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[Nov 14, 2011] Totally Corrupt America by PAUL CRAIG ROBERTS

The Mechanism was probably more compiles as housing bubble emerged in different countries with different regulatory regimes and financial sector traditions....

Last March I reviewed Matt Taibbi's important book Griftopia, an entertaining account of the through-going financial fraud that gave us the financial crisis. Taibbi shows that the US "superpower" can match any third world backwater in the magnitude of greed and fraud that is endemic in business and government. Taibbi's Griftopia was published last year. This year Henry Holt publishers have provided us with Gretchen Morgenson and Joshua Rosner's Reckless Endangerment.

Morgenson and Rosner tell the story again, but with less drama and provocation. Possibly, it might be more acceptable to those gullible Americans who wrap themselves in the flag and refuse to believe that their country could ever knowingly do anything that is wrong.

I am not suggesting that Morgenson and Rosner pull their punches. To the contrary, the authors deliver enough knockouts to be contenders with Taibbi as world champions in exposing the reckless fraud that the US financial sector and its regulators now epitomize.

The financial crisis, which is very much still with us, did not result from accident or miscalculation; neither did it result because of a flaw in Alan Greenspan's theory, as he told Congress when a feeble effort was made to hold him accountable. It was the intentional result of people motivated by short-term profits who wanted to get theirs and get out.

As Reckless Endangerment shows, fraud characterized every stage of the process from the fraudulent borrower incomes and credit scores that mortgage issuers gave to unqualified buyers, through the securitization of the mortgages and their triple-A investment grade ratings by the rating agencies (Standard & Poor's especially, but also Moody's and Fitch) to the investment banks that sold what the banks knew was junk to investors around the world as investment grade securities. Indeed, Goldman Sachs was simultaneously betting against the mortgage derivatives that it was selling to clients.

Investment banks, such as Goldman Sachs, which once considered it a matter of honor to represent the interests of customers, took advantage of the trust that had been built up in the past to commit fraud against customers in order to advance the banks' short-term profits and the out-sized multi-million dollar managerial bonuses that these fraudulent profits produced.

Morgenson and Rosner provide a number of unique accounts of how those benefitting from fraud were able to defeat laws that were passed that would have held them to account. For example, the state of Georgia passed perfect legislation that held predatory lending to account. William J. Brennan Jr. and Georgia Governor Roy E. Barnes got the Georgia Fair Lending Act through the state legislature. It was a model for other states. As the federal regulators had thrown in the towel, the state laws would have prevent the worst part of the financial crisis, it not prevented the crisis altogether.

The Georgia law only lasted a few months, because the rating agencies saw that their enormous profits from issuing fraudulent investment grade ratings were threatened by the law. The corrupt rating agencies mischaracterized the consumer protection act as a jihad by regulators. Standard & Poor's declared that it would no longer allow Georgia mortgages to be placed in mortgage securities that it rated.

In other words, Georgia mortgages could no longer be securitized. This announcement banned Georgia mortgage lenders from securitization. Thus, the law was overturned, and fraud ran wild.

These kind of mafia strong-armed tactics in order to protect at all costs the short-term mega-bonuses that drove the totally fraudulent system have never been held accountable or punished. Totally innocent people are held indefinitely and tortured by the US government for no other reason than to convince the gullible public that they are endangered by terrorists, but those who wiped out the home ownership and retirement pensions of millions of Americans now hold high and honorable positions on corporate boards and US regulatory agencies.

Federal regulatory agencies totally failed. Brooksley Born tried to use her statutory authority to regulate over-the-counter derivatives, but she was blocked by the Federal Reserve chairman, the US Treasure secretary, and the SEC chairman and forced to resign. As University of Chicago Nobel economist George Stigler predicted, regulatory agencies are captured by those who are intended to be regulated. This was the case.

Regulators turned a blind eye to obvious criminal fraud, and were rewarded with lucrative positions in the financial community. The same for the US senators and representatives who repealed Glass-Steagal and other financial regulations.

For example, former US senator Phil Gramm who spearheaded the repeal of the Glass-Steagall Act, which separated commercial from investment banking, the repeal of which set up the financial crisis, was rewarded by being made vice chairman of the mega-bank UBS, a Swiss global financial services company.

What Taibbi, Morgenson and Rosner make clear is that while monster criminals continue to collect their multi-million dollar annual incomes, depressed single mothers, deserted by the men who fathered their child, are sent to prison for having small quantities of illegal drugs to boost their depressed spirits, and their children are put out to adoption.

This is "justice" in America where there is "freedom and democracy."

Paul Craig Roberts was an editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury. His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press. He can be reached at:

[Nov 09, 2011] Zombie Economics: How Dead Ideas Still Walk among Us

The term "Zombies" stresses bloodsucking nature of neo-classical economy. They are math models dressed prostitutes who sell their brains to financial oligarchy. So how about the term "zombie prostitutes". Even this term is benign for peddlers of "great moderation", "The efficient market hypothesis", "dynamic stochastic general equilibrium", "Tickle down economics" and other parts of neo-classical economic toolset.
April 6, 2011

watzizname (Murfreesboro, Tennessee)

- See all my reviews (VINE VOICE) Amazon Verified Purchase(What's this?) This review is from: Zombie Economics: How Dead Ideas Still Walk among Us (Hardcover) The zombies Dr. Quiggin describes and discusses are five economic theories that have proven to be false, but which keep being trotted out as if they were accepted fact by the intellectual courtesans of Laissez-Faire.yland.* Quiggin devotes a chapter to each of five zombie ideas:

. . Chapter 1: The Great Moderation: the lie that business (mainly big business) can now be relied on to govern the economy optimally, or nearly enough so. It can't. By law, corporations MUST seek to maximize the wealth of their shareholders, generally regardless of all other considerations, including the public good.

. . Chapter 2: The Efficient Markets Hypothesis: the lie that "the market" will always correctly determine and implement the optimum prices and quantities produced. It won't. As early a writer as Adam Smith recognized that where there were spillover costs, the market price would be lower and the quantity produced greater than optimal, and when there were spillover benefits the reverse would be true.

. . Chapter 3: Dynamic Stochastic General Equilibrium: The mistaken belief that DSGE models can overcome the Kornbluth objection. They can't. To quote Kornbluth (The Syndic, 1978) as best I can from memory: "No accurate history of the future has yet been written, a fact which I think disposes of History's claim to rank as a science. Astronomers quail at the three-body problem, and throw up their hands in despair at the four-body problem. And yet, every moment in history is a problem in at least three billion bodies. [in 1978; now seven billion] I can juggle mean rainfalls, car-loading curves, birth rates, and patent applications, but I cannot for the life of me fit the recurring facial carbuncles of Karl Marx into my equations, even though we know, well after the fact, that the agonizing staphylococcus infections under that famous beard helped shape the course of twentieth-century totalitarianism . . . ." And DSGE models actually reduce the number of variables taken into account by aggregating them under assumptions which are, to say the least, questionable. Thus, their version of future economic history is inaccurate, sometimes disastrously so.

. . Chapter 4: Trickle-Down Economics: The lie that the best way to help the poor is to reduce the taxes paid by the rich. It isn't. If you believe the trickle-down theory, and you want to help your son or daughter in college or your aging parents, try making me rich by sending the money to me and see how much of what I spend trickles down to those you want to help!

. . Chapter 5: Privatization: the lie that governments never do anything right, and private enterprise will always do it better. It doesn't. The Government put a man on the Moon and back, but just look at the sorry results of privately-run prisons.

What Dr. Quiggin does not, in my opinion, adequately address is WHY these false ideas keep being resurrected. The answer is simple: they are ideas the super-rich want us to believe, because, if accepted, they facilitate the transfer of wealth from those who need it most to those who need it least (because they already have more than enough). So they have their tame economists trumpet these lies, cherry-picking or inventing data to support them. (Whoever said "Show me a supply-side economist and I'll show you an intellectual courtesan." sure hit the nail on the head!)

But despite that omission, the book is well worth reading. Thank you, Dr. Quiggin!

* Thanks to Jim Hightower's "Lowdown" for suggesting the term Laissez-Faire.yland

[Oct 20, 2011] Citigroup Deal to Go to Judge Critical of S.E.C. Practices by PETER LATTMAN

October 20, 2011 |

Judge Jed S. Rakoff has taken the S.E.C. to task for resolving cases without making defendants admit wrongdoing.It is boilerplate language found in nearly every settlement with the Securities and Exchange Commission: A company settles its case "without admitting or denying" wrongdoing.

There it was again in the S.E.C.'s announcement on Wednesday that Citigroup had agreed to pay $285 million to settle a civil complaint that it had defrauded investors in a mortgage securities deal. The bank did so "without admitting or denying" the government's accusations.

But the S.E.C.'s longstanding policy of using this phrase in its settlements is likely to come under scrutiny by the federal judge who must approve the Citigroup settlement - and it could, legal experts say, cause the deal to come undone.

That is because the judge presiding over the S.E.C.'s action against Citigroup is Judge Jed S. Rakoff of Federal District Court in Manhattan, a jurist whom many consider the agency's bête noire.

"Given his recent jurisprudence, if anyone's going to rattle the S.E.C.'s cage on this issue, it's Judge Rakoff," said Michael Koehler, a professor of business law at Butler University who has written about the S.E.C.'s settlement practices.

Judge Rakoff is known for a scathing ruling in September 2009, when he rejected a proposed $33 million settlement between the agency and Bank of America over its acquisition of Merrill Lynch. The judge called it a sweetheart deal for the bank that had been done "at the expense, not only of the shareholders, but also of the truth." (He later grudgingly approved a $150 million settlement.)

More broadly, Judge Rakoff has sharply criticized the agency's practice of resolving cases without forcing the defendant to admit any wrongdoing. In a little-noticed ruling in March, he raised the specter of scuttling the next S.E.C. settlement in his courtroom that included such language.

Judge Rakoff said the use of the "without admitting or denying wrongdoing" language created "a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C."

By using the boilerplate phrase, "only one thing is left certain: the public will never know whether the S.E.C.'s charges are true, at least not in a way that they can take as established by these proceedings," he wrote.

Judge Rakoff's disapproval of the agency's settlement practices came in an accounting fraud case against the technology company Vitesse Semiconductor and two of its former executives.

