Has America’s Use of Finance as a Foreign Policy Tool Backfired?

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From the 1980s onward, one of the major aims of American foreign policy has been to make the world safer for US investment bankers. That might seem like an exaggeration until you look at the priorities of American economic policy as well as the actions of US-dominated international institutions like the World Bank and the IMF. The World Bank, though its International Finance Corporations, pushed emerging economies to set up capital markets. The posture was that more open markets were always better.

Now that we’ve had repeated tsunamis of hot money flows in and out of small economies wreak havoc with them, conventional wisdom among development economists is more along the lines of “protectionism in emerging economies is desirable so they can develop companies and/or export sectors that are capable of competing internationally, and also serve domestic markets, so that the economy isn’t too export dependent. Open capital markets produce too much volatility in interest and foreign exchange rates and thus undermine internal development.”

Similarly, the US has pressed advanced economies for more open financial markets. America’s insistence that Japan deregulate its banking system was a prime driver of its 1980s bubble (I had a bird’s eye view of how the Japanese banks went full bore into all sorts of products and markets they didn’t understand and incurred huge losses as a result).

A cynic might point out that Japan’s speculative boom and bust put a decisive end to Japan’s status as serious challenger to American economic dominance. The Chinese, the poster children of successful development, have made a close study of the Japanese experience. Among other things, the Chinese decided to maintain tight control over the banking system and have restricted international capital flows. Note these curbs have become less effective over time, perhaps due to neglect. Regional governments have helped spawn a large shadow banking system and wealthy company owners have been able to evade capital controls through over-invoicing. Nevertheless, the Chinese financial system is a long way away from being deregulated. As a result, the consensus among Western securities analysts is that China will be able to engineer a soft landing despite the scary size of its credit bubble.

Now of course, there has been pushback against the American model of open capital markets since they can and do upend the real economy. After the Asian financial crisis of the 1997, when the IMF put in place “shock doctrine” style reform programs, countries throughout Asia concluded that they never wanted to suffer through that again. They pegged their currencies low relative to the dollar to build up foreign exchange reserve warchests. Economists have argued that this use of currency pricing to increase exports to the US has been a major culprit in the decline of US manufacturing and job losses. So to the extent that this strategy might have produced foreign policy advantages, it has come at considerable domestic cost.

But has this use of “open markets/’free markets'” as an ideological and policy tool really been a plus for the US, even in its own terms? A thorough analysis is well beyond what can be accomplished in a mere post, but let’s look at some recent evidence.

One can argue that the effectiveness of economic sanctions is evidence that America’s dominant role in international finance has translated into policy gains. Witness the pain inflicted on Iran and more recently, on Russia (although Russia’s European energy trump card has imposed restrictions on how aggressive a sanctions game the US can play).

But dial the clock back in Russia to the early 1990s, and you see a different picture. The US lost Russia thanks to full bore implementation of neoliberal policies, and its finance-centricity was a major component. We’ve chronicled this sorry chapter in part due to the prominent role that Harvard played. It bears repeating long form, since it is not as well known in the US as it ought to be. From a 2013 post:

Summers’ second big problem is the scandal that led to his ouster at Harvard, which was NOT his infamous “women suck at elite math and sciences” remarks. The university has conveniently let that be assumed to be the proximate cause.

In fact, it was Summers’ long-standing relationship with and protection of Andrei Shleifer, a Harvard economics professor, who was at the heart of a corruption scandal where he used his influential role on a Harvard contract advising on Russian privatization to enrich himself and his wife, his chief lieutenant Jonathan Hay, and other cronies. The US government sued Harvard for breach of contract and Shleifer and Hay for fraud and won. This section comes from a terrifically well reported account in Institutional Investor by David McClintick:

The judge determined that Shleifer and Hay were subject to the conflict-of-interest rules and had tried to circumvent them; that Shleifer engaged in apparent self-dealing; that Hay attempted to “launder” $400,000 through his father and girlfriend; that Hay knew the claims he caused to be submitted to AID were false; and that Shleifer and Hay conspired to defraud the U.S. government by submitting false claims.

On August 3, 2005, the parties announced a settlement under which Harvard was required to pay $26.5 million to the U.S. government, Shleifer $2 million and Hay between $1 million and $2 million, depending on his earnings over the next decade. Shleifer was barred from participating in any AID project for two years and Hay for five years. Shleifer and Zimmerman were required by terms of the settlement to take out a $2 million mortgage on their Newton house. None of the defendants acknowledged any liability under the settlement. (Forum Financial also settled its lawsuit against Harvard, Shleifer and Hay under undisclosed terms.

