production. New York City, where I live, used to be an industrial city and, the industrial buildings, the mercantile buildings have all been gentrified into high-priced real estate and the result is that Americans have to pay so much money on education, rent, medical care that if they got all of their physical needs, their food, their clothing, all the goods and services for nothing, they still couldn't compete with foreign labor because of all of the costs that they have to pay that are essentially called rent-seeking.

Housing in the United States now absorbs about 40 percent of the average worker's paycheck. There's 15 percent taken off the top of paychecks for pensions, Social Security and for Medicare. Further medical insurance adds more to the paycheck, income taxes and sales taxes add about another 10 percent. Then you have student loans and bank debt. So basically, the American worker can only spend about one third of his or her income on buying the goods and services they produce. All the rest goes into the FIRE sector -- the finance, insurance and real estate sector -- and other monopolies.

And essentially, we became what's called a rent-seeking economy, not a productive economy. So, when people in Washington talk about American capitalism versus Chinese socialism this is confusing the issue. What kind of capitalism are we talking about?

America used to have industrial capitalism in the 19th century. That's how it got richer originally but now it's moved away from industrial capitalism towards finance capitalism. And what that means is that essentially the mixed economy that made America rich -- where the government would invest in education and infrastructure and transportation and provide these at low costs so that the employers didn't have to pay labor to afford high costs -- all of this has been transformed over the last hundred years.

And we've moved away from the whole ethic of what was industrial capitalism. Before, the idea of capitalism in the 19th century from Adam Smith to Ricardo, to John Stuart Mill to Marx was very clear and Marx stated it quite clearly; capitalism was revolutionary. It was to get rid of the landlord class. It was to get rid of the rentier class. It was to get rid of the banking class essentially, and just bear all the costs that were unnecessary for production, because how did England and America and Germany gain their markets?

"We've moved away from the whole ethic of what was industrial capitalism."

They gained their markets basically by the government picking up a lot of the costs of the economy. The government in America provided low-cost education, not student debt. It provided transportation at subsidized prices. It provided basic infrastructure at low cost. And so, government infrastructure was considered a fourth factor of production.

And if you read what the business schools in the late 19th century taught like Simon Patten at the Wharton School, it's very much like socialism. In fact, it's very much like what China is doing. And in fact, China is following in the last 30 or 40 years pretty much the same way of getting rich that America followed.

It had its government fund basic infrastructure. It provides low-cost education. It invests in high-speed railroads and airports, in the building of cities. So, the government bears most of the costs and, that means that employers don't have to pay workers enough to pay a student loan debt. They don't have to pay workers enough to pay enormous rent such as you have in the United States. They don't have to pay workers to save for a pension fund, to pay the pension later on. And most of all the Chinese economy doesn't really have to pay a banking class because banking is the most important public utility of all. Banking is what China has kept in the hands of government and Chinese banks don't lend for the same reasons that American banks lend.

Shanghai's Pudong district from The Bund. (CC0, Wikimedia Commons)

(When I said that China can pay lower wages than the U.S., what I meant was that China provides as public services many things that American workers have to pay out of their own pockets – such as health care, free education, subsidized education, and above all, much lower debt service.

When workers have to go into debt in order to live, they need much higher wages to keep solvent. When they have to pay for their own health insurance, they have to earn more. The same is true of education and student debt. So much of what Americans seem to be earning -- more than workers in other countries -- goes right through their hands to the FIRE sector. So, what seems to be "low wages" in China go a lot further than higher wages in the United States.)

Eighty percent of American bank loans are mortgage loans to real estate and the effect of loosening loan standards and increasing the market for real estate is to push up the cost of living, push up the cost of housing. So, Americans have to pay more and more money for their housing whether they're renters or they're buyers, in which case the rent is for paying mortgage interest.

So, all of this cost structure has been built into the economy. China's been able pretty much, to avoid all of this, because its objective in banking is not to make a profit and interest, not to make capital gains and speculation. It creates money to fund actual means of production to build factories, to build research and development, to build transportation facilities, to build infrastructure. Banks in America don't lend for that kind of thing.

"So, you have a diametric opposite philosophy of how to develop between the United States and China."

They only lend against collateral that's already in place because they won't make a loan if it's not backed by collateral. Well, China creates money through its public banks to create capital, to create the means of production. So, you have a diametric opposite philosophy of how to develop between the United States and China.

The United States has decided not to gain wealth by actually investing in means of production and producing goods and services, but in financial ways. China is gaining wealth the old-fashioned way, by producing it. And whether you call this, industrial capitalism or a state capitalism or a state socialism or Marxism, it basically follows the same logic of real economics, the real economy, not the financial overhead. So, you have China operating as a real economy, increasing its production, becoming the workshop of the world as England used to be called and America trying to draw in foreign resources, live off of foreign resources, live by trying to make money by investing in the Chinese stock market or now, moving investment banks into China and making loans to China not actual industrial capitalism ways.

"China is gaining wealth the old-fashioned way, by producing it."

So, you could say that America has gone beyond industrial capitalism, and they call it the post-industrial society, but you could call it the neo-feudal society. You could call it the neo-rentier society, or you could call it debt peonage but it's not industrial capitalism.

And in that sense, there's no rivalry between China and America. These are different systems going their own way and I better let Pepe pick it up from there.

Pepe Escobar : Okay. Thank you, Michael, this is brilliant. And you did it in less than 15 minutes. You told the whole story in 15 minutes. Well, my journalistic instinct is immediately to start questions to Michael. So, this is exactly what I'm gonna do now. I think it is much better to basically illustrate some points of what Michael just said, comparing the American system, which is finance capitalism essentially, with industrial capitalism that is in effect in China. Let me try to start with a very concrete and straight to the point question, Michael.

Okay. let's says that more or less, if we want to summarize it, basically they try to tax the nonproductive rentier class. So, this would be the Chinese way to distribute wealth, right? Sifting through the Chinese economic literature, there is a very interesting concept, which is relatively new (correct me if I am wrong, Michael) in China, which they call stable investment. So stable investment, according to the Chinese would be to issue special bonds as extra capital in fact, to be invested in infrastructure building all across China, and they choose these projects in what they call weak areas and weak links. So probably in some of the inner provinces, or probably in some parts of Tibet or Xinjiang for instance. So, this is a way to invest in the real economy and in real government investment projects.

Right? So, my question in fact, is does this system create extra local debt, coming directly from this financing from Beijing? Is this a good recipe for sustainable development, the Chinese way and the recipe that they could expand to other parts of the Global South?

Michael: Well, this is a big problem that they're discussing right now. The localities, especially rural China, (and China is still largely rural) only cover about half of their working budget from taxation. So, they have a problem. How are they going to get the balance of the money? Well, there is no official revenue sharing between the federal government and its state banks and the localities.

So, the localities can't simply go to central government and say, give us more money. The government lets the localities be very independent. And it is sort of the "let a hundred flowers bloom" concept. And so, they've let each locality just go the long way, but the localities have run a big deficit.

What do they do? Well in the United States they would issue bonds on which New York is about to default. But in China, the easiest way for the localities to make money, is unfortunately they will do something like Chicago did. They will sell their tax rights for the next 75 years for current money now.

So, a real estate developer will come in and say; look we will give you the next 75 years of tax on this land, because we want to build projects on this (a set of buildings). So, what this means is that now the cities have given away all their source of rent.

Chicago's Water Tower and Water Tower Place. (CC BY-SA 3.0, Wikimedia Commons)

Let me show you the problem by what Indiana and Chicago did. Chicago also was very much like China's countryside cities. So, it sold parking meters and its sidewalks to a whole series of Wall Street investors, including the Abu Dhabi Investment Fund for seventy-five years. And that meant that for 75 years, this Wall Street consortium got to control the parking meters.

So, they put up the parking meters all over Chicago, raised the price of parking, raised the cost of driving to Chicago. And if Chicago would have a parade and interrupt parking, then Chicago has to pay the Abu Dhabi fund and Wall Street company what it would have made anyway. And this became such an awful disaster that finally Wall Street had to reverse the deal and undo it because it was giving privatization a bad name here. The same thing happened in Indiana.

High School marching band in Chicago's 2008 Bud Billiken Parade. (Curtis Morrow, CC BY 2.0, Wikimedia Commons)

Indiana was running a deficit and it decided to sell its roads to a Wall Street investment firm to make a toll road. The toll on the Indiana turnpike was so high that drivers began to take over the side roads. That's the problem if you sell future tax revenues in advance.

Now what China and the localities there are discussing is that we've already given the real estate tax at very low estimates to the commercial developers, so what do we do? Well, I've given them my advice. I'm a professor of economics at the Peking University, School of Marxist studies and I've had discussions with the Central Committee. I also have an official position at Wuhan University. There, we're discussing how China can put an added tax for all of the valuable land, that's gone up. How can it be done to let the cities collect this tax? Our claim is that the cities, in selling these tax rights for 75 years, have sold what in Britain would be called ground rent (i.e. what's paid to the landed aristocracy).

Over and above that there's the market rent. So, China should pass a market-rent tax over and above the ground rent tax to reflect the current value. And there they're thinking of, well, do we say that this is a capital gain on the land? Well, it's not really a capital gain until you sell the land, but it's value. It's the valuation of the capital. And they're looking at whether they should just say this is the market rent tax over and above the flat tax that has been paid in advance, or it's a land tax on the capital gain for land.

Now, all of this requires that there be a land map of the whole country. And they are just beginning to create such a land map as a basis for how you calculate how much the rent there is.

What I found in China is something very strange. A few years ago, in Beijing, they had the first, International Marxist conference where I was the main speaker and I was talking about Marx's discussion of the history of rent theory in Volume II and Volume III of Capital where Marx discusses all of the classical economics that led up to his view; Adam Smith, Ricardo, Malthus, John Stuart Mill, and Marx's theory of surplus value was really the first history of economic thought that was written, although it wasn't published until after he died. Well, you could see that there was a little bit of discomfort with some of the Marxists at the conference. And so, they invited for the next time my colleague David Harvey to come and talk about Marxism in the West.

Well, David gave both the leading and the closing speech of the conference and said, you've got to go beyond volume I of Capital . Volume I was what Marx wrote as his addition to classical economics, saying that there was exploitation in industrial employment of labor as well as rent seeking and then he said, now that I've done my introduction here, let me talk about how capitalism works in Volumes II and III. Volumes II and III are all about rent and finance and David Harvey has published a book on Volume III of Capital and his message to Peking University and the second Marxist conference was – you've got to read Volume II, and III.

Well, you can see that, there's a discussion now over what is Marxism and a friend and colleague at PKU said Marxism is a Chinese word; It's the Chinese word for politics. That made everything clear to me. Now I get it! I've been asked by the Academy of Social Sciences in China to create a syllabus of the history of rent theory and value theory. And essentially in order to have an idea of how you calculate rent, how do you make a national income analysis where you show rent, you have to have a theory of value and price and rent is the excess of price over the actual cost value. Well, for that you need a concept of cost of production and that's what classical economics is all about. Post-classical economics denied all of this. The whole idea of classical economics is that not all income is earned.

Landlords don't earn their income for making rent in their sleep as John Stuart Mill said. Banks don't earn their income by just sitting there and letting debts accrue and interest compounding and doubling. The classical economists separated actual unearned income from the production and consumption economy.

Well, around the late 19th century in America, you had economists fighting against not only Marx, but also even against Henry George, who at that time, was urging a land tax in New York. And so, at Columbia University, John Bates Clark developed a whole theory that everybody earns whatever they can get. That there was no such thing as unearned income and that has become the basis for American national income statistics and thought ever since. So, if you look at today's GDP figures for the United States, they have a figure for 8 percent of the GDP for the homeowners' rent. But homeowners wouldn't pay themselves if they had to rent the apartment to themselves, then you'll have interest at about 12 percent of GDP.

And I thought, well how can interest be so steady? What happens to all of the late fees; that 29 percent that credit card companies charge? I called up the national income people in Washington, when I was there. And they said well, late fees and penalties are considered financial services.

And so, this is what you call a service economy. Well, there's no service in charging a late fee, but they add all of the late fees. When people can't pay their debts and they owe more and more, all of that is considered an addition to GDP. When housing becomes more expensive and prices American labor out of the market, that's called an increase in GDP.

This is not how a country that wants to develop is going to create a national income account. So, there's a long discussion in China about, just to answer your question, how do you create an account to distinguish between what's the necessary cost to production and what's an unnecessary production cost and how do we avoid doing what the United States did. So again, no rivalry. The United States is an object lesson for China on what to avoid, not only in industrializing the economy, but in creating a picture of the economy as if everybody earns everything and there's no exploitation, no earned income, nobody makes money in their sleep and there's no 1 percent. Well, that's what's really at issue and why the whole world is splitting apart as you and I are discussing in what we're writing.

"When people can't pay their debts and they owe more and more, all of that is considered an addition to GDP."

Pepe: Thank you, Michael. Thank you very much. So just to sum it all up, can we say that Beijing's strategy is to save especially provincial areas from leasing their land, their infrastructure for 60 years or 75 years? As you just mentioned, can we say that the fulcrum of their national strategy is what you define as the market rent tax? Is this the No. 1 mechanism that they are developing?

Michael: Ideally, they want to keep rents as low as possible because rent is a cost of living and a cost of doing business. They don't have banks that are lending to inflate the real estate market.

However, in almost every Western country -- the U.S., Germany England -- the value of stocks and bonds and the value of real estate is just about exactly the same. But for China, the value of real estate is way, way larger than the value of stocks.

And the reason is not because the Chinese Central bank, the Bank of China lends for real estate; it's because they lend to intermediaries and the intermediaries have financed a lot of housing purchases in China. And, this is really the problem for if they levy a land tax, then you're going to make a lot of these financial intermediaries go bust.

That's what I'm advocating, and I don't think that's a bad thing. These financial intermediaries shouldn't exist, and this same issue came up in 2009 in the United States. You had the leading American bank being the most crooked and internally corrupt bank in the country, Citibank making junk mortgage, and it was broke.

Sheila Bair in 2016. (Matt Spangler for Washington College, CC BY-SA 4.0, Wikimedia Commons)

Its entire net worth was wiped out as a result of its fraudulent junk mortgages. Well, Sheila Bair, the head of the Federal Deposit Insurance Corporation (FDIC) wanted to close it down and take it over. Essentially that would have made it into a public bank and that would be a wonderful thing. She said, look Citibank shouldn't be doing what it's doing. And she wrote all this up in an autobiography. And, she was overruled by President Obama and Tim Geithner saying, but wait a minute, those are our campaign contributors. So, they were loyal to the campaign contributors, but not the voters; and they didn't close Citibank down.

And the result is that the Federal Reserve ended up creating about $7 trillion of quantitative easing to bail out the banks. The homeowners weren't bailed out. Ten million American families lost their homes as a result of junk mortgages in excess of what the property was actually worth.

All of this was left on the books, foreclosed and sold to a private capital companies like Blackstone. And the result is that home ownership in America declined from 68 percent of the population down to about 61 percent. Well, right where the Obama administration left off, you're about to have the Biden administration begin in January with an estimated 5 million Americans losing their homes. They're going to be evicted because they've been unemployed during the pandemic. They've been working in restaurants or gyms or other industries that have been shut down because of the pandemic. They're going to be evicted and many homeowners and, low-income homeowners have been unable to pay their mortgages.

There's going to be a wave of foreclosures. The question is, who's going to bear the cost? Should it be 15 million American families who lose their homes just so the banks won't lose money? Or should we let the banks that have made all of the growth since 2008? Ninety five percent of American GDP of the population has seen its wealth go down. All the wealth has been accumulating for the 5 percent in statistics. Now the question is should this 5 percent that's got all the wealth lose or should the 95 percent lose?

Worker installs security panels over windows after police evict woman from her foreclosed home in South Minneapolis, 2009. (Tony Webster, CC BY 2.0, Wikimedia Commons)

The Biden administration says the 95 percent should lose basically. And you're going to see a wave of closures so that the question in China should be that, these intermediate banks (they're not really banks they are sort of like payday loan lenders), should they come in and, bear the loss or should Chinese localities and the people bear the loss? Somebody has to lose when you're charging, you're collecting the land's rent that was paid to the creditors, and either the creditors have to lose or, the tax collector loses and that's the conflict that exists in every society of the world today. And, in the West, the idea is the tax collectors should lose and whatever the tax collector relinquishes should be free for the banks to collect. In China obviously, they don't want that to happen and they don't want to see a financial class developing along US lines.

Pepe: Michael, there's a quick question in all this, which is the official position by Beijing in terms of helping the localities. Their official position is that there won't be any bailouts of local debt. How do they plan to do that?

Michael: What they're discussing, how are you not going to do it? They think they sort of let localities go their own way. And they think, well you know which ones are going to succeed, and which ones aren't, they didn't want to have a one-size-fits all central planning. They wanted to have flexibility. Well, now they have flexibility. And when you have many different "let a hundred flowers bloom," not all the flowers are going to bloom at the same rate.

And the question is, if they don't bail out the cities, how are the cities going to operate? Certainly, China has never let markets steer the economy, the government steers the markets. That's what socialism is as opposed to finance capitalism. So, the question is, you can let localities go broke and yet you're not going to destroy any of the physical assets of the localities, and all of this is going to be in place. The question is how are you going to arrange the flow of income to all of these roads and buildings and land that's in place? How do you create a system? Essentially, they're saying well, if we're industrial engineers, how do we just plan things? Forget credit, forget property claims, forget the rentier claims. How are we just going to design an economy that operates most efficiently? And that's what they're working on now to resolve this situation because it's gotten fairly critical.

Pepe: Yes, especially in the countryside. Well, I think, a very good metaphor in terms of comparing both systems are investment in infrastructure. You travel to China a lot so, you've seen. You'll travel through high-speed rail. You'll see those fantastic airports, in Pudong or the new airport in Beijing. And then you'll take the Acela to go from Washington to New York City, which is something that I used to do years ago. And the comparison is striking. Isn't it?

Or if you go to France, for instance, when France started development of the TGV, which in terms of a national infrastructure network, is one of the best networks on the planet. And the French started doing this 30 years ago, even more. Is there , it's not in terms of way out, but if we analyze the minutia, it's obvious that following the American finance utilization system, we could never have something remotely similar happening in United States in terms of building infrastructure.

So, do you see any realistic bypass mechanism in terms of improving American infrastructure, especially in the big cities?

TGV 2N2 Lyria train at Paris' Gare de Lyon station. (CC BY-SA 4.0, Wikimedia Commons)

Michael: No, and there are two reasons for that. No. 1, let's take a look at the long-term railroads. The railroads go through the center of town or even in the countryside, all along the railroads, the railroads brought business and all the businesses had been located as close to the railroad tracks as they could. Factories with sightings off the railroad, hotels and especially right through the middle of town where you have the railway gates going up and down. In order to make a high-speed rail as in China, you need a dedicated roadway without trucks and cars, imagine a car going through a railway gate at 350 miles an hour.

So, when I would go from Beijing to Tianjin, here's the high-speed rail, there's one highway on one side, one highway on the other side. There'll be underpasses. But there it goes straight now. How can you suppose you would have a straight Acela line from Washington up to Boston when all along the line, there's all this real estate right along the line that has been built up? There's no way you can get a dedicated roadway without having to tear down all of this real estate that's on either side and the cost of making the current owners whole would be prohibitive. And anywhere you would go, that's not in the center of the city, you would also have to have the problem that there's already private property there.

And there's no legal, constitutional way for such a physical investment to be made. China was able to make this investment because it was still largely rural. It wasn't as built up along the railways. It didn't have any particular area that was built up right where the railroad already was.

President Donald Trump visiting China in 2017. (PAS China via Wikimedia Commons)

So certainly, any high-speed rail could not go where the current railways would be, and they'd have to go on somebody's land. And, there's also, what do you do if you want to get to New York and Long Island from New Jersey?

Sixty years ago, when I went into Wall Street, the cost of getting and transporting goods from California to Newark, New Jersey, was as large as from Newark right across the Hudson River to New York, not only because of the mafia and control of the local labor unions, but because of the tunnels. Right now, the tunnels from New Jersey to New York are broke, they are leaking, the subways in New York City, which continually break down because there was a hurricane a few years ago and the switches were made in the 1940s. The switches are 80 years old. They had water damage and the trains have to go at a crawl. But the city and state, because it is not collecting the real estate tax and other taxes and because ridership fell on the subways to about 20 percent, the city's broke. They're talking about 70 percent of city services being cut back. They're talking about cutting back the subways to 40 percent capacity, meaning everybody will have to get in -- when there's still a virus and not many people are wearing masks, and there was no means of enforcing masks here.

Blue Xs mark social distancing on the platform of a New York City subway station, May 2020. (Marc A. Hermann, MTA, Wikimedia Commons)

So, there's no way that you can rebuild the infrastructure because, for one thing the banking system here has subsidized for a hundred years junk economics saying you have to balance the budget. If the government creates credit it's inflationary as if when banks create credit, it's not inflationary. Well, the monetary effect is the same, no matter who creates the money. And so, Biden has already said that President Trump ran a big deficit, we're going to run a bunch of surpluses or a budget balance. And he was advocating that all along. Essentially Biden is saying we have to increase unemployment by 20 percent, lower wages by 20 percent, shrink the economy by about 10 percent in order to, in order for the banks not to lose money.

"You're going to price the American economy even further out of business because they say that public investment is socialism."

And, we're going to privatize but we are going to do it by selling the hospitals, the schools, the parks, the transportation to finance, to Wall Street finance capital groups. And so, you can imagine what's going to happen if the Wall Street groups buy the infrastructure. They'll do what happened to Chicago when it sold all the parking meters, they'll say, OK, instead of 25 cents an hour, it's now charged $3 an hour. Instead of a $2 for the subway, let's make it $8.

You're going to price the American economy even further out of business because they say that public investment is socialism. Well, it's not socialism. It's industrial capitalism. It's industrialization, that's basic economics. The idea of what, and how an economy works is so twisted academically that it's the antithesis of what Adam Smith, John Stewart Mill and Marx all talked about. For them a free- market economy was an economy free of rentiers. Free of rent, it didn't have any rent seeking. But now for the Americans, a free-market economy is free for the rentiers, free for the landlord, free for the banks to make a killing. And that is basically the class war back in business with a vengeance. That blocks and is preventing any kind infrastructure recovery. I don't see how it can possibly take place.

Pepe: Well, based on what you just described, there is a process of turning the United States into a giant Brazil. In fact, this is what the Brazilian Finance Minister Paulo Guedes, a Pinochetista, as you know Michael, has been doing with the Brazilian economy for the past two years, privatizing everything and selling everything to big Brazilian interests and with lots of Wall Street interests involved as well. So, this is a recipe that goes all across the Global South as well. And it's fully copied all across the Global South with no way out now.

Michael: Yes, and this is promoted by the World Bank and the International Monetary Fund. And when I was brought down to Brazil to meet with the council of economic advisers under Lula, [Luiz Inácio Lula da Silva, former president of Brazil], they said, well the whole problem is that Lula's been obliged to let the banks do the planning.

So, basically free markets and libertarianism is adopting central planning, but with central planning by the banks. America is a much more centrally planned economy than China. China is letting a hundred flowers bloom; America has concentrated the planning and the resource allocation in Wall Street. And that's the central planning that is much more corrosive than any government planning, could be. Now the irony is that China's sending its students to America to study economics. And, most of the Chinese I had talked to say, well we went to America to take economics courses because that gives us a prestige here in China.

