There are many ways to create economic suicide on a national level. The major way throughout history has been by indebting the economy. Debt always expands to reach a point where it cannot be paid by large swaths of the economy. That is the point where austerity is imposed and ownership of wealth polarizes between the One Percent and the 99 Percent. Today is not the first time this has occurred in history. But it is the first time that running into debt has occurred deliberately, applauded as if most debtors can get rich by borrowing, not reduced to a condition of debt peonage.
Michael Hudson, Killing the Host — How Financial Parasites and Debt Destroy the Global Economy.
Brief: With few if any of the key factors causing the 2008 Global Financial Crisis (GFC) having been addressed, it seems it is on the verge of making a ‘triumphant’ comeback. But it is not just the financial system that is stacked against the interests of the “99 Percent”; there needs to be a wholesale reinvention of how global economic principles are applied to the benefit of more than the “1 Percent”. With the help of a few clear-eyed, sensible observers past and present, we attempt herein something of a birds-eye view of the landscape, all in the faint hope that it’s not already too late.
— Until the Real Mess Gets Here —
In Joel and Ethan Coen‘s 2007 multi-award winning noir crime drama No Country for Old Men, a West Texas border-town sheriff and his deputy come across the aftermath of a drug deal involving well over a dozen men that has gone seriously pear-shaped. The lawmen spend some time silently surveying the blood ‘n gore drenched vista, with even the world-weary, ‘seen it all before’ sheriff—played with characteristically laconic intensity by Tommy Lee Jones — having difficulty comprehending the magnitude of the carnage that confronts them.
After regaining composure, the deputy offers the following: “Jesus, what a mess!” To which the sheriff drolly replies: “Hell, if it ain’t a mess, it’ll do until the real one gets here.”
Seven years on from the Great Financial ‘Mess’ (aka Global Financial Crisis; GFC), this slice of dialogue from the Coen’s film — released the year the global economy began to unravel — is as pertinent now as it was then. Which is to say, if the world economy hasn’t been in a mess since 2007, given where that same economy appears to be heading at present, it’ll do until the real one get’s here. At the risk of stating the ‘bleeding’, this may not be too far away.
For our purposes herein, an equally compelling reference point from the film — albeit one dripping with as much irony as the film was with blood — is that when it was released, one of the promotional tag-lines went like this: “There are no clean getaways”.
We now know of course that with the exception of the redoubtable Bernie Madoff, in the aftermath of the incomparable “mess” of the GFC, there were too many “clean getaways”. Whilst this is an observation to which we shall return, suffice to say it may be precisely because we not only permitted, but indeed facilitated, these “clean getaways”, we might confidently anticipate the “real mess” arriving anytime soon.
That said, in the fallout from the GFC, amongst the ‘opinionocracy’ there was and continues to be much righteous indignation, hand-wringing, finger-pointing, existential angst and ardent analysis and reflection by all and sundry about everything from why it wasn’t foreseen, how it could get so bad so quickly, who might be held accountable, how it might have been prevented, and what should be done to avoid it in the future.
Regardless of whether it’s the debt crisis in Greece and the Eurozone generally, the recent Wall Street ructions, the mythical economic recovery, the student loan debt, the joblessness, the corporate stock buybacks, and [the] ongoing uncertainty about the financial markets in China — to name just a few of the myriad factors and variables giving rise to global financial volatility and bearish pessimism — it is difficult to escape the conclusion that a crunch time of major proportions is approaching, quite possibly way beyond that of the GFC. We just don’t know from which direction it will come, how fast it is traveling, what actual factor(s) might propel it along its way, or exactly when (not if) it will arrive.
Simply put, one does not need a Ph.D in economic history to at least expect there’ll be a day of financial reckoning, of this we can be quite certain. And in this age of unprecedented uncertainty, one other thing is certain: if past history is anything to go by, we already know who the winners will be — their fate is already preordained!
Putting aside for the moment whether any lessons have been learned from the financial markets’ near-death experience or whether any progress has been made in coming up with answers to these questions — or even whether it may be akin to closing the gate after the nag has bolted — it may be worthwhile showcasing some sensible viewpoints about what needs to be done to build some stability and certainty back into not just the financial system as it stands. And also pose a few new questions and scenarios, if only for posterity.
There would appear to be no better place to begin than with an important new book: Michael Hudson‘s Killing the Host – How Financial Parasites and Debt Destroy the Global Economy. This is one of those rare tomes on the state of the financial system that truly contaminates the economic Kool-Aid and gives lie to the political rhetoric associated with the financial system. It also goes a long way towards answering many if not all those questions posed in the introduction. As noted starkly by Pam Martens from Wall Street on Parade, this book is “a must-read for anyone hoping to escape the most corrupt era in American history with a shirt still on his parasite-riddled back.”
