Yves here. Das makes some statements in this post that I am certain will provide grist for reader discussion. For instance, he contends that growth is necessary for democracy. But is that true, or is that simply the only set of conditions we’ve had, in that the modern era featured (at least until recently) a widening of the franchise and an extension of rights at the same time the industrial revolution produced rising incomes. Yet Japan has had two lost decades and remains a democracy.
Similarly, Das contends that low interest rates helps debtors. That’s true IF they can refinance at those low rates. But the way this movie has worked out is that the better credit quality borrowers can refi and the lower credit quality ones can’t (witness the people who’ve gotten stuck with 24% or higher credit card balances). In fact, high inflation rates favor borrowers, since they get to pay back the obligation in cheaper currency.
But even if you quibble on some of the particulars, I anticipate you’ll agree on the extent of the damage done to trust at various levels of society and how costly it is proving to be.
By Satyajit Das, former banker and the author of Extreme Money: The Masters of the Universe and the Cult of Risk (2011) and Traders, Guns & Money
In Jean Renoir’s 1939 film The Rules of the Game (La Regle du Jeu), a character observes that: “We live at a time when everyone lies.” Those words are equally true today.
All systems – social, cultural, spiritual, economic, financial- rely on trust. It requires the capacity to weigh up the costs and benefits of trusting others. It requires the ability to reciprocate in kind or seek redress when trust is betrayed. When it is working, the system enables strangers to deal with each other safely for their mutual benefit. It is the basis of liberal societies, democracies and economies.
In attempting to deal with the global economic crisis, policy makers have systematically undermined trust in instruments, trust in institutions, trust between nations and trust in the political process.
A Difficult Compact…
It is ironic that the breakdown should be caused by an economic crisis, not a political or social one. But the social compact within democratic societies requires economic growth – constant improvements in living standards and increasing wealth. The entire economic system and expectations cannot do without growth. John Steinbeck identified this tendency in his novel about the depression The Grapes of Wrath: “when the monster stops growing, it dies. It can’t stay one size”.
Today, strong economic growth may have come to an end. The global economy has stalled, entering a period of secular stagnation or contained depression. Employment, incomes, wealth and investment are stagnant or falling. Economy security has reduced dramatically for all but a select few.
The rapid rise of living standards and the size of the economy were driven, to varying degrees, by increases in debt levels, environmental damage and unsustainable consumption of non-renewable resources. The crisis has mercilessly exposed the limits of this economic model.
The crisis has also exposed the limits of policymakers’ tools to restore growth. Government spending to stimulate economic activity is severely restricted globally, due to increased investor focus on public finances and a reluctance to finance heavily indebted nations. With interest rates in most developed countries near zero, central bankers have been forced to resort to non-conventional monetary techniques, primarily quantitative easing (“QE”). The effectiveness of these policy instruments is increasingly debated, with repeated doses of familiar prescriptions failing to restore the health of the global economy.
The crisis has exposed other problems. In recent years, increasing concentration of wealth and inequality was disguised by artificially engineered housing booms and the availability of abundant debt to finance spending. Borrowing became a substitute for rising incomes.
As the top income earners’ share of wealth in many countries increased, strong economic growth papered over the problems of inequality. As Henry Wallick, a former Governor of the US Federal Reserve, accurately diagnosed: “So long as there is growth there is hope, and that makes large income differential tolerable.”
Economist John Maynard Keynes’ warning went unheeded: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done.” Politicians and policy makers struggling to deliver prosperity have turned to financial and political repression.
Financial repression, a term coined in 1973 by Stanford economists Edward Shaw and Ronald McKinnon, entails a variety of measures to channel funds to governments to help liquidate otherwise unsustainable debts. It can take the form of manipulating interest rates, forcing purchases of government bonds, controlling the free movement of capital and nationalising businesses or seizing savings. Ironically, financial repression is generally packaged as measures to ensure the stability and solvency of the economic and financial system.
Current government policy in most developed countries is to keep interest rates low for an unspecified but extended period. Returns are artificially set below the true inflation rate – money loses its purchasing power, the ability to buy real goods and services. As interest rates are the price of money, governments are now deliberately manipulating prices.
With interest rates at zero (known as ZIRP – Zero Interest Rate Policy), governments are increasingly forced to use QE to manipulate the amount rather than the price of money. In July 2012, Denmark’s central bank even instituted negative interest rates on deposits, setting the deposit rate at minus 0.2% per annum. Lending money to the Danish government required savers to accept a penalty. This was NIRP -negative interest rate policy. The European Central Bank (“ECB”) has also considered similar initiatives.
There is limited evidence that low interest rates actually stimulate economic activity. The effect appears temporary with spending reverting to normal levels once rates are normalised.
The major effect of low rates is to allow over indebted borrowers to borrow at lower interest rates and maintain higher levels of borrowing than could otherwise. Low rates help reduce the value of the debt, effectively decreasing the amount of borrowing. The policy subsidises borrowers at the expense of savers.
Low rates reduce the income of savers, including retirees. It undermines compulsory retirement saving schemes, designed to ensure a secure post work life.
In 2010, a “fully sympathetic” Bank of England Deputy Governor Charles Bean told the UK Parliament that retirees “shouldn’t necessarily expect to be able to live just off their income… It may make sense for them to eat into their capital a bit.” He pointed out that: “Very often older households have actually benefited from the fact that they’ve seen capital gains on their houses.” The implication of Mr. Bean’s speech was that retirees should sell their houses, camp in the local park and eat their capital gains.
Central banks insist that they can increase rates when they want to. All addicts believe that they can quit whenever they want to.
A sustained period of low rates makes it difficult to increase the cost of borrowing. Levels of debt encouraged by low rates become rapidly unsustainable at higher rates.
Japan’s public debt is 240 per cent of its Gross Domestic Product (“GDP”). The government spends more than $2 for every $1 of taxes they raise. They borrow the rest at interest rates of less than 1%. If interest rates increased to more normal rates then Japan would not be able to sustain its huge debt.
Desperate to get investors to buy government bonds the Japanese Ministry of Finance has found a new angle – sex. They are running ads promoting ownership of government bonds: “Men who hold JGBs [Japanese Government Bonds] are popular with women!”
