Let them eat iPhones

You say you are struggling to cover your rising expenses while your pay is stagnant? You should have become an executive at a bank. Break the economy and earn big rewards!

But don’t sweat it — you have a phone and that more than makes up for your lack of adequate wages, declining ability to access health care and lack of a pension. Just ask JPMorgan chief executive officer Jamie Dimon.

Mr. Dimon’s pay is more than 220 times that of the average employee at JPMorgan, reports Business Insider, but he says you underpaid employees shouldn’t complain — because you have iPhones! At least Marie Antoinette’s alleged belief in cake allowed France’s plebeians to eat, more than can be done with a phone. Here is what Mr. Dimon said in his latest attempt to show compassion, according to BloombergBusiness:

“ ‘It’s not right to say we’re worse off,’ Dimon said [last September 17] at an event in Detroit in response to a question about declining median income. ‘If you go back 20 years ago, cars were worse, health was worse, you didn’t live as long, the air was worse. People didn’t have iPhones.’ ”

Cutting the pay of chief executive officers would do nothing to solve inequality, Mr. Dimon proclaimed. Instead, “investing in ‘intelligent infrastructure’ ” is what is needed. If possessing a “smart phone” is the key to happiness, apparently “smart buildings” would make us still happier. There’s progress for you — Marie Antoinette never offered anyone a bakery. But as you apply ketchup to your iPhone, you will surely digest smoothly with the knowledge that the chief executive officers of Goldman Sachs and JPMorgan officially became billionaires during 2015.

U.S. Treasury Department under new management (photo by takomabibelot)

U.S. Treasury Department under new management (photo by takomabibelot)

Goldman Sachs’ chief, Lloyd Blankfein — or Lord Blankcheck, as Occupy Wall Street activists memorably dubbed him — took home US$23 million last year, while Mr. Dimon “earned” $27 million, a healthy 35 percent raise. And shed no tears for those who have yet to reach the corporate pinnacle — three Goldman Sachs executives each took home $21 million and three JPMorgan execs each were awarded more than $10 million in stock alone.

Profits of biggest banks increase again

When we last heard from Mr. Dimon, about this time last year, he complained that “Banks are under assault,” adding that “We have five or six regulators coming at us on every issue.” As the six biggest banks in the U.S., which includes JPMorgan, racked up profits totaling $75 billion for 2014, you will be excused for having doubts about just how tough regulators are.

Profits for those banks were no more endangered in 2015, totaling almost $93 billion. Here is how they fared in the just concluded year:

  • JPMorgan Chase & Company: net income of $24.4 billion on revenue of $96.6 billion. JPMorgan reported its highest-ever net income in 2015, and paid out $11 billion to shareholders through stock buybacks and dividends.
  • Bank of America Corporation: net income of $15.9 billion on revenue of $82.5 billion. Net income more than tripled from 2014, and it nearly doubled the dividend it paid shareholders — the bank said it handed out $4.5 billion through common stock buybacks and dividends.
  • Citigroup Incorporated: net income of $17.2 billion on revenue of $76.4 billion. Although revenue was down slightly, net income more than doubled because Citigroup wasn’t troubled with having to pay out billions in fines over its toxic derivatives as it was in 2014.
  • Wells Fargo & Company: net income of $23 billion on revenue of $86.1 billion. The bank reported it handed out $12.6 billion through stock buybacks and dividends, yet it relentlessly demands its tellers pressure customers to open multiple accounts and pays those tellers too little to live on.
  • The Goldman Sachs Group Incorporated: net income of $6.1 billion on revenue of $33.8 billion. Goldman Sachs’ net income was below that of 2014 due to a $3.4 billion deduction (or “charge”) from its earnings due to its reaching a settlement with government regulators over its toxic mortgage-backed securities; profits would have risen without the fine. But please don’t shed any tears for the investment bank — it proudly reported that it “advised” on corporate mergers and acquisitions worth more than $1 trillion, work that by itself netted it billions of dollars while jobs disappeared.
  • Morgan Stanley: net income of $6.1 billion on revenues of $35.2 billion. Similar to its peer banks, Morgan Stanley shelled out $2.1 billion to buy back its stock in an effort to have its profits shared among fewer stockholders. Despite that profit, the bank has said it will lay off staff as part of an effort to “cut costs” under Wall Street pressure.

The biggest get bigger

Yes, the biggest banks keep getting bigger. The four banks with the largest holdings accounted for a composite 42 percent of all U.S. banking assets in 2014, a total that has steadily increased, both before and after the 2008 crash.

Wells Fargo Plaza, HoustonAnd not even the fines levied by regulators slow them down. Earlier this month, Goldman Sachs announced that it had agreed to $5 billion in penalties to settle claims arising from the marketing and selling of dodgy mortgage securities, although nearly $2 billion of that is “consumer relief” in the form of loan forgiveness, the bank said.

