Dire Straits

A culture of denial and greed has led modern day capitalism to the brink of ruin

In what is being described by some as the largest corporate scam ever, US lawmakers “rammed” through Congress a $700 billion dollar rescue package that is hoped will stabilize financial markets in the US and abroad. Wall Street experts warned that the financial system is on the brink of collapse, and the government must step in with what may be the biggest taxpayer bailout in history.

There was widespread opposition to the proposed $700 billion bailout of the financial sector in the US. Nationwide polls of the general population indicated between 70% and 75% were against such a plan. In addition to this, two hundred academic economists signed a petition urging careful consideration of any effort to solve the current financial crisis.

Even some staunch supporters of free market capitalism were wary of the bailout plan. As one observer duly pointed out, “the major effect of this bill is that it is causing fiscal conservatives to blow gaskets. They can't accept the fact that the free market is what caused this mess."

Despite overwhelming opposition to the bailout, the US Senate passed it with flying colors last Wednesday, with the House of Representatives swayed to voting for it a few days later. In effect, both the bill that was shot down and the bill that passed were disapproved by the majority of the population. People had no say in the matter; the whole thing was rammed twice through Congress in three days. Some observed that even if the House of Representatives had refused it for a second time last Friday, it would probably have been rammed through again in the course of the this week.

All this simply reinforced the view of many that what is happening in the US and elsewhere is simply corporate welfare that is being handed out to reckless big business interests. As one person wrote recently on Slashdot, “we have just been ripped off by the most elaborate con in the history of the world. We let a banker tell us ‘let us break the rules so we can make more money’, then when he did and the bottom fell out, we gave him even more money to keep him from going out of business.”

As a result, it should come as no surprise that many were not in favor of the rescue package as it is seen to be providing state aid to billionaires. As far as most people are concerned, big business should be left to sink or swim. After all, the US is a market economy and market forces are now such that those who took unnecessary risks will have to pay for their mistakes.

While this may satisfy the desire for justice on the part of many, some realize that a collapse of the financial sector would not only hurt rich investors, but it would devastate the global economy as well. This means those who were misled into taking on loans that they could not bear would also suffer. Thus, while recognising that Wall Street needs to be held to account for its mistakes, government action in one for or another is nevertheless imperative in order to protect those who were not responsible for the credit crunch.

The question is, naturally, what should be done. As Robert Weissman, editor of the Multinational Monitor points out, “financial firms have to be subsidized, but they also have to feel some serious pain.” Most are in favour of some kind of plan that would let big businesses fail but still protect homeowners and renters in homes that may be foreclosed on. As one person aptly put it, “generally you save the women and children first rather than the idiot with a shotgun that blew a hole in your lifeboat in the first place.”

Opposition to last week’s bailout package, therefore, was not entirely based on a “come what may” attitude. There were plenty of alternatives proposed that were less intrusive, safer, and better targeted to unfreeze liquidity so as to buy time in order to fix the real problem of reckless, unregulated trading in fraudulently valued housing derivatives. Yet these alternatives were all rounded rejected and taken off the table without further debate. This because they would have, in one way or another, imposed a regulatory regime that would have injected a measure of control and transparency in the way Wall Street does business.

The current financial mess is, in effect, the outgrowth of a quarter-century rollback of regulations that controlled what financial firms could and could not do, and protected financial titans from their own worst instincts. Hence, Weissman and others warn that this culture of greed will indubitably re-emerge with a vengeance unless regulatory standards are imposed to prevent a repeat of the current disaster.

Among the actions needed to reign in the excesses of big business is the problem of executive pay which has contributed to staggering wealth and income inequality at great cost to society at large. For this reason, many argue that there should be some penalty for executives who led their companies -- and the global financial system -- to the brink of ruin. In other words, a person shouldn't be rewarded for failure as is now the case.

Furthermore, financial sector compensation systems need to be changed so they don't provide an incentive for risky, short-term behaviour. One way to do this would be to introduce a cap on executive salaries and set tough limits on top pay. Also, there needs to be long-term changes in the bonus culture for executives and traders. Not only should bonuses be more modest, they should be linked to long-term, not year-long, performance.

As the subprime mortgage crisis began to unfold, many economic insiders were aware of the problem but were uncertain as to its extent. This is because the complexity of the system made it difficult to discern which institutions held what; the full extent of the damage is only now being revealed.