These policies debase currencies, undermining money’s function as a mechanism of exchange and a store of value. Once an unquestioned store of wealth, investors in government bonds are now threatened by the risk of sovereign defaults or destruction of purchasing power. Jim Grant of Grant’s Weekly Interest Rate Observer noted that where once government bonds offered risk-free return, now they offer “return free risk”.
A Menu of Oppression…
More aggressive forms of financial repression are evident.
In the restructuring of Greek debt, retrospective legislation was used to deliberately prefer official creditors including the ECB, allowing them to avoid losses at the expense of other creditors. Subsequently, in the course of the bailout of Cyprus, in part because of the write-down in Greek debt held by Cypriot banks, significant losses were imposed on depositors. Unsurprisingly, commercial investors are now reluctant to finance some governments or banks, fearing adverse future changes to their legal status.
In some countries, governments have seized private savings or have directed it into approved investments.
In Spain, the approximately Euro 60 billion Fondo de Reserva was created to guarantee pension payments in times of hardship. The Fund’s investments now constitute primarily (97.5%) Spanish government bonds.
According to Bank of Spain data, Spanish government entities hold around 14% of the total government debt of around Euro 658 billion. Encouraged by the Spanish government and financed by the national central bank and the ECB, domestic banks hold a further 31.5%. In contrast, foreign investor holdings of Spanish government debt have fallen to around 37% from around 50% in 2011.
Purchases by such captive investors have helped the Spanish government finance itself and also reduced it cost of borrowing. The exposure to the government increases the risk of these investors in case of a restructuring of Spanish government debt and its ability to meet its future liabilities to their beneficiaries.
Portugal used its own pension fund to meet its 2011 deficit targets, having already raided Portugal Telecom’s pension fund the previous year. Argentina has seized pension funds, central bank foreign exchange reserves and renationalised YPF, the national oil company, allowing the government access to $1.2 billion of annual profits. Bolivia has nationalised Transportadora de Electricidad, Bolivia’s national power-grid company.
In India, tax authorities retrospectively imposed a large tax liability on UK telecommunications company Vodafone. Raghuram Rajan, an economist at the University of Chicago and recently appointed head of the Indian central bank, commented: “A government that changes the law retrospectively at will to fit its interpretation introduces tremendous uncertainty into business decisions, and it sets itself outside the law. [It] has missed a golden opportunity to show its respect for the rule of law even if it believes the law is poorly written. That is far more damaging than any tax revenues it could obtain by being capricious.”
The ECB, which oversees the 17-nation Euro-Zone, has implemented programs that entail “monetary financing”; that is, central bank funding of governments prohibited under European Union (“EU”) treaties. As Jens Weidmann, President of the German central bank, the Bundesbank, warned in November 2011: “I cannot see how you can ensure the stability of a monetary union by violating its legal provisions”.
Bad Banks …
The financial crisis and subsequent investigations revealed numerous instances of financial institutions placing their own interest before that of clients and exploiting unsophisticated customers for egregious profits.
On 14 April 2012, a former Goldman Sachs Executive Director Greg Smith published a sensational exit interview in the opinion pages of the New York Times. The letter criticised “toxic and destructive” practices and cultures within Goldman Sachs, one of the world’s largest, most important and influential investment banks. Former Chief Executives of the firm have held senior positions in the US and other governments – leading to the firm being christened “Government Sachs”.
The letter followed a series of earlier damaging disclosures about Goldman Sachs, labelled by Rolling Stones Magazine journalist Matt Taibbi as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”.
The criticism highlighted practices focused on getting clients to invest in securities or products that Goldman was interested in getting rid of. The letter highlighted the use of complexity to confuse clients and the focus on highly profitable and (sometimes) unsophisticated clients who did not fully understand the risks of the transactions that they were being encouraged to enter into.
In 2010, US government investigations highlighted suspect practices surrounding the sale of mortgage backed securities, known as the ABACUS and TIMBERWOLF.
Examination of several terabytes (billions of pages) of emails revealed Tom Montag, a senior Goldman executive, describing TIMBERWOLF as: “one shitty deal”. During a Senate hearing, Goldman’s Chief Financial Officer David Viniar was asked: “when you heard that your employees, in these e-mails, when looking at these deals, said God, what a shitty deal … do you feel anything?” Viniar responded: “I think that’s very unfortunate to have on e-mail”. Subsequently Goldman instituted policies against using swear words in emails, cleaning up language rather than sales practices.
The Securities and Exchange Commission (“SEC”) indictment cited Fabrice Tourre, a French employee of Goldman, who sold the Abacus deals to unwitting “widows and orphans”. Among tender emails to his girlfriend Serres, the “super-smart French girl in London”, Tourre observed in January 2007: “The whole building is about to collapse anytime now?.?.?.? Only potential survivor, the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!
He wrote that ABACUS was “pure intellectual masturbation”, ‘a “thing”, which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price. But Tourre had no self-doubt: “Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job :) amazing how good I am in convincing myself !!!”
Goldman executives seemed to have trouble with the English Language. The following exchange took place during a US Senate hearing into these transactions:
Senator Levin: Don’t you have a duty to disclose an adverse interest to your client? Do you have that duty?
Dan Sparks: (head of Goldman Sach’s Mortgage trading): About?
Senator Levin: If you have an adverse interest to your client, do you have the duty to disclose that to your client?
Dan Sparks: The question about how the firm is positioned or our desk is positioned?
Senator Levin: If you have an adverse interest to your client when you are selling them something to them, do you have a responsibility to tell that client of your adverse interest?
Dan Sparks: Mr. Chairman, I am just trusting to understand what the “adverse interest” means…
The exchange mirrored a comedy sketch featuring British comedians John Bird and John Fortune:
Interviewer: “Can we talk about moral hazard?”
Banker: “About what?”
Interviewer: “Moral hazard?”
Banker: “I know what ‘hazard’ means, but what’s the other word?”
In July 2010 Goldman settled the matter, paying a $550 million fine, around 4% of its annual earnings of $13 billion. Charles Geisst, author of a history of Wall Street, was unimpressed: “a fine is not going to bother these people … [It] is like passing around the church collection plate and collecting a few extra bucks for sins.”