Banks have paid a total of $40 billion to settle claims by financial regulators and prosecutors, yet these penalties are bumps in the road for them, no more than a business expense. In part, perhaps that is because much of these penalties come in the form of mortgage modifications, rather than cash, and often these modifications are to loans that the banks service but don’t actually own — allowing them to get credit for modifying loans belonging to another company.

Banking of course is not the only industry undergoing consolidation. Mergers in 2015 were bigger than ever, with corporate deals worth $4.7 trillion. Investment banks earn huge fees for arranging mergers and acquisitions, none more so than the biggest U.S. banks. Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America and Citigroup ranked as numbers one through five in the world in terms of the value of the deals banks “advised” on.

Competitive pressure accounts for some corporate mergers — the capitalist imperative to grow or die does not abate even for the biggest corporations — but pressure to “enhance shareholder value” plays a significant role. “Enhancing shareholder value” is finance-speak for acceding to speculators’ demands for more short-term boosts to profits and higher stock prices, no matter the cost to others or the long-term damage to the company itself. Hedge-fund billionaires are among the fiercest in pressing these demands, continually demanding cuts to jobs that serve only to fatten their swollen wallets. The big banks, as major Wall Street players themselves, both apply this “market” pressure for the same reasons and further profit from acting as “advisers.”

Reforming such insanity is a hopelessly sisyphean task. What if instead banks became a public utility with an end to speculation? Proposals are being floated in the U.S. to create state banks, perhaps on the model of the successful Bank of North Dakota, and the Left Party of Germany has a detailed plan to bring banks under democratic control. Capitalist propaganda aside, there is no need for banking to exist as an uncontrollable behemoth extracting wealth from all other human activities. Why shouldn’t it be a utility under public control that exists to serve the productive economy? We can’t survive on iPhones alone.

Central banks have trillions for speculation, none for people

There’s no money for schools, no money for social services, no money for the environment. There is lots of money for speculators, however. A tsunami of money. Money that is measured in the trillions.

The central banks of the United States, Britain, the eurozone and Japan have so far spent US$6.57 trillion (or €6.06 trillion if you prefer) on “quantitative easing” programs. And, for all of that incomprehensibly gigantic sum of money, what mostly has been accomplished is a stock market bubble. And, as a secondary effect, a boost to real estate prices, making real estate speculation pay off a bit more than it ordinarily does.

(Photo by Photo Dharma from Penang, Malaysia)

(Photo by Photo Dharma from Penang, Malaysia)

Oh, no so much for the overall economy you say? Hard to argue that point. The world’s advanced capitalist countries are mired in stagnation, structural unemployment and widening inequality, with public investment starved and personal debt a monumental problem. Surely those staggering sums of money could have been put to better use. We’ll get to that in a moment, but first a quick accounting. Money spent on quantitative easing is as follows:

  • Federal Reserve: $4.1 trillion in three programs that ended in November 2014.
  • European Central Bank: €600 billion so far; the ECB has committed to spending a total of €1.1 trillion through March 2017.
  • Bank of England: £375 billion.
  • Bank of Japan: ¥155 trillion so far in two and a half years; the Japanese central bank is committed to spending ¥80 trillion per year with no ending date.

“Quantitative easing” is the technical name for central banks buying their own government’s debt in massive amounts; in the case of the Federal Reserve it also bought mortgage-backed securities. The supposed purpose of quantitative-easing programs is to stimulate the economy by encouraging investment. Under this theory, a reduction in long-term interest rates would encourage working people to buy or refinance homes; encourage businesses to invest because they could borrow cheaply; and push down the value of the currency, thereby boosting exports by making locally made products more competitive.

In actuality, quantitative-easing programs cause the interest rates on bonds to fall because a central bank buying bonds in bulk significantly increases demand for them, enabling bond sellers to offer lower interest rates. Seeking assets with a better potential payoff, speculators buy stock instead, driving up stock prices and inflating a stock-market bubble. Money not used in speculation ends up parked in bank coffers, boosting bank profits, or is borrowed by businesses to buy back more of their stock, another method of driving up stock prices without making any investments.

The irrationality of more for those with more

Given that banks are bigger and more profitable than ever (the six biggest U.S. banks racked up a composite net income of US$75 billion in 2014) and U.S. corporations spend about $1 trillion per year buying stock to artificially boost stock prices, shoveling still more money to those with far more than can be spent or invested in any rational way is irrational, no matter how many reports are pumped out by think tanks they pay to tell them otherwise.

So what might have been done with those quantitative-easing trillions thrown at banks instead? The total student debt in the United States, where the costs of higher education has risen more than double the rate of inflation since 1982, is $1.3 trillion as of October 2015. Printing the money to cover the entirety of the country’s student debt would total less than one-third of what the Federal Reserve spent on inflating a stock-market bubble. That leaves many more needs to be addressed.

