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America’s Financial Oligarchy

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Oligarchy is a form of power structure in which power effectively rests with an elite class distinguished by royalty, wealth, family ties, commercial, and/or military legitimacy. The actual literal translation from the Greek is "rule of the few". The word oligarchy is derived from the Greek words "ὀλίγος" (olígos), "a few"[2] and the verb "ἄρχω" (archo), "to rule, to govern, to command".

Throughout history, most oligarchies have been tyrannical, relying on public servitude to exist, although others have been relatively benign. Plato pioneered the use of the term in Chapter Four, Book Eight of "The Republic" as a society in which wealth is the criterion of merit and the wealthy are in control. However oligarchy is not always a rule by wealth, as oligarchs can simply be a privileged group, and do not have to be connected by bloodlines as in a monarchy.  For example in the USSR the oligarchy was represented by special class of government and party servants (nomenklatura). The same in true for Communist China. At the same time in the USA oligarchy by and large corresponds to European aristocracy as vertical mobility, despite hype, is very limited (actually more then in European countries).

Since the collapse of the Soviet Union on 31 December 1991, many managers of state owned Russia-based corporations, including producers of petroleum, natural gas, and metal managed to privatize their holdings and have become oligarchs. Criminal privatization under Yeltsin regime allowed them to amass phenomenal wealth and power almost overnight. In May 2004, the Russian edition of Forbes identified 36 of these oligarchs as being worth at least US$1 billion.

Robert Michels believed that any political system eventually evolves into an oligarchy. He called this the iron law of oligarchy. According to this school of thought, modern democracies should be considered as oligarchies. In these systems, actual differences between viable political rivals are small, the oligarchic elite impose strict limits on what constitutes an acceptable and respectable political position, and politicians' careers depend heavily on unelected economic and media elites. Thus the popular phrase: there is only one political party, the incumbent party.

Corporate oligarchy is a form of power, governmental or operational, where such power effectively rests with a small, elite group of inside individuals, sometimes from a small group of educational institutions, or influential economic entities or devices, such as banks, commercial entities that act in complicity with, or at the whim of the oligarchy, often with little or no regard for constitutionally protected prerogative. Monopolies are sometimes granted to state-controlled entities, such as the Royal Charter granted to the East India Company.

In the the USA the most rapidly rising part of national oligarchy is financial oligarchy.

 Finance is a form of warfare

As Michael Hudson aptly noted in  Replacing Economic Democracy with Financial Oligarchy (2011)

Finance is a form of warfare. Like military conquest, its aim is to gain control of land, public infrastructure, and to impose tribute. This involves dictating laws to its subjects, and concentrating social as well as economic planning in centralized hands. This is what now is being done by financial means, without the cost to the aggressor of fielding an army. But the economies under attacked may be devastated as deeply by financial stringency as by military attack when it comes to demographic shrinkage, shortened life spans, emigration and capital flight.

This attack is being mounted not by nation states as such, but by a cosmopolitan financial class. Finance always has been cosmopolitan more than nationalistic – and always has sought to impose its priorities and lawmaking power over those of parliamentary democracies.

Like any monopoly or vested interest, the financial strategy seeks to block government power to regulate or tax it. From the financial vantage point, the ideal function of government is to enhance and protect finance capital and “the miracle of compound interest” that keeps fortunes multiplying exponentially, faster than the economy can grow, until they eat into the economic substance and do to the economy what predatory creditors and rentiers did to the Roman Empire.

Simon Johnson, former IMF Chief Economist, is coming out in May’s 2009 edition of The Atlantic with a fascinating, highly provocative piece, on the collusion between the US’ “financial oligarchy” and the US government and how its persistence will contribute to prolonging the economic crisis. Here is the summary (hat tip to Global Conditions):

One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you (…)

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear.(…)

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis. (…)

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders (…)

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. (…)

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (…).

(…) elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations.

(…) the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. (…)

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true (…).

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused (…)

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand (…)

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary (…)

In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation (…)

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. (…)

(…) Over time, though, the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine”.

The nature of financial oligarchy is such that the government’s capacity to take control of an entire financial system, and to clean, slice it up and re-privatize it impartially is almost non-existant. Instead we have growing, potentially corrupt, collusion between financial elites and government officials which is hall mark of corporatism in this more modern form on neoliberalism.

Second probably is that institutions are more powerful them individuals and replacement or even jailing of corrupt current officials  while a quite welcome move, can't by itself lead to drastic changes. You need to reinstall the whole system of government controls dismantled by Clinton-Bush regime. Otherwise one set of players will be simply replaced by the other, no less corrupt, hungry and unprincipled.   As Daron Acemoglu pointed out recently, we are in a situation that attempt to fix the financial system will have to involve those same bankers (albeit in lower positions at the time of the crisis)  that created the mess in the first place. To push the analogy a bit strongly, even in Germany post 1945 and Iraq post 2003 new governments still needed to work with some civil servants in the judicial and educational system from the previous regime as well as with tainted industrialists.

In theory, the best way to diminish the power of financiers is to limit the size (limiting the damage) and let them fail and crash badly. Also introduction of a tax of transactions (Tobin tax) can help to cool the frenzy of derivative trading. But there is nobody in power who can push those changes,. That coup is complete. 

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[Nov 03, 2013]  Plutocrats vs. Populists By CHRYSTIA FREELAND

November 1, 2013 |

TORONTO — HERE’S the puzzle of America today: the plutocrats have never been richer, and their economic power continues to grow, but the populists, the wilder the better, are taking over. The rise of the political extremes is most evident, of course, in the domination of the Republican Party by the Tea Party and in the astonishing ability of this small group to shut down the American government. But the centrists are losing out in more genteel political battles on the left, too — that is the story of Bill de Blasio’s dark-horse surge to the mayoralty in New York, and of the Democratic president’s inability to push through his choice to run the Federal Reserve, Lawrence H. Summers.

All of these are triumphs of populists over plutocrats: Mr. de Blasio is winning because he is offering New Yorkers a chance to reject the plutocratic politics of Michael R. Bloomberg. The left wing of the Democratic Party opposed the appointment of Mr. Summers as part of a wider backlash against the so-called Rubin Democrats (as in Robert E. Rubin, who preceded Mr. Summers as Treasury secretary during the Clinton administration) and their sympathy for Wall Street. Even the Tea Party, which in its initial phase was to some extent the creation of plutocrats like Charles and David Koch, has slipped the leash of its very conservative backers and alienated more centrist corporate bosses and organizations.

The limits of plutocratic politics, at both ends of the ideological spectrum, are being tested. That’s a surprise. Political scientists like Larry M. Bartels and Martin Gilens have documented the frightening degree to which, in America, more money means a more effective political voice: Democratic and Republican politicians are more likely to agree with the views of their wealthier constituents and to listen to them than they are to those lower down the income scale. Money also drives political engagement: Citizens United, which removed some restrictions on political spending, strengthened these trends.

Why are the plutocrats, with their great wealth and a political system more likely to listen to them anyway, losing some control to the populists? The answer lies in the particular nature of plutocratic political power in the 21st century and its limitations in a wired mass democracy.

Consider the methods with which plutocrats actually exercise power in America’s New Gilded Age. The Koch brothers, who have found a way to blend their business interests and personal ideological convictions with the sponsorship of a highly effective political network, are easy to latch on to partly because this self-dealing fits so perfectly with our imagined idea of a nefarious plutocracy and partly because they have had such an impact. But the Kochs are the exception rather than the rule, and even in their case the grass roots they nurtured now follow their script imperfectly.

MOST plutocrats are translating their vast economic power into political influence in two principle ways. The first is political lobbying strictly focused on the defense or expansion of their economic interests. This is very specific work, with each company or, at most, narrowly defined industry group advocating its self-interest: the hedge fund industry protecting the carried-interest tax loophole from which it benefits, or agribusiness pushing for continued subsidies. Often, these are fights for lower taxes and less regulation, but they are motivated by the bottom line, not by strictly political ideals, and they benefit very specific business people and companies, not the business community as a whole.

As Mark S. Mizruchi, a sociologist at the University of Michigan, documents in his recent book “The Fracturing of the American Corporate Elite,” this is not the business lobby that shaped America so powerfully in the 1950s and 1960s. Business leaders of the postwar era were individually weaker but collectively more effective; C.E.O. salaries were relatively lower, but the voice of business in the national conversation was much more potent, perhaps in part because it was less exclusively self-interested. The postwar era, not coincidentally a period when income inequality declined, was the time when business executives could say that what was good for G.M. was good for America and really believe it. It didn’t hurt that they were sometimes willing to forgo short-term personal and corporate gain when they judged that the national interest required it.

The second way today’s plutocrats flex their political muscle is more novel. Matthew Bishop and Michael Green, a pair of business writers, have called this approach “philanthrocapitalism” — activist engagement with public policy and social problems. This isn’t the traditional charity of supporting hospitals and museums, uncontroversial good causes in which sitting on the board can offer the additional perk of status in the social elite. Philanthrocapitalism is a more self-consciously innovative and entrepreneurial effort to tackle the world’s most urgent social problems; philanthrocapitalists deploy not merely the fortunes they accumulated, but also the skills, energy and ambition they used to amass those fortunes in the first place.

Bill Gates is the leading philanthrocapitalist, and he has many emulators — nowadays, having your own policy-oriented think tank is a far more effective status symbol among the super-rich than the mere conspicuous consumption of yachts or private jets. Philanthrocapitalism can be partisan — George Soros, one of the pioneers of this new approach, backed a big effort to try to prevent the re-election of George W. Bush — but it is most often about finding technocratic, evidence-based solutions to social problems and then advocating their wider adoption.

Philanthrocapitalism, particularly when you agree with the basic values of the capitalist in charge, can achieve remarkable things. Consider the work the Bill and Melinda Gates Foundation has done on malaria, or the transformative impact of Mr. Soros’s Open Society Foundations in Eastern Europe.

Mr. Bloomberg took philanthrocapitalism one step further — he used his résumé and his wealth to win elected political office. In City Hall, Mr. Bloomberg’s greatest achievements were technocratic triumphs — restricting smoking in public places, posting calorie counts and championing biking. As he prepares for life after political office, he is already honing the more typical plutocratic skill of using his money to shape public policy by energetically engaging in national battles over issues like gun control and immigration reform.

At its best, this form of plutocratic political power offers the tantalizing possibility of policy practiced at the highest professional level with none of the messiness and deal making and venality of traditional politics. You might call it the Silicon Valley school of politics — a technocratic, data-based, objective search for solutions to our problems, uncorrupted by vested interests or, when it comes to issues like smoking or soft drinks, our own self-indulgence.

But the same economic forces that have made this technocratic version of plutocratic politics possible — particularly the winner-take-all spiral that has increased inequality — have also helped define its limits. Surging income inequality doesn’t create just an economic divide. The gap is cultural and social, too. Plutocrats inhabit a different world from everyone else, with different schools, different means of travel, different food, even different life expectancies. The technocratic solutions to public-policy problems they deliver from those Olympian heights arrive in a wrapper of remote benevolence. Plutocrats are no more likely to send their own children to the charter schools they champion than they are to need the malaria cures they support.

People might not mind that if the political economy were delivering for society as a whole. But it is not: wages for 70 percent of the work force have stagnated, unemployment is high and many people with jobs feel insecure about them and about their retirement. Meanwhile, the plutocrats continue to prosper. And for more and more people, the plutocrats’ technocratic paternalism seems at best weak broth and at worst an effort to preserve the rules of a game that is rigged in their favor. More radical ideas, particularly ones explicitly hostile to elites and technocratic intellectuals, gain traction. And that is true not just in the United States but across the Western developed world — for instance, the Italian prime minister Enrico Letta, recently warned that “the rise of populism is today the main European social and political issue.”

AS this populist wave crashes in on both sides of the Atlantic, the plutocrats, for all their treasure and their intellect, are in a weak position to hold it back.

Part of the appeal of plutocratic politics is their power to liberate policy making from the messiness and the deal making of grass-roots and retail politics. In the postwar era, civic engagement was built through a network of community organizations with thousands of monthly-dues-paying members and through the often unseemly patronage networks of old-fashioned party machines, sometimes serving only particular ethnic communities or groups of workers.

The age of plutocracy made it possible to liberate public policy from all of that, and to professionalize it. Instead of going to work as community organizers, or simply taking part in the civic life of their own communities, smart, publicly minded technocrats go to work for plutocrats whose values they share. The technocrats get to focus full time on the policy issues they love, without the tedium of building, rallying — and serving — a permanent mass membership. They can be pretty well paid to boot.

