Bankers as communist nomenklatura?

In a nutshell, the governments that saved the banks and financial markets from a meltdown by borrowing huge amounts of monies are now being attacked for having too much debt by the institutions they saved.

This is just one of several arresting passages in a stimulating Open Democracy article I’ve just received and which argues that the banks have, over the past decade, broken the basic rules of lending - which normally allow only 6 pounds to be created from a single pound deposit and which ensure that 13% of every deposit is kept as a bank deposit. In its place, he argues, has been created a Ponzi scheme. The article continues -

The bankers and financiers do not own banks and financial institutions. They are owned by pension funds, saving policies and endowment policy holders, and even by governments and taxpayers. Effectively, the tax-paying middle class who saves and invests owns the financial industry which is in turn under the management of the bankers and financiers, the nomenklatura of the 21st century. And, like in the Soviet style communism system, these financial apparatchiks are not accountable to anybody but only interested in short term gains and squeezing as much as possible from anyone who has any money and cannot escape: by and large middle class taxpayers
In the 10 years leading to the collapse of 2008, the financial system abandoned the fiat currency and fractional reserve banking. This was the system wereby the money, as the store of value, was underwritten by individual countries and multiplied in a controlled way. Instead, the financiers and bankers started practicing a depleting reserve banking technique: a mechanism that replaces the currency, i.e. fiat money and legal tenders in the banks' reserves (in terms of their ratio) by papers generated by the banks themselves.

The author, Greg Pytel, has an interesting looking blog which rates second in UK blogs about corporate finance and submitted in early 2009 a damning paper to a House of Commons committee with the great title The Largest Heist in History

A Chief Executive of a Bank was one of apparently only a few who took issue with the argument and their exchange can be seen here.
Need to ask someone like Paul Mason what he makes of the argument.

The picture shows a rare painting by Alexander Bozhinov which is being auctioned soon here in Sofia. He was a one of Bulgaria's great caricaturists (whose house I lived next door to recently) but this is actually a painting he did on wood in Berlin in 1927

Public Interest - how innocent we were

One of the really difficult things for people of my generation is to come to terms with is how venal our legislative and legal systems have become (the bankers are simply part of a complex equation). The post-war generation to which I belong was brought up with the tenets of liberal democracy - some of which you will find set out at page 6 of this paper of mine. We believed that government was responsive to public concerns; that our civic input (in whatever form - letters; political membership; political involvement and argument - not least as local councillors) would ensure the system operated in the public interest. The evidence we have seen in the last decade has, however, has forced us to the reluctant conclusion that laws are created generally to protect the rich and powerful; and that the judiciary (despite or perhaps because of its claims of impartiality) is in fact not blindfold but highly susceptible to the interests of the rich and powerful. I leave open the question of whether this is a new phenomenon - or simply one which less deferential a more educated and connected society has become aware of.
The examples I quote are first from a bastion of social democratic values (Canada) and then the better-known practitioner of venality and hypocrisy which happens to be its southern neighbour.The first article identifies the huge inequities in how banks are treated – compared with the rest of us.

They are often protected (from foreign competition); subsidized (for example, in the way capital gains tax worked), and bailed out when needed. But what do banks actually do, in return for all that money? What is their actual economic function?
Let’s cut through the mystification of high finance, and ask that simple question: What do banks do? What do bankers actually produce?
The practical answer, in concrete terms, is simple: nothing. They produce nothing.
In that, the banks are different from the real economy, where hard-working people like you and I produce actual, concrete goods and services that are useful.
Banks, and the financial sector more generally, don’t produce goods and services that are useful in their own right. They produce paper. And then they buy and sell paper, for a profit.
Here’s a little economic lesson. You can’t live off paper. You need food, clothing, and shelter to survive – not paper. And since we are human beings, not animals, we need more: we need education, and culture, and recreation, and entertainment, and security, and meaning. Those are the fundamentals of economic life. Not paper.
What is paper actually good for? You can wallpaper your house with it. You can line your birdcage with it. In a pinch, you can wipe your butt with it.
But other than that, paper is just paper. It is not concretely useful in its own right.
How do banks create that paper? Let me put it bluntly again: They create it out of thin air.
It is not an economic exaggeration to state that the private banking system has the power to create money out of thin air.
Not cash. Not currency. Only the government can produce that.
But most money in our economy – over 95% of money in our economy – is not currency. Most money consists of entries in electronic accounts. Savings accounts. Chequing accounts. Lines of credit. Credit card balances. Investment accounts.
In that electronic system, new money is created, not by printing currency, but through creating credit. Every time a bank issues someone a new loan, they are creating new money.
It’s like a big magic machine, creating money out of thin air. And it’s called the private credit system.
One of my favourite economists, John Kenneth Galbraith, put it this way: “The process by which private banks create money is so simple that the mind is repelled.”
How do they do it? They start out with some capital. Let’s say a billion dollars. Then they lend it out. Then they lend it out again. And again. And again and again, 10 or 20 or 50 times over.
Each new loan, is new money. The economy needs that money, let’s be clear. Without new money, we wouldn’t be able to pay for the stuff we make. So we’d stop making it, and we’d be in a depression.
So the creation of new money (or credit) is as essential function for the whole economy. It’s like a utility. But we’ve outsourced that crucial task to private banks. We’ve given them a legal license to print money – and the freedom and power to do it on their own terms.
Their goal is not providing the economy with a sensible, sustainable supply of the credit we need. Their goal is using their unique power to create money out of thin air, to maximize the profits of the banks, and the wealth of the shareholders.