He ultimately approved the Vitesse settlement, finding it fair and reasonable, but not before criticizing the commission on a number of fronts. He chafed at the S.E.C.'s lack of explanation for why he should approve the settlement and described the agency as treating the court as a "rubber stamp."

But much of his opinion was aimed at the "neither confirm nor deny the allegations" phrase, which he called "troubling."

Judge Rakoff looked back at the history of the practice and found that the S.E.C. had permitted defendants to settle without admitting wrongdoing because that made obtaining settlements much easier. And defendants preferred it, he noted, because if they were forced to acknowledge their bad behavior, private plaintiffs would pile on with civil actions seeking monetary damages far greater than anything regulators were likely to impose. Then, in the 1970s, the S.E.C. began prohibiting defendants who settled from publicly denying the accusations. That was intended to prevent them from engaging in public relations campaigns to contend that they had settled only to avoid protracted litigation.

Those historical reasons were met with scorn by the judge. "The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C.; but, by gosh, he had better be careful not to deny them, either," the judge wrote.

He suggested that permitting the defendant to neither admit nor deny the misconduct was indefensible.

"An agency of the United States is saying, in effect, 'Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it,' " he said.

Such strong language is the norm for Judge Rakoff, one of the more colorful judges on the federal bench in Manhattan. Judge Rakoff, 68, is a former federal prosecutor who also spent years as a criminal defense lawyer before he was named to the bench. He is currently presiding over a number of major cases, including several of the insider trading prosecutions and a dispute between the trustee for the victims of Bernard L. Madoff's fraud and the owners of the New York Mets baseball team.

Judge Rakoff is not alone in his discomfort over the "neither confirm nor deny" language. The Justice Department has long not permitted defendants, except in the most unusual circumstances, to plead guilty to a crime without admitting or denying the charges.

William F. Galvin, the top financial regulator in Massachusetts, has also been a critic of the "neither admit nor deny" language and has forced companies that settle to admit they engaged in unlawful conduct.

And at least one top agency official has expressed concern. In a speech earlier this year, Luis A. Aguilar, an S.E.C. commissioner, worried that defendants who settled with the agency were issuing press releases after settlements that amounted to "revisionist history." If this continued, he said, "it may be worth revisiting the commission's practice."

[Oct 04, 2011] Economic Parasites -

Sometimes I wonder whether this Wall Street 's Trojan Horse Obama deliberately used health reform as a smokescreen for banks bailout.
Sept 20, 2009


Wall Street as a Giant Parasite

"The problem with parasites is not merely that they siphon off the food and nourishment of their host, crippling its reproductive power, but that they take over the host's brain as well. The parasite tricks the host into thinking that it is feeding itself."

Something like this is happening today as the financial sector devours the industrial sector. Finance capital pretends that its growth is that of industrial capital formation. That is why the financial bubble is called " wealth creation," as if it were what progressive economic reformers envisioned a century ago. These reformers condemned rent and monopoly profit, but never dreamed that the financiers would end up devouring landlord and industrialist alike. Emperors of Finance have trumped Barons of Property and Captains of Industry alike.

According to Hudson, you can think of the financial sector as being wrapped around the real economy, almost like a kind of parasite, and that's why it's been called parasitic for so long. The financial sector extracts interest from the real economy, just as the property sector extracts economic rent.

However, the key thing about parasites is that it's not simply that they extract nourishment from their host. This parasite takes over the host's brain, to make it think that it (the parasitic financial sector) is an integral part of the economy, to make the brain think that the parasite is part of the host's own body, and/or that it's almost like a child of the host, to be protected. And that's exactly what the financial sector has accomplished in recent years in the United States. In reality however the parasitic financial sector is bleeding the real economy to death, sucking out all its blood, even as the real economy protects it and continues to regard it as part of itself.

President Obama, who functions in this situation as little more than a totally duped shill, tells us that "we have to save the banks in order to save the real economy." The fact is, however, that you can't serve both the parasite and the host.

Besides, for all practical purposes, the giant financial institutions have already killed their host (the real American economy). And since they realize that the real American economy is practically dead, they are trying to suck as much blood out of it as possible, and will continue even while the corpse is still warm.

Finally, because America's 'real' economy is essentially dead, their plan is to sooner or later jump to another host. Translation: They will eventually move virtually all of their investment money overseas, to prey on real economies that still live, beginning the parasite cycle all over again.

Paul Volcker Do The Right Economic Thing

March 31, 2010 | The Baseline Scenario


'Wake up, gentlemen'

"I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth - one shred of evidence," said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama's Economic Recovery Advisory Board.

He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: "Is that a reflection of your financial innovation, or just a reflection of what you're paid?"

Paul Volcker – Dec 2009

Hillbilly Darrell

It's too late, and all just smoke and mirrors, and propoganda at this point. The rules of the game of American capitalism were permanently and irreperably destroyed when the decisions (Bush AND Obama)were made to bailout and resurrect the TBTF banks post mortem, and the corresponding refusal of the (Bush and Obama) administrations to impliment the legally mandated Prompt Corrective Action resolution authority that has been on the books and has existed since the Savings and Loan debacle of the 1980s. It's that simple. And, I am unaware of anyone successfully demonstrating the ability to "un-ring" a bell.


Most likely, the administration is waiting and watching how foreign governments are handling their too big to fail problem. Governments now want an overall approach. Will it do any good to restrain and breakup US banks and allow foreign banks to come in with their larger size and overwhelm our financial system.


Volcker's talk got almost no press.

I didn't anything on CNBC and Bloomberg showed him speaking – with no sound – while they interviewed a guy from Keefe Bruyette who described the industries preferred alternative: capital controls (as managed by the Fed, no doubt). Note: they would have TBTF banks keep higher reserves.

It really seems to me that a sober, intellectual debate is a losing approach. Its clear that the industry understands that some kind of reform is inevitable, but they want to shape that reform so that: provisions are weak, and administration of the "reforms" falls under institutions that have their best interest at heart and/or they can influence.

Unless the debate is raised to one of concentrated power and taken to the people, REAL financial reform is a dead issue. (PS I think 13 bankers is great - but will J6P will read it?) The financial reform that is in the cards will be comprised of things like Fed-determined capital controls, and a consumer protection agency that falls under the Fed and whose mission is secondary to the Fed's current mission - especially "safety and soundness."

Why do the banks demand that consumer protection is secondary to safety and soundness, and how is that related to TBTF?

1) Current policy is to allow the banks to bilk us all to pay for the financial mess. Not allowing them to do so would threaten their bonuses . . . um . . . I mean safety and soundness.

2) That same policy is likely to be applied when a bank gets into trouble in the future. The Fed will help TBTF banks avoid the resolution process as much as possible – even at the expense of consumers.

Using their customers as a financial resource when a bank is stressed could rightly be termed the "Consumer Soft Put (CSP)". The larger the bank, the greater is the CSP. CSP relies on # of customers and industry concentration (pricing power).

NOTE: One can easily imagine the Fed being lobbied in the future to include the "real option" of the CSP as a form of secondary capital for satisfying the increased capital requirement for TBTF banks.


Robert Reich makes a great point, if this administration were serious about financial reform it would direct the SEC to prosecute bank executives under Sarbanes-Oxley.

Instead we get blah blah blah blah blah blah blah.


I am so tired of all the accolades for Paul "Big Deal" Volcker. I am convinced the bankrupt situation we find ourselves in today had its origins with this man. Here we have the first of many central bankers of the day to figure out you could actually pay a nation's debt by simply printing money. What a brilliant concept. And what has this created? An unemployed, foreclosed upon and bankrupt society so strung out on debt it no longer can offer a measly single digit interest rate for a passbook savings account without fear of collapsing today's fragile, propped up housing, stock, and automobile market.

Christ free Agnes, this capitalistic crony was instrumental in devaluing US currency in 1971 after closing the foreign gold window. And you can see where that has got us. A buck is worth .74 cents in Europe. Ever ask yourself why they keep this guy around. Think it might be for another round of devaluation then?

Per Kurowski

Simon Johnson: "The financial sector does not add anywhere near as much social value as its proponents claim."

Of course not, how could it be, when the regulators never discuss the purpose of the financial sector and only favor what is perceived as having low default risk.

I went to the UN to argue for the developing countries but I later realized that my arguments were just as valid for the developed world.

[Oct 03, 2011] Paul Volcker: Do The Right Economic Thing

By Simon Johnson

A great deal of the popular anger directed at big banks is completely legitimate, as put nicely by John Cassidy at the end of his interview with Treasury Secretary Tim Geithner,

"The hardest part of his job, Geithner often says, is getting people to comprehend the inner logic of a financial-rescue operation, and the unpopular actions it entails. In fact, his problem may be not economic illiteracy but its opposite: Americans understand all too well what has happened. Financial crises have a way of revealing aspects of our economic system that otherwise remain obscured, such as the symbiotic relationship between Wall Street and Washington, the hidden subsidies that financial firms sometimes receive from the Fed and other government agencies, and the fact that the vast profits that firms like JPMorgan Chase and Goldman generate depend in part on an implicit guarantee from the taxpayer. When ordinary Americans are confronted with these realities, they get angry."

Paul Volcker is also angry.

Of course, Paul Volcker expresses himself in the measured language of a distinguished technocrat. But he is very worried about our current financial structure and where it is heading. Speaking today at the Peterson Institute in Washington DC, Mr. Volcker made two broad points (Marketwatch coverage) – both of which we also emphasize in 13 Bankers.

1. The financial sector does not add anywhere near as much social value as its proponents claim.

"The question that really jumps out for me is, given all that data, whether the enormous gains in the financial sector - in compensation and profits - reflect the relative contributions that sector has made to the growth of human welfare" (from NYT story)

2. Too big to fail banks are alive and well – and this poses a major problem to our future prosperity.

"There is an expectation that very large and complicated financial institutions will not be allowed to fail," he said. "Unless that conviction is shaken, the natural result is that risk-taking will be encouraged and in fact subsidized beyond reasonable limits."

The message yesterday and from other statements made by Mr. Volcker is clear. Our biggest banks are out of control and will not be reined in by the measures currently on the table. We need a much stronger approach to big banks – an approach that will strip government-backed banks of their ability to take crazy risks and, most likely, an approach that significantly constrains (and hopefully even reduces) their size.

