Archive for the ‘Banking and Finance’ Category

Reading Neoliberalism and the Global Financial Crisis Politically

Although it has become more common to hear criticism of neoclassical economics, and neoliberal ideology more broadly, the anti corporate social movements need to guard themselves against the coming reaffirmation, perhaps even reconstruction, of these ideas. This will require first dispensing with a few illusions.

It would be false to suppose that the great recession, precipitated by a global financial crisis, has now rendered neoliberal ideology and its underlying justification in free market economics illegitimate. It never had any intellectual legitimacy to start off with. The Savings and Loans collapses of the 1980s, the global debt crisis, the Asian financial crisis, the collapse of Long Term Capital Management and so on demonstrated that neoliberalism had no real intellectual justification. Despite this the reigning free market orthodoxies continued to carry the day both in academia, the media and government.

This is not even to go into what should be seen as the first chapter of the unipolar era; the disaster that neoliberalism occasioned in Eastern Europe, especially Russia.

There are important institutional reasons why this was so. The past 30 odd years has seen a quite conscious one sided class war being waged by the rich, the purpose, not the affect, of which was to skew wealth and power towards the few at the top. In 2006 the top 1% of the US population had 22.6% of national wealth, the same level as in 1929. To get that level back to the level on the eve of the Great Depression took some work. During the neoliberal era there has been a marked shift in the wages-profit share towards corporate profits. This was enabled by stagnating real wages for non-supervisory workers, partly obtained through what Alan Greenspan called “increasing worker insecurity.” This was developed through the threat of job transfer following the globalisation of production.

It should be stressed that this shift towards profits occurred in the context of increasing labour productivity in the United States. Though workers were working harder and smarter nonetheless wages, for the most part, stagnated. The proceeds of greater productivity went to big business and, thereby, the rich. Living standards and wealth were increasingly maintained by way of high household debt levels and rising real estate prices. During the boom in asset prices this gave Americans a feeling of prosperity, but as the Nazi’s infamously exclaimed during the Weimar Republic that was very much a type of “sham prosperity.” Prosperity built on the back of stagnating wages and highly leveraged exposure to asset prices in a speculative bubble is illusory.

It has been pointed out that in the United States during the neoliberal era policy really was not wholly dominated by free market ideology at all. A better description would be “socialism for the rich and free markets for the poor.” The US has always relied on a dynamic state sector, like all advanced industrial economies, to socialise cost and risk. For example much of the development of high technology industry has come by way of the Pentagon. Military Keynesianism has also typically been the preferred method of demand management in the United States. This is because with this type of economic pump priming various assorted nasties, such as spending on the needy and the somewhat greater equitable distribution of national income, occasioned by orthodox Keynesianism are avoided.

Even in the financial sector where doctrines such as rational expectations and the efficient markets hypothesis were dominant free market dogma does not fully account for policy. To be sure such free market dogma was used to justify deregulation, which enabled financial corporations to act with greater degrees of freedom in the pursuit of profit, nonetheless risk has always been socialised. The bail out of Wall Street in the wake of the current crisis has brought this to relief. However as stated risk has been socialised throughout the neoliberal era as the Saving and Loans and LTCM bailouts demonstrate. The affect of neoliberalism is to socialise risk without financial institutions at the same time being required to be mindful of the wider social affects of their activities. The latter, of course, follows on from deregulation.

A good description of the mechanics of neoliberalism can be found in the writings of Adam Smith. In his “The Wealth of Nations”, the supposed sacred text for neoliberals, Smith speaks of what he calls the vile maxim; “ All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.” That is what neoliberalism is; it is the vile maxim as currently adopted by the masters of mankind. Given the shift against wages in the wages-profit share it is also worth taking on board another quote from the supposed master of neoliberal thought; “The liberal reward of labour, therefore, as it is the affect of increasing wealth, so it is the cause of increasing population. To complain of it, is to lament over the necessary effect and cause of the greatest public prosperity.” When you put the two quotes together, when it comes to neoliberalism, all is revealed.

Socialising the risk of financial institutions by exposing the rest of society to risk externalities, whilst privatising profits, is an example of the vile maxim par excellence.