The Democratic political advisers who went from working on behalf of the president or his party to advising the San Francisco billionaire Thomas F. Steyer on his campaign against the Keystone XL pipeline provide a telling example. Twenty years ago, they might have gone to work for the Sierra Club or the Nature Conservancy or run for public office themselves. Today, they are helping to build a pop-up political movement for a plutocrat.

Plutocratic politics have much to recommend them. They are pure, smart and focused. But at a time when society as a whole is riven by an ever widening economic chasm, policy delivered from on high can get you only so far. Voters on both the right and the left are suspicious of whether the plutocrats and the technocrats they employ understand their real needs, and whether they truly have their best interests at heart. That rift means we should all brace ourselves for more extremist politics and a more rancorous political debate.

Where does that leave smart centrists with their clever, fact-based policies designed to fine-tune 21st century capitalism and make it work better for everyone?

Part of the problem is that no one has yet come up with a fully convincing answer to the question of how you harness the power of the technology revolution and globalization without hollowing out middle-class jobs. Liberal nanny-state paternalism, as it has been brilliantly described and practiced by Cass R. Sunstein and like-minded thinkers, can help, as can shoring up the welfare state. But neither is enough, and voters are smart enough to appreciate that. Even multiple nudges won’t make 21st-century capitalism work for everyone. Plutocrats, as well as the rest of us, need to rise to this larger challenge, to find solutions that work on the global scale at which business already operates.

The other task is to fully engage in retail, bottom-up politics — not just to sell those carefully thought-through, data-based technocratic solutions but to figure out what they should be in the first place. The Tea Party was able to steer the Republican Party away from its traditional country-club base because its anti-establishment rage resonated better with all of the grass-roots Republican voters who are part of the squeezed middle class. Mr. de Blasio will be the next mayor of New York because he built a constituency among those who are losing out and those who sympathize with them. Politics in the winner-take-all economy don’t have to be extremist and nasty, but they have to grow out of, and speak for, the 99 percent. The pop-up political movements that come so naturally to the plutocrats won’t be enough.

The author of “Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else” and a Liberal Party candidate for the Canadian Parliament.  

A version of this op-ed appears in print on November 3, 2013, on page SR1 of the New York edition with the headline: Plutocrats Vs. Populists.

[Mar 09, 2013]  Goldman, Banking, Washington, and Business Ethics Cultural Observations from Two Smiths

"We don't pay taxes. Only the little people pay taxes."
Feb 26, 2013 | Jesse's Café Américain

"I'm a very firm believer that a liar is a cheat and a thief and a crook. I don't like liars. I never lie. I always told my own child, "If you murder somebody, tell me. I'll help you hide the body. But don't you lie to me."

"We don't pay taxes. Only the little people pay taxes."

Leona Helmsley

"There is not a more perilous or immoral habit of mind than the sanctifying of success.”

Lord Acton

I wish that C-Span would permit their videos to be 'embeddable.'

Greg's talk is excellent, and thanks to C-Span the video quality is good.

Greg Smith Speaking At Stanford on His Experience at Goldman and Reasons for the Corrosive Decline in Business Ethics

Speaking of excellent essays on corruption, Yves Smith has written a wonderful piece titled, Jack Lew’s Grotesque Citi Employment Deal and the Institutionalization of Corruption.


Corruption, facilitated by the credibility trap, is the biggest problem facing the West today. That is the real subsidy, the most debilitating entitlement.

It is the belief of the elite that the power of their office is an achievement that rewards them with the right to lie, cheat and steal, both for themselves and their friends.

Although it is most important to understand that they would be shocked and insulted if one uses those words, lie, cheat and steal, to describe what they are doing.  They view themselves as exceptionally hard working, as obligated by their natural gifts and superiority.

Through a long indoctrination that starts sometimes in their families, but is most often affirmed in their elite schools and with their circle of privileged friends, they learn to rationalize selective moral behaviour not as immoral but as 'the entitlement of success.'  And they are supported by a horde of morally ambivalent enablers who will tell them whatever they wish to hear.

There are one set of rules for themselves and their friends, and another set of rules for the rest.

Few who actually do evil consciously choose to be evil.  They rationalize what they do in any number of ways, but the deceit often hinges on their own natural superiority, and the objectification and denigration of the other.  We are makers, and they are takers. Although many may work hard, they see their own work as having special value and merit, while the actions of the others are inconsequential and unworthy.

Given enough time, their rationalizations become an ideology, desensitized to the meaning and significance of others outside their own select group.  This supremacy of ideology empties their souls, and opens the door to mass privation and even murder, although rarely done by their own hands.

This is what Glenn Greenwald calls 'justice for some.' Or even earlier what George Orwell captured in the slogan, 'Some animals are more equal than others.'

And just to be clear on this, with regard to the Anglo-American political situation, the tragedy is not that just some are corrupted, which is always the case. The tragedy is that the Democrats and the Labor Party learned that they could become as servilely corrupted by Big Money as the Republicans and the Conservative Party, while maintaining the illusion of serving their traditional political base.

And it has rewarded them very well in terms of extraordinarily well-funded political power, and almost unbelievable personal enrichment afterwards.  

In such a climate of corruption,  political discourse loses the vitality of ideas and compromise for the general good, and take on the character of competing gangs and crime families, engaged in aggressive schemes and protracted turf wars, tottering from one pitched battle and crisis to another.

"A credibility trap is a condition wherein the financial, political and informational functions of a society have been compromised by corruption and fraud, so that the leadership cannot effectively reform, or even honestly address, the problems of that system without impairing and implicating, at least incidentally, a broad swath of the power structure, including themselves.

The status quo tolerates the corruption and the fraud because they have profited at least indirectly from it, and would like to continue to do so. Even the impulse to reform within the power structure is susceptible to various forms of soft blackmail and coercion by the system that maintains and rewards.

And so a failed policy and its support system become self-sustaining, long after it is seen by objective observers to have failed. In its failure it is counterproductive, and an impediment to recovery in the real economy. Admitting failure is not an option for the thought leaders who receive their power from that system.

The continuity of the structural hierarchy must therefore be maintained at all costs, even to the point of becoming a painfully obvious hypocrisy.

And you know how I feel about this.
The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

The problem which the modern world has not yet grappled is how to react to the rise of a global elite, which considers itself the children of a power which is above national restraints, and a law unto themselves.

Their success has been propelled by the dominance of Anglo-American financialization, and the rise of oligarchies in Russia, China, Latin America, and India.  Countervailing power has been co-opted and subsumed.  Any opposition has become marginalized and isolated.

The new oligarchs are supported by their fiat currencies, which together the increase of insubstantial 'cashlessness' in wealth,  provides the ability to define and allocate value at will

They have a penchant towards globalization and deregulation to support selective justice, to the extreme detriment of local rule, and individual choice and freedom.   Above all, they are a law unto themselves, above what they consider subhuman restraint.  Übermenschen.

“Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth. Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition—and many of them, as a result, have an ambivalent attitude toward those of us who didn't succeed so spectacularly. Perhaps most noteworthy, they are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home. Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today's super-rich are increasingly a nation unto themselves...

A multibillion-dollar bailout and Wall Street’s swift, subsequent reinstatement of gargantuan bonuses have inspired a narrative of parasitic bankers and other elites rigging the game for their own benefit. And this, in turn, has led to wider—and not unreasonable—fears that we are living in not merely a plutonomy, but a plutocracy, in which the rich display outsize political influence, narrowly self-interested motives, and a casual indifference to anyone outside their own rarefied economic bubble."

Chrystia Freeland, The Rise of the New Global Elite

Of course this tendency is not new in history, as it is a facet of the human heart, and the empires of the past. But the scope of it is something rarely seen before this. And it is supported by technologies for mass action and control that seem terrifyingly powerful and new.

And as hard as it may be to believe, this too shall pass. But as always, we have some work to do in our own time.


“The mills of God grind slowly, yet they grind exceeding small;
Though with patience He stands waiting, with exactness He grinds all.”

Henry Wadsworth Longfellow

[Mar 02, 2013]  ROBERT HUNZIKER — The New Transnational Elite

ROBERT HUNZIKER — The New Transnational Elite
August 8, 2012 | Filed under: Economics and tagged with: America, American society, banking, banks, Bees, Bilderberg, Bush, candidate, capitalism, change, community, constitution, corporation, corporations, defense, Democrats, derivatives, dimension, enlightenment, individual rights, lifestyle, logic, middle class, military, money, New York, Patriot Act, petition, population, Poverty, Power, president, profit, protest, recession, Republicans, restaurants, revolution, ruling class, U.S., U.S. Congress, United States, World Bank, world economy

DAVOS/SWITZERLAND, 24JAN04 - Dick Cheney, Vice...

The world’s epicenter of capitalism is the United States, and its reach/power/influence circumnavigates the globe. The elites of the capitalist class are no longer tied to territoriality or driven by national competition. “U.S. capitalism has expanded its reach by morphing into a Transnational Capitalist Class.” according to William Robinson (Univ. of Calif.) Global Capitalism and 21st Century Fascism, Aljazeera, May 2011.

The driving force that binds together this elite cadre is free market capitalism; it is the heartbeat of a worldwide network of capitalists that thrive off profits and wealth creation. Their nonpareil world order is driven by money which equates to success, power, collegiality, and increasingly, as this new world order coalesces into the most formidable political entity in the history of humankind, democratic nation-states lose the legacy of the Age of Enlightenment, which played such a major role in the French Revolution (1789-99) and the American Revolution (1775-83), contributing to the Declaration of Independence (1776), and the U.S. Bill of Rights (1791)… stripping away national identities.

The notion that a company or corporate executive or wealthy entrepreneur is bound by an allegiance to their country of origin is passé. The elite capitalists of today are bound to one another, not to countries. They meet at the same conferences, like the World Economic Forum in Davos, Switzerland, or the The Bilderberg Group annual geopolitic forum, or in Asia it is the Boao Forum on China’s Hainan Island each spring, or the Aspen Institute’s Ideas Festival, or Herb Allen’s Sun Valley gathering for media moguls, or the Google Zeitgeist conference, all defining the characteristics of today’s plutocrats; they are forming a global community, and their ties to one another are increasingly closer than their ties to the multitudes back home.

They attend the same operas and polo matches, stay at the same 5-star hotels, lease the same private jets, dine at the same 5-star restaurants, meet Bono, and ceaselessly travel the globe together, with homes on every continent, residing wherever the weather is seasonally most favourable. Their allegiances extend well beyond the borders of their nation-states of origin, and they could care less about the various underling classes of society in any particular country where they do business.

This new global elite, according to Chrystia Freeland (Global Editor at Large, Reuters, who traveled with, and mingles with, the elites), The Rise of the New Global Elite, Atlantic Magazine, Jan./Feb. 2011: “Perhaps most noteworthy, they are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home. Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today’s super-rich are increasingly a nation unto themselves.”

This federation of convenience by the global elite is a lingering problem for the lower classes in America. The U.S.-based CEO of one of the world’s largest hedge funds told Chrystia Freeland that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade.” Notice the CEO’s reference to “not such a bad trade” as representative of free market lingo, i.e., “trade.” Everything is measured in trade terms, like statistics… if you look in the mirror, you’ll see the reflection of a commodity.

This viewpoint is typical of how the global ruling class thinks, and proof positive of it is reflected in today’s politics in America. The right wing embodies this same viewpoint by striving to strip the federal government of public welfare services, privatizing governmental assets, and undercutting benefits to society at large, especially via manipulation of the federal tax code. This same occurrence is happening in real time right now in Greece, Spain, and Portugal as the cadre of elite technocrats out of Brussels, de facto capital of the EU, dictate nation-state policies to those three forlorn countries. The world’s elites love hard times/recessions because of the set up. It makes it easier for them to strip away government largess via austerity programs that they force upon governments, and it allows for undercutting the wages of average citizens as well as dismantling of governmental regulations. This, in turn, prompts protestors to congregate in the streets of capital cities, but over time, the capitalist class waits them out, temporarily residing in one of their homes elsewhere, away from danger, and with time on their side, the capitalists win.

Upon reading Chrystia Freeland’s article in Atlantic Magazine, one comes away with the impression the elite capitalists look down with disdain upon the masses of people, expressing a contempt for those in society who do not have the personal merit to rise to the occasion of wealth and power. Meritocracy is their biblical source, not equality and fraternity. These are hackneyed terms from ‘America of old’ and no longer applicable in the new technologically enhanced world, which itself is the major source of many of the new self-made wealthy.

