naked capitalism

Satyajit Das is an internationally respected expert on finance with over 30 years working experience in the industry. He is also a best-selling author and a regular contributor to leading finance blogs – including our very own Naked Capitalism. His new book ‘Extreme Money: Masters of the Universe and the Cult of Risk’ is out now and available from Amazon in hardcover and Kindle versions.

Interview conducted by Philip Pilkington, a journalist and writer based in Dublin, Ireland.

Part I of the interview can be read here.

Philip Pilkington: In the book you describe ‘money shows’ which are presentations where financiers try to flog their wares to the general public. It really struck me how sleazy these shows are; like something out a carnival sideshow. Salesmen — you know, proper ‘snake oil’ salesmen — stand in front of a crowd and whip them into a frenzy, convincing them that they can all get rich.

I almost found the whole thing quite funny – that is, until I realised that many of these people were just trying to make ends meet. It’s well-known that real wages have stagnated in the last 30 years. And at the same time the financial markets have greatly expanded. These ‘money shows’ seemed to me to be the meeting point of these two toxic phenomena. Perhaps you could talk a little about this?

Satyajit Das: A carnival sideshow is an apt description. But, for me there is also a great sadness. As you correctly identify people became exposed to very complex economic forces – their wages stagnated; the state reduced their benefits – and financialization forced ill-equipped people to try to plan for retirement. At the same time there was enormous social pressure refracted by the media to improve living standards, consume recklessly and get the latest ‘must haves’.

People borrowed to finance consumption or resorted to financial speculation to offset declining income and safeguard their future, increasingly with borrowed money. Home equity – the difference between the current value of the family home and the amount owed on it – provided the initial financial stake. The Money Shows among other things tapped into this. Financial institutions exploited this vulnerability with their products and their marketing. As things like outsourcing and off shoring put greater and greater pressure on jobs and incomes, the entire process accelerated. George Bernard Shaw wrote about this connection between speculation and wealth: “Gambling promises the poor what property performs for the rich, something for nothing.”

The French philosopher Michel Foucault identified a carceral continuum, a system of cruelty, power, supervision, surveillance and enforcement of acceptable behavior affecting working people and their domestic lives. Modern finance evolved into a social control system. People became wage slaves, and then they became debt slaves – money especially evolved into a mechanism for control.

But it wasn’t only the less well off who embraced debt and speculation. The rich also indulged. The reasons were not that different, but just at a different level. Even if you have a lot you don’t have ‘enough’. There is huge insecurity – even for ‘successful’ bankers. There is enormous social pressures for big houses, trophy partners, kids in private schools, expensive holidays and so on. As you go up the food chain, the pressures actually increase – he has private jet, I don’t. He has a Gulfstream 5, I only have a Gulfstream 3 etc. It’s fascinating process – so everyone finds themselves deeper and deeper in debt and speculation.
The Sociologist Zygmunt Bauman’s metaphor of liquid and solid modernity captures the shift from a society of producers to a society of consumers. Security gives way to increased freedom to purchase, to consume and to enjoy life. In liquid modernity, individuals have to be flexible and adaptable, pursuing available opportunities, calculating likely gains and losses from actions under endemic uncertainty. It was a metaphor for the rise of financiers and the financialization of everyday life in a volatile world where risk taking and speculation was an essential survival strategy.

PP: It seems that, in many ways, we’ve entered another age of ‘conspicuous consumption’ – that is, consumption for the sake of displaying power and wealth. As you probably know, the economist Thorstein Veblen coined the turn at the beginning of the 19th century. Soon after consuming conspicuously fell out of fashion even with the rich – after the term became popular as a derogatory expression they stopped building giant gilded mansions for fear that they might be labelled as consuming conspicuously and hence being unfashionable. But some claim there was also a class dimension to this. This was a time when trade unionism and socialism were on the rise and the rich may have thought it more opportune to tone down expressing their wealth.

