An economy ruled by the mob
by John Green
Wed 29th Jan 2014
It is not easy for any of us to get our heads around the complexities of modern economics. Many capitalists themselves and certainly most politicians no longer understand how the system really works. Thatcher and Osborne’s childish exhortations that nations have to balance their books just like careful housekeepers, budgeting so that outgoings don’t exceed income, is simplistic abacus mentality, suitable only in the kindergarten. It bears no relationship to today’s financial fantasy world. No area of the economy has expanded over recent years like the finance sector.
Marx and Lenin warned about the eventual domination by finance capital of the capitalist system, but were unable to foresee how money itself would not only become a commodity, but that the capitalist system itself would become, in essence, a casino for the super rich.
Take even the idea of ‘investment’ and the term ‘investment banker’. In today’s world they are complete misnomers. Investors no longer ‘invest’ in industry, manufacturing and business, but simply buy and sell shares or financial instruments to make a quick profit.
Business strategy today can be summed up in the epithet: fix it, sell it or close it. Companies can no longer afford to take a long-term view in terms of company strategy or to remain patient for markets to recover or improve. Shareholder value of a company has become the only criterion for judging its profitability. This means that rather than focussing on production and quality of product, management is obliged to focus on downsizing - wage reductions and staff cuts to increase share value.
Where four, five or even ten businesses determine the behaviour of whole branches of the economy, it becomes virtually impossible to oppose or counter their wishes or desires. Their investment decisions, as well as decisions taken on job losses or employment, whether to expand production, to contract or move facilities elsewhere have acute relevance for the fates of whole regions and even nations.
Share prices now the criterion
Alfred Rappaport in his book Creating Shareholder Value - writes that the core business theory today is that the value of a company lies not in how far it satisfies its customer base, the quality of its products or in its workplace standards, but exclusively in its functioning as a cash cow for shareholders. That means a company has to deliver profits in the here and now, not in the long-term. Because of the demand for quick profits, companies are under continuous pressure to deliver, not just annual, but quarterly profit reports; shareholders are not interested in long-term aims or strategies, but in high profitability in the short-term. This mentality and way of working can only be deleterious for manufacturing and social well-being, as well as economies as a whole. It bears no relationship to the individual or social needs of customers, workers or citizens.
Whoever dominates the market can pressurise their suppliers as well as customers, so it is better to invest in market dominance than quality of product or creative ideas. That is why takeover frenzy has characterised the recent period. In the USA the change to this business model began in the eighties. Between 1984 and 1989 US manufacturers spent, on average, 184 billion dollars annually in taking over other companies, but less than half that (84 billion dollars) for investment in the factories and workplaces they originally owned. Only 21% of new credit was used for investment in their own production plants.
The reason investment in real infrastructure no longer makes sense in this topsy-turvy world, is that more money can be made, and made quicker, by buying and selling shares than by real investment in manufacturing. A Swiss Bank (UBS) investigation revealed that the ratio between investment into research and development, as well as new investment in existing companies, compared to turnover of the 500 largest US companies fell significantly in recent years. This is happening in other countries too. Companies are worried about spending in such areas as research and development as it is not reflected in the profit figures and, if they did so, it would thus lead to depressed share prices.
Already in 1936, Roosevelt noted that ‘Government by organised money is just as dangerous as government by the organised mob’. However, little notice was taken of this perceptive warning. In fact, one could argue that we are now under the control of organised money which is the mob! Today the real producing industries, as well as most politicians, are under almost total control of financial institutions.
In the ‘old-fashioned’, traditional capitalist economy, those with money invested in businesses could ‘by taking a risk’ with their money expect to make a profit. If the businesses were unsuccessful, investors ran the risk of losing that money, but if they were successful they would reap a profit.
The problem with investing in manufacturing and industry, though, is that such investments have to be made long-term and investors may have to wait until their investments show returns, whereas speculating in shares alone is short-term and returns are immediate.