This global ruling class controls the levers of an emergent trans-national state apparatus of global decision-making and orders emanate from the IMF, World Bank, the EU, and the WTO. The ruling bloc of this world order consists of chieftains of global corporations and financial conglomerates, major players in the dominant political parties of the world, media conglomerates, and technocratic elites.

Several thousand people, who all play in the same sandbox, control the world of finance and politics, similar to the faceless/nameless/shameless fictional elites in the TV series The X-Files. In that series, the ‘Smoking Man’ is the only personality from amongst the elite cadre that is recognized on an on-going basis; he is C.G.B.Spender, the public face of the “Syndicate,” which is a shadow government and highly secretive organization. As the Smoking Man says, “If people were to know of the things that I know… it would all fall apart.” Similarly, one wonders what those ‘things’ are in today’s world, and there are definitely cracks in the veneer of this new capitalistic world order.

For example, “Market capitalism has proven to be a remarkable engine of wealth creation, but if it continues to function in the next 25 years as it has in the past 25, we are in for a violent ride or, worse, a serious breakdown in the system itself. That sounds dire, and it is,” Global Capitalism at Risk. What are you Doing About it? by Joseph L. Bower, Herman B. Leonard, and Lynn S. Paine, Harvard Business Review, Sept. 2011. This article co-written by three professors at Harvard University pinpoints a festering problem that may be impossible to address because, as the article goes on to relate: “The leaders we talked to identified various forces that could severely disrupt the global market system in the decades ahead… these forces arise from multiple sources. Some are fueled by negative consequences of the market system and feedback into it in disruptive ways. Others arise from sources external to the system. Still others relate to….” Frankly, the multiplicity of the financial problem is the problem! The world of finance is a mind-boggling complexity of derivatives overlying derivatives superimposed upon CMOs interlocking with CDSs and residing within the depths of major brokerages and banks, deep in their vaults for nobody to see in full living color. The legendary investor Sir John Templeton summed up the financial monster in two words, writing a memorandum to close friends and family before his death, as he anticipated the future, “Financial Chaos.” World banking/finance is a multi-headed hydra monster of global proportions that may bring the world of capitalism down to its knees, prompting police state intervention to maintain social order. The early stages of this phenomenon have already appeared, and historians may one day earmark the summer of 2007 as the start of the Age of Financial Calamity!

According to William Robinson: Transnational capital has been able to break free of nation-state constraints to shift the correlation of class and social forces worldwide sharply in its favour and to undercut the strength of popular and working class movements around the world. One new structural dimension of 21st century global capitalism is a dramatic expansion of the global superfluous population or that portion marginalized and locked out of productive participation … constituting some one-third of humanity. The need to assure the social control of this mass of humanity living in slums gives a powerful impetus to neo-fascist projects and facilitates the transition from social welfare to social control, otherwise known as police states. Over time, this system becomes ever more violent and the ability of economic power to determine electoral outcomes opens the door for 21st century fascism to emerge without a rupture in electoral cycles and/or a constitutional change.

The door for 21st century fascism has more than opened. It has been blown off the hinges starting with the U.S. Patriot Act, which act violates the U.S. Constitution and which act was rammed down the throats of the U.S. Congress, whose members did not even read the document, by the Bush Administration, implying that any members who voted against the hurried-bill would be blamed for any further attacks at a time when the nation was braced for a second attack.

Another example of impending fascism occurred when President Obama signed the National Defense Authorization Act, which act negates the writ of habeas corpus, the most powerful cornerstone of civil rights since the Magna Carta. Subsequently, May 2012, U.S. District Judge Katherine B. Forrest overruled the domestic military detention provisions of the act, an act that was roundly supported by Democrats and Republicans.

This is a clear, and extremely troubling, clarion call for how far legislators will go to strip U.S. citizens of their rights. According to Republican presidential candidate Ron Paul, “American individual liberties are being stripped away.” The elites contend the negation of individual rights is foisted upon the government in order to maintain civil order, and their lackeys in Congress take bait with open-arms.

As transnational capitalism gains momentum, the chieftains of major U.S. international corporations feel less, and less, empathy towards their homeland and more akin to a world-state wherein the entire planet is their haunt. Their quest for profits dictates a worldly view that brushes aside nation-state regulations that interfere with profits, and their disdain for the peoples of any given nation-state leads to statist political leanings, meaning a concentration of economic controls and planning in the hands of a centralized government for control of individual nation-states whilst worldwide trade is subjected to free market capitalism. This course of action is already evident in Europe where nation-states like Portugal are being dictated to by a centralized body of technocrats, the EU. Likewise, this is happening in America where the Central Bank has become dictator of the markets whilst the global corporations on the Dow Jones Industrial Average carry on in their own markets around the world, splashing strong profits, in part, because of neoliberal tendencies that discriminate between which nation-states offer the cheapest labor and the weakest regulations. The common denominator of global corporations is cheap labor; they hover like bees around the queen wherever cheap labor is to be found.

As a result of an assortment of extremely powerful economic and political forces intertwined within transnational capitalism, it is reasonable to assume the various classes in American society will continue to experience a significant downgrade of lifestyle as the transnational capitalists comb the world for the cheapest labor and the loosest regulations.

In time, America itself will become a target for transnational capitalists’ manufacturing plants & facilities as American wages and benefits continue to stagnate and as right-wingers attack governmental regulations and privatize government assets.

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[Mar 02, 2013]  Growing Split Within Republicans On Too Big To Fail Banks

Posted on February 7, 2013 by 47 Comments

By Simon Johnson

An interesting debate is developing within the Republican Party on how to approach the problem of too-big-to-fail financial institutions.

On the one hand, a growing number of influential voices are pushing for measures that would limit the size of megabanks or even push them to become smaller. Richard Fisher, president of the Federal Reserve Bank of Dallas, continues to draw a lot of attention, as does Thomas Hoenig, the former president of the Federal Reserve Bank of Kansas City and now vice chairman of the Federal Deposit Insurance Corporation. And Jon Huntsman planted a strong conservative flag on this issue during his run for the presidency in 2011.

This assessment is now shared much more broadly across the right, as seen in recent opinion pieces by George Will and Peggy Noonan, as well as regular analysis by James Pethokoukis of the American Enterprise Institute, including on the issue I write about today. See this Holiday 2012 survey, provided by the Dallas Fed, with links to views in favor of and against breaking up the big banks.

Senator David Vitter of Louisiana and Jim DeMint, the former senator from South Carolina who now heads the Heritage Foundation, have also come out hard against very big banks. Both men are usually considered to be in the right wing of the party.

But some other Republicans are pushing back, as seen this week in a paper by Hamilton Place Strategies, a group headed in part by communications professionals who previously worked with President George W. Bush, John McCain and Mitt Romney. (The people involved insist that it is not a Republican firm. Of its five partners, four previously had senior Republican jobs, while the fifth worked for Hillary Clinton and other Democrats. Of its three managing directors, two have worked for Democrats and one was a senior staff member on the Romney campaign. Historically, of course, deference to big banks is bipartisan.)

Can Hamilton Place Strategies help turn the tide within Republican thinking? This is not likely, because its paper is not credible and should not be taken seriously for three reasons.

First, it fails to deal with the most important recent work showing the problems with big banks. For example, it essentially ignores the analysis of Andrew Haldane and his colleagues at the Bank of England, which finds no economies of scale and scope for the world’s largest financial institutions (the paper mentions the finding that economies of scale do not exist above about $100 billion but does not go into the specifics of this result). I see no mention of Richard Fisher and Harvey Rosenblum of the Dallas Fed, who explain clearly how megabanks weaken the effectiveness of monetary policy and undermine United States influence over all aspects of our financial system (a direct counter to one main point of the Hamilton Place Strategies paper).

The paper makes vague assertions about bank equity capital now being sufficient to withstand future adverse shocks, but it fails to take on any of the many concerns raised by Anat Admati and her co-authors, which are increasingly gaining traction. Professor Admati and Martin Hellwig have a new book, “The Bankers’ New Clothes,” which will be introduced on Monday at the Peterson Institute for International Economics (where I am a senior fellow); excerpts have been posted on Bloomberg. Anyone who wants to be taken seriously in this debate needs to read the book (and the technical papers already available).

Second, Hamilton Place Strategies denies the existence of too-big-to-fail subsidies for global megabanks. This is laughable. Has it talked to anyone in credit markets about how they price various kinds of risk – and assess the willingness and ability of the government and the Fed to support troubled megabanks? Or have its authors read the report on the SAFE Banking Act, produced by the staff of Senator Sherrod Brown, Democrat of Ohio? The International Monetary Fund, the Bank of England and other sources cited there put the funding advantage of too-big-to-fail banks at 50 to 80 basis points (0.5 to 0.8 of a percentage point, which is a lot in today’s market).

Such subsidies encourage big banks to borrow more – to take more risk and to become even larger.  The damage when such a bank fails is generally proportional to its size.  So this implicit taxpayer subsidy creates serious risks for the macroeconomy and contributes to the further build-up of taxpayer liabilities – when any financial system crashes, that causes a recession, reduces tax revenue, and pushes up government debt.

Even William Dudley, the former Goldman Sachs executive who now heads the Federal Reserve Bank of New York, acknowledges that too-big-to-fail and its associated subsidies continue. Daniel Tarullo, the lead Fed governor for financial regulation, is in the same place. (Again, neither is cited in the Hamilton Place Strategies document.)

Hamilton Place Strategies contends that large banks can be resolved – taken through liquidation by the F.D.I.C. without difficulties – and that the “living wills” process helps to provide a meaningful road map. I talk to people closely involved with these issues, officials and private-sector participants (as a member of the F.D.I.C.’s Systemic Resolution Advisory Committee and as a member of the Systemic Risk Council, led by Sheila Bair, the former chairwoman of the F.D.I.C.). Hamilton Place Strategies is completely wrong on the substance here.

Hamilton Place Strategies also asserts that global megabanks are an essential part of a well-functioning international economy. Again, I don’t know where this comes from. As part of my work at the Massachusetts Institute of Technology and at the Peterson Institute, I talk with people who run companies, large and small, operating around the world; they emphasize that they need financial services provided by well-run institutions and markets that have integrity.

Putting too-big-to-jail banks in charge of financial flows helps no one – except, presumably, the executives at those banks that the Department of Justice has determined are immune from criminal prosecution.

Third, the Hamilton Place Strategies “report” reads as if it is either some form of paid advertising or a sales pitch to potential clients — but the firm refuses to disclose for whom it is working and on what basis.

In response to an e-mail request for such information, Patrick Sims of Hamilton Place Strategies replied:

“While we don’t publicly disclose our individual clients, we make no secret that we do work for large financial institutions, both foreign and domestic, and related associations. It would be fair for you to note that in your writing. But the views expressed in the paper represent the longstanding views of the firm.”

I’m not sure what “longstanding” means, as the firm was founded in 2010. But in any case, this lack of disclosure completely destroys the credibility of Hamilton Place Strategies and its work in this area.

The firm is in the business of influencing opinion. As it says prominently on its Web site, “We show clients how to shape opinion, navigate challenges, make informed decisions and create opportunities.”

While the firm’s clients in this area may not be clear, the language in its report strongly resembles arguments being made by the Financial Services Forum and other lobbying groups for large banks.  For example, an unsigned blog post on the Financial Services Forum’s Web site from November 2011 has the same arguments and similar wording to what is in the Hamilton Place Strategies report. (It also objects to an earlier commentary I wrote.)

Perhaps all this is a coincidence; the firm has not yet been willing to discuss these points.

When I acquainted the firm with what I was writing in this post and sought comment, the only substantive reaction was a request not to characterize it as a Republican firm.

We have seen deceptive lobbying, posing as objective “research,” many times in the financial reform debate – for example, the case of Keybridge Research on derivatives, which I wrote about in 2011.

If a company’s lawyer is quoted in the press, the report will always include mention of the client-lawyer relationship. Everyone is entitled to a spokesperson.

Law firms are not afraid to tell you whom they represent. After Charles Ferguson’s Oscar-winning movie, “Inside Job,” many academics now disclose when they produce a paper on behalf of an industry association (e.g., Darrell Duffie of Stanford disclosed that he was paid $50,000 by the Securities Industry and Financial Markets Association, a lobbying group, to write a paper opposing the Volcker Rule). Karen Shaw Petrou, a leading banking analyst with whom I have also disagreed on too-big-to-fail issues, discloses “selected clients and subscribers” in some detail.