The infrastructure of the U.S. is crumbling, and governments are short of money to fix what needs to be fixed. The investment needed to modernize and maintain school facilities is estimated to be at least $270 billion. The foreseeable cost of maintaining water systems in the coming decades in the U.S. is estimated at $1 trillion. The American Water Works Association arrives at this total by assuming each of 240,000 water main breaks per year would require the replacement of a pipe. Capital investment needs for wastewater and stormwater systems are estimated to require another $298 billion over the next 20 years.

The shortfall of funding to clean up Superfund sites is estimated to be as much as $500 million per year. The Environmental Protection Agency estimates that one in four United Statesians lives within three miles of a hazardous waste site; more than 400,000 contaminated sites await cleanup. And we can throw in another $21 billion to repair the more than 4,000 dams deemed to be deficient by the Association of State Dam Safety Officials.

Jobs instead of speculation

Add up all of the above and we would have spent a total of $3.4 trillion. Instead of throwing money at speculators and banks in the vain hopes they would spend the money productively instead of pocketing it or directing it toward speculation or boosting stock prices, we could have wiped out all student debt, fixed all the schools, rebuilt aging water and sewer systems, cleaned up contaminated industrial sites and repaired dams, and still have $700 billion more to spend on other needs.

If we were to apply that remaining $700 billion to create a federal jobs program, such as was done during the Great Depression, a total of 14 million jobs paying $50,000 and lasting one year could have been created, or three and a half million jobs paying that salary and lasting four years. That is in addition to all the people who could be put to work performing necessary infrastructure repair work if the above projects were carried out.

All of that for no more money than the Federal Reserve threw away on quantitative easing. This same argument can be made elsewhere: The British think tank Policy Exchange estimates Britain’s needs for investment in transportation, communication and water infrastructure to be a minimum of £170 billion. That is less than half of what the Bank of England spent on its quantitative-easing scheme, and dwarfs an estimated £2.5 billion deficit in the National Health Service.

Instead of spending this money on programs that would put people to work and enable them to get on their feet financially, those with more get more. European non-financial companies are estimated to be sitting on $1.1 trillion in cash, or more than 40 per cent higher than in 2008, the Financial Times reports. The St. Louis branch of the Federal Reserve estimates that, in 2011, U.S. corporations were sitting on almost $5 trillion of cash, a total likely to have increased.

This is what class warfare looks like, when only one side is waging it.

Bigger rewards for holding the economy hostage

They are bigger and badder than ever. The heightened offensive against regulations launched by the financial industry carried forward by the new Republican Party majority in the United States Congress is one demonstration, but just in case you wish more evidence, bank profits got bigger in 2014.

The multibillion-dollar fines U.S. government agencies have assessed banks has merely dented profits, and only in some cases. Four of the six biggest banks in the U.S. — which together hold about two-thirds of all assets in the U.S. financial system — reported higher profits for 2014 than in 2013, and in the cases of the other two, it appears that an increase in fines paid was responsible for their decline in profits.

Overall, these six banks — JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — racked up a composite net income of US$75 billion on revenue of $413 billion.

The most comical comment during the banks’ announcements last week of their financial results was that of JPMorgan Chairman and Chief Executive Officer Jamie Dimon, who whined on a conference call with reporters that “Banks are under assault,” adding that “We have five or six regulators coming at us on every issue.”

Those regulators seemed to have taken it easy on JPMorgan last year. The company’s total legal costs for 2014 were $2.9 billion, compared to $11.1 billion in 2013, according to a report carried by financial news network CNBC. Nonetheless, JPMorgan’s $21 billion in profits for 2014 was considered a disappointment by Wall Street, because the fourth-quarter profit dipped slightly from the previous year’s fourth quarter. Thus, the company wasted no time in announcing that “Senior executives at JPMorgan Chase & Company are pressuring managers across the bank to cut costs,” according to Reuters.

Wall Street traders have already punished the company by sending its stock down in three of the first four trading days following its “disappointing” results. Not even Wall Street banks are immune from their own role as enforcers. Some low-level employees are about to pay for that with their jobs.

U.S. Treasury Department under new management (photo by takomabibelot)

U.S. Treasury Department under new management (photo by takomabibelot)

Never mind that the U.S. Treasury Department handed out $700 billion to Wall Street (among other measures), bailing out the very banks whose bottomless greed and reckless gambling brought on a global economic downturn now in its seventh year. A downturn paid for not by the banks, nor their executives, but through the endless austerity imposed on working people throughout the world. Not one Wall Street executive has been prosecuted.

JPMorgan has been assessed fines for a variety of crimes, among them mortgage fraud and currency-market manipulation. A compliance lawyer for JPMorgan tried to alert authorities to systematic irregularities in mortgage securities before the crash, but was ignored. Jamie Dimon, heroically holding up against the assault on his bank, earned $20 million for 2013. One suspects he will not be homeless once his 2014 compensation is totaled.

That his company will need to come up with billions of dollars by 2019 to meet Federal Reserve capital requirements, which will slow down its ability to speculate with money it doesn’t have in reserve, might just have something to do with his whining.

