At the onset of the global financial crisis, many financial institutions that engaged in risky practices were on the verge of bankruptcy as the housing market crashed. Top regulators soon discovered that shocks suffered by large banks spread quickly throughout the financial system and then to the whole economy. Those large firms, colloquially dubbed “too big to fail,” were also highly interconnected. Jane D’Arista, James Crotty, and a few other economists had identified these inter-connections, but most economists and policy makers had remained clueless.
As the crisis worsened, Fed Chairman Ben Bernanke, New York Fed President Timothy Geithner and others tried to come to grips with what was happening. They started referring to Citibank, Bank of America, Goldman Sachs and other banks as “systemically important,” though former regulator Bill Black more aptly referred to them as “systemically dangerous”. A systemically important/dangerous institution is one that is so large and well-connected to other firms that shocks it suffers are transmitted to many other participants in that system. When these systemically important firms were failing, taxpayers bore the brunt of the impact as the government was compelled to inject massive amounts of taxpayer funds, or face massive economic losses, damages, and inefficiencies. This, of course, gave rise to the now well-known problem of moral hazard, where actors that do not directly bear the costs of risks are incentivized to pile on more risk. Taking into account the potential effects of systemically important firms, it is easy to understand why they can be closely associated with institutions that are “too big to fail.”
The world of international trade negotiators is an increasingly secret one, with even other agencies of national governments not fully aware of what is being offered by their negotiators in such deals. One current example is a pending “trade” deal called the Trade in Services Agreement (TISA), which is being negotiated among 50 countries, including the United States, the EU, Australia, Canada, Chile, Costa Rica, Hong Kong, Iceland, Israel, Japan, Liechtenstein, Mexico, New Zealand, Norway, Panama, Peru, South Korea, and Switzerland. This agreement is apparently supposed to be “classified” information – in other words, secret and unknown to the public that will be affected by it – for a full five years after it is enters into force or the negotiations are terminated!
That an international treaty that has binding and enforceable obligations can be treated as secret for five years after it comes into force is not only bizarre but almost unthinkable. The need for such secrecy would be inexplicable even if such agreements were actually in the interests of people whose governments are involved in such negotiations. That secrecy is sought would on its own be reason for concern, but the little that has been leaked out of the state of the negotiations suggests even more reasons for alarm, especially because such a deal would have far-reaching implications for financial stability and adversely affect everyone in the world.
One critical element of this relates to liberalisation of rules around financial services, discussed in an Annexe. An April 2014 draft of this Annexe is now available on Wikileaks in yet another important public service provided by this organisation. This draft may have been already superseded by the ongoing negotiations, which are apparently to continue in Geneva in the last week of June, but if it is an indication of what is under way then it deserves to arouse much more public outcry.
The interview below is from a series on The Real News Network’s Reality Asserts Itself, with Paul Jay. Jay interviews Costas Lapavitsas, professor of economics at the School of Asian and Oriental Studies, University of London, and author of the book Profiting Without Producing: How Finance Exploits Us All (Verso). Lapavitsas recently did an interview with Triple Crisis blog and Dollars & Sense magazine, serialized here (part 1, part 2, part 3, part 4).
In his article “The Big Casino,” in the latest issue of Dollars & Sense magazine, economist Doug Orr notes the recent attention—thanks largely to Michael Lewis’ celebrated book Flash Boys: A Wall Street Revolt—to high-speed stock trading. Lewis tells a story in which the problem goes no deeper than the rigging of the stock-market game to favor some players over others. (It is a measure of the superficiality of Lewis’ analysis that the solution on offer, and the objective of the story’s heroes, is to set up a different kind of casino!) “The problem with the stock market is not just that the casino game has been rigged to favor some gamblers,” Orr argues. “More fundamentally, the problem is the existence of the casino in the first place.”
Gamblers at a blackjack table know they will occasionally lose. But if they see a player who can take his bets off the table if he is losing and can take part of every pot as well, they will be very upset. This is why Michael Lewis’ book Flash Boys: A Wall Street Revolt, which describes how high-frequency traders are able to “frontrun” the market, has raised such a furor in the business press. Gamblers like playing the game, but not if the game is rigged. When they finally find out how it is rigged they will protest loudly.
On April 3, in reaction to the revelations in Flash Boys, brokerage-firm founder Charles R. “Chuck” Schwab issued a statement calling high-speed trading a “growing cancer” that threatens to destroy faith in the fairness of the markets. Schwab pointed out that while the total number of trades stayed relatively flat from 2007 to 2013, the number of trade inquires rose from 50,000 per second to 300,000 per second! He called this “an explosion of head-fake ephemeral orders” designed to “skim pennies off the public markets by the billions.” He claimed that “high-frequency trading isn’t providing more efficient, liquid markets,” but rather it is “picking the pockets of legitimate market participants.” He pointed out that some high-frequency traders claim to be profitable on over 99% of their trading days, a statistical impossibility unless the game is rigged.