In April 2012, Goldman Sachs paid $22 million to the SEC to settle charges that it allowed select clients to receive non-public information about stocks – a practice known as huddles or Asymmetric Service Initiative. In both transactions, Goldman Sachs, a model for financial firms throughout the world, displayed a disregard for client interests.
Goldman Sachs was not alone.
In June 2012, UK and American authorities fined UK’s Barclays Banks £290 million ($450 million) for manipulating key money market benchmark rates, such as the London Interbank Offered Rate (“Libor”) and Euro Interbank Offered rates (“Euribor”). The UK Financial Services Authority released detailed evidence supporting that Barclays had breached various parts of the Principles for Businesses in manipulating rates in order to obtain financial benefits or, during the global financial crisis, due to reputational concerns.
Subsequently, other major international banks such as UBS, RBS and Rabobank, also paid large fines.
These rates affect a wide variety of transactions. For example, Libor is used to establish the interest costs of $10 trillion of loans, $350 trillion of [over-the-counter] swaps and over $400 trillion of Euro-dollar futures and option contracts traded on exchanges.
Beyond the final effect, the loss of trust is significant. Bank of England Governor Mervyn King observed: “The idea that one can base the future calculation of Libor on the idea that ‘my word is my Libor’ is now dead”.
Investigations have revealed alleged manipulation of benchmark currency and commodity price indices.
US banks, such as JP Morgan and BA, have also paid out large amounts as fines or settlement of claims in relation to mortgage lending undertaken prior to the 2007/2008 crisis.
But regulators too may be complicit. There are suggestions that regulators knew that Barclays as well as other banks were posting artificial rates which did not correspond to the actual rates that the banks would pay to borrow. It is alleged that regulators did not object because of fears that the truth would destabilise already panicked markets.
In the lead up to the financial crisis, finance executives received high salaries and bonuses, based on dubious often manipulated profits. Even in the aftermath of the crisis after governments were forced to support ailing banks, bankers’ voracious desire for large bonuses has continued. The inability or unwillingness of governments to rein in an industry which Martin Wolf of the Financial Times described as “a risk-loving industry guaranteed as a public utility” remains a point of contention.
Reviled and mistrusted, financial institutions throughout the world are losing legitimacy.
The Empire Strikes Back…
The rising lack of trust in governments, banks and global finance manifests itself in various ways.
To preserve the value of their savings, savers are reversing the historic trend to “the abstraction of property through paper currency”. There is a trend to switching from financial instruments to real assets – real estate, gold, commodities, farm land, fine arts and other collectibles.
There is growing interest in alternative paper money, such as the Bavarian Chiemgauer, England’s Lewes Pound or the Berkshares program in Massachusetts. Alternative currencies have limited acceptance within a small area and (sometimes) a finite expiry date. They are designed to encourage local business and emphasise community values.
Interest in digital currencies such as Bitcoin, also reflects, in part, increased concern about the monetary system. Irrespective of whether these alternative currencies succeed, they are testament to a growing distrust of governments and the financial system, representing a challenge to the authority and apparatus of states.
In the US, on Bank Transfer Day, an on-line phenomenon launched by an unhappy Bank of America client, disgruntled customers withdrew money from traditional banks transferring it to not-for-profit credit unions owned by members. The growth of peer-to-peer lending which facilitates the matching of savers and borrowers for small consumer loans also evidences this trend. Example include firms such as Prospect and Lending Club in America as well as UK start-up Funding Circle,
But the loss of trust in the financial system is potentially damaging. A switch to alternative currencies, precious metals and non-financial investments undermines growth and economic activity. Savings are locked in unproductive investments or unavailable to circulate freely. Bypassing banks may lead to a contraction in the availability of credit globally.
Loss of trust even extends to dealings between central banks. In early 2013, the Bundesbank, Germany’s central bank, announced that it would move around 674 tonnes of its holding gold bullion from foreign central banks (the Federal Reserve Bank of New York and the Bank of France in Paris) to Frankfurt.
While the move only affects about one-half of the Bundesbank’s gold reserves and officials stressed that there was no question of “mistrust”, Bill Gross, a founder investment firm Pimco, tweeted the obvious inference: “Central banks don’t trust each other?”
Monetary Colonialism …
Trust between nations is being destroyed.
The global financial crisis highlighted the problems of monetary colonialism -where some countries buy real goods and services from other countries, especially emerging nations, and in exchange sell them securities or I-O-Us with low rates of interest. Now, developed nations are pursuing policies to devalue their currencies, through a combination of low interest rates and increasing the supply of money.
These actions erode the value of sovereign bonds in which other nations, like China, Japan, Germany and others, have invested their savings. Between 2008 and 2012, the depreciation of the US dollar, resulted in a loss for foreign creditors of over US$600 billion. This undermines global trust.
Nations increasingly seek to manipulate the value of currencies to allow them to capture a greater share of global trade, boosting growth. But a calculated policy of engineered currency devaluations to gain trading advantages invites destructive retaliation in the form of tit-for-tat currency wars. These beggar-thy-neighbour policies exacerbate international tensions, manifesting itself in trade protectionism and disputes.
Many nations have used regulations and political pressure to force banks and investors to adopt patriotic balance sheets. This entails institutions purchasing their national government bonds and prioritising lending to domestic borrowers.
Low interest rates and weak currencies have also led capital to flow into emerging nations, with higher rates and stronger growth prospects. Since 2009, in excess of US$ 3 trillion have flowed into emerging markets. These frequently short-term, volatile money movements have the potential to destabilise these economies, derailing their development. This has forced some nations to deploy financial repression of their own – controls on capital flows into the country.
The devaluation of the US dollar had driven up the price of commodities, such as food and energy which are denominated in the American currency. In poorer countries where spending on food and energy, including everyday essentials like cooking oil, is a high proportion of income, this has caused hardship. These developments threaten to reverse progress in reducing poverty.
Higher commodity prices in combination with large flows of capital have created inflationary pressures in many countries which have forced authorities to increase interest rates which have slowed economic growth.
Under the guise of regulations needed to strengthen the financial system, the US has implemented measures whose extra-territorial application may give American banks a business advantage. Such measures do not foster international co-operation in regulating finance.