I'm working now, with Chinese groups trying to develop a "reality economics" to be taught in China as different from American economics.

"America has concentrated the planning and the resource allocation in Wall Street. And that's the central planning that is much more corrosive than any government planning, could be."

Pepe: Exactly, because of what they study at Beijing University, Renmin or Tsinghua

is not exactly what they would study in big American universities. Probably what they study in the U.S. is what not to do in China. When they go back to China, what they won't be doing. It's an object lesson for what to avoid.

Michael, I'd like to go back to what the BRICS [Brazil, Russia, India, China and South Africa] had been discussing in the 2000s when Lula was still president of Brazil and many of his ideas deeply impressed, especially Hu Jintao at the time, which is bypassing the U.S. dollar. Well, at the moment obviously we're still at 87 percent of international transactions still in U.S. dollars. So, we are very far away from it, but if you have a truly sovereign economy, which is the case of China, which we can say is the case of Russia to a certain extent and obviously in a completely different framework, Iran. Iran is a completely sovereign, independent economy from the West. The only way to try to develop different mechanisms to not fall into the rentier mind space would be to bypass the U.S. dollar.

Occupy Wall Street picket of HSBC, midtown Manhattan; Feb. 14, 2013. (Michael Fleshman Via Flickr)

Michael: Yes, for many reasons. For one thing the United States can simply print the dollars and lend to other countries and then say, now you have to pay us interest. Well, Russia doesn't need American dollars. It can print its own rubles to provide labor. There's no need for a foreign currency at all for domestic spending, the only reason you would have to borrow a foreign currency is to balance your exchange rate, or to finance a trade deficit. But China doesn't have a trade deficit. And in fact, if China were to work to accept more dollars, Americans would love to buy into the Chinese market and make a profit there, but that would push up China's exchange rate and that would make it more difficult for her to make its exports because the exchange rate would come up not because it's exporting more but because it's letting American dollars come in and push it up.

Well, fortunately, President Trump as if he works for the Chinese National Committee, said, look, we don't want to really hurt China by pushing up its currency and we want to keep it competitive. So, I'm going to prevent American companies from lending money to China, I'm going to isolate it and so he's helping them protect their economy. And in Russia he said, look Russia really needs to feed itself. And, there's a real danger that when the Democrats come in, there are a lot of anti-Russians in the Biden administration. They may go to war. They may do to Russia what they tried to do to China in the '50s. Stop exporting food and grain. And only Canada was able to break the embargo. So, we're going to impose sanctions on Russia. So immediately, what happened is Russia very quickly became the largest grain exporter in the world. And instead of importing cheese from the Baltics, it created its own cheese industry. So, Trump said look, I know that Russians followed the American idea of not having protective tariffs, they need protective tariffs. They're not doing it. We're going to help them out by just not importing from them and really helping them.

Pepe: Yeah. Michael, what do you think Black Rock wants from the Chinese? You know that they are making a few inroads at the highest levels? Of course, I'm sure you're aware of that. And also, JP Morgan, Citybank, etc. What do they really want?

Michael: They'd like to be able to create dollars to begin to buy and make loans to real estate; let companies grow, let the real estate market grow and make capital gains.

The way people get wealthy today isn't by making an income, it's been by making a capital gain. Total returns are current income plus the capital gains. As for capital gains each year; the land value gains alone are larger than the whole GDP growth from year to year. So that's where the money is, that's where the wealth is. So, they are after speculative capital gains, they would like to push money into the Chinese stock market and real estate market. See the prices go up and then inflate the prices by buying in and then sell out at the high price. Pull the money out, get a capital gain and let the economy crash, I mean that's the business plan.

Pepe: Exactly. But Beijing will never allow that.

Michael: Well, here's the problem right now, they know that Biden is pushing militarily aggressive people in his cabinet. There's one kind of overhead that China is really trying to avoid and that's the military overhead because if you spend money on the military, you can't spend it on the real economy. They're very worried about the military and they say, how do we deter the Biden administration from actually trying a military adventure in the South China Sea or elsewhere? They said well, fortunately America is multi-layered. They don't think of America as a group. They realize there's a layer and they say, who's going to represent our interests?

"There's one kind of overhead that China is really trying to avoid and that's the military overhead because if you spend money on the military, you can't spend it on the real economy."

Well, Blackstone and Wall Street are going to represent their interests. Then I think one of the, Chinese officials last week gave a big speech on this very thing, saying look, our best hope in stopping America's military adventurism in China is to have Wall Street acting as our support because after all, Wall Street is the main campaign contributor and the president works for the campaign contributors.

The politician works for the campaign contributors. They're in it for the money! So fortunately, we have Wall Street on our side, we've got control of the political system and they're not there to go to war so that helps explain why a month ago they let wholly-owned U.S. banks and bankers in. On the one hand, they don't like the idea of somebody outside the government creating credit for reasons that the economy doesn't need. If they needed it, the Bank of China would do it. They have no need for foreign currency to come in to make loans in domestic currency, out of China.

The only reason that they could do it is No. 1, it helps meet the World Trade Organization's principles and, No. 2, especially during this formative few months of the Biden administration, it helps to have Wall Street saying; we can make a fortune in China, go easy on them and that essentially counters the military hawks in Washington.

Pepe: So, do you foresee a scenario when Black Rock starts wreaking havoc in the Shanghai stock exchange for instance?

Wall Street, Nov. 21, 2009. (Dave Center, Flickr)

Michael: It would love to do that. It would love to move things up and down. The money's made by companies with the stock market going up and down; the zigzag. So of course, it wants to do a predatory zigzag. The question is whether China will impose a tax to stop this, all sorts of financial transactions. That's what's under discussion now. They know exactly what Black Rock wants to do because they have some very savvy billionaire Chinese advisers that are quite good. I can tell you stories, but I better not.

Pepe: Okay. If it's not okay to tell it all, tell us part of the story then.

Michael: The American banks have been cultivating leading Chinese people by providing them enough money to make money here, that they think that, okay they will now try to make money in the same way in China and we can join in. It's a conflict of systems again, between the finance capital system and industrial socialism. You don't get any of this discussion in the U.S. press, which is why I read what you write because in the U.S. press, the neocons talk about the fake idea of Greek history and fake idea of the Thucydides' problem of a country jealous of another country's development.

There's no jealousy between America and China. They're different, they have their own way. We are going to destroy them. And if you look at the analogy that the Americans draw -- and this is how the Pentagon thinks -- with the war between Athens and Sparta. It's hard to tell, which is which. Here you have Athens, a democracy backing other democracies and having the military support of the democracies and the military in these democracies all had to pay Athens protection money for the military support and that's the money that Athens got to ostensibly support its navy and protection that built up all of the Athenian public buildings and everything else. So, that's a democracy exploiting its allies, to enrich itself via the military. Then you have Sparta, which was funding all of the oligarchies, and it was helping the oligarchies overthrow democracies. Well, that was America too. So, America is both sides of the Thucydides war if the democracy is exploiting the fellow democracies and is the supporter of oligarchies in Brazil, Latin America, Africa and everyone else.

So, you could say the Thucydides problem was between two sides, two aspects of America and has nothing to do with China at all except, for the fact that the whole war was a war between economic systems. They're acting as if somehow if only China did not export to us, we could be re-industrialized and somehow export to Europe and the Third World.

And as you and I have described, it's over. We painted ourselves into such a debt corner that without writing down the debts, we're in the same position that the Eurozone is in. There's so much money that goes to the creditors to the top 1 percent or 5 percent that there is no money for capital investment, there is no money for growth. And, since 1980 as you know, real wages in America have been stable. All the growth has been in property owners and predators and the FIRE sector, the rest of the economy is in stagnation. And now the coronavirus has simply acted as a catalyst to make it very clear that the game is over; it's time to move away from the homeowner economy to rentier economy, time for Blackstone to be the landlord. America wants to recreate the British landlord class and essentially what we're seeing now is like the Norman invasion of England taking over the land and the infrastructure. That's what Blackstone would love to do in China.

"There's so much money that goes to the creditors to the top 1 percent or 5 percent that there is no money for capital investment, there is no money for growth."

Pepe: Wow. I'm afraid that they may have a lot of leeway by some members of the Beijing leadership now, because as you know very well, it's not a consensus in the political arena.

Michael: We're talking about Volume II and III of Capital .

Pepe: Exactly. But you know, you were talking about debt. Coming back to that, in fact I just checked this morning, apparently global debt as it stands today is $277 trillion, which is something like 365 percent of global GDP. What does that mean in practice?

Michael: Yeah, well fortunately this is discussed in the 19th century and there was a word for that -- fictitious capital -- it's a debt that can't be paid, but you'll keep it on the books anyway. And every country has this. You could say the question now, and The Financial Times just had an article a few days ago that China's claims on Third World countries on the Belt and Road Initiative is fictitious capital, because how can it collect?

Well, China's already thought of that. It doesn't want money. It wants the raw materials. It wants to be paid in real things. But a debt that can't be paid, can only be paid either by foreclosing on the debtors or by writing down the debts and obviously a debt that can't be paid won't be paid.

"Fictitious capital -- it's a debt that can't be paid, but you'll keep it on the books anyway. And every country has this."

And so, you have not only Marx using the word fictitious capital. At the other end of the spectrum, you had Henry George talking about fictive capital. In other words, these are property claims that have no real capital behind them. There's no capital that makes profit. That's just a property claim for payment or a rentier claim for payment.

So, the question is, can you make money somehow without having any production at all, without having wages, without having profits, without any capital? Can you just have asset grabbing and buying-and-selling assets? And as long as you have the Federal Reserve in America, come in, Trump's $10 trillion Covid program gave $2 trillion to the population at large with these $1,200 checks, that my wife and I got, and $8 trillion all just to buy stocks and bonds. None of this was to build infrastructure. None of this $8 trillion was to build a single factory. None of this 8 trillion was to employee a single worker. It was all just to support the prices of stocks and bonds, and to keep the illusion that the economy had not stopped growing. Well, it's growing for the 5 percent. So, it's all become fictitious. And if you look at the GDP as I said, it's fictitious.

Pepe: And the most extraordinary thing is none of that is discussed in American media. There's not a single word about what you would have been describing.

Michael: It's not even discussed in academia. Our graduates at the university of Missouri at Kansas City, we're all trained in Modern Monetary Theory. And as hired professors they have to be able to publish in the refereed journals and the refereed journals are all essentially controlled by the Chicago School. So, you have a censorship of the kind of ideas that we're talking about. You can't get it into the economic journals, so you can't get it into the economics curriculum. So, where on earth are you going to get it? If you didn't have the internet you wouldn't be discussing at all. Most of my books sell mainly in China, more than in all the other countries put together so I can discuss these things there. I stopped publishing in orthodox journals so many years ago because it's talking to the deaf.

"None of this $8 trillion was to build a single factory, employee, a single worker."

Pepe: Absolutely. Yeah. Can I ask you a question about Russia, Michael? There is a raging, debate in Russia for many years now between let's say the Eurasianists and the Atlanticists. It involves of course, economic policy under Putin, industrial capitalism Russian style. The Eurasianists basically say that the central problem with Russia is how the Russian central bank is basically affiliated with all the mechanisms that you know so well, that it is an Atlanticist Trojan Horse inside the Russian economy. How do you see it?

Michael: Russia was brainwashed by the West when the Soviet Union broke up in 1991 . First of all, the IMF announced in advance that there was a big meeting in Houston with the IMF and the World Bank. And the IMF published all of its report saying, first you don't want inflation in Russia so let's wipe out all of the Russian savings with hyperinflation, which they did. They then said, well now to cure the hyperinflation the Russian central bank needs a stable currency and you need a backup for the currency. You will need to back it with U.S. dollars.

"Russia was brainwashed by the West when the Soviet Union broke up in 1991."

So, from the early 1990s, as you know, labor was going unpaid. The Russian central bank could have created the rubles to pay the domestic labor and to keep the factories in place. But, the IMF advisers from Harvard said, no you'll have to borrow U.S. dollars. I met with people from the Hermitage Fund and the Renaissance Fund and others. We had meetings and I met with the investors. Russia was paying 100 percent interest for years to leading American financial institutions for money that it didn't need and could have created itself. Russia was so dispirited with Stalinism that, essentially, it thought the opposite of Stalinism must be what they have in America.

They thought that America was going to tell it how America got rich, but America didn't want to tell Russia how it got rich, but instead wanted to make money off Russia. They didn't get it. They trusted the Americans. They really didn't understand that, industrial capitalism that Marx described had metamorphosized into finance capitalism and was completely different.

And that's because Russia didn't charge rent, it didn't charge interest. I gave three speeches before the Duma, urging it to impose a land tax. Some of the people I noticed, Ed Dodson was there with us and we were all trying to convince Russia, don't let this land be privatized. If you let it be privatized, then you're going to have such high rents and housing costs in Russia that you're not going to be able to essentially compete for an industrial growth. Well, the politician who brought us there, Viatcheslav Zolensky was sort of maneuvered out of the election by the American advisers.

Russian Duma Building, Moscow, 2017. (Wikimedia Commons)

The Americans put billions of dollars in to essentially finance American propagandists to destroy Russia, mainly from the Harvard Institute of International Development. And essentially, they were a bunch of gangsters and the prosecutors in Boston were about to prosecute them.

The attorney general of Boston was going to bring a big case for Harvard against the looting of Russia and the corruption of Russia. And I was asked to organize and to bring a number of Russian politicians and industrialists over to say how this destroyed everything. Well, Harvard settled out of court and essentially that made the perpetrators the leading university people up there. (I'm associated with Harvard Anthropology Department, not the Economics Department.)

So, we never had a chance to bring my witnesses, and have our report on what happened, but I published for the Russian Academy of Sciences a long study of how all of this destruction of Russia was laid out in advance at the Houston meetings by the IMF. America went to the leading bureaucrats and said; look, we can make you rich why don't you register the factories in your own name, and if you're registered in your own name, you know, then you'll own it. And then you can cash out. You can essentially sell, but obviously you can't sell to the Russians because the IMF has just wiped out all of their savings.

You can only cash out by selling to the West. And so, the Russian stock market became the leading stock market in the world from 1994 with the Norilsk Nickel and the seven bankers in the bank loans for shares deal through 1997. And, I had worked for a firm Scutter Stevens and, the head adviser, a former student of mine didn't want to invest in Russia because she said, this is just a rip off, it's going to crash. She was fired for not investing. They said look, we know that's going to crash. That's the whole idea it's going to crash. We can make a mint off it before the crash. And then when it crashes, we can make another mint by selling short and then all over again . Well, the problem is that the system that was put in with the privatization that's occurred, how do you have Russia's wealth used to develop its own industry and its own economy like China was doing. Well, China has rules for all of this, but Russia doesn't have rules, it's really all centralized, it's President Putin that keeps it this way.

President Vladimir Putin meeting with German business executives, Nov. 1, 2018. (The Kremlin)

Well, this was the great fear of the West. When you had Mikhail Gorbachev beginning to plan to do pretty much what is done today, to restrain private capital, the IMF said hold off. We're not going to make any loans to stabilize the Russian currency until you remove Mr. Primakov.

The U.S. said we won't deal with Russia until you remove him. So, he was pushed out and he was probably the smartest guy at the time there. So, they thought [President Vladimir] Putin was going to be sort of the patsy. And he almost single-handedly, holding the oligarchs in and saying, look, you can keep your money as long as you do exactly what the government would do. You can keep the gains as long as you're serving the public interest.

But none of this resulted into a legal system, a tax system, and a system where the government actually does get most of the benefits. Russia could have emerged in 1990 as one the most competitive economies in Eurasia by giving all of the houses to its people instead of giving Norilsk Nickel and the oil companies to Yukos. It could have given everybody their own house and their own apartment, the same thing in the Baltics. And instead it didn't give the land out to the people. And Russians were paying 3 percent of their income for housing in 1990. And rent is the largest element in every household's budget.

"Russia could have emerged in 1990 as one the most competitive economies in Eurasia by giving all of the houses to its people."

So, Russia could have had low-price labor. It could have financed all of its capital investment for the government by taxing, collecting the rising rental value. Instead, Russian real estate was privatized on credit and it was even worse in the Baltics.

In Latvia, where I was research director for the Riga Graduate School of Law, Latvia borrowed primarily from Swedish banks. And so, in order to buy a house, you had to borrow from Swedish banks. And they said, well, we're not going to lend in the Latvian currency because it can go down. So, you have a choice; Swiss Francs or German Marks or U.S. Dollars. And so, all of this rent was paid in foreign currency. There came an outflow that essentially drained all the Baltic economies. Latvia lost 20 percent of its population. Estonia and Lithuania followed suit.

And of course, the worst hit by neo-liberalism was Russia. As you know, President Putin said that neo-liberalism cost Russia more of its population than World War II. And you know that to destroy a country, you don't need an army anymore. All you have to do is teach it American economics.

Pepe: Yes, I remember well, I arrived in Russia in the winter of 91 coming from China. So, I transited from the Chinese miracle. In fact, a few days after Deng Xiaoping's famous Southern tour when he went to Guangzhou and Shenzhen. And that was the kick for the 1990s boom, in fact a few years before the handover, and then I took the Trans-Siberian and I arrived in Moscow a few days after the end, in fact, a few weeks after the end of the Soviet Union.

But yeah, I remember the Americans arrived almost at the exact minute, wasn't it, Michael? I think they already were there in the spring of 1992. If I'm not mistaken.

Russian 1992 privatization voucher. (Wikimedia Commons)

Michael: The Houston meeting was in 1990. But all before that already in, 1988 and 1989, there was a huge outflow of embezzlement money via Latvia. The assistant dean of the university who ended up creating Nordex, essentially the money was all flying out because Ventspils in Latvia, was where Russian oil was exported and it was all fake invoicing. So, the Russian kleptocrats basically made their money off false export invoicing, ostensibly selling it for one price and having the rest paid abroad and, this was all organized through Latvia and the man who did it later moved to Israel and finally gave a billion dollars back to Russia so that he went on to live safely for the rest of his life in Israel.

Pepe: Well, the crash of the ruble in 1998 was what, roughly one year after the crash of the baht and the whole Asian financial crisis, no? It was interlinked of course, but let me see if I have a question for you, in fact, I'm just thinking out loud now. If the economies of Southeast Asia and Northeast Asia, the case of South Korea and Russia, were more integrated at the time as they are trying to integrate now, do you think that the Asian financial crisis would have been preventable in 1997?

Michael: Well, look at what happened in Malaysia with Mohammad Mahathir. Malaysia avoided it. So of course, it was preventable, and they had the capital controls. All you would have needed was to do what Malaysia did. But you needed an economic theory for that.

And essentially the current mode of warfare is to conquer the brains of a country to shape how people think and how they perceive the economy. And if you can twist their view into an unreality economics, where they think that you're there to help them not to take money out of them, then you've got them hooked. That was what happened in Asia. Asia thought it was getting rich off the dollars inflows and then the IMF and all the creditors pulled the plug, crash the industry. And now that all of a sudden you had a crash, they bought up Korean industry and other South Asian industries at giveaway prices.

That's what you do. You lend the money; you pull the plug. You then let them go under and you pick up the pieces . That's what Blackstone did after the Obama depression began, when Obama saved the banks, not the constituency, the mortgage borrowers. Essentially that's Blackstone's modus operandi to pick up distressed prices at a bankruptcy sale, but you need to lend money and then crash it in order to make that work.

Pepe: Michael, I think we have only five minutes left. So, I would expect you to go on a relatively long answer and I'm really dying for it. It's about debt, it about the debt trap. And it's about the New Silk Roads, the Belt and Road Initiative, because I think rounding up our discussion and coming back to the theme of debt and global debt.

The No. 1 criticism apart from the demonization of China that you hear from American media and a few American academics as well against the Belt and Road is that it's creating a debt trap for Southeast Asian nations, Central Asian nations and nations in Africa, etc . Obviously, I expect you to debunk that, but the framework is there is no other global development project as extensive and as complex as Belt and Road, which as you know very well was initially dreamed up by the Ministry of Commerce. Then they sold it more or less to Xi Jinping who got the geopolitical stamp on it, announcing it, simultaneously, (which was a stroke of genius) in Central Asia in Astana and then in Southeast Asia in Jakarta. So, he was announcing the overland corridors through the heartland and the Maritime Silk Road at the same time.

At the time people didn't see the reach and depth of all that. And now of course, finally the Trump administration woke up and saw what was in play, not only across Eurasia but reaching Africa and even selected parts of Latin America as well. And obviously the only sort of criticism, and it's not even a fact-based criticism, that I've seen about the Belt and Road is it's creating a debt trap because as you know Laos is indebted, Sri Lanka is indebted, Kyrgyzstan is indebted etc. So, how do you view Belt and Road within the large framework of the West and China, East Asia and Eurasia relations? And how would you debunk misconceptions created, especially in the U S that this is a debt trap.

Six proposed corridors of Belt and Road Initiative, showing Italy inside circle, on maritime blue route. (Lommes, CC BY-SA 4.0, Wikimedia Commons)

Michael: There are two points to answer there. The first is how the Belt and Road began. And as you pointed out, the Belt and Road began, when China said, what is it we need to grow and how do we grow within our neighboring countries so we don't have to depend upon the West, and we don't have to depend on sea trade that can be shut down? How do we get to roads instead of seas in a way that we can integrate our economy with the neighboring economies so that there can be mutual growth?

So, this was done pretty much on industrial engineering grounds. Here's where you need the roads and the railroads. And then how do we finance it? Well, The Financial Times article, last week, said didn't the Chinese know that [with past] railroad development, they've all gone broke? The Panama Canal went broke, you know, the first few times there were European railway investment in Latin America in the 19th century, that all went broke.

Well, what they don't get is China's aim was not to make a profit off the railroads. The railroads were built to be part of the economy. They don't want to make profit. It was to make the real economy grow, not to make profits for the owners of the railroad stocks. The Western press can't imagine that you're building a railroad without trying to make money out of it.

Then you get to the debt issue. Countries only have a debt crisis if their debt is in a foreign currency. The first way that the United States gained power was to fight against its allies. The great enemy of America was England and it made the British block their currency in the 1940s. And so, India and other countries, that had all these currencies holdings in sterling, were able to convert it all into dollars.

The whole move of the U.S. was to denominate world debt in dollars. So that No. 1, U.S. banks would end up with the interest in financing the debt. And No. 2, the United States could, by using the debt leverage, control domestic politics.

Well, as you're seeing right now in Argentina, for instance, Argentina is broke because it owes foreign-dollar debt. When I started the first Third World bond fund in 1990 at Scutter Stevens, Brazil and China and Argentina were paying 45 percent interest per year, 45 percent per year in dollars debt. Yet we tried to sell them in America. No American would buy. We went to Europe, no European buy this debt. And so, we worked with Merrill Lynch and Merrill Lynch was able to make an offshore fund in the Dutch West Indies and all of the debt was sold to the Brazilian ruling class in the central bank and the Argentinian bankers in the ruling class, we thought oh, that's wonderful.