One can’t help but see a class dimension to what you’ve just said. While in the 80s and 90s people were playing down the notion of social class, actual class divisions were becoming increasingly pronounced. Now we’re in a curious – and somewhat unique – historical situation where, due to their not earning sufficient wages to keep pace with productivity increases, working people have to go into debt just to consume enough to keep the whole system ticking over at full capacity.

You were, in many ways, at the center of the mechanism for reinforcing these unusual dynamics – that is, global finance. What do you make of this unbalanced moment in history? Is Big Finance just an arm to facilitate major imbalances in wealth distribution? Is it any more than that?

SD: Class is a loaded term; it has connotations of inherited wealth, privilege, education, inflexible social delineation and lack of mobility. It means different thing to different people. There were the ‘Ivy league’ and Oxbridge set. But many people in finance came from modest backgrounds – the PSDs poor, smart and driven to do well. The social dynamic at work is more complex than class.

It is about ‘haves’ and ‘have nots’; many of latter were became ‘have not paid for what they haves’. It was about having a peculiar skill set that allowed you to position yourself in the centre of this extraordinary change. If you were at the right place in this ‘unbalanced moment of history’, as you call it, you could earn disproportionate rewards for your efforts and have considerable power. Those who didn’t have this set of skills were left behind very quickly. Like all rapid changes in structures, whether social or economic, it created great social inequality – a small percentage got mega rich, there was a small middle class and then everybody else were ‘wage slaves’ or ‘debt slaves’.

Elite financiers don’t necessarily still see the developments in the terms described. They think that only elite bankers knew how to get things done. They know much more and make the world function more efficiently. They see the banker’s role in driving growth as heroic and are puzzled that others don’t see that.

PP: I don’t think that class has connotations of inherited wealth at all. Class is about level of income. A blue-collar worker, a white-collar worker and a financier might be born into the same family – but they’ll earn different incomes and move in different social sets. Hence why I think class became more of an issue as income disparities rose. Anyway, no matter, we’ll agree to disagree.

But do you think the financial structure was largely built up as a means to paper over the underlying disparities? Do you think that this was its key function?

SD: I do agree with you on disparities of income and wealth. They were exacerbated during the ‘Great Financilisation’. As real incomes stagnated in many countries, easier access to debt – the democratisation of credit – and the opportunity to ‘speculate’… ahem… ‘invest’ in the form of privatised retirement savings became a way to paper over the problems. The people selling the debt and creating the investment products were given the opportunity to profit and they did. In many cases, they, as we know, misrepresented the risk of financial structures and were heavily incentivised by fee structures that encourages this mis-selling.

The phenomenon was interesting psychologically. It meant if you were less well off then it was your fault – you had made poor financial choices. A fascinating insight into this can be found in the late Joe Bageant’s book Deer Hunting for Jesus. People in his home town in the American South who are impoverished and disadvantages blame themselves for their plight. They oppose even the most rudimentary assistance from government as ‘communism’.

So in this sense, finance was very much part of the process of reinforcing and entrenching the income and wealth differences.

PP: Regarding the ‘social class’ thing I think we’re just quibbling over terminology, really. I see things essentially the same way.

Moving on. That people were unable to consume at sufficient levels to keep the economy going and went into debt in order to do so is clearly the underlying cause of the crisis. But what do you make of the strange situation that’s resulted? I mean, all the economists are saying – and rightly for once, I think – that we have a serious problem with demand. People simply cannot afford to buy enough stuff to keep the economy growing at a reasonable pace. And since they’re all paying down debt they probably won’t be able to take on enough debt to consume at this level for some time (which is probably less than a bad thing). What do you make of this situation? And where does this place finance? What has finance’s role become in this brave new world?

SD: A useful place to start is look at what debt does – it accelerates consumption. Instead of saving to purchase you buy today but pay tomorrow. As early credit card advertising put it, debt takes ‘the waiting out of wanting’. Debt fuelled purchasing creates demand driving greater investment, in part because producers think that demand has suddenly increased. Increased production capacity means that they have more to sell and investors demand growth in earning etc so they must generate increased sales – so the whole process takes on a life of its own. It’s a kind of Ponzi Prosperity.