“Current government policy in most developed countries is to keep interest rates low for an unspecified but extended period. Returns are artificially set below the true inflation rate – money loses its purchasing power, the ability to buy real goods and services. As interest rates are the price of money, governments are now deliberately manipulating prices.”
I don’t know what “artificially set” means. Interest rates are always “artificial”, unless you see the Fed as a natural force.
About Japan: “These policies debase currencies”
With 0 inflation?
“Desperate to get investors to buy government bonds the Japanese Ministry of Finance…”
What about not selling bonds?
It’s Henry WallicH.
The author is stuck in a Walrasian “natural” real interest rate framework and seems to believe the Fed has only recently begun setting rates in contravention to a market rate. This is of course so incorrect as to not even be wrong and it, along with other misconceptions, tend to interfere with the more important points he’s trying to make. It would have been better had he confined himself to a discussion of the financial sector and left monetary operations alone.
I think things are more complicated than that.
To begin with, there are a great many countries which do not have monetary sovereignty. There are also a great many countries which cannot resort to Keynesian stimulus because it would cause inflation. Could Das be including these in his analysis?
Secondly, surely you must be aware of how governments unabashedly manipulate the methods by which they measure inflation:
Also Das specifically emphasizes the price of food and energy. Not everyone experiences prices in the same way. Since 2000 the price of food and energy have gone up much faster than, for instance, the price of big screen TVs or laptop computers. Poor people spend a much greater percentage of their total income on food and energy than more affluent people. If we were to caluclate the price of a “lifeline” basket of goods, as it used to be called back in the days of regulated utilities, I’d be willing to wager the price of that minimual basic survival package has gone up far faster since 2000 than price indexes which include big screen TVs and laptop computers.
Although I agree with many of his observations, Das’s essay really misses the mark in terms of offering a coherent understanding of our times.
Starting with his comments about democracy and Steinbeck, economic growth is not the issue for democracy. Jefferson’s concept of an agrarian society didn’t require growth at all; in fact, Jefferson hated the idea of a central bank, precisely because he understood that wealth–especially a wealthy investor class–would threaten the equal distribution of political power needed to maintain democracy. Jefferson understood that the rich could, and would, use their financial power to circumvent the three elements necessary for a functioning democracy: equality, fairness, and truth. He would not be suprised by our predicament today.
And the quote form Steinbeck, as I recall it, is misplaced: The “monster” is not democracry but the banks (really the rentiers); if the banks (rentiers) can’t keep growing, i.e., accumulating, then they die. In short, Steinbeck understood that the banking system that literally ruled over the dust bowl was at its heart a Ponzi scheme.
The real issue, which Das misses for the details, is culture. When we moved from a society and culture that was concerned with economic fairness and social participation, and to a society that stressed individual freedom (i.e., unfettered action), we set the stage for our current predicament. By moving to a culture and society that venerated the accumulation of wealth and material goods, which is necessary for economic growth at least in the neoclassical model, then we started to erode the trust between people. Japan, as Yves notes at the top, is a great example of this: The striking homogeneity of Japanese society allows for strong cultural bonds and a high degree of trust, which is exhibited in its democratic institutions.
Of course we’ll see how this survives Fukushima, and the other affects of Japanese political corruption. But that’s the real point&emdash;When greed and power are allowed to pollute our key social and cultural institutions, then trust dies.
I’m sure that many will point out prior to our move to “freedom” our society was unjust, and this shift was necessary in order to bring justice to many groups. While I agree with that we suffered much injustice that had to be corrected, I’m not so sure about the mechanism we used to achieve that end. As we see today, removing discrimination under the banner of “freedom” only invites later discrimination as the bigots will always demand their right to be bigots. The better approach would have been to fight aginst injustice under the banner of Fairness, Justice, and Truth, the three elements needed for democracy.
Sadly, our desire to maximize individualism has only played into the hands of the wealthy who lent us the money we spent to become debt-slaves, who rigged the markets so they could never lose, who bought the courts and politicians with unrestricted campaign donations and gifts, and who flood the airwaves with lies or suppress the news as they see fit.
In short, those with the most freedom are the greatest tyrants. And those with the most freedom are those with the most money. But I suppose you can’t fault a banker for thinking like that.
David Lentini says:
I think the second passage much more accurately describes what happened over the past 45 years. For millennia the freedom of one individual invariably was gained by the enslavement of another. The only way out of this predicament — that is the exploitation of other human beings in order to liberate oneself — was to exploit natural resources and/or science and technology instead. Most people perform extreme logical and empirical contortions to deny that there exists an antinomy between freedom and equality.
And by the way, there’s a word for people who demand absolute freedom. We call them psychopaths, as Andrew M. Lobaczewski explains
My criticism of Das in this essay is that he gives the psychopaths equal moral and intellectual footing with everyone else. He doesn’t at all take sides.
Good points about this being, ultimately, a cultural issue. Our political economy, in my view, accurately reflects culture. The values we collectively hold on individualism has gradually diminished what our ancestors would call morality. You cannot have an individualistic culture and bring anything other than chaos and, ultimately, feudalism of one kind or another.
I’d say it’s the other way around, actually. The various civil rights movements were grounded in economic justice and fairness, but popularly debased by elites into a narrower form of individualism, which could then be more easily discredited. MLK, for example, called for economic justice in no uncertain terms.
What always bothers me about Das’ writing is that he covers for what amounts to massive fraud and theft with statements like “growth has ended” and “growth is necessary for democracy”, as if democracy would come rushing back if we could just somehow start to grow an otherwise healthy economy. Growth has ended because demand growth has ended, because the kleptocracy is looting the economy and wages have been dropping while prices rise for decades. Sure trust has been destroyed, but lack of trust didn’t break the economy. Corruption, theft and looting broke the economy. Loss of trust is the result of that, not some kind of cause.
I don’t actually believe democracy requires growth, but it does require some controls over wealth inequality. Das conveniently ignores the deleterious effects of the latter and instead posits some phony rule about growth == democracy.
