CHAPTER
7
The Rise of Ultra-Capitalism
Volatilities gave electronic speculation what it needed to feed on and flourish beyond the wildest expectations. The consequence is a massive, revolutionized, and largely unregulated financial sector armed with the latest high-tech weaponry and pursuing profits on any battlefield, straining the stock and bond markets, plucking loot from any debacle, shooting the economic wounded, and outgunning the “real economy” in its transactions by huge ratios. This leap in the importance of spectronic finance is hard to overestimate.
Kevin Phillips [1]
What did the world’s
presumed economic leader, the
A powerful financial oligarchy is nothing new.
What is new, however, is its
capacity to damage global economic momentum severely.
What is new is the sad picture of countries successfully improving the
lives of their people through economic freedom but then being set back by the
imperfections in global finance. Positive
economic momentum takes years to produce; reversal of this momentum can happen
in weeks, and result in social chaos and frequently violence.
In the early 1990s, the
world seemed to be moving toward a common ideology of economic freedom, powered
by the growth, productivity, and unifying capabilities of the Information Age
Revolution. Communism and socialism
had failed to produce a superior social contract, but in contrast, economic
freedom was improving lives wherever it was competently applied.
Democratic capitalism seemed prepared to eliminate material and cultural
scarcity; a world of peace and plenty seemed to be both an opportunity and an
obligation for society.
Southeast Asian nations¾
By the end of 1997, however, all four of these Asian economies were in
shambles. Currency was devalued as
much as 70%; wages were cut 40%; unemployment, prices, and interest rates were
all rising; government deficits were growing bigger; virtually no new money was
available for business; even lines of credit for operating successful businesses
were cut.
Quickly, the uplifting sense of common purpose was replaced by confusion
and dangerous social tensions. Government
leaders who had been proud of their nations’ successes were now disparaged at
home and abroad. Those leaders who
had espoused the common ideology of free markets now became angry critics of the
immorality of currency speculators and the economic imperialism of the West.
When economic freedom is the norm, an economy can run itself, with little
required of governments except civic order, a stable medium of exchange, and
capital prepared to invest in long-term growth.
Instead, the world’s economy had been damaged by ultra-capitalism,
accompanied by great instabilities in the medium of exchange, and impatient
capital demanding quick returns.
The world’s economic leader, the
To free the world economy to grow and improve all lives, governments, led
by the
·
Control speculation through
taxation and by limiting the amount that can be borrowed.
·
Allow market
disciplines to monitor the process by stopping subsidies, large-risk insurance,
and bailouts.
·
Regulate world banking to
limit damage from “hot” or short-term money rushing in and out of the countries.
·
Develop a new
currency-stabilizing mechanism by harmonizing economic fundamentals in selected
countries.
The
The inherent contradiction in capitalism, according to Marx, is pressure
on profit margins relieved by downward pressure on wages.
According to his theory, in an economic downturn, both pressures are
magnified until the system implodes in a proletarian revolution.
Marx was partly right, but the greater cause of the boom/bust cycle is
government’s unwillingness to control speculation with borrowed money.
Contrary to Marx, the inherent contradiction is not in the economic theory of
capitalism but in government’s failure to manage currency and credit to
benefit the
general welfare. The fault lies with politicians, their errors of judgment, and
their willing response to the lobbying from ultra-capitalists for too easy
credit.
Until the Industrial Revolution in the eighteenth century, society
remained feudal, with static classes and limited freedom.
Capital for commerce was provided by a few wealthy people; labor was
manual, provided mainly by slaves and serfs. With the new technology of the
Industrial Revolution, productivity increased by several thousand times,
although capital held by only a few was still dominant. Adam Smith, and later J.
S. Mill, described how to maximize surplus through involved workers’ sharing
in improved performance; most of industry, however, remained feudal, for return
on capital was adequate, even when workers were more wage-slaves than
participants. Because Mill’s theory of broad wealth distribution through
workers’ accumulation of ownership received little visibility, democratic
capitalism had to be developed by the trial
and error of entrepreneurs willing to experiment with capitalism by improving it
through democratic participation.
In the 20th century, visionary companies combined new technology with
involved workers motivated by performance bonuses and opportunities for
ownership participation. Democratic capitalism thus gained momentum until the
last quarter of the century when ultra-capitalism spread globally and became
dominant. Ultra-capitalism included
mercantilism that treated workers as a cost commodity, and finance capitalism
that speculated with borrowed money causing investment capital to be impatient
and the medium of exchange very volatile. Wall
Street and institutional investors adopted ultra-capitalism and demanded
short-term profits. Many CEOs were seduced to ultra-capitalism by multi-million
dollar salaries and multiples of those millions from enormous stock options.
The Information Age Revolution paralleled the growth of ultra-capitalism
and demonstrated productivity many times greater from cognitive power than did
the Industrial Revolution from manual labor. Information Age industries,
further, demand as a competitive necessity the culture of democratic capitalism
in order to release the cognitive power of their people.
At the beginning of a new millennium, it is unclear whether society will
benefit from the extraordinary opportunities of the Information Age and
democratic capitalism, or whether the malign influences of ultra-capitalism will
destroy the world’s economic momentum. This choice to be made between these
competing forms of capitalism is every citizen’s responsibility: The choice is
for either a twenty-first century of peace and plenty through worldwide economic
common purpose or more folly and violence from a continued concentration of
wealth and power.
The
History of Economic Conflict: Cooperative
Commerce versus Making Money on Money
Throughout history, leaders from government, religion, and elsewhere in
the culture have recognized the threat to society from money that was not
neutral, stable, and patient. The threat to cooperative commerce by those with
the exclusive mission of making money on money goes back to the beginnings:
1000
B.C. and earlier:
Barter was used for commercial exchange but was usually limited to
two-party transactions.
1000-650
B.C.:
Various items were used as a medium of exchange, including cattle,
stones, and women; none was either divisible or easy to handle.
600
B.C.: First coinage was introduced
with various denominations, based on the perceived value of precious metals.
This was to be the basic system for next 2,500 years.
Old Testament:
“Unto a stranger thou mayest lend upon usury, but unto a brother thou
shalt not.”[5]
New
Testament: Jesus warned:
“No man can serve two masters; for either he will hate the one and love
the other, or else he will stand by the one and despise the other.
You cannot serve God and Mammon.”[6]
Rabbinic
Literature:
“The love of gold will not be free from sin, for he who pursues wealth
is led astray by it.”[7]
299-400:
Roman emperors paid for war by debasing currency.
Coin of the realm was recalled, melted, and reissued with lower
precious-metal content.
632:
In the Koran, Islamic law encouraged patient capital through equity investment
but prohibited impatient capital through interest-bearing loans.
789:
When Charlemagne became Holy Roman Emperor, he forbade making money on money in
his Admonitio Generalis.[8]
1200:
Anselm of
1213:
Cardinal Robert Courçon presented his Summa to the Council of Paris,
emphasizing labor as the basic value and condemning the making of money on money
as a corruption of the commercial process. “The
Council ordered each Christian, under pain of excommunication and censure, to
work either spiritually or physically and to earn his bread by the sweat of his
brow.” Courçon
concluded: “All usurers, all rebels, and all plunderers would
disappear, we would be able to give alms and provide for the churches and
everything would return to its original state.”[10]
1300:
Dante Alighieri in his allegorical poem, the Divine
Comedy, described people realizing their potential in a world of peace and
justice based on a commercial order. Under
Dante’s scrutiny of the evils
contaminating
the commercial process, he found a natural law at work and reserved some of the
greatest tortures in hell for the financial predators who transgressed this law.
Dante speaks to Virgil:
“Go back a little further,” I said, “to where
you spoke of usury as an offense
against God’s goodness. How
is that made clear?”
Recalling the Old Testament, Virgil replies:
“Near the beginning of Genesis,
you will see
that in the will of
to labor and to prosper. But
usurers,
by seeking their increase in other ways,
scorn Nature in herself and her followers.”[11]
1694:
King William III of
1695:
John Locke, physician, philosopher, statesman, humanist, and expert on
distribution of wealth and monetary matters returned to
This is evident, that
the multiplying of brokers hinders the Trade of any Country, by making the
Circuit, which the Money goes, larger, and in that Circuit more stops, so that
the Returns must necessarily be slower and scantier, to the prejudice of Trade:
Besides that, they Eat up too great a share of the Gains of Trade, by
that means Starving the Labourer, and impoverishing the Landholder.[13]
1776:
Adam Smith assimilated lessons learned over the centuries of the
development of capitalism. Smith
then anticipated the conflict between the job-growth economy that benefits the
many, and privileges for speculation that benefit the few. He warned of the
dangers from the “prodigals and projectors” who would make money high-cost
and volatile, and would deflect it from job growth.
1789:
Alexander Hamilton, George Washington’s Secretary of the Treasury,
successfully lobbied for payment of war debts at par, and assumption of
$21,500,000 of state debts. An
incidental effect was profits derived from speculation by those who had
anticipated this law and bought up revolutionary soldiers’ scrip for 20 cents
on the dollar. This was the first
use of “insider information” in the new republic.
1790:
Thomas Jefferson,
1792-1845:
1805:
President Jefferson opposed the National Bank and favored State banks as
a means of diffusing the power of financial capitalism.
He exhorted his Secretary of the Treasury, Albert Gallatin:
“It is the greatest duty we owe to the safety of our Constitution to
bring this powerful enemy to a perfect subordination.”[16]
1806:
Capitalists successfully lobbied for a growing body of law, resisting
shorter work days and supporting imprisonment for union activity.[17]
The courts outlawed strikes in
1812:
President James Madison failed in his effort to control finance
capitalism because he was forced to negotiate privileges for the bankers in
exchange for their funding the War of 1812 when the country was nearly bankrupt.
Subsequently, the postwar boom escalated into speculation, much of it on
borrowed money. The Panic of 1818-19, the first speculative cycle in the
1814:
John Taylor, a
1830s:
Andrew Jackson tried hard to democratize capitalism, but he lacked the
tools of economic understanding.
In
1860s-70s:
After the Civil War, dominant finance capitalists persuaded Presidents
Andrew Johnson and U.S. Grant to control currency in a deliberate devaluation to
restore the asset value of the wealthy to pre-war levels.
This technique, copied from the British, caused unemployment, dropping
wages, and rising prices in the economic disaster of 1873.
Later, Ludwig von Mises would blame economic calamities in
1888:
The Farmers’
1896:
The Populist Party was defeated. Their platform, including seeking
democratic capital, became obscured by William Jennings Bryan’s “Cross of
Gold” platform, a political argument between gold and silver interests. The
Populist Movement declined for lack of reform focus.
1873,
1884, 1893, 1907:
Widespread money panics occurred at the height of the crop season when
large amounts of money were needed to bring crops to market.
This seasonal need could not be met except by paying out limited
reserves, causing the whole money supply to contract.[22] When
the surge of demand hit New York banks, their choices were either to draw on
reserves at higher rates or form syndicates to pool resources and meet demand or
borrow gold from Europe to support more lending. Eventually they did none of
this, which resulted in local farmers’ banks not having liquidity to make
loans. This uncertainty caused
people to take their money out of the banks, and that in turn caused bank runs
and bank failures. At root, the
system did not have the flexibility to fund short-term working-capital needs of
the most basic industry, agriculture.
1913:
Financial panics spawned the Federal Reserve.
The Fed was founded to provide the liquidity needed to prevent a
repetition of the bank panics, and to prevent the damaging boom/bust cycles by
representing the public interest. Roger
Lowenstein described this responsibility as follows: “The Federal Reserve
System was created, in 1913, for many reasons, but the underlying one was that
people no longer trusted private bankers to shepherd the financial markets.”
From the beginning, however, Lowenstein added:
“The Fed is supposed to regulate banking but not to shelter banks.”[23]
1928-32:
President Herbert Hoover’s Republican predecessors had done little to
control the leveraged speculation that caused the Crash of 1929. After the
crash, Secretary of the Treasury Andrew Mellon followed the time-honored
ceremony of regaining “fiscal integrity” by hurting people.
Mellon behaved like an avenging angel, shrinking currency 30% in two
years and instituting retroactive tax increases as high as 63%.
These actions converted Wall Street’s overdue stock-market correction
into
The Crash of 1929 is an example of the government’s willingness to
encourage speculation with easy credit. In that crash, brokers’ loans, that
is, stock bought “on margin,” or borrowed money, went from $1.5 billion in
1923 to $6.0 billion in December 1928. Anyone
observing this pattern could have seen the train wreck coming.
New borrowings were collateralized by rising values; the sickness fed on
itself for years. Banks were borrowing from the government at 5% and then
lending at 12%. Corporations were
pumping surplus cash into the stock market rather than into either growth or
dividends. After the crash, the
margin calls demanding that the loans be repaid, fed the downward spiral. As the
values plummeted, the borrowers had to come up with more cash, which forced them
to sell more, which continued the downward spiral.