Ultimately, you have to be able to pay back the debt out of your cash flows or income. If you have bought assets that are collateral for the debt then the asset value has to be stable and the cash flows from the asset sufficient to repay the debt with interest. Finally, you reach the inflexion point where you can’t service or repay the debt and the assets funded by the debt can’t generate the income to support the debt. The whole process goes into reverse.

If you use debt in this way to fuel demand then when the capacity to take on debt ceases so does demand. In effect, the world exaggerated ‘real’ demand and with it economic growth. To go back to equilibrium we have to do several things – run through the excess ‘stuff’ we bought; divert income to paying down debt, absorb the excess capacity we created, restore credit creation capacity by recapiltalising banks crippled by bad loans etc. That is precisely what deleveraging means and what is happening. So we become locked into a lengthy period of low growth, low demand which is not easy to reverse – as Japan shows.

In this environment, finance – that is banks – are part of the problem as they absorb funds as they are rescued and also a drag as they can’t create credit even where there is demand.

In the long run, the future of finance depends on whether once things get better – somewhere down the track say in 100 or 200 year (just kidding folks!) – we just repeat the mistakes all over again or change the role of banks.

Banks are utilities matching borrowers and savers, providing payment services, facilitating hedging etc. The value added comes from reducing the cost of doing so. Paul Volcker questioned the role of finance: “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence. US financial services increased its share of value added from 2% to 6.5% but Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”

The idea of financial services as a driver of economic growth is absurd – it’s a bit like looking at a car’s gearbox as the basis for propulsion. But financiers don’t necessarily agree with this assessment, unsurprisingly.

PP: I’ve always found the likes of Greenspan quite representative of many in the new elites in that he was a disciple of the writer Ayn Rand. While others weren’t/aren’t Randians – or, as some call them, Randroids – many subscribe to the ideologies put forward by writers like Milton Friedman or to the individualistic rhetoric employed by politicians like Thatcher and Reagan.

It seems that at a certain moment the elites gave up on paternalism altogether. In many ways I’ve always thought that this was in keeping with a sort of counter-culture mentality. The idea being that people no longer needed to be told what to do but would instead form into spontaneous self-organising networks that would ostensibly spring up as a result of market mechanisms. Many of these people adopt a sort of counter-culture language; speaking of ‘freedom’, ‘liberty’ and ‘individualism’.

However, the result seems to have been that this mentality has been used to justify income disparities together with the creditor-debtor financial nexus we have been discussing. Maybe you could talk a little about these ideas, especially insofar as you encountered them while working in the industry?

SD: People want neat answers and clear ideological positions – he’s a Randroid, she a Vulcan, they are Keynesians etc. It’s comforting and satisfies prejudices. Reality is never that neat. In my experience, policy makers or financiers are pragmatic rather than purely ideological. They may have a world view, but their action do not frequently tie clearly to pure philosophies, whether it be free markets or any other economic doctrines. Just look at the evidence.

Ronald Reagan – the beatified doyen of conservatives – ran substantial budgets deficits that had a distinct Keynesian taint. Blair and Clinton’s social democrat administrations presided over the aggressive dismantling of banking regulation, which looks distinctly neo-liberal not to mentioned ill-conceived. Margaret Thatcher may have spouted Hayek but she was not interested in pure agendas: “Economics are the method; the object is to change the soul.” Conservative politician Enoch Powell ridiculed Thatcher’s monetarist policies: “A pity she did not understand them!” No pure economic model has been implemented in living memory, except perhaps in North Korea.

