After the 2008 global financial crisis and panic, the international banking system very nearly collapsed. In the days after Lehman Brothers failed, panic prevailed. ATMs were on the very brink of denying punters access to their own money. A prominent international banker advised his wife to withdraw all their funds from the banking system.
To salvage the private banking system taxpayer-backed central banks intervened in ways that were (and remain) spectacular and historically unprecedented. Extraordinary monetary and other measures were and are still taken to bail out the finance sector’s big losers: reckless private bankers and financiers. Central bankers created trillions of dollars ‘out of thin air’ and used it to finance private bank bailouts. They went further: they lowered central bank base rates of interest charged to bankers – and have kept those rates extraordinarily low for almost six years - to slash the cost of borrowing for private bankers.
Governments too bent over backwards to save bankers. They amplified the extraordinary largesse of their central banks by extending taxpayer-backed guarantees against losses. These guarantees hauled global banks back from the brink of bankruptcy.
The result is a global casino in which the vast majority of taxpayers lose, and a favoured few continue with business as-better-than usual. And it’s one in which, despite the catastrophic failure of 2007-9 and its consequences, the finance sector continues to make unprecedented and unexpected gains.
Protest against Goldman Sachs. Flickr/SEIU International
At the same time the global economy persists in a state of weakness and stagnation: what Martin Wolf of the FT calls “a contained depression.” Unemployment across the world remains high and in some countries is higher than during the depression of the 1930s. Global financial imbalances persist – with countries like China and Germany building up surpluses, and others like the US and UK persisting with trade and capital account deficits. Fiscal deficits exploded after the crisis, as a result of rising unemployment, a collapse in tax revenues and bank bailouts. Social and political upheavals are inevitable. And, as the recent emerging market instability revealed, the global financial system remains wildly volatile and unpredictable. Most worrying of all: the threat of deflation stalks the Eurozone and beyond.
There are three lessons from this experience.
First: as the global bank bailout revealed, in a well-developed monetary system with the apparatus of a central bank and with its own currency – there is never a shortage of money. As Prime Minister Cameron recently reminded us when he addressed the flooding crisis facing voters in Conservative constituencies, and soon after he had declared that Britain “is nearly bankrupt”: “Money is no object” for a government bent on funding a solution.
In the real world, where billions of people live, money is always scarce. There is no money, we are told, for transforming the economy away from fossil fuels; for reducing poverty, caring for the vulnerable, creating jobs, providing affordable childcare, tackling diseases, or for educating every one of the world’s children.
Denmark’s Social Democrat government and central bank recently argued that “there is no money” to fill a hole in the finances of a state-owned energy company that had made an operating loss of DKr6bn in 2012. This created an opening for Goldman Sachs – the investment bank memorably described by Matt Taibbi as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”.
Goldman was invited by Denmark’s Social Democrats to take a 19% stake in Dong energy. With this minority stake the Danish government has allowed the bank to leverage enormous power over the taxpayers of Denmark. Goldman now has veto rights over the state-owned company’s business plan, its CEO or finance director, acquisitions or the sale of new shares.
Second: if private wealth holders who gamble are then granted government bailouts, protection from losses and subsidies for speculation, then we are no longer dealing with anything resembling a free market system. If those who make investment decisions are protected from the consequences – if the link between risk and reward is broken, as it was in the centrally planned Soviet economies – then the market system breaks down. Today’s global capital “free-market” system exists only in the imaginations of orthodox economists.
The third, and most important, lesson for citizens of democratic states is this: the small elite that controls the global finance sector has succeeded in capturing, effectively looting, and then subordinating democratic governments and their taxpayers to the interests of those who possess private wealth. Citizens who value democracy and its institutions have a duty to regain control over finance, and to render the sector servant, not master, of their economies.