[Sep 20, 2011] Financial Capitalism v. Industrial Capitalism by Michael Hudson

Contribution to The Other Canon Conference on Production Capitalism vs. Financial Capitalism
Oslo, September 3-4, 1998.

Our economy is evolving into something different from what most people imagine it to be. The emerging system bears little relation to what academic textbooks describe, to say nothing of what politicians are promising.

Today's problems also are different from those which Marxists and other critics have long denounced. True, the class war has been put back in business since the collapse of Soviet Communism. But industrial capital as well as labor has come under attack in an internecine war of finance capital against industrial capital, and even against the power of governments to retain control over national economies.

Was Marx too optimistic?

In the face of this new form of economic warfare, capitalism's foundations are proving to be weaker than Marx had believed. One almost might wish nostalgically that the system still held the promise that it possessed for Marx and his Victorian contemporaries.

From the time socialists coined the term 'capitalism' in the mid-19th century, the word has been used mainly as an invective. Yet to Marx it signified the historical stage preceding socialism – a stage that promised to lead almost automatically to a better world. Capitalism's historical role was to prepare the world for socialism by integrating the world's national economies into a single market, whose business corporations would grow so large in scale as to constitute virtual planning. All that would be left for socialism to accomplish would be to take over a finely attuned industrial system and mobilize its economic surpluses to uplift humanity at large.

Stage-of-development theories are inherently optimistic in the sense that the next evolutionary step seems to be imprinted embryonically on society's (indeed, civilization's) DNA molecule. Marx even endorsed free trade on the ground that it would speed up this evolutionary process. An enemy of bureaucracy, he saw the governments of his day dominated by landed aristocracies, militarized nobilities or colonial satrapies. Their tendency was to act as reactionary impediments to the economic organism trying to evolve forward, prone as they were to special interest pleading by the vested interests that retained political control over the fiscal and lawmaking processes.

As far as the financial sector was concerned, the fraud and corruption that characterized American railroad speculation and its stock waterings, and the failures of the great international investments in the Suez and the Panama Canals, brought ruin to the bondholders who originally sub-scribed to these projects. But this appeared to be simply part of the growing pains of industrial capitalism. In the end, rationality was expected to win out. In Vol. III of Capital (edited after his death by Engels), Marx expressed an optimistic faith that financial capital would become subordinate to industrial capital. He described the banking system as an 'integument' acting increasingly as the planning arm within industrial capitalism, bringing the world economy closer to international socialism.

In England, John Hobson found the taproot of imperialism to be the expansion of finance capital. A debt deflation led to underconsumption within the industrial economies, obliging financial expansion to take the form of a competition for colonies as spheres of influence, although most trade and investment would continue to be focused within the leading industrial nations themselves, for this was where most of the money was located.

In America, emperors of finance and the real estate kings they enthroned were gaining the upper hand over captains of industry. Thorstein Veblen analyzed how pecuniary relations – its financial and monetary structure – distorted the economic system away from how it would be run rationally by engineers. In Germany, whose banking and industrial structures had become more closely integrated than was the case either in England or the United States, the socialist Rudolf Hilferding coined the term 'finance capitalism' in 1910.

As England moved toward entry into the Great War, Herbert Somerton Foxwell wrote a series of papers for the Economic Journal expressing concern that continental Europe was winning an industrial edge over his own country precisely because of a more industrially oriented banking sys-tem. English banks had evolved at first out of the merchant banking of the goldsmiths – extending short-term credit to merchants to finance the shipping of goods, especially their importation and exportation – and then by the Bank of England monetizing loans to the government to finance its war debt (the purpose for which the Bank had been created in 1694). From the outset of the Indus-trial Revolution, however, English merchant banks stood aside from financing manufacturing technology. James Watt had financed the steam engine with funds borrowed from his family and friends, and subsequent industrialists were obliged to do the same. Most investment in industrial capital and other means of production was financed out of retained earnings. The commercial banking system limited its activities to advancing ready cash against export orders and extending other short-term business credit, duly collateralized. Matters are still the same way today.

Industrial Capitalism vs Financial Capitalism by techno

Daily Kos

When I took economics at the University of Minnesota in the early 1970s, one of my professors was Walter Heller. Heller was President Kennedy's Council of Economic Advisors chairman and would claim, quite seriously, that he taught Kennedy Keynesianism.

In those days, the Keynesians were utterly dominant in academe and government. There were so many of them, they had subdivided into various schools. It could be argued that Heller represented the right wing of the Keynesian school. His economics department used the Neoclassical Samuelson text and his primary accomplishment in the Kennedy administration was his tax cut suggestion.

But even from the right wing of the Keynesian impulse, Heller was quite clear that he thought folks like Milton Friedman were at best mistaken and quite possibly insane. Yet by the time I graduated, the acolytes of Friedman were running the economy of Chile with their sights set MUCH higher. And yes, they would set the economic operating assumptions for planet earth for a generation.

There has been a lot of invented terminology to describe the change in fortunes of the Keynesians and the Friedmanites. But the MOST descriptive was that it marked the change from Industrial to Finance Capitalism. If River Rouge was the defining symbol of Industrial Capitalism, then the archetypical example of Finance Capitalism was Enron.

Enron embodied the major flaws of Finance Capitalism--it was only possible because of economic deregulation, it relied on a willing suspension of disbelief in all reasonable measures of prudence, it sold cotton-candy products like weather futures, and it relied on industrial sabotage to make its fantasy profit targets.

All of these maneuvers were done in public with the main movers featured prominently on the covers of the business press. Phil Gramm, who shepherded Enron's enabling deregulation through the Senate, was a regular talking head on the television news shows because he was a true believer who preached, as a trained economist, that deregulation was necessary and virtuous. This was not some sort of invisible conspiracy, this was a seizure of the intellectual high ground.

But, scream the apologists for Finance Capitalism, we are not industrial saboteurs, vandals, and rip-off artists. We are SCIENTISTS and one of our members has been rewarded with a Nobel since 1968.

And sure enough, the defenders of Finance Capitalism have erected an awesome intellectual apparatus to justify their crazy ideas and when all else fails, they point to rising numbers at their Meccas--the trading pits of the various stock exchanges world-wide.

The problem is that under the rules of Finance Capitalism, stock markets become a measure of economic destruction. If the strategy of wealth accumulation is plunder, then the higher the markets, the greater the destruction. This fact highlights the most obvious difference between Finance and Industrial Capitalism. When the Capitalist strategy is to profit from creating complex and difficult products, markets actually measure (if not produce) real growth. Otherwise they are as economically useless (and destructive) as any other casino.

No sane person believes the faith-based economic explanations of Finance Capitalism any longer, because it cannot deliver on its promises. The list of its failures is almost infinite but some highlights include: the collapse of the Russian economy into an orgy of corruption and plunder with the arrival of the high priests of Finance Capitalism; the rejection of neo-liberalism in nine countries (and counting) in Latin America; the rejection of Finance Capitalism's one-sided EU constitution in of all places, France; and the fact that the economists who preach Finance Capitalism must now gather behind squads of armed police because millions of people have realized that whatever these intellectual prostitutes decide in their closed-off meetings, their lives are about to get much worse.

When it comes to delivering generalized prosperity, Finance Capitalism is an utter failure no matter how high the stock markets may climb. In fact, the soaring markets in a world where misery grows daily is the perfect condition for open and violent class warfare. But even worse than creating pre-revolutionary conditions, Finance Capitalism's penchant for destruction has now reached the stage where the survival of the biosphere is at stake.

Why this is so

Whenever a "progressive" politician wants to prove his gravitas in USA, he or she will say something like, "what this country needs is an Apollo-like program to ensure energy independence." As a self-confessed space nut as a child, I think the metaphor is pretty damn good.

The Apollo metaphor is apt because any complex or long-term space mission must be able to power itself with the energy it can gather on the fly. This dictates a strategy of solar collection combined with a hyper-efficient use of the precious energy that has been captured. Scale this up to a planetary scale and the scope, direction, and the magnitude of the energy problems facing us all become abundantly clear.

The Apollo metaphor also applies because it was a stunning example of an incredibly complex project done successfully in a short time. Yet it is here where the differences between Finance and Industrial Capitalism are especially manifest. Just because the original Apollo project could be done under the rules of Industrial Capitalism does NOT mean a much more complex project like energy independence could be accomplished under a regime of predatory finance. In fact, it almost certainly cannot.

Folks forget that Apollo was an act of industrial whimsy. At best, it was an exercise in a `my rockets are bigger than yours' show of force. But mostly it was a demonstration of industrial potential--we went to the moon because we could. The space race was the world's largest air show and folks from every corner of the planet enjoyed it.

The key component of space travel was the liquid-fueled rocket. It was invented by a good Yankee named Robert Goddard. Poor Goddard was forced to raise private funding for his experiments so essentially his life was wasted creating demonstration projects. Even during the Great Depression when public works became official government policy, public investment in aerospace was stingy. Rocketry requires too much expensive experimentation to be funded privately so Goddard remained a sideshow freak.

The Germans, on the other hand, understood the benefits of public funding in aerospace. So when their rocketeers set about to build their liquid-fueled boosters, they had government backing AND total industrial cooperation. While Goddard was an inventive genius, Von Braun was like an orchestra conductor whose players were the research departments of the finest schools and most accomplished industrial firms in the land.

Needless to say, Von Braun made MUCH more interesting rockets than Goddard. That's what happens when the support system is a government rather than charity. So when the great conductor fell into the hands of US Army, the systems that helped build the V-2 had to be duplicated as well. And they were. Public money invested in aerospace made 1945-1970 the golden age of American aviation.

By 1970, American aerospace had not only figured out how to land men on the moon, it had produced the best subsonic airliner (747) and the fastest airplane (SR-71). Since then, the economic forces that have crippled the rest of industrial America have produced a generation of stagnation. On Dec 17, 2003, a replica of the Wright Flyer was scheduled to re-enact the first flight on the 100th anniversary. 100 years of American aerospace wound up stuck in the sands of Kitty Hawk, propellers flailing uselessly.

