Breaking Bankers’ Death Grip on Our Global Economy
How it all began: unprecedented bailouts
How it continued for four years and still does
The under-appreciated consequences
The global dimension
Will bankers rule the world?
How bankers control global media
How to stop them
Conclusion: the stakes if we don’t
How it all began: unprecedented bailouts
Just four years ago this October, then Treasury Secretary Hank Paulson took an unprecedented step. He wanted to save a rapidly collapsing American financial sector. So, in a widely reported single meeting, he handed out over $120 billion of the people’s money to CEOs of America’s eight top banks.
The step was unprecedented for two reasons. First, in the Great Depression, government had taken control of failing banks in order to save the innocent victims of their collapse. FDR first declared a “bank holiday” to stop the runs on banks. Later, he and Congress created the Federal Deposit Insurance Corporation (FDIC) to make their depositors secure and obviate the motivation for runs. Failing banks were put in receivership and sold off or liquidated. Their managers were put out on the street, and their shareholders lost everything.
The objectives of FDR’s intervention is banking were simple. First, save the depositors and other innocent parties. Second, by saving them, save the economy.
The terms and effects of Paulson’s bailout could not have been more different. Although Paulson got equity for the people in return for their contribution, he agreed not to vote it. Thus a condition of Paulson’s bailout, from the very beginning, was abdication, not assertion, of government control. Fox and the rest of the right wing created a vast smokescreen with charges of “socialism,” but the simple facts of the “investment” belied any government control.
The second reason Paulson’s step was unprecedented was that Congress was not involved. Paulson handed out the $120 billion to private companies on his own initiative, using weak legislative authority, relying on fear of a universal collapse.
The fear was real and realistic. But whether Paulson (a banker himself) exaggerated the risk is still unknown. It may never be known with any confidence. You can’t replay history as an experiment in economics.
Most of the bankers didn’t really want the money. With arrogance typical of their insular culture, they thought, “What happened to Lehman Brothers couldn’t happen to me.” But how could they refuse the offer of free money with no strings attached? They kept control of their firms, their jobs, their private planes, and their bonuses, none of which they would have had in the 1930s.
The suddenness and magnitude of the financial crisis took everyone by surprise, including Dubya and his non-banking advisers. No one outside the tiny circle of Masters of the Universe had any idea what was going on. None understood how derivatives, other banking “innovations,” lax regulation and a putrid, corrupt banking culture had built a huge house of cards that was about to fall, threatening a second Great Depression in an otherwise smoothly functioning real economy.
But Paulson, a usually calm and supremely self-confident arbiter of destinies, was running around like Chicken Little, crying “The sky is falling!” So the rest of the Executive, Congress, and the American people followed him meekly, fearing a total collapse. I did, too.
But most people, including me, expected a second chapter to the story. We expected a full, thorough and public investigation of the causes of the near-collapse. We expected an accounting, in which responsible individuals went to jail, lost their jobs, or lost a little money. At the very least, we expected the perpetrators of America’s second-worst-ever financial catastrophe to confess error and apologize. Most of all, we expected fundamental systemic reform, so that such a thing would never happen again, at least not until the next Gilded Age.
Except for Lehman Brothers’ bankruptcy, none of that ever happened.
How it continued for four years and still does
Nearly four years have passed since that fateful meeting of October 13, 2008, in which Hank Paulson set the precedent of “too big to fail.” But no second chapter has really begun.
Goldman Sachs settled a securities fraud claim for a minuscule hit to its balance sheet, but without admitting guilt. Bank stocks and bonuses went down for a while, and there was a brief, failing spasm of effort to contain outlandish financial executive pay and bonuses. Congress passed the Dodd-Frank bill to reform the system, but its practical effect is still tied up in vital regulations, which bankers have delayed and watered down. That is all.
Bernie Madoff went to jail. But his was a different story altogether. His was a classic Ponzi scheme, designed to bilk individuals and a few institutional investors. It had nothing to do with the much more sophisticated (and poorly understood) Ponzi scheme of $700 trillion of derivatives now outstanding.
And it had nothing to do with the Crash of 2008. Madoff went to jail because he brought the lax morals, lax regulation and abysmal economics of our present Gilded Age to their logical conclusion before they got there naturally. But they will in due time.
This same scenario has repeated itself, over and over again, ever since October 2008. First there was TARP—the Troubled Assets Relief Program—which “invested” $700 billion of the people’s money in bad financial institutions and toxic financial instruments.
That second unprecedented step was hard for the people to swallow. Congress balked at first and refused to pass TARP. The markets tanked. Paulson redoubled his Chicken Little imitation. Congress caved. The people bailed the bankers out, without any accounting or systemic reform, just a vague promise of future action.
The bankers and their fifth column inside government learned a lesson from Congress’ brief near-revolt. They went underground. While giving lip service to transparency and accountability, they continued the bailouts in increasingly opaque ways.
The instrument of this underground effort was the Federal Reserve System. First it opened the “Fed window,” buying toxic financial instruments and giving essentially free loans to all banks, not just those in trouble. Before President Obama ever took office, the federal government had appropriated, spent or committed over 6.6 trillion dollars in the name of economic recovery.
When that wasn’t enough to revive a broken economy, the Fed went to “quantitative easing”—essentially printing more money to buy government bonds. Creating more demand for bonds drove their prices (yields) down, reducing general interest rates for everyone, including banks.
When the public raised a hue and cry, fearing inflation, the Fed came up with an even more obscure expedient: so-called “Operation Twist.” It sells short-term bonds and buys long-term bonds, thereby artificially increasing demand for the latter and driving long-term interest rates down. (Most financial instruments, including mortgages, derive their interest rates from long-term benchmarks. That’s not a bad thing because short-term interest rates are now as close to zero as they have ever been, or negative in real terms, i.e. adjusted for inflation.)
To recite this history is not unduly to criticize the Fed. The Fed is a creature of Congress with limited authority. It works under constant suspicion from ignorant people whose knowledge of economics is primitive or nonexistent. Most legislators and virtually all the general public have no real understanding of what it does. Yet it is an expert body, highly skilled at correcting problems that Congress and bankers have created and that virtually no one outside the banking community understands.
That said, the Fed fell right into bankers’ hands. Charged with the responsibility of cleaning up their mess, it took the path of least resistance: continuing the bailouts in increasingly obscure and opaque forms.
And rightly fearing the modern equivalent of the last century’s bank runs, the Fed worked largely in the dark. The exact amount of “toxic assets” it has bought and holds (let alone from whom), the precise results of “stress tests” of financial institutions, and the extent of bank-by-bank compliance with stricter reserve requirements—all these things are tightly held secrets. Their general magnitudes, let alone their details, are known only to the Fed, the bankers themselves, and perhaps a few select members of Congress smart and diligent enough to wade into the swamp of dreary numbers and unfamiliar economic concepts.
The under-appreciated consequences
The Fed has bragging rights in one respect. It met its primary goal: avoiding a second Great Depression. The American economy is still limping along and even healing. Unemployment is around 8%, far from the 25% of the Great Depression.
But under the surface, all is not well. The Great Bailout will soon enter its fifth year. Every single step in it has had the same effects as Paulson’s path-breaking handout of $120 billion on October 13, 2008.
The effects are four. First, whether directly or indirectly, the government gave banks enormous amounts of free (or nearly free) money. All together, the sum is now somewhere between five and ten trillion dollars. No one knows exactly because of the Fed’s opaqueness and secrecy.
In an ideal society, all this information would be available worldwide on the Internet. But in an ideal society, we wouldn’t have bank runs or financial panics. The risks of those catastrophes give the Fed a plausible excuse for secrecy in what is supposed to be an open society.
So not only don’t we know the precise numbers and the precise recipients of this government largesse, nearly all of whom are private businesses. We don’t even know how much of this secrecy is really necessary, and how much is a cover-up for government mismanagement and handouts to undeserving private bankers. This is government in the dark.
There is nothing intrinsically wrong with bailouts. FDR’s program saved banks (at least those worthy of saving) by bailing out depositors. What’s wrong is bailing out the wrong party and avoiding any real accountability for stupidity, greed and just plain wrongdoing.
Intentionally or not, that’s what the Fed did. It bailed out malefactors, rather than their innocent victims, and did little to hold the malefactors accountable. The proof of the pudding is in the eating: the malefactors are still doing wrong and getting rich by doing it.
Second, largely to avoid spurious charges of “socialism,” the government abjured any direct control over banks. So bankers have continued their business as usual—the very business that produced this four-year (so far) “crisis.” Their management style and culture continue without significant hindrance, restraint or noticeable change. They are the very same style and culture that caused the Crash of 2008.
Third, there has been virtually no effective, let alone decisive, institutional or systemic reform. There have been some preliminary steps, including the Dodd-Frank law and an attempt by the EU to corral the $700 trillion of derivatives now outstanding.
