A new report from the Bank of International Settlements, which one might think of as the apex of the global financial system, has slammed the system it coordinates in no uncertain terms. But the system is very good at ignoring criticism, even when it criticizes itself. The report asks, “like a person who eats too much, does a bloated financial system become a drag on the rest of the economy?”
Then it answers its own question with a resounding yes:
First, as is the case with many things in life, with finance you can have too much of a good thing. That is, at low levels, a larger financial system goes hand in hand with higher productivity growth. But there comes a point – one that many advanced economies passed long ago – where more banking and more credit are associated with lower growth.
Our second result comes from looking at the impact of growth in the financial system – measured as growth in either employment or value added – on real productivity growth. Here we find evidence that is unambiguous: faster growth in finance is bad for aggregate real growth.
The report notes that in theory “a more developed financial system is supposed to reduce transaction costs, raising investment directly, as well as improving the distribution of capital and risk across the economy.” But everyone has long since learned in the five sorry years since the financial elite from AIG to Bank of America to Countrywide ripped us off (in a striking analogy to the war profiteer scam simultaneously being played by the likes of Halliburton and Blackwater) that the U.S. financial system has not “developed” in that direction over the last several decades. Rather, it has “developed” toward multiplying transaction costs, replacing investment with gambling, evading distribution of capital, and focusing risk away from the elite. Officials of Countrywide and their competitors throughout the mortgage and banking system enriched themselves precisely by raising transaction costs – sell junk mortgages and transfer them elsewhere ASAP while charging a few dollars more for each mortgage’s transaction fees, which they pocketed: the higher the fees, the lower the responsibility.
The objective of finance was shifted from supporting corporate investment in the means of production (enrichment of the business sector for the benefit of the whole society) to supporting financial manipulation by the financial sector (enrichment of the financial sector for the exclusive benefit of that financial sector). Meanwhile, capital was not distributed to productive businesses but concentrated in the hands of CEOs where it was squandered on idiotically lavish lifestyles. And the whole scam was run with the exchange of a smirk and a wink between corrupt finance CEOs and corrupt politicians, an unstated but clearly understood deal by which the politicians would use taxpayer funds to cover all risk incurred by the CEOs.
All of this sorry story could easily be used as evidence that the U.S. capitalist system needs to be replaced, but in fact this scam does not represent the U.S. capitalist system. The U.S. capitalist system is a compromise between the piracy of the super-rich, whose appetites otherwise give both them and everyone else financial artereoschlerosis, and pure socialism, which risks both inefficiency and abuse by micro-managing bureaucrats. The scams of the S&L crisis and the 2008 recession represent the failure of a system under attack from the inside, by the very people who profited the most: the kings of capitalism.
Former financial regulator William Black:
...our agency, in the savings and loan crisis, made over 10,000 criminal referrals to the FBI. That same agency, in this crisis, made zero criminal referrals. If you don’t get people pointing the way and pointing to the top of the organization, you don’t get effective prosecutions. So, in the peak of the savings and loan crisis, we had a thousand FBI agents. This crisis has losses 70 times larger than the savings and loan crisis. And the savings and loan crisis, when it happened, was considered the largest financial scandal in U.S. history. So we’re now 70 times worse. And as recently as 2007, we had 120 FBI agents—one-eighth as many FBI agents for a crisis 70 times larger. And they looked not at the big folks, but almost exclusively at the little folks. [William Black on Dangerous Intersection.]
It is true that the scam has been run before, but the last time it was run at anything like the 2008 scale with anything like this level of political cover-up was 1929…and then a reformer took office and put a stop to it. When the S&L industry tried to repeat the scam in the 1980s, a major FBI initiative “resulted in over 1,000 felony convictions” [William Black interview on Financial]. In both 1929 and the 1980's, the scam was seen in Washington as breaking the rules, as an attack on the system, as an attack on America. But the U.S. today is neither the land of FDR nor the land of Reagan: it has become the battlefield of a class war by the super-rich to overthrow what may be called our "social-capitalist" democratic system. Today, the misbehavior of the super-rich and their political and regulatory allies are assiduously ignored. Stuff happens (but not to those too big to have stuff happen to them); no one is guilty; things come out of the blue. And thus ironically it is the captains of capital who have emerged the true enemies of capitalism and, far more importantly, of democracy.
Capitalism is not a goal but a tool, and a powerful tool it is. Wielded with skill, it is the sharpest economic sword ever invented, but the capitalist sword has two edges and can kill a fool who wields it as easily as enriching the society wise enough to control it. And the key to exercising that social control over the sharp economic sword of capitalism is transparent democratic regulation.
Stellar examples of this transparent democratic regulatory process have emerged over the last decade (e.g., efforts by Brooksley Born at the Commodity Futures Trading Commission in the 1990s to regulate derivatives, reform efforts by Sheila Bair at FDIC, and the 2010 Congressional Oversight Panel investigation under Elizabeth Warren). Unfortunately for the future prospects of both U.S. economic stability and the health of U.S. democracy, such reform efforts have been steamrolled by the momentum of the insider attack on the system. Now, the insider's insider--the Bank of International Settlements--is joining the reformers, saying, “Hold on a minute! You are killing the goose that lays the golden eggs!” We’ll see if anyone in Washington hears the BIS warning.
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