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The Price of Peace; Money, Democracy, and the Life of John Maynard Keynes, Kachary D. Carter, 2020

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Three Conscientious Objectors in 1915 Bertrand Russell, John Maynard Keynes, Lytton Stratchey

As a freshman at Cambridge University, Keynes was invited to join a secretive club, the Apostles, a sort of graduate seminar and dinner party where one member would present a paper. Keynes represented a new generation of Edwardians, leading a sexual revolution with Lytton Strachey, contrasting with the older Victorians like Bertrand Russell. Stratchey wrote of Keynes to Leonard Woolf in 1905, “He analyses with amazing persistence and brilliance. I never met so active a brain (I believe it’s more active than either (G.E.) Moore’s or Russell’s)…he perpetually frightens me.” Bertrand Russell wrote: “Keynes’s intellect was the sharpest and clearest that I have ever known. When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool.” An artistic grouping, Bloomsbury was born around 1905 at the house where Virginia (Woolf) and her sister Vanessa lived. Apostles Keynes, Leonard Woolf, Lytton Stratchey, E.M. Forster, Clive Bell and others moved to London. In 1906 Keynes took a job at the India Office where he worked on Indian currency and monetary policy.

In 1914, as WWI started, an obscure genius known to some in government from his India Office days, John Maynard Keynes, was summoned to London by Treasury and the Bank of England. Witnessing banker’s pursuit of their own narrow concerns during a bank run crisis, where Bankers focused on their own short-term pecuniary profit, abandoning all thought of “the honour of our old traditions or future good name”, Keynes concluded that political oversight of the bankers was needed. Keynes conceived a solution which Treasury and Parliament blessed that foreign bills could be redeemed for gold but domestic needs including those of the banks would be met with a new alternative paper currency. The plan worked and the run was stopped.

Keynes was invited to Paris for the WWI treaty of peace negotiations. Disturbed by the Allied demand for massive reparations that were unrealistic , Keynes proposed that Germany be allowed to issue bonds guaranteed against default by the Allied governments. Keynes was not privy to the negotiations drawing new borders and breaking up the Ottoman Empire so doesn’t appear aware of the division of oil reserves among the Allies. When Wilson rejected Keynes “Grand Scheme”, Keynes resigned from the peace negotiations and penned maybe his most influential work in 1919, “The Economic Consequences of the Peace” which Carter describes as:

…provincial, shortsighted, vicious, and in many respects deeply unfair polemic. It is also a masterpiece and very likely the most influential work Keynes ever put his name to—a furious tirade against the autocracy, war, and weak politicians. It is at once a howl of rage directed against the most powerful men in the world and an ominous prophecy of the violence that would again sweep the continent in the years to come.

Keynes wrote:

The resulting international system created at Versailles was extremely fragile and would only function if workers believed in it, and workers would not believe in it unless it worked. Break the collective faith in a better tomorrow, and workers will walk off the job, riot in protest, or worse.

The principle of accumulation based on inequality was a vital part of the pre-war order of Society and of progress as we then understood it. This principle depended on unstable psychological conditions, which it may be impossible to recreate. It was not natural for a population, of whom so few enjoyed the comforts of life, to accumulate so hugely. The war has disclosed the possibility of consumption to all and the vanity of abstinence to many.

Bolshevism in Russia was already known to all as an alternative to La Belle Epoque. All over Europe, but particularly in Germany conditions were ripe for the rise of a strongman. Without jobs, food, a sense of purpose, and confidence in a better tomorrow, Europe was already on the path to another war.

Keynes formalized his political theory of economics with three lectures in 1926 “The General Theory of Employment, Interest and Money“,”The End of Laissez-Faire“, and “A Short View of Russia“. Overlooked in Britain even though Bloomsbury loved them, they formed the core of a unique, practical political theory that the United States would apply on a vast scale during the great depression and WWII.

In 1930, Keynes published “A Treatise on Money” an assault on the ability of central bank interest rates to affect investment. Keynes suggested that the state spend money on public works since domestic investment was the problem. This direct assault on laissez-faire caused Austrian Friedrich von Hayek to pen two part indictment of the book. Milton Friedman later claimed von Hayek encourage a do nothing policy that did harm by recommending that “you just have to let the bottom drop out of the world.” Keynes himself responded to von Hayek; “one of the most frightful muddles I have ever read.”

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Franklin D. Roosevelt in his inaugural address in 1933 said

Primarily this is because the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men…They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish…The money changers have fled from their high seats in the temple of our civilization. We may now restore the temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.

In his first 100 days FDR created the FDIC, the SEC, the TVA, and the Agricultural Adjustment Administration.
Felix Frankfurter, a friend of Keynes and appointee to the US Supreme Court in 1939, delivered a letter from Keynes to FDR and arranged meetings for Keynes in 1934 with key administration players not totally on board with Keynesian ideas. One player Keynes met was John Kenneth Galbraith who was running the office of price administration. Galbraith described the meeting as the Pope visiting the lowly village priest. Keynes largely found himself preaching to the choir.
FDR met Keynes and thought him politically naive about the President’s relationship with Wall Street. FDR believed a banking industry hostile to his reforms was driving up interest rates on government debt by sitting out Treasury bill auctions. “There is a practical limit to what the Government can borrow– especially because the banks are offering passive resistance in most of the large centers,” Keynes did make progress with Fed Chairman Eccles who understood the need to keep interest rates low to help the government spend its way out of the Depression.

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In 1936 Keynes published his most important work “The General Theory of Employment, Interest and Money“, a work that Carter calls the most important work in economics in 160 years, to be compared with the monuments of Aristotle, Thomas Hobbes, Edmund Burke, and Karl Marx.

It is a theory of democracy and power, of psychology and historical change, a love letter to the power of ideas. The book is dangerous because it demonstrates the necessity of power. It is a liberation book because it re-framed the central problem at the heart of modern economics as the alleviation of inequality, pivoting away from the demands of production and the incentives facing the rich and powerful that had occupied economists for centuries. It is a frustrating book because it is written in novel abstractions, argued in convoluted sentences and dense equations. And it it a work of genius because it proves a simple truth that, once offered, seems obvious: Prosperity is not hard-wired into human beings; it must be orchestrated and sustained by political leadership.

Keynes said of the genius of Sir Issac Newton:

Newton could hold a problem in his mind for hours and days and weeks until it surrendered to him its secret. Then being a supreme mathematical technician he could dress it up, how you will, for purposes of exposition, but it was his intuition which was preeminently extraordinary…The proofs, for what they are worth, were, as I have said, dressed up afterwards–they were not the instrument of discovery.

Explaining his own method in The General Theory Keynes says:

The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly way of thinking out particular problems…Too large a proportion of recent “mathematical” economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and inter-dependencies of the real world in a maze of pretensions and unhelpful symbols.

The term macroeconomics hadn’t even been coined. Keynes not only invented modern economics, he invented the modern economist and placed him at the top of the new intellectual power structure. The book is a collaborative work done by the Cambridge “Circus” an almost cult like group with its own private language. The two most important contributors beyond Keynes were Joan Robinson and Richard Kahn. Carter says Robinson is the most important economist never to have won a Nobel prize in economics. Two of her students Amartya Sen and Joseph Stiglitz were honored with the Nobel prize. In fact she was only named full professor at Cambridge in 1965, thirty years after publication of her most significant work for which she is not credited. Carter likens Joan Robinson to Rosalind Franklin who discovered the double helix of DNA and was never recognized. Joan Robinson’s published contributions to economics continued until her death in 1983. Much of the The General Theory is incomprehensible. The book is difficult and obscure because Keynes wanted it to be. Its sheer ugliness created a small industry of interpreters. Two economists won Nobel prizes for interpreting the work.

<> <> Joan Robinson and Richard F Kahn

Keyesian economics found its first real world application during the FDR years. For Joan Robinson “The economic theory which was developed in America was a return to pre-Keynesian doctrines that smothered everything important in Keynes.” For Richard Kahn, the re-engineering of The General Theory into mathematics was a Faustian bargain–a fatal turn that would ultimately lead to Keynes being discredited.

In June 1942, Keynes was rewarded for his service with a hereditary peerage. On 7 July his title was gazetted as Baron Keynes, of Tilton, in the County of Sussex.

Maynard’s wife Lydia was a principal ballet dancer with Ballets Russes under Diaghilev and partnered with Nijinsky

Lydia partnered by Vaslav Nijinsky
There is a youtube video of Lydia dancing with George Balanchine in 1929.

Bretton Woods agreement 1944-1972 Lydia was 5’0″ Maynard was 6’7″

In 1944 Keynes attended the Bretton Woods conference in New Hampshire to hammer out a new international economic system. The Mount Washington Hotel overlooked the Ammonoosuc River where Keynes’s wife Lydia bathed nude each morning.
Keynes called for a new Supernational Bank to regulate the global money supply, currency, and trade flows. This international central bank would issue “Supernational Bank money (SBM) to national central banks like the Federal Reserve, the Bank of England, and their other counterparts throughout the world. These national central banks would borrow SBM from the Supernational Bank as a matter of course as they conducted their ordinary monetary policy operations.
The Supernational Bank would allow nations to grapple with domestic problems without resorting to deflation. Nations would never have to worry about running out of money in an emergency, because the Supernational Bank would always be there to provide money on reasonable terms. No government would have to intentionally create unemployment to resolve a currency or trade problem. Under the old system, when loans became unavailable for any reason–war, banking instability, bad monetary policy, a stock market bubble, or a simple disinterest in foreign lending–the only way a country running a trade deficit to fix its situation would be to force down the price of its goods in foreign markets. Ultimately it would resort to deflation and mass unemployment to do so. Keynes argued the surplus nations were not injured by countries that ran deficits. While the deficit country ran up large financial debts, the surplus country enjoyed fat export trade that employed its workers and raised the standard of living.
What the world also needed was an international authority that could punish countries for running a persistent trade deficit or a persistent trade surplus. Keynes proposed an International Clearing Union (ICU). Each participating central bank would open an account with the ICU. International trade payments would be made through those accounts, using a new international currency called Bancor that the ICU would create at will. When a country ran a persistent deficit or a persistent surplus, the ICU would require it to revalue its currency to bring the system back toward balance. The revaluations would be up or down to a limit of 5%.

Unfortunately for Keynes’s vision, Harry Dexter White, the US representative of the FDR administration arrived at Bretton Woods with a plan already formulated and the US had the clout to get its way. Keynes’s plan had been rejected before the conference even began. Instead all nations that joined the Bretton Woods project would agree to make their currencies convertible into dollars at a fixed exchange rate. The dollar only would be convertible into gold at a price later fixed at $35 per ounce. An International Monetary Fund (IMF) would be established to provide emergency loans in a crisis. A World Bank would be created to assist with post war reconstruction.

Instead of an international regulatory apparatus, Keynes got a gold standard with a bailout fund. White spend much of his time at the conference trying to secure USSR participation. He failed and the USSR never ratified the Bretton Woods agreement. Britain was broke and Keynes could do nothing about the outcome of the conference. Keynes died on Easter Sunday 1946.

The backlash against FDR’s New Deal and War powers was led by the bankers, wall street, and the corporate American elite. Undermining Keynesian economics combined the McCarthy era Communist scare accusations, the rise of the Ayn Rand inspired libertarian movement emphasizing unfettered individual freedom (freedom from government interference), and the resurgence of laissez-faire (market fundamentalism) economics centered at the Chicago School with von Mises and von Hayek and the London School of Economics.
Chicago School graduate Paul Samuelson wrote the textbook Economics: An Introductory Analysis, first published in 1948 that became the principal introduction to economics for generations of American students including this reader. While incorporating some Keynesian ideas, Samuelson was careful to couch these ideas in the long tradition of market fundamental economics. Some labeled Samuelson a neo-Keynesian .

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In 1958 Galbraith published his sensational The Affluent Society where the economics of scarcity had been replaced by an economy of abundance able to meet the needs of everyone with advertising used to encourage further consumption. Galbraith noted that great inequality still existed in America. The book had an immediate and wide spread impact on economic discussion which Carter calls similar to the impact of Thomas Piketty’s Capital in the Twenty-First Century, a history of inequality of income and wealth in France, Britain, and America. Galbraith was perhaps the best known member of the JFK brain trust. Expecting a cabinet appointment, Galbraith was instead named ambassador to India, then under Nehru and the Congress party. Galbraith was a vocal opponent of US involvement in Vietnam so likely JFK wanted to isolate him to quiet his opposition.

In 1972, Nixon shocked the world announcing the end of the post war Bretton Wood system. The gold standard was abandoned and massive monetary and fiscal stimulus programs were launched with low interest rates and business tax cuts. A 10% import tariff would be imposed and price controls put into place. Carter doesn’t discuss it but the US had moved from a trade creditor nation to a trade deficit nation by the late 1960’s. Strongest of the Creditors were Germany and Japan. Sometime about 1971, a young London School of Economics educated Paul Volcker penned a three page secret memo to his boss Henry Kissinger suggesting that foreign nations should be encouraged to have the United States recycle their surpluses through Wall Street. Yanis Varoufakis claims to have seen this secret memo, but the reality is that approximately 70% of all foreign trade surpluses, including China, are now recycled by the United States. Thus a new industry, financialization, which today dominates the US economy was created.

Volcker was named Fed Chairman by Jimmy Carter in 1979. He promptly raised interest rates to an unprecedented peak of 20%. Volcker had turned the Federal Reserve into the primary instrument of US economic policy to fight inflation. Further creative uses of the Fed would be used in the 2008 banking crisis.

