Grip of giant banks on the economy stronger than ever

“Too big to fail” banks are bigger than ever. Holding the global economy hostage, extracting profits from every aspect of human activity and remaining well above the reach of the law are simply business as usual — not to mention extremely profitable.

The six largest banks in the United States — each among the world’s largest — reported composite net income of $91 billion for 2013. Yep: $91 billion in cold cash, for only six enterprises, and that total is the profit after paying out their colossal salaries and bonuses.

Wells Fargo Plaza, HoustonTo put the total in further perspective, the six banks enjoyed a profit margin of 19.1 percent. By way of comparison, the average corporate profit margin in mid-2013 was 9.3 percent. It would seem that financiers have managed to trudge on despite suffering the critiques of people who refuse to believe that their multimillion-dollar compensation is a God-given right.

No less than an authority than Gregory Mankiw says that’s so. Professor Mankiw was the chair of the council of economic advisers under former U.S. President George W. Bush and is currently the head of the economics department at Harvard University. But if you are expecting scholarship from someone with such credentials, you will be disappointed. For example, he wrote in his paper, “Defending the One Percent”:

“Those who work in commercial banks, investment banks, hedge funds and other financial firms are in charge of allocating capital and risk, as well as providing liquidity. They decide, in a decentralized and competitive way, which firms and industries need to shrink and which will be encouraged to grow. It makes sense that a nation would allocate many of its most talented and thus highly compensated individuals to this activity.”

So there you have it: Financiers do not self-select on the basis of lust for money without regard for the damage they do to others, but are anointed by society. Do you recall a referendum selecting them? I do not, either.

Accountability? How quaint!

Opportunities for upward flow of money were not in short supply last year. Here are the 2013 full-year results for the six largest banks, as reported by the companies themselves last week:

• JPMorgan Chase & Co.: net income of $17.9 billion on revenue of $96.6 billion. That was JPMorgan’s profit after setting aside $8.7 billion to cover legal expenses.
• Bank of America Corp.: net income of $11.4 billion on revenue of $89.8 billion.
• Citigroup Inc.: net income of $13.9 billion on revenue of $76.4 billion. Although Citigroup’s 2013 net income was close to double that of 2012, it was nonetheless considered disappointing! Not even Citigroup is immune from the pitiless system it and its peer institutions have created. Its stock price has dropped several points since last week, meaning the market is demanding it squeeze out more profits.
• Wells Fargo & Co.: net income of $21.9 billion on revenue of $83.8 billion.
• The Goldman Sachs Group Inc.: net income of $8.0 billion on revenue of $34.2 billion. Those profits are after compensation and benefits totaling $12.6 billion. The average compensation for a Goldman Sachs employee for 2013 was $383,000, lower than the $399,000 of 2012. Oh the humanity!
• Morgan Stanley: net income of $17.9 billion on revenue of $96.6 billion.

How big are these six banks? So big that they hold 67 percent of all the assets in the U.S. financial system, considerably more than they held five years ago.

Cause the crash and then profit from it

And what “services” do these too-big-to-fail financial institutions provide? Matt Taibbi, in the Rolling Stone article that gave Goldman Sachs the memorable moniker of “vampire squid,” summarized:

“Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest.”

Goldman Sachs and its peer intitutions seek to extract money from every aspect of human activity. These, and other banks, have never had to accept responsibility for bringing down the world’s economy. Other than a few individuals who have been hauled into court because their scheming was too blatant to ignore (who are always tagged “rogue traders” as if they don’t operate within a well-established system), it’s business as usual.

Why should the we be at the mercy of a tiny elite that knows no limits to its rapaciousness? A crucial component of a better world would be a drastically shrunken banking system, under democratic community control, oriented toward human need and rational investment, and prohibited to engage in any speculation. Banking should be a public utility. The point of a market is to serve humanity — yet under the current world capitalist system, human beings exist to serve markets. And markets are nothing but the aggregate interests of the most powerful industrialists and financiers.

Financiers may see themselves as untouchable monarchs when they look into a mirror, but we need not swallow such nonsense any more than our ancestors did when they ceased to believe that a king is chosen by God to rule over everyone.