But the American statute requires detailed regulations to work, and so-called “legislation” by the EU Parliament and Commission doesn’t operate automatically. It has to be implemented by national legislation in each member state. So bankers are fighting, delaying and diluting effective law with lobbying and obfuscation. If they don’t get their way, they will undoubtedly add litigation to their arsenal. Already four years have passed since our own generation’s “1929 moment,” and nothing yet is certain except watering down and delay.
Fourth—and perhaps most crucial—there has been no general individual or institutional accountability. Not one single individual responsible for our generation’s financial catastrophe has gone to jail. Except for Lehman Brothers, no first-tier bank has gone bankrupt or been liquidated, though some second-tier financial institutions (like Countrywide) have. Wasn’t that the whole idea of bailouts: bail the banks out and let the people and real business cope as well as they can?
No major bank has admitted fault in any suit brought by the SEC or another government regulator. Shareholders have lost a little money but have gained most of it back. Executive perks are off the front pages and are now back in Guilded Age territory. The same foxes, or their successors in business ethics, are in charge of the henhouse as were in charge in early 2008. Nothing significant has changed in four years.
In finance, as in war, individual responsibility is the salvation of our species. There is an iron law of life: if you fail to hold people accountable—let alone reward them—for doing antisocial things, they will do them again. And again. And again.
That’s why we now have $700 trillion of derivatives outstanding. Most of them are written and controlled by a small coterie of investment bankers, without effective oversight by anyone, and without the “sunlight” of a regulated exchange.
That’s why Jamie Dimon, JP Morgan’s CEO, had the gall to travel the world, declaiming that banks are over-regulated. He did so until he presided over a $2 billion unexplained and possibly illegal trading loss. Now he’s quieter.
That’s why Barclays bank just paid a huge fine for manipulating the “LIBOR” (London Interbank Offered Rate) in its own interest, distorting financial markets in England, throughout Europe, and indirectly worldwide. That’s why reporters and investigators suspect that Barclays was just the tip of the iceberg, and that LIBOR manipulation was and is universal. (Why regulators ever accepted a key interest-rate index based on the financial sector’s self-interested self-reporting is a mystery yet to be probed.)
Finance may be complicated. Human nature is not. Reward or fail to penalize selfish and antisocial behavior, and you will get more. With the possible exception of death and taxes, no law of life is more reliable than that.
The Great Bailout, now in its fifth year, may be our species longest-lasting, biggest and yet most catastrophic practical demonstration of that law. In essence, it has rewarded social and economic malefactors with ever more of the people’s money so they can continue to gamble and cheat. The Fed and other central banks have so far staved off financial collapse, but they have failed to consider an essential human truth: gambling with other people’s money can be habit-forming.
The global dimension
It would be one thing if the Great Bailout were confined to America. Despite our self-regard and self-anointed “exceptionalism,” we Yanks comprise only a little over four percent of the world’s population.
But the Great Bailout is not confined to us. Outside the so-called “emerging economies,” it appears to be in the process of spreading like an economic plague. The current exponent is Europe. Perhaps “victim” would be a better term.
I have written about Europe’s own struggles with banking malefactors several times. [1, 2, 3, and 4] I won’t repeat that analysis here. But two points are worth making.
First, with one exception, Europe has followed and is following the same path that we Yanks set. (The sole exception is Chancellor Merkel’s hard bargaining, which forced private holders of bad Greek bonds to take a 50% “haircut.”) It is bailing out the banks and private investors at the center of its financial crisis. It is giving them free money, without imposing any penalties or economically significant conditions on its bailouts. In allowing bankers to continue business as usual, it is rewarding bad behavior and therefore encouraging more of it.
Second, like the US, Europe so far has devoted nearly all its systemic reform efforts to government, not private-sector banking. So the very corrupt and tottering private edifice that precipitated the crisis is, on both sides of the Atlantic, virtually unchanged since 2007. If nothing else, the Barclays LIBOR-manipulation scandal proves that conclusively.
When Europe imposes any conditions at all, it imposes them on the governments and their people. It asks the people of Greece, Ireland, Spain (and maybe Italy) to tighten their belts and increase their retirement age. It asks the people of Germany to pay up in taxes to keep the whole rotten system afloat. And it asks sovereign European nations (rightly, in my view) to surrender some of their sovereignty to create a powerful and resilient commonwealth able to ward off future financial panics.
The point is not whether these reforms are good or bad. Some of them are good, and some are long overdue. The point here is that all the action is on the government side, and nearly all of it is restrictive. Nothing much is happening in the private sector, let alone anything restrictive enough to curtail bad behavior.
Perhaps various governments have been negligent in this four-year-and-ongoing global financial catastrophe. Certainly regulation has been lax, on both sides of the Atlantic. The Crash of 2008 might not have happened if the Fed, Fannie and Freddie had been a little more careful about the types of mortgages private parties were taking, the terms of their loans, and they way they were packaged in securities to pass off the risk to unsuspecting buyers like hot potatoes. Similarly, the crisis in Europe might not exist if governments, including the EU itself, had been more diligent in enforcing sovereign deficit and debt limits. But isn’t the solution to this governmental negligence more, not less, regulation?
Even if governments were partly at fault, the crisis could not have happened without the eager participation of bankers who profited vastly from it and are still doing so. Without effective systemic reform of the private sector, and without an end to rewarding bad behavior, the “crisis” will never end. It will become a cancer on the real economy, sucking away the world’s financial lifeblood until it causes a universal, global second Great Depression.
Will bankers rule the world?
The need to rein in bankers is not exactly esoteric or counterintuitive. Everyone understands it. It motivated Dodd-Frank, as well as so-far mostly desultory attempts to set up derivatives exchanges. It motivates “stress tests” and increasing capital-reserve requirements, which are now becoming global.
But these are pallid measures. None of them addresses the root cause of the crisis: a global banking culture of utter impunity, driven by repeatedly rewarding improvident risk taking and other antisocial behavior and killing market discipine.
Why is this so? Not all politicians and non-financial business leaders are stupid. Surely if the dolts in the Tea Party recognize continuing bailouts as unsustainable, many of their “betters” do, too. So why, in four years, have there been no effective steps to rein private bankers in?
The answer may surprise you. Although we claim to live in a modern, unsuperstitious, monotheistic, rational world, we still believe in gods. Perhaps our most important god today is “The Markets.”
When the government sued Goldman Sachs for securities fraud in selling the very sort of derivatives that precipitated the Crash of 2008, The Markets went down. As I have written, they should have gone up, because that suit, if properly concluded, could have been the end of the beginning. But The Markets went down, impliedly disapproving even a slap-the-wrist suit that ultimately extracted no confession of wrongdoing.
Since 2007, Chancellor Merkel is the only political leader, worldwide, ever to have forced the bankers to pay a penny for their sins. When she first proposed, and tried to insist on, improvident bankers taking a “haircut” on their shaky Greek bonds, The Markets again went down. Only much later, when the deal with 50% haircut was finalized and the only realistic alternative was massive, immediate default, did The Markets go up. More recently, The Markets went up when Merkel and her fellow EU leaders abandoned a proposal to give EU bailout bonds (i.e., taxpayers’ investments in bailing out private bankers) priority over other debt.
In each of these three instances, rational markets should have gone one way—because politicians and governments were beginning to succeed in getting rogue bankers under control. Yet they went the other way. The Markets represented bankers’ interests as reliably as their lawyers, perhaps more so.
Through his character James Bond, Ian Fleming once wrote a marvelous aphorism: “Once is coincidence. Twice is happenstance. Three times is enemy action.” How many more times will it take before the West’s taxpayers, people and pols wake up to the fact that The Markets are not some neutral, celestrial arbiter, but rogue bankers’ means of asserting economic power?
As this recent history suggests, the Market God doesn’t like anything resembling accountability for losses on the part of private bankers, or taxpayers seeking measures to get their bailout money back. When anything restrains private bankers’ free use of other people’s money for their own benefit, the Market God gets angry.
But who is this Market God, anyway? Adam Smith spoke of the “invisible hand” of markets, and that’s probably what most people have in mind.
But when Adam Smith invented that phrase, he conceived of vast markets for commodities, with thousands of producers, sellers and buyers, all competing for sales independently, without collusion or even communication. That’s a “market” in classical economics. Adam Smith never could have imagined the collusion, self-dealing, cooperation and concentration of economic power that goes on in modern, global finance. (Smiths’s great work came out the same year our country was founded, in 1776. In those days there was no national bank, let alone a central one, and big private banking houses regularly failed. There was no such thing as “too big to fail.” And anyway, Smith’s work was all about commodities and manufacturing, not banking. Banking was even more obscure back then than it is now.)
The last few years have given us brief glimpses into how “The Markets” in finance really work. Goldman Sachs settled, for peanuts, an allegation of selling a housing-upside deal designed by a major client to go south. In the recent Barclays LIBOR scandal, a major global bank’s management and traders manipulated a key index to the private advantage of favored traders, supposed to be acting at arm’s length.
If this behavior is just the tip of the iceberg—and it probably is—the international banking community is less like a market and more like an isolated, sociopathic culture seeking to enrich itself by playing games of chance with our money.