Upton Sinclair once quipped, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

Hamilton Place Strategies’ decision not to disclose who is paying for its “research” is far more significant than all the errors in its white paper.

An edited version of this post appeared this morning on the’s Economix blog; it is used here with permission.  If you would like to reproduce the entire column, please contact the New York Times.

February 7, 2013 at 10:34 am

With the recent disclosure by Mr. Dimon of the “money room” at Chase in Florida moving “4 or 5 $$$ trillion a day”, it is hardly conceivable that big banks are going to be pared down to size any time soon. Power is too concentrated, in the hands of too few.

February 7, 2013 at 5:32 pm

cut and pasted from the wiki article:

“….Some, such as former International Monetary Fund chief economist Simon Johnson even went so far as to argue that the increased power and influence of the financial services sector had fundamentally transformed the American polity, endangering representative democracy itself.[7]

In February 2009, white-collar criminologist and former senior financial regulator William K. Black listed the ways in which the financial sector harms the real economy. Black wrote, “The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy in order to reward already-rich financial elites harming the nation.”[8]…..”

So if Prof. Johnson says, “Again, I don’t know where this comes from.”

Then that could mean that whoever is saying it doesn’t know what they are talking about :-))

@Bond, “Power is too concentrated, in the hands of too few.”

And they are free to blow themselves up with the power that they have.

The question I have is whether they have the right to blow up the web of sustainable life on the planet that runs itself through commerce and trade transactions?

Bruce E. Woych
February 7, 2013 at 5:40 pm


“Among us today a concentration of private power without equal in history is growing.”

“Private enterprise is ceasing to be free enterprise and is becoming a cluster of private collectivisms; masking itself as a system of free enterprise after the American model, it is in fact becoming a concealed cartel system after the European model.”
“And industrial empire building, unfortunately, has evolved into banker control of industry. We oppose that.”
“We have also learned that a realistic system of business regulation has to reach more than consciously immoral acts. The community is interested in economic results. It must be protected from economic as well as moral wrongs. We must find practical controls over blind economic forces as well as over blindly selfish men.”
Excerpted from:
Faculty Research
The New Deal
Franklin D. Roosevelt Speeches
Message to Congress on the Concentration of Economic Power
Franklin D. Roosevelt
April 29, 1938
To the Congress of the United States:

Bruce E. Woych
February 7, 2013 at 5:48 pm

The Case For and Against Too-Big-to-Fail Banks

“The case for the too-big-to-fail banks, by Neil Irwin: …[I]n the last few months, there’s been a new wave of calls to break up the “too big to fail” banks that were at the center of the crisis — and the beneficiaries of a massive wave of bailouts.

So, is splitting those banks up the answer? … The move … has a growing list of powerful allies. … But what is the counterargument? … A new paper from Patrick Sims of Hamilton Place Strategies, a policy and communications firm led by Bush administration White House and Treasury official Tony Fratto, amounts to a case for the big banks. (Hamilton Place counts major banks and their trade associations among its clients)…, here are some of the arguments…”

Daniel Barkalow
February 7, 2013 at 6:53 pm

“Can Hamilton Place Strategies help turn the tide within Republican thinking? This is not likely, because its paper is not credible and should not be taken seriously for three reasons.”

While the paper is not credible and should not be taken seriously, that fails to relate to the question. Since when has credibility determined the effect of a document on politics?

Bruce E. Woych
February 7, 2013 at 11:45 pm
(A Growing Split…with integrity & insight)
“Almost all conservatives who care to vote congregate in the Republican Party. But Republican ideology celebrates outsourcing, globalization, and takeovers as the glorious fruits of capitalism’s “creative destruction.” As a former Republican congressional staff member, I saw for myself how GOP proponents of globalized vulture capitalism, such as Grover Norquist, Dick Armey, Phil Gramm, and Lawrence Kudlow, extolled the offshoring and financialization process as an unalloyed benefit. They were quick to denounce as socialism any attempt to mitigate its impact on society.”
” Conservatives need to think about the world they want: do they really desire a social Darwinist dystopia?

The objective of the predatory super-rich and their political handmaidens is to discredit and destroy the traditional nation state and auction its resources to themselves. Those super-rich, in turn, aim to create a “tollbooth” economy, whereby more and more of our highways, bridges, libraries, parks, and beaches are possessed by private oligarchs who will extract a toll from the rest of us. Was this the vision of the Founders? Was this why they believed governments were instituted among men—that the very sinews of the state should be possessed by the wealthy in the same manner that kingdoms of the Old World were the personal property of the monarch?”
Revolt of the Rich
Our financial elites are the new secessionists.
By Mike Lofgren • August 27, 2012

Brian Wilson
February 8, 2013 at 12:08 am

Muppets rearranging chairs on the Titanic, while the band plays on. Whatever. The danger to the global economy has never been more palpable. The last place anyone looks for change and hope is Washington. At this juncture, people would do well to accept that there is nothing that will save the global economy from the fate of monumental greed embodied by the TBTF banks.

Xavier L.
February 8, 2013 at 5:08 am

“The damage when such a bank fails is generally proportional to its size.”

Here, I cannot agree. It is much worse than that. A bank two times bigger will do more than twice the damage when it fails.
In wonkish terms, the consequences of a failure are convex, and it is (or should be) one of the main arguments for breaking the big banks.

February 8, 2013 at 9:00 am

What we’re seeing here is a repeat of the debate that played out between Roosevelt/Taft and Wilson a hundred years ago – trust busting vs. regulation. I thought this debate had been settled, such that it was recognized that some circumstances call for breaking up monopolies, others for regulation, and still others for both. Apparently not. Though I suspect that, in this rendition, both sides are being disingenuous in their arguments because in actuality they oppose both approaches.

Peter P
February 8, 2013 at 11:58 am

A great article, but missing Simon’s normal clarity of message. It start with a polarizing and prickly headline “A Growing Split Within Republicans On Too Big To Fail Banks”, but hardly addresses that.

But then it analyzes the “Hamilton Place Strategies”, which is obviously a paid opinion piece masquerading as independent opinion, and demolishes it accurately. How do we set standards or expectations so that paid-for-speech is easily seen to be what it is, and valued for what it is: largely worthless?

Patrick R. Sullivan
February 8, 2013 at 4:00 pm

Does this argument hold also for Fannie Mae (and Freddie Mac)? Fannie was the country’s largest borrower, behind only the Treasury at one time.

Its lobbyists always managed to trump the concerns over its size, of Larry Summers, Phil Gramm, Ronald Reagan, Paul Volcker, Alan Greenspan, Jim Leach (to name just a few). Their winning argument being that their size made interests rates lower for home purchasers.

I missed the part where the GSEs were included in TBTF.

February 8, 2013 at 4:18 pm

What it must be like to be Professor Johnson and know what he knows. Very few manage to still sleep at night with that knowledge. Prepare, people.

Bruce E. Woych
February 8, 2013 at 5:08 pm

Trusted Criminals: White Collar Crime In Contemporary Society [Paperback]
David O. Friedrichs (Author)

Trusted Criminals: White Collar Crime In Contemporary Society by David O. Friedrichs (Jun 25, 2009)

Bruce E. Woych
February 8, 2013 at 5:42 pm

The Revolt of the Elites and the Betrayal of Democracy [Paperback]
Christopher Lasch (Author)

The Revolt of the Elites and the Betrayal of Democracy

The Revolt of the Elites and the Betrayal of Democracy


Buy from Amazon February 9, 2013 at 12:21 pm

““I’m saying that there is a 90% chance of collapse by next April, but it could happen at any time between now and April,” Keiser reported on August 17. “You have to look at [the global economy] in terms of the way a systems analyst would look at any complicated system. Every time you add more to the system the complexity doesn’t rise in a linear fashion, it rises exponentially. So every time the Fed puts on more quantitative easing, every time investment banks bail out some other investment bank, every time more derivatives are released into the system, you don’t go from, let’s say, 700 trillion notional value derivatives to 800 trillion in a linear way. You have to think of it in terms of this global quadrillion to two quadrillion derivative soufflé being encumbered with, exponentially, more risk. This is classic systems analysis.”

This nation’s economy has been growing in complexity, exponentially, since 1971 when the U.S. dollar was taken off the gold standard. “The game here is to try to pick where it starts, what is the trigger, and to study it in terms of how the economies rattle and roll, as a result of this complete and utter systemic breakdown,” continued the founding host of The Keiser Report, a biweekly program, that aired its 330th episode yesterday.

Could Japan trigger the global economic collapse?

Keiser looks to the economy of Japan as a “weakest link” and a possible trigger for systemic collapse. He says what turned his eye toward Japan was the recent announcement that the second biggest buyer of U.S. Treasury debt is no longer China. Keiser explains, “America is the biggest buyer of its own debt. But taking the second spot is Japan. China is walking away from the table.”

Keiser continues, “Japan has always been under the treasury of America’s thumb. They will do whatever America says. And now they are the number two biggest buyer [sic] of US Treasury bonds. But that is extremely dangerous because their economy itself is a tinderbox, probably the weakest, most fragile economy in the world—after the Fukushima disaster, after 20 years of the zombie economy and the zombie banks. But now they are supporting America. Japan, the zombie economy, is supporting the American economy, to give you an idea how fragile the system is.”

“There is no avoiding the collapse. There is no remedy for the collapse.”

He then predicts civil unrest and a generational civil war. Therefore, the government is preparing for civil unrest, long anticipated by the John Warner National Defense Authorization Act of 2007, which rewrote federal law to allow deployment of the military, specifically, in cases of “economic collapse.”

After describing our evolving “hard gulag” situation in this country with private prison systems increasing capitalization, expecting 20-50 million more inmates in the near future, Keiser defines a new type of dystopia he calls a “soft gulag,” where citizens give up more freedoms—such as facial recognition—in exchange for deals on consumer goods.”

Norm Cimon
February 9, 2013 at 1:49 pm

After reading Irwin’s tout of Hamilton’s PR flakery, I wrote him an email. In it, I pointed out how much deception was involved in the use of correlation to explain away the MBS risk. I also pointed him off to the research that shows how the financial houses and their quant lackeys are part of a dynamical marketplace that will explode again. This is no longer about house A competing against house B for some perceived marginal gain. It’s about the entire market place cycling between periodic bursts of wildly excessive risk-hypnosis punctuated by market-destroying bouts of de-leveraging. It really is all systemically one, just as the hippies were fond of saying. They were just ahead of their time.

There’s a lot going on. The Bank of England appears to have taken the lead on this. Led by Andrew Haldane, they’re rethinking their risk management given what they now understand about the dynamics of the marketplace for derivatives, and the British government seems to be moving this along. The bankers don’t seem worried but I think they’ve missed the boat – again.

This undercurrent, with the Fed deferring to the Bank of England in developing new strategies, has been flowing through the scientific and policy community for a while. There’s been a gradual ratcheting up of both the regulatory talk, and policy visibility. There are quite a few links in one of Felix Salmon’s blog entries, with lots of opinion’s on both sides:

I might be delusional, but I don’t think so. It’s all happening at a glacial pace for a very simple reason. This house of cards could easily collapse again if any fast moves are made, it’s that dangerous.

With the ouster, pardon me the resignation, of Lanny Breuer from the Justice Department, we’re also hearing much tougher talk and the initiation of criminal litigation. Eric Schneiderman seems like a serious guy. He’s now stepped to the front as the point-man for this effort. At the very least, he doesn’t seem to have any illusions about what went down:

There was lots of talk about how Frontline did a hit job on Breuer. I certainly hope so. That may not have been a random targeting either. It really was time for him to move on given his fawning approach to the criminal activity that led to this collapse. Again, everything has moved very slowly for what seems to me the obvious reason. There is no solid ground, only wall-to-wall eggshells in this oh-so-weak recovery.

There are endless questions to be answered all of them leading to the only important one: can we have a consumer economy without consumers? But we’ll save that for another day.

February 9, 2013 at 4:25 pm

We insist you remove that wig and fake moustache at once private Ryan.
Well I can’t sir, it’s growed on.

