by Francis Lee for the Saker Blog
Moral Hazard: Circumstances that increase the probability of loss because of an applicant’s personal habits or morals. For example, if the applicant is a known criminal or engages in suspect financial dealings. (Dictionary of Business Terms)
Economic Rent: Payments and remuneration over and above normal profits which arise from a monopolistic market position. (Cf. David Ricardo – Theory of Ground Rent).
For our purposes, we can substitute the word criminal with speculator, trader, banker, or financier.
In light of the events of the past few years in the development of capitalism (particularly finance capitalism) it appears self-evident that the banks and financial sector have been given a state-backed guarantee that whatever losses they incur will be underwritten by the government of the day.
Of course such bail-outs only serve to increase the problem of moral hazard (see above). Knowing that they are ‘too big to fail’ these institutions are able to indulge in risky trading (with other peoples’ money – OPM) in the sure knowledge that they are virtually immune from any of the negative consequences of this gambling. If it were their own money, they were gambling with they might be somewhat more circumspect in their actions. Free market capitalism should mean that, for better or worse, you should get what is coming to you. These gilded gentlemen, are, their protestations notwithstanding, not in fact the inhabitants of a free market; they would never have survived in that particular environment.
Thus assured of their invulnerability banks on both sides of the Atlantic have resumed their cocky, business-as-usual trading activities and obscene bonus payouts; and incredibly this even included the nominally nationalised banks in the UK such as Royal Bank of Scotland (RBS).
But where are the new credit-rating agencies, the accountancy firms or big banks in this particular scenario? Are there enough of them, and do they act with due diligence? In fact there are just four significant accountancy firms. As far as I know, all British. The Big Four is the nickname used to refer collectively to the four largest professional accounting services networks in the world, these consisted of the global accounting networks Deloitte, Ernst & Young, KPMG and Price Waterhouse Cooper who are supposed to audit critically. It’s the same with the three New York based credit-rating agencies, Standard and Poor, Moody’s and Fitch’s who dominate the market. In 2008/09 this latter trio was involved in dishing out triple-A ratings to all and sundry.(1)
Sad to say that it actually gets worse. Hypothetically, imagine that a restaurant in your neighbourhood made the kind of money paid to top employees in banking, credit-rating and accountancy firms. You’d expect people rushing to open more restaurants, and with that increased competition you’d expect wages and prices to come down. Again, this is how competition works, or at least is supposed to work. There are thousands and thousands of young graduates aching to get into investment banking, so no shortage of prospective chefs. So where are the unpractised players in high finance? Where indeed.
One of the problems in this situation already alluded to is that the banking and financial industry is a de facto cartel; it is not alone in this respect; it is a closed monopolistic market structure protected from competitive pressures. This is not how it is supposed to work. In theory and assuming free market conditions, most importantly freedom of entry into the market is blocked. In the modern world there are significant barriers to entry, competition is therefore nullified and surplus remuneration and profits (economic rent being the technical term) become the norm. Moreover, there are of course huge entry-cost barriers in this industry, so much so, that payment levels are completely distorted. Remuneration committees perform a back-scratching exercise setting, where members of the committee set each other’s salaries, bonuses and stock options. All very chummy.
The reality is that global high finance is a skewed set of interlocking cartels that divide the market among themselves and use their advantages to keep out competitors. Cartels can and do extract huge premiums over what would be regarded as normal profits in a functioning market, and part of those profits go to keeping the cartel intact: huge PR efforts, a permanent recruiting circus drawing in top academic talent; clever sponsoring of, say, an ambitious politician’s re-cycling scheme; vast lobbying efforts behind the scenes; and highly lucrative second careers for ex-politicians and ex high-ranking soldiers. There is also plenty of money to offer talented regulators three or four times their salary.
Additionally, the flagrant rent-seeking, monopolistic abuse is protected by the government from failure. They are apparently so vital to our well-being and their personnel so intrinsically gifted that they must be supported no matter what the cost. So much for the free market!