A few years later, John Maynard Keynes viewed the catastrophic economic
damage done by the stock market crash of 1929, and he put speculation and the
motivations of Wall Street into perspective:
Speculators may do no harm as bubbles on a steady stream of enterprise.
But the position is serious when enterprise becomes the bubble on a
whirlpool of speculation. When the
capital development of a country becomes a by-product of the activities of a
casino, the job is likely to be ill-done. The
measure of success attained by Wall Street, regarded as an institution of which
the proper social purpose is to direct new investment into the most profitable
channels in terms of future yield, cannot be claimed as one of the outstanding
triumphs of laissez-faire capitalism — which is not surprising, if I am right
in thinking that the best brains of Wall Street have been in fact directed
towards a different object.[24]
1930s: After the damage had
been done, the government established the Securities and Exchange Commission
(SEC) to prevent future calamities. Among other moves, the SEC raised margin
requirements to 50%. The speculators now were required to use their own money
for one-half of their bets. By the end of the century, however, the amount of
leverage allowed for speculation was close to 100% in unregulated hedge funds,
the borrowings were in trillions of dollars, and new laws added opportunities
for more leverage.
1932-44:
President Franklin Delano Roosevelt in 1936 bragged that he had
neutralized the privileged financial oligarchy during his first Administration;
he planned to complete his mastery of them in the second. He failed, however,
for the usual reason: The government needed the finance capitalists to fund
preparation for World War II.
FDR reluctantly instituted bank deposit insurance of $5,000 per account
to stop bank panics, but he warned that the practice was an abrogation of market
discipline that could cause economic catastrophes.
By the 1980s, deposit insurance had been raised to $100,000 per account
with no limit on how many bank locations where the speculators might borrow
another federally-insured $100,000. FDR
was right, the Savings-and-Loan catastrophe was the result, and the taxpayers
paid for the government’s mistake
and the speculators’ greed.
1963-1968
: Despite the bipolar tension between the
1971:
Republican President Richard Nixon caused instabilities in the international
monetary system that opened up the world’s electronic monetary casino.
Because of American economic weaknesses in 1971, foreigners were cashing
in dollars for gold so fast that the reserve was disappearing.
Nixon, forced to “close the gold window” and “float” the dollar,
allowed market forces to determine the dollar’s value relative to other
currencies. As a result, for the first time in commercial history, no mechanism
was in place to stabilize currency. According to Joel Kurtzman, “It created
enormous arbitrage possibilities and set the stage for the invention of a myriad
of new financial products.”[25] It
also uncoupled the “money” economy from the “real” economy and put them
badly out of balance:
The new neural network of money made its debut rather abruptly on
After Nixon abandoned the world’s currency-stabilizing mechanism, the
international economy was launched into new and uncharted financial waters. The
premise that market forces would discipline the system proved to be invalid
because market forces had been compromised by deposit insurance, bank subsidies,
and bailouts. Nixon, a Republican,
took action in other areas of the economy that contradicted free market
principles with unsuccessful efforts to control prices and wages. A less visible
effect of Nixon’s actions was the beginning of ultra-capitalism, a perversion
of capitalism in which impatient and volatile money changed industry’s goals
from long-term and patient to short-term and greedy. Ultra-capitalists began to
demand any action, including breaking up companies, that would produce
short-term gains. Kurtzman
explained:
Selling off portions of a company, borrowing money in the capital markets
and then paying it out to stockholders as dividends, even using profits not for
new investment but to purchase a company’s own shares of stock, all became
common practices used by companies to keep their stock prices high.
The era of long-term investing ended sometime in the 1970s.[27]
1974:
The Employees’ Retirement Insurance Security Act (ERISA) was signed into law
by President Gerald Ford to protect pensions.
A worker’s money would be available on retirement because it was
“funded,” that is, cash was taken out of companies, given to trustees to be
invested, later to be paid on retirement.
Before ERISA, companies
assumed that most of the pension money would be funded out of future earnings;
consequently, current cash was used to grow the business.
In effect, ERISA took no-cost growth capital out of companies and
invested it primarily in the stock market. Creative
financial engineering to direct this workers’ money to democratize capitalism,
however, was not done. For example,
basic pensions could have been insured with the pension money directly invested
in companies through a preferred stock paying a 6% annual dividend. A large
dividend, plus long-term appreciation, could have given the wage-earner a secure
double-digit return.
ERISAs enormous flow of cash, excessive liquidity, hit the stock market
at the same time that the benefits of the Information Age revolution were
becoming apparent. Arbitrage on the instabilities in the international monetary
market, new speculative instruments called “derivatives,” and new
unregulated institutions called “hedge funds” were being mixed into the
financial formula. In combination, they began to drive the bull market to record
levels. The world’s economy was becoming more and more dominated by
ultra-capitalism. Senior government officials in the Treasury Department and the
Fed became more involved in protecting finance capitalism rather than pursuing
the original mission of regulating it for the common good. Is this not the
ultimate contradiction in capitalism when the worker’s money is used by
ultra-capitalism to concentrate wealth for the few?
Ultra-capitalism Was Launched during the Last
Quarter of the Century and Came to Dominate both the
The
foregoing sketch of the tortuous path of capitalism and the many bumps in its
road brings us to the final quarter of the 20th century, a time when
many believed that economic freedom was ready to unite the world, but other
successors to the money changers of history were busy bringing ultra-capitalism
into dominance. This was certainly a turning point, for the 21st
century will see either the refinement of capitalism through democratic
principles or the collapse of capitalism through its concentrated excesses that
have already caused instabilities within capitalism itself and world violence.
Ultra-capitalism was
the result of the combination of excessive liquidity (from ERISA), excessive
volatility (from floating the dollar), and then the contradiction in
deregulating banking at the same time that market disciplines were suspended.
Each of the four contributing factors was supported by the lobby power of
Wall Street, though not in an integrated way. Ultra-capitalism was the
unintended consequence of the lack of an integrated policy that could actually
control currency and credit for the general welfare. The lobby power of Wall
Street sucked ultra-capitalism into this vacuum.
During
this time, the struggle between different forms of capitalism was not apparent
because most reformers regarded capitalism as a generic monolithic system;
democratic capitalism was hardly on the radar screen of economists and
interpreters of the culture. Ultra-capitalists
were concerned only with short-term earnings, and they treated workers as a cost
commodity, an expendable object fit for layoffs. Mergers and acquisitions were a
rewarding way for bankers, lawyers, and executives to make large amounts of
money. Benefiting from slippery
accounting rules, mergers themselves became a way to improve short-term
earnings. In this climate, Wall
Street measured CEOs in terms of their actions in large and quick downsizings.
Wall Street, most of the financial press, and even the Business Schools
celebrated ultra-capitalism, calling it the “American Model,” that form of
capitalism with exclusive interest in building stockholder value. The time frame
was always short-term, and the interests of other “stakeholders” were
ignored. In this environment, in fact, the word “stakeholders” itself became
a pejorative expression.
Information Age industries,
although interested in stock price and stock options, depended on the
involvement and contributions of their associates.
Many traditional companies also built on the loyalty of wage earners and
customers. Some of these companies downsized because of global competition, but
they did it through attrition, retraining, generous severance, and with a view
to maintaining the spirit of cooperation and trust. This part of global
capitalism was building momentum on the fundamentals of democratic capitalism:
corporate integrity, employee participation, profit-sharing, ownership, job
security, and associates who were independent thinkers, educated, and involved.
At the same time, the relationship between government and finance
capitalism in the
Back in the early 1970s, before the global economy was hooked up to
supercomputers and changed to the megabyte standard, the financial sector was
subordinate to Congress and the White House, and the total of financial trades
conducted by American firms or on American exchanges over an entire year was a
dollar amount less than the gross national product.
By the 1990s, however, through a twenty-four-hour-a-day cascade of
electronic hedging and speculating, the financial sector had swollen to an
annual volume of trading thirty or forty times greater than the dollar turnover
of the “real economy,” although the latter was where ordinary Americans
still earned their livelihoods.[28]
Deal-makers thrived in this environment.
Smart financial people figured out how to make money with OPM (Other
People’s Money). A company would
become targeted for takeover, and in many cases the company’s assets would be
leveraged to finance the takeover, that is, used as collateral for the borrowed
money. The institutional investors
supported ultra-capitalism without polling their constituency, for deals always
meant a quick win on their investment and a better position on their national
ranking.
Most of the deal-makers had an accountant’s love of cost-cutting. The
complexities of building for the long term were of less interest to deal-makers
who discovered that one-dimensional management was all that was required.
Shortly after a takeover, the word would go out to cut people, and
“downsize” became the familiar expression.
Downsizing is easy to do, and it always improves results in the
short-term, particularly when tax laws allow the downsizers to pull in expenses
from future years, thereby making increasing profits in following years almost a
certainty.
Kevin Phillips also described the history of economic self-contradiction
in which the financial part of capitalism became dominant.
He traced the history, since the sixteenth century, of
This national transformation was no accident.
Economic circumstances had begun souring for Americans in the 1970s, and
in the 1980s the
During similar financialization phases over the centuries in various
countries, taxes were shifted to the middle class, manufacturing declined,
financial services grew, and capital became more concentrated. The satisfaction
of building and selling things morphed into the excitement of making money on
money.
LDCs, the First Victims of Ultra-Capitalism
Throughout
the 1970s and 1980s, the economic failure of the less developed countries (LDCs)
demonstrated the need for an international monetary policy that is long-term,
integrated, and protected from the ad hoc
actions of politicians. This was the presumed mission of the Bank for
International Settlements (BIS), located in
The LDC failures
contained many lessons that, if learned, would have prevented future economic
damage. In the 1970s, South American
countries and
The effect on the world’s economy from rising American inflation caused
by the deficit funding of Johnson’s “Guns and Butter” programs, prompted
the world’s central bankers to gang up on Paul Volcker and insist on action in
the late 1970s as soon as he became chairman of the Fed. Volcker then conducted
a scorched-earth attack to reduce inflation, and in the process drove the cost
of money up to 20%. An unintended
consequence of this high interest rate was the bankrupting of several of the
LDCs because their interest rates “floated” up.
After the economic damage to the LDCs, the
The common denominators in the South American debacles were over-lending
of short-term money and excessive liquidity that encouraged investment in risky
projects or speculation. This short-term hot money then fled the troubled
country when the economy reversed. International banks had no protocols to
measure the total of short-term debt being accumulated by countries, including
the ability to relate this debt to the amount of patient capital invested.
This debt/equity ratio, vital in viewing the level of a company’s
financial risk, was ignored in whole countries. This miss is an important
example of freedom without the requisite discipline. The freedom was of free
capital roaming the world, promoted by the
Walter Wriston, head of Citibank at that time, stated the faulty
rationale for imprudent lending: “Countries
do not go bankrupt.” Despite Wriston’s misplaced optimism, countries did go
broke, and several large
At the same time, many big banks were also hyperventilating over bad real
estate loans they had made. Underlying these speculative, bad-banking actions,
the banks’ basic business, commercial loans, was also declining.
Competition from the finance arms of big corporations was taking this
business away. For example, General
Electric’s aggressive CEO, Jack Welch, had learned how easy it is to make huge
profits in
financial
services.[30] The
Most commercial bankers had not been trained for speculation.
If they had wanted a higher-risk career, they could have become
investment bankers. A well-run
conservative bank, such as Bankers Trust, which had been successful at lending
money for commerce, became a not-very-good currency trader, and ended up being
sued by Proctor & Gamble. The biggest bank, Citicorp, was near bankruptcy
several times from bad loans and speculation under the same leadership, but the
government bailed it out each time. The
combination of deregulation together with the abrogation of market disciplines
pushed the bankers toward ultra-capitalism, that is, towards an economy in which
the desire to make money on money goes up, while the sensitivity to the quality
of the loans goes down.
The government, through
the Federal Reserve, suspended the effects of competition and ignored the
mistakes of bankers by feeding the banks a spread between the cost to borrow at
3% or less, and the return on Treasury Bonds at 6% or more, a spread so large
that bankers only whispered about it. Some
called it “Greenspan spread.” This
weaning process brought banks back to health at the taxpayers’ expense and
further desensitized the bankers to the negative effects of imprudent loans.
This experience was early evidence that the government’s true mission was protecting finance capitalism, not regulating it. Little democratic debate over this shift of the
banking mission was heard, whether in the halls of Congress or elsewhere.
All of a sudden, it seemed, one’s friendly, conservative banker who
formally had carefully fed capital into the job-growth economy, had become an
enthusiastic high-stakes player in the world’s electronic monetary casino.
One
of the more bizarre episodes in the history of ultra-capitalism’s domination
of currency and credit was the silver round-up by rich Texans, Bunker and
Herbert Hunt. The Hunts tried to
corner the silver market, presumably as the ultimate hedge against inflation.
