Showing posts with label Wall Street. Show all posts
Showing posts with label Wall Street. Show all posts

Saturday, November 01, 2008

FDR and the origins of State Capitalism

As I have written before state capitalism is a historic epoch. It saved capitalism from self destruction and from workers revolution. A revolution which was aborted and beccae a model for historic shift in the thirties to State Capitalism. It resulted from the shift from post WWI production to finance capital. The roaring twenties was a period of both Fordist expansion and expansion of finance capital. And that led to the crash of 1929.

It follows, therefore, that during a crisis the decline in commodity prices is always accompanied by a contraction in the volume of credit money. Since credit money consists of obligations assumed during a period of higher prices, this contraction is tantamount to a depreciation of credit money. As prices fall sales become increasingly difficult, and the obligations fall due at a time when the commodities remain unsold. Their payment becomes doubtful. The decline in prices and the stagnation of the market mean a reduction in the value of the credit money drawn against these commodities. This depreciation of credit instruments is always the essential element of the credit crisis which accompanies every business crisis.
Rudolf Hilferding, Finance Capital. A Study of the Latest Phase of Capitalist Development


In response to the crash of '29 Keyenes suggested that since the State creates capital in the form of money that it should intervene as the producer of credit and save the market. Just as it is now saving International Financial Capitalism from itself;

“The government intervention is not a government takeover,” Mr. Bush said. “Its purpose is not to weaken the free market. It is to preserve the free market.”

Which is exactly what FDR did after three years of Depression in the U.S. And which Republicans have spent the last sixty years denouncing, mistakenly, as Socialism. George W. Bush has ended his romance with Ronald Reagan to embrace the real politicks of FDR.

As Rosa Luxemburg pointed out;This new type of capitalism--properly called state-capitalism--persists to the present day in the ideological dress of 'socialism."


In fact it was a historic moment in Capitalism, when the financial exuberance of the market collapsed internationally, and the capitalist State came to the rescue, changing the nature of capitalism forever.

To sum up: the development of the productive forces of world capitalism has made gigantic strides in the last decades. The upper hand in the competitive struggle has everywhere been gained by large-scale production; it has consolidated the "magnates of capital" into an ironclad organisation, which has taken possession of the entire economic life. State power has become the domain of a financial oligarchy; the latter manages production which is tied up by the banks into one knot. This process of the organisation of production has proceeded from below; it has fortified itself within the framework of modern states, which have become an exact expression of the interests of finance capital. Every one of the capitalistically advanced "national economies" has turned into some kind of a "national" trust.N.I. Bukharin: Imperialism and World Economy Chapter VIII


State Capitalism in the thirties took on various forms, including Fascism, which itself is a form of nationalized corpratist state. Which once again right wing American politicos deliberatly confuse with Socialism. Whether it was FDR, or the populist movements of Prairie Socialism or Social Credit, state capitalism originated as a form of Distributionism, and is not socialism.At best it is about 'sharing the wealth', but not changing the fundametal nature of capitalism.

With the end of WWII the modern form of State Capitalism was born. It was internationalist and imperialist, reliant upon the Cold War to continue the prosperity of War Production. Both East and West were mutating into new forms of State Monopoly Capitalism; Stalinism in the East and the Military Industrial Complex in the West.

Contrary to pundits on the right, it is the historic mission of the capitalist state to save capitalism from itself, from its excesses. A lesson learned in the thirties. Socialism is not merely the state nationalizing or owning private assets, it is workers owning the means of production, not as taxpayers or consumers, but as producers. Anything less is merely another face of capitalism.

And capitalism is not a 'free' market, but the historic movement towards global expansion and the increasing development of large monopolies, whether they are private corportations or state controled ones. Thus China's development as evolving from State Capitalism into a form of Monopoly Capitalism can be explained in light of both Schumpter and Hilferding .

Lenin and Bukharin influenced by Hilferding saw Capitalism of their day evolving as a new form of Imperialism, which today we call Globalization. They also saw the beginings of a new form of Capitalism; Fordist rproduction financed by Banks which we call Monopoly Capitalism. However their view that socialism was public ownership of Monopoly Capitialism was coloured by their view of the State.

As Social Democrats they viewed control of the State as the essence of Socialism. When in reality, as the Russian Revolution, and later Revolutionary periods of workers uprisings; Spaing 1936-39, post WWII revolts in Poland/East Germany and Hungary, France in 1968 and Italy in 1973 would show, workers recolution was about direct workers control of production, workers self management, not state ownership or state management.

Which is why stripped of the rhetoric, the so called Socialism of China is simply another face of Monopoly capitalism. And the current financial crisis is a crisis of competing capitals, which may result in rebalancing the Imperialist powers globally. America is in debt to the Asian Tigers and the current economic crisis harkens us back to the crisis and reshaping of the world after 1914.

And like that period the elephant in the room is actually not the fiscal crisis at all but the solution to this crisis which is either Inter-Imperialist War or workers revolution. Already the sabre rattling and small wars and war like crisises are part of the background noise we read and hear everyday, despite the rollercoaster that is Wall Street.

Around the world food production is down, costs are up and last year there were thirty major revolts world wide around food. In China and around the developing capitalist economies the proletariat are revolting, each new product failure, collapsing mine, or major capitalist disaster is met with increasing distrust of the 'system', the 'estalishment'. The falling rate of profit that so called Marxist myth, has once again reared its ugly head.

And if the pending crash and recession are serious and deep enough even American Idol besotted American Consumers may suddenly realize they are actually proletarians, facing the imminant collapse of not only their Empire, but of their very livlihoods, and revolution will be on the agenda once again.

It was exactly this threat of world revolution that spurned FDR and the American capitalist establisment to try and stablize capitalism last time around. And for sixty years it succeeded, until the predictable happened again; capitalism melted down.

--------------------The Origins of State Capitalism-------------------------

"H.G. Wells was one of the few socialists who claimed to see big business, and multinational corporations, in particular, as the forerunners of a World Socialist State"

John Maynard Keynes wanted a global system of fair trade and fair development free of debt bondage and unemployment. His greatest ideas came up against a USA determined to rule the world, to hold off trade competitors at any cost, and to wring from the Third and Fourth worlds every ounce of wealth it could squeeze at whatever cost in human suffering.

Keynes was an enlightened capitalist. His life’s work is adequate proof of that. He was also an anti-Communist, quite openly. Nonetheless, his total defeat on international trade and monetary policy by the US demonstrates the fate of the enlightened, even of enlightened capitalists – even ones of outstanding genius up against corporate capitalist imperialism.

He was a member of the justly famous Bloomsbury group: Virginia and Leonard Woolf, Lytton Strachey, Clive and Vanessa Bell, Duncan Grant, and a host of other luminous, talented, gifted people. Keynes connected as well with W.H. Auden, Rupert Brooke, Serge Diagilev, Nijinsky, Ottoline Morrell, G.B. Shaw, Ludwig Wittgenstein, Sidney and Beatrice Webb, as well as every major economist and many of the most powerful politicians of his time.


Franklin Roosevelt Studied in Post-Soviet Russia

Primakov, now functioning as a senior figure in Russian policy circles, and an informal advisor to Putin, made a high-profile television appearance on an NTV Sunday evening program, Jan. 28. He said that Russia is being criticized today more sharply than at any time since the end of the Cold War, because of "subjective factors on the other side": expectations that Russia would be a towel boy for Western institutions, beginning in the early 1990s.

Primakov recalled how, when he was Prime Minister, "a representative of the International Monetary Fund came over and tried to impose certain models of development on us. They were trying to impose on us a system whereby the state was not to be involved in anything, everything was to be left at the mercy of the market, and the market was supposed to take care of everything."

As against the fallacies of the IMF, Primakov cited Franklin Roosevelt, saying: "No country has ever managed to extricate itself from an economic crisis situation without decisive interference of the state. This is what Roosevelt said, and this is what [Ludwig] Erhard in West Germany after the Second World War said, and he acted accordingly.... We have seen a turning point; at long last we have rejected the views of the people I would describe as dogmatic liberals who thought that the market would provide all the answers.... At present the state is increasingly involved in the economy. It does not mean that the state will revert to [the Soviet central planning agency] Gosplan, to issuing directives. But indicative planning and even industrial policy as such were also denied. Now, thank God, we have abandoned this, and this is not liked."

The current Russian deliberations about Roosevelt go far beyond any opportunistic considerations that might be involved, having to do with Putin's team seeking a third term for him. They bring to the front of the agenda, where they should be, three things.

First, a reminder of what a difference for the world, the quality of leadership in the United States of America makes.