Neoliberalism should not be confused with classical liberalism, after all for Smith the argument for liberty was based on the supposition that it would lead to equality. The “neo” in neoliberalism comes from the economic thought of the mid-to-late 19th century, which represents a bastardisation of Smith.

So what is neoliberalism really all about then? The past 30 years has seen relatively stagnant economic growth and a greater transfer of wealth and power to the few, even though workers were more productive. A large scale social, economic and political process such as this cannot simply happen. It is not possible that the broader population would consent to such robbery in the absence of some compelling set of justifications manufactured for this very purpose, especially in a democracy. Large scale social processes, including thievery on a grand scale, requires some type of ideological justification. This is the main purpose of neoliberal ideology. The ideology serves to justify the application of the vile maxim. That the ideology had no intellectual justification and was framed in a misplaced pseudo-scientific framework does not really matter. The ideology was highly functional for the corporate institutions that dominate society.

The libertarian Marxist thinker Harry Cleaver has argued that the way to read Marx is “politically.” Cleaver argues that “Das Kapital” was meant to serve as a “weapon” for the working class in order to facilitate the self-emancipation of the working classes. We should read neoliberalism “politically” also. Hayek et al have furnished a weapon for the rich to use against the poor and the working class. Neoliberalism, as such, is a form of Marxism for the rich.

So long as corporations continue to dominate society then the reigning ideology will be reaffirmed or reconstructed in one form or another. The current focus on neoliberalism by the the anti-corporate global justice movements is both appropriate and corrosive. It is appropriate because this is how the great social robbery of the past 30 years has been justified. It is corrosive because policy never really has been motivated by free market dogma and undue focus on neoliberalism tends to obscure the institutional framework that underlies the current crisis. This is especially the case for behavioural critiques of neoclassical economics.

In a real sense the great recession is really a political, rather than an economic, crisis. Corporations have acquired far too much power and because they are motivated by profit it is to be expected that they would like to maintain their privileged position in society. To the extent that neoliberal dogma is increasingly challenged in the mainstream it is because of the consequences that financialisation has had on the broader real economy; it has hurt the rich too, especially of the manufacturing sector.

What this means is that free markets for the poor and socialism for the rich will continue to dominant policy. This will be so irrespective of the fate of neoliberal ideology. So long as corporations are able to ensure that their preferences are attended to by the state and society this must be so. It might be that the next phase of the current crisis is a reconstruction of neoliberal ideology in one guise or another. The proper response to any such reconstruction is to bring to relief the underlying institutional causes of the crisis in order for us to achieve the social constraint of the corporation. Such constraint would be achieved in hope of the eventual supplanting of this particularly crass form of economic and social organisation all together.

One way in which this neoliberal counteroffensive will proceed is through concern over budget deficits. This is how the first neoliberal offensive kicked off. At the time of stagflation neoclassical economists argued that budget deficits would, and did, lead to all sorts of bad effects, especially a so-called “crowding out” of private investment and hence economic growth. Crowding out was justified by an application of rational expectations, the same underlying idea behind the efficient markets hypothesis. In fact, however, the largest economic expansion in US history followed on after the massive World War Two era deficit. Fiscal deficits lead to economic expansion and they pay for themselves as a result.

Society will come under further attack using budget deficits as a pretext. This will happen all over the western world and will be a classic play coming right out of the neoliberal play book. This play will be enacted by both conservative and social democratic and labour based governments.

Social democratic and labour parties everywhere have fallen into line with neoliberal dogma, for reasons first articulated by libertarian socialist and Marxist thinkers during the height of the revisionist controversy of yesteryear. The industrial labour movement everywhere must now reconsider what are the appropriate forms of political action for it to adopt, given that their preferred political parties have everywhere facilitated the 30 year long assault on the working class.

Social democracy has been a grand failure. Slowly trade unionists are recognising this. Now is the time for the industrial labour movement to show courage and rethink the political sphere. One way this can be achieved is by unions and social movements working together from the grass roots up to attack the immense power of the corporation. Neoliberalism represents a fundamental assault on democracy. A powerful affirmation and extension of democracy is the most useful antidote to corporate power. There is nothing the corporation fears more than an aroused citizenry fighting for its rights.