I honestly never understood the notion that a firm has to grow to survive. Why? What heaven-sent rule is it that a firm that doesn’t continually grow break? Or is it just that lack of growth equals some strange capitalist fetish about “stagnation”. Many family businesses exist for decades or longer with little overall growth — they may expand some and contract some over time, but overall stay the same, and yet they continue to provide both to the community and their owners.
Why do I suspect that the real reason eonomists, etc. claim as an axiom that companies must always grow or die is that the disease of greed that controls many capitalists makes them almost constitutionally incapable of standing still?
Finally, Das’ statements are always gramatically couched as “this has happened”, “that was done”, as agentless, unstoppable events. That’s horrendously false. And the tools of economic policy are not exhausted as he posits — its simply that the most basic tools are simply not being used due to corruption and graft, namely prosecution of fraud and fiscal stimulus.
Finally, instead of pointing any of this out he criticizes what has been done as if it was simply of matter of bad tactics instead of merely the product of a diseased and corrupt leadership.
Altogether, another failure from Das.
I don’t know if failure is the right word — another bloodless, technocratic, causeless “analysis” from Das is more like it.
+100 because growth is a nice term for killer competition – survival of the fittest by ruthless competition usually because they are also the most financially advantaged. Competition in this special language actually means the prevention of competition. The survival of the insane.
Das is a banker. Once you acknowledge that, his distorted view of “democracy” is easily understandable. For the banking class, “democracy” is a tool to be utilized to share the wealth, with debt as it’s primary weapon. Terms like “growth” and “stability” are offered as carrots.
It’s interesting how the collective American psyche has become engrossed with the concept of growth. We are the spoiled children of the planet, but we still want more. I believe this why the establishment has been so successful with their stealth agenda of wealth extraction. As long as we keep buying into the false message of growth being necessary and debt as a benign fact of life, the extraction will continue until there is little left to salvage.
Note that common stock as private money ALLOWS but does not REQUIRE growth.
Usury is a tool of subjection and is thus ONLY suitable against foreigners.
As for spoiled, we should not blame the victims of a system that has stripped them of their farms, businesses, and human dignity.
“For the banking class, “democracy” is a tool to be utilized to share the wealth”
I’m not excusing the banking class for its moral turpitude, but don’t most people view “democracy” as a tool to be utilized to share the wealth?
Growth has ended because if focused on hard goods and we in the Western world consume too much of these hard goods vs. what we produce.
The 99% in the developed countries want the 1% to share but even if all wealth was redistributed more fairly, that would mean even more material consumption than there is today. This seems impossible considering where the productive capacity resides today and unless we default on our liabilities to emerging markets.
If we want our economies to grow or keep up, we will have to focus on non materialism but ironically, the more we need to focus on non-materialism, the more materialistic we will become.
I think the position you describe for yourself is more one of American Puritanism, whereas that which you describe for Das is more one of Jeffersonianism.
Here’s how Reinhold Niebuhr explained it:
YankeeFrank- Firms “must” grow, if I understand the argument, because in general larger firms will have economies of scale that out-compete smaller firms. Thus, in the absence of anti-trust legislation or enforcement, the natural tendency in most industries is for one or two firms to eventually absorb and/or shutter all their smaller competitors. E.g., Walmart. The modest family firms that can resist this tide are the exception. Thus, most “capitalists” are beholden to the logic of the market, and must grow or die, whether they personally would be content with stasis or not. If they sit still, they may get pushed back into the ranks of wage-earners!
Of course since we are in some late phase of capitalism, this story has already played out many times, and most industries are already concentrated into just a few oligopolistic firms. So the narrative focus moves away from the industrialists, who indeed have become financiers in their own right, to finance capitalism and “the fictions of fictitious capital” as Michael Hudson calls it.
I think that’s part of it, but doesn’t explain it all. Larger firms really don’t have to outcompete smaller firms in any other arena than the political.
Missing from your statement is what Amitai Etzioni called “political power and intra-market structures”:
Etzioni then goes on to enumerate some of the ways economic elites attempt to convert their inordinate economic power to inordinate political power, which is in turn used to create an uneven playing field in market economies:
As Alberto Daniel Gago points out, these practices become especailly egregious when a nation’s production becomes captive to multinational corporations and “public policies, values and institutions reinforce economic concentration in the wake of the shifting conditons of internationalization.”
As Yves is fond of pointing out, firms absorb other firms for the benefit of the CEO, not the shareholders. Above a certain size, efficiency (at least of banks) diminishes though the CEO’s “package” continues to grow ad nauseum.
Similarly, Das contends that low interest rates helps debtors Yves Smith
Low real interest rates do and are good. But if interest rates are merely low in nominal terms then they drive people into debt.
We as a society decided we were smarter than the ancients, and in particular, the Hebrew Scriptures, and could make usury work. But note that the Hebrew Bible did allow usury – but ONLY from foreigners. Why? To bring them into subjection!
“At the end of every seven years you shall grant a remission of debts. This is the manner of remission: every creditor shall release what he has loaned to his neighbor; he shall not exact it of his neighbor and his brother, because the Lord’s remission has been proclaimed. From a foreigner you may exact it, but your hand shall release whatever of yours is with your brother. However, there will be no poor among you, since the Lord will surely bless you in the land which the Lord your God is giving you as an inheritance to possess, if only you listen obediently to the voice of the Lord your God, to observe carefully all this commandment which I am commanding you today. For the Lord your God will bless you as He has promised you, and you will lend to many nations, but you will not borrow; and you will rule over many nations, but they will not rule over you. Deuteronomy 15:1-6 [bold added]
The rich rules over the poor, and the borrower becomes the lender’s slave. Proverbs 22:7
One might ask why debt forgiveness was necessary if usury was forbidden from one’s fellow countrymen? The answer is that the loans were to be interest-free.
I have been young and now I am old,
Yet I have not seen the righteous forsaken
Or his descendants begging bread.
All day long he is gracious and lends,
And his descendants are a blessing. Psalm 37:25-26 New American Standard Bible (NASB)
It is well with the man who is gracious and lends; He will maintain his cause in judgment. Psalm 112:5
… he lends money on interest and takes increase*; will he live? He will not live! He has committed all these abominations, he will surely be put to death; his blood will be on his own head. Ezekiel 18:13
*Note that in the Bible profits are good yet profit taking is condemned! Common stock as private money neatly resolves this apparent contradiction since the profits accumulate in the number and price of the shares as long as dividends are NEVER paid. In other words, the assets need never be “taken.” But of course – the purpose of a common stock company is to democratically consolidate capital for economies of scale, not dissipate it.