We know that they're going to pay the foreign Yankee Dollars debt because the Yankee Dollars debt is owed to themselves. They're the Yankees! They're the client oligarchy. And you know, from Brazil client oligarchy is, you know, they're cosmopolitan, that's the word. So, the problem is that on the Belt and Road, how did these other countries pay the debt to China?

Well, the key there again is the de-dollarization, and one way to solve it is since we're trying to get finance out of the picture, we're doing something very much like, Japan did with Canada in the 1960s. It made loans to develop Canadian copper mines taking its payment, not in Canadian dollars, that would have pushed up the yen's exchange rate, but in copper.

So, China says, you know you don't have to pay currency for this debt. We didn't build a railroad to make a profit and you want, we can print all the currency we want. We don't need to make a profit. We made the Belt and Road because it's part of our geopolitical attempt to create what we need to be prosperous and have a prosperous region. So, these are self-reinforcing mutual gain. Well, so that's what the West doesn't get -- mutual gain? Are we talking anthropology? What do you mean mutual? This is capitalism! So, the West doesn't understand what the original aim of the Belt and Road was, and it wasn't to make a profitable railroad to enable people to buy and sell railway stocks. And it wasn't to make toll roads to sell off to Goldman Sachs, you know. We're dealing with two different economic systems, and it's very hard for one system to understand the other system because of the tunnel vision that you get when you get a degree in economics.

"We're dealing with two different economic systems, and it's very hard for one system to understand the other system because of the tunnel vision that you get when you get a degree in economics."

Pepe: Belt and Road loans are long-term and at very low interest and they are renegotiable. They are renegotiating with the Pakistanis all the time for instance.

Michael: China's intention is not to repeat an Asia crisis of 1997. It doesn't gain anything by forcing a crisis because it's not trying to come in and buying property at a discount at a distressed sale. It has no desire to create a distressed sale. So obviously, the idea is the capacity to pay. Now, this whole argument occurred in the 1920s, between [John Maynard] Keynes and his opponents that wanted to collect German reparations and, Keynes made it very clear. What is the capacity to pay? It's the ability to export and the ability to obtain foreign currency. Well, China's not looking for foreign currency. It is looking for economic returns but the return is to the whole society, the return isn't from a railroad. The return is for the entire economy because it's looking at the economy as a system.

The way that neoliberalism works, it divides the economy in parts, and it makes every part trying to make a gain, and if you do that, then you don't have any infrastructure that's lowering the cost for the other parts. You have every part fighting for itself. You don't look at in terms of a system the way China's looking at it. That's the great advantage of Marxism, you'll look at the system, not just the parts.

Pepe: Exactly and this is at the heart of the Chinese concept of a community with a shared future for mankind, which is the approximate translation from Mandarin. So, we compare community with a shared future for mankind, which is, let's say the driving force between the idea of Belt and Road, expanded across Eurasia, Africa and Latin America as well with our good old friends', "greed is good" concept from the eighties, which is still ruling America apparently.

Michael: And the corollary is that non-greed is bad.

Pepe: Exactly and non-greed is evil.

Michael: I see. I think we ran out of time. I do. I don't know if Alanna wants to step in to wrap it up.

Michael: There may be somebody who has a question.

Pepe: Somebody has a question? That'll be fantastic.

Alanna: There is a question from Ed Dodson. He wanted to know why there are these ghost cities in China? And who's financing all this real estate that's developed, but nobody's living there? We've all been hearing about that. So, what is happening with that?

Michael: Okay. China had most of its population living in the countryside and it made many deals with Chinese landholders who have land rights, and they said, if you will give up your land right to the community, we will give you free apartment in the city that you could rent out.

So, China has been building apartments in cities and trading these basically in exchange to support what used to be called a rural exodus. China doesn't need as many farmers on the land as it now has, and the question is how are you going to get them into cities? So, China began building these cities and many of these apartments are owned by people who've got them in exchange for trading their land rights. The deals are part of the rural reconstruction program.

Alanna: Do you think it was a good deal? Vacant apartments everywhere.

Pepe: You don't have ghost cities in Xinjiang for instance, Xinjiang is under-populated, it's mostly desert. And it's extremely sensitive to relocate people to Xinjiang. So basically, they concentrated on expanding Urumqi. When you arrive in Urumqi it is like almost like arriving in, Guangzhou. It's enormous. It's a huge generic city in the middle of the desert. And it's also a high-tech Mecca, which is something that very few people in the West know. And is the direct link between the eastern seaboard via Belt and Road to Central Asia.

Pepe Escobar at the Khunjerab pass, China-Pak border, on New Silk Road overdrive.

Last year I was on an amazing trip. I went to the three borders, the Tajik-Xinjiang border, Kyrgiz-Xinjiang border and the Kazakh-Xinjiang border, which is three borders in one. It's a fascinating area to explore and specially to talk to the local populations, the Kyrgiz, the Kazakhs and the Tajiks. How do they see the Belt and Road directly affecting their lives from now on? So, you don't see something spectacular for instance, in the Xinjiang – Kazakh boarder, there is one border for the trucks, lots of them like in Europe, crossing from all points, from Central Asia to China and bringing Chinese merchandise to Central Asia.

There's the train border, which is a very simple two tracks and the pedestrian border, which is very funny because you have people arriving in buses from all parts of Central Asia. They stop on the Kazakh border. They take a shuttle, they clear customs for one day, they go to a series of shopping malls on the Chinese side of the border. They buy like crazy, shop till it drops, I don't know for 12 hours? And then they cross back the same day because the visa is for one day. They step on their buses and they go back.

So, for the moment it's sort of a pedestrian form of Belt and Road, but in the future, we're going to have high-speed rail. We're going to have, well the pipelines are already there as Michael knows, but it's fascinating to see on the spot. You see the closer integration; you see for instance Uyghurs traveling back and forth. You know, Uyghurs that have families in Kyrgizstan for instance, I met some Uyghurs in Kyrgyzstan who do the back-and-forth all the time. And they said, there's no problem. They are seen as businessmen so there's no interference. There are no concentration camps involved, you know, but you have to go to these places to see how it works on the ground and with Covid, that's the problem for us journalists who travel, because for one year we cannot go anywhere and Xinjiang was on my travel list this year, Afghanistan as well, Mongolia.

These are all parts of Belt and Road or future parts of Belt and Road, like Afghanistan. The Chinese and the Russians as well; they want to bring Afghanistan in a peace process organized by Asians themselves without the United States, within the Shanghai Cooperation Organization, because they want Afghanistan to be part of the intersection of Belt and Road and Eurasian Economic Union. This is something Michael knows very well. You don't see this kind of discussions in the American media for instance, integration of Eurasia on the ground, how it's actually happening.

Michael : That's called cognitive dissonance.

Alanna: To try to understand it gets you cognitive dissonance.

Pepe: Oh yeah, of course. And obviously you are a Chinese agent, a Russian agent. And so, I hear that all the time. Well, in our jobs we hear that all the time. Especially, unfortunately from our American friends.

Alanna: Okay. I know you have other things to do. This has been fabulous. I want to thank you so much, both of you, uh, with so easy to get attendance for this webinar. There were 20 people in five minutes enrolled and in two days we were at capacity. So, I know there are many more people who would love to hear you talk another time, whenever you two are so willing. And I think you both got much out of your first conversation in person. Everybody listening knows these two wonderful gentlemen, they have written more than 10 books, and they have traveled all over the world. They are on the top of geopolitical and geoeconomic analysis, and they are caring, loving people. So, you can see that these are the people we need to be listening to and understanding all around the world.

So, thank you so much. Ibrahima Drame from the Henry George School is now going to say goodbye to you and will wrap this up. Thank you again.

Pepe: Michael it was a huge pleasure. Really, it was fantastic. Really nice, we're on the same website. So, let's have a second version of this.

Ibrahima: So, let's have a second version of this two months from now. Thank you very much for participating and I really hope you liked this event. And, we also want to ask for your support by making a tax-deductible donation to the Henry George School. I believe I shared the link on the chat. Thank you. And see you soon.

Pepe: Thank you very much. Thanks Michael. Bye!

Michael Hudson is an American economist professor of economics at the university of Missouri Kansas City and a researcher at the Levy Economics Institute at Bard College. He's a former Wall Street analyst political consultant commentator and journalist. He identifies himself as a classical economist. Michael is the author of J is for Junk Economics, Killing the Host, The Bubble and Beyond, Super Imperialism: The Economic Strategy of American Empire, Trade Development and Foreign Debt and The Myth of Aid , among others. His books have been published translated into Japanese, Chinese, German, Spanish and Russian.

Pepe Escobar, born in Brazil, is a correspondent and editor-at-large at Asia Times and columnist for Consortium News and Strategic Culture in Moscow. Since the mid-1980s he's lived and worked as a foreign correspondent in London, Paris, Milan, Los Angeles, Singapore, Bangkok. He has extensively covered Pakistan, Afghanistan and Central Asia to China, Iran, Iraq and the wider Middle East. Pepe is the author of Globalistan – How the Globalized World is Dissolving into Liquid War;Red Zone Blues: A Snapshot of Baghdad during the Surge . He was contributing editor to The Empire and The Crescent and Tutto in Vendita in Italy. His last two books are Empire of Chaos and 2030 . Pepe is also associated with the Paris-based European Academy of Geopolitics. When not on the road he lives between Paris and Bangkok.

[Jan 11, 2021] The Transnational Financiers, who control the Federal Reserve, Wall Street, the Federal Reserve, the military industrial complex, Silicon Valley, Academia, Education, think tanks, politicians plus political parties, don't care about the US

Jan 11, 2021 |

Brianborou on January 08, 2021 , · at 4:00 am EST/EDT

Unfortunately, the deeper point is being missed. The Transnational Financiers, who control the Federal Reserve, Wall Street, the Federal Reserve, the military industrial complex, Silicon Valley, Academia, Education, think tanks, politicians plus political parties, don't care about the US of the Western world. Their goal is a NWO as described by the insider Professor Carol Quigley's book, Tragedy and Hope. Rule by a small nucleus of central bankers ie The Bank of International Settlements and controlled via technocrats. They have no allegiance to countries, nations, ideology but themselves. Paul is spot on one point it's not democrat via republican or left via right but them against the rest of humanity!

Ken Leslie on January 08, 2021 , · at 4:48 am EST/EDT

What is noticeable here is a bit of a contrast between those who live in the US and those who don't. The former group is naturally very attached to the country and are getting very emotional over its fate. This is understandable but not defensible. The United States has no right to a divine appeal or special treatment. It is a witch's cauldron into which the poor and benighted of the world were thrown only to be turned into tormentors of others by means of some strange black alchemy. We are now witnessing the weakening of the spell and awakening of the enchanted masses.

The exhibition of high emotion doesn't seem appropriate here because simply, there is nothing to mourn. The golden 1950s? That was a fluke based entirely on the outcome of WWII – the world had been devastated, the US cocooned and protected – and it gave us the Dulles brothers. 1960s and 1970s? A conservative's nightmare – legions of long-haired parasites, jangly guitars, LSD, womens' lib and the ultimate humiliation of NAM!

So when was this golden age? Under Reagan? Well, this is when the dismantling of the inner core of the empire began. Would Dr Roberts still advocate Reaganomics and dark cold war threats combined with the destruction of the American working class?

In the end, a number of people have remarked that after decades of ballooning into a malignant quasi-empire, the US is painfully finding its true level. The "rebellion" being discussed here was a farce (as confirmed by the stock market) and these are just dummy moves orchestrated to placate the proles (look, this is just the beginning – since 2016).

Dr Roberts confirms something I said yesterday – what kind of rebellion is possible in a country with two dozen super-endowed and powerful spying organisations and a super well-armed internal suppression apparatus? The libertarians over at ZH ask these questions – but the curse of the CIA is completely self-inflicted and richly deserved. One does not create a modern unholy inquisition and expect to be able to escape its tentacles.

People talk about hope and optimism. This is the view of an outsider who has been affected by American global criminality. There cannot be any hope or optimism for the USA until it fully renounces its collective psychopathy which has cost the world millions of lives and billions of dollars (not for long) in value.

[Jan 10, 2021] The best critique of Hudson's financialization thesis is provided by Michael Roberts, a retired Marxist economist:

Jan 10, 2021 |

Tichard , Jan 10 2021 18:25 utc | 29

[Nov 07, 2020] November 6, 2020 at 11:59 am

Notable quotes:
"... Banking in the hands of private interests is more dangerous than a standing army ..."
Nov 07, 2020 |

Another entirely succesfull election for the FIRE sector – they must have enjoyued the theater of it all – after they got Biden on the ticket – they knew – no matter which way the country voted that they had the election in the bag. They had the Smurfes fighting over the small stuff – to plan

You had Trump – a lifelongh con-man and preditor – physically and figuratively a self admitted ++++y grabber, a coward, spoiled rich-boy narssisist who used bone spurs to duck service and probably has not read or understands the constitution.

Then You had Biden – always a FIRE sector champion who come to run like he was fresh fished and landed doing a slimy fish dock dance.

Well the real fight for the future of democracy and the planet is sided between the creditor class and the rest of us Smurfs
Its the same fight going back thousands of years in hundreds of countries

Banking in the hands of private interests is more dangerous than a standing army

In my view – the fight is not between the Dems and Repubs – it is the People, freedom and Democracy against the Speculators, vested interests and Finance – who have demonstrated its contemp of People, the Planet and Democracy

Rudolf , November 6, 2020 at 2:08 pm

Plus 1. Nailed it.
Anyone who thinks that the single party system with 2 factions will provide anything for the 99% is an idiot. The repugnants/democraps, employees of the FIRE sector oligarchs, have been playing "good cops/bad cops" with middle class/working class forever. It's a tactic that's been used since "civilization " began. There was a time when the western world's dominant language was Latin. We know what happened there.

[Nov 02, 2020] The banks and another excellent write up at Wall Street on Parade.

Nov 02, 2020 |

uncle tungsten , Nov 1 2020 21:59 utc | 42

The banks and another excellent write up at Wall Street on Parade .

Again Ferdinand Pecora harking back to the 1930's as discussed in the past weeks commentaries:-

Wilmarth's writing is so insightful and profound in its analysis of the similarities between the banks of the late 1920s and today that it feels like the ghost of Ferdinand Pecora might have been whispering in Wilmarth's ear. Pecora was a former prosecutor from New York who was chosen to preside over much of the early 1930s Senate Banking hearings and investigations of the corrupt Wall Street structure that led to the 1929 crash and Great Depression.

Three banking names that played significant roles in the crash of 1929 and the ensuing Great Depression were National City Bank, JP Morgan, and Chase National Bank. National City Bank was the precursor to today's Citigroup, the bank that would have collapsed in 2008 except for the largest taxpayer and Federal Reserve bailout in global banking history. JPMorgan and Chase combined in 2000 to create today's JPMorgan Chase.

[Oct 05, 2020] Financialization The Road To Zero, Part 2- From Capitalism To Financialization -

Oct 05, 2020 |

Financialization & The Road To Zero, Part 2: From Capitalism To Financialization

by Tyler Durden Sun, 10/04/2020 - 22:55 Twitter Facebook Reddit Email Print

Authored by 'ICE-9' via The Burning Platform blog,

This is Part 2 of a 4-part series.

Read Part 1 here...

...but 4,500 years of mercantilism were not going down without a fight. Fractional reserve banking had been steadily growing since the 14th century but was exclusively a private business affair unrelated to the state. These early fractional reserve "banks" began as safe stores for gold and silver but it did not take long for their unscrupulous owners to start speculating with their customers' deposits, thus the nascent fractional reserve nature of these deposits where redemption coupons in circulation outnumbered physical gold and silver held in "trust". After many rounds of speculative losses with other people's gold and silver, "banks" crashed, losses accumulated, and the Renaissance city states ultimately stepped in to ban this fractional reserve practice and re-enforce the Catholic prohibitions against usury. As a result, the early 16th century mercantile "banking" industry evolved into a transparent and audited business based upon fees received for the facilitation of foreign coin exchange, notary services, and the provision of letters of account credibility. With usury removed, the business of transparent and audited mercantile banking spread from Northern Italy throughout Western Europe and control of the banking industry transferred to Catholic and later, Protestant businessmen. So from 1585 to 1650 the golden age of transparent and audited mercantile banking laid the groundwork for the rise and exploitation of the Dutch and English colonial empires, and the success of mercantile banking also sowed the seeds for its eventual corruption by unscrupulous players in usury friendly Protestant England.

With the resurrection of the European super-state after centuries of dormancy, the various crowns found it increasingly difficult to secure funding to fight their continental wars of ego, secure their growing colonial empires, and fund their increasing opulence at home, so sovereigns began to form nascent "central banks" within their court administrations. These nascent "central banks" served the crown and the crown alone and existed as polite shake-down operations as wealthy subjects placed themselves in peril if they refused to lend their gold and silver despite high probability the sovereign would default as was his divine right. So after depleting the royal treasury during the Second Anglo-Dutch War, the English crown initiated a shakedown of the goldsmith bankers when Parliament passed The Great Stop of the Exchequer in 1672 which repudiated all outstanding loans and all but destroyed the English mercantile banking system. What gold and silver was left to the Exchequer immediately went to use in prosecuting both the Third Anglo-Dutch War and the Franco-Dutch War, which by 1678 left the Exchequer in such dire financial circumstances that it put national security at serious risk. A funding void followed where loans to the crown in gold and silver were nearly impossible to secure, so a first attempt at pure fiat money promoted as "legal tender" followed without success. Then in 1685 Charles II died and the Catholic James II ascended the throne putting usury and national finances at risk of eliminating any recourse at replenishing the depleted Exchequer. So under cover of religion, the Catholic king's authority was nullified, his Protestant daughter ascended the throne, usury was preserved, and Parliament with its powers to raise funds acquired legal supremacy over the crown.

With a weakened monarchy, new relative strength in Parliament, and a depleted Exchequer, Parliament pulled itself together and got to work and, once lingering legal succession issues surrounding James II were resolved, it passed the Bank of England Act of 1694. The overt exigencies in this act were related to funding the new war with France and controlling rebellion in Ireland. But the act also replaced the old rarely used pure fiat money of Charles II with bills redeemable in gold which also paid interest to their holders. Thus usury was legally preserved by an act of Parliament which a weakened future potentially Catholic monarch could not overturn. These bills backed with gold gained in popularity and filled the Exchequer's immediate funding gap and allowed England to continue prosecuting its wars against the Dutch. For a brief eleven years, from 1696-1707, England had returned to sound mercantile banking practice and acceptance of these interest bearing bills spread, filling the Exchequer with physical gold and silver.

But then enter one Sir William Paterson. This same Sir William – chief organizer of the ill-fated Darien Scheme where investors lost everything and 1,200 Panamanian colonists perished – in 1694 was the primary promoter behind the joint stock incorporation and charter of the privately owned Bank of England. A major conflict of interest – not recognized by divine right – arose here whereby King William III was himself a major shareholder in this newly chartered bank. But this bank was merely one of many banks chartered at the time operating under the ruinous fractional reserve practice, and nearly all these banks eventually failed save one – the Bank of England. What made this bank charter special was its inside connection to the House of Stuart and its location inside the untouchable City of London Corporation – that one square mile of sovereign within a sovereign ceded in 1067 by William the Conqueror to the inhabitants of London. And, this special Bank of England had discovered the magic formula that transformed Parliament into a perpetual debtor, turned the bank's liabilities into assets, and as the money they created had zero cost, afforded the owners of this special Bank of England an infinite rate of return on fiat issuance. Not since the Pharaohs convinced the Egyptians they were Gods had such an elaborate fraud been perpetrated upon mankind.

To coincide with the Union of England and Scotland in 1707, this special Bank of England – one of many chartered banks at the time – was awarded responsibility for managing the issue and redemption of the popular interest bearing bills of what was now the Exchequer of Great Britain. Given the enticement of near infinite rates of return, it did not take the Bank of England long to begin issuing its own fiat money for use by Parliament and to retire the old interest bearing bills with redemptions. The magic formula was set – the Bank of England had figured out not how to receive interest from lending its own money, but how to receive interest by creating new money. And the opaque nature of the magic formula with its unknown gold and silver reserves held in "trust", together with pomp and trappings, gave the fiat money financial process the appearance of authority and legitimacy. Parliament got its means to fund a new round of wars of attrition with France, the people got taxed at a slower rate of increase, and the House of Stuart and their banker friends got wealthy beyond belief. And to the holders of accumulated fiat money, they discovered a way how to transfer the bulk of a society's real wealth – land, gold, labor, and raw materials – into their own possession for free, using this fiat money of no inherit value to purchase things having real intrinsic value. Therefore, at its most fundamental level, capitalism became the mechanism by which one trades the family cow for a bag of magic beans.

This special relationship between Parliament and its wars of attrition and the House of Stuart and its banker friends had solved the riddle of Exchequer funding so Great Britain could now focus on its primary 18th century endeavor – war with France. From 1701 to the final defeat of Napoleon in 1815, Great Britain prosecuted eighteen officially declared wars against France. The stakes were serious now as France and its livre had wrested control of the world's reserve currency from the mercantile banking Dutch after their late 17th century wars with both England and France had exhausted the Dutch treasury and the Dutch, with their mercantile banking model, could not print their way back from defeat. The House of Stuart and its banker friends now saw defeating France and appropriating the world reserve currency to their Bank of England as the overriding collective purpose of Great Britain, and Parliament was ready and eager to assist for the "Glory of Britannia". But neither France's nor Great Britain's empires contained large quantities of gold or silver, so privateers on both sides played a large role in wartime funding but this stolen loot was especially important to the French corsairs and their mercantile banking system. Thus the inherent empire self-destruct mechanism latent in all physical money based commercial models – depleting the crown treasury – would play a major strategy in the prosecution of Great Britain's prolonged wars of attrition with France. Thus 18th century Europe pitted infinite paper fiat money versus limited physical gold and silver to the death in winner-take-all stakes for control of the world reserve currency.

The first Industrial Revolution from 1760–1820 did not create a large "virtuous cycle" for British fiat money, and given the fractured nature of the British chartered banking system, this early land empire was not yet conducive to establishing a fiat money empire. For an idea of the imbalance in economic scale versus land size existing within the 18th century British colonies, at the cusp of the 1755 tobacco price crash the tiny Caribbean island of Barbados brought in more customs and excise income to the crown than all American colonies combined. And, economic depressions in the colonies caused by events in and taxes imposed by the home country were common which prompted early colonialists to build up a high degree of productive diversification and self-sufficiency. However, after more than 100 years of war against France and the final defeat of Napoleon, the mantle of world reserve currency passed to the House of Hanover and its banker enablers, so Parliament's favorite charter bank began in earnest to churn out incredible amounts of bank notes that were now no longer needed to fund wars of attrition. Other charter banks knew well of this special relationship between Parliament and the Bank of England so these banks began accumulating the Bank of England fiat money to use as their "reserves" held in "trust". The inflation caused by this round of excessive money printing, combined with little to no increase in wages, reached the point of starvation in the London streets, and Parliament's disastrous Corn Act of 1815 drove grain prices even higher resulting in food riots and complete economic stagnation. Thus to this point first the House of Stuart and their banking friends, then the House of Hanover and its banker enablers, through the magic formula of fiat money, had brought the United Kingdom 121 years of near continuous war, recurring national bankruptcies, and now open starvation. Something had to be done.

