Breaking the Oligararchs

Capitalism is as unsafe as the Bank. --G. K. Chesterton

Simon Johnson knows something about banking. In particular, he knows when banking goes wrong. As the former Chief Economist of the IMF, it was his job to know that. Nations that had gotten themselves into trouble would come to him hat in hand and ask for a bailout. He knows why these nations get into trouble, for the trouble is always the same, and he recounts the troubles in an article in the Atlantic Monthly. The trouble with these economies is oligarchy, the control of the many by the few:

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.
The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

We have normally associated these conditions with “Banana Republics” and third-world kleptocracies. But these nations were only doing on small-scale what the American Bankers were doing on a grand-scale:

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 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.

Remarkably, the solution Dr. Johnson advocates is exactly the same one that Distributism does, break up the oligarchies:

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.
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.

As things now stand, the Obama Administration is mortgaging the future to restore the oligarchs to their positions of power, in the naïve belief that only oligarchy can save us. Even if the plans were to work, the best they could do is restore the conditions that created the current crises. Why this failure of vision? Johnson identified the reason last night on the Bill Moyers Journal:

I think the banks have control of the state, Bill. Not the state control of the bank. If the state had control of the banks, the banks wouldn't be able to turn around and say, no on your Chrysler deal and no way on modifying the rules about mortgages and allowing bankruptcy judges to modify mortgages in bankruptcy. These are two hot issues this week. The banks are saying no to the government.

While Dr. Johnson does advocate the Distributist solution, his analysis does not go as deep as does that of the Distributists. G. K. Chesterton identified the problem: Capitalism is as unsafe as the Bank. Modern banking is an inherently unstable business; you borrow short to lend long, which as any investor can tell you is a recipe for disaster. The problem is exacerbated by the fractional reserve system: the banks take the depositor's money and leverage it by printing 10 times the amount to lend out. This makes it a very profitable business in good time, but it also means that even a small amount of defaults can wipe out a bank's capital. Further, since the banks can print such enormous amounts of money, we need a “central bank” to control the level of lending with all sorts of Rube Goldberg financial contraptions. On this inherently unstable financial base rests the entire system of modern capitalism.

Since the banks do hold the system hostage, they can get whatever they want from the government. In fact, the more dire their situation, the stronger their bargaining position. They demand—and get—a veto power over the government; they are, in effect, the effective rulers of the state. But it is a state that is no longer sustainable. Johnson makes it clear that the oligarchies must be broken before economic order can be restored.

And if they are not? Simon Johnson leaves us with a dire warning:

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.


JimB Saturday, April 25, 2009 at 12:45:00 PM CDT  

It's so ironic that The Fed, Treasury Dept. & Wall Street CEO’s and their Harvard “quants” with their economic neutron bombs have done a more thorough job than what Osama Bin Laden’s stated goal was in attacking the WTC - which was to bring down the entire financial system.

Old Fashioned Liberal Saturday, April 25, 2009 at 6:43:00 PM CDT  

Are there ways to break the oligarchs and big banks without nationalizing the banks? Such as just letting the banks fail?

Septeus7,  Sunday, April 26, 2009 at 12:50:00 PM CDT  

Excellent post but I have a few more we may want clarify.

Quote from Dr. Johnson: “Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Over borrowing always ends badly, whether for an individual, a company, or a country.”

There are two problems with this statement even if in the general it is close to happens. What actually happens is that mostly privately controlled central banks issues too much credit to workers and businesses creating a self feeding bubble economy because creditors then turn around and speculate on markets using the interest collected from the loans.

Why do they always do this? Because they are in fact fulfilling a market function of getting credit to people that need credit and if the governments encourage this process they do so at the behest of the private financing capital.

I suggest Stephen Zarlenda's book the “Science of Money” for the bubble economies always being caused by PRIVATE bankers based on current market conditions.
But that leads us to the questions what market conditions make Banker over lend and workers and businesses to over borrow?

