The Fourteenth Banker Blog

September 8, 2010

Witless Patsies?

Filed under: Running Commentary — thefourteenthbanker @ 7:08 AM

Before his untimely demise, Lee Harvey Oswald made the claim that he was a patsy, framed by conspirators.

Interestingly, Oswald was a self proclaimed Marxist. Since this financial crisis I have wondered more than once about whether Karl Marx was right, whether capitalism would fall of its own internal tensions. So this interesting piece hooked my attention. David Harvey is a Distinguished Professor at City University New York. He teaches a full course on reading Karl Marx, but prepared this paper for presentation to the American Sociological Meetings in Atlanta a few weeks ago.

Given the financial crisis, Harvey wanted to revisit material he has taught for a long time. Some of the material is highlighted here and is chilling in its applicability. Which raises the question of financiers, are they unwitting patsies for the wearing down of a plundered economic system? I would submit, and those who have followed my blog know well, that while at some date in the future such financiers may claim “Patsy” status, it is by many individual actions that such outcomes come to be collectively accepted. Individuals are responsible, despite the camouflage provided by massive corporations.

So here are some highlights of the selected paper.

Continuous financial innovation has been crucial to the survival of capitalism. But finance and money capitalists also demand their cut of the surplus value produced. Excessive power within the financial system can itself then become a problem, generating a conflict between finance and production capital. Financial institutions, furthermore, have always integrated with the state apparatus to form what I call a “state-finance nexus.”5 This usually stays in the background except in a crisis, as happened in the United States in the wake of the Lehman collapse: the Secretary of the Treasury (Henry Paulson) and the Chair of the Federal Reserve (Ben Bernanke) were making all the key decisions (President Bush was rarely seen).

Two key points to note here. First, the conflict between Finance and Production Capital. For Marx, Production Capital was that segment of the economy that combined capital with labor to produce goods and services for profit. Perhaps it is stating the obvious to note that Finance has now come into conflict with the goods producing sectors. It is oft noted that Finance has grown to an outsized portion of public company profit and market capitalization. It is also commonly noted that the function of the allocation of capital has been heavily distorted by the self-serving nature of Finance at this stage in our history. Be it the profanity laced cynicism of internal Goldman memos, the prevalence of front running on the trading platforms, the complicity in the hiding of public finances in Greece, the privatizing of profit and socializing of risk, or the nonchalant acceptance of a financial crisis every 5 to 7 years, Finance no longer even maintains an illusion of serving the economy. Unemployment and under employment render grim testimony to decades of profiteering with callous disregard to the welfare of the greater populace in the home country or abroad. Second, the state-finance nexus, or what I have referred to as the first and second estates, work in tandem, particularly evident in crisis. To say that the government did not sell out to Wall Street is to deny reality.

A low profit-margin regime arose in almost all lines of conventional production in the 1980s even as real wages stagnated. With the dismantling of capital controls over international movement, uneven geographical development and inter-territorial competition became key features in capitalist development, further undermining the fiscal autonomy of nation states. This also marked the beginnings of a shift of power towards East Asia. But it also led capital to invest more and more in control over assets – capturing rents and capital gains – rather than in production. The speculative asset bubbles that formed from the 1980s onwards were the price that was paid for unleashing the coercive laws of competition world-wide as a disciplinary force over the powers of labor and over the previously autonomous powers of the nation state with respect to fiscal and social policies.

Deregulating and empowering the most fluid and highly mobile form of capital – money capital – to reallocate capital resources globally (eventually through electronic markets and a “shadow” unregulated banking system) facilitated the deindustrialization in traditional core regions. Capital then accelerated its reliance on a series of “spatial fixes” to absorb overaccumulating capital….

…Two corollaries then followed. One was to enhance the profitability of financial corporations relative to industrial capital and to find new ways to globalize and supposedly absorb risks through the creation of fictitious capital markets (the leveraging ratio of banks in the US rose from around three to thirty). Non-financial corporations (such as auto companies) often made more money from financial manipulations than from making things.

Harvey loses me a bit at this point as he implies a deliberate class power grab with specific and intentional dispossessing of populations prone to exploitation historically (overseas) as well as the bankrupting of the middle class here in America. But I am forced to realize that my repugnance for the language is based on my presumptions. I instinctively want to cut the elites some slack here. But the only slack I can muster is to suggest that they have acted in individual capacities rather than as conspirators. Or is that being to generous?