Because of this, many feel that true reform can only come about if there is better disclosure about what's going on. Moreover, stricter regulations are required in order to make it harder to engage in complicated transactions. Ultimately, this would mean the prohibition of some financial innovations altogether, and require that financial institutions properly fulfill their core responsibilities of providing credit to individuals and communities.

Finally, instead of tax incentives and tax cuts many see that what is desperately needed at this point in time is the introduction of a new tax. This tax would be a tax on investments, akin to the Tobin tax. The Tobin tax is the suggested tax on all trade of currency across borders. Named after the economist James Tobin, the tax is intended to put a penalty on short-term speculation in currencies. The original tax rate he proposed was 1%, which was subsequently lowered to between 0.1% and 0.25%.

The difference between the Tobin tax and a more general tax on investments is that it would not only include currency transactions, but all types of investment transactions, including the buying and selling of stocks and bonds. The ultimate purpose, however, would remain the same: to curb short-term speculation. At the same time, it would introduce a much needed revenue stream for governments which have suffered over the past three decades from the influence of those who have been preaching that big government is bad and small government is good.

Culture of Greed

Until now, the greed that lies at the heart of the investing industry which, in turn, has led to major panics on the world’s stock markets, has always been put down to the “rogue” activities of individual traders. Thus, in 1995 the first such major scandal occurred when Nick Leeson racked up losses of around $1.4 billion at Barings Bank. Leeson's actions ultimately led to the collapse of Barings. Convicted of fraud, he was sentenced to a jail term of six-and-a-half years.

The next such major scandal occurred in January of this year, when a broker in France carried out the biggest bank fraud in history -- a scam that cost France's second-largest bank $7.1 billion and sent shudders through the world’s financial markets.

It’s hard to believe that such traders could have acted without being noticed in one way or another. Unfortunately, business leaders are often like monkeys: hear no evil, speak no evil, and see no evil. As long as profits are somehow being made and business is booming most turn a blind eye to what is going on. The same also goes in the way some companies are run, Enron being a prime example.

But it’s not only the “fat cats” at the top that are guilty of such behaviour. Individual investors, including some most hurt by the credit crunch, are also to blame. Shareholders tend to be forgiving so long as they are making money. In fact, they tend to have more of a short-term mentality than the business executives who are now being blamed for the mess afflicting the world’s financial markets. In the end, however, the fall guys are usually the lone broker or rogue official who got carried away by it all; yet the underlying culture of greed remains unexposed.

What makes this particular financial crisis different from the rest is that the system is being exposed for what it is. Rotten to the core, no one individual can be found to take the blame. Not only this, everyone is exposed, which clearly shows that what is faulty are the very foundations of modern day capitalism itself.

Casino Economy

The stock market is often viewed as an indicator of the economy. However, the stock market has little to do with the health of an economy. On countless occasions “the market” reacted in ways that defied analyst’s expectations and sometimes ran counter to commonsense. Thus, when there was bad news which should have led stocks lower, share prices actually went higher; the reverse was also frequently the case. Not only this, the dictum of when equities falls bonds rise was also shattered: there were a number of times when bonds and stocks rose and fell in tandem.

Nowhere is this disconnect between the stock market and the real world apparent than with what happened last week in the US. Corporate media the world over issued forecasts of doom and gloom if the proposed financial rescue package of $700 billion dollars wasn’t passed by American lawmakers. As if to reinforce this message, stock markets plummeted when on Monday the House of Representatives actually rejected the bill. Yet when on Friday an amended version of the same bill did make it through Congress, stock markets finished even lower than on Monday.

The same could be said of other so-called market indicators. At one point, the high price of energy was seen as the catalyst which would lead to the collapse of the world economy. Many believed that the world economy wouldn’t be able to withstand a high oil price above $100 dollars a barrel. The price of oil surged past this level, yet the global economy appeared to carry on. Not only this, but it has recently come down sharply and is once again below $100 dollars a barrel. However, no one appears to be talking about oil anymore, and the boom and bust scenarios based on the price of black gold appears to be no longer of much concern.

The same also holds true for the US dollar. Many feared a downward spiral for the American currency if it sank to below $1.50 against the euro. After going past that level the downward spiral had yet to start. Since then, the American currency has appreciated. As with the price of oil, people no longer seemed to regard its movement with much significance.