It would be quite instructive if investigative reporters could determine the precise number of individuals actually involved in these so-called “markets.” I have made a crude estimate that no more than 250 people caused the Crash of 2008. I would be astonished if the $700 trillion derivatives “market” involves more than 250 decisionmakers and key traders. Ditto the “market” for sovereign bonds in Europe. If so, banking malefactors comprise one out of a million people in America, and one out of twenty million of our species.
Of course this small a group of people can communicate daily, if not by phone and e-mail, through the common media of their computer screens and trading algorithms. They know each other; they attend the same conferences; they work and play together. Nearly all of them live in one of four cities: New York, London, Hong Kong and Shanghai. And they live there divorced from the general population, in gated communities or guarded high-rises of whose opulence the hoi palloi (and most pols) can only dream.
So a minuscule fraction of our population, let alone global population, determine our collective economic fate. Their “market” is not so much a conspiracy as a gentlemen’s clique. (The number of women involved in international high-stakes banking operations is minuscule. Those few females that work there are generally the first to blow the whistle.)
Bankers and traders don’t have to conspire or collude because they all think alike. They just do what comes naturally. Without colluding or even consulting, traders like Rick Santelli killed any political chance to stop the housing market from crashing.
Bankers and traders do compete; some win and some lose. But they are all in the same game: gambling with other people’s money, and protecting their prerogatives by corrupting politicians and manipulating markets. Once the pols gave them free taxpayers’ money with which to gamble for their own benefit, they naturally never wanted to let go. Conspiracy or not, their self-interesting path was clear: keep the people’s money flowing.
When their common interests are threatened, bankers all know what to do. They make The Markets tank. So in the end, the Market God works through fallible, collusive and self-interested individuals, just like all other gods in human history.
The difference is that bankers and traders are far smaller in number and far more explicitly self-interested than the medieval Catholic (or any modern) clergy. Relative to population, even the Vestal Virgins and operators of ancient Roman oracles vastly outnumbered them. They are a minuscule minority holding the global financial system and (through it) the real economy hostage.
But just like all high priests in human history, they have ways of making laypeople toe the line. When governments do something they don’t like, they sell. Or they bet against The Markets with options, futures or more powerful derivatives. Since they control, directly or indirectly, hundreds of millions or trillions of dollars, these modern oracles have far more power than any ancient high priest. And their market-tanking warnings have far more persuasive power than any ancient omen or oracle.
Many people (including untutored politicians) believe that their oracular entrails come from the Economic God, because they think the Scripture of John Adams so states. This belief derives not from any close analysis of that Scripture, let alone real understanding of modern economics. It comes from misunderstanding of a single memorable phrase: “the invisible hand,” which even sounds godlike.
How bankers control global media
The final linchpin in bankers’ control of our modern world is the media. Partly for historical reasons, and partly because good media require money, the globe’s media centers are roughly the same as its financial centers: New York, London, Hong Kong and Shanghai. In those cities, the bankers call the shots because they have the money and support the rest of the community.
To see how this dynamic works, you need only read The Economist’s latest issue (June 30 — July 6). Its cover story is a fourteen-page “Special Report” on the revival of the city of London as an international banking center and magnet of security and comfort for the world’s super-rich.
Not only is this “report” the most triumphalist and self-congratulatory thing I have yet to read in a supposedly objective British journal. It also presents the clearest advice to kowtow to one’s “betters” since the days of Charles Dickens. Here, verbatim, is the most succinct statement of its message, highlighted in large type on page 16:
The subliminal message is even more powerful. If a publication with the traditional independence, irreverence, and quantitative insight of The Economist can kowtow to bankers just like Fox, the Wall Street Journal and now the New York Times, the rest of us had better kowtow, too. There is no better explanation I can conceive for how bankers, worldwide, have avoided real accountability for the financial catastrophe they caused four years ago and counting.
In my mind there is also no better explanation for Britain’s rejecting the Euro, the financial transactions tax, EU-wide financial integration, and EU-wide regulation of the finance sector than the facts disclosed in The Economist’s special report on London. Bankers are just as smart as Caesar once was; they know how to divide and conquer. All that remains of Britain’s once-grand global empire is its London banks; a plea to save them at any cost falls on willing ears, even of those who will pay.
So, unbeknownst to pols and unremarked by captive media, the tiny clique of global bankers has become the single most concentrated power in our modern world. They no longer control just finance, in the West at least. They control the media as well. Through influence, subtle blackmail (unfavorable publicity) and soft corruption (campaign contributions), in increasingly dysfunctional and expensive democracies, they control public policy, at least insofar as it affects their interests.
Anyway, Western Governments today have little decisive power beyond taxing and making war. Nuclear weapons make war unattractive, and there is a universal, global distaste for taxation. So, little by little, not just our Yankee government, but all Western governments, are slowly drowning in a bathtub. (For numerical evidence that the Yankee private sector has more clout than the US federal government or the government of California—the world’s eighth largest economy—click here.) The sole important exception might be the EU as a whole, but its success at resisting the tide of financialization remains to be seen.
That’s not entirely bad. Traditionally, national governments have been seats of nationalism, racism, religious intolerance and jingoism. There is some evidence that even China might be tending in that direction as it grows more powerful. At least it tolerates internal voices that its leadership would do better to repudiate, if not silence.
But while bankers have the advantage of being truly global and generally blind to nationality and race, they have some decided disadvantages. They are amoral, if not immoral, and entirely self-interested. Therefore the words “psychopath” and “sociopath” fit their culture well, if not all individuals in it. More important, little of their work ever creates wealth as do farmers, miners, manufacturers, inventors, and scientists. All they do is shuffle wealth around, with a decided trend toward putting it increasingly in their own hands.
Today the notion that political power flows from the barrel of a gun is passé, especially in the nuclear age. Bashar al-Assad may be the last person on Earth to understand why, but it is so. Today, political power flows from money. If we let bankers continue to corner all the money, and control and manipulate it for their own private benefit, all real power that matters will fall into their hands.
Years before the Crash of 2008, the finance sector’s share of all US business profits reached the pathological level of 41%. That number reflects a society in clear decline. So does the Supreme Court’s decision in Citizens United, which allows bankers to use those profits to propagandize our people and corrupt their leaders. As bankers stretch their power to make their profits and influence global, any chance of a global Golden Age of real capitalism will be lost. You cannot run a vibrant real economy when nearly half of its profits go into shuffling paper and increasing the power of self-dealers without a trace of social conscience.
How to stop them
Bankers’ power is all the more dangerous for its insidiousness and indirection. It’s hard to understand how much power they have until you try to rein them in. Only if you analyze the painfully slow progress of reform, even four years after the Crash of 2008, can you begin to fathom the boundless real power that the minuscule clique of bankers has over the rest of us.
It’s also hard to rein them in because the last century’s “solutions” are just as passé as Bashar al-Assad’s travesty of “politics.” Nationalizing banks by decree only works in places like Venezuela or Argentina, in large measure due to the last century’s failure of Communism.
But temporary, market-based nationalization is a different story. Without it, bankers’ power will continue to grow indefinitely. Rich people’s gambling with other people’s money to enrich themselves will become a way of life. So-called democracies will become desiccated husks, with all real power concentrated in a self-perpetuating title-less financial aristocracy. And that perversion of human culture may yet become global, subverting even authoritarian societies like China and Russia.
If you think that’s not already happening, ask yourself why—with global concern and an infinitely better-informed public—it has already taken nearly four years to do anything to curtail bankers’ excesses or bring any of them to account. Back in the 1930s real reform was well under way within four years of the Crash of 1929.
The mechanism for reform could be simple. Just wait for each big bank to make a misstep. (You won’t have to wait long.) Then buy control, on the free market, at bargain prices, through government or a special independent commission. Finally, split the big banks up and make them compete again, reducing their wealth and power. Sell off the pieces to private investors separately, or liquidate the banks and sell them branch by branch and asset by asset. In most cases, the cost of buying control will be far less than the amounts realized from a sale of assets.
In theory, there may be other ways of breaking bankers’ stranglehold on the global economy. But other means, such as regulation and criminal sanctions, haven’t worked and aren’t likely to. In the regulatory or political arena, or in the courtroom, bankers have every advantage over even well-meaning pols, let alone non-banking businesses and ordinary citizens. They have the knowledge and expertise of their obscure operations. They have patience and perseverance, born of strong, individual self-interest. They have the money to hire legions of the best lobbyists, lawyers and accountants, not to mention PR hacks to get the ignorant public on their side. And their wealth gives them economic power to influence or corrupt the entire process, whether directly by bribes or political contributions or indirectly by demagoguery.
The only way to handle rogue banking now is Colin Powell’s prescription for Saddam’s elite tank force in Gulf I: cut off its head and kill it. I’m not suggesting violence or revolution; there’s no need for them. All we need to do is exploit markets to buy control of banks when their managers’ failures reduce their market value to a fraction of the value of the assets they control. Then sell off those assets to make banks small enough to fail again, and to bring some semblance of real competition and market discipline back to this lazy, corrupt and collusive “industry.”
