Banker Power Trumping Democratic Power: The Crisis on Two Continents

We live in troubled and ironic times. The times are certainly troubled. The IMF's Managing Director has recently spoken with some justification of a looming "lost decade" for the global economy -- warning of "dark clouds" blocking the capacity of the world's leading economies to deliver a renewed bout of economic growth and generalized prosperity. The times are also deeply ironic: since the governing solution to those dark clouds -- in countries as substantial as Italy and Greece, and in institutions as powerful as the IMF -- would currently appear to be the replacement of elected leaders by appointed technocrats. The solution favored by the powerful is the transfer of state authority from democratically chosen leaders to governors drawn predominantly from the ranks of the very bankers whose inadequate supervision of their own industry darkened the skies in the first place. In this manner, a global financial crisis that initially discredited bankers has incrementally morphed into one to be settled on terms directly specified by bankers themselves. A crisis of economics has been turned into a crisis of democracy. It is an outrage.

The only thing challenging that morphing is the explosion of popular protest which has accompanied it. In key cities in Europe now, the battle lines are being drawn between the technocrats in the ministries and the protesters on the streets. In key cities in the United States, similar lines exist between those who control Wall Street and those who occupy it. If the next decade is not to be lost, it is absolutely vital that, in the clash between money and the people, the people win.

But will they? Only if, inspired by the occupation of Wall Street, a wider political constituency in the United States comes to recognize the force of four truths that the conservative media work endlessly to deny.

1.It was behavior by key privately-owned financial institutions, and not action by federal agencies, that caused the economic crisis of 2007-8, even though leading figures within those financial institutions have yet to be held accountable for that behavior. Wall Street, not Pennsylvania Avenue, made this mess.

• A lot of ink is spilt these days blaming our existing economic problems on excessive government spending and the over-regulation of private industry, particularly private banking. Nothing could be further from the truth. It was a deregulated set of major privately-owned financial institutions, each seeking profit growth by speculating with other people's money, that triggered the credit bubble of the Bush years and which brought the global banking system to temporary gridlock in September 2008. In the first years of the new millennium, "Goldman envy," as it was reportedly termed, drove investment banking into a frenzy of risk taking for which later even Goldman Sach's Lloyd Blankfein publicly apologized. People complain now about anarchist elements in the OWS movement damaging property. They are right to be critical; but if they are to be consistent, they must also recognize the vastly greater scale of damage to property (and to human happiness) inflicted by Wall Street excess prior to 2008. According to later IMF calculations, the toxic assets released into the global banking system by Wall Street institutions cost that system at least $4.1 trillion; and it cost the rest of us maybe 50 million jobs world-wide. Anarchist-inflicted damage on shop windows and parked cars is as nothing compared to the scale of factory closures and community destruction inflicted by a deregulated banking sector.

2.The resulting recession continues to cause widespread economic misery, but it has not prevented key financial institutions from renewed profit-taking and sustained resistance to their tighter regulation. Wall Street has gone on its merry way, declining to help clean up any part of the mess that its excess made.

• Main Street continues to struggle. What economic recovery has occurred remains largely jobless in nature, with companies reluctant to hire and banks reluctant to lend. The money that reconstituted them has yet to be passed on in equal measure to the small and medium size enterprises that are so heavily dependent, for their capacity to function at all, on a regular flow of easily-available bank credit. Currently the top 20 banks in the United States, the very banks bailed out in 2008-9 by taxpayer largesse, "devote only 18 percent of their commercial loan portfolio to small business." Profit levels and employment levels in the rest of the U.S. economy remain low. Poverty levels remain high, and the distribution of income and wealth remains unusually unequal. All this at the very time when American banks are quietly raising the fees they charge, and when both in the U.S. and in Europe the biggest companies are now excessively cash-rich, poised to engage in a frenzy of mergers and acquisitions that will create ever larger companies without any commensurate increase in employment. Indeed the banking sector has lately made its own contribution to America's high level of long-term unemployment. It is worth noting that Bank of America's decision to lay off 30,000 of its employees was the largest single culling of staff by any single private company in the United States in the whole of 2011, and Bank of America is not the only major financial institution currently culling the lower ranks of its staff.