And an economic system that can do that much damage to rocket science is somehow going to figure out a way to scale up the Apollo program to a planetary scale? Impossible!! A system that pays a $54 million dollar year-end bonus to a money changer will not hire 540 top-notch engineers at $100,000 a year to figure out a way to power planet earth on its solar income. Unless there are economic conditions similar to those that enabled the original Apollo program to happen, the idea that we can design our way out of the energy trap we built for ourselves with a mega-Apollo program is an absurd fantasy.

Removing the ultimate roadblock

When my mother was 87, she was watching some stupid blowhard pontificating about the wonders of economic deregulation on the McNeil / Lehrer report. She turns to me and snorts, "FOOL! doesn't anyone remember what the economy was like before regulations?!!"

My mother is now dead. So are most of the people who really remember why we gave up on Finance Capitalism in the first place. In the end, this isn't about Milton Friedman, or Alfred Marshall, or David Ricardo, or any of the other defenders of Finance Capitalism. Their appearance is so predictable, one could easily believe they grow such folks in vats. Why would it be otherwise? Money-changers hire these "economists" to justify their existence--it is no surprise there is a profession of hacks dedicated to promoting the interests of the investing classes.

The problem is, their theories never work. Finance Capitalism should have been discredited in 1873 or 1893 or 1921. It actually WAS discredited in 1929. But it never really died. By 1974 when Finance Capitalism made its comeback, it resumed its place at the head intellectual table overnight. It was like it had never left. And the key to its comeback was the death of folks who could remember why it had been discredited in the first place.

The reasons that the operating assumptions of Finance Capitalism simply must go are many. But two related problems--peak oil and climate change--are SO far from being meaningfully addressed by current economics that all other problems are trivial by comparison.

Al Gore is currently catching flack from the scientifically illiterate over his harmless and childishly upbeat film on climate change. But the biggest flaw in Inconvenient Truth is how it trivializes the problems. We are already in uncharted waters so far as it relates to atmospheric carbon, EVEN IF we were to douse all fires worldwide tomorrow. Fire has been essential to human existence and we have spent the last 10,000 figuring out ever more clever ways to start fires. Dousing ALL fire on earth in 10 YEARS is an astonishingly huge task (and even THAT might not help much for decades.)

Of course, we will probably not have much to say about how many fires must be quenched because supplies of the MOST wonderful fuels of all time are about to start drying up. The difference between modern life and a junkyard is liquid fuels. The difference between 21st century and 19th century reality is gasoline. The designs of our cities, our methods of transportation, our means of providing food--are all based on the assumptions of cheap petroleum products.

The idea that someone who has dedicated his life to explaining the "economic" reasons why a hedge-fund operator is qualified to address problems of the sweep and scope of climate change and the end to the Age of Petroleum is fundamentally absurd. These are problems of industrial design and Finance Capitalists are almost, without exception, economic Luddites. A lot of industrial skills have been destroyed in the last 30 years by these people. To expect these same people to become builders overnight is delusional.

What is even worse, our schools of economics have been churning out clones who actually believed that the strategies of the Finance Capitalists were virtuous because they led to prosperity. To get an advanced degree in economics at an American university, you not only have to drink the Kool-Aid, you have to be willing to mix it up and serve it. The key ingredient in the Kool-Aid apparently made it impossible to differentiate between growth and destruction.

To take on a mindset that well entrenched seems hopeless. The Finance Capitalists own the schools, the journals, and the awards. Even though they possess no evidence, they believe they have been successful. NOT a crowd likely to roll over and play dead.

So they must be circumvented. If we wish to mount an Industrial Capitalistic response to the large economic problems, we need three sorts of modern economists:

  1. Those who specialize in understanding which of the rules of Industrial Capitalism worked best when last tried (this group can include anyone over about 60 who learned industrial economics, the French who were taught the principles of dirigisme, etc.)
  2. Those who can expand on previous wisdom to create a new Industrialism designed to convert our societies from ones that burn energy capital to ones that allow us to live on our energy income.
  3. Those who can come up with simple explanations to be used in public for why Industrial Capitalism ALWAYS outperforms Finance Capitalism.
We have the technology and institutions to fix major problems but cannot because of corruption in the political sector, intellectual laziness in education and the media, and runaway greed in the financial sector. The problems caused by political corruption and runaway greed can be handled by political will, taxation, and stricter regulations. The intellectual disintegration brought on by 35 years of Finance Capitalism is a much more serious problem.

John Maynard Keynes, one of the architects of Industrial Capitalism in the 1930s, understood the problems of intellectual inertia so well. He claimed that "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than it is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves quite exempt from any intellectual influences, are usually slaves of some defunct economist."

The interesting question is, Can we dethrone the Finance Capitalists in time to save planet earth for human habitation? The Industrial Capitalists provided the institutions that gave us the Internet. It should be used to finally and completely discredit Finance Capitalism.


Notes 2.

[Jun 15, 2011] 23 Things They Don't Tell You About Capitalism.

William Podmore (London United Kingdom) Excellent introduction to economics

Ha-Joon Chang, Reader in the Political Economy of Development at Cambridge University, has written a fascinating book on capitalism's failings. He also wrote the brilliant Bad Samaritans. Martin Wolf of the Financial Times says he is `probably the world's most effective critic of globalisation'.

Chang takes on the free-marketers' dogmas and proposes ideas like - there is no such thing as a free market; the washing machine has changed the world more than the internet has; we do not live in a post-industrial age; globalisation isn't making the world richer; governments can pick winners; some rules are good for business; US (and British) CEOs are overpaid; more education does not make a country richer; and equality of opportunity, on its own, is unfair.

He notes that the USA does not have the world's highest living standard. Norway, Luxemburg, Switzerland, Denmark, Iceland, Ireland, Sweden and the USA, in that order, had the highest incomes per head. On income per hours worked, the USA comes eighth, after Luxemburg, Norway, France, Ireland, Belgium, Austria and the Netherlands. Japan, Switzerland, Singapore, Finland and Sweden have the highest industrial output per person.

Free-market politicians, economists and media have pushed policies of de-regulation and pursuit of short-term profits, causing less growth, more inequality, more job insecurity and more frequent crises. Britain's growth rate in income per person per year was 2.4 per cent in the 1960s-70s and 1.7 per cent 1990-2009. Rich countries grew by 3 per cent in the 1960s-70s and 1.4 per cent 1980-2009. Developing countries grew by 3 per cent in the 1960s-70s and 2.6 per cent 1980-2009. Latin America grew by 3.1 per cent in the 1960s-70s and 1.1 per cent 1980-2009, and Sub-Saharan Africa by 1.6 per cent in the 1960s-70s and 0.2 per cent 1990-2009. The world economy grew by 3.2 per cent in the 1960s-70s and 1.4 per cent 1990-2009.

So, across the world, countries did far better before Thatcher and Reagan's `free-market revolution'. Making the rich richer made the rest of us poorer, cutting economies' growth rates, and investment as a share of national output, in all the G7 countries.

Chang shows how free trade is not the way to grow and points out that the USA was the world's most protectionist country during its phase of ascendancy, from the 1830s to the 1940s, and that Britain was one of world's the most protectionist countries during its rise, from the 1720s to the 1850s.

He shows how immigration controls keep First World wages up; they determine wages more than any other factor. Weakening those controls, as the EU demands, lowers wages.

He challenges the conventional wisdom that we must cut spending to cut the deficit. Instead, we need controls capital, on mergers and acquisitions, and on financial products. We need the welfare state, industrial policy, and huge investment in industry, infrastructure, worker training and R&D.

As Chang points out, "Even though financial investments can drive growth for a while, such growth cannot be sustained, as those investments have to be ultimately backed up by viable long-term investments in real sector activities, as so vividly shown by the 2008 financial crisis."

This book is a commonsense, evidence-based approach to economic life, which we should urge all our friends and colleagues to read.

M. A. Krul (London, United Kingdom) Popular anti-orthodoxy

Ha-Joon Chang, economist at Cambridge University, is a familiar author to many in the general public by now for his persistent and eloquent efforts (when writing) to combat the economic orthodoxy on several major policy points. In particular, he is known for his defense of protectionism as a means to promote economic growth and for his rejection of the idea that 'free trade' and 'free markets' lead to better outcomes than alternatives such as government dirigisme. In "23 Things They Don't Tell You About Capitalism", he attempts to make the lessons of heterodoxy familiar to as wide a public as possible, addressing 23 orthodox economic clichés that are often accepted by a skeptical general public only because they seem to be supported by all in the economic field. In making the counterarguments accessible and generally known, Chang has done the English-speaking world a great service.

The 23 things he discusses can be roughly clustered into a number of groups: he discusses the orthodoxies of free trade as against protectionism, the orthodoxies of free markets as against government intervention, the orthodoxies of wage policy (particularly the idea that wages are infallibly determined by individual marginal productivity), the orthodoxy that inequality of income and outcome does not matter, and finally the idea that financial managers and economists know best. On all of these points, he has very important lessons to convey to policymakers, civil servants, and the general public to show that these things should either be rejected out of hand or be taken with a large truckload of salt. Using the strengths of economic history, he accessibly shows in each of these cases how the cliché is either refuted by the facts or itself an incoherent idea, or both.

That said, sometimes his critique does not go quite far enough, and this shows the limitations of Chang's own economic theory standpoint. As he makes clear, the book itself is intended to criticize the orthodoxies of 'free market' capitalism, but not capitalism itself. As a result, his critique is not as powerful and does not convey as many important popular lessons as it could. For example, although he is quite right about the relation between protectionism, government intervention, and growth, he does not criticize the concept of growth itself as the only goal in economic policy, nor does he point out the essential fact that growth can in fact be bad for the median living standard if it causes the distribution of wealth to be more unequal. He also, because of his market economy predilections, vastly understates the success of planned economies historically, despite referring at one point of the book to Robert Allen's excellent research on Soviet industrialization policy. He also does not point out that the strong capitalist investor state he favors itself historically has tended to impede the development of more egalitarian outcomes and tends to be repressive of unions and collective action. Finally, he does not critique any of the assumptions of microeconomics, only macroeconomics.

Nonetheless, most of the 23 lessons are well taken and although I have some disagreements with a number of them, they are exceedingly well formulated for public understanding and indeed much closer to a real picture of how capitalist economies work than any of your average macroecon textbooks. It is therefore to be hoped that this book will have a wide audience. Help other customers find the most helpful reviews Was this review helpful to you?