Bruce E. Woych
February 10, 2013 at 2:44 pm

Bubble Psychology and Complicity in Financial Fraud
By Noah Millman • February 7, 2013, 11:38 AM
(Recent article in the American Conservative) Quite a good point!
Essentially the author points out that buyers in a black market that expect to turn a profit themselves on questionable goods and their sources, simply don’t want to know too much information…which indirectly makes the buyers complicit to the corruption. It is a good article and raises a more comprehensive perspective as to the nature of a corrupt bubble posing as institutional and normative errors.
….Neither a borrower nor a lender be? …Well in contemporary jingo…it’s more like “…Off the record, on the QT, and very hush-hush…”
But Noah Millman goes further to raise eyebrows and ask academia for help in answering it…(perhaps a future Baseline title issue?):
….I’d be interested to know whether there’s any academic literature addressing this question of opacity/complexity and its relationship to bubbles.”
“In any bull market, the willingness of intermediaries to “conceal materially relevant information” goes up, and so does the willingness of risk-takers to let that information be concealed. It’s very hard to regulate away that behavior – doing so would be tantamount to regulating away bubble psychology. But how possible it is to conceal this kind of information is a function not only of the regulatory environment (which also gets laxer during bubbles – bubble psychology works on regulators, too) but of the nature of the products themselves. Credit securitization provided multiple opportunities to inaccurately represent risk, each of which was seized by somebody, and which collectively resulted in a much more substantial mis-representation than would have been the case with simpler products.
I’d be interested to know whether there’s any academic literature addressing this question of opacity/complexity and its relationship to bubbles.”
Bubble Psychology and Complicity in Financial Fraud
By Noah Millman • February 7, 2013, 11:38 AM
(Recent article in the American Conservative)

Bruce E. Woych
February 10, 2013 at 4:06 pm

“And Jon Huntsman planted a strong conservative flag on this issue during his run for the presidency in 2011.” (text above)
P “rebuilder-in-chief” with an eye toward 2016.”
A Growing? split…seems retrospective. The conservatives are driven by party politics and political bosses are labeling working conservatives as outsiders. There isn’t (or shouldn’t be…) a novel split in the “Party” but the extreme fundamentalists in the tea party helm have factioned and fractured as the lobby-driven fiscal conservatives have made hypocrites out of true social conservativism. Meanwhile, anything labeled moderate takes on a mantel of rejection from the political bosses that feed off of the extremist’s absolute intolerance for outsiders (left undefined as everyone else). So we end up with Mitt Romney instead of a true leader and politician like Jon Huntsman. Given the choices, as a life long Democrat I would have accepted Huntsman as a compromise with a true intention to lead the people, rather than take another beating from Obama’s three ring Monty circus of crisis derailing promises and false appeals to empathy that sells his image while we become entrenched in suspended disbelief at his actions.

So heads up Conservatives, you have been split all along and the entire country is becoming factioned and fracked into corruption and pollution. You don’t need a change of heart; you need a complete heart transplant. A virtual revolt against the capture of your party by “nuts” and bolts political animals serving a financial minority. You may still get a second chance to rally around a real candidate that would not only be your “rebuilder-in-chief” but may well reunite America and save Democracy from corporatism and oligarchic command restructuring of the Republic itself.
Whither Jon Huntsman?
Posted by Sean Sullivan on January 14, 2013 at 3:32 pm
“Written off as too moderate by conservatives and crowded out by Mitt Romney among centrist Republicans, Huntsman was a man without a political home in the 2012 primary field.

Looking ahead to 2016, he still is, in many respects.

After the primary, Huntsman had some tough talk for his party, lashing the GOP over immigration and even taking on Romney’s policies. He’s kept up his tough love the past few months, telling the The Ripon Forum last month: “As long as compromise is seen as something akin to treason, it becomes impossible for us to move the policy ball forward.”

In the wake of Romney’s controversial “47 percent” comment and post-election remark that Obama won by bestowing “gifts” upon certain voters, Huntsman is not the only one in the Republican Party calling for a new message. And given the way the way the public views the GOP these days, few would argue that a makeover isn’t in order.

As we’ve written, there is already a race to be the
GOP “rebuilder-in-chief” with an eye toward 2016.”

Bayard Waterbury
February 10, 2013 at 5:05 pm

Simon, Hamilton Place Strategies is simply another plutocratic shill for the same old financial oligarchs who keep working to rip out the throats of global investors. I am far from convinced that the Dodd-Frank enactment did anything substantial to avert future catastrophic financial occurances. Hell, we aren’t even close to making regulation based upon the law, let alone sufficiently staffing the enforcers or budgeting them for effectiveness. Pays to have friends in high places? Goldman, etal, define that principle. And, it isn’t just the endless risk high volume proprietary trading that bothers me, but the fact that the derivatives market has grown exponentially without any regulation in the law to more that a qaudrillion of notional value, if not twice that size. Who cares about TBTF, when these absurd investment gambles represent a potential for near term financial holocaust!! Who can bail out the world, when everything fails?

Bruce E. Woych
February 11, 2013 at 2:39 am

10 Reasons The U.S. Is No Longer The Land Of The Free
by Jonathan Turley … the Shapiro professor of public interest law at George Washington University.
(585 Responses to “10 Reasons The U.S. Is No Longer The Land Of The Free”)

Bruce E. Woych
February 11, 2013 at 3:39 pm

Cultures and Organizations, Software of the Mind: Intercultural Cooperation and its Importance for Survival
Geert Hofstede (Author)
From the Back Cover
The Classic Work on “Groupthink”-now in paperback! Since its original hardcover publication, this trailblazing work has stirred a response so deep and wide that its subtitle has become part of our language. Now for the first time in paperback, Geert Hofstede’s study of the “software of the mind” helps us look at how we think-also at how we fail to think as members of groups. Drawing on decades of rigorous research, the author reveals the unexamined rules by which we live and work together. Melding unswerving intellectual courage and hard social, cultural, and organizational research, Hofstede shapes a sobering picture of a world perilously lacking in self-knowledge-unaware of serious difference between the groups that populate our planet and appallingly oblivious to the hidden “programs” that govern the behavior of cultures in a time of skyrocketing global contact. But culture shock-whether the shocking contact is between an individual and a new country, between organizations, between the sexes, or between opposing diplomats-can be turned to our advantage, Hofstede says-if we understand it. And understanding is what this work is all about. This is a book that every thinking person will want to read. Broad in scope, profoundly original in thought and profoundly important, it offers vital knowledge and insight on issues that will shape the future of our individual and collective lives. and profoundly
See all Editorial Reviews
Cultures and Organizations, Software of the Mind: Intercultural Cooperation and its Importance for Survival

February 11, 2013 at 4:44 pm

How about this for a research project for a econ student:

When most people read “The damage when such a bank fails is generally proportional to its size.” they think that this quote describes a linear relationship. (i.e. if a bank of 2X in assets fails and the impact on the economy is 2Y, then if a bank of 4X fails the impact will be 4Y.) I would think the relationship is more likely to be logarithmic. More like the richter scale for earthquakes.

Has someone actually tried to compile actual data on something like this? (versus economic models based on a bunch of assumptions which may or may not be valid)

Bruce E. Woych
February 12, 2013 at 9:45 pm

Simon Johnson :
The Wall Street Takeover and the Next Financial Meltdown

Bruce E. Woych
February 12, 2013 at 11:22 pm

The Coming Collapse of the Middle Class
Jan 31, 2008
Distinguished law scholar Elizabeth Warren

Bruce E. Woych
February 12, 2013 at 11:30 pm

(British spellings from original [sic])
“In 1943, in an analysis of Hitler’s programme in the Quarterly Journal of Economics, the word ‘privatisation’ entered the academic literature for the first time. The author, Sidney Merlin, wrote that the Nazi Party ‘facilitates the accumulation of private fortunes and industrial empires by its foremost members and collaborators through “privatisation” and other measures, thereby intensifying centralisation of economic affairs and government in an increasingly narrow group that may for all practical purposes be termed the national socialist elite’.The gung-ho free marketeers who rode to power with Thatcher in 1979 don’t seem to have been aware of the Nazi prelude, although they would have known of later privatisations in Pinochet’s Chile.”

Bruce E. Woych
February 13, 2013 at 12:20 am

Financialization and the World Economy

Bruce E. Woych
February 13, 2013 at 12:25 am

Quadrillion Dollar Derivatives Market 20 Times Global GDP

Bruce E. Woych
February 13, 2013 at 2:02 pm
The Center for Media and Democracy is a non-profit investigative reporting group whose work aids public awareness about the people, companies, and groups attempting to shape the media and our democracy. Founded in 1993, our national reporting and analysis focus on exposing corporate spin. We accept no funding from for-profit corporations or the government. The Center for Media and Democracy’s websites are PR Watch, SourceWatch, BanksterUSA, ALECexposed and Food Rights Network.

Bruce E. Woych
February 13, 2013 at 8:50 pm

The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead by David Callahan

Desi Girl: Deport Simon Johnson
February 16, 2013 at 1:13 pm

Too-Idiotic-to-Jail Professors like Simon and Anant will write anything for a quick buck and to sell books.

Will Simon and Anat disclose their earnings from MIT and Stanford when they are also spending time writing books, useless columns and TV talk shows?

Simon’s second retort against the Hamilton Place Strategies paper is too ludicrous to be true. Isolating the funding advantage of a large firm to ‘government subsidies’? Haha. I really wonder how MIT keeps subsidizing this man!.

IBM 5Y CDS is quoted at 34 bps. Intel 5Y CDS is quoted at 55 bps.

Does IBM have the implicit backing of the government? Ha Ha

Research funded by (stolen from) unknowing students at MIT and Stanford is not a prerequisite for accuracy.

Simon is too-connected-to-deport because of his friends in high places (i.e. elisabeth warren)

Bruce E. Woych
February 16, 2013 at 8:54 pm

Sorry there Old Desi Girl…you’re off the reservation (and your meds…) and completely out of line with the new Republican consensus.
The Republican talking points are clear…we must keep our immigration population….. so Simon will not be deported as you demand (slightly aside…pssss…dope! He’s a “citizen!).

“Hamilton Place Strategies, a Washington research group, argued in a recent paper that low-skilled immigrant workers in agriculture also boost the economy by increasing work for Americans in other sectors, such as transportation and marketing.

Republican Senator Marco Rubio, who was picked by his party to respond to Obama’s speech late Tuesday, also emphasized the economic benefits of immigration reform.”
“We can also help our economy grow if we have a legal immigration system that allows us to attract and assimilate the world’s best and brightest,” said Rubio, a son of Cuban immigrants who is working to forge a bipartisan immigration bill in the Senate.”

Bruce E. Woych
February 16, 2013 at 9:18 pm

Banker Occupation: Waging Financial War on Humanity
Stephen Lendman (Author)

Banker Occupation: Waging Financial War on Humanity

Banker Occupation: Waging Financial War on Humanity


Buy from Amazon February 16, 2013 at 9:29 pm

Catherine Austin Fitts Interview:The Looting Of America (Part 4 of 4)

Bruce E. Woych
February 17, 2013 at 7:19 pm

“Too Big to Fail has become Too Big for Trial”
Senator Elizabeth Warren·3 videos
Published on Feb 15, 2013
Senator Elizabeth Warren asks federal bank regulators why no banks were taken to trial in the aftermath of the financial crisis.

February 19, 2013 at 11:45 am

At the risk of sounding political, Republicans will fall in line with whatever lobbyist/plutocrats decide. As far as a viable system, size is not the key issue. The key issue is reasonable and regulated risk, with regulated insurance and reinsurance on all risk taking.
Hello from a Progressive voice – “USA: Politics,
Economics and International Issues” is a blog
for Progressive change. American citizens need
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are important to the USA. Most of our problems
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USA: Politics, Economics and International Issues

Bruce E. Woych
February 19, 2013 at 11:56 am

CIA Officer Explains New World Order’s Demise

Tony Foresta
February 20, 2013 at 3:35 am

Anyone who worked for the den of viper and thieves and wanton warprofiteers in the fascist bushgov is suspect!!! How can they be trusted since every single policy, directive, word, and deed of the pathological liars and fascists in the bushgov was intent on deception, division, ruthless dominance, wanton profiteering, fascism, and savage advancement and shielding of the predatorclass and predatorclass oligarchs exclusively. These shaitans and their broods can NEVER be trusted or believed on any subject unless you are fascist, redneck, religios fanatic, wingnut, or predatorclass. Now I know all the sensitive erudite adults visiting this blog will dismiss my commentary as incendiary or insane other other such dispersions, – but I dare any of you to counter my positions on the merits. You have now, did not then, and never will have any grounds to stand on. The bushgov was a fascist regime that gutted poor workingclass Americans, raped, dismantled and redefined that thing we call the Constitution, shamed America and the ruleoflaw, and hurled the nation into the most severe, longest lasting economic crisis since the Great Depression. So any commentary, white paper, research, or criticism from anyon affiliated with the fascists chickenhawk warmongers and wanton profiteers in the bushgov must always and forevermore be dismissed, denied, ridiculed, and condemned. No one can reasonably challenge or refute these assertions, but I welcome the debate!!!