ANSWER: Underpayment of Labor. Since the owner of Capital always undervalue labor and fails to pay enough wages to clear the market lending to the illusion of overproduction and more often than not so vastly underpay workers that the worker is to borrow maintain basic living conditions i.e. living off credit cards for the working classes and the middle class is force to borrow to maintain middle class lifestyle due to the inflation cycle.
In short, depressions are caused by devaluation of Labor both physical and monetary. Now let’s start dealing with the real science of economics aka human ecological physics and sociology.
If wages are continuously cut as a cost to be reduced then worker can no longer function as consumers and savers. Now consumption will occur regardless up until the bubble pops but the more important factor is without savings capital formation is impossible long term. Why are savings necessary for capital formation? The answer has nothing to do with banking contrary to monetarist doctrines. People falsely think capital formation is the result of business getting credit or using saved revenue to invest in R&D or new equipment, etc….
Now while in a bubble Banks do not loan to productive business because the lack of profit relative to speculative returns but prior to the bubble businesses won’t have that trouble. The question of limited credit for capital formation based on the lack business savings therefore cannot be the main issue regarding why savings are needed for capital formation.
Monetarists confuse capital formation with capital acquisition i.e. they think that if a business purchases in new capital goods then use that capital to lower the cost of production and produces greater revenue and reinvests in more capital equipment and R&D that cycle is capital formation. That is wrong.
In the real world, Capital formation is not simply capital acquisition used in an industrial production cycle but involves three interacting processes. 1. Capital creation 2. Physical production, and 3. Capital acquisition. When you understand the true process of Capital formation which is social and physical you can begin to understand why savings are necessary for capital formation.
Step 1. Capital Creation:
The process of capital involves creative conception, engineering design, and entrepreneurship.
Inventor and Engineers who are the ones are the who envision creative concept from science in order to apply physical principles to a new tool/machine design but what does it take make a good inventor? It takes savings by individual families. Why? Because without family savings our future inventor or engineer cannot go to school and learn the necessarily scientific, cultural, and social concepts needed to create good inventions. Why? Because an invention has to serve a social function, create a cultural improvement, and be based on sound scientific (physical) principles otherwise it won’t work. Now if a child can’t go to school and is forced to support the family income (because father’s wages are too low) by going to work in a factory for 18 hours a day he can’t participle in the cultural and social process of invention. The Capital Owner has stolen the freedom of the worker’s children to develop their true human potential.
The entrepreneurship basically can’t exist because; 1. With no education that allows him to understand what risks and what potential market could be created for a new product, 2. With no infrastructure he can’t to transport himself or his ideas and create distribution networks, 3. and no seed money he can’t get investors.
Step 2. Physical Production.
Physical production involves labor, capital, materials, and infrastructure. Once again underpayment destroys all 4 because; 1. Low wage workers can’t generate the tax revenue needed the infrastructure to transport material cheaply and electrical/ water system needed to operate capital machinery, 2. Families without savings can’t send their children to trade school so the quality of workmanship declines 3. The result poor labor and infrastructure wastes material and destroys capital.
Step 3. Capital Acquisition.
The process involve technical knowledge of the production process in order know what capital goods are needed, affordable and reliable means of transportation, integrating the new capital into process of production. Once again without high wages that means no skilled workers or infrastructure needed to make capital acquisition feasible.
So underpayment physically destroys the “ecological” process that is needed for human society to have industrial capitalism.
Real economics doesn’t care about so-called market prices unless they shut down the necessary physical process of human development in the physical sense. Labor isn’t doesn't value because a market price for it can be determined for it. Labor has value when it has utility towards physical and cultural contribution needed for continued human existence.
Marginal Utility and the Labor theory of value are both nonsense. Productive Utility is the only scientific definition of value because it only definition of value that doesn’t reduce to self-contradictory intangibles such “ the feelings of pleasure and pain” or the “the satisfaction of needs” but places value as a Gestalt effect arises from the qualities of phenomena of human existence not effect of quantities of sense perception. Any other definition will result in the dehumanizing assumptions of the Behaviorist School and self-contradiction. Marginal Utility= Marginal Quantities of quantifiable quantities based on quantifiable sense perceptions of quantifiable quantities of an individual quantity of an individual nerve firings= idiocy.
Labor Theory of Value= Value=Calories Burned/desire for object = more idiocy.
Why do Capital Owners always underpay labor? Because as Distributism explains the separation of ownership from work destroys the ability to understand the value because the harmonic relationship between the two has been destroyed. Therefore if you distribute productive property ownership as too as many people much possible i.e. decentralize and localize capital you create what Henry C. Carey (not a Distributist but a good economists who might as well have been) called the harmony of interests.
Quote from Dr. Johnson: “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….
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”
I’m thinking that is close to right solution but a few things need to be pointed out. First, it not a problem of just a few big banks but the entire Federal Reserve System needs to be nationalized. The reason why the banks are in trouble is because they are creatures of the post Bretton Wood's financial system and the system died in August of 2007. It died and it’s not coming back. The blow-up doll popped and the hanky-panky is over and we need a real economy now.
Second, the mere of act of nationalization won’t help. You must have a goal in mind for nationalization otherwise you’ve simply handled the Federal government a dead corpse full of toxic assets making them the taxpayer’s problem. You haven’t fixed anything.
Here’s what you do. You nationalize the entire system and here’s how:
1. Declare a freeze on derivatives and other toxic assets. No more selling and trade paper that you don’t what it worth.
2. Reinstate the Glass-Steagall act firewall between commercial banking and so-called investment banking i.e. go back nature exchanges and halt the unnatural exchanges.
3. Place the commercial banks under Federal Protection so that necessary economic functions for society remain intact.
4. Freeze all foreclosures on primary residence for the duration of the crisis.
5. Start bankruptcy reorganization and triage the debt (what has to written off, what has to be paid, and what can wait) and the courts the settle the issues over the coming years.
6. Break up the banks into smaller ones and regulate the finance industry.
7. Repeal sections of the Federal Reserve Act and restore the issuance power to the Congress.
8. Force the nationalized Federal Reserve now under Treasury to issue .5%-0% loans for productive activities only under a new reindustrialization recovery program. If people want to speculate let them do it they own money and not the National Bank’s money. Target Cooperatives and force business away from the Sloanist model into a more Distributist one i.e. Worker-Owner.
That’s it and crisis is over.

