The two faces of finance

The locus of power has long been the point where banking and politics intersect. But the way they interplay is very different in different parts of the world. The capital markets may be global, but the banking systems on which that activity rests remain national. The tension between the global and the national is making the current situation intractably complex.

In the English speaking world, the banks have become something of a rogue force. After a quarter of a century of “financial de-regulation” – a nonsense claim, given that finance is rules – English speaking banks made up their own rules, almost destroyed the monetary system of the world, then cheerfully handballed the whole problem to governments to fix, making sure to blame governments later and issue threats about the dangers of being “over-regulated”.

The LIBOR scandal is likely to be the last straw. It is one thing to invent financial instruments that no-one understands, even when the wreckage becomes immense. It is quite another to debauch the global interest rate, which is the core of money itself. Even politicians understand how dangerous that is.

In Europe, it is a very different dynamic. Banking is corporatist, subsumed in the system rather than a law unto itself. The euro crisis is in part an unwinding of the worst excesses of that corporatism. Spain is likely to be the place where it finally comes to a head, with the Germans and Italians wanting the Spanish government to submit to supervision before the funds are made available to recapitalise the weakest of the banks.

Aware that there is no real distinction between the polity and the financial system in Spain (mainly because it is roughly the same in their own countries), Germany and Italy are positioning for more centralised control of Europe’s banks, not so much nationalisation of the banks as a kind of regionalisation. Whether it works is another matter. If it doesn’t, the end game will be Italy. Germany can bully Spain, but it can’t bully Italy, which has a primary budget surplus and a large industrial base that would thrive if Italy exited the euro and its currency collapsed.

In Asia (to indulge in generalisations), the banking system tends to be unable to impose basic disciplines of the cost of capital on the industry base. That was seen in Japan in the 1990s, when to boost its mercantile strategy absurdly long time lines for return on capital were used, as R Taggart Murphy pointed out in his book “The Real Price of Japanese Money”  There should be a similar study of the real price of Chinese money. Its formal banking system remains communist in spirit and the cost of capital is problematic. I can remember being at conference in China with a number of heavyweight observers of the country. I asked what the cost of capital is in China. No-one was keen to answer.

Overlaid on those national and regional differences between the financial systems is a homogenous trading environment; the global capital markets, in which more than $3 trillion is transacted per day. That means that the regulators trying to fix the banking problems have to look in two directions at once: at the specific character of the banking problems they face at the local level and at the traders who are watching and investing in such a way that they amplify what is happening, whether it is good or bad. The extreme strength of the $A is what happens when these traders think you are doing well, the high rates on Spanish and Italians bonds is what happens when they think you are not.

The volatility and speed of change that these traders create makes the complexity close to unmanageable. The obvious solution is for governments to act in concert to limit the financial traders and their meta money, but that is unlikely to occur.

The tendency for economics to assume that all economics and finance is the same is just as harmful. Because mainstream economics pretends to be scientific, it is ill suited to noticing the differences between countries, only the quasi-scientific commonalities.

And it is not just mainstream economics. The same applies to Marx, another economist prone to blunt and crude generalisations. He was at times prescient as John Lanchester points out in the LRB:

“It’s hard not to conclude from these selected sentences that Marx was extraordinarily prescient. He really did have the most astonishing insight into the nature and trajectory and direction of capitalism. Three aspects which particularly stand out here are the tribute he pays to the productive capacity of capitalism, which far exceeds that of any other political-economic system we’ve ever seen; the remaking of social order which accompanies that; and capitalism’s inherent tendency for crisis, for cycles of boom and bust.

“I should, however, admit that I haven’t quoted these sentences exactly as Marx wrote them: where I wrote ‘capitalism’, Marx had ‘the bourgeoisie’. He was talking about a class and the system which served its interest, and I made it sound as if he was talking only about a system.”

In other words as much platitude as prescience. Lanchester then points out where the generalisations fail:

“Scandinavian welfare capitalism is very different from the state-controlled capitalism of China, which is in turn almost wholly different from the free-market, sauve-qui-peut capitalism of the United States, which is again different from the nationalistic and heavily socialised capitalism of France, which again is not at all like the curious hybrid we have in the UK, in which our governments are wholly devoted to the free market and yet we have areas of welfare and provision they haven’t dared address.

Singapore is one of the most avowedly free-market countries in the world, regularly coming top or near top of surveys for liberalisation of markets, and yet the government owns most of the land in the country and the overwhelming majority of the population lives in socialised housing. It’s the world capital of free markets and also of council flats.

There are lots of different capitalisms and it’s not clear that a single analysis which embraces all of them as if they were a single phenomenon can be valid.”

Quite. Which means economic analyses, and from that solutions to financial crises, need to be specific. Not the crudities of economic schools, whether it be neo-classical or Marxist. But how can they happen when the regulators have to deal with global capital flows that are very much employing a “single analysis”? In fact, it has got to the stage where the “single analysis” of economic indicators and finance has been turned into mathematics and used for algorithms that drive high frequency trading.

That means the threat to the financial systems is coming from two directions.

 

 

 

 

 

Comments

  1. So the answer in the end then, is…. protectionism. Recognising that there is no one-way to deal with the problem frees all parties to the global system to do their own thing. And with even the likes of H&H calling for defensive currency intervention, protectionism surely isn’t far away.

    • But whilst protectionism seems to be an answer, Janet, aren’t these the times we always apply it, and doesn’t it direct us into trade wars (and worse)?

