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Rearview Mirror Economics: Mutant Markets And Crony Capitalism

Politics / Global Economy Mar 08, 2013 - 07:17 PM GMT

By: Andrew_McKillop


The well known British economist the late Joan Robinson once observed that the only thing worse than being exploited by capitalism, is not being exploited by capitalism. This whimsical English humour was fine in her day, but questions she treated like generations of economists before her, have never been settled. More important, today's reason for asking questions like - Why are markets not working? - is that western society and its economic model or models now faces a critical, life-or-death struggle.

Today, the most exposed  European countries, meaning those most advanced in the process of economic and political breakdown including Spain, Italy and Greece have youth unemployment rates as high as 55 percent. Young people are exiling themselves in droves. Even during the Great Depression things were either only just as bad as that, or better. Also today, all major western countries have national sovereign debts that are basically impossible to ever repay. Should they be repudiated, and if not, what else can be done?  Permanent austerity, economic stagnation and recession?

As recent Italian elections have shown, public opinion and voter confidence in the lethal mix of "steady as you go", middle of the road, market-friendly reformist government, brandishing its basic refusal to govern behind "technocratic" wraps has declined almost to zero. Italy now has complete political stalemate. Its political system offers voters a tired and tarnished buffoon with plutocratic leanings, so-called market reformists and so-called reformed communists, and a former comic whose movement demands that all previous politicians, in Italy, must be put on trial and wherever corruption can be proven, must be given long custodial jail terms. The global finance fraternity reacted to this by Fitch-slapping Italy, the Fitch agency downrating it to BBB citing four main reasons: election results which are 'non-conducive' for further structural reforms, unexpectedly deep recession, greater than expected budget deficits, and a weak government 'unable to respond to shocks'.

Italy may be a stark version of what crony capitalism and politics produce - when they fester long enough - but exactly the same process, the same defective ideology, the same basic refusal to govern and the same increasingly total rejection by the people is commonplace in all Western countries, today.

This is New Normal. The so-called New Economy that takes us all along with it for the magic carpet ride to nowhere is what we can expect: crisis prone, corruption riddled, inefficient, a denial of democracy, and a guarantee of mass poverty in the future. With or without the deadly civil wars and technological catastrophes this "model" is apt to produce, before it crashes.

President Obama, at the height of the first crisis threatening the entire banking-finance-insurance industry, in 2009, supposedly told banking and finance chiefs that Federal bailout was the only thing "separating them from the pitchforks". The raging mass of rioters would have destroyed the entire industry, would have more than occupied the Citadels of Finance, physically lynch mobbing Wall Street fixers and gurus - but kindly Barack Obama ordered the Federal Reserve to make unlimited bailouts. Since 2009 these have attained about $16 trillion. Paid for, of course, by the would-be rioters and their heirs and descendants - including loan interest - unless the debt is repudiated.

Today, although not yet proposed as more than asides in dinnertime speeches of IMF chiefs, central banking chiefs, Davos Forum talkers, and thinkpiece article in pink-coloured newspapers with deep blue political leanings, the Western world needs a Dawes Plan for itself.

This plan, which for a short while saved Weimar Germany, basically set a 30 - 80 percent writedown and abandonment of reparations payments and debt obligations owed by Germany to western lenders, in the 1920s. In modern parlance "an 80 percent haircut" - close to decapitation. At the time the US was able to, and did pick up the tab but as already noted this in no way "saved democracy" in Germany. Today however, even this kind of heroic mass writedown of debt might not be enough - due to the structure of society and the global economy after decades of New Economy "reform".

Whether China, other Emerging economies, and the few other net creditor nations which exist like Russia and the Gulf oil exporters would pick up the tab is not at all sure, for one stark reason because the damage would continue. The trade and budget deficits would keep on swelling, the reforms would not work (as if they were ever meant to), the economy would go on de-industrializing and outplacing, unemployment would remain massive, the playtime casino "economy" of financial markets would go on blowing asset bubbles in the air then slinking away when they popped - and so on.

The bad lesson of the New Economy has been learned and spread to the world faster than Asian flu or SARS and AIDS.  In early 2013, Southeast Asia’s corporate debt loads are approaching the pre-1997 financial crisis peak of 75 percent of regional GDP, and South Korea’s household debt has reached 165 percent of disposable income compared with 135 percent in the US at the start of the subprime crisis. China, with its $3 trillion stash of not-so-hard currency reserves is the supposed tab-picker-up but national debt increased by nearly one-sixth in the single year of 2012, to 206 percent of GDP.  China's corporate cash flow is about 50 percent dependent on the life support of new capital at nearly zero interest, the same way way as the banks which supply it.

The tragicomic farce can muddle through a while longer, Men of Good Faith might gargle, but no solutions are available unless, or until a miracle happens.

The logic of how government should repair the grievous damage crony capitalism has done to the image and mechanism of "free market capitalism" since 2008 is a subject that not only Joan Robinson and Adam Smith might have liked talking about, if they could understand what had happened to the economy since the 1980s. Whether it was Turgot, Bastiat, Say, Ricardo, Malthus, Marx,Veblen or Schumpeter - all of them might also have had partial explanations, and possible one-liner solutions for the post-2008 crisis. Several of them would have found it unbelievable we have a giant economy with giant corporations, but these have a massively dysfunctional and predatory relation to the economy, society and the environment at one and the same time. The hat trick!

