Death by financial rules

Surely the greatest misnomer in modern times is the term “financial de-regulation”. For at least 25 years, various business funded think tanks and mono-culture, conformist university economics departments have hailed its advantages, for the most part completely capturing the world’s business press. I know. I am actually a business journalist who was, until recently, in the mainstream media. I watched it first hand. This continuous and intense propaganda worked. It has even been successfully prosecuted after the GFC, the blame for which has been somehow laid at the feet of governments and not the financial institutions and private actors who actually caused it.

As I have long argued, the phrase is nonsense, always has been nonsense and always will be nonsense. Finance IS rules. It can’t be de-regulated. As Andrew Haldane of the Bank of England pointed out in a terrific speech at Jackson Hole, far from reducing the number of rules — surely the point of “de-regulation” — it has massively increased the rules. Haldane uses the metaphor of a dog catching a frisbee to describe how intuition is better than complex analysis in completing difficult tasks. He should also have used the metaphor of dogs chasing each others’ tails, because that is what has happened as regulators and traders descended into a grim embrace trying to outdo each other.

Because this simple point about money being rules seems destined not to be understood, both regulators and analysts treat government and private markets as if they are separate. They are not. They are a continuum. Two sets of rule makers and rule users. All that has happened with financial de-regulation is that the setting of the rules has shifted from governors to traders (witness the $4 trillion in the foreign exchange market transacted per DAY and compare it with, say US GDP of $15 trillion a YEAR). As Haldane points out, is has created a spiral of growing complexity as regulators try to catch up with traders. In banking, he calls it the Tower of Basel.

Does this look like “de-regulation” to you?

In the US, regulatory reporting has a history going back to the early 19th century. Nationally chartered banks began to submit quarterly returns after the formation of the OCC in 1863. In 1869, following a legislative amendment, these became “call reports”, so named because banks were asked to report on surprise dates to prevent window-dressing. The Federal Reserve Act of 1913 required all state-chartered member banks to file reports with the OCC and in 1917 responsibility for collecting these passed to the Federal Reserve. By 1930, these reports might contain around 80 entries.

Today, regulatory reporting is on an altogether different scale. Since 1978, the Federal Reserve has required quarterly reporting by bank holding companies. In 1986, this covered 547 columns in Excel, by 1999, 1,208 columns. By 2011, it had reached 2,271 columns. Fortunately, over this period the column capacity of Excel had expanded sufficiently to capture the increase.

Taken together, the emerging picture is of a steadily-rising regulatory tower. New floors have been added in response to each crisis episode. Extra filing cabinets have been ordered and installed to house the explosion in regulatory returns. And many new skulks of supervisory foxes (together with the occasional hedgehog) have been installed on the upper floors.

Haldane provides many measures of the explosion of rule making, it is very much worth the read. He reveals by implication the complete absurdity of the push to deregulate from right wing think tanks and right wing economists. They have styled themselves as being anti-government and in fact they started a dynamic in which both governments and traders set in train an orgy of rule setting. That is, the very opposite of what they said they were trying to achieve.

I am very much attracted to the notion, popularised by the historian Paul Johnson in his “History of the Modern World”, of the “law of unintended consequences”: how routinely actions create the opposite outcome to that intended. This insight is often used, and often rightly, to criticise well intentioned government action that creates the opposite result to that sought. It is a framework much loved by right wing think tanks when they are demonising big government. They have not noticed, however, that in the area of financial deregulation the same problems apply to their own arguments and on a scale that beggars belief. That says something about their capacity for self criticism.

It has turned the world’s money system into a Tower of Babel.

Haldane explores whether the rules should be kept simple or complex, tending to come down on the side of simplicity. He quotes Herbert Simon’s use of heuristics, evolving models of analysis that change over time. That is appropriate, and addresses the problem of why the quasi scientific models for economic analysis are so flawed. Scientific, or mathematical laws do not evolve. They are supposed to be true at all times. Obviously that cannot work when you have human beings who can understand those rules and act on them. To state the obvious, such action is outside, it cannot be captured by the rules. Because when the rules were formed, that action had not happened yet.