      I enjoyed Sell On The News’ thoughtful piece, and I suggest the fundamental difference he sees between international banks may be explained by the manner in which they take their risk management seriously.

      It has become clear US, British, Australian (Irish, Greece, Spanish, Italian, etc.) banks failed the risk management test. However, although it appears the German banks have passed it in their home market, they’ve obviously fallen down in respect of their international lending.

      So, despite apparent worldwide differences in banking, where might we find any real ray of light?

      I have little sympathy with any of the banks. They must to return to investing people’s savings securely and to lending prudently.

      Let the investment banks play the risks.

      I think if we solved the banking question, we’d have gone a long way to solving boom-bust.

      • I agree, Bryan. Which is why I am yet to be convinced that H&H’s (& McKibbin’s) currency interventionist policy is the way to go. But I recognise why they both advocate it. It’s in SoN’s early comment ..”The capital markets may be global, but the banking systems on which that activity rests remain national. The tension between the global and the national is making the current situation intractably complex.”

      • Governor of the BoE Mervyn King’s Oct 2010 Buttonwood speech may interest you then, Bryan –

        http://www.ethicalmarkets.com/2010/10/25/banking-from-bagehot-to-basel-and-back-again/

        In it he postulates an end to fractional reserve banking, and calls for a formal separation of the balance of payments system from the investment banking (speculation) system.

        While I have sympathy for his rationale, I do not favour a replacement of the current banking system/s with yet another designed by … bankers.

        For my part, I think nothing will fundamentally change until currency issuance itself is rendered free from ‘sovereign’ exclusivity.

        • In it he postulates an end to fractional reserve banking…

          he calls for this elimination apparently oblivious to the fact that it has already been eliminated in many countries — including Australia.

          http://www.rba.gov.au/mkt-operations/dom-mkt-oper.html

          (note that this does not stop Australian economists teaching this mythology to their unwitting students)

          So he already has some “test tubes” to see if this elimination has the effect he expects. From what I’ve read of Deep Ts stuff I didn’t get the impression that our banking systems was intrinsically safer than the UK.

          He also seems to have the economists misunderstanding of FRB, re: causality, that was at the centre of the Keen/Krugman debate a few months ago.

          • Yippee ki-yay said:

            So he already has some “test tubes” to see if this elimination has the effect he expects.

            I think the S&Ls in the United States during the 1980s qualify as another “test tube,” and we all know how that ended:

            **quote**
            Most political, legislative, and regulatory decisions in the early 1980s were imbued with a spirit of deregulation. The prevailing view was that S&Ls should be granted regulatory forbearance until interest rates returned to normal levels, when thrifts would be able to restructure their portfolios with new asset powers. To forestall actual insolvency, therefore, the FHLBB lowered net worth requirements for federally insured savings and loan associations from 5 percent of insured accounts to 4 percent in November 1980 and to 3 percent in January 1982.16 At the same time, the existing 20-year phase-in rule for meeting the net worth requirement, and the 5-year-averaging rule for computing the deposit base, were retained. The phase-in rule meant that S&Ls less than 20 years old had capital requirements even lower than 3 percent. This made chartering de novo federal stock institutions very attractive because the required $2.0 million initial capital investment could be leveraged into $1.3 billion in assets by the end of the first year in operation.17 The 5-year-averaging rule, too, encouraged rapid deposit growth at S&Ls, because the net worth requirement was based not on the institution’s existing deposits but on the average of the previous five years.18

            Reported capital was further augmented by the use of regulatory accounting principles (RAP) that were considerably more lax than generally accepted accounting principles (GAAP). However, where GAAP was more lenient than RAP, the Bank Board adopted the former. As of September 1981, troubled S&Ls could issue income capital certificates that the FSLIC purchased with cash, or more likely with notes, and they were included in net worth calculations. That same month, the FHLBB began permitting deferred losses on the sale of assets when the loss resulted from adverse changes in interest rates. Thrifts were allowed to spread the recognition of the loss over a ten-year period, while the unamortized portion of the loss was carried as an asset.” Then in late 1982, the FHLBB began counting appraised equity capital as a part of reserves. Appraised equity capital allowed S&Ls to recognize an increase in the market value of their premises.

            Perhaps the most far-reaching regulatory change affecting net worth was the liberalization of the accounting rules for supervisory goodwill.19 Effective in July 1982, the Bank Board eliminated the existing ten-year amortization restriction on goodwill, thereby allowing S&Ls to use the general GAAP standard of no more than 40 years in effect at the time.

            http://www.fdic.gov/bank/historical/history/167_188.pdf

            **end of quote**

  2. Thank you for another interesting post. I do wish that Lanchester’s point in regard to the different balances and forms of capitalism/socialism was more widely recognised. Too often the dumb barking of ideologues drowns out the reality that there is no ideal. It also covers up that there is rarely a right or wrong*, most often it is just us hoping to find out what is appropriate and works.

    *I’m not looking to start a debate on right, wrong or truth. That is for another thread on another day.

    • You’re no fun. Let me try and get a debate kick started.

      American style, post-Reaganism capitalism – which has made dupes of generations of shallow, self-absorbed, spiritually bereft, psychologically unbalanced, insular, unworldly men and women, wed to dogma of government and taxation as a form of tyranny, affordable healthcare and education as wrongheaded, and the attainment of individual wealth as the pinnacle of one’s existence – is wrong. Like, really, really wrong. This malevolent creed of uber-individualism, creeping and multiplying like cancer, has permitted the financial sector to completely co-opt the political system, distort the nature of society to its own ends, and (metaphorically) enslave the populace, who, like the unending lines of hopeful recruits for Foxconn’s erstwhile Dickensian factories, continue to seek their salvation in pursuit of The Dream.