Silver had been selling for $6 an ounce in early 1979; by November, it
was up to $18.77; then it topped at $52.50 in January 1980.
This movement exposed the plan by the Hunts and some Saudi Arabian
associates to corner the market. The
Hunts had been accumulating silver since 1973, and they ended up “controlling
some two-thirds of all silver in the
The same inflation-fighting high interest rates of 1980 helped get the
Hunts in deep trouble. Silver prices plunged to $10.40 an ounce by the
end of March,
1980. The Hunt’s potential default threatened to topple their main broker,
Bache Halsey Stuart Shields, and possibly the giant bank, First National of
Chicago.
This presented Chairman Paul Volcker of the Federal Reserve with a
difficult choice. The speculators, and those who lent them money, should have
been punished quickly and severely by the discipline of free-market forces, but
lacking government control of leveraged speculation, the dollar amounts had
grown so huge that potential failure triggered a concern over the entire
financial system. The government came to the rescue when Volcker worked over the
weekend to help bail out the Hunts, “giving his blessing as godfather to a
thirteen-bank consortium for a new $1.1 billion, ten-year loan to enable the
Hunts to repay their short-term debt.”[32]
The Hunts were hurt
financially, but their $2 billion in losses did not affect their lifestyle.
Some in Congress criticized Volcker for having bailed out the Hunts.
This event further sensitized the banking system to the idea that if a
potential failure is big enough, then it carries a de
facto taxpayer guaranteed bailout. This
unstated policy was far from Adam Smith’s ideal of free banking in which
people who take stupid risks, and banks that make stupid loans, are punished
quickly, severely, locally, and visibly by the natural actions of the free
market. Steven Solomon summarized the Hunt escapade as follows:
It touched a raw nerve
in the bosom of democratic capitalism that politicians were only too glad to
deflect onto central bankers. It was
hard to explain to the democratic body politic why rescuing big financial
institutions, because of their unique ability to spread contagion, served the
public good while the government failed to intervene to save ordinary businesses
employing thousands. In the
Ronald
Reagan Freed That Which Should Be Controlled, and Controlled That Which Should
Be Free
The S&L scandal is a case study for all citizens to learn how the
government fails to control currency and credit for the general welfare but does
control deposit insurance for the benefit of the speculators. President Ronald
Reagan made speeches about how a democratic republic’s success depends on
diffusion of both economic and political power (see chapter 5, introduction),
but then his Administration moved in the opposite direction, concentrating
wealth and power. An early example of this misdirection was the deregulation of
the Savings and Loan industry. Reagan proudly described this deregulation in
1982 as the most important financial legislation in fifty years, not realizing
that he was initiating an economic catastrophe.
A member of the Congressional staff and an industry lobbyist added the
fine print to the law that escalated federal deposit insurance to $100,000, with
no limit on the number of locations at which speculators might borrow. President
Reagan was not in the habit of studying the details.
The Secretary of the Treasury, the former head of Merrill Lynch, was
pleased to anticipate a profitable shift of the peoples’ money from savings
accounts to certificates of deposit that would benefit Wall Street.
Republican President Reagan’s mistakes can be traced back to Democrat
President Johnson’s mistakes in the 1960s when his inflationary policies
resulted in interest rates that later rose to 20%.
These actions were the direct cause of the Savings and Loan debacle, for
the S&Ls were in the impossible position of borrowing high-cost, short-term
money to invest in low-return, long-term mortgages.
Congress tried to fix the problem with deregulation that caused worse
problems. Later, Congress tried to
rectify the damage caused by bad deregulation, going so far in the other
direction that financially sound banks were forced out of business.
Later, these banks successfully sued the government.
Each of these mistakes by politicians was paid for by the taxpayer.[34]
Reagan was determined to
“get the government off peoples’ backs.”
He was convinced that “the government was the problem, not the
solution.” He then proceeded, like
Presidents before and after him, with badly designed programs that failed in
their mission, gave deregulation a bad name, and further confused people about
the proper function of government. The
source of the confusion lay in applying the concept and practices of laissez-faire to the monetary function.
Laissez-faire could be applied
to free banking, but that is not a practical alternative.
The Founders had understood, and experience demonstrates, that control of
currency and credit is a prime government obligation that must be part of the
structure, not part of laissez-faire economic freedom.
While the Reagan
Administration was misapplying the theory of laissez-faire
to deregulate the banking industry, the government was at the same time
protecting the banking industry. In 1984, the government actually bought the
Continental Illinois Bank for $5.5 billion.
Unable to get the other banks to bail Continental out, the government
nationalized it, and within two years wrote off $1.2 billion in bad loans.[35]
This event was the formal beginning of the “too big to fail” policy,
the notion that once economic blunders get big enough to threaten the entire
financial structure, then the government steps in to clean up the mess.
Two years earlier, much smaller Penn Square Bank in
Bill Isaac carried the day, that time, so Penn Square disappeared, but he
had delayed the capitulation to the “too big to fail” government policy for
only two years when the government bailed out Continental Illinois.
Advice from an M&A Expert
The conventional
wisdom in ultra-capitalism is that takeovers are provoked by entrenched, poorly
performing management. This may be true occasionally, but the compelling
motivation for takeovers is money. Deals
are extremely lucrative to all involved—bankers, lawyers, accountants, CEOs of
takeover companies, and even the CEOs of the companies taken over.
In ultra-capitalism, deals need only this logic: “If it can be
financed, it should be done.”
From the earliest days
of the takeover craze in the 1970s, Marty Lipton was one of the most famous
mergers and acquisitions (M & A) lawyers.
Lipton had made money from the process by collecting $20 million fees,
but later he criticized the system, not as an efficient reallocation of
resources, but rather as merely a new way to make lots of money without regard
to the social impact. In 1987,
Lipton published his thoughts from an earlier lecture.[37]
From his profound experience in many deals, Lipton could separate the
superficialities from the realities. The
following were his major points:
·
Takeovers are
driven by speculative financial considerations, not by intrinsic business
reasons.
·
Some managements
may be deficient, but, as a group, they pursue socially beneficial objectives
such as expanding the enterprise, improving productivity, and cultivating
planning, research, and development.
·
Financial
corporatism has none of these objectives.
·
Institutional
investors, managers of pension funds, dominate the market.
They are graded and compensated on annual performance.
·
Tax and
accounting rules favor takeovers: Interest
is tax deductible, dividends are not; acquisition costs, including premiums, can
be capitalized and amortized over many years.
Lipton wondered how much the job sector might have been improved if the
$139 billion that financed mergers and acquisitions in 1985 had been invested in
new products, new markets, and automation. Lipton
believed that the laws gave special privileges to the takeover artists. To level
the field, he proposed elimination of double taxation on dividends, elimination
of tax deductibility on junk bonds, no two-tier bids, all financing in place
before announcement of a takeover, no voting rights for short-term equity, a
legal limit of 10% of junk bonds as a percent of S&L assets, and a graduated
capital-gains tax on securities held for less than five years, starting with 60%
on gains made in less than a year. Most
of his proposals bounced off the walls of Congress, built up over the years by
ultra-capitalism’s lobbying.
The
Plaza Accord Misfires
In
This wild ride of the yen demonstrated why politicians should not disrupt
free-market forces with non-integrated solutions. The drop of the yen in this
case demonstrated the fundamental instability of the system.
Countries with
their currency pegged to the dollar, such as
After the Plaza Accord, the Japanese reduced their interest rate to less
than 3% in order to fund the productivity improvements that were then necessary
to protect their export sales from the stronger yen.
Later, they took the interest rate to almost zero.
The unintended consequence of this low-cost Japanese money was the
over-funding of Asian economies, resulting in too much money put into too many
poor investments. With politicians
destabilizing the world economy through these kinds of capricious actions, and
with this level of volatility, no currency system, whether fixed, pegged, or
floating, can work well.
The
The trend from manufacturing to financial services has historically
preceded an economic decline. The 1998 yearbook of the Organization for Economic
Cooperation and Development (OCED) shows the
With a per capita income at last count of just $27,821 a year, the
After nearly a half-century of government inducements for American
manufacturing to move to other countries, mainly for reasons of political
hegemony, President Bush tried to rectify the damage by ignoring free market
forces and tweaking the currency.
Alligators
Lurking in the Swamp
While manufacturing was declining, ultra-capitalism was on the rise. The
“prodigals and projectors” had a new toy called “derivatives”—puts,
calls, options, and futures of all types. A
derivative is a financial instrument by which a speculator bets on the future
value of another, underlying financial instrument.
Carol Loomis described them as “alligators lurking in the swamp.” The
alligators have been multiplying: $1.6
trillion in 1987, $7.4 trillion in 1991, $16 trillion in 1994, and over $100
trillion in the new century.[39]
These numbers can be compared to the entire U.S. GDP of about $10
trillion. Derivatives have
given the speculators new ways to bet, new ways to leverage their bets, and new
ways to avoid banking regulations.
After the Crash of 1929,
a new statutory provision, “Regulation T,” limited the amount that brokers
could lend for the purchase of stock to 50% of the total investment.
Derivatives, however, are bets on the direction
that stocks will go; therefore, they are not subject to Regulation T.
Joel Kurtzman described this new and uncontrolled phenomenon:
Conceptually, these
abstract products are often outgrowths of real products that have been traded on
the futures markets for years. But
when they go electronic, they do it with a twist.
Rather than trading a contract today for a bushel of wheat to be
delivered next year, these new products are usually contracts to take delivery
on a financial product. Instead of
buying wheat on the futures market, the new products that are traded are
contracts to buy stocks, specific ones or all the stocks on the entire stock
market, in some cases, and even such esoteric items as foreign currencies and
future interest rates. Future
contracts on interest rates did not exist in 1971.
They did not really get into the market until the late 1970s when
Citicorp invented them in
Roger Lowenstein, like Kurtzman, lamented the lack of regulation of
derivatives. They both saw the sheer
volume of trading as a threat because so much damage could be done so fast.
Lowenstein pointed out another feature of these derivatives, the disclosure
problem that makes it increasingly difficult to read financial statements and
learn the facts:
The Street has been using equity swaps to get around Regulation T for
almost a decade, but in recent years the scale of the business had soared. The
first modern swap was engineered in 1981, by 1990 there were $2 trillion worth
of interest rate swaps, which are just one type of derivative.
By 1997 the total was $22 trillion. One
offshoot, largely unintended, of this tremendous growth was that banks’
financial statements became increasingly obscure.
Derivatives weren’t disclosed in any way that was meaningful to
outsiders. As the volume of deals
exploded, the bank’s balance sheets revealed less and less of their total
obligations. By the mid-1990s, the
financial statements of even many mid-sized banks were wrapped in an
impenetrable haze.[41]
The banks did not care;
they were making too much money. The
government did not care; the Federal Reserve Board was encouraging the free flow
of capital by protecting the process,
not regulating it.
Lowenstein added:
With regard to
derivatives, the policy-making arm of the Fed took a laissez-faire
approach starting with Greenspan, who was enamored with the seamless artistry of
the new financial tools. In public
debates, Greenspan repeatedly joined forces with private bankers, led by
Citicorp’s John Reed, who were fighting tooth and nail to head off proposals
for tougher disclosure requirements. Even
as hedge funds increasingly used swaps to dodge the Fed’s own margin rules,
Greenspan cast an approving eye. Incredibly,
rather than trying to extend some form of margin rule to the derivative world,
Greenspan proposed to eliminate the margin rules entirely.
His 1995 testimony to Congress read like a banker’s brief.
At its heart was a beguiling single idea: That more trading (and hence
more lending) was always good because it bolstered “liquidity.”[42]
The Fed explained that they did not have to control derivatives because
the banks, being regulated, did that for them. This statement would be funny if
the problem were not so serious. The
banks were—and still are—a part of the problem, not its solution. According
to Lowenstein:
Save for the Fed, the
only ones who could restrain derivative lending were the banks. But Wall Street
never polices itself in good times. The
banks own balance sheets were steadily ballooning; by the late 1990s, Wall
Street was leveraged 25 to 1.[43]
Greenspan did not heed Adam Smith’s warning to beware of the
“prodigals and projectors” who would deflect capital away from job growth
and the general welfare and deliver it to the speculators. In his advocacy of
“liquidity,” Greenspan ignored the overheating of South American economies
in the 1980s with petrodollars, and the “excessive liquidity” from ERISA
that helped propel the bull market. The Fed’s position did not anticipate the
Asian crisis of 1997, in fact, it helped cause it.
Ultra-capitalism had been given easy credit, market disciplines had been
abandoned, repetitive crises had occurred, and the government that had in effect
designed the flawed system kept on bailing it out instead of either fixing the
system or letting market disciplines apply their corrections.
A democratic republic succeeds only by reflecting the will and wisdom of
the people. The derivatives
casino would be quickly shut down if the majority understood this corruption of
capitalism. The only thing certain
is that when this abrogation of government responsibility to control currency
and credit for the general welfare results in an economic decline, it will be
the people—remote and uninformed—who will be hurt.