Until it is understood that regulators and traders are just part of the same continuum of rule making, and that creating a financial system which is sane will require something outside the continuum of rules, we are in big trouble. Crises will continue. We need to look to human wisdom, for instance. Haldane would argue for simplicity. Experience, perhaps. What is certain is that we need something other than just a new rule.

Haldane comments that decent change would require an about turn from the behaviour of the last 50 years. He asks if a “once-in-a-lifetime crisis cannot deliver change it is not clear what will?” He is right. The basic lessons have not been learned. Including that money IS rules.

“To ask today’s regulators to save us from tomorrow’s crisis using yesterday’s toolbox is to ask a border collie to catch a frisbee using Newton’s Law of Gravity.”

 

Comments

  1. I agree that the amount of ‘red tape’ and rules & laws must be simplified; but it must be remembered that it was Big Government that bailed out the ‘too big to fail’ financial organisations. Oh what a tangled web we weave when we set out to deceive – if the banks & private capital could push through with NINJA loans and credit default swaps that they knew were dodgy…….then the Government should have let them crash. But alas, as you state, an intertwining continuum has developed between Governments, Banks & Business.

  2. There was an interesting article in the Wall Street Journal a couple of years ago that I wish I could find again, that tracked the number of employees and the total budgets of the finance market regulatory agencies in the USA; the shape of the graph looked a bit like a graph of world population since 1820.

    The only people who really could be said to have known what was going on pre 2007, and who therefore arguably should have been doing the “regulating”, were the maverick hedge fund guys who were “shorting” everything. Everybody else, including the regulators, assumed that a new paradigm applied, and central to this was that “house prices can never fall”.

    If the disaster insurance industry and its regulators somehow managed to convince themselves that no further disasters were going to take place, insurance would become an under-priced bubble and a systemic risk too.

    The question I want to keep raising is, when have the regulators ever actually justified their existence? They could have been ringing alarm bells prior to 2007, if they were as good as the advocates of regulation assume they are.

    I say that the “bailouts” should have been at the very least accompanied by the requirement that all executives were dismissed without compensation or superannuation, and barred from being finance sector executives again for life. Then I bet we would have seen the finance sector actually find its own solution. The whole “systemic risk” thing was a shakedown pure and simple. More courageous and insightful political leaders would have called its bluff. Reagan would have.

    • “The whole “systemic risk” thing was a shakedown pure and simple.”

      Yep … and nothing has been learned, or will be learned until we start looking properly at what finance actually is. Rules of value and obligation, underpinned by trust and a, in the end, a type of power relation.

      • Indeed. You forgot one notable –

        “Whoever controls the money in any country is absolute master of industry [legislation] and commerce” – James Garfield, 20th US President, 2nd assassinated (after Lincoln)

    • PhilBest said:

      Reagan would have.

      Ha! Ha! Ha! Ha! Ha! Ha! Ha! Ha!

      PhilBest, why don’t you regale us with another good joke?

      The most hard-hitting criticisms of Reagan have come from the fringe right, from folks like Kevin Phillips writing in Bad Money. As Phillips so thoroughly documents, it was Reagan who ushered in “The Great American Debt Bubble” and the era of “U.S. Financial Mercantilism: Bailouts, Debt, and the Socializaiton of Credit Risk, 1982-2007.”

      It was Reagan who presided over the first wave of accountability-free bailouts, beginning with the Mexico, Argentina, Brazil debt crisis bailouts in 1982, which were quickly followed by the bailout of Continental Illinois Bank in 1984. Then came the “discount window bailouts” where the “Fed provides loans to 350 weak banks that would later fail, giving the big depositors time to exit” and then the “post-stock market dive rescue” in 1987 which entailed “massive liquidity provided by the Fed” to weak and underperforming finance-sector participants.