      Scandinavian welfare capitalism, in all its herring munching, dressed down, blonde purity, is good. Spend a week in Washington D.C. then a week in Oslo and tell me I lie.

      • “..and (metaphorically) enslave the populace”

        Why do you water down an otherwise perfectly apropos description with the word, “metaphorically”?

        How is debt bondage vis-a-vis mortgages, credit cards, student loans etc, intrinsically any different to, say, the experience of the victims of sex trafficking? In both cases, the slave is compelled to work purely in order to repay a “debt” … with usury. In the absence of debt, persons would be free to choose their vocation, and hours of work, based on other criteria than sheer (forced) necessity – eg, personal interest/inspiration, creative drives, opportunity, altruism, etc.

        Humanity as a whole would be far more free (physically, mentally, and spiritually), creative, productive, calm and peaceful, and receptive to each other, in the absence of debt and usury.

        Excellent prompt for debate, BTW. +1 to your observations.

        • I thought it best to dilute that description. My bank’s customer service representatives do sound a little dour at times, but at least they are not nihilistic, hollow-eyed, gun-toting Russian pimps who will cheerily kill my family lest I attempt to flee my 6 by 6 ft, airless accommodations.

          We at least have the option (he mused somewhat hypocritically, typing on the credit card purchased computer in the comfort of his over-priced, mortgage financed, post-war outer suburbs fibro house), difficult as it is, to escape all of this without the threat of a brutal death. The trick is to convince yourself that a reduction in what you considered to be your rightful “lifestyle” is not in fact the same as dying. After awhile, you wonder what you were so anxious about and think to yourself- what is all this shit that I own ?

          Disclaimer: Author is currently in midst of protracted early mid-life crisis.

      • +10 monsieurbarso, for both the sentiment and the bold choice of words with truths within. IMO extreme capitalism is as bad and corrupt as communism and the worst (tough competition) is what is happening now, with profits privatized while losses are laid on the taxpayers of today and tomorrow.
        I have been trying to go back to being an ignorant sheep recently -don’t worry, be happy and all that- to avoid getting caught in a midlife crisis from pure sadness for the sake of the next generation.

  3. Wow what fantastic contributions special thanks to monsieurbarso and Opinion8red.

    I guess the term debt bondage is one that communicates the reality to which you refer without need of qualification.

    Protection has a legitimate role to offset the currency manipulations of the saver economies. Their function is much more social and thus IMO worthy than printing currency as a counter strategy.

    The multitude who wanted cheap stuff are about to pay a price far greater than they would have if there had been a tariff.

    And I think there is some fairness that buyers of cars support the industry through tariffs rather than all taxpayers.

  4. Christine Lagarde: The financial industry is a service industry. It should serve others before it serves itself.
    It’s as simple as that.

    • I would pose a fundamental question – How can “finance” ever be considered a “service” ( http://oxforddictionaries.com/definition/english/service ), when the core of banking is the loaning of “money” electronic bookkeeping entries … at interest … in exchange for a signature on a document that renders the signatory a debt slave of the lender?

      The reality is, “banking” is parasitic. It does not provide a “service” at all. Rather, its core profits arise from the enslavement of others, via leveraging their daily labour. En masse.

      Additional profits then arise from the provision of add-on “services” – eg, fees and charges for the granting of access to “your” … digital bookkeeping entries. Which are merely tokens of someone’s debt slavery – if not yours, then someone else’s.

      Until the provision of “money” as the lifeblood of human economy no longer means debt bondage, “banking” and “finance” cannot be considered a “service”.

      IMHO.

      • Do away with fractional banking. Have governments control the printing of money. Money would enter the economy through government infrastructure projects and pulled out through taxation. There would be no need for interest on money for idle money, but profits on value creation.

        • Do away with fractional banking

          it’s been done away with.

          Someone else might identify the time that occurred but it might have been the wallace inquiry in the 90s.

          • Fractional banking occurs on a massive scale. Australia, Canada, New Zealand and Sweden are small fry in a global financial system

          • Done away with….

            Yep. In Australia NO RESERVES are required.

            So, with no money to back it up, Australian banks can swap a few keystrokes for the Deeds to bricks and mortar.

          • cheers,Tsport.
            I am not an economist, I am just trying to look after my future.
            What I am trying to say is that why can a central bank control the money supply for the government and charge interest to the government on that money that was simply created out of nothing.
            Then that debt can never be repaid without borrowing for the interest.
            The Federal Reserve of America is owed $5.5 Trillion from the government and most of those loans were to buy dodgy securities. The central bank lent money to government at interest that was created out of nothing.
            There is no value to that money.
            So, why can’t money enter the economy directly from a government for value created and taxed out of the system when it starts to lose value.
            Interest is a step that need not exist.
            Please correct me if I am wrong.

          • If fractional banking is done away with wouldn’t banks then need to hold 100% of the reserve.
            Fractional banking did not start with a 0% reserves policy,
            the loan had to backed by an equivalent reserve.

        • Give money creation to the central planning government/bankers/corporate elites?