The Federal Reserve’s
In the latter part of the twentieth century, the Federal Reserve Board
effectively supported the growth and dominance of ultra-capitalism through
deregulation, abandonment of market disciplines, excessive liquidity, and
excessive volatility. This observation is a contrarian view at a time when the
long-time Chairman of the Federal Reserve is deified by most, crediting him for
continued economic success. In 2002, however, when the market and economy slid
into decline, his sainthood was questioned but not yet in a way likely to
identify root causes of the world’s economic woes.
He was successful only in the sense that his mistakes were not visible
for a long time, and he did eventually recognize the radical impact of the
Information Age.
Greenspan’s presumed function was to prevent inflation, with a
subsidiary function, “not to upset the markets.”
His focus on inflation appropriately moved from the traditional worry
about a rise in factory-workers wages to asset inflation in the stock market.
Greenspan’s inflation-fighting tool was his power to raise or lower
interest rates. An increase can, for example, trade off a reduction in inflation
with a slowing of industries like home-building. When Greenspan became worried
about stock market inflation, however, the obvious question is why he did not
limit the amount of money speculators could borrow from their brokers to buy
stock. The equally obvious answer is
because that action would have been unpopular with Wall Street and contrary to
Greenspan’s liquidity obsession.
The
structural arrangement of government and the Federal Reserve Board was based on
the perceived tension between government’s urge to exercise control over
money, and the capitalists’ not trusting government to follow that urge in a
way that finance capitalists could approve.
Central banks, including the Federal Reserve, were established to bridge
this tension between government and finance capitalism.
Steven Solomon analyzed this relationship between democratic national
policy and finance capitalism:
·
Central banks
arbitrated an unspoken marriage of convenience between two disparate regimes
that constituted democratic capitalism, the democratic nation-state polity and
market capitalist economy, to make the rules of the game by which society’s
wealth was produced and managed. Since
the sixteenth century, these two overlapping, though at times opposing, forms of
social organization evolved together through uneasy and shifting modus vivendi.
·
The logic of
capital was to maximize profit, regardless of national borders, political
rights, social equity, or environmental consequences, and to seek to preserve
the value of the capital it accumulated. The
primary purpose of the democratic liberal state, by contrast, was to ensure
liberty, equity, defense, and economic welfare for its citizenry.
The disparate logics of capital and the democratic state converged on one
crucial common goal, economic prosperity, and its prerequisite, a stable and
friendly political economic environment for capitalist enterprise.
Each of the main models of democratic capitalism, Anglo-American laissez-faire,
European liberal social welfare, Japanese neo-mercantilist capitalism, provided
this with varying divisions of responsibility and power between the market and
governmental realms.
·
One of the main
fulcrums of prosperity that had to be managed was the special role of money and
finance. Governments naturally
preferred to exercise the state monopoly over money freely itself.
But private capitalists did not trust them and possessed a veto:
abstention from lending. Central
banks evolved as a medium of compromise from this historical tension, especially
from the mid-nineteenth century, when the paper money and credit revolution had
assisted “financial capitalism” to dominate the heights of the market
economy.[44]
Solomon’s description of the tension between the liberal state and
private bankers is useful to an understanding of the proper role of finance
capitalism in support of the job-growth economy. Unfortunately, the tension was
historically resolved in favor of Wall Street because the government needed capital to fight wars,
and the politicians who were supposed to be representing Main Street let Wall Street, instead, write the rules.
Abetting this Constitutional failure during the 20th century
was the persistent ignorance of reformers who convinced themselves that they
were controlling the appetites of capitalism when, in most cases, they were
missing the mark with small suffocating laws. This combined failure of the
political left and political right resulted in the impediment of concentrated
wealth that has now escalated into ultra-capitalism that threatens both the
national and the world’s economy.
Solomon’s analysis is penetrating and useful, but I cannot be true to
democratic capitalism without challenging his conventional wisdom that the
maximization of profits and welfare of the citizenry are based on “disparate
logics.” This unexamined premise
by so many limits visibility of the complementary logic of democratic
capitalism.
The need for correction of these persistent failures is now clear.
The voting public must elect a new breed of political representatives who
will design comprehensive, integrated, long-term, fiscal and monetary policies,
not to protect the special interests of the ultra-capitalists but to promote the
general welfare of all of the citizens. Now that the people are the main source
of new capital, the government can no longer be held hostage to Wall Street as
the main source of capital.
In Ultra-Capitalism, Even Bonds
Are Speculative Instruments
In
the 1980s, traders in government bonds became more important as the deficit
grew, and something as prosaic as government bonds became a speculative
commodity. The politicians made
political moves to pressure the Fed on interest rates, and they took action to
effect the value of the currency, both moves being characteristic of traditional
economic nationalism. The bond
traders then used increased volatility to turn these instruments over every few
weeks instead of every few years. Speculators
love this rapid turnover and uncertainty; and brokers churn more commissions out
of the increased turnover. They also can make money by guessing right, not on
fundamentals, but on what they perceive the Fed will do with interest rates.
For example, if the Fed moves rates up, the bond market can either
respond positively to a movement against inflation or it can respond negatively,
assuming that the Fed is concerned about more inflation.
The speculator guesses which one, and then bond derivatives are bet like
casino chips. Al Ehrbar described this speculative adventure on margin:
Consider
this somewhat simplified example. An
institution puts up $100,000 in cash to buy $10 million of treasury bonds
yielding 6.2% and, here’s the leverage, borrowing the other $9.9 million at a
rate of 3.5%. It collects $620,000
in interest on the bonds, pays $346,500 in interest on the loan and winds up
netting $273,500 a year on its $100,000 investment, unless long-term rates head
up, that is. When that happens, the
institution gets a margin call to put up another $100,000 for each drop in bond
prices, and it can quickly become a net loser, even if the carry remains rich.[45]
Interest rates, controlled by the Fed, kept coming down in the early
1990s for the political reason of “helping the economy,” and then the Fed
began to raise interest rates to “fight inflation.”
This government-induced volatility first provoked many to refinance homes
and then later stopped them from refinancing homes.
What on the surface looked like a straightforward transaction, borrowing
money to buy a home, became another casino chip called “mortgage-backed
securities.” When the refinancing
of mortgages slowed to a crawl, reflecting both saturation and the slowing
action of the Fed, the mortgage-backed securities took a dive.
Over-leveraged companies, such as Askin Capital, which had been using
exotic techniques, went broke. Then,
following another of Wall Street’s formulas: “Sell what you can, not what
you should,” $20 billion in 10-year T-bills were sold in March and April of
1994 to offset the new risk in mortgage-backed securities. The average life of
mortgage-backed securities was stretching out, and they suddenly became
longer-term bonds which are riskier because they are more sensitive to changes
in interest rates.
Nervous traders on margin tried to average out the maturities on their
holdings, that is, the mix of 5-, 10-, 20-, and 30-year bonds.
In this circumstance, the bond traders could not sell enough ten-year
mortgage-backed securities, so they did the next best thing and sold ten-year
government bonds. Now, all of a
sudden, a sell pressure was on ten-year government bonds.
“What’s happening? Where
did this come from? How do I get
out? At what loss?
The phone’s ringing, they want me to cover my margin.
Maybe this is a free-fall; I’d better dump!”
Sophisticated investors such as George Soros diversified their government
bonds in many countries but still took a beating in this bond massacre.
The signals in a speculative cycle are frequently clear, but as the
process wears on, the numbers get bigger, and the greed grows stronger.
In the Great Bond Market Massacre of 1994, bondholders worldwide suffered
more than $1 trillion in losses. Ehrbar detailed that primary government
dealers’ net borrowing, secured by Treasury bonds, increased from under $50
billion in 1990 to almost $200 billion in 1994.
The crash was caused, as usual, by too much money on loan for
speculation. The media, as usual,
searched for some explanation other than leveraged speculation, including the
Federal Reserve’s rate increase or even a political assassination in
The bond massacre of 1994 resulted in visible casualties.
Hedge-fund managers lost heavily, life-insurance companies lost $50
billion, other insurance companies lost $20-25 billion.
Rep. Henry B. Gonzalez (D., Texas), Chair of the House Banking Committee,
held hearings in April, 1994, on the dangers posed by hedge funds using large
credit lines for speculative purposes. Gonzalez
maintained that hedge funds now needed extra scrutiny because of their ability
to disrupt markets. Despite
Gonzalez’s urgings, no significant change in the control of leveraged
speculation was forthcoming from Capitol Hill, for Wall Street, not
The
Mexican Crisis of 1994
The 1994 economic crisis in
·
No international
disciplines to control the amount of short-term loans.
“Hot money” stimulates economic growth beyond prudent levels.
In every case when there is an oversupply of money, the result is
increasingly risky projects and speculation, and
·
No international
monetary structure was in place to balance the hot money and patient capital
needed for long-term growth of a country. The result was excessive liquidity in
hot money, too little patient capital, and no protocols to move short-term money
into patient capital in an emergency.
·
Bankers
in the
·
Nations leading
the world economy had not structured a new stabilizing mechanism for
international currency after the dollar was floated in 1971.
Commerce hates instability; speculators live off of it.
·
In 1994,
The Mexican economy was
severely damaged. Wages dropped,
prices went up, social tensions were exacerbated, civil war broke out in
Asian Tigers Caught in a Trap in 1997
After the demise
of Communism, many believed that the world would become a better place as
economic freedom improved lives and spread around the globe. Economic freedom
was expected to eliminate material scarcity, and economic common purpose was
expected gradually to reduce the hatreds and violence. The people in
This extraordinary performance in providing new freedoms and new human
rights to the people of the world’s fourth largest nation had begun in 1966,
when Suharto gave the responsibility for economic planning to Widjojo Nitisastro,
a man of intellect, honesty, and energy. Widjojo, a Ph.D. graduate of the
Promoters of human rights, democracy, and improvement in the human
condition around the world should carefully study not only
What, then, caused the Asian crisis of 1997?
Joseph E. Stiglitz, Chair of President Bill Clinton’s Council of
Economic Advisors and later Chief Economist at the World Bank, was quite clear
in his opinion:
The
countries in
These Asian countries were caught in an ultra-capitalist “capital
crisis” that was treated as a “liquidity crisis” by the IMF and the
The causes of the Asian crisis were the same as those described for the
1994 Mexican crisis: excessive liquidity, excessive volatility, bank
deregulation, and suspension of market disciplines. The rush of short-term money
from international bankers overheated the Asian economies, resulting in
speculation and the funding of questionable projects.
The consequent economic weakness might have been corrected by a modest
tightening and a slower growth rate; however, because of the superior power of
ultra-capitalism’s currency speculators, hot money fled the countries;
national currencies went into free fall, some dropping 70%; and economic
progress was reversed. Previously successful businesses that had provided jobs
and paid the bills suddenly had the cost of those bills multiplied by four.
Many good companies could not pay at this level and went out of business.
The unifying force of a rising standard of living was displaced by the
disuniting effects of unemployment, falling wages, and higher prices that
resulted in social unrest and sometimes violence.
The IMF had been trained and conditioned over the years in “liquidity
crises,” a situation in which a country’s imports exceed their imports, that
is, they are spending more than they are earning.
From the beginning in Bretton Woods in 1944, the IMF’s mission was to
be a lender of last resort and to keep world prices stable.
Following this mission, the IMF would lend countries money while
insisting on actions that would bring income and expense into balance by slowing
growth and spending less.
The threats of currency speculators and the readiness of hot money to
take flight combined to initiate a downward spiral that was just the opposite of
the sort of crisis that the IMF knew how to handle.
The Indonesian economy spiraled downwards as its currency declined, and
the more the currency declined, the more the money fled, provoking further
currency attacks and deeper economic declines. In this capital crisis, not only
were controls lacking on the amount and type of money coming in but also no
mechanism was in place to stop its outward flow.
The simplest way to stop the downward spiral would have been a conversion
of short-term money to long-term debt, but amazingly, this approach was opposed
by the IMF and the U. S. Treasury Department.
They called it “an infringement on economic freedom.”
I call it “amazing” because of the policies self-contradictory
hypocrisy: The structural
corruptions in ultra-capitalism regularly destroy the benefits of economic
freedom, and yet the constituted authorities nonetheless defend them on the
faulty basis of “free capital roaming the world.”
While the IMF and the U.S. Treasury Department were applying the wrong
“liquidity crisis” solutions to the “capital crisis,” at the same time
they seemed determined to change the politics and culture of troubled nations.
They helped in removing Suharto, the architect of
Ethnic and religious
differences had receded as causes of social turmoil during the time when the
Asian economies were growing rapidly and the quality of life for most of the
people was improving. Conversely,
when the economies reversed, the residual animosities came to the surface. This
clash of cultures was highlighted in
Many of the popular media are economically illiterate and add their
disinformation to this economic confusion. American
experts predicted that Asian countries would become more short-term profit
oriented and lay off more workers. The effect of the crisis would be an emphasis
on cost-cutting rather than on growth. Workers
would be dumped as the route to greater profits, and any sense of social
contract would be dumped with them. Incredibly,
a crisis caused by ultra-capitalism
would be corrected by more
ultra-capitalism, if you believe the media.