Even bankers remain sufficiently good capitalists to understand the logic of control. When their boards dismiss them, they can flee to their private islands and rest on their riches. Or they can reform themselves and start new careers, as must millions of people whom their malfeasance has cost jobs. Just buy the banks, split them up, dismiss the malefactors, and sell off the pieces to youngsters who believe in risk taking and personal responsibility and want to give banking a try.
The removed managers won’t suffer much, and few will cry for them. But our society, our economy, and capitalism itself will be much better for their departure.
Doing this will involve some expense and some political controversy. But it will be much cheaper than the sum of all global bailouts so far. It will be infinitely cheaper than continuing those bailouts, in the EU and elsewhere, for the foreseeable future.
Conclusion: the stakes if we don’t
It is now possible to foresee how the decline of the United States might mirror the decline of ancient Rome. In Rome, Caesar’s “bread and circuses” distracted ordinary people from their personal plight and from Rome’s degeneration into empire. In America today, the sham of democracy is itself the bread and circuses.
How else can you explain the travesty of the Republican primaries, in which self-evidently unqualified candidates tried to outdo each other in sounding more doctrinaire and extreme? How else can you explain the national media’s marginalization of the single Republican candidate—Jon Huntsman, Jr.—qualified to be president? And is his marginalization a coincidence when he, alone among the candidates of both parties, suggested breaking up the big banks?
How else can you explain Sheldon Adelson—an über-rich owner of casinos in Macao—single handedly keeping alive the candidacy of trailer-trash Newt for weeks after sensible Republicans had seen Newt for what he is? And aren’t casinos in Macao just one step removed from the gigantic casino that our $700 trillion derivatives market has become?
How else can you explain the continued emphasis of all national media (even PBS) on the “horse race” and candidates’ slips of the tongue? How else can you explain our nation’s television “news” (and, as a result, our candidates) devoting virtually no attention to any real plans for addressing vital national issues like energy, jobs, immigration and the steady erosion of Congress’ competence and power?
Democracy is dying in America for two reasons. First, our Constitution, which we treat as scripture, has given us dysfunctional government, the more so the more time goes on. Second, it is not in bankers’ interest to have functional government. So they are doing everything they can to belittle it, diminish it, and eventually drown it in a bathtub. The gridlock that our Constitution imposes on us helps them at every turn, so they are winning.
What is going on in America and Europe is far from an exercise in theoretical economics. Nor is it business in any ordinary sense. It’s a power struggle. It’s a power struggle in which The Markets are not some neutral, celestial arbiter, but the most powerful weapon bankers have.
With the exception of Dimon, bankers are often subtle and smooth. They’ve learned PR from our species’s best professional liars. Their line is that they want to help us, doing “God’s work,” in Lloyd Blankfein’s words. (Funny how people laugh when pols say things like that, but not when bankers do.) They tell us that their financial “innovation” will make capitalism work better. But they ignore the fact that financial “innovation”—in the form of speculation (gambling) and manipulation (cheating)—has been the source of every financial panic and crisis in human history.
Have you ever heard of a financial panic or crash caused by real industry? If so, please let me know, and cc financial historians.
A great, global power struggle is going on right under our noses. Some people can’t see it because it doesn’t involve the usual players. It doesn’t involve right or left, except indirectly. It’s not a replay of the Cold War. It’s above and beyond nation-states. And it doesn’t involve terrorism or Islam, extreme or otherwise. It’s a struggle between international bankers, on the one hand, and governments, non-financial businesses, politicians and ordinary people (aka “taxpayers”) on the other.
Who wins will determine whether Western democracies remain wealthy, democratic, and even capitalist in any meaningful sense. In light of what has already happened here in America, who wins may also determine whether leading-edge science and engineering continue in the Americas or pass to Asia and Germany.
Research takes money. When all of it goes to bail out private bankers, there’s none left over for ordinary people’s human needs, let alone research.
America is in the “vanguard” in this regard. Europe is next. If the trend continues Japan will lead Asia. Authoritarian China is likely to be last.
If this process is allowed to continue, the end result may be a virtual takeover of the West by a tiny group of arrogant and self-interested people. Our promising Third Millennium then may resemble the Second, during most of which a similarly minuscule clique (the isolated clergy of a single Church) dominated Europe through the exercise of true belief and raw economic power. But this time, the dominant institution will be international banking, and the true belief will be that its present operations and reliance on bailouts reflect capitalism and free markets.
You can always tell what institutions dominate a society by the height of the buildings they command. In the Second Millennium, they were cathedrals. Go look and see whose buildings dominate your city’s skyline today.
If, on the other hand, Asia is able to resist and Europe and the Americas are not, the bankers winning will accelerate the West’s decline. In that event Asia may lead the world, unambiguously, long before the middle of this century. The West will lag for failure to control its bankers, coupled with a naïve belief that The Markets will save it from the self interest of sociopaths and their raw economic and political power.
In this struggle, the widespread belief that the instruments of bankers’ control are godlike, neutral arbiters may be their most potent weapon ever. And lest you think it will be a short struggle or its effects short-lived, recall that the Church’s “soft power” dominated the West for most of a millennium, until the Protestant Reformation and the Renaissance.
The word “Renaissance” is telling. It’s French for “rebirth.” Wouldn’t it be nice if real capitalism—which requires failure, individual accountability, and responsibility—could begin a rebirth right now?
Birth is painful. Ask any mother. So is rebirth. But the alternative increasingly appears to be subjugation to a tiny self-interested minority and consequent economic stagnation (or worse) for a long, long time.
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How it continued for four years and still does
The under-appreciated consequences
The global dimension
Will bankers rule the world?
How bankers control global media
How to stop them
Conclusion: the stakes if we don’t
How it all began: unprecedented bailouts
Just four years ago this October, then Treasury Secretary Hank Paulson took an unprecedented step. He wanted to save a rapidly collapsing American financial sector. So, in a widely reported single meeting, he handed out over $120 billion of the people’s money to CEOs of America’s eight top banks.
The step was unprecedented for two reasons. First, in the Great Depression, government had taken control of failing banks in order to save the innocent victims of their collapse. FDR first declared a “bank holiday” to stop the runs on banks. Later, he and Congress created the Federal Deposit Insurance Corporation (FDIC) to make their depositors secure and obviate the motivation for runs. Failing banks were put in receivership and sold off or liquidated. Their managers were put out on the street, and their shareholders lost everything.
The objectives of FDR’s intervention is banking were simple. First, save the depositors and other innocent parties. Second, by saving them, save the economy.
The terms and effects of Paulson’s bailout could not have been more different. Although Paulson got equity for the people in return for their contribution, he agreed not to vote it. Thus a condition of Paulson’s bailout, from the very beginning, was abdication, not assertion, of government control. Fox and the rest of the right wing created a vast smokescreen with charges of “socialism,” but the simple facts of the “investment” belied any government control.
The second reason Paulson’s step was unprecedented was that Congress was not involved. Paulson handed out the $120 billion to private companies on his own initiative, using weak legislative authority, relying on fear of a universal collapse.
The fear was real and realistic. But whether Paulson (a banker himself) exaggerated the risk is still unknown. It may never be known with any confidence. You can’t replay history as an experiment in economics.
Most of the bankers didn’t really want the money. With arrogance typical of their insular culture, they thought, “What happened to Lehman Brothers couldn’t happen to me.” But how could they refuse the offer of free money with no strings attached? They kept control of their firms, their jobs, their private planes, and their bonuses, none of which they would have had in the 1930s.
The suddenness and magnitude of the financial crisis took everyone by surprise, including Dubya and his non-banking advisers. No one outside the tiny circle of Masters of the Universe had any idea what was going on. None understood how derivatives, other banking “innovations,” lax regulation and a putrid, corrupt banking culture had built a huge house of cards that was about to fall, threatening a second Great Depression in an otherwise smoothly functioning real economy.
But Paulson, a usually calm and supremely self-confident arbiter of destinies, was running around like Chicken Little, crying “The sky is falling!” So the rest of the Executive, Congress, and the American people followed him meekly, fearing a total collapse. I did, too.
But most people, including me, expected a second chapter to the story. We expected a full, thorough and public investigation of the causes of the near-collapse. We expected an accounting, in which responsible individuals went to jail, lost their jobs, or lost a little money. At the very least, we expected the perpetrators of America’s second-worst-ever financial catastrophe to confess error and apologize. Most of all, we expected fundamental systemic reform, so that such a thing would never happen again, at least not until the next Gilded Age.
Except for Lehman Brothers’ bankruptcy, none of that ever happened.
How it continued for four years and still does
Nearly four years have passed since that fateful meeting of October 13, 2008, in which Hank Paulson set the precedent of “too big to fail.” But no second chapter has really begun.
Goldman Sachs settled a securities fraud claim for a minuscule hit to its balance sheet, but without admitting guilt. Bank stocks and bonuses went down for a while, and there was a brief, failing spasm of effort to contain outlandish financial executive pay and bonuses. Congress passed the Dodd-Frank bill to reform the system, but its practical effect is still tied up in vital regulations, which bankers have delayed and watered down. That is all.