The final nails in the coffin of New Deal economic mechanisms occurred under Bill Clinton taking the advise of Bob Rubin and Larry Summers. The Glass-Steagall act was repealed allowed the merger of banks with wall street to create too big to manage financial monsters. Then Clinton declared that there was no need to regulate Wall Street created derivatives that were at the heart of the 20008 sub prime mortgage crisis. Carter points out that the credit default swap (CDS) was the most explosive of these new derivatives. The CDS was a form of insurance whereby a default of an insured derivative would pay the holder. There was no requirement that the entity taking out the insurance actually owned the derivative insured.

The Obama administration was economically scammed by Tim Geithner and Larry Summers. The big banks were bailed out, Glass-Steagall was not reinstated, no banker was prosecuted for their illegal activities. And, according to Carter, 9.3 million lost their homes with government doing virtually nothing to preserve home ownership. A $75 billion plan designed to save 4 million homes never happened. The money was allocated but never spent. The family loss of homes contributed greatly to the increase in unemployment during this time.
Democratic Representative Dennis Cardoza of California in 2011 exclaimed:

For the life of me, I can’t figure out why a community organizer who says he cares about families, who says he cares about communities, has turned his back on one of the biggest problems in America.

Keynes believed that an enlightened management of the economy to produce widespread prosperity and job security would alleviate the problems of unrest that lead to revolutions either communist or fascist. Today the world has the highest level of inequality ever measured.

In 2008, Joseph Stiglitz calculated that if the $48 trillion global economy were simply divided among every one of its inhabitants, a family of four world receive $28,000, high enough to end poverty in every country. Carter calculated that the 2018 economy of $85.8 trillion economy and 7.5 billion people would yield an income of $45,000 for each family of four. “The economic problem of humanity is no longer a problem of production but of distribution–inequality.

Keynes was a conscientious objector dedicated to the elimination of the causes of war. Yet the history of the US after WWII was one of almost continuous real armed conflict and a continuous succession of virtual wars: the cold war til 1992, the war on drugs, and the war on terror after 9/11, The later two were not wars against state actors but against amorphous largely hidden force scattered globally. State actors found themselves invariably drawn into all these virtual wars often with terrible consequences. In real shooting wars with armies, Korea was fought to a draw; Vietnam was lost at a cost of more than 1 million lives; Afghanistan and Iraq never end; Syria and Libya appear to be without resolution. In foreign policy, the US, starting in 1953 and continuing to this day, assist in the overthrow of governments in country after country. The US today is the world’s greatest threat to stability and peace.

As Piketty documents, we are living in a period of unprecedented inequality of income and wealth. Carter concludes, the US government has remained, with the exception of Bill Clinton, stubbornly Keynesian but Keynesian principals are applied only during ever escalating economic crises. Applying Keynesian solutions in government policy sporadically and blind to people’s suffering serves only to rescue the oligarchs from their own incompetence and crimes. This malignant phenomenon has been named “Corporate Socialism“. The failures of the 2008 banking crisis highlighted the bankruptcy of Market Fundamentalist views of the world. Without extensive, enlightened, humane state management, unfettered capitalism is capable of generating enormous instability and suffering that only the state can correct. As an optimist foresees, the global economy, properly managed by the state, is capable of reducing income and wealth inequality and improve the lives and quality of life of everyone on earth, and eliminate war.

A bit of trivia; Keynes was 6’7″, Galbraith was 6’9″ and Volcker was 6’7″.

Capital and Ideology, Thomas Piketty, 2020
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A continuation of Piketty’s earlier 2014 work extending his previous analysis starting from 1500 to the present and adding France, India, China, Germany, Spain. the Nordic countries, Russia and Eastern Europe, the Petro-Monarchies, etc.
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Today, the postcommunist societies of Russia, China, and to a certain extent Eastern Europe…have become hypercapitalism’s staunchest allies. This is a direct consequence of the disaster of Socialism and Marxism and the consequence of all egalitarian internationalist ambitions. So great was the communist disaster that it overshadowed even the damage done by the ideologies of slavery, colonialism, and racialism and obscured the ties between those ideologies and the ideology of ownership and hypercapitalism–no mean feat.

Furthermore, social democrats never really reconsidered the issue of just ownership after the collapse of communism. The postwar social-democratic compromise was built in haste, and issues such as progressive taxation, temporary ownership, circulation of ownership (for example, by means of a universal capital grant financed by a progressive tax on property and inheritances), power sharing in firms (via co-management or self management), democratic budgeting and public ownership were never explored as fully or systematically as they might have been.

It (modern property law) originated…with Christian doctrine, which sought over many centuries to secure the property rights of the Church as both a religious and a property-owning organization.

…the concentration of private property, which was already extremely high in 1800-1810, only slightly lower than on the eve of the (French) Revolution, steadily increased throughout the nineteenth century and up to the eve of World War I…The case of Paris is especially noteworthy; there, the wealthiest 1 percent owned nearly 50 percent of all property in 1800-1810 and more than 65 percent on the eve of World War I.

As for achieving real equality, however, the great promise of the (French) Revolution went unfulfilled…And when a progressive income tax was finally adoption on July 15, 1914, it was not to finance schools or public services but to pay for war with Germany.

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When slavery was abolished in the 19th Century, the discussion in slave owning nations concerned compensation for the owner’s of slaves, never about compensation for the slaves.

It is easy to see that in a society where slaves represented virtually the entire work force, their market value could reach astronomical levels, potentially as high as seven or eight years of annual production…Recall that France saddled Haiti with a debt equivalent to three years of Haitian nation income in 1825 yet remained convinced that it was making sacrifices compared to what slaves in Saint-Dominique actually yielded in profit.

In 1860, the market value of (US) slaves (4 million in number) exceeded 250 percent of the annual income of the southern states and came close to 100 percent of the annual income of all the states. If compensation had been paid, it would have been saddled with interest and principal payments for decades.

The secession of the southern states and the resulting Civil War ended these discussions and US slave owners were never compensated for their loss of property as a result of the war and the emancipation proclamation.

Piketty follows the transformation, starting around 1500, of society from Ternary (Clergy, Nobility, Third estate–the workers) to Ownership societies with a centralized state. This transformation was accompanied by the rapid development of arms, warships, and navigation, needed to support the endless wars among the new nation states. This technological development of war tools enabled the co development of slavery and colonialism. Even the Ottoman and Chinese Empires were no match for the modern war machine. Gunboat diplomacy reigned supreme into the twentieth century. An extreme example are the two opium wars of Britain against China in the mid nineteenth century. Not only did China have to allow the sale of opium in China, but China was saddled with massive reparations for the costs of the wars.

Japanese Depiction of Perry’s black ships
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Japan reacted to the American (Admiral Perry), French and British visit by warship in the mid nineteenth century with the Meiji reformation, whereby Japan acquired and built its own advanced arms and warships and became a colonial power in its own right.

In the period 1880-1914, the United Kingdom and France earned so much from their investments in the rest of the world (roughly 5 percent additional national income for France and more than 8 percent for the United Kingdom) that they could allow themselves to run persistent structural trade deficits (an average of 1-2 percent of national income for both countries) while continuing to accumulate claims on the rest of the world at an accelerated pace. In other words, the rest of the world labored to increase consumption and standard of living of the colonial powers, even as it became increasingly indebted to those powers.

On Colonial state tax revenues in the eighteenth century:

…both countries (England and France) were taking in 600-900 tons of silver in 1700, 800-1100 tons in the 1750’s, and 1600-1900 tons in the 1780’s, leaving all other European powers far behind. Importantly, Ottoman tax receipts remained virtually unchanged from 1500 to 1780; barely 150-200 tons. After 1750, it was not only France and England that had a far greater tax capacity than the Ottoman Empire; so did Austria, Prussia, Spain, and Holland.

…the development of the modern state involved two great leaps forward. The first unfolded between 1500 and 1800 in the leading states of Europe, which were able to increase their tax revenues from barely 1-2 percent of national income to about 6-8 percent. This process was accompanied by the development of ownership societies at home and colonial empires abroad. The second leap forward came in the period 1930-1980, when the rich countries as a group went from tax revenues of 8-10 percent of national income on the eve of World War I to revenues of 30-50 percent of national income in the 1980s. This transformation was accompanied by a broad process of economic development and historic improvement in living conditions and gave rise to various forms of social-democratic society…It proved difficult to extend the second leap forward to poorer countries in the late twentieth and early twenty-first centuries…

If we include all military conflicts across the continent in each period, we find that European countries were at war 95 percent in the sixteenth centry, 94 percent in the seventeenth century, and still 78 percent in the eighteenth century (compared to 40 percent in the nineteenth century and 54 percent in the twentieth century). The period 1500-1800 was one of incessant rivalry among Europe’s military powers, and this is what fueled the development of unprecedented fiscal capacity as well as numerous technological innovations, particularly in the areas of artillery and warships.

By the end of the American Revolutionary and Napoleonic Wars (1792-1815), British public debt had soared to more than 200 percent of national income, the debt was so high that one-third of the taxes paid by British taxpayers between 1815 and 1914 (mainly by people of middle and low income) was devoted to repayment of the debt and interest (profiting the wealthy who had lent the government money to pay for the wars)…It also might have been preferable to tax the wealthy rather than allow them to become still wealthier by buying government bonds…with political power in the hands of the wealthy, the choice was made to spend money on the military and to finance it with public debt, and this helped to secure European domination over the rest of the world.

…these protectionist and mercantilist measures, imposed on the the rest of the world at gunpoint, played a significant role in achieving British and European industrial domination. According to available estimates, the Chinese and Indian share of global manufacturing output, which was still 53 percent in 1800, had fallen to 5 percent by 1900.

The colonial ideology that seeks to liberate and civilize nations in spite of themselves generally leads to disaster, no matter what the color of the colonizer’s skin (Japan).

The success of Japan’s proprietarian and industrial transition shows that the mechanisms at work have nothing whatsoever to do with Christian culture or Eueopean civilization…the Japanese experiences shows that proactive policies, especially regarding public infrastructure and investments in education, can overcome very strong and longstanding status inequalities in a matter of decades…we will see that the reduction of social inequality in Japan was further assisted by an ambitious program of agrarian reform in the period 1945-1950 as well as by highly progressive taxation of top incomes and large estates.

The fall of ownership society in the period 1914-1945 can be analyzed as a consequence of three challenges; the challenge of inequality with European ownership societies, which led to the emergence first of counterdiscourses and then of communist and social-democratic counter-regimes in the late nineteenth and first half of the twentieth centuries; the challenge of inequality among countries, which led to critiques of the colonial order and the rise of increasingly powerful independence movements in the same period; and finally a nationalist and identitarian challenge, which heightened competition among the European powers and eventually led to their self-destruction through war and genocide in the period 1914-1945.

The period from 1726-1914 saw low inflation and complete stability in the value of the pound sterling and the French gold franc. World War I put an end to monetary stability and the suspension of convertibility of their currencies into silver or gold.

…from 1914 to 1950 inflation averaged 13 percent a year in France (equivalent to a hundred fold increase in the price level) and 17 percent in Germany (a three hundredfold price increase).

…ownership societies that seemed so prosperous and solid on the eve of World War I collapsed between 1914-and 1945. The collapse was so complete that nominally capitalist countries actually turned into social democracies between 1950 and 1980 through a mixture of policies including nationalizations, public education, health and pension reforms, and progressive taxation of the highest incomes and largest fortunes. Despite undeniable success, however, these social-democratic societies began to run into trouble in the 1980’s. Specifically, they proved unable to cope with rampant inequality that began to develop more of less everywhere around that time.

Why did social democratic societies fail after 1980?

Ronald Reagan (R) and Margaret Thatcher wave after their arrival in Camp David, 22 december 1984, before their meeting. (Photo credit should read ARCHIVES UPI/AFP/Getty Images)

In the first place, attempts to institute new forms of power sharing and social ownership of firms remained confined to a small number of countries (especially German and Sweden). This avenue of reform was never explored fully as it might have been, even though it offered one of the most promising responses to the challenge of transcending private property and capitalism. Second, social democracy did not have a good answer to one pressing question; how to provide equal access to education and knowledge, particularly higher education. Finally, we will look at social-democratic thinking about taxation, especially progressive taxation of wealth. Social democracy did not succeed in building new transnational federal forms of shared sovereignty or social and fiscal justice. Today’s globalized economy is one in which regulation in all its forms has been undermined by free trade and free circulation of capital, instituted by agreements to which social democrats consented or even instigated. In any case, they had no alternative to offer. The resulting heightened international competition has gravely endangered the social contract (and consent to taxation) on which the social-democratic states of the twentieth century were built.

The French and British never embraced corporate power sharing and social ownership preferring nationalization of private companies:

Then in 1986-1988 the Gaullist and liberal parties returned to power in a new context of privatization and deregulation under Thatcher and Reagan, while at the the same time the Communist bloc was slowly crumbling. This led to the privatization of most of the companies that had been nationalized between 1945-1982.

…from 1917 to 1991, new thinking about private property was blocked by the bipolar opposition of Soviet Communism and American capitalism. One was either for unlimited state ownership or for full private shareholder ownership….The fall of the Soviet Union inaugurated a new period of unlimited faith in private property from which we have not yet completely emerged but which is beginning to show serious signs of exhaustion.