Stock markets and other investment vehicles have nowadays become nothing more than glamorized betting shops that are increasingly divorced from economic realities. Hence, in the past people owned shares because of the real value of a company; they knew what the company produced, had confidence in its products and services, and the stock was valued as a long-termed investment. In the “good old days”, investing was a science, and investment brokers had to know not only how to read a balance sheet, but also had in-depth knowledge of the companies they were dealing with.

Nowadays, the situation is completely different. Investments are primarily based on a perception of value, and are thus highly speculative by nature. Many don’t know how to read a balance sheet, have only a passing knowledge of the companies they deal with, and undertake transactions with the view of generating a quick profit. Likewise, people invest in stocks as a way to increase their savings in the short or medium term, and have little idea of what they are actually investing in. An extreme example of this is the phenomenon of the day trader who sits in front of his computer and basically plays with stocks as if he was betting on a huge wheel of fortune in a casino economy.

As a result, the perceived value of a company based on its stock price has been divorced from economic reality. Well-established companies have been led to ruin not because their products or services were bad, but because of the speculative movements of its share price. Conversely, weak companies are propped up as valuable assets solely because of the speculative nature of their share price.

A prime example of all this was the dot-com bubble of the late 1990s. Then, internet-based companies which produced nothing except elusive dreams saw the value of their stocks rise to amazing heights and out-perform well-established companies with sound business models. While there were a few voices in the wilderness issuing warnings of doom and gloom, these were largely ignored. Instead, people chose to believe in the hype of a “new economy” in where the rules and traditional practices have changed. When the bubble burst with the start of the new century, however, many found to their shock and surprise that the rules and traditional practices haven’t changed at all. In the end, the new economy was shown for what it really was: a sham. Meanwhile, the “old economy” simply swept up the pieces; many first time and inexperienced investors were left holding over-valued and useless shares.

The subprime mortgage crisis, which in effect triggered the present financial mess, was simply the continuation of this very same process. The large investment banks which are now crying out for help knew very well what was happening. As Maria Bartiromo, a finance television presenter for MSNBC known to many as “the money honey”, revealed last year on the McLaughlin Group when commenting on the credit crunch: “[…] easy money was all over the place, but that was a bubble. We knew that couldn't last.”

These words are quite revealing. It shows that leading investors and financial propaganda artists such as Bartiromo were quite well aware of what was going on. As Robert Weissman explains, “Wall Street players knew they were speculating in a bubble economy. But the riches to be made while the bubble was growing were extraordinary.” Perhaps the money honey and others like her knew that it couldn’t last, but they surely didn’t pass on this information to their viewers who were continually misled into believing that everything was fine. When the bubble finally popped, many were no doubt left asking Bartiromo: “so, where’s the money, honey?”

The cynical view of Bartiromo and others like her is typical of present-day capitalism which is built upon inflating bubbles and watching them pop. Hence, their attitude is one of “been there, done that”, now it’s time to move on. Ask for a bailout from the government, and then continue as if nothing happened. In effect, this is the main shortcoming to the US government bailout that everyone is worried about: there's no disincentive to engage in unreasonably risky behaviour in the future.

Such a cynical view is all the more repulsive as these same people who preach the religion of the free market also look upon government intervention as if it were something evil. Leaving everything up to the market, as if “the market” is somehow a self-regulating organism is a mantra that has been repeated not only throughout the established capitalist societies of the west, but to the emerging economies of the south and the former communist countries of Central and Eastern Europe. Consequently, this has led to oxymoronic political beasts such as the Liberals in Hungary who have publicly acclaimed that government is a bad manager of economic affairs and that these affairs should be left in the hands of private enterprise. And yet, it is now bad manager governments which are being asked for help by private enterprise for the damage done by self-regulating free market wheelers and dealers.

The Corporatist State

Apart from the obvious economic fallout from the present financial mess, some view the American bailout plan with trepidation for it takes the US one step closer to fascism. Accordingly, this argument holds that there are two main elements to fascism: economic corporatism in where the state bestows the running of the economy to a handful of corporations which, in turn, feed off the state in the form of corporate welfare; and a police state in which domestic and foreign policy are both driven by the business strategy of these same corporations.