It pays to be a banker

The year 2014 was a very good one for banks. Here are the full-year results for the six largest banks, as reported by themselves.

• JPMorgan Chase & Company: net income of $21 billion on revenue of $97.9 billion. This was three billions dollars more than the year before, but still not good enough in the eyes of speculators.
• Bank of America Corporation: net income of $4.8 billion on revenue of $85.1 billion. The net income is down from 2013, but that appears to be due to “litigation expenses” of $16.4 billion, more than double the 2013 litigation expenses of $6.1 billion. Almost all of those extra expenses occurred in its consumer real estate division; the bank agreed in August to pay nearly $17 billion to settle charges that it sold toxic mortgages.
• Citigroup Incorporated: net income of $11.5 billion on revenue of $77.2 billion. Citigroup’s profits were lower than the year before, but the culprit is familiar — it reported legal costs of $4.8 billion in 2014, more than ten times the $430 million of 2013. Citigroup agreed in November to pay $1 billion for rigging foreign-exchange markets and agreed in July to pay $7 billion for selling bad mortgages.
• Wells Fargo & Company: net income of $23.1 billion on revenue of $84.3 billion. With profits up from 2013, Wells Fargo said it handed out $12.5 billion to shareholders through dividends and net share repurchases, five billion dollars more than a year earlier. This at the same time that many of its branch tellers can’t move out of their parents’ house because of low pay.
• The Goldman Sachs Group Inc.: net income of $8.5 billion on revenue of $34.5 billion. Those were higher than a year earlier. The average pay for Goldman Sachs employees for 2014 was $373,265, but as that includes secretaries and clerks, those involved in speculation make far more.
• Morgan Stanley: net income from continuing operations of $6.2 billion on revenue of $33.6 billion. This profit is more than double what the company made the year before, but nonetheless is not good enough. The company moved quickly to appease speculators, announcing it would cut the percentage of its revenue going to wages, pay higher dividends and buy back more stock.

What would they do if they weren’t under “assault”?

Subject to the same remorseless laws of capitalism as any other industry, the industry rapidly consolidated. The percentage of total industry assets owned by the five biggest U.S. commercial banks has increased more than four-fold since 1990. Nor is that something peculiar to U.S. banking — the five largest banks in the European Union hold 47 percent of their industry’s total assets.

The “assault on banks” must have been conducted with a wet noodle. Although by any ordinary human logic, these colossal sums of money should satiate the most asocial speculator, the remorseless logic of capitalism dictates that more is never enough, that profits have to increase steadily. Even the rate of the increase can be expected to increase.

While working at a financial news wire during the stock-market bubble years of the 1990s, I vividly recall one day when a major computer company reported a profit of more than $800 million for its latest three-month period, more than the year-earlier quarter, only for its stock price to be driven down. Curious, I discovered that “analysts” had forecast a profit even bigger, and the rate of the increase had been lower than the rate of the increase a year earlier. That was enough for speculators to lash out.

The financial industry acts as both a whip and a parasite in relation to productive capital (producers and merchants of tangible goods and services). The financial industry is a “parasite” because its ownership of stocks, bonds and other securities entitles it to skim off massive amounts of money as its share of the profits. It is also a “whip” because its institutions — stock, bond and currency-exchange markets and the firms that trade these and other securities on those markets — bid up or drive down prices, and do so strictly according to their own interests.

A management that fails to maximize profits in the short term and deliver higher stock prices in the longer term is in danger of being pushed out, not because diffuse shareholders possess that leverage individually, but because the financial industry as a whole, through the markets it controls, can sell off enough stock to make the price nosedive, leaving the company vulnerable to an unfriendly takeover by a speculator seeking to profit from the reduced value of the company. Executives who do what the “market” dictates, on the other hand, are showered with riches.

Moreover, companies with stock traded on exchanges are legally required to maximize profits for shareholders, above all other considerations. A company that fails to make a deal, or decides against selling itself to another company, is subject to being sued in courts because angry speculators will sell their stock, causing the price to decline and then complain that the company’s management failed to maximize “shareholder value.”

Governments representing the world’s four largest economies — the U.S., the E.U., China and Japan — committed US$16.3 trillion in 2008 and 2009 alone on bailouts of the financiers who brought down the global economy and, to a far smaller extent, for economic stimulus. These are the governments that are “assaulting” banks. Such is the looking-glass logic of capitalism.

State banks would mean jobs, credit and investment: Why don’t we?

One of the many problems with the current banking system is that your tax money helps fuel speculation. Unless there is a public bank that your local government can place deposits into, revenues are the playthings of big banks.

Some of that money will go toward investment via loans — at a hefty profit to the bank, of course — but a significant portion will go toward risky, socially harmful speculation. What if these public funds were instead put in a professionally run public bank? There would be more funds available for investment, significant savings on interest costs and more jobs would be created. That is the conclusion of a series of studies examining the issue.