      Another conservative, Andrew J. Bacevich, renders no less scorching condemnations of Reagan. As he wrote in The Limits of Power: “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.”

      If one wants to see the reality of Reagan, and not merely Republican Party hype, one need look no further than the following graphs:

      Net Change in Government Spending Since Reagan
      http://talkingpointsmemo.com/images/government-spending-recession.png

      National Debt Graph by President
      http://zfacts.com/p/318.html

      The Debtwatch Manifesto
      http://www.debtdeflation.com/blogs/2012/01/03/the-debtwatch-manifesto/

      • Er, excuse me, it is a bit of a long shot to try and pin all that stuff on President Ronald Reagan as comparable to the bailouts of 2008 onwards. There are significant differences in every case. Reagan opposed on principle, Federal taxpayer bailouts of banks.

        What the Federal Reserve did, and what FDIC did, and what other bureaucracies did without even having to involve the President, and what the IMF did for debtor nations (not for private sector banks), is in none of these cases comparable with what happened in 2008 and since.

      • Yea right, PhilBest, Reagan was just president, so he didn’t have anything to do with any of that bad stuff. It was his underlings, appointees and subordinates that did all that bad stuff.

      • As Kevin Phillips so thoroughly documents, it was Reagan who ushered in “The Great American Debt Bubble” and the era of “U.S. Financial Mercantilism: Bailouts, Debt, and the Socialization of Credit Risk, 1982-2007.”

      • Another conservative, Andrew J. Bacevich, renders no less scorching condemnations of Reagan. As he wrote in The Limits of Power: “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.”

  3. It is not correct to say that money is rule, but rather that capital is the rules and it is the fundamental rules of the system, its hearth. To say that money is rules is confusing for anyone who isn’t educated in this area and it doesn’t reflect the reality. Many other systems have had money circulation and rules, but they were not capitalist systems. The most important characteristic of today’s system is the CAPITAL and money is only the universal form of its existence and movement, not its rules. Capital defines the rules of money, its quality forms and quantitative emission as well as its rules of movement, not vice versa.

    Having that in mind, it is much easier for everyone now to understand why the government can’t regulate or deregulate the financial industry, e.g. the industry which is the emanation of capital itself and personifies the ultimate aim of capital existence – accumulation and concentration of global wealth and power. The government is unable to do anything, because it works IN the system and works FOR the system, it is PART of the system. The government can only HELP easing the capital rules, e.g. the fortification of capital, but not never weakening it, because the government is the political mantle of the capital.

    The one who pays is the one who order the music, so no significant change of financial sector regulations could be expected by any government in this crisis. The government can’t kill the body it feeds from. But the opposite is a very real possibility, because soon or later the financial dinosaurs won’t need anymore democratic governments and they won’t hesitate at all to remove them. We are already witnessing the first stage of this dramatic change. But again, it will happen because the capital rules dictate so, not vice versa.

    • You repeat the overly pessimistic party line of both the Marxists and the neoliberals, or as Hannah Arendt put it in On Violence, “Marx’s estimate of the state as an instument of oppression in the hands of the ruling class.” But history has proven you wrong on numerous occasions.

      As Reinhold Niebuhr put it in The Irony of American History:

      **quote**
      In the international contest between Marxism and the democratic world, it is ideologically unfortunate that the most powerful nation in the alliance of free nations should also be most consistently bourgeois in its attitudes. This gives the communist propaganda some undue advantages….

      Marxism is so formidable as a political creed precisely because it expresses the convictions of those who have discovered the errors in the liberal-bourgeois creed in bitter experience. Marxism is so dangerous because in its consistent form it usually substitutes a more grievous error for the error which it challenges. In this debate between errors, or between half-truth and half-truth, America is usually completely on the side of the bourgeois credo in theory; but in practice it has achieved balances of power in the organiation of social forces and a consequent justice which has robbed the Marxist challenge of its sting….