Second, an understanding of how the collaboration of the United States and Russia, as two of the world's great nations, has shifted the course of history for the better, in the past, and could do so again. MGIMO, the venue for the Feb. 8 "New Deal" conference, recently issued an in-depth study of what a multipolar world could look like, and it by no means excluded the U.S.A. (See "Moscow Discussion: Can U.S.-Russian Relations Improve?" in EIR, Dec. 8, 2006.) And when his NTV interviewer asked if Russia should form a bloc with countries that have been ostracized, e.g., for seeking nuclear weapons, Yevgeni Primakov strongly condemned any notion of turning anti-American: "To form a bloc against America? I am against it.... There should be no anti-Americanism in our policy. We should look for ways to uphold our national interests without confrontation. This is Putin's course and I support him on that to the hilt."

Lastly, the American System economics of the Roosevelt period in the U.S.A., with all it implies for basing relations among nations on their mutual interest in the improvement of life for their populations, is exactly what needs to be brought into action in Russia, in the United States itself, and throughout the world.




'A new deal'

In his Presidential acceptance speech in 1932, Roosevelt promised "a new deal for the American people." The term was taken from a 1932 book by the same name, "A New Deal," written by Stuart Chase. That book rapidly disappeared from the shelves after Roosevelt's election. Its contents were the currency of White House economic policy discussion by Tugwell and other central planners around the new President.

Chase, along with Tugwell and Robert Williams Dunn, had jointly written a report, "Soviet Russia in the Second Decade," following their 1927 travel to Stalin's Russia.

In his 1932 book, "A New Deal," Chase argued that the earlier transition out of feudalism into what he called laissez-faire capitalism, was essentially over. The era of Trusts, monopolies, capital concentration by large banks, must now give way to central or collective planning. Chase wrote, "modern industrialism, because of its delicate specialization and interdependence, increasingly demands the collectivism of social control to keep its several parts from jamming. We find a government meeting that demand by continually widening the collective sector through direct ownership, operation and regulation of economic functions." He adds, "Competition is perhaps a good thing—in its proper place. Where is its proper place? Collectivism is beyond peradventure on the march."

Much of Chase's book was filled with fulsome praise for Stalin’s Russian model of central planning and its achievements, reflecting the fascination of numerous younger American intellectuals in the early 1930's.

In his "A New Deal," intended as a kind of blueprint for the Roosevelt campaign, Chase advocated what he called, "The Third Road, a road which runs neither to red dictatorship nor to black (business)." Chase proclaimed that under the Third Road, "private profit will not furnish the happy hunting ground it used to. State trusts, investment control, the curbing of speculation, will choke the muzzle of the more devastating forms." He also proposed drastic economic controls, an eerie harbinger of what would come to pass under the Federal Reserve of Alan Greenspan: "The Federal Reserve will take over the control of currency, the stock exchanges, banks and domestic investment... A new Foreign Trade Corporation will supervise exports, imports and foreign loans. Public works will undoubtedly be centralized in one department..."

Leaving no doubt that his sentiments were not market-oriented in any way, Chase concluded his tract by stating, "We can go on, however...without violent revolution...if we are willing to halt expansion, and organize industry on the basis of using to the full the equipment we now possess. This is the program of the third road. It is not an attempt to bolster up capitalism, it is frankly aimed at the destruction of capitalism, specifically in its most evil sense of ruthless expansion. The redistribution of national income, the sequestration of excess profits, and the control of new investment are all designed to that end." Little wonder that Chase was given a very discreet background policy role in FDR's inner circle. This was explosive stuff for the American public, even in an economic depression.

After leaving Harvard in 1910, Chase had joined the Boston Fabian Club and went to Chicago to work in Jane Addams' Hull House. As a young bureaucrat with the Federal Trade Commission in 1917, Chase investigated charges against Armour & Co. meatpackers. This all shaped his social outlook, and the Soviet model gave it justification in terms of national planning. Chase first met Roosevelt in 1932, but his role was more as a writer than as a policy administrator in the New Deal. He held several official consulting posts in the New Deal, but was mainly influential through his good friend, Rexford Tugwell, and through his writings.

Rexford Guy Tugwell, the Columbia University economics professor who traveled with Chase in 1927 to the Soviet Union, was the central person of this collectivist group around FDR. Indeed, when it emerged that Tugwell was one of the inner circle of the new President, business leaders and newspapers began to research Tugwell's economic writings, and came away shocked, leading some to nickname him, "Rexford the Red."

As newspaper journalists began digging into Tugwell's published writings for clues as to what policies the new President Roosevelt was being given by his top advisers, they became alarmed.

In a paper in the American Economic Review March 1932, Tugwell wrote, that the quest for profit no longer motivated business, but that instead it produced "insecurity" because profits were, "used for creating over-capacity in every profitable line; they are injected into money market operations in such ways as to contribute to inflation; they are used, most absurdly of all, as investments in the securities of other industries." Tugwell proceeded further in his frontal assault on the core of the market private enterprise system which had created such extraordinary wealth and improvement of general living standards over the previous decade: "Industry is thought of as rather a field for adventure...The truth is profits persuade us to speculate." When such comments were widely reported in the Nation's media, they did little to bolster businessmen's confidence in the new Administration.

In discussing a proposal to introduce national economic planning, Tugwell wrote in 1932, "it seems altogether likely that we shall set up, and soon, such a consultative body...The day on which it comes into existence will be a dangerous one for business...There may be a long and lingering death (of the private profit enterprise—w.e.), but it must be regarded as inevitable." Private business, Tugwell added, "would logically be required to disappear. This is not an overstatement for the sake of emphasis; it is literally meant."

In October 1932, that is, one month before FDR's election, Rexford Guy Tugwell went on to formulate a six-point program for dealing with the depression crisis. Tugwell opposed wage cuts, then a common method of corporate cost cutting. He insisted, however, on reducing retail prices, and called for "drastic income and inheritance taxes," as well as "avoidance of budgetary deficits and monetary inflation." Obviously businesses could not possibly simultaneously maintain wage levels, reduce prices, and pay increased taxes, without risking bankruptcy in such crisis times. To this, Tugwell advocated, "the taking over by the government of any necessary enterprises which refuse to function when their profits are absorbed by taxation."

In brief, Tugwell's program, and this was planed, would first make it impossible for business to function, then bring those failed businesses under nationalization or state ownership. Tugwell concluded his 1932 program, "So long as prices, profits and individual production programs are at the disposal of independent business executives, our system will continue to show much the same faults as it displays at present." Tugwell endorsed Norman Thomas' League for Industrial Democracy program which called for a, "new social order based on production for use, not for profit."

Tugwell was strategically placed in 1933 as Deputy Secretary of Agriculture, just under his recommended choice of Secretary of Agriculture, Iowa farm editor, Henry A. Wallace. Tugwell continued in the early months to have regular access to his old friend, FDR as well.

Rudolf Hilferding and the total state.

Before World War I, Hilferding followed the traditional Marxist view that identified the executive branch of the modern state as a "committee for managing the common affairs of the whole bourgeoisie." He regarded the state as the "conscious organ of [a] commodity producing society" which reached the height of its power in the era of finance capital. For Hilferding the most important features of "modern capitalism" were "those processes of concentration which, on the one hand eliminate free competition' through the formation of cartels and trust, and on the other bring bank and industrial capital into an ever more intimate relationship." Through this relationship, he argued, capital assumed the form of finance capital which, "in its maturity, is the highest stage of concentration of economic and political power in the hands of the capitalist oligarchy."(3) Hilferding also thought that the development of finance capital created the economic preconditions for socialism, which could be achieved only through the seizure of political power. Workers, organized in trade unions and in the SPD, could use the state to wrest large-scale industry from the control of finance capital and transform it into public property. He thought that it was possible for the working class to win state power through electoral means, but that capitalist suppression of workers' rights or a major war between rival capitalist powers could lead to violent revolution. Nevertheless, he did not argue that the SPD itself should "make" the workers' revolution.(4) World War I and its aftermath forced Hilferding to revise his views on the relationship between Social Democracy and the state. In 1918 he joined the anti-war Independent Social Democratic Party (USPD), in which he supported the socialization of key industrial sectors, the dismantling of the army and bureaucracy, and the democratization of German politics. By 1921, however, he was convinced that the socialist revolution had failed. The splintering of the workers' parties, the SPDs counterrevolutionary actions, and the political "immaturity" of the working class combined to halt Germany's social and economic tranformation. For Hilferding defending whatever democratic gains the revolution had made against the growing strength of Germany's reactionary right wing became the socialist movement's main task and he strongly supported the USPD's reunification with the SPD in 1922.(5) Hilferding steadfastly advocated the parliamentary road to socialism after 1922, and he justified this strategy with an analysis of contemporary changes in the economic and political situation both at home and abroad. He asserted that the war had accelerated the economic processes he had identified prior to 1914. The expansion and further concentration of capital, the formation of cartels and trusts, the increasing influence of finance capital, and the state's intervention in the economy were bringing the era of capital competition to a close. A new system, characterized by economic regulation and planned production, was developing. If left undisturbed, this process would result in a hierarchical social order in which the economy was organized, but the ownership of the means of production remained in private hands. Hilferding called this system "organized capitalism." He saw in its stability and its enhanced use of planning the potential for a socialist planned economy.(6) Social Democracy's task, Hilferding believed, was to educate workers and to fight for the democratization of production. In his view, the republic gave the working class real access to political power because its institutions were subject to the will of the voters.