The other impact was heightened reliance on “accumulation by dispossession” as a means to augment capitalist class power. The new rounds of primitive accumulation against indigenous and peasant populations (particularly in Asia and Latin America) were augmented by asset losses of the lower classes in the core economies, as witnessed by losses of pension and welfare rights as well as, eventually, huge asset losses in the sub-prime housing market in the US. Intensifying global competition translated into lower non-financial corporate profits.

There is much more in the paper but I think you get the drift. I return from time to time to the idea that a new banking model may be possible and that new capital is needed in the business. Perhaps some recall the older “ownership conundrum” posts. I still stand by the hope that a new kind of owner will create a possibility of a new kind of institution. Just two days ago a more famous blogger made just that point. John Hempton was linked to Naked Capitalism and he says the following:

I mention this because of my perverse view that re-regulation – opposed by most bankers – might be surprisingly good for banks over the long run.

The real winners and losers of deregulation

Competition – I argue – removed any real benefit of deregulation for bank shareholders.  (The benefits for bank management created by the sudden need to cope with this brave-new-world however were obvious.  They saw the opportunity and need to grow to maintain ROEs – and they lent with gay-abandon – taking all sorts of fees, commissions and bonuses along the way…)

The benefit for borrowers of competition however were dissipated in higher home prices and hence larger mortgages.  The real winners were people selling homes – not people buying them.  Even quite modest houses became valuable – and the elderly (the classic group moving to less expensive homes) did quite well.  I haven’t heard the expression “old and poor” quite as much as I used to.  More generally you can see the relatively affluence of the elderly in the sell-the-home and go cruising set.  Carnival Cruises was – for a very long time – a better stock than you might ever have imagined.

The other supposed beneficiary was suffering an illusion.  Plenty of people – especially in their children’s teenage years – had an-in-the-end-illusory wealth effect – where they thought their home was worth much more than it was – and felt confidence in spending some of that money – or in saving less for their retirement – because after all they could downsize and they might inherit part of Grandma’s (housing) fortune.

Net-net the losers out of excessive bank leverage were (a) the shareholders because they got lower spreads and took more risk, (b) taxpayers because they partly bore the risk and (c) younger home buyers because they got royally-rogered by the elderly people they bought from.

I am waiting for some bank management – particularly a stronger incumbent – to see it that way and advocate sweeping bank re-regulation which will (a) reduce taxpayer risk (b) increase spreads and (c) reduce leverage.  This will allow the strong incumbent to earn a good ROE at little risk on a lot more capital and will make the bank’s shares a surprisingly good investment.

So with John I will wait to see if any banking leader wakes up to these realities and puts aside the mantle of “Patsy” to Karl Marx’ prophesy.

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8 Comments »

  1. (first thoughts)

    & now you know why communism was so popular during the Great Depression. They thought Marx’s predictions about the collapse of capitalism were coming true. & maybe they were. Without World War II, who knows what might have been?

    I don’t know about a class power grab. I don’t think “the upper class” was organized, though it contained powerful individuals. The TBTF banks are organized *now.* But some wealthy individuals, certainly. Consider the Koch Brothers, and the Coors family.

    Comment by The Raven — September 8, 2010 @ 7:50 AM | Reply

  2. Might I suggest you buy & read his entire book, or at least the first chapter of it? I’ve recently read it, and it’s eerily captivating and convincing an account of why boom/bust cycles keep occurring. (Capital allocation issues that start once there is too much capital available to only invest in production innovation, which then leads to asset investment, which leads to bubbles, to put it in a nutshell)

    Comment by Foppe — September 8, 2010 @ 7:51 AM | Reply

  3. The conspiracy angle seems to always be overblown. Jamie Dimon ardently desires to increase the market value over his time in his stock holdings of JPM. So does every other employee participant who generates his personal wealth from increased market values of their own JPM stock. The other employees understand that their job security rests on the same premises. The employees from Dimon on down have a perfectly meshed and agreed goal. Absolutely , a result to be expected but actively and openly encouraged. Other major players understand the mutuality of their goals. A rising tide lifts all boats sort of understanding. Every employee understands that the last added effort to increase earnings per share translates into their personal gain over and above the oligopoly of players.