Of course it will be argued that banks perform a vital function of supplying credit and loans to households and businesses, and as such may be compared to other public utilities such as energy and railways. But recognised public utilities are, unlike banks, tightly controlled or even nationalised, although this is unfortunately changing; but the rewards in these industries are nowhere near those prevalent in the financial sphere. Nor do we allow these industries to play the derivatives markets with tax-payers’ money. This point is particularly important and goes right to the heart of the matter.
The question is whether the Countrywide’s (Countrywide Financial, a US mortgage lender bailed out in the US after reckless lending) of this world are risk-taking enterprises or public utilities. You can’t be both. If the government is going to be on the hook by means of deposit insurance … or implicit federal insurance or other forms of taxpayer guarantees far too important to fail institutions, bank risk-taking has to be tightly controlled. Cautious, risk-aversion, public-utility style banks need intelligent credit and balance sheet managers, not envelope pushing high-rollers with eight-figure pay-checks.
It could be plausibly argued, therefore, that this specially privileged position of finance and its institutions rests upon the regulatory capture of the political apparatus of policy and decision making by this same interest group. There can be no other explanation. Trans-national corporations, global finance and the bond markets seem to be calling all the shots. Governments around the world to date have been seemingly subservient to both their power and their values. Nowhere is this more the case than in the US/UK.
This hegemony of finance and the privileging of financial interests in the UK has been a long-term problem. Taken as a case study, nothing could demonstrate this more graphically than the sell-off of Cadburys, a long-established British confectionary-manufacturing company dating back to the 18th century, to the US food multi-national, Kraft. Of course Cadbury’s is not the first successful British company to be subject to a takeover. We can list the long line of pillage. British Airport Authorities (BAA) various Energy and Water companies, P&O-Ferries (purchased by DP World – Nasdeq-Dubai) Pilkington’s Glass (now owned by the Japanese) Alliance and Leicester Building Society (now absorbed by the Spanish Giant – Santander) Abbey National (another Santander takeover), Rolls-Royce, Aston Martin, Boots (a pharmacy company bought out and owned by a US company in Illinois) KitKat chocolate company, Harrods, The Savoy hotel, even the football (soccer) team Manchester United? Typhoo tea or HP Sauce. This list is by no means exhaustive, and it grows year on year.
Of course, this policy is predicated upon the nonsensical notion that ownership does not matter. This statement is, to use Keynes apt description, ‘of a featherbrained order.’ It should be relegated to the other egregious platitudes such as ‘deficits don’t matter’ (Dick Cheney) or ‘an end to boom and bust.’ Of course, ownership matters. Foreign ownership of domestic assets means a negative outflow of income streams, this is the whole purpose of overseas ownership. It also means a loss of sovereignty of economic ownership, policy and decision making, on the part of the firm which is being bought out, and as well as a loss for the nation.
Of course, the City (of London) loves it. They make much of their money by charging consultancy and brokerage fees and organizing Mergers and Acquisitions (M&A) activity. It has been estimated that:
‘’There are also nearly $1.3bn of reorganisation costs and $390m of fees to advisers, prompting Kraft shareholder Warren Buffett, the legendary US entrepreneur, to describe it as a “bad deal”.
It should also be borne in mind that the Kraft bid was based upon leveraged (that is to say, borrowed) capital. And where did Kraft borrow the funds to buy out Cadbury? Well from no less a source than the Royal Bank of Scotland! It beggars’ belief that an overwhelmingly publicly owned UK bank is underwriting a hostile bid from a foreign multinational for a long-standing UK company.
Well, the CEO of Cadbury’s Todd Stitzer walked away from the takeover with an estimated £12 million. Okay for him. For the hapless workers at the Cadbury’s plant closures and redundancies loom. Industry concentration also increases as there is one less competitor in the field which in its turn means more opportunities for price-fixing and general anti-competitive behaviour.