          My view of the fixes is:

          1) Debt free money
          2) Competitive suppliers of money (limited concentration of any one supplier)
          3) Money which is backed by a scarce commodity such as gold so it can’t be overly produced or debased

          We need to take the powers of money creation away from central planners/corporate monopolies – it hasn’t worked well in USSR and it won’t work well for the Western world as we are finding out day by day.

    • It’s a pity the IMF doesn’t practice what it preaches when imposing debt slavery on recipients of its bail out packages.

      Money as debt is at the core of the problem. When the creation of money is not attached to the creation of a debt we will have a system which functions for the people, not parasitical corporatist elites and their puppet and paid for representatives in governments.

  5. I agree, excellent contributions. I wonder what “protection” means in the case of cross border capital activity? It is a term more normally applied to trade, not finance. I remain a big fan of the Tobin tax idea, a very small tax that would make the speculators think twice. If that is protectionism, then call me a protectionist. But I see it more as a contest over who gets to set the rules of money — government or traders? The big difference between trade in goods and services and trade in money, is that price and value are extrinsic to such products, an outside value, while price and value are intrinsic to finance, so they can’t be separated. Finance IS price and value.

    • Hi SoN, thanks for another thought-provoking and insightful piece.

      “Protection … It is a term more normally applied to trade, not finance.”

      Indeed. I imagine that this may be because “protectionist” measures have historically been used only by some nations at any time, and in relation to specific sectors of their economy/s?

      IMO, the world has changed post-2008. Has there ever been a time when such a large % of the global economy has been involved in competitive currency debasement aimed (in theory) at supporting/boosting the international competitiveness of entire national economy/s, rather than just specific sectors?

      • It’s changed alright and it was 2009, March as I recall. The G20 meeting in London.

        Competitive currency debasement has come out in earnest because Sovereigns and CB’s themselves took on the role of filling the demand gap left behind by the economic collapse brought on by Banking industries in their economies. Govts/CB’s consider debasement a tool for a competitive edge. Well almost all – (RBA?).

        So the core problem, IMO is how to again stimulate (NON Govt and CB provided) consumer demand? Beacuse if Gov’ts and CB’s played a much smaller role in our economies , their influence would recede.

        The outcome of the GFC is dangerous in this regard. Govt’s/CB’s/Banks now are seen to be the be all and end all to the future well being of national economies, NOT commerce , private endeavour or private enterprise. People are coming to see Govt as their only protector, not themselves or their own initiatives and enterprise. Govt’s will not relinquish this growing uber status willingly. It will have to be wrenched from them by newly elected entities. The struggle for that is underway now, in the US with this election.

        So, while economies are so much hostage to Govt and Banks via their CB’s, we can expect self serving policies to be primary and intervention to increase. The Chinese mercantile economic model comes to mind, levers pulled in secret from behind Central Committee doors. Which is why the RBA now stands somewhat alone in this crowd, for now.

        What is right, or wrong? Personal liberty, free of odious Govt intrusion is right. Small Govt is better than Big Govt. Investment Banking seperated/segregated from Commercial Banking is right. The sharing of accurate and fully transparent economic data is absolutely right while manipulation should be punishable by severe enforced penalties. Currency manipulation is wrong – but it is widespread.

        There indeed are 2 faces of finance. But they are ;
        1) Those on the inside.
        2) The rest of us.

        You can tell who we are. We are the ones with the white wolly fleece out in the paddock. I find it helps to understand the game your playing in.

        • I agree that Central Banks and the finance sector in general play an oversize role in our economic and social fabric, but this is in large part the legacy of a United States primarily concerned with defeating Communism, who – along with its allies – sought economic supremacy through consumption, and greater consumption through a manufactured culture of consumerism, a design ethos of obsolescence, and the heightened role of debt in creating the “wealth” that allows its citizens to keep on consuming.

          So, given where this has brought us, who else but CBs could ever stimulate demand at a level that keeps the whole game ticking along at a sufficiently large scale and momentum to restrain the Chinese peasantry from engendering that one thing that scares the living bejesus out of every big government loathing investment banker – volatility ? Short of another global, 1940s style war, that stimulus ain’t coming of its own volition.

          Personal liberty is never possible as an absolute condition, and Government – in the western democratic mould, has not proven antithetical to the increased degrees of “liberty” we all enjoy, in spite of Government actually increasing in size (under conservatives and progressives alike). Aside from no longer being able to buy a hand-gun to keep at home to ward off odious tax collectors, I’m not sure how our personal liberties have been substantively compromised by Government ?

          • Some points of possible disagreement;

            Private Debt came into it’s own and grew from about the time Globalisation became a real force. Debt and the freeing up of credit markets was a strategic effort to fill the wealth gap so that consumption could rise in Western countries while real wages fell as well paid manufacturing jobs migrated to cheaper localities.

            It’s convenient that the stimulation economies need to grow , even survive, now comes from Govts and their affiliated bodies. Keeps the citizenry subservient.

            You may want to swat up on the encroachment of Govt in the realms of freedom of speech, environmental indoctrination and communications infrastructure for just some examples. I will leave out confiscation of legitimate earnings by wasteful taxes.These are not benevolent forces at work. In fact my impression of your comment on this is that you subscribe to the Govt is all good and well meaning meme already. (No offence intended btw.)

          • Yes, it’s irony heaped upon irony upon horror upon horror. Still, waddayagunnado ?. Yep, I’ve swatted up, read the book, seen the movie, visited the theme park, bought the t-shirt. I am interested in reading more, though – where can I find some of your literature ?