So Parliament set about to save its favorite banking charter. Six years after the London food riots, it required the Bank of England to maintain a minimum reserve held in "trust" and to facilitate conversion of its fiat money into gold. So the House of Hanover and its banker enablers discovered the new magic trick of borrowing gold to fulfil this new inconvenience, and promptly went back to churning out more fiat money and by 1825 had precipitated a collapse of the United Kingdom banking system that effectively eliminated nearly all competing charter banks. For their disastrous actions, in 1833 the Bank of England was again rewarded by Parliament with the Bank of England Act granting its fiat money monopoly status as "legal tender" for a "limited period" under "certain conditions", which over time became unlimited and unconditional as no certain conditions were ever enumerated. Thus the act wiped out all competing charter banks and forced every person and entity in the British empire to either use or pay exchange fees to use the Bank of England's fiat money. And on top of all this, the House of Hanover and its banker enablers, ensconced within the untouchable City of London Corporation, from the safety of this "anachronism gifted by the Normans", found even more profitable ventures than fraudulent banking and war funding in the forms of the slave and opium trades. So by 1833 the same people behind slavery and opium were handed gratis sole control over the fiat money that would soon engulf 26% of the world's land surface. What could possibly go wrong?

The Bank of England itself, that's what went wrong. Another major financial crisis initiated by the House of Hanover and its banker enablers' boom-bust magic formula was "solved" by Parliament's Bank Act of 1844 that set a fictional amount of imaginary gold as a fabricated "reserve" held in opaque "trust" and thereby "limited" the amount of fake fiat money the Bank of England could issue out of thin air against its imaginary gold reserves, but excluded loans to the public whose losses bothered no one in the House of Lords. The Bank Act worked so well that by 1847 the Bank of England itself teetered on the brink of insolvency, so to retain their special relationship, Parliament repealed the Bank Act of 1844 and now the Bank of England was legally free again to print as much fiat money as it wanted. And so economic crises and near collapse followed again from 1857-8, 1867-9, and 1873-96, each time fixed by Parliament with a tweak here, and act there, and a new unenforced regulation or two. Thus following the 1833 grant of "legal tender" status, during their 67 years of 19th century money monopoly the House of Hanover and its banker enablers gave the United Kingdom 32 years of recession, depression, bankruptcy, and financial collapse. But despite its delivery record its special relationship with Parliament continued into the 20th century where it once again found its raison d'être – war funding.

One side benefit inadvertently derived from the never ending 19th century financial crises precipitated by Bank of England fiat money mis-managers was Parliament spent so much time dealing with economic problems at home and unrest in the colonies abroad that it had little time to prosecute new European wars of attrition. With the Crimean War excepted, a sort of Pax Decoctur gripped the United Kingdom's European aspirations as it focused on its Second Industrial Revolution at home and small scale conflicts abroad to secure far flung provinces against both people that mostly didn't use money and people that mostly did use opium. This "Peace through Insolvency" enabled the United Kingdom to continuously reduce its national debt without exception from a level of about 265% of GDP in 1820, down to around 40% of GDP at the start of the 20th century. As a result, the House of Hanover and its banker enablers were able to finally develop the "virtuous cycle" necessary for the proper function of a true fiat money empire – the colonies ship raw materials to the home country and receive fiat money in payment, the home country took those raw materials and produces value added manufactured goods, then exported those manufactured goods back to the colonies that paid for these value added goods with fiat money received from the sale of raw materials. All value added activities remained in the home country, and with European populations increasing across the colonies, this "virtuous cycle" generated economic "growth" and "profit" across the United Kingdom's industrialized areas. However, these cheap raw materials from abroad also sealed the demise of domestic producers, promoting urbanization at home that stagnated factory wages and led to large scale emigration to the colonies abroad, both phenomena adding to the "virtuous cycle" and increasing "value add" to those with access to capital and ownership of the means of production.

A key component to this British "virtuous cycle" was the House of Hanover and its banker enablers were able to capture the bulk of world raw material sales and thus expand its fiat money empire outside the colonies by the process of commoditization. Large brokerage houses, often controlled by subsidiaries of the Bank of England, bought and sold such huge quantities of these raw materials on forward contracts that they were able to manipulate their prices. These hedge purchases and sales not only provided trading income, but also ensured all contracts were settled in Bank of England fiat money regardless of point of sale or purchase. To squeeze even more profit from this "value chain", other Bank of England subsidiaries expanded into corporate plantation holdings throughout the colonies, especially in India following the 1862 Cotton Famine. This practice then spread to mining tenements following the discovery of huge gold deposits throughout Australia and the annexation of the Transvaal. Thus the vast majority of the "virtuous cycle" was captured and maximum "value" squeezed out the entire "value chain" and into the hands of the House of Hanover and its banker enablers. And so began a new line of exploitation for capitalism – the manipulation of commodity prices via the coordinated bulk purchase and sale of these commodities in concert with the manipulation of the "value" of fiat currency. Entire sectors of commodity production around the world were sent into financial ruin by a coordinated attack from both the brokerages and Bank of England monetary policy, these sectors bought nearly en toto for a shilling on the pound, then pumped and dumped using the same coordinated mechanism but in the opposite directions. Large swaths of entire industries like cotton, land, oil, wheat, coal, iron ore, et cetera regularly passed into and out of the hands of the House of Hanover and its banker enablers generating tremendous profits for them and debilitating losses for others.

At the dawn of the 20th century, capitalism had fully matured, sound money mercantile banking no longer existed, and the magic formula had made the United Kingdom the most powerful financial, economic, and political empire ever assembled. The covert secret formula however was it had fought only one major European war – The Crimean War – since the defeat of Napoleon, and since then the Exchequer had reduced its outstanding budget deficit relative to GDP a full 85%. And for the first time in the fiat empire's history, it began delivering large amounts of gold into the City of London Corporation. The sun never set on Britannia, it ruled the waves, it had commoditized every basic raw material important to the Second Industrial Revolution, and it had subjugated nearly every primary producer on the planet to its service through price manipulated contracts denominated in Bank of England fiat money. The United Kingdom was in a commanding position but had not yet proven itself as undisputed world military power, and the German Empire was beginning to accumulate victories and influence on the Continent. So it was inevitable that the egos in Parliament would go back to their old bad habits of 100 years ago and start looking for a major fight to revive the "Glory of Britannia". And thus began a 50 year effort to destroy the rising European star of Germany, with its formidable military, efficient and technologically advanced industry, growing colonial empire, and Hegelian guiding principles of "objectivity, truth, and ethical life" which now threatened to not only swallow up and assimilate all the Germanic peoples of Europe, but to swallow up and eliminate their privately owned central banks as well. The City of London Corporation would tolerate no fiat money rival and Germany could not continue to grow unchecked in influence – nigh, could not continue to exist – and put at risk ownership of the Bank of England's magic money formula.

This is where the banking story of the United States merges with that of the House of Hanover and its banker enablers. To its great credit, the United States had three times in its early history repelled the external imposition of a privately owned central bank. After Andrew Jackson allowed the Federal charter for the den of vipers – aka Second Bank of the United States – to expire in 1837, the existing network of disunited state chartered banks grew across the young country with the addition of every new state, each charter issuing its own semi-fiat money backed by reserve requirements dictated by each state. Fiat money from the states varied in exchange value and bank failures were common, but the distributed and discretized nature of this Free Banking Era localized the crises and generally did not lead to national economic disasters as did the regular and recurring management failures of the Bank of England. It was during this laisse-faire period that the United States experienced incredible growth of territory, population, political clout, and economic output, and the Federal Treasury had financially strengthened to the point where the country had the temerity to negotiate for territory, wage its own wars of conquest, and purchase new territories without serious economic repercussion. With regards to banking it seemed the United States had found the magic money formula by not finding the magic money formula and had instead wandered into a kind of balanced budget quasi-capitalism where state charter banks issued local fiat money that few wanted as it had to compete with the gold and silver specie put in circulation by the Federal Treasury. But then every balanced budget just begs for a good war of attrition and that's exactly what came next.

At the cusp of the American Civil War, the Bank of England had coopted the South into its commoditized fiat empire as most of their raw cotton exports went to British textile mills. Thus the Bank of England's fiat empire had crept quietly into America when the London financiers gave full support to Confederate war funding by purchasing its heavily subscribed and sterling denominated Cotton Bonds. To facilitate war funding at home, both the Union and Confederacy resorted to fiat money issue, with the Confederacy printing greybacks and the Union printing greenbacks. To enforce these new greenbacks as Union fiat money, Congress passed the National Banking Act of 1863 establishing a system and network of national banks using a uniform fiat money with a stipulated uniform fractional reserve requirement mandating these banks purchase and hold US Treasury bills as "reserves". Both sides struggled with inflation, but the Confederacy, if not defeated in battle, would likely have succumbed eventually to inflation that by war's end ran at 9,000% of prewar levels rendering the greybacks effectively worthless. But the old magic money formula of turning liabilities into assets worked just well enough for the Union and with this National Banking Act their greenbacks replaced the former hocus pocus uncoordinated sideshows from state charter bank fiat issue antics commonly backed with no more than borrowed gold. Ironically, counterfeiting during the Civil War was a persistent problem, so the National Banking Act not only removed gold convertibility and gold and silver reserve requirements, but also established the United States Secret Service to ensure the Union's new fake paper money was not fake fake paper money. And just like the creation of its progenitor the Bank of England, greenbacks were only to be in circulation for a limited time, which in 1878 became legally unlimited time but with the re-imposition of convertibility into gold. America had officially entered into the world of capitalism, and for the first time had a uniform national banking system under the control of the US Treasury using a single fiat currency convertible into gold with a fractional reserve requirement. But the greenback was finding itself more and more controlled by Wall Street proxies of the City of London Corporation, Wall Street's influence was growing immensely within the US Congress, and the bankers of the City of London Corporation had set their sights on gaining control of the levers of America's new magic formula.

But full control of that magic formula would take some time to acquire as the American people proved more intractable than the pliant Dickensian subjects of the City of London Corporation. The weakened post bellum United States with its new national bank network, huge Federal budget deficit, new fiat money empire throughout the defeated Confederate States, and fast expanding Northern modern industrial base presented the City of London Corporation bankers with proverbial low hanging fruit. After both sides weathered the depression caused by the Panic of 1873, the City of London Corporation bankers' first salvo at usurping the American money creation mechanism was the financially engineered Panic of 1893 where a coordinated commodity price crash was timed with a run on the US Treasury gold holdings that nearly drew down the country's entire gold reserve and sent the United States into prolonged depression. But there's no depression a good war can't fix, so the politically popular 1898 Spanish-American War was prosecuted and with a quick victory the US spirits and economy sprang back to life. The City of London Corporation bankers' initial crude efforts was thwarted, so a second better organized salvo was launched in 1907, this time at the undertaking of Wall Street proxies, complete with a ready-made plan to fix everything and paid agents ready in Congress to promote the benevolence and virtue of the Money Trust. And to show the American people their selfless good intentions, both J. P. Morgan and John D. Rockefeller magnanimously gifted their own money to acquire and "save" insolvent banks after the US Secretary of the Treasury secretly pledged taxpayer bailout money should Morgan's and Rockefeller's bank investments fail. Wall Street began its marketing campaign through Congress for the privatization of both the national currency issue and monetary policy, promising America that once control of these powers passed into secret hands all these recurring depressions caused by these very same secret hands would immediately cease. But not all members of Congress were yet paid agents of Wall Street, and in 1913 the Pujo Committee released the results of its scathing Money Trust investigations. The American public was in no mood to submit their sovereignty to the Wall Street Money Trust on behalf of the City of London Corporation bankers, and time was running out for the bankers to get America ensnared into their plans to deal with the new, powerful Continental upstart that threatened the Bank of England's fiat empire gravy train – Germany.

The second half of the European 20th century following the brutal wars of unification saw the Prussian state and its German coalition fiefdoms start to grind out military victories over first Denmark and next Austria, but it wasn't until the German Empire coalesced after its decisive and highly efficient defeat of world power France in 1871 that alarms began ringing in the City of London Corporation. The German people, united under one state and the Hegelian principles of "objectivity, truth, and ethical life", was one thing, but this Hegelian destiny to unite all Germanic peoples under that state – including Germanic peoples living in states with privately owned central banks – was another thing entirely. But the German Empire with its sound monetary policy, advanced high tech ground based military capability, and expanding colonial empire presented a formidable adversary, one that guaranteed mutually assured destruction if challenged alone. Initial efforts to destabilize the German Empire from within using communist agitators all fell flat as the German government enacted liberal labor and social reforms blunting each new call for a general strike. Against this rising German Empire stood a United Kingdom that had won just one major war in 85 years, was crawling out of the 20 years Long Depression, and whose banks and investment houses were clear culprits in ever recurring financial panic, one after the other, that had disastrously rippled throughout the global economy. The limits of growth had been reached with the industrial-colonial model of the British Empire, the system was devolving into stasis, and the Exchequer's budget deficit had been reduced to the point where a new major war of attrition could now be prosecuted.

On the American home front the Jekyll Island conspiracy between the Wall Street proxies for the City of London Corporation bankers and the US Congress had been in play since 1910. Its success was a crucial step for the Exchequer to gain a reliable overseas source of credit and for the Ministry of Defense to establish a supply chain prior to prosecuting its coming war of attrition against the German Empire. It is likely these conspirators knew full well their plans would commit the United States to not only massive war funding to Great Britain, but also pit the Americans as enemy against whatever countries Parliament might declare war upon for the "Glory of Britannia". So in practice, when Congress passed the Federal Reserve Act in August 1913 despite the Pujo Committee findings, it not only robbed the American people of control over its monetary policy, but to a large extent robbed it of control over much of its foreign policy as well. Thus this fateful act of betrayal to both American citizens and British subjects joined the eventual downfall of the British fiat empire with an American commitment to Endless Wars in defense of its coming fiat empire. This was a master stroke for the City of London Corporation bankers that brought the Federal Reserve System into its cross ownership nexus that now facilitated trans-continental coordination of both monetary and foreign policies that assured aggregate coordinated outcomes always resulted in a net gain to the City of London Corporation bankers, regardless of which side of the Atlantic experienced victory or defeat. And this new Federal Reserve System was isolated from all direct European land based military threats and had the ability to create huge quantities of fiat money adsorbed by a brand new tax base within the expanding American industrial economy which was now inescapably locked into ever growing Federal debt by the XVI Amendment. Thus not since the fall of Troy had a free and independent people willingly invited such unseen dangers into their midst, and by subterfuge the Federal Reserve Act ended 137 years of fierce American independence with a single unconscionable law and just 30 words contained in a new constitutional amendment.

Within four years of the Federal Reserve Act's passage, the City of London Corporation bankers were victorious, the German Empire crushed absolutely, and the flame of "objectivity, truth, and ethical life" extinguished. There would be no consolidation of the Germanic peoples under a single state controlled central bank, and no challenge to the Bank of England's control over its fiat empire. The costs were staggering – 20 million dead, 21 million injured, 1.2 million Queen's subjects killed, USD $3.2 trillion. Despite these losses, the combined ownership nexus of the Bank of England and the Federal Reserve System saw the City of London Corporation bankers in an even more powerful position that before the war, and for the first time since wresting control of the world reserve currency from France in 1815, the Bank of England began to share this status with the United States dollars it also controlled. And to ensure the permanent dominance of the Federal Reserve System and avoid any resurrection of populist economic policy threats like the Free Silver Movement, or for that matter, to forever eliminate serious economic policy discussion from public debate, in 1920 Congress ratified the XIX Amendment. Accumulated post-WWI budget deficits on both sides of the Atlantic ballooned – the Exchequer's climbed from a prewar 20% of GDP to 180%, and the Treasury's increased from 10% to 40% of GDP, with both countries finding themselves in the usual post-war recessions. Time to fire up the post-war printing presses – but this time, only on the other side of the Atlantic as the City of London Corporation had grand plans for its new American vassal.

And for all that post-war M2 fiat money now flooding into America – from a total of $18 billion circulating in 1915 to $47 billion in 1929 – the United States got things like flappers, guys going over waterfalls in barrels, jazz clubs, ultra-rich organized crime families, a mass entertainment industry, and through that cultural miasma somehow managed to build thousands of factories, make millions of cars, pave thousands of miles of roads, erect skyscrapers, and electrify cities. But the average Queen's subject didn't even get so much as an extra helping of pudding. What were the Roaring 20s in America, where industrial and service jobs abounded with the flood of fiat money created out of thin air, were more like the Boring 20s in the United Kingdom, where the printing presses remained idle and recession and mass unemployment were the order of the decade. But then under orders from the City of London Corporation bankers the Federal Reserve System raised interest rates from 4% to 6%, and suddenly the jazz music stopped, the flappers quit flapping, and the bills for all that art deco came due in October 1929. We all know the story of what happened next.

One side benefit of the Great Depression in the United States was so many people were unemployed that few paid income taxes, so Congress could not immediately start a new war of attrition to right the ship of finance at Wall Street's behest. Learned advisors first had to resort to their old bag of tricks with a tweak here, a Congressional rider there, a new regulation or two, and even introduced the new academic driven massive Keynesian make-work stimulus programs. Nothing worked no matter how rarefied or how many respected monetary scientists offered lofty solutions, so with the Federal Reserve insolvent and out of gold, President Roosevelt resorted to the old goldsmith shakedown tactic and issued Executive Order 6102 in April 1933, followed by Congress and its Gold Reserve Act of January 1934. The EO effectively confiscated all gold in the United States, gave it to the privately owned Federal Reserve System at $20.67 per troy ounce, removed the gold standard again, then raised the gold price to $35 a troy ounce and began printing massive amounts of pure fiat money. That gave the appearance of working, and industrial output slowly rose to greater than 1929 pre-crash gold standard levels entirely on the back of the inflation unleashed by pure fiat issuance until everything collapsed again in 1937. It began to look more and more like the fog of war was the only solution to pull America out of this depression and unbeknownst to most, the country had been rearming itself since early 1940, nearly two years before the bombing of Pearl Harbor.

The United Kingdom was in serious economic trouble too, having spent the entirety of the 1920s in deep recession and now hopelessly mired in a depression it could not shake. The old 18th century playbook would have to be dusted off, but at a great cost – financial destruction of the British Empire and sacrifice of the Bank of England for the greater good of the City of London Corporation's central bank cross ownership nexus. Starting in the early 1920s, the City of London Corporation bankers had recalled their communists to kick in the teeth and pick whatever flesh was remaining from the bones of the Weimar Republic, and the now worthless Reichsbank was put to work printing up never before seen hyper-inflation. These actions not only plunged Germany into the economic stone ages, but deprived nexus owned Bank of France of war reparations desperately needed to modernize its industrial base. Such was the threat posed by even the remains of a German Empire that such actions were deemed acceptable losses so long as "objectivity, truth, and ethical life" were sent to the unequivocal dustbin of history. Now, on its knees before the world's creditors and on the brink of devolving into a failed state, Germany was needed once again by these same creditors – and needed fast by Great Britain. Despite having few natural resources within its borders, Germany's military machine would be resurrected from the dead and come roaring back with a vengeance on a mission to once again unite all Germanic peoples under the banner of a revisionist version of "objectivity, truth, and ethical life", and it could only do that through the magic formula of central banking foreign credit.

Within six years of Hitler's ascension to the German Chancellery, Wall Street and the City of London Corporation bankers had financed the greatest mechanized military ever assembled – the Wehrmacht. The Dawes plan of 1924 had initiated the linkage between German industry and Wall Street finance for which the American banker Charles G. Dawes shared the 1925 Nobel Peace Prize. Under the Dawes Plan, prior to the 1929 crash, the Weimar Republic had paid its war reparations not to France or England, but to a consortium of Wall Street investment banks. This Dawes Plan gave Germany a life-sustaining infusion of US dollar credit that would in theory produce trade that would hypothetically generate customs and excise taxes that were surmised to eventually go towards war reparations to England and France. But then Hitler repudiated the Versailles Treaty, and the Gold Reserve Act allowed millions more pure fiat US dollars to flow out of Wall Street to their agents in "neutral" Stockholm and into the Nazi controlled Deutsche Reichsbank. Wall Street and the City of London Corporation loved Hitler and the House of Windsor openly saluted him. Nazism was to be a great boon to the trans-Atlantic financiers as Hitler would devoured the expendable and unprofitable Slavic peoples and ensured a never ending stream of new revenue with every eastern conquest. It was a foolproof plan – the Atlantic Ocean was wide, the Kriegsmarine small, the Luftwaffe would run out of gas before it arrived over New York City, and the communist martyrs installed in Russia would put up a fierce and expensive fight until Lebensraum ran out of room. But what Wall Street had not figured into its equations was that Hitler would sign an Anti-Comintern Pact, a Phony War would transform into a hot war, and another go at uniting all the Germanic peoples of Europe would commence under the new banner of Blut und Boden. The City of London Corporation bankers would have to fix this Wall Street mess themselves and call up the blue blooded true believers, those who existed for one purpose and one purpose only – the "Glory of Britannia".

We all know the story of what happened next and how WWII dragged in the entire central bank cross ownership nexus to secure victory for the "Glory of Churchill". But for all the tens of thousands of pages published in the learned journal tomes, there is not one observation made how the Federal Reserve System failed to deliver the expectations sold to America that it would end the boom-bust cycles inherent under post bellum 19th century quasi-capitalism. There was not one erudite call to re-examine the "special relationship" now cemented between Congress and the Federal Reserve System, and not one monetary scientist noticed the Federal Reserve System cross ownership nexus came out of the Great Depression – the depression it created – more powerful than when it entered. Instead, the world got lofty excuses like The General Theory of Employment, Interest, and Money proclaiming that more of the same failures would make everything indubitably jolly good. Not one political scientist noticed the Great Depression was used to eliminate banks not in favor with the elite ownership hierarchy within the trans-Atlantic central bank cross ownership nexus. And, not one scholarly paragraph examined how depressions are, and have always been, financially engineered mechanisms to destroy competitor banks and consolidate increasing power into a handful of fewer banks owned by a shrinking secret ownership pool.



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With the conclusion of WWII, the Exchequer was broke as it had issued such an immense quantity of debt to finance the war that it could never be repaid without resorting to harsh austerity measures at home that would threaten social unrest during a period of national weakness. But with the Bank of England in control of monetary policy, any semblance of economic recovery would be impossible, so after 252 years of their "special relationship", Parliament made the only logical choice available to it and in 1946 the Bank of England was nationalized and played no further dominant role in world capitalism. But the central bank cross ownership nexus made out just fine as the Bank of England wiggled out of holding the bag on all those unpayable war debts as the nationalization dumped them onto the backs of the Queen's subjects in another miraculous "heads they win, tails you lose" event. Thus 1946 begins the British period of state controlled capitalism that was in effect a transition period into de-industrialization where large segments of its economy were nationalized to ensure they were not revived through modernization and thus would never be placed into competition with industry in the United States or other European countries that were using their post-WWII rebuilding programs to modernize their industries.

After both the Bank of England and Bank of France were lost to nationalizations, Wall Street tool the pre-eminent role within the central bank cross ownership nexus and got straight to work on elevating the US dollar to the status of undisputed world reserve currency, thus ending the 130 year run of the pound sterling.

