The Rich Under Attack II: "The Gods of Greed"

The UK’s Guardian is publishing three extracts from a new book by , Larry Elliott and Dan Atkinson, “The Gods That Failed: How Blind Faith in Markets Has Cost Us Our Future.”

It seemed worthy of note because it illustrates the backlash against the Wall Street types caricatured by Tom Wolfe as “Masters of the Universe.” But his Sherman McCoy clearly had an exaggerated sense of his place in the world and suffered a nasty fall from grace.

Here, Elliott and Atkinson go after a super-elite they call the New Olympians which they don’t define very precisely but they depict as the perpetrators and beneficiaries of a system that was billed as delivering benefits to the population as a whole but in fact siphoned wealth upward. They put the uber-rich, the IMF and the World Bank in the same boat. Without an explanation of how their interests came to coincide, this story starts to veer into conspiracy theory land.

Now perhaps the split between the promoters/winners and the chumps looks more clear cut in England than on the other side of the Atlantic. In the US, the lines aren’t as clear. A whole cohort of academics and commentators, the vast majority of which are neither super-wealthy nor ensconced in global organzations, zealously defend free market ideology. And the Republicans, at least until recently, have used bugagoos like gay marriage to get red staes, which have lower average incomes and higher proportions of the population on welfare than blue states, to go against their economic interests and cast their lot with Republicans.

So if you scrutinize the argument, you’ll see a lot of bold strokes and bright color, more cartoon than a well-detailed portrait. But guess what? The free market ideology is often crudely drawn and similarly suffers under close examination.

The libertarian fantasy is that we can do away with government except for things like defense, roads, etc. So how are people supposed to conduct business? Let’s say A has made a brand new type of laptop and B is interested. How is B going to verify that A’s laptop lives up to its promises? Well, in the absence of consumer protection and retail sales laws, B would have to have an expert inspect and test it. And even if the computer was OK at the time of purchase but crapped out two weeks later, B would have no recourse.

Without some level of legal protection, people would only do business only in areas where they were competent to evaluate the product. Beyond that, they’d deal only with vendors they knew by reputation to be honorable, which would limit them in most cases to one degree of separation. That might work just fine in a pre-industrial economy, but if you are dealing with goods of any complexity, it quickly breaks down. We need rules and an enforcement mechanisms to allow for impersonal transactions. Otherwise the cost of contracting becomes extremely high.

So the best way to read this excerpt isn’t as rigorous analysis – it certainly isn’t – but as a narrative designed to compete with the free market ideology.

I worry about these appeals to emotion, even when they are well larded with facts. But it may take some exhortation and rabble rousing to get the public to start thinking about what is and isn’t working. Notice the sense of outrage over the way average blokes have been shortchanged. That sentiment is real and will get even stronger as the economy weakens.

From the Guardian:

On March 17, [2008.] Dame Carol Black, the government’s national director for health and work, declared that absence and worklessness related to sickness were costing the country £100bn a year, and it was announced that ministers were to look at replacing the doctor’s sick note with a “fit note”, detailing what people can do rather than what they cannot when they are on leave for health reasons…

Four days later, the chief executives of Britain’s five largest banking institutions – Barclays, HBOS, HSBC, Lloyds TSB and Royal Bank of Scotland – met the Bank of England. In the jargon of the City, they wanted governor Mervyn King to widen the types of collateral against which the Bank would lend to the clearing banks. In plain English, they wanted him to lend taxpayers’ money against much flakier assets than would normally be considered acceptable.

Why did they need this handout? Because banks themselves had stopped lending each other money…..Those banks that escaped unharmed were sure of only one thing: with so many of their peers exposed to incalculable risks, there was more bad news to come.