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16 comments on “Grip of giant banks on the economy stronger than ever

  1. Vassilis says:

    Nice one. And the solution is to take away from the banks the ability to “invent” new money out of debt. To look for the values again and reform the economic and tax system. That, calls for politicians with great courage, because the financiers will not go without a fight. In fact they might try a kamikaze trick if things go too far. I guess that there is still time to change things in a civil manner, but the “ifs” are too many… Hope and pray!

  2. “‘Too big to fail’ banks are bigger than ever. Holding the global economy hostage, extracting profits from every aspect of human activity..”

    including our social lives (facebook!) and now even our sex lives! (thru the corporate-owned porn industry now the increasingly popular hookup applications like grindr!)

    “… and remaining well above the reach of the law are simply business as usual — not to mention extremely profitable.”

  3. I agree with Vassilis. I find it some intriguing that some IMF economists are circulating a plan on how to strip private banks of this privilege. Here’s one of them Michael Kumhof explaining his paper The Chicago Plan Revisited: http://www.youtube.com/watch?v=d6x8RqiAqno

    • I only watched the first 10 minutes of the video to which you linked, but what I saw indicated that the “Chicago plan” is a call for a return to the gold standard put forth by Chicago School ideologues including Milton Friedman and Frank Knight. Setting aside that present-day capitalism has grown too complex for a return to the gold standard, such a policy would vastly constrict the money supply. The government would have no ability to provide a stimulus — we’d be on permanent austerity worse than the world is currently being treated to.

      • Sorry, I believe you’re mistaken about that. The plan has nothing to do with the gold standard. It calls for government to issue “money” (electronically) according to a formula that would protect the economy against inflation or deflation. Banks would build their reserves by a) allowing the government to use this new money to pay off sovereign debt or b) by borrowing it.

        Banks would be prohibited from issue new loans beyond what they hold in reserves.

        Here’s the link to the original paper: http://www.stanford.edu/~kumhof/chicago.pdf

        • The authors claim there proposal would lead to: “(1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money; (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt; and (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation.” It would, additionally, reduce inflation to zero and yield a 10 percent increase in economic output.

          That is quite a list, one that seems more a product of a magic wand than a reform. The authors’ premise is that credit itself causes booms and busts, but while credit over-extension (i.e., too much debt) can be the proximate cause of a crash, the underlying, real cause(s) are always more complex and deeper. The authors seem to believe that the booms and busts of capitalism can be conjured away. They can’t. The instability of capitalism inevitably leads to booms and busts; credit-fueled market bubbles can certainly magnify these, but to reduce all this instability to credit is an ideological fig leaf, intentionally averting one’s eyes from larger structural implications. It completely ignores, for example, growing inequality that causes household reliance on debt because of stagnating or falling wages.

          I found a lot of criticism of this paper by financiers, many of whom flatly believe that such a program, if actually implemented, would amount to government confiscation of private wealth. We can imagine how much support among the capitalist elite there would be for that. I also found a commentary by the conservative British paper The Telegraph that included this: “The US Federal Reserve would take real control over the money supply for the first time, making it easier to manage inflation. It was precisely for this reason that Milton Friedman called for 100pc reserve backing in 1967. Even the great free marketeer implicitly favoured a clamp-down on private money.” Friedman was notorious for advocating tight-money policies — i.e., austerity.

          The paper is highly technical and appears to contain many underlying assumptions. An interesting thought experiment, perhaps (as it has generated quite a bit of commentary), but it should be evaluated extremely cautiously. Many grains of sand are called for here.

      • Marko says:

        I’m always skeptical of anything associated with the IMF or “Chicago” , but one needs to be careful not to throw out the baby with the bathwater.

        Kumhof , co-author of the paper in question , is one of the leading proponents of the theory that rising income inequality was a factor in the increase in household leverage that led to the crisis , as outlined in this paper :

        “Inequality, Leverage and Crises: The Case of Endogenous Default”

        http://www.imf.org/external/pubs/ft/wp/2013/wp13249.pdf

        from the conclusion : “….a reversal of the post-1983 increase in income inequality would lead to a sustained reduction in leverage that would significantly reduce the probability of further crises….”

        That alone tells me that Kumhof is someone I should not so readily dismiss , merely because of the institutions he’s associated with. Maybe he’s trying to steer those institutions back on the right track. Additionally , I see the objections of “financiers” as a positive , not a negative.