      The significant point in the American development is that here, no less than in Europe, a democratic political community has had enough virtue and honesty to disprove the Marxist [and more recnetly, I might add, neoliberal] indictment that government is merely the instrument of privilieged classes.

      **end of quote**

      • What gives you the impression that I am on a Marxist position? Or you want to say that the government and FED did well rewarding Wall Street during this last crisis? You obviously are so bias and afraid of truth that everyone who point the problem must be accused of some kind of Marxism or communism. This is pity, because if we don’t acknowledge the real problem, we will never know how to solve it.

        Isn’t the government doing everything in the benefit of the bankers, isn’t the central bank doing everything in the benefit of the bankers, is anyone punished for the wrong doing during GFC and later, etc…. may I continue with the list of facts? Why everyone may point a separate fact from this list, but if someone does point all of them together it means he is a Marxist? Or maybe you want to say that the problem didn’t arise from the capital market (banks and Wall Street)? So where is then the problem? Where had the sub-prime mortgages and derivatives been created and by whom – by households, by main street in the little shops or kinder gardens? And who does the government help, who benefits from QE1, QE2, QE3 etc…?You are so pathetic and outdated with even mentioning Marx. We are living in 21 century and communism is dead, but capitalism is in deep sh**, because the capital of Wall Street doesn’t want to create jobs, it can make profits without creating jobs. If that is not a problem, then what is it? Would you be so kind to tell me?

      • Arguably none of us any longer live in a capitalist society. A creditist (?!) society, maybe; but the days when capital, the result of successful business endeavours was re-deployed to further enhance society, are over. Today we exist in a debt soaked society, not a capital rich one.

      • Lori said:

        …because if we don’t acknowledge the real problem, we will never know how to solve it.

        So what is the “real problem” according to your September 15, 2012 at 4:08 pm comment? Let’s recap:

        • …capital is the rules and it is the fundamental rules of the system, its hearth.

        • Capital defines the rules of money, its quality forms and quantitative emission as well as its rules of movement, not vice versa.

        • …the government can’t regulate or deregulate the financial industry…

        • The government is unable to do anything, because it works IN the system and works FOR the system, it is PART of the system.

        • …the government is the political mantle of the capital.

        • The one who pays is the one who order the music, so no significant change of financial sector regulations could be expected by any government in this crisis.

        That sure sounds like a Marxist or neoliberal manifesto to me.

        And if we define the “real problem” as such, then just what exactly is the solution you propose? If government and our traditional democratic polity are hopeless in the face of this omnipotent capital monster, then who or what do propose to subue it? Please give details as to how and what you propose to control capital.

    • Lori, whilst not the most authoritative of sources, Wikipedia would beg to differ over your application of the term “capital” –

      http://en.wikipedia.org/wiki/Capital_%28economics%29

      http://en.wikipedia.org/wiki/Financial_capital

      For discussion’s sake, can we accept that the term “capital” should be used only in reference to already produced durable goods that are used in production of goods and services (first link), or more widely, to “the funds provided by lenders (and investors) to businesses to purchase real capital equipment for producing goods/services (second link)? If so, then can I also venture to suggest that by “capital”, you are not meaning either of these definitions, specifically vis-a-vis durable goods and/or the means of purchasing equipment to produce goods? That instead, what you are intending to mean is the (shall we say) financial wealth that is created by the financial sector – per your statement “the industry which is the emanation of capital itself” – and is subsequently used for a variety of activities, including the Wikipedia-defined activities, as well as for what you aptly describe as “the ultimate aim of capital existence – accumulation and concentration of global wealth and power”?

      If you would agree with the above, then I would respectfully submit that your opening comment is incorrect –

      “It is not correct to say that money is rule, but rather that capital is the rules”

      If we accept that “capital” is either already-produced durable goods, or the finance used to purchase those items necessary to create durable goods, then it follows that an accepted medium of exchange is first required in order for “finance” to have any relevance in a modern context. The medium of exchange is not just the facilitator or trade, it is the means of accounting one’s overall debit/credit position. In absence of a medium of exchange, we have only direct barter of goods/services for other goods/services. So the cornerstone of “finance” is the accepted medium of exchange. In order to be accepted, all its users must implicitly or explicitly agree to the rules of that medium of exchange.