Permanent Revolution 08 Revolutionary theory and imperialism

In his 1910 book, Finance Capital,4 Hilferding examined the latest developments in the capitalist mode of production. He explained how the process of concentration and centralisation of capital, which Marx outlined, had grown apace in the last quarter of the nineteenth century. This had given rise to the domination of the economy by huge cartels or trusts rather than small scale enterprises so typical of the era of “free competition capitalism”. This he called monopoly capitalism, a new stage in the development of capitalism.The reason that the banks had come to dominate in this way was due in the first instance to changes within capitalist production itself. The rise in the organic composition of capital had lengthened turnover time (i.e. the length of time it takes for machinery and plant to wear out and transfer its value completely through several cycles of production) and so reduced the adaptability of firms to short-run cyclical ups and downs. To get over the effects of short term fluctuations in demand the firms turned more and more to the banks and the provision of credit; they also needed credit to finance the ever larger sums necessary for new investment in machinery. As a result of this development the banks themselves began to commit huge sums to industry for ever longer periods of time. As a consequence they could not move capital about freely to take advantage of every short term fluctuation in the rate of profit between sectors. This meant, in turn, that the banks had an interest in the formation of cartels and trusts so as to prevent as far as possible fluctuations in output and demand putting their huge credits at risk. Hilferding summarised the process thus:“The most characteristic features of ‘modern’ capitalism are those processes of concentration which, on the one hand, ‘eliminate free competition’ through the formation of cartels and trusts, and on the other, bring bank and industrial capital into an ever more intimate relationship. Through this relationship . . . capital assumes the form of finance capital, its supreme and most abstract expression.” 5Thus a central feature of this new stage was the growth of banking monopolies which in the course of their development had come to dominate, and even fuse with, the key sectors of industrial capitalism to form “finance capitalism”.A natural consequence of the concentration of capital in this way was that huge amounts of machinery and plant (constant capital) more and more outweighed the growth of variable capital (i.e. the amount advanced to buy wages). This growth in the “organic composition of capital” led inexorably to the tendency of the rate of profit to fall (TRPF), as Marx had explained in Capital.On the basis of this law he explained how finance capital uses its power to offset this law. The huge monopolies can cut output within certain limits in order to maintain prices and profits; they can influence the national governments to erect tariffs preventing foreign monopoly capital entering their markets to compete with and undercut them; they can even keep prices in the internal market high and practise “dumping” at lower prices in colonial or semi-colonial markets.But for Hilferding the key factor which explained the relatively crisis-free expansion of monopoly capital which marked the last years of the nineteenth century and the early years of the twentieth was the export of capital to foreign countries. This, for Hilferding, was the root of the explanation of the long boom of 1895-1913. Following Marx in Capital he illustrated the way in which the export of capital to countries with a lower organic composition of capital and higher rate of profit overcomes the effect of crises due to the operation of the law of the TRPF:“The precondition for the export of capital is the variation in the rate of profit, and the export of capital is the means of equalising regional rates of profit. The level of profit depends upon the organic composition of capital, that is to say upon the degree of capitalist development.” 6Hilferding explained that the policy of finance capital which it pursues to secure external markets for sales, capital investment, access to raw materials and so on is the policy of imperialism. Moreover, on the basis of the recent developments in the growth of monopoly capital and faced with the internal contradictions of this growth, “capital can pursue no other policy than that of imperialism”

.7Rudolf Hilferding and 'the stability of capitalism' --

The real danger comes from WITHIN scientific socialism--Rudolf Hilferding the orthodox [Marxist], not Eduard Bernstein(4), the revisionist. Hilferding sees the new stage of capitalism in its financial razzle-dazzle appearance and becomes enamored of its capacity to “unify” commercial, industrial, and financial interests [instead of being] concretely aware of the greater contradictions and antagonisms of the new monopoly stage of capitalism.
I wish to stress the seeming orthodoxy of Hilferding. No one, absolutely no one--not the firebrand Rosa Luxemburg, nor the strict realist V.I. Lenin, and I dare say not Hilferding himself--knew that what he was doing with his theory of finance capitalism was bringing in the first theory of retrogressionism [into Marxism]....Even with over four decades of hindsight, and much, hard thinking on the subject, I have first now realized that what Hilferding was SEEING and analyzing (and it took Nikolai Bukharin’s theory of the transition period to bring it home to me)(5) was the STABILITY OF CAPITALISM.
Watch the orthodoxy though: Hilferding is proposing no revisionism. The automatic fall of capitalism is still expected and the inevitability of socialism in a mechanistic sort of way is also held to tightly. BUT rather than seeing monopoly as a transition into opposite of a previous stage, monopoly is treated more like simple large-scale production. THAT IS THE KEY. For if it is not a transition into opposite of a fundamental attribute of capitalism, then CAPITALISM’S ORGANIZATION and centralization, monopolization’s appearance as the “emergence of SOCIAL control”...is in fact superseded socialism. Or more precisely, [Hilferding] retrogresses back to home base: the equilibrium of capitalist production.
By viewing the whole development of trusts and cartels not from within the factory, but from “society,” that is, the market, Marx’s general law of capitalist accumulation--the DEGRADATION of the proletariat along with capitalist accumulation--has no meaning for Hilferding. Neither does Marx’s postulate “private production without the control of private property” make any imprint on Hilferding.(6) And of course labor remains a unity; there is not any inkling of an aristocracy of labor arising out of the monopolization and degradation and imperialism.
You must remember that even with the outbreak of World War I, but before Lenin did his own analysis [of imperialism in 1915], he introduced Bukharin’s WORLD ECONOMY AND IMPERIALISM which said pretty much the same thing as Hilferding. All this I want to repeat again and again in order to emphasize the orthodoxy, in order to show that [even when] all the formulae are adhered to the loss of revolutionary perspective not yet in a positive way but in the negative of awe before the EXISTENT, continued capitalism can be very, very deceiving. If it was [deceiving] to Lenin we better watch it all the time.
What in truth emerges from a close study of Hilferding...is that the new generation of Marxists following Engels’ death [in 1895], placed within growing, centralized production, SAW MONOPOLY NOT AS A FETER BUT RATHER AS AN ORGANIZING FORCE OF PRODUCTION. So that the Second International, which had openly rejected Bernsteinism and gradualness, accepted Hilferdingism. That meant tacit acceptance of the capacity of capital to gain a certain “stability,” to modify its anarchism as a “constant” feature. They saw in [this] new stage not a TRANSITION to a higher form, but something in itself already higher, although “bad.”
Now the person who made this all clear to me was Bukharin, that logical extension of Hilferding, blown into the THEORY of counter-revolution right within the first workers’ state. It is to him that we must turn. Here too for our generation it is correct to view him with hindsight, precisely because his is “only” theory that will become full-blown actual counter-revolution with Stalin supplying it an objective base.
Keep in mind therefore the three actual stages of capitalist production for the three decades since the publication of Bukharin’s ECONOMICS OF THE TRANSITIONAL PERIOD:
l) 1920-30: Taylorism plus Fordism, that is, the discovery of the [assembly] belt line and with it the necessity for a fascistic order in the factory. It may be “vulgar” to call gangsters part of the intelligentsia, but that is the genuine face of “social control” when the masses themselves do not control [production]. Marx’s view of the planned despotism plus the industrial ARMY of managers, foreman, etc. has moved from theory to such EVERYDAY practice that every worker knows it in his bones; he needs no ghost come from the grave to tell him THAT....
2) 1930-40: General crisis; New Dealism where “everybody” allegedly administers, and fascism where openly only the elite do, both in mortal combat with the CIO and the general sit-down strikes (which made a true joke of private property) for “social control.” Plan, plan, plans: National Five-Year Plans in Russia, Germany, Japan; John Maynard Keynes, the New Deal, technocracy, the Tennessee Valley Authority, public works.
3) 1940-50: Monopolization has been transformed into its opposite, statification. (What greater scope for a modern Moliere, to take those weighty volumes of the Temporary National Economic Committee (TNEC)(7) proving monopolization and how strangling it is, and then on the eve of World War II they are finally published in full, prefaced by a call for full mobilization which shows that monopolization plus Hitlerism is child’s play as compared to American statification.)
End of World War II, “end” of fascism and state-private-monopoly rule. Complete state-capitalism reaching its tentacles from Russia into Eastern Europe, engulfing Britain, seeping into Western Europe and peering out of the U.S. TOTAL, GLOBAL PLANS: Marshall, Molotov, Monnet, Schumann, Truman’s Point 4.(8) Keynes is dead; long live the state plan. The intelligentsia in Russia, the Social Democratic labor bureaucracy elsewhere, all in mortal combat with the Resistance, with the Warsaw [uprising](9), with general strikes and colonial revolutions. One strangles the revolution “for” the masses’ own good, and the other for “democracy’s” shadow.


