WAY BEYOND MONKEY BUSINESS: Financialization and the Destruction of the US Economy

In one of those great New Yorker cartoons a tattered businessman is sitting with unkempt kids around a post-apocalyptic campfire, and he tells them: “Yes, the planet was destroyed, but for a beautiful moment in time we created a lot of value for shareholders”. The notion of shareholder primacy (originally conceived by leading neoliberal and father on Monetary Theory, Milton Friedman) has now been called “the dumbest idea in the world” by Jack Welch (former CEO of GE) who followed its precepts to the near destruction of his firm. Even the scholar most responsible for its intellectual canonization, Michael C. Jensen, eventually published a mea culpa. At a recent meeting of the “the masters of the universe” at Davos, it was declared DOA. Unfortunately, rumors of its demise are gravely overstated, and the era of corporate mismanagement is far from over. Plus, focusing on a few bad apples in the barrel of managerial philosophy is classical gaslighting. In fact, this particular manifestation of managerial myopia, even if corrected, is merely one tiny tip of a multi-peaked iceberg. Beneath the surface are financial and cultural distortions on a galactic scale. Essentially, we took an economy capable of generating relatively widespread prosperity and turned it into an immense rat’s nest of phantom wealth and unprecedented predation. Famed economist, John Maynard Keynes, once said that progressive and productive economies would “euthanize rentiers” (those who extract rather than add value), but it is they who have euthanized the rest of us.

From Bad Management to Really Bad Banking

The sources of our parasitic economy are manifold, and go far back into our history. Slavery, for example, had many long term and significant retarding effects upon the shape and character of our economy. Equally significant were our early battles with money and banking institutions (especially central banking cartels). This contentious relationship has given way to complete capitulation, and now “shadow bankers” (venture and hedge funds and private equity firms) call the shots. Harvard Professor, Joseph Schumpeter (of “Creative Destruction” fame) observed that periods of productive credit expansion, are followed by a “second of unproductive wave”. This second wave can be extremely protracted in nations experiencing the twilight of their empires. With the deregulation and public backstopping of hyper-speculation, financial chicanery became the raison d’état the US economy. Using the Pandemic as cover, the US Treasury and the Federal Reserve has now expanded their mandates to include bailing out hedge and private (pirate) equity funds as well as individual non-bank firms.

Another major misalignment of vital resources came with the perpetual mobilization via the “Military-Industrial (and Surveillance)-Complex”, not to mention tying the fate of a nation to permanently cheap fossil fuels. Can you imagine how many alternatively fueled vehicles would be on the roads if we had paid the price at the pump for our many military misadventures (against enemies real and contrived). However, as we passed the peak on cheap fossil fuels, financial fakery and arms merchanting stepped in to fill the void. If the US were not the primary provider of weapon systems to the world, we would have very little industry at all.

The paucity of productive activity matters little when firms merely become platforms for financial fleecing. Toward the end last century (1993) two prominent economists (George Akerloff and Paul Romer) discovered a fatal flaw in business financial systems that they aptly labeled “looting” (lucrative incentives for executives to pillage their own firms). Beyond merely cooking the books to fool investors, they also focus on bankruptcy for fun and profit. After stealing from suppliers and employee pensions funds for decades, they could take the firm into chapter 11, to abrogate contracts and jettison obligations. Oddly enough golden parachutes for top management remained intact. It was once illegal to buy back one’s stock, but in the era of Shareholder Primacy, debt loading to jack up one’s stock price was a major business model. Moreover, with arrival almost free money, firms could load-up on debt, collude with corporate raiders, pay exorbinant takeover fees and executive bonuses, and then push otherwise productive firms over of edge.

Follow the Money

Hyper-finalization has been a major problem for the US in the past. Bubbles & crashes and banker induced “panics” (recessions bordering on depressions) occurred at fairly regular intervals. In my own book, Serfs Up: Ruminations on the Political Economy of Our Time, I detail how banking has always more than a bit dodgy, however in recent years, having acquired what Warren Buffet calls, “weapons of financial mass destruction” (i.e. derivatives to the tune of nearly a quadrillion dollars), the destruction is pretty much assured. As financial shenanigans were put on steroids, the canyon between the “real” workaday and the phony financial economy grew wider and deeper. Since money comes into being as debt, as well as leveraged bets the debts will not be paid, the ability to create money literally “out of thin air” meant Wall Street and Main Street need never meet. A real economy becomes superfluous.

Initially the capture of the economics profession by a small cult of misguided and mislabeled (neoliberals) zealots provided an intellectual smokescreen for the complete dismantling of New Deal labor relations, anti-trust provisions, and financial safeguards. Yet, the watershed point came via a series of curious events, which Former UN economic development executive, and managing editor of the Harvard Business Review, Joel Kurtzman, labeled The Death of Money. These events included:

v Nixon’s unilateral abandonment of the post-war global financial arrangements (Bretton Woods) and elimination the Gold Standard, as well as opening up China for US investment and trade;

v Computational advances and the complete digitalizing of currencies, as well as relaxing restrictions on global capital flows;

v Deregulations enhancing the climate for mergers and acquisitions and increased use of degraded and “junk bonds”, as well as explosive growth in Hedge, Private Equity, and Venture Capital firms; and,

v Vast expansions of fictitious wealth generation via changes in securitization standards and use of increasing complex derivatives, as well as growth in phantom collateral.