      In SoN’s definition, “money” is rules. I agree with this, though think that it does not go far enough in clarifying the issue.

      I would prefer to drop the term “money” altogether, and refer only to what are its alleged functions:

      Medium of exchange
      Unit of account
      Store of value

      My view is that the “medium of exchange” and “store of value” functions of … digital tokens … should be separated. Why? Because in order for the “medium of exchange” function to be effective, the rules must encourage circulation, and discourage hoarding. The moment that a medium of exchange is allowed to also be considered a “store of value”, its effective function as a medium of exchange (currency circulating in the economy) is undermined. Why? Because a store of value will be hoarded.

      Allowing usury is the #1 way in which the medium of exchange function of “money” is tied to the store of value function. When you can earn a rate of usury on your medium of exchange by storing it with a money lender, then per Aristotle, your “money” begets more money without your doing anything. Allowing usury is the key error of humanity – it allows the usurer to create an incentive for hoarding the medium of exchange, and gives the usurer the power to manipulate the effectiveness of that incentive. By raising or lowering the rate of usury offered and/or required, VOILA … we have the boom or bust of an economy.

      We need to redefine the rules of “money”, so that what we refer to as “money” should ONLY function as a medium of exchange and a unit of account.

      The only way that I know of to do this is to ban usury, thus removing the power to render the medium of exchange/unit of account as a store of value as well.

      With no incentive to store/hoard, the medium of exchange/unit of account can and will circulate unhindered in the economy. In other words, it can fulfill its true function.

      • I should add, the above is also why I am firmly against a “gold standard” or any other form of tying the perceived value of the medium of exchange to real items (commodities) having a real perceived value themselves. Especially if convertibility is either permitted, or implied. Why? Because once again, this results in adding a (perceived) store of value function to the medium of exchange + unit of account functions, and so once again, as with usury, enables the manipulation of the circulation of the medium of exchange in the economy (thus boom and bust).

      • What you are suggesting is to liquidate all financial markets. Do you realize that what you propose to be the money rules is what it was the socialist financial system in Eastern Europe? Money was used only as a medium and accounting means there and every one knows the final outcome. Capitalism can’t survive without usury or money being used as a storage of wealth and this is the main problem. If money stop being used as a storage of wealth, then capitalism will be dead. We definitely will live in a new economic order, but it won’t be capitalism. We have to see and understand the reality, not just talking about imaginary society and wishful, but unrealistic changes.

        Re capital, it can be as much productive as it could be unproductive. Any investment for profit is actually a capital, no matter in what industry it is invested. Real capital is in the real economy, as you noted it, but the financial capital isn’t something strange and foreign for capitalism, the financial markets are actually the most developed form of capital markets, where people trade nominal capital and also claim that they supply liquidity to the whole economy. To separate financial markets from capitalism is the strangest idea I have ever heard. In what dimension do they exist if not in capitalism? Why they are even called “capital markets”? The fact that they are out of control, doesn’t have anything to do with their nature, they are still capital markets. They are moving capital from one point in economy to another and if that movement doesn’t enhance the real productive capital, is only because the masters can make quicker profits from derivatives, sub-prime mortgages, QE1,2,3 etc…. instead of investing in real productive capital. Financial capital doesn’t create wealth, it only redistributes the already produced real wealth. I think everyone knows that.

        Thank you very much for the replay, it is always good to discus important topics. Thanks to MB too. I love its weekends postings and discussions.

      • If money stop being used as a storage of wealth, then capitalism will be dead. We definitely will live in a new economic order, but it won’t be capitalism..

        As Janet has aptly noted, the so-called “capital” markets are really “creditist” markets; capitalism (in the real, productive capital sense) is dead already. It appears that you concur with this, given your comments about financial capital markets not creating real wealth, only redistributing it.