[Oct 03, 2012] America’s Financial Oligarchy Is Still in Control by W. Lorimer Wilson

6 April 2009 | FSU Editorial 

“The crash has laid bare many unpleasant truths about the United States . One of the most alarming is that the finance industry has effectively captured our government”, says Simon Johnson, a chief economist with the International Monetary Fund in 2007 and 2008. In an article entitled “The Quiet Coup” in the May, 2009 issue of the Atlantic magazine he (with James Kwak) goes on to say that “if the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform and if we are to prevent a true depression, we’re running out of time”.

America is in financial crisis but instead of the financial oligarchy being broken up to permit essential reform they are continuing to use their influence to prevent precisely the sorts of reforms that are needed immediately to pull the economy out of its nosedive. Unfortunately, our legislators seem unwilling to act against these powerful financiers opting instead to succumb to their power and influence and continue to give them what they deem to be in their best interest instead of that of the taxpayers’. All this is happening because of the false belief by all concerned that large financial institutions and free-flowing capital markets are crucial to America’s position in the world and that whatever the banks say is true and what they want is necessary. The government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. There is no better time to take such action than now but it is evident that reform is but a pipe dream. Americas financial oligarchy is still in control and, as such, the long-term consequences will be dire!

Johnson’s article is so frank, so insightful and so alarming it deserves the widest readership possible during these traumatic times and, as such, I have taken the liberty to edit and paraphrase in places his intriguing interpretation of what ails Americas economic state and what needs to be done to alleviate the crisis.

The Powerful Elites have Over-reached

Johnson says that “typically countries in crisis are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks and that certainly is the case in America .  Indeed, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarmingly, they are now using their influence to prevent precisely the sorts of reforms that are needed immediately to pull the economy out of its nosedive. Unfortunately, the government seems helpless, or unwilling, to act against these powerful financiers.

Financial Industry has Gained Political Power

Of course, the U.S. is unique in that, just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts.

Instead, the American financial industry gained political power by amassing a kind of cultural capital, a belief system … in which Washington insiders believe that large financial institutions and free-flowing capital markets are crucial to America’s position in the world … and always and utterly convinced that whatever the banks said was true.

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large….In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

America’s Oligarchs and the Financial Crisis

America’s oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew. (See the article I wrote entitled “Our Worst Nightmare: The Puncture of the U.S Housing Bubble” back in early 2006 for a detailed expose on just how such loans were handled.)

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal” in that when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine.

Some of these deals may have been reasonable responses to the immediate situation but it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.

The Way Out

Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

Nationalize the Banks

In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy—the function that the private banking sector is supposed to be performing, but isn’t. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Limit Bank Size

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

Overhaul Antitrust Legislation

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100 years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy.

Cap Executive Compensation

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. Wall Street’s main attraction—to the people who work there and to the government officials who were only too happy to bask in its reflected glory—has been the astounding amount of money that could be made. Limiting that money would reduce the allure of the financial sector and make it more like any other industry.

Increase Regulation and Taxation

Outright pay caps are clumsy, especially in the long run and most money is now made in largely unregulated private hedge funds and private-equity firms, so lowering pay would be complicated. Therefore, regulation and taxation should be part of the solution.

More Transparency and Competition

Over time the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine.  

Two Plausible Scenarios

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign. Moreover, when the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this:

a) the global economy continues to deteriorate,

b) the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent,

c) creditors take further hits and confidence falls further,

d) Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off,

e) a dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment,

f) under this kind of pressure, and faced with the prospect of a national and global collapse, minds become more concentrated.

The conventional wisdom among the elite is still that the current slump cannot be as bad as the Great Depression. This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances.

If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.”

The Financial Oligarchy’s Control Continues

Please Note: Such wishful thinking is not about to happen any time soon as evidenced by a change just this past Thursday on April 2nd, 2009 to three accounting rules by the Financial Accounting Standards Board (FASB) that now gives banks more discretion in reporting the value of mortgage securities. The new rules, referred to as mark-to-market, will enable all financial institutions with such securities to report higher profits by assuming that the securities are worth more than anyone now is prepared to pay for them.

FASB, at first, resisted making the changes because they would enable financial institutions to avoid recognizing losses from bad loans that they had made but they buckled under heavy political pressure brought to bear, on behalf of the financial oligarchy, by legislators from both parties.

 As a result of having their way the financial institutions affected are now free to apply the new rules to their financial statements for the quarter that ended on March 31st. How convenient!  Edward Yingling, president of the oligarchy’s lobby group, the American Bankers Association, was naturally very pleased with their successful efforts and praised the FASB quickly putting a spin on the changes saying that ‘Today’s decision should improve information for investors by providing more accurate estimates of market values.’

Not everyone was so elated, however. Two of the rule changes passed unanimously including one that will permit financial institutions to write down assets to market value only if they conclude that the decline is ‘other than temporary.’ The one that will allow banks to keep part of such declines off their income statements but still show said declines on the institutions’ balance sheets, however, had one of the FASB dissenters in the vote, Thomas J. Linsmeier, arguing that accounting rules already on the books allowed ‘the fiction that all banks are well capitalized’, adding that such changes ‘would make them seem better capitalized’ than they actually were. Linsmeier was not alone. The vote drew condemnation from an organization called the Investors Working Group, and the two former S.E.C. chairmen who lead it – William H. Donaldson and Arthur Levitt Jr. but even they were no match for the power and influence of the financial oligarchy.

The country is in financial crisis and instead of the financial oligarchy being broken up to permit essential reform they are continuing to use their influence to prevent precisely the sorts of reforms that are needed immediately to pull the economy out of its nosedive. Unfortunately, our legislators seem unwilling to act against these powerful financiers opting instead to succumb to their power and influence and continue to give them what they deem to be in their best interest instead of that of the taxpayers’. All this is happening because of the false belief that large financial institutions and free-flowing capital markets are crucial to America’s position in the world … and always and utterly convinced that whatever the banks say is true and what they want is necessary. The government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. There is no better time to take such action than now but it is evident that reform is but a pipe dream. America’s financial oligarchy is still in control and, as such, the long-term consequences will be dire!

Simon Johnson is a former chief economist with the International Monetary Fund and is currently a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He, along with James Kwak, a former McKinsey consultant, is a co-founder of The Baseline Scenario ( which is a blog dedicated to explaining what happened in the global economy and what we can do about it.

Lorimer Wilson is an economic/market analyst and commentator who has written numerous articles on the major economic and financial crises (past, present and impending) of our times, investing in times of crisis, commodities, market timing and other investment philosophies. He is a Contributing Editor to and can be contacted at lorimer [dot] wilson [at] live [dot] com.

Replacing Economic Democracy with Financial Oligarchy By Michael Hudson

June 03, 2011 | Information Clearing House
Soon after the Socialist Party won Greece’s national elections in autumn 2009, it became apparent that the government’s finances were in a shambles. In May 2010, French President Nicolas Sarkozy took the lead in rounding up €120bn ($180 billion) from European governments to subsidize Greece’s unprogressive tax system that had led its government into debt – which Wall Street banks had helped conceal with Enron-style accounting.

The tax system operated as a siphon collecting revenue to pay the German and French banks that were buying government bonds (at rising interest risk premiums). The bankers are now moving to make this role formal, an official condition for rolling over Greek bonds as they come due, and extend maturities on the short-term financial string that Greece is now operating under. Existing bondholders are to reap a windfall if this plan succeeds. Moody’s lowered Greece’s credit rating to junk status on June 1 (to Caa1, down from B1, which was already pretty low), estimating a 50/50 likelihood of default. The downgrade serves to tighten the screws yet further on the Greek government. Regardless of what European officials do, Moody’s noted, “The increased likelihood that Greece’s supporters (the IMF, ECB and the EU Commission, together known as the “Troika”) will, at some point in the future, require the participation of private creditors in a debt restructuring as a precondition for funding support.”1

The conditionality for the new “reformed” loan package is that Greece must initiate a class war by raising its taxes, lowering its social spending – and even private-sector pensions – and sell off public land, tourist sites, islands, ports, water and sewer facilities. This will raise the cost of living and doing business, eroding the nation’s already limited export competitiveness. The bankers sanctimoniously depict this as a “rescue” of Greek finances.

What really were rescued a year ago, in May 2010, were the French banks that held €31 billion of Greek bonds, German banks with €23 billion, and other foreign investors. The problem was how to get the Greeks to go along. Newly elected Prime Minister George Papandreou’s Socialists seemed able to deliver their constituency along similar lines to what neoliberal Social Democrat and Labor parties throughout Europe had followed –privatizing basic infrastructure and pledging future revenue to pay the bankers.

The opportunity never had been better for pulling the financial string to grab property and tighten the fiscal screws. Bankers for their part were eager to make loans to finance buyouts of public gambling, telephones, ports and transport or similar monopoly opportunities. And for Greece’s own wealthier classes, the EU loan package would enable the country to remain within the Eurozone long enough to permit them to move their money out of the country before the point arrived at which Greece would be forced to replace the euro with the drachma and devalue it. Until such a switch to a sinking currency occurred, Greece was to follow Baltic and Irish policy of “internal devaluation,” that is, wage deflation and government spending cutbacks (except for payments to the financial sector) to lower employment and hence wage levels.

What actually is devalued in austerity programs or currency depreciation is the price of labor. That is the main domestic cost, inasmuch as there is a common world price for fuels and minerals, consumer goods, food and even credit. If wages cannot be reduced by “internal devaluation” (unemployment starting with the public sector, leading to falling wages), currency depreciation will do the trick in the end. This is how the Europe’s war of creditors against debtor countries turns into a class war. But to impose such neoliberal reform, foreign pressure is necessary to bypass domestic, democratically elected Parliaments. Not every country’s voters can be expected to be as passive in acting against their own interests as those of Latvia and Ireland.

Most of the Greek population recognizes just what has been happening as this scenario has unfolded over the past year. “Papandreou himself has admitted we had no say in the economic measures thrust upon us,” said Manolis Glezos on the left. “They were decided by the EU and IMF. We are now under foreign supervision and that raises questions about our economic, military and political independence.”2 On the right wing of the political spectrum, conservative leader Antonis Samaras said on May 27 as negotiations with the European troika escalated: “We don’t agree with a policy that kills the economy and destroys society. … There is only one way out for Greece, the renegotiation of the [EU/IMF] bailout deal.”3

But the EU creditors upped the ante: To refuse the deal, they threatened, would result in a withdrawal of funds causing a bank collapse and economic anarchy.

The Greeks refused to surrender quietly. Strikes spread from the public-sector unions to become a nationwide “I won’t pay” movement as Greeks refused to pay road tolls or other public access charges. Police and other collectors did not try to enforce collections. The emerging populist consensus prompted Luxembourg’s Prime Minister Jean-Claude Juncker to make a similar threat to that which Britain’s Gordon Brown had made to Iceland: If Greece would not knuckle under to European finance ministers, they would block IMF release of its scheduled June tranche of its loan package. This would block the government from paying foreign bankers and the vulture funds that have been buying up Greek debt at a deepening discount.

To many Greeks, this is a threat by finance ministers to shoot themselves in the foot. If there is no money to pay, foreign bondholders will suffer – as long as Greece puts its own economy first. But that is a big “if.” Socialist Prime Minister Papandreou emulated Iceland’s Social Democratic Sigurdardottir in urging a “consensus” to obey EU finance ministers. “Opposition parties reject his latest austerity package on the grounds that the belt-tightening agreed in return for a €110bn ($155bn) bail-out is choking the life out of the economy.” (Ibid.)

At issue is whether Greece, Ireland, Spain, Portugal and the rest of Europe will roll back democratic reform and move toward financial oligarchy. The financial objective is to bypass parliament by demanding a “consensus” to put foreign creditors first, above the economy at large. Parliaments are being asked to relinquish their policy-making power. The very definition of a “free market” has now become centralized planning – in the hands of central bankers. This is the new road to serfdom that financialized “free markets” are leading to: markets free for privatizers to charge monopoly prices for basic services “free” of price regulation and anti-trust regulation, “free” of limits on credit to protect debtors, and above all free of interference from elected parliaments. Prying natural monopolies in transportation, communications, lotteries and the land itself away from the public domain is called the alternative to serfdom, not the road to debt peonage and a financialized neofeudalism that looms as the new future reality. Such is the upside-down economic philosophy of our age.

