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The Real Crime: Concentration of Power

Banksters Comments Off

Jul 222011

By Prof. Ralph Gomory
Global Research, July 21, 2011
We are missing the lesson of the current British outrage over Murdoch just as we missed the lesson of the financial crisis in America. Was the real crime in England that employees of the News of the World illegally hacked the cell phone of a missing girl? Was the real financial crime in America illegal acts such as Ponzi schemes or insider trading? The answer is no in both cases. The real crime in England was legal, not illegal; it was that one man had the power to influence large parts of the British parliament and was credited with a major influence in electing whichever government he favored. No one in government dared to cross him until an emotion-provoking illegal act unleashed a public outcry. That outcry has, at least temporarily, liberated the members of Parliament from their fear of being smeared by Murdoch’s newspapers if they dared to be hostile to his interests or beliefs. Was the real crime in America illegal acts? No. Despite the press devoted to Madoff, the real crime, here as in England, was legal. Selling subprime mortgages to people who could never pay them back was legal. Rating agencies certifying to the high quality of the resulting worthless securities was legal. The whole web of interacting CDO’s was legal. It was the legal, though strongly unethical, actions of a powerful Wall Street dedicated to self-enrichment at any price that brought down the U.S. economy. And, though we are still far from recovering from that disaster, the power of money has prevented any fundamental reform of the financial sector. In both countries, the real crime is the concentration of power that allows these things to happen. How Power is Used Power can be exerted through both the stick and the carrot. In England, members of Parliament feared being smeared in the powerful Murdoch newspapers, and they also knew that if they accommodated his views or interests, they could profit from his support. In the United States, members of Congress understand that Wall Street money and corporate money can either be used to defeat them or to support their campaigns. They also know that if they are sufficiently influential in the right direction, lobbying jobs that are far more financially rewarding than their present occupation await them when they retire from Congress Money can extend its power to other parts of government, too. In England, part of the police force became a Murdoch ally in ferreting out more news about important stories. In America, regulatory bodies, established to protect the public interest, become blind to risky behavior and kind to the industry. And these examples are some entries in a long list of possibilities. The Tyranny of Government It has been common throughout history for the concentration of power to be in governments, often but not always monarchies or dictatorships, and for the leaders of such governments to act to enrich themselves and their friends. In the years preceding the American Revolution, the British government’s restrictions on colonial manufacturing, the Navigation Acts, the tax on stamps, and the tax on tea, brought revenue to the British Crown and profits to British merchants and manufacturers at the expense of the colonies, but also produced a revolution. This tyranny by governments is the type of oppression which the Tea Party is constantly reminding us of, but today’s tyranny is of a different type. The Tyranny of Wealth The problem today is not the tyranny of government, but rather the concentration of money, and hence power, in Wall Street and in the largest corporations. And it is clear that enough money can buy political power. Both Wall Street and the major corporations have added to their strong direct effect on the economy a decisive effect on the actions of governmental bodies. It is their influence on the federal government that caused the regulatory bodies to stand back from regulation and encouraged the excesses of the financial sector in the years leading up to the crash. It was the federal government, led by Wall Street alumni, that rescued the financial institutions so that they are now posting record profits despite having impoverished the nation. It was the overwhelming lobbying power of the financial sector that prevented the passage of meaningful financial reform. The banks that were too big to fail are, with the concurrence of both political parties, now bigger than ever. And the actions of the U.S. Supreme Court, permitting the unrestricted use of corporate and Wall Street money for campaigns, are adding to this effect. The declared goal of most major U.S. corporations today is to make their stock as valuable as possible. As more than two-thirds of all stock is held by the wealthiest five percent in the country, this corporate goal amounts in practice to simply making the wealthy wealthier and increasing the extreme concentration of wealth and power that already exists in America today. And if making the stock as valuable as possible means sending jobs and technology abroad, while holding down wages at home, so be it. Yet it is to this same corporate leadership that the government turns for policy advice on how to create jobs and revive the economy. Today Today we have a concentration of wealth unmatched since the days immediately preceding the Great Depression in 1929. This wealth and power, concentrated in Wall Street and in the major corporations, is being used for the enrichment of the already wealthy. Unfortunately, that enrichment is one that does not raise all boats. As statistics clearly show, the big boats are rising rapidly and the small boats are not doing well. After the Great Depression, the U.S. government acted to lessen the power of concentrated wealth. It separated commercial from investment banking, insured bank deposits, enacted social security, and facilitated unions as a counter-force to corporations. It even became to some extent the employer of last resort. But the power of wealth today over both political parties is now such that new government actions are mainly words that cover real inaction, and even that limited action is often described as the actions of a too large and too powerful government. Today, the threat of tyranny comes not from the government, but from the concentration of wealth and power outside government, and from the influence on government of that great concentration of wealth and power. Ralph Gomory is Research Prof. NYU, Pres. Emeritus, Alfred P Sloan Foundation, Former IBM SVP Science-Tech