        • @ GSM

          I don’t see the upcoming presidential election in the US as being so clear-cut as you do.

          In my opinion, we are still wondering around in the political and economic wilderness.

          The choice between government and no-government is a false choice. A more correct choice should be between good government and bad government, because as James Madison fully understood, bad government and no-government are essentially the same—-tyrannous. Hence, according to Madison, “it is of great importance in a republic, not only to guard the society against the oppression of its rulers; but to guard one part of the society against the inustice of the other part.” That takes a strong government.

          The latest effort by the British film-maker Adam Curtis, All Watched Over by Machines of Loving Grace, is a superb portrayal of how the failure to heed Madison’s counsel leads to tyranny:

          http://topdocumentaryfilms.com/all-watched-over-by-machines-of-loving-grace/

          Achieving good government, however, is one of what Hannah Arendt called “the great unsolved, political questions of our century.”

          The pessimists and cynics assert that achieving good government is an impossibility, and thus the best option is no-government.

          The naive optimists, on the other hand, whether they be modern or traditional religionists, overestimate the ease with which good government can be achieved.

          What I find particularly disturbing about the United States is the number of people, and these hail equally from the left as from the right, who, because of some interest or ideological conceit, defend bad government.

          • @ GSM

            I’m not completely unsympathetic to your position. However, the Republicans have proven to be much better at talking the talk than walking the walk. As Andrew Bacevich points out in The Limits of Power:

            **quote**

            Reagan portrayed himself as conservative. He was, in fact, the modern prophet of profligacy, the politician who gave moral sanction to the empire of consumption. Beguiling his fellow citizens with his talk of “morning in America,” the faux-conservative Reagan added to America’s civic religion two crucial beliefs: Credit has not limits, and the bills will never come due. Balance the books, pay as you go, save for a rainy day—-Reagan’s abrogation of these ancient bits of folk wisdom did as much to recast America’s moral constitution as did sex, drugs, and rock and roll.

            **end of quote**

          • Besides the growth of government and debt that occurred under Reagan was also the rapid expansion of the police state.

            The U.S. police state, as Christian Parenti explains here:

            http://vimeo.com/23346020

            and Eric Sterling explains here:

            http://vimeo.com/22914107

            is very much the child of the bourgeoisie (or capitalist class).

            Whether Reagan was sincere in reigning in the police empire when he was elected is, I suppose, open to debate. Eric Sterling, who was a Democratic congressional aide at the time, says Reagan initially tried to cut back on the police state, but was stymied in his efforts by political posturing and one-upmanship by the Democrats.

            However, this monster is now beginning to turn on its creators, as the recent Gibson Guitar case illustrates:

            http://reason.com/blog/2012/02/23/the-great-gibson-guitar-raid-months-late

            Or as Hannah Arendt put it in The Origins of Totalitarianism:

            **quote**
            [B]ourgeois attempts to use the state and its instruments of violence for its own economic purposes were always only half successful. This changed when the German bourgeoisie staked everything on the Hitler movement and aspired to rule with the help of the mob, but then it turned out to be too late. The bourgeoisie succeeded in destroying the nation-state but won a Pyrrhic victory; the mob proved quite capable of taking care of politics by itself and liquidated the bourgeoisie along with all other classes and institutions.

            **end of quote**

          • I found these graphs which very vividly illustrate what Bacevich asserts about Reagan being the “modern phrophet of profligacy”:

            “Federal Debt As A Percent Of GDP — By President!”

            http://articles.businessinsider.com/2010-05-22/markets/30060713_1_national-debt-tax-cuts-government-revenues#ixzz23KmoSIzZ

            “US Government Spending Charts”

            http://www.usgovernmentspending.com/spending_chart_1972_2010USp_13s1li011mcn_F0f

            “Ignoring the role of private debt in an economy is like driving without accounting for your blind-spot”

            http://blogs.lse.ac.uk/politicsandpolicy/2012/03/14/ignoring-the-role-of-private-debt-in-an-economy-is-like-driving-without-accounting-for-your-blind-spot/

        • Lawrence Goodwynn, in The Populist Moment, elaborates on one of “the great unsolved, political questions of our century”:

          **quote**

          While the Populists committed themselves to a people’s movement of “the industrial millions” as the instrument of reform, the history of successful socialist accessions to power in the twentieth century has had a common thread—-victory through a red army directed by a central political committee. No socialist citizenry has been able to bring the post-revolutionary army or central party apparatus under democratic control, any more than any non-socialist popular government has been able to make the corporate state responsive to the mass aspirations for human dignity that mock the pretensions of modern culture. Rather, our numerous progressive societies have created, or are busily creating, overpowering cultural orthodoxies through which the citizenry is persuaded to accept the system as “democratic”—-even as the private lives of millions become more deferential, anxiety-ridden, and (no other phrase will serve) less free.

          Increasingly, the modern condition of “the people” is illustrated by their general acquiescence in their own political inability to affect their governments in substantive ways. Collective political resignation is a constant of public life in the technological societies of the twentieth century. The folkway knows no national boundary, though it does, of course, vary in intensity in significant ways from nation to nation. In the absence of alternatives, millions have concentrated on trying to find private modes of escape, often through material acquisition. Indeed, the operative standard of progress in both ideological worlds of socialism and capitalism focuses increasingly upon economic indexes. Older aspirations—-dreams of achieving a civic culture grounded in generous social relations and in a celebration of the vitality of human cooperation and the diversity of human aspiration itself—-have come to seem so out of place in the twentieth-century societies of progress that the mere recitation of such longings, however authentic they have always been, now constitutes a social embarrassment….