Quote Old Fashioned Liberal : “Are there ways to break the oligarchs and big banks without nationalizing the banks? Such as just letting the banks fail?”

Not under the Constitution which tells Congress to establish national rules regarding bankruptcy and this includes the financial industry. Congress is too establish the means to spend credit into circulation and if bank fails while operating within our national system it subject by law is placed under Federal bankruptcy protection which means it is subject the Federal government’s decisions regarding its holdings aka nationalized.
The American Constitution thank God does not permit a “Free Banking” system where International Bankers can dictate terms to the Federal Government like the central Banks of Europe.
Under the Libertarian model all the good assets would looted and taken out the Western Nations for investors to find better banks most likely the Islamic world (flat fee system) and entire western world would be left all zombie banks with nothing but debt. At some point the government would collapse or go begging to the IMF and be placed under its feudal conditionalities forcing all taxes to paid into the private International Banksters. In other we would in the exact same place we headed are now but only much faster.
Basically libertarians (except Georgists) are right wing Corporate Marxists (all property should be own collectively by consumers/people via the corporation) who say that the way to stop centralized global government is to destroy national sovereignty which doesn’t make any sense but that is what they believe.
The problem is seem to have forgotten the Constitution grants sovereignty to the Federal government and therefore don’t have to put ourselves under the thumb the nation crushing IMF and World Bank although that’s we seem to do doing.

bugeaters,  Monday, April 27, 2009 at 1:18:00 PM CDT  

2 things
1. Some more Chesterton: I could do a great many things before I came to definitely anti-social action like robbing a bank or (worse still) working in a bank.
2. while skimming this article i read "rhubarb financial contraptions" instead of Rube Goldberg - seems either one would work after re-reading it.

Anonymous,  Friday, May 1, 2009 at 7:04:00 PM CDT  

Is it possible to create a decent standard of living for all citizens and at the same time have people inspired by "greed" in order that they be as productive as possible ?

There must be some way of having the oligarchs striving for a great society instead of being motivated by complete selfishness .

I thought it was Henry Ford who said that great riches were more of a heavy responsibility to the nation than a luxury.

I believe the problem lies in who are the oligarchs and what their motivation is ..... rather than that oligarchs exist.

Aaron Thursday, May 7, 2009 at 1:08:00 PM CDT  

"I believe the problem lies in who are the oligarchs and what their motivation is ..... rather than that oligarchs exist."

It's time to dust off Machiavelli and develop a good theory of social class. Reading Machiavelli will cure your of any desire for liberal democracy and toward republicanism.

In every society there are 3 forces at to influence politics.

The One i.e. Autocrat of Tyrant.
The Few i.e. Aristocracy or Oligarchy.
The Many i.e. Democracy or Ochlocracy.

So which one what do you want?

Answer? You want to decentralize not just property but political power as well. The entire idea of the separation of power comes from concept and is basis of republicanism is that only a balance of power can maintain the general welfare.

The problem is that the Congress doesn't represent the people it represents the lobbyist paid for by the Banking Oligarchs.

The problem with the President is that he doesn't represent an independent leader working on behalf of the nation but is a pawn of Banking Oligarch because of the political machine and his advisors like Larry Summer.

The best argument for Monarchy has always been that a King tried to his lands and his people will form a natural interest toward those lands and people and be less inclined toward letting Imperial Oligarch loot them.

In fact, that is how the Modern Nation-State arose. It was a kind of pact between the great Louis XI and people of against the feuding Oligarchs and uniting the country as Nation for the time.

While I'm not a monarchist, I have to say that maybe Hamilton's idea of "elected President for Life" which got him accused of being a monarchist wasn't as bad of an idea that people think.

The now to the question of the "Few" You can have Aristocracy or Oligarchy.
Aristocracy has an attachment to place and limited ambition like the founding families of old fashion city-state. Those old families dominated the political and business of town because they have been their longer and built more wealth than newcomer but they a desire to make their lives there and keep their city alive.
The Aristocracy is the original city builders who understand the principle of agape and the commonwealth or General Welfare.
An Oligarchy on the other hand are interconnected families of insane imperialists who loot town to town and nation to nation intermarrying with the original Aristocracy into order to gain control so that they can add another town to the family Empire. They don't care about the places or people the control they just want more power and thus are always interesting in the Occult, Satanism i.e. power from deception using symbols as psychological warfare.

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