It would appear that the City of London has not and will not learn from the error of its ways, but then why should they! They have an exceptionally good racket going forward. They will continue in the same manner, who, like the Bourbons ‘’have learnt nothing and forgotten nothing. ‘’ But of course, it pays them to learn nothing and forget nothing.
Of course, this state of mind has been engendered by the certainty of bailouts when their ‘trading’ activities go awry. If the government of the day continues to subsidize failure, failure is what it will continue to get. As a consequence of this Britain will continue to be denuded of its vital companies and increasingly dependent on its waning financial activities – a cosmopolitan group who basically have no interest in the UK economy since their activities are directed to international capital flows and speculation. In this situation it makes no sense to talk about a UK economy or a UK product.
When companies become so disconnected from their home base what happens to the national economy? How can it be expected to perform well when the profitability of its corporations no longer depends on the national economy for the best investment opportunities? In what sense will the UK be a society when it has no national economy? And for the UK read for the national economies of the West in general, with the possible exception of Germany. However, according to the now retired doyen of the present order, the world is actually going in the right direction. Consider ‘’… we are fortunate that, thanks to globalization, policy decisions in the US have been largely replaced by global markets … It hardly makes any difference as to who the next President will be. The world is governed by market forces.’’(2) Thank you for that pearl of wisdom Mr. Greenspan. Now everything can be hunky-dory!
Governments around the world must regain control of their economies. This must happen at least at a regional level. Otherwise, globalization and the forces pushing globalization – The Enemy Within – will simply mean the world functioning as an oyster for the activities of multinational corporations and the race to the bottom which they impose on the recipients of their investment, or short-term speculative flows of ‘hot money’ with the usual destructive impacts, particularly in the developing world.
So far there has been much talk – meaning the usual sweet-talk which comes from the authorities and which goes nowhere – but little concrete action. Returning to the main theme of this article, it seems that little short of outright nationalisation of bankrupt industries will be sufficient to concentrate the minds of the banking and financial fraternity. Secondly there should be a much stricter and draconian code of the public interest when independent companies are threatened with hostile takeovers.
But is it conceivable that any government in the developed world would do this? That is anyone’s guess and there’s the rub. In the short to medium term the answer is almost certainly no. These people are frankly incorrigible and a new generation of politicians and businesspersons with vision and a will to fundamentally reconfigure the world is what is needed. Whether this leadership emerges or not is a moot point, however.
NOTES
(1) In the 2008 blowout the ratings agencies played a critical role in the marketing of risky mortgage-backed securities, such as collateralized debt obligations, which helped bring the U.S. financial system to its knees.
Investment banks had bundled collections of individual mortgages, which by themselves can be hard to trade, into baskets that could be bought and sold like any bonds. These financial instruments were then sold to investors. But in order to sell them, the investment banks counted on them receiving stellar ratings from the agencies to tempt investors starved for return.
(2) Quoted in Wolfgang Streeck, – Buying Time: The Delayed Crisis of Democratic Capitalism. – 2014 – p.13
The root cause of the problems is the failure to have or enforce anti-trust laws particularly in the US since Clintons time.
Cross ownerships and people warehousing investments should be banned for banks, media, pharma, transportation, energy and tech companies.
In the past 30 years there has been mono or duopolistic control allowed and the current situation and orgy of corruption is the result.
And the situation with the corrupt DOJ, AGs FBI etc means perhaps the military should oversee this.
The civil service cannot be trusted.
Most of the US media appears to be owned by people holding in trust for banking interests. CBC NBC ABC
They have attempted to do this in Russia and Putin and his team put a stop to it, and the current focus is China under Soros.
If there was review of all the laws broken since 1992 a lot of people with be in jail.
”It could be plausibly argued, therefore, that this specially privileged position of finance and its institutions rests upon the regulatory capture of the political apparatus of policy and decision making by this same interest group. There can be no other explanation.”
Absolutely correct. This is precisely the greed, corruption, and malevolent incompetence which we have come to know as neoliberalism.