The second article I owe to a site - Byliner - which offers simply good writing. Out of curiousity I hit this piece which tracks how the American judicial system treated someone outraged with the secretive and iniquitous way heritage land was being sold to commercial gangsters.

WHEN DECHRISTOPHER’S CASE finally went to court last March, 2,000 protesters showed up. So did the Salt Lake police department, federal marshals, and Homeland Security agents. The trial lasted three days, with Judge Benson making a few things clear up front. First, DeChristopher’s attorneys wouldn’t be allowed to use a necessity defense—the argument that he had to disrupt the auction because of his beliefs about climate change (he had successfully bid for about 12 lots of land with no intention of paying). Second, the defense couldn’t bring up the fact that DeChristopher had actually raised money to buy the land; the court’s view was that, by then, the fraud had been committed. Finally, the defense could not inform the jury that past bidders had not been able to pay for their parcels either. Shea and DeChristopher’s other attorney, Ronald Yengich, were left to argue that their client had acted on impulse and hadn’t intended to disrupt the auction. The prosecution didn’t have much trouble refuting this, given DeChristopher’s public statements, and it came as little surprise when, on March 4, DeChristopher was convicted

You can imagine the behind-the-scene discussions which went on to fix that!

Culture corner
And, after these photos of reality, let's have a fix of something more worthwhile in these latest paintings from Its about Time

Identifying the real culprits

I haven’t said anything in the blog yet about the Occupy Wall St protest movement - which is most remiss of me. An article in what is a new magazine for me – Orion Magazine – expresses the issues very well

What is needed is a new paradigm of disrespect for the banker, the financier, the One Percenter, a new civic space in which he is openly reviled, in which spoiled eggs and rotten vegetables are tossed at his every turning. What is needed is a revival of the language of vigorous old (US) “progressivism”, wherein the parasite class was denounced as such. What is needed is a new Resistance. We face a system of social control “that offers nothing but mass consumption as a prospect for our youth,” that trumpets “contempt for the least powerful in society,” that offers only “outrageous competition of all against all.

There’s also a good post (and discussion) on the Real Economics blogsite And Jonathan Scheel has an eloquent piece in The Nation on the subject.
And yesterday I came across the website of the marvellously-entitled Centre for the Study of Capital Dysfunctionality – set up before the global crisis at the London School of Economics by a financier who simply became disgusted with his experiences and now writes and talks eloquently about alternative systems.
He and others produced a book about the Future of Finance last year which (like a lot of others I suspect) I missed. It can be quickly downloaded hereand should be read in conjunction with the report which came from the Vickers banking commission which was set up by the UK Government in 2010

The Occupy Wall St movement is overdue (see my blog the Dog which didn’t bark) and is explained by two simple emotions – anger and impotence. Anger at the greed and wealth of a tiny group of financiers who provide no service but simply use invented money to sustain a sick way of life for themselves which impoverishes the majority. And impotence at a political system which not only gave them this opportunity in the first place – but shows no sign of wishing or being able to rein them in.