Frederich Hayek and Frank Knight, founder of the first Chicago School considered free markets, which they advocated, to be unjust because they distributed wealth based on luck and inheritance rather than capability and effort. They were wary of the tendency of free markets to speculation, frenzy and fraud. Knight and Hayek did not consider markets an ideal tool for satisfying demand as they inevitably moulded themselves to the desires of active participants and ignored other factors, like the environment and quality of life. Knight argued that the economy is too complex and unstable to be controlled by simplistic government intervention. Intervention, he argued, is dangerous, rejecting the economic prescriptions of both the Keynesian and Friedman schools.

I always find Knight’s criticism of Friedman’s Second Chicago School interesting: “The emotional pronouncement of value judgements condemning emotion and value judgements which seems to me a symptom of a defective sense of humor.”

Everything was oriented to propping up economic growth, keeping yourself in power or increasing your profits or bonuses. It was a certain pragmatism. Few traders I know believe in pure economic models. They borrow here and steal from there. Whatever works. It’s like that line that David St. Hubbins has in This is Spinal Tap: “Before I met Jeanine my life was cosmologically a shambles. I would use bit and pieces of whatever Eastern philosophy would drift through my transom.”

Confucius wrote that: “The superior man understands what is right; the inferior man understands what will sell.” Professors and theoreticians may be after some elusive truth but basically they were the piano players in the whorehouse. Financiers did what they had always done, try to make money for their firms which, given they take about 50%, meant more for themselves. But what they did had far reaching effect on the rest of the world and the structure of society, some intended, others unintended.

PP: Some of those examples could be met with counterexamples— I don’t think Thatcher’s attacks on miners was wholly pragmatic and much of Reagan’s deficits were based on military expenditure and tax cuts to the wealthy; to call that Keynesianism is to stretch the term some.

Are you saying that ideology plays no role in policy? I mean Greenspan may not have followed an ideology when he lowered interest rates, but his willingness to aggressively deregulate indicates to me an ideological taint.

SD: That’s my point exactly. You can always find examples which justify one position or another. Policy was not a neat set of philosophical diktats.

Ideology does play a role, clearly. Thatcher wanted to reduce the poor of the unions. Reagan believed in ‘trickle down’. They and Greenspan clearly believed that market based solutions were preferable to government intervention. But my point is it is neither consistent nor coherent.

There are ideological elements. There are pragmatic reactions to what was seen to be not working – remember both Thatcher and Reagan came to power during the economic stagnation of the 1970s with popular electoral mandates for change, both economic and social. There are also personal reactions – Rand’s world view was deeply affected by her family’s plight after the Bolsheviks came to power in Russia. Greenspan’s flexible world view was shaped by his relatively modest background, his ambition and political cunning. It is not a simple Manichean world. There are no obvious conspiracies.

Labelling people ‘x’ or ‘y’ is too simplistic. There are a lot of complex factors interacting in different ways. To understand them, to understand the financialisation of the world, you have to move beyond a purely ideological framework. You have to acknowledge that there are many contradictory forces at work and they shift constantly. If you want to change it then you have deal with this complexity. Outrage won’t get you there. In reality, many socially progressively people seemed to me to adopt the position of graffiti artist Banksy: “We can’t do anything in the world until capitalism crumbles. In the meantime we should all go shopping to console ourselves.”

PP: Well then what are the alternatives? It would be nice to say that, given environmental concerns, we could all just cut down on consumption, but we’ve seen what cuts in consumption really mean: unemployment, low economic growth and general misery. In fact, an argument could be made that if we want environmental sustainability we need continued real GDP growth but we need to push this growth in a more environmentally friendly direction – otherwise there might just be a sort of ‘environmental malaise’ in which an impoverished population just ignore all environmental considerations; recent polls seem to indicate that when people go broke they stop caring about the environment. Not surprising really.

So, apart from simply cutting consumption the only other two options seem to be increased government spending – which Japan seems to show is possible beyond the previously thought constraints (their bonds have the lowest yields in the world and their debt-to-GDP is well over 200%) – or increased wages which means income redistribution. What do you think of these options? And do you think they have a realistic future or do you think we might be caught in the ruins of this collapsed Ponzi scheme for some time?