Did Hilferding Influence Schumpeter?

The thesis regarding the limited ability of free competition to promote
technological progress is supposed, for both theoreticians, to be a conclusion drawn
from past historical experience. More precisely, Schumpeter argued that the
capitalist era could be divided into two distinct periods (Screpanti and Zamagni
1993, pp. 243ff.): (a) The era of ‘competitive capitalism’ when small enterprises
dominated, an era which declines in the 1880s and (b), the era of monopolistic or
‘big-business capitalism’, during which large enterprises, trusts and cartels
dominated, starting roughly from the 1880s and having consolidated its fully
fledged form by the time Schumpeter’s book was written.
For Hilferding, too, the elimination of free competition and monopolies
came, historically, in a similar way: ‘Finance capital signifies the unification of
capital. The previously separate spheres of industrial, commercial and bank capital
are brought under the common direction of high finance, in which the masters of
industry and of the banks are united in a close personal association’, and
consequently: ‘The basis of this association is the elimination of free competition
among individual capitalists by the large monopolistic combines’ (Hilferding 1910,
p. 301, emphasis added). Thus, ‘it is also clear that monopolistic combines will
control the market’ (ibid., p. 193).
We have seen, so far, that for both theoreticians the real incentive for
innovation was the ability of monopolistic formations – deriving from their noncompetitive
nature – to create extra profits. Also, the elimination of free
competition was regarded, by both economists, as the main characteristic of an era
during which large enterprises, trusts and cartels dominated, and which attained its
typical characteristics around 1900.

As far as the other aspect of the Schumpeterian hypothesis is concerned,
namely that perfect competition is an unstable market structure where only large
enterprises can push technological progress forward, the views of both theoreticians
are strikingly similar. For Schumpeter, once big corporations are formed, the
imperfectly competitive market structure becomes stable, as large firms become
increasingly conducive to technological progress and change:9 ‘There are superior
methods available to the monopolist which either are not available at all to a crowd
of competitors or are not available to them so readily’ (Schumpeter 1942, p. 101).
‘The perfectly bureaucratized giant industrial unit .… ousts the small or mediumsized
firm’ (ibid., p. 134). On the same line of argument, the large firm is
considered to possess the ability to attract superior ‘brains’, to secure a high
financial standing (ibid., p. 110), and to deploy an array of practices to protect its
risk-bearing investments.
In his Finance Capital, Hilferding had developed a similar approach:
The expansion of the capitalist enterprise which has been converted into
a corporation .… can now conform simply with the demands of
technology. The introduction of new machinery, the assimilation of
related branches of production, the exploitation of patents, now takes
place …. from the standpoint of their technical and economic suitability
.… Business opportunities can be exploited more effectively, more
thoroughly, and more quickly .… A corporation .… is able, therefore,
to organize its plant according to purely technical considerations,
whereas the individual entrepreneur is always restricted .… The
corporation can thus be equipped in a technically superior fashion, and
what is just as important, can maintain this technical superiority. This
also means that the corporation can install new technology and labour
saving processes before they come into general use, and hence produce
on a large scale, and with improved, modern techniques, thus gaining
an extra profit, as compared with the individually owned enterprise.
(ibid., pp.123-4)
Consequently, ‘The introduction of improved techniques .… [benefits] the
tightly organized cartels and trusts. [T]he largest concerns introduce the
improvements and expand their production’ (ibid., p. 233).
Hilferding repeatedly affirmed the position that the big corporation is able
to create the conditions which may assure its market supremacy as well as its extra
profits for a long period: ‘An industrial enterprise which enjoys technical and
economic superiority can count upon dominating the market after a successful
competitive struggle, can increase its sales, and after eliminating its competitors,
rake in extra profits over a long period’ (ibid., p. 191).
Thus Hilferding expressed what we could codify as ‘Hilferding’s
hypothesis’, namely the thesis that ‘the size and technical equipment of the
monopolistic combination ensure its superiority’ (ibid., p. 201), which is, in general
terms, very similar to ‘Schumpeter’s hypothesis’, written thirty-two years after
Hilferding: ‘large firms with considerable market power, rather than perfectly
competitive firms were the “most powerful engine of technological progress”’
(Schumpeter 1942, p. 106). The obvious similarity of ideas of both theoreticians on
this specific issue needs no further comment.
Further to the above, Hilferding introduced, in his Finance Capital, the
notion of a ‘latest phase’ of capitalism, which is characterised by the following
main features: the formation of monopolistic enterprises, which put aside capitalist

competition; the fusion of bank and industrial capital, leading to the formation of
finance capital, which is considered to be the ultimate form of capital; the
subordination of the state to monopolies and to finance capital; and, finally, the
formation of an expansionist policy of colonial annexations and war.10
Hilferding regarded capital exports as an inherent characteristic of
capitalism in its ‘latest’, monopolistic, stage, rooted in the ‘cartelisation and
trustification’ of the economy and the need ‘to annex neutral foreign markets ....
above all overseas colonial territories’ (Hilferding 1910, pp. 326, 328).
Finance capital, as Hilferding defined it, is advanced to industrial
capitalists who use it. This ‘new’ concept is also seen as the linking between
capitalism’s ‘latest’ stage and imperialism (Winslow 1931, p. 727). The colonies
were regarded as the outlets for the export of finance capital. In this sense, finance
capital was considered to be helpless without political and military support: ‘capital
export works for an imperialistic policy’ (Hilferding 1910, p. 406) since it ‘does not
want freedom, but domination’ (ibid., p. 426). Imperialism is, thus, a tendency to
expansion of a developed capitalist power, a tendency created, in the last instance,
by economic processes, but also supported by political processes. It is argued,
therefore, that imperialism, which is capitalist rivalry at its highest level, leads to
war and mutual destruction of the capitalist powers.



SEE:

No Austrians In Foxholes

State Capitalism in the USSR

China: The Truimph of State Capitalism

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Monday, October 27, 2008

McCain A Socialist

Call this a case of the pot calling the kettle black, McCain calls Obama's economic policies socialist Yesterday on Meet the Press McCain admited his own home mortgage buy back plan originated in the 1930's under FDR, and was originally proposed by Hillary Clinton. Now who is a socialist?

MR. BROKAW: But there, there is this continuing use...
SEN. McCAIN: ...I feel that...
MR. BROKAW: ...of the phrase "socialism." How would you describe the $700 billion bailout that has the United States government buying shares in American banks, in effect nationalizing those banks to a degree, and even your own mortgage plan of spending $300 billion to buy bad mortgages from banks, having taxpayers who have done the responsible thing, in effect, subsidize people who've done the dumb or wrong thing?
SEN. McCAIN: Because we are in a financial crisis of monumental proportions. The role of government is to intervene when a nation is in crisis. A homeowner's loan corporation was instituted in the Great Depression. They went out and they bought people's mortgages, and, over time, people were able, then, to pay back those mortgages. And the Treasury actually made some money.
This Treasury in this administration is spending its time bailing out the banks. The cause of the crisis was the housing crisis, as we know. And how--home values, as long as they continue to decline, then we're not going to see a turnaround in this economy. A lot of other things have to happen, have to happen, but at least let's understand that we ought to keep people in their homes. That's the American dream. And they say now that maybe they're going to address that problem. Let's address it first. And so when a, when a nation is in crisis, that's when a government has to intervene.
Now, a lot of the times you were talking about, 2004, other times, times were pretty good overall. You had different--you have to have different roles of government in different times. I'm a fundamentally--obviously, a strong conservative. But when we're in a crisis of this nature, that's when government has to help. That's, that's what, that's what our fundamental belief--the reason why we have governments. In times of crisis, we go in and we try and help the people, especially in this situation where they're the, the victim of a drive-by shooting by excess, greed and corruption in Washington and Wall Street. And again, I and others said we have to have legislation to rein it in. Senator Obama didn't lift a finger.
MR. BROKAW: Well, you did--you made your comments about Fannie Mae and Freddie Mac at the time of the accounting issue, when that was first raised. Can you cite a time...
SEN. McCAIN: In, in reality, we, we proposed legislation and made a statement that said, "Look, it's not just the accounting, this whole process is going to lead to disaster." I'd be glad to provide you with the letter.
MR. BROKAW: Let me ask you quickly about your $300 billion bailout of, of mortgages.
SEN. McCAIN: Hm.
MR. BROKAW: Some people have said, look, if there's a homeowner out there who's done the irresponsible thing...
SEN. McCAIN: Mm-hmm.
MR. BROKAW: ...and a bank is looking at that foreclosure and saying, "Hey, I don't have to work this out. I can just get the government to pick it up," why should a taxpayer in Waterloo, Iowa, or in Akron, Ohio, have to subsidize somebody who has done the dumb, wrong thing?
SEN. McCAIN: Well, in simplest terms, if their neighbor next door throws the keys in the living room floor and leaves, then the value of their home is going to dramatically decrease as well. And again, this has been done before. As I said, during the Great Depression and...
MR. BROKAW: And that's when Republicans called it socialism under FDR.
SEN. McCAIN: Well, look, in the Great Depression, there were some things that worked and some things that didn't work. But for the government to do nothing in the face of a massive crisis of proportions that we have not seen, I mean, it's hard for us to imagine how, in, in retrospect, how serious the Great Depression was, but the fact is that Senator Obama, by the way, opposes that, that; and I want to use some of the $750 billion to go and buy those mortgages and that, I think, will stabilize the market. It's not the only thing that needs to be done, but I think it's a vital first step so Americans can realize the American dream.