Several of the above, and other economists would have urged the break up of Crony Corporations, starting with banks forthwith and pronto; others would have argued they must be nationalized. In most western countries, today, this is what we have: a newish, ineffective, informally nationalized mix of State-and-private crony enterprises that can and do ruin the economy, the environment and society even better and faster than previous.

Believing that present "new Keynesian" remedies should work, when they previously never worked is Albert Einstein's definition of madness.

The modern history of reformist anti-trust action by governments in the financial domain suggests that the big banks, even if they were broken up, will rapidly regroup, like the Hydra. So what can be done instead of this, or when breaking them up fails?

Traditional banking and finance reforms, before the advent of the New Economy, aimed at improving regulation, forcing the private financial sector to shoulder more risk by setting higher reserve requirements, and included the Mandarin State deciding on how to channel credit to key and emerging sectors. These traditional remedies are surely still being played, in a new and mutant (as well as crippled) way but our present crisis and the inevitable future crises bring into play a spectrum of highly complex problems needing sophisticated proposals for radical change.

The blunt cudgel of The Siege Economy and No Fiat Money is not needed, but changes as radical as the transformed fresh-start economy and transformed social comtrol of the economy are needed.

For instance, “Limited Purpose Banking” could be imposed fast and easily. This would impose a 100 percent reserve requirement on banks. No credit levering multiples of what the bank has on its regularly audited books would be permitted. This would certainly transform the banks, into modest institutions with little or even zero capacity to finance speculation. This would also permit, and need full nationalization of money issuance or creation, removing all money, near-money and derived credit creating abilities from the bankers, brokers and insurers. This new downsized and moderated banking and credit system would be better adapted to local democratic and community activities, than to national, continental or worldwide economic activities: Small is Beautiful.

We immediately hit the issue of scale: gigantism and globality are two of the biggest key themes of the New Economy. What they have delivered is national, community and environmental ruin. The lure of "central command and control" is strong, but teamed with roll-a-dice casino capitalism and refusal to govern this schizoid double headed beast can only cause chaos. Upstream we have chaotic financing; downstream we have meticulous high-tech industrial planning and organization: the only common factor is that both are operated only by minorities, only in private.

Even the term "central" banking shows its basic urge to dominate far and wide, overseas or even globally: today we can see the results of unfettered central banking.

For sure and certain, central banking and democracy are opposing or antinomic terms, making it very necessary to pose the most basic question of all: Can there be meaningful democracy in a huge, and even undefined "pyramidal system" with has literal Global Reach, but no responsibility, without the first step of rigorously decentralizing power? How does this happen?

Probably the biggest change we need, and a change that is happening, is re-popularizing democracy. For decades, as the New Economy swilled into the lifeblood of the economy like cancer cells, democracy was flushed out the bath tub with the baby we can call Hope for the Future. Democracy, in plenty of western countries today, has a bad smell and a bad image. This is a problem that will not go away: simply bemoaning that Washington and other capital are “broken” and "remote" does nothing.

New and different, and well-designed planning systems bridging society and the economy, the community and the market, are needed and - in poorer countries - already exist. They are almost always dentralized and smaller scale and always include democratic decision making. Notably in "Red Latin America", including Brazil, Cuba, Venezuela, Ecuador, Bolivia and Argentina we can find participatory budgeting of local private, semi-private and public economic spending, investment and production. Above all this concerns practical bottom-up efforts for creating and maintaining a major social and democratic component in economic decision making and the operation of the economy.

Reducing scale as well as integrating participatory decision making and responsibility does away with one of the biggest scourges of crony capitalism: the Too Big to Fail syndrome. As we also know government itself, in the Western former-democracies has been infected and colonized by this ideology. Governments also believe they are too big to fail, too big to fall. This system of New Democracy fits hand in glove with the New Economy: it is totally interventionist and can only create monopolies, when it is not itself first created by monopolies.

New Capitalism already exists, including worker-owned companies and small corporations in Europe and the US, as well as Latin America and South Asia. Among the key reasons this model is not more widespread apart from its "danger to politics as usual", is what the US 19th century advocate of industrial democracy, John Dewey called the " the shadow cast on society by big business". Bringing all institutions under community control, including the means of production, exchange, distribution, transport and communication was in Dewey's view the basic need. Even in his day, like Veblen, he could warn what will happen without it: the control of government by the peak of the income pyramid, with the vast majority “down below” almost completely disenfranchised.

Going even further back in the ethics and philosophy of government, Socrates and Plato, some 2500 years ago warned that democracy is inherently unstable, needs constant renewal and without it will almost certainly morph into plutocracy, autocracy or tyranny. This is what we have today - called "No Alternative politics" - but is completely opposed and unrelated to the public will.

Future historians, if they exist, will look back at the curious spectacle unfolding in the early 21st century: for the first time in human history, humans are literally destroying their life support systems, including a functional and responsible economic system, through the pursuit of mutant ideologies dredged from the 18th century and earlier. We have laid ourselves open to the Black Swans of financial and economic catastrophe, and the ever-present threat of technological catastrophes, in the plural, while average persons only want to earn a decent living. The swan song of democracy has joined the wake of the economy, meaning the time for massive change is now, either by riot or reason.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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