And while Harvard can’t be held singularly responsible for the plutocratic land-grab in Russia, the fact that its project leaders decided to feed at the trough sure didn’t help:

Reinventing Russia was never going to be easy, but Harvard botched a historic opportunity. The failure to reform Russia’s legal system, one of the aid program’s chief goals, left a vacuum that has yet to be filled and impedes the country’s ability to confront economic and financial challenges today.

And while Summers was not responsible for Shleifer getting the contract, he was a booster and later protector of Shleifer:

Summers wasn’t president of Harvard when Shleifer’s mission to Moscow was coming apart. But as a Harvard economics professor in the 1980s, a World Bank and Treasury official in the 1990s, and Harvard’s president since 2001, Summers was positioned uniquely to influence Shleifer’s career path, to shape US aid to Russia and Shleifer’s role in it and even to shield Shleifer after the scandal broke. Though Summers, as Harvard president, recused himself from the school’s handling of the case, he made a point of taking aside Jeremy Knowles, then the dean of the faculty of arts and sciences, and asking him to protect Shleifer.

And the protection Shleifer got was considerable:

Knowles tells Institutional Investor that he does not remember Summers’ approaching him about Shleifer… However, not long after Summers says he intervened on the professor’s behalf, Knowles promoted Shleifer from professor of economics to a named chair, the Whipple V.N. Jones professorship.

Shleifer’s legal position changed on June 28, 2004, when Judge Woodlock ruled that he and Hay had conspired to defraud the U.S. government and had violated conflict-of-interest regulations. Still, there was no indication that the Summers administration had initiated disciplinary proceedings. To the contrary, efforts were seemingly made to divert attention from the growing scandal. The message from the top at Harvard was, “No problem — Andrei Shleifer is a star,” says one senior Harvard figure…

One instance was a meeting early in the academic year that began in September 2004, less than two months after the federal court formally adjudicated Shleifer’s liability for conspiring to defraud the U.S. government. A faculty member asked [Dean] Kirby why Harvard should defend a professor who had been found liable for conspiring to commit fraud. The second confrontation came early in the current academic year when another professor asked Kirby why Harvard should pay a settlement of $26.5 million and legal fees estimated at between $10 million and $15 million for legal violations by a single professor and his employee, about which it was unaware. On both occasions Kirby is said to have turned red in the face and angrily cut off discussion.

On at least one other occasion, Summers himself told members of the faculty of arts and sciences that the millions of dollars that Harvard paid in damages did not come from the budget of the faculty of arts and sciences, but didn’t say where the money came from. Those listening inferred he meant that the matter shouldn’t be of concern to the faculty and that they shouldn’t raise it, a curious notion, given that Shleifer was one of their own…

Shleifer has never acknowledged doing anything wrong. Summers has said nothing. And so far as is known, there has been no internal investigation or sanction. “An observer trying to make sense of the University’s position on Shleifer, Ogletree and Tribe is driven to an unhappy conclusion. Defiance seems to be a better way to escape institutional opprobrium than confession and apology. . . . And most of all being a close personal friend of the president probably does one no harm.”

And before you think this sorry performance of US AID was a mistake, the only part that appears to have been unintended was the hand-over-fist looting by Shleifer and Hay. Mark Ames, who witnessed the plundering of Russia by its elites and their Western allies at close range, pointed out that US AID has used its humanitarian image as a cover for covert operations for decades. Russia saw the expansion of US AID’s role from helping “train” foreign police forces to a vehicle for having CIA operatives infiltrate every possible foreign power nexus of interest, be it governmental, religious, or social programs. Naturally, finance and financial flows would become recognized as being on the list. And we can see how well this mission creep worked. From Ames:

There were many ways to transform Russia in the 1990s, but thanks to funding from USAID, the path chosen was the most brutal and disastrous of all: Shock therapy, mass privatization, and the mass impoverishment of 150 million people. As Janine Wedel and my former eXile partner Matt Taibbi documented, USAID funding and support empowered a single “clan” from St. Petersburg led by Anatoly Chubais, who oversaw the complete destruction of Russia’s social welfare system, and the handing over of lucrative assets to a tiny handful of oligarchs.

Under Chubais’ stewardship, Russia’s economic output declined some 60% in the 1990s, while the average Russian male life expectancy plummeted from 68 years to 56 years. Russia’s population went into a freefall, Russia’s worst death-to-birth ratio at any time in the 20th Century — which is amazing when you think that USAID’s privatization program had to compete with the ravages Hitler, Dzerzhinsky and Stalin wreaked on Russia.