On the massive inequality that developed in the United States from about 1980:

The bottom 50 percent of the income distribution claimed about 20 percent of national income from 1960 to 1980, but that share has been divided in half, falling to just 12 percent in 2010-2015. The top centile’s share has moved in the opposite direction, from barely 11 percent to more than 20 percent…the share of total income going to the bottom 50 percent in Europe remains significantly larger than the share going to the top centile.

To sum up: in the light of the history of the past two centuries, educational equality played a more important sole in economic development than the sacrilization of inequality, property, and stability. More generally, history demonstrated the recurrent risk of an “inequality trap” which many societies have faced throughout the ages. Elite discourse tends to overvalue stability, and especially the perpetuation of existing property rights, whereas development often requires a redefinition of property relations and opening up of opportunities to new groups.

On the failures of progressive taxation:

First, parties of the left failed to foster the kind of international cooperation needed to protect and extend progressive taxation; indeed at times they contributed to the fiscal competition that has proved devastating to the very idea of fiscal justice. Second, thinking about just taxation too often neglected the idea of a progressive wealth tax, despite its importance for any ambitious attempt to transcend private capitalism, particularly if used to finance a universal capital endowment and promote greater circulation of wealth.

…we now know that the top centile’s share of total wealth can fall from 70 percent to 20 percent without impeding growth (quite the contrary, as Western European experience in the twentieth century shows). We know from experience with Germanic and Nordic versions of co-management that employee and shareholder representatives can each control half the voting rights in a firm and that such power sharing can improve overall economic performance.

On tax havens:

…this minimum estimate implies that the financial assets tucked away in tax havens are roughly equal to the total amount of all financial assets legal owned by Russian households inside Russia (roughly one year of national income). In other words, off shore property has become at least as important in macroeconomic terms as legal financial property…In a sense, illegality has become the norm.

…by exploiting data made public by the Bank for International Settlements (BIS) and the Swiss National Bank (SNB) on countries where assets are held, one can estimate each country’s approximate share of offshore assets held in tax havens relative to the total (lawful and unlawful) assets held by residents of each country. The results are as follows; “only” 4 percent for the United States, 10 percent for Europe, 22 percent for Latin America, 30 percent for Africa, 50 percent for Russia, and 57 percent for the petroleum monarchies.

On China:

China thus appears to have settled on a mixed-economy property structure: the country is no longer communist since nearly 70 percent of all property is now private, but it is not completely capitalist either because public property still accounts for a little more than 30 percent of the total–a minority share but still substantial. Because the Chinese government, led by the CCP, owns a third of all there is to own in the country, its scope for economic intervention is large: it can decide where to invest, create jobs, and launch regional development programs.

If we compare China to the other Asian giant, India, it is clear that since the early 1980s China has been both more efficient in terms of growth and more egualitarian in terms of income distribution (or, rather, less inegalitarian, in the sense that concentration of income has increased less dramatically than in India)…one reason for this difference is that China has been able to invest more in public infrastructure, education, and health care. China achieved a much higher level of tax revenue than India, where basic health-care and educational services remain notoriously underfinanced. China has nearly matched Western levels of taxation, taking in roughly 30 percent of national income in taxes (and roughly 40 percent if one includes profits from public firms and sale of public lands).

On the dangers posed by the central banks:

After the bankruptcy of Lehman Brothers in September 2008 and the ensuing financial panic, things changed completely…The world’s major central banks devised increasingly complex money-creation schemes collectively described by the enigmatic term “quantitative easing” (QE). In concrete terms, QE involves lending to the banking sectors for longer and longer periods (three months, six months, or even a year rather than a few days or weeks) and buying bonds issued by private firms and governments with even longer duration (of several years) and in much greater quantities than before. The Federal Reserve was the first to react In September 2008 its balance sheet increased from the equivalent of 5 percent of GDP to 15 percent; in other words the Fed created money equivalent to 10 percent of US GDP in a few weeks time. This proactive stance would continue in subsequent years; the Fed’s balance sheet had risen to 25 percent of GDP by the end of 2014…In Europe the reaction was slower. The ECB and other European authorities took longer to understand that massive intervention by the central bank was the only way to stabilize financial markets and reduce the “spread” between the interest rates of the various European countries. Since then, the ECB purchases of public and private bonds have accelerated, however, and the ECB’s balance sheet stood at 40 percent of Eurozone GDP at the end of 2018…By avoiding cascading bank failures and acting as “lender of last resort”, the Fed and ECB did not repeat the errors that the central banks committed in the interwar years, when orthodox “liquidationist” thinking (based on the idea that bad banks must be allowed to fail so that the economy can restart) helped push the world over the edge of the the abyss…What makes central banks so powerful is their ability to act extremely rapidly.

Piketty does not discuss the New Deal US Federal Deposit Insurance Corporation FDIC program which allows the federal government to instantly take over failing banks, reorganize them with new management, and reopen them after a single weekend, assuring depositors that their savings are insured and immediately available. Obama and his treasury secretary Tim Geithner refused to allow the Shiela Bair led FDIC to break up and reorganize the failing banks during the 2008 crisis. This would have been the available and desired solution to the failures.

…the danger is that these monetary policies, by avoiding the worst gave the impression that no broader structural change in social, fiscal, or economic policy was necessary. Nevertheless, the fact is that central banks are not equipped to solve all the world’s problems or to serve as the ultimate regulator of the capitalist system…To combat excessive financial deregulation, rising inequality, and climate change, other public institutions are necessary; laws, taxes, and treaties drafted by parliaments relying on collective deliberation and democratic procedures.

In the abstract, there is nothing to stop central banks from enlarging their balance sheets by a factor of ten or even more…From a strickly technical standpoint, the Fed or ECB could create dollars or euros worth 600 percent of GDP and attempt to buy all the private wealth of the United States or Western Europe…central banks and their boards of governors are no better equipped to administer all of a country’s property than were the Soviet Union’s central planners.

…the Bank of Japan and Swiss National Bank both have balance sheets in excess of 100 percent of GDP…It is nevertheless impossible to rule out that similar things will someday happen to the Eurozone or the United States. Financial globalization has assumed such proportions that it may lead those responsible for setting monetary policy step by step toward decisions that would have been unthinkable only a few years before.

Many citizens have quite understandably begun to ask why such sums were created to bail out financial institutions, with little apparent effect in jump-starting the European economy, and why it shouldn’t be possible to mobilize similar resource to help struggling workers, develop public infrastructure, or finance large investments in renewable sources of energy. Indeed it would be by no means absurd for European governments to borrow at current low interest rates to finance useful investments, on two conditions; first, such investments should be decided democratically, in parliament with open debate, and not by a Governing Council meeting behind closed doors; and second, it would be dangerous to lend credence to the notion that every problem can be resolved by printing money and taking on debt. The principal instrument for mobilizing resources to undertake common political projects was and remains taxation, democratically decided and levied on the base of each taxpayer’s economic resources and ability to pay, in total transparency.

And yet the Democratic presidents who followed Reagan, Bill Clinton (1992-2000) and Barack Obama (2008-2016) never made any real attempt to revise the narrative or reverse the policies of the 1980s. In particular, in regard to the reduction of the progressive income tax (whose top marginal rate fell to an average of 39 percent from 1980 to 2018, half its level in the period 1932-1980) and the de-indexing of the federal minimum wage (which led to a clear loss of purchasing power since 1980), the Clinton and Obama administrations basically validated and perpetuated the basic thrust of policy under Reagan…But it may also be that acceptance of the new fiscal and social agenda was partly due to the transformation of the Democratic electorate and to a political and strategic choice to rely more heavily on the party’s new and highly educated supporters, who may have found the turn toward less redistributive policies personally advantageous.

In particular, higher-income voters voted more heavily for Tony Blair’s New Labour in the period 1997-2005 than they had voted for Labour previously. That may seem logical given that New Labour also attracted more and more votes among college-educated people and its fiscal policies were relatively favorable to high earners. Just as the Clinton (1992-2000) and Obama (2008-2016) administrations had validated and perpetuated the Reagan reforms of the 1980s, New Labour governments in the period 1997-2010 largely validated and perpetuated the fiscal reforms of the Thatcher era.

I have tried to highlight the significant dangers posed by the rise of socioeconomic inequality since 1980. In a period marked by internationalization of trade and rapid expansion of higher education, social-democratic parties failed to adapt quickly enough, and the left-right cleavage that had made possible the mid-twentieth-century reduction of inequality gradually fell apart. The conservative revolution of the 1980s, the collapse of Soviet communism, and the development of neo-proprietarian ideology vastly increased the concentration of income and wealth in the first two decades of the twenty first century. For want of a constructive egalitarian and universal political outlet, these tensions have fostered the kinds of nationalist identity cleavages that we see today in practically every part of the world…When people are told that there is no credible alternative to the socioeconomic organization and class inequality that exists today, it is not surprising that they invest their hopes in defending their borders and identities instead.

In the broadest terms, the tax system of the just society would rest on three principal progressive taxes: a progressive annual tax on property, a progressive tax on inheritances, and a progressive tax on income. As indicated here, the annual property tax and the inheritance tax would together yield about 5 percent of national income, all of which would be used to finance capital endowments. The progressive income tax, would yield about 45 percent of national income, which would be used to finance all other public expenditures, including the basic income and, above all, the welfare state (which would cover health, education, pensions, and so on).

The model of participatory socialism proposed here rests on two key pillars; first, social ownership and shared voting rights in firms, and second, temporary ownership and circulation of capital. These are the essential tools for transcending the current system of private ownership. By combining them, we can achieve a system of ownership that has little in common with today’s private capitalism; indeed it amounts to a a genuine transcendence of capitalism.

If every individual is to have a chance of finding decently remunerated employment, we must put an end to the hypocritical practice of investing more in elitist educational programs and institutions than in institutions that cater to the disadvantaged. The labor code and, more generally the entire legal system need to be overhauled. New systems of wage bargaining, a higher minimum wage, a fairer wage scale, and sharing of voting rights within firms between workers and shareholders can all contribute to the establishment of a just wage, a more equal distribution of economic power, and a deeper involvement of workers in shaping the strategy of their employers.

The central goal of democratic equality vouchers is to promote participatory and egalitarian democracy. Currently, the prevalence of private (political) financing significantly biases the political process. This is particularly true of the United States where campaign finance laws (always inadequate) have been set aside by recent decisions of the Supreme Court. But it is also true in emerging democracies such as India and Brazil as well as in Europe, where current laws are equally inadequate and in some cases totally scandalous.

The redefinition of the global legal framework will require abandonment of some existing treaties, most notably those concerning the free circulation of capital that came into effect in the 1980s-1990s because these stand in the way of meeting the above mentioned goals. These treaties will need to be replaced by new rules based on the principles of financial transparency, fiscal cooperation, and transnational democracy.

Finally it should be noted that this book was written before the start of the global covid19 pandemic and the global recession/depression. Undoubtedly much is about to change socially and politically in response.

Chain of Title; How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud, David Dayen, 2016

Amid the suffering of the 1930’s, communities banded together to fight foreclosures…Sustained action led to several foreclosure moratorium throughout the Midwest…To stop foreclosures, the Home Owner’s Loan Corporation (HOLC) bought defaulted mortgages from financial institutions at a discount and sold them back to homeowners. Beginning in 1933, HOLC acquire one million mortgages–one out of five in the country at that time. Eighty percent of HOLC clients saved their homes when they might have lost them…HOLC gave borrowers a twenty year mortgage with a fixed interest rate allowing them to gradually pay off the principal over the life of the loan…

Thus the New Deal gave birth to the modern mortgage industry.

No such governmental efforts were made during the subprime mortgage crisis of 2008. While campaigning, Obama favored cramdowns, where judges in bankruptcy can modify the terms of the mortgage, but Obama’s economic team opposed cramdowns and 10 senate Democrats voted against its use. HAMP, Obama’s loan modification program appealed to the banks primarily for the additional fees HAMP might generate. In this book, banks usually accepted HAMP applications at the same time they moved forward with foreclosure. Treasury claims (with no evidence) that 5 million loans were modified by HAMP (and other programs). This book estimates that 6 million homes were lost to foreclosure. A later book, Homewreckers puts the number of homes lost to foreclosure at 10 million. Homewreckers presents the macro view as millions of homes were sold by the banks with Obama government assistance to vulture funds. Most of these home remain off the market, empty, without repairs.

Lisa and Michael Researching fraudulent documents

This book features three Floridian victims of the great foreclosure banking fraud; Lisa Epstein, a nurse, Michael Redman, selling cars on the internet, and Lynn Szymoniak, a lawyer. They each discovered that their foreclosure cases were filled with fraudulent documents showing the wrong dates, the wrong plaintiffs, wrong amounts owed, wrong fees. They quickly uncovered a whole industry created to support mortgage securitization and its array of derivatives moving so fast that producing legally required documents would only be done after the fact, such as a need to foreclose on a single mortgage. Original documentation was usually destroyed by the originators. The Mortgage Electronic Registration System (MERS) was substituted for keeping track of securitized loans and they were never up to the task. County Recorders around the country are the keepers of the official legal filings for all mortgage documents and the mortgage industry went into overdrive to try to file postdated assignments, etc. regarding particular mortgages. The resulting chaos of documents creates broken chain of titles for millions of properties, meaning that no title company can insure the title and the property cannot be sold or transferred. There is no way to guarantee that a title or note claimant will not emerge in the future.