        The changes I speak of a far from “wishful, but unrealistic”. As noted in other recent posts, debt-free and interest-free capital / money / currency has been created in several countries in the past, with profound, positively transformative results –

        http://www.webofdebt.com/articles/infrastructure-crisis.php

        http://www.webofdebt.com/articles/bankrupt-germany.php

      • Michael Hudson, an economist who hails from the 18th/19th century classical school of economics (what Niebuhr would call “the liberal-bourgeois creed”), recently gave an interview to Union Solidarity International that you might find of interest:

        http://michael-hudson.com/2012/08/union-discussion/

        Hudson draws a bright line in the sand betweeen industrial capitalists and financial capitalists. He warns that labor is so preoccupied with fighting its traditional enemy, industrial capitalists, and vice versa, that both run the risk of being extirpated by the elephant in the room, the financial capitalists.

        I would argue that in addition to the distinction between industrial capitalist and financial capitalist, another distinction is neccessary, and that is betweeen national captialist and transnational capitalist.

      • Here I’ve transcribed what Hudson said, beginning at minute 37:00

        **quote**
        Essentially the banks have taken over your governments there and that’s what’s made your government so rotten, especially the social democratic parties that are the main bank lobbyists.

        That’s the irony, that it’s the left-wing of the political spectrum, the social-democrats and the socialist parties, that have become the bank lobbyists and are what we used to call the right-wing of the specturm. And there’s a confusion, that so much of the social democracy has been aimed at attacking industry and attacking manufacturing and attacking employers that they don’t realize that the employers themselves have been taken over by the banks and the fight that used to be, the class struggle against employers, is now a struggle of the entire economy, industry and labor alike, against the banks.

        And you have to solve that bigger struggle before you can go back to the familiar old class struggle.

        **end of quote**

      • Another devastating critique of the American left was rendered by none other than Australia’s Robert Hughes, who asserts that America’s academic left, obsessed with culture wars, has all but abandoned economic issues to the American right:

        **quote**
        Hence, in universities, what matters is the politics of culture, not the politics of the distribution of wealth and of real events in the social sphere, like poverty, drug addiction and the rise of crime. The academic left is much more interested in race and gender than in class. And it is very much more interested in theorizing about gender and race than actually reporting on them. This enables its savants to feel they are on the cutting edge of social change, without doing legwork outside of acadame; the “traditional left” has been left far behind, stuck with all that unglamorous and twice-told stuff about the workers. It is better to rummage around in pop culture, showing how oppressive structures are “inscribed” in some of its forms and “questioned” by others—-a process inseparable, of course, from the protean energies of capitalism, seeking to re-invent its oppressive self every day through popular culture in order to find new and better ways of turning us into docile consumers.

        ROBERT HUGHES, The Culture of Complaint: A Passionate Look Into the Ailing Heart of America

        **end of quote**

      • Good points made by Michael Hudson and Robert Hughes.

        I would add that one of the reasons the left has largely abandoned economic issues is that many of the left see the class struggle as essentially having been won. Apart from a bit of tinkering around the edges, Western nations have already elevated the working class to the status and rewards that they fought for. Witness the “cashed up bogan” in Australia. The cleaners getting $100k a year+ in the mining camps.

      • I strongly agree with M.Hudson, he is one of the few academics in US, who have the courage to draw the real picture. But again, the fact that industrial capital now is in the same boat as the main street doesn’t change my point.

        What is born (meaning financial capital and markets) from the previous industrial stage of capital development is its own creation although unpleasant and ugly, and that is why is so confusing for most of the people. But let me remind the history of the Great Depression, when the banks and the financial capital was again the master of the disaster. Was it the Great Depression during capitalism or in some other socioeconomic order?