USAID funded Chubais through public-private organizations and a Harvard program that was so patently corrupt, Harvard and its program directors including economist Andrei Shleifer were sued by the US Department of Justice for “conspiring to defraud” the US government (not to mention Russians). USAID also paid public relations giant Burson-Marsteller to sell the disastrous voucher program to the Russian public, in a mass media advertising blitz that promoted Chubais’ political party on the eve of parliamentary elections. It was this USAID funded privatization, and the USAID-backed Russia “democrats,” which soured Russians on market capitalism and democracy (renamed “dermokratsia” or “shitocracy” in Russian).

So while the West likes to decry the popularity of Russia’s strongman Putin, it’s the result of its citizens getting a taste of an American effort to impose democracy, except imposing “free markets” was the real aim of this project. And as experience in Latin America, starting with Pinochet, has shown, rapid deregulation leads to plutocratic land grabs. There was no reason to think Russia would be any different. Putin’s high approval ratings rest in no small measure on his having imposed some curbs on the oligarchs and improving living conditions for ordinary Russians.

And one big reason that Russian oligarchs remain powerful is that they have been able to put their plunder in the safekeeping of US and UK tax havens. Reuters reports tonight that London has more billionaires per capita than any city, followed by Moscow.

A new article at American Interest by Ben Judah titled How Offshore Finance Sank Western Soft Power makes a forceful case that unbridled finance, specifically, the nexus between tax havens and looting plutocrats, has undermined one of the West’s most important assets, its claim to have a more virtuous political and economic model. I strongly suggest you read the article in full. Key extracts:

When most people think about offshore finance, they don’t think about the future of Europe: They think about palm trees, about shell corporations headquartered in a P.O. Box, and about secret Swiss bank accounts. But this is not what people in Eastern Europe think.

When Russians, Ukrainian, Azerbaijanis—I will spare the reader from a roll call of the 15 fraternal republics—when these countries think offshore finance, they think about their stolen futures. But isn’t that a good thing? Won’t that make them realize that West is best?

Not so fast. First, a few figures. The offshore economy has grown into a gargantuan parallel financial system. There may be more than $20 trillion hidden in more than fifty tax havens. The colossal treasure hidden in British tax havens alone is more than $7 trillion. And a disproportionately large share of that money is Eastern European. Take Russia’s missing $211.5 billion: That’s the conservative estimate for illicit financial flows out of Russia alone between 1994–2011…

East European corruption fighters are discovering that Western countries and their systems of offshore economies have enabled the colossal theft of their countries’ resources. Bubbling up from beneath the surface of both the Russian opposition and the Ukrainian Maidan is a new sense of disdain for the West…

This is what happened to Daria Kaleniuk at Kiev’s Anti-Corruption Action Centre. The director of one Ukraine’s most important NGOs battling corruption spent years investigating how corruption actually works. But the more she learned, the more she viewed both America and the European Union as hypocrites.

Kaleniuk explains:

What we found was that the money stolen in Ukraine was heading into British and European tax havens and hidden using shell companies inside the European Union. This was very uncomfortable to find out. What we felt is the Western elites were being hypocritical to us—preaching anti-corruption but allowing this offshore world to flourish.

…..Ukrainian MP Lesya Orobets is running for Mayor of Kiev on a platform that flirts with nationalist outrage. She is enraged by Western complicity with the offshore black hole into which Ukraine’s national wealth has long disappeared:

What you need to understand is that Western tax havens have resulted in Ukrainian deaths. Take for example the theft of Ukraine’s HIV budget. The national budget for fighting HIV was stolen and hidden in tax havens and in Great Britain. But this has consequences—we are now approaching a 2 percent HIV infection rate in Ukraine, which is near the no-return point of pandemic. This corruption will kill British men too. I hear they come to Ukraine. But they also return home. What will happen if the British do not close down their tax havens? I will be deeply, negatively, impressed.

….The West has gotten used to enjoying a hero’s reputation amongst Eastern European democrats. But get to know the Moscow opposition or the Maidan and you soon learn that London is now a byword for corruption, and the names of whole European countries—Luxemburg, Cyprus, Switzerland, Andorra, and even the Netherlands—are synonymous with “theft.”

