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Recent events in Cyprus, the seizure of bank deposits to affect bailouts of large private banks and the implementation of capital controls to limit the rate at which remaining bank deposits can be moved out of the country, suggest the global banking crisis widely presented in the mainstream press as behind the West is still very much present. Germany’s Chancellor Angela Merkel frames Cyprus’ troubles as deriving from a combination of fiscal laxity for which economic austerity is the cure and of out-of-control Cypriot bankers for which ‘internal’ resolution is the remedy. Left out is the role Western Central Banks, German banks, and more broadly Wall Street, have played in the global economic catastrophe that continues to unfold.
The proximate cause of the crisis, the spark that lit the fire, was two of Cyprus’ largest private banks were found to be insolvent and in need of ‘resolution’ in the circumstance where they had received deposits from inside and outside the country in excess of the country’s ability to internally resolve them. The cause of the insolvencies was loans made that couldn’t be repaid and investment assets that had declined in value. Most large Wall Street firms were in similar positions in 2008 when, because of the U.S.’s ability to produce unlimited ‘bailout’ funds through the Federal Reserve’s digital ‘printing press,’ the funds they needed to return to faux solvency were simply handed to them. But because it belongs to the European Currency Union Cyprus does not have this option of ‘printing’ its way to American style bank catatonia.
In a series of moves indicating the ECB (European Central Bank) sees itself as blameless in Cyprus’ troubles, it made needed loans to the Cypriot government contingent on ‘internal’ resolution of the banks, meaning funds for the needed bank ‘bailouts’ had to be found somewhere and that somewhere was in depositors’ accounts. By raiding depositor accounts the ECB assured remaining depositors would take their money elsewhere as soon as they could do so, therefore the Cypriot government instituted capital controls to manage the quantity of funds allowed to leave the country. The results are likely a deep economic depression unfolding in Cyprus and the eventual unwinding of the larger European Union project.
Left out of this story is the role the U.S. and European Union played as the major state-based proponents of neo-liberal finance capitalism; the role of Wall Street, including large German banks, in producing the garbage assets on which the global banking system continues to choke, and the ongoing practices of economic extraction and predation epitomized by the events unfolding in Cyprus. The economic theories of neo-liberalism were behind the absence of capital controls that would have limited the size of external deposits in Cypriot banks to manageable levels. Garbage U.S. mortgage-backed securities and other ‘structured’ financial products created by Wall Street found their way into the investment portfolios of nearly every bank in Europe. And efforts to force ever more neo-liberal policies onto the citizens of the world continue unabated under the U.S. led Trans Pacific Partnership Agreement.
But limiting blame to Wall Street’s, including Germany’s Deutsche Bank’s, role in creating and selling garbage assets understates the role the broader system of finance capitalism has played in the rolling economic catastrophes of the European ‘periphery.’ Unhindered capital flows have been a source of economic disruption for several decades now but they too are but aspects of the larger problem: the system of global finance capitalism itself. Both excessive bank created (private) credit and the uncoordinated nature of capitalist investment render finance capitalism a doomsday machine even were corrupt and / or incompetent bankers not also behind the catastrophes it creates.
The mainstream (capitalist) economic view of international investment is trade based—one country makes products that another country buys. The difference between the money received and the costs of production—“savings” can be kept in its original form or exchanged for another currency. If in the aggregate an ‘excess’ of savings remains in a country, say when China sold more goods to the U.S. than it bought in the 2000s, it is invested—capital seeking a return, and this is purported to have led to economic growth with low inflation, the ‘great moderation’ of economists’ lore. If this excess is great enough, goes the theory, it could even lead to a credit driven bubble, hence one version of the mainstream economic explanation of the housing bubble in the U.S. But left out of this formulation is bank credit and investment allocation in what economist Hyman Minsky called ‘money manager’ capitalism.
Banks create credit to finance investment unrelated to trade imbalances. Various modes of banking—investment banking and asset management in particular, exist to facilitate investment of bank created credit globally. And even rational bankers making prudent loans face a ‘coordination’ problem—they don’t know who else is financing similar loans and what quantity of money can be effectively invested in a business or region. Add to this the system where bankers get paid to make loans that can only be repaid from eternally rising asset values or were never intended to be repaid, the practices by degree behind the West’s property fiasco of the 2000s, and suddenly the finance-precipitated economic crises of the last 30 years make a lot more sense.
Through the banks directly and through the ‘shadow banking system’ private credit has grown exponentially in recent decades and it has circled the globe at increasing speed. The ‘excess savings’ view of global investment hides the role of Wall Street in the creation and distribution of credit. For example, Deutsche Bank, the large German bank, was one of the largest creators and distributors of garbage financial products on Wall Street in the 2000s. So banks both create money through credit finance and the financial products to be bought with the money thus created—literally a license to print money. And both the creation of credit and the production and distribution of garbage financial products pay bankers extremely well while coincidentally increasing the risk of economic catastrophe through cash-flow leverage now distributed globally.