The three victims discovered the widespread practice of robo-signing, where unqualified people were signing massive numbers of documents (thousands a day) without examination and these signatures were often notarized at different times and locations and sometimes with expired on not yet valid notary licenses. A single person might sign as VP for many different banks and institutions. Some signers were dead or in prison at the time of signing.

One service company DocX created after the fact documents for banks. Lynn uncovered a document filed in Florida with BOGUS ASSIGNEE whose address is xxxxxxx. Whether intended as a joke or someone failed to replace the name is unknown but BOGUS ASSIGNEE documents started showing up in other states in official public records.

Michael received an anonymous document:

DocX printed a catalog for foreclosure mills and mortgage servicers , with an online order form called GetNet for missing documents. Curing a defective mortgage would cost you $12.95. Lost note affidavits and allonges were also $12.95. Creating a “missing intervening assignment?” $35.00. “Re-creating the entire collateral file”–that means the note, mortgage, securitization agreement, everything? It’s yours for the low,low price of $95.00.

The documents needed were often produced in foreign countries, some even in Panama.

Lynn Szymoniak

From 2009-2011 documenting the massive bank fraud, creating a grass roots movement with blogs, and chat rooms, in addition to fighting their own foreclosure cases became a full time occupation for all three featured activists. The robo-signing for a time got some national attention. In 2011, CBS’s 60 minutes came to Lynn’s house to film a segment. On April 3,2011 60 minutes aired two segments; one the interview with Lynn and a second on children of foreclosed homes living in Orlando vans and motels. 60 minutes received a award for the story. For a brief time some banks called a moratorium on foreclosure activity. The three believed that criminal indictments were imminent. In the Obama administration with Eric Holder as AG, none of this would happen on a national level.

Michael searched Illinois public records and found the Obama satisfactions of mortgage on their condo signed in 2005 by Chase robo-signer Marshe Caine. Michael posted this on his blog and hits soured after a Dutch blog linked to it. The next day Michael found a second robo-signed Obama document. Michael wrote on his blog; “Feel free to call or email me to discuss this further, Mr. President.” Three weeks later Bank of America resumed foreclosures.

On Feb 9, 2012, state and federal regulators announced the National Mortgage Settlement with the five largest mortgage servicers: Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, and GMAC. Victims of the fraud would receive $2,000. Noone at the bank’s personnel would be fired or go to jail. The only silver lining; Lynn was awarded $18 million for her whistle blower case. After expenses and legal fees, she netted $5.5 million. Foreclosures would move forward at even more accelerated rates with Florida’s “rocket-docket” executing summary decisions in just 20 seconds per case. Public records may never be free of all the fraudulent Recorded documents.

Crooked banks rely on isolation and shame. The Isolation renders the prospect of individual homeowners fighting big banks impossible; the shame makes no level of misconduct from Wall Street as critical as missing a mortgage payment. The foreclosure fighters created community spaces to disarm isolation and shame, giving struggling homeowners a voice and a chance. Without the foreclosure fraud movement there is no Occupy Wall Street; there is no Elizabeth Warren wind of the Democratic Party; this is no student debt movement, or low-wage worker movement, or movement to transfer money to credit unions and community banks. Lisa and Michael and Lynn, and all the bloggers and lawyers and activists who put their heart into this issue, raised public consciousness so that mega-banks have lost just a hint of their aura of invincibility.

For more on Obama’s administration see Scamming the President.

Kochland; The Secret History of Koch Industries and Corporate Power in America, Christopher Leonard, 2019

The Fred C. Koch Family
Fred C. Koch died Nov 17, 1967 Mary R. Koch died December 21, 1990 Charles Koch died Aug 23,2019.

Charles Koch

In a 1974 speech (Charles) Koch attacked the entire narrative behind the New Deal (based on Keynesian Economics), claiming that Roosevelt’s legislation was not, in fact, in response to a lack of federal-level regulation. Koch said that when the New Deal was passed, the economy was already “polluted by massive governmental manipulations of the money supply.”…The business community needed to wage a long-term campaign that would change the way Americans thought about the markets and the role of government (Hayek, Mises, Friedman). Koch said that the campaign should have four elements; 1) Education; 2) Media outreach; 3) Litigation; and 4) Political Influence.

David and Charles Koch

Based on his long term vision, Koch founded the Cato Institute, contributed to the Heritage Foundation and other right wing think tanks; rebuilt the law and economics departments of George Mason University near Washington in the image of the Chicago school, and created the Mercatus Center another free market think tank. This center offered free seminars to more than 4,000 federal judges from all 50 states. Koch was central to the creation of ALEC, the American Legislative Exchange Council, which writes right wing laws and pressures state legislatures to pass them. Koch is behind the Americans for Prosperity lobby that was central to defeat of the Obama era cap and trade legislation in 2010, the only serious effort by congress to limit carbon emissions. In the 2010 midterm election, the Republicans gained control of the house and senate, in large part due to the emergence of tea party candidates and Koch’s Americans for Prosperity efforts.

David and Charles Koch

Koch Industries was to benefit enormously from Federal Action, particularly from the Clean Air Act of 1970. Refineries already operating in 1970 (Koch had two) were “grandfathered” in to the era of clean air regulation. The unintended consequence of this legislation was to halt the construction of new refineries, assuring that no new competition would enter the business. Existing refinery owners immediately started gaming the act; for example companies could be exempted if curbing pollution would be unreasonably expensive. This assured that new technologies would never be implemented in the existing refineries. The EPA was to enforce the New Source Review program which prohibited new refineries from entering the game. The last refinery built in the US was completed in 1977. The EPA needed to rely on state regulators to enforce the New Source Review and these state regulators were simply outgunned and overwhelmed by the giant refinery corporations. Koch’s two refineries were able to increase their capacity more than ten fold and were able to introduce new outputs and products at will. Much of this expansion was achieved without first obtaining permits that would have limited pollution from the plants. Koch refused to invest in suggested new pollution control measures.

Pine Bend Refinery Rosemount, Minnesota

In mid 1996 a sour water stripper that limits the amount of ammonia that was pumped into the wastewater treatment plant ceased operating properly. Repairing the stripper would require shutting down the refiner which Koch refused to do. Instead Koch flushed the ammonia rich waste into large detention pools on the far end of the refinery. When these filled they began spraying the contaminated water onto the surrounding wetlands and fields. In January 1997, Heather Faragher, The only employee trained in waste water management at Koch’s refinery but without the authority make changes at the refinery, told the Minnesota Pollution Control Agency, which was responsible for enforcing federal EPA standards, everything that Koch had been doing at the refinery. in 1998 the MPCA fined Koch $6.9 million for pollution. Federal criminal charges in 1999 resulted in a criminal fine of $6 million, $2 million to the County Park system. Koch also agreed to pay the EPA a $3.5 million fine. Similar events happened at Koch’s Texas refinery, causing Charles Koch to initiate a new program to assure that Koch was in compliance with all state and federal regulations (100% compliance, 100% of the time). He hired a group of regulatory compliance attorneys locating them at company headquarters in Wichita Kansas with the authority to force all company divisions to comply with regulations and with the authority to shut facilities down if necessary. He was driven to this measure to avoid future big fines, to protect Koch’s now tarnished reputation, and to prevent state and federal officials from inspecting and investigating his operations. Privacy and secrecy are Charles Koch’s highest priorities.

A big disappointment in this 600 page book is the failure to address the extent to which Koch benefits financially from direct government subsidies. The topic receives one short mention with no figures of the scale of corporate welfare or crony capitalism enjoyed by Koch. Charles Koch often speaks about his opposition to government subsidies but there is no evidence in this book that Koch has ever turned down a single subsidy. The book does mention that fracking was developed largely due to government subsidies and Koch indirectly benefited as fracking increased the production of oil and natural gas so that the US is now energy independent. One would dearly love to know the extent to which Koch’s remarkable success was due to direct government subsidies.

The fossil fuel industry has always depended on trading, the buying of crude oil, natural gas, etc. and on selling refined or manufactured products. Historically this trade has not been done using established commodity markets. Koch established a separate trading division located in Houston. Charles Koch insisted that his traders have the best available information including the best weather forecasts. Koch invested heavily in computers and developed elaborate models of the relevant markets. Central to the success of Koch trading was the availability of inside industry information which can be used freely and legally in Koch’s markets. Market volatility is what drives profits in trading and Koch’s traders became expert in exploiting volatility. In the cold winter of 2000, one trader placed large bets on the volatility of natural gas prices and earned Koch $75 million. The trader’s base salary was $60,000 and he earned $4 million in a bonus. Koch keeps a close leash on its traders and knows on a day to day basis company exposure to its trader’s bets. Unlike banks, wall street firms and insurance companies, Koch has never experienced unexpected losses from a rogue trader. In 2000, as Clinton was leaving office, his administration passed the Commodity Futures Modernization Act, leaving the market for derivatives unregulated and in the dark. Thus Clinton set the stage for the 2008 subprime mortgage crisis. This book explores how fossil fuel industry traders quickly learned and adapted to this new age of unregulated financialization. We think of Wall Street, the banks, and the insurance companies, but the fossil fuel industry reaped enormous profits from exotic and dark trades.

How Koch Became an Oil Speculator Powerhouse

Companies like Enron and Koch all engaged in illegal trading activity, best exemplified by California’s electric utility deregulation fiasco that started in 2000. ALEC was instrumental in getting the disastrous neoliberal bill passed in 1998. The New Deal Era public utilities system for electrical power was replaced by a radical new system. The existing utilities retained their geographic monopolies with set maximum electric rates, but they were stripped of their generators. Power generation was privatized and the utilities were required to buy power on a daily basis. An emergency state agency was created to buy electricity when the markets failed. A massive daily trading system emerged. The new system was quickly overrun by unusually hot weather. The scale of Koch’s illegal trading activities in California electric power were dwarfed by the scale of Enron and other huge energy companies and largely escaped being tarnished further by its illegal trading. Charles Koch’s 100% compliance order somehow did not include the trading division. Enron’s fraud and illegal activities forced it out of business in 2007.

California Electricity Crisis of 2000-2001

Charles Koch was a keen student of the latest management theories. Early in his career, he adopted the teaching of Edward Deming who revolutionized Japanese manufacturing practices after WWII. His typical management hire was a young graduate of a midwestern university often with an engineering degree and often someone raised on a farm with midwestern work habits. Charles Koch believed he could educate the young graduates to his philosophy and new hires spent hours in seminars and training. The new hire would then be assigned a job and his performance closely watched. If he was successful, he would then be reassigned to another position that might be totally alien to the experience and training of the employee. They might find themselves moved from a refinery to a trading desk where a whole new set of skills is required. If successful there, the employee might be moved to another position, maybe in fertilizer or pipelines or most anything. If the employee does not succeed in their new assignment they are terminated from Koch. Its a bit like the father that throws his child in the deep water to see if they sink or swim. In spite of this style of management, employees at Koch, if they succeed, seem extremely loyal to Charles Koch and enjoy long careers. In 1969, two years after Charles Koch became CEO, Laurence J. Peter published a book describing what became known as the Peter Principal. Organizations continue to promote their workers until they reach a point where they are no longer able to successfully perform the functions required by their position. This book makes no mention of the Peter Principal but Charles Koch, whether he knew the principal or not, seemed to embrace it and used advancement within Koch to test and challenge his employees until they break at which point they are removed.

In 1987, an investigative report published in the Arizona Republic charged that the oil companies were stealing oil from native American reservation oil fields. Several US Senators got interested and the largest oil companies told them to look at Koch. The Senators got an FBI agent assigned to investigate and he started observing Koch trucks and gaugers as they pumped oil from the field tanks to their trucks, measuring the amount of oil taken using gauge sticks inserted into the field tanks before and after the pumping. The drivers would record the amount of oil taken and leave a ticket at the site. This ticket determined what Koch owed for the oil taken. When the truck was emptied at its destination an accurate measure of the oil taken could be obtained. The work of the guagers is only approximate and Koch trained the drivers never to be short, i.e. never to have the oil actually delivered be less then the ticket left at the site. To be short meant an immediate termination. The drivers were never instructed to steal oil, they were instructed never to deliver less oil than Koch was obligated to pay for. The obvious and only was to assure that they were not short was to always be long. The Senate passed the investigation to the Justice Department which made Koch hand over its records for three years. In each of these years Koch received an average of 400,000 Barrels of oil per year worth about $10 million that they didn’t pay for. The Justice Dept. didn’t want to charge individual drivers but thought it would be difficult to charge the top executives for the theft. The case did go to trial and was settled for an undisclosed amount. There was bad publicity for Koch but no lasting consequence. This is just another example of Koch pushing beyond the limits of legal and normally understood ethical behavior.

Additional Details on Oil Theft from Christopher Leonard

Two sections of the book deal with Koch treatment of unions, first the union at the Minnesota refinery, and second the Georgia Pacific division unions. The stories are different but similar. Koch refuses to negotiate, changes the work rules, slowly squeezes wages, moves union pensions to 401K s and interferes with health care programs. It is pretty miserable to work a union job at Koch but the alternatives are worse. Charles Koch’s toughness is illustrated by his reaction to a union strike at the Pine Bend refinery in Minnesota, which in 1970 was still a strong union state. Charles Koch hired a Texas oilman whose hero was George Patton to run the refinery. When the workers voted to go on strike, he hired enough non union workers to keep the refinery running and flew them on site by helicopter. The skeletal crew lived on site with their boss. When the teamsters refused to cross the picket line, Koch negotiated a deal whereby Koch drivers would replace the teamsters for the drive through the picket line, load the truck, and return it to the teamster driver. When the strike extended, Koch built a separate road entrance bypassing the picket line and convinced the teamsters to drive their trucks through the new entrance. For specialized maintenance requiring workers from other unions, Koch eventually convinced them to make repairs in spite of the strike. In this way the refinery union was slowly isolated and weakened. They eventually settled on Koch’s original terms, but after losing more than a year of wages.