As I stressed, please read this important article in its entirety. Despite America’s record of CIA thuggery and undeclared wars, we used to be clean enough internally and involved in enough of the right sort of international activities so as to be able to maintain the appearance of being a reluctant imperialist (this from the imperialism enthusiast Niall Ferguson, who hectored America for its lack of enthusiasm in his 1990s book The Cash Nexus), and on balance, to be a useful ally. The rapid rise of open corruption and the power of America’s new oligarchs has laid waste to what little was left of America’s good name. The tacit assumption seems to be that with no credible competitor for superpower role, the US position remains secure despite increasingly reckless and destructive behavior.

But as Ed Luce of the Financial Times has pointed out, the alternative to the weakening of US power isn’t to accelerate the rise of a replacement, but to usher in more instability. Yet even commentators like Luce are constitutionally unable to see how rank corruption is playing into this process, not doubt because far too many well-placed people benefit directly or indirectly. This road to hell is not paved with good intentions, but with willful blindness.

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  1. vlade

    “improving living conditions for ordinary Russians.”
    The main reason why the living conditions improved was the price of oil. It it was $25 for the last decade, Russia would be now a basket-case 3rd world country.

    Otherwise, I entirely agree that the US (and the RotW) screwed up their chance to build a better world by doing a better what-do-we-do-with-post-Soviet-Union job. It’d be funny if it wasn’t so scary, as the screw-up is not massively dissimilar to the post WW1 screw-up with Weimar Germany…

    And I couldn’t agree more with your last paragraph. What the true elites (and here I mean not the misused 1%, but the 0.001% who really concentrate the wealth and power) don’t seem to get is the world is different from 100 years ago when all of this could be resolved by a war or two (to the general detriment of mankind, but relatively little detriment of the elites). This time quite a few people have nukes, and all it takes is one person who’s idiotic or desperate enough.

    1. Yves Smith Post author

      Cyprus is not a secrecy destination:


      Cyprus was used mainly for investment into Russia, peculiarly both by multinationals who wanted disputes to be adjudicated by English law courts, and oligarchs who wanted the same. The Russians who kept money in Cyprus not for that purpose were mainly the second tier wealthy. The big money went to the real heavyweight tax secrecy jurisdictions.

  2. Steve H.

    It seems like the BB&L (Boston Bankers and Lawyers) really believe that money is power.

    “Political power grows out of the barrel of a gun.”
    “All politics is local.”

    Russian guns are a lot more local to the Euro than the dollars are. Perhaps someone is learning from the Afghani ploy, passed down through the millenia: drain the invaders wallet for ten years and then request their exit. Ukrainian fascists seem to have used Western speculative cash to springboard their own agenda, which uses guns.

    Or perhaps, since Germany has demanded that America return German gold, the Ukraine gambit was a tactical move to gain the 36 tons of Ukrainian gold to ship back to Germany. Nuland’s 5 billion dollars were Federal Reserve virtual dollars; the gold taken from Ukraine has real mass.

    1. MyLessThanPrimeBeef

      All non-violent means are ultimately backed by violent means, except love…although some love is backed by force.

      Money is power only to those citizens in areas where power can be exerted. Outside of that, you need violence explicitly. You need overt force. Within, money is power. implicitly. If you print money without permission, you go to jail. If you don’t follow the rules of that money, for example, if you fail to pay your taxes, bad things happen. If you don’t believe money is power, you will be made to believe it.

      1. OpenThePodBayDoorsHAL

        Isn’t the root crisis one of values? We know (roughly) why America rallied to defeat fascism in 1941, sure in large part it was to defend Prescott Bush’s interests etc, but I think honestly that we believed that democracy was morally a much more decent way of life. Instead today, whether it’s Wall St piggery, big pharma protection rackets, big telco monopolism, or big Beltway everything…they’ve lost even the veneer of doing what’s right because it’s right., not just because some a**hole billionaire wanted another zero on his account statement.
        I remember climbing in the remote Andes some years ago and coming upon a shepherd’s hut. They had just one thing on the wall: a photo of JFK. We seem to have lost all concept of just how widespread and valuable that global goodwill has been to us.

  3. allcoppedout

    Great narrative ringing true. I can remember a serious argument amongst World Bank hired transitional economists (can’t have been many as I was on the pay role) that we should not claim the pain would be over in 500 days. From what was said round the table I thought we were winning. The following day we got briefing notes with 150 days as the positive to extenuate. No one in our audiences was dumb enough to believe this rot. Typical questions concerned whether the World Bank stuff was any more than another nomenclature ideology.