And a modern world reserve currency needed a colonial fiat empire, so the United States started with Western Europe via the Anglo-American Loan Agreement of 1946 and later the Marshall Plan of 1948 to kick off its "virtuous cycle". The Russian financial system remained unchanged, and it absorbed Eastern Europe into its new expanded fiat empire. Thus, the true winners at the cessation of hostilities from a purely financial perspective were the United States and the Soviet Union.

In 1951 during the fog of the Korean War and with the Secretary of the Treasury in the hospital, the Assistant Secretary of the US Treasury – not Congress – handed the power to set interest rates independently of government economic policy entirely to the Federal Reserve System. Like the original Federal Reserve Act, this additional power grab was sold to the American people on the premise the privately owned Federal Reserve System would "tame inflation" and "foster economic stability without responding to short-term political pressure". This single act by an adjutant set the stage for the Federal Reserve System to wield incredible power over government policy and essentially hold Congress to ransom, where although the US Treasury was responsible for raising government money, the privately owned Federal Reserve System was now responsible for setting that money's price paid to it for creating it out of thin air. So the Federal Reserve System now had the power to create or destroy national wealth by reducing or raising interest rates and there was no legal stipulation for whom their policies should benefit. Thus unbeknownst to the American people, this unnecessary power relinquishment was, in effect, the crucial piece that would set the stage for enabling the financialization of the America economy.

Post-WWII capitalism under the American fiat leadership functioned much like it did prior to the war except where the fiat empire was concerned. Instead of conquest and physical occupation of resource rich lands and filling these lands up with colonists, the United States resorted to a proxy conquest model where it initiated coup d'états, assassinations, foreign espionage, fraudulent elections, and foreign propaganda campaigns to install pliable dictators and friendly juntas. These leaders were amicable to pursuing "growth" policies, allowed American military bases on their soil, and had no qualms about crushing dissent at home or piling billions of US dollar denominated debt onto the heads of their citizenry. In exchange for their compliance, these dictators and juntas were kept in power with generous foreign aid packages, and they in turn doled out lucrative resource development concessions, purchased US made military hardware, and awarded contracts to US corporations for industrial, civil, and defense projects. In a new twist on colonization, many of these American proxy conquests created large numbers of emigres into the United States and provided a mechanism to ensure the consumer base at home continued to grow and devour excess production capacity as American living standards rose and native born birth rates declined. A new "virtuous cycle" evolved whereby industry in the conquered fiat empire eventually began to generate export income sold into the US dollar denominated commodity markets, and those US dollars returned to the United States to purchase US value added exports and services. And to secure this new "virtuous cycle", in 1947 the Central Intelligence Agency was born out of the National Security Act, and it quickly evolved into its main directive of waging clandestine foreign hybrid wars to consolidate and grow the American fiat empire, install and keep friendly governments investing in US exports – especially military equipment – and defeat the competing Soviet fiat money empire. Thus with its responsibility of maintaining its new global fiat empire, the United States entered into its historical phase of Endless War.

The United Kingdom on the other hand could no longer afford control over its fiat empire as it had no viable value added export capability at war's end and thus its "virtuous cycle" stopped functioning. It instead resorted to de-colonialization, but only in terms of physical land holdings. The City of London Corporation bankers either kept effective control over these former colonies' new central banking systems or was its primary beneficiary, and in either case it retained the majority of financial profits derived from these newly created banking systems. This "de-colonized" banking model was similar to the false "independence" of the Federal Reserve System, but here the City of London Corporation bankers retained control through majority stock ownership of the member banks that comprised the new banking systems. In the English speaking constitutional monarchies where the serious financial profits were generated, an additional failsafe was guaranteed by the Queen's appointment of Governor Generals who could – and once did in Australia – sack recalcitrant duly elected governments that did not put the City of London Corporation's interests above those of their own people.

One post-WWII change with huge repercussions to American capitalism was the US dollar denomination takeover of global commodities trade from the pound sterling. As world population and industrialization increased and Western Europe crept back into consumer manufacturing, the volume of forward contracts traded in dollars grew in step. However, all that American ingenuity put into its fiat empire's "virtuous cycle" began to work too well in the Middle East and North African oil sectors. By 1965 the combined dollar revenues received from new oil exports, taken together with all Western European dollar revenue streams, were greater than what the US domestic export capacity could absorb through its "virtuous cycle". Instead of buying US value added exports, these surplus overseas dollars went searching for investments and with limited low risk opportunities available, they eventually found the US Treasury Gold Window. The 1934 Gold Reserve Act had ended domestic dollar convertibility into physical gold but not international convertibility, which was retained as per the Bretton Woods agreement, and during the second half of the 1960s these foreign dollars began to drain the US Treasury of its gold reserves. Despite the gold rush, the US Treasury held its official exchange price constant at $35 an ounce – the same price set after the depression era Gold Reserve Act. When the House of Rothschild finally raised the gold price in 1968, it signaled US gold reserves were in decline and prompted frenzied buying from Western Europe up until the day that American capitalism ended.

RKKA , 2 hours ago

Western society is extremely destructive and self-destructive. At a time when humanity abandoned matriarchy even before the new era, feminism is flourishing in the West. Homosexuality was the cause of the fall of Ancient Greece and Ancient Rome, but in the West it is believed that after 2 thousand years it is still supposedly fashionable. Back at the beginning of the 6th century BC. e.

Solon decreed to punish any adult male found in the premises of a school where young boys and girls studied. However, in the West, pedophilia still flourishes and the Lolita Express runs.

Western decrepit pedophile elites deserve a replacement and a kick in the ***! The West will fall just like the depraved, pedophilic, homosexual Ancient Rome fell. No huge amount of money and no huge army will save the West. Why do you need to save yourself? What would be the next generation of soulless and godless pedophiles, homosexuals and money-gamblers? Why do you need money if you sold your soul?

HoodRatKing , 1 hour ago

I believe the 3rd world doesn't need a constitution to shoot weapons at the bankers... Some are quite good at it too!

Ben A Drill , 2 hours ago

Everyone was born naked and broke.

HoodRatKing , 1 hour ago

No, we were born covered and full of life... The broke are those who have no life & are swimming naked in a tank full of gangster sharks.

sir lozalot , 2 hours ago


Dying-Of-The-Light , 1 hour ago

Talk about a cut and paste Job. This article has so many inaccuracies that I would need to write a book to refute them. Unlike CHS I don't write endlessy to flog eBooks on line while begging for donations to constantly advertise myself. I don't want to bore anyone with an endless monologue to counter some of the huge errors in this article. I am just stunned he can chuck this out when it is truly shoddy.

The guy is very bright and he usually writes very well, but this article from him is an utter mess.

Krinkle Sach , 3 hours ago

This generation
Rules the nation
With version

Music happen to be the food of love
Sounds to really make you rub and scrub
I say

Pass the dutchie 'pon the left hand side (I say)
Pass the dutchie 'pon the left hand side
It a go bun, give me music, make me jump and prance
It a go dung, give me the music, make me rockin' at the dance (Jah know!)

It was a cool and lonely breezy afternoon
(How does it feel when you got no food?)
You could feel it 'cause it was the month of June
(How does it feel when you got no food?)
So I left my gate and went out for a walk
(How does it feel when you got no food?)
As I pass the dreadlocks' camp I heard them say
(How does it feel when you got no food?)

Pass the dutchie 'pon the left hand side (I say)
Pass the dutchie 'pon the left hand side
It a go bun, give me music, make me jump and prance
It a go dung, give me the music, make me rockin' at the dance (Jah know!)

So I stopped to find out what was going on
(How does it feel when you got no food?)
'Cause the spirit of Jah, you know he leads you on
(How does it feel when you got no food?)
There was a ring of dreads and a session was there in swing
(How does it feel when you got no food?)
You could feel the chill as I seen and heard them say
(How does it feel when you got no food?)

Pass the dutchie 'pon the left hand side (I say)
Pass the dutchie 'pon the left hand side
It a go bun, give me music, make me jump and prance
It a go dung, give me the music, make me rockin' at the dance (Jah know!)

'Cause me say listen to the drummer, me say listen to the bass
Give me little music make me wind up me waist
Me say listen to the drummer, me say listen to the bass
Give me little music make me wind up me waist, I say

Pass the dutchie 'pon the left hand side (I say)
Pass the dutchie 'pon the left hand side
It a go bun, give me music, make me jump and prance
It a go dung, give me the music, make me rockin' at the dance (Jah know!)

You play it on the radio
And so me say, we a go hear it on the stereo
And so me know you a go play it on the disco
And so me say we a go hear it on the stereo (bow!)

Pass the dutchie 'pon the left hand side (I say)
Pass the dutchie 'pon the left hand side
It a go bun, give me music, make me jump and prance
It a go dung, give me the music, make me rockin' at the dance (Jah know!)

On the left hand side (I say)
On the left hand side (I say)
On the left hand side
(We meet) On the left hand side (say man)
On the left hand side

Me say east, say west, say north and south (on the left hand side)
This is gonna really make us jump and shout (on the left hand side)
Me say east, say west, say north and south (on the left hand side)

Buster Cherry , 2 hours ago

Know your limits:

Zhaupka , 12 minutes ago

Not sure if this passes ZH / United States Censors:

Those who studied recent-Ancient History - Plato or Socrates - shall understand Athens.

Athens ( Greece ) domination over 200 plus city states. Athens was the center where the Wealthiest Families of Planet Earth resided at the time. Athens is where the 200 plus city states paid their tribute (taxes) for Military Protection and maintenance of basic civil human-to-human peaceful exchanges. Athens Wealthy fed and protected the 200 plus city states.

The elites in Italy, the Medici's provided food, clothing, housing and other to the general populations - all this easily understood including the Medici Parties for the entire town for free!

Those of yester years did not: take the wealth they dug from Planet Earth, put it in their pockets, then later put the wealth back into Planet Earth, that wealth is here today.

Plus new wealth is created.


Here is a brief Modern List of "The Elites" "The Globalists" "The Powers That Be (TPTB)" that feed, clothe, house, and entertain the populations encased this larger Western World Superstructure:

* Rothschild Family of Paris
* Warburg Family of Hamburg
* Lazard Family of Paris
* Israel Moses Seif Family of Rome
* Goldman / Sachs Family
* Rockefeller Family
* Lehman Family
* Kuhn Loeb Family of New York

These families similar to the ultra-wealthy families in Athens give everyone food, clothing, shelter, cities, education, and everything one has or knows others have.

These are the New Athens Families of the Western World on Planet Earth.

The reader has a very difficult time enjoying the fact the reader is a Common Ordinary Pedestrian Modern Peasant whose existence is sustained by the Super Ultra Wealthy as in the days of Athens where nameless faceless common folk depended on similar Super Ultra Wealthy to merely survive day-to-day.

Without these Super Ultra Wealthy Families - "The Elites" or "The Globalists" or "The Powers That Be (TPTB)" - on the afore list, dominating other Human Populations on Planet Earth, most reading would be starving To Death existing during a pitiless life in less than abject poverty.

2020: 178 Nation-States use the New Families of the Western World on Planet Earth "Reserve" Currency to pay Tribute for Military Protection and Trade and Simple Sustenance - fed and protected. Whole cities would cease to exist, the electricity, gas, and tap water would stop flowing immediately.

The mass illusions provided by the Athens-like Super Ultra Wealthy Western World Families' Personal Servants are imaginative and entertaining.

Common ZH Readers would have a very, very difficult time conceiving through the Haze the reader is nothing more than a Dependent Common Ordinary Pedestrian Modern Peasant because of the Haze.

Lessee - remove the Haze of the Super Ultra Wealthy Western World Families and see their Servants:


United States Government(s) / Economy is Infected and Infested with Middle Eastern Arabs:

Finance. Military. Law. Medical. Political. Business.

United States Federal Reserve Branch: BERNANKE, YELEN, ROSENGREN, GREENSPAN, et al.



United States National Medical:
Deputy Attorney General ROD ROSENSTEIN's SISTER: The United States Center For Disease Control (CDC), Atlanta, Georgia, United States, Dr. Nancy Messonnier (Nanc married a white) et al.

United States Political (in ur face):

Add Commercial Real Estate: SAM ZELL, COOPERMAN, SILVERSTEIN Properties, and Middle-Men.

The afore are all from the Middle East.

Middle Eastern Arabs are J's by a different name - same.

Now there is clearer focus for the Dependent Common Ordinary Pedestrian Modern Peasant ZH Reader. Less Haze.


The Second List afore controls these Democrats and Republican Party Gang Member Servants.

Party Member Servants: "vote" to appear to control the United States Federal, State, County, City, Town, Village Governments. For example:

United States House of Representatives,
United States Senate,
United States Judicial,
United States Executive,
- Democrats and Republicans -
all signed the papers to transfer
United States Intellectual Property,
United States Agriculture,
United States Financial Services,
United States Technology Transfer (Patents, Software Code, Aero/Astro -nautical, et al.),
United States Currency and Foreign Exchange, and Other
to China.


* Lifetime Debt - give me house, gimme car, gimme food, gimme water, gimme clothes.

Wherefore art thou u?

Thomas Paine you rascal!

conraddobler , 1 hour ago

What's going on is painfully obvious. It has been for decades, nothing is done except to continue taking it up another notch. When it all collapses those who set the fire will show up to sell fire insurance.

Nothing will ever change.

People will breathlessly bow down before those who caused the mess, anything to get some access to more debt at low rates.

You can buy an entire world this way.

HoodRatKing , 1 hour ago

Great article, I've included a link in my latest blog post!

[Sep 26, 2020] Criminalization of large banks and participation of money laundering as a new normal

Sep 26, 2020 |

The original title is Taibbi- Revenge Of The Money Launderers

Authored by Matt Taibbi via,

On December 11, 2012, U.S. Justice Department officials called a press conference in Brooklyn. The key players were once and future bank lawyer Lanny Breuer (disguised at the time as Barack Obama's Assistant Attorney General in charge of the DOJ's Criminal Division), and Loretta Lynch, the U.S. Attorney for the Eastern District of New York, and future Attorney General.

The duo revealed that HSBC, the largest bank in Europe, had agreed to a $ 1.9 billion settlement for years of money-laundering offenses.

An alphabet soup of regulatory agencies was represented that day, from the Justice Department, to Immigration and Customs Enforcement (ICE), the U.S. Treasury, the New York County District Attorney, and the Office of the Comptroller of the Currency, among others.

The regulators outlined a slew of admissions, with HSBC's headline offense being the laundering of $881 million for Central and South American drug outfits, including the infamous Sinaloa cartel.

The laundering was so brazen, regulators said, the bank's Mexican subsidiary had developed "specially shaped boxes" for cartels to pack with cash and slide through teller windows. The seemingly massive fine reflected serious offenses, including violations of the Bank Secrecy Act (BSA), the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA).

The next years would follow up with a flurry of similar settlements extracting sizable-sounding fees from other transnational banks for laundering money on behalf of terrorists, sanctioned businesses, mobsters, drug dealers, and other malefactors. Firms like JP Morgan Chase ($1.7 billion), Standard Chartered ($300 million), and Deutsche Bank ($258 million) were soon announcing settlements either for laundering, sanctions violations, or both.

Even seasoned financial reporters accustomed to seeing soft-touch settlements scratched their heads at some of the deals. In the case of HSBC, the stiffest penalty doled out to any individual for the biggest drug-money-laundering case in history -- during which time HSBC had become the " preferred financial institution " of drug traffickers, according to the Justice Department -- involved an agreement to "partially defer bonus compensation for its most senior executives." If bankers can't get time for washing money for people who put torture videos on the internet , what can they get time for?



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Read the rest of the report here ...

[Sep 22, 2020] Why does neoclassical economics produce ponzi schemes of inflated asset prices?

Sep 22, 2020 |

Sound of the Suburbs , 54 minutes ago

Why does neoclassical economics produce ponzi schemes of inflated asset prices?

  1. It makes you think you are creating wealth by inflating asset prices
  2. Bank credit flows into inflating asset prices, debt rises faster than GDP and you eventually get a financial crisis.
  3. No one notices the private debt building up in the economy as neoclassical economics doesn't consider debt.

This economics still has its 1920s problems. What is the fundamental flaw in the free market theory of neoclassical economics? The University of Chicago worked that out in the 1930s after last time. Banks can inflate asset prices with the money they create from bank loans.

Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money.

"Simons envisioned banks that would have a choice of two types of holdings: long-term bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw this as beneficial in that its ultimate consequences would be the prevention of "bank-financed inflation of securities and real estate" through the leveraged creation of secondary forms of money."

The IMF re-visited the Chicago plan after 2008.

It looks like they did have some idea what the problem was.At the end of the 1920s, the US was a ponzi scheme of inflated asset prices. The use of neoclassical economics and the belief in free markets, made them think that inflated asset prices represented real wealth accumulation.

1929 – Wakey, wakey time. Why did it cause the US financial system to collapse in 1929? Bankers get to create money out of nothing, through bank loans, and get to charge interest on it.

What could possibly go wrong?

Bankers do need to ensure the vast majority of that money gets paid back, and this is where they get into serious trouble.

Banking requires prudent lending.

If someone can't repay a loan, they need to repossess that asset and sell it to recoup that money. If they use bank loans to inflate asset prices they get into a world of trouble when those asset prices collapse.

As the real estate and stock market collapsed the banks became insolvent as their assets didn't cover their liabilities.

They could no longer repossess and sell those assets to cover the outstanding loans and they do need to get most of the money they lend out back again to balance their books.

The banks become insolvent and collapsed, along with the US economy.

When banks have been lending to inflate asset prices the financial system is in a precarious state and can easily collapse.

What was the ponzi scheme of inflated asset prices that collapsed in Japan in 1991?

Japanese real estate.

They avoided a Great Depression by saving the banks.

They killed growth for the next 30 years by leaving the debt in place.

Debt repayments to banks destroy money, this is the problem.

What was the ponzi scheme of inflated asset prices that collapsed in 2008?

"It's nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world" All the Presidents Bankers, Nomi Prins.

They avoided a Great Depression by saving the banks.

They left Western economies struggling by leaving the debt in place, just like Japan.

It's not as bad as Japan as we didn't let asset prices crash in the West, but it is this problem has made our economies so sluggish since 2008.

In 2020, the world is a ponzi scheme of inflated asset prices.

The use of neoclassical economics and the belief in free markets, made them think that inflated asset prices represented real wealth accumulation.

The central banks have to keep pumping in liquidity to stop all the ponzi schemes collapsing.

If the ponzi schemes collapse, this feeds back into the financial system when bankers have been lending to inflate asset prices.

Sound of the Suburbs , 1 hour ago

Bankers make the most money when they are driving your economy towards a financial crisis.

You don't want to leave them to their own devices.

On a BBC documentary, comparing 1929 to 2008, it said the last time US bankers made as much money as they did before 2008 was in the 1920s.

Bankers make the most money when they are driving your economy into a financial crisis.

At 18 mins.

The bankers loaded the US economy up with their debt products until they got financial crises in 1929 and 2008.

As you head towards the financial crisis, the economy booms due to the money creation of bank loans.

The financial crisis appears to come out of a clear blue sky when you use an economics that doesn't consider debt.

The economics of globalisation has always had an Achilles' heel.

The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn't look at debt, neoclassical economics.

Not considering private debt is the Achilles' heel of neoclassical economics.

Sound of the Suburbs , 1 hour ago

Come on.

Wakey, wakey.

You are just repeating 1920s mistakes.

The Americans wrapped a new ideology, neoliberalism, around 1920s economics and repeated the economic mistakes of the 1920s.

Policymakers couldn't see what Glass-Steagall did, as they thought banks were financial intermediaries.

It separates the money creation side of banking from the investment side of banking, and stops bankers producing securities; they buy themselves with money they create out of nothing.

(There are intermediaries involved so it's not obvious, but this is effectively what is happening)

The whole thing turns into a ponzi scheme and you get a 1929 or 2008 type event.

1929 and 2008 look so similar because they are.

At 18 mins.

1929 and 2008 -- Minsky Moments, the financial crises where debt has over whelmed the economy.

They did save the banks this time, which avoided another Great Depression.

They left the debt in place, which caused a balance sheet recession.

As a CEO, I can use the company's money to do share buybacks, to boost the share price; get my bonus and top dollar for my shares.

Share buybacks were found to be a cause of the 1929 crash and made illegal in the 1930s.

What lifted US stocks to 1929 levels in 1929?

Margin lending and share buybacks.

What lifted US stocks to 1929 levels in 2019?

Margin lending and share buybacks.

A former US congressman has been looking at the data.

"The Great Crash 1929" John Kenneth Galbraith

"By early 1929, loans from these non-banking sources were approximately equal to those from the banks. Later they became much greater. The Federal Reserve Authorities took it for granted that they had no influence over these funds"

He's talking about "shadow banking".

They thought leverage was great before 1929; they saw what happened when it worked in reverse after 1929.

Leverage acts like a multiplier.

It multiplies profits on the way up.

It multiplies losses on the way down.

Today's bankers seem to have learnt something from past mistakes.

They took the multiplied profits on the way up.

Taxpayers picked up the multiplied losses on the way down.

Mariner Eccles, FED chair 1934 -- 48, observed what the capital accumulation of neoclassical economics did to the US economy in the 1920s.

"a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth. This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped"

The problem; wealth concentrates until the system collapses.

"The other fellows could stay in the game only by borrowing." Mariner Eccles, FED chair 1934 -- 48

Your wages aren't high enough, have a Payday loan.

You need a house, have a sub-prime mortgage.

You need a car, have a sub-prime auto loan.

You need a good education, have a student loan.

Still not getting by?

Load up on credit cards.

"When the credit ran out, the game stopped" Mariner Eccles, FED chair 1934 -- 48

...... etc .....

x_Maurizio , 1 hour ago

DISAGREE ON EVERY SINGLE WORD, in particular with this:

rules/regulations/capital requirements have infected the global banking system and rendered it a harvesting operation for retail and a derivatives rule/regulation/capital requirment evasion device for the pursuit of profit

absolutely false.

Banking system is in the 4th part of a cycle that they have created !

  1. The first part has been capital harvesting (1970-1980)
  2. The second part has been deregulation and hunt for stellar return on investment
  3. The third part is financialisation and plunder of real economy
  4. The fourth part is the destruction of real economy through debt, deflation, extreme financial activity seeking for Yields. The banks have been the fortresses of globalisation. Commercial banking has been absorbed by investment banking. In this deflationary environment Commercial Banking has practice NO ROI.

You want to see the Banks working again? Reintroduce the Glass Steagall and separate again investment and commercial banking. Repeal all what has been done between 1987 and 1999. THAT will stop globalisation, that will stop the slow bleeding-to-death of westerne economies, that will save commercial banking and our capitalistic societies.

Pumpkin , 1 hour ago

Fake money, fake banks. All lies die in the end.

[Sep 20, 2020] The Criminal Prosecution Of Boeing Executives Should Begin by Mike Shedlock

Sep 20, 2020 |

Authored by Mike Shedlock via MishTalk,

Damning details of purposeful malfeasance by Boeing executives emerged in a Congressional investigation.

FAA, Boeing Blasted Over 737 MAX Failures

On Wednesday, the Transportation Committee Blasted FAA, Boeing Over 737 MAX Failures

The 238-page document, written by the majority staff of the House Transportation Committee, calls into question whether the plane maker or the Federal Aviation Administration has fully incorporated essential safety lessons, despite a global grounding of the MAX fleet since March 2019.