This is not mere hyperbole. As the title implies, Hudson employs the biological metaphor of the relationship between that of the host and the parasite to describe that of the financial sector and the economy as a whole. After recalling that the financial oligarchs of the early 20th century (the JP Morgans, John D Rockefellers et. al.) considered compound interest as the Eighth Wonder of the World, Hudson says that for them ‘it meant concentrating financial fortunes in the hands of an emerging oligarchy indebting the economy to itself at an exponential rate’.
Compound interest he says, in language that is as clear as it is unsettling (in that it gives us an unambiguous assessment of their collective mindset, one that prevails still),
‘….[h]as been the key factor in polarizing the distribution of wealth and political power in societies that don’t take steps to cope with this dynamic. The problem lies in the way that savings and credit are lent out to become other peoples’ debts without actually helping them earn the money to pay them off.’
In Hudson’s clear-eyed view, this poses a major problem for the financial/banking sector: how to prevent losses to creditors when loan defaults occur — or if one is to extend the metaphor, [how to] prevent the host from overwhelming or even killing the parasite. Such defaults prevent banks from paying their depositors and bondholders until they can foreclose on the collateral pledged by debtors and sell it off. But for the economy at large he says,
‘….the problem is bank credit and other loans loading the economy down with more and more debt, “crowding out” spending on current output. Something has to give – meaning that either creditors or debtors must lose.’ [My Emphasis]
Politicians thus face a choice of whether to save banks and bondholders or the economy, and from this Hudson asks some compelling questions. Do they simply reward their major campaign contributors by giving banks enough central bank or taxpayer money to compensate losses on bad loans? Or do they restructure debts downward, imposing losses on large bank depositors, bondholders and other creditors by writing down bad debts so as to keep debt-strapped families solvent and in possession of their homes?
We will return to Hudson’s book later, but now is a good time to reflect on some fundamental factors which need to be considered in order to bring about a sensible reordering of priorities and which clearly must be addressed in order to prevent a financial apocalypse.
— The Amoral Hazard —
With Hudson’s above ‘either/or’ factor in mind, any discussion of the GFC — or more broadly the state of the financial system and the wider economy — is incomplete without considering moral hazard. Since the GFC it is a phrase that has become part of the vernacular of political and economic debate, which is not to suggest that the concept is new to that debate. Oh that was the case! Nor has it been addressed, no matter how much it has been cited as the key problem.
Put simply, the “moral hazard” exists in situations where banks, financial institutions and large corporate entities have a reasonable expectation that governments will bail them out and they will not even be held accountable for their actions if they make reckless and risky decisions that don’t pay off. There is no reason whatsoever to think the major Wall Street players have any less expectation they will be bailed out next time.
The “moral hazard” then is such that these same institutions are more inclined to take an increasingly cavalier approach to risk management, even if in doing so [this] endangers not only the firms they manage, but the very market upon which they depend to survive. As we have seen, in taking such risks, they not only placed themselves, their shareholders, their firms, their employees, their customers and clients as well, but the global financial system at substantial risk.
Moral hazard at its simplest is all about ‘skin in the game’, with it being something of a continuum, which is to say that there are degrees (or levels) of it. The more skin in the game, the less the moral hazard, or at least that’s the theory. Closely linked with moral hazard and the free-market debate is the notion of rational self-interest. This is the principle that all actions by individuals can only be defined as rational if such actions seek to maximise the self-interest of the individuals concerned. Rational self-interest (or egoism) is the basic principle underpinning economic rationalism. The individual in question who is rational will only consider the upside and downside of an economic decision insofar as it relates to their own interests, the implications of which cannot be overstated.
Now it goes without saying then that the individuals concerned will always seek (and be expected to seek) to maximise the upside and reduce the downside to themselves. Whether or not in seeking to maximise the upside this takes into account the possibility that in doing so it increases the downside for others is something of a moot question. It doesn’t come into it.
To put it another way, of the scores of banking and financial crises that have occurred internationally during the last thirty plus years, all were resolved by bailouts in one form or another at taxpayer expense. In short, profit is privatized and exclusive while risk (i.e. losses) is socialized and inclusive. In essence, heads I win, tails you lose!