That fear seems amply justified. Speculation has left the global economy more vulnerable to a financial collapse than at any time since 1929. According to the supposedly sophisticated models used by market practitioners, a stock-market crash such as the one in 1929 was likely once in 10,000 years. They said the same, however, about the stock market crash of 1987, the collapse of the hedge fund Long Term Capital Management in 1998 and the subprime crisis. The obvious conclusion is that these models are flawed. The International Monetary Fund (IMF) recently described the crisis that erupted last August as “the largest financial shock since the Great Depression”…..

Fortunately for the banks, in Brown’s Britain they are seen as a cut above the average benefits scrounger. A month after they visited King, the governor announced a £50bn “special liquidity scheme” to provide emergency loans to struggling institutions. It was a similar story across the Atlantic. Over the weekend of March 15 and 16, America’s central bank, the Federal Reserve Board, launched a rescue for Bear Stearns, the country’s fifth-largest investment bank. To smooth a takeover by JP Morgan Chase, the Fed assumed up to $30bn (£15bn) of Bear’s more doubtful assets. Were this act of corporate welfare not sufficient, the Fed also announced that it was to provide emergency liquidity to the market. For good measure, it cut interest rates.

What was most extraordinary about all of this was not the bailing-out of City and Wall Street types who had spent decades, like surly teenagers, insisting that they wanted only to be free from the stuffy, paternal state institutions to which they now turned for help. Rather it was the failure of those same institutions to insist on any quid pro quo. In the real world, when a wild-child son or daughter comes home, tail between their legs, their “boring” parents usually require them to clean up their act in return for financial support and use of their old bedroom. Not so in the world of banking and finance. In remarks to the press in March, the British treasury actually ruled out tougher controls.

But then there is plenty of evidence that, in Britain as elsewhere, those in government could see little wrong with the system as it is. Democratically elected governments have, over the past three decades, willingly ceded control of the world economy to a new elite of freebooting super-rich free-market operatives and their colleagues in national and international institutions like the IMF, the World Bank and the World Trade Organisation. These New Olympians, who earn that title by their remoteness from everyday life and their lack of accountability, have gained this control on a prospectus every bit as false as much of the promotional material for the “exotic securities” of which they are so fond. The charge sheet is as follows:

· They promised economic stability – and have delivered chaos and volatility.

· They promised an economic order based on enterprise, thrift and personal effort – and have delivered one based on chronic indebtedness and wild speculation.

· They promised a “transparent” future in which all costs and prices would be clearly laid out – and have delivered a world of bizarre, occult financial knowledge.

· They promised a greatly expanded middle class of property- and share-owning individuals – and have unleashed havoc on professional and white-collar career structures.

But then none of this ought to be surprising. The New Olympians are unconcerned with – in fact, hostile to – job security (other than their own), social tranquillity and the traditional aspiration for both the good life and the quiet life. They roll their eyes when they hear that the Detroit car worker, the Argentinian shopkeeper or the Cornish fisherman is complaining that their way of life is under threat. Like it or lump it, the New Olympians say. That’s just the way it has to be. Meanwhile, elected politicians bend over backwards to make life as pleasant as possible for them.

That was vividly illustrated in February when the British government backtracked on its extremely modest proposals to increase taxes on some of the heroes of business and finance. These were the wealthy “non-domiciled residents” who, while living in the UK, claimed their residence to be elsewhere and paid tax only on income shown to have been earned in Britain. In his pre-Budget report in October 2007, the chancellor, Alistair Darling, had proposed a tougher regime for those 20,000-odd non-doms who had been in Britain for seven years or more, a regime that included the payment of an annual £30,000 flat tax to the exchequer. The backlash from the assembled bankers, ship-owners and other tycoons was predictable, as their political and media apologists lauded their contribution to economic growth and employment and warned of disaster should these philanthropists take themselves elsewhere.

Vince Cable, the Liberal Democrats’ treasury spokesman, noted the bizarre nature of the campaign being waged: “We hear stories that a high proportion of non-doms will flee … It is also claimed that public discussion of non-dom taxation is dangerous because it might frighten these fragile creatures away. This is effective propaganda. We are in the absurd position that some taxpayers on modest incomes have started to feel sorry for the wealthy tax-avoiders.”….