Most fundamentally, re-implementing capital controls, the ‘excess savings’ school’s solution to managing capital flows, and re-regulating banks and bankers, the managed neo-liberal solution, both look past the coordination problem fundamental to capitalism. The base rationale for capitalism is that individuals and capitalist enterprises acting independently in their own interests produce the best possible aggregate outcomes. The removal of capital controls did precede the spate of economic debacles tied to global finance and so did de-regulation of the banks. However, re-implementation of capital controls and re-regulation of the banks, were they to occur (Dodd – Frank is ineffective), are de facto evidence individuals and enterprises acting in their own interests do not produce good aggregate outcomes. Why then retain the ‘capitalism’ of ‘managed-capitalism’ when its most fundamental premises are contradicted by the fact that social welfare is made to suffer if the social welfare considerations behind the ‘management’ of capitalism aren’t pushed to the fore?
Put another way, what better system could be conceived to loot and plunder the globe than that where bankers get to create credit and also the financial products representing claims on ‘real’ assets that can be bought with it? Currently hedge funds in the U.S. are buying bulk houses at pennies on the dollar because private (bank) credit was used to inflate house prices in a credit-fueled boom that went bust. Foreclosed upon home ‘owners’ still owe tens of billions to the banks even though their houses are long gone and the bulk house purchases will be leveraged (using bank credit) to cash the hedge fund investors out and residual value will be sold to shadow banks that have created ‘cash-flow’ economics that depend more on low funding costs and continuing credit expansion than on the values of the underlying houses. And this same dynamic is playing out with ‘state’ assets across peripheral Europe as economies are crashed by bankers (with the help of Central Banks and state actors like Angela Merkel and Barack Obama) and assets are purchased at pennies on the dollar against captive cash flows (think public water and power systems).
But to be clear, this system is also in fair measure just random destruction, not a brilliant conspiracy. As the consolidation of wealth around finance capital demonstrates, there are clear ways for small groups of connected insiders to benefit from economic looting and plunder. But the coordination problem (long understood by capitalist economists before the rise of neo-liberalism) is both fundamental to capitalist production and, to the extent outcomes result from an absence of information rather than planned looting, random within the system itself.
The Asian currency crises of the mid-late 1990s resulted from multiple independent ‘money managers’ deciding at the same time to ‘invest’ in economies with limited capacity to put it to profitable use in capitalist production. The ‘coordination’ issue is that had these money managers known the amount of money they were collectively intending to invest relative to the amount that could be absorbed they could in theory have made the decision to put the money that couldn’t be put to ‘good’ use elsewhere– but they didn’t know. The result was over-investment, with money dumped into many projects that served no useful role in ‘the economy.’ Once it was understood that over-investment had resulted in (caused) mal-investment the money that remained was quickly removed leaving smoldering carcasses where functioning, if less ‘rich’ in Western terms, indigenous economies had previously existed.
In Europe as well as in the U.S. much of the rising ‘sovereign’ debt behind calls for fiscal austerity derive from governments shifting bank liabilities onto public balance sheets. Three billion euro of Cyprus’ ‘public’ debt reportedly came from its contribution to the ECB’s ‘bailout’ of Greece that in fact went to pay European banks and Western hedge funds for ‘investments’ they had made in Greek government bonds. The U.S. has been more successful than Europe in hiding bank bailout costs that will ultimately wind up on the public’s balance sheet through residual New Deal programs that make good hiding places to stash bogus bank assets. And ‘automatic stabilizers’ like Federal unemployment insurance and Mr. Obama’s largely Republican stimulus program are behind rising public debt being cited by U.S. Austerians as reasons to cut social insurance programs.
Cyprus and the rest of the European periphery face the complicating factor of having given up their own currencies to belong to the European Currency Union. This likely means the European Union will, in fits and starts and in various configurations, eventually unwind. But the other problem of predatory and extractive global finance capitalism will continue until it is brought down. Mainstream economists will eventually get their incremental reforms as ongoing and new crises erupt. But again, what is the rationale for ‘managing’ an economic system whose fundamental premise is that it works best when it is left unmanaged?
Finance capitalism is fatally flawed in theory and in practice. Its ultimate product is that which is before us: a global plutocracy dependent on state capture, power and control to plunder and loot what will become, by necessity, increasingly resistant populations. The post-War ‘moderation’ cited by mainstream economists worked to the extent it did by limiting private debt creation. However, the base imperative of finance capitalism today is infinitely expanding (private) debt—it is the source of its political and economic power. Those in the U.S. who remain in the Democrat / Republican divide are blind to where real power lies. Events in Cyprus have provided a glimpse for those who care to see.
Rob Urie is an artist and political economist in New York.