Banks and casino capitalism in the 21st century

One thing this economic depression is doing is provoking more widespread critical discussion than at any time in recent memory of the structure of present-day economies and how they may need to be reformed in the immediate future.

Of course, a great deal of this is "disaster capitalism", in which conservative advocates for deregulation of business, weakening/suppression of unions, low wages, ignoring environmental pollution and global warming and the dismantling of the "social safety net" push the same scheme they favor in good times and bad, year in and year out, as innovative and urgent solutions to economic problems. The urgency of depression-related problems doesn't seem to have much improved the actual quality of their analyses.

On the other hand, there are people looking in a serious way at substantive problems in the current economy and looking toward real solutions. Michael Hudson, an economist at UM-Kansas City, looks at the role of banks in Doomsday Scenario: What Happens When Banks Control the Economy? Alternet 02/01/2012. He writes:

Dismantling public attempts to steer banking to promote economic growth (rather than merely to make bankers rich) has permitted banks to turn into something nobody anticipated. Their major customers are other financial institutions, insurance and real estate – the FIRE sector, not industrial firms. Debt leveraging by real estate and monopolies, arbitrage speculators, hedge funds and corporate raiders inflates asset prices on credit. The effect of creating “balance sheet wealth” in this way is to load down the "real" production-and-consumption economy with debt and related rentier charges, adding more to the cost of living and doing business than rising productivity reduces production costs.

It's important to always recognize that laws and regulations create the framework in which some economic dynamics thrive and others are inhibited. Inhibiting "casino capitalism" is a very necessary thing. When vulture capitalists like Willard Romney's Bain Capital buys a healthy business, loads it up with debt, then takes heavy profits out of the borrowed funds and leaving the business with paying the debt service on the extracted profits, that is a form of casino capitalism that actually inhibits the functioning of the real economy. And tax structures like that in the US that strongly favor capital gains and carried interest create strong economic incentives for just this kind of destructive behavior.

We see a similar phenomenon at work today when there is no consistent reporting requirements or adequate regulation on credit defaults swaps (CDS) that are essentially gambling on the value of sovereign debt from individual countries increasing or decreasing. The CDSes vastly expand the risk exposure of individual banks and the financial system as a whole to situations like the current euro crisis. And they create incentives for individual actors (bond speculators) to do things that may benefits one institution or group of investors at a severe costs to individual countries, to political democracy and to the financial system as a whole.

Hudson argues:

Banking has moved so far away from funding industrial growth and economic development that it now benefits primarily at the economy’s expense in a predator and extractive way, not by making productive loans. This is now the great problem confronting our time. Banks now lend mainly to other financial institutions, hedge funds, corporate raiders, insurance companies and real estate, and engage in their own speculation in foreign currency, interest-rate arbitrage, and computer-driven trading programs. Industrial firms bypass the banking system by financing new capital investment out of their own retained earnings, and meet their liquidity needs by issuing their own commercial paper directly. Yet to keep the bank casino winning, global bankers now want governments not only to bail them out but to enable them to renew their failed business plan – and to keep the present debts in place so that creditors will not have to take a loss.

I'm not in entire agreement with Hudson's analysis. I think he focuses too narrowly in his macro-analysis on the specific problems of the banking system, though his factual description just quoted is a hugely important part of the picture. I also have my reservations about how he describes the effects of planned changes in the money supply in this essay.

But he is providing an important, critical-minded look at the real problems in our current economic structure and legal/regulatory environment that seriously need to be addressed.

Tags: michael hudson, neoliberalism, us economy