Kurtzman warned that “megabyte money” (generated at will by public and private entities) would amplify financial instabilities to catastrophic levels. It would also accelerate off-shoring and engender firm valuations completely divorced from any realistic metrics or proven management practices. It noteworthy that, as his predictions became the playbook for economy, he switched sides and ended his career in the cave of the “Junk Bond King” at the Milken Institute. Apparently, he concluded that participation in planetary Ponzi schemes is better than no economy at all, until it’s not.

From Insatiable Rentiers to Super-Saboteurs

The term sabotage is derived from the French (wooden shoe) and refers to the dragging one’s feet. While we might think of terrorists, it clearly implies an inside job. In their recent book, Sabotage: The Hidden Nature of Finance, Anastasia Nesvetailova and Ronen Palan, put their finger on the nexus of our continuing financial crisis, that came to public attention in the “Great Recession of 2008”. Of course, it was far from beginning or ending in that year. They evoke, as well as invoke, my all-time favorite economist, Thorsten Veblen (1857–1929), the oracle of a previous Gilded Age. However, I must admit his several books, while not mathematical, use archaic and euphonious prose that make for a difficult slog. Fortunately, Ken McCormick made him more accessible via his Veblen in Plain English. He has many prescient insights into our current predicament (from malignant militarism and authoritarian dangers to “conspicuous consumption” and the “predatory instinct”). Furthermore, as the father of “evolutionary economics” his critique of the prevailing devices of static equilibrium and myopic marginal utility remain salient, not to mention his focus upon institutions and technologies.

In addition to exposing the motives and methods of the rentier (“leisure”) class, Veblen established a dichotomy between industry (and the “engineering mentality”) on the one hand and business on the other. For him business was more subterfuge and collusion, while engineering was more about innovation and productivity. He contended that the primary aim of business and their financial co-conspirators is to sabotage transparent and competitive markets (including labor markets) to consolidate monopoly power and extract inordinate profits.

Nesvetailova and Palan explain how the tools of “sabotage” have become finely honed, once again, and on a scale that puts the “money trusts” of the Gilded Age to shame. They explain how neoliberal economic mythology, which maintains that money and banking are merely neutral intermediation between savers and borrowers, is not only a crock, it is willful malpractice. Moreover, according to our authors, the advent of TBTF (too big to fail) banking, if pure sabotage. What does it say about the “free-market fundamentalism” of the neoliberals that certain size banks, no matter how reckless and/or negligent they might be, will not be allowed to fail? Wait it gets worse, the pandemic is being used to justify including completely unregulated, excessively reckless, and hyper-leveraged non-banks under the blanket of tax payer protections?

You might ask why would and bankers undermine themselves and other corporate enterprises? It seems counterintuitive because most of us failed to recognize that banking had returned to its Gilded Age preoccupations. It has been driven by the investment side ever since the New Deal firewall to the commercial side (e.g. Glass-Steagall Act) was blown-up by Bill Clinton. Investment banks have clients and customers, and their business is to find customers for any ill-collateralized crap their clients want to sell. How else could one explain how our local bankers totally forgot the basics banking when they were issuing NINJA (no income, no job, no asset) or liar loans? Moreover, most people are still unaware that the mortgaged-backed security crisis began with the securities that clients wanted to hawk to hapless investors, as well as credit default derivatives to the less hapless. Next “quants” were commissioned to simulate a particular pattern of tranches to fool the rating agencies into a AAA. Some fools, however, needed additional cajoling (or brides). Only then would the marching orders go out to armies of loan officers (more than a few were my 19-year-old undergraduates) to find anyone who could fog a mirror, not to mention grandmothers with little life and loads of equity, and put them into unpayable debts. In the end the banks banked their fees coming and going as well getting paid twice via government loan insurance and the sale of the properties to private (pirate) equity funds. Some firms like Blackstone, came to places like Phoenix, Arizona and bought a billion-dollars-worth of homes, turned them all into rentals, and sold the securitized rental stream virtually overnight. It was greatest land grab since days of the conquistadors. These self-same villains (e.g. Tom Barrack, Steve Mnuchin, Wilbur Ross, and Steve Schwarzman) from the bestseller on the housing crisis, Homewreckers, are now directing Trump’s pre-emptive pandemic bailouts. No surprise that the public largesse is pouring into private equity, not to mention zombie firms with one foot in the grave long prior to the onset of the virus. Meanwhile the Federal Reserve (actually a private banking cartel), is allowing you and your great grandchildren to underwrite the ensuing mess (including aid to foreign banks and non-bank firms, alike).

Early in the new millennium I gave a talk to a group of Canadian corporate lawyers, ostensibly to explain the Sarbanes-Oxley Act (affectionally called SOX). Recall it came about when major accounting firms suddenly forgot how to do accounting, resulting in a wave of the famous corporate frauds in the run up to 9–11. I soon made their eyes gloss over when I attempted to unravel the financial sleight-of-hand embedded in such items as the Gaussian copula. I ended up by suggesting that what we really needed was BOX (sox for bankers). And we still do. Resurrecting Glass-Steagall would be a good start. Much bigger (converging on 100%) reserves might be another. Plus, regionalizing or nationalizing several banks to serve like public utilities could work as well. Instead, however, the banks have nationalized all of us and we will soon be unwilling captives of the more zombie firms and shadow bankers as well.

Gregory A. Daneke, Professor Emeritus, School of Business, Arizona State. Other teaching posts: Michigan & Stanford. Gov. service: GAO, DOE, and White House.

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