SEE:
No Austrians In Foxholes

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Friday, October 24, 2008

No Austrians In Foxholes


The old joke goes there are no athiests in foxholes. With the crash of international financial capitalism there are no Austrians in foxholes. Capitalism rushes to the embrace of it's state to bail it out. Everyone now accepts that State Capitalism resulted from the previous Great Depression and in order to avoid another one, the State is required to save the financial market. Some American libertarians and conservatives decried the state bail out of the banks, but no rational self interested capitalist was listening to them.

Nor contrary to some wags were they thumbing through the Communist manifesto to find a solution. They simply were returning to their Keynesian roots, apologizing abjectly for their folly of declaring him dead and useless.

Suddenly the darlings of the neo-cons, Ayn Rand, von Mises and Hyaek, were no longer the belle's of the ball. They once again quickly became relegated to the dustbing of history. Once again an anomaly of booming capitalism, a joyful ideology for those who embraced the greed of an unregulated market, an excuse to line pockets of the wealthy while ignoring the neccisity of producing real value; goods, services, infrastructure. Today the bankers and financiers are now fully fledged Keyensians.

In the Nouvel Observateur weekly, columnist Jacques
Julliard rejoiced that France was no longer hearing “diatribes” against its
“archaic” system.
“Where have the (economic)
liberals gone?” he asked. “Since Bush nationalized the American banking system
we don’t hear from them anymore.

Even the most stalwart follower of Ayn Rand has admitted the failure of her ideology.

Alan
Greenspan is having a crisis of faith.

The former chairman of the Federal
Reserve and long-time deregulator admitted to U.S. lawmakers yesterday he "made
a mistake" in assuming banks could self-regulate the complex derivatives
market.
It was an about-face for Mr. Greenspan, a diehard supporter of
deregulation. He was a close friend of Ayn Rand, the most notable of
libertarians who champion the individual over the state. Yesterday, he threw her
theories under the bus, but it was no shock to Ms. Rand's followers.

It is in fact startling to hear the right wing President of France sounding like a socialist, but not unexpected given the gravitas of the current crisis.

"The
idea of the all-powerful market that must not be constrained by any rules,

by any political intervention, was mad. The idea that markets were always right
was mad," Mr Sarkozy said. "The present crisis must incite us to refound
capitalism on the basis of ethics and work & Self-regulation as a way of
solving all problems is finished. Laissez-faire is finished. The all-powerful
market that always knows best is finished," he added.



In fact it appears that the only ones proclaming the joys of unregulated markets are those from the Eastern Bloc, former communists and socialists who have never experienced the joys of American capitalism in all its gory glory.

In a
letter published on Tuesday by the daily Mladá fronta Dnes,
Czech
President
Václav Klaus says that the global financial crisis did not result
from
insufficient market regulation, but, on the contrary, from excessive
government
interventions and increasing public spending.
According to
Klaus, there is a
risk that the rescue packages proposed by some governments
will turn the
European banking system into a partially state-owned and
centrally regulated
sector.



Ironic that. He sounds like Bush, Paulson, and Greenspan prior to the crash. They now have abandoned their faith in self regulated markets, and have embraced the need for state capitalism; a regulated capitalism supported by huge investments of public funds.

"I
know many Americans have reservations about the government's
approach
,
especially about allowing the government to hold shares in private
banks. As
a strong believer in free markets, I would oppose such measures under
ordinary circumstances. But these are not ordinary circumstances," Bush
said.



But in reality the state promoted the ideals of the financial and monopoly capitalists as their own, they did their bidding, even as they do it now. Its about power in and over the markets. There never was an unbridled capitalism of small self employed artisans, which is the libertarian ideal, in fact capitalism is not about work or business, but about accrual of capital for its own sake.

Whether it was Keynes and the social contract after WWII or the shift towards monetarist policies and free trade in the seventies, eighties and ninties, it was all done by the capitalist state, in order to maintain and stabilize capitalism.

The mistake made by the left and the right was to assume that state capitalism was 'socialism'.

This mistaken link between public ownership and socialism was the result of the ideologues of the 2nd International, who adovcated that capitalism would evolve into socialism, that is public capitalism would arise from private monopoly capitalism.

After the Bolshevik revolution, and the subsequent Great Depression, capitalism was in a historical crisis, its old models no longer sufficient to meet the demands of those who create capital, the working class. Class war was on the horizon, the final death knell of capitalism was being wrung by a mobilized militant working class and by the failure of financial capitals coinciding.

The capitalist state was reformed to meet this crisis,based on variations of models of Keynes General Theory. State Capitalism is the highest form of capitalism, and that is what Randites and Austrian School apologists forgot.

Is this ciris out of the ordinary as Bush claims? Was i unpredicatable as Greenspan and Volker claim. Why no. Many pundits have pointed ot the similarities of this crash to those in the past; some going as far back as the Great Crash of 1873 in the U.S., the Great Depression of 1931-33, the 1973 post Viet Nam war crash.

What do all these crashes have in common? They occurred in relation to rapid industrialization of economies during and after large scale wars. In the case of 1873, it occurred after the civil war destroyed the last of the small scale artisinal base of American industry replacing family shoe making businesses and the like with large scale factory production.

The Great Depression occurred after WWI and the 1973 crash occurred as a result of America's incurssion into Viet Nam.

At the begining of the Bush regime in the U.S. the Republican government went from having a surplus to having a deficit. And those wags on the right, the very same neo-cons who a decade before had deonounced government deficits that led to expanded public sector infrastructure growth, now were cheering on the Bush government to expand its deficit especially when it came to planning for war against Afghanistan and then Iraq.

The wat in Iraq led to a government deficit that dwarfs those of the seventies and eighties.

That is the elephant in the room. America celebrated like it was 1929 for eight years under Bush, while sending their sons and dughters to fight in a foriegn war. There was no war rationing, no draft call, no need to commit by Joe or Jane Yank to Bush's war. So it was party time back home.

America also ended it dominance in manufacturing and actual production during the Reagan era. As we entered the new millineum right wing libertarian mags like Reason praised the end of America's dominance in production claiming the new capitalism in America would be based on service sector jobs.

And they were partially right. With contracting out and offshoring an essential part of the New World Order of the WTO and expanding globalization of capital, America now found itself no longer manufacturing goods at home, but buying them at WalMart from newly emerging fordist economies in Asia.

Americans laid off in manufacturing ended up in low paid jobs selling products they once made at the local WalMart. America now relied upon its citizens to produce capital not through manufacturing but through consumption.

America made credit easily available, and American's liquidated their savings in an orgy of spending that kept America going for the past eight years.

Was this crash unexpected? Of course not. It began a year ago, but Bush, Paulson, Greenspan, Bernake, and the right wing neo-cons were in denial. I have blogged as have others predicting this crash. That it would be as serious as the Great Depressions of 1873 and 1933 was also not unexpected, nor was the fact that the monopoly and financial capitalists flight back into the safe arms of the Nanny State unexpected.

There are no Austrians in foxholes when the economy melts down. Ideology is tossed out and capitalists and their politicians once again embrace state capitalism to bail them out.


SEE:

CRASH
Black Gold
The Return Of Hawley—Smoot
Canadian Banks and The Great Depression
Bank Run
U.S. Economy Entering Twilight Zone


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Monday, September 15, 2008

The Failure of Privatization


The collapse of Fannie May and Freddie Mac, the American government mortgage lending institutions,is a clear admission of the failure of the neo-con agenda of privatization.

While right wing pundits like to refer to the government bail out of Fannie and Freddie as 'nationalization', this is a red herring. Fannie May was created by the FDR government because of the economic collapse of the great depression. It was always a state capitalist institution.

In the seventies the neo-con think tanks promoted 'competition' and the Nixon government created a state funded shareholder corporation to compete with Fannie called Freddie Mac.