          As a body of political ideas, socialism in America—as in so many other countries—-never developed a capacity for self-generating creativity. It remained in intellectual servitude to sundry “correct” interpretations by sundry theorists—-mostly dead theorists—-even as the unfolding history of the twentieth century raised compelling new questions about the most difficult problem facing mankind: the centralization of power in highly technological societies. If it requires an army responsive to a central political committee to domesticate the corporate state, socialism has overwhelmingly failed to deal with the question of who, in the name of democratic values, would domesticate the party and the army. In the face of such a central impasse, it requires a rather grand failure of imagination to sustain the traditional socialist faith.

          **end of quote**

          • “Rather, our numerous progressive societies have created, or are busily creating, overpowering cultural orthodoxies through which the citizenry is persuaded to accept the system as “democratic”—-even as the private lives of millions become more deferential, anxiety-ridden, and (no other phrase will serve) LESS FREE”

            +1000

            Thanks glen.

          • “No socialist citizenry has been able to bring the post-revolutionary army or central party apparatus under democratic control…”

            If you’ve not already, you might find Mikhail Bakunin thought-provoking –

            http://theanarchistlibrary.org/authors/Michail_Bakunin.html

            In particular, in context of the above quote, his criticisms of Marxism are well worth pondering, especially in light of subsequent history –

            http://en.wikipedia.org/wiki/Mikhail_Bakunin#Critique_of_Marxism

          • Whether Reagan was sincere in reigning in the police empire when he was elected is, I suppose, open to debate. Eric Sterling, who was a Democratic congressional aide at the time, says Reagan initially tried to cut back on the police state, but was stymied in his efforts by political posturing and one-upmanship by the Democrats.

            However, this monster is now beginning to turn on its creators, as the recent Gibson Guitar case illustrates:

            http://reason.com/blog/2012/02/23/the-great-gibson-guitar-raid-months-late

          • However, what we have now is a monster on our hands. As Hannah Arendt put it in The Origins of Totalitarianism:

            **quote**
            [B]ourgeois attempts to use the state and its instruments of violence for its own economic purposes were always only half successful. This changed when the German bourgeoisie staked everything on the Hitler movement and aspired to rule with the help of the mob, but then it turned out to be too late. The bourgeoisie succeeded in destroying the nation-state but won a Pyrrhic victory; the mob proved quite capable of taking care of politics by itself and liquidated the bourgeoisie along with all other classes and institutions.

            **end of quote**

          • Now we’ve got a monster on our hands. AsHannah Arendt put it in The Origins of Totalitarianism:

            **quote**
            Bourgeois attempts to use the state and its instruments of violence for its own economic purposes were always only half successful. This changed when the German bourgeoisie staked everything on the Hitler movement and aspired to rule with the help of the mob, but then it turned out to be too late. The bourgeoisie succeeded in destroying the nation-state but won a Pyrrhic victory; the mob proved quite capable of taking care of politics by itself and liquidated the bourgeoisie along with all other classes and institutions.

            **end of quote**

          • Now the police empire which Nixon began in the 1960s has taken on a life of its own. As Hannah Arendt put it in The Origins of Totalitarianism:

            **quote**
            Bourgeois attempts to use the state and its instruments of violence for its own economic purposes were always only half successful. This changed when the German bourgeoisie staked everything on the Hitler movement and aspired to rule with the help of the mob, but then it turned out to be too late. The bourgeoisie succeeded in destroying the nation-state but won a Pyrrhic victory; the mob proved quite capable of taking care of politics by itself and liquidated the bourgeoisie along with all other classes and institutions.

            **end of quote**

          • @ Opinion8red,

            My problem with all these Fichtean-inspired philosophies that make freedom absolute—-Marxism, anarchism, laissez faire, libertarianism, neoliberalism, the counter-culture of the 60s, the California ideology, etc.—-is that in practice, as opposed to in theory, they have all proven to be recipes for tyranny.

          • @ Opinion8red,

            Or to put that another way, we ignore Kant’s antimony of freedom and nature at our own risk.

    • On the Tobin tax point…

      genuine question

      Can anyone identify a downside/negative aspect to such a tax?

      • Discourage short-term speculation, without adversely effecting long-term international investment decisions ? Sounds like a nightmare for the finance drones with ludicrously short time horizons, but it sounds like a bloody good start to me. Although in the absence of other macro-economic reforms or amending the incentives throughout the system, I doubt it is the cure-all for the global economic construct.

        • Would it really discourage short-term speculation?

          How long before some maths wunderkid came up with a new derivative, to “spread the risk” of the speculators’ Tobin Tax obligations (onto the unwitting public, of course)?

          The Tobin Tax is not even a band-aid solution, IMO …

          “There are a thousand hacking at the branches of evil to one striking at the root” – Henry David Thoreau

      • It’s a (stinking) tax.

        We should be reducing the plethora of taxes, NOT thinking up new ways to introducing more of them them.

        • I don’t look at it like a tax in the sense of taxing income, it is a deterrent. How else can you deter an action where the whole purpose of it is to make money (regardless of the potentially destructive consequences) but by putting a fee upon it. Suddenly more caution has to be used.

          • Hmmmm.

            Sounds an awful lot like the “carbon price/tax” to me. Isn’t that supposed to act as a deterrent to “polluters”?