Bernie Madoff went to jail. But his was a different story altogether. His was a classic Ponzi scheme, designed to bilk individuals and a few institutional investors. It had nothing to do with the much more sophisticated (and poorly understood) Ponzi scheme of $700 trillion of derivatives now outstanding.
And it had nothing to do with the Crash of 2008. Madoff went to jail because he brought the lax morals, lax regulation and abysmal economics of our present Gilded Age to their logical conclusion before they got there naturally. But they will in due time.
This same scenario has repeated itself, over and over again, ever since October 2008. First there was TARP—the Troubled Assets Relief Program—which “invested” $700 billion of the people’s money in bad financial institutions and toxic financial instruments.
That second unprecedented step was hard for the people to swallow. Congress balked at first and refused to pass TARP. The markets tanked. Paulson redoubled his Chicken Little imitation. Congress caved. The people bailed the bankers out, without any accounting or systemic reform, just a vague promise of future action.
The bankers and their fifth column inside government learned a lesson from Congress’ brief near-revolt. They went underground. While giving lip service to transparency and accountability, they continued the bailouts in increasingly opaque ways.
The instrument of this underground effort was the Federal Reserve System. First it opened the “Fed window,” buying toxic financial instruments and giving essentially free loans to all banks, not just those in trouble. Before President Obama ever took office, the federal government had appropriated, spent or committed over 6.6 trillion dollars in the name of economic recovery.
When that wasn’t enough to revive a broken economy, the Fed went to “quantitative easing”—essentially printing more money to buy government bonds. Creating more demand for bonds drove their prices (yields) down, reducing general interest rates for everyone, including banks.
When the public raised a hue and cry, fearing inflation, the Fed came up with an even more obscure expedient: so-called “Operation Twist.” It sells short-term bonds and buys long-term bonds, thereby artificially increasing demand for the latter and driving long-term interest rates down. (Most financial instruments, including mortgages, derive their interest rates from long-term benchmarks. That’s not a bad thing because short-term interest rates are now as close to zero as they have ever been, or negative in real terms, i.e. adjusted for inflation.)
To recite this history is not unduly to criticize the Fed. The Fed is a creature of Congress with limited authority. It works under constant suspicion from ignorant people whose knowledge of economics is primitive or nonexistent. Most legislators and virtually all the general public have no real understanding of what it does. Yet it is an expert body, highly skilled at correcting problems that Congress and bankers have created and that virtually no one outside the banking community understands.
That said, the Fed fell right into bankers’ hands. Charged with the responsibility of cleaning up their mess, it took the path of least resistance: continuing the bailouts in increasingly obscure and opaque forms.
And rightly fearing the modern equivalent of the last century’s bank runs, the Fed worked largely in the dark. The exact amount of “toxic assets” it has bought and holds (let alone from whom), the precise results of “stress tests” of financial institutions, and the extent of bank-by-bank compliance with stricter reserve requirements—all these things are tightly held secrets. Their general magnitudes, let alone their details, are known only to the Fed, the bankers themselves, and perhaps a few select members of Congress smart and diligent enough to wade into the swamp of dreary numbers and unfamiliar economic concepts.
The under-appreciated consequences
The Fed has bragging rights in one respect. It met its primary goal: avoiding a second Great Depression. The American economy is still limping along and even healing. Unemployment is around 8%, far from the 25% of the Great Depression.
But under the surface, all is not well. The Great Bailout will soon enter its fifth year. Every single step in it has had the same effects as Paulson’s path-breaking handout of $120 billion on October 13, 2008.
The effects are four. First, whether directly or indirectly, the government gave banks enormous amounts of free (or nearly free) money. All together, the sum is now somewhere between five and ten trillion dollars. No one knows exactly because of the Fed’s opaqueness and secrecy.
In an ideal society, all this information would be available worldwide on the Internet. But in an ideal society, we wouldn’t have bank runs or financial panics. The risks of those catastrophes give the Fed a plausible excuse for secrecy in what is supposed to be an open society.
So not only don’t we know the precise numbers and the precise recipients of this government largesse, nearly all of whom are private businesses. We don’t even know how much of this secrecy is really necessary, and how much is a cover-up for government mismanagement and handouts to undeserving private bankers. This is government in the dark.
There is nothing intrinsically wrong with bailouts. FDR’s program saved banks (at least those worthy of saving) by bailing out depositors. What’s wrong is bailing out the wrong party and avoiding any real accountability for stupidity, greed and just plain wrongdoing.
Intentionally or not, that’s what the Fed did. It bailed out malefactors, rather than their innocent victims, and did little to hold the malefactors accountable. The proof of the pudding is in the eating: the malefactors are still doing wrong and getting rich by doing it.
Second, largely to avoid spurious charges of “socialism,” the government abjured any direct control over banks. So bankers have continued their business as usual—the very business that produced this four-year (so far) “crisis.” Their management style and culture continue without significant hindrance, restraint or noticeable change. They are the very same style and culture that caused the Crash of 2008.
Third, there has been virtually no effective, let alone decisive, institutional or systemic reform. There have been some preliminary steps, including the Dodd-Frank law and an attempt by the EU to corral the $700 trillion of derivatives now outstanding.
But the American statute requires detailed regulations to work, and so-called “legislation” by the EU Parliament and Commission doesn’t operate automatically. It has to be implemented by national legislation in each member state. So bankers are fighting, delaying and diluting effective law with lobbying and obfuscation. If they don’t get their way, they will undoubtedly add litigation to their arsenal. Already four years have passed since our own generation’s “1929 moment,” and nothing yet is certain except watering down and delay.
Fourth—and perhaps most crucial—there has been no general individual or institutional accountability. Not one single individual responsible for our generation’s financial catastrophe has gone to jail. Except for Lehman Brothers, no first-tier bank has gone bankrupt or been liquidated, though some second-tier financial institutions (like Countrywide) have. Wasn’t that the whole idea of bailouts: bail the banks out and let the people and real business cope as well as they can?
No major bank has admitted fault in any suit brought by the SEC or another government regulator. Shareholders have lost a little money but have gained most of it back. Executive perks are off the front pages and are now back in Guilded Age territory. The same foxes, or their successors in business ethics, are in charge of the henhouse as were in charge in early 2008. Nothing significant has changed in four years.
In finance, as in war, individual responsibility is the salvation of our species. There is an iron law of life: if you fail to hold people accountable—let alone reward them—for doing antisocial things, they will do them again. And again. And again.
That’s why we now have $700 trillion of derivatives outstanding. Most of them are written and controlled by a small coterie of investment bankers, without effective oversight by anyone, and without the “sunlight” of a regulated exchange.
That’s why Jamie Dimon, JP Morgan’s CEO, had the gall to travel the world, declaiming that banks are over-regulated. He did so until he presided over a $2 billion unexplained and possibly illegal trading loss. Now he’s quieter.
That’s why Barclays bank just paid a huge fine for manipulating the “LIBOR” (London Interbank Offered Rate) in its own interest, distorting financial markets in England, throughout Europe, and indirectly worldwide. That’s why reporters and investigators suspect that Barclays was just the tip of the iceberg, and that LIBOR manipulation was and is universal. (Why regulators ever accepted a key interest-rate index based on the financial sector’s self-interested self-reporting is a mystery yet to be probed.)
Finance may be complicated. Human nature is not. Reward or fail to penalize selfish and antisocial behavior, and you will get more. With the possible exception of death and taxes, no law of life is more reliable than that.
The Great Bailout, now in its fifth year, may be our species longest-lasting, biggest and yet most catastrophic practical demonstration of that law. In essence, it has rewarded social and economic malefactors with ever more of the people’s money so they can continue to gamble and cheat. The Fed and other central banks have so far staved off financial collapse, but they have failed to consider an essential human truth: gambling with other people’s money can be habit-forming.
The global dimension
It would be one thing if the Great Bailout were confined to America. Despite our self-regard and self-anointed “exceptionalism,” we Yanks comprise only a little over four percent of the world’s population.
But the Great Bailout is not confined to us. Outside the so-called “emerging economies,” it appears to be in the process of spreading like an economic plague. The current exponent is Europe. Perhaps “victim” would be a better term.
I have written about Europe’s own struggles with banking malefactors several times. [1, 2, 3, and 4] I won’t repeat that analysis here. But two points are worth making.
First, with one exception, Europe has followed and is following the same path that we Yanks set. (The sole exception is Chancellor Merkel’s hard bargaining, which forced private holders of bad Greek bonds to take a 50% “haircut.”) It is bailing out the banks and private investors at the center of its financial crisis. It is giving them free money, without imposing any penalties or economically significant conditions on its bailouts. In allowing bankers to continue business as usual, it is rewarding bad behavior and therefore encouraging more of it.
Second, like the US, Europe so far has devoted nearly all its systemic reform efforts to government, not private-sector banking. So the very corrupt and tottering private edifice that precipitated the crisis is, on both sides of the Atlantic, virtually unchanged since 2007. If nothing else, the Barclays LIBOR-manipulation scandal proves that conclusively.