A few weeks after the
Other parts of
Western-style capitalism being adopted in
The apologists for ultra-capitalism argue that a currency attack by
speculators is a useful discipline. The
scandal is that the mature economies, led by the
How can these crises be avoided? I propose solutions consistent with
democratic capitalism throughout this book, and I repeat them here:
·
The global economy, like the American economy and all national
economies, requires a structure in place to monitor the amount and type of money
flowing into countries.
·
Through agreements and protocols from the BIS and the G-7 nations, the
power of speculators must be checked.
·
Taxes that discourage short-term speculation must be imposed.
·
Investment for long-term growth must be rewarded by further reduction in
capital gains taxes.
·
The flow of capital must be controlled so that risk is accurately
reflected in bank reserves.
·
The rising value of artificial assets must not be used to collateralize
easy credit.
·
International banks must be regulated by rules and policies that result
in high-quality loans for the world’s economic growth.
A Russian Disaster: 1998
The collapse of
the young, post-communist, Russian economy had several causes. The all important
price of crude oil in early 1997 dropped almost by half; the nervous
international bankers moved their focus from Asia to Russia; the IMF and the
U.S. government again treated a capital crisis
as a liquidity crisis, as they had done in Asia; and Russia lacked the
necessary infrastructure for economic freedom to function.
The latter problem is ironic because the Russians and their American
advisors made the same fundamental error in the transition to economic freedom
that the Marxists had made. In both cases, the people in charge lacked
understanding of the management of change and how to refine an existing
structure to support new economic practice.
In 1917, the Marxists, had followed Marx’s advice to tear down the
political and cultural structure; early in the 1990s, the American advisors
urged the Russians to try “shock therapy,” ignoring the lack of minimum
structure. Economic disasters were the result in both cases.
The confusion between a capital crisis and a liquidity crisis had a
special twist in the Russian disaster. A Wall Street leader, Goldman Sachs,
proposed a conversion of short-term money to long-term as the best solution,
namely, to convert the GKO, short-term Russian bonds, voluntarily to Eurobonds.[53] A
Wall Street firm was actually recommending that the door be closed to capital
flight. The proposal failed because, under pressure from the White House, the
IMF pumped more money into
Following American
advice,
·
For the first
time in history, a fully nuclear-ready country had been destabilized.
·
Anti-Western
sentiment had never been so strong or widespread in modern
·
The economic
catastrophe, in combination with pushing NATO into three countries contiguous
with
·
Because of the
economic breakdown, the possibility of nuclear disasters increased because
nuclear missile sites and nuclear submarines could neither be maintained nor
decommissioned properly.
·
·
“The worst
American foreign policy disaster since
Successful governance
follows this sequence: Civil order, first; then, economic freedom; followed by
political freedom. Both the U.S.S.
R. tyrannical structure and civil order had been torn down without a
replacement. The American
ultra-capitalists recommended, as usual, eliminating all cross-border controls.
Foreign countries were thus encouraged to pump money in, while corrupt
Russians were as quickly taking the capital out.
The capital flight is estimated to have been between $150 billion and
$200 billion. The
Nation’s editorial does not equivocate:
It’s probably wrong to
think of it as capital flight, think of it rather as a chronic hemorrhaging of
Fareed Zakaria
pointed out a clever way to spot the evidence of capital flight:
In all, more than $200 billion has leaked out of
Zakaria added that one did not see any Chinese on the menu at The Palace
because
The
Rise and Fall of Long-Term Capital Management [62]
The $3.6 billion bailout of Long-Term Capital Management (LTCM) in 1998
gave new meaning to leveraged speculation and took ultra-capitalism into
dangerous new territory. LTCM was an
unregulated hedge fund located for tax reasons in the
LTCM was a spin-off from
Solomon Brothers after the 1991 scandal in which senior people admitted having
falsified bids for Treasury securities. This
had taken place in John Meriwether’s department, but Meriwether’s boss, John
Gutfriend, took several months to inform the Fed. Warren Buffet, Solomon’s
largest shareholder, took over. The
bond trader was fired, and, later, Meriwether and Gutfriend left. After leaving
Solomon, Meriwether set up LTCM in 1993 with, at one time, 25 Ph.D’s,
including two Nobel-Prize winners in Economics, on the payroll.
Forbes reported:
John Meriwether seemed
to have a magic touch. What he
really had was nerve-wracking leverage. With
returns like that, no wonder the Chairman of Merrill-Lynch and dozens of others
at the firm invested in Long-Term Capital. But,
adjusted for the risks, how good really were those returns?
It’s the old story: financial genius is a short memory in a rising
market. Without leverage, the bet is hardly worthwhile: You would make $5,000 on
a $1-million trade when the discrepancy is eliminated. But introduce the
Archimedes principle and the picture changes.
Suppose that you were able to buy $1-million worth of Treasuries on
$10,000 in margin. Now that $5,000
profit is not just 5% on your money, it is 50% on your money.[63]
In 1998, however, Meriwether went directional, but he bet the wrong way.
Instead of converging, the yields on the Treasuries spread further, but
LTCM’s esoteric models built by those PhD’s had not included the possibility
of a whole government’s defaulting on bonds, as
Again, instead of taking action to prevent the disease or let the
speculators die, the government stepped in to nurse the source of infection. On
The chairman of the Federal
Reserve Board admitted to the House Banking Committee that the Fed was powerless
to control hedge funds; he assured the elected Representatives that, instead,
the hedge funds
were
“controlled through the banks who are regulated.”[64]
To the contrary, however, the sources of LTCM’s funds, namely the
Incredibly, [Greenspan] again downplayed the risks posed by rogue
investors such as hedge funds. The
Chairman’s credibility seemed to know no bounds:
“Hedge funds are strongly regulated by those who lend the money,”
Greenspan asserted.[65]
Lowenstein continued:
Regulators limit the
amount that Chase Manhattan and Citibank can lend, so that their loans do not
exceed a certain ratio of capital. The
regulators do this for a good reason: Banks have repeatedly shown that they will
exceed the limits of prudence if they can. Why,
then, does Greenspan endorse a system in which banks can rack up any amount of
exposure that they choose, so long as that exposure is in the form of
derivatives? The Fed’s two-headed policy, head in the sand before a crisis,
intervention after the fact, is more misguided when viewed as one single policy.
The government’s emphasis should always be on prevention, not on
active intervention.[66]
In the1990s, hedge funds
multiplied at a rate that further exemplified the financialization of the
economy. Forbes
estimated that Wall Street firms, on which the Fed was counting to monitor the
hedge funds, were grossing over $2 billion a year on hedge-fund business and
bringing a good part to the bottom line. This
does not count the revenue that hedge funds were generating for other parts of
the firms. Business
Week, usually sympathetic to finance capitalism, this time issued a warning:
Who’s watching the
hedge funds? The lessons are clear.
More disclosure is an absolute necessity in this age of leverage and
global capital. Hedge funds are no
exception. Someone must also be watching. The
banks, certainly, must take an active role in monitoring their loans, as well as
the kind of derivative transactions they support.
But LTCM’s wild ride shows that banks have a difficult time monitoring
themselves, much less others. Federal
regulators, as a consequence, must accept the fact that the public holds them
responsible for the nation’s financial stability.[67]
The government’s practice of insuring and subsidizing risk was extended
by way of LTCM to wealthy private investors who had used every possible artifice
to avoid paying taxes. The Fed’s argument before Congress, that no private
funds were used in the bailout, is specious.
What if the banks lost money in the bailout?
The taxpayer would, one way or the other, make up the losses. This
massive bailout extended the governments’ too-big-to-fail bank policy to an
unregulated hedge fund for wealthy private investors, a dangerous precedent that
added to the large library of non-democratic privileges that have allowed
ultra-capitalism to grow and dominate.
Representative Bruce Vento (D., Minnesota), a member of the House Banking
Committee, put his finger on the problem, pointing out the gap between
free-market theory and practice, a double standard: one for
In
December, fifteen months after he lost $4.5 billion in an epic bust that seemed
about to take down all of Wall Street and more with him, Meriwether raised $250
million, much of it from former investors in the ill-fated Long-Term Capital,
and he was off and running, again.[69]
Ultra-Capitalism:
Quality of Earnings Declines along with Integrity
One by-product of ultra-capitalism’s domination of the economy has been
a steady erosion in the integrity of financial results reported to stockholders.
In theory, the value of stocks should be based on actual corporate and
expected corporate earnings. For
over a 60-year period, the multiple of earnings had been around 15 times.
During the bull market of the 1990s, it rose to over 30 times for “old
economy” stocks, and up to infinity for dot.com companies who had no earnings.
In mid-2002, after the stock market had fallen dramatically, the average
multiple on trailing earnings was still around 30.
The Dow Jones would have to drop to around 7,700
from its peak of 11,722 in January 2000 to fit the 60-year profile, which
it did.
During the quarter-century of ultra-capitalist dominance, many companies
crossed the line from aggressive interpretation of accounting rules to improve
earnings to outright illegality in their frantic effort to improve reported
earnings. Names such as Cendant, Sunbeam, Enron, Worldcom, Tyco, Imclone, and
several others became better known for their lack of integrity than they had
ever been for their good products.
In March of 2003, HealthSouth
leapt into this Hall of Shame by admitting that they had been cooking the books
to the tune of $1.4 billion since 1999. CEO
Richard Scrushy had not been tricky at all: He just told his people flat out
what the earnings had to be and later said that honesty in accounting would have
to wait until he sold his stock. This
mindset of a CEO corrupted by ultra-capitalism was demonstrated by Scrushy’s
boast in his letter to shareholders for 2001: “We celebrated another year of
fulfilling Wall Street’s expectations maintaining our record as the Fortune
500 company with the second-longest streak for meeting or exceeding
analysts’ expectations.”[70]
Before ultra-capitalism, most companies would not provide
short-term profit estimates because they were naturally subject to so
many outside effects. In 2003, the times were changing: Several major
corporations were refusing to give any estimates on quarterly earnings.
In addition to outright
criminality, ultra-capitalism adopted its own form of relativism, that is, a
clever presentation of earnings purged of selected components. Anyone
experienced in running a business is aware of annual, non-repetitive surprises
that used to be routinely assimilated into the reported earnings as part of the
real world. Now they were being
designated differently. A front-page
feature article in The Wall Street Journal
described the phenomenon in the title and subtitles:
Moving target.
What’s the P/E Ratio? Well
Depends on What is Meant by Earnings. Terms
like “Operating,” “Core,” “Pro Forma,” “Earnings Before Bad
Stuff” leave investors muddled.[71]
The article reports that the Standard & Poors’ 500 stock index had
an overall P/E ratio of 22.2 in mid-2001, and then continues:
While that is well above the long-term historical average of 14-15, it
strikes some pros as reasonable in view of factors such as low interest rates
and a chance for a profit comeback…but there’s a catch.
In recent years, P/E ratios have become increasingly polluted.[72]
The article went on to calculate that the unpolluted average ratio was
36.7 times, an astronomically high level in face of declining corporate
earnings.
Companies in their frantic search for the earnings improvement that Wall
Street demands, label certain expenses as “special” or “one-time” or
“exceptional” or “non-cash.” Wall
Street analysts who made their performance bonuses primarily on rising stock
values, passed on these phony reports to the public as real.
Besides faking numbers, many good companies learned how to produce
earnings during the bubble by becoming speculators.
Kevin Phillips reported:
Microsoft found the business of selling put options on their own stock a
terrific
way to make money... . Dell, in some fiscal quarters, made more money selling
options than computers.[73]
Populist Revolt
At the turn of the
century, the number of protestors against global capitalism was growing and
their voices were becoming louder. Wherever
international agencies met—
Many of the CEOs and bankers at the Davos meeting, for example, had been
rewarding themselves with many millions of dollars in personal compensation.
Most refused to recognize that their compensation feeding-frenzy bore a negative
relationship to the protestors only a few miles away, who, with symbolic irony,
attacked a McDonald’s restaurant. When
the same demonstrators tried to storm the Davos meeting rooms, they were held
back by police. About two months earlier in September 1999, some 50,000
protestors representing 1,000 NGOs had been present at the WTO meeting in
What the protestors failed to grasp, however, and what their fury
obscured, is that no social theory or practice of economics can achieve what
they desire other than a refined and democratized global capitalism. The
economic ideology that can improve all lives, unify people, and stop the
violence is not “no capitalism” but democratized capitalism.