            And yet, unsurprisingly (to me), the legislation specifically goes out of its way to give the nod to the creation of carbon derivatives products. Allegedly so that “polluters” can “hedge” / “manage” their “risk” and “obligations” under the scheme.

            It’s all a great big steaming pile of bovine faeces.

            The reality is that it is just another bankster-concocted scheme for fleecing the public.

            The Tobin Tax would inevitably result in the same end.

    • Very good points!

      There is a very big difference between free trade in goods and free trade in money yet the two are being conflated all the time as though the rules of one must be the rules of the other.

      Often this seems to be done quite deliberately “We can’t control money BECAUSE we know that freer trade in goods is better” by those who profit from the ‘money/debt’ industries.

      One can quite easily accept the need for different rules – in degree and nature – for trade and for money without being guilty of some heinous inconsistency.

      Certainly, there are benefits in having flexible and efficient methods of settling trade transactions but that is small beer and can be easily accommodated.

      The extent to which trade in money must be unregulated is a completely different issue – as you point it out – the idea that it can be unregulated is a nonsense. The real debate is simply what regulations should apply. It is not a surprise that the money/debt industry and its supporters feel the need to obscure this as the meme of ‘free trade’ suits their purposes.

      The international trade in Australian financial assets that are unconnected with trade in goods and services should be closely monitored and regulated. Speculation in particular should be strongly discouraged – tobin tax etc.

      While there is some understanding of the dangers of ‘dumping’ and predatory pricing when it comes to goods there is almost complete ignorance in the public debate of the financial equivalent – foreign ‘cheap money’ and a domestic dependence on the saving habits of foreigners.

      Australia does not require the savings habits of foreigners ( often involuntary and manipulated but at best reflective of foreign conditions) to undertake any domestic investment project. Afterall, all that happens is a foreign entity purchases local currency that already exists and directs that to local investment.

      They are not creating $AUS – there are merely taking control of a stock of them and directing them to a particular purpose that locals have not chosen to undertake – largely because they are obsessed with consuming them or investing them in residential housing.

      Any items that must be imported to complete an investment project iare simply a matter of trade and subject to the prevailing exchange rate which would more closely reflect trade flows rather than money.

      This is not an all or nothing issue.

      We just need to be much more discriminating and selective as to what $AUS financial assets foreigners may purchase and the manner in which those transactions take place.

      For example: I can see few compelling reasons for allowing our governments to sell government securities to foreign interests. The capacity to sell securities to locals to fund government projects strikes me as a very natural and sensible limit on the actions of government. (before a squadron of MMT fans swoop – I dont rule out the printing of money as an option for a fiat currency govt etc but i remain unconvinced that in the hands of our politicians such proposals are sensible options)

  6. I find it kind of ironic that for some 200 years Marx was ridiculed for his “half baked ideas” (as Brad DeLong loves to say)… and now is being reproached because, other than the solution-that-cannot-be-named (the “Lord Voldemort solution”, I guess), he can’t provide us with ready-made cures to capitalism’s ills…

    I mean, the man couldn’t even predict that in Singapore they would have public housing! 🙂

    ===

    By the by, Lanchester’s LRB article on Marx made some good points. It also made some basic mistakes.

    I won’t dwell on his mistakes, except to point out that his “David Harvey’s lectures” example shows he doesn’t really know what surplus value is. And, as if to make sure this mistake wouldn’t go unnoticed, he repeated it a little later, when talking about Facebook: “When you start looking for this mechanism at work in the contemporary world you see it everywhere, often in the form of surplus value being created by you, the customer or client of a company.”

    It’s not the “customer or client of the company” who creates surplus value, it’s the company’s workers. But you’ll have to take my word for it, as I don’t intend to explain why this is so.

    Cheers!

  7. I do like the reminder of finance as rules, not a law of nature. No small part of life these days is figuring out which rules are for your own (and social) benefit and which are for the benefit of others. Rules applied broadly here to include social norms etc.

    So many of the rules lived by now are products of the hyper-consumption corporate machine. Adding finance to this mix is just another set of rules to be tested for merit.

    Whist the forces that try to sway behaviour are as manipulative and vested as ever, there is still choice and it our choices that define us (to keep with the potter theme).

    (great piece and interesting comments btw)

  8. I see a steady erosion of individual freedom as inevitable and entirely predictable……as long as populations continue to grow.
    While many may lament the level of ‘political correctness’ applied to all aspects of life…they are a consequence of the increasing difficulty of ensuring the millions of us crowded together can live in peace with our neighbours. In the ‘good old days’, rugged individualists who chafed at the rules of the many…could retreat into the wilderness, grow a beard, live off the wildlife and carve out a social niche by marrying or shooting the neighbours.
    Those options no longer exist. Overcrowding in megacities benefits a few, but for decades now the many have been placated with debt funded consumerism to engender a feeling of progress and satisfaction. Compound interest is now revealing why that was ever only a temporary solution….so what happens next?

    • You might be right Russell. I thought it was going that way in Europe but didn’t get that sense living in the US, but being back here for a few years I think it the same everywhere. We don’t have the camera surveillance of the UK or the US, but it’s going that way.

      A far bigger issue for me is regulations that in the end reduce the ability of small companies to employ as they just can’t comply with all the regulations now. I believe the big companies benefit at the expense of small business. I spoke to a guy who runs a bottle shop who was forced to install a full commercial kitchen for no good reason other than him and his staff making their lunches at work. People just don’t believe this sort of crap happens.