With the reduction or, in some countries, even abolition of taxes on share buying and selling we have witnessed an acceleration in the tendency to simply trade in shares, currencies and financial instruments rather than invest in real industry and business. This has resulted in the buying and selling, or asset-stripping, of businesses and even whole nations rather than promoting investment in the production and research facilities themselves. Bigger and quicker profits can be made by cutting wages, employee numbers and asset-stripping.
Fix it, sell it or close it
With increased globalisation, production has simply been moved to lower wage economies - a race to the bottom. For instance, the global toy-making industry during recent decades has wandered from country to country. Only 40 years ago, the USA was the world’s biggest toy manufacturer, then during the seventies US companies began moving production to Hong Kong, Taiwan and South Korea. As wages rose there and unions were formed, manufacturing was then moved to Malaysia, Thailand and Indonesia and the Philippines, and then finally to China. The same is true of much of the manufacturing industry today. In the 1930s, there were globally around 50 car manufacturers, in the 1970s there were 25, by 2007 there were only 13 left. The global IT sector today is dominated by around two dozen companies; in other areas of the economy the situation is similar.
The way in which investment and money lending has shifted has had enormous repercussions on nations and societies. It has led, and is continuing to lead, to the destruction of indigenous industries and the starving of research, to the off-shoring of production and destruction of the social fabric by increasing insecurity, reducing employment opportunities, by forcing wages down and increasing unemployment.
Lloyd Blankfein, former boss of Goldman Sachs, in a 2010 interview with the German financial paper Handelsblatt, expressed his business philosophy by emphasising that the classic credit business was ‘too risky’ for him, because he would ‘have to put all that precious money into factories, canal construction and satellite projects. And you can’t get out of those, at least not quickly,’ he said, ‘you are trapped. No, not that, that’s really too dangerous for our bank’. It is exactly that philosophy of the big ‘investment’ banks that is actually hindering investment, and it is hindering innovation and research because both these require long-term investment for them to make sense and deliver results.
What also characterises finance capital domination is that there are no longer any real risks involved in lending. Any big loss will only lead to the affected banks being bailed out by the state; bank managers don’t lose their jobs as a result of bad in investments. There is not even a market as such in the finance sector because it is dominated by very few all-powerful players who determine the rules. This finance dominated regime has also led to the increased indebtedness of nation states.
Debt is the ball and chain
The debts of most European nations have doubled in the last 15 years or so and from 2008 onwards these debts rose steeply. This is closely connected with the rescue operations undertaken on behalf for the banks, but it is also due to a country-by-country competition in tax-lowering measures for business and the wealthy, making Europe as a whole a tax El Dorado for the monied elites. In a word, state debts are simply the taxes the rich haven’t paid and the financial bets they lost. And for these debts, pensioners, working people and the unemployed and small businesses are paying with their very existence.
These economic developments are not simply the result of stupidity but deliberate calculation. This strategy was spelled out very clearly already in the nineteen-nineties, by Herbert Giersch, Director of the German-based Kiel Institute for World Economy and advisor to the German government. He argued for the lowering of taxes in order to make the state so poor that ‘its empty cash tills would dictate’, alongside ‘a frightening deficit’, the facilitation of a radical down-sizing of the state sector without engendering widespread resistance. That is the underlying aim of neo-liberalism.
As a result of this cataclysmic shift in the way the capitalist system now operates, we have seen state economies, like those in Spain, Greece, Ireland and Portugal entering their death throes; month by month thousands of small businesses are being bankrupted, unemployment rises inexorably and whole generations are denied adequate living standards and exist with little hope or positive future.
The ‘solutions’ offered to correct the global financial crisis has been to advocate the cutting to the bone of public spending and forcing wages down. This has been accompanied by mass youth unemployment and increased poverty. Those countries with high deficits, like Greece, Spain and Ireland, are then asset-stripped by the bankers. It is certainly not the people who stand to gain from this painful surgery, but the banks who lent and lost the money in the first place, and it is the same banks which print the money.
Of course the only viable solution would be to write off these state debts. But countries deep in debt are now even more in the stranglehold of the big banks and, just like individuals in debt, are forced into compliance and are powerless to resist. Both are different expressions of the same ruse, called ‘control’.