Notwithstanding the 2010 Dodd-Frank Act, both parties appear to have in effect washed their hands of any real commitment to reduce or discourage reliance on the moral hazard. That is, to take those responsible to task, [to] more effectively re-regulate and restructure the industry, [to] develop timely new legislative measures to support that belated makeover, and especially [to] ensure genuinely effective regulatory oversight of the industry to prevent the rampant fraud and corruption, and hold those who don’t play by the rules truly accountable, with extremely long jail sentences as the prize if they don’t play ball.
All this despite the fact this mismanagement, corruption, fraud, incompetence, and just plain mercenary cronyism, has demonstrated its ‘real-time’ power to not just destabilise the global economy but to destroy it, and to boot, people’s lives, livelihoods, hopes, dreams, optimism and aspirations.
As for Dodd-Frank itself and where it’s at now, Robert Reich has this to say:
‘[Dodd-Frank] was an attempt to rein in Wall Street, but Wall Street lobbyists have almost eviscerated that act and have been mercilessly attacking the regulations issued. Republicans have not even appropriated sufficient money to enforce the shards of the act that remain.’
More’s the pity one might say. Dodd-Frank could very well have been President Obama‘s signature achievement. For many though the seeming lack of political determination to aggressively address and resolve the issues at the heart of the GFC is arguably Obama’s biggest failure. This, possibly even more so than his timid approach to reducing America’s emissions and energy consumption and his singular unwillingness to challenge the neoconservatives pushing America’s hegemonic envelope, to name just two areas of underachievement on the president’s part! Franklin D Roosevelt (FDR) he ain’t apparently!
Now if Obama hadn’t appointed to key positions or retained many of the same people as advisors that were either responsible for the GFC in the first instance – or were aware of and in a position to do something about the problems and issues prior to the GFC but dismissed numerous attempts by various folk to bring these to their attention – one might be tempted to attribute his failure to the recalcitrance – indeed visceral personal enmity toward the president – of the Republican (GOP) dominated Congress.
However, the Congress wasn’t dominated by the GOP during the first two years of his first term, so this begs the question of what Obama and his fellow party members did and how much more they could have done before the Republicans grabbed the president’s policy agenda by the ‘short ‘n curlies’ in 2010, to properly and effectively address the issue once and for all. Yet as we have already seen in an earlier post, this was never Obama’s intention from the off. (See “Gangbangsters of Grab-it-All Street”.)
Yet despite the “change we can believe in” and “yes, we can” invocations of his 2008 campaign rhetoric, in office Obama was unwilling to more fully leverage that mandate to take on the Wall Street racketeers and hold them to account. He was never gonna bite the hand ‘feeding’ his 2012 relection prospects. “Change” then for many folk turned out to be more or less the new ‘same-old, same-old’ when it came to reigning in the Street Mob and the Laissez-Faireys.
To be fair, Obama came into the White House accompanied by an unprecedented burden of expectation, which was inevitable when ‘Dubya’ – his saddlebags filled with a legacy of lead – rode off into the post-presidential sunset after a rousing sendoff from the townsfolk. This expectation no doubt was fuelled by the dismay that a lot of Americans felt after Bush, and the unholy mess he bequeathed Obama. Most reasonable people would agree that few commanders in chief possibly since FDR have schlepped into the Oval Office facing as many deeply entrenched issues as he has had to deal with.
As the record shows however, Obama was not shy about leveraging the disillusionment with the Bush era to achieve his presidential ambitions. Whilst there’s nothing inherently wrong with that – that’s Politics 101 – presidential aspirants of all stripes and colours are always going to risk over promising and under-delivering, a surefire recipe for voter dissatisfaction if promises – explicit or implicit – are not delivered or seen to be delivered.
By the same token, people forget that even FDR was unpopular with large sectors of the electorate throughout the thirties at the height of the Great Depression, and his re-election at both key points after his first win was never assured. As much as the far right free marketeers like to revision history and deride Roosevelt’s achievements, for all his shortcomings and failings, the Man in the Chair ushered in a decades long, prosperous period of economic stability and sustainable, more equitable growth (though it was far from obvious at the time, even amongst his most ardent supporters), with a very different economic philosophy: the Big Pie needs to be shared more fairly, evenly and consistently.
It was a revolutionary idea at the time. Who’d have ‘thunk’ it? Well, FDR for one!
In effect, his New Deal was an unprecedented experiment in economic and social egalitarianism underpinned by a swathe of sweeping, new financial legislative and regulatory reform to support that philosophy. It was not socialism as some attempted to portray it, but a wholly new way of thinking about economic management and how the markets might be made to work better for a greater number of its participants and adherents, especially in a supposed liberal democracy.