Protect the Bondholders

Banksters, The Establishment Comments Off

Jun 232011

By London Banker

The latest twists and turns in the Greek bailout fiasco have combined with a disturbing insight into FSA attitudes here in the UK to make me concerned that the system may now be distorted beyond peaceful reform. In fact, the danger of harmful destabilisation may be much worse because supervisor actions reinforce poor outcomes.

I am told that the primary objective of the ECB in Greece and the FSA in the UK is the same: Protect the bondholders.

Perhaps I am naive, but I did not realise that the FSA saw this as its primary mission until someone at the FSA bluntly told me so and someone in the markets confirmed it independently as only just and proper that this should be so.

If protecting bondholders from bad debt really is the primary objective of the supervisors, then the supervisors have become the problem. Capitalism does not work when capitalists are shielded from the economic risks that they freely undertake for profit when they enter into private contracts for debt finance. If bondholders know that they can get the ECB and the FSA to tilt the field in their direction, they have no incentive to balance yield against risk. They should just go for yield wherever they find it, and trust the ECB and FSA to ensure that they get their money whatever happens to the company, the depositor, the employee or the taxpayer who foots the ultimate bill for their yield.

If the objective of current official interaction with the markets is to prevent market determined outcomes, then we are in for a very ugly period of instability. The market is going to force a market outcome. The officials standing in the way can influence who profits from the market clearing, but the market is going to clear. If the officials have decided that the bondholders always win, then the rest of us will always lose. And once the rest of us – the companies, depositors, employees and taxpayers – remember that we have political power, then we will change the system.

This is what we are seeing in Greece on the streets. The Greek people have realised that the government works for the bondholders; the ECB works for the bondholders; the IMF works for the bondholders. They now understand what was not clear before: No one works for the people.

Strangely, this is also the realisation taking hold in Germany too. People are waking up to the fact that their national economic self-interest is subordinate to the claims of the bondholders. The German government’s priority is to protect the bondholders.

What scares me is that I naively believed the UK was different. I believed that the FSA was a market regulator that understood market operations. I am now under no such illusion. They have told me their job is to protect the bondholders. If that is true, then the UK is no different than Greece, just slightly behind Greece on the arc of history.

It used to be that the role of the state in financial market regulation was to ensure efficient market operations, promote transparency of prices and liquidity, protect consumers from abusive practices, and to resolve failed companies according to principles of equitable distribution of assets among like classes of creditors. If the role of the state now is to shield HFT, dark pool and OTC markets from transparency, provide liquidity where the market fails, oversee the orderly fleecing of consumers, and to ensure that some creditors of failing firms always win while others always lose, then we no longer have a market economy. And as virtually all these regulatory policies have evolved in the absence of public debate and legislative scrutiny, we also no longer have democratic governance of markets.

Perhaps this is what tiny Iceland realised when it determined that it would default rather than protect the bondholders. Perhaps in a small country in a big ocean it is easier to perceive a common interest in economic and political adaptation to protect the future of your children and your neighbours, rejecting the claims of the faceless, pitiless and stateless bondholders.

I suddenly have a lot more sympathy for the Greek people than I did a fortnight ago. Come the revolution here, I may be in the streets too.

Some will say that the Greeks are hard line communists pining for generous state benefits and pensions they haven’t earned. Maybe so. But there is more economic justice in such a system with such objectives determined in a democratic process than in any system that sees its primary imperative as Protect the Bondholders.