        Credit is the hearth of the capitalist enterprise. Without credit there is no capitalism, so financial capital and financial markets are inseparable part of capital development and growth. The problem arises when everything in our world starts to be seen by the bankster as capital productive, e.g. profit earning, and basic goods like food and shelter, basic services as education and health are seen as capital investment and are loaded with debt, which cannot be re-payed, because they can’t grow on the same basis as industrial productive capital grows in a production cycle. Their valuation can grow only through inflation, e.g bubbles. For example, a house has the same utility value and is the same 20 and more years later as it is at the moment of its purchase, the bread and butter is the same etc. Once in the consumers hands those goods are no more real capital(real profit) productive, they are for consumption. But the banksters expect them to continue to grow in value by some kind of miracle, which is nothing else but redistribution of main street income.

        So if we emphasis so strongly the difference between industrial and financial capital, it is only because financial capital has grown so rapidly and uncontrollably that now it represents totally new problem for the whole economy, even for the global world. But this financial dinosaurs are still defining our system as capitalism, just in a higher stage of its evolution. The fact that no one likes this stage is irrelevant. Isn’t enough for everyone to understand that the government isn’t on the side of main street, when it defines them as TBTF (too big to fail)? Everyone else could fail, but them.

        RE the left side academics in US, there has never been significant left side academics. The most left-side research is done in Harvard Uni where the top 1% (Wall Street) feeds from. They have very wise policy – one has to know his main enemy well as to be able to fight it successfully. That is why they are so successful in convincing the electorate and the government that the world can’t survive without Wall Street.

      • Lori said:

        But let me remind the history of the Great Depression, when the banks and the financial capital was again the master of the disaster.

        Exactly!

        But the US and Great Britain did not slip into Nazism as a result of the Great Depression, and Germany did.

        Hannah Arendt in The Origins of Totalitarianism and Steve Keen, in the following video, have some interesting things to say as to why:

        http://www.debtdeflation.com/blogs/2012/07/11/vision-action-leadership-2011-conference/#comments

        Neither Keen nor Arendt argue that Nazism is state capitalism or fascism, fascism being a specific subtype of state capitalism. (As George Orwell observes in essays such as “England Your England” and “Looking Back on the Spanish War,” most leading industrialists and financiers in the UK and US in the 1920s and 1930s, along with a large host of other folks, were fascists.) What Arendt and Keen do argue is that Nazism came as a reaction to state capitalism and fascism, and that these provided the breeding grounds from which Nazism sprang.

        If we look at the history of the last 500 years of Western Civilization, and Kevin Phillips’ Wealth and Democracy is a great read on this, what we see are a series of crises identical to what we are experiencing now. Five hundred years ago one of the Spanish arbitristas expressed sentiments that seem appropriate for Australia today: “The possession and abundance of such wealth [the vast mineral wealth from various parts of the empire] altered everything. Agriculture laid down the plough…trade put on a noble air, and exchanging the work-bench for the saddle, went out to parade up and down the street. The arts disdained mechanical tools….”

        As Phillips points out, Spain was not unique in this regard. Spain, the Dutch Republic, Great Britain and the United States have all followed similar trajectories, as each leading power “began to erode [its] relatively broad prosperity”:

        **quote**
        Developing weaknesses in production or older forms of commerce—-the Spanish wool industry, Dutch fisheries, or British iron-ware—-were recurring early symptoms, as were an emerging disproportion of financiers and rentiers couples with an ever-greater inclination to invest in government bonds or send money out of the country for a better return.

        **end of quote**

        But if we take an even longer view of history, and here we’re talking thousands of years instead of hundreds, we see the same problem plagued other civilizations. The economies and societies of these other civilizations were not even organized along capitalistic lines, as Western Civilization is. As Carroll Quigley notes of civilizations which have turned the corner from expansion to conflict and decay:

        **quote**

        The vested interests encourage the growth of imperialist wars and irrationality because both serve to divert the discontent of the masses away from their vested interests (the universal surplus)…

        The vested interests have triumphed and are living off their capital, building unproductive and blatant monuments like the Pyramids, the “Hanging Gardens of Babylon,” the Collosseum…. The masses of the people in such an empire live from the waste of these non-productive expenditures. The golden age is really the glow of overripeness, and soon decline begins. When it becomes evident, we pass from Stage 5 (Universal Empire) to Stage 6 (Decay).