In many parts of the western world, the police state aspect to fascism has already been achieved through the introduction of “anti-terrorism” laws. These appear to be designed foremost to prevent change from within (i.e., mass demonstrations, uprisings, and revolutions) through the use of fear. As an old Chinese saying goes, “kill a chicken to keep the monkeys quiet.” In the UK, for instance, pre-charge detention is used for individuals suspected of terrorism. Pre-charge detention refers to the period of time that an individual can be held and questioned by police before being charged with an offence. Under current anti-terror laws in the UK, a person can be locked up and repeatedly questioned by police and not even be told why they are there. A person held in pre-charge detention can be kept for a maximum period 28 days without being charged; this is seven times the limit for someone suspected of murder.

As far as some are concerned, the $700 billion dollar rescue package represents a distinct movement in the direction of fascism’s second element, the further encroachment of economic corporatism, in where the state manages for the good of corporations and vica-versa. The bailout plan, therefore, is a clear demonstration of how the interests of private corporations in government are being promoted over interests of the public. As one observer noted, “we are indeed backing into something that is fascism.”

The danger of corporatism to democracy is nothing new and was apparent long before Hitler or Mussolini took to the stage of world politics in the 1920s and 1930s. The campaign by Teddy Roosevelt against the system of trusts which controlled the US economy in the late 19th century were intended on curbing the excesses of capitalism and bringing the robber baron era to an end. It was the undermining of these measures toward the end of the 20th century that led to a re-emergence of both the robber barons (in the form of highly paid CEOs) and trusts (huge multinationals created in response the notion of “globalization”) which, in turn, has led to the present state of affairs.

The individual most responsible for the re-emergence of the robber baron era in the US is none other than the former Chairman of the Federal Reserve Alan Greenspan. Not only was he in favor of subprime mortgages and saw nothing wrong with using them as a financial instrument, he also expressed views critical of the anti-trust efforts of the late 19th century. Hence, through his position of power and influence he helped to nurture the bubble which had now popped. This was done by allowing "competition" among banks, securities companies, and insurance companies, which in turn lead to the rise of mega-institutions that are so large and intertwined that they can't be allowed to fail.

Those who attempt to draw parallels between the fascism of the past (as it existed in Italy and Germany) with the corporatism of the present, however, fall into the trap of misunderstanding some fundamental differences between the two. Many make this mistake by ascribing the notion of a “corporatist state” to Mussolini’s concept of fascism. The corporatism that is often associated with fascism refers to civic assemblies that represented early guilds. In this manner, fascism attempts to create a modern version of feudalism by merging such "corporate" interests with those of the state.

This form of corporatism is not the same as modern use of the term of corporatism, however, which is connected with the specific notion of a business corporation. Indeed, modern commercial corporations contradict much of what fascism stood for. The internationalist aspect of multinational corporations runs counter to the nationalist tendencies inherent in fascism. Along these lines, the internationalist character of modern-day globalization has more in common with communism than fascism. This partly explains why it was so easy for those in positions of power and influence in Central and Eastern Europe during the late 1980s and early 1990s to make the switch from communism to capitalism.

The importance of this with relation to what is going on at present is that the problems afflicting the world’s financial markets are in part attributable to the free-for-all bonanza which was unleashed with the collapse of the Iron Curtain. As Alan Greenspan admitted in his memoirs, what enabled the relative boom of the 1990s was the easy money which was made from the collapse of the former Soviet Empire: access to cheap commodities (including oil); a corrupt process of privatization launched by cronies of the capitalist west, which netted giant multinationals valuable assets at a fraction of the cost; and expensive modernization and renewal projects (including the “need” for new military weaponry) which helped to prop flagging western industries.

In essence, part of the problem of the present is that the post cold war plunder by the west has now more or less run dry. The casino economies which were spawned due to a combination of new markets, greater access to cheap capital, and the influx of new technology have reached their limits. The very same inability to reconcile economic reality with ideological dogma, which led to the fall of communism in Central and Eastern Europe two decades earlier, is now threatening the capitalist countries of the western world.

Although there are many differences between the crises which had led to the implosion of the communist states of Central and Eastern Europe and the present crisis which threatens the capitalist west, the undercurrents driving them are nevertheless the same. As some see it, the solution should be therefore similar: communism is dead; it’s now time to bury capitalism.