When Europe imposes any conditions at all, it imposes them on the governments and their people. It asks the people of Greece, Ireland, Spain (and maybe Italy) to tighten their belts and increase their retirement age. It asks the people of Germany to pay up in taxes to keep the whole rotten system afloat. And it asks sovereign European nations (rightly, in my view) to surrender some of their sovereignty to create a powerful and resilient commonwealth able to ward off future financial panics.
The point is not whether these reforms are good or bad. Some of them are good, and some are long overdue. The point here is that all the action is on the government side, and nearly all of it is restrictive. Nothing much is happening in the private sector, let alone anything restrictive enough to curtail bad behavior.
Perhaps various governments have been negligent in this four-year-and-ongoing global financial catastrophe. Certainly regulation has been lax, on both sides of the Atlantic. The Crash of 2008 might not have happened if the Fed, Fannie and Freddie had been a little more careful about the types of mortgages private parties were taking, the terms of their loans, and they way they were packaged in securities to pass off the risk to unsuspecting buyers like hot potatoes. Similarly, the crisis in Europe might not exist if governments, including the EU itself, had been more diligent in enforcing sovereign deficit and debt limits. But isn’t the solution to this governmental negligence more, not less, regulation?
Even if governments were partly at fault, the crisis could not have happened without the eager participation of bankers who profited vastly from it and are still doing so. Without effective systemic reform of the private sector, and without an end to rewarding bad behavior, the “crisis” will never end. It will become a cancer on the real economy, sucking away the world’s financial lifeblood until it causes a universal, global second Great Depression.
Will bankers rule the world?
The need to rein in bankers is not exactly esoteric or counterintuitive. Everyone understands it. It motivated Dodd-Frank, as well as so-far mostly desultory attempts to set up derivatives exchanges. It motivates “stress tests” and increasing capital-reserve requirements, which are now becoming global.
But these are pallid measures. None of them addresses the root cause of the crisis: a global banking culture of utter impunity, driven by repeatedly rewarding improvident risk taking and other antisocial behavior and killing market discipine.
Why is this so? Not all politicians and non-financial business leaders are stupid. Surely if the dolts in the Tea Party recognize continuing bailouts as unsustainable, many of their “betters” do, too. So why, in four years, have there been no effective steps to rein private bankers in?
The answer may surprise you. Although we claim to live in a modern, unsuperstitious, monotheistic, rational world, we still believe in gods. Perhaps our most important god today is “The Markets.”
When the government sued Goldman Sachs for securities fraud in selling the very sort of derivatives that precipitated the Crash of 2008, The Markets went down. As I have written, they should have gone up, because that suit, if properly concluded, could have been the end of the beginning. But The Markets went down, impliedly disapproving even a slap-the-wrist suit that ultimately extracted no confession of wrongdoing.
Since 2007, Chancellor Merkel is the only political leader, worldwide, ever to have forced the bankers to pay a penny for their sins. When she first proposed, and tried to insist on, improvident bankers taking a “haircut” on their shaky Greek bonds, The Markets again went down. Only much later, when the deal with 50% haircut was finalized and the only realistic alternative was massive, immediate default, did The Markets go up. More recently, The Markets went up when Merkel and her fellow EU leaders abandoned a proposal to give EU bailout bonds (i.e., taxpayers’ investments in bailing out private bankers) priority over other debt.
In each of these three instances, rational markets should have gone one way—because politicians and governments were beginning to succeed in getting rogue bankers under control. Yet they went the other way. The Markets represented bankers’ interests as reliably as their lawyers, perhaps more so.
Through his character James Bond, Ian Fleming once wrote a marvelous aphorism: “Once is coincidence. Twice is happenstance. Three times is enemy action.” How many more times will it take before the West’s taxpayers, people and pols wake up to the fact that The Markets are not some neutral, celestrial arbiter, but rogue bankers’ means of asserting economic power?
As this recent history suggests, the Market God doesn’t like anything resembling accountability for losses on the part of private bankers, or taxpayers seeking measures to get their bailout money back. When anything restrains private bankers’ free use of other people’s money for their own benefit, the Market God gets angry.
But who is this Market God, anyway? Adam Smith spoke of the “invisible hand” of markets, and that’s probably what most people have in mind.
But when Adam Smith invented that phrase, he conceived of vast markets for commodities, with thousands of producers, sellers and buyers, all competing for sales independently, without collusion or even communication. That’s a “market” in classical economics. Adam Smith never could have imagined the collusion, self-dealing, cooperation and concentration of economic power that goes on in modern, global finance. (Smiths’s great work came out the same year our country was founded, in 1776. In those days there was no national bank, let alone a central one, and big private banking houses regularly failed. There was no such thing as “too big to fail.” And anyway, Smith’s work was all about commodities and manufacturing, not banking. Banking was even more obscure back then than it is now.)
The last few years have given us brief glimpses into how “The Markets” in finance really work. Goldman Sachs settled, for peanuts, an allegation of selling a housing-upside deal designed by a major client to go south. In the recent Barclays LIBOR scandal, a major global bank’s management and traders manipulated a key index to the private advantage of favored traders, supposed to be acting at arm’s length.
If this behavior is just the tip of the iceberg—and it probably is—the international banking community is less like a market and more like an isolated, sociopathic culture seeking to enrich itself by playing games of chance with our money.
It would be quite instructive if investigative reporters could determine the precise number of individuals actually involved in these so-called “markets.” I have made a crude estimate that no more than 250 people caused the Crash of 2008. I would be astonished if the $700 trillion derivatives “market” involves more than 250 decisionmakers and key traders. Ditto the “market” for sovereign bonds in Europe. If so, banking malefactors comprise one out of a million people in America, and one out of twenty million of our species.
Of course this small a group of people can communicate daily, if not by phone and e-mail, through the common media of their computer screens and trading algorithms. They know each other; they attend the same conferences; they work and play together. Nearly all of them live in one of four cities: New York, London, Hong Kong and Shanghai. And they live there divorced from the general population, in gated communities or guarded high-rises of whose opulence the hoi palloi (and most pols) can only dream.
So a minuscule fraction of our population, let alone global population, determine our collective economic fate. Their “market” is not so much a conspiracy as a gentlemen’s clique. (The number of women involved in international high-stakes banking operations is minuscule. Those few females that work there are generally the first to blow the whistle.)
Bankers and traders don’t have to conspire or collude because they all think alike. They just do what comes naturally. Without colluding or even consulting, traders like Rick Santelli killed any political chance to stop the housing market from crashing.
Bankers and traders do compete; some win and some lose. But they are all in the same game: gambling with other people’s money, and protecting their prerogatives by corrupting politicians and manipulating markets. Once the pols gave them free taxpayers’ money with which to gamble for their own benefit, they naturally never wanted to let go. Conspiracy or not, their self-interesting path was clear: keep the people’s money flowing.
When their common interests are threatened, bankers all know what to do. They make The Markets tank. So in the end, the Market God works through fallible, collusive and self-interested individuals, just like all other gods in human history.
The difference is that bankers and traders are far smaller in number and far more explicitly self-interested than the medieval Catholic (or any modern) clergy. Relative to population, even the Vestal Virgins and operators of ancient Roman oracles vastly outnumbered them. They are a minuscule minority holding the global financial system and (through it) the real economy hostage.
But just like all high priests in human history, they have ways of making laypeople toe the line. When governments do something they don’t like, they sell. Or they bet against The Markets with options, futures or more powerful derivatives. Since they control, directly or indirectly, hundreds of millions or trillions of dollars, these modern oracles have far more power than any ancient high priest. And their market-tanking warnings have far more persuasive power than any ancient omen or oracle.
Many people (including untutored politicians) believe that their oracular entrails come from the Economic God, because they think the Scripture of John Adams so states. This belief derives not from any close analysis of that Scripture, let alone real understanding of modern economics. It comes from misunderstanding of a single memorable phrase: “the invisible hand,” which even sounds godlike.
How bankers control global media
The final linchpin in bankers’ control of our modern world is the media. Partly for historical reasons, and partly because good media require money, the globe’s media centers are roughly the same as its financial centers: New York, London, Hong Kong and Shanghai. In those cities, the bankers call the shots because they have the money and support the rest of the community.
To see how this dynamic works, you need only read The Economist’s latest issue (June 30 — July 6). Its cover story is a fourteen-page “Special Report” on the revival of the city of London as an international banking center and magnet of security and comfort for the world’s super-rich.
Not only is this “report” the most triumphalist and self-congratulatory thing I have yet to read in a supposedly objective British journal. It also presents the clearest advice to kowtow to one’s “betters” since the days of Charles Dickens. Here, verbatim, is the most succinct statement of its message, highlighted in large type on page 16:
”The three groups of people who are particularly unpopular in Britain—the rich, bankers and immigrants—are those on whom London [and its recent success] depends.”