On lying. People have always lied and always will. I’ve read that we lie on average 6 times a day. Not sure how precise that number is but the reality is that we humans live in perception and rationalize everything around those perceptions. We are constantly making up story lines. Some people are more reality based than others. People with mental disabilities are often more reality-based but we have trouble and listening to them. Their thoughts are too concrete for our make believe world. And the number of lies increases with the unsustainability of one’s lifestyle.
A system is based on a set of rules (ethics?) that everyone respects to make the system run smoothly. The system grows until it reaches a ceiling.
When a large percentage of people can not benefit from the system while adhering to its rules, they will stop respecting the rules and the system will break down.
IMO, this is happening in the US. And instead of changing the rules, people are clinging to them with even more fervor.
Certainly those with a lot to lose (the plutocrats and their mercenaries and minions, including the Fed) are defending the old system and rules.
Growth is slower, yes; but even more important, the benefits of growth are accruing overwhelmingly to the plutocrats. So the economy feels stagant (or worse) to the majority, and American exceptionalism feels very wobbly, indeed.
I’m still thinking about Dan Kervick’s posts yesterday, with which I largely agreed. I’m not at all sure that faster growth is desirable in a materialist economic philosphy that considers the entire non-human universe only as raw material for human consumption, and has jettisoned all non-quantitative (i.e., moral) standards of measurement in its quixotic quest to be a “science”.
I do support redistribution, simply on the basis of decency and justice. But long term, I am bothered that even redistribution would probably serve to perpetuate the current system with most of its fundamental flaws, and to protect the plutocrats, even as it did in the 1930s. I also think we need a deeper change in consciousness.
But perhaps — probably — this is a case for not allowing the perfect to be the enemy of the good. (Unless we are much closer to that change in consciousness than I think.)
In my heart I want redistribution because I don’t like seeing people suffer but my head says that redistribution will just make us consume even more and accelerate the destruction of our planet. But I also know that not sharing also leads to environmental destruction.
I am so confused that frankly I have no idea how we can fix things!
You are being thoughtful in your comment but I disagree that redistribution would perpetuate the same system. The system is based on and thrives by radical inequality and the ideology of a few winners and many losers. A policy of redistribution would imply a radically different approach, i.e., collective values would trump individual values–i.e., today we believe it is better to make millions selling meth than being a High School chemistry teacher. Of course no one would admit it but secretly I think this is the tendency. Thus we see no Wall Street criminals in jail (who are actually worse and more destructive than Walter White) not just because the USG and most law-enforcement agencies are corrupt but because society admires “go-getters” and “winners” who game the system. Just look at popular entertainments which reflect the true inner psychic state of society.
Banger, I would like to believe that you are right. I’m not sure we saw that change of consciousness in the 1930s — it seems to me the fundamental consideration was preserving capitalist democracy. Obviously, I’m voicing wide-ranging doubts about materialism, environmental degradation, rational egotism, the quest for endless growth, and all that. Perhaps too wide-ranging, hence the Voltaire quote.
I certainly agree with you that we need a change in consciousness, and redistribution may be the perfect place to start.
Actually people did change somewhat during the Depression–people cooperated more formed communities of interest and soldiered on. Studs Terkel documented attitudes in his classic book on the Great Depression Hard Times.
I will happily take your word for it, since I know such a change can take place in people, and I choose to believe it will happen on a broad scale again…
“In 2010, a “fully sympathetic” Bank of England Deputy Governor Charles Bean told the UK Parliament that retirees “shouldn’t necessarily expect to be able to live just off their income… It may make sense for them to eat into their capital a bit.” He pointed out that: “Very often older households have actually benefited from the fact that they’ve seen capital gains on their houses.” The implication of Mr. Bean’s speech was that retirees should sell their houses, camp in the local park and eat their capital gains”
The policy subsidises borrowers at the expense of savers.
Savers are no better than borrowers if they are lending to bad borrowers.
The biggest problem with this policy is that it perpetuates and accelerates malinvestment by impeding the removal of destructive players in all industries.
The biggest problem with this policy is that it perpetuates and accelerates malinvestment by impeding the removal of destructive players in all industries.
Malinvestment? How can we be sure there is any since deflation could eliminate all but the most basic industries?
And deflation is INHERENT when purchasing power is LENT, not SPENT into existence. And usury makes it even worse since the interest is transferred to those with a higher propensity to hoard money.
Here in Canada, 2/3 of boomers are retiring with debt.
70% of the debt over the last decade was taken on by 50+. Instead of paying off their mortgages, they were increasing their debt.
Either they have been buying their dream home, either they have been using refis to make ends meet instead of downsizing to a sustainable lifestyle. For me it is obvious there has been huge malinvestment in real estate. Obviously, malinvestment is not obvious or we would not get bubbles.
In my world, when you need food, you don’t bake bricks.
I refuse to blame the victims; if society is rotten it got that way from the top down, not the bottom up.
Home of their dreams? Why not? We in the US and Canada should all be living in very nice homes by now.
I’m sick of hair shirt Progressives. Read the Bible, especially the Old Testament. All things considered, especially justice, God prefers we live peaceful, prosperous lives with NO poverty. If the genuine prophets ever wore hair-shirts, it was probably from poverty, not a desire to punish themselves or to encourage others to do the same. John the Baptist was not impressive because he lived off locusts and wild honey but because he was, by God’s grace, content to do so to concentrate on more important things.
You see, I don’t believe it starts and stops at the top. I believe there is movement from the top and from the bottom.
I think we are stuck in this quagmire precisely because too many people think it all depends on those at the top.
By only blaming the top, people have turned themselves into victims.
It DOES depend on those at the top since they have the power and/or influence to change things.
And people are victims! How can it be the 21th Century and we have homeless in a fantastically rich country?
Because much of that wealth was stolen from other parts of the planet!
We could have been just if not much more wealthy without the theft.