The latest of these studies advocates that a Vermont state-government agency be converted into a state bank, run along the lines of the Bank of North Dakota, the only state bank in the United States. This study, prepared by researchers at the universities of Vermont and Massachusetts for the coalition group Vermonters for a New Economy, concludes that a Vermont public state bank would lead to more than 2,000 new jobs, hundreds of millions of dollars in increased economic output and a significant increase in funds available for investment.

Vermont maple syrup (photo by Gerald Zojer)

Vermont maple syrup (photo by Gerald Zojer)

Earlier, separate studies concluded that state banks in Oregon and Washington state would lead to thousands of jobs and hundreds of millions of new revenue. Advocates of a state bank in California believe the creation of a public bank would lead to billions of dollars in benefits there. The Bank of North Dakota turns a profit on behalf of that state’s government while providing investments for local projects — an example that could be replicated elsewhere.

Vermont has a small population similar to North Dakota’s, and the researchers who prepared the Vermonters for a New Economy paper drew on North Dakota’s experience. The paper concludes that a Vermont state bank would result in:

  • 2,535 new jobs, including more than 1,000 in the first two years.
  • $192 million added to the state economy.
  • As much as $236 million in new money would be available for credit.
  • Savings of almost $100 million from reduced interest costs.

If it acts like a bank, why not make it a bank?

Such achievements would represent a considerable benefit for a small, rural state with 600,000 residents. The paper does not recommend that Vermont start a state bank from scratch, but rather convert an existing state agency, the Vermont Economic Development Authority, into one. The paper said the authority, in conjunction with two other state agencies that provide specialized loans, already carries out many of the functions of a bank. The authority is tasked with “providing loans and other financial support to eligible and qualified Vermont industrial, commercial and agricultural enterprises” by the state legislature, a mission similar to a state bank.

As of now, the Vermont state government deposits its revenues in two commercial banks, TD Bank (based in Toronto) and People’s United Bank (a regional bank based in Connecticut that swallowed a local bank previously used). Those two banks can, and do, use the money deposited by the Vermont government for any purpose its managers desire. Although the paper went out of its way to praise both for their willingness to lend locally, they have little obligation to do so. TD Bank, typical of large financial institutions, is heavily involved in speculation — it has a reported derivatives exposure of $3.8 trillion, a total more than four times more than its assets. There is risk here.

Were the state government to instead place its revenue in a state bank, all the funds (excepting those required to be held as reserves under applicable federal regulations) would be available for local investment, both as loans and for needed public infrastructure projects. Moreover, a state bank could borrow funds from the Federal Reserve at a much lower rate than by borrowing from a commercial bank and, by being able to use funds from its state bank, the government would float fewer bonds, saving on interest payments. The paper said:

“A public bank could direct as much credit as desired within fed reserve requirements, capital ratios, and prudent banking towards investment in-state lending agencies by partnering with them. A bank can also expand the amount of credit available through leveraging, which the [state] Treasurer and lending agencies cannot do.” [pages 10-11]

The paper calculates that, even with reserve requirements, there would be more than $200 million in new credit available, which could be directed toward useful investment rather than speculation. Because Vermont’s deposited revenue represents a minuscule percentage of TD and People’s United’s assets, and because a state bank would be much more focused on public needs, the proposed state bank’s credit would be in addition to, not a replacement for, commercial banking credit:

“[O]n the question of a public bank creating new credit or not, we find no evidence to support critics, and find that public bank lending will mostly add to existing credit within the state. Furthermore, even if public bank lending simply replaced existing lending by private banks, the results would still be highly beneficial.” [page 22]

What’s good for a small state is good for a bigger state

In addition to the other benefits, the profits from loans would be returned to the state. The Bank of North Dakota routinely produces profits for that state’s government while providing a reliable source of funding for local investment. There have been bills introduced into the Vermont Legislature to study the creation of a state bank, but so far have not advanced due to opposition by the Vermont Bankers Association.

Similar bills have been introduced in other states, which have also faced considerable headwinds, despite (or because of) similar conclusions.

A study by the Center for State Innovation found that a state bank in Oregon could help create or retain 6,900 to 8,800 additional small-business jobs, make $1.3 billion available in new credit and earn profits for the state after only three years. Another study by the same organization focusing on Washington state predicted that a state bank there would created as many as 10,000 small-business jobs, make $2.6 billion available in new credit and also begin turning a profit after three years.

Advocates of a California state bank believe that it would generate $133 billion in credit becoming available for the largest U.S. state. A bill to study this issue was passed by the state legislature, but was vetoed by Governor Jerry Brown. The Bank of North Dakota reported net income of $82 million in 2012 — what would such a bank return in bigger states?

Ultimately, however, the stranglehold of financiers can not be reformed away. It can only be eliminated by converting all banking into a public utility for the broad benefit of society with speculation firmly prohibited.