Loyd E. Eskildson "Pragmatist" (Phoenix, AZ.) Excellent Data-Based Perspectives!

The 2008 'Great Recession' demands re-examination of prevailing economic thought - the dominant paradigm (post 1970's conservative free-market capitalism) not only failed to predict the crisis, but also said it couldn't occur in today's free markets, thanks to Adam Smith's 'invisible hand.' Ha-Joon Chang provides that re-examination in his "23 Things They Don't Tell You About Capitalism." Turns out that the reason Adam Smith's hand was not visible is that it wasn't there. Chang, economics professor at the University of Cambridge, is no enemy of capitalism, though he contends its current conservative version should be made better. Conventional wisdom tells us that left alone, markets produce the most efficient and just outcomes - 'efficient' because businesses and individuals know best how to utilize their resources, and 'just' because they are rewarded according to their productivity. Following this advice, countries have deregulated businesses, reduced taxes and welfare, and adopted free trade. The results, per Chang, has been the opposite of what was promised - slower growth and rising inequality, often masked by rising credit expansion and increased working hours. Alternatively, developing Asian countries that grew fast did so following a different version of capitalism, though to be fair China's version to-date has also produced much greater inequality. The following summarizes some of Chang's points:

  1. "There is no such thing as a free market" - we already have hygiene standards in restaurants, ban child labor, pollution, narcotics, bribery, and dangerous workplaces, require licenses for professions such as doctors, lawyers, and brokers, and limit immigration. In 2008, the U.S. used at least $700 billion of taxpayers' money to buy up toxic assets, justified by President Bush on the grounds that it was a necessary state intervention consistent with free-market capitalism. Chang's conclusion - free-marketers contending that a certain regulation should not be introduced because it would restrict market freedom are simply expressing political opinions, not economic facts or laws.
  2. "Companies should not be run in the interest of their owners." Shareholders are the most mobile of corporate stakeholders, often holding ownership for but a fraction of a second (high-frequency trading represents 70% of today's trading). Shareholders prefer corporate strategies that maximize short-term profits and dividends, usually at the cost of long-term investments. (This often also includes added leverage and risk, and reliance on socializing risk via 'too big to fail' status, and relying on 'the Greenspan put.') Chang adds that corporate limited liability, while a boon to capital accumulation and technological progress, when combined with professional managers instead of entrepreneurs owning a large chunk (eg. Ford, Edison, Carnegie) and public shares with smaller voting rights (typically limited to 10%), allows professional managers to maximize their own prestige via sales growth and prestige projects instead of maximizing profits. Another negative long-term outcome driven by shareholders is increased share buybacks (less than 5% of profits until the early 1980s, 90% in 2007, and 280% in 2008) - one economist estimates that had GM not spent $20.4 billion on buybacks between 1986 and 2002 it could have prevented its 2009 bankruptcy. Short-term stockholder perspectives have also brought large-scale layoffs from off-shoring. Governments of other countries encourage longer-term thinking by holding large shares in key enterprises (China Mobile, Renault, Volkswagen), providing greater worker representation (Germany's supervisory boards), and cross-shareholding among friendly companies (Japan's Toyota and its suppliers).
  3. "Free-market policies rarely make poor countries rich." With a few exceptions, all of today's rich countries, including Britain and the U.S., reached that status through protectionism, subsidies, and other policies that they and their IMF, WTO, and World Bank now advise developing nations not to adopt. Free-market economists usually respond that the U.S. succeeded despite, not because of, protectionism. The problem with that explanation is the number of other nations paralleling the early growth strategy of the U.S. and Britain (Austria, Finland, France, Germany, Japan, Korea, Singapore, Sweden, Taiwan), and the fact that apparent exceptions (Hong Kong, Switzerland, The Netherlands) did so by ignoring foreign patents (a free-market 'no-no'). Chang believes the 'official historians' of capitalism have been very successful re-writing its history, akin to someone trying to 'kick away the ladder' with which they had climbed to the top. He also points out that developing nations that stick to their Ricardian 'comparative advantage,' per the conservatives prescription, condemn themselves to their economic status quo.
  4. "We do not live in a post-industrial age." Most of the fall in manufacturing's share of total output is not due to a fall in the quantity of manufactured goods, but due to the fall in their prices relative to those for services, caused by their faster productivity growth. A small part of deindustrialization is due to outsourcing of some 'manufacturing' activities that used to be provided in-house - eg. catering and cleaning. Those advising the newly developing nations to skip manufacturing and go directly to providing services forget that many services mainly serve manufacturing firms (finance, R&D, design), and that since services are harder to export, such an approach will create balance-of-payment problems. (Chang's preceding points directly contradict David Ricardo's law of comparative advantage - a fundamental free market precept. Chang's example of how Korea built Pohang Steel into a strong economic producer, despite lacking experienced managers and natural resources, is another.)
  5. "The U.S. does not have the highest living standard in the world." True, the average U.S. citizen has greater command over goods and services than his counterpart in almost any other country, but this is due to higher immigration, poorer employment conditions, and working longer hours for many vs. their foreign counterparts. The U.S. also has poorer health indicators and worse crime statistics. We do have the world's second highest income per capita - Luxemburg's higher, but measured in terms of purchasing power parity (PPP) the U.S. ranks eighth. (The U.S. doesn't have the fastest growing economy either - China is predicted to pass the U.S. in PPP this coming decade.) Chang's point here is that we should stop assuming the U.S. provides the best economic model. (This is already occurring - the World Bank's chief economist, Justin Lin, comes from China.)
  6. "Governments can pick winners." Chang cites examples of how the Korean government built world-class producers of steel (POSCO), shipbuilding (Hyundai), and electronics (LG), despite lacking raw materials or experience for those sectors. True, major government failures have occurred - Europe's Concorde, Indonesia's aircraft industry, Korea's promotion of aluminum smelting, and Japan's effort to have Nissan take over Honda; industry, however, has also failed - eg. the AOL-Time Warner merger, and the Daimler-Chrysler merger. Austria, China, Finland, France, Japan, Norway, Singapore (in numerous other areas), and Taiwan have also done quite well with government-picked winners. Another problem is that business and national interests sometimes clash - eg. American firms' massive outsourcing has undermined the national interest of maintaining full employment. (However, greater unbiased U.S. government involvement would be difficult due to the 10,000+ corporate lobbyists and billions in corporate campaign donations - $500 million alone from big oil in 2009-10.) Also interesting to Chang is how conservative free marketing bankers in the U.S. lined up for mammoth low-cost loans from the Federal Reserve at the beginning of the Great Recession. Government planning allows minimizing excess capacity, maximizing learning-curve economies and economies of scale and scope; operational performance is enhanced by also forcing government-owned or supported firms into international competition. Government intervention (loans, tariffs, subsidies, prohibiting exports of needed raw materials, building infrastructure) are necessary for emerging economies to move into more sophisticated sectors.
  7. "Making rich people richer doesn't make the rest of us richer." 'Trickle-down' economics is based on the belief that the poor maximize current consumption, while the rich, left to themselves, mostly invest. However, the years 1950-1973 saw the highest-ever growth rates in the U.S., Canada, Australia, and New Zealand, despite increased taxation of the rich. Before the 'Golden Age,' per capita income grew at 1-1.5%/year; during the Golden Age it grew at 2-3% in the U.S. Since then, tax cuts for the rich and financial deregulation have allowed greater paychecks for top managers and financiers, and between 1979 and 2006 the top 0.1% increased their share of national income from 3.5% to 11.6%. The result - investment as a ratio of national output has fallen in all rich economies and the pace at which the total economic pie grew decreased.
  8. "U.S. managers are over-priced." First, relative to their predecessors (about 10X those in the 1960s; now 300-400X the average worker), despite the latter having run companies more successfully, in relative terms. Second, compared to counterparts in other rich countries - up to 20X. (Third, compared to counterparts in developing nations - eg. JPMorgan Chase, world's 4th largest bank, paid its CEO $19.6 million in 2008, vs. the CEO of the Industrial and Commercial Bank of China, the world's largest, being paid $234,700.) American CEOs do not get... Read more ›

[Feb 21, 2011] SEC Expert on Why It is a Wuss at Litigation

naked capitalism


at 4:23 am SEC lawyers have a strong incentive to win cases, as it builds their resume, but it is far easier to win cases by way of settlements on minor charges, than by way of judgments on major charges, for obvious reasons, namely that the charged parties are much more likely to cooperate in the former case than in the latter.

Yes, major cases that set precedent are fantastic…..

The commonly held perception expressed by readers on your blog as elsewhere–that SEC staff have an incentive to go soft on industry in order to land cushy jobs–is not entirely fiction, but is much less widespread than outside observers believe.

But the phony enforcement described above doesn't build any reality-based resume. Any reasonable person would scoff at it, as for example Yves always does here. So if it's not true that this "resume" is meant to be sent to the corporate complex on the other side of the revolving door, then where is it supposed to be sent?

That could actually be true, particularly since the game plan here over the last 30 years seems to have been to make government less competent as a justification for shrinking it further.

I wish you wouldn't repeat the lie that anyone has "shrunk" government or ever intended to. Government, as a bipartisan project, only gets bigger and more aggressive. But it gets bigger and more aggressive on behalf of the corporations and the rich and against the people. Only the good civics, ostensibly public interest part of government is being destroyed.

One of the two glaring parallels between this regime and the Ancien Regime is how government is incompetent or negligent at doing anything worthwhile but overbearing in its worthless, pointless assertions of power, so that more and more people experience it as nothing but pointless oppression. The Food Tyranny bill just passed threatens a radical escalation of this worthless oppression. (And then there's the looming insurance Stamp mandate.)

Anyone who feels oppressed, cramped, bottlenecked is realizing that the reason for this is a worthless but oppressive government, including the worthless extensions of government known as corporations. These government entities also do nothing but impose ever more taxes and regulations while providing ever fewer and worse services.