Our money system is very good at creating wealth since endogenous money creation is an extremely good idea. But there are two forms of endogenous money – liabilities and shares in equity. Sadly, our governments decided long ago to subsidize the former at the expense of the later.
Perhaps. But that’s not what happened and now the ROW wants what the US has and there are billions of them.
I don’t see why a pleasant living for the entire world is not sustainable IF we’ll just ditch the present money system for an ethical one.
What mal-investment? Carney says he’s no longer worried about the real estate market. Everything’s fixed. Didn’t you get the memo?
LOL! They just recently put CMHC under OSFI supervision and we know Harper would love to privatize it.
My prediction is that the real estate market will tank. Foreclosures will balloon. CMHC will suffer and the people will end up paying. Government will sell it off for peanuts to a banking consortium and banks will end up owning the foreclosed properties turning us into a rentier society.
I’ve been talking about this for more than a decade to everyone around me… they’ve been telling me to shut up and stop being so negative. They implore that I just focus on myself and my family because nothing can be done. That I am not my brother’s keeper.
Whatever. I’ve got a big stash of popcorn…
Trust me, I know how you feel! My wife just tells me to keep my mouth shut, but my conscience says I shouldn’t. I blog because it’s my preferred outlet for escaping the delusional bullshit surround me. LOL!
The global economy has stalled because people cannot afford to buy the products of the long range global economy.
We have seen a general breakdown of local production / distribution / consumption chains………..overpowered by oil and gas powered global trade now turning as the dash for gas years have ended.
A very very different world from the more static coal based economies of England up to the time of Suez but of course which began much earlier on the run up to the Great war and its second round.
You can get different types of growth.
Whats striking about Ireland is the decline of the village ,market town & Provincial city during the post 1973 / 79 phase.
This was especially apparent during the euro years when internal goods and services inflated in coast while external goods dropped in cost relative to cash flow.
This was a deliberate move by the bankers to make us into extreme conduit economies where we must export to import goods which once were less vital.
You get a general hollowing out of human scale structures under this system of control.
In a country which can print its own money medieval town centers would thrive after a 33% drop in oil consumption.
Our role is to provide interest ,rent on natural utilities and carbon credits to financial capitals.
Waterford Toll road (a capital project of however dubious value) is not being used to the max.
I have seen it during rush hour …its nearly empty – people prefer to waste fuel going into Waterford town.
What was the true purpose of this “capital project”
“Growth has ended because demand growth has ended, because the kleptocracy is looting the economy and wages have been dropping while prices rise for decades. Sure trust has been destroyed, but lack of trust didn’t break the economy. Corruption, theft and looting broke the economy. Loss of trust is the result of that, not some kind of cause.”
So good, it needs to be repeated.
Yes!! Das seems a bit like Lucy getting miffed at Charlie Brown for finally wising up and refusing to take another run at the football… The kleptocrats don’t want to restore ethical behavior, they only want the suckers to somehow keep believing in their good intentions after they have been exposed for being rapacious and cruel. They should worry more about showing enough remorse to escape the guillotine, never mind asking for us to trust them again!!
“The global economy has stalled, entering a period of secular stagnation or contained depression.” – Das
Well, I guess that’s it, everybody. We can all go home and wait to die!
This defeatist talk would end soon after the federal government sent $1 million to every long-term unemployed American they have failed. Please don’t say this would be politically impossible. I’m only talking economics.
Das, the banker, refuses to understand the difference between nations with a sovereign currency (issuer of its currency, floating exchange rate, debts denominated in its currency which it issues) and nations subject to a foreign currency, the Euro for instance.
“The crisis has also exposed the limits of policymakers’ tools to restore growth. Government spending to stimulate economic activity is severely restricted globally, due to increased investor focus on public finances and a reluctance to finance heavily indebted nations.”
The examples he cites, Greece, Spain, Portugal, all have debts denominted in the Euro, a currency that they do not control. This puts them into a position like that of one of our 50 states, users of the currency. These states must collect taxes and sell bonds in order to spend. And the interest rate and price of these bonds varies with the risk that these bonds might not be repaid.
Not so for a sovereign currency (U.S., Japan, U.K.). The sovereign issuer of its own currency has policy space that the others do not. Where is the hyper-inflation that the hard money types have been warning about for years and years? When one of the ratings agencies devalued the rating of the U.S. a few years ago, what happened to U.S. securities? Nothing!
It never ceases to amaze me how so many seemingly intelligent people assert/believe the U.S. or Japan is a Democracy.
Well, I can understand people being FOOLED into thinking Japan is a democracy. I mean, its across the pacific. And its not like many people realize one party has ruled japan since WW2 with the exception of 4 years.
But what I dont understand is that so many Americans think America is a democracy. I just. Dont. Get it.
Scott Reynolds Nelson’s popularized economic history of US financial crises, A Nation of Deadbeats, argues that US financial crises have been collapses of financial trust through extension into shady dealings. After each crisis, a new means of establishing trust is invented either informally by business operators or through legislation. And after a generation, that system too becomes gamed, corrupted, and collapses.
If we are at the end of trust, we are at the end of economic transactions on credit. We are at the end of being able to shift the timing of payments using other people’s money. We are at the end of minimizing risks through pooling of funds and through allowing other people not directly connected with the interests of the enterprise to participate in the pools.
That doesn’t seem likely. No doubt the 1% are already finding ways to establish trust in financial dealings.
It is still possible to have a low resource use world and high levels of pursuit of happiness (to use the Enlightenment term) by everyone. The path to get from here to there has been crippled by individual greed, an ideology that denies the existence of a commons, a financial system that amplifies hoarding, and a global political system increasingly captured by the very institutional interests that stand to lose the most in the transition.
Some think that is the collapse of capitalism finally. Others think that it is the collapse of life on earth. It already has been the collapse of the bourgeois democracy instituted in the 18th and 19th centuries. In every country, politicians have been bought out and have bought police forces to protect themselves.
Will it take the spontaneous collapse of long-established governmental institutions to free up the transition? Anyone who thinks so cannot be optimistic about the future.