Under Reagan the neo-cons were in full control and privatized Fannie May making it a shareholder based corporation, but still with state capitalist gurantees that the government would back their investments.

Last week the Bush administration admited that privatization had failed and bailed out Fannie and Freddie.

In a further irony state capitalist funds (called soverign investment funds) from China, India ,Singapore, and Dubai Inc. are being promoted as a way of bailing out the current failing private banks in the U.S.; Lehman Brothers and Merril Lynch.

The irony in this is that the greatest accumulation of wealth in the world currently is not on Wall Street, which is bleeding, but in China, where trillions of dollars remain in that countries Foriegn Investment Fund. As they do in the Middle East.

While the neo-cons denounced Keyensianism as a failure, the social contract that built modern post war capitalism in the West, lasted sixty years. The neo-con agenda of the Cato Institute and its like lasted a mere twenty years and led to two major Wall Street crashes, first in 1987 and now the down turn we have had for the past two years.

And of course those businesses that called for unregulated markets and getting government out of the way of business are now the same folks calling for regulation and lining up at the doors of the State with their hands out.


SEE:

Black Gold

The Return Of Hawley—Smoot

Canadian Banks and The Great Depression

Bank Run

U.S. Economy Entering Twilight Zone



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Tuesday, March 18, 2008

Crash


While President Bush and his fan club over at Fox Business News refuse to admit America is in a recession the economists have moved on from fears of stagflation to absolute terror;

Wall Street fears for next Great Depression Independent

But there's no mistaking the mood within the US Federal Reserve at the moment. Pessimism was replaced by fear months ago. While the economy is moving inexorably towards a slowdown, a high-speed train wreck is taking place on Wall Street.

It is that combination that has scared the living daylights out of the Fed's hierarchy and prompted them into a history-making bail-out of the Wall Street broker Bear Stearns. To put the weekend's action into context, this is the first time since the Great Depression that the US central bank has funded the rescue of a financial institution that wasn't a regulated, deposit-taking bank.

Financial markets turmoil stirs economists' memories of 1929 crash

"The threat of contagion and wholesale breakdown on a scale of 1929 is real," said University of Maryland business professor Peter Morici.

"The real questions are - which of the big banks will be next to fail? How many more banks will fail? Will the whole system turn to panic if Citigroup (another troubled bank) unwinds?"

Harvard economist Martin Feldstein said the U.S. economy could suffer the worst recession since the Second World War.

Many economists now believe the U.S. economy has already slipped into negative territory,

Ben Bernanke has likened the Great Depression to the Holy Grail of macroeconomics – an experiment in unravelling the mysteries of global economic collapse.

As an academic specializing in the Dirty Thirties, the former Princeton University economist ultimately concluded that U.S. banking authorities botched the Depression by letting panicked runs on banks wreck the real economy.

Years from now, a new generation of academics may similarly try to draw lessons from how Mr. Bernanke, now the U.S. Federal Reserve Board chief, handles the great credit collapse of 2007-08.

By running to the rescue of investment banks and opening up the interest rate spigot, Mr. Bernanke is eager to avoid the same problems he dissected in his seminal 1983 paper, “Non-monetary effects of the financial crisis in the propagation of the Great Depression.”


SEE:

Black Gold

The Return Of Hawley—Smoot

Canadian Banks and The Great Depression

Bank Run

U.S. Economy Entering Twilight Zone



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Saturday, February 16, 2008

Insurance Woes and Whines


Insurance firms feel profit pinch
Industry giants blame roiling markets, high loonie for dampening fourth-quarter earnings and outlook


Sez the headline. But the reality is that it has less to do with the loonie, and more about their investments in the U.S. including of course their exposure to the sub-prime credit mess. Ah the joys of global capitalism. The reason that banks want to merge of course is to compete for positions in the global financial markets, that is the U.S. market. And this is what happens when they do.....

Manulife is Canada's largest insurer. Approximately 64 per cent of its earnings are generated in the United States and Asia. Smaller rival Sun Life faces a similar predicament with about 52 per cent of its earnings originating from the U.S., U.K. and Asia.

For the October-December quarter, Sun Life reported earnings of $555 million or 97 cents per share. That compared with net income of $545 million or 94 cents per share for the same period in 2006. "This quarter was also marked by significant market turbulence," McKenney said.

Chief executive Donald Stewart said that volatility would likely affect the industry's outlook in the near term. Echoing those sentiments, Manulife CEO Dominic D'Alessandro suggested that "unsettled markets" would likely affect wealth businesses.

Sun Life also disclosed it has $84 million in direct exposure and $961 million in indirect exposure to monoline bond insurers. Those companies, which provide insurance against default in securitized debt, have become a source of worry because certain firms have had their credit ratings downgraded.

Chief investment officer Jim Anderson said Sun Life's direct exposure to monolines is with two insurers that are "AAA rated with a stable outlook." Its indirect exposure is to insurers with "investment grade" ratings, adding most of its exposure is in the U.K.

Insurance companies used to be the most risk adverse and conservative of financial institutions. However with the shift to globalization of the marketplace in the eighties and nineties from production to FIRE (financial services, insurance, real estate,) this all changed. A renewed financial market dominated the market, as it once had prior to WWI, the result of this financial exuberance, and shift from investment in production to investment in investment instruments bailed out New York and London from their Reagan/Thatcher excesses and declines. In doing so insurance companies as well as the banks and other financial businesses exposed themselves to the dangers of the balloon and bust market. Chickens, home, roost.

Just as people meet and authorize someone from among their own number to take specific action on their behalf, so commodities must meet to authorize a single commodity to confer full or partial citizenship in the world of commodities. The act of exchange is the occasion for such a meeting of commodities. The social activity of commodities on the market is to capitalist society what collective intelligence is to a socialist society. The consciousness of the bourgeois world is concentrated in the market report. It is only after the successful completion of the exchange that the individual can have any insight into the process as a whole, or any guarantee that his product has satisfied a social need, as well as the incentive to begin his production anew. The object which is thus authorized by the common action of commodities to express the value of all other commodities is – money. The authority of this particular commodity develops along with the development of the exchange of commodities.

Finance Capital, Hilferding 1910


SEE:

Lenin Was Right

Petro Dollars Bail Out The CITI


Bank Smack Down


U.S. Economy Entering Twilight Zone

Lenin's State Monopoly Capitalism


40 Years Later; The Society of the Spectacle


Commodity Fetish a Definition

State Capitalism in the USSR

Plutocrats Rule


The Right To Be Greedy


Social Credit And Western Canadian Radicalism

It's the Labour Theory of Value, stupid


China: The Truimph of State Capitalism

Deconstructing Hayek

Social Insecurity- The Phony Pension Crisis


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Friday, January 25, 2008

Robbing the Bank From the Inside


Bad news just gets worse...not only do we have the collapse of the paper credit market.... can you say junk bond scandal of the eighties.. now we have a flashback to bank scandals of the nineties...wait a minute shouldn't the market have regulated itself so this didn't happen, again...once again the myth of self regulation is exposed for the sham it is...global markets are not self regulating never have been that is why Capitalism created the State in its own image.



French bank hit by worst scandal ever

SocGen trader's $7.1B loss dwarfs Barings debacle


PARIS - A junior computer whiz at the French bank Societe Generale has been accused of racking up a $7-billion loss in bad bets on stocks in the biggest trading scandal in banking history.

France's central bank and government scrambled to shore up confidence in the banking system after the 144-year-old SocGen told investors already battered by the credit crisis that it had discovered the "exceptional" fraud late last week.

The trader had circumvented the bank's risk controls through in-depth knowledge of its computer systems, but was caught when he tried to cover up his losses.

The country's central bank chief dubbed the trader "a genius of fraud" while French police announced a criminal probe.

Richard Fuld, the chief of Wall Street firm Lehman Brothers, called the debacle "everyone's worst nightmare" at the meeting of policy and business leaders in Davos.

The losses spiralled to ¤4.9-billion ($7.1-billion) -- nearly its net profit in 2006 -- as the bank tried to close out the rogue trader's stock index futures positions in Monday's sliding market.


2002: Former currency trader John Rusnak accused of hiding US$691 million in losses at Allfirst bank of Baltimore, at the time under parent Allied Irish Bank, pleads guilty to one of the largest bank fraud cases in U.S. history. Rusnak was sentenced in 2003 to 7 1/2 years in prison.

_ 1996: Sumitomo Corp., a 300-year old Japanese metals trader, discovers that its star copper trader, Yasuo Hamanaka, amassed $2.6 billion in losses in unauthorized trades over a decade. The revelation caused copper prices to plummet worldwide. Sumitomo has paid millions of dollars in class action lawsuits and Hamanaka served more than seven years in prison.