Markets were indeed fallible as far as FDR was concerned, and for him it was simple. Government not only had a role to play, it had a responsibility, even if that meant intervening when significant market fluctuations were not self-correcting, even if this meant pissing off the righteous descendants of the Gilded Agers. In a liberal democracy underpinned by market capitalism, it was and is truly nonsensical bordering on the anarchical to suggest otherwise. In fact FDR once said, “We have always known that heedless self-interest was bad morals; we know now that it is bad economics.” The core truth of that aphorism still applies.
And for some inexplicable reason, FDR’s philosophy resonated big-time with luckless Americans during the Depression, even if it did take a World War and some time well after FDR’s passing for the benefits to reveal themselves in full bloom. As indicated, number 32’s New Deal did not however resonate with the economic, business and political elites of the era though, many of whom actually profited from the Great Crash, and in doing so, cushioned themselves from the worst effects of that Depression. At the time their own philosophy was assigned to the trash-can of economic history; at least that was what we thought, until Ronald Reagan arrived in Washington. As it turned out, it only went into a recycle bin, said “bin” becoming the economic equivalent of Pandora’s Box.
Since the GFC, the Laissez-Faireys have once crawled their way back out of the primeval slime with a vengeance, although this time they never actually went away. We might have hoped we’d seen the back of them, but that was only wishful thinking; they were just keeping their powder dry. Yet what these folk don’t get is that of all the threats that face America, a ‘redux’ of the GFC has to be the biggest! If economically the US falters again, it will almost certainly bring down everyone else with it. This includes I fear my own country Australia, one of the few developed Western nations that ‘managed’ to escape the worst effects of the last meltdown, albeit with less good management than good luck!
— No Country for Poor Men —
In order to gain a more comprehensive insight into the present global economic reality, it’s at this point we must digress slightly. A 2011 documentary called Surviving Progress by directors Mathieu Roy and Harold Crooks, amongst many illuminating revelations showcased how past civilisations were destroyed by “progress traps” – alluring technologies and belief systems that served immediate needs, but ‘hocked’ the future. Think the Romans. Think the Mayans et. al.
As pressure on the world’s resources inevitably speeds up and financial and corporate elites bankrupt whole nations including their own, it begs the obvious question as to how (or if) our globally entwined civilisation can escape a final, catastrophic progress trap. With this in mind, the future implications of the GFC should be clear enough. If the GFC doesn’t qualify as a “catastrophic progress trap” – one barely avoided – I’m not sure what might do the trick.
Further, Thomas Homer-Dixon’s The Upside of Down – Catastrophe, Creativity, and the Renewal of Civilisation is a similarly themed exercise in illuminating the status quo. For anyone interested, this book — published it should be noted two years before the financial system went pear-shaped — provides a frightening insight into where the world is at and where it might go in the future. Homer-Dixon contends that five “tectonic stresses” are accumulating deep within the inner workings of today’s global order, one still very much shaped by America. These are:
• economic stress from greater global economic instability and widening income/wealth differentials between rich and poor including in the developed world; [my emphasis]
• energy stress, especially from increasing scarcity and rising costs of oil and other conventional non-renewable energy sources;
• demographic stress from differentials in population growth rates between rich and poor nations and from expansion of megacities and mega-slums in poor societies;
• environmental stress from worsening damage to land, waterways, species habitats, eco-systems, oceans, forests, and fisheries; and,
• climate stress from man-made impacts on the make-up of Earth’s atmosphere along with the changing behaviour of global weather patterns.
Along with the collective fear, uncertainty, doubt, anxiety, insecurity and anger that these forces generate, and compounding the myriad complexities within and the numerous interrelationships between all of the above, are two key multipliers that prevail now but did not exist in previous periods of history such as the Roman era, one Homer-Dixon references frequently throughout his book.
Moreover, Homer-Dixon says the effect of the five stresses is multiplied by the following:
• the rising connectivity and speed of our societies as evidenced by advances in information technology, communications and transport; and by
• the escalating power of small, disparate groups (e.g. hackers, terrorists) with varying agendas, motives and means – to destroy infrastructure and people, incl. potentially, whole systems, cities etc.
Although Homer-Dixon identifies energy stress as being the most important factor, after the GFC it is the economic and financial stressors that may now be the most critical. For one thing, as we have just seen, another GFC can happen virtually overnight, especially when we factor into the mix the first multiplier above (think high-frequency trading).