Georgia Pacific’s plants and warehouses were subjected to modern software systems designed to increase worker productivity. This increased productivity was accompanied by a corresponding increase in injuries, some of them fatal. These injuries would result in OSHA investigations and modest fines, but any government interventions were anathema in Koch’s culture. While trying their best to prevent injuries, the numbers stayed stubbornly high. Stressed employees will make mistakes and the only solution is to decrease the pressure. On the contrary Koch would fire employees that were considered too cautious and careful because that meant they worked slower. Had the OSHA fines been in the millions, I have no doubt Koch would have figured things out to reduce or eliminate injuries.

Koch created a Value Creation Group but this got subdivided and one of the subdivisions was Koch Agriculture. Koch had virtually no experience in agribusiness volatility. In 1997 Koch saw an opportunity to buy century old Purina Mills headquartered in nearby St. Louis. The problem with private equity acquisitions is that is drew Koch into businesses where it had no expertise. They agreed to pay $670 million for a company worth $109 million. Koch borrowed $570 million and put up $100 million of its own money for the purchase. Koch tried to impose the Koch culture on a company with its own very different and well established culture with the result that key employees left the company in droves. Due diligence failed to uncover massive contracts between Purina and hog feedlots which required Purina to produce piglets that the feedlots were under contract to buy and grow using Purina food. When the hog market imploded, the feedlots defaulted on their contracts (that Koch didn’t know existed) and Purina was forced into bankruptcy. Purina and the creditors lawyers believed the Koch corporate veil that was supposed to protect the holding company, was flawed, and Koch was forced to settle by putting up another $60 million in cash to get rid of Purina. Charles Koch fired everyone associated with this disaster and closed the entire acquisitions division.

Koch began a complete reorganization of the business in 1999. Over the years Koch had acquired a wide hodgepodge of unrelated businesses. Koch unloaded many of its pipelines, sold a small chemical company and other odds and ends. At the core of the new structure, Koch Petroleum was rename Flint Hills Resources. Others were simplified and reorganized into Koch Minerals, Koch Supply & Trading, and Koch Chemical Technology Group. New leaders were appointed to run these consolidated businesses. Koch Industries became little more than a holding company protected by a legally impenetrable veil to protect it from problems in its divisions. Charles Koch also finally put to rest the 20 year long legal feud with brother Bill and could totally focus on growing Koch. Koch’s spectacular growth after 2000 was the result of operating one of the largest private equity operations in the country. Private equity finds distressed public companies that can be purchased cheap, converted from publicly traded or coop into privately held companies. Charles Koch from the beginning wanted his company to remain private, to operate in secret, and to forego dividends in favor of reinvesting profits to grow the business. He was proving that he could learn fast from past mistakes, correct them mercilessly and move on. He initiated his “10,000 percent compliance” program discussed earlier at this time to keep the government and regulators off his back. Clinton ushered in the age of financialization in 2000 and George W Bush from Texas and Dick Cheney entered the White House. Koch was set for a decade of spectacular growth.

In 2003, Farmland a depression era coop headquartered in Kansas City wanted to sell a group of liquid nitrogen fertilizer plants all located close to their midwest farm customers. The most expensive component, at 80% in the production of liquid nitrogen is natural gas and domestic natural gas was very expensive. Lower cost imported fertilizer had undermined Farmland’s market. Koch had inside information that fracking was about create a vast increase in the supply of natural gas and prices would plummet. This purchase would mean a significant reentry into agribusiness and the acquisition team didn’t know if Charles Koch was ready to forget the Purina experience but he fully backed acquisition. Natural gas prices plunged and the fertilizer plants became immediately profitable.

Also in 2003 Georgia Pacific approached Koch to see if they were interested in purchasing several struggling pulp mills in Georgia and Washington – Oregon. The mills came with several unionized warehouses for the mill’s products. When the Koch team visited Georgia Pacific’s Atlanta headquarters (51 stories tall) they saw a bloated, hyper luxurious operation. At the same time DuPont came on the market. Overall, Koch was looking at corporate takeovers worth more than $25 billion. Koch acquired both DuPont’s Invista for $4.4 billion and Georgia Pacific for $21 billion. Charles Koch had always disliked borrowing, but borrowing is the foundation of the private equity business. Find an under performing company with lots of cash flow and buy it with borrowed money. Make sure the holding company is protected from the creditors, turn the companies around and use the resulting cash flows to repay the loans. Koch was now willing to borrow seemingly unlimited money to fuel its acquisition appetites. Both DuPont and Georgia Pacific were heavily dependent on the building of new housing which was a hot market right up to the sub prime mortgage crash of 2008. Charles Koch did not panic but scaled back operations at all affected acquisitions and waited to weather the downturn storm.

June 29, 2012 (Reuters) – DuPont Co has settled a $745 million lawsuit brought by Koch Industries Inc’s Invista unit over safety and environmental problems at plants once owned by the large chemical company.

How The Kochs Are Fracking America

The crash of 2008 made fracking economically viable and the supply of natural gas exploded. Then drillers in North Dakota applied fracking to crude oil successfully for the first time. There was an area called the Eagle Ford Shale region near Corpus Christi where Koch’s second light crude refinery was located. Koch’s planners decided on a plan to build pipelines between Eagle Ford and Corpus Christi and to buy and build a ship slip to export any excess crude oil. Charles Koch embraced the plan immediately and only wanted to assure the plans were big enough. Oil from fracking start to flow in 2010 when by the end of the year 139,000 barrels a day were being produced. By 2014 production hit 1.68 million barrels a day roughly 20% of all crude oil produced in the US that year. Because the 1970 Clean Air Act effectively prevented the building of new refineries, Koch’s Corpus Christi refinery enjoyed enormous profits from the newly available light crude.

Koch Brothers War on Renewable Energy

Through this same period the Kochs focused their political attention on fighting renewal energy initiatives at the state level (ALEC), fighting any carbon restrictions at the state and federal level, and rolling back CAFE auto efficiency standards. Charles Koch and his company became much more visible as a result of these massive anti environmental efforts and he started experiencing demonstrations at his gatherings and now requires constant security protection. Gone were the days when Charles could drive his modest old station wagon from the family home to Koch headquarters.

The Age of Surveillance Capitalism; The Fight for a Human Future at the New Frontier of Power, Shoshana Zuboff, 2018

This is a look at the transformation of Google, Facebook, and others from their initial mission to serve their users to the exploitation of those users by selling their privacy to the highest bidder to achieve enormous personal wealth and power.

In her personal experience Zuboff describes sitting as a nineteen year old in the back of a seminar where Thomas Friedman (founder of the Chicago school of economics) instructs doctoral students who will soon run the economy of Chile after the CIA inspired coup and assassination of elected President Salvador Allende in favor of the Pinochet military dictatorship in 1973.

Thomas Friedman and Friedrich Hayek, economics as ideology and their opposite John Maynard Keynes

Zuboff also briefly alludes to debates she had at Harvard with the aging and discredited behaviorist BF Skinner, author of the novel Walden Two. She spends time in the book discussing Alex Pentland of the MIT media lab who she considers a BF Skinner intellectual successor armed with the tools Skinner could only dream of having and using. She calls Pentland a high priest of Surveillance capitalism. Pentland helps provide the intellectual justification that legitimizes instrumentarian (a new word coined by Zuboff) practices. Pentland never mentions Skinner in his work but his behavior modification goals are the same.
BF Skinner at Harvard and Alex Pentland of MIT Media Lab

Zuboff explains why user consent through opt-in or opt-out has been rendered meaningless under Surveillance Capitalism. To read a single contract agreement in detail might take hours and with third parties almost always involved there may be 1,000 individual contracts to read and digest. If you opt out surveillance capitalists will threaten to downgrade your system and will probably still collect and distribute your information without your permission. You have no way to find out what they are doing. If you ask for the information collected, as a Belgium privacy attorney attempted to do of Google, they are unable to retrieve it for you. It is buried somewhere in a second tier of automatic computation technology. The user has no way of determining what software is currently running on your computers or smart phones or what peripherals like GPS, cameras, microphones, etc. have been usurped for external control. To add insult to injury, you will pay for the transmission bandwidth they secretly steal from you to illegally surveil your activities. If you have installed smart home devices like thermostats or security systems you have no way to know what these smart devices are observing and collecting. Your car driving behavior can be monitored with bad insurance consequences, not only by your new car, but by your smart phone. Your new car can be disabled by the finance company and its GPS location sent to the REPO people to come get your car. Then imagine advances in voice and face recognition and you start to get the terrifying idea. Then imagine all of this surveillance capability in the hands of a non democratic government like China. You can’t do anything at all without the state monitoring (and influencing) your behavior.

What does older capitalistic history teach us?

It (government interventions into free market capitalism) appeared in the trust busting, civil society, and legislative reforms of the Progressive Era. Later it was elaborated in the legislative, judicial, social, and tax initiatives of the New Deal and the institutionalization of Keynesian economic during the post-World War II era; labor market, tax, and social welfare policies that ultimately increased economic and social equality.

In fact the Bretton Woods conference of 1944 created a new world economic order based on a US-centric dollar based fixed exchange rate system, created the IMF and World Bank, and was a complete repudiation of Keynesian economics. This system worked only so long as the US remained the dominant manufacturing power, creating large trade surpluses that the US could recycle as investments. When trade reversed around 1970 and the US became a trade debtor nation, the American economy shifted from manufacture to financialization, convincing trade creditors to invest their surpluses with Wall Street, who kept inventing new and innovative ways to use the mountains of cash suddenly at their disposal. The Neoliberal contribution to all this was the erosion of government regulation of corporations and the use of IMF and Worldbank loans to vulnerable nations and colonies whose defaults resulted in the massive transfers of state owned commons into private hands like Wall Street hedge funds. See Greek Spring by Yanis Varoufakis. None of this history is clear from her book. For an excellent introduction to macro economics from Bretton Woods to the present see Yanis Varoufakis’ minotaur book. The breakup of the Soviet Union in the 1990’s was another opportunity for the Neoliberals who descended on the former Soviet Union members with plans to transfer all public commons into private hands. The result was to create a new class of asset owners in each country that more resembled a mafia than capitalists. We remain in this condition to this day. The massive and fundamental shift of the American economy from manufacture to financialization is not mentioned by Zuboff.

To her credit, Zuboff does site French economist Thomas Piketty’s monumental work on wealth and income distribution in England and America from the eighteenth century to the present.

A market economy…if left to itself…contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based…If we are to regain control of capital, we must bet everything on democracy.

Our present economic system has been accurately described as corporate welfare with massive government subsidies for agriculture, energy, extraction, and other industries. Hayek and Friedman would turn over in their graves if they knew where American capitalism has taken us. This trend reached its pinnacle (we only hope) with the Bush-Obama massive bailouts of the financial institutions and Zuboff’s beloved General Motors after the sub-prime financial scandal-crisis of 2008. Shiela Bair (W appointee to head the FDIC) was fully prepared to break up the big banks starting with Citibank using her FDIC authorization and charter, but was prevented from doing so by Tim Geithner who was shockingly appointed by Obama as his treasury secretary. See more at Scamming a President. No meaningful reforms were enacted to prevent a recurrence of this collapse and we anxiously await the next iteration.

Zuboff mentions Rand Corporation futurist Herman Kahn’s 1967 book The Year 2000, where the author anticipates the future possibilities of computer power intrusions into our lives characterizing this as “a twenty-first century nightmare”. She says Kahn was the model for the character of Dr. Strangelove in Stanley Kubrick’s 1964 movie. No!

Herman Kahn wrote an earlier book published in 1960 “On Thermonuclear War” where Kahn speculated that it would be possible to create a “Doomsday Machine“; a vast collection of nuclear weapons connected to an automated trigger mechanism that, upon detection of a threat and without any human intervention, would initiate nuclear holocaust. Most experts at the time believed such a system could not be built. In fact the Soviet Union built just such a secret machine called The Dead Hand whose current status is unknown. See Daniel Ellsberg’s Doomsday Machine book. Kahn’s 1960 book was the inspiration for Kubrick’s movie where the Soviet Union have successfully built a doomsday machine but have kept it secret from the US. The character Dr. Strangelove is a caricature of a former Nazi scientist, not Kahn. Kahn was a consultant on the movie.

Zuboff uses a discussion of totalitarianism to illustrate how slow academics and intellectuals are to understand completely sui generis unprecedented developments. Our understanding of totalitarianism came into focus only in the 1960’s, well after the demise of European Fascism and dramatic changes following Stalin’s reign of terror. She points out that between 1930 and 1953 Stalin appears ten times on the cover of Time magazine. She leaves out any discussion of Mao’s China, but China emerges later in her discussion of State uses of surveillance capitalism.

She introduces and coins Instrumentarian power as a contrast to totalitarian power.