Conscience of a conservative
at 5:47 am The email listed sounds a lot more on the money than the conspiracy theories, but I can't help think the writer left one thing out. The SEC does not get the budget it needs to persue all cases to their full conclusion. AS the former insider says, these cases take a great deal of time and money and the outcome is not guaranteed. If the SEC was properly funded it would be in a better position to retain their talent and fund legal battles instead of always settling.
at 7:39 am "SEC lawyers have a strong incentive to win cases"

Really? How does that assessment square with Judge Rakoff's observations during S.E.C. v. BAC over the SEC's proposed settlement for BAC's fraudulent concealment of MER bonuses prior to the shareholder vote on the BAC-MER merger? A sampling…

"In other words, the parties were proposing that the management of Bank of America-having allegedly hidden from the Bank's shareholders that as much as $5.8 billion of their money would be given as bonuses to the executives of Merrill who had run that company nearly into bankruptcy-would now settle the legal consequences of their lying by paying the S.E.C. $33 million more of their shareholders' money.",15

"The S.E.C., while also conceding that its normal policy in such situations is to go after the company executives who were responsible for the lie, rather than innocent shareholders, says it cannot do so here because "[t]he uncontroverted evidence in the investigative record is that lawyers for Bank of America and Merrill drafted the documents at issue and made the relevant decisions concerning disclosure of the bonuses." Id. But if that is the case, why are the penalties not then sought from the lawyers? And why, in any event, does that justify imposing penalties on the victims of the lie, the shareholders?"


"Overall, indeed, the parties' submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry-all at the expense of the sole alleged victims, the shareholders. Even under the most deferential review, this proposed Consent Judgment cannot remotely be called fair."


"The S.E.C. also claims it was stymied in determining individual liability because the Bank's executives said the lawyers made all the decisions but the Bank refused to waive attorney-client privilege. But it appears that the S.E.C. never seriously pursued whether this constituted a waiver of the privilege, let alone whether it fit within the crime/fraud exception to the privilege. And even on its face, such testimony would seem to invite investigating the lawyers. The Bank, for its part, claims that it has not relied on a defense of advice of counsel and so no waiver has occurred. But, as noted earlier, the Bank has failed to provide its own particularized version of how the proxies came to be and how the key decisions as to what to include or exclude were made, so its claim of not relying on an advice of counsel is simply an evasion." Id. n.3.

Judge Rakoff makes the S.E.C. lawyers sound like a bunch of pussy cats, not people who want to win.

Wild Bill
at 8:17 am "The commonly held perception expressed by readers on your blog as elsewhere–that SEC staff have an incentive to go soft on industry in order to land cushy jobs–is not entirely fiction, but is much less widespread than outside observers believe." We're not wrong! We know what we see! We know what's going on! Linda Thompson was hired because she knew the game, not because she litigated Enron. This should have been your first point, and you should have expounded upon it with examples and reasoning. Instead you buried it in the middle of a bunch of crap. You're a former SEC lawyer - YOU DID THE SAME THING SHE DID! I'm starting to hate this blog.
at 8:24 am I think it's safe to say that the model of regulatory enforcement is completely broken. We have had a paradigm shift in the industry. It's time for one in enforcement.

Wall Street has become like organized crime. So the question is, how did the FBI break the mob? It professionalized its ranks, making them incorruptible, or nearly so. It sent in moles who gave law enforcement a clear picture of what was going on and who was doing what. It had a powerful agency head who protected all levels of its staff from political interference. And it had an aura and a mission. TV shows, movies. Kids wanted to be G-men, and it was not about the money.

In short, ask yourself, how did Elliot Ness bring down Al Capone? That's what we need to rein in Wall Street. That's our model.

Conscience of a conservative
at 9:33 am Wall Street has not become like the mob. A better analogy would be the cigarette industry. Think of how much more profitable Tobacco would be if lobbyists could convince politicians to defund the FDA. Wall Street's business is not unlike Tobacco , they source product at the cheapest price and attempt to package at the highest price. The prospectus is like the warning label on a pack. Wall Street wants to make sure the warning label says as little as possible and enforcement is not there if they break the rules.

People will always leave the SEC for other jobs, but more people would stay if the pay was better. And the SEC has to go for quick wins and settle or they risk running out of scarce funding.

I,m sure there's some regulatory capture and pressure from the Fed or Treasury ,etc to back off on certain prosecutions, but money is a big issue here and to pretend it's not an issue and blame it 100% on corruption in my view fails to accept the realities of the situation.

One reason why the FDIC is more effective is because their funding situation is better.

at 9:52 am "Ironically, a simple model for clean government comes from Singapore."

Well, at least you've always been straightforward about your desire for authoritarianism.

at 10:07 am Do you expect banks or bank officers to be prosecuted? Take a look at who is the Secretary of the Treasury (Tim Geithner-Goldman Sachs), the Budget Director (Jacob Lew-Citigroup) and the Chief of Staff (William Daley-JP Morgan Chase). Let's face it. The banks are a huge source of political patronage and that's why nobody has been prosecuted for this fiasco. The banks are very glad to hire those who have served them well in office.

The bankruptcy trustee sues JP Morgan Chase because of its complicity in the Madoff scandal. Does the government do anything as a result of potential money laundering? Absolutely not. The Obama administration people are looking out for their futures. Not prosecuting JP Morgan Chase, Citigroup and Goldman Sachs is likely to result in large future rewards.

at 10:10 am Sorry, but I'm skeptical.

First of all, I don't understand why settling a lot of easy cases should impress a top law firm, if indeed what impresses them is outstanding skill.

Secondly, it seems to me the best and most aggressive law enforcers are never primarily motivated by money. They tend to be the kind of people whose spirit would die if they had to work in support of a corrupt organization.

In fact, most of us would much prefer doing something we can believe in rather than something that makes us feel dirty.

I believe the problem at the SEC, as with many government agencies, lies at the top. Good, aggressive staff is drawn to (and often literally loves) a leader who is just like them, and who encourages them and protects them from political efforts to hobble them. And a leadership that doesn't want to rock the boat will find reasons to reject any job applicants who don't "fit in."

Cynical Mumble
at 10:40 am This has always been clear to see for years – that the agencies are captured and do what they're told. In truth, these guys are under considerable pressure to do what they are told, I like the passing discussions on what motivates this mode of operation. I think some SEC lawyers already consider their Government jobs as the proverbial "greener pasture" and simply don't want to fuck that up by offending the industry. I don't believe the budget issues are an issue in why the SEC won't do it's "imaginary" job. Look at the Defense Contractors lining up to feed at the trough to "modernize" the SEC's infrastructure, even if nothing gets done – it is extremely lucrative.
F. Beard
at 11:29 am Why not just give SEC attorneys a percentage of the fines for a successful prosecution plus an extra bounty on criminal convictions? Why not make the SEC itself a lucrative career so there would be little temptation to move to private industry?

Still, I would bet that fundamental reform in money creation would do more to ensure an honest and stable financial system than any amount of regulation.

Independent Accountant
at 11:54 am Full disclosure: I have never worked at the SEC. However, I have been "on the other side of the table" from the SEC for 36 years. The SEC almost invariably selects insigificant cases to pursue and settles them quickly. Most of its lawyers have no understanding of evidence and couldn't try a case if their lives depended on it. The go to the SEC for 3-5 years, get their tickets punched, then leave for law firms which they gave "passes" to as SEC employees. The SEC needs a housecleaning from top to bottom. The SEC has enough money to do its job. It needs to reallocate resources. I had a client with $196 in assets and 32 stockholders, a shell, get an SEC comment letter. Why is the SEC even looking at registrants with less than say $250 million in market cap? Why? Because by spending time on obscure, non-connected firms, it can avoid looking at large connected ones. My bottom line: anyone at the SEC who worked on Wall Street or for a NY BigLaw or Big 87654 firm at any time in the last ten years should be exited. Now. "But the SEC will lose all that valuable expertise". Are you kidding?
at 12:44 pm Do you think the system would be better off with no regulation whatsoever? I ask because I am gradually coming to think that everything eventually gets gamed and corrupted. Thus, since Wall St.'s main occupation apparently is to game the system, the best thing is just to take away the game, i.e. end the charade that there are any rules at all. This means closing the SEC. The system then goes back to Laissez-faire and everyone must rely on their reputation to survive-which means apart from the microsecond trading and other shenanigans, Wall St. goes under because they don't have a shred of good reputation left. If you, or anyone else here has any thoughts I'd like to hear it.
at 12:57 pm The SEC is an important element of the con. It gives the impression that there is a regulatory apparatus out there when, in fact, there is none.

Ineffectual regulation is useful to our looting elites as a distraction. We are left discussing whether the SEC is doing its job or if it is doing its job well enough. Well, the SEC is doing its job and a very good one at that. It is meant to blow smoke at the rubes and give cover to the looters, and it does. It is pure kabuki, the appearance of regulation without any real regulation. It is a Trojan horse. It portrays itself as on the side of reform, of the people, but it is really just an instrument of Wall Street meant to screw over those selfsame people as much as possible.

at 1:49 pm There are two mechanisms to revitalise the SEC:

1) Whistle blowers get 15-30% of fine imposed, a la IRS;

2) A portion of the fine is also distributed to the investigative team.

This should focus minds on large and winnable cases.

Mat Albert 5416
at 2:15 pm In a single paragraph Hugh managed to say pretty much everything that anyone needs to know about the SEC.

There's a pattern which connects all of this, as Hugh has pointed out a number of times before:

from Wikipedia: KLEPTOCRAC­Y

Kleptocrac­y, alternativ­ely cleptocrac­y or kleptarchy­, from Greek kleptes (thieves) and kratos (rule), is a term applied to a government that takes advantage of government­al corruption to extend the personal wealth and political power of government officials and the ruling class (collectiv­ely, kleptocrat­s), via the embezzleme­nt of state funds at the expense of the wider population­, sometimes without even the pretense of honest service. The term means "rule by thieves"."

The only question that remains is how long will the ruling thieves bother with "even the pretense of honest service"?

[Feb 06, 2011] The Slow Recovery of Unemployment

February 06, 2011 | Economist's View

Ron -> Michael Pettengill...

You can trace the change in dynamics back to the 1954 tax code change increasing the investment tax burden on dividends and leading to lower tax on capital gains. That imbalance fueled the equity consolidation leading to financialization.