The Global Financial Crisis: Minsky Moment or Marx Moment? Or Maybe a Marxsky Moment?

The noted American marxist journal, The Monthly Review has a most fascinating debate on the global financial crisis between Thomas Palley, a structural keynesian, and John Bellamy Foster and Robert McChesney, both orthodox marxists. The debate featured in the April 2010 edition of this important publication.

Now I have always argued that the crisis has had class war right at its core; that is, it is not possible to understand the economic crisis without taking into account the fact that wages for non-supervisory workers have been largely stagnant, in the United States (the state of “really existing neoliberalism”), throughout the neoliberal era.

But I have also been fond of Misky’s financial instability hypothesis. I have felt that these two aspects need to be combined in some fashion.

Palley does this in a most forceful way. He argues,

The new Marxist, SSA, and structural Keynesian views trace the roots of the crisis back to the adoption of the neoliberal growth model in the late 1970s and early 1980s when the post-Second World War “Treaty of Detroit” growth model was abandoned. The essence of the argument is that the post-1980 neoliberal growth model relied on rising debt and asset price inflation to fill the hole in aggregate demand created by wage stagnation and widened income inequality. Minsky’s financial instability hypothesis explains how financial markets filled this hole and filled it for far longer than might reasonably have been expected

Palley goes on to develop a model that does this in greater detail. His work is impressive, well argued and persuasive. He does speak of Minsky “super cycles”, which Foster and McChesney chide him for on grounds that such cycles do not appear in Minsky’s work. Foster and McChesney here make good points, but the real issue is whether such cycles obtain or not. That is an empirical question requiring detailed study.

To borrow from Isaac Newton, I frame no hypothesis.

The real difference between the two revolves around whether capitalism can be reformed so that such crises do not repeat themselves. For Foster and McChesney the crisis is a reflection of a long standing and deep seated crisis of stagnation, what Paul Krugman would perhaps have called “the age of diminished expectations”, brought about by a persistent crisis of accumulation. This is intrinsic to capitalism and cannot be eliminated.

So they write,

the underlying problem of accumulation in the advanced economies today is one of a deep-seated stagnation tendency arising from a high degree of monopoly (oligopoly) and industrial maturity. More actual and potential economic surplus is generated than can be easily or profitably absorbed by consumption and investment, pulling the economy down into a slow growth state. As a result, accumulation becomes increasingly dependent on special stimulative factors

With such stimulative factors taking the form of overt financialisation, speculative bubbles in asset prices and the like. You could still add in Minsky’s approach here, I think.

Palley is surely right to identify the real issue at play

If there is a difference, it may well be a difference of degree of optimism. Structural Keynesians believe it possible to design appropriate institutions that, combined with traditional Keynesian demand management, can escape capitalism’s stagnationist tendencies and deliver full employment and shared prosperity. New Marxists and SSA theorists are more pessimistic about the capitalist process, the ability to escape stagnation, and the social possibilities of markets. Consequently, their institutional design would have a larger public sector and more nationalization, especially regarding the financial sector

I think Foster and McChesney would agree that this is essentially the debate’s bottom line, so to speak. I certainly myself form that impression.

The problem with Palley’s approach is that he does not really provide us with any real discussion as to why the neoliberal growth model was adopted.

I do not believe, furthermore, that the model is a “growth” model at all.

During the hey day of keynesian demand management, that is what is sometimes called the “golden era of capitalism”, there was a much more equal spread between wages and profits. The whole edifice was broadly social democratic and the trend rate of economic growth was higher than the trend rate throughout the neoliberal era.

The neoliberal “growth” model actually tolerates economic growth that was less than trend, by about 50% less,than that exhibited during the hey day of the keynesian growth model. Growth was not really the object of policy. What was?

To see what was we need to consider the origins of the neoliberal growth model. The reason was declining corporate profits. The purpose of neoliberalism was to increase profits, hence the wages squeeze to which Palley refers. In reality what we had was a neoliberal profit model. Economic growth was below trend, as discussed above, but the take of profits in the wages-profit share leaped to record levels. In fact the record kept getting broken like the record in women’s pole vaulting. That’s why you had stagnating wages, for how can you manage to achieve record profit shares when growth is well below trend? Simple; you take and take some more. For the consumer to maintain the American dream required taking on very high private debt, which brings in my pal Minsky.