Instumentarian power moves differently and toward an opposite horizon. Totalitarianism operated through the means of violence, but intrumentarian power operates through the means of behavioral modification, and this is where our focus must shift. Intrumentarian power has no interest in our souls or any principal to instruct. There is no training or transformation for spiritual salvation, no ideology against which to judge our actions. It does not demand possession of each person from the inside out. It has no interest in exterminating or disfiguring our bodies and minds in the name of pure devotion. It welcomes data on the behavior of our blood and shit, but it has no interest in soiling itself with our excretions. It has no appetite for our grief, pain, or terror, although it eagerly welcomes the behavioral surplus that leaches from our anguish. It is profoundly and infinitely indifferent to our meanings and motives. Trained on measurable action, it only cares that whatever we do is accessible to its ever-evolving operations of rendition, calculation, modification, monetization, and control.

Deng Xiaoping Architect of Democracy Free Capitalism in China

Instrumentarian power in the hands of non democratic States like China is almost beyond comprehension in its potential power. Yanis Voroufakis describes Singapore under Lee Kuan Yew and his disciple Deng Xiaoping who transformed China’s economy using the Singapore model as democracy free capitalism.

Voroufakis primary point in Voroufakis Ted talk is that Western capitalist corporations are hording massive mountains of profit, investing only in corporate consolidation, and are in direct contradictions of Keynesian economics to recycle surpluses to level the cycles of boom and bust. These uninvested surplus mountains may doom democracy and life as we know it.

Industrial capitalism depended upon the exploitation and control of nature, with catastrophic consequences that we only now recognize. Surveillance capitalism…depends instead upon the exploitation and control of human nature. The market reduces us to our behavior, transformed into another fictional commodity and packaged for others’ consumption.

Surveillance capitalism’s successful claims to freedom and knowledge, its structural independence from people, its collectivist ambitions, and the radical indifference that is necessitated, enable, and sustained by all three now propel us toward a society in which capitalism does not function as a means to inclusive economic or political institutions. Instead, surveillance capitalism must be reckoned as a profoundly antidemocratic social force.

As Thomas Paine noted in the Eighteenth century; “…a body of men holding themselves accountable to nobody, ought not to be trusted by any body.”

Surveillance capitalism’s antidemocratic and anti egalitarian juggernaut is best described as a market-driven coup from above. It is not a coup d’etat in the classic sense but rather a coup de gens: an overthrow of the people concealed as a technological Trojan horse that is Big Other…It is a form of tyranny that feeds on people but is not of the people.

The young people we have considered…are the spirits of Christmas yet to come. They live on the frontier of a new form of power that declares the end of a human future, with its antique allegiances to individuals, democracy, and the human agency necessary for moral judgment. Should we awaken from distraction, resignation, and psychic numbing…it is a future that we may still avert.

Zuboff starts her book with the assertion that Surveillance capitalism cannot be controlled or contained through the lens of antitrust or privacy. She mentions the EU regulation the General Data Protection Regulation (GDPR) which only went into effect in May 2018 and only within the EU. It is too early to see if this ambitious effort will have any impact as it works its ways through EU regulators and the courts. She appears sceptical. For the Guardian’s take on GDPR. So what do we do?

If democracy is to be replenished in the coming decades, it is up to us to rekindle the sense of outrage and loss over what is being taken from us. In this I do not mean only our “personal information”. What is at stake here is the human expectation of sovereignty over one’s own life and authorship of one’s own experience. What is at stake is the inward experience from which we form the will to will and the public spaces to act on that will…That Surveillance capitalism has usurped so many of our rights in these domains is a scandalous abuse of digital capabilities and their once grand promise to democratize knowledge and meet our thwarted needs for effective life.

For more on the despotic behavior of Facebook and Google

And the Weak Suffer What they Must? Europe’s Crisis and America’s Economic Future, Yanis Varoufakis, 2016

White and Keynes at Bretton Woods

Shortly after D day in 1944, the allies met at Bretton Woods to hammer out a post war global economic order. The American delegation was led by New Deal economist Harry Dexter White:

Bretton Woods offered White an opportunity to project the New Deal onto a global canvas. His brief for the Bretton Woods conference was nothing less than to design from scratch a stable, viable worldwide financial system for the postwar era.

But the New Deal stabilized capitalism in the US by instituting a broad range of political recycling mechanisms; among them the Federal Reserve, the FDIC Federal Deposit Insurance with the power to restructure failed banks, social security, even the military budget.

John Maynard Keynes attended the conference armed with a plan that would stabilize global capitalism for the long run by creating just such political recycling structures on a global scale. But White, who as a student had been heavily influence by Keynes, was charged to push through a very different and flawed system, totally dependent on America maintaining a global trade surplus and recycling that surplus to deficit nations at the will and whim of the American government. Thus was born the system wherein all other currencies would be tied to the dollar at fixed rates of exchange and the dollar would in turn be tied to gold at $35 an ounce.

By the late 1960’s, America’s trade surplus evaporated as Europe, led by Germany, and Japan started exporting more manufactured goods to the US than the US was exporting to them. This could not continue and in 1971 the Nixon administration, led by Paul Volcker, announced the Nixon Shock, dumping the gold standard and cutting all other currencies loose from the dollar.

The moment men like Paul Volcker saw that political surplus recycling was beyond the American economy’s capacity, they brought the whole damned (Bretton Woods) system down- with the 1971 Nixon shock. For they understood the fallacy that Europe refuses to grasp: if you set up a free trade, free capital and single currency system without a political surplus recycling mechanism, you will end up with something like the 1920’s gold standard.

From the moment that Europe was discarded form America’s comforting postwar dollar zone, European elites struggled to re create the defunct dollar zone within Europe. Never having grasped the lessons that the New Dealers learned during the 1930s and 1940s, European officialdom repeated the same mistakes made during the 1920s, creating an ill designed gold standard like currency in the heart of Europe

It is dangerous error to believe that monetary and economic union can precede a political union or that it will act (in the words of the Werner report) “as a leaven for the evolvement of a political union which in the long run it will in any case be unable to do without. Cambridge economist Nicholas Kaldor 1971

France’s Francois Mitterrand and Britain’s Margaret Thatcher believed that the next big economic shock in Europe would force Europe into a political federation with the creation of political institutions capable of recycling surpluses just as the US has done in the 1930’s and 1940’s.

Francois Mitterrand and Margaret Thatcher

Thatcher’s mistake was to assume that Mitterrand’s scheme would succeed. She failed to recognize, as Mitterrand had also failed, that is was not in the European Union’s DNA to carve a federation out of its monetary union’s troubles…Only inefficient, sweeping authoritarianism could emerge from its wooden underbelly.

So, unable to learn from history and unwilling to forget their petty agendas, Europe’s ruling class set out to re-create the gold standard, demonstrating a grandiose failure of perception of what they were doing. Keynes had described the gold standard as a “a dangerous and barbarous relic of a bygone era.” Little did he know that Europe would re-create it in the late 1990’s, thus replicating circumstances ripe for another Great Depression in the 2010’s; and economic crisis that ended up…preventing the very political union that was to have been its antidote.

Lacking a political surplus recycling mechanism, Europe’s monetary union meant that the weakest nations and their frailest citizens had to suffer a sharp contraction the moment Europe’s capitalism went into a spasm in response to financialization’s inescapable seizures. Mitterrand’s original hope (that a future global financial would force upon the euro zone a federal solution) offered any respite from the pitiless reality. By 2010, two years after the type of crisis Mitterrand had in mind, that hope had died out too.

Paul Volcker, now President of the New York Federal Reserve next brilliant move came during the Carter Administration with his little known Warwick speech in which he declared: “A controlled disintegration in the world economy is a legitimate objective for the 1980’s.” Here is what Volcker, about to become Federal Reserve Chairman had in mind:

Volcker’s Controlled Disintegration

If America cannot recycle its surplus, having slipped into a deficit position back in the mid-1960’s, it must now recycle other people’s surpluses!
The trick for America to gain the power to recycle other countries’ surpluses in the 1980’s, Volcker believed, was to persuade foreign capitalists to voluntarily send their capital to Wall Street…The trick was to hit two usually contradictory targets at once: on the one hand push American interest rates through the roof while on the other, ensuring that Wall Street offered a more lucrative market for investors than its equivalent in London, Frankfurt, Tokyo, Paris, or anywhere else.

What do bankers do when such a tsunami of capital comes their way daily? When billions of dollars, net, run through their fingers every morning of each week? They find ways to make it breed on their behalf. Throughout the 1980’s the 1990’s and all the way to 2008, Wall Street took in the daily influx of foreign capital and, on its back, built mountains of derivative trades which, in time, acquired the property of private money.
Financialization, as we now call this process, was the critical byproduct of maintaining and enhancing US dominance on the back of increasing trade imbalances and in the interest of financing America’s ever-expanding twin deficits. It began as froth on top of the stream of profits flowing from Germany and Japan to Wall Street, once Volcker’s “controlled disintegration” of the world economy was taking effect. But soon the froth took over, usurping the underlying stream of actual values, turning finance into the driver and industry into the servant.

Reagan’s Massive Government Spending Program

But things began to go awry after 1986 when American authorities decided to wind back their vacuum cleaner, limiting the rate at which US deficits grew. The recession in the early 1980’s, caused by Volcker’s sky high interest rates and Ronald Reagan’s early budget cuts, frightened the Reagan administration into action. Using the US military budget as its main instrument, Washington effected the most Keynesian macroeconomic expansion in America’s history… The president,who had won the 1980 election by preaching against public spending and in favor of shrinking the state, won reelection in 1984…on the basis of a massive public spending spree.

Undermining New Deal Regulations

Enter Bill Clinton in 1993:

The Clinton administration, and especially Robert Rubin and Larry Summers in the National Economic Council and the US Treasury Department respectively, were busily working toward maintaining the Minotaur’s feeding frenzy. America’s deficits kept global capitalism effervescent, creating the illusion of a Great Moderation when underneath the surface, markets were increasingly addicted to America’s growing imbalances. If the American Minotaur’s frantic consumption of other people’s products and money were to end, markets take a hit, banks would go under, and the global economy might keel over. Precisely as it did in 2008.

Global Minotaur

As we have seen, the birth of America’s global Minotaur needed finance to be liberated so that the beast could do its work (supplying German, Japanese, Swedish, and later Chinese factories with sufficient demand) while also being nourished (by the profit of the German, Japanese, Swedish, and later Chinese factory owners), who sent them streaming into Wall Street.

The banker’s emancipation from their New Deal fetters was both a symptom and prerequisite for the new phase of American dominance. Who else but the bankers could facilitate the vast capital transfers, the perpetual tsunami of capital necessary to satiate American deficits that had to keep growing in order to maintain the illusion of what Ben Bernanke, one of Volcker’s successors, named the Great Moderation? Fair-weather recycling writ large, had taken over globally from the planned, political recycling that was the essence of the Bretton Woods system. Though this was never going to end well, it had the capacity to put the global economy on a spending spree that lasted three decades before crashing down in 2008.

During the same period, from the 1990s onward, Europe’s banks were copying the practices of the Anglo-sphere’s all-singing all-dancing financial sector, without having the safety net of a Federal Reserve, or a Bank of England, or even a Bank of Japan to catch them when the inevitable fall from grace occurred. The combination of the euro zone’s flimsy monetary architecture and the imperatives of Anglo-Saxon financialization, which infect the Parisian and Frankfurt banks under the noses of Brussels and Frankfurt, produced a reliance on money markets that Europe’s monetary union could not withstand.

Of American Officials views, Varoufakis notes:

They know America no longer has the power to stabilize the world economy by itself. They understand that Europe’s policies are detrimental to America’s future. And they are frustrated that their European interlocutors are not only ignorant of simple macroeconomic laws, but, curiously that they are not even ashamed of their ignorance.

Ponzi Austerity

The European monetary union’s reaction to the 2008 crisis was to create the mother of all Ponzi schemes Ponzi austerity:

These toxic transfers (of bank debt into taxpayer debt), effected in the name of European solidarity, led to a death dance of insolvent banks and bankrupt states, and couples that were sequentially marched off the cliff of competitive austerity. Deflation, ultra-low investment, social fragmentation and rising poverty ensured that large sections of proud European nations, most the weakest of their citizenry, were dragged into the contemporary equivalent of the Victorian poorhouse.

Capitalism in the Age of Globalization, Samir Amin, 2014 (originally published in 1997)

Samir Amin is a French-Egyptian Marxian economist. He lives in Dakar, Senegal. Amin’s primary focus in this work is this challenge:

The first (capitalism) wishes to fix evolution, more or less submitting it to the perspective of the unilateral action of capital. Socialism on the other hand permits one to see why this capitalist globalization remains truncated, generating, reproducing, and deepening global polarization step by step. The historical limit of capitalism is found exactly here: the polarized world that it creates is and will be more and more inhuman and explosive. Challenged by this enormity, socialism has a duty to propose an alternative vision of globalization, the means of achieving it in the true sense of the word and giving it a human and truly universalistic character. This is, in my opinion, the challenge.

Rejection of capitalism by turning to ethnicity and religious fundamentalism actually have become integrated into this brutal globalization and are made use of by it. They cannot be the answer to apocalyptic capitalism.