The first LBO was in 1955. Not much happened through the sixties, just increased horizontal M&A. With the seventies bank deregulation, much more M&A with more vertical due to relaxation of anti-trust, and lots more LBO, downsize and downwards wage pressure. In the eighties anti-trust was abandoned, more financial deregulation, more M&A (especially LBO), more downsize and R&D cut-backs to payoff leverage debt, withdrawal of tax exemption for commercial non-profit health insurance and health providers leading to for profit status and consolidation of New Deal era BC/BS and Catholic nuns's hospitals.

In the nineties our first black Republican president allowed the gutting of remaining New Deal financial regulation and reinstituted bucket swaps, which were outlawed by TR in 1907, on his way out of office.

It all started in 1954, despite the fact that it took two decades to show up in any significant manner. That is the way that economic changes evolve. It can take half a century for a crisis to arise from a ill-considered tax incentive policy that influences investment decisions.

When you first kill the goose that lays the golden eggs, there is a wind fall of goose meat and some developing eggs. Now we got nothing left of it but feathers.

Michael Pettengill

If one looks at history and the data, employment will continue to be a drag on the economy with millions suffering until taxes are hiked.

The 30s began with substantial tax hikes which enabled policies that created jobs at a rate, which conservatives claim was too low because of high taxes, equivalent to adding 40 million jobs while GW Bush was president.

Reagan cut taxes and we ended up with the worst job losses since the 20s, but then Reagan hiked taxes six times while engaging in massive Keynesian deficit spending stimulus on wasteful and useless military projects.

HW Bush and Clinton hiked taxes even more and were able to cut the Keynesian deficit spending over the 90s and create a budget surplus and record high employment, in spite of recovering from several asset bubbles popping, bubbles that formed as a result of bankers getting massive deregulation. Yes, the HW Bush years did suffer from job losses and slow job creation, but HW spent way more than Obama has on cleaning up the Reagan real estate bubble and massive bank failures and mortgage defaults, the worst since the 20s-30s.

But hey, Reagan said we no longer needed to sacrifice because American government hands out free lunches.

Bernard D'Mello, 'Financialisation' and the Tendency to Stagnation by Bernard D'Mello

John Bellamy Foster and Fred Magdoff, The Great Financial Crisis: Causes and Consequences, New York: Monthly Review Press/Kharagpur, India: Cornerstone Publications, 2009, pp 160, US$12.95/Rs 100.

Beginning with the failure of two Bear Stearns hedge funds and the consequent freezing of the high-risk collateralised debt obligations market in June 2007, the financial crisis deepened in 2008, and at the time of writing in April 2009, the wheels of finance are yet to start turning again even though governments and central banks around the world have taken many measures -- "dropping money from helicopters", metaphorically speaking, into the financial markets, going much further than merely acting as "lenders of last resort", exercising their "too big to fail" policy, and so on. By all accounts, the financial catastrophe is the worst since the Great Depression, bringing in its wake a severe economic crisis, and it is time to seriously examine its causes and consequences, a challenge the book under review takes up quite admirably.

The feeding of the speculative bubble in the home mortgage market by massive credit expansion, the selling of large amounts of subprime mortgages, the peculiar securitisation of the mortgage loans and the speculative trading of such securities in the global financial markets, the credit rating agencies' fraudulent ratings, the off-balance sheet device of the structured investment vehicle, and role of credit default swap arrangements have, taken together, commanded a fair share of attention among financial analysts. To make sense of this whole host of factors, the authors, John Bellamy Foster and Fred Magdoff place their description of the unfolding of the crisis quite neatly into the basic pattern of speculative bubbles outlined by Charles Kindleberger in Manias, Panics, and Crashes: A History of Financial Crises -- a novel offering ("displacement"), credit expansion, speculative mania, distress, and crash/panic -- and, with the same clarity and wit so characteristic of the "literary economist".

Going by this, it might be tempting to view the crisis as a direct consequence of the deregulation of the financial system since the 1970s, especially the cumulative dismantling of Glass-Steagall that was finally buried when the then US President, Bill Clinton signed the Financial Services Modernisation Act in 1999. But this is not a liberal-left account. The authors come from an intellectual tradition (the Monthly Review school) that has its origins in Paul Sweezy's synthesis of Marx's political economy with J M Keynes' insights on investment, effective demand,1 and the structure and behaviour of modern finance, as well as the theory of oligopoly. They locate the roots of the financial bust in the "real" economy and in the underlying accumulation (savings-and-investment) process, both its financial and "real" aspects.

Finance to the Fore

Since the late 1970s, a gravitational shift of economic activity from the production of goods and non-financial services to finance has been underway. One indicator of this process has been the rapid growth since then of the share of financial profits in total corporate profits. Also reflective of this process of "financialisation" is the explosive growth of private debt -- household, non-financial, and financial business -- as a proportion of gross domestic product, and the piling of layers upon layers of claims with the existence of instruments like options, futures, swaps, and the like, and financial entities like hedge funds and structured investment vehicles. With financialisation, the employment of money capital in the financial markets and in speculation, more generally, to make more money, bypassing the route of commodity production, increasingly became the name of the game. In Marx's terms, financialisation entailed a shift from the general formula for capital accumulation, M-C-M', in which commodities are central to the generation of profits, to one "increasingly geared to the circuit of money capital alone, M-M', in which money simply begets more money with no relation to production" (p 133).

The flood of private debt to finance such activity has been sustained by successive booms in asset prices; indeed, such booms have, in turn, been fed by the explosion of debt.2 As long as the asset price bubble grows, consumers and businesses get access to more credit to buy more home or financial assets because their creditworthiness is determined by the market values of the assets they hold, which act as collateral. The rise of asset values and the intensification of the speculative mania contribute to the growth of borrowing, which, in turn, flames the fires of speculation and the further rise of asset values. On the supply side of the financial markets, in the competitive race to grab the hindmost of the profits in store, a whole array of players get into the act of frenzied "financial innovation", leading to the multiplication of financial assets of all kinds, for instance, the securitisation of mortgage loans through the collateralised debt obligation, or the credit default swap to speculate on the quality of credit instruments. It is only when the asset price bubble pops and the underlying collateral thus vanishes in thin air that all hell breaks loose across financial institutions and markets, and across countries in this world of globalised finance.

Weak Propensity to Invest

But what brought on the financialisation of the economy in the first place? The US economy entered a period characterised by slow economic growth, high unemployment/underemployment and excess capacity beginning with the sharp recession of 1974-75 after around 25 years of rapid ascent following the second world war. The inducement needed to generate investment high enough to sustain the vigorous growth of the so-called Golden Age was no longer to be found. But capitalism as a profit-directed system has an imperative to accumulate capital -- it cannot stand still; it either expands or it slumps. An important "solution" to the problem of long-term "stagnation" was found in financialisation, which proved functional for capitalism, in that, what growth the economy produced over the period of the 1980s to the present has, to a significant extent, been due to the financial explosion. Speculative finance became "the secondary engine for growth given the weakness in the primary engine, productive investment" (p 18). The system was now "more and more dependent on a series of financial bubbles to keep it going, each one bigger than the last" (p 18).

As the authors themselves give credit to, their analysis leans heavily on Paul Sweezy and Harry Magdoff's documentation and analysis of developments in the US and world economy in the pages of the Monthly Review over a period stretching from the late 1960s to the late 1980s (as also, short perspective articles by Sweezy up to the mid-1990s), a number of these pieces tracing the process of what later came to be called financialisation. The analytical framework of the book draws on Paul Baran and Paul Sweezy's 1966 classic, Monopoly Capital: An Essay on the American Economic and Social Order (New York: Monthly Review Press, 1966). Rather than a tendency for the rate of profit to fall,3 Baran and Sweezy hypothesised a tendency for the relative share of the economic surplus4 to rise. The main problem is one of finding ways to absorb this gigantic actual and potential economic surplus. "Underconsumption" -- the shift in the distribution of income from labour to capital exacerbating the problem of effective demand -- as an ex ante tendency draws the economy towards stagnation, for the process of accumulation of capital is predicated upon an increase in the rate of surplus value while at the same time having to rely on mass consumption to spur investment and economic growth. High levels of inequality hold down the relative purchasing power of the working class, weakening consumption and adding to overcapacity, thus lowering expected profits on new investment, and thereby dampening the willingness to invest.

Counteracting Tendencies

The problem of capitalism is that individual units of capital strive to expand their wealth to the maximum possible extent without considering the ultimate overall effect this would have on effective demand in the context of the economy's expanding capacity. Truly, "The real barrier of capitalist production is capital itself", as Marx once put it.5 Under monopoly capitalism, this barrier is raised even higher. First, in the class struggle -- the relationship between the two main classes, involving exploitation by capital and the workers' resistance to it -- capital has the upper hand, thus raising the rate of surplus value to attain a higher rate of profit, and thereby making possible a higher rate of accumulation. Second, with oligopolistic pricing, the uniform rate of profit of competitive capitalism gives way to a "hierarchy of profit rates" -- highest in "tightly" oligopolistic product markets and lowest in the most competitive ones. This leads to a skewed distribution of the surplus value generated, one that favours the larger, more monopolistic firms; they, in turn, could "re-invest" a larger proportion of their profits, making possible a higher rate of accumulation. But on the demand side, the large oligopolistic units of capital tend to regulate and slow down "the expansion of productive capital in order to maintain their higher rates of profit".

Underconsumption as an ex ante tendency and the problem of effective demand thus asserts itself even more under monopoly capitalism than under its competitive counterpart. But there are counteracting tendencies. Civilian government spending picks up some of the slack in effective demand; however, there are forces opposing such spending, especially where the projects or activities undertaken either compete with private enterprise or undermine class privileges. But there are other offsetting tendencies, such as militarism and imperialism, expansion of the sales effort, and financialisation,6 which have been the main external stimulants boosting effective demand and thus aggregate output. As already mentioned, financialisation has been functional for capitalism in the context of a tendency to stagnation; indeed, more recently, it has been the main "response of capital to the stagnation tendency in the real economy". But the present crisis of financialisation, symptomatic in the financial crash, "inevitably means the resurfacing of the underlying stagnation endemic to the advanced capitalist economy" and there now seems to be "no other visible way out for monopoly-finance capital" (p 133).