Great comment–I didn’t read it before making mine–we are thinking along the same lines perhaps. We are in a cultural and moral crisis and not an economic crisis–the economy languishes because we don’t agree on values. Despite the fact of global capitalism and its absurdities, it is clear that a policy of increased spending on infrastructure, education (real not the teaching to the test variety) and so on would boost the economy but we are not doing so because we don’t have common moral values–we are deeply divided culturally and even among the cultural sub-groups there is deep division as can be seen by the often contentious discussions online.
Das says we suffered and are suffering some kind of economic crisis but the events that led up to the 2008 crisis are political and ultimately cultural. Starting in 1978 the Democratic Party became, increasingly dominated by the world of finance and gradually left one of its main constituencies, workers and unions to flutter in the winds of culture wars and consumerism, i.e., trading debt for rising wages.
All this enabled Big Money to again dominate society without an effective counter movement. The success of the Labor Movement insured its own political decline as people, increasingly, saw themselves as part of the privildeged of the world as cheap consumer goods and the radical growth of the ubiquitous “entertainment” dominated our culture.
Politics caused the demise of Glass-Steagall and the so-called Global War on Terror which was, in my view, an Orwellian “war” that focused the law-enforcement community which once aimed at domestic crime to chase ghosts and entrap mental defectives into “plots” against the country. Politics caused, over time, the degradation of the Civil Service through the contracting system and corruption of the regulatory agencies throughout government by causing Congresses and administrations to look the other way as regulators built careers through corruption and bribery. I witnessed with my eyes and ears how Washington changed into the richest area of the country where every world-class hustler and con-artist descended to play angles, game the system, through bribery, sex and the whole parcel of BS that should be obvious by now to overwhelm the many people in Washington who still care and cared about public service.
Lack of trust is inevitable in our system since it is, culturally, based on the notion that we should all act in our individual self-interest and that it is far better to be rich, dominant and successful whether you are selling crystal meth, running cons or selling porn than teaching chemistry in a high school.
Frankly we are in a situation when we have to find Jesus or whatever the equivalent is to you, i.e., some transcendent order that indicates that life may be something beyond each of us pursuing every whim and every pleasure that comes along. Even classical Epicurianism would condemn this society and its absurd focus self-indulgence and narcissism.
Trust only can be built around common moral standards. Personally, I believe these standards are fairly easy to discern–many moral standards can be found not only from traditional sources in moral philosophy or religious writings but also from social-science and neuro-science which have something to tell us if we’d only listen.
I have often thought that the end of state usury laws presaged the
end of a “square deal” for the American people and that the beginning of branch banking presaged the end of small business and of small community life. It was a fact in the not too distant past that the bankers in a small community were the
go to people for community donations and for funding community projects.
Try calling Chase or Citi for a donation for your local scout troop.
“Catch-22 says they can do anything we can’t stop them from doing.”
The devil speaks out of both sides of his mouth. Low interest rates are a problem -because they increase the rate of borrowing and limit borrowing at one and the same time. Big banks have behaved badly but banking cooperatives are even worse. Local currencies are springing up to stabilize local economies but are constraints on economic growth. Das makes vast over simplistic generalizations which would take a treatise to deconstruct. He cleverly or not so cleverly co-opts the arguments of those who would oppose his conclusions and ignores the obvious. For Das the devil is not so much in the details but in his poorly constructed conclusions. Why is Naked Capitalism giving him air time?
The end of trust indeed. Thank you for a thought-provoking post, Satyajit Das.
We have a debt-based monetary system that together with the rule of law after it was imposed in the 1930s, cheap and abundant energy, and marginal rates of taxation, worked reasonably well for decades to fund economic growth while enabling the growth of a middle class in a Greenspanian-dream “virtuous cycle”.
If growth is to be minimal for the foreseeable future while a huge debt overhang penalizes an entire generation if we adhere to the status quo, what alternative policies and monetary system best align with these realities, including the need for social equity and to remediate massive environmental degradation?
And how does a society control and restore the rule of law to address those, such as the individuals and organizations Das mentioned, who have violated trust, broken the social contract, initiated a stealth class war, and garnered and employed such enormous resources and organizational skills in manipulating Markets and Messaging to accumulate vast personal wealth, wealth that they have in turn used to corrupt the political system and co-opt segments of the apparatus of the state itself?
…”These developments threaten to reverse progress in reducing poverty.”
Dude makes some good points but overall I have no idea what the actual POINT of the entire piece is. He seems to be a bit dissociated from real-world effects of banksters looting the world’s wealth and subverting political institutions; sure, he TALKS about trust being lost, but bitcoin and alternative currencies aren’t a liberating tool for the people, they’re a round peg in a square hole. To a hammer, all the world is a nail. To a banker, apparently, all the world is a market- an abstract reality filled with stats and charts and data which substitute for direct observation, for really grasping the zeitgeist of the masses. He’s close to getting it, close to a really good piece, but a failure to connect the dots results in an incoherent pile of almost.
And this is just part 1! The comments are always interesting. Thoughts from observant people. Thank you, everyone.
A rich man is a narcissist. A poor man is expendable.
Trust? No one trusts banks (or private insurance companies) which is why the banks need government deposit insurance!
A monetarily sovereign government has absolutely NO need for banks. And as for the private sector, why should some, the so-called creditworthy, be lent the stolen purchasing power of the population just because they can probably return that stolen purchasing to the original thieves plus interest?
I would be ashamed to have been a banker for reasons that would fill a book and those are just general observations. Imagine the volumns of personal suffering that are recorded in Heaven that bankers and their intellectual supporters might have to account for?
Yes, the souls of (some) individual bankers might avoid eternal damnation but many of them will undoubtedly be last in the Kingdom.
So bankers, is it better to start rich and end poor? Really?
“We live at a time when everyone lies.”
I dispute that but, of course, the wicked tend to think everyone else is too.
But here’s the original lie of bankers: “Your deposit is available on demand.”
Just a long as those 0% card offers keep coming, I can live like a banker! Well I can pay my insurance premium.
This solution would build trust, confidence, and prosperity.
Understanding the LVT Model
Das understands that the loose-money policy in the major economies has created rampant inflation in many developing countries.
I am always astonished at how loose-money proponents in developed countries fail to consider global impacts, since global liberalists would be the ones expected to understand those impacts most readily. But when a man’s salary depends…
But at least Das gets it.