    The promotion of technocracy is very strange and rests on corruption. Yet no amount of exposure diverts them from the tactic. I think it is all code for ‘we are the boys who have the money, the guys in power, follow us’. In another job I rarely gathered more than one ‘shadow’ in the Soviet block. The World Bank provided two or three when I spoke some basic British sociology. There always seems to be an oligarchy that will sell out its country and the US seems no exception. Thieves are rarely concerned with the value and opportunity they destroy. One wonders if ‘we’, as a wide public, believe we somehow benefit from these thefts.

  4. Banger

    The reality of global power arrangements is never reported on in the U.S. media and I mean NEVER. What you are describing are the lineaments of the Deep State. The Deep State is a series of networks and secret agreements between powerful people built up over generations who have a stranglehold on power at least in the U.S. and increasingly in Europe. It functions much in the way of traditional organized crime only more so. Nothing is beyond them–mass murder, assassinations, false-flag events and so on. It is not a centralized system but is structured like an emergent network–they’ve had nearly seven decades to develop and they thrive on the ignorance of the public who does not want to know how power operates. The sad fact is that though this state is secretive–it isn’t that hard to see–aspects of it are uncovered everyday here at NC.

    1. Ulysses

      “networks…built up over generations.” Absolutely. Many ancient historians employ the technique of “prosopography” to uncover the unofficial family and business relationships between elite families that help explain the twists and turns of ancient political history.

      Most average Americans have no idea of the hidden power of certain family dynasties, and how new money requires generations of mixing with old money before it can fully come into its own plutocratic power. A good, thorough prosopographical analysis of the American ruling class would be enormously useful for a better understanding of today’s world.

      1. Ulysses

        Just in case any ambitious graduate student is looking for a place to start these prosopographical labors–just check out the membership of the American Whig-Cliosophic Society and move west from there.

      2. gepay

        “networks… built up over generations” I believe it but I believe in the general outline of what the NYT and the Washington Post call conspiracy theory. As the US became the World Empire master “they” had to become more overt so we the assassinations of the 60’s JFK-MLK-RFK. There was the manipulations of the price of oil in the 70s to get the developing and 3rd world into debt slavery leading to the debt crises of the 80s – It also caused the stagflation of the 70s which led to Reagan and Thatcher’s busting the power of the Unions so wage-price inflation wouldn’t happen again – it worked – the FED creates tens of trillions of dollars but there isn’t raging inflation even as wages decline. It also created the “hot money” which is still running around the world and destabilizing various economies. The opening up of China so that there would be enough disciplined low wage workers to make globalization possible (it also needed jet planes, electronic communications, and computers plus airconditioning for the globalization of the South).
        I read NC to see how the system is eating itself. It has degenerated to the point that it can’t be reformed. Especially not by changing how they teach economics in US or European colleges. The rule of law that applied to most everybody has been tossed by the wayside. Property law? It used to mean something. The constitution? It worked for a while for most people except blacks, native americans, poor immigrants. Now the American and European middle class is up for grabs.
        Countries are being bombed that aren’t at war. American citizens are killed by executive order. Democratically elected governments are overthrown or replaced by technocrats. Just what will be the tipping point?

  5. steviefinn

    Brilliant stuff Yves – A reminder to me of what we wouldn’t know if left to rely on the shallow & biased MSM . Thank you.

  6. Worker-Owner

    Harry Elmer Barnes mentions gunboat diplomacy and protection of foreign investors (and investments) as a contributor to the causes of war, especially World War I in The Genesis of the World War: an Introduction to the Problem of War Guilt of 1926. But it is taboo in the commercial press. The gunboats are there protecting the interests of the advertisers, you see, and criticizing an advertiser is bad business.

  7. jgordon

    When I saw the title of this article, I thought it would be about the US dollar having its reserve currency status eroded due the incessant use by the regime of the SWIFT system against those the regime does not like. Although I guess it sort of worked out that way, from another angle. Undermining the moral authority of the regime by using finance to achieve (or attempt to achieve) corrupt and illegitimate policy goals causes a strong incentive in the rest of the world to treat the regime and its tools as pariah.

  8. Dino Reno

    Invasion and conquest by non-military means is seen by America as work in progress. Part art, part pseudo-science, it requires a commitment to experimentation. The counties where the lab rats are housed are sure to better off no matter how bad the end results simply by their exposure to the attempted cure. If their lifeless bodies reject our tender ministrations, then they were simply beyond hope to begin with. Frankly, they are better off dead than have to survive one more minute in some collective, socialist hell beyond our control. Seen in this light, it is surprising and disappointing to our officials that more countries don’t invite us in to set them straight. China actually seems willing to some degree to cooperate with liberalizing state financial controls as it faces a 25 trillion dollar debt bomb. Inviting our bankers in confirms how desperate the situation is and how explosive it will become.