    We do this by any means we can get away with. Get mine now to get out before the madding crowd is the mentality of the players below the top two layers of the company. Anyone worth a couple hundred grand a year understands this is the nature of capitalist reality. We are now much more cynical and ruthless petit bourgeosie.

    Understand that through various devices, most specifically the ” Business Plan” that the results required are communicated. In my company, you beat the plan by 10 % to secure the top bonus. This meant every department squirreled the added 10 % automatically when presenting their portions of the over all plan. Being in major contracting, as the tax manager, I was the nemesis of the squirrelers. My cumulative taxable income was many millions greater than financial statements due to finding the squirrels. This was required to avoid the terribly onerous Look Back Interest paid on shorted percentage completion results. Naturally, I sold this as general estimate removal under the tax regulations to the auditors. Everyone was happy to squirrel and still get the bonus. It was particularly lovely when good people had better than expected results including the squirrel carried over to the next year.

    Admittedly, my problem was the opposite of companies in trouble. What I am pointing out is that big corporations are first, foremost and forever bureaucracies. Many times the big shots at the top are clueless about the details as the financial system big shots so recently proved.

    Bureaucrats always co-operate for their own benefit. Is co-operation institutional conspiracy?

    Comment by Jerry J — September 8, 2010 @ 1:08 PM | Reply

  4. I really liked the linked piece by David Harvey. Thanks ever so much. I ordered the book this morning.

    I keep hoping to find a book by an economist or financial type that links the diverse aspects of capitalist decline and death. There are so many. The problem could be encapsulated in a hypothetical mass change. Would capitalism survive or be granted a very long life if there were a population collapse back to say 1800 levels, or less, with most of our current technologies surviving? The labor problem would be short term ended . Another problem would rear it’s ugly head in such a context. The surviving population would still be required to purchase capitalist system generated products and services assuming the elites own the wealth as rentiers. It would seem though that the technology would be required to be owned by the population in some direct manner after a short while. Certainly , the natural resources problem would be put off for a very long time barring a resumption of over breeding. It seems to me that the capitalist system depending on growth would require population growth putting us back in the same position we are now at some future point.

    Contravening all this though is the more realistic proposition that most technology is lost and that there is a global reversion to anti secular religious systems of many stripes. Back to tribal structures being the way in which human societies learn to survive. Survival is first a local matter.

    Either way, capitalist systems were a one shot? Once terminated, human systems would turn capitalist ideas into very long lived taboo’s? I would thing such taboos would be at the core of local survival.

    Comment by Jerry J — September 8, 2010 @ 9:16 PM | Reply

  5. One thing that is clear to me is that capitalism requires growth of some sort in order to work. Deflation is antithetical to capitalism, as money does not go toward capital formation to provide productive investment, rather deflation encourages the paying down of debts, disincentives hiring as companies are already at max capacity, and the hording of capital waiting for the next investment. Or over max capacity, encouraging the wait and see what will happen approach to investment.

    If we in a deflationary spiral down (I think we are), how do we get tightfisted moneywads to part with their money? So that they invest in investment areas that benefit us all? An old fashion WW might get us there, but that would be a painful experience for everyone, and not really clear who would be the winners or losers.

    Comment by Trainwreck — September 8, 2010 @ 11:23 PM | Reply

  6. And don’t forget wage arbitrage. As far as the eye can see there are cheaper employees overseas.

    At what point will we get control of our labor markets?

    Comment by Trainwreck — September 8, 2010 @ 11:27 PM | Reply

  7. It’s interesting how we so closely associate ‘Capitalism’ with ‘Laissez Faire Capitalism’ as if they’re the same thing. As if regulation were antithetical to the concept of capitalism.

    We’ve swallowed whole the idea that rules ruin the game when it’s patently obvious that, like in any sport, rules are essential to the workings of the marketplace. Capitalism without regulation is akin to ‘sport’ in the old Roman Coliseum. … and that’s no fun.

    Do we really need to revisit Marx just because there’s a rash of high-sticking and slashing on the ice, or do we just need to call the fouls and enforce the rules as written and intended?

    Comment by Lucy Honeychurch — September 10, 2010 @ 3:45 AM | Reply


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