'The Truth Is in the Whole'

It must be mentioned that the book focuses almost exclusively on the financial crisis in the context of the US economy. No doubt this is the epicentre of the catastrophe. Nevertheless, in these times of financialisation of the capital accumulation process globally (albeit an Americanisation of global finance), if one were to go by Hegel's dictum that "The Truth is in the Whole", then to understand what is going on in the US, one has to also take account of what is happening in the whole world, just as developments in the US make a difference elsewhere. In particular, the structure and distribution of world effective demand along with the huge imbalances reflected in the massive deficits and corresponding surpluses in the current accounts of the balance of payments of the major economies, and the structure of capital flows7 thereby engendered, need to be brought into the picture. The neo-mercantilist direction of the Chinese, German (also, some other European economies), and Japanese economies come to mind, which needs to be taken together with the fact that despite the phenomenal rise in inequality in the US, the country's savings rate has secularly declined, in part due to the wealth effect brought on by financialisation. These developments have, in turn, led to increasing US current account deficits, matched by huge capital inflows, and reflected in the accumulation of massive non-resident holdings of dollar-denominated financial assets. To what extent has all of this buttressed the speculative mania and the crash?

Again, confronted with Hegel's dictum, and reminded of Rosa Luxemburg's thesis of capitalism's imperative to move into the non-capitalist regions of the world, we might also ask whether as time has gone by in this post-cold war era of a fully globalised capitalism, the system is now more prone to deep crises, given that it can now grow only by internal expansion.

'Monopoly-Finance Capital'

The main chapters, apart from the introduction, were "originally written as parts of a running commentary [in the Monthly Review] during the years 2006-08 as the present crisis took shape" (p 21). In fact, the four chapters following the introduction -- "The Household Debt Bubble" (May 2006), "The Explosion of Debt and Speculation" (November 2006), "Monopoly-Finance Capital" (December 2006), and "The Financialization of Capitalism" (April 2007) -- were all written before the crisis began. But this does not diminish their value. The chapter on "The Household Debt Bubble" presents interesting data, for instance, debt service payments as a percentage of disposable income by income percentiles, which together suggest that "financial distress is ever more solidly based in lower-income, working-class families" (p 31). The chapter on "The Explosion of Debt and Speculation", after presenting data on the sky-rocketing of debt -- household, non-financial sector, financial business, and government -- suggests a decline in the stimulatory effect of the expansion of debt on the economy as a result of its changing composition. In particular, "financial sector debt now larger than any other single component and growing faster than all the rest (a shift from M-C-M' to M-M'), may explain much of the decreased stimulation of the economy by debt expansion" (p 49).

Importantly, in the chapter on "Monopoly-¬Finance Capital", the authors argue that the new way monopoly capitalism has found of reproducing itself, namely, through the explosive growth of finance, suggests that it has moved into a "new hybrid phase", which they designate "monopoly-finance capital"8 (p 64). Drawing on Sweezy, the chapter outlines how the "financial explosion has reacted back in important ways on the structure and functioning of the corporation-dominated "real" economy"9 (p 66). And, in the chapter on "The Financialization of Capitalism", Foster and Magdoff profile its class and imperial implications (pp 84-88).

But, in order to absorb these and other insights in each of the six chapters, the reader will have to put up with a lot of repetition. And, there seems to be an analytical flaw. In chapter 6, in a section "From Financial Explosion to Financial Implosion" dealing with the instability and fragility of a system, while examining the massive increase in private debt, the authors state that "the problem is further compounded if government debt (local, state, and federal) is added in" (p 122). This is analytically untenable. Unlike private debt instruments, US Treasury securities have a zero default risk -- they can be held indefinitely (for they are continuously "rolled over") at no financial risk to the government or to the private sector holder, for the government can never become bankrupt if it borrows in the same currency it has the power to declare as legal tender (fiat money). In fact, in the midst of the present crisis, Treasury securities are preferred holdings, for they can be readily sold for money or pledged as collateral for availing of loans.10 But of course, Treasury securities face purchasing power risk -- inflation can erode their purchasing power or deflation can result in an increasing real value of the debt for the government.

There is apprehension though about the value of the dollar, the currency in which these securities are denominated -- a depreciation of the dollar relative to the asset holder's own currency -- but this foreign exchange risk is faced by such holders for all forms of dollar denominated assets that they may hold. A significant fall, though, in value of the dollar would adversely affect the very growth strategies of the US's neo-mercantilist rivals (China, Germany and some other European countries, and Japan), as also those of US financial interests (which exercise significant power and influence in shaping the US exchange rate policy), predicated as these grand designs are upon the maintenance of a "strong" dollar. Given this, and the fact that the portfolios of the foreign assets of the neo-mercantilist powers are largely dollar-denominated, presently, all the countries at the apex of the global pyramid of power and wealth want a "strong" dollar, and will thus do all they can to ensure this. So it is highly unlikely the neo-mercantilist powers will shift their foreign portfolios of wealth away from the dollar leading to a collapse in its value. However, with the plunge in the net worth of firms geared to the circuits of money capital alone, and the consequent decline in their relative power and influence, in the event of the dollar losing say 30-40% of its value, given its "overvaluation" in the light of persistently high US current account deficits, all hell is bound to break loose with a further deepening of the financial and economic crisis globally. The historical parallel over here is the loss of international confidence in the pound sterling in 1931 in the midst of the Depression and the many bankruptcies and financial failures that resulted therefrom. Is the international role of the dollar then at stake?11

Crying Out for Answers

Clearly, we are all crying out for answers and there is a lot to gain from working one's way through this book. However, with all its strengths, there is something, I feel, missing in this volume -- the authors refrain from taking on other Marxist writers on the subject. Marxists usually differ a great deal in many matters of interpretation and evaluation, and there is a lot to learn from their debates. There are, for instance, those who endorse Marx's falling rate of profit theory, with whom the Monthly Review school differs. The former focus on systemic tendencies that, they contend, have lowered the rate of profit, and seek to link these with the role of monetary and financial phenomena disrupting the accumulation process. The disinclination to debate with other schools of Marxist thought on the financial crisis is our loss. Picture the young Paul Sweezy, penning his The Theory of Capitalist Development in the 1930s, boldly taking on a whole bunch of Marxist thinkers on crisis theory, from Henryk Grossman to Mikhail Tugan-Baranovsky, and Marx too, and the positive "externalities" flowing from this initiative. Be that as it may, there is a whole new generation today wanting to know what caused the present financial catastrophe and what might be its likely ramifications. After all, not long ago, the cold war ended with the restoration and triumph of capitalism on a global scale, and then, less than two decades later, capitalism is bankrupt. This book, with its cogency that is the hallmark of the Monthly Review, needs to be widely read.


1 Keynes considered effective demand -- demand, at a profitable price, for the volume of goods and services that could be produced with existing capacity -- to be capitalism's most fundamental macroeconomic problem.

2 We follow what appears as the typical pattern of speculative bubbles from the 1980s onwards, as outlined by Paul Sweezy and Harry Magdoff, "The Stock Market Crash and Its Aftermath", in their book, The Irreversible Crisis (New York: Monthly Review Press), 1988, pp 43-55.

3 In Marxian terms, a rise in the "organic composition of capital" (the ratio of the value of used-up means of production and the value produced by "necessary labour") increases labour productivity, which raises the rate of surplus value -- the ratio of the value produced by "surplus labour" ("surplus value") and the value produced by "necessary labour". So an increasing organic composition of capital proceeds pari passu with a rising rate of surplus value, making the direction in which the rate of profit (the surplus value divided by the sum of the value of the used-up means of production and the value produced by "necessary labour") moves indeterminate. See Paul Sweezy's 1942 classic, The Theory of Capitalist Development (New York: Monthly Review Press, 1970), p 102.

4 The economic surplus is difference between total output and the "socially necessary" costs of producing it.

5 In this paragraph, we draw on Paul Sweezy's "Monopoly Capitalism" in John Eatwell, Murray Milgate and Peter Newman (eds.), Marxian Economics (London: Macmillan), 1990: 302.

6 Here, effective demand is stimulated via the "wealth effect" -- a tendency for consumption to grow, even in the absence of the growth of incomes, due to rising asset prices.

7 The increase in net liability of a country to the rest of the world, represented by the current account deficit, if persistent and high, as in the case of the US, leads to a huge cumulative build-up of net claims by non-residents on the domestic economy. In contrast, in the case of a country with a current account surplus, there is a net outflow of funds, and, if that surplus is persistent and high, as in the case of countries following neo-mercantilist growth strategies, it will result in a huge cumulative build-up of net claims by residents on the rest of the world's economies. But, of course, there are also autonomous capital flows -- strategic rivalry between nations is not merely manifested in trade; it also takes the form of controlling resources beyond national boundaries through foreign direct investment and militarism. And, given the role of the dollar as international money, the US has an advantage over its neo-mercantilist rivals, China, Germany and Japan, in this respect -- it can finance much of its foreign investment and militarism by creating monetary liabilities abroad.

8 According to Paul Sweezy, from the latter half of the 1970s a "relatively independent -- relative, that is, to what went before -- financial superstructure sitting on top of the world economy and most of its national units" began to take shape, emerging around the mid-1990s. See his perspective piece, "The Triumph of Financial Capital" (Monthly Review, Vol 46, No 2, June 1994, pp 1-11).

9 There is also the need to take account of the impact of increasing "openness" (in the trade and financial sense) on product market structures, for instance, the impact of foreign direct investment on transforming a "tight" oligopolistic market into a "loose" one, or the impact of price competition from imports on profit rates in oligopolistic industries facing global excess capacity. All this may call for a relook at the hypothesis of the relative share of the economic surplus to rise, using more recent data.

10 Prabhat Patnaik also finds it untenable to lump together the private and the public debt "to show the fragility of the system". See his "The Economic Crisis and Contemporary Capitalism", EPW, Vol 44, No 13, 2009, p 49.

11 The reference here is to the central role of the dollar in the gigantic web of global private capital flows. For a different but interesting approach to this question, see Ramaa Vasudevan, "The Global Meltdown: Financialisation, Dollar Hegemony and the Subprime Market Collapse", EPW, Vol 44, No 13, 2009, pp 193-99.

Bernard D'Mello is deputy editor, Economic & Political Weekly, Mumbai. This article also appears in the EPW on 9 May 2009.


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