The subliminal message is even more powerful. If a publication with the traditional independence, irreverence, and quantitative insight of The Economist can kowtow to bankers just like Fox, the Wall Street Journal and now the New York Times, the rest of us had better kowtow, too. There is no better explanation I can conceive for how bankers, worldwide, have avoided real accountability for the financial catastrophe they caused four years ago and counting.
In my mind there is also no better explanation for Britain’s rejecting the Euro, the financial transactions tax, EU-wide financial integration, and EU-wide regulation of the finance sector than the facts disclosed in The Economist’s special report on London. Bankers are just as smart as Caesar once was; they know how to divide and conquer. All that remains of Britain’s once-grand global empire is its London banks; a plea to save them at any cost falls on willing ears, even of those who will pay.
So, unbeknownst to pols and unremarked by captive media, the tiny clique of global bankers has become the single most concentrated power in our modern world. They no longer control just finance, in the West at least. They control the media as well. Through influence, subtle blackmail (unfavorable publicity) and soft corruption (campaign contributions), in increasingly dysfunctional and expensive democracies, they control public policy, at least insofar as it affects their interests.
Anyway, Western Governments today have little decisive power beyond taxing and making war. Nuclear weapons make war unattractive, and there is a universal, global distaste for taxation. So, little by little, not just our Yankee government, but all Western governments, are slowly drowning in a bathtub. (For numerical evidence that the Yankee private sector has more clout than the US federal government or the government of California—the world’s eighth largest economy—click here.) The sole important exception might be the EU as a whole, but its success at resisting the tide of financialization remains to be seen.
That’s not entirely bad. Traditionally, national governments have been seats of nationalism, racism, religious intolerance and jingoism. There is some evidence that even China might be tending in that direction as it grows more powerful. At least it tolerates internal voices that its leadership would do better to repudiate, if not silence.
But while bankers have the advantage of being truly global and generally blind to nationality and race, they have some decided disadvantages. They are amoral, if not immoral, and entirely self-interested. Therefore the words “psychopath” and “sociopath” fit their culture well, if not all individuals in it. More important, little of their work ever creates wealth as do farmers, miners, manufacturers, inventors, and scientists. All they do is shuffle wealth around, with a decided trend toward putting it increasingly in their own hands.
Today the notion that political power flows from the barrel of a gun is passé, especially in the nuclear age. Bashar al-Assad may be the last person on Earth to understand why, but it is so. Today, political power flows from money. If we let bankers continue to corner all the money, and control and manipulate it for their own private benefit, all real power that matters will fall into their hands.
Years before the Crash of 2008, the finance sector’s share of all US business profits reached the pathological level of 41%. That number reflects a society in clear decline. So does the Supreme Court’s decision in Citizens United, which allows bankers to use those profits to propagandize our people and corrupt their leaders. As bankers stretch their power to make their profits and influence global, any chance of a global Golden Age of real capitalism will be lost. You cannot run a vibrant real economy when nearly half of its profits go into shuffling paper and increasing the power of self-dealers without a trace of social conscience.
How to stop them
Bankers’ power is all the more dangerous for its insidiousness and indirection. It’s hard to understand how much power they have until you try to rein them in. Only if you analyze the painfully slow progress of reform, even four years after the Crash of 2008, can you begin to fathom the boundless real power that the minuscule clique of bankers has over the rest of us.
It’s also hard to rein them in because the last century’s “solutions” are just as passé as Bashar al-Assad’s travesty of “politics.” Nationalizing banks by decree only works in places like Venezuela or Argentina, in large measure due to the last century’s failure of Communism.
But temporary, market-based nationalization is a different story. Without it, bankers’ power will continue to grow indefinitely. Rich people’s gambling with other people’s money to enrich themselves will become a way of life. So-called democracies will become desiccated husks, with all real power concentrated in a self-perpetuating title-less financial aristocracy. And that perversion of human culture may yet become global, subverting even authoritarian societies like China and Russia.
If you think that’s not already happening, ask yourself why—with global concern and an infinitely better-informed public—it has already taken nearly four years to do anything to curtail bankers’ excesses or bring any of them to account. Back in the 1930s real reform was well under way within four years of the Crash of 1929.
The mechanism for reform could be simple. Just wait for each big bank to make a misstep. (You won’t have to wait long.) Then buy control, on the free market, at bargain prices, through government or a special independent commission. Finally, split the big banks up and make them compete again, reducing their wealth and power. Sell off the pieces to private investors separately, or liquidate the banks and sell them branch by branch and asset by asset. In most cases, the cost of buying control will be far less than the amounts realized from a sale of assets.
In theory, there may be other ways of breaking bankers’ stranglehold on the global economy. But other means, such as regulation and criminal sanctions, haven’t worked and aren’t likely to. In the regulatory or political arena, or in the courtroom, bankers have every advantage over even well-meaning pols, let alone non-banking businesses and ordinary citizens. They have the knowledge and expertise of their obscure operations. They have patience and perseverance, born of strong, individual self-interest. They have the money to hire legions of the best lobbyists, lawyers and accountants, not to mention PR hacks to get the ignorant public on their side. And their wealth gives them economic power to influence or corrupt the entire process, whether directly by bribes or political contributions or indirectly by demagoguery.
The only way to handle rogue banking now is Colin Powell’s prescription for Saddam’s elite tank force in Gulf I: cut off its head and kill it. I’m not suggesting violence or revolution; there’s no need for them. All we need to do is exploit markets to buy control of banks when their managers’ failures reduce their market value to a fraction of the value of the assets they control. Then sell off those assets to make banks small enough to fail again, and to bring some semblance of real competition and market discipline back to this lazy, corrupt and collusive “industry.”
Even bankers remain sufficiently good capitalists to understand the logic of control. When their boards dismiss them, they can flee to their private islands and rest on their riches. Or they can reform themselves and start new careers, as must millions of people whom their malfeasance has cost jobs. Just buy the banks, split them up, dismiss the malefactors, and sell off the pieces to youngsters who believe in risk taking and personal responsibility and want to give banking a try.
The removed managers won’t suffer much, and few will cry for them. But our society, our economy, and capitalism itself will be much better for their departure.
Doing this will involve some expense and some political controversy. But it will be much cheaper than the sum of all global bailouts so far. It will be infinitely cheaper than continuing those bailouts, in the EU and elsewhere, for the foreseeable future.
Conclusion: the stakes if we don’t
It is now possible to foresee how the decline of the United States might mirror the decline of ancient Rome. In Rome, Caesar’s “bread and circuses” distracted ordinary people from their personal plight and from Rome’s degeneration into empire. In America today, the sham of democracy is itself the bread and circuses.
How else can you explain the travesty of the Republican primaries, in which self-evidently unqualified candidates tried to outdo each other in sounding more doctrinaire and extreme? How else can you explain the national media’s marginalization of the single Republican candidate—Jon Huntsman, Jr.—qualified to be president? And is his marginalization a coincidence when he, alone among the candidates of both parties, suggested breaking up the big banks?
How else can you explain Sheldon Adelson—an über-rich owner of casinos in Macao—single handedly keeping alive the candidacy of trailer-trash Newt for weeks after sensible Republicans had seen Newt for what he is? And aren’t casinos in Macao just one step removed from the gigantic casino that our $700 trillion derivatives market has become?
How else can you explain the continued emphasis of all national media (even PBS) on the “horse race” and candidates’ slips of the tongue? How else can you explain our nation’s television “news” (and, as a result, our candidates) devoting virtually no attention to any real plans for addressing vital national issues like energy, jobs, immigration and the steady erosion of Congress’ competence and power?
Democracy is dying in America for two reasons. First, our Constitution, which we treat as scripture, has given us dysfunctional government, the more so the more time goes on. Second, it is not in bankers’ interest to have functional government. So they are doing everything they can to belittle it, diminish it, and eventually drown it in a bathtub. The gridlock that our Constitution imposes on us helps them at every turn, so they are winning.
What is going on in America and Europe is far from an exercise in theoretical economics. Nor is it business in any ordinary sense. It’s a power struggle. It’s a power struggle in which The Markets are not some neutral, celestial arbiter, but the most powerful weapon bankers have.
With the exception of Dimon, bankers are often subtle and smooth. They’ve learned PR from our species’s best professional liars. Their line is that they want to help us, doing “God’s work,” in Lloyd Blankfein’s words. (Funny how people laugh when pols say things like that, but not when bankers do.) They tell us that their financial “innovation” will make capitalism work better. But they ignore the fact that financial “innovation”—in the form of speculation (gambling) and manipulation (cheating)—has been the source of every financial panic and crisis in human history.
Have you ever heard of a financial panic or crash caused by real industry? If so, please let me know, and cc financial historians.
A great, global power struggle is going on right under our noses. Some people can’t see it because it doesn’t involve the usual players. It doesn’t involve right or left, except indirectly. It’s not a replay of the Cold War. It’s above and beyond nation-states. And it doesn’t involve terrorism or Islam, extreme or otherwise. It’s a struggle between international bankers, on the one hand, and governments, non-financial businesses, politicians and ordinary people (aka “taxpayers”) on the other.