    1. NotTimothyGeithner

      We do use military means. We gift weapons and send advisers to our preferred warlords. The only difference between us and the European powers was our dishonesty, but swap “civilizing the savages” and “bringing the good news” with “humanitarian intervention” and “open markets,” then Sam Powers and her ilk sound like a less literate versions of Cecil Rhodes.

      1. F. Beard

        Hopefully, the US population (“USA! USA!”, etc.) will soon realize that we should not dare to inflict on others a system that even fails US.

  9. F. Beard

    I can’t see how you can possibly talk of “open markets” when our money system is a government-backed/enforced/subsidized credit cartel! Let US banks be 100% private with 100% voluntary (via a Postal Savings Service that makes no loans itself) depositors and then what damage can they do except to themselves and those who CHOOSE to lend/deposit with them?

    But good for China that it has few illusions about banks and now that it has the industrial capacity I can’t see that generating internal demand should be difficult. Heck, there shouldn’t be a single pothole unfilled in China and medical care, the Internet, etc. should be excellent. And why shouldn’t China become energy independent and shame the West by becoming at least carbon-neutral? And while the West may lack the courage to develop thorium reactors, I doubt the Chinese do.

    Ah well, the truth keeps marching on and don’t look now but China has the largest you-know-what population in the world, about 300 million, I recall. Now if they’ll only take the commandment about usury seriously perhaps China can shame the West into doing so too.

    1. F. Beard

      Oh, I see. Markets can be open but the problem is that they are open to privateers, pirates operating under sanction of law, to wit, the government backed banking cartel.

      It’s ironic that “open” is condemned for the sins of a closed, opaque money system with a dark history.

  10. susan the other

    Thank you for this post. A good refresher of how hapless we all are. I think it stands to reason that if and when the western banking system implodes, control is lost. And that would be now. No wonder we are in a global struggle to allocate resources (energy and agricultural; minerals) and there is talk of turning commodities into partial currencies. So then, back to barter. Or the reverse, the weird and looney Bitcoin which attempts to create a currency from a virtual commodity. In all of this manipulation of “wealth” it would seem prudent to put a higher value on human capital and environmental capital. To fail to do so just perpetuates the senselessness of it all.

    1. F. Beard

      So then, back to barter. sto

      If liabilities (bank credit, fiat) are considered “money” then there is no reason to denigrate shares in equity, common stock, as “barter”, none at all. Yes, it’s inconvenient to the “money must be debt crowd” to admit they are wrong but common stock is neither debt nor simply a barter item. Instead, it is in principle and should be in practice, an ETHICAL private money form that does not punish bystanders with either inflation or deflation.

  11. Michael Berger

    Yves, a potentially dumb question, but germane to something related I’m working on (if you don’t mind):

    How aware – do you believe – was/is the average Japanese of the U.S. role in their financial crisis? Not the government, but the average man/woman on the street?

    1. Yves Smith Post author

      I’m sure not, this is even well recognized among financiers. As someone who had rooted around Sumitomo Bank as a consultant before joining them, which was hands down the best managed bank in Japan at that time, there was absolutely no way they could handle deregulation. Even as of 1985, they didn’t have a remotely adequate asset-liability management capability in their Treasury. Deregulating banks like that was like telling the operators of a drayage company that they were really in the transportation business and telling them to go pilot a 747.

      1. MyLessThanPrimeBeef

        It’s interesting to note that the Sumitomo group started almost 300 years ago as a copper mining company.

      2. Michael Berger

        Thanks Yves.

        I assumed as much, but better to ask someone who was in the thick of it, and be sure…

  12. washunate

    Thought provoking piece. Perhaps we will only really know in hindsight? That the Bretton Woods system collapsed in the 1970s and the post-Bretton Woods system collapsed in the 1990s is public knowledge, but citizens really have little access to information about what has actually been happening in world finance and diplomacy in our post post-Bretton Woods world.

    I think that perhaps the psychopaths were too successful. Power and wealth have concentrated so extremely in the US that our domestic society is no longer able to cope with massive squandering of resources on the national security state and corporate welfare. Perhaps that’s what the GFC was, a collapse of the post post-Bretton Woods system, laying bare the core choice between an authoritarian empire and a constitutional republic.

  13. MyLessThanPrimeBeef

    Poor Asian (and other) countries…have to peg their currencies low to build up foreign exchange reserve war chests.

    Are they really monetary sovereigns?