I don’t agree with how Foster and McChesney frame their argument, but nonetheless we must recognise that profits, not growth per se, is at the core of capitalism. In this sense a growth model that is great for GDP growth, but which has the tendency to restrict profits, is not functional in the long run under a capitalist system dominated by large corporations whose raison d’etre is to maximise profits.

It’s a type of institutional contradiction. So I think that Palley’s argument is not deep seated enough. I agree with Foster and McChesney on that.

Having said that I also like to add one more point that I think Foster and McChesney do not appreciate.

Say Palley is right about the prospects that a reformed capitalism, the type he outlines, can prevent future crises and lead to sustainable economic growth. That Palley’s approach would do this with greater equity and fairness seems to be an unspoken corollary of the argument. That means corporations would need to acquiesce in the curtailing of super profits.

What implication would this have for the case for socialism?

Precisely zero.

The argument for socialism rests on moral grounds. Marxists, especially marxian economists, like to focus on pragmatic considerations such as accumulation crises, stagnation crises and the like.

The case for socialism is developed through an application of pre-industrial classical liberal ideas, that arose out of the enlightenment and the rise of a spirit of rationalism therein, to a modern industrial capitalist society. Any economic system that has vast concentrations of private power is unjust for precisely the same reasons that the classical liberals used to critique the state during their era.

The case for socialism flows on from such considerations. Marxian economics is quite irrelevant.

What is at issue between Palley and Foster and McChesney is not so much socialism versus capitalism as it is the scientific credentials of marxian economics.

On the latter I pretty much agree with the Australian post keynesian economist, Steve Keen, who has developed a pretty convincing argument rebutting the scientific basis of marxian economics.

This fits in to my broader view that no theory of economics deserves the title “theory” or the honorific “scientific”.

But the fact that marxian economics has no legs does not in the least bit upset my socialist convictions.

With Kevin Rudd Everything is the Same Only He Isn’t Here

It has been said that not long after the October 5 2000 uprising that ousted Slobodan Milosevic from power in Serbia many people grumbled that “everything is the same, only he isn’t here.”

So it is in Australia since the 2007 election. Remember when Brand Rudd told us that he’s “Kevin from Brisbane” and that “he is here to help.” Come in spinner! Everything is the same only he isn’t here.

The Age newspaper reports that the two-speed economy is to “return with a vengeance.”

The gap between the resource states and the rest is set to widen in years ahead as the two-speed economy comes back ”with a vengeance”, a report says.

Forecaster Access Economics says that, as the commodities boom gathers pace, Western Australia and Queensland will expand fastest this financial year, with growth rates of near 3 per cent extending this lead in the long term…

…After raising interest rates at five of the past six Reserve Bank board meetings, RBA governor Glenn Stevens last week said the CPI would shed some light on whether inflation was staying within the RBA’s target range of 2 to 3 per cent.

Rising interest rates, needed to nip inflationary pressure resulting from the boom in the bud, tend to hit the eastern states hardest because households there have larger mortgages

So we are going back to the two-speed economy. I though Brand Rudd wanted an Australia “that makes things.” Notice the bit about mortgage stress.

But much more important was an article by Charles Purcell, also in today’s The Age, that reports on the seething anger out there in the community that has been provoked by the massive declines in housing affordability. As I pointed out in my last entry the commodities boom threatens to crowd out Australia. The anger that Purcell reports on is the type that led to the rise of One Nation. Just take a look at what Purcell has to say

there is a voter groundswell of anger over housing in Australia. But it’s not the sort of transitory anger that one might have over many issues of the day — it’s a deep anger, a bitter anger that extends not only to those trying to buy their first house but also the parent who sees his children potentially locked out of the market forever, a fear his children share…

…It is an anger that grows as prices continue to spiral upward, rising to higher, ridiculous multiples of average yearly wages. It is an anger that festers over the outrage of negative gearing. It is an anger that grows as mortgage stress sweeps the land. It is the impotent anger of letters to the editor and calls to late-night radio programs, desperately searching for answers and reassurance

Purcell could have added that this sort of anger and concern is what got Rudd elected. That’s why Rudd told us that he was “here to help.” Interestingly, The Age today also has a report on a huge fine that has been given to a unionist in the building industry. According to the report

Electrician Mirek Grzegorek was stunned to receive a letter from the building industry watchdog warning him he could be fined $22,000 for attending a couple of short union meetings…

…”At the time there was an understanding if you go on a union meeting during working hours then your employer rightfully can deduct up to four hours of your time, even if the meeting takes 10 minutes.”