Today, in Europe as a whole, the wealth of the small elite is larger than the combined national debts of all the European nations. If the European Central Bank did what it was supposed to do it could solve the national debt crisis easily. It should give cash not to the banks but invest it directly in productive infrastructure. Of course such lending would have to be properly regulated and controlled to prevent inflation, but it would make sense. At present the Central Bank is only allowed to lend to other banks not to individual nation states, and it does this at low interest rates, but the banks which borrow this money, then lend to the indebted states at a higher interest level, so making easy and handsome profits. At the moment these banks effectively control where the money is lent, and it is not invested in socially useful areas.
There is a clear reason why the Central Bank doesn’t extend credit to individual states: the business interests of the private banks earn lucrative sums from the difference between the Central Bank’s interest charges and those they then pass on to the borrowing states. At the moment, here in Europe, we are experiencing how these banks have the decision-making power over the rate of interest charged to nation states and utilise that in order to steer political policy their way. If nations had the right to obtain credit from the European Central Bank directly, no one would have to worry about or take notice of hysterical and erratic financial markets, possible chain reactions or rating agency pronouncements. The present indebtedness of most European countries is almost exclusively due to the implementation of neo-liberal economic policies.
A law unto themselves
What has also helped push the banks down the road of unfettered speculation has been the removal of controls and the traditional obligation on banks to retain reserves in relation to lending, to minimise the consequences of unforeseen collapses. In the UK the minimum reserve obligation has been abolished altogether and in the USA it is only in force for certain categories of financial transaction. The European Central Bank demands that banks have a minimum reserve of 2% but that also only refers to certain balances and there are many creative ways of getting around such regulations.
The recent bank rescue operation of ‘quantitative easing’ has, in the main, poured money into the very same pockets of those who already had plenty of it, and has had a minimal impact on the markets in merchandise. Instead this money has been spent on buying more shares and credit papers, thus driving share prices upwards, but unlike price rises in the real economy that signify inflation, in the financial markets it does not mean inflation but ‘increased value’ and these rises are seen as a demonstration of successful economic development.
The tragic irony of the course present day capitalism has taken is that it is a driverless, heavy locomotive running ever faster to its own destruction. Of course, some of the less stupid capitalists, like George Soros for instance, do recognise the inherent dangers. Polly Toynbee, writing in the Guardian on 24 January 2014 mentions two others, in connection with the impending pensions crisis.
A recent paper from the Conservative Centre for Policy Studies, authored by Michael Johnson, a former Cameron policy adviser and investment banker turned gamekeeper, and titled, Costly and Ineffective, ‘is so radical,’ writes Toynbee, ‘and egalitarian that it caused the resignation of CPS board members, including Lord Forsyth, doyen of many a City investment bank and insurance company who was reportedly "apoplectic" at what he called a "Stalinist" policy. No surprise, for it proposes the demolition of the pensions industry.
The paper pulls the rug from under the rationale for most tax reliefs, exposing vast sums the Treasury could claw back. Relief on contributions, national insurance, tax-exempt lump sums and others amounts to a phenomenal £48.4bn a year. Half of all tax relief goes to the top 8% earning over £50,000, who need no incentives. Just abolishing higher-rate relief would bring in £7bn.
Such radical reform would, says Johnson, "require preparedness to confront deeply entrenched vested interests within the savings industry". But the government has just failed that test, even on the modest first step of capping pension charges stolen from the "hardworking" to line City silk purses.
The pension bill now in parliament has no cap, or transparency on charges. On Monday Lord Lawson, putting forward amendments similar to Labour's, demanded compulsory disclosure and independent supervision, complaining that "the foxes are regulating the hen coop". Here was a former Tory chancellor – a Tory chancellor! – saying: "There is absolutely no correlation between investment management fees and performance" – adding that "portfolios are being deliberately churned to generate commissions".’
So there is no excuse for arguing that these powerful financial managers do not know what they are doing or do not see the implications of their policies and the devastation they are causing. It is clear for all with eyes to see. But they are trapped in an anti-humanitarian juggernaut that is careering to self-destruction, but taking us all with it.