        CARROLL QUIGLEY, The Evolution of Civilizations

        **end of quote**

      • Another excellent read on the rise and fall of civilizations, with much greater emphasis on moral and spiritual rise and fall as opposed to Quigley’s sole emphasis on materiality, is Peter Turchin’s War and Peace and War.

  4. SON, this is superb. Again. May add some on topic comment after due pondering. But for the moment, feel compelled to put on record that out of all the financial commentary I read every week, I am finding myself looking forward to the weekend and your thought-provoking, deeper issue, Big Picture pieces most of all. Thank you.

    And thank you MB, for offering SON this platform and audience.

  5. ‘the blame for which has been somehow laid at the feet of governments and not the financial institutions and private actors who actually caused it.’

    Not sure why this appears surprising to you….its a direct result of that intense and unrelenting propaganda you mention, delivered through the MSM.
    We do not have a free press that can be called MSM. I’m not sure there ever has been a free press when the powerful have their financial interests dependent on the presentation of a particular point of view?
    I guess it’s why the powerful buy MSM outlets in the first place?
    In recent times we have seen more public statements from that shining example of where hard work can get you (Gina R) and it seems the purchase of media was meant to enhance her capacity to tell us where we needed to improve. And what a benefit that has given us.
    I for one have been chastened by the news there are people in West Africa that would willingly do my job for $2/day, though I am uncertain how they would manage here in Perth on $14/day….assuming their patriotism and work ethic would have them working 7 days a week.

  6. About 20 odd years ago I exported Australian honey to Germany, the worlds biggest market for honey. I discovered something very interesting in their system of laws covering ‘pure food’.

    The discovery was that the anglo culture of negative rule making ie don’t do this and don’t do that is perfect for thise wishing to circumvent the intent of rulemakers.

    In the German Pure Food Laws [circa 1560] the rules are positive that is what is permitted is listed if it is not on the list then you cannot do/add it.

    Makes more sense to me with respect to regaining control of finance/capital.

    Great conversation thanks

    • Not a bad idea for the FIRE sector, in that it inverts the burden of proof onto them to be allowed some new financial “innovation”.

  7. The most basic rule of finance; the basis upon which all other rules is built lies in the words “I promise to pay….”. The first extension of that rule is followed by the words “…the bearer of this note…”. It is what cash is. Given all the uncertainties and meddling in the global markets, is it any wonder that people have retreated to the most basic form of protection; the Ground Zero of our financial rules – Cash. Whatever happens, there will be purchasing power of some degree left in money; without it we have no society left. There is no longer a stock market or a property market, as the rational valuation mechanisms have been corrupted. Gold only has a value in cash terms; we no longer bite it to see if ‘it’s good’ and swap it for a mule. It’s time to sell property, if it hasn’t been sold already; sell stock holding; sell the jewellery and commute your super fund to it’s most conservative option. Because it may not be tomorrow that the markets re-set, that may have to wait until Thursday!

  8. Agree with your observations but make two points.
    First, a general retreat to cash is what will ensure other asset classes fall in price….self fulfilling.

    Second, as most central banks have effectively reduced real interest rates to below zero….holders of cash are already being fleeced. A tax on the prudent.

    • I’m not spiritual, but if ever there was time for the meek (the patient; long suffering) to inherit the earth…this is it!

  9. Hi guys, why do my comments not appear?
    It looks like discrimination. I believe MB is a free discussion forum.

    Mod: your comment was long enough to get stuck in the spam filter – its now cleared.

    • There’s comments from you at 4.08 yesterday and 8.14 this morning. Are there others that are missing? I’ve always found MB very accommodating to views different to theirs, and to contrasting posters.