”These people are frankly incorrigible”
Very true. And now that they are being confronted by growing, abler, and saner adversares, they become ever more insane and desperate. Interesting times ahead.
You place too much trust in military leaders.
I wasn’t aware Putin, Xi, and Raisi were military leaders. But by ”adversaries”, I wasn’t primarily referring to individuals but to the states of Russia, China, and Iran.
“But is it conceivable that any government in the developed world would do this? That is anyone’s guess and there’s the rub. In the short to medium term the answer is almost certainly no. These people are frankly incorrigible and a new generation of politicians and businesspersons with vision and a will to fundamentally reconfigure the world is what is needed. Whether this leadership emerges or not is a moot point, however.”
Doing this would be the definition of a marxist revolution. Who controls the state, the rent seekers or the people?
Johnny: You just hit the nail firmly on the head; “Doing this would be the definition of a Marxist revolution.”
Which is why the oligarchs work overtime to maintain wall to wall control of the mass media and constantly indoctrinate minds throughout the world that Marxism is evil and of the devil. That indoctrination is so skilled and successful that people become subconsciously programmed against their own best interests. We are all supposed to hate Russians because they introduced the necessary antidote to the European mind. Now the one country that is soaring ahead with stunning vitality just so happens to be the world’s most coherent Marxist state. So we must pivot against China and hate them.
If all of this doesn’t work then there is the time tested ancient Roman institution of organized death squads.
But Harold Wilson did not need a death squad. The secret oligarchy just wore him out and broke his spirit.
I read this oligarchic totalitarianism as the patriarchal ego triumphant in its own illusionary bubble.
So wither Marxism then? Well it was never actually completed. Marx died of illness before he could move on from the political economy of capitalism to the political economy of the proletariat. That was the really important part of the whole enterprise. The book “Beyond Capital” by Michael Lebowitz covers this nicely.
So the political left has its own crisis, clearly. I like Gilad Atzmon’s reading here. Commenting on the Corbyn debacle he opines “that all the Left can really do is get back in contact with its own metaphysical origins.”
That is interesting indeed and in my opinion qualifies Atzmon as a real philosopher. The problem being the Left has bought into the bourgeois fantasy that it does not have any “metaphysical” origins. But without authentic metaphysical origins nothing can be validated as “real”.
So if we go hunting for the Left’s metaphysical origins we just might find that it is actually a feminine expression of real Christianity. This makes it hated twice over by the oligarchs. Hated for being authentic Christianity and also hated for being a physical manifestation of the sovereign feminine. How about that for a “midnight terror.”
I really cannot understand how the UK would allow Kraft to buy Cadbury but it is beacon of the fact the UK is now rotten to the core.
And this is thanks to Thatcher, Major, Blair and Johnson.
We then need to look at who really owns Kraft.
I wonder will be next – Vickers, Lloyds, Vodaphone, Unilever ?
The end result of this the house of cards will collapse.
Britain has had the worst bunch of politicians it has ever had in the past 40 years.
Harold Wilson was last relatively honest one.
But the UK so called upper classes are stupid, stuffy, backward fops to start with.
interest group? one name apparently which you can read about here:
https://www.armstrongeconomics.com/international-news/politics/the-dark-lord-behind-the-curtain/
wow, and from the video the words Sovereignty must go, must be abolished!!!
A unified Europe? and the one constant problem that remains:
It is necessary to discover a head capable of directing it, endowed with an intelligence surpassing the most elevated human level.
—H.G. Wells
Let that man be a military man or a layman, it matters not.
—Paul Henry Spaak, first president of the Council of Europe, planner of the European Common Market, president of the United Nations General Assembly, and one-time Secretary-General of NATO
Strong, one-man civilian control of America’s giant military establishment is vital to the nation’s wellbeing. The concentration of authority is inevitable.