A recent, mainstream American book Winner Take All – how Washington made the rich richer and turned its back on the middle class explores these questions. How did the incredible inequalities arise? And why is the American political system acting so perversely – with voters apparently supporting the parties whose governments dismantled the regulatory systems and created the mess? The book shows quite clearly that American government is in bed with corporate power. No surprise there for many of us in Europe – but a bit of an eye opener for the average American reader whose access to such books is fairly limited. An excellent review (and discussion thread)summarises thus -

The book downplays the importance of electoral politics, without dismissing it, in favor of a focus on policy-setting, institutions, and organization. First and most important – policy-setting. Hacker and Pierson argue that too many books on US politics focus on the electoral circus. Instead, they should be focusing on the politics of policy-setting. Government is important, after all, because it makes policy decisions which affect people’s lives. While elections clearly play an important role in determining who can set policy, they are not the only moment of policy choice, nor necessarily the most important. The actual processes through which policy gets made are poorly understood by the public, in part because the media is not interested in them (in Hacker and Pierson’s words, “[f]or the media, governing often seems like something that happens in the off-season”).
And to understand the actual processes of policy-making, we need to understand institutions. Institutions make it more or less easy to get policy through the system, by shaping veto points. If one wants to explain why inequality happens, one needs to look not only at the decisions which are made, but the decisions which are not made, because they are successfully opposed by parties or interest groups. Institutional rules provide actors with opportunities both to try and get policies that they want through the system and to stymie policies that they do not want to see enacted.

What is particularly interesting about the review is that it sets the book in the wider context of the malaise of American academic social science -

There is no field of American political economy. Economists have typically treated the economy as non-political. Political scientists have typically not concerned themselves with the American economy. There are recent efforts to change this, coming from economists like Paul Krugman and political scientists like Larry Bartels, but they are still in their infancy. We do not have the kinds of detailed and systematic accounts of the relationship between political institutions and economic order for the US that we have e.g. for most mainland European countries. We will need a decade or more of research to build the foundations of one.
Hence, while Hacker and Pierson show that political science can get us a large part of the way, it cannot get us as far as they would like us to go, for the simple reason that political science is not well developed enough yet. We can identify the causal mechanisms intervening between some specific political decisions and non-decisions and observed outcomes in the economy. We cannot yet provide a really satisfactory account of how these particular mechanisms work across a wider variety of settings and hence produce the general forms of inequality that they point to. Nor do we yet have a really good account of the precise interactions between these mechanisms and other mechanisms.

One of the discussants in the discussion thread on the book review asked what the European literature said on the matter. The only response was a reference to Wolfgang Streeck’s new book on Germany - Re-forming Capitalism; institutional change in the German political economy. Earlier this year I mentioned a couple of recent publications which have exposed the extent of big business influence on the EU – Bursting the Bubble (Alter EU 2010); and Backstage Europe; comitology, accountability and democracy by Gijs Jan Brandsma.
The painting is (of course) by Georg Grosz - Eclipse of the sun - about the military-industry complex

asking the tobacco companies to draft public health policy

You are all probably as confused about the Greek "bailout" and associated BRIC problems as I am. I have just read the clearest exposition - in Social Europe of all places. The article suggests that the 200 billion euros net support which the Greek economy has apparently received is equivalent to a "reverse wealth tax" and asks why the alternative policy of "direct bank support through bank recapitalisation" was not considered.

It is a much more effective and cheaper solution than a full guarantee of sovereign debt. The taxpayers could get bank equity in exchange for their money. If this crisis is like others, there is a chance that share values recover and taxpayers break even in the long run. The 2007-2009 crisis has shown that governments are indeed able to contain a banking crisis by resolute action like forced recapitalisation and temporary nationalisation of banks. The better prepared we are for such an event the smaller will be the impact on the economy. Europe’s governments have had plenty of time to prepare over the last year, so why was such a solution not even considered?
The reasons are political. Such a solution would have upset powerful vested banker interests, even though it would have imposed the costs on those most responsible for the massive credit misallocation.
A strong negotiating position of politicians confronts two important obstacles:
• First, the finance ministry and banking authority typically lack competence and information in order to prepare contingency plans for bank recapitalisation. There is an acute skill shortage in the finance ministry and what talent there is meets a wall of secrecy put up by an uncooperative banking sector.
• Secondly, the strong lobbying power of the banking sector deters politicians from preparing in advance and taking risks in favour of the taxpayer.
Conflicts of interest between the politicians and the bankers are rampant.
After the disastrous risk-management performance of many bankers revealed in the 2007-2009 banking crisis, it is surprising that the same people still enjoy great influence in the policy process. The consequences are predictable. If you ask a frog to come up with a plan for draining a swamp, you are like to end up with a proposal for more flooding.

The painting is a Nenko Balkanski - a favourite of mine - to be seen at the Kazanluk Gallery