Growth under the Blair and Brown governments has relied excessively on speculation in two forms: that in the City and that by home-owners. Economically, the legacy is a debt-sodden, lopsided and unequal country in which the pay of those at the top rises at 10 times the rate of those at the bottom. Instead of taking on the City, however, the government has turned its attentions to the workforce – both blue-collar and white-collar – which has to be made ready for the global challenge from China and India by being re-skilled and re-educated and by learning how to be “entrepreneurial”. Furthermore, the majority is routinely subjected to ever more illiberal, intrusive and obnoxious interference from state agencies, whether in terms of visual surveillance and the proposed identity card scheme, or in terms of being instructed to change their “attitudes” on a range of subjects.

In the period before the New Olympian takeover, market capitalism proved remarkably good at providing both peace of mind and material advancement. Living standards rose rapidly, financial crises were rare, banking crises rarer still. The New Olympian regime, by contrast, has offered neither faster growth in living standards (for at least 99% of the population) nor peace of mind. The modern era has been characterised by slower growth in average real incomes, higher levels of debt to maintain living standards, greater job insecurity and financial crises that have become more frequent and more far-reaching. The only class that has benefited unambiguously from the new world order has been that of the New Olympians, just as the only creed that has been accepted has been their creed.

The ancient Greeks believed their 12 most important gods and goddesses lived on Mount Olympus….Today, there are another dozen governing spirits that hover above and direct our daily lives.

First among these modern gods is globalisation…From the acceptance that economic power had shifted from the nation state to the global market, everything else stems. Governments that seek to meddle with the global market do so at their peril. Rather than tame globalisation, they are supposed to ready their citizens to compete in a world of cut-throat competition. Rather than putting tariffs on foreign steel or banning a foreign company from buying their ports (as the US has done) or seeking to prevent cheap food from undercutting their farmers (as the French have done), they should invest in education, skills and science in the belief that this will “brain-up” their population and create a knowledge economy that will find an upmarket niche in a world awash with cut-price goods….

The twin brother of globalisation is communication….

Nation states, despite the impact of globalisation and communication, retain considerable power…..These are, however, impediments to the smoother running of the global market and thus need to be removed. The World Trade Organisation – a supranational body with punitive powers for governments that transgress its rules – started a new round of talks in November 2001 designed to open up markets in agriculture, manufacturing and services. The IMF and the World Bank insist that poor countries receiving financial assistance should abandon state control of their mines, banks and energy companies. In Brussels, the European Commission is dedicated to the removal of the restrictive practices and state subsidies that throw sand into the machinery of the single market. The next three gods are, therefore, liberalisation, privatisation and competition.

Yves here. Although this section is a bit overwrought, Dani Rodrik has made a similar observation: you can’t have deep integration of markets, national sovereignity, and democracy at the same time. One has to go.

The sector of the economy to benefit most from these developments was finance. International banks had always tended to have global reach, they could benefit more than any other sector from more rapid communication, it was in their interests to have barriers on capital removed, they picked up hefty fees for organising privatisations, and competition allowed them to wipe out weaker competition. What was not really apparent until last year was how powerful this sixth god – financialisation – had become. In countries like Britain, the expansion of the City of London had been the engine of the economy’s growth – the fastest-growing parts of the finance sector expanded at around 7% a year between 1996 and 2006. Meanwhile, manufacturing output stagnated. Financialisation, it was argued by its proponents, was good for a country like Britain. It allowed the country to specialise in what it was good at, made London the hub of global finance, encouraged innovation and – by allowing the market to decide where capital should go – made the economy more stable. Whether this proves to be true in the long term remains to be seen. In the short term, economic growth did not accelerate, productivity did not surge, there was no miracle cure to the balance of payments and only rare glimpses of trickle-down.