        The Bretton Woods period imposed similar restraints on economy-wide leverage , but did not inhibit countercyclical gov’t spending during downturns. Rising gov’t leverage was permitted during periods of falling private leverage. Under this regime , economy-wide leverage was stable post-WWII , and economic growth during that period earned it the “Golden Age” label. Post-1971 , with the abandonment of Bretton Woods , has been a disaster by comparison.

        If you don’t have the tool of increased leverage to juice the economy , maybe you’re forced to restrict inequality to reasonable levels in order to sustain aggregate demand. I’d like to see that kind of regime again. Screw the financiers.

        • In case I haven’t been clear, objections of financiers would be a positive for me, too. And there are always individuals in large institutions like the IMF and World Bank with dissenting viewpoints. I am skeptical not because of an IMF affiliation, but because the promised benefits are pie in the sky; impossible achievements for a reform.

          What we really need to do is stop having illusions about capitalism, and begin constructing a humane economy based on human need, not endless accumulation for a privileged few. Let’s go beyond financiers: Screw the system that allows them to flourish.

  4. My biggest concern is that it comes from the IMF – I already know whose side they’re on. Yet I still wonder what their motivation could be. I think there some people in powerful places who know the ship of capitalism is sinking and believe this is the only way to reign in the bankers. The co-leader of the NZ Green Party believes it’s yet another signal the World Bank and IMF are abandoning the “Washington Consensus” (i.e. the right of the US to run the financial system). A good friend believes that the financial geniuses who control the IMF see this as a way to keep their money when the dollar crashes. The NZ New Economics Party believes that if sovereign money is enacted without a Land Value Tax, the government reserves created under the Chicago Plan will end up in real estate speculation: http://neweconomics.net.nz/index.php/tag/tandvaluetax/

  5. Danielle Ha says:

    Q: what is the difference between IMF vs World Bank?
    A: none, the IMF is for ‘sovereigns’, and the World Bank is for ‘nonsovereigns’…

    This is yet another distraction from the reality of top-down systematic control model’s breakdown
    (call it neo-liberalism, Laissez-faire capitalism, Capitalism/Communism, Soviet communism/Chinese dictator capitalism, socialism, French socialism, fascism, isms…EU, UN, NATO, IMF or whatever)

    After over a century wasting TIME & OIL/resources & SPIRIT perfecting proxy wars and crushing over anything in its way, Successful Capitalism itself ends up… cannibalized by itself (ironic)

    Economy IS
    Debt (automobiles, pollution, landfills, slums, droughts, deserts, smog, radiation, loan defaults, Detroit, failed states) (the 99%)
    = Wealth (instant… large balance sheets, fancy cars, jets, expensive real estate, celebrities) (.01%)
    = zero net. (no real success)(but TINA, class war)

    The GAME of musical chair capital-ism or X-ism is not attainable without destroying all nations and all resources in the shortest of TIME – most Efficiently for the .000000001% TOP. The scores: the top ten whatever.

    Top-down management/command-ism alone is caught in its own thermodynamics (diminished benefits) as well. It wants to manage its own image, its impotence, its own death… It is sustained by an army of the “best (costly)” minds, lawyers, scientists, CEOs, professional PR artists… and cynicism/envy… but so futile against its own weight (systematic corruption, entropy).

    ILLUSION crashed only by REALITY (gasp).

    We should look at ourselves first, the ones who fell for them for too long…
    The poisons: Greed, Anger/Envy and Foolishness. I myself learned the hard way too.

    Please remember that there is a truly beautify sky and living planet that we can conserve/husband as others have done for thousands of years.

    It’s about time to not buy/tune in the tv (the loathing/envy), dump the cars (sloth) and especially the fear.

    Get rid of the poisons, first. Bring in the sunlight in you and others.

    • Get rid of the televisions, automobiles and fear. Good advice. I’ve already done those things myself.

      Acknowledging our complicity in our oppression, and losing our fear so that we can change our conditions, are basic building blocks of a better world.

  6. Danielle Ha says:

    Avert world depression repeat of 1930s by banning usury in any form. Banks should only be ‘deposit’ locations by the governments.

    • Indeed, banks should be public utilities, under democratic control and prohibited to engage in any speculation.

      • nexusxyz says:

        We had that at one point. The only way we are possibly going to get it back is as a result of a crisis. The ‘system’ cannot change itself as this never happens.

        The danger is that the crisis is so profound that there will be little to recover. Letting the banks lose threatens our very existence. They create nothing and destroy value.

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