    A real monetary sovereign shouldn’t have to peg its currency to another currency.

  14. lee

    Thank you for providing a clarifying context for my gut reaction to the crisis in Ukraine (anti-US/EU) about which I have been arguing with some folks at Daily Kos. While the front page posters at DK have largely shied away from the issue there is some pretty lively disputation going on amongst others there.

    After much picking of nits as to who did what to whom and when and just who occupies the moral high-ground and so forth and so on, I finally came up with:

    “Rapacious and corrupt Western finance is the the principal enemy from where I stand. To be sure there are other enemies and issues aplenty, but for this moment in history almost anything that thwarts the expansion and aims of Western finance and its lackeys in D.C, London, Moscow, Geneva and elsewhere is, not in all cases necessarily but in most cases probably, to the good. If as Americans we renew our moral standing in the world by taking back our government from plutocrats, I’ll join the bandwagon for democracy elsewhere. But the U.S. and its allies don’t stand for much worth fighting for at the moment.”

    Deathless prose and brilliant insight it might not be but it does represent for me a moment of clarity for which I’m holding you personally responsible.


  15. ewmayer

    Nice article, but I cannot resist one snarky aside related to the oh-so-prevalent “wise Chinese central planners looking to engineer a ‘soft landing'” trope amongst economists:

    The Chinese, the poster children of successful development, have made a close study of the Japanese experience.

    With a view toward replicating it on an even grander scale, you mean?

  16. skippy

    Thought this comment from MB might belong here…

    ” Stephen Morris
    May 13, 2014 at 11:42 am

    Looking beyond the superficiality of provincial Australian problems, the real issue here goes much deeper. It is a problem facing the entire world: the failure of the system of elective government to cope with the increasing demands on government.

    The late economics Nobel laureate James Buchanan (in “The Reason of Rules”) described the problem of elective government – or “franchised monopoly government” – as follows:

    “[S]uppose that a monopoly right is to be auctioned; whom will we predict to be the highest bidder? Surely we can presume that the person who intends to exploit the monopoly power most fully, the one for whom the expected profit is highest, will be among the highest bidders for the franchise. In the same way, positions of political power will tend to attract those persons who place higher values on the possession of such power. These persons will tend to be the highest bidders in the allocation of political offices. . . . Is there any presumption that political rent seeking will ultimately allocate offices to the ‘best’ persons? Is there not the overwhelming presumption that offices will be secured by those who value power most highly and who seek to use such power of discretion in the furtherance of their personal projects, be these moral or otherwise? Genuine public-interest motivations may exist and may even be widespread, but are these motivations sufficiently passionate to stimulate people to fight for political office, to compete with those whose passions include the desire to wield power over others?”

    Under such conditions (and in the absence of true Democracy) it is totally predictable that:

    a) the system will adversely select megalomaniacal (and possibly psychopathic) political agents who act in their own interests, with minimal regard for the subjects they rule;

    b) such politicians will deliberately misrepresents the state of affairs to the public in their desperate attempts to secure votes (as shown by the examples in this article);

    c) such politicians will engage in obscene competitions to hand out bread and circuses – each side seeking to outdo the other to secure power – running up unsustainable public debts in the process; and

    d) such politicians will engage in grubby auctions, buying off special interest groups and powerful lobbies piecemeal with gifts from the public purse . . . and look to receive favours in return, either in the form of support in government or employment in later life.

    The system of elective government is broken beyond repair. Things are only going to get worse.

    Fundamentalist libertarians (of the sort who seem to have congregated at “The Economist” in recent years) argue that government should simply be “scaled down”, that the state should do nothing more than the bare minimum needed to protect the property of the wealthy.

    Of course, that wouldn’t solve the problems of widespread market failure. It would simply render everyone else hostage to the oligarchs who wield market power. It would do nothing to stop the relentless concentration of wealth and power in fewer and fewer hands.

    The solution to this problem will require economists to become a lot more unconventional than they have hitherto shown themselves to be. It will require lateral thinking on a greater scale than we have seen up till now. It may require some people to question their most sacred beliefs.

    Buchanan himself thought that the solution – or part of the solution – lay in greater Democracy:

    “In sum, the effects of direct democracy add-ons to existing decision rules surely work toward reducing the range and scope for politicization, a result supported by classical liberals.”

    For those willing to think even further outside the square, we might question the monopolistic nature of the state itself.

    The creation of ever larger and ever more concentrated polities (the EU, for example, or the relentless concentration of power in the Australian central government) works to increase the biggest regional monopolies of all: the monopolies on power which are “the state”.