If, then, protestors’ energy could be focused on the democratization of
capitalism around the world, they would find themselves no longer barred by the
police from the meetings but, rather, leading a new non-violent revolution. The
protests in
One of the NGOs at Seattle, a
French group, showed a deeper understanding of the problems by promoting a
“Tobin tax,” the tax on international speculation proposed in 1979 by
Professor James Tobin, Nobel-Prize winner in Economics from Yale.
A win/win idea, the Tobin tax on the $1.7 trillion traded daily on the
world’s electronic monetary casino, over 90% of which is speculation, would
dampen speculation and provide hundreds of billions of dollars to help economies
get going, address environmental problems, and fund massive health and education
needs.[74]
President
Clinton Favors Rules-Based Trade While His Officials Deny It
President Bill Clinton had pushed for the WTO meeting in Seattle in
November, 1999; then on January 30, 2000, the President, accompanied by five
Cabinet Secretaries, appeared at the World Economic Forum in Davos, Switzerland,
with this message: “We have got to reaffirm unambiguously that open markets
and rules-based trade are the best engine we know to lift living standards,
reduce environmental destruction, and build shared prosperity.”[75]
In so saying, the President was correct and summarized it well.
The key words were “rules-based trade,” but whose rules?
The standard of living had been going up nicely in the Southeast Asian
countries, but for lack of proper rules that progress was reversed.
Clinton and Secretary of Treasury Rubin advocated the promising global
movement to free markets. With the encouragement of the Wall Street lobby,
they also pushed for open markets for financial services and elimination
of all cross-border capital controls, all wonderful concepts and, in fact, part
of the route to a world of peace and plenty.
The devil, however, is in the details: Clinton and Robert Rubin did not
address the stabilization of world currency and the standardization of banking
protocols that would have controlled the lending of hot money and kept it in
proportion to long-term, patient capital. Neither
did they address the growing opportunities to borrow that were making the
speculators more powerful than the central bankers.
Nor did they address the abrogation of market disciplines that had muted
the sense of risk in lending money. Also
ignored were the wage levels in emerging economies, so low that spendable income
necessary for reciprocal purchases that make free trade work was unavailable.
Finally, they did not acknowledge that without the right structure in
place, pulling down the cross-border controls made emerging economies vulnerable
to attack by the peddlers of hot money and then the speculators.
Although Rubin echoed
some of the President’s rhetoric, calling for a new financial architecture, he
dismissed out of hand Tony Blair’s call for a powerful global central bank, he
scorned German suggestions for coordinating leading currencies, and he squelched
talk about capital and currency controls. His
reforms looked a lot more like patching the plumbing than like new architecture.
In Cologne, Rubin squired through a reform program that reflected Wall
Street’s caution: Instead of a new
Bretton Woods, there was a new fund for the IMF to provide help for countries
prior to a crisis, and instead of capital controls or taxes on short-term
speculation, there were calls for more disclosure and banking guidelines so that
investors could police themselves. The
debt forgiveness for the poorest nations demanded by Jubilee 2000 became partial
debt relief, to be meted out only after three years of painful adherence to IMF
conditions. Enforceable labor rights
were reduced to a new ILO (International Labor Organization) declaration against
the worst forms of child labor.[76]
Like his presidential predecessors,
In
1999, ultra-capitalists beat back reformers’ efforts to exercise reasonable
control of derivatives, and they successfully lobbied the repeal of the Glass-Steagall
Act. This Act had been passed in
1933 to separate commercial banking and investment banking to eliminate a
conflict of interest. Soon after the
repeal of Glass-Steagall, Citigroup and other monster financial services
companies demonstrated why the Act had been a necessary part of
government structure to regulate banking. Citigroup, acting as commercial
bankers, provided Enron with billions of dollars of loans so that Citigroup,
acting as investment bankers, could get the billions of dollars of deals that
Citigroup helped Enron negotiate. In time, the loans turned into bad loans and
the deals turned into bad deals (see chapter 9). The financial motivation to
ignore the quality of the loans in order to obtain the profitable deals resulted
in the easy credit that allowed Enron to happen. Easy credit, which had caused
economic disasters since the beginning of the republic, was now coupled with
derivatives, and that added new ways to bet, new ways to borrow, and new ways to
duck regulations.
Disturbed
by the collapse of hedge fund LTCM, Brooksley Bonn, Chair of the Commodities
Futures Trading Commission (CFTC), recommended that Congress consider regulation
of derivatives. On
Derivatives
are defended as a way for companies to hedge their businesses against changes in
interest rates and currency. This
defense is weak because it diverts attention from the root causes of volatility.
Take away the volatility and little reason remains for companies to
justify expensive hedging. Neither
does this defense address the use of derivatives for speculation at multiples
many times greater than their use as a business hedge.
Representative John Dingell (D., Michigan), the ranking Democrat on the
House Commerce Committee, commented: “After
six months of study, the working group has basically concluded that we should
get rid of almost all regulation of these products and let the good times
roll.” Disagreeing with the
committee, Dingell added: “Proposals
for the creation of totally unregulated institutional markets are dangerous
follies.”[77]
Democrats frequently
issue such warnings after another triumph of the Wall Street lobby, but the
warnings never become serious efforts at comprehensive reform.
The dominance by finance capitalism only grows stronger, demonstrated by
the elimination of restrictions on ultra-capitalism’s merging or different
financial services. Confidence in
the lobby power of ultra-capitalism was so great that the Citigroup merger of
enormous size was already a fait accompli
when President Clinton signed the Bill, late in 1999, rescinding Glass-Steagall.
Most of the debate in Congress about the new law was about privacy in
banking and priority lending to low- and middle-income borrowers.
Little or no discussion took place about adding hundreds of billions of
dollars of potential obligations onto the taxpayers to bail out the enormous
financial services corporations that this Bill encourages.
No discussion at all addressed the effect of the repeal to condition
bankers further to ignore the quality of loans.
The repeal of Glass-Steagall substantially adds to the “too big to
fail” rule; now, it is “the really too big to fail” rule.
By 2002, Citigroup had hired both Robert Rubin and Stanley Fisher, the
prime drivers behind the “liberalization of capital markets” while Rubin had
been Secretary of Treasury and Fisher was the top American at IMF.
Rubin became the chairman of Citigroup’s Executive Committee, and
Fisher became the vice chairman of the Board.
Rubin “earned” about $16 million in 2001 plus options, the year in
which Citigroup was a major source of the easy credit that allowed Enron to
happen, and the year that
Citigroup’s Smith Barney was successfully sued for misleading small investors.
Rubin
retired from government just weeks before Glass-Steagall was rescinded.
His move provoked a letter from a coalition including the Center for
Community Change, The Association of Community Organizations for Reform Now, The
Greenlining Institute, The New York Public Interest Research Group, and Ralph
Nader. The letter to the Office for
Government Ethics objected to Rubin’s move as “turnstile behavior with an
undeniable appearance of impropriety.” The coalition had fired its pop-gun;
the Wall Street lobby remained nuclear armed.
In 2000, ultra-capitalism capped its amazing political performance by
successfully passing the Commodities Futures Act.
Not satisfied with merely avoiding control of derivatives, this Act, with
heavy lobbying by Enron, further extended the use of borrowed money to
speculate. With this new law, Congress is effectively allowing speculators to
buy stock futures for 10 cents on the dollar. In 1933, the SEC reduced the
amount that
speculators could borrow from brokerage firms from 90% of the bet to 50%. The 2000 Commodities Futures Act effectively brings leverage opportunities back to 90%!
Derivatives:
The Climax of Ultra-Capitalism.
The
rise of ultra-capitalism traced in this chapter has climaxed in derivatives
whose daily trading dwarfs all commerce. These speculative ventures, free of
regulation, are traded in amounts and at a speed that threatens the free-market
system. Unprecedented violations of economic principles by derivative traders
may be examined according to the following three categories:
·
Disclosure: The use of derivatives makes examination of reported
earnings and balance-sheet values a futile effort. Earnings can be faked by
estimates of future values that are not subject to either regulation or
oversight. The total amount of
borrowed money reported on the balance sheet is also a fiction because of new
ways to hide debt. Derivatives
themselves are unregulated, but they also provide further opportunities to get
around existing regulations.
·
Integrity in Financial Reporting: Wall Street’s enormous capacity to
reward or punish companies for modest changes in quarterly earnings puts
pressure on many executives to make favorable judgments of future value in the
“mark-to-market” procedure. Self-serving and contradictory judgments are
made on values many years into the future by both parties to the trade but are
not reconciled, regulated, or audited.
·
Neutral Money: The free-market
theory of Adam Smith, classical economics, holds that money and
credit—liquidity—must be neutral in its effect on commerce. Too
little liquidity slows economic growth, too much liquidity encourages
speculation and overly risky projects. Derivatives significantly increase
liquidity without any control of where the money goes. Lacking control,
excessive money and credit always gravitate to speculation.
Mark-to-market procedures applied to derivatives can be contrasted to
standard accounting practice in which inventory is valued either by the cost
when produced or by the market value at the time the financial report is being
prepared, whichever is less. In other words, a mark-to-market procedure
has been used in traditional accounting, but it was designed to have a
conservative effect in reporting true value only. If ten widgets cost $100 when
they were produced, but declined in value and could be sold at the time of the
financial report for only $80, accounting rules require that the inventory be
“marked” to the “market” value of $80. The traditional double-entry
accounting rules would require a reduction in the inventory value of $200 and a
reduction of current earnings of $200, as well.
Then, when the company closes the books for the year and prepares the
annual report, the rules require that the outside auditors validate the
integrity of the reported figures. One of the many ways that they do this is by
going to various locations in the company actually to count and value widgets.
Contrast this conservative accounting practice to the wonderful world of
derivatives, in which beauty is in the eye of the beholder only, and the
“market” value can be “marked” at whatever level both parties to the
trading transaction independently feel they need as a way to meet profit
targets. No rules control these
judgments or reconcile contradictory forecasts, neither is there any audit to
confirm that the resulting profits are fairly stated.
This seemingly magic opportunity to fabricate profits by the
mark-to-market technique was generously employed by Enron at the end of each
quarter when their traders produced a report of earnings that would please Wall
Street by “cranking the dials.” This was Enron’s own expression for
effecting the appearance of greater profit by raising the estimate of
future value to be brought into current earnings (see chapter 9).
Ultra-capitalists treat “liquidity” as a
self-validating concept, like “integrity,” but whereas one cannot
have too much integrity, free markets work only if there is enough but not too
much money. Many times in our
economic history, we have suffered from liquidity problems because the
government did not properly “control currency and credit for the general
welfare.” Liquidity problems
became so repetitive during the latter part of the 19th
century that the Fed was established in 1913 in an attempt to eliminate them.
The private system could not
even provide the money that farmers needed to plant in the spring, pay their
bills for a few months, and then pay back their loans at harvest time in the
fall. The rigidities of the gold standard and mistakes by
Adam Smith made it clear that liquidity could be either good or
bad. If too much liquidity were
available to the “prodigals and projectors” with which to speculate and
engage in high-risk adventures, then it would be bad liquidity; if however,
liquidity were available to “sober people” to invest in economic growth, it
would be good (see chapter 6). In 1920, however, the Fed demonstrated that it
did not know the difference between bad and good liquidity when it overfed the
speculators and caused a boom/bust cycle. This, however, was just a warm-up for
the Fed’s repetition of the same act with the excessive liquidity that caused
both the Crash of ‘29 and the bubble economy of the 1990s.
Excessive liquidity—the bad kind—in each case can also be
described as easy credit from too willing bankers who allowed too much
leverage with too much borrowed money for speculation.
Excessive liquidity in each of these cases was followed by too little
liquidity when the bankers, after all of the bad loans they had made, tried to
put their balance-sheet reserves-to-loans-outstanding back into the shape
required by government regulation. This could also be called locking the barn
door after the horse has been stolen. In this process, bankers
limit the lending of money to credit-worthy companies just when the money is
most needed both by the companies and by the economy.
Brooksley Bonn, while head of the CFTC (Commodities Futures Trading
Commission), tried to get oversight of derivatives (see above page ### ),
but she was successfully resisted by senior government officials, including
the chairman of the Fed, Alan Greenspan, and the Secretary of Treasury, Robert
Rubin. They outmatched Ms Bonn with very clear positions on derivatives at the
Congressional hearings on the collapse of LTCM. Greenspan said: “Regulation of
derivatives transactions that are privately negotiated by professionals is
unnecessary” Rubin added: “ New rules or regulatory oversight on derivatives
could increase legal uncertainty in a thriving global market place.”[78]
Greenspan, Rubin, and others who have mistakenly translated Adam Smith
and usurped free market principles for the benefit of financial services, have
done enormous damage to the world’s economy by believing and promoting the
concepts that there can be neither too much deregulation nor too much
liquidity. One of their defenses
against regulation of hedge funds and derivatives is that such regulation would
simply drive the hedge funds out of the country. This
suggestion, instead, reminds us that the rules must be international which is
presumably the mission of the BIS (Bank for International Settlement), based in
The derivatives threat to the free market can be neutralized by the
government’s giving the same type of oversight and regulation to the
derivative market that they give to banks, the stock market, and the commodities
market. New rules will follow from this oversight that will place necessary
controls on faking profits from future estimates, require reports of significant
changes in reserves to reflect risk, and call for new types and levels of
disclosure from banks and hedge funds alike. Appropriate changes in tax policy
will curb speculation by means of transaction taxes and additional taxation of
short-term gains. With
Robert
Rubin, have actually opposed efforts by other countries to write rules
that could purge volatility and bring monetary stability (see above, p. ###).