—Roswell Gilpatrick, Deputy Secretary of Defence
and we never here and what role exactly is the Vatican supposed to play in all of this political upheaval?
and as I have tried to state the obvious before using the analogy of the statue of the prophet Daniels why is the last world empire a mix of iron and clay? Ultimately because monarchies are or were the strongest of empires.
Most of the facts may be correct but I question the author’s wisdom. The solution offered (“Governments around the world must regain control of their economies”) reminds me of an alcoholic who wishes to quit drinking yet is unable to let go of his bottle. The only place he’ll ever quit is in his mind.
The problem is not Banksters vs Government, but hard currencies (gold backed) vs fiat.
Bankers, politicians, socialists, capitalists, workers, entrepreneurs, lawyers, prosecutors, judges, Muslims, Christians, Jews (yes even them), Bhudists and what have you not, they’re all the same: Humans, fallible, corruptible, and sometimes, occasionally, honest and brave.
What unites them all spiritually is the Divine… (again that stupid grin on my face), but I’ll have to leave that aspect for another day. On the secular level though, it is money. Roughly all of human transactions (or activity) involves it at 50%. At the most basic level, easily understandable by all, it stands to reason, all else being equal (ignoring supply and demand imbalances) that an honest trade involves the exchange of equivalent amounts of work. Another way of putting it is: an honest trade is in essence a barter of goods and/or services. Most modern economists or monetarists would like us believe that money is a “technology” created by Man and thus can be manipulated and improved. It is not. Originally money was simply barter markets spontaneously finding their common denominators in gold, silver and copper (all of which are goods that require work). Because their usage is intrinsically fair (real stuff against real stuff instead of a new esoteric technology), no law, authority, king or government were ever needed to impose them. And the only possible “improvements” of money are the means of control, circulation and distribution, but never its fabrics which can only be freely decided by the market if it has any pretense of fairness.
Now fiat currency, that is a totally different beast. Not a single instance in all of human history when fiat was spontaneously adopted by the economy or markets. Always and everywhere, only under physical duress and threat of violence. Why…? (idiot grin)
Could write volumes on this one I presume. But basically, before it turns to outright venalities, the purpose first (no matter how well intentioned) is to remove the limits full metallic currencies impose upon those in power, be them bankers or governors, capitalists, socialists, ecologists, etc… In short they want to do without patience, fortitude, discipline, modesty, prudence and honesty, and instead indulge in their pretenses and delusions.
Simple mathematics tells me that Modern Fiat Currencies and the monopolies (state and private) they allow and guarantee, are single handedly responsible for 90% of the world excesses. those include wars, poverty, biotope destructions, resource depletions, media powers, excessive population control, extremism of every denomination, color and shape, and so much more… this is so because under a gold standard 90% of the moral and physical carnage could simply not have been financed at such a rate of waste.
And yet no one, nowhere, ever breaches the subject. How strange indeed… Could it be we all are that proverbial alcoholic, way too advanced in our fiat intoxication to ever let go the bottle?
All of this is a lesson for Russia, China, Eastern Europe etc on how not to allow these large entities to accumulate their position.
There may be a case for letting a business grow initially, but if it gets too big in the end it must be broken up or controlled somehow.
Example – Standard Oil was broken up in 1911 following the passage of the Sherman Anti-Trust Act
https://en.wikipedia.org/wiki/Sherman_Antitrust_Act_of_1890 which is what is needed now to be enforced and amended to deal with various entities like Google, Microsoft etc….
“Governments around the world must regain control of their economies. This must happen at least at a regional level.”
Indeed they must. They may ask Vladimir Vladimirovitch on guidance how to do it. After that, they may ask Xi how to keep the control.
Never thought I’d hear of the example of Cadbury being sold off to Kraft on this site.
I used to be a fan of Smarties chocolate candies (similar to M&M’s) namely for their lack of artificial colorings, speaking as someone who grew up in the USA where Smarties aren’t distributed. Years later, after interest in this alternative-to-M&M’s had dwindled, I came across an article accusing Nestle (the owner of Rowntree’s which created the Smarties brand) of mistreating workers in Africa or some other region.