      • Totally agree with the small business compliance cost, it’s just too hard for most (incl. me!), far easier to earn a living working for a big business with way less personal risk. Irks me somewhat that the various small business minister’s etc have never been in that position.

        • I don’t know what it’s like in other places in the world, but in the U.S. there is a two-tiered application of the law. Individuals and small businesses—-such as Gibson Guitar as can be seen here http://reason.com/blog/2012/02/23/the-great-gibson-guitar-raid-months-late —-get ground into the dirt by federal bureaucracies like the Fish & Wildlife Service. The BPs and Exxons of the world, on the other hand, operate with impunity.

          Gibson just last week settled with the feds, and the settlement Agreement can be found here:

          http://www2.gibson.com/News-Lifestyle/Features/en-us/Gibson-Comments-on-Department-of-Justice-Settlemen.aspx#disqus_thread

          What one finds is that the only thing the feds had to hang their hat on was their own self-serving interpretation of some arcane technicality in Madagascar law. What the Lacey Act, which is the law Gibson was accused of violating, does is to allow the U.S. federal government to prosecute violations of other countries’ laws. Madagascar law allows the export of ebony, but only if that wood is “finished,” otherwise the export is deemed illegal. So this entire imbroglio boiled down to whether the ebony that Gibson imported was “finished” or not. The law was promulgated by the Madagascar government to protect the interests of manufacturers and labor in Madagascar, and has nothing to do with the protection or preservation of forests or illegal logging.

          The feds also alleged illegal import of wood from India. But that part of the government’s case fell apart when Gibson, as Gibson has stated in previous press statements, obtained an affidavit from the Indian government confirming that they had violated no Indian law.

          So the STATEMENT OF FACTS portion of the Agreement is a confirmation of what Gibson has been arguing all along, and that is that this had nothing to do with curtailing illegal logging, and everything to do with enforcing India’s and Madagascar’s labor laws. That was quite an admission that Gibson won from the government.

          Of course these police state tactics which the Fish & Wildlife Service employs against individuals and small businesses do not come billed as political repression, but come cloaked as some noble cause like saving the forests or saving the elephants or saving the whales. But one should not assume that Fish & Wildlife and its cohort of fringe environmentalist supporters have a monopoly on the moral high ground. While they always attempt to portray themselves as being on the side of the angels, “evil” self-serving business interests are lined up on Fish & Wildlife’s side as well, as this quote from “The Tennessean” confirms:

          “There was praise for the Gibson agreement from the U.S. hardwood industry, which strongly supports the Lacey Act because of provisions that disallow importation of some woods that the industry contends might unfairly compete with American lumber.”

          “ ‘I feel those of us who have been working hard to defend the Lacey Act have been somewhat vindicated by the agreement and Gibson’s acknowledgment that they imported illegal materials and did not follow due care,’ said Jamison French, chairman of the Washington, D.C.-based Hardwood Federation and chief executive of Northland Forest Products.”
          http://www.tennessean.com/apps/pbcs.dll/article?AID=2012308070032&nclick_check=1

          According to opensecrets.org, the U.S. forestry industry spent more than $17 million last year alone in lobbying and campaign contributions.

          Any delusions that Fish & Wildlife is a sincere and genuine guardian of the environment, and not just the handmaiden of corporate interests, should have been dispelled long ago when, a couple of years before the BP Gulf blowout, it placed its imprimatur upon “the conclusion that deepwater drilling for oil in the Gulf of Mexico posed no significant risk to wildlife, despite evidence that a spill of even moderate size could be disastrous, according to federal documents,” as reported by the NY Times:

          http://www.nytimes.com/2010/07/06/us/06wildlife.html?_r=3&scp=1&sq=2007%20september%20fish%20and%20wildlife&st=cse

      • I spoke to a guy who runs a bottle shop who was forced to install a full commercial kitchen for no good reason other than him and his staff making their lunches at work. People just don’t believe this sort of crap happens.

        I must confess I’m sceptical without knowing the full story and the relevant regulations that were applied.

        • You’ve obviously never ran a small business, as I have, and had to deal with the federal government.

      • Interesting – read something recently where bluetooth identifiers are being tracked inside shopping centres. They don’t know exactly who you are, but they do know all your habits when you turn up. Apparently doesn’t break any laws because you are not identified individually.

        Lesson – turn off your bluetooth… or buy less doughnuts.

  9. Great article about the different forms of capitalism around the world. The important point that should be understood is there are all really politically driven bastardised forms of capitalism.

    No one is practising real capitalism at the moment. People love to blame capitalism for all the problems which is ridiculous. America the supposed poster child is hardly an example of true capitalism. What form of capitalism has banks and corporates being bailed out, government spending around 40% of GDP, central banks manipulating the price and quantity of money in the entire economy?

    The fact is you can square point the finger at a favoured elite gaming the system. That’s big government, big business, big unions, big banks and big charities making the rules to ensure they win. Forget about capitalism just focus on people in power making sure that whatever way the cookie crumbles they make money and the punter gets screwed.

    In this sort of world you can call for more regulation or less regulation, more capitalism or more socialism it doesn’t matter.

    The only thing that you can count on is whether Team A or Team B is running the show when the music stops this system isn’t sustainable and will collapse in on itself.

  10. This has been a very interesting post and subsequent debate. What I would really like to know is, if finance is two-faced, why does it look so damn ugly?