What Europe really needs is sensible economic policies that serve the people and not abstract economic theories; what we have, though, is governance by unelected financial bodies. Where profit alone rules, there is no space for democracy, as the recent banking crisis has clearly demonstrated, but the right conclusions are not being drawn by our political leaders. The powerful financial forces find democracy and democratic decision-making an annoyance and hindrance to their goals. That’s why democracy everywhere is being actively dismantled or is under threat. They want a completely compliant and predictable market, free of any regulation and control.
In the complete opposite of what is needed in order to solve the crisis, still greater areas of public life are being privatised. A poor nation state is a dependent state which is no longer in a position to regulate the market. Such unregulated markets only strengthen the strong and enfeeble the weak even more, and they polarise society more. This results in national markets and means of production being devastated and a situation in which only the few ‘fittest’, i.e. strongest, will survive.
Social democrats have no clothes
The old Social Democratic vision of being able to create a ‘caring capitalism’ or what the Germans called ‘a social market economy’ is in tatters. It was always a chimera, but that is clearer now than ever. Social Democratic parties, like the Labour Party, find themselves, vis a vis blanket financial dominance, bankrupt of any ideas, and are desperately thrashing around for ways of demonstrating any difference between themselves and the conservative parties to sceptical electorates. Social Democratic policy was traditionally based on the ideas of personal responsibility in business, a mixed economy and a welfare net to protect the most vulnerable from the worst ravages of the system. The policies of all bourgeois parties today, but particularly social democratic ones, has as much in common with that of their founders as Thatcher had with Mandela.
In a pathetic attempt to insert a wedge between Labour Party policy and that of the coalition government, Ed Balls’ recent modest proposal for a tax increase for the very rich from 45p to 50p in the pound has been greeted by squeals of outrage from the wealthy elite and its media hacks. Jonathan Isaby, chief executive of the Tax Payers' Alliance, said the 50p rate would be "an unmitigated disaster" for Britain. But historically 50p would still be very low. In 1971, the top rate of income tax on earned income was cut to 75%. In 1974 that cut was partly reversed and the top rate on earned income was raised to 83%. Margaret Thatcher, who favoured indirect taxation, i.e. making the poor pay more, reduced personal income tax rates during the 1980s from 83% to 60%. So Balls’ proposal is still 10% less than what the rate was under Thatcher!
Recently, the financial sector has provided an unprecedented profitability, but it was not always like that. By 2007 the profitability of the financial sector in the USA was 41%, whereas between 1973-85 the comparable figure was only 10%. Almost every second dollar earned in the USA since 2007 was by the finance sector - what a profound distortion of the national economy. A similar seismic shift took place in the UK under Thatcher and Blair, resulting in a devastating contraction of manufacturing in the country. And this destruction of manufacturing brings with it a concomitant loss of tradition, experience and skills and social devastation.
The almost total lack of bank regulation by governments has led to this impasse. We now have a casino economy, and in a casino economy, the owner of the joint wants control not a free market among players. And it is the giants now dominating the world economy that are running the casino. The market for credit default insurance before the crisis had a turnover of US$60 trillion and is dominated by only five big players: JP Morgan, Goldman Sachs, Morgan Stanley, Barclays Group and Deutsche Bank.
In the USA, the 25 most successful hedge fund managers earned more over recent years than the bosses of the 500 largest companies registered on the stock market. That is why anyone looking for a lucrative career in business today goes into the financial sector. These massive returns are coming not from investment in manufacturing or supplying business credit, but from gambling, pure and simple.
Unless our subservient politicians are willing to challenge the financial big boys head-on, we are doomed to be crushed as their juggernaut rolls on remorselessly over us.
Many of the ideas and some of the facts contained in the above article have been culled from the excellent analysis of today’s capitalism, Freiheit statt Kapitalismus - ueber vergesssene Ideale, die Eurokrise und unsere Zukunft (Freedom instead of Capitalism - on forgotten ideals, the Euro crisis and our future), by Sahra Wagenknecht, a member of the Federal German Parliament for Die Linke.