Here is the final paragraph from an essay by John Kay titled
The preposterous claim that deviations from market efficiency were not only irrelevant to the recent crisis but could never be relevant is the product of an environment in which deduction has driven out induction and ideology has taken over from observation. The belief that models are not just useful tools but also are capable of yielding comprehensive and universal descriptions of the world has blinded its proponents to realities that have been staring them in the face. That blindness was an element in our present crisis, and conditions our still ineffectual responses. Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart.
to which I responded
What we are up against
A refreshing reminder of the staid mechanistic approach of so-called market-efficient economics. Good for the status quo as used to explain to the world WHY the Masters of the universe are in charge. I’m not sure how many of the deans of business schools and Harvard economics professors are prime advocates. But I imagine a substantial amount remembering the interviews that Ferguson did in the documentary Inside Job. They get very well rewarded for being apologists for the current system.
But I would like to take off from this point and try 500,000 foot summary of some of the issues. I am not sure how many people really understand the nature and the reasons for our problems I have a stack of books on my porch more than 3 feet high that I’ve read since 2008 attempting to grasp it. It is only with the addition of the latest by Nicholas Shaxson called Treasure Islands Uncovering the Damage of Offshore Banking and Tax Havens that I feel I have made really significant progress.
Whether it is possible for the occupy movements to create among their followers and the wider public at large an understanding of the situation, I’m not sure. But I suspect that short of violent revolution which has never been a positive accomplishment–the only way forward is to formulate this broader understanding.
I imagine that most of us have a pretty good grasp of the events that brought us to the current brink. But let me try to summarize where we stand 1st with the euro and only slightly less with an equally messy situation in the United States and likewise probably in China as well.
The “system” incents players to bet against it
With Greece on the verge of default, we do not precisely know which banks hold how much of Greece’s sovereign debt. This leads to a lack of trust within the European banking system, heightened with the bailouts of Ireland, Portugal, and Spain. And now Italian debt is under attack. Why? Because we have the insane unregulated system where hedge funds and shadow banking entities can along with so-called normal banks sell short this debt and have incentives to do so because like John Paulson with sub prime housing they can make literally billions of dollars from doing so. And of course by doing so they further undermine trust and confidence. Why? Because again there is no transparency in the system. No one has any insight as to reason for their action and with uncertainty you get a mob psychology.
With deregulation there appeared to be no real incentives for auditors to do a factual and transparent job. We get instead so-called private stress tests. But at the same time as speculators drive up the cost of borrowing within the European PIIGS. They create a panic situation forcing one country after another to plunge into austerity. This action strangles the economy, puts more people out of work, decreases capital spending and therefore demand and empowers the ongoing downward spiral which feeds on itself making matters worse.
It would appear that the amount of wealth has become so imbalanced that the top 1% has far more than they know what to do with and consequently with 0 interest rate costs, they engage in asset speculation or just sit there and keep money in the bank as with US corporate profits which are kept offshore and therefore tax-free further depriving the US economy of oxygen as it were. Austerity is another way of driving up government expense, keeping employment down and demand down, and perpetuating the current vicious circle.
The system is a black box – impenetrable to outsiders
The system has problems. Everyone acknowledges that. Because it is become utterly opaque no one can identify who has what assets and worse no one has the faintest idea of the various derivative pledges where I have read that American banks are selling European banks credit default swaps insuring European sovereign debt and bringing God knows how many hundreds of billions of dollars of liability to American shores and to the federal reserve where since the top five or ten Banks are way too big to fail will be automatically bailed out again. An ugly ugly situation.
Now what I had not heretofore grasped is the past 50 years long history of offshore banking and tax havens which now has moved onshore starting with the city of London in the 1970s and going full tilt after Thatcher’s Big Bang and 86. Involving the channel islands especially jersey. The Caymans Bahamas, Bermuda, Hong Kong. And in the United States starting with Citibank’s move to South Dakota and then with Chases moved into Delaware and Nevada and Wyoming looking for revenue in racing everyone down the drain.
This has created a situation where with the rise of the euro dollar markets after Nixon’s closing of the gold window in 71 enabled American banks to establish offices in the City of London and in the Caymans and to open operations closed in complete secrecy enabling over time the huge cross-border money transfer flows estimated now I think at 2 or $3 trillion a day.
Offshore Banking and tax havens have corrupted the system
Yes this is been a part of globalization but look where it’s gotten us. Our politicians cheerfully take their orders from Wall Street which is set up to service those with wealth in whatever degree of anonymity or secrecy they request. And in a global race to the bottom that benefits the largest corporations and the 1% and is stripping the core structure from the rest of our society we have a situation where our largest corporations are incented to keep their profits offshore demanding a tax holiday to bring them back and in 2004 when they got the last one brought back about 350 billion and failed to do the investment in new jobs and new hiring that they promised. The net benefit was for the multimillionaires and the rest of us were left to pay the bill.