Capitalism today is sustained by the existence of five monopolies enumerated by Amin:
1. Technological Monopoly. This monopoly is sustained by huge state expenditures especially through military spending.
2. Financial Control of worldwide financial markets. With deregulation and the liberalization of rules governing finance, finance has become capital’s most global component. Past empires like the British maintained financial control through trade surpluses. The US attempts to maintain its dominance and the dollar as the global currency despite massive trade deficits. As a result, today’s financial system is extraordinarily fragile.
3. Monopolistic access to the planet’s natural resources. The reckless environmental dangers of this monopolistic exploitation are dangerous and increasingly obvious.
4. Media and Communications monopolies. These lead to a uniformity of culture and provide effective means for political exploitation. These monopolies are a primary source of the erosion of democratic practices.
5. Monopolies over weapons of mass destruction. The US monopoly of 1945 was held in check through the cold war but today the US again has an unacceptable monopoly that cannot be held in check through international democratic controls.

Bangladesh Factory Collapse

Amin’s central focus is the evolving social contract between Capital and Labor. The early 20th Century saw the spread of Fordism by which Amin not only refers to mass industrial production but to the rise of labor organization and negotiated social contracts between capital and labor. The name is perhaps unfortunate given Henry Ford’s antipathy toward union organizing. By the end of WWII and up til about 1970, organized labor proved able to hold their own in upholding dignified social contracts with capital. Today, with capital able to physically relocate for tax and labor advantage, the social contracts enabling workers to enjoy a decent middle class living have evaporated to be replaced by a capital induced permanent state of unemployment or “surplus labor” as capital economists prefer to refer to it. Global capital uses subcontracting at the periphery to limit liability (from collapsing factories, indentured labor, environmental damage, etc.). Amin is not a numbers guy (in sharp contrast with French economist Piketty) but he does point out that modern finance is able to move capital around the globe at about 30 times the volume of trade. This has to exaggerate short term opportunism and instability as capital lurches from crisis to crisis.

Amin prefers to refer to the global economy as having a center and a periphery. This replaces the nomenclature of first, second, third, and forth worlds. As the global economy moves away from its center, the level of surplus labor increases until virtually the entire population is included in this category. This state of economic affairs makes modern capitalism inherently unstable lurching from crisis to crisis. Modern capital managers are trained in crisis management and little else. Capital has no long term objectives, vision, or dreams. It blindly lurches along putting out fires as best it can.

Amin equally decries the damage capital is doing to our environment seemingly without constraint or cost. The environmental damage, like “surplus labor” only intensifies as one moves from the center toward the periphery.

The US is the absolute center of destructive capitalism. There is potential for a second East Asian center of China, Japan, and the tigers. India is another potential regional center. The European EC has had some success in integrating markets and allowing some mobility of labor but capitalism intentionally created the EC with very weak central political structures including a weak central bank. The result is becoming a German dominated EC. Germany’s current project is the “Latin Americanization” of Eastern Europe under German control. Already the Czech Republic has become a German protectorate. The EC must strengthen central democratic institutions if it is not to fall apart or become totally dominated by Germany. Amin spends some time examining the failed example of the Bandung Project, the loose coalition of 29 non aligned nations (neither aligned with the US nor the Soviet Union). Formed at the Bandung Conference in 1955, this coalition represented more than half the world’s population.

A major objective of imperialism and colonization as controlled from the center was the Balkanization of Africa and the Middle East. Britain had the same objective in India but largely failed, only able to carve out the two Pakistans as they left India. This Balkanization makes it much more difficult to build regional solutions, whether in Eastern Europe, Africa, or the Middle East. All this leaves only the US-Canada as a continental region with the potential to do something about breaking up the five monopolies of capitalism.

Amin speculates that the IMF, the World Bank, and the GATT-WTO could potentially be reformed to serve to correct some of the extreme problems of global capital but today they serve the interests of global capital at the center and promote neoliberal objectives. Unless they are reformed they will continue to contribute and exaggerate the global economic crises and not abate those crises.

Amin decries the absence today to a towering intelligentsia like that of the enlightenment able to have a profound impact on thinking about new forms of social contract between capital and labor. Amin finds the academic apologists of capital with their non empirical talk of the magic and invisible markets risible and dangerous. Amin admires Marx’s analysis of the problem but finds Marx fell far short of suggesting organizational and political solutions to the problem. He refers to the Soviet revolutionary experience as “Sovietism” and the Chinese revolutionary experience as “Maoism”. He refuses to call either Communism. He believes there has to be a regional political organizational solution to the problem of capital and control over its five monopolies. Amin admits he doesn’t have the answer.

The Divide; American Injustice in the Age of the Wealth Gap, Matt Taibbi, 2014

A painful book full of well researched stories from both ends of the injustice spectrum; from wall street to welfare to stop and frisk to immigrant extortion and deportations.

At the center of the failure to try or jail a single financial bankster is Attorney General Eric Holder, author during the Clinton administration of the infamous Collateral Consequences doctrine at the heart of the current “too big to jail” policy. This then is the bookend to the story of Timothy Geithner’s refusal to break up Citibank or any other too big to fail institution. See She Bear at the FDIC. As with Geithner, Taibbi makes a strong case for cowardliness at the heart of each failure. This is in sharp contrast to the effective government action to deal with the savings and loan crisis of the 1980s where many executives were sent to jail and were banned for life from banking. See William Black’s account.

Collateral Consequences doctrine dictates that no prosecution should be undertaken where innocent bystanders like stockholders and corporate employees or global financial stability may be adversely effected. In effect, this vague, undefinable “doctrine” has prevented any and all government prosecutions from proceeding. Instead, the government has negotiated an endless stream of financial “settlements” where the corporations agreeing to the settlement admit to no wrong doing, no one gets fired, and no one has to face future litigation. At its highest in the case of JP Morgan the total settlements amounted to 12% of one year’s profits. The target institutions have come to look at these “settlements” as a normal cost of doing business as usual. The underlying criminal behavior continues.

The most notorious and disgusting cases were the The HongKong and Shanghai Bank HSBC settlement for mafia and drug cartel money laundering and the LIBOR interest fixing settlement involving many banks. If these cases do not involve criminal activity then what does. Oh, I see, it is criminal to stand on the sidewalk outside your own apartment. This is the type of contrast Taibbi is exposing.

Less emphasized in this book but equally true, most of these bankster “settlements” have gone directly into government coffers. Those victimized by the fraud receive nothing or laughable amounts. The bank illegally repossessed and sold your house? Here’s $200, now go away.

How about the whistle blowers like the woman at JP Morgan Chase fired because she blew the whistle on robo-signing for credit card collections. All the government can seem to do after several years is to continue to “lose” her whistle blower’s case file. She doesn’t even know if she is on file.

For lighter entertainment, Taibbi includes the case of several big time short sellers (see also the Big Short) who wrongly guess that a well run Canadian insurance company is about to go out of business and then hire some clowns to try to force them out of business with dirty tricks. When this fails, the insurance company sues the short sellers for damages but of course the Canadians lose the case.

Then there is the interesting case of the Barclay Bank buying the husk of Lehman Brothers after the government (read Hank Paulson) refuse to bail them out forcing Lehmans into bankruptcy. Barclay masterminds a clever scheme to secretly reduce the $50 Billion asset purchase by $5 billion by tricking the judge with an amendment. When the Lehmans creditors discover the scheme and sue, the same judge that was fooled during bankruptcy hearings buys a weird McNamara like “Fog of War” defense, this time called the “Fog of Bankruptcy” that during hurried bankruptcy filings “shit happens”. Too bad, no relief for the creditors.

Want to invest in a growth industry? Try private jailers. Note that the sharp increased slope starts with Reagan but does not slow for Clinton.

Age of Greed, The Triumph of Finance and the Decline of America, 1970 to the Present, Jeff Madrick, 2011

Madrick begins his account around 1970 when CEOs made an average of 12 times the compensation of the average worker and bankers were paid less than the CEOs of major non banking corporations. Today the CEOs make 200-300 times the average worker and CEOs of finance companies can join the ranks of the top 400 wealthiest Americans, far outreaching the wealth of the average CEO. This 40 year period also saw the greatest decline in American industrial innovation and research in history. He tells the story of this decline through the careers of the most notorious characters of the period.

Citigroup’s Wriston, Inventor of Too Big to Fail

He starts with Walter Wriston, who headed what later became Citigroup from 1967 through 1983 as it became the first “too big to fail” financial institution. Writon worked tirelessly to undermine, eliminate, or circumvent all banking regulation while repeatedly requiring the Federal government to come to his rescue when his bank got into financial difficulties. During his tenure, state usury laws were eliminated, the limits on interest banks could pay depositors were eliminated, and the prohibition against interstate banking were eliminated. Both Carter and Reagan were responsible for these banking changes.

Pickens, Greenmail specialist and Milken, junk bond specialist

He then moves to the aggressive acquisitions and mergers period of the 80s highlighting such innovations as insider trading (Ivan Boesky), greenmail, the launching of a fake bid to buy a company to induce other bidders to enter a bidding war. T Boone Pickens repeatedly used greenmail launching bids without ever completing a company purchase building enormous wealth in the process. He uses GEs Jack Welsh to illustrate that acquisitions with no strategy other than maximizing profits and driving up the price of the company stock. Welch perfected the art of manipulating accounts to show increased profits every quarter for 13 straight years. In the process GE shed hundreds of thousands of jobs, closed countless divisions, and moved GE steadily toward becoming a financial giant accounting for more than half of GEs profits. To provide money for all these acquisitions, Michael Milken perfected the junk bond, a way to raise money from investors outside normal financial regulations. Milken was brought down, not from abuses in junk bonds, but because he began to illegally “park” stock purchases for those quietly buying stock in a target company above the 5% disclosure limit.

Welch strips GE and exports jobs

He illustrates how destructive acquisitions have become to the companies involved and to the overall economy. The goal is to become the dominant player in a field after which reducing labor and research (innovation) can be used to drive profits without fear of competition. The consumer and the economy as a whole suffers. The biggest example comes out of the mergers in media, cable, and entertainment with the mergers of Warner, Time, Turner, and AOL which destroyed enormous wealth and turned the unique 24 hours news CNN network into a news-less shell.

After junk bonds became a dirty word and helped to bring down the entire S&L industry, the new hot investment vehicle became the hedge fund. Hedge funds are limited to 100 very wealthy investors. He uses George Soros, who claims he never broke the rules with his investing then admits that there were no rules, and John Meriwether of LTCM who introduced the VAR volatility measure and hiring of mathematical “quants” to the business of risk managed investing. LTCM collapsed in 1998 but Soros is still going strong.

Weil Too Big to Manage

He returns to Citigroup with CEO Sandy Weil, illustrating the nutty progressing of acquisitions and divestitures. Weil came by way of Shearson merging with AMEX who when acquired by Prudential. Weil then bought back Shearson from AMEX and bought Travelers. Weil then merged with Citi to form Citigroup. The only problem was the Glass-Steagall separation of investment from retail banking. Weil approached Alan Greenspan who offered a two year waiver to allow the merger and a year later Glass-Steagall was history. Citigroup continued its various flirtations with disaster, coming to the brink of collapse time after time only to have the government rescue it. An early colleague of Weil, Jimmy Dimon followed his own circuitous route to eventually head JP Morgan.

He then leads us through the corrupt world of stock analysts, featuring Frank Quattrone, and IPOs leading to the dot com crash of 2000. By 2000 virtually every analyst was recommending buy or strong buy for every new stock issue. A hold or sell meant simply that the analysts company had been cut out the commissions involved in the IPO. Allocations of IPO shares was a rewards – punishment labyrinth of conflicting interests. Hundreds of billions were lost as the companies folded in the crash. Similar things happened in communications with analysts like Jack Grubman pushing Worldcom, Global Crossings, Tyco, and Adelphia stocks ever higher. To add to the mix, accounting giant Anderson, was approving the crazy accounting of companies like Worldcom and Enron. Banking giants were also using “creative accounting” to show profits and hide losses or risky exposure.

Finally he turns to the current mess featuring Bear Stern’s Jimmy Cayne, Lehman Brothers’ Richard Fuld, Merrill Lynch’s Stan O’Neil, and Citigroup’s Robert Rubin. Derivatives for currencies, commodities, and other securities have been around since the 1960s and were applied to mortgages by Fanny Mae in the 1980s but for conventional or conforming loans only. Dividing securities into tranches or slices to tailor risk and insuring derivatives have also been around a while. What was new after the dot com crash was that mortgage backed derivatives became the new best way for financial institutions to earn huge fees. Everyone from Freddy and Fannie, to Wall Street, to the banks, to the hedge funds all jumped on board, creating an enormous demand for new mortgages. The only way to meet this demand was to create new types or mortgages (ARMS, interest only, pay what you can) and sell them to an ever wider collection of consumer. Enter specialized mortgage firms like Countrywide under Angelo Mozilo. When the quality of mortgages started to get B ratings, ever creative geniuses of finance created the CDO 2 which was made up of B rated derivatives somehow magically transformed into AAA instruments.

Masterminding the big crash

Estimates put the federal exposure to mortgages backed by government guarantees at $12 Trillion, too big to fail on steroids. Despite TARP and institution bas debt writedowns in the hundreds of billions, we still don’t know the extent of toxic assets still sitting on the books. Madrick is particularly critical of the failure of government not to insist that the books be cleaned and the institutions forced to lend to business and consumers as a price for the bailouts. He also thinks the government should have been better compensated for the extreme risks the public took. He doesn’t however call for a breakup of the too big to fail finance organizations.