_ 1995: Collapse of Britain's Barings Bank after a trader in Singapore, Nick Leeson, lost 860 million pounds (then worth US$1.38 billion) on futures trades. The fraud prompted banks worldwide to tighten internal checks. Leeson spent four years in prison.

_ 1995: Toshihide Iguchi, a New York bond trader for Japan's Daiwa Bank, charged with hiding $1.1 billion in trading losses he accumulated over 12 years. The bank later pleaded guilty to failing to notify U.S. authorities sooner. It was hit with $340 million in fines and ordered to shut its U.S. operations. Iguchi was sentenced to four years in prison and fined.

1994: Joseph Jett, a government bond trader at Wall Street brokerage Kidder Peabody & Co., was fired after the firm accused him of faking $348 million in profits to fatten his bonus. Jett denied wrongdoing and wasn't charged criminally. Last year a federal judge upheld a March 2004 order by the Securities and Exchange Commission saying Jett had booked fake profits of approximately $264 million and had to return $8.2 million of bonuses and pay a $200,000 civil penalty. The scandal contributed to the demise of the venerable Kidder.

_ 1991: Bank of Credit and Commerce International (BCCI), operating in nearly 70 countries, is seized by bank regulators, acting on auditors' reports of huge losses from illegal loans to corporate insiders and from trading transactions. Some 250,000 depositors left without funds. Claims exceeded US$10 billion.

© 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


Bank of America Settles Suit Over the Collapse of Enron - WSJ.com

By Rick Brooks and Carrick Mollenkamp Staff Reporters of THE WALL STREET JOURNAL

Companies Featured in This Article: Bank of America, Citigroup, J.P. Morgan Chase, Merrill Lynch, Deutsche Bank, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank

Bank of America Corp. became the first bank to settle a class-action lawsuit alleging that some of the top U.S. financial institutions participated in a scheme with Enron Corp. executives to deceive shareholders.

The Charlotte, N.C., bank, the third-largest in the U.S. in assets, agreed to pay $69 million to investors who had billions of dollars in losses as a result of Enron's collapse amid scandal in 2001. In making the settlement, Bank of America denied that it "violated any law," adding that it decided to make the payment "solely to eliminate the uncertainties, expense and

Why the Blowup May Get Worse

Not since 1966 -- when the term "credit crunch" was coined after the Fed pushed market interest rates above the legal limits banks and thrifts then could pay on deposits and thus stopped lending in its tracks -- has the nation's mortgage apparatus been so close to breaking down.

The current crisis arguably has the potential for more economic disruption than the celebrated 1998 Long Term Capital Management meltdown. Then, as Northern Trust economist Asha Bangalore points out, the economy cruising along -- in contrast to the past four quarters, which have seen below-potential growth on average.

Moreover, mortgage borrowers perversely benefited from the LTCM fiasco. Not only did the Greenspan Fed lower rates, sparking a huge bond rally, but, also, the government-sponsored enterprises Fannie Mae (FNM) and Freddie Mac (FRE) went on virtual buying sprees. As a result, the biggest part of the credit market -- mortgages -- remained flush. Now, Fannie is looking to expand its portfolio beyond the $727 billion limit imposed on it after its accounting and governance scandals -- a move viewed skeptically by the White House but supported by some congressional Democrats.

Indeed, the full impact of the mortgage crisis still lies ahead. From the beginning of 2007 through mid 2008, interest rates on over $1 trillion of adjustable-rate mortgages are slated to be reset, many from low "teaser" rates.

[gorge chart]

THE SUBPRIME MESS ALSO RECALLS another crisis -- the virtual collapse of the commercial-paper market in the wake of the Penn Central bankruptcy of 1970. Back then, the paper market consisted of relatively simple short-term corporate IOUs. Now, so-called asset-backed commercial paper is backed by all manner of things, from credit cards and auto loans to collateralized debt obligations, and comprises over half the CP outstanding. Moreover, notes MacroMavens' Stephanie Pomboy, money-market funds own 27% of CP outstanding.

While the Fed managed to soothe the financial markets' nerves by week's end, the potential for future upheavals remains. As a result, the futures market is looking for the central bank to ride to the rescue with rate cuts. Fed-funds contracts are fully discounting a quarter-point cut, to 5%, at the Sept. 18 Federal Open Market Committee meeting, and a further reduction to 4¾% in December.

As the chart here shows, financial crises have tended to coincide with peaks in the fed-funds rate and subsequent Fed easing. The subsequent rate relief would be hailed by the markets as the start of a new bull run.

There is a new wrinkle -- the precarious state of the dollar. No longer is the greenback viewed as a safe haven in the world, contends Barclay Capital's currency team.

Indeed, as MacroMavens' Pomboy has posited, a Fed rate cut that sends the dollar tumbling could have a perverse effect. The influx of foreign capital has kept U.S. interest rates low and provided a flood of credit for everything from leveraged buyouts to, of course, subprime mortgages. If there's an exodus of foreign capital fleeing a declining dollar, credit could tighten even as the Fed eases. Be careful of what you wish for.




High-yield debt - Wikipedia, the free encyclopedia

The original speculative grade bonds were bonds that once had been investment grade at time of issue, but where the credit rating of the issuer had slipped and the possibility of default increased significantly. These bonds are called "Fallen Angels".

The investment banker, Michael Milken, realised that fallen angels had regularly been valued less than what they were worth. His time with speculative grade bonds started with his investment in these. Only later did he and other investment bankers at Drexel Burnham Lambert, followed by those of competing firms, begin organising the issue of bonds that were speculative grade from the start. Speculative grade bonds thus became ubiquitous in the 1980s as a financing mechanism in mergers and acquisitions. In a leveraged buyout (LBO) an acquirer would issue speculative grade bonds to help pay for an acquisition and then use the target's cash flow to help pay the debt over time.

In 2005, over 80% of the principal amount of high yield debt issued by U.S. companies went toward corporate purposes rather than acquisitions or buyouts.

High-yield bonds can also be repackaged into collateralized debt obligations (CDO), thereby raising the credit rating of the senior tranches above the rating of the original debt. The senior tranches of high-yield CDOs can thus meet the minimum credit rating requirements of pension funds and other institutional investors despite the significant risk in the original high-yield debt.


Hedge funds have gotten rich from credit derivatives. Will they blow up?