But the letter warned that Mr Grzegorek could face a much bigger penalty for attending an unauthorised union meeting

No wonder the Rudd Government caved in to a right wing campaign, pushed with force by The Australian newspaper, to reject a statutory charter of human rights.

The real estate market has been inflated, to a fair degree, by deliberate government policy. It itself is a type of bailout for property investors who banked on perpetually rising asset prices. This is all linked to the Government’s extraordinarily pro big bank friendly nature; to bailout the property investor class is to ultimately bailout the banks who don’t want to be exposed to too many non performing loans. It’s like the bailout of Greece is not a bailout of Greece. It’s a bailout of Greece’s creditors at the expense of the broader population.

So the affect that the real estate asset price boom is having on affordability is the type of externality that we should expect when Australia’s property market is positively geared towards investors, including foreign investors. The Government was just forced to scrap the pro foreign investor measures, but I reckon they’ll be back in one form or another after the next election.

So when Kevin told us that “he is here to help” he, actually, was telling the truth. But who was he trying to help? It is possible to write a thousand word, full referenced, essay in order to answer this question. But there are times when a picture tells a thousand words

Lindsay Tanner Vs Barnaby Joyce: Who is the Real Freak Show

The former shadow minister for finance, Barnaby Joyce, was sacked because he was not an economic rationalist. Lindsay Tanner, Kevin Rudd’s socialist minister for deregulation, by contrast, is an economic rationalist. The contrast explains why Lindsay Tanner holds his post and why Joyce has found himself out on his ass.

Tanner liked to taunt Joyce as a “freak show.” However, Joyce is no freak show. The former shadow finance minister understands full well that he has a constituency and a core belief system built around serving that constituency. Joyce’s constituency is those segments of rural and regional Australia, particularly in his native Queensland, who have been hit hard by globalisation and neoliberalism.

Joyce has stayed true to his constituency and his beliefs even though Abbottman bumped up into the shadow finance portfolio.

It is easy to see that it is Lindsay Tanner who is the real freak show.

This is someone who claims that he is a socialist. This is someone who hails from the “socialist left” of the ALP. Yet he understands full well that he owes his lofty position to his enthusiastic support for, and facilitation of, neoliberal deregulation.

Unlike Barnaby Joyce, Comrade Tanner is more than happy to plunge the knife into the back of his core constituency, if we understand that constituency not to be big business and the banks.

Comrade Tanner has lead the charge against Abbottman’s paid parental leave plans. On what grounds? Because Abbottman’s policy would tax big business. Comrade Tanner not only likes deregulating big business but he also likes to keep their taxes nice and low.

He now is spending plenty of time thinking about how to cut back spending on the broader population. In fact his very political identity now seems to be built on it, judging by the title of his pathetic blog which connotes “the razor gang.”

Keep corporate taxes low, but cut back public spending on the people. Only spend on the people when the rampant greed of the rich threatens to fuck up the economy. That’s freak show Tanner’s motto.

It’s interesting to observe how Abbottman got himself into a spin after making this announcement. He started to attract pretty bad press after his small defiance of corporate power. Big business is wondering; is he really a social conservative that is prepared to hit our interests in the name of social and family cohesion?

I am sure that Brand Rudd and his freak show of a deregulation minister have internalised this lesson. Stay nice and close to the big end of town.

What is especially freakish is that the freak show had the nerve to attack the Greens for “dividing the progressive vote”. Naturally progressives would turn to a party that stands for progressive principles, unlike the backstabbing freak show who exists to serve the interests of big business.