On the day Goldman Sachs was granted its stake in Denmark’s Dong Energy, its despotic power was made plain: the chairman was promptly sacked. 80% of Danes bitterly opposed the Prime Minister’s deal in a poll, and thousands turned out to demonstrate in front of Parliament. Their protests merely served to emphasise the political impotence of the Danish people, the weakness of their democratic institutions, and the contempt they are held in by both bankers and politicians.
To maintain its hold over the global economy, financiers backed by their friends in the media and politics increasingly demand that democratic institutions be further weakened or hollowed out. Only recently the Economist called for an unelected bureaucrat, Ms Lagarde, to be appointed as EU president, and complained that the election of president would make the EU bureaucracy "even more beholden to Parliament."
Thanks to the growth of “offshore capitalism”-–operating beyond government regulation or taxation, but simultaneously backed by almost unconditional onshore taxpayer guarantees and protection--the finance sector can now make massive speculative and almost risk-free gains. Because there has been no meaningful effort by governments to reform or re-regulate the global financial system, and given the systemic threat the global banking system continues to pose, financiers grip on democratic institutions and resources tightens.
This series has been commissioned to shine a light on the nature of money, on the global financial system and to deepen awareness of the urgent need to defend our democratic systems from the rapacious greed of the global finance sector.
In the series we explain how, in the words of Geoffrey Ingham, “private capitalist banks are able to ‘advance’ money into existence on the basis of the support they receive both routinely and in crises from the central bank and, in turn, from the state.” Steve Keen draws attention to the flaws in orthodox economics’ foundational ideas about money – ideas upon which the flawed economic theory of globalisation is built. Jeremy Smith exposes the way in which orthodox economists have deliberately contrived “pejorative language” to frame and ridicule the regulation of finance as “financial repression” – a term re-defined as “technical” by the prominent economist, Carmen Reinhart. Anastasia Nesvetailova explores the world of “shadow banking - a complex network of credit intermediation outside the boundaries of the traditional, regulated bank.” Costas Lapavistas, author of Profiting without Producing, examines “the response of Marxist political economy to the most gigantic turmoil of world capitalism since the end of the World War II.”
The series also examines solutions. Lucca Fantacci makes a proposal for “reuniting the monetary union” of the Eurozone. Douglas Coe proposes that the head of the IMF should follow through on her assertion that the financial system should “serve rather than rule the real economy”; and encourages her bold vision for multinational cooperation and an agenda for monetary reform.
The series illuminates an important truth: that at the heart of western democratic institutions are our publicly managed monetary systems that have evolved over centuries. As a result of bloody struggles between private wealth and wider society, they emerged as a public infrastructural resource, for all, not just the few. They can be reclaimed by the people, for the people. But this will only happen if we grasp the origins and nature of money, and spread broader understanding of the financial system. Once we overcome our reluctance, money ceases to combine the inevitability of nature and the power of taboo. It becomes a shared resource, an instrument for securing the common good.
If we are to reclaim the public good that is the monetary system; if we are to once again subordinate the small elite that makes up the finance sector to the interests of society and the economy as a whole, there must be greater understanding, and democratic and accountable oversight of the system.
The current order exploits the natural diffidence of the inexpert. It mobilises the resources of patriarchy and the misleading insights of every day life, comparing for example a household budget to the government’s budget. Its defeat will require that we give up an all-encompassing structure of sentiment.
The price, and there is always a price, is the transformation of ourselves. Our naïve intuitions about money will have to give way, and we will have to forego the pleasures of irresponsibility.
We know that finance can be reformed, because in our recent history, after the 1929 financial crash and the Second World War, society succeeded in wrenching control of the monetary system back from a reckless and greedy wealthy elite. The period that followed is still known as the ‘golden age’ of economics.
We must learn from that experience, and prepare to once again wrench back control of the monetary system for society as a whole. This series will, we hope, provide a start.
Ann Pettifor’s Just Money: How Society Can Break the Despotic Power of Finance is available on Kindle and via Paypal in pdf format. This article is part of the OurKingdom series, Just Money. You can donate to OurKingdom’s work here.