Getting to there from here is a long road, but successful public state, provincial and regional banks replicated around the world would set a good example, and demonstrate that the staggering cost of a financial industry that continues to run amok is not a burden that we are forced to live with. If we have no control over the economy and our working lives, democracy is an illusion.

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 $76 billion for 2013. Yep: $76 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 18.4 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 $3.0 billion on revenue of $33.1 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.

A path toward bringing banks under democratic control

The struggle to create a democratic economy based on human need requires finding a path to a drastically smaller financial industry. Banking should be a utility, under public control and existing to serve the productive economy, in contrast to its current incarnation as an uncontrollable behemoth that exists to extract wealth from all other human activities.

storm over banksGiven the stranglehold of financiers over the world’s economies, democratizing banks will be no easy task. But it can done. Countries such as Norway and Sweden have nationalized their banks, only to promptly hand them back to private owners.

As always, a word of caution is in order: Although the financial industry acts as both whip and parasite in relation to the productive economy (providers of tangible goods and services) — the whip spurring ever harsher working conditions and intensifying the movement of production to low-wage havens and the parasite extracting money from every possible human activity — there is no neat separation of finance from the productive economy in capitalism. Many manufacturers have financial subsidiaries, for instance, and corporate executives grow wealthy from stock-market bubbles inflated by speculators and other financial manipulations.

The giant piles of money thrown into speculation are the products by industrialists’ profits created through exploitation of employees. There is a symbiotic relationship between financiers and industrialists; together they constitute a globalized class that maintains power through a web of institutions while scrambling to manage the ceaseless instability of capitalism. Although the financial industry is powerful, nonetheless there is not a small cabal of bankers who somehow control everything, an idea rooted in Right-wing conspiracy theories that easily shade off into anti-Semitism.

Caveats in place, the power of financiers must be broken to make any meaningful progress toward a democratic economy. What would a real socialization of banking look like? Specifics would naturally vary from country to country, but the Left Party of Germany has put forth a plan for the socialization of the German banking system that can serve as an excellent starting point for discussion. The Left Party’s model is based on specific aspects of existing local German banks, but contains concepts that are applicable to any country.

The report, How a Socialization of the German Banking System Might Look Like, written by Axel Troost and Philipp Hersel, envisions a banking system based on credit unions (some owned cooperatively by members and others owned by municipal governments) and democratized state-owned banks. Private banks would be either closed or drastically shrunk, depending on their solvency. All banks would be responsible to supervisory boards comprised of representatives of community organizations such as trade unions, environmental groups and consumer associations, and citizens directly elected in community votes.

Requiring banks to provide only basic services

All remaining banks would concentrate on what the report terms the core “PSL” functions — payments, loans, savings. Socialized banks would ensure a “low-cost system of payments including a corresponding supply of cash”; finance public- and private-sector investment that is socially and economically useful; and be secure and sustainable places for savings to be held. In the Left Party conceptualization:

“[S]ocialisation should be regarded as the subordination of the financial sector to steering and control by society and the anchoring of the sector in society.” [page 6]

The report stresses that a reduction in the size of the banking system is unavoidable, both to curtail its influence and to eliminate speculation:

“The false principles which have become established in recent decades were primarily propagated by the financial markets: shareholder value, lean government, competition to attract investment and tax competition. This process needs to be reversed, and the financial sector needs to be reduced to the role of a service provider for the overall economy. …

The aim has to be to substantially reduce the size of the financial sector and to diminish its economic and political power. As a service provider for the real economy and society, the financial sector must not be understood any longer as a place where value is added on its own account, but must be regarded as infrastructure needed for the economy as a whole.” [page 5]

Toward that end, private banks would largely disappear, as far as possible through insolvency. Private banks that remain solvent after all liabilities are placed on the balance sheet and who are so interwoven into the larger economy that their immediate shuttering would unravel other banks and enterprises would not be eliminated, but brought under public control and drastically shrunk in size in a manner that would not cause a cascade of collapses in connected banks and enterprises.

All banks would have to put all liabilities on their balance sheet for inspection, including non-performing loans and bad assets; they would no longer be able to hide them. Those without enough assets to cover the losses would be shut down. European law insures all deposits up to €100,000, and that would remain in force. Shareholders would be wiped out, however, and creditors would absorb losses, not taxpayers.

Only if an institution could not be shut down without causing a cascade of losses in other banks and enterprises would any government money be injected, but in these (hopefully rare) cases, shareholders and creditors would be wiped out and the government would assume ownership. The government would then restructure the bank so it would only perform the core “PSL” functions described above.

Credit unions as the foundation for banking

The current German banking system consists of three “pillars”:

  • Public-law banks (municipality-owned local credit unions and state banks).
  • Cooperative banks (credit unions cooperatively owned by their members).
  • Private banks (which operate across the country and include dominant institutions such as Deutsche Bank and Commerzbank).