An Economist, Religious Leader, Famous Speculator, and Respected Investor Warn
of the Threat from Ultra-capitalism
Two distinct groups have called
attention to the corruptions of ultra-capitalism with its devastating effect on
economic growth and social cohesion. One group is made up of wise, concerned
citizens of the world who represent different parts of the culture, including
economists, religious leaders, socially sensitive speculators, and investors.
The other group numbers in the tens of thousands of protestors and
demonstrators who regularly take up their placards and shout their slogans at
meetings of the WTO, the World Bank, and IMF. Unfortunately, the two groups are
not well integrated. The protestors waste democratic power by spending more time
training in how to conduct street confrontations with the police than they
appear to spend studying the wisdom of the other group. The twenty-first century
will be another one of folly and violence, unless these groups learn how
to couple wisdom and protest in effective reform.
The Economist: Judy Shelton
warned in
1994 about the threat
from instabilities in the international monetary system to the new opportunities
for world economic growth. An
economist at the Hoover Institute, at that time,
At a time when the transition to a post-communist world holds out the
prospect for an international marketplace of free trade and entrepreneurial
initiative, offering new levels of economic prosperity for a growing number of
participants, the lack of an orderly global currency system threatens to destroy
the vision. The international
monetary system currently in existence is no system at all.…
Global
currency arrangements have deteriorated into a high-stakes poker game where the
exchange rates are determined on the basis of the latest bluff between
government officials and speculators.[79]
The Religious Leader: In 1991, Pope
John Paul II, in his
encyclical, Centesimus Annus, addressed the question of how to attain a
just and comfortable society. Speaking
from outside the commercial sphere, the leader of the world’s Catholics
explicitly recommended
stable money, patient capital, and control of speculators. The Pope preached his
gospel of economic integrity as follows:
Economic activity, especially the activity of a market economy, cannot be
conducted in an institutional, juridical or political vacuum.
On the contrary, it presupposes sure guarantees of individual freedom and
private property, as well as a stable currency and efficient public services.
Hence the principle task of the state is to guarantee this security, so
that those who work and produce can enjoy the fruits of their labours and thus
feel encouraged to work efficiently and honestly.
The absence of stability, together with the corruption of public
officials and the spread of improper sources of growing rich and of easy profits
deriving from illegal or purely speculative activities, constitutes one of the
chief obstacles to development and to the economic order.[80]
Without using the expression, the Pope specifically warned about the
dominance of ultra-capitalism:
In this sense, it is right to speak of a struggle against an economic
system, if the latter is understood as a method of upholding the absolute
predominance of capital, the possession of the means of production and of the
land, in contrast to the free and personal nature of human work.
In the struggle against such a system, what is being proposed as an
alternative is not the socialist system, which in fact turns out to be State
capitalism, but rather a society of free work, of enterprise, and of
participation. Such a society is not
directed against the market, but demands that the market be appropriately
controlled by the forces of society and by the state, so as to guarantee that
the basic needs of the whole of society are satisfied.[81]
In so saying, the Pope pronounced a blessing on democratic capitalism;
every point he made parallels the theory and practice of democratized
capitalism.
The Famous
Speculator:
The old adage,
“Ask the man who owns one,” pertains here to our understanding of the
effects of ultra-capitalism on social progress. George
Soros’s credentials as a successful speculator lend
credibility to his warnings about the
dangerous instabilities in finance capitalism,
and his largesse as a concerned philanthropist make him equally convincing in
his commitment to improving lives through an open society.[82]
The
speculator side of Soros became famous in 1992, when he bet on the German mark
and shorted the British pound. The
British government used a good part of its national piggy-bank trying to defend
the pound, but
the British were forced
to give up. “Mr. Soros closed out
his bet, netting his funds $1 billion, plus another $1 billion on related
investments.”[83]
The philanthropic side of Soros made him famous for recycling billions to
help Eastern European countries, including his homeland,
Soros’s warnings
started with an article in the Atlantic Monthly in 1997,
were repeated
in another
article[85] and
a book in 1998. His
record proves that
he understands the system; we ought, therefore, to listen to his advice:
·
An open
government is the opposite of totalitarian government, but it can also be
threatened by lack of government in selected areas and a lack of social
cohesion.[86]
·
Without
supervision, the international financial system will not follow the
supply/demand equation and return to equilibrium.[87]
·
Global capitalism
as now practiced results in uneven distribution of benefits.
·
The burden of
taxation has shifted from capital to citizens.[88]
(In 1934, income taxes were .7% of GDP, in 1992 7.8%, and in 2000 close
to 10%.)[89]
·
Unemployment, and
other social dislocations caused by global capitalism “increases the demands
on the state to provide social insurance while reducing its ability to do so.”[90]
·
Every financial
crisis is preceded by an enormous expansion of credit.[91]
·
The conventional defense against
better derivatives disclosure by bankers is faulty because the
financial risk to banks from derivatives is not eliminated by cash transfers on
any difference between cost and market, as was demonstrated in the Russian
collapse: “Banks remained on the
hook to their own clients. No way
was found to offset the obligations of one bank against those of another.
Many hedge funds and other speculative accounts sustained large enough
losses that they had to be liquidated.”[92]
·
Society
needs a common ideology to sustain itself. Global
capitalism reduces everything to commodities, a buy/sell equation.
The development of a global society has lagged behind the growth of a
global economy. Unless the gap is
closed, the global capitalist system will not survive.
“After the collapse of the Soviet system in 1989, open society
with its emphasis on freedom,
democracy, and the rule of law, lost much of its appeal as an organizing
principle and global capitalism emerged triumphant.”[93]
·
There is no
international regulatory authority for financial markets, and there is not
enough international cooperation for the taxation of capital.
“The burden of taxation has shifted from capital to the citizens.”[94]
·
Since 1971 when
the dollar was floated, the single international currency in the form of
convertible dollars backed by gold has been replaced with three major
currencies, the dollar, the euro, and the yen.
They are “rubbing against each other like tectonic plates, often
creating earthquakes, crushing minor currencies in the process.”[95]
·
The belief in
unsupervised financial markets or “market fundamentalism is today a greater
threat to open society than any totalitarian ideology.”[96]
·
The
·
“The
deficiencies of the political process have become much more acute since the
economy has become truly global.”[98]
·
“The
institutions of representative democracy have become endangered, and civil
virtue, once lost, is difficult to recapture.”[99]
·
“In a
transactional market, as distinct from a market built on relationships, morality
can become an encumbrance.”[100]
·
Stability cannot
be achieved by market participants alone; preserving stability must become an
objective of public policy.[101]
Soros’s solutions all depend on moral
and economic leadership by the
The
Respected Investor:
Warren Buffet is the world’s best-known investor. Thousands of happy
shareholders make the trip to
In his 2002
report to his shareholders, Buffet began with his usual straight talk, saying
that he and his partner, Charlie Munger, “are of one mind in how we feel about
derivatives and the trading activities that go with them. We view them as time
bombs, both for the parties that deal in them and the economic system.”[102]
Buffet explained to his shareholders why he and his partner were shutting
down the derivatives business in their insurance company. He went on to warn of
the systemic danger posed by derivatives.
Buffet’s letter was released on the website of Berkshire Hathaway on
The Wall Street Journal article describes
Buffet as “grumpy” because his insurance company was not doing well. The
WSJ featured in bold print: “Every great investor makes an occasional
mistake.” The article calls attention to a decline in the value of Buffet’s
stock to $60,000 that was “once worth more than $80,000;” it does not
mention, however, that the stock had been at about $40,000 a little over a year
earlier and as low as $11,450 ten years previously. The article concludes with
the observation that Buffet “is not only shooting the messenger, he’s also
blaming the gun.” Instead of grappling with the critical examination of the
macroeconomic effects of derivatives proposed by Buffet, The WSJ article
is patronizing and superficial. Calling
derivatives “little miracles of financial engineering,” The WSJ makes
these points:
·
Derivatives
allow investors to shift and manage risk.
·
Through this
risk management, derivatives add to liquidity.
·
By spreading
risk, derivatives reduce the possibility of failure at one or more major
institutions.
These are the standard microeconomic defenses of
derivatives used by ultra-capitalists, including Fed Chairman Greenspan, to beat
back efforts to get government regulation and oversight of derivatives even
after disasters such as LTCM. In a
puzzling way, however, The WSJ then proceeds to contradict itself by
stating agreement with some of Buffet’s most important points:
·
“Investors
can’t get a clear picture of potential dangers because disclosure remains
inadequate.”
·
“Accounting
for derivatives is a mug’s game. Valuing derivatives on a mark-to-market basis
can be an exercise in fantasy. The result is inflated earnings.”
·
“Limited
and fanciful disclosure can also mask the possibility that risk, rather than
being widely dispersed, has actually migrated to one or two sectors-insurance
and pension funds come to mind-or even a few companies.”
If one were to read these points while blocking out
the earlier, cheap shots at Buffet, one would conclude that The WSJ
editorialist agreed with Buffet that a marauding monster is out there and we’d
better run, not walk, to get control of it by the end of the article however,
The WSJ describes these problems as merely needing
“scrutiny.” One must ask,
however, “scrutiny” by whom and for what purpose? Is this, after all, a
recommendation for government regulation and oversight of derivatives?
This difference of opinion between Buffet and The WSJ, which represents the view of Wall Street, is a special opportunity to examine the conflict in capitalism between democratic capitalism and ultra-capitalism. Ultra-capitalism demonstrates in this case the determination to deregulate financial services and oppose any regulation of new financial instruments such as derivatives. This is the fundamental error that shapes government policy but contradicts the capitalism of Adam Smith and classical economics. As George Soros and others emphasize, the financial markets will not find equilibrium without monetary and fiscal controls. Ultra-capitalism now has such power over our government, and reformers are so limited in their understanding of this subject, that the specific points made by both Buffet and Soros need to serve as a study agenda. Unless enough citizens are educated and aroused on these matters, Wall Street will continue to lobby self-serving policies, and the politicians will make them law. Warren Buffet’s main points are as follows:
·
“Reinsurance
and derivatives both generate reported earnings that are often widely overstated
because today’s earnings are in a significant way based on estimates whose
inaccuracy may not be exposed for many years.”
·
“Derivatives
are usually paid on ‘earnings’ calculated by mark-to-market accounting. But
there is often no real market and ‘ mark-to-model’ is utilized.
This substitution can bring on large-scale mischief.” Profits
should not be reported and bonuses paid on self-serving guesses.
·
Enron
demonstrated in the energy markets how to use derivatives and trading to hype
earnings, “until the roof fell in when they actually tried to convert the
derivative-related receivables on their balance sheet into cash.
‘Mark-to-market’ then turned out to be truly ‘mark-to-myth.’”
·
“Marking
errors in the derivatives business have not been symmetrical. Almost invariably,
they have favored either the trader who was eyeing a multimillion-dollar bonus
or the CEO who wanted to report impressive earnings (or both). The bonuses were
paid, and the CEO profited from his options. Only much later did shareholders
learn that the reported earnings were a sham.”
·
“Derivatives
exacerbate trouble that a corporation has run into for completely unrelated
reasons. This pile-on effect occurs because many derivatives contracts require
that a company suffering a credit downgrade immediately supply collateral to
counter parties.” By “counter
party” Buffet means the person on the other side of the particular trade.
(Think Enron).
·
“Derivatives
create a daisy-chain risk. A participant may believe his large credit exposures
to be diversified and therefore not dangerous. Under certain circumstances,
though, an exogenous event that causes the receivable from Company A to go bad
will also affect those from Companies B through Z.” (Think LTCM and the
Russian default on their bonds).
·
“In
banking, the ‘linkage’ problem was one of the reasons for the formation of
the Federal Reserve System. Before the Fed was established, the failure of weak
banks would sometimes put sudden and unanticipated liquidity demands on
previously strong banks, causing them to fail in turn. But there is no central
bank assigned the job of preventing the dominoes toppling in insurance or
derivatives.”
·
“Large
amounts of risk, particularly credit risk, have become concentrated in the hands
of relatively few derivatives dealers.”
(Think CITI’s lending money to Enron for their misadventures, then protecting
themselves with credit insurance).
·
LTCM used
100% leverage, that is, none of their own money, in total-return swaps, agreeing
to accept the banks’ future gain or loss on the stock or other instrument.
“Total return swaps make a joke out of margin requirements.”