From:"Kevin McKern"
Received:10/19/2006 11:45 AM
Subject:Will they blow up?
The downfall of Amaranth Advisors, the hedge fund that lost $6 billion in a single week by betting on natural gas, was a special case. There was no domino effect taking down energy traders generally, no meltdown of an industry. But if you want to fret over the next financial catastrophes, turn your gaze away from energy futures and focus on something far more obscure: credit default swaps. Hedge funds are neck-deep in these derivatives, and if something goes wrong, the pain will be widespread. A credit swap is an insurance policy on a bond, often a junk bond. The fellow selling the swap--writing the policy, that is--collects a premium. If nothing goes wrong, he pockets the premium and looks like a financial genius. But if the bond defaults, the swap seller has to make good. The notional amount--the aggregate of bonds, loans and other debt covered by credit default swaps--is now $26 trillion. This is a staggering sum, twice the annual economic output of the U.S. Hedge funds account for 58% of the trading in these derivatives, says Greenwich Associates, a financial research firm. Selling protection has been a big moneymaker for funds like $23 billion (assets) D.E. Shaw and $12 billion Citadel, say market participants, and for specialized outfits like Primus Guaranty (nyse: PRS - news - people ) in Bermuda, which took in $57 million in the first half of 2006 selling protection on $1.6 billion in debt. With corporate debt defaults low these days, the temptation is high to write insurance policies on bonds. A hedge fund can make $60,000 to $1 million a year selling protection on $10 million in bonds. It's like finding money in the street. Unless, of course, the economy suddenly enters a recession. If that happens, hedge funds addicted to the credit market will be in deep trouble. "A lot of [hedge funds] have sold insurance, are sitting on the premiums--and are bare-ass," says Charles Gradante, cofounder of Hennessee Group, which tracks hedge fund performance. "If there is a Long Term Capital-type systemic risk potential out there, it's in the [credit swap] market." There must be a lot of investors--or credit speculators--who are cavalier about corporate defaults because junk bonds are trading at yields only modestly higher than the yields on safe U.S. Treasury bonds. The chart displays the yield spread, as calculated by Moody's Investors Service, between junk bonds rated speculative and seven-year Treasurys. Saks bonds with a 97TK8 coupon due October 2011, for example, are now yielding 7.6%, or 287 basis points (2.9 percentage points) over seven-year Treasurys, compared with a 700-basis-point spread to Treasurys four years ago. Today's tight spreads don't leave much of a cushion to cover defaults. There is a close correlation between yield spreads and credit default swap prices. That's because selling a credit swap is equivalent to buying the corporate bond on margin. If you buy a junk bond with borrowed funds, you collect the high coupon on the bond while paying out a lower amount, presumably not too much more than what the U.S. government pays to borrow money. Either way--with a swap or a margined bond trade--you pocket the spread, unless and until the corporate bond gets into trouble, at which point you're sitting on a painful capital loss. The credit-derivatives business is dominated by 14 dealers. Among them: jpmorgan Chase, Citigroup (nyse: C - news - people ), Bank of America (nyse: BAC - news - people ), Goldman Sachs (nyse: GS - news - people ) and Morgan Stanley (nyse: MS - news - people ). All have staggering amounts of derivatives on their books: JPMorgan's notional exposure was $3.6 trillion as of June 30, according to the Federal Deposit Insurance Corp., which is almost three times assets and 30 times capital. Credit derivatives at Wachovia Corp. (nyse: WB - news - people ) have jumped sevenfold since 2003 to $170 billion, more than three times capital. Banks love derivatives because they provide multiple ways to make money. Revenue from all types of derivatives will hit $34 billion or so this year at U.S. banks and securities firms, says Tower Group (nasdaq: TWGP - news - people ), a financial-research outfit, with hedge funds generating much of the money. Hedge funds also buy the potentially toxic waste that banks create when they bundle credit derivatives into so-called synthetic deals. By separating a portfolio of derivatives into different tranches, banks can create virtually default-proof securities for conservative investors--if somebody else is willing to buy riskier "equity" tranches whose value vaporizes when as few as one or two of the underlying bonds default. Banks once kept such tranches on their books as a cost of doing business. Now, says Fitch Ratings, hedge funds are buying them to goose returns. Regulators say there's no reason to worry--yet. All big banks require hedge funds to back up their swaps with cash collateral that is adjusted daily, says Kathryn Dick, deputy comptroller for credit and market risk at the Office of the Comptroller of the Currency. But banks can make only rough guesses at the value of swaps and thus how much collateral their counterparties need to ante up. Even the smartest guys can come up shorthanded. Ask Charlie T. Munger, vice chairman of Warren Buffett's Berkshire Hathaway (nyse: BRKA - news - people ), which lost $404 million unwinding credit, interest-rate and foreign-exchange derivatives positions in its General Re unit. "When we ran it off, it didn't run off at anything like book value," Munger says. "I would bet a lot of money there are some terrible valuations on the books of corporate America." JPMorgan, the most forthcoming of the big derivatives dealers, figures it could lose $65 billion over several years if everybody on the other side of a derivatives trade went broke. A scary number when compared with the bank's $110 billion in capital. Implausible, too, because most of its counterparties are big financial institutions. Hedge funds and other smaller players are much more exposed. Like swaps on interest rates and foreign currency, credit swaps outstanding dwarf the underlying bonds in circulation. That can be a problem when a creditor defaults, as with Delphi (nyse: DPH - news - people ) and other auto parts makers earlier this year. With most swaps, the buyer of protection has to hand over defaulted bonds to get its money, tough to do if, as with Delphi, $20 billion in protection has been written on just $2 billion in bonds. Calamity was averted by the International Swaps & Derivatives Association, which held an auction to determine the amount of cash protection buyers would get. The derivatives market weathered its last near-death experience in early 2005, when credit agencies downgraded the debt of General Motors (nyse: GM - news - people ) and Ford (nyse: F - news - people ), devastating the value of the most risky synthetic derivatives. Hedge funds thought they'd been smart by locking in a three-to-four-percentage-point spread by selling protection on those tranches and buying it on less risky ones. Suddenly, though, they had to close out their moneylosing positions. So many funds had made the same bet that it "magnified the deleveraging process," in the dry words of the Bank for International Settlements. Translation: "Banks refused to buy or sell," says Randall Dodd, a former Commodity Futures Trading Commission economist who now runs the Financial Policy Forum, a Washington think tank. "These guys couldn't trade out of their positions." Bottom-fishing investment banks eventually bailed hedge funds out of their problems. But Dodd and other critics wonder if banks have extracted enough collateral from their hedge fund clients to protect themselves in a wider crisis. "No one has good facts on these things," says David Hsieh, professor at Fuqua School of Business at Duke University, "because hedge funds are private investments."


Balancing the Books
A Legacy Worth Disinheriting: The Federal Reserve remains spooked by the specter of the Great Depression
Edited by Jay Palmer
03/03/2003
Barron's
32

A History of the Federal Reserve Volume 1: 1913-1951

By Allan H. Meltzer

University of Chicago Press; 800pp; $75

Reviewed by Randall W. Forsyth


Central bankers, like generals, often are accused of fighting the last war. The Federal Reserve remains haunted by its most humiliating defeat -- an utter failure not only to prevent the Great Depression, but its ineptitude in countering the most severe downward spiral in American economic history. That failure arguably has a profound impact on Fed policy to this day.

Serious students of monetary policy will be familiar with the broad outline of what's told in Allan H. Meltzer's monumental "A History of the Federal Reserve: Volume 1: 1913-1951." The Great Depression is the most crucial period covered in the book, which encompasses the span from the Fed's founding to the Treasury Accord of 1951, when it gained its independence as a modern central bank.

Unlike others who lay the blame for the Depression on a single cause -- the stock-market Crash of '29, the Smoot-Hawley tariff, the collapse of the international gold standard or the Fed's permitting a one-third contraction in the money supply -- Meltzer reasonably attributes the catastrophe to the confluence of these shocks. But the Fed, which was established after a succession of financial panics in the 19th and early 20th centuries -- precisely to prevent their recurrence -- failed in that narrower mission.

That failure, as Meltzer keenly describes, was a result of misguided policies and political infighting. Policy was ruled by the (wrongheaded) conventional wisdom of the day, that said that the collapse of the 'Thirties was necessary to purge the excesses of the 'Twenties. The Fed was to restrict itself to providing credit solely to meet the private sector's needs -- by buying only "real bills" and not purchasing government securities, which supposedly only pumped up speculative credit, according to the prevailing notion of the time. The reestablishment of the gold standard in the 1920s was considered a success then, but Meltzer describes how it sowed the downturn's seeds. Britain needed to deflate while France and the U.S. had to inflate, so all resisted. New York Fed President Benjamin Strong, who de facto ran policy in the 'Twenties, eased to help the pound. But his jealous counterparts would posthumously blame him for inflating the bubble that burst in 1929.

More important, Meltzer details the dithering that prevented the Fed from taking the most basic monetary action -- large-scale purchases of government securities to add liquidity to the banking system. Fed officials thought policy already was easy because interest rates were near zero and banks didn't borrow from the Fed, ignoring the rise in real interest rates caused by deflation and the contraction in the money stock.

The Bank of Japan repeated those blunders through most of the 'Nineties. The Fed, having learned from history, has not been doomed to repeat it. The U.S. central bank already has slashed its key interest rate target 12 times since January 2001 to a nearly irreducible 1 1/4%. And in a speech last November that still reverberates, Fed Governor Ben Bernanke pointed out that the central bank hasn't run out of monetary bullets even if it runs out of basis points. Even at 0%, the Fed still has a magical device -- the printing press. With a steward of the dollar trumpeting the power to debase it, is it any wonder that gold has rallied and the spread between TIPS (Treasury inflation-protected securities) and fixed-return Treasuries has widened?

Yet the circumstances of the bursting of the bubbles of the 'Twenties and the 'Nineties were markedly different. Ahead of the '29 Crash, the Fed was actively trying to curb speculation. Greenspan & Co. claim no part in the recent bubble, with the Maestro contending that actions to curb the inflation in asset prices posed risks to the economy.

His protest, however, ignores the role played by the Fed in encouraging soaring asset inflation. As previously noted in Barron's, the central bank provided the monetary fuel for the Nasdaq bubble and then throttled it back ("Fed Inflated, Then Burst IPO Bubble," Dec. 11, 2000). Investors and traders also comforted themselves with the notion that the central bank would (and could) rescue the financial markets if they collapsed. That belief, which gained currency especially after the Long Term Capital Management debacle of 1998, came to be known as "The Greenspan Put" -- a get-out-of-jail-free card for speculators.

Now, even though the world enjoys expanding international trade and growth in output and income-exactly the opposite of the 'Thirties -- the Fed still worries about deflation and depression. Moreover, every indicator -- money supply, negative real rates, a steeply sloped yield curve, a weakening dollar and rising commodity prices -- is full-tilt expansionary. Indeed, William Silber of New York University's Stern School recently wrote in the Financial Times that the Fed may not act to curb inflation soon enough -- its blunder of the 1970s. How the Fed failed to foster stable prices after 1951 should be the basis of Meltzer's second volume, which I eagerly await.

---

RANDALL W. FORSYTH is an assistant managing editor at Barron's


SEE

Wall Street Mantra

Black Gold

U.S. Economy Entering Twilight Zone

Hedge Funds, Junk Bonds, Ponzi Schemes



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