The municipal- and cooperatively-owned credit unions have have continued to function well since the economic crisis struck. These continue to provide loans to small and medium-sized enterprises and basic services to depositors, and do not engage in speculation. The state banks (banks owned by the state governments within Germany) were supposed to act like the municipal credit unions (on a larger scale) but instead mimicked private banks by engaging in risky businesses outside their original mandates, saddling taxpayers with covering losses. Private banks concentrated on speculation and have done the worst of the pillars; moreover, despite receiving bailouts, private banks provide the least amount of credit.

Putting all banks on the model of the municipal- and cooperatively-owned credit unions, prohibiting speculation and limiting them to the core “PSL” functions would be the outcome of a socialized banking sector. Simply making banks public is insufficient, the Left Party report says:

“It would appear that banks in public and co-operative ownership can at least partially evade the dictates of the desire for profit. However, public ownership alone is no guarantee that an institution will take this opportunity. But private commercial banks have no alternative to an unconditional orientation to profits, because the financial markets systematically enforce the dictate of the profit motive. In view of this, a socialisation of private commercial banks can probably only succeed if they have first been liberated from the dictate of the profit motive by being transferred to public or co-operative ownership.” [page 8]

A key to the success of the municipal- and cooperatively-owned credit unions is that they operate on a small scale and are anchored in their immediate city or region.

“[Germany’s municipal- and cooperatively-owned credit unions] tend to be small-scale and very much anchored in their region. This includes on the one hand the municipal or regional ownership or patronage, and on the other hand the networking with stakeholders like local chambers of industry, commerce and crafts, sports and charity associations, as well as leading local authorities from religious communities, trade unions and intellectuals. To put it another way: [the credit unions] are integrated into their local environment; they can be said to be territorially socialised. This fits in with the fact that these two pillars of the banking system adhere to a strict territorial principle.” [page 8]

Be socially useful, or be shut down

Surviving state-owned and private banks would be required to adhere to the same core “PSL” functions; those that do not go out of business because those functions would be largely covered already by the credit unions would provide loans for large-capital projects beyond the ability of any credit union on its own. But there would be strict limits on the size of any bank and no bank would be allowed to be a national business. Socialized state and regional banks would coordinate on the large projects. Those larger banks are foreseen as being owned by the credit unions to provide another check on their behaviors.

Limits on territory and legal orientation toward social usefulness are see as as keys toward the goal of converting banking into a utility serving society:

“The [municipal and cooperative credit unions] show that a bank can be very successful if its statutes stipulate that its purpose is not abstract orientation to profit, but the exercise of a certain business model in a certain region. … A socialised bank must be characterised by the fact that the core functions of payments, savings and loans (PSL) are stipulated in its statutes as the area of its operations and its business model, and that these activities are only carried out in a certain geographical area. The region covered by the business operations determines which geographical section of a society is responsible for the societal control.” [page 11]

Nonetheless, a federal system of strict regulations would be implemented, including much higher capital requirements, caps on executive salaries and a ban on bonuses and stock options, an extra tax on the highest earners in banking, a tax on all financial transactions, and a requirement that half of the supervisory boards of banks would be allocated to employees and their trade unions and half must be filled by women.

Although the Left Party model is based on existing conditions in Germany, the basic principles are easily adaptable to other countries. Credit unions, for instance, are common in many countries. At least 7,000 exist in the United States (ordinarily owned by members) and more than 300 exist in Canada, although in those two countries they are buffeted by capitalist market forces and face hostility for being an alternative to large private banks. Similar to Canada, the number of credit unions in Britain is declining as smaller ones in particular face difficulties.

Socialization of the banks includes community control, strict restrictions on financial activities, an end to speculation and an environment in which market forces no longer prescribe behavior. The point of a market is to serve humanity — a strong contrast to the current world capitalist system, in which human beings exist to serve markets. And markets are nothing but the aggregate interests of the most powerful industrialists and financiers.

The Left Party model for bank socialization isn’t a ready-made formula, nor does it purport to be one, but is does provide a valuable starting point. Socializing banks is one only component of the broader task of creating a better world. Viable plans such as the Left Party’s nonetheless explode the idea that the current economic system is the only way to organize society — which is just as much an elite-propagated myth as the idea that a monarch is chosen by God to rule over everyone.

Speculators trade in two weeks what the world makes in a year

Speculation rests on phenomenal amounts of money sloshing around the globe. We could call this endless wave a permanent tsunami, except that would grossly understate the size of the financial wave.

If we could pile up all the money that is exchanged in financial markets and make a literal wave out of it, it would make for an astounding sight were we on the International Space Station, towering above the clouds. The wave would rise so high it might swamp the space station itself.

All right, I am getting fanciful here. And we wouldn’t want to contemplate having to bail out the space station in zero-G conditions. But we are talking about an international financial industry that has truly grown to monstrous proportions, beyond any reasonable necessity.