There are excellent books covering specific periods and incidents covered here but the primary benefit of this work is to pull together a 40 year overall look at the transformations of American business and finance. His conclusion is that the entire period is one of wasted opportunities and massive loss of wealth that could have been used to build a better, sustainable America. From the Latin American loans in the 1970s to the destructive acquisitions binge of the 1980s via junk bonds and the collapse of the S&Ls to the telecom bubble of the 1990s to the technology bubble of 2000 to the mortgage crisis of 2008, trillions of investment dollars were simply flushed down the toilets. Some of that enormous investment found its way into the pockets of a handful of very wealthy investors which was the driving motive for all the investment activity in the first place. In the process, finance became the new way to wealth in America, replacing entrepreneurship and innovation. He sites a study that shows that Harvard graduates now going into finance can expect to earn three times more than their classmates.

In a heavily and properly regulated environment, none of this need have happened but every President from Carter on has led to more and more deregulation. Obamas efforts at reform fall far short and Madrick is pessimistic that government is up to the task to putting into place an adequate regulatory environment.

Treasure Islands, Nicholas Shaxson, 2011

While we are vaguely aware of secret bank accounts in Switzerland and the Caribbean, few actual studies and little journalism are done, maybe because facts are so hard to come by. Here is a compact work delving into the history and current state of offshore banking. It is short of figures because of the secrecy but Shaxson argues offshore banking is at the heart of recent financial crises and seemingly beyond the control of any government. The author, Shaxson, is British and perhaps only a Brit can adequately tell the story.

At the heart of this tale is the City of London which this reader thought was just a part of London where banks locate but is in fact a state within state, much like the Vatican, which traces its origins back to the Magna Carta – it predates Parliament. The City of London, covering a single square mile in the heart of London, has its own government with a Lord mayor at its head elected, not by people, but by corporations who have a vote in the City. The City of London was useful to the monarchs of England because they could borrow to pay for their domestic and international adventures. Then when England created its empire, the City of London was essential in financing that empire. The City reached its old zenith in the roaring twenties when even America had opened subsidiaries of their biggest banks in the City of London. This golden era ended with the crash of 1929, the great depression, the rise of fascism, and WWII. By the end of the war the City of London was a sleepy backwater whose bankers took three day weekends. Nonetheless, every November the City holds its Lord Mayor’s show an arcane ritual with guided coaches and elderly men in long satin robes.

John Maynard Keynes and Harry Dexter White at Bretton Woods

In 1944 John Maynard Keynes, the most brilliant Economist in history, helped negotiate the Bretton Woods agreement to control and limit international finance and create the IMF and the World Bank. This set of principals were to govern international banking until about 1970 and ushered in a period of continuous growth and prosperity for all leading economies.

The debts from WWII led to the breakup of the colonial empires, for Britain starting with the independence and partition of India in 1947 and culminating in the shocking nationalization of the Suez canal by independent Egypt in 1956.

Omar Bongo’s Paris

But something else was going on in this period. Shaxon, working for Reuters, was interested in why oil producing countries in Africa were doing so poorly. The light finally went on during a trip to Gabon in 1997. Gabon became independent of France in 1960 and in 1967 France installed Omar Bongo, then only 32, from a small minority group who combined cunning, charisma, and loyalty to France. France stationed a small contingent of troops to assure Bongo could not be overthrown in a coup. Bongo was to rule Gabon continuously til his death in 2009. Gabon was to become the cornerstone of the Elf (Elf Aquitaine) system, a global system of corruption using Switzerland and Luxembourg as tax havens and secretly connecting former french colony African oil producers to politics in France. The Elf system allowed African oil money to secretly control the politics of France for the benefit of France’s biggest corporations.

Caymans Hong Kong

Shaxon was led to look again at the moribund City of London after the breakup of the British empire. Starting in the 1950’s, the City of London was busily constructing its own labyrinth of offshore banking havens in an elaborate three tier system made from the remnants of the empire. The first tier were the crown dependencies, the islands of Jersey, Guernsey, and Man. The second tier consisted of seven of Britain’s Overseas Territories with the Queen as head of state; Antigua, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks and Caicos Islands. The third tier consisted of Hong Kong and a scattering of other small remnants of empire in the Pacific and elsewhere. The City of London was to keep two sets of books, one for onshore banking and another for offshore banking. Secrecy and an absence of regulation or oversight was the mainstay of the offshore system. Big American banks like Citibank and Chase quickly realized that they could get around the restrictions of the Glass Steagall Act of 1933 which prevented banks from investment or casino banking, by opening subsidiaries in the offshore side of the City of London. By 1960 in France, Britain, and America the highly regulated banking systems and the Bretton Woods conventions were fast eroding. While Thatcher and Reagan continued the national erosion of regulation in the 1980’s the horses had long before left the barn for the offshore system. The Reagan – Thatcher liberalization efforts were attempts to allow domestic financial institutions to catch up with the runaway Euromarket. The Lord Mayor of the City regularly lobbies for liberalization and deregulation, making twenty trips a year to places like China and India. Insider trading has been a regular feature of activities within the offshore system where secrecy and the lack of any regulations lead to an anything goes environment. Out of the ashes of European empire and the fall of Suez rose the Euromarket, an unregulated new empire with its heart in the City of London. A 1957 commission studying the City of London concluded “Logic has its limits and the position of the City lies outside them.”

In 2008 the City accounted for half of international equity trades, 45% of over the counter derivatives, 70% of Eurobond turnover, 35% of international currency trades, and 55% of international IPOs. Yet the City remains all but invisible to historians, political analysts, and the media. The AIG subsidiary that cost US taxpayers $180 Billion operated from the City.

We think of the offshore world as the domain of organized crime, and so Shaxson treats us to a brief history of the pioneering work of mob boss Mayer Lansky who perfected the art of money laundering through Bermuda and Switzerland, converting illicit gains into south Florida real estate. Lansky built the casino and entertainment system in Cuba then “retired” to Miami Beach in 1959 when Castro overthrew the Batista government. Lansky died in 1983 in Miami Beach where he was locally portrayed as this nice grandfatherly benign old man.

Shaxson also treats us to a history of the origins of the modern multinational corporation via the Vestey brothers who built a fully integrated meat monopoly in the early 20th Century around Latin American and Australian producers. The brothers controlled every aspect of the business from production to shipping and storage to marketing. Their principals of operation were – create a monopoly, squeeze the ends (producers and markets) to push the profits to the middle, don’t tell anyone what you are doing, avoid taxes at all costs. By the first world war the brothers were the wealthiest people in Britain yet they paid no taxes at all. They ignored all suggestions that they were not patriotic and were given honorary titles. Their secret weapon of choice to disguise their activities and avoid taxes was the trust. The Vestey brother’s principals are practiced by virtually all modern multinational corporations. Oil multinationals are a classic example of the Vestey style in the modern multinational corporation. The resource owners are squeezed with low royalties as are the consumers with high prices. The profits are squeezed into the middle where they may be opaquely hidden from tax collectors and other stakeholders. It is impossible for shareholders, auditors, let alone management, to figure out how the oil companies actually operate. The Elf system is alive and well in the oil industry.

While trusts are still used offshore, modern secrecy assures that governments cannot trace activities or tie them to individuals or corporations. With the Swiss system, individuals or corporations must fully disclose their identities and the Swiss promise not to tell anyone. With modern offshore systems, accounts are created by proxy and queries will only lead to a lawyer someplace that can protect the identity of the owner by invoking attorney-client privilege. If this is not enough, accounts can be set up to trigger instant electronic closure and movement and erasure of all banking records when an inquiry is detected. Some offshore jurisdictions not only criminalize disclosure of account information, but criminalize the making of inquiries. It is little wonder that so little is known about offshore banking.

So what do we know about this offshore system? The Euromarket grew from a net $500 Billion in 1980 to $1.7 Trillion in 1988. By 1997 90% of international loans were made through this market. We know that Enron had 881 offshore subsidiaries when it went bust; that in 2008 Citigroup had 427 tax haven subsidiaries, Morgan Stanley had 290, and News Corporation (Fox News) had 152. We know that the Cayman Islands had deposits in 2007 totally $1.7 Trillion, that Hong Kong in 2007 had deposits totaling $149 but growing fast. Hong Kong is the center of most corruption activity in China. It is estimated that the United States loses $100 Billion a year in taxes to tax havens. About a third of deposits come from corrupt individuals and organized crime including terrorist networks. Drug sales alone account for $500 Billion annually, more than twice Saudi Arabian oil revenues. That leaves two thirds of deposits to multinational corporations. This makes it virtually impossible to attack or control off shore banking due to the political power of these corporations. And all multinational corporations seem to engage in offshore activities including Cisco and Google, putting a lie to their “do no harm” slogan. Bono, raiser of millions through charitable concerts, uses off shore tax havens. More than 60% of total international trades take place between subsidiaries of the same multinational corporation. The purpose of these trades is opacity from shareholders and auditors and tax avoidance. In a generally ignored detail, LTCM which collapsed in 1998 operated offshore from the Cayman Islands.

For the US, twenty five years of tax cuts “has produced not trickle down — but Niagara up. Much of this new concentration of wealth finds it way offshore.

While wealthy countries lose taxes and regulatory control to the offshore system, the biggest impact is felt in the developing world. Shaxson says that the principal foundation of modern democracy is taxation with representation. It is the interaction between elected officials and the citizens to determine the level of taxes and the use to be made of those taxes by government that underpins the entire system of proper governance. This system is undermined or never allowed to develop in countries that are dependent on minerals for financial resources or become dependent on international aid and finance. And when wealthy individuals lack confidence in the local institutions of government there is an irresistible urge to move their wealth to safe (i.e. hidden) offshore locations, denying the governments both tax revenues and pressure to develop and build stable institutions. A US Federal Reserve official noted “The problem is not that these (latin American) countries don’t have any assets. The problem is, they’re all in Miami.” South Florida banks do not share their deposit information with Latin American countries. As a measure of the damage of capital flight, it is estimated that for every $1 given in foreign assistance $10 flows out to offshore locations at the same time. Much of the $1 itself finds its way soon enough in flight. A study estimated capital flight from 40 African countries from 1970 to 2004 at $607 Billion. Total external debt for these countries in 2004 was $227 Billion. Taken as a whole Africa is a net creditor to the rest of the world. But — “The subcontinent’s private external assets belong to a narrow relatively wealthy stratum of its population, while the public external debts are borne by the people through their governments.” Another study showed that most of Argentina’s external public debt was owed to wealthy Argentines operating offshore.

First bankers lent these countries far more than they could productively absorb; then they taught the local elites the basics of how to plunder their countries’ wealth, then conceal it, launder it, and sneak it offshore. Then the IMF helped bankers pressure these countries to service their debts under threat of financial strangulation.”

He also talks about the race to the bottom in offshore, this time including individual US states which practice a type of offshore activity by promoting lenient regulation and secrecy. All the corporations or entities need do is find some legal jurisdiction somewhere in the world to do their bidding and the rest of the world immediately jumps on board. He uses the example of the dismantling of US usury laws which were repealed first in South Dakota and then in Delaware. Most credit card issuers moved immediately to these states around 1980 and credit card issuance and debt took off. His next example involves the big four accounting firms who audit most multinational corporations books and were organized as limited partnerships. As off book subsidiaries and other accounting tricks came into common use, the big four started to worry about their personal liabilities. The collapse of Enron also destroyed their accounting firm Arthur Anderson LLP, showing the the big four had reason for concern. The big four chose Jersey to create a legal framework for organizing as limited liability partnerships. After a fight in Jersey, the law was changed and in 2001, the City of London approved the same legislation. The big four immediately converted from partnerships to LLPs.

How damaging is offshore? Between 1940 and 1971 there were no banking crisis and only 16 currency crises. Since 1971 there have been 17 banking crises and 52 currency crises. Looking back at 800 years of banking, liberalization of banking always leads to banking crises.

Who populates this offshore world. A bizarre mixture of old continental European aristocrats, Ann Rand libertarians, members of the worlds intelligence communities, global crime networks, assorted lords and ladies and bankers everywhere. Their common enemies are governments, laws, and taxes. Their code of silence rivals the Sicilians and even those who leave the world in disgust are reluctant to talk about it and refuse to reveal identities.

Carl Levin Graham at UBS

In conclusion, Shaxson believes that the richest nations can bring the off shore banking system under control even acting unilaterally, one by one. He gives the example of Carl Levin, long seeking transparency in offshore banking, who, after the departure from the Senate of Phil Graham of Texas for Swiss investment bank UBS, was able to pass a simple measure banning transfers between US banks and foreign shell banks, those operating anonymously. Overnight, thousands of shell banks were reduced to a few dozen. Levin appears repeatedly in this account for his statements and attempts to limit offshore banking.

Shaxson urges all nations to return to the original bargain made between their governments and corporations, a guarantee of limited liability for individual stakeholders and the granting to the corporation of many of the rights of the individual in return for operating transparently for the benefit of all stakeholders whether management, stockholders, customers, or suppliers, and the payment of taxes in full and without delay. Any corporation refusing to abide by the bargain should have their charters revoked and should be banned from doing business within the country. The problem with carrying this out is the degree to which the rich nations have become client states of the multinational corporation. Shaxson believes this would pose a particular difficulty in Britain where the ancient traditions of the City of London have almost always thwarted any attempts at reform. As to the threat that the multinationals will move their business elsewhere, Shaxson believes their offshore activities are so toxic to the host country that their loss may not be such a bad thing. And if the wealthy nations can deny multinational corporations and offshore banks access to their citizens and markets, the huge system would soon wither.