·
“Derivatives
severely curtail the ability of regulators to curb leverage and generally get
their arms around the risk profiles of banks, insurers, and other financial
institutions.”[104]
Buffet may have the luxury of abandoning derivatives, but the rest of the
commercial world does not have such luck. Derivatives
did not exist in any size before 1987, they grew to about $10 trillion in 1994,
$20 trillion in ‘96, almost $40 trillion in ‘98,[105] and
then, in 2002, according to a Business Week article: “The International
Swaps & Derivatives Association estimated the worldwide market at $105
trillion. The Office of the Comptroller of the Currency says
By considering the earlier warnings from economist
Citizens’
Choice: Peace and Plenty or Folly and Violence?
After World War II,
the parts of the world that adopted economic freedom as the engine for progress
improved the lives of hundreds of millions of people. In the 1990s, after the
demise of Communism, more countries moved from tyranny to freedom, further
validating the power of economic freedom to improve lives.
During the 1990s, however, the corruptions of ultra-capitalism slowed the
world’s economic momentum and in many countries reversed it.
Joseph Stiglitz, the 2001 Nobel Prize winner in Economic Science,
summarized the record:
A growing divide between the haves
and have-nots has left increasing numbers in the
Our
failure in economic leadership began in the 1960s: For half-a-century, each
American President, whether Republican or Democrat, has made
enormous mistakes in economic policy that have pushed the world toward the
excesses of ultra-capitalism.
President Johnson’s deficit spending in his “Guns and Butter”
program initiated large inflation; President Nixon floated the dollar and
initiated the excessive volatility that made the speculators more powerful than
the central bankers; President Ford signed ERISA into law, causing the excessive
liquidity that allowed Wall Street to dominate commerce; during Ford’s
presidency, Fed chairman, Paul Volcker fixed Johnson’s mistake by taking
interest rates up as high as 20%, with the unintended consequence of destroying
the positive momentum in many emerging economies as well as undermining the
domestic S&L industry; President Reagan added to the excessive volatility
and liquidity caused by his predecessors, and he reinforced the “Great
American Inversion” by deregulating finance
capitalism at the same time that market disciplines were suspended; also during
the Reagan Administration, taxes were moved from capital to wage earners;
President Bush, the elder, trying to balance trade by changing the relationship
of the dollar and yen, contributed to the Japanese bubble economy and the
funding of overcapacity in Southeast Asia; President Clinton completed the
damage by jawboning emerging economies into taking down their cross-border
capital controls. This new mistake, combined with the excessive volatility,
excessive liquidity, deregulation, and suspension of market disciplines caused
by
In this book, I offer an alternative: The agents of change—democratic capitalists, universities, institutional investors, religions, unions, new politicians, and citizens individually and in groups—have a responsibility more urgent than ever before to reform the economic system by purging the corruptions of ultra-capitalism and adopting democratic capitalism. Only a rising standard of living throughout the world accomplished through democratic capitalism can neutralize the fanatics and stop the reciprocal atrocities.
[1]
Kevin Phillips, Arrogant Capital
(New York: Little Brown and Co.,
1994), p. 99.
[2]
George Soros, The Crisis of Global
Capitalism (New York: BBS Public Affairs, 1998), p. xxi.
[3]
Ibid., p. 136.
[4]
A series with contributions from ten correspondents in eight countries,
“In an Entwined World Market, No Man (or Nation) Is An Island,” The
New York Times, February 17-18, 1999, p. A8.
[5]
Deuteronomy 23:20.
[6]
Matthew 6:24.
[7]
Ecclesiastes 31:5.
[8]
Jacques LeGoff, Your Money or Your
Life: Economy and Religion in the Middle Ages (New York: Zone Books,
1988; published in France, 1986), pp. 24-25.
[9]
Loc. cit.
[10]
Loc. cit.
[11]
Dante, The Inferno, John Ciardi,
trans. (New York: Mentor Press, 1954), pp. 106-7.
[12]
P. H. Kelley, ed., Locke on Money
(New York: Oxford University Press, 1991), p. 34.
[13]
Ibid.,
p. 241.
[14]
Charles Sellers, The Market
Revolution: Jacksonian America 1815-1846 (New York: Oxford University
Press, 1991), p. 46.
[15]
George Seligman, The Theory of Free
Banking (Totowa, New Jersey: Rowan and Littlefield, co-published with
the Cato Institute, 1988), p. 7.
[16]
Sellers, op. cit., p. 62.
[17]
Ibid., p. 54
[18]
Ibid., pp. 119-122. Taylor was in
Congress during Jefferson's Administration and later in Madison's.
He published An Inquiry into
the Principles and Policies of the United States.
See Eugene T. Mudge, The Social
Philosophy of John Taylor of Carolina (New York: AMS Press, 1968).
[19]
Ibid., pp. 345-347.
[20]
Ludwig von Mises, The Theory of Money
and Credit (Indianapolis, Indiana: Liberty Classics, 1980; first
published in Austria, 1912), p. 498.
[21]
Lawrence Goodwyn, Democratic Promise:
The Populist Moment in America (New York: Oxford University Press,
1976), Introduction, p. xvii.
[22]
Seligman, op. cit., p. 14.
[23]
Roger Lowenstein, When Genius Failed:
The Rise and Fall of Long-Term Capital Management (New York: Random
House, 2000), p. 85.
[24]
John Maynard Keynes, The General
Theory of Employment, Interest and Money (New York: Harvest/HBJ Book,
1964; first published in London, 1936), p. 159.
[25]
Joel Kurtzman, The Death of Money: How
the Electronic Economy Has Destabilized the World's Markets and Created
Financial Chaos (New York: Simon & Schuster, 1993), pp. 50-51.
[26]
Ibid., p. 50.
[27]
Ibid., p. 136.
[28]
Phillips, op. cit., p. 98.
[29]
Kevin Phillips, Boiling Point:
Republicans, Democrats, and the Decline of Middle-Class Prosperity (New
York: Random House, 1993), pp.
32-3.
[30]
Jack Welch with John A. Byrne, Jack: Straight from the Gut (New York: Warner Business Books, 2001),
pp. 234-5.
[31]
Steven Solomon, The Confidence Game:
How Unelected Central Bankers Are Governing the Changed Global Economy
(New York: Simon & Schuster, 1995), p. 144.
[32]
Ibid., p. 145.
[33]
Loc. cit.
[34]
Stephen Pizzo, Mary Fricker, and Paul Muolo,
Inside Job: The Looting of America's Savings and Loans (New York:
McGraw-Hill, 1989), p. 325.
[35]
William Greider, Secrets of the
Temple: How the Federal Reserve Board Runs the Country (New York: Simon
& Schuster, 1987), p. 631.
[36]
Ibid., p. 498.
[37]
Martin Lipton, “Corporate Governance in the Age of Finance Corporatism,”
The University of Pennsylvania Law
Review, volume 136, number 1, November, 1987.
[38]
Eamonn Fingleton, In Praise of Hard
Industries: Why Manufacturing, Not the Information Economy, Is the Key to
Future Prosperity (New York: Houghton Mifflin Company, 1999), p. 7.
[39]
Carol J. Loomis, “The Risk That Won't Go Away, Like Alligators in a Swamp,
Derivatives Lurk in the Global Economy. Even the CEOs of Companies that Use
Them Don’t Understand Them,” Fortune, March 7, 1994, p. 40.
[40]
Kurtzman, op. cit., p. 128.
[41]
Lowenstein, op. cit., pp. 103-4.
[42]
Ibid., pp. 105-106.
[43]
Ibid., p.106.
[44]
Solomon, op. cit., pp. 32-3.
[45]
Al Ehrbar, “The Great Bond Market Massacre, A Perilous Rise in
Leverage,” Fortune, October 17,
1994, p. 77.
[46]
Henry Kissinger, Does America Need a
Foreign Policy? (New York:
Simon & Schuster, 2001), p. 226.
[47]
Paul Blustein, The Chastening: Inside
the Crisis that Rocked the Global Financial System and Humbled the IMF
(New York: Public Affairs, 2001), p. 90.
[48]
Ibid., p. 89.
[49]
Joseph E. Stiglitz, Globalization and
Its Discontents (New York:
W. W. Norton, 2002), p. 99.
[50]
Ibid., p. 207.
[51]
Ibid., p. 93.
[52]
Cokie Roberts, on “Sunday Morning News,” ABC, October 7, 2001.
[53]
Blustein, op. cit., p. 264.
[54]
Fareed Zakaria, “Lousy Advice Has a Price,” Newsweek,
September 27, 1989, p. 40.
[55]
“Robbing Russia,” The
Nation, October 4, 1999, p. 4.
[56]
Ibid., p. 5.
[57]
Loc. cit.
[58]
Stephen F. Cohen, Failed Crusade:
America and the Tragedy of Post-Communist Russia (New York: W. W.
Norton & Company, 2000), p. 32.
[59]
Ibid., p. 9.
[60]
“Robbing Russia,” loc. cit.
[61]
Zakaria, op. cit., p. 40.
[62]
Subtitle to Roger Lowenstein's When Genius Failed,
op. cit.
[63]
Robert Lenzer, “Archimedes on Wall Street,” Forbes,
October 19, 1998, p. 53.
[64]
“Excerpts from Greenspan's Remarks before Congress,” The
New York Times, October 2, 1998, p. C3.
[65]
Lowenstein, op. cit., p. 178.
[66]
Ibid., p. 231.
[67]
Editorial, “Who's Watching the Hedge Funds?” Business
Week, November 9, 1998, p. 186.
[68]
“Fed Chief Defends U.S. Role in Saving Giant Hedge Fund,” The
New York Times, September 25, 1998, p. C3.
[69]
Lowenstein, op. cit., p. 236.
[70]
Simon Romero, “The Rise and Fall of Richard Scrushy, Entrepreneur,” The
Wall Street Journal, March 21, 2003, p. C4.
[71]
Jonathan Weil, “Moving Target,” The Wall Street Journal, August 21, 2001, p.1.
[72]
Loc. cit.
[73]
Kevin Phillips, Wealth and Democracy
(New York: Broadway Books, 2002), p. 155.
[74]
http://www.reedweb.org/iirp/factsheet.htm
[75]
Jane Perlez, “At Trade Forum, Clinton Pleads for the Poor,” The
New York Times, January 31, 2000, p. 8.
[76]
Robert L. Borosage, “The Global Turning,” The
Nation, July 19, 1999, p. 20.
[77]
Michael Schroeder, “New Derivatives Regulation Is Opposed,”
The Wall Street Journal, November 10, 1999, p. C1.
[78]
David Barboza and Jeff Gerth, “On Regulating Derivatives, Long-Term
Capital Bailout Prompts Calls for Action, ” The New York Times, December 15, 1998, p. C1.
[79]
Judy Shelton, Money Meltdown,
Restoring Order to the Global Currency System (New York: The Free Press,
1994), pp. 103-4.
[80]
Pope John Paul II, Centesimus Annus
(May 1, 1991) (Washington, D.C.: United States Catholic Conference,
publication No. 436-8), pp. 72-93.
[81]
Ibid., p. 68.
[82]
George Soros, The Crisis of Global
Capitalism: Open Society Endangered (New York: BBS- Public Affairs/Perseus
Books Group, 1998).
[83]
Mitchell Pacelle, “Breaking the Bank,” The Wall Street Journal, December 13, 1999, p. C1.
[84]
Douglas Waller, “Soros to the Rescue Again,” Time,
November 3, 1997, p. 74.
[85]
George Soros, “Toward a Global Open Society,” Atlantic
Monthly, January 1998, p. 20.
[86]
Soros, Crisis, op.
cit., p. x.
[87]
Ibid., pp. xvi-xvii, xx.
[88]
Ibid., p.112.
[89]
Peter Brinelow, “Income Greed: Personal Incomes Are Rising, Washington's
Take Is Rising Faster,” Forbes,
October 16, 2000, p. 126.
[90]
Soros, Toward a Global Open Society,
op. cit., p. 24.
[91]
Soros, Crisis, op.
cit., p. 122.
[92]
Ibid., xiii.
[93]
Ibid., p. xxii.
[94]
Ibid., p. 112.
[95]
Ibid., p. xxi.
[96]
Ibid., p. xxii.
[97]
Ibid., p. xxix.
[98]
Ibid., p. 199.
[99]
Ibid., p. 200.
[100]
Ibid., p. 199.
[101]
Ibid., p. 58.
[102]
Warren Buffet, “Avoiding a Mega-Catastrophe,” Fortune,
March 17, 2003, p. 82
[103]
Editorial, “Derivative Thinking,” The Wall Street Journal, March 11, 2003, p. A14.
[104]
Buffet, op. cit., p.82.
[105]
Barboza and Gerth, loc. cit.
[106]
Peter Coy, Business Week, March
31, 2003, p. 90.
[107]
Stiglitz, op.cit., p. 5.