Who wins will determine whether Western democracies remain wealthy, democratic, and even capitalist in any meaningful sense. In light of what has already happened here in America, who wins may also determine whether leading-edge science and engineering continue in the Americas or pass to Asia and Germany.
Research takes money. When all of it goes to bail out private bankers, there’s none left over for ordinary people’s human needs, let alone research.
America is in the “vanguard” in this regard. Europe is next. If the trend continues Japan will lead Asia. Authoritarian China is likely to be last.
If this process is allowed to continue, the end result may be a virtual takeover of the West by a tiny group of arrogant and self-interested people. Our promising Third Millennium then may resemble the Second, during most of which a similarly minuscule clique (the isolated clergy of a single Church) dominated Europe through the exercise of true belief and raw economic power. But this time, the dominant institution will be international banking, and the true belief will be that its present operations and reliance on bailouts reflect capitalism and free markets.
You can always tell what institutions dominate a society by the height of the buildings they command. In the Second Millennium, they were cathedrals. Go look and see whose buildings dominate your city’s skyline today.
If, on the other hand, Asia is able to resist and Europe and the Americas are not, the bankers winning will accelerate the West’s decline. In that event Asia may lead the world, unambiguously, long before the middle of this century. The West will lag for failure to control its bankers, coupled with a naïve belief that The Markets will save it from the self interest of sociopaths and their raw economic and political power.
In this struggle, the widespread belief that the instruments of bankers’ control are godlike, neutral arbiters may be their most potent weapon ever. And lest you think it will be a short struggle or its effects short-lived, recall that the Church’s “soft power” dominated the West for most of a millennium, until the Protestant Reformation and the Renaissance.
The word “Renaissance” is telling. It’s French for “rebirth.” Wouldn’t it be nice if real capitalism—which requires failure, individual accountability, and responsibility—could begin a rebirth right now?
Birth is painful. Ask any mother. So is rebirth. But the alternative increasingly appears to be subjugation to a tiny self-interested minority and consequent economic stagnation (or worse) for a long, long time.
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posted by Jay Dratler, Jr., Ph.D., J.D. @ 7/11/2012 09:07:00 AM
4 Comments:
At Tuesday, January 15, 2013 at 4:57:00 PM EST,
Warren Kim said…
Dear Professor Dratler,
One of the best articles I have ever read in my life (Considering I am almost 50, I can say this with a straight face).
The warning of the international banking influence has interested me since a few years ago, when I first heard it through the Zeitgeist movement, then became skeptical as I learned this was originated by Skin Heads and racists group ranting against the international Jewish conspiracy. It again peaked my interest as an issue brought by Ron Paul, with his variation. Since the era during President Wilson, and probably before, there was once a healthy debate about centralized banking. Perhaps again this will be a topic of vigorous debate.
With the election of Senator Elizabeth Warren, and her appointment to the banking committee, it remains something to be seen. The international bankers, more than Free Masons or the Skull and Bones, may be the group through their tacit collusion, be the most powerful and influential group on the planet. This influence is spread around the world through the IMF, who installed devastating policies on third world countries through crippling debt, austerity measures, and opening up fragile indigenous economies to the multi-nationals.
I am also of the belief that the Federal Reserve is a private owned entity, apart from the government. Its shares seem to be owned by private banks. If this is true, it truly is the fox looking out for the hen house.
I hope you will update us on this very important issue.
Yours truly,
Warren Kim
At Thursday, February 7, 2013 at 3:20:00 PM EST,
Jay Dratler, Jr., Ph.D., J.D. said…
Dear Warren,
Thank you for your compliment and your support.
That said, I feel compelled to make a couple of important points. First, as your passing reference implies, there is no such thing as an "international Jewish conspiracy."
Many bankers are Jews. But the proportion of Jews who are bankers is about the same as the proportion of everyone else, which is to say minuscule. Bankers are a tiny minority of all of us. That’s why bringing them back under democratic control and market discipline is vital.
More important, bankers’ religion is irrelevant. Their rotten culture is a threat to society precisely because it is amoral and irreligious. It lacks, and in fact undermines, the human values of every organized religion.
Today’s international banking culture revolves around exorbitant compensation, speculation, making a quick buck, and increasing stock prices. There is virtually no thought about doing good in any larger sense; the only goal is doing well. There is not even much thought about building a long-term business or serving customers well. That kind of culture has nothing to do with any religion.
While many bankers are Jewish by descent, few are devout or observant Jews. They don’t have time to attend services or observe the rituals because they’re too busy making money. Devout and observant Jewish men often wear yarmulkes, especially in New York City; yet I have never seen a photo of a prominent Jewish New York banker wearing one.
The psychopathic banking culture that has arisen in Manhattan (and elsewhere) is at war with two central tenants of Judaism. First, Jews have a duty to “repair the world,” or tikkun olam in Hebrew. Second, every Jew strives to be a mensch— an empathetic, sympathetic, kind human being.
You can’t accomplish either goal if your pole star is making yourself rich. But if you are smart, you can get rich by following these two values. There are no shortcuts.
In the past, American banking culture worked to advance both values, as I have outlined in another post. But all that good stuff has vanished in an insular Manhattan culture based on spreadsheets, speculation, arrogance, and profit above all. The transition had nothing to do with Judaism, but a lot do with the gospel of amoral profit that business schools have preached for a generation. Virtually any rabbi, from the most orthodox to the most liberal, would condemn it.
Finally, there is no conspiracy. Bankers don’t have to conspire because they are a small, insular, and tight-knit group, and they all think alike. They quickly deride and marginalize old-school types. When you have a culture that works much like a gang, there’s no need or desire to conspire.
I know you didn’t mean to repeat any anti-Semitic skinhead nonsense. But, as a Jew myself (although not especially religious) I wanted to make absolutely clear how baseless the longstanding notion of an “international Jewish conspiracy” is.
Not only is it false. It is counterproductive. It distracts attention from the real and legitimate target of public anger: a rogue banking culture that nearly destroyed our global economy in 2008 and that, unless changed, will do it again.
The canard also distracts the public from an even more depressing truth: Jews in banking are not alone. Our globally rotten banking culture includes non-Jewish Americans, Englishmen, Frenchmen, Germans, Japanese and Chinese. It is not confined to any single race, nationality, ethnic group or religion.
Finally, the old canard can discourage Jews like me. We don't want to be associate ourselves with anti-Semitism, but do want to heal our sick banking culture, ASAP.
My reply continues on other points below.
Best,
Jay
At Thursday, February 7, 2013 at 3:53:00 PM EST,
Jay Dratler, Jr., Ph.D., J.D. said…
This comment has been removed by the author.
At Thursday, February 7, 2013 at 4:07:00 PM EST,
Jay Dratler, Jr., Ph.D., J.D. said…
Dear Warren,
In addition to my vital point about anti-Semitism above, I just wanted to make two others, quickly.
First, I would not mention Ron Paul in the same paragraph as Elizabeth Warren. Warren is a skilled and accomplished professional, with a deep, expert understanding of banking and finance. She knows cold what makes our current banking culture rotten.
I worked with her, very briefly, and I found her people skills excellent and her mind first rate. I can’t say the same about Paul, who strikes me as a demagogue, and whose understanding of finance and economics is about as deep as a bumper sticker.
Finally, I just don’t know where so many people get such bizarre ideas about our Federal Reserve Bank. It’s a government agency, which is supposed to be independent of both Congress and the Executive. The whole idea of the Fed is that we don't want demagogues like Paul making decisions that could derail our incredibly complex economy; we want experts doing that.
As for private ownership, the Fed has and needs none. It can effectively print money by decree, by writing government IOUs. Since those IOUs are backed by the full faith and credit of the United States, they are as good as gold (maybe better, as gold today is in a speculative bubble).
In some ways, the Fed can seem like a religion, with high priests who speak a language that no one else understands. (Bernanke is trying to change that.) But there’s a huge difference between the Fed and any religious institution: the Fed's language is math and science, the science of economics.
The reason we have a Fed is that we want people who know what they are doing to be in control of our delicate economy. Can those people make mistakes? Sure. Alan Greenspan did when he elevated conservative market ideology above his mathematical expertise as an economist. Mathematicians don’t make silly and untested assumptions like presuming that markets always cure themselves.
When Fed governors stick to their mathematical and economic expertise, and don’t venture into politics or ideology, they are doing exactly what Congress and the people intended. They are using their special expertise to do what’s right economically, regardless of politics or pressure.
That’s why the Fed's bond-buying and quantitative easing have been such successes, despite the cat-calling of so many demagogues (who couldn’t solve a differential equation if their lives depended on it). You wouldn’t want the average Joe on the street designing or programming your computer, so why would you want someone like Rush, Sarah, Glenn or Ron Paul telling us how to adjust our economy?
The Fed's experts understand the timing of inflationary pressures and will change course before they rise to a dangerous level. So far, that hasn't happened, and the Fed's detractors have been consistently, badly (and loudly) wrong.
Best,
Jay
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