After an 18-month investigation, the report, released Wednesday, concludes that Boeing's travails stemmed partly from a reluctance to admit mistakes and "point to a company culture that is in serious need of a safety reset."

The report provides more specifics, in sometimes-blistering language, backing up preliminary findings the panel's Democrats released six months ago , which laid out a pattern of mistakes and missed opportunities to correct them.

In one section, the Democrats' report faults Boeing for what it calls "inconceivable and inexcusable" actions to withhold crucial information from airlines about one cockpit-warning system, related to but not part of MCAS, that didn't operate as required on 80% of MAX jets.

Other portions highlight instances when Boeing officials, acting in their capacity as designated FAA representatives, part of a widely used system of delegating oversight authority to company employees, failed to alert agency managers about various safety matters .

Boeing Purposely Hid Design Flaws

The Financial Times has an even more damning take in its report Boeing Hid Design Flaws in Max Jets from Pilots and Regulators .

Boeing concealed from regulators internal test data showing that if a pilot took longer than 10 seconds to recognise that the system had kicked in erroneously, the consequences would be "catastrophic" .

The report also detailed how an alert, which would have warned pilots of a potential problem with one of their anti-stall sensors, was not working on the vast majority of the Max fleet . It found that the company deliberately concealed this fact from both pilots and regulators as it continued to roll out the new aircraft around the world.

In Bed With the Regulators

Boeing's defense is the FAA signed off on the reviews. Lovely. Boeing coerced or bribed the FAA to sign off on the reviews now tries to hide behind the FAA.

There is only one way to stop executive criminals like those at Boeing. Charge them with manslaughter, convict them, send them to prison for life, then take all of their stock and options and hand the money out for restitution.

adr , 1 hour ago

Remember, Boeing spent enough on stock buybacks in the past ten years to fund the development of at least seven new airframes.

Instead of developing a new and better plane, they strapped engines that didn't belong on the 737 and called it safe.

SDShack , 21 minutes ago

What is really sad is they already had a perfectly functional and safe 737Max. It was the 757. Look at the specs between the 2 planes. Almost same size, capacity, range, etc. Only difference was the 757 requires longer runways, but I would think they could have adjusted the design to improve that and make it very similar to the 737Max without starting from scratch. Instead Boeing bean counters killed the 757 and gave the world this flying coffin. Now the world bean counters will kill Boeing.

Tristan Ludlow , 1 hour ago

Boeing is a critical defense contractor. They will not be held accountable and they will be rewarded with additional bailouts and contract awards.

MFL5591 , 1 hour ago

Can you imagine a congress of Criminals Like Schiff, Pelosi and Schumer prosecuting someone else for fraud? What a joke. Next up will be Bill Clinton testifying against a person on trial for Pedophilia!

RagaMuffin , 1 hour ago

Mish is half right. The FAA should join Boeing in jail. If they are not held responsible for their role, why have an FAA?

Manthong , 1 hour ago

"There is only one way to stop executive criminals like those at Boeing.

Charge them with manslaughter, convict them, send them to prison for life, then take all of their stock and options and hand the money out for restitution."


There is only one way to stop regulator criminals like those in government.

Charge them with manslaughter, convict them, send them to prison for life, then take all of their pensions and ill gotten wealth a nd hand the money out for restitution.

Elliott Eldrich , 43 minutes ago

"There is only one way to stop executive criminals like those at Boeing.

Charge them with manslaughter, convict them, send them to prison for life, then take all of their stock and options and hand the money out for restitution."

Ha ha ha HA HA HA HA HA! Silly rabbit, jail is for poors...

Birdbob , 1 hour ago

Accountability of Elite Perps ended under Oblaba's reign of "Wall Street and Technocracy Architects" .White collar criminals were granted immunity from prosecution. This was put into play by Attorney Genital Eric Holder. This was the beginning of having an orificial Attorney Genital that facilitated the District of Criminals organized crime empire ending the 3 letter agencies' interference.

Dash8 , 1 hour ago

You don't seem to understand the basic principle of aircraft must not require an extraordinary response for a KNOWN problem.

Think of it this way; Ford builds a car that works great most of the time, but occasionally a wheel will fall off at highway problem, right? just guide the car to the shoulder on the 3 remaining wheels and all good.

Now, put your wife and kids in that car, after a day at work and the kids screaming in the back.

Still feel good about your opinion?

canaanav , 1 hour ago

I wrote software on the 787. You are right. This was not a known problem and the Trim Runaway procedure was already established. The issue was that the MAX needed a larger horizontal stab and MCAS would have never been needed. The FAA doesnt have the knowledge to regulate things like this. Boeing lost talent too, and gets bailouts and tax breaks to the extent that they dont care.

Dash8 , 1 hour ago

But it was a known problem, Boeing admits this.

Argon1 , 41 minutes ago

LGBT & Ethnicity was a more important hiring criteria than Engineering talant.

gutta percha , 1 hour ago

Why is it so difficult to design and maintain reliable Angle Of Attack sensors? The engineers put in layers and layers of complicated tech to sense and react to AOA sensor failures. Why not make the sensors _themselves_ more reliable? They aren't nearly as complex as all the layers of tech BS on top of them.

Dash8 , 1 hour ago

It's not, but it costs $$....and there you have it.

Argon1 , 37 minutes ago

Its the Shuttle Rocketdyne problem, the upper management phones down to the safety committee and complains about the cost of the delay, take off your engineer hat and put on your management hat. All of a sudden your project launches on schedule and the board claps and cheers at their ability to defy physics and save $ millions by just shouting at someone for about 60 seconds..

canaanav , 1 hour ago

Each AOA sensor is already redundant internally. They have multiple channels. I believe they were hit with a maintenance stand and jammed. That said, AOA has never been a control system component. It just runs the low-speed cue on the EFIS and the stick shaker. It's an advisory-level system. Boeing tied it to Flight Controls thru MCAS. The FAA likely dictated to Boeing how they wanted the System Safety Analysis (SSA) to look, Boeing wrote it that way, the FAA bought off on it.

Winston Churchill , 43 minutes ago

More fundamental is why an aerodynamically stable aircraft wasn't designed in the first place,love of money.

HardlyZero , 13 minutes ago

Yes. In reality the changed CG (Center of Gravity) due to the larger fan engine really did setup as a "new" design, so the MAX should have been treated as "new" and completely evaluated and completely tested as a completly new design. As a new design it would probably double the development and test cost and be it.

DisorderlyConduct , 1 hour ago

"Lovely. Boeing coerced or bribed the FAA to sign off on the reviews now tries to hide behind the FAA."

No - what a shoddy analysis.

The FAA conceded many of their oversight responsibilities to Boeing - who was basically given the green light to self-monitor. The FAA is the one that is in the wrong here.

Well, how the **** else was that supposed to end up? This is like the IRS letting people self-audit...

Astroboy , 1 hour ago

Just as the Boeing saga is unfolding, we should expect by the end of the year other similar situations, related to drug companies, pandemia and the rest.

highwaytoserfdom , 1 hour ago

It is political economy...

8. The internet was invented by the US government, not Silicon Valley

Many people think that the US is ahead in the frontier technology sectors as a result of private sector entrepreneurship. It's not. The US federal government created all these sectors.

The Pentagon financed the development of the computer in the early days and the Internet came out of a Pentagon research project. The semiconductor - the foundation of the information economy - was initially developed with the funding of the US Navy. The US aircraft industry would not have become what it is today had the US Air Force not massively subsidized it indirectly by paying huge prices for its military aircraft, the profit of which was channeled into developing civilian aircraft.

LoneStarHog , 1 hour ago

People believe that corporate executives are immune from prosecution and protected by the fact that they are within the corporation. This is false security. If true purposeful and intended criminal activities are conducted by any corporate executive, the courts can do what is called "Piercing The Corporate Veil" . It is looking beyond the corporation as a virtual person and looking at the actual individuals making and conducting the criminal activities.

Jamie Dimon should be first on this list.

[Sep 11, 2020] Some Corporate Fear Is Needed, Blain Urges -- A Little Bit Of Good Old Creative Capitalist Destruction

Sep 11, 2020 |

Authored by Bill Blain via,

"One believes things because one has been conditioned to believe them."

Today is the anniversary of 9/11. Please find some time to trade with my former colleagues at BGC/Aurel-Mint who hold their charity day today in memory of the firm's losses in NY that shocking day in 2001.

This morning we wake to the news the UK has staged something of an economic recovery – but as predicted it's proving remarkably sticky reopening the economy. All eyes are still on the tech market – where the bounce proved the ailing cat isn't in particularly good health. I shall stick my neck out and say the correction still has a way to go. Next week – beware.

Yesterday I wrote about complexity and how the pandemic, bubbles, repressed returns, years of monetary distortion and the evolving political economy have changed the dynamics of markets. One of the factors causing confusion is the increasing speed of change – it's happening too quickly for us to fully comprehend.

Apparently my comments on MMT have upset a well-known city economist who told a contact at major investment firm: "Blain knows nothing about economics, he's just a market hack wanting to be heard.." Excellent. And I would agree – I know nothing about economics, but neither does anyone else .. ( Touche!) That's why it's called the dismal science.

Today, let me continue the New Reality analysis about dynamics and the speed of change. Rather than focusing on the past and present, let's focus on the future and the other side of the equation – the outlook for business, industry and government, and how they will influence these changing dynamics.

There are three themes to this morning's story:

What's the upside?

The prospects for the global economy are fantastic! We can look forward to new generation micro-processing which will literally be a quantum revolution. The potential for a clean energy, new battery technologies, environmental improvement, and abundant power from fusion and hydrogen could be enormous. If you think the way we work has changed by "working from home", the future of AI, Robotics, 3D and nano-tech will revolutionise everything we do and how we spend our increased leisure time. A new agricultural revolution in plants, food and soil will allow us to feed the world, alleviate poverty, raise educational standards and allow population growth to stablise, enabling us all to lead less anxious lives. Ah! Bliss.

Marvellous stuff! The future is going to be flying cars, rocket-packs and holidays on the beaches of Mars ?

Perhaps. Why not? If try hard enough .

What's the downside?

All these things can only happen if the global economy moves forward, develops and evolves. There are massive inertia problems to be resolved. Much of our current economy isn't fit for purpose. Political leadership seems mired in quicksand. Bureaucracy is perhaps the greatest scourge of the modern age. The blockages, rigidities and hurdles holding back the business of business aren't getting simpler. They are multiplying.

Not so good is the future going to be like the Vogons currently running financial regulation?

And, most importantly

How will it happen?

The role of government will be critical. The future of the global economy will depend on the delivery of functional physical and social infrastructure to enable change and evolution. That means breaking out of our current gridlocks, including inequality, and completely rethinking and remaking public goods like health, welfare and education and an acknowledgement that social justice and wealth-equality aren't optional.

I don't think I need to say too much about the possibility of a bright Tech-led future – what matters is getting there, or as close to it as possible. As a Porridge reader recently reminded me: 15 years ago there were no smartphones, no social media, no Uber or Airbnb, Apple and Amazon were struggling and GE was AAA rated. The world changes. Get over it.

Let's start with the third issue – The role of government. That's an immediate problem for my generation. We've been brainwashed since infancy to believe government is bad, less government is good. Big G is inefficient and leads to bureaucracy. Any Government spending will be riddled with featherbedding, inefficiency and outright corruption. Far better to let private enterprise lead the way – so we've always been told.

Really? Private Enterprise isn't much better. Let's be honest – big firms have their brief periods of innovation, stratospheric growth and market leadership before they stumble into middle age, become sclerotic and die from obsolescence, competition, null-entropy and bureaucracy – that's the Darwinian process of capitalism. The last thirty years spent worshiping at the Friedman Temple of corporate shareholder capitalism has seen some pretty shady behaviours – massive executive rewards, stock buy-backs and the overleveraging of failing companies to pay out private equity owners . I could go on.

There is a middle ground.

What if Maggie Thatcher was utterly wrong about Government having to be as frugal as a housewife? What if fiat money and monetary sovereignty works? What if Milton Friedman was wrong and Keynes, Smith et al are all right?

Yesterday I raised the issue of stakeholder capitalism – and predictably got a number of emails telling me anything except the continued wealth creation by successful entrepreneurial billionaires will lead to disaster and communism. That's not what a stakeholder economy needs to lead to.

Shock Time. For the first time ever, I am going to say something positive about ESG – Environmental, Social and Governance Investment parameters.

For too many investors ESG is simply an easy tick-box approach to avoid difficult compliance or investment committee questions. But ESG is still at an early stage as we evolve towards Stakeholder Economies. Investments that aim to do good are laudable, but ones that are properly managed, do good and socialise the benefits are even better, especially when they also make profit! (Sharing the money around is the issue for unreformed capitalists..) Few big banks or investors would publically admit ESG is bad - so how can Stakeholder be bad?

The big issue is can Government be trusted to deliver the public goods we will need to deliver our Bright New World? Can they be trusted to use the magical money tree of MMT to deliver the necessary reforms of health, education and welfare provision, solve inequality and rebuild ailing national infrastructure. That's a question for functional democracy.

One of the comments I got yesterday – from a leading academic – sums up the risks: "It's as simple as this – unless you are the EU, which has zero monetary sovereignty, nations can solve all the issues you identify, including social and income equality, through focused MMT spending. Unless you are in the US, where the government has created some $670 bln and given it straight to the richest 1500, while 47 million and one in three kids still go hungry."

It's a warning – MMT is a potential solution. But a dangerous one if misapplied. If the resources of a state, and its control of fiat currency, are directed to support only the rich and powerful – explain to me what's different from what they complain Communist China is guilty of?

Let's be more optimistic. the future looks bright and perhaps we can better resolve issues by adopting Stakeholder Capitalism. We can fund it all by selective government MMT programmes to finance public goods enabling us to do these things. Sounds easy – but perhaps it is? We need Decent politicians – note the capital D. Decent as in decent, honest, brave and true.

Which leads us to the Big Problem , the second issue the trend towards stultifying Bureaucracy.

One of my favourite economic concepts is "Niskannen's Theory of Bureaucracy". Bureaucrats are driven by economic goals – which include making their lives easier, and controlling more and more makes it easy. It's not just a government problem. Its rife across the private sector. Let me start by asking have you spoken to your bank recently?

Probably not. I bet you spent hours in a telephone queue, being told that "due to the Pandemic we are experiencing a high volume of calls" . I read the high street banks are sacking more staff and closing more branches.

Let's face it.. our banks don't work.

Because it makes sense to borrow money at negative real interest rates I recently applied for a mortgage – to finance rebuilding our house. We have money in the bank, and they are aware of our investment portfolio, pensions and other savings. However, they turned me down for a loan – on the basis I had a black credit mark.

It turns out that black score is because a mobile telephone company made a mistake and reported I hadn't paid them the horrendous sum of £66.30. EE have now acknowledged the mistake and apologised for not cancelling a direct debit. I have a cheque on my desk from them repaying the direct debits they claimed before I cancelled it. However, they say that "legally" they can't undo the damage done to my credit score. They say the law demands it stays on my report for 2 years – despite it being patently incorrect.

I asked the bank to be reasonable and look at the information. "Computer says No." The Bank doesn't want to lend to me, or anyone else, full stop. The telecoms company can't be bothered to correct their mistake and raise potentially difficult questions about their systems.

Let's focus on why banking bureaucracies fail. If a high-street bank lends money that causes all kinds of problems – if has to fill in sheaves of client reports, update their KYC, determine why someone with money in the bank wants to borrow more. They then will have to discuss the loan at half and dozen different compliance, diligence, diversity and capital committees. Then they have to weigh the risk of default, and put aside the correct capital charges to apply. Being "Pale, Male and Stale" doesn't help – I might retire at some point in the 10-year life of the loan. Banks definitely don't want to be lending to white-folk in their 60s.

Effectively the big banks no longer function. They have become bureaucracies where the treacle that flows through their operational arteries has made them ineffective and useless. They are still using multiple legacy systems, but don't have the energy and won't allocate the cash to replace them. Yet these same banks are considered critical to the economy and will be bailed out repeatedly, confirming their criticality to the economy. Their executives are paid in millions.

Let the Big Banks go bust – that's what should happen to failing companies!

Actually, go further – close them down. The financial system will not collapse if we put HSBC up against the wall. I would argue it would be a great "pour le encourage les autres " moment.. ( "The English like to shoot an Admiral or two to encourage the rest ", as Voltaire said.) While we are it, lets put EE up against the wall as well, and blindfold a couple of credit agencies as well

A bit of corporate fear would be no bad thing.

There is no shortage of bright young FINTECH challenger banks out there that understand the opportunity to replace banking behemoths, and provide the missing aspects of customer service. The understand the need, the social service concept of banking for all, and they understand the opportunity to automate payments, digitise delivery and actually serve a useful social purpose

I think you get the drift . Extend the same thinking across the whole economy and every government department. A little bit of good old creative capitalist destruction wouldn't do us any harm.

notfeelinthebern , 2 hours ago

Term limits would fix much of it. You go to the donor page for any swamp rat US Senator and it is mind boggling.

WedgeMan , 2 hours ago

Let a big bank fail and then try to buy something at a store with credit card. No dice. A failed bank will leave you with no money. Why do you think our great grandparents stored cash in jars, not in the bank vaults? the strategy is to eliminate all cash and use bank accounts only. This way the grand surveillance State is complete and can control you very easily.

GunnerySgtHartman , 1 hour ago

This is exactly why people should utilize locally-owned banks ... or even better, credit unions. And keep not more than six weeks' worth of funds in your bank/credit union account.

Clint Liquor , 2 hours ago

"I am going to suspend my free market principles, to save the free market". G.W. Bush, before announcing the 2008 Bank Bailouts.

107cicero , 2 hours ago

Blaine has the Voltarie quote wrong; it was from Candide' a novel of his and put into the mouth of a character: "in this country, it is good to kill an admiral from time to time, in order to encourage the others"

bshirley1968 , 2 hours ago

"The prospects for the global economy are fantastic! We can look forward to new generation micro-processing which will literally be a quantum revolution. The potential for a clean energy, new battery technologies, environmental improvement, and abundant power from fusion and hydrogen could be enormous.

If you think the way we work has changed by "working from home", the future of AI, Robotics, 3D and nano-tech will revolutionise everything we do and how we spend our increased leisure time. A new agricultural revolution in plants, food and soil will allow us to feed the world, alleviate poverty, raise educational standards and allow population growth to stablise, enabling us all to lead less anxious lives. Ah! Bliss."

Spoken like a true dystopian cheering, Kool-aid drinking, head-up-his-matrix, idiot. Not one thing listed there will ge beneficial to humanity's freedom and independence........but it might generate a lot more party on dude.

earleflorida , 1 hour ago

Question??? ::: Doth any person remember ' compound interest' on savings & checking accounts?

Doth man hath to venture unto risk{?!?}, be it a Riggs Bank Heist 2020 ((( The CIA and Riggs Bank. - Slate Magazine ))) stock market manipulation to open ones piehole and speak of a 'modern-unspeakable-usury' syndicated crime FRB System criminal enterprise...

earleflorida , 1 hour ago

Question??? ::: Doth any person remember ' compound interest' on savings & checking accounts?

Doth man hath to venture unto risk{?!?}, be it a Riggs Bank Heist 2020 ((( The CIA and Riggs Bank. - Slate Magazine ))) stock market manipulation to open ones piehole and speak of a 'modern-unspeakable-usury' syndicated crime FRB System criminal enterprise...

[Aug 19, 2020] Some Shocking Facts on the Concentration of Ownership of the US Economy

Highly recommended!
Notable quotes:
"... Since the collapse of the Soviet Union, the world has not seen these levels of concentration of ownership. The Soviet Union did not die because of apparent ideological reasons but due to economic bankruptcy caused by its uncompetitive monopolistic economy. Our verdict is that the US is heading in the same direction. ..."
"... In a future instalment of this report, we will show that the oligarchization of America – the placing it under the rule of the One Percent (or perhaps more accurately the 0.1%, if not 0.01%) - has been a deliberate ideologically driven long-term project to establish absolute economic power over the US and its political system and further extend that to involve an absolute global hegemony (the latter project thankfully thwarted by China and Russia). ..."
"... In present-day United States a few major investors – equity funds or private capital - are as a rule cross-owned by each other, forming investor oligopolies, which in turn own the business oligopolies. ..."
"... A study has shown that among a sample of the 1,500 largest US firms (S&P 1500), the probability of one major shareholder holding significant shares in two competing firms had jumped to 90% in 2014, while having been just 16% in 1999. (*2). ..."
"... Institutional investors like BlackRock, Vanguard, State Street, Fidelity, and JP Morgan, now own 80% of all stock in S&P 500 listed companies. The Big Three investors - BlackRock, Vanguard and State Street – alone constitute the largest shareholder in 88% of S&P 500 firms, which roughly correspond to America's 500 largest corporations. (*3). Both BlackRock and Vanguard are among the top five shareholders of almost 70% of America's largest 2,000 publicly traded corporations. (*4). ..."
May 19, 2019 |

A close-knit oligarchy controls all major corporations. Monopolization of ownership in US economy fast approaching Soviet levels

Starting with Ronald Reagan's presidency, the US government willingly decided to ignore the anti-trust laws so that corporations would have free rein to set up monopolies. With each successive president the monopolistic concentration of business and shareholding in America has grown precipitously eventually to reach the monstrous levels of the present day.

Today's level of monopolistic concentration is of such unprecedented levels that we may without hesitation designate the US economy as a giant oligopoly. From economic power follows political power, therefore the economic oligopoly translates into a political oligarchy. (It seems, though, that the transformation has rather gone the other way around, a ferocious set of oligarchs have consolidated their economic and political power beginning from the turn of the twentieth century). The conclusion that the US is an oligarchy finds support in a 2014 by a Princeton University study.

Since the collapse of the Soviet Union, the world has not seen these levels of concentration of ownership. The Soviet Union did not die because of apparent ideological reasons but due to economic bankruptcy caused by its uncompetitive monopolistic economy. Our verdict is that the US is heading in the same direction.

In a later report, we will demonstrate how all sectors of the US economy have fallen prey to monopolization and how the corporate oligopoly has been set up across the country. This post essentially serves as an appendix to that future report by providing the shocking details of the concentration of corporate ownership.

Apart from illustrating the monopolization at the level of shareholding of the major investors and corporations, we will in a follow-up post take a somewhat closer look at one particularly fatal aspect of this phenomenon, namely the consolidation of media (posted simultaneously with the present one) in the hands of absurdly few oligarch corporations. In there, we will discuss the monopolies of the tech giants and their ownership concentration together with the traditional media because they rightfully belong to the same category directly restricting speech and the distribution of opinions in society.

In a future instalment of this report, we will show that the oligarchization of America – the placing it under the rule of the One Percent (or perhaps more accurately the 0.1%, if not 0.01%) - has been a deliberate ideologically driven long-term project to establish absolute economic power over the US and its political system and further extend that to involve an absolute global hegemony (the latter project thankfully thwarted by China and Russia). To achieve these goals, it has been crucial for the oligarchs to control and direct the narrative on economy and war, on all public discourse on social affairs. By seizing the media, the oligarchs have created a monstrous propaganda machine, which controls the opinions of the majority of the US population.