After 1980 Wall Street used its South Dakota and then Delaware wedge to effectively eliminate state caps on interest rates and with the other hand built up its profits by encouraging the credit card industry to convince the middle class whose income was stagnant since roughly 1972 load up on purchases and of course on credit. Finally that went beyond the ability of the banksters to keep the bubble inflated. As a result millions of families are decimated. I’ve read that 20 million mortgages in the United States are underwater. And of course about 5 or 6 million from the housing bubble roughly 2003 2 2007 were fraudulently issued and securitized and because the federal government has still kept its hands off there has not been a resolution to this situation. Which effectively means that the housing situation will not improve in the foreseeable future and may get much worse with foreclosed homes being moved into by drug gangs since Municipalities are slashing their Police Department’s.
Secrecy Renders Challenges impossible
To do something serious one needs to have the intent to challenge this new ruling class but it helps to have the ability also. And with the explosion of tax havens and secrecy in places like the Caymans and Jersey that has since moved into the United States where you can read that Nevada and Wyoming will happily incorporate you in 24 hours for a fee of a few thousand dollars and leave you with all the necessary papers where although your corporate entity has a name and it likely has a registered agent, any information as the to the owners, physical presence or kind of business engaged is no longer requested. The rules have been cooked such that any legal or taxing authority will never penetrate the lack of transparency. And this apparently is all quote legal”.
So how do you clean up something without really being able to identify what it is that you’re trying to clean up? Indeed Shaxson’s, Treasure Island’s has brought home to me how this is at least as much of a problem as all the malfeasance of the economic actors in the crash of 2008 and the coming crash of 2012.
To make matters worse there is now a hybrid form of incorporation. The Limited liability Corporation was created to enable it to go bankrupt without the assets of the directors being attached. The bargain was that it was expected to maintain auditable transparency for its business actions so that in the event of trouble the reasons for the trouble could be ascertained. The other form was the partnership. This is the legal basis of the investment banks until in the late 80s and early 90s, they started going public. It meant that if the action of the partner blew up the partnership, all partners had unlimited liability to repair the damage. In return the law granted the partnership the ability to keep its operations from public scrutiny. But now we have the limited liability partnership from the point of view of an ordinary citizen the worst of both worlds. Those running the business do not have to do it in daylight and also have limited liability should things go wrong. The system in other words is gamed on behalf of the 1%.
The so-called shadow banking system is still in existence and its extent I think is greater than almost anyone could have imagined. As long as this is not understood and universally attacked I don’t see any hope for change. And if we cannot educate and ensure employment for our youth can be said we have a civilization worthy of the name?
Do we want to live in a civilized society?
Shaxson, in his final chapter, which I so far have only scanned, talks about action which needs to be taken in 10 or so areas. And the final area and most important one he says is a change in our basic culture. I would submit that he is right. What does our society stand for? Do we have a society left? Or as John Robb says are we moving towards tribes?
I would submit that one reason that the Occupy movements must continue and should not prematurely come up with specific demands is that we should hope that the groups will engage in their own economic education and come to a detailed understanding of what is wrong and why. And with public debate there might be a chance of over coming the siren song of “New Jersey Shore” and “Desperate Housewives” and taking to the street to demand a total restructuring of the financial system which probably would be tantamount nationalization.
A huge huge task but the alternative is violence and likely prison camps — something we should struggle long and hard to avoid. What will our telecommunications businesses be worth if there is only social chaos in which to operate them?
and a good friend sent the following
That is a longer conversation Gordon. Very quickly, not everything is bad. LLC and LLP created a lot of good as well as bad. Our political system improved what came before it. Banking and international trade evolved for many reasons. What do the most sophisticated players look to? What do they track? Do they know human nature? Do they just bet there again and again?
I think what we find is that man made systems/tools are never ultimately good or bad in and of themselves; but rather it is the intent behind their creation and use that we find outcome determinative. If we are trapped in a system of imperfect consciousness that could make ill use of newer and more powerful tools, if the tools are secondary in power to the intent/consciousness that wields them, do we study the tools? How do we escape the system?
200 years ago our system may have been an improvement…it has now regressed …how to recapture situation where human has more right than corporation?
to which my friend concluded.
Just leave it behind. Create anew. It is how our country was founded. We withdrew our energy from the old and put it into a new creation. That job may be subtler this time around but we have more powerful tools available as well.
Phi Beta Iota: Government corruption, deep secrecy, a dysfunctional media, and an inattentive public created the perfect storm–allowing the 1% to loot the 99% for three decades.