Eventually in August/September 2019 I learned of a similar brand called Nonstop, which is made by Norwegian chocolatier Freia, but was disappointed to learn that they are now owned by (USian) Mondelez International.
So far I have yet to find a similar brand of sugar-coated, fake dye-free milk chocolate ‘dragees’ that isn’t owned by international conglomerates. Preferably Russian, but could be based in any non-Five Eyes nation. (Have yet to hear about Meiji)
The end goal of Globalization is the New World Order’s One World Government. The multi-nationals with links into so many different countries is just part of the strategy of destroying national sovereignty, all the national governments and countries have to crash or fall apart before the the One World Government can arise. Luckily it was decided that West has to crash first (can’t remember what book that was in now) before the rest of the world follows suit. Good luck West, show the rest of the World the path to follow, lead by example.
It is poetic when Perfidious Albion looses economic sovereignty due to globalization / Uncleshuelistan financial imperialism, especially to the latest hegemon that acts like a chicken that has lost its head with everyone / no one in charge. It is like senile Joseph Robinnette Memantine Donepezil Biden having to pretend to be President in the White House — lots of bad Karma principal, interest, and penalties coming due.
If Saule Omarova is for real, it should be possible to create a list of felonies in eight hours on día número uno (or already have a list) and just use civil asset forfeiture to seize the assets, non-financial and financial and shares of stock of the commercial and investment banks and hedge funds and nationalize most of the U.S. economy.
We need either Islamic banking or put fractional reserve banking on a short leash with a firm grip on one end and a choke chain and muzzle on the other. Make leveraged buyouts and stock buybacks illegal (preferably unconstitutional) and implement a / some single tax(es). Make dividends but not interest or fake depletion deductible from corporate income tax.
Article XII (Finance and Taxation), Section 2 | Limitation on tax rate; exemption Ohio Constitution needs to be amended along the lines of the following:
No property, except land values, taxed according to value, shall be so taxed in excess of one per cent of its true value in money for all state and local purposes, but laws may be passed authorizing additional taxes to be levied outside of such limitation, either when approved by at least a majority of the electors of the taxing district voting on such proposition, or when provided for by the charter of a municipal corporation. Land and land values shall be taxed at a rate at least as high as improvements thereon according to value but laws may be passed authorizing additional single tax on land sites. Laws may be passed to reduce taxes by providing for a reduction in value of the homestead of permanently and totally disabled residents, residents sixty-five years of age and older, and residents sixty years of age or older who are surviving spouses of deceased residents who were sixty-five years of age or older or permanently and totally disabled and receiving a reduction in the value of their homestead at the time of death, provided the surviving spouse continues to reside in a qualifying homestead, and providing for income and other qualifications to obtain such reduction. Without limiting the general power, subject to the provisions of Article I of this constitution, to determine the subjects and methods of taxation or exemptions therefrom, general laws may be passed to exempt burying grounds, public school houses, houses used exclusively for public worship, institutions used exclusively for charitable purposes, and public property used exclusively for any public purpose, but all such laws shall be subject to alteration or repeal; and the value of all property so exempted shall, from time to time, be ascertained and published as may be directed by law.”
Article II (Legislative), Section 1e | Powers; limitation of use Paragraph A of the Ohio constitution needs to be repealed
There is more, for example, Article V (Elective Franchise), Section 6 | Idiots or insane persons properly applied, instead of hypocritically so, means that few Ohioans, especially bulbs as dim as Alan Jackson and Ellen Degenerate, their fans, any DSM-V committee members who are residents of Ohio (if any) and the quackiatrists who use it should not be voting, but this is starting to get a bit off-topic.
Not going to happen since Ohio is a southern End Times “Bible” Belt state despite its latitude. Its latitudinalism (and dichotomous thinking, rhetorical devices, etc.) is all that matters.