We use the words 'monopoly,' 'monopolies,' and 'monopolization' in a broad sense and subsume under these concepts all kinds of market dominance be it by one company or two or a small number of companies, that is, oligopolies. At the end of the analysis, it is not of great importance how many corporations share in the market dominance, rather what counts is the death of competition and the position enabling market abuse, either through absolute dominance, collusion, or by a de facto extinction of normal market competition. Therefore we use the term 'monopolization' to describe the process of reaching a critical level of non-competition on a market. Correspondingly, we may denote 'monopoly companies' two corporations of a duopoly or several of an oligopoly.

Horizontal shareholding – the cementation of the oligarchy

One especially perfidious aspect of this concentration of ownership is that the same few institutional investors have acquired undisputable control of the leading corporations in practically all the most important sectors of industry. The situation when one or several investors own controlling or significant shares of the top corporations in a given industry (business sector) is referred to as horizontal shareholding . (*1). In present-day United States a few major investors – equity funds or private capital - are as a rule cross-owned by each other, forming investor oligopolies, which in turn own the business oligopolies.

A study has shown that among a sample of the 1,500 largest US firms (S&P 1500), the probability of one major shareholder holding significant shares in two competing firms had jumped to 90% in 2014, while having been just 16% in 1999. (*2).

Institutional investors like BlackRock, Vanguard, State Street, Fidelity, and JP Morgan, now own 80% of all stock in S&P 500 listed companies. The Big Three investors - BlackRock, Vanguard and State Street – alone constitute the largest shareholder in 88% of S&P 500 firms, which roughly correspond to America's 500 largest corporations. (*3). Both BlackRock and Vanguard are among the top five shareholders of almost 70% of America's largest 2,000 publicly traded corporations. (*4).

Blackrock had as of 2016 $6.2 trillion worth of assets under management, Vanguard $5.1 trillion, whereas State Street has dropped to a distant third with only $1 trillion in assets. This compares with a total market capitalization of US stocks according to Russell 3000 of $30 trillion at end of 2017 (From 2016 to 2017, the Big Three has of course also put on assets).Blackrock and Vanguard would then alone own more than one-third of all US publicly listed shares.

From an expanded sample that includes the 3,000 largest publicly listed corporations (Russell 3000 index), institutions owned (2016) about 78% of the equity .

The speed of concentration the US economy in the hands of institutions has been incredible. Still back in 1950s, their share of the equity was 10%, by 1980 it was 30% after which the concentration has rapidly grown to the present day approximately 80%. (*5). Another study puts the present (2016) stock market capitalization held by institutional investors at 70%. (*6). (The slight difference can possibly be explained by variations in the samples of companies included).

As a result of taking into account the common ownership at investor level, it emerges that the US economy is yet much more monopolized than it was previously thought when the focus had been on the operational business corporation alone detached from their owners. (*7).

The Oligarch owners assert their control

Apologists for monopolies have argued that the institutional investors who manage passive capital are passive in their own conduct as shareholders as well. (*8). Even if that would be true it would come with vastly detrimental consequences for the economy as that would mean that in effect there would be no shareholder control at all and the corporate executives would manage the companies exclusively with their own short-term benefits in mind, inevitably leading to corruption and the loss of the common benefits businesses on a normally functioning competitive market would bring.

In fact, there seems to have been a period in the US economy – before the rapid monopolization of the last decade -when such passive investors had relinquished control to the executives. (*9). But with the emergence of the Big Three investors and the astonishing concentration of ownership that does not seem to hold water any longer. (*10). In fact, there need not be any speculation about the matter as the monopolist owners are quite candid about their ways. For example, BlackRock's CEO Larry Fink sends out an annual guiding letter to his subject, practically to all the largest firms of the US and increasingly also Europe and the rest of the West. In his pastoral, the CEO shares his view of the global conditions affecting business prospects and calls for companies to adjust their strategies accordingly.

The investor will eventually review the management's strategic plans for compliance with the guidelines. Effectively, the BlackRock CEO has in this way assumed the role of a giant central planner, rather like the Gosplan, the central planning agency of the Soviet command economy.

The 2019 letter (referenced above) contains this striking passage, which should quell all doubts about the extent to which BlackRock exercises its powers:

"As we seek to build long-term value for our clients through engagement, our aim is not to micromanage a company's operations. Instead, our primary focus is to ensure board accountability for creating long-term value. However, a long-term approach should not be confused with an infinitely patient one. When BlackRock does not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect our clients' long-term economic interests, we do not hesitate to exercise our right to vote against incumbent directors or misaligned executive compensation."

Considering the striking facts rendered above, we should bear in mind that the establishment of this virtually absolute oligarch ownership over all the largest corporations of the United States is a relatively new phenomenon. We should therefore expect that the centralized control and centralized planning will rapidly grow in extent as the power is asserted and methods are refined.

Most of the capital of those institutional investors consists of so-called passive capital, that is, such cases of investments where the investor has no intention of trying to achieve any kind of control of the companies it invests in, the only motivation being to achieve as high as possible a yield. In the overwhelming majority of the cases the funds flow into the major institutional investors, which invest the money at their will in any corporations. The original investors do not retain any control of the institutional investors, and do not expect it either. Technically the institutional investors like BlackRock and Vanguard act as fiduciary asset managers. But here's the rub, while the people who commit their assets to the funds may be considered as passive investors, the institutional investors who employ those funds are most certainly not.

Cross-ownership of oligarch corporations

To make matters yet worse, it must be kept in mind that the oligopolistic investors in turn are frequently cross-owned by each other. (*11). In fact, there is no transparent way of discovering who in fact controls the major institutional investors.

One of the major institutional investors, Vanguard is ghost owned insofar as it does not have any owners at all in the traditional sense of the concept. The company claims that it is owned by the multiple funds that it has itself set up and which it manages. This is how the company puts it on their home page : "At Vanguard, there are no outside owners, and therefore, no conflicting loyalties. The company is owned by its funds, which in turn are owned by their shareholders -- including you, if you're a Vanguard fund investor." At the end of the analysis, it would then seem that Vanguard is owned by Vanguard itself, certainly nobody should swallow the charade that those funds stuffed with passive investor money would exercise any ownership control over the superstructure Vanguard. We therefore assume that there is some group of people (other than the company directors) that have retained the actual control of Vanguard behind the scenes (perhaps through one or a few of the funds). In fact, we believe that all three (BlackRock, State Street and Vanguard) are tightly controlled by a group of US oligarchs (or more widely transatlantic oligarchs), who prefer not to brandish their power. It is beyond the scope of this study and our means to investigate this hypothesis, but whatever, it is bad enough that as a proven fact these three investor corporations wield this control over most of the American economy. We also know that the three act in concert wherever they hold shares. (*12).

Now, let's see who are the formal owners of these institutional investors

In considering these ownership charts, please, bear in mind that we have not consistently examined to what degree the real control of one or another company has been arranged through a scheme of issuing different classes of shares, where a special class of shares give vastly more voting rights than the ordinary shares. One source asserts that 355 of the companies in the Russell index consisting of the 3000 largest corporations employ such a dual voting-class structure, or 11.8% of all major corporations.

We have mostly relied on for the shareholder data. However, this and other sources tend to list only the so-called institutional investors while omitting corporate insiders and other individuals. (We have no idea why such strange practice is employed

[Jun 04, 2020] The case of the USA is that its financialization process has been running for so long that its already existing infrastructure is crumbling

Jun 04, 2020 |

vk , Jun 3 2020 18:17 utc | 6

You cannot print money into infrastructure. That's money fetishism.

The Marshall Plan would be only USD 100 billion in today's values. It wasn't about the money: the Marshall Plan worked because, in 1946, the USA was the financial center of the world and had an excess industrial capacity large enough to rebuild a much smaller place (Western Europe). USDs flowed into Western Europe, which could only buy American goods and equipment - which the Americans had to sell. American resources then flowed to Western Europe, which in turn flowed back to the USA in USDs. That the USD was backed by gold at the time had nothing to do with this process, but it may have accelerated the universalization of the USD.

The USA (I'm here including all of its provinces: European Peninsula, Latin America, SE-Asia, India, Japan, South Korea, Taiwan, Hong Kong and Australia) is a capitalist society, which means it plans its economy according to the social profit rate. The social profit rate is determined by the national average of profit rates among all the individual capitals in said country. That means economy is always planned by the private, not the public, sector. The White House is impotent here.

Profit rate self-regulates based on the different degrees of organic composition of capital (OCC) of each country/region. To simplify, the tendency is this: value flows from the countries with lesser OCCs to countries with higher OCCs. Taking the European Union as an example, we have that Germany (the country with the higher OCC) will have large and chronic trade surpluses with the rest.

However, the higher the OCC, the lower is the profit rate. As OCC gets to a certain critical level, profit rates begin to plummet, and structural crisis of capitalism occur. In order to stop this process, "financialization" begins.

The case of the USA is that its financialization process has been running for so long that its already existing infrastructure is crumbling. However, the fact that it is crumbling is just the symptom, not the cause. The real cause is that the USA begun to financialize first because it reached an extremely high OCC first.

At first, the USA didn't rebuild its infrastructure simply because it is not profitable. Now, it doesn't do it for the simple fact it can't: with much pain, it managed to bring astronauts beck to the ISS; the infrastructural abyss is now at more than USD 1.1 trn and widening. By now it would have to import a lot of material and expertise from other countries if it really wanted to rebuild and update its infrastructure. Industry lost so much importance in the US economy that, last year, American industry fell to a record level (due to the trade war against China) and the US GDP actually rose - due to the financial sector and services sector compensating for the loss.

The most extreme case of a First World country turning into a mere financial hub is the UK: its trade deficit already is at a gargantuan -14%, and its budget only doesn't collapse because its huge financial hub in London covers that up to more than 7% (i.e. halves). , Jun 3 2020 18:41 utc | 10

Financial hub? Call it what it is. A laundromat for dirty money and ill-gotten gains. Problem is, or problem for those who aren't the extractive wealthy elite which is most of us, more and more money is dirty money and ill-gotten gains even if it is "made" legally. The most recent multi-trillion dollar handout, looting and pillaging actually, to the wealthy extractive elite as part of the so-called "stimulus package" was perfectly legal but dirty money and ill-gotten gains nonetheless.

The stock market is not only a depravity indicator and an indicator of wealth disparity, it's also a massive laundromat for legal and illegal ill-gotten gains. I would venture that at least 30% of the stock market is comprised of black market illegal money being laundered at any given time.

karlof1 , Jun 3 2020 19:09 utc | 13
Erelis @5--

FIRE is a term used my Michael Hudson and other likeminded political-economists. He uses it so often it's hard to provide the initial instance. However, Hudson did write two books about how the FIRE sector gained its dominance, Killing the Host & J is for Junk Economics . It this video interview from 2017 , Hudson explains to Max Keiser about the latter book and how it relates to the just completed election, which begins at the 12:45 mark. That website also links to all previous Keiser Reports where I hope to find the specific interview that discusses the FIRE sector. This one does too, but it's not the specific topic discussed. I guarantee you'll learn a lot from the 10.5 minute interview!

Red Ryder , Jun 3 2020 19:14 utc | 15

Petri Krohn wants redistribution of wealth. Let's look at the idea.

The opposing viewpoint says wealth is not a pie. Wealth comes from growth, innovation, creativity. It is many pies.

Of course, you can't bake your own pie without capital. So, how do we redistribute capital?

You can get it from the government via the banks, if they are 'ordered' to grant loans. They aren't. So, you can't get it from government or banks.

You can take it from the already wealthy. Taxes is the historic way to take wealth from the wealthy. But the tax schedule no longer takes significant amounts from the wealthy. And Congress is corrupted by the wealthy so that route is closed also. There will be no major new taxes on the wealthy.

How can we redistribute wealth, then?

Simplest way is Development Zones with no taxes for a 5-10 years. Investors will pour money in from around the world. New businesses can be started, innovation can be nourished and people can prosper.

Use the system to expand the base of participation and do it in the zones of poverty and redevelopment where the poor and disadvantaged are.

China does this. It works. Other nations do it. They call them FTZ (free trade zones). Russia has some.

Trump was going to do this with his original Infrastructure program. The Dems stopped it. Won't allow any progress.

But, this is the way to go. You raise people out of poverty, your increase their options and income, you grow their region, and lots of new pies are baked.

/div> @Red Ryder , Jun 3 2020 19:14 utc | 15
@Red Ryder | Jun 3 2020 19:14 utc | 15
Trisha , Jun 3 2020 19:56 utc | 30

And who, exactly, is going to do the hard labor required of these infrastructure projects?

Certainly none of the horribly obese Americans I see waddling around, nor many of the young folks stuck with their snouts into soma social media. Most of the youngsters I know have zero clue about working with tools, doing a job right, working hard for not much pay, etc. Males of color living in ghettos while their baby-mommas live off welfare? Hardly.

And where are people going to get the training needed? The Polytechnic Science trade school in the city I grew up in - San Francisco - was torn down long ago. Few in the trades can afford to live in San Francisco any more, even if they could get a job.

Maybe folks like my father who wielded a shovel building roads during the WPA and hated it so much he joined the Army. In other words, hardworking immigrants, or first generation born of immigrants with little education (my dad).

dh-mtl , Jun 3 2020 22:10 utc | 51
Posted by: Red Ryder | Jun 3 2020 19:14 utc | 15 says: 'How can we redistribute wealth, then?'

An economy's wealth is what it produces. The U.S. produces a lot less then it consumes, so it is in debt, and half of its population is poor.

The financial elites, who run the U.S. have gotten wealthy, not by producing something of value, but by strip mining the financial assets of the rest of the population.

If you want to produce wealth, and distribute it properly:

1. Get rid of the U.S.$ as the world's reserve currency. This will allow U.S.$ to be radically devalued.

2. With a devalued dollar, the U.S. will be forced into domestic production (i.e. real wealth creation). Good paying jobs, producing real things, is a very effective way of properly distributing wealth.

3. Carry out a massive infrastructure program to rebuild the U.S.' worn-out infrastructure. The infrastructure itselr, as well as the good paying jobs associated with creating it, is an effective way to distribute wealth.

4. Provide basic health-care and education (including university) to all. This is again a very effective way of distributing wealth, while at the same time supplying a work force capable of carrying out high value added jobs necessary for a goods producing economy.

5. Break-up or regulate the cartels. Profit margins and executive salaries have radically expanded in recent years. This is a sign of lack of competition. Wherever there is inadequate competition the economic actors need to be regulated or broken up. Lower prices, resulting from a normalization of profits and exagerated salary disparities, is another excellent way to distribute wealth.

6. Reduce military expenditures. Most of the military expenditures, beyond what is really needed for defense, are nothing but waste, and at the same time a transfer of wealth from the masses to the military industrial complex.

7. Pay for government sponsored health-care, education and infrastructure with a significant increase in taxes on the wealthy.

8. The massive devaluation of the dollar, combined with infrastructure spending and re-industrialization will no doubt cause significant inflation, at least in the short term. Inflation will reduce both the value of financial assets and debt, again representing a redistribution of wealth from the elites to the indebted masses.

Using the GINI index as a gauge (, Income inequality increased substantially over the past 40 years, from a GINI coefficient of 0.36, moderate, to 0.46, extreme. This change happened as a result of deliberate economic policies designed to enable the transfer of wealth from the masses to the elites. To reverse this mal-distribution of wealth, the policies that led to this need to be reversed as well.

And don't expect the Democrats to do it. They are fully in the pocket of the 'Globalists' who have been the principle beneficiaries of this massive transfer of wealth since 1980.

vk , Jun 3 2020 22:17 utc | 53
@ Posted by: Winni Puu | Jun 3 2020 21:33 utc | 47

The problem with large infrastructure projects is that they do not only get old through physical degeneration, but also through moral degeneration (i.e. they get outdated).

The USA had USD 1.1 trn in old infrastructure (mainly from the 50s-60s) which need repair. However, if the USG spends those USD 1.1 trn, the American people will just be getting what existed before - there's no technological advantage here. So, while the USA spends USD 1.1 trn on 50s technology, China will be spending the same on state-of-the-art, therefore getting a military advantage (because better infrastructure attracts more wealth, both in the form of foreign investment and in the form of rising productivity of labor).

Also, when you do this large-scale technological leap, it just can't be any kind of innovation: it has to be a revolutionary technology, which both greatly increases labor productivity and is future proof (i.e. can last at least 50 years, ideally at least 100 years).

So, this is not just your average bean-counting. When a given national government is so far behind in infrastructure, it has a though decision to make: fix what already exists (with minor and gradual improvements) or do you go all-in with a revolutionary technology to try to do a "great leap"? And that's just the technocratic side of the problem - in capitalism you have the factor that it is the social profit rate that decides what's built and what isn't, by how much and when.

Baron , Jun 3 2020 22:31 utc | 54
The boss of Amazon Jeff Bezos is 65 this year, is worth over a trillion dollars, assuming he lives up the age of 90, converts the assets into cash, does absolutely nothing except spending the money, he has $3 655 347 to run through each hour 24/7 for the rest of his life. If one assumes he has to sleep, eat, go to the bathroom which cuts the number of spending hours (say) by half, he must go through over seven million dollars each and every hour until he drops dead.

This is obscene, it exceeds his needs by such a margin that one cannot but wonder at the sanity of a society that cannot be bothered to address it. This is not to call for income to be distributed equitably, that would destroy the only mechanism that past evidence shows is the driving force for improving living standards for all, but for such distribution to be sane, nothing more nothing else, sanity should inform the creation of laws governing income distribution on every society, including the Republic's. Any such sane arrangements should include the distribution of both income and accumulated wealth, the major disparity in today's society isn't only in income distribution, but even more so in wealth ownership.

[May 05, 2020] Finance Capitalism vs Industrial Capitalism, by Michael Hudson

Notable quotes:
"... history's main engine of economic exploitation – the banking, creditor and financial systems' ever-increasing extraction of value through interest payments. The rentier class and FIRE sector – Finance, Insurance and Real Estate – have long succeeded in depicting themselves as part of a productive economy. Yet for centuries, these sectors were recognized as being parasitic. ..."
"... The pandemic has given this parasitic sector yet another, even more vicious opportunity to exploit and devour humanity. ..."
"... The essence of a parasite is not only to drain the host's nourishment, but to dull the host's brain so that it does not recognize that the parasite is there. ..."
"... Well, it's sort of like Obama's bailout in 2009 and '10 on steroids. It's funny when you read people like Paul Krugman and others Democrats denouncing it all as if it's a Republican bill, but it's identical with Obama's bill and Obama's philosophy. And it was unanimously passed. Chuck Schumer likened it to Roosevelt's New Deal. So I think you should think of it as the Trump-Pelosi bill. Trump simply lifted it wholesale from his campaign backers, who basically are the same as the Democratic National Committee. ..."
"... The bill asks landlords to stop evicting people for three months but let the rent accrue, and personal debts also. Let's look at what's going to happen when the three months are over. ..."
"... You're going to have restaurants and small businesses – whose major expense is rent and credit – not having done much business during these three months. They will end up owing this major cost of doing business for three months without having their usual income. What's going to happen by the end of the summer? ..."
"... The financial bailout aims to enable the financial sector to extract so much money from the economy and drive so many small businesses under that the big venture capital firms and private equity can pick them up at low all prices. You could call it the "Monopolization of the US economy" bill or the "Contributors to Washington politicians" bill. ..."
"... you can look at Hyman Minsky as one who really inspired it in the 19980s and '90s. Its logic is that deficit spending is not bad if it is spent in the real economy to increase employment and spending. ..."
"... Asset prices, capital gains and the wealth of the 1% are going up but real wages and disposable income has been going down. We've seen real estate, stocks and bond prices going up and up since the Obama bailout of 2009, but the economy has not benefited the 95 percent. ..."
"... As long as you leave the 1% with the lion's share of wealth (creditor claims) and property ownership, the economy cannot recover. Without realizing that, there cannot be a class consciousness regarding today's world. ..."
"... The state has become a functionary of the financial sector. It hasn't withered away in the sense as Marx would have thought. ..."
"... the financial sector is much more brutal than the industrial sector that Marx envisioned as evolving toward socialism. Finance conquers the entire economy, industry along with labor ..."
"... the problem is, how do you get rid of a parasitic blister on society? That can only be done by cutting off the blister. ..."
May 05, 2020 |

Jim Vrettos : Welcome once again to the Radical Imagination. I'm your host, Jim Vrettos. I'm a sociologist whose taught at John Jay College of Criminal Justice and Yeshiva University here in New York.

Our guest today on the Radical Imagination is Michael Hudson. He was on our March 8th show. We had such an overwhelmingly positive response to that show that we've asked him to return today, and he's been gracious enough to accept.

Unlike most economists, he's been a fierce champion and advocate for the economic rights of the poor, workers, disenfranchised and the vulnerable around the world through his scholarship and lifelong activism. His unique economic analysis has explored history's main engine of economic exploitation – the banking, creditor and financial systems' ever-increasing extraction of value through interest payments. The rentier class and FIRE sector – Finance, Insurance and Real Estate – have long succeeded in depicting themselves as part of a productive economy. Yet for centuries, these sectors were recognized as being parasitic.

Now with the United States losing some 10 million jobs in just the past two weeks and the world awash in debt, the total world gross domestic product is $90 trillion. The public and private debt is a mind-boggling $260 trillion. The pandemic has given this parasitic sector yet another, even more vicious opportunity to exploit and devour humanity.

As our guest puts it, the recently passed Trump "Bank and Landlord Relief" bill, mistakenly named the Coronavirus bill, starts by providing banks with an even larger giveaway of wealth than they received from Obama in 2008. Helping the banks, financial and real estate sectors in a so-called free market system is conflated with helping the industrial economy and general living standards for most Americans. The essence of a parasite is not only to drain the host's nourishment, but to dull the host's brain so that it does not recognize that the parasite is there.

These debt-bondage economies of Western countries are heading us down a spiral of poverty, decline, injustice and human despair.

Michael Hudson is a distinguished research professor of economics at the University of Missouri, Kansas City, a researcher at the Levy Economics Institute of Bard College, former Wall Street analyst, a political consultant of governments on finance and tax policy, and a popular sought-after commentator and journalist. He's devoted his entire scientific and historical work to the study of domestic and foreign debt, loans, mortgages and interest payments. His analysis and warnings are even more profoundly necessary in these pandemic days and nights. This is just the first in a series of cascading crises.

Welcome so much. Thank you for being back again here on the Radical Imagination. Michael, it's great to see you again. How are you doing? I know we're all trying to keep safe and well and strong. How are things going?

Michael Hudson : I just got back from a walk in Forest Park here in Queens. There was hardly anybody on the streets, but there were a good number of people in the park. I finally was given a face mask by the building's super, and my Chinese friends say that they've mailed me some masks to keep me safe. They're sending foreign aid to New York like we're a third world country.

Jim Vrettos : Well, in a sense, we are, aren't we? We're turning into it for more and more people. Tell us about this so-called bill that's just been passed. What is wrong with it in your estimation? How does it perpetuate and exacerbate the problem in your analysis?

Michael Hudson : Well, it's sort of like Obama's bailout in 2009 and '10 on steroids. It's funny when you read people like Paul Krugman and others Democrats denouncing it all as if it's a Republican bill, but it's identical with Obama's bill and Obama's philosophy. And it was unanimously passed. Chuck Schumer likened it to Roosevelt's New Deal. So I think you should think of it as the Trump-Pelosi bill. Trump simply lifted it wholesale from his campaign backers, who basically are the same as the Democratic National Committee.