Australia’s Big Banks Have Had A Great Financial Crisis Courtesy of Lindsay Tanner, Rudd’s Socialist Minister For Deregulation

It should come as no surprise to learn that Australia’s big, hugely profitable, banks have had a very good financial crisis. Hell, even the head of the Treasury, Ken Henry, tells us so according to a report in today’s edition of The Age

TREASURY head Ken Henry says it has been a good crisis for Australia’s big banks as they fattened margins and dramatically increased their market share.

Dr Henry told a Canberra conference the major banks’ net interest margins widened 0.20 to 0.25 points during the crisis, partly reversing a decade in which they had been halved.

”Net interest margins represent the difference between the rate of interest banks and others charge and the rate of interest they pay on their deposits and other types of funding,” he said. ”Where competition is increasing, it can be expected net interest margins will fall.”

This comes just days after the Reserve Bank all but accused the Banks of gouging customers over the course of the crisis.

THE Reserve Bank has suggested the major banks may be profiteering from their recent round of interest rate increases, arguing moves on lending rates over the past two years have been outpacing funding costs.

The RBA’s comments are likely to reignite political and consumer criticism of the banks, given they appear to debunk warnings by executives that high funding costs continue to pressure mortgage rates.

They come amid signs that households are starting to feel the squeeze on mortgages follow a string of rate rises since October

We should recall that throughout this period the Banks were operating under unprecendeted levels of public support.

So, let us get this straight shall we?

The banks have had a great crisis. They have been goughing the public, but throughout they have been supported by the public through the aegis of the Federal Government.

Notice that we have here the Vile Maxim precisely. Notice that this exposes Rudd’s empty rhetoric on his supposed opposition to neoliberalism.

Things are actually worse than this. Consider the following report on the newly found aggressive debt collection tactics of the banks

Financial counsellors say they are struggling with a big increase in requests for help from debt-laden consumers, who face financial ruin as interest rates rise and financiers become more aggressive about recovering their funds.

Katherine Lane, the principal solicitor at the Consumer Credit Legal Centre in NSW, said the CCLC expected to field about 16,000 calls for assistance this year compared with 13,000 about two years ago.

Yet financiers and debt recovery firms appeared more zealous than ever to bankrupt consumers over relatively small debts, she said.

”We are now facing a wall of calls and there are simply not enough people, not enough phone lines, to help.”
A leading insolvency lawyer who advises the big end of town said he believed big banks and other institutional creditors, confident of economic recovery, have shifted into a new phase in recent months and are starting to enforce their rights to recover bad debts

If you put all this together it is quite clear that Australia’s banks have been practising an especially cynical and vicious form of the Vile Maxim.

How can they do this?

They can do this because Lindsay Tanner, Kevin Rudd’s socialist minister for deregulation, allows them to.

Tanner and Rudd have been especially good mates with the banks. The “Labor” government, supported by the Reserve Bank, looks as if it will try and water down any G20 systemic risk reforms in order to please the gouging banks. If you read Ross Garnaut’s The Great Crash of 2008, you will see that the arguments used to support this do not stand up to scrutiny.

Indeed the “Labor” Government has made bank friendly noises suggesting further tax law breaks and wider deregulation for the financial services industry. These were the recommendations of a report from a government commissioned study that was packed with finance industry figures. It’s like the crisis never happened.

The government in its response, accurately, showed off its record of support for the masters of mankind. The Assistant Treasurer, Chris Bowen, is proud of this record

“That’s the feedback received by the panel – it’s feedback received by the government and we’ve shown by our track record that we’re more than happy to take that feedback on board,” he said.

You bet they are. That’s how what is called the “modern” Labor Party operates.

The recommendations made by the masters makes sense, because for the big money grabbing banks there never really was a crisis given public support.

Lindsay Tanner has justified his treachery by criticising what he calls “producerism.”

But presumably everything described above isn’t “producerism”.

Lindsay Tanner is just about the biggest scum to hit Australian politics in generations.

With an enemy like Tanner the masters of mankind have no need for friends.

If you live in the federal electorate of Melbourne I strongly suggest that you vote the bastard out at the next election.

Categories: ALP, Banking and Finance