How big? The combined daily trading average on the world’s foreign-exchange, bond and stock markets is very roughly about US$6 trillion. If that total seems amazing, it is for good reason: By way of comparison, the gross domestic product of the world is about $65 trillion. To put it another way, in 11 business days financial speculators trade instruments and contracts valued at more than all the products and services produced by the entire world in one year.

Most of us are familiar with stock exchanges, and that is the financial market that draws the lions’ share of corporate mass media attention. But that is actually only a tiny portion; an average day’s turnover on the world’s stock markets amounts to $270 billion. Bond markets (government debt, corporate debt and the myriad of “asset-backed” securities continually cooked up) are several times larger, and foreign exchange is vastly larger than bond markets.

Much of this daily $6 trillion turnover is in derivatives, swaps, futures contracts and assorted legerdemain. Almost all of this is nothing more than self-interested speculation; trading for the sake of the largest possible short-term profits regardless of the cost to the rest of the economy or the destabilizing social costs of these giant pools of capital sloshing around the world, pouring in capital here and pulling capital there as opportunities for short-term profits wax and wane.

Why do stock markets exist?

In theory, stock markets exist to distribute investment capital to where it is needed and to enable corporations to raise money for investment or other purposes. In real life, neither is really true. A corporation with stock traded on an exchange can use that status to issue new shares, raising money without the burden of dealing with lenders and paying them interest. But large corporations can raise money in a variety of ways, for example by issuing bonds or other interest-bearing debt, or by selling shares directly to private investors.

Nor do corporations necessarily wish to float new stock — doing so is disliked by investors because profits are diluted when spread among more shares. Instead, it is more common for large companies to buy back shares of their stock (at a premium to the trading price), which means less sharing of distributed profits.

From 1981 to 1997, for example, non-financial corporations in the United States bought back $813 billion more in stock through buyback programs and corporate takeovers than they issued.* That is money that was diverted from investment, employee compensation or community development, and constitutes still more money stuffed into financiers’ pockets.

Most of the action on stock exchanges is simply speculation, and as computers become more sophisticated, the speculation drives higher trading volumes and becomes more remote from the actual business of the company in which stock is bought. “Day trading,” where speculators buy and sell stock within minutes to earn profits on price fluctuations became common in the 1990s, but in the following decade the big Wall Street firms showed their muscle while bringing speculation to an unprecedented level.

These firms created sophisticated computer programs that buy and sell stocks in literally milliseconds. The programs issue thousands of buy orders that are canceled in minuscule fractions of a second in order to manipulate prices to the benefit of the computer owner. These price differences are only pennies, but are done on such enormous scale that the profits skimmed in this fashion are estimated to be as high as $21 billion per year — only a “handful” of these high-speed computer traders account for a majority of all stock-exchange trades.**

Speculation for its own sake

Speculation tends to reinforce itself. During the two years I spent working on a financial news service during the 1990s stock-market bubble, I repeatedly heard traders say the dramatic price rises could not last but they would continue to ride the bubble as long as the consensus view that the long bull market would continue remained in place. The primary reason for why market players believe stock prices will rise at a given time is because they believe other market players believe stock prices will rise. Not nearly as “scientific” as financiers would have you believe.

Bond and foreign-exchanges markets are no less fueled by speculation, and it is the gargantuan size of these markets that give the larger players in them the power to dictate to the world’s governments, extracting budget-busting bailouts, imposing austerity and raising their needs above all social considerations.

Their size is truly monstrous: the world’s 1,000 largest banks held an estimated US$102 trillion of assets in 2011. Separately, the “shadow banking” system (hedge funds, private-equity firms and other investment companies) is worth an additional $67 trillion.*** Financiers hold an amount of capital that is more than two and a half times larger than the world’s gross domestic product.

As more money is diverted into speculation because there are insufficient opportunities for investment, the size of the financial industry and the percentage of corporate profits claimed by the financial industry steadily grows — the size of both banks and unregulated “shadow banks” have increased since the beginning of the economic crisis in 2008. This capital is a function of the amount of money flowing upward to the rich becoming larger than they can use for personal luxury consumption or investment; these torrents of money are diverted into increasingly risky pure speculation.

Too much money comes to chase too few assets, rapidly bidding up prices until there is no possible revenue stream that can sustain the price of assets bought at inflated levels, triggering a crash. The very size of financial markets is a major contributing cause of economic instability. That size is in turn a product of the continual downward pressure on wages — an increasing share of corporate revenues go toward executive pay and profits as the share going toward wages declines.

A financial industry swollen to such gargantuan sizes have no relation to the actual needs of the economy. It is money that could be used for wages (which would strengthen the economy) or for productive investment were it not so concentrated and under-taxed. Austerity, after all, is only for working people.

* Doug Henwood, Wall Street [Verso, 1998], page 3
** Charles Duhigg, “Stock Traders Find Speed Pays, in Milliseconds,” The New York Times, July 24, 2009
*** TheCityUK; the Financial Stability Board