Until last year, it was easy to argue that these first six gods were beneficial to the global economy, and at worst, neutral. Privatisation in developing countries, for example, was heralded as a way of preventing corrupt ruling cliques from siphoning off profits into Swiss bank accounts. Globalisation was specialisation on a grand scale: the logical conclusion to the sort of division of labour that Adam Smith and David Ricardo had envisaged 200 years ago. The modern world not only means that we can keep in touch by email with our cousins in Cape Town and buy an agreeable Malbec from an Argentinian vineyard in the foothills of the Andes, but also allows our pension fund to buy shares in an Indian software company. On paper, this life of greater choice, freedom and opportunity sounds splendid. It is certainly preferable that modern communication technology allows Mozart’s clarinet concerto to be heard on a CD player in any living room rather than being the exclusive preserve of the court of the Austro-Hungarian emperor in Vienna. In reality, however, the world doesn’t work this way – and that’s because the remaining six gods have such potentially dangerous properties. These are speculation, recklessness, greed, arrogance, oligarchy and excess

Speculation is not always harmful. Britain’s 15 years of uninterrupted economic growth from 1992 onwards was the direct consequence of sterling being forced to leave the European exchange rate mechanism following an attack on the pound orchestrated by Soros. Freed from the need to use excessively high interest rates to defend sterling, growth picked up and unemployment came down. Yet the activities of the big banks and the hedge funds in the first half of 2007 had no noble purpose….

It would be naive to believe that greed could ever be expunged from financial markets… Nor is it uncommon to find that the brokers and dealers do rather better out of asset-price bubbles than their customers…. Every so often, however, the money lust becomes so pronounced that it crosses the dividing line between cupidity and criminality…..

In January, panellists at the World Economic Forum in Davos were asked how the big banks of North America and Europe had failed to spot the potential losses from subprime lending. The one-word answer from a group that included the chairman of Lloyd’s of London and the chief risk officer of the insurance company Swiss Re was “greed”. As one participant put it: “Those running the big banks didn’t have the first idea what their dealers were up to, but didn’t care because the profits were so high.”

It goes without saying that those responsible for the speculative bubble of early 2007 could not conceive that one day it would burst. That was where the arrogance kicked in. The super-heroes of the New Olympian order were the brightest and the best of their generation…Even when cracks did start to appear, the New Olympian class managed to blame everyone but themselves….

The response to the market meltdown helps illustrate the final two principles that govern the modern world. One is that, despite the lip-service paid to democracy, western societies are in effect run by moneyed oligarchies, who have as little time for their wage slaves as did the ruling elite of ancient Athens. In February 2008, two weeks after Darling’s U-turn on the taxation of non-doms, Brown and his ministers opposed a private member’s bill designed to give greater rights in the workplace to agency workers – part-timers who face some of the lowest wages and toughest working conditions of any group.

….our 12th and last principle is excess. It is an axiom of the global order that there is never too much of anything: never too much growth, never too much speculation, never too high a salary, never too many flights, never too many cars, never too much trade. It was for that reason, perhaps, that the financial crisis was accompanied by rising inflation – as demand for oil and food pushed up prices globally – and by almost daily evidence of the impact of global warming. Losses in the financial markets; hardship for pensioners facing dearer heating and food; climate change. There were no prizes for guessing which the New Olympians considered the most pressing issue for policy makers.

The gods promised us paradise if only we would obey and pamper their hero-servants and allow their strange titans and monsters to flourish. We did as they asked, and have placidly swallowed the prescriptions of the lavishly rewarded bankers, central bankers, hedge fund managers and private equity tycoons, while turning a blind eye to the rampaging of the exotic derivatives, the offshore trusts and the toxic financial instruments. Had they delivered, there would, at least, be a debate to be held as to whether the price was too high, in terms of the loss of democratic control and widening social inequality. But they have not. Chronic financial instability and the prospect of, at best, years of sluggish economic activity are the fruits of their guidance.

These gods have failed. It is time to live without them.