Sharmini Peries of The Real News Network interviews Bill Black, associate professor of economics and law at the University of Missouri-Kansas City and the author of The Best Way to Rob a Bank Is to Own One. Black discusses twin news events showing how big banks have been “caught red-handed committing frauds” and yet no government action in the United States has been undertaken to prosecute “any of the Wall Street elites whose frauds actually drove the crisis.”
When President Obama’s fortunes were tanking in the winter of 2010, he needed a way to come out punching at the bankers again in order to gain some more momentum on financial reform—and with the voters. So he turned to an unlikely “populist” symbol—Paul Volcker, former head of the Federal Reserve System from the 1980s, who had been widely reviled, especially on the left, for his anti-inflationary crusade and high interest rate policy at that time. Volcker’s policy raised unemployment to dizzying heights, resulted in thousands of bankruptcies, and ushered in the Third World debt crisis that left much of South America in economic ruin for a decade or more. But as a sign of how crazy U.S. politics had become and how far economic discourse had shifted to the right in the ensuing 30 years, Paul Volcker had become a voice of relative sanity in the fight over financial reform in the wake of the Great Financial Crisis of 2007-2008. Obama called a press conference with Volcker at the front and Timothy Geithner, Obama’s Treasury Secretary who had been very unenthusiastic about significant financial reform, slightly behind and with a scowl on his face. The conference announced Obama’s support for “the Volcker Rule,” which was to be included in the Dodd-Frank Financial Reform bill that was under development and the subject of furious debate in Washington—and that ultimately became law in the summer of 2010.
Sharmini Peries of the Real News Network interviews Triple Crisis blogger Gerald Epstein about new U.S. federal government regulations raising the required capital banks must hold. Epstein explains why the regulations will be more stringent, allowing fewer loopholes, than previously, why they will reduce systemic risk somewhat in the banking system, but why they’re “probably not enough.”
This is the first part of a four-part interview with Costas Lapavitsas focusing on the Era of Financialization and the transformations at the “molecular” level of capitalism that are driving changes in economic performance and policy in both high-income and developing countries. Lapavitsas is a professor of economics at SOAS, University of London, and the author of Financialised Capitalism: Expansion and Crisis (Maia Ediciones, 2009) and Profiting Without Producing: How Finance Exploits Us All (Verso, 2014).
Costas Lapavitsas, Guest Blogger
Dollars & Sense: Over the past few years we’ve heard more and more about the phenomenon of “financialization” in capitalist economies. This concept appears prominently in your writings. How would you define “financialization”?
Costas Lapavitsas: Well, it’s very easy to see the extraordinary growth of the financial sector, the growth of finance generally, and its penetration into so many areas of economic, social, and even political life. But that, to me, is not sufficient. That is not really an adequate definition. In my view—and this is basically what I argue in my recent book and other work that I’ve done previously—financialization has to be understood more deeply, as a systemic transformation of capitalism, as a historical period, basically. I understand it as a term that captures the transformation of capitalism in the last four decades. To me, this seems like a better term to capture what has actually happened to capitalism during the last four decades than, say, “globalization.”
Anton Woronczuk of the Real News Network interviews Triple Crisis blogger Gerald Epstein about the borrowing advantages enjoyed by “Too Big to Fail” banks, due to creditors’ confidence that the banks will be bailed out if they are in danger of failing. Little has changed, Epstein, warns–in terms of the big banks’ advantages or their risk taking–due to the financial crisis or subsequent regulation.
The Shanghai Free Trade Zone was incorporated on September 29, 2013, with the aim of testing some liberalization measures, including financial liberalization. Although the zone is currently moving at a glacially slow pace in terms of liberalizing interest rates and financial flows, there are plans to allow funds to be transferred offshore. If and when this occurs, some financial flows moving offshore may be legitimate—going to real investment in countries like the United States, Japan, and Australia—while others may move truly offshore to known tax havens.
China has already been in the news recently, due to an exposé on offshore accounts held by members of the Chinese leadership. About 22,000 mainland Chinese and Hong Kong citizens were revealed to have accounts in tax havens in the Caribbean and South Pacific. The money is associated with hidden wealth. Some of this is suspected to stem from transactions that may not have been entirely above board. A current anticorruption campaign is attempting to eliminate some of the worst abuses.