    The solution to that might lie in devolution. (Genuine devolution, not the “responsibility without power” that the Coalition is offering the Australian states.)

    Of course, devolution and democracy go hand-in-hand. Democratic governments tend to be devolved governments. Think of Switzerland.

    And centralisation of power is usually achieved against the democratically-expressed wishes of voters. Think of the Euro, where the only countries given a direct vote on the question (Denmark and Sweden) voted No. Think of the “European Constitution” which was rejected by voters and then rammed through against their wishes anyway. Think of Australians who on 30 out of 32 occasions voted down referendum proposals to increase the power of the central government, but had it imposed upon them anyway.

    If we want to look beyond the superficialities of today’s budget, Democracy and Devolution would be good places to start.”

  17. JerseyJeffersonian

    So get this: Joe Biden’s youngest son, Hunter Biden, has just joined the legal team of Ukraine’s largest private gas company:



    Jeez, Banger, Ulysses, and gepay, weren’t you just talking about the power of certain families within the structure of the Deep State? Huh.

    A further post adds some more insight into exactly who the owner of this company is, and illustrates the point about the corrosive effect of off-shoring of illegally expropriated national assets by oligarchs as can be seen in this Yves’ post. It’s really detailed – a virtue – but that needs to be traversed so that the really startling information can jump out at you as you encounter it.


    Ihor Kolomoisky, the apparent new employer of young Biden, is rumored to be behind a lot of the killing and terrorizing in East Ukraine, collaborating with the junta in Kiev in these activities. When you factor in the idea that the majority of his gas fields are in disputed territory in the East, giving him the worry that they might slip out from under his control, the picture comes into better focus. And gosh (h/t Catherine Ashton…), wasn’t it just such a coincidence that CIA director John Brennan, and then in a further coincidence, VP Joseph Biden, had meetings with the junta just prior to all of the killings?

    At this point, I wish to acknowledge that this information came to my attention via several posters over at Moon of Alabama. A sweeping bow is in order rather than a mere hat tip.

    So we have the same oligarchic looting, defended by NeoLiberal stalwarts, with the ill-gotten gains being off-shored, as was detailed above about the rogering of Russia in the 90s, but nobody in Ukraine to put the brakes on like Putin. Years more of time to further institutionalize the oligarchic system. Looks like a good time for Joe Biden (Dick Cheney’s worthy successor…) to hook his kid into the system, and to assist his kid’s new oligarchic boss out with a little good ol’ Deep State rat fucking.

    Like this:


  18. Psychoanalystus

    Good article. I live in south-eastern Europe, and the US has a terrible reputation here. Not only was this region shamelessly plundered by the US and its Western allies-in-theft in recent history, but the hypocrisy of these Western nations is now on display for all to see and ridicule. At this point you can safely say that the influence and “soft power” of the US and its Western European hyenas is over and done, with no possibility of ever being restored. Of course, the US, EU, CIA, NSA, the US embassies and countless foreign NGOs still corrupt and blackmail every possible politician and institution here, but the people are well aware of this (despite the corrupt CIA-controlled mass media here lying as much as the American MSM). Without any credibility left, it is only a matter of time before the US and its cronies get booted out.

    However, I do not agree with the author’s final paragraph, stating that the absence of a single global bully will usher in instability. During the Cold War the world enjoyed far more stability than we have seen after 1990, when the US self-proclaimed itself as “sole superpower” and enforcer of “democratic principles.” I am not cheering for the return of the Cold War (although we now see the “geniuses” at the US State Dept trying to do just that), but a multi-polar world should be a much better situation than what have seen in the last 25 years.

    On my last trip to the US (after a year absence), I was shocked by how quickly the collapse has progressed since my last visit. You really have to stay out for a while to see the progression. The country is completely gutted out, a corpse of a nation. I doubt that it has the energy to sustain its nefarious actions abroad much longer.


  19. Colm Barry

    “America’s insistence that Japan deregulate its banking system” … I remember how the US once threatened sanctions against Japan for not letting Motorola sell mobile phones in their market (sometime in the 1980s). However, the simple reason it couldn’t was that Japan already had digital phones while Motorola still produced analog … So I am not always sure if the US emissaries that bullied other countries into compliance actually were well-informed enough to make sane policy decisions – even in the US’ best interest. I think as a rule, q.v. Putin who has been posted abroad and speaks foreign languages vs. the average US hide-bound politician) the US policymakers do not understand complex issues and a lot of the end results are therefore unintended consequences.q

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