Concentration of financial power in non-democratic hands is inherent in the way that Europe centralized planning in financial hands was achieved in the first place. The European Central Bank has no elected government behind it that can levy taxes. The EU constitution prevents the ECB from bailing out governments. Indeed, the IMF Articles of Agreement also block it from giving domestic fiscal support for budget deficits. “A member state may obtain IMF credits only on the condition that it has ‘a need to make the purchase because of its balance of payments or its reserve position or developments in its reserves.’ Greece, Ireland, and Portugal are certainly not short of foreign exchange reserves … The IMF is lending because of budgetary problems, and that is not what it is supposed to do. The Deutsche Bundesbank made this point very clear in its monthly report of March 2010: ‘Any financial contribution by the IMF to solve problems that do not imply a need for foreign currency – such as the direct financing of budget deficits – would be incompatible with its monetary mandate.’ IMF head Dominique Strauss-Kahn and chief economist Olivier Blanchard are leading the IMF into forbidden territory, and there is no court which can stop them.”4

The moral is that when it comes to bailing out bankers, rules are ignored – in order to serve the “higher justice” of saving banks and their high-finance counterparties from taking a loss. This is quite a contrast compared to IMF policy toward labor and “taxpayers.” The class war is back in business – with a vengeance, and bankers are the winners this time around.

The European Economic Community that preceded the European Union was created by a generation of leaders whose prime objective was to end the internecine warfare that tore Europe apart for a thousand years. The aim by many was to end the phenomenon of nation states themselves – on the premise that it is nations that go to war. The general expectation was that economic democracy would oppose the royalist and aristocratic mind-sets that sought glory in conquest. Domestically, economic reform was to purify European economies from the legacy of past feudal conquests of the land, of the public commons in general. The aim was to benefit the population at large. That was the reform program of classical political economy.

European integration started with trade as the path of least resistance – the Coal and Steel Community promoted by Robert Schuman in 1952, followed by the European Economic Community (EEC, the Common Market) in 1957. Customs union integration and the Common Agricultural Policy (CAP) were topped by financial integration. But without a real continental Parliament to write laws, set tax rates, protect labor’s working conditions and consumers, and control offshore banking centers, centralized planning passes by default into the hands of bankers and financial institutions. This is the effect of replacing nation states with planning by bankers. It is how democratic politics gets replaced with financial oligarchy.

Finance is a form of warfare. Like military conquest, its aim is to gain control of land, public infrastructure, and to impose tribute. This involves dictating laws to its subjects, and concentrating social as well as economic planning in centralized hands. This is what now is being done by financial means, without the cost to the aggressor of fielding an army. But the economies under attacked may be devastated as deeply by financial stringency as by military attack when it comes to demographic shrinkage, shortened life spans, emigration and capital flight.

This attack is being mounted not by nation states as such, but by a cosmopolitan financial class. Finance always has been cosmopolitan more than nationalistic – and always has sought to impose its priorities and lawmaking power over those of parliamentary democracies.

Like any monopoly or vested interest, the financial strategy seeks to block government power to regulate or tax it. From the financial vantage point, the ideal function of government is to enhance and protect finance capital and “the miracle of compound interest” that keeps fortunes multiplying exponentially, faster than the economy can grow, until they eat into the economic substance and do to the economy what predatory creditors and rentiers did to the Roman Empire.

This financial dynamic is what threatens to break up Europe today. But the financial class has gained sufficient power to turn the ideological tables and insist that what threatens European unity is national populations acting to resist the cosmopolitan claims of finance capital to impose austerity on labor. Debts that already have become unpayable are to be taken onto the public balance sheet – without a military struggle, needless to say. At least such bloodshed is now in the past. From the vantage point of the Irish and Greek populations (perhaps soon to be joined by those of Portugal and Spain), national parliamentary governments are to be mobilized to impose the terms of national surrender to financial planners. One almost can say that the ideal is to reduce parliaments to local puppet regimes serving the cosmopolitan financial class by using debt leverage to carve up what is left of the public domain that used to be called “the commons.” As such, we now are entering a post-medieval world of enclosures – an Enclosure Movement driven by financial law that overrides public and common law, against the common good.

Within Europe, financial power is concentrated in Germany, France and the Netherlands. It is their banks that held most of the bonds of the Greek government now being called on to impose austerity, and of the Irish banks that already have been bailed out by Irish taxpayers.

On Thursday, June 2, 2011, ECB President Jean-Claude Trichet spelled out the blueprint for how to establish financial oligarchy over all Europe. Appropriately, he announced his plan upon receiving the Charlemagne prize at Aachen, Germany – symbolically expressing how Europe was to be unified not on the grounds of economic peace as dreamed of by the architects of the Common Market in the 1950s, but on diametrically opposite oligarchic grounds.

At the outset of his speech5 on “Building Europe, building institutions,” Mr. Trichet appropriately credited the European Council led by Mr. Van Rompuy for giving direction and momentum from the highest level, and the Eurogroup of finance ministers led by Mr. Juncker. Together, they formed what the popular press calls Europe’s creditor “troika.” Mr. Trichet’s speech refers to “the ‘trialogue’ between the Parliament, the Commission and the Council.”

Europe’s task, he explained, was to follow Erasmus in bringing Europe beyond its traditional “strict concept of nationhood.” The debt problem called for new “monetary policy measures – we call them ‘non standard’ decisions, strictly separated from the ‘standard’ decisions, and aimed at restoring a better transmission of our monetary policy in these abnormal market conditions.” The problem at hand is to make these conditions a new normalcy – that of paying debts, and re-defining solvency to reflect a nation’s ability to pay by selling off its public domain.

“Countries that have not lived up to the letter or the spirit of the rules have experienced difficulties,” Mr. Trichet noted. “Via contagion, these difficulties have affected other countries in EMU. Strengthening the rules to prevent unsound policies is therefore an urgent priority.” His use of the term “contagion” depicted democratic government and protection of debtors as a disease. Reminiscent of the Greek colonels’ speech that opened the famous 1969 film “Z”: to combat leftism as if it were an agricultural pest to be exterminated by proper ideological pesticide. Mr. Trichet adopted the colonels’ rhetoric. The task of the Greek Socialists evidently is to do what the colonels and their conservative successors could not do: deliver labor to irreversible economic reforms.

Arrangements are currently in place, involving financial assistance under strict conditions, fully in line with the IMF policy. I am aware that some observers have concerns about where this leads. The line between regional solidarity and individual responsibility could become blurred if the conditionality is not rigorously complied with.

In my view, it could be appropriate to foresee for the medium term two stages for countries in difficulty. This would naturally demand a change of the Treaty.

As a first stage, it is justified to provide financial assistance in the context of a strong adjustment programme. It is appropriate to give countries an opportunity to put the situation right themselves and to restore stability.

At the same time, such assistance is in the interests of the euro area as a whole, as it prevents crises spreading in a way that could cause harm to other countries.

It is of paramount importance that adjustment occurs; that countries – governments and opposition – unite behind the effort; and that contributing countries survey with great care the implementation of the programme.

But if a country is still not delivering, I think all would agree that the second stage has to be different. Would it go too far if we envisaged, at this second stage, giving euro area authorities a much deeper and authoritative say in the formation of the country’s economic policies if these go harmfully astray? A direct influence, well over and above the reinforced surveillance that is presently envisaged? … (my emphasis)

The ECB President then gave the key political premise of his reform program (if it is not a travesty to use the term “reform” for today’s counter-Enlightenment):

We can see before our eyes that membership of the EU, and even more so of EMU, introduces a new understanding in the way sovereignty is exerted. Interdependence means that countries de facto do not have complete internal authority. They can experience crises caused entirely by the unsound economic policies of others.

With a new concept of a second stage, we would change drastically the present governance based upon the dialectics of surveillance, recommendations and sanctions. In the present concept, all the decisions remain in the hands of the country concerned, even if the recommendations are not applied, and even if this attitude triggers major difficulties for other member countries. In the new concept, it would be not only possible, but in some cases compulsory, in a second stage for the European authorities – namely the Council on the basis of a proposal by the Commission, in liaison with the ECB – to take themselves decisions applicable in the economy concerned.

One way this could be imagined is for European authorities to have the right to veto some national economic policy decisions. The remit could include in particular major fiscal spending items and elements essential for the country’s competitiveness. …

By “unsound economic policies,” Mr. Trichet means not paying debts – by writing them down to the ability to pay without forfeiting land and monopolies in the public domain, and refusing to replace political and economic democracy with control by bankers. Twisting the knife into the long history of European idealism, he deceptively depicted his proposed financial coup d’état as if it were in the spirit of Jean Monnet, Robert Schuman and other liberals who promoted European integration in hope of creating a more peaceful world – one that would be more prosperous and productive, not one based on financial asset stripping.

Jean Monnet in his memoirs 35 years ago wrote: “Nobody can say today what will be the institutional framework of Europe tomorrow because the future changes, which will be fostered by today’s changes, are unpredictable.”

In this Union of tomorrow, or of the day after tomorrow, would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the Union? Not necessarily a ministry of finance that administers a large federal budget. But a ministry of finance that would exert direct responsibilities in at least three domains: first, the surveillance of both fiscal policies and competitiveness policies, as well as the direct responsibilities mentioned earlier as regards countries in a “second stage” inside the euro area; second, all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration of financial services; and third, the representation of the union confederation in international financial institutions.

Husserl concluded his lecture in a visionary way: “Europe’s existential crisis can end in only one of two ways: in its demise (…) lapsing into a hatred of the spirit and into barbarism ; or in its rebirth from the spirit of philosophy, through a heroism of reason (…)”.

As my friend Marshall Auerback quipped in response to this speech, its message is familiar enough as a description of what is happening in the United States: “This is the Republican answer in Michigan. Take over the cities in crisis run by disfavored minorities, remove their democratically elected governments from power, and use extraordinary powers to mandate austerity.” In other words, no room for any agency like that advocated by Elizabeth Warren is to exist in the EU. That is not the kind of idealistic integration toward which Mr. Trichet and the ECB aim. He is leading toward what the closing credits of the film “Z” put on the screen: The things banned by the junta include: “peace movements, strikes, labor unions, long hair on men, The Beatles, other modern and popular music (‘la musique populaire’), Sophocles, Leo Tolstoy, Aeschylus, writing that Socrates was homosexual, Eugène Ionesco, Jean-Paul Sartre, Anton Chekhov, Harold Pinter, Edward Albee, Mark Twain, Samuel Beckett, the bar association, sociology, international encyclopedias, free press, and new math. Also banned is the letter Z, which was used as a symbolic reminder that Grigoris Lambrakis and by extension the spirit of resistance lives (zi = ‘he (Lambrakis) lives’).”6

As the Wall Street Journal accurately summarized the political thrust of Mr. Trichet’s speech, “if a bailed-out country isn’t delivering on its fiscal-adjustment program, then a ‘second stage’ could be required, which could possibly involve ‘giving euro-area authorities a much deeper and authoritative say in the formation of the county's economic policies …’”7 Eurozone authorities – specifically, their financial institutions, not democratic institutions aimed at protecting labor and consumers, raising living standards and so forth – “could have ‘the right to veto some national economic-policy decisions’ under such a regime. In particular, a veto could apply for ‘major fiscal spending items and elements essential for the country’s competitiveness.’
Paraphrasing Mr. Trichet’s lugubrious query, “In this union of tomorrow ... would it be too bold in the economic field ... to envisage a ministry of finance for the union?” the article noted that “Such a ministry wouldn’t necessarily have a large federal budget but would be involved in surveillance and issuing vetoes, and would represent the currency bloc at international financial institutions.”

My own memory is that socialist idealism after World War II was world-weary in seeing nation states as the instruments for military warfare. This pacifist ideology came to overshadow the original socialist ideology of the late 19th century, which sought to reform governments to take law-making power, taxing power and property itself out of the hands of the classes who had possessed it ever since the Viking invasions of Europe had established feudal privilege, absentee landownership and financial control of trading monopolies and, increasingly, the banking privilege of money creation.
But somehow, as my UMKC colleague, Prof. Bill Black commented recently in the UMKC economics blog: “One of the great paradoxes is that the periphery’s generally left-wing governments adopted so enthusiastically the ECB’s ultra-right wing economic nostrums – austerity is an appropriate response to a great recession. ... Why left-wing parties embrace the advice of the ultra-right wing economists whose anti-regulatory dogmas helped cause the crisis is one of the great mysteries of life. Their policies are self-destructive to the economy and suicidal politically.”8

Greece and Ireland have become the litmus test for whether economies will be sacrificed in attempts to pay debts that cannot be paid. An interregnum is threatened during which the road to default and permanent austerity will carve out more and more land and public enterprises from the public domain, divert more and more consumer income to pay debt service and taxes for governments to pay bondholders, and more business income to pay the bankers.