Moreover, of all the things that the GFC and resultant economic downturn has brought into sharp relief, it is the increasing disparity between the rich (the ‘haves’ or 1 Percent) and the poor (the ‘nots’ or 99 Percent), not just in income and wealth — itself one of the recurring themes of the numerous post-GFC post-mortems — but just about every other important socio-economic indicator.
Yet as important as the other stress factors are though, we should keep the following in mind. We are not suddenly going to run out of energy, nor will there be a total environmental collapse taking place in front of us in more or less real time, or hundreds of thousands of refugees knocking on our front door without us having some advance notice of such developments, the present situation in Europe notwithstanding.
The same cannot be said for another GFC. In any event, any major financial crisis in the near future will seriously limit attempts by the global community to address any of the other forces mentioned should any one of them come into play throughout this time. We can see this being played out even now in respect to dealing with carbon emissions reductions with many countries citing the Recession as a ‘reason’ for inaction on the issue. The U.S. itself is a prime example in support of this statement, with the issue of climate change not even on the political radar since the GFC erupted.
Even here in Australia, as relatively well off as we are, [and] as well as we escaped the worst effects of the meltdown, there is still a surprisingly high degree of uncertainty about the future. This resilience — largely due to our reliance on China’s phenomenal growth — not only protected Australia from the worst impacts of the GFC. Our economic well-being in the future is predicated on this growth continuing, which considering the situation in China at present is highly unlikely. This has doubtless impacted on many people’s views about climate change, how urgent an issue it is, and what we should do about it.
More specifically relevant to the GFC itself, Charles Ferguson‘s Oscar®-winning documentary and accompanying book – Inside Job: The Financiers who Pulled off the Heist of the Century – is a good a start as any for those wishing to get a handle on the event. Amongst other things, Ferguson focuses on massive, widespread conflicts of interest in the financial sector and singles out corrupt industry lobbyists, advisors, lawyers, incompetent regulators, self-serving ratings agencies, and mega-mercenary economics, banking and finance academics for particular attention in respect of their contributing roles in the Crisis.
Michael Kirk’s film The Warning is also essential viewing for anyone wanting to get a handle on who the real culprits were, and why they ignored the ominous signs. Indeed, some of these people were appointed or retained by Obama with some also still key players in the present administration. And they vigorously opposed attempts to legislate for and regulate the new, unmonitored, virtually untaxed, and extremely high risk trading of OTC derivatives.
As well, the Terence McKenna narrated, CBC produced behind the news report Inside the Meltdown – The Secret History of the Global Financial Crisis, is an especially authoritative, in-depth, credible account of the events leading up to the Crisis, and an important analysis of the causes and effects along with discussions about what can—indeed what should—be done, to prevent history repeating itself.
Here’s the thing. All of these documentaries—produced shortly after the Crisis—are even more resonant today. Yet the messages therein clearly have been largely ignored or disregarded. And if that is not enough to bring us to the point of great concern, we should contemplate the current state of America’s debt.
In a recent Counterpunch piece, tellingly titled Wall Street and the Military are Draining Americans High and Dry, William Edstrom points out that the U.S. national debt—usually cited at around $18 trillion—is substantially understated. As of April 1, 2015, according to the Federal Reserve’s own Financial Accounts of the US report, the US government has $32.77 trillion in debt excluding unfunded government pension debts and unfunded government healthcare costs. The ‘bottom line he says is this:
‘….as of August 29, 2015, the government in the US owes $46.1 trillion (which include bonds, unfunded pension costs, unfunded healthcare costs, credit card balances and loans).’ [My Emphasis/Italics]
The final word herein should go to Hudson. Today’s financial sector he says ‘is raiding what was expected a century ago to be the social functions of capital: to expand output and employment’, with the result that ‘[E]conomies are slowing in the face of exponentially growing financial claims (bank loans, stocks and bonds) that enrich the One Percent at the expense of the 99 Percent.’
Moreover he adds,
‘This polarization leads to unemployment and to corporate underinvestment by leaving companies too cash-strapped to undertake new capital spending to raise productivity. Business schools teach today’s new breed of managers that the proper aim of corporations is not to expand their business but to make money for shareholders by raising the stock price. Instead of warning against turning the stock market into a predatory financial system that is de-industrializing the economy, they have jumped on the bandwagon of debt leveraging and stock buybacks. Financial wealth is the aim, not industrial wealth creation or overall prosperity…’
Cue here sheriff Tommy Lee Jones and his deputy in the West Texas desert….“Jesus, what a mess!”….
…You know the rest!
© Greg Maybury, 2012-2015