SD: There are problems to which there are no answers, no easy solutions. Human beings are not all powerful creatures. There are limits to our powers, our knowledge and our understanding.

The modern world has been built on a ethos of growth, improving living standards and growing prosperity. Growth has been our answer to everything. This is what drove us to the world of ‘extreme money’ and financialisation in the first place. Now three things are coming together to bring that period of history to a conclusion – the end of financialisation, environmental concerns and limits to certain essential natural resources like oil and water. Environmental advocate Edward Abbey put it bluntly: “Growth for the sake of growth is the ideology of a cancer cell.” We are reaching the end of a period of growth, expansion and, maybe, optimism.

Increased government spending or income redistribution, even if it is implemented (which I doubt), may not necessarily work. Living standards will have to fall. Competition between countries for growth will trigger currency and trade wars – we are seeing that already with the Swiss intervening to lower their currency and emerging markets putting in place capital controls. All this will further crimp growth. Social cohesion and order may break down. Extreme political views might become popular and powerful. Xenophobia and nationalism will become more prominent as people look for scapegoats.

People draw comparisons to what happened in Japan. But Japan had significant advantages – the world’s largest savings pool, global growth which allowed its exporters to prosper, a homogenous, stoic population who were willing to bear the pain of the adjustment. Do those conditions exist everywhere?

We will be caught in the ruins of this collapsed Ponzi scheme for a long time, while we try to rediscover more traditional sources of growth like innovation and productivity improvements – real engineering rather than financial engineering. But we will still have to pay for the cost of our past mistakes which will complicate the process. Fyodor Dostoevsky wrote in The Possessed: “It is hard to change gods.” It seems to me that that’s what we are trying to do. It may be possible but it won’t be simple or easy. It will also take a long, long time and entail a lot of pain.

PP: You say that a lot of pain will have to be incurred before anything positive happens but this sounds almost identical to what we’re being told by the mainstream media at the moment. Yet, if history is anything to go by simply sitting around and enduring pain is one of the worst depression-era economic policies imaginable. Are you implicitly assuming that the system will readjust automatically? And is this not a variation on the neoclassical theme of self-correcting systems that got us into this trouble in the first place?

SD: There are two separate issues. The first about self correcting systems. The second about what is likely to happen.

The basic system – financialisation, debt and speculation driven growth – doesn’t work. It was a kind of ‘Ponzi prosperity’ which eventually runs out of steam. I certainly don’t think that the system will miraculously renew itself like Arnold Schwarzenegger’s nemesis in the Terminator films. I have never bought that.

It is also not clear what we can do either. The period may reflect Italian philosopher Anton Gramsci’s words: “The old is dying, the new cannot yet be born, in the interregnum all manner of morbid symptoms appear.”

There are no simple, painless solutions any more. The world has to reduce debt, shrink the financial part of the economy and change the destructive incentive structures in finance. Individuals in developed countries have to save more and spend less. Companies have to go back to real engineering. Governments have to balance their books better. Banking must become a mechanism for matching savers and borrowers, financing real things. Banks cannot be larger than nations, countries in themselves. Countries cannot rely on debt and speculation for prosperity. The world must live within its means.

The basic problem is one of demand. We used debt to create demand and now that we can’t increase debt, demand has slowed down. This is crucial thing is it is going to be difficult to return to previous levels of demand, particular growth in demand that the world has come to depend. It may not be a bad thing for the environment and conservation of scarce resources but it won’t be good for growth. That’s the issue, at least as I see it, and it’s a hard one to fix.

All this also needs a fundamental change in thinking at all levels – economic, financial, political and social. That’s difficult and it certainly hasn’t happened so far.

So, reforming the economy, reining in extreme money, is not difficult but comes with short-term painful costs and longer-term slower growth and lower living standards. At best you can try to manage the process. Maintain some degree of stability and avoid a total breakdown. Try to shield those badly affected from the worst of the adjustment process. Try to maintain the fragile social contract which will increasingly be strained as the pain becomes more and more widely felt.