3.The sovereign debt crisis now bedeviling the Eurozone economies is a direct consequence of similar errors of judgment by European financial institutions. It is one compounded by public spending decisions made to counter the effects of a 2008 financial meltdown imported into Europe through trans-Atlantic banking networks. Wall Street institutions helped spread the mess from here to there.

• Arrogance and self-confidence has been evident too in the lending practices of leading European banks. With the establishment of the Eurozone in 1999, money flowed from northern European banks into Mediterranean economies which were then thought to be fully protected by their Eurozone membership. The U.S. investment bank Goldman Sachs proved to be a key player here, helping the Greek government maintain this damaging illusion by obscuring its scale of indebtedness. As The Financial Times reported as early as February 2010, "outright anger" was growing in Europe long before the current crisis: anger "about the role played by western investment banks and hedge funds," anger about "the role that Wall Street titans such as Goldman Sachs have played in helping Greece and other Eurozone countries to massage their debt data over the past decade to meet European limits, and thus to mask some of the fiscal woes that have now come back to haunt international markets."

4.Financial institutions were the conduit through which the original U.S. crisis crossed into Europe; and they may yet be the conduit by which the resulting Eurozone crisis flows back into the U.S. We are still living with the consequences of one banking crisis and may yet have to endure the consequences of another. This banking crisis might yet return to bite us a second time.

• It is a mistake to think that the adverse consequences of the 2008 meltdown have now been entirely washed out of the global financial system. They have not. Major European banks remain dangerously exposed to the long-term consequences of the U.S. housing crisis, many of them still sitting on large quantities of "credit-market assets dating back to the first round of the financial crisis in addition to sovereign debt from struggling Eurozone countries." The Wall Street Journal reported the Royal Bank of Scotland with €79.6 billion of credit-market assets currently on its books but only €10.4 billion of sovereign debt. The reported ratios were similar for HSBC: 54.3:14.6; Deutsche Bank 51.9:12.8; and ING 36.0:11.2. It is true that some European banks are ratioed the other way, heavily over-exposed to sovereign debt. The ratio of credit-based assets to sovereign debt for the Italian bank UniCredit, for example, is 7.2:51.8; and Dexia, the Franco-Belgian finance house that came close to collapse in October, reportedly had 21 billion euros of Greek, Italian, Spanish and Portuguese bonds on its books when its flow of credit dried up. But whichever way the ratio goes, one thing is abundantly clear. Major European banks have toxic assets on their books that straddle the Atlantic and leave them vulnerable to meltdown in the event of a sovereign debt default by any major Eurozone economy. Even the kind of settlement proposed for the Greek economy - a voluntary mark-down of 50 percent of the value of existing Greek debt - is bound to establish so powerful a precedent, and to give European banks so severe a "haircut," as to seriously threaten their capacity ever to grow a full scalp again.

The only force keeping this case for financial control alive and well in the United States is the Occupy Wall Street protest movement. Bernie Sanders is quite right: "the Occupy Wall Street protests are shining a national spotlight on the most powerful, dangerous and secretive economic and political force in America." In the wake of the Citizens United Supreme Court ruling, the bulk of the American political class has been bought. In the wake of the Eurozone crisis, the Greek and Italian political classes have been dismissed. On both continents the people doing the buying and the dismissing are ultimately senior bankers. "Why are so many people protesting against Wall Street?" John Wells asked. "Because it has become stronger than our democratic state and if unrestrained will take us down the dark road to political dictatorship to join the economic tyranny it currently enjoys." Republicans are quick to tell us these days that when we protest against Wall Street excess, we introduce class warfare into American politics. But if this long financial crisis tells us anything, it is that class warfare was fully embedded in the American political system long before any of us decided to protest. As https://editorial.huffingtonpost.com/mt.cgi?__mode=view&_type=entry&id=1101305&blog_id=3#Dean Baker said: "When Wall Street rules, we get Wall Street rules." Politics in a class-ridden society is always ultimately a zero-sum game. It is time therefore -- in contemporary America -- for class warfare by the economic elite to be superseded by class warfare by the working people: and not just time, but time that is long overdue.

First posted with full academic citations at www.davidcoates.net