If this is not war, what is?

Dr. Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1968 and 2003) and of The Myth of Aid (1971).

[Apr 21, 2010 ] The Financial Oligarchy in the US


April 21, 2010 | Jesse's Café Américain

If you do nothing else this week, read the transcript or watch this video.

I have a serious difference of opinion with the speakers with regard to Robert Rubin and his role, but they make up for it with their description of Jamie Dimon as close to the White House and one of the most dangerous men in America today.

And I thought it was interesting that Simon Johnson would say openly that the ONLY Senator who is speaking the truth plainly is Ted Kaufman from Delaware.

Other than that they are substantially putting out a very sound and realistic view of the root of the problems that created the financial crisis, and what requires to be done to rebalance the system and create a sustainable recovery.

BILL MOYERS: And you say that these this oligarchy consists of six megabanks. What are the six banks?

JAMES KWAK: They are Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo.

BILL MOYERS: And you write that they control 60 percent of our gross national product?

JAMES KWAK: They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product.

BILL MOYERS: And what's the threat from an oligarchy of this size and scale?

SIMON JOHNSON: They can distort the system, Bill. They can change the rules of the game to favor themselves. And unfortunately, the way it works in modern finance is when the rules favor you, you go out and you take a lot of risk. And you blow up from time to time, because it's not your problem. When it blows up, it's the taxpayer and it's the government that has to sort it out.

BILL MOYERS: So, you're not kidding when you say it's an oligarchy?

JAMES KWAK: Exactly. I think that in particular, we can see how the oligarchy has actually become more powerful in the last since the financial crisis. If we look at the way they've behaved in Washington. For example, they've been spending more than $1 million per day lobbying Congress and fighting financial reform. I think that's for some time, the financial sector got its way in Washington through the power of ideology, through the power of persuasion. And in the last year and a half, we've seen the gloves come off. They are fighting as hard as they can to stop reform.

The Financial Oligarcy in the US - Bill Moyer's Journal

Fighting America's 'Financial Oligarchy'

April 16, 2009  | NPR

Former International Monetary Fund chief economist Simon Johnson has advised many countries in financial crisis. When it comes to America's current economic woes, Johnson says that U.S. suffers from "financial oligarchies" — government officials and elite members of the financial sector that run the country like a profit-seeking company.

In his article "The Quiet Coup" in the May issue of The Atlantic Monthly, Johnson explains that the close connections between government officials and financial leaders are a major part of the U.S.'s economic problems:

"We face at least two major, interrelated problems," Johnson writes. "The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support."

Johnson insists the U.S. must temporarily nationalize banks so the government can "wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector." But, Johnson adds, the U.S. government is unlikely to take these steps while the financial oligarchy is still in place.

Unless the U.S. breaks up its financial oligarchy, Johnson warns that America could face a crisis that "could, in fact, be worse than the Great Depression — because the world is now so much more interconnected and because the banking sector is now so big."

Johnson was the chief economist at the International Monetary Fund during 2007 and 2008. He is a professor at MIT's Sloan School of Management.

Gary Lo (KCtucker) wrote:

Is it no wonder we are now hearing of banks such as Wells Fargo and Capital One posting profits now?

These banks are taking the governments "free" bail out money (our tax dollars) like spoiled kids grabbing Halloween candy. They are filling their vaults with our money and NOT using it to give out loans and modifcations. I have been currently waiting 8 MONTHS plus for Wells Fargo to give me a mortgage modification. Last week they announced a 3 BILLION dollar profits. Surprise, surprise! They are all crooked! a temporary nationalizing of the banks sounds good to me. At least when the government screws you over you now it's because of incomptence, not greed.

R H (littlehunt) :

Another big mistake is believing the FED is the government. The FED is a private bank. It's not the Treasury and is not the government. The FED is part of the oligarchy. It doesn't answer to the public in anyway. There is no accountability to America. It serves it's own interests.

R H (littlehunt) wrote:

Oligarchy is the perfect word to use for America. We aren't truly democratic or capitalist. Oligarchy properly describes our economics and politics and the way in which our country has truly come to function. 9 out of 10 of those who control everything in America (and the world for that matter) aren't elected by anyone and are usually never known to the average person. Scary. Very scary.

How Financial Oligarchy Replaces Democracy | Michael Hudson

Jun 6, 2011

When Greece exchanged its drachma for the euro in 2000, most voters were all for joining the Eurozone. Their hope was that it would ensure stability, and that this would promote rising wages and living standards. Few saw that the stumbling point was tax policy. Greece was excluded from the eurozone the previous year as a result of failing to meet the 1992 Maastricht criteria for EU membership, limiting budget deficits to 3 percent of GDP, and government debt to 60 percent.

The euro also had other serious fiscal and monetary problems at the outset. There is little thought of wealthier EU economies helping bring less productive ones up to par, e.g. as the United States does with its depressed areas (as in the rescue of the auto industry in 2010) or when the federal government does declares a state of emergency for floods, tornados or other disruptions.

As with the United States and indeed nearly all countries, EU “aid” is largely self-serving – a combination of export promotion and bailouts for debtor economies to pay banks in Europe’s main creditor nations: Germany, France and the Netherlands. The EU charter banned the European Central Bank (ECB) from financing government deficits, and prevents (indeed, “saves”) members from having to pay for the “fiscal irresponsibility” of countries running budget deficits. This “hard” tax policy was the price that lower-income countries had to sign onto when they joined the European Union.

Also unlike the United States (or almost any nation), Europe’s parliament was merely ceremonial. It had no power to set and administer EU-wide taxes. Politically, the continent remains a loose federation. Every member is expected to pay its own way. The central bank does not monetize deficits, and there is minimal federal sharing with member states. Public spending deficits – even for capital investment in infrastructure – must be financed by running into debt, at rising interest rates as countries running deficits become more risky.

This means that spending on transportation, power and other basic infrastructure that was publicly financed in North America and the leading European economies must be privatized. Prices for these services must be set high enough to cover interest and other financing charges, high salaries and bonuses, and be run for profit – indeed, for rent extraction as public regulatory authority is disabled.

This makes countries going this route less competitive. It also means they will run into debt to Germany, France and the Netherlands, causing the financial strains that now are leading to showdowns with democratically elected governments. At issue is whether Europe should succumb to centralized planning – on the right wing of the political spectrum, under the banner of “free markets” defined as economies free from public price regulation and oversight, free from consumer protection, and free from taxes on the rich.

The crisis for Greece – as for Iceland, Ireland and debt-plagued economies capped by the United States – is occurring as bank lobbyists demand that “taxpayers” pay for the bailouts of bad speculations and government debts stemming largely from tax cuts for the rich and for real estate, shifting the fiscal burden as well as the debt burden onto labor and industry. The financial sector’s growing power to achieve this tax favoritism is crippling economies, driving them further into reliance on yet more debt financing to remain solvent. Aid is conditional upon recipient countries reducing their wage levels (“internal devaluation”) and selling off public enterprises.

The tunnel vision that guides these policies is self-reinforcing. Europe, America and Japan draw their economic managers from the ranks of professionals sliding back and forth between the banks and finance ministries – what the Japanese call “descent from heaven” to the private sector where worldly rewards are greatest. It is not merely delayed payment for past service. Their government experience and contacts helps them influence the remaining public bureaucracy and lobby their equally opportunistic replacements to promote pro-financial fiscal and monetary policies – that is, to handcuff government and deter regulation and taxation of the financial sector and its real estate and monopoly clients, and to use the government’s taxing and money-creating power to provide bailouts when the inevitable financial collapse occurs as the economy shrinks below break-even levels into negative equity territory.

Regressive tax policies – shifting taxes off the rich and off property onto labor – cause budget deficits financed by public debt. When bondholders pull the plug, the resulting debt pressure forces governments to pay off debts by selling land and other public assets to private buyers (unless governments repudiate the debt or recover by restoring progressive taxation). Most such sales are done on credit. This benefits the banks by creating a loan market for the buyouts. Meanwhile, interest absorbs the earnings, depriving the government of tax revenue it formerly could have received as user fees.

The tax gift to financiers is based on the bad policy of treating debt financing as a necessary cost of doing business, not as a policy choice – one that indeed is induced by the tax distortion of making interest payments tax-deductible.

Buyers borrow credit to appropriate “the commons” in the same way they bid for commercial real estate. The winner is whoever raises the largest buyout loan – by pledging the most revenue to pay the bank as interest. So the financial sector ends up with the revenue hitherto paid to governments as taxes or user fees. This is euphemized as a free market.

Promoting the financial sector at the economy’s expense

The resulting debt leveraging is not a solvable problem. It is a quandary from which economies can escape only by focusing on production and consumption rather than merely subsidizing the financial system to enable players to make money from money by inflating asset prices on free electronic keyboard credit. Austerity causes unemployment, which lowers wages and prevents labor from sharing in the surplus. It enables companies to force their employees to work overtime and harder in order to get or keep a job, but does not really raise productivity and living standards in the way envisioned a century ago. Increasing housing prices on credit – requiring larger debts for access to home ownership – is not real prosperity.

To contrast the “real” economy from the financial sector requires distinctions to be drawn between productive and unproductive credit and investment. One needs the concept of economic rent as an institutional and political return to privilege without a corresponding cost of production. Classical political economy was all about distinguishing earned from unearned income, cost-value from market price. But pro-financial lobbyists deny that any income or rentier wealth is unearned or parasitic. The national income and product accounts (NIPA) do not draw any such distinction. This blind spot is not accidental. It is the essence of post-classical economics. And it explains why Europe is so crippled.

The way in which the euro was created in 1999 reflects this shallow vision. The Maastricht fiscal and financial rules maximize the commercial loan market by preventing central banks from supplying governments (and hence, the economy) with credit to grow. Commercial banks are to be the sole source of financing budget deficits – defined to include infrastructure investment in transportation, communication, power and water. Privatization of these basic services blocks governments from supplying them at subsidized rates or freely. So roads are turned into toll roads, charging access fees that are readily monopolized. Economies are turned into sets of tollbooths, paying out their access charges as interest to creditors. These extractive rents make privatized economies high-cost. But to the financial sector that is “wealth creation.” It is enhanced by untaxing interest payments to banks and bondholders – aggravating fiscal deficits in the process.

The Greek budget crisis in perspective

A fiscal legacy of the colonels’ 1967-74 junta was tax evasion by the well to do. The “business-friendly” parties that followed were reluctant to tax the wealthy. A 2010 report stated that nearly a third of Greek income was undeclared, with “fewer than 15,000 Greeks declar[ing] incomes of over €100,000, despite tens of thousands living in opulent wealth on the outskirts of the capital. A new drive by the Socialists to track down swimming pool owners by deploying Google Earth was met with a virulent response as Greeks invested in fake grass, camouflage and asphalt to hide the tax liabilities from the spies in space.” (Helena Smith, “The Greek spirit of resistance turns its guns on the IMF,” The Observer)

As a result of the military dictatorship depressing public spending below the European norm, infrastructure needed to be rebuilt – and this required budget deficits. The only way to avoid running them would have been to make the rich pay the taxes they were supposed to. But squeezing public spending to the level that wealthy Greeks were willing to pay in taxes did not seem politically feasible. (Since the 1980s almost no country has enacted Progressive Era tax policies.) The 3 per cent Maastricht limit on budget deficits refused to count capital spending by government as capital formation, on the ideological assumption that all government spending is deadweight waste and only private investment is productive.

The path of least resistance was to engage in fiscal deception. Wall Street bankers helped the “conservative” (that is, fiscally regressive and financially profligate) parties conceal the extent of the public debt with the kind of junk accounting that financial engineers had pioneered for Enron. And as usual when financial deception in search of fees and profits is concerned, Goldman Sachs was in the middle. In February 2010, the German magazine Der Spiegel exposed how the firm had helped Greece conceal the rise in public debt, by mortgaging assets in a convoluted derivatives deal – legal but with the covert intent of circumventing the Maastricht limitation on deficits. “Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives,” so Greece’s obligation appeared as a cross-currency swap rather than as a debt. The government used off-balance-sheet entities and derivatives similar to what Icelandic and Irish banks later would use to indulge in fictitious debt disappearance and an illusion of financial solvency.

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