The problem is that the bill pretends that by giving money to the banks to lend more money to get the country moving again that's going to rescue the economy. It's not going to rescue the economy. The bill injures the economy, because the money ends up with the banks. Part of its $10 trillion – $2 trillion – goes to citizens to spend, but ends up largely being paid to the banks and landlords. Specifically, there is an enormous giveaway that makes real estate tax exempt for the next 30 years.

Jim Vrettos : What about small businesses? Are you including them in this analysis?

Michael Hudson : Most small businesses they're rescuing are the landlords. They have received the most Small Business Administration loans, usually by going through the local political party machine. When the Republicans or Democrats talk about small business, they mean the landlords, who are the proxies for the big real estate interests and the banks behind them.

So let's look at this: The bill asks landlords to stop evicting people for three months but let the rent accrue, and personal debts also. Let's look at what's going to happen when the three months are over.

You're going to have restaurants and small businesses – whose major expense is rent and credit – not having done much business during these three months. They will end up owing this major cost of doing business for three months without having their usual income. What's going to happen by the end of the summer?

A lot of restaurants here in Queens only have takeout service. So how are these small businesses going to pay the debts that have mounted up in the last three months? Many will have to go out of business, declare bankruptcy and start all over again, because otherwise all their earnings for this year and next year – and probably the year after that – would have to go to make up the arrears to their landlords, their creditors and the banks.

So what pretends to be a coronavirus bill is going to say, "You think the virus hit you? Wait till we hit you with the financial bill." The financial bailout aims to enable the financial sector to extract so much money from the economy and drive so many small businesses under that the big venture capital firms and private equity can pick them up at low all prices. You could call it the "Monopolization of the US economy" bill or the "Contributors to Washington politicians" bill.

There was a wish list that the banks had, the real estate interests and corporate lobbyists, that they'd been saving up for just such a crisis opportunity. The coronavirus is equivalent of 9/11. As in 9/11 when President Bush and Cheney pulled out the Patriot Act that they had in their drawer just looking for an excuse. Right now the coronavirus, the Trump-Pelosi bill gives the banks and the real estate sector an excuse to not only be bailed out as if they're losing money, but to evict their tenants.

Jim Vrettos : To profit even more?

Michael Hudson : Not necessarily profit. Profit you have to pay income tax on. Rich people don't make profits. They make capital gains. Only the little people make profits.

Jim Vrettos : You said this was conscious on their part, right? This is a rational way in which they think about these things. There's no moral dilemma to all of this by the large venture capitalists and so on, Wall Street, is that correct?

Michael Hudson : Yes. Obviously the lobbyists have written these laws. Trump is a real estate investor and certainly knows that when it gives the biggest single giveaway to the real estate sector. Real estate will not make a profit for the next 30 or 50 years. But it'll make enormous cash flow. They'll call it depreciation. The depreciation schedule pretends that buildings are losing their value even when they're going way up. It's an accounting system, including the national income accounts that have little to do with the real economy. So there is no more way to empirically describe what's happening using official statistics. We're entering a just-pretend statistical world with a just-pretend rationale and Orwellian euphemisms.

Jim Vrettos : Okay. So moral suasion, what are the limits? You worked with and talked about Rev. William Barber's Poor People's Campaign, for example. You talk about Bernie and his movement and so on. Are these designed to fail? Are there possible strategies that can be used to limit the vicious profits and money that's being made?

Michael Hudson : What's the connection between moral suasion, Reverend Barber and Bernie?

Jim Vrettos : I guess I'm asking here is who speaks for the poor? Who speaks for the workers? Who is standing up for the disadvantaged here?

Michael Hudson : Mainly their employers and creditors claim to be speaking for the workers. Their trickle-down economics says that "What's good for us is good for the workers. We want to help the workers by lending them more money to afford nicer housing, and lend them enough money to afford to pay their rising debt charges."

Jim Vrettos : Yet in fact that's not in their interest.

Michael Hudson : Of course it's not. But they can dominate media and drown out alternatives. The media don't care very much what Reverend Barber says or what Bernie says. The media say, "What's good for the workers is what's good for the banks." In fact, Trump and Biden came up last week and said there's going to have to be a second coronavirus bill, and we've got to really focus this time on the banks. We didn't give them enough in the first bill, o we have to give them more so that they can lend more.

Now, when you say we have to give the banks more money to lend more to get the economy moving, it means we have to have families and businesses take on more debt. This means that more and more of their income must be paid as interest and amortization, financial fees, late fees and penalties, and service charges. The double-talk is about as explicit as can be, with the Democrats being more adept at euphemism than the Republicans.

Jim Vrettos : As you probably know, we're taping this same day that Bernie has dropped out of the campaign. So who do you look to? What movement, what organizations are left to represent the interests of the vast majority of us?

Michael Hudson : I don't see anyone. Certainly in my profession, the economics profession, the major respectable economic journals are all censored by the Chicago School of monetarists and the neoliberals. So it's very hard to look to the economics profession for much help, at least from professors who want to get promoted and get tenure. I don't see much help at all.

As for voters and the two political parties, if you look at what economists call "revealed preference" and who the main voters for Biden are, what are they supporting? They threw the election to Biden, away from Bernie. What did they want? Well, it's as if they want lower wages, less education, more debt and more police power. They want more credit (that is, debt) and they would like to see social programs scaled back. That's what the voters have selected, "because it can beat Trump." That's their revealed preference, if you look at what their voting reflects. It's as if they've chosen lower living standards, and believe that the rich should have enough more money so that maybe some of it will trickle down.

MMT, left- and right-wing

Jim Vrettos : Trickle down. Right. You also work with Modern Monetary Theorists, correct?

Michael Hudson : That's right. I'm on leave from the University of Missouri at Kansas City, which has been the center of that. I'm also, as you pointed out, a research fellow at the Levy Institute, and I've worked closely with Stephanie Kelton, Randy Wray and the others.

Jim Vrettos : So tell us a little about that approach that you still have some confidence in. Tell us about what they are telling us to do, what you're telling us to do as a group.

Michael Hudson : It's not a homogeneous school. The idea of Modern Monetary Theory has roots going back to the functional finance of Abba Lerner in the 1960s, but you can look at Hyman Minsky as one who really inspired it in the 19980s and '90s. Its logic is that deficit spending is not bad if it is spent in the real economy to increase employment and spending.

The Chicago School says any government spending is the road to the gas chambers. I've heard that said literally. They say that with government spending, you're going to end up like Germany in the Weimar area with hyperinflation or like Zimbabwe. They think that running a government deficit actually increases consumer prices and that erodes the purchasing power of financial wealth. Well, Modern Monetary Theory says, first of all, that there's a disconnect between financial asset prices and where the real economy is going. Asset prices, capital gains and the wealth of the 1% are going up but real wages and disposable income has been going down. We've seen real estate, stocks and bond prices going up and up since the Obama bailout of 2009, but the economy has not benefited the 95 percent.

There's a sort of crude MMT solution, to simply run a budget deficit. And one extreme, there are some MMTers – not me and not my colleagues, but some MMTers – who say that all you have to do is run a budget deficit and you'll pump money into the economy. The tacit assumption is that this money is going to be spent in a Keynesian-style way, on hiring labor, especially if the government will build infrastructure. The government would buy goods and services, whose production involves paying labor and you'll reflate the economy, you'll increase the circular flow of income within the production and consumption sector.

On the other hand, Wall Street and England have discovered bad MMT. It's Donald Trump's or the Democratic Party's Obama-style MMT version known as Quantitative Easing. This approach says that deficits are indeed wonderful, as long as the government is running a deficit to spend on Wall Street, not into the "real" economy.

The leading MMT advocates of government spending, like Stephanie Kelton, Randy Wray and a whole group of MMTers who are critics of Wall Street, emphasize just what kind of government deficit spending we're talking about. What actually is spent on public investment, employment and income support. It has to be spent on labor and tangible capital. The fake MMTers are saying government deficits are great if given to the banks. Banks will provide the credit and save the rest of the economy. But that's the opposite of what we're saying. So just like every good religion early on, every good idea from Jesus to Marxism can be turned upside down and into the opposite. You're seeing an attempt today to turn the MMT that we all developed in the last three decades into a travesty of bailouts for Wall Street. It is as if bailing out Wall Street, Barack-Obama or Joe-Biden style, is going to bail out the economy by enabling it to run deeper into debt.

Bernie Sanders' six-point program

Jim Vrettos : So that's the choice we have then – the Trump version or the Obama-Biden version. I just got a group email from Bernie. Stephanie Kelton is one of his economic advisors. I'm going to read it briefly here. It's about the six core provisions that must be included in the next legislation. The first need, he says, is to address the employment crisis and provide immediate financial relief. To do this, we must begin monthly payments of $2,000 for every man, woman and child in our country – guaranteed paid family relief throughout the crisis, so that people who are sick do not need to choose between infecting others or losing their job. Is that what you're talking about?

Michael Hudson : This is similar to the MMT proposal for guaranteed income. What Bernie says is that the best way to introduce this proposal is to begin it during the coronavirus when people most obviously need it. I think Bernie added that it should be given to self-employed, to retirees, and to aliens living here. You have also to give it to everybody, or else they are going to be out in the street. It has to be general. I think a number of our people have been recommending that over the years. Pavlina Tcherneva usually explains this program as an extension of MMT policy.

Jim Vrettos : Absolutely. The second point he makes, along with what you've just said, is that we must guarantee healthcare to all. Medicare must be empowered to pay all of the deductibles, co-payments and out-of-pocket healthcare expenses for the insured, uninsured and under-insured. No one in America who is sick, regardless of immigration status, should be afraid to seek the medical treatment they need.

Michael Hudson : Here is the perfect catalyst opportunity for general healthcare for all. The reason you have to give healthcare for everybody right now, without cost, is that if you don't, they're going to be sick. And without health care, they're going to spread the disease to the rest of the economy. My friends in Hong Kong are telling me that there has been a second wave of virus there, and I'm told that in China there's a second wave. If you don't give the healthcare to everybody who needs it and you don't begin testing everybody and giving them whatever they need to get well. That includes guaranteeing their housing, as you just talked about, enough to pay their rent, buy food and get by when they're not earning an income. The alternative is for them to infect the whole rest of society repeatedly. Here's a perfect scale of model and a dress rehearsal for Medicare For All.

Jim Vrettos : Third point, to use the defense production act to produce the equipment and testing we need.

Michael Hudson : That's nice thought in principle, but the problem is that America has spent three decades since the 1980s disinvesting and outsourcing its industrial sector. I'm told that there are no screws or fasteners made here. How are you going to produce the medical equipment, masks and other things you need?

Masks, I'm told, cost about 20 cents to make. But here in New York they're being sold for $10. I think that the plan to produce them in America is to give U.S. monopolies the power of life over death, your money or your life. Why not $50 a mask – and let buyers pay on credit. Send them a new box of masks each week and sign them up on an easy-payment plan, billed every month like a public utility.

If it costs ten or even a hundred times as much to produce protection in America because they're producing for profit, do you really want to leave this to private industry? You really want the health sector to be public, because if it's privatized, it's going to be run with the objective of charging monopoly rent and lowering the quality. Basically it will be rife with the kind of fraud that we've seen whenever there is a kind of crisis.

I think that Bernie wanted to say that we should revive manufacturing in this country, but this is not something that can be done quick enough to cope with the coronavirus. The government has been grabbing sales of masks and other equipment to European countries and giving them to the Republican States. I think FEMA grabbed masks and ventilators for Massachusetts, a Democratic state. We're going to give it to Western states that vote Republican. The system already is so deeply corrupted that I don't see a short term solution.

Jim Vrettos : Fourth point: Make sure that no one goes hungry. As states record levels of food insecurity, we must increase benefits, expand the WIC program, double the funding for emergency food programs, expand Meals on Wheels, school meals programs, and deliver food to vulnerable populations. So it sounds like an extension of Great Society anti-poverty programs.

Michael Hudson : Again, who will benefit financially from this? Will this be a public program or a privatized program? I'm sure Donald Trump and Wall Street would like to charge the government $20 for every lunch that cost them $2. So at what price and on what terms? Who's going to be the main beneficiary? If Bernie is a good sport and let's Biden decide, he's a goner.

Jim Vrettos : Exactly. Two more: Provide emergency aid to states and cities, $600 billion direct physical aid to ensure that they have the personnel and funding necessary to cope with the crisis. In addition, they must establish programs to provide fiscal support and budgetary relief to States and municipalities.

Michael Hudson : That could be an awful program if it is debt-financed. States and municipalities are so deeply in debt that this crisis is going to push them even deeper. What Bernie seems to be opening himself up to is the Mitch McConnell solution: "Let's abolish the public pensions that they owe, and let's cut back public services. We have to let the banks be paid. Let the Federal Reserve load down the states even more in debt and make sure that they pay their bondholders who are mainly in the wealthiest 5% of the population." This could be a bailout for the 5%. The State and local debt must be written off. It's become a bad debt in the fact of the corona virus.

Unfortunately, American law has no procedure for state and local bankruptcy. They can't wipe out their debt. Even worse, many states have written into their constitution a balanced-budget requirement. If the Federal Reserve gives them support by more credit that has to be repaid, they're going to have to cut back social services. Betsy de Vos would like them to sell off the schools to be privatized. In any case, they're going to have to change the character of local spending. You cannot save the states and localities after this crisis if the current debt and financial overhead remains on the books. There has to be federal funding in one form or another acknowledging that the crisis has prevented the states, New York state, New York City and others from paying their debts. So we need to write them down.

That is going to cost bondholders. They belong to the higher income brackets, because state and local bonds are tax-exempt. Somebody has to bear the costs, and the Republican and Democratic suggestion is the same: to make the 99% pay the the 1%. That is a terrible solution. It doesn't address the debt problem. Without addressing that, you are part of the problem, not part of the solution.

Jim Vrettos : He may be trying to redeem himself a bit here with the six recommendation. Suspend monthly payments. We must suspend monthly expenses like rent, mortgages, medical debt and consumer debt collection for four months. We must cancel all student loan payments for the duration of this crisis, place an immediate moratorium on evictions, foreclosures and utility shut-offs. It doesn't go far enough. Correct?


Michael Hudson : What does "suspending" mean? Does it mean not having to pay rent this month, next month and maybe in August and September? That's fine. But what happens when October comes? If your rent is $1500 a month, do you have to pay the $7500 that has mounted up in arrears – or be kicked out? The landlord or mortgage banker will have a lien on whatever you're supposed to get from Social Security and other income. They will get a lien on your property and wages. So suspending payments isn't enough. They have to be annulled.

The bailout has given an enormous giveaway to the real estate industry, and is backing its right to collect all the rents, or else to evict the tenants and grab their property and paychecks. This is a pro-landlord bill. What's needed is nonpayment. You have to follow the money and come right out and say what the underlying problem is.

Jim Vrettos : Understood. The political resistance to what's going down is so feeble. Certainly during the sixties we had a welfare rights movement that Richard Cloward and Frances Piven helped organize to put pressure from the bottom up and get some sort of guaranteed annual income.

Michael Hudson : For the bottom up, but led by the top down.

Jim Vrettos : Yeah.

Michael Hudson : They were not very effective. There was an egotism saying "We're for the people."

Jim Vrettos : I'm searching for some of your ideas as to what we might support as alternatives. Do you see any out there, and how people can mobilize to resist and organize?

Michael Hudson : I think Reverend Barber is doing good work. I think the Justice Democrats are doing good work. I think the people around AOC also are.

Jim Vrettos : BrandNew Congress we heard are doing some good work.

Michael Hudson : But that's not enough. There's still not much discussion of the economic problem that really is at the root of this. People complain about the symptoms of inequality, even rich people do that. Everybody has books documenting inequality. But what they don't want is a discussion of what's creating it. Does the world have to be this way? What policies are needed to reverse it?

If you discuss that, and find that the root of inequality is the financial system indebting the economy and financializing real estate instead of making it the tax base, then you realize that you have to change the system. Today's wealth is mainly financial and rent-extracting, taking the form of indebtedness for 90% of the population.

The only way to recover is to wipe out this debt. You can't recover the real economy of production and consumption without wiping out the debt overhead, without rolling it back. That is what people are unwilling to see. They're unwilling to look at the solutions, because that's beyond the Overton window. It's cognitive dissonance. Actually curing the problem is no simply rubbing your hands and saying, "Oh, isn't that too bad?" If you criticize the debt system, however, you lose the coverage and the public media. That is why we're on the Internet, not on The New York Times or Wall Street Journal .

Jim Vrettos : Exactly. And you're one of the very few economists who have looked into the philosophical and historical origins of this.

Dismissing debt problems as an "externality" instead of at the core of policy solutions

Michael Hudson : I became an anthropologist and archeologist a Research Fellow in Babylonian economics at Harvard's Peabody Museum in 1984, to focus on that. It was obvious that the debts were not going to be rolled back. In 1980 the U.S. economy was so highly indebted that when interest rates went up to 20%, many economists thought that the debts would be wiped out in a convulsion of bankruptcy as in the 1930s. Instead, you had the government play a new role, to support Wall Street and to deregulate the economy for financial predators. The result was the Drexel Burnham era of corporate rating, and financial takeovers and debt pyramiding that has caused today's problem.

If the problem is financialization, then the solution to the economy has to be to de-financialize. That cannot be done as a slow process. It can only be done in a single stroke, a quantum leap. I don't see a constituency for wiping out the debt as long as people believe that you have to help the banks save the economy and help the 1% trickle down their wealth.

The 1% has no intention of letting its wealth trickle down. Its intention is to take even more wealth from the 99%. Its intention is to suck up, not trickle down. Its lobbyists write the laws to make sure that the wealth is sucked up, not trickled down. And unless you realize that there's a war of the financial sector against the rest of the economy, then as Warren Buffet said, "There's a war on, and we're winning it." But only they know there's a war. The victims don't even know there's a war.

Jim Vrettos : The victims become statistics that we're willing to put up with. One of the questions I have for you here: Each year, over 250,000 people die in the United States in what social scientists refer to as structural violence and economic devastation of living in poverty, with the strains, stresses and anxiety of trying to survive in the structure of work, family, criminal justice, health and housing. We're willing to put up with that, we're willing to blame the victim in a sense, and create a whole structure that attempts to address their problems without dealing with the structural roots.

Michael Hudson : Economists call these problems externalities. In other words, they're external to the economic model. Just as global warming and pollution are external to the model. This is at the root of "free market" theory rationalizing the status quo as natural, as if There Is No Alternative. The problems and costs to society created by financialization and living in the short run are considered external to the model, because the models themselves are short-term. and really focus on how the 1% can make more money. How can the financial sector make more money from the real economy? Debt and credit is see as the solution, not as the problem.


Environmental pollution, personal violence, the suicide rate, emigration and shortening lifespan, that's all external because once you discuss them, then all of a sudden you broaden the problem beyond what economists talk about to what society talks about. In all of the academic disciplines this is occurring. Sociology was developed in an attempt to broaden economics to discuss these overall social issues. Just as the University of Chicago played a narrowing censorial role in economics, it played a similar role in sociology, just talking about status as if it is something inherent. Anthropology was created as a discipline in order look at the long picture. But that's been narrowed into what one anthropologist calls underwater basket weaving and a study of tribal groups.

There is no academic discipline that is focusing the debt problem that we're discussing. Any "discipline" is narrow. You need a pan-disciplinary approach – a broad approach that looks at society as an overall economic system, not as separating one economic organ from suicide rates or public health, as if none have any relationship with each other. It's a desegregated system. There's nothing like the kind of discussion you had in ancient Greece, Rome or Babylonia in ancient times when people treated the social problems as including personal character, the environment and everything else.

Jim Vrettos : Understood. Barber does talk about this to a certain extent by trying to make connections to racism, ecological devastation, war and militarism, the false moral narratives that hold up these injustices. Is that the sort of analysis we need, the thinking that we need to pursue?

Michael Hudson : Who's going to provide that kind of narrative in an academic framework, given the way that the universities segregate their educational system into disciplines? Can you provide it in the media? Is this something that you'd expect to get discussed in now The New York Times or the Wall Street Journal ? Is it something you'd expect to discuss on ABC TV, MSNBC or Fox news? Where are you going to discuss this?

Jim Vrettos : I understand what you're saying. We're all in our little silos here, so-called disciplines that are not interconnected. We don't see that in the political world, in the academic world, as you say, in the so-called spiritual, religious world as well. You've written about how religion and economics have been so separated and how that needs to be re-connected. Do you want to spend a little bit of time on that?

Michael Hudson : Every religion has gone downhill, just like classical economics, which turned into the opposite of what it was in the time of Adam Smith and John Stuart Mill. When I talk about religion's treatment of debt, I begin with Sumer and Babylonia and the idea of religion as preserving economic stability. It wasn't so much out of an idea of utopian idealism that the Mesopotamian rulers canceled debts. They wanted to prevent the economy from falling apart. They wanted to prevent the citizenry – the taxpayers and cultivators on the land – from falling into debt to an oligarchy that would use their money to overthrow the rulers and take over society, financial-style.

Religion tends to reflect the leadership of society, although it tends to begin as a moral reform movement. The leadership in the third millennium, second millennium and even the first millennium BC could not afford an oligarchy impoverishing the rest of society. If an oligarchy did that, society would fall apart. But gradually as Aristotle pointed out, every democracy turns into an oligarchy, and so do palace economies. The oligarchy in turn tends to our takeover religion. In Judaism, Jesus accused the Pharisees of loving money and replacing the Jubilee year with Rabbi Hillel's prosbul in which debtors waived their rights to have a debt cancellation under the Jubilee Year.

Same thing with Christianity. It began with the idea, expressed in Jesus's first sermon when he said that he had come to proclaim the Jubilee Year. He unrolled the scroll of Isaiah and said, that was his message. Christianity began that way. But by the fifth century of our era, it took the African branch of Cyril of Alexandria and St. Augustine, that said, "Okay, we're going to accept the world as it is. It's okay for the landlords to have their land and for the rich people to be rich, but we will just ask them to be moral and act with charity, especially to us paradigmatic poor in the Church."

You have every religion taken over, so you need a continual renovation, a continual Renaissance of religion. It usually is easier to start a new religion – or a new academic discipline – than trying to reform an institution mired in inertia. I don't think existing religions can be reformed, any more than the economics discipline that has deteriorated into a religion of financial wealth-seeking.

I don't know what's happening with the Catholic church. It has a Pope who seems to want to restore the Liberation Theology that the Church was moving toward in the late 20th century. I don't know what the future of that is. Obviously there was a fight by the last two Popes to oppose Liberation theology. The Protestant religions I think are pretty passive.

Jim Vrettos : Sounds like we're in the iron cage as the sociologist Max Weber put it.

Michael Hudson : I thought you were going to say the End Days.

Jim Vrettos : Well, I don't think he put it that way, but-

Michael Hudson : I meant the Book of Revelation.

Jim Vrettos : Right. Marx saw a little hope in the idea of praxis , correct?

Will Finance Capitalism destroy Industrial Capitalism?

Michael Hudson : He thought that industrial capitalism was going to be revolutionary in fulfilling its historical destiny of lowering the cost of production, above all by lowering costs and being more efficient by getting rid of the landlord class and the financial class. He expected credit